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AMZN
2023-02-02
[ { "description": "Director, Investor Relations", "name": "Dave Fildes", "position": "Executive" }, { "description": "Chief Financial Officer", "name": "Brian Olsavsky", "position": "Executive" }, { "description": "Chief Executive Officer", "name": "Andy Jassy", "position": "Executive" }, { "description": "Morgan Stanley -- Analyst", "name": "Brian Nowak", "position": "Analyst" }, { "description": "JPMorgan Chase and Company -- Analyst", "name": "Doug Anmuth", "position": "Analyst" }, { "description": "Goldman Sachs -- Analyst", "name": "Eric Sheridan", "position": "Analyst" }, { "description": "Bank of America Merrill Lynch -- Analyst", "name": "Justin Post", "position": "Analyst" }, { "description": "Citi -- Analyst", "name": "Ron Josey", "position": "Analyst" }, { "description": "Evercore ISI -- Analyst", "name": "Mark Mahaney", "position": "Analyst" } ]
[ { "name": "Operator", "speech": [ "Thank you for standing by. Good day, everyone, and welcome to the Amazon.com Quarter 4 2022 financial results teleconference. [Operator instructions] Today's call is being recorded. And for opening remarks, I will be turning the call over to the vice president of investor relations, Dave Fildes.", "Thank you, sir. Please go ahead." ] }, { "name": "Dave Fildes", "speech": [ "Hello, and welcome to our Q4 2022 financial results conference call. Joining us today to answer your questions is Andy Jassy, our CEO; and Brian Olsavsky, our CFO. As you listen to today's conference call, we encourage you to have our press release in front of you, which includes our financial results as well as metrics and commentary on the quarter. Please note, unless otherwise stated, all comparisons in this call will be against our results for the comparable period of 2021 Our comments and responses to your questions reflect management's views as of today, February 2nd, 2023 only, and will include forward-looking statements.", "Actual results may differ materially. Additional information about factors that could potentially impact our financial results is included in today's press release and our filings with the SEC, including our most recent annual report on Form 10-K and subsequent filings. During this call, we may discuss certain non-GAAP financial measures. In our press release, slides accompanying this webcast and our filings with the SEC, each of which is posted on our IR website, you will find additional disclosures regarding these non-GAAP measures, including reconciliations of these measures with comparable GAAP measures.", "Our guidance incorporates the order trends that we've seen to date and what we believe today to be appropriate assumptions. Our results are inherently unpredictable and may be materially affected by many factors, including uncertainty regarding the impacts of the COVID-19 pandemic; fluctuations in foreign exchange rates; changes in global economic and geopolitical conditions; and customer demand and spending, including the impact of recessionary fears, inflation, interest rates, regional labor market, and global supply chain constraints, world events, the rate of growth of the Internet, online commerce and cloud services and the various factors detailed in our filings with the SEC. Our guidance assumes, among other things, that we don't conclude any additional business acquisitions, restructurings, or legal settlements. It's not possible to accurately predict demand for our goods and services and, therefore, our actual results could differ materially from our guidance.", "And now I'll turn the call over to Brian." ] }, { "name": "Brian Olsavsky", "speech": [ "Thank you for joining today's call. As Dave mentioned earlier, I'm joined today by Andy Jassy, our CEO. Before we move on to take your questions, I will make some comments about our Q4 results. Let's start with revenue.", "For the fourth quarter, worldwide net sales were $149.2 billion, representing an increase of 12% year over year, excluding approximately 360 basis points of unfavorable impact from changes in foreign exchange rates and above the top end of our Q4 guidance range. We've seen that during periods of economic uncertainty, consumers are very careful about how they allocate their resources and where they choose to spend their money. Throughout Amazon's history, we have found that our focus on the customer helps to set us apart in times like these. This past holiday season, customers came to Amazon for great deals, fast delivery, and our widest-ever selection, bolstered by nearly 2 million third-party seller partners who sell on Amazon.", "Enterprise customers continued their multi-decade shift to the cloud while working closely with our AWS teams to thoughtfully identify opportunities to reduce costs and optimize their work. In our worldwide stores business, with the ongoing economic uncertainty, coupled with the continuation of inflationary pressures, customers remain cautious about their spending behavior. We saw them spend less on discretionary categories and shift to lower-priced items and value brands in categories like electronics. We also saw them continue to spend on everyday essentials, such as consumables, beauty, and softlines.", "Our teams worked hard to offer low prices and secure millions of deals for customers in Q4, including our first-ever Prime Early Access Sale in October and the more traditional Thanksgiving to Cyber Monday holiday weekend. These global sales events outperformed our expectations as customers responded to millions of deals across our growing selection. Third-party sellers remain a key contributor to that expanding selection. In Q4, sellers comprised a record 59% of overall unit sales.", "Sellers, vendors, and brands continue to look to Amazon's advertising capabilities to reach customers in the always competitive holiday season, even as the macro environment required them to scrutinize their own marketing budgets. We saw good growth in advertising revenues in Q4, up 23% year over year, excluding the impact of foreign exchange. Prime membership continues to be a great value for our customers, and improving our Prime benefits is a continuous part of our investment strategy. Along with competitive pricing, broad selection and faster delivery speed, we've seen Prime members respond to our expanding entertainment offerings.", "During the quarter, we completed our first season of The Lord of the Rings: The Rings of Power, the most watched Amazon original series in every region of the world, reaching over 100 million viewers and driving more Prime sign-ups worldwide during its launch window than any previous Prime Video content. We also finished our inaugural season as the exclusive home of Thursday Night Football, reaching the youngest median age audience of any NFL broadcast package since 2013 and increasing viewership by 11% from last year among hard-to-reach 18- to 34- year-olds. In aggregate, we invested approximately $7 billion in 2022 across Amazon Originals, live sports, and licensed third-party video content included with Prime. That's up from about $5 billion in 2021.", "As a reminder, these digital video content costs are included in cost of sales on our income statement. We regularly evaluate the return on the spend and continue to be encouraged by what we see, as video has proven to be a strong driver of Prime member engagement and new Prime member acquisition. Moving on to AWS. Net sales increased $21.4 billion in Q4, up 20% year over year and now representing an annualized sales run rate of more than $85 billion.", "Starting back in the middle of the third quarter of 2022, we saw our year-over-year growth rates slow as enterprises of all sizes evaluated ways to optimize their cloud spending in response to the tough macroeconomic conditions. As expected, these optimization efforts continued into the fourth quarter. Some of the key benefits of being in the cloud compared to managing your own data center are the ability to handle large demand swings and to optimize costs relatively quickly, especially during times of economic uncertainty. Our customers are looking for ways to save money, and we spend a lot of our time trying to help them do so.", "This customer focus is in our DNA and informs how we think about our customer relationships and how we will partner with them for the long term. As we look ahead, we expect these optimization efforts will continue to be a headwind to AWS growth in at least the next couple of quarters. So far in the first month of the year, AWS year-over-year revenue growth is in the mid-teens. That said, stepping back, our new customer pipeline remains healthy and robust, and there are many customers continuing to put plans in place to migrate to the cloud and commit to AWS over the long term.", "Now let's shift to worldwide operating income. For the quarter, we reported $2.7 billion in operating income. The operating income was negatively impacted by three large items, which added approximately $2.7 billion of costs in the quarter. This was related to employee severance, impairments of property and equipment and operating leases, and changes in estimates related to self-insurance liabilities.", "This cost primarily impacted our North America segment. If we had not incurred these charges in Q4, our operating income would have been approximately $5.4 billion. We are encouraged with the progress we continue to make in streamlining the costs in our Amazon stores business. We entered the quarter with labor more appropriately matched to demand across our operations network compared to Q4 of last year, allowing us to have the right labor in the right place at the right time and drive productivity gains.", "We also saw continued efficiencies across our transportation network, where process and tech improvements resulted in higher Amazon Logistics productivity and improved line haul fill rates. While transportation overperformed expectations in the quarter, we also saw productivity improvements across our fulfillment centers, in line with our plan. We also saw good leverage driven by strong holiday volumes. Overall, it was a strong effort by the operations team, and we look forward to making further headway as we head into 2023.", "We remain focused on driving cost efficiencies throughout the network and reducing our cost to serve our customers, while ensuring we maintain an outstanding customer experience. Circling back to the three large charges during the quarter. Let me share some additional color, starting with the job eliminations we initiated during the fourth quarter. As we consider the ongoing uncertainties of the macroeconomic environment, this led us to the difficult decision to eliminate just over 18,000 roles, primarily impacting our stores and device businesses as well as our human resources teams.", "As a result, we recorded estimated severance cost of $640 million. These charges were recorded primarily in technology and content, fulfillment, and general administration on our income statement. Next, we recorded impairments of property and equipment and operating leases, primarily related to our Amazon Fresh and Amazon Go physical stores. We're continuously refining our store formats to find the ones that will resonate with customers, will build our grocery brand and will allow us to scale meaningfully over time.", "As such, we periodically access our portfolio of stores and decided to exit certain stores with low growth potential. We'll also take an impairment on capitalized costs and associated values of our leased buildings. The impairment charge in Q4 was $720 million and is included in other operating expense on our income statement. We continue to believe grocery is a significant opportunity, and we're focused on serving customers through multiple channels, whether that's online delivery, pickup, or in-store shopping.", "Lastly, during the quarter, we increased our reserves for general product and automobile self-insurance liabilities, driven by changes in our estimates about the cost of asserted and unasserted claims, resulting in additional expense of $1.3 billion. This impact is primarily recorded in cost of sales on our income statement. As our business has grown quickly over the last several years, particularly as we've built out our fulfillment and transportation network and claim amounts have seen industrywide inflation, we've continued to evaluate and adjust this reserve for both asserted claims as well as our estimate for unasserted claims. We reported overall net income of $278 million in the fourth quarter.", "While we primarily focus our comments on operating income, I'd point out that this net income includes a pre-tax valuation loss of $2.3 billion included in nonoperating income from our common stock investment in Rivian Automotive. As we've noted in recent quarters, this activity is not related to Amazon's ongoing operations but rather the quarter-to-quarter fluctuations in Rivian's stock price. As we head into the new year, we remain heads-down focused on driving a better customer experience. We believe putting customers first is the only reliable way to create lasting value for our shareholders." ] }, { "name": "Andy Jassy", "speech": [ "Everybody, this is Andy. Just before we start with the questions, I just wanted to say it's good to be with you all on the call today. I thought I might jump on the calls from time to time moving forward. And given that this last quarter was the end of my first full year in this role, and given some of the unusual parts in the economy and our business, I thought this might be a good one to join.", "So thanks for having me." ] } ]
[ { "name": "Operator", "speech": [ "[Operator instructions] And our first question comes from the line of Brian Nowak with Morgan Stanley. Please proceed with your question." ] }, { "name": "Brian Nowak", "speech": [ "Thanks for taking my questions. I have two. Andy, I want to ask you, just the first one, you've been in the seat for a while. As you sit there, what are your key focal points, product categories, or investment priorities that you're most focused on to drive durable multiyear growth in that North America retail segment as we recover? And then the second one, just sort of staying on the North America retail side, how do you think about the potential margin potential of that business over the next few years as you sort of grow into the warehouse? And what are the warehouse network? And what are the efficiency factors to get you to those goals? Thanks." ] }, { "name": "Brian Olsavsky", "speech": [ "Brian, this is Brian. First, let me just start with your second question. On the -- sorry, can you hear me? On the expectation for retail margins, especially in North America, what we've said is when we look back to our cost structure pre-pandemic, we were just in the end of 2019, early part of 2020. We're just starting to roll out one-day shipping in North America, and we had an expectation of what our cost structure would look like.", "That has changed quite a bit in the last three years now due to a doubling of our network expansion. I think you've heard me tell this story on different calls. But essentially, we're now trying to, again, regain our cost structure that we've had in the past, balance the -- and get more efficient on the assets we've added in the last two, three years now and also look at all the investment areas that we are working on to drive growth, continuing to look at them where we need to make course corrections, where we need to change things up. And we expect that, again, a lot of the improvement will be in North America operations costs.", "We made good headway in 2022. We always want to make more, and we're going to be working on this definitely through 2023 and beyond. But we have to make and expect to make big improvements in 2023." ] }, { "name": "Andy Jassy", "speech": [ "Yes. And I'll start just at a broad level, priority-wise. The connective tissue for everything we do across the company, including in stores in North America, is we realize that we exist to make customers' lives better and easier every day and relentlessly went to do so. And being maniacally focused on the customer experiences, always going to be a top priority for us.", "At the same time, and this is true in North America as well as across the entire business, we're working really hard to streamline our costs and trying to do so at the same time that we don't give up on the long-term strategic investments that we believe can meaningfully change broad customer experiences and change Amazon over the long term. As I addressed directly the North American stores questions, I think our -- probably the No. 1 priority that I spent time with the team on is reducing our cost to serve in our operations network. And as Brian touched on, it's important to remember that over the last few years, we've -- we took a fulfillment center footprint that we've built over 25 years and doubled it in just a couple of years.", "And then we, at the same time, built out a transportation network for last mile roughly the size of UPS in a couple of years. And so when you do both of those things to meet the huge surge in demand, you're going to -- just to get those functional, it took everything we had. And so there's a lot to figure out how to optimize and how to make more efficient and more productive. And then I think at the same time, if you think about doubling the number of fulfillment centers you have and then adding a very large transportation network and you realize that all of those facilities have to link together to get products to customers, that's a pretty big expansion in the number of nodes in the network.", "It becomes a little bit different network. And so to figure out how to be really efficient across all those links and have them be highly utilized and to get the flows in those facilities working the right way, it takes time. So we're working very hard on it. I'm pleased with the progress we made in Q4, and you can see that in some of the results.", "But that work will extend into '23. So that's first. I think the second thing, priority-wise, I would talk about is just speed. We believe they're continuing to get products to customers faster, makes customers happier, and they also converted a higher rate when they can see promises of deliveries that are faster.", "I think selection will always be a very high area of focus for us. We work with hundreds of thousands in the U.S. and millions overall in the world of selling partners. In this past quarter, 59% of the units sold were from our third-party selling partners, and we work very hard to provide unmatched selection.", "And that matters a lot to customers. I think pricing being sharp is always important. But particularly in this type of uncertain economy, where customers are very conscious about how much they're spending, having the millions of deals that we put together with our selling partners in the fourth quarter was an important part of the demand that you saw, and we'll continue to work really hard on being sharp on pricing. And then just the customer experience improvements that we're working all the time, whether it's adding Buy with Prime that allows Prime users to use their Prime benefits on other websites than just Amazon; or adding RxPass in the healthcare space, where our Prime customers for $5 a month can get all the medicines they're using in unlimited fashion; or whether it's just even in our apparel business, where when you're looking clothing you might buy, being able to see virtually your shoes with that outfit to see how it looks and it changes your customer experience, your buying experience, we will continue to work very hard on those customer experiences, and we have a lot more planned." ] }, { "name": "Operator", "speech": [ "Thank you. And the next question comes from the line of Doug Anmuth with J.P. Morgan. Please proceed with your question." ] }, { "name": "Doug Anmuth", "speech": [ "Thanks for taking the questions. Also for Andy, I have two. Just first, how would you evaluate your efforts in grocery thus far? I know you're -- it's a big, huge market. You're attacking it different ways.", "What are the key steps here that you're focused on to drive greater market share? And then secondly, how should we think about the strategic importance of some of these emerging bets type of areas like healthcare and Kuiper and autonomous vehicles, among others? Thanks." ] }, { "name": "Andy Jassy", "speech": [ "On the first one on grocery, I'd just start by saying that we think grocery is a really important and strategic area for us. It's a very large market segment, and there's a lot of frequency in how consumers shop for grocery. And we also believe that over time, grocery is going to be omnichannel. There are going to be a lot of people that order their grocery items online and have it delivered to them, and there are going to be a lot of people who continue to buy in physical stores.", "But you're going to also see a hybrid of those, where people pick out what they want online and pick it up in stores, or people are in stores and there's something that's not in inventory in the stores, so they go to their app or to a kiosk and order it to be delivered from online. And so I think having omnichannel is going to really matter. And I think that we have a pretty significant-sized grocery business. I think people sometimes don't realize that and that we've been building for a long time.", "It's continuing to accelerate, and I kind of see it broken into a few pieces. If you think about the online grocery offering, we have a very large business there. It looks different from the typical mega physical grocery store. But if you think about the aisles in a grocery store, from packaged food to paper products to canned goods to pet supplies to health and personal care items to consumables, we have a very large business there that continues to grow at a rapid clip and then we think will continue to grow.", "But it doesn't have a big market segment share in perishables. And if you really want to have significant market segment share in perishables, you typically need physical stores. And we have kind of two different offerings there. For what I think is the very best organic physical store experience and selection, we have Whole Foods, which is a very significant-sized business that's continuing to grow.", "I really like the progress that, that business has made on profitability in the last year. And I like what I see in front of it, and I think that's a very -- it's a premium product, but it's a significant business. It's a good business for us in the grocery space. I think if you want to have a mass physical store offering, you need a different offering.", "And that's what we've been working on with Amazon Fresh, and we have a few dozen stores so far. We're doing a fair bit of experimentation today in those stores to try to find a format that we think resonates with customers. It's differentiated in some meaningful fashion and where we like the economics. And we've been -- we've decided over the last year or so that we're not going to expand the physical Fresh doors until we have that equation with differentiation and economic value that we like, but we're optimistic that we're going to find that in 2023.", "We're working hard at it. We see some encouraging signs. And when we do find that equation, we will expand it more expansively. But I think that we have a very significant opportunity in the grocery segment.", "I think we're building a pretty broad grocery network across online and physical, and you're going to see us continue to work on it." ] }, { "name": "Operator", "speech": [ "Thank you. And our next question comes from the line of Eric Sheridan with Goldman Sachs. Please proceed with your question." ] }, { "name": "Eric Sheridan", "speech": [ "Thanks so much. Maybe I'll ask one big picture of Andy and then just a housekeeping matter to Brian, if I can. Andy, keeping on this theme of sort of big picture and strategy and your perspective, I'd love to get your view on the international e-commerce businesses. Obviously, you're in a range of geographies with a wide variance of maturity and different investment cycles.", "Can you give us your perspective on how you see Amazon's global e-commerce footprint today? And how investors should be thinking about the mix of growth and margin evolution in those international businesses in the years ahead? And maybe, Brian, if I can just ask a quick follow-up. In the Q1 operating income guidance that you gave, I think there's some confusion among investors as to where you might be capturing some of the restructuring charges from the announcements that the company has made on employee count between Q4 and Q1. Can you just clarify what was captured in Q4 versus what might be included in the way you frame the Q1 operating income guidance? Thanks so much." ] }, { "name": "Brian Olsavsky", "speech": [ "Sure, let me start. This is Brian. Let me start with that second part. So as I said earlier, we took a $640 million charge tied to the position elimination that we announced in Q4.", "A lot of that fell into Q1 into mid to late January. So the way to think about it is for the terminations in January, the salaries for the first three weeks are covered in operating results for Q1. But the period after that, where there's weeks or months of severance coverage, job placement, a lot of those costs are what the $640 million charge was in Q4. So I hope that helps." ] }, { "name": "Andy Jassy", "speech": [ "And on the question about international e-commerce, we're very enthusiastic about the business we're building there. I think just perspective, if you look at the compounded annual growth rate from 2019 to '21, in the U.K., it was over 30%; in Germany, it was 26%; in Japan, it was 21%. And the fact that we haven't given back that growth, and these are all net of FX, but if you look at even the last couple of quarters where we're continuing to grow and we haven't given back some of that growth, a meaningful amount of market segment share has shifted to our global established e-commerce territories, and we're excited about that. Now we're -- at this stage, we're big enough in our developed international territories that when there's something significant happening in the macro, we're going to be impacted as well.", "And if you just look in Europe as an example, the inflation is higher than most places and the impact on Europeans for the war in Ukraine is more significant, and also the energy prices and hikes there are more significant. So you can see that in some of our growth numbers. And then you look at our emerging countries, and these are -- they're all a little bit different in all -- in a little bit different stage as you recognize in the question. But if you look at countries like India and Brazil and the Middle East and Africa and Turkey, Mexico and Australia and a number of those types of countries, we like what we're seeing.", "They take a certain amount of time. There's a certain amount of fixed investment you have to make when you enter a new geography, and then you have to drive a certain amount of revenue to be able to cover that fixed investment. But they're all on the right trajectory and following trajectories that roughly look like what we saw in North America and our established international geographies, and we think it's the right investment and believe we're going to have a large profitable international e-commerce business." ] }, { "name": "Operator", "speech": [ "Thank you. And the next question comes from the line of Justin Post with Bank of America. Please proceed with your question." ] }, { "name": "Justin Post", "speech": [ "Great. Thanks. Maybe one for Andy and then one for Brian. AWS, if you look at the revenue growth of mid-teens, it implies it could be flattish and even down this quarter.", "So maybe talk about what's driving that. Is it workload changes? Are there some clients that are shifting? Anything on the market share you could comment on? And then second, when do you think this could recover? Like what's the time frame? And would you expect margins to come back when revenues reaccelerate? I'll leave it at that." ] }, { "name": "Brian Olsavsky", "speech": [ "Thanks, Justin, for your question. This is Brian. Let me start with the -- what we're seeing at the customer level. So as I've mentioned, continuing -- it's across all industries.", "There are some points of weakness, things like financial services, like mortgage companies that do. As mortgage volumes down, some of their compute challenges or compute volumes are down. Crypto is -- lower trading in crypto. And things tied to advertising, as there's lower advertising spend, there's less analytics and compute on advertising spend as well.", "But -- so there's select of things. But by and large, what we're seeing is just an interest and a priority by our customers to get their spend down as they enter an economic downturn. We're doing the same thing at Amazon, questioning our infrastructure expenses as well as everything else. And we -- there's things you can do.", "You can defer -- you can switch to lower-cost products. You can run calculations less frequently. There's just -- you can do different types of storage on your data. So there's ways to alter your cost and your bill in a short period of time.", "I think that's what we're seeing. And as I said, we're working with our customers to help them do that. And again, we're seeing ourselves at Amazon. So I'll let Andy add some color on kind of the general trends in AWS, but that's more what we're seeing at the customer level right now." ] }, { "name": "Andy Jassy", "speech": [ "So I would just add -- I mean, I think Brian covered a bunch of it. I think most enterprises right now are acting cautiously. You see it with virtually every enterprise, and we're being very thoughtful about streamlining our costs as well. And when you are being cautious, you look for ways that you can find -- you can spend less money.", "And where companies can cost optimize or, in some cases, they may be used to doing analysis over 90 days of information and they say, \"Well, can I get away with it for two weeks, doing two weeks' worth,\" it's not necessarily the best thing long term. But a lot of companies will do that when they're in uncertain economic situation. And the reality is that the way that we've built all our businesses, but AWS in this particular instance, is that we're going to help our customers find a way to spend less money. We are not focused on trying to optimize in any one quarter or any one year, we're trying to build a set of relationships in business that outlast all of us.", "And so if it's good for our customers to find a way to be more cost effective in an uncertain economy, our team is going to spend a lot of cycles doing that. And it's one of the advantages that we've talked about since we launched AWS in 2006 of the cloud, which is that when it turns out you have a lot more demand than you anticipated, you can seamlessly scale up. But if it turns out that you don't need as much demand as you had, you can give it back to us and stop paying for it. And that elasticity is very unusual.", "It's something you can't do on-premises, which is one of the many reasons why the cloud is and AWS are very effective for customers. I think -- and I've spent a fair bit of time with the AWS team on this, and we look closely at what we see. We have a very robust, healthy customer pipeline, new customers, migrations that are set to happen. A lot of companies during times of discontinuity like this will step back and think about what they want to change strategically to be in a position to reinvent their businesses and change their customer experiences more quickly as uncertain economies emerge, and that often means moving to the cloud.", "We see a number of those pieces as well. And we're the only ones that really break out our cloud numbers in a more specific way. So it's always a little bit hard to answer your question about what we see. But we, to our best estimations, when we look at the absolute dollar growth year over year, we still have significantly more absolute dollar growth than anybody else we see in this space.", "And I think some of that's a function of the fact that we just have a lot more capability by a large amount, with stronger security and operational performance and a larger partner ecosystem. So I think it's also useful to remember that 90% to 95% of the global IT spend remains on-premises. And if you believe that, that equation is going to shift and flip, I don't think on-premises will ever go away, but I really do believe in the next 10 to 15 years that most of it will be in the cloud if we continue to have the best customer experience, which we have to work really hard at an event which we're working to do. It means we have a lot of growth in front of us in the AWS business." ] }, { "name": "Operator", "speech": [ "And our next question comes from the line of Ron Josey with Citi. Please proceed." ] }, { "name": "Ron Josey", "speech": [ "Great. Thanks for taking the question. Maybe a bigger high-level question here just around Prime member engagement and just seeing third-party seller services growth accelerating in the quarter. And I believe it was mentioned that customer is spending more on everyday essentials, which may be a relatively new use case.", "Talk just a little bit more, maybe Andy and Brian, just around how engagement is evolving here for Prime members and really how this has grown wallet share over time and where this is going. Thank you." ] }, { "name": "Brian Olsavsky", "speech": [ "Yes. Thanks, Ron, for your question. I would say that the Prime membership is -- remains strong and so has the dollars purchased per Prime member. It varies a bit by geography.", "But in general, if you step back, we had some very large video properties that we had launched last year, Thursday Night Football and Lord of the Rings: Rings of Power. Both of them had record sign-ups for Prime membership. And we know that, again, investments like that will help with not only a new member or new Prime member acquisition, but also retention. And we see a direct link between that type of engagement and higher purchases of everyday products on our Amazon website.", "So the health of Prime is very strong. As Andy mentioned earlier, we are continuing to work to get our speed of delivery up to get more one-day shipments. And we think that will also be well received by Prime members. But it's a combination of price selection and convenience.", "I think we've made inroads on all of them, especially with the third-party selection that's been added over the last few years. So I think testament to that is the sales that we had in the fourth quarter. In a very competitive and deal-driven environment, people came, Prime members and others came to Amazon to do their shopping. So we're encouraged by it." ] }, { "name": "Andy Jassy", "speech": [ "Just to add really one piece here, which is just, if you step back and think about a lot of subscription programs, there are a number of them that are $14, $15 a month really for entertainment content, which is more than what Prime is today. If you think about the value of Prime, which is less than what I just mentioned, where you get the entertainment content on the Prime Video side and you get the shipping benefit, the fast shipping benefit you can't find elsewhere and you get the music benefit, you get the Prime Gaming benefit and you get the photos benefit and you get the Buy with Prime capability, use your Prime subscription on websites beyond just Amazon and some of the grocery benefits that we provide, and RxPass like we just launched to get a number of medications people take regularly for $5 a month unlimited, that is remarkable value that you just don't find elsewhere. And we will continue to add things to Prime and continue to experiment with lots of different features and benefits. But it's still early days.", "And as we continue to make the service better and better and fully featured, we see people continuing to spend more at Amazon across our various businesses. So we're optimistic about it." ] }, { "name": "Operator", "speech": [ "And our final question comes from Mark Mahaney with Evercore ISI. Please proceed with your question." ] }, { "name": "Mark Mahaney", "speech": [ "Thanks. Two questions. Brian, just any color on why mid-teens is kind of a holdable growth rate for AWS over the next couple of quarters, given what looks like pretty clearly, continuing deterioration in enterprise demand? And then, Andy, I wonder at a high level if you could just talk about how your priorities may have changed or the company's priorities may have changed over the last year or so as you've been the CEO. And it looks like there's a bit of a peel back on devices, a peel back on physical stores, except for groceries, and then maybe a little bit more of a lean in on health.", "And I'm not quite sure what you're doing with entertainment content spend like that. Maybe it's the same, maybe it's a little bit more. But just at a high level, how would you say your priorities have changed or are different than the prior CEOs? Thank you." ] }, { "name": "Brian Olsavsky", "speech": [ "Hi, Mark. So on the AWS growth rate, I'm not sure I can forecast for you with any level of certainty what is going to happen beyond this quarter. You kind of -- this is a bit uncharted territories economically. And as we mentioned, there's some unique things going on with the customer base that I think many in this industry are all seeing the same thing.", "So I don't have a crystal ball on that one, but we are going to continue to work for to be there for our customers. And as I said in the earlier comments, we do have new deals. We have new workloads coming to the cloud. The value was there.", "And whether there's short term, perhaps short-term belt tightening in the infrastructure expense by a lot of companies, I think the long-term trends are still there. And I think the quickest way to save money is to get to the cloud, quite frankly. So there's a lot of long-term positive in tough economic times. Saw that in 2020 when volumes for customers shifted very quickly.", "It led to a resurgence after that and probably acceleration of people's journeys to the cloud, and we'll just have to see if that happens again with what we're seeing today." ] }, { "name": "Andy Jassy", "speech": [ "Yes. I would say I think for any leadership team, each era is different, and it's often meaningfully impacted by what's happening around you. And I think that if you look at the last couple of years with things like the pandemic and the labor shortage in 2021 and the war in Ukraine and inflation and uncertain economy, good leadership teams look around and try to figure out what that means and how they should adjust their businesses. And so if you look at -- in the early part of 2022, I think we realized that as we tried to make sure we met the surge in demand for consumers and sellers and having to make decisions in 2020 for what fulfillment network investments we're going to make in 2022, we just had more capacity than we needed.", "And you saw us in the early part of 2022 delay some of our builds and mothballed some of our facilities to try and be more economic. And I think when we look at some of our physical business investments, physical store investments, I think there were just some areas where we didn't have conviction that they were going to be big needle movers for Amazon. And so that's why we closed down our 4-Star bookstores. And as we got into the early part of the summer, where we start our operating planning process, we -- and there was a lot of things happening in the macro economy, we started that process with the high-level tenet of we want to find a way to meaningfully streamline our costs in all of our businesses, not just their existing large businesses, but also in some of the investments we're making.", "We want to actually do a pretty good, thorough look about what we're investing and how much we think we need to, but doing so without having to give up our ability to invest in the key long-term strategic investments that we think could change broad customer experiences and change Amazon over time. And you saw that process led to us choosing to pause on incremental headcount as we tried to assess what was happening in the economy, and we eliminated some programs in fabric.com and Amazon Care and Amazon Glo, and Amazon Explore. We decided to go slower on some -- on the physical store expansion in the grocery space until we had a format that we really believed in rolling out and we went a little bit slower on some devices, and until we made the very hard decision that Brian talked about earlier, which was the hardest decision I think we've all been a part of, which was to reduce or eliminate 18,000 roles. And so those were all done with an eye toward trying to streamline our cost but still be able to invest in the things that we think really matter over the long term.", "Now we have a way of looking at investments that is different maybe from some other companies. I'm not saying it's right or wrong. It's just the way we look at it, which is when we think about big areas to invest in, we ask ourselves a few questions. We ask, if we were successful, could it really be big and move the needle at Amazon, which is a high bar at a place like Amazon? Do we think it's being well served today? Do we have a differentiated approach? And do we have some competence in those areas? And if we don't, can we acquire them quickly? And if we like the answers to those questions, we will invest.", "Sometimes, that leads to very logical extensions for people. When I got to Amazon 25 years ago, we were a books-only retailer. And when we expanded into music and video and electronics, that seemed pretty natural to people. Amazingly, people were very surprised we were expanding into tools.", "That seemed far field for people, but it turned out not to be. When we launch something like Buy with Prime, I think people see that as more predictable. That process has also led us to less predictable investments. And I remember, I had a front-row seat in the AWS experience, having worked with the team and led the team from the very start.", "And I remember both externally and internally, there were a number of people who wondered why we were doing that. It was so different from retail only. But think about how different a company Amazon would be today if we hadn't invested in AWS. And so that informs some of the other meaningful investments we're making beyond our stores, in retail and advertising, and AWS businesses.", "I think that while we've gone slower in some devices and things, we still -- when we look at the answers to those four questions, we are very enthusiastic about our investments in streaming entertainment devices, our low Earth orbit satellite, and Kuiper, healthcare and a few other things. And I think that do I think every one of our new investments will be successful? History would say that that would be a long shot. However, it only takes one or two of them becoming the fourth pillar for Amazon for us to be a very different company over time. So I think it's very worthwhile.", "We're going to continue to invest. We're going to be very thoughtful about how we streamline our costs, and I think you see a lot of that, but we're also going to continue to invest for the long term." ] }, { "name": "Dave Fildes", "speech": [ "Thank you for joining us today on the call and for your questions. A replay will be available on our Investor Relations website for at least three months. We appreciate your interest in Amazon, and we look forward to talking with you again next quarter." ] } ]
AMT
2019-02-27
[ { "description": "Senior Director, Investor Relations", "name": "Igor Khislavsky", "position": "Executive" }, { "description": "Chairman, President, and Chief Executive Officer", "name": "James D. Taiclet, Jr.", "position": "Executive" }, { "description": "Executive Vice President and Chief Financial Officer", "name": "Thomas A. Bartlett", "position": "Executive" }, { "description": "Deutsche Bank -- Director", "name": "Matthew Niknam", "position": "Executive" }, { "description": "Raymond James -- Managing Director", "name": "Ric Prentiss", "position": "Executive" }, { "description": "UBS -- Analyst", "name": "Batya Levi", "position": "Analyst" }, { "description": "Morgan Stanley -- Managing Director", "name": "Simon Flannery", "position": "Executive" }, { "description": "Macquarie Bank -- Analyst", "name": "Amy Yong", "position": "Analyst" }, { "description": "KeyBanc Capital Markets -- Analyst", "name": "Brandon Nispel", "position": "Analyst" } ]
[ { "name": "Operator", "speech": [ "Ladies and gentlemen, thank you for standing by. Welcome to the American Tower Fourth Quarter and Full Year 2018 Earnings Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session. Now, if you've given the operator your name already, you may press *1 for questions. We ask that you please limit yourselves to one question per queue. If you wish to ask a second question, please requeue. All other participants: If you have not given the operator your name, please press *0 at any time to give the operator your information for the Q&A session. As a reminder, this call is being recorded. Your hosting speaker today: Igor Khislavsky. Please go ahead, sir." ] }, { "name": "Igor Khislavsky", "speech": [ "Thanks, Kevin. Good morning and thank you for joining American Tower's Fourth Quarter and Full Year 2018 Earnings Conference Call. We've posted a presentation, which we'll refer to throughout our prepared remarks, under the Investor Relations tab of our website, www.americantower.com.", "Our agenda for this morning's call will be as follows: First, I will provide a few highlights from our financial results for the quarter and full year 2018. Next, Jim Taiclet, our Chairman, President, and CEO, will provide a brief update on our Stand and Deliver strategy and our key priorities for 2019. And finally, Tom Bartlett, our Executive Vice President and CFO, will provide a more detailed review of our 2018 results and 2019 outlook. After these comments, we'll open up the call for your questions.", "Before I begin, I'll remind you that this call will contain forward-looking statements that involve a number of risks and uncertainties. Examples of these statements include our expectations regarding future growth, including our 2019 outlook, capital allocation, and future operating performance, the pacing and magnitude of the Indian carrier consolidation process and its impacts on American Tower, and any other statements regarding matters that are not historical fact.", "You should be aware that certain factors may affect us in the future and could cause actual results to differ materially from those expressed in these forward-looking statements. Such factors include the risk factors set forth in this morning's earnings press release, those set forth in our Form 10-K for the year ended December 31st, 2017, as updated in our Form 10-Q for the quarter ended June 30th, 2018, and in other filings we make with the SEC. We urge you to consider these factors and remind you that we undertake no obligation to update the information contained in this call to reflect subsequent events or circumstances.", "Now, please turn to Slide 4 of our presentation, which highlights our financial results for the fourth quarter and full year. Both periods were positively impacted by our settlement with Tata, partially offset by the negative impacts of Indian carrier consolidation-driven churn. During the quarter, our property revenue grew 25.3% to $2.1 billion, our adjusted EBITDA grew more than 38% to $1.4 billion, and our consolidated AFFO and consolidated AFFO per share increased by about 51% and 46% to $1.07 billion and $2.40 respectively. Finally, net income attributable to American Tower Corporation common stock holders increased by 26.4% to $278 million, or $0.62 per diluted common share.", "From a full-year perspective, our property revenue grew 11.4% to $7.3 billion, our adjusted EBITDA grew more than 14% to $4.7 billion, and our consolidated AFFO grew by 22% to over $3.5 billion, while consolidated AFFO per share rose by nearly 19% to $7.99. Finally, net income attributable to American Tower Corporation common stock holders increased by 6.6% to more than $1.2 billion for the year, or $2.77 per diluted common share.", "Before turning the call over to Jim, I also want to note that many of our comments around the fourth-quarter and full-year 2018 results and our 2019 outlook will be focused on growth rates normalized for the impacts of both the Tata settlement and the carrier consolidation-driven churn in India. We view these normalized results as important indicators of the underlying trends of the business. We've included reconciliations of these normalized metrics to our GAAP results in the back of our earnings presentation, in our press release, and in our supplemental package. And, with that, I'll turn the call over to Jim." ] }, { "name": "James D. Taiclet, Jr.", "speech": [ "Thanks, Igor, and good morning to everybody on the call today. My comments will center on two topics: Our early progress on the Stand and Deliver 10-year strategic plan that I announced last year and our specific priorities there for 2019. But first, I'll quickly touch on our 2018 results and a few highlights.", "2018 was another year of strong organic growth for American Tower, particularly in the U.S., as well as disciplined portfolio expansion and continuously improving operational execution. All these factors resulted in double-digit growth and consolidated AFFO per share for the 11th consecutive year. Notably, throughout 2018, our business performed at a high level despite increased macroeconomic, political, and capital markets volatility.", "I believe this resiliency is a reflection of several things: First, the fundamental driver of our business globally is the continued advancement of mobile technology from 2G through 3G and 4G, ultimately to 5G, and the related expansion in the number of highly capable smartphones and other devices along with the corresponding growth in mobile data usage on those devices. Second, we've made a concerted effort over the last 15-plus years to enhance the resiliency embedded within the business model through our innovative contract structures, prudent balance sheet management, diversification strategy, and many other areas. Over the next decade, we expect to use our Stand and Deliver strategy to continue to augment that resiliency while driving attractive growth and returns for our shareholders. The balance of my remarks today will center on a short overview of our progress in year one of our strategy and our priorities for 2019.", "The first focus area of Stand and Deliver is to drive operational efficiency throughout the business, and even throughout the industry. This includes improving the experience for both our tenants through site-level enhancements and process improvements while expanding our margins. In 2018, we continued to drive cycle times down to enable tenants to get onto our sites as fast as possible, which also starts the billing cycle as fast as possible. We also invested more than $30 million in green energy solutions such as advanced batteries, solar installations, and other initiatives, primarily in our African markets, as we sought to optimize the fuel management component of our business there.", "Not only do these investments have the potential to drive significant efficiencies for us and the broader industry as well, they're also helping us reduce our carbon footprint. Meanwhile, in our foundational U.S. business, the benefits of our strong revenue growth paired with our cost controls and operating efficiency led to cash gross margins that were approximately 80 basis points higher than 2017.", "The second platform for Stand and Deliver is to grow our portfolio and capabilities across our served markets. In 2018, we added more than 24,000 sites through acquisitions and new builds and entered Kenya as our 17th market. We're well on our way to integrating these new assets into our comprehensive global portfolio and systems, and as always, these investments were made utilizing our proven return-based capital allocation methodology, which has enabled us to build an unmatched and highly diversified global portfolio over the last two decades.", "A focus on innovation is the third component of our Stand and Deliver strategy, and while we are still in the early stages of our innovation initiative, 2018 yielded some tangible progress toward our long-term goals. Our fiber-related assets in Latin America and South Africa, for example, are today generating cash flow, driving colocation on our newly fiber-connected towers there, and helping position us to benefit from small-cell-driven densification in urban areas like Sao Paolo and Mexico City.", "Earlier-stage projects are also under way, and include everything, from EDGE data centers to a potentially significant expansion of our in-building coverage capabilities through CBRS spectrum, to exploring a possible role in future autonomous driving and drone control networks. In all cases, we're looking for business models that are either based upon or complementary to our existing macro towers. Our innovation initiatives are pursued within the framework of the franchise real estate characteristics that made our existing operations so durable and profitable over the long term. These are commercially sharable assets, long-term contracts, and high operating leverage.", "And, the final element of Stand and Deliver is our commitment to enhancing American Tower's industry leadership as the only true global mobile infrastructure provider to best support our existing and new customers as we enter a 5G future. For example, we're working with leading universities in the field of distributive power generation and power management to optimize site uptime, to minimize ongoing energy costs, and potentially dramatically reduce the mobile industry's carbon footprint in emerging markets by replacing or minimizing the runtime of diesel generators. Furthermore, as I mentioned earlier, we're actively implementing these kinds of solutions already in our major African markets and in India, resulting in a material reduction in our generator runtimes already in 2018.", "From a broader perspective, we worked closely in 2018 with several nongovernment organizations and government bodies to bring the transformational capabilities of mobile broadband to more and more people. In addition to expanding our digital village concept in India, we have now brought that solution to Nigeria and have begun deployments in Latin America as well.", "In 2019, we expect to continue to make progress on the Stand and Deliver strategy in all the areas I just mentioned, and within that general objective, there are several particular items of note. First, as you may have seen in the 2019 outlook we issued this morning, we expect another very strong year of new leasing business in the U.S., with organic tenant billings growth of approximately 7%. To turbocharge that robust demand trend that drives our top line, we're also continuing our efforts on the operational efficiency front in the U.S. market. This includes initiatives to drive down maintenance expenses and a continued focus on using the latest technology to capture and organize all relevant site-level lease data and the structural engineering characteristics of our towers. We're then leveraging that data mining to inform our commercial, operational, and engineering decision-making.", "In our international markets, we have several key points of emphasis. In India, we're focused on managing through the latter stages of the carrier consolidation process and positioning our business there for attractive long-term growth, which we expect to occur. In Africa, we expect to make meaningful investments in fuel management in 2019 while continuing to selectively look for new assets and drive colocation and build-to-suit opportunities with key regional customers. And, in Latin America, we're focused on capitalizing on the current 4G buildouts occurring across the region.", "From a corporate perspective, we expect to further strengthen our balance sheet in 2019 as part of our continuing commitment to our investment-grade credit rating. Maintaining strong liquidity, opportunistically turning out floating-rate borrowings into fixed-rate instruments, and selective debt retirement and refinancings along the way are all potential components of this strategy in 2019.", "Simultaneously, we expect to grow our dividend by around 20%, subject to our board discretion, and continue to view that dividend as a critical component of our return profile. Finally, we anticipate deploying additional discretionary capital toward a combination of site development and construction, acquisitions, and share repurchases consistent with our long-term return criteria.", "In closing, everyone here at American Tower is proud of our long track record of delivering results and even more energized about taking advantage of our unique position in the industry to lead the way into a 5G future. With that, I'll turn it over to Tom to take you through our 2018 results and detailed outlook for 2019." ] }, { "name": "Thomas A. Bartlett", "speech": [ "Thanks, Jim. Good morning, everyone. As you can see, we finished 2018 really strong, with Q4 U.S. organic tenant billings growth of 8%, the receipt of nearly $350 million in cash from Tata as part of our settlement agreement in India, and with solid results throughout our Latin America and EMEA markets. During the year, we deployed over $4 billion in capital, including $1.9 billion for acquisitions, adding over 22,000 new sites, nearly $940 million from CapEx inclusive of approximately $255 million to build over 2,000 new sites, over $230 million to repurchase about $1.6 million shares of common stock, and $1.4 billion to grow our common stock dividend by over 20%, extending our long track record of consistent dividend increases.", "And, as Igor highlighted, we again generated double-digit increases across our key metrics, closing out another solid year for American Tower. Given our high-quality asset base and consistent focus on portfolio diversification, innovation, and operational efficiency, we expect 2019 to be another year of strong performance, but before we get into our 2019 outlook, let me quickly discuss our financial and operating results for 2018.", "If you'll please turn to Slide 6, for the full year, we generated organic tenant billings growth normalized for the impact of India carrier consolidation-driven churn and the Tata settlement of 7.5% on a consolidated basis. Almost 6% of this was driven by volume growth from gross new business throughout our geographic footprint.", "Our reported U.S. property segment revenue growth for the year was about 6%, including a negative impact of 2.6% from lower noncash, straight-line revenue recognition. U.S. organic tenant billings growth, which was largely amendment-driven, was 7.3%, the highest since 2014, and a figure that we believe clearly led our industry. Volume growth from colocations and amendments contributed 5.6% to the full-year growth rate while pricing escalators contributed just over 3%, and this was partially offset by churn of about 1.3% and an impact of less than 20 basis points from some other items.", "Major U.S. wireless carriers made significant network investments throughout the year to keep pace with mobile data usage that experts say continues to grow at 30-40% annually, which drove record levels of new business for American Tower. In fact, we exceeded the prior U.S. record set in 2014 for new business run rate additions by over 14% on a per-site basis and added almost 70% more new business run rate in 2018 than the prior year.", "Our reported international property revenue growth for the year was about 18%, underpinned by normalized organic tenant billings growth of approximately 8%. Our growth internationally was supported by significant network spending by tenants across our footprint, especially in key markets like Mexico, Brazil, and South Africa. While the mix of colocation amendments varied by market overall, colocation amendment revenue drove nearly 6% of the growth while escalators contributed another 4.2%. Other run rate items added 0.6%. This was partially offset by normal due-course churn of around 2.6%.", "And finally, the day one revenue associated with the more than 24,000 sites we added over the course of the year last year contributed another 3.5% to our global tenant billings growth. These new assets included our acquisition of approximately 20,000 sites from Idea and Vodafone in India as well as over 2,400 newly constructed sites, primarily in our international markets, where average day one NOI yields were approximately 10%.", "Turning to Slide 7, we also generated solid adjusted EBITDA and consolidated AFFO growth in 2018, driven by strong revenue growth as well as diligent management of operating and interest expenses, maintenance CapEx, and interest and taxes. As expected, our results also benefited from the Tata settlement recognized in Q4. For the year, adjusted EBITDA grew by more than 14%, with our adjusted EBITDA margin increasing to nearly 63%. On a normalized basis, adjusted EBITDA growth was nearly 9%, with a margin of over 61%. Notably, on an FX-neutral basis, we exceeded our initial 2018 outlook for normalized adjusted EBITDA by over $110 million.", "We also drove double-digit consolidated-AFFO and AFFO-per-share growth for the 11th consecutive year. Consolidated AFFO grew about 22% and consolidated AFFO per share grew nearly 19% to $7.99, while AFFO attributable to common stock holders grew around 17%, or roughly 14% per share. On a normalized basis, consolidated AFFO and consolidated AFFO per share grew over 14% and 11% respectively, and after further adjusting for FX, we outperformed our initial outlook for consolidated AFFO by about $115 million, or $0.20 per share.", "Now, turning to Slide 8, let's now take a look at our expectations for 2019. As we've discussed for the last year or so, the Indian wireless market -- and with it, our Indian tower business -- is in the latter stages of a rapid transformation, which we expect to be a clear long-term positive. With that said, and as we've been communicating, in the immediate term, net transformation is impacting our expectations for 2019 as 2018 churn events flow into our reported results.", "As you can see, we've laid out the property revenue impacts of this related consolidation churn on the slide, and have included similar bridges for your reference for adjusted EBITDA and consolidated AFFO later in the deck. Given the short-term nature of this event, I'll focus the rest of my comments regarding our 2019 expectations on the underlying core trends of the business, which we have labeled as normalized within the slides. The normalized reconciliations are also in the deck's appendix.", "At the midpoint of our outlook, we expect to generate over $7.2 billion of property revenue in 2019. Normalized consolidated property revenue is planned to rise by nearly 6%, including nearly $630 million in FX-neutral property revenue growth, supported by record contributions from colocations and amendments. Our U.S. property revenue is expected to grow by about 4%, including a roughly 3% negative impact from noncash straight-line recognition, while our anticipated international property revenue growth is over 8% on a normalized basis. This 8% includes a $105 million or 3% negative impact of unfavorable FX translation.", "Flipping to Slide 9, we expect organic new business to be the primary driver of growth across our global footprint in 2019, supported by multiple simultaneous network initiatives from the large multinational tenants that comprise a majority of our revenue base. In the U.S., we're projecting organic tenant billings growth of around 7% as carrier spending on 4G continues and 5G-related activity begins to accelerate. On a dollar basis, we expect that the contribution of new business to our organic growth in 2019 will exceed the record levels we saw in 2018, further illustrating the quality of our portfolio and the strength of our contracts. Further, we continue to view the underlying drivers of demand in the U.S. as multiyear in nature, which would yield continued strong growth beyond 2019.", "In Latin America, we expect organic tenant billings growth of between 7-8% for the year. Demand trends in the region remain strong, with carriers focusing on improving and extending 4G networks as advanced devices increasingly enter the marketplace. Additionally, after some volatility around recent elections in several of our larger markets in the region, the macroeconomic and currencies in those markets appear to have stabilized, which we would view as an incremental positive.", "With that said, compared to 2018, our 2019 Latin America organic tenant billings growth rate is expected to be lower, primarily as a result of lower CPI escalators and slightly higher expected churn spilling over from 2018. Interestingly, we expect new business run rate additions to increase by about 10% over the prior year, but we expect new business contribution to organic tenant billings will be about 14% lower due to the timing of these commitments. Over the longer term, we believe we'll have excellent opportunities to build on these expectations as carrier investments continue. In addition, we're excited about our Latin America build-to-suit program in 2019, given the acceleration of network densification needs for 4G in the region. Specifically, our outlook implies that new builds in Latin America will increase by more than 50% versus last year.", "2019 organic tenant billings growth in EMEA is expected to be around 6%, down slightly from 2018. Similar to Latin America, while new business additions are expected to be higher overall, we anticipate marginally lower CPI-linked escalators and slightly higher churn in the region. I'd also note that we expect organic growth to gradually accelerate over the course of the year, particularly in our largest EMEA market, Nigeria. Looking slightly longer-term is our EMEA market's progress with 4G network deployments. We would expect demand trends to further recover. We think we may be seeing the leading edge of that trend in the new build side, where we would expect the total number of new builds in EMEA to rise by well over 50% from 2018 levels.", "And finally, we expect our Asia results in 2019 to again include impact from India carrier consolidation-driven churn. By the end of 2019, however, we expect that most of the redundant legacy 2G equipment resulting from carrier consolidation will be removed from our sites, and carriers will be focused on building out nationwide 4G networks across the market. Notably, our continuing tenant leases in India have an average remaining term of over four years, similar to that of our U.S. business. Given this extended contract length and the level of investment needed to deploy 4G over the next several years, we expect future due-course churn in India to be below historical levels of 3-4%.", "Further, we are seeing evidence that the recovery and investment in the market is beginning to take hold. During 2019, we expect the new business contribution on a per-site basis will increase over 15% from the prior year. By the latter portion of 2019, we expect to be progressing significantly closer to the high single- to low double-digit organic tenant billings growth rates we have historically seen in India. Overall and on a normalized basis, we expect to see organic tenant billings growth of between 8-9% in India for 2019.", "Moving on to Slide 10, at the midpoint of our outlook, we expect to generate just under $4.5 billion of adjusted EBITDA. Normalized adjusted EBITDA is planned to grow by nearly $280 million, or over 6%. This reflects the strong growth trends we are seeing throughout our business as well as the significant operating leverage inherent in the tower model based on the fixed-cost nature of the business. This also reflects the benefits of the power and fuel investments we've made across our markets in Africa, and we expect these investments to drive measurable benefits to our margins during 2019.", "Further, we anticipate that SG&A as a percent of revenue will decline slightly to be around 7.5% on a normalized basis, representing the lowest level in at least a decade. Finally, our normalized adjusted EBITDA expectations include an estimated negative impact of around $45 million from unfavorable FX translation effects and a $75 million impact from lower net straight-line recognition, excluding the straight-line impact associated with the Tata settlement.", "Looking at Slide 11, we expect to translate our solid underlying trends in adjusted EBITDA to strong normalized consolidated AFFO growth. At the midpoint of our outlook, we expect to earn over $3.4 billion of consolidated AFFO, generating $7.70 a share. Normalized consolidated AFFO is planned to grow by a total of nearly $320 million, or roughly 10%. As compared to 2018, this includes an FX-neutral incremental contribution of nearly $400 million from cash-adjusted EBITDA, partially offset by $47 million or so in slightly higher capital improvement CapEx, interest expense, and cash taxes, as well as roughly $35 million from unfavorable FX trends.", "On a per-share basis, we expect normalized consolidated AFFO growth to be over 9% for the year. These solid growth rates illustrate not only our focus on operational efficiency throughout the business, but also our prudent balance sheet management and selective accretive investments. In fact, we expect to convert adjusted EBITDA to consolidate AFFO at a rate of over 90% at the midpoint of our normalized outlook.", "Looking at Slide 12, we remain committed to our long-held return-based diverse capital allocation strategy. In 2018, we deployed about $1.4 billion for our growing common stock dividend as well as over $230 million to repurchase common stock. We also allocated nearly $940 million of CapEx, over half of which was utilized for a combination of new site builds, primarily in our international markets, where the initial NOI yields continue to be in the double digits, and to add incremental capacity to existing sites to support colocation.", "Finally, we spent nearly $2 billion on new assets, primarily in our international markets, to help expand the recurring cash flow generation of the business. We expect to deploy capital in a similarly balanced manner in 2019, including about $950 million at the midpoint of our outlook for capital expenditures, with over half of this again dedicated to increasing site capacity and building new sites.", "Our common stock dividend is planned to grow by 20% or so to $1.7 billion, subject to board discretion, and we also anticipate spending around $800 million to increase our stake in our India business through the purchase of the Tata and IDFC put options, which will raise our AFFO attributable to common stockholders. As we alluded to last quarter, we also continue to evaluate the potential of bringing a financial partner on board in India as a way to further diversify our capital sources.", "Our capital allocation strategy has hinged on our underlying commitment to maintain leverage in the 3-5x range. This diverse capital allocation strategy, coupled with the strict return criteria embedded in our investment methodology, has been the foundation of our ability to cultivate a diverse, expansive footprint of mission-critical communications infrastructure across the globe. That discipline is evident in our long-term track record of delivering solid organic growth year in and year out, and the declining capital intensity of our business, and consequently to the expansion in our return on invested capital. As you can see in this slide, these positive trends continued in 2018.", "Since 2014, we've increased our consolidated AFFO per share on an annual compounded basis by over 15% and increased our return on invested capital by about 1.4%, while at the same time more than doubling our site count, expanding into five new markets and further diversifying our business through our innovation program.", "Slide 13 highlights our tremendous levels of sustained new business growth we've been able to generate and the corresponding increases in our contracted non-cancelable revenue base. These increases are directly attributable to our aforementioned disciplined investment methodology as well as our innovative approach to contract optimization. Over the last five years, our annual organic new business additions have grown at an average rate of over 9%, adding approximately $1.2 billion to our run rate. This has been driven by the compelling secular growth in wireless, our intense focus on offering class-leading service to our tenants, and of course, our high-quality global portfolio and internal focus on operational efficiency.", "Taken together, we believe that these attributes have elevated our organization to a preferred provider status with many of the leading multinational mobile operators around the globe, as evidenced by our results. Going forward, we believe we're optimally positioned to continue to drive strong levels of new business throughout our diverse footprint, and we've been able to leverage this strong organic growth -- as well as selective M&A -- to steadily expand our contracted non-cancelable revenue base, which stood at approximately $35 billion as of the end of 2018. This book of non-cancelable revenue gives us significant visibility into our future cash flows and performance and facilitates a long-term strategic view with regard to our investments.", "Turning to Slide 14 and in summary, as I mentioned, 2018 was another strong year for American Tower, with solid organic growth, particularly in the U.S., where we reached 8% organic tenant billings growth in the fourth quarter for the first time since 2014. We also made significant progress managing through the carrier consolidation in India and expect to return to high single- to low double-digit organic tenant billings growth there in 2020 and beyond. Compelling demand trends coupled with diligent operating expense management enabled us to drive strong adjusted EBITDA and consolidated AFFO, with 2018 marking our 11th consecutive year of double-digit consolidated-AFFO-per-share growth.", "Looking to 2019, we expect another solid year of new business across our portfolio. We again anticipate leading the industry with respect to organic growth in the U.S. and believe we are well positioned on a global basis to take advantage of the substantial investments being made by our tenants on their mobile networks. We are again targeting dividend growth of at least 20% in 2019, subject to discretion of the board, and continue to be prepared to simultaneously make selective investments in growth to help fuel our future performance.", "Looking slightly longer-term, we remain committed to our Stand and Deliver strategy and our innovation program, and expect that these initiatives, coupled with our high-quality global asset base, will position us well to meet the wireless connectivity needs of the future while maximizing shareholder returns for many years to come. And, with that, I'll turn the call over to the operator so we can take some questions." ] } ]
[ { "name": "Operator", "speech": [ "Thank you. Ladies and gentlemen, if you wish to ask a question and you've already given the operator your name, you may press *1 at any time. If you have not given an operator your information, please press *0 and give the operator your name. They will instruct you one step further. Once again, if you've already given the operator your name, you may press *1 at any time. The first question in queue is Matt Niknam, Deutsche Bank. Please go ahead." ] }, { "name": "Matthew Niknam", "speech": [ "Hey, guys. Thank you for taking the question, and congrats on the quarter. So, my question is on the U.S. Can you give us any more color on what drove the acceleration this quarter in organic billings trends, specifically around the nice pick-up in colo and amendment activity? And then, what are some of the underlying assumptions around the '19 outlook, particularly around activity from both Sprint and T-Mobile? Thanks." ] }, { "name": "James D. Taiclet, Jr.", "speech": [ "Matt, it's Jim. The quarterly results we had that were so strong are really endemic of a long-term trend in U.S. wireless. So, a few years ago -- and, we've updated this -- we did a regression analysis at American Tower that correlated our organic growth to 20 or so independent variables, and we tried to tease out which of those variables were the two or three most important ones with the highest R-squared. And so, what we've derived from that were really top two that drove the answer. One was aggregate industry mobile data volume in the U.S. -- so, depending on whether there were six, five, four, or three carriers, how many gigabits per month were going through the mobile network -- the physical mobile network, and that's been going on at a 30-40% rate increase per annum all through this recent three to five years.", "What happens as a result of that in the field is that there's really three outcomes. One is the equipment per site goes up because there's just a larger volume of data going through the sites, and that's one way to handle that data volume. Secondly, there's additional spectrum bands added. That has two ramifications. One is there's more equipment -- again, usually added to specific spectrum bands to optimize their performance. When you put the spectrum band on, you have an optimal size of antenna that goes with it, and often, those are added. But secondly, the higher-spectrum bands also drives density requirement, so that's where some of the colocations come in -- when higher-density bands or volume come in and cause cell splits.", "And then, the last piece of it, which is helpful to us because we have a large in-building footprint in the industry, is that when the data volume goes up that dramatically, offload in buildings with either DAS systems or other technologies more valuable. So, that's one big driver, is just aggregate data volume, and it occurred again in 2018, and it drove a lot of our new business growth.", "Second higher R-squared correlation was total carrier mobile CapEx, and it was at or above $30 billion by our estimate last year. We expect it to be about the same this year, and that has historically -- for our company -- led to mid to high single-digit organic tenant billings growth. So, it's really those two trends manifesting themselves, whether it was the quarter or the year 2018, and we don't really see those trends abating much in 2019." ] }, { "name": "Thomas A. Bartlett", "speech": [ "And, Matt, just to give the math going into 2019, the application pipeline remains really strong, and it was strong across the board throughout 2018, very strong in Q4, and we see that continuing in 2019, largely amendment-driven, as Jim talked about. So, roughly 80% is amendment-driven versus 20% colo. Amendments -- what we're seeing -- are in that $800.00-900.00 range. So, we're looking for a reported 4% with that 3% straight-line decline, so, roughly a 7% growth in our U.S. business. What's interesting is that we actually expect to see higher new business from colo and amendment additions to organic growth in '19 versus '18, and if you actually take a look at just the fact that we're coming off of a higher base at the end of '18 versus coming off '17, it actually had a negative impact of 50 basis points on the organic growth rate.", "So, if you look at the 7% organic growth rate, on the same base, it would be 50 basis points higher. And, the churn is in the same kind of 1.5 -- middle between 1-2%, so, pretty consistent with where we've seen it in the past. Escalators just over 3.1%. So, we're really excited about what we're seeing in the U.S. business, our U.S. team is really excited to drive another year, we think it will again lead the market relative to core organic growth, and so, it's really going to underpin the rate of growth that we're seeing in the consolidated business." ] }, { "name": "Matthew Niknam", "speech": [ "And, just to circle up, I don't think there's any real assumption based on carrier consolidation or a slowdown in activity that's baked into the '19 outlook in the U.S." ] }, { "name": "James D. Taiclet, Jr.", "speech": [ "No. We didn't put any kind of U.S. industry consolidation either way in the 2019 outlook that Tom just talked about." ] }, { "name": "Thomas A. Bartlett", "speech": [ "Keep in mind, that does still have long-term contracts in place, and so, we wouldn't expect to see much activity relative to that event in 2019." ] }, { "name": "Matthew Niknam", "speech": [ "Great. Thank you." ] }, { "name": "Operator", "speech": [ "Next, we have Ric Prentiss, Raymond. Please go ahead." ] }, { "name": "Ric Prentiss", "speech": [ "Good morning, guys. I want to follow up on Matt's questions a little bit there. One of the other items in the U.S. has the other -- you mentioned industry-leading. What do you think the others in the industry are seeing as a required network churn from Metro, Clearwire, and Leap, and those transactions occurred back in 2013-2014? Do you expect to have churn from those guys at some point this next decade? Just trying to figure out when that might come in." ] }, { "name": "Thomas A. Bartlett", "speech": [ "We will continue to see that over the next several years, Ric, but it's all within that 1-2% churn rate that we've talked about." ] }, { "name": "Ric Prentiss", "speech": [ "Okay. And then, Jim, you talked about IDAS a couple of times now. You talked about it in the regression analysis; also, early on, you talked about the potential for CBRS spectrum. Can you help us understand a little bit about the size, what that opportunity might be like, and the timing of it?" ] }, { "name": "James D. Taiclet, Jr.", "speech": [ "Sure. So, our team in the U.S. -- under current technology and the related costs that go with it -- feels like there's about 2,000 interior structures that qualify for the level of investment required to do -- we'll call it traditional indoor distributed antenna systems. So, we're in the very early stage of trying to figure out how can we dramatically increase the addressable market of in-building, and we've got a couple of approaches to that. Something we call carrier-grade Wi-Fi is one, CBRS spectrum deployment to reduce the fiber investment inside of buildings.", "Another one -- millimeter-wave spectrum that some carriers have access to that we could work with or we could get some access to that could be a third way. So, we're just now -- in our innovation team -- doing trials, some with customers, actually, to try to figure out is there a way to take the 2,000 buildings to 100,000 by having the cost of the installation and operation go down and the spectrum requirement go down as far as cost in a way that you can really dramatically upscale the addressable market. But, this is early days, and it's something that we're looking at our long-term plan to help bolster." ] }, { "name": "Ric Prentiss", "speech": [ "So, nothing really in the '19 budget other than the trials and seeing how it could attack, and then, it might be the next-decade-type thing?" ] }, { "name": "James D. Taiclet, Jr.", "speech": [ "Next five to 10 years, if it scales. That would be one of the product roadmaps that we're pursuing. And then, our innovation program, Ric -- because there's some uncertainty and these are longer-term projects, we have a number of these roadmaps that we're pursuing, and some of them will scale, we hope, and others may not, but we have a diverse approach to this like we've had a diverse approach to our international expansion in 2007 and beyond, so we're putting a number of small investments out there to try to build a business model with customers that then can scale." ] }, { "name": "Ric Prentiss", "speech": [ "Great. Thank you, guys." ] }, { "name": "Operator", "speech": [ "Next question is from the line of Batya Levi, UBS. Please go ahead." ] }, { "name": "Batya Levi", "speech": [ "Great, thank you. Just one follow-up on the U.S. When you look at your outlook for incremental EBITDA versus the new revenue, it looks like the conversion margin is a little bit lower. Is there anything to call out there? And then, in Latin America, you mentioned some of the drivers of the slowdown. Can you provide a bit more color on the magnitude of the churn and where that's coming from, and then, how the new business is actually trending in Mexico and Brazil? Thank you." ] }, { "name": "James D. Taiclet, Jr.", "speech": [ "I think the biggest impact, probably, Batya, relative to the conversion rates in the U.S. is probably straight-line. So, I think if you back out the straight-line impacts, you'll continue to see those high rates of conversion, if you will, up in the 80-90% levels in the U.S. market, which have been consistent with some of the prior years. If you look down in Latin America, I think you'll see in the Mexico market, the growth is going to be up in the high single-digit 8-10% range, Brazil is probably a little bit lower, largely due to the escalators, and some of the incremental churn that we expected to occur relative, candidly, to Nextel and some of the other activities down in the marketplace we just haven't seen.", "So, we're anticipating that some of that may rationalize in 2019, and have included that in our forecast. But, overall, as I said, the Latin America market is going to be generating more new business than it actually did in 2018, which is interesting -- as I mentioned in my remarks, the timing of those commencements in terms of where we're looking right now is contributing to the decline, if you will, in the overall organic growth in the market. But again, the teams down in Latin America are really excited about the levels of investments that are being made into those markets, and we expect another strong year down in LATAM." ] }, { "name": "Batya Levi", "speech": [ "Okay, thank you." ] }, { "name": "Operator", "speech": [ "And, next question is from the line of Simon Flannery, Morgan Stanley." ] }, { "name": "Simon Flannery", "speech": [ "Good morning. Tom, you've mentioned about new builds -- Latin America and EMEA up about 50% each. Can you just dig into that a little bit more? How does that look versus the 2,400 you did in 2018? And then, any commentary on the M&A environment? Are you potentially looking at more deals or more countries? Thanks." ] }, { "name": "Thomas A. Bartlett", "speech": [ "Sure, Simon. We have about 3,000 in the plane and are underpinning the forecast, as we talked about this morning. We continue to drive 100-150 per month in India, and what we're seeing in LATAM and EMEA is a lot of what we've seen starting over the last 12 months -- further densification. We've talked about in Brazil the fact that there are 50,000 sites, and we've always thought that they needed perhaps twice as many sites in that market, and I think we're now starting to see that level of investment activity from the carriers in markets like Brazil, and so, we're expecting to see 50% growth rates in those two markets -- LATAM and EMEA -- in 2019, so I think again, it just gets back to the level of investment that the carriers need to be making to continually drive 4G investment in the marketplace.", "And so, Brazil is actually one of the higher-growth markets that we see in terms of new build-to-suits in the market, and as we've always mentioned, the build-to-suit program that we have is the best returning NOI yield that we've got in the business, so, to the extent that we see that even ramping throughout the year, we'll dedicate more CapEx to that." ] }, { "name": "James D. Taiclet, Jr.", "speech": [ "And, on the M&A front, Simon -- it's Jim -- our primary objective is to deepen our position in our anchor markets, we'll call them -- so, the U.S., Brazil, Mexico, S.A. For example, last year, in India, we added to an anchor market we have there in Asia. That's got to get integrated, and some of the rest-of-the-industry consolidation is going to play out before you ever see us do anything else material there, but we would look there in the future, and then add some selected adjacent markets when we have common customers, et cetera, like we did with one last year in Kenya.", "So, that's really how we're approaching this. We don't feel like we have to be doing, on one hand, dramatic inorganic growth to meet our business plan. On the other hand, we're continuously seeking accretive deals that meet our investment criteria, and when those appear and we can get them within our price point, you'll see us act. There's nothing to speak to today specifically, but we're maintaining that similar kind of approach." ] }, { "name": "Simon Flannery", "speech": [ "That point on pricing -- is that a reference to some of the European prices? Is that still an area where you see better value elsewhere?" ] }, { "name": "James D. Taiclet, Jr.", "speech": [ "It really references all regions, including the U.S. and Europe, which are lower ROIs, if you will, than some of the other countries as far as hurdle rates go. However, we've turned away what we think are high-priced deals in all the reasons I just talked about, so we're disciplined across the board. The fact of the matter, though, is that in Europe specifically -- to address that particular question -- there are what I'll call relatively new investors in the tower space that tend to come from infrastructure, pension funds, or insurance firms that maybe have different investment criteria than us, and until those rationalize a bit, it may be tough for us to get to some of these bigger deals." ] }, { "name": "Simon Flannery", "speech": [ "Great. Thanks for the color." ] }, { "name": "Operator", "speech": [ "Our next question is from the line of Amy Yong, Macquarie. Please go ahead." ] }, { "name": "Amy Yong", "speech": [ "Thanks, and good morning. Maybe one on India. When we think about 2020 and beyond hitting normalized growth, what are some of your underlying assumptions around the health of the carriers? And then, on your comments on bringing a new partner, what's the thinking behind that? Is this a leverage issue, or something more on the operational side? Thanks." ] }, { "name": "James D. Taiclet, Jr.", "speech": [ "Sure, Amy. It's Jim. First of all, let's just set the table with India here. There's a reordering going on in the mobile network architecture of that entire country and the 1.3 billion people it serves, and that reordering is going almost immediately from a 2G/3G hybrid network architecture to a full-up, 4G, national, billion-people-served topology for 4G. From an engineering perspective, that's a massive transformation that is going to happen. We're probably in the third inning of that now, which is the decommissioning of a lot of the 2G and 3G infrastructure that really doesn't fit in a 4G three- to four-carrier environment in India over the next seven or eight years.", "So, we see the inflection point, as Tom suggested, in 2020, where now, we're into the fourth or fifth inning of this process and the investment has to come in for the rearchitecturing of this kind of a network, and even 5G is being talked about in India. So, that's where the underlying situation is, we think. And then, as far as the carrier health goes, this is an outcome that we've always expected, with there being three to four significant mobile operators in India because the network investment to get to that 4G architecture was going to be so substantial when you're trying to provide 10 gigabits a month to 1.3 billion people. So, we always expected this.", "Our view of the health of each of those companies -- you can look at their own public statements, but we do think that Voda/Idea, with their merger -- which they're still integrating and need to continue to do -- has made a lot of progress toward positioning itself to achieve long-term growth, improving operating metrics, and both of the parent companies have sort of stepped up with capital commitments or other investment support that should enable this to occur. So, we are quite confident that with the three to four large carriers in India that are now in place, the industry will be able to get healthier in aggregate and financial performance will improve for all of them, but it will take a few years to get to that inflection point." ] }, { "name": "Thomas A. Bartlett", "speech": [ "Amy, just underpinning -- and, to the second question that you had, underpinning this is really a market that we see in India that probably has about 600,000 leases overall from a number of different sources as well as our own internal engineering. We expect that to grow to over a million within the next several years, so that's really underpinning the underlying growth that we see in the marketplace. And, even if you take a look at 2018, and particularly in 2019, you take a look at our new business that we're generating in the market -- we'll generate more new business in 2019 than we did in 2018, and it's a steady growth. On a per-site basis, it's over 15% more.", "So, we're really excited about what we're seeing, and as I mentioned in March, on a normalized basis, when you back out the carrier consolidation churn, we're talking about corrugated growth rates that are up in the 8-9% range, which are actually the highest across the entire footprint. So, we're really excited about what we see in the marketplace, and candidly, we'll be happy to have this consolidation behind us as we move into the latter part of 2019 and then into 2020.", "With regard to your question on partners, it's really opportunistic for us at this point in time. For Jim and me, it's an allocation of capital. To the extent that there's an opportunity there that makes sense, that we can really reallocate capital to some other parts of the business, or to the balance sheet, or whatever it might be that might generate a higher rate of return for our shareholders, then we're going to jump on it. To the extent that it's not, then we won't. So, there's nothing new to report on that. We continue to look at the opportunity, and more to come in the future." ] }, { "name": "James D. Taiclet, Jr.", "speech": [ "Adding new partners in India is not a must-do. It's an optionality that we have." ] }, { "name": "Amy Yong", "speech": [ "Got it. Thank you." ] }, { "name": "Operator", "speech": [ "Thank you. And, we do have time for one final question, and that is from the line of Brandon Nispel, KeyBanc Capital Markets. Please go ahead." ] }, { "name": "Brandon Nispel", "speech": [ "Great, thanks for taking the question. Can you guys just maybe update us on your broader thoughts on the T-Mobile/Sprint merger? Do we see an increase of new leasing activity before churn happens for that? Maybe update us on the exposure for sites that both have T-Mobile and Sprint. And then, maybe talk more broadly about the innovation program. When do you expect these programs to be more material, and when do you expect to share more details regarding these programs? Thanks." ] }, { "name": "James D. Taiclet, Jr.", "speech": [ "Sure, Brandon. This is Jim. I'll speak briefly to the T-Mobile/Sprint situation. The facts of the matter are both those firms right now are about 9% of our consolidated property revenues across the global footprint of American Tower. The overlap, where they both have equipment on the same tower -- each of them is 3-4% of our consolidated revenue, so, about a third of the sites or so, there's potential overlap. Until we get the future network design plan and roadmap for that plan from our customer, whether they merge or not, we can't make estimates on future churn rates, performance, et cetera.", "And, the other ingredient to the unpredictability of this is we have an approach, we think, that's been successful in the past with industry mergers where, because of our scale and because of the diversity of our sites and our ability to operationally execute transitions, we've minimized the churn, as you may have seen, across our industry peer group by those arrangements. So, we would expect to offer a similar opportunity should there be -- and, we don't know if there will or won't yet be a T-Mobile/Sprint merger.", "Along with that, there will be -- whether these companies stay apart or come together -- a combined subscriber group -- together or apart, again -- that will be needing and wanting a 5G service over the next five to 10 years, and that is going to be a significant investment, again, whether these companies are combined or separate. So, too hard to predict right now. Our experience, as many of you know, has been that when we did our assessment on before and after of prior mergers, we actually had revenue growth in aggregate between 15-25% from Point A before the merger was announced to Point B a year after it closed. So, we don't really know how this will play out, but we are well prepared operationally, contractually, and historic performance-wise to address this.", "On the innovation side, again, we are going to make investments only that fit within our investment criteria, just like we do with towers. And so, to give you an estimate of materiality, if you will, it will be difficult on a long-term basis, but we will continue to be able to tell you on a short-term basis how we're doing with that.", "We've already made some material investments in fiber-to-the-tower phased initiatives -- about $700 million so far -- where we have discovered that there's a broader benefit in owning fiber in certain international markets that are poorly served with a fiber-optic cable infrastructure because first and foremost, to drive 4G service, you need fiber-optic cable to the tower, and where we can't get it, we've acted in ways that we've got a high-returning asset already that we're using to bolster our towers' attractiveness, which will turbocharge that investment. So, those are the kinds of innovations that we're discovering as we go, and as far as what the ultimate size of those will be and when they're going to click in, we'll be updating you every quarter." ] }, { "name": "Brandon Nispel", "speech": [ "Great. Appreciate you taking the questions." ] }, { "name": "James D. Taiclet, Jr.", "speech": [ "Sure." ] }, { "name": "Igor Khislavsky", "speech": [ "Great. Well, thank you, everyone, for joining. Have a great day." ] }, { "name": "James D. Taiclet, Jr.", "speech": [ "Thanks, everybody." ] }, { "name": "Operator", "speech": [ "Thank you. Ladies and gentlemen, that does conclude your conference. We do thank you for joining. You may now disconnect. Have a good day." ] }, { "name": "Brandon Nispel", "speech": [ "More AMT analysis", "This article is a transcript of this conference call produced for The Motley Fool. While we strive for our Foolish Best, there may be errors, omissions, or inaccuracies in this transcript. As with all our articles, The Motley Fool does not assume any responsibility for your use of this content, and we strongly encourage you to do your own research, including listening to the call yourself and reading the company's SEC filings. Please see ourTerms and Conditionsfor additional details, including our Obligatory Capitalized Disclaimers of Liability." ] } ]
AMT
2019-05-03
[ { "description": "Vice President, Investor Relations", "name": "Igor Khislavsky", "position": "Executive" }, { "description": "Chairman, President, and Chief Executive Officer", "name": "James D. Taiclet", "position": "Executive" }, { "description": "Executive Vice President and Chief Financial Officer", "name": "Tom Bartlett", "position": "Executive" }, { "description": "KeyBanc Capital Markets -- Analyst", "name": "Brandon Nispel", "position": "Analyst" }, { "description": "Cowen & Company -- Analyst", "name": "Colby Synesael", "position": "Analyst" }, { "description": "Morgan Stanley -- Analyst", "name": "Simon Flannery", "position": "Analyst" }, { "description": "UBS -- Analyst", "name": "Batya Levi", "position": "Analyst" }, { "description": "Bank of America Merrill Lynch -- Analyst", "name": "David Barden", "position": "Analyst" }, { "description": "Raymond James -- Analyst", "name": "Ric Prentiss", "position": "Analyst" }, { "description": "Citigroup -- Analyst", "name": "Michael Rollins", "position": "Analyst" }, { "description": "Deutsche Bank -- Analyst", "name": "Matthew Niknam", "position": "Analyst" }, { "description": "Oppenheimer -- Analyst", "name": "Timothy Horan", "position": "Analyst" }, { "description": "JPMorgan -- Analyst", "name": "Philip Cusick", "position": "Analyst" } ]
[ { "name": "Operator", "speech": [ "Ladies and gentlemen, thank you for standing by. Welcome to the American Tower First Quarter 2019 Earnings Call. Now at this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session. (Operator Instructions) As a reminder, today's call is being recorded and your hosting speaker Igor Khislavsky. Please go ahead." ] }, { "name": "Igor Khislavsky", "speech": [ "Thanks, Kevin. Good morning and thank you for joining American Tower's First Quarter 2019 Earnings Conference Call.", "We've posted a presentation, which we'll refer to throughout our prepared remarks, under the Investor Relations tab of our website, www.americantower.com. Our agenda for this morning's call will be as follows. First, I'll provide an overview of our financial results for the quarter. Next, Jim Taiclet, our Chairman, President, and CEO, will provide a brief update on our U.S. business. And finally, Tom Bartlett, our Executive Vice President and CFO, will discuss our first quarter results and 2019 outlook in more detail. After these comments, we will open up the call for your questions.", "Before I begin, I'll remind you that this call will contain forward-looking statements that involve a number of risks and uncertainties. Examples of these statements include our expectations regarding industry trends, as well as our future growth, including our 2019 outlook, capital allocation and future operating performance; the pacing and magnitude of the Indian carrier consolidation process and its impacts on American Tower, and any other statements regarding matters that are not historical facts.", "You should be aware that certain factors may affect us in the future and could cause actual results to differ materially from those expressed in these forward-looking statements. Such factors include the risk factors set forth in this morning's earnings press release, those set forth in our Form 10-K for the year ended December 31st, 2018, and in other filings we make with the SEC. We urge you to consider these factors and remind you that we undertake no obligation to update the information contained in this call to reflect subsequent events or circumstances.", "Now, please turn to Slide 4 of our presentation, which highlights our financial results for the first quarter of 2019. As expected, these results, as well as our year-over-year growth rates, were impacted by Indian carrier consolidation-driven churn. During the quarter, our property revenue grew 4.4% to $1.8 billion, our adjusted EBITDA grew by 5% to $1.1 billion and our consolidated AFFO and consolidated AFFO per share increased by 6.7% and 5.4% to $861 million and $1.94 per share respectively.", "Finally, net income attributable to American Tower Corporation common stockholders increased by more than 44% to $397 million or $0.89 per diluted common share. Additionally, like last quarter, many of our comments around first quarter results and our 2019 outlook will be focused on growth rates normalized for carrier consolidation-driven churn in India. Normalized outlook growth rates also adjust for the non-recurrence of the impacts of the Tata settlement we recorded in the fourth quarter of 2018. We view these normalized results as important indicators of the underlying trends of our business. Reconciliations of these normalized metrics to our GAAP results are included in the back of our earnings presentation, in our press release and in our supplemental package.", "And with that, I'll turn the call over to Jim." ] }, { "name": "James D. Taiclet", "speech": [ "Thanks Igor and good morning to everyone on the call. My remarks today will focus on the traditional first quarter report theme of our U.S. business, which accounts for the majority of our cash flows. ATC's U.S. operations continue to generate strong organic tenant billings growth, achieving 8.2% in Q1 2019. Rapidly rising mobile data usage in the range of 30% to 40% per year remains the underlying driver of demand for our U.S. assets. The sheer growth in the volume of mobile data traffic, plus consumers expectations of ubiquitous, higher quality coverage, motivate the national wireless carriers to continually invest in their networks to remain competitive.", "Consequently, we again expect U.S. aggregate mobile CapEx in 2019 to be on the order of $30 billion, as carriers preserve network quality and enhanced capacity. For ATC, we expect that to translate into significant lease amendment revenue growth on our towers, including for equipment to support the deployment of new and repurposed spectrum bands. Independent industry research estimates suggest that elevated usage trends will persist, as more advanced devices, applications and network technologies are introduced in the United States. One key projection is that by 2023, the average U.S. consumer mobile device is expected to consume nearly 50 gigabytes of data per month, which is nearly four times current levels.", "Meanwhile, industry analysts are also forecasting the deployment of more than 0.5 billion active IoT devices in the U.S. within the next five years . Taken together, in aggregate. Monthly U.S. mobile data usage is therefore predicted to exceed 20 exabytes by 2023, again, about four times today's levels. As our tenants seek to optimize their networks in the context of this tremendous usage growth, initial deployments and mobile operator planning for wider implementation of 5G have intensified.", "As described in their respective public statements, each U.S. wireless carrier is crafting its own individual approach to the rollout of this new technology. Each has outlined initial plans, based on specific spectrum assets, coverage goals and a number of other factors. At the same time, there are few fundamental 5G-related themes that we believe will be broad based throughout the industry.", "In addition to providing a more efficient technology to help support the existing pace of aggregate data demand growth, we expect 5G to usher in a variety of new products and services for both consumers and businesses. These will include numerous IoT functions and a host of other low latency, high bandwidth applications. And when it comes to 5G, we firmly believe that a substantial portion of that network investment will be oriented toward macro towers, utilizing sub-6 gigahertz spectrum to serve the needs of the 85% of the U.S. population that's living outside of urban areas. This is likely to include spectrum assets like 600 megahertz, 2.5 gigahertz, CBRS and the C-band, among others.", "All these bands, largely deployed on macro tower assets, will likely be utilized to achieve the capacity and the broad coverage needed to serve the topographic and demographic realities of the United States population. Importantly, we view our approximately 40,000-site macro tower portfolio as extremely well positioned to capture a significant portion of this activity during the evolution from 4G to 5G, similar to past network technology cycles.", "Our franchise real estate assets typically have significant incremental capacity and are located in high value areas, such as highway corridors and major suburbs. We contract for space on these assets under lease structures that have enabled us to maximize the revenue and cash flows throughout the mobile technology deployment cycle, while at the same time providing significant value to our tenants. We believe that the combination of the highest quality asset base and the resiliency of our carefully crafted commercial agreements, has contributed to the relative outperformance in our organic growth for the U.S. business within our domestic peer group.", "Slide 6 of our earnings deck provides a quick overview of our recent U.S. track record. As you can see, U.S. organic tenant billings growth since 2015 has averaged more than 6.5% at American Tower, including another strong year expected now in 2019, at roughly 7%. An important component of this growth has been consistently low churn, averaging under 2% over the same time period, which correlates directly with our lease arrangements and ability to mitigate churn events, including those resulting from carrier consolidation. We've also made a concerted effort to build and acquire low capital intensity assets that show attractive operating leverage.", "As a result, U.S. capital intensity for ATC has declined over time, as revenue has grown and maintenance CapEx has remained broadly consistent on a per site basis. Consequently, the overall return on invested capital for our U.S. tower assets has risen by nearly 240 basis points since 2015, with sites we've owned since 2010 generating an even higher ROIC, approaching 20%.", "Based on the underlying demand trends in the industry, the upcoming rollout of 5G, anticipated deployments of new spectrum and our strong competitive positioning, we expect that our core U.S. business will continue to produce favorable results over a multiyear period looking forward. At the same time, we are proactively looking for ways to further enhance our growth trajectory, augment the value of our existing assets and explore efficiencies through our innovation program. This program includes attracting new tenants and industries beyond our traditional telecom tenants, finding new ways to take advantage of the ground space at the base of our tower sites, along with a number of other opportunities. We've also made some relatively small investments in international fiber within that innovation framework, but continue to view U.S. fiber assets as inherently less attractive, due to the extensive availability of competitive fiber supply in the U.S. and the resulting less attractive growth and return characteristics of domestic U.S. fiber.", "One area of focus I'll expand on for just a few minutes is the initiative that we are pursuing on EDGE data. As information generation and processing progressively moves to the network EDGE, particularly with respect to advanced IoT applications, we expect there to be a greater need for lower latency through distributed storage and compute functionality in close proximity to both wireless and wireline end consumers. As compute offerings may eventually serve autonomous vehicle networks, Interactive and immersive media delivery, content caching and any number of other products and services where low latency is a must or data needs to be closer to the consumer or the machine. We've been evaluating this for some time, and have an ongoing EDGE compute trials at several of our tower sites.", "In addition, we recently acquired Colo Atl, an interconnection facility in Atlanta to further explore the latency and distributed transport networks and had a firsthand look at the early stages of the cloud evolution to the EDGE that we expect to see accelerate the future.", "Colo Atl is exactly the type of asset that is ideally suited for our innovation program. The $70 million or so purchase price represents a roughly 15 times year-one adjusted EBITDA multiple and we expect additional growth as this facility is leased up, driving an attractive return on the existing business. Even more importantly, Colo Atl affords us the opportunity to learn firsthand about the evolution of connectivity for consumers' devices, IoT units and autonomous vehicles to the cloud. This includes direct and interactive knowledge of potential future tenant needs, key trends like cloud gaming technology developments, like hybrid cloud and a host of other aspects that we could not evaluate and prototype with partners without owning an asset like this.", "At the same time, I'll emphasize to everyone that projects like Colo Atl do not indicate a shift in strategy or a material pivot in focus for American Tower. On the contrary, our innovation investments are designed primarily to drive additional tenant leasing growth on our tower and in-building systems, whether it be from existing or new customers and adjacent assets that enhance the leasing value and potential of the tower. Importantly, we will apply the same capital allocation discipline that we've used for our tower acquisitions over the years to sizable innovation-related investments that we might explore.", "In the U.S., in particular, we believe those existing assets are poised to deliver continued strong performance, based on the drivers I referenced earlier. In short, we anticipate more equipment finding its way onto more of our sites as network quality and performance remain essential to our domestic wireless operator tenants. Moreover, whether there are three national wireless players or four in the U.S., the number of subscribers will remain consistent and these subscribers will continue to expand their data usage. Therefore, in either a four or three carrier market, we would continue to expect 30% to 40% annual mobile data usage growth, roughly $30 billion of industry CapEx annually and further deployment of 4G and 5G equipment on towers. Consequently, we expect to generate continued solid U.S. organic growth and attractive returns over our planning cycle.", "With that I will turn the call over to Tom to go through our results for the quarter and our 2019 outlook." ] }, { "name": "Tom Bartlett", "speech": [ "Thanks, Jim. Good morning, everyone. Following a strong finish to 2018, we kicked off 2019 with a terrific set of results. Our Q1 U.S. organic tenant billings growth came in at over 8%, new business trends throughout our Latin America and EMEA segments remained solid, the recovery in India continue to progress in line with our expectations and we constructed over 700 sites globally. We also grew our common stock dividend by 20% over the prior year quarter, while continuing to deploy capital to both our core business and to select innovation-oriented investments that Jim just mentioned.", "With that, let's take a deep dive into our first quarter results and our outlook for the full year. If you please turn to slide 8. During the quarter, we generated consolidated organic tenant billings growth, normalized for the impacts of Indian carrier consolidation-driven churn of over 8%. More than 6% of this was driven by volume growth from gross new business.", "From a segment perspective, our U.S. region reported property revenue growth for the period of nearly 6%, including a negative impact of 2.3% from lower non-cash straight-line revenue recognition. This reflected our second consecutive quarter of record new business contributions, leading to organic tenant billings growth of 8.2%. Volume growth from co-locations and amendments contributed over 6%, while pricing escalators contributed just over 3%. This was partially offset by churn of about 1.3%. Our major U.S. wireless carrier customers continue to make significant network investments to keep pace with the growing mobile data usage. And we again saw activity, largely weighted toward amendments in the quarter.", "Our reported international property revenue growth during the period was about 3%, including a negative impact of 9% due to the Indian carrier consolidation-driven churn. Underpinning this growth was normalized organic tenant billings growth of over 8%. International new business was supported by significant network spending from tenants across our footprint, especially in key markets like India, Mexico and South Africa. New business revenue from co-locations and amendments drove about 6% of the growth, while escalators contributed nearly 4%. Other run rate items added nearly 1% with normal due course churn offsetting the items above by just over 2%.", "As expected, the flow-through financial impacts due to the India carrier consolidation churn accelerated in the quarter and Q1 should be the high watermark for the year, regards this consolidation churn. Consequently, we expect to see sequential improvement in India churn starting in Q2 and anticipate that overall organic tenant billings growth rates in the market to approach historical rates beginning in 2020. In fact, even in this past quarter, normalized organic tenant billings growth in Asia was over 10%.", "And finally, the day one revenue associated with the more than 25,000 sites we've added over the course of the last year, contributed another 4.2% to our global tenant billings growth. These new assets included our acquisitions of around 20,000 sites from Vodafone and Idea in India, as well as the nearly 3,200 newly constructed sites, built primarily in our international markets. Our average day one U.S. dollar denominated NOI yields were nearly 12%.", "New builds continue to be an integral part of our capital deployment program. We had a strong quarter of activity in Q1 across our international markets, constructing more than double the number of sites we built in Q1 of 2018. In India, we sustained momentum from last quarter and built over 540 sites, while also building nearly 100 sites in both EMEA and Latin America. Importantly, the day one NOI yield on these sites remained extremely attractive, with yields on new builds in India and EMEA, in particular, generating initial NOI yields in the mid-teen percent range. This activity is an extension of the historical success we've had building sites across our diverse international portfolio where carriers continue to make significant investments in network coverage and capacity. In fact, more than 15% of our total international portfolio is comprised of sites we've constructed, with NOI yields on those sites now in the 20% range. And as I will touch on later, given the attractive economics of these projects and the strong demand for additional towers, particularly in India and Africa, we expect our construction activity to ramp throughout the year.", "Turning to Slide 9. We also generated solid adjusted EBITDA and consolidated AFFO growth during the first quarter, driven by the strong revenue growth and diligent management of operating industry -- interest expense and seasonally low maintenance CapEx. Adjusted EBITDA grew by nearly 5% with our adjusted EBITDA margin increasing to about 61.5%. Normalized adjusted EBITDA growth was over 9%, resulting in normalized adjusted EBITDA margin of nearly 62%. These results included benefits from recent investments we've made in power and fuel, particularly in our African markets, where we continue to optimize our processes and invest in solutions like lithium-ion batteries and solar power. As a result of these investments, for example, we reduced our generator run hours in Africa by over 15% as compared to Q1 of 2018 and continue to look for ways to further reduce our fuel consumption.", "We also drove solid consolidated AFFO and AFFO per share in Q1. Consolidated AFFO grew by nearly 7% and consolidated AFFO per share grew over 5% to $1.94 per share, while AFFO attributable to common stockholders grew nearly 8% or over 6% per share. On a normalized basis, consolidated AFFO grew by over 11% or nearly 10% per share. This was driven largely by our strong cash adjusted EBITDA growth, as well as prudent maintenance of our balance sheet. In addition, our Q1 results also benefited from the lower seasonally adjusted maintenance CapEx levels, which we expect will revert to a more typical range as we move through the rest of the year.", "Turning to Slide 10. Let's now take a look at our expectations for 2019, which are largely consistent with the outlook we previously reviewed with you, given we only issued guidance just a short while ago. At this point, we are reiterating our expectations for organic tenant billings growth across all of our geographic segments. Trends continue to be roughly in line with our prior assumptions. We continue to expect normalized international organic tenant billings growth to be about 50 basis points higher than our U.S. organic tenant billings growth of about 7%. These projections include a record year of contributions from co-locations and amendments throughout the business, just as we discussed last quarter. We expect to see a return to positive organic tenant billings growth in our international business by Q4, after flushing out most of the remaining Indian carrier consolidated churn.", "Looking at Slide 11. At this point, we're also maintaining our expectations for 2019 property revenue, despite FX headwinds of around $13 million versus our prior outlook. Current assumptions reflect a $10 million increase in U.S. revenue versus our prior outlook, primarily driven by the combination of slightly higher straight-line revenue and acquisitions closed in the quarter. In addition, we expect around $3 million in outperformance internationally, including higher new build assumptions, particularly in EMEA. We view this is an early indication of increasing demand for tower space in the region.", "We are also reconfirming our expectations for adjusted EBITDA at the midpoint of our outlook, despite approximately $14 million in unfavorable FX translation. This is primarily due to the revenue items I just mentioned, as well as some slight outperformance on the operating expense side throughout the business.", "And lastly, we are reiterating our expectations for consolidated AFFO for the year, with the business offsetting about $12 million in unfavorable FX. On a per share basis, we continue to expect normalized growth of over 9% at the midpoint, reflecting our strong operating leverage.", "Moving to Slide 12. I'd like to now briefly discuss our capital allocation plans for the year and the success of our capital allocation program historically. We continue to target our annual common stock dividend growth of at least 20%, subject to discretion of the Board and expect to declare roughly $1.7 billion in dividends in 2019. In addition, we plan to deploy $1 billion toward our CapEx program with over 80% of that spending being discretionary in nature. This is up $50 million as compared to our prior expectations, driven by a 250-site increase in expected new builds for the year. We now expect to construct almost 3,300 sites at the midpoint during 2019, which would represent a new record for American Tower. This speaks to the tremendous long-term opportunity we have in our existing markets to add incremental scale and help our tenants add coverage and capacity to their networks.", "Importantly, and as I mentioned earlier, most of our new builds are concentrated in our India and African markets, where initial NOI yields on new site builds were in the mid-teens in Q1. We are especially pleased by the progress we've made in Nigeria, our largest market in Africa, where we have a strong new build pipeline. And finally, taking into account the M&A we've completed year-to-date, the first part of the Tata's options being exercised in our India business that were redeemed in Q1, and the second part that we would expect to redeem in late Q2 or early Q3, we've committed roughly $900 million to acquisitions.", "Our capital allocation plan for 2019 is firmly aligned with our capital allocation methodology we've used over the last decade to drive attractive long-term returns. This process focuses on constructing and acquiring assets that have exclusive real estate rights, significant structural capacity, low capital intensity and the potential for sustained long-term growth in free cash flow generation, all at attractive price points. Since 2009, utilizing this criteria, we've amassed a high quality portfolio of communications infrastructure assets in the most significant free market democracies around the globe and expanded our global site count at an average annual rate of over 22%. This has driven a free cash flow CAGR of over 15% over the same period. That growing recurring free cash flow base has enabled us to further expand our portfolio, while maintaining a strong balance sheet and simultaneously returning capital to shareholders through our common stock dividend and share repurchase programs.", "Turning to Slide 13. A key part of our ability to deploy capital effectively has been an extensive evaluation of different asset classes within the communications infrastructure space, drawing on a large set of historical data. For example, while we have a leading portfolio of macro towers in the United States, we also have one of the largest network of indoor DAS systems in the United States and a smaller portfolio of outdoor small cells. We evaluate the performance of these assets regularly, to help inform our future investments in the U.S. and our international markets, where small cell densification is typically in earlier stages. As you can see on this slide, the performance of these assets has varied considerably over time, with towers indoor systems generating margins and returns significantly in excess of outdoor small cells. This divergent performance is in part due to the much higher tenancy ratios we have seen on towers and venue-based DAS systems, as opposed to outdoor networks with towers and indoor DAS at over 2% (ph) and non-venue outdoor DAS in the low-1% (ph) range.", "Additionally, the capital intensity of outdoor systems in the U.S. is higher with incremental CapEx generally required to secure additional tenants. And finally, the cash flows of small cell systems tend to be more non-recurring in nature, due to the non-cash prepaid amortization revenue associated with upfront capital contributions. Armed with this historical data, we've optimized our capital allocation decisions over time to ensure that capital is deployed to more attractive projects, centered on inherently more attractive assets. This drove our decision to increase the scale of our macro tower and indoor system portfolio in the U.S. through large transactions with GTP and Verizon, for example, while passing on large U.S. fiber assets that have been available for sale. Importantly, we expect to utilize this framework within our innovation program as well. Significant innovation investments, just like the investments we make in our core business, must conform to the same rigorous database criteria, as well as the governance and decision-making approval process.", "Turning to Slide 14 and in summary, 2019 is off to a strong start in American Tower with solid organic trends being realized across our global footprint. Our U.S. business generated organic tenant billings growth of 8% or above for the second consecutive quarter, while new business in EMEA and India continues to build. We've also increased assumptions for new site builds, driven primarily by the elevated demand from our carrier customers in Nigeria, which speaks to the tremendous need for incremental coverage in the emerging markets we serve, as the technological migration to 4G continues. We were able to translate this strong top line growth and the solid growth in adjusted EBITDA and solid AFFO per share and expect to grow AFFO per share on a normalized basis by over 9% for the full year.", "Additionally, we remain firmly committed to growing our common stock dividend, subject to the Board's discretion, as a key part of our total return formula, while maintaining our long-held financial policies and investment-grade credit rating. All in all, we expect 2019 to be another solid year and look forward to updating you all on our continued progress in July.", "With that I'll turn the call over to the operator, so we can jump into some Q&A." ] } ]
[ { "name": "Operator", "speech": [ "(Operator Instructions) With that being said, we'll go straight to the first question from Brandon Nispel, KeyBanc Capital Markets. Please go ahead." ] }, { "name": "Brandon Nispel", "speech": [ "Great, thanks for taking my questions. I had two if I could. First in the US business, another strong quarter of 8%-plus growth. I think some people had thought that that could never happen, given the size of your business. Can you maybe unpack that growth in terms of what percentage of your new leasing activity is coming from the big four US carriers and was hoping that you could also impact your guidance along the same lines for the year?", "Secondly, one of the things that we get questions on, and I thought was highlighted really well on the call, was the return on investment in the US business. When you think about the different international markets you had and maybe particularly India, I was hoping you could comment on your longer-term expectations for return on investment and whether or not there are any structural benefits or negatives that may make those markets less attractive from a return on investment standpoint. Thanks." ] }, { "name": "James D. Taiclet", "speech": [ "So Brandon, good morning. The percent of US business coming from the big four carriers in the United States, both for the quarter and our expectations for the year is going to range 85% to 90%, coming from those four companies. So that's similar for both current results and for the guidance for the year. And then when it comes to India and emerging markets in that, Asia generally low to mid-teen percent ROI is our ultimate goal, or ROIC. So we expect to attain that within the planning period, which is 10 years for each investment, so with the Viom investment a couple -- three years old, we expect by the mid-2020s that we should be able to achieve that kind of level." ] }, { "name": "Tom Bartlett", "speech": [ "And just to add on, just on the color on the growth. Again, we're still, as I mentioned, largely amendment-driven in 2019, and I would expect that to be the same really. For the balance of the year, it is probably 80:20 kind of relationship. And as Jim mentioned, on the ROI, I mean if you take a look at the US actually in EMEA and LATAM, our ROICs in those markets are largely (ph) 10% at this point in time. Now given the consolidated churn that we've seen in India, the ROIC in that particular region is below 10%, probably in that 6% plus kind of range. So we would -- obviously given the growth that we've seen in the market -- by the way, in Q1 we had a record level of new co-locations in Mammoth, contributing to the organic growth in that market. So, and as I mentioned, there over kind of a 10% on a normalized basis growth. So we would definitely see that kind of expansion ROIC over the next several years." ] }, { "name": "Brandon Nispel", "speech": [ "And I guess, if I could just follow up quickly, 85% to 90% new leasing from Big Four, how does that compare with what you've seen historically?" ] }, { "name": "Tom Bartlett", "speech": [ "It's very consistent with what we've seen historically." ] }, { "name": "Operator", "speech": [ "Thank you. And next question is from the line of Colby Synesael with Cowen & Company. Please go ahead." ] }, { "name": "Colby Synesael", "speech": [ "Great, thank you. As it relates to your innovation program and I guess that's where the Colo Atl $70 million investment fits in. I'm just curious, how big is that program and what is the expectation or what expectation should we have for additional smaller, I guess what I would refer to as just trial type acquisitions, just to learn more about that market?", "And then secondly, as it relates to the US organic guidance of around 7% versus the 8% plus you just did that obviously would imply then that we should see a notable step down as we go through the year. How should we interpret that in terms of what might be driving that slowdown as we go through? Thanks." ] }, { "name": "James D. Taiclet", "speech": [ "Colby, good morning. It's Jim. On the innovation program, we're essentially in the exploratory and prototyping phase with outside customers, including in some areas the big four or international markets, there's sort of a prevalence overseas in markets, whether it's energy management or it's figuring out what the EDGE data plan is going to be, is often with our current customers. And secondly, we're trying to understand and prototype projects with customers -- potential customers that might scale in industries other than telecommunications, which will need those kind of assets, so the kind of assets that we provide, which are tower sites and indoor DAS systems, predominantly.", "So that's the realm of the program. What we spent so far to-date on capital expense has been -- and mergers and acquisitions has been about $1 billion total. The bulk of that in five related assets outside the US, whose predominant purpose at ATC is to connect fiber to towers in markets and countries where there isn't a robust fiber supply base, like there is in the US.", "So for 4G sites and certainly for 5G, every tower is ultimately going to need a fiber like connection or fiber connection to it and we're making most of our investments to lay the groundwork literally for that to happen in emerging markets. And so, as Tom said, we're only going to make investments in assets and in locations and for applications that we expect to meet our return criteria similar to towers." ] }, { "name": "Tom Bartlett", "speech": [ "And Colby, regarding to your second question, at this point of time in the year we're keeping our annual guidance roughly the same. Really the only issue with the guidance is, as I mentioned, kind of a short while ago, we continue -- we are seeing the same positive trends we expected when we originally rolled out the guidance just a couple of months ago. Coming into the year, you always have more visibility into the first half. So makes sense that you would expect a stronger first half, and as you know, as we progress through the year and in July, to the extent that we see some different trends, hopefully, we will see upside, but we'll see, and we'll update that guidance in July." ] }, { "name": "Colby Synesael", "speech": [ "So, nothing specific that you're thinking of that would clearly lead to a step down? I guess, sounds like just more conservatism at this point than anything else." ] }, { "name": "Tom Bartlett", "speech": [ "Yeah, I think that's fair. I mean I think we have strong application pipelines. The US group is -- our US team is excited about this types of activity that they're seeing and we're coming off a very strong first quarter, and hopefully, we'll see some of those continuing trends going forward." ] }, { "name": "James D. Taiclet", "speech": [ "There's one mathematical factor in addition to that, which is the quarterly comps from year-to-year can vary. Right? So in 2018 at ATC, we had relatively lower growth than later in the year, and this year we're having initially high growth and we've kept our guidance, as Tom said, for the following quarter. So even the comps mathematically, simply give you a little bit of a different answer, if you will, going forward. So again, we'll update everything based on what actually happens over the next couple of months." ] }, { "name": "Colby Synesael", "speech": [ "Thank you." ] }, { "name": "Operator", "speech": [ "And next question is from the line of Simon Flannery, Morgan Stanley. Please go ahead." ] }, { "name": "Simon Flannery", "speech": [ "Great, thanks a lot. I wonder if we could talk a little bit about some of the international markets. Can you drive it a little bit more into the individual markets in Latin America and EMEA, what are you seeing, where it's strong, where it's a little bit slower? And also in Europe, there's a lot of portfolios that are potentially being offered by the carriers. How do you think about that market and is there likely to be any value there to cause you to do more in that area? Thanks." ] }, { "name": "James D. Taiclet", "speech": [ "Sure, Simon. Some of the strong international markets continue to be Mexico, which is having a 4G campaign, if you will, between the new entrant Altan, and some of the incumbents that are already there. Brazil has also been strong. All four of their wireless operators there are competing in deploying 3G and 4G. In spite of all that there are some lower escalators based on inflation, and also some slightly higher churn in the markets, due to some Nextel legacy items that's it rolling off, which we expected anyway. So -- but overall growth -- gross growth rates, as Tom suggests, in Brazil are really strong. India is really coming back on the new business, the gross new business, if you will, before churn and we expect that trend to continue, especially with the rights offerings and other capital raising activities of Idea, Vodafone and Airtel along the way. So when you add it all up, it's about 10% plus normalized organic growth in our international markets in our forecast this year.", "As far as European assets, so we're going to look at them through the same lens we've always looked at them through, most likely lower growth than some of our current markets. including the US. Also some industry structure concerns over there that could also inhibit growth in returns and frankly, there is a new investor class coming into that space, it has come into that space that has lower return criteria and until that changes, because we're not changing our investment criteria, we may or may not act in a large way in Europe." ] }, { "name": "Simon Flannery", "speech": [ "And the industry structure means less than four players or what's that kind of comment?" ] }, { "name": "James D. Taiclet", "speech": [ "Well there are three or four mobile operators in all the markets which -- in Europe, which causes them to be highly competitive, it's tougher for them to -- because the countries are smaller in scale than, say, the US is to invest as sort of rapidly, historically, than the US will invest. So growth rates tend to be a little bit lower. And then there's the standard supply side of towers in Europe, which tend to be shorter, a lot of overlap and often some churn that comes with infrastructure consolidation that you have to absorb if you're into these businesses. So those are some of the structural issues in Europe that we think retard the growth rate potential a little bit." ] }, { "name": "Tom Bartlett", "speech": [ "Even, Simon, if you take a look at the press release, just look down the segment information, you can see some of the growth we had in the quarter internationally in co-locations and amendments and we have roughly $32 million of new business versus $27 million (ph) from last year. So I think they're all strong growth, and it's largely being led by India. I mean, the -- Latin America continues to be strong and EMEA is up a little bit, but India has actually been kind of the driving force in Q1. So just something to look at." ] }, { "name": "Simon Flannery", "speech": [ "Thank you." ] }, { "name": "Operator", "speech": [ "Our next question is from the line of Batya Levi, UBS. Please go ahead." ] }, { "name": "Batya Levi", "speech": [ "Great, thank you. In the US, can you provide maybe a little bit more color on the type of early activity and applications you're seeing related to 4G deployments and how do you think that changes the 80:20 amendment new lease mix going forward? Do you think some of that new business has gone toward carrier-owned towers or maybe other private companies? And just lastly, can you provide an update on the monthly revenues you get from the amendment today, how's that been increasing over time?" ] }, { "name": "James D. Taiclet", "speech": [ "I mean I think -- I think the question was on the 5G, what are you actually seeing relative to deployment of 5G activity on the -- on the towers, is that correct?" ] }, { "name": "Batya Levi", "speech": [ "That's right. Then amendment, new lease and if you're -- if you think some of that activity is actually going toward their own towers or other private companies?" ] }, { "name": "James D. Taiclet", "speech": [ "Well, I don't know about that mix. I can tell you that I'm -- I mean it's a better question for the carriers themselves in terms of the types of things that they are deploying. But I'm sure that they are 4G enhanced, they are 5G radios that are being deployed as we speak. So that when 5G gets turned on, it's really just a kind of a software upgrade. So I'm certain that they are those applications. I don't know what the percentage is relative to how much of that activity is normal -- to normal kind of 4G activity, but I'm certain that the carriers themselves are deploying that kind of technology. I mean if you look at T-Mobile, they talked about 600 megahertz being rolled out to really support their nationwide 5G capability.", "So you know that -- those types of radios are being deployed. And relative to amendment activity, as I said, overall amendments are roughly 80%. The activity that we're seeing from an application and a -- perspective in the United States, they're probably in the $800 -- $800, $900 range, given the level of equipment that is being put on the sites and amending those particular leases." ] }, { "name": "Batya Levi", "speech": [ "Okay, thank you." ] }, { "name": "Operator", "speech": [ "Next question is from the line of David Barden, Bank of America. Please go ahead." ] }, { "name": "David Barden", "speech": [ "Hey guys, thanks for taking the questions. I guess -- two, I guess, to start. First would be, SBA went out of their way to call out Dish as a new business driver for them. Sounds like they were willing to be flexible to kind of accommodate some Dish's challenges that they look to kind of get their 2020 deadline fulfilled. So I was wondering if you guys could kind of address that opportunity and what it's contributing to this kind of 8.2% domestic growth rate that we're seeing today?", "And then the second is, Jio in India has spoken publicly about trying to monetize its roughly 100,000 tower portfolio, and I could see how that might represent a potential risk if it fell into an independent operator's hands or a potential opportunity if it represented a consolidation opportunity for American Tower. So I wonder if you could talk about the risk-opportunity that Jio represents in their tower portfolio? Thanks." ] }, { "name": "James D. Taiclet", "speech": [ "As far as specific customers, including Dish, David, we don't comment on either negotiations contracts or new business flow with any of them, but you can assume that for us Dish is in that 10% to 15% -- within that 10% to 15% non-major carrier new business ratio that we talked about earlier. As far as Jio, yes, there are press reports about the company exploring ways to either refinance or monetize or spin off tower and fiber assets. we will stay abreast of that -- those developments. Historically, when independent investors eventually get a hold, if they do of carrier-owned tower assets that's good for the tower industry, because the contracts tend to be arm's length and more of what I would call sort of industry standard, once the outside owners are in control of the assets and not the captive carrier business. So it will be a positive if it comes through. Either way, I don't see it as a risk at all." ] }, { "name": "David Barden", "speech": [ "Okay, great, thanks guys." ] }, { "name": "Operator", "speech": [ "And next question is from the line of Ric Prentiss, Raymond James. Please go ahead." ] }, { "name": "Ric Prentiss", "speech": [ "Thanks. Good morning, guys. A couple of follow-ups and then one deeper question. First, when you guys talk about 80:20 amendment co-lo, how do you count if an existing customer comes and wants to do more work at the tower, maybe also including a new RAD center. Is that still counting as an amendment?" ] }, { "name": "James D. Taiclet", "speech": [ "Generally, Ric, that would be a separate lease, but based on specific customers or circumstances or legacy contract that may be on the tower it could be different, but generally a new RAD center equates to a new lease which would count as a co-location." ] }, { "name": "Ric Prentiss", "speech": [ "Okay. And second one, some of the other -- or one of the other tower guys mentioned that they had explicitly kind of assumed in their guidance a combination in the US from four to three, at least on their services business. Is there anything baked into your guidance on assumption of any industry change in the US?" ] }, { "name": "James D. Taiclet", "speech": [ "We don't have any assumptions either way baked into industry consolidation in the US. And given that we're almost halfway through the year, and by the time something might close, whatever the ramifications could occur from that, if it happened, would probably be out in 2020 and beyond." ] }, { "name": "Ric Prentiss", "speech": [ "Makes sense. The deeper question is, following up on Simon's question where you said the new investor classes coming in with lower return hurdles, is that driving also some of your thoughts that building towers might be more -- able to create value than buying towers as you look at M&A?" ] }, { "name": "James D. Taiclet", "speech": [ "Yes, because those new builds, whether inside or outside of the US tend to be historically for ATC the highest-return projects we have, it's always been that way, because you are meeting a specific need of a specific carrier in a specific geography versus buying a portfolio and sort of paying the acquisition premium for that. So it's historically been the best return activity we can do, and we'll continue to do so, and as the batting order, Ric, of our capital allocation process has remained the same, we're going to fund our dividends first, we're going to build towers second, we're going to do M&A third, and if there is excess capital left over we will buy back equity or buy back stock. So that batting order remains the same." ] }, { "name": "Ric Prentiss", "speech": [ "Makes sense. Appreciate the batting order with the Rays doing pretty well. Final question wraps into that, with the -- does it make sense to sell any portions of your portfolio? Increased amount of joint ventures that people have lower return hurdles and have cash in their pocket, could we see you guys sell some more stakes in your Company to bring in fresh capital to deploy elsewhere?" ] }, { "name": "James D. Taiclet", "speech": [ "We're always open to innovative financing and partnership arrangements, Ric, and you've seen us do that in numerous countries, whether they are with carriers or with independent financial partners like PGGM. In Europe, we're actually -- we're a 51:49 partner with them in both France and Germany. So yes, we're open to it and we don't have any sort of religious restrictions, whether it's getting into those stakes or getting out of them, if we think the economic situation merits that." ] }, { "name": "Ric Prentiss", "speech": [ "Great, thanks, guys." ] }, { "name": "Operator", "speech": [ "Our next question is from the line of Michael Rollins, Citi. Please go ahead." ] }, { "name": "Michael Rollins", "speech": [ "Hi, thanks and good morning. Just maybe staying on the strategic front, two questions. A few years back, you articulated the importance of being, I think it was the top three competitor in any market that you're in. I am just curious, in some of the key international markets, how do you evaluate that today and is that still important as you look at the past -- the new markets? And then going back to the question on partnerships, or the comments on partnership, are partnerships more important for the adjacent growth opportunities that you've been considering, for example, on the EDGE data center front or maybe some of the other initiatives where you need to try and edge out into a broader ecosystem? Thanks." ] }, { "name": "James D. Taiclet", "speech": [ "So we're already either first or second, Mike, in most of our major international markets, and by the way, we're first in the US as an independent tower company and have been for some time. We are first in Brazil, and remember independent tower company is important here, because captive carrier assets, really to us, don't perform and aren't managed the same way. But nevertheless, in Brazil, we're number one in Mexico, we're number one, South Africa the number one independent, in India the number one independent. So we've achieved industry leadership as an independent infrastructure provider outside of carrier ownership and control in essentially all of the major markets that we care to be in. There's some where we're not and those were conscious decisions, like at the time in Nigeria where IHS was creating a larger market position than we currently have, will be a happy number two there for a while, it looks like. But, generally in the large major markets, we are the number one or two operator.", "As far as partnerships, we are applying our innovation initiatives really across the board. As I said, the PGGM partnership on a financial perspective in Europe was something that Tom and I talked about as an innovative way to bring capital in to support our ambitions in Europe. Similarly, if we get into -- and you pointed out specifically EDGE data. I think there's a great opportunity for us to bring the asset base that we bring, which is the 40,000 US towers and the 330 or 340 indoor DAS systems we have in the US, to a partner who brings something else, could it be spectrum, could it be cloud compute capability, could it be existing big larger datacenters, any of those are possible.", "So we've had to actually pivot our thinking to say partnerships can be, in an innovation sense, a much broader context than they are today, or they have been historically, I'd say, in our industry, which is partnerships with wireless operators in some fashion, whether it's a sale leaseback, it's sublease et cetera with the mobile operators, those have always been in our industry. But now we're taking a much wider perspective on partnerships and figuring out, we hope where the puck is going, who can partner with our assets and bring theirs in a complementary fashion and that's a perspective we're now taking." ] }, { "name": "Michael Rollins", "speech": [ "Thanks a lot." ] }, { "name": "Operator", "speech": [ "Our next question is from the line of Matthew Niknam, Deutsche Bank. Please go ahead." ] }, { "name": "Matthew Niknam", "speech": [ "Hey, guys. Thank you for taking my question. Just on India, any more color you can share in terms of what's driving the growth activity, and then what gives you confidence in the ability of the business to actually return growth to sort of historical levels within the next couple of quarters, by 2020? Thanks." ] }, { "name": "James D. Taiclet", "speech": [ "So, the drivers in India, organic growth for us on a gross basis now are Jio and the other two major carriers, are actually ramping up as well. As I mentioned, they are going to be having access to proceeds from both rights issues, so equity investments from their end investors and also asset sales that they're all planning or expected to do. So, we think that those three carriers along with BSNL in a much more minor way, will continue to drive organic growth in India, because the three of them are going to need to establish a national 4G network, which although Jio gets a lot of headlines for doing it first, is, A, not pervasive across the country, and B, not us -- with the capacity to handle a billion users on 4G. So that spend is going to happen, there'll be a -- we think a significant increase in the number of sites and the loading on sites in India. And as Tom referenced, our most active construction program already is in India, to start serving this market.", "So when you look at, again, the fundamentals in the US, we talk about is 30% to 40% data growth, $30 billion of CapEx. In India, you're talking about even faster data growth rates on three times as many people, much earlier in the technology deployment cycle. So once the industry consolidation settles in over the course of 2019 and as we roll into 2020 and beyond, we fully expect between those three large carriers and BSNL that there'll be strong top-line organic growth demand in India." ] }, { "name": "Tom Bartlett", "speech": [ "The other thing I'd add Matt is that our own internal estimates, as well as outside third-party estimates is suggesting that kind of the roughly industry 600,000 tower leases that exist in the market are going to be growing to over 1 million over the next several years and I think that's just a reflection of all the things that Jim just talked to." ] }, { "name": "Matthew Niknam", "speech": [ "If I could just follow up, I think in the past you've talked about 3% to 4% sort of normalized longer-term churn in that market. Is that still the case and when do you sort of anticipate getting to more of a stabilized rate?" ] }, { "name": "James D. Taiclet", "speech": [ "Actually, we think that probably the normalized rate of churn, which is if you back out what the impact of the India carrier consolidation churn in Q1, it is probably more in that 1% -- 1% to 2% kind of range. So, half of what you just talked to." ] }, { "name": "Matthew Niknam", "speech": [ "And in terms of timing to get there, that sort of late 2020?" ] }, { "name": "James D. Taiclet", "speech": [ "We realized that already in Q1. So we would think that as we're going out into the -- the end of this year we'll flush out all of that India carrier consolidated churn. So getting back into 2020, we should start to get back to those historical rates of what we've realized in terms of growth back in the '16 and 2017 time frames." ] }, { "name": "Matthew Niknam", "speech": [ "Thank you." ] }, { "name": "Operator", "speech": [ "Our next question is from the line of Tim Horan, Oppenheimer. Please go ahead." ] }, { "name": "Timothy Horan", "speech": [ "Thanks, guys. Tom, I know you said normalized AFFO grew 11%. But if you normalize for the India churn, was that closer to 15%?" ] }, { "name": "Tom Bartlett", "speech": [ "When I referred to the normalization, it's actually backing out that India carrier consolidated churn." ] }, { "name": "Timothy Horan", "speech": [ "Great. Indoor -- can you talk about what percentage of revenue indoor is in the United States now and do you think you're kind of growing at market rate?" ] }, { "name": "James D. Taiclet", "speech": [ "The indoor DAS asset is about 2% to 3% of our US revenue at this point, and that's been growing about 10% recently. So pretty solid growth in that business, although, it's relatively small compared to the major tower asset we have in the US." ] }, { "name": "Timothy Horan", "speech": [ "And then lastly on India, do you think with the consolidation being done and maybe more sales of assets that the pricing structure over there could look more like the US over time? It's a fairly unique market in terms of pricing." ] }, { "name": "James D. Taiclet", "speech": [ "The pricing is going to be in a different category than the US, but the long-term structure of contracts will, I think, evolve more closely to what I would call the global tower industry standard, where there's more favorable escalation rates, less favorable reinvestment rates et cetera on the sites and the elimination of discounts for second or third tenants along the way. So those sort of contract structural adjustments I expect to come over time in India, which will actually improve your effective pricing, frankly. But as far as rates -- rupees for per month per antenna, I can't predict where those are going to go." ] }, { "name": "Timothy Horan", "speech": [ "Yeah. No, that's what I was looking for. That's very helpful. Thank you." ] }, { "name": "Operator", "speech": [ "Thank you. And we do have time for one additional question and that will be from the line of Philip Cusick, JPMorgan. Please go ahead." ] }, { "name": "Philip Cusick", "speech": [ "Just before the bell. Jim, can you talk more about the potential model for your EDGE compute at the tower, any estimate on the potential number or percent of sites over time that that might generate and sort of relative rent versus a carrier? Thanks." ] }, { "name": "James D. Taiclet", "speech": [ "So there's a lot of uncertainty around all those factors Phil, and that's why we're broadening our access and involvement with other industries right now. So we're engaged with cloud providers, we're part of the CVRS team that's looking at how to deploy 3.5 spectrum, both within and without outside of mobile operators. We're involved and engaged, especially our CTO is, on innovation and technology task forces with other industries like the automotive industry, for example. So we are in a learning phase about a lot of these initiatives, including EDGE compute. But we are taking them in a methodical, serious and resourced way, so that we can be ahead of our industry, both in the US and outside, because frankly we feel we're the only globally accessible tower company in the world that can reach really all the highly populated continents with a partner, and some of those partners will be global multinational companies, unlike even the national license holders we have in our tenant base today.", "So we do learn and prototype and determine all those factors. We know it's going to be important and we want to lead the wider industry in figuring out these tower sites. Because of their placement and their immediate proximity to the mobile RAN, radio access network, are going to be really important real estate assets that they should learn how to work with and we want them to work with us." ] }, { "name": "Philip Cusick", "speech": [ "Great. Thanks Jim." ] }, { "name": "Operator", "speech": [ "Thank you. Back over to speakers for any closing remarks." ] }, { "name": "James D. Taiclet", "speech": [ "Great, thank you everybody for joining. Have a great day." ] }, { "name": "Operator", "speech": [ "Thank you. Ladies and gentlemen, that does conclude your conference. We do thank you for joining, you may now disconnect." ] } ]
AMT
2022-04-27
[ { "description": "Vice President of Investor Relations", "name": "Adam Smith", "position": "Executive" }, { "description": "President and Chief Executive Officer", "name": "Tom Bartlett", "position": "Executive" }, { "description": "Executive Vice President, Chief Financial Officer, and Treasurer", "name": "Rod Smith", "position": "Executive" }, { "description": "Deutsche Bank -- Analyst", "name": "Matt Niknam", "position": "Analyst" }, { "description": "Wells Fargo Securities -- Analyst", "name": "Eric Luebchow", "position": "Analyst" }, { "description": "Citi -- Analyst", "name": "Michael Rollins", "position": "Analyst" }, { "description": "Bank of America Merrill Lynch -- Analyst", "name": "Alex Waters", "position": "Analyst" }, { "description": "Raymond James -- Analyst", "name": "Ric Prentiss", "position": "Analyst" }, { "description": "KeyBanc Capital Markets -- Analyst", "name": "Brandon Nispel", "position": "Analyst" }, { "description": "RBC Capital Markets -- Analyst", "name": "Jon Atkin", "position": "Analyst" }, { "description": "UBS -- Analyst", "name": "Batya Levi", "position": "Analyst" }, { "description": "J.P. Morgan -- Analyst", "name": "Phil Cusick", "position": "Analyst" }, { "description": "Credit Suisse -- Analyst", "name": "Sami Badri", "position": "Analyst" } ]
[ { "name": "Operator", "speech": [ "Ladies and gentlemen, thank you for standing by. Welcome to the American Tower first quarter 2022 earnings conference call. As a reminder, today's conference call is being recorded. [Operator instructions] I would now like to turn the call over to your host, Adam Smith, vice president of investor relations.", "Please go ahead, sir." ] }, { "name": "Adam Smith", "speech": [ "Good morning, and thank you for joining American Tower's first quarter 2022 earnings conference call. We have posted a presentation, which we will refer to throughout our prepared remarks under the Investor Relations tab of our website, www.americantower.com. On this morning's call, Tom Bartlett, our president and CEO, will provide an update on our U.S. business.", "And then Rod Smith, our executive vice president, CFO, and treasurer, will discuss our Q1 2022 results and revised full year outlook. After these comments, we will open up the call for your questions. Before we begin, I'll remind you that our comments contain forward-looking statements that involve a number of risks and uncertainties. Examples of these statements include our expectations regarding future growth, including our 2022 outlook, capital allocation, and future operating performance; our expectations regarding the financing plan for the CoreSite acquisition; our expectations regarding the impacts of COVID-19; and any other statements regarding matters that are not historical facts.", "You should be aware that certain factors may affect us in the future and could cause actual results to differ materially from those expressed in these forward-looking statements. Such factors include the risk factors set forth in this morning's earnings press release, those set forth in our Form 10-K for the year ended December 31st, 2021, and in other filings we make with the SEC. We urge you to consider these factors and remind you that we undertake no obligation to update the information contained in this call to reflect subsequent events or circumstances. With that, I'll turn the call over to Tom." ] }, { "name": "Tom Bartlett", "speech": [ "Thanks, Adam, and thank you, everyone, for joining our call this morning. In line with our traditional first quarter practice, my comments on this call will primarily focus on our core U.S. and Canadian tower business. which, together with our U.S.-based data center segment, made up approximately 54% of our total property revenues and 65% of our total property segment operating profit in the first quarter.", "Growth in our foundational U.S. and Canadian business continues to be propelled by the rapid acceleration in mobile data consumption that we've seen over the last decade plus. Back in 2017, the average smartphone in the U.S. was consuming roughly six gigabytes of data per month.", "And today, in the early stages of 5G uptake by consumers, that number has grown by a staggering 240% to over 20 gigabytes on a monthly basis, as both 5G handsets and coverage become increasingly pervasive. This upward trend is expected to continue, with industry estimates now forecasting an average monthly consumption rate of 54 gigabytes by 2027. To meet this expected demand, carriers are aggressively deploying mid-band spectrum to provide ubiquitous 5G mobile services. Historically, annual carrier capex in the U.S.", "has grown by approximately $5 billion to $6 billion, with every new G as MNOs deploy capital to maintain service quality on their increasingly strained networks and provide incremental capacity and density to meet consumer demand for enhanced network performance. Early evidence in the 5G cycle suggests this will continue to be the case. In fact, in 2021, we saw carriers increase aggregate capex to approximately $34 billion, up from the roughly $30 billion annually we saw during the 4G cycle. An independent industry report suggests that this number should continue in the $35 billion range on average going forward.", "Further, as we've seen with prior network technology deployments, we expect a prolonged 5G investment cycle that will extend over the next decade. Today, carriers are in the earlier stages of upgrading sites with new equipment to provide broad, contiguous 5G coverage across their respective subscriber bases. And given the propagation characteristics of mid-band spectrum and ever-increasing mobile consumption, paired with incremental low latency requirements arising from 5G-enabled use cases, we would expect an extended period of investment aimed at delivering greater cell site density and stronger performance across networks for many years to come. Importantly, it is clear that macro towers will continue to be crucial infrastructure for the long runway of carrier network investments that lie ahead.", "Macro sites have historically been the most cost-effective means for carriers to provide broad-based network coverage to the vast majority of the U.S. populous, and evidence suggests that remains unchanged in a 5G world. To support this point, over the last five years, our backlog of contractually guaranteed revenues in the U.S. has more than doubled on a per-site basis.", "This speaks not only to our team's capacity to secure long-term profitable cash flow growth from our more than 43,000 distributed sites but also to the long-term value our tenants place on our macro tower assets as a critical component of their network deployment strategy for 5G and beyond. These trends, along with the guaranteed growth secured through our comprehensive MLAs, support our expectation for strong growth on our tower assets, both in the near and longer term. In 2022, we expect another year of accelerating gross new business growth in the U.S. and Canada.", "And as we previously communicated, growth from colocations and amendments is expected to ramp in the back half of the year with the expectation that we'll exit 2022 on a high point. With colocation and amendment contributions accelerating and the impacts of the Sprint churn beginning to come off their peaks, we're well-positioned to execute on a return to strong mid-single-digit organic tenant billings growth in 2023 and beyond. On the operational front, our U.S. teams remained focused on driving efficiencies throughout the business.", "That allow us to quickly scale up to meet customer needs and maximize the flow-through of top-line growth to the bottom line. Over the last few years, we progressed on process and IT initiatives designed to deliver best-in-class cycle times and introduce technology innovations in the field that improve site monitoring and data collection capabilities, while lowering site-level operating costs, and providing efficiency benefits for our tenants. In addition, a focus on cost controls has driven cash SG&A as a percent of property revenue in the segment to well below 4% on a consistent basis, a trend we expect to continue in 2022 and beyond. As a result, we've been able to continue extending on the significant operating leverage inherent to the tower business model.", "At the midpoint of our 2022 outlook, we expect an operating profit margin of 78.8%, representing a 370 basis point expansion in the segment over the last five years even while absorbing the significant impacts of Sprint churn more recently. This strong conversion of top-line growth to profit margin, combined with the low capital intensity of just over 1% positions our U.S. and Canadian business continue its decades-long track record of delivering strong free cash flow growth in 2022 and beyond. With that, I'd like to shift gears for a moment to our data center segment, which we expect to benefit from many of the same long-term technological trends that are driving attractive growth in our tower business.", "We're off to a great start in our first full quarter of ownership of the CoreSite business. In Q1, as expected, the CoreSite team delivered a very strong quarter of new and expansion sales as these interconnection-rich networks and cloud-dense data center campuses continued to attract strong demand from enterprises, the cloud, network, and IT service providers in key U.S. markets. Looking forward, we expect to continue to see accelerating hybrid IT in multi-cloud deployments drive increasing demand for our highly interconnected portfolio, which should result in opportunities to selectively deploy capital toward high-yield development projects.", "Additionally, as the 5G revolution begins to unlock new capabilities, we're beginning to see incremental deployments resulting from AR/VR, gaming, artificial intelligence, machine learning, and other next-generation use cases, which require lower latency. We would only expect this trend to accelerate and drive more demand for our data center campuses over the coming years while pushing storage and compute requirements further out to the network edge. And when we combine our differentiated data center portfolio, CSP, and network operator relationships with our distributed U.S. macro tower portfolio and long-standing MNO partnerships, we believe we have a significantly enhanced option to create value as the edge evolves over the coming years.", "In summary, we're more excited than ever for the opportunity to extend on our long track record of strong, profitable growth in the U.S. As the 5G environment continues to take shape, we believe we're uniquely positioned to drive continued long-term value for shareholders while playing a critical role as an industry leader in this evolving 5G landscape. Finally, I'd like to acknowledge the horrific events unfolding in Ukraine today. It's hard for any of us to comprehend the suffering of those affected by this humanitarian crisis.", "And while we do not have operations or employees in Ukraine, our thoughts and prayers go out to all those we have lost and to all those who continue to be subjected to this crisis. We, like many global organizations, are focused on finding ways to help the millions of people who are suffering, both within the country and those who are now refugees elsewhere. And we will look to join with others to contribute to the relief efforts underway. With that, let me hand the call over to Rod to discuss our first quarter results and updated 2022 outlook.", "Rod?" ] }, { "name": "Rod Smith", "speech": [ "Thanks, Tom, and thanks, everyone, for joining today's call. As you saw in today's press release, we're off to a great start in 2022, delivering another quarter of strong performance across our global business. Before getting into the details of our Q1 results and revised outlook, I want to touch on a few highlights from the quarter. First, demand for our towers continues to be strong throughout our global footprint, evidenced by the sequential acceleration of organic tenant billings growth across each of our reported segments.", "Additionally, organic leasing activity was complemented with nearly 1,450 newly constructed sites in Q1, our 11th quarter of over 1,000 new builds in the last three years, a milestone that was only achieved once prior to 2019. Second, growth from our recently acquired premier assets, Telxius and CoreSite, is at the high end of our initial expectations. As a result, we are modestly raising guidance for Europe organic tenant billings growth and the midpoint of our data center segment revenues. Additionally, in Europe, we recently signed an agreement with 1&1 in Germany, establishing a leasing framework to support their network rollout, which we expect to be another solid catalyst for growth in an already strong leasing market.", "We believe this further speaks to the quality and strategic positioning of our acquired Telxius assets, the opportune timing of the transaction and our optimism for the future. And finally, we continue to leverage the capital markets to support our investment-grade balance sheet, and we're able to issue $1.3 billion in senior unsecured notes on attractive terms right after the end of the first quarter, with proceeds used to term out a portion of our floating rate debt. Looking ahead, and as it relates to our CoreSite financing plan, we continue to explore options that are aimed at maximizing shareholder value, while supporting our investment-grade credit ratings. Consistent with our prior outlook, we are targeting to finance the $10 billion-plus purchase price, roughly equally between debt and equity, the latter potentially being satisfied through issuances of common equity, mandatory preferred equity, or other convertible instruments, or private capital, or a well-balanced combination.", "With that, please turn to Slide 6, and I'll review our property revenue and organic tenant billings growth for the quarter. As you can see, our Q1 consolidated property revenue of $2.6 billion grew by 22% or over 23% on an FX-neutral basis over the prior-year period, which included a contribution of approximately 17% in growth from Telxius and CoreSite. In the U.S. and Canada, property revenue grew under 1% due to the impacts of Sprint churn, while international growth stood at roughly 32% or nearly 35%, excluding the impacts of currency fluctuations.", "Additionally, our newly expanded U.S. data center business contributed over $180 million of growth in the quarter. These growth rates across our property segments continue to reflect the essential nature of digital services and our communications real estate throughout our served markets. Moving to the right side of the slide, you'll see our organic tenant billings growth for the quarter, with consolidated growth standing at 3%.", "In the United States and Canada, while growth was 0.6%, we saw an acceleration of gross organic new business on a dollar basis, posting our highest quarter since Q1 2020, resulting in a 3.3% contribution to growth. Given the mechanics of our MLAs and the timing of certain use fees in 2021, we will see a decline in gross organic new business in the second quarter before ramping up in the back half of the year, which was all contemplated in our original 2022 guidance. Escalators were 3.5%, which is also impacted by certain timing mechanics within our MLAs. Though for the full year, we expect escalators to come in right around 3%, consistent with historical trends.", "This growth was largely offset by the impacts of Sprint churn. On the international side, growth was 7.4%, and we saw improvements across each of our reported segments. Starting with Latin America, growth came in at roughly 8.7%. This includes approximately 8.5% from escalations, which represents an acceleration of 300 basis points as compared to Q4 2021.", "Additionally, relatively consistent growth organic leasing trends were largely offset by churn primarily associated with certain decommissioning agreements as highlighted on our Q4 2021 earnings call. In Africa, we generated organic tenant billings growth of 8%, which includes 7% in gross organic new business contributions, our second-highest quarter on record. This strong new leasing activity was complemented by the construction of over 600 sites in the quarter, as we see 4G coverage and densification initiatives continue to drive strong top-line growth and returns across the region. We have now constructed over 3,800 sites in Africa since the start of 2020, around the time we closed the Eaton Tower transaction, which meaningfully augmented our scale and enhanced the existing MNO relationships in the region.", "As a point of reference, prior to the Eaton transaction, we had constructed less than 2,200 sites in the preceding nine years of operations in Africa combined. Turning to Europe. We saw growth of 18.8%, reflecting pronounced contributions from the Telxius portfolio, which was not in our Q1 2021 base. Absent Telxius, our legacy European business grew over 6%, an expansion of 300 basis points as compared to our Q1 2021 growth rate.", "As we look to the back half of 2022, where we'll have more comparable year-over-year results with Telxius included, we expect to see strong organic tenant billings growth in the mid-7% range, driven by accelerating 5G deployments and continuing investments in 4G. In APAC, we saw growth of 2.1%, a continuation of the improvements we have seen over the past several quarters as churn further moderates in the Indian market. In fact, churn is now down to the mid-6% range, the lowest we've seen in nearly five years, which we project to further improve over the course of 2022. Turning to Slide 7.", "Our first quarter adjusted EBITDA grew approximately 13% or nearly 14% on an FX-neutral basis to $1.6 billion. Adjusted EBITDA margin was 61%, down over five percentage points over the prior year, driven by the lower margin profile of newly acquired assets, the conversion impacts of commenced Sprint churn, along with the higher pass-through revenue resulting from rising fuel costs. Moving to the right side of the slide, attributable AFFO and attributable AFFO per share grew by roughly 6% and nearly 4%, respectively. Growth was meaningfully impacted by the timing of cash taxes and maintenance capex in 2021, which was heavily back-end weighted.", "The contributions of these two line items provided a negative year-over-year growth headwind of approximately 5% on AFFO in the quarter. Let's now turn to our revised full year outlook, where I'll start by reviewing a few of the key high-level drivers. First, due to higher pass-through revenue associated with rising fuel costs, strong underlying trends in the business, and modest FX improvements, we're increasing our property revenue outlook by $75 million at the midpoint. It's important to note that we continue to apply our standard methodology for projecting FX across our regions, taking the more conservative of the trailing 30-day spot rate averages and an aggregation of bank estimates.", "When applying current spot rates, we would actually see improvement beyond these revised assumptions, although we believe it's prudent to continue with our standard approach. Second, through solid conversion of our top-line upside, the carryforward of some cost benefits, and strong services performance in Q1, we are raising our outlook for adjusted EBITDA by $55 million. At an attributable AFFO per share level, we are raising our guide at the midpoint to $9.72, an increase of $0.02. Finally, as I mentioned earlier, we are maintaining our prior guidance assumptions around the equity financing for CoreSite.", "With that, let's move into the details of our revised full year expectations. As you can see on Slide 8, we are now projecting consolidated year-over-year property revenue growth of 14% at the midpoint. The increase, as compared to prior guidance, is due to approximately $66 million in additional international pass-through and straight-line revenue, $7 million in core property revenue outperformance, along with another $2 million in FX benefits. Moving to Slide 9, you'll see our revised organic tenant billings growth expectations for 2022.", "With the leasing environment remaining largely consistent across our footprint, we are reiterating our prior growth rates for Latin America, APAC, international, U.S., and Canada and on a total consolidated basis. We are modestly raising our expectations for Africa, driven by stronger new business, and Europe mainly due to higher CPI-driven escalation contributions. As such, we now expect organic growth of greater than 6% and greater than 9% in Africa and Europe, respectively. Moving to Slide 10.", "And as noted earlier, we are raising our adjusted EBITDA outlook by $55 million and now expect year-over-year growth of roughly 10.5%. These revised expectations include $26 million from cash gross margin outperformance, driven by the increase in our revenue guidance and some services margin expansion, partially offset by higher pass-through expenses. We also now expect an additional $19 million in net straight line and another $10 million associated with revised FX assumptions. Turning to Slide 11.", "We are raising our expectations for AFFO attributable to common stockholders by $10 million at the midpoint as the benefits from the operational and FX upside I just mentioned are being partially offset by higher interest expenses, the result of an elevated rate curve since our last call. This translates to an increase of $0.02 on a per-share basis, moving the midpoint to $9.72. As I mentioned earlier, and consistent with our initial outlook, our AFFO guidance includes an assumption for the CoreSite equity financing, which, for modeling purposes, assumes a common equity issuance by midyear. However, we continue to evaluate several potential sources, including common equity, mandatory convertible preferred equity, and other convertible instruments, and also private capital partnerships, where discussions continue to progress as a result of strong interest from leading private investors for a minority stake in our U.S.", "data center business. That said, we remain flexible in our approach, with the final mix ultimately depending upon what course offers the most attractive cost of capital, terms, and operational flexibility. Finally, with respect to the balance sheet management, following our recent senior unsecured note issuance, which I highlighted earlier, and pro forma for executing our equity financing, we will have termed out a significant balance of our floating rate debt and would expect to bring our net leverage to the high five times range, with a clear path to returning to our target range of three to five times over the next couple of years. Moving on to Slide 12, let's review our capital deployment expectations for 2022, which are consistent with our prior outlook and reflect our continued focus on driving strong, sustainable AFFO per share growth.", "As always, distributing capital to our common shareholders remains our top priority, and we continue to expect to allocate, subject to board approval, approximately $2.8 billion toward our dividend in 2022. On a per-share basis, this equates to approximately 12.5% in year-over-year growth, consistent with our double-digit target. On the capex front, we are reiterating our prior outlook midpoints across all categories. This plan supports our initial expectations to construct approximately 6,500 new sites across our international footprint and includes roughly $300 million toward our data center business, $270 million of which is tied to development projects.", "We will continue to prioritize our development opportunities across our global footprint given its strong return profile and our ability to largely fund these initiatives through locally generated cash flows. In fact, of the nearly 1,450 sites we constructed in Q1, we saw an average day-one NOI yield of 14%, at the high end of the double-digit initial return rates we've seen through our build program historically. Looking ahead, our development pipeline remains strong, with opportunities afforded by our scale, market positions, customer relationships, operational capabilities, and solid underlying secular trends, which continue to drive strong demand across the portfolio. Finally, on Slide 13 and in summary, Q1 was a fantastic start to the year, with organic tenant billings growth accelerating sequentially across each of our reported segments as 5G deployments, 4G densification initiatives, and the benefits of our comprehensive MLA agreements drive strong organic new leasing and increasing demand for newly constructed sites.", "We see the same secular trends driving solid performance on the data center front, and we could not be happier with the assets and team we've added through the CoreSite and DataSite acquisitions. We continue to be encouraged by the demand trends across our global portfolio of distributed communications real estate and look forward to executing on a number of strategic initiatives, including finalizing our CoreSite financing through the rest of the year, as we aim to deliver compelling total returns to our stockholders. With that, I'll turn the call back over to the operator for Q&A." ] } ]
[ { "name": "Operator", "speech": [ "Thank you. [Operator instructions] Our first question will come from the line of Matt Niknam from Deutsche Bank. Go ahead, please." ] }, { "name": "Matt Niknam", "speech": [ "Hey, guys. Thank you for taking the question. Just two, if I could. First, on Europe.", "So we've heard a lot of press around larger carrier portfolios coming to market there. I'm wondering how you think about the prospects of scaling up in Europe further through the lens of either full ownership versus partnering with a financial sponsor as you've done in the past? And then already in light of leverage, sitting at 6.4 turns right now. And then secondly, on CoreSite, obviously, this was the first full quarter with CoreSite under your belt. I'm wondering if there are any positive or negative surprises you can share? And then, Rod, I think you alluded to maybe a little bit of an increased outlook for the data center business, if there's any color or additional detail you can give? Thanks." ] }, { "name": "Tom Bartlett", "speech": [ "Hey, Matt. Let me start off, and then Rod can add in as he sees. First of all, within Europe, we're -- first of all, both Telxius, as well as our CoreSite acquisition, are hitting on all cylinders. They're both outperforming our expectations kind of right out of the gate.", "And so in Europe, we're very focused on really realizing the full potential with Telxius. As Rod said, we just landed the transaction with 1&1. So our focus is really on the final integration steps with Telxius and really leveraging that capability in the markets that we're in. So we're really pleased with the teams there and the contracts there and the relationship with Telefonica.", "With regards to CoreSite, they had a record retail and scale quarter. And so we're really pleased with what we've seen there. We've got a terrific management team in place, a good balance between activity between the retail scale and hyper scale types of business. We've got our sights set on building out some of the existing infrastructure that we have available to us.", "So on both transactions, we couldn't be more pleased with the activity that we're seeing right out of the gate." ] }, { "name": "Rod Smith", "speech": [ "Hey, Matt. Thanks for joining us, and thanks for the question. I'll add a couple of points on CoreSite. So we are seeing positive trends in CoreSite.", "You've heard us say it before, we continue to view the asset as a very unique, high-quality asset, and we're seeing the quality of the asset come through early on here in the financials. So we did have a terrific end of the year last year in terms of new and expansion revenue being added. We do see that accelerating into 2022. So that's really positive.", "That allowed us to increase the midpoint of the revenues by about $5 million. And we have seen the backlog for that measure kind of come up. We're sitting at about $19 million backlog versus a year ago same period where it was around $9 million. So that's up about $10 million.", "And we -- across the major metrics here, we think the business is really strong. In terms of revenue growth, the range we look at is between 6% and 8%. We're looking at the high end of that range, maybe even a touch above that range this year. The escalators are in the range of 2% to 4%.", "Interconnection growth, our target range is between 6% and 8%, and again, we'll be at the high end of that range. We believe cash mark-to-market in the range of 2.3%. We'll have to see exactly where that ends up. It always can be affected by kind of unique renewals from certain customers, but the range there is about 2% to 3% on an ongoing basis.", "The monthly recurring revenue per cabinet, we look at growth rates of 4% to 6% range. Again, we're in the mid-single digits for this year. So that is compelling. The churn rate is the right where we expected them to be in the middle of the range, the range of 6% to 8%.", "So we're firing on all cylinders with the business. I think it really demonstrates the quality of the asset. The fact that customers of this business really do enjoy the interconnection nature and the cloud-centric nature of these assets. And from a capex perspective, we put in about 2% of revenue back in, in maintenance capex.", "And for growth capex, we've got about $300 million going into the business this year really to build out additional capacity. Hopefully, that gives you some color, Matt." ] }, { "name": "Operator", "speech": [ "Our next question will come from the line of Eric Luebchow with Wells Fargo. Go ahead." ] }, { "name": "Eric Luebchow", "speech": [ "Hi. Good morning. Thanks for taking the question. Just wondering if you could comment a little bit on the 1&1 relationship, the new MLA you signed.", "Is that kind of driving a faster organic growth outlook in Europe than you previously had anticipated? And then secondly, I just wanted to take your temperature on the potential to do future data center M&A. Obviously, CoreSite, only in eight markets. Are you seeing some opportunities out there, whether internationally or perhaps in secondary markets in the U.S. that might be interesting to further scale that platform? Thank you." ] }, { "name": "Tom Bartlett", "speech": [ "Yes. Let me -- I'll take the first -- or the second one, and Rod, you could take the first one on 1&1. First of all, with regards to the data centers, we're really leveraging what we have acquired at the end of last year. And we're very focused on further developing that business, working very much on just the fundamentals of expanding sales, extending distribution, developing the campuses, market expansion, leveraging the interconnection capabilities that they have.", "And then secondly, looking at unlocking the opportunities at the edge. And so I think what you will see in the CoreSite transaction is yes, there will be further build-out of existing resources. There are expansions into -- up in Silicon Valley, we have a fairly sizable new assets that we're looking to build up there. And really just trying to, again, unlock the edge and work jointly with both of our customer sets on figuring out how we can play a meaningful role in that development.", "So the U.S. is our first project in terms of trying to work through all of these opportunities here. We remain really excited about the opportunity there. The kinds of conversations that we're having with the various potential customers are really exciting for us.", "It's going to take a while for this to unfold. But that's really where our focus is. And so we don't see -- our towers are our business. That's the reason that we did this transaction to begin with, to further develop the revenue that we're going to be able to enjoy at the tower side.", "And so that's where our focus is going to be. And then on 1&1, Rod?" ] }, { "name": "Rod Smith", "speech": [ "Yes. Thanks, Tom, and thanks, Eric. So with 1&1, we are pleased that we have the agreement with 1&1. We're really looking forward to help them build out their greenfield 5G network across Germany.", "So that really is very exciting. The deal that we struck really is a framework around how the two parties will work together contractually. It also kind of lays out and gives 1&1 kind of that framework to access our sites. So that's exciting.", "There are long-term contracts kind of embedded in there. So we'll work through that. It's not really driving additional growth in our 2022 organic tenant billings yet, although we do think it's a very exciting development that will provide growth over the long term and maybe even pick up in the back half of this year a little bit. But maybe, Eric, I'll hit a couple of points on the growth rates here in Europe.", "So you saw the announcement earlier in the presentation. We did have organic tenant billings growth in Europe in the high teens. A lot of that is driven by the Telxius assets, which is, again, a really high-quality assets across Europe, particularly in Germany. We do expect that momentum to continue, at least in terms of the leasing activity, but the -- when you get out into the back half of the year when you bring the Telxius base revenue into the equation, we expect organic tenant billings growth for Europe to moderate and drop down into the 7% range, maybe between 7% and 8%.", "So still very strong growth. If you exclude Telxius and you just look at Germany -- I mean, just look at Europe on a legacy business, that business for Q1 grew greater than 6% on an organic tenant billings growth basis. That compares to a year ago same period at only 3%, 3.5%. So we're seeing really good growth momentum in Europe on the OTP metric on the legacy business as well as being assisted with the high-quality assets from Telxius.", "And we do think 1&1 will be a kind of a multiyear additional benefit as we go forward." ] }, { "name": "Operator", "speech": [ "We'll go next to the line of Michael Rollins with Citi. Go ahead." ] }, { "name": "Michael Rollins", "speech": [ "Thanks and good morning. Just curious if you could talk a little bit more about the domestic leasing environment in terms of that multiyear visibility that you've previously been speaking to and how that visibility is evolving for the business?" ] }, { "name": "Rod Smith", "speech": [ "Yeah. Sure. Thanks for the question. Thanks for joining us.", "So I'll just remind you in terms of the long-term guidance that we have out there, it was over a seven-year average really going out to 2027, and we were looking at, at least 4% growth over that time on average reported and on a normalized basis, excluding the impact -- the negative impact of this project, it would be up over 5%. You know what that metric looked like in '21, and now you see kind of where we're guiding in '22. We'll hit an average of about 2% for those two years on a reported basis. And if you exclude, again, normalized for the Sprint churn, that would be up around 5%.", "And we're actually seeing that in Q1 in terms of our U.S. organic growth, which came in at about 0.6% for the quarter. And that did have an impact from Sprint churn that was pretty close to 4%. So that would have been up in the mid-to-upper fours if you normalize through the Sprint churn.", "So that's certainly where we expect to head. If you look at the '23 to '27 time period, we would look at reported organic tenant billings growth being greater than 5%, greater than or equal to 5%. And on a normalized basis, around 6%, greater than or equal to 6%. So we do see that acceleration kind of in momentum.", "We think we're in for a nice run here of really stable long-term healthy growth in the U.S. business once we work through the Sprint churn. And in these numbers, it's important to point out that two-thirds of the -- not just the underlying revenue, but also the growth is already contracted in the MLAs, that we have the holistic MLAs. And it does include the acceleration and the partnership we have with DISH in terms of that agreement where revenue begins this year.", "It accelerates through the year, and then it will be there over the long term. So hopefully, that gives you a little color, Michael, in terms of the U.S. growth rates." ] }, { "name": "Operator", "speech": [ "Our next question will come from David Barden with Bank of America. Go ahead, please." ] }, { "name": "Alex Waters", "speech": [ "Hi. Good morning, everyone. This is Alex Waters on for Dave. Maybe just my first one here.", "Rod, you hit on a -- in your prepared remarks, but could you elaborate a little bit more on the plans for the size and the timing of the CoreSite equity raise? I think in the past you said it was 2Q and then may slip into 3Q. And then how have the plans evolved to include private capital there?" ] }, { "name": "Rod Smith", "speech": [ "Yeah. Thanks, Alex. Thanks for the question. Thanks for joining us.", "So we're working through the financing plan. We're very excited about the prospects and the different opportunities we have. As I said in the prepared remarks, we're looking at equity and equity component. That's really the final piece of the entire CoreSite financing.", "We ended the quarter here at about 4.6 times leverage. Our target range is between three and five times. And we do have a plan to delever over the next couple of years. So we expect by the end of the year to get into the mid-to-upper five times.", "So that's where the equity component comes in. We're looking at raising about $5 billion from an equity transaction. That's what's in our base model. And the outlook, just to reiterate here -- the base plan assumes that we're going to do a common equity issuance for the $5 billion at roughly $235 a share.", "That's what's in our 2022 guidance for AFFO and AFFO per share growth. But with that said, we're also looking at other forms of equity. So complementing the common equity with some preferred convertible equity instruments, other kinds of convertible instruments, and private capital. So we are looking at private capital options.", "Much of that has come from inbound inquiries that we've had. When people heard that we were buying CoreSite, I think there was a lot of excitement in the marketplace in terms of the high-quality nature of those assets. So there was a lot of inbound interest there. We also went out with some outbound inquiries and we've been working through a process.", "So -- the other thing I would just clarify here, Alex, I think I mixed up the numbers on the leverage. We're ending at 6.4. And I think I may have said 4.6. So again, we're getting back down into the mid-to-upper fives by the end of the year.", "I think you had made a comment in your question that we might be pushing the equity financing into Q3. I'm not sure that's correct but we're working through the process. There's a good chance that we could have it wrapped up in Q2 like we initially said at the outset of the year." ] }, { "name": "Tom Bartlett", "speech": [ "And I guess, Rod, I would just add, we chose not to change the outlook assumptions. So at the time when we issued that initial outlook, we had the equity at that $5 billion level, at the price point level. And as I said, just for clarity, I just want to make sure that we just kept that the same going forward. And obviously, we'll adjust that when Rod finally closes this whole transaction, which, again, we would expect in Q2." ] }, { "name": "Operator", "speech": [ "We'll go next to the line of Ric Prentiss with Raymond James. Go ahead." ] }, { "name": "Ric Prentiss", "speech": [ "Thanks. Good morning, everybody." ] }, { "name": "Tom Bartlett", "speech": [ "Good morning, Ric." ] }, { "name": "Ric Prentiss", "speech": [ "I appreciate you guys being available. First question is down in Brazil, Oi looks like it's finally making it to the final positioning. Can you update us a little bit about how you see the Oi getting carved into the other three operators as far as what it means to that market? And just what your exposure is?" ] }, { "name": "Tom Bartlett", "speech": [ "Sure. Rod, do you want to -- I can --" ] }, { "name": "Rod Smith", "speech": [ "Yes. Ric, so -- Oi has kind of finished their process of exiting the market and splitting their business up into the other three remaining carriers. So we do see that as a positive event, taking that -- those leases and putting them with carriers that are financially secure and kind of in a healthy competition in that market. So we think that is certainly going to be productive.", "We do have a chunk of revenue from Oi. We have about 6.7 -- just about seven years remaining on average on those leases, Ric. In terms of the revenue impact to our business, it's less than 1% of our revenues globally that we have with Oi down in Brazil. Even though we have that nearly seven years on average, that's an average, so there could be some leases that come up a little bit earlier than that.", "And we may see churn beginning as early as next year and kind of moving through the next few years. So we'll be working through that process. But in general, we think it's a healthy thing for the industry there in Brazil. We've been working through kind of the process as Oi has for the last couple of years.", "So I think it's good to get that behind us and get it behind the wireless segment there in Brazil so everyone can move forward." ] }, { "name": "Tom Bartlett", "speech": [ "Yeah. and Ric, I'd just reiterate that I think this is candidly a very positive event, putting these assets in the hands of TIM, Claro, and Vivo. And they're very focused on building out further 4G and 5G. So I think this is a real positive for the market." ] }, { "name": "Operator", "speech": [ "We'll move on to the line of Brandon Nispel with KeyBanc. Go ahead." ] }, { "name": "Brandon Nispel", "speech": [ "Yeah. I wanted to follow up on Mike's question. Do you guys continue to expect to be at $150 million in colocation and amendments in the U.S. in '22? And then how should we think about the exit rate in terms of colocation and amendments for modeling purposes for 2023? Is that going to be a good run rate? Thanks." ] }, { "name": "Rod Smith", "speech": [ "Yes. Brandon, thanks for the question. Thanks for joining us. So we are targeting about $150 million of contribution to organic tenant billings growth through colocation and amendment.", "The metric for the quarter was about $36 million. So that's an acceleration over the exit out of 2021, and it's higher than any quarter we had in 2021. So we are seeing that acceleration in that gross leasing activity in the U.S. As I said in my prepared remarks, we will see a slight pullback in Q2 in that metric really just around the mechanics of the way the MLAs work in the U.S.", "But when you get to Q3 and Q4, we'll be above the Q1 total here. So we'll be exiting at a higher level going into next year. I don't want to talk about next year too specifically here and give guidance, but we are seeing an acceleration in that metric. We expected to see that, and we are seeing that.", "And it's all very constructive and kind of in line with our longer-term organic tenant billings growth guidance for the U.S." ] }, { "name": "Operator", "speech": [ "We'll move on to the line of Jon Atkin with RBC. Go ahead." ] }, { "name": "Jon Atkin", "speech": [ "Thanks so much. A couple of questions. I noticed that the -- you talked about $120 million of asset acquisitions, $30 million of which were towers. Can you talk to us a little bit about what comprised the rest?" ] }, { "name": "Rod Smith", "speech": [ "Sure, Jonathan. I can give you that. It's really just a variety of small acquisitions on the tower side. Many of them were in Europe.", "We do have an arrangement with a carrier in Europe, where we [Inaudible] buy a number of sites throughout the -- throughout each quarter in Europe. We're also buying a few down in Latin America, ones and twos here and there. We also always have a pipeline in the U.S. where we're rolling up a few acquisitions here and there.", "And then there's some payments that are related to the prior year deals that we acquired. So there's really not a ton going on there. I would think about it in terms of Europe and Latin America, primarily." ] }, { "name": "Jon Atkin", "speech": [ "And just interested in the -- Sungard announced the bankruptcy earlier in April. And I think CoreSite, as a stand-alone company, had kind of alluded to some events around the prepackaged bankruptcy. But now that we're kind of going through the next phase of that, I wondered what impacts you're seeing on your data center business from that type of event?" ] }, { "name": "Rod Smith", "speech": [ "No, Jon, we're not expecting anything material from that perspective. We don't see it -- we don't see any real negatives. Nothing meaningful to note. So we're committed and kind of confident in the growth rates that I outlined a little earlier in the call." ] }, { "name": "Operator", "speech": [ "And our next question will be from Batya Levi with UBS. Go ahead." ] }, { "name": "Batya Levi", "speech": [ "Great. Thank you. In the U.S., can you talk a little bit about the activity you're seeing from DISH? And fixed wireless is ramping faster than we had expected. I know it's still very small, and the carriers have a lot of hollow capacity.", "But anecdotally, do you see any change in carrier activity on the side where usage is increasing significantly? I want to get your thoughts on that. And then another question on in terms of the cost to build, you have a significant build program this year on development capex. Can you talk about your -- sort of what you're seeing in terms of the cost versus your expectations and any delays? Thank you." ] }, { "name": "Tom Bartlett", "speech": [ "Batya, on the continued build-out in the U.S., I mean, yes, there are -- I think the carriers have all said they're interested in continually building out fixed wireless, but that's not getting in the way in terms of their capital spend on really building out 5G. And so we would expect, again, kind of the continued acceleration of that 5G build really accelerating, as Rod just said, kind of in the second half of the year. Spectra being cleared and being able to be put in place, We're excited about the prospects for that 5G build. I don't think the carriers are going to let anything get in the way of that opportunity going forward.", "And on the build side, I just want to say, this is -- of the last 12 quarters, 11 of them have built over 1,000 new builds. And that's going to contribute significantly to our overall growth rate in '22 as it has in '21. We've laid out a path of looking at north of 40,000 builds over the next several years and have visibility into contracts with all of our existing customers to do so. Rod mentioned the build that's going on in Africa.", "We see equally build going on in Europe, clearly in India as well as in Latin America. So we're really excited about the build program. We're looking at over 6,000 new builds in '22. And as I mentioned, I'm hoping that that will continue to accelerate going forward." ] }, { "name": "Rod Smith", "speech": [ "And Batya, I'll give you a couple of specific numbers here. On the costs -- you've mentioned the cost of the builds. They're coming in at a little less than $100,000 on average, maybe closer to $75,000 on average per site. And we are continuing to see the targeted NOI yields being in the low to mid-teens.", "So we're in the range of about 14% now, which is great. Regarding your question on DISH, we are seeing activity from DISH in the U.S., we did last year. As you know, that continues this year. We see it mostly showing up in our financials through our services business.", "So we're continuing to have strong volume and activity in our services business. We're projecting in and around $225 million to $230 million in services revenue for this year. Last year, it was up to about $250 million. So there's a slight pullback there.", "But if you think about our services activity for the first quarter of 2022, it's almost 100% growth over that same time period in last year. And certainly, the DISH greenfield build is a big part of that. And if you rewind back to 2020, our services business was driving less than $100 million in revenue. So we've seen that step up in our services business, which really highlights the level of activity that we're seeing in the U.S.", "And again, DISH is part of that. We'll begin to see leasing revenue here this year from DISH, and that will ramp in the back half of the year. And we'll exit at, of course, a much high level of leasing revenue from DISH than we entered the year. And then that will ramp and continue for years to come." ] }, { "name": "Operator", "speech": [ "We'll go now to the line of Phil Cusick with J.P. Morgan. Your line is open." ] }, { "name": "Phil Cusick", "speech": [ "Hey, guys. Thanks. A couple, if I can. First, if you can -- if I can follow up on the capital raise for CoreSite.", "If you were working on a large European deal, would that be material enough that it would be hard to raise public equity in the meantime? Or is that not something that's an issue? And then second, can you dig into your comments about the expected decline in gross organic new business in the second quarter before you said ramping up in the back half of the year? And is that alluding to the Verizon MLA expiration? It doesn't seem like that impacted the first quarter at all. Thanks so much." ] }, { "name": "Rod Smith", "speech": [ "Yes. Thanks, Phil. Thanks for joining the call and thanks for the question. So in terms of the capital raise, I mean, I don't want to get into too much hypothetical.", "There lot of different deals over in Europe, a lot of different [Inaudible]. I don't want to guess in terms of the level of capital that potentially could be needed. I would tell you, our equities are really strong. We've got a lot of support in the equity markets.", "If we wanted to go out and raise equity, we're very confident that we can do that for the right value accretive deal for our shareholders. So that's what I would say in terms of the potential for any other acquisitions and in issuing equity. Certainly, we'll continue to be active and looking around. We like the transaction that we have in Europe.", "We like what we're seeing in the Telxius business. We think that was a high-quality set of assets with really good contracts, and we purchased it at the right time. So from a European perspective, we like exactly where we sit today, and we are focused on financing the CoreSite opportunity as well. Jumping over to the deceleration from Q1 to Q2 in our OTBG contributions from colocations and amendments, it's dropping down from like the mid-30s for Q1 into the low 30s for Q2.", "It's not Verizon-driven, it's really just mechanics of the MLAs and where some use right fees kick in early in the year. And then we do see that ramping up, and we expect it to be in the range of 40 plus each of the final two quarters in the year. So that's kind of the way to think about that ramp. There's nothing concerning about the step down in Q2.", "It's all just MLA mechanics, and we feel very good about the level of activity in the position of our U.S. portfolio." ] }, { "name": "Tom Bartlett", "speech": [ "And Phil, let me just reiterate, As I said all along, the CoreSite capital raise is not impacting how we think at all about future tower opportunities. We'll stop." ] }, { "name": "Operator", "speech": [ "We have time for one final question. That will come from the line of Sami Badri with Credit Suisse. Go ahead." ] }, { "name": "Sami Badri", "speech": [ "Thank you very much for the question. First, I wanted to just get a better sense on how you think about the CoreSite business from a pricing and renewal perspective. And I know you mentioned that business for retail colo and other parts also were very strong last quarter, but what is kind of the strategy at AMT? Are you guys looking to kind of just take a bigger share out of the market by lowering pricing a little bit and winning a bigger chunk? Or are you maintaining pricing discipline as legacy CoreSite and seeing kind of the revisions and renewals as kind of as strong as what CoreSite was reporting before they were taken out by you guys? Just trying to get a better idea on the strategy and the vision of CoreSite under AMT." ] }, { "name": "Tom Bartlett", "speech": [ "Let me just -- I can start, and Rod can get it. We're very focused on pricing discipline, OK? I mean the assets that they have and what the business is doing with its own fabric within, we think, can support this high single-digit, low double-digit kind of growth rate going forward. And so the team is very focused on extending distribution into all its three major pieces, really driving new and expansion sales, working on those renewals, developing the campus, and market expansion leveraging interconnection. So really driving organic growth from existing customers and bring -- getting new business from high-quality new ones and driving new logos within the business.", "So no change at all in terms of the direction and the discipline that the team brings to the marketplace. We are -- have increased some of the funding to be able to accelerate some of the build-out so that there's more opportunity for growth. But the underlying discipline in terms of how they have approached the business is what we acquired. And we're very excited about continuing that same type of discipline going forward." ] }, { "name": "Operator", "speech": [ "And with that, we'll turn the conference call back over to your host." ] }, { "name": "Adam Smith", "speech": [ "Thanks, everyone, for joining today's call. Please feel free to reach out to me or the IR team with any further questions. Thanks again." ] }, { "name": "Operator", "speech": [ "Ladies and gentlemen, this conference is available for replay beginning today, April 27, at 11:30 a.m. Eastern Daylight Time, running through May 11, 2022, at midnight. During that time, to access the AT&T executive playback service, dial toll-free 1 (866) 207-1041. Internationally, (402) 970-0847.", "And the access code is 7543388. I'll repeat those numbers. The toll-free number is 1 (866) 207-1041. The international number is area code (402) 970-0847 with the access code 7543388.", "[Operator signoff]" ] } ]
AMT
2021-04-29
[ { "description": "Vice President of Investor Relations.", "name": "Igor Khislavsky", "position": "Executive" }, { "description": "President and Chief Executive Officer", "name": "Tom Bartlett", "position": "Executive" }, { "description": "Executive Vice President, Chief Financial Officer, and Treasurer", "name": "Rod Smith", "position": "Executive" }, { "description": "Morgan Stanley -- Analyst", "name": "Simon Flannery", "position": "Analyst" }, { "description": "Raymond James -- Analyst", "name": "Ric Prentiss", "position": "Analyst" }, { "description": "RBC Capital Markets -- Analyst", "name": "Jon Atkin", "position": "Analyst" }, { "description": "Deutsche Bank -- Analyst", "name": "Matt Niknam", "position": "Analyst" }, { "description": "Bank of America Merrill Lynch -- Analyst", "name": "David Barden", "position": "Analyst" }, { "description": "Barclays Investment Bank -- Analyst", "name": "Tim Long", "position": "Analyst" }, { "description": "UBS -- Analyst", "name": "Batya Levi", "position": "Analyst" } ]
[ { "name": "Operator", "speech": [ "Ladies and gentlemen, thank you for standing by. Welcome to the American Tower first quarter 2021 earnings conference call. As a reminder, today's conference is being recorded. [Operator instructions] I would now like to turn the call over to your host, Igor Khislavsky, vice president of investor relations.", "Please go ahead, sir." ] }, { "name": "Igor Khislavsky", "speech": [ "Good morning, and thank you for joining American Tower's first-quarter 2021 earnings conference call. We've posted a presentation which we will refer to throughout our prepared remarks under the investor relations tab of our website, www.americantower.com. On this morning's call, Tom Bartlett, our president and CEO, will provide a strategic update on our U.S. business; and then Rob Smith, our executive vice president, CFO and treasurer, will discuss our Q1 2021 results and revised full-year outlook.", "After these comments, we will open up the call for your questions. Before we begin, I'll remind you that our comments will contain forward-looking statements and involve a number of risks and uncertainties. Samples of these statements include our expectations regarding future growth, including our 2021 outlook, capital allocation, and future operating performance; our expectations regarding the impacts of COVID-19; our expectations regarding the impacts of the AGR decision in India; our expectations regarding our pending Telxius acquisition; and any other statements regarding matters that are not historical facts. You should be aware that certain factors may affect us in the future and could cause actual results to differ materially from those expressed in these forward-looking statements.", "Such factors include the risk factors set forth in this morning's earnings press release, those set forth in our Form 10-K for the year ended December 31st, 2020, and in other filings we make with the SEC. We urge you to consider these factors and remind you that we undertake no obligation to update the information contained in this call to reflect subsequent events or circumstances. And with that, let me turn the call over to Tom." ] }, { "name": "Tom Bartlett", "speech": [ "Thanks, Igor. Good morning, everyone. As is typical in our first-quarter call, the focus of my comments today will be on our foundational U.S. business which represented nearly 58% of our total property revenue and more than two-thirds of our consolidated property segment operating profit in Q1 while accounting for about three quarters of our $60 billion in contractually committed revenue.", "The overall NOI yield of our U.S. property segment now stands at 11.5%. The sites in the portfolio for at least 10 years, generating more than 20%. These metrics reflect our long track record of driving strong, profitable, recurring cash flow growth in the U.S., and we remain confident in our ability to extend that track record long into the future.", "This confidence is inspired not only by the exceptional visibility we have into our long-term organic growth rates through our existing comprehensive master lease agreement, but also due to a number of favorable industry trends that we expect to drive our business forward. These trends, in large part, center on our customers' 5G network deployments which we expect to meaningfully accelerate over the next several years, giving rise to a more developed 5G world. On the demand side of the equation, mobile data usage growth shows no signs of slowing. The average smartphone user in the U.S.", "is currently consuming more than 15 gigabits per month and is expected to be using more than 50 gigabits on a monthly basis by 2026, reflecting a CAGR of nearly 30%. The proliferation of value-added streaming services, mobile video conferencing, and other content-rich bandwidth-intensive applications continues to stress existing 4G wireless network, creating the need for more material additional network capital investments. An emerging AR and VR applications and other next-gen capabilities are contributing virtually nothing to mobile data uses today given the limited coverage and low 5G device penetration, but we don't think that will be the case for long. The 5G network revolution is under way and it's quite possible, perhaps even likely.", "The current growth projections for U.S. mobile data usage will prove to be conservative much like what we've seen in the past. The development of 5G-related low-latency applications and services, additional growth from enterprise accounts, and even fixed wireless applications in the home, could all drive usage much higher over time. We expect that the increased availability of spectrum in the marketplace, particularly on the mid-band side will help enable this usage growth going forward.", "Spectrum has always been the lifeblood of the wireless industry and given the capacity necessary to provide users a true 5G experience, it is more important today than ever before. Particularly significant, in our view, our mid-band spectrum assets, like 2.5 gig in the newly acquired C-band frequencies, as they provide our customers with a crucial middle ground between the attractive propagation characteristics of low-band spectrum and the deep capacity characteristics of higher band. We believe the results of the most recently completed C-band auction underscore the importance of this spectrum to our customers as they look to monetize the benefits of 5G. Importantly, as the carriers emphasized in their public comments after the auction, we expect this spectrum to be deployed quickly.", "The wireless industry is in a strong financial position and numerous steps have been taken by the carrier to, not only fund the upfront purchase price of the spectrum, but also to effectively deploy it. In fact, we are already seeing sizable increases in activity in our own services segment. And consistent with our long-term outlook expectations, we expect to see higher levels of gross new business in our property segment beginning later this year particularly in '22 and beyond. Part of this uptick in activity is in rural area, as stimulus funds from the government support smaller companies to effectively deploy wireless Internet services and as the major operators continue to fill in the white spaces in their network.", "The deployment of fixed wireless for households around the country using mid-band spectrum as our customers are planning could also provide further opportunities for us going forward. Taking all of these factors into account, we believe we have a highly attractive, long-term monetization opportunity in front of us. The carriers further identify their network and add more equipment to existing lease sites to support their incremental capacity needs. A significant portion of this growth is locked in to our existing contractual relationships.", "Other components of the growth may be more variable, either way, we expect to see higher levels of activity in the marketplace, accompanied by increasing wireless capex spend. On this point, analysts are projecting more than $35 billion in average annual capital spending from our customers over the next several years which would represent industry record. Put that in perspective, that average annual rate is more than double what the carriers spent back when 2G was actually deployed. While each of our customers have slightly different strategies to deploy 5G, we are confident that they will be successful in doing so.", "We also believe that our macro tower-oriented U.S. portfolio of over thousand sites is optimally positioned to benefit from these accelerating deployment. Macro sites continue to be, by far, the most cost-effective RF-efficient network engineering option and are also optimally located to help deliver coverage and capacity for hundreds of millions of people nationwide. As a result, we continue to believe that the vast majority of mid-band deployments in the U.S.", "for the foreseeable future will be on macro towers. As our network infrastructure was ideally suited for our customers' needs for 2G, 3G, and 4G, we have no reason to believe that 5G will be any different. While we do expect to be unique to 5G is the added use of massive MIMO technology for mid-band spectrum deployments on our macro towers which should provide operators with more dynamic coverage and capacity capabilities. The race to nationwide 5G with the use of massive MIMO will require more fiber connections to antennas, increased DC power and enough capacity to accommodate the size and weight of these more intelligent RF solutions.", "To prepare for these requirements, we have been proactively investing in more efficient and scalable power solutions at many of our sites. We've also upgraded the capacity of many of our tower structures over the last decade, installed energy-efficient LED lighting on many sites, and invested in site hardening initiatives where appropriate. Simply put, we stand ready to service our customers as they accelerate their 5G deployment. Importantly, macro sites may even be more critical today given the incremental density network that will require to support a 5G architect.", "And because only one of our existing tenant is on more than half of our sites today, we have a tremendous opportunity to drive incremental lease and capacity utilization as densification initiatives ramp up. As has been our experience, we would expect roughly $0.90 of every dollar we generate from this organic leasing activity will flow straight to the bottom line. As a result, we expect to continue to drive strong operating leverage in the business, along with modest capital intensity, reflecting two of the hallmark of our last several decades to growth. Additionally, we expect to continue to generate strong operating profit margins, including more than 78% in 2021.", "All of these factors contribute to our confidence and our ability to drive average annual U.S. and Canada organic tenant billings growth of at least 5% through 2027, normalized for the Sprint turn impact and at least 6%, from 23% to 27% specifically, calculated on the same basis. Importantly, more than two-thirds of this growth is now contractually locked in given the signing of our MLA with DISH in the first quarter. Embedded with these expectations is the assumption that our portfolio of wireless tower will be our fastest-growing asset, as has been the case over the last five years when our organic tenant billings growth was an average of roughly 40 basis points higher than our overall U.S.", "metric. This resilient trend, in our view, is another point of validation. The Macro Tower will continue to be the focal point of modern wireless network, generating the best economics across the telecommunications real estate universe. Going forward, we expect these economics to get even better.", "Margins will benefit from densification-driven leasing activity and continued amendment while costs will remain largely fixed and capital intensity to continue to be low. Existing leases will escalate in historical rate of at least 3% and normal force churn should be quite modest, likely trending down over time, particularly, once we work through the sprint cancellations over the next few years. We intend to remain laser-focused on maximizing our sustainable cash flow growth from these fundamental 5G drivers. We also believe that the economics of our U.S.", "business and specifically of our Macro Tower site can be further enhanced through the implementation of selective platform expansion initiatives. Chief among them is edge compute which is starting to come into clear view as true 5G becomes a reality for consumers and perhaps even more importantly, for the enterprise segment. We expect the key drivers of demand for edge compute solutions to be the emerging need for incremental cloud brand locations and lower latency applications processing in a 5G environment. As more and more data processing evolves to the network edge to support those needs, we anticipate new micro edge data center architecture will be necessary to complement the existing regional framework.", "Select locations within our nationwide Macro Tower asset base which, by definition, RS and mobile network edge, are positioned to play a meaningful role in this evolution. The underlying thesis supporting this lead is the concept net that suggests it has been for the last two decades in the deployment of wireless networks, shared neutral host infrastructure will be the most cost-effective and efficient way to rapidly deploy cloud-native 5G applications at scale. And given that our attractively located tower sites have existing access to fiber and end power while already hosting multiple communications providers, they are natural candidates to represent hub locations for these low-latency wireless edge data centers. Scale deployment of the true mobile edge remains several years away, but in our view, the TAM could be quite significant, running well into the billions of dollars annually.", "In the meantime, we have some half-dozen ongoing small-scale distributed commute trials at our tower sites, creating a beachhead to larger scale through mobile edge deployment. Additionally, our Colo ATL facility continues to outperform our expectations and we are having meaningful conversations with a number of key stakeholders across the data center and cloud sectors regarding the optimal requirements for the 5G Edge. As we've noted previously, we intend to explore global joint ventures or partnerships to effectively leverage these inherent opportunities and we continue to work through a number of different scenarios in that front. The early data points we are seeing throughout the industry all suggest that this can be a meaningful scalable opportunity that can represent solid upside for us in due time.", "And we are devoting resources internally to ensure that we are in a position to be opportunistic and agile. In the context of the long-term outlook we discussed last quarter, we believe that mobile edge compute could eventually represent meaningful potential upside. Having said that, we are going to remain disciplined from a capital deployment perspective as you would expect. Recurring revenue for all long-term growth prospects, healthy ROIC, and an attractive margin profile are all prerequisite for us to deploy meaningful capital anywhere, and that includes our efforts on the platform expansion side.", "Our preliminary assessments indicate that the edge opportunity fits nicely into our framework, but we will need to prove out this thesis going forward. So taking into account the strong underlying baseline growth path we have in the U.S. for the next decade, we are in a position to be thoughtful, deliberate, and strategic with these types of initiatives. Additionally, while we are laser-focused on driving incremental value in the U.S., we expect to have attractive opportunities to deploy capital internationally, for high-quality scaled Macro Tower portfolios are likely to come to market.", "And while my comments today are focused on our U.S. operation and marketplace, the exact same approach can be duplicated globally, whether it's growth, platform expansion opportunities or margin expansion, the message globally are identical. With our roughly 220,000 site pro forma for the Telxius acquisition, we have an unmatched presence in some of the fastest-growing wireless broadband market period and we can offer to a number of different parties and one-stop capability that is second to none. While we would expect to expand the depth of this presence over time so as not to be complacent, we believe it already gives us a significant competitive advantage.", "As we've always done on a global basis, we will be seeking to maximize long-term growth and AFFO per share while maintaining attractive returns on invested capital. We also continue to invest in our people, our systems and processes, and remain focused on numerous ESG initiatives while dedicating ourselves to ensuring a diverse and inclusive culture throughout the company. To summarize, I want to reiterate our excitement about the U.S. market.", "We are in the very early stages of a transformative there in U.S. wireless technology, one that has the potential to fundamentally alter how we live, work, and play while opening them up tremendous new possibilities across numerous industries. Our extensive portfolio of communications real estate across the country sits at the cross-section of the elements that can make this transformation a reality. And as a result, we are positioned to drive compelling long-term stockholder returns while continuing to provide industry-leading service level to both existing and new customers.", "Finally, I want to recognize our nearly 6,000 employees around the world who are working tirelessly for all of us, achieving the types of results. Rod is going to walk you through now, particularly to this horrific pandemic is really remarkable. And I want them to know just how much we all appreciate their dedication and hard work. With that, let me hand the call over to Rod to discuss our first-quarter results and updated outlook.", "Rod?" ] }, { "name": "Rod Smith", "speech": [ "Thanks, Tom, and thanks, everyone, for joining today's call. I hope you and your families are doing well and staying healthy. As you saw in today's press release, we're off to a strong start in 2021 as 5G ramps up in the U.S. and as carriers in our international markets deploy significant capital toward their network enhancement initiative.", "Before getting into the details of our Q1 results and revised outlook, I want to touch on a few highlights for the quarter. First, we announced the acquisition of Telxius which we believe will be transformational for our European business. We also signed a master lease agreement with DISH which locks in attractive multiyear growth in cash property revenue for us beginning in 2022. Second, demand for our towers continues to be strong throughout our global footprint and we saw this reflected in both our solid tenant billings growth and in the high volume of new builds in the quarter.", "Third, we continue to leverage the capital markets to support our investment-grade balance sheet, issuing $1.4 billion in senior unsecured notes and refinancing existing debt at highly attractive rates. And finally, we made good progress regarding the financing plan for our expanding European business, including private capital. We expect to communicate specific details of our plan prior to closing the first tranche of towers which we anticipate will be later this quarter. With that, please turn to Slide 6 and I'll review our property revenue and organic tenant billings growth for the quarter.", "As you can see, our Q1 consolidated property revenue of $2.130 billion grew by 7.9% or nearly 10% on an FX-neutral basis over the prior-year period. This included U.S. property revenue growth of 13% and international property revenue growth of 1.7% or 5.8%, excluding the impact of currency fluctuations. These growth rates were right in line with our expectations and continue to reflect the essential nature of mobile services and the importance of our tower portfolio throughout our served markets.", "Moving to the right side of the slide. Organic growth was once again a significant contributor to our overall revenue growth. On a consolidated basis, organic tenant billings growth was 4.1%, including 3.6% in our U.S. and Canada segment and 5% in our international markets.", "In the U.S., we had a solid quarter of gross new business commencement as expected and churn was right in the middle of our historical 1% to 2% range. Escalators were 2.6%, impacted by certain timing mechanics within our MLA with T-Mobile. For the full year, we expect escalators to come in right around 3%, consistent with historical trends. Meanwhile, international organic tenant billings growth was particularly strong in Latin America, coming in at 7.9%, and was also quite solid in Africa, where we generated growth of 7.4%.", "In both regions, we are continuing to see our tenants actively deploying equipment across their network as mobile data consumption grows rapidly. Activity in Nigeria was a highlight once again and we continue to expect growth in that market to ramp up going forward. We also had a strong quarter in Europe, particularly in Germany, where gross new leasing growth was around 7%, driven by accelerating 5G deployments and continuing investments in 4G. In India, we saw an organic tenant billings growth decline of 1.6%, in line with our expectations as we continue to work through the latter stages of AGR and consolidated related churn in the market.", "On the gross new business side, we saw another solid quarter which was further complemented by contributions from the more than 5,000 sites we have constructed in the market since the beginning of 2020. Notably, Global commenced monthly new business in the quarter, including contributions from new build was more than $11 million, up about 17% versus the prior-year period and representing a new ATC record level. Turning to Slide 7. Our first-quarter adjusted EBITDA grew 13.3% or 14.9% on an FX-neutral basis to $1.440 billion.", "Adjusted EBITDA margin was 66.7%, up nearly 3 full percentage points over the prior year, driven by continued organic growth and prudent cost controls throughout the business, as well as, the benefits of straight-line revenue related to the T-Mobile MLA signed late last year. Cash SG&A as a percent of total property revenue was 6.6% for the quarter as significant scale across our footprint continued to yield benefits, along with some bad debt reversals in India. Moving to the right side of the slide. Consolidated AFFO and consolidated AFFO per share each grew by about 24%.", "These growth rates included the benefit of the nonrecurrence of about $63 million in one-time cash interest expense booked in Q1 of last year, associated with our purchase of MTN's minority stake and our Ghana and Uganda business. Normalizing to that item, growth would have been around 16%, the highest rate in several years. This was driven by high conversion of cash adjusted EBITDA, as well as, lower-than-expected cash interest, nonrecurring cash tax refunds and seasonally low maintenance capex. I will note that the cash tax and maintenance capex trends we saw this quarter are largely attributable to timing, so these lines are expected to pick back up over the rest of the year.", "As a result, we expect that Q1 will be the highest level of quarterly consolidated AFFO per share that we see in 2021. Finally, on an FX-neutral basis, consolidated AFFO and consolidated AFFO per share growth for the quarter would have been right around 26%. Let's now turn to our revised full-year outlook, where I'll start by reviewing a few of the key high-level drivers. First, due to the negative impacts of translational FX fluctuations in some of our international markets, we are reducing our property revenue outlook by $25 million at the midpoint.", "On an FX-neutral basis, we would be increasing our property revenue expectations due to higher pass-through and straight-line revenue internationally. Second, despite these FX headwinds, we are raising our outlook for both adjusted EBITDA and consolidated AFFO. The adjusted EBITDA outperformance is primarily attributable to higher expected contributions from our services segment, driven by preconstruction site acquisition, zoning and permitting work for our customers, as well as, slightly more favorable SG&A trends in the business regarding our improved AFFO expectations. In addition to the services outperformance, we are anticipating lower cash taxes and cash interest expense for the year.", "Finally, for our historical practice, our revised outlook continues to exclude the impacts of our pending Telxius transaction and its associated financing. We expect the transaction to close in multiple tranches, beginning with the majority of the European sites later in the second quarter and with some of the German rooftops in the Latin America sites in Q3. Once the assets begin to close, we will update further iterations of our guidance to include these contributions. We look forward to quickly integrating the portfolio and as previously noted, expect the deal to be immediately accretive to consolidated AFFO per share.", "With that, let's turn into the details of our revised full-year expectations. As you can see on Slide 8, we are now projecting consolidated year-over-year property revenue growth of 7.5% at the midpoint. The decline, as compared to the prior guidance, is due to approximately $48 million in negative translational FX impact which is being partially offset by about $23 million in additional international pass-through and straight-line revenue. Moving to Slide 9.", "You'll see that we are reiterating our organic tenant billings growth projections across all regions as the global leasing environment remains consistent with our prior expectations across our footprint. We continue to expect consolidated organic tenant billings growth of 3% to 4% in 2021. In the U.S., as Tom outlined earlier, we anticipate a prolonged period of strong growth, driven by 5G-related densification initiatives by the carriers as they roll out multiple spectrum bands. We continue to expect that gross new business activity will accelerate through the year and into 2022.", "Looking to Latin America. Organic tenant billings growth is expected to be roughly 7% for the year. Despite some challenges around COVID trends in the region, carrier activity remained consistent as customers continue to increase their mobile data usage and carriers respond with incremental network investments. In Africa, we expect to generate organic tenant billings growth in excess of 8%, driven primarily by spending on 4G deployment.", "We are seeing especially strong growth in Nigeria, where new business trends continue to inflect positively in where our contract structures with key tenants are supporting growth. As we move into the back of the year, we anticipate that Africa organic tenant billings growth will accelerate to above 9%. In Europe, we continue to expect organic tenant billings growth of over 3% for the full year and are seeing solid trends, particularly on the gross new business side. We're especially encouraged by what we are seeing in Germany, where organic tenant billings growth, excluding churn, hit 7% in Q1 for the first time.", "We expect positive new business trends to continue going forward as incumbent carriers accelerate their 5G initiatives and as a new tenant begins to roll out its network. Finally, in India, we continue to expect roughly flat organic tenant billings for the year. While we believe we're in the very late stages of the consolidation process, we maintain our expectation that we will see elevated churn this year as the post-AGR environment sorts itself out. With that said, we remain optimistic that the long-term growth trajectory in the market should be more favorable, particularly, given that the structural framework of the wireless sector today is probably the most constructive it has been in the last decade.", "Moving to Slide 10. We are raising our adjusted EBITDA outlook and now expect year-over-year growth of 9.6% despite about $30 million in negative translational FX impact, as compared to our prior outlook. Around $33 million in incrementally expected services gross margin, $3 million or so in net straight-line favorability and about $4 million in lower cash SG&A is enabling us to more than offset the FX headwind. The services activity we are seeing is broad-based and spread across multiple tenants and, in our view, another indication that U.S.", "network investment activity is in the early stages of a sustainable acceleration. Turning to Slide 11. We are also raising our expectations for full-year consolidated AFFO and now expect year-over-year growth of over 9%, with an implied outlook midpoint of $9.25 per share. Services segment outperformance, as well as, about $13 million in net cash interest and cash tax favorability are driving this upside in enabling us to absorb about $25 million in unfavorable FX impact.", "On a per share basis, we expect growth of 9% for the year and continue to drive toward our goal of delivering double-digit growth. Moving on to Slide 12. Let's review our capital deployment expectation for 2021 which are broadly consistent with our prior outlook and reflect our continuing focus on driving strong, sustainable growth in consolidated AFFO per share. Distributing capital to our common shareholders remains our top capital allocation priority and we continue to expect to allocate approximately $2.3 billion toward our dividend in 2021, implying a year-over-year growth rate of around 15%, subject to our board's approval.", "Regarding capex, we are raising our projections by $25 million at the midpoint due to some additional expected U.S. land investments and a modest increase in start-up capex internationally. On the acquisition front, we spent around $115 million in the first quarter and continue to expect to deploy over $9 billion for the Telxius transaction later this year. As I mentioned earlier, we have made substantial progress on the financing plan for our European business and our acquisition of the Telxius asset.", "This includes on the private capital front, where we continue to remain confident that we could bring in one or more high-quality strategic counterparties to purchase minority stakes in our European business, not only to help us finance the Telxius transaction, but also to collaborate on future European expansion opportunity. On the debt side of the equation, we continue to expect to take our net leverage up to the high 5 times range. Having completed a U.S. dollar-denominated senior unsecured notes offering in Q1, we anticipate that other near-term debt issuances are likely to be euro-denominated.", "This is consistent with our expected material expansion of euro-based revenues in our business and will enable us to take advantage of highly attractive financing rates. Finally, any remaining funding needs that isn't covered by debt issuances or private capital will be in the form of equity through a common equity issuance and/or a mandatory convertible preferred issuance. Our goal continues to be to fund this transaction in a way that is not only optimal from a capital structure perspective, but also enables us to optimize shareholder return. Turning to Slide 13.", "I'd like to spend a few minutes on our new build program which has accelerated over the last few years to meet increasing demand for new sites by a number of our key international tenants. As you can see, since 2016 and including our expectations for this year, we will have added over 23,000 sites to our portfolio through new construction. In 2020, we built over 5,800 towers, a new American Tower record and we're off to a great start in 2021, adding nearly 2,000 sites in our international markets for the quarter, a level of activity only exceeded by that of Q4 of 2020. Moving to the middle of the slide.", "You can see that we are seeing highly attractive returns on capital deployed toward new sites. In Q1, average day one new build NOI yields were around 12%. In our APAC region where we added over 1,300 sites, we saw highly attractive yields of around 15%, and in Africa, where we added more than 500 sites, we average day one returns of over 10%. We're anticipating another record year of new builds in 2021 with 6,500 sites at the midpoint of our outlook.", "The majority of these deployments will be focused across these same APAC and Africa region, where we expect to drive the most attractive new build returns and where the vast majority of new build activity is for investment-grade anchor tenants. Looking beyond 2021. We expect this trend of increasing demand for incremental wireless infrastructure to continue as carriers in markets with fast-growing populations and surging demand for mobile data work to enhance their network. We believe that our existing global scale, track record of providing best-in-class service levels and strong relationship with MNOs, place American Tower in a favorable position to act as a preferred partner for these large-scale deployments.", "As such, we'll look to take advantage of the opportunity to continue growing our international portfolio by deploying capital for high-return new build projects. And as Tom noted on last quarter's call, based on the demand we are seeing for new sites internationally, we are targeting the construction of 40,000 to 50,000 new sites over the next five years. Finally, on Slide 14 and in summary, Q1 was another quarter of solid organic growth, margin expansion, dividend growth, and strong new build activity. We were able to secure a transformational deal in Europe with the pending Telxius transaction, signed a value-added of long-term MLA in the U.S., continued to enhance our balance sheet through opportunistic refinancings and remained focused on cost controls and driving sustainable recurring growth.", "We are excited about the global demand for tower space and look forward to making additional progress on many fronts through the rest of the year as we seek to deliver compelling total returns to our shareholders. With that, I'd like to turn the call back over to the operator for Q&A." ] } ]
[ { "name": "Operator", "speech": [ "[Operator instructions] Your first question comes from the line of Simon Flannery from Morgan Stanley. Please go ahead." ] }, { "name": "Simon Flannery", "speech": [ "Thank you very much. Good morning. Tom, thanks for the overview on the --" ] }, { "name": "Tom Bartlett", "speech": [ "Hey, Simon." ] }, { "name": "Simon Flannery", "speech": [ "How are you? Thanks for the overview on the U.S. portfolio, very helpful. It does seem like you're also becoming more constructive on Europe. We have the Telxius transaction and to Rod's comments about looking for partners, it seems like that extends beyond this deal.", "So perhaps, you just give us a little bit more color on what you see in Europe now? It seems like Germany, in particular, is very strong, but are you open to that becoming an even bigger part of your future beyond the Telxius deal? And what are you -- exactly are you looking for in these partnerships as opposed to raising straight equity or debt given the attractive capital markets there?" ] }, { "name": "Tom Bartlett", "speech": [ "Hey, you know, thanks, Simon. Thanks for the question. We've been looking at the European market for a better part of a dozen years and we did create a couple of head properties, if you will, in France and Germany, pretty small in kind of the 4,000 to 5,000 sites a number of years ago and have continued to look in those particular markets to see if there are opportunities. One of the challenges that we always saw in those markets were who the counterparty was what the capital would be required to upgrade the sites themselves and really what were the long-term growth projections and opportunities in the marketplace.", "And so as such, we were never successful in terms of kind of landing any particular transactions up until the transaction that we're just about ready to close with Telxius. And a lot of that is a function of the relationship, I think, that we've built with Telefonica over so many years and have -- they have such credibility, and I think we have a lot of credibility with them and so we were able to put our hands on this particular portfolio. And I think in particular, for those very reasons that I mentioned before that got in the way of us being able to close things, is that there portfolio itself is very solid. It's a terrific set of assets, terrifically located, as I said, good, good counterparty and now what we're starting to see in the marketplace, as Rod talked about, was really the evolution of 5G.", "We're starting to see more spectrum being deployed to support 5G and we're really, I think, just on the front end of what that 5G deployment is going to look like. We see it accelerating, particularly in markets like Germany. And that we see the opportunity for a new entrant who is going to be coming into the marketplace and so we think it really rounds out our overall portfolio. I think we have a significant competitive advantage in that we have a presence in so many different -- very, very important markets around the globe.", "And this just increases the overall presence we have and what was kind of a hole, if you will, in our portfolio, given the size of the assets that we had before. And so now, we're going to have 30,000 sites in the marketplace, terrific counterparty. And as I said right in the beginning part of what we think is going to be a long-term, a growth trajectory in the region. And so we'll use that as a way to be able to continue to grow, if it makes sense and if we find good assets, good opportunities in the region.", "I think we're positioning ourselves with some very interesting private capital and so that will increase the overall platform for our ability to grow in the market. I mean they're very passive. We're operating it. I mean they're minority partners, as you would expect, but they're very interested also in growing their portfolios in our base of assets.", "And hopefully, they'll be able to participate in future potential investments with us. So I think that this is all coming together quite nicely for us in we've received the approvals to be able to move forward with the transaction, in all due respect. And so we're excited about what the region has in front of us. And as I said, equally as important, we're guided now about what that brings to our overall global footprint and how important that could be to CSPs, hyperscalers.", "Who knows who might be looking for kind of a one-stop shop, if you will, in looking at our over 200,000 sites in these key markets and we look to continue to grow that. Rod talked about the 40,000 to 50,000 new builds that we're looking at and so we very much have our sights on increasing our footprint globally and I think this is a great step." ] }, { "name": "Simon Flannery", "speech": [ "Great. Very helpful. Thank you." ] }, { "name": "Tom Bartlett", "speech": [ "You bet." ] }, { "name": "Operator", "speech": [ "Your next question comes from the line of Ric Prentiss from Raymond James. Please go ahead." ] }, { "name": "Ric Prentiss", "speech": [ "Thanks. Good morning, guys." ] }, { "name": "Tom Bartlett", "speech": [ "Hey, Rick." ] }, { "name": "Ric Prentiss", "speech": [ "Hey, I want to follow on Simon's question a little bit there. Tom, if the private capital makes sense in Europe, does it make sense in other areas outside of Europe to come on board with you guys?" ] }, { "name": "Tom Bartlett", "speech": [ "It very well went may, Rick. We've had JV partners in the form of MV -- MNOs in the past, as you well know, with MTN, where we're a great partner and it very well may. I mean, we'll look at it on a case-by-case basis and look at the opportunities. We think we have a good playbook, if you will, that we've created as a result of the work that we've done on this particular transaction and there's definitely a lot of interest.", "And so we'll look at that as a perhaps a means to create a broader platform for our ability to grow. So it's very possible and as you know, we'll look at everything on an individual basis, case-by-case basis." ] }, { "name": "Ric Prentiss", "speech": [ "Makes sense. You also point to obviously some excitement about a new entrant in Germany. I assume that's the Drillisch folks. What can you tell us about their aspirations or what type of networks they're thinking of building?" ] }, { "name": "Tom Bartlett", "speech": [ "I think that's probably a better question for them in terms of what they're actually looking for. They recently though have executed a roaming agreement with Telefonica, so they have a very strong relationship, I think, with tap in the market which will then be able to hopefully take advantage of. And so I think that will unfold over the year, as Dave said publicly in terms of putting that all together, they are looking to roll out 5G, urban markets first. And so this is where our rooftop -- our penetration rooftop assets in that market, as we've talked about, is just been so incredibly valuable and that's a particular asset base that we just didn't have before.", "We were quite rural in terms of the portfolio we had before. So this really takes it up a few notches in terms of our ability to be successful in the marketplace and my sense is they will take advantage of the rooftop assets probably out of the gate." ] }, { "name": "Ric Prentiss", "speech": [ "OK. And thinking of MLAs, we're getting a lot of questions with Verizon having signed MLAs with Brown and ESPEC, you guys have the Verizon portfolio towers from a transaction a few years ago. Talk to us a little bit about what the path, the give and the take is kind of on an MLA with Verizon with you guys." ] }, { "name": "Tom Bartlett", "speech": [ "Well, yeah, I mean, as you know, Rick, we already have a long-term macro lease agreement in place with Verizon and so it wasn't one where it needed to be extended or from that perspective. We have a terrific relationship with Verizon. We have -- we're in conversations with them. I'm in conversations with them on quite a regular basis, not just on this, but on a lot broader issues in the marketplace.", "And so we have a holistic rate that we have right now with them that expires at the end of the year and that's just one element of this broader long-term master lease agreement with them. And whether that continues or not, who knows, but we're, I think, providing excellent service for Verizon. They're being very aggressive on rolled out of 5G and C-band and we'll be there every step of the way for them." ] }, { "name": "Ric Prentiss", "speech": [ "OK. Last one for me. It looks like you've removed the word aspirational from just having your target on AFFO per share be double digit. Does that mean, obviously, it's a goal, but I think aspiration was kind of scared some people last time around." ] }, { "name": "Tom Bartlett", "speech": [ "Well, it is a goal. I mean I don't know if it's aspiration or whatever it was what you won, but my compensation is driven on AFFO per share growth and return on invested capital and our shareholders require that, too. So we very much have an objective of that double digit. Now it's not going to happen maybe in every year.", "It's long-term, but we've been able to be very successful in terms of driving that kind of performance over the last 10 years and we're very focused on continually driving to that kind of performance going forward. 2022, you know, we do have the churn impact associated with the Sprint asset, so could that be a challenge? Yeah, perhaps, but our goal is still the same and so I think we have a number of levers. We're going to be bringing on the Telxius assets which I think we'll be very happy with those results and what that kind of accretion should be, take advantage of the markets. And we'll have our normal solid growth that we see going on in the business and so we just increased our overall EBITDA performance for 2021.", "And so we'll remain laser-focused on our -- on all of our costs, including all of our capital being spent. Again, our goal is to drive that kind of performance." ] }, { "name": "Ric Prentiss", "speech": [ "Makes sense. Thanks, Tom. Everybody stay well." ] }, { "name": "Tom Bartlett", "speech": [ "Uh, you too, Ric." ] }, { "name": "Operator", "speech": [ "Your next question comes from the line of Jon Atkin from RBC. Please go ahead." ] }, { "name": "Jon Atkin", "speech": [ "Thanks. So I wanted to ask about Telxius and you talked about strategic counterparties. At a height level, can you talk a little bit about the types of things that are factoring into your with respect to governance valuation or just kind of other factors that will kind of play a role and how this shakes out? And then it's been a couple of conference calls since you mentioned fiber and I just wondered if there's kind of an update there? Or is that less of a focus these days in some of your Latin American properties? Thanks." ] }, { "name": "Tom Bartlett", "speech": [ "Maybe I'll ask Rod to address the first question and I'll take the second one, Jon." ] }, { "name": "Rod Smith", "speech": [ "Sure, Tom. That sounds great. Thanks, Jonathan, for the question. I hope you're doing well.", "So from a high level in terms of our Telxius financing, our plan has not changed and we continue to make very good progress on the path that we originally announced when we announced that we were entering into the transaction itself. So there's a few broad principles that we're looking for. One is, we expect to finance this deal in a way that's consistent with our investment-grade credit. That still is the focus.", "Our aim is to minimize the dilution of our current common stockholders, so continue to be focused on that as well and we expect to finance this transaction in a way that supports us being immediately accretive which is what we said early on and that's continuing to be our focus and our expectation here as we move forward. So a couple of things. In terms of the internal workings of the financing plan, I don't want to get into details around the governance and valuation and those sorts of things. The one thing I would say valuation-wise is very consistent with kind of the valuation of what we're doing with Telxius.", "In terms of the minority stakes that we are selling, we're selling minority stakes potentially in our European business, not just to Telxius, so we would be putting our legacy businesses combining that with the Telxius assets. So one key point is we do expect our debt to come up to the high 5 times. We've said that before. We're still very comfortable in that range and we do believe that that's consistent with our investment-grade credit rating and have had many discussions with the credit agencies and we do not expect any risk of downgrades or outlook changes or anything from that perspective.", "Additional near-term senior notes that we may issue in order to fund the Telxius transaction are likely to be denominated in euro currency and that will allow us to take advantage of the very attractive rates that we see in the euro market, certainly. And then on the private capital front, as Tom alluded to and I mentioned in my comments, we continue to progress along that path and we're very confident that we can bring in one or more very strategic investors. So we certainly are talking to the world's premier investors and certainly folks that understand this space that understand the European market and other markets, quite frankly, as well as, have relationships with some of our biggest customers around the globe. So there may be more than just financial benefits here to our shareholders, but also strategically kind of broader partnership benefits as well.", "So certainly, that's a key focus. And then the final piece of the financing plan will come in the form of equity, so whatever is not funded through the increased net leverage that I talked about and through the euro debt offerings and private capital, we expect to go into the marketing issue and issue some equity. In terms of timing, we do expect the transaction to begin to close in the second quarter here, probably as early as late May for some of the European markets. The Latin American markets were originally expecting that they would close probably in sometime in Q3.", "There is a chance that Brazil and some of the other markets could close as early as the end of May or at some point in Q2, but we'll continue to kind of work through the timing there. There will be some assets, but particularly, some select rooftops that will close in Europe in Q3, not in Q2. So we will have multiple closings across Q2 and across Q3. So that's kind of the way that it shakes out.", "And again, we remain very confident of this financial plan and our patience and kind of putting it together and managing through the details is really going to pay off for our shareholders and we're in very good shape to begin to execute on this in the month of May as we prepare to close the first tranches of the Telxius transaction." ] }, { "name": "Tom Bartlett", "speech": [ "And then, Jon, with regard to your second question on where we are with fiber is one of our platform extension industries. First of all, kind of where we are? I mean we have a six-country fiber footprint: Mexico, Brazil, Argentina, Colombia, S.A., and India, and we cover over 30,000 route kilometers. We actually passed 1.25 million homes in those markets and the networks themselves are a mix of active long-haul metro to B2B in Mexico and Brazil and a concentration of fiber-to-the passive optical networks in S.A., Colombia, Brazil, and Argentina. We've spent over $1 billion of capex over the past four years in those markets, $700 million for acquisitions and $300 million for development and readout development capex.", "So we've been monitoring it very, very closely from a revenue perspective. I think we generated about $100 million in 2020 and our ROIC for those particular investments selectively is in kind of the 5%, 5.5% kind of range. Interestingly, the S.A. asset, return on invested capital is probably double that, so what we're thinking about from strategically, again, is we're looking at this from an initiative perspective, a platform initiative perspective, some of the underlying elements of it, foundations of it, again, go back to how we're looking at the overall power, the multiservice, multi-tenant, the long-term anchor contract, escalators, exclusive real estate rights, a way for us to really be able to create a competitive advantage, and really complement the kind of the power returns that we've been experiencing for the last 10 years or so.", "So our strategy really has somewhat kind of two-pronged, I would say. The first is to pivot and transform our current fiber businesses in Mexico and Brazil to wholesale long-term contracts. We'll be looking to do this through long-term contracts with Tier 1 carriers. Also going to involve some strategic inorganic transactions like we were just talking about before and the focus is clearly creating a competitive long-term strategic asset in those markets.", "And then the second strategy really entails kind of reaching certain economics in these deployments, particularly, in S.A. and Brazil and our focus on future investments in some of our emerging neutral host open access network. So we'll continue to be opportunistic where it obviously makes sense, be monitoring it very closely, but we do see that we'll see a kind of a shift to open passive optical multi-tenant access network over time. We think that's a great way to be able to improve the return on invested capital and our regional focus is currently right now on Latin America and where most of the assets are and leveraging our existing MNO relationships.", "So we think we can create that model in LatAm and then be able to scale it globally. So I mean that's kind of where we are. It's still a work in progress, but I think we've learned a lot and I think we're making great progress on the strategy." ] }, { "name": "Jon Atkin", "speech": [ "Thank you." ] }, { "name": "Operator", "speech": [ "Your next question comes from the line of Matt Niknam from Deutsche Bank. Please go head." ] }, { "name": "Matt Niknam", "speech": [ "Hey, thanks for taking the questions. Just two if I could, one on the services side. If you can give us any updates in terms of how we should think about the cadence of revenues and services margin the next couple of quarters? Just -- and then also kind of get a better sense of the breadth of the strength. I think in the prior remarks, you mentioned pretty diverse in terms of contribution, so if you can give us any color there? And then secondly, on the SG&A front in India.", "It looks like you're moving past some of the elevated bad debt that hit you a year ago. So just trying to get a better sense of how we should think about that in terms of whether there's any incremental bad debt you anticipate in that region or whether you move past that. Thanks." ] }, { "name": "Tom Bartlett", "speech": [ "Great, Matt, and I'll let Rod get into that." ] }, { "name": "Rod Smith", "speech": [ "Yeah. Thanks, Tom. Thanks, Matt. I hope you're doing well.", "Thanks for the question. So with regards to our services business, as you saw in the comments earlier and I think Tom alluded to, we are seeing a significant uplift in our services revenue for the year. So you saw us raise our full-year outlook to about $175 million, up from about $120 million. The margins are broadly consistent year over year, so we're expecting that mid- to just a touch above mid-50% margin.", "That's similar to what we saw in 2020. That's what we're expecting in 2021. In terms of the timing of the services revenue, we are seeing an acceleration of, let's say, applications and kind of activity in the market and we expect that to continue throughout the next couple of quarters. So more than 60% of the revenue of the $175 million is back-end weighted, so we would expect in Q3 and 4, both of those periods would be north of $50 million per quarter in terms of revenue.", "So that's kind of the way to think about services. Services, what we're seeing really is kind of a broad-based increase in services that goes across most -- all of our large customers, certainly, and it's focused on ADP, engineering, mouth analysis, things like that. Those sorts of activities are generally kind of front-end loaded. That services work happens well before you see leasing activity and any kind of enough lift in leasing revenue.", "So it's a really good sign here in terms of the activity level, the services that we see kind of ramping up toward the end of this year and as we transition into 2022. Certainly, when you think about India and bad debt, there's still a few places where we're watching customers around the globe, a couple in Africa and a couple in India. Certainly, we're doing really well. There's no significant incremental bad debt in our outlook.", "In our accounts receivable, the way it sits at the end of Q1 is broadly in line with the way that it's set at the end of Q1 last year, so we haven't had a significant increase in accounts receivables. So we continue to collect and be pleased with the way that our customers are paying in India and in the select places in Africa that we're watching. We did end up unwinding a bad debt reserve in India by just under $10 million or so, so that's certainly a good sign, but with that said, we continue to kind of watch India. There's a few things that we're looking for relative to some of our customers there in terms of capital raise projects that they're in.", "And certainly, the amount of liabilities through the AGR and some of the activity between our customers and the government to try to negotiate those fees, kind of we watch back quite closely. But that's really the story on accounts receivable and bad debt, so we've had a good quarter. We did well throughout 2020 and we don't have any significant incremental bad debt in our outlook for 2021." ] }, { "name": "Matt Niknam", "speech": [ "That's great. Thank you for the color." ] }, { "name": "Rod Smith", "speech": [ "You're welcome." ] }, { "name": "Operator", "speech": [ "Your next question comes from the line of David Barden from Bank of America. Please go ahead." ] }, { "name": "David Barden", "speech": [ "Hi, guys. Thanks for taking the questions. I guess, Rod or Tom, the -- obviously, the thing that's going to propel the gross revenue trajectory domestically is the C-band auction and the pursuit of exploiting that opportunity among the carriers. Can you, for the benefit of us generally across this global portfolio that you have, can you kind of maybe tick off the next one, two or three markets where you're expecting this kind of opportunity to emerge with spectrum auctions forthcoming? And then the second question is John Stankey at AT&T kind of study was giddish about the supply chain marketplace, even in the United States.", "Could you talk about how you're thinking about the supply chain, chip availability, specifically affecting your company's or customers' ability to deploy and how you kind of factored that into your thinking about the guide? Thank you." ] }, { "name": "Tom Bartlett", "speech": [ "Yeah. No, sure, Dave. Maybe I'll start off and Rod can chime in with some additional commentary. I mean what we're seeing around the globe is I think both Rod and I mentioned even in our remarks, was just an onslaught of new spectrum coming into the marketplace and we're even -- we're seeing in India, we're seeing clearly in Europe, we're seeing in Latin America, and the wide slots of spectrum.", "You know, for 5G to be effective, you need a wider slot spectrum. You can't beat a 10 meg, you're looking at 20 to 40 to 60 meg of spectrum and so that's the first sign, I think, David, that we see. Because as I mentioned and as what you all know, spectrum is the lifeblood of being able to roll out any of these new technologies and for 5G to be able to truly realize the full 5G experience in terms of speed and latency, you need significant amounts of it. And so I look at -- and in my comment before on Europe, what we've seen in certain of those critical markets, critical countries in Europe, really stepping up to launching a lot of new spectrum and I think that's one of the reasons that we're really now starting to see some come outsized growth in those particular markets.", "Something that we hadn't seen for several years and that was really -- that really drove us to looking at some of the growth curves in that market, for us to even lean into some of the assets that are there and so that's just kind of the first sign of it, I think. You look at markets like Africa, though, I mean Africa, I think Rod had mentioned they're kind of in the 8%, looking at growing to the 9%, even kind of ending out the year. You look at markets like Nigeria and things like that, where we're talking kind of double-digit growth rate. I mean that's just because the wireline presence there just doesn't exist and wireless broadband is everything that our customers are investing in, so you have slightly different reasons for some of the growth.", "Many of the markets are just getting into 4G, so we're still on the front of that 4G curve. And Latin America, you look at Brazil growth, you look at the Mexico growth, I mean, they're in the kind of the 7%, 8% kind of growth range. So we're really excited about what we're seeing outside of the United States and what's really driving it clearly is more spectrum, more wireless penetration. Unfortunately, the pandemic has actually driven even more of a need for connectivity.", "And so we're seeing even more wireless usage in those markets in particular, again, because the wireline markets are just so foreign and nonexistent and so we would expect to see Europe kicking in with 5G. Africa continued growth as 4G becomes more of a reality there. Latin America, similarly, 4G into 5G ultimately and even in India, the growth there is strong. We've got the churn issues that we have to deal with in that particular market and we're getting our arms around and making sure that we really nail those there, but it's not a growth issue, they've got new spectrum, they've got 4G.", "You see the likes of Facebook. You see all of the big foreign investments that's coming into the marketplace and so it's really an exciting market from a broadband wireless perspective. So I mean that kind of gives it on a global scale and from a supply chain perspective, we don't see any impact on our side from a supply chain perspective at this point. I mean our customers are the ones that are kind of frontline with issues that they may have from some of the OEMs and things like that.", "But at least from our perspective, we're not seeing any impact from that perspective." ] }, { "name": "David Barden", "speech": [ "OK. Great. Thanks, Tom. I appreciate it." ] }, { "name": "Tom Bartlett", "speech": [ "Yeah. Sure, Dave." ] }, { "name": "Operator", "speech": [ "Your next question comes from the line of Tim Long from Barclays. Please go ahead." ] }, { "name": "Tim Long", "speech": [ "Thank you. I was hoping you could talk a little bit more. You talked about edge compute a little bit in your prepared remarks. Could you just kind of update us on how you're thinking about kind of the business model for AMT? And obviously, this is a longer-term trend, any more views on data center investments and how you think you might monetize that? And then I have a follow-up." ] }, { "name": "Tom Bartlett", "speech": [ "OK. No, I mean let me take a step back a little bit in terms of kind of what we're seeing from an evolution perspective, if you will. First of all, this whole market is, in fact, developing. With regards to specific to the edge, we are at kind of the beginning and we're seeing certain elements aligned, if you will, but we're really starting to and trying to participate in those, but we really are at the beginning size of it.", "If you start to think about kind of, first of all, the C-RAN impact, what the cloud impact is, we just saw some recent announcements in the market relative to the cloud players aligning with some of the MNOs and we've seen Verizon doing that over the last year or so. What we're starting to see is, if you think about kind of the 4G low mid-band power market and what it looks like at the site level. As we move into the 5G and the low band, mid-band, what we're starting to see at the site, for example, is a lot of MIMO is going to be starting to be deployed, a lot of tenant arrays, a lot of new fiber that's going up to the poles themselves, 5 times to 10 times more fiber strands needed, higher power, more heat. And so there's a lot of elements that are going on actually at the site itself which is going to drive more and more equipment, improvements to the public radio interface on the front haul which connects actually the tower to the baseband unit itself and so now what we're starting to see is we're seeing Cloud-RAN and O-RAN.", "From an O-RAN perspective, it's just different types of equipment that our customers are able to put together to be able to load onto the site. And at the kind of at the base level, at the baseband unit which is where the data center element comes in, we're starting to see disaggregation at the baseband unit level into the DU and to the CU level. And that's giving our customers the ability and us to be able to look at where, in fact, we might be able to expand and be able to enjoy some of this additional compute capability that's going to exist at the edge as the 5G experience becomes more prevalent throughout the country. So we continue and expect to see this incremental convergence of this wireline and wireless and network.", "We think it stresses the importance of that first mile network architecture and so as a result, we are actually very, very excited about the opportunity. It's a shared neutral host solution. We think it's going to be very efficient added at the site level and we actually are exploring it and going down the path of really two elements, right, two ways, if you will. We've talked about the distributed compute.", "The enterprise workloads continue to move on to the public cloud and so there's a growing near-term market segment that's in use of that kind of off-prem cloud computing. It's really a hybrid solution and so we were located on some tent, if you will, of our sites and you'll see them. There are shelters there, there's power, there's capability to be able to offer this kind of a capability to these kind of mid-sized enterprise account and they're actually being quite successful. They're loading up very quickly and believe me, they're not meaningful from an AMC perspective, but they are absolutely meaningful from an experience perspective and learning exactly what our customers are going to be looking for.", "The bigger opportunity for us is still at the mobile edge compute side. And so that will become, we believe, more of a reality as that 5G world becomes more developed, and so we have a number of MOUs with a number of different players focused on solutions to the MNOs, as well as, focused on solutions to the cloud service provider. And so we're exploring those, putting those in front of those particular accounts and looking at what the ultimate opportunity would be. I mean the site is a perfect location for being able to and being able to expand our customers' edge compute capability, not just within the United States, but on a global basis.", "If we can bring in 500 kilowatts of power into particular site with a number of shelters that exist in the site, to be able to load up racks and servers, we think and give that cloud ramp which will actually exist in that DU, so that's why that disaggregation is so important between those two particular elements of the RAN. We think that we can enjoy some significant opportunity upside here from this whole initiative and so it is an extension of our existing platform. Again, neutral host, but it really provide ultimately that cloud ramp which we think is going to be needed to be able to enjoy that kind of latency that our enterprise accounts and customers are going to be looking for." ] }, { "name": "Tim Long", "speech": [ "OK. Thank you. I just wanted to follow up, when you think about Africa and particularly India, obviously, some aggressive tower build plans over the next few years, but can you just talk a little bit about kind of this year and potential COVID-related risks to those builds and any other risks to the business because of the pandemic? Thank you." ] }, { "name": "Tom Bartlett", "speech": [ "Yeah. I mean I think that the build itself, our plan, our outlook, I think, is in the 6,000 to 7,000 sites. There could be some timing issues associated with the build. The need is there.", "I'm certain that the sites are going to be built, but particularly in a market like India who are suffering so significantly right now, there can be a timing issue in terms of having essential people out in the marketplace to be able to build. Clearly, lives saved is more important than towers built, so there could be some timing there -- issues. But ultimately, over that five-year period, we are seeing the demand for the 40,000 to 50,000 sites that Rod laid out and our forecast right now is for that 6,000 to 7,000 sites. There could be some timing issues associated with particularly the sites in India.", "I'm not seeing the same implications in Africa at this point in time. And by the way, our overall 6,000 to 7,000 sites, that outlook already includes some carving back of what we are expecting overall in the marketplace. And relative to COVID, overall, as we've seen over the last year, our business is quite resilient, people need connectivity. I think that's been more obvious than ever over this past year, particularly in many of our global markets, and so our customers are doing everything possible that they can to be able to maintain that kind of connectivity.", "We're doing everything we possibly can to be able to support them, to be able to ensure that kind of connectivity. And so we're working our tails off with our customers to make sure that we can do that." ] }, { "name": "Tim Long", "speech": [ "OK. Thank you." ] }, { "name": "Operator", "speech": [ "Your next question comes from the line of Batya Levi from UBS. Please go ahead." ] }, { "name": "Batya Levi", "speech": [ "A couple of questions. First, on U.S., as you think about your long-term guidance, can you tell us what it assumes in terms of the mix of amendments versus new co-location? And the new site build, that program that you have, what percent of that would be in the U.S.? And as the carriers deploy CDMA, do you have any indication that they're leaning more toward new leases as well? And then maybe just a follow-up on the escalator, Rod. If you can tell us a little bit more why it stepped down and then when it will go back to 3%? And also if the DISH MLA, if you can confirm that to 3% escalator as well. Thank you." ] }, { "name": "Tom Bartlett", "speech": [ "I thought you said there were just a couple of questions?" ] }, { "name": "Batya Levi", "speech": [ "I know. I thought we should take this call longer." ] }, { "name": "Tom Bartlett", "speech": [ "No. That's great, that's great. No, thanks for being here and thanks for the question. I'll let Rod take that run with it." ] }, { "name": "Rod Smith", "speech": [ "Yeah. Thanks for the question, Batya. So I'll try to remember all of the different aspects here, but if I missed any, just to remind you. Maybe I'll start at the end and work backwards a little bit.", "So the escalator in the U.S., you saw our escalator for Q1 was about 2.6%. That really was driven by the impact of the timing mechanics within the T-Mobile MLA. As we signed a new MLA with T-Mobile, the escalator shifted from one period to another and that affected the volume of escalator in Q1. But for the full year, we do expect the escalated to be right in that 3% range, 3% or just above potentially and Q2, we do expect the escalator for the U.S.", "to be 3.1%. So there's no structural change, there's no permanent shift, it really is just a timing issue. And I'll also point out, it's a little ahead of time, but in 2022, you may see some lumpiness as well with the escalator given the time shift here. But again, 2022 for the full year, we anticipate the escalator to be right in that 3% range, 3% or just above as usual, so, no, nothing to be concerned there.", "We haven't had any philosophy shift and no kind of contractual change in terms of what the escalator is. It remains at 3% and as it always has in the U.S. So then I think in your next question was relative to the long-term guidance. So maybe I'll just take a minute to remind the folks on the call of what that is.", "So we're looking at, over the next seven years, we put our guidance at least 4% organic tenant billings growth on average over that time period. That includes the Sprint churn which will begin to roll off of our billing later this year in Q4 in the beginning of October. If you normalize for that, we're looking at that long-term organic growth rate in the U.S. of about 5%.", "The other thing that I would point out here is if you look at just the first couple of years, '21 and '22 on a Sprint impacted basis where we'll see that churn again beginning in Q4 of 2021, the expected organic tenant billings, including that, will be around 2%, but normalizing that, it will be around 5%. Once we get clear from that, when you get out to '23 and beyond, so '23 out to '27, even with the impact of the print churn. We're predicting organic tenant billings growth, north of 5%, and on a normalized basis for that same time period, north of about 6%. So we are very excited and confident about the future in the U.S.", "We are seeing some acceleration of gross new biz. We're seeing that today. We expect that to continue and that really is fueling these very solid organic tenant billings predicted over a long period of time. Again, that's seven years and just a couple of key components here.", "I'll remind you, 23% or two-thirds of this, two-thirds of this revenue that we need to hit these things are already contracted in our long-term agreements in some of these holistic deals, so that's key. That includes DISH kind of being in here in the assumptions with some modest activity which potentially could be outperformed, depending on the pace and the level of their network build over that time period. And some of the C-band spectrum deployments for some carriers in some of the years maybe in addition here and outside of kind of the traditional holistic that we're looking for that potentially as an upside. And then in terms of the co-location amendment mix, we're currently still at heavy amendment, 80% and 20% co-location, that's the way it's been for a little while.", "It may vary from carrier to carry, but that's what it's been consistently and we expect that that will be the case for a couple of years, but going out longer-term, it will vary. We do expect that there could be a higher percentage of co-locations than we've traditionally seen as the carriers deploy this higher band spectrum and they have a need to densify their network builds over time. So we're certainly planning for some of that as well, but it's probably too early to predict that too much specificity in terms of what that will be in terms of the mix in the out years. And was there another piece in your question, Batya, that I didn't address?" ] }, { "name": "Batya Levi", "speech": [ "Just the DISH MLA, does it have a 3% escalator?" ] }, { "name": "Rod Smith", "speech": [ "Yeah. The DISH MLA is uh, the DISH MLA has the 3% in there. So the escalator is consistent with everything else that we do and consistent with our philosophy here in the U.S. And then in terms of timing of the revenues, I'll just maybe highlight for folks that we do expect revenue to begin in 2022 and it'll be modest in that year and then it'll ramp up going forward.", "And we'll see -- we'll be working with this to help them roll out their network over an extended period of time." ] }, { "name": "Batya Levi", "speech": [ "Awesome. Thanks so much." ] }, { "name": "Rod Smith", "speech": [ "You're welcome." ] }, { "name": "Igor Khislavsky", "speech": [ "OK. Great. Well, thank you, everybody, for joining this morning. That'll wrap it up.", "I hope everyone is doing well, and we'll talk to you soon." ] }, { "name": "Tom Bartlett", "speech": [ "Thanks, everyone." ] }, { "name": "Operator", "speech": [ "[Operator signoff]" ] } ]
AMT
2020-02-25
[ { "description": "Vice President, Investor Relations", "name": "Igor Khislavsky", "position": "Executive" }, { "description": "Chairman, President and Chief Executive", "name": "James D. Taiclet, Jr.", "position": "Executive" }, { "description": "Executive Vice President and Chief Financial Officer", "name": "Tom Bartlett", "position": "Executive" }, { "description": "Citigroup, Inc. -- Analyst", "name": "Michael Rollins", "position": "Analyst" }, { "description": "", "name": "Unidentified Participant", "position": "Other" }, { "description": "UBS Investment Bank -- Analyst", "name": "Batya Levi", "position": "Analyst" }, { "description": "Morgan Stanley -- Analyst", "name": "Simon Flannery", "position": "Analyst" }, { "description": "Cowen & Company -- Analyst", "name": "Colby Synesael", "position": "Analyst" }, { "description": "Goldman Sachs -- Analyst", "name": "Brett Feldman", "position": "Analyst" }, { "description": "Raymond James -- Analyst", "name": "Ric Prentiss", "position": "Analyst" } ]
[ { "name": "Operator", "speech": [ "Ladies and gentlemen, thank you for standing by and welcome to the American Tower Fourth Quarter and Full Year 2019 Earnings Call. At this time, all participants are in a listen-only mode and later you will have an opportunity to ask questions. [Operator Instructions] As a reminder, this conference is being recorded.", "I would now like to turn the conference over to our host, Vice President, Investor Relations, Igor Khislavsky. Please go ahead." ] }, { "name": "Igor Khislavsky", "speech": [ "Thanks Karen. Good morning and thank you for joining American Tower's fourth quarter and full year 2019 earnings conference call. We posted a presentation, which we will refer to throughout our prepared remarks, under the Investor Relations tab of our website www.americantower.com.", "Our agenda for this morning's call will be as follows: First, I'll quickly summarize our financial results for the quarter and full year; next, Jim Taiclet, our Chairman, President and CEO, will provide a brief update on our Stand and Deliver strategy and our key priorities for 2020; and finally, Tom Bartlett, our Executive Vice President and CFO, will discuss our 2019 results and 2020 outlook.", "After these comments, we will open up the call for your questions.", "Before I begin, I'll remind you that this call will contain forward-looking statements that involve a number of risks and uncertainties. Examples of these statements include, our expectations regarding future growth, including our 2020 outlook, capital allocation and future operating performance, our expectations regarding Indian Carrier Consolidation-Driven Churn and the impacts of the AGR decision in India, and any other statements regarding matters that are not historical facts. You should be aware that certain factors may affect us in the future and could cause actual results to differ materially from those expressed in these forward-looking statements. Such factors include the risk factors set forth in this morning's earnings press release, those set forth in our Form 10-K for the year ended December 31, 2018, as updated in our Form 10-Q for the quarter ended September 30, 2019, and in other filings we make with the SEC. We urge you to consider these factors and remind you that we undertake no obligation to update the information contained in this call to reflect subsequent events or circumstances.", "Additionally, many of our comments around fourth quarter and full year 2019 results will be focused on growth rates normalized for the impacts of the non-recurrence of our Q4 2018 Tata settlement and Carrier Consolidation-Driven Churn in India. We view these normalized results as important indicators of the underlying trends of our business.", "We have included reconciliations of these normalized metrics to our GAAP results in the back of our earnings presentation, in our press release and in our supplemental package.", "Now. please turn to Slide 4 of our presentation, which highlights our reported and normalized financial results for the fourth quarter and full year 2019.", "During the quarter, our property revenue declined 9.3% to $1.9 billion, while growing 8.2% on a normalized basis. Our adjusted EBITDA declined by 14.6% to $1.2 billion, while growing 11.3% on a normalized basis. And our consolidated AFFO and consolidated AFFO per share declined by roughly 20% to $859 million and $1.93 respectively, with normalized growth of over 14%.", "Finally, net income attributable to American Tower Corporation common stockholders increased by roughly 103% to $563 million or $1.26 per diluted common share.", "From a full-year perspective, our property revenue grew 2.1% to $7.5 billion or by 9.1% on a normalized basis. Our adjusted EBITDA grew nearly 2% to $4.7 billion or nearly 12% on a normalized basis. And our consolidated AFFO declined by 0.5% to $3.5 billion while consolidated AFFO per share declined by roughly 1% to $7.90. On a normalized basis, consolidated AFFO growth and consolidated AFFO per share growth were 12% and more than 11% respectively.", "Meanwhile, net income attributable to American Tower Corporation common stockholders increased by 53.9% to nearly $1.9 billion for the year or $4.24 per diluted common share.", "Finally, before I hand it over to Jim, I'll note that we are now reporting operating results in six segments, after separating the EMEA property segment into Africa property and Europe property. Historical segment results are included in our supplemental package on the website.", "And with that, I'll turn the call over to Jim." ] }, { "name": "James D. Taiclet, Jr.", "speech": [ "Thanks Igor, and warm welcome to everyone who is joining us on the call this morning. Given recent developments with respect to the T-Mobile, Sprint transaction, I'll begin today's remarks with a few high-level thoughts on the potential effects on American Tower. Since the proposed merger between T-Mobile and Sprint was announced back in April of 2018, we have consistently stated that we expect the merger to be net neutral to net positive for our company over the mid to long-term. This optimistic perspective has been driven by our belief that the combination would speed up the deployment of multiple band spectrum, including a number of mid-band assets and that the accelerated nationwide 5G coverage requirements associated with this transaction will drive further demand for tower space.", "In addition, we believe the case for our U.S. business long-term upside is even stronger with Dish's commitment to building a new full nationwide network. We do expect to see some churn associated with network rationalization, but we anticipate that it will be more than offset by incremental industry network investments in coverage, capacity and densification over time. We're excited to partner with all of our tenants, including the new T-Mobile and Dish, to help speed the deployment of fast efficient 5G broadband service to consumers throughout the country.", "With that, I'm going to focus the rest of my comments on our progress toward our Stand and Deliver strategy overall, as well as our specific priorities for 2020. I'm confident that executing on this strategy will position ATC even better to support the deployment of 5G networks in the U.S. and advance mobile broadband networks in all of our markets worldwide.", "As Igor noted a few minutes ago, we had another great year in 2019 and we expect to build on our current position of strength by continuing to focus on our Stand and Deliver strategies four key pillars. The first of these is to drive operational efficiencies throughout our own business, as well as the wider mobile industry. We believe that optimizing application cycle times, improving the tenant experience and driving operational efficiencies throughout our internal regions and functions will lead not only to faster and more efficient deployments for our tenants, but also higher margins and better returns for our company over time.", "We're making tangible progress on a number of dimensions and efficiency. For example, we've invested around $100 million in green energy solutions, such as advanced batteries, solar installations and other initiatives, primarily in our African and Indian markets as part of our commitment to reduce our fossil fuel usage. These advanced energy management solutions may also reduce the pass-through fuel cost to our tenants over time while enhancing their network reliability. Meanwhile, in the U.S., we've worked closely with our tenants to optimize service levels to support their ongoing 4G and accelerating 5G investments, leading to reduced cycle times and more efficient network deployments for them.", "Among the contributors to this are our master lease agreements that provide for more streamlined administrative processes for site applications and our highly capable in-house zoning and permitting and structural engineering teams. And throughout our global footprint, we continue to drive down our run rate SG&A expense as a percent of revenue, while we add scale, grow revenues and improve business processes.", "Growing our portfolio and capabilities across our served markets is the second pillar of Stand and Deliver, and we've added more than 38,000 sites through acquisitions and new builds since we unveiled the strategy in 2018, while expanding into three new markets. In 2019, specifically, this included the acquisition of nearly 5,800 sites through our recent Eaton Towers acquisition, another 2,400 or so sites in Chile and Peru and more than 400 in the U.S.", "We continue to see attractive acquisition opportunities globally and are pursuing those within the context of our proven capital allocation strategy. In addition, we've seen demand for new builds accelerate across a number of our markets as incremental network densification becomes a necessity in many more places.", "With highly attractive returns on new build towers even on day one, we expect to see our new build program playing an even more prominent role in our Stand and Deliver strategy going forward.", "Our focus on innovation, the third pillar of Stand and Deliver is continuing to gather momentum. In 2019, for example, we acquired an interconnect facility in Atlanta to help optimally position ourselves in and better understand the elements in demands for edge computing. We've also made strides in the CBRS space and continue to believe that the market opportunity there is likely to be concentrated in indoor venue-based facilities, at least initially.", "In addition, we're in the process of ramping up our own use of drone technology internally, particularly in the U.S., to help us better survey our sites and optimize power maintenance. And as I alluded to earlier, we're also helping lead the way on renewable energy solutions in the African and Indian telecommunications industries, working with technical experts both in the U.S. and abroad as we do so.", "Finally, we continue to evaluate a number of other innovative opportunities looking for business models that are either based on or complementary to our existing macro towers. A critical component of these models is that they are secured by owning or controlling local franchise real estate rights, a characteristic that has made our existing business so durable and profitable over the last 20 plus years. Our focus remains on commercially shareable assets supported by long-term contracts with high operating leverage.", "Our commitment to enhancing American Tower's industry leadership is the final pillar of Stand and Deliver, and we're pursuing this in numerous ways today. This commitment starts with our dedication to sustainability and being a constructive force in the communities in which we operate. To this end, we continue to enhance our sustainability program, governance practices and our commitment to diversity and inclusion throughout the business.", "Further, in August 2019, we signed on to the Business Roundtable statement on the purpose of the corporation, as we believe we have the ability to deliver sustained value across the range of our stakeholders. From an operational perspective, our work with leading universities and academics in the field of distributed power generation continues with the goal being a material reduction in carbon emissions and a corresponding leap and efficiency in our African and Indian operations. And at the same time, we're expanding the presence of our Digital Village initiative and now have installations in five different countries where underserved populations are gaining access to critical broadband connectivity and the resources and opportunities that come along with it.", "Most notably, this includes e-learning for both children and adults that enhances their educational opportunities beyond what can be offered by the local village schools. Further, we are members of the Nareit Executive Board, the World Economic Forum, Digital Communication Board of Governors, and I co-chair the US-India CEO Forum, which has the goal of improving economic collaboration and increasing employment in both the U.S. and India.", "We're also participants in numerous other industries, government and NGO interactions designed to enhance our understanding of the world around us and position American Tower to continue to make a positive global impact through the transformative nature of access to wireless technology.", "These interactions include in-depth dialog with existing tenants and potential new tenants, both in the U.S. and overseas. And in 2020, executing on the key elements of Stand and Deliver across the board will be the priority of our dedicated employees throughout our global operations.", "A few specific items stand out to me as some of the biggest opportunities. First, on the operational efficiency front, we continue to explore and identify new and more efficient ways of driving our business forward while enhancing the levels of service we're providing to our tenants. We expect to continue to improve our margin performance in 2020 as we simultaneously integrate newly acquired portfolios in Africa and Latin America. We're also creating shared service centers to support much of the lease extraction and other administrative elements of our business, which we believe will further drive down our SG&A as a percentage of revenues over time.", "We expect that our increasing use of drones and continued investment in fuel and power solutions will also help reduce costs, while simultaneously providing the better overall value proposition for our tenants.", "Expanding our portfolio is another key focus for 2020 and our new build program is perhaps the biggest point of emphasis. We constructed a record of more than 4,500 sites in 2019 and we expect to exceed that by around an additional 2,000 sites in 2020 at the midpoint of our outlook. Importantly, we expect average day one NOI yields on these new builds to continue to be in the double-digit range.", "On the innovation front, we expect to see more near-term momentum in the deployment of commercial 5G in the U.S. As more cell sites, antennas and spectrum bands are optimized for 5G, the surrounding ecosystem should become incrementally more dynamic, which is likely to present us with additional commercial opportunities.", "From our vantage point today, the use of CBRS spectrum and edge compute our two areas that maybe especially interesting for us in 2020. We also expect to continue to make meaningful investments in clean energy and fuel innovation this year, concentrated mainly in India and Africa.", "Finally, in terms of industry leadership, we expect to augment our current positioning throughout 2020 by building on existing relationships with numerous NGOs and industry groups. At the same time, we set a target to build another 15 to 20 digital villages this year and look forward to publishing an even more comprehensive sustainability report to better reflect the many initiatives we have under way in this area.", "In closing, we're excited about what the future holds and we're fortunate to find ourselves in a very solid position as we enter 2020. Our Board of Directors, senior leadership team and dedicated employees around the world are all committed to executing our Stand and Deliver strategy and are energized by the dynamic growth trends in mobile technology.", "So with that, let me turn it over to Tom for a review of our 2019 results and our detailed expectations for 2020." ] }, { "name": "Tom Bartlett", "speech": [ "Hey, thanks, Jim. Good morning, everyone. As you can see, 2019 was another very strong year for American Tower, where we generated double-digit normalized consolidated AFFO per share growth and leading U.S. organic tenant billings growth rates, while building a record number of 4,500 new sites, acquiring over 9,000 more and entering two new markets. We also grew our common stock dividend by 20% again, and drove our average cost of borrowing down while extending our average tenure by over a full year.", "In addition, as Jim just discussed, we continue to execute on our Stand and Deliver strategy, expanded our normalized margins and made tangible progress with regards to our innovation initiatives.", "Before we discuss our 2020 outlook, let me first highlight some of our financial and operating results for Q4 and the full year of 2019.", "Turning to Slide 6. You can see that our underlying Q4 growth trend showed continued strength across our operations. We generated consolidated normalized organic tenant billings growth of 6.5%, including 6.2% in the U.S. and nearly 7% in our international markets, led by Africa at 10% and Latin America at 8%. As expected, the U.S. growth rate decelerated from prior quarters as new business commencements continue to pull back from the record levels we generated earlier in the year. This is largely due to the slowdown of new business from Sprint and T-Mobile as they navigated their merger approval process for the quarter. Offsetting a portion of this was an increase in gross new business generated across our international markets, particularly in Brazil and Mexico.", "And as we expected, our international operations returned to positive organic tenant billings growth in Q4 as the impacts of India Carrier Consolidation churn largely subsided. For the quarter, our consolidated normalized property revenue growth rate was more than 8%. In addition, and again on a normalized basis, we generated adjusted EBITDA growth of more than 11% in the quarter, expanding our adjusted EBITDA margin by over 200 basis points.", "And finally, we converted nearly 90% of that adjusted EBITDA growth to consolidated AFFO, resulting in normalized consolidated AFFO per share growth of 14.5%.", "Moving on to Slide 7. For the full year, our overall normalized property revenue growth was over 9%, driven by normalized organic tenant billings growth of 7.4% on a consolidated basis. About that 6% of this was driven by volume growth from gross new colocation and amendment activity, with another 3.4% being generated from escalators. Normalized churn is around 2%.", "For the year, we commenced globally over $30 million in new monthly recurring revenue across our tower and gas assets, on par with 2018 for both organic co-lo and amendment activity, as well as newly built sites.", "Our reported U.S. property segment revenue growth for the year was nearly 10% supported by organic tenant billings growth of 7.3% and around $167 million in straight line benefits from the U.S. MLA we signed in the third quarter. Volume growth from colocations and amendments contributed 5.7% for the full year growth rate, while pricing escalators contributed just over 3%. This was partially offset by churn of about 1.5% and negative impact of roughly 20 basis points from some other items.", "Industry experts suggest wireless carriers again spent upwards of $30 billion in capital during the year to support their wireless network performance, as mobile data usage grew by more than 30%. Our reported international property revenue declined by about 6%, given the non-recurrence of last year's Tata settlement, while growing nearly 9% on a normalized basis.", "Normalized international organic tenant billings growth was about 7.7%, driven by significant network spending in key markets like Mexico, Brazil and South Africa. Colocation/amendment revenue grow roughly 6.5% of the growth, while escalators contributed nearly 4%. Other run rate items added 70 basis points, while normalized churn for the year was around 3%.", "Finally, the day one revenue associated with the over 38,000 sites we've added over the course of the last two years, contributed more than 2% or $120 million to our global tenant billings growth. These new assets included the construction of more than 4,500 sites in 2019, as well as 9,000 acquired sites in the U.S., Latin America and Africa, roughly 8,000 of which closed in late December, and therefore, do not really have any impact on our 2019 operational results.", "Turning to Slide 8. We also generated double-digit normalized adjusted EBITDA and AFFO growth in 2019, driven by strong underlying revenue growth and diligent management of our operating costs. For the year, normalized adjusted EBITDA grew by nearly 12%, with the corresponding adjusted EBITDA margin increasing to roughly 63%, a year-over-year expansion of nearly 200 basis points.", "On an FX-neutral basis, we exceeded our initial 2019 outlook for normalized adjusted EBITDA by over $300 million. These adjusted EBITDA results included significant progress in our fuel management operations, particularly in Africa, where we saved over 20 million liters of diesel fuel for our tenants over the last two years. As of the end of the year, we had around 3,600 sites with lithium-ion batteries and more than 800 with solar.", "We also grew normalized consolidated AFFO by 12% and the corresponding AFFO per share by over 11% for the year, reflecting our 12 straight year of generating double-digit consolidated AFFO growth. In fact, since 2009, our consolidated AFFO per share has grown in CAGAR of 14%.", "As with our adjusted EBITDA performance, we outpaced our initial outlook expectations for normalized consolidated AFFO by around $120 million on an FX-neutral basis or over $0.25 per share.", "Moving to Slide 9. Let's now take a look at our expectations for 2020. Before we dig into the numbers, I'd like to summarize a few of the key high-level assumptions we've included in our outlook. First, as expected, and as I mentioned earlier, we saw a deceleration in our U.S. new business commencements and pipeline in the back half of 2019. And that is carried over to the early part of 2020. Much of this deceleration was attributable to lower activity levels from T-Mobile and Sprint, as they progressed through their merger approval process.", "Given the recent court affirmation of the deal, we have now assumed that for the purposes of our 2020 outlook, activity levels with the new T-Mobile will reaccelerate but not until the back half of the year. We expect the exact timing of the reacceleration to depend upon when the merger closes. But at this point, we view it unlikely that a significant rebound in activity will occur in the first half of the year.", "And again, as Jim highlighted, we believe the current lower activity levels in the marketplace are temporary, as all of the carriers will need to continually invest in their networks to meet the expanding usage patterns of their customers. In addition, we haven't assumed any new activity from potential new entrants into the market.", "Meanwhile, in India, while India Carrier Consolidation-Driven Churn has largely subsided as anticipated, from a planning perspective we've layered in some additional churn for 2020 as a result of the uncertainty created by the recent India Supreme Court ruling on the definition of adjusted gross revenue, and the corresponding incremental liabilities being placed on the legacy wireless carriers.", "I'll note, however, that to the extent, an incrementally positive solution is reached with respect to the AGR issue, it is possible that this included churn will not materialize. Additionally, for the same reason, we've assumed lower levels of gross new business in India for 2020, as we expect that carriers may be less able to make near term network investments.", "Taking these assumptions into account at the midpoint of our outlook, we expect consolidated property revenue to grow by 7.8% or 9% on an FX-neutral basis, supported by solid overall levels of new business, lower churn and contributions from new assets, both acquired and built.", "Our U.S. property revenue is expected to grow in the mid-5% range, while we expect our international property revenue growth to be more than 11% despite an anticipated 3% or $85 million negative impact from FX translation.", "Turning to Slide 10. We expect organic new business to again be a critical component of our overall growth in 2020, driven by significant network investments being made by our large multinational tenants. In the U.S., we're projecting organic tenant billings growth of around 5% as carrier spending on 4G continues and 5G related activity picks up. There are few principal factors driving our U.S. organic tenant billings lower than we have seen over the last few years.", "First, as I alluded to earlier, and as we expected, our new business commencements and pipeline trading down in Q4 of 2019, attributable primarily to T-Mobile and Sprint's activity levels. Given that trend and similarly slower activity levels expected in the first part of this year, our U.S. organic tenant billings growth rate is expected to be lower than last year. Also impacting the growth rate is the fact that our base of business is now significantly larger, creating overall drag on 2020 growth rates.", "And finally, churn in 2020 is expected to be 1.8%, or around 30 basis points higher than in 2019, although still well within our historical 1% to 2% range. For the year, total monthly commenced organic new business in the U.S. is expected to be a bit lower in '20 than 2019. As I mentioned, the timing of the new business in 2020 is expected to be more back-end loaded in the year.", "With all that said, we remain incredibly constructive on the long-term demand trends for tower space in the U.S., and anticipate the new business activity will ramp up to higher levels in the back half of this year and into '20 and '21 given the forecasted demand growth, anticipated spectrum deployments and opportunities associated with 5G.", "Moving on to Latin America, we expect organic tenant billings growth of around 7% for the year, broadly consistent with what we saw in 2019. Demand trends are solid with carriers increasingly focused on improving and expanding 4G networks as mobile data usage accelerates. After incurring some iDEN decommissioning in Brazil last year that elevated churn in the region, we expect our LatAm churn to decline to around 1.7% in 2020, partially offsetting this positive trend. Our initial gross new business expectations for the year is slightly lower as compared to 2019.", "Escalators are also expected to be down nearly 1%, given lower inflation rates. Over the longer term, we believe we'll have excellent opportunities to grow our Latin American business as carrier investments continue.", "In that regard, we continue to see strength in our new build program in the region as network densification initiatives take hold and consequently expect to build between 400 and 500 sites in 2020. Overall, we expect LatAm tenant billings to grow by close to 12% in 2020.", "Switching to Africa. 2020 organic tenant billings growth is expected to be around 11%, up from 9% in 2019. This is being driven primarily by our expectation that given our significantly expanded regional portfolio, gross new business contributions to growth will be up substantially as compared to 2019.", "In addition, escalators are expected to be slightly higher at around 6% while churn is projected to remain steady at around 1.8%. On the new build side, given continued strong demand, we expect to construct up to 1,000 sites in the region in 2020 as compared to around 700 in 2019. This would represent a record level of new builds for us in Africa.", "Meanwhile, in Europe, we expect organic tenant billings growth of between 1% to 2%, down slightly from 2019 based primarily on higher levels of churn due to some Carrier Consolidation in Germany. Over the longer term, particularly in France, where we recently signed a deal with Orange to acquire up to 2,000 sites over the next few years, we would anticipate higher levels of activity as 4G and 5G coverage initiatives accelerate and the corresponding necessary spectrum is allocated.", "Finally, in India, we expect organic tenant billings growth to be essentially zero in 2020 versus a roughly 20% decline in 2019. This includes churn assumptions of around 12% for the year as compared to 33% in 2019 given that the impacts of the Carrier Consolidation process are largely over.", "With that said, we still anticipate churn in India to be quite a bit higher this year than historical levels and what we would expect in future years. As a result, a few legacy ICC impacts provisions we've made for the potential impacts of the recent AGR decision, as I mentioned earlier, and the last tranche of contractual churn associated with our 2018 acquisition of the Vodafone and Idea sites.", "Gross new business activity is expected to be quite strong at about 9% and, in fact, would be the highest of all of our international markets, although not quite at historical levels, again, given some of the likely funding challenges facing certain carriers due to the supreme court AGR decision.", "Longer term, we continue to expect India mobile network operators to deploy significant levels of capital into their networks, as 4 G penetration grows and mobile data usage continues to expand. And again to the extent a more favorable resolution to the AGR issue is breached, it is possible that we may outperform our current expectation.", "Overall, on a consolidated basis, our outlook assumes commencing more than $27 million in new monthly recurring business across our tower index assets, of which between $404 million will be from newly constructed sites with the balance coming from more traditional organic collocation/amendment activity.", "So, while our organic tenant billings growth in certain regions may be under pressure due primarily to broader industry events and timing issues, we have the ability to supplement that growth through our global build-to-suit growth engine.", "Moving on to Slide 11. At the midpoint of our outlook, we expect adjusted EBITDA to grow by $390 million or 8.2%. This includes continued high margin flow through of organic growth, as well as the impacts of accretive M&A transactions, build-to-suit activity and a full year of our new MLA agreement with AT&T. We expect to target areas in our business where we can take additional efficiencies, including power and fuel, where we're continuing to invest in more efficient equipment and renewable energy solutions.", "In fact, we expect to save upwards of 40 million liters of fuel utilized by our tenants in 2020, leading to reduced emissions and costs. Our cash SG&A expense as a percentage of revenue is expected to be around 7.6%, down for over 8% in 2019. We anticipate being able to further reduce that metric over time. And finally, our adjusted EBITDA expectations include an estimated negative impact of around $45 million from unfavorable FX translation effects.", "Turning to Slide 12. We expect to convert our adjusted EBITDA growth and the strong consolidated AFFO growth as well. Before taking into account the one-time previously disclosed $65 million cash interest expense impact of purchasing MTN stake in our Ghana and Uganda joint ventures, consolidated AFFO is expected to grow by 9.5% or 9.4% per share basis.", "Including that one-time MTN related cash interest expense payment, at the midpoint of our outlook, we expect consolidated AFFO to grow by a total of nearly $270 million or roughly 7.6%. As compared to 2019, this includes a contribution of $413 million of FX-neutral cash adjusted EBITDA.", "Offsetting this increase is $23 million or so in higher cash taxes of roughly $41 million drag from unfavorable FX translation and $15 million in other items. On a per share basis, we expect consolidated AFFO growth to be over 7% for the year and are projecting AFFO attributable to American Tower common stockholders per share to grow by over 8% into mid-point. This per share growth rate would be over 10% without the one-time $65 million cash interest expense impact triggered by the MTN buyout.", "Looking at Slide 13. We remain committed to our consistent diverse return-based capital allocation strategy. In 2019, we deployed over $1.7 billion for our growing common stock dividend, while spending over $1 billion on capex with nearly 85% of that spending being discretionary in nature. Around $367 million of that discretionary spend was to fund the construction of more than 4,500 sites throughout our global footprint, a new record for American Tower.", "Finally, we spent around $3.3 billion, including the assumption of debt to acquire new assets, and another $426 million on the first set of puts in India earlier in the year. Total, we deployed more than $6 billion throughout the year while staying well within our leverage targets and simultaneously strengthening the balance sheet. We expect to deploy capital in a consistent balanced manner in 2020, including allocating just over $1.1 billion at the midpoint of our outlook for capital expenditures with roughly 85% of the spend again being discretionary.", "Approximately $200 million of net capex is planned to be spent investing in our business on innovation related initiatives, including further additions of lithium-ion batteries and solar in certain international markets, as well as selective expansion of our fiber infrastructure largely in Latin America.", "Once again, we expect to grow our common stock dividend by 20% or so to more than $2 billion, subject to Board discretion. In addition, we've allocated roughly $523 million to buy MTN's minority stakes in our joint ventures in Ghana and Uganda in the first half of the year and also expect to spend roughly $348 million at year-end 2019 exchange rates to pay for the final Tata put in India.", "Our latest expectation is that the Tata put will be completed in the first half of 2020, but the process remains subject to regulatory approval. Pro forma for these transactions, we will own roughly 92% of our India operations, and a 100% in both Ghana and Uganda.", "What this will mean going forward is that in the absence of any additional transactions impacting our minority interest, the gap between our consolidated AFFO and AFFO attributable to American Tower common stockholders will shrink.", "As you can see on this slide, our comprehensive asset base, investment discipline and ability to deploy capital to attractive opportunities around the world has helped us drive compelling mid-teens growth in consolidated AFFO per share over the last decade.", "Further, despite adding more than 150,000 sites to our portfolio since 2009, we've also been able to increase our return on invested capital over that time period to 10.6% as of year-end 2019. We continue to believe the growth across the combination of consolidated AFFO per share and ROIC is critical to our creation of long-term sustainable stockholder value.", "Turning to Slide 14. I want to spend a few minutes in our international build-to-suit program, which as I alluded to earlier, had a record year in 2019. We expect to raise the bar to an even higher level of activity in 2020. Most of our new build sites continues to be focused in our international markets. And as you can see, we've ramped the program from building around 2,000 sites back in 2017 to an expected 6,500 sites in the midpoint of our outlook for 2020.", "We have purpose-built this global engine to support significant tenant driven inorganic growth. Importantly, not only are we building more sites, but we're also maintaining the attractive day one economics that we've generated historically. With one tenant, our initial average NOI yield on international new builds over the last 3 years has been around 11%, increasing further over time as we generate additional collocations.", "To give you a sense of our historical colocation success, we've added roughly 0.5 tenant on average to sites built in 2015, 0.4 to sites built in 2016, and around 0.3 to sites built in 2017. Given this growth profile, we continue to deploy significant capital toward our new build initiatives and expect to spend almost $400 million at the midpoint of our 2020 outlook on development capex.", "Finally, as you can see in the chart on the right side of page, newly constructed sites are contributing meaningfully to our overall book of monthly run rate additions over the last 3 years, with a total of nearly $7 million added. We expect another $4 million or so in 2020 as our new build equity accelerates.", "Turning to Slide 15. And in summary, 2019 was another strong year for American Tower with solid organic growth, accelerating new-build activity, meaningfully accretive M&A, continued strides and increasing margins by driving operational efficiencies throughout the business. The underlying secular growth trends in mobile on a global basis, continue to act as a catalyst for consistent sustainable growth in our revenues and cash flows, and we are dedicating resources to ensure that we are optimally positioned to take advantage of those trends.", "Looking to 2020, we expect another solid year of revenue and cash flow generation fueled by new business growth and margin expansion across our portfolio, complemented by a record year of new builds with a consistent growth in our common stock dividend and our continuing capacity to fund opportunistic accretive M&A.", "In the U.S., we are well positioned to benefit from a revised wireless industry structure and look forward to working with our existing, potentially new tenants to accelerate the deployment of 5G throughout the country. In our international markets, underlying trends are solid with increasing smartphone penetration in mobile data usage continuing to drive strong demand for our tower's business.", "Looking slightly longer term, we are fully committed to our Stand and Deliver strategy and are confident that we are on the right path to deliver attractive, sustainable, long-term total returns to our stockholders for years to come.", "With that, I'll turn the call over to the operator, so we can take some questions." ] } ]
[ { "name": "Operator", "speech": [ "[Operator Instructions] Our first question comes from the line of Michael Rollins from Citi. Please go ahead." ] }, { "name": "Michael Rollins", "speech": [ "Thanks, and good morning. I'm curious if you could talk about the significance of segmenting the European business from the African business and based on your historical aspirations to be a leader in each of the regions that you serve, how does the segmentation play into the goals of what you might want to achieve in Europe versus Asia -- sorry, Europe versus the Africa?", "And then just secondarily, if you could talk a little bit more about how we should think about the flow of growth over the year in the domestic business given the commentary for the activity to be back half weighted and the annual growth goal that you provided? Thanks." ] }, { "name": "James D. Taiclet, Jr.", "speech": [ "Mike, good morning, it's Jim. I'll take the first one and Tom can speak to the trend on the second. As far as Europe and Africa separating, we essentially took the opportunity with the Eaton transaction to really focus more transparency on both markets given the significant differences that they have. And then secondly, as I suggested, with Eaton coming on Africa, it's actually a sizable region in and of itself now. So, it was just high time to separate them just for those reasons. There is really nothing else behind it.", "As far as leadership aspirations, they take sometimes years or many years to achieve. And for us, it has to do with the discipline of our investment program. Right now and for the last couple few years, I'd say that the match of asset pricing and growth rates has not met our investment criteria. And so, we haven't felt the need or really the attractiveness to buy large asset portfolios in Europe with those prices. But things change and whether the growth rate surges or the asset pricing moderates, those are the times you'll see us act more decisively, but we think it's really important to have the beachhead in that part of the world in France, in Germany, the two largest continental economies.", "And so, we think that it's important business for us, but just asset pricing and growth need to come better into line for us to act more decisively." ] }, { "name": "Tom Bartlett", "speech": [ "And Michael, in the U.S., on the second one, versus kind of last year, I probably see kind of a 40 plus percentage in the first half of the year and kind of a 60% in this second half of the year. With the new MLAs that we have in place, there could be -- the organic tenant billings growth rate might be a bit higher in Q1, actually. But overall, we would expect kind of the new T-Mobile was roughly the same that we had generated last year. But this year it all, kind of, second half of the year driven, which will prove to be positive actually heading into 2021 we believe.", "I'll also remind you that we haven't assumed any activity from any new entrants, including Dish, into the outlook for the year." ] }, { "name": "Michael Rollins", "speech": [ "Thanks very much." ] }, { "name": "Operator", "speech": [ "Our next question comes from the line of David Barden from Bank of America Merrill Lynch. Please go ahead." ] }, { "name": "Unidentified Participant", "speech": [ "Hey, guys. It's Josh, in for Dave, thanks for taking the questions. Two if I could. Can you just provide any additional commentary on the Indian Supreme Court ruling, and when you think this will all be behind us? And any thoughts you have on reports, the government has been intervening in the market to raise prices? And then secondly, what are your expectations for the gross-related impact related to the AT&T Telefonica deal? And do you think there are other markets where this type relationship could evolve? Thanks." ] }, { "name": "James D. Taiclet, Jr.", "speech": [ "Sure, Josh. It's Jim again. And I'll go ahead and start, and Tom can add additional commentary. So, as far as India, the Supreme Court there in that country is taking its independent action as independent judiciaries tend to do. For us to predict what those actions are going to be and how they'd rollout is something we're not going to do. But I will tell you that part of the history of this company is to adapt to changing conditions and it's not by accident. We've built the company that way through our portfolio diversification, our long-term contracts, our comprehensive MLAs and the four-dimensional strategy that we sort of call Stand and Deliver in the current timeframe.", "So, we'll adapt to this as it unfolds. And so to predict how it will unfold, I can't offer much in the way of content. But our adaptability, I can assure you will be put into play however it evolves.", "As far as the government intervening, we just see what happens in the market. We're not involved in those discussions or internal government decision-making processes in India. But the pricing rationalization I would call it was long due. There is no way to continue to provide the kind of gigabit, multi-gigabit service per month the kind of prices that were being charged. And now that some common sense is come into the market, that was just overdue.", "Secondly, in Mexico, with AT&T and Telefonica under new arrangement, we've got a significant amount of Telefonica leases with long-term lease commitments that will -- we expect will be honored. And we are also having about four years on average with those leases. And as far as AT&T, it's a large and well-integrated customer with us in Mexico as well as the U.S. And whatever traffic moves from the Telefonica network over time into the AT&T network is going to have to be served. And I think we're in a great position as a partner with AT&T in Mexico to meet that demand with them. So, we don't expect this to be materially adverse scenario to our Mexico business." ] }, { "name": "Unidentified Participant", "speech": [ "Got it. Thanks for taking the questions." ] }, { "name": "Operator", "speech": [ "Our next question comes from the line of Batya Levi from UBS. Please go ahead." ] }, { "name": "Batya Levi", "speech": [ "Great, thank you. Question on India, can you provide more color on the 12% churn assumption you have? Is that based on some early notification from the carrier or you're just assumption that as the year progresses that they could take-off some equipment? And on the gross activity side, it looks like it was still strong throughout the end of last year. Have you seen a slowdown since then? And does the 9% assume activity from all players? And maybe just finally, in the event that there is a restructuring there, can you talk about what kind of protection, you have? Thank you." ] }, { "name": "Tom Bartlett", "speech": [ "Sure, Batya. The first couple of questions, we had a little bit higher churn in Q4, which is -- I consider India Carrier Consolidation churn, which is kind of kicking in into 2020. It's a couple of percent. The kind of the overarching planning provision that I put in place relative to the AGR decision is probably another 4% or so. So, when you kind of back out this and kind of look at the kind of the normalized churn rate, it's probably in that 4% rate for the year. It's still a little bit higher than I would expect longer term.", "But that kind of gives you a sense of what we think as being the kind of a normalized rate. Relative to the kind of the gross new business, yes, it's around 9%. And again, because of the AGR decision, we've kind of scoped that back a little bit for 2020 planning purposes. The carriers continue to work through a lot of these AGR decisions we thought that it might slow down a bit the overall rate of growth.", "The build program continues to be very, very strong and its -- 70%, 80% of our total build program will be in India. You have seen the kind of -- the really terrific NOI yields that we've had in that marketplace. So, again, as I mentioned, while the overall growth is a bit slower than last year, it's still our highest across our international footprint with that 9%. So, we're really positive, constructed longer term on it. We just need to kind of get through kind of this AGR processing." ] }, { "name": "James D. Taiclet, Jr.", "speech": [ "And Batya, it's Jim. Just to add to that in the larger context, we're going through in India, in the mobile industry, a reordering of that industry. It was long overdue, that's why the consolidation came in. And now the actions of certain government agencies and courts and the impact of those, which will be, we hope, fairly short-lived. But at the end of the day, we look at the long-term technical demand for tower space in every market that we're in. And if you just step back and look at India, the market for mobile service, there's 1.3 billion people plus there. At the end of this decade, if not sooner, they'll be using probably 10 gigabits a month on 4G, if not 5G, across that population. The network infrastructure that's there today is woefully inadequate to do that.", "So, there's a reordering of the industry and some shaking out has happened. But at the end of the day, no matter what carriers are serving that population, they're going to have to have a significant amount of equipment added to sites in that country and a significant amount of sites added over time, and we'll be there for that. And again, we'll adapt to the industry structure, who the customers are, who the customers ownerships are, who the competition is, to get our fair share of that and monetize it in the way we've typically done." ] }, { "name": "Batya Levi", "speech": [ "Okay. Thank you." ] }, { "name": "Operator", "speech": [ "Next question comes from the line of Simon Flannery from Morgan Stanley. Please go ahead." ] }, { "name": "Simon Flannery", "speech": [ "Thank you very much. Just coming back to the Sprint, T-Mobile, is it your hope to sign a holistic MLA here to sort of flatten out some of the churn on the Sprint network? And how long do you think that would take to execute? And then just on the new builds, perhaps you could just give us a little bit more color about the key markets that you're targeting in 2020?" ] }, { "name": "James D. Taiclet, Jr.", "speech": [ "Hey, Simon, it's Jim. Good morning. I'll take the T-Mobile, Sprint and Tom can talk to the build program. As far as our negotiations with T-Mobile or other carriers, they're ongoing constantly at various levels. We've found ways with all of our major customers, that toward the end of the day, come to an arrangement with them whether it's retail or wholesale, you could characterize. That allows us to have a strong growth rate and them to feel like they have an efficient way to deploy their network.", "I am extremely confident that we'll continue to have those kinds of interactions with the T-Mobile management. And at the end of the day, if it's a holistic or a wholesale type agreement, that is best for both parties, we'll enter into that as we've done with others. And if it's a more retail establishment with more flexibility, we'll work within that as well.", "The remaining term is two years. So, that gives us time on the Sprint leases to work with T-Mobile, Sprint closely to figure out what the best answer is for all of us. So, I'm very confident that we're going to find an arrangement that works for both." ] }, { "name": "Tom Bartlett", "speech": [ "Yes, I guess in terms of the split of the 6,500 sites, probably looking at upwards of 1,000 in Africa, 600 plus in Latin America, and about 5,000 in India." ] }, { "name": "Simon Flannery", "speech": [ "Great. Thanks so much." ] }, { "name": "Operator", "speech": [ "Our next question comes from the line of Colby Synesael from Cowen. Please go ahead." ] }, { "name": "Colby Synesael", "speech": [ "Great. Two questions. Jim, you mentioned in your prepared remarks as part of your strategy you guys will focus more on CBRS and edge in 2020. I'm wondering if you could expand on that. And then just Tom, one question as it relates to just I guess the numbers a bit. U.S. straight line, your assumption now for 2020, the $185 million last quarter and your supplemental for 2020, it was $103 million. The AT&T MLA happened in early September. So, I assume that was already reflected. Just curious what the explanation is for that delta versus what you guys are guiding for last quarter? Thank you." ] }, { "name": "Tom Bartlett", "speech": [ "Sure, Colby. On the innovation initiatives, they are in early stages. We actually hope to be a pioneer in both of these in our industry, but unclear how they're going to develop and at what rate. But we're out in front, we think, with the right partners. So, as far as CBRS goes, we expect that in the next few years that will be mainly indoor small cell solution that will reduce the cost of delivery of service inside of venues and that would therefore widen dramatically the number of venues that DAS system, if you will, makes economic sense. So, that's the path we're on there.", "As far as edge compute, my vision long-term is that there is incredible sense and there'll be a lot of value and being able to interconnect at the cell site at the tower site, multiple mobile operators and multiple cloud providers to really enhance the latency improvements and the throughput and responsiveness of 5G in the future.", "And again, we're working, we think, with some of the very best partners in trialing this. We've set up really a lab, if you will, with Colo Atl in Atlanta, and we have six sites up and running at Tower locations in the Southeast U.S. this year, to go ahead and test this out with a few very well regarded parties in those fields that I discussed. So, I think that we're, again, in the front of this. We hope to lead the infrastructure definition of what is going to take to do these kinds of edge compute solutions, and we'll keep updating you all as we go forward." ] }, { "name": "James D. Taiclet, Jr.", "speech": [ "Colby, on the second piece, you're right. I mean, we had some adjustments that we made in the straight-line colocs on the MLA. And then we just have, we have natural extensions in our other kind of non-related leases right across the portfolio." ] }, { "name": "Colby Synesael", "speech": [ "And is there anything specific? I mean, it seemed like a fairly large jump versus last quarter. I was wondering if there's anything to point out?" ] }, { "name": "James D. Taiclet, Jr.", "speech": [ "Nothing, nothing specific. And I'd just point out, yes, it's really a true up. In 2020, I'll just remind you that we do expect again another pickup of around $30 million straight-line in our outlook. But relative to Q4 and finishing up the year, nothing specific, just kind of further landing in that calculation." ] }, { "name": "Colby Synesael", "speech": [ "Okay. Thank you." ] }, { "name": "Operator", "speech": [ "Our next question comes from the line of Brett Feldman with Goldman Sachs. Please go ahead." ] }, { "name": "Brett Feldman", "speech": [ "Thanks. And firstly, I just want to follow-up on the question about your outlook for India. If I heard Tom's answer correctly, it sounds like your pipeline for gross new activity may indeed be better than the 9% growth. But in light of the uncertainty market, you're choosing to take a degree of conservatism. And it sounded like that's also the way you're thinking about churn. So, I just wanted to clarify whether it's what you're actually seeing, your funnel for both of those metrics that caused you to guide as you did, or if it was also heavily influenced by an appropriate degree of conservatism?", "And then, just secondly, we're starting to see the C-band process move ahead and we might get an FCC authorization on that reasonably soon. What's your latest updated thinking in terms of the impact you would expect that to have in your business? I mean, are you mostly assuming this could be a huge amendment cycle from your existing customers, or do you think that this could be a catalyst for a significant amount of new site deployments owing to the propagation differences and the frequency? Thank you." ] }, { "name": "Tom Bartlett", "speech": [ "Hey, Brett. I'll take the first one and then Jim will take the second one. Your question on India, I think that to the extent that the AGR decision is, if resolved quickly and appropriately, the pipeline could increase. But relative to my comments on the conservatism, it's more largely in the churn side. And so, I don't -- I wouldn't expect, I don't know that we'd have significant increases on the growth side, but there very well could be possibly benefits on the churn side." ] }, { "name": "James D. Taiclet, Jr.", "speech": [ "And Brett on the C-band spectrum availability, first of all, just as a reminder to everyone, it's probably going to be a few years to allocate through auction or otherwise and then clear that spectrum and really get it ready to deploy. So, we're looking forward to that, because as you sort of suggested that certainly for our existing customers, if that spectrum is available and you want to have the same sort of signal strength using that spectrum as you have in 600, 700, the sites absolutely have to be closer together, which requires densification.", "The other issue is that that spectrum won't go through obstructions such as walls as foliage and things like that quite as well. So, that's going to kind of add to the densification requirement. And for new customers, we're working with a number of industries in a preliminary fashion. The fact that this spectrum might be available and if you see the impact of an options, I think we're in well -- very good position to carry that forward, but it's hard to predict right now. But the existing customer base, we expect is going to need to use the spectrum and we'll deploy it in a denser fashion over the next number of years." ] }, { "name": "Brett Feldman", "speech": [ "Thank you." ] }, { "name": "Operator", "speech": [ "Last question comes from the line of Ric Prentiss with Raymond James. Please go ahead." ] }, { "name": "Ric Prentiss", "speech": [ "Thanks. Good morning, guys. Hey, a couple of follow-up questions on the CBRS spectrum side, Jim, would you imagine yourself participating in the spectrum auction or just acting as the host of spectrum?" ] }, { "name": "James D. Taiclet, Jr.", "speech": [ "We expect Ric, to act as a host of spectrum and allow our customers and other industries to secure the spectrum and go ahead and deploy it if they're within their plans. Now, there is some general access spectrum that's out there too and that's a kind of bands that anyone can use, and in low density venues might make a lot of sense to use because the availability of the spectrum for large significant quantities of volume is not going to be required, but just having enough availability of spectrum to augment the outdoor network would be valuable. So, the generals available to all and some of our customers and other clients may come with the more prioritized spectrum, but we don't intend to necessarily bid in options." ] }, { "name": "Ric Prentiss", "speech": [ "Makes sense. And Jim, you mentioned or Tom, you mentioned 5,000 of the new builds in India, who is your anchor tenant there? Just so we can understand, kind of, as the industry rationalizes there, what you might be exposing yourself with?" ] }, { "name": "James D. Taiclet, Jr.", "speech": [ "It's -- Ric, it's largely Airtel." ] }, { "name": "Ric Prentiss", "speech": [ "Okay. And a couple of, obviously, quick ones here. In the AT&T, new MLA, what was it that got addressed in that one? Was it FirstNet project, was it preparing -- just when I think that was a fairly large one. What drove the new MLA there with AT&T?" ] }, { "name": "James D. Taiclet, Jr.", "speech": [ "Ric, it's Jim. Our practice is we don't speak to specifics of any customer agreement. But what I can say is that, look, we've been working with AT&T and its predecessor since SpectraSite bought the SBC towers in the late 1990s, I believe. So, this is just another cycle in the pattern of collaborative agreements with that executive team as its evolved over time. And we're the largest tower company in the country and they're one of the largest mobile operators in the country and it's just a natural cycle evolution of how we do business together." ] }, { "name": "Ric Prentiss", "speech": [ "And last one from me is, obviously, you mentioned that no new ones like Dish in the guidance. What would it take if Dish wanted to take over some of the decommissioned Sprint sites if they found that as Dish said on their earnings call that some of the RAD centers are at good height? What would be involved in Dish taking a look at the some decommissioned Sprint sites?" ] }, { "name": "James D. Taiclet, Jr.", "speech": [ "Ric, it's Jim. Broadly, their obligations on the part of T-Mobile, Sprint on those sites already, varying terms. We try to work closely with both Dish and T-Mobile, Sprint to figure out what makes the most sense really for the industry and for the companies to put each site in the proper hands so that this deployment can be successful for really all -- both of those customers.", "So, we've sorted out, but it'd be a very detailed negotiation based on the facts and the volumes and the locations." ] }, { "name": "Ric Prentiss", "speech": [ "Makes sense. Thanks guys." ] }, { "name": "Tom Bartlett", "speech": [ "Thanks, Ric." ] }, { "name": "Igor Khislavsky", "speech": [ "Great. Well, thank you everybody for joining this morning and have a great day." ] }, { "name": "Operator", "speech": [ "[Operator Closing Remarks]" ] } ]
AMT
2020-07-30
[ { "description": "Vice President, Investor Relations", "name": "Igor Khislavsky", "position": "Executive" }, { "description": "President and Chief Executive Officer", "name": "Tom Bartlett", "position": "Executive" }, { "description": "Executive Vice President, Chief Financial Officer, and treasurer", "name": "Rod Smith", "position": "Executive" }, { "description": "Deutsche Bank -- Analyst", "name": "Matthew Niknam", "position": "Analyst" }, { "description": "UBS -- Analyst", "name": "Batya Levi", "position": "Analyst" }, { "description": "RBC Capital Markets -- Analyst", "name": "Jonathan Atkin", "position": "Analyst" }, { "description": "Credit Suisse -- Analyst", "name": "Sami Badri", "position": "Analyst" }, { "description": "Raymond James -- Analyst", "name": "Rick Prentiss", "position": "Analyst" }, { "description": "Bank of America Merrill Lynch -- Analyst", "name": "David Barden", "position": "Analyst" }, { "description": "Oppenheimer and Company Inc. -- Analyst", "name": "Tim Horan", "position": "Analyst" }, { "description": "Cowen and Company -- Analyst", "name": "Colby Synesael", "position": "Analyst" } ]
[ { "name": "Operator", "speech": [ "Ladies and gentlemen, thank you for standing by. Welcome to the American Tower Corporation second-quarter 2020 earnings conference call. As a reminder, today's conference is being recorded. [Operator instructions] I would now like to turn the conference over to your host, Igor Khislavsky, vice president, investor relations.", "Please go ahead, sir." ] }, { "name": "Igor Khislavsky", "speech": [ "Good morning, and thank you for joining American Tower's second-quarter 2020 earnings conference call. We've posted a presentation, which we will refer to throughout our prepared remarks, under the investor relations tab of our website, www.americantower.com. Before the rest of my comments, I'll note that due to COVID-19, all of us on the call this morning are again dialing in remotely from different locations. So to the extent there are any minor technical difficulties, we would ask that you bear with us.", "Our agenda for this morning will be as follows: first, I'll quickly summarize our financial results for the second quarter. Next, Tom Bartlett, our president and CEO, will provide an overview of our international business and the associated key trends and churns. And then, finally, Rod Smith, our executive vice president, CFO and treasurer, will discuss our second-quarter results and updated 2020 outlook. After these comments, we will take your questions.", "I'll remind you that this call will contain forward-looking statements that involve a number of risks and uncertainties. Examples of these statements include: our expectations regarding future growth, including our 2020 outlook, capital allocation and future operating performance; our expectation regarding the impacts of COVID-19; our expectations regarding the impacts of the AGR decision in India; and any other statements regarding matters that are not historical facts. You should be aware that certain factors may affect us in the future and could cause actual results to differ materially from those expressed in these forward-looking statements. Such factors include the risk factors set forth in this morning's earnings press release, those set forth in our Form 10-K for the year ended December 31, 2019, as updated in our Form 10-Q for the three months ended March 31, 2020, and in other filings we make with the SEC.", "We urge you to consider these factors and remind you that we undertake no obligation to update the information contained in this call to reflect subsequent events or circumstances. Now please turn to Slide 4 of our presentation, which highlights our financial results for the first quarter. During the quarter, our property revenue increased 2.4% to nearly $1.9 billion. Our adjusted EBITDA also grew by 2.4% to over $1.2 billion.", "And our consolidated AFFO and consolidated AFFO per share increased by 1.6% and 1.5%, respectively, to $924 million and $2.07. On an FX-neutral basis, growth rates for property revenue, adjusted EBITDA and consolidated AFFO per share would have been 8.6%, 7.6% and 7.4%, respectively. Finally, net income attributable to American Tower Corporation common stockholders increased by roughly 4% to $446 million or $1 per diluted common share. And with that, I'll turn the call over to Tom." ] }, { "name": "Tom Bartlett", "speech": [ "Thanks, Igor. Good morning, everyone. I hope that you're all healthy and well. As we navigate the ongoing COVID-19 pandemic, our No.", "1 priority continues to be the health and safety of our employees, their families, our tenant suppliers and surrounding communities. The remote work policies I mentioned on our last call continue to serve us well throughout our global footprint, and I'm pleased to say that there are even a few geographies where certain employees have been able to return to the office with numerous incremental safety measures in place. I'm also happy to report that our business continues to perform well as we work closely with our tenants to preserve and enhance mobile connectivity when it is needed the most. And outside of FX impacts, which have moderated slightly over the last few months, we have, to this point, not seen material impacts from COVID-19 on our operations.", "As we move forward, we believe we are well positioned to continue to provide high levels of service and drive solid results. The rest of my remarks today, similar to prior second-quarter calls, will center on the key trends and return profiles we are seeing across our international business and what we expect in the future. Since we entered Brazil and Mexico back in the late 1990s to provide geographic diversification to our foundational U.S. business, we've added nearly 140,000 communication sites in 19 countries outside of the United States, focusing on partnering with large multinational wireless carriers in select markets with strong property rights, rules of law and vibrant wireless industries.", "Since day 1 of our international expansion strategy, our mandate has been clear: build and acquire multitenant, exclusive franchise real estate assets that will generate attractive organic growth rates, while driving margin expansion and growing returns on invested capital over the long term, and do so with an emphasis on building leading market positions in the largest democracies across the world with the goal of positioning ourselves as either the top 1 or 2 tower company in each market. This strategy has been underpinned by our proven risk underwriting process, including, among other things, contemplating FX movements and local country inflation trends. As we've discussed with you before, all of our investments are evaluated using a 10-year unlevered DCF model, with varying IRR hurdles due to the inclusion of appropriate risk adjustments to account for the specific local country risk, the type of asset, counterparty and a host of other factors. These hurdles range from the mid- to high single digits in markets like the United States and Western Europe, to the mid- to high teens in some of our more nascent African markets, to ensure that our shareholders are being appropriately compensated for the level of risk being assumed.", "This balanced approach to market risk has enabled us to evaluate each individual investment opportunity in the context of its risk-adjusted return profile, long-term AFFO accretion potential and the NPV expected to be generated, rather than utilizing a specific cap as to how big any market or region can get or should get in relation to the United States. Operationally, we are also executing a number of risk-mitigation strategies. For example, our MLAs include primarily local CPI-based escalators. Our overall portfolio has significant diversification, and we selectively issue local currency debt, where it makes sense.", "Further, the vast majority of our local country-generated net cash flows are denominated in the local currency, and we are generally reinvesting those same cash flows back into those very same markets. Lastly, we have mechanisms in place through which we are able to pass through the cost of land to our tenants in Latin America, and the cost of fuel power to our tenants across India and Africa, helping to further derisk significant portions of our operating expenses across these regions. Taking all of these items into account, we believe we have a risk evaluation and mitigation framework that will enable us to continue to be successful internationally over the long term. Within this context, the primary thesis underlying our global strategy has always been and continues to be that the evolution of network technology that we've seen in the United States will be replicated internationally, likely at an accelerated pace given the lack of fixed-line penetration in many areas.", "Our U.S. business model and international model are effectively the same. The sites look the same. The structures are comparable, and the MLAs are fundamentally similar, but include the risk mitigation terms I discussed earlier.", "At the core, our international expansion serves as a way to significantly increase our total addressable market. As consumers gain access to advanced smartphone handsets and mobile data usage increases, mobile network operators continue to deploy meaningful wireless capex. Service providers in the international markets, where we have a presence, are expected to spend approximately $30 billion on their networks in 2020, in essence doubling the TAM of our U.S. market alone.", "With mobile broadband penetration growing, we continue to expect to generate higher organic growth rates internationally than in the United States over the long term, while driving meaningful expansion in our international return on invested capital. Fundamentally, we are utilizing our international strategy to increase and extend our overall global return profile. The ongoing COVID-19 pandemic has served to further highlight the criticality of wireless connectivity internationally, particularly in markets where fixed-line penetration is minimal. Unlike in the United States, where most of us are plugging into our Wi-Fi-enabled fixed-line connections as we work from home, mobile networks serve as the backbone of virtually all work-from-home functions in these international locations.", "And as you can imagine, broad-based stay-at-home orders and other restrictions that have been implemented in these markets over the last several months have led to additional strain on existing mobile networks. For example, Vodafone Idea in India noted that they experienced a year's worth of data traffic across their network in a single week following the implementation of lockdown measures. Similarly, major carriers across Latin America, Africa and Europe have outlined significant spikes in data usage, and regulators have allocated additional temporary spectrum and implemented other policies to help maintain connectivity. As I mentioned earlier, we are committed to doing everything we can to support our tenants as they deal with the strain of this increased usage on their networks.", "Now I'd like to take a few minutes to discuss the attractive economics that we were driving across our international business. In the second quarter, our international operations accounted for roughly 43% of our property revenue and about one-third of our property operating profit. Our international tower and DAS properties drove an annualized cash gross margin of over $1.8 billion in the quarter, resulting in a nearly 9.5% NOI yield on our more than $19 billion in total international tower and DAS investments, as you can see on Slide 6 of our earnings presentation. This NOI yield includes both sites that we have recently acquired as well as sites that have been in our portfolio for a number of years, benefiting from long-term tenancy and revenue growth.", "Our most seasoned vintage of international sites, those built or acquired prior to 2010, is yielding approximately 24% in U.S. dollar terms, illustrating the power of operating leverage within our business. We view this type of return profile as a clear indication that international tower assets have the capacity to drive economics that are equal to or better than the United States' tower model over the long term. Importantly, I'll note that the NOI yield numbers I'm referencing today are U.S.", "dollar equivalents, that is, they take into account any foreign currency devaluation in the numerator while freezing the denominator at historical exchange rates in the period in which the sites were acquired or built. Over the last 20 years, especially since 2007, we have been steadily growing our international portfolio with a focus on macro towers in some of the largest free-market democracies worldwide. Through a combination of our highly efficient new build programs and selective acquisitions, including the Eaton Towers deal we closed at the end of last year, we've added more than 130,000 international sites in just the last decade, including more than 24,000 sites we built ourselves. These sites typically have lower initial returns due to lower initial tenancy.", "You can see this on the slide, where sites we've added to our international portfolio between 2010 and '14 are generating yields of 10%, and those added since 2015 are generating yields of around 8%. Over time, our experience across all of our served markets has been that, as networks mature, additional spectrum bands are deployed and consumers obtain advanced handsets; mobile data usage grows exponentially; and significant additional network density becomes a necessity. As a result, we've seen sites that have initially produced modest returns attract colocations and amendments with minimal incremental costs, thereby driving substantial upside over time, no different than what we've experienced in the United States. In Latin America, where we've owned and operated towers for now over two decades, have invested approximately $8 billion and now have over 41,000 sites across eight countries.", "4G deployments are in full swing. Our longtime presence and scale have resulted in substantial business relationships with key operators in the region, including AT&T, América Móvil and a number of others. These relationships, coupled with our extensive asset base, has enabled us to drive average organic tenant billings growth of around 10% in the region over the last five years, backed by strong levels of new business activity and the continuing appetite for mobile data. Although organic growth rates are down a bit in 2020, in part due to falling local CPI, we continue to expect a long trajectory of solid underlying growth.", "We're also focused on our new build program as network densification efforts accelerate. In fact, we expect to construct over 500 sites across Latin America this year and anticipate strong demand for new builds in the region over a multiyear period. Importantly, these new builds typically have day-one NOI yields in the high single-digit range with just one tenant. With the average tenancy ratio of around 1.5 across the region, we believe we are well positioned to drive meaningful margin and return accretion in Latin America for many years to come.", "In Africa, a majority of our markets are in earlier stages of the technology evolution, with 4G penetration only around 10% and average mobile data usage being a fraction of Lat Am numbers as a result. We've invested approximately $5 billion across the continent and have an average tenancy of around 1.5 on our portfolio of nearly 19,000 sites, which are yielding roughly 11%. Importantly, we've partnered with key telecom operators like Vodafone, MTN and Airtel to bring enhanced connectivity to hundreds of millions of people. With extremely limited fixed-line penetration, young tech-savvy populations and governments committed to modernizing economies through connectivity, we expect mobile broadband to play a foundational role in Africa's growth story over the next decade-plus.", "We also anticipate the continued organic growth of our new build program, to which we expect to construct a little over 1,000 sites this year. And our ongoing business development efforts will enable us to build on the strong foundation we've created in Africa as we deliver solid growth and increasing returns over the long term. At the same time, we are making substantial progress on our commitment to reduce the mobile industry's carbon footprint through our innovative power and fuel program. In African markets, where grid power in many areas tends to be unreliable, we are now deploying next-generation greener technologies, including lithium-ion batteries and solar solutions.", "We expect to invest more than $60 million in 2020 to enhance the uptime performance of our sites in the region, while reducing greenhouse gas emissions after deploying in excess of $100 million over the last few years. Not only do these initiatives benefit our tenants, through higher uptimes and more efficient operating capabilities, but also they represent a critical part of our commitment to being a responsible corporate citizen. These investments have helped enable us to reduce diesel consumption by more than 25% from 2017 to 2019 across our global footprint after normalizing for portfolio growth. Meanwhile, in Europe, where we have nearly 5,000 sites between Germany and France and recently entered Poland by acquiring a handful of towers, networks are at a fairly mature stage, with 4G having been broadly deployed over the last decade.", "Organic tenant billings growth has been modest for us, is expected in the low single-digit range, and new build opportunities have been somewhat limited. Despite this, we drove NOI yields of 8% across our European asset base as of Q2, largely as a result of the price discipline we displayed when we acquired these assets. We tend to think of our initial investments in the region as beachfront properties, allowing us to have a good position to evaluate other potential opportunities. Consequently, we continue to look for ways to expand our European portfolio but only at valuations that, with underlying growth expectations, allow us to hit our required return thresholds.", "Our entry into Poland, although on a small scale initially, is an example of our continued focus on finding macro tower portfolios poised for sustainable growth in markets with attractive regulatory frameworks, support of regulators and vibrant wireless sectors, all at sensible valuations. And finally, moving to India, where we will have invested over $5 billion pro forma for redeeming our minority interest, we believe the wireless industry has now completed a much-needed and long-awaited consolidation to enable the deployment of 4G technology throughout the country by the remaining carriers. Through this process, we've experienced high levels of churn, which is reflected in our current 8% NOI yield. Although I'd note that the more than $400 million in cash settlement payments we received from Tata are not incorporated in that number for it to be higher.", "More recently, there have been pricing increases by all of the carriers in the marketplace, while the telecom regulator has indicated that it intends to be supportive of the carriers through rational spectrum policies, and the Indian government continues to stress its Digital India initiative. The key near-term issue that needs to get supported out in the marketplace centers on the AGR decision by the Supreme Court, including finalizing the time line as to when the wireless carrier payments are to be made, particularly as it relates to Vodafone Idea. We are hopeful that India can return to being a significant growth engine for the company, as it was for nearly a decade before the consolidation process kicked off several years ago. We have several reasons for optimism in this regard.", "As I just mentioned, the market structure is now much more rational. Price competition in wireless has stabilized and the regulatory environment seems constructive. The Indian consumer has proven to have a tremendous appetite for mobile data, with average smartphone usage per customer of well over 10 gigabits per month, even before the impacts of COVID-19. With that said, the majority of wireless users in India are still using legacy technologies rather than 4G, in large part because the networks are ill-equipped in their current state to handle 4G levels of traffic for more than one billion people.", "To get those networks ready, we continue to believe that significant levels of incremental network spending are necessary, accompanied by a material level of network densification. With our nearly 75,000 site-existing portfolio and the additional sites we're heading through our new build program, we believe we are well positioned to benefit from our tenants' network deployments over an extended period of time. Additionally, we're continuing to meaningfully participate in connecting the unconnected in India through our Digital Village program. With more than 150 Digital Villages in place today, and more in development, we are proud to be making a difference in the areas of digital literacy, e-learning, telehealth, as well as providing enhanced access to career opportunities in many rural Indian communities.", "So looking forward, we believe that we have a compelling opportunity to further enhance our international business by driving organic growth, focusing on operational efficiency and continuing to build and acquire sites using our proven investment evaluation methodology. Our preference continues to be to add incremental scale to existing markets while strengthening ties with large multinational wireless carriers. But there are a handful of additional markets that could be attractive for us as well. We also believe there are additional opportunities to generate margin improvement as we further standardize operational processes, create regional centers of excellence and further reduce our power and fuel requirements.", "We also believe there will be demand for many of our innovative initiatives to extend our core platform of capabilities for new and existing tenants. So in summary, we believe that our diverse macro tower-focused international portfolio positions us well for a prolonged period of solid growth and attractive returns on invested capital. We can further augment this through disciplined, selective acquisitions and new builds on a global basis. While we expect our foundational U.S.", "business to drive the majority of our cash flows for years to come, we think our international operations can enhance and extend our growth trajectory by effectively doubling our total addressable market size. The global demand for mobile connectivity shows no sign of slowing, and we believe we are positioned to play a critical role in extending the reach of mobile broadband, while generating strong total returns for our shareholders. So with that, let me hand it over to Rod to go through the details of our results and updated outlook. Rod?" ] }, { "name": "Rod Smith", "speech": [ "Thanks, Tom, and good morning to everyone on the call. I hope you are safe and healthy. As you saw in today's press release, we had another solid quarter throughout our global business, driven by consistent demand for our mission-critical tower assets. Before we turn to the accompanying charts, I would like to highlight a few specific accomplishments for the quarter.", "First, we met our revenue, adjusted EBITDA, consolidated AFFO and consolidated AFFO per share expectations, which I will discuss in more detail shortly. Second, we had solid organic tenant billings growth across our business, led by Africa at nearly 10% and Latin America at over 7%. Third, we constructed more than 500 towers across our international footprint. And finally, we further strengthened our investment-grade balance sheet by issuing $2 billion in senior unsecured notes across multiple tenders with very attractive economics.", "Now let's turn to the details of our second-quarter results. Please turn to Slide 8, and we will review our property revenue and organic tenant billings growth. Although we experienced some unfavorable capex translational impact, primarily resulting from the global pandemic, overall, we generated solid underlying revenue growth. In the interest of understanding our fundamental operational performance, I'll be referring to growth rates for some of our key metrics on an FX-neutral basis, in addition to our standard as-reported basis.", "As Igor mentioned earlier, our second quarter consolidated property revenue of nearly $1.9 billion grew on a reported basis by $44 million or 2.4% over the prior year period, and on an FX-neutral basis by $158 million or 8.6%. Our U.S. segment represented 57% of our consolidated property revenue, with international comprising the remaining 43%. A key contributor to our consolidated property revenue was our tenant billings revenue of $1.620 billion, which grew by nearly 10%.", "The components of our tenant billings growth included around $71 million in colocation and amendments, roughly $50 million in contributions from escalators and $72 million in day-one tenant billings from acquisitions and new builds. These positive items were partially offset by churn impacts of $46 million and $2 million in other items. Our U.S. property segment revenue totaled nearly $1.1 billion for the quarter and grew by $80 million or 8% over the prior year period.", "Our international property revenue of nearly $806 million declined by $36 million or 4.3% as compared to last year's levels, primarily due to the FX translational headwinds we just discussed. Moving to the right side of the slide. You will see that our consolidated organic tenant billings growth was in line with our expectations at 5% for the quarter. For our U.S.", "property segment, organic tenant billings growth was 4.7%, comprised of new business activity, which contributed 3.7%; escalators, which contributed 3.2%; churn of 1.9%; and a roughly 30 basis points negative impact from other items. As expected, this growth rate reflects a sequential deceleration, driven primarily by relatively modest contributions to our new business from T-Mobile over the last few quarters. With that said, and as I will discuss in more detail when we review our updated outlook, we have seen new business activity from T-Mobile begin to pick up, with further acceleration anticipated toward the end of the year. Our international property segment organic tenant billings growth was 5.4%, led by Africa at nearly 10% and Latin America at over 7%.", "Europe was just over 2%, while India was 0.4%, again, in line with our expectations, given anticipated churn in general market conditions. The component parts of our international organic tenant billings growth were new business activity, which totaled nearly 7%; our mostly local inflation-based pricing escalators, which contributed 3.7%; and other items, which contributed around 20 basis points. These items were partially offset by churn of 5.3%, much of which was in India. Now please turn to Slide 9, and we will review our adjusted EBITDA and AFFO results.", "Our second quarter consolidated adjusted EBITDA of just over $1.2 billion grew on a reported basis by about $28 million or 2.4% over the prior year, and on an FX-neutral basis by $90 million or 7.6%. Our adjusted EBITDA margin was 63.3%, up roughly 70 basis points over the prior year. This increase was attributable to a combination of our solid organic growth, diligent focus on cost controls and a favorable impact of some incremental net straight line. These favorable impacts were partially offset by approximately $21 million in bad debt reserves against certain receivables in India.", "Although we operate in 20 countries, our U.S. business, again, drove the substantial majority of our property segment operating profit in the quarter, accounting for 68% of the total, while our international business generated the remaining 32%. Moving to the right side of the slide. You can see our consolidated AFFO of $924 million grew on a reported basis by nearly $15 million or 1.6% over the prior year and on an FX-neutral basis by around $69 million or 7.5%.", "Consolidated AFFO per share of $2.07 grew on a reported basis by $0.03 or 1.5% over last year's levels, and on an FX-neutral basis grew by $0.15 or 7.4%. This growth in AFFO and AFFO per share was driven by our previously discussed growth in adjusted EBITDA as well as interest expense management, careful oversight of cash taxes and lower maintenance capital spending. Let's now take a look at our updated expectations for 2020. Before I get into the numbers, I want to cover a few of our high-level assumptions.", "First is our updated expectation regarding the postmerger acceleration in new business activity from T-Mobile. Our prior outlook assumed activity levels would have materially increased by now, and that we would be seeing increased levels of new business from T-Mobile starting this month. Although we have seen a modest increase in activity, it has not yet reached the level we expect to eventually see based on T-Mobile's public comments. As a result, we now expect this acceleration of new business to come much later this year.", "Consequently, we are reducing our U.S. organic tenant billings growth expectations for 2020, which I will discuss in more detail shortly. Next is our updated expectations regarding customer collections and additional reserves for some bad debt. For the most part, tenants throughout our footprint have continued to pay on time and without interruption through the pandemic.", "However, in India, we have layered in approximately $65 million in additional bad debt assumptions for the full year. This is primarily attributable to the expected timing of payments from the government-owned carrier, BSNL, as well as the possibility that Vodafone Idea future payments become interrupted or delayed as they await a final outcome of the ongoing AGR court proceedings in India. Additionally, we have assumed roughly $10 million in incremental bad debt reserves for a few tenants in Africa. Lastly, we have updated the foreign currency exchange rates in our full-year outlook.", "The impacts of these revised FX rates on full-year expectations, as compared to our prior guidance, are estimated to be a positive $45 million of property revenue, $20 million for both adjusted EBITDA and consolidated AFFO. Aside from these adjustments, our other high-level assumptions remain largely consistent with our prior view as demand for our telecommunications real estate across all of our markets is expected to remain solid. If you will please turn to Slide 10. I will now review our revised outlook midpoints.", "Our updated guidance for property revenue is $7.720 billion, which is a decrease of $30 million compared to the midpoint of our prior outlook and reflects a growth rate on a reported basis of 3.4%. On an FX-neutral basis, the growth rate is approximately 8%. For our U.S. segment, we now expect property revenue of $4.380 billion, which is $35 million lower than our prior projections.", "About $20 million of this decrease is attributable to the timing of T-Mobile activity, with the remaining $15 million-or-so being driven by an adjustment in our noncash straight-line revenue expectations as a result of an accounting true-up. For our international segment, we now anticipate property revenue of $3.34 billion, which is $5 million higher than our prior expectation. This is being driven by roughly $45 million in favorable FX impacts, along with around $10 million in other outperformance, partially offset by a $50 million currency-neutral decline in pass-through revenues across our footprint due to lower fuel prices. At a high level, our expectations for our international businesses are broadly consistent with our prior outlook, which demonstrates the critical nature of our assets, as well as the effectiveness of our more than 5,000 employees across the globe.", "We could not be more proud of the way our global teams have performed throughout this pandemic. Moving on to the right side of the slide. We now expect organic tenant billings growth to be between 4.5% and 5% on a consolidated basis. This includes projected U.S.", "organic tenant billings growth of approximately 4.5% for the full year. As I just mentioned, the change to our U.S. expectations is driven by our adjusted timing assumptions around T-Mobile's activity ramp-up with us, rather than a fundamental change in underlying long-term trends. For our international segment, we are reaffirming our outlook for organic tenant billings growth of approximately 5%.", "Moving on to Slide 11. You will see that we now expect our full-year adjusted EBITDA to be $4.930 billion, which is $40 million below the midpoint of our prior outlook and reflects nearly 8% growth over the prior year on an FX-neutral basis. The drivers of this reduction in outlook are: a roughly $75 million increase to our bad debt reserves, primarily in India; an approximately $17 million reduction in net straight line; and a $10 million reduction from our services segment, which is the result of the revised outlook for T-Mobile activity. These negative impacts are expected to be partially offset by a favorable FX translational impact of $20 million as well as an additional $42 million or so of general outperformance we now anticipate throughout our business, particularly on the direct expenses and SG&A side.", "As part of our adjusted EBITDA projections, we now expect cash SG&A as a percent of total property revenue for the year to be in the high 8% range or around 7.4%, excluding bad debt. Lastly, we now expect consolidated AFFO for the full year to be $3.670 billion, which is $20 million above the midpoint of our prior outlook and reflects nearly 9% growth over the prior year on an FX-neutral basis. We have been able to offset the expected decline in cash-adjusted EBITDA through $25 million in lower net cash interest, $10 million in lower cash taxes, $10 million in reduced maintenance capital expenditures and about $20 million in FX favorability. On a per share basis, we expect to generate consolidated AFFO of $8.23, up $0.05 relative to our prior guidance.", "Moving on to Slide 12. Let's review our capital deployment expectations for the year. Our full-year dividend, subject to the Board approval, is expected to be approximately $2 billion, resulting in an annual common stock dividend growth rate of right around 20% once again. As previously discussed, in future years, you could expect our dividend to grow roughly in line with our REIT taxable income.", "That will be consistent with our REIT requirements as well as with our internally held dividend philosophy, and is likely to result in growth rates dipping below 20% beginning next year. Subject to Board discretion, we anticipate the impact of any deceleration in the growth rate to be gradual and expect our dividend to grow between 15% and 20% for each of the next several years. We also expect to deploy nearly $1.1 billion toward our capex program, with more than 85% of that investment being discretionary. This is down $25 million from our prior outlook, with $15 million in lower redevelopment capex and an additional $10 million decline in maintenance capex.", "We have spent roughly $757 million on M&A so far this year, including our acquisition of MTN's minority stakes in our joint ventures in Ghana and Uganda earlier this year, and our entry into Poland through a small transaction in late June. The purchase of Tata's remaining interest in our India business, which, at current exchange rates, has an approximate value of $329 million, is currently pending regulatory approval in India. We continue to expect to complete the purchase of these shares this year. We also deployed around $56 million to share repurchases earlier in the year.", "This, combined with our year-to-date dividend declaration of $967 million, brings our total capital return to shareholders so far this year to over $1 billion. Finally, as a step toward ensuring we have access to a wide variety of options for raising capital, we intend to implement an at-the-market stock offering program. We anticipate having the ability to, from time to time, sell up to $1 billion of our common stock. It's our intention to use the proceeds for general corporate purposes, which may include investment opportunities or debt repayments, among other things.", "Turning now to Slide 13. I will briefly discuss our investment philosophy, historical capital allocation and the associated financial returns. Since 2010, we have deployed nearly $46 billion through a combination of common stock dividends, our internal capital investment program, M&A transactions and common stock repurchases. As you can see on the capital deployment chart to the left, approximately $27 billion was invested in M&A.", "Over $10 billion was returned to our common stockholders through the combination of dividend distributions and share repurchases. Roughly $7 billion represented discretionary capital investments, and with the remaining $1 billion being dedicated to nondiscretionary maintenance capital projects. As Tom alluded to earlier, the vast majority of investments to date have been geared toward macro towers. This has been guided by our long-standing investment objectives, which have always been, and continue to be, focused on generating maximum total shareholder returns by driving long-term AFFO per share growth and attractive return on invested capital, all while prudently managing risk.", "Based on our significant experience and our constant review of all types of communications infrastructure, we view macro towers, whether in the United States or in select international markets, as the most compelling assets for us to own as we pursue our investment objectives. Likewise, as we explore innovation initiatives as a means of extending our platform of communications real estate, our long-standing investment objectives and our disciplined approach will remain the same. As you can see from our historical results, our investment process has worked well for our shareholders. A key element of our success has been that our tower portfolios, regardless of where they're located, share several value-creating characteristics, including the ability to monetize growth in mobile data consumption; significant and proven operating leverage, driven by contractual escalators, new business commencements and a high likelihood of multitenancy; and very low ongoing capital maintenance.", "Lastly, the high-quality nature of our model is highlighted in our consistent and attractive financial returns. In the last decade, we have added more than 153,000 sites, many of which were less mature towers located outside the United States and came with lower day-one tenancy and margin profiles. Even taking this into account, as you can see on the chart to the right, our return on invested capital has risen by around 50 basis points over the last 10 years and stands now at nearly 11%. We view this as a testament to our disciplined investment approach and a powerful operating leverage inherent in the tower model.", "If we can now turn to Slide 14, and I will make a few closing remarks. First, we finished the second quarter with a solid set of results and believe we are well positioned as we head into the second half of 2020 and beyond. Pro forma for refinancing activity earlier this month, we have over $5 billion in total liquidity, with an average tenor of more than six years and an average interest cost of under 3%. This position reflects our early redemption of all of our 2020 and 2021 senior notes, which leaves us with no senior note maturities until 2022.", "As Tom and I both discussed, outside of translational FX effects, the impact of the COVID-19 pandemic on our business, thus far, has been modest. We are pleased to see our global infrastructure assets play such a critical role in keeping people connected through this difficult time. And in closing, I will make two final points. First, we are energized about the United States as we look out over a multiyear period.", "We expect the new wireless landscape to drive higher levels of network deployment activity as C-band spectrum becomes available, DISH begins rolling out their network and 5G activity across the industry ramps up. And second, our international markets also show great promise as our primarily large multinational tenants continue to invest heavily in their networks, including around $30 billion expected in 2020. Networks across the globe are seeing tremendous growth in mobile data usage as consumers gain access to advanced handsets and applications, and we expect a long cycle of carrier capital spending to support these trends. From our vantage point today, we continue to be excited about the future of wireless communications and the central role our real estate will play.", "With that, operator, will you please open the line for questions?" ] } ]
[ { "name": "Operator", "speech": [ "Thank you. [Operator instructions] Your first question comes from the line of Matthew Niknam. Please go ahead." ] }, { "name": "Matthew Niknam", "speech": [ "Hey, guys. Thank you for taking the question. Just two, if I could. First, on the U.S., if you can give us any additional color on what you're seeing in your discussions with the new T-Mobile, whether this delay is really timing related or have there been any changes in terms of spending plans in there and relative to earlier expectations? And then just secondly, on the ATM Program, can you help us think about the investment opportunities you're evaluating and the decision to use equity, and the potential means of funding this relative to the debt you've traditionally used, given where your leverage sits today? Thank you." ] }, { "name": "Tom Bartlett", "speech": [ "Yes. Matt, this is Tom. On the T-Mobile side, based upon everything that I think they've said publicly, I think it's fair to say that it really is just timing. And they're working through all their plans.", "They closed their deal in April, and then settled their transaction with DISH not that long ago. So we believe it clearly is timing and are looking forward to really supporting them as they continue to really build out their network even further. On the ATM side, really, it's good plumbing. It really is just having more flexibility.", "It's not a significant number, clearly, compared to general ATM Programs as part of market cap. So it really is just kind of good plumbing to have a flexibility of having access to a number of different sources of capital." ] }, { "name": "Matthew Niknam", "speech": [ "If I could just follow up. Go ahead, Rod." ] }, { "name": "Rod Smith", "speech": [ "I'm sorry, Matt. Yes, let me just add a couple of points on the U.S. growth. No.", "1 is, everyone kind of saw the slowdown from T-Mobile toward the middle to third quarter of last year. Now that we're almost lapping that slowdown, that's where — the further away from the beginning of that slowdown, the bigger impact that it has on the organic tenant billings growth deceleration. So the fact that they haven't started up yet is that's causing us to reduce our outlook from above 5% down to about 4.5%. And the other expectations in the U.S.", "industry remain the same. So we haven't seen any changes in our expectations relative to the other carriers or anything else going on in the U.S. It really is isolated to the new T-Mobile and the timing of when they begin spend." ] }, { "name": "Matthew Niknam", "speech": [ "That was going to be my follow-up. Appreciate it. Thank you." ] }, { "name": "Operator", "speech": [ "Your next question comes from the line of Batya Levi. Please go ahead." ] }, { "name": "Batya Levi", "speech": [ "Great. Thank you. Just to follow up on the U.S. activity.", "Can you provide an update on how you think about the potential decommissioning that T-Mobile can do? I think the Sprint sites are up for renewal next year. And second question on Lat Am. How do you think about the growth going forward, given that the macro environment is weaker and the potential acquisition of or by other carriers could potentially create some churn activity? Yes. I would like to see your thoughts on how you think that could impact your growth over the next few years.", "Thank you." ] }, { "name": "Tom Bartlett", "speech": [ "Yes. Thank you. OK. Batya, with regard to — I'm going to address the Lat Am question first.", "I mean we're really excited about the opportunities that we continue to see down in the market, particularly in a market like Brazil, which is still so underserved. I mean, you could take a look at customers per site, it's significantly higher than what we're seeing in the United States. And so we continue to see the opportunities for further densification, where our build programs continue to grow. So we're actually very energized.", "And our teams in the markets are very excited about the opportunities there. Yes. There is some consolidation perhaps going on in the market, but that was fully understood, fully expected. So there are really no surprises there.", "And I think the government themselves, particularly with regards to what we're seeing in the pandemic, continue to want to drive connectivity and digital connectivity in their markets. So we're quite excited about that. And Oi, as you all know, represents a relatively small piece of revenues. I'm sorry, Batya, your second question on the U.S.", "side was?" ] }, { "name": "Batya Levi", "speech": [ "On the T-Mobile decommissioning activity that would come, that could start potentially next year?" ] }, { "name": "Tom Bartlett", "speech": [ "Yes. No. You're right. I mean, those Sprint sites, a vast majority of those sites come up for renewal toward the end of next year.", "We believe they're obviously very well-positioned sites, and we will likely try to mitigate it. But that current potential is possible and hopeful that between the new build that's going on in the marketplace, as well as DISH's expectations for building out, that will be successful in terms of mitigating that. But that's all part of a lot of the negotiations and discussions that are going on as we speak." ] }, { "name": "Batya Levi", "speech": [ "Got it." ] }, { "name": "Rod Smith", "speech": [ "And Batya, if I could, Batya, I'll just add a couple of comments on the Sprint, T-Mobile, maybe to put the merger kind of in context with the U.S. markets. So you know that the U.S. is experiencing kind of an exploding growth in mobile data, about 30% a year increases.", "We've seen accelerating deployments for 5G kind of heading our way. There's a number of new spectrums heading into the market that will have to be built out. The carriers continue to invest heavily in 4G as they focus on their customer experience and strengthen their networks to handle the growing data demands. So all that is really constructive in terms of what's happening in the U.S.", "landscape. When you look at T-Mobile, in particular, their deal comes with pretty significant buildout requirements. So they've said that they're going to spend $40 billion over the first three years, build an additional 10 to 15 sites, particularly in some of the rural areas where they're expected to cover 97% of the population on low-band spectrum, about 75% on mid-band spectrum within three years. So they've got an awful lot of work to do.", "They're certainly going to be deploying capital. So we continue to believe that it's been in their best interest and good for our shareholders as well, to the extent that we can enter into an arrangement where they can have quick access to our sites and potentially renegotiating the way some of the churn happens over time. So to spread that potential churn, which is we continue to believe it's in the range of 3% to 4% of our overall property revenues, that's the overlap piece. And we continue to expect that, that could be spread out over time.", "And we could give T-Mobile easy, quick access to our sites through a holistic deal, which will help them deploy their network." ] }, { "name": "Batya Levi", "speech": [ "That's helpful. Thanks so much." ] }, { "name": "Operator", "speech": [ "Your next question comes from the line of Jonathan Atkin. Please go ahead." ] }, { "name": "Jonathan Atkin", "speech": [ "Yes. I wondered if you could talk a little bit more about Brazil and kind of the directionality of the organic growth rate. You talked about Oi, but maybe Nextel, in that consolidation, does that represent perhaps a little bit of a headwind or not big enough to matter? And then I just wondered a little bit about India. Yes, you talked a little bit about the bad debt provision.", "But if you talk about just actual leasing activity in the market, any changes to kind of call out over the next couple of quarters versus what you've seen? Thanks." ] }, { "name": "Tom Bartlett", "speech": [ "Jon, first on Brazil, just kind of getting a little bit deeper into the market. It's a market that we expect the wireless capex is going to be in the $3 billion to $4 billion range. So obviously, very, very strong high-growth market for us. The capex percent of carrier revenues to be around 25%, which is actually a bit higher than we've seen in prior years, consistent with last year.", "So we think that, that's a good sign. Their margins are in the 40%. So the carriers themselves, I think, are quite well capitalized and very focused on building out their 4G overall initiatives. The local CPI has actually been down over the last several years, so with our escalators, in concert with it.", "And that's being really reflected in some of the 2020 escalator that we're seeing this year. But Vivo, TIM, América Móvil, including Nextel, in that transaction is relatively insignificant relative to our overall growth rates. And we're seeing organic tenant billings growth of over 8% in Q2. Churn was in kind of the mid-1s, 1.7% for the year, and we expect for the year overall billings growth of 7%.", "So we're bullish on the marketplace. We think we're well positioned. We have really solid relationships with what we expect to be kind of the three main players in the marketplace. And as I mentioned before, we do believe that the networks are overburned.", "They have roughly 3,000 to 4,000 SIMs per cell site. It's really twice what we're seeing in the U.S. So the teams, as I said, are bullish. We're building out sites.", "We have a lot of interesting things, I think, going on with the various carriers. So we're excited about what we expect in the marketplace. On the India side, again, if you take a look at the kind of the total growth that we've seen in the market, and again, it's double digits on a total gross basis. The carrier spending continues to be strong, building out their networks.", "They continue to make their network investments to support the overall usage demands. I mean, I think, I mentioned in some of my comments that we really remain optimistic about the market. The structure is now much more rational. The price competition in wireless has actually stabilized.", "And the regulatory environment is very, very constructive. There is a significant appetite for mobile data. From a customer's perspective, they're using over 10 GB per month, and that was even before the COVID 19 impact. So as well as they're still using significant legacy technologies, 2G technologies rather than even 4G.", "So we think, as the network continues to get equipped, as the government continues to expand its overall Digital India strategy, that there's going to be a significant amount of further densification and network investment going on in the marketplace." ] }, { "name": "Jonathan Atkin", "speech": [ "And then lastly, on the U.S. Yes. And on the U.S., you talked about Sprint, T-Mobile at some length. What about the rest of the industry? There's two other national carriers.", "And if you think about an aggregate kind of their activity level, anything that you're expecting there that would be different compared to year-to-date trends?" ] }, { "name": "Tom Bartlett", "speech": [ "No. I mean they've been very consistent. I mean, very steady in terms of their buildout. You've heard them kind of tweak what they expect their overall capex expectations are probably for the year.", "But for us, they've been very consistent. We expect them to be so." ] }, { "name": "Jonathan Atkin", "speech": [ "Thank you very much." ] }, { "name": "Operator", "speech": [ "Your next question comes from the line of Sami Badri. Please go ahead." ] }, { "name": "Sami Badri", "speech": [ "Hi. Thank you very much for the question. I just wanted to take a step back to India and just talk about — I was hoping you could give us some of your views on U.S. hyperscalers really kind of starting to navigate that region and how that actually changes anything.", "And then maybe, perhaps, just thinking about your international strategy and what you've observed in India and how that could potentially happen in other markets. Does this at all change your international M&A strategy or expansion strategy at all? Are there regions that you're going to start avoiding simply because you don't want to get tangled up in these kinds of speed bumps along the road? And I just want to get your take kind of on those different dynamics there." ] }, { "name": "Tom Bartlett", "speech": [ "Yes. I think that the fact that we're seeing another number of hyperscalers investing in India is a very good thing. There are significant investments being made into the networks. They see the same things that we do in terms of the kind of the digital transformation that's going on in the marketplace, and they're bringing many more applications and products to the consumers of those particular markets.", "And given that the wireline penetration is very, very low in that market, as well as most of the markets that we're in outside of the United States, we think that then most of that traffic to be able to utilize those applications is going to go over those wireless networks. And clearly, the carriers are going to want to invest in their networks to be able to support it. It's no different than what we've seen here in the United States. And so I think it's a very good time, candidly.", "And I would hope that we would continue to see more of that kind of activity occurring in the markets outside where we have a presence." ] }, { "name": "Sami Badri", "speech": [ "Got it. And then just taking back to the U.S. I know on prior earnings calls, you've talked about the micro data center opportunity. And probably within the last 12 months, this opportunity has quickly evolved from proof of concepts in 2019 to now fully funded VC competitors.", "And you guys have now kind of drawn the lines in the sand coming to the table. So if you could give us an update on the micro data center opportunity within the U.S." ] }, { "name": "Tom Bartlett", "speech": [ "Well, I mean, the underlying premise, clearly, is that we believe that the cloud is moving to the edge. And we see this. There are a number of factors that are supporting it, whether you're looking at C-RAN, you're looking at what's going on with cloud infrastructure. And with the deployment of 5G, we think that enterprise customers are going to be looking for low-latency access as well as cloud kinds of capabilities out at the edge.", "And so we remain very bullish on the whole opportunity. We do have a number of trial sites. I think we have five or six trial sites down in the Southeast and actually out in West. And the way we are looking at that, it really is that, at this point in time, there are really kind of a couple of distinct trends that we're paying attention to.", "First of all, on the distributed compute, and then, more broadly, on the mobilized computing, where we think that the TAM is going to be significantly higher and that we'll be able to create some scale. And we've talked about the distributed compute, which is really where we're focused right now with regards to a number of our kind of trial sites. And that's where enterprise workloads, moving to the public cloud — and there's a growing near-term market segment in use for on- and off-prem private cloud computing in somewhat of a hybrid solution. And so in many of the sites that we have, we have 50 kilowatts of power, and we're providing kind of local compute capability for mid- and smaller-sized enterprises.", "And so it's an interesting market segment. I don't think it's actually being serviced particularly well today. But clearly, that's not the big opportunity that we see going forward. The big opportunity is clearly on the mobile edge compute, and it's one where we think that we are actually going to be able to further scale.", "But we're really just in the earning — in the early innings of it. But the concept of the strategy is that we expect that we'll be able to build a neutral-host, multi-operator, multi-cloud data center in several thousand of our sites that we have across the country. And we do have a meet-me room/data center in Atlanta, which is, as I said, tied to a major data center down in the marketplace. And so we're tracking the opportunity and what it will mean to be able to really develop this type of a strategy.", "We realize that we don't have lots of the skill sets that are going to be required to really scale this. And so like our other kind of innovative initiatives, very potentially, we'll look to partner to be able to gain access to those kinds of skill sets and capabilities, distribution, software engineers, those types of things, to really be able to scale and grow the opportunity. So early innings, as I said, but we remain quite bullish on the overall opportunity." ] }, { "name": "Sami Badri", "speech": [ "Thank you very much." ] }, { "name": "Operator", "speech": [ "Your next question comes from the line of Rick Prentiss. Please go ahead." ] }, { "name": "Rick Prentiss", "speech": [ "Thanks. Good morning, guys. Busy day, but hope you and your family and employees are doing OK through this COVID-19 time. Yes.", "Wanted to touch on the Sprint decommissioning question again. Obviously, T-Mo has a lot of dominoes they're trying to knock down in the process. But it sounded like, to Batya's question, you guys might be more interested in spreading the effect of the churn through holistic over time versus maybe taking a onetime payment like you did with Tata?" ] }, { "name": "Tom Bartlett", "speech": [ "Rick, it will come down to math, right? It's really a TBD-type of an event. We expect, really, based upon what T-Mobile has said, is that they're going to need thousands of sites over and above what they're expecting right now after the decommissioning, right? And so there could be an opportunity for those sites. There could be an opportunity for those sites in the hands of somebody else. And so it's a bit of 3-dimensional task right now in terms of work with these transactions with all of our customers and potential customers.", "I would expect that there will be a churn of some sort. I don't know if it will be all at once or over an extended period of time. But we believe that, longer term, there are clearly going to be a number of offsets. And if you just take a look at the wireless growth that we're seeing in the marketplace and what we would expect the amount of capital that all these carriers are looking to spend and the fact that this is going to be coming into the fold there, we would expect solid growth going forward.", "But — so it's really a TBD at this point. I wouldn't want to give you a sense of that anything is certain or anything is put in concrete. We continue to work all those items with our customers." ] }, { "name": "Rick Prentiss", "speech": [ "So it's all math negotiation to see how it plays out? OK." ] }, { "name": "Tom Bartlett", "speech": [ "Right." ] }, { "name": "Rick Prentiss", "speech": [ "You mentioned DISH a couple of times that, obviously, we're all monitoring DISH very closely. There is a feeling that DISH needs a lot more funding to really get the network ramp going. It was a good sign to see Dave Mayo joined, I think, DISH as network deployment head. But how are you thinking about when DISH might be starting to show up in the process as you look into '21, '22, '23? How — given the funding is not there yet?" ] }, { "name": "Tom Bartlett", "speech": [ "Well, I mean they also have network requirements that they need to adhere to. And I think that 2023, I think, is the first commitments that they've made. So I would expect to see them hit market in '21. I think that's a better question for T-Mobile.", "I mean, I think, it is a good sign that they brought in Dave Mayo. I think he'll do a terrific job there. And time will tell in terms of what it looks like. But we're there to service them and support them in any way that they feel necessary.", "And we think that we've got a portfolio of assets that really can be helpful to them, and I think they appreciate that as well. So — but I would expect that we'll start to see them toward the end of this year into 2021. They're not in our forecast. They're not in our guidance.", "Until we really have a more formal arrangement with them and understand what their demands are going to be, we won't put them into our forecast." ] }, { "name": "Rick Prentiss", "speech": [ "OK. And apologize if you might have already answered this, a lot of calls this morning. On the AFFO guidance, Slide 11. It talked about a $45 million benefit to AFFO guidance from other components.", "Could you impact that? What's in that $45 million that obviously offset the $45 million negative on cash EBITDA?" ] }, { "name": "Tom Bartlett", "speech": [ "Yes, I mean it's interest. It's maintenance capex. It's cash tax. It's kind of the typical group of items below EBITDA that impact AFFO that we're seeing some positive benefits from." ] }, { "name": "Rick Prentiss", "speech": [ "OK. And last one from me is, the CBRS auction is obviously going on right now. What are your thoughts about what that means, particularly maybe to the indoor space, and what the opportunity might be for you guys?" ] }, { "name": "Tom Bartlett", "speech": [ "Yes, we continue to be very positive on the indoor spot or indoor space. We think that the unlicensed here access spectrum in the U.S. has the potential to really transform, if you will, the overall indoor connectivity landscape. It improves the overall TAM, clearly, and it reduces the overall total ownership cost.", "And so we're very positive, and we have a number of trials going on, Rick, as we've talked about in the past. But again, it's early innings right now in terms of what that opportunity is. We have 400 DAS locations, if you will, around the country, with a TAM of probably a couple of thousand. But we think that, given the cost components of being able to open up the network, that TAM could increase tenfold.", "And so we're seeing what that looks like. We're taking a look at what those relationships are going to look like then with the landlords across the country. But we are energized by what we think we might be able to and how we might be able to position ourselves." ] }, { "name": "Rod Smith", "speech": [ "And Rick, I'll just give you a couple of numbers there to back up what Tom was saying about the AFFO. So the $45 million offsets are broken down with $10 million in lower maintenance capex, $25 million in lower net cash interest and $10 million in lower cash taxes." ] }, { "name": "Operator", "speech": [ "Your next question comes from the line of David Barden. Please go ahead." ] }, { "name": "David Barden", "speech": [ "Hey, guys. Thanks for taking the questions. Tom, I think in the opening comments, you mentioned that you saw the CPI dipping in some of the international markets, affecting your organic growth. So I was wondering if you could kind of put some numbers around that.", "And then kind of another situation unfolding in Latin America is the Telefónica RAN sharing agreement with AT&T. I think that there's just been a lack of certainty around what that will ultimately look like, and you guys have talked about having some engagement there to maybe try to create a holistic relationship down there. Could you kind of update us on any progress on that front? Thanks a lot." ] }, { "name": "Tom Bartlett", "speech": [ "Yes. Sure, Dave. I think on the CPI side, the escalator, I think, in the quarter was roughly 3.7%. And then, really, again, the way it works off of the 2019 kind of the inflation numbers, which then drive what the escalator would be.", "So our escalator is down. And if you think about — even looking at Brazil, for example, the growth rates in Brazil, in my sense, were up in the kind of even a 10% range in the last couple of years, as I recall, and were now down in kind of that 7% to 8% range. And so it has a significant impact, if you will, kind of going forward. And as you well know, it's very volatile on a year-to-year basis, but it can impact the overall organic growth rates by a couple of hundred basis points in one way or another.", "With regards to Mexico, a fair question in terms of Telefónica and their interest in the marketplace. We have a terrific relationship with AT&T in the market. And we're working closely with both Telefónica and AT&T right now on that transition and what that might look like over the next several years. And so it's a TBD.", "We're in the middle of it. And as I said, I think we're really well positioned to be able to support both our customers as they transition their network." ] }, { "name": "David Barden", "speech": [ "Great. Thanks so much." ] }, { "name": "Operator", "speech": [ "Your next question comes from the line of Tim Horan. Please go ahead." ] }, { "name": "Tim Horan", "speech": [ "Thanks, Tom. Regarding that, do you think there's an opportunity longer term for you to guys to deploy more equipment as we kind of virtualize the networks more and the carriers can kind of share the equipment? Particularly as the cable companies are kind of entering the market, they're going to want capacity but maybe not trying to deploy their own equipment. I know you've done some of this in the past, and well in each segments, but just any thoughts around that?" ] }, { "name": "Tom Bartlett", "speech": [ "Tim, are you talking about O-RAN? Or..." ] }, { "name": "Tim Horan", "speech": [ "Yes. Yes." ] }, { "name": "Tom Bartlett", "speech": [ "Yes. It's very interesting. I mean I do think the whole O-RAN opportunity, which we've seen in other markets, by the way, we've seen in other parts of the world, is definitely starting to take hold here in the United States. And ultimately, we could see in the large carriers looking to take certain segments of their spectrum, certain segments of their technology and really opening it up.", "It kind of ties to my thoughts before in terms of kind of that cloud even becoming closer and closer to the edge. Now keep in mind that, that's kind of what happens behind the curtain. So that's happening back on the RAN side, away from the impact on the towercos. So my sense is that, any opportunity for the carriers, wireless carriers, and potential new players in the marketplace to be able to bring down their total cost of ownership, will then allow them to have more capital available to spend on the RAN, which is really where we come in, right? So we don't expect any of the kind of the O-RAN implications to impact with all what's happening from the site out to the device.", "And as I said, in fact, the total cost of ownership comes down as a result of the kind of the open nature of the infrastructure that might allow more capital to be able to spend on where we come in, which is from the tower out to the device. And so we're cautiously optimistic on the opportunity for O-RAN in the United States as well as in many of our international markets." ] }, { "name": "Tim Horan", "speech": [ "And kind of related on the technology front, do you think carriers are still favoring macros over small cells? Or if you're talking to the carriers, how are they feeling on small cell deployments at this point over the next couple of years?" ] }, { "name": "Tom Bartlett", "speech": [ "It all comes down to band. It all comes down to densification. We don't see any change. I mean the economics are so clearly that the macro tower can be able to support much more efficiently their customer base.", "Now there are going to be certain locations, there may be certain technologies, certain bands that can be better utilized and supportive on a small cell than in those dense urban markets. But we don't see it any different right now. Those dense urban markets in New York City's kind of a thing just because of interference. You're talking about high band, just like what Verizon is doing today.", "So I don't expect, really, any change to that. It's going to be a function of band. It's going to be a function of the densification of the market that they're trying to serve. But really, it's topography of what they're trying to serve.", "But we don't see any change at all, the use of small cells versus macro." ] }, { "name": "Operator", "speech": [ "And your final question today comes from the line of Colby Synesael. Please go ahead." ] }, { "name": "Colby Synesael", "speech": [ "Great. Two, if I may. There's been some press reports of late that the Vodafone Idea may have skipped out on its June payments to ease some of the tower operators. And I'm curious if you were one of those, or if everything you're doing is, I think, just cautionary and being — trying to get ahead of that.", "And to the extent that they haven't actually made their June, or perhaps July payment, do you think that, that's going to last until the AGR situation is settled? Or is this maybe just a month or two? And then secondly, I'm just curious, what do you think your exit velocity is in terms of U.S. organic growth, call it, in the fourth quarter of this year? And what does that really imply, I guess, for potential growth in 2021? As I'm sure you can appreciate a lot of investors are trying to give a sense of what is that magnitude of acceleration that could potentially sink. And when we start to balance that out with some of the comments, Rod, that you mentioned about trying to flatten out the churn., just trying to start to frame out how to think about what that could look like? I appreciate you don't want to give guidance, but clearly, a big focus for investors." ] }, { "name": "Tom Bartlett", "speech": [ "Yes. So Colby, let me try to address a couple, and Rod can add a few comments as well. On the whole Vodafone India situation, I mean, I don't want to get into specifics there. I think if you step back and if you take a look at where the government is, I mean, the government has definitely advocated for having three strong players in the marketplace.", "They're currently working through, as the other carriers are, with the Supreme Court in terms of where that final AGR issue is going to land. We're hopeful that there'll be some resolution to this even over the next 30 to 45 days or so. There's a hearing, I think, in mid-August for the carriers that are no longer providing service. But we hope that, that will provide some guidance for how the payments, the extended payments will be made, have to be made by the carriers themselves.", "I mean they've made some sizable good faith installments, as best I can tell, in terms of what is owed in the marketplace. And they are aggressively trying to restructure to save costs and compete in the marketplace. And so, yes, I mean there is some slow pain going on in the marketplace. We're working very closely with them, as we would be working with any customer who's going through a similar situation.", "So more to come. You saw what some of our expectations were relative to how we looked at outlook for the balance of the year. But kind of given the direction of the government, given what we're seeing in the marketplace, again, we remain optimistic and cautiously optimistic about their ability to continue and to grow. I'm sorry, Colby, your question on the U.S.", "side was? Oh, the exit rates. It will largely be, candidly, a function of the kind of growth that we're going to be seeing later in the year by the various carriers in terms of their overall investments in their network. You heard Rod talk about that we were talking about an overall growth rate based upon what we're seeing right now in kind of that 4.5-ish range. So it's down a little bit, again, largely tied — it was exclusively tied to the timing of T-Mobile.", "So we're optimistic that the T-Mobile will pick up pace, and we'll see that increase in activity. And I think that will bode well for going into 2021. And the whole notion of the churn relative to Sprint, as we talked about before, that's a TBD. In terms of where does the mass best align for us and where can we best service our customers, in terms of whether that will be over an extended period of time, or whether that would be taken more upfront, so more to come on that one." ] }, { "name": "Rod Smith", "speech": [ "And Colby, maybe I'll just add a couple of comments on the accounts receivable issue, not specific to Vodafone. So Tom covered that up. But just to put it into context, Q1 rolling into Q2, our accounts receivable has been very stable. So we didn't see any increase in our overall accounts receivable across the globe.", "Our DSO numbers are still in the mid- to upper 30s. That's consistent, Q2 over Q1. So we've been very pleased that, not only in India but also in terms of the COVID-19 impacts around the globe, we've had very stable accounts receivable balances from Q1 to Q2, where our net receivables on the books at the end of Q1 was about $620 million. It's actually about $585 million at the end of Q2.", "With that said, you will see in our numbers that we took a bad debt reserve charge in Q2 of about $25 million. And then we also built into the back half of the forecast an additional $75 million. Those are both reserves at this point. So we do expect that much of that will be collected.", "It just may — it may take us a little bit longer. So we're trying to be cautious for the back half of the year. I'd also let you know that we have — the balances in our accounts receivable ledger that are over 90 days are 100% reserved coming out of Q2. So again, we look at that as a pretty comfortable position, maybe a conservative position.", "They're reserves, they're not actually bad debt write-offs yet. So we do expect to collect a lot of that. It's just a matter of when. And of course, Vodafone is tied to AGR, and we'll see how that gets resolved here soon." ] }, { "name": "Colby Synesael", "speech": [ "Great. Thank you." ] }, { "name": "Operator", "speech": [ "And there are no further questions." ] }, { "name": "Tom Bartlett", "speech": [ "Thanks, everybody, for joining. Have a great day, and stay healthy and safe." ] }, { "name": "Operator", "speech": [ "[Operator signoff]" ] } ]
AMT
2022-02-24
[ { "description": "Vice President of Investor Relations", "name": "Adam Smith", "position": "Executive" }, { "description": "President and Chief Executive Officer", "name": "Tom Bartlett", "position": "Executive" }, { "description": "Executive Vice President, Chief Financial Officer, and Treasurer", "name": "Rod Smith", "position": "Executive" }, { "description": "Morgan Stanley -- Analyst", "name": "Simon Flannery", "position": "Analyst" }, { "description": "Citi -- Analyst", "name": "Michael Rollins", "position": "Analyst" }, { "description": "Raymond James -- Analyst", "name": "Rick Prentiss", "position": "Analyst" }, { "description": "Bank of America Merrill Lynch -- Analyst", "name": "David Barden", "position": "Analyst" }, { "description": "Deutsche Bank -- Analyst", "name": "Matt Niknam", "position": "Analyst" }, { "description": "KeyBanc Capital Markets -- Analyst", "name": "Brandon Nispel", "position": "Analyst" }, { "description": "RBC Capital Markets -- Analyst", "name": "Jonathan Atkin", "position": "Analyst" }, { "description": "UBS -- Analyst", "name": "Batya Levi", "position": "Analyst" } ]
[ { "name": "Operator", "speech": [ "Ladies and gentlemen, thank you for standing by. Welcome to the American Tower fourth quarter and full year 2021 earnings conference call. As a reminder, today's conference call is being recorded. [Operator instructions] I would now like to turn the call over to your host, Adam Smith, vice president of investor relations.", "Please go ahead, sir." ] }, { "name": "Adam Smith", "speech": [ "Good morning, and thank you for joining American Tower's fourth quarter and full year 2021 earnings conference call. We have posted a presentation, which we will refer to throughout our prepared remarks under the investor relations tab of our website, www.americantower.com. On this morning's call, Tom Bartlett, our president and CEO, will provide an update on our Stand and Deliver strategy. And then Rod Smith, our executive vice president, CFO, and treasurer, will discuss our 2021 results and 2022 outlook.", "After these comments, we will open up the call for your questions. Before we begin, I'll remind you that our comments contain forward-looking statements that involve a number of risks and uncertainties. Examples of these statements include our expectations regarding future growth, including our 2022 outlook, capital allocation, and future operating performance; our expectations regarding the financing plan for the CoreSite acquisition; our expectations regarding the impacts of COVID-19; and any other statements regarding matters that are not historical facts. You should be aware that certain factors may affect us in the future and could cause actual results to differ materially from those expressed in these forward-looking statements.", "Such factors include risk factors set forth in this morning's earnings press release; those that will be set forth in our upcoming Form 10-K for the year ended December 31, 2021; and in other filings we make with the SEC. We urge you to consider these factors and remind you that we undertake no obligation to update the information contained in this call to reflect subsequent events or circumstances. With that, I'll turn the call over to Tom." ] }, { "name": "Tom Bartlett", "speech": [ "Thanks, Adam. Good morning, everyone. As you saw in today's press release, we generated strong results in 2021, while strategically deploying capital to assets that we believe will further enhance our future growth trajectory and augment our ability to continue to deliver compelling total shareholder returns for many years to come. The strength of our operational and financial results reflects the high-quality nature of our tower business model, the dedication of our talented global teams, and our commitment to provide best-in-class service to our customers.", "It also reflects our commitment to sustainability and being a good corporate citizen, which provides additional purpose and continues to be a focus at every level of the organization. Last year at this time, we presented multiyear targets for U.S. organic tenant billings growth and AFFO per share growth. And I'm pleased to be able to say that we're exactly where we thought we would be today as it relates to those targets.", "We continue to expect to average at least 4% in U.S. organic tenant billings growth from 2021 through 2027 on a reported basis, implying an average of at least 5%, excluding the impacts of Sprint churn. And as part of these projections, we anticipate an acceleration in U.S. organic tenant billings growth between 2023 and 2027, when we are targeting growth rates of at least 5% on a reported basis and at least 6%, excluding the Sprint churn.", "Similarly, on the AFFO side of the equation, we believe we are on track to average at least 10% growth in AFFO per share, on average through 2027. This includes a year of more subdued growth in 2022, as expected, but also a recovery in growth rates in 2023 and beyond as the Sprint churn impacts fade and global secular growth tailwinds continue. 5G is probably the most significant of these growth drivers. And in 2021, we saw the early stages of transformational 5G network upgrades in multiple markets, including nearly $105 billion spent by U.S.", "carriers for critical mid-band spectrum and over $65 billion in capex deployed by carriers into network investments across our global footprint. With mobile data consumption expected to grow at an average annual rate of more than 25% over the next five years in the United States and at even higher rates in some of our international markets, we anticipate prolonged network investment cycles to drive compelling, sustained growth rates across our regions. And while we believe our macro tower assets will continue to drive the vast majority of growth and returns for the company as 5G advances, we're also excited about additional opportunities that we expect to arise from the accelerating cloud-based interconnected and globally distributed digital transformation that is in its early stages today. We expect our recently closed CoreSite acquisition to augment our ability to capture potential upside from this transformation while enhancing the value of our existing portfolio of distributed communications real estate over time.", "We anticipate these expectations to be underpinned by the continued execution of the four strategic pillars in our Stand and Deliver strategy, growing our assets and capabilities, driving industry leadership, operational efficiency, and extending our platform. As part of our commitment to growing our assets and capabilities to meet our customers' needs, we deployed more than $10 billion for tower M&A in 2021 focused on Europe, where we have meaningfully improved our long-term strategic positioning. We saw accelerated organic growth trends in the region throughout the last year, and we expect those trends to continue, supported by data growth projected at a CAGR of 26% over the next five years across our major European markets. Separately, we added strategic financial partners, CDPQ and Alliant, who joined our existing partner, PGGM, creating a solid platform for future growth and investment ahead of what we anticipate being an exciting decade in the European marketplace.", "In addition to expanding through M&A, we further grew our asset base through our internal capex program by investing $1.4 billion, primarily to construct a record of nearly 6,400 new communication sites, along with deploying nearly $120 million toward our energy efficiency investments, primarily in Africa. These investments continue to generate returns that are among the highest in our portfolio. Through our talented teams and operational expertise, we expect to remain a preferred partner to support customers as they execute on their network build-outs, which we expect to drive continued acceleration in our new site construction for the next several years while advancing our sustainability efforts and commitment to a greener mobile future. Through our commitment to enhance our industry leadership, we've continued our focus on sustainability by accelerating our efforts to combat climate change, as evidenced by our recent adoption of science-based targets for carbon emission reductions.", "These targets represent direct and indirect greenhouse gas emissions reduction targets of at least 40% by 2035 against the 2019 baseline, as well as targets to reduce indirect supply chain emissions by at least 40%. To date, we've invested over $275 million in capex toward energy efficiency and reduction solutions, which directly support our committed targets and initiatives. Concurrent with our emissions reduction targets and renewable energy investments, we are actively working on various land stewardship and social impact initiatives. We're a member of the World Economic Forum's Edison Alliance 1 Billion Lives Challenge, which aims to spur development of affordable and accessible digital solutions across health, finance, and education to the underserved.", "Through our involvement, we engaged with an array of high-level country and regional platforms and committed our time, expertise, and ideas to make digital access a top priority for all. Also this past year, American Tower was awarded a 2021 World Summit on the Information Society prize for our digital communities program, which spans across India, Africa, and Latin America and seeks to improve the quality of life and increase economic opportunity through connectivity. At the end of 2021, we reached a significant milestone of launching our 200th digital community in India and have set a goal to grow to 2,000 digital communities globally over the next five years, focusing on education, healthcare access, financial inclusion, and career development. Finally, we advanced our commitment to diversity, equity, and inclusion by implementing customized plans focused on talent development, recruitment, and education to enhance our inclusive culture across our global footprint.", "We also continued our partnership with HBCU supporting critical infrastructure enhancement projects and engaging in academic and professional development opportunities for their talented students. Further, we extended our leadership position and Nareit's dividends through diversity, equity, and inclusion CEO Counsel, which addresses opportunities related to DE&I in the REIT and publicly traded real estate industry. Also, we stay on top of the best ESG practices, policies, and actions within the REIT sector through active participation on Nareit councils and initiatives. These accomplishments and areas of focus are reflections of our unwavering commitment to operating our global business in a sustainable way while guided by our core principles.", "We are also steadfast in driving operational efficiency throughout the business. Over the past several years, we've implemented shared service center model, executed on various cost control and process improvement initiatives, and implemented site-level enhancements that not only drive value to American Tower but also for our customers. An example of these initiatives is our use of drone technology to help us ensure the structural integrity of our sites. In 2021, our U.S.", "team demonstrated its capabilities to scale up driving service revenue to its highest level in over a decade in supporting major carrier activity in preparation for 5G deployments. Looking ahead, we believe the investments we have made in the operating structures and processes that have been put in place are competitive advantages that will facilitate scalable expansion while converting meaningful top-line growth to AFFO. At the same time, through our platform expansion initiatives, we've evaluated a range of new communications' real estate models to identify long-term growth opportunities that could complement and leverage our global tower presence, further advance our position as a market leader ahead of emerging technological trends and create attractive returns for our stakeholders. Through this process, we believe advanced wireless network technologies, in conjunction with the shift of computing power from the core to the edge, will accelerate digital transformation across many industries.", "We've only begun to understand the true capabilities and performance of widespread 5G coverage. And with new applications on the horizon, we think mobile edge computing will become a critical component of converged neutral host infrastructure. We believe today's 5G Edge, deployed in public or private networks with regional site hosting, will evolve to distributed tower-centric locations. We think future AI and machine learning, edge-optimized solutions supporting massive IoT devices, and immersive experiences enabled with AR and VR, such as gaming, healthcare, and education will drive latency-sensitive edge deployments across our strategically positioned set of assets.", "We expect this evolution and these deployments to drive a meaningful TAM with our distributed macro tower assets ideally located to host such computing infrastructure and an integrated grid that enhances our competitive position and service offerings. Together with the CoreSite and our other data center assets, we have the scale to enable a richly interconnected hub-and-spoke edge-computing model that extends today's data center multi-cloud ecosystem out to our distributed neutral host sites, greatly enhancing our probability of success at the edge. On that note, I'd like to welcome the CoreSite team to the American Tower family. And together, I look forward to executing on our long-term development plan, while driving meaningful incremental value to our macro tower sites over time.", "As we move forward, we remain focused on further enhancing our investment-grade balance sheet, which has been a critical element that has enabled us to grow, and we expect it to remain an important component of our future success as well. We are committed to maintaining our investment-grade credit rating. And with the strength of our balance sheet as our foundation, we will continue to apply our Stand and Deliver strategic framework to capture value as 5G and growing mobile demand present compelling growth opportunities for American Tower. In closing, we believe that our comprehensive global portfolio, strong balance sheet, prudent capital allocation strategy, and continued focus on sustainability position us to extend our track record of driving solid growth and returns as we embark upon an exciting new era of digital transformation enabled by 5G.", "We will continue to execute on our Stand and Deliver strategy and follow the same values and discipline that have fueled our track record over the last two decades. As we continue to build and strengthen our diverse comprehensive portfolio, while enhancing our operational capabilities, we believe American Tower is well-positioned to support our global customer base as we enter a hyper-connected, digitally driven world. With that, let me turn the call over to Rod to go through our 2021 results and the details of our 2022 outlook. Rod?" ] }, { "name": "Rod Smith", "speech": [ "Thanks, Tom, and thanks, everyone, for joining our call today. I hope you and your families are well. As you just heard from Tom, American Tower had another year of solid performance, which included strong Q4 results throughout our global business. Before we dive into the details of our expectations for 2022, I'll briefly review our Q4 and full year 2021 results.", "To start, I'd like to highlight a few key accomplishments from the past year. First, 2021 marked another year of strong overachievement against our initial AFFO per share targets. For the full year, we posted consolidated and attributable AFFO per share growth of 13.7% and 11.7%, respectively. This is a demonstration of our ability to deliver solid total revenue growth, tightly manage operating costs and execute on strategically important M&A transactions, all while maintaining a thoughtful and disciplined approach to our capital structure.", "I'll also note, this is a great start toward achieving our previously stated objective of delivering, on average, double-digit AFFO per share growth between 2021 and 2027. Second, we delivered our third consecutive year of record new builds. As we've discussed previously, these newly constructed sites continue to be among our best uses of capital. And in 2021, we saw average day one NOI yield of nearly 12% over the nearly 6,400 sites we constructed.", "bFinally, during 2021, we completed two strategic M&A transactions and, as a result, strengthened our position in the United States and Europe, two critically important markets for us. With that, let's dive into the details of our Q4 and full year 2021 results. Turning to Slide 8. In the fourth quarter, our consolidated property revenues grew by more than 13% year over year or over 14% on an FX-neutral basis.", "In our U.S. and Canada segment, property revenue grew 1.2%. This included an organic tenant billings growth decline of 0.5% or an increase of over 4% when excluding the impacts of Sprint churn. As a reminder, over half of the total Sprint churn commenced in 2021, primarily on October 1st, as expected.", "International property revenues grew over 28%, with nearly 20% driven by contributions from our Telxius assets. International organic tenant billings growth was 5.7%, led by Latin America at 7.4%, followed by Africa at 7.3%, and Europe at 6.6%. APAC grew for the second consecutive quarter, coming in at 1.3%. This was complemented by the addition of nearly 1,900 high-yielding, newly constructed sites across our international markets.", "Moving to adjusted EBITDA. Growth was over 10% in the quarter, while the impacts of Sprint churn, combined with the addition of newer, lower-tenancy assets, drove a decline in adjusted EBITDA margin to 62%. Finally, consolidated AFFO per share grew 3.8% in the quarter or 4.3%, excluding the negative impacts of foreign currency fluctuations. This included nearly $140 million of year-on-year cash-adjusted EBITDA growth, which was partially offset by the higher net cash interest expense, along with higher cash taxes and maintenance costs.", "As anticipated, the timing of these expenses was heavily back-end weighted in 2021, resulting in a material impact to the year-over-year growth rates in Q4. Meanwhile, AFFO per share attributable to American Tower common stockholders grew by 1.4% in the quarter. Turning to Slide 9. Full year consolidated property revenue growth was 14.5%, including organic tenant billings growth of 3.8% and total tenant billings growth of 11.3%.", "U.S. and Canada property revenue growth was nearly 9%, with organic tenant billings growth of 2.9%. This included contributions from co-locations and amendments of 3.2%; another 3% in growth from escalators; around 0.2% in negative impacts from other run-rate items; and churn of 3%, which consisted of around 1.8% in normal cost churn and the balance driven by Sprint. This was complemented by new asset contributions to tenant billings of 4.1% and approximately $144 million in higher straight-line revenues as compared to 2020.", "Our international property revenue grew by over 21% with organic tenant billings growth of 5.5% for the year. Overall colocation and amendment growth was 5.9%, while 3.8% came from escalators and 0.3% from other run-rate items, all of which was partially offset by 4.5% of churn. This elevated churn was primarily concentrated in India, where more recently, we have started to see the churn rate moderate. Finally, with our recent expanded data center portfolio, we have introduced a new data center segment within total property, consisting of the newly acquired CoreSite and DataSite assets along with our existing Colo ATL facility.", "This segment contributed approximately $23 million to our total property revenue in 2021. Turning to Slide 10. Adjusted EBITDA grew 16% for the year to nearly $6 billion. This included strong flow-through of organic tenant billings growth; $100 million in incremental services gross margin versus 2020; over $140 million in net straight-line growth, as well as around $300 million in contributions to growth from newly acquired assets, primarily in the U.S.", "and Europe. On a consolidated basis, adjusted EBITDA margins were down around 20 basis points as compared to 2020, primarily due to the impacts of Sprint churn in the U.S. and the addition of newer lower tenancy international assets, which we believe are well-positioned to drive meaningful margin expansion over time. We also grew consolidated AFFO by 15.4% and consolidated AFFO per share by 13.7% in 2021, with over $680 million in cash-adjusted EBITDA growth from the drivers I just mentioned.", "This growth was partially offset by higher financing costs associated with our recent strategic M&A as well as a modest increase in maintenance capex and higher cash tax expense as compared to 2020. Finally, AFFO attributable to AMT common stockholders per share grew 11.7% year over year. With that, let's turn to our outlook for 2022. I'll start by highlighting a few key assumptions underlying our projections.", "First, we expect a strong year of new leasing activity across our operations, with anticipated gross new business contributions to total tenant billings growth nearly 7% higher than what we saw in 2021. This expectation is being driven by a few key items. In the U.S., the comprehensive MLAs we've signed over the last few years are continuing to result in solid levels of new business activity. In Europe, we expect an exceptionally strong year, boosted by our larger presence following the Telxius transaction.", "And across our developing market footprint, the demand for site continues to rise as next-generation network deployments advance. Second, we expect churn to be higher than historical levels in 2022. In the United States, this will be driven by Sprint churn we've discussed previously, with about $160 million in year-over-year impacts in 2022 versus 2021. Additionally, in select international markets, a handful of carrier consolidation events are temporarily driving churn higher.", "Third, we've layered in some preliminary assumptions related to our CoreSite financing. And finally, our initial outlook reflects estimated negative translational FX impacts of approximately $125 million for property revenue, $70 million for adjusted EBITDA, and $55 million for consolidated AFFO versus 2021. Moving into the details on Slide 11, you can see we expect total property revenues of over $10.3 billion at the midpoint, representing growth of 13% or nearly 15% on a currency-neutral basis. This includes expected property revenue growth of less than 1% in the U.S.", "and Canada and over 14% of FX-neutral growth in our international regions. We also expect data centers to contribute roughly $705 million of growth in cash revenue to the property segment in 2022. Turning to Slide 12, and unpacking the property revenue growth assumptions a bit, you'll see our expected organic tenant billings growth rates for 2022. I'd like to note here that our tenant billings metrics do not include contributions from the data center segment.", "Looking at the United States and Canada, we anticipate growth of approximately 1%, in line with the 2022 expectations implied in the long-term projections we presented last year. This includes contributions to growth from colocations and amendments of roughly $150 million, representing solid double-digit growth versus 2021. We expect this to be partially offset by churn of over 5%, which includes a 3.7% impact associated with Sprint. Turning to Latin America.", "We expect organic tenant billings growth of greater than 6% for the year, supported by solid gross colocation and amendment activity as well as additional growth from our CPI-based escalators, which we anticipate to be around 300 basis points higher than in 2021. These items are being partially offset by higher churn in 2022, primarily related to Telefonica in Mexico as well as the continuation of Nextel churn in Brazil. With both events, we expect to receive settlement payments over the course of 2022, compensating us for the early termination of leases ahead of their expiration, where applicable. As is typical, these payments will fall outside of the organic tenant billings growth metrics.", "Moving to Africa. Organic tenant billings growth is expected to be in the 6% range. We continue to see strong demand for our macro tower assets driving colocation and amendment growth of around 6.5% for the year. In addition, we expect escalators to be up as compared to 2021 by roughly 90 basis points.", "This will be partially offset by an expectation for elevated churn as carrier consolidation and some smaller market exit events from Q4 of 2021 work their way through our 2022 financial metrics. Meanwhile, in Europe, we're seeing the benefits of added scale from the Telxius acquisition, the early stages of 5G rollouts, and low churn, all driving expected organic tenant billings growth of approximately 9% in 2022. This includes roughly 6% in contributions from colocations and amendments and escalators of around 4.5%. These higher escalators are being driven by the combination of higher CPI and the mechanics of having the Telxius assets in our numbers for the full year of 2022.", "Churn is expected to decline to around 1.5% as we benefit from the lower-churn Telxius assets and reduced cancellations across our legacy business as carrier consolidation events wind down. Finally, in Asia Pacific, we're guiding to 2% to 3% organic tenant billings growth in 2022, including churn of around 5%, representing less than half of the 2021 churn rate. At the same time, our outlook does imply a reduction to gross colocation and amendment growth contributions relative to 2021 levels as carriers in the marketplace continue to digest recent developments. With that said, we are encouraged by the market reforms aimed at improving the overall health of the telecom sector as well as more recent steps taken by the carriers to rationalize pricing and improve overall profitability in the marketplace.", "We think these steps could bode well for the long-term growth picture in India. Turning to Slide 13. At the midpoint of our outlook, we're projecting adjusted EBITDA of over $6.5 billion, representing year-over-year growth of 10% or nearly 11% on a constant currency basis. We continue to drive solid organic growth conversion rates and are complementing this through growth on assets acquired in 2021, including approximately $360 million in expected adjusted EBITDA from CoreSite in 2022.", "We are seeing some margin compression in 2022. This is primarily the result of Sprint churn in the U.S., along with the full year impact of the slightly lower-margin CoreSite and Telxius assets. That said, the benefits of our continued focus on operational efficiency are taking hold in our regional legacy businesses, particularly in Africa, where our commitment to sustainable energy solutions and strong cost controls are driving meaningful expansions in margins. Turning to Slide 14, we expect consolidated AFFO to grow by more than $380 million to over $4.7 billion, despite absorbing approximately $160 million in negative impacts to AFFO from Sprint churn.", "This includes $675 million in FX-neutral cash-adjusted EBITDA growth and the expectation for maintenance capex to be more or less flat as compared to 2021 as capital intensity remains in the 2% range. We expect this to be partially offset by approximately $55 million in higher cash taxes and $185 million in incremental cash interest expense, primarily associated with our preliminary CoreSite financing assumption as well as roughly $55 million in expected negative translational FX impacts. Additionally, we've layered in a common stock issuance assumption for the purposes of outlook in the first half of 2022, again, tied to the CoreSite transaction. Taking these assumptions into account, we expect our consolidated AFFO per share for the year to be $10.05, reflecting growth of 4%, or roughly 8%, excluding the impacts of Sprint churn.", "Finally, AFFO attributable to AMT common stockholders is expected to grow approximately 3% year over year to $9.70 per share in 2022. This includes an assumption of approximately $165 million in minority interest impacts related to our partnerships in Europe. Moving on to Slide 15, let's review our capital deployment in 2021 and expectations for 2022. In 2021, we declared nearly $2.4 billion of common dividend distributions, representing a year-over-year growth rate of 15%.", "We spent another $1.4 billion through our capex programs, over $500 million of which was dedicated to our development projects, including the construction of nearly 6,400 new sites across the globe. Finally, we deployed over $20 billion, including the assumption of debt to acquire the Telxius and CoreSite assets as well as a handful of smaller transactions around the world. We expect these new assets to drive meaningful accretion and shareholder value over time. Looking to 2022, our dividend remains a top priority.", "And subject to board approval, we expect to distribute approximately $2.8 billion to our shareholders, as we continue to increase the dividend in line with our stated long-term, double-digit growth targets. We also expect to deploy roughly $2.1 billion in capital expenditures, over 90% of which will be discretionary. Of our total discretionary capital spending, we expect approximately $270 million to be directed toward attractive organic development opportunities in our data center segment. On the tower side, we expect to deploy roughly $565 million in development capex, primarily for the construction of 6,500 sites in our International segment.", "Similar to 2021, we anticipate driving average day one NOI yields on these new builds of nearly 12%. As you can see on the chart to the right, these international new site investments have driven exceptional returns over time. In our earliest vintage, we're seeing average NOI yields of 46%. Sites built between 2010 and 2014 are yielding around 26%.", "And on the more than 26,000 sites we've constructed since the start of 2015, we're seeing yields in the 20% range, with room to expand as we continue to drive lease-up on these lower-tenured sites. Looking forward, we believe our international new-build program presents a significant opportunity to continue adding meaningful portfolio scale while achieving highly attractive returns. And we'll continue to prioritize site development opportunities as a key part of our capital allocation strategy over the long term. Turning now to Slide 16, we've laid out our current thoughts around the permanent financing strategy for our CoreSite acquisition.", "As always, the primary objective is for us to finance this transaction in a way that optimizes our capital structure within our investment-grade framework, minimizes dilution to our common stockholders, and positions us to continue to opportunistically deploy capital in ways that maximize value creation for our shareholders over the long term. At a high level, we expect to get there through a combination of debt and equity issuances. The debt markets remain attractive. And as we have done in the past, we expect to be opportunistic as we seek to term out revolver and term loan borrowings into longer-term fixed-rate instruments.", "On the equity side, we anticipate evaluating a number of alternatives, including common equity, mandatory convertible preferreds, and private capital partnerships, much like we did for the Telxius acquisition in 2021. With that said, for the purposes of our initial 2022 outlook, we have assumed that roughly half of the $10 billion purchase price will be financed through a common equity issuance assumed to occur in the first half of 2022. As you can see on the slide, we anticipate that this will bring our leverage back down to the high five times range while putting us on track to get back to five times or below over the slightly longer term. Importantly, we remain committed to our investment-grade rating and have been working closely with the rating agencies throughout this process.", "As we continue to evaluate a number of potential options, particularly on the equity side, we will plan to keep you all updated as to our progress. In the meantime, we believe that the baseline case we have incorporated in our current outlook positions us well as we create long-term shareholder value with the CoreSite assets. Turning now to Slide 17, and in summary, we drove strong results in 2021, including compelling double-digit AFFO per share growth, record new build activity prudent, balance sheet management, and the completion of several transactions that we believe will enhance American Tower's leading global position. As we look across our global footprint, we're encouraged by what we see as a long tailwind of secular technology trends that are expected to drive continued strong recurring demand for our critical communication infrastructure assets.", "In the U.S. and Europe, we're well-positioned to support a continued acceleration in 5G activity as carriers deploy new spectrum assets and build out greenfield networks. Meanwhile, in our early stage markets, we expect to benefit as operators look to upgrade and densify their mobile networks to meet ever-increasing mobile data demand, all of which we believe will translate into meaningful growth and attractive total shareholder returns at American Tower for many years to come. And with that, operator, we can open up the lines for questions." ] } ]
[ { "name": "Operator", "speech": [ "Thank you. [Operator instructions] And we will go to the line of Simon Flannery with Morgan Stanley. Please go ahead." ] }, { "name": "Simon Flannery", "speech": [ "Great. Thank you very much and good morning. Tom, you talked to -- about some of the deals you've been doing over 2021. And I wanted to get a sense of your -- how you're thinking about M&A from here.", "There's a lot of portfolios available in Europe. Obviously, the public equity valuations have pulled back. So I'm not sure if there's been an adjustment on the private side as well. But how are you thinking about the opportunities out there to continue to build your business? And about what the optimal mix between regions and assets are over the medium term? And then just a housekeeping question for you, Rod.", "You talked about some of the churn in Latin America. You didn't call out Oi. Any update on what the recent Oi transaction and the regulatory approvals means for this year and beyond?" ] }, { "name": "Tom Bartlett", "speech": [ "Sure. Simon, I'll do the first, and then, Rob, you can talk about Latin America. Simon, with regards to M&A, I mean, it's no different than we've been looking at things for the last two decades. We are -- because of our sheer size and our presence, we get invited into looking at just about every transaction that we see going on around the planet.", "And we evaluate them. We have business development teams in every one of our markets. Clearly, the focus for us right now is looking at opportunities in Europe. But it's -- as a result of the Telxius transaction and what we've done there before, we do have terrific scale in some of the critical markets in that region.", "And as you saw Rod just talk about, we're seeing really -- as we expected, given where the markets are from a 5G perspective, it's really outsized growth in 2022 going forward as the spectrum is deployed and as 5G gets rolled out. And as you said, there are a lot of portfolios there. And we are looking at all of them. A lot of it, we've seen it in the public realm, and we've had ongoing discussions.", "But clearly, we're looking at it very, very carefully, looking at what would be the real opportunity there going forward, a very disciplined look in terms of valuation. So it's really impossible at this point in time to speculate in terms of success in those. But we will clearly evaluate them and look at them and determine whether we can create long-term value as a result of those transactions. We have a very diverse portfolio, which has really proved to be, I think, very valuable over the last 10 years as we've looked at the growth across the regions that we have.", "And Europe had been that particular market where we did not have the significant presence. And now we do, and we're taking advantage of that growth. So we'll continue to evaluate those opportunities. And as I said, it's really difficult to predict what the outcomes might be, but we'll continue to take a very disciplined review of those options." ] }, { "name": "Rod Smith", "speech": [ "Hey, Simon. Good morning. Thanks for the question. I hope you're doing well.", "So in Latin America, just to recap here, we're guiding toward just above 6% organic tenant billings growth. And that's really driven by solid organic new bids. So we've got about 3.3% or so contributing from an organic new builds perspective.  And we're also seeing outsized escalators. So we've got escalators in above 8% in that market.", "So nice strong escalators there. And that really is sort of an inflation hedge that we have in the Latin American markets. But we are seeing temporary elevated churn. So we've got about 5% churn coming out of Latin America.", "The churn that's in the outlook for 2022 is primarily Telefonica up in Mexico and then Nextel down in Brazil. Oi doesn't really play into the equation quite yet. We do have a long-term contract with Oi. So that will play out over the next seven years or so.", "And we'll see where that goes. I don't want to get ahead of anything that may happen in the market there from a regulatory perspective. But it's not really a main component in our 2022 numbers, and we've got protection there out over seven years. And the Oi revenue is in and around 1% of our total revenue." ] }, { "name": "Simon Flannery", "speech": [ "All right. Thank you, Rod." ] }, { "name": "Operator", "speech": [ "And our next question is from Michael Rollins with Citi. Please go ahead." ] }, { "name": "Michael Rollins", "speech": [ "Thanks and good morning. Curious if you can unpack a little bit more of the domestic levels. And with AT&T talking about starting to deploy in the second half for mid-band, DISH deploying their network, and Verizon continuing to build out the C-band, T-Mobile expanding and integrating, can you give us a sense of sort of what activity levels or activity assumptions that are in the number? And if there's some opportunity, depending on how these expertise work their way through the system to influence performance this year and heading into next year?" ] }, { "name": "Rod Smith", "speech": [ "Yeah. Good morning, Michael. Nice to have you on the call. Thanks for joining us, and thanks for the question.", "So the U.S. market in terms of organic growth or organic new builds is really quite strong. We continue to see all of the major carriers being very active. And the place that that shows up initially, maybe as an early indicator here, is within our services business.", "So once again, we're guiding toward services revenue above $220 million, so still well above kind of historical levels, a little bit below where we were in 2021, but still a nice solid level of services activity. And the margins there are still coming in at 55% right where they normally do. And then when you think about the U.S. organic growth here, we're guiding toward 1% or so.", "And I'll give you the piece parts there. So organic new business is slightly up from where it was from the prior year in terms of a percentage basis. So that's about 3.3%. Escalators are holding very firm, slightly ahead of where they were in 2021.", "They're coming in at 3.1%. And then we have cancellations coming in at about five -- a little over 5%, and that is primarily driven -- at least the outsized churn there is primarily driven through the Sprint churn that we've all talked about. In terms of going forward, you do know that we've got MLAs with most of our carriers, where we've got kind of lock-in revenue as well as revenue growth. So three-quarters of the ramp is in there.", "Even in our long-term guide, we do have about two-thirds or so of not only the underlying revenue in the guide, but the actual growth locked up in MLA. So nice really clear visibility in terms of the growth that we see going out. We do have one customer that's on an à la carte basis. So as they begin to deploy, we do expect that to ramp toward the back half of the year.", "And we also have the agreement with DISH, which we've talked about in the past, that is beginning to produce revenue for us this year. That will escalate through the year, so we'll see a ramp-up during the year from that. And then it will continue to ramp over time. And that's what really gives us the confidence to put out the long-term growth rates that Tom talked about and getting back up into that mid-single-digit growth rate sustainably in the U.S.", "And then the final point that I would make is the colocation and amendment contributions to organic new business. For the year, we're guiding around $150 million, $150 million. And that's up from the level in 2021, which is close to about $130 million or so. And that represents a solid 15% year-on-year growth rate.", "So we're quite pleased with what we see in the U.S. from a gross growth. And the churn that we're seeing is temporary will subside, and then we think growth will return into that mid-single digits in the U.S. over the long term." ] }, { "name": "Michael Rollins", "speech": [ "And just a follow-up briefly. So for the national carriers that you have MLAs with, is mid-band 5G covered under those MLAs? Or might that be something that has to get figured out in the future?" ] }, { "name": "Rod Smith", "speech": [ "No, I think when you think about the MLAs that we have, it's based on use rights and a use-right fee that's all incorporated. So to the extent that their activity level fits within the use right bucket, then it's covered. To the extent that their activity level goes beyond what was contemplated and what was granted to them in the use right, then that would be upside. And certainly, anyone that's on an à la carte basis, it's a pay as you go.", "And there's certainly upside there, depending on how quickly they deploy, how best they deploy. And we do see in the U.S. that things are continuing to heat up. We're expecting north of $30 billion once again in terms of carrier capex, and that bodes very well for our short-term as well as long-term tenant leases here.", "So we -- and we're excited about 5G in the U.S. and all the C-band spectrum that's been auctioned off and that is out there that will eventually be deployed, and we're seeing lots of activity as well." ] }, { "name": "Michael Rollins", "speech": [ "Thanks." ] }, { "name": "Rod Smith", "speech": [ "Thanks, Michael." ] }, { "name": "Operator", "speech": [ "And our next question is from Rick Prentiss with Raymond James. Please go ahead." ] }, { "name": "Rick Prentiss", "speech": [ "Good morning, everyone." ] }, { "name": "Rod Smith", "speech": [ "Good morning, Rick." ] }, { "name": "Rick Prentiss", "speech": [ "Glad you guys are doing well. I hope you continue to stay well. A couple of questions. First, I appreciate the color on what your assumption is as far as the equity component, about half of the $10 billion total, about $5 billion equity rates common as an assumption.", "How should we think about the gating factors of what would -- what are you waiting for to go to market? Obviously, there's some overhang on the stock as we wait for the offering. How should we think about what are the gating factors on go-to-market? And update us a little bit on what might be going on with private capital in that aspect." ] }, { "name": "Tom Bartlett", "speech": [ "Sure, Rick. So the gating item is really sorting through the kind of the different options that we have ahead of us. There may be an element of common equity that we deploy here. And for modeling purposes, for outlook purposes, we are assuming that it's half of the $10 billion.", "Certainly, when you think about that equity offering, we did go through a tender offer. That tender offer resulted in us closing right at the end of the year, and then we deal with open windows and closed windows and when, as a company, we can go out to market. And that kind of pushed us into January, which was beyond Q4. And then looking at the way Q4 rolled out, we couldn't go out with equity at that point.", "So there's a lot of complicating factors kind of in there. But certainly, we have windows that open up here shortly and then again in Q2. But with that said, we're focused on the long-term value creation from CoreSite, which is a high-quality, very interconnected network and cloud-centric set of assets that we think, over the long term, is going to drive a lot of value. So we want to make sure that we put the right financing together.", "And if that takes a little bit more time to get the right pieces put together, then that's what we'll do. And with that said, the common equity that we have in the assumption is an assumption. We're also out looking at private capital partnerships. We're also looking at mandatory convertible preferred instruments.", "And we'll make the best decisions based on market conditions, terms and conditions of any potential private capital, and we'll make those decisions. Again, as I said in the prepared remarks, always with the best interest of the shareholders in mind and minimizing dilution is always important to us. So we take that very seriously. And then also making sure whatever we do stay solidly within the framework of investment-grade credit.", "That's another thing that's very important to us." ] }, { "name": "Rick Prentiss", "speech": [ "A lot of the case. I want to follow up on one of Simon's questions also. As Tom, you mentioned there's a lot of portfolios discussed out there. What about other asset classes, fiber data centers, besides towers in Europe or other venues, how interested are you in fibers or data centers outside the U.S.? And we get the question a lot with CoreSite, do you need to spend a lot on kind of replicating in Europe, the data center concept of what you've gotten with CoreSite?" ] }, { "name": "Tom Bartlett", "speech": [ "Yeah. No. Thanks, Rick. I mean outside of the United States, our focuses are clearly a tower portfolio.", "We do have some initiatives going on with regards to fiber down in Latin America. We actually do have some smaller data centers, candidly down in Latin America as well on a very small scale. The reason for, clearly the CoreSite acquisition was really in the United States, that's where we think that edge grid is really going to be developed first. And we'll look at that as clearly the market to develop that strategy and then evaluate options to be able to expand that, to the extent that it makes sense outside of the United States.", "So the platforms that we're really seeking outside are largely driven by the tower. We have a lot of tower and fuel initiatives going on, particularly in Africa as well as in India. So we consider that a platform extension, if you will, Rick, where we're really trying to reduce the overall carbon footprint, improve the quality of the site, reduce our overall diesel consumption similar to -- really consistent with what we're trying to do with our science-based targets, but offering even more value to our customers through our more efficient power and fuel initiatives. But we will really develop the kind of that data center model, the interconnected model with our tower portfolio within the United States.", "And so outside of the United States, it clearly is a tower focus." ] }, { "name": "Rick Prentiss", "speech": [ "Great. That helps. Appreciate you guys. Stay well." ] }, { "name": "Rod Smith", "speech": [ "Thanks, Rick." ] }, { "name": "Operator", "speech": [ "And our next question is from David Barden with Bank of America. Please go ahead." ] }, { "name": "David Barden", "speech": [ "Hey, guys. Thanks for taking the questions. Maybe just if I could do a couple of quick ones. I guess, first, Tom, could you maybe talk us through, at the end of the day, who the new leadership team is for the CoreSite asset? And then, Rod, just to follow up on Rick's question.", "Given the valuation, you guys paid was very strategic and a kind of a very competitive process and the markets pulled back, is it plausible to believe that there is private capital out there that would want to pay what you paid for a stake in that business? And then I guess my last follow-up, if I could, Rod, was you mentioned that you're going to be getting some termination fees coming from Latin America. Could you kind of put some numbers around that for 2022?" ] }, { "name": "Tom Bartlett", "speech": [ "Yes, Dave. I'll just take the first one. It's a quick one. I mean Steve Andrin, who is President of our U.S.", "business, is responsible for the CoreSite investment in the business. Juan Font, who was within the business, who's a terrific leader, is actually responsible for running the CoreSite business, working directly for Steve. Rod?" ] }, { "name": "Rod Smith", "speech": [ "Yeah. And David, I'll tackle the next two. So on the private capital side, yes, I think it's absolutely plausible to think that there are investors out there that see the long-term value and value creation within the CoreSite assets. We do believe that the CoreSite set of assets is among and of the highest quality portfolio of highly interconnected, cloud-centric, network-centric data center-type assets our in the U.S., and they're strategically placed across the country from West Coast to Central, over to the East Coast as well.", "So the locations are perfect in terms of being able to tie into lots of our towers across the globe. So as we look at this and we look through kind of short-term volatility in the equity markets as well as even with interest rates and things like that, I think it's very plausible. And we're very encouraged by the fact that there are a number of investors out there that see the long-term value and value creation here and believe in the transition of some of these data center assets into more distributed cloud on-ramps, more distributed compute power and tying that up with tower companies and the traditional tower company customers. So that's a long way of saying, yes, absolutely, I think people would be interested in this.", "But with that said, our options are all kind of open and on the board, and we'll be evaluating that over the coming period of time. And then in terms of the termination fees, it's in the range of $40 million that you'll see kind of come through the numbers in 2022, really kind of flat with what we experienced in 2021 as well as in terms of termination fees." ] }, { "name": "David Barden", "speech": [ "All right. Awesome. Thanks, guys. Appreciate it." ] }, { "name": "Rod Smith", "speech": [ "Thanks, David." ] }, { "name": "Operator", "speech": [ "And our next question is from Matt Niknam from Deutsche Bank. Please go ahead." ] }, { "name": "Matt Niknam", "speech": [ "Hey, guys. Thanks for taking the questions.  Just two, if I could. First, just to go back to data centers. We're about two months in post-deal close.", "I'm just wondering if you can share maybe the initial playbook for those assets, the CoreSite assets, and more specifically, plans on potentially expanding the footprint beyond either the existing markets domestically or internationally. And then secondly, just to pivot to India because that's the one region I believe has not come up yet in Q&A. Can you just talk about what's driving the improvement in the outlook there in 2022? And then maybe more broadly, give us any updates you're seeing in terms of the overall demand backdrop there for the carrier customers. Thanks." ] }, { "name": "Tom Bartlett", "speech": [ "Matt, let me take the first one, and Rod can take the second one on India. Yes, we are. We're about two months into the transaction. CoreSite had a strong finish to 2021, and we expect even a stronger set of growth metrics for in 2022.", "I mean there, we're moving through the integration process, as you would expect. Rod talked about the financing element of it. And we have teams looking at all of the opportunities to create synergies between the tower business as well as the data center business. But we're going to enjoy all the underlying growth that's coming from the business itself.", "We're integrating the data center companies that we had, albeit on a small scale, clearly compared to CoreSite into the CoreSite business. So there are a lot of activities going on from an integration perspective. On the commercial side, there are a significant amount of customer conversations, discussions, proof of concepts that are being developed and worked through on a number of different fronts with a number of different types of customers, the cloud service providers, the MNOs. And so there are continued initiatives going on to look at the opportunities to be able to bring our vision to the market.", "And it's not going to happen overnight. But in the meantime, we have the ability to really enjoy the underlying growth and the positioning that CoreSite has. And they have some development that's going on within their own portfolio this year in terms of building out some of the data centers that they've got. But as I said, the underlying growth trends are greater than they were in 2021.", "So we're really excited about the leadership team that we've got in place and the opportunities that we're going to see come to fruition over the next couple of years." ] }, { "name": "Rod Smith", "speech": [ "And Matt, in terms of your question around India, I'll hit a couple of highlights here. So in India, I think you're probably aware that the backdrop of the telecom environment is improving quite a bit and has done so in the last several -- certainly the last several quarters, the government has really stepped up and shown support for the wireless segment and the telecom segment. In addition, the carriers themselves have increased the tariff. So there, they've got healthier businesses as they go forward.", "And specifically to [Inaudible], you've seen probably just recently even their intentions to monetize part of their stake in the India's portfolio to improve liquidity. They also chose to have some of the interest on their spectrum does and their AR fees going back to transitioning that from a liability to the government and swapping it for some equity. So they've greatly improved kind of their balance sheet. And now they have a much longer runway, really, the whole sector has a much longer runway to kind of sort through the environment there.", "Because of those things, we are seeing churn subside in the marketplace, and we've seen that over the last several years. So in India, specifically, we're guiding to 2% to 3% positive organic tenant billings growth. That comes with 5% gross organic growth, a 2% escalator, which is contractual throughout all of our leases there, and about 4.5% churn. That churn rate is down from over 10% in 2021.", "So that's where you see sort of the biggest improvement there. And the other thing I would say is we think the India marketplace is going to be very constructive here over the long term. Certainly, there's a large population. The networks are in early stage of development.", "They need a lot more infrastructure, and the Indian subscribers really do consume lots of data in there. So we think that the market is still trying to absorb some of these positive changes that they've seen. And once that happens and all the carriers kind of get used to the new environment there, we should see churn continue to decline over time as well as gross new business increase over time. And those are the things that kind of get us back to that upper single-digit growth rate potentially.", "But as of now, we're fairly cautious around India in terms of our outlook and projections. And even in the long-term guide that Tom talked about earlier, that 10% AFFO per share growth, we have fairly modest improvements built in there for India, not getting back up to that full upper single-digit growth rate. So there's upside from that perspective if India continues to improve over the coming quarters and years." ] }, { "name": "Matt Niknam", "speech": [ "Very helpful. Thank you, both." ] }, { "name": "Rod Smith", "speech": [ "You're welcome." ] }, { "name": "Operator", "speech": [ "And our next question is from Brandon Nispel with KeyBanc. Please go ahead." ] }, { "name": "Brandon Nispel", "speech": [ "Awesome. Thank you for taking the question. You guys gave the $150 million in colo amendment guidance for the U.S. business in '22.", "It's clearly up year over year, but still well below 2018 and 2019. I was hoping you could help us understand the primary differences between what was happening in 2018 and 2019 versus your 2022 guidance and maybe where we're going. Then in relation to that $150 million number specifically, could you help us understand what percentage of that is fully contracted versus your expectations for billings coming in more a la carte? Thanks." ] }, { "name": "Rod Smith", "speech": [ "Sure, Brandon. So in terms of looking backwards to 2018, I don't want to go through too much detail between the two. But certainly, back in 2018, there was an explosion of activity in the U.S. from all the carriers.", "That was a time when we had all the carriers, including Sprint, investing heavily and contributing to our revenues in a pretty heavy way. So Sprint was a big contributor back then. And it was at a time when AT&T was also aggressively building out the FirstNet network. So those two things were kind of unique around 2018, and those aren't repeating.", "So we're very happy with where we are in terms of the colocation amendment contributions in 2022. We do see that accelerating into the back half of 2022, and we expect that acceleration to continue going out. And again, a lot of that growth, even beyond '22, is contracted in the holistic MLAs that we have. So we have visibility to that growth.", "So we do think we're entering a multiyear cycle of acceleration when it comes to that organic new biz, the colocation and amendment piece of it. And what was the other question that you had? The $150 million --" ] }, { "name": "Tom Bartlett", "speech": [ "Rod, I would just --" ] }, { "name": "Rod Smith", "speech": [ "Go ahead, Tom." ] }, { "name": "Tom Bartlett", "speech": [ "Yeah. I would just add on that one particular piece. When you think about kind of '17, '18, '19, it was kind of at the latter end of kind of the heavy 4G investments. And you would typically see that with new technologies going in place.", "So my sense is that that's what we would start to see when we think about 5G. We're just in the early stages. The carriers are starting to clear and roll out C-band. I mean, we'll start to see it even the end of this year when we start to get into ramp up on the organic growth rates.", "But as 5G takes hold and continues to develop and identifies, we would expect that similar type of growth ramp up clearly with 5G. And yes, as Rod said, Sprint was very active back at that point in time, obviously, not around any longer. But with DISH now in its place, hopefully, they would be able to be that kind of fourth agent there and really driving that kind of growth." ] }, { "name": "Rod Smith", "speech": [ "And Brandon, I think your other question was around the percentage of the $150 million that was contracted. It's in around three-quarters." ] }, { "name": "Brandon Nispel", "speech": [ "Ok. Thank you." ] }, { "name": "Operator", "speech": [ "And next, we have a question from Jonathan Atkin with RBC. Please go ahead." ] }, { "name": "Jonathan Atkin", "speech": [ "Thanks very much. So in the slide deck, you talked about Telxius driving a lot of growth in international. I wondered if you could give us a little bit more color on contributions and which particular markets that came from? And then may be related to the very first question around M&A, but you talked a lot about kind of 5G and edge. And I wondered how does that affect your prospective capex profile across which sorts of assets? You also have fiber, which hasn't come up a lot on this call in LatAm, for instance.", "So across assets and regions, how does 5G and Edge kind of affect your incremental capex going forward as well as affecting the types of assets that you might look at a little bit more seriously going forward compared to in the past? Thanks." ] }, { "name": "Tom Bartlett", "speech": [ "Sure. No, Jonathan, I mean let me start, and Rod can add-in. But from a European perspective, clearly, much of the growth is coming in Germany, where they've been very aggressive in terms of rolling out 5G as well as in Spain. So I mean those are our two critical markets there.", "But Germany is really going to be, I think, really driving a lot of it, and we're seeing a lot of activity in Spain as well. From a capex perspective, maybe you can take a look at even our projections for 2022. I mean, it's largely driven by our tower portfolio. There are certain development activities within the data center assets in the United States building out, but it pales in comparison to what we're expecting on the tower capex side.", "We're looking at a major generator rollout for a large customer in the United States, which is a piece of it. And we're also looking to build another 6,000 to 7,000 sites. So if you look at over the last several years, we've built probably cumulatively about 20,000 sites, and we have significant expectations for continuing that kind of a trend, and '22 is no different. And so as 4G and as 5G is developed around the world, we continue to see the need for new build-to-suits, and that is the best use of our capital.", "With regards to fiber and some of the other assets, John, I'd tell you and I'd say, it's de minimis. I mean it's very, very small. And in many cases, they were just science projects, where we're still trying to see if there's really an opportunity in those markets. But -- and I would see that trend candidly for the next several years, that the direction for capital is going to be driven to the tower base of assets, again, largely driven to the development side of building out new sites and very little spend on some of the fiber portfolios or fiber assets outside of the United States.", "And John --" ] }, { "name": "Jonathan Atkin", "speech": [ "Go ahead. Yes." ] }, { "name": "Rod Smith", "speech": [ "Sorry, Jonathan, I'll hit the question on Europe and Telxius. So as you saw from the prepared remarks and in the slides, we are looking at about 9% organic tenant billings growth in Europe. So a real strong upper single-digit number. That compares to 2021, which was around 5%.", "A couple of the drivers there. We are seeing solid organic new biz up around 6% or so for the market. The escalators are up a bit, so we're up at around 4.5%. Escalators, the churn is down from 2.4 in 2021 down to 1.4 in 2022.", "A lot of that is directly driven by the Telxius assets, which are very low to no-churn assets the way the contracts are written and kind of from a structural standpoint. So that reduction in churn, that 100 basis points, you can really subscribe back to Telxius. And that gives you the 9% organic growth rate. I would say, we're seeing our best growth here in Germany.", "But even if you pull away the Telxius assets that are adding to the overall growth here, we're still seeing north of 6% or so of growth in the legacy business kind of across Europe. A couple of things that I would point out. In terms of the 9%, we do expect that to moderate throughout the year and be lower in the back half of the year after we kind of lap having Telxius on for a full year. So we're looking at about 7% organic growth in the back half of 2021.", "And then beyond that, we are looking at Europe not being at 9%, but being kind of in that mid-single digits and upper single digits. So in Germany, we're still looking at 6% to 7% organic tenant billings growth in that market. And across all of Europe, we're looking at mid-single digits, let's call it, 5% to 6% organic growth in Europe even beyond 2022." ] }, { "name": "Jonathan Atkin", "speech": [ "Thank you for that color. And then just in terms of potential private capital partnerships, any kind of a refresh that you could give us on just the criteria that you would have from, whether it's a governance standpoint or strategic, what they bring strategically to the table or the financial criteria that you employ when you evaluate potential private capital partners?" ] }, { "name": "Rod Smith", "speech": [ "Yeah, Jonathan. I'll keep it at a fairly high level here. And I don't want to overemphasize the private capital or any of these different elements because we're still working through the process. And when we do land on our optimal financial plan here, we'll let you know.", "But in terms of our criteria, we certainly look well beyond just capital. So as we did with Telxius, we want to know that we've got world-class, large investors with us that have the same or similar mindset around the specific assets, the region, and the future of those assets. Because additional capital and really having a partner that wants to grow in terms of this asset, it's going to be around exploiting this asset in terms of that cloud distribution, that heavy interconnection, and then eventually moving to the edge or the metro edge. So we certainly want someone at the table with us that has a similar vision there, that is excited about that and again, doesn't get too wrapped up in a short-term equity volatility, but see a long-term investment.", "And certainly, the investors that we would talk to, just like in the Telxius process, are long-term investors. They're 15- to 30-year investors. They're not five years and out. So that's what we want.", "And then we also really like investors that are very experienced and investing. We like having people at the table with us talking about ways to grow, how to grow. And we find a real value to that. So I would just maybe emphasize the fact that our partnership in Europe with CDPQ, Alliant, and PGGM has been very good for us, not just for the capital, but for a lot of other reasons.", "So we couldn't be more pleased with the way that partnership has unfolded. And if we were to do something in the U.S., it would be -- we would be equally as optimistic around the good relationship, the shared vision and those sorts of things. And of course, governance in terms and conditions are always important to us in value. It's something we take seriously.", "So we'll certainly be working through that, but that will be a criteria that will be on the table." ] }, { "name": "Jonathan Atkin", "speech": [ "Thank you." ] }, { "name": "Rod Smith", "speech": [ "You're welcome." ] }, { "name": "Operator", "speech": [ "And ladies and gentlemen, our final question will come from Batya Levi with UBS. Please go ahead." ] }, { "name": "Batya Levi", "speech": [ "Great. Thank you. Two quick follow-ups. Can you provide the geographic mix of the 6,500 new builds this year? And just the -- on the U.S., $150 million of new colo amendment.", "What's the colo versus amendment mix? And how should we think about the pacing through the year?" ] }, { "name": "Rod Smith", "speech": [ "Yeah, Batya. So I'll hit the first one here for you. So we're looking at around, for 2022, about 6,500 new builds. As in the past, it's heavily concentrated in the India region.", "So north of 4,000 roughly, and these will be rough numbers in India. The next largest region is going to be in Africa, which is going to be in the range of 1,900 or so, then we drop. And Latin America and Europe are pretty equal at around 500 sites each. And I'll just remind you that in Europe, we're building a lot of towers there through the Telxius transaction, came with a 10-year build-to-suit commitment of 3,000 sites over that time period.", "So we're actively building those assets. We're also building assets for Orange across Europe, which the way they show up in our numbers, it kind of comes through as more in terms of an acquisition because they build them and kind of flipping to us, but it really is sort of a build-to-suit program as well. So we couldn't be more pleased with the way that our build-to-suit program is working and unfolding. We continue to see double-digit NOI yields kind of across the mix here of all these regions, which is really good.", "So we are solidly kind of on track to hit that 40,000 to 50,000 new builds that Tom had talked about in the past. And then in terms of your other question, when it comes to the split between amendments and colos, there's not a lot of detail that I'll get into from that perspective. A lot of our revenue is under the MLA agreements, which again is more used rights than fixed fees and not so much ascribed to a colo versant amendment we're still seeing heavy amendments in the industry by and large. Certainly, there's 1 carrier that might be a little bit more weighted toward co-location.", "But we're still seeing in terms of the activity level, heavily weighted toward close in meets, but I wouldn't want to try to split the $150 million because that's not the way that our contracts work in terms of the revenue." ] }, { "name": "Batya Levi", "speech": [ "All right. Thank you." ] }, { "name": "Rod Smith", "speech": [ "You're welcome." ] }, { "name": "Operator", "speech": [ "And speakers, I'll turn the conference back to you for any closing comments." ] }, { "name": "Tom Bartlett", "speech": [ "Thank you very much, everyone, for joining us this morning. I know there's a lot of news around the world. I hope you all stay safe and well. And again, just appreciate you all being here this morning.", "To the extent you have any further follow-ups, please give us a call. We are clearly by the phones waiting to talk. So thank you all." ] }, { "name": "Rod Smith", "speech": [ "Thanks, everyone." ] }, { "name": "Operator", "speech": [ "[Operator signoff]" ] } ]
AMT
2020-10-29
[ { "description": "Vice President of Investor Relations", "name": "Igor Khislavsky", "position": "Executive" }, { "description": "President and Chief Executive Officer", "name": "Tom Bartlett", "position": "Executive" }, { "description": "Executive Vice President, Chief Financial Officer, and Treasurer", "name": "Rod Smith", "position": "Executive" }, { "description": "Citi -- Analyst", "name": "Michael Rollins", "position": "Analyst" }, { "description": "Raymond James -- Analyst", "name": "Ric Prentiss", "position": "Analyst" }, { "description": "Deutsche Bank -- Analyst", "name": "Matt Niknam", "position": "Analyst" }, { "description": "RBC Capital Markets -- Analyst", "name": "Jon Atkin", "position": "Analyst" }, { "description": "Barclays -- Analyst", "name": "Tim Long", "position": "Analyst" }, { "description": "Bank of America Merrill Lynch -- Analyst", "name": "David Barden", "position": "Analyst" }, { "description": "Credit Suisse -- Analyst", "name": "Sami Badri", "position": "Analyst" }, { "description": "UBS -- Analyst", "name": "Batya Levi", "position": "Analyst" } ]
[ { "name": "Operator", "speech": [ "Ladies and gentlemen thank you for standing by. And welcome to the American Tower Corporation third-quarter 2020 earnings conference call. [Operator instructions]. I would not like to turn the conference over to your host Igor Khislavsky, vice president of investor relations.", "Please, go ahead sir." ] }, { "name": "Igor Khislavsky", "speech": [ "Good morning, and thank you for joining American Tower's third-quarter 2020 earnings conference call. We've posted a presentation, which we will refer to throughout our prepared remarks, under the investor relations tab of our website, www.americantower.com. Before the rest of my comments, I'll note that due to COVID-19, all of us on the call this morning is again dialing in remotely from different locations. So to the extent, there are any minor technical difficulties, we would ask that you bear with us.", "Our agenda for this morning will be as follows: first, I'll quickly summarize our financial results for the third quarter. Next, Tom Bartlett, our president, and CEO will provide an update on our platform expansion initiatives, and how we are positioned to benefit from continued wireless technology evolution. And finally, Rod Smith, our executive vice president, CFO, and treasurer, will discuss our third-quarter results and updated 2020 outlook. After these comments, we will take your questions. I'll remind you that this call will contain forward-looking statements that involve a number of risks and uncertainties.", "Examples of these statements include our expectations regarding future growth, including our 2020 outlook, capital allocation, and future operating performance; our expectations regarding the impacts of COVID-19; our expectations regarding the impacts of the AGR decision in India; and any other statements regarding matters that are not historical facts. You should be aware that certain factors may affect us in the future and could cause actual results to differ materially from those expressed in these forward-looking statements. Such factors include the risk factors set forth in this morning's earnings press release, those set forth in our Form 10-K for the year ended December 31, 2019, as updated in our Form 10-Q for the three months and on March 31, 2020, and in other filings we make with the SEC. We urge you to consider these factors and remind you that we undertake no obligation to update the information contained in this call to reflect subsequent events or circumstances. Now, please turn to Slide 4 of our presentation, which highlights our financial results for the third quarter.", "During the quarter, our property revenue increased by 3.4% to nearly $2.0 billion. Our adjusted EBITDA grew by 5.6% to approximately $1.3 billion. And our consolidated AFFO and consolidated AFFO per share increased by 14.7%, and 14.5%, respectively, to $1.2 billion and $2.29. On an FX neutral basis growth rates for property revenue, adjusted EBITDA, a consolidated AFFO per share would have been 8.1%, 9.7%, and 19.5%, respectively.", "Finally, net income attributable to American Tower Corporation common stockholders decreased by roughly 7% to $464 million, or $1.04 per diluted common share. The decrease included the impacts of an FX loss of about $49 million in the quarter and a loss on retirement of long-term obligations of roughly $37 million. And with that, I'll turn the call over to Tom." ] }, { "name": "Tom Bartlett", "speech": [ "Thanks, Igor. Good morning everyone. Consistent with our past practice for our third-quarter reports, my remarks today will center largely around the evolution of mobile technology, and how we are positioning American Tower to benefit, specifically, how we aim to extend our core neutral host exclusive real estate portfolio to a digital multi-product, a multi-service platform offering incremental value to existing and new customers. I'll also go into a bit more depth around two specific platform expansion initiatives, one, in the United States, and one outside of our core U.S.", "market. But before I elaborate on that topic, I wanted to briefly cover a few key points in the comprehensive master lease agreement or MLA that we signed with T-Mobile in mid-September. This agreement which lasts through early 2035 augments our strategic relationship with T-Mobile, positions us to capture a significant new business with them over an extended period of time, and preserves the potential for incremental upside for us particularly later on in the contract term. The MLA maintains the typical annual base escalator that we will recognize on the entire portfolio of included leases over the nearly 15-year term.", "These escalators are consistent with our historical three to three and a half percent average rate included in our other U.S. based customer lease agreements. In addition to the base escalator, as is typical with our other comprehensive MLA agreements, there is an annual use fee or bonus escalator component. This additional annual use fee calculated as a percentage of the prior-year lease run rate is in force over the entire term of the agreement and allows T-Mobile to add equipment on certain sites up to pre-agreed loading levels.", "As a result of this user fee, we lock-in contractually guaranteed revenue growth over and above the base escalator, while T-Mobile will be able to more efficiently deploy their network., a win for both parties. In total, between their contracted backlog, we already had in place before the deal, the approximately, $17 billion in incremental contractual backlog from the agreement, and the 10% or so of our T-Mobile revenues that sit outside of the MLA, we expect to generate at least $23 billion in total revenue from T-Mobile through the contract term and bring our total consolidated contractually committed revenue to more than $58 billion. As of the end of Q3, this backlog incorporates the impact of cancellations included within the agreement, which in total is expected to represent around 4% of our consolidated property revenue at the time they occur. Included in these contractual terminations are principally the legacy Sprint revenues that we extended for 10 years back in 2011.", "As you may recall, through that contract, we were able to delay the significant Ivan churn than our peers experienced for more than five years. Having realized the NPD benefits from that, we will now see some of that deferred to commissioning flow through our run rate over a multi-year period. Once that is complete, we would expect to incur minimal levels of cancellations from T-Mobile over the remaining life of this agreement. Taken as a whole, we believe that our expanded relationship with T-Mobile will be important, as we seek to generate double-digit annual growth in the combination of our consolidated AFFO per share and dividend yield over the next decade.", "These types of comprehensive agreements have been incredibly valuable and strategic for us, as we are better able to service our customers and consequently become more strategic to them as they densify their networks and deploy new spectrum. As a result, our cash flow generation becomes even more predictable, providing us with a solid foundation for continued investment in our business, and generating further shareholder value. With that said, we now turn our attention back to discussing how we are positioning American Tower to further benefit from the evolution of mobile technology. Our core global macro tower business has been and will continue to be the foundation of our success, and the primary driver of future cash flows.", "In fact, our conviction around macro towers being the primary infrastructure for 5G deployments has only increased. As more and more mid-band spectrum is deployed to support 5G, and his network usage continues to grow at upwards of 30% per year and even faster internationally, we believe that significant additional macro tower oriented network densification is inevitable. Recall that today, we believe our consolidated customer base is spending upwards of $60 billion per year on building out their networks. Going forward, there will be the need for even more equipment on more of our sites, as carriers deploy massive MIMO, and utilize DSS, or and then, any other tools they have at their disposal to optimize their network performance and efficiency.", "In addition, as 5G and the surrounding ecosystem develops in the US, and is network technology continues to advance throughout our international footprint. We expect to have compelling opportunities to extend our core value proposition, into new related creative product and service offerings to expand our total addressable market. One of the key trends driving these opportunities is the continued convergence of wireless and wireline networks. We believe that this convergence along with increasing digitalization, network virtualization, and the agility of cloud-native software-defined services will lead to increasing demand for distributed, interconnected global edge compute processing.", "As a result, the first mile of cloud on-ramps at this edge should become a more critical component of our customer's network architecture, and notably, this age is exactly where our exclusive communications, real estate assets are located. To capitalize on the opportunities this network evolution is likely to present, we are focused on developing communications infrastructure business models that augment the value of our existing assets, expand our revenue base beyond traditional tenants, and enhance our leadership role in the wireless ecosystem. At the highest level, our goal is to selectively extend our digital infrastructure core capabilities to further encapsulate neutral hosted wireless connectivity, transport, and compute functions as part of our comprehensive ATC platform. We can then offer tenants an integrated suite of complementary solutions to fit well within their ever more complex network designs.", "Within this framework, we intend to remain disciplined in terms of how we deploy capital and believe ventures with select partners could be the most efficient way to develop this platform extension. We expect our investments to focus on business models with several key elements: first, contracted long term revenue commitments from Tier 1 customers.; Second, increasing ROIC with multi-tenancy, and multi-service offerings requiring modest ongoing maintenance capex; third, operating leverage characteristics similar to towers, we focus on our fixed costs; and for synergies and adjacencies with existing ATC assets and skillsets. So that General backdrop in mind, let me dive deeper into a few specific areas where we are currently focusing our efforts with one example in the United States, and one offshore. In the United States, as 5G deployments accelerate, we expect the proliferation of lower latency applications, and incremental cloud-based customer demand for application level and network compute functions at the edge.", "There are two distinct solutions within this emerging ecosystem that we are paying attention to. Distributed compute, and mobile edge compute. We believe that these two offerings will develop at different timelines and will allow us to provide differentiated valued propositions for our customers. On a distributed computing side, enterprise workloads continue to move to the public cloud.", "And a growing near-term market segment is the use of on or off-prem private cloud computing is a hybrid solution. Small and medium-sized businesses are often willing to move legacy workloads to more responsive, proximate, cost-effective data centers, and we believe that many data centers at some of our macro towers can represent optimal locations for these installations. We have started to deploy micro data center facilities at select tower sites, and have seen early indications of solid demand in collaboration with partners like Flexential. In the near-term, this solution enables us to develop operational excellence around the technology and iron out the kinks on a small scale.", "With that said, we don't necessarily think this use case alone will be the long-term driver of significant value for us. We expect true 5G mobile edge compute solutions to represent a much larger long-term opportunity. The foundational concept of our mobile edge strategy is the expectation that localized neutral host, multi operator, multi-cloud micro data centers can be the most cost and technology efficient means to which latency can be reduced to the edge. And that these facilities can be optimally located at select macro tower sites that already have power, fiber, and multiple wireless tenants, rather than each cloud provider and carrier forging ahead with their own connectivity arrangements, our vision is to serve as the neutral host for these low latency relationships, which would drive cost efficiency, improve enter MNO application performance, and accelerate deployment of these facilities throughout the network.", "We expect this to be a multi-year rearchitecture process, and we are in the early stages of leveraging the knowledge that we've developed to Colo Atl in the small scale deployments at the tower sites I mentioned earlier, to determine the specifics of our go-forward strategy. They also mentioned these offerings in all likelihood will involve partnerships and joint ventures, as we continue to explore where in the value chain we can drive the most incremental upside. At this point, we think a scaled solution is still at least a few years away, but there is tangible progress being made, and we are excited about the possibilities. Underlying this excitement of the potential future 5G related use cases that we expect to drive rapid uptake of mobile edge compute functions.", "Immersive AR and VR gaming applications are obvious examples. Autonomous Vehicle connectivity is another, including our involvement in C-V2X with partners like Qualcomm, and Audi. Next-generation drone delivery networks, real-time sensor-based data collection and analytics, and a host of other enterprise-oriented solutions are also on the way and will require significant levels of compute power on the network edge. Our objective today is to position American Tower to be ready to act decisively when the time is right to be a meaningful player in the space.", "Meanwhile on the international side. Most of our markets are at least five years behind the US, in terms of deployed network technology. As a result, the edge compute opportunity and other potential 5G enabled business models are further down the road. The strategic advantage that we expect to have in these areas similar to what we did with our core tower business is the ability to prove out these models in the United States first, and then export them internationally when the time is right.", "Over time, we believe that our global interconnected reach will be critical in the context of an ever more global, multinational customer base, and their need to support their customer's global needs. In the meantime, one of the main focus areas of our platform extension efforts today throughout Africa and India especially, is on developing power as a service, to drive operational efficiency and cost savings, while materially reducing the carbon footprint of the wireless industry. Throughout much of Africa, and India, the electric grid is inherently unreliable. It is part of our service offerings, we are responsible for providing onsite power for our tenants.", "In the past, this was almost exclusively delivered through diesel generators with significant daily run times and diesel usage at considerable expense. More recently, as solar and lithium-ion battery technologies improve are becoming more cost-effective, we have accelerated our adoption of these technologies to make power provision in our sites more efficient, and environmentally friendly. In fact, at the end of 2019, we had 12.3 megawatts of solar capacity already online with more than 4,500 sites utilizing lithium-ion batteries. To date, we've invested nearly $135 million on fuel and power optimization solutions, and expect to continue to make these investments as we improve site reliability levels for our tenants.", "As we disclosed in our latest sustainability report, our long term target is to reduce our scope on fossil fuel consumption in diesel related greenhouse gas emissions in Africa, and India by more than 60%, or 140 million liters of diesel annually by 2027. Already, we have made significant progress toward that objective having reduced annual diesel consumption by 65 million liters since 2017, after normalizing for site count growth. To give you a sense of what that translates to, it's essentially the equivalent of taking more than 35,000 cars off the road for a full year or preserving more than 65,000 acres of forest. In addition, we are currently exploring the development of science-based emissions targets consistent with the Paris Agreement goals.", "These initiatives are in their early stages. We are excited about the impact that we can make going forward. Just like in the United States where we are seeking to leverage our expanding platform to augment the value of our communication sites, we believe that we can translate our expertise and industry leadership in fuel and power internationally into tremendous added value. Reducing the total cost of ownership for our tenants further improving up times and developing more efficient, clean, renewable networks will benefit stakeholders across the value chain.", "We're committed to making substantial additional progress over the long term. Just like in the United States where we are working on a number of other initiatives, we're continuing to look at things like fiber to the tower, fiber to the home, and other transport models. In many of our international markets as ways to further broaden our addressable market and add value. These valued propositions would all be predicated on long-term contractual commitments with multi-tenant and multi-service elements that mirror our existing tower model.", "in closing, on a global basis, we are in a time of tremendous technological digital transformation. Access to ubiquitous broadband connectivity has never been more important, particularly, in the context of the ongoing pandemic. There are new use cases emerging every day with modern wireless networks becoming more and more dynamic, responsive, and critical. As providers of the underlying infrastructure that supports mobile connectivity for billions of people around the world, we have a unique advantage point from which to observe all of these developments.", "And I think, we also have an incredible opportunity to pair our advantages and scale, financial resources, and global reach with our platform expansion initiatives to drive tremendous incremental value for our stakeholders over time in a sustainable way. With that, let me turn the call over to Rod, to go through our third-quarter results, and updated full-year 2020 outlook. thanks, Tom." ] }, { "name": "Rod Smith", "speech": [ "Thanks, Tom. And good morning, everyone. Thank you all for joining our call, and I hope you're well and remain safe during these challenging times. As you saw in our press release, we had a very strong third quarter that outpaced our expectations, and as a result, are raising our full-year outlook for key metrics.", "Before we dive into the details of our results and updated expectations, I'd like to highlight the following. First, demand for our global tower assets was strong in the quarter, most notably and as Tom just discussed, we signed a comprehensive nearly 15-year long master lease agreement with T-Mobile in the U.S. which brought our contracted base of committed future revenue across the company to over $58 billion. We believe that this MLA serves as another reaffirmation of macro towers serving as the baseline of modern wireless networks for the foreseeable future.", "We also expanded our tower portfolio through select acquisitions and build to suit initiatives, acquiring more than 300 sites in building nearly 1,500 which was a quarterly record. We continue to effectively manage through the challenges posed by COVID with a continued focus on the safety of our employees, vendors, customers, and communities. Additionally, our focus on operational excellence, efficiency, and cost controls enabled us to drive expanding margins across the business, despite some of the challenges resulting from the global pandemic. Moving to the balance sheet, we issued around $2.8 billion in the U.S.", "dollar in euro-denominated senior notes across several tenders, including 30 years during the quarter. As a result of these refinancing initiatives, we were able to further extend our repayment schedule, and reduce our weighted average positive borrowings. We ended the quarter with nearly $6.7 billion in liquidity and increased our Euro-denominated borrowings to represent over 10% of our total debt. Finally, we declared a common stock dividend of $1.14 per share, extending our long track record of solid dividend growth.", "Returning capital to shareholders through the dividend remains an important part of our capital allocation strategy. Now, please turn to Slide 6, and I will review our property revenue and organic tenant billings growth. In addition to discussing growth rates on a reported basis, I'll also outline FX neutral metrics. Our third-quarter consolidated property revenue of nearly $2 billion, grew on a reported basis by $66 million, or 3.4% over the prior-year period.", "And on an FX neutral basis by $155 million, or 8.1%. Our U.S. property revenue totaled more than $1.1 billion and grew by $27 million, or 2.4% over the prior year. Including a roughly 2% negative impact from lower straight-line revenue.", "Approximately 55% of our consolidated property revenue was generated in the U.S. Our international property revenue was approximately $865 million and grew on a reported basis by around $39 million, or 4.8%. This included FX headwinds of roughly $89 million as compared to Q3 of last year. And on an FX-neutral basis, International Property revenue grew by $129 million, or 15.6%.", "FX trends have appeared to stabilize over the last several months, and FX was slightly better in Q3 than our prior expectations. Our underlying revenue growth rates reflect solid demand for our tower space from our base of primarily large multinational tenants who are expected to invest approximately $30 billion in their networks this year, as they continue to add coverage increased network capacity and rollout more advanced network technology. Moving to the right side of the slide, you can see that we achieved consolidated organic tenant billings growth of 4.4% for the quarter, right in line with our expectations. This included US organic tenant billings growth of 4.2% comprised of new business activity which contributed 2.9%.", "Escalators which contributed 3.1%. The churn of 1.4%, and a roughly 0.3% negative impact from other items. As expected this growth rate reflects a sequential deceleration driven by modest levels of new business activity from T-Mobile over the last year but continued strong contributions from other tenants. On a gross basis, including the impacts of our new MLA with T-Mobile, we expect activity to increase beginning in early 2021.", "Although this will be accompanied by higher levels of churn over the next few years as T-Mobile decommissioned certain Sprint sites. Our international organic tenant billings growth in the quarter was 4.7% led by Africa at over 8%, and Latin America at 7%. Europe was just over 2%, while India was negative 0.5% all of which were in line with our expectations. Grows new business commencements were solid once again as network expansion and densification initiatives continued.", "The component parts of our international organic tenant billings growth were new business activity which totaled over 6%. Our mostly local inflation based pricing escalators which contributed 3.5%, and other items which contributed 20 basis points. Partially offset by the churn of 5.2% concentrated in India. Moving on to Slide 7.", "You can see that our third-quarter consolidated adjusted EBITDA of nearly $1.3 billion grew on a reported basis by about $69 million, or 5.6% over the prior year. And on an FX neutral basis by $119 million, or 9.7%. Adjusted EBITDA margins were 64.5%, up roughly 160-basis-points over the prior year, and 120-basis-points sequentially. This increase was attributable primarily to solid organic growth throughout the business, as well as diligent cost management, and efficiency initiatives.", "Our U.S. business again drove a substantial majority of our consolidated property segment operating profit accounting for roughly two-thirds of the total. Moving to the right side of the slide, you can see our consolidated AFFO of $1billion, $20 million grew on a reported basis by nearly $131 million, or 14.7% over the prior year. And on an FX neutral basis by around $175 million for nearly 20%.", "Consolidated AFFO per share of $2.29 grew on a reported basis by about $0.29, or 14.5% over last year's levels. And on an FX neutral basis grew by $0.39, or almost 20%. This growth in AFFO and AFFO per share was driven by our previously discussed growth in cash adjusted EBITDA, as well as lower cash interest costs resulting from financing activity along with lower levels of cash taxes and maintenance capital spending. Let's now move on to the high-level themes driving our updated 2020 expectations, which reflect increases across all key metrics.", "Our revised full-year outlook is based on underlying demand expectations that are broadly consistent with our prior view. The large multinational carriers that account for the vast majority of our consolidated property revenue continue to deploy network capital as their customers consume more and more mobile data, irrespective of some of the disruptions caused by COVID-19. In the US, we expect leasing demand to pick up as we head into 2021, as carriers ramp investments in 5G and continue 4G upgrades. Mobile data consumption grows at 30% or more per year, and mid-band spectrum deployments accelerate.", "In the intermediate-term, we think that much of this acceleration is likely to revolve around the deployment of 2.5 gigahertz spectrum. Looking slightly further out, we expect that the C band vicious spectrum assets, and to some extent, CBRS are likely to all be relevant drivers of network activity. As a result, we believe that the U.S. wireless landscape remains constructive and is poised to drive solid tower leasing activity for many years to come.", "Our International businesses are performing well and continue to meet our expectations. Highlighting the resiliency and critical nature of tower assets across the globe. We also continue to augment our international portfolio through both accretive M&A, and high return newbuild programs. For the full year, we are raising our expectations for new builds to 5,500 at the midpoint.", "On the back of a record third-quarter where we constructed nearly 1,500 sites. On the M&A front, we added nearly 300 sites across our international footprint in Q3, bringing our year to date total to about 800, including more than 300 in Europe. Broadband connectivity across our international footprint has never been more critical, particularly, in markets with limited fixed-line access. And we are working closely with our tenants to help them drive it.", "As part of these efforts, we have augmented several customer relationships recently which we believe position us well to drive attractive growth while delivering high levels of service. We are already seeing benefits of these enhanced partnerships through accelerating organic growth in markets like Nigeria, and higher levels of newbuild activity in many of our other markets and expect these positive trends to continue over the long term. Meanwhile, in India, the Supreme Court has ruled on a 10-year AGR repayment timeline for the carriers. We view this as a positive as it provides incremental clarity in the marketplace in near-term breathing room for the carriers in terms of their liquidity.", "While we believe it is too early for these positive developments to translate into significant improvements in our near-term operating results, they do provide a base for optimism for the longer term. As it relates to our 2020 outlook, outside of some more favorable projections for a bad debt due to better collections over the last few months, our operational expectations in India are essentially unchanged from our prior view. Now, please turn to Slide 8, and we will review our raised outlook midpoint. Our updated guidance for property revenue is $7.89 billion which is an increase of $165 million, compared to our prior outlook.", "And reflects a growth rate on a reported basis of 5.6%. On an FX neutral basis, the growth rate would be right around 10%. For the U.S. property segment, we now expect revenues of nearly $4.5 billion, which is $115 million above our prior projection.", "This is primarily being driven by about $105 million in incremental straight-line revenue attributable to our new T-Mobile MLA, as well as some other non-run rate outperformance in the business. For our International property segment, we now anticipate property revenue of $3 billion, $390 million which is $50 million higher than our prior projections. This is being driven by approximately $15 million in favorable FX impacts along with around $13 million in additional currency-neutral pastures, and roughly $7 million in incremental straight-line revenue. As well as $15 million or so in other outperformance throughout the business.", "Moving to the right side of the slide. We are reiterating our expectations for 4.5% to 5% consolidated organic tenant billings growth. This includes a projection of 4.5% for the US and roughly 5% for international. As I mentioned earlier, we do expect an acceleration in gross new business activity in the U.S.", "beginning in early 2021, in part driven by our new agreement with T-Mobile. Turning to Slide 9. You can see that we now expect our full-year adjusted EBITDA to be $5 billion, $100 million, which is $170 million above the midpoint of our prior outlook. And over11% greater than the prior year on an FXneutral basis.", "The primary drivers of this increase are, approximately, $105 million in an incremental net straight line. About $27 million and better than expected non-pass through, primarily non-run-rate cash revenues around $28 million, and lower than expected non-pass-through direct operating costs in cash SG&A, including $20 million and lower bad debt expectations in India. In favorable FX impacts of roughly $5 million. For the year, we now expect cash SG&A as a percent of consolidated property revenue to be 8.2%, or around 7.2%, excluding bad debt reflecting continued scale benefits across the business.", "Lastly, we expect consolidated AFFO for the full year to be $3.75 billion at the midpoint, which is $75 million, or 2% above our prior outlook. On an FX-neutral basis, this reflects the growth of nearly 11% even including the $63 million one-time cash interest expense impact from our purchase of MTNs joint venture stakes in Africa earlier this year. The primary drivers of the increase as compared to our prior expectations include the cash adjusted EBITDA outperformance I just mentioned, $20 million and lower net cash interest, and about $5 million and favorable FX impacts, partially offset by $10 million in additional expected maintenance capital spending. On a per-share basis, we now expect to generate consolidated AFFO of $8.40, an increase of $0.17 as compared to the prior outlook.", "On an FX neutral basis, the year on year per share growth rate would be nearly 11%. Moving on to Slide 10. Let's review our capital deployment expectations for the full year. Let me start by stating that we remain committed to our existing disciplined approach to capital allocation, which for many years has proven to be successful.", "This deep-rooted philosophy guides our decisions regarding dividends, capital expenditures, M&A, and stock repurchases. For 2020, we expect our full-year dividend subject to Board approval to be approximately $2 billion dollars. Resulting in an annual common stock dividend growth rate of right around 20%. As we discussed on last quarter's call, we expect the dividend growth rates in future years will likely be below 20%.", "In line with our expected re taxable income growth rates, again subject to the discretion of our board. Regarding our capital expenditures, we expect to deploy about $1 billion, $150 million with more than 85% allocated toward discretionary projects. This is up to $75 million from our prior outlook, driven primarily by higher expected newbuild activity, as well as some acceleration in start-up capital spending and a small increase in maintenance capex. On the M&A front, we have spent roughly $860 million so far this year, including our previously mentioned purchase of the JV stake in Africa in the first quarter, and we are actively evaluating additional opportunities.", "Our previously announced purchase of [Inaudible] has a remaining stake in our India business is still pending regulatory approval in India. At quarter-end and exchange rates this represents a purchase price of approximately $336 million, and for the purposes of outlook, we have assumed that this transaction will be finalized by the end of the year. And lastly, with our year-to-date dividend declarations plus the $56 million we have deployed for stock repurchases, we have now returned about $1.5 billion to common stockholders so far in 2020. Turning now to Slide 11.", "I will briefly touch on our strong investment-grade balance sheet which we believe will be a critical component of our continued growth. Since becoming an investment grade in late 2009, our balance sheet strength has allowed us to grow revenue, adjusted EBITDA, consolidated AFFO, and consolidated AFFO per share, while maintaining prudent levels of liquidity and ensuring unobstructed access to capital at attractive rates. During the quarter, we access capital markets in the U.S. and Europe to issue roughly $2.8 billion across multiple tenures, including 30-years in both the U.S.", "dollar in Euros. As of the end of the quarter, our average cost of debt stood at 2.9% more than 200-basis-points below 2010 levels. And average debt tenor was more than seven years, nearly two years in excess of where we were back in 2010. Our available liquidity totaled $6.7 billion, and our net leverage was 4.5 times solidly within the three to five times target range.", "Taking all this balance sheet momentum into account, we believe that we are in a tremendous position of financial strength. Looking forward, we remain committed to our existing financial policies as we continue to believe that a strong balance sheet, low cost of debt appropriate and consistent levels of leverage along with disciplined capital allocation decisions are essential to our ability to deliver attractive total shareholder returns over an extended period of time. On Slide 12. And in summary, we are positioned to finish the year strong with improving margins, enhance strategic relationships with our tenants, and continued opportunities to deploy capital toward creative growth.", "Looking ahead, 5G deployment activity in the U.S. is poised to accelerate beginning in 2021, and we believe this will include material deployments of the mid-band spectrum. Primarily in suburban and rural areas of the country where our towers are located. In addition, Dish is expected to begin building a nationwide network toward the back half of next year driving potential future upside.", "Given our comprehensive portfolio of U.S. assets and mutually beneficial relationships with our tenants, we believe that we are well-positioned to drive a prolonged period of attractive contractually guaranteed U.S. growth. Meanwhile, we expect our diverse International Property segment to continue to perform well as global mobile network operators deployed significant capital to deliver capable high-quality networks for their customers who are consuming more, and more mobile data than ever before.", "Our international footprint of more than 140,000 sites is an excellent complement to our foundational U.S. asset base, and we expect that over the long term it will help us elongate and augment our growth trajectory. Finally, we believe that as a result of our strong balance sheet, our disciplined and steady approach to capital allocation, and most importantly because of our 5,500 experienced and talented employees across the globe, we are well-positioned to continue our long track record of driving consistent reoccurring consolidated AFFO per share growth, and growing dividend, and attractive total shareholder returns. With that, operator, will you please open the line for questions." ] } ]
[ { "name": "Operator", "speech": [ "Thank you. And we have a first question from Michael Rollins with Citi. Please, go ahead. Wait.", "One moment here. My apologies Mr. Rollins. Please, go ahead." ] }, { "name": "Michael Rollins", "speech": [ "Thanks, and good morning. Two questions if I could. The first is, you were describing that gross new activity in the U.S. business should improve in early 2021.", "Is there a risk that carriers slow activity while they await the results of the C-band auction? Can you provide us with a framework or historical perspective on how to think about how much leasing activity can improve from the current run rate. And then just secondly, if you could help unpack the timing of churn related to the comprehensive deal that you signed with T-Mobile. Thank you." ] }, { "name": "Tom Bartlett", "speech": [ "Hey Michael, maybe I'll start and then, Rod can come in. What we'll come out with specific guidance. Obviously in February of next year when we release earnings. But what we are seeing is, as we said on the last call, we expect that a pickup in activity from T-Mobile.", "So \\ there is going to be one of the principal drivers of the pick up particularly early on in 2021. As we see the level of activity picking up in the latter half of 2020. So there are going to be one of the principal -- I think drivers of that pickup. And with regards to the C-Band question what we've seen historically, you've seen this as clearly as well being so close to us and to what the carriers are doing.", "They're going to be taking advantage and leveraging every last megahertz they have of the spectrum. And so I think that they're not going to wait specifically for the new spectrum to be deployed there. That's going to fit right into their strategy at C-Band deployment schedule is going to be over a multi-year. And so they're going to continue to build out their current 5G if you will.", "Along with that same kind of layered cake spectrum capacity that we've talked about in the past. So we would expect that the carriers are going to continue to spend, continue to meet their own customers' needs, and they're doing it differently. As you well know, they're doing it across many different bands. But they're going to continue to deploy.", "So as I said, we'll provide more detail on that deployment in our Q4 call. But we're obviously, very bullish in terms of how we would see 2021. And Rod, you have anything to add." ] }, { "name": "Rod Smith", "speech": [ "Yes. I'll add a couple of things. Good morning, Michael. Thanks for the question.", "So the pickup that we are seeing going forward really centered on T-Mobile. As Tom alluded to so, everybody knows that there was a slowdown from T-Mobile that began late in 2019 as they prepared for their merger with Sprint. That persisted through most of 2020 to date. So now that we're lapping that we've got a base of growth to grow from.", "And that was the new T-Mobile deal. We have contracted levels of business going into 2021. So we do see an acceleration there. The other carriers have been pretty consistent through 2020, so that's been good to see this year so far.", "And then related to the churning part of your question, we do see that churn for T-Mobile happening over a multi-year period. It really will begin in late 2021, and go out for a few years, about four years. And we'll talk more about that Michael when we give guidance in February." ] }, { "name": "Michael Rollins", "speech": [ "Thanks for the additional detail." ] }, { "name": "Operator", "speech": [ "Next, we'll go to a question from the line of Ric Prentiss with Raymond James. Please, go ahead." ] }, { "name": "Ric Prentiss", "speech": [ "Good morning. I hope you guys are doing well." ] }, { "name": "Rod Smith", "speech": [ "Good Morning, Ric." ] }, { "name": "Ric Prentiss", "speech": [ "A couple of questions. Hey Rod. A couple of questions. I apologize I got pulled off their second there to give my name and firm when you were getting your prepared remarks.", "T-Mobile when they were talking about the new MLA said that the escalators could de-escalate over time. Tom, you mentioned before I got cut off that escalators are consistent with the three, three and a half range. But how should we think about escalators plus usage and then churn affecting that kind of a multi-year basis. Do the numbers go up every year or percent going down.", "How should we think about that comment from T-Mobile say escalators are going to de-escalate." ] }, { "name": "Tom Bartlett", "speech": [ "Well, I think is I mentioned Ric. There are two escalators that are part of this agreement. As is typical with similar types of the agreement you have the base escalator which we have in all. As you well know in all of our agreements, master agreements which are in the three to three and a half percent range.", "And that will stay fixed for the entire term of the contract. On top of that is our -- what we call is our use fee or our second escalator that's on top of the base escalator. And that escalator allows then -- and that on an annual basis, and it's and it's determined based upon the prior year, monthly roll or the ending year run rates. And that then allows T-Mobile to add equipment up to preloading agreements, up to certain rights on the agreement themselves.", "And that escalator is also in force over the lane of the contract. Now that second escalator unlike the first does decrease over time really as a result of the base getting bigger. So it's a slightly lower escalator that it's applied to a higher base to drive a consistent rate of incremental growth. And so the comment was that I believe that it does de-escalate.", "And on that second escalator the way we think about that, that is in fact true. But it's really as I said, a function of that the base is getting bigger. And so you have a slightly, lower use fee escalator being applied to it to keep a consistent rate of incremental growth. Again, as part of the comprehensive or holistic agreement over the entire term of the agreement.", "So that's I think, I'm trying to tie to connect the dots and tie it together. That's fundamentally how that agreements both escalators will work." ] }, { "name": "Ric Prentiss", "speech": [ "Ok. And I know you're going to give 21 guidance on the February call. But should we think about given all the complexity here. Maybe you guys might consider giving multi-year guidance in the future." ] }, { "name": "Tom Bartlett", "speech": [ "That's something that we are thinking about. I mean I spent time with writing or so. It's very very possible Ric, just to give people a sense of what it might look like on a multi-year period given the churn that we are expecting, and as a result of the Sprint this is coming off. But that's very possible." ] }, { "name": "Ric Prentiss", "speech": [ "Lastly to me, you mentioned, Rod mentioned Dish that the back half of 21 ramping up. Are you guys MLA discussions with them. Should we expect an MLA and Dish could there be maybe C-Band effort earlier and then you suggested if people are aggressive the other carriers." ] }, { "name": "Tom Bartlett", "speech": [ "On the Dish question, I don't wanna get into any specifics with them or -- as you would expect, we're in know significant conversations with them. As we're always talking to customers. They've stated that they are looking to start to build out their network. I believe in the second half of the year.", "And so we want to make sure that we're there for them and able to service them to the extent that we can. So there candidly a lot of conversation going on there. As I said that we'd like we have with all our customers. On this evening and that's as possible in anticipation of that spectrum being deployed, carriers getting ready to be able to participate in that.", "That's always an opportunity. We believe. I'm not sure how the material that would be. Candidly Ric, at this point in time it's hard to tell.", "The likes of Verizon, AT&T, I mean they deploy capital in a very regimented measured way. And so it's hard to say that would materially change the timing or direction of growth rates. But it's very possible that there might be some acceleration of some growth. As a result of that band, in particular, becoming available." ] }, { "name": "Ric Prentiss", "speech": [ "Are you seeing anything from cable operators who are buying some spectrum. And are registered for some options in any activity from the cable. Interested in the towers." ] }, { "name": "Tom Bartlett", "speech": [ "Yes. We've had. We have cable customers today. Again, I don't want to get any specifics there Ric.", "Particularly as it relates to new entrants into the market. But we're obviously, I think well positioned to be able to service them to the extent that they go down that path." ] }, { "name": "Ric Prentiss", "speech": [ "Appreciate it. Hope all your employees are well during these crazy times. Good luck, guys." ] }, { "name": "Tom Bartlett", "speech": [ "Yes. You too, Ric. Be well.Rod Smith Thanks, Ric." ] }, { "name": "Operator", "speech": [ "And our next question is from Matt Niknam with Deutsche Bank. Please, go ahead." ] }, { "name": "Matt Niknam", "speech": [ "Hey, guys. Thanks for taking the questions. Just a few on international. I guess more broadly are you seeing any cause or slowing in the pacing of activity across your larger markets whether you like the macro or COVID-related pressure hampering carrier spending plans.", "And then just drilling down in terms of India, Colo and amendment activity looks like it's moderated now for three straight quarters. So I'm just wondering what's the latest you're seeing there, and how should we think about the pacing of net organic growth from here. Thanks." ] }, { "name": "Tom Bartlett", "speech": [ "Hey Matt. Hey, thanks. Thanks for the question. I think on the contrary on international markets.", "I continually see incredible densification initiatives and new newbuild projects going on in just about all of the markets whether it's Mexico, Brazil, down in Latin America, Africa. We're seeing significant increases in demand for build to suits new locations orders. So I can go by market and I can see significant levels of increase in Colo orders as well as build to suites. As Rod said, I would continue to set records on built to suit activities.", "So I think that's just indicative of the amount of densification that's going on around the globe. Particularly in India. In India again, we hit on a gross basis, double-digit growth rates. And so what we see continued demand there.", "I think there has been a general slowdown overall, not just regards to COVID, but I think also with regard to clearing through a lot of the AGR. A lot of tax issues, I think that put a slowdown if you will. Some of the levels of the spend that the carriers were doing in the marketplace. But hopefully, much of that will be behind us and the carriers I now -- I know are really starting to think about and move forward in terms of looking to increase rates of growth going forward.", "COVID has impacted some of the builds to suit activity in the marketplace in terms of getting permits and some of those types of things. And as you well know,I mean India has really struggled as you know much of the world. But in particular, India has struggled with COVID, particularly over the last several months. So I know that has actually slowed down some of the build pursued activity.", "But on the growth side, the market is very strong." ] }, { "name": "Rod Smith", "speech": [ "And Tom, if I could just add a couple of points there. So on the organic tenant billings growth, we did have a basically a flat organic tenant billings growth for the quarter in India. But we had about 2.3% added through the newbuild program that Tom just mentioned. So we built just shy of a thousand towers in India in the quarter.", "And I'll just remind everyone that in India, our day one returns on those new bills are solidly in the double digits. So even close to 14 %." ] }, { "name": "Matt Niknam", "speech": [ "Thanks, guys." ] }, { "name": "Tom Bartlett", "speech": [ "Yes. Thanks, Matt." ] }, { "name": "Operator", "speech": [ "And our next question is from Jon Atkin with RBC. Please, go ahead." ] }, { "name": "Jon Atkin", "speech": [ "Thanks. So one international, and one U.S. I guess on the U.S., given again all the moving parts around CBRS, and C-Band, and Dish, and the T-Mobile churn that Rod talked about. Can you frame the U.S.", "organic growth rate next year. Just directionally higher or lower than what you were forecasting for this year based on, based on what you're seeing right now. And then internationally, apart from India where it sounds like you made a little bit of a different assumption with respect to bad debt there was some churn -- there's some gross leasing a lot to unpack there. But what are the biggest variables to think about as we think about 2021 either by country or within India? If India is that country that would need the most variability in the outlook.", "I would appreciate your perspective. Thanks." ] }, { "name": "Tom Bartlett", "speech": [ "Yes. Hey, thanks, Jon. We'll get that specific term for 2021 and on our next quarter's call. I think as we've alluded to it, we've talked that we would expect an increase in the gross in the U.S.", "business. Michael if that wouldn't be before and I think it's a function of some of the activity that we're seeing happen with T-Mobile. And we're very bullish on what's going on in the U.S. markets.", "I mean not a lot of different fronts not just in terms of the new spectrum, new technology being deployed, but potential new entrants into the market continued growth in demand even though the realization process that the government is driving in terms of trying to ensure that broadband is therefore for all. I mean I think all of these would clearly give us a bullish sense of what we would expect in the U.S. market over, over the next couple of years. And in particular in 2021, just on top of the ongoing demand that we see going on from a network usage perspective.", "Internationally, in each of the markets we -- just in terms of guidance for 2020, I mean all of the markets are up from a revenue perspective. As I mentioned before they're significant densification efforts going on in all of the markets. You can always go market by market and look at various metrics, and you can do -- you can see that there is a significant new infrastructure that needs to be added. New sites need to be added in those markets to be able to support the growth that they have going on in those markets.", "And so, as we've always said, as you well know, the international markets are a couple of technologies behind generally. And so -- and without any really strong wireline capability and so on. And a pandemic even the market to the world that we're living in today there's even more of a demand for wireless infrastructure in those markets. And so, I think all of that gives a good backdrop for what we would expect growth to look like in the, Internationally in those markets.", "We've always said it's going to be two basis points to 300 basis points faster than we're seeing in the United States. And if you take a look at even in Q3, you look at Latin America, you look at Africa they're all up in 7% to 8% range. And so, it's -- the model works. I think the strategy works and we're very bullish in terms of what we're expecting to see in our international markets over the next several years." ] }, { "name": "Jon Atkin", "speech": [ "The 5,500 deals that upsized our outlook that you gave us to any kind of a regional pick out that you could provide." ] }, { "name": "Tom Bartlett", "speech": [ "I mean, I think we have. I mean to give the one. I mean India was up a bit. We've seen continued growth in the India marketplace from a couple of the large carriers there.", "So there's an outsized, probably piece of that 500 that is there. And as Rod mentioned, we're getting double-digit rates of return right out of the gate. We're seeing also significant demand in Africa. In Nigeria markets, like Nigeria, Uganda, some of the markets where we're seeing upticks in the overall bill to suit the activity.", "Brazil is a market we've always talked about. It's been indeed probably twice as many sites in the market as they are today. I think to be able to meet the demand and provide a good quality signal, and so we're seeing increased demand for site builds in Brazil as well. So it's a bit of a mixed across the three of them I'd say.", "And I'm hopeful that we're going to be able to see continued increases in rates that built the suits going forward. It's our best rate of return capital dollars spent in the business. And so, we work very closely with our carriers to be able to maximize that category of capex." ] }, { "name": "Jon Atkin", "speech": [ "Thank you, very much." ] }, { "name": "Rod Smith", "speech": [ "And Jonathan, I'll just give you a few numbers here to support Tom's comment. So of the 5,500, India is going to be the lion's share of that probably close to 3,500. In Latin America maybe around 500. In Africa, you can think of that as about 1,300 hundred or so in that range in a handful in Europe, maybe 40 in Europe and in a small number in the U.S." ] }, { "name": "Jon Atkin", "speech": [ "Got it. Thanks, so much." ] }, { "name": "Operator", "speech": [ "Next, we have a question from Tim Long with Barclays. Please, go ahead." ] }, { "name": "Tim Long", "speech": [ "Thank you. Thank you. Just one quick clarification if I could and then a question. I just want to make sure I heard it right as far as not to kill the team of Sprint MLA here.", "But it is the comment that this is likely going to be a four-year period. I think I heard that. And then second, I'm just interested in talking a little bit about Europe. Obviously, still pretty small but a few hundred, 200 acquired sites there.", "Could you give a little more color on that, and maybe update us on views there with the MLA landscape is obviously still a lot of activity in the European theatre. And you guys are underrepresented. So just an update there would be great. Thank you." ] }, { "name": "Tom Bartlett", "speech": [ "Yes. Sure, Tim. The churn in the -- as we said multi-year, three to four years that you would expect to see a lot of that churn flush through. So hopefully that will give you a sense of the time period on that.", "Europe has always been a market. We've been looking at Europe and getting deeper into the region for many, many years. And we've always struggled from a valuation perspective and a growth perspective. We think of the U.S.", "business being the largest driver of cash flow as the developed market and create a consistent rate of growth. And then we've looked at our Europe, our international markets candidly as ways to increase the slope of the curve. From a cash flow growth perspective, and so we're willing and have been able to take some higher levels of risk if you will going into international markets using significantly higher risk-adjusted hurdle rates. But really is a function of the core U.S.", "business. And so when we take a look at Europe as being somewhat more of a developed market, the growth rates have just not been particularly strong. I mean the beachfront properties that we have in France, and Germany and now just entered into Poland. The growth rates have been in the 2% to 4% rate growth.", "And so when we think about allocating capital that generally hasn't been overly exciting handily in terms of the overall rates of growth. And then when we take a look at then the underlying valuations for a lot of the assets in the particular markets, we really struggle with some of the growth expectations that you would have to realize to be able to support some of the underlying valuations for those assets. Now, we're -- given the size and the scope of American Tower, we're part of every deal that goes down in the region. And so we're watching it very closely.", "We're participating in certain areas. As you said, we're undersized I guess relative to some of them to sell next for example in the marketplace. But that's Ok. I mean, we're -- that doesn't bother me in terms of our presence.", "We're going to continue to look at a deal by every deal on its own, and take a look at the underlying variables of the deal and the expectations of the deal and to the extent that ROIs and the NPDs can be sizable. We'll look to participate in it and see where we land in terms of being successful there. But just because we're relatively undersized versus the other players in the marketplace that doesn't concern me at all. We're all here about creating ethical per share growth in ROIC growth and to the extent that they can contribute to do those two variables.", "We're going to weigh in and participate. So, we'll see where that lands over then continue to develop there. There are a lot of assets as you said, we're going to be coming up on the marketplace. There are a lot of large carriers who are looking to monetize their assets.", "So there very well could be some opportunities there. And as I said, we'll just take a look at them one at a time." ] }, { "name": "Tim Long", "speech": [ "Ok. Thank you, very much." ] }, { "name": "Rod Smith", "speech": [ "Ok, Tim. I think the other part of the question was the breakdown of the sites that we acquired in Q3, so we acquired a little over 300 sites in Q3. 195 of those wherein France. There are arrangements with Orange which we've talked about in the past.", "And then there was an additional block here in Chile and Peru which are additional tranches with the NPL agreement that we have. So that makes up the majority of that. That's 305. So it's really in France, Chile, and Peru." ] }, { "name": "Tim Long", "speech": [ "Ok, great. Thanks for the clarification." ] }, { "name": "Operator", "speech": [ "And next, we go to a question from David Barden with Bank of America. Please, go ahead." ] }, { "name": "David Barden", "speech": [ "Hey, guys. Thanks for taking my question. I wanted to -- Hey Tom. I wanted to come back to the T-Mobile agreement a little bit.", "Last quarter you guys took T-Mobile out of your second-half guidance. Your competitors actually spoke pretty optimistically about what that was going to mean for them. And so the conclusion was that T-Mobile was steering business away from American Tower in an effort to gain leverage to negotiate a new MLA. And as a result of that, as we look forward to conversations that are going to emerge around the C-Band deployments, brand new networks are not going to be deployed everywhere, only need to be deployed somewhere.", "Is there a thought that other carriers Dish included are going to look at what T-Mobile did in terms of how they steered business to some players and away from others to gain leverage in these negotiations that somehow the balance of power between the towers and the carriers might have changed somehow. Could you comment on how you think that might evolve in the next phase of network development." ] }, { "name": "Tom Bartlett", "speech": [ "Yes. I mean, I don't think that's the case, candidly. I think given the real estate that we have and the sites that we have, we're quite comfortable that the carriers are always going to have to come to us. I mean that's the kind of beauty of the business that we have in the real estate that we have.", "I mean, we're always in negotiations with all the carriers. We're trying to meet their needs along the way as any typical less or less of a relationship. But I don't think there's any real credence to the fact that there are leverage that created as a result of moving or not coming onto our side. I mean we have a very long term view of our business, of our customer base.", "We think that -- I think that's indicative of the 15-year agreement that we put in place with T-Mobile. We think that as we said in the past that these types of master lease agreements are incredibly strategic and important to us for a number of reasons. Not just a driving sizable predictable growth, but we also see really very sizable growth. Overall as a result of the additional right to use the base escalator.", "Historically, if you look at ATC in the United States, we've garnered -- we've generated over 50% of the new business in the United States on a fairly consistent basis. And so I think that's indicative of the types of relationships that we have with our carriers over time. They are always other issues in terms of some of the negotiations. Sure, we get some high price sites, sites that have been out there for a very long period of time that have escalators on them, and we work very closely with the carriers to try to bring those back to the market.", "But then generating other types of value for us over a long time. So, we have -- we're in constant conversations with our U.S. customers. And so I don't see that activity.", "And if it does as I said, it would be noise, and it would not impact the way we think about our business or the way we strike kind of long term lease agreements with any of our customers." ] }, { "name": "David Barden", "speech": [ "Got it. Ok. Thank you for that. And then Rod, can I just one quick one.", "You mentioned that part of the guidance was in the quarter inflated to non-run rate outperformance factors. Could you elaborate a little bit on what those were, and what they contributed." ] }, { "name": "Rod Smith", "speech": [ "Sure, Dave. I think what I think you're referring to the Q3 numbers. So the non-run-rate items are primarily in India. We had a few settlements in India about $25 million worth of settlements in India that will not be recurring that were in our Q3 numbers." ] }, { "name": "David Barden", "speech": [ "Ok. So that was the big delta in the Indian performance. All right. thank you so much." ] }, { "name": "Rod Smith", "speech": [ "Correct." ] }, { "name": "Operator", "speech": [ "And our next question is from Sami Badri with Credit Suisse. Please, go ahead." ] }, { "name": "Sami Badri", "speech": [ "Thank you for the question. So a lot of the questions today have been focused on the model the 3Q results, the escalators, and it's often very helpful. But I wanted to just shift gears to the microdata center and to the edge compute commentary that you made earlier on the conference call. And I think the one thing that a lot of market constituents and analysts community is interested in is what does American Tower's core strategy entering this market is it going to be a provider of Colo.", "Is it going to be the leasing aspect. Is it going to be the go-to-market with Flexential and other providers. Can you just give us more color on what we should expect from AMT the next couple of years on what your tactical strategy is going to be within the edge ecosystem. That would be very helpful just to get a good idea of where all the chips are going to fall." ] }, { "name": "Tom Bartlett", "speech": [ "Right. No, no I appreciate thanks. Thanks for the question. I tried to cover that in some of my prepared remarks.", "I mean at the highest level, we're really trying to create power like communications infrastructure business models that really augment if you will. The value of our existing assets, expand our revenue base beyond the traditional tenants if you will, and expand our role in that whole delivery system. It's all about extending the platform. And clearly part of that platform is that compute capability.", "And so we're looking as part of that platform and the compute transport functions, and really trying to create ways of being able to incrementally provide service to our customers. And so, if you think about our longer-term views of it, we're candidly looking at, ok of the 40,000 sites in the United States which could all be considered edge compute locations, it is at the edge. It is at the very edge of the edge if you will. How many of those sites would put it well in terms of fitting them out to be able to support the number of enterprise accounts.", "To support hyperscale. To support data centers in ways where we can provide and be really part of that process to provide lower latency types of applications. And each one of those sites then given the real estate that we have, how many shelters can we put in each one of those locations. How much power can we drop into each one of those shelters.", "And how many come down to how many cabinets can we load up in each one of those shelters. And so we're looking at sites that potentially can hold two or three shelters. Each shelter holding eight to 10 caps each providing 100 kilowatts of power into each one of those shelters themselves. In a way that it can provide then really an on-ramp or accounts in that particular location into the wireless world.", "And so the models that we have and the trials that we have right now are trialing exactly that, and looking at then what are the price points for each one of those cabinets. Can we get a traditional $1,900 to $2,000 per cap. Each one of those locations how stackable are the shelters going to be. And then really looking at what that demand is.", "And so we have several proofs of concepts that we're working on in tandem with some potential partners. And actually are looking at those now in front of certain enterprises to be able to determine really what is the opportunity there. In terms of how far we go along the value prop scale that's yet to be determined. Clearly, we have co-location in real estate.", "So those are given then the question is Ok. How far do we go up the stack, and then how do we provide those kinds of capabilities. As I mentioned in my remarks, it's not like we're looking to hire thousands of software engineers, or 2,000 sales reps to start selling into enterprise accounts and providing them access to cloud-based services. That's not our skillset.", "And so we would look to augment our capabilities with other capabilities to be able to jointly provide what we think could be a very interesting valued proposition to the enterprise accounts around the country. So, time will tell. This is early stage now. As I said, we're really dedicated to had a number of resources dedicated to trying to understand what this is.", "What the capex requirements are going to be at the site location, and really again to come back to driving tower-like communications infrastructure business models. So that's it. I'm a short setting couple of soundbites, and you'll continually hear more and more about our strategy there as it develops. And as we continue to go down the journey." ] }, { "name": "Sami Badri", "speech": [ "Got it. Thank you. That was actually a lot of detail. Just one quick follow-up on that and this fall mainly has to do with domestic versus international and this micro opportunity.", "A lot of the focus and the commentary has been focused on the domestic deployment of micro data centers. But what about international, right. There are clearly big differences in terms of how the network looks abroad. And do you see edge being a much bigger opportunity abroad versus domestic at least it's in the next two to three years, or is it going to be predominately focused on domestic opportunities for now." ] }, { "name": "Tom Bartlett", "speech": [ "As I mentioned before traditionally, our international markets are a couple of technologies behind where they are in the United States. Having said that though, I think one of the real advantages that we bring to a venture is our global reach. And the lack of really processing capability in many of the emerging markets that we have today. And so while I think this strategy will probably more initially develop in the United States, I think the real value ultimately, particularly, as the world shrinks, and as the cloud learns -- will connect us a whole and does move to the edge.", "I think our global reach is actually a really interesting element. To what as I said, we bring to the party, and so it's difficult to say how the outside the United State market might develop. We might find in certain markets that it may develop more quickly and that the edge compute capability turns into more than just an edge. You may be able to cluster certain edges to provide more of a metro data facility.", "Again, particularly, in areas of the world where there really isn't a lot of data center presence. So it'll be a very interesting question. And one, we're getting our arms around and understanding exactly what are the benefits as a result of having that global reach. I think candidly that they're significant, and we'll try to leverage that as much as we possibly can." ] }, { "name": "Sami Badri", "speech": [ "Thank you, very much." ] }, { "name": "Operator", "speech": [ "And our final question comes from Batya Levi with UBS. Please, go ahead." ] }, { "name": "Batya Levi", "speech": [ "Great. Thank you. A couple of follow-ups under Timor MLA again. I think you adjusted the straight line for this year, $20 million higher than the original guidance.", "What drove that. And second, in terms of as you look at the T-Mobile deployment, you have a pretty good insight into the long term and that will expand. Would you be able to provide some color if you think that you took a larger share of Timor's future activity with this long term contract. And also to the extent that T-Mobile acquires more spectrum or builds more sites do you -- can you give us some commentary in terms of could there be upside to this existing MLA, or is it mostly captured at least for the next few years." ] }, { "name": "Tom Bartlett", "speech": [ "Yeah. No thanks. Let me start in a right to get in to add any additional color. On the straight line, I mean it's -- we're just refining the calculations as you might expect it.", "It's a very complicated calculation. And so it was just the refinement of the calculation is that we are able to do so. There's nothing remarkable I think going on with regards to the actual straight-line calculation. And with regard to your other question, I mean all of our contracts are designed to take more than our fair share of the business.", "And as I mentioned before historically in the United States, we've captured over 50% of the new business in the United States. And so our contracts are designed to do that but in a way that's providing a meaningful capability and service to our customers. And so with regards to that the agreement that we put in T-Mobile, we are absolute, we believe more strategic to them. We're working side by side with them on a number of different initiatives.", "As we typically do when we enter into these types of relationships, clearly there is a desire for them to want to put more equipment on our sites. As a result of the fact that they're already paying for it. And so, as a result of that, we would think that we would get an outsized part of their business. And so this is no different.", "And so to the extent that they're, there are accelerations. There are different initiatives that they're looking to undertake which knowing T-Mobile we would expect. So we would hope that we would be really in the catbird seat in terms of being able to pick up a lot of that incremental business. And that's as I said historically what these kinds of comprehensive holistic master lease agreements are really positioned us to be able to take advantage of.", "We hope so." ] }, { "name": "Batya Levi", "speech": [ "Got it. Thank you." ] }, { "name": "Operator", "speech": [ "And Mr. Khislavsky, I'll turn the call back over to you." ] }, { "name": "Igor Khislavsky", "speech": [ "Great. Thanks, Lea. Thank you, everybody, for joining this morning. And have a great rest of your day." ] }, { "name": "Operator", "speech": [ "[Operator signoff]" ] } ]
AMT
2023-10-26
[ { "description": "Senior Vice President of Investor Relations", "name": "Adam Smith", "position": "Executive" }, { "description": "President and Chief Executive Officer", "name": "Tom Bartlett", "position": "Executive" }, { "description": "Executive Vice President, Chief Financial Officer, and Treasurer", "name": "Rod Smith", "position": "Executive" }, { "description": "Morgan Stanley -- Analyst", "name": "Simon Flannery", "position": "Analyst" }, { "description": "Citi -- Analyst", "name": "Michael Rollins", "position": "Analyst" }, { "description": "Bank of America Merrill Lynch -- Analyst", "name": "David Barden", "position": "Analyst" }, { "description": "Raymond James -- Analyst", "name": "Rick Prentiss", "position": "Analyst" }, { "description": "Deutsche Bank -- Analyst", "name": "Matt Niknam", "position": "Analyst" }, { "description": "Wells Fargo Securities -- Analyst", "name": "Eric Luebchow", "position": "Analyst" }, { "description": "MoffettNathanson -- Analyst", "name": "Nick Del Deo", "position": "Analyst" }, { "description": "UBS -- Analyst", "name": "Batya Levi", "position": "Analyst" } ]
[ { "name": "Operator", "speech": [ "Ladies and gentlemen, thank you for standing by. Welcome to the American Tower third quarter 2023 earnings conference call. As a reminder, today's conference call is being recorded. Following the prepared remarks, we will open the call for questions.", "[Operator instructions] I would now like to turn the call over to your host, Adam Smith, senior vice president of investor relations. Please go ahead, sir." ] }, { "name": "Adam Smith", "speech": [ "Good morning, and thank you for joining American Tower's third quarter 2023 earnings conference call. We have posted a presentation, which we will refer to throughout our prepared remarks under the investor relations tab of our website www.americantower.com. On this morning's call, Tom Barlett, our president and CEO will discuss current technology trends, and how our distributed portfolio of assets is positioned to benefit from ongoing wireless technology evolution. And then, Rod Smith, our executive vice president, CFO and treasurer will discuss our Q3 2023 results and revised full year outlook.", "We are also joined on the call today by Steve Vondran, our current executive vice president and president of our U.S. tower division, who as announced this morning will assume the role of global chief operating officer effective November 1, before assuming the role of our president and chief executive officer on February 1, 2024. After these comments, we will open up the call for your questions. Before we begin, I'll remind you that our comments will contain forward-looking statements that involve a number of risks and uncertainties.", "Examples of these statements include our expectations regarding future growth, including our 2023 outlook, capital allocation and future operating performance; our collections expectations associated with Vodafone Idea in India and any other statements regarding matters that are not historical facts. You should be aware that certain factors may affect us in the future and could cause actual results to differ materially from those expressed in these forward-looking statements. Such factors include the risk factors set forth in this morning's earnings press release, those set forth in our Form 10-K for the year ended December 31, 2022, as updated in our Form 10-Q for the six months ended June 30, 2023, and in other filings we make with the SEC. We urge you to consider these factors and remind you that we undertake no obligation to update the information contained in this call to reflect subsequent events or circumstances.", "With that, I'll turn the call over to Tom." ] }, { "name": "Tom Bartlett", "speech": [ "Thanks, Adam. Good morning, everyone. And my focus for today's call will be on the technology trends and network investments that drive demand for our leading tower and data center platforms, as well as the developments we're seeing at the edge. While my comments will largely be focused on the 5G evolution and the progress we're seeing in the United States, we believe similar trends will prevail across our international footprint as they have historically.", "Beginning with our macro tower business, the fundamental factor that drives demand for our global power portfolio, growth in mobile data consumption continues unabated. This is true both in the United States and across the globe, where mobile network data traffic has almost doubled over the last two years alone to a staggering 126 exabytes per month. Looking out over the next five years, forecasted growth in data traffic per device remains compelling as more spectrum for 5G networks will be deployed at scale. Average monthly data usage per smartphone across our key developed markets like the U.S., Germany and Spain is expected to grow at a healthy compounded annual rate of 18% between 2023 and 2028.", "And I would note that these estimates have been somewhat conservative historically. So let's spend a moment on where we are in the 5G investment cycle in the U.S. and where we believe we're going over the next several years. Just as we saw with the 3G and 4G rollouts, we expect the 5G investment cycle to play out in three phases that represent discrete business cases for the carriers and these three phases will drive two peak periods of spend that are bridged by a temporary phase of more moderate activity.", "The first phase is coverage-driven and aimed at upgrading existing infrastructure with new spectrum bands and radio technology, its competition to provide broad nationwide coverage with the new G ramps up. At the same time, carriers are looking to realize the efficiency benefits of their investments in new software, hardware and upgraded user devices. Initial equipment upgrades and new spectrum deployment quickly deliver reduced cost per gigabyte resulting in the ability to maintain margin profiles. Absent this migration, any incremental investments in the prior generation would be expected to result in significantly diminished returns as the additional densification required to sustain increasing network traffic on existing spectrum bands would be cost prohibitive.", "As the cadence of initial coverage investments begin to moderate from record spend of over $40 billion in 2022, the first peak of the 5G cycle, we retain a high degree of conviction that there's a long tail of network investment to come. This belief is predicated on several factors, including our experience with past investment cycles, industry forecast for growth in mobile data consumption that apply a necessity for significant incremental coverage and capacity and the visibility into network needs, we get through our contract structures. Today, Phase 1 of the 5G rollout is winding down and we're heading into a second phase. We expect Phase 2 to be characterized by carriers beginning to harvest the network efficiency benefits of their initial investments, while moderating spend from the record levels of 2022 to roughly $35 billion in 2023, which is $5 billion in excess of 4G averages, representing the second highest level of annual spend on record.", "In this next phase, we will begin to see a seeping in of 5G technology across the wireless and enterprise landscape. For example, 5G smartphone penetration has now surpassed the 50% mark in North America, which will ultimately allow for the majority of network traffic to shift over to 5G networks which we would expect to occur in the 2025 time frame. We're also looking forward to the emergence of more ubiquitous accessibility of stand-alone 5G core networks, which will unlock improved 5G network quality, higher speeds and lower latency and provide a platform for the development of innovative services and consumer applications. Finally, we anticipate that the arrival of end-to-end 5G capabilities will facilitate additional monetization opportunities at the enterprise level through use cases like private networks, network slicing and other IoT services that are beginning to emerge today.", "Ultimately, these dynamics will culminate in a third capacity focused phase aimed at significant densification of 5G networks. We continue to believe that 5G will advance and enable the next generation of mass market consumer use cases, particularly once 3GPP-released 17 and 18 are in the market, coupled with 5G cores that provide the true benefits of the end-to-end technology upgrade at scale. That said, meeting industry forecasts for growth in mobile data consumption that will drive the need for substantial network capacity investments seems highly achievable when taking into account the technology we have at our fingertips today. In fact, industry estimates already show that 5G subscribers are consuming two times to three times more mobile data than the average 4G subscriber.", "So let's take the case of mobile video consumption, which has consistently shown to be a dominant use case across subscriber usage types. As you can see on Slide 6, today the average smartphone subscriber in North America utilizes roughly 21 gigabytes of mobile data per month, and this is expected to grow to about 48 gigabytes by 2028. Of the 21 gigabytes consumed today, the majority or approximately 19 gigabytes are attributed to video streaming, which corresponds to a little over an hour of daily video usage and 360 and 480 pixel videos currently make up around half of that time. So by simply assuming a modest level of incremental usage toward higher resolution streaming such as eight minutes of 4K Ultra HD, we would see video consumption alone drive usage to the forecasted 48 gigabytes per month or approximately 2.3 times the current rate.", "Furthermore, the data already shows that 5G is driving increased usage of higher resolution video formats. A recent report from Ericsson found that since 2021, 5G users report a nearly 50% increase in time spent on enhanced video formats. For example, among that user base, usage of new video formats like 360 degree videos and multi-view streaming have increased by an average of 10 minutes and 15 minutes per day, respectively, while time spent streaming videos and standard resolution has decreased by 23 minutes over the same period. In short, we've already seen 5G adoption linked with a shift in behavior toward using more data intensive applications, a trend we firmly believe will continue going forward.", "And while we remain confident that new low latency, high bandwidth consumer applications will be born as 5G stand-alone networks are deployed at scale, we see a highly tangible case for densification requirements from where we stand today. With that, I'll briefly provide an update on CoreSite in our data center segment before shifting to the progress we're making at the edge. The case remains that demand in CoreSite's interconnection centric business is exceeding our initial expectations. Our teams delivered record signed new business in 2022, a record we are targeting to exceed in 2023.", "We've also seen consistent elevated growth in interconnection revenue, mark-to-market pricing increases that exceed our historical averages, low churn and ongoing performance that we believe positions us to deliver compelling results in the segment for many years to come. And much like we see in our tower business, the secular trends that underpin the business model like the migration of workloads from on-prem to hybrid multi-cloud environments and the emergence of AI use cases that will drive more demand in our ecosystem continue on a path toward long-term acceleration. For example, findings from our recent 2023 state of the data center report showed that 94% of IT leaders noted that native direct connection between co-location data centers, major cloud providers, which CoreSite provides is essential for improved performance, enhanced security, cost savings and hybrid cloud connectivity. Further, 92% of IT leaders are considering moving critical workloads from public cloud to colocation to accelerate revenue growth and support the increasing need for AI and machine learning applications.", "In this context, we continue to upgrade our offerings and capabilities within the business to support emerging use cases. For example, earlier this month, we launched new capabilities on our OCX, our pioneering software defined networking platform, enabling clients to rapidly create higher bandwidth virtual connections to Google Cloud and AWS Direct Connect and between CoreSite data centers, including 50 gigabit services. These upgrades reduce the time required for organizations to augment network capacity to support high bandwidth, low latency hybrid applications like AI, machine learning and digital media production. When it comes to current and future AI and machine learning applications, CoreSite's flexible, purpose-built design data centers position us to host power-intensive GPU services being used for AI and ML use cases.", "For example, we're already providing GPU capacity for applications like 3D visualization and rendering and for software development with a niche cloud environment. And for the densest AI applications, our purpose built facilities are designed to accommodate liquid cooling with modest development efforts when required. As we've stated previously, in the near term, we continue to believe the majority of today's generative AI workloads will provide hyperscale opportunities that don't meet our investment criteria or fit within the CoreSite ecosystem. However, as GEN AI evolves, we would expect the balance of workloads to shift from large language model development, intensive training and public prompts to specialized inference-based use cases as productivity gains from the deployment of custom models accelerates.", "At this stage, when low latency interconnection high power density and distributed high performance compute become the priorities, we believe CoreSite and ultimately, our distributed portfolio of franchise real estate assets across the U.S. are going to be optimally positioned to benefit. On that note, we've continued to see progress toward the realization of demand cases that support our initial edge thesis, and we believe we have an opportunity to enable a more efficient exchange of network traffic and support cloud services and peering in a more distributed manner. As a result, we've been working both internally and with external stakeholders to develop an edge model we can execute on as compelling opportunities present themselves.", "In our initial assumption that through CoreSite, our seat at the table and visibility into the customer demand environment would be materially enhanced is holding true. We're increasingly seeing interest from potential customers looking to extend technologies such as private cloud computing AI and 5G applications closer to the end device through a more distributed architecture. This is resulting from several key demand cases including availability of future power requirements, business efficiency, revenue generation opportunities and customer experience. When it comes to power, CoreSite has secured significant future power availability and is insulated from expected shortages in markets like Northern Virginia.", "However, power constraints in general are increasingly in focus in legacy data center markets. In this case, we believe our distributed land footprint in Tier 2 and 3 markets with significant power availability and capability to connect back to CoreSite campuses can serve more distributed power capacity needs, while enabling customers to enjoy the interconnection benefits of the CoreSite ecosystem. And as potential customers increasingly focus on new revenue opportunities and customer experience including through the proliferation of applications like next-generation gaming, AR and devices and wearables that leverage interactive AI, we believe we have a compelling combination of distributed points of presence and interconnection capabilities that can be extended to a broader edge. In addition, by prioritizing our existing owned real estate, which in many cases is already designated for use as digital infrastructure, we see an opportunity to drive a significant time to market advantage and reduce overall development costs, which could be compelling to customers and enhance returns on investment.", "As a result of these factors, we continue to work toward establishing a repeatable, rapidly deployable design with initial capacity in the 1 megawatt range, which could then be scalable to incremental megawatts with interconnection to multisite campuses as demand dictates. As always, we'll assess potential growth at the edge through the prism of our disciplined capital allocation framework committing capital only if the opportunity meets our investment criteria and aligns with our long-term strategic vision of growing our interconnection ecosystem in a way that maximizes shareholder value. In closing, the bottom line is that we remain at the relatively early stages of a 5G and network technology evolution that we believe will necessitate continuous incremental investment in existing infrastructure like towers, data centers and distributed edge infrastructure. We also believe that ongoing technology developments will unlock new capabilities that will drive the next wave of innovative and data intensive consumer and enterprise devices and applications.", "And American Tower, with its leading tower portfolio and real estate footprint combined with a highly interconnected data center ecosystem is in a truly differentiated position to serve the network infrastructure needs of the future. Before I hand the call over to Rod, I'd like to close my remarks by congratulating Steve Vondran, who effective November 1 will hold the role of global chief operating officer until February 1 of next year, at which point he'll transition to the position of chief executive officer; and Bud Noel, who will become our new executive vice president and president of our U.S. tower division. The board and I have worked diligently on succession planning weighing the merits of an external search against the talent we have within our organization.", "Steve joined American Tower in 2000 and currently serves as the executive vice president of our U.S. and Canada business, including both towers and data centers. For the past 23 years, Steve has been instrumental to the growth and sustainability of earnings from American Tower and has built tremendous credibility with our global organization his peers, the board of directors, the American Tower investor base and our customers. All this to say, Steve is a clear candidate to lead American Tower in its next growth phase.", "And over the next several months, I'll work closely with Steve, the executive leadership team and the board to ensure a seamless transition. Lastly, I want to thank all of the incredible American Tower employees around the world both past and present, our customers and investors for their support and confidence you've demonstrated since I joined in 2009. Although, this is a difficult decision on my part, I look forward to the time ahead with family and friends and new challenges, while watching the company under Steve's leadership continue to succeed. With that, I'll turn the call over to Rod to review our latest results and updated outlook.", "Rod?" ] }, { "name": "Rod Smith", "speech": [ "Thanks, Tom. Good morning, and thank you for joining today's call. In Q3, we continued our trend of strong performance, driven by solid demand for our diverse global portfolio of assets. Against the challenging macroeconomic backdrop, we remain focused on delivering results and creating value by driving organic growth across our existing portfolio and demonstrating global operational efficiency and cost management in support of attractive margin expansion.", "At the same time, we are committed to strengthening our balance sheet by enhancing our liquidity extending our maturities, reducing floating rate debt volatility and making progress toward our leverage target. These efforts coupled with the evolving technological trends highlighted by Tom, remain key drivers of our current performance and give us confidence in our ability to drive sustained growth over the long term. Before delving into the specifics of our Q3 results and raised outlook, let me touch on a few highlights from the quarter. First, we saw a continuation of solid trends across our global operations, driving consolidated property revenue growth of 7%, consolidated organic tenant billings growth in our tower business exceeded 6% for the third consecutive quarter and was complemented by over 9% revenue growth in our data center business.", "As a result of this strong performance and visibility extending through the end of 2023, we raised our full year expectations across nearly all segments, which I'll discuss in more detail later. Next, our keen focus on cost management resulted in conversion rates exceeding 100% and adjusted EBITDA margin expansion of roughly 290 basis points year over year and still over 215 basis points when normalized for the prior year VIL revenue reserves, complementing our operational efforts. On the balance sheet side, we raised $1.5 billion in senior unsecured notes at a weighted average cost of approximately 5.9% by utilizing the proceeds to pay down revolver balances, we reduced our floating rate debt exposure to approximately $4 billion or less than 11% of our total outstanding debt as of the end of the third quarter down from over 22% at the start of the year. Finally, we're making significant progress on the strategic review of our India business.", "As we are in the final stages of this process, we remain committed to communicating the outcome to our shareholders before the end of the year, consistent with our past messaging. In Q3, we recorded $322 million in goodwill impairment charges associated with our India business. This was prompted by indications of value obtained through the process conducted over the past several months, supported by our own interim goodwill impairment test. We believe this impairment accurately reflects the current market conditions, evolving risk premiums associated with operating in the India market and more generally increases in the cost of capital.", "With that, please turn to Slide 8, and I'll review our property revenue and organic tenant billings growth for the quarter. As you can see, consolidated property revenue growth was 7% or 8% on an FX neutral basis. U.S. and Canada property revenue growth was over 5%, which includes a nearly 2% headwind associated with a reduction in straight-line revenue, offset by timing benefits associated with certain non-recurring one-time items in the quarter.", "International growth was nearly 9% or approximately 11% excluding the impacts of currency fluctuations, which included a 4% benefit associated with the full collection of VIL billings in India in the quarter, as compared to the approximately $48 million revenue reserve in the prior year. Finally, as I mentioned in my earlier remarks, our data center business revenue increased by over 9% and continues to demonstrate solid outperformance as compared to our initial underwriting plan. As Tom mentioned earlier, we anticipate 2023 to again break the signed new business record just set in 2022, setting up CoreSite to drive sustained attractive levels of growth as the backlog of new business commences over the next several years. Moving to the right side of the slide.", "Strong performance across each of our segments drove consolidated organic tenant billings growth of 6.3%. Within our U.S. and Canada segment, organic tenant billings growth was 5.3% and greater than 6.5% absent sprint related churn, including another quarter of colocation and amendment contributions of nearly $60 million. Our International segment saw outperformance across nearly all reported segments, primarily driven by higher new business in Africa and churn delays in Latin America and APAC resulting in organic tenant billings growth of 7.9%.", "Turning to Slide 9. Adjusted EBITDA grew over 10% to $1.8 billion for the quarter or approximately 11% on an FX neutral basis. As I highlighted in my opening remarks, adjusted EBITDA margin expanded to 64.4%, a 290 basis point improvement compared to the previous year, primarily driven by solid organic growth, effective cost management throughout the business and the one-time revenue items I mentioned. In fact, despite the current inflationary environment, we have managed to maintain a relatively flat year over year cash SG&A profile remaining consistent with the themes from the first half of the year, with cash SG&A as a percent of property revenue standing at approximately 6.5% for the quarter, a nearly 70 basis point improvement versus Q3 of 2022.", "Moving to the right side of the slide. Attributable AFFO and attributable AFFO per share each increased by over 9%, driven by solid cash adjusted EBITDA growth partially offset by an approximately 5% headwind from financing costs. Now, shifting focus to our revised full year outlook. I'll start by highlighting a few key items.", "First, as a result of our strong performance in the third quarter and the momentum taking us through the end of the year, we've raised our guidance for property revenue, adjusted EBITDA, attributable AFFO and attributable AFFO per share. Next, our revised outlook includes a reduction in U.S. services, resulting in a $20 million decrease in gross margin compared to our previous expectations for the year. As we've highlighted in the past, although, quarter-to-quarter variations in tower leasing activity have impacted our services revenue in 2023, our leasing revenue remains unaffected, underpinned by the comprehensive master lease agreements currently in place.", "Finally, the updated midpoints include revised FX assumptions that have resulted in outlook to outlook headwinds of approximately $28 million for property revenue, $14 million for adjusted EBITDA and $5 million for attributable AFFO. With that, let's dive into the numbers. Turning to Slide 10. We are increasing our expectations for property revenue by approximately $60 million as compared to our prior outlook.", "Our revised expectations are driven by $31 million in core property revenue outperformance, along with approximately $45 million and $12 million in additional pass-through and straight-line revenues, respectively. Our revised guidance includes $10 million in outperformance associated with VIL collections with roughly half included in our core property revenue and the balance in the pass-through outperformance illustrated. Growth was partially offset by $28 million of negative FX impacts. Turning to Slide 11.", "We are increasing our expectations for organic tenant billings growth across nearly all segments. In the U.S. and Canada, we are increasing our guidance to greater than 5% or approximately 6.5% excluding Sprint churn, now with an expectation for approximately $230 million in colocation and amendment growth contributions. Growth is further benefiting from non-Sprint related churn delays, which we now anticipate occurring in 2024.", "In Latin America, we have increased our outlook from approximately 4% up now to approximately 5%, largely driven by continued delays in anticipated consolidation-related churn. Next, we're increasing our Africa outlook from greater than 11% to approximately 12%, primarily due to a continued uptick in colocation and amendment demand. In APAC, we are increasing our guidance from approximately 4% to about 5% supported by a combination of strong new business in delayed churn. Moving on to Slide 12.", "We are raising our adjusted EBITDA outlook by $60 million. This reflects the strong conversion of the incremental property revenue highlighted earlier, coupled with prudent cost controls, resulting in an incremental $67 million in cash property gross margin outperformance along with an additional $14 million in cash, SG&A savings and $30 million of straight line. This growth was partially offset by a reduction of $20 million associated with our U.S. services business and a negative FX impact of $14 million.", "Turning to Slide 13. We are raising our expectations for AFFO attributable to common stockholders by $40 million at the midpoint or approximately $0.09 on a per share basis, moving the midpoint to $9.79 per share. Our performance was driven by the cash adjusted EBITDA increase of $61 million partially offset by $16 million of other items, including an acceleration of certain maintenance projects in cash taxes, along with incremental minority interest due to outperformance in our JV businesses, partially offset by improvements to net interest. As I noted earlier, FX caused a headwind of approximately $5 million.", "Moving on to Slide 14. Let's review our capital allocation plans for the full year. Consistent with the expectations set at the beginning of the year, we are planning to distribute approximately $3 billion in common stock dividends which represents a year-over-year growth rate of 10% on a per share basis, subject to board approval. Our full year capex spend also remains consistent at $1.7 billion with the acceleration of certain non-discretionary projects that I mentioned earlier, offset by lower discretionary spend, which includes a reduction in development capex associated with lower anticipated new build volumes.", "As always, our goal is to execute a capital deployment strategy that maximizes total shareholder returns. In line with my earlier remarks, we're focused on creating incremental value through solid organic growth and quality of earnings optimizing global operational efficiency and expanding cash margins, all while strengthening our financial position by further reducing balance sheet risk and enhancing financial flexibility. As it relates to capital allocation and against the current economic backdrop, we believe it's optimal to prioritize balance sheet strength and keep discretionary spend focused on select capital expenditure projects that yield the best risk-adjusted returns and quality of earnings. Additionally, decoupled from our current line of sight to its attributable AFFO growth for next year, we anticipate maintaining a dividend per share profile in 2024 that closely aligns with our 2023 expectation of $6.45 per share resuming growth in a manner supportive of our REIT taxable income thereafter, all subject to board approval.", "By focusing on the above priorities, we believe American Tower is positioned for sustained and compelling total shareholder returns supported through balance sheet strength over the long term. Consistent with our historical practice, we'll discuss our 2024 plans in more detail on our next earnings call. Moving to the right side of the slide and as highlighted earlier, as a result of the successful execution of our financing initiatives in the third quarter, we reduced our floating rate debt balance to below 11%, increased our liquidity to $9.7 billion, and our average maturity remains over six years. We closed the quarter with net leverage of approximately five times, which benefits from certain non-recurring items in the quarter, as I mentioned earlier, and we expect to close the year slightly above five times.", "Moving forward, we'll remain opportunistic and potentially further accessing the debt capital markets, ensuring continued strength in our balance sheet, reducing risk and enhancing our financial flexibility. Turning to Slide 15, and in summary, our diverse portfolio of global communications assets continue to demonstrate resiliency in the face of a challenging macroeconomic backdrop, producing attractive growth through organic leasing, further amplified by exceptional cost management at the margin. Complementing our operational performance, we continue to make progress in strengthening and de-risking our balance sheet. Furthermore, we remain committed to managing our capital structure, sources and uses and capital allocation priorities in a manner that positions American Tower to drive sustained attractive returns for our shareholders over the long term.", "With that, operator, we can open the line for questions." ] } ]
[ { "name": "Operator", "speech": [ "Thank you. [Operator instructions] And we'll go to the line of Simon Flannery with Morgan Stanley." ] }, { "name": "Simon Flannery", "speech": [ "Tom, all the best for the future. It's been great working with you over the years, even back to the Verizon use of cell days. And Steve, congratulations and best of luck in the new role. If we could come back to the capital allocation please.", "The comments around the dividend and perhaps, Rod, you could just talk about target leverage? Are you thinking about bringing leverage down more aggressively given the rate environment and the uncertain macro environment? Just any color around that would be great or any other drivers of the dividend decision? And perhaps how are you thinking about M&A more broadly outside of the India process that you referenced earlier. There's a big gap here between public and private markets. Any opportunities there that you see? And what about buybacks? Is that something that could come into your toolbox in the coming quarters here? Thank you." ] }, { "name": "Rod Smith", "speech": [ "Yeah. Simon, good morning. Thanks for joining. I'll hit the leverage piece first, and then Tom will address the dividend more broadly.", "When you think about the leverage, we've been a little bit higher than our stated range. We've been up in the five, three range. We did end this quarter at around 5.0 that was benefited from some non-recurring one-time revenue items. So we do expect that to tick back up toward the end of this year.", "And we expect to end this year, again, higher than our stated range of three to five times up in the 5.2%, 5.3% range. It is a priority of ours to bring that leverage down, along with driving organic growth operational efficiency, expanding margins, controlling the SG&A in the -- and ultimately, the AFFO and AFFO growth that we can drive. So the target is to get to 5.0 as soon as we can. We'll be working through that diligently next year.", "And a lot of these operational objectives around organic growth and driving AFFO, as well as capital allocation, our capital plan, specifically you'll see a reduction -- you've seen a reduction in our capital plans this year versus last year. And that, again, is all in line with trying to drive down leverage and strengthen our balance sheet. We do think those are important steps to take to drive total shareholder return in the short term and the long term. So that's what it's really all about the dividend holding it flat next year is in line with that.", "I mean, I'll say, we believe that's the best use of capital in terms of strengthening the balance sheet in this time of uncertain rates. When it comes to M&A, we continue to not see compelling M&A opportunities in our pipeline. So it's not something that's hitting our radar screen in terms of capital allocation this year and we turn the corner into next year. Then I'll turn it over to Tom to hit and a little bit more directly." ] }, { "name": "Tom Bartlett", "speech": [ "First of all, Simon, thanks for your kind words. But maybe with regards to the dividend, it's important just to just take a step back and understand how we really manage this dividend growth. Since we became a REIT over a decade ago back in 2012, we've always looked to complement AFFO growth with a compelling yield, which we've grown, as you all know, around 20% annually as compared to our AFFO per share growth, which has been closer to 10% over that same time period. We've aligned our distribution with REIT taxable income, as you would expect.", "And within REIT AI you do have a recurring run rate and more of one-time buckets, consistent of things like earnings and profits, settlements, throwbacks NOLs, which we used last decade, much of which is discretionary in the planning that are absolutely separate from AFFO. And these tools allow us for to manage a more predictable glide path on our dividend. So here we are in 2023, we're committed to a 10% dividend growth rate which, like other years, consisted of certain one-time items to manage the dividend path and ensure alignment between our distribution and REIT AI. And so, although our recurring REIT AI bucket was negatively impacted by interest rates, we utilize certain one-time items to manage toward the distribution.", "And absent those items, like most years, we'd be overdistributed. So as we look ahead to '24, we see an opportunity to accelerate our glide path and reset REIT AI closer to the run rate, which means temporarily relatively flat dividends per share in '24 decoupled from our expectations for AFFO growth based on our line of sight today. So our priorities that Rod just laid out really remain on maximizing our total shareholder returns. And we see the optimal path to do so, really centered around strengthening and de-risking our balance sheet, which means, in part, reducing our debt balance and advancing our pathway to sub five times net leverage and with that, more financial flexibility.", "And we view the levers to accelerate this path through maximizing organic growth, reducing our cost base as we've done in '23 and will continue to do in '24 with disciplined capital allocation that Rod just referred to, together with managing the dividend in a relatively flat basis before resuming growth in line with our recurring REIT AI thereafter. So this isn't a decision we take lightly, as you would expect. But given the current macro volatility, we believe that the balance sheet strength and accelerating financial flexibility for future opportunities, which could include buybacks is the optimal approach from where we sit today. So hopefully, that gives you a little bit of a sense, at least in terms of how we're thinking about it and how it fits into our overall plans for creating value long term." ] }, { "name": "Simon Flannery", "speech": [ "Right. Yeah. That's very helpful. So just to be clear, the hope would be to resume dividend growth in '25 or into 25?" ] }, { "name": "Tom Bartlett", "speech": [ "Yes." ] }, { "name": "Simon Flannery", "speech": [ "Great. Thank a lot." ] }, { "name": "Operator", "speech": [ "And next, we go to Michael Rollins with Citi. Please go ahead." ] }, { "name": "Michael Rollins", "speech": [ "Thank and good morning. And Tom, I also want to express my thanks and best wishes for your upcoming retirement. Congratulations to Steve on your upcoming transition to the CEO role. Just a couple of questions for me.", "-- You're welcome. And again, thank you, it's both at Verizon and at AMP. We've been working --" ] }, { "name": "Tom Bartlett", "speech": [ "We got a long answer. My hairline has receded more than yours." ] }, { "name": "Michael Rollins", "speech": [ "So a couple of things. So first, on activity levels in the domestic business. Curious, if you could just go deeper into what you're seeing as you're looking at the balance of this year and what it means for next year in terms of how that domestic business can grow relative to the long-term annual targets that you set for that business? And if you can -- within that context, also unpack the delays that you're seeing in Sprint related churn and what that means for that decommissioning pace as we look forward? Thanks." ] }, { "name": "Rod Smith", "speech": [ "Sure. I'll take that one. So we're not going to give specific guidance for 2024 at this time, obviously. And I don't want to get into specific care activity levels because I want to leave it to them to talk about the rollout plans.", "But in general, we have seen activity levels moderate over the last several months from the recent highs. However, the visibility that we have into a baseline level of contractually guaranteed growth through these comprehensive MLAs allow us to reiterate our expectation that we're going to achieve an average annual OTBG growth rate of at least 5% in the U.S. and Canada segment between 2023 and 2027. And despite some of the concerns that people have in the market over the recent moderation we have visibility into a level of organic growth in 2024 that's supportive of that average.", "Now, having said that, I want to break down the components a little bit, we do not have visibility into another year of $230 million growth from colocation and amendment activity. That's far away a record from American Tower. But we balance that with an expectation for some moderation in churn following 2023, excluding Sprint. Our MLAs do provide us visibility into a level of colocation and movement contributions that exceeds the average we've seen over the past several years.", "And again, it's supportive of that at least 5% average OTBG that we've guided to between 2023 and 2027. And to reiterate on our Sprint churn, the annual impacts of our Sprint churn have been $195 million in 2021, $60 million in 2022, and $50 million in 2023 and $70 million in 2024 for a total of $375 million. So we're past the peak of that churn, and there's no change to that cadence versus our prior guidance in that respect." ] }, { "name": "Tom Bartlett", "speech": [ "And Mike, I would just add just to make it clear, the delays in churn that we're seeing in the U.S. is not Sprint related. It's other items that we were planning that could be moved out a bit, as Steve is saying the Sprint cadence has not changed. And when you think about next year 2024 in our long-term guide, it's unlikely that there's going to be material upside based on where we sit today.", "We do think there's potential for upside in the longer-term growth rates, but that would probably come in '26 and '27 and down the line, not necessarily in '24." ] }, { "name": "Michael Rollins", "speech": [ "Thanks. And just one quick one, what's the percent that you're seeing in terms of the mid-band upgrades, the percent of sites that have been upgraded for mid-band already versus the amount that might be remaining?" ] }, { "name": "Rod Smith", "speech": [ "It's a little over half at this point." ] }, { "name": "Michael Rollins", "speech": [ "Thank you." ] }, { "name": "Tom Bartlett", "speech": [ "Thanks, Michael." ] }, { "name": "Operator", "speech": [ "And next, we can go to David Barden with Bank of America. Please go ahead." ] }, { "name": "David Barden", "speech": [ "Hey, guys. Thanks so much for taking the questions and let me echo Tom, the years we've spent together. It's been great and congrats to Budd and Steve on the new roles." ] }, { "name": "Tom Bartlett", "speech": [ "Thanks, Dave." ] }, { "name": "David Barden", "speech": [ "So I guess, if I could start, just maybe more on the finance side, Rod. Slide 11, you talked about some of the increases we're seeing in some of the non-U.S. regions. Could you break that down into kind of core organic leasing and then some of the inflation driven escalators? And so, is this real growth that we're seeing that could be sustained or is it more of an inflation driven bubble that we need to kind of be conscious of that might reverse? And then, second, just on the India situation with the write-down, I think the tactic acknowledgment that maybe some of the loftier valuation ambitions were not there.", "I guess we're all sitting here trying to figure out what kind of dilution we should be baking into 2024? The latest press reports that India suggested kind of a $2 billion valuation, something like a five times EBITDA multiple. Obviously, it depends on kind of how big a stake you sell and when you sell it. But is there any kind of more color you can shed on the shape of what kind of dilution expectation we should be thinking about for '24? Thank you." ] }, { "name": "Rod Smith", "speech": [ "Yeah, David. So let me hit the first part of your question. I think I missed a little bit of the second, so I may ask you to repeat that. But when you think about the upside in terms of the growth rates, let me hit it by addressing the organic tenant billings piece first-off.", "So we are seeing increases in organic tenant billings really across the board. So you can see in the charts, they were increasing our overall organic tenant billings for the company to about 6%, that's up about 50 basis points from prior. And that kind of -- that theme is consistent across many of the regions. So as Steve just highlighted in the U.S., we're bringing that guide to beyond 5% from what was previously around 5%.", "International is coming up to greater than 7%. Prior, we were at greater than 6.5%. And then, you look at the different parts of the company region by region, LatAm is going up to about 5% versus what was previously a 4%. APAC is coming up to about 5%.", "Previously, it was 4%. Europe was staying around where it was at 8%. And then, Africa is also coming up to around 12% from what was prior higher than 11%. A couple of things that I would say, in terms of the stay ability or the durability of some of that growth, certainly, in the U.S., it's nice strong performance.", "There is a little bit of delayed churn, so we can expect to see that hit next year. Other than that, the U.S. is very steady in terms of the demand. Part of that is because of the way the contracts we have work out.", "When you think of Latin America, we do have higher levels of churn this year than we have had in prior years. Some of the outperformance is churn driven. So when you think about the LatAm over performance, it's really a delay in churn and probably not all that durable from that perspective. When you get into APAC, it's a similar situation.", "The increase there is delayed churn, maybe some delayed discounts. Europe is staying in line. In Africa, we're seeing higher levels of new business activity. So much of that is, in fact, durable and lasting, that's the way I would kind of articulate that.", "And then, maybe on the second question, if you could maybe just repeat the question about the dilution, just so I get it right." ] }, { "name": "David Barden", "speech": [ "Hey. Yeah, Rod. Thank you. So I think we were just trying to – and thank you for those comments, that's helpful on the pieces part.", "The -- just the India write-down would seem to suggest that the bid-ask spread between what maybe AMT hopes to accomplish from a valuation standpoint and what's been offered has kind of collapsed down to the offer the side of the spread? And is that the right interpretation or reading through that write-down. And then, obviously, we're all attempting to evaluate what the dilution effect for the sale might be on 2024. Any more color on whether it's a full divestiture or 50% divestiture and kind of timetable would help us kind of do that math? Thank you." ] }, { "name": "Rod Smith", "speech": [ "Yeah. That's good, David. Thank you. So we're making good progress with the strategic review that we've set out.", "In terms of the write-down, we are writing the India business down about $322 million and sets the book value in around $2.2 billion or so. And as I stated in my prepared remarks, it really is based on our internal impairment review analysis, discounted cash flow driven and certainly, cost of capital plays a significant role in that. But also, as I highlighted in my comments, it does also consider indications of value that we've determined throughout the process. So I think you can understand what that means, and it will help you kind of think about where things might fit.", "We've also provided a little bit more breakout on the India financials and some of -- in the back of the presentation, which you'll see. But in terms of revenue, we're a little over $1 billion EBITDA. It's about $355 million. Unlevered AFFO is about $290 million.", "So that gives you a little bit more information to kind of piece through and kind of assume where we may -- the way we may have. I don't want to get into too much direct guidance. We'll certainly lay that out when we complete our strategic review, which -- the good news is we're happy with the way the process is evolving. We're confident we'll be concluding it this year just as we've previously mentioned, once we do, we'll let the investors know exactly what we've concluded and what we plan to do there.", "We've said that our goal, and we're on track to achieve our goals, which is to sell a majority equity stake to a financial investor. We've said between 51% and 100%, the reality is it's probably going to be a majority stake. We probably will retain a stake, so it will be somewhere between that 61% and 100%. That's where we're kind of directing the process at this point.", "But again, we are confident that the process will conclude in the next couple of months. And when it does, we'll let the investors know exactly what we've done." ] }, { "name": "David Barden", "speech": [ "Thanks so much, guys. Appreciate it. Good luck everybody." ] }, { "name": "Rod Smith", "speech": [ "Thanks." ] }, { "name": "Operator", "speech": [ "And next, we'll move to Rick Prentiss with Raymond James. Please go ahead." ] }, { "name": "Rick Prentiss", "speech": [ "Guys, I'll echo the bell head, thanks for the memory, Tom. it's been great working with you. I think we went to your first NAREIT like, 14 years ago." ] }, { "name": "Tom Bartlett", "speech": [ "Absolutely. You set up the table for us at the NAREIT conference, Rick, I remember that." ] }, { "name": "Rick Prentiss", "speech": [ "Yeah. And Steve, been great working with you in the past, and we look forward to the new role." ] }, { "name": "Rod Smith", "speech": [ "Thanks, Rick." ] }, { "name": "Rick Prentiss", "speech": [ "Yeah. I want to go back to the dividend question from a couple of different angles as well. Rod, I think you mentioned $6.45 a share approximately current dividend announcing getting paid shortly would imply a little bit higher than that $6.48. Are we thinking it's in that range or is the $6.45 million more we should be thinking about?" ] }, { "name": "Rod Smith", "speech": [ "Yeah. I think at this point, think about it being flat year-on-year. So, of course, every quarter, we get the dividend approved by the board. But our intention is to hold the dividend flat annually year over year to help support deleveraging balance sheet strength and ultimately, AFFO growth, as well as total shareholder returns." ] }, { "name": "Rick Prentiss", "speech": [ "OK. I appreciate the comments that you're trying to kind of decouple from AFFO, more related to the REIT taxable income, it sounds like as well, but sort of implicit in that isn't also that thought that the India sale is anticipated and that also can kind of affect what the dividend might have been prior thoughts." ] }, { "name": "Rod Smith", "speech": [ "Yeah. I guess, Rick, I would say that's not correct. The India business isn't in our REIT at this point. So it really doesn't drive into the retaxable income issue.", "I think Tom articulated all the drivers with that, which it's really -- this is a management decision and certainly supported by our board to prioritize capital to prioritize deleveraging and balance sheet strength, it's not impacted by the India process at all. And Tom highlighted, there are certain REIT rules that allow one-time items in some pre-tax earnings to be moved from one period to another. So there have been times in the past where we've been over under distributed, and we can move some of that over or under distribution back and forth from year-to-year, which is helpful. So in this case, it really is a decision to drive balance sheet strength and using our capital in the best way we can again, to drive total shareholder return in the short term and in the long term.", "And in this market with uncertain interest rates going forward, we think that's prudent and that's really the driving factor." ] }, { "name": "Rick Prentiss", "speech": [ "OK. And then, you said there was a small acquisition from AT&T/SBCs talking about history lesson. Can you talk a little bit about what you're seeing in the marketplace as far as multiples in the U.S., Europe and other places." ] }, { "name": "Rod Smith", "speech": [ "Yeah, Rick. I would -- let me highlight first that we don't see compelling M&A on our pipeline. I think everyone kind of knows that, I'll just reiterate that. We are seeing some things out there.", "Certainly, there is -- not as robust, but there is a market in the U.S. with some smaller portfolios. And I don't want to get into a lot of detail in terms of what we see. I think we still see very high prices, even though they may have pulled back slightly from where they were, let's say, a year ago.", "And for that, we still look at the small deals if we can find compelling ways to expand total shareholder return. We have a little flexibility there. We don't see anything major. But we also just see the majority of the deals are probably still priced a little higher than what today's cost of capital would suggest that they should be.", "The small acquisition you see in our numbers is really just a buyout of a prior SBC sublease, which you'll be familiar with. It was a small tranche." ] }, { "name": "Rick Prentiss", "speech": [ "OK. Was that some of the final purchase option stuff as well?" ] }, { "name": "Rod Smith", "speech": [ "Yeah. That's exactly what it is. It's not the final one. It's just another tranche, and that will continue for a few more years." ] }, { "name": "Rick Prentiss", "speech": [ "Makes sense. And last one for me then. I think you've mentioned that all assets are coming on the tail we reviewed with India getting closer to this process. Any update as far as what you're looking at on the balance sheet that might be possible to say it's not where they are, where we thought it would be or maybe someone else wants to pay more, given private versus pilot multiples?" ] }, { "name": "Rod Smith", "speech": [ "Yeah. I would say, Rick, we routinely review the portfolio performance across our business globally. We do that from a couple of perspectives. One is, there could be capital recycling opportunities, which we think could be very good for our shareholders over the long term, that certainly the decisions we saw driving our exit from the Mexico fiber business.", "It also is what is driving our consideration around what we're doing in India. So I'll highlight that, I don't want to get into specific other places where we might be looking. But we are looking at our portfolio, and it's something we do constantly. The other thing we do is, we constantly look at our capital deployments.", "And from that perspective, we can throttle those back or up depending on where the opportunities are. We can also reallocate or redistribute that capital to where we feel that investments will most -- will be most aligned with our priorities of driving organic growth in the short term and the long term, quality of earnings and consistent durable industry-leading AFFO growth and ultimately, total shareholder return. So I wouldn't just look at whether or not we sell a business here or there, those would be kind of operational decisions, as well as recycling capital, but also kind of our capex programs, how much are we investing? Where are we investing? What kind of assets. And again, those decisions are made each and every year, really each and every quarter, and they are meant to and do align with our priorities." ] }, { "name": "Rick Prentiss", "speech": [ "OK. Thanks, guys. And again, best wishes everybody." ] }, { "name": "Tom Bartlett", "speech": [ "Thanks, Rick." ] }, { "name": "Operator", "speech": [ "And next -- pardon me, next we go to Matt Niknam with Deutsche Bank. Please go ahead." ] }, { "name": "Matt Niknam", "speech": [ "Hey, guys. Thanks for taking the question. Just two related to the U.S. Maybe first on services.", "So it was a pretty sizable drop off maybe less surprising in terms of what's going on in the industry, but services revenue looks like they dropped off in third quarter. Just wondering if you can share any color in terms of whether this is broad-based or related to one or two customers in particular and how to think about sort of forward trajectory into 4Q? And then, maybe on a somewhat related note, in terms of colo and amendment activity in the U.S., so, 3Q held in relatively stable to what you saw in the first half. I think the implied number for 4Q is around $53 million. Just wondering whether that's sort of an appropriate run rate to consider into next year or whether we should anticipate sort of incremental moderations by virtue of just a broader low in the industry? Thanks." ] }, { "name": "Tom Bartlett", "speech": [ "Sure. I'll start out and then, if you want to jump in, Rod. In terms of our service business, it's inherently a non-run rate business, and that makes it difficult to predict. And you saw that in 2021 when we raised our guide materially over a couple of quarters, we're seeing that this year as we've seen a moderation of activity.", "What I would say is because of our cooperative MLAs, that's not a direct read across to our property revenue, because we are somewhat insulated from the peaks and valleys of activity with the customers on that. And it's too early to be giving guidance for 2024 and where we see the activity levels going there. What I would just reiterate is this is consistent with what we've seen in other Gs of activity. And the carriers have an initial build phase that starts out with kind of a wave of activity, and you'll see that moderate a little bit.", "We are seeing the capital spend moderate a bit, but it's still settling at levels higher than it was in 4G. And even with our reduced expectations this year for our services business, it's still higher than it was at the same point in 4G. So we're very optimistic that customers will continue to build throughout the cadence of this 5G build. There will be a restart of that activity.", "We don't know exactly when that's going to happen and we'll give better guidance on that in February as we get more visibility into 2024, what those activity levels are going to be." ] }, { "name": "Rod Smith", "speech": [ "Yeah. And Matt, I'll just add a couple of data points. When you think about the co-location amendment additions. This year, we're anticipating a number of around $230 million for the U.S.", "You recall last year, we were around $150 million, we're at about $58 million this quarter and our guide anticipates a further reduction, but still a number that's greater than $50 million in Q4. I wouldn't just take that Q4 number and annualize. And I think you're better off and we won't give guidance, as Steve suggest until next year. But for modeling purposes, if you look at this year and last year and you split the difference, that's probably a safer place to put in your models today.", "And then, of course, we'll guide in February, and we'll be able to update that number. The only other thing I would say on services is the $140 million number is still higher than the historical average for services, and we're continuing to maintain a very nice gross margin in that business at all levels. So when we saw that go up to about $270 million, we were still in the 50s, low 50s, 53%, 54% margins as it tapered off a little bit to $140 million, we are able to drive up the margins based on the mix of the revenue and the way we service that revenue. So with a lower revenue, we're still able to mitigate some of that with higher margins in the upper 50s at this point." ] }, { "name": "Matt Niknam", "speech": [ "Appreciate it. Thank you both." ] }, { "name": "Tom Bartlett", "speech": [ "You're welcome." ] }, { "name": "Operator", "speech": [ "Thank you. And next, we'll go to Eric Luebchow with Wells Fargo. Please go ahead." ] }, { "name": "Eric Luebchow", "speech": [ "Great. Thanks for taking the question. Just a couple on capital allocation. So given the recent increases in interest rates and cost of capital, I mean, to influence at all as you look into next year, kind of your build-to-suit ambitions internationally or is there any kind of valuation of maybe slowing that to reinvest in other areas and that could potentially be data centers where it seems like you've had really strong performance year-to-date.", "It seems like growth continues to ramp and maybe you need to allocate more capital to your data center business and how you kind of balance that versus other forms of shareholder return? That would be very helpful. Thank you." ] }, { "name": "Rod Smith", "speech": [ "Yeah. Good morning, Eric. Thanks for joining in. And absolutely, all those issues are on the table.", "We look at our capital allocation every year, certainly, and I would say, even more frequently than that in the idea and the approach is to make the best decisions we can to support long-term total shareholder return. With the increase in cost of capital, the increase in interest rates, as well as other factors affecting our markets around the globe, those all play into how much capital we will be deploying, how many build-to-suits will be executing on and where those will be. So that certainly comes into play. I won't get into a lot of detail in terms of decision-making there.", "I would just maybe highlight again that capital this year is lower than it was last year. And the environment in interest rates, in particular, there's still a fair amount of uncertainty. So we will be continuing to kind of look at that capital plan to decide if putting the capital into build-to-suits around the globe is better than some of the other options we have and a continuation of capital reductions is probably what you'll end up seeing in this environment. That's kind of where we're looking at it.", "The other part of your question is absolutely, we look at putting capital into places that primarily or specifically drive and align with our priorities. So when you think about us focused on organic growth over the long term, we're focused on quality of earnings. We're focused on operational efficiencies and driving balance sheet strength, all of the different ways that we can execute on achieving those goals are in play. If that means allocating more capital to higher quality markets versus emerging markets or vice versa.", "If it means putting less into capex and more into debt reduction, if it means reducing the growth of the dividend and putting more toward balance sheet and debt reduction. We think about those things all the time and it plays into our capital allocation and it will next year as well, and we'll lay out what that will mean in February." ] }, { "name": "Eric Luebchow", "speech": [ "Great. Thanks. And just one follow-up question. Latin America, you've talked about some delayed churn in that business.", "So maybe you could just kind of walk us through the cadence of when that you expect that churn to kind of layer through and when you may be on the other side of it. And then, obviously, it seems like given a pretty big reduction in inflation in some of those markets like Brazil, would seem to seem like the CPI-linked escalators will be a bit of a headwind at least into next year. So maybe just talk about some of the moving pieces and the growth outlook there? Thank you." ] }, { "name": "Rod Smith", "speech": [ "Yeah. A couple of things that I'd – that I highlight relative to the LatAm market. I mean, in 2022, we had roughly 5% churn that was part of embedded in our organic tenant billings growth. In Q3 here, it was 5.2%, so pretty consistent.", "For the full year of '23, we're projecting that to be around 6%. So that's what's driving. When we say elevated churn, that's exactly kind of what we're seeing there. We are seeing delays in churn.", "Much of that is tied to the churn that we're experiencing and will continue to experience down in Brazil. We also see churn from Telefonica up in Mexico. Those are kind of the two primary places where we see churn. We've laid out a lot of the different pieces of the oi churn.", "I won't do that again here. But I would say, we do expect elevated churn to continue into next year. I think you're absolutely right in terms of when inflation moderates in some of these markets, that will potentially lower the organic tenant billings growth from that perspective as well. So we'll be watching all of those issues.", "I think when it comes to LatAm, we'll be watching the churn as we go into next year. I can't tell you yet that we're beyond the peak here because of this churn that was delayed and potentially pushed into next year. But over the next couple of years, LatAm because of the reduction in inflation that could happen and the elevated churn, we could be in the low single digits in terms of organic tenant billings growth as we head into next year." ] }, { "name": "Eric Luebchow", "speech": [ "OK. Great. Thank you, Rob. Appreciate it." ] }, { "name": "Rod Smith", "speech": [ "You're welcome." ] }, { "name": "Operator", "speech": [ "And next, we can go to Nick Del Deo with Moffett Nathanson. Please go ahead." ] }, { "name": "Nick Del Deo", "speech": [ "Hey. Thanks for taking my questions. And first of all, I want to echo others' comments and congratulate both Tom and Steve on the upcoming changes." ] }, { "name": "Tom Bartlett", "speech": [ "All right. Thank you." ] }, { "name": "Nick Del Deo", "speech": [ "Tom, just following up on the technology outlook you shared, is there any reason to believe that -- call it, the combination of the volume of spectrum that the carriers have been able to deploy and the capacity improvements enabled by 5G and massive MIMO, are going to allow them to stretch out their 5G upgrades over a longer period of time than may have been the case in the past, I think what you call the harvest phase of the 5G deployment or do you think those -- the impact of those improvements are just confident to what we've seen in the past with other technology upgrades?" ] }, { "name": "Tom Bartlett", "speech": [ "My sense is that they're more comparable with what we've seen in prior upgrades. Yeah. There are bigger swaps of spectrum in the market today that all of our customers are deploying, particularly in the mid-band. But the demand is disproportionate to what we've seen in the past.", "So my sense is that given the demand and the additional kind of usage that we would expect over the next several years, it will be very -- rarely, very, very consistent. The data intensity that I even talked about with regards to adding certain levels of video usage is really going to eat into a lot of that spectrum capacity that is out there. So as I said, there is definitely more spectrum out there, definitely more in the mid-band, but I would expect that the usage that we will see and experience over the next several years, we'll put it on the same path as what we've seen in 3G and 4G." ] }, { "name": "Nick Del Deo", "speech": [ "OK. And then, maybe for Rod kind of a follow-up question on the dividend outlook. You noted that coming 2025, we should start to see the dividend grow at kind of in line with taxable income. I think historically, you had outlined sort of a 10% expectation.", "Should we think of your likely taxable income growth as being in that zone or is it going to be sort of a different level or is it just too early to say?" ] }, { "name": "Rod Smith", "speech": [ "I think, Nick, it -- we'll have to watch kind of the trajectory of the REIT taxable income. But in general, I think it's probably safe for you to assume that that will be in line with all material respects with our AFFO growth and AFFO per share growth, that's probably a safe way to kind of think about it. It may not be exact all the time. But given the fact that we can't predict the future certain -- and certainly, we're not going to be guiding long term on that.", "If you think about where our AFFO and AFFO per share growth is going to be and you think about that being probably consistent with where retaxable income might be and where the dividend growth could be. That's probably the safest bet. I'd just highlight again, we do have a requirement to dividend out 90% of our REIT taxable income. We typically dividend out closer to 100% because we think that's most beneficial to our shareholders from a tax perspective.", "So that's important to notice. But then, Tom, mentioned, there are other ways that we manage the dividend payout relative to REIT taxable income, and that's where there is a little bit more discretion on our end to try to match it up to AFFO growth. So that's probably the way to think about it. Think about what our AFFO growth is going to be over the long term, what our AFFO per share growth is going to be and a dividend growth very well may align with that.But with that said, we will be considering capital allocation and the best uses of capital for our shareholders each and every year and each and every quarter.", "And the dividend specifically, is approved by our board each year in each quarter." ] }, { "name": "Nick Del Deo", "speech": [ "OK. That's great. Thank you, Rod. And can I just -- one quick clarification on the one-time revenue benefits you called out.", "It looks like other was elevated in the U.S. in the quarter. I think that's really the Sprint payments. And any other one-timers that you would call out or be able to describe to us?" ] }, { "name": "Rod Smith", "speech": [ "The only thing it's really in the settlement area. I mean, we had about -- I think it was about $50 million in settlements this quarter. Last year, same quarter was much lower, more in the $15 million range. There's a customer equipment removal settlement in the U.S.", "that was pulled forward from the fourth quarter into the third quarter, that was probably in the range of $25 million or so. But those are really the items. It's the one-time items, it's settlement fees. We get some small settlement fees throughout our other international markets and the timing of those can be somewhat bumpy.", "One thing you'll see from our guide is those settlement fees, those one-time items do drop off pretty substantially in Q4. So that's one of the things you can think about when you look at the bridge from Q3 to Q4 in terms of our AFFO, there will be a non-recurrence of close to $40 million, $45 million of those one-time items." ] }, { "name": "Nick Del Deo", "speech": [ "OK. Great. Thank you so much." ] }, { "name": "Operator", "speech": [ "And next, we'll go to Batya Levi with UBS. Please go ahead." ] }, { "name": "Batya Levi", "speech": [ "Great. Thank you. Tom and Steve, I wish you all the best as well. Just a couple of quick follow-ups.", "Rod, you mentioned that we'll end leverage at about 5.2, 5.3 at year-end. Where do you want that to be over the next year or two? And we will get specific guidance next year, but just directionally, do you expect AFFO to grow in '24, assuming India is sold at year-end? Thank you." ] }, { "name": "Rod Smith", "speech": [ "Yeah. Hey, Batya. Nice to hear from you. Hope you are well.", "Yes, so we ended the quarter with 5.0 leverage. It's going to be a little higher than that at the end of the year, primarily driven because of those one-time items on the EBITDA side. But our clear focus is to delever to reduce debt, as well as reduce our exposure to floating rate debt by driving the percentage of our debt that is exposed to floating rates, and we got that down to about 11% or so. Our goal is to get to five times really as soon as we can.", "And that's what we're focused on, and that's what's driving a lot of our capital allocation decisions is driving balance sheet strength and reducing leverage getting to that 5.0 as soon as we can. So that is clearly the goal. The goal will also -- the goal -- and it's specifically for 2024, that's where we hope to get to. And we're looking for all the opportunities we can find to drive that.", "And that could include reducing the capital program a little bit next year, that certainly is in line with the dividend decision that you heard us articulate today, you'll see that our SG&A is being held flat year over year. You'll see that our margins are expanding that's the result of a lot of global initiatives around operational efficiency to drive additional EBITDA and AFFO. Not only is that good for everyone. It also helps us get our leverage numbers down a little bit.", "It provides a little bit more cash flow to reduce the debt. So those are all the pieces that we're focused on. The short answer is five times as soon as possible. Five times in 2024 would be great.", "That's possible, and we're driving toward that and we'll see if we can achieve it. And then, with AFFO, I would absolutely say, our portfolio, consistent with the way we've explained this for years is really well positioned for durable AFFO per share growth. This year, that was interrupted primarily because of financing cost headwinds, driven by interest rates, additional shares that we issued for some of our prior acquisitions and some minority interest that we have because of some of the private capital that we raised in certain parts of our business. With our new AFFO per share outlook of around $9.79, we're pretty much flat with where we were prior year.", "So we've been able to convert a 1% to 2% reduction in AFFO, AFFO per share up to closer to flat, which is good. But when you think about that number being flat and an 8% headwind from financing being embedded in it, as well as a 2% headwind from VIL short payments or, let's say, the VIL reserve of $75 million we made, you adjust for those things, the underlying core operating performance of the assets that we own around the globe are driving double-digit growth without those headwinds. So we absolutely believe this business can drive growth over the long term and in 2024. The thing that we'll be watching that a potential interrupters would be any material volatility in FX.", "We don't know where rates will go. Rate uncertainty is something that we watch. But absent those sorts of items, we think the portfolio is well positioned to grow next year and over the long term." ] }, { "name": "Batya Levi", "speech": [ "Got it. Thank you." ] }, { "name": "Rod Smith", "speech": [ "You're welcome." ] }, { "name": "Operator", "speech": [ "And ladies and gentlemen, that does conclude our Q&A session for today. I'll hand the call back over to our team." ] }, { "name": "Adam Smith", "speech": [ "Great. Thank you, everyone, for joining today's call. If you have any other questions, please feel free to reach out to me here at the investor relations team. Have a great day." ] }, { "name": "Operator", "speech": [ "[Operator signoff]" ] } ]
AMT
2018-07-31
[ { "description": "-Senior Director of Investor Relations -- Senior Director of Investor Relations", "name": "Igor Khislavsky", "position": "Executive" }, { "description": "-Chairman, President, and Chief Executive Officer -- Chairman, President, and Chief Executive Officer", "name": "Jim Taiclet", "position": "Executive" }, { "description": "-Chief Financial Officer -- Chief Financial Officer", "name": "Tom Bartlett", "position": "Executive" }, { "description": "-Bank of America Merrill Lynch -- Analyst -- Bank of America Merrill Lynch -- Analyst", "name": "David Barden", "position": "Analyst" }, { "description": "-Citi -- Analyst -- Citi -- Analyst", "name": "Michael Rollins", "position": "Analyst" }, { "description": "-J.P.Morgan -- J.P.Morgan", "name": "Analyst", "position": "Other" }, { "description": "-UBS -- Analyst -- UBS -- Analyst", "name": "Batya Levi", "position": "Analyst" }, { "description": "-Oppenheimer & Company -- Analyst -- Oppenheimer & Company -- Analyst", "name": "Timothy Horan", "position": "Analyst" }, { "description": "-Raymond James -- Analyst -- Raymond James -- Analyst", "name": "Rick Prentiss", "position": "Analyst" }, { "description": "-Cowen & Company -- Analyst -- Cowen & Company -- Analyst", "name": "Colby Synesael", "position": "Analyst" }, { "description": "-Morgan Stanley -- Analyst -- Morgan Stanley -- Analyst", "name": "Simon Flannery", "position": "Analyst" }, { "description": "-Deutsche Bank -- Analyst -- Deutsche Bank -- Analyst", "name": "Matthew Niknam", "position": "Analyst" } ]
[ { "name": "Operator", "speech": [ "[Operator instructions] Ladies and gentlemen, thank you for standing by. Welcome to the American Tower second-quarter 2018 earnings call. [Operator instructions] As a reminder, today's conference call is being recorded. I would now like to turn the conference over to the senior director of investor relations, Igor Khislavsky.", "Please go ahead." ] }, { "name": "Igor Khislavsky", "speech": [ "Thanks, Leah. Good morning, and thank you for joining American Tower's second-quarter 2018 earnings conference call. We've posted a presentation, which we'll refer to throughout our prepared remarks, under the Investor Relations tab of our website, www.americantower.com. Our agenda for this morning's call will be as follows.", "First, I'll provide a few highlights from our financial results. Next, Jim Taiclet, our chairman, president, and CEO, will provide some brief commentary on the key current and future trends we are seeing across our global footprint. And finally, Tom Bartlett, our executive vice president, CFO, and treasurer, will provide a more detailed review of our second-quarter results and updated full-year outlook. After these comments, we'll open the call up for your questions.", "Before I begin, I'll remind you that this call will contain forward-looking statements that involve a number of risks and uncertainties. Examples of these statements include our expectations regarding future growth, including our 2018 outlook, capital allocation, and future operating performance; the pacing and magnitude of the Indian Carrier consolidation process and its impacts on American Tower; assumptions around our pending and recently closed acquisitions; and any other statements regarding matters that are not historical facts. You should be aware that certain factors may affect us in the future and could cause actual results to differ materially from those expressed in these forward-looking statements. Such factors include the risk factors set forth in this morning's earnings press release, those set forth in our Form 10-K for the year ended December 31, 2017, and in the other filings we make with the SEC.", "We urge you to consider these factors and remind you that we undertake no obligation to update the information contained in this call to reflect subsequent events or circumstances. Now please turn to Slide 4 of our presentation, which highlights our financial results for the second quarter of 2018. During the quarter, our property revenue grew 6.8% to $1.75 billion. Our adjusted EBITDA grew 6.2% to $1.08 billion.", "Our consolidated adjusted funds from operations grew more than 16% to $844 million, and consolidated AFFO per share increased by over 13% to $1.90. Finally, net income attributable to American Tower Corporation common stockholders decreased by about 11% to $307 million, or $0.69 per diluted common share. This included more than $50 million in net negative impacts from unrealized foreign currency losses and an impairment charge in India during the quarter. And with that, I'll turn the call over to Jim." ] }, { "name": "Jim Taiclet", "speech": [ "Thanks, Igor, and good morning to everybody on the call. Consistent with our past practice, my comments for today's second-quarter call will cover our extensive and highly diversified international business. But first, given our compelling second-quarter U.S. performance, I'll lead off with a few highlights of our foundational U.S.", "business. Most notably, I really want to shine the spotlight on this, the strong pipeline of applications and activity across our customer base has led us to increase, for the second time this year, our U.S. organic tenants billings growth expectations for 2018, to nearly -- to 7%, nearly 100 basis points higher than our expectations going into the year. In the second quarter, our 40,000-plus U.S.", "communication sites contributed about 55% of our property revenues, 63% of our property gross margin, 65% of our property segment operating profit, and the majority of our free cash flow. U.S. organic tenant billings growth of 7.4% during the quarter was the highest level in nearly four years, driven by tremendous new business commencement activity in the first half of 2018. Our major tenants are making substantial investments in their macro tower-based networks as U.S.", "mobile data usage continues to expand at 30% to 40% per year. And for the first time in many years, all of the national wireless operators are making significant investments simultaneously. This activity is being driven by unlimited plans, encouraging increased mobile video and other high-bandwidth app usage, coupled with initiatives like the multiyear FirstNet build-out. For the seemingly insatiable demand of U.S.", "consumers for mobile data and with a wide array of potential next-generation applications as part of the upcoming deployment of 5G, we are confident in our ability to drive attractive U.S. organic tenant billings growth over a multiyear period. This confidence is, in part, driven by the increasing likelihood that previously undeployed mid-band spectrum assets will be critical components of 5G roll-outs in the future that are macro-focused, which should drive incremental growth opportunities in our towers. This is one of the things that we concluded in our most recent technical assessments that mid-band spectrum is going to be very, very important in the U.S.", "and the deployment of 5G throughout the country. And the result of that assessment, we continue to believe that the U.S. will remain the core engine of cash flow growth and margin expansion for American Tower for many years to come. Rapidly growing demand for mobile data and consequently for our communications real estate is a global as well as a domestic [Inaudible].", "And since our initial expansion abroad nearly two decades ago, we've been focused on building a diversified global footprint, which now includes more than 129,000 international communication sites, collectively now generating about 37% of our property gross margin and 35% of our property operating profit with an aggregate NOI yield in the double digits. A significant portion of our international portfolio is located in large strategic markets with democratic political systems and free-market economies such as Germany, France, Mexico, India, Brazil, and Nigeria. In Q2, exclusive of the impacts of ongoing carrier consolidation-driven churn in India, our international organic tenant billings growth outpaced that of the U.S. by around 50 basis points, coming in at approximately 8%.", "This continues a long consistent trend of strong growth generated by our international markets as carriers there race to keep up with rapidly growing demand for mobile services. These trends are further propelled in many of these markets by the absence of fixed-line telecommunications or cable TV and high-speed Internet networks. In both India and Nigeria, for example, fixed-line penetration has remained in the low single digits, while wireless penetration has steadily increased. This means that large young populations in these countries rely on mobile broadband for everything from basic communications to entertainment to banking.", "Mobile service has become an absolute necessity for billions of people around the world, and we remain focused on partnering with our tenants to bring the benefits of mobile broadband to these underserved populations. Across our international markets, the momentum of mobile data usage growth continues at an accelerated pace. A prime example is Mexico where mobile data consumption has increased by more than 150% in just the last two years and where multiple 4G networks are currently being deployed. As a result, our Mexican organic tenant billings growth has been elevated, averaging more than 15% over the last four quarters.", "Meanwhile, in Brazil, our largest market in Latin America, we're starting to see 4G build-outs, accompanied by solid multiyear demand growth for our communications real estate. And despite some volatility in foreign exchange rates there and local politics, the underlying demand for space on our towers in Brazil continues to be robust as mobile data becomes increasingly important in these countries. 4G is also taking root in India, where Reliance Jio has aggressively invested in a brand-new high-speed 4G network over the last several years, and they're changing the standard in the market. Combined with the increasing proliferation of low-cost smartphones, Jio's network build-out has revealed incredible demand for advanced wireless services in India, with the average Jio smartphone user consuming 10 to 15 gigabytes per month of data.", "This is in line and maybe even above with the U.S. levels, despite 4G service being introduced just two years ago in India. We believe this is just a beginning of the 4G story in that country and the result, we've established a portfolio of nearly 77,000 sites there through our internal new build program as well as a number of M&A transactions. We expect high level of -- this high level of scale to enable us to capture significant growth over the long term, particularly after the ongoing carrier consolidation process in the market concludes.", "And while we have described the short-term disruption resulting from this process, our long-term view of India remains extremely positive. We firmly believe that to bring 4G service to well over 1 billion people, the existing wireless network landscape in the country will have to be completely transformed, more density, more and modernized equipment and in the end, many more tower leases. All of which should generate solid growth for ATC many years into the future post-consolidation. The narrative is similar across the bulk of other international markets, most of which are at least five to 10 years behind the U.S.", "in terms of network development. Smartphones around the world are getting cheaper, carrier networks are getting better, and there are significant pent-up consumer demand for mobile content. Around the world, people are flocking to the branded and social media services that we in the U.S. have been using for many years, and they have been delivered via 3G and 4G networks to our smartphones.", "In Mexico, for example, it represents Spotify's third-largest market in terms of streaming volumes following the U.S. and the U.K. Meanwhile, India is Facebook's largest market in terms of users, and it's also India that's driving the most activity on Google Play and is one of the fastest-growing markets for the YouTube platform. Finally, as an example, Nigeria where more than 80% of all Internet traffic is delivered over mobile networks, it represents the second largest market for iROKOtv, commonly referred to as the Netflix of Africa.", "At American Tower, we believe we're still in the early stages of a worldwide mobile revolution and while we have a long established track record of generating international organic tenant billings growth in excess of that in the U.S., our view remains that these types of growth rates can be sustained for many years to come. Importantly, this growth has also led to strong US dollar-denominated NOI yields across our international portfolio, with some of our most seasoned vintages of assets generating yields in the neighborhood of 40% a year. Looking forward, we believe that we're extremely well-positioned on a global basis as the leader in communications real estate with the scale and operational expertise to serve today's primary tenants, the major mobile network operators in those countries. Moreover, we are actively partnering with future tenants that may emerge in Internet of Things, or IoT, space and other industries looking to take advantage of 5G mobile technology in both the U.S.", "and internationally. With the U.S. continuing to drive substantial growth, significant free cash flow and the bulk of our AFFO, we also expect to leverage our extensive international footprint to add to and extend that position of strength. So with that, let me hand it over to Tom to go through the details of our results and our updated outlook." ] }, { "name": "Tom Bartlett", "speech": [ "Hey, thanks, Jim. Good morning, everyone. As Igor highlighted earlier, in Q2, we generated another quarter of strong growth in property revenue, adjusted EBITDA, consolidated AFFO. Perhaps the most significant highlight from the quarter was our U.S.", "organic tenant billings growth, which accelerated over 1% both sequentially and year over year to 7.4%, and as Jim just said, representing the highest level of U.S. organic tenant billings growth since the fourth quarter of 2014. We also grew our common stock dividend by over 20%, repurchased more than 700,000 shares of our common stock and added nearly 10,000 sites to our scaled Indian portfolio. With that, let's dive into the details around our second-quarter performance and updated outlook for the year.", "If you please, turn to Slide 6. During the second quarter, we drove consolidated organic tenant billings growth of nearly 6%, primarily attributable to significant new business additions throughout our global footprint. Our reported U.S. property segment revenue growth for the quarter was about 7%, including a negative impact of around 3% associated with the $24 million decline in noncash straight-line revenue recognition versus the prior year.", "U.S. organic tenant billings growth was 7.4%, driven primarily by volume growth from colocations and amendments of nearly 6%. Pricing escalators contributed just over 3% to the U.S. organic tenant billings growth rates and were partially offset by churn of about 1.2%.", "Importantly, network investments being made by all four major U.S. operators contributed to these healthy levels of growth, as U.S. consumers continue to take advantage of unlimited data plans. In fact, the Ericsson estimates the average U.S.", "smartphone user is now consuming over 10 gigabytes of data per month, up about 90% from 2016 levels. Our new business run rate additions, which were up by over 100% from the prior-year period were again heavily weighted toward lease amendments with large equipment overlays on our sites, resulting in amendment pricing at the high end of our historical range. We continue to believe that strong levels of U.S. organic growth are sustainable over a multiyear period, as ongoing, positive, secular trends in mobile are further enhanced by upcoming scaled rollouts of 5G technology.", "Meanwhile, our reported international property revenue growth was also about 7% in the quarter. International organic tenant billings growth was about 3%, or on a normalized basis, around 8%, excluding the impact of our Indian Carrier consolidation-driven churn. The segment's new business commencements were strong and accelerated year over year as well as sequentially from the first quarter. All in, colocations and amendments drove about 6% of our international organic tenant billings growth, while escalators contributed another 4% and other run rate items added about 50 basis points.", "This was partially offset by cancellations of about 7.5%, of which roughly two-thirds were related to carrier consolidation-driven churn in India. Mexico again led the pack among our international markets, growing 18% on an organic basis this quarter, and while we continue to expect growth in Mexico to step down in the second half of the year because of the timing associated with one of our MLAs, still expected to be 14% by the -- for the year by the way. We anticipate that the combination of several concurrent 4G network deployments and the ongoing Alltel wholesale network build-out will support strong organic growth for years to come. We also saw solid growths in markets like Brazil, where continued 4G investments by our tenants drove organic growth to just north of 10%, around half of which was driven purely by new business volumes.", "Meanwhile in EMEA, South Africa, our most seasoned African market, continues to demonstrate solid performance with organic tenant billings growth of 12% this quarter. Finally, the Day 1 revenue associated with the roughly 25,000 sites we've added over the course of the last year contributed another 3.4% to our global tenant billings growth. This was driven by acquisitions as well as new sites constructed over the past year including more than 450 this quarter. Our new-build programs, primarily in our international markets, continued to generate solid returns, with average Day 1 NOI yields of over 11% on the sites constructed in Q2.", "Turning to Slide 7. We also generated solid adjusted EBITDA and consolidated AFFO growth in the quarter, driven by strong top-line growth, diligent management of operating expenses, interest costs and maintenance capex as well as some timing benefits around international cash taxes. Adjusted EBITDA grew by over 6%, with our adjusted EBITDA margin coming in at nearly 61%. And after stripping out the negative impact of noncash straight-line recognition and the impact of Indian Carrier consolidation-driven churn, our adjusted EBITDA would've grown nearly 12% with our adjusted EBITDA margin expanding to about 61.4%.", "This was despite the addition of the approximately 25,000 new, lower initial tenancy sites over the last year. Finally, SG&A as a percentage of revenue was about 7.5%, down about 20 basis points year over year. Consolidated AFFO and AFFO attributable to common stockholders grew over 16% and nearly 14%, respectively in the quarter. On a per-share basis, consolidated AFFO grew over 13%, while AFFO attributable to common stockholders grew over 10%.", "Finally, on a normalized basis, consolidated AFFO per share grew over 15%. These growth rates reflect our high-quality global portfolio, significant diversification, focus on operational efficiency, and strong investment-grade balance sheet. AFFO metrics this quarter also benefited from some seasonality in international cash taxes, which we would expect to tick up a bit in the back half of the year. Moving to Slide 8, let's now take a look at our updated expectations for 2018.", "At the midpoint of our revised outlook, we expect consolidated property revenue growth of over 5%, including a negative impact of over 2% from lower noncash straight-line revenue, another 3% or so from Indian Carrier consolidation-driven churn, which is consistent with our prior outlook and an incremental 2% associated with our revised anticipated foreign exchange translation effects. We anticipate the consolidated tenant billings will increase by over 8%, including organic tenant billings growth of at least 5% and a 3% to 4% contribution from newly acquired or constructed assets. This is being supported by especially strong trends throughout our U.S. and Latin American segments, where we are again raising our expectations for organic tenant billings growth.", "Additionally, we are marginally raising our outlook for organic tenant billings for Asia while slightly reducing our expectations for EMEA. In the U.S., we now expect organic tenant billings growth of approximately 7%, supported by record levels of new business run rate additions that and we anticipate being up nearly 50% versus last year. This outlook would mark the first time since 2014 that U.S. organic tenant billings growth reached 7% and incorporates the assumption that organic tenant billings growth in the back half of the year will be over 7%.", "Meanwhile, in Latin America, we expect to generate organic tenant billings growth of about 11%, also as a result of higher than anticipated levels of new business. In Asia, we now expect slightly higher levels of gross new business, while churn expectations remain consistent with our prior outlook. As a result, we project an organic tenant billings decline of around 11% versus the decline of 12% previously. And finally, in EMEA, we're slightly reducing our organic growth expectations from around 7% to between 6% and 7%, as we now believe that a reacceleration in the region, particularly in Nigeria, is more likely to occur in 2019 rather than the back half of this year.", "As a result of these trends, on an FX-neutral basis, we now expect to generate over $55 million in additional revenue as compared to our prior outlook, with about $30 million of that coming from the U.S. However, more than offsetting this is about $116 million of incremental foreign exchange translation impacts. As a result, we're lowering our expectations for property revenue by about $60 million. As compared to 2017, our outlook implies a full-year negative FX impact on property revenue of around $137 million, about $124 million of which is expected to occur in the second half of the year.", "Turning to Slide 9, where we are reiterating our expectations regarding the impacts of Indian Carrier consolidation-driven churn. As we've communicated over the last few quarters, we continue to expect near-term churn in the market to be significantly above historical levels, driven by a carrier consolidation process through which the number of carriers will consolidate down to three or four larger players, with improved spectrum positions. We continue to expect total Indian Carrier consolidation-driven churn in our Indian market of roughly $150 million to $200 million and view 2018 as the peak year for that churn. As a reminder, these projections do not include churn for Tata and the Viom portfolio that we acquired several years ago.", "We are engaged in ongoing discussions with Tata regarding their noncancelable long-term lease obligations and believe we'll have a resolution in place by year-end. Although, we do not have anything finalized report at this time. Importantly, our longer-term view of India remains highly constructive, providing 4G services to 1.3 billion people will, in our overview, require a tremendous increase in network density, illustrated by a projected near doubling of cell sites in the market over the next five to 10 years. And while to this point, most of the 4G activity has been driven by Jio, we expect the other carriers to ramp up their spending over the next few years as the consolidation process wraps up.", "Our portfolio of nearly 77,000 sites is well-positioned to capture a significant share of this activity, and as a result, we believe that organic tenant billings growth rates in India will return to the historical range of high single to low double digits over the next few years. Moving on to Slide 10, we now project our adjusted EBITDA to grow by about 5% for the year, down $30 million from our previous outlook. This reflects FX-neutral operational outperformance of over $43 million, with about $24 million of that coming from the U.S. We expect this outperformance to be more than offset by just over $60 million in unfavorable currency fluctuations as compared to our prior expectations, as well as about $13 million in other items.", "These primarily consist of the nonpayment of interest income from TV Azteca, which we're working to remedy. We expect to be able to fully offset these negative impacts at the AFFO line and as a result, are maintaining our expectations for consolidated AFFO of $3.23 billion and consolidated AFFO per share of $7.30. Our expected consolidated AFFO growth of over 11% incorporates about $50 million of FX headwinds relative to our prior outlook, offset by about $21 million in incremental cash-adjusted EBITDA outperformance, $22 million in lower net cash interest, and around $10 million in cash tax favorability. As you can see on Slide 11, we have a long track record of utilizing our disciplined and diverse capital allocation program to drive compelling financial and operational results.", "This record continued during the second quarter as we strategically expanded our portfolio, spending over $660 million, or about half of our capital deployed, during the period to acquire more than 10,000 sites, primarily in India. We also spent nearly $200 million, or about 15% of capital deployed, on discretionary capital projects. More than 60% of this was for new site construction and site augmentation, including over 450 new-builds this quarter, primarily in our international markets, where initial NOI yields were approximately 12%. Finally, roughly 2% of our capital deployed, or about $30 million, was for nondiscretionary capex to maintain our asset base.", "We also dedicated more than $340 million to our common stock dividend, which grew by over 20% during the quarter and an additional $100 million or so to repurchase over 700,000 shares of our common stock. Importantly, our results continue to reaffirm the efficacy of our global capitalized allocation methodology. Since 2013, we have simultaneously expanded our portfolio by over 150%, entered a handful of new markets and expanded our consolidated ROIC by around 140 basis points. Our global portfolio continues to generate attractive NOI yields on a U.S.", "dollar-denominated basis inclusive of any currency devaluation across our markets. While our most mature U.S. vintage generates an NOI yield of more than 20%, our international vintage of the same age generates an NOI yields over 6% higher, the same pattern holds true for our middle and youngest vintages as well. This spread is important because it helps confirm that we're using the appropriate risk-adjusted return methodology when evaluating investments across the diverse geographic footprint.", "Additionally, the trends over time for both businesses suggest a promising future for return expansion, as we continue to lease up and optimize the younger assets in our portfolio. Turning to Slide 12 and in summary, we generated another strong quarter of global results in Q2, including compelling U.S. organic tenant billings growth of 7.4%. We've also raised our outlook for full-year U.S.", "organic tenant billings growth to approximately 7%, underscoring the record levels of demand for our communications real estate, as consumers continue to take advantage of unlimited plans. And internationally, the fundamental trends driving our business remain strong, setting the stage for what we believe to be a long-term period of attractive growth. We also continue to carefully evaluate the underlying performances of our assets and the soundness of our capital allocation methodology. Our ROIC trends are robust, even with our continuing investments in younger assets with significant long-term upside but lower initial tenancy and cash flow.", "Importantly, the U.S. dollar-denominated returns of our international assets across all vintages continue to exceed the sizable returns of comparably aged towers in the U.S., further bolstering our confidence in our investment evaluation process internationally. It also demonstrates the significant long-term return potential of our global portfolio, given the tremendous opportunity we have to replicate the success we've had in our older assets by optimizing the performance of our younger assets. As a result of all of these factors, we're excited about the long-term potential of the global business we worked diligently to create over the last decade.", "We also believe that we're well-positioned to continue to deliver attractive total shareholder returns for the remainder of 2018, specifically as we capitalize on the strong near-term trends being observed in the global wireless industry and the continued consolidated AFFO per share and dividend growth. And with that, I'll turn the call over to the operator, so we can take some Q&A." ] } ]
[ { "name": "Operator", "speech": [ "Thank you. [Operator Instructions] We will go to the line of David Barden with Bank of America. Please go ahead." ] }, { "name": "David Barden", "speech": [ "Hey, guys. Thank you so much. I'm going to ask two questions. Could you -- I could see in the U.S.", "market on Slide 26, in the supplement, how strongly the colocations and amendments kind of stepped up in 2Q. Last night, the Spa was able to kind of say that the company expects that they're going to grow at least as fast in 2019 versus this year. And so I was wondering if you can kind of make the same kind of statement. And then second -- operator, we can still hear you." ] }, { "name": "Jim Taiclet", "speech": [ "Operator, [Inaudible]" ] }, { "name": "David Barden", "speech": [ "And then the second, Tom, just I know last quarter we talked about the back billing and the step-up in the other domestic revenue line. We saw that almost double again this quarter. I was wondering if you could talk about whether that's Decon or back billing or kind of what's driving that? Where we think we should model that for the back part of the year?" ] }, { "name": "Jim Taiclet", "speech": [ "Yes, Dave, sorry. Operator, can you make sure that you are on mute, please?" ] }, { "name": "Operator", "speech": [ "I apologize, sir. I thought I had muted the phone, I'm so sorry." ] }, { "name": "Jim Taiclet", "speech": [ "Thank you. Sure, David, it's Jim. I'll start off and then turn it over to Tom for your second question. The U.S.", "colocation amendment business is trending up in our data as well. When it comes to 2019, first of all, our overall expectation is this is a multiyear roll-out across the U.S. industry, all four carriers are active right now. We expect them to be continuing to do that for not just months or quarters but years, especially given the fact that our research is showing the average smartphone user in United States using like 10 megabit -- 10 gigabits rather a month, which is sort of double what it was a couple of years ago.", "And 4G penetration continues to trend up as well. And so when you multiply the data usage per device per month times the number of devices that are out there, I think these customers of ours are going to have to continue to invest in their networks for a number of years just to keep up with the 4G demand. As far as 2019, our past practice, as you know, has been to gather all the data we can, we like working off a hard data. That will be the application flow in the third and fourth quarters, it'll be the schedule of the expected deployments of actual equipment and the start dates of the billing along with the public statements of the carriers toward the end of the year.", "So we'll be more than happy to give you guys some estimates in 2019 about what that year is going to look like exactly, but I can certainly see it trending very, very similarly, if not better than we see it today. Tom?" ] }, { "name": "Tom Bartlett", "speech": [ "Yes. No, and David, on the back billings, we -- the back billings were a bit higher this quarter than they have been in the past. But we're excited about -- we think in Q3, Q4, as I mentioned in remarks, both the core organic growth rates in those two quarters are going to be north of 7%, and so the application levels continue to be at very, very high levels. We talked about the amount of business that we generated this quarter that the signed new business in the quarter was significantly higher than prior quarter and year over year.", "So the volume activity is significant, and as I mentioned, it's coming from all four carriers, which is really nice to see is all four investing heavily into their networks." ] }, { "name": "David Barden", "speech": [ "All right. Great, guys. Thanks. Good to see the strengths." ] }, { "name": "Operator", "speech": [ "Next, we'll go to the line of Michael Rollins with Citi. Please go ahead." ] }, { "name": "Michael Rollins", "speech": [ "Hi. Thanks and good morning. Two if I could. First, just moving over to India, can you size the current exposure to Tata and maybe provide a little bit more color as to how to think about possible resolutions from that current situation there? And then secondly, just, if you come back to the domestic business as you look at the outlook that you gave for the rest of the year, can you provide sort of your thoughts on what percent is being driven by amendments versus new colocations and density and just sort of a sense of what you're seeing on the type of activity?" ] }, { "name": "Jim Taiclet", "speech": [ "Mike, it's Jim. On the India Tata revenue segment, frankly, it's about $160 million a year of run rate except for the past, sort of we are working really closely with Tata. It's a very complex situation. There's multiple counterparties, four JV partners.", "Bharti Airtel is the acquirer of Tata Teleservices, so they're in a way involved. There've been spectrum issues that Tata and Bharti will have to resolve with the government together that are part and parcel, but we're trying to deal with Tata. So we are working again closely with them and constructively at Tata to preserve the value of the JV of which they're still a member and also to prepare the business for the coming of aggressive 4G national roll-out, which we think is going to start back up again in earnest, in say 2020 or so. So we fully expect to preserve the economic value of the JV.", "The structure and accounting for that, we will update you as we come to final resolution, which I feel we are tracking toward but at the end of the day, I think that the original Viom, now ATC India joint ventures is along with our other assets in the country including Vodafone and Idea towers make us again the largest independent tower company in that country and positioning us in the early 2020s to really take advantage of the boom we expect in 4G there. As far as the U.S., the trend in amendments and colocations is about the 80-20 split first half than we expect the second half of the year, Mike. What -- a lot of what's going on is capacity ads on existing sites. Many of the carriers are either adding spectrum to do that and/or new equipment or some combination thereof.", "The -- each carrier has its program, AT&T, as they call it OneTouch initiative; T-Mobile, you've heard them speak about publicly their drive toward 5G preparation, etc. So we expect this kind of proportionality to go through the entire year, but there's some other really interesting prospects in mid-band spectrum that I think are going to be coming up over the next few years, which maybe we could talk about through the course of the questions little bit later, but Mike, it's this year, it looks like an 80 amendment 20 colocation kind of split." ] }, { "name": "Michael Rollins", "speech": [ "Thank you." ] }, { "name": "Operator", "speech": [ "Next, we'll go to the line of Phil Cusick with J.P.Morgan. Please go ahead." ] }, { "name": "Analyst", "speech": [ "Hi. This is Richard for Phil. Just to kind of follow up on those questions a little bit, the amendments and colocations was $46 million in the quarter. Can we see this accelerate on a dollar basis through the year? Or -- and then what is driving it? It seems like it's more 4G-related, but is there any 5G spending on the domestic side?" ] }, { "name": "Tom Bartlett", "speech": [ "It's pretty much 4G-related. Clearly, there is a FirstNet element that's in there as well but principally, 4G related. I think relative to the colocation amendments, think about it in the context of my answers before in terms of the back half of the year being north of 7%. So you can really back into where we would expect that colocation amendment to be.", "I mean as Jim mentioned, the amendment element of it is in that 80% range. As I mentioned there in my remarks that the value for amendment is at the high end of what we've seen in recent years. So it gives you a sense of the amount of equipment that's actually being added to our sites. So we're really excited about what we expect to be in the second half of the year, and we think that will position us well for going into 2019." ] }, { "name": "Analyst", "speech": [ "I guess the follow-up on that just quickly, it seems like you're saying that 2019, could it be just as strong if not stronger than what we're seeing now?" ] }, { "name": "Tom Bartlett", "speech": [ "Well, I think as Jim said, when we release guidance in the beginning of next year, we'll talk more specifically about '19. What I am talking about is the volume of business that we expect to generate this year, and as a beginning of the year run rate, we expect it to be quite strong." ] }, { "name": "Analyst", "speech": [ "OK. Thank you." ] }, { "name": "Operator", "speech": [ "Next, we go to the line of Batya Levi with UBS. Please go ahead." ] }, { "name": "Batya Levi", "speech": [ "Great. Thank you. A question on India. Can you provide maybe a little bit more color on your tenancy mix there? And also, the driver of the growth activity picking up, is it mostly Jio, or are you seeing others also starting to spend? And the Idea, I believe, that -- just that they're going to pull back on the spending.", "Is that contemplated in your numbers right now?" ] }, { "name": "Jim Taiclet", "speech": [ "Hi, Batya. Good morning, it's Jim. We've got a really robust and well-diversified split of revenues in India. So in the second quarter, Vodafone was our biggest customer on a revenue basis north of 20%, Idea just about the same kind of level, Tata about 17%.", "So Tata, our JV partner, is actually the third largest customer. Our Jio is already at 15% of our business, and they've only been in business for a couple of years, and Airtel is at about the same level. So really well diversified across the leaders, which is great. You may have heard already that Vodafone and Idea got the final approval from the Department of Telecommunications, so that merger, we expect to close pretty quickly.", "And therefore, I think you're going to have a much more robust financial and operational entity there to go ahead and drive 4G even toward the back of this year. So we feel really good about our customer mix there, and it's well-diversified, and we actually see the consolidation as a needed event. It's just happening a little bit more quickly when -- with a little bit more fall-out than we would've modeled originally, but this is what needed to happen to get 4G into this country in a national rollout." ] }, { "name": "Tom Bartlett", "speech": [ "And, Batya, just to kind of finish on your other question relative to Idea and Vodafone, as part of our outlook, we have a very disciplined way of looking at what kind of churn expectations we see throughout the year. And so as part of our India outlook in terms of what we expect to be the decline in organic growth, we would expect that decline to pick up in Q3 and Q4 as part of our consolidated outlook view. And that's in the -- really in Q3, picking up some more of the Telenor churn and then getting into Q4, there is expected Idea/Vodafone churn. So yes, in fact, we have assumed additional churn as part of our outlook." ] }, { "name": "Batya Levi", "speech": [ "Great. Thank you." ] }, { "name": "Operator", "speech": [ "Next, we go to the line of Timothy Horan with Oppenheimer. Please go ahead." ] }, { "name": "Timothy Horan", "speech": [ "Thanks a lot. Jim, can you maybe sauce out what you mean on the mid-band spectrum in terms of which spectrum bands, what type of technology you see deployed there? And do you expect any new entrants into the wireless market in the U.S.? I guess do you think the cable companies are going to look to use the spectrum and can they effectively deploy it? Thanks." ] }, { "name": "Jim Taiclet", "speech": [ "Sure. Tim. I find this really interesting as a degreed but nonpracticing and [Inaudible] engineer, it's especially kind of exciting for myself and my other Inaudible] engineer colleagues around here. But there is only three categories of the spectrum that are really coming into clarity as far as 5G utilization.", "And we'll just go from low to high for a minute, the 600 and 900 megahertz range, you've got, of course, really great coverage characteristics, penetration of buildings, etc., and that will be the initial rollout as publicly stated by T-Mobile. In their 5G roll-outs, they're going to go with the best spectrum, with the most extensive coverage mapping and the best building -- that happens to be there strategy and they'll be able to use two- and four-layer MIMO on macro sites, which is -- would how the initial deployment would work. That's incredibly well matched to our role in suburban tower asset base in the U.S. So again, the lower band spectrum is going to be part and parcel of the 5G roll-out.", "The newest information or expectations that we've learned from our technology advisors and our internal experts is that there's an evolving and growing interest in mid-band spectrum deployments for 5G. And those bands, those frequency ranges are in the 25-gigahertz range, which is well known to be positioned with a vast amount of spectrum at Sprint. The other couple of bands are 3.4 to 3.8 gigahertz, that is known as a CBRS spectrum or 3.5 as people use the shorthand for that. And then there's another band, a little bit higher, 3.7 to 4.2 gigahertz, it's called the C band, and the government is actually actively looking at how to get that ready for deployment over the next few years.", "So when you add those bands together and the channels that you can get out of them, it's going to be a significant addition to the low band that people are talking about using. And the propagation characteristics as far as coverage aren't quite as wide as you get in the low band of course but we are starting to get modeling that shows that these kind of frequency ranges, 2.5 to say 4.2 are ideal for wide-area network mobility and capacity building, right? So again, macros and rooftops tower macro sites are going to be again very well-positioned for this in the suburban areas and the less dense urban environments where we are -- also have presence. This kind of spectrum, you can actually aggregate eight- to 16-layer MIMO kind of technology using the -- with the spectrum that's available for this in those mid-bands. And so this is the most important emerging facet of 5G deployment expectations for us, at least for me, is that this mid-band spectrum could play kind of a foundational role for this going forward.", "And then what most people have talked about are high-band spectrums, millimeter wave, etc. Now you're into 27 gigahertz plus, up to 65 -- 64 to 70. While this is unlicensed spectrum, some of it's held by some of the major customers we have today. But this is going to be great in urban areas, especially dense urban areas with really high capacity needs, but again it travels a very short distance to be effective.", "This is a fixed wireless application that we expect our customers will be using with millimeter wave spectrum as well, and what's kind of interesting right now about our customer base is some are starting at lower band and some are talking about starting at higher band for their first 5G deployments, and I think we can play across all three of these band areas, frankly, Tim, as we go. And our strategy on the millimeter wave is not necessarily going to be to aggregate fiber in the U.S. We think it's a very well-served competitive market here, but it's going to be to collect and aggregate at scale, the deployment rights for siting in urban and dense urban environments. And that's a lot of what our innovation program is meant to explore.", "And by the way, the only way we'll do this is if we can make tower-like returns out of it. So that's kind of a long answer but again, something we think is really -- as we start to look ahead out to three to five years plus kind of time frame is that this could be important to our asset base and our opportunity to expand that asset base." ] }, { "name": "Timothy Horan", "speech": [ "And just a quick follow-up on that. Is the mid-band and the high level, is this kind of a global spectrum bands and are the equipment guys kind of actively pursuing this also?" ] }, { "name": "Jim Taiclet", "speech": [ "Yes, there will be bands across various countries that will be available in these ranges. This can vary, of course, nation to nation and regulator to regulator, but the end of the day, the chipsets, the equipment, the coding of the software will be done across we think all of these ranges at the end of the day for 5G, globally." ] }, { "name": "Timothy Horan", "speech": [ "Thanks." ] }, { "name": "Operator", "speech": [ "Next, we'll go to the line of Rick Prentiss -- one moment, please here. Rick Prentiss with Raymond James. Please go ahead." ] }, { "name": "Rick Prentiss", "speech": [ "Thanks. Good morning, guys." ] }, { "name": "Jim Taiclet", "speech": [ "Hey, Rick." ] }, { "name": "Rick Prentiss", "speech": [ "One follow-up on some of Tim's questions there. This week -- or, sorry, last week, Verizon talked a little bit about shifting their capex budgets from macro to small cell and fiber and doing a lot of self-perform themselves, so it might be the natural extension, Jim, on answering Tim's question, to talk a little bit about what you're thinking about small-cell fibers? Have you seen any change in the macro leasing? Obviously, the 7% U.S. knock rate seems pretty good. So elaborate maybe a little bit on that? And then one quicky back on Tata.", "A lot of debate, I know you're still working on the settlement but with the JV equity stake be something that might be wrapped up in the settlement as well as we just try and think what that final solution might look like?" ] }, { "name": "Jim Taiclet", "speech": [ "Rick, as far as individual customers, you really need to just go back to our friends at Verizon and ask them about how their share wallets dividing up inside the budgets. But a company like that, which has a large enterprise business to begin with and an extensive fiber footprint to begin with is going to always be spending a lot on fiber/small cells, I guess you should group them together. So I go back to the -- that individual clients of ours to ask about how they're actually dividing up their wallets, but what we're seeing as Tom, I think, outlined really clearly is kind of booming spending on our assets by the four major U.S. operators and in fact across the board.", "So I'm not sure there is a division of cash allocation going on that's going to be adverse to what we do. There're many other parts of capex that are involved in this including equipment purchases. And especially fiber, which is -- we're finding or observing, at least in the U.S., incredibly expensive to put into place. The returns for us, we don't see attaining in this country based on the competitiveness of that market but for a company like Verizon or/and AT&T, they've got so many ways to monetize that fiber that, say, we don't have.", "I'm sure it's working well for them but those are businesses we're not seeking to get into enterprise connectivity, etc in the United States. So I'll leave it at that. As far as in the Tata resolution, the last part of the settlement process will revolve JV-related issues, membership timing, etc., etc., but what we're working on now is the economics of the contracts and preserving those going forward. And again we will report on that as they evolve and get more specific." ] }, { "name": "Rick Prentiss", "speech": [ "Thank you." ] }, { "name": "Operator", "speech": [ "Next, we go to the line of Colby Synesael with Cowen and Company. Please go ahead." ] }, { "name": "Colby Synesael", "speech": [ "Great. Thank you. The domestic business was notably higher at least relative to our estimates, I think, versus last quarter. And we also saw commensurate step-up in straight-line that was fairly significant.", "Wondering if you'd just talk about what happened there, and if there's something notable worth calling out? And then secondly, TV Azteca I just wonder if can just give us an update on that situation and conviction and also maybe getting your payment and any other additional color you could provide to that situation? Thank you." ] }, { "name": "Jim Taiclet", "speech": [ "Sure. Colby. Domestic U.S. business is up as you correctly note.", "Straight-line was up some but not dramatically I think we would say, but -- and again, we have a range of contract mechanisms out there. Sometimes, touching individual sites results in an extension, but we have not had any long extensions to report today, which would be the typical sort of massive MLA would have something to do with that kind of announcement, which we're not making today. But again, we have a range of contract structures out there with our U.S. customers and some of them do result in extensions and straight-line adjustments in our favor, if you will.", "But they don't necessarily have to be across the entire portfolio either. When it comes to TV Azteca, since 1999, that company has been a partner of ours and consistently remained current on payments to us regarding a note that was part of a tower transaction back in 1999. In 2018, TV Azteca missed two of their scheduled payments, we're actively pursuing collection for those missed payments and reinstatement of the go-forward schedule, or we'll seek and achieve we expect compensation -- full compensation for the entire note -- so in the fall, which it will be. And so in the meantime, we're reserving the full-year obligation, which we feel is a conservative approach, but we expect to receive payment or equal value as we go through this pretty active process on our part." ] }, { "name": "Colby Synesael", "speech": [ "Any update or expectation on timing in terms of when you would anticipate this being resolved?" ] }, { "name": "Jim Taiclet", "speech": [ "We're working through it now, and we'll let you know when we get full resolution." ] }, { "name": "Operator", "speech": [ "Next, we go to the line of Simon Flannery with Morgan Stanley. Please go ahead." ] }, { "name": "Simon Flannery", "speech": [ "Great. Could you talk about the M&A environment out there? We continue to see some transactions in markets like Europe and so forth. You've been relatively quiet by your standards over the last few quarters here outside of India. So how are you thinking about your interest in doing it and the pricing you're seeing out there? And then how do you balance that against buybacks and your leveraged targets?" ] }, { "name": "Jim Taiclet", "speech": [ "Simon, we're always interested in quality assets at prices that meet our return criteria and our investment criteria. When we don't act, it's only because whatever assets did trade, didn't trade within our investment criteria. And so there is no limitation on capital, no change in allocation methodology. And it's very similar as before, when we can find those opportunities that are going to build long-term value inside of our ledger portfolio, we'll strike and we'll do those.", "When we have excess cash flow beyond raising our dividend on the order 20 or more percent a year, we'll pipeline that cash over to the share repurchase program that we have in place. So nothing has changed on our decision-making process. It just really reconfirms the standards that we have." ] }, { "name": "Simon Flannery", "speech": [ "And are you still primarily focused on staying in the markets you're currently in and getting bigger as appropriate or might you consider either adding or divesting markets at the margin." ] }, { "name": "Jim Taiclet", "speech": [ "We would always consider adding or divesting markets or assets. If it's a better value for our shareholders, we'll go ahead and do that. But we're always -- with our eyes open, we're always seeking complementary assets. I mean we made a small transaction, announced one, I should say, in Kenya, which fulfills part of our -- a small part but a part of our three-pronged African strategy.", "We want to have a solid asset base in Southern Africa and Eastern Africa and then West Africa and Kenya adds to that position, and will hopefully position us for some more inorganic growth in East Africa, for example." ] }, { "name": "Simon Flannery", "speech": [ "Great. Thank you." ] }, { "name": "Operator", "speech": [ "Next, we go to the line of Matthew Niknam with Deutsche Bank. Please go ahead." ] }, { "name": "Matthew Niknam", "speech": [ "Hey, guys. Thanks for taking the question. Just one on Latin America. Just given all the strength you're seeing, I think you may have -- and particularly around Mexico, you mentioned I think 18% billings growth.", "To what extent is the KIO deal and I guess more broadly, fiber ownership helping you in business? And is there other opportunities to take this vision of fiber ownership married with macro side ownership outside of Mexico to other regions? Thanks." ] }, { "name": "Jim Taiclet", "speech": [ "It's helpful. Our ownership controlling ability then -- to then construct fiber to the towers especially is becoming much more helpful. We start to see this as a force multiplier for our towers. It's not necessarily easy to find the capital or the supply base or willing vendors to run fiber to a tower in Latin America.", "It's almost the opposite of U.S. In the U.S. 80 plus percent of towers have fiber optic cable run to them. It's the other way around.", "It's sort of 15%, 20%, 25% depending on the international market that we're in. And so fiber is less easy to come by to the tower, and when we can draw it to our towers, it gives that side of competitive advantage. So it's not necessarily the fiber business itself that's helping us in LatAm so far especially in Mexico, but it's also that force multiplier on the macro tower base that we already have. So would we extend this, what I would consider so far a successful fore into Latin American fiber to the tower, into other countries? Yes, we would.", "Again, if can get our risk-adjusted return, because we're treating those fiber investments with the same investment criteria to our investment committee that Tom leads, as we do a macro tower into our DAS system or any other thing." ] }, { "name": "Matthew Niknam", "speech": [ "And Jim, is this unique to LatAm? Or is this something you'd consider more broadly internationally?" ] }, { "name": "Jim Taiclet", "speech": [ "Yes, so Africa has got some opportunity, South Africa specifically. We've made some small investments in there -- in that country. So we see -- and again emerging markets where the capital availability is not so great for fiber builds, the existing supply base is minimal. When we can connect our fiber to our towers and make a force multiplier, that we'll go ahead and keep doing that.", "And then we can get some other income off the fiber, of course, which would be connecting some of our customers across cities and things like that. But it's going to be largely telecom-based revenue that we're going after." ] }, { "name": "Matthew Niknam", "speech": [ "Thank you." ] }, { "name": "Operator", "speech": [ "And that will conclude the Q&A session for today's call." ] }, { "name": "Jim Taiclet", "speech": [ "Great. Thanks, everyone, for joining. Have a great day." ] }, { "name": "Igor Khislavsky", "speech": [ "Have a great week everybody. Thanks, again." ] }, { "name": "Operator", "speech": [ "[Operator signoff]" ] }, { "name": "Matthew Niknam --Deutsche Bank -- Analyst", "speech": [ "More AMT analysis", "This article is a transcript of this conference call produced for The Motley Fool. While we strive for our Foolish Best, there may be errors, omissions, or inaccuracies in this transcript. As with all our articles, The Motley Fool does not assume any responsibility for your use of this content, and we strongly encourage you to do your own research, including listening to the call yourself and reading the company's SEC filings. Please see ourTerms and Conditionsfor additional details, including our Obligatory Capitalized Disclaimers of Liability." ] } ]
AMT
2019-10-31
[ { "description": "Vice President, Investor Relations", "name": "Igor Khislavsky", "position": "Executive" }, { "description": "Chairman, President & Chief Executive Officer", "name": "James D. Taiclet", "position": "Executive" }, { "description": "Executive Vice President & Chief Financial Officer", "name": "Tom Bartlett", "position": "Executive" }, { "description": "Raymond James & Associates, Inc -- Analyst", "name": "Ric Prentiss", "position": "Analyst" }, { "description": "RBC Capital Markets -- Analyst", "name": "Jonathan Atkin", "position": "Analyst" }, { "description": "JP Morgan Chase & Co -- Analyst", "name": "Phil Cusick", "position": "Analyst" }, { "description": "BofA Merrill Lynch -- Analyst", "name": "David Barden", "position": "Analyst" }, { "description": "Moffett Nathanson -- Analyst", "name": "Nick Del Deo", "position": "Analyst" }, { "description": "Morgan Stanley -- Analyst", "name": "Simon Flannery", "position": "Analyst" }, { "description": "Citigroup Inc -- Analyst", "name": "Michael Rollins", "position": "Analyst" }, { "description": "Cowen & Company -- Analyst", "name": "Colby Synesael", "position": "Analyst" } ]
[ { "name": "Operator", "speech": [ "Ladies and gentlemen, thank you for standing by and welcome to the American Tower Third Quarter 2019 Earnings Call. [Operator Instructions]", "Now, I would like to turn the conference over to your host, Igor Khislavsky. Please go ahead." ] }, { "name": "Igor Khislavsky", "speech": [ "Good morning and thank you for joining American Tower's Third Quarter 2019 Earnings Conference Call. We've posted a presentation, which we will refer to throughout our prepared remarks under the Investor Relations tab of our website www.americantower.com.", "Our agenda for this morning's call will be as follows. First, I'll quickly summarize our financial results for the quarter. Next, Jim Taiclet, our Chairman, President and CEO, will provide an update on some key technology trends in the US, particularly around 5G. And finally, Tom Bartlett, our Executive Vice President and CFO, will discuss our third quarter results and revised 2019 outlook in more detail. After these comments, we will open up the call for your questions.", "Before I begin, I'll remind you that this call will contain forward-looking statements that involve a number of risks and uncertainties. Examples of these statements include, our expectations regarding industry trends, as well as our future growth, including our 2019 outlook, capital allocation, pending acquisitions and future operating performance. The pacing and magnitude of the Indian Carrier Consolidation process and its impacts on American Tower and any other statements regarding matters that are not historical facts. You should be aware that certain factors may affect us in the future and could cause actual results to differ materially from those expressed in these forward-looking statements. Such factors include the risk factors set forth in this morning's earnings press release, those set forth in our Form 10-K for the year ended December 31, 2018, and in other filings we make with the SEC. We urge you to consider these factors and remind you that we undertake no obligation to update the information contained in this call to reflect subsequent events or circumstances.", "Now please turn to Slide 4 of our presentation, which highlights our financial results for the third quarter of 2019. These results as well as our year-over-year growth rates were positively impacted by our new agreement with AT&T in the US and negatively impacted by Indian Carrier Consolidation-Driven Churn. During the quarter, our property revenue grew 9.7% to $1.9 billion. Our adjusted EBITDA grew over 12% to $1.2 billion and our consolidated AFFO and consolidated AFFO per share increased by 8.5% and 8.1% to $891 million and $2 respectively.", "Finally, net income attributable to American Tower Corporation common stockholders increased by nearly 36% to $499 million or $1.12 per diluted common share. Additionally, like the last few quarters, many of our comments around third quarter results and our updated 2019 outlook will be focused on growth rates normalized for carrier consolidation driven churn in India and the Tata settlement in Q4, 2018.", "We view these normalized results as important indicators of underlying trends in our business. Reconciliations of these normalized metrics to our GAAP results are included in the back of our earnings presentation in our press release and in our supplemental package.", "And with that, let me turn the call over to Jim." ] }, { "name": "James D. Taiclet", "speech": [ "Thanks, Igor and good morning to everyone on the call . Consistent with our past practice for third quarter reports and my remarks today will be focused on the evolution of mobile technology. I'll spend most of my time on the US, where we generate roughly two-thirds of our cash flows and were many exciting and potentially impactful developments particularly on the 5G front are beginning to emerge. We continue to believe that the technology cycles driving our business in the US will be largely replicated in our international markets over time, thereby lengthening and strengthening our global growth trajectory.", "Longstanding trends in US mobile continue unabated, unlimited data plans, advanced devices and increasing mobile video consumption consistently result in 30% or more growth in annual mobile data consumption per year. To keep up, our mobile operator customers have added significant additional equipment to existing transmission sites while driving forward with the incremental spectrum deployments to support today's 4G networks. These factors have led to a sustained period of robust domestic organic tenants billings growth for American Tower. An average monthly US smartphone usage now stands at roughly 10 gigabytes per month, nearly doubling in less than three years and by 2028, 10 years roughly from now, industry estimates suggest that the total US mobile data usage will be around six times 2018 levels. We recently concluded that the need to efficiently manage the network cost challenges that this continued explosion in mobile traffic growth creates will actually be the main driver for the deployment of 5G.", "Simply put, the cost per gigabyte delivered must continue to decline at roughly the same rate as the growth in aggregate traffic carried across the network. That's needed to sustain our carrier tenants margins. We've seen this pattern historically with each successive generation of technological evolution 2G to 3G to 4G with carriers using tools like more efficient radio technology, advanced network design, incremental spectrum deployments and additional network density to drive down those operating costs. For 5G, we believe the equation will be similar, but with some new aspects.", "The technologies expected to enable the broad usage of newly developed techniques, such as massive MIMO, dynamic spectrum sharing and self optimizing networks, as well as wider spectrum allocations. All these will help enable wireless carriers to efficiently manage the cost of their exploding network demand.", "The deployment of new spectrum bands for 5G will be tailored to both coverage and capacity and eventually as nationwide coverage is achieved, we expect that 5G will pave the way toward a variety of interesting next-generation products and services that may offer profitable opportunities not just for mobile operators, but also across a variety of industries.", "So from a cost efficiency and practical perspective, 5G is the logical and necessary next step in network evolution. With that said, 4G is still carrying nearly all the usage in the United States today and will continue to be the primary network technology here for years to come.", "And at the same time with faster speeds, 5G is already being deployed in limited coverage areas with devices beginning to enter the market now. So for the rest of my comments this morning, I will focus on three specific areas of that 5G migration. One is spectrum. The second is what 5G networks are likely to look at and the anticipated timeline of that topology. And then thirdly, some of those advanced potential products and services that will be ultimately enabled by 5G technology.", "So on the first point. We expect 5G to be accompanied by significant deployments of new spectrum assets across the full range of low, mid and high bands. We've already seen 600 megahertz low band spectrum selectively deployed on our towers. T-Mobile has stated publicly that they expect 600 megahertz to serve as a significant component of their 5G coverage plan across the country and our portfolio of nearly 41,000 US sites is positioned very well to support that deployment.", "What may be even more impactful for us over time is the widespread roll out of mid-band spectrum. These spans generally between 2.5 gigahertz and 6 gigahertz offer an intriguing blend of low band coverage benefits and high-band capacity benefits. Both of these are expected to be critical attributes of 5G networks.", "So spectrum assets in this range includes Sprint's 2.5 gigahertz spectrum. The 3.5-gigahertz CBRS band and the C-band spectrum currently held by satellite operators between 3.7 gigahertz and 4.2 gigahertz. Importantly, given that propagation characteristics of this spectrum aren't as favorable as low band. We expect that more transmission sites will be necessary to deliver an ubiquitous 5G level signal. In turn, this should lead to incremental amendments in colocations across our nationwide portfolio, which today has ample capacity to support additional carrier equipment.", "Additionally, we continue to evaluate the potential of significantly expanding the addressable market for neutral host and private indoor systems by utilizing CBRS spectrum. And ATC was one of the earliest members of the CBRS alliance to help facilitate that process.", "Finally, there has been considerable discussion around millimeter wave spectrum, small cells and their applicability to 5G. Our view remains that millimeter wave spectrum and small cells will serve pedestrian hotspots and other predominantly fixed location applications in urban and dense urban areas. Less than 1% of our US macro tower sites are located in areas with high enough population density to economically support such outdoor small cell arrays.", "Consequently, the impact to macro tower sites from 5G millimeter wave spectrum deployments are expected initially to be minimal, both from a risk and an opportunity perspective, but over time there may be some macro related uses for 5G at these millimeter wave bands for products such as wireless back haul, fixed wireless service to homes and enterprise and other applications . As we previously discussed, we do not believe that fiber fed outdoor small cells in their current form offer sufficiently attractive economics in the US for us to make material investments in that business. Instead, our aim throughout the 4G to 5G evolution is to maximize the value of our existing macro tower and indoor DAS real estate.", "We're also seeking to add to this core growth by selectively deploying capital through our innovation program toward complementary technologies and initiatives that offer similarly attractive returns as our tower business. At the same time, we continue to look for ways to expand our tenant base and augment the value of our existing portfolio.", "In our view, 5G will likely have a number of layers since any given geographic area will have specific topographic and population characteristics. In rural locations, low band spectrum and perhaps some mid-band will likely be the main components. In suburban areas and highway corridors, where there are more people and more usage, we believe that mid-band spectrum is likely to be an important component of 5G with low band coverage also broadly deployed.", "And finally, in dense urban areas, all three types of spectrum, including high band millimeter wave are likely to be deployed through a combination of rooftop antennas, indoor and outdoor systems and other small cell solutions. The net result is like to be -- likely to be an even more complex radio access network architecture requiring more density, considerably more compute power and more intelligent design to deliver a consistent user experience to all of us.", "These deployments are likely to take a significant amount of time. Past technologies have lasted at least 15 years to 20 years from inception to sunset. Given the scope and intricacies involved with 5G, we would at a minimum expect a similar timeline. Moreover, in the near term, 4G will continue to serve the vast majority of mobile usage across the country. Currently industry estimates suggest that 4G will still represent more than 50% of the embedded US device market share even through the year 2025.", "Consequently, investments by our tenants into augmenting their existing LTE networks are expected to continue well into the 2020s with incremental 5G related spending progressively being added to the mix. This view is further reinforced by currently projected timelines of when mid-band spectrum assets will be available to be deployed, while Sprint's 2.5 gigahertz spectrum is ready today, the CBRS auction for licensed spectrum has yet to occur and the C-band is likely years away from being made available for terrestrial use, consequently we at ATC anticipate a five year to 10 year period ahead of us that will be driven by a combination of ever increasing data consumption and a long-cycle evolution from 4G to 5G technology.", "Therefore, we are exploring through our innovation program opportunities to use our assets to support this transitory period. And in turn to maximize the revenue from our macro tower sites and our in-building systems capabilities. Edge compute solutions at tower sites are one example. As data demand increases on both wired and wireless networks, our macro tower sites have the potential to act as convergence points for wireless access networks, cloud services, the Internet of Things and enterprise networks, given the tower's positioning on the edge of today's mobile networks. As 5G supported applications it require minimal latency develop, there could be a further opportunity for edge compute to play an even more important role, especially in the establishment of autonomous air and ground vehicle management and control systems, autonomous cars and drones.", "To better understand the potential of this and other industry developments. We're already moving forward with trial edge data centers at several of our US tower sites and also have acquired a mid-size interconnect facility in Atlanta earlier this year. We're using this limited scope architecture to learn as much as possible about potential future business models and to work together with some prospective future tenants as they evolve their approaches to this type of distributed data storage and compute technology.", "Drone applications are another promising area, where we continue to focus efforts within our innovation program as well. We're already using drones internally which promote safety and enhances our site monitoring and maintenance functions, similar to what we anticipate from our mobile operator tenants, we're first using this technology to reduce our unit cost of operations as well as increase the quality and the cycle time of our site inspections and structural analysis.", "In the longer term, we continue to believe that our tower sites could play a significant role in a 5G enabled drone air traffic control system and we're working toward that goal. Already UPS, Google and some others have received regulatory clearance to begin drone deliveries for limited purposes and specific geographic areas, which we see as an indication to us that progress is being made.", "Then there is augmented and virtual reality autonomous long haul trucking, smart factories and buildings and a myriad of other next generation applications that are also in the 5G pipeline. Many of these will be deployed by existing mobile operators, industry verticals or even by the government. Some may ultimately fail to gain traction or scale, while there may be others that we aren't even thinking about today that will be introduced by creative entrepreneurs, just like the founders of Uber and Lyft did when a robust 4G platform became available to them.", "All these developments are important for American Tower as we expect our towers and indoor DAS assets to play an even more critical role in the 4G and 5G networks of both the near term and the longer term future. Given the spectrum bands that will be utilized and the much heavier data throughput of 5G networks. We anticipate that transmission site topologies will be denser and there will be more equipment for Tower. Further, we are striving to pursue a well organized and integrated innovation program that we hope will enable us to expand our tenant base and deliver additional value to our investors from our extensive asset portfolio.", "Importantly, this is a global expectation over a medium to longtime horizon, as we believe our properties outside the US will serve similarly critical roles and technology evolution across our 16 international markets and our primary conclusion of my remarks today that 5G will become imperative to mobile operators for reasons of per gigabyte cost management should apply both in the US and internationally as well.", "And with that, I'll turn it over to Tom for more detail on the quarter and our revised full year expectations." ] }, { "name": "Tom Bartlett", "speech": [ "Thanks, Jim. Good morning, everyone. As Igor just mentioned, we again generated stronger-than-expected financial results in the quarter, signed a new master lease agreement with AT&T, built a record 1300 or so sites and acquired another 600. We also continue to opportunistically refinance and extend our debt maturities during the quarter, further strengthening our balance sheet and we continue to make progress on a number of internal initiatives particularly around innovation and process improvement. As a result, we are raising our expectations across our key metrics for the year. With that let's dive into the details of our third quarter results and updated full-year outlook.", "If you please turn to Slide 6. During the quarter, we generated consolidated property revenue growth and organic tenant billings growth normalized for the impacts of India Carrier Consolidation-Driven Churn of 11.9% and 7.4% respectively. Volume growth from colocations and amendments as we've seen all year, contributed about 6% of the organic tenant billings growth driven by continued elevated levels of tenant investments in a number of markets.", "Our US property revenue grew over 14% to $1.1 billion with organic tenant billings growth of 7.1%. Volume growth from colocations and amendments drove close to 6% of this growth and escalators contributed just over 3%. We also recorded approximately $87 million in incremental straight line revenue during the quarter as a result of our new agreement with AT&T. This was roughly $20 million more than our initial projections resulting from the finalization of straight line calculations associated with the agreement.", "These items were partially offset by churn of roughly 1.6%. Similar to the last few quarters. Most of the activity we saw in the new business side was amendment-driven with carriers actively investing to keep pace with the rapid growth in mobile data usage. Our reported international property revenue growth during the period was about 4% after factoring in the negative impact of approximately 4% from India Carrier Consolidation-Driven Churn, normalized international organic tenant billings growth which adjusts for the impacts of that churn was just under 8% in the quarter,including 7.5% in Latin America and around 8% in both EMEA and India.", "New business revenue from colocations and amendments drove nearly 7% of this growth while escalators contributed another 4% or so. Other run rate items added nearly 1% with normal course churn offsetting these items by about 3%.", "Importantly gross new business commencements were up across the board in international markets with around $1.8 million of run rate added in the quarter coming from India, close to $700,000 in EMEA and roughly $1.4 million in Latin America. These run rate additions of nearly $4 million were roughly 50% higher than in the year ago period.", "And finally, as expected the tenant billings impact of India Carrier Consolidation Driven Churn to organic growth was $8 million lower sequentially and we anticipate even more significant drop in Q4 . Similar to last quarter, we also recorded some higher than average positive non-run rate revenue items including roughly $18 million in tenant settlement payments in India and around $13 million in positive items in the US composed primarily of revenue reversals and some back billing .", "And lastly, the day one revenue associated with the over 6,000 sites, we've added over the course of the last year, contributed more than 1% to our global tenant billings growth. Around two-thirds of these sites were constructed internally, including nearly 1300 new sites in the third quarter almost exclusively in our international markets. Both the number of new builds and the over $1 million in run rate revenue added from them were nearly double that of Q3 of last year. And average day one NOI yields on Q3 builds were around 13% illustrating the attractive return profile of these sites and we expect to sustain strong new build momentum into the fourth quarter.", "Turning to Slide 7. We also generated solid adjusted EBITDA and consolidated AFFO growth during the quarter fueled by the strong revenue growth, I mentioned, as well as our continued focus on operational efficiency. Adjusted EBITDA grew by over 12% with our adjusted EBITDA margin coming in at 62.9%, up 30 basis points sequentially. This reflect strong gross margin conversion as well as the benefits of the AT&T MLA which helped to offset the margin impacts of India Carrier Consolidation Driven Churn.", "The adjusted EBITDA growth attained also factors in the negative impacts of around $16 million in slow pay related bad debt reserves we booked during the quarter as well as roughly $10 million in negative FX impacts. As a result of the strong cash adjusted EBITDA growth in the quarter, we also drove strong consolidated AFFO and AFFO per share growth with consolidated AFFO growing by 8.5% and consolidated AFFO per share, up over 8% to $2. Meanwhile, AFFO attributable to common stockholders grew 10.4% or nearly 10% per share. On a normalized basis, consolidated AFFO and consolidated AFFO per share grew by approximately 11%, continuing our long track record of delivering double-digit growth in this key metric.", "Now, moving to Slide 8. Let's now take a look at our updated expectations for 2019. In the US, we are raising our full-year organic tenant billings growth outlet to now more than 7%. This increase is based on a stronger than expected third quarter and continuing expectations that growth will be around 6% in Q4 based on some tougher comps, slightly higher churn and some deceleration in new business activity relative to the record levels we've seen over the last 18 months.", "This is also reflection of 2019 being a front half loaded year in terms of new business is roughly two-thirds of our expected full-year, new business commencements were booked in the first two quarters. In aggregate, we are outpacing our initial revenue expectations due to much of the activity driving that outperformance being pulled forward. We're also raising our EMEA organic tenant billings growth outlook to more than 7% for the year based on lower-than-expected churn in the second half of the year, largely due to timing.", "Meanwhile, trends in Latin America and India are consistent with our prior assumptions and we are reiterating organic tenant billings growth expectations of 7% to 8% in Latin America and 8% to 9% in India on a normalized basis for the year. In aggregate, we continue to expect normalized organic tenant billings growth for international to be roughly a 100 basis points above that of the US, driven by record new business volumes and unlike in the US. We expect the year to be slightly second half weighted across our international markets in terms of new business run rate additions.", "Finally, and as we've said in the past, we continue to expect a return to positive organic tenant billings growth in our international business next quarter on a reported basis, as the negative impacts of the carrier consolidation process wind down.", "But before moving on, I do want to briefly touch on last week's Supreme Court ruling in India on the definition of adjusted gross revenue for the wireless carriers and what it potentially means for our 2020 growth expectations in India. Prior to the ruling, we anticipated that organic tenant billings growth rates in the market would approach historical rates at some point in 2020 after coming out of 2019 with solid gross new business trends and ICCC-related churn impacts trading.", "Today, due to the court decision and the lack of certainty with how and when the carriers and the government may respond, it's too early to determine whether those growth expectations are still reasonable. By the time we issue our 2020 outlook in February of next year. We anticipate having significantly more information available to provide a much more complete view.", "But having said that though, I would also note that over the long term, we continue to believe that for ubiquitous 4G to become a reality in India, significant incremental network density and wireless capital investment is necessary and we would expect to benefit from that given our comprehensive Indian footprint.", "Looking at Slide 9, we are raising our expectations for 2019 consolidated property revenue by $180 million or 2.5%. This reflects the $167 million of straight line revenue benefits attributable to the AT&T MLA, the benefits of the non-run rate items I referenced earlier and some organic outperformance in Q3 relative to our prior expectations, as well as roughly $5 million in additional FX-neutral pass-through revenue. These items are expected to be partially offset by around $32 million from unfavorable FX trends, primarily in the fourth quarter.", "Additionally, I would note that as a result of continued strong demand for our real estate and carefully constructed master lease agreements. Our book of non-cancellable tenant revenue stood at approximately $46 billion at the end of Q3, up from $34 billion last quarter. This equates to more than six years of annual revenue for us, creating a strong foundation for the business for years to come.", "Turning to Slide 10 and we're also raising our expectations for adjusted EBITDA by 4% or $180 million. This reflects the straight line revenue benefit from the AT&T MLA and the conversion of the other property revenue upside from Q3 as well as the benefits from the continuing direct cost outperformance particularly in India.", "This is being partially offset by the bad debt reserves around $6 million in US CIP write-offs, we expect in Q4 and around $16 million in unfavorable FX translation impacts. Consistent with our prior assumptions, we would expect our adjusted EBITDA in Q4 to be down sequentially as the positive non-rate items we saw in Q3, are not expected to recur.", "Finally, we are increasing our expectations for consolidated AFFO for the year by $5 million or down 1%. This is primarily being driven by the cash adjusted EBITDA outperformance in Q3 as well as $5 million in additional expected interest income, partially offset by around $5 million incremental cash taxes across our international operations, and roughly $13 million FX headwinds.", "Additionally, and as you can see on the slide, our revised outlook includes roughly $14 million in distributions to PGGM, our JV partner in Europe, which was not contemplated in our prior outlook, as well as the assumption that year-to-date underspend of maintenance CapEx reverses in the fourth quarter.", "Finally, and just to remind you, we recorded a sizable settlement with Tata in Q4, 2018. So the non-recurrence of that will further impact year-over-year growth rates for us next quarter. For the year, we continue to expect to once again deliver double digit AFFO per share growth on a normalized basis of roughly 11%.", "Turning to Slide 11, our capital allocation plans for the year remain consistent and are governed by the same investment discipline we've used historically. We expect our dividend in 2019 to grow by around 20% to a total of $1.7 billion subject as always to Board discretion.", "In addition, at the midpoint of our outlook, we plan to deploy $1.1 billion of CapEx, around 85% of which is discretionary, focused on augmenting the capacity of existing macro sites, building new ones and buying land under our sites in the United States. This is up $50 million as compared to our prior expectations driven in part by 750 [Phonetic] site increase in our projected build program to suit 40 to 50 [Phonetic] at the midpoint.", "In total, we anticipate that these sites will add more than $3 million in monthly run rate revenue. We also anticipate spending $15 million more than our prior outlook on land purchases in the United States. We've had tremendous success with our land program over the last five years, leading to margin benefits of over 50 basis points for our US business and as the end of the quarter 73% of our land in the US was either owned or under lease of at least 20 years.", "And further, we continue to add incremental scale through acquisitions with about $700 million being spent on the nearly 1,000 sites acquired year-to-date and another $1.85 billion or so including the assumption of existing debt committed to the Eaton Tower transaction in Africa, which we are targeting to close by year end.", "And as we noted in our press release this morning, we're now working with MTN on buying out their stakes in our joint ventures in Ghana and Uganda, which we would expect to happen in the first half of 2020 assuming the closing of the Easton transaction.", "And finally, we paid $426 million for the first set of India puts in March and expect to pay an additional $350 million for the second set by the end of the year subject to regulatory approval. So for the full year, we anticipate deploying about $6 billion of capital, while keeping our leverage steady and without the need for equity financing.", "Looking forward, we expect to continue to evaluate a number of attractive portfolios to further diversify our portfolio and enhance our long-term AFFO per share growth . As you can see in the middle and right charts on the slide, the same disciplined capital allocation process has enabled us to grow our consolidated AFFO per share at an annual average rate of 14% while increasing return on invested capital by 140 basis points over the decade.", "Looking forward, we expect to prudently deploy capital toward growth initiatives globally as we enhance and further diversify our business. Although the business today is far larger than it was in 2009. We continue to target double-digit annual consolidated AFFO per share growth and an increasing return on invested capital.", "Turning to Slide 12. We believe that our balance sheet is a key differentiator for American Tower and has been a critical component supporting our historical growth. Since becoming investment grade a decade ago, we've been focused on optimizing our capital structure from a cost of capital and investment funding perspective, this is included more than $25 billion in debt issuances, composed of unsecured, secured local currency denominated instruments, as well as select issuances of mandatory convertible preferred stock supporting large strategic M&A transactions. Through this process and taking advantage of the market rate environment, we've reduced our weighted average cost of debt from roughly 5.1% as at the end of 2009 to around 3.5% today, including our latest issuance in early October.", "At the same time, we've moved the weighted average tenor of our debt out by roughly one-year and this along with the tremendous underlying cash generation capabilities of our business has enabled us to deploy over $40 billion to a combination of dividends, CapEx, acquisitions and share repurchases over that time frame. While maintaining leverage level solidly in the investment grade range.", "This balance sheet strength and flexibility has facilitated the expansion of our portfolio from around 27,000 sites in 2009 to more than 171,000 sites today and a nearly four-fold increase in AFFO per share over the same period.", "Today, we are more focused than ever on maintaining enhancing our balance sheet and continue to believe that it positions us well to drive continued portfolio expansion, make investments in growth, absorb and manage risk and achieve attractive total returns for our shareholders.", "And turning to Slide 13. And in summary, our third quarter results were strong with demand trends across our global footprint, supporting sustained leading organic growth. We were able to come to terms in a new MLA with a key tenant in the US, augmenting our visibility into future growth and adding to our contracted revenue base, which now stands at over $46 billion. Internationally, we continue to capitalize on the demand for denser and more ubiquitous mobile networks by constructing record levels of new towers for large multinational tenants at attractive day one yields. And finally, we continue to deliver strong consolidated AFFO per share growth extended our long track record of meaningfully growing our dividend and opportunistically added around 400 towers to our foundational US footprint. As a result of our year-to-date performance and consistent expectations for Q4, we raised our outlook for all of our key measures and look forward to finishing the year strong and positioning the Company for continued success.", "With that, I'll turn the call over to the operator, so we can jump into some Q&A." ] } ]
[ { "name": "Operator", "speech": [ "[Operator Instructions] Our first question is going to come from the line of Ric Prentiss from Raymond James. Please go ahead." ] }, { "name": "Ric Prentiss", "speech": [ "Thanks, good morning, guys." ] }, { "name": "James D. Taiclet", "speech": [ "Hey, Ric." ] }, { "name": "Ric Prentiss", "speech": [ "Hey. Couple of questions. First, some equipment companies and tower companies have noted the T-Mobile, Sprint, DISH deal decision being delayed and uncertainty on the approval has caused maybe a temporary pause in the marketplace and don't want you to talk to any specific customers, but in aggregate, have you guys seen any similar trends as far as maybe a pause or slowing down as people try and figure out which way the roads going to fork." ] }, { "name": "James D. Taiclet", "speech": [ "Ric, it's Jim and good morning. Over the years, and you've been watching this as long as I have, the conventional way to deploy wireless networks in any market is a build out period, grooming period to follow and that results in more or less a -- kind of a sine wave type of deployment schedule with some ebbs and flows and that I think is all that's happening now in the US, it's very typical. The carriers will, whichever one will adjust that sine wave to their particular circumstances of the time. So we look at this as normal course." ] }, { "name": "Ric Prentiss", "speech": [ "Okay." ] }, { "name": "Tom Bartlett", "speech": [ "Just to remind you, Ric, I mean is -- as far as the years goes much of our new business was pull forward and we believe in the first half of the year, which has generated outperformance from a revenue perspective, but our expectations for this year from a new business perspective are second only to 2018. And in international, we expect record levels. So it's been a tremendous year and as Jim said, it's timing their ebbs and flows that that carriers will experience when they're deploying their networks." ] }, { "name": "Ric Prentiss", "speech": [ "It makes sense. And then the other question, Jim. Appreciate your 5G comments. There is obviously a lot of interest, what's happening there. In particular, noting what you're talking about with indoor systems and the CBRS that auction scheduled right now for June of 2020. How do you see indoor systems. What role would American Tower play, what's kind of the level of opportunity and the ability to put your balance sheet to work." ] }, { "name": "James D. Taiclet", "speech": [ "Sure, Ric. So we've got 400 indoor DAS, traditional indoor DAS systems up and running today. We've got rights for thousands of properties in the United States and we've got similar kind of portfolios and whether it's Brazil, India and other countries. So we've got, what we think is a leading independent position in most of our markets on indoor installed systems. The goal is to expand the addressable market of the buildings that can actually economically support such a system. When you are using traditional even neutral host architecture that we have today under kind of a 4G regime with license spectrum, the carriers have to put a base station in the building, there has to be fiber wire throughout. It's a fairly expensive proposition to use the conventional technology what CBRS will do and cost is increasingly important as I talked about earlier, outdoors and indoors, it will drive the cost down of installing and operating these indoor networks, once the 3.5 gigahertz phones are deployed and the transmissions are coming through the mobile operator systems. And then the fact the Interior backhaul doesn't necessarily have to be fiber in that situation. There is other ways to get it back to their base station and so therefore the cost should dramatically drop, the scaling, we hope can -- can ramp fairly rapidly as to the addressable number of buildings in the United States that you can get to with the CBRS and ultimately 5G kind of technology, because the cost per building will be lower." ] }, { "name": "Ric Prentiss", "speech": [ "Okay. And you guys would be the neutral host kind of concept." ] }, { "name": "James D. Taiclet", "speech": [ "That's correct. So we would work with the landlord, do the install, operate the shared part of the system and then there would be different ways of connectivity back out to the cloud and back out to the mobile networks." ] }, { "name": "Ric Prentiss", "speech": [ "Very good, thanks, guys." ] }, { "name": "Operator", "speech": [ "Thank you. Our next question then will come from the line of Jonathan Atkin from RBC. Please go ahead." ] }, { "name": "Jonathan Atkin", "speech": [ "Thanks. So I wanted to ask about the innovation program and how much capital you would look to kind of deploy in terms of rough ranges on an annual basis and maybe related to that, although I think it would be bracketed separately but appetite for further fiber investments in Latin America or prospectively in Asia." ] }, { "name": "Tom Bartlett", "speech": [ "Hey, Jonathan. To-date, we spent probably about $1 billion, slightly over $1 billion largely on some of the investments that we've made in Latin America as well as in South Africa, as well as the investments that we've made in the United States. Relative to the -- the data center MeetMe room that we had in Atlanta. So I would say but probably over $1 billion and if -- the future will depend upon the return profiles of each of these initiatives." ] }, { "name": "James D. Taiclet", "speech": [ "And Ric, when it comes to." ] }, { "name": "Jonathan Atkin", "speech": [ "Go ahead." ] }, { "name": "James D. Taiclet", "speech": [ "Jon. When it comes to added fiber in Latin America and some of the markets, Tom referred to, again, that's going to be return-based. But the real goal of our fiber deployments for ATC is to increase the lease-up rate and the value of our macro tower assets in those markets because unlike the US, there is not a vibrant fiber optic cable industry in most of these countries and whether it's ourselves doing funding bringing in partners to bring fiber to the tower. We've got to solve that issue to get a viable 4G signal back into the cloud, so we've got about 600 towers that we've literally wired with fiber in Mexico, 50 in India as we're just getting started and 25 in Brazil. So far, that's the real goal of the fiber investments. Now what comes along with that which is pretty brilliant and Olivier Puech runs our International business, and has led this development, which is we tend to be a neutral host provider as we're running by neighborhoods, we're running by enterprises to get to our tower. And we are now working with some of the mobile operators in those countries that want to do fiber or fixed wireless to the home that we're passing or the enterprise that we're passing. And we have nothing to do with that commercial arrangement between the enterprise, the consumer and the MNO but they're leasing that fiber run from us that we're going to probably do anyway for our towers.", "So we're going to try to scale that, it's a great combination and it's really started to work in Latin America, first, and we think in other places, too." ] }, { "name": "Jonathan Atkin", "speech": [ "Thank you. And then with the AT&T towers having recently traded about 1,000 or so. Just wondering, how you view the puts and takes around the purchase of carrier built towers in the US either related to that or prospectively other portfolios that still exists." ] }, { "name": "Tom Bartlett", "speech": [ "Jon, we continue to look at everything that might be available in the United States and there are some smaller portfolios that are being put together. And just as part of our normal investment committee, business development process, we will take a good hard look at them and see what kind of value can be created and whether that's a good use of our capital." ] }, { "name": "James D. Taiclet", "speech": [ "And there are't any sort of game changing size portfolios left in the United States, anywhere held by carriers or even smaller private companies. They are definitely worth going after. As Tom said, we accomplished one of those transactions already this year and really augmented our portfolio nicely and we'll continue to do that." ] }, { "name": "Jonathan Atkin", "speech": [ "Finally, and that you've mentioned this on other calls, but the operating efficiencies around fuel management in Africa and somewhat in India. And are you in the earlier or the later innings of realizing improvements on that side operationally." ] }, { "name": "Tom Bartlett", "speech": [ "Jon, I would say, we're very much in the earlier innings of that. I mean we started these initiatives particularly in Africa with a lot of the newer base technology, gensets and things like that and we've achieved some really terrific success I think in those markets, but we're really still at the early innings of being able to, to be able to enjoy the future benefits of that." ] }, { "name": "James D. Taiclet", "speech": [ "Yeah. And again it all comes down to the customer and the viability and the performance of their site . We're very customer focused, and that when we put investments into energy management. They are designed to increase the uptime of the site above and beyond any of our competitors in the country that you're speaking of. It's also designed to get the cost down for our customers, the less fuel that we use, the less we pass through to them, so then more efficient sites and therefore our attractiveness for new tenants and the stickiness of those existing goes up and that's two important reasons why we do it. And the third part is, it reduces the carbon footprint of the industry in that country. So we've got three great reasons to pursue what Tom just described and we use the same ROI criteria that we use with every other investment." ] }, { "name": "Tom Bartlett", "speech": [ "And just to size it, we probably spent roughly $30 million, $40 million last year,$50 million, $60 million this year and we're really excited about a lot of these solar battery enhancements that are coming." ] }, { "name": "Jonathan Atkin", "speech": [ "Thank you." ] }, { "name": "Operator", "speech": [ "Thank you. And our next question will come from the line of Phil Cusick from JP Morgan. Please go ahead." ] }, { "name": "Phil Cusick", "speech": [ "Hi guys, thanks. First, I guess not to get into guidance yet. But with a 6% exit run rate in 4Q, is there a reason that you can help us with that we should consider an acceleration in the US in 2020?" ] }, { "name": "Tom Bartlett", "speech": [ "Phil, I will talk through that and in February. We'll -- the reason that we do wait until February is that we're really looking for a lot of the guidance is being delivered by our customers. In the markets that we're spending, in the markets that we're in, carriers over the last couple of years have spent upwards of $40 billion to $50 billion and so we want to make sure we understand where that's actually going to be spending, who is going to be spending and what they're going to be spending on to really then come out to the -- our investors to really get real clarity in terms of what we would expect for the year. So I would hold off that question for a few months and we'll clearly address it in February." ] }, { "name": "Phil Cusick", "speech": [ "And maybe one more that I know a stretch. I know it's early, but the India tax ruling, I'm surprised, there's no impact of that on the value of the put that you have to pay this quarter, anything we should think about there." ] }, { "name": "James D. Taiclet", "speech": [ "Phil, as far as the put goes, that's a pre-negotiated floor price and we're working with Tata and others to complete that transaction, we will go through with that, we're pleased that we're actually going to have upwards of 90% ownership of this asset now going forward, and it's a rupee based payment. So the currency actually is a benefit to us. Given where it is today. So that the put will be accomplished. We'll get our ownership up where we want it, keep working with Macquarie in the market and grow the business." ] }, { "name": "Phil Cusick", "speech": [ "Got it. Thanks, guys." ] }, { "name": "Operator", "speech": [ "Thank you. Our next question, then will come from the line of David Barden from Bank of America. Please go ahead." ] }, { "name": "David Barden", "speech": [ "Hey guys, thanks. A few questions if I could. Just the first one, following up on the India situation, I mean, I think that with or without the Supreme Court ruling. And I think with the Supreme Court ruling, it gets tougher, Idea-Vodafone current course of speed, this doesn't have the capital to continue spending on their network through all of 2020. So when you kind of have base case expectation that 2020 irrespective of the Supreme Court ruling would actually grow at some kind of normal rate. Where do you get the comfort level that Idea-Vodafone is going to have the capital to spend and how do you see that situation resolving itself. That will be the first question, it'd be helpful.", "And the second question will be, Sprint's been doing some kind of innovative things with [Indecipherable] in terms of trying to impact their capital intensity with the Strand-Mount network architecture and it's conceivable that -- that that could increase in terms of its use. It could go to Comcast, it could go to Charter. Could you kind of talk about how you see that approach to network deployment impacting macro tower demand.", "And then the last question, I guess is for you Jim, in particular is kind of one of the funny [Phonetic] things that's happened this year in the sector is that big fund families have been changing their benchmarks to include towers and from your perch at the new report [Phonetic], do you sense that there's any movement there to think again about where Tower sit in terms of the new REIT benchmark hierarchy. Thanks, guys." ] }, { "name": "James D. Taiclet", "speech": [ "Sure. So we'll try to pitch one at a time." ] }, { "name": "David Barden", "speech": [ "Sorry." ] }, { "name": "James D. Taiclet", "speech": [ "Idea-Vodafone, they've got a plan in place to spend $4 billion in CapEx through 2020. They did a $3.5 billion capital raise. Idea and Vodafone are matched together, they've merged on purpose to be able to get the wherewithal to compete in 4G and over the short to mid-term period, we think they will continue to be competitive and work through their issues with the tax department and be a player. There is an interest, I would imagine in the Indian government, whose top level political regime has a program called Digital India, which is going to require at least three or four healthy mobile operators to pull that off. And this is something we expect to be worked through. And we also expect Idea-Vodafone with everything we know now to be part of Digital India going forward, as they work through their issues.", "It will take some time to resolve and will continue to progress. Meanwhile, Jio and Airtel are moving at pace and we'll continue to work with all three, plus BSNL, which is a customer of ours, so we'll go forward with that industry structure." ] }, { "name": "Tom Bartlett", "speech": [ "Before Jim takes the next pitch. Dave, I just want to remind. I mean, even in the third quarter, we generated 8% growth in the quarter on a normalized basis, but we've said it high single-digit kind of low double-digit growth was what we expected. So we are already there in the quarter. So that gives you some sense of it -- the level of spend that's being delivered in the market." ] }, { "name": "James D. Taiclet", "speech": [ "And then with essentially small cell type mountings and ancillary type of transmitters or repeaters, they've always been out there. There will always be more. The macro site is the foundation of all of these networks, it's going to continue to be and when there is filling capacity or a niche that it's not getting great coverage these kind of solutions should be employed. But we don't think they will materially affect our macro business.", "And then on fund benchmarking, the buy side is voting with their feet we think in the real estate industry and moving forward with including in their own benchmarks. As you know Vanguard has been one of the leaders. They're the most visible, but a number of the REIT type investor firms are moving toward technology real estate assets. As far as when the Nareit index will include it or the RMZ, it's -- it's their decisions And I don't have access to those discussions." ] }, { "name": "David Barden", "speech": [ "Okay, thank you." ] }, { "name": "Operator", "speech": [ "Thank you. Our next question that will come from the line of Nick Del Deo from Moffett Nathanson. Please go ahead." ] }, { "name": "Nick Del Deo", "speech": [ "Hey, thanks for taking my questions. Sort of following up on India, as you discussed, there are couple of financially distressed carriers there. They still own stakes in towers that might get shaken lose, valuation ascribed a big tower co there Bharti Infratel things like 5 times EBITDA. If you really believe in India's future, does this not present an opportunity for a well-capitalized player like yourself to really make some big moves and create value over time or are there other considerations, we should bear in mind." ] }, { "name": "James D. Taiclet", "speech": [ "We absolutely think that's true and we've moved very aggressively with Idea's towers, Vodafone's towers and that the 40% some of the joint venture with Tata that we have and owned. And so all those assets we brought in and we're happy with our current footprint at the moment and we're going to grow organically off of that as everything kind of it gets back on track in India. We'll keep our eyes open as we go along. There are some very relatively small tower portfolio still around, and we'd look at those, of course, but as far as something more strategic. We're going to operate what we have and integrate it all for the short term and get where exactly we want to be positioned to look at larger deals down the road." ] }, { "name": "Tom Bartlett", "speech": [ "And Nick, then just in terms of the capital we're spending there. We increased our -- our capital for new builds in the quarter for the year and that's exclusively India and so we're spending more capital there on build-to-suit programs, where those day-one returns are double digit. So but that seems to be a really effective way for us to be able to increase our exposure and expand our footprint in the market ." ] }, { "name": "Nick Del Deo", "speech": [ "Okay, that's helpful. And then, Jim, in your prepared remarks, you noted that I think you said less than 1% of your US sites are in locations with population density sufficient to support outdoor small cells. So that was a really interesting statistic and it was pretty specific. What's the population density threshold that you're using to define what sites fall into that bucket. And understanding that's a small share your business, have you actually observed any impact on new leasing due to small cells on those 1% of sites or rooftops you might manage in those, in those areas." ] }, { "name": "James D. Taiclet", "speech": [ "The answer to the second part is, no, there has been no impact on any of the sort of deployment on our macro site or rooftop management business. I mean, remember that base layer in urban, suburban or rural needs to be there. It's not going to be taken away or tried to be chopped up, you just really shouldn't be taking that approach to the network deployment. But on the first instance, we use a metric of 10,000 people per square mile as the economic threshold with current technology and current costs and we actually, stress tested that if you are able to cut the input costs in half, it ends up being about 5,000 people per square mile. So even at the 5,000 person level, 85% of Americans live in places lower than 5,000 people per square mile. And so that's the network architecture in the US that is going to continue to be macro based just on that fundamental right there. There is no way to cover 320 million people at under 5,000 people per square mile topologies with small cells economically or even technically." ] }, { "name": "Nick Del Deo", "speech": [ "Got it. Thank you, guys." ] }, { "name": "Operator", "speech": [ "Thank you. Our next question will come from the line of Simon Flannery from Morgan Stanley. Please go ahead." ] }, { "name": "Simon Flannery", "speech": [ "Great, thank you. Good morning. On C-band on 5G. I think you talked about having a five year to 10 year runway of growth from that deployment. When do you think this can really kick off if you take the C-band alliance proposals over the last few days, they are now looking to free up 100 megahertz within 18 months of report in order so that potentially gives you leasing in the 2021 [Phonetic] time frame. So you might get it, particularly if it goes to multiple carriers some decent volume in the fairly near-term. I just wanted to see if you think that is feasible and then around that and around CBRS, what interest are you seeing beyond the big four carriers in terms of looking at potentially deploying that. Thank you." ] }, { "name": "James D. Taiclet", "speech": [ "Yeah. Thanks, Simon. And the next couple of years, early 2020s. We expect to have some commercial activity and it will be a long-term bill as you've been described a moment ago. We've got some trials really interesting ones up and running now with some property owners actually, so without disclosing who they are and what specific business they are in, if you think about what venue owner could leverage 5G -- what type of venue owner could leverage 5G technology? You would think of retail, potentially any kind of sports or entertainment venue, those kinds of things and then there is the whole building management site as far as an owner of the commercial piece of real estate, whether it's a fact -- warehouse, a factory, office building just to manage again cost down and operating those buildings. So those are the kinds of verticals that, so to speak, that we are working with on trials and other initiatives right now and some of them are actually, you may not, may or may not know it, but they are up and running on 4G and license technology in certain trial sites already.", "So that's how we're going after this very methodical ROIs on everything. Ed Knapp, our fantastic CTO and he watches over the viability and sustainability in the business cases for these projects. And Tom, of course, has got the financial side, we have Innovation Council that actually has to run through our investment committee when there is a sizable proposal that comes comes down. So that's how we're going to go about it, we think there is real prospect there. But it will take some years to -- to play out." ] }, { "name": "Simon Flannery", "speech": [ "And there's a lot of this activity in CBRS?" ] }, { "name": "James D. Taiclet", "speech": [ "Not necessarily. Right now, but again, we're trialing it with either license spectrum, private 4G LTE kind of set ups and things like that at the moment because when CBRS freeze up in that spectrum, the general access is here. And then the -- the priority access as you've described will be auction, but once that becomes available in both sides of it , especially if you have a -- at a commercial building that you can use the general access network to serve that because it's unlikely that general access will be burdened within your building unless it's you that is controlling it, so that's available. What we think on a wide scale and the last point, I would say is that again, it's going to take some time and the devices need to rollout as well and that's going to again take its own pace." ] }, { "name": "Simon Flannery", "speech": [ "Great, thanks a lot." ] }, { "name": "Operator", "speech": [ "Thank you. We have a question from the line of Michael Rollins from Citi. Please go ahead." ] }, { "name": "Michael Rollins", "speech": [ "Thanks, good morning. You mentioned as part of the change to 4Q domestic site leasing that there was a pickup in churn. Can you expand on what you're seeing on the churn price. And is there anything that on the horizon. Just from past mergers or integration events that we should be thinking of. Thanks." ] }, { "name": "Tom Bartlett", "speech": [ "Michael, I mean, it's up from a -- bit from Q3, but it's de minimis. It's still below 2% and I think it gets up to 1.7% or something like that from the 1.6% or so that we had in Q3. So it's just de minimis across the footprint that we have in the United States." ] }, { "name": "James D. Taiclet", "speech": [ "It's just mostly timing, Ric [Phonetic] as when the -- what sort of the contracts come due or certain we have other verticals that are consolidating and other things that are networks and it's -- as Tom said, it's within the 1% to 2%, we've had for 20 years. So really, nothing different." ] }, { "name": "Michael Rollins", "speech": [ "Thanks." ] }, { "name": "Operator", "speech": [ "Thank you. And then our final question will come from the line of Colby Synesael from Cowen & Company. Please go ahead." ] }, { "name": "Colby Synesael", "speech": [ "Great, thank you. Sorry to go back to the India thing, but I just, thought I'd ask one more question around that. Just given the local law in India. To the extent, one of your customers was to declare for bankruptcy. Would you expect to be paid through that process and I guess are all of your tenants in India currently up-to-date, if you will, in terms of payment. And then secondly, going back to the first question, you got from Ric. As it relates to T-Mobile and your response being ebbs and flows. Just giving, how long we might be at a slowdown from summer of your US providers, would you anticipate that just because of that length, it could actually be material enough that we would see some moderation in your growth rate for some period of time measured in quarters, if you will, as a result of what you're seeing now. When you think about the book to bill as we go into 2020. Thank you." ] }, { "name": "James D. Taiclet", "speech": [ "Okay. We're getting multiple pitches again to finish up here but Colby, we will take them again one at a time. There is a bankruptcy law in India that was put in a couple of years ago, sort of nation wide and the network, still going to be needed, the subscribers still going to have to be served. If there is a financial restructuring, as we had another -- selected other international markets over the years, the networks tend to operate and they need to pay the -- the electric bill and the lease to keep that network going and that tends to be what happens. So that's our historical experience, when there is a financial restructuring that goes off. Our customers by and large in India. As far as their payment schedules in on time, if you will, is not materially different than it has been in the past in that market. BSNL, which is, I think our smallest customer, is a little bit behind what it's typically doing but that -- that's going to catch up we expect.", "And then thirdly, cycling back to the US with T-Mobile, look, the data rate usage is still going up 30% a year . T-Mobile, if it's got a bit of a delay to its merger or not is trying to take share, trying to stay relevant and adding customers and data usage . So it's going to be up to them to answer that question. But we don't expect that that there'll be a long-cycle sort of hiatus from any of our customers going into 2020. But as Tom said, we'll look for the CapEx guidance. We will look for the public statements and we will add up what we see in our field operation as far as applications and interest in the sales force with our sites and we'll go from there and can create the guidance for you in February." ] }, { "name": "Colby Synesael", "speech": [ "Great, thank you." ] }, { "name": "Igor Khislavsky", "speech": [ "All right, well thank you everybody for joining this morning and have a great day." ] }, { "name": "James D. Taiclet", "speech": [ "Yeah. Happy Halloween to everybody and a good weekend all, bye-bye." ] }, { "name": "Operator", "speech": [ "[Operator Closing Remarks]" ] } ]
AMT
2018-05-01
[ { "description": "-Senior Director of Investor Relations -- Senior Director of Investor Relations", "name": "Igor Khislavsky", "position": "Executive" }, { "description": "-Chairman, President, and Chief Executive Officer -- Chairman, President, and Chief Executive Officer", "name": "James D. Taiclet Jr.", "position": "Executive" }, { "description": "-Chief Financial Officer -- Chief Financial Officer", "name": "Tom Bartlett", "position": "Executive" }, { "description": "-J.P.Morgan -- Analyst -- J.P.Morgan -- Analyst", "name": "Phil Cusick", "position": "Analyst" }, { "description": "-Morgan Stanley -- Analyst -- Morgan Stanley -- Analyst", "name": "Simon Flannery", "position": "Analyst" }, { "description": "-RBC Capital Markets -- Analyst -- RBC Capital Markets -- Analyst", "name": "Jonathan Atkin", "position": "Analyst" }, { "description": "-Deutsche Bank -- Analyst -- Deutsche Bank -- Analyst", "name": "Matt Niknam", "position": "Analyst" }, { "description": "-Bank of America Merrill Lynch -- Analyst -- Bank of America Merrill Lynch -- Analyst", "name": "David Barden", "position": "Analyst" }, { "description": "-Macquarie Bank -- Analyst -- Macquarie Bank -- Analyst", "name": "Amy Yong", "position": "Analyst" }, { "description": "-Barclays -- Analyst -- Barclays -- Analyst", "name": "Amir Rozwadowski", "position": "Analyst" }, { "description": "-UBS -- Analyst -- UBS -- Analyst", "name": "Batya Levi", "position": "Analyst" }, { "description": "-Oppenheimer & Company -- Analyst -- Oppenheimer & Company -- Analyst", "name": "Tim Horan", "position": "Analyst" }, { "description": "-Navigant Research -- Analyst -- Navigant Research -- Analyst", "name": "Brett Feldman", "position": "Analyst" }, { "description": "-Raymond James -- Analyst -- Raymond James -- Analyst", "name": "Ric Prentiss", "position": "Analyst" } ]
[ { "name": "Operator", "speech": [ "Ladies and gentlemen, thank you for standing by. Welcome to the American Tower first-quarter 2018 earnings call. [Operator instructions] As a reminder, today's conference is being recorded. I'd now like to turn the conference over to your host, Igor Khislavsky. Please go ahead, sir." ] }, { "name": "Igor Khislavsky", "speech": [ "Thank you. Good morning, and thank you for joining American Tower's first-quarter 2018 earnings conference call. We have posted a presentation, which we'll refer to throughout our prepared remarks, under the Investor Relations tab of our website, www.americantower.com. Our agenda for this morning's call will be as follows.", "First, I'll provide a few highlights from our financial results for the quarter. Next, Jim Taiclet, our chairman, president, and CEO, will share some brief thoughts on our U.S. business and recent developments in the industry. And finally, Tom Bartlett, our executive vice president, CFO, and treasurer, will provide a more detailed review of our first-quarter results and updated full-year outlook.", "After these comments, we'll open the call up for your questions. Before I begin, I'll remind you that this call will contain forward-looking statements that involve a number of risks and uncertainties. Examples of these statements include our expectations regarding future growth, including our 2018 outlook, capital allocation and future operating performance; the pacing and magnitude of the Indian Carrier consolidation process and its impacts on American Tower; assumptions around our pending and recently closed acquisitions; and any other statements regarding matters that are not historical facts. You should be aware that certain factors may affect us in the future and could cause actual results to differ materially from those expressed in these forward-looking statements.", "Such factors include the risk factors set forth in this morning's earnings press release, those set forth in our Form 10-K for the year ended December 31, 2017, and in the other filings we make with the SEC. We urge you to consider these factors and remind you that we undertake no obligation to update the information contained in this call to reflect subsequent events or circumstances. Now please turn to Slide 4 of our presentation, which highlights our financial results for the first quarter of 2018. During the quarter, our property revenue grew 7.3% to $1.71 billion.", "Our adjusted EBITDA grew 6.5% to $1.06 billion. Our consolidated adjusted funds from operations grew nearly 12% to $807 million, and consolidated AFFO per share increased by about 9.5% to $1.84. Finally, net income attributable to American Tower Corporation common stockholders decreased by about 4.7% to $276 million, or $0.63 per diluted common share. This included an impairment charge of approximately $147 million, primarily driven by Aircel's recent bankruptcy in India, partially offset by tax benefits also associated with our India operations.", "About $59 million of these items were attributable to ATC common stockholders. And with that, I'll turn the call over to Jim." ] }, { "name": "James D. Taiclet Jr.", "speech": [ "Thanks, Igor, and good morning to everyone on the call. For those of you who are long-term investors in American Tower, you'll recall that our traditional first-quarter earnings call theme is a review of the U.S. market. And given industry developments over the weekend, I'll first address that Sprint/T-Mobile merger announcement and our view of its ramifications for our company and then move on to overall current trends in the U.S.", "As to our expectations regarding the announced merger between T-Mobile and Sprint, we remain highly confident that this transaction as proposed will be neutral to positive for American Tower's U.S. business. First, the disclosed plans for the combined entity to spend $40 billion in network and other capital investments over the next three years would represent a substantial increase in spending relative to the recent average annual combined spending of the two companies. And the other carriers per their recent public statements are already increasing their capital spend to meet the growing demand for data on their networks while positioning themselves to take advantage of enhanced opportunities that may be offered by 5G.", "Second, aggregate network equipment deployment and, therefore, demand for tower space, remains a function of the number of device units in service and the gigabits of data per unit per month. An accelerated 5G deployment schedule by the U.S. mobile industry should result in a more rapid escalation of both metrics. Hence, that's what expands from cellphones in a fairly modest population of 4G-enabled tablets and laptops on to the Internet of things, machine-to-machine mobile communications, which should dramatically add to the number of connected devices well beyond traditional handsets.", "Moreover, even primarily on cellphones, the gigabits of data per month in the U.S. continues to expand at roughly 30% per year, which would again be further augmented by new IoT data traffic. Third, our experience has been that past U.S. carrier mergers have historically led to a net positive impact to tower revenue growth for ATC.", "In this particular case, it's important to note that the merging companies have announced that their planned 5G network would be based on low-band spectrum in rural and suburban areas, mid-band spectrum in metro and millimeter wave spectrum in dense urban. This is in line with ATC's prior expectations for actual operational 5G rollouts utilizing sub-6-gigahertz bands in the vast majority of U.S. geographies, fully preserving in those geographies supremacy of macro tower sites in the coming 5G technology upgrade cycle. Of specific potential relevance to ATC in this transaction is the merging companies' expectation of deploying 2.5 gigahertz on the bulk of T-Mobile's towers, which none of them have today.", "We also recognize that T-Mobile and Sprint have announced their intention to enhance the efficiency of their combined network by reducing total cell site count over time. However, we expect that there will be a significant amendment opportunity that will run concurrently, as the merging companies have described plans to largely deploy all of their respective spectrum bands on all remaining sites. So while there may ultimately be less total transmission sites in the merged network, each site is likely to have more spectrum bands, more data traffic and more equipment installed, which would result in offsetting amendment benefits from American Tower. In addition, we believe that our leading U.S.", "portfolio of over 40,000 sites and strong existing business and contractual relationships with both companies position us well to help facilitate their network strategy while crafting a win-win solution for both the new T-Mobile and for ATC should the transaction proceed. To summarize, an enhanced amendment opportunity and densification need for 2.5G in a future merged TMobile network, combined with the potential for an accelerated 5G deployment by the wider U.S. mobile industry, in our view, preserves the long arc of cash flow growth that we expect to generate over the current planning period for our U.S. business.", "Turning to current trends in our U.S. and international operations. We had a solid quarter across our global business in Q1, especially in the U.S., where our organic tenant billings growth accelerated to 6.3%. We continue to have a high level of visibility and confidence in activity levels across our U.S.", "operations. And as indicated in our press release and shown on our Slide 6 in the presentation, we've raised our full-year 2018 U.S. organic tenant billings outlook to around 6.5%. The fundamental driver of these results remain consistent.", "More U.S. consumers are using more advanced devices for more bandwidth applications every month. And to keep pace, our wireless carrier tenants are expected to spend over $30 billion in capex this year. Taking into account other multiyear initiatives like FirstNet, we believe we are well-positioned for a sustained period of attractive U.S.", "organic growth. The combination of accelerating consumer utilization of mobile devices to access video services via branded and social media, unlimited data plans offered by all of the national carriers and increasingly capable handsets are driving network traffic ever higher. As of the end of 2017, four out of five Americans were using a smartphone for an average of over five gigabytes per month. That's up more than 800% from just five years ago.", "And industry projections suggest, over the next five years, usage will go up another three to four times. Given the relentless strain on their networks, mobile operators are responding now by adding more equipment and additional spectrum bands to their network infrastructure, leading to strong amendment and colocation growth for ATC. Adding to our confidence and optimism surrounding our multiyear demand curve in the U.S. is the evolving deployment path of 5G.", "In an important development, the industry consortium, 3GPP, recently approved a 5G new radio standard last December that enabled some elements of 5G to be used with an LTE core network. This has the potential to speed the deployment of mobile 5G in the U.S. beyond what we had expected to be an early fixed wireless cable substitution case. Already, several major wireless carriers have signaled their intention to commence mobile 5G service in select markets this year in the U.S.", "As a result, it seems more likely to us that the deployment of mobile 5G and the addition of associated transmission equipment on our tower sites will actually either coincide with or quickly follow millimeter wave rollouts in dense urban areas. In turn, that activity should help support strong organic growth rates for us as 2G and 3G spectrum in suburban and rural and the urban areas is refarmed and new spectrum assets are deployed. Increasingly, it appears to us that in addition to 600 megahertz and 2.5G spectrum, which companies have both been talking about as 5G mobile, there are other spectrum assets that are increasingly likely to also be used for mobile 5G deployments, particularly of recent interest is spectrum in the 3.7 to 4.2 gigahertz range, which could offer an additional opportunity for the carriers to bring mobile 5G service outside of dense urban areas early in the cycle by utilizing our towers. Given the propagation characteristics of those spectrum assets and the coverage as well as capacity needs of an eventual 5G network, we believe that a substantial number of macro towers would be needed to support such a rollout.", "The third and final aspect of the evolving U.S. mobile industry landscape that has the potential to be a meaningful growth driver for our business over the longer term includes smart city technology, AR/ VR edge computing solutions, drone-controlled networks, autonomous cars and other IoT applications. We continue to be active in dialogue with a variety of leading companies across numerous industries to ensure that we position American Tower as the provider of choice for these and other future products and services. Simultaneously, we're using our recently formalized innovation program to develop and trial a number of concepts, including ongoing efforts with ATSC 3.0 broadcast technology, urban smart poles through an alliance with Philips Lighting and our participation in the CBRS Alliance through a strategic investment in Republican -- Republic Wireless, among other projects.", "This focus on innovation has long been an integral part of American Tower's strategy, and we believe it has the potential to eventually contribute significantly to our growth on a global basis and specifically, in the U.S. So as we did in 2007 for our nascent international business then, we've set an aspirational goal for innovation-related initiatives to be a driver of up to 25% of our run-rate revenue 10 years out with the return on investment profile comparable to that of our current business. We're already organizationally and systemically structured to address innovative investment opportunities largely based on our existing macro towers and adjacent assets and targeting both existing and some new customers. We're already starting to gain some traction with our first deployment of smart poles later this year in Huntington Beach, California.", "And we have a number of other prototype deployments in our pipeline and midsize investments we've done in international markets as well. So in summary, we view the growth profile of the U.S., our largest market, by far, our largest free cash flow generator, to be very attractive whether there are four or three national wireless carriers. In the near to medium term, we believe that our growth will be driven by the necessary strengthening and improvement of the domestic 4G network, augmented by early phases of 5G deployments. The massive increase in network speeds and greatly reduced latency of 5G will enable machine-to-machine connectivity through the cloud, along with enhanced mobile entertainment and gaming capabilities for consumers.", "Now with our focus on innovation, we seek to augment and extend our U.S. growth trajectory even further by collaborating with pioneers and building businesses based on the leapfrog from 4G to 5G technology. So with that, I'll turn the call over to Tom to go through our results for the quarter and our updated outlook in detail." ] }, { "name": "Tom Bartlett", "speech": [ "OK. Thanks, Jim. Good morning, everyone. As Igor highlighted earlier, we generated another quarter of strong results, posting solid growth in property revenue, adjusted EBITDA and consolidated AFFO.", "U.S. organic tenant billings growth accelerated sequentially to 6.3%, as Jim noted. We grew our common stock dividend by about 21%, and demand trends across our global footprint were even better than our initial expectations. We also closed on our acquisition of the Vodafone tower portfolio in India at the very end of the quarter, adding over 10,000 sites to our portfolio and further solidifying our position as a leading independent tower operator in the market.", "Given Aircel's recent bankruptcy announcement in India, we've raised our churn expectations for the market in 2018, accelerating the timing of certain churn we previously would have anticipated to occur over the next several years. For purposes of our results and outlook for the year, we've taken what we believe to be a prudent approach in providing for how we see the bankruptcy process working out. We expect 2018 to be the high watermark in terms of Indian Carrier consolidation-driven churn by a fairly wide margin. With that, let's dive into the details around our first-quarter performance and updated outlook for the year.", "If you please turn to Slide 8. During the first quarter, we realized consolidated organic tenant billings growth of nearly 6%, with 5% attributable to volume growth from gross new business added throughout our geographic footprint. Our U.S. property segment revenue growth for the quarter was roughly 4.4%, including a negative impact of over 3% associated with the $25 million decline in non-cash straight-line revenue recognition versus the prior year.", "Volume growth from colocations and amendments contributed nearly 5% to our U.S. growth rate, supported by record levels of organic new business on both an aggregate and per-tower basis. As compared to Q1 of last year, new business commencements were up over 40%. Pricing escalators contributed just over 3% and were partially offset by churn of just around 1.2%.", "Notably, our U.S. organic tenant billings growth accelerated nearly 50 basis points sequentially to 6.3% for the quarter. Network development efforts across our entire domestic customer base, including First-Net-focused activity, helped drive that strong organic growth. New business commencements were once again heavily weighted toward amendments in the quarter, and we continued to see amendment pricing at the high end of our historical range as significant equipment overlays are occurring on our sites.", "We continue to have solid visibility into growth in the U.S. and believe that we're in the midst of a multiyear period of elevated demand for our communications real estate, given the long-term nature of ongoing network initiatives and recent public commentary from our tenants in the marketplace. In our international markets, as a whole, organic tenant billings growth was nearly 5% in the quarter, including solid gross new business commencements, offset by the impacts of the higher levels of carrier consolidation-driven churn in India, particularly as a result of Aircel's recent filing for bankruptcy protection. On a total international basis, colocations and amendments drove nearly 6% of organic tenant billings growth, while escalators contributed another 4.2% and other run rate items added another 40 basis points.", "This was partially offset by churn of about 5.5%, of which about 3% was related to carrier consolidation-driven churn in India. Q1 gross organic growth in our international markets exceeded that of the year-ago period by a few million dollars. As a result, adjusting for the impact of consolidation-driven churn in India, international organic tenant billings growth would have been around 8%. New business was particularly strong in Latin America, where the contribution from colocations and amendments grew nearly 40% over the prior-year quarter.", "Mexico, our second-largest market in the region, generated organic tenant billings growth of 17%, the highest level over the last five years, and this was driven by activity from multiple tenants, including Altan. And finally, on a total American Tower consolidated basis, the Day 1 revenue associated with the sites we've added over the course of the last year contributed another 1.6% to our global tenant billings growth. This was driven by acquisitions as well as the over 300 newly constructed sites built just this quarter, primarily in our international markets, with average day one NOI yields of around 11%. Turning to Slide 9.", "We also generated solid adjusted EBITDA and consolidated AFFO growth in the quarter, driven by strong top line growth and diligent management of operating expenses, interest cost and maintenance capex. Our adjusted EBITDA grew by 6.5%, and adjusted EBITDA margin rose about 0.5% sequentially to 61%, due primarily to revenue outperformance across the U.S., Latin America and EMEA markets as well as the continued cost controls throughout the business. We were able to generate solid margins despite the addition of a number of new, initially lower-tenancy assets, a negative impact of about 40 basis points from net straight-line declines, elevated Indian Carrier consolidated churn rates and a negative impact of about 1.7% as a result of around $29 million of primarily Aircel-driven bad debt expense that we recorded in India in the quarter. Meanwhile, both consolidated AFFO and AFFO attributable to common stockholders grew nearly 12% in the quarter.", "Similarly, on a per-share basis, both rose by around 9.5%. These growth rates reflect our high-quality global portfolio's significant diversification, focus on operational efficiency and strong investment-grade balance sheet. In addition, they're reflective of a conversion rate from adjusted EBITDA to consolidated AFFO of well over 100% and a consolidated property segment gross margin of nearly 71%. So turning to Slide 10, let's now take a look at our updated expectations for 2018.", "At the midpoint of our revised outlook, we expect property revenue growth of over 6%, including a negative impact of over 2% from lower noncash straight-line revenue and another 3% or so from Indian Carrier consolidation-driven churn, now projected to be higher than it was in our prior guidance, primarily as a result of Aircel's recently announced bankruptcy. We anticipate that consolidated tenant billings will increase to about 8%, including organic tenant billings growth of about 4% to 5% and a roughly 3% to 4% contribution from newly acquired or constructed assets. This is being supported by strong trends throughout our U.S., LatAm and EMEA regions, where we are raising our expectations for organic tenant billings growth. In the U.S., we are raising our outlook for organic tenant billings growth to approximately 6.5%, supported by record levels of new business, which is expected to be up more than 30% versus last year.", "And meanwhile, in Latin America and EMEA, we now expect to generate organic tenant billings growth of approximately 10% and 7%, respectively, also as a result of higher-than-anticipated levels of new business. And finally, organic tenant billings are expected to contract by about 12%, representing an additional 4% or so decline versus our prior expectations. This primarily reflects an acceleration in consolidation-driven churn as the result of Aircel's bankruptcy filing. Normalized to exclude for the impacts of carrier consolidation-driven churn in India, we now anticipate consolidated organic tenant billings growth at the midpoint to be around 7% for the year.", "Turning to Slide 11. At the midpoint of our outlook, we are reducing our expectations for property revenue by approximately $60 million, driven primarily by accelerated carrier consolidation-driven churn impacts in India and some unfavorable FX impacts. Excluding India, we expect to exceed our initial expectations with the combination of the U.S., Latin America and EMEA markets forecasted to generate $25 million in tenant billings outperformance and about $35 million in total property revenue outperformance relative to our prior outlook. Notably, the U.S.", "is expected to contribute around two-thirds of that total. Offsetting this strong expected revenue outperformance is just over $70 million of negative impacts associated with Aircel in India, inclusive around $20 million of lower expected FX-neutral pass-through revenue. In addition, and as you can see, we also anticipate about $24 million in unfavorable foreign exchange impacts as compared to our prior outlook. Turning to Slide 12.", "Before we move on to the other aspects of our updated outlook, as we did on our last earnings call, I'd like to quickly review our revised expectations for India. As we've communicated over the last year or so, we expect near-term churn in the market to be significantly above historical levels, driven by a carrier-consolidation process through which we think the current eight or nine wireless carriers will consolidate down to three or four. We are reiterating our prior expectations for total carrier consolidation-driven churn in the market over the next several years of $150 million to $200 million, but now expect more of that run rate to churn off sooner. In 2008 -- 2018 specifically, we are increasing what we expect to realize in India for carrier consolidation-driven churn to around $120 million.", "The increase in churn is principally due to the Aircel bankruptcy. In addition, we also expect pass-through revenue to decline by around $70 million. All of these impacts are included in our revised outlook. Net-net, we believe that these adjustments set us on an accelerated path to return to more normalized levels of organic tenant billings growth in India.", "Further, we do think that 2018 should represent, by far, the largest year of churn for us in India, and that churn should begin to ease next year. I also want to note that we continue to benefit from incremental wireless carrier network investments being made in the marketplace and consistent with our prior outlook, expect gross organic tenant billings growth of about 8% in India for the year. These investments are currently being led by Reliance Jio, who, per their own public statements, have been very aggressive in their 4G network rollout. Over the next few years, we believe, as the other carriers in the market have stated publicly, that they will need to rapidly increase their network spending to keep up.", "Well, we're all well-positioned to capture that incremental activity with our comprehensive India portfolio. And as we get to 2020 and beyond, we believe that this spending will lead to more normalized levels of organic tenant billings growth for us in India. Moving on to Slide 13. We now expect our adjusted EBITDA to grow by about 5.5% for the year, down $35 million from our previous outlook.", "The combination of the U.S., LatAm, and EMEA regions are expected to generate nearly $50 million of adjusted EBITDA outperformance with the majority of this coming from our largest market, the U.S. We expect that outperformance to be more than offset by just over $70 million in lower adjusted EBITDA in India, driven primarily by the combination of the increased carrier consolidation-driven churn I just discussed and the higher bad debt expense we recorded in Q1, primarily associated with Aircel. The balance of our reduced outlook for adjusted EBITDA is attributable to about $10 million in unfavorable foreign currency exchange rate movements. However, we are more than offsetting these items at the consolidated AFFO level and raising our expectations for consolidated AFFO by $20 million and maintaining our outlook for consolidated AFFO per share at $7.30 for the year.", "We now expect consolidated AFFO to grow by over 11%, up about 60 basis points from our prior outlook. The increase is being driven by $29 million in lower net cash interest, $10 million in reduced cash taxes, and about $10 million in reduced maintenance capex expectations, partially offset by around $21 million in lower cash-adjusted EBITDA and around $7 million of negative impact from FX fluctuations. As you can see from these compelling growth rates, we continue to translate solid organic performance across our footprint into strong AFFO growth. As you can see on Slide 14, given our track record of delivering strong financial and operational results, we remain committed to our disciplined capital allocation program.", "During the first quarter, we continued to strategically augment our portfolio, spending nearly $700 million or over half of our capital deployed during the period to acquire nearly 10,600 sites, primarily in India. We expect that the attractive valuations of these assets will enable us to drive rapidly expanding returns once the market normalizes. Historically, we found times of market volatility often present the best opportunity to add high-return assets to our portfolio. We also spent about $170 million, or about 14% of total capital deployed, on discretionary capital projects, with about 70% of this for new site construction and site augmentation.", "We built over 300 new sites this quarter, primarily in our international markets, where initial returns continue to be in the double digits and long-term returns also continue to be even more compelling. Our earliest vintage of new builds, those built between 2000 and 2009, are now delivering returns of around 40%. Just 3%, or under $40 million, was spent on non-discretionary capex in the period, primarily to maintain our high-quality asset base. Lastly, we deployed over $330 million for our common stock dividend, which grew by around 21% during the period.", "We've done all of this while continuing to maintain a strong balance sheet, our investmentgrade credit rating and driving rising return on invested capital for our consolidated business. We ended the quarter at about 4.8 times net debt to annualized adjusted EBITDA, which is solidly within our long-term target range of three to five times. We've also continued to expand our return on invested capital, delivering an ROIC of 10.4%, which is up around 100 basis points over the last five years. We expect that over time, the current investment being made through our methodical capital allocation process will enable us to continue to deliver strong financial growth, rising returns and a consistently growing dividend well into the future.", "So turning to Slide 15 and in summary, we kicked off 2018 with a strong start across our U.S., Latin America and EMEA segments. And while we are seeing elevated near-term cancellations in India, efficiencies, and strong growth in other parts of our diversified business are expected to enable us to generate compelling growth in consolidated AFFO per share for the year. Additionally, by accelerating some of the churn impacts that we have previously assumed to occur more ratably over the next several years, we believe we are now better positioned for a resumption growth in India sooner rather than later. We also continue to focus on taking steps to optimize the business to generate strong returns for our shareholders well into the future.", "Operational efficiency remains a key priority in all of our markets. And the maintenance of our investment-grade balance sheet and strong liquidity position is also top of mind. Further, our innovation teams are busy conducting trials in a number of markets to pave the way for future growth, improve the efficiency of our existing operations and help us to minimize our environmental impact. The underlying trends for communication real estate continues to be strong throughout our global footprint.", "In the U.S., organic tenant billings growth continues to be well over 6%, supported by record levels of new business, as all major carriers in the marketplace invest in their various network initiatives. And in our international markets, we are seeing rapid growth in mobile usage, resulting in strong demand, particularly in key markets like Mexico and Brazil. We think we are well-positioned to continue to deliver attractive total shareholder returns for the remainder of 2018, as we translate the secular growth in global wireless and the continued consolidated AFFO per share and dividend growth. And with that, I'll turn the call over to the operator, so we can take some Q&A." ] } ]
[ { "name": "Operator", "speech": [ "[Operator instructions] Our first question comes from the line of Phil Cusick. Please go ahead." ] }, { "name": "Phil Cusick", "speech": [ "Hey, guys, thanks. On the U.S., clearly, momentum is building in the business. Can you talk about what's built into the guidance at this point? Does the guide assume a ramp in committed activity through the year? Or does today's guidance reflect really only the committed revenue pace today?" ] }, { "name": "Tom Bartlett", "speech": [ "Yes, Phil. No, I mean, it's a function of what we see in our backlog, in terms of the application volumes that we have in place and based upon the discussions that our teams continually have with our customers at the local level. We're expecting to see these kinds of trends continue." ] }, { "name": "Phil Cusick", "speech": [ "And so if we see continued ramp from some carriers through the year, would you anticipate guidance to go higher? Or is that, again, that's already built in?" ] }, { "name": "Tom Bartlett", "speech": [ "No, I mean, given the existing levels that we have, to the extent that we seek increases in those level -- levels of activity, I would expect there to be an increase in the overall organic growth." ] }, { "name": "Phil Cusick", "speech": [ "Great. Thanks, Tom." ] }, { "name": "Operator", "speech": [ "Thank you." ] }, { "name": "Phil Cusick", "speech": [ "Sure." ] }, { "name": "Operator", "speech": [ "And our next question comes from the line Simon Flannery. Please go ahead." ] }, { "name": "Simon Flannery", "speech": [ "Great. Thanks very much.Just continuing on from Phil's question there. Is -- do you have -- and I know it's very early, but is there any concern that Sprint or T-Mobile may moderate some of their activity this year, as they wait for -- to see how the regulators deal with the deal? And then on India, I think in the past, you talked about 2020 being kind of your goal of when you return to more normal activity. Perhaps you could just update us on your thought process around that.", "Thanks." ] }, { "name": "James D. Taiclet Jr.", "speech": [ "Simon, it's Jim. It is too early to see any change in behavior, if it indeed will occur at all, from either Sprint or T-Mobile on their current network plans. Their public statement referred to them continuing those plans. But if we see any adjustments that are significant enough to affect the guidance, we'll let you know, of course, next quarter." ] }, { "name": "Tom Bartlett", "speech": [ "Yes. And as I said, Simon, with regards to kind of levels of churn, given that this year will clearly be the, what we believe to be, the high watermark for churn, we expect to reduce levels come next year. And so even in my comments, beginning in 2020, we would expect to start to get back to more normal levels of organic growth. We're generating 8% of gross growth this year, and we would expect kind of normal churn in kind of that 3% or 4% range.", "And so that's why, ex this churn, we would have probably in the 4%-ish range of organic growth and then you have the incremental churn on top of that. And so we would expect the carriers to -- as they come out of this consolidation process, to continue to invest in their markets. Some probably, even more than others, to try to gain some level footing, if you will, in the marketplace. And so we would expect 2020, 2021 to get back to more normal levels of organic growth that we've seen over the past several years." ] }, { "name": "Simon Flannery", "speech": [ "Thank you." ] }, { "name": "Operator", "speech": [ "Thank you. And our next question comes from the line of Jonathan Atkin. Please go ahead." ] }, { "name": "Jonathan Atkin", "speech": [ "Thanks. So on India, just bigger picture. I wondered if you can comment on the tower industry structure given some changes ongoing. How do you see that further evolving? And any implications you see for your business? And then on a more micro basis, just wanted to confirm that Tata exposure is not in your churn guidance because of the iteration of that lease?" ] }, { "name": "James D. Taiclet Jr.", "speech": [ "Sure. I'll take the first one, Jonathan. As far as the tower industry evolution in India, it's exactly what we'd like to see and very much we expect the outcome to look a lot like where the U.S. industry is.", "What I mean by that is, there are a number of -- and still are a number of captive, as they're called, towercos in India, which are owned and controlled by mobile operators. The behavior of those companies is heavily influenced by the interest of the operators. And we've always had an expectation, since our initial investment that over time, those operators would monetize their towers, sell them off into independent companies like ours. And you have a rational tower market in addition to a rationalizing carrier market with three or four operators.", "So we expect at the end of the day, three or four quite strong, well-capitalized mobile operators, like we have in the U.S. And we also expect two to three significant tower companies with the bulk of those assets -- managing the bulk of those assets, again, like we have in the U.S. So the long-term industry evolution for India, we think, is going to end up very similar to the United States, as they enter a very competitive 4G environment, which again is the same situation that happened here about 10 years ago when Alltel, Nextel, and AT&T Wireless merged into bigger carriers. So that's how we see the landscape playing out, and I think that would be very constructive for our already independent tower company given our scale." ] }, { "name": "Tom Bartlett", "speech": [ "And you're right, Jonathan. This does not include the impacts of the Tata settlement. We would -- we continue to work with our customer, our shareholder, on what that settlement will look like. We would expect that that settlement will probably happen over a couple of year period, working through with the carriers to really assess just how many sites are going to be needed to be able to support their existing customer base in new hands.", "And we're also continuing to look at what additional cost will be needed in our own business given the lower levels of business. So a lot of ongoing activity with that relationship. But you are right. It is not included in those numbers." ] }, { "name": "Jonathan Atkin", "speech": [ "And then just a quick follow-up. Mexico, strong growth there. Where are we in the cycle for Altan? And is this potentially a peak year for same-store growth in that market?" ] }, { "name": "Tom Bartlett", "speech": [ "It's very difficult to say. They have their own regulatory requirements in terms of just how much of that network needs to be -- how much of the population needs to be supported over the next couple of years It will largely depend upon the demand on that network, I believe. And so as I said, we're really pleased with the activity. And it's not just from Altan, but it's from the entire marketplace.", "So we would hope to see this kind of activity for many periods to come but depending, as I said, I think to the extent -- to the success of Altan with leasing out its own network. I think we'll largely drive what that activity might look like over the next several years." ] }, { "name": "Operator", "speech": [ "Thank you. And our next question will come from the line of Matt Niknam." ] }, { "name": "Tom Bartlett", "speech": [ "Matt?" ] }, { "name": "James D. Taiclet Jr.", "speech": [ "Matt?" ] }, { "name": "Tom Bartlett", "speech": [ "Maybe next call, operator." ] }, { "name": "Operator", "speech": [ "Just one second here. Matt your line is open." ] }, { "name": "Matt Niknam", "speech": [ "Hey, guys, can you hear me OK?" ] }, { "name": "James D. Taiclet Jr.", "speech": [ "Oh, yes, we can. Thanks, Matt." ] }, { "name": "Matt Niknam", "speech": [ "OK. Great. So the question was strategy-wise, on the back of the T-Mobile announcement this weekend, does that change at all your plans around international expansion and diversification? And then on the back of that, 5G was obviously at the core of the T-Mobile and Sprint plan in terms of technology roll-out. Does that impact the way you think about fiber and small cells in the U.S.?" ] }, { "name": "James D. Taiclet Jr.", "speech": [ "The Sprint/T-Mobile merger wouldn't affect our capital allocation process, which includes reviewing and acting on international opportunities that fall within our investment criteria. So that doesn't affect -- or that is not affected by the Sprint/T-Mobile merger. That process will remain in place. As far as the 5G plan announced by T-Mobile and Sprint, again, it doesn't change our conviction on -- one thing that I tried -- emphasized in the prepared remarks is the macro-site role in the 5G network rollout in the U.S., I think it's pretty clear now that it's going to be a foundational role.", "Most of the population, about 85% of it. And the vast, vast majority of the geographic coverage is outside of urban and dense urban areas. So we feel that this validates the hypothesis we've always had, which is these macro towers are going to be the foundational infrastructure for 5G. As to fiber and small cells in urban and dense urban areas, again, we have the same strategic view of this, which is location rights at scale, and on a franchised basis, are the value-creating opportunity for us.", "We'll buy or lease or find fiber from the existing marketplace. It's already there in the U.S. Multiple competitors in every urban market, lots of existing asset base, a competitive supply chain. We'll go buy fiber from the market to support the small cell franchise rights, should we get them at scale.", "So it doesn't really change the strategy there either, frankly." ] }, { "name": "Matt Niknam", "speech": [ "Got it. Thanks, Jim" ] }, { "name": "James D. Taiclet Jr.", "speech": [ "Sure." ] }, { "name": "Operator", "speech": [ "Thank you. And our next question comes from the line of David Barden. Your line is open." ] }, { "name": "David Barden", "speech": [ "I guess, one for Tom, just on the kind of updated AFFO outlook. I understand the walk on Slide 13. I guess, on the supplement on Page 16, there's another walk. And if you compare them quarter over quarter, it looks like the big changes are deferred income taxes and other, which includes some kind of provision for India.", "Could you kind of help us walk through the moving parts in that other buildup in taxes and other? And then Jim, just -- you kind of gave birth to this innovations initiative last quarter, kind of laid out a bunch of priorities and targets that you kind of wanted to get to work on. Could you talk to us about what actually is happening on that front right now? And kind of what the budget was for this past quarter and for the year?" ] }, { "name": "James D. Taiclet Jr.", "speech": [ "Sure. I'll start with the second question on innovation. Our biggest investment so far have been fiber-to-the-tower-based infrastructure opportunities in Latin America predominantly, right? So we have an investment in Mexico along those lines and one in Argentina. With those fiber-to-the-tower assets, they also come with the scale transmission rights based on utility poles that come with those particular companies and businesses.", "So that's the bulk of the actual capital investment so far or M&A investment, if you will. Then we have some smaller, very targeted investments, and one is Federated Wireless, a reference I made earlier, where we are working with them as a minority owner to help craft the CBRS spectrum utilization plan for small cells, predominantly in indoor venues as our main interest but outdoor as well. And hopefully, we will be able to help guide that process of utilizing that spectrum in a way where we can get franchise real estate rights, help deploy and get our carries a much cheaper access, especially to indoor opportunities in office buildings, apartments, etc. So that's one small investment we've made.", "Another one, which is fairly modest, under $10 million, is with Philips Alliance, where we co-develop with them an actual product that is being deployed in California right now to combine LED lighting system, which reduces the cost of the municipality for lighting, plus the transmission system for 4 and 5G embedded in the pole. So again, that's another place we made a small investment. And it goes down the line. And we've got innovation teams, David, deployed around the world, very highly qualified people and a fantastic CTO, Ed Knapp, that is managing all of this under sort of my guidance.", "And we will methodically keep making these investments as we go forward." ] }, { "name": "Tom Bartlett", "speech": [ "And David, on the -- on your first question, maybe there are a number of events that are going on in India. And we had the merger of our legacy businesses into the -- our joint venture business that's, we believe, creating some opportunities and with the writedown that we recently took in the quarter. And then more broadly, I think that there are -- we have a number of initiatives that are going on around the world that are tax group is actively working on to be able to mitigate as much tax exposure as we possibly can. So I think among those three areas, I think, is really driving some of the improvement in overall cash taxes that you referred to." ] }, { "name": "David Barden", "speech": [ "If I could just follow up, Tom, is that kind of legacy ATC merged into Viom? Is that kind of under way that the terms and everything been set in your -- or is this negotiation with Tata regarding the legacy leases kind of getting involved in that conversation?" ] }, { "name": "Tom Bartlett", "speech": [ "No, no. David, that's done." ] }, { "name": "David Barden", "speech": [ "OK." ] }, { "name": "Tom Bartlett", "speech": [ "Yes, that was an event that occurred in the quarter. So yes, we do now have that legacy business now officially merged into the traditional Viom business." ] }, { "name": "David Barden", "speech": [ "Perfect. All right. Thanks." ] }, { "name": "Operator", "speech": [ "Thank you. And next, we'll go to the line of Amy Yong. Please go ahead." ] }, { "name": "Amy Yong", "speech": [ "Good morning. Maybe just elaborating on T-Mobile and Sprint. If you could talk about -- I think a lot of investors are focused on the 35 sites that are going to get turned off and maybe the build of 10. Were you surprised by the numbers around that? Is that kind of in line with your expectations? And then just secondly on India.", "If you can help us think through kind of what a good base assumption for 2019 and maybe the shape of growth and churn for the back half of '18 and '19, that would be really helpful." ] }, { "name": "James D. Taiclet Jr.", "speech": [ "As far as T-Mobile and Sprint's network plans, they're not a surprise. They're the internal analysis done by the two companies. They also may well include sites from say Clearwire, MetroPCS, etc., that were likely to be reduced or decommissioned over time anyway by the independent companies. That would -- could be a portion of them.", "But as I said in the remarks, I mean, at the end of the day, this -- should this merger come to fruition and completion, there will be an intelligent rationalization of the 100,000, plus or minus, cell sites that the companies have today into something that will give good coverage but will need to be improved itself over time. And as I said, when you're starting to apply 2.5 gigahertz spectrum to cell sites that were designed for 800, 900 megahertz spectrum, there's going to be a density need over time. There's also going to have to be a significant, we think, amendment activity on the sites that are consolidated into that will offset some of the leases that sunset over the next few -- many years, actually, as what they usually turn out. So we're not surprised by any of it.", "One of our benefits as a company is we have the leading tower portfolio. We're a highly focused macro-site company that doesn't need -- necessarily feel that we have to make any trade-offs elsewhere. And we've got great contractual relationships with both companies and really good business relationships. So we tend to be their network partner in evolving to the layout and infrastructure topology that they're going to need to grow from in the future.", "So we see this as a very constructive opportunity for us, should it go through. And we'll work with them. And I think it will be a good outcome for ATC, as I said." ] }, { "name": "Tom Bartlett", "speech": [ "And Amy, just kind of following up on your question with churn. As I mentioned, we were looking at that kind of $110 million or $120 million of churn in 2018. Probably 60% of that will occur in the second half of the year, given the assumptions that we've made relative to transactions getting approved and notifications coming in to when that -- those leases will actually be canceled. And as I mentioned, it is the high watermark.", "We've talked about $150 million to $200 million of total churn. And given the kind of the 120-ish in '18, with the RCom and MTS churn of -- in the fourth quarter in the kind of the $30 million to $40 million, you can kind of back into what we would expect to be the kind of the 2019 related churn. Now again, this can move around based upon what kinds of cancellation notices, when in fact we do get these, but this is our best estimate of when we think this churn will actually impact us between 2017 and 2019." ] }, { "name": "Amy Yong", "speech": [ "Great. Thanks." ] }, { "name": "Operator", "speech": [ "Thank you. And next, we'll go to the line of Amir Rozwadoski. Your line is open." ] }, { "name": "Amir Rozwadowski", "speech": [ "Thank you very much and good morning, folks. Two questions, if I may. First and foremost, if we think about sort of the demand environment in the U.S., are there any constraints that you're seeing from resources perhaps? Just given the amount of work that's being done or application activity level, are there any sort of limitations into -- in terms of tower climbers or anything that you could see in the food chain that could be holding back some of the activity levels? And then if we think about 5G over the longer term, one of your peers had mentioned that they're starting to see deployments taking place that could be a precursor to 5G or indicative of 5G in non-urban areas. Any comment you can provide to that effect?" ] }, { "name": "James D. Taiclet Jr.", "speech": [ "On our U.S. demand cycle, resource constraints aren't a factor for what we do on our sites at all, Amir. So I wouldn't look at that as any kind of an obstacle or problem that we face. We have an outstanding supply chain.", "We've got great operational employees and a very tight organization in the U.S. So we don't face those constraints, I believe, in any kind of material way. And secondly, as I described in the remarks, yes, there are applications starting to come in for certain types of antennas, trial sites. The -- three or four of the carriers have already announced that they are going to be in certain markets installing this kind of equipment.", "So we're getting applications starting to come in for those projects." ] }, { "name": "Amir Rozwadowski", "speech": [ "Then just a quick follow-up on that. If we think about sort of either antenna designs or any types of technology needed to enable that opportunity set, should we think about 5G as being an incremental add to your total addressable market, just given how networks are expected to be designed to utilize some of that spectrum?" ] }, { "name": "James D. Taiclet Jr.", "speech": [ "I'll give you one quick example. Just a 600-megahertz antenna versus a 700-megahertz antenna. The optimal antenna length is -- or height, if you will, is an extra foot, right? So that comes with weight. It comes with an upcharge.", "So that's just one small example of when you get into more advanced technologies, whether it's lower-band spectrums, which have bigger antennas, or higher-band spectrums, which have smaller antennas but a lot more of them and a lot closer together, the physics are hard to get around. You've got to -- if you want to put that traffic out there using those frequencies, you're going to have to deploy the equipment at scale to meet that 30-plus-percent increase in data demand. And whether you're using 600 or 2500, the trade-offs and everywhere in between, the trade-offs are based on physics, Amir. And there's an equipment set that comes with those." ] }, { "name": "Amir Rozwadowski", "speech": [ "Thank you very much for the incremental color." ] }, { "name": "Operator", "speech": [ "Thank you. And next, we'll go to the line of Batya Levi." ] }, { "name": "Batya Levi", "speech": [ "Great. Thank you. In the U.S., do you see any change in the competitive environment to attract new business from the carriers? And just a question on the guidance. It looks like you're using a higher share count for the '18 guide.", "Any implications for the buyback for the year?" ] }, { "name": "James D. Taiclet Jr.", "speech": [ "Sure, Batya. I'll take the first one. And Tom, you can speak to the share count. We don't see any change in the competitive environment in the U.S.", "On the major MLA front, we have no visibility, first of all, to anyone else's agreements or conversations with customers. But we are -- as the market leader, we would envision ourselves not changing our approach at all. It's patient. It is agnostic in between a holistic-type comprehensive wholesale deal and the set of retail transactions, we'll work with the customer to get our best outcome and their best outcome, should we find common ground.", "So we're agnostic on that, but we're basically looking for the highest level and most reliable cash flow with the least downside in every agreement we have. When it comes to new build opportunities, there's been a competitive tower build environment in the U.S. [Audio gap] a few sites that do get built here from the ground up on a macro basis for many, many years since certainly I've been here. Some of the players and companies and names and promotional efforts change, but that market has always been there.", "And when we can get our return, we'll build towers. And where we can't, others will underbid us, and they will get that opportunity. But with 40,000-plus, I think we're in pretty good shape. So we don't really see any change from our perch in the competitive environment and -- whether it's new builds or existing infrastructure." ] }, { "name": "Tom Bartlett", "speech": [ "And Batya, with regards to your second question, you're right. We anticipate now slightly more M&A activity and capital dedicated to M&A. So that's one of the reasons as well as the timing of when the buybacks occur. So that impacts what the ultimate weighting would be." ] }, { "name": "Batya Levi", "speech": [ "OK. Thank you." ] }, { "name": "Operator", "speech": [ "And our next question will come from the line of Tim Horan. Your line is open." ] }, { "name": "Tim Horan", "speech": [ "Thanks, guys. On -- Jim, T-Mobile and Sprint are kind of implying that over time, wireless can supplant a lot of wireline broadbands. And 12% of households are wireless-only now for their Internet access. Do you think we have the spectrum and the infrastructure to support a much larger percentage of your households being wireless-only? And I know India is largely wireless at this point, and I just have a quick follow-up in India also." ] }, { "name": "James D. Taiclet Jr.", "speech": [ "Well, Tim, I believe that many of the carriers, not just T-Mobile and/or Sprint, feel that this is a real business opportunity for them. Cable substitution, fixed broadband to the home, using a range of spectrum assets based on the topology and the population density of the homes. And of course, there is spectrum available for that, but it's limited. And therefore, if these projects actually get deployed at scale and they're beyond, say, millimeter wave spectrum, which will be effective for maybe a couple of hundred yards or a few hundred yards, you're going to be into macro sites or mini macro sites with mid-band spectrum.", "And if you're going to be, again, putting through the bandwidth, gigabits-per-second type of speeds that require -- is required to do fiber- or cable-to-the-home type competition, you're going to have to have a lot of transmission sites. So the trade-offs are there, whether you want to dig a trench down the street and through everybody's yard or you want to deploy macro sites that have slaved many macros and then a last quarter-mile transmission to the home, there's going to be a cost to competing in either of those environments. But there are a number of mobile companies that have made public statements about their interest in competing on fixed wireless. And that's absolutely the way to do it." ] }, { "name": "Tim Horan", "speech": [ "And now just an update on India, I think in the presentation you said 4% organic growth. When everything kind of shakes out and the industry settles down, do you have any thoughts on what that market can grow at longer term?" ] }, { "name": "Tom Bartlett", "speech": [ "Yes, Tim. Last year, year before, we were up in the high single digits, low double-digit kind of growth rate. Given the demand that we believe we are going to see in that marketplace, we believe that we're going to be getting back to the similar rates of growth." ] }, { "name": "Tim Horan", "speech": [ "Thank you." ] }, { "name": "Operator", "speech": [ "Thank you. And our next question comes from the line of Brett Feldman. Please go ahead." ] }, { "name": "Brett Feldman", "speech": [ "Yes. Thanks. Just to start with a quick clarification, Tom, just so I know I'm doing this right. The churn you're expecting in India, the consolidation churn of $150 million to $200 million, that's property revenue, correct? Meaning, we're comparing that to the $120 million you expect this year? It doesn't include passthrough." ] }, { "name": "Tom Bartlett", "speech": [ "That's right." ] }, { "name": "Brett Feldman", "speech": [ "And then just a follow-up question on India. I mean, you've noted that the new business you're getting, exclusive of churn, is at a lower level as well because there's a lot of focus on network integration. Part of the long-term thesis, I believe, you had around the Viom portfolio is that it did under-index to the bigger operators, but that you estimated that, as consolidation played out, you'd be able to leverage some of the relationships you had in ATC India and bring that business on to Viom. So I guess, I was hoping you can maybe just talk about the nature of the new leasing you are seeing in India even if it is at a lower level to maybe help frame why your constructive on where you're going to be once you get through the consolidation period?" ] }, { "name": "James D. Taiclet Jr.", "speech": [ "Well, I mean, the large pieces of the existing business, Brett, is coming from R Jio, as I mentioned. So they continue to expand. 80% or 90% of the country's data traffic is now going over their network. And so they're continually having to invest heavily into that business and continually to expand the capacity of that network.", "We would expect that, once we get through this -- when we would get through this, the process that they're going through, which is probably another 18 months or so in the marketplace, then all of the carriers, the remaining carriers, will start to invest heavily into that market for both voice and data and to continually building out their 4G. So we think that R Jio -- because R Jio is not going through that same kind of consolidation process that the other carriers are going, that they're able to maintain just more focus on building out their network, underlying what their foundational infrastructure looks like. And so they're just able to build on it and continue with it. And so we would hope and we would anticipate that we'd be able to continue with the kind of the R Jio kind of deployment.", "And then on top of that, be able to enjoy the growth coming from the other consolidated entities." ] }, { "name": "Brett Feldman", "speech": [ "Is it fair to assume that once you get through this consolidation period, to the extent you're able to grow organically on your existing towers, that will be very capital-efficient, meaning that there will actually be excess space on the towers? Or is there anything you're going to have to do to kind of recondition them to take on new tenants?" ] }, { "name": "James D. Taiclet Jr.", "speech": [ "No, you're exactly right. We would anticipate -- we have a lot of single-tenant -- towers in the marketplace, so we would expect to be able to really leverage that at that infrastructure to be able to enjoy that kind of growth going forward." ] }, { "name": "Brett Feldman", "speech": [ "Thank you for taking the questions." ] }, { "name": "Operator", "speech": [ "Thank you. And our final question will come from the line of Ric Prentiss." ] }, { "name": "Ric Prentiss", "speech": [ "Hey, guys. Good morning. Thanks for squeezing me. A couple of questions." ] }, { "name": "James D. Taiclet Jr.", "speech": [ "Absolutely, and I hope you're as pleased as we are with the outcome of the hockey playoffs there, Ric." ] }, { "name": "Ric Prentiss", "speech": [ "One-one. We'll see you in Boston, eh? Two questions, if I could. One, going back to a little bit of what Phil asked. When we think about the U.S.", "momentum, what's the update as far as how long is it taking from executed lease to seeing the revenue show up on the tower in the U.S.? And then I've got a follow-up on India." ] }, { "name": "James D. Taiclet Jr.", "speech": [ "Rick, that depends on a couple of things whether it's amendment or a colocation. The amendments tend to be quicker. And it also depends on the contractual arrangement with each carrier and their own internal approval process. But the lead times are still for amendments in weeks or a couple of months, and in -- when it comes to colocations, it could be three to six months, depending on the carrier.", "So those are the kind of time frames. So I'd say, just to give it some shorthand, a quarter for an amendment, two quarters for a colocation. That's kind of the visibility we have on average." ] }, { "name": "Ric Prentiss", "speech": [ "That makes sense. And in India, going back to something Brett was asking. Obviously, it's excluding pass-throughs, the $150 million to $200 million. Last time, the guidance I think assumed about $90 million would come in '19 -- in 2018, sorry.", "And now we're at $120 million coming in 2018, a difference of about $30 million, but Slide 13 is kind of talking about $71 million. I assume part of that is that bad debt, right? I just want to understand the differences in those numbers, if I'm getting them right." ] }, { "name": "Tom Bartlett", "speech": [ "No, you are, Ric. I mean, there's incremental churn coming from the -- what we anticipate coming from Aircel, which is driving it. There are some timing benefits as a result of some of the other churn that we assumed in the businesses is being pushed out later in the year." ] }, { "name": "Ric Prentiss", "speech": [ "And there was the bad debt in Aircel, was that -- I missed that one, was that $29 million?" ] }, { "name": "Tom Bartlett", "speech": [ "Yes, that's right. No, that's exactly right. And if you take a look at the impacts to EBITDA, on top of the impacts of that revenue-related largely driven by the churn from Aircel, there were some outstanding receivables that we needed to reserve against, given the bankruptcy process. And that was what we booked -- as I mentioned, we booked in Q1." ] }, { "name": "Ric Prentiss", "speech": [ "And that's bad debt, not the churn number?" ] }, { "name": "Tom Bartlett", "speech": [ "That's right." ] }, { "name": "Ric Prentiss", "speech": [ "OK. And just one -- I don't know if you've got the time there. What is the Tata time frame? I think originally, what, it was 2025 they were contractually obligated through. But you're maybe suggesting that you could negotiate the Viom stake versus maybe having churn come in earlier, is that kind of what we should think about?" ] }, { "name": "James D. Taiclet Jr.", "speech": [ "So, Ric, everything's integrated here. Tata is a partner in ATC India now based on the overall legal entity consolidation. So they have a stake in the success of the business as well. They've got -- and we have other partners in the JV.", "And so we're all working through kind of the simultaneous equations that speak to the participation, length of time in the JV, the exit from that, the run rate of revenue and potentially, a settlement portion at some point in the future. So all those things are wrapped together. And it's a constructive process among the partners right now on all those dimensions. And once we conclude it, we'll get -- be able to kind of report out all of the specifics." ] }, { "name": "Ric Prentiss", "speech": [ "All right. Let's go Lightning. We'll see you, guys. Have a good day." ] }, { "name": "James D. Taiclet Jr.", "speech": [ "Thanks, Ric." ] }, { "name": "Ric Prentiss", "speech": [ "Take care." ] }, { "name": "Operator", "speech": [ "Thank you. And speakers, I'll turn it back over to you for any closing remarks." ] }, { "name": "James D. Taiclet Jr.", "speech": [ "All right. Thanks, everyone, for joining today. Have a great day." ] }, { "name": "Tom Bartlett", "speech": [ "All right. Bye, everybody." ] }, { "name": "Operator", "speech": [ "[Operator signoff]" ] }, { "name": "Ric Prentiss --Raymond James -- Analyst", "speech": [ "More AMT analysis", "This article is a transcript of this conference call produced for The Motley Fool. While we strive for our Foolish Best, there may be errors, omissions, or inaccuracies in this transcript. As with all our articles, The Motley Fool does not assume any responsibility for your use of this content, and we strongly encourage you to do your own research, including listening to the call yourself and reading the company's SEC filings. Please see ourTerms and Conditionsfor additional details, including our Obligatory Capitalized Disclaimers of Liability." ] } ]
AMT
2021-07-29
[ { "description": "", "name": "Igor Khislavsky", "position": "Other" }, { "description": "President and Chief Executive Officer", "name": "Tom Bartlett", "position": "Executive" }, { "description": "Executive Vice President, CFO, and Treasurer", "name": "Rod Smith", "position": "Executive" }, { "description": "Raymond James & Associates -- Analyst", "name": "Rick Prentiss", "position": "Analyst" }, { "description": "Morgan Stanley -- Analyst", "name": "Simon Flannery", "position": "Analyst" }, { "description": "Deutsche Bank -- Analyst", "name": "Matt Niknam", "position": "Analyst" }, { "description": "Bank of America Merrill Lynch -- Analyst", "name": "Dave Barden", "position": "Analyst" }, { "description": "Oppenheimer & Co. Inc. -- Analyst", "name": "Tim Horan", "position": "Analyst" }, { "description": "RBC Capital Markets -- Analyst", "name": "Jonathan Atkin", "position": "Analyst" }, { "description": "Cowen and Company -- Analyst", "name": "Colby Synesael", "position": "Analyst" }, { "description": "MoffettNathanson -- Analyst", "name": "Nick Del Deo", "position": "Analyst" }, { "description": "UB --Analyst", "name": "Batya Levi", "position": "Analyst" } ]
[ { "name": "Operator", "speech": [ "Ladies and gentlemen, thank you for standing by. Welcome to the American Tower's second-quarter 2021 earnings conference call. As a reminder, today's conference call is being recorded. [Operator instructions] I would now like to turn the call over to your host, Igor Khislavsky, vice president of investor relations.", "Please go ahead." ] }, { "name": "Igor Khislavsky", "speech": [ "Good morning, and thank you for joining American Tower's second-quarter 2021 earnings conference call. We've posted a presentation, which we will refer to throughout our prepared remarks under the investor relations tab of our website, www.americantower.com. On this morning's call, Tom Bartlett, our president and CEO, will provide a strategic update on our international business with a focus on our newly expanded European portfolio. And then, Rod Smith, our executive vice president, CFO, and treasurer, will discuss our Q2 2021 results and revised full-year outlook.", "After these comments, we will open up the call for your questions. Before we begin, I'll remind you that our comments will contain forward-looking statements that involve a number of risks and uncertainties. Examples of these statements include our expectations regarding future growth, including our 2021 outlook, capital allocation and future operating performance; our expectations regarding the impacts of COVID-19; our expectations regarding the closing of the remaining Telxius sites; expectations regarding the closing of our signed agreements with CDPQ and Allianz; and any other statements regarding matters that are not historical fact. You should be aware that certain factors may affect us in the future and could cause actual results to differ materially from those expressed in these forward-looking statements.", "Such factors include the risk factors set forth in this morning's earnings press release, those set forth in our Form 10-K for the year ended December 31, 2020, and in other filings we make with the SEC. We urge you to consider these factors and remind you that we undertake no obligation to update the information contained in this call to reflect subsequent events or circumstances. And with that, I'll turn the call over to Tom." ] }, { "name": "Tom Bartlett", "speech": [ "Thanks, Igor. Good morning, everyone. I hope that you are all healthy and well. As is typical on our second-quarter calls, my remarks today will center on our international business, which now spans more than 171,000 communication sites and accounted for 37% of our property segment gross margin in the second quarter.", "Given our recent Telxius transaction, I'll focus much of my commentary on our European portfolio, but I do want to first cover some of the key tenets that drive our global strategy and touch on a few important metrics for our international business as a whole. Since entering Brazil and Mexico more than two decades ago, to provide geographic diversification to our foundational U.S. assets, we've oriented our international growth around partnering with large multinational wireless carriers in select markets with strong property rights, solid rules of law and vibrant wireless industries. Since Day 1, our international expansion mandate has been clear: acquire, construct, and market franchise real estate assets to drive strong organic growth, long-term margin expansion and compelling total returns and do so with an emphasis on building leading market positions in the largest democracies around the world in various stages of wireless technology development, all while driving enhanced connectivity for billions of people and being a good corporate citizen.", "Bottom line, our goal was to replicate the model we've built in the United States, to increase the slope of the growth curve and extend it. As a result of our adherence to these core principles and the tremendous contributions from our global leadership teams and employees, we have been able to drive solid results across our international business over the last decade. Markets outside the United States have made meaningful contributions to our long track record of generating strong organic growth, while delivering double-digit annual consolidated AFFO per-share growth and attractive returns on invested capital. In fact, as of the end of the second quarter, international sites that we've owned and operated since before 2010 were generating U.S.", "dollar NOI yields of 30%, with our oldest vintage of sites in Latin America driving NOI yields closer to 40%. And international sites we've built and acquired since 2010, excluding the Telxius assets that we just closed, are generating an average U.S. dollar NOI yield of 10%, with what we believe to be substantial future upside potential. Further, on sites, we've constructed ourselves internationally across all vintages, the NOI yield, as of the end of the second quarter was 25%, demonstrating the tremendous return potential of our new build program.", "Finally, it's important to note that just as we've done in the past, we expect to focus on constructing sites for high-quality, primarily investment-grade tenants as we drive toward our goal of 40,000 to 50,000 new builds worldwide over the next five years. We're focused not only on generating strong growth and returns internationally, but also, in doing so in a sustainable way. This is reflected in our accelerating power-related investments in lithium ion battery storage, solar and other clean energy solutions as we seek to reduce our global carbon footprint and lead the overall telecom industry to a greener, more sustainable future. Moreover, we believe that shared use of renewable energy, combined with storage, has the potential to reduce operating costs over time, which can benefit the entire telecom ecosystem as demand for mobile data usage continues to rise.", "In addition, we are working to make a positive difference in our markets through programs like our digital communities initiative, which seeks to expand access to education and technology to underserved populations by leveraging power and connectivity at our tower sites. To date, this program has enabled well over 100,000 students across six markets to gain critical access to the Internet, while developing digital literacy skills and has recently garnered recognition from the UN World Summit on Information Society. Looking forward, by working with partners, the World Economic Forum and other stakeholders, we expect to meaningfully expand the reach of our digital communities efforts as part of our overall commitment to making a positive difference in our served markets, particularly given the critical need for pervasive mobile broadband connectivity. This criticality for broadband connectivity was amplified by the COVID-19 pandemic and fit squarely within our belief that the network technology evolution we've seen in the United States will be replicated internationally.", "And that as owners and operators of mission-critical communications real estate, our sites will be at the forefront. As mobile data usage continues to grow rapidly and as 2G and 3G networks outside of the United States are upgraded to 4G and 5G, we expect network densification and augmentation to take center stage resulting in long-term sustainable, predictable growth for us. Importantly, the international tower model, just like the U.S. business, is predicated on optimizing operating leverage, signing value-additive, strategic long-term contracts and providing high levels of service to our customers, while carefully and selectively deploying capital to high-quality, accretive growth investments.", "With mobile network operators across our international markets spending upwards of $35 billion in wireless capex annually, and the need for communications infrastructure only expanding, we believe we position ourselves for long-term success. One critical element of our international strategy is a balanced approach to market selection. We've always sought to not only diversify the business from the perspective of the United States versus international, but also, to drive diversification within our international operations themselves. As a result, we operate in a mix of developed and developing markets and as I mentioned earlier, have exposure to multiple concurrent technology cycles throughout our operations.", "We've been quite purposeful in ensuring that we are not too overweight in any one market or region, and that is reflected in our portfolio today. Our recent Telxius transaction is a clear reflection of this long-held strategy. Not only were we able to secure what we believe to be premier assets centered in two highly attractive European countries, but the deal also enabled us to further balance our emerging market presence with communication sites in more mature markets. In fact, on a total company run-rate basis, around 60% of our property revenue is now derived from developed technology-advanced markets.", "We expect the incremental diversification we have gained through the Telxius deal to yield benefits over the long term on many fronts, including with deeper access to the attractive European capital market, both public and private, the addition of incremental euro-denominated revenues and, of course, a much stronger competitive position on the continent itself. So with that, I would like to now take a deeper dive into why we're so excited about our European business and particularly our newly scaled presence in Germany and Spain. We've always said that we view the concept of Europe being a singular tower market as a misnomer, and that remains true today. Europe is a collection of vastly different markets with highly variable characteristics on the regulatory wireless market structure and historical network development sides, among others.", "And we've seen this reflected in many portfolios we've evaluated over the years that we ultimately did not acquire. To that point, our Telxius transaction is less an indication of a sea change across Europe as a whole and much more a reflection of the assets themselves being superior in our view. The wireless market structure and dynamics, regulatory regimes and carrier capex trends in Germany and Spain are favorable, and Telefonica is a high-quality anchor tenant. We also perform significant due diligence on the sites and accompanying contracts, both on the customer side and on the landlord side, and view the outcome of that diligence as a positive differentiator as compared to some of the other portfolios we've evaluated.", "As a result, we're confident that we can drive attractive economics across the portfolio, including high margin flow-through from colocation and amendment growth, complemented by a new build program that we expect will further accelerate over the next few years. This confidence is underpinned by strong underlying wireless market trends in both countries. Mobile data usage from 2019 through '24, for example, is projected to grow at a CAGR of more than 25% in Germany and Spain, similar to the United States. Meanwhile, ARPUs have been relatively steady over an extended period of time.", "The mobile network operators are solidly profitable and 5G device penetration, like in the United States, is still in its infancy. Wireless market structure is also favorable, with significant carrier consolidation having already occurred, leading three major incoming carriers in Germany and four in Spain. Consequently, we believe the downside risk related to further consolidation in these markets is modest for us. Critically, carriers in both Germany and Spain possess significant spectrum assets across multiple bands.", "For instance, the three incumbents in Germany, along with One and One, all have at least 50 megahertz in the 3.5 to 3.7 gigahertz range, which is now starting to be deployed for 5G rollouts. Meanwhile, in Spain, all four major carriers have at least 80 megahertz in the same globally harmonized mid-band range, along with significant spectrum assets from 800 megahertz to 2.1 gigahertz and 700 megahertz spectrum coming to auction shortly. Further, between the two markets, mobile wireless carriers are spending more than $6 billion in wireless capex annually, with a new entrant in Germany in accelerating 5G deployments potentially leading to enhanced capex deployment in the future. Finally, over the last several years, unlike in many other European markets, communication site counts have been increasing, and we believe that substantial further densification efforts will be necessary to augment existing 4G deployments and upcoming 5G rollouts.", "Just like in the United States, as higher band spectrum is deployed for 5G, networks will need to become denser to provide a true 5G experience. With our expanded footprint focused in the urban areas where these deployments are likely to be concentrated, we are well-positioned to drive strong growth over a number of years. In fact, as we laid out when we announced the transaction, we are confident in being able to deliver organic tenant billings growth at least in the mid-single digits on the European Telxius sites over the next several years and likely beyond. This growth rate trajectory would be roughly two times what our legacy European business is generating today.", "On the surface, that may seem like a disconnect, but peeling back the onion a bit reveals that the math is quite straightforward. In large part, the difference is driven by churn. On our legacy sites, we are working through the impacts of some carrier consolidation. And as a result, our churn rates over the past few years have been in the 2.5% to 3% range.", "On the Telxius side, on the other hand, we expect minimal cancellations for the foreseeable future, given most of the existing tenancies represented by Telefonica, with an average noncancelable lease term of between seven and eight years. Simply put, even without assuming any inflection in demand from 5G or new entrants, that churn differential alone should put us solidly in the mid-single digits for organic tenant billings growth on the Telxius sites. And to the extent that there is an uptick in activity from 5G and the other dynamics I referenced earlier, we believe that we have the potential to outperform that range over time. One of the key elements that we expect to backstop this strong growth is the fundamental structure of both our tenant leases of our rooftop and ground leases.", "This has been a much debated topic across the region, and we've seen a variety of different contract terms in various portfolios that we've evaluated over the years. In many cases, those terms, in our view, were such that future growth and profitability would have been significantly constrained. This is not the case on the Telxius assets, which was a critical element of why they were so attractive to us. There are revenue shares in place on certain sites, and there are some capacity constraints with respect to a portion of the rooftop assets.", "But overall, we expect to drive conversion rates on organic growth that will be nearly comparable to what we've seen in the United States, which is extremely important for us. One additional element of our European business that I want to address is our plans for future expansion. As it is, we believe that we now have the scale we need to be successful in both Germany and Spain. With more than 26,000 sites between the two markets, pro forma for the additional German rooftops we expect to close over the next week or so, we are solidly established as a significant player in European communications real estate.", "Further, we expect to leverage our new build program to drive additional scale over time in the region, including 2,400 or so contracted BTS sites in Germany that we anticipate building over the next three to five years. As 4G and 5G-driven densification accelerates, the need for new sites in select markets should continue to grow. On the M&A front, we expect to continue to use our long-standing proven capital deployment methodology to evaluate potential transactions in the future. We have been patient, deliberate and selective in Europe to this point, and that will continue going forward.", "Each portfolio will be examined on its own merits, with long-term growth potential, AFFO per-share accretion and long-term return on invested capital continuing to guide our M&A strategy. With CDPQ and Allianz joining PGGM as our strategic partners in the region, we believe that we are in a better position than ever to prudently expand the business through M&A, should the right opportunities present themselves. And if not, we will do what we have always done, deploy capital elsewhere on a global basis to drive the best possible risk-adjusted return across the business. We also believe that our broader European footprint can further enhance the competitive advantage that we derive from our worldwide shared infrastructure platform.", "Digital transformation on a global scale is being driven by cloud computing and ubiquitous connectivity, and we believe that our existing and future distributed real estate can play a pivotal role in providing mission-critical applications with access to the cloud on-ramps required to support them. One example of this is on-the-edge compute side, where a significantly expanded presence in Europe rounds out our position as a global provider of edge compute solutions to support the transition to cloud-native telecom functions. Similar to the United States, we are still years away from deploying meaningful capital and generating significant revenue from edge compute in Germany, Spain and France. But the same long-term trends pointing to a sizable market opportunity in the U.S.", "also exists in these markets. In addition, we are continuing to explore smart city connectivity, private and shared indoor networks and other innovative next-generation solutions based on WiFi, O-RAN and 5G. In closing, we continue to believe that our comprehensive existing global portfolio and ability to be flexible, strategic and selective with respect to future international growth investments, positions us well for a prolonged period of solid, sustainable growth. With our newly expanded presence in the continent, Europe is going to be a significantly more important component of this path forward.", "And we're also excited about adding high-quality strategic partners in the region to potentially further enhance our growth profile. Meanwhile, the rest of our international business, spread across attractive markets in various stages of wireless technology deployment continues to provide meaningful opportunities for both organic and inorganic growth. Taken together with our foundational U.S. asset base, we believe this diverse international portfolio will not only help us drive compelling returns over the long term, but will also enable us to bring critical mobile broadband connectivity to billions of people, advancing our vision of making wireless communications possible everywhere.", "With that, let me hand it over to Rod to go through the details of our results and the updated outlook. Rod?" ] }, { "name": "Rod Smith", "speech": [ "Thanks, Tom. And thank you, everyone, for joining today's call. I hope you and your families are well. As you saw in our press release, we had a strong second quarter, driven by solid global demand for our communication sites as carriers continued to deploy meaningful capital to augment and extend their networks.", "We expect carriers across our global portfolio to spend upwards of $70 billion in capex for the full year, which is expected to support attractive growth for our global business. Before getting into the details of our second-quarter results and raised full-year outlook, I want to touch on a few key achievements for the quarter. First, we closed on approximately 27,000 sites across Europe and Latin America as part of our Telxius acquisition, and are on track to add the remaining 4,000 or so German rooftop sites in early August. Overall, including the Telxius deal, other small-scale M&A and our new build program, we expanded our global site count by nearly 15% in the quarter.", "Second, we financed the Telxius transaction in what we believe to be an optimal way, including agreements to add CDPQ and Allianz as strategic minority partners in Europe. We also raised approximately $2.4 billion in the euro debt markets at highly attractive rates and issued more than $2 billion in common equity. We are well-positioned to continue to deploy growth capital, while at the same time effectively managing our leverage and maintaining our strong investment-grade balance sheet. Finally, as expected, demand for both existing and new assets across our global footprint accelerated in the quarter, with sequentially higher organic growth and continued strong new build activity.", "In addition, we booked a record quarter in our U.S. services segment, reflecting an attractive demand environment that, combined with our existing comprehensive MLAs, is expected to drive higher levels of gross new business in our property segment in the coming quarters. With that, please turn to Slide 6, and I'll review our Q2 property revenue and organic tenant billings growth. As you can see, our consolidated property revenue of $2.2 billion grew by approximately 18% year over year or nearly 16% on an FX-neutral basis.", "This included U.S. property revenue growth of 13% and international property revenue growth of 24% or 19% on a constant-currency basis. These growth rates reflect the advantages of our global diversification and our ability to benefit from multiple concurrent deployments of network technology around the globe. Growth was also favorably impacted by one month of contributions from the Telxius sites, U.S.", "M&A transactions that closed late in 2020, higher levels of pass-through and straight-line revenue and some nonrecurring elements and revenue reversals. Moving to the right side of the slide, organic growth was again a significant contributor to our overall revenue growth. On a consolidated basis, organic tenant billings growth was 4.8%, reflecting a sequential acceleration of around 70 basis points. This included a step-up in our U.S.", "and Canada growth from 3.6% last quarter to 4.4% in Q2, driven primarily by the flow-through of activity under our comprehensive MLAs. We saw a nearly 20% sequential acceleration in the contribution of colocations and amendment activity to organic tenant billings growth. Escalations were over 3% and churn was 1.9%. 5G activity in the marketplace continues to advance, and all of the major U.S.", "carriers were active in their deployments during the quarter. Outside of the U.S. and Canada, we drove organic tenant billings growth of 5.3%, up from 5% last quarter. Latin America led the way with organic tenant billings growth of 8.4%, driven by solid new business commencements in higher escalators, primarily in Brazil.", "Organic tenant billings growth across our African markets was 8.2%, including 11% growth in Nigeria where we continue to benefit from an MOA signed last year with a major customer. We also had a solid quarter in Europe, with organic tenant billings growth rising more than 100 basis points sequentially to 4.4%. Notably, our legacy German business drove gross organic growth of more than 8%, driven by accelerating 5G deployments and continuing investments in 4G. Meanwhile, in India, we saw an organic tenant billings decline of 1.7%, essentially flat to the first quarter.", "This included fairly healthy gross new business activity, but also continued elevated levels of churn. Turning to Slide 7. Our Q2 adjusted EBITDA grew nearly 22% or around 20% on an FX-neutral basis to $1.5 billion. Adjusted EBITDA margin was 64.2%, up 90 basis points over the prior year, driven by continued organic growth, prudent cost controls throughout the business and benefits from higher levels of straight-line revenues.", "Cash, SG&A as a percent of total property revenue was around 7.7%. Moving to the right side of the slide, consolidated AFFO growth was nearly 19%, with per-share growth of about 17%. Continued solid organic trends, contributions from our newly acquired and constructed assets and cost controls throughout the business, along with cost efficient balance sheet management and about $20 million in FX favorability, were the main drivers of this growth. On an FX-neutral basis, consolidated AFFO growth would have been over 16%, and consolidated AFFO per-share growth would have been around 15%.", "AFFO attributable to AMT common stockholders per share was $2.39, reflecting a year-over-year growth rate of right around 19%. Let's now turn to our raised outlook for the full year. I'll start by reviewing a few of the key updated assumptions. First, we have layered in the impacts of the more than 27,000 Telxius sites we have closed to date, as well as the remaining 4,000 Telxius rooftop sites in Germany that we expect to purchase in the first week of August.", "Second, we have assumed that our agreements with CDPQ and Allianz close in mid-Q3. We expect to receive over $3 billion in total proceeds from these transactions. And after the closing, CDPQ will own 30% of ATC Europe, with Allianz owning 18%. This is higher than the initial 10% that we discussed as Allianz has exercised its option to increase its stake in the business.", "Additionally, PGGM has converted its prior holdings in ATC Europe to minority stakes in our local German and Spanish operating companies. Given this more meaningful minority interest component, we have added net income attributable to AMT common stockholders and AFFO attributable to AMT common stockholders as outlook metrics and would expect to feature both in our financial reporting going forward. Finally, as a result of recent favorable FX trends in many of our markets, our current outlook reflects positive FX impacts of $41 million for property revenue, $26 million for adjusted EBITDA and $20 million for consolidated AFFO as compared to our prior expectations. With that, let's move to the details of our increased full-year expectations.", "As you can see on Slide 8, we are now projecting consolidated year-over-year property revenue growth of nearly 14% at the midpoint, up 6% versus our prior outlook. The increase includes approximately $383 million in total revenue from Telxius, including $141 million in pass-through. Further, we now expect about $58 million in additional pass-through revenue throughout the rest of the business, mostly due to higher fuel prices in India, as well as $19 million or so in higher global straight-line revenue. Moving to Slide 9.", "You'll see that as part of our property revenue outlook increase, we are raising our organic tenant billings growth projections on a consolidated basis to around 4%, up from between 3% and 4% previously as a result of higher growth expectations internationally. In the U.S., we are maintaining our projections for approximately 3% organic tenant billings growth, including the impacts of Sprint churn in Q4. We continue to expect 5G deployments to drive accelerating gross new business activity and believe we have a long runway of solid growth ahead of us as carriers invest in network densification over a multiyear period. In Latin America, we're raising our organic tenant billings growth expectations to over 7% for the year, as customers continue to increase their mobile data usage and carriers respond with incremental network investments despite some continued challenges associated with COVID-19.", "As compared to our prior outlook, we now expect slightly lower churn across the region, although we do still expect churn to trend higher in the back half of the year as some carrier consolidation occurs in markets like Mexico. We continue to drive value additive contractual arrangements in the region and recently signed a significant colocation deal with a major customer in Colombia, which we expect to inflect growth higher in that market in the coming quarters. Meanwhile, in Africa, we are reaffirming our expectations of organic tenant billings growth in excess of 8% as we continue to see encouraging leasing trends in the region. As I alluded to earlier, growth rates in Nigeria are especially strong, where we are continuing to benefit from an MLA signed last year with a major customer.", "This, along with solid trends in other African markets, are expected to drive an acceleration in regional organic tenant billings growth to above 9% in the second half of the year. Moving on to Europe. We now expect organic tenant billings growth of over 5% for the full year, up around 150 basis points versus our prior outlook. This is being driven primarily by two factors.", "First, we expect higher levels of gross new business in our legacy Europe business, where we're continuing to see strong 5G-driven activity, particularly in Germany. Organic tenant billings growth for our legacy European assets is now expected to come in at above 4%, up more than 50 basis points as compared to our prior expectations. And second, the colocation and amendment growth that we expect to see in the second half of the year on the Telxius assets, which is included in our organic tenant billings growth metric, is driving another 100 basis points or so of upside. We view this expected activity as reinforcing our long-term expectations for compelling growth on the Telxius assets.", "Finally, in India, we continue to expect roughly flat organic tenant billings for the year. We are seeing encouraging levels of gross activity in the market but also continued elevated levels of churn. And while we remain optimistic that the market will return to solid growth over the long term, we're not expecting a significant inflection point in growth in 2021, which is consistent with our prior outlook. Moving to Slide 10.", "We are raising our adjusted EBITDA outlook and now expect year-over-year growth of nearly 15%, including a $183 million contribution from the Telxius assets, roughly $26 million in positive translational FX impacts as compared to our prior outlook and about $20 million in higher net straight line. In addition, we now expect $25 million in incremental expected services gross margin as services activity in the U.S. continues to outstrip our expectations. For the year, we expect to book roughly $105 million in services operating profit from total services revenue of $220 million.", "These positive items are being partially offset by roughly $30 million in incremental bad debt assumed for the full year, the majority of which is in India. Overall collections trends in the market remain solid, but we are taking a slightly more conservative approach for the back half of the year within our projections. The remaining bad debt is focused in Mexico, where Altan has recently filed for the equivalent of Chapter 11 bankruptcy. Given its government backing and recent progress within the business, we remain optimistic on the prospects of collecting billings with Altan in full.", "But because we expect the collections to be slow, we have made the bad debt entries for now, consistent with our historical approach in similar instances. Turning to Slide 11. We are also raising our expectations for full-year consolidated AFFO and now expect year-over-year growth of nearly 14%, with an implied outlook midpoint of $9.50 per share. The flow-through of incremental cash adjusted EBITDA, as well as around $20 million in FX tailwinds are being offset by approximately $15 million, $31 million and $25 million in incremental maintenance capex, cash taxes and net cash interest expense, respectively, primarily driven by the Telxius transaction.", "On a per-share basis, we now expect growth of right around 12% for the year. Finally, AFFO attributable to ATC common stockholders per share is expected to grow by nearly 10% versus 2020. This takes into account the expected closing of our transactions with CDPQ and Allianz in mid-Q3 and the corresponding minority interest impacts. The growth rates for the attributable metric is about 2% lower than our projected consolidated AFFO per-share growth, primarily due to the fact that the onetime cash interest expense item associated with our prior African joint venture in 2020 did not apply to the AFFO attributable to ATC common stockholders.", "Notably, across both of these metrics, we are well-positioned to meet our target of driving double-digit growth for 2021. Moving on to Slide 12. Let's review our updated capital deployment expectations for 2021, which now contemplates the Telxius transaction and reflect our consistent focus on driving strong sustainable growth in AFFO per share. First, we continue to expect to dedicate approximately $2.3 billion toward our dividend in 2021, implying a year-over-year growth rate of around 15%, subject to board approval.", "With regards to capex, we are raising our overall projections by $125 million at the midpoint This includes around $65 million in start-up capex attributable to the Telxius sites, as well as $65 million in additional deployment capex as part of our revised expectations of constructing 7,000 sites this year, up from our previous outlook of 6,500. We continue to drive highly attractive returns through our program. And including our revised 2021 expectations, we have added around 24,000 new sites since 2016. Notably, our average Day 1 NOI yields on build so far this year have been 11%.", "We are also adding $15 million in maintenance capex as we are accelerating a few maintenance projects over the rest of the year. This is being partially offset by about $20 million in lower anticipated land capex. On the acquisition front, we have deployed just under $9 billion so far this year, primarily on the Telxius transaction, and expect to spend another $600 million in early August to purchase the remaining 4,000 Telxius rooftop sites located in Germany. Of our nearly $14 billion in expected capital deployments for the year, over 80% is composed of discretionary capex in M&A.", "On the debt side of the equation, we ended the second quarter with net leverage of 5.7 times and expect that metric to trend down into the mid-five times range after closing the CDPQ and Allianz stake sales. We remain firmly committed to our investment grade rating and continue to expect that solid long-term adjusted EBITDA growth will allow us to naturally delever to the upper end of our three to five times range over a multiyear period. Over the next few quarters, we expect to be opportunistic in evaluating the potential benefits of terming out a portion of our floating rate debt into long-term fixed-rate instruments as we continually work to optimize our balance sheet. Looking back over the last decade, we have utilized this strategy to essentially reduce our weighted average cost of debt by half to 2.4% as of Q2.", "Turning to Slide 13. I want to take a few minutes to highlight several elements of our disciplined capital deployment strategy, honing in on two international regions where we have been quite active recently, Europe and Africa. Since the end of 2019, our most transformational international investments have been in Africa, through our acquisition of Eaton Towers, and most recently in Europe through the Telxius deal. As the chart to the left shows, organic colocations and amendment contributions in both regions have been accelerating.", "More importantly, we expect gross colocation and amendment activity to remain at elevated levels over a multiyear period, positioning us well to drive strong growth and attractive returns across our recently acquired assets in both regions. In addition to acquiring high-quality strategic site portfolios, we have also been ramping up our new build programs across both regions, as you can see in the middle chart on the slide. In fact, we've gone from constructing in average of less than 100 sites annually back in the early 2010 to a forecast of around 1,600 sites in 2021, primarily in Africa. Importantly, the return characteristics of these builds have remained extremely attractive, with average Day 1 NOI yields of approximately 10% expected this year.", "As you can also see, yields have risen sharply on older vintages of new build sites as a result of the strong lease-up trends I just mentioned, and we expect to continue to drive meaningful colocation and amendment revenue on our new build sites in the future. Further, we continue to focus on building and leasing sites to high-quality, large investment-grade tenants who we believe will drive the bulk of the network investments in these regions for the foreseeable future. We anticipate the demand for new builds across Africa and also in Europe, where we have inherited a robust pipeline with Telefonica as part of the Telxius acquisition, to remain strong as carriers address their coverage and capacity needs to meet 4G and 5G demand. We are also focused on growing our business sustainably, while driving industry leadership and innovation.", "A perfect example of this is what we've been doing in Africa with energy efficiency and renewable energy, where, by the end of 2021, we will have invested upwards of $250 million on lithium-ion batteries, solar power solutions and other energy-efficient technology. While we are still fairly early in the overall progression of these investments, the initial results have been compelling, with average diesel consumption per site declining by around 35%, coupled with improved battery and generator efficiency and elevated uptime levels that we believe are best-in-class. Through these initiatives, not only are we earning an attractive return on investment, but we are also helping to build and enhance a sustainable global digital ecosystem. This approach to capital deployment in Africa and Europe is indicative of our overall global investment philosophy.", "We continue to look for compelling opportunities to deploy capital in responsible, sustainable ways where we can generate attractive, long-term returns and solid growth while partnering with large multinational mobile network operators as they bring enhanced connectivity to their customers. And we believe that the global diversification that we've built into the business will benefit us for years to come. Finally, on Slide 14 and in summary, Q2 was another quarter of solid organic growth, margin expansion, meaningful new build activity and consistent dividend growth. This was achieved while closing on and beginning to integrate the vast majority of our Telxius acquisition, issuing over $2 billion in euro-denominated debt at record low rates, completing a successful common equity issuance and partnering with two world-class strategic investors in CDPQ and Allianz.", "For all of this, I would like to offer a huge thank you to our nearly 6,000 global employees, including those who have recently joined us from Telxius. Their hard work, unwavering dedication and numerous talents have positioned us extremely well to continue driving compelling total returns for our stockholders. We look forward to finishing 2021 strong and are more excited than ever about our long-term growth trajectory based on the continuing global rise in mobile data demand and our durable competitive advantage throughout our served markets. With that, I'll turn the call back over to the operator for Q&A." ] } ]
[ { "name": "Operator", "speech": [ "[Operator instructions] And our first question goes to the line of Rick Prentiss with Raymond James. Please go ahead." ] }, { "name": "Rick Prentiss", "speech": [ "Thanks. Good morning, guys. Busy summer for you, guys." ] }, { "name": "Tom Bartlett", "speech": [ "It has been." ] }, { "name": "Rick Prentiss", "speech": [ "I appreciate you guys breaking out the guidance between consolidated and proportionate AFFO. I think, as you know, that's one of the three things we adjust for from AFFO to FAD. But looking at that item, the $110 million minority interest adjustment for calendar '21, how should we think about what that magnitude looks like when you have a full year of the minority interest in Europe? Just as we think into '22 or '23, what should that delta be looking like?" ] }, { "name": "Rod Smith", "speech": [ "Yes, absolutely. So that one there, Rick. Let me give you the big pieces of what's actually driving those numbers. And of course, it's Telxius is in there.", "Telxius is in there for the proportionate share of 2021. So of the $110 million roughly, the vast majority of that, of course, is all in the Telxius. The only other ones is with Telxius and then, PGGM, of course, which we now have down in our Germany and Spain areas. And then, we have the small minority interest in India, that's about 8% of the business there.", "So the way to think about the $110 million, roughly $85 million of that or so is Telxius, the remainder is India. So think about the $85 million in being in for roughly, I guess, seven months of the year, and then, you can extrapolate from that. But of course, Telxius is going to grow into next year. We're not giving guidance next year, but that will give you some indication of kind of where to head and put it in the right magnitude." ] }, { "name": "Tom Bartlett", "speech": [ "I think, Rick --" ] }, { "name": "Rick Prentiss", "speech": [ "Yes, sorry, Tom. But seven months for Telxius or mid-third quarter?" ] }, { "name": "Rod Smith", "speech": [ "I'm sorry, Rick, I missed the question." ] }, { "name": "Rick Prentiss", "speech": [ "So Telxius for seven months? Or is it just mid-third quarter? Would it be more like five months in there?" ] }, { "name": "Rod Smith", "speech": [ "Mid-third quarter." ] }, { "name": "Rick Prentiss", "speech": [ "OK, I'm sorry. Tom, go ahead." ] }, { "name": "Tom Bartlett", "speech": [ "I was just going to say, Rick, maybe if you kind of step back and think about it. Going forward, my sense is it will be really proportional to 2021 going forward. So unless other M&A transaction drives kind of a similar mix of allocated capital is Telxius, but my sense going forward will be similar to '21." ] }, { "name": "Rick Prentiss", "speech": [ "OK. And one of the other things we adjust for from AFFO to FAD is prepaid amortization of revenue. And we like the fact that you guys exclude that from your organic growth, that noncash prepaid amortization revenue did tick up in the quarter, it looks like a spike in Europe as well. $48 million in the quarter for this noncash prepaid amortization revenue item.", "Is that something also we should think -- is that like a good run rate going forward? Maybe $50 million a quarter? $200 million per year?" ] }, { "name": "Rod Smith", "speech": [ "Yeah, I think there's --" ] }, { "name": "Tom Bartlett", "speech": [ "You take that one, Rod." ] }, { "name": "Rod Smith", "speech": [ "Yeah, yeah, I think there's nothing significant there that's going to vary. So I think you can think about that as a run rate going forward for at least the foreseeable future here --" ] }, { "name": "Rick Prentiss", "speech": [ "Yes. And of course, there's so much --" ] }, { "name": "Rod Smith", "speech": [ "And so we do think that could change. But barring any other material changes that would drive that, you can think about that as a run rate." ] }, { "name": "Rick Prentiss", "speech": [ "OK, makes sense. Obviously, much lower than one of your peers working about $550 million a year on that noncash item. But I appreciate the breakout of these items and stay busy and well." ] }, { "name": "Tom Bartlett", "speech": [ "Thanks, Rick. You, too." ] }, { "name": "Operator", "speech": [ "And our next question is from Simon Flannery with Morgan Stanley. Please go ahead." ] }, { "name": "Simon Flannery", "speech": [ "Good morning, Tom. I wonder if you could just give us a little bit of color. You've done a lot of deals. How does the Telxius initial integration go? Any kind of initial-learning solution reactions there? And I think you also made some comments in your opening remarks about new growth areas, one of them being private networks.", "We've seen electric utilities sign some deals to work with private spectrum. Where are you seeing most interest there? And when do you think that starts to scale?" ] }, { "name": "Tom Bartlett", "speech": [ "Yeah, no, thanks, Simon. I hope you're doing well. On the integration front, I mean, it's going very, very well. I mean, we do have a lot of experience with these types of transactions.", "But I'm really proud of the teams working through, obviously, a difficult pandemic in terms of getting things done. But all early signs are really positive for us. The people, the teams, the expertise, you've seen some of the other sides' even results in the quarter and the expectation for the year as a result of what we are seeing in both of those critical markets. I mean, for us, from a European perspective, the TAM is large.", "We see new spectrum being deployed. So 5G growth is strong. The organic growth that we see in -- particularly even in Germany, is stronger than we originally even had thought. And from a portfolio perspective, we had done a lot of due diligence, as I mentioned, and as Rod mentioned on the sites themselves.", "We know them quite well. And they're continuing to perform just like we thought. So as I said in my remarks, in our view, this was the best portfolio there with a really solid, high-quality anchor tenant. So everything is going very, very well for us, and we're expecting a good strong year.", "And then, obviously, strength going into '22, I think the organic billings growth is going to continue to uptick. And it will be stronger out of the back end of this year, leading us into providing great foundation for growth in '22. So really all very positive. On the private network side, we continue to look at a number of different initiatives, utilizing different spectrum.", "And so I don't know how quickly they're gonna be rolled out candidly, Simon, and we were participating. As I said, we have a sizable group looking at what the opportunity could be. We have significant DAS networks as you well know. And we're really looking at how can we migrate them to kind of the next technology.", "We'd like to be able to lower the overall cost in the venues that we're in. And so we are looking at available spectrum and looking at technology, but we're still really in the early stages of that deployment. We're in the CBRS Alliance as you well know, and taking advantage of that knowledge and seeing whether there are opportunities leveraging that technology, that spectrum, to be able to even increase the overall value proposition that we have for our customers." ] }, { "name": "Simon Flannery", "speech": [ "Thanks a lot." ] }, { "name": "Tom Bartlett", "speech": [ "You bet." ] }, { "name": "Operator", "speech": [ "And our next question is from Matt Niknam with Deutsche Bank. Please go ahead." ] }, { "name": "Matt Niknam", "speech": [ "Hey, guys, thank you for taking the question. Just two on the U.S. First off, just, I guess, broadly, nice bump up sequentially in terms of colo and amendment activity. I'm just wondering, could you give us any more color in terms of drivers, whether it's broad-based across carriers, and how to think about the potential for sort of incremental improvements from here? And then, within that, maybe just thinking about DISH on a more go-forward basis, any updates you can give us in terms of discussions you're having with them? And does the new agreement they've got with AT&T impact, if at all, how you think about their network build opportunity? Thanks." ] }, { "name": "Rod Smith", "speech": [ "Hey, Matt, I'll start here, and Tom can jump in kind of as we go. So yes, we are seeing an uptick in activity in the U.S., as you suggested. We expected that. So we're actually realizing kind of what we expected.", "When you look at the full year in terms of the gross new business that we expect to drive in the U.S. on an incremental monthly run rate, we expect that to be more than a 20%, 25% growth rate for the U.S. So we expect that kind of monthly run rate addition to be strong. It is broad-based.", "So we see activities through all the carriers. The one thing that I would point out is with DISH, we will see revenue from their activity on our organic tenant billings really begin to impact the numbers in 2022, not so much in 2021, but they're certainly out active doing the planning for their network. They're active in our services business, which you saw the numbers this morning. We're increasing our services outlook to $220 million.", "That's up again from our prior outlook of $175 million, which was up from our original $120 million. So that's the early indication of where you're seeing that level of activity. But we're excited about what we see in the U.S. We're excited about that incremental monthly run rate gross new -- growth of north of 25%.", "And we do think that given the new C-band spectrum and everything that's going on, that we are at the beginning of a multiyear stretch of activity that we expect to see in the U.S." ] }, { "name": "Matt Niknam", "speech": [ "Rod, can I just follow up also on services? I think the implied margin is about -- it's a little under 50%. Traditionally, you've done, I think, closer to 60%. So any explanation on maybe what's driving that delta?" ] }, { "name": "Rod Smith", "speech": [ "Yeah, really, I mean, I think you can think about it, Matt, is just a mix issue in terms of the types of services that we're actually doing. And it's actually a little higher than what you are suggesting. Our original outlook had a gross margin for services in around 54%. It's still in the mid-50s with the latest guidance with the $220 million.", "We have about $120 million, $125 million in direct that we're assuming. But if you did see any inflection there in the margin, it would really be a mix issue with the services. We're not seeing anything from a labor cost or labor shortages that's driving any kind of an impact on our services business. Things are working very well, and a lot of it is done internally." ] }, { "name": "Matt Niknam", "speech": [ "Got it. Thank you." ] }, { "name": "Operator", "speech": [ "And our next question is from David Barden with Bank of America. Please go ahead." ] }, { "name": "Dave Barden", "speech": [ "Hey, guys, thanks for taking the questions. I guess, two, if I could. The first one is maybe Tom or Rod. The availability of private capital kind of really changed the complexion of your footprint in Europe starting with PGGM, and then, scaling up with the Telxius deal now with Allianz and CDPQ.", "Is that kind of money of that kind of scale available only in the developed markets? Or could those relationships or new relationships pivot and kind of change the complexion of some of the work you're doing in the emerging markets next? And I guess, the second question is, Tom, in your opening remarks, you mentioned that Brazil was doing well, improving even. I think that that was kind of an unknown factor with respect to the Oi situation and the carriers kind of splitting up assets down there. Is that an American Tower specific thing? Or is just the entire wireless market irrespective of the Oi situation just doing better? Thanks." ] }, { "name": "Rod Smith", "speech": [ "Yeah, sure, Dave. I mean, on the first one, we're, obviously, very opportunistic in terms of looking at various forms of capital. But I can tell you that the pension funds, infra funds, there is an extensive amount of capital that's available in all of the markets that we are servicing. So yes, it is there, and we'll take a look at whether it makes sense for us, whether they're the right partners for us.", "Our intent here on looking and diversifying the pools of capital that we're using is to provide a platform for us to be able to expand and expand aggressively if it makes sense to do so. And so in Europe, we've set ourselves up with, I think really solid partners in the marketplace, and it really provides a very efficient platform for us to be able to expand. Now the transactions need to be there and they need to make sense for us and all of those things. But having those kinds of partners and that kind of capital available really, I think, helps us significantly in terms of being able to expand in those areas quickly.", "And with regards to Brazil, Brazil -- and I'll do a shout out to our teams in Brazil because we think that the splitting of the Oi portfolio is gonna be a long-term positive for the marketplace. Candidly, there are better funded carriers that picked up those particular assets and it rationalized the portfolios down there quite a bit. And now the spectrum is in the hands of entities, our customers and the market that really want to deploy it and really want to advance the technology deployments in the marketplace. So we think it's that particular transaction event in the marketplace was a net positive for us.", "And as I said, I remain really optimistic on the opportunities in the marketplace and the way our teams are really taking advantage of it." ] }, { "name": "Dave Barden", "speech": [ "Thanks, Tom." ] }, { "name": "Tom Bartlett", "speech": [ "You bet, Dave." ] }, { "name": "Operator", "speech": [ "And our next question is from Tim Horan with Oppenheimer. Please go ahead." ] }, { "name": "Tim Horan", "speech": [ "Thanks, guys. Two questions. One, can you maybe just talk about the benefits of the private finance partners of going private as opposed to just buying your public stock? And secondly, congratulations on the lithium batteries, and I know you've been doing some fiber backhaul. Is there a way over time to move into more and more active elements of the carrier networks to get more outsourcing of the carrier networks? And I guess, would that be net positive and particularly in emerging markets? Thanks." ] }, { "name": "Tom Bartlett", "speech": [ "Sure, Tim, again, on the private capital. we looked at the private capital is a very cost-effective way of aligning ourselves to very attractive partners with deep pools of cash to be able to position us and provide us with a platform for some sizable growth going forward. And that's not an indication that we've got the deals in the hopper that we're ready to roll on. But there are some significant portfolios in the marketplace that may make sense for us going forward.", "We'll look at each one individually and whether it does. But having that pool of capital makes sense from a diversification perspective. I'm big on diversification. As you can see through our portfolio, we have a very broad sense of diversification between U.S.", "and international and within international, with developed and developing markets. And I think that rule proves true for forms of capital, that we want to ensure that we've got access into all different forms of capital that's available to us and take advantage of that going forward. So that's really it, I think, on the capital side. On the active versus passive, we've been very successful on the passive side of this.", "And our intent is to try to continue to stay in that type of a role and leverage that kind of a model. There are certain elements on the active side that we are involved with. Power, for example. We have a number of initiatives in many of our -- actually all of our markets from a power perspective, some on the primary power side, where we're the primary supplier of power in markets like Africa and India.", "And so from that standpoint, we are part of the kind of the active management of ensuring that their networks are running properly. And we've done -- as Rod pointed out, we've done some significant investment in areas, whether it's in solar or lithium to be able to improve our capabilities and to be able to offer that value to our customers, as well as generate value for ourselves, as well as generate value for -- from an eco perspective in those markets and really provide kind of a sustainable platform going forward. We're also very involved in the secondary power side. You look at the United States, for example, in your developed markets, we have thousands of generators in those markets and providing secondary power and backup for our customers there.", "And we're even looking from a power perspective as kind of a virtual power source from a storage perspective that we might be able to provide, particularly in our international markets, as we continue to really leverage solar, as well as lithium-ion. We are even exploring with wind. We have sites there that have solar panels where we've deployed 50,000 to 60,000 panels in the region, and we've got wind turbine. So we're trialing a lot of different things, and we are working with a number of different external parties to really be able to leverage their expertise.", "But when you start to get up into the real active side of the network, as I said, we have really tried to stay away from that, and we'll continue to do so. Our customers are looking for more involvement in that area. But that hasn't been our strength going there. But I mean, to the extent that there are opportunities, and they make sense for us and we get the right resources and talent to be able to do so, we'll look at it.", "But that's not part of our major strategy right now." ] }, { "name": "Tim Horan", "speech": [ "Thanks, Tom." ] }, { "name": "Operator", "speech": [ "And our next question is from Jonathan Atkin with RBC. Please go ahead." ] }, { "name": "Jonathan Atkin", "speech": [ "Thanks. A question on U.S. and on India. So U.S., the growth outlook was unchanged at 3%.", "I just wondered if there's any operational or maybe nonoperational factors to think about as we kind of head into the year, into the second half of the year that might lead to maybe some upside. Or is so much locked in under MLAs that you really don't expect much variability? So that's the U.S. question. And then, for India, you kind of laid out why you're kind of still at that 0% number.", "But if it were to deviate during the second half of the year, would it be due to higher growth activity or lower churn, which is the more plausible outcome for India? Thanks." ] }, { "name": "Rod Smith", "speech": [ "Yeah, Jonathan, this is Rod. So I'll take the first one here. Certainly, so in the U.S., we are projecting organic tenant billings growth right in that 3% range. It's been consistent, so we did not change that in the outlook.", "And I'll just highlight a couple of things. The first one is we are seeing an acceleration in activity in colocation and amendment in the U.S. that we're very excited about, but that acceleration was contemplated when we executed the MLAs that we have in place. So a lot of that activity is kind of built-in pricing and within our guidance.", "So we think certainly for this year, it's very stable. We also gave longer-term guidance for the U.S., which you can go back and refer to. A lot in that guidance, you can see that the growth rates in the U.S. are accelerating over the next several years [Inaudible] for the Sprint churn.", "But the other point that I would make is we do have the Sprint churn that will begin to roll off in Q4 of this year. The largest effect -- single-year effect that we'll see from that will be in 2022. It will continue out to 2024. So there'll be four years of kind of Sprint churn.", "And again, the biggest impact will be in 2022. But you'll see it in our numbers in the end of this year, but that's all baked in within our 3% organic tenant billings outlook. So we couldn't be more excited about the U.S. and its trajectory going forward.", "And once we get through the Sprint churn, we are expecting kind of an acceleration. And again, I would ask you to go back and refer to our longer-term guidance, and you'll see what I'm referring to in terms of the outlook and the acceleration in overall organic growth that we are expecting over the long term." ] }, { "name": "Tom Bartlett", "speech": [ "And just on --- go ahead, Rod. I was going to say you add in to -- you can fill in if I miss some pieces on the India question. It's probably tough to kind of have any major inflection given that we're already halfway through. Candidly, the pandemic held back a little bit of our build in Q2.", "And so I would expect actually a pickup in our build program, so at least from an inorganic perspective in the second half. As you saw, our churn did drop a bit in the quarter from prior year. And so I would continue to kind of expect that going forward. But generally speaking, I wouldn't expect any major inflections one way or the other in the market." ] }, { "name": "Jonathan Atkin", "speech": [ "Thank you." ] }, { "name": "Operator", "speech": [ "Next, we have a question from Colby Synesael with Cowen. Please go ahead." ] }, { "name": "Colby Synesael", "speech": [ "Great. Just to follow up on the new colo and amendment expectations for the United States this year. I think on your fourth-quarter earnings call, you guys had said that you thought that number would be up about 15% year over year. That number, I think, was $134 million in 2020.", "And in response to Matt's question, I thought you might have been mentioning 20% or 25%, but I might have gotten that confused. I was just looking for clarification. And then, secondly, Rod, you mentioned the opportunity to do some refis in the back half of the year. I'm presuming that's not included in your current per-share guidance.", "But I was wondering if you could help try to quantify or size the amount of debt that you could potentially look to refinance. Thank you." ] }, { "name": "Rod Smith", "speech": [ "Yeah, Colby, so I'll just -- I'll clarify here on the run rate of the U.S. when I spoke earlier on the call, it's the monthly run rate incremental additions. That will be up around 20% or just north of 20%. And that's the driver that is really the long-term value creator that you should be thinking about." ] }, { "name": "Colby Synesael", "speech": [ "And then, is that 15% that you had guided to earlier still in play?" ] }, { "name": "Rod Smith", "speech": [ "I'm trying to think. Yeah, the 15% is still in play. And then, on the refi question, as always, we're gonna be opportunistic in terms of refi. So as you probably know, we cleared out all of our maturities for 2021.", "When we think about refinancing, we are really looking into 2022. And again, we'll be opportunistic. We'll look at the rates. We'll look at where the market is and we'll do our calculations and we'll execute when and if and only if it's accretive and good for our shareholders to do so.", "In terms of just giving you a rough scale, we have next year, in and around $1.5 billion maturing. So that's probably what you might look at in terms of a refinancing if we were to do anything later this year that would take out any kind of senior notes for 2022." ] }, { "name": "Colby Synesael", "speech": [ "Great. Thank you." ] }, { "name": "Operator", "speech": [ "And our next question comes from Nick Del Deo with MoffettNathanson. Please go ahead." ] }, { "name": "Nick Del Deo", "speech": [ "Hey, good morning. Thanks for taking my questions. One in Europe, one in Mexico. First, are the Telxius leases structured as traditional leases or MSAs? And do you find that the carriers in Europe are gravitating toward one structure versus the other? And I guess, at the end of the day, does the distinction matter? And then, second, in Mexico, you noted in your prepared remarks that Red Compartida filed for bankruptcy, and you touched on the near-term financial impact.", "Can you dimension what sort of contribution you've seen from them over the last few years? And beyond collecting the receivables that are currently outstanding, kind of how you expect things to play out as it relates to new business going forward?" ] }, { "name": "Rod Smith", "speech": [ "Yeah, sure, sure. So in terms of the -- make sure I got the questions here. So in terms of the structures in Europe, there's really no significant differences in terms of the structure of the contracts in Europe and in the U.S. Of course, any contract has minor differences.", "But structurally, they're similar and nothing that would drive any impact that would be noticed in terms of the numbers in those sorts of issues. In terms of in Mexico, Altan has filed bankruptcy. So we're kind of working through that. I'll point out a couple of things.", "Here, number one is they do have a remaining term on their leases that's quite long. So we have about six years remaining on all their leases. They might make up about 9% of Mexico revenue. And so that's kind of the size that they are in terms of the business there.", "And it's less than 1%, close to 0.5% of the overall company revenue. With all that said, just because they filed for bankruptcy doesn't mean that they're going to exit the market. So we'll be working through that with them and hope that they will restructure and stay in play. I think they're an important player in the Mexico market.", "They're supported by the government, and they have had a fair amount of success other than the fact that their overall balance sheet needs some support. So we still expect them to continue, but that will be kind of up to them as we move forward. And if for any reason, they did exit, we have that six-year protection. And then, we -- that service still needs to be provided.", "So those customers would have to move on to another network, and that could potentially drive higher capex from that perspective to support that customer base on a different network." ] }, { "name": "Nick Del Deo", "speech": [ "Got it. Thank you, Rod." ] }, { "name": "Rod Smith", "speech": [ "You're welcome." ] }, { "name": "Operator", "speech": [ "Our next question is from Batya Levi with UBS. Please go ahead." ] }, { "name": "Batya Levi", "speech": [ "Great. Thank you. A follow-up for the U.S. Can you provide some color on what your long-term guidance had assumed for DISH network builds, and how you think the AT&T DISH wholesale deal would impact that? Thank you." ] }, { "name": "Rod Smith", "speech": [ "Good morning, Batya, we don't think that the new DISH deal will impact our longer-term guidance. Let me highlight here. In terms of our longer-term guidance, I don't want to get into the specifics around DISH and any specific contract terms, but they were in our longer-term guidance. So what we laid out was organic tenant billings growth of at least 4% on average over the next seven years.", "That encompasses 2021 out through 2027. If you normalize that for the Sprint churn, it goes up to about 5%. There are two important chunks there in terms of time periods. If you isolate the 2021 and 2022 time period, we're looking at an average organic growth rate of about 2% in the U.S., including the Sprint churn that we've all discussed.", "Normalizing for that, it would be up around 5%. If you take that next step out to 2023, to 2027, we are projecting greater than 5% even with the residual churn from Sprint. And normalize for that, we're projecting greater than 6% growth between 2023 and 2027. So DISH is in there.", "We're building sites for them today. Revenue will start for them in 2022 and ramp over the next few years. They're in that longer-term guidance, and you can see that longer-term guidance is higher in the out years than it is in the early years because we do expect to see acceleration in a build there as the carriers build out 5G kind of across the U.S. and deploy the new spectrum." ] }, { "name": "Batya Levi", "speech": [ "Great. Just one follow-up. To the extent that AT&T builds out DISH's spectrum, is that potentially an amendment to the current MLA? Or do they have some flexibility?" ] }, { "name": "Rod Smith", "speech": [ "Yeah, we're working through those issues. I don't want to talk about the specifics in that contract. We'll leave that between us and DISH and AT&T to kind of figure out. But we'll be working with DISH, with AT&T to figure out exactly what it means.", "We do believe that DISH's intent is to build the network substantially. In the U.S., that's what our dream contemplates. And the one thing that I would say is there is a firm revenue commitment within our contract that would not change depending on their unaltered build strategy there. So we do certainly have that protection, but we're very optimistic in terms of DISH's intent to build a network and our position to capture revenue there and support them and help them get that network built." ] }, { "name": "Batya Levi", "speech": [ "Got it. Thank you." ] }, { "name": "Operator", "speech": [ "And I will turn the conference back over to Mr. Khislavsky for final comments." ] }, { "name": "Igor Khislavsky", "speech": [ "Great. Thank you, Leah. And thank you, everybody, for joining the call today. Have a great rest of your day." ] }, { "name": "Operator", "speech": [ "[Operator signoff]" ] } ]
AMT
2020-04-29
[ { "description": "Vice President, Investor Relations", "name": "Igor Khislavsky", "position": "Executive" }, { "description": "President and Chief Executive Officer", "name": "Tom Bartlett", "position": "Executive" }, { "description": "Executive Vice President, Chief Financial Officer and Treasurer", "name": "Rod Smith", "position": "Executive" }, { "description": "Executive Chairman", "name": "James D. Taiclet", "position": "Executive" }, { "description": "Goldman Sachs -- Analyst", "name": "Brett Feldman", "position": "Analyst" }, { "description": "Raymond James -- Analyst", "name": "Ric Prentiss", "position": "Analyst" }, { "description": "Citi -- Analyst", "name": "Michael Rollins", "position": "Analyst" }, { "description": "New Street Research -- Analyst", "name": "Spencer Kurn", "position": "Analyst" }, { "description": "Bank of America -- Analyst", "name": "David Barden", "position": "Analyst" }, { "description": "Morgan Stanley -- Analyst", "name": "Simon Flannery", "position": "Analyst" }, { "description": "Cowen -- Analyst", "name": "Colby Synesael", "position": "Analyst" }, { "description": "KeyBanc Capital Markets -- Analyst", "name": "Brandon Nispel", "position": "Analyst" } ]
[ { "name": "Operator", "speech": [ "Ladies and gentlemen, thank you for standing by. Welcome to the American Tower Corporation First Quarter 2020 Earnings Conference Call. [Operator Instructions] As a reminder, today's conference is being recorded. I would now like to turn the conference over to your host, Igor Khislavsky, Vice President of Investor Relations. Please go ahead, sir." ] }, { "name": "Igor Khislavsky", "speech": [ "Good morning, and thank you for joining American Tower's First Quarter 2020 Earnings Conference Call. We have posted a presentation, which we will refer to throughout our prepared remarks under the Investor Relations tab of our website, www.americantower.com. Before the rest of my comments, I'll note that due to COVID-19, all of us on the call this morning are dialing in remotely from different locations. So to the extent there are any minor technical difficulties on the call, we would ask that you bear with us. Our agenda for this morning will be as follows. First, I'll quickly summarize our financial results for the first quarter. Next, Tom Bartlett, our President and CEO, will provide some brief commentary on our U.S. business. Next, Rod Smith, our Executive Vice President, CFO and Treasurer, will discuss our Q1 2020 results and updated 2020 outlook. And finally, our Executive Chairman, Jim Taiclet, will share a few closing remarks. After these comments, we will take your questions. I'll remind you that this call will contain forward-looking statements that involve a number of risks and uncertainties.", "Examples of these statements include: our expectations regarding future growth, including our 2020 outlook, capital allocation and future operating performance, our expectation regarding the impacts of COVID-19, our expectations regarding the impacts of the AGR decision in India, and any other statements regarding matters that are not historical facts. You should be aware that certain factors may affect us in the future and could cause actual results to differ materially from those expressed in these forward-looking statements. Such factors include the risk factors set forth in this morning's earnings press release, those set forth in our Form 10-K for the year ended December 31, 2019, and in other filings we make with the SEC. We urge you to consider these factors and remind you that we undertake no obligation to update the information contained in this call to reflect subsequent events or circumstances. Now please turn to Slide four of our presentation, which highlights our financial results for the first quarter. During the quarter, our property revenue increased 10.5% to nearly $2 billion. Our adjusted EBITDA grew by 14.1% to $1.3 billion. And our consolidated AFFO and consolidated AFFO per share increased by roughly 5% to $907 million and $2.03, respectively.", "These consolidated AFFO metrics were impacted by a onetime cash interest charge of approximately $63 million associated with our purchase of MTN's minority stakes in each of our joint ventures in Ghana and Uganda during the quarter. Absent this onetime item, consolidated AFFO and consolidated AFFO per share would have grown by more than 12%. Finally, net income attributable to American Tower Corporation common stockholders increased by roughly 4.4% to $415 million or $0.93 per diluted common share. And with that, I'll turn the call over to Tom." ] }, { "name": "Tom Bartlett", "speech": [ "Thanks, Igor, and good morning, everyone. I hope you are all staying safe and well. Typically, in our first quarter earnings call, we would talk exclusively about our U.S. business, and how it is positioned in the market. But given that there is nothing typical in the world in which we live today, I'd like to first discuss how we are navigating the COVID-19 pandemic, including its historical impact on the global economy. Our number one priority continues to be the health and safety of our employees, their families, our tenants, suppliers and surrounding communities. Most of our team members globally are working from home. To facilitate this, we bolstered our IT environment to support more remote work and established alternative business processes and solutions to overcome the need to have work accomplished from our office or at our established operational centers. We're practicing social distancing in a few instances where certain employees need to be in the office and have provided added equipment and supplies for those considered essential and needed to be out in our sites supporting our tenants.", "We're also in the process of establishing our overall guidelines and procedures for an eventual return to work in our offices across the globe. These guidelines will adhere to government directives and be supplemented by reasonable and practical criteria based on local situational needs and circumstances. The reopening process will be based on safety readiness levels and will not commence until I'm certain we have complete access to the necessary critical resources and supplies. I also want to emphasize that while immersed in all this activity and uncertainty, relative to just how long this crisis will last, we remain focused on continuing to meet the needs of our tenants. To that end, I want to note that to this point, the direct effects of the virus on our core business outside of translational FX impacts have been modest. While we're continually monitoring the COVID-19 impacts, our business model globally has demonstrated its resiliency and stability. Now more than ever, our infrastructure is incredibly critical to ensure our tenants are able to keep their customers connected. As a result, in many of our served markets, including the United States, we have received official priority designations that enable tower-related work to continue, largely uninterrupted. In a few locations, we have experienced some limitations and restrictions, particularly with respect to new builds and other discretionary tower work. In fact, in certain locations, new construction is currently prohibited.", "While these impacts have so far been modest, we do expect some slight delays in our new build pipeline and colocation activity in certain areas, but do believe these delays will be temporary. All in all, our business and operational focus will continue to be to prioritize actions, projects and capital allocation initiatives that extend, deepen and secure connectivity throughout our served markets. We are proud to help deliver meaningful connectivity to billions of people around the world at an important time like this and are focused on maintaining its continuity. This then brings me to the original topic I wanted to cover with you this morning, and that's of our business here in the United States. In 2020, at the midpoint of our outlook, our U.S. business is expected to represent about 57% of our consolidated property revenues and around 2/3 of our consolidated property operating profit. The U.S. operation is the foundation of our consolidated business and will continue to be for many years to come. Mobile data usage growth of at least 30% per year has driven significant levels of colocations and amendments on our U.S. assets over the last decade. And we expect that growth to continue for the foreseeable future. In fact, according to industry estimates, the average U.S. smartphone user consumed around nine gigabytes per month in 2019, which is up some 450% from just five years ago.", "Incredibly, by 2025, that same user is projected to consume over 45 gigabytes per month. To account for the strain that this usage growth will create on mobile networks, we believe that our tenants will continue to invest significant amounts of capital into our infrastructure. Over the last five years, this spending has averaged upwards of $30 billion per year. In fact, it's increased over the past 20 years as each new technology generation has been deployed, dating back to 2G. And we would expect that number to remain steady, if not rise, over the next few years, particularly given the recent completion of the Sprint, T-Mobile merger. A significant portion of our tenants' network investments in future years is expected to be 5G focused. And I'll take some time to cover our latest high-level thoughts around 5G and what that might mean for our business in a moment. But first, I'd like to spend a few minutes laying out the key characteristics and return profile of our U.S. business. Our U.S. portfolio, comprised of nearly 41,000 sites, has been created over the last 20-plus years through a number of M&A transactions, complemented by our internal new build program. We've consistently focused on sites with premier locations, significant capacity for lease-up, attractive land lease arrangements and modest requirements for ongoing maintenance capex.", "Perhaps the single biggest driver of value in these assets over the long term has been the tenant lease contracts or master lease agreements that accompany them, which we have purposely designed to both deliver compelling value to the tenant and secure attractive economics for American Tower. Our requirement for exclusive franchise real estate locations in mission-critical areas has supported our ability to implement these contract structures to generate a consistent, recurring, growing base of cash flow. As you can see on Slide 6, that focus on tower and other franchise real estate assets has resulted in sustained attractive organic tenant billings growth for American Tower, averaging more than 6% over the past five years. The combination of strong colocation and amendment trends, annual contractual escalators and consistently low churn in the U.S. have been key drivers of this growth, as we've capitalized on the deployment and densification of 4G networks across the country. We've translated this strong organic tenant billings growth into attractive NOI yields across our portfolio, particularly for assets that we've owned over the long term. For example, we're generating yields of 24% on sites we owned prior to 2005 and yields of 17% on sites added to the portfolio from 2005 to 2010.", "On assets added after 2010, including those from our GTP and Verizon transactions, NOI yields averaged around 6% as of the end of the first quarter. We believe there is significant upside in this vintage of sites as additional equipment is deployed, particularly given the expected acceleration of 5G rollouts over the next few years. Our U.S. tower leadership team has done a terrific job managing our base of assets in the U.S., having locked in more than $28 billion in contractually committed revenue as of the end of the first quarter. Margins in this business, including all of the M&A completed over the last several years, have continued to expand with the property segment operating profit margin coming in at nearly 79% in Q1, accompanied by cash SG&A as a percentage of revenue of just 4.1%. Additionally, our U.S. business ROIC has continued to rise over the last 10 years, while we have nearly doubled our asset base. We now have around 3,000 tenants in the U.S., including a vertical segment focusing on nontraditional tenants. This segment, although still in relatively early stages of development, generated more than 15% of our non-MLA-related U.S. no business in the quarter.", "From an operational perspective, over the past year, our U.S. team has been focused on automating tasks to reduce cycle times, implementing a fleet of drones to secure more accurate data on our sites and implementing several new innovative contract structures, providing process efficiencies for both ourselves and our tenants and reducing the need for site-specific evaluations. From a macro industry perspective, over the next few years, we see several trends unfolding in the U.S. First, we believe the cloud is going to come closer to the edge. Second, 5G will be deployed using a number of different spectrum bands, depending upon the specific areas coverage and capacity requirements, which will look like as somewhat labeled, like a 3-layer cake, opening up the network to allow for a multitude of different customer experiences. And third, the variety of end-user devices and applications is expected to grow faster than we could possibly imagine. In addition, much of this activity should enable our customers to be able to wirelessly transmit data at a lower cost per bit. The overall increase in our tenants resulting value proposition, driven by continued 4G and new 5G network deployments on our infrastructure, will, we expect, continue to increase our NOI yields and returns on invested capital. While we expect to have 4G-related infrastructure on our sites for years to come, we believe ubiquitous 5G deployments are also on our doorstep.", "What is interesting is that, in fact, each of the major carriers have initially deployed 5G in their own unique ways. Multiple spectrum bands have been and will continue to be deployed, spanning the range from high-band millimeter wave in cities to low band, like 600 megahertz, in rural areas and will ultimately be coupled with mid-band spectrum to support their customers' needs around suburbs and highway corridors. Importantly, we continue to believe that the majority of the sub-6 gigahertz spectrum deployments throughout the country will be on macro towers, and that mid-band spectrum will be a critical component of our tenants' 5G networks. We continue to expect mid-band deployments to accelerate beginning in the second half of this year as the new T-Mobile builds out more of its 2.5-gig spectrum. For the foreseeable future. As I mentioned, we also expect spending on 4G networks to continue, given that the migration of the user base from 4G to 5G will take a number of years. Bottom line, we believe that as a result, a tremendous amount of incrementally more complex equipment should end up on our towers across the U.S. over the next five to 10 years, allowing our business to continue to excel.", "As I mentioned, we believe that over the next several years, the cloud is going to get closer to the edge. We're already seeing this trend from the major hyperscalers, and as a result, continue to evaluate the opportunities that might be there for us. What will also be interesting is how the hyperscale and cloud service providers will interact and position themselves with the carriers. So as a result, we continue to explore trials and partnerships with a variety of different players, including hyperscalers, cloud service providers, carriers, data center companies and equipment suppliers to see just how our infrastructure may plug into this new environment. Using our existing set of assets on the edge data center front, we continue to learn about the rapidly evolving edge ecosystem through our ownership of the metro interconnect facility in Atlanta and initial deployments of several trial edge data facilities at our tower sites. At a high level, we continue to believe that as information generation and processing progressively moves to the network edge, particularly with respect to advanced IoT applications, there will be a greater need for lower latency through distributed storage and compute functionality in close proximity to both wireless and wireline end consumers.", "Edge compute offerings may eventually serve autonomous vehicle networks, interactive and immersive media delivery, cloud gaming and any number of other products and services where lower latency is a must and/or data needs to be closer to the consumer machine, where we believe the opportunity for us can truly scale. And while the potential for a scaled mobile edge solution is likely several years away, we are seeing initial positive indications of customer interest in our assets and are also having numerous conversations with a number of parties that are likely to play a significant role in the edge going forward. One such example is with Microsoft through their Azure Edge Zones program, where we are now a named partner. As time goes on, we are hopeful that other partnerships will develop to help us accelerate the development of the edge data model. On the indoor connectivity side, we continue to explore ways to leverage carrier-grade Wi-Fi, 4G, 5G and CBRS spectrum to create converged networks.", "These targeted neutral host solutions can make sense in a much broader array of venues than traditional DAS. So in other words, drastically increasing the total addressable market. We've been part of the CBRS alliance for many years and have several CBRS-based deployments throughout the country. As demand for better, faster and more secure network connectivity continues to accelerate in apartment buildings, class A office space and other similar locations, we are positioning American Tower to hopefully play a meaningful role in satisfying that demand. Here, again, we are likely at least a few years away from potentially scaling CBRS-based neutral host systems but are already seeing positive indications of demand for fixed wireless access, private networks and other solutions in these types of locations. As we look at these and other U.S.-based innovation opportunities, I want to underscore that our investment criteria and philosophy remains the same: we are looking for scalable, exclusive, multi-tenant franchise real estate digital infrastructure opportunities that have the potential to deliver consistent, sustainable, recurring growth for us with returns that rival those of our existing tower model.", "Taking these innovation initiatives together with our high-performing existing U.S. business, we are energized about the future. The secular trends driving demand for space on our franchise real estate assets continues to accelerate, and we believe we are optimally positioned to convert that demand into attractive total returns for our stockholders over the long term. Further, our business has performed extremely well through a variety of economic and capital market cycles, and we are confident that American Tower will again stand and deliver through the current turmoil.", "With that, I turn the call over to Rod to go through our results for the quarter and our updated full year outlook. Rod?" ] }, { "name": "Rod Smith", "speech": [ "Thanks, Tom, and good morning to everyone on the call. Thank you for joining. Before I dive into our first quarter results, I'd like to also take a moment and acknowledge the COVID-19 pandemic that is affecting all of us. My thoughts and best wishes go out to our employees, tenants, vendors and to each of you on the call this morning. I hope you all are safe and healthy through this difficult time. Let's now turn to our first quarter results. As you saw in today's press release, we began 2020 with a solid quarter, as mobile data consumption continued to grow across the globe. In fact, in many of our markets, particularly internationally, mobile data traffic has increased as a result of COVID-19, highlighting the importance of wireless services everywhere and the critical nature of our global portfolio of communications real estate. To start, I'd like to note a few of our first quarter achievements. Specifically, we met our expectations for organic tenant billings growth rates across the globe, led by Africa at 9.3%, Latin America at 7.5% and the U.S. at 5.6%. We grew our property revenue in tenant billings by more than 10%. We expanded our adjusted EBITDA margin by 230 basis points over the prior year.", "We made substantial progress integrating the more than 8,000 sites we acquired at the end of 2019 in Africa and Latin America. We've built approximately 1,000 new sites. We strengthened our balance sheet and now have $5.4 billion of liquidity pro forma for our new term loan from earlier this month. And we grew our common stock dividend by 20% again. Before we discuss the details of our full year outlook, let's first spend a few minutes reviewing our financial and operational results for the first quarter. Please turn to slide eight, and we will review our property revenue and organic tenant billings growth. For the quarter, you can see that our underlying growth remains solid throughout our markets. Due to strong demand for our assets across the globe and on an FX-neutral basis, we met our internal expectations for revenue. As Igor mentioned earlier, our first quarter consolidated property revenue of approximately $1,970,000,000, grew by $187 million or 10.5% over Q1 of last year. This included a headwind of roughly $48 million from unfavorable FX translations. Our U.S. segment represented 55% of both our consolidated property revenue and the corresponding growth, while our international segments accounted for the remaining 45%. As always has been the case, the critical components of our consolidated property revenue are those items that impact our recurring tenant billings revenue, including around $79 million in colocations and amendments, a similar level to prior quarters.", "Our consistent and reliable contractual escalators, which added $50 million, our day one incremental tenant billings resulting from our returns-based and disciplined capital investments, which contributed $72 million and includes M&A and new builds. These positive items were partially offset by lease nonrenewals or churn, which reduced our tenant billings revenue by $49 million for the quarter. Looking at our major business segments. Our U.S. property segment revenue totaled nearly $1.1 billion for the quarter and grew by $104 million or 10.5% over the prior year period. Our international property revenue of $883 million grew by $84 million or 10.5% over last year's levels. As expected, we saw solid demand from our major carrier tenants around the globe. This demand was driven by the carriers' need to continually invest in their networks in order to keep pace with the exploding growth in mobile data consumption. Moving to the right side of the slide, you will see that our consolidated organic tenant billings growth also met our expectations, coming in at 5.4% for the quarter. For our U.S. property segment, organic tenant billings growth was 5.6%, comprised of new business activity, which totaled 4.5%; pricing escalators, which totaled 3.3%; and churn of 2%; and a roughly 0.3% negative impact from other items, which partially offset the items I mentioned above.", "As expected, this growth rate reflects a deceleration from prior quarters, partially driven by the impact of the pending Sprint, T-Mobile merger had on new business activity levels. Now that the merger has closed, we stand ready to support the new T-Mobile as it begins to invest significant capital and to perform the earnest work of integrating two complex networks, deploying diverse spectrum holdings and servicing more than 100 million subscribers, all while preparing for a 5G future. Regarding our international segment, organic tenant billings growth was 5.1%, led by Africa at more than 9% and Latin America at 7.5%. Europe totaled just about 2%, while India came in with a decline of around 1%, which was in line with our expectations, given anticipated churn and market conditions. The component parts of our international organic tenant billings growth were new business activity, which totaled 7%; our mostly local inflation-based pricing escalators, which totaled 3.6%; other items, which contributed around 20 basis points and partially offsetting these increases was churn of 5.8%, largely attributable to previously anticipated cancellations in India. Turning to slide nine.", "You can see our first quarter consolidated adjusted EBITDA of nearly $1.3 billion grew by $157 million or 14.1% over the prior year period. As a result of our continued focus on driving organic growth, adding new assets and managing costs throughout our business, our adjusted EBITDA margin was 63.8% for the quarter, which was up 230 basis points compared to Q1 of last year. I will also note that these results include the impacts of around $16 million in incremental bad debt recorded in India due to some slow payments of accounts receivable from certain tenants, including government-owned BSNL. We think it's likely we will collect these receivables in the future, but for now, we have provided for them by increasing our bad debt reserves. In addition, our adjusted EBITDA growth was negatively impacted by approximately $26 million or 2.3% for FX fluctuations as compared to Q1 of last year. Our U.S. property segment operating profit of $858 million grew by $105 million or nearly 14% over the year-ago period, while our international property segment operating profit of $448 million grew by $62 million or 16% over last year's level. As a result, our U.S. segment represented 66% of our property segment operating profit in the quarter and 63% of the corresponding growth, while international accounted for the remaining 34% and 37%, respectively.", "Moving to the right side of the slide, you can see our consolidated AFFO of $907 million grew by $45 million or 5.3% over the year-ago period. Our consolidated AFFO per share of $2.03 grew by $0.09 or 4.6% over last year's levels. It is important to consider that the consolidated AFFO results include the impact of a onetime cash interest expense charge totaling $63 million as a result of our purchase of MTN's stake in each of our joint ventures in Ghana and Uganda. Absent this nonrecurring charge, our consolidated AFFO and AFFO per share growth would have been 12.6% and 12.4%, respectively. As a reminder, we now expect a gap between consolidated AFFO and AFFO attributable to common stockholders to be modest in future years as a result of these minority stake purchases and our expected purchase of the remaining Tata stake in our India business, which is anticipated for later this year. Moving to slide 10, let's now take a look at our updated expectations for 2020. To start, I will address a few of the business issues that require careful consideration as we updated our full year outlook. First and foremost is the COVID-19 pandemic. Although its full year impact on the world is not yet known, to date, on a constant currency basis, we have experienced only modest impacts.", "In fact, in many of our international markets, markets that have little or no fixed line infrastructure, our tenants are actually seeing increases in mobile data consumption across their networks, which may increase demand for our sites over time. As stated earlier, this highlights the world's growing reliance on wireless services and evidences the critical nature of our global portfolio of communications real estate. With that said, COVID-19 has caused global financial turmoil and material moves in many foreign exchange rates relative to the U.S. dollar. Of course, these FX moves are having a negative impact on our updated full year outlook. I'll discuss the detail of those impact shortly. But in the general context of the current FX volatility, I will note that we routinely review our hedging policies and often engage with the help of specialized external advisors in doing so. Although we have hedged purchase prices for certain international transactions in the past, historically, we have concluded that the potential benefit of actively hedging our ongoing translational FX exposure are not worth the real economic cost. Instead, we rely on natural hedges such as the portfolio effect of our 19 markets, our reinvestment of locally generated operating cash flow through new builds and M&A activity and select issuances of local currency debt.", "In addition, most of our tenant leases in international markets have annual local inflation-based escalators or are denominated in U.S. dollars. At this stage, we do not anticipate any significant changes in our approach to hedging, but as always, we continue to evaluate our options. Next, in the U.S., T-Mobile recently completed its merger with Sprint. As a result, we continue to anticipate an acceleration of spending from the new T-Mobile to begin in the second half of the year. In addition, beyond 2020, we believe this industry shift may result in a sustained increase in wireless industry capital spending as 5G deployments ramp and Dish supported its network. We believe we are well positioned to benefit from the future 5G deployments as carriers continue to focus on network quality. Finally, in India, the Supreme Court recently reaffirmed the fees, penalties and interest assessments associated with the previous ruling on the definition of adjusted gross revenues. Although the total liability has been reaffirmed, we don't yet know the pacing and duration of the required payments on the part of the carriers, particularly in the context of the current COVID-19 situation.", "Taking these updated considerations and our assessment of market conditions into account and based on the proven resilience of our global business, our total property revenue outlook on a constant currency basis is unchanged. However, foreign currency exchange rate fluctuations as compared to our prior outlook are expected to negatively impact reported property revenues for the full year by approximately $300 million. For organic tenant billings growth, we are reiterating our outlook across most of our geographic segments. However, for Africa, we now expect organic tenant billings growth of around 9% for the year, down from 11% in our initial outlook. This is being driven by a reclassification of certain revenues out of tenant billings rather than a shift in the underlying fundamentals of our Africa business. Looking at slide 11, you will see that we are also affirming our underlying expectations for adjusted EBITDA at the midpoint of our outlook outside of an FX translational impact of approximately $165 million. This includes the expectation that cash, SG&A as a percent of total revenue will be right around 8%.", "Lastly, we are reiterating our expectations for consolidated AFFO for the year on an FX-neutral basis. We continue to carefully manage our cash interest expense and cash taxes, while converting the vast majority of our cash adjusted EBITDA growth into consolidated AFFO growth. As a result, outside of roughly $140 million or $0.32 per share and unfavorable FX translation impacts, our consolidated AFFO and AFFO per share projections are unchanged. Although we are not surprised by how well our business has performed during the COVID-19 pandemic, we will continue to monitor events closely as the full impacts of this crisis develop. I would also note that to the extent that local market measures, like shelter-in-place orders are prolonged, we could eventually experience some timing issues regarding new business commencements, new builds or even accounts receivable collections. Flipping to slide 12, I'd like to now briefly discuss our capital allocation plans for the year, which remain broadly consistent with our prior view. Our full year dividend declaration, subject to the approval of our Board, is expected to be approximately $2 billion, resulting in an annual common stock dividend growth rate of right around 20% once again. We also expect to deploy $1.2 billion toward our capex program, with 85% of that investment being discretionary.", "As a result of COVID-19 and the associated FX impacts, we now expect a reduction of $50 million from our prior capex outlook. This includes a $30 million reduction in redevelopment capex, $5 million in lower maintenance capex and $15 million in lower development capital spending, in part due to a delay of construction of approximately 1,000 new builds in India. In the first quarter, we deployed $524 million to buy MTN's minority stakes in each of our joint ventures in Ghana and Uganda and have earmarked another $328 million at March 31, 2020, exchange rates for our pending purchase of Tata's remaining interest in our India business. In addition, we have spent roughly $49 million on other M&A so far this year and have deployed about $55 million through April 22 to share repurchases. Given our strong balance sheet and current liquidity, we expect to fund the entirety of our 2020 capital deployment plans with cash on hand, cash from operations and modest levels of revolver borrowings. We also expect to explore additional opportunities to extend and ladder our debt maturities and reduce our overall cost of borrowings. As a result, we anticipate continuing our long track record of generating strong consolidated AFFO per share growth, while simultaneously growing our return on invested capital. Turning now to slide 13, I will briefly summarize the strength of our investment-grade balance sheet and our current liquidity position, which we believe is unmatched in our sector.", "As of the end of the first quarter, we had more than $1.3 billion in cash and $2.9 billion available under our revolving credit facilities. Subsequent to the end of the quarter, we completed an additional one year term loan of nearly $1.2 billion, increasing our liquidity on a pro forma basis to more than $5 billion. Our net leverage at the end of the quarter was 4.6 times, in line with our targeted range and consistent with our historical levels. Our weighted average cost of debt was around 3.1%, and our weighted average debt tenor was over five years. Regarding our debt maturities for 2020, subsequent to the end of the quarter, we announced the redemption of our $750 million, 2.8% unsecured notes, leaving us with just $350 million in the remaining maturities this year. As a result of our prudent financial policies that have been implemented and enhanced over the last decade and the overall stability and resilience of our business, we believe we are in an extremely strong financial position amid the current market turmoil. We expect this to enable us to continue to be opportunistic with respect to investing and growth, including M&A opportunities on a global basis. If you would please turn to slide 14, I will conclude my comments with a brief summary.", "Despite the global pandemic, we had a good start to 2020 as we achieved solid organic tenant billings growth, expanded our margins and ROIC, started integrating the portfolios acquired at the end of 2019 and once again, increased our quarterly dividend by 20%. We further strengthened our investment-grade balance sheet, increasing our current liquidity to $5.4 billion and positioning ourselves to comfortably fund our 2020 capital deployment plan, while expanding our global power portfolio through opportunistic M&A. And finally, outside of the translational FX impacts of the COVID-19 pandemic, our outlook remains largely unchanged, highlighting the critical nature of wireless services everywhere as mobile data consumption continues to grow at a dramatic pace across the globe. With that, let me turn the call over to Jim." ] }, { "name": "James D. Taiclet", "speech": [ "Thanks, Rod, and good morning, everyone. To each of you on the call today, I wish you and yours a safe and healthy path to the COVID-19 pandemic. As Tom stated earlier, our top priority in American Tower is the health and safety of our global workforce. Our dedicated employees and managers throughout the company are committed to keeping critical telecommunications infrastructure fully operational and functional in their communities. The senior executive team and management throughout ATC are doing everything they can to support our global teams in this essential work. Our company is also contributing to those communities financially through our philanthropy and CSR programs and through the American Tower Foundation. This includes everything from working in Boston, Massachusetts with local and state support funds for citizens in need, to funding and donating PPE to health workers throughout the U.S., to helping with the government of India's COVID-19 recovery fund and many more. In addition, Commerce Secretary Ross and I have agreed to immediately pivot the entire near-term work effort of the U.S.-India CEO Forum, which we co-chair, toward COVID-19 relief and recovery efforts in the world's two largest democracies.", "We are fully engaged with the GOI and our Indian counterpart companies in this effort. As ATC's Executive Chairman, I have been offering guidance regarding our COVID-19 response, while also working very closely with Tom to ensure a smooth and seamless management transition. As I move toward completing my nearly 20-year tenure at American Tower, I am tremendously confident in three key respects: Tom's ability to lead our highly capable executive team and the business into a successful and prosperous future, the continuing vibrancy of our Stand and Deliver strategy and its ability to deliver strong performance and returns to our investors and that the ongoing demand drivers for mobile infrastructure will underpin strong growth for ATC for many years to come. Lastly, I would like to thank our investors and analysts, many of whom are on this call today, for your confidence in our team during the many years that I have been privileged to lead it. I fully expect that Tom will now lead the company, along the trajectory of our Stand and Deliver strategy, to even greater heights in the future. And now I'll turn it back over to Tom for some closing thoughts before we go to Q&A." ] }, { "name": "Tom Bartlett", "speech": [ "Hey, thanks, Jim. Before we move on to Q&A, I'd like to first recognize our Board Chairman, Jim Taiclet, for his incredible leadership, judgment and friendship over these last 20 years. Over that period, our business has grown from operating in just three markets, generating about $1 billion in revenue with 15 sites to where we are today. That, in and of itself, is amazing and a testament to his leadership, but it's the way he has guided us and built this culture that, in my mind, will forever be his legacy and my compass for where we go from here. So Jim, I'd like to say on behalf of all your investors and employees, we thank you. Okay. Operator, please, now, let's open the lines for some Q&A." ] } ]
[ { "name": "Operator", "speech": [ "[Operator Instructions] Our first question today comes from the line of Brett Feldman with Goldman Sachs. please go ahead." ] }, { "name": "Brett Feldman", "speech": [ "And congratulate to Tom and Rod, well learned. And congrats, and thank you to Jim. It's obviously sad to see you go, but I do feel like this transition is natural and seamless, and I do think that it speaks volumes about the quality of the organization that you built and the legacy you leave behind. And so I'm going to take advantage of this opportunity to ask you one last question. When you and the Board were starting to design the company's expanded international strategy, which is, I don't know, 13, 14 years ago, you talked about a range of risks that the company was willing to take, a range of stresses that you thought you were designing your international operations to absorb. And while I'm certain you didn't anticipate this exact situation, I was hoping you can maybe remind us of those risk parameters, the stress points that you designed the business for us so as we watch this pandemic unfold, we can assess for ourselves whether these changes are within scope or whether adjustments are going to need to be made." ] }, { "name": "James D. Taiclet", "speech": [ "Sure, Brett, and thanks for your kind comments. I'll start it off and maybe turn it back over to Tom to speak of the plan ahead. But the range of risks that we anticipated was based on the fundamental risk we had at the time, which we were a single country, single-product company that had really large growth ambitions. And I think to risk mitigate that very high concentration in the U.S. tower market that we went on, as you described it, a 15-year sort of diversification plan. So we diversified among currencies, continents, countries, customers, markets, etc, to try to, as you would do, create a portfolio that grew over time that would mitigate risk and grow faster than otherwise we could have. And that's really the framework around what we've been doing for all that time since 2007 or so. So I think within that context, I could let Tom describe how he and perhaps Rod thinks that this can play out given the COVID-19. I think it's still within our framework, frankly, Brett. But let me ask Tom to comment." ] }, { "name": "Tom Bartlett", "speech": [ "Thanks, Jim. And thanks, Brett, as well for the comments. I think, as Jim said, I mean, what kind of supports and underwrites the overall international strategy is it's the same business model as we have in the United States. It's not a new set of products and services. And so it allows us to take the model that we built in the United States in terms of how we look at an infrastructure, how we actually look at the master lease agreements and being able to take that offshore into those large, emerging market economies to be able to drive growth. The other piece that Jim talked about was the diversification. We underwrite these investments operationally, which I'll spend a minute some thoughts on it in a minute, but it's a very diversified portfolio. And so we are scattered around in 19 markets, 18 of which are outside of the United States. And we also think that, that serves as a useful way for us to be able to kind of underwrite the risk.", "The third is we're large incumbents. Our customers are the largest telecommunications companies around the world. So it's we're not dealing with consumers. We're not dealing with a number of small players. These are the large AT&Ts and Verizons outside of out of the United States. And operationally, when we look at the investments themselves, we're looking at them over a very long period of time, so we have a 10-year discounted cash flow, and we underwrite them with a risk-adjusted cost of capital. So we are caring for a lot of the risks that you would normally see. And they have escalators in them that are CPI based, utilizing local debt, reinvesting that cash back into the business. And so we think if we're able to do this in a very balanced way, a very diversified way, we're going to be able to successfully enjoy the growth that we're seeing from these markets that, as you all know, are anywhere from three to five years behind the U.S. from a technology perspective. So we think that's a sound approach, a balanced approach, again, to being able to kind of leverage all the opportunity we see offshore." ] }, { "name": "James D. Taiclet", "speech": [ "Yes. And Tom, I'd like to just add one more point. We still got about 2/3 or more of the cash flow coming from the U.S. So it's grown just as rapidly. In fact, as the international has on a cash flow basis all for that 15-year period. So there wasn't so much risk mitigation that we ended up with, which was really turbocharging growth and keeping a similar risk profile based on diversification. Thanks, Brett." ] }, { "name": "Tom Bartlett", "speech": [ "Jim, if I could just add a couple of comments there in terms of our ability to build new assets in these international markets. When we build new assets, those are our highest yielding investments and we've been able to build a lot of assets around the globe, more than 4,000 sites last year. And this year, we expect to build even more than that. So it's a way for us to kind of expand our horizon and be able to deploy significant capital in the most productive way possible." ] }, { "name": "Brett Feldman", "speech": [ "Okay." ] }, { "name": "Operator", "speech": [ "And we do have a question from the line of Ric Prentiss with Raymond James. please go ahead." ] }, { "name": "Ric Prentiss", "speech": [ "His Morning guys. Well, The world certainly has changed the world has certainly changed in the last two months since your 4Q call. First, I'm glad to hear, and I hope your family, you and your employees stay safe in this crazy time. I'll add my comments to say, Jim, I remember that non-deal road show in San Francisco. Must be almost 20 years ago as you were starting. And the world was in chaos then too, so you guys have navigated very strongly. And echo congrats to Tom and Rod as well. From a business standpoint, obviously, another thing that's changed is Sprint and T-Mobile merger has closed, finally. Dish-Boost might be closing soon. How should we think about the timing of working with them in what's going to be a very complicated process of integrating networks? Do we think of MLAs? Do we think of holistic approaches? And how long do those, generically speaking, how long does it take to kind of work through these complicated master lease agreements?" ] }, { "name": "Tom Bartlett", "speech": [ "Yes. Rick, I think with first of all, thank you for your comments and your thoughts. T-Mobile and Sprint have been working and thinking about, I think, their network deployment plans for some time now. So now that the deal is, in fact, closed, we're now able to sit down with them in a meaningful way to talk about a number of different contractual structures with them. I mean, to this point, we've seen some level of increase in the pipeline, but it's still awaiting the bulk really of what we would expect to eventually come through as they ramp up their network deployments. And so we would expect that, as we said, more in the second half of the year to start up some of the more significant volumes. But these are multiyear master lease agreements that master lease agreement structurally that we would put in place. Clearly, we would entertain one of our traditional holistic agreements, where we think it makes sense for us, as well as makes sense for T-Mobile and Sprint. But I think you could be assured that there are significant conversations going on as we speak. T-Mobile is very anxious to get going in terms of being able to meet a lot of their network commitments, and they'll be very aggressive, I am sure. And we are very much committed to being there. And we'll want to tailor the MLA to really be mutually advantaged to both of us. And so that kind of those events will be going on heavily, I would suspect, over the next 60 to 90 days. Richard Hamilton Prentiss," ] }, { "name": "Ric Prentiss", "speech": [ "Great. And Jim, you mentioned your CEO panel committee in India U.S., India jointly working together on the COVID-19, great effort. Any updated thoughts on when the pacing of the payments and the AGR issue in India might be resolved? I'm seeing COVID-19 has kind of put things on a back burner. But I know we get a question a lot of times about when will the carriers know the pacing of that payment. any thoughts?" ] }, { "name": "Tom Bartlett", "speech": [ "Ric, just as an update. I think as Rod really mentioned, I mean, the process has largely been put on hold as have so many things as a result of the ongoing COVID pandemic. And so my sense is that I mean, and they're on, as you know, full lockdown in the country itself. So it's really status quo as we sit right now. We anticipate in the second half of the year there'll be further hearings to discuss the payment time line for dues and things like that. But everything is really on hold at this point in time." ] }, { "name": "Ric Prentiss", "speech": [ "Makes sense. Again, I'll close with thoughts and hopes and prayers of everybody's family and employees make it through this crazy time. Thanks for taking my questions." ] }, { "name": "Rod Smith", "speech": [ "Thanks, Ric." ] }, { "name": "Tom Bartlett", "speech": [ "Thanks, Ric, and you too." ] }, { "name": "James D. Taiclet", "speech": [ "Ric, thanks for your support, it's Jim, over those last 20 years and your deep understanding of our company. To underpin what Tom said on India very quickly,is that the telecommunication and digital infrastructure industry is one of the significant work streams of this group. And we've got great talent on both sides between American Tower. Sunil Mittal of Bharti Airtel is my sub-co-chair for the group on telecom and also Natarajan Chandrasekaran, who's my co-chair for the entire effort in India with Tata. We have really made some great progress on telecom. In general, we've gotten it on the top shelf of the government of India's consideration to strengthen this industry. And I think the AGR resolution will ultimately be included in how that industry has strengthened. That is becoming increasingly important during this crisis as you can imagine there as it is here." ] }, { "name": "Operator", "speech": [ "And we do have a question from the line of Michael Rollins with Citi. Please go ahead." ] }, { "name": "Michael Rollins", "speech": [ "Thank you morning. I also want to extend my congratulations and thanks to Jim, as well as congratulations to Tom and Rod on their new roles. Maybe taking a step back you're welcome. Taking a step back to some of the comments you discussed on expanding the addressable market for revenue, and this is something that the company has been looking at for quite some time. Is there a way to just further put some numbers on the long-term opportunities to expand revenue, whether it's pushing the cloud to the edge with your towers, leveraging CBRS within the DAS strategy and potentially augmenting that and maybe some of the other initiatives that you've been pursuing in the international market?" ] }, { "name": "Tom Bartlett", "speech": [ "Yes. No, thanks, Michael, and thanks for your congratulations as well. We did set out revenue goals internally, and we've actually talked about them externally, that within a 10-year period, and this is goals that we actually set back in 2017. We would generate probably incremental $1.5 billion from innovation-related events and activities. And fundamentally, there are really two principal elements of those innovation initiatives. First of all, it'll be utilizing exclusive real estate rights and would be multi-tenant. So very much related to our existing tower business. If you kind of step back and you think about our innovation strategy, it's really based upon, again, this neutral multi-tenant connectivity platform, as I'll refer to it, with our own stack that includes exclusive real estate, passive infrastructure, power, transport, compute layers, and again, I refer to that as kind of as our ATC stack on our existing or on a new platform that we are currently building, platform ATC, if you will. I'm not a marketing guy, Michael, but platform ATC.", "So everything that we're trialing from our edge computing initiatives, power initiatives, our in-building initiatives, the ones that you were referring to, and the kind of the multitude of international access and transport initiatives, they're largely fiber based, are really meant to be constructive as we really build out this stack, if you will, on this platform. So it's not a vertical point solution, but really a broad kind of a horizontal platform, if you will, capable of providing really a myriad of connectivity services. So if you think about 2020, we have three or four kind of major initiatives going on, again, building out this stack, if you will, this platform, if you will. And the first one is what you referred to, is kind of building out our in-building capabilities. We're trying to drive down the traditional DAS costs that we've developed and segment that we've developed over the last 20 years. And we're really trying to open it up to increase the overall TAM. So we're using CBRS spectrum and really opportunities to increase the tendency as well as increase the offload from our customers. We're also trying to more fully develop what we call our transport layer of the stack.", "And we're looking at fiber to the curb shared initiatives to really facilitate multiservice providers, and we're doing that largely down in Latin America. You also referred to, and we're doing additional work on developing and exploring our edge-based distributed compute and mobile edge computing opportunities. And I mentioned some of those in my remarks, but we're really trying to leverage our Colo Atl asset in certain sites in our U.S. portfolio. And finally, kind of rounding it out, we're really trying to improve our overall power layer of the stack. We continue to develop a hybrid shared power solution really using historical diesel-fueled generator power with new lower-cost solar and battery packs. So it's a bit of a double click on many of the initiatives. But clearly, we're at the early stages of the development of this stack, if you will. But we do think, again, it's a very effective way to look at our ability to leverage our existing core set of assets and to be able to offer new types of services to existing customers as well as to new types of customers around the globe.", "So we'll talk more broadly about that. I think on an upcoming call, our second or third quarter call where we take a deeper dive into a lot of the innovation initiatives. But we're well on our way, and we're very focused and we're doing it, I think, very efficiently. We're not throwing money against the wall here, if you will, in terms of building it out. We're being very focused but we're and we're, as you know, I think we have a CTO that we brought in a couple of years ago that is really providing an overall oversight on these overall initiatives that we have. So as I said, more to come, and we'll feel this back even further in a couple of quarters." ] }, { "name": "Rod Smith", "speech": [ "And Tom, if I could just add a couple of I'm sorry, Michael, can I just add a couple of things to what Tom outlined? So I would just add that the strength and resilience of our underlying business really does help support our ability to be inquisitive and opportunistic when it comes to innovation. So our strong and kind of consistent adjusted EBITDA margins, north of 63%, are consistent double-digit revenue growth and the fact that our return on invested capital was north of 11%. That strength in the core underlying business, combined with our very strong balance sheet, again, the liquidity position that we're in at $5.2 billion and pretty low cost of debt at 3.1%, that balance sheet strength is ready to go to work and really does support our ability to be inquisitive when it comes to innovation." ] }, { "name": "Ric Prentiss", "speech": [ "Just a quick follow-up. Is there a risk that the activity in the bookings pick up in the back half of the year, as you described, but there are labor constraints to actually get the infrastructure on to all of the sites and so therefore, there could be the possibility of an elongated book-to-bill cycle entering into 2021?" ] }, { "name": "Tom Bartlett", "speech": [ "Michael, sure. I mean, that could always be. We haven't seen that necessarily. We're obviously given kind of the essential ticket, so we're able to be out at the sites, but it could be effective on or could affect our build-to-suit program. For example, we've actually come back a bit on the build-to-suit program. We think that those sites will ultimately be deployed, but the timing could be affected by construction personnel from being out of the site. And we are considered essential personnel. So we think that we won't see significant delays there. But as this continues to go along and if it intensifies, sure, that could delay some of the growth that we see in business. But more specifically, I think it's around build-to-suit." ] }, { "name": "Igor Khislavsky", "speech": [ "Yes. And Tom, I would just add, I think from an industry leadership position, we were, I think, instrumental with business roundtable in the U.S., the U.S.-India CEO Forum, therefore, in India, to get us in both countries that critical infrastructure designation, not only for our own company, but for our suppliers. And that still needs to be worked through a little bit more deeply in India. But in the U.S., I think it's pretty effective right now. So I expect, Mike, that we'll have a fairly capable vendor force available to us as well our carrier customers as a result of some of that leadership." ] }, { "name": "Tom Bartlett", "speech": [ "Yes. And this brings a good point. I mean, one of our initial thoughts was would there be some issues from a supply chain perspective, and it's not necessarily bringing in big radios and things like antennas in, but it's usually that $0.50 part that might get in the way of actually deploying infrastructure. And we haven't seen that at this point in time, but and we don't anticipate it. But as I said, if this continues on, we think we're in a good spot, but and our customers are in a good spot, but time will tell." ] }, { "name": "Michael Rollins", "speech": [ "Thanks." ] }, { "name": "Operator", "speech": [ "And we do have a question from the line of Spencer Kurn with New Street Research. Please go ahead." ] }, { "name": "Spencer Kurn", "speech": [ "Hey guys, thanks for taking the question. Just wanted to inquire about the M&A landscape. In periods of dislocation well, first of all, have you seen any better valuations on some international portfolios in this current dislocation? And I was hoping you could elaborate on your experience in prior periods of market turmoil. Have you found that these are these present opportunities for you to expand more rapidly than you've been able to in periods where markets are tight?" ] }, { "name": "Tom Bartlett", "speech": [ "Yes. No, Spencer. We always are looking at opportunities, M&A opportunities. As you know, we have business development teams around the globe. And it's a fairly lengthy number of opportunities that are out there, if you will. Whether they're COVID-19 related or not, there continue to be a lot of assets out there up for sale. Back in the 2008, 2009 time frame, there was a significant amount of growth. There were companies that were just distressed and looking to monetize their assets. And we actually were pretty aggressive back at the time and picked up some sizable assets. And so we'll see. I think we're in still early stages, if you will, in terms of the pandemic, in terms of its impacting a particular company's financial position. As Rod mentioned before, we have a sizable liquidity position at this point in time. So I think we're really well positioned to be opportunistic here. But we'll go back to our fundamental investment policy and the way we look at deals, and we'll continue to manage it and monitor it that way. And so time will tell. We just closed two transactions at the end of last year, which we're currently integrating and it's going very well. And so we'll continue to see how the year pans out. But as I said, I think we're in a good financial position to be able to strike at some of these to the extent they become available and make sense to us." ] }, { "name": "Spencer Kurn", "speech": [ "Great, thank you." ] }, { "name": "Rod Smith", "speech": [ "Sure." ] }, { "name": "Operator", "speech": [ "And we have a question from the line of David Barden with Bank of America. please go ahead." ] }, { "name": "David Barden", "speech": [ "Let me go everyone else's sentiments. Congrats, Jim, on a successful career and congrats, Tom and Rod, on your guys' elevation. I guess the question I want to ask you is the question I've been getting from a lot of investors, which is what is Tom Bartlett's American Tower going to look like in five years versus how Jim Taiclet's American Tower might have looked? Where is your ambition? What is your strategic goal? Jim, a few years ago, came up with this idea that you wanted to double the size of the company and achieve that goal. What are you ready? Are you able to articulate kind of what your vision now for the company might be and how that might be similar or different from the vision that we've kind of all understood American Tower has? And then let me just ask that." ] }, { "name": "Tom Bartlett", "speech": [ "Yes. No. Thanks, David, and thanks for your congrats as well. We've got an excellent strategic and tactical blueprint that I believe that's in place that Jim and I, and the rest of my colleagues that we developed and that we're currently executing. We refer to it as is our Stand and Deliver strategy. And as you know, there are four key elements of it. There's industry leadership. There's a focused innovation process, one that I just talked about a few minutes ago. It's enhancing our efficiency initiatives. And it's a continuing drive for growth, profitable growth, sustainable growth, both organically and inorganically. I think that the way we have consistently thought about creating shareholder value based upon sound principles, around capital allocation and investment criteria, our dividend policy, the way we manage our balance sheet, is absolutely sound. So I mean, I don't see any changes to the way that we've been operating the business, and clearly, no changes to the blueprint that we really have in place. I think that the existing team is outstanding. And so now it's up to us to continue to execute.", "Will we adjust it and tweak it as the market evolves? Absolutely, as we have continually doing. And as we have done over the last 10, 15 years, if we need to, just, as I say, just as we always have. But the fundamentals are solid. I mean, I don't have any grandiose notions that, OK, we're going to be a $20 billion business by 2025. If that happens, terrific. But we're just going to continue to keep our heads down, really move on the strategy that we've got in place. I think that there are as I was talking a few minutes ago, I think there are a lot of really interesting elements of our innovation strategy, which I think are going to increase the overall addressable market that we're going to be able to take our fair share of. And we're going to continue to globalize. We're a very good and very big international business. I think that there are opportunities for us to continue to globalize, particularly when you look at some centralized global business, operational centers that we have. And so I think there are a lot of things that we can do on the efficiency side. And on the leadership side, Jim is really he's got big shoes to fill on the leadership side, and I think we've got a lot of opportunity to continue to really push the envelope in terms of how we're positioned in all the markets that we're in.", "But when you kind of step back and you look at our inventory, we own about 1/3 of the inventory the assets, if you will, of the 20 market, 19 markets that we're in. So there's a lot of opportunity for inorganic growth. And I think we've got a great business model to enjoy organic growth going forward. So I think we've got the fundamental pieces in place. As I said, we'll tweak it and adjust it based upon where the market is and how the market evolves. But feel very good about the blueprint that we've got in place." ] }, { "name": "James D. Taiclet", "speech": [ "And David, to bring it full circle, when we embarked on our international strategy in '07, it actually positioned us to have, as the circle closed in, say, 2017 through 2025, it gave us the opportunity to potentially expand our U.S. domestic business because our innovation program could then kick in over the U.S. and our international portfolios. It gave us a character that no other tower company in the world has, where we can work with new types of customers like hyperscalers, like big real estate owners that span countries. And we're the only one that can take that dimension of an innovation program on digital infrastructure and circle it back to the United States and maybe even grow faster here over the coming years than we otherwise would have without the Stand and Deliver strategy in the international assets, David. So I think there's some real blue skies here for Tom and the team to pursue under the strategy. And I agree that I don't perceive any big deviations from that based on the fact that this is the same exact team that put the strategy together and executed it for 12-plus years with the people on the call we have right now. So I think we're going to be having really exciting times at ATC going forward." ] }, { "name": "Spencer Kurn", "speech": [ "That's great. Thank you for that, Jim. Appreciate it. And look, everybody." ] }, { "name": "James D. Taiclet", "speech": [ "Thanks again." ] }, { "name": "Operator", "speech": [ "And we do have a question from the line of Simon Flannery with Morgan Stanley. please go ahead." ] }, { "name": "Simon Flannery", "speech": [ "Thank you very much. Good morning. Let me add my congratulations and best wishes to the team. On the mobile edge compute, can maybe you can just give us some sense of what you're seeing in the current market environment. We've seen strong demand for interconnection, etc, in the COVID world. What's going on with the colo business you have today? And as you think about taking advantage of that opportunity, do you think you need to add additional assets more across the country and in other markets to expand that on that opportunity?" ] }, { "name": "Tom Bartlett", "speech": [ "Yes. No. Thanks, Simon, and thanks for your congrats as well. I think when you kind of step back and you take a look at our overall edge computing initiatives, I'd really look at it in kind of two pieces. First of all, from a pure distribution or distributed compute perspective, those are aware we've actually had some early on successes, and this is where we're actually putting cages out at our particular sites. And we're offering edge computing to enterprise, smaller enterprise, midsized enterprise accounts, where they're looking to perhaps move to the public cloud and just looking for some of their workloads to being more distributed. So that's the kind of the easy element and the easy piece that I think we've experienced. And then the second, more complicated piece, candidly, is on the kind of traditional mobile edge computing. And I see this from a number of different elements.", "I see this from the data center side, we're obviously looking at it from the hyperscaler side. And this is where we're looking at the opportunity for lower latency types of needs that we think are going to be ultimately developing out at the edge and how we might be able to participate in that. And so we have, as you know, the Colo Atl facility that we picked up a couple of or last year, really. And we're looking to interconnect that offering and kind of access to the cloud and trying to interconnect it back to our own sites themselves with the compute power that we're putting out at the sites to see what that ecosystem, if you will, looks like. I don't actually know how this is all ultimately going to pan out. I don't know the relationships that we're going to see with the hyperscalers as well as with the carriers. We see a lot of initiatives going on between Amazon and Google and Azure in terms of how they're looking at the C-RAN and how they're working with AT&T and Verizon and getting further and further out to the edge.", "We think that we have some very valuable assets that can be part of that overall solution. And we're looking to be able to kind of leverage the assets that we have to be able to support that. But this is going to be something that, as I mentioned before, it's going to take a while to figure out how to scale. I don't think that without the kind of the whole vehicle element here, with all the IoT element here that it's really going to be something that we can scale efficiently. But that's probably three to five years away. And so we're participating in a number of different trials. As I said, we're taking advantage of this kind of distributed compute capability, and we're trying to figure out how we might fit into the overall mobile edge computing environment going forward. So more to come on that. But as I said, I think we've got some very valuable assets there that can play a meaningful role in some way." ] }, { "name": "Simon Flannery", "speech": [ "Great, thanks." ] }, { "name": "Operator", "speech": [ "And we do have a question from the line of Colby Synesael with Cowen. please go ahead." ] }, { "name": "Colby Synesael", "speech": [ "Great, thank you. And also just want to extend my congratulations to everyone. I guess, just my first question, you had mentioned some counterparty risk in India. I'm just curious if there's any other areas that you think we should be paying attention to or that you're paying attention to, particularly in the COVID-19 environment. And I guess somewhat related, you mentioned in the international markets, at least, right now, you're actually seeing increased usage, particularly in countries where their wireline networks aren't as strong. Do you think that, that will ultimately translate into incremental revenue? Are you starting to have those conversations now? Although on the opposite side of things, do you actually think that given some of the economic pressures that some of those international markets are going to be seeing, we could actually start to see the opposite where they actually start to pull back on some of their", "Investments? Just trying to get a better sense of what's winning out." ] }, { "name": "Tom Bartlett", "speech": [ "Yes. Colby, on that particular question, I think because of the lack of the wireline presence, I think the governments themselves are going to continue to put pressure on the carriers themselves to ensure that their connectivity continues. And as Jim said, we've been on to some tables with WEF and talking with some of our customers there. I mean, they're all essential and they're incredibly important in terms of ensuring that their customers are connected, particularly with this disease that is so isolationary. So yes, I think that, that demand is going to continue there. As Rod kind of walked through some of our growth rates, we're looking at kind of that 7% to 8% growth rate in Latin America and up in the high single-digit growth rate in Africa. So we're I believe that, that kind of the growth is actually going to continue. There will there be issues associated with collections and delays and things like that, internet? We haven't seen it, candidly.", "But to the extent that this continues, sure, that can always be something that we'll that we might see. But we're monitoring it closely. We have obviously, very close relationships with our customers. Our infrastructure is critical to their ability to be able to continue to meet the needs of their customers. So I think we'll be able to manage through that. But we're monitoring it, and we'll watch it very closely and work with our customers to be able to, for all of us, to be able to get through this pandemic. On your first question, could there be delays in organic growth, and we've mentioned some of the delays in the build-to-suit program, the collections issues that we're seeing in India, we've been managing and monitoring those for many years. And so we're working again with our customers. We have an incredible management team in place there who have really terrific relationships with our customers. And so we'll work with them. But ultimately, I think we're in a good position, again, kind of given the critical nature of our infrastructure and that being infrastructure that's really going to allow us all if you kind of get through this pandemic itself." ] }, { "name": "Rod Smith", "speech": [ "And then, Tom, if I can just add one additional point on the collections issue in India, Colby, that you raised. So when we think about our customer base globally, it is a very strong customer base, large multinational carriers, most of which are investment-grade carriers. When you look at our collections, and when you go through the press release and you see the increase in our accounts receivable, the vast majority of that increase comes from India. In India, I'll point to one customer in particular, which is BSNL, which is a government-owned entity, and that entity has a long history of paying their bills. So we do expect that when the government funding comes through and that could be impacted because of the COVID-19 situation in India, when that comes through, we do expect that those receivables will be paid through that customer. Again, our local teams in India that have a very close relationship with BSNL, they've been through this before. That carrier pays their bills from time to time. They do have to wait for government funding, however." ] }, { "name": "Colby Synesael", "speech": [ "Great, thank you." ] }, { "name": "Rod Smith", "speech": [ "Thanks, COVID. I think we have time for one more question. Operator," ] }, { "name": "Operator", "speech": [ "And we do have a question from the line of Brandon Nispel with KeyBanc Capital Markets. Please go ahead." ] }, { "name": "Brandon Nispel", "speech": [ "Great. Appreciate you guys squeezing me in. A couple of three questions. Can you guys quantify for us the backlog in terms of new lease applications that are signed but not on air in the first quarter on a year-over-year basis? And maybe some color on how that trajectory has maybe changed through April here after T-Mobile closed? Second, can you give us what the kicker was on the MLA from AT&T this quarter that may not repeat in the second quarter? And third, maybe just a bigger picture question on 5G. Have you seen enough from your customers for you to see what like a standard configuration that they're going to put up for 5G and what that might mean from an amendment standpoint in the U.S.?" ] }, { "name": "Tom Bartlett", "speech": [ "Yes. Sure, Brad. Let me take the kind of the 5G question, and then I'll ask Rod to kind of manage through the other myriad questions that you asked here. On the 5G side, I think all the carriers themselves, as I mentioned, have taken kind of their own unique approach to being able to deploy it. I mean, if you take a look at Verizon on the millimeter wave, they're in 34 cities, 17 NFL stadiums. On the sub-6, they're talking about using dynamic spectrum sharing, no stated time lines. AT&T in the millimeter, they deployed 5G in, I think, roughly 35 cities. They're adding new 5G cities this year. They have a sizable amount of millimeter-wave spectrum as well. And then in the sub-6, they're providing 5G in, I think, upwards of 100 markets using kind of low-band 5G. And T-Mobile have also taken a very different approach, largely leveraging their sub-6 spectrum now with Sprint with their 2.5 gig kind of sitting on top of a lot of their 600 megahertz spectrum, but they also have a sizable amount of millimeter-wave spectrum. So I think all of the carriers have taken very different approaches.", "All ultimately will be circling around kind of this 3-level layer cake, as I've talked about before, where it's at the very base level, kind of the sub-2 gigahertz level, good propagation, limited capacity, but really, it'd be able to get kind of nationwide coverage. The mid-band, which we've talked about, the CBRS and C band, which we think will ultimately be auctioned off this year, improved capacity, lower propagation. And then the millimeter wave, and they'll look at millimeter wave as being that spectrum that you use for dense urban and urban markets. So I think the carriers themselves, as they've always had, are going to leverage the spectrum that they have. They're going to try to put their hands on more spectrum, as they always have, to be able to come up with this kind of this 3-level approach to being able to deploy 5G. And as I said, it's I think it's on our doorstep. And we'll be seeing it over the next several years get built out. I think some of the forecasts are saying that by 2025 or 2026, 70-some-odd percent of the traffic will be 5G based. So I just think they're going to continue to look at various forms of spectrum, and it's the propagation characteristics are very different, as you well know, but they'll take advantage given the kind of geography that they're looking to support. And Rod on the other?" ] }, { "name": "Rod Smith", "speech": [ "Yes. Sure, Tom. So thanks for the question, Brandon, and I'll address the organic growth and what we expect kind of going forward. So if you look at our Q1 earnings, we came in for organic tenant billings growth, the total company was about 5.4%. U.S. was about 5.6%. International came in at 5.1%. If you look at our outlook for the full year, we're expecting total organic tenant billings growth to be about 5%. In the U.S., we expect it to be about 5%. And internationally, we also expect it to be about 5%. So certainly from that perspective, we do expect a kind of a deceleration in those growth rates throughout the quarter. So I do think you'll see that in the first quarter here, we'll post the highest organic tenant billings growth compared to the next three quarters for the year in order to come down to hit those full year organic tenant billings growth rates that we talked about. Of course, those organic tenant billings growth, I guess, I would point out, Brandon, that a big contributor to the organic tenant billing this year is what happened last year. So we still see a good level of activity coming in for the year.", "The timing of when that activity comes in is a little bit there's a timing issue between quarters, particularly when you think about some of our larger U.S. customers that are under MLA agreements, where the timing of their increases on a quarterly basis could certainly isn't smooth. So we end up, which is a good thing for us, with a bump in Q1, which gives us a full year benefit for a lot of those increases. But in the next few quarters, we will have a lower increase, but it doesn't that won't necessarily be able to translate into lower activity or lower demand for the site. It's really just the timing of the new business increases as per our large MLAs. So I think that's kind of, in a nutshell, without going too much further into individual customers. We do expect a deceleration. I think if you look at our organic tenant billings growth rates and our outlook, we're going to come in right around those levels. That's our best guess at this point. And again, when you see that deceleration, it's not because of a drop in activity levels. It's really mostly driven by the timing of some of the increases for our MLAs." ] }, { "name": "Tom Bartlett", "speech": [ "Great. Thank you, everybody, for being with us this morning. I know we went a little bit late, but I really do appreciate you hanging in there with us. And again, as we've all said, be safe, really, in this environment and keep your family safe, social distance and be well and look forward to catching up with you. Thanks again." ] }, { "name": "Operator", "speech": [ "[Operator Closing Remarks]." ] } ]
AMT
2023-02-23
[ { "description": "Senior Vice President, Investor Relations", "name": "Adam Smith", "position": "Executive" }, { "description": "President and Chief Executive Officer", "name": "Tom Bartlett", "position": "Executive" }, { "description": "Executive Vice President, Chief Financial Officer, and Treasurer", "name": "Rod Smith", "position": "Executive" }, { "description": "Morgan Stanley -- Analyst", "name": "Simon Flannery", "position": "Analyst" }, { "description": "Raymond James -- Analyst", "name": "Ric Prentiss", "position": "Analyst" }, { "description": "Citi -- Analyst", "name": "Michael Rollins", "position": "Analyst" }, { "description": "Bank of America Merrill Lynch -- Analyst", "name": "David Barden", "position": "Analyst" }, { "description": "JPMorgan Chase and Company -- Analyst", "name": "Richard Choe", "position": "Analyst" }, { "description": "Wells Fargo Securities -- Analyst", "name": "Eric Luebchow", "position": "Analyst" }, { "description": "UBS -- Analyst", "name": "Batya Levi", "position": "Analyst" }, { "description": "MoffettNathanson -- Analyst", "name": "Nick Del Deo", "position": "Analyst" } ]
[ { "name": "Operator", "speech": [ "Ladies and gentlemen, thank you for standing by. Welcome to the American Tower fourth quarter and full year 2022 earnings conference call. As a reminder, today's conference call is being recorded. [Operator instructions] I would now like to turn the call over to your host, Adam Smith, senior vice president of investor relations.", "Please go ahead, sir." ] }, { "name": "Adam Smith", "speech": [ "Good morning, and thank you for joining American Tower's fourth quarter and full year 2022 earnings conference call. We have posted a presentation, which we will refer to throughout our prepared remarks, under the Investor Relations tab of our website, www.americantower.com. On this morning's call, Tom Bartlett, our president and CEO, will provide an update on our strategy; and then Rod Smith, our executive vice president, CFO, and treasurer, will discuss our 2022 results and 2023 outlook. After these comments, we will open up the call for your questions.", "Before we begin, I'll remind you that our comments will contain forward-looking statements that involve a number of risks and uncertainties. Examples of these statements include our expectations regarding future growth, including our 2023 outlook, capital allocation, and future operating performance; our collections expectations associated with Vodafone Idea in India; and any other statements regarding matters that are not historical facts. You should be aware that certain factors may affect us in the future and could cause actual results to differ materially from those expressed in these forward-looking statements. Such factors include the risk factors set forth in this morning's earnings press release, those that will be set forth in our upcoming Form 10-K for the year ended December 31, 2022, and in other filings we make with the SEC.", "We urge you to consider these factors and remind you that we undertake no obligation to update the information contained in this call to reflect subsequent events or circumstances. With that, I'll turn the call over to Tom." ] }, { "name": "Tom Bartlett", "speech": [ "Thanks, Adam, and thanks to everyone for joining the call this morning. Five years ago, when we rolled out the Stand and Deliver strategy that would guide us over the following decade, we emphasized driving the business forward through four key pillars: enhancing operational efficiency, growing our assets and capabilities, investing in innovation and platform extensions, and augmenting industry leadership. Since that time, we've seen carriers across our global footprint invest over $300 billion in network assets and methodically deploy next-generation networks to support rapidly increasing data demand in their served markets. Our commitment to execute on each pillar of Stand and Deliver, not only aligns with our customers' needs in this context, but it also enhances American Tower's position to serve as a strategic provider of critical infrastructure for the networks of the future.", "So before highlighting the key strategic objectives, we'll focus on in 2023 and over the next several years, I'd like to spend a moment reviewing achievements from the past five years that have driven our success to date. On the operational front, we've signed comprehensive master lease agreements with T-Mobile, AT&T, Dish, and most recently, Verizon in the United States. These agreements represent a commitment to a mutually beneficial, predictable growth path and strategic alignment between American Tower and its customers, while also demonstrating the value and criticality of our nationwide 43,000-plus site portfolio to support 4G, 5G, and future network generations. Such agreements also bring with them efficiency innovations designed to deliver simplicity in leasing processes and accelerated time to market for the carriers.", "To extend on these benefits, we've invested in technologies to build a holistic standardized data set, mapping the vast majority of our U.S. assets, which can be leveraged to eventually bring application cycle times down to a matter of hours. We believe this type of capability will be a particularly attractive customer value proposition in the context of a 5G densification cycle and one we believe can be scaled across our global footprint over time. Our focus on operational efficiency has extended throughout our international business as well.", "Notably, since the beginning of 2018, we've invested nearly $350 million, primarily in Africa, on improving site level performance through our power as a service program. This includes the installation of lithium-ion batteries and solar arrays for primary and backup power delivery, which has resulted in a sizable reduction in average fuel consumption per site across our African portfolio and has extended the replacement cycles of critical power sources all while providing over a 99.9% average uptime for our customers' networks. At the same time, we've established a centralized procurement organization that aims to drive down material costs. And we've leveraged shared best practices and our scale as a multi-national operator to strengthen our global vendor relationships.", "By streamlining these critical operational functions, we've been able to continue to drive solid investment returns on our capital deployments and efficiently meet the infrastructure needs of our customers, all against a challenging backdrop of price volatility and supply chain disruptions. In fact, since the start of 2018, we've added nearly 26,000 sites to our international portfolio through new builds, more than two times the volume of the previous five-year period. Today, these sites are contributing approximately $250 million in tower cash flow and an NOI yield of approximately 21%, demonstrating meaningful expansion from the already attractive low double-digit day one yields we typically see on these new build opportunities. On the M&A front, we've executed a number of transactions that have been transformational in terms of delivering additional critical scale in existing and new markets ahead of major network investment cycle, the benefits of which we are seeing in our results and forward-looking expectations today.", "These include InSite in the United States, the in portfolio in Africa as well as Telxius in Europe and Latin America, which augmented our scale in Germany and provided entry to Spain in a leadership position just as 5G investments were beginning to ramp up on the continent. More recently, through our efforts to selectively expand our platform and position American Tower as a market leader in the next generation of network architecture development, we entered the data center space through the acquisition of CoreSite. CoreSite delivers an interconnection and cloud on-ramp rich platform as well as exposure to a resilient high-demand communications infrastructure business, which we believe will deliver strong performance as demonstrated by a record signed new business in 2022 and provide accretive returns on a stand-alone basis over time. As importantly, we believe the combination of CoreSite and American Towers platform of distributed tower real estate positions us to enhance the value of our existing assets as the edge proliferates.", "Finally, I'm particularly proud of the steps we've made toward augmenting our leadership in several areas. Organizationally, we've made ESG core to our operations through initiatives such as our commitment to science-based targets, localized DE&I initiatives designed to facilitate an inclusive organization for our employees and stakeholders and through the growth of our digital communities program, which has now reached more than 400 communities and serves more than 335,000 people across 15 countries. As I mentioned on this call last year, we're also a member of the Edison Alliance: 1 Billion Lives Challenge, which provides us the opportunity to contribute to the development of affordable and accessible digital healthcare, finance, and education solutions for communities in need. Over the past year, we've developed partnerships with healthcare providers that have resulted in the launch of several telehealth locations that provide primary, preventative, and specialty teleconsultation services in underserved areas.", "While this is just one positive first step, we believe that we've achieved over the last year, clearly demonstrates the value we can create and the communities we serve through a commitment to multi-stakeholder collaboration and partnerships. And we hope more organizations will join us in efforts like these over the coming years, which brings us to today and our focus for 2023 and beyond. We believe we're poised to build on and accelerate the successes of Stand and Deliver that we've achieved thus far. As I mentioned in the opening, our teams are focused on key strategic objectives that will continue to guide our operations and management teams in American Tower over the next several years.", "The first of these is to leverage our premier platform of assets to drive strong recurring growth, both organically and through our disciplined capital allocation framework and our investment-grade balance sheet, as we seek to capture new business opportunities against the backdrop of secular demand trends that remain as strong as ever. We refer to this internally as scale the core. To this end, we expect an acceleration in organic growth in 2023, representing an improvement of around 100 basis points relative to our prior five-year average. Beginning with our U.S.", "and Canada segment, the benefits of our comprehensive MLAs and ongoing 5G deployments are driving an expectation for organic tenant billings growth of approximately 5% in 2023, including approximately $220 million in year-over-year co-location and amendment growth, which would be a record year for American Tower by a significant margin. We also see a path to solid organic growth in our international segment, led by regions like Europe and Africa, where we're capturing activity from multiple network upgrade and densification cycles and are realizing the benefits of CPI-linked escalators on the vast majority of our leases. This will be complemented by what we expect to be yet another year of solid new build activity, primarily in international markets, where the current 4G and 5G network rollouts continue to drive strong demand for new infrastructure. And in our data centers business, where we're entering 2023 with record backlog, we'll continue to focus on driving increasing growth, both on an organic basis and through high-yield development opportunities that are ongoing today.", "Operationally, our teams are working to continue to build on the many efficiency and growth initiatives we've developed in recent years, which hits on another key objective within the organization: being the most trusted strategic partner for our customers. The most concrete example of our efforts on this front, probably the long-term multi-market agreement we recently announced with Airtel in Africa, which includes a meaningful new build pipeline, a joint commitment to build in accordance with new low-carbon emissions guidelines, which we're calling green sights and a partnership framework to enhance the impacts of both companies' digital communities and kiosks programs on the continent. This agreement exemplifies the benefits of our scale, best-in-class operations, and ability to deliver innovative solutions, while advancing both American Tower and our customers' long-term sustainability and fossil fuel consumption reduction targets. Going forward, we'll continue to work on building alignments with our global customers to leverage our scale to execute on opportunities to drive growth and maximize shareholder returns in a sustainable and responsible way.", "This includes an effort to accelerate our platform extensions. As I mentioned previously, demand trends in the data center space remain robust driven by digital platforms, leveraging distributed computing, and by the early stages of a sustained enterprise migration from on-prem to hybrid IT and multi-cloud architectures. As a result, we see a long runway of opportunity to drive strong returns by investing in the expansion of our existing CoreSite campuses and leveraging the open cloud exchange to extend their interconnection-rich ecosystem. At the same time, we're working to position our combined platforms for outsized success as demand for the workloads and compute functions are drawn closer to the end users at the mobile edge.", "And as we evaluate opportunities to accelerate growth through platform extensions going forward, we'll continue to focus on how we can leverage our core competencies in real estate, power provision, and connectivity to drive incremental value to the ecosystem while delivering increasing shareholder returns. Meanwhile, as a management team, we're laser-focused on positioning our global teams for the future, while growing and maintaining a healthy cultural foundation. These together represent perhaps our most critical key objectives as our world-class team members are the most valuable asset in American Tower. As we position the company to be a market leader in an evolving landscape, we recognize that developing, empowering and retaining diverse and talented team members is fundamental to our success as a company.", "Through this lens, we've renewed our focus on management development and institute region-specific programs designed to support a balanced life for our teams among many other initiatives. We also appreciate that facilitating a culture that is inclusive and equitable is not only shown to drive better decision-making in business outcomes, but more importantly, it's the right thing to do for the people who dedicate so much of their time to growing this business and delivering value to our customers and shareholders. In summary, the long-term secular demand trends underpinning growth in our industry remain resilient. We believe we're optimally positioned to capitalize on the successes of our Stand and Deliver strategy to date.", "And we're more energized than ever as we look to execute on our initiatives in 2023 and deliver strong, sustainable returns for many years to come. With that, I'll turn the call over to Rod to discuss our 2022 results and expectations for 2023. Rod?" ] }, { "name": "Rod Smith", "speech": [ "Thanks Tom. Good morning and thank you for joining today's call. Before I dive into our 2022 results and expectations for 2023, I would like to highlight a few key accomplishments from the past year and provide an update on several developments in India since our last earnings call. First, demand and operational performance across our global portfolio remain as solid as ever.", "We closed the year on a positive note with colocation and amendment tenant billings growth contributions of over 4% in Q4. In particular, our U.S. and Canada property segment delivered its strongest quarter since Q1 of 2020, and we have a clear line of sight to continued acceleration into 2023, which I will discuss shortly. Organic growth was complemented by the construction of nearly 7,000 sites, an American Tower record, including over 2,300 sites built in Q4, our highest level over the past eight quarters with an average day one NOI yield of over 12%.", "Moreover, during its first full year of ownership by American Tower, CoreSite delivered record new business, selling nearly double the number of megawatts compared to the previous trailing two-year average, demonstrating the value of the company's interconnection and cloud on-ramp rich ecosystem. This robust growth was driven by increased demand from high-quality new logos and expansions from existing customers, driven by secular tailwinds of digital transformation and the demand for hybrid IT solutions. Furthermore, since the announcement of CoreSite acquisition, we successfully executed on our permanent financing plan at attractive terms, including through the issuance of common equity and senior notes, as well as our strategic partnership with Stonepeak. These financing activities reduced our leverage from 6.8 times at the end of 2021 to 5.4 times at the end of 2022 and moved us closer to our target range of three times to five times.", "Next, I'd like to take a moment to cover the latest developments in India. As anticipated, Vodafone Idea or VIL continued making partial payments in Q4 of 2022, consistent with our outlook, resulting in total revenue reserves of approximately $38 million for the quarter and around $87 million for the year. Recently, we were pleased to see the completion of the Indian government's conversion of the adjusted gross revenue interest balances to equity in VIL. We view this as a reaffirmation of the government's commitment to support a three-player private carrier telecommunications market and a critical first step toward the possibility of more stabilized collections from VIL.", "However, although VIL had committed to pay their billings in full in 2023 and make payments for outstanding balances from prior years in early 2023, they have communicated that they would continue to make partial payments. For that reason, we believe it is prudent to include revenue reserves against their annual billings and other contracted obligations in our 2023 outlook, which we've assumed at $75 million. We will, however, remain focused on collecting what we are contractually owed in full over the course of the year. In the meantime, we have worked to incrementally better position American Tower and our receivables balance, while also demonstrating a level of support for VIL and India's wireless market.", "This includes the expectation to convert approximately $200 million in existing VIL receivables into optionally convertible debentures pending Vodafone Idea shareholder approval. Upon closing this agreement, we would have elevated the seniority of our pre-existing receivables balance and established an additional level of liquid collateral at American Tower's option. And finally, as we remain focused on stabilizing our India business, collecting our outstanding and future receivables in full and assessing the positioning of our global portfolio, we are currently exploring various strategic options, including the potential sale of an equity stake in our India business. As always, any decision taken will include careful consideration of the growth opportunity and risk profile in the market going forward, valuation and the optimal portfolio and capital structure mix for American Tower and its stakeholders.", "We will certainly keep our investors informed of any developments as we move forward. With that, let's dive into the details of our full year 2022 results. Turning to Slide 6. Full year consolidated property revenue growth was nearly 15% and nearly 18% on an FX-neutral basis, which included a contribution of approximately 11% of growth from Telxius and CoreSite and negative impacts of approximately 2% and 1% from Sprint churn and revenue reserves taken associated with VIL in 2022, respectively.", "Organic tenant billings growth for the full year came in at 3.2%, in line with expectations, complemented by solid growth from new builds with actual volumes coming in at the upper end of our prior outlook range for the year. In the United States and Canada, property revenue growth was nearly 2% with organic tenant billings growth of just over 1%, in line with expectations, including approximately $150 million or 3.4% from colocations and amendments. Escalators added another 3%, consistent with historical trends. This growth was partially offset by churn of around 5%, which consisted of roughly 1% in normal course churn with the balance being driven by Sprint.", "Our international property revenue grew by nearly 13%. International organic tenant billings growth was 6.6%, led by Europe at 8.4% and followed by Latin America at 7.9%, Africa at 7.7%, and APAC at 2.6%. Overall, colocation and amendment growth for the full year was around 5%, while 6% came from escalators, partially offset by just over 4.5% of churn, the result of decommissioning agreements in Latin America, carrier consolidation in Africa and customer-specific churn in APAC. Finally, our data center segment contributed over $765 million to our total property revenue in 2022, including a record year of new business from CoreSite as I previously mentioned.", "Moving on, adjusted EBITDA grew around 11% to over $6.6 billion or around 13% on an FX-neutral basis for the year. Growth was supported by solid contributions from Telxius and CoreSite and strong flow-through of top-line growth achieved through effective cost management. On a consolidated basis, adjusted EBITDA margins were down around 190 basis points as compared to 2021, primarily due to the impacts of the VIL reserves and Sprint churn in the US, higher pass-through revenue due to rising fuel costs and the lower margin profile of newly acquired assets, which we believe are well-positioned to drive meaningful margin expansion over time. Moving to the right side of the slide, attributable AFFO and attributable AFFO per share grew by approximately 5.6% and 3.5%, respectively, including over 11% growth on a per-share basis in Q4.", "For the year, both metrics included over 2% in headwinds associated with FX. Attributable AFFO per share of $9.76 exceeded the original 2022 outlook midpoint laid out a year ago by $0.06, despite absorbing the negative impacts of incremental VIL reserves, rate-driven interest costs, and FX relative to our initial assumptions. Now before I discuss the details of our outlook for 2023, I will start by summarizing a few key highlights and assumptions. First, as we've previously communicated, we expect a meaningful step-up in U.S.", "and Canada organic tenant billings growth, driven by an acceleration in new business backstopped by the comprehensive MLAs we have signed over the last few years together with the sequential improvement in contracted Sprint churn. Internationally, we expect a strong year of organic tenant billings growth across most of our regions driven by continued strength in organic leasing trends, along with contributions from CPI-based escalators, particularly in Europe and Africa. As we've communicated over the past couple of quarters, growth in Latin America will be moderated by churn headwinds associated with a continuation of Telefonica churn in Mexico and Oi churn in Brazil, where we'll see some staggered impacts over the next several years. Second, and as I mentioned earlier, we have factored into our guide an expectation for a continuation in VIL collections volatility, resulting in an assumption of $75 million in revenue reserves for the year.", "Third, given the unprecedented rise in interest rates over the course of 2022, which saw the one-month LIBOR increased by more than 400 basis points and 10-year treasuries increased by around 250 basis points from the beginning to the end of the year, we expect 2023 to have one-time outsized negative growth headwinds associated with financing costs. Key components driving this assumption include elevated costs on our floating rate debt and to a lesser extent, the refinancing of our 2023 senior note maturities as well as the full year impacts of our 2022 equity-related initiatives, including our common equity issuance and the incremental minority interest and preferred distributions associated with our partnership with Stonepeak. Taken together, we have assumed a roughly 8% headwind to attributable AFFO per share growth associated with financing costs in 2023. Next, our initial outlook reflects estimated negative translational FX impacts of approximately $150 million for property revenue, $64 million for adjusted EBITDA, and $47 million for attributable AFFO as compared to 2022.", "And finally, looking beyond the challenges I mentioned associated with interest rates, VIL reserves, and FX, our core business continues to demonstrate strong performance and resiliency, representing nearly double-digit year-over-year growth at the attributable AFFO level. While this performance is fueled by the solid organic leasing trends we're seeing across our global portfolio, it's further amplified by exceptional conversion rates through AFFO, achieved through a keen focus on cost management across our business. With that, let's dive into the numbers. Moving on to the details of Slide 7.", "At the midpoint of our outlook, we expect total property revenues of nearly $10.8 billion, representing growth of approximately 3% or approximately 4% absent the incremental reserves assumed for VIL in 2023. Our guide includes expected cash revenue growth of around $230 million in the U.S. and Canada, and $245 million of FX neutral growth in our international regions, excluding the 2023 VIL reserves of $75 million. We also expect data centers to contribute roughly $55 million of growth in cash revenue to the property segment in 2023.", "Lastly, as I mentioned in my earlier remarks, we anticipate a modest FX headwind of just under 1.5% to consolidated growth. Turning to Slide 8. We expect organic growth to contribute meaningfully to our property revenue growth assumptions. Starting with the U.S.", "and Canada, we anticipate organic tenant billings growth of approximately 5% or greater than 6% excluding Sprint churn. This expectation includes record levels of year-over-year co-location and amendment growth of around $220 million, a nearly 50% increase over the levels achieved in 2022 and a 60% increase as compared to the trailing three-year average. Of the $220 million, over 90% is locked in through MLA-driven use right fee commencements and carryover growth. On the churn side of the equation, after incurring the largest impact of Sprint churn last year, we expect churn of around 3% in 2023, including an approximate 1% impact associated with Sprint, which would represent a year-over-year improvement of over 200 basis points in the segment.", "Moving to Latin America. We expect organic tenant billings growth of greater than 2% for the year driven by relatively consistent co-location and amendment activity and continued solid contributions from CPI-based escalators of approximately 8%. This escalator rate does represent a step down from 2022 levels, as we saw inflation in markets like Brazil moderate in 2022 as compared to 2021. As we've previously highlighted, higher churn of around 8% is partially offsetting gross growth due to the expected continuation of Telefonica churn in Mexico and the early part of what we expect to be staggered Oi churn in Brazil.", "Similar to last year, we do expect to receive some settlement payments from Telefonica over the course of the year, which will be captured outside of the organic tenant billings growth metric. We've assumed approximately $50 million in 2023 payments as compared to the over $80 million we received from Telefonica Mexico and Nextel Brazil in 2022. Turning to Asia Pacific. We are guiding to approximately 4% organic tenant billings growth in 2023, including churn of around 4%, which is around 70 basis points lower than the 2022 churn rate.", "We expect co-location and amendment growth contributions to ramp up compared to 2022, coming in around 6%, fueled by the rollout of 5G networks. However, it is important to note that the reserves we've assumed for VIL in our guide reside outside of this metric, consistent with past practices. Turning to Europe. 2023 organic tenant billings growth is expected to be 7% to 8%, which is slightly lower than 2022 due to the mathematical benefits realized last year, given Telxius was only in the prior year base for a partial year.", "However, this does suggest a solid acceleration off our Q4 2022 organic growth rate of around 6%, which represents a more normalized comparison. On the co-location and amendment front, we anticipate 2% to 3% growth, while growth from escalators stand at roughly 6%, reflecting the benefits of CPI-linked escalators across the majority of our European footprint. Churn is expected to decline to around 1%, reaping the benefits of the lower churn profile of our recently acquired Telxius portfolio. Finally, in Africa, we expect a solid acceleration off of 2022, with expected organic tenant billings growth of approximately 9%.", "This includes co-location and amendment contributions of around 6%, along with escalators of around 10% and expected 450 basis point increase from 2022 levels. This will be partially offset by an expectation of elevated churn of greater than 6%, as carrier consolidation continues to work its way through the financial metrics. Moving on to Slide 9. At the midpoint of our outlook, we expect adjusted EBITDA growth of approximately 4% and around 5%, absent the incremental reserves assumed for VIL in 2023, while absorbing approximately 1% in FX headwinds.", "We expect this growth to be achieved through solid cash conversion rates of 85% to 90%, the result of prudent cost controls across the business, and the expectations for another strong year from our U.S. services business. Turning to Slide 10. We expect attributable AFFO per share to decrease by $0.16 on a reported basis, while remaining flat year-over-year absent the impacts of the 2023 VIL revenue reserves.", "As mentioned, we expect growth to be meaningfully impacted by financing costs, which include a rate-driven increase to cash interest expense along with the incremental full year impact of minority interest and preferred distributions associated with our U.S. data center business. Together with the common equity share issuance in 2022, financing costs are expected to provide a significant one-time growth headwinds of approximately 8% in 2023. As I mentioned earlier, absent the impact of financing costs, FX and the 2023 VIL reserves, our business is demonstrating solid growth contributions of around 9%.", "Moving on to Slide 11, I'll review our capital plans for 2023 and our balance sheet progress and priorities for the upcoming year. In 2023, we will continue to deliver returns to our shareholders through the growth of our dividend. And subject to Board approval, we expect to distribute approximately $3 billion, representing an approximately 10% year-on-year growth rate on a per-share basis. In addition, we expect to deploy around $1.7 billion in capex, of which 90% will be discretionary.", "This will largely be spent continuing the success of our new build program internationally, which assumes the construction of around 4,000 sites at the midpoint. We also expect data center capital to increase modestly as we seek to replenish the record capacity sold in 2022 and maintain appropriate levels of sellable capacity. Moving to the right side of the slide. As you can see, we made tremendous progress toward strengthening our balance sheet over the course of 2022, putting us ahead of the deleveraging path we committed to with the rating agencies, which actually afforded us the flexibility to repurchase a modest number of our shares in Q4.", "Throughout 2023, we will continue to be guided by our long-standing financial policies as we execute on our financing plans. This includes the refinancing of maturing debt, while leveraging our strong liquidity position as needed to remain opportunistic as we access the capital markets. Finally, we remain committed to our investment-grade credit rating. And our priorities over the course of 2023 and into 2024 remain on deleveraging our balance sheet back down to the three to five times range.", "Consistent with our recent comments, at this time, we do not see any material M&A in our pipeline that would alter these areas of focus. Turning to Slide 12. And in summary, we delivered strong results in 2022, demonstrating the resiliency of our business model in the face of various macro-related and customer-specific challenges. Our global portfolio of assets and operational capabilities continue to prove critical in meeting the growing demands of our customers and the customers they serve.", "We saw record new build volumes internationally and record leasing within our CoreSite business and experienced a steady acceleration in colocation and amendment growth as we exited 2022, which we expect to continue into 2023. As we look ahead, we expect to further build on the successes of the recent years and leverage our portfolio to drive strong recurring growth on the back of consistent secular technology trends for many years to come. With that, operator, we can open up the line for questions." ] } ]
[ { "name": "Operator", "speech": [ "OK. [Operator instructions] Your first question comes from the line of Simon Flannery from Morgan Stanley. Please go ahead." ] }, { "name": "Simon Flannery", "speech": [ "Great. Thank you very much. Good morning. Tom, you talked about scaling the core, and Rod just talked about no material M&A in the pipeline, thanks for that.", "Just give us a little bit more color, if you could, on how you see the portfolio today. And is this the mix of assets that you want? You've obviously talked about potentially monetizing some of India. But any kind of areas where you feel like you're overexposed or underexposed? And how long is this sort of approach of not doing large deals likely to last? And then you talked about the strong results in CoreSite. You did buy some land there.", "I've noticed your future development pipeline potential goes up quite significantly, probably as a result of that. Just give us some color as how you think about beyond just incremental capacity, something larger, given the opportunities you see there? Thanks." ] }, { "name": "Tom Bartlett", "speech": [ "Yeah. Sure, Simon. You got a lot going on in that question. But let me try to peel it back and then remind me if I left anything out.", "With regards to scale of the core, it really comes down to really three pieces. One is to just do what we do every day, that's servicing our customers and driving that organic growth. And we've really been very focused on that in the U.S. as you saw our expectations for 2023 and beyond, because those large-scale relationships that we put in place with our -- the critical carriers in the United States are long-term in nature.", "And so we now have a very predictable growth path in the US. And the U.S. is the foundation really of our entire business. And what I've always said is that we enjoy the benefits of diversification, because there are going to be some markets that are going to grow significantly, others that are going to grow less so simply because the methodology that all of our customers use for build are different.", "And they all form those different sign waves as we've talked about in the past. And we can -- if you can layer on all those sign paths, you're able to get some predictable rates of growth. And so we're excited about coming out of 2022 strongly. We expect higher rates of growth in 2023 and in particular, within the United States.", "From a total portfolio perspective, we're constantly looking at where we can maximize value. And we are in 26 countries today, and there could be certain markets there where it may just make sense for us from a number of different perspectives for us to peel back some of those assets. Don't have anything in mind as we speak. We're constantly evaluating it.", "That's kind of what we do. And with regards to India, India is a market where they're going to have a higher population than China, if not now, very soon. They have huge penetration, huge data usage. And it's a market that we would like to be able to continue to keep our toe in because we continue to believe that there is significant growth there.", "To the extent that we can bring in a third-party player to monetize the particular part of the asset and reallocate some of that capital in some other parts of the market, we'll look at that. It's purely opportunistic, and we look at every kind of available opportunity as we speak. With regards to our data center business, of course, I had a terrific 2022 record sales in 2022. And they're replenishing capacity where they needed.", "We've added land in Denver and New Jersey, where we needed some additional runway. But we've got a good amount of capacity in the hopper. We're building out another 30 megawatts of capacity under construction. We actually got one-third of that already pre-leased, and we have 224 megawatts for future development.", "So there's an incredible demand, as you well know, as we've heard from other competitors in the market for interconnection hubs. And that's what I really refer to as core side. It's not a co-location facility. It's an interconnection hub creating opportunities for new logos.", "We added over hundred logos last year. And we're really excited about the opportunity and the demand that we see in the market for activity relative to our data center business in the United States. Did I miss anything, Simon?" ] }, { "name": "Simon Flannery", "speech": [ "Well, I guess, just in terms of the scale M&A, you've obviously done a lot of deals over the years. If you get back down into that three times to five times leverage, is that when we think about you're potentially looking at larger deals again?" ] }, { "name": "Tom Bartlett", "speech": [ "Interesting, Simon. We have a lot of different ways of being able to secure M&A. We demonstrated that really with what we've done in Europe, with our capital, even in the United States with Stonepeak in terms of private capital. So I think the capital is there.", "For us, yeah, it is a function that our objective is to delever. I really do want to get down to that five times kind of leverage. And so that remains a top priority for the business. But on top of that, we want to continue to feed our build program.", "We had record build last year. We have a strong build program this year. With regards to the M&A, there's just still a significant difference between the valuations, the bid and the ask. And there's nothing out there that's compelling as we see it today.", "And so our focus continues to be on, as I said, what we do every day, driving organic growth, driving efficiency. You see we expect margin improvement in 2023 versus 2022 and supporting our build program. Our customers are very active around the world from a build perspective. And I think in the last several years, we brought in like -- we built like 25,000 sites.", "And so there's a significant opportunity there, and the returns are incredibly compelling on that new build program. So as I said, there's just nothing at this point in time that we see out there that's interesting really from an M&A perspective. And we continue to just keep our head down in terms of funding our build program and delevering our business." ] }, { "name": "Simon Flannery", "speech": [ "Great. Thanks a lot." ] }, { "name": "Tom Bartlett", "speech": [ "You bet." ] }, { "name": "Operator", "speech": [ "Your next question comes from the line of Ric Prentiss from Raymond James. Please go ahead." ] }, { "name": "Ric Prentiss", "speech": [ "Thanks, Good morning, everyone." ] }, { "name": "Tom Bartlett", "speech": [ "Hey Rick." ] }, { "name": "Ric Prentiss", "speech": [ "A couple of questions. I'll give it to you part by part. First, as we think about the guidance, and thanks for all the color there, how should we think about in US, Canada the pacing throughout the year? Is it going to ramp through the year? Does it start high and come down? Is it balanced? But opening question everybody is trying to figure out what is happening with the pacing in 2023 in U.S., Canada?" ] }, { "name": "Tom Bartlett", "speech": [ "Actually, Rick, it's going to be very consistent, very linear throughout the year. And so largely, it's a function of the relationships and the agreements that we have in place. But we would expect it to be very consistent in the U.S. throughout the year." ] }, { "name": "Ric Prentiss", "speech": [ "OK. And the related question to extrapolate from that is last year at this time, you laid out some thoughts on longer-term leasing activity in the US, Canada 2023 through 2027 being above 5% and then extraordinarily above -- equal or above 6%. How are you feeling about that exiting 2023, looking at 2024, 2025, 2026, 2027 as you gave us a year ago?" ] }, { "name": "Tom Bartlett", "speech": [ "Yeah. Exactly the same. I mean, it's -- as we have said, as we have predicted, as we have thought, and again, it comes down to largely the relationships that we have with our customers. We see strong demand coming out.", "I still think we're in the early innings really with 5G. Our customers on average are probably on about half of our sites. So there is a significant amount of opportunity there. But it also comes down to the types of relationships and the arrangements that we have with regards to our MLAs.", "So we are underscoring really what we had said a year ago relative to growth coming out of 2023 through 2027." ] }, { "name": "Ric Prentiss", "speech": [ "OK. And the last one for me, taking that to the bottom line, attributable AFFO per share last year at this time mentioned that 21 to 27 maybe above -- at or above 10%. We've had a couple of tough years here with Sprint churn. 2023, we've got financing costs, still some Indian reserves.", "How do we think throw away 2021 to 2027 and just say, hey, as we look at 2023 as a new base point, how are you feeling about that ability to grow attributable FFO per share, dividend per share from this point onwards?" ] }, { "name": "Tom Bartlett", "speech": [ "Well, I mean, you've got a couple of questions in there. We're not going to -- we're not focused on rolling out a long-term guide at this point, as you would expect. But there have been some significant macro environment changes that happened around the world that we use to underwrite kind of that double-digit expectation, which I think is what you're referring to. But I'm not letting the foot off the gas in the business, OK? We're not changing anything at this point in time.", "Our core growth, as Rod just walked through, really remains really, really strong. And we don't have any expectations for that kind of growth diminishing. We see kind of 4G, 5G being rolled out across all of our footprints, which really gives us a lot of comfort in terms of being able to suggest that, that growth is going to continue. Now, also having the types of relationships that we do with our customers in the United States helps underpin a lot of that growth.", "The interest rates, Rod walked through the impact of rates. It's kind of a reset in 2023. I believe it to be kind of more of a one-off, if you will, in 2023. So we remain really bullish on going forward.", "As I said, I'm not going to talk about long-term guide, but I'm not letting the gas -- letting the foot off the gas at all within the business. With regards to -- of our dividend program, as you all know, you're a REIT expert. Our policy is just followed our REIT TI. And it's been very consistent.", "We've been able to enjoy double-digit rates of growth on our dividend for the better part of the last 10 years actually, which has been very supportive. And we continue to be -- we continue to feel that our dividend is an important part of our total shareholder return. So we're looking at 10% dividend, as Rod talked about this year. It's difficult really to predict what that might be.", "It depends upon what we bring into the REIT, what's not in the REIT, obviously, what kind of M&A exists out there. It could drop a little bit to high single digits. But again, we continue to expect it to grow significantly. And as I said, it's an important piece of our overall total shareholder return." ] }, { "name": "Ric Prentiss", "speech": [ "Great. Thank you so much. Everybody stay well." ] }, { "name": "Tom Bartlett", "speech": [ "You bet." ] }, { "name": "Operator", "speech": [ "Your next question comes from the line of Michael Rollins from Citi. Please go ahead." ] }, { "name": "Michael Rollins", "speech": [ "Thanks and good morning. Just a couple of follow-ups. So first, and maybe this is a slightly different question on the U.S. leasing environment.", "But you outlined the percentage of revenue tied to comprehensive deals. I'm just curious if you can unpack where the flex could be in U.S. performance, both in 2023 and maybe going forward as you think about the organic leasing growth potential of the U.S. business.", "And then thinking a little bit more about the percent of revenue that you have tied to comprehensive deals. You shared a lot over the last couple of years on how the U.S. has been shaping up on that front. Can you share with us how other regions fit in terms of the percent of revenue tied to comprehensive deals? And as you work with your customers, are there aspirations that you have in different markets to get that to certain levels over time? Thanks." ] }, { "name": "Rod Smith", "speech": [ "Hey, Michael. Good morning. This is Rod. I'll start here, and Tom can certainly join in.", "So -- but in the US, the leasing activity is really strong. And our revenue in the U.S. is underpinned through what we refer to as the holistic agreements, which I think everyone is very familiar with. But we've seen contributions from colocations and amendments rise from about $150 million in 2022, up to $220 million in 2023.", "That drives about a 5% contribution to our organic tenant billings growth. And as Tom mentioned in his previous answer, we see about 90% of that locked in for 2023. And the long-term guidance that Rick asked about, we are continuing to target equal to or greater than 5% between 2023 out to 2027. And a fair amount of that activity, both the underlying revenue and the revenue growth, is locked in as part of the holistic deals.", "Now of course, as we move beyond 2023, that 90% will come down maybe to about two-thirds or so by the time you get in the outer years. And that's just a function of getting closer to the end of some of the agreements, and chances are some agreements will be rewritten sort of along the way. So we feel really good about the visibility we have into the U.S. leasing market and the strength that we're seeing in the U.S.", "market, particularly because of our assets and the way that we drive these agreements. Now your question kind of refers to flex. And I think what you mean there is where is the potential upside? And of course, there is a potential upside to the extent that there's faster uptake on 5G utilization in the US. And if that requires carriers to densify the networks a little bit quicker, and we see a faster conversion for colocations and fewer amendments going forward, that could certainly provide some upside.", "And then depending on just the build of some of the carriers. And certainly, Dish comes to mind as they build a greenfield network to the extent that they go beyond their minimum commitments with us, that could certainly be some upside as well. So I would really kind of watch -- certainly watch Dish. I would watch the other carriers and see the 5G utilization.", "And some of these new applications come out for 5G, we'll see what kind of bandwidth constraints that puts on networks and when network densification may end up happening. But it's a pretty exciting time in the U.S. market, particularly when you look at the 5G networks and potential applications coming down the pike. So I think that kind of covers off the points around the U.S.", "leasing. When you think about our international business, we don't have holistic deals in the same way in a material fashion outside the US. They are much more traditional green, more of an a la carte, kind of pay as you go around the globe. So that's what I would say about that point, Michael." ] }, { "name": "Michael Rollins", "speech": [ "Thanks very much." ] }, { "name": "Rod Smith", "speech": [ "You're welcome." ] }, { "name": "Operator", "speech": [ "Your next question comes from the line of David Barden from Bank of America. Please go ahead." ] }, { "name": "David Barden", "speech": [ "Hey, guys. Thanks very much for taking the questions. So I guess the first one would be, Tom, thank you for your commentary around kind of the commitment to deleveraging. And I think you said 'there's nothing compelling out there,' significant differences between bid and ask on the buy side of that equation.", "So to the extent that, that is true, is that what's informing your openness now to looking at an equity sale of the India market? Meaning that if things are too expensive to buy, maybe now is the right time to sell. And is that exclusive to the India market, or as you look across the portfolio, could you make the same argument that maybe it's an interesting time to monetize Latin America or other pieces of that? Part two of that would be is now the right time to think about this given the situation with VIL, or should we wait until that situation maybe resolve itself and then we think about an equity sale? And then, Rod, if I could -- so you went out of your way to mention that the financing impact on the AFFO -- attributable AFFO per your calculation is going to be about 8% for the year. Absent that and absent the provisions for VIL, we might be seeing an underlying 8% to 9% AFFO growth per share. Is that our takeaway for how we think about 2024, that obviously, other things aside and the fundamentals across the world that our starting point for thinking about 2024 is an 8% to 9% FFO growth business.", "Thanks." ] }, { "name": "Tom Bartlett", "speech": [ "OK. Dave, you got a bunch of stuff packed in there. Let me start to -- no. Relative to the M&A in India, there's not a direct connect between the two.", "They are somewhat mutually exclusive types of decisions. And it really becomes, again, part of a broader portfolio kind of conversation relative to what we think may make sense for the portfolio in terms of driving further value over time. India is really just kind of an opportunistic at this point in time. And really, it's -- we're in kind of the exploration mode at this point.", "A number of things going on there. And to the extent that there is, again, a value creation opportunity for us, we can continue to enjoy the growth of the market and utilize that capital in other parts of the world, including using it to further de-lever, perhaps more -- even more quickly than we would have otherwise thought is not a bad thing. So there -- I understand the kind of the connection that you're drawing there, but I'm not really looking them in that way. And I really do believe the paths are separate." ] }, { "name": "Rod Smith", "speech": [ "Good morning David I'll take the next one here on the AFFO per share growth. So you can see in the chart that we laid out, we have FFO per share going from $9.76 to really down to $9.60 on an attributable basis. As we mentioned, the financing costs, you can see on the chart there, the $315 million represents about $0.68 of that or about an 8% headwind. The 405 is what's coming from our regional businesses, including our corporate cost centers.", "And that 405 represents about a 9% growth. So that's kind of a core growth rate that we're generating from our operating. The FX headwind is about 1%. And then VIL represents about 2% headwind.", "And when you put it all together, you get to a negative 2% growth. But to the extent that the financing impacts here really are one-time, which we expect, we expect interest to kind of peak this year and then -- in the middle of this year and maybe trend down toward next year, assuming they stay flat or even decline and become a tailwind next year. That certainly would be a good fact. But that could remove that 8% headwind on us.", "FX and the VIL situation in India, both are somewhat unpredictable. But if you put those aside, we feel really good about our global operating business in that upper single-digit growth rate in this environment. And of course, with these uncertainties around FX and maybe recessions in the U.S. and other places, we'll watch and see how that unfolds.", "But absent the volatility in India, absent the FX and the financing headwinds, we feel very good about an upper single-digit sort of a growth rate from our operating units. And that's all driven and underpinned by growth in mobile data consumption around the globe and the need for tower space. And our portfolio is just really well-positioned to benefit from that." ] }, { "name": "David Barden", "speech": [ "OK. Great. Thank you, guys. Appreciate it." ] }, { "name": "Rod Smith", "speech": [ "Yes. Thanks. David." ] }, { "name": "Tom Bartlett", "speech": [ "Thanks." ] }, { "name": "Operator", "speech": [ "Your next question comes from the line of Phil Cusick from J.P. Morgan. Please go ahead." ] }, { "name": "Richard Choe", "speech": [ "Hi. This is Richard for Phil. Just wanted to follow up on the builds. So what do you see as the most attractive markets right now internationally?" ] }, { "name": "Rod Smith", "speech": [ "When it comes to our build program, Richard, I mean, we're going to build about 4,000 sites this year. That's the expectation. The biggest chunks here really come from Africa and India in the range of 1,600, 1,700 sites each in those areas. In Europe, we're going to drive just over 400.", "In Latin America, maybe just under 300 sites. So there's an opportunity to build in all of these markets. And we get really good NOI yields in these markets kind of across the board. So it's not just about the volume of sites.", "Certainly, we like the idea of increasing our footprint Europe, in particular, driving more builds there with very highly credit quality customers in really attractive economies. So the 400 plus, 400 to 500 sites we'll build there are very attractive to us. But as Tom talked about with scaling the core, anywhere where we have management teams and assets and customers, to the extent we can add assets through an internal capex program with high NOI yields, it creates a lot of value for our shareholders long-term. It's good for our customers as well.", "So we think all of these markets are attractive in terms of our ability to build new assets." ] }, { "name": "Tom Bartlett", "speech": [ "Just adding on to that, one of the really interesting, I think, parts of the build is what we're doing in Africa, because we're really focused on building green sites in Africa with Airtel and really leveraging a lot of the power and fuel competencies that we've created in that market. We brought in solar to over 15,000 sites. We brought over lithium-ion in over 19,000 sites. We've reduced 5 million liters of diesel over the last several years.", "And so there is an incredible competency that we're building with regards to Power as a Service in that marketplace. And we're able to bring that then on to those green sites that we're building in conjunction with our -- with the agreement with Airtel. So that's a particular interest that we're really excited about over the next couple of years." ] }, { "name": "Richard Choe", "speech": [ "And coming back to the US, you said about the carriers are about 50% of your sites are 5G. When can we see, I guess, more densification activity? Do you think that's coming at the end of this year or into next year?" ] }, { "name": "Tom Bartlett", "speech": [ "I'm certain that there are certain pockets of the United States where we're already seeing some densification going on in the marketplace. And so I would expect that to continue as penetration continues with 5G sets. Keep in mind, it's in the carrier's best interest to deploy out 5G, because it's going to lower their overall cost of providing service. And so as activity continues to drive and as applications continue to develop and get deployed, you'll start to see that densification.", "But -- so I think it is already going on. And I would expect that over the next two to three years, we'll see an increase even in the densification within the market. Also, keep in mind that carriers are using slightly higher spectrum bands. And so given the propagation characteristics, they're going to be requiring higher levels of densification as a result of that as well." ] }, { "name": "Richard Choe", "speech": [ "Thank you." ] }, { "name": "Operator", "speech": [ "Your next question comes from the line of Eric Luebchow from Wells Fargo. Please go ahead." ] }, { "name": "Eric Luebchow", "speech": [ "Great. Thanks for squeezing me in. So I just wanted to check in on the LATAM business. Obviously, as you mentioned, some churn impacts this year.", "Maybe you could break out the impact from Telefonica and Oi in your guide? And what type of visibility you have on churn beyond 2023 when some of these events may resolve and we could see organic growth go back to historical upper single-digit ranges? And then secondly, just a balance sheet question for Rod, obviously, a big increase in interest expense. Maybe you can talk about how you're thinking about managing the balance sheet this year in terms of fixed floating mix, whether there's the possibility of terming out some additional floating rate debt given the inverted yield curve or accessing the secured market or anything else you're looking at to help drive that down? Thank you." ] }, { "name": "Rod Smith", "speech": [ "Yeah. Sounds good, Eric. So when it comes to Latin America, I guess what I would point to is our guide on organic tenant billings growth is a little bit higher than 2%. That comes in a few pieces.", "The gross new business is going to be in the mid-single digits, let's call it, around 3% or so. We're also seeing higher escalators at around 8%. And we do have a headwind of churn of about 8% as well. That's the bits and pieces in terms of getting into that growth rate.", "So you can see the churn number is fairly high. We do think it's temporary, and we do think it will work through it over the next couple of years and get back to a more compelling overall growth in the market. And when it comes to the churn pieces in our guide specifically, when you look out here in 2023, Telefonica is really the biggest piece. And I don't want to get too detailed in terms of customers.", "But I think everyone knows what's happening in Mexico with Telefonica and then joining AT&T as an MVNO there. So that's driving a fair amount of the churn. We're also seeing some churn remaining from American Movil really through the Nextel assets that were purchased down in Brazil. Those are the two things other than smaller churn, smaller customers throughout the region.", "But it's really the Nextel and the Telefonica in the bigger piece. And then the Oi piece really is going to be out over time. So there's a couple of things that I would say about Oi. Oi in total is about $100 million of revenue for us.", "It represents about 1% of our overall business. About one-third of that is tied in with their landline business, which we fully expect that the landline business of Oi will keep those sites over time. The other two-thirds, we have, on average, five to six years remaining on the length there. So that will be -- kind of over time, we'll see Oi is not a significant impact today that we're seeing, but that may start unfolding this year and into next as we negotiate with the three players who kind of carved up the Oi.", "It will probably extend into a multiyear period in terms of getting through Oi. So that's kind of what's happening in Latin America relative to the churn issues. Yes. On the balance sheet, a couple of things that I would say.", "I mean, we have long-standing percentage policies when it comes to fixed and floating. We run 80-20. We're pretty much there at the end of 2022. We expect to stay in and around that range.", "I mean, we can be opportunistic. I think you saw it at the very end of 2021 just before interest rates began to rise. We were fairly aggressive in terms of terming out floating rate balances. We got our floating rate percentage down to closer to 10%.", "With about 90% or just over 90% on fixed, we did that very purposefully to take advantage of the low rates, both in the U.S. bond market and the euro market. And that was just ahead of purchasing the data center business on December 28th, 2021. So we can be flexible there.", "In terms of managing the balance sheet going forward, we have about $3 billion in bonds that we'll refinance this year. We'll look at a variety of opportunities to do that. That could come in the form of getting into the U.S. capital markets that we can do that or parts of that in the European markets.", "And of course, we'll be balancing short-term and long-term rates. We could stay on the shorter end of the curve and with the expectation that rates may come down in the next couple of years, and then we go out longer when the rates are more attractive. We can also secure some of the debt that's on the balance sheet to the extent we refinance it and maybe carve off some savings from that perspective as well. So there are a lot of opportunities in terms of looking at the market.", "There's a lot to consider in terms of where we expect rates to head. But as I said earlier in one of my last comments, we do expect that rates will probably peak here in the U.S. this year, maybe even drift down later in the year. And we'll continue to watch the markets and interest rates and economy to see what we expect to be happening next year.", "But we'll be looking at the full curve and all the different capital opportunities that we have in front of us to make the very best decisions going forward." ] }, { "name": "Eric Luebchow", "speech": [ "Great. Thanks, Rod." ] }, { "name": "Rod Smith", "speech": [ "You're welcome." ] }, { "name": "Operator", "speech": [ "Your next question comes from the line of Batya Levi from UBS. Please go ahead." ] }, { "name": "Batya Levi", "speech": [ "Great. Thank you. Just following up on India and specifically for Vodafone. Can you size the partial payments that they're making right now, if there's been a change in the pacing? And if there are any adjustments to the pricing of their contract with you? And just going back to evaluating strategic options for India.", "It's been a challenging market, but potentially there is some improvement. How do you sort of underwrite what valuation you would take versus the -- your long-term growth assumptions in that region? Thank you." ] }, { "name": "Rod Smith", "speech": [ "Hey, Batya, I'll take the India reserve question. So you can see in our outlook for 2023, we are calling out a specific reserve for VIL of about $75 million. That's up against on a revenue reserve basis from 2022, we reserved close to $100 million for really the last two quarters in 2022. What I can tell you is, the percentage -- I don't want to get into percentages of revenue that they're paying and those sorts of things.", "But I will highlight that in January, they're paying us a little bit more than they were paying us in the end of 2022. So we are seeing some improvement in terms of the collections through VIL. And we do expect that that improvement will kind of continue, and we'll collect even a little bit more from a variety of their commitments to us as we look out over the balance of 2023. We do expect them to be getting back closer to and increasing their payments to us toward the end of the year.", "So we do expect to see some improvements going in that direction. That's kind of what I would say. In terms of the contracts, we haven't really written any MLAs or leasing contracts with them. We have entered into the $200 million convertible debenture, which also have some terms and conditions embedded in it that call out specific time periods in terms of when payments are due.", "It also has some additional terms and conditions around staying current with leasing fees within the MLAs and those sorts of things. So there's that additional agreement, which gives us a few additional kind of safety nets or safety belts here. But the situation there is volatile. We're focused on trying to support VIL through this period.", "We were very encouraged by the government conversion. We think that could be the beginning of better things for VIL in terms of raising additional capital going forward. And we're focused on long-term value creation and having VIL as a partner in India over the long term. And maybe on your second question, can you remind me what it was?" ] }, { "name": "Batya Levi", "speech": [ "Yeah. With improvement in India, why is this the right time to look for strategic options in the region?" ] }, { "name": "Rod Smith", "speech": [ "Yeah. I would say, it's really just being opportunistic, kind of, looking at the market. Certainly, India has been volatile over the last few years and maybe even a little bit longer than that. But as we said in the prepared remarks, we look at all of our portfolio assets around the globe kind of on a constant basis and evaluate growth opportunities, valuations, and other things.", "So we are in the process of looking at strategic options in India. We haven't made any decisions at this point, but we are kind of going through a process in evaluating things. And it's really around being opportunistic. We do believe that the Indian market is an interesting market and does hold some upside, but there's also a fair amount of volatility that we have experienced.", "So we'll be looking at a number of things. And when and if we conclude and make any decisions, we'll certainly let everybody know." ] }, { "name": "Batya Levi", "speech": [ "OK. Thank you." ] }, { "name": "Rod Smith", "speech": [ "You're welcome." ] }, { "name": "Operator", "speech": [ "Your next question comes from the line of Nick Del Deo from SVB MoffettNathanson. Please, go ahead." ] }, { "name": "Nick Del Deo", "speech": [ "Hey. Good morning, guys. Thanks for taking my questions. First, just a follow-up on the India question.", "Tom, you've emphasized how important new site builds are to your growth outlook and the returns you get with them. Obviously, there's a step down in your build plan in 2023 versus 2022, and it looks like the driver is primarily India. So I guess, does that explicitly tie into your view that India is more volatile, potentially less appealing market than you once believed, or is something else driving that downshift?" ] }, { "name": "Tom Bartlett", "speech": [ "No. It's really not. As a matter of fact, if you saw the numbers coming in from the field in terms of what they expected to build, it's significantly higher, candidly. And what I -- what we do is, we ratchet that back and look at the opportunity and look at where we can drive the most value there.", "So there's nothing going on there with regards to the pullback on sites. By the way, we will see different levels of site build in each one of the countries, just like we see different levels of colos, amendments depending upon what densification looks like and what the carriers are looking like. But now I wouldn't read in anything in terms of the pullback on India new builds for 2023." ] }, { "name": "Nick Del Deo", "speech": [ "OK. OK. That's helpful. And then maybe turning to CoreSite, since you've had it for a little more than a year.", "It seems like things are going consistent with your underwriting, maybe even a bit better. I guess bigger picture, any key learnings you'd highlight now that you've had a chance to have deep discussions with CoreSite's customers and your tower customers about the vision for how you could integrate those assets or have them work together? And I guess, more generally, any adaptations or refinements of your plan versus a year ago that you'd want to highlight?" ] }, { "name": "Tom Bartlett", "speech": [ "Yeah. No, nothing specific. I mean, I -- we have a fair amount of history in the kind of in that particular part of the infrastructure business. We knew what the model was that CoreSite was delivering on with their customers and how significant interconnection was in terms of driving value for their customers as well as for the cloud and service operators, and that demand continues.", "And it's a significant barrier to entry for others to be able to compete against them. I'm continually incredibly impressed with the team and how they think about returns and how they think about the relationships with the customers. So -- but that wasn't surprise, because I thought that candidly through the entire due diligence process. So I knew the quality of the group.", "We did enjoy significant growth in 2022, which I think just goes to the strength of the team and strength of the value proposition that they're offering their customers. And we believe that 2023 is going to be another strong year. We still have, as you would expect, a significant amount of energy around what the edge will ultimately look like. We have created an advisory board.", "We have a lab set up. We have plans to start to look at building out some of that capacity. We've identified about 1,000 sites within the United States that can handle up to over a meg of capacity. And through the relationships that we've been able to develop really through CoreSite with the cloud, we remain really optimistic about what that opportunity is going to look like and how we're going to be able to drive incremental business to our tower site, which is in and of itself has a strong competitive barrier given the ownership that we have of the land and of the site.", "And so we're very excited about it. There's nothing in our guide relative to performance coming from that activity. And as we've said, it's going to be a multi-year rollout. But we think that as a result of the CoreSite assets as well as our tower assets, we're really uniquely positioned to be a meaningful part of the puzzle as the edge continues to develop.", "So as I said, I think we would just continue to underscore what we originally had thought, and we're continually working very methodically in terms of trying to become that linchpin for rolling out that kind of capability." ] }, { "name": "Nick Del Deo", "speech": [ "OK. Thank you, Tom." ] }, { "name": "Rod Smith", "speech": [ "And Nick, maybe I'll just add -- complement on to what Tom said here. As we wait for the edge or work for the edge to develop, the CoreSite business is performing exceptionally well and right in line with our expectations. You heard us talk earlier about the record new business that we achieved in 2022. We see strong demand from enterprise customers on those core data center assets that we have around the country.", "A few of the key metrics here. We are seeing escalations right around 3% on our rental space, which is right in our target range. We see cash mark-to-market adjustments for 2023 go up beyond where they were in 2022. So they've gone from about 2% up to maybe 3% to 3.5%.", "So that's certainly a good factor. Churn continues to be in and around 6.5%, which is on the low end of our range. Interconnection growth we expect in 2023 to be in the 6% to 8% range, kind of right in line with where we would expect it to be. And our development capex is coming in at around $360 million for 2023.", "And much of that is to replace capacity that we sold in 2022 through those record new business numbers that we will be deploying in 2023 and 2024. Replacing that capacity is really where the capex is being deployed. So we're seeing very good results and really demand from that CoreSite business, again, as we look to work to develop the edge." ] }, { "name": "Nick Del Deo", "speech": [ "That's great color. Thank you, both." ] }, { "name": "Operator", "speech": [ "And that's all the time we have for questions today. I would now like to turn the conference back to your speakers for any closing remarks." ] }, { "name": "Adam Smith", "speech": [ "I appreciate everybody joining the call. If you have any questions, please feel free to reach out to myself or the Investor Relations team. Thanks, everyone." ] }, { "name": "Operator", "speech": [ "[Operator signoff]" ] } ]
AMT
2021-02-25
[ { "description": "Vice President, Investor Relations", "name": "Igor Khislavsky", "position": "Executive" }, { "description": "President and Chief Executive Officer", "name": "Tom Bartlett", "position": "Executive" }, { "description": "Executive Vice President, Chief Financial Officer, and Treasurer", "name": "Rod Smith", "position": "Executive" }, { "description": "Goldman Sachs -- Analyst", "name": "Brett Feldman", "position": "Analyst" }, { "description": "Citigroup -- Analyst", "name": "Michael Rollins", "position": "Analyst" }, { "description": "Raymond James -- Analyst", "name": "Ric Prentiss", "position": "Analyst" }, { "description": "Morgan Stanley -- Analyst", "name": "Simon Flannery", "position": "Analyst" }, { "description": "", "name": "Unknown speaker", "position": "Other" }, { "description": "Bank of America Merrill Lynch -- Analyst", "name": "David Barden", "position": "Analyst" }, { "description": "MoffettNathanson LLC -- Analyst", "name": "Nick Del Deo", "position": "Analyst" }, { "description": "Oppenheimer & Co. Inc -- Analyst", "name": "Tim Horan", "position": "Analyst" }, { "description": "Cowen & Co. -- Analyst", "name": "Colby Synesael", "position": "Analyst" } ]
[ { "name": "Operator", "speech": [ "Ladies and gentlemen, thank you for standing by. Welcome to the American Tower fourth-quarter and full-year 2020 earnings conference call. As a reminder, today's conference call is being recorded. Following the prepared remarks, we will open the call for questions.", "[Operator instructions] I would now like to turn the call over to your host, Igor Khislavsky, vice president of investor relations. Please go ahead, sir." ] }, { "name": "Igor Khislavsky", "speech": [ "Good morning and thank you for joining American Towers fourth-quarter and full-year 2020 earnings conference call. We post our presentation which will refer to throughout our prepared remarks under the Investor Relations tab of our website www.americantower.com. Our agenda for this morning's call will be as follows: First, I'll quickly summarize our financial results for the quarter and full-year 2020. Next, Tom Bartlett, our president, and CEO will provide a strategic update on our long-term growth trajectory.", "And finally, Rod Smith, our executive vice president, CFO, and treasurer, will discuss our 2020 results and 2021 outlook. After these comments, we will open up the call for your questions. Before I begin, I'll remind you that this call will contain forward-looking statements that involve a number of risks and uncertainties. Examples of these statements include our expectations regarding future growth including our 2021 outlook, capital allocation, and future operating performance, our expectations regarding the impacts of COVID-19, our expectations regarding the impacts of the AGR decision in India, our expectations regarding our pending Telxius transaction, and any other statements regarding matters that are not historical facts.", "You should be aware that certain factors may affect us in the future and could cause actual results to differ materially from those expressed in these forward-looking statements. Such factors include the risk factors set forth in this morning's earnings press release, those set forth in our Form 10-K for the year ended December 31, 2019, as updated in our Form 10-Q for the three months ended March 31, 2020, and in other filings we make with the SEC. We urge you to consider these factors and remind you that we undertake no obligation to update the information contained in this call to reflect subsequent events or circumstances. Now, please turn to Slide 4 of our presentation which highlights our financial results for the fourth quarter and full-year 2020.", "During the quarter, our property revenue increased 10% to $2.1 billion. Our adjusted EBITDA grew by 13% to nearly $1.4 billion and our consolidated AFFO and consolidated AFFO per share increased by 8.9% and 8.8%, respectively, to $936 million and $2.10. On an FX-neutral basis, growth rates for property revenue, adjusted EBITDA, and consolidated AFFO per share would have been 13.4%, 15.9%, and 11.9%, respectively. Finally, net income attributable to American Tower Corporation common stockholders decreased by roughly 35% to $365 million or $0.82 per diluted common share.", "The decrease included the impacts of approximately $181 million in impairment charges in the quarter across several markets, as well as the non-recurrence of certain income tax benefits in India from 2019. From a full-year perspective, our property revenue increased 6.5% to nearly $8 billion, our adjusted EBITDA grew by 8.7% to approximately $5.2 billion, and our consolidated AFFO and consolidated AFFO per share increased by 7.6% and 7.5%, respectively, to nearly $3.8 billion and $8.49. On an FX-neutral basis, full-year growth rates for property revenue, adjusted EBITDA, and consolidated AFFO per share would have been 10.8%, 12.3%, and 11.6%, respectively. Finally, net income attributable to American Tower Corporation common stockholders decreased by about 10.4% to $1.7 billion or $3.79 per diluted common share, again, impacted by the impairment charges in the fourth quarter and the non-occurrence of certain income tax benefits in India from 2019.", "And with that, I'll turn the call over to Tom." ] }, { "name": "Tom Bartlett", "speech": [ "Thanks, Igor. Good morning, everyone. As you just saw from our posted results, we finished 2020 with another strong quarter and have solid momentum heading into 2021. Globally, the secular trends in mobile that we've leveraged to deliver sustainable, long-term growth are firmly intact.", "As advancing mobile technology modernizes economies, transforms the lives of billions of people, and connects us during an unprecedented pandemic, our extensive communications real estate portfolio is well-positioned to serve as the fundamental backbone of today and tomorrow's modern wireless networks and we're excited about our path forward. But before I get into our future expectations, I want to first briefly summarize our last five years of performance and highlight the key drivers of those results. As a form of a backdrop what we expect going forward. Turning to Slide 6 of our presentation, you can see that from 2015 to 2020, we've generated an 11% CAGR for consolidated property revenue, adjusted EBITDA, and consolidated AFFO per share.", "These results were supported by attractive organic tenant billings growth rates which averaged 6% in the U.S. and 7% internationally. Additionally, over the last five years, we have meaningfully enhanced our global newbuild program, creating a platform that enabled us to construct nearly 5,900 sites just this past year and almost 17,000 sites since the start of 2016. Our focus on new site construction, together with our proven, disciplined M&A strategy has resulted in the addition of nearly 100,000 new sites over the last five years, further lifting our returns and growth trajectory.", "Concurrently, we grew our annual common stock dividend by more than 150% from $1.81 per share in 2015 to $4.53 per share in 2020, adding another attractive element to our total return formula. The consistency of our performance over these last five years speaks to the fact that our Stand and Deliver strategy is working. The four pillars of this strategy: operational efficiency, growing our assets and capabilities, extending our platform, and driving industry leadership have continued to pay dividends across our global asset base. We firmly believe that the continued implementation of these strategic priorities will result in sustainable, long-term growth generation and that remains our focus.", "In other words, while we are obviously mindful of and realize the importance of our quarterly numbers, the way that we run the company is fundamentally designed to optimize returns over a much longer planning horizon. And we believe our results speak for themselves. This philosophy is evidenced by, among other things, our strategic, long-term contracts such as the T-Mobile agreement that we signed in September. In the immediate term, that deal will result in some elevated churn.", "But over the longer term, we expect it to create tremendous value for our stockholders while helping to secure a significant share of industry-leasing activity in our sites and supporting the deployment of 5G across the country. Our recently announced Telxius transaction is another good example of our Stand and Deliver construct in action. Our financial strength, proven capital allocation strategy, and objective of gaining scale in the most attractive markets globally enabled us to identify what we believe to be a unique opportunity for long-term value creation in Europe, and overall, as we expand our global platform. As is typical with our investments, this transaction is expected to be immediately accretive to consolidated AFFO per share.", "However, most of the accretion in shareholder value will be realized over time as we generate lease-up, construct additional sites to round out the portfolio, and drive higher margins. Additional future upside may come, we believe, from our platform expansion initiatives, particularly in markets like Germany where we anticipate that edge computing will be important for carriers and enterprise accounts themselves as they seize the benefits of 5G. And the ability to be in a unique position to be able to provide a global platform of well over 200,000 sites in over 20 countries pro forma for Telxius to global MNOs, hyperscalers, enterprise accounts, and data center companies should drive additional value over time. Our Stand and Deliver commitment also drives our focus on industry leadership, particularly in the area of ESG, including among other things are increasing use of renewable energy, reduction of our emissions, and numerous human-capital initiatives designed to ensure that we remain as not only a preferred employer but also a positive driving force in our communities.", "This was particularly relevant this past year as we enhanced our commitments to diversities throughout the company, committed funds to help counter social injustice and structural inequities, and sought additional opportunities to make a positive impact including initiatives to help bridge the digital divide through programs like our digital villages. Our culture at American Tower is extremely important to me personally, as well as the rest of our executive team. And while we clearly have more to do, I'm proud of the tremendous strides we have all made together over the last few years. Looking forward, we expect our continued execution of Stand and Deliver to result in similarly attractive, long-term sustainable growth for American Tower and compelling total returns for our stockholders.", "Moving to Slide 7, you can see that the U.S. and Canada organic tenant billings growth will continue to be a critical component of our long-term success. Having said that, as I just mentioned, we will have elevated levels of U.S. churn beginning in the fourth quarter of this year and particularly in 2022 which will result in average U.S.", "organic tenant billings growth rates of around 2% across the next two years. This is due to the legacy Sprint network being substantially decommissioned by T-Mobile and the fact that unlike our peers, we have been able to limit iDen-related churn to date as a result of previous master lease agreements. Adjusted to exclude these cancellations, our expected U.S. organic tenant billings growth through 2022 would average around 5%.", "As part of that growth, we expect our gross new business commencements to accelerate beyond 2020 levels given the deployment of new technology, new spectrum, and new market entrants. What's even more interesting for us in line with our focus on long-term growth is the organic trajectory beginning in 2023. As you can see in the slide, from 2023 through 2027, we expect organic tenant billings growth to accelerate to on average at least 5% on a reported basis and at least 6% excluding the impacts of the remaining legacy Sprint churn. Importantly, much of this growth is contractual in part driven by escalators on existing leases which will continue to average more than 3% per year, and in part represented by future new business that we have locked in through contractual frameworks like our agreement with T-Mobile.", "Said another way, the majority of our expected baseline future organic growth in the United States through 2027 is contractually guaranteed today. This is further supported by our expectations that churn in the U.S. will be lower than historical levels once the legacy Sprint leases fully roll off in 2024. The non-contractually guaranteed components of these projections are based on the assumption that annual wireless capex in the U.S.", "will be slightly higher than current levels through 2027 as 5G deployments take hold and as new spectrum like C-Band is deployed. This in many ways mirrors what has occurred in the past with new technology rollouts where capex levels have risen with each new G. We continue to believe that the carriers have a mandate to deploy 5G as quickly as possible, given it is the most cost-effective way for them to address the tremendous growing levels of mobile data traffic streaming across their networks. As a result, we expect to see meaningful incremental densification and amendment activity for the foreseeable future driving strong growth.", "Importantly, we've not layered in any material assumptions around a potential new entrant outside of Dish and we have assumed only modest contributions from edge computing and other platform-expansion initiatives within these numbers. We are working diligently to unearth additional meaningful opportunities that can drive further upside to our growth rates. Turning to Slide 8, we are also reiterating our aspirational goal of delivering average annual double-digit consolidated AFFO per share growth for the next seven years, including initial guidance of around 8.5% growth for 2021. We expect the U.S.", "organic growth I just referenced to to be an important component of our AFFO trajectory. In addition, similar to what we have seen in the past, our expectation is for international organic tenant billings growth rates to be at least 200 basis points higher than the U.S. over the long term, further enhancing our consolidated AFFO per share growth. Many of our international markets who are in earlier stages of technology development have little to no fixed-line penetration and require tremendous incremental investment in their wireless network infrastructure to support future densification.", "The criticality of wireless in these locations has been further highlighted during the ongoing pandemic as have the limitations of current network infrastructure. As a result, we expect that as carriers ramp their network investments, our emerging market organic growth rates will continue to be very attractive. Meanwhile, in more advanced markets like Germany, we are now seeing early stages of 5G build-outs which we believe will result in a long pathway of attractive growth as well. Importantly, we expect organic growth in Germany to accelerate meaningfully over the next several years.", "Furthermore, we expect recent and future M&A, together with our accelerating newbuild program to drive additional value. This includes our pending Telxius deal, several recently closed transactions in the United States, as well as the nearly 5,900 sites we constructed in 2020, and the roughly 6,500 sites we expect to build in 2021. In fact, based upon the demand we are seeing for new sites across our international business, we are targeting the construction of 40,000 to 50,000new towers over the next five years with day one NOI yields continuing to be extremely attractive. And on the M&A side, we expect there to be numerous additional opportunities for us to deploy capital toward high-quality assets with attractive counterparties and favorable economics.", "As in the past, we expect M&A to be a key piece of our future growth story. Enhancing operational efficiency, another pillar of Stand and Deliver, will also be a key area for us as we seek to drive continued double-digit growth in consolidated AFFO per share. As we incrementally globalize the business, we are creating shared service centers, optimizing various back-office processes, sharpening our pencils on site-level services like energy provision, and focusing resources on further enhancing and improving our customers' experience with us, utilizing drone technology, and our instant Colo initiatives are examples of how we are both scaling more efficiently and increasing the value proposition for our customers. We remain laser-focused on driving margin improvement throughout the business which should translate into continued high conversion rates of adjusted EBITDA to consolidated AFFO.", "Finally, we continue to believe that our leading investment-grade balance sheet is a key differentiator for the company and expect that it will be an important component in achieving double-digit consolidated AFFO per share growth. The investment-grade debt markets remain extremely attractive from both the rate and access perspective and we feel good about our ability to not only complete value-additive refinancing transactions but also to fund accretive M&A in the future. We remain fully committed to our investment-grade credit rating and expect it to be an important element of our future success. In conclusion, we believe that we are exceptionally well-positioned to extend our long track record of driving strong growth and attractive returns, particularly at a point in time when mobile broadband connectivity globally has never been more critical.", "We have tremendous visibility into our future baseline growth trajectory, including having roughly $59 billion in contractually committed revenues supported by long-term, mutually beneficial, comprehensive master lease agreements with key tenants. We also expect to have some interesting opportunities to further enhance that baseline through platform expansion initiatives like edge computing, Power as a Service, and other potential sources of upside. Moreover, we believe that our unmatched geographic diversification of distributed sites has the potential to set us apart from the competition, particularly in the context of an increasingly global tenant base, cross-border infrastructure deployments, and an even more connected in a digitally driven world. We firmly believe we have the right strategy, the right macro tower-oriented asset base, and the right management team to move American Tower forward into the 5G era and beyond.", "With that, let me turn the call over to Rod to go through our 2020 results and the details of our 2021 outlook. Rod?" ] }, { "name": "Rod Smith", "speech": [ "Thanks, Tom, and good morning, everyone. I hope you and your families are all doing well. As you can see from our press release and presentation, we had another solid year and finished 2020 on a high note, posting another strong quarter of performance across our global business. This included constructing a record number of high-return new sites, completing two sizable and accretive acquisitions in the U.S., strengthening our already strong balance sheet, and achieving higher-than-previously expected consolidated AFFO per share growth.", "Our mission-critical tower portfolio, ability to execute across our global footprint, disciplined, reliable, and proven approach to capital allocation and strong balance sheet all position us to achieve the long-term predictable growth that Tom referenced earlier. As part of that growth path, we expect to have a strong year in 2021. But before I get into the details of our 2021 expectations, I'll spend a few minutes on our financial results for the quarter and the full-year 2020. As you can see on Slide 10, we reached double-digit growth in property revenue, adjusted EBITDA, and consolidated AFFO in the fourth quarter on an FX-neutral basis.", "Our fourth-quarter consolidated property revenue of $2.1 billion grew on a reported basis by $191 million or 10% over the prior-year period. And on an FX-neutral basis, by $256 million or 13.4%. We generated consolidated organic tenant billings growth of 4.4% including 4% in the U.S. and 5.2% in our international markets, led by Africa at 9.4% and Latin America at more than 7%.", "As expected, U.S. organic tenant billings growth pulls back a bit in Q4, due primarily to the flow-through impacts of slower activity levels earlier in the year. Meanwhile, in international markets, we completed the construction of approximately 2,900 new sites which nearly doubled the previous American Tower record set in Q3 of 2020. Adjusted EBITDA growth was 13% in the quarter with adjusted EBITDA margins up by over 150 basis points year over year due to organic growth, cost controls, and straight-line benefits.", "Finally, we translated that strong adjusted EBITDA growth to solid consolidated AFFO and consolidated AFFO per share growth of nearly 9% or about 12% on a currency-neutral basis. On Slide 11, you can see that our full-year consolidated property revenue growth was 6.5% including organic tenant billings growth of 4.8% and total tenant billings growth of 9.7%. In total, we outpaced our initial property revenue outlook on a currency-neutral basis by more than $130 million. Our organic tenant billings growth included 4.5% in volume growth from collocations and amendment activity with another 3.3% generated through escalators.", "Churn was just under 3% and there was a negative 10-basis-point impact from other items. For the year, we commenced over $19 million in gross new monthly business with nearly $10 million of that in the U.S. Our U.S. and Canada property revenue grew nearly 8%, supported by organic tenant billings growth of 4.6%, contributions to tenant billings from new assets of less than 1%, and approximately $135 million in higher straight-line revenue.", "With respect to organic tenant billings growth, volume growth from collocations and amendments contributed 3.5% to the full-year growth rate. While pricing escalators contributed 3.2%, this was partially offset by churn of about 1.7% and a negative impact of roughly 30 basis points from other items. Our international property revenue grew by nearly 5% or by around 14.5% on a currency-neutral basis as meaningful network capital was again deployed globally by large multi-national tenants. International organic tenant billings growth was 5.1% with collocation and amendment revenue-driving 6.5% growth, while escalators contributed nearly 3.6%.", "Other run-rate items added 20 basis points while churn, concentrated in India, was just over 5%. Finally, the day one revenue associated with the more than 23,000 sites we've added through M&A in our newbuild programs over the last two years, contributed nearly 5% to our global tenant billings growth. This includes the impact of our nearly 5,900 new builds in 2020 which generated average day one NOI yields of over 12%. Moving to Slide 12, for the year, adjusted EBITDA grew by nearly 9% with adjusted EBITDA margin increasing to 64.1%, a year-over-year expansion of over 150 basis points.", "This increase was primarily driven by strong underlying revenue growth, net straight-line benefits, and continuing cost efficiencies throughout the business. On an effects-neutral basis, we exceeded our initial 2020 outlook for adjusted EBITDA by around $150 million. These adjusted EBITDA results included continuing progress in fuel management, particularly in Africa where we reduced our diesel usage by more than 45 million liters in 2020. As of the end of the year, we had more than 7,000 sites with lithium-ion batteries and over 3,000 with solar.", "We also grew consolidated AFFO and consolidated AFFO per share by nearly 8% in 2020 as a result of our previously discussed growth in cash adjusted EBITDA. This growth was also supported by our disciplined capital market strategy. We avoided the credit market disruption caused by COVID-19 between March and May while taking full advantage of improved conditions thereafter. In fact, despite closing over $9 billion in M&A since the start of 2019, we were able to reduce our cash interest expense by approximately $40 million, maintenance capex by more than $10 million, and kept cash taxes flat 2020 verse 2019.", "On a currency-neutral basis, these strategic efforts and effective management of our cost structure facilitated consolidated AFFO per share growth of roughly 11.6%, exceeding our initial expectations for the year by more than $0.23 per share. Now, let's take a look at our expectations for 2021. Before we dig into the numbers, I'd like to summarize a few of the key high-level assumptions surrounding our projections. First, both in the U.S.", "and in our international markets, we expect gross new business additions to our recurring monthly run rate to be above 2020 levels. This is due to a mix of contractually -committed revenue growth particularly in the U.S. and continued solid demand for tower space internationally. Carriers are expected to deploy new technologies and new spectrum while identifying their networks to keep up with rapidly growing mobile data usage around the world.", "Second, we expect churn to be somewhat elevated this year due to a combination of T-Mobile lease cancellations in the U.S. primarily in the fourth quarter, and hold-over churn in India. In the U.S., we expect that churn will be just over 3% for the full year including 6.5% in Q4 specifically. This includes scheduled cancellations as part of our agreement with T-Mobile, some legacy Sprint and Clearwire churn outside of the MLA, and normal course cancellations of around 2%.", "Of the roughly $375 million in total annualized legacy Sprint churn that we expect over the next four years, more than 50% or just under $200 million will hit our run rate in 2021, with the vast majority churning off October 1. Given this is an annualized number, we will incur a quarter of the impact in 2021 with three-quarters of it coming in 2022. In India, we expect churn to be roughly 11% in 2021 which is down about 3% versus 2020 but still higher than historical levels. Similar to 2020, this churn is primarily being driven by hold over consolidation impacts in the effects of the AGR case.", "We continue to work closely with the Indian wireless carriers as they plan for the future and are optimistic that churn rates in India will continue to trend down over the next several years. Finally, I would note that we have excluded the impacts of our pending Telxius transaction and its associated financings from our outlook for historical practice. We continue to expect the deal to close in multiple tranches beginning late in the second quarter, and we'll plan to layer on the deal impact into the future outlook update. As a reminder, we expect Telxius assets to be immediately accretive to consolidated AFFO per share.", "Taking these assumptions into account, as you can see on Slide 13, we expect consolidated property revenue to grow by nearly 8% at the midpoint of our outlook, supported by solid overall levels of organic new business and contributions from new assets. Our U.S. and Canada property revenue is expected to grow by 8% with anticipated international property revenue growth of 7.5%, including an approximately 1% positive impact from foreign currency translation. We expect organic new business to, again, be a critical component of our overall growth in 2021.", "And on a consolidated basis, our outlook assumes more than $23 million of gross new business monthly run rate added across our tower, and debt assets in 2021, up about 20% as compared to 2020. Turning to Slide 14. In the U.S. and Canada, we are projecting organic tenant billings growth of around 3% as 5G deployments continue to gather steam and network densification efforts progress.", "On a gross basis, we expect monthly new business run rate added in 2021 to exceed what we added in 2020 by more than 15%. However, we will see elevated churn from T-Mobile beginning in Q4 and we will also see some carryover effects from slower activity levels in 2020, particularly earlier in the year. As a result, our organic tenant billings growth in the U.S. and Canada is expected to be lower than last year.", "I would note that these projections don't include significant contributions from Dish, nor do they assume material C-Band deployments until quite late in the year. As we saw in the recently concluded C-Band auction, there is a huge premium being placed on mid-band spectrum by the carriers, and we continue to expect that the majority of mid-band deployments will be on macro tower sites. We're enthusiastic about the potential impact of these deployments on our U.S. and Canada growth, particularly in 2022 and beyond.", "Moving on to Latin America, we expect organic tenant billings growth of around 7% for the year, broadly in line with what we saw in 2020. Demand trends remain solid with carriers focused on improving and extending 4G networks as mobile data usage accelerates. Additionally, we expect escalators across the region to be around 130 basis points higher than last year due primarily to certain contractual arrangements in Brazil on some of the tenant leases. Partially offsetting these items is expected churn of nearly 3% in the region due primarily to a settlement agreement we reached with Brazil related to legacy Nextel leases and some Telefonica churn in Mexico in the second half of the year.", "On the inorganic side, we expect to further accelerate our newbuild program and anticipate constructing around 600 sites, a year-over-year increase of almost 50%. Incorporating contributions from these new sites, we expect Latin America tenant billings to grow by around 7.5% for the full year. Meanwhile, in Africa, 2021 organic tenants billings growth is expected to be more than 8%. We anticipate gross new business monthly run rate added to be up roughly 70% year over year with Nigeria leading the way in terms of higher activity levels.", "Partially offsetting this are escalators that we anticipate will be around 70 basis points lower than last year and churn of about 3%, up about 140 basis points versus 2020. The escalators are largely a function of local CPI, while the slightly elevated churn primarily reflects some carrier consolidation in South Africa. We also expect another year of significant newbuild activity in Africa with 1,300 new builds planned for 2021. In total, we expect to drive tenant billings growth of more than 13% in the region.", "In Europe, we expect organic tenant billings growth of over 3% in 2021, up from 2.2% in 2020. The acceleration is being driven by the combination of higher levels of expected new business and slightly lower churn as carriers advance their network deployments. We are starting to see some of the growth that drives our optimism around the Telxius assets in our existing European business. Germany's gross organic tenant billings growth in Q4 of 2020 was nearly 7% and is expected to continue at that level into 2021 with further accelerations anticipating in future years.", "Finally, in India, we expect organic tenant billings growth to be roughly flat in 2021, broadly similar to what we saw in 2020. While we believe the wireless industry consolidation process is essentially complete, there remains some uncertainty with respect to the exact path forward post AGR. As a result, our outlook for 2021 incorporates the expectation that we will again see higher than historical levels of churn. In addition, while new monthly run rate added from new business is expected to be slightly up versus 2020 due to the activity being mostly in the second half of the year, it will not fully impact our organic growth in 2021.", "As a result, although we expect churn to be 11%, down from nearly 14% in 2020, overall organic tenant billings growth is projected to be similar. Long term, we remain optimistic with respect to our India business. There is a tremendous amount of work that needs to be done to bring networks across the country up to 4G standards, and our portfolio is well-positioned to capture that activity. From a structural perspective, we think there is a path to an eventual return to high typical organic tenant billings growth rates in the high single-digits.", "What is less clear is the specific timing of that growth acceleration, which will depend on a number of factors in the marketplace. As we learn more and as the trajectory becomes clear, we will plan to keep you all updated. Turning to Slide 15. At the midpoint of our outlook, we expect adjusted EBITDA to grow by almost $485 million or nearly 9.5%.", "This includes continued high margin flow-through of organic growth, as well as the impacts of accretive M&A transactions completed in 2020, along with built-to-suit activity and a full year of our recent MLA agreement with T-Mobile. In addition, we expect to target areas in our business where we can take additional efficiencies, including power and fuel where we are continuing to invest in more efficient equipment and renewable energy solutions. Our cash SG&A expense as a percent of total property revenue is expected to be around 7.3%, down from just over 8% in 2020, and we anticipate further reductions in the future. Finally, our adjusted EBITDA expectations include an estimated positive impact of around $27 million from the effects of FX translation.", "Moving to the next slide, we expect to convert our adjusted EBITDA growth into year-over-year growth and consolidated AFFO of around $322 million or 8.5%. This includes $358 million from FX neutral cash adjusted EBITDA growth, benefits from lower cash interest costs due to the recent refinancing initiatives, and about $23 million in favorable translational FX impacts. Partially offsetting these items is a $62 million increase in FX neutral cash taxes versus the prior year, as well as a slight increase in total maintenance capex. On a per-share basis, we expect consolidated AFFO growth to be nearly 8.5% for the year, setting the stage for us to achieve double-digit per share growth if we drive some outperformance versus current expectations.", "Moving on to Slide 17, let's review our capital deployment in 2020 and our expectations for 2021. In 2020, we deployed about $2 billion for our dividend while spending roughly $1.1 billion on capex, with more than 85% of that being discretionary. Part of that discretionary spend was to build nearly 5,900 sites throughout our global footprint, a new record for American Tower. We spent around $5.5 billion, including the assumption of debt, to acquire new assets and additional stakes in our Africa and India businesses from JV partners.", "And we also dedicated about $56 million to buybacks. In total, we deployed nearly $9 billion in 2020, a record year for American Tower, while staying within our leverage targets and simultaneously strengthening the balance sheet. We, again, expect to deploy capital in a consistent balanced manner in 2021. This includes $1.4 billion committed to capex, again, largely discretionary, and about $2.3 billion allocated toward our dividend, assuming a growth rate of around 15% and subject to board approval.", "Included in our discretionary capex spend is the expected construction of 6,500 new sites worldwide, an increase of more than 600 sites compared to 2020. Day-one NOI yields on these builds are expected to continue to average more than 10%. In newbuild, capex remains as our highest-return investment with solid anchor tenant credit quality. In addition, and as I'll talk more in a minute, we expect to close our pending Telxius acquisition this year for total consideration of about $9.4 billion.", "Including this transaction, we expect that roughly 90% of our total capital deployment in 2021 will be in investment-grade-rated geographies with investment-grade carriers. As you can see on the right side of the slide, our disciplined capital allocation strategy, coupled with solid operational execution and a strong balance sheet, has enabled us to drive consistent reoccurring long-term growth in consolidated AFFO per share, and we expect more of the same this year. In fact, in 2021, we expect our 2020 investments in newbuilds and M&A to generate around $0.15 in incremental consolidated AFFO per share. We continue to believe that both consolidated AFFO per share growth and attractive returns on invested capital are critical to our creation of long-term sustainable stockholder value.", "Now, turning to Slide 18, I will discuss our financing plans for the pending Telxius acquisition. As a reminder, this transaction is transformational for our European business as it delivers significant scale in key markets, is expected to drive some of the highest organic tenant billings growth rates available in the region, and based on our analysis, represents the best portfolio of tower assets that has come to market in Europe. The total consideration will be approximately $9.4 billion, and we anticipate completing the purchase in 2021 through multiple closings. We expect the first closing to consist of a large portion of the European assets in late Q2, with the remaining assets in Europe and Latin America closing in late Q3.", "Of course, this timeline may shift as the regulatory process unfolds. As we communicated when we announced the deal, we plan to finance the transaction in a manner consistent with maintaining our investment-grade credit rating. We anticipate this will include bringing our net leverage, which stood at five times at the end of 2020, up to the high five times range temporarily. Importantly, we are committed to organically delevering back down to a level consistent with our stated financial policy of three to five times net leverage over a multi-year period.", "On the debt funding front, we expect to utilize a combination of our recently upsized revolving credit facilities and new euro-denominated term loans and plan to opportunistically consider long-term sources, including senior unsecured notes. The balance of the total consideration is expected to be funded with equity, which may include common stock issuances, mandatory convertible preferred instruments, and or private capital, raised through the sale of minority stakes of our European subsidiary to one or more private investment partners. On the private capital side, we are currently engaged in discussions with a select group of premier strategic investors, who not only can provide capital but also have considerable experience in telecommunications infrastructure in the European region specifically. We are encouraged by our progress on this front, and if terms are sufficiently attractive, are optimistic that we can complement a public equity issuance with a high-quality strategic private capital raise.", "As always, through this process, we remain disciplined and focused on minimizing dilution to our common stockholders while optimizing our long-term value creation objectives. On Slide 19, and in summary, 2020 was a very strong resilient year for American Tower, with solid organic growth, operational efficiencies providing high conversion rates, record newbuild activity, accretive M&A, and continued value creation for our shareholders. Looking forward, we are excited about the long-term potential of our business. Our comprehensive portfolio is well-positioned to capture meaningful lease-up as new spectrum assets and new network technologies are deployed globally.", "In the U.S., activity is ramping up, and we expect to continue to create significant value through the master lease agreements with key tenants. We stand ready to quickly integrate the new Telxius assets this year and leverage our expanded European presence for significant future growth which will complement our operations in other less mature markets. Taking into account continued strong tailwinds from secular growth trends in mobile, we expect to be able to deliver attractive sustainable growth in revenues and cash flows for years to come while driving compelling total stockholder returns. And with that, Operator, will you please open the line for questions." ] } ]
[ { "name": "Operator", "speech": [ "Thank you. [Operator instructions] And one moment please for your first question. Your first question comes from the line of Brett Feldman. Please go ahead." ] }, { "name": "Brett Feldman", "speech": [ "Yes, thank you for taking the question, and -- and just a few about the outlook you provided for domestic organic tenant billings growth. First, you mentioned that you do expect that gross activity is likely to increase from here. One of your peers outlined a view that that will begin in the second half of this year. I'm wondering if that's the same assumption you've embedded in your outlook? I'm also curious how sensitive your outlook is to that? I think, at this point, you have an MLA with all of your major customers, and so perhaps the -- the variability here is narrower.", "And then just on churn, I think you suggested a non-Sprint churn was going to be in the 2% range this year, which is a bit above trend. I'm wondering if there's anything you need to focus on? And then I believe T-Mobile has indicated they're going to be shutting down the Sprint CDMA network I think starting next year. I -- is that captured in your churn assumptions as well? Thank you." ] }, { "name": "Rod Smith", "speech": [ "Thanks, Brett. So I'll take that. This is Rod Smith. Thanks for the question.", "So with regards to our U.S. organic tenant billings growth as we roll into 2021, let me get a couple of the component drivers that will be -- that will be factors, including the new business. So as you saw in the presentation, we expect to have organic tenant billings growth of around 3% for 2021. That's down from about 4.6% in 2020.", "There's a few factors driving that. The first one is that our monthly run rate new biz is anticipated to increase by about 50% year over year. So that's -- that's going to -- going to drive some growth there in our organic tenant billings growth. That obviously is being offset by a couple of factors.", "One is, as you mentioned, the Sprint churn. So we do expect to begin to -- the Sprint churn in Q3 of 2021. And as you saw in the presentations and some of our prepared remarks, we are expecting over the next four years to have about $375 million of annualized Sprint churn. The vast majority, that ends up coming in in the beginning in the fourth quarter of 2021.", "So we'll see churn beginning in the fourth quarter, that'll represent about $200 million of annualized run rate that'll begin to come off or come off in Q -- in Q4 of 2020. That has a drag on organic tenant billings growth of almost 100 basis points. So that explains a big chunk of that step down between year over year. The next piece that I would highlight is the activity levels coming out of 2020.", "So everyone knows there was kind of a slowdown in -- from T-Mobile and Sprint in 2020, began in 2019, and -- and went into 2020. That slowdown has a flow-through effect into 2021, which also impact our growth rates. And -- and that is going to impact the beginning of the year, the first half of the year more than the second half of the year. So that's why we're consistent with what you may have heard from some other folks.", "And then the final piece is this, the size of our base is getting bigger and that usually brings down growth by about 20 bps. So we have that as well. And then I would -- the final point I would make on the organic tenant billings growth is our -- our organic tenant billings growth is not that sensitive to the timing of activity. You need in other network decommissioning of this.", "It's mostly made up of -- of contracts that have minimum levels of activity and predefined churn reductions and those sorts of things. So there's not a lot of variability in our numbers from that perspective. And then in terms of the Sprint, I guess I addressed the Sprint churn numbers. So I think that -- that probably addresses that part of your question, Brett." ] }, { "name": "Brett Feldman", "speech": [ "OK. And then was there anything outside of Sprint churn? It sounded like that might be a little higher this year. I wasn't sure if that was a one -- a one-shot deal or something else." ] }, { "name": "Rod Smith", "speech": [ "Yeah, no. I think the way you framed it up is correct. So we expect churn -- normal churn to be within that 1% to 2% range, pretty consistent, nothing abnormal there. And then the Sprint churn, again, that begins in Q4, we'll have about 100-basis-point hit.", "So when you think about that, all in, our annual churn will be in the range of 3%, a little bit above what our normal range is. And again, as you see the quarters unfold in 2021, the fourth quarter will be where you'll see that kind of that big bump up in the churn numbers. And then, of course, that will -- will take one quarter of that in 2021, and then there'll be flow-through effects from that churn into 2022 where we'll get three quarters of that churn in 2022. And that, of course, will have a flow-through negative impact on the 2022 growth numbers." ] }, { "name": "Brett Feldman", "speech": [ "And -- and it's correct --" ] }, { "name": "Rod Smith", "speech": [ "And gross new business is accelerating as we head into 2021, and we expect that to continue into 2022. It's really that the churn had a partially or fully offset that in 2021 or 2022." ] }, { "name": "Brett Feldman", "speech": [ "Got it. And just to be clear, all of this T-Mobile [Inaudible] is currently the churn, it captures everything you expect them to do with the integration, including anything you're doing with the CDMA -- CDMA network?" ] }, { "name": "Tom Bartlett", "speech": [ "That's correct." ] }, { "name": "Rod Smith", "speech": [ "That's correct. Yup, it's all predefined and contracted." ] }, { "name": "Tom Bartlett", "speech": [ "And actually, Brett, I -- I -- I would just add, as -- as I've mentioned before, when we get through this churn, because -- and then we had this really locked in kind of growth rates with our key customers, we would expect the churn really to fall off quite a bit, significantly actually, and they kind of at the '23 to 20 -- '24 to '27 kind of timeframe, which is reflective in some of the growth rates that -- that I laid out for our long-term perspective." ] }, { "name": "Brett Feldman", "speech": [ "Thank you." ] }, { "name": "Operator", "speech": [ "Your next question comes from the line of Michael Rollins. Please go ahead." ] }, { "name": "Michael Rollins", "speech": [ "Thanks, and good morning. Tom, if I could just briefly follow up on a comment that you just made. You talked about the committed growth that you have with key customers. You also talked about that earlier in the call when you were talking about the Slide 7, 2023 to 2027 growth.", "So are there additional long-term deals that you've recently renewed or entered into with carriers other than T-Mobile that is contributing to that visibility into that long-term guidance? And then just secondly, one of the questions that's come up is how to think about AFFO per share growth when you're experiencing the peak churn from the Sprint deal in 2022? Is there anything that investors should be mindful of as you're looking for that long-term target you described, but coming out of '21 and into '22 with that elevated Sprint churn that -- that you and the team were just describing?" ] }, { "name": "Tom Bartlett", "speech": [ "Yeah, no. Hey, Michael, thanks for the questions. With regards to your first comment, I mean there are no new MLAs that -- I mean we already have MLAs in place with the major carriers, so there's nothing else that's -- that's driving that, which I think is what your question was. The -- the most significant MLA that we've recently made is clearly with -- with T-Mobile.", "And so that's what's really impacting if you will. And as I -- as I mentioned, over two-thirds of over the -- the planning period that we're talking about, two-thirds of our growth rates are -- are locked in. And so we have a tremendous visibility in terms of what that's going to look like. And as I mentioned, we have $59 billion or $60 billion already contractually committed revenue on the books.", "So that gives us I think some really good comfort in terms of what we would expect. On top of that, we will also have the -- the large Telxius transaction that will kick in, as Rod said, throughout the year. And so we'll have that benefit continuing forward, which kind of gets into your -- your second question. We've looked at -- as I mentioned in my comments, for the last five years, we're talking about double-digit growth rates in terms of AFFO per share.", "I'm compensated candidly on the bulk on -- on AFFO per share growth, as well as return on invested capital. So those are two critical benchmarks for myself and -- and my team. So we obviously spend a lot of time working through all of the elements of those. In 2022, yeah, there is going to be the -- the trough of the -- the T-Mobile churn that we're going to see.", "We know what it is. We're working on opportunities now to be able to mitigate a lot of that as we go into 2022. We put out an initial guide for 2021 at that 8.5% level. We are all hoping that we're going to be able to improve on that for 2021, particularly as we bring on that kind of the Telxius transaction.", "And then we -- we're -- we're working through what 2022 will look like, but clearly are committed to driving that double-digit AFFO per share growth over the -- the long period of -- of time as we've done in the past. And so we've had historically consolidations going on. As you know, we've had consolidation churn in India over the past. No doubt that the -- the T-Mobile Sprint churn is a large item for us that we need to address.", "But -- but our teams are working on it diligently right now and -- and we're trying to -- to work through that. And -- but clearly, we are committed to driving that double-digit kind of growth." ] }, { "name": "Michael Rollins", "speech": [ "Thanks. And just one other quick follow-up. Rod, when you're talking about the AFFO per share expectation for growth in 2021, you referred to the possibility of upside opportunities. Are those operational, financial in nature? What would be the factors? And there's a line on the slide that talks about the potential path to double-digit growth if upside opportunities to initial outlook materialize.", "Thanks." ] }, { "name": "Rod Smith", "speech": [ "Yeah, Mike. I think there's a lot of -- there's a lot of additional opportunities there. Certainly, some of our operational driving down expenses, bringing up our margins. We continue to kind of work on that on a regular basis.", "There are potential for additional acquisitions, as well as integrating the acquisitions that we've already announced, particularly the InSite transaction and the Telxius to drive additional growth. Capital markets activity and where rates go can certainly be interesting to us as we continue to pay down higher-cost debt and -- and replace it with lower-cost debt. Those sorts of things. As well as driving business through new business around the globe certainly could -- could help.", "So there's a number of things. And -- and we always remain focused on trying to drive upside relative to our plans and outlook. So we'll just continue to do that." ] }, { "name": "Michael Rollins", "speech": [ "Thank you." ] }, { "name": "Operator", "speech": [ "Your next question comes from the line of Ric Prentiss. Please go ahead." ] }, { "name": "Ric Prentiss", "speech": [ "Thanks. Good morning, guys. I hope you continue to do well." ] }, { "name": "Tom Bartlett", "speech": [ "Hey, Ric." ] }, { "name": "Ric Prentiss", "speech": [ "Hey." ] }, { "name": "Rod Smith", "speech": [ "Good morning, Ric." ] }, { "name": "Ric Prentiss", "speech": [ "First, appreciate all the details, short-term, long-term guidance, really helps set the table here as far as what we're looking at. I think a couple of the extra questions. First, you mentioned Dish is fairly modest as far as in the '21 guidance. What should we think about -- will you be able to get your fair share of -- of Dish leases with or without an MLA?" ] }, { "name": "Tom Bartlett", "speech": [ "Yes. Next question." ] }, { "name": "Ric Prentiss", "speech": [ "Pretty clear." ] }, { "name": "Rod Smith", "speech": [ "Yeah. And I'll also confirm, Ric, that --" ] }, { "name": "Tom Bartlett", "speech": [ "No, hey, Ric, I mean I don't -- I don't -- I don't mean to be a wise guy. We have. I mean if -- if you take a look at over the last several years, particularly in the United States, we've -- we've gained more than our fair share of -- of business from our -- from our customers, and it's -- it's a -- it's a function of a number of things. And it's also a function of the contracts that we --we have in place with them.", "I like to think it's also a function of the level of service that we're providing and -- and the quality assets that we have. But what we have been able to -- to demonstrate that kind of outperformance. And you know, we stand ready to support Dish, and however, they're going to be rolling out their network. And we know that we know the teams well and they're -- they're smart team.", "You know, Dave Mayo is a smart guy, smart operator and we're working very closely with them and so we're looking forward to it. And as I said, kind of given the location and given the quality assets, I am confident that we will gain at least our fair share of activity from -- from Dish." ] }, { "name": "Ric Prentiss", "speech": [ "Great. And I think in your prepared remarks you also mentioned that you've not layered in any new entrant beside Dish. Is that an allusion to maybe cable operators starting to deploy some CBRS or what might that come and also imply?" ] }, { "name": "Tom Bartlett", "speech": [ "You know, it -- it kind of covers the waterfront, right? I mean, it -- who -- who knows. I mean, yes, clearly whether there are cable cos or some of those that might be looking to move off of some of their MVNO. We see that happening in other markets. You know, we see that happening in Germany, for example, and having you know has a strong relationship with Telefonica is going to be looking to -- to build out their network in -- in Germany.", "So, it's so hard to say who might be looking to do that. I think, with the -- with the deployment and the new technology. Who knows even whether the hyperscalers or whom -- who might else be coming into the -- to the marketplace wouldn't -- wouldn't surprise me and I don't think it would surprise you either. So, it's kind of a blanket statement that we just don't know what we don't know relative to other players coming into the market.", "So, we haven't included them clearly in any of our forecasts." ] }, { "name": "Ric Prentiss", "speech": [ "And speaking of the MVNOs in Germany, any thoughts about timing to get some agreements in place with a holistic approach in Germany, given the new portfolio and particularly the rooftops are getting?" ] }, { "name": "Tom Bartlett", "speech": [ "Yeah. You know, we've been -- we've been working with all of the players in the market for several years, obviously, and -- and most recently since we have a new potential entrant into the market. Just as with every other one of our customers working very closely, I think, that the -- the assets that we now have, the presence that we now have in Germany gives us a really good platform to be able to support this existing MVNO and new build in -- in Germany. And I think, it's right, yeah.", "You know, we're really excited about some of the organic growth that we expect to see in the region particularly in -- in Germany as they've just gotten through their 5G spectrums and as we see new entrants coming into the marketplace. And now, you know, with the presence that we have there, particularly with the rooftops, we now have that dense urban area covered which we didn't have before. So, I think it really positions as well to be able to capture new business." ] }, { "name": "Ric Prentiss", "speech": [ "Makes sense. The last one for me is a modest edge assumption. When does edge become real and is it going to tie up the same in the U.S. as it is in Europe and other markets?" ] }, { "name": "Tom Bartlett", "speech": [ "Well, I clearly see it advancing in the United States first. But candidly, I almost see the opportunity for it to be even greater outside of the United States. And that's where I think that the, you know, your pro forma for Telxius where, you know, 220,000 sites. We're looking to build 40,000 to 50,000 more sites over the next several years.", "You know, we have a massive global platform, Ric, which I think is really going to be -- puts us in a really unique spot to be able to offer that global platform to hyperscalers, datacenter companies, even global MNOs who are looking for that kind of a ubiquitous tie -- type of a capability. And so, you know, that's what we're looking and trying to build here. You know, this is not 2021, you know, real big revenue opportunity. You know, I think, it's going to take a few years, but we have MOUs in place with several companies in the United States working with them on different kind of value propositions, a different type of market entries, we have proof of concepts that we're bringing -- we're dropping in front of the major MNOs.", "And so, we're very excited on it -- about it. We're -- we're spending a lot of think time working through this and working with potential partners. This is not something that we would be looking to bring entirely on our own. So, I do see this as a -- an opportunity to be partnering with a number of other players to bring.", "And I think that even in our own market in the United States in our portfolio, you know, there probably 4,000 to 5,000 sites that we've identified where we think that we can bring in several shelters into a -- into a site being able to offer up, you know, 20 to 30 cabs with a -- with a 100 to 300, 400 kilowatts of power. And -- and so, I think, we're uniquely positioned to be able to do this not just in the United States but -- but globally. But I do think it'll be, you know, start in the United States. But as I said, I think, our global reach really puts us in a unique position to be able to offer a high-value prop to potential customers." ] }, { "name": "Ric Prentiss", "speech": [ "That's great. Thanks, guys. Stay well and I look forward to the moment I can see you again in person." ] }, { "name": "Tom Bartlett", "speech": [ "Yeah. Absolutely, Ric. You too." ] }, { "name": "Rod Smith", "speech": [ "Yeah, thanks. Thanks, Ric." ] }, { "name": "Operator", "speech": [ "Your next question comes from the line of Simon Flannery. Please go ahead." ] }, { "name": "Simon Flannery", "speech": [ "Great. Thank you very much. Rod, could you just talk a little bit more about the balance of the Sprint churn? You said, $200 million in October 1. The other 175, do you have clarity on when that peels off? Is that in '22, '23? Any specifics around that would be great.", "And then, Tom, maybe just come back to India if you could talk about pricing trends there and capital raising and the ability to maybe move past and return to more normal growth in '22 and beyond?" ] }, { "name": "Rod Smith", "speech": [ "Sure." ] }, { "name": "Unknown speaker", "speech": [ "Broadway is starting coming all --" ] }, { "name": "Operator", "speech": [ "Just a second." ] }, { "name": "Rod Smith", "speech": [ "Yeah, sounds good. So, good morning, Simon. So, the Sprint churn is expected to be around $375 million and that's an annualized number as I stated in the prepared remarks and in the last -- the last Q&A. We expect about $200 million of that annualized number or about 53% to roll -- roll up in Q4 2021.", "The balance will be spread across 2022, '23, and '24 and, I guess, in broad percentages that you can think about 16% of that total $375 million rolling off in 2022, an additional 13% coming off in 2023, and then another 19% coming off in 2024 and then that'll be the end of the Sprint churn." ] }, { "name": "Simon Flannery", "speech": [ "OK. Great. That's helpful. Thank you." ] }, { "name": "Tom Bartlett", "speech": [ "And then, you know, Simon, on India, you know, as Rod said and I alluded to as well, we continue to remain really positive on the market overall. It's a work in progress as you all know. We're looking at, you know, growth -- gross growth in the market, a double-digit. The challenge is the churn.", "And -- and it's coming down on a year-over-year basis and we will -- it will continue to come down and that's what we need to be working on with our -- our carriers particularly Vodafone in the -- in the region. And -- and we are working on that as we speak. And so, over -- over the longer period of time, I would expect that churn to be coming down and for us to be early, be able to start to drive the positive net organic growth. I mean, if you take a look at our overall international markets, you know, we're growing 79% in Latin America, and Africa, Europe.", "As I mentioned before and with -- with Ric, you know, we really see some nice growth, I think, that we're going to be experiencing there. So it is India, it is that focus on that particular market that we need to drive, that will bring up the overall, clearly, the growth rate in the international space and there are a number of things that have to happen in the marketplace which we see happening. They just don't happen very quickly. You know, clearly, the -- the government is committed to digital India -- to their digital India program.", "I think the pandemic has made that even more obvious because, you know, so many Indians there are looking for telehealth services and they need that broadband connection. So, you know, everything that we're hearing, we're seeing is -- is really giving me even more and more comfort, that the government is going to be supporting the carriers to really being able to identify the overall network. And we're seeing that, we're seeing in the build programs, clearly, we're seeing that from -- from all of the three major carriers in the marketplace. We're starting to see price increases in the market, which I think is positive really power -- positive.", "We're also seeing our -- our customers, in particular Vodafone, you know, looking to identify different areas to be able to infuse capital. I also just saw yesterday, from an AGR perspective, that the government is now relooking at some of the new calculations that -- that the carriers were being opposed on that they were going to have to pay over the next 10 years or so. So, again, I think that's just indicative of the fact that the -- the government very much wants, you know, each and every one of the carriers to survive and to participate to their own digitization that's going on within -- within the marketplace. But you know, we got more work to do.", "We've got to work through the contract that we have in place particularly with Vodafone to try to nip the -- some of that churn. But as I said, we're seeing the growth in the marketplace which I think is what we've always seen is that opportunity. And so now, we need to work on that -- the churn, which is exactly what we're doing." ] }, { "name": "Simon Flannery", "speech": [ "Great. Thanks, Tom." ] }, { "name": "Tom Bartlett", "speech": [ "Pleasure, Simon." ] }, { "name": "Operator", "speech": [ "Your next question comes from the line of David Barden. Please go ahead." ] }, { "name": "David Barden", "speech": [ "Hey, guys, thanks so much for taking the question. I guess, Tom, it -- it wasn't too long ago that, you know, the same-store sales organic growth rate domestically was 6% and the belief that the international market would grow to 4% premium to that, you know, out of 10. And now, we have kind of a seven-year outlook, which thank you for that, for the U.S. to grow at 4% and for the international market to grow 2% more than that.", "So, now it's at 6% And, I guess, the question then becomes -- two questions. One, can you just aggregate that 6% growth into organic growth, inflation-based escalators, and new builds relative to the U.S.? And then, can you desegregate it regionally with respect to, you know, which regions are going to be driving more than 6%? And, I guess, to your question -- you're going to answer to Simon's question is now, you know, maybe India is on the lower end of that 6% if that population is correct. Thank you so much." ] }, { "name": "Tom Bartlett", "speech": [ "OK. Hey, David. Well, thanks for that question. Let me -- let me take a -- I'll start it and then I'm sure Rod and either I might be able to fill in some of the pieces.", "But as I talked about it, I mean, to be -- you're -- you're right we talked about kind of 6% to 8% kind of growth rate console -- on a consolidated basis. Right? If you -- if you go back a number of years. Now, we are twice the size of the business that we were back then. So, growth on a base of that size does get to be a little bit more challenging but if even take a look at the numbers that I laid out for the U.S., that this is just organic.", "Right? And so, it's not -- it does not include the -- our built-to-suit programs in the United States. You know, the big -- big item there is -- is the Sprint churn. And so, that's why we kind of laid it out looking at the next couple of years. And then, even layering in on top of, OK, what would that growth look like perhaps without that Sprint churn.", "And that's where it goes next couple of years being on average in the United States organically a couple of percent, but being up in that 5% range to the extent that we did not have it. And then, you go out longer-term '23 to '27 in the United States where, you know, would be greater or equal to 5% and then without a greater equal to 6%. So, it's kind of getting back and particularly if you didn't weigh in the fact that the business is so much bigger. You know, it's getting back to those ranges and -- and, you know, and we're looking at some of that growth coming from some of our platform extension issues but not -- not in any significant way.", "I mean, it's largely from pure organic growth coming from our contractually committed master lease agreements that we have with our -- with our customers. You know, on the international side, we didn't necessarily come out with kind of long-term growth projections for them other than saying that you know we would expect it to be a couple of 100 basis points higher than what we're seeing in the United States. So, given that, you know, you would look at, you know, the '23 to '27 kind of average up in that 7%, 8% normalized without the kind of, you know, without the impact of the churn in the United States. So, you know, it's working really rather consistent with some of those growth rates that we laid out several years ago.", "And as I said that, you know, we do have a -- a big -- a much bigger base of business. You know, what's also exciting though is on the build-to-suit program, you know, that's driving, you know, $10 million of new revenue for us each and every year. We do have, and I do expect as I mentioned, a kind of four sites on adding 40,000 to 50,000 new build-to-suits over the next five years. We set records kind of every month every year in terms of the building of these.", "And you know, double-digit NOI, so it's a really good return of capital for us and with good tenants. So, it really provides upside to our overall growth rate that we expect going -- going forward. You know, with the -- with the -- the Telxius deal and the heavier European presence we're getting a little bit more of a presence in even the developed markets. And -- and I would expect, as I mentioned, I think it was to Ric, you know, that you know up 6% kind of growth rates.", "You know, we're kind of being expected from my perspective in Germany and -- and, you know, I think. that there's really a lot of opportunities there. So again, just kind of stepping back, I don't think they're inconsistent with what we've said in the past. We are bigger business.", "We did -- we do have a big Sprint churn event which will impact us over the next couple of years which is to no one's surprise kicking in really the fourth quarter here. We talked about that right out of the gate ended up being, you know, churn and that kind of four percentage range if you will of our -- of our business. And it really did land on that and, I think, we've been able to put in place a long-term contract with -- with T-Mobile who are really in a very good position from a spectrum perspective and a build from perspective. And I think, we're going to be very aggressive and -- and so given the kind of master lease agreement we have in place with them, you know, I'm -- I'm really excited about that kind of strategic relationship that we have with them to be able to explore new stuff and -- and new areas of business.", "So, it's kind of a long rambling answer for a question but -- but I think it's pretty consistent." ] }, { "name": "David Barden", "speech": [ "OK." ] }, { "name": "Rod Smith", "speech": [ "Yes. And Tom, maybe I'll just add a couple of -- David, maybe I just that a couple of quick points here. When you look at the -- the out years of the U.S. organic common billings growth number, the normalized to the Sprint churn, we say, you know, greater than or equal to 6% between 2023 and 2027.", "When you get beyond that -- that big churn event in 2022. The high-level pieces of that we maintain at 3% escalator in our business. So, that's a piece of that 6%. We expect new business to drive 4% to 5% in that range and then churn outside of Sprint would be back down into that between 1% and 2%.", "That's how you get to that 6% over that '23 to '27 timeframe." ] }, { "name": "David Barden", "speech": [ "OK. Right. Thanks, Rod, and thanks, Tom. Appreciate it." ] }, { "name": "Rod Smith", "speech": [ "Thanks, Dave." ] }, { "name": "Operator", "speech": [ "Your next question comes from the line of Nick Del Deo. Please go ahead." ] }, { "name": "Nick Del Deo", "speech": [ "Hey, good morning. Thanks for taking my question." ] }, { "name": "Rod Smith", "speech": [ "Hey, Nick." ] }, { "name": "Nick Del Deo", "speech": [ "Hey. First one in Europe and then one in India. You know, in Europe, Orange is just talking about trying to get some other carriers that haven't sold their towers yet to kind of join forces and -- and kind of create a pan-European carrier control tower co, you know, maybe akin to what's happened in China. Now, obviously, a lot to happen for that to be realized but if it did, you know, do you feel like that would affect the growth outlook or appeal of European markets for independents like you?" ] }, { "name": "Tom Bartlett", "speech": [ "No. You know, we -- we -- and by the way, Orange is a great customer of ours right now. We're doing a lot of business with -- with them. Candidly, we've -- we've, you know, seen captives working around the world including even in the United States back in -- back in the day.", "And so, we've -- we've operated and we've seen the results and the impacts and I think in many -- in some cases, it bring some stability in certain -- certain respects. But -- but we wouldn't expect that to -- to impact growth rates at all." ] }, { "name": "Nick Del Deo", "speech": [ "OK. OK. And then, you know, India. You know, obviously, emphasis for you over the next decade is going to be new builds which is great to hear a lot of that's going to take place in India.", "You've also been decommissioning a lot of sites in India over the last several years. I assume, you know, sites that are naked when the ground lease came up. Can you talk about that dynamic at all? How many more sites in India you think are left to be decommissioned and when we should start to see, you know, kind of aggregate tower growth in that market?" ] }, { "name": "Tom Bartlett", "speech": [ "You know, we -- we do -- we evaluate that every month every year. And a lot of it is a function of the consolidation that's gone on in the marketplace over the last several years. And so, you know, when something like that happens we look at the sites we look at the opportunities to put new customers on -- on those sites and we evaluate them over, you know, a couple of year period to really gonna get a sense of whether there is an opportunity to -- to lease back up as you said kind of those naked sites. And so, I would expect that the consolidation churn -- what's happened in the market probably in the next couple of years to, you know, you will see those types of things.", "You can't say -- it's relatively overall, relatively insignificant to the portfolio overall, but it is part of our just our normal impairment analysis that we -- we go through. And -- and as you well know with lease accounting it's not just the property itself, it's also the land itself that we're evaluating as well given the debts on the balance sheet." ] }, { "name": "Nick Del Deo", "speech": [ "OK. Got it. And, you know, maybe one -- one quickie if I can. You noted in expectation of the Australian dollar tax rate in your guidance.", "Do you have something in the works in that market?" ] }, { "name": "Tom Bartlett", "speech": [ "Yeah. Actually, with the recent acquisition of Insight, we picked up some land. It's -- it's immaterial really but --" ] }, { "name": "Nick Del Deo", "speech": [ "Oh, OK." ] }, { "name": "Tom Bartlett", "speech": [ "Yes, we do now have -- yeah, we do now have some presence in -- in Australia. Minimal." ] }, { "name": "Nick Del Deo", "speech": [ "OK. OK, great. Thank you, Tom." ] }, { "name": "Tom Bartlett", "speech": [ "You bet." ] }, { "name": "Operator", "speech": [ "And one moment please for your next question. Your next question comes from the line of Tim Horan. Please go ahead." ] }, { "name": "Tim Horan", "speech": [ "Thanks, guys. On the AFFO per share growth of double-digit. I'm just having a tough time getting there. The last kind of few years have been growing organically and more like 7% EBITDA margin spin-off like 50 basis points a year.", "Your interest expense has, you know, improved 100 basis points, you know, maybe a little bit more even. And you're talking about slower organic growth going forward. I mean, what are the other levers you can pull to get to that type of AFFO growth. I mean, do you think the interest expense can continue to improve and -- and will margin improvement acceleration here? Or any other color would be very helpful, thanks." ] }, { "name": "Tom Bartlett", "speech": [ "No, sure, Tim. Let me keep in mind, we've had huge FX headwinds, right? You know, if you even take a look at last year, it was like $0.25, $0.30. So we've had some huge FX headwinds going on. We do have, as Rod pointed out, you know, some M&A that's going to be kicking in in 2021 with Telxius and that will impact, you know, part of this year and then kick in largely in terms of 2022.", "I also have a significant focus on our margin performance, you know. And I think, that there are a lot of really interesting opportunities for us to even further standardize and globalize some of our -- of our business. And so, I'm hopeful that we can even take our industry-leading margins to new levels. And so, you'll see even this coming year margin performance is up from last year.", "And so, I would continue to expect margin improvement going forward. And then, there's just, you know, general operating leverage you know that will come. And so, we talked -- I think Rob mentioned the -- the increased flow through from revenue down to AFFO. So, we're hopeful that that will be a contributor.", "And you know, even on our -- on our balance sheet, you know, we continue to look at ways from a maintenance perspective to -- to drive down our overall cost of borrowing. So, I do think that there are a number of different leverage there, Tim, that we'll be able to -- to drive that. And as I kind of said early on, and take a look at you know the last, I don't know, 10 years in terms of what we've -- we've done, you know, I think our record kind of speaks for itself in terms of the -- the underlying growth that we've been experiencing. Now, we're talking long terms, I mean, every year is going to be at those double-digit growth rates.", "Well, I hope so. But you know, but -- but you can also have challenges from a year-to-year basis but -- but I'm very optimistic that we're going to be able to -- be able to drive those kinds of growth rates." ] }, { "name": "Rod Smith", "speech": [ "And can -- maybe just pulling out -- I'll add a couple of things. A quick point here on FX. The FX assumption that we have in that long-term plan is to hold the FX rates fairly steady to where they are now, you would mention that. We also expect rates to stay relatively low over that time period and I'd remind you that 80% of our debt is fixed.", "So, very insulated from short-term movements in rates. We also have additional senior notes that we can continue to kind of pay down later, redeem early, and replace them with lower interest rate notes now and in the future assuming rates, you know, stay low. So, those are two of the pieces kind of at the -- at the -- put -- to put a finer point on FX and interest rates." ] }, { "name": "Tim Horan", "speech": [ "That's helpful and thanks for the guidance through 2027. Are you implying or I guess do you have major MLA agreements in place through that timeframe for the most part?And do these agreements allow see band equipment to be put on the towers without any incremental payments or minimal incremental payments? Any more color around the MLAs would be great." ] }, { "name": "Tom Bartlett", "speech": [ "Yeah, I mean the MLA, you know, I think -- I think, we've said in the past, I mean, they do cover through this -- this period of time. In relative, the fee band and technology and those types of things, Tim, I really do try to stay away from. I don't want to get into the -- the weeds on some of that activity. But -- but to answer your other question, yeah, MLAs agreements to cover through this period.", "So, we have -- we do have some very good visibility into this. And I think, as Rod said, you know, two-thirds of the -- of the underlying growth there are -- are things that we actually see within the MLA themselves today." ] }, { "name": "Tim Horan", "speech": [ "Thank you." ] }, { "name": "Tom Bartlett", "speech": [ "Sure." ] }, { "name": "Operator", "speech": [ "Your next question comes from the line of Colby Synesael. Please go ahead." ] }, { "name": "Colby Synesael", "speech": [ "Great. Thanks for fitting me in. You had mentioned equity raises, in that there's a variety of different ways in which you're looking at potentially doing that. Can you give us a sense of the total size of equity that you're looking to raise to support the acquisition of TelxiusM And then, secondly, when you think about your leverage target, how much room do you still have left in 2021 for things like buybacks or M&A or should we really kind of push those out in terms of expectations for -- for 2010 and beyond?" ] }, { "name": "Rod Smith", "speech": [ "Thanks, Colby. This is Rod. I'll -- I'll take that and something add-in. So, I think, I'll start just by just reminding everyone we ended the year with leverage at about five times.", "That is that at the top of our stated financial policy of three to five times. When it comes to healthiest and financing, the healthiest acquisitions, of course, we expect to do that in a manner that's consistent with maintaining our investment-grade credit rating. That's always been important to us it continues to be very important to us. And we've been engaged in a variety of fronts here since we announced that deal in terms of preparing some financing.", "The first thing I would note is we do have that committed bridge led by Bank of America. We've gone further and indicated that's so we have that in place as a backstop. You've also seen us in the -- in the debt markets here in terms of the bank facilities we upsized a couple of our result -- revolvers. We also entered into a new term loan that Euro denominated, that's about $1.9 billion value.", "So, we've got, you know, increased liquidity from that perspective. We did end 2022 with about $4.5 billion for almost $4.9 billion of liquidity and these are additive to that to prepare for the closings. One thing that we are comfortable with doing we've been working with the rating agencies, we've been doing a lot of internal analysis and we're comfortable increasing our leverage to the high five times as and when we close the healthiest deal, and then we'll -- we'll be committing to the levering back into within our financial policies over -- over a couple of year time period. So, you will see us with higher leverage probably for an extended time period.", "And I'll let you do the math gold in terms of what that might mean in terms of how much we'll raise from debt to actually execute on the healthiest transactions. The balance of the purchase price that will remain, we'll look at a number of different equity sources, we're looking at public equity, we're looking at mandatory converts, and we're also looking at private capital and we're doing a lot of different analysis. Around that and we'll make the best decisions for our shareholders in terms of maximizing total shareholder return, maximizing AFFO per share growth, and -- and also looking to help make sure that we have a really strong balance sheet as we go into the future so we can continue to grow. So, when you think about that, one of the things we've done is we've looked very hard at raising private capital.", "We've done a lot of work there, we're continuing to be engaged with just a small number of very large premier investors around the world and we maintain a high level of confidence and that -- that could be a very attractive vehicle for our shareholders. So we're continuing to explore that. And we'll -- we'll make the -- the decisions kind of along the way. And I would say when you think about private capital we are in our analysis in the way we're thinking about it we would be selling minority stakes in our European business.", "It's not really related to the Telxius transaction specifically. It's the entire European business that we would look to finance potentially by adding some private capital in there. And in terms of the mix, how much private capital versus how much public equity, we'll be making those decisions here over the coming weeks and months as we kind of work through the analysis and get close to the closing. Did that hit all your points, Colby?" ] }, { "name": "Colby Synesael", "speech": [ "Yeah. Thank you." ] }, { "name": "Rod Smith", "speech": [ "Great. Great. Well, thank you everybody for joining. I think that'll do it for this morning.", "Appreciate you joining, everyone." ] }, { "name": "Operator", "speech": [ "[Operator signoff]" ] } ]
AMT
2018-02-27
[ { "description": "President, Chairman, and Chief Executive Officer", "name": "James D. Taiclet, Jr.", "position": "Executive" }, { "description": "Executive Vice President, Chief Financial Officer, and Treasurer", "name": "Tom Bartlett", "position": "Executive" }, { "description": "Director of Investor Relations", "name": "Igor Khislavsky", "position": "Executive" }, { "description": "Raymond James & Associates -- Managing Director", "name": "Ric Prentiss", "position": "Analyst" }, { "description": "Bank of America Merrill Lynch -- Managing Director", "name": "David Barden", "position": "Analyst" }, { "description": "Barclays Investment Bank -- Analyst", "name": "Amir Rozwadowski", "position": "Analyst" }, { "description": "Citigroup Research -- Analyst", "name": "Michael Rollins", "position": "Analyst" }, { "description": "Macquarie Capital Partners -- Analyst", "name": "Amy Yong", "position": "Analyst" }, { "description": "Deutsche Bank -- Director", "name": "Matthew Niknam", "position": "Analyst" }, { "description": "JP Morgan -- Vice President", "name": "Richard", "position": "Analyst" }, { "description": "Morgan Stanley -- Managing Director", "name": "Simon Flannery", "position": "Analyst" }, { "description": "UBS Investment Bank -- Analyst", "name": "Batya Levi", "position": "Analyst" } ]
[ { "name": "Operator", "speech": [ "Ladies and gentlemen, thank you for standing by. Welcome to the American Tower Fourth-Quarter and Full-Year 2017 Earnings Call. At this time, all participants are in a listen-only mode. Should you require any assistance or like to ask a question at all during today's call, please press *0. As a reminder, today's conference is being recorded. I'd now like to turn the conference over to our host, Igor Khislavsky. Please go ahead, sir." ] }, { "name": "Igor Khislavsky", "speech": [ "Thank you. Good morning and thank you for joining American Tower's Fourth-Quarter and Full-Year 2017 Earnings Conference Call. We have posted a presentation which we'll refer to throughout our prepared remarks under the Investor Relations tab on our website, www.americantower.com.", "Our agenda for this morning's call will be as follows: First, I'll provide a few highlights from our financial results for the quarter and full year 2017. Next, Jim Taiclet, our President, Chairman, and CEO will share some brief thoughts on our recently completed Double Double initiative and our positioning for the future. Finally, Tom Bartlett, our Executive Vice President, CFO, and Treasurer will provide a more detailed review of our 2017 results as well as our initial outlook for 2018. After these comments, we'll open up the call for your questions.", "Before I begin, I'll remind you that this call will contain forward-looking statements that involve a number of risks and uncertainties. Examples of these statements include our expectations regarding future growth, including our 2018 outlook, capital allocation, and future operating performance, the pacing and magnitude of the Indian carrier consolidation process and its impacts on American Tower, assumptions around our pending and recently closed acquisitions, and any other statements regarding matters that are not historical facts.", "You should be aware that certain factors may affect us in the future and could cause actual results to differ materially from those expressed in these forward-looking statements. Such factors include the risk factors set forth in this morning's earnings press release, those set forth in our Form 10-K for the year ended December 31st, 2016, and in the other filings we make with the SEC. We urge you to consider these factors and remind you that we undertake no obligation to update the information contained in this call to reflect subsequent events or circumstances.", "Now, please turn to Slide 4 of our presentation, which highlights our financial results for the fourth quarter and full year 2017. During the quarter, our property revenue grew 10.3% to $1.68 billion, our adjusted EBITDA grew more than 10% to $1.03 billion, and our consolidated adjusted funds from operations and consolidated AFFO per share both increased by about 8% to $707 million and $1.64 per share respectively.", "Finally, net income attributable to American Tower Corporation common stockholders increased by 8.5% to $220 million or $0.51 per diluted common share. This included an impairment charge primarily related to assets in India partially offset by tax benefit associated with the impairment charge. The total amount of the impairment was approximately $209 million in the quarter, about $127 million of which was attributable to AMT common stockholders.", "From a full-year perspective, our property revenue grew 14.9% to $6.6 billion, our adjusted EBITDA grew more than 15% to $4.1 billion, and our consolidated AFFO grew by 16.5% to $2.9 billion while consolidated AFFO per share rose by nearly 16% to $6.72. Finally, net income attributable to American Tower Corporation common stockholders increased by nearly 36% to $1.2 billion for the year. With that, I'll turn the call over to Jim." ] }, { "name": "James D. Taiclet, Jr.", "speech": [ "Thanks, Igor, and good morning to everybody on the call. I'll briefly cover three topics today: The results of our just-concluded 10-year strategic plan, the launch of our next 10-year strategic plan, and our key focus areas for 2018. As many of you may recall, in 2007, American Tower initiated a long-term strategy for growth over a 10-year time horizon. By 2017, our strategy targeted 4x growth in number of communications sites and 4x growth in financial performance. Internally, we called this our Double Double strategy. As you can see, the trajectory of operational results delivered under this strategy is on Slide 6.", "As we announced in our 2017 results today, I'm extremely pleased to report that we far exceeded both of our aspirational strategic goals. On the asset dimension, our strategy called for 100,000 towers and small-cell systems by the end of 2017. We ended the year with more than 150,000 sites, exceeding the goal by over 50%. The commensurate year-end 2017 financial objective was $6.00 per share of consolidated AFFO. We generated $6.72 of consolidated AFFO per share in 2017, exceeding that goal by 12%.", "These accomplishments were led by my colleagues on the American Tower executive team, each of whom has been in their position for the entire Double Double strategy period. Delivering these results on the ground were our nearly 4,500 team members from around the world -- from Boston to Sao Paolo to Johannesburg to Mumbai. American Tower's 2017 results, in particular, were emblematic of the pace of growth enabled by our Double Double strategy.", "We grew our consolidated AFFO per share -- as Igor just said -- by nearly 16%, expanded our return on invested capital and increased our common stock dividend by more than 20%, all while simultaneously buying back around $770 million in stock during the year. Moreover, during the course of just the past five years, we've invested nearly $20 billion to acquire and construct communications real estate. Approximately 60% of that was spent in the U.S. and 40% internationally. With our operational momentum and unmatched asset base, American Tower's mission remains consistent: To secure and optimally manage franchised real estate to enable wireless communications and to deliver strong growth and returns in the process.", "So, today, we're formally launching our next 10-year growth plan for 2018 to 2028, which we call Stand and Deliver. Given our investments and our leading position in the communications real estate industry, we are expanding upon two of our long-held strategic pillars and adding two additional components to our strategy. All four of these components are summarized on Slide 7.", "The first continuing pillar from our Double Double strategy is to deliver operational efficiency to expand margins, but going forward, not only do we intend to focus on efficiencies internal to ATC, we're also expanding our scope into improving the efficiency of the broader mobile industry, including an emphasis on environmental responsibility.", "One example is working with industry and leading academic institutions to develop advanced distributive power solutions for tower sites that could supplement and may eventually replace many diesel generators. We're currently evaluating emerging technologies such as deep storage batteries and renewal energy approaches such as solar and wind. The benefits would include significantly reducing diesel generator fuel costs that are paid for not by us, but by our mobile operator tenants, and also then reducing the carbon footprint of the overall mobile network, especially in emerging markets.", "The second familiar strategic pillar is to grow our assets and capabilities to meet our tenants' evolving needs. The core of our business will continue to be our extensive global macro tower footprint, as we believe that towers will remain the most cost- and technologically effective solution for 2G, 3G, 4G, and ultimately, even 5G mobile technologies. Consequently, we'll still utilize our disciplined capital allocation strategy to build and acquire additional tower assets that meet our investment criteria and we'll continue to make targeted investments when franchised real estate rights can be secured to meet our tenants' evolving requirements, one long-standing example being our leading position in indoor independent small-cell or DAS systems.", "Another such example is the recent small investment in Federated Wireless to help facilitate access to the CBRS spectrum now expected to be made available later this year. While our fundamental view remains that 4G will serve as the primary consumer wireless network technology in the U.S. and abroad through the mid- to late 2020s at least, we also believe that we have to begin now to prepare American Tower to also be the industry leader in the 5G world of the future.", "So, as part of the Stand and Deliver strategy, we're complementing our traditional ATC objectives -- operational efficiency and smart asset aggregations -- with two additional components, which we believe are essential to maximizing our future opportunities in five to ten years' time. The first is a methodical and disciplined approach to innovation. We have institutionalized here a structured program to seek out new potential customers for communications real estate beyond our current mobile network operator tenants.", "Among these future potential customers and partners are companies in the aerospace and other industries that are interested in commercialization of drones, data centers and cloud computing providers, working on EDGE solutions, and social and branded media and entertainment companies. We're also selectively evaluating new communications real estate architectures that our current and future tenants may need to meet their network siting requirements in a 5G world.", "We currently have a number of prototype development efforts and collaborative trials in process in both the U.S. and in many of our international markets. Our wireless smart light pole alliance with Philips Lighting -- especially our Huntington Beach project we announced just this week -- our next-generation broadcast technology trial in Dallas with three customers, and EDGE computing solution evaluations using our tower sites are just three examples of what's going on right now. In addition, we have made a couple of select fiber and urban infrastructure investments in underserved, hyperdense urban markets in Latin America and South Africa to deliver fiber-to-the-tower and small-cell siting solutions at scale where there aren't many other providers.", "We realize that these new customer and architecture opportunities will take time to evolve and that some may not pan out in the end. However, we believe it's imperative to begin working on these future prospects today to ensure American Tower's continued leadership position well into the figure, as 5G enables much more robust consumer business and Internet-of-Things functionality in services over time.", "This brings us to the fourth component of our strategy: Industry leadership, which is represented by American Tower's elevated participation and broad cross-industry consortia, interactions with national and local government bodies, groups pursuing smart city initiatives, and NGOs seeking ways to extend the economic frontier of advanced mobile communications to populations that are currently underserved. We aim to be seen across industries and around the world as the preferred partner for existing and new tenants that require mission-critical access to communications real estate. Our goal is for these opportunities to amount to meaningful additive leasing revenue and cash flow over the course of our 10-year strategic planning period.", "As we orient our company toward this long-term Stand and Deliver strategy, we're also highly focused on the here and now. American Tower has a number of immediate priorities that I'll highlight before turning the call over to Tom for an in-depth review of our 2017 results and our 2018 expectations.", "First, we anticipate that our core U.S. tower market will enjoy strong tenant demand in 2018 and beyond. Based on the mobile operators' recent public statements, the aggregate U.S. carrier CapEx should be in the $30 billion-plus range in 2018, a level which supports robust organic tenant billings growth for our business. With all four national carriers in the U.S. offering unlimited data plans and with increasing mobile video consumption among consumers, we can also expect another year of at least 30% aggregate data growth in the U.S., all of which places further demands on wireless networks.", "With the announced deployment plans for the FirstNet public safety network, a mid-band spectrum buildout expected in the 2.5 GHz band, and the potential launch of low-band 5G coverage projects, we expect tenant organic billings growth of over 6% this year in the United States. While operating in this strong domestic demand environment, we aim to capture as much incremental cash flow growth as we can while also seeking to extend the term length of our existing base of business whenever possible.", "In Latin America, we also expect a solid demand environment, and with ATC's excellent strategic positioning in the region's key markets, we expect to garner both strong organic growth and the opportunity for a robust tower construction program due to customer network expansion in the region. We see the accelerated deployment of 4G in Mexico by both incumbent operators and the new wholesale network providers continuing through the year, supporting organic tenant billings growth with 2017 there. We also expect steady growth in Brazil, which is also pivoting toward a higher-quality 4G market.", "Our EMEA region should also deliver solid results and our management team there continues to patiently explore ways to deepen our presence both in Europe and Africa within our disciplined investment criteria. When it comes to India, we are, of course, highly focused on and involved in the ongoing mobile operator and tower industry consolidation process. While we always expected significant operator consolidation in the Indian market, Reliance Jio's bold launch of its 4G network significantly disrupted the incumbents, driving them to rapidly merge their businesses in response.", "Consequently, an orderly consolidation process that we expected to run over four or five years is being compressed into a much tighter timeframe. As a result, we anticipate that ATC India -- along with all tower operators in the market -- will experience substantial churn in 2018, and this is included in our outlook. We then expect these elevated churn levels to begin to subside in 2019, and by 2020 and thereafter, that the reordered market will gradually return to more typical organic growth rates over the long run.", "Over the mid- to long-term, we believe a rational Indian wireless market with three or four national mobile operators and two to three major tower companies that includes ATC will more than make up for the short-term churn impact of this consolidation process in the short term. Consequently, we have applied our practice of acquiring quality tower portfolios during times of short-term market disruption because they're required at reduced asset pricing. This is the logic behind our signed agreements to purchase the non-Indus Communications real estate assets of Idea and Vodafone. Over our planning period, we expect that these towers may eventually prove to be among the highest-return assets in the company given their low purchase multiple and the market's future long-term growth prospects.", "Lastly, I'd like to thank our investors for their confidence in us as we've executed our Double Double strategy over the past ten years, and I hope that you share our enthusiasm about American Tower's potential for strong cash flow growth and expanded returns over our next 10-year strategic planning cycle. So, with that, I'll turn it over to Tom." ] }, { "name": "Tom Bartlett", "speech": [ "Thanks, Jim. Good morning, everyone. The strong set of Q4 results that you saw this morning wrapped up another solid year, in which we drove consolidated organic tenant billings growth of over 7%, added nearly 7,000 new sites, and acquired a strategic set of urban telecommunications assets in Mexico, which we think will generate leasing growth for years to come. In addition -- and as Jim just alluded to -- we continued to steadily increase our dividend and also repurchased nearly $770 million of common stock throughout the year.", "We believe we're well-positioned for next year, but before we get into the details of our 2018 expectations, let me quickly summarize our operating results for 2017. If you please turn to Slide 9, for the full year, we drove organic tenant billings growth of over 7% on a consolidated basis, with nearly 6% coming from volume growth from gross new business throughout our geographical footprint. Our U.S. property segment revenue growth for the year was over 7%, driven by a 17% increase in new business contributions and an MLA amendment signed with one of our major tenants in the first quarter.", "U.S. organic tenant billings growth was 6.2% for the year, including slightly lower expected Q4 growth of about 5.9% due to some timing impacts associated with certain existing master release agreements as compared to the prior year. Volume growth from co-locations and amendments contributed 4.9% to the full-year growth rate while pricing escalators contributed just over 3%. This was partially offset by churn of about 1.7%, of which just 40 basis points was associated with operational churn from the Big Four wireless carrier core networks. Importantly, as of the end of the year, our average remaining non-cancelable contract term with the Big Four was nearly six years. Throughout 2017, we saw U.S. wireless carriers focus on the quality of their networks as mobile video across unlimited data plans consumed more and more existing network capacity.", "International organic tenant billings growth for the full year was nearly 4% higher than that of the U.S., coming in at about 9.7%. This was supported by significant network spending by tenants across our footprint, including a particularly strong year of activity in key markets like Mexico and Brazil in Latin America, both generating double-digit growth. Co-locations and amendments drove about 7.4% of the growth while escalators contributed another 4.7%.", "Other run-rate items ended at about 20 basis points, offset by churn of around 2.5%, the majority of which was concentrated in India, where carrier consolidated accelerated in the fourth quarter. This carrier consolidation-driven churn -- primarily related to Reliance Communications and MTS -- increased our full-year international churn rate by about 60 basis points. Adjusting for the impact of this, our international organic tenant billings growth would have been over 10%.", "On the inorganic side, the Day 1 revenue associated with the sites we added over the course of the last year contributed another 5% to our global tenant billings growth, and this was driven by our acquisitions as well as the nearly 2,000 newly constructed sites, primarily in our international markets, with average Day 1 NOI yields of over 10%.", "Turning to Slide 10, we also generated strong adjusted EBITDA and consolidated AFFO growth in 2017, driven by the 15% top-line growth and diligent management of operating expenses, interest costs, and maintenance CapEx. Our adjusted EBITDA grew by more than 15%, with our adjusted EBITDA margin holding steady at 61.4%. This was despite the addition of a number of new assets we had during the year, the elevated churn rates and increased levels of bad debt reserves we booked in India during the fourth quarter, primarily related to MTS and Reliance Communications. Notably, we exceeded our initial 2017 outlook for adjusted EBITDA by about $230 million.", "We also drove double-digit consolidated AFFO and AFFO-per-share growth for the tenth consecutive year. Consolidated AFFO grew nearly 17% and consolidated AFFO-per-share growth nearly 16% to $6.72, while AFFO attributable to common stockholders grew nearly 15% or over 14% on a per-share basis. These types of growth rates continue to reflect our ability to simultaneously optimize existing operations across the globe, grow our asset base, and effectively manage our costs while investing in long-term growth opportunities.", "Turning to Slide 11, let's now take a look at the expectations for 2018. At the midpoint of our outlook, we expect property revenue growth of about 7%, inclusive of an expected negative impact of over 2% from lower non-cash straight-line revenue and another 2% from the India carrier-related consolidation-driven churn.", "Given our expectation that the ongoing India-related carrier consolidation process will be a transitory event and that our growth in India will return to more normalized levels in 2020 and beyond, we provided reconciliations of the impact of this consolidation-driven churn on Q4 2017 actuals and our 2018 outlook in our press release and supplemental package. Normalizing just for the impact of this carrier churn, we expect total property revenue growth of about 9%.", "We anticipate in our outlook the consolidated tenant billings will increase by 8% to 9%, driven by organic tenant billings growth of about 5% and a roughly 4% contribution from newly acquired or constructed assets. Excluding the impacts of carrier consolidation-driven churn in India, total organic tenant billings growth would be in the 6% to 7% range at the midpoint. Our outlook includes the impacts of the approximately 20,000 sites we'll be acquiring from Vodafone and Idea in India, with assumed closings by May 1st for both transactions. All in, total reported property revenue is expected to increase by approximately $460 million, or about $600 million on a cash basis excluding straight-line impacts.", "As you can see, we expect a strong year of organic tenant billings growth across most of our global footprint, including in the U.S., where we are again projecting organic tenant billings growth in excess of 6%. This expectation reflects our significant new business pipeline, which includes a 10% sequential increase in lease applications in Q4, partially driven by activities surrounding FirstNet and associated deployments. We continue to see very strong demand for our sites in this, our largest market, with all four national wireless carriers making investments in their networks to keep up with the growing demand for mobile data usage.", "In fact, we expect record levels of U.S. new business commencements during the year, and while our existing footprint is optimally positioned to support the network initiatives of the Big Four and our other tenants, we continue to evaluate additional opportunities for us to add value, including our alliance with Philips Lighting and a host of other projects within our innovation organization. Bottom line, U.S. continues to be an extremely dynamic market and we expect to generate strong organic growth rates for years to come.", "We're also projecting strong organic growth in Latin America, particularly in Mexico and Brazil, our two largest markets in the region. In Mexico, we expect organic tenant billings growth to be driven by multiple ongoing 4G deployments as well as accelerating contributions from the buildout of a new nationwide 4G wholesale network by the Altán Consortium. As a result, we expect that 2018 will mark the third straight year of double-digit organic tenant billings growth in Mexico. Further, the portfolio of urban telecommunications assets that we acquired from KIO Networks in late 2017 is off to a fast start, and we're excited about the near-term fiber-to-the-tower opportunity that we have in the dense urban areas, which house a significant portion of our Mexican portfolio.", "In Brazil, where the economy appears to have stabilized, mobile data usage is growing quickly and our tenants are making significant multiyear investments in their networks, particularly on the 4G side. 2017 represented a record year of new business commencements in Brazil, and we expect 2018 new business to be strong as well, driven primarily by the deployment of 3G and 4G networks as smartphone penetration continues to rise. We expect to utilize our position as the leading tower operator in the country to capture a significant share of these deployments and drive strong organic tenant billings growth in 2018. For the LATAM region as a whole, we expect organic tenant billings growth to be between 9% and 10%.", "Meanwhile, we expect organic tenant billings growth in EMEA to be between 6% and 7% in 2018, which is down from the around 9% in 2017. On a dollar basis, we expect the volume from co-locations and amendments to actually be higher than 2017 levels, but commencement activity is expected to be more back-half-of-the-year-weighted, lowering the overall organic growth rate. Escalators are expected to be down a bit lower as well due to the lower rates of inflation. The underlying trends in EMEA are expected to continue in 2018 and are supported by the strong application volume in the region as well as our pipeline for new builds, both of which were particularly strong in the fourth quarter.", "Finally, as I touched upon previously, we expect our Asia results in 2018 to include significant impacts from accelerated carrier consolidation-driven churn. As carrier combinations such as Vodafone and Idea, Reliance Jio and RCom, Bharti Airtel, Tata, and Uninor are finalized, and as some of the other smaller carriers potentially exit the market, we expect certain redundant tenancies on our towers to be rationalized.", "As a result, our outlook includes about $90 million of carrier consolidation-driven churn in 2018, comprising nearly half of the 3.4% consolidated churn rate that we expect for the year. Incorporating this churn -- along with lower levels of assumed gross new business commencements as carriers focus on integrating their businesses -- results in an expected organic tenant billings decline of nearly 8% in India for the full year, or a positive 3% to 4% after normalizing for the impact of the carrier consolidation-driven churn. So, on a combined international basis, we expect 2018 organic tenant billings growth of a positive 2% to 3%, or about 6% to 7% on a normalized basis, excluding the impact of this Indian carrier consolidation-driven churn.", "Turning to Slide 12, before we move on to the other aspects of our outlook for the year, I'd like to take a slightly deeper dive into what we are seeing in India. As we've communicated over the last few quarters, we expect near-term churn in the market to be significantly above historical levels, driven by this carrier consolidation process, through which we think the current eight or nine wireless carriers will consolidate down to three or four.", "As we progress toward this new steady state over the next couple of years, we expect to incur a total of about $150 million to $200 million of annualized consolidation-driven churn, which includes an expected in-year impact of $90 million in 2018 specifically, as I just described. There are a number of primarily 2G tenancies that have been made redundant given the ongoing carrier M&A, and we expect a significant portion of these leases to churn off our sites in the next two years or so. At the same time, we continue to see meaningful investments in new 4G networks by the carriers, particularly Reliance Jio, whose customers are using extraordinary amounts of mobile data every month.", "Longer-term, we expect that the remaining carriers in the marketplace will be larger, better capitalized, and have improved spectrum positions which enable a more comprehensive deployment of 4G networks across the country to satisfy this insatiable consumer demand for mobile data in India. Given our portfolio of nearly 80,000 towers -- inclusive of our pending Idea and Vodafone transactions -- we think we'll be optimally positioned to capture the resulting incremental demand for communications real estate. So, to summarize, our long-term view of India continues to be very positive, but over the next couple of years, we would expect lower organic growth rates.", "Moving on to Slide 13, adjusted EBITDA is expected to grow over 6% for the year, or by over 8% after normalizing for the impact of the India carrier consolidation-driven churn. This also includes a negative impact of about 3% due to the expected $125 million decline in non-cash net straight-line recognition. Our adjusted EBITDA margin is expected to be down slightly from '17 levels, primarily due to the India churn, lower straight-line, and inclusion of the lower initial tenancy Vodafone and Idea acquired sites in our outlook. Excluding those items, our underlying business would be driving margin expansion of nearly 2% in 2018. In our outlook, our cash SG&A as a percentage of total revenue is expected to be under 8%.", "Meanwhile, 2018 consolidated AFFO and consolidated AFFO-per-share growth rates are expected to be around 11% and 9% respectively. Adjusting for the impacts of the India carrier consolidation-driven churn, consolidated AFFO growth would be about 13% and consolidated AFFO-per-share growth would be nearly 11% at the midpoint. In addition to operational efficiency throughout the business, this reflects our prudent balance sheet management and ability to control costs while continuing to strategically expand our asset base and invest in growth initiatives. Finally, I do want to note that holding current spot FX rates steady for the rest of the year will result in approximately $15 million in incremental consolidated AFFO or an additional $0.04 or so on a per-share basis.", "As you can see on Slide 14, we added to our long track record of strong operational financial growth in '17 and wrapped up our Double Double initiative significantly ahead of our initial targets. In just the last five years, we've almost tripled our site count while entering seven new markets, have more than doubled consolidated AFFO per share, and have nearly tripled our common stock dividend per share. Today, we are well-positioned in the most populous free-market democracies in five continents, where we believe the secular growth trends in mobile will drive significant demand for communications infrastructure.", "During '17, we worked diligently to invest and strategically enhance our portfolio while growing our dividend and committing excess capital toward share repurchases. We deployed over $820 million of CapEx, more than 80% of which was discretionary in nature. We also spent approximately $2 billion for acquisitions, increased our dividend by more than 20%, and simultaneously repurchased nearly $770 million of our common stock.", "In 2018 and beyond, we expect to deploy capital in a similarly diversified, balanced manner. We have about $1.2 billion committed to pending M&A in 2018 and another $900 million at the midpoint of our outlook committed to CapEx. These expenditures include $270 million for the construction of new sites, primarily in our international markets, where Day 1 new build returns are typically in the double digits. Additionally, we expect to commit roughly $1.4 billion to our common stock dividend -- subject to board approval -- and deploy additional available cash toward a combination of share repurchases and incremental M&A. Combined with our prudent levels of leverage, we are well-positioned to use our multifaceted capital deployment program to enhance our total return profile.", "Turning to Slide 15, you can see that our diverse 2018 capital allocation expectations are consistent with our historical practice. Since 2007, the first year in the Double Double timeframe, we've deployed approximately $39 billion of capital. This includes nearly $9 billion of share repurchases and common stock dividends, both of which we continue to believe are important components of our total return profile.", "About three-quarters of our capital in this time period, however, has been dedicated primarily to investments in long-term growth or acquisitions in discretionary CapEx, including new site construction and augmentation. We've invested around $24 billion in acquisitions, including strategic transactions like GTP and the Verizon portfolio in the U.S. and a number of other acquisitions around the globe. Additionally, we've invested approximately $5 billion on discretionary CapEx initiatives while spending just $1 billion or so on nondiscretionary CapEx projects given the low ongoing maintenance requirements of our assets.", "As you can see in the chart in the middle of the slide, more than half of our portfolio investment since 2007 has been directed toward expanding our presence in our largest market -- the United States -- which also generates the vast majority of our cash flows. The remainder of our CapEx and acquisition spend has been deployed to diversify our geographic footprint, with about 25% in our Latin America markets, 12% in EMEA, and less than 10% in India. These well-diversified investments -- along with our high-performing legacy portfolio -- have allowed us to generate significant cash flow growth across our business over the last decade.", "We've grown cash from operations at an average growth rate of over 15%, from around $700 million in 2007 to nearly $3 billion in '17 and expect double-digit growth in this metric during 2018. Inclusive of that expectation, the business has generated nearly $21 billion in cash since 2007, and we believe we're in an excellent position to continue to grow those cash flows at compelling rates for years to come. Supporting this growth is our large base of contractually committed revenue, which today stands at over $32 billion.", "Turning to Slide 16 and in summary, we generated strong operating results in 2017 and continued our long track record of delivering compelling growth across our key metrics. At the same time, we enhanced the company's long-term strategic positioning in key markets, continued to diversify our global footprint through selective acquisitions, and grew our common stock dividend by over 20%.", "In 2018, we're focused on substantially the same strategic initiatives that have enabled our past success. We expect to drive efficiencies across our operations, evaluate accretive investment opportunities, explore additional avenues to drive future growth, and return cash to our shareholders through our dividend and share repurchase programs. Our expansive global portfolio positions us well to be the provider of choice for ongoing wireless network investments and we're committed to providing the best service levels possible to our tenants around the globe.", "We're excited by the underlying trends we're seeing across our footprint. In the U.S., the FirstNet initiative and associated deployments are expected to help drive compelling organic growth, along with the continuing growth in mobile data usage across the industry. In our international markets, we're seeing rapid growth in mobile usage, resulting in very strong demand for our real estate, particularly in key markets like Mexico and Brazil.", "In India, where we do have some near-term challenges associated with carrier consolidation-driven churn, the fundamental long-term demand story is positive, with Indian consumers using extraordinary amounts of mobile data. We think we are optimally positioned to continue to deliver attractive total shareholder returns in 2018 as we translate the secular growth in global wireless into AFFO-per-share and dividend growth. And with that, I'll turn the call over to the operator so we can take some Q&A." ] } ]
[ { "name": "Operator", "speech": [ "Ladies and gentlemen, we do ask that you limit each question to one. Our first question will come from the line of Ric Prentiss of Raymond James. Please go ahead." ] }, { "name": "Ric Prentiss", "speech": [ "Thanks. Good morning, guys. Questions on guidance, if I could. Obviously, a lot of details here, but a lot of moving pieces. It looks like the straight-line adjustments were not much changed from last quarter when you put out your supplement, particularly in the U.S., at least. That implies no new MLAs. So, can you help us understand -- is FirstNet in your guidance? Is it ramped throughout the year? We're all trying to gauge how compelling the FirstNet growth could be or what it could do to revenues." ] }, { "name": "James D. Taiclet, Jr.", "speech": [ "Hi Ric. The way we're adjusting FirstNet is in the broader context of one of our key customers' activities with us across the board. You've heard from them that they plan to make site visits to implement at least one -- if not more than one, in most cases -- technology upgrade. So, FirstNet is a piece of those truck rolls, so therefore, spiking it out is really difficult, but what we get applications that include FirstNet or not, AWS or not, WCS or not, et cetera, those all roll into our guidance through that customer line. So, in aggregate, we're looking at the whole picture. We're not necessarily spiking and aren't really able to spike out FirstNet on its own, but the customer who's got the deployment obligation can speak to that better than we can." ] }, { "name": "Tom Bartlett", "speech": [ "Just to follow on, you're right. The straight line in 2018 is a decline overall of about $134 million or $135 million dollars. In the United States -- as I mentioned in my remarks -- we did see a nice sequential growth in applications from Q3 to Q4, and as I also mentioned, we expect new business commencements in the United States to be at record levels. So, I think that gives you a sense of the kind of demand we're seeing in our U.S. business." ] }, { "name": "Ric Prentiss", "speech": [ "Right. Jim, you mentioned that you'd extend term lengths when possible, so should we think that there are MLAs in the works? How do you guys view going a la carte versus MLAs in the U.S.?" ] }, { "name": "James D. Taiclet, Jr.", "speech": [ "We are agnostic about whether it's a holistic agreement in our terminology, whether it's a long-term MLA or it's site at a time, application at a time. We agree with each customer at any given point in time based on our joint and collective needs. In many cases, the customer is comfortable continuing on that sort of retail basis, if you will. We will seek to continue to get larger deals, but even on a retail basis, there can be extensions a site at a time introduced into those agreements as well. So, we're using all of the tools in conjunction with our customers based on where they are in their deployment plan and what they're most confident in pursuing at that stage." ] }, { "name": "Ric Prentiss", "speech": [ "More on India, if I could squeeze it in. I think you mentioned the $90 million for India carrier consolidation churn. Should we think that normal churn in India should still be in the 4% range on top of that? Just trying to think through what total churn might be in India." ] }, { "name": "James D. Taiclet, Jr.", "speech": [ "Ric, I think it's in that $20 million range, which is what it has been historically. But, yeah, I think your numbers are probably right." ] }, { "name": "Ric Prentiss", "speech": [ "Okay. And then, gross is down a little bit in India because of the consolidation effort as well, so maybe high single-digit percentage growth on the growth side in India?" ] }, { "name": "James D. Taiclet, Jr.", "speech": [ "Yeah, if you take a look at even '17 versus 2018, new commenced business is probably 10% to 15% below what it was in 2017 -- still very strong, but I think as a result of all of the activity in the marketplace, it's a little bit depressed as the carriers themselves are integrating and looking at all of their network plans." ] }, { "name": "Ric Prentiss", "speech": [ "Thanks. I appreciate taking the question." ] }, { "name": "Operator", "speech": [ "Thank you. Our next question comes from the line of David Barden of Bank of America." ] }, { "name": "David Barden", "speech": [ "Hey, guys. Good morning. Thanks for taking the questions. Just another follow-up quick for Tom on guidance. You included the Idea and Vodafone towers in the numbers. Could you tell us what that's adding to the total pie? And then, Jim, just a couple strategy questions. First, is there a budget that you're mapping out for this innovation projects that you're looking at, and does that signal perhaps that you're going to go back and revisit some of these ideas like fiber-to-the-tower or distributed outdoor systems that some of your competitors have been exploring? Second, with what's going on in India, does any of this make you want to slow roll your incremental acquisitions of the Viom project? Thank you." ] }, { "name": "Tom Bartlett", "speech": [ "David, let me take the housekeeping on the India acquisition. The Vodafone Idea -- as I said, we're assuming beginning-of-May of closure on that -- it's about $215 million of revenue and about $70 million of EBIDTA that we have in the forecast." ] }, { "name": "James D. Taiclet, Jr.", "speech": [ "I'll take the questions in order, David. On the innovation budget, if you will, we have a modest SG&A commitment. We've hired some fantastic people, including a corporate Chief Technology Officer, who's got a tremendous and long background in the industry on the innovation technology side. That's in the single-digit millions of dollars, which is included in our SG&A. And then, every other thing that we do goes through our investment committee process. It's got the typical process controls and valuation models that run out of this corporate office to assess whether any investment makes sense.", "To speak to examples of when they do, I would really settle down into franchise opportunities are what we're seeking. What do I mean by that? Franchise opportunities have four or five attributes versus commodity real estate opportunities or investment opportunities for us. I'll just run through them really quick because that's the only way to answer your follow-on question there, which is how do we view the small-cell fiber environment? We will invest in situations where we can get our target return based on a franchise platform.", "What does that mean? It means exclusivity around the asset versus -- a commodity would be an open field. So, our indoor dash projects -- we get exclusivity within the building. When we can get that on small-cell systems or fiber runs or whatever, we'll consider those as well, but we need exclusivity or something close to it.", "Secondly, relatively few competitors and relatively small competitors are already out deploying and running those assets. So, the difference between Buenos Aires, Argentina, where there's hardly anybody running fiber-to-tower, hardly anybody running large, integrated fiber networks -- we see that as an attractive place because we can get a franchise there and we don't have any big competitors that are already in front of us.", "So, if you look the U.S., for example, the big cable companies and the big landline telecom companies have each 300,000 route miles of fiber. These are significant, and you can't compete with that when you're the size that we would be in the United States, for example. So, we like relatively few competitors, relatively small competitors, and that also speaks to another franchise aspect. There's been relatively low prior investment in that asset in that place because you don't have the big competitors and you don't have the long-standing players.", "Next is little competition with our customers. In the U.S., two of the aforementioned large fiber providers that we'd be competing with are two of our business customers, so that's something we look at hard. In other markets where we've begun to explore deploying fiber and done a few investments, like Mexico, our biggest customers don't have any fiber assets in the country. Telcel does in Mexico, but that's one of our smaller customers. Telmex has fiber. So, we look at who the customers are, we look at who the competitors are.", "Finally, we want to be able to facilitate long-term contracts. So, when you've got few competitors, no large competitors, and you've got a first mover advantage on the asset, you can actually facilitate long-term contracts. Finally, you basically end up with future demand exceeding future supply at a multitenant opportunity, which is really what we're after. So, those are the franchise types of attributes that we look for, and that's how we're going to look at every tower investment, every small-cell investment, and every fiber investment -- through that lens. Is there anything else I missed, David, on your set of questions?" ] }, { "name": "David Barden", "speech": [ "That was very comprehensive, Jim. Thank you." ] }, { "name": "Operator", "speech": [ "Thank you. Our next question comes from the line of Amir Rozwadowski of Barclays." ] }, { "name": "Amir Rozwadowski", "speech": [ "Thanks very much, folks, and good morning. I just wanted to touch base again on the U.S. demand environment. Jim, in towns like where we think about holistically the activity levels of that one specific carrier that you mentioned -- it's embedded in your guidance -- is there any framework you can provide as to how you think that will filter through the course of the year? I think there have been some questions on the pace of activity levels through the course of the year, so any color along those lines would be helpful.", "Touching upon the prior question on the focus from innovation, it sounds like really a more selective approach is how we should think about the expansion of your opportunities in some of these tangential markets. Is it fair to say that -- how would you think about M&A within that scope? I'm specifically thinking about any large-scale M&A that could be on the horizon to help transform the business in that direction of capturing those innovation opportunities." ] }, { "name": "James D. Taiclet, Jr.", "speech": [ "What's interesting about innovation -- I'll start with that subject, Amir -- is that we believe a lot of the innovation activity is going to happen on our core macro tower assets. So, we look at a four-dimensional opportunity set here. One is using our existing assets more robustly for existing customers. So, let me give you one example where there will be potential for these innovative distributed energy solutions for our customers in emerging markets where we can actually put an investment in, take out the diesel generator, reduce or eliminate that diesel cost to the customer -- which is about half the site operation cost, if not more, in a lot of these countries -- and get a higher lease rate for that. So, a lot of our innovation is going to drive toward this.", "That's just one example of many that we can use our existing predominantly for to get either new customers on them or new ways of having our existing customers increase their billings with us. New customers on existing sites we've been doing for years, but we're actually going to step up the tempo on that because we think the opportunity set of customers in a 5G world is going to be dramatically wider than it is beyond our four MNOs in the U.S. and other MNOs elsewhere.", "So, the large M&A requirement of driving this innovation program is not necessarily front and center, and whatever we do buy -- like the fiber assets and small-cell siting infrastructure in Mexico City, Buenos Aires, and Johannesburg -- all three of those actually meet the franchise real estate characteristics that I already talked about. Again, we expect tower-like returns because towers have the same franchise characteristics. So, we don't necessarily look at going outside of our franchise real estate charter when we do M&A in the innovation space, and frankly, a lot of it's going to come through our existing asset base as it is today.", "As far as how the year will flow with each of our big U.S. customers, we're going to work that as a derivative of our application flow, which is already strong with many of the customers -- if not all of the customers -- in the U.S. in the first half. In February, we're already seeing -- as Tom said -- a really strong application flow already in the U.S., and as far as when exactly that revenue hits when there's an installation -- or a notice to proceed, as we call it -- and start billing, that'll play out through the year and we'll continue to give you those updates as we do our quarterly results." ] }, { "name": "Amir Rozwadowski", "speech": [ "Thank you very much for the incremental color." ] }, { "name": "Operator", "speech": [ "Thank you. Our next question comes from the line of Michael Rollins of Citi." ] }, { "name": "Michael Rollins", "speech": [ "Hi, good morning. Thanks for taking the questions. Two, if I could. First, in the past, you framed the amount of CapEx in the U.S. relative to where site lease and growth rates could shake out in a given year, and I was curious -- as you look at the totality of activity that you're expecting from multiple carriers that can invest in their networks for the different spectrum bands you mentioned, technologies, et cetera, where could you see site leasing growth peak at on a two- to four-year view? Is there a way to frame that sensitivity? And then, just secondly, if you look at the recent changes in the rate environment, does that affect where you want net debt leverage to sit relative to your target range, and what would it take in the rate environment for you to want to revisit how you approach your target leverage? Thanks." ] }, { "name": "Tom Bartlett", "speech": [ "Let me take that one first. Clearly, in our outlook, we've adjusted for the forwards in terms of what we expect for interest rate growth and interest rate hikes. We're sizably a fixed-rate type of a portfolio from a total debt perspective, and we do give some detail relative to fluctuations in debt in our supplemental detail, so I gave you a little bit more color there. But, given what we're expecting over the next few years, I wouldn't see candidly any changes in terms of how we're thinking of our overall capital structure. I think it's very balanced.", "I think given our commitment to investment-grade and our desire for commitment to investment-grade, I think there are a lot of pools of assets that are available to us to be able to dip into to allocate, so I think that we have a variety of sources to be able to access. As I said, given what we're seeing, I wouldn't expect changes in our capital structure policies, if you will, but specifically, there are some details within the supplemental package that can give you some sense of what that might look like to the extent that there are major fluctuations in cost of borrowing." ] }, { "name": "James D. Taiclet, Jr.", "speech": [ "Mike, on leasing opportunity over the next few years, we continue to use the same methodology to forecast as we have for the last 15 years or so, which basically limits our forecast to the current planning year. We have estimates over the planning cycle. We do a strategic plan, of course, but what we share with investors and make public is data-driven. In other words, what is the application flow we have, what is the announced aggregate capital spend in the U.S. or other markets by our customers, and what is the current trend of data growth in the market? So, if you touch on all three of those, the application flow -- as Tom indicated -- is very strong in the U.S.", "Second, we have $30 billion-plus this year of announced CapEx by our customer base, which perhaps will have a tailwind over the next few years with the recent tax reform that's been implemented in the United States. Thirdly, on the data consumption side, we all expect another 30%-plus growth in that. I don't see any of these necessarily subsiding over the next few years, but once we get data as to the magnitude of each of those components as we roll into 2019, 2020, and beyond, we'll be able to give you some better forecasting for those particular years. But, in 2018, we've come out above 6% for organic tenant billings growth in the U.S. and we think that's strongly supported by the fundamentals." ] }, { "name": "Michael Rollins", "speech": [ "Thank you." ] }, { "name": "Operator", "speech": [ "Thank you. And next, we'll go to the line of Amy Yong of Macquarie." ] }, { "name": "Amy Yong", "speech": [ "Thanks. I was wondering if you could talk a little bit more about the M&A pipeline -- I think you identified about $1 billion of spending for acquisitions -- and maybe some of the markets that remain core to you -- perhaps Nigeria, South Africa, and Europe. Thank you." ] }, { "name": "James D. Taiclet, Jr.", "speech": [ "Sure, Amy. So, the commitment so far that Tom described is primarily for the Idea/Vodafone closing of those two transactions, but beyond that, we've got -- and always have -- many irons in the fire that we're evaluating. You pointed out some of the key markets where we would like to deepen our position, and we're going to do that selectively when it meets our investment criteria, and of course, it also has a lot to do when the major operators or private owners of towers in those markets have a willingness to sell. So, we don't have anything to report today, but I can assure you that we're actively available to evaluate and understand what the opportunities are in our core market." ] }, { "name": "Tom Bartlett", "speech": [ "Amy, to remind you, we are expecting in our outlook build-to-suits of about 3,000 towers, and we're building those underneath master lease agreements that we have around the world, and that's one of the highest rate-of-NOI yields, if you will, out of the gate. It's double-digit. So, that is committed in our outlook." ] }, { "name": "Amy Yong", "speech": [ "Got it. Thank you." ] }, { "name": "Operator", "speech": [ "Thank you. Next, we'll go to the line of Matt Niknam of Deutsche Bank." ] }, { "name": "Matthew Niknam", "speech": [ "Two quick ones, if I could. First, on the Stand and Deliver strategy, are there any specific targets for portfolio growth or AFFO-per-share growth to think about over this planning horizon? I know it's a long way out, but I'm just going to ask it anyway. And then, secondly, on the U.S., the slight deceleration in terms of billings growth -- it was about 40 basis points this quarter -- maybe Tom or Jim, if you could just clarify what drove the deceleration and how we can think about the pacing of growth or activity over the course of '18 in the U.S. Thanks." ] }, { "name": "James D. Taiclet, Jr.", "speech": [ "Sure, Matt. So, our long-term aspiration over the 10-year plan is to continue to look to deliver double-digit AFFO-per-share growth catered over the planning period. That's why we have to start thinking now about what the future opportunity set is going to be five to ten years away in the 5G world that we're emerging into. So, that's our objective -- to keep delivering those double-digit AFFO-per-share performances while maintaining and growing our ROIC as well. So, doing both of those outcomes through smart asset growth, innovation, and operational execution.", "As far as the U.S. pipeline and new business rates of change, they do fluctuate quarter to quarter based on budgets and other customer-driven schedules, including deployment schedules -- believe it or not, weather, things like that -- and so, it's going to vary. This is not a major variation and there are some MLA provisions -- not only the U.S., but in other markets -- where certain large payments are made in certain quarters every year, and that can actually throw off the trend lines a little bit." ] }, { "name": "Matthew Niknam", "speech": [ "Got it. Thank you." ] }, { "name": "Operator", "speech": [ "Thank you. Next, we'll go to the line of Phil Cusick of JP Morgan." ] }, { "name": "Richard", "speech": [ "Hi. This is Richard for Phil. While you provided significant details in the prepared remarks with all of the moving parts in India, can you give us a little more color on how we should think about gross activity levels and the pacing of churn over the next few years? Should it be relatively similar or is 2018 the most negative year? Also, could AMT sign an MLA with the carriers to mitigate the churn headwind from consolidation?" ] }, { "name": "James D. Taiclet, Jr.", "speech": [ "Just on the churn side, the normal churn -- I think Ric had asked that question before, or Dave -- it's in that $20 million-plus -- it's in that typical 4% range. That's the general kind of normal churn that we see. As I mentioned, we do expect that additional $90 million of incremental consolidation-related churn. I would expect that to be at a high-water mark for the churn levels and start to subside going in, but as I said -- I did mention the $150 million to $200 million range, so I would expect similar levels, particularly when you look at the carryover into 2019 because that churn that we expect is going to happen throughout the year, so you're going to see the follow-on impacts from an organic growth perspective and tenant billings perspective in 2019.", "And, over the mid- to long term, as I said, Richard, this is a reordering of a market that makes incredible sense, and it will result in most likely four major mobile operators and two to three significant tower companies. That is the industry structure very similar to what's in the United States, and that industry structure in the U.S. has been a long-term benefit for the tower sector, so that's our expectation in the round. But, of course, along the way over the next couple of years -- and already, frankly -- we are in negotiations with our big customers and have extensive and ongoing relationships with each of them, which I'll highlight for just a minute.", "First of all, you've got to remember -- on the tower side, the supplier side of this equation, we are the No. 1 independent tower company in India and expect to remain so for quite some time, meaning that we are unaffiliated. We have existing contracts with all the big players, especially with the three to four that will remain as major operators at the end of consolidation.", "If you go down the list, Reliance Jio is an extremely valuable and important customer of ours with lots of new business coming through even today. Airtel -- we have an extensive relationship both in India and Africa. Idea/Vodafone -- we are consolidating their non-Indus towers into our company, and there is a commercial agreement, of course, that goes along with that beyond even just those towers, so along with BSNL -- where, again, we've had a long-standing commercial relationship -- we are going to be in an excellent position with each of those four carriers that we expect will be driving the market over the next many decades in India.", "These companies will have the wherewithal, the financial capability, and the scale -- these companies are going to have hundreds of millions of customers each. They have the scale now and will have the scale once these consolidations are completed on the operator side to drive 4G into over a billion handsets in that country, and the network requirement to serve that is going to be enormous, and we're going to be well-positioned over the next two to ten years to take full advantage of that once consolidation wraps up." ] }, { "name": "Richard", "speech": [ "Great. And, a quick follow-up -- in terms of the new build-to-suits, should we expect any difference in terms of where you're building those given the consolidation in India, or should we expect it to be pretty steady with what we've seen in the past?" ] }, { "name": "Tom Bartlett", "speech": [ "It's pretty steady with what you've seen in the past. I think we've seen a pickup in Latin America given some of the demand there, but pretty consistent with what you've seen in the past." ] }, { "name": "Richard", "speech": [ "Great, thank you." ] }, { "name": "Operator", "speech": [ "Thank you. Next, we'll go to the line of Simon Flannery of Morgan Stanley." ] }, { "name": "Simon Flannery", "speech": [ "Great. Thank you very much. Good morning. Tom, on that $90 million for this year, how much visibility do you have over the exact timing and exact amount? Is this a worst-case scenario or is this the middle of what you could expect? I assume in some cases, the companies haven't finished their RF planning and deciding exactly what sites they're going to keep and let go. And then, coming back to the 10-year plan, Jim, what are you thinking about in terms of activity beyond the major carriers? Are you starting to see any more activity there from the big tech companies or others that are looking to deploy more beyond the traditional wireless LTE opportunity? Thanks." ] }, { "name": "Tom Bartlett", "speech": [ "Simon, fair point. What we've assumed in the plan is pretty well balanced first half versus second half, so I wouldn't expect a lot of exposure, if you will, throughout the year given those kinds of expectations. As Jim said, to the extent that there are changes, we'll continue to update, but we think that's a pretty fair assessment of when it would occur. There can be a month slip here and there, but as I said, it's pretty balanced between the first half and the second half." ] }, { "name": "James D. Taiclet, Jr.", "speech": [ "Simon, over the long-term plan, I did speak to some of the sectors that we are already engaging with to understand what their direct -- and, I'll call it indirect -- opportunity is for us. So, if you just think about EDGE data, for example -- data center companies, entertainment companies, et cetera -- that might want to have their content closer to the edge of the network and to the consumer to reduce latency and improve delivery -- and also reduce backhaul costs, frankly, and core data center costs -- those are a whole range of companies that could utilize tower sites, ground stations, ground space at our tower sites for stations that would then have EDGE data. We're doing some of this in other countries already. So, that's one category.", "A second category we're involved in already, which is aerospace, and that's the delivery of either internet service to airplanes -- we have a large customer that does much of that in the U.S. already -- but there are going to be other technologies that you may have even read about this week using satellites, combinations of ground stations, and other things that will bring a new generation here. But then, there's also the autonomous air vehicle opportunity and who could be the customer in that circumstance. It could be a defense contractor, it could be a delivery company such as Amazon that would need to control drones outside of line of sight, which requires -- we think, and the FAA seems to think, now -- a tower-based terrestrial control and navigation network. So, these are the kinds of customers we're looking at in the future.", "And then, on the potentially indirect side would be autonomous land vehicles, whether they're trucks on the freeway or the ubiquitous Google car driving around Mountain View. When you do any of those kinds of things at scale, there needs to be a whole new architecture put in place. Mobile operators may do that, municipalities through smart cities may do some of this, or the actual auto companies or electronics companies themselves may have some siting needs as well. So, we're going to work our way through all of these and many other sectors with the players in those sectors to figure out what they're going to need for siting and whether it's going to come through us directly as an infrastructure provider or through mobile operators as another of their lines of business, but then, what are those operators going to need as far as architecture from us. So, that's how we're looking at it." ] }, { "name": "Simon Flannery", "speech": [ "Thanks a lot." ] }, { "name": "Operator", "speech": [ "Thank you. And, our last question will come from the line of Batya Levi of UBS." ] }, { "name": "Batya Levi", "speech": [ "Great, thank you. At a high level, you used to guide to 200 to 300 bps faster growth internationally versus the U.S., and now, excluding India churn, international is growing similar to the U.S. levels. Can you provide some color on your mid- to long-term view of these international assets? And also, a follow-up on India -- any updates on your thoughts to acquire the remaining stake in Viom? Thank you." ] }, { "name": "Tom Bartlett", "speech": [ "Batya, as I mentioned before, I think there are a couple of things that we're seeing in 2017. If you look at the Latin American market, really solid growth there -- 9% or 10%. It's a bigger business, but as I said, we're still seeing really solid growth in the marketplace, and as a matter of fact, even if you include the build-to-suit activity -- again, higher expectations in '18 than you saw in 2017.", "To me, it's down a bit principally because of the two things that I mentioned. We're looking at record new business in the marketplace, but it's actually going to be a bit more back half-loaded, so that's going to have 100 bps or so of decline, and you are going to see escalators fluctuate with rates of inflation, so we're actually seeing lower rates of inflation in the marketplace as well, which is bringing down -- it's probably another 100 basis points or so.", "On the India side -- yes, we are -- we talked about excluding the churn, but it's also impacting the gross. While it is still strong in 2018, it is below where it was in 2017. The new business commencements are 12% or 13% below. As Jim laid out what we expect is going on in this market over the next several years, we would expect those growth rates -- that gross new business -- to reignite and get back to those levels that we saw even over the last couple of years.", "So, I think longer-term, we would absolutely expect the growth rate from an international business to be north of where our U.S. business is. Given where they are from a technology perspective, from a smartphone penetration perspective, all of those things would line up to suggest that there is going to be heavier investment being made into those markets and will outstrip even the growth that we're seeing in the U.S. market." ] }, { "name": "James D. Taiclet, Jr.", "speech": [ "Also, Batya, we had a little bit of a mix change recently when we added France, which is in our EMEA region. It was purposeful for many reasons, but one of them was to rebalance emerging markets and developed markets in that region, so, therefore, the growth rates moderate the total a little bit just by adding another developed market into the mix. As far as our interest in TIPL or Viom, there's a series of puts and calls over the next one to three years.", "There are four parties involved -- there's ourselves, Tata Teleservices, Macquarie, and IDFC, which is a local investment company in India. Between the four of us, we'll all be discussing everybody's interest in maintaining, expanding, or reducing ownership stakes over the next one to three years, and we'll report that as we go, but actually, there's a fair amount of interest in some of the parties to remain, and we'll evaluate that and negotiate it over the next one to three years." ] }, { "name": "Batya Levi", "speech": [ "Okay, thank you." ] }, { "name": "James D. Taiclet, Jr.", "speech": [ "Great. Thanks, everyone. That concludes the call this morning. Again, thank you for joining us. If you have any further questions, please reach out to Igor and the team, and we look forward to seeing you soon." ] }, { "name": "Tom Bartlett", "speech": [ "Have a great rest of the week, everybody. Thank you very much. Bye-bye." ] }, { "name": "Operator", "speech": [ "That does conclude our conference for today. Thank you for your participation and for using the AT&T Executive Teleconference service. You may now disconnect." ] }, { "name": "Batya Levi", "speech": [ "More AMT analysis", "This article is a transcript of this conference call produced for The Motley Fool. While we strive for our Foolish Best, there may be errors, omissions, or inaccuracies in this transcript. As with all our articles, The Motley Fool does not assume any responsibility for your use of this content, and we strongly encourage you to do your own research, including listening to the call yourself and reading the company's SEC filings. Please see ourTerms and Conditionsfor additional details, including our Obligatory Capitalized Disclaimers of Liability." ] } ]
AMT
2022-07-28
[ { "description": "Senior Vice President, Investor Relations", "name": "Adam Smith", "position": "Executive" }, { "description": "President and Chief Executive Officer", "name": "Tom Bartlett", "position": "Executive" }, { "description": "Executive Vice President, Chief Financial Officer, and Treasurer", "name": "Rod Smith", "position": "Executive" }, { "description": "Citi -- Analyst", "name": "Michael Rollins", "position": "Analyst" }, { "description": "Morgan Stanley -- Analyst", "name": "Simon Flannery", "position": "Analyst" }, { "description": "Wells Fargo Securities -- Analyst", "name": "Eric Luebchow", "position": "Analyst" }, { "description": "Raymond James -- Analyst", "name": "Ric Prentiss", "position": "Analyst" }, { "description": "Bank of America Merrill Lynch -- Analyst", "name": "David Barden", "position": "Analyst" }, { "description": "Deutsche Bank -- Analyst", "name": "Matt Niknam", "position": "Analyst" }, { "description": "J.P. Morgan -- Analyst", "name": "Richard Choe", "position": "Analyst" }, { "description": "UBS -- Analyst", "name": "Batya Levi", "position": "Analyst" } ]
[ { "name": "Operator", "speech": [ "Ladies and gentlemen, thank you for standing by. Welcome to the American Tower second quarter 2022 earnings conference call. As a reminder, today's conference call is being recorded. [Operator instructions] I would now like to turn the call over to your host Adam Smith, senior vice president of investor relations.", "Please go ahead, sir." ] }, { "name": "Adam Smith", "speech": [ "Good morning, and thank you for joining American Tower's second quarter 2022 earnings conference call. We have posted a presentation, which we will refer to throughout our prepared remarks, under the investor relations tab of our website, www.americantower.com. On this morning's call, Tom Bartlett, our president and CEO, will provide an update on our international business; and then Rod Smith, our executive vice president, CFO and treasurer, will discuss our Q2 2022 results and revised full year outlook. After these comments, we will open up the call for your questions.", "Before we begin, I'll remind you that our comments will contain forward-looking statements that involve a number of risks and uncertainties. Examples of these statements include: our expectations regarding future growth, including our 2022 outlook, capital allocation and future operating performance; our expectations regarding the financing plan for the CoreSite acquisition, including the closing of our Stonepeak minority investment and our U.S. data center business, our expectations regarding the impacts of COVID-19 and any other statements regarding matters that are not historical facts. You should be aware that certain factors may affect us in the future and could cause actual results to differ materially from those expressed in these forward-looking statements.", "Such factors include the risk factors set forth in this morning's earnings press release, those set forth in our Form 10-K for the year ended December 31, 2021, and in other filings we make with the SEC. We urge you to consider these factors and remind you that we undertake no obligation to update the information contained in this call to reflect subsequent events or circumstances. With that, I'll turn the call over to Tom." ] }, { "name": "Tom Bartlett", "speech": [ "Thanks, Adam, and good morning, everyone. In line with our historical practice for our second quarter earnings call, my comments today will be focused on American Tower's international business. Before diving into the trends that we see driving a long runway of growth in our international segment, I'd like to take a moment to review the principles that have underpinned our international expansion strategy over the last two decades. Since we first started expanding outside of the United States, entering Mexico and Brazil in 1999 and 2000, respectively, we've been guided by the belief that the secular demand trends and fundamentals of the tower business model that would drive tremendous value in the U.S.", "over a multi-decade period would be replicated internationally. Central to this thesis was at the anticipated proliferation of wireless networks and resulting rapid growth in mobile data demand would necessitate neutral host shared wireless infrastructure across the globe. We also believe that by leveraging our core capabilities developed here in the United States, we could position American Tower as a premier global provider of communications real estate and a prime beneficiary of these trends. Further, given the relative lack of fixed line infrastructure, accelerating population growth and earlier stages of network technology evolution in many parts of the world, we believe we could both augment and extend our overall consolidated growth trajectory.", "So we set out to construct a geographically diverse platform of communication assets in the world's largest democratic economies while establishing relationships with the leading global wireless carriers, achieved primarily through the acquisition of high-quality portfolios with compelling underlying organic growth and risk-adjusted return profiles. We then sought to leverage our scale, customer relationships and capabilities to execute on high-return new build opportunities and innovative solutions like Power as a Service that has strengthened our competitive positioning and supported our customers in meeting their network needs, all while driving increasing shareholder value. As a result of these efforts, today, our global platform includes an international portfolio that fits in over 170,000 sites and contributes approximately 45% of our property revenues and approximately 36% of our property segment operating profit. Focusing in our international new build program for a moment, we've constructed approximately 40,000 sites since launching our international operations over two decades ago, with just over 22,000 of those sites being built since the start of 2018 alone.", "We credit this recent acceleration to our enhanced market positioning ahead of major network deployments, demonstrated operational capabilities and strong cross-national MNO partnerships, all afforded through previous strategic M&A expansion initiatives. In total, these 40,000 American Tower built sites are driving an attractive NOI yield of 25%, owing to the strong demand we've seen for our infrastructure and the operating leverage inherent to the shared tower model across the globe. As such, looking forward, we'll continue driving toward our ambition to add another 40,000 to 50,000 sites to our international portfolio over the next several years. With that, let's take a few minutes to discuss each of our international regions and the key trends developing across our footprint.", "First, I'll touch on Europe. We have a portfolio of over 30,000 sites and strong scaled positions in Germany and Spain which are benefiting from many of the same trends, driving strong growth in the United States, including the early stage of 5G rollouts and a new entrant. As many of you know, we've taken a consistently measured approach to achieving scale in the continent. We started through a modest acquisition in Germany in 2012.", "We then spent the better part of the following decade evaluating various opportunities through our disciplined approach to capital allocation, which led to our entry into France in 2017 and later a small-scale entry to Poland. However, it wasn't until the Telxius transaction in 2021 that we found an opportunity to add significant scale through a portfolio that met the standards of our global underwriting framework. These characteristics include high-quality, strategically located assets that stand to benefit from continued network investments in attractive contractual terms and conditions, such as CPI-based escalators which act as a natural hedge against local inflation, along with a low churn profile, which taken together drive compelling risk-adjusted returns for American Tower and our shareholders. From a timing perspective, we couldn't be happier with our acquisition of the Telxius Tower portfolio.", "Across Germany and Spain, we've seen several quarters of accelerating activity as carriers begin lighting up low and mid-band spectrum with new 5G equipment while continuing to invest to support growth data consumption on their existing 4G networks. At the same time, in Germany, new entrant 1&1 is rolling out a greenfield 5G network, and we believe our portfolio of nearly 15,000 sites primarily located in urban centers across the country is in a strong position to support their network build. Earlier this year, we signed a framework agreement with 1&1 through which we can provide value to the carrier while benefiting from incremental growth associated with the relationship for many years to come. As a result of these factors, we're seeing strong leasing activity on our assets, as well as demand for new builds, particularly in white and gray spot areas where carriers are working to meet coverage requirements and provide critical connectivity in areas that have historically been underserved.", "In 2022, we plan to double our previous record and build approximately 400 sites across Europe, and we expect this trend of elevated new build activities to continue. Thanks to the demand driven by such initiatives, the pipeline secured through the Telxius transaction and our position as a leading independent tower operator on the continent with a global reputation for operational excellence. With that, let's turn to our regions that are in relatively earlier stages of network technology and where we see an opportunity to capitalize on a strong persistent demand environment for an extended period. There's probably no region where the benefits of local scale and the operational expertise gained as a premier independent operator are more pronounced than in Africa, where we're seeing these benefits play out across essentially every facet of the business.", "In recent years, we've seen the proliferation of affordable smart devices and consumer uptake of mobile application use cases drive outsized growth in mobile data usage, and our multinational carrier customers across the region have been working to roll out and enhance their 4G networks in response. For ATC Africa, this has resulted in average organic tenant billings growth in the high single-digit range over the last several years, coupled with five consecutive years of record new build activity. This trend has continued unabated into 2022, and as a result, we've built over 1,000 sites across Africa in the first half alone, up over 30% compared to the first half of 2021 and nearly double the volumes achieved in the same period in 2020. These sites continue to demonstrate very attractive average day one NOI yields with our year-to-date builds producing more than 13%, and we expect to continue to execute on opportunities to add critical scale and earn strong returns in key markets throughout the region over the next several years.", "While the trends supporting a strong growth environment in the region are expected to persist, there are operational challenges to create unique opportunities in the African market, particularly in the context of the global supply chain disruptions, power grid availability and reliability and ongoing macro volatility. It's here that the scale of our African business, the shared learnings of a global organization and an entrenched culture of innovation have resulted in a resilient differentiated business across the region. For example, we've been able to leverage global supply chain learnings from the peak of the pandemic, as well as the resources afforded by our investment-grade balance sheet and strong international cash flows to produce materials for our new build program several quarters in advance. Not only does this result in cost savings in an inflationary environment, but also derisk operational challenges in a core sector of high-yield growth for American Tower while bolstering our reputation as a preferred partner, who is capable of delivering new sites when we say we're going to.", "This forward-thinking approach to the procurement of critical resources has also been applied to an area of our Africa business that we are perhaps most proud of, our power program, where we've accelerated our innovative efforts across the region in recent years. To date, we've deployed roughly $300 million in the region to equip nearly 16,000 sites with the capability to source power from renewables and more energy-efficient resources including lithium-ion batteries and solar arrays. Entered a new build program where we're working toward making the majority of our newly constructed towers operationally 0 or near 0 greenhouse gas emission sites. In fact, as of the end of the second quarter, we've installed lithium-ion batteries and solar panels at nearly 70% and over 40% of our sites in the region, respectively, which has driven a reduction in our reliance on fossil fuel power generators, accommodated our potential to increasingly rely on intermittent renewable sources and supported our progress toward meeting our GHG emission reduction targets.", "More recently, we've been able to leverage our position in the region to form a strategic partnership with a vendor in our energy supply chain. This alliance brings product assembly to the region as we look to augment our delivery of environmentally and economically sustainable power solutions in our sites, where power availability and access to efficient and reliable sources can often be a challenge. Additionally, this local partnership will facilitate the acceleration of our progress toward meeting our emission targets, reducing our supply chain risk, lowering the overall carbon footprint and cost of our procurement process and supporting the local economy and the communities we serve, which we are particularly proud of. Now, let's turn to Latin America.", "It was our first region of international expansion and where we've seen upper single-digit average organic tenant billings growth over the last several years. On a consolidated basis, our nearly 49,000 sites earning a double-digit NOI yield in our earlier vintage in the region, which consists of assets built or acquired prior to 2010, we're seeing a U.S. dollar yield of over 40%. Today, MNOs in the region are in advanced stages of 4G and in the early innings of 5G network deployments, driving a significant need for additional cell sites.", "As a result, we continue to see solid activity on our existing sites, as well as growth through new infrastructure to improve both coverage and capacity. Although we expect to see the ongoing effects of industry restructuring impact net organic growth in the midterm, we believe the portfolio we've developed across the continent over the last two decades will be critical for our customers as they continue to invest in their networks. Looking at Brazil specifically, our largest market in the region in terms of site count for revenue, we're seeing the final stages of a consolidation process that has resulted in transfer of network assets in the hands of large multinational operators, with the capabilities and financial firepower to build out enhanced next-generation networks on a nationwide basis. Further, with the 5G auction now complete, our local scale positions American Tower as a strategic partner to our customers as they transform their networks while allowing us to maximize the opportunities provided by consolidation and increased carrier investment obligations.", "Although we're at the very early stages of a network upgrade investment cycle, we're already seeing incremental demand for our infrastructure, capturing a large share of the initial urban amendment cycle. We expect this amendment cycle to be followed by a period of new site deployments aimed at improving capacity and performance similar to the cadence we anticipate in the U.S. over the course of the next decade, which should translate to solid growth for American Tower in the region over a multiyear period. Finally, let's turn to Asia Pacific.", "Our portfolio in the region predominantly consists of our scaled footprint across India, as well as our more recently established presence in the Philippines and Bangladesh, where we've leveraged our management and site deployment expertise to prudently evaluate opportunities in the region through high-yield build programs, resulting in over 400 sites being constructed across the two markets combined year-to-date. In India, we continue to be encouraged by the improvements in market structure, carrier health and government reforms aimed at easing the near-term financial burden of operators and ensuring a multiplayer competitive ecosystem, all of which is driving incrementally constructive trends across the communications infrastructure landscape. And with the carrier consolidation cycle and associated elevated churn largely complete, our full year outlook includes an expectation for positive organic tenant billings growth in the region for the first time in several years. While challenges certainly remain in the market and we could see some variability in growth from period to period, our optimism around the longer-term opportunity presented in India remains.", "With an attractive backdrop of a growing population of over 1.4 billion people that's driving accelerated mobile data usage and the government is demonstrating a commitment to a digital transformation of the economy, we see a need for thousands of new cell sites to serve 4G and eventually future 5G networks. We expect these catalysts to drive a period of sustained attractive gross growth, as well as the continued acceleration of our new build program, where we're seeing low to mid-double-digit day one NOI yields on average. And taken together with a moderating churn environment, we remain optimistic that India and the Asia Pacific region can be a solid contributor toward achieving our longer-term growth targets on a consolidated basis. In summary, we're encouraged by the trends we're seeing across our international footprint with an acceleration in mobile data consumption driving sustained customer investments on current and next-generation networks globally.", "Over the past two decades, we followed a consistent and disciplined approach to market and asset selection, demonstrated a consistent track record of operational excellence and developed a scaled presence and strong customer partnerships across a geographically diverse and globally distributed footprint, which we believe places us at a distinct competitive advantage in a 5G world and beyond. While we'll continue to evaluate opportunities to further enhance our scale through the same disciplined lens, we remain focused on leveraging our position and capabilities to drive incremental value across our served markets. We believe our well-balanced international platform, combined with our highly complementary foundational U.S. business, provides American Tower with an unmatched global portfolio that's optimally positioned to benefit from multiple network technology evolutions and digital transformation opportunities for many years to come.", "With that, I'll turn it over to Rod to take you through our latest quarterly results and updated outlook. Rod?" ] }, { "name": "Rod Smith", "speech": [ "Thanks, Tom. Good morning and thank you to everyone for joining today's call. As you saw in today's press release, we delivered another quarter of strong performance across our global business. Before walking through the details of our Q2 results and revised outlook, I'll touch on a few highlights from the quarter along with the financing initiatives we've executed over the last several months.", "First, we've announced and partially closed our plans to raise approximately $4.8 billion in equity financing in support of our CoreSite acquisition, beginning with our common equity issuance in early June and later through our announced agreement with Stonepeak in our U.S. data center business. With these two transactions, not only have we addressed our equity financing requirement for CoreSite but we've accomplished it in a manner that maximizes shareholder value and supports our investment-grade credit ratings. Further, through our partnership with Stonepeak who brings tremendous expertise in communications infrastructure and has a like-minded long-term investment philosophy, we've created a platform to further evaluate and finance growth opportunities across our U.S.", "data center business as the 5G ecosystem further develops. Moreover, we believe Stonepeak's investment represents a full valuation relative to what we have invested in our U.S. data center portfolio today, and allows American Tower to retain operational control, as well as the flexibility to execute on our mobile edge strategy. I'll discuss this transaction in more detail later.", "Second, we also continue to strengthen our balance sheet by leveraging the debt capital markets, raising $1.3 billion in senior unsecured notes at attractive terms. As a result of our Q2 financing activities and pro forma for our private capital proceeds, which we expect to use to pay down short-term floating rate debt, we will increase our percentage of fixed debt to nearly 80%, up from 66% as of the end of Q1, and bring pro forma net leverage down to approximately 5.5 times. With our CoreSite financing now largely complete, we remain committed to organically delevering back below 5x over the next couple of years. Third, we see strong secular trends driving increased network coverage and densification initiatives among our customers, continuing to translate solid gross new business globally, including the need for more cell sites internationally as Tom just highlighted, evidenced by the success of our new build program.", "We constructed over 1,500 sites in Q2, representing the 12th quarter of over 1,000 new builds since the start of 2019, a demonstration of the success of our capabilities and expertise, scaled market positions and strong customer relationships. Additionally, demand remains robust for our differentiated interconnection-rich U.S. data center campuses as customers leverage the dynamically scalable solutions and interoperability provided by CoreSite's national ecosystem, leading to another strong quarter of new and expansion leasing. And finally, our first half performance and confidence in our full year outlook and long-term targets amid heightened market volatility, rising inflation and operational challenges is a testament to the resiliency of our business and the stability of the earnings we consistently generate.", "This is made possible through operational excellence and service dependability. Our investment-grade balance sheet, the strength of our underlying contracts, including international revenues supported by CPI-linked escalators, the ability to pass through a substantial portion of our direct costs across our international regions and the matching of escalator terms in the U.S. between customer and land leases, and more importantly, the mobile data trends driving unabated demand for our communications assets. With that, please turn to slide six, and I'll review our Q2 property revenue and organic tenant billings growth.", "As you can see, our Q2 consolidated property revenue of $2.6 billion grew by over 17% and nearly 19% on an FX-neutral basis over the prior year period. In the U.S. and Canada, property revenue was roughly flat due to the continued effects of Sprint churn, while international growth stood at roughly 19% or nearly 23%, excluding the impacts of currency fluctuations, and includes about 12% contributed by the Telxius assets. In addition, our U.S.", "data center business contributed nearly $190 million of growth in the quarter. These growth rates are indicative of the strong secular demand drivers that underpin growth on our communications infrastructure assets across the globe as 4G and 5G deployments continue. Moving to the right side of the slide, you can see we achieved consolidated organic tenant billings growth of 2.6% for the quarter. In the U.S.", "and Canada, as expected, organic growth was slightly negative at 0.4%, including a sequential step down in gross organic new business on a dollar basis associated with the timing of certain MLA use fee commencements in 2021, which we guided to during our Q1 call. We continue to expect a reacceleration in gross new business in the back half of the year. Escalators were 2.8%, which, as we also highlighted last quarter, were impacted by certain timing mechanics within our MLAs. Though for the full year, we expect escalators to come in right around 3%, consistent with historical trends.", "This growth was offset by the impacts of Sprint churn, which continues to drive over 4% of negative headwind year over year. On the international side, organic growth was 7.8%. Starting with Europe, we saw growth of 11.2%, which remains elevated given contributions from the Telxius portfolio, which were only partially included in our Q2 2021 base. Absent Telxius, our legacy European business grew roughly 6%, an expansion of approximately 160 basis points as compared to our Q2 2021 growth rates.", "In Africa, we generated organic tenant billings growth of 9%, which includes 8% in gross organic new business contributions, our highest quarter on record. The continued strength in new leasing activity in the region was complemented by the construction of just over 400 sites in the quarter. As we see 4G coverage and densification initiatives continue to drive strong top line growth and returns across the region. Moving to Latin America.", "Organic growth was 8.3%, which includes approximately 8.7% from escalations. Consistent gross organic leasing growth was offset by expected elevated churn, primarily associated with certain decommissioning agreements as highlighted on previous earnings calls. For both Africa and Latin America, as we look to the second half of the year, we expect a step down relative to the first half in net organic growth rates due to anticipated consolidation-driven churn, which remains consistent with our prior outlook assumptions. In APAC, we saw organic growth of 3.9%, in line with our expectations and representing our fourth consecutive quarter of positive growth, which comes alongside a continuation of solid new build activity with nearly 1,000 sites constructed during the quarter.", "It's important to note that although we remain encouraged by the positive trends we're seeing in our APAC growth rates, we do anticipate a modest sequential step down in Q3 to the low single-digit range before recovering in Q4 to near the upper end of our 2% to 3% full year guide, which remains unchanged. Turning to slide seven. Our second quarter adjusted EBITDA grew just over 13% or over 14% on an FX-neutral basis to approximately $1.7 billion. Adjusted EBITDA margin was 62.5%, down 170 basis points over the prior year, driven by the lower margin profile of newly acquired assets, the conversion impacts of commenced Sprint churn, along with higher pass-through revenue resulting from rising fuel costs.", "Moving to the right side of the slide, attributable AFFO and attributable AFFO per share grew by 7% and 5%, respectively. Growth was meaningfully impacted by Sprint churn and the timing of cash taxes, which together provided a negative headwind of nearly 7%. Let's now turn to our revised full year outlook, where I'll start by reviewing a few of the key high-level drivers. First, our core operating performance remained strong across our business, allowing us to raise our AFFO per share guidance for the year and increase our expectations on an FX-neutral basis for property revenue and adjusted EBITDA.", "Second, we have revised our FX assumptions using our standard methodology which has resulted in outlook-to-outlook headwinds of approximately $100 million, nearly $50 million, $40 million and roughly $0.08 for property revenue, adjusted EBITDA, consolidated AFFO and AFFO per share, respectively. Finally, we have updated our CoreSite financing assumptions to reflect our completed common equity issuance and our anticipated close of private capital funding. This update has resulted in a reduction in our total equity requirement, balanced with the incremental debt and associated interest costs. Additionally, we have contemplated the minority interest impacts related to the Stonepeak partnership and updated closing assumptions, all of which I will address in more detail in a moment.", "With that, let's discuss the details of our revised full year expectations. As you can see on slide eight, we are continuing to project consolidated year-over-year property revenue growth of nearly 14% at the midpoint. The $15 million decrease relative to prior guidance is driven by the FX headwinds I previously mentioned, which were partially offset by over $40 million in core property revenue outperformance. Taking the benefits of CPI in our international escalators and accelerated decommissioning-related settlements, together with upside in our U.S.", "and Canada and data center segments and over $40 million in other outperformance primarily driven by higher international pass-through revenue due to elevated fuel costs. Moving to slide nine, you will see our organic tenant billings growth projections, which have been slightly revised since our last earnings call. While our expectations remain consistent in the U.S. and Canada, international and on a consolidated basis, we have made some adjustments within our specific international segments.", "In Europe, we have adjusted our growth back to approximately 9%, reflecting our expectations for a temporary shift in new business commencement timing from the back half of 2022 into 2023. Demand remains very solid in the region, setting us up well as we exit 2022. You will also see that we have modestly raised the guidance for Latin America to approximately 7% and Africa to approximately 6.5%, both up from previous expectations of greater than 6%, reflecting a continuation of escalation benefits from CPI. Moving to slide 10, we are lowering our adjusted EBITDA outlook by $20 million as compared to our prior outlook, driven again by negative FX impacts, with expected growth of approximately 10% year over year.", "While we are seeing a strong conversion of core property revenue upside to cash margin outperformance, we have taken a revised view on SG&A, notably on bad debt reversal expectations for the year. Although collection trends were solid in Q2, we have pushed out some of our assumptions related to the incremental collections associated with previously reserved balances that we continue to expect to collect in time. Turning to slide 11. We are raising our attributable AFFO per share guidance to $9.74, up from $9.72, despite absorbing the negative effects from FX and a continued rise in interest rates.", "To better understand the components in our revised outlook bridge, I'd like to spend a moment to walk through the moving pieces of the guidance associated with our updated equity plan and the mechanics of our Stonepeak partnership, which consists of $1.75 billion in common equity and $750 million in mandatory convertible preferred equity for a total ownership interest of 29% on a fully convertible basis in our U.S. data center business. First, as I mentioned, we were able to reduce our total equity requirements from approximately $5.5 billion to $4.8 billion, including $2.3 billion of common equity proceeds, which meaningfully reduced our share issuance to approximately 9.2 million shares. The reduction in equity resulted in an increase to our debt balances which, together with the revised timing of the equity raise along with the elevated interest rates, has driven an increase to our interest expense look, which largely makes up the over $50 million other reduction to AFFO as compared to our prior outlook.", "Next, regarding our Stonepeak partnership, the financial impacts for the minority investment will appear in two places. First, the coupon of $750 million of mandatorily convertible preferred equity with a cost in the mid-single-digit percent range will be recognized as a deduction to the AFFO generated by our data center segment and reflected in our consolidated AFFO, which represents approximately $14 million in our 2022 guide, as shown on the slide. Second, until conversion of their preferred equity, which is expected to occur four years from the date of closing, Stonepeak's initial common equity stake in our data center business will stand at 23%, which contemplates approximately $2 billion of net debt on the U.S. data center business and will be considered as a minority interest deduction for attributable AFFO purposes, equating to approximately $20 million in our 2022 outlook.", "Please note, we have also reduced the European minority interest assumption from $160 million previously to $150 million, largely due to FX. Together, we are now guiding to a minority interest adjustment of $170 million in 2022. Finally, -- as I mentioned earlier, our updated outlook also takes into consideration updated equity closing assumptions. We previously assumed a May closing for our common equity issuance, which actually occurred in early June.", "We also assumed our private capital will close in mid-Q3, with planned proceeds to be used to pay down short-term floating rate debt. Taken all together, our revised CoreSite financing plan drove approximately $0.06 of incremental accretion relative to our prior attributable AFFO per share outlook, which includes a negative hit of roughly $0.03, driven by higher interest rates on our debt financing relative to our previous assumptions. Moving to slide 12. Let's look at our capital deployment expectations for 2022, which are updated compared to our prior outlook while continuing to reflect our focus on driving strong, sustainable AFFO per share growth.", "First, we now expect to dedicate approximately $2.7 billion subject to board approval toward our 2022 dividends. This is down slightly from our previous guidance of $2.8 billion, which is simply a function of our reduced common equity issuance and continues to represent approximately 12.5% in year-over-year growth on a per share basis. In regards to capex, we are decreasing our outlook midpoint by $60 million in total, with development capex increasing $15 million and with redevelopment capital and land acquisition spend decreasing $25 million and $50 million, respectively. Our development plan continues to assume the construction of approximately 6,500 new sites globally at attractive returns.", "In fact, on the nearly 3,000 sites constructed in the first half of 2022, we saw a day one NOI yield of roughly 14%. Lastly, we continue to expect to direct roughly $300 million toward our U.S. data center business, largely associated with development spend. Now turning to slide 13.", "And with our CoreSite financing plan largely complete, I will briefly touch on the strength of our investment-grade balance sheet, which is fundamental to the execution of our Stand and Deliver strategy. Our long-stated financial policies, including establishing optimal levels of leverage and an appropriate mix of debt instruments, guide the management of our capital structure. Which, together with our strong business fundamentals, provide American Tower with continued access to capital markets at attractive terms. As you recall, American Tower proactively accessed the debt capital markets in 2021, taking advantage of historically low pricing, raising roughly $3 billion in senior unsecured notes in the second half of the year at a blended cost of approximately 1.6%.", "With our fixed debt percentage at the time rising to over 85%, this effectively allowed us to lock in low-rate debt for future strategic initiatives, including the CoreSite acquisition, which in turn reduced our dependency on the debt markets in 2022 as part of our final financing plan. We believe the strategic and efficient management of our balance sheet puts us in a strong position as we close out 2022 and look beyond. As of the end of the second quarter, a pro forma for the close of the Stonepeak investment in our U.S. data center business, our average cost of debt stands at about 2.6% with an average remaining tenure of over six years.", "Since 2010, we have reduced our average cost of debt by approximately 250 basis points and increased our average debt tenure by about 1 year by accessing the long part of the yield curve, proactively refinancing our debt and capitalizing on low rate environments. In addition, and more recently, we also focused on diversifying and expanding our capital sources and structure by issuing euro-denominated debt, establishing our ATM program, and efficiently executing on public equity raises and partnership agreements with leading global private investors. With a strong liquidity position of approximately $6.7 billion on a pro forma basis, inclusive of Stonepeak proceeds and other financing activities subsequent to the quarter end, in a staggered maturity profile, we feel well positioned moving forward as we focus on organically deleveraging back to within our normal net leverage range over the next couple of years. Taken all together, we see the strength of our financial position as a competitive advantage for American Tower, whether executing on our growth strategy, navigating economic downturns or volatility in the financial markets, and we remain focused on and committed to our thoughtfully established financial policies that have guided our financial strategy for the past decade.", "Finally, on slide 14 and in summary, Q2 was another solid quarter supported by leasing demand across our global portfolio of communications assets, strong execution of capital markets initiatives including financing for the CoreSite acquisition, and meaningful, high-yielding new asset development activity. Our high-quality set of assets and established market positions continue to benefit from secular demand trends driving 4G and 5G initiatives across our global footprint, while the strength of our balance sheet and cash flows has us well positioned to manage and grow the business through potential market volatility and uncertainty. As we look to the back half of the year, we are excited about our growth trajectory and remain focused on executing on our strategic initiatives, which support our long-term double-digit AFFO growth aspirations. With that, I'll turn the call back over to the operator for Q&A." ] } ]
[ { "name": "Operator", "speech": [ "Thank you. [Operator instructions] We'll go to Michael Rollins with Citi. Please go ahead." ] }, { "name": "Michael Rollins", "speech": [ "Thanks. Good morning. Two topics, if I could. First, on the U.S., curious if you can give a further update on the U.S.", "leasing environment? And specifically, provide an update on how American Tower is tracking against the previously provided growth target of at least 5% organic growth beginning next year? And then also, sorry, just one other part of it. Are you seeing any change in the environment, with AT&T announcing the acceleration of its C-band deployments? And then I'll come back maybe on just the second half on India, if I could." ] }, { "name": "Tom Bartlett", "speech": [ "OK. And Michael, I can start and Rob can join it. We're right on track with our previously planned growth rates going forward. We would expect kind of an acceleration in the back half of '22 and then even a further acceleration into '23.", "So we have so much visibility with regards to our MLAs. I think we're in a really good position to be able to track what that growth looks like. But everything is right on track as we've laid out. And with regards to AT&T, nothing outside of the ordinary.", "I mean, all the carriers are building at a great pace. And as I said, very consistent with how we've seen the market and how we see it developing over the next several years." ] }, { "name": "Rod Smith", "speech": [ "Yes. And Tom, maybe I'll just add in there. In terms of further discussing the on-track comment, we guided to approximately 2% of  growth both on average for '21 and '22. And as you can see in numbers, Michael, right on track with that 2.2% last year in the U.S.", "So a little at 1% this year. That puts us right on the back of that 2%. I will remind you that there is a pretty significant headwind from the Sprint churn that is affecting the growth rate. And that does equal about 4% headwind going into this year.", "So that 1% would have been a lot closer to 5% if it hadn't been for [Inaudible]. And then, the further guidance from '23 out to '27 is the -- is around 5% on a reported basis with about 2% adjusted for the Sprint churn kind of coming out of that. And we're well on track for that. We've got about two-thirds of that revenue growth already committed within the framework of our holistic agreement.", "And we're also seeing that in the co-location and amendment contributions from new biz in the U.S., so we are on track with that metric for this year. That is growth over last year. We do expect Q3 and Q4 to be at higher levels than what we had in Q1. So that's the acceleration we're seeing through this year, and we expect the levels as compared next year based on the way that our holistic deals are struck, the addition of DISH, as well as the acceleration of spend from the carrier." ] }, { "name": "Michael Rollins", "speech": [ "And just one question on India. I was just perusing over the supplemental, and on page 12, the historical tower count. It shows in the APAC region, presumably India, that there's been this negative adjustments in sales or just shutdowns of towers that's been running at an annualized rate of 3% to 5%. And just curious when this optimization could substantially slow down or conclude? And if that then releases a headwind on the growth of this segment?" ] }, { "name": "Rod Smith", "speech": [ "Sorry, Mike, I had a little computer difficulty that I just had to address. Yes. So when it comes to India, it really is associated with the consolidation that we've seen in the India market with the churn that we've had over the last several years, as you're well aware of. With that, when we have single tenant towers where we don't see additional lease possibilities in the near term, we end up taking down to kind of rationalize the operating expense aspect of kind of what we're doing in India.", "So as you see churn in India continue to moderate, which we've seen to a great extent over the last couple of years, you'll see that decommission activity in the tower reduction slowdown as well. And there is usually a little lag between when you see the churn come through our revenue numbers. And then, when you see the towers, some towers actually come out of the tower count." ] }, { "name": "Michael Rollins", "speech": [ "Thanks very much." ] }, { "name": "Operator", "speech": [ "And next, we'll go to Simon Flannery with Morgan Stanley. Please go ahead." ] }, { "name": "Simon Flannery", "speech": [ "Great. Thank you very much. Good morning. I was wondering if you could talk a little bit about the data center portfolio.", "I think you referenced in the slides, outperformance there, it looked like the sequential numbers were good. What are you seeing in terms of bookings trends, backlog, things like that, industry pricing? And then I think on the European guidance, you talked about pushing some activity from late '22 into '23, I think one of the other tower companies in Europe had mentioned something similar. Can you just expand on that a little bit? And what gives you confidence that it's just a matter of months and other things, given the kind of recession concerns and the impact power prices might be having there?" ] }, { "name": "Tom Bartlett", "speech": [ "Simon, I'll take on the data center side. And we had another really strong quarter with all of our data center business. We've largely completed the integration of our legacy center into CoreSite. Strong sales, strong backlog, really positive cash in the end, churn is right on track, so we're really pleased.", "They're outpacing. As Rod mentioned, we've actually upgraded our guidance relative to the activity that we've seen within CoreSite. So really strong top line growth, new and expanded sales activity. All very, very good mix with new logos, with network new business, as well as with hyperscale.", "So really balanced strong growth and interconnection as well, which I think is just critical to this competitive advantage that we are seeing in the business and fully expected. So I couldn't be more pleased with what the business has been able to generate out of the gate." ] }, { "name": "Rod Smith", "speech": [ "Yes, Simon, and I would just add to that that gives us confidence to undertake a couple of development projects on the data center side. So we have a few of them, two of them going on. That's driving slightly elevated capex investments in the data center business. So I think you'll see in our numbers, we've got upwards of $300 million, $320 million of capex, which is a little heavier than what we would normally expect to see.", "But we do have a couple of facilities where the demand is so strong, we've undertaken some additional development opportunities there within the campuses that we operate. And then, to address your question on Europe, we are seeing a little bit of a moderation in terms of the growth in Europe. Our previous guidance was to have an organic tenant billings growth for the full year to be greater than 9%. We've taken that back a touch to approximately 9%, and that's primarily driven because we do see some leasing activity that we expected in the second half of 2022 to be pushed into 2023.", "So we do see a very strong market in Europe, particularly in Germany with the addition of 1&1 coming in, in the 5G, the initial deployments of 5G networks. And the way that the organic tenant billing growth will exit this year is going to be approaching 7% sort of equity exit run rate, which -- 7% is a really strong number for us. We couldn't be more happy with the timing of what we're seeing in Europe in terms of the demand for our assets. For the Telxius portfolio, we've picked up a lot of really sort of urban centric assets including a lot of rooftops, and we're finding that very desirable in terms of carrier activity going forward, and that's what's really driving the growth rate there.", "So it's really just a timing in Europe, but the growth rates are released." ] }, { "name": "Simon Flannery", "speech": [ "Great. And on the data center tone, any updated thoughts on the edge opportunity now that you've owned it for six-plus months?" ] }, { "name": "Tom Bartlett", "speech": [ "Yes. Simon, yes, there is. I mean, we've actually created internally an edge advisory board. We're setting up an edge lab.", "We've scanned our sites and have done the, really, the full evaluation of our sites that can support a megawatt and 2 megawatts of activity. We're looking by the end of the year to actually establish and start to build out a few of these megawatt facilities. And we're in discussions with all of the potential participants looking to take advantage of the opportunity, so it's still early days. As you recall, the reason for this particular transaction was the underlying business itself, the diversification of our existing business into the broader digital infrastructure industry and then the potential for being a major player in terms of developing what that edge would look like.", "And so, we'll have more about this on our third quarter call, we'll talk more about technology, Simon." ] }, { "name": "Simon Flannery", "speech": [ "Thank you." ] }, { "name": "Operator", "speech": [ "And next, we got the line of Eric Luebchow with Wells Fargo. Please go ahead." ] }, { "name": "Eric Luebchow", "speech": [ "Great. Thanks for taking the question. First, I wanted to touch on -- you mentioned some of the churn in Latin America. Maybe you could just expand on that, whether that's specific to the oil restructuring in Brazil, kind of how you expect that to flow versus some of the churn you've had in Mexico and how you see that trending into next year? And then Rob, curious on the bad debt reserve you mentioned.", "Any color you can provide in terms of regions that you're closely monitoring in terms of collections or payments activity? That would be helpful." ] }, { "name": "Rod Smith", "speech": [ "Yeah. Good morning, Eric, thanks for joining. So the term that we're seeing in Latin America is primarily the [Inaudible] we've seen in Mexico and Nextel that we're seeing in the Brazil market. We have begun to experience the Oi churn.", "So Oi has consolidated with [Inaudible] in the region. The contract that we have with Oi actually has another year remaining on average across those. They're on a 7,500 sites or so, and Oi makes up about 1% of our growth in that. We've got quite a long time here to kind of work through the churn from the Oi restructuring that's happening.", "That's something that you'll see through the next several years, maybe out longer than -- we're certainly in discussions with the companies who are picking up those assets to talk about maybe restructuring those contracts, figuring out [Inaudible]. We are in a pretty good position with Oi because we do have an average of over six years left on the contract there. And then, in terms of the bad debt, in terms of where we're seeing the bad debt activity, it's in, really, in India and a little bit in Africa. Recently here is we've actually reduced our reserves by about $8 million or so in Q2, and we have a plan and the outlook to further reduce that for a total of about $20 million.", "So traction in Q2 were really quite strong for us round the globe, but particularly in India, but we're happy to see that. And based on all the discussions that we have had with our customers, we expect India will remain in line with those expectations that are in our outlook, which would allow us, for the full year, to reverse about $20 million of prior bad debt reserves. We did reduce, you'll see it in the presentation by about $10 million, and that's just in line of reversing some of those reserves that we have moderated our position slightly there, but it's still good news for us for the year." ] }, { "name": "Eric Luebchow", "speech": [ "Great. Thanks." ] }, { "name": "Operator", "speech": [ "And we can go now to Ric Prentiss with Raymond James. Please go ahead." ] }, { "name": "Ric Prentiss", "speech": [ "Thanks. Good morning, everyone." ] }, { "name": "Rod Smith", "speech": [ "Good morning, Ric." ] }, { "name": "Ric Prentiss", "speech": [ "A couple of questions. First, obviously, I think it's important you guys are focusing on attributable AFFO. Help us understand what a full year impact of the new Stonepeak would be as far as demand out convert $14 million in the current year and the $20 million minority interest? And then I've got two others quick ones." ] }, { "name": "Rod Smith", "speech": [ "Yes, sure, Ric. So the way that we've got the guidance that next year, or actually in Q4 of this year, the full year kind of utilized run rate of approximately $200 million. $50 million of that has really come [Inaudible] in the data center business that we have. So that's kind of the exit run rate.", "The balance, roughly the $150 million, is what we have in Europe. So that's kind of what you can think of from the minority interest piece of our AFFO going into next year. $200 million. $150 million in Europe and about $50 million on the data center side.", "And that's mandatory, you're going to see that through with deduct to our AFFO. The mandatory is about $750 million mid-single-digit interest rate. So you just calculate the math, and that's what you'll see in terms of the deducts from AFFO from that." ] }, { "name": "Ric Prentiss", "speech": [ "OK. Second one is, you guys obviously know I've really focused on removing amortization of prepaid rent from valuation and noncash item. Interestingly, you're a number smaller than Crown. Crown did put a table out there talking about what they see as far as amortization of prepaid rent going forward.", "Is that something you guys would consider? And I've got one other quick one." ] }, { "name": "Rod Smith", "speech": [ "I don't know, Ric, if we would put out a table. But I can tell you this year for the full year, we're looking at about $110 million or so in amortized revenue kind of coming through our numbers. That's down a little bit from last year. Last year, we were about $140 million.", "I think from a going forward run rate basis, if you think of that line item being around $25 million to $30 million on a quarterly basis. That's what we see. We think it will hold pretty consistent as we go forward. But you can think about our amortized revenue in line with the $25 million to $30 million per quarter, and it's going to be a $100 million this year." ] }, { "name": "Ric Prentiss", "speech": [ "That makes sense. And last one for me is we're getting a lot of questions from investors on data centers. You talked about the growth capital opportunity there at CoreSite. What do you think maintenance capex is in the data center business? One, I think, unusual question we get, but it came up, is what would cause data centers to become obsolete or individual data centers become obsolete?" ] }, { "name": "Rod Smith", "speech": [ "Yes. Maybe I'll take the first one, Tom, and then You can handle the second one. So the maintenance capex is about $20 million this year for us in our data center business, Ric. It tends to run about 3%, maybe 4% of the data center revenue, and we don't see that changing at all.", "So that's what I should think about the maintenance capex of the business." ] }, { "name": "Tom Bartlett", "speech": [ "And Ric, relative to your second question, I mean, it all comes down to really barriers to entry. And if you think of the asset that we have with CoreSite, the barriers to entry are incredibly strong with the interconnection capability with the cloud on ramps. And so, it's hard to think about a world in which customers are not going to be still looking at kind of this hybrid environment to be able to connect with the cloud, to be able to really use data centers as a sales channel for themselves as their interconnection within the business. So we don't anticipate any of that kind of activity you said.", "But I must say that it's -- I think this particular asset that we have within CoreSite that we're building out really continues to build up those barriers to entry, and that's going to be critical. It's much like the tower business. We build up a strong barrier to entry with the exclusive pieces of real estate we have. That's our strategy, to find those assets that have those strong barriers that we can continue to develop." ] }, { "name": "Ric Prentiss", "speech": [ "Makes sense. Thanks, guys. I love hearing barriers to entry." ] }, { "name": "Tom Bartlett", "speech": [ "Thanks, Ric." ] }, { "name": "Operator", "speech": [ "OK. Next, we'll go to David Barden with Bank of America." ] }, { "name": "David Barden", "speech": [ "Hey, guys. Thanks so much for taking my question.  First, I guess, maybe Rod, you -- in your script, when you were talking about the partnership with Stonepeak, mentioned something to the effect that you were creating a platform for data center investment given Stonepeak's experience in the comm infrastructure space. I think one of the concerns some people have about American Tower's foray into data centers is that it's going to be a big call on capital at the margin, and we just don't know how big it's going to be. So if you could kind of clear up a little bit about how you think this platform might be looking at acquisitions and investments and calls on capital? And then second, maybe Tom, I don't know if you have a view on this, but with respect to American Tower not having a holistic MLA with Verizon at this stage, do you feel that AMT -- contributing factor to AMT's kind of domestic same-store sales growth performance this year might be that Verizon is allocating some business to its other tower partners in the early stages of its C-band build, and that we need to wait for them to come around to be common AMT customer?" ] }, { "name": "Tom Bartlett", "speech": [ "I mean, David, let me take that one and then I'll let Rod, and then I'll come back and add on to that to the first one. Relative to how Verizon is building out their C-band, it's really hard to tell in terms of whether it's happening with other carriers who have a more holistic type of an MLA versus ourselves. I don't think so. Candidly, I think that Verizon is being very, as they always are, measured in terms of how they're rolling out C-band.", "And I would expect, candidly, over the next half of the year and clearly into '23, some real investments that they're going to be making into the sites. It would represent a significant piece of their portfolio. And strategically located into critical markets, that I know Verizon is going to want to drop in C-band on those sites. They have to.", "And I would expect that to see in the second half. Relative to the timing in terms of us not having that, it's really difficult to say whether there's been a timing difference in terms of when we're going to see that type of activity. As I said, I don't think so. But more importantly, I would expect to see significant activity really ramping up in the second half and into '23, which is a more important element." ] }, { "name": "Rod Smith", "speech": [ "Yes. And David, with regards to your question on the data center spend, this year, we do have capex in the plan of about $300 million, maybe a touch over. Includes a couple of development projects that really will not be recurring in nature. So we're looking at about $200 million of historical annual investments in the divestment projects and total capex, including the maintenance capex.", "And that's where we expect to stay going forward. That would allow us to keep ahead of kind of net absorption, forward-looking through years and to make sure that each of our facilities has a billable megawatt capacity. And in order to do that, we expect to reinvest about that $200 million, give or take, which is what CoreSite had been doing historically. Maybe ours will be a touch higher, maybe they were closer to $150 million -- between $150 million and $200 million, we'll probably be closer to $200 million or maybe a touch over.", "So we're not looking to compete on a national scale in the data center business. We really bought CoreSite because of the cloud-centric network dense nature, the interconnection nature of these assets and kind of the geographical spread throughout the U.S. and really good proximity to our tower sites with its facilities in L.A., upper Silicon Valley, Chicago, down Denver, Boston, New York, Northern Virginia, we have [Inaudible]. We've got a nice spread of these assets.", "And because of the high-quality nature, that's what's giving us the nice growth rates that, as Tom mentioned earlier, up in the 10% range, which is well above our underwriting expectations of between 6% and 8%. So we see really strong demand for these assets of high quality, and we're looking to really take these assets, and potentially in the future, connect them to our self cloud on-ramps and interconnection facility at the tower site. That's the real significant upside. With that said, we'll be reinvesting the CoreSite cash flow kind of back and to keep ahead of that two years of that absorption on the megawatt capacity.", "And then, you may see us add a data center here or there throughout the U.S., but not a major change in capital allocation certainly." ] }, { "name": "David Barden", "speech": [ "That's super helpful, guys. Thank you very much." ] }, { "name": "Operator", "speech": [ "And we'll go to Matt Niknam with Deutsche Bank." ] }, { "name": "Matt Niknam", "speech": [ "Thanks for taking the questions. Just maybe to follow up on the prior one around expanding the platform. I guess more broadly beyond data centers, just thinking about the broader comm infrastructure portfolio, are you seeing incremental opportunities internationally that may not have been as present a year ago? And then secondly, as it relates to India, 4% organic growth this quarter, we noticed a pretty big step down in churn. I'm just wondering if there's any additional color you could share there and whether that's maybe -- this quarter is maybe a better run rate to think about from a churn perspective in India on a go-forward basis?" ] }, { "name": "Tom Bartlett", "speech": [ "Matt, I'll take the first one. Rod can take the second one. Yes, we're very focused on the U.S. as we said.", "Yes, there are a lot of opportunities outside of the United States. And as a result of the positioning that we have with CoreSite, we get approached by many different players to develop, but we're very focused on the U.S. And as Rod said, to the extent that there's outsized capex, we're going to be incredibly measured about how we spend that. But it will be at the tower sites.", "Remember, the edge is all about the opportunity at the site itself. And we've identified largely over 1,000 sites that, with power and interconnection, could support upwards of at least a megawatt of capacity. And so, we're going to be looking at that where we can take it to a megawatt, where we can take it to two, where we could take it to three. And to the extent that we're able to develop the demand from a customer perspective, we will look at building that kind of capacity out.", "But it will be very measured. It will be based upon demand, and it will largely be in the United States." ] }, { "name": "Rod Smith", "speech": [ "Matt, thanks for joining the call. So regarding India, we are guiding to 2% to 3% organic tenant billings growth in India. For the second quarter, we did see a higher number than that, close to 4%, which was nice to see. That was driven by consistent sort of stable organic new business.", "We have a 2% escalator, of course. And then, we did see a reduction in churn in Q2 from Q1, and certainly, a further reduction from the prior year quarter. So when we go forward, one thing that I will highlight is in Q3, we do see a higher level of churn happening in Q3 compared to Q2. So don't be surprised if you see that organic tenant billings getting pulled back a little bit from the 4% to probably below 2%, maybe approaching 1%.", "That will be temporary and you'll see it come back up in Q4 up in the 3% range. So I think for now, we are constantly optimistic about India. There are still some churn events that we're working through, and we feel good about a 2% to 3% number for this year. And certainly, as we go forward, we hope to see and expect to see continued moderation on the churn line, solid new business activity that allow us to grow from that 2% to 3% organic billings growth.", "But of course, we'll address that in next February when we give guidance for 2023." ] }, { "name": "Matt Niknam", "speech": [ "That's great. Thank you, both." ] }, { "name": "Operator", "speech": [ "And next, we can go to Phil Cusick with J.P. Morgan. Please go ahead." ] }, { "name": "Richard Choe", "speech": [ "Hi. This is Richard  for Phil. Just wanted to follow up on the international tower builds of the $40,000 to $50,000 over the next few years. I wanted to get a sense of how much of that is contracted versus any other good line of sight into..." ] }, { "name": "Rod Smith", "speech": [ "Yes. I would say,  Richard, we have a good line of sight into -- I mean, certainly, there are elements of that that are contracted in the Telxius transaction that we did over in Europe. There are about 3,000 sites that we'll build for Telefonica over time. There's also a site that we're building for Orange over time that are contracted.", "I don't want to put too firm numbers on there in terms of the Orange piece. When it comes to India, Africa and Latin America, it's more opportunistic, but we do have a really good run rate in terms of building sites. This year, we'll build around 6,500 towers. That's a little bit above where we were in the prior year.", "And we see that run rate as being sustainable as going forward. And as, of course, you know, we highlight this often, those builds are some of our most attractive capital deployment opportunities. And we're seeing double-digit NOI yields day one from those newly constructed sites around the globe. So we have a high level of confidence in that $40,000 to $50,000 number.", "Some of it is contractual, some of it more opportunistic, but the pipeline is robust." ] }, { "name": "Richard Choe", "speech": [ "Great. And a follow-up on that. The yields are high on day one, but what kind of collocation, I guess, expectations do you have on those builds over time? Can you give us any color around that?" ] }, { "name": "Rod Smith", "speech": [ "Yes. I think we would view them to be very similar to the rest of our towers and be comparable to the market that they're in. Certainly, the towers we build, we like to see that they are multi-tenanted, of course, and we know that the growth in mobile data consumption around the globe continues to run at a really solid clip in that 30% range or even higher in some markets. So certainly, getting additional tenants on those sites is something that's really important.", "We do have a line of sight to see that. And we see with these new builds, we do see in the north of 20% NOI yields on most of these assets. So time will tell, but given the demand for tower sites, the critical nature of these tower assets globally, and the fact that a lot of these emerging markets, as well as Europe are transition to new technologies, either building out 4G networks or in the case of Europe, transition now to 5G, there's a need and the demand for more and more towers. So that gives us the confidence that we will be able to attract additional tenants on these sides." ] }, { "name": "Richard Choe", "speech": [ "And the last follow-up for me. On the data center side, just to clarify, there's no additional capital coming in from Stonepeak with either the new builds, but there might be if there's an acquisition, a small one or whatnot?" ] }, { "name": "Rod Smith", "speech": [ "Yes, I think that's right. The way -- and we announced a $2.5 billion investment, which will give them a minority stake. That will be when their preferred investment is fully converted. They'll be a 29% roughly of the data center business.", "And certainly, if there's any capital requirements needed to fund our data center business, there will be a capital call to all investors, us investing kind of on a pro rata share. And then, certainly, if there's M&A opportunities that require capital calls, of course, again, it will be the same situation. We'll be funding that together." ] }, { "name": "Richard Choe", "speech": [ "Great. Thank you." ] }, { "name": "Operator", "speech": [ "And we have time for one last question. We'll go to the line of Batya Levi with UBS. Please go ahead." ] }, { "name": "Batya Levi", "speech": [ "Great. Thank you. In the U.S., can you provide a little bit more color on the activity we're seeing from DISH? And a question on capital allocation. You typically bring back share buybacks after an issuance or ahead of like mandatory conversion.", "Going forward, can we expect you to balance maybe debt reduction versus opportunistic buybacks?" ] }, { "name": "Tom Bartlett", "speech": [ "Sure. I'll do the first one. On DISH, they're right where we thought they would be. I mean, they've been very measured in terms of their deployments.", "They've been very active. We got a couple of critical markets that they are bringing up, and we have a comprehensive MLA with them and then we're seeing good activity across the country." ] }, { "name": "Rod Smith", "speech": [ "Yes. And then, relative to the capital allocation question, you've heard us say it many times, but the first priority, of course, is funding our dividend. And not only funding it, growing the dividend. So this year, we'll have a double-digit 12.5% growth rate on the dividend.", "And in the current environment that we're in, we certainly will be focused on delevering. It's no surprise to anyone on the call, I'm sure, that we are outside a little high of our target range of around 5%, below 5%. So we ended the quarter at about 5.8%. That's about 5.5% of the pro forma the investment from Stonepeak in.", "So we still have some delevering work to do, which we will be focused on. So we will be focused on organic growth, where we focused on driving 10% AFFO per share growth. We'll be focused on delevering. We'll be focused on our capex plans around the globe, funding the build to suits that can see very good returns on across all the markets that we're currently in.", "And then, to the extent that there are opportunities to buy back shares at attractive prices from time to time or fund additional M&A from time to time that's accretive and fits within our disciplined approach, we'll balance those to investment opportunities and make the choice that's best for our shareholders and drives the most AFFO per share growth." ] }, { "name": "Batya Levi", "speech": [ "Great. Thank you." ] }, { "name": "Operator", "speech": [ "And speakers, I hand the call back to you." ] }, { "name": "Adam Smith", "speech": [ "Thank you, everyone, for joining today's call. Please feel free to reach out the investor relations team with any questions. Thank you, everyone." ] }, { "name": "Operator", "speech": [ "[Operator signoff]" ] } ]
AMT
2022-10-27
[ { "description": "Senior Vice President, Investor Relations", "name": "Adam Smith", "position": "Executive" }, { "description": "President and Chief Executive Officer", "name": "Tom Bartlett", "position": "Executive" }, { "description": "Executive Vice President, Chief Financial Officer, and Treasurer", "name": "Rod Smith", "position": "Executive" }, { "description": "Morgan Stanley -- Analyst", "name": "Simon Flannery", "position": "Analyst" }, { "description": "Bank of America Merrill Lynch -- Analyst", "name": "David Barden", "position": "Analyst" }, { "description": "Cowen and Company -- Analyst", "name": "Greg Williams", "position": "Analyst" }, { "description": "UBS -- Analyst", "name": "Batya Levi", "position": "Analyst" }, { "description": "Citi -- Analyst", "name": "Michael Rollins", "position": "Analyst" }, { "description": "Raymond James -- Analyst", "name": "Ric Prentiss", "position": "Analyst" }, { "description": "Deutsche Bank -- Analyst", "name": "Matt Niknam", "position": "Analyst" }, { "description": "JPMorgan Chase and Company -- Analyst", "name": "Richard Choe", "position": "Analyst" } ]
[ { "name": "Operator", "speech": [ "Ladies and gentlemen, thank you for standing by. Welcome to the American Tower third quarter 2022 earnings conference call. As a reminder, today's conference call is being recorded. [Operator instructions] I would now like to turn the call over to your host, Adam Smith, senior vice president of investor relations.", "Please go ahead, sir." ] }, { "name": "Adam Smith", "speech": [ "Good morning and thank you for joining American Tower's third quarter 2022 earnings conference call. We have posted a presentation, which we will refer to throughout our prepared remarks under the Investor Relations tab of our website, www.americantower.com. On this morning's call, Tom Bartlett, our president and CEO, will discuss current technology trends and how we are positioned to benefit from continued wireless technology evolution. And then Rod Smith, our executive vice president, CFO, and treasurer, will discuss our Q3 2022 results and revised full year outlook.", "After these comments, we will open up the call for your questions. Before we begin, I'll remind you that our comments will contain forward-looking statements that involve a number of risks and uncertainties. Examples of these statements include our expectations regarding future growth, including our 2022 outlook, capital allocation, and future operating performance; our collections expectations associated with Vodafone Idea in India; the Stonepeak transaction and the expected value and future investment activities of our U.S. data center business; our expectations regarding the impacts of COVID-19 and any other statements regarding matters that are not historical facts.", "You should be aware that certain factors may affect us in the future and could cause actual results to differ materially from those expressed in these forward-looking statements. Such factors include the risk factors set forth in this morning's earnings press release, those set forth in our Form 10-K for the year ended December 31st, 2021, as updated in our upcoming Form 10-Q for the nine months ended September 30, 2022, and in other filings we make with the SEC. We urge you to consider these factors and remind you that we undertake no obligation to update the information contained in this call to reflect subsequent events or circumstances. With that, I'll turn the call over to Tom." ] }, { "name": "Tom Bartlett", "speech": [ "Thanks, Adam. Good morning, everyone. As is typical for our third quarter call, my comments today will center on the key technology trends we're seeing across the wireless landscape and how our distributed tower portfolio is positioned to benefit from next-generation network deployment and generate sustained resilient growth, despite ongoing macroeconomic volatility. Additionally, I'll provide an update on the CoreSite portfolio of assets, our latest view on the evolution of the mobile life, and the progress we are making in advancing our edge strategy, which aims to leverage our distributed tower and land assets, in combination with our interconnected data center portfolio to drive incremental value as network technology evolve.", "Since the start of 2019, 5G spectrum auctions, mainly in the mid band, have collectively driven over $155 billion in purchase price proceeds across our served market. These acquisitions of large swaths of new spectrum have kicked off what we believe will be at least a decade-long period of network investments, aimed at delivering on the promises of 5G's faster and lower latency applications. We anticipate this will result in $5 billion of incremental annual customer capex spend in the United States, on average, as compared to the levels we saw throughout the 4G cycle. Additionally, in the U.S., the visibility we gained through the comprehensive MLAs we put in place with AT&T, T-Mobile, DISH, and most recently, Verizon, supports our expectation that these investments will drive a near-term acceleration in organic new business growth and a sustained level of elevated tower activity over a multi-year period.", "As we saw during the rollout of 4G, we expect this investment cycle to play out in two broad phases. The first being a coverage phase, through which carriers prioritize upgrading their existing footprint to maximize the percentage of the population having 5G access and begin to benefit from the cost efficiencies associated with their network technology upgrades. Over the last year, we've seen carriers leveraging our presence in nationwide scale to efficiently and aggressively upgrade equipment on our sites, both here in the United States and in several markets across our international footprint to meet those 5G build-out objectives. In the second phase, as consumers adopt advanced 5G-enabled mobile devices and applications, carriers will invest in additional capacity through network densification to facilitate increased mobile data consumption and optimized customer experience.", "We saw this second phase play out after 4G was launched in the United States around 2010. By coupling the provision of higher bandwidth speed and improved network capabilities with the proliferation of advanced smart connected devices with improved user interfaces, 4G unleashed innovative applications, such as video streaming, mobile gaming, as well as industry redefining application, which is mobile-enabled ride-sharing and transportation. The introduction of these new data-intensive applications contributed to an annual consumption growth rate of nearly 50% from 2013 to 2018, requiring carriers to meaningfully invest in the densification of their network. Similarly, we expect our customer's 5G network anticipating delivery times of 5 to 10 times lower latency and increased download speeds up to 100 times to further unlock new capabilities, facilitate consumer and enterprise innovations, enable use cases that will necessitate further proliferation of connected devices and drive higher network throughput.", "Consider emerging augmented and virtual reality technology as an example, video streaming excluded, primarily because of the advancements achieved through 4G, driving extended destination investment in order to provide users with adequate network quality. Currently, video streaming bandwidth requirements range from a few megabits per second to about eight megabits per second for HD and up to 25 megabits per second for 4K, depending upon the resolution, eventually working to 50 and closer to 100 megabits per second for 8K videos. Depending on compression schemes and the device requirements, looking ahead to the theoretical max specs for potential future applications of mix reality, we would expect multiple gigabits per second. Again, that is gigabits with the G.", "Compared to 4G, 5G will offer enhanced resolution, rapid refresh rates, real-time raw midstream with low latency and provides three times more bits per hertz spectrum efficiency in the 5G mid band. Even when factoring in all these benefits, we believe rapid mobile data consumption growth, along with the shorter propagation characteristics of mid-band spectrum. We'll necessitate a massive 5G densification phase of network investment, greater than what we realized in 4G. As a result, we expect this future capacity as to support sustained growth in our tower business.", "At the same time, we expect the applications driving these densification efforts to present new neutral host infrastructure opportunities, aimed at minimizing latency and reducing traffic burdens on middle mile network. This is a good segue into a discussion about our CoreSite data center activity and the progress we're making in advancing our edge strategy to support these networks of the future. While the tower business certainly remains healthy and staggered deployment of network generation rollouts across our geographically diverse footprint provide a solid runway for growth over the next decade, we remain focused on identifying new opportunities for value creation through the platform expansion pillar of our stand and deliver strategy. A key element of this pillar is identifying new opportunities that leverage our portfolio of communication assets and our capabilities in managing and redeveloping distributed real estate to provide new multi-tenant neutral host infrastructure model that support the demands of next-generation networks and applications.", "As we previously communicated, the most apparent opportunity of scale that we see over the next decade is out of the mobile edge, which ultimately solidified our decision to acquire CoreSite at the end of 2021. We still believe this acquisition further positions us to take advantage of the emerging digital transformation enabled by 5G. Having now owned CoreSite for more than three quarters, we couldn't be happier with the performance we're seeing across the business and the use cases driving leasing activity, which we expect to serve as growth catalysts well into the future. Importantly, we're extremely encouraged by the consistently positive customer feedback on this acquisition.", "Customers continue to view CoreSite as a strong operator in hybrid IT solutions provider with a high-quality ecosystem, which under the American Tower umbrella can now provide more predictable scalability and future incremental value through our combined platform capabilities and expertise. So far in 2022, CoreSite has achieved solid new business volumes, a reflection of the strong demand for the company's interconnection and cloud on-ramp rich ecosystem, where over 80% of revenues are derived by customers with a variety of interconnections to at least five different and independent customers. This strong demand demonstrates the differentiated value proposition and resiliency of these strategically located and well-integrated assets. We are pleased to see strong new business volumes from enterprises, prioritizing digital transformation to the implementation of hybrid IT solutions, leading the migrations from an on-premise data centers to co-location data centers in major metros.", "We are also encouraged to see accelerating demand from leading digital platform, seeking to extend compute functionality closer to their users to enable automation, collaboration, and address latency-sensitive applications and early indicators supporting our edge evolution thesis. Critical to CoreSite's interconnection-rich ecosystem value proposition is its open cloud exchange platform or OCX. OCX provides CoreSite customers with quick scalability and represents an essential element, as we seek to expand the ecosystem to more distributed points of presence at the edge development. Today, through this automated Layer 2 Ethernet software-defined networking platform, we connect our customer communities within and between our U.S.", "data centers, and we connect cloud providers to CoreSite's nationwide portfolio. We continue to invest in improving the platform's features and building out the functionality and reach to enable high-performance, hybrid architectures more quickly and securely and at a lower total cost of operation than alternative solutions. More recently, we launched Layer 3 enhanced network services, including virtual routing, cloud connect tiering to service providers, and cloud-to-cloud connectivity to leading cloud providers. These enhanced functionalities simplify an enterprise's network hardware or management resources at a lower total cost of ownership.", "Through continued innovation over time, CoreSite's vision is to provide customers with single port access to their entire digital supply chain, which we will also expect to be leveraged and extended as the distributed interconnected edge ecosystem develops over time. While the distinctive characteristics of CoreSite's portfolio, including its enhanced capabilities accorded to its OCX platform, represent the critical attribute in advancing our edge strategy, we also see tremendous value in CoreSite's development pipeline. Coresite continues to execute on opportunities to redeploy their cash flow toward high-yielding development project. Customers require additional scale across our footprint.", "And consequently, over 20% of our data center development under construction is now pre-leased. We also recently announced the acquisition of a purpose-built data center in Southern Florida, MI2, which will be connected to our existing Miami facility, expanding and strengthening our Southeastern footprint, where we have also integrated our legacy data centers in Atlanta and Orlando into the CoreSite ecosystem. As we look further out, we expect workloads to become even more distributed and localized. Therefore, we see the importance of an interconnection hub like CoreSite, increasing as customers look to future-proof their digital businesses who secure, flexible and scalable solution, enabling agile interoperability as businesses shift to more customized hybrid multi-cloud IT environment and importantly, require an extended edge computing presence to support evolving low latency applications.", "In turn, the mobile edge is emerging as a critical area in the convergence of wireless and wireline network. Over the past year, these 5G deployments in the U.S. have continued at a rapid pace, we've seen elevated emphasis from select wireless carriers with respect to their edge compute strategies and a forging a partnership with cloud and enterprise technology platform to better prepare for the network demands of the future. We see all of this as incremental data points in support of our vision for forthcoming demand of VA.", "In our view, much like the adoption of the shared tower model, this digital ecosystem over time will be most efficiently provisioned through a distributed neutral host, multi-tenant interconnected edge infrastructure model, reducing the capital intensity and total cost of ownership among MNOs, cloud, landline and enterprise players and critically, facilitating a seamless universal customer experience for end users. Our tower portfolio, coupled with our U.S. data center business, represents a distributed portfolio of real estate with accessibility to robustly interconnected core network and native access to cloud on rent. We believe the combination of these platforms will be critical as data processing extends from the core to the edge.", "With that migration, more distributed and localized points of presence, along with transit costs and low latency considerations, will become essential over time, providing American Tower and CoreSite, the potential to win across multiple edge layers. To date, our team has identified over 1,000 sites within our existing U.S. tower portfolio that we see as shovel-ready candidate for mobile edge deployment based on location, parcel footprint, land control, and existing fiber and power access. Over the next several months, we plan to break ground on our first one-megawatt edge facility and an owned tower site to build upon our understanding of market demand and customer requirements, design a blueprint that can be rolled out at scale as the edge ecosystem developed and demonstrate the differentiated value proposition at American Tower and CoreSite can offer potential customers.", "As always, any future development will go through our disciplined approach to evaluating the market opportunity and economic returns of edge deployments at scale, as well as an evaluation of the best way to finance future deployment, which could potentially include strategic partnerships, financial sponsors or both. In short, the strategic partnerships emerging between the MNOs and cloud service providers, the evolution of latency-driven edge leasing activity within our CoreSite portfolio, and our interactions with the architects, the low latency networks of the future have only strengthened our conviction. The edge will represent a meaningful opportunity to drive incremental value to our assets over the long term. Although this architecture will take time to develop, American Tower is positioning itself as a critical future provider and partner for cloud, MNO, and enterprise customers, as wireless and wireline network convergence accelerates over time.", "In the meantime, we'll seek opportunities to advance our learnings, including through the development of an edge application integrator and our participation in various trials in edge industry form. We are proactively taking the necessary steps to understand emerging trends, network requirements, and customer needs. All aimed at strengthening our option to win at the edge over the long term. In closing, demand for wireless connectivity continues to grow across the globe, where despite the dynamic challenges we've all navigated over the past several years, the need for reliable wireless and broadband access has been elevated in importance as a means to advance global economies and the populations they serve.", "With carriers aggressively deploying their valuable spectrum assets, we will begin to realize the true capabilities of 5G. And with that, we expect to see new innovations that will change the way we live for the next decade and beyond. Our effort to build scale across our global footprint of macro tower assets for over the past two decades, combined with our continuous focus on platform expansion and innovation has position American Tower to support our customers in meeting the continued acceleration in mobile data demand, while leading the way in the development of new infrastructure model that will be essential in meeting the needs of applications of the future and drive incremental value on our assets over time. With that, let me turn the call over to Rod to go through our third quarter results and updated full year 2022 cost.", "Rod?" ] }, { "name": "Rod Smith", "speech": [ "Thanks, Tom. Good morning and thank you to everyone for joining today's call. As you heard from Tom, we are very encouraged by the technological trends that we believe will drive continued secular growth in the industry and a long runway of growth for American Tower. Before I walk through the details of our Q3 results and revised outlook, I will first touch on several key trends and developments from the quarter, including the evident strength of leasing demand across our footprint and renewed collections volatility in India.", "First, we continue to see 4G and 5G investments driving strong demand across our footprint, which translated into solid gross leasing growth in the quarter and we expect this trend to continue and further accelerate, particularly in the U.S. as we approach 2023. We complemented sequential growth in organic leasing with nearly 1,600 newly constructed sites internationally earning on average, low double-digit returns on day one, driven by those same trends. Additionally, demand for hybrid IT solutions optimally suited for our U.S.", "data center portfolio remains healthy. This resulted in another strong quarter of leasing results, fueled by digital platforms and the continuation of enterprises moving their IT infrastructure from on-premises to interconnection-rich co-location facilities with direct cloud access, such as CoreSite. Next, we closed on Stonepeak's initial $2.5 billion investment in our U.S. data center business in August, which was upsized by another $570 million after quarter end at the same valuation in terms.", "This further highlights the differentiated characteristics and value of the CoreSite portfolio, while establishing a partnership through which we will execute on our U.S. data center strategy. Also, we signed a new comprehensive MLA with Verizon at the end of August, which is expected to allow Verizon to efficiently accelerate their 5G network deployment over a multiyear period. This agreement is yet another data point, illustrating the fundamental long-term criticality of our portfolio as our customers seek to leverage our scale and capabilities to rapidly deploy nationwide 5G and further provides tangible evidence that our U.S.", "business should have a solid runway of growth over the next several years. Additionally, we executed a new multi-market MLA with Airtel Africa, our largest customer in the region. Under this new long-term agreement, we've secured attractive terms across our existing Nigeria, Kenya, Uganda, and Niger portfolio, along with a contractually committed, attractive build-to-suit pipeline to support Airtel Africa's 5G deployment, among other opportunities. Importantly, with Airtel Africa, we share a focus on advancing wireless connectivity in a sustainable manner, which is represented in this agreement through a commitment to deploy low-carbon sites and expand our digital communities program.", "Our agreements with both Verizon and Airtel Africa, two of our largest customers is the latest demonstration of the value our global scale and operational capabilities as a company, both in markets and across borders, can unlock to provide mutually beneficial solutions for American Tower and our partners. With that, I'd like to take a moment to address some uncertainty related to collections arising out of our India operations and how this event has affected our results for Q3 and revised outlook for 2022. In Q3, collections from Vodafone Idea, or VIL, fell short of our billings. And the customer has also communicated an expectation for that trend to continue through the balance of this year.", "As a result, we found it prudent to take certain reserves associated with VIL in Q3 and against the anticipated Q4 billing shortfall in our revised guidance. Consequently, our full year expectations now include approximately $95 million in additional revenue reserves, about half of which was booked in Q3. It also includes the removal of a $30 million bad debt reversal that was assumed in our prior guidance. Together, these result in a reduction in adjusted EBITDA and attributable AFFO of $125 million.", "At this time, our revised outlook for net income does not assume any additional impairment charges associated with the goodwill and intangibles that we currently have on the books associated with VIL, as the shortfall in cash flows is being viewed as temporary. It should also be noted that VIL did express a commitment to revert back to 100% payment at the start of 2023 and repay outstanding pass-through balances, which could potentially provide an opportunity to reverse certain reserves we've taken in the future. VIL has also laid out a set of strategic steps that we will closely monitor on its path to more stabilized and consistent payment, including the conversion of its AGR interest into equity held by the Indian government. However, until then, we expect continued uncertainty in collections for VIL and have reflected those risks in our revised outlook.", "In the meantime, we are actively working with VIL on the path forward, which could potentially include converting a portion of its existing AR into optionally convertible notes, which we believe can better secure our receivables. We will incorporate new developments that unfold over the next several months into our guidance for 2023 on this February's call. With that, please turn to Slide 6, and I'll review our Q3 property revenue and organic tenant billings growth. As you can see our Q3 consolidated property revenue of $2.6 billion increased by over 10% and over 14% on an FX-neutral basis as compared to the prior-year period.", "Growth was primarily driven by solid organic leasing, execution on our international new build program in contributions from our U.S. data center business, partially offset by headwinds of approximately 2% associated with revenue reserves taken in India during the quarter, as discussed, and another 2% from Sprint-related churn. Moving to the right side of the slide, you can see we achieved consolidated organic tenant billings growth of 2.6% for the quarter. In the U.S.", "and Canada, as expected, net organic growth was slightly positive at 0.3%, including a sequential step-up in gross organic new business of $38 million, a meaningful acceleration from $31 million in Q2 in our highest quarter since Q1 of 2020. As we have indicated throughout the year, we expect this acceleration to continue into Q4 and even further in 2023, where a large portion of our growth will be contractually committed through our comprehensive MLAs. Escalators were 2.8%, which, consistent with last quarter, were impacted by certain timing mechanics within our MLAs. Though for the full year, we expect escalators to come in right around 3%, consistent with historical trends.", "This growth was offset by the impact of Sprint churn, which continues to drive over 4% of negative headwinds year over year and will step down in Q4 as the largest tranche of contractual Sprint churn will have lapped in our year-over-year growth metric. On the international side, organic growth was 6.1%. Starting with Europe, we saw growth of 6%, which is now at a more normalized level with healthy largely in the prior-year base. In Africa, we generated organic tenant billings growth of 6.8%, modestly higher than prior expectations due to some delays in anticipated churn now pushed to later in the year.", "Growth also included another strong quarter of gross organic new business standing at 7.5%, putting Africa on track for its best organic new business year on record and continuing past quarter trends, we saw the strong organic leasing activity complemented with an active new build program, constructing just over 250 sites in the quarter as we see 4G coverage and densification initiatives continue to drive strong top-line growth and returns on our capital deployments across the region. Moving to Latin America. Organic growth was 8.2%, which includes approximately 9. 7% from escalations.", "Growth through organic new business and escalations was partially offset by another quarter of elevated churn, primarily associated with certain decommissioning agreement, which we expect to further accelerate in Q4, as highlighted on previous earnings calls. In APAC, we saw organic growth of 1.9%, in line with our expectations, which comes alongside a continuation of solid new build activity with 1,200 sites constructed during the quarter. Turning to Slide 7. Our third quarter adjusted EBITDA grew nearly 6% or over 8.5% on an FX-neutral basis, to over $1.6 billion, with strong revenue growth and cost controls, partially offset by the negative impacts of Vodafone Idea revenue reserves and Sprint-related churn, together representing approximately 6% headwinds to growth.", "Adjusted EBITDA margin was 61.5%, down 170 basis points year over year, driven by the lower margin profile of newly acquired assets, the conversion impacts of Vodafone Idea reserves, and Sprint churn, along with higher pass-through revenue resulting from fuel costs. Moving to the right side of the slide, attributable AFFO, and attributable AFFO per share decreased by approximately 3% and 5%, respectively, with each including a 3% headwind associated with FX. Growth was meaningfully impacted by the Vodafone Idea reserves and Sprint-related churn, combining for an over 8% offset to otherwise strong and resilient performance across our global operations. Let's now turn to our revised full year outlook, where I'll start by reviewing a few of the key high-level drivers.", "First, performance remains solid across our portfolio as demand for wireless connectivity and the rollout of next-generation networks are fueling strong new business volumes across our regions. Together with the straight-line benefit from our recently executed MLAs, along with pass-through increases, primarily related to power and fuel, we're raising our property revenue and adjusted EBITDA guidance for the year. Second, we have revised our FX assumptions using our standard methodology, which has resulted in outlook-to-outlook headwind of $45 million, $22 million, and $13 million for property revenue, adjusted EBITDA, and consolidated AFFO, respectively. Finally, and as noted earlier, we have incorporated approximately $125 million in incremental reserves relative to our prior outlook, associated with Vodafone Idea.", "This includes $95 million in revenue reserves, split between Q3 and Q4, and the removal of our previous assumption for incremental bad debt reversals of around $30 million. As I mentioned, Vodafone Idea has communicated its intention to resume full recurring payments in 2023. However, at this time, we believe these adjustments to be appropriate for the current year. With that, let's discuss the details of our revised full year expectations.", "As you can see on Slide 8, we are raising our property revenue outlook by $70 million at the midpoint. This outperformance includes straight-line upside of approximately $65 million, primarily associated with our recently executed Verizon and Airtel Africa MLAs, and $77 million in higher pass-through revenue driven by fuel costs, along with various non-recurring benefits, including accelerated decommissioning-related settlements in Latin America, which we now expect to total approximately $85 million for the full year. Our guidance raise was also supported by a recurring revenue upside across several of our segments, helping to contribute to some modest revisions to our organic tenant billings growth outlook, which I'll touch on shortly. This outperformance was partially offset by the $95 million in incremental revenue reserves related to Vodafone Idea and $45 million in FX.", "Moving to Slide 9, you will see our organic tenant billings growth expectations, while we are reiterating our prior outlook on a consolidated basis and for the U.S. and Canada as well as APAC segment, we are slightly revising our expectations for International, Europe, Latin America, and Africa. For international, we are raising our organic growth to approximately 6.5%, up from approximately 6% previously. In Europe, we have adjusted our organic growth expectations to greater than 8% from approximately 9% in our prior outlook, where we expect new business commencements to shift further into 2023.", "In Latin America, we are increasing our organic growth expectations to greater than 7%, up modestly from approximately 7% in our prior guidance, reflecting a continuation of the CPI-linked escalation benefits in the region. In Africa, we are increasing our organic growth expectations to greater than 7%, up from approximately 6.5% in our prior guidance, reflecting the delays we're seeing in anticipated churn, as I mentioned earlier. As a reminder, in Latin America and Africa, consistent with prior assumptions, we anticipate consolidation-driven churn events to drive a sequential decline in growth as we exit the year resulting in what we expect to be approximately 4% and 5.5% organic tenant billings growth in Q4, respectively, with some carryover impacts as we head into 2023. Lastly, in the U.S.", "and Canada, where we are reiterating our prior organic growth outlook, we expect to see Q4 organic tenant billings growth of around 4%, with further improvement in 2023, backstopped by the contractual visibility afforded through our comprehensive MLAs with the big three carriers plus DISH. Moving to Slide 10. We are raising our adjusted EBITDA midpoint by $30 million as compared to our prior outlook, where we're seeing a high conversion of property revenue outperformance delivered through prudent cost controls and continued elevated services volumes, providing meaningful upside as compared to our previous expectations. These benefits are partially offset by the $125 million associated with incremental reserves assumed for Vodafone Idea, as previously discussed along with $22 million in FX.", "Turning to Slide 11. We are lowering our attributable AFFO guidance by $40 million or $0.09 on a per-share basis. This adjustment is attributable to the Vodafone Idea reserves we have taken, which is translating into approximately $0.27 per share of downside, offsetting what was otherwise very strong performance across our business, which represented approximately $0.20 per share outperformance on an FX-neutral basis. Moving to Slide 12.", "Let's start by taking a look at our capital deployment expectations for the year, which are slightly updated compared to our prior outlook and continue to reflect our focus on driving sustained AFFO per share growth and shareholder returns. Within our capital deployment plan, we are reiterating our expectations to dedicate approximately $2.7 billion, subject to Board approval toward our 2022 dividend. With regard to capex, we are reducing our total midpoint by $45 million, with redevelopment decreasing by $35 million and start-up decreasing by $10 million, the result of some timing adjustments and savings as compared to our prior plan. We continue to assume the construction of approximately 6,500 new sites globally and roughly $300 million toward our U.S.", "data center business, largely associated with development spend. As we've highlighted in the past, we continue to generate exceptional returns through our discretionary capex program, which remains largely financed through the redeployment of locally generated cash flows. We view our ability to allocate nearly $1.8 billion toward accretive high-yield projects as a strategic benefit after years of building scale and credibility with our global customer base in a compelling way to further build scale and drive accretion for years to come. Finally, although we have not incorporated into our revised guide, I'd like to highlight that with the additional capacity we currently have as we outpace our delevering plan, we expect to opportunistically restart our share buyback program.", "Given recent market performance and the strong fundamentals we anticipate in our business over the long term, we see this as a great opportunity to further drive shareholder value, particularly against other forms of capital deployment in our current line of sight. Moving to the right side of the slide, I'd like to take a moment to review the progress we have made since the start of the year to shore up our balance sheet and liquidity position, particularly in light of the market volatility and unprecedented rise in rates occurring over the past several months. As you recall, we closed the CoreSite acquisition using our bank facilities and term loans, temporarily moving our leverage to 6.8 times and our floating rate exposure to 31% at the end of 2021. Since that time and against the challenging backdrop, we have strategically termed out short-term borrowings through common equity, private capital, and senior unsecured note offerings, all at solid terms and pricing.", "Today, our leverage stands at 5.5 times ahead of plan with floating rate exposure of around 20%, in line with our long-term target. Looking ahead, we continue to believe this profile is appropriate given the predictable and contractual nature of our cash flows while providing us exposure to pre-payable debt, which offers us financial flexibility as we execute on our delevering path, and access to the typical low rate short-term curve. In addition, a meaningful portion of our floating rate debt is euro denominated, which provides us a natural hedge and diversified capital structure, while also offering pre-payable debt at terms more competitive than those currently available in the US. Although we anticipate 2023 as it appears today, we'll present certain growth challenges stemming from the current rate environment, we feel comfortable with our proven approach to balance sheet management.", "This includes our ability to manage our upcoming 2023 maturities where we expect our diversified sources of capital and solid liquidity position to provide near-term financing flexibility, allowing us to opportunistically access the markets against a healthy and constructive backdrop. In short, we believe our investment-grade balance sheet and the long-standing policies we've established position us well to navigate various economic cycles, including the challenges we're all facing today. And although we may see certain growth headwinds in the near term, we believe our investment-grade credit rating and continued access to diversified sources of capital coupled with our focus on maintaining robust liquidity will serve as a more meaningful competitive advantage over the next several years. Finally, on Slide 13.", "And in summary, we had a strong Q3 across our global business with solid operating performance, accelerated leasing, and resilient demand even in the face of a challenging economic backdrop. During the quarter, the long-term critical nature of our portfolio of assets in positioning to drive sustained and compelling growth was further highlighted through key customer agreements with Verizon and Airtel Africa and the closing and subsequent upsizing of our Stonepeak partnership in our U.S. data center business. Although we will likely experience some growth pressure in the near term associated with the continued rise in interest rates, we see our investment-grade balance sheet, liquidity, and diversified sources of capital as a key competitive advantage as we execute on our growth strategy over the next decade and beyond.", "As we look ahead and over the long term, we are excited about the positioning of our global portfolio of communications assets as our customers augment and extend their networks to meet exploding data-driven demand and believe our global scale and proven capabilities have us positioned to drive incremental sustainable growth and value creation for our shareholders for years to come. With that, I'll turn the call back over to the operator for Q&A." ] } ]
[ { "name": "Operator", "speech": [ "Thank you. [Operator instructions] Our first question comes from the line of Simon Flannery, Morgan Stanley. Please go ahead." ] }, { "name": "Simon Flannery", "speech": [ "Thank you. Good morning. Tom, it was good to hear your discussion about the opportunities from 5G and particularly from capex capacity additions as well as the favorable comments around near-term and medium-term U.S. leasing trends.", "Can you square that with the capex trajectory at the likes of Verizon and T-Mobile where they're expecting a significant step down? I know it's not a one-for-one relationship. But how do you expect this to evolve? Because I think there's a sense here that there will be some deceleration as we've seen sort of in prior 4G cycle. So what's the offset to those lower capex numbers?" ] }, { "name": "Tom Bartlett", "speech": [ "Simon, having seen the trends from the carriers for many, many years. I mean, there's always volatility in their overall spend. It will largely be a function of device penetration and application development that will require the further densification that we believe in the -- in their deployment as well. So it's not a kind of a one-for-one type of a -- I think a relationship with our overall growth.", "And also keep in mind that with our agreements that we have in place, we have these broad comprehensive agreements which really locked in a lot of that revenue growth for us. And so 70%, 80% of our revenue growth, we have tremendous visibility into as a result of those master lease agreements. And I would expect the carriers, as I said, to be investing in their market that demand develops. And I would expect, given the benefits of 5G that each and every one of us are going to be using significantly more levels of spectrum, if you will, over time.", "So I said it's not a one-for-one. Our MLAs do give us that kind of visibility. And overtime, I would expect higher levels of capex being spent on 5G, just as we saw being 4G versus 3G." ] }, { "name": "Simon Flannery", "speech": [ "Great. Thanks a lot." ] }, { "name": "Tom Bartlett", "speech": [ "You bet." ] }, { "name": "Operator", "speech": [ "Next question comes from the line of David Barden, Bank of America. Please go ahead." ] }, { "name": "David Barden", "speech": [ "Hey, guys. Thanks so much for the question. Two, if I could. The first, Rod just digging into the biggest moving part in the guidance, the Vodafone Idea relationship.", "I guess two pieces to that. One is, is there's been a lot of press about them versus, say, Bharti, Indus, and maybe trying to renegotiate tower rates to 'soften' the impact on costs? And then, could you kind of talk about what you're willing to give on that front? And then, also, you talked about converting your accounts receivable to notes. I mean, historically, towers have never been impacted by bankruptcies. How is converting accounts receivable to notes a better option than just kind of continuing the way you are as a tower company with your counterparty there? And then I guess the last piece maybe, Tom, on capital allocation, the conversation about buybacks, I'm sure, is welcome, but there's been a lot of conversation over the last two years about AMT's ambitions in Europe and scaling there, and there's obviously some pretty big deals and I think that obviously cost of capital is a huge issue, your equity where it is as an issue.", "Could you categorically rule in or rule out what your position on expanding Europe is right now? Thanks." ] }, { "name": "Rod Smith", "speech": [ "Hey, David. Good morning." ] }, { "name": "Tom Bartlett", "speech": [ "Yeah, Rod. Why don't you start and take the first couple and then I'll take the third." ] }, { "name": "Rod Smith", "speech": [ "Yes. That sounds good. Good morning, David. Thanks for the question.", "I hope you're doing well. So regarding India and Vodafone and kind of their current situation, their desire to renegotiate some MLAs, I don't want to get into too many of the terms and conditions, certainly not want to talk about things that haven't happened yet in the future. But, I can tell you, they are in a predicament with their balance sheet, which everyone knows about, there's been a lot of press regarding that. So they're looking for a number of things from us in terms of supporting them.", "Discounts may be one of them, we'll certainly talk about that with them kind of over time. But I don't want to get into the details in terms of what we may or may not be willing to do. If we were to provide any kind of a disc that just run through our churn numbers and would be in our guidance. I don't expect any changes through our organic net billings guidance for this year negotiation or renegotiation with Voda.", "So -- and if anything changes next year, we'll update you for next year. I guess shifting, David, to the note, we did convert 200 -- or we have the option to convert $200 million of our existing accounts receivable, this is not a new investment, into Voda. I want to make sure that, that's clear. But existing accounts receivable that's on the balance sheet, we have signed an agreement where this $200 million could become a convertible note, but that is contingent on some conditions happening in India, both the government converting their near-term interest into -- I think, everyone is aware of that playing out.", "So that have to happen first. And if that does happen, then we could convert $200 million of our existing accounts receivable into a convertible note. The reason that's interesting to us, number one, is it helps shore up Voda a little bit. It basically moved the account receivable and, let's say, an MLA default into more of a financial interest and it helps them get some equity and maybe some additional debt on their book.", "So we want to support them and help them through this difficult time. So that certainly is one reason. The other thing, having this note, it does have predefined payment time frame in it, which is a little bit more certain than what you might see in typical accounts receivable that's hanging on the balance. And then we also have the option, at our option, to convert it to equity, which is another way for us to liquidate that favorable balance.", "So I think it increases our flexibility. It increases the probability in the near-term to convert it to cash, and that's really the reason we're interested in doing it. So -- and it helps Voda. So all those things, we did really looked at it and it makes a lot of sense for us, and I think it makes sense in terms of our willingness to support them." ] }, { "name": "Tom Bartlett", "speech": [ "And I guess, David, just regards to your last question on Europe and the opportunistic buyback program that Rod talked to. First of all, with regards to our Celsius asset base and integration, we're really very pleased with what we've experienced over the last year. I mean you've seen the growth rates and the success that we've had there and the relationship that we've actually built with Telefonica. So that's all gone incredibly well.", "With regards to further scaling, we do have a sizable build-to-suit program that we are in the midst of, and we see even more a build-to-suit opportunity coming forward, I think particularly in Germany. With regards to further M&A, we stepped away really just due to the sellers' expectations of value. There's just a significant delta between the bid and the ask at this time. Now over time, that may change.", "There's just a lot of volatility economically or obviously, you will know around the world. And so there's just a significant amount of space between the bid and the ask. And so we've really stepped away from those. We're always asked to participate in them.", "And so you always see in the media that American Tower is doing this or that but -- and I know you well know that we're incredibly disciplined in terms of how we look at valuation. And given the terms and conditions of some of these transactions as well as the expectations of -- from a pricing perspective, we just don't see the value creation in those opportunities at this time. As I said, maybe that will change over time. I would hope over the next 12, 18 months, you might see some change there.", "But right now, not. And so we're going to continue to not to focus off the organic growth, working with our customers in the region. Drop in our build-to-suit program, which has been an incredibly terrific way for us to be able to grow inorganically within the business. As Rod said, at some very attractive yields.", "And really support our customers in the market and enjoy the growth that way." ] }, { "name": "David Barden", "speech": [ "Perfect. That's helpful color. Thank you both, Tom and Rod. Thank you." ] }, { "name": "Tom Bartlett", "speech": [ "Thanks, David." ] }, { "name": "Rod Smith", "speech": [ "Thanks." ] }, { "name": "Operator", "speech": [ "Our next question is from Greg Williams, Cowen. Please go ahead." ] }, { "name": "Greg Williams", "speech": [ "Great. Thanks for taking my questions. I have two. One is how much of the raise in guidance the $142 million in straight line was related to the Verizon MLA, if any? And second one is just dovetailing off of the M&A discussions, what is your appetite for M&A that's not tower-related? Now that you think about augmentor data centers, we've heard possible Asia data centers are of interest or even U.S.", "fiber. And I'm just curious of your thoughts. Thanks." ] }, { "name": "Tom Bartlett", "speech": [ "Hey, Rod. Why don't you take the first one, and then I'll take the second." ] }, { "name": "Rod Smith", "speech": [ "Yeah. Thanks. Thanks, Greg, for the question. So the straight line increases that you see in our in our outlook here, we have an increase of straight line of about $65 million built into our property revenue guide.", "That's really split between the new Verizon deal as well as the deal over in Africa with Airtel Africa. I don't want to break down that in too much detail and give you the piece parts, but it's really those two deals that make up." ] }, { "name": "Tom Bartlett", "speech": [ "And Greg, with regards to M&A on the data center side, as we said all along, we are very focused on developing the U.S. market. I mean CoreSite's got a terrific presence in the United States. And with our tower portfolio here in the United States, we want to be able to enjoy the benefits of the CoreSite activity, as I highlighted, and as Rod highlighted itself, but also really be able to bring together this overall notion that we have in terms of developing that edge capability that we'll be realizing out the sites themselves, at our tower sites themselves.", "And so when you're seeing all this, again, noise about buying data centers and things outside of the United States, that's not where we're looking. That's not where our focus is. And if you take a look at the capital that's being spent on the business because we do have a fair amount of development going on within the CoreSite, within the data center activity, it's largely driven just from the cash flow that the business is generating. So the $200 million to $300 million that we're investing back into the data center business in terms of providing more capability going forward, not just in our OCX platform, but also in space itself is just being driven by the $300-plus million of AFFO that the business is generating itself.", "So U.S. is our chessboard as we speak, relative to our data center activity." ] }, { "name": "Greg Williams", "speech": [ "Great. That's helpful color. Thank you both." ] }, { "name": "Tom Bartlett", "speech": [ "Thanks, Greg." ] }, { "name": "Operator", "speech": [ "The next question is from Batya Levi from UBS. Please go ahead." ] }, { "name": "Batya Levi", "speech": [ "Great. Thank you. Can you provide a little bit more color on the carrier activity that you're seeing in Europe, given the macro backdrop, I think some carriers are pulling back on capex. How do you think this will drive the growth into next year? And another question on AFFO, I know we'll get full guidance next year, but a lot of moving parts going into 2023 with U.S.", "accelerating, but higher interest costs and FX. Can you provide a general view on your expectations for your AFFO into next year? Thank you." ] }, { "name": "Rod Smith", "speech": [ "Yeah. Thanks, Batya. I'll give you a quick update on Europe here. So we are seeing really strong growth in Europe as you've heard us talk about consistently throughout the balance and the activity is really split across the markets and across the carry.", "So we're seeing good activity with all the carriers there. I don't want to talk about carrier to carry, but I will just call out that we are seeing 101 begin to build a new park there. We are beginning to see leasing activity. We certainly expect that to ramp up toward the later part of this year and be a much more meaningful contributor next year.", "The one thing we'll see, we are pulling back our guide a little bit in Europe, but organic in -- growth. That really is just a delay in terms of timing on some certain leases that we have in our pipeline. We're seeing that shift up a little bit into -- later into Q4 and even some of the things later into Q4 shifting into next year. So that's really what you're seeing from that perspective.", "And remind me the second part of your question was it AFFO guide?" ] }, { "name": "Batya Levi", "speech": [ "Yeah. Into 2023 if you have a general guidance that you expect the AFFO per share to grow double digits. How should we think about 2023?" ] }, { "name": "Rod Smith", "speech": [ "Yeah. I think -- I mean, I think you should think about 2023 as a challenging year for us. I think everyone knows the interest rates are rising rapidly here, probably more rapidly than most people expected as we head into the end of this year. That is a noticeable material headwind for us in the AFFO line heading into -- so that will be a challenge.", "That certainly will take us off of our target AFFO growth. I don't want to get into too many specifics. But I think you guys have probably enough information to kind of work the numbers. And when you look at the rate of increase on interest line for us with the interest rates rising that will be a challenge.", "When we get -- the other challenge for next year is the timing of equity raise, we'll have the full new equity to 10 million shares kind of running in the numbers next year with the early in half of this year. So the comp is a difficult comp from that perspective. I do think when you get out to '24 and beyond, we are seeing really good support for leasing revenue in around the globe. Particularly in the U.S., you've heard us say we're acceleration of new business from co-location and amendment activity.", "That acceleration continues. We expect to end this year very strongly coming in very close to that $150 million of co-location new business in the US. And we're seeing that accelerate into next year on a run rate basis, which is also underpinned by our long-term MLAs. So, we have really high visibility into next year.", "So we expect to see a meaningful step-up in U.S. co-location and amendment revenue into next year. And that puts us firmly on track for our long term and particularly to the U.S. organic growth averaging 5% from '23 out to '27.", "And that includes some impact from the -- which is about 100 basis points. So without that, you'd be at about 6%. We're firmly on track for that beginning next year and going forward because of that nice acceleration, that strong demand we're seeing in the US." ] }, { "name": "Batya Levi", "speech": [ "Thank you." ] }, { "name": "Rod Smith", "speech": [ "Thank you." ] }, { "name": "Operator", "speech": [ "Question is from Michael Rollins, Citi. Please go ahead." ] }, { "name": "Michael Rollins", "speech": [ "Thanks and good morning. Just curious, as you're looking out over the next 12 to 24 months, can you frame just some of the friction points around whether it's market consolidation that you're seeing or some of just structural issues for maybe things that customers are working through? And just how to think about the magnitude and timing of those headwinds, maybe relative to some of the other things that you've noted around the build-to-suit opportunities and the organic improvement in demand?" ] }, { "name": "Tom Bartlett", "speech": [ "Michael, let me -- maybe I'll -- I can start with that, Rod. I mean that's kind of an open-ended question there. You have when you start to think about what's going on around the world. I think the backdrop here is still the technology, right? And the backdrop is still the demand for broadband wireless.", "We've seen it through several technology cycles, and that's really driving the ongoing capital that all of our customers are looking to commit over the next several years. And so that provides, I think, a real stable platform for growth. And as Rod kind of went through all the numbers, we're seeing that, right? And we're seeing 5G being deployed in more and more markets. We've seen the growth rates accelerate here in the United States.", "We expect that to continue into 2023. You've seen the strong growth coming from many of our other markets as well, particularly in Europe and Africa, really a lot of significant activity going on in the market. You've also seen our customers aligning themselves more closely with us. These longer-term strategic master lease agreements that we put in place, the one that we've talked about with Verizon, the other one that we've talked about with Airtel.", "I mean these are long-term contracts with well-capitalized companies. There are still spot of churn that we have going on in the market. A lot of activity in Latin America with some consolidation, particularly in Brazil and Mexico that Rod kind of walked through. And so we'll see a heightened level of churn in Latin America over the next 12 months to 18 months.", "We've seen some consolidation going on in Africa. But then again, we've been able to really largely work through all of that churn and still sizably increase the growth in each one of those markets. So I don't see any seismic shifts, if you will, over the next 12 months to 18 months. Yeah, we are in a rising interest rate environment.", "We're in an inflationary time around the world. The good news is that, we have long-term contracts and those very high inflationary markets. We've got escalators based on CPI and inflation in those areas. The other element, I think, within our business is we're well diversified.", "And so while we're perhaps taking a market that might be growing slower in another market, we'll be increasing the growth. And so it's offsetting some of the shortfall that you might see in other markets. I mean, we've talked about this in the past. It our carriers invest kind of like a sine wave, right? I mean, it's heavy investment and then they -- it's less investment as they're tuning their network, and then it's a higher investment.", "We continue to see that. We've seen that through 1G, 2G, 3G, 4G, and we'll see that through 5G. Our customers aren't going to be building the networks before they see the demand. And so that's going to be a function of device penetration is going to be a sign of application development.", "I mean, I talked about the two phases. You well know this, in terms of network deployment, first getting the coverage and then we're going to see further densification and sales splitting as their customers are utilizing the network. And with higher band spectrum, we're going to see an even increased level of densification just because of the propagation characteristics of the bands. So I do think that kind of a long rambling answer for you, perhaps.", "But I mean, the core is the underlying technology and the desire for our customers and their countries themselves and their citizens to really be able to significantly increase their overall usage in wireless data. And so as a result, that provides, I think, a real kind of protection for us particularly when we're looking at these long-term agreements." ] }, { "name": "Rod Smith", "speech": [ "Hey, Michael. This is Rod. I just add --" ] }, { "name": "Tom Bartlett", "speech": [ "Hopefully, that answers your question." ] }, { "name": "Rod Smith", "speech": [ "Yes. And Michael, I'll just add, in terms of the churn, the near-term, one thing that you will see is our churn rates are actually coming down from Q3 to Q4. So globally, we -- in our 2.6% Q3 organic tenant billings growth, it was about $5.5% -- 5.4% that was cancellations or churn. That's going to step down to about 4% in Q4, which will end up driving our organic tenant billings growth for Q4, up from that mid-2s up to over -- well over four, certainly, which is really good.", "And that 4.4 in Q4 is what helps us drive that 3% for the full year. And in the U.S., you're seeing that churn drop in the US. So the good news here is, we're through the big bulk, the initial bulk of Sprint churn, you're going to see organic tenant billings growth for Q4 in the U.S. at around 4%, which will be getting us back to where we really want to be longer term.", "And then in the international markets, we do have some, as Thomas saying some churn events, some elevated churn. Those churn events will be temporary as certain countries go through a little consolidation. But you will see from Q3 to -- from Q3 to Q4, churn will step up by about 100 basis points, going from about a little under 5% to up end of the five churn in the international markets. And the only thing I'd call out specifically is in Latin America, you will see -- that's where a bulk of that temporary churn will begin to hit.", "So you will see a step up in our churn rates in Latin America going from about 5% in Q3, up to a little over 8% in Q4. And that's all the normal churn that that we've all talked about that you guys know is coming. Some of that will persist into next year as well, particularly in Latin America." ] }, { "name": "Michael Rollins", "speech": [ "That's helpful color. Thank you." ] }, { "name": "Rod Smith", "speech": [ "You bet. Thanks, Michael." ] }, { "name": "Operator", "speech": [ "And our next question is from the line of Ric Prentiss, Raymond James. Please go ahead." ] }, { "name": "Ric Prentiss", "speech": [ "Thanks. Good morning, everybody." ] }, { "name": "Tom Bartlett", "speech": [ "Hey, Ric. Good morning." ] }, { "name": "Ric Prentiss", "speech": [ "Hey. I want to follow up on a couple of questions. One following up on Simon's question about capex. If we think about the U.S.", "Is part of the reason maybe you guys are so confident that the U.S. leasing goes up in 4Q and then goes up and accelerating to 2023 possibly to do with the timing? Your Verizon MLA, your positioning of when you were getting contracts from DISH and that visibility that you talked about, Tom. Just trying to think, is some of this that it's very visible to you, it's really kind of more timing related?" ] }, { "name": "Tom Bartlett", "speech": [ "Well, yes, I mean, Ric, absolutely. And as I mentioned with Simon, given kind of the MLA structure we have in place, it's kind of irrelevant in terms of that capital spend from our perspective, right? I mean because we already have the kind of the rates and the pricing kind of locked in for a long-term period. Now having said that, when I back up, I also believe that that capital is going to be spent over time. And that could be a timing issue as well.", "It's all a function of customer demand and application development and device penetration. And so when you have those all locked in, you're going to see our customers physically spending on their networks because they have to. They're not going to want to see any decline in quality of service. And so they're going to want to meet this demand and stay ahead of the curve as they traditionally have.", "And so -- but from an AMP perspective, you're exactly right, timing is not that relevant to us just because of the construct of the agreements that we have in place." ] }, { "name": "Ric Prentiss", "speech": [ "Right. And if you're not seeing any air pocket out there that's been some of the concern in the marketplace because of high-interest rates or because of inflation, maybe turns into recession at least on the U.S. side and the carrier spend with you, it sounds?" ] }, { "name": "Tom Bartlett", "speech": [ "No, we haven't. We have not." ] }, { "name": "Ric Prentiss", "speech": [ "OK. And last question for me is a follow-up on some of David's questions. The stock buyback, what would trigger that? What else has to happen to trigger the stock buyback? That obviously will require some funding that could affect back on to the interest rate side. And second question with that is, was your $570 million upsizing from some peak kind of expected in the guidance also?" ] }, { "name": "Tom Bartlett", "speech": [ "Well, I mean, from our standpoint, and then I'll let kind of Rod step in here. We continue to look at the opportunities to delever as well as to look at supporting our equity. And given the movements candidly in the equity I think that there's some opportunities there to be able to generate some value. And so it will be a balance between the two.", "We talked about M&A and M&A kind of given the delta between the bid may ask kind of around the world. I think that's less focus, candidly, at this point in time. And so we'll look at our NAV and we'll look at it versus our share price. And well, as we always have, look at the kind of the most attractive ways of being able to drive AFFO per share." ] }, { "name": "Rod Smith", "speech": [ "Yes. And Rick, maybe I would add to that, just from a leverage standpoint, we ended the quarter here at 5.5 times levered post this -- the CoreSite acquisition, we were as high as 6.8. So I'll just remind you and everyone else we have. We did start out higher than our target leverage range, which is three to five times.", "We work through plans with the rating agencies to delever -- our investment-grade credit rating. That is critical to us. That's very important. We take leverage very seriously.", "That's why we've been able to delever as quickly as we have, going down from that 6.8 to 5.5. I'd also tell you that the 5.5 is -- we're comfortably lower than the delevering plan that we've agreed with the rating agency. So that puts us in a pretty good position. The plans that we've agreed with the rating agencies did not contemplate or include the $570 million.", "So that additional capacity that we have to either further delever well, well ahead of the delevering plan, or we can put it to use in a different way. So that's what we'll be looking at. When you think about the $570 million from Stonepeak, that is in our guidance in terms of the mechanics and the way it runs through our numbers. But it's important to point out that it is a benefit when it comes to our ability to delever.", "And then, of course, when we think about what we do with that capacity or any other capital capacity that we have available to us, we'll always put a share buyback up against our own internally generated net asset value of the company and what we look at in terms of the share value. We're also balancing the analysis around the cost of debt and how we drive better AFFO per share accretion, either paying down our revolving credit lines or buying back shares. So there's a lot of math, as you know, that goes into that. So we expect to be flexible and opportunistic as we evaluate what we do with our capital.", "And I do think that you could see us do both, continue to delever at a furious pace as well as buy back some shares when we think that's appropriate." ] }, { "name": "Ric Prentiss", "speech": [ "Makes sense. Thanks for that extra color. Stay well, guys." ] }, { "name": "Tom Bartlett", "speech": [ "Thanks." ] }, { "name": "Rod Smith", "speech": [ "Thanks, Rick" ] }, { "name": "Operator", "speech": [ "And we have a question from the line of Matt Niknam, Deutsche Bank. Please go ahead." ] }, { "name": "Matt Niknam", "speech": [ "Hey, guys. Thanks for squeezing me in here. Just one housekeeping and one broader question. On the housekeeping side, maybe just to go back to the Stonepeak $570 million raise.", "How does that impact the minority adjustments? I think it's been about $50 million typically between consolidated and proportionate AFFO. Just wondering how that may change in light of the incremental funding from Stonepeak. And then secondly, I think you've kind of answered this in terms of the U.S., but I'm wondering more broadly, as you think about tighter financial conditions, stronger U.S. dollar, weaker foreign currencies, is that weighing at all on any international customers or regions investment plans, just given some of the lower presumable purchasing power as they head into 2023? Thanks." ] }, { "name": "Tom Bartlett", "speech": [ "Rob, do you want to cover the MI question and I can talk more broadly?" ] }, { "name": "Rod Smith", "speech": [ "Yes. So we took in another $570 million from Stonepeak as an additional investment into our CoreSite business. So the original investment of $2.5 billion gave them basically a current ownership of about 22%, almost 23% of the business there. And then with their additional $570 million, that's going to pop up to about 28% to 29% ownership.", "And that is for the pieces of those investments that are actually equity from day one. You may recall from some of our disclosures, there are some pieces of those investments that are preferred, which will convert to equity their mandatory converts over a full year period. So they will convert to equity. When that happens, then their ownership will jump up from the 28% to 29% up to about 36%.", "The way to think about the MI impacts here, when you get to Q4 -- hit the run rate, you're going to see about $150 million of Q4 exit run rate for the European minority then, and you'll see about $60 million or so for the Stonepeak minority interest. That will all run through the minority interest section. On these preferred notes that we have with Stonepeak, you'll see another $45 million that will be interest that will run through the interest line, but you want to keep that in mind as well. So that puts us at a run rate of about a little over $200 million of MI as we exit Q4, $200 million, $210 million." ] }, { "name": "Tom Bartlett", "speech": [ "And Matt, on the second question, relative to the impact of what's going on around the world, on our customers outside of the United States. Interestingly enough, we haven't seen anything of significance that would give me the sense that they're going to be slowing down on their build programs around the world. Now who knows what that might look like going into 2023 and 2024. But they have the same level of energy that we've seen over the last 12 to 18 months.", "Now we are also protected just because of the diversification of markets and diversification of customers. And so as a result of that, we are actually able to avert a particular issue in one area or another. And also keep in mind, as I mentioned in my remarks that our customers have spent almost $160 billion on spectrum. And so they don't -- they want to monetize that $160 billion and be able to get out into the market as fast as they possibly can.", "So we are seeing, as I said, the continued robust deployment of capital in the markets. And we continue to support them. And we see also -- again, a lot of build-to-suit activity in the market as well, which is also an indication of their willingness and ability to spend." ] }, { "name": "Matt Niknam", "speech": [ "That's great. Thank you both." ] }, { "name": "Tom Bartlett", "speech": [ "You bet." ] }, { "name": "Rod Smith", "speech": [ "Thanks, Matt." ] }, { "name": "Operator", "speech": [ "And our final question comes from the line of Phil Cusick, J.P. Morgan. Please go ahead." ] }, { "name": "Richard Choe", "speech": [ "Hi. This is Richard for Phil. Just wanted to follow up in Latin America. You're expecting a little bit higher churn.", "Will that impact any new activity, or can you still see new activity growth continue through their -- despite the higher churn? And then also on the services side, it remains pretty solid. Are you seeing anything changing the trajectory of the services business, or do you think it will continue to stay pretty steady?" ] }, { "name": "Tom Bartlett", "speech": [ "Rod, why don't you take those two?" ] }, { "name": "Rod Smith", "speech": [ "Yeah. Sure. Thanks, Tom. Richard, I think when you talk about Latin America, we are expecting higher levels of churn, but pretty consistent levels of that gross new biz.", "And we're also complementing that with higher levels of escalator, which are driven by local CPI in the region. So those two things are pretty solid. We'll see where inflation goes and how the trajectory of our escalator in that region may change over time. But there is solid consistent new activity in Latin America despite the fact that there is a little consolidation churn happening in some of the markets there.", "And then when it comes to services, we're in another great year in services we're going to be up in the mid $200 million, we raised our guidance at the gross margin level by about $20 million. So we are going to be in that mid $200 million range for services revenue. That continues to come through at really nice margins in the mid-50s, 54%, 55% at the gross margin level. So our services business is performing exceptionally well and has proven to be very resilient.", "And that is because the U.S. carriers continue to be very active. I'm not going to guess in terms of where it's going to go in coming years. But to the extent that the activity levels stay high, we'll continue to see really solid high services.", "Well, there's a chance I could pull back as the timing of activity from the carriers kind of ebb and flow from quarter to quarter. So we'll see what happens next. But we're going to be up in the mid-200s this year in services. All the carriers are active, and we're maintaining really healthy margins in the mid-50s." ] }, { "name": "Richard Choe", "speech": [ "Great. Thank you." ] }, { "name": "Tom Bartlett", "speech": [ "Thanks, Richard." ] }, { "name": "Operator", "speech": [ "And that concludes our questions." ] }, { "name": "Adam Smith", "speech": [ "Great. Thank you, everyone. If you have any questions, please feel free to reach out to the Investor Relations team. Have a great day." ] }, { "name": "Operator", "speech": [ "[Operator signoff]" ] } ]
AMT
2021-10-28
[ { "description": "Vice President, Investor Relations", "name": "Igor Khislavsky", "position": "Executive" }, { "description": "President and Chief Executive Officer", "name": "Tom Bartlett", "position": "Executive" }, { "description": "Executive Vice President, Chief Financial Officer, and Treasurer", "name": "Rod Smith", "position": "Executive" }, { "description": "Citi -- Analyst", "name": "Michael Rollins", "position": "Analyst" }, { "description": "Morgan Stanley -- Analyst", "name": "Simon Flannery", "position": "Analyst" }, { "description": "Deutsche Bank -- Analyst", "name": "Matt Niknam", "position": "Analyst" }, { "description": "Wells Fargo Securities -- Analyst", "name": "Eric Luebchow", "position": "Analyst" }, { "description": "Bank of America Merrill Lynch -- Analyst", "name": "David Barden", "position": "Analyst" }, { "description": "Raymond James -- Analyst", "name": "Ric Prentiss", "position": "Analyst" }, { "description": "RBC Capital Markets -- Analyst", "name": "Jon Atkin", "position": "Analyst" }, { "description": "MoffettNathanson LLC -- Analyst", "name": "Nick Del Deo", "position": "Analyst" }, { "description": "Oppenheimer & Co. Inc. -- Analyst", "name": "Tim Horan", "position": "Analyst" } ]
[ { "name": "Operator", "speech": [ "Ladies and gentlemen, thank you for standing by. Welcome to the American Tower third quarter 2021 earnings conference call. As a reminder, today's conference call is being recorded. [Operator instructions].", "I would now like to turn the call over to your host, Igor Khislavsky, vice president of investor relations. Please go ahead, sir." ] }, { "name": "Igor Khislavsky", "speech": [ "Good morning, and thank you for joining American Tower's third quarter 2021 earnings conference call. We've posted a presentation, which we will refer to throughout our prepared remarks under the investor relations tab of our website, www.americantower.com. On this morning's call, Tom Bartlett, our president and CEO, will discuss current technology trends and how we are positioned to benefit from continued wireless technology evolution. And then Rod Smith, our executive vice president, CFO, and treasurer, will discuss our Q3 2021 results and revised full year outlook.", "After these comments, we will open up the call for your questions. Before we begin, I'll remind you that our comments will contain forward-looking statements that involve a number of risks and uncertainties. Examples of these statements include our expectations regarding future growth, including our 2021 outlook, capital allocation, and future operating performance; our expectations regarding the impacts of COVID-19; and any other statements regarding matters that are not historical fact. You should be aware that certain factors may affect us in the future and could cause actual results to differ materially from those expressed in these forward-looking statements.", "Such factors include the risk factors set forth in this morning's earnings press release, those set forth in our Form 10-K for the year ended December 31, 2020, and in other filings we make with the SEC. We urge you to consider these factors and remind you that we undertake no obligation to update the information contained in this call to reflect subsequent events or circumstances. With that, I'll turn the call over to Tom." ] }, { "name": "Tom Bartlett", "speech": [ "Thanks, Igor. Good morning, everyone. Consistent with our prior Q3 calls, my comments today will center on the key trends driving our business now and how we think the technological landscape will develop in the future. I'll touch on how we are positioned to benefit as 5G deployments accelerate in cloud-native applications in the edge of all, particularly in the United States.", "Additionally, I'll spend some time discussing our European markets, where we now have a scaled presence and are poised to create further value as technology evolves there, and then briefly cover what we are seeing in our earlier-stage international markets. Finally, I'll outline some of the progress we've made in some of those same emerging markets and the platform expansion side, particularly with respect to our investments in sustainability and renewable energy as we continue to lead the industry into a greener future. At a high level, much of my commentary today will sound familiar to those of you who have listened in on prior technology-focused calls, and we view that as a positive. Technology is evolving and advancing right in line with our expectations.", "In the long-term secular trends that have driven and continue to drive, our business remains strong. There are also new developments in the marketplace around the overall digital ecosystem that we are excited about and our tenants continue to power ahead with their network augmentation and expansion activities. Taken together, this is a backdrop that we expect will lead to sustained attractive growth for us over the long term. Central to this belief is the view that our core global macro tower business will be the foundation of our success and the main driver of our cash flows for the foreseeable future, as macro towers should remain the most cost and technology efficient network deployment solution in most topographies worldwide.", "Our conviction in this regard has only grown stronger over time supported by our customers' significant investments in new spectrum assets, record levels of wireless capex spending in markets like the United States, and numerous public statements by them indicating their intention to utilize macro sites to drive aggressive deployments of 5G and other wireless technologies globally. We continue to view mid-band spectrum, which includes the recently auctioned C-band and the two and a half gig band currently being deployed in the U.S., as the workhorse of the true 5G experience, and we believe to be the fundamental enabler of the immersive next-generation 5G applications and use cases that are set to emerge as coverage improves and advanced devices penetrate the market. Importantly, we continue to expect the propagation characteristics of the sub-6 gig frequencies, compared to traditionally deployed mobile spectrum to necessitate significant network densification over the long term supporting a multiyear period of strong growth on our tower sites. We're seeing the leading edge of this activity in the U.S.", "today, generating record services revenues, driven by all of the major carriers as they accelerate the early stages of their respective 5G deployments. Further, application volumes within our property business are strong, supported by expected wireless capex spend in the mid-$30 billion range this year. Industry experts anticipate that these elevated levels of capital spending will be sustained for a number of years, driven by a mobile data usage growth CAGR of more than 25% over the next five years. Amazingly, this follows a more than 25% CAGR for the last five years, and cumulative growth of approximately 7,500% over the last decade.", "This compelling demand backdrop, coupled with the long-term noncancelable leases that comprise our more than $60 billion global contractual backlog, gives us confidence in our ability to drive organic tenant billings growth in the mid-single-digit range on average in the U.S. through 2027, and to drive higher growth rates abroad in that same period. I'll touch on this further in a few minutes. But as a quick reminder, these baseline growth expectations exclude any material contributions from our various platform expansion initiatives.", "What they do include are expectations for an extended period of solid growth in our European markets, where we are seeing similar network growth trends to the United States with early stage 5G deployments set to accelerate in the coming years. We expect that our newly scaled European presence will allow us to drive long-term value creation as the explosion of mobile data usage across the region continues and the need for communications infrastructure accelerates as a result. Across Germany, Spain, and France, where 5G mobile subscriptions currently make up less than 5% of the total user base, we expect mobile data usage per smartphone to grow by more than 25% annually for the next five years, similar to the United States, and consequently expect capex spend across the three markets to exceed $11 billion annually over a similar time period. And as happened in the United States, we are already seeing this acceleration in network investment translate into elevated activity.", "In fact, in the third quarter, normalizing for the impacts of the Telxius deal co-location and amendment contributions to European organic tenant billings growth rose by around 200 basis points year over year. Although we expect a significant portion of initial 5G investments to be focused in urban locations across our European footprint where roughly 80% of the population resides, we anticipate urban-oriented consumer demand to be complemented by an ongoing push from European regulators to deliver rural connectivity, which will represent another opportunity for us to drive colocation on our tower sites in those areas. We believe our balance of rural and recently expanded urban assets positions us well to capture significant market share of upcoming 5G deployments over the next decade. Finally, in our earlier stage markets across Latin America, Asia, and Africa, we continue to see solid demand for our critical infrastructure largely driven by deployments of legacy network technologies, particularly 4G.", "Whether looking at Brazil, Mexico, India, or Nigeria, consumers are rapidly increasing their utilization of smartphones, thereby driving mobile data usage growth higher. In many of these regions, existing network infrastructure is insufficient to support this deluge of usage as cell site performance is challenged with increased levels of network load. In response to these trends, we are aggressively marketing our existing assets and continue to look for additional acquisition opportunities to bolster our footprint in these markets. But at the same time, we have significantly ramped up our new build program given the tremendous need for entirely new infrastructure.", "In fact, if you take the nearly 5,900 sites we built last year and add our expected 7,000 sites at the midpoint of our outlook to be constructed this year, it would represent almost as many sites as the previous five years combined. And as we laid out a few quarters ago, we are targeting the construction of up to 40 to 50,000 new sites over the next five years. With day one NOI yields on these builds continuing to average above 10%, we are excited about deploying significant capital to these initiatives going forward as we capitalize on the advancement of network technology across the emerging world while helping to connect billions of people. In addition to the core secular growth trends driving our global tower business, we are seeing indications, particularly in more mature markets like the United States, of a broad evolution within the overall wireless ecosystem.", "This evolution is closely intertwined with 5G and includes an increased prevalence of cloud-native network solutions, more emphasis on the various permutations of the network edge and an ever-increasing intersection of the wired and wireless portions of today's converged network architecture. As networks virtualize, O-RAN or Open RAN, it's expected to become a more important option to improve their economics. We are now starting to see this phenomenon with DISH in the United States, and in Germany, where one and one has spoken extensively about its intent to utilize this technology. By utilizing O-RAN, carriers have the potential to optimize network design and drive cost efficiencies, freeing up incremental capital to invest in densification and other network enhancements that help drive growth in site deployments and colocations.", "Importantly, the role of the tower in this evolving network design is as critical as ever. While base station functionality will likely continue to evolve to be cloud native software agile, the radio equipment that is placed on the tower itself, which has always driven our revenue, will continue to reside on the tower. Importantly, we believe we can leverage our extensive global distributed real estate portfolio to not only drive continued strong growth in our core tower business but also to take advantage of other emerging opportunities as networks virtualize. This may include multi-access edge computing and potential other edge cloud permutations of neutral host infrastructure.", "At the end of the day, modern software-driven networks are becoming smarter, faster, more capable, and more dynamic, and we are focused on ensuring that American Tower has a meaningful role to play in this context on the infrastructure and real estate side of the equation. One of the areas we focused on is the development of the network edge or, more accurately, the development of multiple layers of the network edge. With the need for lower latency expected to become more and more critical over time with applications like AR, VR, telemedicine, real-time analytics, autonomous driving, entertainment, streaming, you name it, and many others are beginning to emerge, we continue to believe that this could be a meaningful opportunity for American Tower. As we've done more work on the evolution of the edge, the concept of multiple edge layers has come into better focus.", "Today, for example, by far the most prevalent layer is the regional metro edge owned, for the most part, by the large data center companies where vast amounts of data processing is then centralized. These locations provide access to cloud on-ramps and are absolutely critical within today's networks. We expect this need to be the case for the foreseeable future. In fact, as the volume of data carried across networks continues to explode, we anticipate the demand for these types of large-scale facilities will only grow.", "The upside of these locations is their size and capacity. The downside, to this point, hasn't been all that relevant, is the fairly significant network transit costs and latency built into reaching these central compute functions as the data often has to travel hundreds of miles to reach these destinations. These transit costs and latency considerations, which we expect to become more important in the future, will necessitate more edge locations as uplink data increases from IoT use cases and demands for distributed computing advance. The next layer beyond the metro edge, in our view, will be the aggregation edge.", "Here, you're likely to post C-RAN hubs and future MEC applications as network virtualization advances, along with distributed data processing, AI inferencing, and other compute functions which will need reduced latency. The major hyperscalers continue to evolve their edge cloud platforms so that they can extend computing capabilities deeper into the mobile access network at the aggregation edge. The next layer beyond this, which we turn the access edge is where our existing tower sites are located today, offering an opportunity to meaningfully enhance the value of our legacy real estate. We expect to eventually see vRAN and O-RAN network functions, AI inferencing, data caching, and a variety of other next-generation AR and VR cloud-native ultra-low-latency applications residing at these locations.", "Finally, we've also identified the on-premise edge, which would lie beyond even our tower sites and could eventually help support private networks, smart factories, and a host of other applications located at the end-user site. At the end of the day, our 20,000-foot view is that all of these edge elements will need to fit together to provide a cohesive framework for full-scale 5G across the network ecosystem. The goal for us is to figure out what the optimal linkages between the layers look like, who are the key players will be and what elements of the edge we may want to own in order to further enhance the strong long-term growth we expect from our core existing business. To date, as we seek to connect the dots, we've been active with a number of trial edge compute sites at the access edge while also operating our Colo ATL metro data center interconnection facility in Atlanta.", "Through these investments, we have built relationships with key existing and potential future customers, have learned a tremendous amount about key demand trends and have had a front row seat for the beginning stages of the convergence of wireless and wireline networks that I alluded to earlier. More recently, we acquired DataSite, a data center company, consisting of two multi-tenant data centers in the Atlanta area and in Orlando. In addition to strengthening our existing position in Atlanta, the addition of a network dense carrier hotel facility in Orlando provides us with a strong Southeastern presence with the profile and characteristics that we believe will be critical in the early evolution of the metro edge as we evaluate its role in the mobile networks of the future. We expect these facilities, which have 18 megawatts of combined power, an additional four and a half megawatts of expansion capacity, to effectively complement Colo ATL and enable us to enhance our ability to develop neutral-host, multi-operator, multi-cloud data centers to support the broader core to edge connectivity evolution in the United States.", "We continue to believe that while a scaled application-driven edge-oriented business model is still likely several years away, it has the potential to be a sizable market opportunity with meaningful potential upside, not only in the United States, but also on a global basis. Leading global MNOs are now positioning their networks with released 16 5G stand-alone core features to explore edge cloud opportunities. And with our distributed macro side presence key markets around the world, we think we are well positioned to potentially be a provider of choice on the edge, particularly for large multinational MNOs and other categories of customers who may be looking for a multi-market solution. Switching gears a bit.", "While we believe edge compute will eventually also be relevant in emerging markets, it is unlikely to happen in the immediate future. Consequently, we have focused our platform expansion efforts across our developing regions and other areas, most notably on increasing the sustainability and efficiency of power provisioning in our sites. As we highlighted in our recently published 2020 corporate sustainability report, we've continued to make progress toward our goal of reducing diesel-related greenhouse gas emissions by 60% by 2027 from a 2017 baseline. In 2020, we achieved an additional 8% reduction from 2019, reaching 53% of the 10-year goal.", "We are continuing to make solid progress in 2021 with an expectation to spend an additional $80 million toward energy-efficient solutions, primarily in lithium ion and solar power across our Africa footprint, which will bring our cumulative spend to nearly $250 million. And as we announced earlier this week, we are furthering our commitment to combat climate change by adopting science-based targets, which we expect to help inform our future investments in sustainability. In addition to the positive environmental benefits from these investments, we are also delivering shareholder value through AFFO per share accretion. Lithium ion batteries provide significant energy efficiency, density, and lifespan improvements over legacy solutions.", "And while, to date, AFFO benefits to American Tower have largely come through fuel savings we anticipate over time that our yields on these investments will further expand as we are able to lengthen battery and generator replacement cycles. Having already expanded our lithium ion-powered site count from 4,500 in 2019 to 6,700 in 2020, we are targeting another 8,000 sites by the end of 2022 and recently signed a multimillion dollar bulk battery purchase agreement in Africa in support of this goal. Importantly, we believe that energy efficiency, the use of renewables, and sustainability in our broader sense can represent an important competitive advantage for us, not only from the flow-through to AFFO, but also the differentiation in service quality for our customers. We continue to view sustainability as a critical component of our company culture, and we'll be highlighting our continued progress in future sustainability reports, which I encourage all of you to read by the way.", "In closing, our excitement around 5G on a global basis continues to grow. Consumers and enterprises are using more advanced devices for more things, resulting in consistent elevated growth in mobile data usage, which, in turn, strains existing wireless networks and necessitates incremental densification and network improvement. Considerable new spectrum is being deployed. New entrants in select markets are building greenfield networks, and our macro tower-oriented portfolio remains well positioned to capture a significant portion of wireless investment activity.", "In addition, through our platform expansion strategy, we are focused on ensuring that the company benefits from the ongoing convergence of wireless and wireline and the associated expansion of virtualization in cloud-native applications throughout the network ecosystem. Importantly, as we optimize our core business and look for ways to further enhance our growth path in the broader digital infrastructure world, we are as committed as ever to driving profitability, sustainability, and recurring growth. We're energized by the future and are excited to be in a vibrant industry that is helping to connect the world. With that, let me turn the call over to Rod to go through our third quarter results and updated full year 2021 outlook.", "Rod?" ] }, { "name": "Rod Smith", "speech": [ "Thanks, Tom, and thank you, everyone, for joining today's call. I hope you and your families are well. Q3 was another quarter of strong performance for us. And as you heard from Tom, we are as encouraged as ever by the technological trends that underpin our long-term growth potential.", "Before digging into the details of our results and raised outlook, I'd like to touch on a few highlights from the quarter. First, we closed on our strategic partnership agreements with CDPQ and Allianz, through which they purchased an aggregate of 48% of our ATC Europe business for a total consideration of around EUR 2.6 billion. In addition, we closed the remaining 4,000 Telxius communication sites in Germany back in August. With the transaction now fully closed and funded, our teams are working to rapidly integrate the assets, and we are already seeing encouraging activity on the portfolio.", "Second, we continued to strengthen our balance sheet, raising roughly $3 billion in senior unsecured notes, including our euro offering earlier this month. Through our financing transactions, we have been able to maintain an attractive weighted average cost of debt while also continuing to extend our maturities. As a result of this activity, along with the benefit from a nonrecurring advance payment received from a tenant during the quarter, we finished Q3 with net leverage of 4.9 times. While we expect net leverage to increase back into the low 5 times range in the fourth quarter, we are right on track with our overall post-Telxius delevering path.", "And lastly, we saw another quarter of record services activity in the U.S. as carriers accelerated 5G-related projects. We view this as a leading indicator of strong levels of gross leasing in our property segment as we head into 2022 and beyond. And with that, please turn to Slide 6, and I'll review our Q3 property revenue and organic tenant billings growth.", "As you can see, our consolidated property revenue grew by over 19% year over year or over 18% on an FX-neutral basis to nearly $2.4 billion. This included U.S. and Canada property revenue growth of around 10% and international property revenue growth of over 31% or 13% when excluding the impacts of the Telxius acquisition. This strong performance is indicative of a continuation of the long-term secular trends driving demand for our infrastructure assets across the globe.", "Moving to the right side of the slide, we also had a solid quarter of organic tenant billings growth throughout the business. On a consolidated basis, organic tenant billings growth was nearly 5% for a second consecutive quarter. As expected, U.S. 5G investments from the major carriers drove healthy activity levels, leading to organic tenant billings growth in our U.S.", "and Canada segment of over 4%. Contributions from colocation and amendments were more than 3%. Escalators came in at 3.2%, and churn was just over 2%. Moving to our international operations.", "We drove organic tenant billings growth of nearly 6%, reflecting a sequential acceleration of around 60 basis points. Africa was our fastest growing region in the quarter, posting organic tenant billings growth of well over 9% led by Nigeria, where we continue to see 4G investments driving both colocation activity and new site construction. We also saw a consistent quarter in Latin America, where organic tenant billings growth was right around 7%, driven by solid new business and higher escalators primarily in Brazil. Meanwhile, European organic tenant billings growth accelerated by around 100 basis points sequentially to nearly 5.5% as expected.", "Excluding impacts from the Telxius acquisition, organic tenant billings growth in the region would have been over 4.5% in the quarter, more than 200 basis points higher than the year-ago period, driven primarily by new business contributions. This positive trend reflects both ongoing 4G activity and early 5G investments leading to solid growth from both colocations and amendments. Looking to Germany, in particular, we saw a more than 300-basis-point increase in colocation and amendment contributions in our legacy business, as compared to the prior year period, resulting in organic tenant billings growth of over 5.5%, up from 5.2% in the second quarter. Finally, in Asia Pacific, we saw organic tenant billings growth of 0.7%, up roughly 200 basis points as compared to Q2.", "This reflects a modest acceleration in gross new business activity, coupled with a more than 2% sequential decline in churn, which was in line with our expectations. Turning to Slide 7. Our third quarter adjusted EBITDA grew more than 19% or over 18% on an FX-neutral basis to nearly $1.6 billion. Adjusted EBITDA margin was 63.2%, which was down compared to Q3 2020 as a result of adding new lower initial tenancy assets to our portfolio, which we believe will drive strong organic growth and, therefore, margin expansion in the future.", "Cash SG&A as a percent of total property revenue was around 7.3%, a roughly 40-basis-point sequential improvement. Moving to the right side of the slide, consolidated AFFO growth was over 13% with consolidated AFFO per share of $2.53, reflecting a per share growth of nearly 11%. This was driven by strong performance in our core business, contributions from new assets and around $13 million in year-over-year FX favorability. Our performance also reflected the benefits of our commitment to driving efficiency throughout our operations and minimizing financing costs despite growing the portfolio by nearly 38,000 sites over the last year.", "And finally, AFFO per share attributable to AMT common stockholders was $2.49, reflecting a year-over-year growth rate of nearly 12%. Let's now turn to our updated outlook for the full year. I'll start by reviewing a few of the key updated assumptions. First, our expectations for organic growth across the business are consistent with our prior outlook.", "Carriers continue to deploy meaningful capital as they invest in network quality, and we are seeing numerous bands of spectrum being deployed for both 4G and 5G. We are also slightly increasing our expectations for services revenue for the year to around $235 million as a result of an outsized third quarter, although this implies that services volumes will moderate somewhat in Q4. Second, as a result of our focus on operational efficiency and cost controls, along with some onetime benefits, we expect to be able to take some costs out of the business as compared to our prior expectations. Combined with the current services gross margin outperformance, this will drive our adjusted EBITDA margin expectations higher for the balance of the year.", "Third, in India, we are encouraged by recent regulatory reforms, which we believe can provide some much-needed breathing room for capital-constrained carriers in the marketplace and improve the telecom environment overall. While we believe this is a clear positive first step toward market recovery, we continue to expect flat 2021 organic tenant billings growth in the region as we further evaluate the long-term impacts of these developments on the sector. Finally, incorporating the latest FX projections, our current outlook reflects negative FX impacts of $30 million for property revenue, $20 million for adjusted EBITDA, and $15 million for consolidated AFFO as compared to our prior expectations. With that, let's move to the details of our revised full year outlook.", "Looking at Slide 8, as expected, leasing trends remained strong across our global business, and as a result of an increase in pass-through together with some modest core property revenue outperformance, we are raising our property revenue outlook by $10 million. This represents 14% year-over-year growth at the midpoint and includes $30 million in unfavorable translational FX impacts as compared to our prior outlook. Moving to Slide 9. You'll see that we are reiterating our organic tenant billings growth expectations of approximately 4% on a consolidated basis.", "This includes roughly 3% growth in our U.S. and Canada segment where 5G deployments are driving solid activity levels as we exit the year. As a reminder, we expect the first and largest tranche of contractual Sprint churn to hit our run rate in the fourth quarter of this year. And while we expect gross activity to remain solid, our guide implies a Q4 U.S.", "organic tenant billings growth rate of negative 1%, as we communicated previously. On the international side, we continue to anticipate organic tenant billings growth in the range of 5 to 6% as carriers continue to focus their efforts on enhancing and densifying wireless networks in the face of ever-rising mobile data demand. Moving to Slide 10. We are raising our adjusted EBITDA outlook by approximately $50 million and now expect year-over-year growth of nearly 16%.", "This increase reflects continued strength in our services segment, where we now expect to see roughly $145 million in services gross margin for the year, up from the 123 million implied in our prior guidance with year-over-year growth of more than 180%. On the cost side of the equation, we continue to maintain cost discipline globally, helping to drive adjusted EBITDA margins up by around 40 basis points for the full year as compared to prior expectations. Turning to Slide 11. We are also raising our full year AFFO expectations and now expect year-over-year growth in consolidated AFFO of roughly 15% with an implied outlook midpoint of $9.64 per share.", "The flow-through of incremental cash-adjusted EBITDA, coupled with the continued cash tax and net cash interest benefits as compared to the prior expectations are being partially offset by around $15 million in negative translational FX impacts. On a per share basis, we now expect growth of approximately 14% for the year consistent with our long-term growth ambitions that we highlighted at the start of the year. Finally, AFFO attributable to ATC common stockholders per share is expected to grow by nearly 12% versus 2020, incorporating the minority interest impacts of our strategic partnership with CDPQ and Allianz in Europe. Moving on to Slide 12.", "Let's review our capital deployment expectations for 2021. As you can see, we remain focused on deploying capital toward assets that drive strong sustainable growth in AFFO per share coupled with a growing dividend, providing our investors with a compelling combination of growth plus yield. Working our way through the specific categories, our first priority remains our dividend. For the full year, we continue to expect to distribute $2.3 billion, subject to board approval, which implies a roughly 15% year-over-year per share growth rate.", "As a reminder, our dividend growth will continue to be driven by underlying growth in our REIT taxable income, incorporating the impacts of M&A and other moving pieces in the business. Consistent with our prior comments, we anticipate growing our dividend by at least 10% annually in the coming years. Moving on to capex. We reiterate our expectations of spending nearly $1.6 billion at the midpoint with nearly 90% being discretionary in nature.", "Driving a good portion of this discretionary capex is our continued expectation to construct 7,000 sites at the midpoint this year with the vast majority in our international markets. Turning to acquisitions. Including contributions from minority partners, we have deployed around $10 billion so far this year primarily for the Telxius transaction. as well as for smaller transactions, including DataSite.", "In total, of our nearly $14 billion in expected capital deployment for the year, we expect over 80% to be composed of discretionary growth capex and M&A. Moving to the center of the slide. You can see the composition of our $35 billion in cumulative capital deployments since the start of 2017, including our 2021 full year expectations. We continue to augment our developed market presence, which we believe positions us optimally to drive value from accelerating 5G deployments and next-generation technology evolutions, as Tom laid out earlier.", "We are also allocating capital toward higher growth earlier-stage markets that are typically at least five years behind the U.S. and Europe in their network deployments. Taken together, we believe that our global footprint positions us to capture multiple waves of investments across the globe over a sustained period of time. Finally, you can see that more than a quarter or around $9.5 billion of our deployed capital in the last five years has been distributed to shareholders in the form of dividends and share repurchases.", "We continue to view these components as critical to total shareholder returns. Moving to the right side of the chart. Supporting this phase of significant investment and growth has been our investment-grade balance sheet. We believe that our access to low-cost, diversified sources of financing has been a key differentiator and are proactively working to extend this critical competitive advantage into the future.", "In fact, incorporating our latest financing efforts, we now have a weighted average cost of debt of around 2.4%, a weighted average tenor of debt of approximately seven years, and over 85% of our balance sheet locked into fixed rate instruments. Finally, on Slide 13, and in summary, in Q3, we continue to capitalize on a strong global demand backdrop, delivering our highest quarter of consolidated AFFO per share on record. This was driven by solid organic growth, record-setting services volumes, disciplined cost controls, strategic balance sheet management, and accretive portfolio expansion. As we look ahead, we believe our existing global real estate portfolio is well positioned to drive long-term recurring growth as carriers augment and extend their networks.", "And with the strength of our investment-grade balance sheet and diversified pool of funding sources, we expect to continue to deploy capital toward accretive investments that can enhance our growth path and enable us to create additional value. Given our positioning at the intersection of real estate and technology in an ever more interconnected world, we are excited to continue to deliver connectivity to billions of people worldwide in a sustainable way while driving compelling total returns for our shareholders. With that, I'll turn the call back over to the operator for Q&A." ] } ]
[ { "name": "Operator", "speech": [ "Thank you. [Operator instructions]. And we have a question from Michael Rollins with Citi. Please go ahead." ] }, { "name": "Michael Rollins", "speech": [ "Thank you. Good morning. Two questions, if I could. The first question is on the domestic environment.", "Just curious if you can give us an update on U.S. leasing, how it compared to your prior expectations entering into this year and what that means for the average organic tenant billings growth guidance that you provided. I think the average for '21 and '22 was about 2% on a reported basis and about 5% on a normalized basis. And then just, Tom, to follow up on your comments on the edge and data centers, is it inevitable that American Tower needs to either partner with a larger data center portfolio or directly own a larger data center portfolio? Thanks." ] }, { "name": "Tom Bartlett", "speech": [ "Yes. Thanks, Michael. Maybe, Rod, why don't you take the first part of the question and then I'll fill in on the second piece?" ] }, { "name": "Rod Smith", "speech": [ "OK, great. Good morning, Michael. Thanks for the question. So in terms of the U.S.", "leasing environment, we're seeing a very strong environment. Certainly, all the major carriers have been active. You've seen that show up most notably in our services environment. We've seen a tick-up in the contribution from colocation and amendment activity into our organic tenant billings growth.", "So that's been accelerating through each of the last three quarters, just as we expected from the outset in the year. So in terms of our expectations, everything really is right in line with what we expected. I don't want to get too deep into the second part of your question around growth and activity when it comes to 2022. But I will just reiterate a couple of points that we've already made.", "So directionally, your comments are correct. We guided to an average organic tenant billings growth in the U.S. for '21 and '22 of around 2%. You can see we're coming in here in '21 at around 3%.", "That suggests around 1% organic tenant billings growth for 2022 in the U.S. So that's where we would expect to be. And again, I'm not providing guidance for next year, just reiterating the components of our long-term plan. And maybe one thing that I will kind of highlight here just briefly is that Sprint churn hit us in Q4 for the first time, that first tranche, as you heard in my comments.", "So Sprint churn, now that it's active, I'll just give you the numbers there, again. 2021, we are rolling off 195 million of annual Sprint revenue and churn. In 2022, we'll roll off an additional 60. 2023, we'll roll off another 50 million.", "And 2024, we'll roll off another 70 million. So that's Sprint churn here. That's what's really causing the lower organic growth rates in our U.S. business next year.", "The gross growth, we see the environment being very strong, accelerating through 2021, and we expect that to continue going in. Just to give you a couple of the piece parts. In terms of the impact it will have in the fourth quarter, you will see organic kind of billings growth rates in the U.S. at around a negative 1%.", "That will include churn for the quarter of about 6.6%, and embedded within that is about 4.5% just from the Sprint churn. And of course, all this will have an impact on AFFO in terms of going forward into future years. So we've guided that our goal is to hit double-digit FFO growth on average from 2021 out through 2027. And of course, some years, it will be higher.", "Some years, it will be lower. The goal really is an average. And when you think about 2022 when this first tranche of Sprint churn kind of rolling through, that's a year that I would say that it would be challenging to get to 10%. And I'll also say, Michael, we haven't given up on it.", "There are certain levers that we can pull and things that we can do with the business to maximize AFFO and AFFO per share growth, and we're doing all of those things. So that kind of puts a little bit of context around the U.S. activity for this year and rolling into next year." ] }, { "name": "Tom Bartlett", "speech": [ "And, Michael, relative to your second question, you can tell that we're obviously energized and excited about the opportunity at the edge. I mean the impetus right now is really 5G, and driving all of these lower latency types of applications and needs out further into the market closer and closer to the end user. We've always said, from a digital transformation perspective, it's going to be cloud-based, it's going to be connected, and it's going to be distributed. And we think we're in a very good competitive position given the vast amount of distribution that we have in the 25 markets that we're servicing.", "So we're trying to position ourselves in this broader market to be able to take advantage of the opportunity. We're going to do it intelligently. Our execution strategy continues to evolve. We think we've done it intelligently in terms of picking up some of the metro sites, building out our own sites.", "We have some market agreements in place to drive access into those sites, and this is going to evolve. This is not going to happen overnight, as you well know. And so we've got partnerships in place to be able to look at this. We're going to be able to hopefully leverage some of those partnerships, and we'll just continue to monitor the best approach in terms of being able to best position ourselves to be able to take advantage of this opportunity.", "We've done that in the past in terms of being smart in terms of how we allocate capital to these types of investments. Will it take the form of partnerships owning -- further owning more metro sites, unclear at this point in time. That will continue to evolve as the market continues to evolve. But we do think we're in a really good position in terms of being able to leverage our real estate, our exclusive real estate and to be able to take advantage of that neutral host model." ] }, { "name": "Michael Rollins", "speech": [ "Thanks." ] }, { "name": "Tom Bartlett", "speech": [ "You bet." ] }, { "name": "Operator", "speech": [ "Next, we move on to the line of Simon Flannery with Morgan Stanley. One moment, please. Mr. Flannery, your line is now open.", "I apologize." ] }, { "name": "Simon Flannery", "speech": [ "OK. Thank you. Good morning. First, Rod, I wonder if you could give us a little bit more color on the advanced payment.", "It looks like about close to $1 billion. What's going on there? Is that something that we will see again? And then there's been a lot of talk about supply chain. We're seeing higher inflation, particularly in markets like Brazil. Are you seeing any pressure on your customers in terms of their ability to source radios, to source tower crews, and the cost of that, that might impact some of the installs? And do your MLAs protect you from any delayed installs? Any color around that would be great." ] }, { "name": "Rod Smith", "speech": [ "Simon, great. Thanks for the question, and good morning. Thanks for being on the call. So with the advanced prepayment, I'm not going to provide details around that.", "I will say it was a little over $1 billion from one of our customers. It really is just a prepayment for lease payments going out over, let's say, the next 12 months. So it will kind of run through our financial statements pretty quickly. And there's nothing more to it than just a prepayment of the next 12 months kind of leasing fees.", "So from our perspective, it's not a big deal. It helps with liquidity. It brought our leverage down a little bit. You saw we ended a little bit below five times in terms of leverage.", "So it wasn't a bad thing for us to do, but it's a pretty simple transaction. And I wouldn't want you to read any more into it than that. In terms of supply chain, Tom, maybe you want to add a few comments here, but from a supply chain, we see no major impacts at this point, certainly across our business. As you can see in our services business, we continue to hit higher and higher levels of activity in bringing our outlook up again to the -- another consecutive quarter here.", "So we've got access to the crews. You've also seen our margins expanding in the services business in particular. And in the U.S., we're not building a tremendous amount of tower. So we certainly don't have any restrictions or challenges from that perspective.", "One place I would say, going into 2022, we will be keeping our eye on crew availability and labor and things like that. If the environment stays the way it is, we should be fine. If things get worse, we'll need to keep our eye on it. We do buy a lot of generators.", "We have generator orders out that are already in place that bring us out into the beginning to the middle of 2022. So from that perspective, we know we're going to get the materials we need, and we expect to get the materials we need and feel pretty good about that. But in the second half of 2022, again, we'll continue to watch the supply chain issues. And to the extent that there are any issues that get worse, we'll continue to keep an eye on it and kind of put the levers.", "But from where we sit now, we don't think we don't see anything hitting us right now. We don't expect any challenges through the middle of 2022. And beyond that, it's too early to comment. We'll just keep our eye on it." ] }, { "name": "Simon Flannery", "speech": [ "Great. Thank you." ] }, { "name": "Operator", "speech": [ "And our next question is from Matt Niknam with Deutsche Bank. Please go ahead." ] }, { "name": "Matt Niknam", "speech": [ "Thanks for taking the question. One on India. I guess, there's some better organic growth this quarter returned to positive growth, I think, for the first time since 2Q '20. So can you maybe talk a little bit more about the overall demand backdrop across your carrier customers and whether, I guess, maybe to drill in a little bit more churn was about a couple of million lower than what we've seen in terms of recent run rate.", "And so I'm wondering if the 14 million we saw this quarter is maybe a better run rate than I think about and start modeling going forward. Thanks." ] }, { "name": "Rod Smith", "speech": [ "Yes. Thanks for the question, and good morning. So we did see organic tenant billings in Asia to kind of turn a corner here and get a positive. So we posted a 0.7% positive growth rates we're still looking for the full year to be right around zero.", "And as we look at the market, we remain optimistic in terms of the gross activity. So the way that even that point seven organic tenant billings for the quarter, I'll give you a little bit of the breakdown there. So we're seeing high single digits, nearly double-digit organic new business. That's been pretty consistent for at least six to eight consecutive quarters.", "And based on where they are in their development kind of transitioning from 3G to 4G networks, we expect that, that gross demand should continue. The escalators are locked in right around 2 to 2.2% or so, so we have that account. And we have seen a moderation in a pretty sharp decline here year over year in terms of the churn rate. So a year ago, Q3 churn in India was about 13.5%.", "It's down out of about 7.5%. We think that's certainly a very favorable sign and one that we expected to see, and we hope to continue to see that going forward. In terms of the -- you did see that there was some good news from the government in terms of regulatory support for the industry. And we think that, that will help the market in general, the whole sector as well as the carriers, particularly the ones with the AGR dues, but all the carriers even with your spectrum fees, strengthen their own balance sheets, kind of regroup and gear up for competition in the sector there and to invest in the networks.", "So we are optimistic about going forward growth rates there, but we would expect, let's call it, high single-digit organic growth with churn levels there in the mid-single digits and hopefully moderating down over time." ] }, { "name": "Matt Niknam", "speech": [ "Rod, can I just follow up? One other question I want to just sneak in is on capital improvement capex, it's been trending lower. I think year to date, you've only done around 100 million. But I think the guide is for about 185 million for the year. I'm just wondering what's been driving the lower capital improvement capex year to date.", "And then is it fair to assume that a much larger step up that could weigh on AFFO in 4Q? Thanks." ] }, { "name": "Rod Smith", "speech": [ "Yes. So the cap maintenance there is going to pop up in Q4. I think you see that. You just mentioned that in terms of our guidance.", "It really is just timing, and it's a timing issue that we've seen in prior years. So if you look back at our last year spread on maintenance capex, you'll see kind of the same sort of cycle. It is a cash capex number. So it does lag a little bit in terms of the activity.", "So you see this kind of spike in leasing activity that's coming -- that's running through our services revenue. And then you kind of see following on from that, you'll see an uptick in the maintenance capex that we run through to support the towers and maintain everything out of the tower sites. So it really is just a timing issue, Matt." ] }, { "name": "Matt Niknam", "speech": [ "Great. Thank you." ] }, { "name": "Operator", "speech": [ "And next, we have a question from Eric Luebchow with Wells Fargo. Please go ahead." ] }, { "name": "Eric Luebchow", "speech": [ "Great. Thanks for taking the question. Perhaps you could talk about Verizon real quickly. I think your holistic pricing structure with them expires at the end of this year.", "So wondering if you could update us on the nature of conversations with them around that aspect of the MLA. And then, secondly, on the European side, it's nice to see the improvement in organic tenant billings growth. Can you just kind of talk about how the outperformance is coming from, whether that's churn from Telefonica versus new bookings? And then on the new bookings front, any update on conversations with one by one as they contemplate the new build and how you think you're positioned there? Thanks." ] }, { "name": "Rod Smith", "speech": [ "Yes. Thanks for the question. I'll take the first part there. And so from -- when you look at our business over in Europe, we are very pleased with the trajectory of the growth rates over there.", "You've seen a couple of sequential quarters of increased organic growth rates, just as we expected to see now that the market has kind of seen a reduction in churn, they're gearing up for 5G deployment. So that's been really good to see. In terms of the piece parts of the organic tenant billings, certainly, the Telefonica additional sites plays a role in there. One of the biggest ways that it plays in early on, it's still very early in terms of bringing those assets in.", "But I think we've talked before about the assets there in Europe that they basically have a long-term contract, and there are other tenant -- material other tenants on there. So there's really very little churn that will -- that's possible on that portfolio. So we have very low churn expectations on that portfolio, and it's a big chunk of revenue. That certainly helps kind of inflect the growth rates to go up higher.", "And then in terms of the question with Drillisch 101, we really don't want to comment on ongoing negotiations, but negotiations continue there. I can assure you." ] }, { "name": "Operator", "speech": [ "And we will move on to the line of David Barden with Bank of America. Please go ahead." ] }, { "name": "David Barden", "speech": [ "Hey, guys. Thanks for taking the questions. First, Rod, just to follow up on the Europe situation. At our conference last month, you kind of talked a little bit about how you perceive the European marketplace being ripe for incremental consolidation.", "I was wondering if you or Tom could kind of elaborate a little bit on how you see the European market evolving as it matures from a tower third-party infrastructure provider perspective. And then second, if you could elaborate a little bit on what is going on now with Telefonica in Mexico and its network sharing agreement with AT&T and how that relationship between the two of them is evolving for [Inaudible]." ] }, { "name": "Tom Bartlett", "speech": [ "David, it's Tom. I can start and Rod can add in. With regards to Europe, we think we have a really solid position in a few of the critical markets. We've got good scale in the market.", "You've got a great relationship, obviously, with Telefonica and Orange in particular. And so we're energized by the type of growth that we're now seeing in the marketplace. But we continue to look at opportunities to further build scale not just in the three markets that we're in but also if there are other opportunities, but only if it makes sense, like everything else that we do. And so there are, I think, a lot of opportunities in the region, and we're evaluating them as you would expect.", "And to the extent that there's some opportunities there to secure some of that portfolio to gain further scale even in the markets that we're in and relationships with key customers, we'll clearly look to do that. And so Europe is, as we've said, an area or part of the world that we look to continue to further develop if it makes sense. With regards to Telefonica, again, we've got a great global relationship with them. They're positioning to an MVNO, as you all know, and they're going to have some time for that to be able to -- for that to occur.", "There will be some churn over time, but the contract that we have with them I think goes out for several years at this point in time. And so we'll continue to monitor that. And we've managed these types of events, I think, quite well over our history, and I'm sure we'll do that here." ] }, { "name": "David Barden", "speech": [ "Thanks, Tom." ] }, { "name": "Tom Bartlett", "speech": [ "Sure, Dave." ] }, { "name": "Operator", "speech": [ "And our next question is from Ric Prentiss with Raymond James. Please go ahead." ] }, { "name": "Ric Prentiss", "speech": [ "A couple of questions, guys. First, I appreciate you guys breaking out the attributable AFFO. We think that's important to focus investors on cash to comment, and you continue to exclude noncash amortization from your organic rate. So I appreciate that accounting stuff.", "First question, we get a lot on interest rates and inflation. Can you talk a little bit about how you guys are viewing the interest rate environment and inflation environment, how it affects, so your financials? Any potential deals like David was just asking about just the fundamentals of the business? So a little bit of primer on interest rates and inflation as you see it." ] }, { "name": "Rod Smith", "speech": [ "Yes, sure, Rick. Thanks for the question. I'll take that one. So let's hit interest rates first.", "So you've seen us, Ric, over the last several quarters, even the last couple of years, very active in the capital markets, very active in terms of our debt structure, capital structure and different things like that. So we've been focused on strengthening our balance sheet in a very proactive way. So we now have our average maturities out over about seven years with an average cost of debt down to about 2.4% or so. And 85% of our debt is now fixed out over the long term.", "So that's a heavier weighting to expect to variable compared to our kind of standard financial policy. So we've been preparing for an environment where interest rates may tick up. So we think from an interest rate perspective, our balance sheet is very solid and ready for it. There's nothing we can do about preventing interest rates from rising.", "We do think they may rise over time modestly, but we're very well prepared for it. The other thing I would add is in terms of global capital allocation and looking to invest capital, the strength of our balance sheet really does represent a competitive advantage for us, particularly in a time when interest rates may be rising. So we'll keep an eye on that and look to be very opportunistic as we go forward from that perspective. And then when you think about inflation rates, one of the ways you'll see that run through our business as many of our contracts internationally, particularly in Africa and Latin America, are all geared toward inflation rates and the escalator is adjusted based on inflation rate.", "So as and when we see higher levels of inflation in the international markets, we'll see higher levels of growth as well. In the U.S., I'd remind you that our escalators are fixed at around 3%. That's been consistent for a long time. So we're pretty well insulated from interest rates rising in the U.S.", "from a balance sheet perspective, but we still lock in that revenue growth of 3% on the U.S. escalator." ] }, { "name": "Ric Prentiss", "speech": [ "And I think in your prepared remarks, you talked a little bit about acquisition opportunities even outside of Europe. David was asking about Europe. How should we think about how you view the potential opportunities in Africa, LatAm or other markets as far as portfolios coming up? And what makes for attractive intelligent decisions, as you kind of alluded to?" ] }, { "name": "Tom Bartlett", "speech": [ "Rick, it comes back to the same model that we've been executing for the last decade. It's looking to build up scale, looking at the counterparty, looking at the market itself and then looking at the transaction itself, what additional capital has got to go into the portfolio to be able to ensure that we can support a second or a third tenant, what does the growth profile look like. I mean there are probably a dozen different elements of that evaluation that go into deciding whether, in fact, we would be interested and then driving what that price is. We've used the same 10-year discounted cash flow approach and continue to use it.", "Obviously, the variables change but largely -- I mean the actual numbers but largely the variables themselves, from a qualification perspective, are the same. And so we'll look at those and look at all of those opportunities as we think about globally how to allocate capital." ] }, { "name": "Ric Prentiss", "speech": [ "Any change in the pipeline as far as deals going? And what might be changing that pipeline as far as potential deals?" ] }, { "name": "Tom Bartlett", "speech": [ "The -- you're talking about the pipeline of transactions?" ] }, { "name": "Ric Prentiss", "speech": [ "Yes. Yes." ] }, { "name": "Tom Bartlett", "speech": [ "Yes. I mean the -- it's been very consistent. I mean the pipeline itself, there are -- there's more activity, as you've seen and as you report on in Western Europe. And -- but in terms of the pipeline, in terms of the opportunities, they remain relatively consistent.", "Overall, if you look at our total portfolio, the last count I did, we own about a third of the inventory in all of the markets. And so there's still a lot of opportunity in the markets that we're in, given how carriers, our existing customers' carriers are looking at -- continually looking at trying to monetize their portfolio. Smaller towercos are looking for opportunities to exit. There is private capital involved in some of those smaller towercos, and so they're looking to monetize some of their funds, some increased opportunity in Southeast Asia that's going on as we speak, as you've well seen.", "But it's been -- the pipeline has been very consistent. I would say where it's a little bit outsized is probably all of the noise is going on in Western Europe. And there just seems to be a lot of activity going on there, as you've seen, as we've seen in the -- all of the even the -- all the public comments. And so there's probably a bit of an outsized pipeline in that region.", "But other than that, it's been very consistent." ] }, { "name": "Ric Prentiss", "speech": [ "It sounds a [Inaudible] on 5G." ] }, { "name": "Rod Smith", "speech": [ "Rick, you mentioned attributable. Maybe I'll just give you a couple of data points there because we have you've seen over the last quarter or so, we've had a few moving pieces with closing the Telxius transaction in numerous tranches. We also brought in private capital and maybe a good time to just kind of level set that. So for the full year, we're looking -- you can see in our presentation in terms of AFFO attributable to our minority shareholders is about 100 million.", "That breaks down 75 million roughly for the European business and about 25 for the India business. The way our partners kind of break down is you know CDPQ owns 30% of our European business and Allianz owns about 18% of that business. PGGM holds about 17% in Germany and about 13% in Spain. And we have Macquarie as a partner over in India.", "They own about 8%. Now is a good time to kind of think about the run rate aspect of that minority interest. When you look at Q4, now that all the dust has settled, we think the run rate -- a good ballpark run rate is about 40 million for Q4. So if you annualize that, you get a range of 150 to 160 that would be attributable to the minority interest partners.", "The one word question I would say is we will -- we did receive the put for Macquarie. You've seen that in our filings. So we will eventually close on that, and that will be an adjustment to the numbers at that time." ] }, { "name": "Ric Prentiss", "speech": [ "That really helps. Thanks, Rod. It's important to focus on that. Thank you." ] }, { "name": "Operator", "speech": [ "And next, we will go to the line of Jon Atkin with RBC. Please go ahead." ] }, { "name": "Jon Atkin", "speech": [ "Thanks very much. I wanted to ask about Latin America. I'm hearing an echo here. The churn has picked up in recent quarters.", "I imagine some of that might be held -- but I wonder if you can provide some color on what's driving that." ] }, { "name": "Rod Smith", "speech": [ "Jon, good morning. Thanks for the question. Yes, I don't want to go through the churn carrier by carrier, but I think you do know that there are a few customers in Latin America that are exiting the businesses or that have been consolidated. So we do have the Nextel exit down in the Brazil area.", "We do have Telefonica kind of transitioning to the MVNO in that -- in the Mexico market and moving on to the AT&T side. Some of that churn has begun. You've seen kind of a bump-up in our non-run rate activity in Latin America for some decommissioning in Brazil that is related to the Nextel sites coming down. That will continue into next year.", "So you'll see a bump-up in churn. And then you'll also see kind of a bump-up in that non-run rate as well. And then there are -- you will see some benefits to some of the churn that come through the settlement payments. And there are a few other smaller customers, but that probably gives you a flavor of kind of who's there and kind of what's happening in Latin America from a churn perspective." ] }, { "name": "Jon Atkin", "speech": [ "And then on Nigeria, I just was hoping that you could give us a little bit of qualitative view as to the tailwinds and headwinds to expect as it pertains to organic growth. You obviously have a little bit of a different portfolio than IHS given how you enter the market. But how do you think about -- or what are the factors to keep in mind around organic growth in Nigeria going forward?" ] }, { "name": "Rod Smith", "speech": [ "Yes. I think in Nigeria, we've seen very strong growth for the last several quarters here. We expect that to continue. We've got a great portfolio in Nigeria with a solid anchor tenant with MTN in there as a partner of ours.", "So that's been really good. I would say that as long as the economy and the economy in Nigeria is largely driven by fuel prices, as long as that's good, I think we're in really good shape because we've got a great portfolio in the country, and the carriers will continue to invest capital and build out sites. We've got a pretty robust build program there. So you've seen the guide with 7,000 sites that we expect to build as a good chunk of those in Africa, and in Africa, a lot of them are in Nigeria.", "So I would say that we are very bullish on Nigeria in terms of the growth rates. We're seeing high single-digit, if not double-digit, organic growth rates in Nigeria. As long as the economy there continues to roll forward, I think we're in a really good shape, and that's largely, I believe, based on fuel pricing." ] }, { "name": "Jon Atkin", "speech": [ "Lastly, I think you were asked about Verizon and the holistic MLA kind of wondered if you had any kind of response to that." ] }, { "name": "Tom Bartlett", "speech": [ "Jon, it's consistent with what we've said in the past. We've got a, I think, a terrific relationship with Verizon. I can't comment on anything specifically relative to negotiations or those types of things. But we want to be able to service our customers and be strategic to them as makes sense for them.", "And so we'll look to continue dialogue. And if they're looking for more a la carte type of pricing, we'll go in that direction. If they're looking for renewal of [Inaudible] we'll go in that direction. So more to come but they're very active in the marketplace.", "They're very aggressive in terms of building out their network, and I think we've seen it. They talked about it. And the they're doing a terrific job, and we're here to support them however best we can." ] }, { "name": "Jon Atkin", "speech": [ "Thank you." ] }, { "name": "Operator", "speech": [ "Next, we go to Nick Del Deo with MoffettNathanson. Please go ahead." ] }, { "name": "Nick Del Deo", "speech": [ "Thanks for taking my questions. One on Telxius and then one on domestic spectrum deployment. So first, how long does it take to typically get acquired carrier on sites or I guess, in the case of Telxius, quasi carrier sites kind of plugged into your systems and effectively marketed so that you really see the lease improvements from being independently owned flow-through? And will it happen faster than normal for Telxius since, again, they were kind of quasi independent before you picked them up? And then second, in the U.S., we oftentimes talk about urban markets seeing activity first with spectrum deployments, especially for like the upper mid-band spectrum that the carrier deployed today in force. Are you seeing that play out in practice across your portfolio? Or is it more even than we might suspect?" ] }, { "name": "Tom Bartlett", "speech": [ "On the Telxius, I can tell you, day one, we were marketing those sites, OK? So we're as aggressive as we possibly can in terms of providing those sites out to our customers. I mean the integration has gone really well, I think. And it takes time from a system perspective in getting that organized, getting them into systems and integrating systems and things like that. And that can take six months to a year.", "But that doesn't prevent us from marketing those sites to our customers and making them available to all of our customers. We'll be aggressive from a capital perspective to the extent that there are some sites that we need to attend to, to -- from a structural perspective to be able to support them. But as I've said all along, I mean, this was a really terrifically built portfolio, and that was one of the attractions to the portfolio to begin with. So we're being as aggressive as we can to really be able to take advantage of these sites, particularly in markets like Germany and Spain, where 5G is really picking up.", "From a U.S. perspective, you're right. I mean if you go back to even the old analog days, I mean the markets were generally built up from your urban markets because that's where you're able to get the best bang for the buck when you're rolling out capital. This one, though, I would say with 5G is broader.", "I mean it is a goal to get nationwide coverage for all the customers and then to continue to fill it in as demand and as capacity requirements are required. What's not a surprise to us, and then I reiterated in my comments, the macro towers is the main asset that our customers are deploying 5G on. And I never had any doubts of that simply -- I mean, I've been involved in the industry for 30 years. So the macro tower is just the best way for our customers to get that signal out to their customers, and so we're seeing that.", "But we are seeing it more across the entire country, again, as customers are really trying to be able to get to that nationwide coverage." ] }, { "name": "Nick Del Deo", "speech": [ "Got it. Thanks, Tom." ] }, { "name": "Tom Bartlett", "speech": [ "You bet." ] }, { "name": "Operator", "speech": [ "And ladies and gentlemen, we have time for one final question. That's -- excuse me -- Tim Horan with Oppenheimer. Please go ahead." ] }, { "name": "Tim Horan", "speech": [ "Two clarifications and one question. Do companies pay when they install the equipment or with the MLAs you have to pay regardless of whether or not they install equipment, one? Secondly, Tom, you've been able to kind of raise prices in the U.S. about double the inflation rate historically now. Right now, it's almost half the inflation rate.", "Do you think over time you would have the ability to kind of increase prices faster than inflation? And then lastly, I know you mentioned a lot of new technologies out there. Are there any that you think are a risk to the business model that you're concerned about or watching? Thanks." ] }, { "name": "Tom Bartlett", "speech": [ "Sure, Tim. I'm not sure -- go ahead, Rod. You take that first." ] }, { "name": "Rod Smith", "speech": [ "Yes, I'll have the first one, Tom, around the payment cycle and equipment installation. So Tim, I would say that it really works in a variety of ways depending on which contracts you're talking about and how it's structured. Certainly, on a pay-by-the-drink type of an a la carte contract, carriers would pay us lease by lease as and when they install the equipment or probably better, more precisely said, when the contract gets executed and the commencement date is triggered. And that's typically when the building permit is pulled in construction starts or certainly by the time that the equipment is installed.", "If you're looking at more of a holistic transaction, then there's a disconnection between fees and exactly when equipment is put on. You've heard us say it before, in the holistic type of environment, we price out activity over a multiyear period. We know exactly what the carriers want to do and what they are willing to pay for. We give them those rights, and we put a payment cycle to it as well, which we spread out over time, in a little bit more of a consistent manner, so it's not as volatile as the activity.", "So in that context, you may see payments hit before equipment is installed, and you could also see payments hit after the equipment is installed. It really depends on the payment time line that's in the holistic view." ] }, { "name": "Tom Bartlett", "speech": [ "Yes. And, Tim, on the other two questions, relative to technology, we have a number of technology consultants that we can -- we use that I talk with weekly, as well as all of our own internal. We continue, as I said before, believe that, that macro site is the most efficient way for customers worldwide to be able to deploy their networks and continue to be so. So and as I just mentioned and is what you've seen from our customers talking about rolling out 5G, it's all on the macro sites.", "So answer to the question on the technology side is no. We don't see any competing technologies that we'll get in our way there. From an inflation perspective, 95% of our contracts in the United States are on a fixed escalator. And my sense is that it's a very important element of our agreements, and that's going to continue to say there are going to be some years when it may be a bit higher, although it's -- it hasn't been for many, many years.", "And so generally, it's underneath it. But it's also consistent with how we look at our land in terms of the landlord as well. So it's a balance as well between the landlords as well as our customers. So I don't think that there's any unique opportunity to be able to really change that.", "As you well know, we would really price our contracts where it makes sense for our customers to want to be on our sites. And so we continue to look at our pricing along those lines." ] }, { "name": "Tim Horan", "speech": [ "Thank you." ] }, { "name": "Operator", "speech": [ "And I'll turn the call back to the speakers for any final closing comments." ] }, { "name": "Igor Khislavsky", "speech": [ "Great. Thanks, Leah, and thank you, everyone, for joining the call. Have a good rest of your day." ] }, { "name": "Tom Bartlett", "speech": [ "Thanks, everyone." ] }, { "name": "Operator", "speech": [ "[Operator signoff]" ] } ]
AMT
2023-07-27
[ { "description": "Senior Vice President, Investor Relations", "name": "Adam Smith", "position": "Executive" }, { "description": "President and Chief Executive Officer", "name": "Tom Bartlett", "position": "Executive" }, { "description": "Executive Vice President, Chief Financial Officer, and Treasurer", "name": "Rod Smith", "position": "Executive" }, { "description": "Wells Fargo Securities -- Analyst", "name": "Eric Luebchow", "position": "Analyst" }, { "description": "Morgan Stanley -- Analyst", "name": "Simon Flannery", "position": "Analyst" }, { "description": "Deutsche Bank -- Analyst", "name": "Matt Niknam", "position": "Analyst" }, { "description": "Citi -- Analyst", "name": "Michael Rollins", "position": "Analyst" }, { "description": "Raymond James -- Analyst", "name": "Ric Prentiss", "position": "Analyst" }, { "description": "RBC Capital Markets -- Analyst", "name": "Jon Atkin", "position": "Analyst" }, { "description": "TD Cowen -- Analyst", "name": "Greg Williams", "position": "Analyst" }, { "description": "UBS -- Analyst", "name": "Batya Levi", "position": "Analyst" }, { "description": "", "name": "Unknown speaker", "position": "Other" } ]
[ { "name": "Operator", "speech": [ "Ladies and gentlemen, thank you for standing by. Welcome to the American Tower's second quarter 2023 earnings conference call. As a reminder, today's conference call is being recorded. Following the prepared remarks, we will open the call for questions.", "[Operator instructions]. I would now like to turn the call over to your host, Adam Smith, senior vice president of investor relations. Please go ahead, sir." ] }, { "name": "Adam Smith", "speech": [ "Good morning. And thank you for joining American Tower's second quarter 2023 earnings conference call. We have posted a presentation, which we will refer to throughout our prepared remarks under the investor relations tab of our website, www.americantower.com. On this morning's call, Tom Bartlett, our president and CEO, will provide an update on our international business, and then Rod Smith, our executive vice president, CFO and treasurer, will discuss our Q2 2023 results and revised full year outlook.", "After these comments, we will open up the call for your questions. Before we begin, I'll remind you that our comments will contain forward-looking statements that involve a number of risks and uncertainties. Examples of these statements include our expectations regarding future growth, including our 2023 outlook; capital allocation, and future operating performance; our collections expectations associated with Vodafone Idea in India and any other statements regarding matters that are not historical facts. You should be aware that certain factors may affect us in the future and could cause actual results to differ materially from those expressed in these forward-looking statements.", "Such factors include the risk factors set forth in this morning's earnings press release, those set forth in our Form 10-K for the year ended December 31, 2022, as updated in our upcoming Form 10-Q for the six months ended June 30, 2023, and in other filings we make with the SEC. We urge you to consider these factors and remind you that we undertake no obligation to update the information contained in this call to reflect subsequent events or circumstances. With that, I'll turn the call over to Tom." ] }, { "name": "Tom Bartlett", "speech": [ "Thanks Adam and thanks to everyone for joining this morning's call. Consistent with our past practice my comments today will focus on our international segment which consists of a well-diversified, high growth portfolio of assets across key developed and emerging geographies outside of the United States. Before diving into our international operations though and in light of the recent excitement surrounding the potential arising from AI workloads, I'd like to spend a moment highlighting the demand we're seeing in our CoreSite data center business, where we've seen 9% year-over-year growth, in both revenue and operating profit for the first six months of the year. Following record levels of signing new business in 2022 and Q1 of 2023, we continue to see demand for data centers outstripping supply in our initial underwriting expectations, elevated pre-leasing in a pipeline that points to an extended opportunity for increasingly profitable growth.", "Each of these factors is contributing to strong pricing trends, and the ability to be selective in terms of signing new logos and expansions from existing customers, ensuring accretion to the value of the interconnection ecosystem and overall AFFO growth, particularly once we begin commencing the remainder of the record new business we've signed over the last year and a half. This is all before factoring in expectations for elevated demand from AI used cases. While much of the immediate demand in the market today is coming from hyper scale requirements, the longer term opportunity for interconnection hub like CoreSite, is just as significant and is arising from several key demand drivers. First, we've already seen an acceleration in outsourcing to CoreSite as hybrid IT and multi cloud access are becoming more relevant for continued digital transformation across all workloads.", "As enterprises increasingly leverage new generative AI models for business and customer applications, they'll need to deploy servers that require more power and cooling than on premises data centers can typically handle. At the same time, we expect existing enterprise customers who are building AI into their products and operating models will expand their power and space requirements in CoreSite with its flexible and scalable model and speed to market benefits, is already well positioned to support these expected used cases today. Second, we're seeing today's cloud enabled large language models requiring connections to proprietary distributed datasets use for training, which CoreSite as an interconnection ecosystem with a nationwide distribution of cloud on-ramps is well situated to serve. And finally we see a significant incremental opportunity arising from the use of hybrid and custom large language models for training and inferencing where low latency, high power density and distributed high performance compute is expected to result in elevated activity across our existing CoreSite campus footprint.", "Over time, we see a potential for these dynamic requirements to push demand for a more distributed compute infrastructure for which our CoreSite portfolio and ultimately our distributed footprint of land parcels on the Tower sites may be ideal locations over the long-term. Simply put, the ongoing demand trends in the data center space and the emergence of generative AI used cases are providing American Tower from CoreSite an opportunity to play a central role as an infrastructure provider against a backdrop of technology evolution that's expected to drive a step up function increasing computing power demand. As a result, we see a compelling opportunity to continue delivering the industry leading yields on invested capital that CoreSite has historically achieved which Rod will touch on more later. With that, let's turn to our international Tower business, where our objectives have remained clear, since we began expansion over two decades ago, leverage our proven capabilities and expertise to selectively invest in the world's largest free market democracies with regulatory structures that are supportive of the neutral host tower model, healthy competitive wireless industries, and high quality assets and counterparties.", "At the same time we focused on investing in markets that are in various stages of network technology development, and where we see a path to establishing nationwide scale. By bringing these factors together, we believe we could both augment and extend our growth trajectory, leverage our platform and expertise to create incremental value in selected markets, and add to an already compelling total return profile for American Tower shareholders. As a critical component of this portfolio management and capital allocation program, we measure and analyze our assets on an ongoing basis to ensure the marriage identified and our initial investment underwriting remained consistent today. As you've seen recently, such evaluation has led to select divestitures including our Mexico fiber business and operations in Poland and a strategic review of our India business.", "The takeaways from these analyses together with our on the ground experiences across our global business continue to shape and evolve our approach to capital allocation. And the criteria we use to support ongoing capital investment and the setting of appropriate risk adjusted rates of return. Today, we have a leading international portfolio of nearly 183,000 sites that are contributing approximately 45% and 36% toward consolidated property revenues and operating profit respectively, and are expected to deliver more than 8.5% in total tenant billings growth, including greater than a 6.5% organic growth in 2023. The secular demand trends driving our international growth remained consistent.", "Similar to the U.S., industry estimates forecasts roughly $35 billion in carrier capex across our non-U.S. markets in 2023 and forecast suggest mobile data consumption is set to grow in the 20% to 30% range on average in these markets over the next several years, which would mark a continuation of the trends we've seen over the better part of the last two decades. Globally, we've anchored our portfolio in key markets, which are in varying stages of network development relative to that of the U.S., where some level of 5G coverage deployed over a combination of low and mid band spectrum has reached approximately 95% of the population. In Europe, that number is closer to 60%, while Africa and Latin America are closer to 7% to 8%, suggesting a long tail of 5G and other next generation technology investments requiring significant incremental network density and sell side points of presence.", "Critical to our expansion strategy has been our discipline in establishing appropriate contract structures with the leading M&A in each geography. Although we've experienced certain consolidation driven churn events across our international portfolios over the past several years, we believe that through our proactive steps to increase exposure to leading multinational counterparties, we strategically reset our international customer base, enhancing the quality of our earnings and predictability of growth. In fact, in Africa, approximately 90% of our Q2 property revenues are derived by market leaders Airtel, MTN, Vodafone, and Orange, as compared to roughly 80%, five years ago. In Europe, we similarly see over 80% of property revenue supported by Telefonica, Orange, Vodafone, and Deutsche Telekom versus less than 60% at the same time in 2018.", "In Latin America, which has a more fragmented customer base, given our operations across eight markets, we're still generating approximately 75% of our property revenues from Telefonica, At&T, American mobile, and Tim, up from a little over 60% over the same time period. In addition to focusing on partnerships with market leaders, we've underwritten attractive leasing terms, including real estate REITs, and CPI linked escalators in the vast majority of our contracts outside of India. This disciplined approach to securing growth and critical contract terms is evident in our results in Q2, with a combination of gross organic new business and our escalator generated just under 13.5% growth in aggregate for Latin America, Europe, and Africa, roughly 300 basis points over our trailing five-year average. This reflects our ability to complement new site leasing with attractive amendment growth across our international operations, as we've done in the U.S.", "historically. In fact, looking again at Latin America, Europe, and Africa, of the roughly $100 million we've generated through colocation and amendment growth over the past 12 months, around half, both in each region and in the aggregate has come in the form of amendments, illustrating our ability to monetize various stages of network investment cycles, and our success in franchising our proven U.S. tower model throughout our global operations. There's perhaps no better example of the benefits of remaining disciplined in terms of contract structure in Europe, where over the last several quarters, CPI linked escalators in Germany and Spain have provided a boost to our organic growth profile.", "And where again, roughly half of our new business growth has been driven by 5G related amendment activity on existing sites. In 2023, these factors, as well as a healthy leasing environment are coming together to derive an expectation of approximately 8% organic kind of Billings growth in Europe, including an expectation for an acceleration in growth from colocations as we exit the year. As the 5G investment cycle continues our contract structures along with our work to develop leading operating capabilities in the region, and an ongoing expectation for low churn should allow us to deliver solid organic growth in the region for the foreseeable future. Furthermore, the importance of the scale we built as a distinct competitive advantage has never been clear.", "To our global diversified presence, and decades long track record of operational excellence, we've established American Tower as a trusted, strategic partner for our customers. This is exemplified by our new build program, where we partnered with leading carriers to rapidly deploy new sites, which has driven some of our highest returns on invested capital. In fact, since we began expanding internationally, we have built over 45,000 international sites, which are achieving a NOI yield of approximately 25%. And approximately 65% of these sites have been built since the start of 2017 alone shortly after we crossed the 100,000 international site mark.", "Nearly 8000 of these sites have been built in Africa, where our scale presence and strategic relationships with key wireless operators have afforded us the opportunity to build several 1000 new sites in recent years, that typically deliver mid teen yields on day one. As we continue to augment our scale in key markets across the region, 4G investments, which are very much in the middle innings today are driving compelling organic tenant billings growth and our existing assets, including an expectation for greater than 11% growth in 2023, of which approximately 7% is coming from colocation and amendments, the highest of any region. And as the 4G cycle rounds out over the next few years, and we move toward 5G and the densification requirements that come with it, we expect capacity utilization across the assets we've built over the last several years to result in ongoing compelling growth. Meanwhile, our regional scale and leading capabilities have resulted in the opportunity to invest in accretive platform extensions, such as our power as a service program in Africa.", "As you'll see in our recently published sustainability report, through 2022 we've invested approximately $345 million in this program, primarily in solar arrays and lithium ion battery solutions. As a result, we decreased annual diesel consumption at our sites in the region by an estimated 43.5 million liters when compared to business as usual operations and we've reduced our greenhouse gas emissions intensity per tower by 21%, against our 2019 baseline. Based on the demand to extend this program, it seems clear that this solution provides compelling differentiated value to our customers. At the same time, the program advances our progress toward meeting our science based targets and supports our customers network sustainability goals.", "Meanwhile, similar to our new build program, these investments have been among the highest return opportunities we've seen. And as more power intensive 5G begins to be deployed at scale more broadly, we believe we'll be well positioned to continue extending the reach of this high return program to new geographies over time. Finally, we're more focused than ever, on leveraging the benefits of our scale to maximize the margin profile of the business. For example, through our Global Business Services Organization, we've invested in standardization across lease management and other transactional processes that's driving both significant increase in productivity and run rate savings on an annual basis.", "Through our procurement organization we will begin to truly leverage our scale as a buyer to reduce input costs in our build to suit programs. Drive cost optimization when it comes to power and energy components and work with other critical vendors in our supply chain to realize incremental efficiencies. And while we're beginning to see the benefits of these and many other initiatives in our operations today, we believe we have a significant opportunity to transform our organization into one that is truly global, and capable of maximizing the operating leverage inherent to the business to expand on an already attractive margin profile. In summary, we believe our global platform of assets is exceptionally positioned to benefit from what we expect to be a massive wave of incremental infrastructure demand required to support the technological advancements and network capabilities we're beginning to see in the market today.", "By complementing our U.S. platform, with a continued disciplined approach to international growth, and a focus on leveraging our scale, capabilities and learnings from over two decades of international U.S. operations we can provide compelling growth and margin expansion, and augmented return opportunity for investors, and a differentiated value proposition for our customers for many years to come. With that, I'll turn the call over to Rod to go through the quarterly results and updated outlook." ] }, { "name": "Rod Smith", "speech": [ "Thanks, Tom. Good morning. And thank you for joining today's call. As you saw in our press release, we had a strong second quarter reflecting a continuation of resilient demand for our diversified global portfolio, and solid operational execution across our organization.", "Before I walk through the details of our Q2 results, and revised full year outlook, I'll start with highlighting a few items from the quarter. First, we continued to strengthen our balance sheet, raising approximately $2.7 billion in fixed rate debt through a combination of Euro and U.S. dollar denominated senior notes at a weighted average cost of 4.9%. As a result, we decreased our exposure to floating rate debt to approximately $6 billion or less than 15% of our total outstanding debt as of the end of the second quarter.", "Next, the momentum experienced across our global business in Q1 continued into the second quarter with outperformance across new business, escalations and churn, resulting in another quarter of over 6% organic tenant billings growth, allowing us to raise our full year expectations across our Latin America, Europe, and Africa segments. We also had another strong quarter at CoreSite where elevated leasing volumes since our acquisition continued into Q2, and were further supported by solid pricing trends, high renewal rates, and interconnection growth of approximately 10%, which together with our tower business drove property revenue growth of over 4% in the quarter. Complementing top line growth, and as I highlighted last quarter, we are maintaining a strong focus on cost management. Once again in Q2, despite an elevated inflationary environment, we kept cash SG&A roughly flat year over year, helping to support an adjusted EBITDA margin expansion of approximately 60 basis points to 63.1% or over 100 basis points when normalizing for VIL reserves.", "Finally, we continue to engage in active discussions with a focused group of investors around the potential sale of a majority equity interest in our India business as we assess strategic options in the market, and exercise we anticipate completing in the second half of the year. As always, we will remain disciplined and patient with the goal of achieving the best outcome for American Tower and its shareholders. With that, please turn to Slide 6 and I'll review our property revenue and organic tenant billings growth for the quarter. As you can see, Q2 consolidated year over year property revenue growth was over 4% or over 6% on an FX neutral basis.", "This included U.S. and Canada property revenue growth of over 5%, international growth of nearly 3%, or over 7%, excluding the impacts of currency fluctuations, and over 7% growth in our U.S. data center business. In the quarter we recognized approximately $35 million in revenue reserves associated with VIL short payments, as collection patterns in Q2 were relatively consistent with that of Q1.", "Moving to the right side of the slide, we achieved another strong quarter of organic tenant billings growth, which stood at 6.2% on a consolidated basis. In our U.S. and Canada segment, organic tenant billings growth was 5.1% and approximately 6.5% absent sprint related churn, including another quarter of elevated colocation and amendment growth contributions of nearly $60 million. Our international segment saw outperformance across nearly all reported segments, primarily due to a combination of higher than anticipated colocation and amendment growth and continued churn delays, resulting in organic tenant billings growth of 7.9% up from 7.5% in Q1.", "At a segment level, Africa, Europe, and APAC produce growth of 12.9%, 8.3%, and 5.6% respectively, each in acceleration off of Q1, with Africa representing a record for the region, APAC delivering its highest quarter since Q3 of 2017, and Europe demonstrating growth of over 575 basis points above its precalculus average. In Latin America, we did see a modest deceleration of 5.4% as expected. Consistent with the last quarter, we continued to realize benefits associated with CPI linked escalators across the vast majority of our international markets while a continued delay in anticipated consolidation driven churn in Latin America has kept reported churn favorable to our initial expectations through the first half of the year. Finally, strong leasing trends across our international business has driven an acceleration in colocation and amendment growth contributions across nearly all of our segments, resulting in an approximately 40 basis point improvement sequentially at a consolidated international level.", "Organic tenant billings growth was further complemented by the construction of more than 565 sites with virtually all of the step down relative to Q1 associated with India volumes, as we continue to prioritize capital deployments across our footprint to projects that demonstrate the most attractive risk-adjusted rates of return. Turning to Slide 7, adjusted EBITDA grew nearly 5% to over $1.7 billion or approximately 6% on an FX-neutral basis for the quarter. As I mentioned, adjusted EBITDA margin expanded to 63.1% driven by elevated organic growth, combined with prudent cost controls throughout the business, which allowed for a conversion of over 85% of revenue to adjusted EBITDA growth, again, on a normalized VIL basis. Cash, SG&A as a percent of total property revenue was around 6.8%, and over 20 basis point improvement compared to prior year.", "Moving to the right side of the slide, attributable AFFO and attributable AFFO per share decreased by less than 1% and approximately 2%, respectively. This decline includes financing cost headwinds of approximately 7% and 9% against attributable AFFO and attributable AFFO per share growth, respectively, driven by the rise in interest rates over the past year. Let's now turn to our revised full year outlook, where I'll start by reviewing a few of the key high-level drivers. First, as mentioned earlier, we had a solid second quarter, and the core performance of the business continues to remain strong supporting an increase to our expectations for property revenue, adjusted EBITDA, attributable AFFO, and attributable AFFO per share.", "Next, consistent with our prior outlook, we have maintained our VIL revenue reserve assumption of $75 million for the year. As I noted, we saw similar collection trends in the second quarter as compared to Q1 bringing our year-to-date reserves associated with VIL to approximately $70 million. Subsequent to the quarter end, VIL made a full payment for July's billings and has committed to paying at least 100% of billings moving forward. In this case, we could potentially see some upside to our outlook assumption.", "However, we believe it is prudent to leave the full year assumption unchanged at this time. Additionally, we have assumed lower U.S. services volumes through the balance of the year, resulting in an approximately $40 million reduction in gross margin as compared to our prior outlook. While the recent pullback was more abrupt than our initial expectations, moderation in carrier spend following the recent historic levels of activity we've seen in the industry isn't unexpected and is consistent with past network generation investment cycles.", "Despite this reduction, we're still seeing healthy levels of activity on our sites, which we expect to continue, and our guide still assumes over $40 million in services gross margin contribution in the back half of the year which on an annualized basis, is still in excess of any year throughout the 4G cycle. It is also important to note that although our services business is non-run rate, more susceptible to in-period carrier activity and cyclical in nature, our comprehensive MLAs continue to provide us with a high degree of visibility and contractual protection against activity variability in our 2023 property revenue and organic tenant billings guide, as well as the growth we've assumed in our long-term U.S. and Canada organic tenant billings growth target. Finally, on the macro side, we have revised our FX and interest assumptions.", "Starting with FX our revised outlook includes the negative impact associated with the recent devaluation in the Nigerian Naira with impacts partially mitigated through the USD denomination of roughly half of our tenant revenues in the market. This is further offset by the strengthening of other currencies in our portfolio, resulting in minimal FX impacts versus our prior outlook. On the interest side, our guidance reflects a modest increase to interest expense based on the updated forward curve estimates of SOFR, partially offset by interest income. With that, let's dive into the numbers.", "Turning to Slide 8, we are increasing our expectations for property revenue by approximately $125 million as compared to our prior outlook. Outperformance was driven by approximately $65 million in core property revenue supported by increases to the U.S. and Canada segment, which includes the benefits of several non-recurring onetime items along with our U.S. data center and international segments.", "Complementing our core upside, we're also increasing our outlook by another $60 million, primarily associated with straight line and pass-through revenue. Moving to Slide 9, we are increasing our expectations for organic tenant billings growth at a consolidated and international level. In the U.S. and Canada, we are maintaining our guidance of approximately 5% or over 6% excluding sprint churn, with an expectation for at least $220 million in colocation and amendment growth contributions.", "In Latin America, we have increased our outlook from greater than 2% to approximately 4%, largely driven by continued delays in anticipated consolidation-related churn. In Europe, we are raising our guidance to approximately 8%, up from 7% to 8% previously, supported by modest improvements in our escalator contributions, together with an expectation for colocation and amendment growth to be closer to the upper end of our initial 2% to 3% assumption as we continue to make operational progress in Germany on leasing up our rooftop assets. Next, we're increasing our Africa outlook from approximately 9% to greater than 11%, primarily due to a continuation of solid new business demand. Although we are pleased with the acceleration in organic tenant billings growth in APAC in Q2, we are maintaining our prior outlook of approximately 4% at this time.", "Moving on to Slide 10, we are raising our adjusted EBITDA outlook by $75 million. This reflects the strong conversion of the incremental property revenue I just mentioned, facilitated through prudent cost controls resulting in an incremental $75 million in cash property gross margin, along with an additional $40 million, primarily due to straight line. This growth was partially offset by a reduction of $40 million associated with our U.S. services business.", "Turning to Slide 11. We are raising our expectations for AFFO attributable to common stockholders by $25 million at the midpoint, representing approximately $0.05 on a per share basis moving the midpoint to $9.70 per share. Updates to our expectations include the cash adjusted EBITDA increase of $35 million, partially offset by approximately $10 million in other items, including the impacts of interest expense and also a slightly higher minority interest, which is the product of outperformance in our U.S. data center business.", "Moving on to Slide 12, while our capital allocation plans remain consistent relative to our prior outlook, primarily consisting of $3 billion in common stock dividends, subject to board approval and $1.7 billion in capital expenditures, I'd like to spend a moment to review our approach to ensure adequate capacity for our CoreSite business as we support an elevated backlog and expectations for continued future demand. On the left side of the slide, you see our plans continue to assume approximately $360 million in discretionary spend allocated to our U.S. data center business in 2023. This level of spend supports a high watermark of cash backlog, driven by the record levels of leasing since closing our acquisition at the end of 2021.", "Similarly, our retail and scale backlog, excluding hyperscale, is also at record levels, demonstrating the strength of the core business and diversification of new leasing which we expect to drive incremental ecosystem value and a continuation of the industry-leading returns CoreSite has produced historically. The differentiated nature of the CoreSite assets, representing a network, cloud and digital platform rich interconnection hub, which in conjunction with large-scale, purpose-built adjacent capacity uniquely positions CoreSite to support the high-performance workloads of today and in the future including expected incremental AI capacity needs. Combined with the favorable supply and demand dynamics we're seeing across the data center industry, we have a high degree of confidence in our ability to drive double-digit stabilized yields on our development investments, largely supported by the reinvestment of CoreSite's own cash flows with further support from American Tower and our partner, Stonepeak. In fact, our pre-leasing at the end of the quarter was approximately 36%, which further derisks our capital investments and illustrates the robust demand we're seeing across the space.", "While such demand drives the need for incremental investment, we are eager to support the business and realize the attractive rates of return CoreSite has historically proven, while remaining selective and disciplined in current and future development priorities and decisions. Moving to the right side of the slide, and as I mentioned earlier, we continue to execute on our financing initiatives in the quarter raising $2.7 billion in fixed rate debt, extending our average maturity to over six years while reducing our floating rate debt balance to below 15%. We also closed the quarter with net leverage of approximately 5.3 times ahead of our own deleveraging path toward our targeted range of three to five times. Moving forward, we'll remain opportunistic in potentially further accessing the debt capital markets to appropriately manage our investment-grade balance sheet.", "Turning to Slide 13 and in summary, our business continues to demonstrate resiliency and benefit from ongoing demand across our operations while effectively mitigating certain risks and variability through the strength of our customer agreements. Supported by a continuation and positive growth trends in Q2, we were able to increase the full year outlook midpoints across the majority of our key metrics, largely supported by core property outperformance across our tower and data center segments. We believe our global portfolio, strong balance sheet, best-in-class operating capabilities, disciplined approach to capital allocation, and keen focus to drive long-term efficiencies across our organization has American Tower well positioned to deliver strong, sustained growth in shareholder returns as we close 2023 and over the long term. With that, operator, we can open up the line for questions." ] } ]
[ { "name": "Operator", "speech": [ "[Operator instructions]. And our first question is from Eric Luebchow with Wells Fargo. Please go ahead." ] }, { "name": "Eric Luebchow", "speech": [ "Hi. Good morning. Thanks for taking the question. So I wanted to touch on the U.S.", "domestic leasing environment. We heard from one of your peers that carrier activity had slowed substantially during Q2. It looks like you're seeing a little bit of that in your service revenues, but I wanted to talk more about your organic tenant billings growth. Obviously, you reiterated the guide this year, but as we look beyond 2023, I know you have I think, 75% locked in into your long-term guide, but could it sustain slowdown in carrier activity, put that 5% number potentially at risk beyond 2023, maybe you could just walk through some of the puts and takes there?" ] }, { "name": "Rod Smith", "speech": [ "Hey, Eric, good morning. And thanks for the question and thanks for joining the call. So as the other tower companies are experiencing the slowdown with the carrier spend, we're seeing that as well. You rightly point out, you see it mostly in the services revenue.", "So for us, you noticed we took our guide down from over $200 million down to about $175 million. In that process, we also were able to increase our margins and kind of mitigate some of that softness. The thing that I would point out there as it relates to services is the level of activity we see continuing into the back half of the year, even through the slowdown, it's still equal to or better than the high watermark of level of activity we experienced throughout the 4G cycle. So we still view the services business and activity levels as pretty healthy.", "And this is not inconsistent with what we've seen in other technology upgrades with the carriers to have an initial burst of spending they get their network upgraded on the new technology. Then you see a pullback in capex and that sustained level of new capex under the cycle is typically higher than the last cycle. And that's what we're seeing, that's what we expect. In terms of the longer-term guidance is you think the way that our comprehensive agreements are set up, we really are in very good shape we think, from now out to 2027.", "So I'll just remind you in terms of what our long-term guide was. We are seeing an average of about 5% organic tenant billings growth in the U.S. from now until 2027. And the slowdown does not change our view there because the vast majority of that is fully contracted.", "That includes the incremental impact of sprint churn. Without that, we'd be at about 6%. And again, we don't see that changing because this pullback or slowdown as described from carriers because of the way that our holistic or comprehensive agreements were. So that's kind of -- that's the strong nature of those comprehensive agreements that we have.", "It really does protect us from these fluctuations in spend from quarter to quarter or even year to year. And within that guide, we do have 4% to 5% of activity base, new business kind of coming through. So I think from that perspective, we're in pretty good shape." ] }, { "name": "Eric Luebchow", "speech": [ "Great, thanks Rod. And just one follow-up. I wanted to touch on the data center business. Maybe you could give a little more color on the strength you've seen there.", "Is it coming from more of your traditional retail colocation requirements or are you starting to see increased demand for larger footprint deals perhaps tied to some of the AI demand we've heard about in the market with the cloud service providers, and I guess, given the demand backdrop, do you think that maybe capex needs in that business might need to go up in future years or do you feel kind of comfortable with where you're at in terms of capital intensity with CoreSite?" ] }, { "name": "Tom Bartlett", "speech": [ "Eric, maybe I'll start this one, and then Rod can finish on. I think the mix of customers has actually been pretty consistent across the cloud and enterprise and the network. I think as Rod mentioned in his prepared remarks, we see a kind of record levels of cash backlog that's contracted revenue that's going to hit a balance of this year and into 2024 and a little bit into 2025. We see a pipeline that's up roughly 70%.", "We see pricing and it's up 15% on a year-over-year basis. Even the renewal rate, the MLR renewal rates is up at the 7% level. So there is a significant demand for these assets. We have a significant amount under development and a significant amount in the pipeline.", "So we're really outpacing the way we even underwrote the transaction to begin with. So really pleased with what we're seeing across the data center platform." ] }, { "name": "Rod Smith", "speech": [ "Yes, Eric, maybe I would add just a couple of other comments to Tom's answer there. The overall growth that we're seeing in CoreSite is really healthy. We saw 10% overall revenue growth in Q1. We're seeing high single-digit growth in Q2.", "So you put that together for the first half and the revenue was up high single digits, which is really robust. We continue to see healthy escalators in that business. The cash mark-to-market is still up in our range, at the high end of our range, even beyond the 3% high end of the range. The churn is well controlled and within our range of 6% to 8%.", "Interconnection growth, we've always targeted 6% to 8%. We're seeing a higher level of growth than that today. So that's that ecosystem that we have kind of at work producing what we hope to produce. And then, hitting the capex part of your question, we've got $360 million this year in capex, we had about $300 million last year.", "And we do think that's a good run rate. It will fluctuate from time to time, but the purpose for our capex program, of course, is really to make sure that we have the adequate capacity available to satisfy the new business and the demand in the backlog. So you can see from the chart, we have an average backlog of about $53 million, which will be deployed over the next 18 to 24 months or so. So we are ensuring that we have that capacity available.", "So that $360 million really is going into the 28 locations we have, the campuses either adding buildings into those campuses or adding conditioned space within existing buildings to make sure that we're keeping pace with the demand that we see. And the demand is robust. So certainly, there's opportunities to deploy even a little bit more capital. We'll continue to evaluate the returns and the growth rates and those sorts of things.", "But all in, we're exceptionally pleased with the way the data center business is performing. And we do think staying in that between 300 to 360 in and around that area is the right place in terms of ensuring we have the capacity available to meet the demand in our current facilities." ] }, { "name": "Eric Luebchow", "speech": [ "Great. Thank you for the questions." ] }, { "name": "Operator", "speech": [ "Next, we move to Simon Flannery with Morgan Stanley. Please go ahead." ] }, { "name": "Simon Flannery", "speech": [ "Thank you very much. Good morning. Rod, I wanted to come back to the balance sheet if we could. Good updates on the floating rate debt and the leverage.", "You said in there, you want to continue to delever and I guess this also brings in Tom. You haven't done a lot of deals since the CoreSite deal. And I know you've been in this kind of focus on the balance sheet kind of period. So perhaps you just talk about what does -- where you want to get to on the leverage side of things and are you starting to think about being more opportunistic on the M&A side and maybe any commentary on the bid offer spreads, I know you talked about the India deal a little bit, but where do you see the opportunity to find things at a reasonable value, given the move in rates, etc.? Thank you." ] }, { "name": "Rod Smith", "speech": [ "Yes. Good morning Simon, thanks for joining the call. Thanks for the question. So delevering is a priority for us.", "We've talked about that for quite a while. It comes in a couple of forms, outright in reducing overall debt, we're focused on that as well. Our target range is between three and five times. You saw that we ended Q2 at just over that at about 5.3 times.", "So a little outside that window. We want to get down below five times, and that's what we're really focused on going forward. With that said, when we look at our capital program, our overall priorities haven't changed. We still prioritize the dividend and dividend growth so that's key.", "We see very good day one NOI yields and returns in the new build program. So this year, we're deploying about 1.7 billion in capital. We think that's a very good use of capital and resources for our shareholders. And then, beyond that, when you look at M&A, as Tom has talked about in the past, in our pipeline today, we just don't see anything compelling.", "That's a combination of terms and conditions and markets where they're available in different criteria. So we look globally, we look at the pipeline, we continue to have a pipeline that we review. But again, nothing is compelling. So with that said, and in the specific environment where the rate -- the go-forward interest rate is still uncertain, we think it's very prudent to prioritize delevering and debt reduction.", "We think it's very prudent to reduce the amount of floating rate debt so we lock in our interest rates on a larger portion of our debt. So going forward, our target range is about 20% for floating rate debt. We've got that down to around 15%. And I think in Q3, you'll see us continue to be opportunistic depending on where the rates are in the U.S.", "and where the 10-year is in the U.S. and the benchmark over in Europe. You could see us back in the capital markets to reduce our exposure to floating rate debt even below the 15%. And you'll see us going forward this year and well into next prioritizing delevering and trying to get down below five times." ] }, { "name": "Tom Bartlett", "speech": [ "Yes, Simon, I think I'll just underscore. I think it comes back to what Rod's saying is that there's nothing strategic out there. There's nothing compelling. We find it much more advantageous to invest in our own business that is through deleveraging, that is through investing through our capital.", "That's through buying back shares, I mean, given where we're trading. So we find it much more valuable to allocate our capital that way at this point in time than anything we see out in the market." ] }, { "name": "Simon Flannery", "speech": [ "Great. Thank you very much." ] }, { "name": "Operator", "speech": [ "And our next question is from Matt Niknam with Deutsche Bank. Please go ahead." ] }, { "name": "Matt Niknam", "speech": [ "Hey. Thanks for taking the question. Just two on international. I guess, first on the churn expectations.", "I think, Rod, you had alluded to maybe some reduced expectations for churn at least this year in LatAm, just wondering if you can give us any updates in terms of the outlook, both for LatAm and Africa and whether the ultimate sort of churn expectations have been reduced or is this more of a deferral than anything else? And then, secondarily, just on India, if you could maybe give us any additional color in terms of updates on discussions. You mentioned, I think, second half in terms of when you'd like to have the process completed, so any additional color would be great there? Thanks." ] }, { "name": "Rod Smith", "speech": [ "Hey Matt, good morning. Thanks for the question. So regarding the debt, the simple answer here is the -- some of the increases in our organic tenant billings for the balance of the year is really a delay in churn, not an expectation that churn is going to be materially lower over the long term. So, it's primarily in Latin America driven by the oi churn, which is delayed.", "So we do anticipate that to pick up later in the year in Q3 and Q4. And that oi churn is about 2% of our overall -- within our organic tenant billings growth, it's 200 basis points in that revised kind of view of that approximately 4%. So it really is a timing issue there. And then in Africa, it's pretty consistent.", "We're seeing some delays, but nothing too material, and it's not a change in terms of our overall long-term view in Africa. We're still looking at some churn in AirtelTigo in Ghana and Cell C is churning off some sites down in South Africa. So churn ends up being approximately 6% in the African market. And Latin America, it's about 6.5% kind of in total for the year.", "The other thing I would highlight is in Africa, we are seeing elevated levels of new business and activity. So we've been really pleased with that. So that's the churn piece. I guess jumping over to India, I'll just make a couple of comments on our process there.", "So as you know and as we've talked about in the past, we're fully engaged in a process in India. It started with a full evaluation of the market, particularly the future impacts of that market under different scenarios. And we're also evaluating potential uses of capital that we may take out of that market as a result of this process. We are -- we continue to focus and we're very engaged with a few remaining select investors.", "We're highly focused on selling a majority stake in that business anywhere, and I'll be kind of broad the process is continuing here, but anywhere from 50% to 100% stake sale. I don't want to talk about any more details than that. Of course, valuation is always important. Terms and conditions are always important.", "They are primary key considerations for us as we work through it. And I would say at the moment, we're happy with the progress that we've made to date. We've been working on it for quite some time. We are in the late stages of the process.", "And as I said in my prepared remarks, we do expect to complete a transaction sometime during the second half of this year. That's kind of what we're looking for. And our goal is to drive the best outcome for our shareholders through this process. We're going to remain very thoughtful, very disciplined, and very patient as we get through the final stages here.", "And we hope to update you all at some point soon in terms of the process and next steps here. But again, we're in late stages of the process." ] }, { "name": "Matt Niknam", "speech": [ "Excellent. Thank you." ] }, { "name": "Operator", "speech": [ "Next, we go to the line of Michael Rollins with Citi. Please go ahead." ] }, { "name": "Michael Rollins", "speech": [ "Thanks, and good morning. I was hoping to revisit some of the comments that you're providing around the carrier activity in the U.S. and specifically, is there a way to frame what changed relative to the carrier activity expectations that American Tower may have had earlier in the year for the full year 2023 and then given that customers under these comprehensive MLAs can execute a certain amount of capacity and if activity is less, does that mean they're not taking full advantage of the capacity they're paying for and then create some form of greater backlog of deployments that need to come through the system in the future?" ] }, { "name": "Tom Bartlett", "speech": [ "Hey Michael, maybe I'll start and then Rod can kind of kick in. And the types of questions you're asking for, I think, are probably more appropriate for them. We've seen T-Mobile come out and say they're rolling out more carriers. We've seen Verizon talk about their deployment and looking for more mid-band and how that's going to drive kind of the second wave.", "But I think if you kind of step back, the pullback that we're seeing in spending today is absolutely reflective of the cadence of network investment cycles that we've seen historically. I mean, you and I have both been around long enough to see most of them and meet all of them and how that cadence has progressed. And the 5G cycle is no different, at least from my perspective, than what we saw with prior cycles. I mean it -- when we looked at our long-term growth expectations for U.S.", "and Canada in 2021, we had and had anticipated having those comprehensive MLAs in place. And so, it's obviously kind of straight line what we are looking at in terms of our overall growth and protects from -- as we've talked about this kind of signed wave, if you will, of development. But the cycles typically progress as there's a coverage cycle. It's what we've seen in past cycles, including 3G and 4G.", "It's an initial multiyear period of elevated coverage capex, and it's tied to new G spectrum aimed at upgrading the existing infrastructure. It's largely cost based. I mean, the carriers are dropping in new technology to bring down their overall cost per bit, as well as then positioning themselves to be able to offer their customers, their consumers and enterprise customers more technology and more capability. It's then followed by some grooming that will go on.", "And perhaps that's kind of the stage that we're starting to see ourselves in at this point in time. And then, later in the cycle, it will fill back into a capacity stage where we'll start to see more densification going on. And so, when we think of kind of the services and the cadence, if you will, every time it is difficult to predict because the cycles from each of the customers are so different. As Rod said, the $175 million or so that we're looking to service, it is kind of the third -- largest on record.", "Last two years, we're up, I think, north of the $200 million range. But there still is a sizable year for our services business. So -- and our customers themselves are spending still record level versus where they were spending in 4G. So I know there's a lot of this anticipation of what's going on in 5G, why is this pull back and spend in 5G.", "I think we need to take a look at kind of a broader period of time here and saying, OK, our customers have deployed 5G to a large extent, they're continuing to deploy. We still do see obviously, services activity from all of them and we would expect to move through over the decade further levels of investment as they continue to drive more value for enterprises, as well as then more value for consumers. So I'm hopeful that our investor base doesn't get spooked by the fact that this is a pullback. It's very consistent.", "The cadence is really spot on with what we've seen with other technologies. And we're going to -- we continue, as well as any of our customers do, heavily investments in the 5G networks over time." ] }, { "name": "Michael Rollins", "speech": [ "Thanks." ] }, { "name": "Tom Bartlett", "speech": [ "Thanks, Mike." ] }, { "name": "Operator", "speech": [ "Next, we go to Ric Prentiss with Raymond James. Please go ahead." ] }, { "name": "Ric Prentiss", "speech": [ "Thanks. Good morning, everybody. A couple of questions to follow up on some of the ones we had. Thanks for the updates on India, but a few extra ones.", "Can you remind us again how much you spent in India, where is that on your books right now as we look to maybe a transaction getting wrapped up here, hopefully?" ] }, { "name": "Rod Smith", "speech": [ "Yes, Ric, we've invested around $5 billion into the market. What we have on our books today is in the range of about $2.5 billion." ] }, { "name": "Ric Prentiss", "speech": [ "OK. And earlier, I appreciate the color that India's Vodafone Idea looks like they're getting current and 100% going forward. At what point you thought you might take a stake on that receivable, is that kind of on pause as you go through wrapping up the strategic review, and did I hear you say you maybe have slowed down some of the builds in India, is that also related to kind of the process?" ] }, { "name": "Rod Smith", "speech": [ "I guess on the first piece, when you say a stake in the receivables, you might be talking about the idea of converting some of the receivables with VIL into a different type of financial instrument. We have done that, Rick. So we've got about $200 million of prior receivables that we've converted into more of a financial note or a note receivable. So that is in place, and I think it will certainly work to our advantage over time.", "We are seeing a slowdown in terms of the new builds in India. And it is partly driven by our view, a higher cost of capital kind of reviewing pricing and our overall appetite to invest in the market. It doesn't mean that those new builds might not accelerate again if the opportunities come through with some higher pricing and higher returns. But the -- we're focused on driving the highest returns on the opportunities that we have to build.", "But we are seeing kind of a reduction there in India. And it's not because the overall demand is down. It's really we're being very disciplined and patient. And we're also continuing to build towers in Europe and Africa and a handful in Latin America.", "So in this environment, we're just being very selective and putting our capital toward the sites that give us the highest growth, the highest risk-adjusted rates of return going forward, and we balance that with our desire to delever and prioritize some capital toward delevering this year and into next." ] }, { "name": "Ric Prentiss", "speech": [ "OK. And then, you also mentioned delevering is a priority, makes sense. But that stock buyback might make sense in the future, particularly compared to M&A out there. What would be the timing to think about putting a plan in place and how low does leverage have to get maybe?" ] }, { "name": "Rod Smith", "speech": [ "Yes. I would say, I mean, we want to be opportunistic there. But we're also -- we want to get down below five times. There's a combination of a couple of things, Rick.", "I think you want to watch where our leverage is getting down below five times. I've said in the past and we continue to be ahead of the delevering schedule with the rating agency. So from that perspective, where we sit today, we're very comfortable. We want to accelerate that delevering and get down below five times well ahead of the rating agency agreed plan because of the uncertainty around interest rates and the high cost of carrying debt these days as you've all experienced.", "So you want to watch kind of where our leverage goes and the closer we get to five times, the lower that overall leverage gets. And certainly, when it gets down below five times, we might hit a little bit more flexibility kind of in our capital allocation. The other thing that we are watching is the rate environment and where that goes, and when there will be a little less uncertainty around rates. And when they peak and begin to come down, we're not making any bets on when that will happen, but that will be something we continue to watch.", "And depending on how that unfolds, we may be able to prioritize buybacks sooner rather than later or maybe not if rates continue to stay high and this continued uncertainty. So we'll be watching both the rate environment here in the U.S. And as you know, we do a lot of borrowing in Euro denominated debt as well, and we'll be looking at our overall leverage. Hopefully, that helps.", "And of course, the share price is part of that as well." ] }, { "name": "Ric Prentiss", "speech": [ "Yup, it all makes sense, all the calculus that you look at. Great. Thanks, everyone. Stay well." ] }, { "name": "Rod Smith", "speech": [ "Thanks, Ric." ] }, { "name": "Operator", "speech": [ "Next, we go to Jon Atkin with RBC. Please go ahead." ] }, { "name": "Jon Atkin", "speech": [ "Thanks very much. On the CoreSite strength, Tom, you talked about positive renewal spreads and pricing. I wondered, is that happening as a result of like higher price list for cabinets and for cross connects, is that kind of a deliberate action you're taking on both new business and applying it to the base or if you can kind of tell us a little bit about the source of that strength? And then, I wanted to ask about -- I think just real quick on DISH with their -- Dave Mayo retiring and then some of the uncertainty around that, how should we think broadly about U.S. leasing trends beyond this year just in a qualitative sense? Thanks." ] }, { "name": "Tom Bartlett", "speech": [ "I think relative to DISH, Dave has been a great partner of ours going forward, as well as the entire business. So I'm sure while he will be missed I've got a great team in place there, Jonathan. So I don't think they're going to miss a beat. As I said, Dave is a great guy, really a great engineer, very, very technical and has been instrumental to driving the business.", "But they're a big business and like with ours. I mean, if we lost one person and that changed the direction of the business, that would be a sad thing. So they're a large institution, and I think they're well positioned and a good partner of ours. So I don't see any change there at all.", "With regard -- your first question, Jonathan, was?" ] }, { "name": "Jon Atkin", "speech": [ "Yes, of course, a little bit more color around the CoreSite, the strength you are seeing?" ] }, { "name": "Tom Bartlett", "speech": [ "Right, right. A lot of it is a function of our own pricing increase that we put in place. I mean, looking at the market, looking at the demand, they were initiated by ourselves. The volumes are robust, as I said, the pricing is up 15% above first half of 2022.", "The funnel was healthy. As a matter of fact, on the funnel on the $54 million, I think 80% of it is actually retail and scale. So largely enterprise driven as opposed to even having a major piece driven by the scale. And on the 7%, historically, we've been in that 2% to 4% rate.", "So very pleased with the fact of those renewal rates being up significantly above where we've been historically." ] }, { "name": "Jon Atkin", "speech": [ "I think anything around innovation initiatives around EDGE data centers, things of that nature?" ] }, { "name": "Tom Bartlett", "speech": [ "Yes. We have a number of projects going on within the business, candidly, Jonathan. No news to report. Working on several different pilots with potential customers.", "As I mentioned in the past, we have a number of sites that are -- have a significant ability to add capacity of power at each one of them. So still very early days, early innings of that. Hopeful that AI inferencing in particular, will drive even more of that need out at the customer prem. So we continue to explore, continue to work through a number of different pilots and projects, but nothing new to report at this point." ] }, { "name": "Jon Atkin", "speech": [ "Thank you." ] }, { "name": "Operator", "speech": [ "Next, we go to Greg Williams with TD Cowen. Please go ahead." ] }, { "name": "Greg Williams", "speech": [ "Great. Thanks for taking my questions. Just the first one would be on the cadence of your U.S. new leasing going forward.", "So you hit about 119 in new leasing in the first half of the year, and you're guiding 220 for the full year, that implies a notable step down to like $50 million mark per quarter in the next two quarters. But you did give yourself leg room by saying at least $220 million here in full guidance. So I'm just trying to understand how much of this is conservatism versus taking our estimates down to the low 50s? And just second question, in that new leasing are you seeing a lot of DoD spectrum or dual-band radio spectrum being deployed and if not, could we then see another leg of growth as these dual-band radios and DoD get scaled and ready to deploy?" ] }, { "name": "Rod Smith", "speech": [ "Hey Greg, thanks for the question. Regarding the cadence here, I think you do want to plan for that lower 50 certainly by the time you get out to Q4. We'll see a slight deceleration from Q3 to Q4. So maybe you're up in the mid-50s and the low 50s by the time you get to Q4, but that's what we do expect and see in terms of the new business in the U.S.", "going forward. And it's very in line with kind of that 220, 220 plus sort of range. So we're certainly very happy with that, and it drives about a 5% new business growth contribution to that overall organic tenant balance growth. And then, in terms of the DoD and the spectrum, we're not seeing a lot of that.", "I'm not sure, Greg, if I would go out and say that that upside is certainly not in the short term, if it would, it would probably be clearly small here this year. We wouldn't expect to see much of an impact. And to the extent that it is deployed later some of that may be within our holistic agreements as well with certain carriers." ] }, { "name": "Greg Williams", "speech": [ "Got it. Thank you." ] }, { "name": "Rod Smith", "speech": [ "You're welcome." ] }, { "name": "Operator", "speech": [ "And our next question is from Batya Levi with UBS. Please go ahead." ] }, { "name": "Batya Levi", "speech": [ "Great. Thank you. A couple of follow-ups. First, how do you think about your current scale in the data center business against the growing demand that you're experiencing? And on the services side, you did mention that there was an abrupt slowdown in carrier activity.", "Was that across the board or specific to one or two clients and do you provide the split for installation versus maybe managed services and one of your peers is getting out of the installation business, how do you think about that? Thank you." ] }, { "name": "Rod Smith", "speech": [ "Hey Batya, good morning. Thanks for joining the call. I think when you think about data centers, we're happy with the scale that we have. We've got great facilities, 28 facilities across really eight key markets.", "Their eco -- the ecosystem there is very rich with cloud on-ramps and network companies and enterprise customers. And it really gives us kind of the backdrop and the footprint that we need. And we're not seeing any headwinds because of a lack of scale. So all the great financial results that we're seeing, we're able to do it, because of the quality of the ecosystem and the way that these facilities are distributed throughout the U.S.", "So from that perspective, we feel really good with our data center investment to date. Now, certainly, adding a location here or there, you've seen us do that a little bit even before we bought CoreSite. That certainly could be in the cards going forward. But we really do like the assets we have.", "We're not overly focused on trying to ramp up the scale as we've talked about in the past. When it comes to services, I would say we are seeing a slowdown -- it's -- I don't know if abrupt is the right word to use there, but we did see kind of a slowdown. I wouldn't say that it's across the board. I don't want to get into specific carrier by carrier, of course.", "But some carriers continue to plug right along and others have slowed down a little bit. Again, it's not unexpected from our view. When it comes to the final part of your question, in terms of the construction services, that's always been a pretty small part of our business. We've been maybe a little different than some of our competitors from that perspective.", "It is a small piece and it continues to be a small piece of our business. Most of what we do is in the permitting zoning engineering kind of those preconstruction activities. We do some construction services and deployment but not a lot." ] }, { "name": "Batya Levi", "speech": [ "Got it. Thank you." ] }, { "name": "Rod Smith", "speech": [ "You're welcome." ] }, { "name": "Operator", "speech": [ "And our last question will come from Phil Cusick with J.P. Morgan. Please go ahead." ] }, { "name": "Unknown speaker", "speech": [ "Hi, this is Richard for Phil. Just wanted to follow-up on the grooming comment that you made earlier. Does that typically last for just a few quarters or is that something longer? And then, I have one more." ] }, { "name": "Tom Bartlett", "speech": [ "Yes. I mean, it depends -- it will be depending on the carrier, on the customer themselves. Typically, as we've said in the past, I mean, things happen in the form of sign ways. We see heavy build, then we'll see a lighter build as it gets filled.", "I mean, the carriers aren't going to be spending the money ahead of time until they see the network demand. And so, there will be certain locations, certain geographies, urban parts of the market, mortgage and is more of the suburban, where you can see shorter cycles on the grooming side. So it really depends on the customer. And it's -- you can't really come up with a kind of an average, if you will, overall." ] }, { "name": "Unknown speaker", "speech": [ "Got it. And then, on the expense side, are you seeing any pressure in the domestic business on ground lease renegotiations on renewals, given where CPI or inflation is?" ] }, { "name": "Rod Smith", "speech": [ "No, Richard, I would say we're really not. I mean, we have long-term leases on the vast majority of these sites. We either own or have 20-year leases on more than 70% of our sites approaching 75%. So we're in good shape from that perspective.", "And we do a lot of work well ahead of expirations of the ground leases to renew these things and kind of move the exploration data out or buy the land through our capital program. So we don't see and we're really not exposed to any short-term significant spikes in land rent because of an inflationary environment. On average, our land goes up in line with our revenue in that 3%, 3% to 4% range." ] }, { "name": "Unknown speaker", "speech": [ "Great. Thank you." ] }, { "name": "Rod Smith", "speech": [ "You're welcome." ] }, { "name": "Operator", "speech": [ "I'll now turn the conference back to the leadership team for closing comments." ] }, { "name": "Adam Smith", "speech": [ "Thanks, everyone for joining today's call. Please feel free to reach out to myself or the investor relations team with any further questions. Thank you." ] }, { "name": "Operator", "speech": [ "[Operator signoff]" ] } ]
AMT
2019-07-31
[ { "description": "Vice President of Investor Relations", "name": "Igor Khislavsky", "position": "Executive" }, { "description": "Chairman, President and Chief Executive Officer", "name": "James D. Taiclet, Jr.", "position": "Executive" }, { "description": "Executive Vice President and Chief Financial Officer", "name": "Tom Bartlett", "position": "Executive" }, { "description": "Morgan Stanley -- Analyst", "name": "Simon Flannery", "position": "Analyst" }, { "description": "Cowen and Company -- Analyst", "name": "Colby Synesael", "position": "Analyst" }, { "description": "KeyBanc Capital Markets -- Analyst", "name": "Brandon Nispel", "position": "Analyst" }, { "description": "Bank of America Securities -- Analyst", "name": "David Barden", "position": "Analyst" }, { "description": "Goldman Sachs -- Analyst", "name": "Brett Feldman", "position": "Analyst" }, { "description": "Raymond James -- Analyst", "name": "Ric Prentiss", "position": "Analyst" }, { "description": "UBS -- Analyst", "name": "Batya Levi", "position": "Analyst" }, { "description": "Citigroup, Inc. -- Analyst", "name": "Michael Rollins", "position": "Analyst" } ]
[ { "name": "Operator", "speech": [ "Ladies and gentlemen, thank you for standing by. Welcome to the American Tower Second Quarter 2019 Earnings Call. [Operator Instructions]", "I would now like to turn the conference over to our host, Mr. Igor Khislavsky. Please go ahead." ] }, { "name": "Igor Khislavsky", "speech": [ "Thank you. Good morning and thank you for joining American Tower's second quarter 2019 earnings conference call. We've posted a presentation which we will refer to throughout our prepared remarks under the Investor Relations tab of our website www.americantower.com.", "Our agenda for this morning's call will be as follows. First, I'll quickly summarize our financial results for the quarter; next, Jim Taiclet, our Chairman, President and CEO, will provide a brief update on our international business; and finally, Tom Bartlett, our Executive Vice President and CFO, will discuss our second quarter results and revised 2019 outlook in more detail. After these comments, we will open up the call for your questions.", "Before I begin, I'll remind you that this call will contain forward-looking statements that involve a number of risks and uncertainties. Examples of these statements include, our expectations regarding industry trends, as well as our future growth, including 2019 outlook, capital allocation, pending acquisitions and future operating performance; the pacing and magnitude of the Indian Carrier Consolidation process and its impacts on American Tower; and any other statements regarding matters that are not historical fact. You should be aware that certain factors may affect us in the future and could cause actual results to differ materially from those expressed in these forward-looking statements. Such factors include the risk factors set forth in this morning's earnings press release, those set forth in our Form 10-K for the year ended December 31st, 2018, and in other filings we make with the SEC. We urge you to consider these factors and remind you that we undertake no obligation to update the information contained in this call to reflect subsequent events or circumstances.", "Now please turn to Slide 4 of our presentation, which highlights our financial results for the second quarter. As expected, these results as well as our year-over-year growth rates were impacted by Indian Carrier Consolidation-Driven Churn. During the quarter, our property revenue grew 5.7% to $1.8 billion; our adjusted EBITDA grew over 9% to $1.2 billion; and our consolidated AFFO and consolidated AFFO per share increased by 7.8% and 7.4% to $910 million and $2.04 per share, respectively. Finally, net income attributable to American Tower Corporation common stockholders increased by more than 39% to $429 million or $0.96 per diluted common share.", "Additionally, similar to the last few quarters, many of our comments around second quarter results and our updated 2019 outlook will be focused on growth rates normalized for carrier consolidation-driven churn in India. Normalized outlook growth rates also adjust for the non-recurrence of the impacts of the Tata settlement in Q4 2018. We view these normalized results as important indicators of the underlying trends of our business. Reconciliations of these normalized metrics to our GAAP results are included in the back of our earnings presentation, in our press release and in our supplemental package.", "And with that, I'll turn the call over to Jim." ] }, { "name": "James D. Taiclet, Jr.", "speech": [ "Thanks, Igor, and good morning to everyone on the call. Consistent with our past practice for second quarter reports, my remarks today will center on American Tower's International business. But first, I do want to make just a few comments on the anticipated merger between T-Mobile USA and Sprint, which was approved by the US Department of Justice last Friday. Since then, T-Mobile and Dish have made public statements and filings regarding their agreements and plans for their respective networks. Based on what has been made public today, we at American Tower continue to expect that these developments will likely result in net positive impacts on our US business over the long-term. While there may be some decommissioning of sites as the new T-Mobile optimizes its network and rolls out 5G, we would also expect significant demand from the combined company for our extensive US portfolio during that process and well into the future.", "Furthermore, Dish is set to acquire Sprint's prepaid business and has made a commitment to deploy facilities based 5G broadband network capable of serving 70% of the US population by June of 2023. As a result, we also expect to secure meaningful new business from Dish, as they transition their current narrowband IoT network design into a full-fledged 5G mobile architecture over the coming years. In the near term, we do not expect the recently announced transaction approval to material impact our 2019 results and we will provide you with ongoing updates as the situation develops going forward.", "With that, let's get into our International business. For the portfolio of approximately 130,000 communication sites in 16 countries outside the US, we believe that our global scale diversity and reach is unmatched. As a result, we are well positioned to work closely with the large multinational tenants, who comprised a significant majority of our international revenues and who together are on track to spend upwards of $25 billion on network capex in our served markets this year. In the second quarter, our business outside US accounted for nearly half of our property revenue and about 35% of our property operating profit, generating an aggregate US dollar NOI yield of over 11%.", "In our most seasoned vintage of international sites, those built or acquired prior to 2010 is yielding approximately 30% in US dollar terms, illustrating the power of our recurring organic revenue model overseas. We've been growing this portfolio steadily through a combination of internal new build programs and selective acquisitions. The most recent example, bringing the Eaton Towers transaction that we signed and announced in May. The thesis underpinning our international expansion is a rapid growth in mobile data usage is not just the US but a global phenomenon. And as a result, demand for communications real estate is expected to grow over an extended time horizon.", "Under that premise, I'd like to spend a few minutes discussing each of our international segments and their key growth drivers. I'll begin with Latin America, where we have owned and operated towers for over two decades in Mexico and Brazil, and now have nearly 38,000 sites across 8 countries. Just to give you a comparison, we have about 40,000 sites in the US. Today carriers across Latin America are focused on 4G network deployments. Fueling this trend are a series of recent and upcoming spectrum auctions, primarily in low and mid bands in our two largest markets, Brazil and Mexico, and in many other countries in the region as well. Moreover, our long time presence and scale in Latin America has resulted in substantial business relationships with the key operators in the region, including AT&T, Telefonica, America Movil and others. Consequently, over the last five years, we've averaged double-digit organic tenant billings growth in Latin America, backed by strong levels of new business activity and the continuing appetite for mobile data in the region.", "In addition to continuing organic growth opportunities, we're now seeing solid momentum from new build towers, with our outlook for new tower construction in Latin America in 2019 up significantly versus last year. And with regional 4G penetration still well below 50%, we expect solid demand for colocations, amendments and new builds in Latin America to continue for some time.", "Moving on to EMEA. We currently have a portfolio of nearly 17,000 sites building over 11% on US dollar basis and another 5,500 reserve site coming with the Eaton Towers transaction. Since entering the region in 2011, we helped bringing greatly improved connectivity to hundreds of millions of subscribers while partnering with many of the key telecom operators across Africa and Europe, including Vodafone, MTN, Airtel and others. And while our German and French markets are well into the 4G transition, with stable carrier investments and relatively consistent growth prospects going forward, most of our African markets are much earlier in terms of technology evolution, network capacity and mobile data usage. We see a tremendous opportunity in the region as a result, particularly given that there is limited fixed line infrastructure in place in Africa, and wireless broadband has been recognized by African governments is one of the key aspects of their economic modernization plan.", "At the current time, 4G penetration on average is still under 10% in our African markets, and mobile data usage is a fraction of what we see in the US and other more advanced countries. As smartphone prices continue to come down and as more Africans begin using advanced handsets, we expect to see significant incremental mobile data usage and consequently demand for towers, both for existing sites as well as for new builds. We spent the better part of the last decade positioning American Tower to benefit from this upcoming wave of demand by acquiring more than 10,000 sites in Africa and constructing another 1,700. This macro tower oriented portfolio has performed well to-date with significant future upside expected.", "In addition to the Eaton Tower's acquisition, we've also started to ramp our build program in the region with 2019 new build expected to be roughly double 2018 levels. We're also making great progress increasing our operational efficiency, while reducing the mobile industries carbon footprint through our innovative power and fuel program. In Africa, where grid power in many areas tends to be unreliable, we are actively deploying next generation greener technologies, including lithium-ion batteries and solar solutions. We expect to invest more than $50 million in 2019 to enhance the uptime performance of our sites in the region, while at the same time significantly reducing greenhouse gas emissions.", "Finally, moving to India. The mobile communications industry is completing a much needed consolidation to support the funding of 4G technology throughout the country. There are now four large and capable wireless carriers, Vodafone Idea, Airtel, Reliance Jio, and BSNL. In our view, each has sufficient spectrum assets and customer basis to credibly deploy 4G in the coming years. Although only a relatively small proportion of subscribers in India are on a 4G network today, their usage pattern indicates a bright future for adoption and network demand in India. Incredibly, those people with smartphone access are using an average of upwards of 10 gigabits per month already more than the current average for US smartphone subscribers. We believe that a significant build-out will be needed in India to meet 4G-driven demand and then our portfolio of approximately 75,000 sites is well positioned to garner solid organic growth for years to come.", "Beginning at some point in 2020, as we've said previously, we would expect to see the leading edge of more normalized levels of organic growth as Indian Carrier Consolidation Churn subsides enabling organic tenant billings growth to resume an upward trajectory. New build demand in India is also robust and we anticipate constructing more than 2,000 sites this year as 4G deployments ramp up there. To summarize, Indian macro trends are stable, the telecom industry seems to be on the right track, and we think that our portfolio coupled with our relationships with the major carriers now in the marketplace positions us to be successful over a long period of time in that region.", "At the consolidated international level at American Tower, we are confident about the prospects for strong long-term growth as the global migration to 4G continues to progress in Latin America, EMEA and India. We view our International business is tremendously complementary and additive to our core US tower business, which continues to drive the majority of our AFFO.", "So with that, let me hand it over to Tom to go through the details of our results and our updated outlook." ] }, { "name": "Tom Bartlett", "speech": [ "Hey, thanks Jim. Good morning, everyone. As Igor highlighted earlier, we posted another quarter of strong results with US organic tenant billings growth of 7.5%, improved organic growth in EMEA, and the construction of more than 1,100 sites globally. We also announced the Eaton Towers transaction, which will build in our presence in Africa, while further aligning us with key multinational tenants. Also, together with our other completed and signed acquisition agreements, we now expect to acquire more than 6,000 sites globally in 2019.", "With that, let's take an in-depth look at our second quarter results and our revised outlook for the full year. So if you please turn to Slide 6. During the quarter, we generated consolidated organic tenant billings growth normalized for the impacts of Indian Carrier Consolidation-Driven Churn of nearly 8%. Volume growth from colocations and amendments contributed about 6% of this growth, driven by carrier network investments across our footprint. Our US business property revenue grew over 5% to just over $1 billion this quarter, with organic tenant billings growth of 7.5%. Volume growth from colocations and amendments drove around 6% of this growth, and escalators contributed just over 3%. This was partially offset by nearly 2% the negative impact of lower non-cash straight line revenue, as well as churn of roughly 1.3%. All four major carriers in the market contributed to our results, and roughly 80% of the new business activity generated was in the form of amendments.", "Our reported international property revenue growth during the period was over 6%, including a negative impact of over 5% due to Indian Carrier Consolidation-Driven Churn. Underpinning our international revenue growth this quarter, was a normalized organic tenant billings growth rate of about 8%. Solid demand trends throughout our key markets like Brazil and South Africa continue to drive the strong normalized growth as our tenants deployed capital to support their network build-outs. New business revenue from colocations and amendments was about 6% of this growth, while escalators contributed nearly 4%. Other run rate items added nearly 1% with normal course churn offsetting these items, but just over 2%. As expected, the financial impacts of Indian Carrier Consolidation-Driven Churn were slightly lower sequentially and we continue to expect these impacts to decline throughout the remainder of the year.", "In addition, Q2 included higher than typical contributions from several non-run rate revenue categories, which positively impacted our results. These items which included some increased pass-through revenue, the benefit of some tenant settlements in India and elevated levels of backfilling totaled roughly $45 million in the quarter. Finally, the day one revenue associated with the nearly 16,000 sites, we've added over the course of the last year, contributed just over 2% to our global tenant billings growth. These new assets include our acquisition around 10,000 sites from Idea in India, as well as the nearly 4,000 newly constructed sites over the last year. Demand for new towers continue to accelerate, and as a result, we've built nearly 1,100 towers across our international markets in the quarter, more than doubling our pace from a year ago.", "New builds continue to be an integral part of our capital deployment program, driving attractive day one returns. In fact, initial NOI yield for these builds averaged about 12% in Q2 and we expect additional lease-up opportunities to raise yields further. Our new build program remains focused primarily on macro towers, given their strong recurring revenue, exclusive franchise real estate characteristics, and superior return profile. Importantly, we believe that we're still in the early stages of a long period of new build demand as 4G technology reaches more and more subscribers, particularly in less mature markets.", "Turning to Slide 7. We also generated solid adjusted EBITDA and consolidated AFFO growth during the quarter. Adjusted EBITDA grew by over 9% with our adjusted EBITDA margin increasing to 62.6%. Normalized adjusted EBITDA growth was more than 12% and our normalized adjusted EBITDA margin excluding the negative impact of non-cash straight line revenue was over 63%. We continue to effectively manage our SG&A during the quarter and continue to realize operating expense benefits from recent investments in power and fuel. This was particularly impactful in our African markets, where we continue to optimize our processes and invest in lithium-ion batteries and solar power to enhance the efficiency of our sites and reduce our emissions. As a result, our Q2 generator run hours were down nearly percent as compared to the prior year period, and we're on track to hit our green energy deployment goals for the year.", "We also generated strong consolidated AFFO and AFFO per share growth, with consolidated AFFO growing nearly 8% and consolidated AFFO per share up over 7% to $2.04. Meanwhile, AFFO attributable to common stockholders grew over 15% or nearly 16% per share, which is partly attributable to our increased ownership interest in India. On a normalized basis, consolidated AFFO and consolidated AFFO per share grew nearly 11%.", "Turning to Slide 8. Let's now take a look at our updated expectations for 2019. We are raising our organic tenant billings outlook for the -- our US segment and now expect growth of at least 7% for the year. New business activity is running ahead of our prior assumptions, backed by strong carrier investment to support continued growth of their customers mobile data usage. In EMEA, we are seeing lower churn than we anticipated, and as a result are raising our organic tenant billings outlook to about 7% for the year. Meanwhile, trends in Latin America and India are consistent with our prior assumptions, and we are reiterating organic tenant billings growth expectations of 7% to 8% in Latin America and 8% to 9% in India on a normalized basis.", "Taking international as a whole, we now anticipate normalized organic tenant billings growth will be nearly 100 basis points higher than the US, driven by a record year of contributions from colocations and amendments. With our revised 2019 outlook, we also continue to expect to return to positive organic tenant billings growth in our international business by Q4 when the impact of Indian Carrier Consolidation-Driven Churn begins to subside.", "Looking at Slide 9, we are raising our expectations for 2019 [Phonetic] consolidated property revenue by $60 million or nearly 1%. This reflects organic tenant billings outperformance as well as the benefit of the Q2 items I discussed earlier. Our revised outlook also includes about $6 million of additional straight line revenue, partially offset by $2 million of negative translational FX impacts.", "Flipping to Slide 10. We're also raising our expectations for adjusted EBITDA by 1.3% or $60 million. This reflects the strong conversion of the incremental property revenue I just mentioned, as well as roughly $11 million in additional adjusted EBITDA from our services segment, which set a new record for both revenue and adjusted EBITDA in the quarter. Lastly, we are increasing our expectations for consolidated AFFO for the year by $70 million or approximately 2%. This is primarily being driven by our higher outlook for adjusted EBITDA and the benefit of lower projected financing costs, and includes assumptions of slightly higher maintenance capex spending in the back half of the year. On a per share basis, we expect normalized consolidated AFFO growth of nearly 11% at the midpoint, reflecting the strong operating leverage embedded in our business. Finally, I do want to note that holding the current spot FX rate steady for the rest of the year will result in approximately $8 million or $0.02 per share in incremental consolidated AFFO as compared to our outlook.", "Now turning to Slide 11. Our capital allocation plans for the year reflect our disciplined investment evaluation process and diversity of our global portfolio. We expect our dividend in 2019 to grow by around 20% to a total of $1.7 billion subject to Board discretion. In addition, at the midpoint of our outlook, we plan to deploy just over $1 billion of capex. over 80% of which is discretionary, focused on augmenting the capacity of existing macro sites and building new ones. This is up $50 million as compared to our prior expectations, in part, driven by a 250 site increase in our new build expectations to 3,500 sites at the midpoint for the year. By the way, building 3,500 sites would be a new record for American Tower.", "We also plan to enhance our global scale through attractive M&A as we've done in the past. Year-to-date, we've committed approximately $3.3 billion, including $1.85 billion for our recently announced acquisition of Eaton Towers, which we expect to close by the end of 2019. This transaction will enhance our scale and markets like Ghana and Kenya and Uganda, and further solidify our presence in Africa, is a key partner of the major wireless carriers in the continent, many of which are our existing tenants. We've also acquired and closed 363 other sites year-to-date to a total of $150 million, primarily in Latin America and expect to close on around 400 additional sites in other related property interests in the United States during the third quarter for around $500 million. Like the Eaton Tower transaction, we've not included any impact from these US assets in our current outlook.", "Finally, included in $3.3 billion I just mentioned, is the $426 million that we paid for the first set of Indian inputs in April, and around $360 million for the second set that we expect to pay for in the third quarter subject to regulatory approval. In total, we expect to deploy approximately $6 billion of capital during 2019, primarily to enhance our global scale and expand the future cash flow generation of our business.", "Turning to Slide 12, you can see that our capital allocation strategy has driven strong financial performance. Since 2007, we've increased our global site count more than 7 fold, by acquiring and constructing high quality communication sites with strong growth characteristics and attractive recurring revenue profiles. As a result, across this time period, we've generated a 15% consolidated AFFO per share CAGR, while increasing our return on invested capital by more than 200 basis points. Looking forward, we believe we're well positioned to continue to selectively grow our portfolio as we build in our history of delivering strong organic growth.", "Now looking at Slide 13, our build program continues to be a critical component of our capital allocation program. And as I mentioned earlier, we expected record year of new-build activity in 2019 throughout our international markets. Importantly, the initial NOI yields of these international new builds continue to average double digits, with Asia and EMEA approaching the mid teens. These returns further improve over time as we lease up the assets, and in fact, many of the top performing sites in our portfolio are sites that we have built ourselves. International sites built before 2010, for example, now yield approximately 45% on a US dollar basis, and even sites constructed since 2014 are generating an average NOI yield of 20%. Given this favorable favorable return profile, we remain committed to helping our multinational carrier tenants improve their networks through the construction of new sites. Of all the ways we can add scale to our business, our new build program again primarily focused on adding new macro tower sites remains one of the most accretive.", "Turning to Slide 14, and in summary, our second quarter results were strong with solid organic trends across our global footprint. Our US business generated organic tenant billings growth of 7.5% in the quarter, enabling us to raise our full year US organic billings outlook to at least 7%. Meanwhile, organic growth in EMEA and Asia continue to improve, and Latin America trends remain solid. We also increased assumptions for new site builds for the second consecutive quarter, driven primarily by elevated demand from carriers in India, Nigeria and Brazil, which speaks to the tremendous need for incremental network density to support our continuing deployment of 4G. Combined with our 2019 M&A activity, including closed and signed transactions, we expect to add approximately 10,000 towers to our portfolio this year.", "Finally, we converted our strong top line results into solid growth in adjusted EBITDA and consolidated AFFO per share in the second quarter, and now expect to grow consolidated AFFO per share on a normalized basis by nearly 11% for the full year. Furthermore, we remained firmly committed to growing our common stock dividend as a key component of our total return profile subject to the Board discretion, while maintaining our long held financial policies and investment grade credit rating. Overall, 2019 is shaping up to be another great year for American Tower and we're focused on finishing the year strong to position us for continued success.", "With that, I'll turn the call over to the operator, so we can jump into some Q&A. Operator?" ] } ]
[ { "name": "Operator", "speech": [ "Thank you. [Operator Instructions] Our first question comes from the line of Simon Flannery. Please go ahead." ] }, { "name": "Simon Flannery", "speech": [ "Great. Thank you very much. Good morning. Jim, thanks for the overview on international, just doing a lot of activity in Europe recently from Vodafone and others, can you just comment on that market? Is that something we're likely to see American Tower, you know as it just not give you the growth and value equations. And maybe back to this 35% of operating profit, where is that likely to be over time might that get to 50-50? And then just on the merger, if we assume that Sprint, T-Mo goes through, how would we expect the transition to go in terms of activity and would you expect to try to negotiate a master lease agreement to minimize the churn and decommissioning? Thanks." ] }, { "name": "James D. Taiclet, Jr.", "speech": [ "Sure. Yeah, I'll start with the international piece. I mean, Europe has always been a major target of American Towers international strategy since we really accelerated in 2007. But as you point out, Simon, the growth and costs of asset equation hasn't at -- in the larger deals that have traded so far met our investment criteria. We're actively there. We've got a great stand-alone team in Europe that is only doing two things, looking at new opportunities for asset growth and operating our current German and French businesses to their maximum potential. So we are going to be in the hunt continually here and as far as the overall operating profit as a percentage of the companies.", "International is designed here to naturally grow up to 15%, I should say, over a long period of time, because we have more towers, they grow faster and we think the deployment timelines are longer because many of these countries as we've talked about our earlier phases of the technology lifecycle from 2G to 3G to 4G to 5G. So yes someday, we'll have 50% of our operating profit coming from international, but that's going to depend on the M&A flow, the US growth rate and a few other factors, but we'll get there someday and the whole system is -- it was designed to do that.", "When it comes to Sprint and T-Mobile, at the highest level, the way at least that we're looking at this situation is that the agreement that's been announced between the Justice Department, T-Mobile and Dish, really positions the US to accelerate its achievement of global leadership in 5G technology, while at the same time retaining a competitive industry structure that benefits consumers. So to answer your question, I believe this will be an excellent environment for American Tower, especially with the increasing focus that you've heard about recently on low and mid-band spectrum for 5G, especially from the Sprint, T-Mobile sides of the equation, not to mention Dish, just last week Verizon, and of course, AT&T has been talking about this already.", "So that's really coalescing to what we think is a great environment for us long term in the US. As far as the transition, of course, we are going to -- one could imagine, already started talking about the contours of what a new MLA might mean for some of these industry participants of the transactions that were down. So that's part and parcel of what we do. We're going to try to accomplish in that transition period with the MLA is to retain as much of our business as we can, while making it more efficient, not just for American Tower, but for the industry to make that 4G to 5G transition, and because we've got those 40,000 really well positioned high capacity macro sites in the US, we're in a really good place to work with each of our customers to do that. So the transition will be much like you've seen us do it before as far as trying to work within the situation that we're facing to minimize our churn and optimize our growth trajectory going forward over a long period of time." ] }, { "name": "Simon Flannery", "speech": [ "Great. Thanks a lot." ] }, { "name": "Operator", "speech": [ "Thank you. Our next question comes from the line of Colby Synesael. Please go ahead." ] }, { "name": "Colby Synesael", "speech": [ "Great. Thank you. Two questions if I may. First off, your -- just want to talk about your US organic growth, so that 8.2% in the first quarter, 7.5% in the second quarter, can you just raise guidance from approximately 7% to just over 7% which would imply then a pretty notable step down in the back half of the year. Just curious if you think you will be able to give a little bit more specifics on what you would expect to be exiting the year in terms of growth rate and what's really driving that deceleration?", "And then secondly, as it relates to India, I know you slightly adjusted the guidance for some payments and I think some other things that weren't previously anticipated. I'm just curious what's the risk to your forecast in India right now? That market seems still pretty fluid, still pretty dynamic chance for incremental consolidation beyond what's already been announced. How confident are you that you really get back up to that high single-digit, low double-digit growth rate, I guess, over the next, call it, 12 months? Thanks." ] }, { "name": "James D. Taiclet, Jr.", "speech": [ "Yeah, hi Colby. With regards to the growth rate, keep in mind that in 2019 we're going to be generating more in business coming into organic growth than we actually did in 2018. So it's a very, very strong year. In terms of the timing of the growth rates on a quarter-by-quarter basis, a lot of it is a function of the growth in the prior quarters and the prior year. And so, if you look at kind of the third and the fourth quarter of 2018, they're very, very strong quarters for us. And so as a result, it's having an impact in terms of the overall organic growth going into the second half. So the first half is stronger than expected, tougher comps in the second half. We do have also a slight increase in churn, I believe in the fourth quarter, still well within the 1% to 2%, but that's also impacting the overall growth. So we're going into 2020, we will be back in the next six to nine months to talk about what those growth rates look like going into 2019, but I think the leading growth rates that we've got in our core organic growth are very, very strong and will continue to update them as the carriers continue to process more search rings and applications with us." ] }, { "name": "Tom Bartlett", "speech": [ "And as far as India goes, Colby, we don't see any risk to the forecast for 2019 is material. We've got a really good pipeline of actually organic growth as it is. In fact, we're already above 9% organic tenant billings growth in India, ex the consolidation churn. So we're already, kind of, at the the gross run rate minus normal churn that we would expect in that market and it's just a matter of what's the timing of the roll-off of the consolidation churn. It could be, just a couple of quarters and it's going to go down through the rest of the year anyway. So we're quite confident in achieving not only our short-term 2019 objectives in India, but really confident in achieving our target IRR over the planning period for the investments we're making in India. We used 10-year models IRR from that market for us, that's target is above 10% and we're very confident that we're going to achieve that over the planning period.", "So you know, it's a long-term business. There will be some industry changes. There's one happening in the US as well. We're confident there too that there is a path through consolidation that actually could be stronger for our company. Then pre-consolidation, I'd say both in the US and India, and it takes time to get there, but we're confident we will." ] }, { "name": "James D. Taiclet, Jr.", "speech": [ "And Colby on that, we continue to underpin and see that growth as a function of just a growth in pure leases. Right now, with a churn that's occurred over the last two years, roughly again, from an industry perspective, 600,000, 700,000 leases, we continue to believe and see and reexamine this on a current basis if the leases are going to be well over $1 million -- 1 million leases over the next three to five years. So there is strong growth in the market." ] }, { "name": "Colby Synesael", "speech": [ "Thank you." ] }, { "name": "Operator", "speech": [ "Thank you. Our next question comes from the line of Brandon Nispel. Please go ahead." ] }, { "name": "Brandon Nispel", "speech": [ "Hey, guys. One question on the US market and one sort of housekeeping item if I could. One of the things you guys have always pointed to in terms of demand for your tower sites is mobile data usage. But the other thing you guys point to is capital spending in the US from the wireless carriers. So I was hoping you could just share some thoughts in terms of what 5G means from a capital spending perspective, particularly around some of the M&A that's going on?", "Then two on just housekeeping. Maybe can you update us on the exact dollar amount of property revenue churn you expect to the rest of the year in India and potentially anything that's remaining in the 2020? Thanks." ] }, { "name": "James D. Taiclet, Jr.", "speech": [ "Okay, Brandon. It's Jim. I can speak to the US kind of main parameters of what drives our demand. The data usage continues to go up 30 plus percent per year in the US even as we're well into the 4G transition. What's interesting to me about that is that every three or four years people go, how can it keep going up? And one of the reasons it keeps going up is every app you put on your phone actually refreshes in the background when you're not even using it. So there are data draws on people's phones that occur when you're not have even using the app or watching a video whatever. So these are going to continue to drive usage in addition to the video uptake both in social media and in branded media that's coming on mobile devices. So we're really quite confident that 30 plus percent data growth in the US is something that will continue for some time.", "And actually for the next 5 to 10 years, most of that is going to have to be dealt with by the 4G network in the technology that we're using today, while we transition to 5G. So as you go from -- look at capital spending, its $30 billion plus and it has been roughly for many years in the US, that's the industry spend rate for 4G. We can't really see a scenario where the industry -- the US wireless industry would spend less than that, transitioning to 5G, because they're going to have two things going on at the same time. One is, managing 30% plus growth on the existing network and laying the groundwork and introducing the 5G network. So there is -- we think there is going to be plenty of opportunity and really need for the industry to continue to spend that $30 plus billion a year run rate of capex, and again the transaction that's been announced might actually bolster that going forward based on the competitive dynamic between the three largest of the expected industry competitors in the US, plus the disruptives from entrepreneurism of Dish in there as well. So we feel good that capital spending is going to stay at the same level or better as we move from 4G to 5G." ] }, { "name": "Tom Bartlett", "speech": [ "And then on the churn question, in Q2, we generated about $66 million, of which about $63 million was actually the Indian Carrier Consolidated Churn. In Q3, again, as we've said, we expect that to wind down. In Q3, we would expect it to be in the $55 million to $60 million range in Q4, down into the 20 and 25 range. So again, a significant fall off as you would expect of that churn that occurred from the consolidations over the last couple of years. And we -- again, we expected the ongoing churn rates to get back down into kind of that on a -- run rate basis kind of in that 1%, 1.5% kind of rate." ] }, { "name": "Colby Synesael", "speech": [ "Great. Thanks for taking the questions." ] }, { "name": "Operator", "speech": [ "Thank you. Our next question comes from the line of David Barden. Please go ahead." ] }, { "name": "David Barden", "speech": [ "Hey guys. Thanks for taking the questions. I just want go back to the merger a little bit. I mean, it's been a long time since we had one of these. Jim, could you kind of walk us through, kind of, when you think American Tower will know what the game plan is? Would you know that ahead of time before the close, because they're trying to get ready or will you not know until afterwards and then you kind of have a six-month period where you're trying to figure out the details?", "And then the second question is, just related to the Dish option to kind of take over decommission sites, what would that look like? Can that really happen that way or does Dish have to have their own agreement with you before that could happen?", "And then the third, I guess, question would be just the 400 tower acquisition in the US, it's a big number of towers. It looks like it was 1 million in quarter, so it looks they were pretty well loaded towers. Where did those come from? Thank you." ] }, { "name": "James D. Taiclet, Jr.", "speech": [ "So David, let me start with the T-Mobile, Sprint merger. The timing of when information is going to be available for us to model and forecast the results as to our company is going to evolve over time. As you saw over the past couple of weeks that this agreement has come together very quickly. It's multi-party. There is still another circuit of legal challenges that needs to be resolved with the set of states out there. So we will learn incremental information probably over the next number of months and not all before the closing will be available.", "So we will continue to be very close as we have been with the, I mean, frankly outstanding management teams across our industry, whether it's T-Mobile, Sprint, Dish, AT&T, Verizon, these are very well organized, incredibly capable management teams, and I can tell you, highly competitive with each other. We work with each of them closely. Remember, there's only four of us on the wireless side, three of us of size on the tower side. We will be with each of these players every step up their way and as this information comes to light and they feel that they either are disclosing it or providing it to us in a confidential manner and negotiations. We'll work with that as it comes, but there is no way to predict right now when we are going to know enough material information for us to understand what the rollout is going to look like.", "The other side of it is that, we will be endeavoring to give offers out there to help accentuate and benefit each of these carriers based on how they tell us that their strategy is coming to life. So this is a very interactive process. It's going to take a lot of time and it gets down literally the way we forecast as applications coming and the timing of those, the bill of materials that comes along with it on each application and whenever set of rights that we all agree to. So it's going to take time time frankly. There's is no other way to describe it.", "The Dish option to take on leases, we'll have to dig into the contracts on all sides. We have MLAs with Dish, we have them with Sprint, we have them with T-Mobile, and there are also contractual obligations we don't have access to yet between those parties. So once we get all again the information we need, we will understand how the contracts need to look or be revised or created between us and Dish to do assignments or new leases on towers as the case may be.", "And then finally, we do put our money where our mouth is. The US is an important growth region for us still. Again, most of the AFFO that comes from the company today. International will catch over -- up over some long period of time, but we're still investing heavily in the US and we just demonstrated that with the announcement of this sort of mid-sized acquisition, if you will, and it's a private transaction. So we really can't disclose too much more about it than we already have. But it will be a great tuck in and in the last, you know a percent or so to our portfolio, which we think will be high growth, which is where the real value is in these sites along with some really solid big four rent roll that will come with it. So again, it's just the normal course of business with us. We're able to meet our investment criteria with this particular counterparty. The fact that our financial position allows us to move quickly and with surety allows sellers to feel good about making agreements to purchase towers to scale with us. So it's just normal course for ATC." ] }, { "name": "David Barden", "speech": [ "Thanks, Jim." ] }, { "name": "Operator", "speech": [ "Thank you. Our next question comes from the line of Brett Feldman. Please go ahead." ] }, { "name": "Brett Feldman", "speech": [ "Thanks. Just two if you don't mind. Your other revenues in the quarter were particularly strong that can include a lot of things including settlements, but I also think your fiber solutions revenues are embedded in there. So if you can give us a little insight as to whether there was any one-time strength and maybe just the extent to which there was recurring strength in that line item. And then, are you seeing anything, even though, it's early days around the deployment of millimeter wave spectrum in the US, I think, we all just sort of assumed that's going to be predominantly on small cells. But if you're seeing on towers that would be interesting and maybe just even higher level. Do you see new emerging franchise real estate opportunities around 5G deployments in the US is something beyond the scope of towers and maybe historically would not have been interesting to you. Thank you." ] }, { "name": "James D. Taiclet, Jr.", "speech": [ "Brett, on the other revenue and the non-run rate, we generally run in kind of that 4% revenue range. They're difficult to forecast -- as you said, things like the straight line, the back billing, these are things that our teams are doing every day of the year and it's difficult to determine exactly the timing of when these types of things will hit. And so we'll have a quarter that's bit outsized, another quarter that's bit undersized, but averaging in that kind of that 4% range. This particular quarter, we're just over 6%. Then again, it's a function of a little bit higher back billing, some small settlements in Latin -- markets like Latin America and in India, as well as some additional work that we've done on pass-through. So very difficult thing to forecast, definitely contribute to our overall growth. Don't know candidly in Q3, Q4, where there will be other items like these, but what we've included in our outlook is the impact of what we did realize in Q2." ] }, { "name": "Brett Feldman", "speech": [ "Is there anything that's generally recurring in there. As you saw in the footnote, you mentioned fiber solutions, I'm wondering if we're under appreciating that?" ] }, { "name": "James D. Taiclet, Jr.", "speech": [ "No, I mean, I think back billing is something that we do every day. Settlements, we've got 2,500 customers plus or around the globe and so there constantly going to be settlements going on, renegotiations on certain terms, on certain contracts and things like that. And those types of events are in fact recurring. It's not driven by fiber. This is really largely driven just by our pure macro business." ] }, { "name": "Brett Feldman", "speech": [ "Got it." ] }, { "name": "Tom Bartlett", "speech": [ "And Brett, when it comes to the millimeter wave spectrum, we've seen some but not significant business on our macro towers around those kind of deployments, but there are going to be some potentially significant opportunities for our adjacent asset classes to our macro towers for 5G. And many of them are starting already today, so one of the largest ones outside the US, frankly, and it will continue and accelerate from 4G to 5G is the need to fiberize, they -- say in India towers or to bring fiber to the tower in Latin America, Africa and other places.", "In countries where there is not a large capital commitment or large industry commitment to fiber deployments, and these are places we've made those investments, because we need fiber to the tower and we can charge for that last mile. And then when we make those investments, we then can, you know go to our customers and allow them to use those right of ways in some of that fiber, because we're passing homes, we're passing businesses. We don't do that in retail side. We wholesale some of that fiber capacity that we need for the tower anyway along the route if you will to some of our telco customers to do retail business that they will manage. So that is one opportunity that will go from 4G to 5G.", "Another one which I think is quite interesting, we're still in its evolution is applying in the US CBRS spectrum to a much more efficient and low cost indoor small cell solution. Again, early days there, it would apply to 4G and 5G, it doesn't necessarily have to be 3.5 spectrum, but in the US that type of spectrum is being deployed with both a licensed prioritization and an unlicensed of general access bands, and that's exactly the kind of thing that you can use in buildings at very low cost that general access band to serve a specific need.", "So CBRS on the indoor side, fibers outside the US and other developed markets to towers are both going to be needed. And we also see kind of an interesting innovation initiative around edge compute and that will be more of 5G program. So a little bit longer time horizon to get there, but we're already finding that distributed compute and storage is relevant even today, and now -- and we're trying to figure out exactly what that capillary system needs to look like, what the customer bases are and who the customers will be, and I think that will really be part and parcel of 5G, but again, we can get started on it even now." ] }, { "name": "Brett Feldman", "speech": [ "Thank you." ] }, { "name": "Operator", "speech": [ "Thank you. Our next question comes from the line of Ric Prentiss. Please go ahead." ] }, { "name": "Ric Prentiss", "speech": [ "Thanks. Good morning, guys. I wanted to follow-up on some of Brett's questions there. As you think about maybe doing more fiber to improve the visibility of your tariff plus wholesale along the route. Do you envision a day where you would report fiber separately from tower property rent?" ] }, { "name": "Tom Bartlett", "speech": [ "Yeah, Rich, you know depending upon the size and things like that and the decision making, I mean, there is whole array of areas of decision that would go in to being able to need to disclose that. I mean, we're clearly to the extent that people are interested in it, in terms of what we're doing around the globe, clearly willing to talk about that and be transparent about it. But candidly, need to be a lot bigger from where it is. I mean, we've invested probably upwards of $1 billion on some of the innovation types of programs, including fiber, but it really represents about 2% of our revenue. So it's quite small right now. And by design, because these are part of our overall elevation strategy that we've got within the business." ] }, { "name": "James D. Taiclet, Jr.", "speech": [ "Right. And I would say if the -- here in long time run likely, Ric, that we'd ever split this out because the whole innovation program that Tom just refer too including the fiber investments, it is really designed to enhance the macro tower portfolio we have. So whether it's share generators once you had for a long time is an offering, whether it's ground space or edge compute on our tower sites for American Tower or it's fiber that makes it a more valuable or more sticky site for customers who want to be on and stay on. It's really part of the macro tower property business and that's probably where you will see it embedded for quite some time." ] }, { "name": "Ric Prentiss", "speech": [ "That makes sense. And one of the reason for the questions, you've get a lot of questions from investors and it comes up in industry shows like maybe the Tower Infrastructure Show where people look at a multiple American Tower is trading at on an AFFO multiple basis versus some of the peers out there. And I think you guys know we prefer funds available for distribution, you get the real cash, but is there a debate out there about your multiple versus some of your peers. Thus, it seems maybe more likely that tower business is maybe worth more and you need to look at cash. It is possible to get those questions on kind of multiple disparity?" ] }, { "name": "James D. Taiclet, Jr.", "speech": [ "Well, let me just say, to address it this way, Ric. Our fiber investments outside the US have to meet the same investment criteria the tower acquisitions have to meet outside the US. And that would apply into -- in the United States too and that's why you have never seen us make a fiber acquisition in the US. The return criteria, we cannot figure out how to achieve at the level of macro towers in the US. But when it comes to these, really as Tom referred to, relatively small acquisitions or investments in South Africa, Brazil, Argentina, et cetera, those have met or exceeded our investment criteria for macro towers in those countries. And that's the only time you're going to see us at. So frankly, we give you a fiber investment in ATC is just as valuable, just as high growth and high return in the macro tower or we won't put the money into. So we won't be different than someone -- the company that may have decided to go all in on a fiber business, whether it's inside or outside the US, because if you are not discriminating about this, we haven't been able to find ways to match macro tower returns and growth rates outside the investments we made where we made." ] }, { "name": "Ric Prentiss", "speech": [ "Sure." ] }, { "name": "Tom Bartlett", "speech": [ "And Ric we were able to do that, because of our international opportunity, being in the 16 markets as Jim talked about, $25 billion of capital is being invested by our customers in those markets. And so on top of that $30 plus billion there being invested in the US, we're contributing in a total opportunity if you will from a market perspective of over $50 billion. And so that is where we believe that we will be able to drive those tower like returns as Jim referred too." ] }, { "name": "Ric Prentiss", "speech": [ "That's very helpful. Thanks guys." ] }, { "name": "Operator", "speech": [ "Thank you. Our next question comes from the line of Batya Levi. Please go ahead." ] }, { "name": "Batya Levi", "speech": [ "Thank you. In the press you had a target for international growth to be 200 basis points to 300 basis points faster than the US. Now with the disruption in India behind us this year, an accelerated build program, I was wondering if you still think that you can get back to that kind of growth internationally? And second question, can you provide an update on pricing, maybe the revenue profile on new business in LatAm. It looks like new billings is not really ramping as much as the new tariffs added and just wanted to see if that's just due to timing? Thank you." ] }, { "name": "Tom Bartlett", "speech": [ "You know, I think on that one particularly, Batya, I think it is just the timing of it. The new business from a function of the builds down in the program as well as -- you also have some contractual year-over-year going on, but the new business is stable. I mean, you saw even in our updated guidance, it still remains very, very strong. From an organic perspective, we do have a lower inflation in some of those markets. So on a year-over-year basis, I want to say that's 80 basis points to 100 basis points impact to the overall organic growth just because of the inflation is lower, but the new business is very strong in those markets and the build program is very strong. We do have slightly higher churn in Brazil as a function of some of the iDEN churn kind of coming off from Nextel, but very solid and stable growth rates in the region." ] }, { "name": "James D. Taiclet, Jr.", "speech": [ "And Batya, in Latin America, we do have a more aggressive build plan and I think showing up in some of the tables at this point in the second quarter report, that's timing. So there is a ramp up in actual build volume in Latin America this year for American Tower. And then on the broadest level of your question, over a long period of time, we still think that international will grow a couple of 100 basis points higher than the US, because it began earlier in the cycle, some CPI based inflation which is actually declined recently in some markets. When all those things normalize over a long period of time, we still think there's outsized growth in the international markets that we've chosen to go into, but that's going to fluctuate as Tom said earlier year-to-year based on a number of factors, including the US growth rate at the time that delta is going to be a little smaller." ] }, { "name": "Batya Levi", "speech": [ "All right. Thank you." ] }, { "name": "Operator", "speech": [ "Thank you. Our next question comes from Michael Rollins. Please go ahead." ] }, { "name": "Michael Rollins", "speech": [ "Hi. Thanks for taking the questions. Just have two. First you mentioned I think that in the US activity about 80% was amendments, 20% was Colo. For the Colo, is there a common narrative as to where they're going, it could be more rural coverage, densification and suburbia, just kind of curious if there is a common narrative of where this tight placements are going and then what your view may be in the future of how the deployment strategies could evolve over the next few years given some of the comments you made about 5G in your anticipations?", "And then second, as you look at the return on capital in the international business, is that denominator on a adjusted for current currency rate? And do you also look at it as returns based on the initial dollars that we're putting at those historical currency rate? Thanks." ] }, { "name": "James D. Taiclet, Jr.", "speech": [ "Mike, it's Jim. I'll start with the US piece and turn it over to Tom for the ROIC calculation. The 80-20 amendment to colocation is normal course for us. There's really no unusual theme is toward the colocations are happening. The breadth and the scope of our portfolio allows us to have a pretty consistent colocation business, and it's along all those lines that you kind of touched on. There is suburban to fill in, whether there's just for cell splitting capacity or adding maybe a higher spectrum band that then requires a tighter array in a suburban environment. There is also, as you said, the rural coverage piece that kind of continues to go on, whether it's a cafe programs or others that are driving this brand new Greenfields out in places to reach more people.", "We have the Verizon towers that are still leasing up with colocations from some of the other carriers as we go. So this is a set of initiatives and sources of where that colos come from. And in the 5G environment that fill in, because there will be higher band spectrum coming in 2.5 that you've already read and heard about, perhaps 3.5 outdoors as well as indoors and you're also going to have C band spectrum in the plus or minus 4.0 gigahertz coming in. There'll be that higher frequency, shorter transmission radio bands coming in over the next few years. They're going to require a denser network nationwide at some proportion. So that's where you'll see the future of 5G colocations will be a big part of that." ] }, { "name": "Tom Bartlett", "speech": [ "And Mike, on the ROIC, I mean, it comes out right out of the current financials. So both in new numerator and the denominator have been adjusted for FX, current rates." ] }, { "name": "Michael Rollins", "speech": [ "Thanks." ] }, { "name": "Operator", "speech": [ "Thank you. There are no questions in the queue. Please continue." ] }, { "name": "James D. Taiclet, Jr.", "speech": [ "Great. Thank you everyone for joining and have a good day." ] }, { "name": "Igor Khislavsky", "speech": [ "Yeah. Have a great rest of the summer everybody. Bye now." ] }, { "name": "Operator", "speech": [ "[Operator Closing Remarks]" ] } ]
AMT
2018-10-30
[ { "description": "Senior Director, Investor Relations", "name": "Igor Khislavsky", "position": "Executive" }, { "description": "Chairman, President and Chief Executive Officer", "name": "James Taiclet", "position": "Executive" }, { "description": "Executive Vice President and Chief Financial Officer", "name": "Thomas Bartlett", "position": "Executive" }, { "description": "Barclays -- Analyst", "name": "Amir Rozwadowski", "position": "Analyst" }, { "description": "Cowen & Company -- Analyst", "name": "Colby Synesael", "position": "Analyst" }, { "description": "Macquarie -- Analyst", "name": "Amy Yong", "position": "Analyst" }, { "description": "Raymond James -- Analyst", "name": "Ric Prentiss", "position": "Analyst" }, { "description": "RBC Capital Markets -- Analyst", "name": "Jonathan Atkin", "position": "Analyst" }, { "description": "Deutsche Bank -- Analyst", "name": "Matthew Niknam", "position": "Analyst" }, { "description": "Morgan Stanley -- Analyst", "name": "Simon Flannery", "position": "Analyst" }, { "description": "J.P. Morgan -- Analyst", "name": "Phil Cusick", "position": "Analyst" } ]
[ { "name": "Operator", "speech": [ "Ladies and gentlemen, thank you for standing by. Welcome to the American Tower Third Quarter 2018 Earnings Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. (Operator Instructions) As a reminder, today's conference is being recorded.", "I would now like to turn the conference over to our host, Senior Director of Investor Relations, Mr. Igor Khislavsky. Please go ahead." ] }, { "name": "Igor Khislavsky", "speech": [ "Good morning, and thank you for joining American Tower's third quarter 2018 earnings conference all. We've posted a presentation, which we will refer to throughout our prepared remarks under the Investor Relations tab of our website www.americantower.com. Our agenda for this morning's call will be as follows. First, I'll provide a few highlights from our financial results. Next, Jim Taiclet, our Chairman, President and CEO, will provide some brief commentary, focusing on key technology trends in the US. And finally, Tom Bartlett, our Executive Vice President and CFO, will provide a more detailed review of our third quarter results and updated full year outlook. After these comments, we'll open up the call for your questions.", "Before I begin, I'll remind you that this call will contain forward-looking statements that involve a number of risks and uncertainties. Examples of these statements include our expectations regarding future growth, including our 2018 outlook, capital allocation and future operating performance, the pacing and magnitude of Indian Carrier Consolidation and its impacts on American Tower, assumptions around our pending and recently closed acquisitions and other transactions and any other statements regarding matters that are not historical facts. You should be aware that certain factors may affect us in the future and could cause actual results to differ materially from those expressed in these forward-looking statements. Such factors include the risk factors set forth in this morning's earnings press release, those set forth in our Form 10-K for the year ended December 31, 2017, as updated in our Form 10-Q for the quarter ended June 30, 2018 and in the other filings we make with the SEC. We urge you to consider these factors and remind you that we undertake no obligation to update the information contained in this call to reflect subsequent events or circumstances.", "Now, please turn to slide four of our presentation, which highlights our financial results for the third quarter of 2018. During the quarter, our property revenue grew 5.8% to $1.75 billion. Our adjusted EBITDA grew 5.3% to nearly $1.1 billion. Our consolidated adjusted funds from operations grew about 10% to $821 million and consolidated AFFO per share increased by nearly 7% to $1.85. Finally, net income attributable to American Tower Corporation common stockholders increased by about 23% to $367 million or $0.83 per diluted common share.", "And with that, I'll turn the call over to Jim." ] }, { "name": "James Taiclet", "speech": [ "Thanks, Igor, and good morning to everyone on the call. The highlight of our third quarter was our US property segment Organic Tenant Billings growth of 7.4%, leading us to raise our 2018 expectations for that metric to about 7% for the full year. Unlimited data plans and increasing mobile video consumption continue to drive additional spectrum deployments and equipment installations by our domestic tenants to support 4G network technology and that's leading to those elevated growth rates. Moreover, our major US customers are beginning to embark on tangible plans for 5G technology, which provides a relevant backdrop to our usual third quarter topic of technology development.", "But before getting into the details of those trends, I'd like to spend a few minutes on our comprehensive agreement with Tata, which I'm pleased to disclose in this morning's press release. We've been working amicably with the Tata Group for nearly a year to reach an agreement that satisfies three main objectives for us, while also respecting our partner's goals of an orderly exit from both the mobile business and from our tower joint venture. Those three objectives for ATC, which we believe we've attained through this agreement were to first preserve our ability to achieve American Tower's long-term return on investment targets in India by securing economic value for Tata Teleservices leases to be terminated, while at the same time, retaining a portion of the run rate through new leases with other Tata Group businesses. Second, to better position ATC India for growth in the post consolidation phase of the Indian mobile market in the 2020 timeframe and beyond. And thirdly, to set the timeline to evolve the joint venture through the replacement of Tata as a partner with either increased ATC ownership, an additional partner or some combination. Tom will provide additional details of the agreement during his remarks, so now let's jump into our regularly scheduled technology discussion.", "My remarks will focused today on technology trends in the US, which remains our largest market, generating the bulk of our company's cash flows. We also expect that over time, these trends will follow across our international markets. As I noted earlier, the overwhelming driver of tower demand today is 4G technology and we believe that will remain the case well into the 2020s. However, as momentum for 5G builds, a number of trends in network deployments are expected to increasingly contribute to our demand profile as well.", "The first of those is the anticipated deployment of new spectrum assets as carriers continue to enhance the capacity and speeds of their networks. Already, 600 megahertz equipment for 5G applications is being deployed on our sites and several carriers have been vocal about millimeter wave base roll-outs as well. But in my view, one of the most compelling aspects of evolving 5G expectations is the role of mid-band spectrum, including 2.5 gigahertz, CBRS spectrum in the 3.5 gigahertz band and C band spectrum assets in the 3.7 gigahertz to 4.2 gigahertz range. All these bands have the potential to significantly enhance network performance over time, and importantly, are well-suited to macro tower-oriented deployments. 2.5-gigahertz, for example, a spectrum that several carriers have identified as being vital for their 5G network plans.", "There is substantial channel bandwidth with favorable MIMO capacity and peak speed characteristics. In addition, the 2.5 gigahertz band is able to propagate across considerably longer distances than millimeter wave spectrum. And as a result, 2.5 gigahertz is an intriguing hybrid between low and high band spectrum for 5G. Importantly, outside of dense urban areas, we continue to believe macro towers are the ideal signal transmission points for 2.5 gigahertz spectrum. We've already started to receive applications for the very early stages of deployments of this spectrum, utilizing massive MIMO antennas on our tower sites and we would expect the activity around 2.5 gigahertz deployments to increase over time.", "CBRS spectrum is another interesting opportunity, it is a priority element of our innovation program. This year's spectrum in the 3.5 gigahertz band can potentially help significantly expand the US indoor opportunity for American Tower beyond the 15 -- or 100 or so venues in the US that we today believe are suitable for traditional indoor DAS systems. Being able to dynamically share this spectrum can help drive down costs and we are working on new and innovative architectures that may make it feasible to bring connectivity using CBRS spectrum to Class A office buildings, condominium complexes and other indoor environments, where DAS has historically been cost prohibitive. Combining shared CBRS spectrum with reduced cost installation architecture can enable private LTE systems enhance Wi-Fi installations in addition to traditional indoor cellular coverage, thereby enhancing the economics of installing the system for both the building owner and our customers.", "We're also increasingly convinced that spectrum in the C band range of 3.7 gigahertz to 4.2 gigahertz will be a significant driver of macro site demand in the mid to long-term time horizon. This band similar to 2.5 gigahertz has crossover benefits that combines potentially several hundred megahertz of bandwidth and sufficient propagation distances to be utilized in suburban settings, which are predominantly served by towers.", "In addition to helping ushering the deployment of new spectrum, we anticipate that 5G is likely to open up a host of new business and consumer services, including a tremendous expansion in IoT functionality. Consequently, another primary focus area of our innovation program continues to be to foster relationships with companies in a variety of industries that may end up being new tenants, while at the same time, exploring complementary technical solutions and network architectures to augment our existing core macro business.", "One example of our efforts with respect to emerging applications is our ongoing evaluation of edge compute solutions at our tower sites. Our sites can act as a convergence point for the wireless access network, cloud services, the Internet of Things and enterprise networks. We are currently engaged in discussions with players in numerous industries that may ultimately be edge compute tenants and expect to further explore the potential long-term opportunity going forward.", "While evaluating prototyping and partnering around future 5G growth opportunities represents a focus area of our innovation program, we have additional initiatives that seek to leverage currently available technology as well. One prime example of this is ATSC 3.0 broadcast technology, which we've been working on in Dallas with several partners. This new broadcast standard is designed to enable significant expansion and broadcast content to mobile devices, while opening up the ability to add value for broadcasters through geographically targeted ads. As the largest independent owner of broadcast towers in the US, we're extremely well positioned, should this new standard and product take hold.", "So to summarize, we are experiencing strong organic growth in the US driven by 4G technology, which we expect to continue for many years to come, but we're also increasingly convinced that emerging 5G technology will further extend American Tower's growth trajectory many years into the future, not only in the US, but also in international markets. We see meaningful potential to utilize our tower sites for mid-band spectrum that's not even in use for available today. We also believe there is additional opportunity for indoor small cell systems based on CBRS spectrum. And importantly, our experience proves that macro tower and indoor systems provide high colocation and return on investment performance and 5G should thereby provide additional runway for both those asset classes.", "And we are also applying our innovation approach to outdoor small cell architectures in an effort to bring installation and operational cost down to develop avenues to hopefully achieve tower like returns on those installations though at a much earlier stage in solving that equation. The bottom-line is that we see real, but long-term opportunity in macro, indoor and possibly outdoor small cells and we'll use our innovation program to pursue those aggressively and in a disciplined manner that we've always followed.", "Now, I'll turn it over to Tom for more detail on the quarter and our full year expectations." ] }, { "name": "Thomas Bartlett", "speech": [ "Hey. Thanks, Jim. Good morning, everyone. As Igor highlighted earlier, we had another quarter of strong growth across our key metrics. Organic Tenant Billings growth in the US was over 7% for the second consecutive quarter. Simultaneously, we grew our common stock dividend by 20% and repurchased more than 600,000 shares. We also settled with TV Azteca with respect to the unpaid interest issue we disclosed last quarter, which resulted in the receipt of nearly $60 million in late September and favorable use right terms. Subsequent to the quarter end, we further diversified our geographic footprint with our expansion into Kenya. And just a few days ago, we were able to reach a settlement agreement with Tata in India, as Jim mentioned, that we believe helps clear the path for us to capitalize on the acceleration in 4G deployments that we expect in this market.", "With that, let's dive into the details around our third quarter performance and updated outlook for the year. If you please turn to slide six, during the third quarter, consolidated Organic Tenant Billings growth was over 5% or nearly 8% on a normalized basis, primarily attributable to a record contribution of new business generated from the colocations and amendments across our global asset base, resulting from the strong pace of run rate additions over the course of the last 12 months. Our US business reported property segment revenue growth for the quarter of about 6%, including a negative impact of nearly 3% associated with $21 million decline in non-cash straight line revenue recognition versus the prior year.", "US Organic Tenant Billings growth was 7.4%, including volume growth from colocations and amendments of nearly 6%. This new business recognized in the quarter was up nearly 30% versus Q3 of 2017 and up over 7% sequentially. Pricing escalators contributed just over 3% and were partially offset by churn of about 1.5%. Signed new business in the quarter, which was up by around 60% versus Q3 of '17, was again heavily weighted toward lease amendments as carriers continue to add incremental equipment into their networks. Given the multi-year nature of carrier spending initiatives in the market, we expect to sustain solid levels of organic growth in the US going forward.", "Our International business reported property revenue growth was also about 6% in the quarter. International Organic Tenant Billings growth was about 2% or around 8%, excluding the impact of the Indian Carrier Consolidation-Driven Churn, which represented over 70% of the total international churn. Colocations and amendments drove nearly 6% of International Organic Tenant Billings growth, escalators contributed another 4.3% and other run rate items added about 60 bps. This was partially offset by cancellations of about 8.5%, again primarily concentrated in India.", "Key international markets across LatAm and EMEA continue to show positive trends, with Brazil, Mexico and South Africa, all generating Organic Tenant Billings growth between 11% and 12% this quarter. And in India, although, Carrier Consolidation has resulted in elevated levels of churn, gross new business volumes came in slightly higher than our prior expectations. Overall, organic commenced new business across our international markets was up about 15% sequentially in the quarter. And finally, the day-one revenue associated with the sites we've added over the course of the last year contributed another 4.4% to our global Tenant Billings growth. This was largely driven by acquisitions and to a smaller degree revenue from newly constructed sites, including nearly 700 towers built this quarter. Our new build programs, primarily in our international markets, continue to generate solid returns with average day-one US dollar NOI yields of over 9% in Q3.", "Turning to slide seven, we also generated solid adjusted EBITDA and consolidated AFFO growth in the quarter, supported by strong top-line growth, diligent management of operating expenses, interest costs, net of interest income and maintenance CapEx. Our adjusted EBITDA grew by over 5% with our adjusted EBITDA margin coming in at over 61%. And after stripping out the negative impact of non-cash straight line recognition and the impact of the Indian Carrier Consolidation-Driven Churn, our adjusted EBITDA would have grown over 10%. Finally, SG&A as a percentage of revenue was about 7.6%, roughly flat on a sequential basis.", "Consolidated AFFO and AFFO attributable to common stockholders grew nearly 10% and 11% respectively in the quarter. On a per share basis, consolidated AFFO grew about 7%, while AFFO attributable to common stockholders grew about 8%. Finally, on a normalized basis, consolidated AFFO per share grew nearly 10% and these growth rates reflect our high quality global portfolio, significant diversification, focus on operational efficiency and strong investment grade balance sheet. In line with our previous expectations, the growth rates this quarter incorporated sequential increases in maintenance CapEx and cash taxes. We expect both of these items to tick up again in Q4.", "Turning to slide eight, as Jim briefly touched on earlier, we have reached a settlement agreement with Tata with respect to their contractual obligations on certain of our towers in India. For the agreement, we will receive a one-time cash payment of approximately $320 million in the fourth quarter. In exchange, approximately 80% of Tata's Tenant Billing run rate on our sites representing roughly a $120 million in annualized billings will churn-off effective November 1st of this year. The remaining $30 million or so in annual run rate will continue under various new leases, including leases assumed by other Tata related entities.", "We are consequently updating our view on Carrier Consolidation-Driven Churn in India to incorporate this incremental $120 million or so in annualized churn from Tata. We now expect a total of between $270 million and $320 million in Carrier Consolidation Churn with approximately a $140 million occurring in 2018 and between a $130 million and a $180 million expected in 2019. Besides from the incremental Tata churn, these new charge -- ranges reflect assumptions probably consistent with our prior expectations. With the signing of this agreement, we believe that the major anticipated churn events associated with carrier consolidation in India have now been substantially cared for within our numbers. We expect to have between $550 million and $600 million or so of ongoing annualized tenant run rate revenue in Asia, post the Tata churn and expect to increase this base over time as incumbent carriers eventually make investments to expand and improve their 4G networks.", "Our portfolio of more than 76,000 sites, combined with strong relationships with the major remaining carriers, should position us well to play an important role in the transformation of India from 2G to 4G over the next decade. Over 90% of our leases will in fact be with remaining large incumbent wireless carriers. We expect it to eventually result in more normalized rates of organic growth, moving to the high single to low double-digit range during the 2020 to 2021 timeframe. Finally, I'd also note that even in 2018, despite the volatility, our gross organic growth in India is expected to be about 9%.", "Moving to slide nine, before I dive into our updated '18 outlook, I'd like to quickly summarize a few key considerations driving our optimism on the long-term growth potential in India. India is the world's largest free market democracy and also one of the biggest wireless markets with well over a 1 billion mobile subscribers today and over a 1.5 billion expected by 2022. To put that into context, 1.5 billion subscribers would represent nearly 4 times the subscriber base of the US. With minimal fixed line penetration, wireless connections are absolutely critical for consumers and businesses and wireless broadband access has been clearly recognized by the government as a fundamental driver of economic growth and transformation. The path toward increased broadband access in India is represented by the deployment of 4G, which in most parts of the country is still in its nascent stage. In fact, despite 4G investments made thus far, over 50% of connections are still 2G based. This, however, is changing rapidly, helped in part by the ongoing carrier consolidation process that we've referenced for some time now. Once this consolidation wraps up, we expect the three remaining large wireless operators, plus BSNL, to eventually ramp CapEx spending for 4G, as the wireless competitive environment trends toward normalization. Importantly, because 4G brings exponentially more data traffic, it requires significantly more network density. As a result, third party forecasts indicate that India will need nearly twice as many cell site leases to enable ubiquitous 4G connectivity. With more than 76,000 communication sites in the market today, we believe we're well positioned to capture a significant portion of this incremental demand, enabling us to achieve our targeted returns over time.", "Moving to slide 10, let's now take a look at our updated expectations for the full year 2018 revenue. At the midpoint of our revised outlook, we expect annual reported property revenue growth of about 10%. This includes a negative impact of over 2% from lower non-cash straight line revenue and a negative 2.5% associated with foreign exchange translation effects. We expect consolidated Tenant Billings to increase between 8% and 9%, including Organic Tenant Billings growth of around 5% and a 3% to 4% contribution from new assets. This new asset contribution includes around $13 million from the combination of our new sites in Kenya and a portfolio of urban fiber assets in Brazil that we expect to close on November 1st. This is also being supported by especially strong trends throughout our US and Latin American segments, where we are raising our expectations for Organic Tenant Billings growth. Additionally, we are maintaining our expectations for Organic Tenant Billings in EMEA, while slightly reducing our expectations for Asia as a result of the incremental Tata churn I just discussed.", "In the US, we now expect Organic Tenant Billings growth of over 7%, supported by record levels of new business run rate additions. Further, we expect that Organic Tenant Billings growth in the fourth quarter will be at least as high as the 7.4% rate we achieved in the second and third quarters of this year. Meanwhile, in Latin America, we expect to generate Organic Tenant Billings growth of over 11%, also as a result of higher than anticipated levels of new business. In Asia, while we expect slightly higher levels of gross new business, our churn expectations are being raised to incorporate the impact of our settlement with Tata. As a result, we project an Organic Tenant Billings decline of around 13% versus the decline of 11% we included in our prior guidance. And on a gross basis, as I mentioned earlier, we now expect organic growth of around 9%, up versus our prior outlook, which anticipated growth of just over 8%. Finally in EMEA, we are maintaining our organic growth expectations of between 6% and 7%, as performance in the business continues to be consistent with our previous projections.", "In total, we are raising our property revenue outlook by $325 million as compared to our prior outlook. About $300 million of this is accounted for by the net impacts of our Tata agreement. The remainder is driven by approximately $55 million in higher revenue expectations across the business, including the new assets I referenced earlier and US outperformance, including around $9 million in incremental straight line revenue. This is being partially offset by roughly $30 million in unfavorable FX impacts. As a result of our revised expectations for India Carrier Consolidation-Driven Churn, we now expect the consolidated churn rate of approximately 4.1% for the year. Churn across the remainder of the business is expected to remain between 1% and 2%, in line with historical ranges.", "Moving on to slide 11, we now project our adjusted EBITDA to grow by over 12% for the year, up $315 million from our previous outlook, reflecting a $300 million net benefit for the Tata agreement. The increase also reflects about a $7 million contribution from our newly added portfolios and about $11 million in net straight line impacts in the US. Overall, of more than $30 million FX-neutral increase in our EBITDA expectations, about $13 million is in the US with the remainder spread across our international markets. This is being partially offset by approximately $12 million in unfavorable currency fluctuations as compared to our prior expectations as well as just under $7 million in other non-run rate items.", "We are also raising our consolidated AFFO expectations by $255 million to just under $3.5 billion, reflecting a year-over-year growth rate of over 20%. On a per share basis, we now expect consolidated AFFO of $7.88. These increases are being driven primarily by about $250 million or $0.56 per share in net impacts from the Tata agreement. In addition, we expect over $18 million or roughly $0.04 per share in incremental consolidated AFFO, resulting primarily from higher anticipated cash EBITDA and lower net cash interest expense. This is expected to be partially offset by about $13 million incremental FX headwinds.", "Turning to slide 12, we remain committed to our proven investment evaluation methodology, which has enabled us to generate consistent cash flow growth and returns over the long term. Over the last two decades, we worked judiciously to cultivate a high quality portfolio of global assets with attractive cash flow growth. In fact, since 2007, we've grown our US segment free cash flow at an average annual rate of about 12% and our International segment free cash flow by an average of about 25%. This is attributable to the operational excellence of our teams in the highly structured map-based process we utilize to assess new investments, which includes careful consideration of ongoing capital needs, the sustainability of future growth and a host of other factors.", "As you can see in the slide, not only have we've been able to generate tremendous long-term growth in free cash flow, but also we've been able to do it while keeping capital intensity, which reflects the non-discretionary capital needs of the business extremely low. In fact, as we've scaled our operations, capital intensity on a global basis has decreased by nearly a-third. This in turn further enhances the recurring free cash flow stream of the business, which increases our ability to invest in future growth and innovation, while simultaneously returning cash to our stockholders.", "Since 2007, we've expanded our portfolio by an average of about 20% annually, while simultaneously repurchasing nearly $5 billion in stock, distributing over $5 billion through our dividend program, maintaining our investment grade rating and diversifying our sources of capital. We remain committed to that investment grade rating, are comfortable with our long-term target leverage range of 3 to 5 times and expect to continue to evaluate opportunities to further strengthen and diversify our balance sheet as we seek to build on our past performance. We believe that continued discipline within our investment evaluation process combined with our balance sheet strength positions us well to deliver attractive total returns to stockholders for many years to come.", "And as you can see on slide 13, our expansion strategy has also resulted in sustained growth in consolidated AFFO per share and an expansion of our return on invested capital over time. These are the financial metrics that comprise our leadership team's long-term performance objectives and drive compensation. Since 2007, we've grown our consolidated AFFO per share at over 16% on average each year. We've also simultaneously expanded our ROIC by nearly 2%, despite growing our asset base over 7-fold during the period. We expect that the strong organic growth generated by the scaled asset base in combination with our strong balance sheet will continue to enable us to make compelling investments in assets, while minimizing any potential dilution for our shareholders.", "Looking at slide 14 and in summary, we had another strong quarter's global results in Q3, including US Organic Tenant Billings growth of over 7% and Organic Tenant Billings growth in Latin America of over 11%, enabling us to raise our expectations for full year organic growth in both regions. Our continued focus on cost controls throughout the business has enabled us to also increase expectations for adjusted EBITDA and consolidated AFFO from our legacy operations. Additionally, we reached an agreement with Tata, which resolved the last major known near-term churn item for us in India and clears the path toward achieving more normalized levels of growth in the market in 2020 and 2021 timeframe.", "We continue to be excited about the long-term potential of our global business. We've worked carefully to select assets with attractive free cash flow characteristics and low capital intensity, while continuing to focus on operational efficiency. As a result, we are well positioned to deliver attractive total shareholder returns over the long run as we seek to capitalize on the rapidly evolving wireless communications landscape across our global footprint.", "And with that, I'll turn the call over to the operator, so we can take some Q&A. Operator?" ] } ]
[ { "name": "Operator", "speech": [ "Thank you. (Operator Instruction) Our first question comes from the line of Amir Rozwadowski. Please go ahead." ] }, { "name": "Amir Rozwadowski", "speech": [ "Thank you very much and good morning folk and thank you for taking the questions. Wanted to ask, two if I may. First on US site rental growth, while clearly at healthy levels and recognizing that you took up your Organic Tenant Billings outlook for the year, it seem to be largely flat on a sequential basis. Is this the current run rate we should expect going forward or are there factors that could edge it up higher? For example, Jim, I believe you alluded to the fact that you're just starting to see massive MIMO deployment on 2.5 gigahertz, so any color there would be most appreciated. And then I've got a follow-up after." ] }, { "name": "Thomas Bartlett", "speech": [ "Hey, Amir, it's Tom. It was up a bit Q3 to Q2, although relatively flat sequentially. It was up a couple in colocation amendments, escalations were up a little bit. But I think if you actually kind of look forward to the balance of the year, we actually are finishing I think on a very strong note. We've continued to kind of set record levels, as we said in Q2, Q3. The commenced new business in the year is up probably 50% from where it was year -- where it was last year. When we start to get into 2019, we will introduce guidance at that time period. And we do that largely due to the fact that the carriers themselves will then have been public in terms of what their overall capital plans will be, so we'll be able to give you a much better sense of where it will be. But I have to say that this year has been terrific year for the US, if you've seen, I think there have been leading industry growth rates and the team continues to knock it out of the park. So we're really encouraged by the growth that we've seen. We think they are long-term trends. But in terms of coming out with the -- actually the rates in 2019, we will do that in the February timeframe." ] }, { "name": "James Taiclet", "speech": [ "Yeah. And just to add to that, Amir, we look at a few gauges, as we've talked about in the past when we think about forward opportunities and I would just remind everybody on the call of those that gauge to look at, one is aggregate mobile usage in the US, it's still growing 30% to 40% a year from what we can surmise based on the data. If that continues, we should have strong growth going forward in the next few years. Also, the second gauge we often look at is aggregate US industry CapEx for mobile. Again, if it's in the $30 billion range, it supports the kind of growth we've been experiencing. And then lastly, the spectrum availability, when spectrum becomes more available and you can look at the SEC schedules and other inputs for that, we tend to have strong growth. So if you look at those three gauges over the next couple, three years, you can get a sense of how our trajectory should look." ] }, { "name": "Amir Rozwadowski", "speech": [ "Thanks very much. That's very helpful. And then my second question. Jim, I believe you mentioned the potential opportunity to bring tower like returns to outdoor small cells. What needs to be done in terms of getting the business there? Is this a matter of acquisitions that you guys are thinking about, diversifying your asset base to areas such as fiber or how should we think about the necessary steps to be able to peak your interest in potentially moving to that business model?" ] }, { "name": "James Taiclet", "speech": [ "Yeah. I think the key to this is attaining scaled franchise real estate rights in municipalities because everything else is a production input. Fiber is a production input, we can get off the US existing fiber market. You can -- in especially urban areas, you can get multiple bidders on fiber runs. So we're going to go to supply chain. But the most important thing for us is getting franchise rights at scale, large scale in municipalities and we've got a few small examples of that and prototypes and trials that we have done. We're starting another one in Southern California. We're going to see if these things will actually attain those franchise real estate rates and then we can use those key positions to monetize them going forward with multiple carriers. So for us, what we're really interested in is really an outcome in sort of 5G small cells, if we can help encourage it, open source infrastructure meaning third parties like us create the infrastructure for multi-use and it can be our existing customers and/or new customers. And secondly, that that infrastructure is resilient meaning if there are changes in administration or municipal concerns that the regulatory realm -- relationships that that infrastructure is survivable and it will continue to create great returns for the provider. So if we can get the regulatory regime to go toward an open source resilient model, we can achieve scaled franchise rights, that really is the key to getting the outdoor business up to tower like returns for us. What we've done outside the US though, where we don't have sufficient fiber capacity -- existing fiber industry like in Mexico, South Africa and Brazil now is that -- and Argentina as well, we decided, in those cases, we can get a tower like return on the fiber to the tower itself and then tag small cells on to it over time. So depending on the market, Amir, there's a different solution set. But in the US, which is, of course, the biggest and most focused market for us, it's really getting franchise real estate rights." ] }, { "name": "Thomas Bartlett", "speech": [ "And just to underscore that, Amir, I mean, if you look at the opportunity we have in Mexico, that came along with 50,000 small towers, if you will, in the key markets like Mexico City, Guadalajara, Monterrey and Buenos Aires, so that ties to that exclusive real estate model that Jim's referring to." ] }, { "name": "Operator", "speech": [ "And we'll be moving on to the next question. We do limit you to one question. We'll be going to Colby Synesael. Please go ahead." ] }, { "name": "Colby Synesael", "speech": [ "Great. I just wanted to go to India. So, was the negotiation with Tata, when you look at what you guys did the $325 million and then also restructuring the JV, the Viom portion, was that all one negotiation or were those two discrete events? And the reason I ask is that the $325 million seems a little light relative to what we are anticipating, all things considered, and I'm just trying to take in -- trying to see if I should be thinking about how you structured the JV and ultimately what you're paying for that as part of that overall process. And then just one quick housekeeping on that. Can you remind us -- is it correct that you owned 65% of the JV, Tata owned 26% and IDFC owned 9%? And if that's correct, I would have thought the new blend would get you to 87% pro forma ownership. And I think in the press release, you guys mentioned 79%. So I'm just trying to understand what I'm missing there. Thank you." ] }, { "name": "James Taiclet", "speech": [ "Colby, it's Jim Taiclet. Let me first say, I'm extremely pleased with this agreement. This is an equitable MLA settlement and it is integrated with the future transition of ownership in the joint venture, all that had to be negotiated simultaneously because it does -- each piece affects the other. And what's important about this is, I firmly believe that this MLA settlement is going to enable us to meet our investment criteria for our India business, I think one of the best position to actually evaluate that and we pushed on it for a year to make sure we got the numbers we needed to make our investment return pull, so that's the first piece.", "The second piece of this is by -- in an integrated fashion solving for the MLA, if you will, and solving for the future ownership, it allows us to stabilize the business, fully integrate all of our assets, including Idea and Vodafone that we've recently acquired, achieve cost synergies and in doing all of that, really prepare this operation for the growth phase in the post consolidation market, which as Tom suggested, we think will happen over the next couple of years.", "The third benefit of this is it opens up the opportunity now that we have certainty of the future ownership position of Tata Group to establish the optimal ownership and capital structure for our all India business going forward as we integrate the whole thing. So there are tangible and intangible benefits here that we are more than convinced have made this agreement really positive for us. As far as the ownership piece, currently, I think we're at 63% at ATC, that's going to go to 79% in the first foot of this Tata share and then we'll decide where we go from that. Today, they're at 13%. By the way, McCoy is at 8% and IDFC is I think 1% or 2%. So there will be a long-term ownership structure that we will determine over the next year or two to take this business into the future here." ] }, { "name": "Thomas Bartlett", "speech": [ "And Colby, I would just say, just to kind of underscore a couple of things that Jim said. I'm not exactly sure what numbers you might be referring to or what the timing is. We've got the benefit of the cash flow coming in from this business all year, where some had expected it to be kind of effective back in the beginning of the year and we do have the going forward MLA with the leases on the 30,000, so -- the $30 million of revenue. So there are a couple of other pieces in there that they may alter some of that math that you may actually have. And just to also come back to Jim's point, we have 26%, the 70% odd also includes the 2% coming from IDFC. So it's half of the Tata put -- plus the IDFC piece. That's what gets the math, again. McCoy, I think as Jim mentioned has about 8%. So we'll continue to evaluate also the possibility of continue looking it -- bringing in our other global investors into the business as Jim mentioned as we've done in other geographies. It's worked really well for us in other geographies, but we'll see if it makes sense here." ] }, { "name": "Operator", "speech": [ "Our next question comes from the line of Amy Yong. Please go ahead." ] }, { "name": "Amy Yong", "speech": [ "Thanks. Tom, I guess there's a lot of concern from investors around interest rates rising. At 4.6 leverage, can you help us think about some of the puts and takes? You have obviously some cash coming in, but you also have a pretty big commitment in 1Q with India. Can you help us just think through what you're thinking -- how you're prioritizing cash and maybe if we should expect that the buyback will continue to stall, given the commitment in India? Thank you." ] }, { "name": "Thomas Bartlett", "speech": [ "Yeah. No, sure, Amy. As you can see in some of the slides, over the last decade, we are committed to the allocation strategy that we've had. Its first to our dividend, which is growing pretty steadily at over 20%. Then to our CapEx program, where I've said just 2% of the revenues is non-discretionary with the balance driving incremental value, either new builds. This quarter, we had 700 new builds, redevelopment or land acquisitions and M&A or share buyback wherever we can create more value. And all this is a function of our staying within our leverage targets, being committed to that investment grade rating in that 3 to 5 times level.", "So if you step back and you take a look at 2018, we'll generate just about $3.5 billion of AFFO, that 1.3%, 1.4%, so as we targeted to our dividend, $800 million on our CapEx and $1.6 billion or so roughly to M&A and the incremental $500 million or so of EBITDA has given us that added flexibility regards our leverage ratios and allowed us to buy back shares, which is about $250 million or so year-to-date. So we think that allocation approach gives us a lot of flexibility. It's very balanced and I think our record of growth to both AFFO share and ROIC is really reflective of it. And so as we kind of finish out the year, which we think we're doing very strongly, start out the beginning of the year. I think we have a lot of opportunities to keep all of those four ladders, if you will, to -- with regards to our capital -- with regards to our allocation program in place. We would expect to continue to drive incremental EBITDA. We are continually working on driving operating expense savings within the business." ] }, { "name": "James Taiclet", "speech": [ "Yeah. And I would say, Tom to reaffirm your earlier point, we've done regression analysis on all of our capital allocation decisions over the last 10 or 15 years. And the first and highest and best returns have come from growth CapEx, building new towers, buying back lands, et cetera. The second most valuable to the investor has been our M&A program. And when we have excess cash, we just return it to you by repurchasing shares and once we've paid our dividends. So the batting order that we've been outlining here, again that Tom just went through, we've done the regression analysis that says that is the right order for us based on our decision criteria and our operational execution and so we'll be making those decisions in a consistent way with the cash we have available." ] }, { "name": "Operator", "speech": [ "Next question comes from the line of Ric Prentiss. Please go ahead." ] }, { "name": "Ric Prentiss", "speech": [ "Yes. Good morning, guys." ] }, { "name": "James Taiclet", "speech": [ "Hey, Ric." ] }, { "name": "Ric Prentiss", "speech": [ "Hey. First, congrats to Boston, obviously, a strong year for you guys." ] }, { "name": "James Taiclet", "speech": [ "Well, it's about time somebody said that." ] }, { "name": "Ric Prentiss", "speech": [ "Just surprised Jim didn't hit it, but yeah, very strong (inaudible) obviously." ] }, { "name": "James Taiclet", "speech": [ "We would have by the end of Q&A, if you hadn't stepped up, Ric. So thanks." ] }, { "name": "Ric Prentiss", "speech": [ "But I want to follow Colby and go to India, I guess. Want to understand, how many years were remaining on that $120 million worth of revenue that is going to now show up in churn, $20 million this year and a $100 million next year?" ] }, { "name": "Thomas Bartlett", "speech": [ "Yeah. Four to six. I mean, it was -- it fell off a bit in the fourth year going into the six, so average of about five." ] }, { "name": "Ric Prentiss", "speech": [ "Yeah. Okay. And then when we think about the flow-through of that $120 million, how should we think of that flowing through from property revenues to EBITDA and AFFO? $20 million is already reflected into your guidance, but how should we think about that incremental $100 million and what that means flowing through to EBITDA and AFFO?" ] }, { "name": "Thomas Bartlett", "speech": [ "I mean, it will be -- it's chart, it's coming out of the run rate, right. So I think you think about it most of -- all of it coming out of revenue and virtually coming out of EBITDA. Now, keep in mind that as a result of those 28,000 leases or -- probably 24,000, 25,000 coming off, the business itself will have the opportunity to take some incremental cost out of their operation as well. So to the extent that there were some of those sites on and it being the only site on a particular tower, we'll look at that particular tower and the opportunity for that going forward and we could take some land costs out of the business. So there will be a number of costs, I think that will be able to come out of the business as well, Ric. But relative to that Tenant Billings, think of that coming out of the churn rate, so think about it coming out of property revenue and EBITDA as well." ] }, { "name": "Operator", "speech": [ "Our next question is from the line of Jonathan Atkin. Please go ahead." ] }, { "name": "Jonathan Atkin", "speech": [ "Yeah. So wondered, if you could hit a little bit on the -- some of the growth drivers that you're currently seeing in Nigeria and in Mexico, Telesites in Mexico reported a little bit of lumpiness, I'm just kind of curious what you're seeing in that business? And then just one more on India. Just in terms of longer-term tower industry structure, any sort of updated thoughts, given what's going on among two of your larger peers in that market and how that might affect kind of the commercial model for Indian telcos over the medium to longer-term? Thanks." ] }, { "name": "James Taiclet", "speech": [ "Yeah. Jonathan, maybe I'll take the first one and Tom you can grab the second question. But in Mexico, for example, we have a really significant MLA with one of our customers and that can have some uneven billing over the course of the year based on the MLA timing, but it's a significant revenue and growth driver for us and it's multi-year. The second element Mexico for us is the Altan build out. We have a significant portion of that build out. You might recall that Telesites is an affiliate of Telmex and Telcel and I think Altan as result of that kind of looks to ATC first whenever they can and we've got some really good growth, not only currently, but in the future, we expect from all tenants -- from our existing legacy customers too. So that's kind of the layout in Mexico for us.", "Nigeria is a little bit slow right now based -- versus prior years, but this is typical when networks are built out as more of a sine-wave as we've talked about. There'll be a couple of strong years and a couple of grooming years and that's kind of what's happening in Nigeria right now, and we expect that given the demand of -- again, if you go back to the same kinds of things, what's the mobile usage in the country, are they moving from 3G to 4G in emerging markets and then what's the aggregate CapEx and what's some of the big customers there, Airtel and MTN there to stay, we're pretty convinced that this will be a good business long-term and that cycle will turn up." ] }, { "name": "Thomas Bartlett", "speech": [ "Then on the tower, Jonathan, I mean, really kind of three pieces. The -- there are companies like GTL, Tower Vision, Ascend, smaller players in the market. It's hard to say what might happen with them at the end of the day, we probably expect them to exit or merge somehow either into the independent tower cos with really kind of the India's merged, which has probably a 150,000, 160,000 sites and us that have up to kind of 80,000. So that's on the independent side. And then you still have a couple of the captives with BSNL and RTL. So I think as we've seen in the United States, we've seen the -- coming down to kind of four broad wireless carriers and ultimately we see the consolidation on the tower co itself. So it's following the same trends as we have seen in the US, which we've talked about in the past and my sense is there'll be some further consolidation on the tower side, particularly with some of the smaller players." ] }, { "name": "Operator", "speech": [ "And we will open the line of Matthew Niknam. Please go ahead." ] }, { "name": "Matthew Niknam", "speech": [ "Hey guys, thanks for taking the question. I know it's a little bit early, but as we think about 2019, you've got the midpoint of guidance this year for consolidated AFFO at about 7.88. I know that's boosted by the Tata settlement, but how should investors think about next year's AFFO per share considering that $100 million churn headwind, which seems to be pure margin -- maybe put another way, is there an offsetting impact that's material enough to offset that from a increased stake and lowered minority interest that you would take out? Thanks." ] }, { "name": "Thomas Bartlett", "speech": [ "No, sure, Matt. That's very well one piece of it, the incremental capital that may come from third parties to help offset some of that, but I think it just comes back to the strength of the business itself. I mean, there are -- roughly $0.56 is identified coming from the Tata settlement and so we took up the guidance in our underlying business. But I think if you take a look at over last 10 years, our goal is to continue to drive double-digit growth within the business. We'll talk obviously more specifically and federally relative to what makes up that overall growth rates, but those are -- that's what really drives human eye within the business and the leadership team that you have here. I think that there are a lot of very positive things within the business, particularly even in the second half of the year with the strength of just the organic growth that we see in the business. So we feel really good about the end of the year, how we're finishing and what we would expect for 2019 and think we have a lot of ways, if you will, to be able to mitigate some of the exposures that we've seen or the volatility that we've seen in India. But I think longer-term, when we start to think about India, I also just want people to think, this represents about 5% of our enterprise value. Okay. And so we take a look at that from a kind of a risk reward, we're really excited about the position that we have in India. And while we may not see the net growth in '19, we would expect to be back to that high single-digit kind of organic growth rates, double-digit growth rates in 2020 and 2021. So we have a lot of levers we think within the business. We are a very diversified business and so we think that there are a lot of really good things in the business to help offset some of that volatility that we might see in '19." ] }, { "name": "James Taiclet", "speech": [ "Yeah. And as Tom said that we'll do our formal guidance in February, that's when we have enough of our application flow that we understand all the US and many of the international carriers are going to say what their CapEx will be for 2019 and we'll have better feedback from our field as to what their customers are saying locally. But in the mean time, you can just take that reminder of $0.56 a share for the full year 2018 devoted to Tata and the AFFO. If you wanted to back that out, start with the remainder number and then look at these gauges in the context that I've been talking about, what are your CapEx expectations for the industry, what do you think the aggregate growth of data is going to be next year and some of those other inputs that you can get and build your model from that, I think we've given you all the pieces to go ahead and get started." ] }, { "name": "Matthew Niknam", "speech": [ "Thank you." ] }, { "name": "Operator", "speech": [ "We'll open the line of Simon Flannery. Please go ahead." ] }, { "name": "Simon Flannery", "speech": [ "Thank you very much. Good morning. Tom, coming back to your comments on capital allocation, you did the Kenya deal, you've been finalizing fiber in Brazil, but we haven't seen any major transactions for a little while. Can you just talk about the broader M&A market? There's a lot of portfolios in Europe that have come up, that might come up. How are you just thinking about opportunities in Europe or elsewhere and the overall environment? Thanks." ] }, { "name": "Thomas Bartlett", "speech": [ "Yeah. No, sure, Simon. I mean, we think about it exactly as we've always thought about it. I mean, we're involved, as you would expect, as kind of a small community in all of these opportunities and we continue to come back to just kind of the underlying way we value these businesses in terms of looking at the long-term growth, in terms of looking at all the capital requirements of the business and most of those opportunities just kind of fall by the wayside because they don't meet our return thresholds, if you will. And there are some sizable transactions out there, there are -- have been many in Europe as you know. And where -- we have our Germany and our France operation is there is really kind of a beachfront force to give us an opportunity to look even further about the particular asset bases that are in the market. And never say never, but we just haven't seen the growth on -- opportunity there at the right kinds of return thresholds for a lot of those portfolios that are available for sale. And so there are a lot of smaller opportunities that we'll look at. You've seen the kind of the ones we've done in Latin America, the kind of the fill-ins that we've done in there and looking at the opportunity we just did in Brazil and following on what we've done in Mexico. We've done some small things in Africa, we just did enter Kenya. So we'll continue to look at those kind of opportunities and many of them provide opportunities for build-to-suits. So they get us into the market, we can operate Kenya out of Joburg, which is really good from a value creation perspective. And we'll continue to evaluate other portfolios there. If they meet the thresholds, we'll look at that as an opportunity to expand. Africa happens to be one of those regions, where we would like to get deeper into the market. It's -- we're -- we've had great experience there, we have a great management team in the market, we have solid relationships with our customers. So that is an area where we would like to get deeper, but just haven't found an opportunity to do so at this point." ] }, { "name": "Simon Flannery", "speech": [ "Great, thank you." ] }, { "name": "Operator", "speech": [ "And we have time for one more question, we'll open the line of Phil Cusick. Please go ahead." ] }, { "name": "Phil Cusick", "speech": [ "Hey, guys, thanks. To start, can you talk about Mexico, AT&T has been very public that they plan to ramp spending down. Do you expect growth to slow with that or you think you can continue despite --" ] }, { "name": "James Taiclet", "speech": [ "There's numerous moving pieces in Mexico, Phil. We don't speak to our customers' plans, we allow them to do that and -- but we -- what we can tell you is in a range of plus or minus a few hundred basis points that sine-wave of spending is going to, we think, continue in Mexico over the next few years. They're basically transitioning from a 3G to a 4G network for 120 million people or so. Altan will continue to be a big part of that. We'll see what Telefonica decides to do in AMX, but everyone's going to 4G. That's going to be the competitive requirement in Mexico to have a mobile business. And we're going to be providing bulk of the infrastructure for that as really the only truly independent tower company down there." ] }, { "name": "Phil Cusick", "speech": [ "Great. And then last, I guess, finishing up, the potential for the US business we've been thinking about, in the past, the company has talked about a range of 6% to 8% growth, but in May when we saw you, you said that might be too high, given the company's size at this point. Now, at 7.4% and with it looking like US carriers are still ramping, do you think that 8% is still out of bounds for next year?" ] }, { "name": "James Taiclet", "speech": [ "Well, we're not going to predict next year yet, Phil. We need all of our input variables, unfortunately, we've got half a dozen engineers running this place and we don't make predictions until we get data, generally. We can't call anything out of the question, but a lot of things have to go really well for our industry for us to get 8% on the size of this US business now that we have in American Tower. So we'd love to see all those things fall in place, whether it's dish or others or an accelerated FirstNet. I mean, there's a lot of ways to get there. But look, the history and the regression analysis on our customers' behavior has been $30 billion plus or minus $2 billion or $3 billion over the last few years as far as what their spending capacity is as an industry and so that's where we tend to look to as we think about the future. But could it be higher? It could, but you'd have to have whether it's cable or dish or somebody else show up with some more capital probably." ] }, { "name": "Phil Cusick", "speech": [ "Thanks, Jim." ] }, { "name": "Igor Khislavsky", "speech": [ "Well, already. Well, thanks everyone. That wraps the call. Have a good day." ] }, { "name": "James Taiclet", "speech": [ "All right. Take care. Have a great weekend everybody." ] }, { "name": "Operator", "speech": [ "Today's conference will be available for replay. You can find that information on the American Tower Company's website. And that does conclude your conference for today. Thank you for your participation and for using AT&T Teleconference Service. You may now disconnect." ] } ]
OKE
2017-08-02
[ { "description": "Vice President, Investor Relations", "name": "Andrew Ziola", "position": "Executive" }, { "description": "President and Chief Executive Officer", "name": "Terry Spencer", "position": "Executive" }, { "description": "Chief Financial Officer, Executive Vice President, Strategic Planning and Corporate Affairs", "name": "Walt Hulse", "position": "Executive" }, { "description": "Executive Vice President and Chief Operating Officer", "name": "Kevin Burdick", "position": "Executive" }, { "description": "Vice President, Commercial", "name": "Mike Fitzgibbons", "position": "Executive" }, { "description": "Senior Vice President, Natural Gas Liquids", "name": "Sheridan Swords", "position": "Executive" }, { "description": "Citi -- Analyst", "name": "Eric Genco", "position": "Analyst" }, { "description": "BMO Capital Markets -- Analyst", "name": "Danilo Juvane", "position": "Analyst" }, { "description": "Wells Fargo -- Analyst", "name": "Michael Blum", "position": "Analyst" }, { "description": "Barclays -- Analyst", "name": "Christine Cho", "position": "Analyst" }, { "description": "Jefferies -- Analyst", "name": "Chris Sighinolfi", "position": "Analyst" }, { "description": "Morgan Stanley -- Analyst", "name": "Tom Abrams", "position": "Analyst" }, { "description": "UBS -- -- Analyst", "name": "Shneur Gershuni", "position": "Analyst" }, { "description": "JPMorgan -- -- Analyst", "name": "Jeremy Tonet", "position": "Analyst" }, { "description": "Mizuho Securities -- Analyst", "name": "Brian Zarahn", "position": "Analyst" }, { "description": "-- Goldman Sachs -- Analyst", "name": "Ted Durbin", "position": "Analyst" } ]
[ { "name": "Operator", "speech": [ "Good day, and welcome to the Third Quarter 2017 ONEOK Earning's Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Mr. Andrew Ziola. Please go ahead, sir." ] }, { "name": "Andrew Ziola", "speech": [ "Thank you, and welcome to ONEOK's Third Quarter Earnings Conference Call. A reminder that statements made during this call that might include ONEOK's expectations or predictions should be considered forward-looking statements and are covered by the Safe Harbor provision of the Securities Acts of 1933 and 1934. Actual results could differ materially from those projected in any forward-looking statements or discussion of factors that could cause actual results to differ. Please refer to our SEC filings.", "Our first speaker this morning is Terry Spencer, President and CEO of ONEOK. Terry?" ] }, { "name": "Terry Spencer", "speech": [ "Thanks, Andrew. Good morning and thank you all for joining us today. As always, we appreciate your continued interest in investing in ONEOK. Joining me on today's call are Walt Hulse, Chief Financial Officer, Executive Vice President, Strategic Planning and Corporate Affairs, and Kevin Burdick, Executive Vice President and Chief Operating Officer.", "Before I hand the call over, I have a few brief opening remarks. I want to start out by saying how much I appreciate the efforts of our employees who personally endured Hurricane Harvey. Employees at our Mont Belvieu area facilities and countless others at our company worked tirelessly to keep our assets running safely in order to provide needed services to our customers. I am very proud of them and, as expected, their dedication and commitment to this company continues to be nothing short of remarkable.", "I should also mention that the swift recovery of the Mont Belvieu infrastructure following Harvey would not have been possible without the hard work and cooperation of many of our industry peers, customers, service providers, and local governments. Many thanks to them.", "I also want to extend our thoughts and prayers to the victims, their families, and all affected by the senseless tragedy that occurred in New York City yesterday afternoon. The city and its people will once again prove its courage and resolve as it copes with this tragic event.", "Moving on to our third quarter performance, building off our second results, third quarter performance strong, benefiting from natural gas and natural gas liquids volume growth and higher transportation revenues in our natural gas pipeline segment. These results demonstrate that we are well on our way to achieving our 2017 guidance.", "As we stand today, compared to a year ago, rig counts have increased in the states we serve by 70%, driven primarily by technological advances in drilling, which has made exploration more effective, more efficient, and production more prolific. We are seeing petrochemical facilities and ethane crackers come online and expect two more to start up in the next several months.", "The industry has been anticipating these start-ups for several years and now we are beginning to see real demand for ethane, which Kevin will discuss more in a moment. We're also hearing from customers about the next wave of petrochemical facilities to be designed and built on the Gulf Coast. I mention this because it's important to point out that the energy industry is once again proving its resiliency and adaptability to the marketplace. I believe ONEOK has played a big part in that by continuing to invest capital to aggregate supply and deliver it to the markets. We are well positioned to meet the needs of our customers today and we are committed to continue investing in and around our assets to meet their needs into the future.", "With that, I will now turn the call over to Walt." ] }, { "name": "Walt Hulse", "speech": [ "Thank you, Terry. ONEOK's third quarter adjusted EBITDA was $517 million, compared with $462 million in the second quarter 2017, a 12% increase primarily driven by natural gas and natural gas liquids volume growth.", "As noted in our earnings release, third quarter results included approximately $20 million in non-cash impairment charges related to nonstrategic assets and equity investments in our G&P segment, which impacted third quarter earnings per share by $0.03. We estimate that, without the disruption of Hurricane Harvey, the NGL segment's earnings would have been approximately $4.5 million higher for the quarter, or $0.01 per share.", "Last week, we announced our quarterly dividend of 74.5 cents per share, or $2.98 per share on an annualized basis, unchanged from the previous quarter when we increased the dividend by 21%. Dividend coverage was a healthy 1.3x for the quarter. Management still expects to recommend annual dividend increases of approximately 9-11% beginning in 2018 and annual dividend coverage of 1.2x or greater.", "Since June, we've announced nearly half a billion dollars in attractive, low multiple growth projects, supported by commitments from anchor customers. In September and October, we issued 3.3 million shares through our ATM equity program, resulting in net proceeds of $184 million.", "The proceeds of these issuance, along with cash generated in excess of dividends support these recently announced high return projects as we prudently manage our balance. We continue to see opportunities to make attractive investments supported by customer commitments. To the extent that we make additional future investments, the ATM will be one of the tools available to fund future growth.", "ONEOK's trailing 12-month gap debt to EBITDA improved again to 4.9x at September 30. Our annualized third-quarter gap debt to EBITDA run rate was 4.6x. We continue to expect leverage to be around our target of 4x or less by late 2018 or early 2019. We continue to proactively manage our balance sheet. We repaid $1 billion in outstanding debt in July and September combined and completed a $1.2 billion senior notes offering in July, essentially extending the term of the debt at a very attractive rate.", "We are well positioned with ample liquidity to effectively manage our debt maturities and continue to finance growth investments. As it relates to the review of rates on West Texas LPG, in last September, the administrative law judge provided its finding to the Railroad Commission of Texas, which the commissioners may accept, modify, or remand for further proceedings. There is no deadline for them to take action, but we anticipate the commissioners may consider the findings and any exceptions filed by the parties this December.", "Regardless of the outcome, we do not expect Railroad Commission's decision to have a material impact on our financial results. It will also not impact our current or future negotiated rates on West Texas LPG, nor will it hinder our ability to secure new NGL supply from producers and processors, as noted by our recent announcement to expand into the heart of the Delaware Basin.", "In yesterday's earnings announcement, we maintained our 2017 guidance outlook, which was updated last quarter to reflect the completion of the ONEOK and ONEOK Partners merger transaction. We expect to announce 2018 guidance sometime after the first of the year. Please refer to our news release, investor presentation, and 10-Q filings for additional details on the quarter. I'll now turn the call over to Kevin for a closer look at each of our business segments." ] }, { "name": "Kevin Burdick", "speech": [ "Thank you, Walt. Starting with our natural gas liquids segments, third quarter adjusted EBITDA increased 8% compared with the second quarter 2017, including the impact from Hurricane Harvey, which lowered our EBITDA by approximately $4.5 million. We sustained no significant damage to our facilities but experienced reduced volumes due to industry downtime and increased operating costs following the hurricane. We essentially realized no benefit from optimization directly related to the hurricane.", "As we look forward, we have seen wider spreads so far early in the fourth quarter. NGL volumes gathered averaged approximately 812,000 barrels per day, a 5,000 barrel per day increase compared to the second quarter 2017. Higher Midcontinent volumes and higher volumes on our West Texas LPG Pipeline drove the increase. Volumes on our Bakken NGL Pipeline decreased slightly from the second quarter due primarily to plant maintenance activities at our Garden Creek and Grasslands Natural Gas processing plants in the Williston Basin and planned maintenance on the Overland Pass Pipeline.", "As we discussed previously, our Bakken NGL Pipeline can run above its nameplate capacity of 135,00 barrels per day, and through October, volumes had returned to levels at or above what we experienced in the second quarter. We continue monitoring producer customer activity as well as the current utilization of Overland Pass Pipeline and are evaluating our options to provide additional capacity out of the region.", "Third quarter NGL volumes fractionated were down slightly compared with the second quarter 2017, primarily impacted by Hurricane Harvey. Volumes that were unable to be fractionated during the third quarter were stored and will be fractionated in either the fourth quarter of 2017 or the first quarter 2018.", "Ethane rejection levels on our NGL system remained relatively unchanged in the third quarter 2017, averaging more than 150,000 barrels per day, similar to second quarter levels. As multiple petrochemical facilities are expected to come online in the next few months, we continue to expect ethane recovery levels will fluctuate in the fourth quarter and into early 2018 as these start-ups occur.", "As we have moved into the fourth quarter, we have seen a significant increase in our gathered volumes. In October, we exceeded 900,000 barrels per day on numerous days. The increase is a combination of volume growth from overall raw feed and additional ethane that is being recovered.", "For the natural gas gather and processing segment, third quarter 2017 adjusted EBITDA increased 11% compared with the second quarter 2017. With the segment once again posting solid volume growth in the Williston Basin and STACK and SCOOP areas. In the Williston Basin, volumes processed again established new highs with an average of more than 840 million cubic feet per day during the quarter, despite planned maintenance at some of our processing facilities and the maintenance on Overland Pass Pipeline. Midcontinent volumes averaged more than 740 million cubic feet per day, and 8% increase compared with the second quarter 2017.", "Rigs remained steady across our acreage with approximately 30 rigs operating on our dedicated acreage in the Williston Basin and approximately 15 rigs on our dedicated acreage in the STACK and SCOOP areas combined. In the Williston Basin, we connected 130 wells during the third quarter for a total of 313 through the first nine months of the year, well on our way to completing our target of 400 in 2017.", "We now estimate that drilled but uncompleted wells on our dedicated acreage increased to between 350-400, compared with 300 previously. We continue hearing of improved efficiencies across the basin, including indications of between 10-15% productivity improvements in wells completed in 2017 compared with 2016. At current rig activity levels, in addition to duck inventories in the basin, we expect continued volume growth into 2018.", "Growth in the Midcontinent continues as well. We connected 35 wells in the Midcontinent during the third quarter, and have connected 76 during the first nine months of the year, well on track to reach our target of 100 by the end of the year.", "The segment's average fee rate was $0.86 per MMBtu in the third quarter 2017, compared with $0.76 per MMBtu in the third quarter of 2016, a 13% increase, which was driven primarily by increased volumes on contracts where we received higher fees. We still expect the segment's average fee rate to be approximately $0.85 for all of 2017.", "In the natural gas pipeline segment, adjusted EBITDA increased 8% in the third quarter 2017 and 13% through the first nine months of the year compared with the same periods in 2016. The segment continues to benefit from higher fee-based earnings and increased transportation capacity contracted.", "We continue discussions with producers and markets to develop long-term natural gas takeaway solutions across our footprint, especially out of the Permian Basin, where we have had a long-standing asset position with our West Tex Pipeline System and recently our joint venture Roadrunner Pipeline.", "As Walt discussed, we've announced nearly half a billion dollars of capital growth projects, with the most recent being the $200 million expansion of the West Texas LPG Pipeline into the prolific Delaware Basin, one of the fastest growing plays in the US. The project is supported by long-term dedicated NGL production from two third-party natural gas processing plants, which we estimate will produce up to 40,000 barrels per day.", "The project is expected to be completed in the third quarter of 2018. Fees on this project are negotiated bundled rates at market-based transportation and fractionation rates. Because this is an extension and expansion of an existing pipeline asset, we expect EBITDA multiples to be in the 4x-6x range, better than our typical 5x-7x. Additionally, the lateral is sized to allow for future growth beyond the initial two plants. We continue to discuss opportunities with numerous customers in the Delaware regarding potential contracts with more than ten new processing plants in the area.", "Terry, that concludes my remarks." ] }, { "name": "Terry Spencer", "speech": [ "Thanks, Kevin. I have just a couple of closing comments as it relates to our future growth projects before we take your questions. Following the West Texas LPG expansion announcement, we still continue to develop our unannounced inventory of potential capital growth projects. We've updated that inventory, which is now between $2.5-3.5 billion compared with $1.5-2.5 billion previously. This inventory remains heavily focused on NGL infrastructure, which we anticipate could be announced between now and 2020. We are expanding our existing businesses and continuing to focus on deploying capital prudently at attractive returns and ways that will create value for our customers and investors.", "Finally, I want to once again thank all of our employees for their continued hard work and their commitment to safe operations, our customers, and the communities we operate in.", "...", "Operator, we are now ready for questions." ] } ]
[ { "name": "Operator", "speech": [ "Thank you. [Operator Instructions] Our first question will come from Shneur Gershuni from UBS." ] }, { "name": "Shneur Gershuni", "speech": [ "Hi. Good morning. Just a couple of questions. To start off, I was wondering if we could talk about your CapEx funding strategy going forward. You tapped the ATM this past quarter and I'm trying to understand. Is it more because you were during a blackout during the merger process and needed to get leverage and line posts closed and no longer expect to use it and use retained DCF? Or, alternatively, do you continue to plan on using the ATM as a primary source of funding?" ] }, { "name": "Walt Hulse", "speech": [ "Well, Shneur, there was no relation to the period of time between the announcement of the merger and the closing of the merger. It's important to note that we've announced these $500 million or so of new growth projects since June and we wanted to use the ATM to make sure that we funded those because they were in addition to the CapEx that we had previously been discussing. It was more of getting ahead of the game and making sure that, as we look at forward growth projects, we maintain a very strong balance sheet." ] }, { "name": "Shneur Gershuni", "speech": [ "Okay. And then, secondly, the $500 billion of identified CapEx for 2018, are there any other projects that you're very close to approving or moving forward with that could take the number up materially in 2018? Or, is that the run rate we should be thinking about?" ] }, { "name": "Terry Spencer", "speech": [ "I think you should always think about that -- we've got this base run rate of routine growth, but we're continually working this backlog of new projects. As contractual commitments and anchor customers come together, certainly we'll go forward and take those projects to our board. We have a number of projects that are in various stages of development, and as those things mature, like we've always said, once we get those approved by our board, we'll certainly go public with those." ] }, { "name": "Shneur Gershuni", "speech": [ "Okay. Final question. You've had this forecast out there for dividend growth around the 10% range for several years going forward. How much capital do you need to be investing in to achieve that growth rate over the next couple of years? Is it a couple hundred million dollars? Is it more than you're running at? Less? Just kind of wondering what's the cadence to being able to achieve that growth rate, operating leverage versus needing to invest the capital." ] }, { "name": "Walt Hulse", "speech": [ "Sure. The dividend growth rate that was previously announced was supported by base growth CapEx in line with the past couple of years. New projects enhance these cash flows and will produce more free cash flow to reinvest in our business and maintain our strong balance sheet." ] }, { "name": "Shneur Gershuni", "speech": [ "Great. Thank you very much." ] }, { "name": "Operator", "speech": [ "[Operator Instructions] We'll take our next question from Jeremy Tonet with JP Morgan." ] }, { "name": "Jeremy Tonet", "speech": [ "Good morning. Terry, I just wanted to pick up on one of your last comments with regards to the upsize in the growth project evaluation list, going up to $2.5-3.5 billion. I was wondering if you could provide a little bit more color on what specifically is driving that or what's changed? It sounds like the NGL pipeline is a part of the driver there, but is there any more you can share as far as what basins or anything else in the market that's evolved that you guys see as better opportunities now?" ] }, { "name": "Terry Spencer", "speech": [ "Certainly, Jeremy, at a high level we're seeing core NGL growth in the basins that we operate. Certainly, in the Williston Basin, we continue to grow. The prospects, as Kevin mentioned on his call remarks, look great as we continue to see strong development in the STACK and SCOOP. This recent announcement in West Texas is an indicator of the opportunity that's in front of us there. The bulk of the CapEx -- this increased CapEx in this unannounced backlog is going to be in the NGL segment. It'll be in the form of pipeline loops, pumps, pipeline infrastructure, potentially fractionation capacity, and some storage in there possibly. Projects of that nature, primarily, is what that consists of. Kevin, do you have anything you could add to that?" ] }, { "name": "Kevin Burdick", "speech": [ "No. Just again, significant growth of our existing assets." ] }, { "name": "Jeremy Tonet", "speech": [ "That makes sense. Thanks. Another question on funding growth CapEx going forward, there's been an increased use of hybrid securities out there. How do you think those stack up versus the ATM when you're looking to minimize dilution for future growth?" ] }, { "name": "Walt Hulse", "speech": [ "Of course, we will look at every opportunity that we have to fund the business going forward. We're pleased to be in a position with a very strong investment grade balance sheet and traditional capital excess is something that we enjoy and will probably be where we would lean more toward. But, we'll stay on top and apprised of everything that's in the marketplace and evaluate whether it's a fit into our cap structure or not." ] }, { "name": "Jeremy Tonet", "speech": [ "Thanks. And then, just looking at the STACK and SCOOP, can you talk a little bit more about the dynamics there? It seems like STACK continues to have good opportunities moving forward with Canadian Valley and Knox seems like it's still on the back burner at this point. Can you share any more on what you see there?" ] }, { "name": "Terry Spencer", "speech": [ "Kevin can help you there." ] }, { "name": "Kevin Burdick", "speech": [ "Yeah. Again, we're excited about the STACK and SCOOP. Our volume growth sequential quarter-to-quarter just shows that and demonstrates some of the potential. On the G&P side, we do have the 200 million a day offload that we've got out there that's expected to be complete by the end of the year. That's the first drawing to capacity. Then, we've also got the Canadian Valley II expansion, which we've announced.", "Beyond that, our NGL segment, with the footprint we've got in the STACK and the SCOOP there, there's a lot of other additional plants. I think EnLink just came out yesterday and announced a new plant that would be under our contract with them. So, a lot of activity going on in the STACK and SCOOP. Producers have come out here, just the last couple of calls I've seen, and talked about moving to the full development program, which just drives the efficiency of the rigs up. So, there is a lot of opportunity for us given our footprint in the STACK." ] }, { "name": "Jeremy Tonet", "speech": [ "Thanks for that, and just a last one on the Bakken, on the processing side there, can you update us on the competitive dynamics? You've seen some other MLPs moving forward with processing the expansion, such as Bear Den and others. Can you give us your latest thoughts there?" ] }, { "name": "Kevin Burdick", "speech": [ "With the volumes that we have seen in the Williston, we probably -- especially as we've moved into the fourth quarter and gotten past some of this maintenance -- have 125 million a day of capacity left. So, with the rig activity we're seeing and the well performance that we're seeing, clearly, we can see additional processing capacity that we would need." ] }, { "name": "Jeremy Tonet", "speech": [ "Thanks for that. That's it for me." ] }, { "name": "Operator", "speech": [ "Our next question will come from Eric Genco with Citi." ] }, { "name": "Eric Genco", "speech": [ "Good morning. I was just wondering what you've been hearing from producer customers in the Williston heading into next year in terms of rig counts and activity. You're talking about 400 wells this year and 30 rigs, that seems like that's about 27 days to complete a well, which seems high. Do you expect the rig counts to taper off? And, if nothing changes, is 400 a conservative number going forward? How do you think about all of that?" ] }, { "name": "Kevin Burdick", "speech": [ "I may have some thoughts and Mike Fitzgibbons may have a couple of thoughts as well. Our conversations with the producer customers continue to be very positive. The rig counts have held in and we've seen some price strength here over the last few weeks. We see no indications that those rigs are going to back off. So, yes, if you maintain this activity level at 30 rigs, the 400 would be light as we think about 2018. Not ready to get out there with the guidance yet. We'll do that as we release our financial guidance. But clearly, you're right. The 27 is high, so we'd expect the well connects to go up in '18. Mike?" ] }, { "name": "Mike Fitzgibbons", "speech": [ "No, I agree with that. The only thing I'll add is we've had a couple of producers announce they can achieve their volume growth targets with less rigs because of the efficiency increases. So, we may see a rig or two drop, but we're still seeing very productive wells in our forecast in volume growth from those rigs." ] }, { "name": "Eric Genco", "speech": [ "Great. I'm curious, as you look out at the $485-495 million of projects since June, and $40 million of that is finished in 2017. The rest is overwhelmingly in '18. Do you expect your overall debt balance -- your net debt balance at quarter end was around $9.5 billion. Do you expect that to drop meaningfully or do you think it hangs in there or drifts up a little as you have the EBITDA growth that gets you to your leverage target?" ] }, { "name": "Walt Hulse", "speech": [ "We're not going to give specific guidance to '18, but I would say we do expect to have significant EBITDA growth that will help those lever statistics along in the most dramatic fashion." ] }, { "name": "Eric Genco", "speech": [ "Okay. So, the $9.5 billion of net debt -- do you see it materially dropping over the course of the next year or no?" ] }, { "name": "Walt Hulse", "speech": [ "I think, given the level of our CapEx, we'd expect to see deleveraging come more from the increase in the EBITDA than a drop in debt." ] }, { "name": "Eric Genco", "speech": [ "Alright. Thank you." ] }, { "name": "Operator", "speech": [ "Our next question will come from Danilo Juvane with BMO Capital." ] }, { "name": "Danilo Juvane", "speech": [ "Good morning. I wanted to go back to 2017 guidance. The G&P segment specifically -- the wave. How strongly it has performed this year would imply a decline in 4Q just to get to the high end of the guidance range there. It seems that you're being a little bit conservative by not raising guidance, in my opinion. Are there any other offsets we should be thinking about, whether they be related to Harvey or maybe some of the ethane volumes you had baked into your forecast are going to be latent because of the outages in the Gulf Coast?" ] }, { "name": "Kevin Burdick", "speech": [ "No. Specific to your question about G&P, when you do that math, that's where you get to. But, the one dynamic that we always consider as we're thinking about the fourth quarter for gathering and processing is weather, especially when you look at the month of December. We do historically see a little bit of a pullback of our volumes, so we do factor that in. I don't think we see any lingering effects related to Harvey from our business. As we've talked about, we've seen transitioning a little bit, just overall, the volume growth we've seen in October in our NGL segment. Clearly, a decent chunk of that volume growth would be ethane, which would send the signal that the ethane recovery story is starting a little bit. That's how I would frame up how we're thinking about guidance, and still holding that firm." ] }, { "name": "Danilo Juvane", "speech": [ "Thanks for that. With respect to growth CapEx, I think the previous guidance was $500 million for the year? Thus far, we've paid $250 million. Should we expect the big chunk in 4Q here, or is that going to extend over into 2018?" ] }, { "name": "Kevin Burdick", "speech": [ "Yeah, with the recent announcements, we're hot and heavy into the construction on those projects that we've announced. You would see that capital ramp up in Q4." ] }, { "name": "Danilo Juvane", "speech": [ "Thank you. Those are my questions." ] }, { "name": "Operator", "speech": [ "Our next question will come from Brian Zarahn with Mizuho." ] }, { "name": "Brian Zarahn", "speech": [ "Good morning. On the West Texas expansion project, could you elaborate a bit on the volume assumptions on your 4x-6x multiple expectation?" ] }, { "name": "Kevin Burdick", "speech": [ "Sure. If we think about the up to 40,000 barrels a day that goes in service on the back half of 2018, we would expect that volume to ramp up maybe over a year or two past the in-service date. Sheridan?" ] }, { "name": "Sheridan Swords", "speech": [ "Exactly right. Yeah, within two years, we should be at or above the 40,000." ] }, { "name": "Brian Zarahn", "speech": [ "Okay, so the 4x-6x multiple assumes around 40,000 barrels a day volume?" ] }, { "name": "Kevin Burdick", "speech": [ "Yes." ] }, { "name": "Brian Zarahn", "speech": [ "Okay. On those new barrels, what type of fractionation opportunities are there potentially, or would those go to third parties?" ] }, { "name": "Kevin Burdick", "speech": [ "Well, the 40,000 that we referenced in the press release -- we do have a bundle to service with them. We will be fracking those barrels. It's a total package deal for us. The pipeline does give us the opportunity to talk to more people and to bring more volume on that and fractionate it as well as at or below multiples that we'll see on this project." ] }, { "name": "Brian Zarahn", "speech": [ "Okay, so just to summarize. The 4x-6x multiple expectation assumes about 40,000 barrels a day of volumes, including fractionation fees." ] }, { "name": "Kevin Burdick", "speech": [ "Yes." ] }, { "name": "Brian Zarahn", "speech": [ "Okay. That's helpful. Excess capacity -- how do you view the competitive landscape in the Permian for NGL takeaway to increase the utilization of the extension?" ] }, { "name": "Sheridan Swords", "speech": [ "Brian, this is Sheridan. It's a very competitive landscape out there, but as we've said before, with having an existing pipeline that we can incrementally add capacity to it to dial into what the customer actually needs, we can do it much cheaper and faster than other pipelines -- brand new pipelines that are coming in there. So, we see ourselves being very competitive. With this new expansion, we get us into a position that we can compete even better for these Delaware barrels. We have talked to multiple producers and processors out there, in the short term, before we announced this and after we announced this. We've even had more come to us and want to get on this pipeline and talk to us about it. So, we're very excited about what this brings to us and very excited about seeing more expansions come out." ] }, { "name": "Brian Zarahn", "speech": [ "So, stay tuned for updates on the extension. Obviously, a lot of focus on your organic opportunities. As we move into 2018, how do you view M&A playing a role in your growth?" ] }, { "name": "Terry Spencer", "speech": [ "Certainly, in our thinking, we don't have any M&A factored in, but we're always going to be thinking about those opportunities and we've got a strong currency to work with. It's a financially sound company, but I can tell you our focus will be heavily organic and any M&A -- whether it's a bolt-on asset or something even broader from a strategic perspective -- will certainly just be an opportunistic approach. So, heavy organic will be the key strategy and key focus for 2018." ] }, { "name": "Brian Zarahn", "speech": [ "Thank you." ] }, { "name": "Operator", "speech": [ "Our next question will come from Michael Blum with Wells Fargo." ] }, { "name": "Michael Blum", "speech": [ "Good morning. One more question on West Texas -- the new pipeline project. I think you mentioned you'll also be expanding the existing system? If that's correct, how much are you also expanding that by?" ] }, { "name": "Terry Spencer", "speech": [ "Michael, we're expanding by the equivalent amount of 40,000." ] }, { "name": "Michael Blum", "speech": [ "Okay. Since the extension line is 110, as you move above that 40,000 on the extension line, does that imply that you'll have to then probably further expand the mainline? What are the capabilities to do that?" ] }, { "name": "Terry Spencer", "speech": [ "Michael, you're exactly right. You'll have to continue to expand the mainline. We can expand and spend that capital on the mainline as we get the commitments on the lateral coming in there. We don't have to spend it all upfront. We can incrementalize that capital in there. As I said, we expect those projects that we're working on now to expand the mainline and bring more volume in on the lateral. We'll be in at or better than the 4x-6x that the original one is. We did put some upfront capital in there to put a bigger piece of pipe in the ground so that we are better able to compete in the Delaware." ] }, { "name": "Michael Blum", "speech": [ "On the cadence of dividend increases as you go out in time, are you planning to do a one dividend increase per year, or are you planning to do every quarter? What's the thought there?" ] }, { "name": "Walt Hulse", "speech": [ "Obviously, the board will address that on a quarterly basis, but our expectation would be to be in line with our past practice and most likely look at that quarterly. The board will evaluate the facts and circumstances each quarter and then act accordingly." ] }, { "name": "Michael Blum", "speech": [ "Thank you very much." ] }, { "name": "Operator", "speech": [ "Our next question will come from Tom Abrams with Morgan Stanley." ] }, { "name": "Tom Abrams", "speech": [ "Thanks. G&P, strong margins in the quarter. Can you just break that down a little bit on how much you might attribute to NGL prices and spreads versus fees?" ] }, { "name": "Kevin Burdick", "speech": [ "Yeah, we've converted so much of our -- through the contract restructuring, we've moved so much of the commodity exposure to fee. It's primarily fee. When you combine that with our hedge position for 2017, virtually all that is just volume growth with the fee increase." ] }, { "name": "Tom Abrams", "speech": [ "Good. On the distribution, not so much for '18, but more for '19 -- just the philosophy around issuing equity to make a 10% or so distribution growth when you want to strengthen your balance sheet. Your capital spending is clearly very strong and the industry itself seems to be moving more toward that mid-single digit type being acceptable for the larger companies. I'm just wondering how you traded off those kinds of dynamics." ] }, { "name": "Walt Hulse", "speech": [ "We're in the position today where, in this particular quarter, we covered the dividend by 1.3x and we expect to have significant dividend coverage going forward, which will give us a lot of excess cash flow to put back into the business and reinvest in the business. As I had said previously, the dividend growth that we had previously got it to was based on the run rate CapEx that we've been spending over the last couple of years. As we add these multiple projects, we just expect to have even more cash flow to invest in the business going forward." ] }, { "name": "Tom Abrams", "speech": [ "Thanks a lot. Great quarter." ] }, { "name": "Operator", "speech": [ "Our next question will come from Christine Cho with Barclays." ] }, { "name": "Christine Cho", "speech": [ "Hi, I just have a couple of operational questions. The Bakken G&P volumes were up, but the NGL Pipeline volumes were down sequentially. What went on there? Was it just more ethane that was rejected versus last quarter?" ] }, { "name": "Kevin Burdick", "speech": [ "Yes, Christine, that was primarily around ethane. It also relates to the maintenance activities that we saw at our assets and how we had to move gas around to continue to process as much of the gas as we possibly could. We did end up rejecting more ethane than we had the previous quarter.", "In addition to that, another dynamic that was going on during the same time is our de-ethanizer at Stateline really ramped up during that time period. The NGLs produced actually went up, but the NGLs we were pushing down the pipe went down a little bit." ] }, { "name": "Christine Cho", "speech": [ "So, if the NGL volumes were up, but the pipeline volumes were down, where did the incremental NGLs go? Do you guys have storage up there?" ] }, { "name": "Kevin Burdick", "speech": [ "No, again, it was primarily ethane that was rejected due to a lot of the maintenance and other activities that were going on. And then the ethane that's going through the de-ethanizer does end up in markets in Canada as well." ] }, { "name": "Christine Cho", "speech": [ "Okay. In your prepared remarks, you alluded to evaluating opportunities for providing additional takeaway out of the Bakken. Your 10-Q says that you're expecting to add capacity to the Bakken NGL line by third quarter of next year. If you do that, don't you have to expand Overland Pass? I thought that was full? Or, are there other alternatives?" ] }, { "name": "Sheridan Swords", "speech": [ "Yes, as we are looking at the total system, both Overland Pass and Bakken Pipeline, to look at all alternatives to expand it. But, you are correct. Overland Pass is full. So, any expansion on the Bakken Pipeline will have to take into account takeaway from the bottom end. We're looking at all options to expand that system as we continue to see the robust growth in the Williston." ] }, { "name": "Christine Cho", "speech": [ "And that would have to be looping, I'm assuming?" ] }, { "name": "Sheridan Swords", "speech": [ "There are a lot of different options there. It could be looping of the existing system or a completely new system." ] }, { "name": "Christine Cho", "speech": [ "I see. Okay. With natural gas production increasing out of the Bakken, is the incremental residue gas still going down northern border? Or, do you guys have an idea of how much of the gas is going to AECO?" ] }, { "name": "Kevin Burdick", "speech": [ "Physically, all of the gas out of the basin is virtually ending up on northern border that ends up in the Midcontinent -- the upper Midwest -- markets. So, how it gets priced, from an AECO perspective, is really a different question. But, all of the gas -- we're confident that, with the growth projects we see out there, we will continue to be able to move all of the residue out of the region on border." ] }, { "name": "Christine Cho", "speech": [ "Great. Thank you." ] }, { "name": "Operator", "speech": [ "Our next question will come from Ted Durbin with Goldman Sachs." ] }, { "name": "Ted Durbin", "speech": [ "Good morning. I just wanted to verify -- I think your prepared remarks, you said your NGL gathering volumes were up to 900,000 barrels per day in October? Is that right?" ] }, { "name": "Kevin Burdick", "speech": [ "That's correct." ] }, { "name": "Ted Durbin", "speech": [ "That's a big pick-up versus what you did in third quarter. What's the driver there and can you give us a breakdown of whether it's mostly Midcon or which regions that's coming out of?" ] }, { "name": "Kevin Burdick", "speech": [ "Well, we're really seeing increase in all of our regions. We talked about the Bakken barrels being down and now we're back up to those levels before. Midcontinent volumes are up as well. A chunk of that is going to be ethane, as we have seen ethane recovery pick up during the month of October. We still think that will fluctuate a little bit as these new pet-chems come online and go through the start-up. But again, we've seen some nice volume growth out of all the areas." ] }, { "name": "Ted Durbin", "speech": [ "Is it fair to say the margins on that additional will be in line with your rules of thumb, the $0.30, the $0.09, and the $0.03?" ] }, { "name": "Sheridan Swords", "speech": [ "Yeah, they will be close. Typically, we have a little bit of a breakdown for Ethane and a little bit of an incentive, but it's going to be materially in the line of what we've given. Remember, a lot of the ethane that's probably coming on is going to be a Belvieu based barrel coming out of the Midcontinent, which will be at a higher than the average rate that we have in our presentation. That has both Conway and Belvieu in it, and we talk about the Midcontinent. We'll probably be just slightly higher than that." ] }, { "name": "Kevin Burdick", "speech": [ "So, Sheridan, it's fair to say that in many of your contracts you have a tiered structure, a slightly lower transportation and frack rate for ethane versus your propane plus?" ] }, { "name": "Sheridan Swords", "speech": [ "That is exactly right. But, we expect the Belvieu barrels to come out first, which would be higher than the Conway priced barrels." ] }, { "name": "Ted Durbin", "speech": [ "Great. That makes a lot of sense. Can you talk about the overall returns -- blended returns -- on the $500 million of growth CapEx you've announced since June. As we think about that bigger chunk -- the $2.5-3.5 billion -- what kind of EBITDA multiples should we think about for both of those buckets?" ] }, { "name": "Kevin Burdick", "speech": [ "I think you're going to see a lot of those projects in that unannounced backlog are going to be similar to the routine growth that we've seen historically. You could see a good chunk of this coming in at 4x-6x, but I think broadly speaking overall, some of the larger infrastructure projects that are in that mix are going to be in your 5x-7x that we've historically indicated. Does that help you?" ] }, { "name": "Ted Durbin", "speech": [ "Yeah, that's helpful. And then, the last one for me. Operating costs look like they're up a decent amount here in the third quarter year-over-year. Is it all just new assets? It sounds like there were some hurricane costs in there. Was this a good new run rate on up costs or is there any kind of one-time items in there?" ] }, { "name": "Walt Hulse", "speech": [ "Yeah, the up costs are really just more of our growth in dealing with that. Yes, there was a little bit in there for the hurricane, but every quarter, you typically will see some one-time attributes. It'll probably a decent run rate as we think about going forward." ] }, { "name": "Ted Durbin", "speech": [ "Alright. That's it for me. Thank you." ] }, { "name": "Operator", "speech": [ "And our next question will come from Craig Shere with Tuohy Brothers." ] }, { "name": "Craig Shere", "speech": [ "Good morning. October saw another, even larger, stairstep up in the Conway to Mont Belvieu basis divs. How sustainable do you see this, and could this trend, combined with your dividend coverage, mitigate the need to hit the ATM as more projects are announced?" ] }, { "name": "Kevin Burdick", "speech": [ "Yes, you're right. We have seen an increase in spreads through the month of October. We do think there is some likelihood that those will maintain for two or three months, or beyond that. On the flipside, as our volumes do increase, that will reduce a little bit the amount of volume we can actually move on the pipes as we physically are flowing more volume on our assets. So, there is a little bit of a give and take there, but yes, it's nice to have that tailwind of the stronger spreads. Sheridan?" ] }, { "name": "Sheridan Swords", "speech": [ "Yeah, I definitely agree. You're very right. It's more this ethane we talked about and more volume growth. We will consume more of the pipeline for fee-based business and that will leave less capacity for optimization activities." ] }, { "name": "Craig Shere", "speech": [ "Understood. With respect with the $200 million West Texas LPG expansion -- I guess 160 at net to OKE -- I think three years ago, the guidance was given that you were hoping to achieve on the original acquisition and follow-on business, including maybe $500 million of expected growth CapEx, you're expecting to achieve an all-in 6x-8x multiple by the end of the decade. It seems like maybe the growth CapEx figure is coming well under the $500 million you all envisioned years ago. Do you see that due to efficiencies, but the EBITDA expectation would be intact? How do you see that multiple playing out over time?" ] }, { "name": "Sheridan Swords", "speech": [ "Craig, I still think we'll still reach that by the end of the decade as we go through -- especially, as we look at all the projects and plants we're looking at right now. We knew it would take us some time when we bought the assets to get our strategy in place because a lot of the plants that were coming on when we first bought the assets were already committed. So, we knew we had to wait for the second wave of gas plants being built that were not committed, and that's where we are right now. And, we're finding that we can very effectively compete for these gas plants. I still think that we will reach that 6x-8x by the end of the decade." ] }, { "name": "Craig Shere", "speech": [ "I was under the impression that the original guidance did not corporate any additional upside from associated fractionation. Does that continue to be the case? Does the 4x-6x for the $200 million project include or exclude related fractionation?" ] }, { "name": "Sheridan Swords", "speech": [ "Our fractionation system pulls from all across our assets and then we see growing through the whole thing. So, it all depends on when those fractionation capacities are needed. If we keep growing like this, as Terry mentioned, we will probably end up having to build more fractionation capacity and we'll see the Permian as being able to help support that growth and we will get market rates for that." ] }, { "name": "Craig Shere", "speech": [ "But, does that feed into the original multiple expectations for the West Texas acquisition you originally made?" ] }, { "name": "Sheridan Swords", "speech": [ "When we did that originally, the original was more based on pure tariffs and not the fractionation piece." ] }, { "name": "Craig Shere", "speech": [ "Okay. Thank you." ] }, { "name": "Operator", "speech": [ "Our next question will come from Chris Sighinolfi with Jefferies." ] }, { "name": "Chris Sighinolfi", "speech": [ "Good morning, Terry. Bakken's done quite well this year. Obviously, the DAPL was sitting out there for a long time at a storied history to get in service, but now that it is and we're seeing clear book pricing at a premium, in your conversations with producer counterparts up there, how much is the pipeline being in place and the pricing dynamic, if at all, is shaping decisions and how long they see that evolving over time?" ] }, { "name": "Terry Spencer", "speech": [ "With DAPL, anytime we can provide more pipeline takeaway capacity for crude, it benefits the producing from a reliability perspective and also just a netback perspective. We typically hear that their netbacks are maybe $2.00-3.00 better than they were before DAPL. That's just increased strength and helped their cash flow to fund more drilling. Certainly, operational reliability has to have improved significantly." ] }, { "name": "Mike Fitzgibbons", "speech": [ "Absolutely. You can look at some of the state data and rail has really taken a downward trend. Clearly, the pipe's going to be more reliable than rail." ] }, { "name": "Chris Sighinolfi", "speech": [ "Okay. For Sheridan, this is a question to which I'll plead ignorant. What is your expectation, or have you guys looked at, what happens with ethylene and polyethylene markets when we bring on this much seam cracking capacity in a narrow window of time? I'm blind to what happens further downstream, so can you help us think about the effects of that and what your pet-chem customers are saying and thinking about it, and if there's an opportunity for you to participate at all in that?" ] }, { "name": "Sheridan Swords", "speech": [ "What we hear from our customers on the polyethylene market -- I think these crackers are going to make ethylene, but you're already seeing these companies bring on ethylene to polyethylene units. So, you're really talking about where the ethylene is going. Worldwide, with the low cost of feedstocks we have in the United States, they're all saying the Gulf Coast crackers are much further to the left on the supply stack.", "So, if we would overbuild and the world cannot consume that much polyethylene, you will see more the Naphtha crackers and Far East crackers being shut down -- maybe some European crackers -- a long time before you see the Gulf Coast crackers shut down. That's why you're seeing the next wave of crackers being talked about on the Gulf Coast. This is the most advantaged placed today to build crackers due to the cost of feedstocks." ] }, { "name": "Chris Sighinolfi", "speech": [ "The multi-year view, then, if I were to paraphrase it, is something similar to what we're seeing with other departments, where US markets -- simply because of advantaged cost structure, pushes out higher cost supply globally. So, we're basically going to make end roads via export. That's the expectation?" ] }, { "name": "Sheridan Swords", "speech": [ "That's right." ] }, { "name": "Chris Sighinolfi", "speech": [ "Are there particular foreign markets we could pay attention to, to get a sense from where that demand or supply competition's going to be most severe?" ] }, { "name": "Sheridan Swords", "speech": [ "I think, from a demand side, you're going to see the growth from China and India. We also see some from Latin America and maybe a little bit from Europe. But, China and India are going to be the big movers on the demand side. On the competition for supply, the only thing that's going to affect that is the gas to oil ratio. If you would see oil and gas on a BTU basis come back closer together and Naphtha would become more advantaged, you may see -- I would think we would see on supply.", "It depends on how you look at supply competition. Obviously, we are exporting propane and ethane, which are going to crackers that would compete polyethene against our polyethene that's being produced in the United States. But, that's still pulling the hydrocarbon through our system and out of the United States." ] }, { "name": "Chris Sighinolfi", "speech": [ "Right. So, if we're seeing the next wave of pet-chem crackers at least talked about to be built domestically, it would seem like that community's making a determination that the facility better exists here than to export the ethane to whatever foreign market and crack it there? Is that fair, or is there something about the nature of all of this that I don't understand?" ] }, { "name": "Sheridan Swords", "speech": [ "I think it's a combination. Where we're seeing most of the people that want to export ethane for cracking, or even propane for cracking -- in India and China, I think they want to build their own facilities and get advantage of the cheap feedstock from the United States. The people that are building the next wave of crackers are the ones that built the first wave. They're going to be the ExxonMobil SABI cracker down at Corpus Christi that's been announced. All of the other people are also talking about when do they build their next cracker, and all of them are saying it's probably going to be in the Gulf Coast." ] }, { "name": "Chris Sighinolfi", "speech": [ "Okay, great. I appreciate it.", "..." ] }, { "name": "Operator", "speech": [ "And that does conclude today's question and answer session. At this time, I will turn the conference back to management for any additional or closing remarks." ] }, { "name": "Andrew Ziola", "speech": [ "Okay. Thank you, everyone. Our quiet period for the fourth quarter starts when we close our books in early January and extends until earnings are released after the market closes in late February. Have a great rest of your day." ] }, { "name": "Operator", "speech": [ "Ladies and gentlemen, this does conclude today's conference. Thank you all for your participation. You may now disconnect." ] } ]
OKE
2023-11-01
[ { "description": "Vice President, Investor Relations and Corporate Affairs", "name": "Andrew Ziola", "position": "Executive" }, { "description": "President and Chief Executive Officer", "name": "Pierce Norton", "position": "Executive" }, { "description": "Chief Financial Officer and Executive Vice President Investor Relations and Corporate Development", "name": "Walt Hulse", "position": "Executive" }, { "description": "Senior Vice President, Natural Gas and Natural Gas Gathering and Processing", "name": "Sheridan Swords", "position": "Executive" }, { "description": "UBS -- Analyst", "name": "Brian Reynolds", "position": "Analyst" }, { "description": "Executive Vice President, Chief Enterprise Services Officer", "name": "Kevin Burdick", "position": "Executive" }, { "description": "JPMorgan Chase and Company -- Analyst", "name": "Jeremy Tonet", "position": "Analyst" }, { "description": "Wells Fargo Securities -- Analyst", "name": "Michael Blum", "position": "Analyst" }, { "description": "Citi -- Analyst", "name": "Spiro Dounis", "position": "Analyst" }, { "description": "Scotiabank -- Analyst", "name": "Tristan Richardson", "position": "Analyst" }, { "description": "AllianceBernstein -- Analyst", "name": "Jean Salisbury", "position": "Analyst" }, { "description": "Barclays -- Analyst", "name": "Harry Mateer", "position": "Analyst" }, { "description": "Truist Securities -- Analyst", "name": "Neal Dingmann", "position": "Analyst" }, { "description": "Barclays -- Analyst", "name": "Theresa Chen", "position": "Analyst" }, { "description": "Wolfe Research -- Analyst", "name": "Keith Stanley", "position": "Analyst" }, { "description": "Seaport Global Securities -- Analyst", "name": "Sunil Sibal", "position": "Analyst" }, { "description": "Bank of America Merrill Lynch -- Analyst", "name": "Neel Mitra", "position": "Analyst" }, { "description": "Tuohy Brothers -- Analyst", "name": "Craig Shere", "position": "Analyst" } ]
[ { "name": "Operator", "speech": [ "Good day and welcome to the ONEOK third quarter 2023 earnings conference call and webcast. All participants will be in listen-only mode. [Operator instructions] After today's presentation, there will be an opportunity to ask questions. [Operator instructions] Please note, today's event is being recorded.", "I would now like to turn the conference over to Andrew Ziola, vice president, investor relations. Please go ahead, sir." ] }, { "name": "Andrew Ziola", "speech": [ "Thank you, Rocco, and welcome to ONEOK's third quarter 2023 earnings call. We issued our earnings release and presentation after the markets closed yesterday, and those materials are on our website. After our prepared remarks, management will be available to take your questions. Statements made during this call that might include ONEOK's expectations or predictions should be considered forward-looking statements and are covered by the safe harbor provision of the Securities Acts of 1933 and 1934.", "Actual results could differ materially from those projected in forward-looking statements. For a discussion of factors that could cause actual results to differ, please refer to our SEC filings. Just a reminder, for Q&A, we ask that you limit yourself to one question and a follow-up in order to fit in as many of you as we can. With that, I'll turn the call over to Pierce Norton, president and chief executive officer.", "Pierce." ] }, { "name": "Pierce Norton", "speech": [ "Thanks, Andrew. Good morning, everyone, and thank you for joining us. On today's call is Walt Hulse, the chief financial officer, treasurer, and executive vice president, investor relations and corporate development; and Sheridan Swords, executive vice president, commercial liquids and natural gas gathering and processing, which includes our commercial responsibility for our NGL business, refined products, and crude businesses. Also available to answer your questions are Chuck Kelley, senior vice president, commercial of natural gas pipelines; and Kevin Burdick, who has assumed the newly created position of executive vice president, chief enterprise services officer, with responsibilities for cybersecurity, information technology, enterprise optimization, innovation, and integration activities.", "This position will be vital as we continue to integrate systems, technologies, and workforces following the acquisition of Magellan. Kevin is uniquely qualified for his experience in integration processes, information technology, commercial and corporate operations to lead the company as we continue to identify, prioritize, and realize the value of the synergies as one company. We completed the acquisition just over a month ago. And since then, we've been fully focused on integration activities, maintaining the reliable and responsible operations our customers and stakeholders expect from us, and at the same time, exploring optimization and integrated opportunities by engaging the combined commercial, operational, and engineering teams.", "What has become evident at this point based on the number of commercial synergies and opportunities is the importance of prioritization, the value of combining our companies. The potential commercial synergies and the opportunities going forward are significant. More to come on this in the coming months. But after September 25th and gaining full access to both companies, I can say that the collaboration of our employees is already presenting additional possibilities.", "ONEOK's increased scale, scope, and diversified operations are already enabling us to create exceptional value for our stakeholders. We've added primarily fee-based earnings and expect significant free cash flow through the new refined products and crude businesses and expected tax synergies, which, combined with ONEOK's legacy operations, is setting up a strong finish to 2023 and a solid foundation for 2024 performance. Yesterday, we announced third quarter 2023 earnings and increased our full year 2023 financial guidance on a pre-acquisition basis for the second time this year. We also provided new consolidated guidance that includes the impact of the Magellan acquisition.", "Walt will provide more detail in our guidance a little bit later, which is underscored by our strong volumes across our systems and favorable market conditions continuing to drive confidence in our expectations. We saw double-digit growth in NGL and natural gas processing volumes in the third quarter and continued to see robust producer activity across our operations with North Dakota natural gas production reaching a new all-time high in August. The industry landscape is healthy. And now, with a more diversified portfolio of assets, we are even better positioned to make the most of opportunities across our operations.", "So, with that, I'll turn the call over to Walt for the financial performance and a guidance update." ] }, { "name": "Walt Hulse", "speech": [ "Thank you, Pierce. I'll start with a brief overview of our third quarter financial performance. ONEOK's third quarter 2023 net income totaled $454 million or $0.99 per share. Third quarter adjusted EBITDA totaled more than $1 billion, an 11% increase year over year.", "Adjusted EBITDA would have exceeded $1.1 billion for the third quarter of 2023 excluding $123 million of transaction costs, $35 million of third-party fractionation costs, and partial earnings from the refined products and crude segment. Refined products and crude segment earnings totaled $40 million of adjusted EBITDA from the six days following the close of the Magellan acquisition, which includes a $9 million mark-to-market gain on commodity derivative positions settling in the fourth quarter of 2023. It is worth noting, those six days of earnings aren't necessarily an indicator of full third quarter segment earnings, in part, due to the uptick in our seasonal butane blending business. As of September 30th, we had no borrowings outstanding under our $2.5 billion credit agreement and had more than $280 million of cash on hand.", "As we look ahead, we expect fourth quarter 2023 net debt to adjusted EBITDA, excluding transaction costs, to be approximately 3.7 times on an annualized run rate basis. Moving on to our increased guidance. On a pre-acquisition basis, we now expect 2023 net income midpoint of $2.61 billion and adjusted EBITDA midpoint of $4.8 billion, which is $125 million higher than our last guidance increase in August. These midpoints are specific to legacy ONEOK operations and exclude impacts from the Magellan acquisition in order to provide a more accurate comparison with our original 2023 guidance.", "Since that original guidance announcement in February, we've increased our adjusted EBITDA midpoint by $225 million. Our higher guidance expectations are driven by volume strength across our operations, higher average fee rates, lower-than-expected third-party NGL fractionation costs, and sustained strength in our natural gas pipeline segment. Moving on to our newly announced 2023 consolidated financial guidance, which includes impacts from the Magellan acquisition. We expect a consolidated net income midpoint of $2.6 billion and adjusted EBITDA midpoint of $5.1 billion.", "Consolidated guidance includes earnings from the refined products and crude segment following the close of the acquisition on September 25th and also includes $175 million of transaction costs. Earnings assumptions for the refined products and crude segment also include an approximately $40 million unfavorable earnings impact in 2023 related to commodity inventory balances being valued higher at the time of the acquisition than pre-acquisition value. As these inventories are sold, we will recognize a smaller margin than we would have -- than would have been recognized at the pre-acquisition value of the inventory. An additional $10 million unfavorable impact is expected in 2024 related to the same inventory valuation adjustment.", "The refined products and crude segment is expected to perform in line with its previously increased expectations, which reflects solid segment fundamentals despite the impact of the inventory valuation. We continue to expect total capital expenditures, including growth and maintenance capital and excluding legacy Magellan capex, of approximately $1.575 billion in 2023. This includes assumptions for continued strong producer activity and initial activities related to the expansion of Elk Creek pipeline and fully looping the West Texas NGL pipeline. As we look ahead, our financial outlook remains strong.", "When we announced the acquisition in May, we expected total combined adjusted EBITDA to approach $6 billion in 2024, supported by stable and growing volumes across our operations. As we stand today, our confidence in that outlook has only increased further, and we believe there is a potential to exceed those expectations. I'll now turn the call over to Sheridan for a commercial update." ] }, { "name": "Sheridan Swords", "speech": [ "Thank you, Walt. Let's start with our natural gas liquids segment. Third quarter 2023 NGL volumes increased 11% year over year, with all regions where ONEOK operates seeing increases compared with the third quarter of 2022. Compared with the second quarter of 2023, both Rocky Mountain and Mid-Continent NGL raw feed throughput increased 5%, driven by continued strong production activity in these basins, resulting in higher propane plus volumes and slightly higher ethane recovery levels.", "Rocky Mountain region volumes averaged more than 400,000 barrels per day in September. The continued growth in volume from the Rocky Mountain region provides momentum into 2024 and further supports why we have started initial long lead time activities for an Elk Creek pipeline expansion. We continue to maintain our ethane recovery assumptions for the remainder of the year with the Permian in near full recovery, the Mid-Continent in partial recovery, and opportunities to incent recovery in the Williston. In the natural gas gathering and processing segment, third quarter processed volumes averaged more than 2.3 billion cubic feet per day, a 12% increase year over year.", "As Pierce mentioned, North Dakota gas volumes have reached record production levels of more than 3.3 billion cubic feet per day in August. Our Rocky Mountain region processed volumes averaged more than 1.5 billion cubic feet per day during the third quarter and reached more than 1.6 Bcf per day in September. We've connected 450 wells in the region for the -- through the first nine months of the year, compared with approximately 245 connections during the same period last year, a more than 80% increase. We've also increased our well connect guidance for 2023 due to the strong pace of completions and now expect to connect 525 to 575 wells, compared with our previous guidance of 475 to 525 wells.", "Currently, there are approximately 37 rigs and approximately 15 completion crews operating in the basin, with 20 rigs and approximately half of the completion crews on our dedicated acreage, which remains more than enough activity to grow production. In the Mid-Continent region, third quarter processed volumes increased 10% year over year and increased 3% compared with the second quarter of 2023. We continue to see producers focused on higher crude-producing areas and currently have three rigs on our dedicated acreage in the region. We have connected 46 wells in the region through the first nine months of the year, compared with 40 in the same period last year.", "We expect to be at the high end of our Mid-Continent well connect guidance of 45 to 55 wells in 2023. Moving on to the refined product and crude segment. We only have six days of operation from this new segment in the third quarter due to the timing of the acquisition closing, but the segment continues to perform in line with expectations that were already increased earlier this year. Healthy business fundamentals continue to drive consistent performance, and we're currently seeing strong seasonal butane blending margins.", "Looking ahead, we see a growing list of opportunities, which will continue to drive growth in this segment through synergies. The more time we spend with the assets and with the legacy Magellan employees, we're seeing even more opportunities. In the natural gas pipeline segment, strong year-to-date results continue to benefit from demand from natural gas storage and transportation services, and we saw increased demand for interruptible services during the third quarter as extreme heat in Texas drove increased electric generation demand and pricing. We're seeing opportunities for additional expansion in Oklahoma and Texas -- with additional storage expansion in Oklahoma and Texas, and demand for long-term storage capacity remaining strong.", "We continue to work toward FID in the Saguaro Connector pipeline and expect to receive the presidential permit before the end of the fourth quarter. There has been significant interest from producers in the Permian Basin relative to shipping gas west to the potential LNG export facility and reported support from multi, large, well-known customers anchoring the export project. Here's -- this concludes my remarks." ] }, { "name": "Pierce Norton", "speech": [ "Thank you, Sheridan and Walt, for adding color to what was a very strong quarter. With only two months left in 2023, there's still time for progress to be made and a lot to be excited about. Since closing, I've had the privilege of visiting many of our field and office locations and will continue to visit additional sites. I'm energized by the enthusiasm and the collaboration that I've already seen between both the legacy ONEOK employees and the Magellan employees.", "I can say with certainty that we have an incredible teams in place. Thank you to all of our employees for what you're doing to continue our high level of service through safe and reliable operations. And thank you to our investors for your support and trust in our vision for the future of ONEOK. Our future is bright, and the long-term value of bringing our companies together will play out in the years ahead.", "With that, operator, we're now ready for questions." ] } ]
[ { "name": "Operator", "speech": [ "Thank you. [Operator instructions] Today's first question comes from Brian Reynolds with UBS. Please go ahead." ] }, { "name": "Brian Reynolds", "speech": [ "Hi. Good morning, everyone. Maybe to start off on synergies, I know that you've only had four weeks into the pro forma ONEOK and this larger growth capex projects will likely take some time to commercialize and talk about. So, curious if you can just talk about some of the smaller low-hanging fruit synergies that you've seen over the last few weeks, particularly around just commercial discussions around batching, blending, and bundling.", "Have you seen some initial commercial success and when can we see some realizations there? Thanks." ] }, { "name": "Pierce Norton", "speech": [ "So, I'll start off, and then I'm going to kick it over to Kevin on this. I'm going to kind of start with part of your question is, you know, kind of what have you seen immediately with some of the kind of the smaller things. You know, as you know, after closing, we do have immediate synergies that have been realized basically from day one, which are board costs, credit facility renewals, cyber insurance, audit fees, and then the executive organizational design that was put in place. So, all of those kind of things added up to some immediate savings that will be annualized, you know, primarily in next year.", "I'm going to turn it over to Kevin to kind of talk a little bit more about the process, both on the small things and the large things." ] }, { "name": "Kevin Burdick", "speech": [ "Yeah, Brian. As we think about kind of how we went through the process and how we're tracking, if you go back to really the announcement back in May, is we immediately started kind of documenting all the synergy opportunities through the integration planning work we were doing. Once we got close, then we had access to a lot more information, a lot more data. We continued to refine those estimates of existing opportunities, and we found new ones as well as the companies got to talk more closely.", "At this point, we've got around 250 different opportunities that we've identified. And now, we're going through and prioritizing those based on value, time to achieve, or is there capital required, things like that. In many cases, like Pierce mentioned, some of it have been captured. Several others are being worked right now as we speak.", "And then others still, we've got teams in place that are identifying, developing plans to go capture. I think the key is for each of these opportunities, we have owners identified that are held accountable for the results and we've got tracking mechanisms in place that were tracking status, what's been captured, how that relates to the forecast and our estimates as we go forward. So, that's kind of a general kind of overview of the process. As it relates to some of the commercial synergies you asked about, yes, some of those may be a little longer -- you know, longer lead time.", "But Sheridan and his team have teams in place that are working these high-priority items that are -- that have the opportunity to drive the most value. And then I'll just kind of close the question with all this will be factored in as we think about our guidance and go out with '24 guidance probably in February of next year. These will all be factored in and will be included in that guidance as we move forward." ] }, { "name": "Brian Reynolds", "speech": [ "Great. Thanks. I appreciate all that. Maybe to pivot just toward the forward growth capex outlook.", "Relative to the initial S-4, it seems like ONEOK has pulled forward some capex related to West Texas LPG and Elk Creek expansions. And it seems like Saguaro is trending toward more of a JV-type relationship, which could defer capital further. So, perhaps could you just update us on kind of a forward capex outlook maybe for '24 and beyond, just given some of these recent trends, and does it imply that ONEOK could be trading closer to a 10% free cash flow yield if capex trends lower? Thanks." ] }, { "name": "Walt Hulse", "speech": [ "Well, Brian, we aren't going to give you 2024 capex guidance today. I think that all of the material projects have been disclosed at this point. And, you know, as we look toward 2024 and the opportunities that we have, we see quite a bit of opportunity without any significant material capital projects that we're ready to announce. So, we think we're set up very well for 2024, but we'll give you the guidance in February to firm that number up." ] }, { "name": "Brian Reynolds", "speech": [ "Great. Fair enough. I'll leave it there. Have a great rest of your morning." ] }, { "name": "Operator", "speech": [ "Thank you. And our next question today comes from Jeremy Tonet with J.P. Morgan. Please go ahead." ] }, { "name": "Jeremy Tonet", "speech": [ "Hi. Good morning." ] }, { "name": "Pierce Norton", "speech": [ "Good morning, Jeremy." ] }, { "name": "Walt Hulse", "speech": [ "Good morning, Jeremy." ] }, { "name": "Jeremy Tonet", "speech": [ "Just maybe wanted to pick up on the last question a little bit and fully appreciate not giving '24 guidance today, but just trying to get a state of affairs as it stands right now. And I think -- you know, I wanted to be kind of clear, I guess, on the guidance and if I'm looking at this the right way, if what's implied for remainder of the year for fourth quarter, about, I think, just over 1.4 billion. But then on a normalized basis, you back out most of that 50 million inventory adjustment, and then there's 40 million or so of transaction costs. So, it seems like the run rate for the business might be close to 1.5 billion looking at 4Q.", "Now, granted there's seasonality that can impact that at different points throughout the year, but then you also have 200 million of synergies from Magellan that should be realized and you do have an increasing GOR, and there's other, you know, projects set to come on over time in '24. I'm just wondering, moving pieceswise, is that encapsulate -- what we should be thinking about? Is that a good base to work off of or any other color on these pieces would be helpful?" ] }, { "name": "Walt Hulse", "speech": [ "Well, Jeremy, I think you've done a good job of summarizing some of the moving parts there. And, you know, those, at this point, I would say are all moving in a favorable direction. In my prepared remarks, I mentioned that on a run rate basis after you take out the merger expenses and the like that we expect to be approximately at 3.7 times debt to EBITDA in the fourth quarter, which is ahead of the expectations that we had when we announced the transaction. So, that's obviously showing that we've got favorable free cash flow materializing, and that's going to give us even more flexibility as it relates to capital allocation as we go into 2024.", "And we'll update you all on that as we get into the 2024 season." ] }, { "name": "Jeremy Tonet", "speech": [ "Got it. That's very helpful. And I guess --" ] }, { "name": "Pierce Norton", "speech": [ "Well, Jeremy, this is Pierce. You know, we do the same thing we've always done, which is we continue to look at different things out there. And like Walt said, you know, with the capital allocation strategy that we have, you know, it's just a lot more flexible going forward post-Magellan and especially with our debt to EBITDA metrics coming down quicker than what we expected. So, it's probably about as much color as I can give you right now." ] }, { "name": "Jeremy Tonet", "speech": [ "Got it. That's helpful. I'll leave it there. Thanks." ] }, { "name": "Operator", "speech": [ "Thank you. And our next question today comes from Michael Blum with Wells Fargo. Please go ahead." ] }, { "name": "Michael Blum", "speech": [ "Thanks. Good morning, everyone. I wanted to ask on the West Texas NGL pipeline expansion. In the slide, you mentioned optionality to use the legacy system for NGLs, refined products, or crude.", "I'm wondering if you can just expand on that. Is there any way to get a sense of how you think that will kind of split over time?" ] }, { "name": "Sheridan Swords", "speech": [ "Michael, this is Sheridan. I think what we're talking about there is that, as we explained before, the legacy system that we bought from Chevron, we've been looping that system from West Texas all the way into the Fort Worth area, where we tie into the Arbuckle II pipeline. When that loop is completed, which is in our West Texas project, we can segregate out the legacy system, the system we bought from Chevron, and use it for a different product. And that is one of the things we're looking at in synergies and we'll continue to evaluate as we go forward.", "But that gives us an opportunity to be able to move more product back into the Permian, whether that be, you know, refined products, where it gives us an opportunity to move crude out of the Permian into the Gulf Coast or leave it in NGL service. That's probably more of a longer-term-type synergy that we have right now as we continue to look at that. But we do think that is an opportunity going forward to be able to leverage our three liquid pipeline streams in that pipeline, what we use it for." ] }, { "name": "Michael Blum", "speech": [ "OK. Got it. Thanks for that. And then just one question on the Bakken.", "It seems like the Bison XPress pipeline project is moving ahead. So, I wanted to just get your thoughts on that project. Does this reduce ethane recoveries volumes for you or, ultimately, should we think of this as a sort of a tailwind because, ultimately, it opens up the potential for more natural gas production in the basin, which obviously would lead to more associate NGL production?" ] }, { "name": "Sheridan Swords", "speech": [ "Michael, I think what this project does is make sure that we have enough natural gas takeaway out of the basin. We wouldn't want that to be a constraint on the producers up there. Well, I do not think it has a big impact on our incentivized ethane program that we've had going on there because, today, there's enough natural gas production coming out of the basin. So, I think it's going to allow the producers to continue to grow and have a surety of natural gas takeaway without hurting our ethane recovery benefits that we have today." ] }, { "name": "Michael Blum", "speech": [ "Great. Thank you." ] }, { "name": "Operator", "speech": [ "Thank you. And our next question today comes from Spiro Dounis with Citi. Please go ahead." ] }, { "name": "Spiro Dounis", "speech": [ "Thanks, operator. Good morning, team. First question just to maybe on the export opportunity, I don't think that was a synergy necessarily when you announced the deal, but something you may have been better positioned to do post-Magellan. Just curious where that stands now and if expanding into exports is kind of high on the priority list of things to do post-close?" ] }, { "name": "Pierce Norton", "speech": [ "Spiro, this is Pierce, and I'll let Sheridan kind of fill in some of the details here. But we've said all along that what Magellan brings to us is the expertise to operate docks and to build docks and to just really understand the dynamics of marketing across docks. We don't expect to necessarily turn any of those docks into anything other than what they're currently doing. But we do believe that global demand will continue to grow, both in crude and both in probably refined products and liquefied petroleum gas and propane.", "So, you know, we're going to continue to look at that. And as the market dictates and as we learn more and we get some customers that either on the producing side or the takeaway side that wants to take space across docks, then we're going to continue to look at that. So, Sheridan, you got anything to add?" ] }, { "name": "Sheridan Swords", "speech": [ "The only thing I would add to that, Pierce, is that with the addition of the Magellan employees, we have much more confidence in both our engineering and operation capabilities since that is what they bring to the table since they are already operating marine docks and have built marine docks." ] }, { "name": "Spiro Dounis", "speech": [ "Got it. That's a great color. Thanks for that, guys. Second question, just going to the Bakken, I guess we're hearing increased talk of peers maybe looking to develop LNG infrastructure in the region, too.", "You've obviously got a pretty good stronghold there, but just curious how you're assessing the risk of kind of new competition in the basin going forward?" ] }, { "name": "Sheridan Swords", "speech": [ "What I -- this is Sheridan again. What I would say on competition coming in the basin is what we've said for many times is that on the G&P side, we have 60% of the market share, and that feeds our NGL pipeline. So, we're very -- feel very secure about that volume. And then on the third-party NGL customers, we have long-term contracts with them.", "And that also gives us a surety that we will be able to maintain our volume coming out of the Bakken and be able to capture the growth going forward." ] }, { "name": "Spiro Dounis", "speech": [ "Great. That's all I had today, guys. Thank you." ] }, { "name": "Operator", "speech": [ "Thank you. And our next question today comes from Tristan Richardson with Scotiabank. Please go ahead." ] }, { "name": "Tristan Richardson", "speech": [ "Hey. Good morning, guys. Appreciate the comments on what you're seeing so far early in the merger. Just curious like, hey, we've replaced the concentric circle with the telescope, but in that telescope, you talked about, you know, mid to high single-digit dividend growth.", "Curious about capital allocation now that the merger is closed and thinking about balancing project opportunities with allocating free cash toward repurchases and dividend growth to be competitive with peers." ] }, { "name": "Walt Hulse", "speech": [ "Yeah. Well, Tristan, you know, as I just mentioned, you know, our debt metrics are coming in line even quicker than we had expected. We continue -- we think that direction will continue, and that's going to give us significantly greater flexibility as we move forward to think about capital allocation. It's going to give us plenty of capital to take advantage of high-return projects as they become available and think about ways of returning value to shareholders.", "And we're going to lay that out as we get into '24 as we see forward where our debt metrics are headed, and we'll give you more clarity as we get into February." ] }, { "name": "Tristan Richardson", "speech": [ "Appreciate it, Walt. And then maybe, Sheridan, where do you see sort of this GOR theme, particularly in the Bakken, going long term, and particularly as producers consolidate -- operator consolidation drives producer efficiency. But just where -- what's the endgame or in terms of where do we top out from a GOR perspective long term?" ] }, { "name": "Sheridan Swords", "speech": [ "You know, Tristan, that's a good question, and we've had that talk to our producers about that as well, and they don't know where the top end of it is. What we do know is as wells continue to age, the GOR continues to grow up -- grow. Now, we do see some up and down in the GOR overall for the basin because as new rigs come on, depending on where they come on, they may have a starting point of a lower or higher GOR. So, overall, it makes it move around.", "But every well up there, as it continues to decline, the GORs continue to rise. And so, that gives us a lot of confidence that even in a flat crude environment, which crude is growing right now, but in a flat crude environment, we are still going to see some pretty good growth in the gas volume in the basin." ] }, { "name": "Tristan Richardson", "speech": [ "Appreciate it. Thank you, gentlemen." ] }, { "name": "Operator", "speech": [ "Thank you. And our next question today comes from Jean Ann Salisbury with Bernstein. Please go ahead." ] }, { "name": "Jean Salisbury", "speech": [ "Hi. Good morning. You referenced contracting in the Permian on nine plants to kind of underpin West Texas LPG and the looping. Can you give any more detail on the duration of those contracts, even qualitatively? As I'm sure you're aware, we seem to be heading toward severe Permian NGL pipe overbuild in 2025.", "So, having long-term contracts seems important." ] }, { "name": "Sheridan Swords", "speech": [ "I would say that we have long-term contracts. That's the people that we have contracted with both now and for the LPG expansion or the NGL expansion are long-term contracts. So, we feel comfortable that we have the volume behind to be -- to have a very favorable return on that project and with a lot of upside as we continue to grow. We think it's a very cost-effective way to do it, that we can be able to compete going forward, even as new pipelines come online." ] }, { "name": "Jean Salisbury", "speech": [ "Thanks. That's helpful. And you may have said this before, but can you remind us roughly what portion of the liquids pipelines for the combined company do you think you can generally take the full PPI indexation on?" ] }, { "name": "Sheridan Swords", "speech": [ "On the liquids pipelines, on the NGL pipeline, a lot of that is more driven by individual contracts as we do. It's not as much on the tariff itself. And then there's a larger portion of that on our new refined products system that contain that. But about 70% of our tariffs on the refined product system are at market rate that we can move as we want to.", "And so, 30% would be more on a FERC tariff rate." ] }, { "name": "Jean Salisbury", "speech": [ "Great. Thanks so much." ] }, { "name": "Operator", "speech": [ "Thank you. And our next question today comes from Harry Mateer with Barclays. Please go ahead." ] }, { "name": "Harry Mateer", "speech": [ "Hey. Good morning. You know, while you mentioned the 3.7 times annualized run rate leverage number for 4Q ex transaction costs, I guess following up on Jeremy's question a bit, just curious how much seasonality is in that number and can you just confirm your goal is still to bring leverage to the 3.5 times level that you previously laid out? And it sounds like more quickly than you previously thought." ] }, { "name": "Walt Hulse", "speech": [ "Well, Harry, we're pretty positive on '24 and where things are headed. So, I think that, you know, we expect to continue to make progress on our leverage metrics as we go throughout 2024. You know, we've said aspirationally all along that 3.5 is a good spot to be. We don't care if we go below it a little bit.", "That's fine. If we've got significant earnings and it drives our debt to EBITDA below 3.5, you know, that's a good problem to have. So, we're very pleased with the trajectory of that credit metric and have no reason to think it's going to change any direction." ] }, { "name": "Harry Mateer", "speech": [ "OK. Thanks. And then my follow-up is when you think about that target, how do you go about the balance between EBITDA growth and debt reduction? And maybe put differently, should we think about ONEOK being in the bond market refinancing? You have some small maturities next year. Do you think it's more likely that free cash will take care of that and maybe that puts ONEOK out of the bond market for a while as things currently stand?" ] }, { "name": "Walt Hulse", "speech": [ "Well, I'm not going to say we will or we won't be in the bond market, but I would just say that the last several maturities that we've had, we've called for cash. We're generating a lot of cash. So, I think we've got the flexibility to manage our debt portfolio in a very comfortable manner. But we're going to keep our flexibility.", "If it makes sense for us to go to the credit markets for a reason, we're -- you know, we may or may not do that. But you can see what we've done in the last several -- and given the size, we're probably going to maintain that flexibility." ] }, { "name": "Harry Mateer", "speech": [ "OK. Understood. Thank you." ] }, { "name": "Operator", "speech": [ "Thank you. And our next question today comes from Neal Dingmann with Truist Securities. Please go ahead." ] }, { "name": "Neal Dingmann", "speech": [ "[Inaudible] thanks for the time. My first question is just around the synergy ops that you talked about on Slide 8 specifically. I don't know if you all could comment yet, maybe it's too early, but I'm just wondering if you could comment on how quickly you all are thinking about the potential for start realizing some of that batching upside, which looks quite interesting." ] }, { "name": "Kevin Burdick", "speech": [ "I mean, just in general, as we look at the synergies, obviously, they're going to -- there's going to be a variety of scenarios that play out. Some will get very quickly, potentially by the end of the year. There may be others that are going to take some capital and some effort to put things in the pipeline in the ground or other activities like that that may span out a ways. So, it'll be a blend.", "But I think, again, the focus here is that, you know, our confidence level in achieving these things continues to grow as we get more information." ] }, { "name": "Neal Dingmann", "speech": [ "That makes sense. And then -- go ahead. Go ahead, I'm sorry." ] }, { "name": "Pierce Norton", "speech": [ "Well -- so this is Pierce. What I was going to tell you is that kind of a tagging on to what Kevin is saying is that we are confident that these opportunities are there. It's just a matter of the timing of when they come in. And we'll let you know that as we give our guidance from year to year." ] }, { "name": "Neal Dingmann", "speech": [ "OK. Thanks for that add. And then just -- you touched upon this a little bit earlier, and my second question is just on Rockies and Mid-Con activity. It seems like last quarter was solid.", "You talked about a number of connects there, especially in the Rockies. I'm just wondering, are you currently seeing sort of similar type of activity? Just any color you could add there. Thank you." ] }, { "name": "Sheridan Swords", "speech": [ "This is Sheridan -- Neal, this Sheridan. Yeah, we still are seeing good activity in the Bakken. You know, we've increased our well count activity, and that's to show you what we're seeing. And we think that's going to continue or know that's going to continue into 2024 in the Bakken.", "So, we're very excited about that. And that's why we continue moving on long lead time items for the Elk Creek expansion. And then the Mid-Continent, as we said multiple times, has really been surprising us to the upside that more producer activity out there, especially with oil-driven rigs that are producing high GPM or high liquid content gas. That's really not only producing more gas in the region but also more liquids for the NGL pipeline.", "So, we continue to see growth being -- very -- we're very optimistic about growth going through the fourth quarter and into 2024." ] }, { "name": "Neal Dingmann", "speech": [ "Great details. Thanks, guys." ] }, { "name": "Operator", "speech": [ "Thank you. And our next question today comes from Theresa Chen with Barclays. Please go ahead." ] }, { "name": "Theresa Chen", "speech": [ "Hi. I wanted to ask related to the line of commentary around the synergies. Can you just help us think about how much commercial synergies are in that 450 to 470 2023 refined products and crude EBITDA guidance for the year? And specifically, are there incremental butane blending opportunities during this winter in 4Q outside of what MMP had locked in during this past summer, just in light of still elevated octane spreads versus historical levels and your natural length in butane, coupled with your marketing and optimization capabilities?" ] }, { "name": "Sheridan Swords", "speech": [ "Theresa, yeah, we do think there's a little bit this quarter. You said it best. A lot of it has been locked down or been hedged, but we do have some above that, and we are seeing wider spreads at this time. So, availability is there.", "And also, with our position -- legacy normal butane position, there's opportunity there. We'll have the butane available, and we can work a little bit on logistics costs. We think most of that is really going to come as we come into next year. We will see a much bigger opportunity for synergies in the butane blending in the 2024 time frame." ] }, { "name": "Theresa Chen", "speech": [ "Thank you." ] }, { "name": "Operator", "speech": [ "Thank you. And our next question today comes from Keith Stanley with Wolfe Research. Please go ahead." ] }, { "name": "Keith Stanley", "speech": [ "Hi. Good morning. First, just a follow-up on West Texas LPG. It's a big step up in capacity from 300 a day to 740.", "Do you see any strategic rationale to building or buying Permian plants to bolster your long-term NGL supply position? It would seem like you'd have a lot of synergies doing that and a lot of operating leverage as you fill the pipeline." ] }, { "name": "Sheridan Swords", "speech": [ "Keith, we continue to look at that, and we've looked at a lot of different opportunities out there. What I can tell you is just by us expanding, we started off at about 140,000 barrels a day. Now, we're going up to 700,000 barrels a day. It has not been an impediment for us to be able to contact -- contract NGLs on that pipeline, but we will continue to look at as opportunities come.", "If we need to get into the G&P space and if it makes sense, we will get into it and do that. But so far, we've been able to contract and expand that pipeline without having the G&P presence. And a lot of that is if you think about it, we have a very integrated value chain and touch a lot of the producers out there in many different areas. So, if we look holistically across our system, we can create and offer a very attractive program to them to incentivize barrels coming onto our West Texas system." ] }, { "name": "Pierce Norton", "speech": [ "Hey, Keith. This is Pierce. I think this is the point in the call where I tell you that we're going to be intentional and disciplined about any future M&A opportunities." ] }, { "name": "Keith Stanley", "speech": [ "Got it. Thanks for that. Second question on Saguaro, and sorry if I missed this, but can you say -- are you in discussions or looking at working with potential partners on the project or do you think it's more likely you would move forward on that by yourself?" ] }, { "name": "Kevin Burdick", "speech": [ "Yeah. We're in a position right now where we're working toward FID and expecting the presidential permit here at -- by the end of the year. And, you know, we'll lay out the full program if and when we get to that FID point in time." ] }, { "name": "Keith Stanley", "speech": [ "OK. Thank you." ] }, { "name": "Operator", "speech": [ "Thank you. And our next question comes from Sunil Sibal with Seaport Global Securities. Please go ahead." ] }, { "name": "Sunil Sibal", "speech": [ "Yeah. Hi. Good morning, everybody, and thanks for taking my question. So, my first question was related to the West Texas LPG, and I apologize if I missed this.", "Could you indicate what is that system running at right now? It seems like, in Q3, you had a little bit of a step-down in volumes." ] }, { "name": "Sheridan Swords", "speech": [ "West Texas LPG throughput, yeah, we can -- I'm sorry. Sunil, is your question about how -- what are our volumes looking at like on the West Texas throughput today?" ] }, { "name": "Sunil Sibal", "speech": [ "Yeah, ballpark." ] }, { "name": "Sheridan Swords", "speech": [ "Yeah. Our volumes continue to -- we continue to grow that volume, especially as we bring some of these plants online. But right now, we're running about, you know, 400 and -- we -- 430,000 barrels a day. It's coming through our whole Gulf Coast -- Permian and Gulf Coast system on the LPG.", "And we have capacities -- when we get this completed, we will be able to have capacity for over 740,000 barrels a day." ] }, { "name": "Sunil Sibal", "speech": [ "OK. And thanks for that. And then my second question was a little bit more broader. You know, we've seen a number of E&P deals announced over the course of the last few months, and I was curious, you know, if you had any dialogues with your E&P customers with regard to that or how is that impacting your dialogue with the producer customers?" ] }, { "name": "Pierce Norton", "speech": [ "So, I'll kind of take -- I think that's a big-picture question. First of all, I think with -- you know, go all the way back to Oxy, you know, with what they did with Anadarko. And then fast forward to what Exxon has done, and then most recently Chevron. We actually view that as very positive because most of those companies are kind of reinvesting in domestic production, very large companies.", "So, we see that as a positive for domestic production here in the United States. So, that's the first thing I'd say. The second thing was -- is we do business with all of those people. And now that we are not only in gathering and processing but in natural gas pipelines, in the NGL business, refined products and crude, that goes into this bundling concept where when you have that as a producer, one are your areas you've added are different businesses going forward.", "We just feel like there's even going to be more opportunities to bundle different deals together to get more and more businesses with these larger companies." ] }, { "name": "Sunil Sibal", "speech": [ "OK. Thanks. Thanks, Pierce." ] }, { "name": "Operator", "speech": [ "Thank you. And our next question today comes from Neel Mitra with Bank of America. Please go ahead." ] }, { "name": "Neel Mitra", "speech": [ "Hey. Good morning. Thanks for taking my questions. So, it seems like everything is going well.", "You're going to be below four times leverage easily for 2024, and the 6 billion in guidance seems pretty conservative. How are you looking at shareholder returns right now? Is a repurchase program in 2024 on the table, just as we look for how to return cash to shareholders after this merger, and when we can think about how we're going to do that?" ] }, { "name": "Walt Hulse", "speech": [ "Well, I would say, clearly, our financial flexibility is increasing and all of the capital allocation tools that are available are available to us and will be considered going forward. So, plenty of flexibility, and stay tuned." ] }, { "name": "Neel Mitra", "speech": [ "OK. Great. And then second question on building an LPG terminal on the Gulf Coast. Some of your peers have talked about how they initially priced the greenfield.", "And now, they will price everything at brownfield to try to combat new entrants. Does this make LPG exports or a new terminal kind of lower on the priority list than the batching, bundling, etc. when you consider the barriers to entry just with pricing for existing players that are in the space right now?" ] }, { "name": "Sheridan Swords", "speech": [ "Neel, this is Sheridan. We still have aspirational to have the LPG export terminal. We're not going to do a project that's uneconomical, but we do have one of -- or the only person that has the amount of volume at our disposal to be able to support a new dock. And we do have customers that are interested in seeing a new dock being built.", "So, we think there's an opportunity there as well. As it relates to how we prioritize that with our other opportunities, we're going to -- as Kevin said, we're going to look at things on capital, how quick that we can get it to market, and how much money we're going to make on that to determine which projects we have our resources work on. But I don't think that the LPG export dock has moved down in the list from where it is before. We still are continuing to look at it and still have conversations, but it is a much longer-term project than some of the other ones that we have in the synergy category." ] }, { "name": "Neel Mitra", "speech": [ "Got it. I appreciate the commentary. Thank you." ] }, { "name": "Operator", "speech": [ "Thank you. And our final question today comes from Craig Shere with Tuohy Brothers. Please go ahead." ] }, { "name": "Craig Shere", "speech": [ "Hi. Congratulations on the closing and quarter and thanks for taking the question. Just one for me, and you've kind of talked around this a little bit or kind of responded to some Q&A on it. But, Pierce, you mentioned prioritizing incremental commercial opportunities identified post-close at the start of this call.", "And I'm a little unclear given all the commentary if this is mostly about chopping wood and management bandwidth or despite better-than-expected deleveraging, are you starting to see more accretive capital deployment opportunities than you're prepared to pursue all at once?" ] }, { "name": "Pierce Norton", "speech": [ "Well, what we are seeing is as we have put these to -- you know, just as a reminder, you know, prior to September the 25th, you are limited in how much discussion and how far you can go with some of these discussions, both on with people, contracts, commercial opportunities. So, what we're seeing is as we have gotten access to all the information, all the contracts, and the people, and our people are working together, we're just seeing more and more opportunities. And so, we're going to prioritize this. It's hard to tell right now if we've overrun some of those kind of things.", "But that's something that we're -- you know, we definitely have enough that we can prioritize the things that are going to make the highest impact in the shortest amount of time. So, those are the ones that we're focusing on, and we're managing through the rest of them. But we're not going to lose an opportunity because we feel like we're -- you know, we don't have resources. We'll get resources to deal with those." ] }, { "name": "Craig Shere", "speech": [ "Fair enough. Thank you." ] }, { "name": "Operator", "speech": [ "Thank you. And ladies and gentlemen, this concludes our question-and-answer session. I'd like to turn the conference back over to Andrew Ziola for closing remarks." ] }, { "name": "Andrew Ziola", "speech": [ "All right. Thank you, everybody. Our quiet period for the fourth quarter starts when we close our books in January and extends until we release earnings in late February. We'll provide details for that conference call at a later date.", "Thank you for joining us and have a good day." ] }, { "name": "Operator", "speech": [ "[Operator signoff]" ] } ]
OKE
2023-05-03
[ { "description": "Vice President, Investor Relations and Corporate Affairs", "name": "Andrew Ziola", "position": "Executive" }, { "description": "President and Chief Executive Officer", "name": "Pierce Norton", "position": "Executive" }, { "description": "Chief Financial Officer and Executive Vice President, Strategy and Corporate Development", "name": "Walt Hulse", "position": "Executive" }, { "description": "Executive Vice President and Chief Operating Officer", "name": "Kevin Burdick", "position": "Executive" }, { "description": "UBS -- Analyst", "name": "Brian Reynolds", "position": "Analyst" }, { "description": "JPMorgan Chase and Company -- Analyst", "name": "Jeremy Tonet", "position": "Analyst" }, { "description": "President, Gathering and Fractionation", "name": "Sheridan Swords", "position": "Executive" }, { "description": "Wells Fargo Securities -- Analyst", "name": "Michael Blum", "position": "Analyst" }, { "description": "Scotiabank -- Analyst", "name": "Tristan Richardson", "position": "Analyst" }, { "description": "Barclays -- Analyst", "name": "Theresa Chen", "position": "Analyst" }, { "description": "Citi -- Analyst", "name": "Spiro Dounis", "position": "Analyst" }, { "description": "AllianceBernstein -- Analyst", "name": "Jean Salisbury", "position": "Analyst" }, { "description": "Truist Securities -- Analyst", "name": "Neal Dingmann", "position": "Analyst" }, { "description": "Bank of America Merrill Lynch -- Analyst", "name": "Neel Mitra", "position": "Analyst" }, { "description": "Seaport Global Securities -- Analyst", "name": "Sunil Sibal", "position": "Analyst" }, { "description": "Senior Vice President, Natural Gas", "name": "Chuck Kelley", "position": "Executive" }, { "description": "Tudor, Pickering, Holt and Company -- Analyst", "name": "Colton Bean", "position": "Analyst" }, { "description": "Tuohy Brothers -- Analyst", "name": "Craig Shere", "position": "Analyst" } ]
[ { "name": "Operator", "speech": [ "Good day, and welcome to the ONEOK first quarter 2023 earnings conference call and webcast. [Operator instructions] After today's presentation, there will be an opportunity to ask questions. [Operator instructions] Please note, this event is being recorded. I would now like to turn the conference over to Andrew Ziola, VP of investor relations.", "Please go ahead." ] }, { "name": "Andrew Ziola", "speech": [ "Thank you, Chad, and welcome to ONEOK's first quarter 2023 earnings call. We issued our earnings release and presentation after the markets closed yesterday, and those materials are on our website. After our prepared remarks, management will be available to take your questions. Statements made during this call that might include ONEOK's expectations or predictions should be considered forward-looking statements and are covered by the safe harbor provision of the Securities Acts of 1933 and 1934.", "Actual results could differ materially from those projected in forward-looking statements. For a discussion of factors that could cause actual results to differ, please refer to our SEC filings. Just a reminder for Q&A, we ask that you limit yourself to one question and one quick follow-up in order to fit in as many of you as we can. With that, I'll turn the call over to Pierce Norton, president and chief executive officer.", "Pierce." ] }, { "name": "Pierce Norton", "speech": [ "Thanks, Andrew. Good morning, everyone, and thank you for joining us. On today's call is Walt Hulse, our chief financial officer and executive vice president, investor relations and corporate development; and Kevin Burdick, the executive vice president and chief commercial officer. Also available to answer your questions are Sheridan Swords, senior vice president, natural gas liquids and natural gas gathering and processing; and Chuck Kelley, senior vice president, natural gas pipelines.", "Yesterday, we announced first quarter 2023 earnings and affirmed our full year 2023 financial guidance. Strong first quarter results were supported by continued earnings growth in each of our businesses, with higher natural gas processed and natural gas liquids volumes providing a solid start to the year. Producer activity continues to drive new volume to our assets, and recent conversations with customers point to additional activity through the remainder of the year. Crude prices well above breakeven economics in the basins where we operate and continued strong demand for U.S.", "energy support a constructive outlook for 2023. We provide midstream services to some of the largest, most well-capitalized producers in the U.S., helping contribute to our history of earnings stability and growth despite commodity prices. We continue to evaluate infrastructure and the needs of these customers so that we can provide added capacity or services aligned with their growth. The successful completion of our Demicks Lake III natural gas processing plant and MB-5 fractionator projects provide additional system capacity and resiliency and are examples of our continued focus on organic growth, aligned with our customers' needs.", "We remain financially well positioned, with significant balance sheet strength and flexibility to support continued growth. Our capital allocation priorities remain consistent, with ONEOK's unique ability to identify and execute on high-return organic growth opportunities setting us apart. With that, I'll turn the call over to Walt for a discussion of our financial performance." ] }, { "name": "Walt Hulse", "speech": [ "Thank you, Pierce. ONEOK's first quarter 2023 net income totaled 1.05 billion, or $2.34 per share, and adjusted EBITDA for the period totaled $1.72 billion. As we discussed on our last call, we booked the gain related to the Medford insurance settlement in the first quarter, resulting in a net increase in operating income and adjusted EBITDA of $733 million. This reflects the insurance settlement gain of $779 million, offset partially by $46 million of third-party fractionation costs incurred during the first quarter.", "We expect third-party fractionation costs to remain around this level with the potential to decrease through the remainder of the year as our MB-5 fractionator ramps up. Excluding the Medford impact, net income increased 24% year over year and adjusted EBITDA increased 14% over the same period, benefiting from increased NGL and natural gas processed volumes, higher average fee rates, and higher natural gas storage rates. We ended the first quarter with a higher inventory of unfractionated NGLs, primarily due to the timing of the MB-5 fractionator being placed in service, and expect to recognize approximately $12 million over the second and third quarters as that inventory is fractionated and sold. In April, Moody's upgraded ONEOK's credit rating to Baa2 from Baa3, recognizing our significant deleveraging, conservative financial policy, and consistent strong operating and financial governance.", "Our net debt to EBITDA remains below our long-term target of 3.5 times, and we had $680 million of cash and equivalents as of March 31. Our cash balance is primarily made up of highly liquid government and Treasury money market funds and deposit fully insured by the FDIC. We've reduced our total debt -- net debt by more than $1 billion compared with the first quarter of 2022. In February 2023, we redeemed $425 million of 5% notes due September 2023.", "And we recently announced a June redemption of $500 million of 7.5% notes due September 2023, both with cash on hand. As Pierce mentioned, we affirmed our financial guidance expectations in yesterday's earnings release. With our strong first quarter performance and positive outlook for the remainder of the year, our confidence remains high in achieving our financial guidance. I'll now turn the call over to Kevin for a commercial update." ] }, { "name": "Kevin Burdick", "speech": [ "Thank you, Walt. Let's start with our natural gas liquids segment. First quarter 2023 NGL volumes increased both year over year and compared with the fourth quarter 2022, with higher producer activity levels driving increased C3 plus or propane plus volumes on our system. Permian Basin volumes saw the largest increase, up 17% compared with the first quarter of 2022 and 14% compared with the fourth quarter of 2022.", "We continue to have success contracting additional volumes in the basin and connected one new third-party natural gas processing plant during the first quarter. Permian producer activity remains strong, and we continue to consider incremental expansions on our West Texas NGL system to accommodate increasing volumes. Volumes in the Rocky Mountain region increased during the first quarter compared with the same period last year and decreased slightly compared with the fourth quarter of 2022. The decrease was driven entirely by reduced ethane recovery as our propane plus volumes increased sequentially.", "We expect volumes to continue to grow in the spring and summer months. In the Mid-Continent region, consistent producer activity in the STACK and SCOOP continues to drive NGL volumes on our system. Raw feed throughput volumes increased compared with the fourth quarter of 2022, driven primarily by higher ethane recovery. Regarding the macro ethane environment, we expect domestic petrochemical utilization rates to continue to improve as we move through 2023, with lower sustained natural gas pricing and lower ethane inventory levels driving improved ethane economics and volumes across our system.", "Through the remainder of the year, we continue to expect that the Permian Basin will stay at high levels of ethane recovery, the Mid-Continent will be in partial recovery, and that we will have opportunities for incentivized recovery in the Rocky Mountain region. In April, we completed our 125,000 barrels per day MB-5 fractionator in Mont Belvieu. With MB-5 now fully operational, our systemwide fractionation capacity is nearly 900,000 barrels per day. The added capacity will be used to accommodate volume growth and reduce third-party fractionation needs.", "We remain on track to complete our MB-6 fractionator in the first quarter of 2025. In the natural gas gathering and processing segment, first quarter processed volumes averaged more than 2.1 billion cubic feet per day, an 11% increase compared with the first quarter of 2022. In the Rocky Mountain region, processed volumes averaged nearly 1.4 billion cubic feet per day during the first quarter and have recently reached more than 1.5 Bcf per day. We connected nearly 150 wells in the region during the quarter, compared with approximately 90 connections in the first quarter of 2022, a more than 60% increase.", "Well connections in the region are currently on pace to exceed our guidance midpoint of 500 for the year. There are currently approximately 40 rigs and 23 completion crews operating in the basin, with 20 rigs and approximately half of the completion crews on our dedicated acreage. We continue to expect additional rigs entering the region as we exit winter. In the Mid-Continent region, first quarter processed volumes averaged more than 750 million cubic feet per day, a 27% increase year over year.", "We connected 11 wells in the region during the first quarter, compared with six in the first quarter of 2022 and are on track to be within our guidance of 45 to 55 connections. There are currently more than 50 rigs and 11 completion crews operating in the region, with 10 rigs on our dedicated acreage. Despite weakness in natural gas prices, we continue to see strong activity in the higher-crude and NGL-rich producing areas of the region, where producers are focusing their drilling. In the natural gas pipeline segment, strong first quarter results continue to benefit from firm transportation services and the demand for natural gas storage.", "We are on track to complete an expansion of our natural gas storage capabilities in Oklahoma in the second quarter, allowing us to utilize and subscribe an additional 4 billion cubic feet of our existing storage capacity. We have subscribed 100% of this incremental capacity through 2027 and 90% through 2029. We continue to evaluate the Saguaro Connector Pipeline, a potential intrastate pipeline project that would provide natural gas transportation to the U.S. and Mexico border for ultimate delivery to an export facility on the west coast of Mexico.", "There continue to be positive developments related to the potential LNG export project, and we still expect to make a final investment decision on that ONEOK pipeline in mid-2023. Pierce, that concludes my remarks." ] }, { "name": "Pierce Norton", "speech": [ "Thank you, Walt and Kevin. As you both have highlighted, ONEOK is well-positioned for another year of strong financial and operational performance. We continue to execute on high-return organic growth projects and remain intentional and disciplined in looking for additional opportunities to add value for our business and our stakeholders. Demand for our products and services remains robust, and we're continually looking for opportunities to enhance the vital services we provide for our customers.", "Our employees take pride in our position as a leading midstream operator, maintaining our focus on operational reliability, safety, and environmental responsibility. As part of our core values, a focus on safety and environmental performance is at the core of our business, and we're proud of the cultures we've built around these key areas. 2023 is not only a year of continued financial progress, but also a year to continue our commitment to responsible operations, emissions reduction projects, and our continued pursuit of a zero-incident culture. With that, operator, we're now ready for questions." ] } ]
[ { "name": "Operator", "speech": [ "Thank you. We will now begin the question-and-answer session. [Operator instructions] And the first question will be from Brian Reynolds from UBS. Please go ahead." ] }, { "name": "Brian Reynolds", "speech": [ "Hi. Good morning, everyone. Maybe to start off on the third-party frac fees, the original guidance stipulates roughly a quarter billion in costs for all of '23, but 1Q trended better than expected. And now, with MB-5 up and running, you know, kind of curious if you can give us an updated view on how we should see third-party frac fees trending going forward and into next year.", "Thanks." ] }, { "name": "Walt Hulse", "speech": [ "Well, Brian, as we said in the remarks, we expect that $46 million level to be viewed as kind of a run rate going forward, with the potential for us to do better as we bring up MB-5 throughout the balance of the year." ] }, { "name": "Brian Reynolds", "speech": [ "Great. Thanks. And as a follow-up, maybe just to touch on Bakken activity levels, you know, are off to a strong start this year with weather helping out in 1Q. You know, given ONEOK has completed roughly a third of its Rockies well connects in 1Q, I was wondering if we should expect a slowdown in activity from producers or if we continue to see similar activities going -- similar activity going forward.", "Thanks." ] }, { "name": "Kevin Burdick", "speech": [ "Yeah. Brian, it's Kevin. I think we see similar activity levels, if not a little bit stronger. Now, we did as -- if you remember in the fourth quarter, we were a little light on our connections and said that just timing had slipped some of those into the first quarter.", "So, that was part. But there -- the activity levels with 20 to 20-plus rigs on our acreage and that looking to be consistent, if not growing, moving forward. I don't see the activity level slowing down. That's why we think, you know, right now, we're -- with those tailwinds looking that we'd be ahead of our midpoint of the guidance for the well connects." ] }, { "name": "Brian Reynolds", "speech": [ "Great. Appreciate it. I'll leave it there. Thanks." ] }, { "name": "Operator", "speech": [ "And the next question will be from Jeremy Tonet from J.P. Morgan. Please go ahead." ] }, { "name": "Jeremy Tonet", "speech": [ "Hi. Good morning." ] }, { "name": "Pierce Norton", "speech": [ "Morning, Jeremy." ] }, { "name": "Walt Hulse", "speech": [ "Good morning, Jeremy." ] }, { "name": "Jeremy Tonet", "speech": [ "Just want to dial into the Bakken a little bit more, if I could. That is helpful with the 1.5 Bcf per day volume number that you provided there. But just wondering, on the NGL side itself, I think we saw the Bakken NGLs tick down a little bit quarter over quarter, but the rates went up a little bit quarter over quarter. Just wondering, I guess, you know, where you see that now, how you think about NGL volumes trending in kind of like the ethane extraction economics at this point?" ] }, { "name": "Sheridan Swords", "speech": [ "So, Jeremy, this is Sheridan. What I would tell you is that, as we said in the remarks, the decrease in volume quarter over quarter was due to less ethane that we incentivized in the first quarter versus the fourth quarter. And actually, our C3 plus volume on the NGL system was up quarter over quarter. So, we still see good growth, good trajectory of growth going through 2023.", "And with low gas prices right now and we think that ethane is really the preferred feedstock in the petrochemicals, we will have plenty of opportunity to incentivize ethane out of the Bakken going forward as well." ] }, { "name": "Jeremy Tonet", "speech": [ "Got it. That's helpful. Thanks. And just wanted to kind of pivot, you know, with the insurance proceeds, obviously, a lot of capacity on the balance sheet and thinking about where that could be deployed going forward between growth or buybacks or what have you.", "And just any updated thoughts, I guess, as far as incremental West Texas LPG looping or other extensions of the value chain such as LPG export facility in the Houston Ship Channel." ] }, { "name": "Walt Hulse", "speech": [ "Well, I'll start out with the first part of it and kick it over to the other guys for the West Texas part. Jeremy, you're absolutely right. Our balance sheet is in stellar shape at this point and it does give us quite a bit of flexibility. Our priorities haven't changed at all.", "Our first priority is to find very high-return projects that we can grow our business. You know, our debt reduction has kind of achieved the goals that we were looking for and that, you know, does create our flexibility for further dividend increases and potentially even stock buybacks over time. But that is our list of priorities. And as I said, you know, high-return growth projects, they're at the top of the list.", "And that's a good segue into West Texas LPG." ] }, { "name": "Kevin Burdick", "speech": [ "Yeah. Jeremy, it's Kevin. The -- as we think about -- like we said in the remarks, with -- you know, the Permian volumes have been strong for us. We've seen nice growth there.", "So, clearly, we're continuing to evaluate, and we'll stay ahead of any capacity needs we had by -- through our looping of West Texas LPG. So, we'll stay on top of that and won't get caught short on capacity." ] }, { "name": "Jeremy Tonet", "speech": [ "Got it. That's helpful. Thank you." ] }, { "name": "Operator", "speech": [ "And the next question will be from Michael Blum from Wells Fargo. Please go ahead." ] }, { "name": "Michael Blum", "speech": [ "Thanks. Good morning, everyone. Wanted to ask on the Saguaro Pipeline project, around contracting. What percent of the pipeline do you need to be contracted to move forward, and what sort of an average length of contract that you're looking for?" ] }, { "name": "Kevin Burdick", "speech": [ "Well, Michael, it's Kevin. As we think about Saguaro, we'll look at that project from an integrated perspective. I mean, you've got the contracts with the LNG facility, the potential pipeline in Mexico, and then our potential pipeline. So, all of those are related.", "At the end of the day, the off-takers are the ones that will be, you know, looking for the transportation out of Waha. So, that's the way we're thinking about that. Not ready to talk about any contract terms or, you know, rates or anything like that yet. Still early in the process.", "But we are taking the steps forward. We continue to move it forward. And hopefully, we'll be in a position to announce something midyear." ] }, { "name": "Michael Blum", "speech": [ "OK. Great. So, just maybe a follow-up on that, since midyear is fast approaching here, if you do go forward with the project, would that result in some increase in 2023 capex? And then just generally, when would be capex for the project be spent?" ] }, { "name": "Kevin Burdick", "speech": [ "Well, that'll all depend on when it -- you know, we would announce something. But again, not ready to talk about, you know, any specific capital that might hit because we're still unsure when it might be FID." ] }, { "name": "Michael Blum", "speech": [ "All right. Thank you." ] }, { "name": "Operator", "speech": [ "And our next question is from Tristan Richardson from Scotiabank. Please go ahead." ] }, { "name": "Tristan Richardson", "speech": [ "Hey. Good morning, guys. Kevin, appreciate your comments on the Permian. Obviously, you've got production growth there, as well as adding a new plant -- third-party plant.", "But you also talked about contracting additional volumes. Can you kind of talk about that environment, whether these are medium- and long-term deals? Just kind of what that environment looks like and how that may have contributed to the first quarter." ] }, { "name": "Kevin Burdick", "speech": [ "Well, I think a lot of the volumes that we've seen on our system are growing volumes on contracts that may have been put in place several years ago, you know, back when, you know, even pre-COVID. But we also have seen opportunities to go contract new volumes. And, Sheridan, do you want to talk about some of the things we've seen there?" ] }, { "name": "Sheridan Swords", "speech": [ "Yeah. I mean, obviously, volume is growing well in the Permian Basin. And as we have a lot of relationship with producers out there and processors that we've been able to get our fair share, if not a little bit more, of the volume that's come up. So, we've had good luck contracting new volume.", "A lot of that is coming through existing plants on our system or the potential for new plants as we look into the forward. But we think we're -- have a compelling story out there to be highly competitive in a very competitive area, and we are seeing some success." ] }, { "name": "Tristan Richardson", "speech": [ "Appreciate it, Sheridan. And then maybe just the obligatory high-low question. Obviously, strong results in the first quarter. Just thinking about the full year outlook, some of the conditions necessary to hit the high end versus what might need to happen to see the low end occur?" ] }, { "name": "Pierce Norton", "speech": [ "Tristan, this is Pierce. I think you all have picked up on the fact that, you know, we're coming out of the first quarter with some really, really strong tailwinds, and that actually is a very positive move for us. A lot of times during the first quarter, we're trying to explain kind of the different trajectories that we have, but we really, really like the trajectory that we're on now, and we've affirmed our guidance range. And, you know, stay tuned for the quarters to come." ] }, { "name": "Tristan Richardson", "speech": [ "Appreciate it. Thank you, guys." ] }, { "name": "Operator", "speech": [ "And the next question is from Theresa Chen from Barclays. Please go ahead." ] }, { "name": "Theresa Chen", "speech": [ "Hi. Thank you for taking my questions. Within the G&P segment, can you talk about the fee escalation that I think kind of just totally steps up in the second quarter now that we're a month and change through it? How that's trending now and how that gets to your guidance within the fee range?" ] }, { "name": "Kevin Burdick", "speech": [ "Theresa, it's Kevin. On the fee rate, again, that's going to move around on a couple of factors. One is just various contract mix as new volume comes on the system every quarter. And then the others is the contract escalators that kick in.", "So, we've said historically and previously that in G&P segment, that's typically occurs in the spring. So, you're just seeing just the minor moves like that or just contract mix moving around from quarter to quarter." ] }, { "name": "Theresa Chen", "speech": [ "OK. And then in terms of the third-party frac fee, so understand that you have downside from the 46 million per quarter as you utilize some of the space on MB-5. But as some of your competitors are also bringing on additional frac capacity second half of this year and into next year, would you expect that the spot fee will also weaken to some extent? So, is there a further downside even in addition to you being able to use MB-5?" ] }, { "name": "Pierce Norton", "speech": [ "I think there is the potential as we look out into 2024. A lot of what we did in 2023, we have contracted it at a certain rate. But as we get into 2024 or for some reason we would need a little bit more in '23, we're definitely seeing spot frac rates are a lot lower than they were six months ago and that will -- we predict that will continue into 2024. So, we could see some additional downside or upside as it would be for us on lower third-party frac fees." ] }, { "name": "Theresa Chen", "speech": [ "Thank you." ] }, { "name": "Operator", "speech": [ "The next question is from Spiro Dounis from Citi. Please go ahead." ] }, { "name": "Spiro Dounis", "speech": [ "Thanks, operator. Good morning, guys. First question, I, actually, want to talk about Elk Creek. Pierce, you talked about keeping pace with customer needs, and I acknowledge this question is probably a bit on the early side, but just given the well connect outlook, potential for ethane recovery, GOR is increasing over the next year or so, when is it sort of time to start thinking about an Elk Creek expansion? How are you guys thinking about some of the capital needs and timing that will go into that?" ] }, { "name": "Pierce Norton", "speech": [ "Yeah. I think I'll kind of give a high-level thing, throw it to Kevin here. But I can tell you that we said before that we're not going to get short -- caught short on capacity. So, as your question of when is it start time to thinking about it, we're thinking about it.", "So, I'll let Kevin kind of fill in the blanks there." ] }, { "name": "Kevin Burdick", "speech": [ "Yeah. We are -- with the strength we've seen recently and even going back to last year with the activity levels and the producer -- the rigs that were there. But particularly now as we move into Q1 and seeing what we have seen from the producers, we're definitely taking steps that -- are already taking steps necessary to ensure that we've got the capacity when we need it." ] }, { "name": "Spiro Dounis", "speech": [ "Great. That's helpful color. Second question, kind of outside the quarter as well, but over the last two years or so, even before that, we've sort of seen you lean more in some more utility-like businesses, these storage expansions, now the potential Saguaro Pipeline, and more take-or-pay style. Is that part of kind of a larger plan to introduce even more earnings stability into the platform? And how should we think about maybe other avenues where you can continue to grow there?" ] }, { "name": "Pierce Norton", "speech": [ "Well, the short answer to that is yes. This is Pierce. You know -- but those things are really driven by customer demands as well. But we definitely are looking for those opportunities.", "That's part of the intentionality of, you know, the diversification, you know, into those more, you know, stable earnings-type areas in the -- in our footprint. So, the short answer is yes." ] }, { "name": "Spiro Dounis", "speech": [ "Understood. Appreciate the color. It's a lot, guys. Thank you." ] }, { "name": "Operator", "speech": [ "And the next question will be from Jean Ann Salisbury from Bernstein. Please go ahead." ] }, { "name": "Jean Salisbury", "speech": [ "Hi. Good morning. I just have one, another one on the Saguaro Connector. I guess my understanding is that inside Mexico pipelines have -- I don't want to use the word disaster, but have generally been very, very far delayed and not successful.", "How does ONEOK and how do investors get confidence that if you build another pipeline to the border that the rest of it will be on time?" ] }, { "name": "Kevin Burdick", "speech": [ "Jean Ann, this is Kevin. I think the way I would answer that is, I mean, obviously, we -- as we come to a decision to FID or not, that will be -- we're factoring in what's going on with the full aspect of the pipeline. And I think it's safe to say you know us, we'll be -- do the things we need to do from our contractual position to mitigate that risk as much as we possibly can." ] }, { "name": "Jean Salisbury", "speech": [ "OK. That makes sense. Thank you for taking my question." ] }, { "name": "Operator", "speech": [ "And thank you. The next question is from Neal Dingmann from Truist. Please go ahead." ] }, { "name": "Neal Dingmann", "speech": [ "Hi. Good morning. Thanks for the time. My first question is just on the contract structure.", "I'm just wondering, maybe in the type of volatile commodity tape we're in now, could you remind me, I don't think it's changed much, but I just want to make sure I've got this, what percent of this year's earnings you expect to be fee-based? And I'm just wondering, do you all have availability, I don't know, in any of these contracts to potentially walk them up the remainder of the year?" ] }, { "name": "Kevin Burdick", "speech": [ "Just overall, we've said we're 90% fee-based and 10% commodity-exposed. And then if you think about the G&P business with our POP contracts where some of the direct commodity exposure occurs, we're well hedged in 2023. So, that even reduces that commodity exposure further. So, really, it's a -- when you just look at it on an earnings perspective, it's a small percentage that we have direct commodity exposure." ] }, { "name": "Neal Dingmann", "speech": [ "Perfect. OK. And then my second just on the Rocky Mountain nat gas G&P. You did have a nice step-up last quarter on the total there.", "I'm just wondering if you can remind me how should we think about the expected cadence for the remainder of the year? I see that -- I forget what slide I'm looking at here, but obviously, the guide you've got for the year is still -- we're now already at the low side, but you've got a pretty good range. I'm just wondering how -- is there pretty good step-ups we should think about?" ] }, { "name": "Kevin Burdick", "speech": [ "You're talking about the gathering and processing the volumes --" ] }, { "name": "Neal Dingmann", "speech": [ "Correct. Correct." ] }, { "name": "Kevin Burdick", "speech": [ "From the Rocky Mountain region?" ] }, { "name": "Neal Dingmann", "speech": [ "Yes." ] }, { "name": "Kevin Burdick", "speech": [ "OK. I mean, yeah, we -- the first quarter, we were at the low end. And if you go to the -- you know, we referenced that we had reached here recently 1.5 Bcf. So, we definitely think there's some -- there's ramp, and that's one of the tailwinds Pierce mentioned is where we sit today from a Bakken or Rockies volume perspective, we're in really good shape." ] }, { "name": "Neal Dingmann", "speech": [ "Great to hear. Thank you, all." ] }, { "name": "Operator", "speech": [ "And the next question is from Neel Mitra from Bank of America. Please go ahead." ] }, { "name": "Neel Mitra", "speech": [ "Hi. Good morning. Thanks for taking my question. A lot has been answered, so I wanted to go a little bit beyond the quarter.", "And with the Medford proceeds and what seems to be a strong '23, it seems like your leverage levels are trending well below kind of the 3.5 times target. So, when you think about that a little bit longer term, do you plan to stay lower like some of your peers or are you thinking more about dividend increases, repurchases, or possible acquisitions? And just in terms of how you plan to think about the mix?" ] }, { "name": "Walt Hulse", "speech": [ "Sure. Neel, this is Walt. Well, if you back out the gain from the Medford settlement, we're right around 3.4 times. So, yes, we threw 3.5, but we're not meaningfully below it at this point.", "We are not concerned if that trend is lower. We would -- if we don't have investment opportunities we like, it probably would trend lower in the short term. But, you know, we continue to look at attractive opportunities. We've spoken a little bit about the increases we're seeing in the various basins and some of the expansion plans that we might need to do on some of the pipes and the like.", "So, those are very, very high return types of projects, and that's where we'd like to be first. And then we have flexibility for other capital return, you know, now that we're down and achieve these goals." ] }, { "name": "Neel Mitra", "speech": [ "Got it. And then second question, I know you've seen a lot of stickiness in terms of the rigs on your activity. But now that -- just we've seen crude fall below $70 twice this year, how do you see the producer activity given that a lot of publics have budgeted around $70 if we stay in this environment over, you know, intermediate to longer term?" ] }, { "name": "Kevin Burdick", "speech": [ "Well, Neel, this is Kevin. And, you know, I haven't had a lot of time to talk to our customers over the last couple of days. But what I would say, you're right, the rigs have been very sticky. I like that word.", "As we -- as prices -- if you rewind, rigs really started coming back to the Bakken in earnest as prices move through $50, $55. That's when we started seeing the stickiness. Now, when it ran up to 110, you know, rigs didn't necessarily follow. But then as the prices came back down, they didn't go away either.", "So, we still feel very good. It's not a matter of -- that's still well above breakeven. Producers are still generating a tremendous amount of cash flow, even at the prices we're seeing on the tape right now. So, that would give me a lot of confidence that we're going to continue to see that stickiness, even in this type of environment." ] }, { "name": "Pierce Norton", "speech": [ "And the only thing I'd add to that, this is Pierce, is, you know, I get the opportunity to go around and meet with, you know, these heads of many of these, you know, exploration and production companies, and they take a really long-term view. So, it's not just what is the price today. Yes, the price has fallen off of crude the last couple of days. But they're taking a long-term view of what they think crude is going to do over time because until they get the rigs drilled out there, drilled, wells producing, you know, you don't have the opportunity to capture, you know, whatever price it is out there.", "So, they really take a long-term view, and it seems to be a very wide path that they look at now as far as a range of prices that they don't really get emotional and go either up or down. They stay very steady." ] }, { "name": "Neel Mitra", "speech": [ "OK. Great. I appreciate the color." ] }, { "name": "Operator", "speech": [ "And the next question will come from Sunil Sibal from Seaport Global Securities. Please go ahead." ] }, { "name": "Sunil Sibal", "speech": [ "Yes. Hi. Good morning, everybody, and thanks for the clarity on the call. So, I wanted to start off on Bakken.", "I think there has been some chatter in the E&P community about well productivity. So, I was curious if you could talk about -- in the past, you've talked about close to 400 wells per year to maintain your gas volumes. I was curious to know if that number has changed in your view based on some of the recent results. And also, it seems like gas-to-oil ratio have trended down recently." ] }, { "name": "Kevin Burdick", "speech": [ "This is Kevin. There was a couple of questions in there. One is on well productivity, and we really have not seen a degradation at all in the well productivity. We've -- there has been a little bit of movement with the strong prices to different areas of the play.", "So, we've seen some changes, a little bit in the -- in potentially the gas-to-oil ratio but nothing that would cause us concern to think that wells are getting less productive. If anything, producers and if they're drilling in the same areas, the technology continues to improve, and we've seen strong results. So, we don't have any concerns at this point on what's going on with oil productivity or the GORs." ] }, { "name": "Sunil Sibal", "speech": [ "OK. And then my follow-up was on your natural gas pipeline segment. It seems like a pretty strong Q1. And even if the remainder of the year turns out to be similar to last year, I think you would exceed that guidance.", "So, I was just curious if there are any one-time items in Q1 which helped the gas pipeline." ] }, { "name": "Chuck Kelley", "speech": [ "Sunil, this is Chuck. No, Q1 was a solid quarter for us in all regards. Our storage revenues were higher. Obviously, we had some gas sales that we were able to pick up in the quarter like we typically do first quarter.", "So, there wasn't a single outlier that generated that performance. So, balance of the year, you know, we expect to be, you know, at or above our midpoint and looking forward to see what opportunities come about this summer." ] }, { "name": "Sunil Sibal", "speech": [ "Got it. Thanks for that." ] }, { "name": "Operator", "speech": [ "Thank you. And the next question will be from Colton Bean from Tudor, Pickering, and Holt. Please go ahead." ] }, { "name": "Colton Bean", "speech": [ "Hi. Just a quick follow-up on Saguaro. It looks like the proposed 48-inch diameter would offer plenty of capacity over and above the proposed LNG export send-out. So, can you speak to how you scope that project and what opportunities you might be tracking downstream apart from LNG?" ] }, { "name": "Kevin Burdick", "speech": [ "Colton, this is Kevin. Well, we're just lining up again with what's going on with the possible export facility. So, as we just back up from there and what they're talking about building in Mexico and what we would need to build for the border crossing, that's what we're looking at right now. But not ready to talk about any other opportunities or so forth.", "But there's potential plans for the LNG facility for additional terrains, and so we scoped the pipe kind of what they were looking for." ] }, { "name": "Colton Bean", "speech": [ "Understood. Thank you." ] }, { "name": "Operator", "speech": [ "And the next question is from Craig Shere from Tuohy Brothers. Please go ahead." ] }, { "name": "Craig Shere", "speech": [ "Good morning. Just a couple of quick ones. So, the Permian NGL unit rates were shown at about $0.06 versus over $0.06 in the fourth quarter. Wondering if there's any detail or trend there.", "And could you remind us roughly on the increments that you can increase Elk Creek with additional pumping and what kind of capex that would incrementally run?" ] }, { "name": "Kevin Burdick", "speech": [ "Craig, I'll take the first -- I'll take the last one and let Sheridan talk about the fee rates. On the Elk Creek expansion, as Pierce alluded to, yes, we're -- it's adding pumps up and down the pipe. So, that's -- that would be the scope of the project. We haven't talked any specifics on what that would cost.", "And -- but again, we're not going to get caught short on capacity, and we're already taking the steps necessary to hopefully bring that forward." ] }, { "name": "Sheridan Swords", "speech": [ "Craig, this is Sheridan. Sorry." ] }, { "name": "Craig Shere", "speech": [ "I'm sorry. Could you quickly just elaborate how quickly or soon that can be done? It's pretty efficient stuff, right? So, can you do it in well under a year once the decision is made, or how quickly can you roll that out?" ] }, { "name": "Kevin Burdick", "speech": [ "That -- again, we're still working through. That's the steps we're taking is understand exactly what that would be, you know, working with power companies, working with pump providers, and things like that. So, we -- those are the steps -- the types of steps we're taking to ultimately come up with how long it might take. But yeah, it's not like building a brand-new pipeline start to finish." ] }, { "name": "Craig Shere", "speech": [ "All right. Thank you." ] }, { "name": "Pierce Norton", "speech": [ "Craig, this is Pierce. The only thing I'd add to that is, you know, the thing to remember on that as it relates to capital is these are very high-return projects. So, whatever the number is, you know, when we announced that, hey, they were going to do this, you know, just be assured that it's a very high return project." ] }, { "name": "Craig Shere", "speech": [ "Understood. And those Permian NGL unit rates?" ] }, { "name": "Sheridan Swords", "speech": [ "Yeah. Craig, this is Sheridan. I mean, we always see a little bit of escalation or changing up and down in our fee rates. It all depends on where the volume is coming from.", "And one of the biggest thing that drives that is if we're getting a little bit more volume from a transport-only contract versus a T&F contract or is that mix is a little bit, it's going to play with that rate just slightly and you're just seeing just a little bit of a slight change. I mean, it's just noise. It's really immaterial. It's just kind of contract mix." ] }, { "name": "Craig Shere", "speech": [ "Yeah. So, no trend going on there, just bouncing around." ] }, { "name": "Sheridan Swords", "speech": [ "No trends. There's no trends going on." ] }, { "name": "Craig Shere", "speech": [ "Thanks." ] }, { "name": "Operator", "speech": [ "And ladies and gentlemen, this concludes our question-and-answer session. I would like to turn the conference back over to Andrew Ziola for any closing remarks." ] }, { "name": "Andrew Ziola", "speech": [ "Well, thank you, all, for joining us today. Our quiet period for the second quarter starts when we close our books in July and extends until we release earnings in early August. We'll provide details for that conference call at a later date. Thank you, all, and have a good day." ] }, { "name": "Operator", "speech": [ "[Operator signoff]" ] } ]
OKE
2021-04-28
[ { "description": "Vice President, Investor Relations and Corporate Affairs", "name": "Andrew Ziola", "position": "Executive" }, { "description": "President and Chief Executive Officer", "name": "Terry Spencer", "position": "Executive" }, { "description": "Chief Financial Officer and Executive Vice President, Strategy and Corporate Affairs", "name": "Walt Hulse", "position": "Executive" }, { "description": "Executive Vice President and Chief Operating Officer", "name": "Kevin Burdick", "position": "Executive" }, { "description": "Wells Fargo Securities -- Analyst", "name": "Michael Blum", "position": "Analyst" }, { "description": "President, Gathering and Fractionation", "name": "Sheridan Swords", "position": "Executive" }, { "description": "Senior Vice President, Natural Gas", "name": "Chuck Kelley", "position": "Executive" }, { "description": "J.P. Morgan -- Analyst", "name": "Unknown speaker", "position": "Analyst" }, { "description": "UBS -- Analyst", "name": "Shneur Gershuni", "position": "Analyst" }, { "description": "Barclays -- Analyst", "name": "Christine Cho", "position": "Analyst" }, { "description": "Credit Suisse -- Analyst", "name": "Spiro Dounis", "position": "Analyst" }, { "description": "Truist Securities -- Analyst", "name": "Tristan Richardson", "position": "Analyst" }, { "description": "Sanford C. Bernstein -- Analyst", "name": "Jean Ann Salisbury", "position": "Analyst" }, { "description": "Tuohy Brothers -- Analyst", "name": "Craig Shere", "position": "Analyst" }, { "description": "Seaport Global Securities -- Analyst", "name": "Sunil Sibal", "position": "Analyst" }, { "description": "Wolfe Research -- Analyst", "name": "Alex Kania", "position": "Analyst" }, { "description": "Citi -- Analyst", "name": "Timm Schneider", "position": "Analyst" }, { "description": "Goldman Sachs -- Analyst", "name": "Michael Lapides", "position": "Analyst" }, { "description": "Morgan Stanley -- Analyst", "name": "Robert Kad", "position": "Analyst" } ]
[ { "name": "Operator", "speech": [ "Good day and welcome to the first-quarter 2021 ONEOK earnings call. Today's conference is being recorded. At this time, I would like to turn the conference over to Andrew Ziola. Please go ahead, sir." ] }, { "name": "Andrew Ziola", "speech": [ "All right. Thank you, Travis and welcome to ONEOK's first-quarter 2021 earnings call. We issued our earnings release and presentation after the markets closed yesterday, and those materials are on our website. After our prepared remarks, we'll be available to take your questions.", "A reminder that statements made during this call that might include ONEOK's expectations or predictions should be considered forward-looking statements and are covered by the safe harbor provision of the Securities Acts of 1933 and 1934. Actual results could differ materially from those projected in forward-looking statements. For a discussion of factors that could cause actual results to differ, please refer to our SEC filings. Our first speaker this morning is Terry Spencer, president and chief executive officer.", "Terry?" ] }, { "name": "Terry Spencer", "speech": [ "Thank you, Andrew. Good morning, and thank you all for joining us today. As always, we appreciate your continued trust and investment in ONEOK. Joining me on today's call is Walt Hulse, chief financial officer and executive vice president, strategy and corporate affairs; and Kevin Burdick, executive vice president and chief operating officer.", "Also available to answer your questions are Sheridan Swords, senior vice president, natural gas liquids; and Chuck Kelley, senior vice president, natural gas. ONEOK's solid first-quarter results are providing positive momentum as we enter warmer operating months. Volumes on our system and our outlook for the year continues to improve, supporting the increase to our financial guidance which we announced yesterday. Even without the weather-related earnings impact in the first quarter, our base business earnings increased compared with the fourth quarter.", "But while the quarter's results were positive, Winter Storm Uri did provide us with significant operational challenges that I want to highlight. Our employees' preparation before the extreme weather event and hard work during it enabled us to operate with very few interruptions. Operations teams ensured our assets were weatherized for extreme conditions, and that our employees were on-site and prepared to make the necessary adjustments to keep our assets running. Many of our employees were faced with challenges of their own, including limited or no heat, running water or electricity at their own homes, but still worked to help ONEOK provide essential natural gas and NGLs when needed most.", "Despite these extraordinary winter -- weather conditions, we continued to meet the critical needs of our customers, including natural gas utilities and electric power plants. Our natural gas pipeline and storage assets were particularly well positioned to address the needs for natural gas. The segment's ability to continue providing reliable service helps meet increased natural gas demand and contributed to higher adjusted EBITDA during the quarter. Kevin will provide more details in a moment.", "Despite weather-related volume impacts across our operations, strength in our base business was evident in our Rocky Mountain region NGL and natural gas volumes during the quarter. The Williston Basin continues to outperform expectations and provide us with solid and stable earnings. As I've said before, ONEOK's earnings growth in 2021 is not dependent on increased rig activity or increasing commodity prices. The opportunities available to us are from a robust drilled but uncompleted well inventory, increased natural gas capture and rising gas to oil ratios in the Williston Basin and increasing ethane demand.", "The opportunity for earnings growth without the need for significant investment is unique to ONEOK and our strategic assets in key operating areas. With yesterday's earnings announcement, we raised expectations for 2021 and now expect adjusted EBITDA growth of more than 17% compared with 2020. Our higher guidance expectations include the latest producer forecasts and drilling plans, and our earnings range also includes the potential impact from a shutdown of the Dakota access pipeline. Increasing producer activity, higher commodity prices and strengthening energy markets have further enhanced our view of 2021 and are setting up to provide positive momentum as we exit the year.", "As we look toward 2022, high single to low double-digit growth in EBITDA appears reasonable in the $50 to $70 per barrel price range when you adjust 2021 for the approximately $90 million weather impact to revised guidance. We also continue to look for opportunities outside of our traditional growth drivers to enhance our businesses. Our sustainability and renewables teams continue to actively research opportunities that will complement our extensive midstream assets and expertise. They're focusing on opportunities to lower our greenhouse gas emissions while enhancing profitability, further strengthening the vital role we expect to play in a low-carbon economy.", "Opportunities under evaluation include the further electrification of compression assets, potential carbon capture and storage projects, sourcing renewable energy for operations and other longer term investments, such as hydrogen transportation and storage. And as always, we'll remain disciplined in our capital approach as we develop these opportunities. Demand for the products we transport remain strong. The pandemic and recent weather events have further highlighted the importance of natural gas, NGLs and the many end-use products they help create, which all play a vital role in helping us to lead safer and healthier lives.", "Our ability to transport these products safely and responsibly to markets is key to their ultimate end use. This quarter once again proved our ability to do that, even in the most extreme conditions. With that, I will turn the call over to Walt to discuss our financial performance and updated 2021 guidance." ] }, { "name": "Walt Hulse", "speech": [ "Thank you, Terry. With yesterday's earnings announcement, we increased our 2021 net income and earnings per share guidance 10% and adjusted EBITDA guidance 5% compared with our original expectations provided in late February. We now expect a net income midpoint of $1.35 billion or $3.02 per share, and an adjusted EBITDA midpoint of $3.2 billion this year. At the segment level, we increased 2021 adjusted EBITDA guidance for the natural gas gathering and processing and natural gas pipeline segments, primarily due to increasing producer activity from higher commodity prices and incorporating the results of the first quarter.", "Adjusted EBITDA guidance for the natural gas liquids segment decreased slightly, primarily due to reduced volumes and lower ethane demand in the first quarter related to Winter Storm Uri. Total capital expenditures for 2021, including growth and maintenance capital, remain unchanged from our original expectations of $525 million to $675 million, a more than 70% decrease compared with 2020. This range includes capital to complete the Bear Creek plant expansion and associated field infrastructure in the fourth quarter of this year and a low-cost expansion of the Arbuckle II pipeline in the second quarter. Now a brief overview of our first-quarter financial performance.", "ONEOK's first-quarter 2021 net income totaled $386 million or $0.86 per share. First-quarter adjusted EBITDA totaled $866 million, a 24% increase year over year and a 17% increase compared with the fourth quarter of 2020. Distributable cash flow was more than $660 million in the first quarter, a 27% increase year over year and a 28% increase compared with the fourth-quarter 2020. First-quarter dividend coverage was nearly 1.6 times, and we generated more than $245 million of distributable cash flow in excess of dividends paid during the quarter.", "Our March 31 net debt to EBITDA on an annualized run rate basis was 3.98 times compared with 4.6 times at the end of 2020. We ended the quarter -- the first quarter with no borrowings on our $2.5 billion credit facility and more than $400 million of cash. Earlier this month, the board of directors declared a dividend of $0.935 or $3.74 per share on an annualized basis, unchanged from the previous quarter. Healthy earnings in the first quarter provided momentum for 2021 and helped to accelerate our deleveraging efforts.", "As Terry mentioned, increasing producer activity, ample capacity on our systems, and the continued opportunity for flared gas capture and strong gas to oil ratios in the Williston Basin and increasing ethane demand continue to support our base business and increase financial expectations this year. I'll now turn the call over to Kevin for a closer look at our operations." ] }, { "name": "Kevin Burdick", "speech": [ "Thank you, Walt. Winter Storm Uri impacted operations across all three of our business segments in February. Reduced volumes due to well freeze-offs, especially in the Mid-Continent and Gulf Coast Permian regions, increased electricity cost and customer facility outages presented challenges during the quarter. However, our ability to meet increased demand for natural gas and NGLs during the period helped to more than offset the volume impacts.", "Volumes across our operations returned quickly following the extreme weather with NGL raw feed throughput and natural gas processing volumes in the Rocky Mountain region in March exceeding our first-quarter 2021 averages. Let's take a closer look at each of our businesses. Starting with the natural gas pipeline segment. The safe and reliable operations of our pipeline and storage assets through the storm provided critical transportation services and storage withdrawals for our customers.", "In addition, we sold 5.2 Bcf of natural gas, which we previously held in inventory, into the market in the first-quarter 2021 to help meet the increased demand. This compares with 1.2 Bcf that we sold in the first quarter of 2020. Our ability to provide reliable service throughout the extreme weather conditions highlights the importance of market-connected pipelines and storage assets and the value of these vital services. Since the storm, we've received increased interest from customers seeking additional long-term transportation and storage capacity on our system.", "This morning, we initiated an open season for more than 1 Bcf of incremental firm storage capacity at our West Texas storage assets. In our natural gas liquids segment, first-quarter 2021 earnings increased compared with the fourth quarter of 2020 despite the volume impact from Winter Storm Uri. Systemwide volumes were reduced by an average of approximately 64,000 barrels per day during the quarter, with the largest impacts in the Mid-Continent and Gulf Coast Permian regions. During the first quarter, increased optimization and marketing activities in the segment related primarily to higher commodity prices and wider spreads between Conway and Mont Belvieu prices, presented opportunities to utilize our integrated NGL pipeline and storage assets to meet market needs, helping to partially offset volume and cost-related impacts.", "First-quarter raw feed throughput from the Rocky Mountain region increased 4% compared with the fourth quarter of 2020 and 20% year over year despite an 11,000 barrel per day impact from Winter Storm Uri. As we sit today, volumes from the region have reached more than 300,000 barrels per day. During the quarter, ethane volumes on our system in the Rocky Mountain region increased compared with the fourth-quarter 2020 as we incented some ethane recovery, which we have talked about in the past. On a short-term basis, we were able to incent recovery by purchasing ethane at several gas plants at a premium value to natural gas, selling it into the Mont Belvieu ethane market and collecting the difference while increasing producer netbacks and NGL volumes on our system.", "Continued ethane recovery from the region will depend on regional natural gas and ethane pricing and is not included in our updated guidance. Economics in the Mid-Continent region also provided the opportunity to incentivize ethane recovery and we continue to expect partial recovery in the region throughout the remainder of the year, which is included in our guidance. In the Permian Basin, we saw increased ethane rejection in the first quarter. Overall, petrochemical facility outages related to Winter Storm Uri reduced demand for ethane during the quarter.", "We expect ethane recovery in the Permian Basin to continue ramping back up as petrochemical demand returns following February storm impacts with a return to near full recovery in the second half of 2021. Discretionary ethane that can be recovered on our system in both the Mid-Continent and Rocky Mountain regions remains approximately 100,000 barrels per day. In the Rockies region, full recovery would provide an opportunity for $400 million in an annual adjusted EBITDA at full rates. Our opportunity for recovery in either region at any given time will fluctuate based on regional natural gas pricing, ethane economics and potential incentivized recovery.", "Moving on to the natural gas gathering and processing segment. In the Rocky Mountain region, first-quarter processed volumes increased 5% year over year despite colder-than-normal weather in February. In March, volumes exceeded 1.2 billion cubic feet per day, a level we can maintain even without increased producer activity. Our ability to capture additional flared gas, rising gas to oil ratios and a large inventory of drilled but uncompleted wells on our acreage are the key drivers of our 2021 volume expectations.", "Recent producer M&A activity in the Williston Basin has highlighted new drilling plans on acreage that, in some cases, may not have been developed in the near term, but now likely will be. And indications from several of our producers in the basin point to increasing activity in the second half of 2021, particularly in Dunn County. In response to this, we've resumed construction on our Bear Creek processing plant expansion and expect it to be complete in the fourth quarter of this year. Once complete, we will have approximately 1.7 Bcf per day of processing capacity in the basin, and we'll be able to grow our volumes with minimal capital as producer activity levels increase.", "In the first quarter, we connected 38 wells in the Rocky Mountain region and expect to connect more than 300 this year. Based on very recent producers completion schedules, we expect a significant increase in well connects in the second and third quarter as completion activity picks up with improved weather. There are currently 16 rigs operating in the basin with eight on our dedicated acreage, and there continues to be a large inventory of drilled but uncompleted wells with more than 650 basinwide and approximately 350 on our dedicated acreage. With eight completion crews currently operating in the basin, no additional activity or crews are needed to hold natural gas production flat on our acreage or reach our well connect guidance for the year.", "Any additional completion crews would present upside to our guidance. As the current DUC inventory gets worked down, we expect producers to bring rigs back to the basin to replenish the inventory levels, providing tailwinds as we move into 2022. Additionally, as of February, approximately 100 million cubic feet per day of natural gas flaring remained on our dedicated acreage, presenting a continued opportunity for us to bring this volume onto our system and help further reduce flaring in the basin. The gathering and processing segment's average fee rate remained $1.04 per MMBtu during the quarter, unchanged from the fourth-quarter 2020.", "Winter Storm Uri reduced Mid-Continent volumes by approximately 30 million cubic feet per day for the quarter, causing the average fee rate mix to shift more toward the Rocky Mountain volumes, driving the higher average rate. We now expect the fee rate for 2021 to average close to the high end of our $0.95 to $1 per MMBtu guidance range. The segment's 2021 guidance does not assume increasing producer activity levels in the Mid-Continent region or the Powder River Basin. However, both areas have received attention as commodity prices have strengthened.", "Any increasing activity in those areas would be an added tailwind to our 2021 expectations and provide volume momentum into 2022. Terry, that concludes my remarks." ] }, { "name": "Terry Spencer", "speech": [ "Thanks, Kevin. Good overview of a challenging but encouraging quarter that has positioned us well for the rest of 2021. With volumes trending upward and strength in our base business, our outlook continues to improve. But we remain disciplined in our approach and focus on what matters most for the long-term sustainability of our business.", "Enhancing our financial stability, participating in the innovation necessary for a transition to a low-carbon economy and serving our customers' needs safely and responsibly continue to be our focus. The first quarter showcased many of these focus areas, and we have many more great things to look forward to in the remainder of this year and beyond. Thank you to our employees for all that you have done this quarter and over the past year to focus on customer needs and continue operating safely and responsibly. Operator, we are now ready for questions." ] } ]
[ { "name": "Operator", "speech": [ "[Operator instructions] Our first question comes from Michael Blum, Wells Fargo." ] }, { "name": "Michael Blum", "speech": [ "Thanks. Good morning, everyone." ] }, { "name": "Terry Spencer", "speech": [ "Good morning, Mike." ] }, { "name": "Michael Blum", "speech": [ "A couple of questions for me. One, the T&F rate out of the Bakken, I mean, it's not a big deal, but it did fall by $0.01 versus last quarter to $0.27 from $0.28. Just wanted to know if that was -- that has anything to do with the ethane recovery incentivized -- incentivization program? Or is there something else there that we should be thinking about?" ] }, { "name": "Sheridan Swords", "speech": [ "Michael, this is Sheridan. You're right. The tick down in the average rate was due to the amount of ethane that we incentivized to come out of the Bakken and the lower rate that was received for those barrels." ] }, { "name": "Michael Blum", "speech": [ "Great. And then second question, I apologize if I missed this, how many rigs are running on your acreage today in the Bakken?" ] }, { "name": "Chuck Kelley", "speech": [ "Michael, this is Chuck. We've got eight of the 16 rigs in the basin on our acreage today." ] }, { "name": "Michael Blum", "speech": [ "Great. Thank you very much." ] }, { "name": "Operator", "speech": [ "Our next question comes from Jeremy Tonet, J.P. Morgan." ] }, { "name": "Unknown speaker", "speech": [ "Hey, good morning guys. This is James on for Jeremy. Maybe just wanted to start here on the Bakken outlook. You mentioned the 350 DUCs on the acreage and the unchanged G&P completion guidance here.", "So maybe just looking out into where you see the DUC inventory by year-end? And also just cadence for completion activity in the remainder of the year. You mentioned 2Q and 3Q, you expect to see a ramp, but is it safe to kind of assume with only 38 wells completed in the first quarter, maybe an average out for the remaining quarters here to meet the well completion guide?" ] }, { "name": "Kevin Burdick", "speech": [ "This is Kevin, James. The -- yes, absolutely. Like we said in the remarks, we expect a significant increase in the completions. Chuck and his team, these conversations we're having with producers are literally days and just a couple of weeks old.", "And we anticipate a pretty sizable step-up in Q2 and Q3. Q4 is always a little dependent on the weather as you think about that, but we still feel really good about our 300 guidance. So yeah, it would need -- we'll see a pickup in the summer." ] }, { "name": "Chuck Kelley", "speech": [ "And James, this is Chuck. What I would add to what Kevin said is we completed the 38 in Q1, but a lot of that planning was done back in Q4, and a lot of the producers still had some uncertainty over stability of crude pricing, what was DAPL going to do. So we didn't anticipate Q1 will be strong. But as Kevin said, the ramp is extremely good, starting here in Q2, we're already seeing it and certainly into Q3 and these are recent conversations." ] }, { "name": "Unknown speaker", "speech": [ "Sounds good. I appreciate the color there. And then ESG is obviously topical with emissions these days. And maybe just looking across your nat gas pipeline footprint, have you guys looked at opportunities there to reduce carbon emissions? And what maybe is that project set? And if you have -- have you guys allocated a set dollar amount there yet? Or are you still kind of in the initial stages there?" ] }, { "name": "Terry Spencer", "speech": [ "Yeah, James. This is Terry. So certainly, we have remained very focused over the years, and in particular, in the last couple of years, reducing our emissions impact across our asset footprint, not just in natural gas but in liquids as well. And so that remains a key focus for us.", "The types of things that we're looking at that -- can be big needle movers in terms of reducing our greenhouse gas emissions, things like electrification of compression, natural gas-fired compression being converted to electrics, which then can consume or be in a position to consume renewable power. That's a key focus. We have done some of that. We've got a lot of electric compression operating today, particularly in the Williston Basin.", "But we also have some big units down in Oklahoma. So we know how to do it, and we expect to continue to steadily increase our fleet of electric compression. So that's a key focus. And obviously, the renewables team is working on a lot of other things on the energy transition front, taking advantage of our skill set and taking advantage of the pipeline processing capability or expertise that we have.", "So that's kind of it in a nutshell. Kevin, anything you can add to that?" ] }, { "name": "Kevin Burdick", "speech": [ "No." ] }, { "name": "Terry Spencer", "speech": [ "I guess, as far as capital, yes, we have allocated some capital, not just on the compression front but also we're doing some work on the carbon sequestration front as well. So we've allocated some meaningful capital there. It's not a huge amount of capital as we're just getting started in this. But as we move forward, we expect that capital to pick up.", "I think the key emphasis is that projects that we work on or that we're considering in the sustainable -- area of sustainability, they've got to make economic sense. They've got to generate a return, a reasonable return." ] }, { "name": "Unknown speaker", "speech": [ "Got it. That makes sense. I appreciate that. Just last one for me if I can sneak one in.", "Do you guys have a number you can share or just color you can share on where you see gas/oil ratios trending post 2021? I know you mentioned higher, but is there any more detail you can share there?" ] }, { "name": "Kevin Burdick", "speech": [ "No. I think the thing to do is I just go back over the time. We provide the information of the trend that's happened over the last -- what is it, 70-plus percent, over the last four years or something like that. And we have no reason to believe that's going to taper off." ] }, { "name": "Chuck Kelley", "speech": [ "Yeah, it's increased over 15% just here in the past year. You can see that in our chart." ] }, { "name": "Unknown speaker", "speech": [ "Got it. Thanks for the questions. I'll leave it there." ] }, { "name": "Terry Spencer", "speech": [ "Thanks, James." ] }, { "name": "Operator", "speech": [ "[Operator instructions] Our next question comes from Shneur Gershuni, UBS." ] }, { "name": "Shneur Gershuni", "speech": [ "Hi, good morning, everyone. Thanks for taking our questions today. Just -- Terry, I just kind of wanted to focus on some of your prepared remarks that you made around momentum building toward the end of the year. And that ex storm, you're sort of intimating that '22 can grow by high single digits or low double digit.", "I guess, kind of back of the envelope, that sounds like about $3.4 billion. I was wondering if you can talk about the momentum a little bit. And in the answers to your previous questions, you have talked about the completions toward the end of the year and so forth. So kind of understand the cadence with respect to '21.", "But how have the conversations changed with producers with oil now in the 60s for some time? Like how they evolve since February? Is that where some of the momentum is coming from or is it strictly related to gas/oil recoveries and NGL recoveries?" ] }, { "name": "Terry Spencer", "speech": [ "Well, Shneur, Kevin, in his remarks, he mentions momentum. He uses that word. Because he used that word, I'm going to let him answer that question." ] }, { "name": "Kevin Burdick", "speech": [ "Thanks, Terry. No, Shneur, it's all the things that you mentioned. Conversations with customers, not just our G&P customers, but as Sheridan and his team work with their customers across all the basins. It's just that we anticipate increasing activity.", "We've seen prices stabilize here, appear at a nice level. Clearly, that can generate fantastic returns in most every basin we're in. The gas to oil ratio increasing in the Bakken gives us more confidence that you're going to continue to see those volumes tick up. So there's just a lot of factors that go into that.", "And I think a key -- as we have conversations with the producers, particularly in the Bakken, the note is as they're going to work the DUC inventory, I know a lot's been written about, well, where are the rigs? Well, they're going to work their DUC inventory down first, and then as that declines and it gets back to more of a normalized rate, then we'll probably see and we expect to see rigs come back based on our conversations with them. So all those reasons are why we think in the back half of the year, you will see an increase and a tick up, not necessarily in completion crews, but in rigs. And that will provide the momentum as we go into '22." ] }, { "name": "Terry Spencer", "speech": [ "The only thing I'd add to Kevin's remarks is just when you just think about the worldwide recovery, from the pandemic, certainly, that's providing a lot of momentum to us. And we see it not just in the commodity prices that are relatively strong, but also we're seeing it in pet chem demand. And we've got hammered -- the pet chem space got hammered here in the Gulf Coast, obviously due to weather. But we've seen that pick back up and those operations restore.", "We're also seeing new petrochemical plants being built across the global space. So pet chem demand showing no signs of letting up and, certainly, that's why ethane is a big part of our story. And certainly, it's a big part of our story as we think about 2022 and beyond." ] }, { "name": "Shneur Gershuni", "speech": [ "I really appreciate the color there. I was wondering if we can also expand on the conversation from the prepared remarks about ethane recovery in the Rocky Mountains. You sort of described how you were purchasing in a premium, selling in Mont Belvieu. And I think you stated that the potential from this is not currently in your guidance today.", "I was just wondering if you can walk us through this? Obviously, you're providing incentives, so it would be less than the 400 million that you kind of outlined as the upside potential, but are you -- is it kind of like a day-to-day decision where this is occurring? Or are you signing some more smaller term contracts in the three, six, nine or 12-month nature? I'm just trying to understand whether it's day to day or could there be some momentum on some smaller term type contract deals?" ] }, { "name": "Sheridan Swords", "speech": [ "Shneur, this is Sheridan. We are doing this day-to-day to be able to capture the most spread between the markets. So we saw that in February where the price of gas spiked really high, then we shut down the incentive program and did not buy ethane out during that period of time. So it really is a day-to-day decision that we can make.", "So we're looking at both the regional gas price in the Bakken and the price of ethane in Mont Belvieu to make those decisions. And we didn't bring out the whole 100,000. We only brought out a small portion of ethane during this period of time." ] }, { "name": "Shneur Gershuni", "speech": [ "OK. Are any of the producers interested in doing some smaller term deals at all? Or is this just going to continue to be a day-to-day decision?" ] }, { "name": "Sheridan Swords", "speech": [ "Really, right now, as we see it, we think we are better served by doing it day-to-day instead of -- because we get to capture the full -- we get to capture the spread for what we buy it on the gas price and what we sell it for ethane. If we lock in a longer term, we'd have to lock in that spread, and we think that, that spread is going to continue to widen. So we'd rather do it on a day-to-day basis at this time." ] }, { "name": "Shneur Gershuni", "speech": [ "All right. Perfect. Thank you very much guys. Really appreciate the color today." ] }, { "name": "Sheridan Swords", "speech": [ "You bet." ] }, { "name": "Terry Spencer", "speech": [ "Thank you." ] }, { "name": "Operator", "speech": [ "Our next question comes from Christine Cho, Barclays." ] }, { "name": "Christine Cho", "speech": [ "Thank you. I actually wanted to also touch upon the 2022 comments. Is there any more color you can provide on the different basins? Like what your -- what you're thinking about growth in the Bakken versus Mid-Con versus Permian? Just kind of in context of how you guys say that you're not anticipating an increased activity in the Mid-Con in 2021 results, but curious how that and the Permian looks for 2022, especially in a $50 to $70 price environment?" ] }, { "name": "Kevin Burdick", "speech": [ "Christine, this is Kevin. I mean we're not going to provide a lot more color at this point because it's an outlook. But clearly, when you look at our footprint, we feel pretty strong about the Bakken. We think there's going to be growth there.", "We've got a good -- great position in the Permian. We've seen activity levels pick up there as well. And -- but no, I don't think it's going to -- from a Mid-Continent perspective, it's -- we don't have a lot of growth baked in to that basin." ] }, { "name": "Christine Cho", "speech": [ "OK. And then I wanted to also touch upon Bear Creek. I know in your prepared remarks, you talked about Dunn County seeing a lot of activity. And I know there have been some big wells there.", "And I know that you have a plant there, but is that full already? Or are the producers currently flaring the gas there or building a DUC inventory? I just wasn't sure if you were able to move those volumes to be processed at your other plants in McKenzie, if necessary?" ] }, { "name": "Kevin Burdick", "speech": [ "No. Christine, this is Kevin. We've talked about that plan. When we built the first one there, that was geographically more isolated than our other facilities.", "So we have a small amount of ability to move gas around to other plants. But effectively, that plant is near full at this point. But producers are working closely with us to align their timing to the timing of when our infrastructure, not just the plant, but also some of the field infrastructure necessary to gather the gas to get it to the plant. So we've mentioned the four large producers down there in Continental, in Marathon, in ConocoPhillips and XTO, large acreage positions, and they are coordinating with us extremely closely on the timing so that we don't flare gas down there." ] }, { "name": "Christine Cho", "speech": [ "So should we expect like kind of a stair-step in volumes when that plant comes on? Or is it still going to be more a slow ramp?" ] }, { "name": "Kevin Burdick", "speech": [ "I think the way a lot of the developments occurring nowadays is it will be a little lumpy, I mean, as they bring on pads. But yes, you're not going to see some massive step change the day the plant comes up because, again, producers, we all are extremely concerned and want to reduce flaring as much as possible. And so the coordination among us and our customers is very tight on the timing of when the capacity will be available." ] }, { "name": "Christine Cho", "speech": [ "Got it. Thank you." ] }, { "name": "Operator", "speech": [ "Our next question comes from Spiro Dounis, Credit Suisse." ] }, { "name": "Spiro Dounis", "speech": [ "Hey, good morning, guys. Two questions for you on capex. First one, just thinking about Bear Creek II being official now. I think that was already contemplated in the original capex range.", "So just curious, does that sort of push you up toward the higher end of the range? And if not, what are the drivers that would actually get you to that high point?" ] }, { "name": "Kevin Burdick", "speech": [ "Spiro, this is Kevin. Yes, the Bear Creek facility and the related field infrastructure is included in that forecast. The things that would get you to the higher end is really more activity. I mean if you look at that capex, you've got our maintenance cap, which is pretty static.", "And then the rest of it is Bear Creek II and routine growth, which are things like well connects and some small projects in the other segments. So to the extent we see increased activity, and that comes sooner. And we would need some more kind of that standard, high-return well connect capital. That's what would take you toward the higher end.", "The rest of it is just going to be timing as far as how the capital is spent over the course of the year." ] }, { "name": "Spiro Dounis", "speech": [ "Got it. That's helpful. Sticking with capex, it sounds like a lot of the growth you guys are contemplating in 2022 won't require capex. It sounds like very much a continuation of a lot of the trends you're seeing in '21.", "So I guess as we think about the trajectory into next year for capex, is it fair to assume more or less in line with '21, if not maybe even below these levels?" ] }, { "name": "Kevin Burdick", "speech": [ "Yeah, the key thing to me about our capital spend as we look forward is the available capacity or the operating leverage we have across our assets. We referenced in our remarks about the capacity we'll have in the Bakken from a processing perspective. We recently completed an expansion on Elk Creek to bring it up to 300,000 barrels a day and we've still got the legacy Bakken NGL line combined with OPPL that we could always use. We talked about the minor expansion on Arbuckle II.", "We've got capacity in West Texas. So we can grow our EBITDA without a significant uptick in capital. So yes, you're probably going to think of it more in lines of 2021, if you're talking about '22, more in line of that versus we're not going to have to add another long-haul pipeline or something like that." ] }, { "name": "Spiro Dounis", "speech": [ "Got it." ] }, { "name": "Terry Spencer", "speech": [ "I think, Kevin, that's a good point. Spiro, let's hang on with me for a second. I mean that segues into an important point to make, that with this excess capacity that we have available, the fact that all of this infrastructure is pretty well in place for the next three or four years without any sort of major backbone type transmission project needing to be built in the NGL space. I mean you could see this business from an EBITDA perspective hit a $4 billion type of number in the right pricing environment without having to expend a heck of a lot of capital.", "So -- I mean I think that expands on that headroom concept or that available capacity concept that we keep trying to express to the market to understand about our business that we built a lot of that major infrastructure is already in place, and the rest of this stuff is smaller routine growth. So -- and that's what puts us in a position. In the right pricing environment, right activity levels, I mean we could see a $4 billion kind of EBITDA number here." ] }, { "name": "Spiro Dounis", "speech": [ "OK, appreciate those comments there. Thanks, Kevin." ] }, { "name": "Kevin Burdick", "speech": [ "Sure." ] }, { "name": "Operator", "speech": [ "Our next question comes from Tristan Richardson, Truist Securities." ] }, { "name": "Tristan Richardson", "speech": [ "Hey, good morning, guys. I really appreciate all the commentary on completion activity and what you're seeing -- thinking about for 2022. Just on 2022, as you see -- start to see well connects accelerate throughout the year, should we think of '22 as a kind of well above that 300 well connects type of mark that you're talking about for '21? And you noted potential for rig additions. Are rig additions something we could see as early as the second half or is this more of a -- based on conversations that you're having, this is an exiting the year type of event?" ] }, { "name": "Chuck Kelley", "speech": [ "Tristan, this is Chuck. I'd say that the rig activity we anticipate certainly would start to -- you would start to see rigs showing up here toward the end of spring and the beginning of summer. It's definitely a second half activity. As Kevin referenced earlier, our producers have told us that they're going to work through their DUC inventory first, then bring the rigs in like they traditionally do midyear and ramp that up.", "And we've got one good indicator up there right now. We've gone from two to eight completion crews in the basin. And you think about completion crews and the well connects that we have for the balance of the year, we're pretty excited about hitting that 300-plus number. And as we look into next year, certainly see no less than that, obviously.", "So without really getting into 2022 specifics, we think we're going to have a lot of tailwinds behind us this year and going into next year." ] }, { "name": "Tristan Richardson", "speech": [ "That's helpful. And then just a clarification questioning. Kevin, I wanted to go to your $400 million in EBITDA comment with respect to ethane. Is that sort of the potential opportunity in a full rejection to full recovery scenario or is that sort of where you're at today moving to full recovery?" ] }, { "name": "Kevin Burdick", "speech": [ "No. That's just -- we provided the information previously that ever 25,000 barrels a day of volume coming out of the Rockies is worth about $100 million of EBITDA. So that's just doing the math there of 100,000 barrels a day of ethane, if it all came online at full rates, would be worth $400 million of EBITDA a year." ] }, { "name": "Tristan Richardson", "speech": [ "That's great. Super helpful. Thank you guys very much. Appreciate it." ] }, { "name": "Kevin Burdick", "speech": [ "You bet." ] }, { "name": "Operator", "speech": [ "Our next question comes from Jean Ann Salisbury, Bernstein." ] }, { "name": "Jean Ann Salisbury", "speech": [ "Hi, good morning. I have two questions that may actually be the same question. But the first one is about, on Slide 10, it looks like February flaring ticked up a bit from the declining trend that we had seen in prior months. Was that a one-off due to weather or some other reason? Or does it suggest that we're hitting a gas constraint somewhere and that flaring could creep up more?" ] }, { "name": "Chuck Kelley", "speech": [ "Yeah, Jean Ann, this is Chuck. That was pretty much due to weather and then a little bit of drilling in some areas that are a little hard to get to right now, but it is not -- it's not an indication of increased flaring forthcoming in the basin." ] }, { "name": "Jean Ann Salisbury", "speech": [ "OK. Cool. Then I guess my questions are different. My second question was also about the incented ethane from the first quarter.", "Was that -- was that, that there were sort of some temporary gas blowouts in the basin or something more structural like gas basis is like gradually widening there? It's hard to tell because northern border kind of takes some from the Bakken and some from Canada. But is this sort of the fact that now it's in the money for you to do and before it wasn't suggest something structural is changing in terms of gas takeaway getting limited?" ] }, { "name": "Sheridan Swords", "speech": [ "Jean Ann, this is Sheridan. No, I don't think it has anything to do with gas limited takeaway. What has to do with is we're seeing strength in ethane demand on the Gulf Coast, and we saw a spread between gas in the Bakken and ethane prices on the Gulf Coast that we want to take advantage of. And we continue to see that grow, especially now as we head into May, we're seeing a lot of increased demand for ethane in the Gulf Coast from our assets down there.", "Probably as strong as we've seen in the last three or four years going into May." ] }, { "name": "Jean Ann Salisbury", "speech": [ "Perfect. That's all for me. Thanks." ] }, { "name": "Operator", "speech": [ "Our next question comes from Craig Shere, Tuohy Brothers." ] }, { "name": "Craig Shere", "speech": [ "Good morning. Congratulations on the good quarter." ] }, { "name": "Terry Spencer", "speech": [ "Thanks, Craig." ] }, { "name": "Craig Shere", "speech": [ "Trying to understand better the roughly 10% year-over-year '22 EBITDA uplift outlook. If I understand correctly, the '21 updated guidance includes up to $50 million of headwind on adaptable shutdown. What, if anything, are you incorporating into 2022 when you say maybe roughly 10% uplift for DAPL? And then if I understand correctly the answer to Tristan's question, while you're assuming a recovery in rig counts to fill in the DUCs, there is no assumption in your '22 outlook for an increasing frac crew deployment. Is that correct?" ] }, { "name": "Kevin Burdick", "speech": [ "Craig, I think there's a couple of things in there. One, you referenced DAPL. If you think about -- we've talked previously about the impact, we believe, to DAPL at this point and talking to our customers is quite small. Given the time that's now passed, we're well into the year, the pipeline is still operating, and there's still not a clear path of what's going to happen to it.", "The EIS is supposed to be complete by the, I think, March of '22. So even in the scenario where it would get shut down, I don't know that there's that much impact to '22 as everybody believes that process is going to -- will ultimately get the permit. So from that standpoint, that's how we're thinking about DAPL. Just -- and on the rig counts, we kind of answered that previously that we absolutely believe there'll be an uptick in rigs and activity levels in the second half of this year.", "As to what that exactly looks like as we move into '22, that remains to be seen and that's why the range is provided." ] }, { "name": "Terry Spencer", "speech": [ "And Craig, we wouldn't have said it if we didn't have visibility to it. You know us too well." ] }, { "name": "Craig Shere", "speech": [ "Absolutely. I guess, I'm trying to get at if you're kind of saying that you expect at least maybe 300 well connects next year, that doesn't sound like it's -- that comments assuming any healthy uptick in frac crews. Rig counts to fill in the DUCs, yes. But if we get another two or three frac crews, that could add to what you're talking about.", "Is that correct?" ] }, { "name": "Terry Spencer", "speech": [ "Yes." ] }, { "name": "Craig Shere", "speech": [ "Great. And one other question. Can you elaborate on prospects for realized Permian pricing to ramp with increasing bundled NGL services?" ] }, { "name": "Kevin Burdick", "speech": [ "Craig, could you repeat that? We didn't get it here." ] }, { "name": "Craig Shere", "speech": [ "Just your Permian realized NGL pricing is lower because there's still a lot of legacy just transport only. And trying to get a sense for the outlook of being able to switch to more and more integrated services that will give a higher bundled rate." ] }, { "name": "Sheridan Swords", "speech": [ "Well, what I -- this is Sheridan. What I would say is that I don't see a whole lot of uplift in that average rate. One is we are seeing a lot of pressure on rates for new volume out in the Permian that's out there right now, that's putting pressure on that. So our legacy volumes are going to be where they're at because they're on long-term contracts.", "But I think as we bring new volumes on, they will be at a lower rate. So I don't see a whole lot of uptick in the average rate on the West Texas system." ] }, { "name": "Craig Shere", "speech": [ "What about the ability to combine the transport on West Texas with fractionation to get higher all-in pricing?" ] }, { "name": "Sheridan Swords", "speech": [ "Well, right now, we've seen sometimes there's been some new rates done that is basically at our average rate today for both transportation and fractionation." ] }, { "name": "Craig Shere", "speech": [ "Really. OK, thank you very much." ] }, { "name": "Operator", "speech": [ "Our next question comes from Sunil Sibal, Seaport Global Securities." ] }, { "name": "Sunil Sibal", "speech": [ "Yes, hi. Good morning guys and thanks for all the color. My first question was related to your comments previously regarding how you're looking at clean energy investments. I think you referred that you're going to hold those projects to same kind of economic returns.", "Now most of the recent projects you did on NGL pipelines, etc., were more like 4 to 5x EBITDA multiples. So I was just curious, when you think about these new investments, risk versus reward, how should we be kind of thinking about any incremental investments in that area, especially if you look at CCS and all those kind of technologies?" ] }, { "name": "Kevin Burdick", "speech": [ "This is Kevin. I mean, as Terry mentioned earlier, as we evaluate these projects, we are going to maintain our financial discipline, our economic thinking and the return standards that we have. Does that mean it's a four times project like some of our others? Probably not. But is it going to earn a reasonable return? Yes, we believe they will.", "So we will definitely -- if we're spending capital, we're going to be looking for a return on that capital." ] }, { "name": "Sunil Sibal", "speech": [ "Understood. Any clarity on time line on those decisions, on those evaluations?" ] }, { "name": "Kevin Burdick", "speech": [ "We're -- we are -- our team is working it hard. I mean there's a lot of opportunities out there, and we are evaluating them to look and see how they fit with our footprint, with our capabilities and the need for us to get involved and the opportunities. So we're not going to rush it. It's important to us.", "We're working hard at it, but it's not something we're going to do just to say we've got a project. We're going to again make sure it's the right strategic and financial fit for us." ] }, { "name": "Sunil Sibal", "speech": [ "Understood. And then I had one kind of bookkeeping question with regard to the act on recovery. So those margin uptick, does that show up mainly in the gas G&P segment? Or should we expect that in the NGL segment? The reason I ask is I noticed that with this guidance update, you moved up the G&P segment guidance EBITDA, whereas the NGL segment EBITDA guidance has moved down a little bit." ] }, { "name": "Sheridan Swords", "speech": [ "This is Sheridan. You will see the uptick from incentivized ethane showing up in the NGL segment. But in our forecast for the remainder of the year, we do not -- we did not forecast any incentivized ethane in that forecast. So that will all be upside if we find the opportunity to bring more ethane out of the Bakken." ] }, { "name": "Sunil Sibal", "speech": [ "OK, got it. Thank you." ] }, { "name": "Operator", "speech": [ "Our next question comes from Alex Kania, Wolfe Research." ] }, { "name": "Alex Kania", "speech": [ "Thanks very much. Maybe just another question on the renewals. Does it -- and thinking about the economics and how you want to make the investment, does like a conversion to electric or even ultimately renewables mean like a lower cost basis for you? Or is that something that maybe kind of a value-add that you can kind of upcharge existing customers really for, lack of a better term, kind of ESG-related matters? Just trying to think of what the investment of the return could be and ultimately as well from a renewable investment standpoint, is that something where you would really contract? Or is it maybe even investment in some of these facilities?" ] }, { "name": "Kevin Burdick", "speech": [ "It may be any of those or all of the above. I mean we have situations where we may -- if we can secure power for a lower cost and it's a cleaner renewable energy, we'd absolutely do that. And we -- and have the opportunity to benefit in that. In other parts of our business, that gets -- those power costs may get passed along.", "So we would help out our customers. We may be in a situation where we can provide the power to the assets. So we're not constraining ourselves one way or the other and how we're thinking about providing renewable power to -- for our assets." ] }, { "name": "Terry Spencer", "speech": [ "I think the other thing I can add to that, Kevin, is that on an ongoing basis, we're needing to replace compression in our footprint as we have -- as machines become antiquated or as they wear out, we need to replace that compression anyway. So sometimes some of that -- those opportunities can be additions to the rate base. So that -- they can be in our regulated assets where they can -- we can earn a guaranteed return. The only difference is we'll put in electric compression as opposed to fossil fuel compression or by field compression or some of the things that we're considering.", "So it could take that form as well." ] }, { "name": "Alex Kania", "speech": [ "Makes sense. And then maybe just a follow-up. Just given the kind of the backdrop of the growth potential, it probably isn't a big priority, but just with respect to M&A, is there any maybe desire to kind of diversify geography a little bit more, kind of balance it Bakken relative to the Permian? Are there any assets that might be interesting? Or is it just tough to compare that relative to what's internal?" ] }, { "name": "Terry Spencer", "speech": [ "Well, I mean we're always thinking about those types of things. I can tell you right now the appetite from a large-scale M&A standpoint is not very high, but we are always thinking about what opportunities are out there that we could bolt-on to the asset footprint that could make it better. So we're always thinking about those things. But certainly, they've got to be strategic, got to make a lot of sense.", "They've got to be accretive from an earnings and credit standpoint. All of those things are going to be required on the M&A front. But I will tell you, candidly, the prospects are kind of few and far between, but we're always looking." ] }, { "name": "Alex Kania", "speech": [ "Great. Thanks so much." ] }, { "name": "Terry Spencer", "speech": [ "You bet." ] }, { "name": "Operator", "speech": [ "Our next question comes from Timm Schneider, Citi." ] }, { "name": "Timm Schneider", "speech": [ "Just a quick one in. I didn't see this in the release, maybe I missed it. But in your initial guidance, I think the rate for -- in the G&P segment was $0.95 to $1. Came in at $1.04 this quarter.", "So does that directionally imply we should be assuming that rate to go down throughout the rest of the year?" ] }, { "name": "Chuck Kelley", "speech": [ "Timm, this is Chuck. I would -- we gave guidance earlier this year on the average fee being $0.95 to $1. It's been $1.04 the past two quarters. I'd just say you could probably hang your hat on $1, and we're going to have quarters where we're above it.", "And there might be just $0.01 or so below it. But I think $1 is a good number. You might see a couple of cents above that throughout the year." ] }, { "name": "Timm Schneider", "speech": [ "OK. Got it. And the follow-up is I'm going to assume, if I ask you for fixed and variable cost on your system to get ethane down to the Gulf Coast, do you want to answer that? But what are the kind of main fixed costs and variable costs to think about as you think of that ethane coming down to the Bakken? And how does that vary from the Mid-Con to the Bakken, if at all, in a big way?" ] }, { "name": "Sheridan Swords", "speech": [ "Timm, this is Sheridan. I would say, yes, you're right. I'm not going to answer what it is. But the variable cost is just the top cost to pump it from the Bakken and to run it through a frac.", "Just electricity and gas to do that. That's the only difference. The difference between bringing it out of the Bakken versus the Mid-Continent is just that the Mid-Continent is closer to Mont Belvieu than the Bakken is, so you have less pumping capacity -- less pumps you have to run to get it down there. So not that big a variable cost." ] }, { "name": "Timm Schneider", "speech": [ "OK, got it. No, that make sense. And that's it for me, thank you." ] }, { "name": "Operator", "speech": [ "Our next question comes from Michael Lapides, Goldman Sachs." ] }, { "name": "Michael Lapides", "speech": [ "Hey, guys. Thanks for taking my question. One or two easy ones. First of all, in the G&P segment in the quarter, I didn't see you all call out any volumetric impact due to Winter Storm Uri.", "Was there any? That's kind of the first question. The second question, a lot of your peers or several of your peers that benefited in February from what happened with gas are now tied up or caught up in efforts to try and actually recover the cash from their customers, some of which has sparked litigation already. Just curious, do you have the cash in the door for all of it? I didn't see a big accounts receivable balance buildup. So just wanted to see and maybe check on those two items." ] }, { "name": "Chuck Kelley", "speech": [ "Yes. Michael, this is Chuck. Second question first. No, we've been paid for the gas sales that we made in February.", "So there are no accounts receivable out there for that. Secondly, your volume question on impact of Winter Storm Uri, it was primarily a Mid-Continent impact for us. As Kevin mentioned in his remarks, it was 30 million a day for the quarter, so 30 x 90, 2.7 Bcf. So essentially, if you had a 10-day event in the Mid-Con, 270 million a day for 10 days.", "So our plants -- our producers behind those plants obviously have well freeze-offs. Plants had some power issues. So it was primarily a Mid-Continent issue for us in G&P. Had a little bit of an impact in the Bakken, but February is always tough in the Bakken." ] }, { "name": "Michael Lapides", "speech": [ "Got it. And with all the debate going on in the Texas legislature over the last couple of weeks or so, really last -- almost two months now -- little over two months now, how do you think about the concept of weatherizing your Permian infrastructure? And not just you and Terry, this may be a conversation you're having with your peers. How does the industry do that?" ] }, { "name": "Terry Spencer", "speech": [ "Well, I mean -- right. I can speak for ONEOK. We've weatherized, OK? I think where a bulk of the problem was, is back in the field, where it's very difficult. It's difficult to weatherize wellhead production.", "It's been done in the Bakken. Obviously, the Bakken had marginal impact from the severe conditions. But down in Texas and even in parts of Oklahoma, we don't quite -- we don't do it as robustly as we do in Williston.So I think there's a lot to be learned from producers who operate in a hostile environment all the time. A lot can be shared with producers down in Texas and how to weatherize.", "But -- I mean a lot of issues stem from the fact that it's difficult in terms of wellhead production to weatherize. And especially if the electric power is getting shut off on you, too, if you're a producer and you're trying to -- you've got heat tracing and insulation that requires electric power and then your power is getting shut off, it makes -- you're froze up.So I can speak for ONEOK. We did a great job weatherizing, and that's how we were able to continue to operate. We had very few facilities go down due to freezing, and we had large volumes of gas coming out of storage that made up for the wellhead supply that froze off.", "We just continued to make deliveries. And those deliveries and the market demand was going up dramatically. So even in the face of rising demand because of the cold temperatures, we are able to rock and roll and maintain deliveries. And fortunately, this cold snap only lasted about 10 days.", "But anyway, that's -- it's a challenging undertaking to make sure everything is weatherized. I can speak for ONEOK. We did a great job." ] }, { "name": "Michael Lapides", "speech": [ "Got it. Thank you guys. Much appreciate it." ] }, { "name": "Terry Spencer", "speech": [ "You bet. Thank you." ] }, { "name": "Operator", "speech": [ "Our last question comes from Robert Kad, Morgan Stanley." ] }, { "name": "Robert Kad", "speech": [ "Thanks so much. I was wondering if I could just ask quickly on Northern Border and the Btu spec limit discussion. Now you have a bit of distance from the technical conference and response from FERC last year. So I was just kind of wondering where the process stood at this point? Whether it's discussions with producers or any next steps with FERC?" ] }, { "name": "Chuck Kelley", "speech": [ "Yes. Robert, this is Chuck. TC Energy is the operator of Northern Border. And in discussions with them, we understand they're still working with the customers up in the Upper Midwest as well as the downstream pipelines that they interconnect with, looking to develop a tariff solution that addresses the operational concerns and balances the interest of parties from the Bakken on into Chicago.", "So more to come." ] }, { "name": "Robert Kad", "speech": [ "Great. Thank you." ] }, { "name": "Operator", "speech": [ "At this time, I'd like to turn the call back over to Andrew Ziola." ] }, { "name": "Andrew Ziola", "speech": [ "All right. Well, thank you, everyone, for joining us. Our quiet period for the second quarter starts when we close our books in July and extends until we release earnings in early August. We'll provide details for the conference call at a later date, and the investor relations team will be available throughout the day.", "Thank you for joining us, and have a great week." ] }, { "name": "Operator", "speech": [ "[Operator signoff]" ] } ]
OKE
2020-02-25
[ { "description": "Vice President of Investor Relation and Corporate Affairs", "name": "Andrew J. Ziola", "position": "Executive" }, { "description": "President And Chief Executive Officer", "name": "Terry K. Spencer", "position": "Executive" }, { "description": "Chief Financial Officer, Treasurer And Executive Vice President, Strategic Planning And Corporate Af", "name": "Walter S. Hulse", "position": "Executive" }, { "description": "Executive Vice President And Chief Operating Officer", "name": "Kevin L. Burdick", "position": "Executive" }, { "description": "Senior Vice President of Natural Gas Liquids", "name": "Sheridan C. Swords", "position": "Executive" }, { "description": "Senior Vice President of Natural Gas", "name": "Charles M. Kelley", "position": "Executive" }, { "description": "SunTrust -- Analyst", "name": "Tristan Richardson", "position": "Analyst" }, { "description": "UBS -- Analyst", "name": "Shneur Gershuni", "position": "Analyst" }, { "description": "Barclays -- Analyst", "name": "Christine Cho", "position": "Analyst" }, { "description": "JPMorgan -- Analyst", "name": "Jeremy Tonet", "position": "Analyst" }, { "description": "Goldman Sachs -- Analyst", "name": "Michael Lapides", "position": "Analyst" }, { "description": "Tudor, Pickering, Holt & Company -- Analyst", "name": "Colton Bean", "position": "Analyst" }, { "description": "Bank of America -- Analyst", "name": "Derek Walker", "position": "Analyst" }, { "description": "Jefferies -- Analyst", "name": "Chris Sighinolfi", "position": "Analyst" }, { "description": "Wells Fargo -- Analyst", "name": "Michael Blum", "position": "Analyst" }, { "description": "Wolfe Research -- Analyst", "name": "Alex Kania", "position": "Analyst" }, { "description": "Seaport Global Securities -- Analyst", "name": "Sunil Sibal", "position": "Analyst" }, { "description": "Barclays -- Analyst", "name": "Harry Mateer", "position": "Analyst" }, { "description": "BMO Capital Markets -- Analyst", "name": "Danilo Juvane", "position": "Analyst" }, { "description": "Tuohy Brothers -- Analyst", "name": "Craig Shere", "position": "Analyst" } ]
[ { "name": "Operator", "speech": [ "Good day, and welcome to the Fourth Quarter 2019 ONEOK Earnings Call. [Operator Instructions]", "At this time, I would like to turn the conference over to Andrew Ziola. Please go ahead, sir." ] }, { "name": "Andrew J. Ziola", "speech": [ "Thank you and good morning, and welcome to ONEOK's Fourth Quarter and Year-End Earnings Call. This call is being webcast live, and a replay will be made available. After our prepared remarks, we'll be available to take your questions. A reminder that statements made during this call that might include ONEOK's expectations or predictions should be considered forward-looking statements and are covered by the safe harbor provision of the Securities Acts of 1933 and '34. Actual results could differ materially from those projected in forward-looking statements. For a discussion of factors that could cause actual results to differ, please refer to our SEC filings.", "Our first speaker this morning is Terry Spencer, President and Chief Executive Officer. Terry?" ] }, { "name": "Terry K. Spencer", "speech": [ "Thanks, Andrew. Good morning, and thank you all for joining us today. As always, we appreciate your continued trust and investment in ONEOK. Joining me on today's call is Walt Hulse, Chief Financial Officer and Executive Vice President, Strategic Planning and Corporate Affairs; and Kevin Burdick, Executive Vice President and Chief Operating Officer. Also available to answer your questions are Sheridan Swords, Senior Vice President, Natural Gas liquids; and Chuck Kelley, Senior Vice President, Natural Gas. 2019 was an outstanding year, a year of project execution and record-setting safety performance for ONEOK, positioning ourselves for exceptional growth in 2020 and 2021. Yesterday, we announced fourth quarter and full year 2019 results, announced our 2020 guidance and provided a 2021 outlook. We also announced three expansion projects that will further strengthen ONEOK's position in the Williston and Permian Basins, and increase the needed natural gas processing and NGL transportation capacity for our customers. It is important to point out that these high-return projects build off of our existing assets. These projects include the Demicks Lake III plant in the Williston Basin, the full expansion of the Elk Creek pipeline to 400,000 barrels per day and the fourth expansion of the West Texas LPG pipeline since October 2017.", "Our growth program is providing critical natural gas and NGL infrastructure to our customers, including assets to help significantly reduce natural gas flaring in the Williston Basin and provide increased connectivity all the way to the Texas Gulf Coast. Upon completion, our announced projects will expand the backbone of our NGL business and will add processing capacity to further strengthen our position as a leading midstream service provider. As for project updates, we announced that Elk Creek was completed in mid-December, Demicks Lake I and II were completed in October 2019 and January 2020, respectively, and the first phase of the MB-4 fractionator was completed in late December. Kevin will provide more color on the projects that are slated for completion here in the first quarter. Our last earnings call in late October, I made a comment that 2021 is setting up to be another year of double-digits growth. With many of our projects being completed this year and into next year, we are confident in our 2020 earnings outlook of adjusted EBITDA increasing approximately 20% compared to our 2020 guidance midpoint.", "With that, I will turn the call over to Walt." ] }, { "name": "Walter S. Hulse", "speech": [ "Thank you, Terry, ONEOK's 2019 net income totaled $1.28 billion or $3.07 per share, an 11% increase compared with 2018. In 2019, adjusted EBITDA totaled $2.58 billion, a 5% increase year-over-year. Natural gas liquids and natural gas volume growth, higher average fee rates and increased transportation capacity contracted, all contributed to a strong 2019 performance. The natural gas gathering and processing and natural gas pipeline segments ended the year with adjusted EBITDA increases of 11% and 12%, respectively, compared with 2018, exceeding the high end of the 2019 guidance range in both segments. The natural gas liquids segment adjusted EBITDA increased 2% compared with 2018, about 4% below the low end of the 2019 guidance range, due primarily to narrower-than-expected NGL price differentials. Distributable cash flow for 2019 was $2.02 billion, up 11% compared to 2018, with a healthy full year dividend coverage of 1.38 times. We also generated nearly $560 million of distributable cash flow in excess of dividends paid in 2019.", "Our annual dividends paid during 2019 were $3.53 per share, a 9% increase compared with 2018, in line with our previously stated guidance. And in January, the Board of Directors declared a dividend of $0.935 or $3.74 per share on an annualized basis, also an increase of 9% compared with the first quarter of 2018. Our December 31 net debt-to-EBITDA on an annualized run rate basis was 4.8 times. We continue to expect to be at four times debt-to-EBITDA run rate in late 2020 or early 2021 with deleveraging continuing thereafter as volumes ramp and additional projects come online. We ended the year having no borrowings outstanding on our $2.5 billion credit facility and $220 million of commercial paper outstanding. As Terry mentioned, with yesterday's earnings announcement, we provided detailed 2020 financial and volume guidance and a 2021 outlook. Our 2020 guidance includes increases in our earnings per share and adjusted EBITDA midpoints of 16% and 25%, respectively, compared with 2019. We expect double-digit year-over-year earnings growth in our natural gas liquids and our natural gas gathering and processing segments of 15% and 11%, respectively.", "Our natural gas pipeline segment had a strong 2019, and we expect another solid year of performance for the segment in 2020. Key drivers to achieving our 2020 financial guidance expectations include volume growth expected from the Elk Creek pipeline and the Demicks Lake processing plants, and contributions from the Arbuckle II pipeline, the MB-4 fractionator and the second West Texas LPG expansion, all projects that we expect to be completed here in the first quarter. Our 2020 growth capital guidance range of $2.25 billion to $2.73 billion is a significant decrease compared with our peak capex spend in 2019 and incorporates the projects we announced yesterday. As a reminder, what we call routine growth capital such as well connections and plant connections is included in this number. Our 2021 outlook of an approximate 20% increase in adjusted EBITDA compared with the 2020 guidance midpoint is driven by continued volume growth on Elk Creek resulting from the increased volumes from plants connected in 2020, the Bakken NGL pipeline extension and the Bear Creek expansion. Volume growth in the Permian Basin and the Gulf Coast from the completion of the MB-5 fractionator and the third and fourth expansions of West Texas LPG pipeline will also contribute to the 2021 increase. With these project completions this year and early next year, total capital expenditures are expected to decrease significantly in 2021 relative to 2020.", "I'll now turn the call over to Kevin for a closer look at each of our operating segments." ] }, { "name": "Kevin L. Burdick", "speech": [ "Thank you, Walt. 2019 was an impressive year with strong producer activity across our operations, driving NGL raw feed throughput and natural gas processed volume increases of 7% compared with 2018. We expect volumes to continue to increase in 2020 and our earnings to remain more than 90% fee-based. As Terry said, we completed our Demicks Lake II plant in the Williston Basin in January and expect to complete three additional NGL projects by the end of the first quarter. Overall, our projects are on time and on budget, positioning us well for continued growth as volumes on these projects ramp up. Let's start with our Rocky Mountain region, which includes the Williston and Powder River Basins. Producer activity remains strong in both the Williston and Powder River basins. North Dakota continues to see natural gas production of more than three billion cubic feet per day, and the basinwide rig count remains in the 50 to 55 range with approximately 25 rigs on our dedicated acreage. Rig counts have remained consistent in this $50 to $55 WTI crude oil price environment, which we expect to continue. Natural gas volumes processed in the Rocky Mountain region increased 11% in both the fourth quarter and full year 2019 compared with the same periods in 2018. Processed volumes averaged 1.05 billion cubic feet per day for 2019, above the midpoint of our volume guidance range.", "We expect processed volumes from this region to increase more than 25% compared with 2019 due to the completion of the Demicks Lake plants as we significantly reduce gas currently being flared. We connected 526 wells in the Rocky Mountain region in 2019. Better-than-expected well performance and higher gas to oil ratios contributed to volume growth even with producers temporarily delaying well completions until our Demicks Lake plants came online. We expect to connect between 575 and 625 wells in 2020. Our 200 million cubic feet per day Demicks Lake I natural gas processing plant that was placed in service in the fourth quarter is expected to be full by the end of the first quarter. We expect our Demicks Lake II plant to ramp to full capacity over the next 12 to 18 months. With the latest reported natural gas flaring data of approximately 500 million cubic feet per day in the basin and approximately 300 million of that on ONEOK's dedicated acreage, we now have the capacity available to capture a significant portion of this flared gas. Our Bear Creek plant remains on schedule to be completed early in the first quarter of 2021, which will provide much-needed processing capacity to the highly productive geographically isolated Dunn County area, where we have substantial acreage dedications.", "The Demicks Lake expansion will provide an additional 200 million cubic feet per day of processing capacity when it is completed in the third quarter of 2021. With the completion of these two facilities, ONEOK will have approximately 1.9 billion cubic feet per day of processing capacity in the Williston Basin. NGL raw feed throughput volumes in the Rocky Mountain region, which consists of Elk Creek and the Bakken NGL pipeline, increased 9% compared with the third quarter 2019 and 23% compared with the full year 2018. We expect our Rocky Mountain NGL volumes to continue to increase as approximately 850 million cubic feet per day of processing capacity from ONEOK and third-party plants has come online since the third quarter 2019. We recently reached more than 230,000 barrels per day of raw feed throughput on Elk Creek and the Bakken NGL pipeline combined and continue to expect to exit the first quarter of 2020 with more than 240,000 barrels per day. Yesterday, we announced an expansion of the Elk Creek pipeline to its full capacity of 400,000 barrels per day. The expansion is supported by well over 240,000 barrels per day of long-term dedicated production from ONEOK and third-party plants, excluding any incremental ethane. Of the 160,000 barrel per day expansion, approximately 60,000 barrels per day of the capacity is expected to be available in early 2021 and the remaining 100,000 barrels per day by the third quarter of 2021.", "We also see continue to see growth in the Powder River Basin as production results remain strong, benefiting both our natural gas gathering and processing and natural gas liquids segments. Moving on to the Mid-Continent. Natural gas volumes processed increased 3% year-over-year, above the midpoint of our guidance range, connecting 117 wells to our gathering and processing system. Based on recent discussions with our customers, we expect our natural gas volumes processed in the Mid-Continent region to decrease approximately 10% this year compared with 2019 and expect to connect 40 to 60 wells. Total NGL raw feed throughput in the Mid-Continent region for the fourth quarter decreased slightly compared with the third quarter, due primarily to spot volumes in the third quarter that did not carry over to the fourth quarter. Outside of ethane rejection, we expect relatively flat Mid-Continent volumes on our system in 2020 compared with the fourth quarter 2019. During 2019, we connected five new third-party processing plants to our natural gas liquids system in the region, and two previously connected third-party plants on our system were expanded. Our Arbuckle II pipeline remains on schedule for completion by the end of the first quarter of 2020. Arbuckle II will play an important role in transporting incremental supply from the Williston and Powder River Basins, the Mid-Continent and the Permian Basin to the Gulf Coast.", "Arbuckle II is the lower end of the NGL backbone and will be our fifth pipeline that can funnel supply from across our entire system to the Gulf Coast markets. Finishing with the Permian Basin and Gulf Coast. NGL raw feed throughput volumes in this region increased 22% year-over-year, and the average fee rate increased compared with the third quarter 2019. We expect average rates to continue to increase as we bring on new volumes with bundled rates from our completed expansion projects. We announced our fourth expansion of the West Texas LPG system, 100,000 barrel per day fully contracted expansion with long-term dedicated production from third-party processing plants in the region. We now have announced approximately 260,000 barrels per day of expansions on West Texas LPG to support volume growth in the region. Our systemwide NGL fractionation capacity remains highly utilized. Phase one of our MB-4 fractionator, which was completed in December, has increased our capacity by 75,000 barrels per day. Phase two of the project, which will add the remaining 50,000 barrels per day of capacity, remains on schedule for completion by the end of the first quarter of 2020. And our MB-5 fractionator remains on track for completion in the first quarter 2021. Our overall NGL segment raw feed throughput volume guidance is expected to increase 15% in 2020, driven by a full year of operations of Elk Creek and the completions of the Arbuckle II pipeline, the MB-4 fractionator and 80,000 barrel per day West Texas LPG pipeline expansion, all expected in the first quarter of 2020. Continued growth from plant connections and expansions completed in 2019 will also contribute to higher volumes in 2020. We expect six to nine new third-party plant connections or expansions, including the connection already completed with Demicks Lake II.", "Terry, that concludes my remarks." ] }, { "name": "Terry K. Spencer", "speech": [ "Thank you, Kevin. 2019 was another successful year for ONEOK, and I'm proud of our employees who continue to focus on safety, reliability and the execution of our growth projects. Operating our integrated network of assets in the manner for which ONEOK has a strong reputation remains our focus and is the foundation for all our successes we've discussed today, and will continue to be as we move forward as we transition from this build cycle to a period of significant cash flow generation. Thank you to all our dedicated employees for your hard work and contributions in helping us achieve another year of companywide growth in 2019. And 2020 is off to a great start as we are in the middle of many project completions and new asset operations that will position us well in the coming years.", "With that, operator, we're now ready for questions." ] } ]
[ { "name": "Operator", "speech": [ "[Operator Instructions] And our first question comes from Tristan Richardson with SunTrust." ] }, { "name": "Tristan Richardson", "speech": [ "Morning guys. Appreciate all the commentary on the expansions. Could you talk just a quick one. The difference on the capex side between Demicks III. It seems like you've got a lot of efficiencies versus the first two as well as the Bear Creek expansion. Just the difference in costs, should we think of that as an opportunity for enhanced return profile for Demicks III versus the others?" ] }, { "name": "Kevin L. Burdick", "speech": [ "Yes. Tristan, this is Kevin. Yes, that's I mean, that's the way we think about it. The reason for the lower capital is, again, kind of more expansions when as we've constructed Demicks I and Demicks II, things like power, a lot of the inlet handling for the plant, some of the pipeline infrastructure, we're doing we're expanding existing compressor stations rather than building new compressor stations. So all those things contribute to that capital being lower than the previous projects." ] }, { "name": "Tristan Richardson", "speech": [ "Helpful. And then and just on the Elk Creek expansion, in terms of the volumes behind that, should we think of that as primarily there to serve Demicks III as well as Bear Creek? Or are there could you talk about the quantity of other third-party plants that could be behind the latest expansion?" ] }, { "name": "Kevin L. Burdick", "speech": [ "Yes. I mean, that's the way to think about it. As we continue to ramp volumes with more than 240,000 barrels a day now of contracted on the pipe, we needed to expand it. We also wanted to make sure we had the ability to handle any ethane that needs to come out incrementally. But again, the economics are really based more on just the traditional, the classic C3 plus volume growth that we see. We still have a lot of opportunities, and we're in late-stage negotiations with several customers north of the river as we build that lateral that's going to connect over to the Hess plant. So there's still opportunities out there in front of us." ] }, { "name": "Tristan Richardson", "speech": [ "Appreciate it. Thank you guys very much." ] }, { "name": "Kevin L. Burdick", "speech": [ "Thank you." ] }, { "name": "Operator", "speech": [ "[Operator Instructions] We'll take our next question from Shneur Gershuni with UBS." ] }, { "name": "Shneur Gershuni", "speech": [ "Morning, guys. I was just wondering if we can dive into the 2021 plus 20% EBITDA guidance a little bit. Just trying to understand what it assumes, I guess, with obviously, it's what part of it is a ramp-up of Elk Creek, but how much ethane recovery are you assuming from the Bakken? Is it full ethane recovery? Also I was wondering if you can talk about kind of the margin uplift? If you can sort of like walk us through what is the delta between 2020 and 2021 in terms of what's going into your assumptions?" ] }, { "name": "Kevin L. Burdick", "speech": [ "Sure. Shneur, this is Kevin. Clearly, it is a Bakken-driven story. I think you start and just kind of go down the list of projects that are coming on either late this year or early, early in 2021. So you've got Bear Creek II, that expansion, which, again, there's going to be some flared gas behind that facility when it's up. We've got four large, well-capitalized producers that are just dying to go drill down there, but there's just no capacity currently. So there's growth there. We've talked about the north lateral from our on our in our NGL segment that will go connect to the Hess Plant that will be completed in Q4 of this year. So we'll have a year of volumes on that. You've got continued just core growth in of our existing plants, the Demicks Lake facilities that will continue to ramp up, and then we'll have a little opportunity for Demicks III toward the end of the year. And then you mentioned the ethane opportunity that yes, we do have what we would consider a modest level of ethane. If you look at the production growth, that just from capturing the flared gas and as these other ours and third-party plants ramp up, it's just some math that determines we're going to need to pull some ethane out. So we've got around 25,000 to 40,000 barrels per day of ethane that we believe will come out in 2021 and that is a result of the BTU heat content issue on Northern border. Permian and Gulf Coast, we've got the three expansions that are coming on between now and the middle of 2021 that will provide additional volume growth, and we have a full year of the MB-5 fractionator in 2021 as well. So you pull all that together, we see, both our NGL and G&P segments, volume growth continuing to increase, and it's going to be well into double digits." ] }, { "name": "Shneur Gershuni", "speech": [ "That was very helpful. Really do appreciate that. Maybe as a follow-up question, kind of a 2-parter, if you don't mind. With your capex activity, I mean, despite the fact that you've announced these new projects, it is definitely lower than where it's been and you sort of see slowing producer activity. I was just wondering what are the opportunities for ONEOK to pivot and optimize on the cost side? Are there costs that you can now strip out now that you can sort of see where your business is running? And also, are you able to potentially pursue an asset-light strategy? When I sort of think about your Elk Creek expansion as well as the West Texas LPG brings a lot more volumes into on the NGL side, which would suggest you would need a frac. But given their excess frac capacity out there, are there ways for you to sublease others other fracs and sort of take advantage of that in pursuing asset-light strategy? Just sort of wondering if you can sort of talk about other ways to optimize for further earnings growth beyond 2021?" ] }, { "name": "Kevin L. Burdick", "speech": [ "Yes. Kevin, again. I think we I believe we have been doing that already in a lot of ways. The previous question about Demicks Lake, that's a great example of a brownfield expansion to where we put it there. And again, we're able to significantly reduce the capital for that capacity. As we think about the fracs, I think we've done that as well. We have clear line of sight to MB-4 being full and significant volumes, if not MB-5 being full. But if you remember, the other thing we've done is we've announced like 65,000 barrels a day of, again, expansions at our existing facilities that our team was able to go find for much less capital than building another greenfield frac. And so that has delayed any discussion of an MB-6 because our team has been able to find those types of debottlenecking and expansion opportunities. So I'd like to thank our team. We've done that. And we that's part of our DNA as we think about how we provide the capacity for our customers. And I know you made a comment at the very beginning, I would like to just give you my point of view, and I don't think we have seen slowing producer activity on our acreage, especially when you talk about the Bakken and the Permian. Yes, the Mid-Continent has pulled back, but we haven't seen any slowed activity in the Bakken or Permian at all." ] }, { "name": "Shneur Gershuni", "speech": [ "No. Fair enough. I do appreciate the color. Maybe one final question. When do you guys expect when is your next projection for ONEOK to be a cash taxpayer?" ] }, { "name": "Walter S. Hulse", "speech": [ "Shneur, we as we've said in the past, when we did the acquisition of the partnership back in 2017, we said we wouldn't be a taxpayer through 2021. We've built between $6 billion and $7 billion worth of assets with bonus depreciation that we've been able to take advantage on top of that. So we have a good runway here before we will become a taxpayer at all. And then, at some point, there will be a limitation on the utilization of the NOL that was put in place with the last tax act. But that would at that point, going forward, we would have kind of a 4% to 5% marginal rate somewhere out there in the future. So we don't see a full tax paying situation well into the future." ] }, { "name": "Shneur Gershuni", "speech": [ "Thank you very much and appreciate college today, guys." ] }, { "name": "Operator", "speech": [ "Our next question comes from Christine Cho with Barclays." ] }, { "name": "Christine Cho", "speech": [ "Hi everyone, If I could actually start as a follow-up to the ethane extraction in the Bakken. Should we think of this the ethane extraction that you'll potentially do next year as a temporary dynamic until another pipeline comes on and more Canadian gas can come back to blend with the Bakken gas? Or do you think it will be more of a permanent thing?" ] }, { "name": "Kevin L. Burdick", "speech": [ "Christine, this is Kevin. I think we believe it's going to be a long-term thing. Because if you think about new capacity, any new capacity that's going to come online in the Bakken, it is highly likely it's going to have a BTU spec on it also because it's not going to have other gas to blend down with like currently is going on on Northern border. So at least the various projects that we've looked at and been involved with, all of those contemplate a BTU spec." ] }, { "name": "Christine Cho", "speech": [ "Okay. That's what I thought. Just wanted to confirm. And then could you give us a breakdown of where the six to nine third-party plant connections are regionally?" ] }, { "name": "Sheridan C. Swords", "speech": [ "Christine, this is Sheridan. Those are going to come in as you'd expect, in the Bakken and in the Permian. And the six is pretty much half and half on each one of them. The growth is going to be some plants that will be coming on at the end of 2020 that could either be in 2020 or 2021." ] }, { "name": "Christine Cho", "speech": [ "Okay. And is the growth primarily Bakken? Or that's also split between Permian and..." ] }, { "name": "Sheridan C. Swords", "speech": [ "It's split." ] }, { "name": "Christine Cho", "speech": [ "Okay. And then can you give us an idea of the cadence and the magnitude of the third-party frac costs and rail cost roll off in 2020?" ] }, { "name": "Sheridan C. Swords", "speech": [ "Yes. Christine, we won't see any third-party rail costs in 2020 or we haven't predicted any since Elk Creek coming online, that has been reduced to 0. But the third-party frac will be about the same level it was in 2019 as in 2020 as we get ready for MB-5 coming online." ] }, { "name": "Christine Cho", "speech": [ "Okay. So those costs are not going to go down this year?" ] }, { "name": "Sheridan C. Swords", "speech": [ "Third-party frac costs won't go down in 2020 from 2019. And that's baked into our guidance." ] }, { "name": "Operator", "speech": [ "We'll take our next question from Jeremy Tonet with JPMorgan." ] }, { "name": "Jeremy Tonet", "speech": [ "Hi, good morning. Just wanted to follow-up, I guess, with your conversations with producers in this environment and given how the commodity price has declined a bit here. Just wondering if you could relate with us, I guess, expectations for drilling activity. Has that been moderating? Or it seems like it'd all be firmly baked into your guidance at this point, but anything that you can share with us, I guess, on this topic?" ] }, { "name": "Kevin L. Burdick", "speech": [ "This is Kevin. Yes, we're looking at the commodity environment very similar to our producers. Really, we focus on the crude side. We don't we have reduced our direct commodity exposure so significantly that really it's not that big a deal just when you get into the NGL prices or the nat gas prices. Most of the producers, our customers are telling us they're planning for a $50 crude environment. And therefore, that's the activity levels we're kind of assuming of the activity levels that you're seeing in the Bakken and the Permian in the current landscape. So that's the way we're thinking about it over the next couple of years, which we believe is very consistent with the way our customers are thinking about it." ] }, { "name": "Jeremy Tonet", "speech": [ "That's helpful. And just a couple of cleanup questions, I guess, with the NGL logistics side. How do you guys sit on the storage side at this point? Do you think that there's more expansions that are needed there to kind of do what you want to do in Belvieu? And then in the 2021 guide, I guess, the Conway-Belvieu spread, any thoughts you could share with us on how that lands at that point?" ] }, { "name": "Sheridan C. Swords", "speech": [ "Well, I'd just say on the storage side that right now, we are in the process of constructing two new storage wells, both are 1.5 million barrels. And we're also putting in a 3.5 million barrel brine pond. So right now, we do see the need to expand our storage facilities, and we are doing it, and those will come up one of those will come one of those wells will come up this year. The next one will come up next year. So we think that puts us in a very good position on our storage side to be able to handle our growth. And then on the Conway to Belvieu spread, as we said, with the Arbuckle II pipeline coming online, for sure, the spreads are going to be very narrow. And in our 2020 and 2021 guidance, we are predicting a historically low spread or very narrow spread between Conway and Belvieu." ] }, { "name": "Jeremy Tonet", "speech": [ "Got you. Great. And just to confirm, I think you had said $50 to $55 is kind of the price deck that you guys are employing when you think about this guidance going forward?" ] }, { "name": "Walter S. Hulse", "speech": [ "Yes. From a crude activity perspective, that's the level we're thinking about it." ] }, { "name": "Jeremy Tonet", "speech": [ "That's, that's just to me. Thank you." ] }, { "name": "Operator", "speech": [ "We'll take our next question from Michael Lapides with Goldman Sachs." ] }, { "name": "Michael Lapides", "speech": [ "Hey guys, A couple of questions. First of all, when thinking about flaring and flaring limits, just curious do you think there's potential for North Dakota to tighten the flaring limits further? And if so, what would have to happen for that? And second, do you have any read-through or read into the recent report put out by the Railroad Commission in Texas regarding flaring there?" ] }, { "name": "Kevin L. Burdick", "speech": [ "I'll Michael, it's Kevin. I'll start and then let Chuck jump in. I mean, the flaring the gas capture targets or the flaring targets in North Dakota do step down at the end of this year. They step down from 88% capture or step up from 88% capture to 91% capture. So clearly, that is one step-up in conversations we have with the state and our producers. Obviously, we want to drive that number well below that. We have experience. When you look back at 2015 and 2016, when we when midstream kind of got caught up, we drove flaring to lower levels than that. So I think that's the goal. As it relates to Texas, yes, we saw the report. I think any just from a regulatory perspective, I do think we'll see continued discussions around flaring. As to where that goes from a regulation standpoint, I don't know that I'd have a point of view at this point. But Chuck, anything?" ] }, { "name": "Charles M. Kelley", "speech": [ "Yes, I guess what I would add, in North Dakota, Michael, is that the kind of the interested stakeholders up there between the state, the producers and the processors have been meeting fairly regularly over the last, let's call it, two quarters, looking at the current flaring rules, flaring exemptions, how the interested parties can work more closely together to mitigate flaring. And there's some discussion of potentially changing some of these rules going forward, but there's nothing concrete as of yet." ] }, { "name": "Michael Lapides", "speech": [ "Got it. And then..." ] }, { "name": "Terry K. Spencer", "speech": [ "Michael, let me just make one quick comment to I'll follow-up. So with the Texas report, I think it's just indicative of the fact that the heat on producers is really going to be stepping up in terms of flaring. And I think for midstream companies, I think that actually creates, obviously, opportunity. And in particular, we're going to see, I think, a step-up in terms of infrastructure getting built or maximized in order to reduce the flaring. And obviously, when we maximize that throughput from that rich gas, we're going to create more NGLs coming out of the basin sooner rather than later. So I think that's going to I think it's really going to step up. And I think the step one was the fact that the Texas Railroad Commission acknowledged what was happening. I think they did some really kind of took a unique look at it in terms of intensity of flaring. I think it really showed a picture that it's going to have to be addressed. And the regulators are going to have to address it and midstream's going to be a big part of that solution, of course." ] }, { "name": "Michael Lapides", "speech": [ "Got it. And then one follow-up just on the guidance. The growth capex range is a pretty wide range to give in February of the prompt here. Just curious what anchors the low and the high end of that range?" ] }, { "name": "Kevin L. Burdick", "speech": [ "Michael, it's Kevin. Similar to last year, when we had an even wider range, it really comes down to timing. You look at the number of projects we have we're expecting to come online in the first quarter. If we're always looking for ways to pull those back, if those get pulled back and we start realizing the EBITDA sooner, we'd love to do that, but that may pull a little capital that would move you toward the high end. Conversely, if some of these things, if they go the other direction for whatever reason, it could slow down some of the capital spend in 2020 that would move you toward the low end. So it's really just going to come down to timing." ] }, { "name": "Michael Lapides", "speech": [ "Thank you guys much appreciated. Thank you." ] }, { "name": "Operator", "speech": [ "Our next question comes from Colton Bean with Tudor, Pickering, Holt & Company." ] }, { "name": "Colton Bean", "speech": [ "So just to follow-up there on the 2020 capital program. Can you clarify how much of that is attributable to the $900 million of backlog additions you slated for 2021?" ] }, { "name": "Kevin L. Burdick", "speech": [ "Yes. About half of the $900 million we announced is 2020 spend." ] }, { "name": "Colton Bean", "speech": [ "Got it. That's helpful. And then with Demicks Lake III announced slated for 2021, how are you evaluating absolute residue gas takeaway, understanding the comments earlier on heat content, but just in terms of absolute dry gas capacity?" ] }, { "name": "Charles M. Kelley", "speech": [ "Yes. Colton, this is Chuck. What I could say, I mean, obviously, you're going to need residue gas takeaway. We've said before some time in '22, perhaps 2023. We're currently in late-stage negotiations, negotiating a proceeding agreement with the project coming out of the Bakken. We're under an NDA, so we can't go into that any further. However, we believe some time in the next month or two, you should see some information come out publicly." ] }, { "name": "Colton Bean", "speech": [ "Understood. And just a final one from me. On the Elk Creek expansion, is that effectively an all or nothing type process? Or could you add horsepower more ratably as it's needed?" ] }, { "name": "Sheridan C. Swords", "speech": [ "Well, Colton, this is Sheridan. As you said we said in our remarks that we will get some of that early in 2021 and then the later will come in later 2021, so we are ramping up that capacity as we go through the year. And if some reason we could slow it down if we needed to. We don't see that happening, but we could. We will get some as we go through the 2021. So we are ramping up the capacity." ] }, { "name": "Operator", "speech": [ "We'll take our next question from Derek Walker with Bank of America." ] }, { "name": "Derek Walker", "speech": [ "Thanks for taking my question guys, Just a couple of ones for me. Maybe I'll follow-up on the growth capex. I think you've talked to sort of the routine capex before around well connects and plant connects. How much of the 2020 growth capex is considered routine capex? And then similarly, kind of going into 2021, you mentioned a step down in growth capex again. Should we kind of think of a similar run rate for routine capex in 2021? Or should we think of that directionally up or down?" ] }, { "name": "Walter S. Hulse", "speech": [ "Yes. Over the years, we've said that our growth our routine growth capex is somewhere between $250 million to $400 million or so. It varies depending on where the plants are that we have to connect or the wells we're connecting, but it always is in that range. It's included in our guidance for 2020. From a growth capex standpoint, it wouldn't be significantly different in 2021, but we expect a meaningful step down in capex from 2020 to 2021 in the range of $1 billion less in 2021 than we will have in 2020." ] }, { "name": "Derek Walker", "speech": [ "Got it. And then maybe I'll just ask a quick one on the dividend policy. You hit 9% last year. Should we think about 9% again in 2021? Or should we think about kind of a normalized sort of rate relative to either the dividend [Indecipherable] or perhaps some of the larger midstream names in the space?" ] }, { "name": "Walter S. Hulse", "speech": [ "Well, we've guided pretty regularly since 2017 that through 2021, we would pay in that 9% to 11% range. We've been at 9% throughout. And we don't see anything at this point that will change that view through 2021, and we're not going to give a view pass that." ] }, { "name": "Derek Walker", "speech": [ "Thank you." ] }, { "name": "Operator", "speech": [ "Okay, We'll take our next question from Chris Sighinolfi with Jefferies." ] }, { "name": "Chris Sighinolfi", "speech": [ "Hey, good morning, everybody. Thanks for the colors. Kevin, I just wanted to go back maybe to something Michael was asking, but ask it slightly differently. And that's on flared volumes on the Rocky's footprint today, I believe, in your January update, you'd noted, for November, it was about 300 million cubic feet a day net to your acreage. I'm just curious, I guess, as a starting measure, where that is today? And then if we look at the growth in gathered volumes you've modeled or anticipate for 2020 versus what you did in the fourth quarter, how much of that is like phasing growth versus how much of that is flared capture? And I ask just to better understand the walk, but also where is that sort of as a set up to where that leaves us in 2021?" ] }, { "name": "Kevin L. Burdick", "speech": [ "Yes. Chris, clearly, the I mean, the latest number we have another month, it was basically flat, maybe a little bit our flaring on ours was a little bit less, but we're still in that 300 range. As we look going forward, we sorry, there's an echo here that's kind of messing with me. But as we look going forward, the volumes of the flared gas capture will drive especially as we move through the early parts of the year, we'll drive that flaring down significantly. But again, with the DUCs, with the rig count that's still running, as we kind of get toward the back half of 2020 and going to 2021, you still got just straight production growth at the rig counts we're currently seeing and the productivity of the wells being drilled. And then the other again, I mentioned earlier that another key volume dynamic for the growth is Bear creek II, that there's going to be some flared gas behind that system because it's geographically isolated. And we fully anticipate, as we get capacity down there, you're going to see some rig movements into that region to drill that area up." ] }, { "name": "Chris Sighinolfi", "speech": [ "Okay. That's very helpful. I guess, as a related point, Kevin, for those watching, I guess, inlet volumes at this creek plants, are we likely to see volumes sort of wheel to your newer facilities for processing before the aggregate footprint more broadly fills up? Are there efficiencies in having, I guess, an expanded plant portfolio where you're not where certain plants maybe are not isolated, but connected? Or, I guess, a longer-dated question, when you start to recover as staying on the plan for 2021, are we likely to see that sort of disproportionately affecting certain plants and not others? I'm just asking because I know some people track individual facilities." ] }, { "name": "Kevin L. Burdick", "speech": [ "Yes. We look at our system in total. Again, with the exception of Bear Creek, that area, the rest of our system, we look at it in total. And absolutely, we'll see some gas move from, say, Garden Creek to Demicks Lake and from Lonesome Creek to Garden Creek as we optimize our system. We'll push the gas to the plant and the facility that we believe we can get do it for the least cost and take advantage of our assets. So you will see some of that go on, but it really doesn't impact ethane recovery. Again, it will be a similar argument or discussion. If we start recovering or need to recover a little ethane that will ultimately come down to what the how the tariff is worded from a Northern border standpoint if there is a change there and how we want to operate our facilities." ] }, { "name": "Chris Sighinolfi", "speech": [ "Okay. Great. And if I could ask one final question, totally different. Can you just remind me some of the drivers of outperformance for the nat gas segment pipe segment in 2019? I noted a modest EBITDA reduction that I think you're guiding for 2020. It looks like you remain very well contracted on the capacity there. So I'm just, I guess, wondering if it's a rate or a cost issue? Or if it's something entirely different?" ] }, { "name": "Charles M. Kelley", "speech": [ "Chris, this is Chuck. So our 2019 outperformance was really driven by the capturing or the excuse me, the interruptible volumes that we flow. There was great demand particularly in Texas and Oklahoma on our interruptible capacities. But within the Permian Basin, they're being less takeaway capacity alternatives. And certainly, we had a real strong Q3 with very, very good cooling and relative generational load for the heat generating cooling. So that was 2019, the uplift. As you compare it year-over-year, what we did in looking at 2020 guidance, we typically will normalize our spring and summer electric generation loads. So as you look at our midpoint in 2020, we do have some upside in there should there be a repeat of a good strong summer, so our interruptible volumes can help us to the upside. And I might add that, recently, Permian Highway has indicated that they will be delayed until Q1 of 2021. So that potentially presents another opportunity for our Texas intrastates to capture some more interruptible transport services." ] }, { "name": "Chris Sighinolfi", "speech": [ "That's great. Thanks for the review of that. Appreciate it. All. Right, guys." ] }, { "name": "Operator", "speech": [ "We'll take our next question from Michael Blum with Wells Fargo." ] }, { "name": "Michael Blum", "speech": [ "Hey, thanks. Good morning everyone. Question on the 100,000 barrels a day West Texas LPG expansion. Is that are those new plants that are sort of fueling those commitments? Or are you taking market share from others?" ] }, { "name": "Sheridan C. Swords", "speech": [ "Michael, this is Sheridan. We're doing both. We're getting plants new plants that are being connected, and we are getting volume off of the existing plants that are going to other pipelines." ] }, { "name": "Michael Blum", "speech": [ "Okay. And then just turning to the 2021 guidance, how much of the growth coming out of the Rocky Mountain region is contingent on Powder River Basin development versus just continued growth in the Bakken?" ] }, { "name": "Kevin L. Burdick", "speech": [ "Michael, both segments. It would be a very modest level of increase. It's not a driver. The driver is the Bakken and the Permian." ] }, { "name": "Terry K. Spencer", "speech": [ "But Michael, don't let that be an indication of how we feel about the Powder, OK? We think the Powder has got a lot of unrealized potential. It could be it could and it just needs a little bit of price help, and we're certainly well positioned to be able to exploit that if, in fact, it the Powder does get a little bit of price help." ] }, { "name": "Michael Blum", "speech": [ "Right, thank you." ] }, { "name": "Kevin L. Burdick", "speech": [ "Thank you." ] }, { "name": "Operator", "speech": [ "We'll take our next question from Alex Kania with Wolfe Research." ] }, { "name": "Alex Kania", "speech": [ "Thanks. I guess, just a follow-up question with respect to West Texas LPG. With the expansion, more or less set, how do you think about the timetable with respect to your options related to conversion or repurposing of the legacy pipe?" ] }, { "name": "Sheridan C. Swords", "speech": [ "Alex, this is Sheridan. We with this latest expansion that we announced, we still have a little bit more expansion to do before we can free up one of the pipes to go into an alternative service. We did contemplate making a full expansion of the pipeline to open up the legacy pipe into a different service, but with we want to have better clarity and better line of sight into additional volume that we predict will be coming on later before we would go ahead and do the full loop complete the full loop of the West Texas pipeline, freeing up the legacy system for a different service." ] }, { "name": "Alex Kania", "speech": [ "Great, thanks." ] }, { "name": "Operator", "speech": [ "And our next question comes from Sunil Sibal with Seaport Global Securities." ] }, { "name": "Sunil Sibal", "speech": [ "Hi, good morning, guys. I got on the call late, just a couple of clarifications. I know you might have touched it. On the leverage side, I think you mentioned that you expect to get to close to four times leverage some time in 2020. Is that correct? And if so, any if you can talk anything about funding assumptions that go into that?" ] }, { "name": "Walter S. Hulse", "speech": [ "Well, what we said in the prepared remarks was that the expectation that we've said before remains the same that we expect to be at four times debt-to-EBITDA on a run rate basis either in the fourth quarter of 2020 or in early 2021. So that doesn't change. And then we expect to continue to delever further as we go beyond that period in 2021 as these projects come on, capex goes down and cash flows increase. So nothing's changed." ] }, { "name": "Sunil Sibal", "speech": [ "Okay. Got it. And then one kind of broader question. I think in the past, you've talked about corporate M&A and the industry environment not being that conducive to that. I was wondering if you're seeing anything different in the industry environment right now?" ] }, { "name": "Terry K. Spencer", "speech": [ "No. No difference. Still a tough environment from an M&A perspective. We're going to stay focused on this organic growth strategy. If we do take advantage of some M&A opportunity, it'll more be in the area of the strategic bolt-on asset type acquisition. So our thinking really hasn't changed." ] }, { "name": "Sunil Sibal", "speech": [ "Okay, got it. Thanks. You bet." ] }, { "name": "Operator", "speech": [ "Our next question comes from Harry Mateer with Barclays." ] }, { "name": "Harry Mateer", "speech": [ "Good morning. Sorry, first, just a follow-up on the last question. But you guys previously have talked about a 3.5 times aspirational leverage target. And just want to confirm if that's still the case? And have you given any consideration to making that less of an aspirational target and more of an actual target potentially with some firmer time guidelines, just given how shaky the macro backdrop feels?" ] }, { "name": "Walter S. Hulse", "speech": [ "Well, if you just do the projections out based on the guidance that we've given you, you'll see that we go toward and through that 3.5 times pretty quickly. What we said is that we thought aspirationally, on a going-forward basis, that we would be around that 3.5 times as we saw continued growth going forward. If we don't see additional growth from where we are today, we will be well below 3.5 times." ] }, { "name": "Harry Mateer", "speech": [ "Got it. Okay. And then financing needs this year, if you could just talk about what your plans might be? Your next bond maturity is until 2022, but you do have a 2021 term loan that's prepayable. And you guys will outspend cash flow this year, again, after all the capex and dividend. So just curious how you're thinking about possible debt capital needs, especially given that 10 years almost at 1.3% right now?" ] }, { "name": "Walter S. Hulse", "speech": [ "We'll obviously build some short-term debt as we finish up this construction program. And you're right. We do have the term loan out there coming due in 2021. So we'll keep our eye on the market. And when we think it's appropriate, we may access the debt market. Obviously, we have no equity financing whatsoever in our thoughts." ] }, { "name": "Harry Mateer", "speech": [ "Got it. Okay. And then last one for me, just putting different parts together in terms of your EBITDA growth for 2021 and then the indication you gave about $1 billion of less capex in 2021 versus 2020. It seems like things are aligning for you to be at least free cash flow neutral after growth capex and the dividend. So and there are a number of other of your large-cap midstream companies that are trying to get there next year as well. So is that something like true free cash flow generation that you're thinking of targeting as a matter of policy? Or is it really, at this point, still just dependent on what other projects you might find?" ] }, { "name": "Walter S. Hulse", "speech": [ "Well, we're not going to give forward guidance out there. Again, if you do the math on what we've had out there, it will be a reality that that's where we'll be going forward. And we'll see what the future brings. But we're in a position where, on a going-forward basis, the company is going to generate a very significant amount of cash, well above dividends." ] }, { "name": "Harry Mateer", "speech": [ "Got to thank you." ] }, { "name": "Operator", "speech": [ "And our next question comes from Danilo Juvane with BMO Capital Markets." ] }, { "name": "Danilo Juvane", "speech": [ "Thank you and good morning, everyone. A quick question for me. Did you guys outline what price assumptions you have for the gathering and processing business for NGLs and natural gas included?" ] }, { "name": "Kevin L. Burdick", "speech": [ "Yes. Danilo, this is Kevin. Yes, we're like we mentioned, we're looking at the crude environment in that $50, $55 type environment. Again, we're not that the direct commodity exposure we have is very limited, but we're thinking about nat gas prices and NGL prices not out of the not significantly different than like we look at the strip over the next year or so." ] }, { "name": "Danilo Juvane", "speech": [ "I guess, so your guidance is premised on this basically strip budget for the entirety of the year?" ] }, { "name": "Kevin L. Burdick", "speech": [ "Yes. When you look at our guidance, that's the way we're thinking about those prices." ] }, { "name": "Danilo Juvane", "speech": [ "That's it for me. Thank you." ] }, { "name": "Operator", "speech": [ "We'll take our final question from Craig Shere with Tuohy Brothers." ] }, { "name": "Craig Shere", "speech": [ "Congratulations on the new project announcements. Apologies, I was on the call a little late. So if you already addressed, we can skip it. But any comments on the export opportunities. And Walt, as you kind of have answered two or three questions about leverage, is there a downside limit where it just doesn't make sense to let that ratio fall any further, if you don't have sufficient growth capex and M&A available, a point where you have to think about new dividend or share buyback policy?" ] }, { "name": "Walter S. Hulse", "speech": [ "Well, as it relates to the second part of your question, obviously, as our debt gets paid down to the levels that I was just discussing, it opens up a lot of alternatives for us, whether it be share buybacks or dividends or whatever. But I think the key is that it will be we'll have the flexibility to do what we think is appropriate at that time. And as for the docks..." ] }, { "name": "Craig Shere", "speech": [ "Like, are you willing to go under three times?" ] }, { "name": "Walter S. Hulse", "speech": [ "I'm sorry." ] }, { "name": "Craig Shere", "speech": [ "Are you just willing to go under three times?" ] }, { "name": "Walter S. Hulse", "speech": [ "Craig, we'll cross that bridge when we get there and see what the market environment is. But we're not there today. And so we're not going to speculate as to what the market is going to be at that point going forward." ] }, { "name": "Kevin L. Burdick", "speech": [ "And Craig, this is Kevin. On the dock, similar as we have been communicating. It's still part of the business we would love to have. It's not something that we think we have to have, but we have a team working it very hard. Again, we're very confident that our barrels will continue to clear. We're not directly we don't have the price exposure to determine what the relative that or what that real value of the prices are on the Gulf Coast. But we'll keep working that opportunity. When we get the markets when I say the markets on the customers that we would be selling to, we have a lot of conversations around the globe with them, at the same time having conversations with people in the Gulf Coast about what are the dock and partnership opportunities there. So we'll keep working those. And when we get it all lined up, that's when we might make an announcement." ] }, { "name": "Terry K. Spencer", "speech": [ "Craig, I'll just [Indecipherable]. Craig, let me just make one follow-up comment to Walt's comment, the company has historically always managed the balance sheet in a very prudent way with an emphasis toward being investment grade. I mean, that's if you want to look for some hard line somewhere, that will be a hard line for us. And so as we think longer term, the company is always going to do what makes sense and is prudent, OK? And we've shown a long history of doing that. So that's what you can hang your hat on. That there's my speech." ] }, { "name": "Craig Shere", "speech": [ "Okay. Just as my last follow-up. I was just wondering I don't know if Kevin wants to come back. But if LPG's, ethane or anything else was looking like the strongest horse in the race in terms of your ideal opportunities?" ] }, { "name": "Kevin L. Burdick", "speech": [ "In regards to export facility, Craig?" ] }, { "name": "Craig Shere", "speech": [ "Yes." ] }, { "name": "Kevin L. Burdick", "speech": [ "Okay. Yes. It would be LPGs is where the significant focus is right now. And we're not ignoring the ethane opportunities that may come our way. But I think LPGs are the ones driving the majority of the conversations at this point." ] }, { "name": "Craig Shere", "speech": [ "Right. Thanks Very much." ] }, { "name": "Kevin L. Burdick", "speech": [ "Thanks, Greg." ] }, { "name": "Operator", "speech": [ "Ladies and gentlemen, this concludes today's question-and-answer session. I will now turn it back to Andrew Ziola for closing remarks." ] }, { "name": "Andrew J. Ziola", "speech": [ "Our quiet period for the first quarter starts when we close our books in early April and extends until we release earnings in late April. We'll provide details for that conference call at a later date. Again, thank you all for joining us, and the IR team will be available throughout the day for your questions. Have a good rest of your day. Thank you." ] }, { "name": "Operator", "speech": [ "[Operator Closing Remarks]" ] } ]
OKE
2022-08-09
[ { "description": "Vice President, Investor Relations and Corporate Affairs", "name": "Andrew Ziola", "position": "Executive" }, { "description": "President and Chief Executive Officer", "name": "Pierce Norton", "position": "Executive" }, { "description": "Chief Financial Officer and Executive Vice President, Strategy and Corporate Affairs", "name": "Walter Hulse", "position": "Executive" }, { "description": "Executive Vice President and Chief Operating Officer", "name": "Kevin Burdick", "position": "Executive" }, { "description": "JPMorgan Chase and Company -- Analyst", "name": "Jeremy Tonet", "position": "Analyst" }, { "description": "President, Gathering and Fractionation", "name": "Sheridan Swords", "position": "Executive" }, { "description": "UBS -- Analyst", "name": "Brian Reynolds", "position": "Analyst" }, { "description": "Wells Fargo Securities -- Analyst", "name": "Michael Blum", "position": "Analyst" }, { "description": "Tudor, Pickering, Holt and Company -- Analyst", "name": "Colton Bean", "position": "Analyst" }, { "description": "Barclays -- Analyst", "name": "Theresa Chen", "position": "Analyst" }, { "description": "Goldman Sachs -- Analyst", "name": "Michael Lapides", "position": "Analyst" }, { "description": "Bank of America Merrill Lynch -- Analyst", "name": "Chase Mulvehill", "position": "Analyst" }, { "description": "Tuohy Brothers -- Analyst", "name": "Craig Shere", "position": "Analyst" }, { "description": "Senior Vice President, Natural Gas", "name": "Charles Kelley", "position": "Executive" }, { "description": "AllianceBernstein -- Analyst", "name": "Jean Salisbury", "position": "Analyst" }, { "description": "Seaport Global Securities -- Analyst", "name": "Sunil Sibal", "position": "Analyst" }, { "description": "U.S. Capital Advisors -- Analyst", "name": "James Carreker", "position": "Analyst" } ]
[ { "name": "Operator", "speech": [ "Good day, and welcome to the second quarter 2022 ONEOK Earnings Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Andrew Ziola, vice president, investor relations.", "Please go ahead, sir." ] }, { "name": "Andrew Ziola", "speech": [ "Thank you, Nash, and welcome to ONEOK's second quarter 2022 earnings call. We issued our earnings release and presentation after the markets closed yesterday, and those materials are on our website. After our prepared remarks, management will be available to take your questions. Statements made during this call that might include ONEOK's expectations or predictions should be considered forward-looking statements and are covered by the safe harbor provision of the Securities Acts of 1933 and 1934.", "Actual results could differ materially from those projected in forward-looking statements. For a discussion of factors that could cause actual results to differ, please refer to our SEC filings. [Operator instructions] With that, I'll turn the call over to Pierce Norton, president and chief executive officer. Pierce?" ] }, { "name": "Pierce Norton", "speech": [ "Thanks, Andrew. Good morning, everyone, and thank you for joining us today. We appreciate your interest and investment in our company. On today's call is Walt Hulse, chief financial officer and executive vice president, investor relations and corporate development; and Kevin Burdick, executive vice president and chief commercial officer.", "Also available to answer your questions are Sheridan Swords, our senior vice president of Natural Gas Liquids and Natural Gas Gathering and Processing; and Chuck Kelley, our senior vice president of Natural Gas Pipelines. Yesterday, we announced strong second quarter 2022 earnings, provided an update on the Medford incident and affirmed our 2022 financial guidance expectations. As we sit today, we still expect to achieve the midpoints of our 2022 net income and adjusted EBITDA guidance, which Walt will provide additional details shortly. Our second quarter financials were achieved despite unseasonable weather in the Rocky Mountain region during the quarter.", "Two separate April weather events caused widespread outages and power, disrupting midstream and producer operations across the region. Our employees were well-prepared and quickly responded to the challenge. They remain focused on the safe operation of our assets and the safety of the communities where we operate. And they work with local agencies, customers, utility providers to resume normal operations as quickly as possible.", "Across our operations, we continue to see strength in producer activity, with commodity prices and demand supporting a strong second half of the year. While it is still too early to provide our outlook for 2023, we are well-positioned across our integrated footprint to help transport and process central natural gas and natural gas liquids. Before I turn the call over, I'd like to make and provide an update on the Medford, Oklahoma fractionation facility. On Saturday, July 9, mid-afternoon, there was a fire at the facility.", "First and foremost, all of our personnel were safe and accounted for. The safety of our employees and communities is always the main concern and initial focus during a situation like this. I would like to thank the many employees, first responders and local agencies who worked together to quickly respond to the incident. We cannot say enough about the corporation and the coordination efforts of those teams who work to put a safety of our personnel and the surrounding community first.", "We are cooperating with government agencies as we work to determine the cause of the incident, but expect the facility to remain out of service for an extended period of time. In yesterday's earnings release, we provided details of our property and business interruption insurance coverage. Because of this coverage, we do not currently anticipate that the incident will have a material effect on our financial condition, results of operations or cash flows. However, the timing of insurance proceeds may impact financial results in a given quarter or year.", "From an operational perspective, we continue utilizing our system of integrated NGL pipeline, fractionation and storage assets. We're also working with industry peers on additional fractionation and storage arrangements. I want to thank those companies for working with us to keep these essential products flowing since the incident. Our industry has a long history of stepping up to help each other when disruptions happen, and this incident has once again proven that relationships and corporation are critical to this industry's long-term success, and we want to thank them once again.", "With that, I will turn over the call to Walt for discussion on our second quarter financial performance." ] }, { "name": "Walter Hulse", "speech": [ "Thank you, Pierce.ONEOK's second quarter 2022 net income totaled $414 million or $0.92 per share, a 21% increase compared with the second quarter of 2021 and a 6% increase compared with the prior quarter. Second quarter adjusted EBITDA was $886 million, an 11% increase year over year. Compared with the first quarter of 2022, higher second quarter results were driven by increased NGL volumes across our operations and higher realized commodity prices primarily benefiting our natural gas gathering and processing segment. Operating costs increased in each of our business segments, which is typical for the second quarter, as improved weather allows for more routine maintenance projects to take place.", "As of June 30, our net debt-to-EBITDA on an annualized run rate basis was 3.8 times, and we continue to view 3.5 times or lower as our long-term aspirational leverage goal. In June, we redeemed nearly $900 million of senior notes due in October 22, with cash and short-term borrowings. We currently have no long-term debt maturities due until September of 2023. Yesterday, we reaffirmed our 2022 financial guidance expectations.", "And to expand on Pierce's comments earlier, as we sit today, we still expect to achieve the midpoint of our guidance ranges, which remain at $1.69 billion for net income and $3.62 billion for adjusted EBITDA. We expect total 2022 capital expenditures to trend toward the upper end of the range of our guidance range of $900 million to $1.05 billion driven by higher producer activity levels and expansion opportunities in our natural gas pipeline business. Positive drilling activity across our operations and expectations for higher natural gas and NGL volumes in the second half of 2022 support our financial guidance and continue to point to a strong volume exit rate this year. I'll now turn the call over to Kevin for a commercial update." ] }, { "name": "Kevin Burdick", "speech": [ "Thank you, Walt.During the second quarter, we saw NGL volume growth across all our operating regions compared with the first quarter 2022. NGL volume expectations remain strong through the remainder of the year, providing confidence in achieving the midpoint of our raw feed throughput guidance for 2022. Natural gas processed volumes and well completions during the quarter were significantly impacted by the April weather events and we now expect process volumes to be toward the lower end of our 2022 volume guidance range. Let's take a closer look at our natural gas liquids segment.", "Total NGL raw feed throughput volumes increased 5% year over year and 4% compared with the first quarter 2022. Rocky Mountain region NGL volumes increased 10% year over year and 5% compared with the first quarter 2022. Activity in the region has rebounded following the April storms as July volumes averaged more than 360,000 barrels per day, 9% higher than the second quarter average. Mid-Continent NGL volumes increased 4% compared with the first quarter 2022 driven by increased C3+ volumes as producers continued to add rigs in the basin with a large majority of the region's NGLs dedicated to ONEOK system.", "In the Permian Basin, NGL volumes increased 10% year over year and 4% compared with the first quarter of 2022. We recently completed a 25,000 barrel per day expansion on a portion of our West Texas NGL pipeline in the basin to support continued expected volume growth. We saw increased ethane volumes on our system in the second quarter of 2022 and expect continued opportunities for ethane to be recovered through the remainder of the year. We anticipate high levels of recovery in the Permian Basin, periodic recovery in the Mid-Continent and continued opportunities to incentivize ethane recovery in the Rocky Mountain region as in-basin natural gas prices fluctuate.", "Our fractionation capacity is fully utilized following the incident at our Medford facility. And as Pierce mentioned earlier, we have worked with industry peers to secure additional fractionation and storage capacity. Medford's capacity was approximately 210,000 barrels per day of our total systemwide nameplate capacity of more than 980,000 barrels per day. Construction continues on our 125,000 barrel per day MB-5 fractionator in Mont Belvieu, which we now expect to be complete early in the second quarter of 2023.", "Moving on to the natural gas gathering and processing segment. In the Rocky Mountain region, second quarter processed volumes averaged more than 1.2 billion cubic feet per day, a slight decrease compared with the first quarter 2022 due to the April weather. We've seen recent volumes return to pre-storm levels, and in July, volumes reached approximately 1.4 billion cubic feet per day. Through the first 6 months of the year, we've connected 157 wells in the region and we continue to expect approximately 375 to 425 well connections in the region this year.", "There are currently approximately 45 rigs and 18 completion crews operating in the basin, with 21 rigs and approximately half the completion crews on our dedicated acreage. Basinwide, rigs have more than doubled in the last 12 months from only 20 rigs total in July 2021. As we've said before, approximately 15 rigs on our acreage can maintain natural gas production at current levels. But with more than 20 currently on our acreage, we expect to see higher well connections in 2023 compared with 2022 if these activity levels remain.", "The basinwide DUC inventory remains at approximately 500, with half of those on our dedicated acreage. This compares with approximately 650 DUCs in a basin a year ago. Recent producer M&A in the Williston Basin continues to show the value and long-term viability of the play. We see these recent announcements as positive for ONEOK as we expect increased activity from the acquirers to drive NGL and natural gas volumes to our system.", "In the mid-continent region, we continue to see increased activity with four rigs now operating on our acreage and 46 rigs basinwide. We expect steady to increasing activity through the remainder of the year with the majority of rigs basinwide driving additional NGLs to our system. In the Natural Gas Pipelines segment, strong second quarter results benefited from the continued increasing demand for natural gas storage and transportation services. Last quarter, we discussed a recently completed 1.1 billion cubic feet expansion of our Texas storage facility, which is now fully subscribed through 2032.", "Additionally, we are expanding our storage capabilities in Oklahoma, enabling an additional four billion cubic feet of storage capacity to be contracted. This project is expected to be complete in early 2023, and is nearly 90% subscribed through 2029. We also recently completed two open seasons for additional pipeline capacity to address increased demand: one on our West Texas pipeline system in the Permian Basin and one on our Viking pipeline in the upper Midwest. Both open seasons were successful, and we plan to move forward with low capital expansions on both systems.", "The value of our natural gas pipelines and storage assets continue to be highlighted in the outperformance we've seen from this segment so far this year. Pierce, that concludes my remarks." ] }, { "name": "Pierce Norton", "speech": [ "Thank you, Walt and Kevin. As we enter the second half of 2022, we see producer activity and attractive commodity prices providing tailwinds to our business. We've affirmed our financial guidance for the year underscoring the resiliency of our operations, earnings and employees who are always ready and willing to respond to changing market and operational dynamics. Challenges happen in our business and weather is unpredictable.", "But how we respond to the -- is the real difference maker. Operating safely, sustainably and environmentally responsibly remains an important focus and is key to our success as a midstream operator. How we operate is important, but also how we engage with our employees, communities and other stakeholders is also important. To learn more about our commitments in these areas, I encourage you to review our most recent corporate sustainability report, which was just published to our website last week.", "The report details our most recent environmental, social and governance-related performance and programs and highlights key initiatives underway across the company. Our ESG efforts are a source of pride for ONEOK, and we are committed to continuing to make progress in these important areas. With that, operator, we're now ready for questions." ] } ]
[ { "name": "Operator", "speech": [ "[Operator instructions] We will take the first question from Jeremy Tonet from JPMorgan. Your line is open. Please go ahead." ] }, { "name": "Jeremy Tonet", "speech": [ "Hi. Good morning. Just want to dig into Medford a little bit more, if possible. And as we think about everything there, you talked about not being material, but maybe you could help us to understand better what the threshold is for financial materiality there.", "And then just as far as kind of the parameters of what's happened with regards to volume uploads, where are those volumes going now? Can you tell us? And you said about the time line being extended, if this slips deeper into '23, would this impact -- might it impact your ability to offload volumes if volumes continue to grow?" ] }, { "name": "Pierce Norton", "speech": [ "So Jeremy, I think I'll let Walt take the materiality question for us, and then we'll flip it over to Kevin and Sheridan on the offloads." ] }, { "name": "Walter Hulse", "speech": [ "Well, Jeremy, I think that we're very comfortable with that comment, I'm not going to give you our level of materiality. But I will say that -- remember that our insurance coverage provides for a 45-day period, which we have as a stand-alone and then we have business interruption insurance from that point forward. So we're very, very comfortable with the view of where we've come out from a materiality standpoint." ] }, { "name": "Kevin Burdick", "speech": [ "Yes, Jeremy, it's Kevin. On the volumes and where they're going right now, I mean, clearly, a lot of them are going down to Belvieu. We talked in our remarks about our industry peers that have been very helpful in securing spots for those barrels. We feel good about being able to move the volume, especially as we get to MB-5, and keep in mind, that's going to be another 125,000 barrels a day of new capacity that will come online early in the second quarter.", "So that's the things we've got lined up there. And again, we feel good about being able to move the volumes." ] }, { "name": "Sheridan Swords", "speech": [ "One thing I would add is we've been able -- talking with our peers, we have -- very much comfortable with our growth plans through '23, depending on how long this lasts and we'll be able to handle all of the volume coming on our system." ] }, { "name": "Jeremy Tonet", "speech": [ "Got it. That's helpful. And just want to pivot over toward IROs, if you could, and realize it's hot off the press, and it seems like the shape keeps changing a bit here and what the bill looks like. But just wondering thoughts you can provide as far as how as it currently stands, this might impact your tax profile in 2023 or going forward? And as the bill is written right now separately, would this increase or change your appetite to pursue CCS, renewables or other items like that?" ] }, { "name": "Walter Hulse", "speech": [ "Well, I'll handle the tax portion of that. Jeremy, you're right, it's still off the presses and we're getting a lot of the details. But I do think the late in the game addition of using tax depreciation versus book depreciation was a positive development for us. And we don't see a real meaningful increase in our tax over the long-term.", "We may have a little bit higher tax in the earlier years. But if we get into that alternative minimum tax of that 15%, that would be for an extended period of time where we would have otherwise gone to a statutory rate. So while we expect some higher level of taxes, that addition to the tax depreciation was a big positive." ] }, { "name": "Pierce Norton", "speech": [ "And so I'll take the question about CCUS. I'd like to remind everybody on the call that 36% of the natural gas demand in this country is devoted to electricity. You add to that 33% in the industrial sector. So that's a total of almost 70% of the natural gas demand goes to those two forms of consumption.", "Anything that is done that would enhance the ability to capture carbon from natural gas being consumed is a good thing for our industry. And so these incentives, it's left to be seen exactly how effective they're going to be because we need to know the details, but it does encourage us as an industry and as a producer of natural gas and actually the liquids that are coming off the oil production in the natural gas production in these rich basins that this will help to curb the CO2 emissions in the future. And we do think that will open up some opportunities that we will look both at CCUS and hydrogen. So I think it's a positive for the industry, what's happening." ] }, { "name": "Jeremy Tonet", "speech": [ "Got it. That's helpful over there. Thanks." ] }, { "name": "Operator", "speech": [ "We will take the next question from Brian Reynolds from UBS. Your line is open. Please go ahead." ] }, { "name": "Brian Reynolds", "speech": [ "Hi. Good morning. Maybe touch a little bit on the '22 reaffirmed guide. As it relates to the base business, ONEOK appears to expect to complete roughly 60% of its wells for the year-end in the back half of '22 and Mid-Con volumes look to be on track to surpass 4Q '19 levels by year-end.", "So I was just kind of curious if you could just talk about, given the year-to-date impact from weather in the Medford frac fire, I was curious if you could talk about how the base business is performing relative to initial year expectations in terms of activity." ] }, { "name": "Kevin Burdick", "speech": [ "Thanks. I mean I'll start, Brian, it's Kevin. I think the base business is performing very well. If you think about where we were going into the storms, we were right on track with everything that we had kind of outlined and laid out.", "The storms up in the Bakken did kind of set the basin back a couple of months, not just with the volumes flowing, but also -- it was kind of a couple of months pause on -- or lower completions that we saw. So it kind of delayed things and that's the reason that we're going to be at the lower end of the guidance from a volumetric perspective there. But on the flip side, when you look at the NGL business and what they've done both from an earnings perspective as well as a volumes perspective and then the outperformance of the gas pipeline business, I think those two segments are performing at or better than we anticipated coming into the year. So I think it sets us up nice going into '23." ] }, { "name": "Brian Reynolds", "speech": [ "Great. I appreciate that color. And follow-up on the Medford frac. I know while it's probably a little bit too early, has there been any initial thoughts on potential replacement of the Medford frac and whether we could see it be built in Mont Belvieu or Conway at this time?" ] }, { "name": "Kevin Burdick", "speech": [ "Brian, you hit it on the head. We're still really early in that process. And again, not ready to talk about timing or anything like that. We've got capacity secured, we believe, to move our volumes, and we'll keep working that until we get more information." ] }, { "name": "Brian Reynolds", "speech": [ "Fair enough. Enjoy the rest of your day, everyone. Thank you." ] }, { "name": "Operator", "speech": [ "Next question from Michael Blum, Wells Fargo. Your line is open. Please go ahead." ] }, { "name": "Michael Blum", "speech": [ "Thanks. Good morning, everyone. So apologies for maybe a technical question, but just so I understand it, are you going to be accruing insurance proceeds in your EBITDA results in Q3 and Q4? So that's how guidance is basically unchanged? Or is that not the case and you're just able to make it up in other areas?" ] }, { "name": "Walter Hulse", "speech": [ "Michael, we expect to get timely recovery of our business interruption in insurance. We will actually book that as we receive those proceeds. But that's why we said that we may have, from time to time, a little bit of a timing difference if we get right at quarter end. But we expect timely ongoing payments that would flow through our income statement in a normal way." ] }, { "name": "Michael Blum", "speech": [ "OK. Great. I also just wanted to ask about AECO gas prices, which are trading at a pretty big discount to Henry Hub. Can you just remind us how your ethane recovery economics in the Bakken work? Will you benefit in any way from the decline in AECO gas prices?" ] }, { "name": "Sheridan Swords", "speech": [ "Michael, this is Sheridan. The way we buy gas at the alternative at the gas plant. So we go and look at what we could sell gas at the gas plant versus what we could sell ethane in Mont Belvieu. And so whatever the gas plant is receiving, that's what we can get.", "So an AECO price is a factor in what the gas price we're receiving at the gas plant." ] }, { "name": "Michael Blum", "speech": [ "Got it. Thank you." ] }, { "name": "Operator", "speech": [ "Next question from Colton Bean, Tudor, Pickering, Holt & Co. Your line is open. Please go ahead." ] }, { "name": "Colton Bean", "speech": [ "Good morning. So the NGL segment had a fairly significant step-up in costs. Of the three drivers you mentioned, I think fuel, power and then third-party services, do you expect an improvement in the back half of the year for any of those? Or is Q2 level a pretty good run rate moving forward?" ] }, { "name": "Kevin Burdick", "speech": [ "Well, I think there are a couple of dynamics going on, Colton. The $30 million you referenced, really you got power costs were just higher, but we also had more volume, so you had more power just moving it there. And then we also had a turnaround in the second quarter, which caused us to go get some outside frac capacity during the quarter, and that's in there as well. So some of those costs will just be -- will float as power cost moves around, but some of the other costs were more onetime.", "So that's as we think going forward, we typically do more work like turnarounds and integrity work and other expense project type work. We'll do more of that in the summer when the weather is better. So historically, you might see a little stronger in the summer from a cost perspective on those types of activities." ] }, { "name": "Colton Bean", "speech": [ "Understood. And then just following up on the Bakken ethane discussion. I mean it sounds like with the wider gap between AECO and Mont Belvieu pricing this quarter, would you expect any upside to that bundled rate, just if you -- if the incentive rate that you have to offer is now less of a discount than it would have been previously?" ] }, { "name": "Sheridan Swords", "speech": [ "Colton, there's a lot of factors that go into that. Sometimes it impact it, sometimes it doesn't. And I think we are -- we think we have a good opportunity to incentivize more ethane in the second half of the year. So we're very bullish on that, but -- due to the regional gas prices.", "But how it affects the overall average rate kind of depends on where it's come in volume and the escalators that we have on our base business." ] }, { "name": "Colton Bean", "speech": [ "Got it. Appreciate that." ] }, { "name": "Operator", "speech": [ "Next question from Theresa Chen from Barclays. Your line is open. Please go ahead." ] }, { "name": "Theresa Chen", "speech": [ "Hi. I just wanted to ask first on the $16.4 million increase in the NGL segment related to higher average fee rates. Can you tell us what that was related to precisely? And is that expected to carry forward?" ] }, { "name": "Sheridan Swords", "speech": [ "Yes, that was mainly related to inflationary escalators for both fuel and power and inflation, and we do have those inflationary escalators coming on throughout the year. So we do anticipate it will increase." ] }, { "name": "Theresa Chen", "speech": [ "OK. And in your G&P segment, the $5.3 million increase due to the contract settlement during the quarter, should we expect some sort of offset in base earnings going forward as a result?" ] }, { "name": "Sheridan Swords", "speech": [ "No, I don't believe you'll see any offset. It's just normal course of business on our large portfolio mix. So you won't see any offset." ] }, { "name": "Theresa Chen", "speech": [ "Thank you." ] }, { "name": "Operator", "speech": [ "Next question from Michael Lapides, Your line is open. Just go ahead, from Goldman Sachs." ] }, { "name": "Michael Lapides", "speech": [ "Hey, guys. Thank you for taking my question and congrats on a really good quarter. Just curious, as you think about infrastructure needs going forward, given kind of some of the volume commentary about July volumes. How are you thinking over the next year or so about the need for either new processing or even a sixth frac at Belvieu?" ] }, { "name": "Kevin Burdick", "speech": [ "Michael, this is Kevin. I mean I think we're in really good shape as we've talked for the last several months. And when you think about with Demicks Lake III coming up, that gets us a nice headroom of capacity in the Bakken. We've talked about the available capacity that currently exists on Elk Creek, and then we've got low-cost expansion opportunities if we need to expand that pipe.", "We just demonstrated we've got some expansion opportunities on West Texas as our volumes continue to grow out there that we can expand that pipe in tranches. Plenty of capacity in the mid-continent Obviously, with what's going on at Medford, frac capacity is tight and it's going to remain that way until we get clarity on what's going on with Medford. But other than that, we're in excellent shape as we think about our capacities and where we're at." ] }, { "name": "Michael Lapides", "speech": [ "So then if there's not really a need potentially -- I mean volumes could always surprise to the upside. But if there's not really any need for any material new asset development in 2023, that implies that the capital budget kind of declines a ton which not a surprise. How are you and how are the board -- how is the Board kind of thinking about capital allocation and uses of some of that significant free cash flow that you might be generating next year?" ] }, { "name": "Pierce Norton", "speech": [ "So this is Pierce. The way we look at that is that we look at all the levers that's available to us. So we're going to be looking at as we get closer and closer to what Walt had mentioned about the 3.5x on the debt-to-EBITDA ratio as we continue to go below 100% on our payout ratio, then that's going to actually open up some of those other elements to us that we've had in the past. Of course, our first focus is going to be on these organic opportunities because they give us the best chance to deploy capital that gives us really, really good rates of return.", "We are proud of our ROIC that we've been able to achieve, and we are predicting that is going to continue to go up. So I think what it's going to do is just give us more flexibility to use whatever levers that we feel like bring the most value to our shareholders." ] }, { "name": "Michael Lapides", "speech": [ "Got it. Thanks, guys. Much appreciated." ] }, { "name": "Operator", "speech": [ "Next question from Chase Mulvehill from Bank of America. Your line is open. Please go ahead." ] }, { "name": "Chase Mulvehill", "speech": [ "Hey. Good morning. I wanted to come back to the G&P side of the business and I guess a few questions. I guess just correct me if I'm wrong.", "And I think your commodity or POP exposure is 15% to 20% this year. And then maybe just remind us again the gas versus NGL exposure on those POPs and how much you have hedged versus open today? And then just maybe tie into their kind of what you're thinking about realized G&P rates in the back half of the year?" ] }, { "name": "Kevin Burdick", "speech": [ "Chase, this is Kevin. You're right. We provide the hedging information that will come out in our queue and we've provided that in the past. So we are pretty well hedged, but prices have run up significantly, and we've been able to benefit for that for the part of those contracts that aren't hedged.", "So that's what you're seeing that. And also, the other thing that's driving the price improvement is just what volumes are on what contracts. So we've been fortunate to have some volumes come in on higher -- in this case, higher POP-type contracts and been able to benefit from that." ] }, { "name": "Chase Mulvehill", "speech": [ "Is it fair to assume in 3Q that a lot of your open volumes for natural gas as opposed to NGLs?" ] }, { "name": "Kevin Burdick", "speech": [ "Typically, from an open perspective, we've got -- we hedge most of our commodities in a similar way. So you're not going to have a higher percentage hedge necessarily of natural gas versus crude versus NGLs." ] }, { "name": "Chase Mulvehill", "speech": [ "OK. Right. If we go up to the NGL section and look at volumes and kind of where they are today, I think you said 360,000 barrels a day. If we go back and look back in April, you were doing 385,000 a day.", "So we're not back to kind of April peakest levels. But yet G&P volumes in the Rockies are actually back to peak levels. So kind of help me connect the dots there. Is that method related? Or is there something else? And should we kind of ramp pretty quickly back to that 385,000?" ] }, { "name": "Sheridan Swords", "speech": [ "I think in the first quarter announcement -- this is Sheridan, we came out and said we had reached 385,000, but we had an average 385,000. Actually, July at 360,000 will be our highest monthly average that we've had off the Bakken pipeline. And we continue to trend higher in -- as we get into August, we are trending even higher than that. So from an NGL perspective on the Elk Creek pipeline, we are back further than we were in the first quarter or even in the fourth quarter of 2021." ] }, { "name": "Chase Mulvehill", "speech": [ "OK. Last one, just to squeeze one more in. I apologize. I just want to confirm this.", "It sounds like obviously, you're seeing -- looking at Medford and trying to figure out when you can bring it back online, but I just want to confirm that it is not a total loss. You do not see it as a total loss at this point, correct?" ] }, { "name": "Pierce Norton", "speech": [ "Well, I mean, the way I would say that in is we are looking at all the pieces and parts to that facility right now. So we'll be assessing that over the coming weeks as to exactly what pieces of equipment are still usable or not. So we can't say emphatically right now that it's either a total loss or not a total loss. We're doing the assessments of that." ] }, { "name": "Chase Mulvehill", "speech": [ "OK. Got it. Makes sense. I'll turn it back." ] }, { "name": "Operator", "speech": [ "Next question from Craig Shere from Tuohy Brothers. Your line is open. Please go ahead." ] }, { "name": "Craig Shere", "speech": [ "Good morning. Congrats on the quarter. One clarification on Medford. So as far as new expense for third-party fractionation or things that were contracted, you ultimately get insurance recoveries, but doesn't this kind of at least limit optimization margin opportunities until some things resolved?" ] }, { "name": "Walter Hulse", "speech": [ "Craig, I think that we are -- we believe that we've got business interruption insurance for our entire business under that coverage and really don't see a meaningful difference from how our earnings would be sorted out in our normal guidance." ] }, { "name": "Craig Shere", "speech": [ "OK. And maybe this is expressing my own ignorance, and I apologize. Given the increased gas storage and storage pricing, I'm kind of assuming storage is more of a steady year-round product versus gas pipes that have more seasonality since the storage has to fill. So if that's the case, does the improving storage position in terms of capacity and pricing reduce your gas pipe seasonality?" ] }, { "name": "Charles Kelley", "speech": [ "Craig, this is Chuck. No, see, the way we contract with our customers, frankly, these are firm fee-based contracts. What the customer tends to do is place seasonal spreads and utilize their transport and combined storage for optionality. From a pipe standpoint, we've got a levelized fee earnings throughout the year.", "So the optionality actually comes from the customer, but not the pipeline or variability from the customer, not the pipeline." ] }, { "name": "Craig Shere", "speech": [ "Got you. So the increasing contribution of the storage really doesn't impact seasonality?" ] }, { "name": "Charles Kelley", "speech": [ "Could you repeat that?" ] }, { "name": "Craig Shere", "speech": [ "So the fact that you're increasing the amount of storage and the pricing is looking more attractive, that doesn't have any impact on the seasonality question." ] }, { "name": "Charles Kelley", "speech": [ "Correct. We're seeing a step up in our storage revenues based on higher rates and the expansion that came online in April, and we'll have an additional expansion come online in April of 2023 where you'll see another step up in our storage revenues." ] }, { "name": "Pierce Norton", "speech": [ "So Craig, the only thing I'd add to that, this is Pierce, is post winter storm Uri, the value of storage has increased. And so we do have customers that play that seasonal spread and that benefit goes to them. But we also have utilities that are putting gas into storage every single month during the summer is getting ready for that winter pull that they have during their peak demand from basically December through March." ] }, { "name": "Craig Shere", "speech": [ "Got you. Thank you." ] }, { "name": "Operator", "speech": [ "Next question from Jean Ann from Salisbury -- sorry, Jean Ann Salisbury from Bernstein. Your name is open. Please go ahead." ] }, { "name": "Jean Salisbury", "speech": [ "Hey. Good morning. It looks like there's been some movement on the open season for gas takeaway options out of the Bakken, but it seems like they're targeting 2026, just kind of a long time from now. Do you think that, that will be soon enough to not constrain gas growth out of the Bakken?" ] }, { "name": "Kevin Burdick", "speech": [ "Jean Ann, this is Kevin. Yes, I think we feel good about the timing of that. There's some other smaller scale things that have gone on up there that have created a little more capacity. So we think that timing lines up pretty well with kind of our outlook of where gas volumes go.", "I would remind you, there's still, we believe, $300 million, $400 million a day of Canadian gas that can be displaced coming out of the Bakken. And so that's -- there's capacity there that just may not on the surface, look like it's there. In addition, we can always, if you get tight and we're -- I'd say we were wrong or we're a little bit late, you can always recover ethane to reduce the MMBtus that go into the pipe. So we -- all in all, we feel good about where we're at." ] }, { "name": "Jean Salisbury", "speech": [ "That makes sense. And there's been a trend of NGL integrated midstream companies buying GMP companies, which ONEOK has not really participated in. If this trend continues, do you see it potentially impacting your rates or your flows in the Gulf Coast negatively?" ] }, { "name": "Pierce Norton", "speech": [ "Well, I think I'll let Kevin get into the details of this, but we believe that the positions that we have in the other basins are the right thing for us to pursue based on our positions with our assets and the things that we see in the future. I mean, could it have a downward pressure on some of the volumes, yes. But I'd remind everybody that the rates that we get as far as margins in the Permian and the Mid-Continent are some of our lowest ones. So as far as having a really material impact, we don't see that in the future.", "Kevin, do you have anything to add to that?" ] }, { "name": "Kevin Burdick", "speech": [ "No, I'd just say that with some of those transactions, obviously, we take a look at a lot of things, but they just haven't been a fit for us. One of the things I would put out there is that many that we have continued to grow volumes on our West Texas LPG system, many of those contracts have quite a bit of term left, and many of them are with producers who have taken kind rights. So regardless who the processor is, we believe those volumes will stay with us. So that's some of the other dynamics at play." ] }, { "name": "Jean Salisbury", "speech": [ "Great. That's very helpful. That's all for me. Thank you." ] }, { "name": "Operator", "speech": [ "The next question is from Sunil Sibal from Seaport Global Securities. Your line is open. Please go ahead." ] }, { "name": "Sunil Sibal", "speech": [ "Yes. Hi. Good morning. Thanks for the clarity on the volume trends.", "So one question for me on the capex side of things. Could you talk a bit about what kind of inflation trends you're seeing in terms of building costs versus what you had budgeted at the start of the year?" ] }, { "name": "Kevin Burdick", "speech": [ "Yes. From a cost perspective, we've probably seen more pressure on outside services more than anything as we think about our projects. In many cases, for the projects we are working on, especially MB-5 and Demicks III, that equipment had been purchased years ago before the projects were paused. So we had a lot of that taken care of.", "On the new equipment that we're ordering and the new materials we're ordering, probably as much impact from a supply chain perspective just on a timeliness or schedule perspective than cost. So those are some of the things we're obviously watching closely and staying on top of. It hasn't impacted any of our scheduled dates or our dollar amounts that we've got these projects approved for. So we still feel very good that we're right on top of -- on budget and on schedule." ] }, { "name": "Sunil Sibal", "speech": [ "OK. And then one housekeeping question for me. It seems like in your reconciliation, you had called out a $10 million sequential decrease in the NGL segment from commodity price differentials. I thought the commodity price differentials kind of widened out a little bit in Q2 versus Q1.", "Am I just looking at that correctly? And I was just curious about that line item." ] }, { "name": "Kevin Burdick", "speech": [ "Sunil, this is Kevin. Yes, that's just with our assets and with -- we've got assets in Conway and Belvieu and storage. That's just the delta between sometimes we have an opportunity to make money in a different prices per -- by commodity. So how different prices compare of the different commodities and how we move barrels around and how we sell barrels.", "And so that $10 million was just lower than the -- sequentially lower in the first -- than the first quarter in that part of our business. But it's all -- it's part of that kind of how we're optimizing our system." ] }, { "name": "Sunil Sibal", "speech": [ "OK. And anything to read into that from the second half of this year?" ] }, { "name": "Kevin Burdick", "speech": [ "No. That bounces -- that will bounce around quarter to quarter just in the sequential comparison." ] }, { "name": "Sunil Sibal", "speech": [ "Got it. Thanks. Thanks for the color." ] }, { "name": "Operator", "speech": [ "Next question from James Carreker from U.S. Capital Advisors. Please go ahead." ] }, { "name": "James Carreker", "speech": [ "Hey, thanks for the question. Just thinking about the Medford outage some more. Were those NGLs fractionated they're largely sold into Conway or they sold down in Mont Belvieu and just making sure that there's -- with that outage, there's sufficient pipe capacity to move incremental barrels down to Mont Belvieu to get fracked." ] }, { "name": "Sheridan Swords", "speech": [ "James, this is Sheridan. We don't designate by frac where we sell barrels. We can -- with our integrated system, we can deliver barrels from any of our frac into the Mont Belvieu complex. And with that frac being down, we can get these barrels into the Mont Belvieu complex, mainly because of our Arbuckle II asset that we had just brought online that we know had significant extra capacity on it for upside.", "So we're able to deliver through the raw feed system down to Mont Belvieu. And if we need to, we can use the purity system to do that as well. Since we don't have as much purity is coming off -- we don't have any purity coming off the Medford frac, we have a little bit extra capacity on that. So from a pipeline perspective, we feel very good about getting the product into mobility." ] }, { "name": "James Carreker", "speech": [ "And I guess -- maybe one follow-up, maybe it's minor, but just noticed on this earnings presentation, you're now saying greater than $0.06 bundled rate on your Gulf Coast Permian volumes versus prior approximately $0.06. Is that maybe a trend that continues? Or any other color on what's going on there?" ] }, { "name": "Sheridan Swords", "speech": [ "Yes. A lot of it. I think we'll see our rates tick up a little bit, and you're seeing that because of the inflationary escalators that we have on our system." ] }, { "name": "James Carreker", "speech": [ "OK. Thank you." ] }, { "name": "Operator", "speech": [ "It appears that there is no further question at this time. Mr. Andrew, I'd like to turn the conference back to you for any additional or closing remarks." ] }, { "name": "Andrew Ziola", "speech": [ "Our quiet period for the third quarter starts when we close our books in October and will extend until we release earnings in early November. We'll provide details for that conference call at a later date. Thank you all for joining us, and have a good day." ] }, { "name": "Operator", "speech": [ "[Operator signoff]" ] } ]
OKE
2019-02-26
[ { "description": "-Vice President of Investor Relations -- Vice President of Investor Relations", "name": "Andrew Ziola", "position": "Executive" }, { "description": "-President and Chief Executive Officer -- President and Chief Executive Officer", "name": "Terry Spencer", "position": "Executive" }, { "description": "-Chief Financial Officer, Executive Vice President, Strategic Planning and Corporate Affairs -- Chief Financial Officer, Executive Vice President, Strategic Planning and Corporate Affairs", "name": "Walt Hulse", "position": "Executive" }, { "description": "-Executive Vice President and Chief Operating Officer -- Executive Vice President and Chief Operating Officer", "name": "Kevin Burdick", "position": "Executive" }, { "description": "-Wells Fargo Securities -- Analyst -- Wells Fargo Securities -- Analyst", "name": "Michael Blum", "position": "Analyst" }, { "description": "-BMO Capital Markets -- Analyst -- BMO Capital Markets -- Analyst", "name": "Danilo Juvane", "position": "Analyst" }, { "description": "-Jefferies -- Analyst -- Jefferies -- Analyst", "name": "Chris Sighinolfi", "position": "Analyst" }, { "description": "-Senior Vice President, Natural Gas Liquids -- Senior Vice President, Natural Gas Liquids", "name": "Sheridan Swords", "position": "Executive" }, { "description": "-J.P. Morgan -- Analyst -- J.P. Morgan -- Analyst", "name": "Jeremy Tonet", "position": "Analyst" }, { "description": "-Goldman Sachs -- Analyst -- Goldman Sachs -- Analyst", "name": "Michael Lapides", "position": "Analyst" }, { "description": "-Senior Vice president, Natural Gas -- Senior Vice president, Natural Gas", "name": "Chuck Kelley", "position": "Executive" }, { "description": "-Sanford C. Bernstein -- Analyst -- Sanford C. Bernstein -- Analyst", "name": "Jean Ann Salisbury", "position": "Analyst" }, { "description": "-Bank of America Merrill Lynch -- Analyst -- Bank of America Merrill Lynch -- Analyst", "name": "Dennis Coleman", "position": "Analyst" }, { "description": "-Tuohy Brothers -- Analyst -- Tuohy Brothers -- Analyst", "name": "Craig Shere", "position": "Analyst" }, { "description": "-Wolfe Research -- Analyst -- Wolfe Research -- Analyst", "name": "Alex Kania", "position": "Analyst" }, { "description": "-Seaport Global Securities -- Analyst -- Seaport Global Securities -- Analyst", "name": "Sunil Sibal", "position": "Analyst" } ]
[ { "name": "Operator", "speech": [ "Good day and welcome to the fourth-quarter 2018 ONEOK earnings call. Today's conference is being recorded. At this time, I would like to turn the conference over to Andrew Ziola, VP of investor relations and corporate affairs. Please go ahead, sir." ] }, { "name": "Andrew Ziola", "speech": [ "Thank you, Shelby, and welcome to ONEOK's fourth-quarter and year-end 2018 earnings conference call. This call is being webcast live and a replay will be made available. A reminder that statements made during this call that might include ONEOK's expectations or predictions should be considered forward-looking statements and are covered by the safe harbor provision of the Securities Acts of 1933 and 1934. Actual results could differ materially from those projected in forward-looking statements.", "For a discussion of factors that could cause actual results to differ, please refer to our SEC filings.Our first speaker this morning is Terry Spencer, president and chief executive officer. Terry?" ] }, { "name": "Terry Spencer", "speech": [ "Thanks, Andrew. Good morning and thank you all for joining us today. As always, we appreciate your continued interest and investment in ONEOK. Joining me on today's call is Walt Hulse, chief financial officer, executive vice president, Strategic Planning and Corporate Affairs; and Kevin Burdick, executive vice president and chief operating officer.", "Also available to answer your questions are Sheridan Swords, senior vice president, Natural Gas Liquids; and Chuck Kelley, senior vice president, Natural Gas. On today's call, we will discuss ONEOK's fourth-quarter and full-year financial and operational performance, our 2019 financial guidance and 2020 outlook and provide an update on our more than $6 billion capital growth program.2018 was an impressive year for ONEOK, both operationally and financially as volumes across our assets and our earnings posted significant increases. And our first full year of operation following the acquisition of ONEOK Partners, we announced more than $5.5 billion of new capital growth projects, experienced NGL and natural gas volume growth across our operations and strengthened our already solid investment-grade balance sheet. Our long track record of earnings growth continues.", "ONEOK's operating income has increased nearly $1 billion over the last five years while adjusted EBITDA has also doubled over that five-year period and has increased 50% since 2015. 2018 was a year of growth and new project announcements, and 2019 will be a year where we rely on our ability to execute and position our business for continued earnings growth into 2020, and I'm confident that we will. Over the next 12 to 24 months, our focus will be set on completing our projects on time and on budget, on protecting the safety of the hundreds of employees and contractors we have working on these assets, and on the safe and reliable operation of our existing assets. We continued to evaluate additional opportunistic projects that address customer needs and the increasing demand for NGLs and natural gas in the U.S.", "and abroad. One of these projects, which has received a lot of attention, is the potential NGL export facility. What I can say is that we're closer to a deal now than we've ever been but there are a number of details that still need to be worked out before we announce anything further. We're optimistic about where we are in the process and believe this facility would be a great fee-driven addition to our already predominantly fee-based business model.", "Along with announcing 2019 guidance yesterday, we also provided an outlook for 2020 to help bridge the gap between what will be a heavy-billed year in 2019 and a large step-up in volumes and earnings expectations in 2020. We expect a greater than 20% increase in adjusted EBITDA in 2020 compared with 2019 expectations. More than $4.4 billion of capital growth projects expected to be completed in 2019 and in the first quarter of 2020 will provide a foundation for significant earnings growth in 2020 and beyond. We acknowledge that we have disclosed a fairly wide range for 2019 capital expenditures with our guidance based on -- upon a $3.1 billion midpoint.", "Given the volatility in commodity prices we experienced around year-end, our CAPEX range demonstrates that we have the flexibility to make adjustments based on increases or decreases in producer activity. As the year progresses, we will likely tighten the range as appropriate. Walt will provide more detail in a moment. With that, I'll now turn the call over to Walt." ] }, { "name": "Walt Hulse", "speech": [ "Thank you, Terry. ONEOK's 2018 operating income totaled $1.8 billion, a 32% increase year over year. In 2018, adjusted EBITDA totaled $2.45 billion, a 23% increase year over year. Strong natural gas and natural gas liquids volume performance helped us achieve 2018 net income, adjusted EBITDA, and distributable cash flow guidance, which were all increased during -- twice during 2018 because of better-than-expected operating results.", "The Natural Gas Liquids segment's 2018 adjusted EBITDA increased 25% compared with 2017. The Natural Gas Gathering and Processing and Natural Gas Pipeline segments also saw impressive earnings increases of 22% and 8%, respectively. The Natural Gas Gathering and Processing and Natural Gas Pipelines segments also exceeded 2018 adjusted EBITDA guidance, driven primarily by increased producer activity on our dedicated acreage and higher contracted transportation volumes on our natural gas pipelines. The Natural Gas Liquids segment ended 2018 nearly 6% above our original guidance expectations.", "The segment's fourth-quarter 2018 earnings were impacted by lower optimization and marketing earnings as the average Conway to Mont Belvieu price differential decreased approximately $0.12 as compared with $0.24 in the third quarter. Additionally, due to maintenance at our [Inaudible] Oklahoma fractionator, the segment had higher NGL inventories than expected at year-end 2018, which impacted fourth-quarter earnings by approximately $20 million. We expect to recognize a $20 million earnings benefit from the sale of this inventory in the first quarter of 2019. Strong business segment performance in 2018 set a solid foundation for 2019.", "We announced 2019 guidance expectations with yesterday's earnings release, including our expectation for net income, adjusted EBITDA to increase approximately 10% and 6%, respectively, in 2019. We expect year-over-year earnings growth in all three of our business segments with Natural Gas Liquids segment expected to be the largest contributor to that growth. We expect key drivers for 2019 to include our recently completed Sterling III and West Texas LPG pipeline expansion projects. We expected completion of the southern portion of Elk Creek pipeline in the third quarter, additional third-party plant connections in our Natural Gas Liquids segment, and increased volumes and a higher-average fee rate in our gathering and processes segments.", "Kevin will provide more detail on our volume and operational outlook. Total distributable cash flow in 2018 was more than $1.8 billion, up more than 30% from 2017 with a healthy dividend coverage of nearly 1.4 times. We generated nearly $0.5 billion of distributable cash flow in excess of dividends paid in 2018, a more than 70% increase compared with 2017. This is cash we reinvested in the business to fund our capital growth program.", "During 2018, our total debt increased only approximately $200 million while we spent just over $2 billion on capital expenditures. At December 31, our debt to EBITDA on an annualized run rate basis was 3.75 times and 3.83 times on a trailing 12-month basis. We saw a significant decrease in leverage from 2017 to 2018 and ended last year with an even stronger balance sheet than we had anticipated. We entered 2019 with total liquidity of $3.5 billion, including borrowing capacity of $2.5 billion available on our credit facility and $950 million available on our three-year unsecured term loan agreement.", "This liquidity plus strong anticipated distributable cash flows and excessive dividends positions us well for completing the capital growth projects still ahead of us. Our capital spending is heavily weighted toward 2019 as the bulk of our largest projects are being placed in service this year and early in 2020. In 2019, we expect approximately $3.1 billion in growth capital expenditures, of which more than two-thirds is related to Elk Creek, Arbuckle II, MB-4, and Demicks Lake I. Another 10% is related to routine growth capital expenditures, which includes well connections and plant connections, and the remainder is related to spending on growth projects being put in service in 2020 and 2021, such as MB-5, the West Texas LPG expansion, and Demicks Lake II.", "With these announced projects, 2020 CAPEX is expected to be significantly less than 2019. As it relates to the range we provided, the low end reflects a sustained reduction in commodity prices that would drive significant slowing of producer activity, which we have not seen and do not expect to see based on our customer activity and announcements so far in 2019. The high end of the range reflects a significant increase in producer activity and related capital to address that growth. To reiterate, at current market conditions, we feel comfortable with the midpoint of our capital guidance range.", "Having said all that, with our strong balance sheet, expected continued earnings growth and financial flexibility, we expect no equity financing needs in 2019 nor in 2020, based on our expected slate of growth projects and our rapid deleveraging as these projects come online. During the fourth quarter, we paid a dividend of $0.855 per share, and in February, we paid a dividend of $0.86 per share or $3.44 per share on an annualized basis. As it relates to our expectations for dividend growth -- for the dividend growth rate going forward, I will make a few comments. To start, I want to point out that many positive things have happened to our earnings prospects since we initially guided to a 9% to 11% annual dividend growth rate when we announced the acquisition of ONEOK Partners.", "We are pleased to have the financial flexibility to return capital to shareholders at an attractive rate, fund our growth projects, and maintain a strong investment-grade balance sheet. We acknowledge that many investors and some research analysts have expressed the view that prudent capital allocation in the midstream space is more value. Accordingly, many investors do not require as high a dividend growth rate as they did in the past and that alternative approach is o returning capital maybe appropriate at some point in the future. We have received quite a bit of feedback on both sides of this issue.", "Going forward, on a quarterly basis, our board will continue to -- their practice to evaluate dividend growth and alternative ways to return capital to shareholders based on the strength of our business, the commodity price environment of our producer customers, the funding needs of our growth projects, investor sentiment, and our strategy to maintain a strong investment-grade balance sheet. We believe that investors continue to value our ability to return capital to shareholders while also funding our growth projects without expecting to issue equity to complete our announced capital projects. Before handing the call over to Kevin, I'll provide an update on the West Texas LPG rate case that was being reviewed by the Railroad Commission of Texas. In January, the case was settled with higher rates, respectively, across the pipeline system.", "These rates are assumed within our guidance ranges. As we said previously, the majority of new volume commitments on the system are being contracted at market-based negotiated rates, but we are pleased to have this matter resolved. I'll now turn the call over to Kevin for a closer look at our business segment performance." ] }, { "name": "Kevin Burdick", "speech": [ "Thank you, Walt. As both Terry and Walt said, in 2019, we continue to execute on our low multiple organic growth program that is providing needed infrastructure for our customers across our operating areas. As these projects are completed in the second half of 2019 and early in 2020, we expect to see volumes and EBITDA ramp quickly. I'll walk through each of our operating areas and highlight our expected growth drivers in 2019 and into next year.", "Starting with the Rockies region. We continued to see strong producer activity and efficiency improvements across the Williston Basin and Powder River Basin, which is driving associated natural gas and NGL growth. NGL volume gathered on the Bakken Pipeline in 2018 increased 4% compared with 2017. Fourth-quarter NGL volumes gathered averaged 148,000 barrels per day, a 7% increase compared with the third-quarter 2018.", "Growth has continued early in 2019 as we have gathered more than 165,000 barrels per day out of the Williston and Powder River basins on numerous datess, which includes rail volume. In the gathering and processing segment, Rocky Mountain region natural gas volumes processed increased more than 14% in 2018 compared with 2017. Fourth-quarter processed volume decreased slightly compared with the third-quarter 2018 due to typical winter weather and maintenance, which were already factored in to our expectations. So far in 2019, our Williston Basin processing plants are operating close to full capacity and averaged more than 1 billion cubic feet per day during January.", "With more than 250 million cubic feet per day of natural gas currently being flared on our dedicated acreage in the Williston Basin, we expect our 200 million cubic feet per day Demicks Lake I natural gas processing plant to open full in the fourth quarter of 2019 and provide approximately 25,000 barrels per day of NGLs to the Elk Creek pipeline. Demicks Lake II, also a 200 million cubic feet per day plant, is expected to be complete in the first quarter of 2020 and will provide additional capacity for natural gas and NGL volumes to ramp through 2020. There continues to be more than 60 rigs operating in the Williston Basin with approximately 25 rigs on our dedicated acreage. These rig counts have remained relatively consistent as crude prices have fluctuated in recent months.", "We connected 610 wells in the Rocky Mountain region in 2018, exceeding our guidance of 550 wells, and expect to connect approximately 620 wells in 2019. We also continued to see solid rig activity in the Powder River Basin, where we have approximately 1 million acres dedicated to our Natural Gas Liquids segment and a 130,000 acres dedicated to our Natural Gas Gathering and Processing segment. There are more than 20 rigs on our dedicated NGL acreage in the Powder River Basin currently and we continue to hear positive feedback from producers in the area. The southern portion of the Elk Creek pipeline from the Powder River Basin to the Mid-Continent remains on track to be complete as early as the third-quarter 2019, with the entire Elk Creek pipeline expected to be fully in service in the fourth quarter of 2019.", "We have clear line of sight to Elk Creek reaching its initial contracted capacity of approximately 100,000 barrels per day in the first quarter of 2020, generating it's targeted adjusted EBITDA multiple of 4 to 6 times within the first few months of operation. We included a new slide in our earnings presentation yesterday that shows the various contributors to the expected volume ramp, which includes approximately 25,000 to 30,000 barrels of rail volume, approximately 25,000 barrels from Demicks Lake I, 10,000 to 15,000 barrels of Powder River volume, and approximately 25,000 to 30,000 barrels from third-party plants that are currently under construction or being expanded. The Powder River volume will be moved to the southern portion of Elk Creek once complete in the third quarter to make additional room for Williston Basin volume on the Bakken NGL pipeline. Elk Creek volumes are expected to continue to increase throughout 2020.", "Moving on to the Mid-Continent, 2018 NGL volumes gathered in the Mid-Continent increased 17% compared with 2017. NGL volumes gathered from the region decreased in the fourth-quarter 2018 compared with the third-quarter 2018 due to increased ethane rejection and approximately 20,000 barrels per day of NGLs from a third-party plant, which moved to a third-party NGL pipeline, as expected and as we'd previously disclosed. We completed the 60,000-barrel per day expansion of our Sterling III NGL pipeline in the fourth quarter and expect raw feed volumes to ramp up over the next 12 months. Our NGL pipeline capacity between Conway and Mont Belvieu is approximately 90% utilized.", "Arbuckle II is under construction and on schedule for an expected completion in the first quarter of 2020. Initial capacity on Arbuckle II is 400,000 barrels per day but will be expanded to 500,000 barrels per day in the first quarter of 2021. We continue to expect that transportation capacity from Conway to Mont Belvieu will remain highly utilized due to growing NGL volumes, which we expect will keep spreads wider than normal until Arbuckle II is placed in service. In our gathering and processing segment, 2018 Mid-Continent natural gas volumes processed increased more than 18% compared with 2017 and increased 8% in the fourth-quarter 2018 compared with the third-quarter 2018, benefiting from the completion of several large well pads that we previously mentioned had been delayed from the third quarter to the fourth quarter.", "We connected 138 wells in the Mid-Continent in 2018. During the fourth quarter, we completed the expansion of our Canadian Valley natural gas processing plant in the STACK, which brings our total Oklahoma processing capacity to approximately 1.1 billion cubic feet per day. In our Natural Gas Pipelines segment, we recently completed expansions on our ONEOK gas transportation pipeline system, which support growth in the STACK and SCOOP. The expansions included a 100 million cubic feet per day of westbound capacity and a 100 million cubicle feet per day of eastbound capacity, which are fully subscribed under firm transportation agreements.", "An additional 50 million cubic feet per day expansion of the eastbound capacity is expected to be complete this quarter. Now a quick update on our Permian Basin and Gulf Coast operations. NGL volumes gathered on our West Texas LPG system averaged 200,000 barrels per day in 2018, a 5% increase compared with 2017. Since the first expansion of this system was fully placed in service in the fourth quarter, we have seen volumes ramp reaching more than 250,000 barrels per day on several days in 2019.", "Our Mont Belvieu fractionators continue to operate highly utilized, and we remain on schedule to complete our 125,000 barrel per day MB-4 fractionator in the first quarter of 2020. We expect MB-4 to exit 2020 full and for MB-5, which is also 125,000 barrels per day to ramp up quickly once it's completed in the first quarter of 2021. ONEOK's total systemwide NGL fractionation capacity remains around 800,000 barrels per day, given our current product composition and we're utilizing approximately 90% of our fractionation capacity. We're currently undergoing the bottlenecking projects that could add an additional 15,000 to 30,000 barrels per day of fractionation capacity in 2019.", "These projects are in addition to the 20,000 barrel per day expansion of our Bushton, Kansas fractionator that we discussed on our third-quarter call. We continue to expect that these debottlenecking projects, our current available capacity, our storage assets, and a small amount of already contracted third-party offloads will provide sufficient capacity until MB-4 is complete. In our Natural Gas Pipelines segment, we have completed capital growth projects in the Permian Basin. That include a 300 million cubic feet per day expansion of our West Tex Transmission pipeline system and a project to make our Roadrunner Gas Transmission pipeline bi-directional.Before I turn the call back to Terry, let's discuss our 2019 volume guidance, which incorporates recently announced customer activity levels.", "We expect our NGL throughput volume to be approximately 11% greater than 2018, driven by growth in all three of our operating regions. In our gathering and processing segment, we expect natural gas volumes processed to increase approximately 5% compared with 2018, primarily from growth in the Williston Basin. Additionally, with our Demicks Lake I plant coming online in the fourth quarter, we expect our 2019 exit rate for volumes processed in the Williston Basin to be approximately 20% higher than our current processed volume level. Our 2019 NGL volume guidance was provided yesterday using a new volume disclosure.", "The new metric is NGL raw feed throughput volume and it represents all physical raw feed volume on which ONEOK charges a fee for transportation, fractionation or a bundled fee for both services. This is the volume metric that we use internally and we believe better represents the key drivers to our earnings. We have provided historical comparisons at the new metric and plan to provide actual gathered and fractionated volumes for a period of time for comparison purposes. Please reach out to our investor relations team if you have questions regarding the change.", "Terry, that concludes my remarks." ] }, { "name": "Terry Spencer", "speech": [ "Thanks, Kevin. Good color on 2018 operations and drivers in 2019. As we sit today, ONEOK is in a great position with an extensive and integrated system of assets in some of the country's most productive basin. I truly believe that one of the reasons we've been successful over the years is because of our focus, meaning our focus on doing what we do well and doing what is best for our customers, investors, and for ONEOK in the long term.", "We have a large growth program in progress right now, but we're not growing just to grow. Getting bigger isn't the point. We're focused on our customers and we're growing to meet their needs. We're focused on our investors and investing in attractive return projects.", "We're focused on our balance sheet and growing our strong asset positions. And we remain focused on growing the right way by being mindful of the environment and the safety of our employees, contractors, and local communities. The hard work of our 2,700 employees and the support of our investors has enabled us to continue to grow our operations in a way that meets the needs of our customers, stakeholders, and investors. A big thank you to all of you for a successful 2018.Operator, we're now ready for questions." ] } ]
[ { "name": "Operator", "speech": [ "Thank you. [Operator instructions] Our first question comes from Michael Blum with Wells Fargo." ] }, { "name": "Michael Blum", "speech": [ "Hi. Good morning, everybody." ] }, { "name": "Terry Spencer", "speech": [ "Good morning, Michael." ] }, { "name": "Michael Blum", "speech": [ "Just a few quick questions. One, your comments on the dividend. So I obviously understand you're not providing a new dividend growth rate but should we take this to mean that you're definitely signaling that you'll be lowering the growth rate going forward?" ] }, { "name": "Terry Spencer", "speech": [ "No, you should not. And what we've done is we've just reminded you of the process that we've always used for making a determination on what we pay each quarter in terms of the dividend. The dividend growth guidance is still out there. We haven't changed it.", "But we're just reminding you that given all the discussions that are out there in the marketplace today about this this topic, we continue to employ the same process that we've used each and every quarter. And our our board, if they decide to make a change, given all the facts and circumstances that we face today, then we'll let right know. Everything -- the process that we use is still intact and still in place, and that guidance is still out there." ] }, { "name": "Michael Blum", "speech": [ "OK. Great. That's helpful. Thank you.", "On -- just wanted to ask a question on leverage. Should we just think -- given that you're not going to issue equity, should we expect that leverage will kind of flex higher into 2019 and then come back down in 2020 as more of the projects come into service and EBITDA ramps up. Is that the right way to think about it?" ] }, { "name": "Terry Spencer", "speech": [ "Yes, that's right, Michael. But I think what I would point out is that we're obviously entering the year at a very attractive spot, 3.75 times on a run rate basis. So, as we move through the year and CAPEX as we get to the back end of the year in the fourth quarter, leverage will pick up a little bit just as we're bringing those assets online and starting the cash flow in the fourth quarter and into the first quarter of 2020." ] }, { "name": "Michael Blum", "speech": [ "OK. Great. And then I don't think -- I just want to confirm. For the 2019 CAPEX range, is there any capital in that number for the potential LPG export dock?" ] }, { "name": "Terry Spencer", "speech": [ "No, there is not." ] }, { "name": "Michael Blum", "speech": [ "Great. That's all I had. Thank you." ] }, { "name": "Terry Spencer", "speech": [ "You bet." ] }, { "name": "Operator", "speech": [ "Our next question comes from Danilo Juvane with RMO Capital Markets." ] }, { "name": "Danilo Juvane", "speech": [ "Thanks and good morning. My first question is for Kevin. I noticed that you didn't outline any frac volume guidance for the quarter you're going forward. Do you see any visibility for an incremental frac going forward here just given how significant and flush your NGL volumes are within your system." ] }, { "name": "Kevin Burdick", "speech": [ "Well, Danilo, I think I'd go back to we feel confident. I mean, with the volume ramp we see as we look at our volumes going through '19 when we look at the capacity we've got today, we look at the storage we've got. We look at the expansions or the debottlenecking projects that we under way, we have a good outlook and having enough capacity that will bridge us till MB-4 comes online in the first quarter of 2020." ] }, { "name": "Danilo Juvane", "speech": [ "Got it. [Inaudible]" ] }, { "name": "Kevin Burdick", "speech": [ "[Inaudible] answer your question?" ] }, { "name": "Danilo Juvane", "speech": [ "No, it does. It does. Thank you for that. And as you kind of think about your CAPEX, specifically the high end of that range, obviously you've said no equity for the plan here.", "But if you do hit that high end of the range, still no plans for equity?" ] }, { "name": "Kevin Burdick", "speech": [ "No. If we hit the high end of the range, we will have seen a a significant increase in producer activity and be bringing on these assets with very significant cash flow when they come on line. So yes, we're still -- we're focused on the midpoint of our range but we want to demonstrate that we have the flexibility to flex that depending on producer activity." ] }, { "name": "Danilo Juvane", "speech": [ "Thanks. Those are my questions." ] }, { "name": "Operator", "speech": [ "Our next question comes from Christopher Sighinolfi with Jefferies." ] }, { "name": "Chris Sighinolfi", "speech": [ "Hey, good morning, guys." ] }, { "name": "Terry Spencer", "speech": [ "Morning. Morning Chris." ] }, { "name": "Chris Sighinolfi", "speech": [ "Terry, I just want to circle back real quickly on Michael's question just around dividend commentary. I mean, you guys had one of the more sort of heads-up negotiation process with ONEOK Partners when you guys were doing the merger and know that at that time the 9% to 11% growth rate through '21 was sort of an important consideration for them. Clearly '21 is also a year where everything we know that you're building will be online, and sounds it like, from Kevin, running pretty well where leverage will come down. So I guess, are you talking or were Walt's comments about the shareholder feedback and dividend versus other forms of shareholder return, is that to be interpreted as something that's actively discussed in the near term or more around period beyond this '21 negotiation with ONEOK Partner company?", "Yes, I will let Walt answer that question about his comments.", "[Inaudible]" ] }, { "name": "Walt Hulse", "speech": [ "I guess, what I would tell you is that our board's practice has been to evaluate all of those options on a quarterly basis as we've moved forward here. And we just wanted to acknowledge to the marketplace that we are hearing feedback from folks and that that is being translated into the discussions with the board. It'll just be another factor that they factor in, but they have always considered whether alternatives to dividend growth for other ways to give back capital to the shareholders and they'll continue to look at those opportunities going forward and at some point in the future they may make some sense." ] }, { "name": "Chris Sighinolfi", "speech": [ "OK. If I could, two questions then on CAPEX you or, I guess, cash flow. The 2018 growth CAPEX, Walt, was just a bit light of what the midpoint of your '18 guidance. Assuming that's timing but just wanted to check on that.", "And then related, you did have a working capital benefit last year that was not immaterial. I'm just wondering if we should assume anything for line items like that in 2019." ] }, { "name": "Walt Hulse", "speech": [ "Yes. The CAPEX is entirely timing. I mean, nothing's changed whatsoever in our view of the scope of these projects, so we have -- we're on budget and on time as Kevin mentioned. So it's just a function of timing, and timing is kind of how we factor through 2019 into 2020 as well.", "Yes, from the working capital standpoint, you've got significantly lower commodity prices at year end 2018, about 25% lower than they were in 2017, which just gets reflected in both your accounts receivable and your account payable, and we had about $50 million less in inventory at the end of the year. So nothing other than that that's really significant." ] }, { "name": "Chris Sighinolfi", "speech": [ "OK. Great. One final question, if I could, for Kevin, I think. Just on the NGL market dynamics, particularly in the Mid-Continent that obviously you guys enjoyed a very strong spread environment in an '18 forecast, a nice scenario in 2019, although not as not as frothy.", "I'm just wondering how -- I guess, two questions really, that how [Inaudible] coming up and any available capacity that emerges on the map or system focuses in on what you're thinking in this guidance? And then second to that, the Williams [Inaudible] announcement on Blue [Inaudible] and their comments about being able to move volumes off the third-party system. I don't know who's third-party system that is, could be yours. Just wondering how that factors on your market view." ] }, { "name": "Terry Spencer", "speech": [ "OK. Chris, I'm going to let Sheridan take that one." ] }, { "name": "Sheridan Swords", "speech": [ "Chris, this is Sheridan. First I'll talk about the spreads between Conway and Belvieu. Yes, we are projecting a more narrow spread in '19 and we saw an '18. And some of the factors of what you said with [Inaudible] coming on could have could have some downward or squeezing pressure between Conway and Belvieu.", "It just depends on how much purity products they can move out of the Conway market into Belvieu. In terms of as we go forward past 2019, as we've said, Arbuckle II, when it comes online, it will open up a lot of purity capacity on our system, on the Sterling system, that presently is being used for raw feed, which we think will bring the spreads back into more of a historical or normal level of very narrow differential between the two markets. So any additional capacity that's put in service in between Conway and Belvieu past Arbuckle II, we really think will have very limited impact on the spreads from where they are at that time. I would also say on -- as you talked about a third-party pipeline, what I would say is we do not anticipate a material change in third-party volume that we currently fractionate in exchange in Mid-Continent that comes off of [Inaudible] for many years in the future.", "So with that, that. But I would also say that we do anticipate volume growth from Williams acquisition of discovery. It created a need for additional capacity. I know PTL.", "In this regard, we were able to reach an agreement with Williams to accommodate this potential growth in terms that are favorable to us. Also, remember that we received an immediate EBITDA uplift from both shipping our barrels on our own -- 100% own pipeline and from the additional third-party volume shipped on [Inaudible]. We are pleased that [Inaudible] continue to serve both growth as a DJ and provide ONEOK with incremental benefit." ] }, { "name": "Chris Sighinolfi", "speech": [ "Great. Thanks a lot, guys." ] }, { "name": "Operator", "speech": [ "Our next question comes from Jeremy Tonet with JP Morgan." ] }, { "name": "Jeremy Tonet", "speech": [ "Hi. Good morning. I just wanted to come back to the guidance here. In the range that you've provided for EBITDA for '19, if you could build a bit more on -- what would be some of the drivers for the low end versus the high end there? I mean, you'll get the 2020 guide kind of the 20% plus, is there like a certain commodity price environment that's kind of baked in there or any other color that you could provide on that?" ] }, { "name": "Terry Spencer", "speech": [ "No -- Jeremy, I think the key there is, as with any year, a lot of it will come down to just the actual volumes that are flowing, and that will be predicated based on producer activity. This year is kind of interesting in that, especially in the Bakken, you look at from a gathering and processing perspective with the flared gas backlog that provides us support, if you will, for that volume outlook in the Williston Basin but at the same time, we're bumping up against some capacity in both the GMP segment and the NGL -- in the NGL segment. So clearly spreads could have an impact as we move through the year. That could move you up or down a little bit.", "But by and large, we feel good about the midpoint of that guidance range, given the volumes that we have flowing today. The line of sight we've got to growth coming out of the Permian on our West Texas expansion, growth coming out of the Mid-Continent on the Sterling III expansion, and then just the higher month-to-month volumes coming out of out of the Bakken." ] }, { "name": "Jeremy Tonet", "speech": [ "That's helpful. Thanks. And going back to the CAPEX range real quick here. Just wanted to confirm.", "You, guys, hadn't seen any kind of cost overruns here and as far as the range we're talking about. That's simply just a matter of timing between whether projects -- spending falls into '19 or '20 depending on the commodity price environment and how quickly producers want this infrastructure?" ] }, { "name": "Terry Spencer", "speech": [ "That's correct. All of our projects that we've announced are on schedule and on budget right now. So it's purely a timing -- the timing that we're talking about." ] }, { "name": "Jeremy Tonet", "speech": [ "That's helpful. That's it for me. Thanks." ] }, { "name": "Operator", "speech": [ "Our next question comes from Michael Lapides with Goldman Sachs." ] }, { "name": "Michael Lapides", "speech": [ "Hey, guys. Two questions. One, can you just talk about some of the commentary or feedback you've gotten from your producer/shipper customers in the Mid-Con? Just kind of generically what are they saying about the environment today, how they're thinking about the next 12 to 24 months production and volume-wise, and kind of how that flows through to you, guys." ] }, { "name": "Terry Spencer", "speech": [ "We're going to let Chuck Kelley take that question." ] }, { "name": "Chuck Kelley", "speech": [ "Thank you, Michael. Good question. What we're seeing in the Mid-Continent STACK and SCOOP, Trump primarily for this year and maybe into the early part of next year, a lot of these producers that we deal with, as you know, have alternatives in other basins. They completely believe in the STACK and SCOOP.", "The inventory is there. The rock is good. We're all firm believers in that. We're still seeing good activity year over year.", "We had a great '18 over '17. So as we rode into '19 we came in with a pretty -- a record volume platform for us. We still see 2% growth year over year. So -- and what we're seeing primarily in the STACK and SCOOP, we're seeing more activity in the SCOOP than the STACK.", "So what you'll see from us this year, seeing some rig movements between us and other processors on dedicated acreage. We'll still average in that eight to 10 rig count for the year, so we feel very good about our position in the STACK from a -- and SCOOP from a GMP standpoint. We have, as you know, a little over than 300,000 acres. But more importantly, our NGL position, and Sheridan can speak to that, as to how many processing plants he's connected to and the growth that he is still seeing in the Mid-Con." ] }, { "name": "Sheridan Swords", "speech": [ "Yes." ] }, { "name": "Terry Spencer", "speech": [ "Sheridan?" ] }, { "name": "Sheridan Swords", "speech": [ "We're connected over 90% of the plants in the Mid-Continent. And of all the new plants we've contract on a long-term basis, 10 to 15 years old. Almost all the new plants that have come up in the last couple of years. And as Chuck said, we continue to talk to those customers and see the producers behind them.", "A lot of them are very excited about the growth prospects they see even though we've seen some producers back off a little bit. And in our volume guidance that we provided for '19, we've already incorporated all these conversations and everything we've had with our producers on the NGL side as well as what the GMP side." ] }, { "name": "Michael Lapides", "speech": [ "Got it. And then one follow up on CAPEX. Just trying to think about it, like you've got so many large projects under way whether it's the fracs whether it's Arbuckle, Demicks Lake. How should we think about not just even 2020 but even kind of beyond that 2021 CAPEX? Should we kind of think that growth CAPEX slows materially, which means maybe there's less growth in EBITDA from new projects coming online but there's also a sizable pickup in free cash? Or is there another wave of kind of major or sizable projects like in Arbuckle or others, and they simply haven't been announced yet?" ] }, { "name": "Terry Spencer", "speech": [ "So, let me take the first part of that question and then Kevin can follow up. So if you just think back historically we've had a number of these large organic growth programs over the past several years. And it seems like every time we talk about this very question and we answer this very question the same way, and we're going to probably answer it the same way again. But we'll see this growth and then what will happen is based upon the visibility that we perhaps don't have looking into -- looking two or three years down the road, we'll have the cap -- the growth capital taper off.", "OK? And so Kevin will tell you that, yes, as we go into 2020 and 2021, we -- our own internal forecasts are indicating less capital to be spent. However, each and every time, we have continued to -- as that visibility gets closer to us, we've been able to develop more projects and continue to keep the organic growth train going, if you will. And so that's, I mean, yes, that's just historically, that's how it's happened and I think it's very possible that there is opportunity out there we don't know about yet that will come. So, Kevin, anything to add to that?" ] }, { "name": "Kevin Burdick", "speech": [ "Yes, that's spot on. And I think one of the ways to think about it is with these two, primarily the two big pipes, Arbuckle II and Elk Creek, we've more than doubled the backbone, if you will, of our NGL system from North Dakota to the Gulf Coast. And so as we move forward with the operating leverage we have on those pipes to continue to expand it through low-cost pump stations, that provides us the opportunity. So really future capital needs are things like maybe another processing plant in the Bakken, another fractionator in the Gulf Coast, which are in much smaller chunks than the large multi-billion dollar projects that we've got under way right now.", "So I do think you're going to see that flange down over time but as Terry suggested, we'll continue to look for opportunities to generate nice returns on on other projects as well." ] }, { "name": "Michael Lapides", "speech": [ "Got it. Thank you, guys. Much appreciated." ] }, { "name": "Operator", "speech": [ "Our next question comes from Jean Ann Salisbury with South [Inaudible]." ] }, { "name": "Jean Ann Salisbury", "speech": [ "Hi. Good morning. I just wanted to follow up on [Inaudible] So outside of the [Inaudible], there've been [Inaudible] cuts across a number of [Inaudible], which currently [Inaudible] system. [Inaudible]" ] }, { "name": "Terry Spencer", "speech": [ "Gina, I couldn't understand a word you said. It's -- we've got to technical difficulty on your transmission for some reason. Did any of you --" ] }, { "name": "Jean Ann Salisbury", "speech": [ "[Inaudible]" ] }, { "name": "Terry Spencer", "speech": [ "Did any of you pick up?" ] }, { "name": "Jean Ann Salisbury", "speech": [ "Is this any better?" ] }, { "name": "Terry Spencer", "speech": [ "That's much better." ] }, { "name": "Jean Ann Salisbury", "speech": [ "All right. Great. So I just wanted to follow up Chris' question [Inaudible]. Outside of the [Inaudible] volume, the [Inaudible] Grand Prix [Inaudible] Do most of the plants have the option [Inaudible]?" ] }, { "name": "Sheridan Swords", "speech": [ "I think your question, Jean Ann, was do those plants have the option to switch. And what I would tell you is, as I said in my statement, that all the plants we've contracted here lately are 10 to 15 years. So our contract, the dedication those plants have to the ONEOK system are for many years to come. So those plants are already dedicated to us and will not come off." ] }, { "name": "Terry Spencer", "speech": [ "So they don't have the ability to switch." ] }, { "name": "Sheridan Swords", "speech": [ "Yes. So they don't have the ability to switch." ] }, { "name": "Jean Ann Salisbury", "speech": [ "Thanks. And can you give us a sense [Inaudible] around the [Inaudible] per gallon [Inaudible] assumption? [Inaudible]?" ] }, { "name": "Sheridan Swords", "speech": [ "We have not had any of the $0.10 around that Conway to Belvieu spread. It's very -- it's difficult to get forward numbers on Conway, a lot of those products. At times we will forward-sell a little bit, where we store one month's product and ship it the following month a little bit of it but it is very difficult to head to the north, south." ] }, { "name": "Jean Ann Salisbury", "speech": [ "OK. Sorry about the [Inaudible]" ] }, { "name": "Sheridan Swords", "speech": [ "On a long-term basis. You just don't have the liquidity." ] }, { "name": "Jean Ann Salisbury", "speech": [ "Sure. It makes sense. Thank you." ] }, { "name": "Operator", "speech": [ "Our next question comes from Dennis Coleman with Bank of America Merrill Lynch." ] }, { "name": "Dennis Coleman", "speech": [ "Hi. Good morning. My question, I guess, maybe to follow up a little bit on your discussion from the question with Michael, should we think about sort of the next wave of projects as being tied to some of the discussion about crude oil pipeline takeaway out of the Bakken? And as we see announcements there, potentially we could see you start to talk about your growth projects beyond 2020?" ] }, { "name": "Terry Spencer", "speech": [ "Well, you get out long-term then maybe it would be but if you look over the next two or three years, we feel comfortable. And as we talk to our customers, that both crude and residue takeaway there will be enough there to provide pretty significant growth over the next few years. So I don't know that I would tie our next plant or additional capacity we may need in the Bakken over the next two or three years to a crude oil crude oil solution. I mean, you've got a couple open seasons out there that are being looked at.", "You've got some other expansion opportunities that I know people are floating around. So again, right now our producers feel pretty good about their crude takeaway. And then you've always got crude by rail that can get you to the coast as a bridge, if you will, to get to a pipe if they need it" ] }, { "name": "Dennis Coleman", "speech": [ "OK. Thanks for that. I guess, then my follow-up, can you just give a little bit of color about that the debottlenecking projects that you talked about, the 15 -- I guess the 15,000 to 30,000 a day of frac capacity and what's the nature of those projects are?" ] }, { "name": "Terry Spencer", "speech": [ "That's just a variety -- there's several items in those numbers that will span just from very low-cost expansions and some different equipment that we could put in, some different controls we could put in that could squeak out at that three or four different facilities, an extra five or six thousand barrels a day." ] }, { "name": "Dennis Coleman", "speech": [ "And is it something -- are these something that can happen in a month or two, or second half of the year?" ] }, { "name": "Terry Spencer", "speech": [ "They'll range. Some of them may happen very quickly, others may take a few months if we've got to order some vessels or equipment that might have a longer lead time too." ] }, { "name": "Dennis Coleman", "speech": [ "OK. That's it for me. Thanks." ] }, { "name": "Operator", "speech": [ "We'll take our next question from Craig Shere with the Tuohy Brothers." ] }, { "name": "Craig Shere", "speech": [ "Good morning." ] }, { "name": "Terry Spencer", "speech": [ "Good morning, Craig." ] }, { "name": "Craig Shere", "speech": [ "Picking up on [Inaudible] on the dividend." ] }, { "name": "Terry Spencer", "speech": [ "Can't hear you, Craig." ] }, { "name": "Walt Hulse", "speech": [ "Craig, you're breaking up." ] }, { "name": "Craig Shere", "speech": [ "[Inaudible] now? Is this better?" ] }, { "name": "Terry Spencer", "speech": [ "That's better." ] }, { "name": "Craig Shere", "speech": [ "As CAPEX drops materially by the second quarter of 2020, wouldn't you envision capacity to both sustain up to low-double digit dividend growth and consider share buybacks? And how do you think about fair value for the shares, given the really massive, very low-cost organic growth built in with completion of both of those very large NGL pipelines with mass upsizing?" ] }, { "name": "Terry Spencer", "speech": [ "Well, Craig, what I would tell you is you're absolutely right that as we go into the back half of 2020 and into 2021 2022, we expect to have very significant cash flow in excess of dividends. And we basically have a three-tier approach to thinking about that. And our first approach is to try to find very attractive growth projects that we can go ahead and build. Our second approach is to make sure that our balance sheet is as strong as we possibly can have it.", "And then after we've done those two, we surely will put the possibility of share buybacks in the mix, and think about that and -- but that'll be a discussion at the board level as we get out there a couple of years." ] }, { "name": "Craig Shere", "speech": [ "Do you have any thoughts on unfair value? I mean, obviously, the leverage from continuing to fill up Elk Ridge and Arbuckle II is substantial as we look beyond 2020. So one would assume that you could sustain above-average growth rates." ] }, { "name": "Terry Spencer", "speech": [ "Yes -- no, I -- if you're asking me if I think our stock is underpriced, the answer is yes. I think we've got [Inaudible] and it really comes down to the cadence of which that growth will come on the pipes. But I think the fact that we've been able to guide to achieving our 100,000 barrels a day in the first quarter of operation Elk Creek and the significant contracting that's gone above and beyond that initial 100,000 really leads to a very attractive growth going forward." ] }, { "name": "Craig Shere", "speech": [ "That sounds good. And my last question, I don't know who wants to take it, maybe Terry. But you guys built over like a decade and a half a dominant Bakken, the Mont Belvieu position, that no one else has. But the Permian through Mont Belvieu to LPG export market is certainly comparatively more crowded.", "Certainly there's a lot of synergies from moving into LPG exports, but how do you think about the competitive landscape there?" ] }, { "name": "Terry Spencer", "speech": [ "Well, certainly it's significantly more competitive than our other areas. However, we've been a pretty effective competitor. When we linked the West Texas system with our infrastructure in the Gulf Coast and basically brought it into the ONEOK system proper, it changed the game for us and we're seeing it in the volume performance, particularly in the Permian. So the exports are a natural progression for us in the value chain.", "And it's not something that we absolutely have to have but certainly believe that it's a strategic and important component for us that I think we'll do a great job at if and when we get a project put together. It certainly enhances our ability to market internationally for obvious reasons. I mean, I will tell you that we market internationally today even though we don't operate a dock. But I think if we have a dock or an export terminal, it will certainly substantiate us as a true international player.", "So all of that fits together. It fits together well. And on top of that, it's a business that's a fee-based component, so it fits well contractually as well. So, there you go." ] }, { "name": "Craig Shere", "speech": [ "And how would you compare the all-in costs of that potential announcement to, say, a new frac or new processing train?" ] }, { "name": "Terry Spencer", "speech": [ "If you think about how we're approaching the project, and I have to let Sheridan make a comment after. But if you think about how we're approaching it, which is primarily with a joint venture partner, so there'll be the export terminal itself will have some -- have partial -- we'll have partial ownership in that but then also there's infrastructure that has to be built around the terminal interconnection to storage facilities, connections to markets, and connections to our our system proper, you're talking about a cost net to ONEOK roughly in a half a billion dollar range. So from an order of magnitude to capital, that's what we're talking about." ] }, { "name": "Craig Shere", "speech": [ "Great. Thank you." ] }, { "name": "Operator", "speech": [ "We'll take our next question from Alex Kania with Wolfe Research." ] }, { "name": "Alex Kania", "speech": [ "Thanks for taking my question. This is just more for a clarification question. For the 2019 outlook, are you baking in kind of a -- some consequence related to Shin Oak coming into service this year or were you talking mainly about the 2020 impacts?" ] }, { "name": "Kevin Burdick", "speech": [ "I think when we set out our guidance for what 2019 is going to be and we looked at what the Conway to Belvieu spread is in '19, we did take into consideration that Shin Oak could possibly create some more capacity for purity products between Conway and Belvieu. And I think that's why you see that our number is a little bit lower than it was in 2019 -- in 2018." ] }, { "name": "Alex Kania", "speech": [ "OK. Great. Thank you very much." ] }, { "name": "Operator", "speech": [ "Our next question comes from Sunil Sibal with Seaport Global Securities." ] }, { "name": "Sunil Sibal", "speech": [ "Yes. Hi. Good morning, guys, and thanks for all the clarity in the call. Just wanted to go back to the balance sheet and leverage question a little bit.", "So it seems like there's a potential for you to kind of expand the fairway for potential projects and CAPEX. I was wondering is there kind of a maximum leverage that you will look at when you think about that CAPEX, especially considering that some of these projects will be longer-lead item -- longer-lead projects?" ] }, { "name": "Walt Hulse", "speech": [ "Well, I'm not going to put a specific number out there. I think you can do the numbers based on the CAPEX, but -- we've put out the significant cash flow growth that we expect to see this year and going into the coming years. We think we'll be in line with what the rating agencies have put out there publicly and kind of the expectation in the marketplace. We'll definitely be moving above 4 times for a very short period of time and -- as we get through the construction phase.", "But as we come down into 2020, the significant incremental EBITDA and cash flow delevers us very quickly than in the 2021." ] }, { "name": "Sunil Sibal", "speech": [ "OK. So 4 and maybe 4.5 times kind of max out there and then obviously 2020 cash flow growth will probably bring it on pretty quickly? Is that the right way to think about that?" ] }, { "name": "Walt Hulse", "speech": [ "I think you're in the ballpark and you can you can do the math yourself but I don't think you're too far off." ] }, { "name": "Sunil Sibal", "speech": [ "OK. Got it. And then one last one for me, in terms of management's view on industry consolidation opportunities, especially what you're seeing so far is probably more like project consolidation. Do you see opportunities for even corporate consolidations opening up in the current environment?" ] }, { "name": "Terry Spencer", "speech": [ "Sunil, I think you're right. We have seen a lot of asset consolidation, and we've seen asset JVs, too. But I think you're going to see more of that, just -- I think that the corporate consolidation is, obviously, other than some of the structural things we've seen over the course of the last year, I think from a straight up corporate consolidation, it's -- we still have time yet before that starts to happen. I think -- again, I think, we're going to see it, but it's going to take some time." ] }, { "name": "Operator", "speech": [ "We have no more questions in the queue at this time. I would now like to turn the conference over to Andrew Ziola." ] }, { "name": "Andrew Ziola", "speech": [ "Well, thank you, everybody. Our quiet period for the first quarter starts when we close our books in early April and extends until we release earnings in early May. We'll provide details for the conference call at a later date. Thank you for joining us, and the IR team will be available throughout the afternoon.", "Have a good rest of your day." ] }, { "name": "Operator", "speech": [ "[Operator signoff]" ] }, { "name": "Sunil Sibal --Seaport Global Securities -- Analyst", "speech": [ "More OKE analysis", "This article is a transcript of this conference call produced for The Motley Fool. While we strive for our Foolish Best, there may be errors, omissions, or inaccuracies in this transcript. As with all our articles, The Motley Fool does not assume any responsibility for your use of this content, and we strongly encourage you to do your own research, including listening to the call yourself and reading the company's SEC filings. Please see ourTerms and Conditionsfor additional details, including our Obligatory Capitalized Disclaimers of Liability." ] } ]
OKE
2019-10-30
[ { "description": "Vice President of Investor Relations and Corporate Affairs", "name": "Andrew J. Ziola", "position": "Executive" }, { "description": "President and Chief Executive Officer", "name": "Terry K. Spencer", "position": "Executive" }, { "description": "Chief Financial Officer, Treasurer, Executive Vice President, Strategic Planning, Corporate Affairs", "name": "Walter S. Hulse", "position": "Executive" }, { "description": "Executive Vice President and Chief Operating Officer", "name": "Kevin L. Burdick", "position": "Executive" }, { "description": "Senior Vice President, Natural Gas Liquids", "name": "Sheridan C. Swords", "position": "Executive" }, { "description": "Senior Vice President, Natural Gas", "name": "Charles M. Kelley", "position": "Executive" }, { "description": "JP Morgan -- Analyst", "name": "Jeremy Tonet", "position": "Analyst" }, { "description": "UBS -- Analyst", "name": "Shneur Gershuni", "position": "Analyst" }, { "description": "Barclays -- Analyst", "name": "Christine Cho", "position": "Analyst" }, { "description": "SunTrust -- Analyst", "name": "Tristan Richardson", "position": "Analyst" }, { "description": "Wells Fargo Securities -- Analyst", "name": "Michael Blum", "position": "Analyst" }, { "description": "Credit Suisse -- Analyst", "name": "Spiro Dounis", "position": "Analyst" }, { "description": "Bernstein -- Analyst", "name": "Jean Ann Salisbury", "position": "Analyst" }, { "description": "Goldman Sachs -- Analyst", "name": "Michael Lapides", "position": "Analyst" }, { "description": "RBC Capital Markets -- Analyst", "name": "Elvira Scotto", "position": "Analyst" }, { "description": "Bank of America Merrill Lynch -- Analyst", "name": "Derek Walker", "position": "Analyst" }, { "description": "Tuohy Brothers -- Analyst", "name": "Craig Shere", "position": "Analyst" }, { "description": "Wolfe Research -- Analyst", "name": "Alex Kania", "position": "Analyst" }, { "description": "Seaport Global Securities -- Analyst", "name": "Sunil Sibal", "position": "Analyst" } ]
[ { "name": "Operator", "speech": [ "Good day, and welcome to the Third Quarter 2019 ONEOK Earnings Call. [Operator Instructions]", "At this time, I would like to turn the conference over to Andrew Ziola. Please go ahead, sir." ] }, { "name": "Andrew J. Ziola", "speech": [ "Thank you, Travis. And welcome everyone to ONEOK's Third Quarter Earnings Conference Call. This call is being webcast live, and a replay will be made available. After our prepared remarks, we'll be available to take your questions.", "A reminder that statements made during this call that might include ONEOK's expectations or predictions should be considered forward-looking statements and are covered by the safe harbor provision of the Securities Acts of 1933 and 1934. Actual results could differ materially from those projected in forward-looking statements. For a discussion of factors that could cause actual results to differ, please refer to our SEC filings.", "Our first speaker this morning is Terry Spencer, President and Chief Executive Officer. Terry?" ] }, { "name": "Terry K. Spencer", "speech": [ "Thanks, Andrew. Good morning, and thank you all for joining us today. As always, we appreciate your continued interest and investment in ONEOK.", "Joining me on today's call is Walt Hulse, Chief Financial Officer, Executive Vice President, Strategic Planning and Corporate Affairs; and Kevin Burdick, Executive Vice President and Chief Operating Officer. Also available to answer your questions are Sheridan Swords, Senior Vice President, Natural Gas Liquids and Chuck Kelley, Senior Vice President, Natural Gas.", "Yesterday, we announced third quarter earnings results and updated our 2019 financial guidance expectations. The first nine months have set us up well for another year of companywide earnings growth in 2019 and have laid the foundation for continued growth next year. We also reiterated our outlook for greater than 20% earnings growth in 2020.", "We provided updated timing on several of our capital growth projects, including our Demicks Lake I natural gas processing plant in North Dakota, which was completed earlier this month, and our Demicks Lake II plant, which we expect to complete in January 2020. The northern section of our Elk Creek NGL pipeline is expected to begin line fill activities in November, and we'll provide meaningful volume and earnings growth as we exit the year.", "Between now and the end of the first quarter of 2020, we expect to fully complete five growth projects that will add more than 700,000 barrels per day of NGL transportation capacity, 125,000 barrels per day of fractionation capacity, and an additional 400 million cubic feet of natural gas processing capacity, including Demicks Lake plants. This critical natural gas and NGL infrastructure, including assets to help significantly reduce natural gas flaring in the Williston Basin. We'll provide immediate earnings and volume uplift in 2020, and stable fee-based growth for years to come.", "With that, I will turn the call over to Walt for comments on our third quarter results." ] }, { "name": "Walter S. Hulse", "speech": [ "Thank you, Terry. ONEOK's third quarter 2019 net income totaled $309 million or $0.74 per share and third quarter adjusted EBITDA totaled $650 million, year-to-date net income and adjusted EBITDA increased 11% and 5% respectively, compared with the same period last year.", "Distributable cash flow through the first nine months of the year was $1.5 billion, up 13%, compared with 2018 with a healthy year-to-date dividend coverage of 1.42 times. We have also generated nearly $450 million of distributable cash flow in excess of dividends paid through the first nine months of this year.", "During the third quarter, we paid a dividend of $0.89 per share and last week we announced the dividend increase to $0.915 or $3.66 per share on an annualized basis. The dividend is payable on November 14th to shareholders of record on November 4th. This latest increase results in a 9% increase in 2019 dividends paid, compared with 2018 in line with our previously stated guidance. In August, we completed a $2 billion senior note offering providing increased liquidity and balance sheet flexibility.", "In addition to funding capital expenditures proceeds from the offering also were used to proactively manage upcoming debt maturities, including repaying $250 million of our $1.5 billion term loan due 2021, and redeeming $300 million of senior notes that were due March 2020. At September 30, net debt-to-EBITDA, on an annualized run rate basis was 4.5 times. We continue to expect to be at 4 times debt-to-EBITDA run rate in the fourth quarter of 2020 or the first quarter of 2021. With deleveraging continuing in the quarters to follow that.", "We ended the third quarter with the full $2.5 billion available on our credit facility and more than $670 million of cash. With yesterday's earnings announcement, we narrowed our 2019 financial guidance ranges. The midpoint of our net income guidance increased to $1.28 billion and our adjusted EBITDA midpoint remain unchanged at $2.6 billion. The natural gas gathering and processing and natural gas pipeline segments are trending toward the high end of the previously announced financial guidance ranges, each with the ability to exceed the high end of that range.", "Our performance in these segments reflect stronger-than-expected volume growth in the Williston Basin and STACK and SCOOP areas in the gathering and processing segment and higher firm transportation capacity contracted on expansion projects in the natural gas pipeline segment.", "Our natural gas liquids segment is trending toward the low end of its previously announced financial guidance range, primarily due to lower optimization and marketing earnings from narrower than expected pricing spreads between Conway and Mont Belvieu. And due to the impact of increased ethane rejection on our system. Despite a vastly different commodity price environment and spreads that were one-third is large as a year ago, our base business grew, compared with a strong quarter last year. As we mentioned in prior quarters, we expect earnings from this -- for this segment to be heavily weighted toward the back half of the year.", "The Williston Basin continues to be a primary contributor to ONEOK's growth, underscored by the fact that volume growth in the region is at higher margins relative to our other regions. We've also updated our 2019 growth capital guidance range to $3.5 billion to $3.7 billion, consistent with my remarks last quarter, reflecting the accelerated timing on several of our capital growth projects. The early in-service on these projects also accelerate their associated EBITDA contributions and further underscores our confidence in our earnings growth and deleveraging next year.", "As Terry already mentioned, we continue to expect adjusted EBITDA growth of greater than 20% in 2020, compared with our 2019 guidance midpoint and the emphasis remains on greater than 20%.", "I'll now turn the call over to Kevin for a closer look at each of our business segments." ] }, { "name": "Kevin L. Burdick", "speech": [ "Thank you, Walt. We continue to see strong producer activity across our operations with NGL and natural gas volumes through the first nine months of the year already surpassing full-year 2018 volumes. Overall, our projects remain on time and on budget, positioning us well for continued growth as volumes on these projects ramp up over the next several months.", "Let's take a closer look at our operating regions starting with the Rockies. Producer activity remained strong in both the Williston and Powder River basins, North Dakota saw record natural gas production again in August of more than 3 billion cubic feet per day and the basin wide rig count remains at approximately 60. As Terry mentioned, our 200 million cubic feet per day Demicks Lake I natural gas processing plant is now in service and we expect it to ramp quickly to full capacity, once the entire Elk Creek Pipeline is in service.", "With natural gas flaring of more than 550 million cubic feet per day in the basin and more than $300 million of that on ONEOK's dedicated acreage, the volume growth is immediately available to capture. We also expect to complete our 200 million cubic feet per day Demicks Lake II plant in January of 2020, which will help further alleviate flaring in the basin.", "Third quarter natural gas volumes processed in the Rocky Mountain region were nearly 1.1 billion cubic feet per day, an increase of 7% year-over-year and 2%, compared with the second quarter of 2019. This puts us on track in 2019 for the higher end of our volume guidance range. We now expect to connect between 525 wells and 550 wells in the Rocky Mountain region this year, compared with our prior well connect guidance of 620 wells.", "Better than expected well performance and higher gas to oil ratios have contributed to the growth even with producers temporarily delaying completions to avoid additional flaring, due to lack of processing capacity and NGL takeaway. This has translated into a rising drilled, but uncompleted well count, which has reached approximately 1,000 basin wide with more than 400 on our acreage. We expect producers to begin working this inventory off, once Elk Creek, an additional processing capacity come online providing further support for our expected growth in 2020.", "NGL raw feed throughput volumes in the Rocky Mountain region increased approximately 7%, compared with the second quarter 2019, due primarily to the southern section of our Elk Creek pipeline coming online in July. In addition to our Demicks Lake I plant, more than 300 million cubic feet per day of third-party processing capacity was recently completed with an additional 750 million cubic feet per day of capacity expected to be completed in the Rockies region by the first quarter of 2020.", "At full capacity these plants are capable of producing a total of approximately 160,000 barrels per day of propane plus when full. We are already seeing additional NGL volumes from the region in October, with throughput averaging more than 190,000 barrels per day, which includes the already full a 140,000 barrel per day Bakken NGL Pipeline. Line fill activities on the northern section of Elk Creek are expected to begin in November and volumes will continue to ramp up through the remainder of the year, including approximately 25,000 barrels per day, currently being railed that will transition to the pipeline and reduce our rail cost.", "We expect to exit 2019 with more than 215,000 barrels a day of raw feed throughput for the region and reach more than 240,000 barrels per day in the first quarter of 2020. As a reminder, each 25,000 barrels per day of incremental volume results in nearly $100 million of adjusted EBITDA. We also continue to see increased producer activity in the Powder River Basin, as production results remained strong and some rigs have relocated there from other basins, benefiting both our natural gas gathering and processing and natural gas liquids segments.", "Moving on to the Mid-Continent. Natural gas volumes processed increased 8% year-over-year and are tracking above the midpoint of our guidance expectations. Total NGL raw feed throughput in the Mid-Continent region decreased, compared with last quarter, due to higher Mid-Continent ethane rejection, specifically during July and August. We had approximately 50,000 fewer barrels per day of ethane on our system in the third quarter of 2019 then the second quarter 2019, but saw an increase of approximately 30,000 barrels per day of propane plus volumes in the region, which demonstrates strong core supply growth.", "We've seen ethane on our system increase in the fourth quarter, but continue to expect fluctuation through the remainder of the year. As we near the start up of new petrochemical facilities on the Gulf Coast. Through the first nine months of the year we've connected 98 wells to our natural gas gathering and processing system and connected five new third-party processing plants to our natural gas liquids system in the Mid-Continent.", "Two previously connected third-party plants on our system have also been expanded in the region. NGL volumes from these new connections and expansions in addition to growing Rockies volumes will drive the volume growth on our Arbuckle II Pipeline, which remains on schedule for completion in the first quarter of 2020. We continue to stay in contact with our customers in the region about their plans and forecast, and this information has been incorporated into our growth outlook for 2020.", "Now taking a closer look at our Permian Basin and Gulf Coast operations. NGL raw feed throughput volumes in this region increased 26% year-over-year and the average fee rate increased by approximately $0.015, compared with the second quarter 2019. This was driven primarily by a ramp in volumes on completed West Texas LPG expansion projects and the replacement of lower rate legacy volumes on the system with market based transportation and fractionation rates. We expect average rates to continue to increase, as our 80,000 barrel per day expansion and 40,000 barrel per day expansion are completed in the first quarter of 2020 and the first quarter of 2021 respectively.", "Systemwide NGL fractionation capacity remains highly utilized. Phase 1 one of our MB-4 fractionator, which will provide approximately 75,000 barrels per day of capacity is expected to be completed by the end of the year. Phase 2 of the project, which will add the remaining 50,000 barrels per day of capacity remains on schedule for completion in the first quarter of 2020. MB-5 remains on track for completion in the first quarter of 2021.", "Terry, that concludes my remarks." ] }, { "name": "Terry K. Spencer", "speech": [ "Thank you, Kevin. Our operating performance, systemwide volume strength and execution of our capital growth program with a very strong balance sheet has clearly exceeded many expectations. But while the operational and earnings growth is important, the way in which we operate conduct our sales and business and construct our projects is equally important, and it is the importance that we place on safe, sustainable and responsible operations that is the foundation for all of the successes we've discussed today.", "You can find more detailed information related to our environmental, social and governance focus priorities and programs in our most recent corporate sustainability report, which can be found on our website. The report is our 11th Annual ESG report and with each version of this report we have prioritized increasing disclosures, content and relevance for ONEOK's many stakeholders. I encourage you to review the report on our website. We continue to focus on improvements in these areas and welcome your feedback to help us do so, because our goal is to build and grow a business that is profitable, safe and environmentally responsible for the long-term.", "Thank you to all our dedicated employees for your hard work and contributions this quarter. We're only a couple of months away from closing out another year of companywide growth and we're about to enter an exciting year of new asset operations and additional project completions.", "With that, operator, we're now ready for questions." ] } ]
[ { "name": "Operator", "speech": [ "Thank you. [Operator Instructions] First question comes from Jeremy Tonet, JP Morgan." ] }, { "name": "Jeremy Tonet", "speech": [ "Good morning." ] }, { "name": "Terry K. Spencer", "speech": [ "Good morning, Jeremy." ] }, { "name": "Jeremy Tonet", "speech": [ "Just wanted to start off with the project ramps you have a lot of moving pieces here, a lot of projects coming online over the next couple of quarters. And you talked on it in your remarks, but just with Demicks Lake I and II. How should we think about those plants ramping up, especially because you need Elk Creek online to kind of perform the way you want to perform there? Just how should we expect EBITDA to ramp up over the next few quarters with all these different projects coming online?" ] }, { "name": "Kevin L. Burdick", "speech": [ "Jeremy, this is Kevin. And then I'll let others jump in. But clearly Elk Creek is kind of the key project that we need to get done. The basin is short NGL takeaway capacity right now, but as Elk Creek comes in service, then all of the processing plants up there, not just Demicks Lake I, but you've got some third-party processing plants that are up now and you've got another one that's going to come online in the fourth quarter. All those plants will be able to ramp and clearly there is substantial flaring behind not just our system, but other companies systems as well. So you would expect it's going to ramp very quickly from the flared gas inventory.", "Then as you move through 2020 -- early 2020 and the flares get put out, you still see the strength in rigs we're seeing up there. And you've also got growth coming out of the Powder as well. So you'll see an immediate step-up as we put out the flares and then you'll continue to see a ramp, given the rig counts and the activity levels we're seeing." ] }, { "name": "Jeremy Tonet", "speech": [ "That's very helpful. Thanks. And just turning to capex, you guys have a very deep portfolio of projects and seems like it's kind of peaking right about now. Just wondering what -- how you guys think about the balance of capital with great opportunities versus capital discipline that the market seems to be focused on? How do you see capital trending next year, any color or thoughts you could provide there?" ] }, { "name": "Walter S. Hulse", "speech": [ "Jeremy, this is Walt. We've got several projects that we've already announced which include Demicks Lake II, MB-5, Elk Creek II in West Texas expansion. All of those will be completed throughout the course of 2020. So you can kind of do the math on what we've already got ticked off. So we'll see a meaningful step down in our capex next year from what we have in 2019. Going forward, we think the vast majority of everything that we see on the horizon has been announced, there will be other growth opportunities that will come, but remember, we've built the backbone of the system here with these two pipes. So we have significant operating leverage going forward.", "So if we had another processing plant or something along those lines. Order of magnitude is significantly less as we go forward, and then also, I would point out that anything that we would announce in the coming quarters would really get spent over a couple of years, so our 2020 capex at this point is something that you can get a pretty good look at just based on what we've announced today." ] }, { "name": "Jeremy Tonet", "speech": [ "That's helpful. That's it for me. Thanks. Sorry?" ] }, { "name": "Operator", "speech": [ "Okay, our next question comes from Shneur Gershuni, UBS." ] }, { "name": "Shneur Gershuni", "speech": [ "Good morning." ] }, { "name": "Terry K. Spencer", "speech": [ "Good morning." ] }, { "name": "Shneur Gershuni", "speech": [ "I'm wondering, if we can sort of talk about a couple of things here. Just -- and you sort of mentioned in your prepared remarks about the reduction and expectation for Bakken well connects for this year. But it was interesting your comment seem to indicate that it's a function of the infrastructure delays, which in theory would imply a higher inventory for next year. But at the same time, you also noted that the liquid component is higher, so your volume expectations are unchanged. So when I think about next year, does it not mean that you have a potential for -- an even higher inventory of connections and with the higher cuts that you're seeing is coming from the liquids side that you would think that 2020 could even better than what you had originally visioned for 2020 or might not thinking about that correctly?" ] }, { "name": "Kevin L. Burdick", "speech": [ "This is Kevin. I mean, yes, I think that conceptually, you're on the right path. We were able to through fewer producers were, I mean, clearly they were butting up against some flaring constraints, right? With -- because the basin with short processing capacity and takeaway, NGL takeaway was full. So rather than going ahead and completing those wells, no one they're going to flare, they backed off, and that's been going on for several months. So, yes, that dock increase was the result of that. And yes, that gives us some tailwinds as we move into 2020.", "And then on the other side of that, they just producers continue to deliver strong results, which even though we connected fewer wells and we had anticipated, we were still able to get more toward the higher end of our volume guidance." ] }, { "name": "Shneur Gershuni", "speech": [ "Would you --" ] }, { "name": "Terry K. Spencer", "speech": [ "Kevin, it's fair to say that producers have consistently exceeded our expectations, particularly in Williston. I think there we've benefited from their own capital discipline, and certainly finding ways to enhance the productivity of the wells, the gas, oil ratios have been a big deal for us up there, which in turn has increased the amount of liquids that would be available to our plan. So I think just all in all the backdrop is the producers have really have done a super job not only delivering on what we expect them to deliver, but exceeding those expectations?" ] }, { "name": "Shneur Gershuni", "speech": [ "All right, great. And then just two quick follow-ups. One, just a clarification, you talked about more ethane recovery in 4Q '19. Is that a function of the fact that you -- that there is a challenge to takeaway gas out of the basin right now, and you just need to make more room on the gas line, so it makes more sense to recover the ethane? Is that kind of the reason or is there something different?" ] }, { "name": "Sheridan C. Swords", "speech": [ "Yes, this is Sheridan Swords. I think you're right, and you really need to look at the gas issue especially in the Permian and in the Mid-Continent and when the Permian gas goes really low, you see a lot more ethane want to come out of the Permian Basin versus the Mid-Con and we saw that in the third quarter. But now the gas prices during this first part of fourth quarter have moved up in the Permian, a little bit and gas prices in Mid-Continent moved down which allows more ethane to come out of the Mid-Continent. So you really need to look at the gas price, because the TNF out of the Mid-Continent and the TNF out of the Permian are fairly close together, so it's not on that side of it." ] }, { "name": "Shneur Gershuni", "speech": [ "Okay, great. And one final question, in your conversation with Jeremy about capex, and we talked about it being materially lower in 2020 versus 2019. So there should be some sort of a free cash flow in version. And I would expect there'd be an improvement in leverage. Like, when is the right time for us to start discussing return of capital options for the free cash flow where you look at options like buybacks? Do you change the dividend policy, I'm just kind of curious kind of what your thoughts are, once the free cash flow starts to materialize next year?" ] }, { "name": "Walter S. Hulse", "speech": [ "Sure. We've said that we would get to 4 times debt-to-EBITDA by Q4 of 2020 or Q1 of 2021, we expect to continue to delever after that and we'll proceed down through into that 3.5 range, which is kind of aspirationally where we'd like to be. So we still have some time, we're going to, that's going to take through 2021 maybe in the 2022. So we're going to continue that delevering, as our primary focus. And then going forward, we always are on the hunt for good growth opportunities and to the extent that the commercial team find those growth opportunities, we're going to pursue those, but keeping that leverage in that on a going forward basis in and around that 3.5 times." ] }, { "name": "Terry K. Spencer", "speech": [ "The only thing I would add to Walt's comments are that the priority continues to be fund those -- these attractive growth projects and we continue to have a runway of growth in front of us, albeit, we don't have any of those great big infrastructure projects or background projects like Walt mentioned earlier, but the priority we'll continue to be around these great return organic projects. And then certainly, we think about as we -- if and as we have cash available, certainly retire debt. And then share backs could come in these equation, but I don't see it, but it's certainly something that we think about, if we get to a point where we're running out of growth projects and we're forced to look at other ways to invest our capital certainly share buybacks or something that we would consider." ] }, { "name": "Shneur Gershuni", "speech": [ "All right, perfect. Thank you very much guys. Really appreciate the color." ] }, { "name": "Terry K. Spencer", "speech": [ "You bet." ] }, { "name": "Walter S. Hulse", "speech": [ "Thank you." ] }, { "name": "Operator", "speech": [ "Our next question comes from Christine Cho, Barclays." ] }, { "name": "Christine Cho", "speech": [ "Hi, everyone." ] }, { "name": "Terry K. Spencer", "speech": [ "Hey, Christine." ] }, { "name": "Christine Cho", "speech": [ "[Technical Issues] if I'm to back out the Rockies volumes that are feeding into the Arbuckle II contracted capacity. I still estimate that over 100,000 barrels per day is supposed to come from Mid-Continent. And I know the outlook for 2020 and at least more than 20% growth over 2019 is driven primarily by Bakken. But how should we risk the need for Mid-Con volumes to show up to hit numbers? Do you need it to be flat at a minimum? Or can it sustain a decline and we can still hit those numbers?" ] }, { "name": "Kevin L. Burdick", "speech": [ "I mean, Christine, this is Kevin. Just looking, kind of, holistically at the Mid-Con clearly there has been some pullback recently by producers, we've factored all that in, we're probably thinking of the Mid-Continent in a flat to slightly declining type of environment as we factor in that to our 2020 growth outlook. So we don't need significant or really any growth coming out of the STACK and SCOOP to meet the growth outlook we provided for 2020." ] }, { "name": "Christine Cho", "speech": [ "Okay, that's helpful. And then moving over to capex, you guys are very transparent and providing the capex for each of the individual projects, but how should we think about the range of annual spending, you guys do on ancillary capex that is included in the project capex that you've disclosed or maintenance capex. So like well connects, I don't know maybe adding a compression -- a compressor or pump something like that here?" ] }, { "name": "Kevin L. Burdick", "speech": [ "You know, just looking at, kind of, what we would consider, kind of, that routine, growth routine capex that we're going to see on a year-in, year-out basis, it's probably in the $400 million or $500 million range. You throw some processing plants like Walt alluded to earlier on top of that it raises up a little bit. But that's kind of the range, just for that normal blocking and tackling type growth that we'd see." ] }, { "name": "Christine Cho", "speech": [ "Okay." ] }, { "name": "Walter S. Hulse", "speech": [ "Kevin, the only thing -- Christine, hang on a second, the only thing I would add to that is well connects makes up a bulk of that --" ] }, { "name": "Kevin L. Burdick", "speech": [ "And routine growth right? Yes, OK." ] }, { "name": "Walter S. Hulse", "speech": [ "Absolutely, yes. Just connect and well." ] }, { "name": "Kevin L. Burdick", "speech": [ "And then probably plant connections and then other miscellaneous gathering infrastructure both on the gathering processing side as well as liquid side, right?" ] }, { "name": "Christine Cho", "speech": [ "Okay. Thank you." ] }, { "name": "Walter S. Hulse", "speech": [ "Thank you." ] }, { "name": "Operator", "speech": [ "Our next question comes from Tristan Richardson, SunTrust." ] }, { "name": "Tristan Richardson", "speech": [ "Good morning, guys. Appreciate the commentary on direction of 2020 capital deployment, but just thinking about the flexibility you have for some of your longer-dated projects that 2021 timeframe, that MB-5, Arbuckle expansion etc. Talking about just your ability to flex the timing of those either based on volume trajectory or producer plans, etc?" ] }, { "name": "Kevin L. Burdick", "speech": [ "As we -- I guess, as we think about the big one there would be MB-5. With the volumes, we have coming and have line of sight to for MB-4 you're going to fill it up extremely quickly, so any growth at all, MB-5 is going to continue on. So I mean, could you do something if something went south in a hurry, potentially so, but again we don't see that again just with the line of sight, we've got to volumes that are going to hit us in the next few months here." ] }, { "name": "Walter S. Hulse", "speech": [ "Yes. Obviously, from the well connect and that sort of routine, if we saw a significant downturn in producer activity. We have some flexibility on our -- but we don't see it as it relates to MB-5 and Arbuckle II will be done in the first quarter of 2020." ] }, { "name": "Tristan Richardson", "speech": [ "Thank you, guys. And then just one small follow-up, just can you talk about the performance of the joint ventures, and why you saw the cash distributions from joint ventures expected to be much higher this year than you previously thought. Is that one-time event or is there just general outperformance on Northern Border or OPPL's old direction there?" ] }, { "name": "Terry K. Spencer", "speech": [ "Yes, we've pretty robust discussion about this on our Q2 call. We had a one-time, kind of, catch-up $50 million distribution at our Northern Border and expect it to go back to its normal course in the quarters going forward that's in line with where it's been. So that was the only one, other than that the joint ventures are all performing very well." ] }, { "name": "Tristan Richardson", "speech": [ "All right. Thank you guys very much." ] }, { "name": "Terry K. Spencer", "speech": [ "Thank you." ] }, { "name": "Operator", "speech": [ "Our next question comes from Michael Blum, Wells Fargo." ] }, { "name": "Michael Blum", "speech": [ "Great. Good morning, everyone." ] }, { "name": "Terry K. Spencer", "speech": [ "Good morning, Blum." ] }, { "name": "Michael Blum", "speech": [ "Can you just give us an update on where the -- where things stand in terms of the potential expansion of Northern Border? And then, kind of, related to that, what's the timing for when you would need to see a new gas pipeline of capacity out of the Bakken before you would need to start effectively, I would call it force recovering ethane, because a BTU limits?" ] }, { "name": "Charles M. Kelley", "speech": [ "Michael, this is Chuck. As far as Northern Border expansion or any other residue takeaway out of the basin. We're actively working with parties on these residue projects frankly we're under non-disclosure agreements. But suffice it to say that there will be expansion opportunities out of there, and we realize that those takeaways needed to take care of our customers. So, we will definitely be part of that solution. As far as your second question on BTUs, BTU changes, could you please repeat your second question for me?" ] }, { "name": "Michael Blum", "speech": [ "Yes, just one question about timing like when do you have to have new gas pipeline capacity to avoid basically reaching the limit and having to extract ethane?" ] }, { "name": "Charles M. Kelley", "speech": [ "Okay, those are really kind of two questions; one, is on the BTU limits on Northern Border. Northern Border is currently in discussion with customers and point operators about a potential BTU change in their tariff. And that would be forthcoming, we would believe in 2020 and anything beyond that will defer to our TransCanada operator on the asset.", "However, as far as more ethane recovery being necessary, it really comes down to how quickly the Bakken continues to grow and we have line of sight in 2020, it's kind of real quickly with these gas plants coming on. So as we continue to displace Canadian volumes that BTU will rise and obviously, the way to mitigate that is to recover more ethane. So I think 2020, you will see more ethane recovery. I can't give you a number on that. Longer term, we will need some residue takeaway relief. And I think that's more in the '22 timeframe." ] }, { "name": "Michael Blum", "speech": [ "Great. Thank you very much." ] }, { "name": "Charles M. Kelley", "speech": [ "You're welcome." ] }, { "name": "Operator", "speech": [ "Our next question comes from Spiro Dounis, Credit Suisse." ] }, { "name": "Spiro Dounis", "speech": [ "Hey. Good morning, everyone. First question on the Mid-Con, just wonder if you could talk a little bit more about your ability to connect more third-party plants. It looks like you guys connected a few more this quarter and maybe seems to be a bit of a step-up. So, just curious, if there is an enhanced push to do more of that maybe as a way to kind of bridge you through next year, and alleviate some of that pressure, we're expecting to come from some of the rig count reduction?" ] }, { "name": "Sheridan C. Swords", "speech": [ "Yes, this is Sheridan. We don't really have that many more plants in the Mid-Continent to connect. We've kind of connect all the ones that are out there, we saw a big push in 2019. A lot of those plants, we've seen some increase in production from those plants and we expect to kind of stay at that level through next year, the level we're at today on a C3 plus basis. So, and I think right now there is plenty of capacity out there what's to process the gas that's there." ] }, { "name": "Spiro Dounis", "speech": [ "Got it. And second question, just with respect to the narrow bands for 2019 guidance and imagine you have considerable visibility at this point. So just curious what could maybe flex full-year EBITDA results from here toward the high or low end of that range?" ] }, { "name": "Sheridan C. Swords", "speech": [ "It's primarily going to be really just the specific timing of these projects and we look at the biggest levers we have, that would be number one. We've talked about spreads it can fluctuate up and down that could be a little bit of a driver, but we've got pretty good line of sight at this point to where we're going to end the year." ] }, { "name": "Spiro Dounis", "speech": [ "Understood. Thanks, it really helped. I'm sorry." ] }, { "name": "Sheridan C. Swords", "speech": [ "No just to -- Walt jumped in, weather is always, it could be a factor, if you get earlier or know weather that could be an impact as well." ] }, { "name": "Spiro Dounis", "speech": [ "Okay, that's helpful. Appreciate the color. Thanks guys." ] }, { "name": "Operator", "speech": [ "Our next question comes from Jean Ann Salisbury, Bernstein." ] }, { "name": "Jean Ann Salisbury", "speech": [ "Hi, good morning. As you referenced a lot of Bakken processing capacity starting up in theory enough to eliminate flaring. Can you share what your estimates for flaring levels once there is enough processing in Elk Creek or like down to the 12%, say target something much lower or possibly something a little higher?" ] }, { "name": "Terry K. Spencer", "speech": [ "Jean Ann, the way I would answer that is, if you go back to few years or actually just with probably 12 to 18 months ago. The basin was down into for several months down into single-digit. So easily, I think with this processing capacity, once everybody, once we get Elk Creek up and once everybody gets, kind of, everything debottlenecked, I think you're going to see flaring get back down below the state targets or above the state targets for capture. I think that's going to -- that will happen." ] }, { "name": "Jean Ann Salisbury", "speech": [ "Okay, that's helpful. And then can you just -- around your connects flexibility, you have to move volumes between the existing Bakken NGL pipeline and Elk Creek once it starts up?" ] }, { "name": "Sheridan C. Swords", "speech": [ "This is Sheridan. We'll operate those systems, kind of, in tandem to make sure that we optimize, variable costs, optimized going into OPPL and going on Elk Creek Pipeline. So we have a lot of flexibility to move product back and forth between the two pipelines to maximize capacity." ] }, { "name": "Jean Ann Salisbury", "speech": [ "Okay, thanks. That's all from me." ] }, { "name": "Operator", "speech": [ "Your next question comes from Michael Lapides, Goldman Sachs." ] }, { "name": "Michael Lapides", "speech": [ "Hey guys, thanks for taking my question. I won't even get into the upcoming LSU game here. But real quickly figured and one you all would like that. Real quick good items; one, I assume there is -- should we think about, and I know 2021 is a long way off in the world can change seven times between now and then. But I assume there's still a pretty decent step up in '21 off of 2020. You've talked about 2020 EBITDA being up 20% plus, but is there still another pretty decent size step up coming in 2021, that's first question.", "Second question, you guys have talked about a desire to -- want to have export capacity. Just given all that's going on in the world, ethane prices down a lot more, China trade war still going on. How are you thinking about that opportunity and where that fits in the landscape of things you're targeting that do over the next year or two?" ] }, { "name": "Terry K. Spencer", "speech": [ "So Michael, first of all, I'll take LSU and 14 points. And then the next question is yes, as we think about 2021 double-digit growth is certainly in the cards and how this business is continuing to be set up and we still got obviously organic growth projects that will be coming on through '20 and critical projects in 2021. So we're still set up nicely there. I think as far as the export dock project goes still a project we're very interested in doing. We continue to work it pretty hard. If the economics make sense, we'll certainly do a project, but if they don't make sense, I think we're in good shape with our business in terms of clearing barrels, we have arrangements in place that gives us some certainty that -- of course over the next handful of years we can clear barrels. So we're not really concerned there, I think, the export dock is a great complement to our fee-based activities. So we're going to continue to work it and when we get to a point where we can announce it certainly we'll let you all know." ] }, { "name": "Michael Lapides", "speech": [ "Got it. Thanks guys. Much appreciated." ] }, { "name": "Terry K. Spencer", "speech": [ "Thanks, Mike." ] }, { "name": "Operator", "speech": [ "The next question comes from Elvira Scotto, RBC Capital Markets." ] }, { "name": "Elvira Scotto", "speech": [ "Hey, good morning everyone, thanks for the commentary around the 2020 EBITDA growth, and it sounds like the confidence level and hitting that greater than 20% growth is pretty high, especially given the comments that you made about your view on the Mid-Con, but if I can ask the question another way, what would have to happen for you to walk back that outlook?" ] }, { "name": "Kevin L. Burdick", "speech": [ "Elvira, this is Kevin. And I'll start again we -- the thing we have stressed for the last several months. We continue to focus on this is with the flared gas in the Bakken, we've got incredible line of sight to these volumes, a similar situation occurred back in the '16, '15 or '16 timeframe where we saw the flared gas, we had projects and we immediately captured it and turned it into EBITDA. So with the flaring that's occurring in the basin, with the dock count that's out there, with the productivity and the returns, the producers are seeing we've just got a lot of confidence if that's going to be the substantial driver to that growth in 2020. And that's not even getting into the growth we're seeing out of the Permian, the Powder and other places. So we just have a confidence because we have that line of sight, we can reach out and touch these volumes." ] }, { "name": "Terry K. Spencer", "speech": [ "Kevin, probably the only thing else I'd add to that is we don't have a whole lot in here baked in for ethane recovery. So with the ore spreads, so we're at seasonally low spreads with -- you're typically low this time of the year. Ethane economics are marginal for recovery, if those things turn, there is actually more upside probably did this number than downside." ] }, { "name": "Elvira Scotto", "speech": [ "Great. And just very quickly though, how does commodity or crude oil price factor into this view. I mean, are you looking at anything as long as we're about $50 or do you think even you get to somewhere below $50 you're still fine with this outlook?" ] }, { "name": "Kevin L. Burdick", "speech": [ "Well, we go back to when rigs really came back to the Bakken, they really start coming back in earnest it at around $45 per barrel from the conversations we have with our customers most are planning for a $50 environment more from a cash flow perspective, but the improvements they've seen in the productivity of the wells. Again, the returns on the well aren't be challenged, it's solely just living within their cash flow, which has been the consistent theme we've gotten from our customers. So I think easily, if you stay north of $50 probably even if you go down to the $45 range, you're still -- this things good to go." ] }, { "name": "Elvira Scotto", "speech": [ "Great. That's perfect. Thanks on that. And then just one quick follow-up on the capital allocation discussion. Where does M&A fit in all of this, I mean, are you guys are you open to looking at various assets or are you kind of set on just your organic growth and M&A just has to be super compelling?" ] }, { "name": "Terry K. Spencer", "speech": [ "You just answered it, we're focused on the organic growth and M&A has to uber compelling and most likely, it would be smaller bolt-on types of acquisitions." ] }, { "name": "Elvira Scotto", "speech": [ "Great, thank you very much." ] }, { "name": "Terry K. Spencer", "speech": [ "You bet." ] }, { "name": "Operator", "speech": [ "Our next question comes from Derek Walker, Bank of America Securities." ] }, { "name": "Derek Walker", "speech": [ "Hey, good morning guys. [Indecipherable] on the call today. Just had a quick clarification, I think you said in your formal remarks, but I just want to make sure I heard it right. I think believe in the Rockies the NGL volumes were expected to be 240 in 1Q '20. Is that assuming 140 for Bakken NGL and then 100 on Elk Creek that seems no rail, is that correct for the 25, that rail that you're seeing today that should you just transfer over to the pipe that I'm hearing it?" ] }, { "name": "Sheridan C. Swords", "speech": [ "This is Sheridan. Yes, you are correct, and we're starting to transition to -- away from specifically talking about what's on Elk Creek to what's coming out of both the Rockies region, which is Williston and Powder River Basin. Because of the flexibility we have between moving between pipes. So that 240 is basically over 100,000 barrels a day increase from where we were when we just had the Bakken pipeline coming in. So that's the new plants that we talked about coming online, rail coming off and then ramp up on to those volumes and actually we said we think will be above 240 coming out of the first quarter." ] }, { "name": "Derek Walker", "speech": [ "Got it. That's helpful. And then, maybe I'll just get one in on ESG, I mean, you guys announced in September that you got added to the Dow Jones Sustainability Index. Can you just talk a little bit about some of your ESG Initiatives and have you any conversation specifically with investors around that, and they focused on any particular metrics?" ] }, { "name": "Terry K. Spencer", "speech": [ "Well, there are always focused on getting more information and certainly probably what we've done, where we've made incredible progress is certainly in the disclosure of our emissions and various environmental impact data, that has -- we had a lot of discussion, obviously from a governance perspective, I think, we've been lauded for the -- for our efficiency from a governance standpoint. When you really think about our broad thoughts around reducing our impact to the environment, that's certainly an area where I think it's resonated with investors.", "I think the fact that we've done this now for 11 years in a row and at this -- and this work product continues to improve each and every year. I think certainly that has resonated with investors as well. So disclosure, disclosure, disclosure and as we continue to move forward, we will continue to disclose more information and certainly around emissions targets and that type of outlook will certainly something that's top of mind and that will hopefully be in a position where we can do and provide those types of disclosures in the not too distant future." ] }, { "name": "Derek Walker", "speech": [ "Excellent. Thanks guys. That's it from me." ] }, { "name": "Terry K. Spencer", "speech": [ "You bet. Thank you." ] }, { "name": "Operator", "speech": [ "Our next question comes from Craig Shere, Tuohy Brothers." ] }, { "name": "Craig Shere", "speech": [ "Good morning." ] }, { "name": "Terry K. Spencer", "speech": [ "Hi, Craig." ] }, { "name": "Craig Shere", "speech": [ "Terry when you highlighted ethane was only further upside as a catalyst over and above the 20% year-over-year 2020 EBITDA growth guidance. But then you all comment of that 2021 is prime for another year of double-digit growth. When we're looking out two years like that. Are we kind of taking it some of the ethane eventually? Or does that kind of remain an opportunity?" ] }, { "name": "Kevin L. Burdick", "speech": [ "Yes. No we're really, over the course of the next handful of years not expecting or at least we've not got in our base forecast internally much ethane baked into it. At least for the next two or three years." ] }, { "name": "Craig Shere", "speech": [ "And what kind of market dynamics do you expect would be necessary to kind of, it start to realize -- I mean, would be ethane exports or what do we really need to start to get more value there?" ] }, { "name": "Kevin L. Burdick", "speech": [ "Well, obviously we've got more petrochemical facilities coming on domestically. And then you've got additional petrochemical facilities coming on internationally. So I think the continued development of international exports, whether that's at the Gulf Coast or in the Northeast, I think continues to be key drivers. And obviously ethane economics and dependent upon net gas to -- where net gases and if net gas and we continue to have some sort of a conservative view on that gas going forward. I think if you see net gas remain relatively weak. The likelihood if you're recovering significantly more ethane certainly improves. But as we think ethane economics are so volatile that we've really -- we felt it appropriate not to bake a whole lot in -- into our internal forecasts. Sheridan you've got anything add to that?" ] }, { "name": "Sheridan C. Swords", "speech": [ "Well, that continue to say what's going to drive ethane. Also, as we talked earlier about the relative gas price in the Mid-Continent versus the Permian to see which one moves ahead of the other one to pull the ethane out for the demand that is there." ] }, { "name": "Craig Shere", "speech": [ "Sure. Are you still considering ethane when you're looking at these export project opportunities?" ] }, { "name": "Terry K. Spencer", "speech": [ "Absolutely." ] }, { "name": "Craig Shere", "speech": [ "And I presume that if you did that, it would be something kind of semi long-term contracted and take out some of that volatile in and out of economics. So you'd have somewhat certainty about pulling through the system?" ] }, { "name": "Terry K. Spencer", "speech": [ "That's correct. I mean, the way we're thinking about it is the contracts that you would enter into with respect to ethane on the sales standpoint, which certainly underwrite the dock a fee-based type arrangement, if you will, or perhaps the sale with a fee-based component built into it." ] }, { "name": "Craig Shere", "speech": [ "Great, thank you." ] }, { "name": "Terry K. Spencer", "speech": [ "The macro ethane economics are going to be what they're going to be, broadly speaking. But as we think about the dock, if the dock and as it relates to ethane fee-based, it's a fee-based business." ] }, { "name": "Craig Shere", "speech": [ "Great. Thanks for the color." ] }, { "name": "Terry K. Spencer", "speech": [ "Great." ] }, { "name": "Sheridan C. Swords", "speech": [ "Thank you." ] }, { "name": "Operator", "speech": [ "Our next question comes from Alex Kania, Wolfe Research." ] }, { "name": "Alex Kania", "speech": [ "Hey, good morning. Just thinking a little bit more about the prospects for ethane recovery in the Bakken just next year either for price reasons or I guess physical constraint reasons, just with respect to Northern Border. How do we really think about those ethane volumes getting handle. Does that -- do you think of that is like incremental to what is it being contracted on Elk Creek and further south already? Or does it -- could it cover like existing contracted volume levels that you've kind of our established right now, just again, kind of, it sounds like you've suggested it was incremental, but I just wanted to confirm?" ] }, { "name": "Sheridan C. Swords", "speech": [ "This is Sheridan, when we look at and is quoted volumes coming out of the Rockies. We do not consider ethane in any of those volumes. It's all C3 plus, so any ethane that we would get, due to be enforced out because of constraints or the very unlikely that it becomes economical will be upside to our volume numbers that we've given." ] }, { "name": "Alex Kania", "speech": [ "Great, thank you." ] }, { "name": "Operator", "speech": [ "Okay. Our final question comes from Sunil Sibal, Seaport Global Securities." ] }, { "name": "Sunil Sibal", "speech": [ "Hi, good morning, guys and thanks for all the color on the call. I just wanted to understand a little bit about the balance sheet management. So it seems like you will hit the forex, kind of, leverage metrics in early 2021. I was kind of curious how should we think about that on a more kind of longer-term basis. Do you want to be closer to forex or should we be thinking more like between 3 or 3.5 excess longer-term target?" ] }, { "name": "Terry K. Spencer", "speech": [ "Well, we expect to continue to the left to delever past to 4 times and aspirationally we like to be around that 3.5 that gives us a lot of borrowing flexibility going forward for these smaller type of capex that would come out in the future. So we use 3.5 is an aspirational target and just think about going forward." ] }, { "name": "Sunil Sibal", "speech": [ "Okay, got it. And then just one clarity on the capex side, so obviously you guys have given a pretty good kind of breakdown of capex for various projects. When I bake all that into my numbers etc, it seems like you will be in a pretty good spot to get 35% to 40% reduction in capex in 2020 versus where you've end up in 2019. I was just curious, is that number seems reasonable or if I may be off somewhere?" ] }, { "name": "Terry K. Spencer", "speech": [ "No we're not going to guide to our 2020 capex. But I think you can just take the projects we put in service and kind of subtract out what we still have to do and build up to a pretty good number. So the base will come up with your expectation is readily available, we'll leave that to you." ] }, { "name": "Sunil Sibal", "speech": [ "Okay, got it. Thanks guys." ] }, { "name": "Terry K. Spencer", "speech": [ "Thank you." ] }, { "name": "Operator", "speech": [ "Okay. At this time, I would like to turn call back over to Andrew Ziola." ] }, { "name": "Andrew J. Ziola", "speech": [ "All right. Thank you, Charles -- excuse me, our quiet period for the fourth quarter starts when we close our books in early January and extends until we release earnings in late February. We'll provide details for that conference call at a later date. Thank you for joining us this morning and the IR team will be available throughout the day. Have a good week." ] }, { "name": "Operator", "speech": [ "[Operator Closing Remarks]" ] } ]
OKE
2022-11-02
[ { "description": "Vice President, Investor Relations and Corporate Affairs", "name": "Andrew Ziola", "position": "Executive" }, { "description": "President and Chief Executive Officer", "name": "Pierce Norton", "position": "Executive" }, { "description": "Chief Financial Officer and Executive Vice President, Strategy and Corporate Affairs", "name": "Walt Hulse", "position": "Executive" }, { "description": "Executive Vice President and Chief Operating Officer", "name": "Kevin Burdick", "position": "Executive" }, { "description": "UBS -- Analyst", "name": "Brian Reynolds", "position": "Analyst" }, { "description": "President, Gathering and Fractionation", "name": "Sheridan Swords", "position": "Executive" }, { "description": "Wells Fargo Securities -- Analyst", "name": "Michael Blum", "position": "Analyst" }, { "description": "AllianceBernstein -- Analyst", "name": "Jean Salisbury", "position": "Analyst" }, { "description": "JPMorgan Chase and Company -- Analyst", "name": "Stephen McGee", "position": "Analyst" }, { "description": "Barclays -- Analyst", "name": "Theresa Chen", "position": "Analyst" }, { "description": "Pickering Energy Partners -- Analyst", "name": "Michael Cusimano", "position": "Analyst" } ]
[ { "name": "Operator", "speech": [ "Good day, and welcome to the ONEOK's third quarter 2022 earnings conference call and webcast. [Operator instructions] Please note, this event is being recorded. I would now like to turn the conference over to Andrew Ziola, vice president of investor relations. Please go ahead." ] }, { "name": "Andrew Ziola", "speech": [ "Thank you, Betsy, and welcome to ONEOK's third quarter 2022 earnings call. We issued our earnings release and presentation after the markets closed yesterday, and those materials are on our website. After our prepared remarks, management will be available to take your questions. Statements made during this call that might include ONEOK's expectations or predictions should be considered forward-looking statements and are covered by the safe harbor provision of the Securities Acts of 1933 and 1934.", "Actual results could differ materially from those projected in forward-looking statements. For a discussion of factors that could cause actual results to differ, please refer to our SEC filings. [Operator instructions] With that, I'll turn the call over to Pierce Norton, president and chief executive officer. Pierce?" ] }, { "name": "Pierce Norton", "speech": [ "Thanks, Andrew. Good morning, everyone, and thank you for joining us on our call this morning. We appreciate your interest and investment in our company. On the call today is Walt Hulse, the chief financial officer and executive vice president, investor relations, and corporate development; and Kevin Burdick, executive vice president and chief commercial officer.", "Also available to answer your questions are Sheridan Swords, our senior vice president of natural gas liquids and natural gas gathering and processing; and Chuck Kelley, our senior vice president of natural gas pipelines. Yesterday, we announced strong third quarter 2022 earnings, affirmed our 2022 financial guidance midpoints, and provided our 2023 growth outlook to exceed $4 billion of adjusted EBITDA. Our third quarter results demonstrate the resiliency of our strategic and integrated assets in some of the most highly productive U.S. shale basins, and our employees who are dedicated -- have dedicated themselves to the safety and reliability, and sustainability of our operations.", "Looking forward, we expect continued strength in producer activity and increased volumes and higher earnings from our fee-based services in all of our business segments in a favorable commodity price and increasing demand backdrop. So with that, I will turn the call over to Walt for a discussion of our financial performance and the expectations and our insurance update. So Walt?" ] }, { "name": "Walt Hulse", "speech": [ "Thank you, Pierce. ONEOK's third quarter 2022 net income totaled $432 million or $0.96 per share, a 10% increase compared with the third quarter of 2021 and a 4% increase when compared with the second quarter. Third quarter adjusted EBITDA was $902 million, a 4% year-over-year increase and an increase from the second quarter. Higher results benefited from increased Rocky Mountain region NGL and natural gas volumes, higher realized commodity prices, net of hedging, and higher average fee rates.", "Additionally, we had lower interest expense due to our lower debt balances and increased capitalized interest. Third quarter 2022 results reflected our $5 million property insurance deductible related to the Medford incident and approximately $30 million of losses related to the 45-day business interruption waiting period under the terms of our insurance policy. We received notice in September that our Medford property insurers agreed to pay $100 million unallocated first installment of insurance proceeds. And as of today, we received $45 million of that amount and expect to receive the remaining amount before year-end.", "We've applied this cash receipts to our outstanding insurance receivables. After the waiting period ended, we incurred costs subsequent to the 45-day business interruption waiting period of $21.7 million, primarily related to third quarter -- I'm sorry, to third-party fractionation agreements and recorded a partial impairment charge of $6.7 million, representing the value of associated with certain Medford facility property based on the limited assessments completed to date. There is no income statement impacts of these incurred business interruption costs or impairment charges as they are fully offset by insurance receivables. We continue sharing information with our insurance carriers to refine ongoing business interruption insurance coverage and to determine the ultimate path to replacement of this temporary loss of fractionation capacity.", "We will provide additional updates as we move forward in this process when material information is available. And lastly, for the third quarter, we ended with higher NGL inventory levels that have since been sold forward, and we will realize $17 million earnings benefit from those sales in the fourth quarter and first quarter of 2023. As of September 30, our net debt-to-EBITDA on an annualized run rate basis was 3.8 times, and we continue to view 3.5 times or lower as our long-term aspirational goal. We currently have no long-term debt maturities until September of 2023 and we have no material exposure to floating interest rates through our current outstanding long-term debt.", "Yesterday, we affirmed our 2022 guidance midpoints of $1.69 billion for net income and $3.62 billion for adjusted EBITDA. We now expect total capital expenditures of $1.2 billion, driven by our acceleration of spending on the MB-5 fractionator and smaller scale expansion projects that were not previously planned for '22 across our three business segments that will contribute to growth in 2023. Key drivers for our 2023 outlook of a more than 10% increase compared with our 2022 midpoints to exceed $4 billion in adjusted EBITDA include continued strength in fee-based earnings and rates, stable to growing producer activity providing higher natural gas and natural gas liquids volumes in our system and expected higher realized commodity prices due to higher hedges. These tailwinds into 2023 from our base business, additional insurance recoveries related to Medford, and our strong financial position provide us confidence in our double-digit earnings growth outlook for next year.", "I'll now turn the call over to Kevin for a commercial update." ] }, { "name": "Kevin Burdick", "speech": [ "Thank you, Walt. Let's start with our natural gas liquids segment. Rocky Mountain region NGL volumes increased 17% year over year and 12% compared with the second quarter 2022, driven by volume recovery following the April severe weather and overall volume growth, including higher incentivized ethane on our system. Volumes have remained strong in the region with September averaging more than 380,000 barrels per day.", "Third quarter Mid-Continent NGL volumes decreased year over year and compared with the second quarter, due primarily to lower ethane recovery on our system. In the Permian Basin, NGL volumes were unchanged year over year and compared with the prior quarter. With the recent third-party plant connection in October, we expect volumes from this region to increase through the remainder of this year and into 2023. We also continue to see interest from customers seeking additional NGL takeaway out of the Permian, so we will continue to evaluate future low-cost expansions on our system.", "From a 2022 NGL volume guidance perspective, we expect to be near the midpoint of our guidance range, due mostly to the ethane rejection we have been seeing in the Mid-Continent and the impact of the April storms. Regarding ethane. Beginning in September, we started to see lower demand for ethane from the pet chems leading to more ethane rejection across most regions. The decrease in utilization has been driven by lower NGL demand globally, especially in China and Europe, along with some pet chem outages.", "We expect ethane demand to remain muted somewhat in the fourth quarter and into early 2023. And this has been factored into our 2022 and 2023 expectations. As we sit today, we are seeing ethane and ethylene inventories starting to get worked off, which we believe will lead to increasing demand in 2023. As for ONEOK, it is typical that we don't incentivize as much ethane out of the Bakken during the winter season due to higher natural gas prices and natural gas demand, but we will continue to be opportunistic.", "As it relates to our 2023 outlook, we expect the Permian to be in full ethane recovery, the Mid-Continent to be in partial recovery, and the Rockies continuing to provide opportunities to incentivize recovery. Construction continues on our 125,000 barrel per day MB-5 fractionator in Mont Belvieu, which we still expect to be completed early in the second quarter of 2023 and is reflected in our updated 2022 capital guidance. Moving on to the natural gas gathering and processing segment. Producer activity remained strong in the Rocky Mountain region with third quarter processed volumes averaging 1.4 billion cubic feet per day, a record quarter for us.", "Our average fee rate also increased, reflecting the impact of contract escalators, higher volumes on higher fee component contracts and a larger percentage of our total volumes from the Rockies. On a go-forward basis, we expect this average rate to range between $1.10 and $1.20. Year to date, we've connected 244 wells in the region. We now expect to complete approximately 375 well connections near or at the low end of our guidance due to the impact of the April storms, timing of some wells coming on, and availability of completion crews and materials.", "Activity still remains high, just some timing elements that we now expect will push a few large pad completions into next year. These same factors also led us adjusting our volume expectations for 2022 to be near or slightly below the guidance range. There are currently more than 40 rigs and 18 completion crews operating in the basin, with more than 20 rigs and approximately half the completion crews on our dedicated acreage. As we've said before, approximately 15 rigs on our acreage to maintain natural gas production at current levels.", "But with more than 20 currently on our acreage, we expect to see higher well connections and volumes in 2023 compared with 2022. The 200 million cubic feet per day Demicks Lake III processing plant under construction remains on schedule to be completed in the first quarter and will bring needed capacity to the region. The basinwide DUC inventory remained stable at around 500, considering the increasing rig count and activity with half of those on our dedicated acreage. In the Mid-Continent region, we continue to see increased activity with four rigs now operating on our acreage and more than 50 rigs basinwide.", "We expect steady to increasing activity and volumes through the remainder of the year and into next year with the majority of rigs basinwide driving additional NGLs to our system. In the natural gas pipeline segment, with strong year-to-date results benefiting from the continued increasing demand for natural gas storage and transportation services, we now expect this segment to exceed the high end of its guidance range of $400 million to $430 million. We are highly subscribed for our storage service in Oklahoma and Texas at higher rates and for longer terms, including our recent expansion of our Texas storage facilities, which is now fully subscribed through 2032. Additionally, we are expanding our storage capabilities in Oklahoma, enabling an additional 4 billion cubic feet of storage capacity to be contracted.", "This project is expected to be complete in April 2023 and is nearly 90% subscribed through 2029, and we are also evaluating an additional expansion of our Texas storage assets. And lastly, before I turn the call back to Pierce, we began a compression electrification project on our interstate Viking gas transmission pipeline to improve operational reliability and provide future greenhouse gas emissions reductions on the system. The project is expected to cost $95 million and be completed in the third quarter of 2023 and is included in our outlook. Pierce, that concludes my remarks." ] }, { "name": "Pierce Norton", "speech": [ "Thank you, Walt and Kevin. As we enter the last couple of months of 2022 and look forward to the next year, I'm proud of our employees and want to thank them for their hard work and contributions who continue to focus on operating safely, sustainably and environmentally responsible and are key to our success as a midstream operator. How we operate is important, but also how we engage with our employees, communities and other stakeholders is equally as important. Also important for ONEOK is to remain focused on meeting the growing energy demand for today even as it looks forward to helping drive the energy transformation needs for the future.", "We also recently announced that ONEOK joined with two other large publicly traded companies based in Oklahoma and a venture capital firm to fund an effort to transform Oklahoma into a hub of energy technology start-ups and redefine a sector that has shaped the region's economy for more than a century. We believe this partnership aligns to our long-term business strategy, which includes potential low-carbon investments that contribute to low -- long-term growth and business diversification. ONEOK has been building the right teams and resources to better participate in the innovative practices and technologies that it sees now and those that may play a role in the future. Before I turn the call over for Q&A, I wanted to highlight an important ESG item we mentioned in our earnings release.", "ONEOK's MSCI ESG rating was recently reviewed and updated by MSCI to AAA from AA, and we maintained our industry leader status. As I previously said, our ESG efforts are a source of pride for ONEOK, and we are committed to continuing to make progress in these important areas. With that, operator, we're now ready for questions." ] } ]
[ { "name": "Operator", "speech": [ "[Operator instructions] The first question comes from Brian Reynolds with UBS. Please go ahead." ] }, { "name": "Brian Reynolds", "speech": [ "Hi. Good morning, everyone. Maybe to revisit some of the assumptions in your prepared remarks around '23 earnings growth, it seems like we should see some tailwinds on volumes and hedges rolling higher. I was curious if you could just dive a little bit further into the ethane recovery assumptions for '23.", "Historically, you guys have been pretty conservative on this assumption, but curious as how we should think about how Btu concerns plateauing ethane demand for the next few years and Permian nat gas tightness impacted some of your assumptions as it relates to Rockies recovery into 2023 and that 10% earnings growth? Thanks." ] }, { "name": "Kevin Burdick", "speech": [ "Hi, Brian. This is Kevin. I'll start and then Sheridan can add in. Think about the overall 2023 growth outlook, we expect our volumes are going to be up, both NGL and Gathering and Processing in all of our basins with the tailwinds, with the existing rigs we're seeing today as those carry over into '23.", "So volume growth is going to be the primary driver. You've also got -- you're going to have a full year of the contract fee escalations. So we'll see a full year of that. You've got a step up in our hedging.", "If you look at the hedge prices we have in '23 compared to '22, that's going to be a significant step up there. The ethane recovery assumptions are pretty similar to what we had going into '22. As we mentioned, full recovery we expect out of Permian, partial in the Mid-Continent, and we'll continue to incentivize ethane out of the Bakken, where appropriate." ] }, { "name": "Sheridan Swords", "speech": [ "The one thing I would add on that is when we look at '23 as we looked in '22, we have limited incentivized ethane coming out of the Bakken factored in. We really see that as an opportunistic -- opportunity going forward." ] }, { "name": "Brian Reynolds", "speech": [ "Great. I appreciate that color. Maybe just to pivot toward capital allocation for a minute. ONEOK is trending toward its leverage target and payout ratio targets.", "Obviously, there are some concerns that were partially alleviated with earnings around the insurance proceeds. But I was curious of how we should think about the return of capital framework looking into '23 given that you've had the same dividend since 2019, but that said, never cut at the same time. So any color there, I appreciate it." ] }, { "name": "Pierce Norton", "speech": [ "So, Brian. This is Pierce. With our positive earnings growth indications for 2023, our payout ratio and our debt-to-EBITDA metrics are indicating that we are going to have more flexibility to execute on one or more of the capital allocation levers that are going to be available to us to create that value for our shareholders as we progress through 2023. So that's the way I'd answer your question there." ] }, { "name": "Brian Reynolds", "speech": [ "Fair enough. I'll leave it there. Have a great rest of your morning." ] }, { "name": "Pierce Norton", "speech": [ "Thank you, Brian." ] }, { "name": "Operator", "speech": [ "The next question comes from Michael Blum with Wells Fargo. Please go ahead." ] }, { "name": "Michael Blum", "speech": [ "Thanks. Good morning, everyone. I wanted to ask the latest on Northern Border. Where does it stand in terms of gas coming from Canada versus the Bakken? Is there any more room there? And then related to that, any updates on a potential expansion project on North Border?" ] }, { "name": "Kevin Burdick", "speech": [ "Yeah, Michael. It's Kevin. For your first question, we estimate there's still probably 300 million to 400 million a day of gas coming from Canada. That will continue to get displaced from Bakken as Bakken grows.", "So you've got some opportunities there. And also, we're in active discussions with multiple parties on various residue takeaway and demand projects, actually some demand projects in Basin. We have secured about 100 million a day of takeaway solution on WBI that's going out south that doesn't go to Northern Border. So that's going to help.", "So we don't think there's one single solution that provides -- that's going to provide that, but we do believe we'll be able to find and there will be the necessary capacity out of Basin as we move forward." ] }, { "name": "Michael Blum", "speech": [ "OK. I guess second question, just wanted to ask -- I know you haven't really made a decision yet about whether you're going to rebuild Medford or maybe build something else at Mont Belvieu or otherwise. So just curious if you could talk to the dynamics, if you do choose to not rebuild Medford, does that change anything in terms of the market dynamics between Conway and Mont Belvieu for you as it relates to Sterling?" ] }, { "name": "Sheridan Swords", "speech": [ "No. I mean, there will be a little bit of an impact on that if we build down in Mont Belvieu if you put Medford down in there. But today, or when Medford was up, most of our liquids was transported down Sterling anyway to the Mont Belvieu market. So we think overall, the market dynamics are not going to be impacted that much, whether we build it at Medford or at Mont Belvieu." ] }, { "name": "Michael Blum", "speech": [ "Great. Thanks so much." ] }, { "name": "Operator", "speech": [ "The next question comes from Jean Ann Salisbury with Bernstein. Please go ahead." ] }, { "name": "Jean Salisbury", "speech": [ "Hi. Good morning. In the third quarter, there was more ethane recovered from the Rockies and less from the Mid-Con than I would have expected. Is it fair to say that most of the time you would recover marginal ethane from the Mid-Con before the Rockies and that maybe it was specifically due to AECO price blowouts in the quarter that it was a little flipped from usual?" ] }, { "name": "Sheridan Swords", "speech": [ "Yes. We look at the gas basis as really what kind of drives us on which basin we're going to incentivize. So yes, AECO pricing versus what's going on in the Mid-Continent will drive what's going -- where we incentivize ethane coming out of there. We did see a lot of benefit in the third quarter coming out of the Rockies due to the basis and what we could secure gas prices for and so on for ethane.", "So that we see that as a great opportunistic two basins that we can incentivize at times and kind of play that gas base between the two. So we think that's a big advantage to our system." ] }, { "name": "Jean Salisbury", "speech": [ "OK. That's helpful. And assuming that Bakken does go back to higher rejection in the next couple of quarters, I think the Northern Border Btu spec at that receipt point is probably going to exceed the 1,100, which I think Northern Border has said, is kind of the max that they really want. Does anything happen then? Or is that just all kind of a whole FERC process to potential cap in?" ] }, { "name": "Kevin Burdick", "speech": [ "Jean, this is Kevin. Yes, as you reject more ethane, that will raise the Btu content on Northern Border. If you were back to about where we were pre-COVID and that number was north of 1,100, right now, there is not a spec on the pipe. So the Northern Border, it's our understand they'll watch it.", "They've got some levers to pull if it gets too high and downstream markets start to have concerns. They continue to work with shippers and all the relevant stakeholders to potentially go back to FERC for a spec, but we don't have an exact timing on that. So we'll watch it. If it gets to the point where it gets -- the Btu level gets too high and downstream markets start raising issues, then we always have the option to recover ethane to lower it back.", "And if we do that, if it's required at that point, then that would require -- I mean, that would be at full rates, not at an incentivized rate." ] }, { "name": "Jean Salisbury", "speech": [ "Great. That's all for me. Thank you." ] }, { "name": "Operator", "speech": [ "The next question comes from Jeremy Tonet with J.P. Morgan. Please go ahead." ] }, { "name": "Stephen McGee", "speech": [ "Hey. Good morning. This is Stephen McGee on for Jeremy. Just starting along the insurance line, as far as business interruption insurance goes.", "Just trying to get an idea of what's covered under that. Does that include optimization, marketing in there as well? And then for 2023, does that include the business insurance as well?" ] }, { "name": "Walt Hulse", "speech": [ "Well, as we said on the last call, the coverage that we have is that we are entitled to receive coverage so that we get return to what we would have made, but for this event. So it's systemwide. So if that does impact other parts of the business like optimization and marketing, that gets factored into our BI calculation. The money that we received in September, [Inaudible] that we booked in September, I wouldn't necessarily look at as a run rate because there's still are some moving parts that we're working with the insurance companies to refine how we look at BI going forward.", "Those costs were predominantly the third-party frac costs. And as we work with them and refine how much optimization in the market, we do expect to receive some benefit from that going forward. In 2023, we expect BI coverage to continue. And at that point, be on a pretty regular month-to-month catch-up so that we're hoping that you really don't see any real variation from the BI insurance going forward." ] }, { "name": "Stephen McGee", "speech": [ "Understood. And then, I guess, flipping over to capex, you pulled some forward, well connects kind of toward the lower end of the guide, but still up a little bit this year. So I'm guessing most of the uptick this year is MB-5. Should we expect, I guess, a little bit less capex into 2023 now because of that? And just if you could walk us through, I guess, that raise this year and then what that looks like in the next year as well." ] }, { "name": "Kevin Burdick", "speech": [ "Yes, Stephen. It's Kevin. Yes, MB-5 was a significant mover in moving some of that capital forward into '22. We also had a compressor station up north in the Bakken that we moved forward with that will add to our growth in '23.", "We referenced the Viking compression project in the -- in our opening remarks. And then we just had a handful of smaller routine growth-type projects that typically have extremely strong multiple -- strong earnings power from them, and that will contribute in '23 as well. So just a combination of those factors are what led into the increase in '22. You're thinking about '23 correctly.", "If -- once we complete MB-5 and Demicks Lake III, that would lead you probably to a little step down in capital barring other projects that we continue to work on that could prove. So that's the unknown at this point is we're constantly working on new projects that -- and as they reach FID, we'll announce them. But absent those, then yes, you would expect capex to maybe come down a little bit in '23." ] }, { "name": "Stephen McGee", "speech": [ "All right. Great. Thank you. I'll leave it there." ] }, { "name": "Operator", "speech": [ "The next question comes from Theresa Chen with Barclays. Please go ahead." ] }, { "name": "Theresa Chen", "speech": [ "Hi. Thank you for taking my questions. First, I would love to touch on the 2023 guidance and delve into some of the assumptions here. Mainly, if you could provide some color on your price deck assumption and then in terms of Bakken activity, in particular, any color you can share on assumptions for rig counts, well completions, exit-to-exit growth in oil or gas? And then granted that the ethane recovery dynamic remains in development and can be volatile, but any sort of color you can give on the recovery assumption in 2023 versus the level that you just reported for the third quarter 2022?" ] }, { "name": "Kevin Burdick", "speech": [ "Theresa, this is Kevin. And we're not -- again, we're not going to get into the detailed guidance specifics that we'll release probably sometime next -- early next year. But I would tell you, as we think about price decks and activity levels, there's probably more rig. If you just look at today, there's more activity in the basins that we're looking at, that we're talking about than we have in that outlook.", "So the activity levels we're seeing today are plenty strong to help us achieve that exceedings of $4 billion." ] }, { "name": "Theresa Chen", "speech": [ "Got it. And in the Gathering and Processing segment, that $1.16 average fee rate, quite a step-up from the previous run rate and I understand the color you shared on the fee escalators and the composition of it. Just trying to think about the trajectory of growth here. Was there anything in particular driving this? And as we think about the escalators in 2023 and beyond, should we assume similar magnitudes of step-ups? Or generally speaking, how should we think about this line?" ] }, { "name": "Sheridan Swords", "speech": [ "Theresa, this is Sheridan. When you think about that margin which is driving that increased step up, a lot of it was on escalation is where it came from. Some on the contract mix being on. We got volume on higher contracts or more margin contracts and on others as we go forward.", "The big thing that's going to drive as we get into '23, executing that trajectory is what the inflationary escalators are going to be, and we'll have to see how inflation comes out and how the -- we go against CPI and most of the time on that, how CPI reacts in '23 versus '22 is going to be a big driver on where we land on that and going forward. So it's really going to be based on inflation, would be the biggest piece." ] }, { "name": "Theresa Chen", "speech": [ "Thank you." ] }, { "name": "Operator", "speech": [ "Next question comes from Michael Cusimano with Pickering Energy Partners. Please go ahead." ] }, { "name": "Michael Cusimano", "speech": [ "Hi. Good morning, everyone. I wanted to first focus on the natural gas liquids optimization and marketing number, I think you all noted a 44 million decrease sequentially. Was any of that a result of Medford at all? Or was it just other -- I think you all mentioned some price differentials and timing on the NGLs?" ] }, { "name": "Sheridan Swords", "speech": [ "Michael, this is Sheridan. Yes, Medford did have an impact on those numbers, and that's factored in there. And that 45-day waiting period, we did take some hits in optimization and marketing there. And as you mentioned, the other things we have is spreads were a little bit narrowed during that time.", "We had forward sales due to Medford, that we push forward sales forward, that we will receive some of that money or $17 million of that money in the first quarter and second quarter -- I'm sorry, fourth quarter and first quarter as we go forward here, we will get that $17 million back. So that -- those are the three main factors as you see in that drop in optimization and marketing." ] }, { "name": "Michael Cusimano", "speech": [ "OK. And just to clarify, you would expect to be -- in the future, you would expect to be -- or you expect to recoup insurance proceeds in the event of any optimization of marketing reductions, what would happen?" ] }, { "name": "Pierce Norton", "speech": [ "We do. We do expect to get insurance proceeds, but a lot of that $45 million as we -- part of that is in the 45-day waiting period, which we wouldn't get that because that's on us. But going forward, we expect to get any losses in marketing and optimization that we would have received if Medford had been up, we expect insurance to cover that." ] }, { "name": "Michael Cusimano", "speech": [ "OK. That is helpful. And then previously, you all have given like a current month run rate out of the Bakken for NGL takeaway. I think you gave a September number.", "Any indication you can have for what October looks like going forward?" ] }, { "name": "Kevin Burdick", "speech": [ "Michael, we're not going to provide kind of numbers in Q4. We gave you the number for September. That was a -- that's a really good run rate if you think about it as we move through. We get into the fourth quarter and you start bringing weather into play.", "So that's why we backed off that." ] }, { "name": "Michael Cusimano", "speech": [ "OK. Understood. And then last one, if I can. If I break up the insurance proceeds from one allocation for business interruption, the other for property loss, are you all viewing the property loss as replacement cost? Or is it getting back the frac capacity to where like MB-5 recover some of that? Just trying to think of like how that shapes out from the way you and the insurance company are thinking about it?" ] }, { "name": "Walt Hulse", "speech": [ "We have specific coverage that would cover the replacement or the repair of the facility to get it back to the point where we would achieve the 210,000 barrels of capacity that we currently have. So we have property coverage to put us back in the same position that we were before. And then -- but we do have the flexibility with those dollars that it would cost to do that to build it wherever we want to do that, and that's what we're still considering at this point. Going forward, we would expect to likely not get as much -- not get unallocated money.", "This was -- it should be allocated out for the BI on a monthly basis once we get into kind of a monthly rhythm. And the property will be what it is as we spend the money for the repair or replacement of the facility." ] }, { "name": "Michael Cusimano", "speech": [ "OK. That's helpful. Would MB-5, since it was already undergoing construction, be something that you could allocate any sort of property loss to? Or would it be in MB-6 and beyond if you wanted to?" ] }, { "name": "Walt Hulse", "speech": [ "No. MB-5 is its own stand-alone project that we built because we needed it. And -- we -- obviously, it will help us a little bit as it comes on and we are going to be in our natural ramp-up phase. But that is part of our capital and the proceeds that we received for the repair or replacement of the Medford facility will be discrete, and it will cover those costs." ] }, { "name": "Michael Cusimano", "speech": [ "OK. This is all really helpful. I appreciate it. That's all for me.", "Thank you." ] }, { "name": "Operator", "speech": [ "This concludes our question-and-answer session. I would like to turn the conference back over to Andrew Ziola for any closing remarks." ] }, { "name": "Andrew Ziola", "speech": [ "All right. Thank you, all. Our quiet period for the fourth quarter starts when we close our books in January and extends until we release earnings in late February. We'll provide details for that conference call at a later date.", "Have a good day, and thank you for joining us." ] }, { "name": "Operator", "speech": [ "[Operator signoff]" ] } ]
OKE
2020-10-28
[ { "description": "Vice President, Investor Relations, and Corporate Affairs", "name": "Andrew Ziola", "position": "Executive" }, { "description": "President and Chief Executive Officer", "name": "Terry Spencer", "position": "Executive" }, { "description": "Exec Vice President, Strategic Planning and Corporate Affairs, and Chief Financial Officer", "name": "Walter Hulse", "position": "Executive" }, { "description": "Executive Vice President and Chief Operating Office", "name": "Kevin Burdick", "position": "Executive" }, { "description": "J.P. Morgan -- Analyst", "name": "James Kirby", "position": "Analyst" }, { "description": "Senior Vice President, Natural Gas", "name": "Chuck Kelley", "position": "Executive" }, { "description": "UBS -- Analyst", "name": "Shneur Gershuni", "position": "Analyst" }, { "description": "Barclays -- Analyst", "name": "Christine Cho", "position": "Analyst" }, { "description": "Senior Vice President, Natural Gas Liquids", "name": "Sheridan Swords", "position": "Executive" }, { "description": "Truist Securities -- Analyst", "name": "Tristan Richardson", "position": "Analyst" }, { "description": "Wells Fargo Securities -- Analyst", "name": "Michael Blum", "position": "Analyst" }, { "description": "Credit Suisse -- Analyst", "name": "Spiro Dounis", "position": "Analyst" }, { "description": "Sanford C. Bernstein -- Analyst", "name": "Jean Salisbury", "position": "Analyst" }, { "description": "Mizuho Securities -- Analyst", "name": "Gabe Moreen", "position": "Analyst" }, { "description": "RBC Capital Markets -- Analyst", "name": "Elvira Scotto", "position": "Analyst" }, { "description": "Seaport Global Securities -- Analyst", "name": "Sunil Sibal", "position": "Analyst" }, { "description": "Goldman Sachs -- Analyst", "name": "Michael Lapides", "position": "Analyst" }, { "description": "Tuohy Brothers -- Analyst", "name": "Craig Shere", "position": "Analyst" }, { "description": "Bank of America Merrill Lynch -- Analyst", "name": "Derek Walker", "position": "Analyst" }, { "description": "Goldman Sachs -- Analyst", "name": "Ganesh Jois", "position": "Analyst" } ]
[ { "name": "Operator", "speech": [ "Good day, and welcome to the third-quarter 2020 ONEOK earnings call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Andrew Ziola.", "Please go ahead, sir." ] }, { "name": "Andrew Ziola", "speech": [ "Thank you, Sarah, and good morning, and welcome to ONEOK's third-quarter 2020 earnings call. We issued our earnings release and presentation after the markets closed yesterday, and those materials are on our website. After our prepared remarks, we'll be available to take your questions. A reminder that statements made during this call that might include ONEOK's expectations or predictions should be considered forward-looking statements and are covered by the safe harbor provision of the Securities Acts of 1933 and 1934.", "Actual results could differ materially from those projected in forward-looking statements. For a discussion of factors that could cause actual results to differ, please refer to our SEC filings. Our first speaker is Terry Spencer, president and chief executive officer. Terry?" ] }, { "name": "Terry Spencer", "speech": [ "Thank you, Andrew. Good morning, and thank you all for joining us today. As always, we appreciate your continued trust and investment in ONEOK. Joining me on today's call is Walt Hulse, chief financial officer and executive vice president, strategic planning and corporate affairs; and Kevin Burdick, executive vice president and chief operating officer.", "Also available to answer your questions are Sheridan Swords, senior vice president, natural gas liquids, and Chuck Kelley, senior vice president, natural gas. Higher third-quarter results were driven primarily by curtailed volume returning to our system and increased ethane recovery. The majority of volume across our operations has now exceeded pre-pandemic levels and better represents our volume expectations prior to the widespread production curtailments during last quarter. We're in a much improved position today than we were on our second-quarter call.", "Back in July, we discussed the expectation for curtailed volume to return in the third quarter. Now, just three months later, not only has essentially all of the curtailed volume on our system returned but had returned at a faster rate than expected. This momentum, especially from September, is expected to continue with the fourth quarter being just as good, if not better, than the third quarter, which also sets a good baseline into 2021. Additionally, we've successfully captured more previously flared natural gas in the Williston Basin, needing the effort to reduce flaring even as production has returned in the region.", "In August, we captured a higher percentage of gas than the statewide average of 92%, an opportunity we've discussed for numerous quarters. Infrastructure put in place earlier this year and the hard work of our employees allowed us to help producers in the region decrease flaring, allowing both our customers and ONEOK to benefit from previously uncaptured earnings. This is just one example of our continued focus on customer service, safety and environmental responsibility, despite the challenges of operating and conducting business during the global pandemic. Operating conditions have greatly improved from second quarter lows, but there are still uncertainties around the pandemic and the economic recovery.", "Despite that uncertainty, we remain focused on continuing to meet the needs of our customers. Our conversations with producers are increasingly positive as commodity prices have shown some stability and demand has shown positive signs. These conversations have now shifted more toward 2021, indicating the potential for an improving pace of drilling and completion activity next year. As curtailed volumes have recovered, so have our earnings.", "We now expect 2020 earnings to approach the midpoint of our previously provided outlook ranges, which Walt will discuss shortly. On our last call, I shared our outlook for 2021, and today, the backdrop is even stronger. Volumes in the Bakken ramped throughout the third quarter, setting us up for a strong fourth quarter and 2021. We expect to achieve double-digit earnings growth in 2021 compared with our new and updated 2020 outlook.", "As it relates to our dividend, distributable cash flow this quarter exceeded the dividend by $125 million. With earnings strength expected in the fourth quarter and into 2021, we expect distributable cash flow to cover both the dividend and our 2021 capital expenditures as we continue on our path to deleveraging. As always has been the case, the dividend remains a potential lever we could pull if our deleveraging expectations are not being met. This quarter demonstrated the reliability of our assets, the unwavering dedication of our employees and the resiliency of our extensive and integrated businesses.", "While the second quarter was challenging, our employees remained focused on serving customer needs and preparing our assets for the eventual return of curtailed volumes. The key infrastructure projects we completed prior to the pandemic create substantial capacity for future growth as markets continue to improve. With that, I'll turn the call over to Walt." ] }, { "name": "Walter Hulse", "speech": [ "Thank you, Terry. ONEOK's third-quarter 2020 net income totaled $312 million or $0.70 per share. Third-quarter adjusted EBITDA totaled $747 million, a 15% increase year over year and a 40% increase compared with the second quarter of 2020. Distributable cash flow was more than $540 million in the third quarter, a 12% increase year over year with a healthy dividend coverage of 1.3 times.", "We also generated more than $125 million of distributable cash flow in excess of dividends paid during the quarter, an 11% increase compared with the same period last year. Our September 30 net debt-to-EBITDA on an annualized run rate basis was 4.6 times as we saw a significant step-up in EBITDA in the third quarter from the return of curtailed volume across our system. We continue to manage our leverage toward four times or less and maintain three and a half times as our long-term aspirational goal. We ended the third quarter with no borrowings on our $2.5 billion credit facility and nearly $450 million in cash.", "Last week, the board of directors declared a dividend of $0.935 or $3.74 per share on an annualized basis, unchanged from the previous quarter. We took proactive steps earlier this year to provide ample liquidity and protect our investment-grade ratings. We've demonstrated our ability to access the capital markets even during challenging market conditions and have been able to use our balance sheet flexibility to help guide financial decisions throughout this period of uncertainty. We proactively paid off upcoming debt maturities and have been opportunistic in repurchasing more than $200 million of debt through open market repurchases in the first nine months of the year.", "From an upcoming debt maturity standpoint, we have no maturities due before 2022. As Terry mentioned, with yesterday's earnings we announced, that we now expect 2020 net income and adjusted EBITDA results to be higher, approaching the midpoint of our previously provided outlook ranges. Our improved outlook is supported by the volume strength we're seeing across our assets, the pace the curtailed volumes returned and our ability to capture previously flared gas, resulting in an earnings run rate more in line with our original 2020 expectations and providing a clear path to our continued deleveraging. Yesterday, we also announced the early completion of our two remaining active projects, the Bakken NGL pipeline extension and Arbuckle 2 pipeline extension, which were originally scheduled for completion in the fourth quarter 2020 and first-quarter 2021, respectively.", "Third-quarter capex included dollars pulled forward from the fourth quarter and 2021 for these projects and retained growth capital primarily for well connects and maintenance activities. We have now substantially completed all of our active capital growth projects. We continue to expect a run rate of total annual capital expenditures, including maintenance and growth of 300 to $400 million. This base level of annual capital will be maintained until producer activity levels provide visibility to volume growth warranting expanded capacity, but as always, we remain flexible with the ability to restart projects quickly as customer needs change.", "Recent conversations with producers, particularly those who have substantial positions in the Dunn County area of the Williston Basin are indicating that more rigs will return in 2021, resulting in a potential need to restart Bear Creek 2 construction if this activity materializes. Even in this scenario, our 2021 capital expenditures would likely be in the $500 million range. We now expect our cost saving measures to total approximately $130 million this year compared with our 2020 plan. Both September -- through September, we've recognized approximately $100 million in savings and continue to look for additional efficiencies.", "From a financial perspective, we remain well positioned with ample liquidity and balance sheet strength to withstand additional market uncertainty should it arise and to be opportunistic in the event of a faster-paced recovery. I'll now turn the call over to Kevin for a closer look at our operations." ] }, { "name": "Kevin Burdick", "speech": [ "Thank you, Walt. With nearly all curtailed production back online by the end of the third quarter, we saw a large step-up in NGL and natural gas volumes across our system compared with the second quarter. NGL volumes across all of our operating areas exceeded pre-pandemic levels in the third quarter. And natural gas volumes processed in the Rocky Mountain region had reached more than 1.2 billion cubic feet per day in October.", "I'll start with the natural gas liquids segment. Third quarter NGL raw feed throughput volumes across our system increased 7% year over year and 15% compared with the second quarter. In the Rocky Mountain region, which is our highest margin business, volumes are averaging approximately 245,000 barrels per day in October, a 14% increase over our third-quarter 2020 average and a more than 50% increase from the second quarter 2020. The return of curtailed production, completion of DUCs and increased flared gas capture have contributed to higher volumes.", "As the primary NGL takeaway provider from the region, our natural gas liquids segment not only benefits from the gas captured on ONEOK's dedicated acreage but also for many third-party plants across the basin. With more than 130,000 barrels per day of available capacity out of the region and the ability to expand capacity with minimal capital if needed, there's a long runway to grow with our customers. We expect NGL earnings in the region to see additional benefit from two other areas as we move into 2021. First, the early completion of our Bakken NGL pipeline extension in August.", "This lateral extension connects our system with an area of Williams County, which has historically had limited NGL transportation options. In addition to the original contract, with an expanding third-party plant in the area, we've also contracted two additional third-party plants near the pipeline. Volume has already started flowing on the extension, and we expect a continued ramp into next year. As a reminder, this project is also supported by a minimum volume commitment.", "Second, we expect to transport all of our Williston and Powder River Basin volumes exclusively on our Elk Creek and Bakken pipelines beginning very early next year once we complete a low-cost pump expansion on Elk Creek, which will reduce our transportation costs paid to Overland Pass pipeline. In the Mid-Continent region, we completed the Arbuckle 2 pipeline extension in August, earlier than our target date of the first-quarter 2021. This extension includes connectivity from our Elk Creek pipeline to the Arbuckle 2 pipeline, allowing increasing Rocky Mountain volumes the optionality to be transported to the Mont Belvieu market hub. Increasing petrochemical demand and favorable ethane economics resulted in significant ethane recovery across the Mid-Continent region through a good portion of the third quarter.", "Our raw feed throughput volumes in the region increased 9% compared with the second-quarter 2020, largely due to ethane recovery. Ethane volumes in the Mid-Continent averaged more than 245,000 barrels per day in the third-quarter 2020 compared with the second-quarter 2020 average of 210,000 barrels per day, a more than 17% increase driven by nearly all of our Mid-Continent plant connections recovering ethane in July and August. In September, we saw a reversal back to ethane rejection as pricing and volumes were impacted by decreased petrochemical demand due to Hurricane Laura. We had seen some plants in the Mid-Continent return to recovery this month, but expect the ethane volumes on our system to fluctuate for the remainder of 2020 and into 2021.", "In the Permian Gulf Coast region, third-quarter NGL raw feed throughput volumes increased 16% compared with the second-quarter 2020, benefiting from returning volumes and approximately 30,000 barrels per day of short-term fractionation-only volumes. Even without the addition of short-term volume, raw feed throughput in the region still increased more than 6% compared with the second quarter. As we've mentioned previously, we continue to offload 25,000 barrels per day on third-party NGL pipes. This firm contract will expire at the end of the year, which will eliminate this expense as we move these barrels to our integrated system.", "Moving on to the natural gas gathering and processing segment. Total natural gas volumes processed increased 13% compared with the second-quarter 2020 and processing volumes in the Rocky Mountain region have reached more than 1.2 billion cubic feet per day in October, a more than 16% increase from our third quarter average. The return of curtailed volumes to our system in the Williston Basin drove the third quarter average fee rate to $0.94 per MMBtu compared with $0.71 in the second quarter. As a number of high fee percentage, large producers brought production back online, some sooner than expected.", "Going forward, we expect the average fee rate to remain around this level. There are 13 rigs currently operating in the Williston Basin with eight on our dedicated acreage, which is an increase from the past few months. Drilled but uncompleted wells in the basin totaled more than 850 with approximately 400 on our dedicated acreage. We've said previously that it takes 15 to 20 well completions per month to maintain our processing volumes around 1.1 to 1.2 Bcf per day.", "This is a relatively small number of well completions, considering we have averaged 28 completions per month through the first nine months of 2020. When we factor in our current volume levels, a significant DUC inventory that is profitable to complete in this price environment, the rigs currently on the system and some additional flared gas opportunities, we've had ample inventory to support current volume levels through 2021, assuming no increase in producer activity during that time frame. Of course, any additional producer activity in the basin would present upside, resulting in more wells drilled and/or completed, driving higher volumes, and ultimately, earnings for ONEOK. Slide 7 in our earnings presentation has been updated to illustrate the ability to maintain current natural gas processing levels with minimal well completions.", "This slide is meant to be a representation, not guidance or an indication of our expected future volumes. For reference, there are four to five frac crews in the region today, each with the capability to complete five to six wells per month. In addition to the substantial inventory of wells on our system, other volume tailwinds in the basin include rising gas-to-oil ratios and additional gas capture opportunities. GORs have continued to increase and remain well over two to one, the result of activity concentrated in Dakota basin and maturing wells.", "This level of gas production suggests that even in a flat or slightly declining crude oil production environment, we could still see stable to increasing gas volumes in the region. The latest North Dakota data, which is for the month of August, showed 215 million cubic feet per day still flaring in the basin, with approximately 80 million cubic feet per day of that on ONEOK's dedicated acreage. Statewide flaring in August decreased to 8% compared with nearly 20% at the same time last year. As Terry mentioned, flaring on ONEOK's acreage was below the statewide average, a reflection of the infrastructure that our employees have worked hard to construct and operate in the region over the last decade, and specifically, over the last couple of years.", "With 1.5 Bcf of processing capacity, we will continue to push to capture even more of the gas produced as we move through 2021. In the natural gas pipeline segment, we reported another strong quarter of stable fee-based earnings, with firm capacity remaining nearly 95% contracted. The segment continues to be a stable fee-based earnings driver for the company, providing essential natural gas to end-use customers. Terry, that concludes my remarks." ] }, { "name": "Terry Spencer", "speech": [ "Thanks, Kevin. That was a great overview of a strong quarter, headlined by the expected return of volumes and a solid demonstration of the resiliency of our businesses. This quarter was not only marked with volume-related milestones and accomplishments, in August, we issued our 12th annual sustainability and ESG report. And just recently, we received notable ESG-related recognitions, including being recognized by JUST Capital for the second year in a row as the industry leader in the energy equipment and services sector and receiving an award for environmental excellence from the Environmental Federation of Oklahoma.", "We're always evaluating ways to improve our ESG-related performance and enhance our long-term business sustainability. This includes planning and preparing on for potential changes to our industry, customer needs or the broader demand for energy. There has been much discussion about the future state of the energy industry, and we get asked frequently what our role could be in the low-carbon world. The answer is simple.", "ONEOK has always promoted a business culture, prioritizing safety, environmental responsibility and profitability in all that we do. And as we always have, we will do our home works to gain knowledge and prepare diligently for the future and as our industry continues to meet the world's energy needs in an environmentally responsible way. Whether it's actively evaluating the use of renewable energy at our facilities, developing carbon capturing projects or assessing the feasibility of using our extensive assets for hydrogen transportation and storage, our commitment to environmental stewardship remains steadfast. Our assets, their location and our midstream skill set is compatible with many of these types of projects, but they still need to make strategic sense for our business.", "In many cases, technology or large scale application may be further into the future, but we'll continue to evaluate opportunities that fit within our businesses because we absolutely believe that our large and extensive infrastructure has a vital role to play in the long-term energy transition. And while we evaluate new and future opportunities, I want to thank our employees for doing what they do best, operating our assets safely and responsibly and transporting the essential NGLs and natural gas that are used to heat your home, generate electricity and create the many end-use products that help us live healthier, safer and more productive lives. With that, operator, we are now ready for questions." ] } ]
[ { "name": "Operator", "speech": [ "[Operator instructions] And we'll go ahead and take our first question from Jeremy Tonet with JP Morgan." ] }, { "name": "James Kirby", "speech": [ "James on for Jeremy. I just wanted to start with the '21 guidance here for double-digit growth. Just given where the strip is today, what are the price assumptions built into that guidance? And then just looking at Slide 7 with the well completion guide, is 300 well -- kind of the ballpark for well completions needed to kind of maintain that volumes there within Bakken?" ] }, { "name": "Kevin Burdick", "speech": [ "Well, Jerry, it was real hard to understand you, but let me take the first question about growth into '21. When we talk to producers in this price environment, clearly, the DUCs are profitable to complete. I mean I think that's the focus, especially as we look as you move through the rest of this year and the early parts of '21. You've got that substantial DUC inventory in the Bakken, and you've seen some rigs come back.", "So as we've said before, in a 35 to $40 environment, the DUCs work well as far as the economics. You get north of $45. That's when we saw rigs coming back in a material way in '15 and '16. And I think our conversations with customers today that would still hold.", "So as we think about '21, we're absolutely not thinking about it in the context of a $55 environment. It's more in line with what the strip would look like today. Chuck, do you want to add there?" ] }, { "name": "Chuck Kelley", "speech": [ "No, I would agree with those prices. And as far as what you referenced with producers, we've had discussions with our Bakken producers and looking at their 2021 forecast and drill schedules and what they've provided, they expect the pace of completions in the first half of the year to be DUC driven, as Kevin mentioned. However, they anticipate adding rigs in the spring. So I think as you look at the strip in '21, that pretty much supports that statement." ] }, { "name": "James Kirby", "speech": [ "Got it. So if I just understand, do you -- my next question here, I mean, just looking at seeing kind of $50 million in the G&P segment that was kind of captured here from improved commodity prices. I guess at a higher level, can you talk about how much of that is the element of an improved volume and kind of versus the fee component there? Just any color you can provide there. I appreciate the color on the G&P fees going forward, assuming the kind of $0.94.", "Any color you could provide there." ] }, { "name": "Kevin Burdick", "speech": [ "Jeremy, we're struggling. Was your question about the fee rate in the G&P business?" ] }, { "name": "James Kirby", "speech": [ "Yeah, sorry. Just basically, what is the kind of breakdown of color you could provider there in terms of the -- how much of that is attributable to improved volumes versus kind of the improved commodity prices?" ] }, { "name": "Terry Spencer", "speech": [ "Jeremy, this transmission is really bad. There must be a bad connection. So we're having real difficulty understanding and just hearing your question. So what we could do is try to get to you offline.", "But I think, Chuck, if you've got any commentary around the fee rate that might be helpful for Jeremy?" ] }, { "name": "Chuck Kelley", "speech": [ "Sure. Yeah, we can talk about pretty much what drove our increase in the fee rate quarter over quarter. If you think about it, it's really a combination of two things: basin mix and contract mix. So as we saw, our Williston Basin curtailed volumes returning to our system, particularly from our large producers, these producers have contracts that are fee-only or high -- have a high fee with a lower percentage of proceeds component.", "And as these curtailed volumes came back on, then what happened was the mix of the basin contribution to that average fee changed. In Q2, it was more toward a 50-50 mix between Mid-Continent and Bakken, with, of course, Mid-Continent being the lower fee margin business. So here in Q3, we saw our Rockies volumes contribute upwards of approximately 60% of that calculation. So a combination of large producers, higher fee, lower POP components, all Williston volume-related and roughly 60% of that basin mix and the average of the basin weigh." ] }, { "name": "Operator", "speech": [ "We'll go ahead and take our next question from Shneur Gershuni with UBS." ] }, { "name": "Shneur Gershuni", "speech": [ "Hi. Good morning, guys. Hopefully, my connection is OK. Just to clarify before I ask my questions, you're basically saying that mix shift of where the volumes came from is part of the reason why the rate went up.", "Is that fair to maybe characterize your last response?" ] }, { "name": "Kevin Burdick", "speech": [ "Yeah. That one -- I mean, again, it's a shift in both the volumes from the Mid-Con kind of decline in the higher percentage of Williston volume and then also the mix of contracts. So we had a lot of our larger, higher fee-based customers brought gas back online in a sizable way in the third quarter." ] }, { "name": "Shneur Gershuni", "speech": [ "Perfect. OK. Just moving on to my questions here. First of all, thank you for providing all the incremental data on well connections and that Slide 7 where I kind of feel like I can choose my own adventure.", "So when I think about Slide 7, I just want to understand how to utilize it correctly here. It suggests 15 average well completions a month, sort of keeps you flatter. I guess, that's about 180 completions for the year -- for '21. And to grow, you got the 25, 35, 45 scenarios.", "And then, as you mentioned in the call, you got 400 DUCs that are in the mining right now, but maybe they're not all in the right areas. So when I sort of piece that together, if I see, let's say, how should DUCs get completed? And you mentioned that you have eight rigs running on your acreage, which gives you what, two wells per rig per month. It sort of seems like you can be materially above the 28 average well completion that you sort of highlighted in -- that you saw in September. So when I think about that, all else equal, that you can have a material increase in production year on year.", "Am I being too simplistic in my analysis here, or is that the way to be thinking about that?" ] }, { "name": "Kevin Burdick", "speech": [ "No. Shneur, this is Kevin. I think that's exactly how we're looking at it. I mean that DUC inventory that provides you a substantial runway for growth.", "And when we add the rigs on top of that and we do expect to capture a little more gas and that gives you that volume strength that we foresee." ] }, { "name": "Shneur Gershuni", "speech": [ "In the prepared remarks, I believe, Terry mentioned that double-digit growth for '21 versus '20, which one of those scenarios are you assuming? Is it 25, 35, just trying to understand that?" ] }, { "name": "Kevin Burdick", "speech": [ "We haven't -- again, we haven't necessarily provided the specific link there. But again, I'd go back to the previous comments from Jeremy -- that I made with Jeremy that we're not -- we're thinking about this in the context of a 40 to $45 type environment as we look at '21." ] }, { "name": "Shneur Gershuni", "speech": [ "OK. And then, maybe as a follow-up question, one of your peers yesterday sort of was talking about the Williston, in general, that the producers are becoming significantly more efficient, more stages per frac, longer laterals and so forth and sort of intimated that GORs are going to continue to go up and maybe even faster than they had previously. Is that something that you're hearing from your customers as well, too? Is that something that you're seeing as well also?" ] }, { "name": "Chuck Kelley", "speech": [ "Yeah, this is Chuck. We are. We're seeing it from our producers. I think we mentioned on last call, lateral lengths, we're seeing -- pushing out to the three-mile level.", "We're also seeing increased frac stages. So we're seeing -- so you're seeing greater production efficiencies. And of course, the GORs continue to rise in the basin. So when you look at those three components, it's all painting a pretty good picture for these new wells coming online." ] }, { "name": "Terry Spencer", "speech": [ "It's just that -- the bottom line of that is the breakeven costs continue to come down significantly." ] }, { "name": "Chuck Kelley", "speech": [ "That's correct." ] }, { "name": "Shneur Gershuni", "speech": [ "Yeah. That's super helpful. And maybe one final question, if I may, for Walt. When I sort of think about the results for the third quarter, if I annualize and then look at your leverage compared to that, you start to get down to the 4.6 zone and so forth.", "As we move into next year, what's the leverage ratio on an annualized basis that you would like to get to before you would consider buybacks?" ] }, { "name": "Walter Hulse", "speech": [ "Well, Shneur, I would answer that question in a couple of ways. I think that we will continue to see that leverage ratio trend in the right direction. We had -- when we originally gave 2020 guidance, we gave some expectations of where we thought leverage would get to at the end of '20, early 2021. And that kind of got moved out 12 to 15 months based on the pandemic.", "So I think we're still trending that range toward four times. And whether that happens on a run rate basis at the end of '21 or early 2022, we'll be headed in the right direction." ] }, { "name": "Shneur Gershuni", "speech": [ "Perfect. Thank you very much today for all the color" ] }, { "name": "Operator", "speech": [ "We'll take our next question from Christine Cho with Barclays." ] }, { "name": "Christine Cho", "speech": [ "Good morning, everyone. I'm going to apologize in advance, but I also want to discuss Slide 7. When you talked about the 15 to 20 wells a month in the Bakken to hold volumes flat at the 1.1 or 1.2 Bcf a day level. When I combine that with your comments that you'd expect to be at least $3 billion in EBITDA next year that would to me at least imply Bakken volumes will have to hold at least from current levels.", "Is your capex of 300 to $400 million next year indicate that level of well connects of 15 to 20 per month in the Bakken? And how should we think about that?" ] }, { "name": "Kevin Burdick", "speech": [ "Yeah, Christine, this is Kevin. Yes, I think we would expect to be able to do that. Again, we've got available processing capacity. So all we're talking about in that that we would need would be well connect capital.", "To go connect wells, we might need to add a compressor or the station or something like that. And that would be within that 300 to $400 million type range, given the environment that we're looking at today." ] }, { "name": "Christine Cho", "speech": [ "OK. And then, if I could actually move over to Overland Pass, and I appreciate the comments that you made in prepared remarks about taking your Powder River Basin over to Arbuckle. But overall cash earnings were down in 2Q and that level continued into 3Q. Did you guys move volumes from the Bakken NGL and Overland Pass to Elk Creek? Or did a large customer get off the system? And I thought that pipe was previously full.", "So should we think that there's available capacity on that system going forward?" ] }, { "name": "Sheridan Swords", "speech": [ "Christine, this is Sheridan. We did move some volume off of OPPL onto the Elk Creek, Bakken system in both the second and third quarter. And part of the run rate you're at today is what you'll see through the fourth quarter. And then, once we get into 2021, we will -- our plan right now is to remove all the volume off that system.", "Once we get into 2021, by moving that volume off the system and moving on our own system, we think due to cost savings that we will see, we should see approximately a 40 or $50 million uplift in earnings." ] }, { "name": "Christine Cho", "speech": [ "OK. Could you -- are you going to have to expand Elk Creek?" ] }, { "name": "Sheridan Swords", "speech": [ "As Kevin said in the earnings, well, we have a low-cost expansion that we will complete by the end of the year and that will allow us to move all the volume off of OPPL onto Elk Creek." ] }, { "name": "Christine Cho", "speech": [ "Got it. And sorry, one follow-up. Would you have to pay anything to take your volumes off of Overland Pass for the last quarter, this quarter and next quarter?" ] }, { "name": "Sheridan Swords", "speech": [ "Well, we have some contractual obligations that we can't get into at this time. But any obligations or any contracts we have will not extend into 2021." ] }, { "name": "Operator", "speech": [ "We'll take our next question from Tristan Richardson with Truist Securities." ] }, { "name": "Tristan Richardson", "speech": [ "Hi. Good morning. Really appreciate all the comments on '21, particularly clarifying some of the assumptions, especially on certain environment. I mean you guys noted that customer conversations are encouraging and rigs could potentially return in the spring, which would presumably accelerate that completion activity.", "So to the extent a return of the rigs occurs, as you noted, any of that return would be upside to the general assumptions driving the $3 billion-plus 2021 expectation?" ] }, { "name": "Kevin Burdick", "speech": [ "I mean, I think there's clearly the potential for that. I mean that's what we talked in our opening remarks that that would be the upside. I think that it just will boil down to how the producers and our customers determine to deploy that capital as far as completing DUCs and rigs coming back. The other thing that rigs coming back, if you think about the lag of those rigs coming back, that also then would start supporting growth into '22 as well." ] }, { "name": "Tristan Richardson", "speech": [ "Very helpful. And then, I guess just -- conversely, can you see outside of a reduction in completion -- or pace of completion activity. Are there headwinds out there that would prevent you to that sort of $3 billion number in 2021?" ] }, { "name": "Kevin Burdick", "speech": [ "I mean that's the -- again, just other than you said the activity levels, and we all know the risk that would come with -- that might drive that, but other than that, the thing I think we just keep coming back to is we've got plenty of processing capacity. We've put a lot of compression and field infrastructure in place to get the gas to the plant. We've got an NGL system that's got available capacity. So we're sitting in a good spot to be able to grow with our customers with very little capital." ] }, { "name": "Terry Spencer", "speech": [ "Right. Kevin, I think the other thing I would add to your comment is as we talk to the producers, certainly, they're making their decisions based upon a longer-term view of commodity prices. Now certainly, you could have -- you've got OPEC risk out there. You've got COVID-19 risk out there in the universe that certainly could impact these numbers as we think about 2021.", "But the fact of the matter is that industry has done some things, not only the way they operate but also in the way they manage their markets. And we've got new pricing indices in the Gulf Coast that could mitigate and ensure that the phenomenon we saw in the springtime in terms of negative crude prices does not happen again. So we're pretty certain we're not going to see that type of scenario materialize, but certainly, we'll see month-to-month or quarter-to-quarter volatility in commodity prices like we always do, but we don't anticipate, even if we see some of these other phenomenon -- other things happen like OPEC or the COVID. We don't think we're going to get back in a scenario like we saw in the springtime, which was a huge impact to what transpired in the second quarter, seeing those negative crude prices." ] }, { "name": "Operator", "speech": [ "We'll take our next question from Michael Blum with Wells Fargo." ] }, { "name": "Michael Blum", "speech": [ "Thanks. Good morning, everybody. Wanted to ask about ethane for next year, really. Do you -- I guess, what ethane price do you think you need to see recoveries in the Bakken and would you consider, are you considering a lower tariff to incentivize some of those ethane recoveries next year? And then, I apologize for the multipart question here, but is any of that -- is any ethane recovery assumed in your forecast or expectation for double-digit growth in '21?" ] }, { "name": "Sheridan Swords", "speech": [ "Michael, this is Sheridan. What I would say on your first question, the ethane price that we would need in the Bakken, obviously depends on what the gas price is in the Bakken, but it'd be fair to say that we would need to be in the $0.40 per gallon range at current fee structure that we have today. We always have the ability to flex our fees or change our fees to incent ethane to come out if we think that's the best thing to do, but a lot of it depends on, obviously, we have to get -- still have the price with fees to be higher than the gas price in the area. As we look into 2021, we are not assuming any ethane recovery out of the Bakken in our double-digit growth.", "We are only assuming a partial ethane recovery through the year in the Mid-Continent for the double-digit growth as well, which is where we could see some upside as we go into next year based on the volume happens. But I think that represents kind of a call option that we have that if volume doesn't show up, that would force people to go into different areas to extract that thing where if volume does not show like we think it is next year, you could see ethane be economic coming out of the Bakken which would support our growth rate for next year." ] }, { "name": "Terry Spencer", "speech": [ "And Sheridan, we do see some additional pet chem demand coming as well, right?" ] }, { "name": "Sheridan Swords", "speech": [ "That's right. There's one cracker that's -- to be completed here in the fourth quarter of 2020. And then, we also have an export dock that is to complete -- that has been completed and will start exporting full capacity into next year. So we see good demand coming on for next year.", "And that's why we think we could see some ethane recovery for a portion of the year in 2021." ] }, { "name": "Terry Spencer", "speech": [ "Thank you very much." ] }, { "name": "Operator", "speech": [ "We'll take our next question from Spiro Dounis with Credit Suisse." ] }, { "name": "Spiro Dounis", "speech": [ "Good morning, guys. First question for Walt. Just with respect to leverage and getting to that three and a half times aspirational target. I think I heard in your response to Shneur, that the strategy at this point is maybe steady deleveraging, with cash flow over time, which sounds like, obviously, that's been pushed out a little bit.", "Just curious beyond some of the repurchases you guys have done in the open market where maybe there's a lot of opportunity there going forward, any appetite to get more proactive here? And specifically, what I'm thinking about is just on the M&A side and using M&A as a tool to maybe both delever as well as do something strategic. I'm not sure if anything is screening for you on that front?" ] }, { "name": "Walter Hulse", "speech": [ "Well, we think we're going to naturally delever. And I think we're -- we shouldn't be four times first, three and a half aspirational over time. But I think getting to that four times goal is the near-term target. We obviously are going to look at opportunities that come along the way.", "And if something was attractive from a delevering standpoint that would be a positive, but I don't think that would be a driver for us to do a transaction for sure." ] }, { "name": "Terry Spencer", "speech": [ "Yeah, Spiro, this is Terry. So while we're -- while we always think about acquisitions and opportunities to add assets or businesses to our business, that's just an ongoing process. It's really not our top priority right now. And managing the core business, managing the balance sheet is our priority.", "And we're just going to stay focused on that. We'll stay focused on our operations. We're going to stay focused on serving our customer needs. And optimizing our business where we can.", "The fact of the matter is, as I've said before, M&A opportunities are kind of few and far between, and particularly, those that are actionable. So we don't spend a whole lot of time worrying about that. So right now, in this environment, stay focused on core business." ] }, { "name": "Operator", "speech": [ "We'll take our next question from Jean Salisbury with Bernstein." ] }, { "name": "Jean Salisbury", "speech": [ "Good morning. What drives the flaring that is still happening on your acreage and on the Bakken more broad-based? And what would need to happen next year to get it even lower? Or is this just kind of a good indication?" ] }, { "name": "Kevin Burdick", "speech": [ "OK. Jean, this is Kevin. I think you look at the flaring that's left. We'll still have some isolated pockets of wells and/or pads that haven't been connected and/or we have some maybe pressure limitations.", "We're working to continue to put in some infrastructure. Obviously, we've taken out a lot of that flared gas as productions come back online. As we've said before, you're always going to have some level of flaring, especially when you look at IP rates and if a producer brings on a very large pad and we're not building for the peak 30 days or things like that. So those are the types that you've got operational disruptions that could cause some flaring from time to time.", "So we'll continue to work to obviously look for ways to capture all the gas that's out there, connect a few of these and continue to watch the pressures on our system." ] }, { "name": "Jean Salisbury", "speech": [ "OK. So maybe a little bit lower, but not -- I shouldn't put on like a tiny number. OK. And then, I just wanted to follow up on a question that was asked previously.", "Ethane price would not have to get all the way to $0.40 for you to start sort of recovering and getting some benefit from the Bakken? I think what you're saying that for your -- some of the portion that you market yourself, you could do it at a lower price and make money." ] }, { "name": "Sheridan Swords", "speech": [ "Yeah. We could always -- this is Sheridan. We could always lower our fees to make it economical to recover ethane. We always have that option.", "And that's not only with our own volume coming off of our plant, but that would also be with a lot of third-party volumes. And this is something that times we've done in the Mid-Continent when we think ethane may be coming into rejections. To get them come in earlier, we've reduced our fees at times to four months to allow them to come in. So we have that option.", "And if we see the opportunity to do that and we think that it makes sense that is definitely within our wheelhouse to view that thing for ethane to come out." ] }, { "name": "Operator", "speech": [ "We'll take our next question from Gabe Moreen with Mizuho." ] }, { "name": "Gabe Moreen", "speech": [ "Hi, good morning, everyone. If I could ask maybe a little bit about what you're seeing with the poor curve for gas here being north of $3. Assuming some of your legacy areas like the Mid-Con, you're seeing maybe some refracs or producer interest and some stuff like that. I'm just curious if any discussions are happening?" ] }, { "name": "Chuck Kelley", "speech": [ "Gabe, this is Chuck. What was the last question regarding Mid-Continent, producer discussions? I didn't quite hear it." ] }, { "name": "Gabe Moreen", "speech": [ "Yeah. The gas prices at $3. Just wondering if producers are looking at refracs [inaudible] right now?" ] }, { "name": "Terry Spencer", "speech": [ "Yeah, that's a good question. We have seen some refracs here this year, particularly last quarter, and I understand there's a couple of schedules here in our Q4. Other than that, Mid-Continent producers we've spoken with have shared their preliminary plans for 2021. And they're indicating a restart in activity in both the stack and the scoop.", "We're seeing two to three rigs. We're talking about next year for us right now in our acreage, there might be a fourth. And what they're citing is strengthening Mid-Continent gas prices for some of the gas refracs, particularly in the stack. I hope that gives you a little bit of color of what we're hearing in the Mid-Con." ] }, { "name": "Gabe Moreen", "speech": [ "That was helpful. And then, two quick clarification housekeeping questions for me. One is kind of what the expectations now are for total second-half 2020 capex, given 2Q spending, I think, some of that pull forward. And then, the other is just the guidance on double-digit growth for '21.", "I think last quarter, you sort of sensitized with DAPL being on or off. Are there any sensitivities with DAPL being on or off?" ] }, { "name": "Kevin Burdick", "speech": [ "Gabe, this is Kevin. I'll start and then Walt can chime in. As we think about capex, yes, clearly, with what we've spent in the third quarter with the acceleration of some of these projects and the activity levels we saw, we are at the high end and the capital usually tapers off in the fourth quarter, especially with weather and other things. But we'll definitely trend toward the upper, if not slightly above the top end of the range there, just given what we've spent year to date.", "But I think going forward about capital, the notion that we can continue to stay in the kind of a run rate to continue to grow with the customers in that 300 to $400 million range would be solid. Absolutely, we're thinking about DAPL and continue to think about it. Our outlook remains consistent with what we said before that if you would experience or the industry would experience a DAPL shutdown, we still believe it would be a mid- single-digit type growth for DAPL, even in that scenario. Our customers, as we talk to them, they definitely have been exploring alternatives.", "Some of them have been securing some rail, some of them have been moving some volumes to other pipes and getting allocation there. So we do feel we could -- we'd be able to support volume growth even in the DAPL shutdown scenario." ] }, { "name": "Gabe Moreen", "speech": [ "And Sheridan, do you have anything to say in the event a DAPL shutdown could happen, you have the potential to be accrued transporter out of here with some pipe you currently operate?" ] }, { "name": "Sheridan Swords", "speech": [ "Yeah. We still continue to look at whether or not we would take the Bakken, the 12-inch pipeline into crude service. As Kevin said, the producers out there have really looked at alternatives, and there's a lot of alternatives beyond ours as well. Rail being one of them.", "Obviously the other pipes that may be in a better position to start up quicker than our Bakken pipe could be the convert. But we still continue to investigate that to make sure it's ready to move if we need to do that based on the DAPL shutdown." ] }, { "name": "Operator", "speech": [ "We'll take our next question from Elvira Scotto with RBC Capital Markets." ] }, { "name": "Elvira Scotto", "speech": [ "So recently, we've seen an acceleration of upstream M&A. What are your thoughts on this trend? I mean, clearly, having larger, better capitalized shippers on your system would be a positive. But do you see any potential impact to contracting? And do you think that the larger, more integrated midstream companies like the ONEOK that can offer services across the value chain benefit here?" ] }, { "name": "Kevin Burdick", "speech": [ "Elvira, this is Kevin. I don't know that we see -- I don't think -- we definitely don't see that as a negative. We've got a lot of very large customers. And I don't see it as a contract issue at all.", "We've got -- the vast majority of our contracts are long term, they're locked in. And we like those contract structures. The companies typically -- the larger companies we deal with, many of them have a long-term view of display, especially as we think about the Bakken, and they're looking at the reservoir over the next 10 to 20 years, not over the next three to four. So that can help from a standpoint of just good, strong ratable growth over time.", "But I don't know that we'd see it as a significant pro or con either way." ] }, { "name": "Elvira Scotto", "speech": [ "Got it. And then, as a quick follow-up to that M&A question, I appreciate the comments that you made on ONEOK and M&A, but I'm interested in your thoughts on overall trend that you think we can see in midstream M&A potential?" ] }, { "name": "Kevin Burdick", "speech": [ "So Elvira, certainly, there is some potential in the midstream space for consolidation in gathering and processing. And I've been saying for a better part of 15 years that there's going to be significant consolidation this year and I've been wrong every time. But we do see some potential for private equity to potentially look at placing assets into the market. The fact of the matter is that most of those assets don't really make a whole lot of sense for us, don't fit with the bigger picture.", "We've done a lot of work in trying to manage our risk as it relates to wellhead risk. And so, we've done a real good job there contractually as well as how we operate our businesses. So really to the extent we do see some things in the midstream space, specifically in gathering processing, most of those, as I see the landscape today, don't really shift that well, and certainly, carry with it some risks that we don't like. But broadly speaking, on a large scale for midstream, there's some -- you see some assets that have been spun out from other companies and utility companies, and some of those assets are assets that look pretty good, that could make some sense.", "But certainly, we're going to look at the landscape and be diligent and disciplined in the way we consider acquisitions, just as we always have." ] }, { "name": "Operator", "speech": [ "We'll take our next question from Sunil Sibal with Seaport Global Securities." ] }, { "name": "Sunil Sibal", "speech": [ "Yeah. Hi, good morning. Hopefully, you can hear me all right. I just had a quick question.", "If you could remind us, in terms of your volumes or the cash flows exposure to the drilling on Federal/Indian lines." ] }, { "name": "Kevin Burdick", "speech": [ "I'm sorry. I couldn't make out your question. Your connection is kind of garbled. So maybe try the next question, if we can hear that and understand that one.", "The connection is really -- the audio is really poor." ] }, { "name": "Sunil Sibal", "speech": [ "So my question -- second question was related to the capital allocation strategy. I was wondering if you've had any recent discussions with the rating agencies? And how does that figure in terms of your capital allocation strategy?" ] }, { "name": "Kevin Burdick", "speech": [ "We have regular conversations with the rating agencies. We have throughout this -- throughout the pandemic. We had regular conversations even before the pandemic. I think they've been supportive.", "You can talk to them directly. We have been pretty clear about our view on the dividend, but it's part of the capital allocation process that our board thinks about every quarter. But we really see the strength of the business and the dividend coverage that we saw in this quarter and what we think about moving forward. It's a part of the delevering that we're seeing and the rating agencies have been looking at as well.", "So I can't speak for them, but we have a very regular dialogue with them." ] }, { "name": "Sunil Sibal", "speech": [ "Great. Thanks for that. I'll take my other questions offline." ] }, { "name": "Operator", "speech": [ "We'll take our next question from Michael Lapides with Goldman Sachs." ] }, { "name": "Michael Lapides", "speech": [ "Hey, guys. Thank you for taking my question, and congrats on a great quarter. Real quick, we've had lots of M&A questions, and they've all been asset acquisition or company acquisition-driven. I want to take it on the other side.", "Is there anything within the ONEOK portfolio that might not necessarily be core to ONEOK. You have a pretty integrated system, but just curious how you're thinking about that as a potential path to accelerating the deleveraging process?" ] }, { "name": "Terry Spencer", "speech": [ "Yeah, Michael, we always think about that. We're constantly thinking about asset rationalization. The fact of the matter is that we really don't materially have any assets that we don't consider to be core to our business, but we may have assets that certainly don't generate quite as higher rate of return as others. So we'll always think about those and we look at the landscape and the market opportunity and -- to determine if ownership of the hold value for somebody else is greater.", "So we're always thinking about those kinds of things, but as we sit today, our asset collection all fits together pretty well." ] }, { "name": "Michael Lapides", "speech": [ "Got it. And then, two related questions just on the third quarter. First of all, in the Bakken, what were the well connects in September? Like what was the cadence? I know you did 55 during the quarter. But what was the well -- what was the cadence of that through the quarter? Was it significantly higher in September as an exit run rate relative to what it was at the beginning in the quarter?" ] }, { "name": "Chuck Kelley", "speech": [ "Michael, this is Chuck. I know our quarterly number was 55. Frankly, I don't have the monthly breakdown in front of me. So we really can't speak to how it broke out over the quarter.", "We do have line of sight here in Q4 to a similar type number." ] }, { "name": "Operator", "speech": [ "We will take our next question from Craig Shere with Tuohy Brothers." ] }, { "name": "Craig Shere", "speech": [ "Thanks for taking the question. Congratulations on a terrific quarter. First, based on conversations with producers, any color around the magnitude of potential in Williston recoveries that you could see on your dedicated acreage from the spring? And kind of dovetailing with Terry's comments about breakeven costs falling, are you getting body language that the $40 to the new $35, like what we saw in 2015, 2016 as far as spring material rig count recoveries?" ] }, { "name": "Kevin Burdick", "speech": [ "Craig, it's Kevin. Yes, the conversations with producers is going great. They continue to get better and better. Chuck referenced lateral lengths and the frac, the completion technologies, etc.", "In addition to that, they have figured out spacing, and they know exactly what they're going to get. I think one of the charts we provide, not in our quarterly materials but I think in our investor deck shows year over year how the type curves have improved every year. And as we talk to producers, they don't expect that to change as they continue to get better. So does that take the $45 to the new $40 or vice versa? I don't know, but all I can tell you is in this price environment, all the conversations we're having with customers right now are about increasing activity, not about shutting activity down." ] }, { "name": "Craig Shere", "speech": [ "Great. And last question. Kevin, I just want to dig deeper into your clean tech and environmental comments. I mean some things we kind of maybe heard of is lithium extracted from oilfield brine, hydrogen perhaps cheaper to derive from the old oilfields and on field liquefaction perhaps assisting with flaring in certain basins.", "Acknowledging there's a lot of uncertainty over the next five to ten years, are there any areas of transition that will stand out more for you or you could potentially participate?" ] }, { "name": "Kevin Burdick", "speech": [ "Well, let me just -- hopefully, this will answer your question. I think when we think about our participation in a low-carbon environment, it comes in basically three buckets. First is reducing the impacts on the -- from our existing assets and reducing our emissions. We've got opportunities to do that in terms of enhanced pipeline integrity and leak protection or leak prevention.", "We also have the opportunity with electrification of existing natural gas-fired equipment, and in particular, compressors. And so, we've got -- we've done some of that work. We've got a lot of electric drive machines in service, and that's growing. And we're looking at continuing to do that as we go out over a 10-year time frame that can and will have a significant impact in lowering our emissions.", "It also gives us the opportunity to consume solar and wind-derived electricity, which obviously is a good thing to do. The other bucket is the transportation and storage and logistics for hydrogen. As you mentioned, CO2 carbon capture. We've got some projects that we're looking at.", "This is a pretty low-hanging fruit to reduce the amount of CO2 emissions. And then, we're thinking about renewable fuels and other inert types of commodities or substances so that fit very well with our existing capability and assets. And then, we're thinking about other low-carbon projects that just make strategic sense for our business. And that could be investing in some new technologies, potentially hydrogen fuel cell technologies.", "We could have investments in those types of projects, direct investments in some of those. So the thing -- so profitability, business strategy, all of these things have to make sense with that broader objective to be a profitable company and to make us better and to reduce our impact on the environment. So that's kind of how we think about it. We're probably not going to invest in projects that absolutely don't have a fit or don't connect in some form or fashion strategically with our core business and our core capability as a midstream company.", "So that's, I think, a long-winded answer to your -- thanks for your question. Hopefully, that helped." ] }, { "name": "Operator", "speech": [ "We'll take our next question from Derek Walker with Bank of America." ] }, { "name": "Derek Walker", "speech": [ "Thanks, everyone. I know we're over the hour, and I appreciate you squeezing me in here. Maybe I'll just ask one and ask the other questions offline. But if I heard you right during the formal remarks, I believe you said you captured $100 million of cost reductions this year up to this point.", "And I know there's some commentary around cost savings with shifting volumes around, it was kind of 40 to $50 million. Does that 40 to 50, is that incremental to that $100 million? Or have you achieved some of that already? And I guess is there a general sort of cost reduction target that you have going into next year. I think you had $120 million last year, but I just wanted to make sure that's incremental to what you've already talked about?" ] }, { "name": "Kevin Burdick", "speech": [ "This is Kevin. The 40 to $50 million, I believe, you're talking about that Sheridan referenced. That's related to kind of margin in our NGL business. And so, that would not be included in the $130 million we expect to save from our cost savings.", "So those are two separate things." ] }, { "name": "Derek Walker", "speech": [ "Got it. Thank you." ] }, { "name": "Operator", "speech": [ "We'll take our next question from Ganesh Jois with Goldman Sachs." ] }, { "name": "Ganesh Jois", "speech": [ "Hi. Thank you for taking my question. Just following up on Derek's question on the costs, we saw a meaningful step down in the opex in the G&P segment. Just wanted to understand if there was something unique happening in this particular quarter, or if this is a decent run rate to think of from a total opex perspective going forward?" ] }, { "name": "Kevin Burdick", "speech": [ "The step down you're referring to is that compared to the second-quarter or you compared to last year?" ] }, { "name": "Ganesh Jois", "speech": [ "Both actually because, I guess, you have many more plants that are online this year than last year, and yet, your numbers were meaningfully lower. So just curious if there's something happening unique to this quarter, or if this is the new normal in terms of cost structure?" ] }, { "name": "Kevin Burdick", "speech": [ "No. I don't know that I'd say it's a new normal. But clearly, when we have worked really hard over the last several months, really since the beginning of the pandemic to cut costs wherever possible. So we are doing things like there's -- we have compressor stations that we can reroute gas and shut down compressor stations, and there's a couple of plants in the Mid-Continent we have temporarily idled, that pulls cost out.", "You don't need as much materials and services and probably the biggest driver is our contract labor. We are doing most everything ourselves at this point with our employees as volumes have left. So with some process improvements and other things we found, we expect that some of that will be sustainable. But you would also expect that as our volumes pick back up, the costs will go up a little bit just from that additional volume." ] }, { "name": "Ganesh Jois", "speech": [ "Got it. Thank you." ] }, { "name": "Operator", "speech": [ "That concludes today's question-and-answer session. Mr. Ziola, at this time, I'd like to turn the conference over back to you." ] }, { "name": "Andrew Ziola", "speech": [ "All right. Thank you, Sarah. Our quiet period for the fourth quarter starts when we close our books in January and extends until we release earnings in late February. We'll provide details for the conference call at a later day.", "Thank you for joining us, and have a good week. Thank you, everybody." ] }, { "name": "Terry Spencer", "speech": [ "Thanks, Andrew." ] }, { "name": "Operator", "speech": [ "[Operator signoff]" ] } ]
OKE
2021-11-03
[ { "description": "Vice President,Investor Relations and Corporate Affairs", "name": "Andrew Ziola", "position": "Executive" }, { "description": "President and Chief Executive Officer", "name": "Pierce Norton", "position": "Executive" }, { "description": "Chief Financial Officer and Executive Vice President, Strategy and Corporate Affairs", "name": "Walt Hulse", "position": "Executive" }, { "description": "Executive Vice President and Chief Operating Officer", "name": "Kevin Burdick", "position": "Executive" }, { "description": "UBS -- Analyst", "name": "Shneur Gershuni", "position": "Analyst" }, { "description": "Barclays -- Analyst", "name": "Christine Cho", "position": "Analyst" }, { "description": "Senior Vice President, Natural Gas Liquids", "name": "Sheridan Swords", "position": "Executive" }, { "description": "J.P. Morgan -- Analyst", "name": "Jeremy Tonet", "position": "Analyst" }, { "description": "Sanford C. Bernstein -- Analyst", "name": "Jean Salisbury", "position": "Analyst" }, { "description": "Senior Vice President, Natural Gas", "name": "Chuck Kelly", "position": "Executive" }, { "description": "Wells Fargo Securities -- Analyst", "name": "Michael Blum", "position": "Analyst" }, { "description": "Tudor, Pickering, Holt and Company -- Analyst", "name": "Colton Bean", "position": "Analyst" }, { "description": "Truist Securities -- Analyst", "name": "Tristan Richardson", "position": "Analyst" }, { "description": "Tuohy Brothers -- Analyst", "name": "Craig Shere", "position": "Analyst" }, { "description": "Wolfe Research -- Analyst", "name": "Alex Kania", "position": "Analyst" }, { "description": "Goldman Sachs -- Analyst", "name": "Michael Lapides", "position": "Analyst" } ]
[ { "name": "Operator", "speech": [ "Good day and welcome to the ONEOK third quarter 2021 earnings call. Today's conference is being recorded. At this time, I would like to turn the conference over to Andrew Ziola. Please go ahead sir." ] }, { "name": "Andrew Ziola", "speech": [ "Thank you, Todd, and welcome to ONEOK third quarter 2021 earnings call. We issued our earnings release and presentation after the markets closed yesterday, and those materials are on our website. After our prepared remarks, we'll be available to take your questions. Statements made during this call that might include ONEOK's expectations or predictions should be considered forward-looking statements and are covered by the safe harbor provision of the Securities Acts of 1933 and 1934.", "Actual results could differ materially from those projected in forward-looking statements. For a discussion of factors that could cause actual results to differ, please refer to our SEC filings. [Operator instructions] With that, I'll turn the call over to Pierce Norton, president and chief executive officer. Pierce?" ] }, { "name": "Pierce Norton", "speech": [ "Thanks, Andrew, and good morning, everyone. We appreciate your interest and investment in ONEOK and thank you for taking your time to join us today. With me on today's call is Walt Hulse, chief financial officer and executive vice president, strategy and corporate affairs; and Kevin Burdick, executive vice president and chief operating officer. Also available to answer your questions are Sheridan Swords, senior vice president, natural gas liquids; and Chuck Kelly, senior vice president, natural gas.", "Yesterday, we announced strong third quarter earnings results and increased our 2021 financial guidance expectations. Our third quarter results were driven by NGL and natural gas volume growth on our system, the result of increasing producer activity and improving market demand. As world economics continue to recover from the pandemic, we're seeing demand continue to recover for natural gas and NGLs, and we're focused really on helping to meet that increasing demand for these critical energy products, particularly as we head into the winter months. As we look forward, we continue to coordinate with our customers on future growth expectations and are focused on innovation throughout the company.", "In September, we announced a greenhouse gas emissions reduction target, marking another major environmental milestone for our company. Our goal is to achieve an absolute 30% reduction or 2.2 million metric tons of our combined Scope 1 and 2 emissions by 2030 compared with 2019 levels. We will undertake a number of strategic emission reduction measures to meet this target, including the further electrification of certain natural gas compression assets, implementing additional methane mitigation through best management practices, system optimizations and then collaborating with our utility providers to increase the use of low carbon energy for our operations, just to name a few. As we continue to evaluate low carbon opportunities, we remain focused on those that will complement our operations and capabilities while providing long-term stakeholder value.", "As we have additional detail on specific projects or the future emission reduction activities, we will share that information and our progress toward our 2030 target. I will turn the call over to Walt Hulse to discuss our financial performance." ] }, { "name": "Walt Hulse", "speech": [ "Thank you, Pierce. With yesterday's earnings announcement, we once again increased our 2021 financial guidance expectations and narrowed our ranges. We now expect net income of $1.43 billion to $1.55 billion and adjusted EBITDA of $3.325 billion to $3.425 billion with a midpoint of $3.375 billion. This represents a 10% increase in our net income and EPS guidance midpoints and a 5% increase in our adjusted EBITDA midpoint compared with our previous guidance.", "Our higher expectations are driven by continued volume strength in the Rocky Mountain region and Permian Basin, increased demand for natural gas storage and transportation, and higher commodity prices. Our 2021 capital expenditures are expected to be closer to the higher-end of our guidance range of about $525 million to $675 million as a result of increased producer activity and project timing. We continually work with our customers to evaluate their future capacity needs and supply expectations, and we'll align our projects and capital investment with those needs. Our outlook for growth in 2022 continues to also strengthen, driven by the increasing producer activity and rising gas to oil ratio in the Williston Basin, along with the recent completion of our Bear Creek plant expansion.", "Additionally, new ethane demand from new and expanding petrochemical facilities is expected to come online before the end of the year. Kevin now will provide more detail on each of these shortly. Now for a brief overview of our third quarter performance. ONEOK's third quarter 2021 net income totaled $392 million or $0.88 per share, a 26% increase compared with the third quarter 2020 and a 15% increase compared with the prior quarter.", "Third quarter adjusted EBITDA totaled $865 million, a 16% increase year over year and an 8% increase compared with the second quarter 2021. Our September 30 net debt to EBITDA on an annualized run-rate basis was 4.0 times, and we have this line of sight in sub-4 times in the near future. We ended the third quarter with no borrowings outstanding on our $2.5 billion credit facility and nearly $225 million of cash on the balance sheet. We continue to proactively manage our balance sheet and upcoming debt maturities.", "And earlier this week, we redeemed the remaining $536 million of senior notes due February 2022. Our next debt maturity is not until October of 2022. In October, the board of directors declared a dividend of about $0.935 or $3.74 per share on an annualized basis, unchanged from the previous quarter. I will now turn the call over to Kevin for an operational update." ] }, { "name": "Kevin Burdick", "speech": [ "Thank you, Walt. In our Natural Gas Liquids segment, total NGL raw feed throughput volumes increased 5% compared with the second quarter of 2021 and 10% year over year, averaging nearly 1.3 million barrels per day. Our highest NGL volume to-date. Third quarter raw feed throughput from the Rocky Mountain region increased 5% with the second -- compared within second quarter 2021, and nearly 50% compared with the third quarter 2020.", "Volume growth was driven by increased producer activity in the region, ethane recovery, and increasing volumes from recently connected third-party plants, and including the 250 million cubic feet per day third-party plant that came online in July. Roughly throughput volumes from the mid-continent and the Permian Basin also increased. Permian volumes increased 12% compared with the second quarter 2021, driven by higher ethane recovery and producer activity levels. We have also connected additional third-party plants in the basin during the quarter.", "The segment was also able to utilize our integrated assets to capture the benefit of location and commodity price differentials during the third quarter, providing additional earnings on top of our primarily fee-based results. Petrochemical demand continues to strengthen as facilities have returned to normal operations following Hurricane Ida and as the pandemic recovery continues. Two new petrochemical plants coming online before the end of this year could provide more than 160,000 barrels per day of additional ethane demand once fully operational. This additional capacity combined with strong ethane exports, should support a wider ethane to natural gas differential in 2022.", "Ethane volumes on our system in the Rocky Mountain region increased compared with the second quarter 2021 as we incented additional ethane recovery during the third quarter. Recovery continued in October and is also expected throughout November, given our current regional natural gas and ethane prices. In other regions, we continue to forecast partial ethane recovery in the mid-continent and near full recovery in the Permian for the remainder of the year. So all of these assumptions are included in our increased financial guidance for 2021.", "Any additional ethane recovered would provide upside to our 2021 expectations. Discretionary ethane on our system is now more than 225,000 barrels per day. Of that total opportunity, more than 125,000 barrels per day are available in the Rocky Mountain region and 100,000 barrels per day in the mid-continent. As our NGL volumes continue to grow across the systems, so does the discretionary ethane.", "Moving on to the Natural Gas Gathering and Processing segment. In the Rocky Mountain region, third quarter processed volumes averaged nearly 1.3 billion cubic feet per day, a 2% increase compared with the second quarter of 2021 and a nearly 25% increase year over year. Scheduled plant maintenance at four of our processing facilities, which we have since come back online, decreased third quarter volumes by approximately 30 million cubic feet per day for the quarter. We estimate that approximately 14 to 15 rigs, which can drill approximately 300 wells per year, is enough to maintain 1.4 billion cubic feet per day of production behind our system.", "Any of the additional rigs, combined with the rising gas-to-oil ratios of wells already connected to our system, would provide additional volume growth. Conversations with our producers in the region continue to point to higher activity levels through the end of the year and into year 2022. There are currently 32 rigs and 10 completion crews operating in the basin with 17 rigs and five completion crews on our dedicated acreage. This is more than enough activity to grow gas production on our acreage.", "In addition to our rigs that's currently operating in the basin, there remains a large inventory of drilled but uncompleted wells with more than 520 basinwide and approximately 300 on our dedicated acreage, compared with about 400 ducks on our dedicated acreage at this time last year. In the third quarter, we connected 72 wells in the Rocky Mountain region. And in October, we connected more than 30 additional wells. Based on the most recent producer completion schedules, we still expect to connect more than 300 wells this year.", "With our Bear Creek plant expansion and related compressor stations now complete and in-service, we should see a significant number of well completions in the fourth quarter in Dunn County as producers had timed their completions with the start-up of our well expansion to avoid flaring. The new plant will accommodate increasing volumes as it ramps to full capacity over the next two to three years. With Bear Creek 2's completion, we now have approximately 1.7 billion cubic feet per day of processing capacity in the basin. We also continue to see that -- increased activity in the Mid-Continent region with two rigs now operating on our acreage and 10 wells connected during the third quarter.", "Sustained higher natural gas and NGL prices can drive a continued increase in our activity next year. During the third quarter, the gathering and processing segments fee rate averaged a $1.02 per MMBtu, compared with $0.94 per MMBtu in the third quarter of 2020. Changes in our average fee rates continued to be driven by our volume and contract mix each quarter. We still expect the fee rate for 2021 to average between $1 and $1.05 per MMBtu.", "Onto the natural gas pipeline segment. This segment result is stable. Fee-based earnings continue to drive solid results with adjusted EBITDA increasing 8% compared with the prior quarter. As we entered the winter heating season, we continue to see this increased interest from our customers for additional long-term transportation and storage capacity on our system, following the extreme winter weather event earlier this year.", "The segment's market connected pipelines and more than the 52 billion cubic feet of natural gas storage provide critical services to our customers all year around but especially during the winter. As always, we're working with our customers to understand their needs and to help meet increasing demand in the coming months. Pierce, that concludes my remarks." ] }, { "name": "Pierce Norton", "speech": [ "Thank you, Kevin. The strong results for this quarter underscore the quality of our assets and the hard work and dedication of our more than 2,800 employees. I'm very proud of the fact that our employees maintain discipline and focus on this importance of safety, reliability, and the responsible operations of our assets. The first nine months of this year has set up well for the end of the next year, the companywide earnings growth in year 2021, and have laid the foundation for continued growth next year.", "With that, operator, we're now ready for questions." ] } ]
[ { "name": "Operator", "speech": [ "[Operator instructions] We'll take our first question from Shneur Gershuni with UBS." ] }, { "name": "Shneur Gershuni", "speech": [ "Hi. Good morning, everyone. Maybe to start off, I was wondering if we can talk about tailwinds into 2022. You gave some pretty good color about well completions in the presentation there.", "It sounds like you've about 100 wells left to complete for this year out of the 300 with only two months to go. You've got Bear Creek now in service. Is it also fair to assume that you potentially have some PPI inflators on some of your assets like Elk Creek and so forth? And so just kind of wondering how to how to think about ONEOK as we sort of head into 2022. In the past, you've talked about a $3.5 billion to $4billion upside potential.", "Is that the case? Are this tailwind stronger now? Just wondering if you can give us sort of some color as to how do you think of the tailwinds right now as we head into 2022." ] }, { "name": "Kevin Burdick", "speech": [ "Shneur, this is Kevin. I think there's multiple kind of answers in that question. One, when we think about tailwinds into '22 I really go more toward the activity levels we're seeing in the Bakken with the rigs, with the DUC inventory, with the rising GORs. We're seeing really nice activity and volume growth in the Permian.", "So I kind of point to that core volume growth. In addition to that, you've got like I said in the remarks, ethane demand coming on the system, which could drive additional ethane recovery as we think about 2022. So that's where I think the tailwinds are. But to your -- you asked a question in there about kind of inflators on our contracts.", "In our NGL segment and our GNP segment, the vast majority of our contracts do have escalators on the fee rate, so we're covered as we think about inflation and other things like that. So those contracts are covered." ] }, { "name": "Shneur Gershuni", "speech": [ "OK. So you're still good with the range from before. OK. And then maybe just sort of given your leverage trajectory, kind of curious about what kind of return of capital options are potentially considering when you hit your leverage targets mid next year.", "Could we potentially see a dividend increase or buybacks on the table? Just any color on that as well too, please." ] }, { "name": "Walt Hulse", "speech": [ "Sure, Shneur. This is Walt. We're very pleased to have achieved that 4.0 here in the third quarter. We want to continue to see that trend lower.", "And so we're not going to stop looking for that debt reduction and then improving debt-to-EBITDA ratio. The other thing with free cash flow is it gives us the opportunity to invest in our capital growth as we go forward, utilizing free cash flow and not having to finance. Obviously, as we get further and further along into the reduction, our options open up. But at the moment, we're focused on debt reduction and using our free cash flow for high return projects." ] }, { "name": "Shneur Gershuni", "speech": [ "Great. Perfect. Thank you very much. Appreciate the color today." ] }, { "name": "Walt Hulse", "speech": [ "Thank you." ] }, { "name": "Operator", "speech": [ "Thank you. We'll take our next question from Christine Cho with Barclays." ] }, { "name": "Christine Cho", "speech": [ "Morning. If I could start with the incented ethane extraction in the Bakken, the quarter was a little noisy with a number of plants being offline so it's kind of hard to tell on a sequential basis but can you just give us an idea of I think in your prepared remarks that you said you continue to incent ethane, what the magnitude of the increase was on a quarter-over-quarter basis. And Belvieu spread over Ventura gas didn't seem like it would incentivize ethane extraction, so should we assume it's because of your exposure to AECO? And I know you're not going to tell us what your exposure to AECO is but can you give us an idea of what your limitations and constraints would be so that we can try and figure out maybe what your max exposure could be?" ] }, { "name": "Sheridan Swords", "speech": [ "Christine, this is Sheridan. What I would tell you is when we look at the opportunity to incentivize ethane, we look at what we could sell gas at for at the gas plant not at Ventura. So we look at what's going on in the marketplace, what the market is offering us for gas price at the plant, and then we buy it. If we choose to incentivize it, we buy the ethane at that price or slightly better than that price to go in.", "So you can't really use venture or AECO. You have to look and see what is happening at the gas plant at the time. In terms of volume, we -- as we said in the remarks, we did incentivize more ethane in the third quarter than we did in the second quarter. At this time, we're not going to give you an idea how much more but we did incentivize more in the third quarter." ] }, { "name": "Christine Cho", "speech": [ "And would it be safe to assume that you could incentivize even more like on a fiscal basis going forward?" ] }, { "name": "Sheridan Swords", "speech": [ "Yes, especially as volumes grow in the basin and grow on our in our GNP segment, we do have an opportunity to incentivize more anything. But as I said in previous, we look at what's going on the marketplace, where the prices are in all basins to see how much we think is the right amount of ethane to bring out so we don't push other basins that we have operations into rejection." ] }, { "name": "Christine Cho", "speech": [ "OK. And then I guess when we think about the ethane demand that is slated to ramp up, how do you think about the risk to the operational crackers not running at full utilization if gas prices and ethane prices get too high?" ] }, { "name": "Sheridan Swords", "speech": [ "What I would say there's still a very strong spread between ethane and ethylene. And so it looks like the crackers have plenty of room to continue to run. Now with new crackers run at full rate, we think they will but they need to run at -- more ethane needs to be cracked today than has been because of that wide ethane to ethylene spread. So we see good volume going forward.", "And then you couple that with the exports that are coming online. We expect stronger export demand in 2022 than we've seen in 2021, especially as additional crackers come on in China." ] }, { "name": "Christine Cho", "speech": [ "Great. Thank you." ] }, { "name": "Operator", "speech": [ "Thank you we'll take our next question from Jeremy Tonet with J.P. Morgan." ] }, { "name": "Jeremy Tonet", "speech": [ "I think on prior calls you talked about a low double digit increase for EBITDA versus -- well, a midpoint of $3.2 billion of EBITDA at that point in time with the guidance. I'm just wondering if that's kind of a fair way to think about it. Commodity prices look like they're higher than what was quoted in the first call there but just trying to update, I guess, how you guys are thinking about 2022 now versus what you had laid out in the first quarter." ] }, { "name": "Walt Hulse", "speech": [ "Jeremy, this is Walt. I think when we laid it out in the first quarter, our guidance at that point was $3.050 billion. Obviously, with the strength that we've seen and build throughout the year, we already achieved what was out there at that point in time. I -- what I would comment on is that quarter to quarter, we have seen everything strengthen in our business whether it be producer activity, commodity prices.So all of the trends are headed in the right direction.", "We think that we're going into '22 with a very good tailwind and we will give you our '22 guidance in February." ] }, { "name": "Jeremy Tonet", "speech": [ "Got it. That makes sense there. And maybe just pivoting toward D.C. for a minute and granted it's pretty uncertain outlook there.", "We have very cloudy crystal ball but just wondering if you could offer any thoughts on what you might be looking for out there and how that could impact ONEOK, the higher 45-Q or minimum tax or anything else that is on your mind at this point." ] }, { "name": "Walt Hulse", "speech": [ "Well, as it relates to the alternative minimum tax, now there's still quite a few moving parts right now. If it is enacted, it's unclear at this point how it will interplay with bonus depreciation, which is in place for the next several years and has been in place. It's unclear how it will interplay with the interest limitations that are already in place on the NOL utilization. And also the billion dollar threshold may be increasing, making the whole conversation somewhat irrelevant.", "So we are on top of it. We've got a team that is watching the developments there and we will continue to do that. But at the end of the day, even in its worst case, we wouldn't see it changing our progress on deleveraging or being able to fund our capex going forward." ] }, { "name": "Jeremy Tonet", "speech": [ "Got it. Thank you for that. That's a very helpful answer." ] }, { "name": "Operator", "speech": [ "Thank you. We'll take our next question from Jean Ann Salisbury with Bernstein." ] }, { "name": "Jean Salisbury", "speech": [ "Hi. Good morning. North Dakota statewide flaring increased in recent months as you show on Page 8. Can you talk about the reasons for that and if it's an indicator that it might be tough to get all of the expected gas production growth going forward? Notably ONEOK's acreage clearing hasn't increased, so maybe it's different for you all across, I think, capacity.But just wondering about the trends in wider North Dakota versus you all." ] }, { "name": "Kevin Burdick", "speech": [ "Jean Ann, this is Kevin. I'll -- Chuck can chime in as well. But I think what you saw going on through the summer is you had several outages at facilities. We've talked about some of the facilities we had down.", "And while the majority of the cases producers are then curtailing that volume, sometimes you'll see a little tick up in flaring. And the same with some minor third-party plants that were going through some expansions and other maintenance activities during the summer. I don't think that's a trend. I think it's going to trend back the other way as we get into what I'd consider more normal operational run rates for these facilities.", "The conversations we're having with all our customers up there, and I'm sure third parties are the same way, the target discussion is zero. It's not the state targets anymore. So we are working with our customers for sure on how we drive that number as close to zero as we possibly can, as it relates to the timing of our facilities, as it relates to how they're bringing on large pads, etc. So I would expect that to turn around as we get these facilities up and going." ] }, { "name": "Jean Salisbury", "speech": [ "That's really helpful. Thank you. And then just wondering if there's been any recent movement on either the Bison project or the northern border expansion to get some more gas takeaway kind of on the horizon?" ] }, { "name": "Chuck Kelly", "speech": [ "Yeah, Jean Ann. This is Chuck. The projects that were discussed prior to the pandemic when we saw the trajectory of the basin requiring additional residue takeaway, we are revisiting those projects as we see increased activity in the basin. Rising GORs is quite a few factors that indicate that in the next, call it, two to three years these projects are going to become necessary.", "So there's a lot of work being done on it behind the scenes right now and we will definitely be a part of that solution right." ] }, { "name": "Jean Salisbury", "speech": [ "Great. Thanks. That's all for me." ] }, { "name": "Operator", "speech": [ "Thank you. We'll take our next question from Michael Blum of Wells Fargo." ] }, { "name": "Michael Blum", "speech": [ "Thanks. Good morning, everyone. I wanted to just ask a bit about the mid-continent. I just wanted to hear what you're seeing in terms of producers plans there.", "Do you think there's a possibility that mid-con volumes could be flat in 2022? Do you think there's been enough uptake and drilling activity? Thanks." ] }, { "name": "Kevin Burdick", "speech": [ "Michael, it's Kevin. I think if you look at the total basin, yeah, it's nice to see the uptick in rigs. I know there's been a couple of producers that have come out pretty strongly and and announced increases in production in the Mid-Continent, especially from a gas and NGL perspective. The way we kind of look at it is, A, we focus on the total rigs because with our NGL position across that basin, where we're connected to about every plant, chances are if a rig shows up in the Mid-Continent, the NGLs are coming to us.", "So that's a tailwind. While we may not have a lot of those rigs running on our dedicated acreage in GNP, we do have a couple. We've completed some wells and that's a nice -- again, we continue to talk to our customers and if we see these types of prices sustained, I think you could see some more activity in the Mid-Continent." ] }, { "name": "Michael Blum", "speech": [ "Great. Thank you very much." ] }, { "name": "Operator", "speech": [ "Thank you. We'll take our next question from Colton Bean with Tudor, Pickering, Holt & Company." ] }, { "name": "Colton Bean", "speech": [ "Morning. So maybe to blend the two questions there on ethane incentive and then the mid-con, I think we saw a slight recovery in the average bundled mid-con rate for Q3. Was that really just a result of this spread between ODT and Bellevue widening out a bit? And if so, I guess are current levels or Q3 levels at least kind of sufficient to get that historical $0.9 cent per gallon rate?" ] }, { "name": "Sheridan Swords", "speech": [ "This is Sheridan. What I'd say is two things that drove the rise in the average [Inaudible] in the Mid-Continent, you mentioned one of them, which is we saw a wider spread between OGT and Bellevue. I think factors or one of the months in the quarter, we did incentivize -- didn't have to incentivize any ethane now. That came out naturally.", "The other thing we also saw an uptick in our C3-plus volume which gets a higher rate than the ethane volume. A lot of our plants have a split tier rate for ethane and C3-plus. So both of those contributed to the higher rate." ] }, { "name": "Colton Bean", "speech": [ "Great. And then back on the balance sheet, you've highlighted that the desire to drop below 4x, looks like effectively there on a run rate basis. Is there a new kind of leverage target that you guys think about whether it's the ratio or do you think more in terms of an absolute debt target? And really just interested in how you're thinking about the balance sheet philosophically over the next couple of years." ] }, { "name": "Pierce Norton", "speech": [ "Well, I mean we've said before that aspirationally we would like to head toward 35 and maybe even a little bit lower but I think we're going to see opportunities going forward. At -- the EBITDA levels that we're at, half a turn is a whole lot of money to invest. So we think we've got meaningful room there to continue to invest in great projects and still see our deleveraging trend downwards toward that aspirational target of around 3.5 times." ] }, { "name": "Colton Bean", "speech": [ "OK. Thank you." ] }, { "name": "Operator", "speech": [ "Thank you. We'll take our next question from Tristan Richardson of Truist Securities." ] }, { "name": "Tristan Richardson", "speech": [ "Hi. Good morning, guys. Just a quick one on capital. Clearly you guys have -- you've shown the Elk Creek slide before.", "Obviously there's plenty of capital efficient optionality there on the downstream side but can you frame for us maybe generally the capex dynamic in 2022 versus 2021? Certainly a very modest capital year with Bear Creek but with additional third-party plants on line in the second half, GOR trends in that sort of pent-up volumes dynamic, you mentioned, in anticipation of Bear Creek. Can you just frame for us what the capital could look like in GMP or just broadly in 2022?" ] }, { "name": "Kevin Burdick", "speech": [ "Tristan, this is Kevin. I'm not going to give you a number because that will flow with or as we provide you guidance early next year. But the way we're -- we think about capital, we're constantly evaluating what our customers needs are and what our capacities are. So rather we're talking about processing -- gathering and/or processing needs in the Bakken, frac capacity needs in Bellevue, other pipeline needs maybe on West Texas.", "We're evaluating all of the information from our customers about what their plans are as we move into '22 and then factoring that in. So the great position we're in, as you mentioned Elk Creek, but even should we need additional frac capacity like an MB-5 to restart that paused project, we've already said we've already spent a significant amount of that money. So both the additional capital we would need to provide that capacity as well as the time we would need to deliver the capacity, we're in really good shape because we might only need, say, 12 to 18 months to finish out a frac. And the pipeline, we've already got pipe ordered and bought so you don't have that exposure.", "So these projects that could come back are in really good shape to -- we don't have to spend a lot of money and we can do them relatively quickly." ] }, { "name": "Operator", "speech": [ "Thank you. We'll take our next question from Craig Shere with Tuohy Brothers." ] }, { "name": "Craig Shere", "speech": [ "Good morning." ] }, { "name": "Walt Hulse", "speech": [ "Good morning, Craig." ] }, { "name": "Craig Shere", "speech": [ "So we're talking about that 25 a month well connects in the Bakken, and obviously it's increasing. I think you said 30 in October, and if I did the math right, maybe a 38 or more from November, December. So I had a couple of questions. One, if these trends continue, does it seem inevitable that by year-end next year, we hit over 1.5 a day? And this is all just off your activity, right, on your acreage but it kind of ignores activity with third-party processing plant connections into your NGL system, right.", "So how much more upside could there be there?" ] }, { "name": "Pierce Norton", "speech": [ "Well, Craig, that's -- I mean you've hit on the tailwinds we've talked about. I mean if you're north of 30 rigs in the basin, absolutely we believe that's enough to grow gas production across the entire basin. And so that's not only going to benefit us from a GMP perspective but all the third-party connections that Sheridan has on the NGL side. We're going to benefit from growth there as well.", "We're in great shape because we've still got, I think, 125,000 barrels a day of capacity on Elk Creek or on our NGL systems coming out of the basin. So again, we don't have to spend a lot of capital to capture that EBITDA." ] }, { "name": "Craig Shere", "speech": [ "OK. And it sounds like there's this great tailwind, everything's looking wonderful. I understand well wait till February to get next year's guidance but it seems like updated full-year midpoint EBITDA guidance kind of suggests decent but the kind of sober fourth quarter. Nothing more recent outperformance versus expectations.", "Could you maybe talk about the gives and takes going into the fourth quarter?" ] }, { "name": "Pierce Norton", "speech": [ "Well, I think the gives and takes are, as you're probably going to predict we'll say is we always know there's weather we have to deal with in North Dakota. And so if you get a calm early winter then yeah, I think that could provide some upside. We do have a lot of well connects forecasted in the last couple months of the year. That's what producers are telling us.", "But if you get some weather, could those be delayed? I think the key -- potential so. But I think the key is we have kind of this arbitrary cutoff at December 31. Well, the well connects are going to get done rather it's in on December 15th or January 15th. So as we think -- if we back up and look at the trends over the next several months, clearly we've got optimism of where we're going to be.", "But I think, yes, you've hit on -- there are -- I think there's some upside as well with both volumes if these wells come on line like we think and as well as the ethane recovery option that would be a positive upside for us in the fourth quarter." ] }, { "name": "Craig Shere", "speech": [ "Great. Thank you." ] }, { "name": "Operator", "speech": [ "Thank you. We'll take our next question from Alex Kania with Wolfe Research." ] }, { "name": "Alex Kania", "speech": [ "Hey, good morning. Two questions. First is just thinking about the ethane recovery opportunity, thinking going into next year and maybe putting it into context with your view of kind of a widening spread between ethylene natural gas next year just with increased demand. So would it be fair to think that there's a kind of double opportunity there between both volumes and maybe an ability to kind of reduce the incentive pricing that you have on ethane?" ] }, { "name": "Sheridan Swords", "speech": [ "Yeah, this is Sheridan. You're exactly right. We think there is an opportunity both on them. Obviously, if we -- the wider the ethane to natural gas spread gets, the more we can capture of that spreads and so the incentive is less.", "And also as volume continues to increase in the Bakken in and potentially in the Mid-Continent, we also have the opportunity bring even more ethane out. So you're exactly -- you're thinking about it right. There's a double benefit going into 2022." ] }, { "name": "Alex Kania", "speech": [ "Great. Thanks. And then just maybe a follow up on thinking about the, I guess, the maintenance gas level at the very least on the 300 wells a year in the 14 to 15 rigs. Does that also imply or kind of assume any continued work-down of the DUC inventory or is that 14 to 15 rigs, say, enough to kind of keep volumes where they are and then whatever else are going with the GOR but not having to really dive into the inventory of the DUCs anymore?" ] }, { "name": "Pierce Norton", "speech": [ "I think you'll see the DUC inventory continue to work down a little bit. Those will occur, I guess, call it, simultaneously. You'll look at the completion crews and at 10 completion crews, I think you will -- and the number of rigs running, I think you'll work the inventory down. It'll be a little slower.", "But the more rigs you have, the more kind of a working -- you'll get down to a working inventory level at some point where the producer likes to keep a certain level so that they don't ever want a completion crew to be waiting on on a well to complete. So I think you'll see it stabilized but I do think you're going to have a period of time here for the next several months where you're going to have both the DUC inventory getting worked down as well as these new rigs churning out new wells." ] }, { "name": "Alex Kania", "speech": [ "Great. Thanks very much." ] }, { "name": "Operator", "speech": [ "Thank you. We'll take our next -- our last question from Michael Lapides with Goldman Sachs." ] }, { "name": "Michael Lapides", "speech": [ "Hey, guys. Thanks for taking my question. Mine is a little bit more long term in nature. When you get close to a point where you're going to think about capital allocation again and given just what the industry has been through over the last couple of years, if not longer, how do you think about from an equity standpoint what you and the board would view as an appropriate kind of how to return capital back to equity holders.", "Meaning do you think it's embedded primarily in the dividend growth or are you thinking it's embedded more so in buybacks and in very limited dividend growth? Do special dividends play a role? Just -- I'm trying to just think about how you're thinking and how the board's thinking about capital allocation as you would see improving fundamentals ahead." ] }, { "name": "Pierce Norton", "speech": [ "So, Michael, I'll -- this is Pierce. I think the -- what our first priority would be to grow our earnings per share and return that value that way in the equity price. I mean Walt said this before. As we go down through the four and get to the 3.5 and maybe lower, it does open up our opportunities.", "But we also are looking at one of those growth opportunities to reinvest in the business to continue to grow our earnings per share. And then it opens up the board to look at some of those other opportunities. Walt, you got anything to add to that?" ] }, { "name": "Walt Hulse", "speech": [ "No, I think that's exactly right. We -- as we see those earnings growth, the board will continue to evaluate all those opportunities. And if anything comes back to it, we have more attractive returns and high multiple projects and we're going to want to focus our capital on. If that isn't the case, then obviously looking at other forms of capital returns to shareholders is something we'll have to evaluate." ] }, { "name": "Michael Lapides", "speech": [ "Got it. Thank you, guys. I'll followup offline. Much appreciated." ] }, { "name": "Pierce Norton", "speech": [ "Welcome. Thank you." ] }, { "name": "Operator", "speech": [ "Thank you. That concludes our questions for today. I'll turn it back to Andrew Ziola for closing remarks." ] }, { "name": "Andrew Ziola", "speech": [ "Our quiet period for the fourth quarter and year end starts when we close our books in January of 2022 and extends until we release earnings in late February. We'll provide details for that conference call at a later date. Thank you all for joining us, and the IR team will be available throughout the day." ] } ]
OKE
2020-04-29
[ { "description": "Investor Relations, vice president", "name": "Andrew Ziola", "position": "Executive" }, { "description": "president and chief executive officer", "name": "Terry Spencer", "position": "Executive" }, { "description": "chief financial officer, treasurer and executive vice president", "name": "Walter S. Hulse", "position": "Executive" }, { "description": "Executive vice president and chief operating officer", "name": "Kevin Burdick", "position": "Executive" }, { "description": "senior vice president", "name": "Sheridan Swords", "position": "Executive" }, { "description": "senior vice president", "name": "Chuck Kelley", "position": "Executive" }, { "description": "UBS -- Analyst", "name": "Shneur Gershuni", "position": "Analyst" }, { "description": "Barclays -- Analyst", "name": "Christine Cho", "position": "Analyst" }, { "description": "JPMorgan -- Analyst", "name": "Jeremy Tonet", "position": "Analyst" }, { "description": "SunTrust -- Analyst", "name": "Tristan Richardson", "position": "Analyst" }, { "description": "Credit Suisse -- Analyst", "name": "Spiro Dounis", "position": "Analyst" }, { "description": "Wells Fargo -- Analyst", "name": "Michael Blum", "position": "Analyst" }, { "description": "Bernstein -- Analyst", "name": "Jean Ann Salisbury", "position": "Analyst" }, { "description": "Tudor, Pickering, Holt & Company -- Analyst", "name": "Colton Bean", "position": "Analyst" }, { "description": "Goldman Sachs -- Analyst", "name": "Michael Lapides", "position": "Analyst" }, { "description": "Jefferies -- Analyst", "name": "Chris Sighinolfi", "position": "Analyst" }, { "description": "Bank of America -- Analyst", "name": "Dan Lungo", "position": "Analyst" }, { "description": "U.S. Capital Advisors` -- Analyst", "name": "Becca Followill", "position": "Analyst" }, { "description": "RBC Capital Markets -- Analyst", "name": "Elvira Scotto", "position": "Analyst" }, { "description": "Tuohy Brothers -- Analyst", "name": "Craig Shere", "position": "Analyst" } ]
[ { "name": "Operator", "speech": [ "Thank you for standing by. Good day and welcome to the First Quarter 2020 ONEOK Earnings Call. Today's conference is being recorded.", "At this time, I would like to turn the conference over to Andrew Ziola. Please go ahead sir." ] }, { "name": "Andrew Ziola", "speech": [ "Thank you, Paula and good morning everyone, and welcome to ONEOK's First Quarter 2020 Earnings Call. We issued our earnings release and presentation after the markets closed yesterday and those materials are on our website. After our prepared remarks, we'll be available to take your questions. During the Q&A session, we would appreciate it, if you'd limit yourself to one question. A reminder that statements made during this call that might include ONEOK's expectations or predictions should be considered forward-looking statements and are covered by the Safe Harbor provision of the Securities Acts of 1933 and 1934. Actual results could differ materially from those projected in forward-looking statements. For a discussion of factors that could cause actual results to differ, please refer to our SEC filings.", "Our first speaker this morning is Terry Spencer, President and Chief Executive Officer. Terry?" ] }, { "name": "Terry Spencer", "speech": [ "Thanks, Andrew. Good morning and thank you all for joining us today. And as always, we appreciate your continued trust and investment in ONEOK.", "Joining me on today's call is Walt Hulse, Chief Financial Officer and Executive Vice President, Strategic Planning and Corporate Affairs and Kevin Burdick, Executive Vice President and Chief Operating Officer. Also available to answer your questions are Sheridan Swords, Senior Vice President Natural Gas Liquids; and Chuck Kelley, Senior Vice President Natural Gas. On behalf of ONEOK, we hope you, your families and your colleagues are healthy as we all navigate and cope with the uncertainties surrounding the COVID-19 pandemic. As an essential critical infrastructure business, our employees continue daily work. We remain focused on operating safely and responsibly and on providing the essential services that our communities and customers rely on us for. We've asked all employees to work from home who are able and we've increased safety protocols for those critical employees continuing to work on site.", "We've offered additional support to employees through temporary benefit adjustments and human resources programs and are prioritizing open communication with employees, our Board of Directors and the financial community related to our COVID-19 response efforts. The current environment and worldwide impacts of this pandemic are clearly unprecedented. But as you know, COVID-19 is not the only challenge facing the energy industry right now. The commodity price collapse and resulting recent pullback in crude oil production across the country is greatly impacting our industry. As described in the earnings release, we did not provide what one would call a traditional guidance update, but we did provide a range of possible outcomes for 2020. Providing specific volume and commodity price guidance would not be appropriate for us due to the number of potential variations of outcomes that are possible for price forecasts, curtailment quantities and the duration and pace of economic recovery on a worldwide basis among other factors.", "That said, we have performed a scenario analysis and based on currently available information, we believe the range of possible 2020 adjusted EBITDA results will likely be between $2.6 billion and $3.0 billion. While this wide range indicates potential challenges, it also has opportunity and as we are well positioned to realize earnings growth in 2020 and 2021 as NGL markets remain resilient and storage capacity is at a premium despite the challenges our industry faces. Now, I'd like to comment on the recent dividend announcement, which we prudently held flat at $0.935 per share for the quarter. As we look to the future, we expect our business to generate sufficient cash flow to pay the dividend. Our decision to significantly reduce capital spending until growth opportunities return puts us in a good position to continue returning value to our shareholders.", "As we always do, each quarter we'll work with our Board to assess our forward views of future cash flows and the dividend as appropriate. We've been through cycles before and we have a long track record of delivering on expected results. And most importantly, the fundamentals of our business have not changed. Our strong balance sheet and liquidity provide important financial flexibility. Our extensive and integrated assets including available storage in key market centers are competitively well positioned. Our fee-for-service business model mitigates our direct commodity exposure, including the stability of our natural gas pipelines business, which has nearly 100% take-or-pay contract structures with primarily financially strong, electric and utility customers.", "Our customers are some of the most resilient and well capitalized in the industry with decades of proven reserves. And the demand for NGLs in the U.S. and abroad remains and there are signs that international demand is beginning to recover. All these factors provide the foundation for a resilient business that we believe is built to weather these kinds of uncertain market conditions and provide a platform to resume growth when it makes sense. The natural gas and NGL reserves in the basins served by our systems haven't moved. The reserves are still there and we believe our ability to serve them is stronger than ever. Many of our capital growth projects have recently come online or are nearing completion.", "These projects have driven volume growth across our businesses including reducing the amount of flaring in the Williston Basin as we expected up until the pandemic. And as we have done in previous commodity cycles, we're able to adjust the scale and timing of our growth projects to best fit the needs of our customers. We made proactive adjustments early on in this cycle to better align our capital investments with our customers' needs and we will continue to be flexible and responsive to those needs as our view of the market evolves. Kevin will provide more detail on these projects in a moment. As history shows, how you react in markets like this will have lasting impacts for quarters and years to come. Swift financial and operational decisions made at ONEOK in 2015 and 2016, while difficult at the time, set us up well for a transformational period of growth over the past few years. We're now in a great position with available integrated capacity across our system once market conditions improve.", "With that, I will turn the call over to Walt." ] }, { "name": "Walter S. Hulse", "speech": [ "Thank you, Terry. I'll start with some brief comments on our first quarter financial performance, our liquidity and then our capital allocation strategy as we move forward. ONEOK reported a net loss of $142 million in the first quarter of 2020, which includes a non-cash impairment charge of $642 million or $1.17 per share. Excluding these non-cash impairment charges, ONEOK's EPS was $0.83 per share for the first quarter. First quarter adjusted EBITDA totaled $701 million, a 10% increase compared with the first quarter of 2019. Natural gas liquids and natural gas volume growth, higher average fee rates and higher contracted natural gas, transportation capacity, all contributed to year-over-year earnings growth.", "Distributable cash flow for the quarter -- for the first quarter 2020 was $522 million, up 7% compared with the fourth quarter of 2019. And we reported healthy dividend coverage of 1.35 times. We also generated $136 million of distributable cash flow in excess of dividends paid during the quarter. Earlier this month, the Board of Directors declared a dividend of $0.935 or $3.74 per share on an annualized basis. We recorded impairment charges in the first quarter of 2020 related primarily to long-lived assets and goodwill in the natural gas gathering and processing segment. Our asset impairments charges related to gathering and processing assets in Western Oklahoma, Kansas and the Powder River Basin. The timing of these charges was triggered by significant adverse changes in the market environment during the first quarter.", "From a liquidity standpoint, in early March, we completed a $1.75 billion senior notes offering and used a portion of the proceeds to repay amounts outstanding under our commercial paper program, providing us increased liquidity and balance sheet flexibility during this uncertain market environment. Our March 31 net debt-to-EBITDA on an annualized run rate basis was 4.86 times, and we ended the first quarter with no borrowings outstanding on our $2.5 billion credit facility and more than $530 million of cash. We are still targeting leverage of four times or less, but due to the current environment the time line for reaching target leverage from operating cash flows has been pushed out. As Terry mentioned, with yesterday's earnings announcement we provided a 2020 outlook. The 2020 net income is now likely to be in the range of $500 million to $900 million, which reflects the impairment charges. And adjusted EBITDA is likely to be in the range of $2.6 billion to $3 billion. As Terry said, the range of possible results from our multivariable scenario analyses led us to this 2020 outlook to give our investors a sense of what we view are likely outcomes in the current environment. As the industry recovers, we will update if appropriate.", "From a capital allocation perspective, in early March we suspended an additional expansion on the West Texas LPG pipeline, the Demicks Lake III plant and reduced the scope of the expansion on Elk Creek pipeline. Yesterday, we announced that we paused several projects and reduced our 2020 growth capital expenditures further. So far in 2020, we have reduced forecasted capital expenditures by $900 million compared with our original 2020 guidance provided in late February. Kevin will discuss these adjustments to growth capital in a moment. We now expect growth capital to range between $1.4 billion and $1.8 billion this year, which includes more than $900 million that we've already spent in the first quarter, as we completed Arbuckle II, Demicks Lake II, MB-4 and 45,000 barrels per day of the West Texas LPG expansion. Only approximately 40% of our 2020 capital expenditures is left to spend over the remaining three quarters.", "Looking ahead, we can continue to significantly scale back capital. If commodity prices remain depressed and producer activities remain low, we could potentially operate in a $300 million to $400 million annual capital expenditure range, which would include limited routine growth spent in alignment with our producers' needs and maintenance capital. Our flexibility to scale back capital and to adjust to our customers' needs is a significant financial tool we can use in this environment to help preserve balance sheet strength and liquidity. On the other side of the equation, we stand ready to resume these projects as producer activity returns.", "I'll now turn the call over to Kevin for a closer look at our completed growth projects and operations." ] }, { "name": "Kevin Burdick", "speech": [ "Thank you, Walt. We saw volume growth across our system in the first quarter of 2020, compared with the first quarter 2019. NGL raw feed throughput volumes increased 6% and natural gas processed volumes increased 5% year-over-year. The natural gas pipeline segment continues to deliver strong fee-based earnings as our total capacity reached 100% contracted in the first quarter. This segment, which represents more than 15% of ONEOK's EBITDA, provides solid fee-based earnings and stability, even through volatile commodity price environments. As Terry and Walt discussed, the volatile commodity price and demand environment makes predicting our future volumes or segment-level performance very challenging, but we can provide certain data points based on the information we have at this time to help frame up the current volume and activity levels that we're seeing across our operations.", "Let's start with an update on our growth projects. During the first quarter, we completed and placed into service the Arbuckle II Pipeline and the remaining capacity of our MB-4 fractionator in Mont Belvieu which is 100% contracted. We also completed 45,000 barrels per day of our fully contracted 80,000 barrel per day West Texas LPG Pipeline system expansion. The remaining capacity of the expansion, which was delayed due to weather during the first quarter, is expected to be completed in May. We completed our Demicks Lake II processing plant in January, bringing our total processing capacity in the basin to more than 1.5 billion cubic feet per day. The projects that were completed in the fourth quarter 2019 were ramping, as expected, until the commodity collapse in March. Demicks Lake I, which was completed in October of last year, reached near full capacity of 200 million cubic feet per day in the first quarter.", "Total NGL raw feed throughput volume from the Rocky Mountain region, which includes volume on both the Elk Creek and Bakken NGL Pipelines, reached 240,000 barrels per day in March prior to the collapse. Compared with the fourth quarter of 2019, we saw a more than 7% increase in Rocky Mountain region raw feed throughput volumes, as new processing plants and plant expansions were connected to our NGL system. The volumes we reached in the first quarter combined with the quality of the basin and our customer base give us confidence that growth will resume once demand recovers. These assets put us in a great position to capture natural gas and NGL volumes for our customers when that occurs.", "We announced yesterday that we are pausing the majority of construction activities on several of our remaining capital growth projects including the expansion of our Bear Creek processing plant in the Williston Basin, construction of the MB-5 fractionator in Mont Belvieu, additional Mid-Continent fractionation expansions and the third expansion of the West Texas LPG Pipeline system. The decision to pause these projects reflects the changing needs of our customers and our ability to be flexible through this uncertain commodity price environment. The projects we paused can all be restarted quickly when our customers' activity resumes. Now let's take a closer look at our current -- at the current activity across our operations. As we sit today, the production plans of our customers continue to evolve as market dynamics shift. Many of our customers have announced a reduction in rig activity and in some cases are curtailing existing production. In the Williston Basin, there are currently approximately 30 rigs operating with around half of those on our dedicated acreage. Many of the wells that have been curtailed on our acreage to date have been older vintage wells that produce lower volumes at a higher cost to producers. Other wells taken off-line by producers were previously flaring, so they have not reduced our volume.", "We have also seen wells curtail that have opened up capacity for wells previously flaring to flow onto our system. These three factors have resulted in less volume coming off our system than you would expect. And given the significant backlog of flared gas, total production won't have to recover fully for our processing capacity to be highly utilized. Based on the latest reported natural gas flaring data out of North Dakota, approximately 400 million cubic feet per day was flaring in the basin with more than 200 million of that on ONEOK's dedicated acreage. As Terry mentioned, our customers in the Williston Basin are some of the most stable and well capitalized in the industry. We've had one customer this year file for bankruptcy protection. However, they continue to flow volume. We do not foresee additional significant bankruptcy risk among our largest customers in the region. And smaller scale private producers make up approximately 15% in aggregate of our total production from the region. In the Permian Basin, approximately 70% of our NGL volume is from the Midland Basin, one of the most resilient basins in the U.S.", "As our West Texas LPG Pipeline expansion is fully completed in May, we will continue to transition volumes away from offloads, we currently have with third-party NGL pipelines onto our pipeline. We are currently offloading approximately 50,000 barrels per day and we expect to move 20,000 barrels per day over to our system in the third quarter of this year with the remainder in the first quarter of 2021. As these volumes move onto our system, we'll be able to collect full transportation and fractionation fee rates on that volume.", "Additionally, our systemwide propane plus fractionation capacity remains highly utilized at approximately 85% to 90% and over half of our 27 million barrels of underground NGL storage is available to capture opportunities in the market. We're adding 1.5 million barrels of storage in the third quarter of this year and expect to complete an additional 1.5 million barrels of storage in 2021. We have also added 3.5 million barrels of brine storage in Mont Belvieu, substantially increasing our capacity.", "In the NGL markets, we are seeing seasonally strong demand for propane in Conway at our rail racks and on our north system from wholesalers, as well as in Mont Belvieu from exporters. This demand is contributing to the strong relative price of propane to crude. Petrochemical facilities in both Conway and Mont Belvieu continue to have strong demand for ethane driving the price to near recovery economics in the Mid-Continent.", "Terry, that concludes my remarks." ] }, { "name": "Terry Spencer", "speech": [ "Thank you, Kevin. Our recent project completions and the volumes we've seen materialize prior to this downturn provide confidence in the growth behind our system that is available to capture once demand recovers. ONEOK's strong record of delivering on our expected results combined with our competitive, integrated asset position and high-quality customer base and the best resources plays are fundamentals of our business that provide us with a foundation for stability, even through difficult commodity cycles. We have been through downturns before, and we know how to position ourselves for success as conditions improve.", "To our employees, both those continuing to work remotely and those who are still reporting to a facility or field location, thank you for your continued work, flexibility and dedication to our company. We're focused on maintaining essential services for our customers and your commitment to continuing to operate responsibly are exceptional. During a very difficult time, you have risen to the challenge by remaining committed to the health and well-being of our company, families and communities. While the near-term view of the world is changing every day, the long-term fundamentals of our strategic business remains strong and well positioned for continued growth, when global energy demand recovers.", "With that, operator we're now ready for questions." ] } ]
[ { "name": "Operator", "speech": [ "Thank you. [Operator Instructions] And our first question will come from Shneur Gershuni with UBS." ] }, { "name": "Shneur Gershuni", "speech": [ "Hi. Good morning, guys. Thank you very much for a lot of the color today. I just wanted to start-off with the I guess, we'll call it an outlook or guidance. I do appreciate a lot of the color that you gave in terms of some of the inputs when you're talking about why your system will be impacted less and the offload opportunities. I was wondering, if you could share with us your views as to how you get to the upper end and conversely to the lower end of that outlook? What conditions in the Williston or elsewhere needs to play out to basically end up at your higher end or end up at your lower end?" ] }, { "name": "Kevin Burdick", "speech": [ "Sure. This is Kevin. Yeah. I mean, there's a variety of things that's as we kind of laid out the permutations you look at, when you consider the variability of all the inputs we're looking at that's the reason for the outlook. So obviously, if you get to the upper end demand for example demand comes back more quickly. Prices recover more quickly. Producers respond more quickly. So at the end of the day, you're getting the volume on your system quicker. On the low end of the range, it's just prolonged. And by prolonged, it could be anything from just how producers respond to how the demand recovers." ] }, { "name": "Shneur Gershuni", "speech": [ "Do you have anything specific with respect to like when shot is come back and so forth is there any sort of cadence that we should be thinking about?" ] }, { "name": "Kevin Burdick", "speech": [ "No. I mean, we're not going to again, we're not going to provide specifics on that, because there's a variety of ways you could get to each to the high end and there's a variety of ways you could get to the low end as well. So we're not going to get into how long, because that would just be kind of factoring in one variable." ] }, { "name": "Operator", "speech": [ "And moving on we'll go to Christine Cho with Barclays." ] }, { "name": "Christine Cho", "speech": [ "Thank you. Good morning. Maybe we could start with the NGL segment, the Bakken rate. It looks like it came down. I'm guessing that's partly due to Elk Creek coming online, which I think has a lower rate. But should we think that you moved some more volumes from Bakken NGL Pipeline and Overland Pass onto this line? Or was there anything else we should factor in? And is this $0.28 level a good run rate going forward or should we expect that it could trend a little lower through the remainder of the year?" ] }, { "name": "Sheridan Swords", "speech": [ "Christine, this is Sheridan. I think, there's two factors in there. One is, while we were railing volume out of Bakken, we were charging customers a higher fee for that service, especially the ones that were came on for Elk Creek. And as Elk Creek has come on, they've come back to a rate that we contracted with them, which was lower than the $0.30 rate.", "So I think that as we go forward the $0.28 rate, we see today is a good going forward run rate. Our rates are not determined by which pipeline we use if we put barrels on Bakken or Elk Creek or what we put on OPPL, because the rates you are seeing are -- we charge our customer from a bundled service from a transportation and fractionation. So it's not impacted by which pipelines we use." ] }, { "name": "Christine Cho", "speech": [ "Okay. So even though the rate came down the margin is higher that's how we should think about it?" ] }, { "name": "Sheridan Swords", "speech": [ "Well, as the rate came down obviously we aren't railing as much volume. So our costs have come down as well, but I think going forward $0.28 is what you will see going forward. Obviously, that does have some impact on how much is coming out of the Powder River Basin on that line, which is at a lower fee and how much is coming out of the Bakken." ] }, { "name": "Christine Cho", "speech": [ "Okay. Great. Thank you." ] }, { "name": "Operator", "speech": [ "Moving on, we'll go to Jeremy Tonet with JPMorgan." ] }, { "name": "Sheridan Swords", "speech": [ "Good morning." ] }, { "name": "Terry Spencer", "speech": [ "Good morning." ] }, { "name": "Jeremy Tonet", "speech": [ "I was just hoping that you could share a little bit more as far as Northern Border kind of key content there and any thoughts you guys could provide with regards to the need or lack of need to extract ethane going forward this year just given kind of the mix shift between Bakken gas going on the price and Canadian gas going on the price. Just trying to get a better sense of what's going on -- what could be going on there? Thanks." ] }, { "name": "Chuck Kelley", "speech": [ "Hey, Jeremy, this is Chuck. So as you know TransCanada is the operator of Northern Border. So I'm going to answer your question based on our 50% of ownership of Northern Border Pipeline as a partner. So we've been watching over the past quarter in particular as volumes have kind of changed a little bit between Bakken and receipts coming in from Canada as volumes have changed a little bit in the Bakken into the pipeline.", "So obviously, the pipeline is concerned about anything above 1,100. And this is a fluid situation. As that ratio changes and the mix between Canada and the Bakken you'll see that BTU blend mix in Northern Border and then consequently downstream. So, where the pipeline is today, we understand they're going to go ahead and file their tariff and set an upper limit. I believe it's 1,100 to start June 1.", "And Northern Border has held numerous formal meetings with shippers, markets, downstream pipes all interested parties regarding that limit. And frankly, the limit -- the BTU spec just needs to be put in place to meet the downstream deliverability requirements in Chicago." ] }, { "name": "Jeremy Tonet", "speech": [ "Yes. Makes sense. Thanks for that. And then maybe going to the GP segment just with the average fee kind of moving lower there quarter-over-quarter and it seemed like there was a POP influence there that kind of drove that. I was wondering if you could provide a little bit more color on kind of what were some of the drivers and how you might expect that to change in this environment?" ] }, { "name": "Chuck Kelley", "speech": [ "Sure. So as we've discussed in our 10-K and our 10-Qs under a certain percentage of proceed contracts with fees our contractual rates or percentages may increase or decrease. And these are based on several thresholds in the contracts production volume commodity prices system pressures that we're obligated to provide or the producer's obligated to meet.", "So our average rate can be impacted by those factors and also impacted if volumes increase or decrease on contracts that have different POP percentages or fee rate. So for example we have several large producers who may have contracts that are more fee-based than POP and if they're currently curtailing, you'd see the impact of that on our fee rate. Consequently, it would come down. Again, we can't speculate what kind of contract mix we're going to see over time as producers are making decisions frankly weekly as to what wells are going to be produced and certainly at what production level volumes. So we can't necessarily forecast that average rate, but that gives you the understanding of what's behind how that average fee rate is developed and thought about." ] }, { "name": "Operator", "speech": [ "And moving on we'll go to Tristan Richardson with SunTrust." ] }, { "name": "Tristan Richardson", "speech": [ "Good morning guys. Appreciate all the commentary on operations as well as the liquidity and capital and how the balance sheet is preparing for this. Can you talk about the investment-grade profile? It seems like the rating agencies are willing to take a long-term view, I mean looking out past the short-term disruptions of 2020. But to the extent leverage remains elevated can you talk about just the priority of the investment-grade profile?" ] }, { "name": "Chuck Kelley", "speech": [ "Well we speak regularly to the rating agencies. And while we've had a market imbalance and it's delayed the pace of our leverage reduction, it hasn't reduced our expectation or desire to reduce leverage. We believe our assets are in a position to support the growth in the basin we serve once the imbalance is rectified and that the rating agencies recognize that.", "Our credit ratings are very important to us and we've demonstrated by our actions in the past that if the current demand reduction -- end up being longer in duration, we have several tools at our disposal to reduce leverage. And we've already taken the first action in this regard by pausing our capital projects to preserve cash flow. We continuously evaluate our options to manage the balance sheet and look prudently to maintain our credit ratings going forward." ] }, { "name": "Tristan Richardson", "speech": [ "Appreciate it. Thank you guys very much." ] }, { "name": "Operator", "speech": [ "Moving on we'll go to Spiro Dounis with Credit Suisse." ] }, { "name": "Spiro Dounis", "speech": [ "First question just on growth and the durability of earnings here and forgive me for asking about 2021 just given the tough visibility right now. But as we talk to investors that's still where a lot of the focus is at this point, so just wondering if you could talk to some of the high-level drivers of growth or even what a flat scenario would look like in 2021 versus 2020 and if you could maybe tie that to your ability to cut CapEx to those baseline levels you mentioned. So in other words is it really a heavy lift to maintain EBITDA levels next year?" ] }, { "name": "Kevin Burdick", "speech": [ "This is Kevin. When we think -- I mean we start talking 2021 granted that is -- that's out there given the uncertainty today. But the key I'd come back to is, where our assets are located we've got tremendous confidence in the basins where we operate. Those resources are still there.", "As we look forward when you consider the flare gas that's still available to capture as production comes back up online in the Bakken, that's going to drive additional volumes for our natural gas processing plants and the NGL segment. And I think you hit on the other key point is, with this available capacity, we can do that with extremely minimal capital as we think about 2021 as these volumes come back and the environment improves." ] }, { "name": "Terry Spencer", "speech": [ "And Kevin I think -- the only thing I'd add to that is we've been in this situation before where we had built up some headroom in our businesses and we're able to harvest cash flow. And so with the prospect of 2021, CapEx spending being very low we'll be right back to that particular situation. So when you start looking at that the free cash flow generation of the business is pretty significant." ] }, { "name": "Spiro Dounis", "speech": [ "Okay. Understood. And then." ] }, { "name": "Walter S. Hulse", "speech": [ "I guess the only other comment that, I would make as you think about these ranges that we've put out there and the durability of the business we -- in this range of potential outcomes there are built into some of these numbers pretty significant curtailments, OK?", "And so you have to think about the lower end of the range and I'm not going to give you specifics because then I'd be giving you financial guidance, OK? But as we look at the potential outcomes, there's a pretty significant percentage of production that we've assumed to be curtailed in one of these scenarios and that's reflected in these numbers.", "So I think that just in and of itself explains the durability of the business. And unfortunately we can't give you specific specifics. We'd like to but we can't. Probably as I said in the call, it wouldn't be appropriate for us to do that. But we feel really good about how well positioned in spite of all the things that the headwinds that the industry faces we're in a pretty darn good position." ] }, { "name": "Spiro Dounis", "speech": [ "Yes. And I can appreciate a tough question to answer now. So I appreciate you all taking a swing at it. Second one just to follow up on the CapEx. Can you just talk a little bit about why the Arbuckle extension expansion are still in the backlog? Is that something that can still come out at some point? Or is that really needed as part of the broader network right now?" ] }, { "name": "Kevin Burdick", "speech": [ "I'm sorry. You were this is Kevin. Could you repeat that question? You were a little jumbled as it came through." ] }, { "name": "Spiro Dounis", "speech": [ "Yes. Sorry. I'm sick of using this cellphone. So just wondering if you guys could walk through the decision to lead the Arbuckle extension and expansion in the backlog. Is that something that can still come out at a future point? Or is that really needed at this point for the broader network?" ] }, { "name": "Kevin Burdick", "speech": [ "Okay. Yes. The extension remained in as we think about that. That pipeline was important because it allows us to move Bakken barrels all the way to Mont Belvieu. So we wanted that connectivity. And also keep in mind these projects kind of proceed at different paces and many of them are further along or not further along. So that goes into our consideration as well and why that one is still in the schedule." ] }, { "name": "Spiro Dounis", "speech": [ "Got it. Thanks, everyone." ] }, { "name": "Operator", "speech": [ "And moving on we'll go to Michael Blum with Wells Fargo." ] }, { "name": "Michael Blum", "speech": [ "Hi. Good morning, everyone." ] }, { "name": "Walter S. Hulse", "speech": [ "Good morning." ] }, { "name": "Michael Blum", "speech": [ "I just want to talk a little bit about the dynamics in the Bakken, particularly as it relates to the flared gas. So and I guess my question is like as you get shut-ins and reduced drilling activity, will you see a reduction in flared gas as well just naturally? And will that generally going to quantify or any rule of thumb to think about how that would impact the number of well connects you would need to do based on that change in flared gas?" ] }, { "name": "Kevin Burdick", "speech": [ "Michael, it's Kevin. I'll start and Chuck or others may have some comments. But yes, like we said in our prepared remarks, there's multiple dynamics that could go on impacting flared gas. We have seen some wells shut in that had previously been flaring. So that doesn't impact our volumes obviously.", "We've also seen some situations where some gas was taken off-line. But other gas that was flaring due to some pipeline or compression constraints started flowing on the system. So effectively it was replaced which would bring flaring down.", "So yes, I do think these the curtailments will bring flaring down in a couple of different ways. But the key point there is I think with our capacity and we had continued to build out some gathering lines as we move through the first quarter. As those volumes come back, we believe we're going to have the capacity to capture the gas much more fully than we did say in the January or February time frame." ] }, { "name": "Michael Blum", "speech": [ "Okay. Great. Thank you very much, guys." ] }, { "name": "Operator", "speech": [ "And next we'll go to Jean Ann Salisbury with Bernstein." ] }, { "name": "Jean Ann Salisbury", "speech": [ "If ethane price were to rise to the $0.30 or $0.40 range next year, would that be enough incentive for you to recover the gas in the Bakken, even if it didn't cover your full midstream tariffs? And do you have the contractual capability to do that?" ] }, { "name": "Kevin Burdick", "speech": [ "Did you say $0.30 to $0.40 ethane values?" ] }, { "name": "Jean Ann Salisbury", "speech": [ "Yes. Yes for ethane. Yes." ] }, { "name": "Terry Spencer", "speech": [ "We always have the ability to flex our rates if we need to to be able to bring ethane on, on an economic basis. So that is always out there that we have the ability not only in the Bakken or Williston, we also have that ability in the Mid-Continent. So if we see the opportunity to be able to flex our rates a little bit to bring volume on we will do that. We also have to be cognizant of is if the market is bounced at certain prices, if we bring more volume on from another basin, it could push out volume from a basin that is flowing today. So we take all those things into consideration. But to answer your question, we do have that ability to flex our rates -- our NGL rates out of the Williston Basin." ] }, { "name": "Sheridan Swords", "speech": [ "This is Sheridan. We could add to that to your comments about ethane is what you're seeing in the Mid-Continent with the strength in ethane prices today and natural gas prices being as weak, what could affect us in 2020 fairly significantly if this continues is we could see producers and processors begin to extract ethane in the Mid-Continent and other places as well, right?" ] }, { "name": "Andrew Ziola", "speech": [ "That's very true, because the numbers right now are very, very close to recovery economics in the Mid-Continent. And if you take everything into consideration increased propane recoveries when you're in, ethane recovery you could make an argument that in May, we could see some more ethane come out of the Mid-Con that we hadn't predicted." ] }, { "name": "Jean Ann Salisbury", "speech": [ "Okay. Thank you." ] }, { "name": "Terry Spencer", "speech": [ "Yeah. Thanks." ] }, { "name": "Operator", "speech": [ "Next we'll go to Colton Bean with Tudor, Pickering, Holt & Company." ] }, { "name": "Colton Bean", "speech": [ "So, just really a quick one. I think last quarter, Chuck, you may have mentioned that you guys looking at a proceeding agreement for residue gas takeaway out of the Bakken. Can you just update us on where you stand with that, and if that project has been impacted at all by the production outlook?" ] }, { "name": "Chuck Kelley", "speech": [ "Sure, Colton. Yeah. I mean with everything evolving, our producer forecast evolving and what have you in the basin like anything we've kind of taken a step back and we're trying to determine when we see the full need for that project. The way it sits today, I was looking -- we were looking at potentially fourth quarter of 2022. I'm not quite sure honestly, if that's been moved out yet or not. We're still evaluating that." ] }, { "name": "Colton Bean", "speech": [ "Got it. Appreciate that." ] }, { "name": "Operator", "speech": [ "And next we'll go to Michael Lapides with Goldman Sachs." ] }, { "name": "Michael Lapides", "speech": [ "Hi, guys. Thank you for taking my questions and glad to hear everybody and their friends are all well. Can you just talk -- Shneur mentioned this in the first question, just the cadence within your guidance for 2020. And the only reason I ask that is first quarter you did around $700 million of EBITDA. The midpoint of your guidance would imply you keep doing around $700 million of EBITDA each quarter. But the first quarter impact was before all the shut-ins and before all the production cuts. Just kind of what's offsetting that? Like what keeps you kind of at that $700 million quarterly run rate? Can you just high level kind of the puts and the takes a little bit?" ] }, { "name": "Kevin Burdick", "speech": [ "This is Kevin. Michael the way I guess I would think about that is, you got to remember in the first quarter we always have a winter impact and we were bringing -- we are bringing a lot of these assets online. And so we moved -- as we think about January and February, it wasn't really till we came out in early March that we saw some of the volumes pick up like we expected.", "Clearly, if you see curtailments as we move through April, May and June, obviously, you're going to see a step down as you move through the second quarter, but then recovery back as we move our way through the back half of the year. So yes, you would expect to see a step down in the second quarter with that recovery in the back half." ] }, { "name": "Michael Lapides", "speech": [ "And is that recovery predicated on Bakken producers, reramping up production starting in the fourth quarter? And at the current strip price, does that give them the economic incentive to do so, so quickly?" ] }, { "name": "Kevin Burdick", "speech": [ "Clearly Bakken volumes would be a component of that. But again with our West Texas expansion, with the other assets we brought online, with what we're seeing in the NGL markets and for marketing inventory storage type opportunities, there's a lot of things that I think could -- as we move through the second quarter that could play out for the back half of the year." ] }, { "name": "Michael Lapides", "speech": [ "Got it. And then one last one. Just curious, if you're thinking about the potential for any repurposing of any of your existing assets? I mean lots of moving parts across oil gas NGLs. Just curious if there are opportunities whether in storage, whether in existing older pipe to repurpose things given what's just going on in the marketplace." ] }, { "name": "Sheridan Swords", "speech": [ "Michael, we can -- this is Sheridan. We continue to always look at that. And as we expressed earlier, we thought there was always an opportunity to maybe repurpose West Texas Pipeline for crude oil that was -- if that opportunity would manifest itself. So we continue to look at those opportunities as we continue to go forward. Obviously, storage right now is a big commodity that everybody is looking at with the shape of the prices right now that we continue to evaluate. Right now we do think our storage is better used as NGL to play that part of the structure of the market than it is in other product, but we do continue to evaluate the ability to repurpose assets into other service." ] }, { "name": "Michael Lapides", "speech": [ "Got it. Thank you, guys. Much appreciate it." ] }, { "name": "Operator", "speech": [ "We'll go to Chris Sighinolfi with Jefferies." ] }, { "name": "Chris Sighinolfi", "speech": [ "Hey. Good morning, everybody. Thanks for taking.." ] }, { "name": "Walter S. Hulse", "speech": [ "Hey, Chris." ] }, { "name": "Chris Sighinolfi", "speech": [ "I have two questions, Terry if I could. The first you followed I think from Tristan's your line of inquiry just about credit rating. I don't know if that one's for you or Walt maybe it involves more of a Board readthrough. But can you just walk us through how you guys think about leverage and the rating? You've talked about capital declines that are possible. Certainly, I think, I was reading into that like how low could the spending be next year. But I guess what I'm getting after is at what point does the dividend come into conversation? Walt, you had mentioned sort of multiple levers and you talked about CapEx first. And I'm just curious how everybody thinks about those components put together." ] }, { "name": "Walter S. Hulse", "speech": [ "Well because -- I think it's fair to say that we continually evaluate all options available. But I think it's really important to understand that with the CapEx that we've reduced that we will be cash flow positive definitely in the third and fourth quarter and into 2021. So deleveraging will happen. It's just a question of the pace if there are things that we might do to accelerate that pace. If that makes sense we'll go down that path. But I think Terry addressed our view on the dividend while we look at it on a quarterly basis we will be earning cash flow to pay it going forward. That's our expectation." ] }, { "name": "Chris Sighinolfi", "speech": [ "Okay. I'm sorry, if I missed that in the prepared statement. And then I want to follow up -- I appreciate the NGL conversation. We've been thinking about it. Similarly to Sheridan some of the things that you and Kevin have talked about. I'm curious and there's a lot of focus on crude storage. We obviously get purity product NGL storage reported. There's Y-grade capacity, obviously, that's significant behind that and fungible. And I'm just wondering if there's anything that you're seeing that would lead to concerns around an NGL storage situation. And as it pertains to that any update you guys can give as we start to get Mid-Con or Rocky shut-ins what Belvieu Conway might do? Thanks." ] }, { "name": "Sheridan Swords", "speech": [ "Chris, this is Sheridan. I would say in terms of NGL storage capacity we feel we are in a great position on our NGL storage capacity. One is we're at a seasonal time when storage capacity is low where you'd see more building in a normal year. Obviously, this is an abnormal year. But also at this time right now we are seeing great demand for the NGL products.", "Propane is really being demanded from exporters. Even at times in Mont Belvieu we can't supply with our current production all the needs from people buying product down there that we typically sell to. So propane -- that's why we're seeing propane trade so well versus crude. And we also are seeing that phenomenon on the ethane market that the petchems are still having a very good demand that we've actually had to turn some people away for that we typically supply ethane to because we don't see that we'll have that product in the next month.", "Now if more ethane comes on through recovery we will be able to satisfy those needs, but we are seeing very good demand for our two biggest products which leads to that we think we have plenty of storage capacity not only for regular operations, but also to be able to capture some of the opportunities that the market are giving us in the contango market that we're seeing." ] }, { "name": "Walter S. Hulse", "speech": [ "So Chris, I'm just going to add -- reiterate one thing that Sheridan said earlier in his answer was with respect to propane storage inventory is at a seasonal level. The capacity is -- actually we've got plenty of capacity. So this is the time of year when propane retailers start putting product in hold. And -- so I just want to make sure that was clear." ] }, { "name": "Operator", "speech": [ "And next we'll go to Dan Lungo with Bank of America." ] }, { "name": "Dan Lungo", "speech": [ "Hey, guys. Thanks for taking my question. Sorry to push on the dividend a little bit. But when it comes to maintaining the investment-grade ratings, based on your current projections if you're at the lower end of your EBITDA range, you're going to be above that all important five times marker which is a trigger for downward high yield if it's sustained for a longer period of time. So without a serious recovery in EBITDA or -- in 2021, it just seems like you only need to be pulling additional levers to maintain that investment-grade rating if things end up being worse than expected. So I'm just wondering how do you weigh in maintaining a dividend versus staying in the investment-grade rating?" ] }, { "name": "Kevin Burdick", "speech": [ "Dan, I would tell you that we speak to the rating agencies regularly. I don't know that I necessarily agree entirely with your expectations of where leverage will be on a long-term basis here. And we've spoken about the dividend three times now. So we're not going to get back into it." ] }, { "name": "Dan Lungo", "speech": [ "All right. Thank you." ] }, { "name": "Operator", "speech": [ "And next we'll go to Becca Followill with U.S. Capital Advisors." ] }, { "name": "Becca Followill", "speech": [ "Good morning guys. I'm still confused about this page five the footnote. Is it -- is the change in the drop from $0.92 to $0.85 tied to NGL prices crude prices? With the decline in NGL prices from Q1 to Q2 and the increased shut-ins are we going to see that rate drop further? Is it a good run rate to use?" ] }, { "name": "Kevin Burdick", "speech": [ "Becca this is Kevin. Chuck spoke to that earlier to the earlier question about what drives that fee rate change and that disclaimer. So yes, there are thresholds that he mentioned that are dependent on a variety of things. And we're not going to provide an update at this point of what we think that range would be. But we can tell you that as we've factored in all those scenarios that various outcomes have gone into the $2.6 billion to $3 billion EBITDA range that we provided." ] }, { "name": "Becca Followill", "speech": [ "Thank you." ] }, { "name": "Operator", "speech": [ "Moving on we'll go to Elvira Scotto with RBC Capital Markets." ] }, { "name": "Elvira Scotto", "speech": [ "Hi, everyone. Thanks for taking my questions. So it looks like you've done a lot of really good work here on the scenario analysis. And with respect to this kind of $2.6 billion lower end of EBITDA kind of outcome, I think it seems like you have pretty good confidence that that's the low end. What would have to happen in order for that EBITDA to be below that end?" ] }, { "name": "Kevin Burdick", "speech": [ "We're not -- Elvira, we're not going to go there as far as providing that information. Like we said, we ran a variety of scenarios that considered a variety of different price, volume, producer activity outcomes. And we believe that the EBITDA is likely to fall within that $2.6 billion to $3.0 billion range. And that's what we're providing at this point. Elvira, as I indicated earlier, the numbers consider substantial curtailments and a significant duration of this downturn. So I think that's about as much as we can give you." ] }, { "name": "Elvira Scotto", "speech": [ "No. That's really helpful. And then just my last follow-up question here is in some of these conversations that you've had with some of maybe your Bakken producer customers, at what point would you expect activity to pick up? And when I say that I mean, at what commodity price? And maybe you can kind of -- you can think back to that 2015, 2016 time period?" ] }, { "name": "Kevin Burdick", "speech": [ "Well this is Kevin. And I think there's a couple of dynamics there. One is, if they're curtailing gas, what price does it take to have them bring curtail gas back. And without giving a specific number, obviously they're looking at what their variable cost to produce is. That will vary by producer and it'll vary by location. So that's what will go into that. So clearly, that's a lower price. As we think about the next tranche would be completions. There's still 400-plus DUCs in the basin. So that we -- that's going to have a price -- that activity would come back. So, as we move -- as prices improve, those are the things that we'll watch as the curtail gas will come back first and then you'll start seeing completion crews added and producers work off their DUCs." ] }, { "name": "Terry Spencer", "speech": [ "Elvira, I think -- thanks. Terry. I think it's fair to say that if we see a -- this continued downturn, the faster producers curtail and correct the supply and demand imbalance the faster there'll be a recovery. That's how we look at it." ] }, { "name": "Operator", "speech": [ "And moving on, we'll go to Craig Shere with Tuohy Brothers." ] }, { "name": "Craig Shere", "speech": [ "Good morning. First, let me just congratulate you on holding off on the less-economic initial forays in the long desired crude gathering and export terminal opportunities. Sometimes what we don't do is more important than what we do. With respect to in-flight growth projects that are now on hold, do you see a pecking order among them in terms of what might come online first or resumed first?" ] }, { "name": "Kevin Burdick", "speech": [ "No I don't know that we would look at it that way. I think it'll be -- as we talk to our customers in each of our basins, we'll -- that's what we'll look at. So, if we continue to see -- we've seen some really strong growth out of the Permian up until the collapse and if we see that continue, then obviously the West Texas expansion would be back on the table. And similarly in the Bakken, if we saw certain areas. And remember with Bear Creek, it is a very -- it's a geographically isolated area. So, it would be specific producers, showing a desire to get activity back in a certain area of the Bakken. So that's the type of thing that would cause Bear Creek to come back online. But it'll be producer-by-producer, processor-by-processor type discussions that will drive those projects." ] }, { "name": "Terry Spencer", "speech": [ "Craig I think the other thing that you could see and I've been through this -- through these cycles so many times I can't count. But I think the thing we've seen in the G&P space over the years is that when you get into these down cycles, people start talking that is midstream companies start talking about asset consolidation and shutting underutilized facilities down and underutilized gathering systems and doing offloads. And you could see those kinds of things that it's going to matter which side of the coin you're on could brought by either revenue benefit or cost savings benefit. So, we could see some of those discussions happening as we go forward." ] }, { "name": "Craig Shere", "speech": [ "Terry, I'm sorry. So you could see yourself as a potential consolidator on some distressed assets?" ] }, { "name": "Terry Spencer", "speech": [ "Sure. Well we could potentially -- there might be facilities that we believe make more sense that we could idle for a period of time and deliver volumes to somebody who has available capacity." ] }, { "name": "Walter S. Hulse", "speech": [ "So just to say I hear a thing that in an operational way, there's an opportunity to consolidate and find good economic outcomes between multiple different companies." ] }, { "name": "Terry Spencer", "speech": [ "Exactly. You do that through offload processing deals or onload -- if you're the receiver you do that through an onload processing deal. It doesn't involve ownership. Thanks Walt." ] }, { "name": "Craig Shere", "speech": [ "I got you. And I don't know if Walt wants to chime in again and sorry for beating a dead horse. We've had some questions about dire worst-case leverage conditions and potential additional levers. I want to focus more on patience. So, if credit isn't deteriorating to untenable levels, but lower for longer lasts much longer than perhaps envisioned today, is there a limit to how many years you're willing to wait for organic improvement in your targeted net debt-to-EBITDA ratio?" ] }, { "name": "Walter S. Hulse", "speech": [ "Yes, Craig. That's a quite hypothetical question. I would tell you that -- I would point you to talk to the rating agencies about their view on timing. I think for investment-grade companies, it tends to be a little bit longer view than quarter-to-quarter. And so, as we see this playing out, we see ourselves naturally delevering and we're going to look at other opportunities that might help that along. But I would say if you get out years into this sure everything is on the table. But you're -- that's pretty hypothetical." ] }, { "name": "Operator", "speech": [ "And this concludes the conference call and I'll pass it back to Mr. Ziola." ] }, { "name": "Andrew Ziola", "speech": [ "All right. Thank you everyone. Our quiet period for the second quarter starts when we close our books in early July and extends until we release earnings in late July. We'll provide details for that conference call at a later date. Again thank you all for joining us and the IR team will be available throughout the day and the week in case you have more follow-up questions. Thank you, very much and have a good day." ] }, { "name": "Operator", "speech": [ "[Operator Closing Remarks]." ] } ]
OKE
2018-08-01
[ { "description": "VP, IR & Communications", "name": "Andrew Ziola", "position": "Executive" }, { "description": "President & CEO", "name": "Terry Spencer", "position": "Executive" }, { "description": "CFO & EVP of Strategic Planning & Corporate Affairs", "name": "Walter Hulse", "position": "Executive" }, { "description": "EVP & COO", "name": "Kevin Burdick", "position": "Executive" }, { "description": "UBS Investment Bank -- Analyst", "name": "Shneur Gershuni", "position": "Analyst" }, { "description": "Barclays -- Analyst", "name": "Christine Cho", "position": "Analyst" }, { "description": "ONEOK, Inc. -- Analyst", "name": "Sheridan Swords", "position": "Analyst" }, { "description": "Wells Fargo -- Analyst", "name": "Michael Blum", "position": "Analyst" }, { "description": "RBC Capital Markets -- Analyst", "name": "Elvira Scotto", "position": "Analyst" }, { "description": "BMO Capital Markets -- Analyst", "name": "Danilo Juvane", "position": "Analyst" }, { "description": "Senior Vice President, Natural Gas", "name": "Chuck Kelley", "position": "Executive" }, { "description": "JP Morgan -- Analyst", "name": "Jeremy Tonet", "position": "Analyst" }, { "description": "Bank of America -- Analyst", "name": "Dennis Coleman", "position": "Analyst" }, { "description": "Tuohy Brothers -- Analyst", "name": "Craig Shere", "position": "Analyst" } ]
[ { "name": "Operator", "speech": [ "Good day and welcome to the Second Quarter 2018 ONEOK Earnings Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Andrew Ziola. Please go ahead, sir." ] }, { "name": "Andrew Ziola", "speech": [ "Thank you, Brad and good morning and welcome to ONEOK's second quarter 2018 earnings conference call. This call is being webcast live and a replay will be made available. A reminder that statements made during this call that might include ONEOK's expectations or predictions should be considered forward-looking statements and are covered by the Safe Harbor Provision of the Securities Acts of 1933 and 1934. Actual results could differ materially from those projected in forward-looking statements. For a discussion of factors that could cause actual results to differ, please refer to our SEC filings.", "Our first speaker this morning is Terry Spencer, President and CEO of ONEOK. Terry?" ] }, { "name": "Terry Spencer", "speech": [ "Thanks, Andrew. Good morning and thank you all for joining us today. As always, we appreciate your continued interest and investment in ONEOK. Joining me on today's call is Walt Hulse, Chief Financial Officer, Executive Vice President, Strategic Planning and Corporate Affairs; and Kevin Burdick, Executive Vice President and Chief Operating Officer. Also available to answer your questions are Sheridan Swords, Senior Vice President, Natural Gas Liquids; and Chuck Kelley, Senior Vice President, Natural Gas.", "On today's call, we'll discuss ONEOK's second quarter financial and operational performance, our updated financial guidance included in yesterday's earnings announcement, and share our progress on our more than $4 billion of capital growth projects. As we noted in our release yesterday, the high level of productivity continues in the basins where we operate. Our consistent volume growth underscores the strong performance of our supply customers across our asset footprint.", "And while NGL pricing spreads and optimization are noteworthy, the fact is our core business, the fee-based services we provide for both natural gas and natural gas liquids customers, continues to expand with incremental volume growth across our system and is the largest contributor to our earnings growth this year, and we are well positioned for additional volume growth through incremental investments at attractive returns. Our long-term strategy remains focused on expanding our integrated assets through capital growth projects and strategic acquisitions that fit within our footprint and provide sustainable long-term fee-based earnings.", "Yesterday, we completed the acquisition of Martin Midstream's 20% interest in the West Texas LPG Pipeline. With that acquisition, ONEOK became the sole owner of West Texas LPG, a strategic step in our broader Permian Basin strategy and further positioning us for expansion opportunities, some of which are in the late stages of negotiations. Construction on our organic growth projects is progressing as planned and Kevin will provide more detail on those projects in a moment.", "With that, I will now turn the call over to Walt." ] }, { "name": "Walter Hulse", "speech": [ "Thank you, Terry. ONEOK's second quarter operating income totaled nearly $450 million, a 40% increase year-over-year and a 7% increase compared with the first quarter 2018. Second quarter adjusted EBITDA was $602 million, a 30% increase year-over-year and a 6% increase compared with the first quarter 2018. During the second quarter, we paid a dividend of $0.795 per share and last week, we announced another 4% increase to $0.825 per share or $3.30 per share on an annualized basis, in line with our previous guidance. The dividend is payable on August 14. At June 30, our debt-to-EBITDA on an annualized run rate basis was 3.4 times and 3.66 times on a GAAP trailing 12-month basis.", "We generated more than $160 million of distributable cash flow in excess of our dividends paid in the second quarter, a 9% increase compared with the first quarter 2018. Total distributable cash flow in the quarter was more than $450 million with healthy dividend coverage of nearly 1.4 times. We have proactively managed our future debt maturities and liquidity with our $1.25 billion senior notes offering completed in July. Proceeds from the offering were used to repay short-term borrowings and together with excess distributable cash flow, we'll fund our upcoming debt maturity and help fund our capital growth expenditures. As of today, we have approximately $900 million in cash and $2.5 billion available on our credit facility. We continue to maintain a strong balance sheet and significant liquidity as we construct our capital growth projects.", "With yesterday's earnings announcement, we increased our net income and adjusted EBITDA financial guidance midpoint expectations and narrowed our financial guidance ranges. The midpoint of our net income guidance increased $30 million to $1.09 billion and our adjusted EBITDA midpoint increased $35 million to $2.35 billion. These guidance increases are primarily driven by expected continued volume growth and our NGL optimization and marketing results. If the optimization spreads maintain at these levels and no severe weather occurs in the fourth quarter, we could easily be at the high-end of our guidance range.", "I'll now turn the call over to Kevin for a closer look at each of our businesses." ] }, { "name": "Kevin Burdick", "speech": [ "Thank you, Walt. Starting with the performance of our natural gas liquids segment. NGL volumes gathered in the second quarter averaged 903,000 barrels per day, a 12% increase compared with the second quarter 2017 and a 6% increase compared with the first quarter 2018. Volume growth remained strong as we have averaged more than 930,000 barrels per day in July. Two new third-party natural gas processing plants were connected in the STACK and SCOOP areas in the second quarter where strong producer results and increased ethane recovery continue to drive higher volumes. Mid-Continent gathered volumes averaged 569,000 barrels per day during the quarter, an 8% increase compared with the first quarter 2018.", "Our Bakken NGL pipeline remains full and we began railing NGLs out of the region during the quarter. We expect to be able to rail up to 30,000 barrels per day to provide interim takeaway capacity until the Elk Creek Pipeline is in service. NGL volumes fractionated averaged 696,000 barrels per day during the second quarter, a 12% increase compared with the same period last year. We expect to be toward the high-end of our guidance range of 650,000 to 725,000 barrels per day fractionated in 2018. As total NGL volumes increase across our system, ethane volumes are also increasing. We had approximately 60,000 barrels per day of additional ethane on our system in the second quarter compared with the same period in 2017. The increase has continued in July with more than 70,000 barrels per day of additional ethane on our system compared with the same month last year.", "With the strong volume growth across our system, pipeline utilization has increased, which has led to a higher than anticipated location price differential for ethane priced in Conway. This price differential is causing Conway priced ethane to remain in rejection. Even without the Conway priced ethane being recovered, we are well on our way to achieving our volume targets. We continue to expect ethane production across our system to increase during the second half of this year as petrochemical companies complete expansion projects and exports increase. Last week, the start-up of another Gulf Coast ethane cracker was announced, which is approximately 90,000 barrels per day of additional demand and we expect several additional petrochemical facilities to come online by the second quarter 2019, totaling more than 200,000 barrels per day of new ethane demand totaling more than 200,000 barrels per day of new ethane demand. Optimization and marketing activities in the second quarter also contributed to the segment's higher adjusted EBITDA with increases of $23 million compared with the first quarter 2018 and nearly $50 million compared with the second quarter of 2017. Wider location price differentials between Conway and Mont Belvieu and the sale of NGL inventory previously held contributed to the increases. We continue to expect transportation capacity from Conway to Mont Belvieu will remain highly utilized due to growing NGL volumes, which we expect will sustain current spreads until Arbuckle II is placed in service.", "Moving on to the natural gas gathering and processing segment, adjusted EBITDA for the segment increased 30% compared with the second quarter 2017 and increased 28% compared with the first quarter 2018, driven by volume growth in the Williston Basin and the STACK and SCOOP areas. Producer activity across our dedicated acreage remains strong. Second quarter natural gas volumes processed averaged nearly 1.8 billion cubic feet per day, a 17% increase compared with the second quarter 2017 and a 3% increase compared with the first quarter 2018.", "During the second quarter, ONEOK's natural gas volumes processed in the Rocky Mountain region averaged 932 million cubic feet per day, more than 100 million cubic feet per day higher than the same period in 2017 and a 5% increase compared with the first quarter 2018. We connected 210 wells in the Williston Basin and 26 wells in the Mid-Continent during the second quarter. We now expect well connects to total approximately 680 for the year with 550 well connections expected in the Williston Basin and the remainder in the Mid-Continent.", "We have approximately 60 million cubic feet per day of available processing capacity and will add an additional 200 million cubic feet per day of capacity in Oklahoma in the fourth quarter of this year with the expected completion of our Canadian Valley plant expansion, which remains on schedule. In the Williston Basin, we have approximately 125 million cubic feet per day of available processing capacity including the recently completed expansion of our Bear Creek plant, which increased its capacity to 130 million cubic feet per day from 80 million.", "We continue to look at additional plant and compression expansion opportunities in the basin in addition to our 200 million cubic feet per day Demicks Lake plant that is under construction and expected to be complete in the fourth quarter 2019. The segment's average fee rate increased to $0.89 per MMBTU in the second quarter 2018, above our original guidance of $0.80. Higher fees have been driven by greater than expected volume growth in the Williston Basin and higher volumes on contracts that have higher fees. We now expect our average fee rate to be in the range of $0.85 to $0.90 for 2018.", "In the natural gas pipeline segment, second quarter adjusted EBITDA increased 6% year-over-year benefiting from higher interruptible transportation volumes and decreased 9% compared with the first quarter 2018, primarily due to normal seasonality. In June, we announced four expansion projects to provide additional takeaway capacity in the Permian Basin and STACK and SCOOP areas by up to a total of 1.7 billion cubic feet per day. The projects include an expansion of ONEOK's WesTex Transmission system from the Permian Basin to the Texas Panhandle, a project to make Roadrunner Gas Transmission bidirectional to transport natural gas from the Delaware Basin to additional markets at Waha, and both westbound and eastbound expansions of ONEOK's Gas Transportation system in Oklahoma to accommodate growing volumes from the STACK and SCOOP areas. These capital efficient expansions will quickly create critical takeaway capacity and offer additional optionality for natural gas producers and processors in these areas. The open seasons have concluded on the WesTex, Roadrunner, and ONEOK Gas Transportation westbound projects. We've received strong interest on the projects and will provide the results once all bids have been analyzed and contracts finalized.", "Now a quick update on our growth projects starting with Elk Creek. We have begun construction on the southern portion from the Powder River Basin area to the Mid-Continent and we continue to expect this section to be completed as early as the third quarter 2019, which should help alleviate some capacity constraints in the Williston Basin before the entire line is in service. We expect the entire project will be complete by the end of 2019. We've also contracted an additional 20,000 barrels per day on Elk Creek since our last call bringing the total contracted volume to approximately 140,000 barrels per day.", "We are currently buying right-of-way for Arbuckle II and remain on schedule for that project, which is expected to be complete in the first quarter of 2020. We've contracted an additional 30,000 barrels per day on Arbuckle II bringing our total contracted volume to approximately 290,000 barrels per day. Site work has begun on our 125,000 barrel per day MB-4 fractionator and we remain on schedule for this facility to be complete in the first quarter of 2020. We remain on schedule to complete our 110,000 barrel per day extension of our now wholly owned West Texas LPG pipeline in the third quarter and we are in late stage negotiations with several producers and processors in the region for additional expansions. As those deals are finalized, we will announce them. Lastly, the 60,000 barrel per day expansion of our Sterling III pipeline is also on schedule and is expected to be completed in the fourth quarter 2018, which will provide additional capacity for growing Mid-Continent volumes.", "Terry, that concludes my remarks." ] }, { "name": "Terry Spencer", "speech": [ "Thank you, Kevin. These calls are a great way to discuss operational performance and earnings results, but they don't always allow time to discuss the many other valuable and business enhancing initiatives happening at ONEOK whether it's implementing new technology to help our employees stay safe, volunteering time in our communities, improving pipeline safety monitoring or protecting the environment, our employees are doing great things for our business and for the communities where we live and work. So thank you to our employees for all of your efforts.", "Within the next month, we'll be publishing our 10th Annual Sustainability and ESG report, which will highlight these initiatives and many others. I encourage everyone to review the report. To all of our investors, thank you for your continued support of ONEOK, our operations, and our strategy for growth.", "So with that, we're now ready for questions, operator." ] } ]
[ { "name": "Operator", "speech": [ "Thank you. At this time, we will open the floor for questions. (Operator Instructions) And our first question comes from Shneur Gershuni with UBS." ] }, { "name": "Shneur Gershuni", "speech": [ "Good morning." ] }, { "name": "Terry Spencer", "speech": [ "Good morning." ] }, { "name": "Shneur Gershuni", "speech": [ "My first question, I was wondering if we can talk about kind of the drivers related to guidance. You tightened up the low-end of the guidance range and so forth, but I was wondering if you can talk about the higher-end of the guidance range and what we would need to see to be able to hit the higher-end? Is there some specific drivers that you think that are likely to happen, are there some macro events that we should be thinking about? Any color around hitting the higher-end would be appreciated. Thank you." ] }, { "name": "Terry Spencer", "speech": [ "Sure, Shneur, as Walt indicated in his comments, he mentioned that optimization margins going forward, if they stay about where they are, we could see hitting the high-end of the guidance pretty easily particularly also if we see some -- a little bit less severe weather than we typically plan in our G&P segment. So certainly optimization spreads, as we've proven, are very difficult to forecast with any degree of certainty. We really don't see anything fundamentally that could -- that will change or compress these spreads, but certainly we factored in some cushion in our current guidance, but again, let me reiterate, if we see these optimization spreads kind of stay in this $0.20 a gallon range throughout the end of the year we can see some upside, particularly in this NGL business. Certainly, the high-end of guidance is very achievable if that happens." ] }, { "name": "Shneur Gershuni", "speech": [ "So to clarify, kind of the midpoint of your guidance does not assume that the spreads that we are seeing maintain themselves, but if they do, when you're not forecasting one way or another, then you would definitely be able to hit the high-end, is that a fair paraphrase?" ] }, { "name": "Terry Spencer", "speech": [ "That's right on." ] }, { "name": "Shneur Gershuni", "speech": [ "All right, perfect. And a follow-up question, just wanted to dig in on Mid-Con volumes a little bit and I think you guys kind of touched on it in pieces in your prepared remarks, but is it a scenario where ethane is backing up the gas pipelines, the Permian with what it's doing is sort of backing up the entire system? Are there debottlenecking issues that just sort of need to be taken care of and we can see an upside opportunity for Mid-Con volumes as bottlenecks are worked out. I was just wondering if you can sort of talk about kind of the steps and where we are with that?" ] }, { "name": "Kevin Burdick", "speech": [ "Hey, Shneur. This is Kevin. No, we don't see bottlenecks from the standpoint of the ethane that's being left in creating residue issues. Our producers from what we hear both are -- on our G&P side and overall producers from an NGL standpoint continue to have great results. We haven't seen them back off at all and we definitely expect those volumes to increase as we move through the rest of this year and into '19." ] }, { "name": "Shneur Gershuni", "speech": [ "So is it fair to say the Mid-Con is kind of a timing issue right now?" ] }, { "name": "Kevin Burdick", "speech": [ "For our G&P business, yes, a lot of timing and then the slight reduction in the well count -- in the well connects that we put out there is just really maybe slightly less than 1 rig and some timing is all that drives that, but no, still feel good about where we're at from a volume perspective." ] }, { "name": "Shneur Gershuni", "speech": [ "Perfect. Thank you very much, guys. Appreciate the color." ] }, { "name": "Operator", "speech": [ "Thank you. (Operator Instructions) Our next question comes from Christine Cho with Barclays." ] }, { "name": "Christine Cho", "speech": [ "Hi, everyone." ] }, { "name": "Terry Spencer", "speech": [ "Hey, Christine." ] }, { "name": "Christine Cho", "speech": [ "I was wondering if we can get an update on the utilization levels on Sterling and Arbuckle and if you could provide some insight into which product you're optimizing the most at the moment?" ] }, { "name": "Terry Spencer", "speech": [ "So, turn that -- we'll turn that question over to Sheridan." ] }, { "name": "Sheridan Swords", "speech": [ "Christine, this is Sheridan. Right now on the Sterling pipeline, we're still in that 80% to 90% utilized range even though we have moved more volume in the second quarter than we did in the first quarter. And then on the Arbuckle pipeline, we're in the 85% to 90% range and we were moving all of the Y-grade we can out of the Mid-Continent on Arbuckle at this time." ] }, { "name": "Christine Cho", "speech": [ "Okay and which NGL product are you optimizing the most at the moment?" ] }, { "name": "Sheridan Swords", "speech": [ "Ethane and propane are the ones we're optimizing the most and that's just really driven by the fact that those are the two products that we have the most on our system. So we're still optimizing butane as well because it has very nice spreads, but we just don't have as much butane as we have ethane and propane." ] }, { "name": "Christine Cho", "speech": [ "Okay and then I noticed that you guys took out the language that ethane rejection is expected to decrease to 70,000 barrels per day by year-end, with Conway ethane frac spreads expected to be negative and the producers that are priced off Conway expected to continue to reject the ethane, what do you expect your ethane rejection exit rate to be now?" ] }, { "name": "Kevin Burdick", "speech": [ "I think -- Christine, this is Kevin. I mean, we clearly we're not going to -- we won't be at the 70,000 barrels per day of rejection at the end of the year with Conway still being rejected, but I think the key there is that ethane that's not coming on is giving us the space for the optimization and will more than make up the value if you will that wouldn't come from the Conway barrels that would be recovered will more than make up for that with optimization. So that's kind of where we sit today. With these wide spreads, no, we don't expect that to come out by the end of the year, but we're going to more than make it up with the optimization." ] }, { "name": "Christine Cho", "speech": [ "Okay and then one more if I could, can you give us an idea of how much your Mid-Con contracts are priced off Conway versus Belvieu? And then are all the Bakken contracts priced off of Belvieu?" ] }, { "name": "Terry Spencer", "speech": [ "We won't give that much breakdown, but at the macro level all the contracts you're probably 60:40 Belvieu to Conway." ] }, { "name": "Christine Cho", "speech": [ "60:40 Bellevue, Conway. Perfect. Thank you so much." ] }, { "name": "Operator", "speech": [ "Thank you. And our next question comes from Michael Blum with Wells Fargo." ] }, { "name": "Michael Blum", "speech": [ "Hey, good morning, everybody. Just wanted to clarify or get confirmation, the incremental contracting you did on Elk Creek, that's coming from Bakken producers of Bakken volumes and the sort of the follow-up question to that is do you have any update on the potential to add either DJ volumes or even potentially Western Canadian [ph] volumes to Elk Creek? Thanks." ] }, { "name": "Kevin Burdick", "speech": [ "Yes, Michael, it's Kevin. The 20,000 barrels a day is coming out of the Bakken. I mean, that's I think primarily coming out of the Bakken, maybe a little bit out of the Powder, but -- and discussions continue to go well up there, I mean, you're seeing a lot of growth across all the G&P companies in the Williston as producers continue to have great success in the Williston and we've seen a lot of activity in the Powder as well and the DJ. So a lot of conversations going on with producers about additional volume. Sheridan?" ] }, { "name": "Sheridan Swords", "speech": [ "The only thing I would add is, is we've talked to the contract that we have -- the people we've already contracted with, their ramp up schedules have been moving forward. So we think that we will ramp up to our contracted volume quicker than we originally thought." ] }, { "name": "Michael Blum", "speech": [ "Okay and then kind of a minor issue, I guess, is just more curious on the dynamics. The North System, is there anything (inaudible) out of the ordinary going on there given the delays with Mariner East 2 getting into service in terms of servicing Northeast, is there anything to be aware of over there? Thanks." ] }, { "name": "Sheridan Swords", "speech": [ "There's nothing on the North System that's been affected by Mariner East to what's going on there. I mean the North System was down in the second quarter versus the first quarter, but that's more seasonality that we see every year. We still do receive volume into the Conway off of rail out of the Marcellus and that's probably driven by the Mariner East issues, but we've been receiving those for quite some time, but I don't think it's enough to really affect the North-South spread or affect anything on the North System." ] }, { "name": "Michael Blum", "speech": [ "Okay, thank you very much." ] }, { "name": "Operator", "speech": [ "Thank you. And our next question comes from Elvira Scotto with RBC Capital Markets." ] }, { "name": "Elvira Scotto", "speech": [ "Hey, good morning. So what are some of the benefits that you guys see with the full ownership of West Texas LPG versus only owning 80%. Is it just the ability to deploy more capital?" ] }, { "name": "Terry Spencer", "speech": [ "So, Elvira, one of the key things to make note of, when you have a partner and particularly if that partner is trying to monetize and create liquidity, you could wind up with a partner that doesn't necessarily fit with us. So you had some risk there, so we've taken that risk off the table, but I think probably the most important thing is the ability to freely integrate that pipeline system in with our existing NGL business. When you've got a partner that's got a 50:50 vote, which is basically how the JV was structured long ago when Chevron owned it, you want to be on the same page obviously and so, the thing that -- the risk that you run is that you can't -- you don't -- you're not perfectly aligned if you've got somebody else involved and as a result, you may not be able to do all the things you want to do with that pipeline asset. So by taking out Martin, we've cleaned that up and now we own it 100% and now we can more effectively, without risk, integrate that business and take advantage of all the synergies that, that asset has with our existing business and existing assets. That help you?" ] }, { "name": "Elvira Scotto", "speech": [ "Yes, very helpful, thanks. And then in your -- you mentioned in your prepared remarks that you were looking at expanding your integrated footprint, organic growth projects and strategic M&A. So can you maybe talk about your appetite for larger scale M&A? And what sorts of assets you'd consider to expand your integrated footprint, is it more downstream sort of export type capacity?" ] }, { "name": "Terry Spencer", "speech": [ "Well, first of all, from an M&A perspective, certainly we're very -- we remain very interested in M&A, but I think what you saw with the West Texas Pipeline acquisition, I mean, that's a perfect example of what we're really interested in. Certainly, as we think about acquisitions and acquisitions from a more strategic standpoint, if they simply don't fit very well or have a real compelling strategic logic, we're not going to be very interested in it. So that's how we think about it. I think broadly speaking in terms of the types of assets, again that we're interested in, certainly downstream assets, particularly as it relates to terminalling, storage, transportation of liquid products, they don't have to be NGLs, it could be crude oil, it could be refined products, it could be petrochemical products. That infrastructure as well as long-haul crude oil transportation further upstream could certainly make a lot of sense and we've been very vocal about that over the past couple of years. And just candidly, what I'll tell you is those assets, people don't want to let go of them very often. So the opportunity from an acquisition perspective sometimes is limited as well as those are certainly quality of fee-based assets that everybody wants, including us." ] }, { "name": "Elvira Scotto", "speech": [ "Great. All right, thanks a lot." ] }, { "name": "Terry Spencer", "speech": [ "You bet. Thank you." ] }, { "name": "Operator", "speech": [ "Thank you. And our next question comes from Danilo Juvane with BMO Capital Markets." ] }, { "name": "Danilo Juvane", "speech": [ "Thank you and good morning. Guys with the gathering fee being as strong as it has been for the first six months of the year, is it fair to say that the new guidance number that you provided I think it was $0.85 to $0.90, should that be something that we should carry over into 2019 as well?" ] }, { "name": "Chuck Kelley", "speech": [ "Yes, this is Chuck. I would say that in '19 you'd probably see similar range on our fees as we move forward with the mix of volumes coming out of the Bakken primarily driving that." ] }, { "name": "Danilo Juvane", "speech": [ "Got it. And I guess, switching gears, I noticed that you're still stating no equity needs well into 2019. Does that message change at all just given how strong you've performed so far this year and of course, you do speak about having additional opportunities next year, do you see a need of potentially issuing equity at some point in '19?" ] }, { "name": "Walter Hulse", "speech": [ "This is Walt. We obviously have experienced strong cash flows, which is helpful, because we get to reinvest that back into the business and that helps us from the debt capacity standpoint as well. So we don't see anything today with what we have on the table that would change our view that we want [ph] to issue equity in 2018 or well into 2019, if at all in 2019. Now that said, we are seeing opportunities for growth projects that are on the horizon and if they come sooner as opposed to later, we have to leave that door open, if we need to manage the balance sheet. We think the investment grade credit rating is incredibly important and we're going to do what we need to do to protect that, but if those move out further on the timeline and these pipelines start cash flowing the way they will, we continue to expect to delever very quickly, 2020 and beyond." ] }, { "name": "Danilo Juvane", "speech": [ "Thanks, Walt. Last question from me, you mentioned in the press release some impact to NGL's segment earnings from the timing of unfraced NGL volumes. Should we be expecting a positive impact over the next couple of quarters from that dynamic?" ] }, { "name": "Walter Hulse", "speech": [ "I mean, when we think about the frac volume, yes, we did put some raw feed in inventory in the second quarter. We expect that'll get fraced off over the rest of the year. So we should be -- that you should see that come over the next couple of quarters." ] }, { "name": "Danilo Juvane", "speech": [ "Any estimates what the EBITDA impact would be from that?" ] }, { "name": "Walter Hulse", "speech": [ "Probably in that -- it'd be in the $10 million to $20 million range." ] }, { "name": "Danilo Juvane", "speech": [ "That's it for me. Thank you so much." ] }, { "name": "Operator", "speech": [ "Thank you. And our next question comes from Jeremy Tonet with JP Morgan." ] }, { "name": "Jeremy Tonet", "speech": [ "Good morning." ] }, { "name": "Terry Spencer", "speech": [ "Good morning." ] }, { "name": "Jeremy Tonet", "speech": [ "Thanks, I think you guys touched on a couple different times here with regards to guidance, but just kind of bringing it all back together as far as what kind of the main drivers were to the guidance increase, raising it here, was it just kind of strong first half is in the books at this point or now you kind of assume spread duration is going to remain at higher and better levels for longer duration in the back half of the year. And just want to confirm West Texas LPG acquisition is not factoring in here as you guys already consolidated that. Were there any other items that you'd say if you kind of rain quarter, what was the biggest components to the increase in guidance here?" ] }, { "name": "Terry Spencer", "speech": [ "Well, Jeremy, I think you're right on in the comments you've made, but the biggest mover certainly is optimization. Now we do very typically as I mentioned and Walt mentioned in his remarks, is we do factor in some weather degradation later in the year. If that -- and, you know, that weather can be severe. If it's not as severe as we've got factored in, we can certainly see some pretty significant benefits to our G&P segment as we move through the fourth quarter, but the biggest mover is the optimization and again, as I said earlier, it's difficult to predict these spreads with any degree of certainty, but what I will tell you is everything that we're looking at today is leaning to a pretty consistent -- a scenario where we see wide spreads for an extended period of time." ] }, { "name": "Jeremy Tonet", "speech": [ "Okay. That's helpful, thanks, and then just going back to the 30 less well connects in Mid-Con you're talking about, it seems like it's kind of timing related, I think here, but just wondering if you could share kind of what areas this is, if this is a STACK, SCOOP or kind of legacy areas?" ] }, { "name": "Terry Spencer", "speech": [ "No, it's pretty much just in general and again that's back to rigs move around a little bit on our acreage and it's not that we're seeing any degradation overall in the STACK and SCOOP, it's just maybe less than one rig that's been on our acreage versus on somebody else and a little bit of timing. That's all that's driven there. There is no structural or fundamental change in our outlook of how we're viewing the STACK and the SCOOP." ] }, { "name": "Jeremy Tonet", "speech": [ "That's very helpful. Thanks for taking my question." ] }, { "name": "Operator", "speech": [ "Thank you. And our next question comes from Dennis Coleman with Bank of America." ] }, { "name": "Dennis Coleman", "speech": [ "Yes, hi, good morning. A lot has been asked, so just a couple of detailed ones for me, if you would please. There's a footnote that says you may bring Elk Creek on the southern leg in the third quarter as to putting the whole thing on in the fourth quarter, any meaningful earnings impact from that, that we might expect to model in?" ] }, { "name": "Terry Spencer", "speech": [ "The earnings impact would be like we've said, we're using rail as a bridge to provide our customers that service as it relates to, you know, their growing volumes in advance of the pipeline capacity. So one way to think about it is, as we move barrels, if we get that southern section done, we're able to move barrels from the Powder River Basin over to that pipe and start collecting the full pipeline fee rather than the rail -- and not have to pay the rail cost. So that would be the uplift we would get. That's the way we're thinking about it and we haven't really talked about '19 guidance yet, but clearly, as we get closer and we do that, that will be considered as we provide that guidance." ] }, { "name": "Dennis Coleman", "speech": [ "Perfect. Okay, and then obviously strong results here and potentially the higher guidance, does that change anything about when you think you will become a cash tax payer?" ] }, { "name": "Walter Hulse", "speech": [ "No, we still have a -- as we've guided in the past, we won't be paying taxes through at least 2021 or beyond that there will be some point further out than that and that hasn't changed." ] }, { "name": "Dennis Coleman", "speech": [ "Okay, that's it from me, thanks." ] }, { "name": "Operator", "speech": [ "Thank you. Our next question comes from Craig Shere with Tuohy Brothers." ] }, { "name": "Craig Shere", "speech": [ "Good morning." ] }, { "name": "Terry Spencer", "speech": [ "Good morning." ] }, { "name": "Craig Shere", "speech": [ "Starting [ph] into the ground, but just a little confused on the last answer to Jeremy's question on guidance, you are assuming some discount to recent spreads from Conway to Mont Belvieu on the optimization into this second half, right?" ] }, { "name": "Terry Spencer", "speech": [ "That's correct. Some degradation in the spreads going forward through the third and fourth quarter." ] }, { "name": "Craig Shere", "speech": [ "Okay and so, to your point if we just stay flat from where we've recently been, you'll hit the upside of guidance?" ] }, { "name": "Terry Spencer", "speech": [ "You got it." ] }, { "name": "Craig Shere", "speech": [ "Okay and then, Kevin, on the additional 20,000 a day for Elk Creek and 30,000 for Arbuckle and any thoughts about how quickly that will ramp, I know Sheridan kind of mentioned that up in the Bakken, producer activity plans seem to suggest a quicker ramp than you guys had shared on the last call for your legacy contracts?" ] }, { "name": "Kevin Burdick", "speech": [ "I don't. I mean, yes, we continue to get good information or positive information from our producers about the volumes being stronger. That has translated into additional contracts and a little bit steeper ramp, but we would still expect it, you know, the volumes are going to ramp over a year or two as we move through these projects and once they come online." ] }, { "name": "Craig Shere", "speech": [ "Okay and any thoughts about what next in the Permian besides the West Texas LPG expansion?" ] }, { "name": "Kevin Burdick", "speech": [ "You know as we think, we got a lot of visibility to volume growth and you look at what's going on out there, I mean clearly the Permian with the number of rigs and the growth expectations on the liquids side, we have a lot of targets out there and again are in late stage negotiations with several of them. So we would look to continue to expand and loop West Texas all the way from the Permian to where it connects with Arbuckle II and now that we wholly own it, we'll be able to integrate eventually that pipe into Arbuckle II and achieve some significant capital savings by leveraging the Arbuckle II pipeline and the capacity there versus laying another line that's part of West Texas LPG." ] }, { "name": "Craig Shere", "speech": [ "Okay, so it's just maximizing what you've got, nothing on the crude side or any other ideas there?" ] }, { "name": "Kevin Burdick", "speech": [ "So Craig, we're always thinking about the crude business. We're always thinking about potential to take existing assets and repurpose them to crude and vice versa. So we're always thinking about those things. I would never rule out the opportunity particularly in a basin where crude is being produced as prolifically as it is. We are certainly always thinking about it and in particular in the Permian." ] }, { "name": "Craig Shere", "speech": [ "And the last question, a bit of a follow-up to Elvira's M&A question, she referenced export possibilities, I know that Terry you've kind of commented in the past you won't mind moving into LPG exports. Any kind of update on the market there? Your thoughts?" ] }, { "name": "Terry Spencer", "speech": [ "Well, we continue to aggressively pursue export terminalling opportunities. That has never stopped. We like the prospects that are in front of us today. Our commercial teams are working very hard and looking at a lot of options. We're talking to a lot of international markets where we're spending a lot of time hopping across the pond speaking with potential customers and potential partners in a project such as an export terminal. So very, very high on our list and certainly a business or an activity that makes a lot of sense for us." ] }, { "name": "Craig Shere", "speech": [ "Great, thank you." ] }, { "name": "Terry Spencer", "speech": [ "Thank you." ] }, { "name": "Operator", "speech": [ "Thank you. We have no further questions at this time. I would now like to turn the conference over back to Mr. Andrew Ziola." ] }, { "name": "Andrew Ziola", "speech": [ "Well, thank you everyone. Our quiet period for the third quarter starts when we close our books in early October and extends until we release earnings in late October. We'll provide details on the conference call at a later date. Thank you for joining us and have a good day." ] }, { "name": "Operator", "speech": [ "Thank you. This concludes today's teleconference. You may now disconnect." ] } ]
OKE
2023-08-08
[ { "description": "Vice President, Investor Relations and Corporate Affairs", "name": "Andrew Ziola", "position": "Executive" }, { "description": "President and Chief Executive Officer", "name": "Pierce Norton", "position": "Executive" }, { "description": "Chief Financial Officer and Executive Vice President Investor Relations and Corporate Development", "name": "Walt Hulse", "position": "Executive" }, { "description": "Executive Vice President, Chief Commercial Officer", "name": "Kevin Burdick", "position": "Executive" }, { "description": "UBS -- Analyst", "name": "Brian Reynolds", "position": "Analyst" }, { "description": "JPMorgan Chase and Company -- Analyst", "name": "Jeremy Tonet", "position": "Analyst" }, { "description": "Senior Vice President, Natural Gas and Natural Gas Gathering and Processing", "name": "Sheridan Swords", "position": "Executive" }, { "description": "Barclays -- Analyst", "name": "Theresa Chen", "position": "Analyst" }, { "description": "Wells Fargo Securities -- Analyst", "name": "Michael Blum", "position": "Analyst" }, { "description": "Citi -- Analyst", "name": "Spiro Dounis", "position": "Analyst" }, { "description": "Scotiabank -- Analyst", "name": "Tristan Richardson", "position": "Analyst" }, { "description": "AllianceBernstein -- Analyst", "name": "Jean Salisbury", "position": "Analyst" }, { "description": "Bank of America Merrill Lynch -- Analyst", "name": "Neil Mehta", "position": "Analyst" }, { "description": "Wolfe Research -- Analyst", "name": "Keith Stanley", "position": "Analyst" }, { "description": "Truist Securities -- Analyst", "name": "Jake Nivasch", "position": "Analyst" }, { "description": "Tuohy Brothers -- Analyst", "name": "Craig Shere", "position": "Analyst" }, { "description": "Seaport Global Securities -- Analyst", "name": "Sunil Sibal", "position": "Analyst" } ]
[ { "name": "Operator", "speech": [ "Good morning, everyone, and welcome to the ONEOK second-quarter 2023 earnings conference call and webcast. All participants will be in listen-only mode for the duration of the call. [Operator instructions]. After today's presentation, there will be an opportunity to ask questions.", "[Operator instructions] Please note this event is being recorded today. I would now like to turn the conference over to Andrew Ziola, Vice President of Investor Relations. Please go ahead." ] }, { "name": "Andrew Ziola", "speech": [ "Thank you, MJ, and welcome to ONEOK's second-quarter 2023 earnings call. We issued our earnings release and presentation after the markets closed yesterday, and those materials are on our website. After our prepared remarks, management will be available to take your questions. Statements made during this call that might include ONEOK's expectations or predictions should be considered forward-looking statements and are covered by the safe harbor provision of the Securities Acts of 1933 and 1934.", "Actual results could differ materially from those projected in forward-looking statements. For a discussion of factors that could cause actual results to differ please refer to our SEC filings. Just a reminder for Q&A, we ask that you limit yourself to one question and a follow-up in order to fit in as many of you as we can. With that, I'll turn the call over to Pierce Norton, president and chief executive officer.", "Pierce?" ] }, { "name": "Pierce Norton", "speech": [ "Thanks, Andrew. Good morning, everyone, and thank you for joining us. On today's call is Walt Hulse, chief financial officer and executive vice president, investor relations and corporate development; and Kevin Burdick, the executive vice president and chief commercial officer. Also available to answer your questions are Sheridan Swords, our senior vice president, natural gas liquids and natural gas gathering and processing; and Chuck Kelley, senior vice president, natural gas pipelines.", "Yesterday, we announced second-quarter 2023 earnings and increased our full-year 2023 financial guidance. Strength in volumes across our operations, particularly in the Rocky Mountain region and Permian Basin, resulted in higher second-quarter results and positive momentum entering the second half of 2023. We continue working toward a successful closing of our pending merger transaction with Magellan while remaining focused on the growth of our legacy assets. Initial activities have begun on two NGL pipeline expansion projects.", "The growth we are seeing across our existing operations is driving the need for these economically attractive projects. Walt and Kevin will talk more about the early work that we are doing on the Elk Creek and West Texas natural gas liquids pipelines. Regarding our pending acquisition of Magellan Midstream, we've recently accomplished two critical milestones toward completing the transaction, including the expiration of the HSR waiting period in June and the filing of the definitive proxy materials with the SEC in July. Proxy mailings are already hitting investors' mailboxes.", "As we look ahead to the shareholder and unitholder votes on September 21st, we're confident that the investors of both companies will see the compelling long-term value proposition this transaction brings with immediate financial benefits and incremental growth through the combination of these two companies. Today, we will walk you through both the macro and micro takeaways of our synergy assumptions. I will cover the macro, and Kevin will go into more detail with the macro explanations. On Slide 6 in our earnings presentation, which was provided yesterday with our news release, you will see a summary of how we've organized the synergy opportunities we've identified to date and have targeted to realize as a combined company.", "You can see we have slided these commercial opportunities into four categories and have provided a breakdown for both the assumed scenario in our proxy and for the incremental potential near-term commercial opportunities. So, now I'd like to cover the macro takeaways from Page 6 previously referenced. First, combined, these companies will have opportunities that were not possible as stand-alone companies. Second, batching and blending are done by both companies today.", "Therefore, these operational techniques are well understood by both companies. They are not new. But the difference is with these assets under one company's direction, batching and blending value can be realized on a larger scale. Third, with the exception of bundling, the three remaining commercial categories are within 100% of our control.", "This means that we make the decision to pursue opportunities if they make commercial and economical sense instead of relying on factors outside of our control. Fourth, as we integrate the two employee bases post close, we can focus on widespread collaboration and believe that we will find even more opportunities not identified to date. And finally, there is significant potential value in the near term, the next one to four years, above our assumed case in the proxy. ONEOK has proven our commercial creativity over the course of our company's transformative history, and together with Magellan's team, we believe our companies have many opportunities to continue improving the services that we offer to our customers and returning value to our investors.", "With that, I'll turn the call over to Walt Hulse for the discussion of our recent financial performance and guidance increase." ] }, { "name": "Walt Hulse", "speech": [ "Thank you, Pierce. With yesterday's earnings announcement, we increased our 2023 financial guidance expectations. We now expect a 2023 net income midpoint of $2.49 billion and an adjusted EBITDA midpoint of $4.675 billion, a $100 million increase from our original adjusted EBITDA midpoint provided in February. These midpoints are ONEOK specific and exclude the impact of the pending merger with Magellan and any future merger-related costs in order to be an apples-to-apples comparison with our original guidance provided in February.", "Higher guidance expectations were driven by volume growth, volume strength across our operations, higher average fee rates and lower-than-expected third-party NGL fractionation costs. In the second quarter, we recorded $31 million of third-party fractionation costs, compared with $46 million in the first quarter. We expect approximately $30 million of third-party fractionation costs per quarter to be a good run rate for the remainder of the year as MB-5 is fully operational. Strong producer activity and a constructive volume outlook also drove the increase in our capital expenditure guidance.", "We now expect total capital expenditures, including growth and maintenance capital, of approximately $1.575 billion in 2023. Initial activities, including the purchase of long lead time components related to the expansion of Elk Creek pipeline and the decision to complete the full looping of the West Texas NGL pipeline are included in our updated guidance. Kevin will provide more detail on these projects shortly. Now, a brief overview of our second-quarter financial performance.", "ONEOK's second-quarter 2023 net income totaled $468 million or $1.04 per share. Second-quarter adjusted EBITDA totaled $971 million, a 10% increase year over year. If you exclude merger-related and third-party fractionation costs, second-quarter adjusted EBITDA increased nearly 15% and would exceed $1 billion. In June 2023, we redeemed $500 million of our 7.5% senior notes due September 2023 with cash on hand.", "Our net debt to EBITDA remains well below our long-term target of 3.5 times, and we had more than $100 million of cash and equivalents as of June 30. Early in the second quarter, Moody's upgraded ONEOK's credit rating to Baa2 from Baa3. As it relates to our pending acquisition of Magellan, I'd note all three rating agencies, Moody's, S&P, and Fitch, reaffirmed our investment-grade credit ratings pro forma for the acquisition showing a recognition of increased scale, earnings diversity, and growth opportunities that this acquisition provides. As it relates to merger transaction financing, we expect to complete a notes offering prior to the close of the transaction.", "We are monitoring the markets and will be opportunistic in our timing of that offering. I now turn the call over to Kevin for a commercial update." ] }, { "name": "Kevin Burdick", "speech": [ "Thanks, Walt. Let's start with our natural gas liquids segment. Second-quarter 2023 NGL volumes increased 11% year over year and compared with the first quarter 2023. Higher volumes were driven by increased producer activity, particularly in the Rocky Mountain region and Permian Basin.", "Both regions saw double-digit volume increases year over year and compared with the first quarter 2023. Permian Basin volumes saw the largest increase, up 26% year over year, driven by continued growth from existing plants and volume from a new plant connection in the first quarter of 2023. Volumes in the Rocky Mountain region increased 17% compared with the first quarter of 2023 and 14% compared with the same period last year driven by increased propane plus volume and slightly higher incentivized ethane. Mid-continent region volumes increased 8% compared with the first quarter of 2023, partially driven by increased ethane recovery.", "While we've seen ethane prices decrease recently from July highs, they remain at a level driving recovery in most basins. We think the recent volatility in ethane pricing is the market responding to some short-term dynamics along with the general tightening in the overall supply and demand balance. Given these market conditions, we remain confident in our ethane recovery assumptions included in our updated guidance. The Permian in near full recovery, the mid-continent in partial recovery, and opportunities to incent recovery in the Williston.", "As Walt mentioned, we've begun initial work, including purchasing long lead time components for two NGL pipeline expansion projects. Activities are underway to complete the looping of West Texas NGL pipeline, which will more than double ONEOK's NGL capacity out of the Permian Basin. The full loop is expected to be in service in the first quarter of 2025, which aligns with our customers' needs. We also are taking steps toward expanding the Elk Creek pipeline to 400,000 barrels per day to provide capacity for growing volumes in the Williston.", "In the natural gas gathering and processing segment, second-quarter processed volumes averaged nearly 2.2 billion cubic feet per day, a 16% increase year over year. In the Rocky Mountain region, processed volumes averaged nearly 1.5 billion cubic feet per day during the second quarter and have averaged more than 1.5 bcf per day in the month of July. We've connected more than 280 wells in the region through the first half of the year, compared with approximately 160 connections in the first half of 2022, a 75% increase. As we sit today, we're on pace to reach the high end of our 475 to 525 well-connect guidance range for the year.", "Currently, there are approximately 35 rigs and 20 completion crews operating in the basin with 19 rigs and approximately half of the completion crews on our dedicated acreage which remains more than enough activity to grow production on our acreage. In the mid-continent region, second-quarter processed volumes increased 12% year over year and decreased slightly compared with the first quarter of 2023, primarily due to the timing of new pads coming online. We've seen some recent decreases in STACK and SCOOP activity in the past few months but continue to see increased activity in Western Oklahoma as producers are focusing on higher crude producing areas. We currently have nine rigs on our dedicated acreage in the mid-continent and have connected 23 wells in the region through the first half of the year.", "In the natural gas pipeline segment, strong year-to-date results continue to benefit from demand for natural gas storage and transportation services, and we now expect the segment to exceed the high end of its original earnings guidance range. We recently completed an expansion of our natural gas storage capabilities in Oklahoma, allowing us to utilize and subscribe an additional 4 billion cubic feet of our existing capacity. We have subscribed 100% of this incremental capacity through 2027 and 90% through 2029. We continue to evaluate the Saguaro connector pipeline, a potential intrastate pipeline project that would provide natural gas transportation to the U.S.", "and Mexico border for ultimate delivery to an export facility on the west coast of Mexico. There continues to be positive developments related to the potential LNG export project with support from multiple large, well-known customers anchoring the project. We expect to make a final investment decision on the ONEOK pipeline later this year. Now, I want to end where Pierce left off with a micro look at the Magellan transaction synergies.", "I will discuss how we define each category, an example of the opportunity, the sensitivities and comments on the overall risk weighting. The dollar ranges between our assumed case and the near-term potential are shown on Page 6 of our investor presentation for all four categories. Liquids pipelines provide opportunities to move natural gas liquids and refined products through the same product pipelines. Both companies refer to this as batching.", "This operational technique utilizes available capacity and combined connectivity to ship a refined product or natural gas liquid to a demand center to capture a higher value. An annualized average of 100,000 barrels per day in any combination of refined products or NGLs at $0.07 per gallon would result in more than $100 million annually. The ability to mix products to obtain a higher value is called blending. The combined assets will increase unleaded butane blending as well as other incremental blending opportunities, increasing an additional 25,000 barrels per day annually at a $0.20 per gallon uplift on any given slate of products or NGLs would result in approximately $75 million annually.", "As volumes grow or contracts expire, a wider variety of services can be combined or bundled to offer greater value to customers. This focuses on optimizing system utilization and connectivity to and from key customers and market centers. This is the one category where time and decisions, primarily by customers, will jointly be needed to realize this synergy. Picking up an incremental 25,000 barrels per day at $0.10 per gallon would provide approximately $40 million a year.", "Additional opportunities that can be realized within the one- to four-year time frame include incremental refined product, NGL, and crude oil storage and optimization activities. We also see value and opportunities to leverage Magellan's proven marine export expertise. We have consistently said that acquisitions of this size often result in a 25% reduction in G&A cost, which, in this case, would be $200 million. However, we have assumed only $100 million in both the assumed case and the near-term potential case.", "It's also important to point out when the transaction was announced, we significantly risk-weighted our financial assumptions to come up with our total assumed $200 million of synergies. This should highlight the level of conservatism we've applied to our expectations and also the potential upside to our assumptions, which we think could drive synergies to more than $400 million. As we've said previously, we have a high level of confidence in achieving the assumed $200 million of near-term synergies. For obvious commercial reasons, we're not going to provide specific project level details at this time.", "However, we have provided realistic potential outcomes by categories. We believe our ability to batch and blend products on our combined pipeline systems as well as bundled services to increase value for customers will provide significant synergy opportunities over the next one to four years. Pierce, that concludes my remarks." ] }, { "name": "Pierce Norton", "speech": [ "Thank you, Kevin, and thank you, Walt. We've had a strong first half of the year with a promising second half still ahead of us. We continue to focus on the fundamentals of our business that have gotten us where we are today. These fundamentals include customer service, reliability, innovation and, most importantly, a focus on operating safely and responsibly.", "We have a long and successful track record of growing and transforming our business while innovating for future opportunities but even through change and advancements over our more than 100-year history, ONEOK employees have been consistent in their dedication to doing things the right way. In the coming weeks, we'll be publishing our 15th Annual Sustainability Report. I'd encourage you to review the report and see our many updates related to our environmental, safety, and health performance, related targets, employee initiatives and examples of how we're economically participating in the future of energy transformation. We're proud to share our efforts and accomplishments, but we also know we can't stop there.", "As our company continues on our journey of growth, change and progress, we remain committed to operating responsibly and sustainably. As we look forward to increasing our operations, workforce, and expertise through the merger of Magellan, we're also excited to join two companies with proud histories with a more promising future combined. I want to thank all the employees from both companies that are working on integration plans while continuing to run daily operations. We look forward to building on all that both companies have accomplished, creating a larger, more diversified company with a shared commitment to safety and stakeholder value.", "With that, operator, we're now ready for questions." ] } ]
[ { "name": "Operator", "speech": [ "Thank you. We will now begin the question-and-answer session. [Operator instructions]. At this time, we will pause momentarily to assemble our roster.", "Today's first question comes from Brian Reynolds with UBS. Please go ahead." ] }, { "name": "Brian Reynolds", "speech": [ "Hi. Good morning, everyone. I appreciate the prepared remarks and slide details around the commercial synergy opportunities. I was curious if we could just view -- if we could talk about if we should view the upside opportunity of synergies to be around $800 million versus the original $200 million that you talked about when the deal was announced? And then second, are there any assumptions around growth synergies on Slide 6, just given the larger integrated framework that you'll have? And if not, how should we think about the size and scope of those opportunities? Thanks." ] }, { "name": "Pierce Norton", "speech": [ "So, this is Pierce, Brian. I'll start out with some comments, and I'll let Kevin fill in or share in either one. So, the $800 million is a list of opportunities that we have that's fairly lengthy as far as what the potential could be based on certain volume assumptions, pricing assumptions, and time. And so, you come up with your list first, and then you have to go back and risk weight those as to what you think can realistically be done.", "I think in any of these transactions, you want to come up with the most comprehensive list possible realizing that you may not get them all. So, we're very comfortable in that range of $200 million to $400 million. And so -- but we wanted to add the color to kind of show how we risk weighted both into that assumption." ] }, { "name": "Brian Reynolds", "speech": [ "Great. Appreciate that. And I guess just a follow up, is there -- can you talk about the size and scope of those potential growth synergy opportunities, whether it's downstream, I guess? Thanks." ] }, { "name": "Kevin Burdick", "speech": [ "Brian, it's Kevin. No, I mean we've kind of provided as much as we're going to provide at this time. Again, just for competitive reasons, we're not going to -- we don't -- we prefer not to get into the details at this time of some of that. A lot of these will happen with not a lot of capital.", "Some may require a little bit, but we'll work those details as once we get closed and get into it." ] }, { "name": "Brian Reynolds", "speech": [ "Fair enough." ] }, { "name": "Pierce Norton", "speech": [ "The only thing I'd add to that, Brian -- this is Pierce -- is there's not one large opportunity in any one of those buckets that's driving it. It's multiple opportunities." ] }, { "name": "Brian Reynolds", "speech": [ "Fair enough. And if I may just -- I know it's a little bit too early to discuss what the final company will look like post-merger but kind of just curious if you could just talk about leverage for a larger integrated company. We've seen NGL peers take leverage to three times. And we've seen some recent spin co announcements talk about five times as being the right number.", "So, just kind of curious as a combined entity, what do you think the right leverage target is for ONEOK and Magellan? Thanks." ] }, { "name": "Walt Hulse", "speech": [ "Well, we definitely haven't changed our view on where we want to be from a long-term standpoint. We've heard out there that 3.5 times, we thought was a good benchmark for us. We are going to trend that direction pretty quickly with this transaction. And as we said in the past, we have no issue if we trend a little bit lower than that 3.5 times.", "But we think that puts us in a good position to take advantage of opportunities as they come down the road over time." ] }, { "name": "Brian Reynolds", "speech": [ "Great, I'll leave it there. Thanks for the time." ] }, { "name": "Operator", "speech": [ "The next question comes from Jeremy Tonet with JPMorgan. Please go ahead." ] }, { "name": "Jeremy Tonet", "speech": [ "Hi. Good morning." ] }, { "name": "Kevin Burdick", "speech": [ "Good morning, Jeremy." ] }, { "name": "Jeremy Tonet", "speech": [ "Just wanted to start with the underlying -- the fundamental business -- fundamentals of the underlying business here. With the results that you've had raising the guidance as far as we are into '23 just wondering if you could talk a bit more on operational momentum in the business right now. How you see that trending into '24 to the extent you're able to comment and specifically with regards to the numbers put forth in the prospectus and knowing that that is not guidance, but just wondering if there's any frame of reference you can provide there is how you see results potentially shaping up versus that number?" ] }, { "name": "Kevin Burdick", "speech": [ "Jeremy, it's Kevin. I think it's shaping up very well. The activity levels we're seeing across our footprint really in all three of the major areas. And even a little activity in the Powder, but primarily the Bakken and the Permian announcing or talking about these expansion projects that we're pushing forward to me signals that volume's coming and the activity levels we're seeing right now in the Williston and the Permian would absolutely dictate that we would be continuing to grow as we move through '24." ] }, { "name": "Walt Hulse", "speech": [ "Jeremy, the one thing I might do is give you a little bit of context on those numbers that were in the proxy. Those were numbers that were developed in September of '22 for our board meeting in November where we got the 2023 plan approved. The numbers for 2023 were the primary focus of those numbers. But as we've made -- as we stated in these conversations, and you'll remember, if you looked at the proxy that it goes back to September of 2022, we were using the same numbers for our board that we were using in our planning process.", "They were not a forward projection of our full view of what we would do in outer years. It was a pretty good view of 2023. So, as we see these business opportunities grow, we will give guidance for '24 and beyond when we get to February and in future periods." ] }, { "name": "Jeremy Tonet", "speech": [ "Got it. Maybe just one more cut at this. Is there any way, I guess, to provide color on what inputs were for -- driven into the 2024 numbers, such as Bakken rig count or other? And how they trend now versus what you saw at that point in time?" ] }, { "name": "Walt Hulse", "speech": [ "Like I said, I think that you should think about those numbers with the primary focus on 2023 to try to look forward 15 months and give a rig count is something that we don't typically try to do. We usually freshen that up and the team is actively thinking about that as we head into the fall for 2024." ] }, { "name": "Jeremy Tonet", "speech": [ "Got it. Just real quick last one if I could. If you could provide updated thoughts on the West Texas LPG loop and Elk Creek, what type of project economics you see for those investments?" ] }, { "name": "Sheridan Swords", "speech": [ "Jeremy, this is Sheridan. I'll start with the West Texas completing that loop. So, we're just finishing completing the loop that we started in 2018. It's a very low cost per barrel of capacity loop, and we'll be adding the pipeline capacity when it's done coming out of the Permian will be well over 700,000 barrels.", "We have contracts in place that give us a very nice return on that project with still a lot of capacity left to be contracted as we go forward. So, we're very excited about that project. I think that's going to be a very, very low multiple projects when we're done, high return. On the -- coming out of the Elk Creek as we continue to see volume grow in the Elk Creek on obviously, out of our G&P presence up there, where we have a large majority, 60% of the market share up there and then off of what volumes we see from third parties that we've already contracted.", "We now see the opportunity that we need to grow this pipeline to make sure we don't get caught short. So, with the margins we see on there and just putting in pumps on our pipeline and just the last bit of capacity, it's going to be another very high-return, low-multiple project on that. So, obviously very excited as we continue to grow forward. Just another example, as we said, we will not get caught short of volume coming out of the Bakken." ] }, { "name": "Jeremy Tonet", "speech": [ "Got it. That's great. Thank you." ] }, { "name": "Operator", "speech": [ "The next question comes from Theresa Chen with Barclays. Please go ahead." ] }, { "name": "Theresa Chen", "speech": [ "Good morning. First, I'd like to get a little bit more detail on the batching opportunities. Do you have examples of which types do you see the most upside for batching? And are you already seeing commercial interest in this? And just what underlies that $0.07 per gallon estimate." ] }, { "name": "Sheridan Swords", "speech": [ "I think we -- this is Sheridan again. I'll give you one example of what we can do it as a batching opportunity is obviously with our Sterling pipeline that runs in between the Gulf Coast and the Mid-Continent region. We can put refined products on that to move refined products in between those two locations on the safe pipeline as we are moving NGLs on that pipeline as well. So, that's an example of an area where we could be moving back and forth between two areas on refined products on the NGL pipeline.", "That's an example of batching." ] }, { "name": "Theresa Chen", "speech": [ "And what underlies the $0.07 estimate -- for the illustrative estimate?" ] }, { "name": "Sheridan Swords", "speech": [ "The reason we use $0.07 illustrated estimates, that's kind of what we see the overall tariff in between those two areas tend to be from more on the refined products pipeline as we see that, then obviously, there could be upside to that as we go forward, depending on where the markets are. But that's -- we wanted to use a number that was out there in the market, and that's what we see today." ] }, { "name": "Theresa Chen", "speech": [ "Got it. And on the blending piece, are you -- within this illustrative example, are you looking to blend 25,000 barrels per day of incremental butane into the gasoline pool? Or are you looking to expand margins by $0.20 for 25,000 barrels per day?" ] }, { "name": "Sheridan Swords", "speech": [ "I think we see a lot of opportunities in both areas. We're trying to give you an idea of what the impact could be and give you more of a notionally where we're thinking about going on that. It could be both. We could be -- we think that there's opportunity for increased margin.", "We also think there's an opportunity for increased volume. But we're trying to give you an idea of what the impact could be and a little bit of sensitivities around that. That's how we came up with the numbers that we gave you." ] }, { "name": "Theresa Chen", "speech": [ "Thank you." ] }, { "name": "Operator", "speech": [ "The next question comes from Michael Blum with Wells Fargo. Please go ahead." ] }, { "name": "Michael Blum", "speech": [ "Thank you. Good morning, everyone. I want to go back to the proxy again for a minute specifically on the capex in the proxy for 2023, it's higher than your revised capex guidance here this morning. So, I'm wondering if you could just explain the variance there? And then does that imply that '23 capex could go higher if you FID more projects for the balance of the year?" ] }, { "name": "Walt Hulse", "speech": [ "Michael, if you -- again, think of the timing when we did it. This is back September of last year. At that point in time, we thought the Saguaro pipeline would be further along in its process. We've now said that we expect FID between now and the end of the year.", "So, that just from a timing standpoint, that analysis assumed that the Saguaro pipeline was fully included. And with the timing moving on that and some other projects, we see some of that kind of shifting out, some of it won't be realized that we will actually do it, and there may be other projects. The capital, as we look at commercial opportunities is continually revisited and the number that we gave you today is our expectation for 2023." ] }, { "name": "Michael Blum", "speech": [ "OK. Perfect. And then I just wanted to ask on the Elk Creek expansion, I'm assuming that this will be brought on in phases. So, is that correct? And anything you can provide in terms of a timeline for when you'll be adding capacity? And then what is the cost of the project?" ] }, { "name": "Kevin Burdick", "speech": [ "Michael, it's Kevin. On the timing, we're not -- we're just going to -- we're not going to get caught short. As we look at our customers, we're going to make sure we've got that capacity there. We're still working through.", "And on the cost, we're given consistent with the NGL expansion as well, we decided to give here's what the impact is going to be in '23 as we move forward and we get to '24, then we'll provide -- it will be included in those numbers there as well." ] }, { "name": "Michael Blum", "speech": [ "All right. Thank you." ] }, { "name": "Operator", "speech": [ "The next question comes from Spiro Dounis with Citi. Please go ahead." ] }, { "name": "Spiro Dounis", "speech": [ "Thanks, everybody. Maybe just to follow-up on some of these questions and starting with capex. It sounds like these pipeline expansions are going to be pretty capital efficient. But maybe you could just give us a general sense of the trajectory on capex going into '24 on a stand-alone basis.", "Obviously, Mont Belvieu 5 dropping off you still have Mont Belvieu 6, you've added these pipeline expansions. And so directionally, without Saguaro, let's say, it doesn't seem like it's trending in any particular direction versus '23." ] }, { "name": "Kevin Burdick", "speech": [ "I mean -- Spiro, this is Kevin. Again, we're not going to start guiding to '24 yet, but just notionally, you think about the projects, we've got our -- at the activity levels we're seeing, it'd be relatively consistent from just kind of that routine stuff. So, to the extent we don't announce any other larger projects than it would be in the ballpark. But again, like Walt said, we're constantly looking at projects.", "We're evaluating projects and some pop and get to the point where we execute and others don't. So, it's kind of hard to say. But we don't -- there's nothing we're seeing other than Saguaro. It's more pipeline expansion type stuff." ] }, { "name": "Spiro Dounis", "speech": [ "Got it. And second question actually is on Saguaro. I know you're still working toward an FID there. But I guess I'm just curious if you've seen any incremental interest beyond the LNG project downstream of that pipeline? And if you're also sort of feeling any interest from potential JV partners yet?" ] }, { "name": "Kevin Burdick", "speech": [ "Our focus right now on Saguaro is -- I mean, like we said in the remarks, there have been some positive developments, that's great. But our focus is on continuing to drive out and ensure we get the presidential permit and the timelines we need and continuing to refine our estimates, and we're focused on that -- the U.S. side of that pipeline." ] }, { "name": "Spiro Dounis", "speech": [ "Got it. I'll leave it there. Thanks, guys." ] }, { "name": "Operator", "speech": [ "The next question comes from Tristan Richardson with Scotiabank. Please go ahead." ] }, { "name": "Tristan Richardson", "speech": [ "Hey, good morning, guys. Kevin, you talked a little bit about the volatility we saw in June and July around ethane. But can you talk about maybe the dynamic you're seeing in the north obviously, with a tighter market at Belvieu with relief on the way and then obviously, weather's impact there. Were we able to see some incentivized ethane come in, into June? And then just curious maybe what you're seeing in the third quarter." ] }, { "name": "Kevin Burdick", "speech": [ "Just -- I'll start. And just in general, at a high level, the environment does bounce around. That's why we talk about we'll have opportunities to incentivize ethane. Once again, you've got to look at what's going on with gas prices up north in Canada and what's going on with Belvieu ethane.", "So, we've had those opportunities. It's moved around. We're not going to provide the specific volumes. But again, it continues to be an opportunity for us.", "I mean, Sheridan, anything to add?" ] }, { "name": "Sheridan Swords", "speech": [ "One thing I'd add with that is that with this -- we had a big run-up in ethane prices, and it came off and overall is still higher than it was in the first part of June, which has allowed the Mid-Continent for later part of June, July and into August to be in full ethane recovery." ] }, { "name": "Tristan Richardson", "speech": [ "That's helpful. Thank you. And then maybe, Walt, I understand we're not talking about '24 capex just yet or even identifying the cost of specific projects at this point. But maybe can you talk a little bit about long lead time procurement in '23 and maybe just generally what proportion of a project that might be?" ] }, { "name": "Walt Hulse", "speech": [ "Well, I think that I would -- as you look forward, kind of think about it this way, that as Kevin mentioned, most of what we're looking at is build-outs from our existing system whether it's expansions or add-ons to that. So, at the moment, we don't have any significant sized project that we have looming out there other than we've obviously talked about the potential of the Saguaro pipeline. And the long lead times. In this environment, you always have to be on that game.", "And so we are looking at that as it relates to all of our projects and how we can be there to meet the needs of our customers going forward. So, that's just a reality in this day and age." ] }, { "name": "Tristan Richardson", "speech": [ "Appreciate it. Thank you, Walt." ] }, { "name": "Operator", "speech": [ "The next question comes from Jean Salisbury with Bernstein. Please go ahead." ] }, { "name": "Jean Salisbury", "speech": [ "Hey, good morning. Kevin, can you give a little bit more detail on why the gas pipeline segment is doing so much better than guidance? It seems like a lot of it is from renegotiating storage up to higher rates. So, if you can give any kind of direction on how much of your storage capacity has been renegotiated up to the current rates already? And how much might be yet to come, that would be helpful as well." ] }, { "name": "Kevin Burdick", "speech": [ "Jean, really, it's just segment hitting on all cylinders. There's a variety of things. I mean, absolutely, after Uri, the increase in storage, both from an amount of storage contracted up and the rates we were getting that was a benefit. The segment has seen an opportunity, again, through its retained fuel and some gas sales to be opportunistic there.", "That's been strong. And with some market dynamics and how they've handled here recently parking loans and so forth has been a little bit of a benefit to us. So, really, the segments just performed outstanding, and we continue to find other projects as well. We're not done as it relates to looking at other storage opportunities, expansion opportunities, whether it be in Texas or Oklahoma.", "So, again, segment is just doing a great job capturing the market opportunities that are provided." ] }, { "name": "Jean Salisbury", "speech": [ "Great. Thanks. And one more for you, if I can. It seems like Bakken volumes are outpacing your expectations a bit.", "If you can just kind of say whether that's primarily been a function of more oil growth overall, higher GOR than you forecast or more ethane recovery than you forecast or just all three, that would be helpful." ] }, { "name": "Kevin Burdick", "speech": [ "Well, when we think about gas, the gas production, that wouldn't have as much ethane recovery, but it's definitely the activity levels we're seeing, the productivity, it's a combination of both of those. Producers just continue to get better and better when it -- as it relates to their drilling techniques, their completion techniques, some of the length of the laterals has expanded in certain areas. All those things really go into giving us, again, a lot of strength as we exit Q2, where we're at and where we think it's going to go. So, you're right.", "We do see strength, and we think we're in a great position." ] }, { "name": "Jean Salisbury", "speech": [ "Great. That's all for me. Thank you." ] }, { "name": "Operator", "speech": [ "The next question comes from Neil Mehta with Bank of America. Please go ahead." ] }, { "name": "Neil Mehta", "speech": [ "Hi. Thanks for taking my question. I noticed on the G&P side, you hit kind of the top end of your rate at $1.20 Mcf. I was wondering kind of the factors behind that, whether it was inflation, more wells driven toward the Bakken? And then how any commodity sensitivity would play into that and if that rate is sustainable going forward?" ] }, { "name": "Sheridan Swords", "speech": [ "Neil, this is Sheridan. A lot of that, obviously, the increase in rates is going to be -- we had inflationary factors in there. Depends on the contract mix where -- what contracts coming in there. We've renegotiated contracts.", "So, it's overall, as we move through, we continue to improve those contracts, to go forward. But I think one of the biggest ones is probably more of the inflationary escalators having the biggest impact." ] }, { "name": "Neil Mehta", "speech": [ "OK. And then just a general question on the commercial synergies with batching, blending, bundling. How much of these synergies are kind of spread based and opportunistic versus finding new demand centers where kind of serving demand on a baseload basis." ] }, { "name": "Kevin Burdick", "speech": [ "Neil, this is Kevin. I'll take it. And again, we're not going to get into project-specific details. But I think Sheridan mentioned earlier, it's going to be -- those opportunities are going to be a mix of both.", "It's going to be volumetric, and it's going to be rate. And to the extent we can find opportunities for the higher rates, great. If it's more volume, that's great, too. So, that's kind of how we're thinking about it." ] }, { "name": "Neil Mehta", "speech": [ "OK, thank you." ] }, { "name": "Operator", "speech": [ "The next question comes from Keith Stanley with Wolfe Research. Please go ahead." ] }, { "name": "Keith Stanley", "speech": [ "Hi. Thank you. First, just a quick follow-up on the blending synergies, the 70 million to 195 million. Is that predominantly butane blending? Or are there other types of product blending activities you see with the merger? I asked just because Magellan's business today is about 150 million a year on butane blending.", "So, the synergy number is just pretty large." ] }, { "name": "Sheridan Swords", "speech": [ "Keith, this is Sheridan. We see some opportunities in butane blending, but we see opportunities in other blending as well, not just on butane, but other NGLs into different products. We see -- be able to expand that and be able to actually do the butane blending that is being done today also cheaper." ] }, { "name": "Keith Stanley", "speech": [ "Got it. Thanks. And second question, just want to better understand the components of Saguaro. So, it seems like Mexico Pacific's made really good progress with the trains being fully commercialized the first two anyway.", "Can you give an update on where you see things for the connecting pipeline in Mexico? I just have not heard as much about that. Is your understanding there's a lot that needs to be done on that to move forward? Or that's progressing well as well and consistent with your timeline?" ] }, { "name": "Kevin Burdick", "speech": [ "Well, again, this is Kevin. Keith, the remarks I made earlier, we're going to stick to those. We're working -- there have been some positive developments, like you said. But at the end of the day, we're focused on the U.S.", "side and making sure we are in line with the overall timing and needs of the projects. So, that's our focus right now is really on the U.S. side." ] }, { "name": "Keith Stanley", "speech": [ "OK. Thank you." ] }, { "name": "Operator", "speech": [ "The next question comes from Neal Dingmann with Truist. Please go ahead." ] }, { "name": "Jake Nivasch", "speech": [ "Hi. Thank you for the question. This is Jake Nivasch on for Neal. Just one for me.", "Going back to the synergies, but just touching on the different segment, the bundling part knowing like you guys said this is not entirely in your control, but I just wanted to get a sense, should we assume the synergies or the potential synergy opportunity that you're seeing here, is that -- would that be like evenly spread throughout the, I guess, one- to four-year time -- just near term in general? Or is that going to be lumpy potentially? Just trying to get a sense of the dynamics there. Thank you." ] }, { "name": "Sheridan Swords", "speech": [ "Yeah, Neal, this is Sheridan. Yes, there's some -- I think there's some opportunities near term, but it is going to be a little bit lumpy. As we said in the remarks, it's a lot is going to be dependent on when contracts come up and as we continue to see how these two assets work together and multiple touch points with the same customer is going to create opportunities. So, we're going to see some in the beginning and then as contract roll off, will be lumpy throughout the four-year time period." ] }, { "name": "Jake Nivasch", "speech": [ "Got it. That's it for me." ] }, { "name": "Operator", "speech": [ "The next question comes from Craig Shere with Tuohy Brothers. Please go ahead." ] }, { "name": "Craig Shere", "speech": [ "Good morning. Thanks for putting me in. You add existing asset and commodity optimization synergies, I just want to dig in a little different manner, more into Brian's question on combined growth project opportunities. I understand you don't want to get into commercially sensitive areas maybe relating to crude transport, exports and all kinds of other things.", "But would it surprise you to see the combined business perhaps produce 2 billion to 3 billion more aggregate incremental growth project opportunities at your normal historical four times to six times build multiple by late decade?" ] }, { "name": "Walt Hulse", "speech": [ "Craig, I think I would leave you with the thought that a lot of these opportunities are incremental off of our existing assets or Magellan's assets. So, in most cases, we're expecting very low return -- very high return, low multiple opportunities. So, not an enormous amount of capital that is necessary to make those hit. We will continue to evaluate that and see if there are other growth opportunities that come up.", "But I think that we would expect to be at the lower end of that four to six, if not significantly better than that." ] }, { "name": "Craig Shere", "speech": [ "Gotcha. And one other follow-up, maybe a little over the skis on this because you've got to finish the merger, but -- once we get past that, do you intend to break out commercial synergies on an ongoing basis?" ] }, { "name": "Pierce Norton", "speech": [ "This is Pierce. We are in the process of deciding exactly how we're going to report all these segments. And then when we make that decision, we're going to move forward. But we're reporting by segment the way that we report on our business.", "As far as -- we'll give you as much detail as we possibly can without compromising anything we have from a competitive advantage standpoint." ] }, { "name": "Craig Shere", "speech": [ "Fair enough. Thank you." ] }, { "name": "Operator", "speech": [ "The next question comes from Sunil Sibal with Seaport Global Securities. Please go ahead." ] }, { "name": "Sunil Sibal", "speech": [ "Yeah. Hi, good morning, everybody. And thanks for all the details on the MMD transactions synergies. I was just curious, so it seems like where things stand now with regard to this transaction, there are some aspects of the transaction, which are beyond OKE use control.", "So, I was kind of curious if this weren't to go per the plan, what are some of the other levers that OKE could pull to accelerate growth in the forward years?" ] }, { "name": "Pierce Norton", "speech": [ "Well, I think the way I'd answer that question is that both companies right now, we're focused on the vote. Magellan is focused on their vote and ONEOK, we're focused on our vote. We believe that the Magellan unitholders and the ONEOK shareholders are going to see the value in this deal, the combined companies. And I think we're scratching the surface there because when we get these two companies combined, I think and get our employees collaborating together, I'm very confident in the innovation of both companies is going to turn out to be something that people are going to really be proud that they voted yes for this deal." ] }, { "name": "Sunil Sibal", "speech": [ "Thanks for that. And then one clarification question. It seems like ONEOK filed a shelf last week for additional equity. So, I was just curious if you could provide some context around that?" ] }, { "name": "Walt Hulse", "speech": [ "Sure. I'm actually glad you asked that question. That is just renewing the ATM plan that we have had in place for better part of seven or eight years. We've had -- we have not utilized that within the last five years and don't really have any expectation to utilize it going forward.", "But we do think it's a nice liquidity tool to have in our -- to have available to us, but there is no expectation that we would be using the ATM on a going-forward basis." ] }, { "name": "Sunil Sibal", "speech": [ "Thanks for that." ] }, { "name": "Operator", "speech": [ "This concludes our question-and-answer session. I would now like to turn the call back over to Andrew Ziola for closing remarks." ] }, { "name": "Andrew Ziola", "speech": [ "Our quiet period for the third quarter starts when we close our books in October and extends until we release earnings in late October. We'll provide details for that conference call at a later date. Thank you all for joining us, and have a good day." ] }, { "name": "Operator", "speech": [ "[Operator signoff]" ] } ]
OKE
2018-10-31
[ { "description": "Vice President, Investor Relations and Corporate Affairs", "name": "Andrew J. Ziola", "position": "Executive" }, { "description": "President and Chief Executive Officer", "name": "Terry K. Spencer", "position": "Executive" }, { "description": "Chief Financial Officer, Executive Vice President, Strategic Planning and Corporate Affairs", "name": "Walter S. Hulse", "position": "Executive" }, { "description": "Executive Vice President and Chief Operating Officer", "name": "Kevin L. Burdick", "position": "Executive" }, { "description": "BMO Capital Markets -- Analyst", "name": "Danilo Juvane", "position": "Analyst" }, { "description": "UBS Investment Bank -- Analyst", "name": "Shneur Gershuni", "position": "Analyst" }, { "description": "Senior Vice President, Natural Gas Liquids", "name": "Sheridan C. Swords", "position": "Executive" }, { "description": "Credit Suisse -- Analyst", "name": "Spiro M Dounis", "position": "Analyst" }, { "description": "Wells Fargo Securities -- Analyst", "name": "Michael Blum", "position": "Analyst" }, { "description": "Barclays Capital -- Analyst", "name": "Christine Cho", "position": "Analyst" }, { "description": "JPMorgan -- Analyst", "name": "Jeremy Tonet", "position": "Analyst" }, { "description": "Senior Vice President, Natural Gas", "name": "Charles M. Kelley", "position": "Executive" }, { "description": "Goldman Sachs -- Analyst", "name": "Michael Lapides", "position": "Analyst" }, { "description": "Seaport Global Securities -- Analyst", "name": "Sunil Sibal", "position": "Analyst" }, { "description": "Jefferies -- Analyst", "name": "Christopher Sighinolfi", "position": "Analyst" }, { "description": "Tuohy Brothers -- Analyst", "name": "Craig Shere", "position": "Analyst" } ]
[ { "name": "Operator", "speech": [ "Good day and welcome to the Third Quarter 2018 ONEOK Earnings Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Andrew Ziola. Sir, please go ahead." ] }, { "name": "Andrew J. Ziola", "speech": [ "Thank you, Katie, and welcome to ONEOK's third quarter 2018 earnings conference call. This call is being webcast live and a replay will be made available. A reminder that statements made during this call that might include ONEOK's expectations or predictions should be considered forward-looking statements and are covered by the safe harbor provision of the Securities Acts of 1933 and '34. Actual results could differ materially from those projected in the forward-looking statements. For a discussion of factors that could cause actual results to differ, please refer to our SEC filings. Our first speaker this morning is Terry Spencer, President and Chief Executive Officer. Terry?" ] }, { "name": "Terry K. Spencer", "speech": [ "Thanks, Andrew. Good morning and thank you all for joining us today. As always, we appreciate your continued interest and investment in ONEOK. Joining me on today's call is Walt Hulse, Chief Financial Officer, Executive Vice President, Strategic Planning and Corporate Affairs; and Kevin Burdick, Executive Vice President and Chief Operating Officer. Also available to answer your questions are Sheridan Swords, Senior Vice President, Natural Gas Liquids; and Chuck Kelly, Senior Vice President, Natural Gas. On today's call we will discuss, among other topics, ONEOK's third quarter financial and operational performance; our financial guidance increased included with yesterday's earnings announcement; NGL fractionation capacity; and we'll share our progress on our now $6 billion in capital growth program. Our strategy to create value for our stakeholders remains the same. With our assets well positioned in some of the most economic and prolific basins in the United States, we continually find opportunities to serve our customers through long-term fee-based contracts.", "The NGL and natural gas volume growth we have experienced this year continues to result in high quality earnings growth attributable to our core business of fee-based services. Our volumes in the Williston Basin and the STACK and SCOOP areas combined with favorable optimization and marketing activities from our extensive reliable and integrated NGL network has resulted in another increase in our 2018 financial guidance. Since our last call, we've announced additional capital growth projects anchored by long-term customer commitments, which include the second expansion of our West Texas LPG pipeline to serve the continued growth in the Permian; another NGL fractionator in the Gulf Coast MB-5; another processing plant in the Williston Basin, Demicks Lake II; and an expansion of the Arbuckle II pipeline which has already begun construction. Building off of our extensive asset base allows ONEOK to expand at attractive returns, providing clear visibility to strong earnings growth in 2019 and accelerating thereafter.", "With that, I will now turn the call over to Walt." ] }, { "name": "Walter S. Hulse", "speech": [ "Thank you, Terry. ONEOK's third quarter operating income totaled $495 million, a 40% increase year-over-year and an 11% increase compared with the second quarter 2018. Third quarter adjusted EBITDA was $650 million, a 26% increase year-over-year and an 8% increase compared with the second quarter 2018. With yesterday's earnings announcement, we increased our 2018 financial guidance for the second time this year driven by strong financial and volume performance year-to-date and our confidence in the fourth quarter. We increased guidance for net income by 9%, distributable cash flow by 7%, and adjusted EBITDA by 5%; all compared with our previous guidance midpoints. Our new adjusted EBITDA midpoint is now $2.47 billion, an increase of $120 million compared with the guidance we announced last quarter and nearly $500 million above our 2017 adjusted EBITDA.", "Adjusted EBITDA guidance midpoint for all three business segments also increased with the largest increase of nearly 11% in the natural gas liquids segment. Continued volume growth and strong optimization results drove the $145 million increase in the NGL segment's guidance. And greater-than-expected volume growth and higher average fee rates drove the guidance increase in the gathering and processing segment. With two months left in 2018, we feel confident in our new financial and volume guidance ranges. Kevin will provide additional detail on our revised 2018 volume expectations. During the third quarter, we paid a dividend of $0.825 per share. And last week, we announced another 4% increase to $0.855 per share or $3.42 per share on an annualized basis, in line with our previous guidance. The dividend is payable on November 14th to shareholders of record on November 5th.", "At September 30, our debt-to-EBITDA on an annualized run-rate basis was 3.4 times and 3.78 times on a trailing 12-month basis. We generated $133 million of distributable cash flow in excess of dividends paid in the third quarter, a 6% increase compared with the second quarter 2018. For 2018 we expect to generate more than $500 million of distributable cash flow in excess of dividends that we can reinvest in the business to fund our capital growth program. Total distributable cash flow in the quarter was more than $470 million, up 4% from the previous quarter with a healthy dividend coverage of nearly 1.4 times. With $1.6 billion of equity issued in 2017 and January 2018, we have satisfied our expected equity needs for our announced capital growth projects through the remainder of 2018. We expect to benefit from increasing cash flows from operations in 2019 and expect any additional equity financing to be considered in the latter part of 2019.", "This consideration will be based on the timing and amount of capital expenditures. We expect any additional equity financing if needed to be limited to issuance under our existing at-the-market equity program. As of now, we have nearly the full capacity of $2.5 billion available on our credit facility. We remain focused on sustaining our strong investment grade balance sheet and having significant liquidity as we construct our capital growth projects.", "I'll now turn the call over to Kevin for a closer look at each of our business segments." ] }, { "name": "Kevin L. Burdick", "speech": [ "Thanks, Walt. Starting with our natural gas liquids segment. NGL volumes gathered in the third quarter averaged 956,000 barrels per day, an 18% increase compared with the third quarter 2017 and a 6% increase compared with the second quarter 2018. Mid-Continent gathered volumes averaged 614,000 barrels per day during the quarter, an 8% increase compared with the second quarter 2018. Volumes on our West Texas LPG system averaged 204,000 barrels per day, a 4% increase compared with the second quarter 2018. Our Bakken NGL Pipeline remains full and we continue to rail NGLs out of the region. We expect rail volumes to continue to increase until the Elk Creek Pipeline is in service. NGL volumes fractionated averaged 732,000 barrels per day during the third quarter, a 21% increase compared with the same period last year and a 5% increase compared with the second quarter 2018.", "Fractionation capacity across the industry remains tight and our fractionators have been running near capacity. With recent expansion and debottlenecking projects, we estimate we have more than 800,000 barrels per day of fractionation capacity given our current product composition, which gives us approximately 60,000 barrels per day of available capacity to accommodate growth. We expect that this capacity along with additional debottlenecking projects at our existing fractionators, our storage assets, and a small amount of already contracted third-party offloads will provide sufficient capacity until our MB-4 fractionator comes online in the first quarter of 2020. ONEOK's standard practice is to align our NGL transport and fractionation agreements pricing terms with the actual physical redelivery location of either Conway or Mont Belvieu thus avoiding the risk of pricing mismatch in our contracts.", "So, the contracts that support Arbuckle II include Conway pricing terms until Arbuckle II is in service and then the terms will switch to Mont Belvieu pricing. The benefit of our integrated system, including our use of storage for unfractionated NGLs in both the Mid-Continent and Mont Belvieu, offers a number of ways to optimize available capacity and provide our customers the NGL services they need. Our Sterling I and II pipelines are currently shipping purity products and running full and our Sterling III pipeline is transporting unfractionated NGLs into Mont Belvieu. Our Arbuckle Pipeline continues to operate close to its full capacity of 255,000 barrels per day. We continue to expect the transportation capacity from Conway to Mont Belvieu will remain highly utilized doing to grow -- due to growing NGL volumes, which we expect will keep spreads wider than normal until Arbuckle II is placed in service.", "When Arbuckle II comes into service, it will have the ability to move the unfractionated NGLs currently flowing on Sterling III. This will open up capacity for more purity products to get to Mont Belvieu, which we believe will narrow the Conway to Mont Belvieu NGL pricing differentials. In conjunction with increasing the segment's adjusted EBITDA guidance, which Walt talked about earlier, we've also updated 2018 volume expectations. Our guidance for NGLs fractionated increased by approximately 5% and we narrowed the range for NGL gathered volume guidance keeping the midpoint at approximately 925,000 barrels per day due to better-than-expected C3+ volume growth in the STACK and the SCOOP, which was offset by the continued rejection of the Conway priced ethane. Total ethane supply on our system continues to increase with approximately 100,000 barrels per day of additional ethane gathered on our system in the third quarter 2018 compared with the same period in 2017.", "Moving on to the natural gas gathering and processing segment. For the third quarter, adjusted EBITDA for the segment increased 12% compared with the third quarter 2017 driven by volume growth in the Williston Basin and the STACK and SCOOP areas. Contract settlement adjustments in the second and third quarters of 2018 together resulted in a sequential quarter adjusted EBITDA decrease, but the core business continues to grow. Volumes remained strong across the basins where we operate. Third quarter natural gas volumes processed averaged more than 1.8 billion cubic feet per day, a 15% increase compared with the third quarter 2017 and a 3% increase compared with the second quarter 2018. During the third quarter, ONEOK's natural gas volumes processed in the Rocky Mountain region reached a new milestone averaging more than 1 billion cubic feet per day, a 17% increase compared with the third quarter 2017 and an 8% increase compared with the second quarter 2018.", "In the Mid-Continent, third quarter natural gas volumes processed averaged 835 million cubic feet per day, a slight decrease compared with the second quarter 2018 due to several large well pad completion delays. In October we have already seen increased production with processed volume reaching nearly 900 million cubic feet per day on several days. We connected 137 wells in the Williston Basin and 29 wells in the Mid-Continent during the quarter. We've now connected a total of more than 550 wells through the first nine months of the year, well on our way to meeting our increased guidance of 680 well connections. Rig activity remained strong with nearly 35 rigs on our Rockies dedicated acreage including two in the Powder River Basin and 15 in the Mid-Continent. The strong producer activity we've seen around our assets year-to-date is expected to continue for the foreseeable future.", "We updated our 2018 volume guidance for the segment with the main change being the expected volume mix by basin. Our Rocky Mountain processed volume midpoint increased and our Mid-Continent processed volume midpoint slightly decreased due to the timing of completions in the STACK and the SCOOP areas. The segment's average fee rate increased to $0.92 per MMBtu in the third quarter 2018 from $0.89 in the second quarter 2018. Higher fees continued to be driven by greater-than-expected volume growth in the Williston Basin compared with the volume growth in the Mid-Continent. We expect our average fee rate for the fourth quarter to be similar to the third quarter. In the natural gas pipelines segment, third quarter adjusted EBITDA increased 6% compared with the second quarter 2018 and increased 3% year-over-year benefiting from increased interruptible transportation volumes and firm transportation capacity contracted.", "We had successful open seasons on three of the expansion projects announced in June, which will provide additional takeaway capacity in the Permian Basin and STACK and SCOOP areas. Open seasons resulted in more than 900 million cubic feet per day of capacity secured on our project to make Roadrunner Gas Transmission bidirectional, 300 million cubic feet per day of capacity secured on the expansion of our WesTex Transmission system in the Permian Basin, and 100 million cubic feet per day of secured -- secured on the westbound expansion of ONEOK's Gas Transportation system in Oklahoma which is on track to be completed before the end of the year. The eastbound expansion of the ONEOK gas transmit -- gas transportation system did not have an associated open season, but was anchored by 115 million cubic feet per day of firm commitment.", "Now a quick update on our growth projects. Since our last earnings call, we've completed the extension of our West Texas LPG pipeline into the Delaware basin. We also completed the expansion of our Canadian Valley natural gas processing plant in the STACK, which brings our total Oklahoma processing capacity to approximately 1.1 billion cubic feet per day. Volumes on both projects are expected to ramp-up over the next 12 to 18 months. Additionally, we recently completed some meaningful fractionation expansions in the Mid-Continent including an approximately 20,000 barrel per day expansion of our propane plus capacity or heavy-in capacity at our Bushton, Kansas fractionator. This expansion was part of the related infrastructure upgrades included in our Elk Creek Pipeline project to help accommodate the heavier NGL barrel coming from the Williston Basin.", "We remain on schedule to complete the 60,000 barrel per day expansion of our Sterling III NGL Pipeline this quarter. Construction remains on track for Elk Creek and we continue to expect to complete the southern section as early as the third quarter 2019 and the entire pipeline by the end of 2019. We've also contracted an additional 30,000 barrels per day on Elk Creek since our last call bringing total contracted volume to approximately 170,000 barrels per day. Arbuckle II is under construction and on schedule for an expected completion in the first quarter of 2020. The expansion of Arbuckle II, which was announced in July and will increase total capacity from 400,000 barrels to 500,000 barrels per day, is expected to be complete in the first quarter of 2021. We've contracted an additional 20,000 barrels per day on the system bringing our total contracted volume to approximately 320,000 barrels per day.", "Also, our MB-4 fractionator is on schedule to be complete in the first quarter of 2020. Finally, we are currently constructing an additional 400 million cubic feet per day of processing capacity in the Williston Basin with our Demicks Lake I and II plants with Demicks Lake I on track to be complete in the fourth quarter 2019. Given our current volume outlook, we expect Demicks Lake I to open nearly full. As a reminder, all these projects are backed by long-term commitments and/or acreage dedications addressing the needs of our customers and are aligned with the expected volume growth we see across our operating basins.", "Terry, that concludes my remarks." ] }, { "name": "Terry K. Spencer", "speech": [ "Thanks, Kevin. This has clearly been a quarter of operational milestones and impressive financial results that underscore the reliability of our employees and our assets and the success of our customers in the basins where we operate. I'm not one who typically focuses on statistical records because we've achieved more than I can count over the years. Our goal after all is to create value for our stakeholders and let our track record of capital discipline and performance speak for itself, including doing what we say we're going to do and working hard to improve each and every day. But the milestone Kevin mentioned earlier about reaching 1 billion cubic feet per day of processing in the Williston Basin is one that I think speaks volumes about the growth of our operations and the ambition of our employees.", "Just eight years ago, we had only one processing plant in the basin. Now we're processing 1 billion cubic feet per day of natural gas and are the primary NGL takeaway provider from the region. The growth between then and now isn't just a story of the Williston Basin, which has been an incredible basin for us, but it's also a reflection of our bigger company story and our continued growth in all the basins where we operate. Our employees have taken a great base of assets across our system and built a fully integrated midstream operation with unique competitive advantages in each basin where we operate. This kind of ingenuity and drive while doing it safely is what our employees thrive on and what has enabled us to announce our long list of growth projects at attractive returns.", "This couldn't have been accomplished without the hard work and dedication of each and every employee or without the continued support of our longtime investors. To follow up on my closing remarks last quarter, we recently published our 10th Corporate Sustainability and ESG Report, which is available on our website. Stakeholder expectations have continued to increase for the energy industry to operate safely and environmentally responsibly. At ONEOK, our long history of good corporate citizenship is clearly reflected in this report and I'm proud of our progress.", "Operator, we are now ready for questions." ] } ]
[ { "name": "Operator", "speech": [ "Thank you, sir. (Operator Instructions) Our first question will come from Danilo Juvane from BMO Capital." ] }, { "name": "Danilo Juvane", "speech": [ "Thanks and good morning, everyone. Congrats on the quarter. I wanted to start with the Mid-Con on how the volumes were sort of light this quarter. Can you sort of explain what drove that decline?" ] }, { "name": "Kevin L. Burdick", "speech": [ "Yes. Danilo, this is Kevin. Again as I stated in my remarks, it was really just the timing of some of the well completions that we had kind of scheduled out with the producers. We had a little maintenance activity. But I think as it relates to the STACK and SCOOP, what I do is look at the Mid-Continent volumes of NGL. I mean we had like a 45,000 barrel per day increase sequential quarter-to-quarter for the NGL group, which I think is a broader indication. We still feel very strong about the SCOOP and STACK as well as we've seen the volumes pick up significantly in October in our G&P segment." ] }, { "name": "Danilo Juvane", "speech": [ "Got it. I know you don't provide guidance or anything until February at least, but should we expect volumes in Mid-Continent to remain as strong if not stronger in 2019?" ] }, { "name": "Kevin L. Burdick", "speech": [ "Yes. I think we expect -- we do see this rig count remain, which we expect and I think you will see volume growth. I mean getting the Canadian Valley II expansion complete and having that capacity now, you've got some of the pipe constraints with our projects and others that have taken care some of the residue. So, I think you're set for growth as we move through 2019 and beyond." ] }, { "name": "Danilo Juvane", "speech": [ "Got it. One of your largest customers in the Bakken outlined a pretty bullish long-term view for the basin. By our estimates, you are tapped out in terms of processing capacity and that's without including the PRB picking up here. How much more Rockies related growth are you guys seeing going forward here?" ] }, { "name": "Kevin L. Burdick", "speech": [ "Well, let's start on the G&P side, we still have some available processing capacity that we think we'll see a little more flowing, but we'll get there with our Demicks Lake I plant that's coming up in the fourth quarter. From an NGL perspective, yes, takeaway -- the pipeline is full, but we've got the rail capacity that we've got up to 30 000 barrels a day of rail capacity that we will take advantage of as we move through '19 until Elk Creek comes online. And with Elk Creek again the southern section being complete in the third quarter, that allows us to accommodate growth that we expect to come out of the Powder early by shifting those volumes over to that pipe." ] }, { "name": "Danilo Juvane", "speech": [ "Got it. Last question from me." ] }, { "name": "Kevin L. Burdick", "speech": [ "Does that help?" ] }, { "name": "Danilo Juvane", "speech": [ "Absolutely, thank you. I appreciate that. Last question from me is on the ATM. Obviously you said that you may need limited equity next year depending on the project timing. As you are sort of developing these organic projects, is it fair to see that you continue to get something in the 4 times to 6 times EBITDA range?" ] }, { "name": "Walter S. Hulse", "speech": [ "Yes. We continue to see very attractive growth opportunities that are in the range of our earlier capital investments." ] }, { "name": "Danilo Juvane", "speech": [ "Okay. Those are my questions. Thank you." ] }, { "name": "Operator", "speech": [ "Thank you. Our next question comes from Shneur Gershuni with UBS." ] }, { "name": "Shneur Gershuni", "speech": [ "Good morning." ] }, { "name": "Terry K. Spencer", "speech": [ "Good morning, Shneur." ] }, { "name": "Shneur Gershuni", "speech": [ "Just to start off, I was wondering if we can talk about storage a little bit. I guess kind of a two part question here. When we look at the inventory builds on your balance sheet, can we just assume that's effectively unbooked EBITDA and that's due to timing? And then secondly, when we sort of think about your storage positions and we sort of think about the spreads and the pipes being full and so forth, are you able to synthetically effectively sell volume at Mont Belvieu without actually moving the molecule by using your storage in Belvieu and using your storage in Conway?" ] }, { "name": "Sheridan C. Swords", "speech": [ "I don't think so. I mean we can sell volume -- I'm sorry, this is Sheridan. We can sell volume forward and store it in Conway until it's ready to be shipped to Belvieu, but eventually it's going to have to be shipped. We can't synthetically make the transaction without actually physically shifting the volume. Does that answer your question?" ] }, { "name": "Shneur Gershuni", "speech": [ "Yes, that's essentially it. And also the value of EBITDA -- of the inventories booked at the end of each quarter on your balance sheet, is that effectively unbooked EBITDA that just didn't happen due to timing?" ] }, { "name": "Kevin L. Burdick", "speech": [ "Yes. This is Kevin. I mean, Shneur, really talking about it from a raw feed perspective that would be an inventory. Yes, that would be effectively unbooked EBITDA." ] }, { "name": "Shneur Gershuni", "speech": [ "Great. And just a couple of follow-up questions here. You sort of addressed some of this on your -- in your prepared remarks, but just to try to nail it down for us less technical people. Given the questions in the industry about being short capacity, can you walk us through how you mitigate that risk? When you go to build a new processing plant for example, do you already line up the transportation and frac capacity that you expect at the output of that plant? If you can sort of walk us through that, please." ] }, { "name": "Sheridan C. Swords", "speech": [ "Yes, this is Sheridan. That's basically what we do. So most of our -- due to the bundled services that we provide and how we contract, we go and provide certain amount of capacity to each processing plant, whether it's us or whether it's other people, and we make sure we have the transportation and fractionation capacity available to get that to the pricing point in the contract and that's when we talked about Arbuckle II. Until Arbuckle II comes up, some of our contracts will stay priced in Conway as we can't physically get that barrel yet to Belvieu. But we look at through our whole system to make sure we're balanced and we don't get out of whack and get into a spot where we are having to buy third-party or buy other spreads to handle our contracts or commitments." ] }, { "name": "Shneur Gershuni", "speech": [ "Perfect. That makes total sense. One final question just in terms of outlook both near term and longer term. Ignoring the optimization spreads just due to the volatility in that, the good results that we've had this quarter; you've raised guidance, which implies a stronger 4Q; how much visibility do you have of the base business growing into 2019? And then if I recall correctly during your prepared remarks, you'd mentioned that Elk Creek is now 70% contracted. By the time it comes online, could we actually be in a position to be expanding that?" ] }, { "name": "Kevin L. Burdick", "speech": [ "On that last question, yes, this is Kevin. We would love for that to be the case. I mean we continue with -- the growth in the Bakken continues to be strong. I think a lot of people listened to the call yesterday of one of the large producers up there and they were clearly very bullish when you just look at the returns they're getting on the well. So, absolutely we don't think we're done. And like we've mentioned, we could expand that pipe with minimal capital by just adding pump stations as we continue to grow our contracted volume. And you're also seeing growth in the Powder River as well, which would feed Elk Creek from that standpoint. So yes, we think that's something that we're keeping an eye on of when we might need to expand that." ] }, { "name": "Shneur Gershuni", "speech": [ "And with respect to 2019 in terms of the trends in your base business, should we expect a similar cadence of growth that we're seeing in 3Q this year and what you're guiding to for 4Q this year?" ] }, { "name": "Kevin L. Burdick", "speech": [ "I mean without getting into guidance, clearly when you look at the rigs that are on our acreage on the G&P side and you look at the rigs that are ultimately behind our significant positions in the Mid-Con and the Bakken on the NGL side, absolutely you would expect growth. As we've talked about, some of the pipes are full; but again we definitely believe that core business is going to be in a great position not just in '19, but then as we move through '20 when these assets come in service" ] }, { "name": "Terry K. Spencer", "speech": [ "Shneur, this is Terry. We'll be coming out with guidance after the first of the year at some point in time in January. So -- and as Kevin indicated, all the fundamentals look incredibly strong for us as we think about '19. Certainly you can't forget about 2020 and 2021. We're doing a lot of things in '19 that sets us up for 2020 and 2021 in a big way. So, you'll see more as we come out with guidance after the first of the year in terms of what our thoughts are as far as volumes and all the indications we're seeing from all the producers and rig count expectations are all just -- are outstanding for '19." ] }, { "name": "Shneur Gershuni", "speech": [ "Perfect. I really appreciate the color, guys. Thank you very much." ] }, { "name": "Operator", "speech": [ "Thank you. Our next question comes from Spiro Dounis with Credit Suisse." ] }, { "name": "Spiro M Dounis", "speech": [ "Hey, good morning, everyone. Just wanted to start off on the tightness in the frac market. Obviously you guys have taken steps there with Mont Belvieu 4 and 5 in 2020, '21. But I guess just in the near term here, how do you guys think about the short-term solutions to help clear the market? Does it all just go into storage? Are there other creative solutions you guys can come up with going forward? And then just around OKE specifically, what are the other benefits we could see accrue to you guys over the near term here?" ] }, { "name": "Sheridan C. Swords", "speech": [ "This is Sheridan. I think what you're seeing happen in the market is obviously storage plays a big part in that. If you can store barrels for us to be in Conway or in Belvieu for unfractionated NGL barrels until your fracs skip up in '20 and 2021. Also we continue to look at our fracs in very detail to see is there any minor debottlenecking that we can do to eke out 5,000 barrels a day here, 10,000 barrels a day and look at the different compositions we have. So, we have some plans for that as we get into '19 -- the first quarter of '19. We'll have a little bit of turnarounds to help allow us to incrementalize and move some of our fracs up in capacity.", "So, I think you're seeing some of those by -- all the industry participants continue to look at each one of those and also we have seen and it's been pointed out in other calls that there's actually some petrochemical crackers now that are looking at cracking unfractionated raw feed as well especially when spot frac market gets as wide as we've seen it, you obviously then have those participants coming in. So, I think all those things are what's going to be needed to get to 2020 or -- and beyond 2020. I still don't think the frac market will -- I think the frac market will still be tight in 2020. We need to get through 2021 to really loosen it up or get it back to more normal levels. But everybody is well incentivized to find every creative solution to get a little more frac capacity either through storage, through cracking through a petrochemical facility, or increasing your own frac capacity." ] }, { "name": "Spiro M Dounis", "speech": [ "Got it. That's great color. And then just on West Texas LPG and the potential to I guess convert over to a crude pipeline there. How are you thinking about the timing around that, which I think is kind of a big factor I'm guessing in the economics? But what are the other factors you guys are considering as you think about that decision?" ] }, { "name": "Sheridan C. Swords", "speech": [ "I think one of the biggest things we're considering is whether or not with all the growth we've seen out there and our ability over these last months to be able to contract new volume, which drove our announcement of the expansion out there, that it may be better served to leave it in NGL service. And so, that's probably one of the biggest decisions we have is what's the best service and how do we make the most money out of it going forward. Obviously there's spread differential in crude out there right now that everybody's trying to get to, but what's the long-term aspect of being able to contract that. So there's a lot of different things, but we're talking to people about it and try to understand how do we make the most money with the assets we have." ] }, { "name": "Spiro M Dounis", "speech": [ "Got it, makes sense. That's it for me. Thanks, everyone." ] }, { "name": "Operator", "speech": [ "Thank you. Our next question comes from Michael Blum with Wells Fargo." ] }, { "name": "Michael Blum", "speech": [ "Hey, good morning, everybody. I apologize in advance, this is probably like a multipart question. But I'm trying to understand a little bit about some of the dynamics with the flows and the bottlenecks. So it sounds like the producers are getting close to flaring limits in the Bakken, which obviously one way to alleviate that would be to toggle ethane, yet you've got downstream constraints on frac capacity to fractionate. So, just wondering like how those two factors are sort of playing out those dynamics? And I guess related to that, what is your utilization of frac capacity currently at Conway and is there any room there for additional frac? So, I know there's a lot in there so apologies." ] }, { "name": "Kevin L. Burdick", "speech": [ "Michael, this is Kevin. Will start with the flaring in North Dakota. Clearly as you've seen the state reported information published the latest one, it's ticked up little bit. I would remind everybody that that information is the gross production and the gross gas capture levels. So then what happens, but each individual producer then is able to -- with the updated regulations, they're able to utilize or take credits if you will if they have beat the target over the last six months and they're also able to exclude 60 days of IP gas on their new wells. So, we believe many of our producers will be able to stay under and expect to stay under the flaring targets as they move through '19 till some of the capacity comes online.", "To the question about the ethane and the toggling there, clearly we're managing that very carefully with all our processing plants to try to maximize throughput while still also managing the downstream impact. So obviously we are rejecting -- at this point with the Bakken line being full and then the rail activity, we are rejecting as much ethane as we possibly can to give us as much NGL takeaway capacity as possible to help them out. So, that's the way we think about that. As for the Conway specific, Sheridan, you have comments about the Conway?" ] }, { "name": "Sheridan C. Swords", "speech": [ "Michael, what I'll say about Conway as we stated in Kevin's remark that we have about 60,000 barrels a day of available fractionation capacity and with our integrated system, we can make that fractionation capacity show up anywhere on our system that we want to as we move raw feed around. But with the wide north-south spread, you would say all that fractionation capacity is in Conway because we're taking everything we can to Belvieu. So right now, we probably say we have 60,000 barrels a day of fractionation capacity in our Conway market. That is above what we're bringing in on gathering. Today we're using that 60,000 barrels a day to reduce our raw feed in inventory and we plan on ending the end of this year -- end of 2018 with minimal raw feed in inventory to get ready for the ramp-up in volume in '19 and get us to the 2020 MB-4 fractionator." ] }, { "name": "Michael Blum", "speech": [ "Got it. I appreciate the detail there. My second question really is more of a balance sheet financing question. Just as we think about modeling going forward, is there a leverage ratio that we should think about where you'd start to then consider tapping the ATM for equity a little bit to keep that within some sort of range? Thanks." ] }, { "name": "Walter S. Hulse", "speech": [ "Well, Michael, what I would say is with the increased cash flow and the earnings growth that we've had in '18, we've been able to reinvest that money back into the business. So, it's kept our leverage at a run rate basis right now at 3.4 times. So, we're sitting pretty good at the end of three quarters and going into '19. We've always said that our longer-term target is to be below 4 times and nothing's changed on that. But we've also said that we expected it to creep up in the latter part of '19. The rating agencies have acknowledged that and so we're going to have to keep an eye on it. But our expectation is that if cash flows keep flowing as they are, we'll be in a pretty good spot moving throughout '19. So we're keeping ourselves flexible if we need some equity, but we think there's a good chance that there won't be any equity in '19." ] }, { "name": "Michael Blum", "speech": [ "Great. Thank you very much, everyone." ] }, { "name": "Operator", "speech": [ "Thank you. Our next question comes from Christine Cho with Barclays." ] }, { "name": "Christine Cho", "speech": [ "I have a follow-up to Shneur's question. If you fractionated the barrels, but put it into storage afterwards as purity product, then it's booked as revenue in your income statement. Is that right? So, there could be inventory on your balance sheet that already has been recognized as revenue?" ] }, { "name": "Kevin L. Burdick", "speech": [ "That is correct if you fractionate." ] }, { "name": "Walter S. Hulse", "speech": [ "It's when you actually sell the barrel that we get it. The thing is that we fractionate and store so many barrels on a constant flow basis that they're constantly flowing through there, Christine, bringing in as much as we do on a daily basis. But we actually recognize the revenue when it is sold, but barrels are fungible and they're going in and out of storage every day." ] }, { "name": "Christine Cho", "speech": [ "But I guess when we look at the buildup in your inventory, I mean should we -- if more of that was purity product than Y grade, I'm just trying to get a sense of like whether or not that was already recognized versus not if that makes sense." ] }, { "name": "Walter S. Hulse", "speech": [ "It won't be recognized until we got it sold. But obviously if it's purity product, we have the ability to sell it into the marketplace at any time." ] }, { "name": "Christine Cho", "speech": [ "Okay." ] }, { "name": "Sheridan C. Swords", "speech": [ "We fill almost all our barrels everyday into the marketplace. We don't take price risk on our barrels. So, we're selling our barrels every day into the marketplace." ] }, { "name": "Christine Cho", "speech": [ "Okay. But I guess I'm also trying to split too, Sheridan, your comments on an earlier question that you guys are trying to reduce your Y grade inventory in storage. Is that right?" ] }, { "name": "Sheridan C. Swords", "speech": [ "That is correct." ] }, { "name": "Christine Cho", "speech": [ "Okay. But the number went up so I can only assume that your purity product storage went up. Is that incorrect?" ] }, { "name": "Sheridan C. Swords", "speech": [ "Those aren't necessarily the same. If you fractionate our Y grade in inventory, we'll sell it into the marketplace. If we decide to keep Y grade in storage, we may still sell it in the marketplace and then sell it forward or something as we go to that. But just because we fractionate more barrels -- more barrels in Y grade, it doesn't necessarily mean that we have to store that barrels purity product. We still have the ability to place it into the market." ] }, { "name": "Christine Cho", "speech": [ "Okay. And then I think you kind of alluded to this in your prepared remarks. But for the last year and change, you guys have told that we should assume that your optimization capacity would decrease throughout the year as customer commitments grew. But it sounds like we should assume that what you have now is what you'll continue to have, maybe actually go up when your Sterling III extension comes online. Is that the right way to think about it?" ] }, { "name": "Sheridan C. Swords", "speech": [ "Well, as our Sterling III expansion comes online, we will be moving and we will have obligations to move more Y grade into the Mont Belvieu market. Not all of that that Y grade that we move into the Mont Belvieu market we'll need to frac because some of the main contractors for the Sterling III expansion was a transport only barrel. So, we still have that obligation to get those barrels into the Mont Belvieu market. But to the extent we have excess capacity on Sterling III and have the frac capacity in Mont Belvieu to frac it, we would increase our optimization." ] }, { "name": "Christine Cho", "speech": [ "Okay. And then the -- how much debottlenecking can we see out of the fracs? I mean you guys already mentioned the 20,000 barrels per day of propane plus out of the Bushton frac. Was that included in your 800,000 number or no?" ] }, { "name": "Sheridan C. Swords", "speech": [ "Yes, it was." ] }, { "name": "Christine Cho", "speech": [ "Okay. But how much more could we see beyond that? Do you guys have like a general sense?" ] }, { "name": "Sheridan C. Swords", "speech": [ "I think you can may be able to see 20,000 to 30,000 possibly." ] }, { "name": "Christine Cho", "speech": [ "Okay." ] }, { "name": "Sheridan C. Swords", "speech": [ "A lot depends on when you get these higher levels depends actually on the composition that you have coming into the system. So as we do different things, composition could change and move around, but you could see 20,000 to 30,000 possibly." ] }, { "name": "Terry K. Spencer", "speech": [ "So Sheridan, this is Terry. So, that 800,000 barrel a day number could be a higher number particularly if the feed composition changed to a lighter barrel, more ethane." ] }, { "name": "Sheridan C. Swords", "speech": [ "Yes. We can frac 840,000 plus barrels a day as our nameplate if we had the right composition and especially in the winter time when you got colder temperatures, we can definitely get above our nameplate with the colder temperatures in there. But right now we still have some ethane we rejected on our system so we're still fracing very heavy barrels especially at the Bushton fractionator. So if we get lighter feed, we will go above that. But we're saying we're -- at the composition we see today, we can get above 800,000 barrels a day." ] }, { "name": "Christine Cho", "speech": [ "And we wouldn't see the 840,000 plus unless the Conway ethane frac spread went positive. Is that right way to think about that?" ] }, { "name": "Sheridan C. Swords", "speech": [ "Yes. You would need to get more ethane into the Conway fracs, however that happens." ] }, { "name": "Christine Cho", "speech": [ "Okay, super. Thank you." ] }, { "name": "Operator", "speech": [ "Thank you. Our next question comes from Jeremy Tonet with JPMorgan." ] }, { "name": "Jeremy Tonet", "speech": [ "Good morning. Just want to pick up with Conway-Belvieu a bit more here and granted it's a very very difficult question to answer and you're not providing guidance at the time. But I was just wondering if you could provide us with your updated thoughts on how you think that spread could kind of trend over next year? What do you see as some of the give and takes there and as it impacts your optimization, do you see more risk to the upside or downside in 2019 versus 2018 optimization margins there?" ] }, { "name": "Sheridan C. Swords", "speech": [ "Well, 2018 was pretty good so if 2018 would repeat itself, that would be very good. But we think it will be volatile and -- but it won't go back to historical levels or anywhere close to historical levels until we get Arbuckle II up and get more purity capacity in between Conway and Belvieu. But a lot to me depends on what the demand is in Belvieu for exports on propane and petrochemicals on ethane and overall price. There's a lot of factors that go into that. But what we do know is it that we have volume in Conway that can't get to Belvieu due to pipeline constraints and that won't be allayed to Arbuckle II, which is what leads to a wide north-south spread." ] }, { "name": "Jeremy Tonet", "speech": [ "Fair enough, thanks. And at the risk of asking about something besides NGL, just want to pivot toward the WesTex expansion there and really just trying to dig in a little bit more and see how much of that -- this build-out is getting to destinations that really kind of clear the basin. I mean does the extension kind of connect into northern -- north of Plainview or for NGPL kind of north of Amarillo? Just trying to see how much extra this helps get past choke point." ] }, { "name": "Charles M. Kelley", "speech": [ "Yes. Jeremy, this is Chuck. The OGT -- I'm sorry, the OWT northbound; it was pretty much designed to move the Waha gas molecules north to the Mid-Continent where the spreads were wider and they could access little different markets. So yes, you're seeing that gas up into the Texas Panhandle and potentially utilizing some of the Oklahoma assets as well." ] }, { "name": "Jeremy Tonet", "speech": [ "So, it connects the north of those kind of two hubs on those pipes?" ] }, { "name": "Charles M. Kelley", "speech": [ "Yes. You're looking at NGPL Panhandle, Mid-Continent based markets." ] }, { "name": "Jeremy Tonet", "speech": [ "That's helpful. Thanks. That's it for me." ] }, { "name": "Operator", "speech": [ "Thank you. Our next question comes from Michael Lapides with Goldman Sachs." ] }, { "name": "Michael Lapides", "speech": [ "Hey, guys. Congrats on a great quarter. We're six days out from election day, how are you guys thinking if the unlikely scenario plays out that Prop 112 in Colorado passes? And I know you've kind of talked about it, but just how do you think this kind of flows through each of your three segments?" ] }, { "name": "Terry K. Spencer", "speech": [ "This is Terry. Really no significant impact if Proposition 112 passes. So doesn't look like it's going to pass, it's close; but it doesn't look like it's going to pass. But even if it does, don't expect any significant impact to us, to our business whatsoever." ] }, { "name": "Michael Lapides", "speech": [ "Got it. And then one other question really just kind of balance sheet and credit metric perspective. You've got a lot of growth projects that you're going to do fourth quarter this year through next year. What is the peak leverage level, the peak debt to EBITDA that you're willing to go to knowing that it's going to be temporary meaning knowing it may be just for a quarter or two or two or three quarters before the big backlog of projects comes online in second half '19 through 2020?" ] }, { "name": "Walter S. Hulse", "speech": [ "Well, I think my answer is going to be the same as I said just before is that our long-range target is 4 times and we will edge above that in the latter part of '19. But we're seeing very significant cash flows from the business that we're reinvesting into the business. So, we think that if things keep trending that we'll be in a good spot from a balance sheet standpoint. But if we need a little bit of equity, we have the ATM available." ] }, { "name": "Michael Lapides", "speech": [ "Got it. Thank you, guys. Much appreciated." ] }, { "name": "Terry K. Spencer", "speech": [ "Thank you." ] }, { "name": "Operator", "speech": [ "Thank you. Our next question comes from Sunil Sibal with Seaport Global Securities." ] }, { "name": "Sunil Sibal", "speech": [ "Yes, hi. Good morning, guys. A couple of questions for me. First, the clarification on the max frac capacity that you mentioned previously on the call. The 840,000 barrels a day and then you have 20,000 to 30,000 on top of that or that encompasses everything?" ] }, { "name": "Kevin L. Burdick", "speech": [ "We would have -- the 20,000 to 30,000 would be on top of both the 800,000 barrels a day that we can frac with our current composition. So, the extra 20,000 to 30,000 barrels a day would be on top of that." ] }, { "name": "Sunil Sibal", "speech": [ "Okay. Got it. Thanks for that. And then on the G&P segment contract settlements, which impacted this quarter, how should we kind of think about that going forward? Is that something of a bit of an ongoing issue or is that kind of resolved at this stage?" ] }, { "name": "Charles M. Kelley", "speech": [ "This is Chuck. No, that -- we have approximately 2,000 contracts in the G&P segment and from time to time, you're just going to see settlements and adjustments on some of these contracts. So no, that wouldn't be something we would anticipate going forward." ] }, { "name": "Sunil Sibal", "speech": [ "Okay. And then lastly, on the Canadian Valley processing plant that you brought online. I was just wondering based on the activity you're seeing behind that, what's the kind of expectation for that plant ramping up and getting flow?" ] }, { "name": "Charles M. Kelley", "speech": [ "We think as we said in the remarks, it will be -- probably it will ramp over the next 12 to 18 months." ] }, { "name": "Sunil Sibal", "speech": [ "Okay. Got it. Thanks, guys. That's all I had." ] }, { "name": "Charles M. Kelley", "speech": [ "Thank you." ] }, { "name": "Operator", "speech": [ "Thank you. Our next question comes from Chris Sighinolfi with Jefferies." ] }, { "name": "Christopher Sighinolfi", "speech": [ "Hey, good morning, guys. Thanks for taking my question. Just a little nitpicky one maybe for me, Terry, if I could. Slide 7 of the deck, you guys feature as you have in past quarters the anticipated bundle -- average bundle rate by region. I just was noticing the Mid-Con, WesTex -- I'm sorry if you mentioned this before, but there's now a tilde between those two ranges as opposed to a less than symbol. So, I'm just curious what sort of happened in those regions to maybe bump up modestly your view on the bundled rate?" ] }, { "name": "Sheridan C. Swords", "speech": [ "Well, I think on West Texas Pipeline, you're seeing a bump up on that because as we brought these new volumes on, they're at the market rate which is much higher than the legacy rate that some of the old volume was on. And some of that old volume has left and so we filled some of the existing volume with higher market volume. So, our average rate is starting to trend up on the West Texas Pipeline as we thought it would as we bring on market-based barrels, market-priced barrels. And the Mid-Continent is the same thing, we've been able to contract at a little bit higher rates. As we continue to go forward, we've had some volume decrease on areas like the Barnett Shale and places like that but some of our smaller volume -- smaller rate volume and we're putting it into STACK and SCOOP which is higher rate volume. So, we're seeing a shift toward the higher margin volume from the low margin volume on our system." ] }, { "name": "Christopher Sighinolfi", "speech": [ "And is there -- I guess as you think about that then on profile forward, is there a meaningful amount of contracted volume that you guys know of that you think is going to be profiling off in the next couple -- whatever period you want to define it, but that could cause that rate to go higher on just existing capacity or is this driven more over time just by adding this stuff?" ] }, { "name": "Sheridan C. Swords", "speech": [ "I think on the West Texas Pipeline over next year and into 2020, you will see a lot of our low rate volume leave the system in favor of market-based or more market rate volume. So yes, you could see a significant increase in the West Texas LPG system average bundled rate." ] }, { "name": "Christopher Sighinolfi", "speech": [ "Okay, great. Switching gears real quickly, a lot of questions on the Bakken from a gas recoverability and processing perspective. I'm just curious if we get it to crude, you had mentioned in reference one of the large producers up there talking positively about the basin. There's two pipelines that have talked about expansion opportunities. I'm just wondering your view on that from a crude perspective as both the major operator and someone who formerly had a crude project in the backlog?" ] }, { "name": "Kevin L. Burdick", "speech": [ "This is Kevin. Yes, you had -- we got a lot of questions when you had a differential blow out a little bit. That was primarily due to an abnormal amount of refinery maintenance that was occurring in the upper Midwest. You've seen that spread come back in. But as you look forward, clearly you've got an open season out there right now on DAPL. You've got some other expansions being discussed. I mean clearly the producer yesterday was in conversations about larger expansions that they think may happen over the next couple of years. And you've also got some rail -- significant amount of rail capacity that used to be in service and now is sitting there. So with a combination of those expansions and the rail capacity, I think as we talk to customers, they're comfortable that that's going to absolutely bridge them to the point if you did need another greenfield project to provide additional capacity out." ] }, { "name": "Christopher Sighinolfi", "speech": [ "Okay. Yes, I guess that's what prompted my question was the discussion of significant new capacity which seemed to be bigger than what those current expansions have discussed. And so when I was just dusting off who had at prior points in time talked about projects from there, you guys being one, I was just curious if that -- obviously you have a ton on your plate and I'm not saying you should add anything more at this point. I'm just curious if Bakken Crude Express gets dusted off at any point." ] }, { "name": "Kevin L. Burdick", "speech": [ "It's not on our radar at this point. I mean we're absolutely locked and focused on providing the processing and the NGL takeaway. But long term we are a big player up there, is it something that we would consider, absolutely." ] }, { "name": "Terry K. Spencer", "speech": [ "Chris, it's Terry. So what I'll tell you just from our experience the last time, the challenge associated with getting the kind of commitments that you need to make these large projects like Bakken Express work is very challenging. The things that these producers do are innovative ways using their ingenuity to find ways to get barrels out of that basin and Kevin just listed off all those things. And we've recently talked to some producers in private meetings about this very thing and they're working on a lot of things. They have a lot of options to get crude out of the basin and we really don't have concerns about crude takeaway certainly over the near term and broadly over the long term really." ] }, { "name": "Christopher Sighinolfi", "speech": [ "Okay. Thanks a lot for taking my questions, guys. Appreciate the color." ] }, { "name": "Operator", "speech": [ "Thank you. Our next question comes from Craig Shere with Tuohy Brothers." ] }, { "name": "Craig Shere", "speech": [ "Hello. Congratulations on a good quarter." ] }, { "name": "Walter S. Hulse", "speech": [ "Hey, Craig." ] }, { "name": "Craig Shere", "speech": [ "One quick follow-up on West Texas LPG repurposing. I was under the impression that the expansion connecting the line and Arbuckle II kind of sets you up for twining the system so that you don't have to have an either or proposition albeit maybe a couple of years out to really bring on an opportunity to enter into crude service. Can you kind of elaborate on that?" ] }, { "name": "Sheridan C. Swords", "speech": [ "I think what we're saying there is when we complete the loops that we're starting on these expansions we've done so far, we'll have a complete system from the Permian to Arbuckle II and then we'll use Arbuckle II to get into Mont Belvieu, which will open up the legacy West Texas system for some other service. As we continue to go, we've explored looking at crude and what that looks like. But we're also seeing a lot of opportunity in the NGL service that we may be able to fill all that we have or capacity that we see going forward on this loop into Arbuckle II and need additional capacity for NGL. So, it may be better to leave it in NGL service or it may be better to put it in crude service. But as we go along, we'll make that determination; but it's not a foregone conclusion that we will move it to crude service. We'll move it to the right service that makes us the most money." ] }, { "name": "Craig Shere", "speech": [ "Understood. I know kind of breaking into services in the crude space has been -- along with LPG exports has been kind of a focus for longer-term opportunities to add a leg to the stool so to speak. If West Texas is most optimally used for NGL service for a number of years forward, is there anything else you're looking at to kind of provide additional multiple services to the same producers?" ] }, { "name": "Sheridan C. Swords", "speech": [ "Well, I think we still would like to look at the crude side of it for sure, it just may not be through this method. There's obviously there's other methods to get into that side of it from different ways starting from gathering or even further down the road it could be M&A further down the road, you don't know. On the export side, we continue to work very hard in the export side and having a lot of meaningful discussions and growing. But when we're ready to announce that one, we'll announce that one when we get everything lined up. So we still see that as opportunities where we could grow. It just may not be through the West Texas LPG side." ] }, { "name": "Terry K. Spencer", "speech": [ "Craig, the only thing I'd add to what Sheridan said is that we've talked about other products, refined products in particular terminalling that could make some sense for us. So crude, refined products, LPGs, potentially logistical opportunities serving petrochemicals and refineries; those type of logistical assets could make sense for us. Certainly we don't see a lot of them popping up for sale. People covet those assets, but certainly we're interested in those types of things and particularly bolt-on opportunities. When Sheridan indicated M&A, that's what he was referring to just acquiring assets that could make sense. So, we're always prospecting to those opportunities -- those types of opportunities.", "So as we think about LPGs, we think about Mexico, we think about Canada potentially; we're actively pursuing or actually considering or developing opportunities in those spaces. So, that's the kind of thing that we're in and certainly the export opportunity is something we've been working for years. We like where we are today. We're making progress and certainly when we get further down the road, we're ready to roll that project out and certainly will come out. I would just tell you personally from the export standpoint if we're not announcing something probably in the first half of '19, I'll be disappointed; but again really a lot of things have to happen in order for that to be successful." ] }, { "name": "Craig Shere", "speech": [ "I appreciate all the color. It certainly sounds like a full plate." ] }, { "name": "Operator", "speech": [ "Thank you. Our final question will come from Shneur Gershuni with UBS." ] }, { "name": "Shneur Gershuni", "speech": [ "Hi, guys. Just one very small follow-up. In your responses to Christine about the inventory levels and sort of the changes in value and so forth, is it fair to conclude that with NGL prices rising something like 20% or 25% from let's say June 30th to September 30 that that's part of the remeasurement upwards as well also you're just booking something at a higher cost that's come in?" ] }, { "name": "Kevin L. Burdick", "speech": [ "Yes. So, I think that's the way you look at it." ] }, { "name": "Shneur Gershuni", "speech": [ "Okay. So you can have a scenario where the actual volume of inventories goes down, but the value booked on the balance sheet goes up because of the price basically if that's a potential outcome?" ] }, { "name": "Kevin L. Burdick", "speech": [ "Yes. Just as you work through that and work that off, then yes, you could see some changes." ] }, { "name": "Shneur Gershuni", "speech": [ "Alright, perfect. That answers my question. Thank you very much, guys." ] }, { "name": "Operator", "speech": [ "Thank you. At this time, I would now like to turn the call back over to Mr. Ziola for closing remarks." ] }, { "name": "Andrew J. Ziola", "speech": [ "Our quiet period for the fourth quarter starts when we close our books in early January and extends until we release earnings in late February. We'll provide details for the conference call at a later date. Thank you all for joining us and have a good day." ] }, { "name": "Operator", "speech": [ "Thank you, ladies and gentlemen. This concludes today's teleconference. You may now disconnect." ] } ]
OKE
2022-05-04
[ { "description": "Vice President, Investor Relations and Corporate Affairs", "name": "Andrew Ziola", "position": "Executive" }, { "description": "President and Chief Executive Officer", "name": "Pierce Norton", "position": "Executive" }, { "description": "Chief Financial Officer and Executive Vice President, Strategy and Corporate Affairs", "name": "Walt Hulse", "position": "Executive" }, { "description": "Executive Vice President and Chief Operating Officer", "name": "Kevin Burdick", "position": "Executive" }, { "description": "", "name": "Unknown speaker", "position": "Other" }, { "description": "UBS -- Analyst", "name": "Brian Reynolds", "position": "Analyst" }, { "description": "President, Gathering and Fractionation", "name": "Sheridan Swords", "position": "Executive" }, { "description": "Senior Vice President, Natural Gas", "name": "Chuck Kelley", "position": "Executive" }, { "description": "Wells Fargo Securities -- Analyst", "name": "Praneeth Satish", "position": "Analyst" }, { "description": "Tudor, Pickering, Holt and Company -- Analyst", "name": "Colton Bean", "position": "Analyst" }, { "description": "Goldman Sachs -- Analyst", "name": "John Mackay", "position": "Analyst" }, { "description": "Bank of America Merrill Lynch -- Analyst", "name": "Chase Mulvehill", "position": "Analyst" }, { "description": "Seaport Global Securities -- Analyst", "name": "Sunil Sibal", "position": "Analyst" }, { "description": "Barclays -- Analyst", "name": "Theresa Chen", "position": "Analyst" } ]
[ { "name": "Operator", "speech": [ "Good day, and welcome to the first quarter 2022 ONEOK earnings call. Today's conference is being recorded. At this time, I would like to turn the conference over to Andrew Ziola. Please go ahead, sir." ] }, { "name": "Andrew Ziola", "speech": [ "Thank you, Paula, and welcome to ONEOK's first quarter 2022 earnings call. We issued our earnings release and presentation after the markets closed yesterday, and those materials are on our website. After our prepared remarks, management will be available to take your questions. Statements made during this call that might include ONEOK's expectations or predictions should be considered forward-looking statements and are covered by the safe harbor provision of the Securities Acts of 1933 and 1934.", "Actual results could differ materially from those projected in forward-looking statements. For a discussion of factors that could cause actual results to differ, please refer to our SEC filings. [Operator instructions] With that, I'll turn the call over to president and chief executive officer. Pierce?" ] }, { "name": "Pierce Norton", "speech": [ "Thanks, Andrew. Good morning, everyone, and thank you for joining us today. We appreciate your interest and investment in our company. On today's call is Walt Hulse, chief financial officer and executive vice president, investor relations and corporate development; and Kevin Burdick, executive vice president and chief commercial officer.", "Also available to answer your questions are Sheridan Swords, senior vice president of natural gas liquids and natural gas gathering and processing; and Chuck Kelley, senior vice president of natural gas pipelines. Yesterday, we announced first quarter 2022 results, which highlighted year-over-year natural gas and NGL volume growth. Earnings significantly increased year over year when adjusting for the favorable winter storm Uri impact in the first quarter of 2021. We Customer and producer conversations continue to point to additional activity through the remainder of the year, supported by strong demand for U.S.", "energy and commodity prices far exceeding basin breakeven economics. Our built-in operating leverage and a proven track record of disciplined and intentional growth have positioned us well to support increasing producer activity levels. Our systems have significant capacity to grow alongside the needs of our customers. And because of our large infrastructure projects are complete, we now have opportunities for bolt-on expansion projects with quicker in-service dates, attractive returns, and minimal capital requirements.", "Not only are we expecting strong activity going forward, but our position in the key U.S. shale basins provides us a long runway to continue our efforts to help address increasing domestic and international energy demand. Current events continue to demonstrate the importance of natural gas and natural gas liquids and a long-term energy transformation and highlights the critical role that ONEOK plays in providing essential energy products and services. Before I hand the call over, I'd like to discuss the recent weather events that have impacted our Rocky Mountain region operations in April and into early May.", "First of all, I want to thank our employees in the area, and those who supported from other locations to ensure that we were as prepared as possible for these two unprecedented winter events within a two-week period. The severe April storms caused blizzard conditions, record-setting snowfall, high winds, and extensive power outages across North Dakota, Montana, and South Dakota. A number of our employees, staff facilities during these conditions to maintain the safe and reliable operations of our assets. Many of these employees were also dealing with lost power and damage at their own homes.", "Widespread outages left many of our facilities without power for several days and a significant number of wells across the Williston Basin were shut in. Our primary focus has been on the safety of our employees, assets, and the communities where we operate as we continue to work through the full impact of the storms. Due to the basinwide power outages, our April Rocky Mountain region volumes were reduced in both our natural gas gathering and processing and natural gas liquids segments by approximately 20%. May volumes will continue to be impacted as down power lines are replaced.", "Currently, our process volumes are more than 1.1 billion cubic feet per day, and our NGL volumes are more than 320,000 barrels per day and trending up as shut-in wells are brought back online. The coordination during and since these weather events with our customers, local agencies, communities, and other operators in the area has been impressive, once again highlighting the resiliency of our employees, assets, and our customers. Even with this late winter storm, we are affirming our financial guidance ranges and midpoints for both adjusted EBITDA and earnings per share. With that, I'll turn the call over to Walt for a discussion of our financial performance." ] }, { "name": "Walt Hulse", "speech": [ "Thank you, Pierce. ONEOK's first quarter 2022 net income totaled $391 million, or $0.87 per share, a 24% increase compared with the first quarter 2021 when excluding the benefit of Winter Storm Uri. First quarter EBITDA -- adjusted EBITDA increased 11% year over year when excluding Winter Storm Uri. We ended the first quarter with a higher inventory of unfractionated NGLs primarily due to timing and expect to recognize those earnings in the second quarter as our current inventory is fractionated and sold.", "Our net debt-to-EBITDA on an annualized run-rate basis remains below four times, and we continue to view three and a half times or lower as our long-term aspirational leverage goal. In April, Moody's updated ONEOK's rating outlook to positive, and affirmed our investment-grade rating. ONEOK maintains investment-grade ratings with Moody's, S&P and Fitch. As Pierce mentioned, the recent extreme April storms have impacted our operations in the Rocky Mountain region.", "But even with these weather impacts our 2022 financial guidance. Strong volumes prior to the weather impacts, strengthened drilling activity, DUC completions through the remainder of the year and a positive outlook for NGL and natural gas demand this year points to a strong volume exit rate in 2022. I now turn the call over to Kevin for a commercial update." ] }, { "name": "Kevin Burdick", "speech": [ "Thank you, Walt. During the first quarter, we saw a double-digit NGL volume growth across all our operating regions compared with the first quarter 2021, and Rocky Mountain region natural gas processing volumes increased 11% year over year. After reporting record Rocky Mountain region natural gas and NGL volumes in the fourth quarter 2021, we saw volumes decrease sequentially in the first quarter 2022, primarily due to normal seasonality across our operating areas. Through the first four months of the year, we've continued to see encouraging activity from producers, and we expect these activity levels to trend higher through the remainder of the year.", "Let's take a closer look at our natural gas liquids segment. Total NGL raw feed throughput volumes increased 17% year over year supported by increasing producer activity and increased ethane recovery. Rocky Mountain region NGL volumes increased 24% compared with the first quarter of 2021. In April, we reached peak volumes of more than 385,000 barrels per day from the region prior to the severe late-season storms Pierce discussed earlier.", "Mid-Continent NGL volumes increased 10% year over year. As producers continue to increase activity in the Mid-Continent, a large majority of those related NGLs are transported on our system. So far this year, NGL volumes from the region are trending slightly higher than we had originally planned. In the Permian Basin, NGL volumes increased 23% year over year due to strong producer activity levels, which feed our West Texas NGL pipeline.", "In the Gulf Coast, construction continues on our 125,000 barrel per day MB-5 fractionator in Mont Belvieu, which we now expect to be complete in the second quarter of 2023. MB-5 will increase our total systemwide fractionation capacity to more than 1 million barrels per day. International LPG demand remains strong, and we continue to expect both domestic and international ethane demand to continue to increase throughout 2022. As natural gas prices have increased this year, ethane prices have kept pace, providing attractive ethane recovery economics in certain areas of our system.", "While first-quarter ethane recovery is typically lighter due to natural gas heating demand and typical winter weather impacts, we see strong ethane recovery opportunities for the remainder of the year. Moving on to the natural gas gathering and processing segment. In the Rocky Mountain region, first quarter processed volumes averaged 1.3 billion cubic feet per day, an 11% increase year over year. In April, volumes reached a peak of more than 1.4 billion cubic feet per day prior to the storms.", "We connected more than 90 wells in the region in the first quarter compared with 38 connections in the first quarter 2021, and are on pace to meet our guidance midpoint of 400 well connections in the region. There are currently 38 rigs and 12 completion crews operating in the basin, with 17 rigs and approximately half of the completion crews on our dedicated acreage. This continues to be more than enough activity to grow gas production in the basin and on our acreage. Additionally, the basinwide DUC inventory remains at approximately 500, with half of those on our dedicated acreage.", "Recent reports from the North Dakota Pipeline Authority highlight the long runway of core drilling inventory remaining in the Williston Basin. Enhanced drilling and completion technologies are significantly increasing the basin's core acreage and further extending the decades of profitable drilling locations remaining in the region. The core acreage in the basin has expanded by an additional 3,000 square miles, with more than 7,000 drilling locations added to inventory that are profitable at crude oil prices of $60 per barrel. In the Mid-Continent region, we continue to see increased activity with three rigs now operating on our acreage and 45 rigs basinwide.", "We continue to expect increased natural gas processing volumes from the region compared with 2021 and expect the majority of rigs basin wide to drive additional NGLs to our system. In the natural gas pipeline segment, strong first-quarter results benefited from increased natural gas sales and higher seasonal volumes compared with the fourth quarter 2021. We continue to see strong demand for natural gas storage services and are working to expand our facilities to meet this increasing demand. We recently completed a 1.1 billion cubic feet expansion of our Texas storage facilities and announced an open season to increase our storage capabilities in Oklahoma, enabling an additional 4 billion cubic feet of storage capacity to be contracted.", "This project is expected to be complete in early 2023. We also recently announced two open seasons for additional pipeline capacity to address increased demand, one, on our WesTex pipeline system in the Permian Basin, and one on our Viking pipeline in the Upper Midwest. We continue to work with customers across our natural gas pipeline network to address their evolving transportation and storage needs as these key assets continue to provide value year round. Pierce, that concludes my remarks." ] }, { "name": "Pierce Norton", "speech": [ "Thank you, Kevin, and Walt. The overall dynamics in the midstream space and for ONEOK specifically remain positive. We increased activity, strengthened demand, and available system operating leverage. The U.S.", "energy industry is well-positioned to be a significant source for domestic and global natural gas and NGL supply for the long term, with midstream playing a vital role in the safe and responsible transportation of these vital energy resources. As we continue to help supply our country and the world with low-cost energy, we are also looking to play an important role in the transformation to a lower-carbon future through best management practices and collaboration with customers and service providers. We are addressing the growing need for energy products and services today, while also preparing for a long-term energy future. It's this innovation, resiliency, and dedication of our employees that makes ONEOK a leader in our industry with the positive momentum we're seeing in our business, and the increasingly positive outlook for the remainder of the year, we're well-positioned for yet another year of volume and earnings growth.", "With that, operator, we're now ready for questions." ] } ]
[ { "name": "Operator", "speech": [ "[Operator instructions] And first, we'll go to Jeremy Tonet with J.P. Morgan." ] }, { "name": "Unknown speaker", "speech": [ "Hi. This is Steve on for Jeremy. I guess I just wanted to start obviously with the most topical one about weather. And in the release, we talked about reaching 1.4 million cubic feet per day in the Bakken.", "So, I just wanted to see if that's -- is that an average? Or was that what you got to and just kind of how that's trending now with how things are there?" ] }, { "name": "Kevin Burdick", "speech": [ "This is Kevin. That reached volume that we said, that's not an average for April. That was just -- we wanted to provide a number out there that showed where we -- the gas that was available. So we were at 1.4 Bcf a day on a few days there before the storms hit, which shows kind of where we were trending.", "In my remarks, I mentioned that we were at -- or I think Pierce mentioned, we were at 1.1 Bcf a day currently, and that's trending up as the wells are brought back online." ] }, { "name": "Unknown speaker", "speech": [ "Got it. And then next one, I guess, we'll go to the GORs. I guess I just kind of want to get some feedback there on how you're seeing those trending as new wells get drilled. Are they maintaining kind of that GOR level? Or are they becoming I think, more oil-based at early stages and just how you're kind of seeing that go?" ] }, { "name": "Kevin Burdick", "speech": [ "Yes. The GORs, when you look at trends over time, obviously, they've been going up, I think the number is like 80% since 2016. But yes, you'll see some fluctuations, some minor fluctuations as new wells are brought on. That the GORs do increase over time for individual wells.", "The GORs also are a little different across different parts of the basin from a regional perspective. But yes, you'll see some dynamics of that will bounce around month to month as new wells are brought online and as drilling occurs in different parts of the play. But the general trend is it's going to continue to go up." ] }, { "name": "Operator", "speech": [ "Moving on, we'll go to Brian Reynolds with UBS." ] }, { "name": "Brian Reynolds", "speech": [ "Hi. Good morning, everyone. Maybe just to start off on operations. I was wondering if you could talk a little bit more about the completion guidance for this year.", "We saw roughly 90 wells completed, which kind of indicates that roughly 25% of the well completions were done in 1Q per the guide. So typically knowing that most of the well completions were ONEOK back half weighted just due to natural seasonality, I was curious if you could see some upside to that well completion number particularly as producers, specifically the privates took to take advantage of the current pricing and rigs start to materially come back into the basin over the balance of '22?" ] }, { "name": "Sheridan Swords", "speech": [ "Brian, this is Sheridan. And what I would say -- we said in our remarks that we're staying at our previous guidance on well connects. But as you said, coming out of the first quarter with 90 well Connects is a really good start to this year." ] }, { "name": "Brian Reynolds", "speech": [ "Fair enough. Maybe to pivot to just future -- the natural gas segment really outperformed this quarter. I was curious if you could just talk about those future recontracting opportunities, specifically around the Permian and around the WesTex system just given Permian nat gas tightness and whether there are opportunities to expand WesTex similar to what we saw one of two in 2018?" ] }, { "name": "Pierce Norton", "speech": [ "Chuck, do you want to take that one?" ] }, { "name": "Chuck Kelley", "speech": [ "Yes, surely. Brian, this is Chuck. So as you said in 2018, we had an expansion, we also recontracted. We're seeing right now similar opportunities for this year.", "We're currently working on an additional expansion opportunity beyond the open season that's listed on our website, that will be moving Permian gas north as well. like we did in 2018. So that's an incremental expansion. And then on recontracting, we see some really good recontracting opportunities this year, somewhere in the neighborhood of up to 200 million a day on recontracting." ] }, { "name": "Operator", "speech": [ "And next, we'll go to Praneeth Satish with Wells Fargo." ] }, { "name": "Praneeth Satish", "speech": [ "Thanks. Good morning. I think you mentioned that NGL volumes in the Bakken reached 385,000 barrels per day prior to the winter weather. So I mean that's an 88% utilization rate on your NGL pipe.", "So I guess my question is, why aren't you moving forward with an Elk Creek expansion at this point? Are you waiting for utilization to get closer to 100% or waiting to see what happens with the gas pipe expansion? Just trying to get a better understanding of your thought process behind an expansion." ] }, { "name": "Sheridan Swords", "speech": [ "Praneeth, we -- this is Sheridan. When we look at the expansion, we got -- we look out forward and see when we'll need it, when we need to start commissioning that expansion. And you've got to think about that we have about 440,000 barrels a day today and at 385,000 that has quite a bit of incentivized ethane in it. so we can kind of swing on that as well.", "So we continue to look through our gathering and processing what's going on in the basin when we need to expand that and when we need to expand the capital. And right now, we're sitting today, we think, in the short term, we have enough capacity on the system to handle what we need going forward, but we continue to evaluate the opportunity to expand and make sure that we put ourselves in a position that when it is time to expand, we can expand it quickly." ] }, { "name": "Praneeth Satish", "speech": [ "Got it. And then I wanted to ask about the rate case on the Guardian pipeline. If you could just ballpark the magnitude of the rate case, and how you intend to proceed? Would you expect to settle with shippers? I mean I know you're probably limited in what you can say, but just any clarity would be helpful." ] }, { "name": "Pierce Norton", "speech": [ "Chuck, do you want to take that one? Got a connection problem. But as we look at the rate case, yes, it's not going to be a big deal at all. When I say a big deal, it's not going to be material in the terms of where we're at from a rate and where we might go. Yes, those typically will evolve.", "We'll do our best to work with the shippers on the pipe, and come up with a rate that we feel is appropriate and move forward. But it's not going to be meaningful to our overall EBITDA." ] }, { "name": "Operator", "speech": [ "And next, we'll go to Colton Bean with Tutor, Pickering, Holt & Company." ] }, { "name": "Colton Bean", "speech": [ "Morning. Just a follow-up on Pierce and Kevin's comments. It sounded like 1.1 billion Bcf of processing currently versus the 320,000 bpd. So I think on the processing side, still down about 15% versus Q1, but actually up for NGL.", "So one, I just wanted to clarify that that's what you mentioned in terms of incentivized ethane. And then, two, interested in your thoughts on whether we're seeing a more structural shift or primarily due to pricing volatility over the last month or two?" ] }, { "name": "Pierce Norton", "speech": [ "Colin, when you say structural shift, I'm not sure I'm following that question on the pricing." ] }, { "name": "Colton Bean", "speech": [ "Yes. Kevin, I think you mentioned that you see ethane opportunities over the balance of the year. So I guess I mean it seems like that would imply that you are seeing a pull on ethane. But I just wanted to get your thoughts on the market broadly." ] }, { "name": "Pierce Norton", "speech": [ "OK. Go ahead, Sheridan." ] }, { "name": "Sheridan Swords", "speech": [ "Colton, this is Sheridan. I think when we look at the ethane market, no doubt it's going to be, I think, recovery rejection is going to be volatile through this year in certain areas. But with the increase in domestic demand that's coming online and with the increase in international demand or export demand, we still see some growth in ethane demand or a pull coming in. And right now, ethane is the only advantage crack and the petrochemicals right now.", "We are in the short term, seeing a little bit of softness due to we have some maintenance going on in the petrochemical industry. and they are working through some of the logistic issues they have on the supply side getting out, but that seems to be as we talk to our customers, is getting better. So as we see that, we -- that's what gives us confident that we'll see good opportunities to bring more incentivized ethane out of the Bakken for the rest of the year." ] }, { "name": "Colton Bean", "speech": [ "Yes. Maybe a related question there. Sorry. Go ahead." ] }, { "name": "Pierce Norton", "speech": [ "No. We didn't say anything. Go ahead." ] }, { "name": "Colton Bean", "speech": [ "Yes. Just on the optimization of marketing, it looks like that ticked higher here in Q1. I think historically, you all have highlighted the Conway to Belvieu ethane spread as key indicator of optimization opportunities? I guess, one, is that still a good marker? And then, two, can you frame the opportunity that you're seeing if so?" ] }, { "name": "Sheridan Swords", "speech": [ "Well, a lot of things that happened in the optimization of marketing between 4Q and 1Q, as you remember in 4Q, we were down due to timing of inventory sales, and we said we'd get that back in 2022 when we got it back in the first quarter of '21. And the reason we use ethane as the marker for the Conway to Belvieu spread for optimization is the fact that ethane is the product we have the most of. So that's volume in it. But volatility in that spread views is just a lot of opportunity, whether or not it's going to Bellevue or in favor of Conway with all products.", "So we were able to use that volatility to make our positions on contracts to make matter either way in the favor of Conway or in favor of Bellevue, what we need is just some volatility between the two markets, not necessarily just wide markets to Bellevue." ] }, { "name": "Colton Bean", "speech": [ "OK. And I guess in terms of the spread that we've seen just over the course of Q2, I mean, is that maybe offer a little bit of upside relative to that 5% guidance contribution?" ] }, { "name": "Sheridan Swords", "speech": [ "Yes. We're seeing a little bit wider spread right now on the ethane side in Q2, and that's mainly right now due to the fact that we have some Mid-Continent petrochemical crackers that are in turnaround. We think they'll be short lived through May, but it has given us some upside in the second quarter." ] }, { "name": "Operator", "speech": [ "And next, we'll go to John Mackay with Goldman Sachs." ] }, { "name": "John Mackay", "speech": [ "Hey. Thanks for the time. I just wanted to kind of collect some of the comments you guys have had so far. Just thinking about the flat or unchanged guidance versus some of the weather impacts.", "I guess you've talked about first-quarter well connects being a little bit better. talked about Mid-Con maybe being a little bit better. But just can you kind of line up the moving pieces that get you to kind of maintained guidance versus after the weather impact, specifically? Is your kind of ethane recovery assumption actually better now than it was a few months ago?" ] }, { "name": "Kevin Burdick", "speech": [ "Well, this is Kevin, John. I think you hit on a bunch of the key attributes we're looking through. One, yes, we've seen weather impact our Bakken volumes, but it hasn't changed the rest of the year outlook for our growth opportunities in the Bakken, both on the G&P side and the NGL side. So we see that as very positive.", "And we continue to see activity at or above levels than we were anticipating when we put out guidance. So we think there's going to be some offset there. Clearly, we've had ethane recovery opportunities both so far to date and as well as, as we look through the remainder of the year that we believe are going to be strong. You mentioned we're seeing growth.", "There's been some very positive and favorable calls where other processors and producers in the Mid-Continent about volumes growing there. So we think there's some upside there. And the Permian, again, where we can -- we haven't talked about it a lot on this call, but we've continued to get our fair share of the volume growth coming out of the Permian, and like our position with both our West Texas LPG system as well as our WesTex pipe system we've talked about. So there's a lot of tailwinds for us in a lot of those other areas, including the optimization and marketing side we have on the NGL business.", "And we think those are absolutely going to offset any hurt we may have had with the severe weather impact in April." ] }, { "name": "John Mackay", "speech": [ "That's good. Thanks for pulling this together. Maybe just as a follow-up, you guys talked about kind of strong international demand for NGLs. Can you just remind us where you sit on the export idea and kind of what the latest might be?" ] }, { "name": "Kevin Burdick", "speech": [ "Well, we continue to work it. As we've said for a while, it's a piece of the business. We would love to extend the value chain and we see that as a natural extension. It's a nice fee-based business.", "But at the same time, we're working with a lot of different markets, and we're trying to get a deal done. It would happen, but we're not going to step out and do something that's going to earn a return that we're not used to. So we're going to be disciplined. We're going to be intentional about a dock project, but we continue to work it." ] }, { "name": "Operator", "speech": [ "Next, we'll go to Chase Mulvehill with Bank of America." ] }, { "name": "Chase Mulvehill", "speech": [ "Hey. Good morning. I guess a couple of questions and one kind of follow-up question, I guess, maybe on ethane. On one of your competitors' conference calls earlier this week, there was mention that the Permian is still rejecting about 200 to 200,000 barrels a day of ethane.", "And obviously, if we hit some bottleneck constraints with natural gas egress in the Permian, then you would look to recover that. So I guess maybe my question is, if this actually does happen and you start going to full ethane recovery mode in the Permian, what do you think that means for ethane recovery and other basins? Do you think that you have to have an offset there? And if so, kind of what basins do you think you'll see some of the offsets?" ] }, { "name": "Pierce Norton", "speech": [ "Yes. I think all that 200, as I read that call too, all that 200 may not be recoverable out there in the Permian. I can only speak to our system. Our system, we're fairly full on recovering ethane on our system.", "But if you would see natural gas prices get depressed and if there's more ethane to be recovered out of the Permian, that will have a downward pressure on ethane as it relates to other basins and probably the first basin we would see come out of is probably our Mid-Continent Basin. But we still have the opportunity to move that mid-continent basin in front of the Permian Basin by flexing our rates as we've done out of the Bakken because we've always said the Bakken well at full rates will be out of -- we'll be in rejection for this year and for the future. But I think it may have some impact on it, but I don't think it's going to have a major impact on what our forward -- what we're forward-looking for ethane out of the Mid-Continent." ] }, { "name": "Chase Mulvehill", "speech": [ "OK. Great. That's helpful. The other question is really just when we think about Bakken egress and kind of look at the situation over the next two or three years -- do you see any egress bottlenecks, whether it's for oil, NGLs or natural gas? And if so, which one do you think you hit first?" ] }, { "name": "Kevin Burdick", "speech": [ "Well, I think the basin is in really good shape. Oil is fine with energy transfer and DAPLs expansion. They're in great shape. NGL.", "We've talked about that. We've got capacity currently, and we have a quick low-cost expansion. We could add another 100,000 barrels a day of NGL capacity. So we go to residue.", "We -- there's still volume on Northern border that can be priced out or pushed out. Bakken gas can displace gas coming from Canada. There's an open season out right now for 400 million, 500 million barrels a day that Northern Border has out there on a Bison reversal and there's some other smaller expansions from a residue perspective that are out there being discussed, that could -- that will help out the basin from a residue takeaway. So all in all, we feel like the capacities that are out there and some of the expansions that are available, put the basin in really good shape from a takeaway perspective." ] }, { "name": "Operator", "speech": [ "And moving on, we'll go to Sunil Sibal with Seaport Global Securities." ] }, { "name": "Sunil Sibal", "speech": [ "Yes. Hi. Good morning, folks, and thanks for all the clarity. I just wanted to start off with a couple of clarifications.", "If I heard correctly, I think you said April volumes reduced by 20% because of the weather events. So just wanted to clarify, is that 20% based on the peak rates that you mentioned hitting in April? Or is it more related to Q1 averages?" ] }, { "name": "Pierce Norton", "speech": [ "Yes. That would be roughly off the 1.4 Bcf a day." ] }, { "name": "Sunil Sibal", "speech": [ "Got it. And then I think you mentioned also that you have runway to exceed the 400 well connects in that you guided to for Bakken. I was curious, is that the exit rate we are talking about? Or do you think that for the full year average -- or for the full year total, you would probably exceed 400 well connects?" ] }, { "name": "Pierce Norton", "speech": [ "Well, I think what Sheridan said was we're still maintaining our guidance range, which the midpoint would be 400 well connects, but connecting more than 90 wells in the first quarter is an outstanding start to the year. So there's definitely -- we think there could be some upside there." ] }, { "name": "Sunil Sibal", "speech": [ "Got it. And then one on capex trend. So it seems like you expedited the start-up date on the MB-5 a little bit, and then you're also adding gas capacity. What does that mean for the total capex for full year? I saw that Q1 was a little bit higher or was it pickup from Q4?" ] }, { "name": "Pierce Norton", "speech": [ "Yes. We still feel good about our capital guidance range as well. As we think about -- as we looked at the first quarter, we always have some seasonal kind of timing things of just routine growth type stuff. Again, we did not increase the cost at all for MB-5 in accelerating that schedule.", "That was just our ability. We had some things go our way from a schedule perspective early in the project that allowed us to pull it forward. So the guidance range for capital is still in place." ] }, { "name": "Operator", "speech": [ "And our final question will come from Theresa Chen with Barclays." ] }, { "name": "Theresa Chen", "speech": [ "Hi. Thanks for taking my questions. First, I just had a question of clarification around the different moving components of the average bundled rate for the Rocky Mountain NGL raw feed throughput. So if you did -- on an average basis $0.26 for the $3.14 for the average of first quarter, and hit $3.85 in April, what would be the analogous average bundle rate if there was a lot of incentive ethane attributed to about $3.85?" ] }, { "name": "Sheridan Swords", "speech": [ "Theresa, this is Sheridan. To be honest with you, I have no idea what it will be. It will be around the 26. The reason I say that is the accountants will work through it and we have a lot of moving parts on that.", "But it's going to be 26% to 27% in that range is where I would say that it's going to come out to be." ] }, { "name": "Theresa Chen", "speech": [ "Got it. And to the earlier comment about your customers seeing some alleviation downstream on the pet chem front, I'm just curious to hear how do you see the pace and path of supply chain models relieving out of the Gulf Coast? To the extent that it can reduce some of the economic run cuts on ethane cracking and increased demand." ] }, { "name": "Sheridan Swords", "speech": [ "Well, I could say is as we've talked to our customers and seeing what they're seeing in there, and they said they have had some issues getting rid of the polyethylene pellets to get them exported out of there or actually get them from the petrochemical facilities to the dock. And they keep saying they're working through that and continue to improve that to be better. And they're optimistic that it's going to improve over time is kind of what we're hearing. Obviously, if there's a bottleneck there, you could see them slow down their production to make sure they get rid of the products.", "But they seem to be more upbeat now than they have in the past." ] }, { "name": "Theresa Chen", "speech": [ "That's helpful. And lastly, if I can just squeeze one more in. On the cost side, you've seen some good cost control in first quarter. Just wondering your outlook for costs for the year as far as potential inflationary pressures go?" ] }, { "name": "Pierce Norton", "speech": [ "We've seen a little bit of the inflationary pressures. I would just remind everybody that we also have the escalators on our contracts that we think are more than offset the cost increases we have seen. The first quarter -- if we look at op cost, the first quarter is usually just a little bit light as you think about the rest of the year. But we still feel good.", "Again, all that's factored in as we talk about reaffirming our guidance. Inflationary pressures are included in that analysis." ] }, { "name": "Operator", "speech": [ "And now I'd like to turn it back to Mr. Ziola for any additional or closing comments." ] }, { "name": "Andrew Ziola", "speech": [ "Our quiet period for the second quarter starts when we close our books in July, and extends until we release earnings in early August. We'll provide details for that conference call at a later date. Thank you all for joining us, and have a good day." ] }, { "name": "Operator", "speech": [ "[Operator signoff]" ] } ]
OKE
2021-02-23
[ { "description": "Vice President, Investor Relations and Corporate Communications", "name": "Andrew Ziola", "position": "Executive" }, { "description": "President and Chief Executive Officer", "name": "Terry Spencer", "position": "Executive" }, { "description": "Chief Financial Officer and Executive Vice President, Strategy and Corporate Affairs", "name": "Walt Hulse", "position": "Executive" }, { "description": "Executive Vice President and Chief Operating Officer", "name": "Kevin Burdick", "position": "Executive" }, { "description": "Wedbush Securities -- Analyst", "name": "Michael Blum", "position": "Analyst" }, { "description": "UBS -- Analyst", "name": "Shneur Gershuni", "position": "Analyst" }, { "description": "Barclays -- Analyst", "name": "Christine Cho", "position": "Analyst" }, { "description": "Executive Vice President and Chief Operating Officer", "name": "Chuck Kelley", "position": "Executive" }, { "description": "Truist Securities -- Analyst", "name": "Tristan Richardson", "position": "Analyst" }, { "description": "J.P. Morgan -- Analyst", "name": "Jeremy Tonet", "position": "Analyst" }, { "description": "Tudor, Pickering, Holt & Co. -- Analyst", "name": "Colton Bean", "position": "Analyst" }, { "description": "Mizuho Securities -- Analyst", "name": "Gabe Moreen", "position": "Analyst" }, { "description": "Senior Vice President, Natural Gas Liquids", "name": "Sheridan Swords", "position": "Executive" }, { "description": "Sanford C. Bernstein -- Analyst", "name": "Jean Ann Salisbury", "position": "Analyst" }, { "description": "Seaport Global Securities -- Analyst", "name": "Sunil Sibal", "position": "Analyst" }, { "description": "Goldman Sachs -- Analyst", "name": "Michael Lapides", "position": "Analyst" }, { "description": "Bank of America Merrill Lynch -- Analyst", "name": "Derek Walker", "position": "Analyst" } ]
[ { "name": "Operator", "speech": [ "Good day, everyone, and welcome to today's fourth-quarter 2020 ONEOK Earnings Call. A quick reminder that today's program is being recorded. And at this time, I'd like to turn the floor to Andrew Ziola. Please go ahead, sir." ] }, { "name": "Andrew Ziola", "speech": [ "Thank you, Greg, and welcome to ONEOK's fourth-quarter, year-end 2020 earnings call. We issued our earnings release and presentation after the markets closed yesterday, and those materials are on our website. After our prepared remarks, we'll be available to take your questions. A reminder that statements made during this call that might include ONEOK's expectations or predictions should be considered forward-looking statements and are covered by the safe harbor provision of the Securities Acts of 1933 and 1934.", "Actual results could differ materially from those projected in forward-looking statements. For a discussion of factors that could cause actual results to differ, please refer to our SEC filings. Our first speaker is Terry Spencer, president and chief executive officer. Terry?" ] }, { "name": "Terry Spencer", "speech": [ "Thanks, Andrew. Good morning, and thank you all for joining us today. As always, we appreciate your continued trust and investment in ONEOK. Joining me on today's call is Walt Hulse, chief financial officer and executive vice president, strategy and corporate affairs; and Kevin Burdick, executive vice president and chief operating officer.", "Also available to answer your questions are Sheridan Swords, senior vice president, natural gas liquids; and Jeff Kelly, senior vice president, natural gas. Before we discuss our 2020 results and 2021 guidance, I want to first express my deep appreciation for our employees who have been working tirelessly through recent extreme winter weather in the U.S. from North Dakota to the Gulf Coast. They have continued to meet the needs of our customers, while faced with personal challenges of their own homes, losing power, without water, freezing pipes, you name it.", "I continue to be amazed by all that they do to provide exceptional customer service under very challenging circumstances. After a year like 2020 and so far in 2021, it's understandable to want to focus on what's ahead. But first, I'd like to highlight several operating, financial and ESG-related accomplishments achieved during a challenging 2020. ONEOK's adjusted EBITDA grew 6% year over year despite a global pandemic, reduced worldwide energy demand, and depressed financial markets.", "Our resilient business, the advantages of our integrated assets, and the dedication of our employees has never been more evident. The credit goes to those employees who have continued to prioritize the health and safety of the communities, families, and fellow employees. Whether continuing to report on-site in order to monitor assets and systems or juggling the complexities of working from home, all of our employees are critical in keeping natural gas and natural gas liquids flowing on our systems, and these energy products are critical for the economy to quickly recover from this pandemic. From an ESG perspective, we received numerous recognitions this year, including recently being named, an industry mover in the S&P Global Sustainability Awards and the only North American energy company included in the Dow Jones Sustainability World Index.", "ONEOK also was the only Oklahoma-based company to receive a perfect score of 100 in 2021 Human Rights Campaign Corporate Equality index. We formed a stand-alone environmental sustainability team back in mid-2017 that accelerated our ongoing environmental stewardship efforts. In collaboration with those efforts, we recently created a group charged with the commercial development of renewable energy and low carbon projects. The team is actively researching opportunities that will complement our extensive midstream assets and expertise and not only lower our greenhouse gas emissions but also helped enhance the vital role we expect to play in a future transition to a low-carbon economy.", "Opportunities under evaluation include the further electrification of compression assets, potential carbon capture and storage opportunities, sourcing renewable energy for operations, and other longer-term opportunities such as hydrogen transportation and storage. As we develop these opportunities, we'll remain disciplined in our capital approach, applying similar project criteria in terms of return thresholds, contractual commitments, and operational fit, just as we do on other projects. We accomplished a great deal in 2020. And financially, we ended the year stronger than we started it, with improved leverage and a more solid balance sheet.", "Strategic financial decisions and strong operating performance has positioned the company for another year of earnings growth in 2021. Yesterday, we announced our 2021 adjusted EBITDA guidance range of $2.90 billion to $3.2 billion, which is a 12% year-over-year increase compared with the midpoint. As the fundamentals of our business continue to improve, we're more likely to end the year at the higher end of our earnings guidance range and will likely adjust guidance upward accordingly. Earnings growth in 2021 isn't dependent on significant increases in producer activity or on sustained higher commodity prices, although we have seen both in recent months.", "The earnings power of our assets and available capacity from completed projects enables growth even in an environment continuing to rebound from 2020. Kevin will talk more about the key operational drivers of our guidance shortly. Let me touch briefly on the Dakota access pipeline. Since we provided our original outlook in July, we believe that the potential impact to ONEOK, if DAPL were shut down, has significantly decreased.", "Producers have had time to secure alternative crude transportation, and we've seen crude oil prices increase, making rail transportation even more feasible. We believe that even if DAPL is shut down quickly after a ruling in April, the earnings impact to ONEOK in 2021 would be less than $50 million of EBITDA, assuming the pipeline was shut down for the remainder of the year. We remain confident in the long-term resiliency of our business, our well-positioned integrated assets, and especially our employees in these challenging times. While world events have resulted in volatile times, ONEOK's businesses remain resilient, and we'll continue to provide essential services for decades to come, delivering much-needed natural gas liquids and natural gas to our customers.", "With that, I will turn the call over to Walt." ] }, { "name": "Walt Hulse", "speech": [ "Thank you, Terry. One ONEOK's fourth-quarter and full-year 2020 adjusted EBITDA totaled $742 million and $2.72 billion, respectively, representing year-over-year increases of 12% for the fourth quarter and 6% for the full year. Distributable cash flow was nearly $520 million in the fourth quarter, a 6% increase compared with 2019. We also generated more than $100 million of distributable cash flow in excess of dividends paid during the quarter.", "At December 31, net debt-to-EBITDA on an annualized run-rate basis was 4.6 times compared with 4.8 times at the end of 2019. Proactive financial steps taken through 2020 and earnings contributions from completed projects enabled us to improve our leverage metrics despite challenging market conditions. We continue to manage our leverage toward 4 times or less and maintain 3.5 times as a longer-term aspirational goal. We ended 2020 with no borrowings outstanding on our $2.5 billion credit facility and approximately $525 million of cash.", "ONEOK is now rated investment-grade by three major credit rating agencies, as Fitch issued a first-time rating of BBB with a stable outlook in November. Additionally, Moody's and S&P both reaffirmed ONEOK's investment-grade ratings in 2020. We proactively paid off upcoming debt maturities, and we're opportunistic in repurchasing nearly $225 million of debt through open market repurchases in 2020. We currently have no debt maturities due before 2022.", "We ended up achieving cost savings of more than $150 million last year compared with our original plan and would expect a good portion of that to carry over into 2021. Last month, the board of directors declared a dividend of $0.935 or $3.74 on an annualized basis, unchanged from the previous quarter. As Terry mentioned, with yesterday's earnings announcement, we provided 2021 financial guidance, including a net income midpoint of more than $1.2 billion and an adjusted EBITDA midpoint of $3.05 billion, a 12% increase compared with 2020. Earnings expectations are supported by increasing producer activity, ample capacity and efficiency gains from recently completed projects, and the continued opportunity for flared gas capture and strong gas to oil ratios in the Williston Basin.", "Additionally, due to higher natural gas and propane prices, driven by extreme weather across our operating areas over the past two weeks, our natural gas pipelines and natural gas liquids segments benefited from our ability to supply increased demand to meet critical needs during this time. We expect benefits from these short-term opportunities to be partially offset by decreased natural gas and natural gas liquid volumes from well freeze-ups, that still represent upside to our guidance midpoints. Our 2021 guidance assumes first-quarter WTI crude prices at the current strip and assumes a range of $45 to $50 for the remainder of the year. From a producer activity standpoint, we are also assuming volume levels that correspond with a $45 to $50 WTI range.", "Sustained higher prices will lead to a quicker volume ramp and drive earnings toward the higher end of our guidance range. Total capital expenditures for 2021, including growth and maintenance capital, are expected to range between $525 million and $675 million, a more than 70% decrease compared with 2020. This range reflects improved producer activity levels and volume expectations, including capital to complete the Bear Creek plant expansion and associated field infrastructure later this year, which we referenced on our third-quarter call. Conversations with producers in the Dunn County area of the Williston Basin remain extremely positive and the likelihood of meeting this additional capital this year is high.", "The original adjusted EBITDA multiple of 4 to 6 times still holds for this project with the multiple on the incremental remaining capital being much lower. In terms of 2020 capital expenditures, we completed an expansion of our Elk Creek pipeline in December, another example of low capital operating leverage on our system. The $100 million expansion increased capacity by 60,000 barrels per day and provides added transportation capacity on our most efficient pipeline out of the Williston Basin. As we like to remind people, every 25,000 barrels per day of NGLs from the region contributes approximately $100 million of annual EBITDA to ONEOK.", "Financially, our priorities in 2021 remain largely unchanged, with our primary focus on debt reduction and investing alongside our customers. I'll now turn the call over to Kevin for a closer look at our operations." ] }, { "name": "Kevin Burdick", "speech": [ "Thank you, Walt. I'll start with a quick recap of fourth-quarter operations and then discuss 2021 growth drivers. In our natural gas liquids segment, fourth-quarter raw feed throughput from the Rockies region increased 13% from the third-quarter 2020 and 24% year over year. In January, propane plus volumes from the region exceeded our fourth-quarter average despite typical winter weather challenges.", "In the Mid-Continent region, ethane on our system decreased nearly 40,000 barrels per barrels per day in the fourth quarter compared with the third quarter primarily due to high ethane inventories from hurricane-related petrochemical outages in the third quarter. In the Permian Gulf Coast region, raw feed throughput volumes were lower in the fourth quarter compared with the third quarter due to the short-term fractionation-only contract that rolled off, as well as a third-party plant outage and reduced ethane on our system. Moving on to the natural gas gathering and processing segment. In the Rocky Mountain region, fourth-quarter processed volumes increased 16% compared with the third quarter and 11% year over year as nearly all curtailed volume came back online.", "The return of volume with a high fee percentage in the Rockies, combined with lower volumes in the Mid-Continent, drove the segment's average fee rate to $1.04 per MMBtu compared with $0.94 per MMBtu in the third quarter. In the natural gas pipeline segment, we reported another strong quarter of stable fee-based earnings with firm capacity 95% contracted. The segment continues to provide ONEOK with firm fee-based earnings driven by end-use demand. You can find more detailed information on our fourth-quarter and full-year 2020 results in our earnings materials.", "Now, moving on to 2021. As we sit today, the operating environment is much improved from even a few months ago. Conversations with our customers remain positive, and we're seeing increasing producer activity across our operations. Our 2021 volume guidance at the midpoint would result in a 7% increase in total NGL volume and a 5% increase in total natural gas processing volumes compared with 2020.", "In the natural gas liquids segment, we expect volume growth to be driven by projects completed in 2019 and 2020, continued growth from well completions, and the ramp of new plant connections and expansions completed in 2020 and 2021. In the Williston Basin, the recent low-cost expansion of our Elk Creek pipeline increased its capacity to 300,000 barrels per day and increased our total NGL capacity from the region to 440,000 barrels per day. With this expansion, we have ample capacity to transport our Williston and Powder River Basin volumes, exclusively on the Elk Creek pipeline at the beginning of this year, which reduces transportation costs paid the overland pass pipeline and is expected to result in $40 million to $50 million in additional earnings in 2021. The Elk Creek expansion provides added capacity, which is also available for potential ethane recovery if needed.", "Our current NGL volume guidance does not assume Williston Basin ethane recovery but does assume partial Mid-Continent ethane recovery. We currently have approximately 100,000 barrels per day of incremental ethane opportunity in both the Mid-Continent and Williston Basin. As we look forward, domestic and international petrochemical demand and export dynamics look strong, but we continue to expect ethane volumes on our system to fluctuate throughout 2021. With available pipeline capacity between Conway and Mont Belvieu, the differential between the two market centers is expected to be near the historical average of $0.02 to $0.03 per gallon for ethane.", "However, so far in 2021, we've seen prices for several of the NGL products fluctuate outside of this range. Recent extreme winter weather and the resulting increase in propane prices in the Mid-Continent created opportunities for both our optimization and marketing business as we utilize our pipeline and storage assets to meet market needs. In the Permian Gulf Coast region, our firm contract to offload 25,000 barrels per day on third-party NGL pipeline expired at the end of 2020, and these volumes are now flowing on our system, eliminating the additional transportation costs. From a federal land perspective, we estimate that less than 10% of our NGL volume is from acreage on Federal lands, primarily in the Permian Basin.", "Moving on to the natural gas gathering and processing segment. Higher 2021 volumes are expected to come from the Williston Basin. There are currently 16 rigs operating in the basin with eight on our dedicated acreage. Our conversations with producers indicate that in the current pricing environment, they expect to bring more rigs back to the region once weather improves in the spring.", "There also remains a large inventory of drilled the uncompleted wells in the basin, with more than 650 basinwide and more than 375 on our dedicated acreage. The capture of additional flared natural gas in the region remains an opportunity. The latest North Dakota data, which is for the month of December, showed the state achieving a record of 94% gas capture. This leaves approximately 185 million cubic feet per day still flaring in the basin, with approximately half of that on ONEOK's dedicated acreage.", "Increasing rig activity, flared gas capture, DUCs, and continually increasing gas to oil ratios will provide solid tailwinds for volume growth in the region. At the midpoint of our guidance, we expect a 17% increase in 2021 processed volumes compared with 2020, which would result in an average volume greater than 1.2 billion cubic feet per day. We expect to connect between 275 and 325 wells in the region this year, which would be 25 completions per month at the midpoint. The segment's average fee rate is expected to range between $0.95 and $1 in 2021 based on our volume mix assumptions for the year.", "As we said previously, nearly 80% of our dedicated acreage in the Williston Basin is on private land. The smaller portion on Federal land is primarily outside of the core Basin acreage, where little to no activity was expected. In the Mid-Continent region, we expect to connect 30 wells in 2021, the same amount connected in 2020. Flat rig activity and natural production declines in the region are factored into our volume guidance for the year.", "However, producers have indicated that with strengthening commodity prices, particularly natural gas and NGLs, they are evaluating adding rigs in the stackings period. In the natural gas pipeline segment, we expect transportation capacity to be approximately 95% contracted in 2021. As we've experienced recent extreme cold temperatures across our operating areas, we've continued to transport natural gas on our extensive natural gas pipeline systems to the markets that need it most. Our well-positioned assets and connectivity with end-use customers have enabled us to provide services on our pipelines to meet higher demand during this critical time.", "In both the Permian and Mid-Continent areas, we're experiencing a significant reduction of supply due to well freeze-offs. ONEOK's more than 52 billion cubic feet of natural gas storage assets, which are primarily located in the Mid-Continent, we're able to bridge the supply shortfall by providing natural gas to meet critical needs. Some of the gas provided from storage is owned by ONEOK, which we retain through our transportation contracts and sell as part of our normal course of operations. While these were short-term weather events, our preparedness, and our ability to quickly react and adjust services for customers highlights operational flexibility and financial upside in an already financially stable segment.", "Terry, that concludes my remarks." ] }, { "name": "Terry Spencer", "speech": [ "Thank you, Kevin. We're in a good position, both financially and operationally as we've begun 2021. And the current market environment is showing positive signs of increased producer activity and increasing demand for our products. As we said many times before, we will remain focused on delivering value to our shareholders in a profitable, safe, and environmentally responsible way.", "Thank you again to all of our employees for the work you did in 2020 to prepare us for growth in 2021. Operator, we're now ready for questions." ] } ]
[ { "name": "Operator", "speech": [ "Thank you, sir. [Operator instructions] And first from Wells Fargo, we have Michael Blum." ] }, { "name": "Michael Blum", "speech": [ "Great. Good morning, everybody. I just wanted to go back to just a comment you made earlier about the guidance that you thought you perhaps trend toward the high end of the guidance range. I just want to make sure I understood that correctly.", "Is that just based on year-to-date pricing versus what's baked into your guidance? Or are there other factors that's leaving your stack conclusion?" ] }, { "name": "Terry Spencer", "speech": [ "Yes. Well, I think your primary -- what you're looking for right now is what are producers going to do in 2021. And they're providing us pretty good indications and given the stronger backdrop in the commodity prices that we're seeing. They're giving us good signals.", "But it's going to take a little bit of time for them to permit the rigs and do the things that they'd like to do in response to those prices. So I just take a little bit of time right now, but the body language is very good, and as Kevin indicated in his comments, it looks really positive. But as we see these prices now, we've got crude with a six handle on it. Our producers even further going to increase their activity.", "And we think that they will, but it's going to take a little bit of time to sort through that. Kevin, you got anything to --" ] }, { "name": "Kevin Burdick", "speech": [ "No, Terry. But I think that's what we're hearing. The feedback from producers continues to be positive about strengthening activity given these crises. So just watch that play out." ] }, { "name": "Terry Spencer", "speech": [ "So, Michael, I'll just make a -- I'll make a comment. Remember where we were last year at this time. We issued guidance in February and two weeks later, we got hit with a global pandemic. You might understand a bit of conservatism here in the guidance that we put forward, but we're certainly getting a pretty good body line on what we think is going to happen in 2021.", "And we'll adjust it accordingly. We won't wait until the end of the year to adjust the guidance. We'll jump on it pretty quick if we continue to see the strength that we're seeing today." ] }, { "name": "Michael Blum", "speech": [ "Great. I appreciate that. And then probably a little greedy with this question, but I think, historically, at this point of the year, you have given kind of like a soft directional guidance for the following year. So this year would be 2022, you obviously haven't done that this year.", "But just based on some of the data that you provided in your own slides, I think you've said you can kind of back into that, I think you need kind of low 20s rig count to keep production flat in 2022. So I think right now, we were about 15 rigs in the Bakken. So is that still the right math? Because it sounds like based on your prior comments that you think you're heading in that direction, but you're just not sure yet?" ] }, { "name": "Terry Spencer", "speech": [ "I'll let Kevin take that question." ] }, { "name": "Kevin Burdick", "speech": [ "Michael, I guess -- I think that the 20 counts probably was a little high based on -- that may hold crude flat. But again, with the rising gas to oil ratio, and our ability to continue to capture more and more of the gas, that number, to me, is probably somewhere a little bit less than 20 average --" ] }, { "name": "Michael Blum", "speech": [ "Great. Thank you very much." ] }, { "name": "Operator", "speech": [ "And we'll move on to Shneur Gershuni with UBS." ] }, { "name": "Shneur Gershuni", "speech": [ "Good morning, guys. I just wanted to follow-up on the '22 kind of impacts. Kind of a two-part hypothetical question here. So given the plans to finish building the Bear Creek plant, all else equal and I realize it's a hypothetical situation or scenario, is it fair to assume that there will be incremental EBITDA going into '22 versus kind of where you're standing with respect to '21? And then in terms of how it goes through the plant.", "But then also, when we think about Elk Creek and we think about the Bear Creek in northern border, the possibility exists that you get incremental recovery of ethane that ends up on to Elk Creek into results of hitting Bear Creek northern border?" ] }, { "name": "Terry Spencer", "speech": [ "Yes. So, sure, take Bear Creek first. And yes, you're thinking about that right. I mean, I think when we paused it, originally, we were probably thinking more of a '22 time frame.", "But now that we're looking at it by the end of this year, that would absolutely add incremental EBITDA into '22, if we go forward and finish it by the end of the year. So that is absolutely an upside to how we were thinking about '22 previously. As it relates to northern border and potential for ethane, just that potential still exists as you see volumes continue to increase in the basin. And on the gas side, that high Btu gas is going to go into northern border.", "And so the math just continues to work with the blended content, or the heat content is going to go up, which, over time, is going to drive the need to pull that back down a little bit. Northern border proposed the tariff, forecasting to go back and work with shippers and producers, and other stakeholders in the region. It's our understanding those conversations are under way at this point. So we'll watch that for an official tariff that might get filed, but I would expect that process to continue over the coming months." ] }, { "name": "Shneur Gershuni", "speech": [ "OK. And maybe as a follow-up to the first questions that were asked. I was just wondering if you can give us a little bit around sensitivity and just clarify one of your responses Michael's question. Is there like an EBITDA percent of NGL that we should be thinking about that you can share with us in terms of how we think about modeling? And then just, in answering the question about the rigs, you said it was below 20.", "If I do my math, you needed 25 wells to stay flat per month. When I divide that by two, as I think about 2 miles per rig, that should bring in more around 13 or 14 rigs. Just wondering if you could clarify those points." ] }, { "name": "Terry Spencer", "speech": [ "OK. What was your first question again? Sorry." ] }, { "name": "Shneur Gershuni", "speech": [ "Just when I think about changes in NGL prices and impact to changes in EBITDA, is there like a $0.05 change in NGL with equal X amount of dollars in EBITDA as we sort of think about your guidance range? And then the second part was about how many rigs you need specifically to keep yourself flat versus growing? You said below 20, but it sort of sounds like it would be in low teens if I do my math correctly." ] }, { "name": "Terry Spencer", "speech": [ "OK. So on the first one, on just the commodity pricing, given how heavy fee-based we are, and how much hedged we are, there's really not a massive or significant move in pricing, just with our -- we're so fee-based at this point. Yes, with an improving commodity backdrop, you are going to get pick up a little bit, but we're not talking about hundreds of millions of dollars there. On the second question, I do believe your -- I do agree that it's -- the number of rigs we believe we need is in more of that mid-teens-ish is what we're thinking there as we look at that.", "And in our earnings material, we have kind of a different -- shows different completion rates and what that would do to our gas production over time. And I think that's the key. So much is written about what the basin needs to hold production flat that all that is typically crude oil-based. And again, with the strengthening gas to oil ratios, the number of rigs we need the whole gas production flat is quite a bit less than that.", "But we put that number in the mid-teens." ] }, { "name": "Shneur Gershuni", "speech": [ "No, that makes perfect sense. If I can slip one last one in. The timeline on the green investments that were mentioned in the prepared remarks, is that something that can happen relatively soon? Or do you need some sort of tax incentives to be passed? Is this kind of like a three-year view? Or is this something that can happen in the next 18 months?" ] }, { "name": "Terry Spencer", "speech": [ "Yes, it'd be more near term. I mean, as we're thinking about that, some of the smaller investments in these projects that Terry mentioned. But as opportunities present themselves on a larger scale, we'll consider them and with the appropriate return threshold." ] }, { "name": "Shneur Gershuni", "speech": [ "Perfect. Thank you very much. I really appreciate the color today." ] }, { "name": "Operator", "speech": [ "All right. We'll move on to the next question. It's Christine Cho with Barclays." ] }, { "name": "Christine Cho", "speech": [ "Thanks for taking my question. Maybe if I could start with the fee-based rate for G&P, assumed in guidance is $0.95 to $1. You came in above that in 4Q. And I would think Bakken production only increases while Mid-Con decreases this year.", "So shouldn't that support a fee-based rate similar to what we saw in 4Q, if not better? So is that just conservatism? And is there a cap on this fee-based rate at some point?" ] }, { "name": "Chuck Kelley", "speech": [ "Christine, this is Chuck. I'd say when we put our forecast together, we go ahead, and we break down what's the mix of our producer volumes by contract. So as we did that, these different contracts have varying levels, both fee as component of total value. So based on the projected mix of volumes, we feel comfortable in the $0.95 to $1 range.", "We may have quarters where it, in fact, exceeds that because the mix may be a little bit difficult than what we originally assumed. And we've seen some of that, obviously, here in Q4. So you could see some to the upside above the dollar, but we feel pretty confident in the $0.95 to $1 range." ] }, { "name": "Christine Cho", "speech": [ "OK. And then if I could move on to some of the prepared remarks, talk about some tailwinds, which sounds like it's going to materialize first quarter or at least first half. You talk about the NGL spreads, providing opportunity for the NGL segment. But then you also talked about 52 Bcf of storage that you have in the Mid-Con.", "And you talk about retaining some of that and selling it as part of your normal course of operations. Just to clarify, does that mean you're selling gas into the grid? And if you could also give us some color on what's the max deliverability rate on the storage? Like how much gas can you take out of the storage each day?" ] }, { "name": "Terry Spencer", "speech": [ "Christine, we'll let Chuck handle that question." ] }, { "name": "Chuck Kelley", "speech": [ "So, Christine, the storage we're referring to are located in Kansas, Texas, and Oklahoma, but the largest of that 52 Bcf, call it, 46 Bcf in Oklahoma, remaining fields in Texas, so about another four or five in the balance up in Kansas. So yes, as we transport gas, we do retain some fuel that becomes equity for us. And we have an ongoing normal course of business. We go ahead and we'll store that gas.", "We have a sales program portfolio where we look in the forward strip relative to weight COGS as anyone would and choose how we want to monetize that equity gas. We also keep some gas available, obviously, for unexpected situations, market movements, and what have you. And we set up each year this way. So what happens this year, we set up and this event occurred.", "So we were able to participate in these market prices that you may have seen here in Oklahoma and Texas. And I'm sure we'll talk more about that in the Q1 earnings call." ] }, { "name": "Christine Cho", "speech": [ "And any color on max withdrawal rates?" ] }, { "name": "Chuck Kelley", "speech": [ "I don't know if you publicly have provided that in the past. But just generally, in Oklahoma, and then when we're fully pressurized, you could see us withdrawing as high as 1.4, 1.5 Bcf a day. Our Texas numbers, obviously, the caverns are smaller. So you're more in that 350 million to 400 million a day, again, when they're pressurized." ] }, { "name": "Christine Cho", "speech": [ "Great. Thank you so much." ] }, { "name": "Operator", "speech": [ "And next question will come from Tristan Richardson with Truist Securities." ] }, { "name": "Tristan Richardson", "speech": [ "Good morning. I appreciate all the commentary around the assumptions for '21. Just wanted to follow-up on a previous question with respect to rigs in the Rockies. I think just on the range of completions you guys have talked about for the year, do we directionally see an improvement in rigs from your customers to achieve the range? Or should we think of that range as that's a range of outcomes with just the current state of rates today?" ] }, { "name": "Chuck Kelley", "speech": [ "I think the way we look at it, again, back to the original remarks, as we talk to our customers and a lot of these conversations were taking place with crude in the $45 to $50 environment, that's the activity levels that we kind of have baked in. Very recent conversations with the strengthening of the commodity strip, those conversations are starting to get stronger as far as the amount of activity. So that's the way, I guess, we would think about this in our remarks around the range and Terry's comments about us trending toward that upper end if we see the current commodity environment hold because we do believe customers will bring more activity at the current price environment if it holds." ] }, { "name": "Tristan Richardson", "speech": [ "Sure. Thank you. And then just on the capex, I think in previous quarters, you guys have talked about $300 million to $400 million a year as a potential kind of new run rate. Can you talk about the current guide and what's embedded in that? Should we think about maybe that incremental spend is this purely the Bear Creek expansion? Or I'm just we bridge that gap between the previous range you guys have talked about hypothetically?" ] }, { "name": "Terry Spencer", "speech": [ "Sure. So if we just kind of put the $300 million to $400 million discussion in context, that was initially made back in the summer, and crude was in the $30s. So even at a $45 to $50 level assumption, you expect a lot more activity, which is built-in. So that's one part.", "Bear Creek II, you're right, that's probably a little over $100 million of that number. And then the rest, if you think there's another $100 million, where we've found opportunities, for example, a compression replacement expansion project on one of our interstate pipes that's not only going to provide additional capacity, more reliability, and reduce our emissions footprint. We're doing some work down in Mont Belvieu to expand our storage position. That's a good project.", "We're also doing some work in Belvieu to expand our distribution network and get more direct connected to a few customers. So those are things. Again, none of them by themselves. Each one is $20 million, $30 million, $40 million, but you add three or four of them together, and there's another $100 million.", "So they're all good projects. They're strong return projects, and we found those opportunities. So we're going to go execute on them." ] }, { "name": "Tristan Richardson", "speech": [ "I appreciate it. Thank you, guys." ] }, { "name": "Operator", "speech": [ "And moving on, we have Jeremy Tonet with J.P. Morgan." ] }, { "name": "Jeremy Tonet", "speech": [ "Good morning. Just want to dig into the guide a little bit some of the buildup there. When you talk about kind of the potential for increased activity if current commodity prices hold, are these producers more on the public side or the private side? Just trying to get a feeling for who might be increasing activity here. And just curious if the GOR ratio, is that continues to improve over time, kind of do you have any thoughts that quantify as far as how you think that ratio kind of improves over time, that's at least in your forecast?" ] }, { "name": "Terry Spencer", "speech": [ "We'll let Chuck handle it for both those questions." ] }, { "name": "Chuck Kelley", "speech": [ "Yes, Jeremy. To your first question, I'm sorry, I was thinking about the GOR question. Give me your first question then one more time if you don't mind." ] }, { "name": "Jeremy Tonet", "speech": [ "Yes. Just as far as commodity prices hold and there's the activity pick up. Is it more from the public or private, larger, or smaller? Just trying to get a feel for who could be increasing activity here?" ] }, { "name": "Chuck Kelley", "speech": [ "Sure. No, it's a combination. I mean, obviously, you've seen a couple of the publics say that the capex position that they set, they're going to hold that for 2021 pending some of its DAPL, some of it at the time, but they said that we were in a $45 to $50 crude environment. So they're rethinking that a little bit, obviously, but it's a combination of the large, capitalized public plus some of the privates up there.", "And then as far as the GOR question, GOR has increased just in the past year 15% year over year. And I think we pointed out in our slide, it's 63% since 2016. So pretty significant increase, particularly this last year, we're seeing that 15%. So when you think about it, they're rising over time as pressures declined, so more that trapped gas is released relative to crude, and producers have confirmed this for us as well that they think the implied GORs will continue to rise.", "Now, I can't say it at 15% year over year, but it's definitely rising." ] }, { "name": "Terry Spencer", "speech": [ "Pretty significant tailwind for us." ] }, { "name": "Jeremy Tonet", "speech": [ "Got it. That's helpful. Thanks. And just if I think about the capex, as you guys outlined it there.", "Does that include Bear Creek right now? Or if the current commodity Paris holds and there's these upside opportunities, where would you expect kind of capex to pull out if these things come to fruition as you outlined here?" ] }, { "name": "Kevin Burdick", "speech": [ "No. Bear Creek is included in that capex number of the midpoint of $600 million." ] }, { "name": "Terry Spencer", "speech": [ "Jeremy, this is Terry. I don't want comment I'll make about that about Bear Creek is the way you have to think of the two-thirds of the capital to complete Bear Creek 2s, it sucks. It's equipment. It's material.", "There's a lot of labor that we incurred that's on cost. And so this small amount that Kevin is referring to, the returns on an incremental investment are huge. And so it makes a lot of sense given the -- specifically in Dunn County, where we're seeing this activity, it makes sense to address it. And so I just can't stress enough how outstanding the economics are, how compelling the economics are in completing that project." ] }, { "name": "Jeremy Tonet", "speech": [ "Got it. And so maybe just to clarify, if the upside opportunity emerges, as you said, the capex, as you budget it now kind of covers that being able to service that production? Or would capex move up a little bit more from here to kind of cover that higher activity level?" ] }, { "name": "Kevin Burdick", "speech": [ "It would just move up just a little bit because you're only talking about well connect capital at that point, which is the most efficient capital we spend in the portfolio." ] }, { "name": "Jeremy Tonet", "speech": [ "Understood. That's helpful. OK, great. Thank you." ] }, { "name": "Terry Spencer", "speech": [ "You bet." ] }, { "name": "Operator", "speech": [ "All right. Next, from Tudor, Pickering, Holt & Co, we have Colton Bean." ] }, { "name": "Colton Bean", "speech": [ "Good morning. So just circling back to some of the comments on throughput. It looks like for the midpoint of the gathering guide it falls just below Q4 '20 levels. Can you frame you expect a trajectory over the course of the year? Or asked differently, does that assume exit-to-exit declines or that we're entering the year a bit softer and then rebounding thereafter?" ] }, { "name": "Kevin Burdick", "speech": [ "Well, up in the Bakken, we exited 2020 at a very good level, right, in that 1.2 range. Of course, here in Q1, you typically see weather, and we've seen the effects of weather throughout February and -- back half of January, primarily February. So if you think about the shape of the volumes throughout the year, Qs 2 and 3 have always been very strong for at the beginning of Q4, equally strong. December is kind of dicey again for weather." ] }, { "name": "Colton Bean", "speech": [ "Got it. And then just sticking on the G&P side, there's a little bit wider gap between gathered and process volumes when based on the guide, it looks like to actually close in 2021. Were you offloading more volumes during the quarter or anything else to point to?" ] }, { "name": "Kevin Burdick", "speech": [ "I'm sorry, I missed the last part. I couldn't understand that." ] }, { "name": "Colton Bean", "speech": [ "Yes. Just interested if you were potentially offloading some volumes to third-party processing or what drove that gap in the Bakken and then why exactly that would close over the course of 2021." ] }, { "name": "Kevin Burdick", "speech": [ "No, we weren't offloading some. I just can't answer what gaps you're referencing because, frankly, I didn't see it. From a business perspective, there's nothing going on. So it would just be kind of a normal course and fluctuation of the gathered versus profit.", "This is frac protect going on, that could have impacted it." ] }, { "name": "Colton Bean", "speech": [ "Understood. Yes, it was just a little bit wider than historical, so wanted to follow up. Appreciate it." ] }, { "name": "Operator", "speech": [ "All right. Next question will come from Mizuho. We have Gabe Moreen." ] }, { "name": "Gabe Moreen", "speech": [ "Good morning, everyone. I just kind of want to follow-up on the events of the last like to. And I'm just wondering from your perspective, I know it's early days here. You think that the conversations with customers in terms of the guys winter rising assets.", "There's only so much you could do about well freeze-offs, but just wondering in terms of processing plant reliability. And then kind of as you look at the portfolio overall, whether it's gas pipeline capacity coming out of Canada or whether it's some of your gas storage assets, where do you think will be some upward pressure maybe on some of the rates you can charge for those services?" ] }, { "name": "Chuck Kelley", "speech": [ "Gabe, this is Chuck. In the Williston, obviously, we purchased winterized packages for all everything. I mean, we've got heat tracing equipment in our plants. We've purchased arctic packages for our compression.", "So this is a normal course of business in the Bakken. We've seen it minus 30, and our amazing people are still out there running these assets. It's incredible, and we don't have very high utilization, very rarely off-line. So it freezes is the wellheads.", "Coming down to Oklahoma and Texas, and frankly, that's just a value proposition for producers, and frankly processors and pipelines. Can you go ahead and winterize and spend whatever that percentage extra might be for a small event? And I'd say, going forward, people are going to really look at those costs. And so in fact, somebody is willing to pay for that service." ] }, { "name": "Kevin Burdick", "speech": [ "Gabe, this is Kevin. The only thing I would add is when you think about the last several weeks, our pipeline assets performed incredibly well. I mean, they ran, and they were up virtually the entire time. And our field folks did a fantastic job keeping those assets available and reliable, whether it was pipeline, compression, dehydration, all the equipment that we needed to run, they ran virtually uninterrupted.", "Our processing plants ran extremely well, too, even in the Mid-Continent. Really the only disruptions we had was when we lost power, which was really there was one event that we could do about that. But I do think, obviously, with all, there's been a lot of conversation about how the market should respond and the availability and having storage assets and having pipeline assets, we're always looking for those opportunities to expand that footprint. And we'll be there if some of the customers need some additional services, with our integrated assets, we can provide them." ] }, { "name": "Gabe Moreen", "speech": [ "Great. Thank you. And then maybe if I could just follow-up sort of on -- I appreciate the initial capital comments in the opening remarks. Just as a follow-up to that, I was wondering how warm or not warm conversations on potentially converting how Elk Creek would be with producers.", "And I don't recall you ever having put out a capex figure on that conversion. Is that something that you're willing to kind of take a stab at?" ] }, { "name": "Sheridan Swords", "speech": [ "Yes. I think you're referring -- Gabe, this is Sheridan. I think you're firing conversion to Elk Creek to crude oil system. Right now, we continue to see really good volumes on the NGLs Elk Creek system, that I don't think the conversion is in the cards at this time.", "In fact, through this whole February, as Chuck said, the Bakken base and performed the best out of all the regions on the NGL system. Their volume dropped least amount and already almost back to pre-winter or pre-storm levels at this time. So I think, right now, we don't see a case where we're going to convert Elk Creek to a crude oil system and then talking with the producers up there. A lot of them are securing space on other pipelines in anticipation of the DAPL going down and on rail terminals.", "And as we talk to the customers, they really don't see an impact to their volumes if DAPL would go down this time." ] }, { "name": "Terry Spencer", "speech": [ "And, Sheridan, their hesitance to sign up for long-term capacity to underwrite and other crude lines or this crude conversion. So I think that's factor as well." ] }, { "name": "Sheridan Swords", "speech": [ "Yes, that's the main factor. I mean, we don't want to sign up for a long-term deal to convert this system when they already have viable outs to that." ] }, { "name": "Gabe Moreen", "speech": [ "Got it. Thanks, everyone." ] }, { "name": "Operator", "speech": [ "Next question will come from Jean Ann Salisbury with Bernstein." ] }, { "name": "Jean Ann Salisbury", "speech": [ "Hi. Good morning. On Slide 10, the wedge that you're calling the flared gas capture opportunity. What level of flaring would that represent on your acreage? If you did capture it all? And is it really stick to capture all? What do you see if anything to happen for you to get it?" ] }, { "name": "Kevin Burdick", "speech": [ "Jean, it's Kevin. We've gotten that question a lot. Clearly, we think we can capture more gas than gas -- capture some of the gas that's still playing. Even with the percentages coming down well into the single digits, we think there's more room to drive that even lower.", "A lot of our conversations that we're having with customers now, especially some of the larger ones, they like that number to be zero. Now that, ultimately, is going to require some -- would require some kind of changes in the way we work together and the way some of the equipment on the wellhead is structured. But again, if it can be done, and we're encountering those conversations with the customers. In total, does it go to zero? Probably not with operational disruptions, etc.", "But we've got many customers now working with us, one in -- just from a variety of perspective from a value capture, from an emissions perspective, just bringing that number as low as we possibly can." ] }, { "name": "Jean Ann Salisbury", "speech": [ "Great. Thank you. And then between the starting up and energy transfer, suggesting we may try to connect some of the enables NGL production to their own system. It seems like there may be some more challenges to one of dominance Mid-Con NGL system.", "Can you comment on the medium-term pressure that you see here? And how much it kind of erode your business?" ] }, { "name": "Terry Spencer", "speech": [ "Well, what I would say about the energy transfer enabled deal is that in the Mid-Con, the volumes on our system are tied up under long-term contracts, which have many years left on them. And we don't specifically talk about contract terminations or volumes on the system, but we think our contracts, right now, for the immediate future, are very well secured." ] }, { "name": "Jean Ann Salisbury", "speech": [ "OK. Thank you." ] }, { "name": "Operator", "speech": [ "All right, Next, we have Sunil Sibal with Seaport Global Securities." ] }, { "name": "Sunil Sibal", "speech": [ "Yes. Hi. Good morning, guys. And thanks for all the clarity on the call today.", "I just had a clarification – yes, can you hear me?" ] }, { "name": "Terry Spencer", "speech": [ "Yes." ] }, { "name": "Sunil Sibal", "speech": [ "So my question was on the sensitivity you provided in case DAPL was shut down sometime in April, $50 million for 2021. I was curious, how would you characterize that impact, say in 2022, if DAPL were to remain shut down and we were in a $45 to $60 WTI price environment?" ] }, { "name": "Kevin Burdick", "speech": [ "Well, we haven't gotten into trying to speculate what would happen beyond that. They're well into the EIS process. I think we believe that they'll, ultimately, be successful even if it gets shut down if they would get the proper uses and permit approvals. But again, you could maybe do a little extrapolation if you wanted to think about '22.", "But again, that's going to be dependent on -- if you're in this type of price environment, it's going to be -- it's not going to be a big number because, again, rails continues to be very attractive at these commodity prices." ] }, { "name": "Sunil Sibal", "speech": [ "Got it. And then on the -- sorry, go ahead. Then my second question was on the Elk Creek expansion that you completed in the fourth quarter. Just curious, were there any MEC commitments tied to the season? Or is it just the original MECs kind of hold for this expanded capacity also?" ] }, { "name": "Terry Spencer", "speech": [ "I think the answer is expanding Elk Creek, the 300,000, did a couple of things for us. And one, we mentioned on our call is that ensures that we can move all our volume off of OPPL onto Elk Creek and still have ample capacity to be able to bring ethane out of the Bakken if that is needed as well. That was the pre-empts of why we did the expansion of Elk Creek." ] }, { "name": "Sunil Sibal", "speech": [ "OK. Got it. Thanks." ] }, { "name": "Operator", "speech": [ "All right. And then moving on, we have Michael Lapides with Goldman Sachs." ] }, { "name": "Michael Lapides", "speech": [ "Hey, guys, thank you for taking my question. Just real quick, high level, how are you thinking about the path to deleveraging and kind of the balance between using incremental cash flows? And at the high end of your guidance, your free cash flow positive after the dividend, it seems -- how you're thinking about allocating cash flow between dividend growth, between new growth projects, or between paying down debt." ] }, { "name": "Walt Hulse", "speech": [ "Well, Mike, what I would say is that we always want to make sure that we have -- if we have a good project that is going to serve our customers' needs that we're going to make that investment. As Kevin mentioned, we've got smaller projects here that we're kind of adding to our system around. We don't have any larger capital plans on the horizon here in the near future. It's really more additive to our existing systems.", "So you're going to see the bulk of that free cash flow go to debt reduction here in the near term. And our deleveraging plan is right on track. And these commodity prices hold at this level it's doing nothing but accelerate." ] }, { "name": "Michael Lapides", "speech": [ "Got it. Thank you, guys. Much appreciated." ] }, { "name": "Walt Hulse", "speech": [ "Thanks, Mike." ] }, { "name": "Operator", "speech": [ "All right. And everyone, it looks like our last question is going to come from Derek Walker with Bank of America." ] }, { "name": "Derek Walker", "speech": [ "Hi, guys. Can you hear me?" ] }, { "name": "Terry Spencer", "speech": [ "Yes." ] }, { "name": "Derek Walker", "speech": [ "Got it. Just on the leverage point, I just wanted to see -- what's your confidence in kind of hitting the 4 times versus the 3.5 times, and what's going to kind of get you to that 3.5% number? Is it more incremental growth projects? Is it just the operating leverage you have on your distant systems? Just any color you can provide there would be helpful." ] }, { "name": "Walt Hulse", "speech": [ "Well, I think that we kind of think is the 3.5 and 4 is definitely going to be the continued growth that we see in our system. That obviously is going to produce cash flow and help us from a debt reduction standpoint. So we'll try to do it from both sides of the coin. But it's the continued growth that we see on our system over time.", "And the fact that we have so much headroom within our asset base. These pipes have lots of capacity so that we've got great operating leverage going forward." ] }, { "name": "Derek Walker", "speech": [ "Got it. And then maybe just one on Mid-Continent. You talked about, I think, 30 well connects this year. With potential that you talked about some customers actually adding petrol activity.", "Do you see that kind of coming into 2022? Or how do you kind of think about the new content kind of coming out of 2021?" ] }, { "name": "Kevin Burdick", "speech": [ "From a well connection activity perspective -- and I think as we move through '21, we've had a lot of conversation about that. As you move into '22, it's going to be a function of commodity price. I mean, if we're still sitting in this -- if you're still sitting in a 55 to 60 type environment, then you're going to see an increase in activity. And I believe that activity will sustain.", "There's a lot of drilling location up there left, a lot of inventory depth, and I think you'll see that sustained through '22." ] }, { "name": "Terry Spencer", "speech": [ "Kevin, it's not all just about crude price. I mean, obviously, NGLs and natural gas are a big driver for the activity up there. And as we've seen stronger natural gas prices, particularly as we come through the polar vortex, as we come out the other side of this thing, I think fundamentally, the fundamental backdrop is we're going to see higher values for natural gas and certainly for liquid. So those will also be important drivers for producers, particularly in Oklahoma." ] }, { "name": "Derek Walker", "speech": [ "Got it. And then maybe one last one for me. Yes. Just on the, I think recovery, I think this is [Inaudible] Williston, I think some in Mid-Continent, but you kind of mentioned there could be some volatility.", "So I guess how do you think about the ethane recovery throughout the year?" ] }, { "name": "Terry Spencer", "speech": [ "Well, what we see for the ethane recovery in Mid-Con, we do feel we'll see some ethane recovery this year, probably maybe a little bit more in the second half of the year. Obviously, what we've seen now is, in February, a lot of the petrochemical facilities have gone off-line due to loss of power and gas. So in February, we did see a lot of ethane rejection across our system. Ironically, even as we come out the other side and the drop of gas prices, today, we are starting to see an increased amount of ethane recovery in the Mid-Continent.", "But we do think, throughout this year, it will be a little lumpy, it's more weighted toward the back half of the year. The fundamentals for the petrochemical industry are very good right now as we see the price of propylene and ethylene very high. And as these plants come back, getting back on, they're going to run at very high rates. So we think we'll see more ethane recovery potentially in the first half of the year, which would drive us more to the upside of our guidance." ] }, { "name": "Kevin Burdick", "speech": [ "So a complete recovery from the hurricane impact like last year, we're through all that." ] }, { "name": "Terry Spencer", "speech": [ "We're through all that piece and now just got to get them back up after the storm." ] }, { "name": "Derek Walker", "speech": [ "Great. I appreciate it, guys. Thanks for the time." ] }, { "name": "Operator", "speech": [ "All right. Everyone, that looks like that will conclude our Q&A session today. I'd like to turn the floor back to Andrew for any additional or closing remarks." ] }, { "name": "Andrew Ziola", "speech": [ "OK. Thank you, Greg. Our quiet period for the first quarter of 2021 starts when we close our books in April and extends until we release earnings in later April. We'll provide details for the conference call at a later date.", "Thank you for joining us and have a good week." ] }, { "name": "Operator", "speech": [ "[Operator signoff]" ] } ]
OKE
2022-03-01
[ { "description": "Vice President, Investor Relations and Corporate Affairs", "name": "Andrew Ziola", "position": "Executive" }, { "description": "President and Chief Executive Officer", "name": "Pierce Norton", "position": "Executive" }, { "description": "Chief Financial Officer and Executive Vice President, Strategy and Corporate Affairs", "name": "Walt Hulse", "position": "Executive" }, { "description": "Executive Vice President and Chief Operating Officer", "name": "Kevin Burdick", "position": "Executive" }, { "description": "Well Fargo Securities -- Analyst", "name": "Michael Blum", "position": "Analyst" }, { "description": "President, Gathering and Fractionation", "name": "Sheridan Swords", "position": "Executive" }, { "description": "Senior Vice President, Natural Gas", "name": "Chuck Kelley", "position": "Executive" }, { "description": "J.P. Morgan -- Analyst", "name": "Jeremy Tonet", "position": "Analyst" }, { "description": "UBS -- Analyst", "name": "Brian Reynolds", "position": "Analyst" }, { "description": "Barclays -- Analyst", "name": "Theresa Chen", "position": "Analyst" }, { "description": "Tudor, Pickering, Holt and Company -- Analyst", "name": "Colton Bean", "position": "Analyst" }, { "description": "Sanford C. Bernstein -- Analyst", "name": "Jean Ann Salisbury", "position": "Analyst" }, { "description": "Goldman Sachs -- Analyst", "name": "Michael Lapides", "position": "Analyst" }, { "description": "Tuohy Brothers -- Analyst", "name": "Craig Shere", "position": "Analyst" }, { "description": "Truist Securities -- Analyst", "name": "Tristan Richardson", "position": "Analyst" }, { "description": "Seaport Global Securities -- Analyst", "name": "Sunil Sibal", "position": "Analyst" }, { "description": "Pickering Energy Partners -- Analyst", "name": "Michael Cusimano", "position": "Analyst" }, { "description": "Wolfe Research -- Analyst", "name": "Alex Kania", "position": "Analyst" } ]
[ { "name": "Operator", "speech": [ "Good day, and welcome to the fourth quarter 2021 ONEOK earnings call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Andrew Ziola, vice president of investor relations and corporate affairs. Please go ahead, sir." ] }, { "name": "Andrew Ziola", "speech": [ "Thank you, Jennifer. And welcome, everyone, to ONEOK's fourth quarter and year-end 2021 earnings call. We issued our earnings release and presentation that includes 2022 guidance after the market closed yesterday and those materials are on our website. After our prepared remarks, we'll be available to take your questions.", "Statements made during this call that might include ONEOK's expectations or predictions should be considered forward-looking statements and are covered by the safe harbor provision of the Securities Acts of 1933 and 1934. Actual results could differ materially from those projected in forward-looking statements. For a discussion of factors that could cause actual results to differ, please refer to our SEC filings. [Operator instructions] With that, I'll turn the call over to Pierce Norton, president and chief executive officer.", "Pierce?" ] }, { "name": "Pierce Norton", "speech": [ "Thanks, Andrew, and good morning, everyone. We appreciate your interest and investment in ONEOK. Thank you for taking the time to join us. We've got a lot to cover today.", "With me on the call today is Walt Hulse, chief financial officer and executive vice president, strategy and corporate affairs; and Kevin Burdick, executive vice president, chief operating officer. Also available to answer your questions are Sheridan Swords, senior vice president, natural gas liquids; and Chuck Kelley, senior vice president of natural gas. Yesterday, we announced strong fourth quarter and full year 2021 performance, recording our eighth consecutive year of adjusted EBITDA growth. That equates to a 13% annual growth rate during that 8-year period, highlighting the stable and resilient earnings power of our assets despite various economic and commodity cycles.", "In 2021, during a year of continued economic recovery and lingering pandemic-related challenges, we grew adjusted EBITDA 24% compared with 2020, continue to strengthen our balance sheet, and achieved record natural gas and NGL volumes on our Rocky Mountain region assets. 2021 provided other milestones as well, including our announcement of a greenhouse gas emissions reduction target, receiving an upgraded AA ESG rating from MSCI, and once again receiving a perfect score in the latest Human Rights Campaign Corporate Equality Index. These are only a few of the many great things we're doing as a company to ensure ONEOK remains a great workplace, community partner, and service provider. With yesterday's earnings announcement, we also provided 2022 financial and volume guidance expectations.", "We expect increasing producer activity and improving market demand to drive strong volume and earnings growth across our operations. As we've said before, we are well-positioned financially and operationally in 2022 and for many years to come. Before I hand the call over to the team for more details on 2022, I'd like to reiterate what makes ONEOK so uniquely well-positioned for the long term. First, our extensive and integrated assets, which are located in some of the most productive U.S.", "shale basins. Our customers are well-capitalized with decades of proven reserves and many have announced plans to sustain and grow production levels in 2022. In the Williston Basin, in particular, steady crude oil production still means NGL and natural gas growth for ONEOK due to rising gas to oil ratios. Second, our dedication to safe, reliable, and environmentally responsible operations.", "Our commitment to safety in the environment is a core value for ONEOK. It's critical for us to be safe and reliable service provider, and we strive to be a good partner in the areas where we operate. Our ESG-related performance is a source of pride for ONEOK, and we're committed to continuing to make progress. Third, our strong balance sheet and investment-grade credit ratings, which provides significant financial flexibility.", "We've reduced our leverage to below four times and continue to drive that lower, providing optionality for the future cash flows and investor returns. Fourth, our built-in operating leverage and proven track record of disciplined and intentional growth. After completing more than $5 billion of capital growth projects prior to the pandemic, our systems have significant capacity to grow alongside the needs of our customers. And because of our large infrastructure projects are complete, we now have opportunities for short-cycle, bolt-on-type projects at attractive returns.", "Fifth, the resilience and increasing demand for natural gas and NGLs. We deliver energy products and services that are vital to an advancing world, and we believe these resources will play an important role in the energy transformation. And finally, the depth and experience of this management team who have a proven track record and extensive experience. This team has been through commodity cycles, adapted business models, and adopted significant changes in technology and innovation over the years.", "This team continues to grow our core business and advance our company forward. It is because of these factors and the segment-specific drivers the team will discuss in a moment that I have such confidence and excitement for ONEOK's future. With that, I'll turn the call over to Walt for discussion of our financial performance." ] }, { "name": "Walt Hulse", "speech": [ "Thank you, Pierce. ONEOK's fourth quarter and full year 2021 net income totaled $379 million and $1.5 billion, respectively. Adjusted EBITDA for the same periods totaled $847 million and $3.38 billion, respectively, representing year-over-year increases of 14% for the fourth quarter and 24% for the full year. Our December 31 net debt-to-EBITDA was just below four times, passing through an important marker and our continued deleveraging strategy.", "We continue to prioritize reducing leverage below four times and view three and a half times or lower as our long-term aspirational debt-to-EBITDA goal. In 2021, we reduced our total outstanding debt more than $600 million by proactively paying off nearly $550 million of maturing debt on November 1 with cash on hand and being opportunistic with open market repurchases earlier in 2021. We currently have no debt maturities due before the fourth quarter of 2022. Fourth-quarter results reflect volume growth in our Rocky Mountain region that was offset by higher operating costs.", "These higher costs were driven by discretionary employee-related benefit costs and expenses related to planned O&M maintenance projects completed in the fourth quarter in our natural gas liquids and our natural gas pipeline segment. As Pierce mentioned, with yesterday's earnings announcement, we provided 2022 financial guidance, including a net income midpoint of $1.69 billion and EPS of $3.76 per diluted share. We also provided an adjusted EBITDA range of $3.5 billion to $3.8 billion, with $3.62 billion as our midpoint, representing a 7% increase compared with 2021. We expect double-digit earnings growth at the midpoints for both the natural gas liquids and natural gas gathering and processing segments, driven by higher volume expectations across our operations.", "Kevin will provide more detail on our volume outlook. In our natural gas pipeline segment, we expect earnings to be stable year over year when adjusting for Winter Storm Uri in the first quarter of 2021. Our 2022 guidance assumes producer activity associated with WTI crude oil prices in the low $70 range. Sustained higher prices could lead to more activity and a quicker volume ramp, which could drive earnings toward the higher end of our guidance range.", "We expect total capital expenditures of approximately $975 million, which includes growth and maintenance capital. This midpoint reflects the investments necessary to keep up with the expected increase in producer activity and volume expectations, including investments to complete Demicks Lake 3 in early 2023 and MB-5 in mid-2023. Our routine growth capital accounts for a higher number of well connects and other high-return routine growth projects, such as pump stations, compression expansions, and other debottlenecking projects to meet our customer needs. Our guidance also assumes the impact of inflation.", "As we've mentioned previously, we have escalators on many of our natural gas liquids and gathering and processing contracts. These are typically tied to either CPI or PPI indexes and provide protection from rising costs. We expect these types of escalators to keep pace or exceed inflationary costs as we move forward. I'll now turn the call over to Kevin for an operational update." ] }, { "name": "Kevin Burdick", "speech": [ "Thank you, Walt. Fourth-quarter volumes continued to show strength, particularly in the Rocky Mountain region, where processed volumes increased 5% and NGL volumes increased 6% compared with the third quarter of 2021. Natural gas processed volumes in the Mid-Continent increased in the fourth quarter compared with the third quarter as we've seen -- as we've continued to see more activity in the region, while NGL volumes in the Mid-Continent decreased due to some reduced third-party volumes and lower ethane recovery levels. Overall, for 2021, natural gas and NGL volumes saw significant increases from 2020 levels.", "We saw record natural gas and NGL volumes on our Rocky Mountain region assets with significantly higher activity in rising gas to oil ratios. In the fourth quarter alone, our team connected 130 wells, nearly doubling the amount from the third quarter for a total of more than 320 in 2021. A great accomplishment for our team in meeting the needs of our customers and continuing to provide momentum into 2022. Now taking a closer look at 2022.", "At the midpoint, our volume guidance would result in an 8% increase in total NGL volumes and an 11% increase in total natural gas processing volumes compared with 2021. These higher expectations are supported by increasing producer activity, volume growth from recently completed ONEOK and third-party projects, rising gas to oil ratios in the Williston Basin, and ethane recovery opportunities across our NGL system. With the recent completion of our Bear Creek plant expansion, we are already seeing increasing volumes from Dunn County, and we expect the plant will continue to ramp up over the next two to three years. However, with activity levels in the area consistently outpacing our expectations, we could be looking at an even quicker ramp.", "In the natural gas liquids segment, we expect continued volume growth from our existing customers and from new third-party plant connections. In the Williston Basin, volumes are expected to increase compared with 2021, supported by higher activity levels and recently completed and expanded processing plants. The Mid-Continent also continues to pick up, particularly from private producers with very recent activity levels providing potential tailwinds not fully factored into our guidance expectations. Our NGL system is connected to more than 90% of the natural gas processing plants in the Mid-Continent.", "So any increased producer activity in the region is likely to provide NGL volume to ONEOK, regardless if the activity is on our gathering and processing dedicated acreage. In the Permian Basin, we expect double-digit NGL volume growth on our West Texas NGL pipeline compared with 2021, driven by increased volumes in the Midland and Delaware basins. The volume growth is primarily from long-term contracts entered into a few years ago as well as new contracts we have recently signed. Switching to ethane.", "Demand continues to increase with more than 300,000 barrels per day of incremental demand expected to come online in 2022 from new and expanding petrochemical facilities and from growth in exports. Our NGL volume guidance assumes full ethane recovery in the Permian Basin and partial Mid-Continent recovery throughout the year. We've assumed no full rate Rocky Mountain region recovery. However, we do anticipate opportunities to incent some recovery.", "This opportunity will fluctuate throughout the year, but a conservative amount is assumed in our 2022 guidance. Moving on to the natural gas gathering and processing segment. We expect volume growth this year in both the Rocky Mountain and Mid-Continent regions. In the Rocky Mountain region, we expect processed volumes to grow 15% at the midpoint compared with 2021 and average nearly 1.5 billion cubic feet per day in 2022.", "Just five years earlier, in 2017, volumes totaled 830 million cubic feet per day. That's an approximately 12% annual growth rate over the last five years, while crude oil production has increased in the low single digits. Accordingly, GORs have increased nearly 70% during that same time period. The Williston Basin remains resilient and highly productive.", "Producers continue to gain efficiencies as they drill in this proven and highly economic region, and the core of the basin is expanding. The North Dakota Pipeline Authority recently estimated that in the last two years alone, more than 7,000 drilling locations have been added to inventory that are profitable at $60 per barrel. This is consistent with what our customers are telling us, as most of them still have decades of inventory remaining. There are currently 33 rigs and 10 completion crews operating in the basin with 15 rigs and five completion crews on our dedicated acreage.", "This is more than enough activity to grow gas production on our acreage, and we expect that as DUCs are completed through the spring, rigs across the basin will increase. As we've said previously, approximately 14 to 15 rigs, which can drill around 300 wells per year, is enough to maintain 1.4 billion cubic feet per day of production on our system. Any additional rigs combined with the rising gas to oil ratios of wells already connected to our system would provide additional volume growth. Additionally, more than 475 DUCs remain basinwide with more than 250 on our dedicated acreage.", "We expect to connect 375 to 425 wells in the region this year. In the Mid-Continent region, activity continues to increase. We expect processing volumes in the region to increase compared with 2021, and we expect to more than double our well connections in 2022 to 30 to 50 wells compared with 15 last year. In the natural gas pipelines segment, we expect transportation capacity to be approximately 95% contracted and earnings to remain nearly fully fee-based in 2022.", "Following a successful open season in 2021, we're in the process of expanding our Texas natural gas storage capacity by 1.1 billion cubic feet, which will increase our total systemwide storage capacity to more than 53 billion cubic feet. We continue to work with customers seeking additional long-term transportation and storage capacity on our system, which remains highly valued as these critical services are used year around. Pierce, that concludes my remarks." ] }, { "name": "Pierce Norton", "speech": [ "Thank you, Kevin, and thank you, Walt. Strong financial and operating results in 2021 have provided momentum for another year of growth. We continue to benefit from our interconnected systems, built-in operating leverage, and the ability to incrementally grow with our customers. We continue to invest in our core businesses, remaining focused on optimizing our assets and staying dedicated to operating responsibly and reliably.", "Service is another one of ONEOK's core values, and it is something that our more than 2,800 employees know very well. Through 2021, they worked tirelessly through severe weather events like Winter Storm Uri to serve our customers and continue delivering the vital energy products necessary for the global economy to run. Our employees' dedication to meeting customers' needs while operating safely and responsibly, enabled our strong 2021 performance and has set us up for another year of growth in 2022. With that, operator, we're ready to answer questions." ] } ]
[ { "name": "Operator", "speech": [ "Thank you. [Operator instructions] And our first question today comes from Michael Blum with Wells Fargo." ] }, { "name": "Michael Blum", "speech": [ "Thanks. Good morning, everybody. I wanted to go back to the comments on incentivized ethane recovery in 2022. Can you just give us a sense of what's going to drive that? And have you changed the rates directionally that you're charging on that incentivized ethane?" ] }, { "name": "Sheridan Swords", "speech": [ "Michael, this is Sheridan. What we -- as we said before, what drives that is the difference between natural gas prices in the Bakken compared to ethane prices in Mont Belvieu. And so what's going to drive that rate higher is if we see that spread continue to wide, we will incentivize more ethane out of the Bakken to capture that spread. So it's not -- we're not putting out a new tariff or reducing TNF fees, we're actually literally capturing gas price to ethane prices, which today is widened out wider than what we saw in '21." ] }, { "name": "Michael Blum", "speech": [ "OK. Great. I appreciate that. And then just maybe a related question, can you give us your latest thoughts on the -- some of the proposed, including your own natural gas pipeline expansion projects out of the Bakken? Do you think we're getting closer to a place where we're going to need some more gas capacity?" ] }, { "name": "Chuck Kelley", "speech": [ "Yes, Michael, this is Chuck. I do and we do, we believe that the Bakken will need some resolute takeaway, let's say, in the next, call it, three years, either side of that. And as you may have heard on TC Energy's call, they said don't be surprised if you see an open season this spring. And frankly, I think all stakeholders, processors, pipelines, and producers realize the decision probably needs to be made this year to effectuate that time line.", "So between Northern Border's Bison Express pipeline and some underutilized pipelines in the Powder River Basin, I think we'll be able to go ahead and manage that egress." ] }, { "name": "Operator", "speech": [ "Our next question will come from Jeremy Tonet with J.P. Morgan." ] }, { "name": "Jeremy Tonet", "speech": [ "Hi. Good morning. Just wanted to pick up on the Bakken a little bit here, I guess, more thoughts about NBPL in heat content and given kind of the trajectory here, just wondering if you could walk us through, I guess, procedurally next steps if it's viewed that the heat content would get too high and there would need to be adjustments in the rate or less ethane accepted? Or just any thoughts you could share there?" ] }, { "name": "Kevin Burdick", "speech": [ "Yes, Jeremy, it's Kevin. Yes, that phenomenon still exists. If you -- if we rewind a little bit pre-COVID, we were bumping up against those -- some BTU downstream challenges. And there was a lot of discussion in the basin and Northern Border had proposed a new tariff that ultimately got denied and FERC asked the pipe to go back and work with shippers, work with markets to produce a little more information.", "COVID hit and it really reduced the volumes back to where it wasn't an issue. If you look at gas production or gas capture in the Bakken today, we are back up to the pre-COVID levels. So the only thing that's keeping that problem from being persistent is the ethane that we're recovering on an incentivized basis, which is reducing the heat content. If that market turns around and we don't incent ethane, then that's going to raise the BTU content back on border to the levels we were seeing pre-pandemic.", "So absolutely -- Northern Border, it continues to have those conversations. It's our understanding, they will go back to FERC with a recommendation sometime this year. But in the meantime, we've proven if we do end up with a heat content issue, we can always recover ethane to make that OK, the BTU spec back OK on the pipe. But if that's a forced ethane recovery because of a BTU limit, that would be at full rates." ] }, { "name": "Jeremy Tonet", "speech": [ "Got it. That's a helpful context there. And maybe just kind of pivoting toward the guide for a minute here, and thanks for kind of listing some of the puts and takes. But just was curious if we think about kind of the formation of the guidance, I imagine this was informed last night, and it was formed a little while ago.", "And if you kind of overweigh the world today as we see it within how that applies to the guidance range. Could you provide any color there? Would that put you guys kind of at the high end? Or any other thoughts on what's happening today? And how that covers, I guess, where you could fall in the guidance range?" ] }, { "name": "Pierce Norton", "speech": [ "Jeremy, this is Pierce. I think given our asset capacity that we have today and then given kind of the backdrop that you described, which has improved demand and improved commodity prices, it is really what's kind of driving this volume metric growth, and we all know that volume impacts us. I'd probably say that our outlook today is as good or better than our guidance midpoint." ] }, { "name": "Operator", "speech": [ "And we'll hear next from Brian Reynolds with UBS." ] }, { "name": "Brian Reynolds", "speech": [ "Hi. Good morning, everyone. Maybe just a follow-up on the guidance and talking about the upper end of the guidance range, which we seem to be pointing toward. Just kind of curious if you can help me reconcile the upper end of the G&P growth versus the NGL throughput.", "It seems like G&P growth is a little bit higher. Just kind of curious if you can give a little bit more commentary around ethane recovery assumptions. Are you assuming a little bit of ethane rejection into '22? Or is that just kind of a conservative estimate with ethane recovery to the upside?" ] }, { "name": "Sheridan Swords", "speech": [ "Brian, this is Sheridan. I think what you need to look at is, on the G&P side, what we noted in our release was that an increase in the Rocky Mountain region. On the NGLs, the increase was across our regions. And one of the big contributors to that is the Mid-Continent is growing less than 8%.", "So that's bringing down the average for our NGL segment. And also in our guidance, we have less incentivized ethane than we did in 2021. So that's another reason that you brought it down a little bit as well." ] }, { "name": "Brian Reynolds", "speech": [ "Great. Really appreciate that color. And as a follow-up just on capital allocation. The high end of the guide kind of implies '22 leverage exiting there 3.5.", "Just curious if you could talk about the evolution of the long-term leverage target? And how we should think about future opportunities around return of capital as we get into the end of the year and end of '23?" ] }, { "name": "Walt Hulse", "speech": [ "Well, we're very pleased with how we've progressed on our leverage metrics and that we broke through that four times and are heading in the direction, as you mentioned. I think that as I said on the last call, we're trying to triangulate between a couple of different metrics and just not entirely focused on the debt-to-EBITDA metric. We're also focusing on a dividend payout ratio. As you see at the guidance, we're starting to break under 100%.", "And that's trending, again, also in the right direction. And we'd like to see that get some room under that 100% as we look and think about capital in the future. But there's no doubt that our flexibility as we move forward and these metrics get in line continues to broaden and be a little bit more flexible. And we'll look at that as the year and going into '23 progress." ] }, { "name": "Brian Reynolds", "speech": [ "Great. Appreciate the color. Have a great day, everyone." ] }, { "name": "Operator", "speech": [ "And our next question comes from Theresa Chen with Barclays." ] }, { "name": "Theresa Chen", "speech": [ "Morning. I was wondering if you wouldn't mind providing some incremental color on your production outlook, on the projection outlook in your areas of service, into 2022, and maybe beyond as well as the GOR outlook." ] }, { "name": "Kevin Burdick", "speech": [ "When you say production, Theresa, are you talking about the crude productions as we see it? Or --" ] }, { "name": "Theresa Chen", "speech": [ "By our customers." ] }, { "name": "Kevin Burdick", "speech": [ "By our customers?" ] }, { "name": "Theresa Chen", "speech": [ "Yes." ] }, { "name": "Kevin Burdick", "speech": [ "I mean we think about crude -- yes, we think about crude production in the flat -- excuse me, in the Bakken, it's going to be -- we believe it will grow slightly. I mean we don't think it's going to grow at 10%, but we do believe there will be some level of growth based on what our customers are telling us and the completions that we see on schedules, etc. With that crude production growth, we obviously then believe our gas production is going to grow at the percentages that we've outlined previously. So I guess that's how we're thinking about that, STACK/SCOOP going down the Mid-Continent.", "This is one that we've been saying flat to slightly declining. However, with the recent activity pick-up, we're probably looking at it in a slight increase type environment. I think that's consistent with what some others have said on their calls as well with some of the recent information. And obviously, the Permian is going to grow and has shown growth, and we believe we'll continue to get our fair share with both our West Texas LPG asset and our OWT system out there.", "So we believe we can participate in that growth in the Permian." ] }, { "name": "Theresa Chen", "speech": [ "Got it. And would you mind just sharing what kind of commodity price assumptions underlie your 2022 guidance?" ] }, { "name": "Kevin Burdick", "speech": [ "Well, that's where Walt mentioned as we look at activity levels and things like that, we were using a low $70s-type number for crude for '22. As we think about the rest of the commodities, we've driven so much exposure of -- the commodity exposure out of our business and with how we contract, we really -- that doesn't have a huge impact to us. I mean, it is a little bit of a tailwind right now at these prices. But it was definitely back if you think of crude in that $70 environment, that would be the associated NGLs and gas prices that we would have been looking at." ] }, { "name": "Operator", "speech": [ "And we'll hear next from Colton Bean with Tudor, Pickering, Holt & Company." ] }, { "name": "Colton Bean", "speech": [ "Good morning. So I think you may have just touched on this. But with the 2022 G&P guidance, it looks like EBITDA per Mcf is effectively flat year on year. Fee rate is guided to a similar range.", "So it sounds like part of that -- well, I guess, just broadly, could you walk us through why unit margins would be flat if the Bakken is comprising a greater share of volumes? And then it sounds like commodity margin, that may be skewed a bit by a price deck, but it seems like for both hedged and unhedged volumes, you'd have a better outcome there." ] }, { "name": "Kevin Burdick", "speech": [ "Colton, are you talking about specifically about G&P? Or are you talking about overall? I'm not sure we followed exactly what you're asking there." ] }, { "name": "Colton Bean", "speech": [ "Just the G&P segment specifically. Yes, looking at the G&P segment, if I just take the G&P EBITDA versus volumes, it looks like EBITDA per Mcf, so on a unit basis, is kind of flattish. But I would have thought that the fee rate would have seen some escalation with the Bakken growing as quickly as it is. And then on the commodity side, it sounds like that may be partially attributable to a difference in price deck." ] }, { "name": "Chuck Kelley", "speech": [ "One thing -- excuse me, Colton, this is Chuck. One thing I would add is, we've seen our volume guidance -- obviously, our volumes are up year over year. And as part of that, we do have some percentage of proceeds exposures, roughly, call it, 15%, 18%. And at these volumes and these prices, you have a larger commodity piece contribution to our EBITDA.", "So the $1 to $1.05 average fee rate is across our segment. Obviously, the Bakken is higher. So I'm not necessarily following your question." ] }, { "name": "Kevin Burdick", "speech": [ "Colton, I think another thing that's factored in there is just we've seen that fee rate bounce around periodically quarter to quarter. So we're giving you -- we're doing our best to give you the average for the year, that fee rate can move around depending on specific producer characteristics. So if a producer that has more of a POP contract with a lower fee, all of a sudden completes a bunch of wells in one given quarter, that can actually move that fee rate down. So what you're getting there is a blend, but it's going to bounce around quarter to quarter." ] }, { "name": "Colton Bean", "speech": [ "Yes. No, understood. You can follow up for that. I think looking at it from a high level, it just looks like the EBITDA per M is relatively flat.", "So with both commodities and Bakken growing was a bit confused there, but can follow up on that. And then just on the opex side of things, I know you mentioned compensation factored into that. So can you give us an idea of how you'd expect that to progress relative to Q4 levels?" ] }, { "name": "Kevin Burdick", "speech": [ "Well, I think Q4, obviously, as Walt mentioned, had a couple of anomalies with the higher employee costs that were discretionary in the timing on some of our expense projects. If you think about '22 relative to '21 and look at a run rate, you're going to have a full year of Bear Creek 2 from a -- and you'll see increased costs just with increased volumes, which we'll see. And then lastly, you will see some level of -- I'm sorry, I just lost my train of thought here. Those are the two big drivers we'll see.", "And then -- but from a timing perspective, historically, our expenses, you'll see that kind of grow over the year just related to the timing of a lot of the expense projects we'll do in the summer-fall and then trying to get them done by the end of the year. Does that help you?" ] }, { "name": "Colton Bean", "speech": [ "It does, yes." ] }, { "name": "Operator", "speech": [ "And our next question comes from Jean Ann Salisbury with Bernstein." ] }, { "name": "Jean Ann Salisbury", "speech": [ "Hi. Good morning. I had a question about Mid-Continent guidance. It looks like you're projecting basically flattish gathering and processing volumes in 2022 versus 2021, in the Mid-Con, but you're connecting many more wells than you did in 2021.", "Are you expecting much more oil-directed drilling? Or is it a timing thing? Or am I totally missing something else?" ] }, { "name": "Chuck Kelley", "speech": [ "Jean Ann, this is Chuck. No, we see an increase of -- I think our volume guidance came up roughly 2%. We actually, I think that might be a little light, it might be more like 3% to 5%. So we did guide on volume slightly higher than our actuals from last year.", "And we do have good line of sight to the 30 to 50 well count that we put out in guidance right now. We've got four rigs operating on our acreage, well-capitalized public's behind that with a couple of privates coming in Q2 and early Q3. So I would say that our Mid-Continent volumes will be up, obviously, relative to 2021." ] }, { "name": "Jean Ann Salisbury", "speech": [ "OK. That's helpful. And then how are you thinking about the timing of Elk Creek expansion? Would you need both Bakken pipes to be approaching full or just Elk Creek to be basically full and Bakken doesn't have to be sold to pursue it?" ] }, { "name": "Sheridan Swords", "speech": [ "Jean Ann, this is Sheridan. When we think about Elk Creek expansion, Really, we do look at them both together. So we both look at Elk Creek and the Bakken pipeline to understand when we need to expand. And really, the next expansion on Elk Creek will come on what we call the east-west portion as we see sustainable volume that has to be delivered to OPPL.", "As we optimize that, we may decide to increase the pumps on that east-west section so that we can move on, back off OPPL, to optimize our earnings. So that's kind of what we look at when we are going forward. So right now, we feel with the Bakken, OPPL connection and Elk Creek, we have plenty of capacity to meet our customers' needs, and it's just going to be an optimization when we expand." ] }, { "name": "Jean Ann Salisbury", "speech": [ "Great. Thanks. That's all for me." ] }, { "name": "Operator", "speech": [ "And our next question comes from Michael Lapides with Goldman Sachs." ] }, { "name": "Michael Lapides", "speech": [ "Hey, guys. Thank you for taking my questions. Just curious, cost of everything in the world's up, meaning commodity --" ] }, { "name": "Pierce Norton", "speech": [ "Michael, we could barely hear you." ] }, { "name": "Michael Lapides", "speech": [ "Can you hear me now?" ] }, { "name": "Pierce Norton", "speech": [ "There you go. Perfect." ] }, { "name": "Michael Lapides", "speech": [ "Real quick. Cost to everything is up. Inflation's rough out there, steel, labor, etc.. Can you talk about that trend that's impacting kind of all industries? And whether that's had an impact on your capital budget? So if we look at your capex forecast, are you seeing changes at all in which original expectations for either MB-5 or Demicks were? Or the average cost for every new well connect relative to what it cost in maybe 2021 or 2020?" ] }, { "name": "Kevin Burdick", "speech": [ "Michael, it's Kevin. Not significantly, and those numbers are baked into the guidance as we think about it. Related to Bear Creek 2 and Demicks Lake 3, we were so far down the road on those projects that when you think about steel and a lot of the materials, a lot of that stuff was already purchased, bought on site, in many cases, installed at the site. Since that time, we've gone out and recontracted everything, rebid everything and we're not seeing anything that would cause us to deviate from where we're -- what we articulated from a cost standpoint.", "We are seeing probably a little tick up, as everybody else is, on just kind of your general materials and services. But so far, nothing that would be outside of what we would consider norms that -- and the philosophy is developed when we put the guidance together." ] }, { "name": "Michael Lapides", "speech": [ "Got it. Meaning you're not seeing a lot of pressure in the cost to do new well connects relative to what you've seen over the last couple of years." ] }, { "name": "Kevin Burdick", "speech": [ "No. I mean there may be a minor uptick in some of the prices, again, of the materials. But again, all that's baked into what we've got from our growth and maintenance capital budget." ] }, { "name": "Michael Lapides", "speech": [ "Got it. And then when we think about the capital budget for this year, really, the impact of MB-5, is the bulk of the spend on that frac in this year and there's just a little trickle in the next year? Or is it more evenly weighted across the years?" ] }, { "name": "Kevin Burdick", "speech": [ "Well, I think it will be -- your heavier spend will be this year and early next year. We do believe both MB-5 and Demicks Lake 3 will be completed early in the quarters that we provided out there, and we're doing everything we can to accelerate them even more because we'd like to have that capacity available and some of that's factored into the guidance expectation as well." ] }, { "name": "Michael Lapides", "speech": [ "Got it. Thank you, guys. Much appreciated." ] }, { "name": "Kevin Burdick", "speech": [ "You bet." ] }, { "name": "Operator", "speech": [ "And we'll go next to Craig Shere with Tuohy Brothers." ] }, { "name": "Craig Shere", "speech": [ "Hi. Congratulations on the ongoing progress here. With regards to the realized NGL pricing, I'm sorry if I missed it, but it seems like the Rockies was just $0.01 lower sequentially. And I was wondering to what degree is that just random fluctuation or it reflects the level of incentivized ethane? Or does it impact maybe some volumes actually starting to increase all the PRB?" ] }, { "name": "Kevin Burdick", "speech": [ "No, Craig, this is Kevin. That realized NGL pricing, I think you're referring to on the G&P side. That's just a function. It does include our hedges in there, which is what is -- what pulled that down slightly from Q3, I think, is what you're referring to.", "So it's just a function of all our hedges getting lumped in with what's going on the prices. It's gotten nothing to do with the NGL --" ] }, { "name": "Craig Shere", "speech": [ "I was talking about the $0.25 versus the $0.24." ] }, { "name": "Kevin Burdick", "speech": [ "On the Elk Creek or the Rockies rate? Yes, that is a function of the incentivized ethane. So that drop in a penny has nothing to do with anything contractually that's going on. It's purely the incentivized ethane." ] }, { "name": "Craig Shere", "speech": [ "Gotcha. And you all have been talking about for some time, 25 rig connections or well connections among 300 a year in the Williston, pretty much holding volumes flat. But you've kind of been saying that over a couple of quarters, the volumes have been increasing. And at the same time, GORs, GPMs and overall well productivity keeps improving.", "If we're thinking about over 1.5 year-end run rate, do you think -- what are the prospects that an even more subdued rate of well connects, say, 300 versus the 422 guidance, could keep that higher level of production flat versus what we had seen in the third quarter?" ] }, { "name": "Kevin Burdick", "speech": [ "Yes, Craig, this is Kevin. I do think that's possible. We continue to be surprised. I think, as I said in my remarks, producers continue to get better and better.", "So as each well gets more prolific and as the gas to oil ratios continue to increase, that just means you're going to need fewer wells to hold production flat. Now we'd like to see obviously the same capital deployed and grow production. But at the pace we're going on right now, that's been a trend over the last several years, as each year, it seems like the same number of wells will allow us to stay flat even though the baseline keeps getting larger. So that trend could absolutely continue." ] }, { "name": "Operator", "speech": [ "And next question comes from Tristan Richardson with Truist Securities." ] }, { "name": "Tristan Richardson", "speech": [ "Hi. Good morning, guys. Just one from me. Just thinking about 2023 and beyond and your large projects, clearly, there's a lot of cost advantages in resuming these projects.", "And if you think about the volume ramp on projects once online, can you talk about maybe the return on capital advantages or incremental return on capital for this year's budget, maybe relative to previous returns on capital or historical returns on capital?" ] }, { "name": "Walt Hulse", "speech": [ "Tristan, there's no doubt that we continue to see an upward trend in our return on invested capital, and that really comes back to the operating leverage, that we're seeing growth and we don't have to put capital, meaningful capital, into our pipeline assets that we built. Obviously, a pump station here or there as volume grows, but that operating leverage has year-over-year continues to fall to the bottom line, and we have enjoyed and expect to continue to enjoy increasing return on invested capital going forward." ] }, { "name": "Tristan Richardson", "speech": [ "Appreciate it. Thank you." ] }, { "name": "Operator", "speech": [ "And our next question comes from Sunil Sibal with Seaport Global Securities." ] }, { "name": "Sunil Sibal", "speech": [ "Yes. Hi. Good morning, folks, and thanks for the clarity. Just a couple of follow-ups.", "First of all, it seems like the well completion activity in Rocky Mountain was very strong in Q4. I was curious if you can talk about what kind of cadence we should see in volume growth in that region, especially considering that typically, Q1 also sees some weather events? So should we be thinking of a little bit of a subdued growth in Q1 despite this strong well completions and then a ramp up? Or should we be expecting some other trends?" ] }, { "name": "Chuck Kelley", "speech": [ "Sunil, this is Chuck. What I'd say about our well connect cadence for 2022, in some ways, it resembles 2021. We had, as you said, a lot of momentum, 130-plus well connects coming out of Q4. 2022 is more back weighted to Q2 and Q3, just as it was in 2021.", "We did have some momentum, obviously, carry into here -- into Q1 this year. Q2, typically, it's a little dip every year because of frost laws and the weather spring. But -- so the cadence would be more back weighted to Q3 and 4. Volumes associated with that would probably resemble the well connect activity." ] }, { "name": "Sunil Sibal", "speech": [ "Got it. And then one follow-up on the cost issue. I realize that Q4 seems like, sequentially, the costs were up about $25 million or so versus Q3. What's a good way to kind of think about that breakdown in onetime costs versus kind of ongoing costs?" ] }, { "name": "Walt Hulse", "speech": [ "Well, like I said, if we just -- I guess the way to think about it, if we look at kind of the full year 2021, I do think our costs will be up a little bit in 2022, just overall. I mentioned before, you'll see a full year of Bear Creek II. The other item I forgot to mention earlier was taxes. You'll see we'll have an increase in our ad valorem taxes in '22 versus '21, so those type of things.", "And then just the ongoing volumetric costs that are associated with the volumetric growth, which we'll see with the growth we're seeing across our system." ] }, { "name": "Sunil Sibal", "speech": [ "Got it. Thanks for the books." ] }, { "name": "Operator", "speech": [ "Our next question comes from Michael Cusimano with Pickering Energy Partners." ] }, { "name": "Michael Cusimano", "speech": [ "Hey. Good morning, everyone. Most of my questions have been answered, but if you can just talk about the progress that you've made in adding plant connections in the Permian? And then maybe what you view as your competitive advantage there, and if that's a growth area from here? And then lastly, just if you have looked at any acquisitions in order to, I guess, inorganically grow your footprint there?" ] }, { "name": "Sheridan Swords", "speech": [ "Michael, this is Sheridan. When we look at the Permian, we still continue to be very competitive because we continue to sign up more people. A lot of our competitive advantages, we have a pipe in place there today. We're connected to a lot of the unintegrated players that want an alternative source.", "We also have cheap expansions on our system that we can continue to grow. So we can continue to provide a competitive alternative to other people out in the basin, and we see that because our volumes continue to grow. We're seeing -- as we mentioned, we're seeing double-digit growth. We're also seeing growth from people we've already contracted.", "As the volume out there grows on their system, it comes to our system. And we have long-term contracts in place, as we do in every other place. On the M&A question --" ] }, { "name": "Pierce Norton", "speech": [ "So, Michael, I'll weigh on that. This is Pierce. I mean, yes, we do look at M&A opportunities in all of these basins. We kind of drop them into kind of two categories, a defensive kind of play versus a proactive look at it.", "As it relates to looking at these, when you look at -- especially in our NGL business, when you look at the length of our contracts in a lot of these places and you look at maybe the prices that you have to pay to get the G&P opportunities that feed the NGL business, then we just don't see that as being maybe a place where we would deploy our capital when you look at it as the benefit to our shareholders. So yes, we look at them, but so far, we hadn't found anything that we think is attractive there." ] }, { "name": "Michael Cusimano", "speech": [ "Great. Thank you." ] }, { "name": "Operator", "speech": [ "And our next question comes from Alex Kania with Wolfe Research." ] }, { "name": "Alex Kania", "speech": [ "Hey. Good morning. Maybe two questions. First is, just I was thinking about the headroom on the kind of your pipeline infrastructure out of the Rockies.", "And could you remind us, maybe you said it, I might have missed it on the call, but you're at 335,000 bpd in Q4, sort of, what's the expectation of that going as you're assuming for 2022? And the second question would be, if you could maybe talk a little bit just about the kind of commodity components of the POPs. Kind of, what price deck were you assuming when you were talking about kind of the outlook for the G&P business for this year?" ] }, { "name": "Sheridan Swords", "speech": [ "Alex, this is Sheridan. As we think about capacity on Elk Creek in the Bakken, as I said, if we think about them together, we currently have a 440,000 barrels a day of capacity. As you said, we're running in the 330,000 to 350,000 range today. We see that -- we're having plenty of capacity for the period of time now.", "A lot of that we had incentivized ethane on there as well. So we also we're pulling that into that. So we think we have plenty of capacity on that system going forward for a period of time, and we can take it up another 100,000 barrels a day pretty easily, just adding some additional pumps in a very short period of time. So we feel very comfortable with our capacity coming out of the Rockies." ] }, { "name": "Kevin Burdick", "speech": [ "And, Alex, on the question about the POPs, we provided that earlier. We're -- again, we're thinking about it in a low $70-type crude environment. If you go back and look at what NGL prices were doing when crude was kind of in that range, that gets you in the ballpark, and then gas, kind of that same one. It had being in the upper threes, upper $3-type number.", "The other thing to remember when you're thinking about the POP is, we are about 75% hedged when you look at it in the -- for those POP contracts in 2022. So there's really just not a lot of commodity exposure left when you factor in the impact of the hedges as well." ] }, { "name": "Operator", "speech": [ "And our last question today will come from Jeremy Tonet with J.P. Morgan." ] }, { "name": "Jeremy Tonet", "speech": [ "Thank you for squeezing me back in here. Just a real quick question. Our conversations with regulators in North Dakota leads us to see a lot of emphasis on the potential for carbon capture and state policy as well as really kind of support this development. And North Dakota being only one of two states that has Class 6 primacy that allows CO2 wells to be developed at the pace the state set there, kind of sets them apart from others.", "And also, you have the Summit pipeline pointing toward North Dakota in progress there. Just wondering, any updated thoughts that you have -- that ONEOK has on carbon capture, and could this be something that realistically enters the fold at some point? Do you have any visibility here?" ] }, { "name": "Kevin Burdick", "speech": [ "Yes, Jeremy, it's Kevin. Yes, this is something we are actively involved in, in conversations with state officials with other private entities, etc., for opportunities. We've had a few conversations with them so far, and we've got conversations scheduled with them in the very near future to have discussions around that. I do think there are some opportunities when you look at -- that's what we do, right? We've got a lot of -- we know how to process things.", "We know how to build pipelines, and we know how to store things. And so I think there's opportunities. It's just finding the right partners up there and getting the right opportunities before we pull the trigger on something, but it's definitely something we're actively working on." ] }, { "name": "Jeremy Tonet", "speech": [ "Got it. That's helpful. I'll leave it there. Thank you." ] }, { "name": "Operator", "speech": [ "And this concludes our question-and-answer session. Mr. Ziola, I'd like to turn the conference back to you for any additional or closing remarks." ] }, { "name": "Andrew Ziola", "speech": [ "All right. Thank you, Jennifer. Our quiet period for the first quarter starts when we close our books in April and extends until we release earnings in early May. We'll provide you details for that conference call at a later date.", "Thank you for joining us, and the IR team will be available throughout the day. Thank you, all." ] }, { "name": "Operator", "speech": [ "[Operator signoff]" ] } ]
OKE
2019-05-01
[ { "description": "Vice President of Investor Relation and Corporate Affairs", "name": "Andrew J. Ziola", "position": "Executive" }, { "description": "President and Chief Executive Officer", "name": "Terry K. Spencer", "position": "Executive" }, { "description": "Executive Vice President and Chief Financial Officer", "name": "Walter S. Hulse", "position": "Executive" }, { "description": "Executive Vice President and Chief Operating Officer", "name": "Kevin L. Burdick", "position": "Executive" }, { "description": "Barclays -- Analyst", "name": "Christine Cho", "position": "Analyst" }, { "description": "Senior Vice President, Natural Gas Liquids", "name": "Sheridan C. Swords", "position": "Executive" }, { "description": "Wells Fargo -- Analyst", "name": "Michael Blum", "position": "Analyst" }, { "description": "JPMorgan -- Analyst", "name": "Jeremy Tonet", "position": "Analyst" }, { "description": "Senior Vice President, Natural Gas", "name": "Chuck Kelley", "position": "Executive" }, { "description": "Jefferies LLC -- Analyst", "name": "Chris Sighinolfi", "position": "Analyst" }, { "description": "Goldman Sachs -- Analyst", "name": "Michael Lapides", "position": "Analyst" }, { "description": "Bank of America -- Analyst", "name": "Dennis Coleman", "position": "Analyst" }, { "description": "Seaport Capital -- Analyst", "name": "Sunil Sibal", "position": "Analyst" }, { "description": "Bernstein -- Analyst", "name": "Jean Ann Salisbury", "position": "Analyst" }, { "description": "Tuohy Brothers -- Analyst", "name": "Craig Shere", "position": "Analyst" } ]
[ { "name": "Operator", "speech": [ "Good day and welcome to the First Quarter 2019 ONEOK Earnings Call. Today's conference is being recorded.", "At this time, I would like to turn the conference over to Andrew Ziola. Please go ahead, sir." ] }, { "name": "Andrew J. Ziola", "speech": [ "Thank you, Todd and good morning and welcome to ONEOK's First Quarter 2019 Earnings Conference Call. This call is being webcast live and a replay will be made available. After our prepared remarks, we'll be available to take your questions.", "A reminder that statements made during this call that might include ONEOK's expectations or predictions should be considered forward-looking statements and are covered by the Safe Harbor provision of the Securities Acts of 1933 and '34. Actual results could differ materially from those projected in forward-looking statements. For a discussion of factors that could cause actual results to differ, please refer to our SEC filings.", "Our first speaker this morning is Terry Spencer, President and Chief Executive Officer. Terry?" ] }, { "name": "Terry K. Spencer", "speech": [ "Thanks, Andrew. Good morning and thank you all for joining us today. As always, we appreciate your continued interest and investment in ONEOK. Joining me on today's call is Walt Hulse, Chief Financial Officer, Executive Vice President, Strategic Planning and Corporate Affairs and Kevin Burdick, Executive Vice President and Chief Operating Officer. Also available to answer your questions are Sheridan Swords, Senior Vice President, Natural Gas Liquids and Chuck Kelley, Senior Vice President, Natural Gas.", "I'll make a few brief comments and then turn the call over to Walt to discuss our first quarter financial highlights. To start, we've continued to see an improving industry backdrop since January. Crude prices have strengthened, producers remain active across our operations and our capital growth program remains on track and on budget. Project construction is progressing very well with our ability to predict expected completion dates improving every week. As it looks today, we now expect the southern section of the Elk Creek pipeline to be complete early in the third quarter of this year and the entire pipeline complete during the fourth quarter. The Arbuckle II pipeline and MB-4 fractionator are expected to be complete in the first quarter of 2020.", "Keep in mind, the earlier these projects are completed and are placed into service, the earlier ONEOK begins to recognize earnings on them. Based on producer activity and the progress on our projects and assuming no dramatic market change, ending the year at the low end of our capital guidance range is less likely than it was in February. To the extent that we may be above the guidance midpoint of $3.1 billion, we would be spending construction dollars in 2019 that were previously planned for 2020 and accelerating the in-service dates for some projects. Last week, we announced an extension of our Bakken NGL pipeline in North Dakota to connect with a third party natural gas processing plant.", "We're not only connecting an additional plant, we're reaching into a new area of the Bakken and providing NGL takeaway in Williams County, which historically has had limited transportation options. And by doing so, we are enhancing our ability to provide potential NGL transportation services to more customers. Additionally, our commercial team continues to evaluate a potential NGL export facility on the Gulf Coast. As this opportunity continues to evolve and develop, we will provide further details as appropriate.", "After more than a year of taking about our capital growth projects, we are nearing projects, we are nearing completion on several of them. Over the coming months, these projects will add critical NGL takeaway, fractionation and natural gas processing capacity for our customers where they need it the most, providing ONEOK with substantial long-term fee-based earnings and cash flow growth.", "With that, I will turn the call over to Walt for comments on our first quarter results." ] }, { "name": "Walter S. Hulse", "speech": [ "Thank you, Terry. ONEOK's first quarter 2019 net income totaled $337 million or $0.81 per share, a 27% increase year-over-year and first quarter adjusted EBITDA totaled $638 million, a 12% increase year-over-year. All three business segments recorded double-digit adjusted EBITDA growth compared with the first quarter 2018. Distributable cash flow in the first quarter 2019 was more than $500 million, but more than 17% from the first quarter 2018 with a healthy dividend coverage of 1.43 times. We continued to reinvest in the business, generating more than $150 million of distributable cash flow in excess of dividends paid in the first quarter 2019.", "During the first quarter, we paid a dividend of $0.86 per share and in April, we announced an increase to $0.865 per share or $3.46 per share on an annualized basis. The dividend is payable on May 15 to shareholders of record on April 29. Our March 31, debt to EBITDA, on an annualized run rate basis, was 4.0 times and 4.1 times on a trailing 12 month basis. We ended the first quarter with total available liquidity of $3.25 billion, including borrowing capacity of $2.5 billion available on our credit facility and $750 million available on our three-year unsecured term loan agreement. As Terry mentioned, the industry environment has strengthened since the fourth quarter and construction on some of our largest projects could be completed early in the quarter as we've specified.", "We have clear line of sight to the ramp and timing of expected cash flows on these projects, which combined with our strong balance sheet and financial flexibility, continues to underscore our expectation for no equity financing needs in 2019 or 2020.", "I'll now turn the call over to Kevin for a closer look at our operating performance." ] }, { "name": "Kevin L. Burdick", "speech": [ "Thank you, Walt. I'll walk through each of our operating areas and touch on a few more highlights related to operations in our projects. Starting with the Rockies region, raw feed NGL throughput volume on the Bakken NGL pipeline averaged 167,000 barrels per day in the first quarter with most of this growth attributable to increasing volumes being railed from the basin. Natural gas volumes processed in the Rocky Mountain region increased to more than 1 billion cubic feet per day during the first quarter, as we continued to see strong producer activity and record North Dakota natural gas production in January.", "We estimate more than 250 million cubic feet per day of natural gas is currently being flared on ONEOK's acreage, providing a clear backlog of volume to fill Demicks Lake I, when it begins service in the fourth quarter of this year. We expect additional flared natural gas and continued strong production to provide for a quick volume ramp of Demicks Lake II, which is expected to come online in the first quarter of 2020.", "Each of these plants, when full, are expected to provide approximately 25,000 barrels per day of NGLs to our Elk Creek Pipeline, not including ethane recovery. We continue to expect Elk Creek to reach approximately 100,000 barrels per day in the first quarter of 2020 with volumes increasing throughout 2020 and beyond. At volumes of 100,000 barrels per day, Elk Creek will be generating its targeted adjusted EBITDA multiple of 4 to 6 times within its first few months of operation.", "In addition, we now have secured contracts with natural gas processing plants in the Rocky Mountain region that can produce up to 200,000 barrels per day of NGLs, up from 170,000 barrels per day previously reported. The Williston Basin continues to average more than 60 rigs operating with approximately 25 rigs on our dedicated acreage. If crude prices sustain around $60 to $65 per barrel, we could see additional rigs move into the basin once NGL takeaway capacity and natural gas processing capacity are completed this year. Feedback from producers in the Powder River Basin also remains positive, where we continue to have more than 20 rigs on our dedicated NGL acreage.", "Moving onto the Mid-Continent, NGL raw feed throughput volumes increased approximately 4% in the first quarter 2019 compared with the same period last year. Volumes decreased in the first quarter of 2019 relative to the fourth quarter of 2018, primarily due to the impact of winter weather in the first quarter and some short-term volume we only gathered in second half of 2018.", "Construction on Arbuckle II pipeline is on track for completion in the first quarter of 2020 and our total contracted capacity on Arbuckle II is now 350,000 barrels per day compared with 320,000 barrels per day previously. In our gathering and processing segment, winter weather impacts and the delayed timing of several well completions contributed to the decline in natural gas volumes processed in the Mid-Continent in the first quarter 2019 compared with the fourth quarter 2018.", "Producer activity on our acreage in the STACK and SCOOP areas remains in line with our expectations and we're on track to be within our volume guidance range. In our natural gas pipelines segment, contracted pipeline capacity increased 10% compared with the first quarter 2018. This increase was driven by recent pipeline project completions in both the Mid-Continent region and the Permian Basin. These strategic expansions have helped alleviate natural gas pipeline constraints in these areas, as we've been able to provide much needed takeaway for our customers.", "Now, taking a closer look at our Permian Basin and Gulf Coast operations, NGL raw feed throughput volumes in this region increased 7% compared with the fourth quarter 2018, primarily driven by increased volume on our West Texas LPG pipeline system, including a ramp in volumes from our completed extension into the Delaware Basin. Additionally, the average NGL fee rate associated with our Gulf Coast Permian volumes increased to an average of $0.05 per gallon in the first quarter 2019.", "The higher rate is primarily being driven by increased bundled service volumes or transportation and fractionation volumes on West Texas LPG. Volume on this pipeline has historically been lower margin, transport only barrels, but as legacy volumes roll off, we are replacing them with higher margin transportation and fractionation volume, which we expect will cause this average rate to continue trending upward.", "ONEOK's systemwide NGL fractionation capacity is approximately 810,000 barrels per day, given our current product composition and this capacity remains approximately 90% utilized. We continue to look at several debottlenecking projects that could add 40,000 to 50,000 barrels per day of fractionation capacity in 2019 and early 2020 and be efficiently completed at costs substantially lower than new construction. These de-bottlenecking projects are expected to provide capacity to help bridge us to the early first quarter 2020 completion of our 125,000 barrel per day MB-4 fractionator, which we expect will exit 2020 at full capacity.", "Terry, that concludes my remarks." ] }, { "name": "Terry K. Spencer", "speech": [ "Thank you, Kevin. We've had a great start to 2019 and are looking forward to getting a number of these projects to the finish line in the coming months. The credit goes to our employees who remain extremely focused on operating our existing assets and building new ones safely and responsibly. We'll be putting hundreds of miles of pipeline and several facilities into service later this year and into next, which will dramatically increase the scale of our operations and provide much needed infrastructure and services for our customers. Our employees work every day to provide solutions for these customers, to enhance our business and to make ONEOK even more sustainable for the long term, all while focusing on safety and reliability, limiting our impact on the environment and providing value to our investors. Again, I want to express my thanks to all of our employees.", "With that, operator, we're now ready for questions." ] } ]
[ { "name": "Operator", "speech": [ "Thank you. (Operator Instructions) We'll take our first question from Christine Cho of Barclays." ] }, { "name": "Christine Cho", "speech": [ "Good morning, everyone." ] }, { "name": "Terry K. Spencer", "speech": [ "Good morning." ] }, { "name": "Christine Cho", "speech": [ "I wanted to start off with the lateral to the Bakken NGL line. I think the processor that you're connecting to, their other processing plants have been connected to different NGL takeaway solutions. Can you provide us some color on what's going on with those other options and why they finally came to you. Also my guess is the capacity of the pipeline even though you guys haven't disclosed it, it's much more than the contract is. Can you give us an idea of what other opportunities you have along the line." ] }, { "name": "Sheridan C. Swords", "speech": [ "Christine, this is Sheridan. I think once we get Elk Creek in line that the customers up there are seeing that our alternative for NGL takeaway nets them a greater net back than going the existing route and as they continue to expand up in that area that their existing outlets are limited and they need that extra capacity. And you are correct, we are putting in a line that could move probably over 200,000 barrels a day, the lateral going over there. We see today other processing plants in the area that this pipeline goes by are producing approximately 10,000 barrels a day. But as we talk to people in the area, that 10,000 barrels a day could grow to as much as 40,000 barrels per day in the near future." ] }, { "name": "Christine Cho", "speech": [ "Okay, great. And then moving over to, just sort of the ethane, with also Permian ethane that's coming out, and I think pressuring ethane prices, in the event Conway ethane frac spread remains negative, should we think that third-party processing plants are rejecting the ethane, so there's less supply of ethane showing up at Conway for you to optimize, just some color on how we should think about that." ] }, { "name": "Sheridan C. Swords", "speech": [ "Well, I think you're right. As long as you keep Conway ethane in rejection, which it is sitting there today, you will have about the same amount of ethane you have today. It may grow a little bit as we bring on a couple of new plants in the second quarter. But remember, not every plants can't reject, not every plant can reject all the ethane. There is some ethane that has to come out naturally anyway on our system. So I think what we're seeing today is what we think we'll see going forward if we stay in a time when Conway is going to stay in ethane rejection." ] }, { "name": "Kevin L. Burdick", "speech": [ "And Christine, this is Kevin. I mean, you've also got significant amount of demand for more ethane coming on in the back half of '19 as well. So, that's going to be -- that's going to pull more ethane out also." ] }, { "name": "Christine Cho", "speech": [ "Okay. And can you give us an idea of, like the utilization on Sterling I and II for the quarter." ] }, { "name": "Terry K. Spencer", "speech": [ "Well, we just finished the expansion of Sterling III and we really operate those pipelines altogether, they move around and we're a little bit under 90% for the total system." ] }, { "name": "Christine Cho", "speech": [ "Okay, great. And then last question for me, I just wanted to make sure, can you remind us on the LPG export project, any partner that you guys bring on would be someone who would take the volumes? Yes?" ] }, { "name": "Kevin L. Burdick", "speech": [ "Yeah, Christine. This is Kevin. Well, I think it could. We're exploring a lot of alternatives, but yeah, especially as you think about ethane, that would be a scenario that could play out. LPGs might have a different approach, but we're working with the markets on both sides and we're working with others as well and still working through the details of what that might look like." ] }, { "name": "Christine Cho", "speech": [ "When you say both sides, you mean ethane and LPG, I'm sorry I just..." ] }, { "name": "Kevin L. Burdick", "speech": [ "Yes." ] }, { "name": "Christine Cho", "speech": [ "Okay. Thank you." ] }, { "name": "Operator", "speech": [ "Thank you. We will take our next question from Michael Blum of Wells Fargo." ] }, { "name": "Michael Blum", "speech": [ "Thanks. Good morning, everybody." ] }, { "name": "Terry K. Spencer", "speech": [ "Good morning." ] }, { "name": "Michael Blum", "speech": [ "Just two questions from me. One, some of the recent data coming out of the government on Bakken production shows a decline in the last couple of months. So I was wondering if you can just comment in terms of any trends you're seeing in terms of overall production trends in the Bakken?" ] }, { "name": "Kevin L. Burdick", "speech": [ "Well, Michael, this is Kevin. I mean, from a gas perspective, it's had a record in January. So, that's always a good sign. February, you had quite a bit of weather, not necessarily abnormal, but that pulled production back a little bit, which is standard kind of operating procedure this time of year. There is the feedback we're getting from, not only our G&P customers, but then you -- there have already been a couple of calls from some of the other processors up there, the results have been incredibly strong. So, we don't see any pullback of volumes of rigs and the results seem to keep getting stronger." ] }, { "name": "Michael Blum", "speech": [ "Okay, thanks for that. The second question I had was on this potential LPG export project. I was wondering if you can just talk to some of the competitive dynamics and return expectations you would have. I'm sure you're well aware that one of the big players in that market is out very publicly talking about basically keeping their rates down to keep competition out of the markets. So I was wondering if you could just kind of talk about the competitive dynamics and what returns would look like for a project like this. Thanks." ] }, { "name": "Terry K. Spencer", "speech": [ "Michael, we are seeing -- it's a very competitive market out there on the LPG side and if we would get into the LPG and ethane, it would be a very strategic move that we see that we need to be able to clear our product and be able to incite more ethane to come out. So, it's a bigger look than just straight economics. No doubt the economics would be more compressed than we've seen on some of the recent projects, but we think it's a long-term play if we would go that route that we would do." ] }, { "name": "Kevin L. Burdick", "speech": [ "I think, Michael, this is Kevin, I think we've said and we continue to maintain that the project will -- the project will stand on its own merits. So, as we look at that, obviously, the economics will be key, but share and dried, it's a very competitive landscape out there for the project." ] }, { "name": "Michael Blum", "speech": [ "Great, appreciate it." ] }, { "name": "Operator", "speech": [ "Thank you. We will take our next question from Jeremy Tonet of JPMorgan." ] }, { "name": "Jeremy Tonet", "speech": [ "Hi, good morning." ] }, { "name": "Terry K. Spencer", "speech": [ "Good morning." ] }, { "name": "Jeremy Tonet", "speech": [ "Just wanted to touch on Elk Creek and how that was going with the contracting side, if anything was added since the last quarter and kind of what's enabled you to pull forward the timeframe here. It seems like pipeline projects seem to be pulling backwards as opposed to be pulling forward, so wondering what we were able to accomplish?" ] }, { "name": "Terry K. Spencer", "speech": [ "We'll start with the contracting. As I said in my remarks that we were now 200,000 barrels a day contracted out of the Rockies region that will ultimately we believe here that hit Elk Creek. As for the construction, our teams just -- they've done a great job executing as we've gone through the first stages of the project. As we move forward, we've been very open about starting with the Southern section and the team has made great project, even through some tough weather and some very wet weather in the winter and early spring. But still on track and got comfortable that we now think it's going to be that Southern sectional can be complete early in the third quarter. So just a great job of executing so far by our project team, as it relates to right away acquisition and getting the pipe in the ground." ] }, { "name": "Jeremy Tonet", "speech": [ "That's helpful, thanks. And looking at the Mid-Con, it looks like things stepped down a little bit 1Q versus 4Q for some of the volumes you had, just wondering how you see that kind of trending over the balance of the year. Has there been any change as far as producer communications per their activity levels, are things kind of within the band of what you expect?" ] }, { "name": "Chuck Kelley", "speech": [ "Jeremy, this is Chuck. I'd say the Mid-Con, we've had a good start to the year with our 32 well connects and the number of rigs operating on our acreage are consistent with our plan and with guidance. Volumes were within the band of guidance. So we feel good about our numbers balance of the year in Mid-Con and in talking with some of the producers, we actually see some of the rigs movement, moving to our acreage on the SCOOP later in the year, end of Q2, end of Q3. So overall, I just think we're on pace with our guidance for the year." ] }, { "name": "Jeremy Tonet", "speech": [ "That's helpful. That's it for me. That's it from me. Thank you." ] }, { "name": "Operator", "speech": [ "Thank you. We will take our next question from Chris Sighinolfi of Jefferies." ] }, { "name": "Chris Sighinolfi", "speech": [ "Hey, good morning, everybody. Thanks for your time, guys." ] }, { "name": "Terry K. Spencer", "speech": [ "Good morning." ] }, { "name": "Chris Sighinolfi", "speech": [ "Terry, I'm not sure if this is for you, or if this is for Walt, but just wanted to follow up on the discussion we had on the last quarter call about the pace of your dividend growth, was just, I've noticed in subsequent presentations following that discussion that the 9% to 11% rate that you previously discussed and featured no longer appears. Obviously, the pace of growth has decelerated over the last two quarters below that range unless there is a subsequent step up later in the year. So I'm just -- I'm not advocating for a particular range or saying that there's something optimal, I'm just trying to figure out how to interpret what we've seen and what you guys are thinking at this point." ] }, { "name": "Walter S. Hulse", "speech": [ "Well, as far as the omission, I wouldn't read anything into that. We've been clear on that guidance and it hadn't changed. We established that guidance shortly after the consolidation transaction. So it's in place. so, I wouldn't read anything into that. I think as the board thinks about -- as we go into the balance of the year and it thinks about our dividend policy going forward, obviously, we got the guidance there.", "But I think the most important fact that they will take into consideration is just the tremendous cash flow growth that we see for the company. The business is performing extremely well and particularly with these projects coming online earlier and the growth opportunities we continue to develop, the free cash flow generation really is continuing to exceed our expectations as we look out. So that will be the key thing that they take into consideration, as I think about the dividend policy going forward." ] }, { "name": "Chris Sighinolfi", "speech": [ "But the baseline view is still a view around the 9% to 11% that you had talked about." ] }, { "name": "Walter S. Hulse", "speech": [ "Absolutely. That guidance is still there." ] }, { "name": "Chris Sighinolfi", "speech": [ "Okay. Sure. All right. Thanks for that. And then I guess maybe for Kevin or for Sheridan. We had previously chatted about heat content in the Bakken as it pertained to Northern Border and the fact that ethane rejection might not just be a economic decision, but maybe an operational one. I'm just wondering where we shake out on that, a lot of processing is set to come up later this year and into next year, but curious how the dynamics look today." ] }, { "name": "Kevin L. Burdick", "speech": [ "Yeah. This is Kevin. And yes, that's still something we watch very closely and stay in touch with that as you push, with the basin being in ethane rejection right now, you're pushing more and more high BTU content gas into Northern Border. That trend will continue, and you're right, if you think about Demicks I and Demicks II and the (inaudible) and Crestwood's expansion and you think about those, that all the capacity there and all that residue making its way to Northern Border, clearly, we're watching the BTU content at the bottom of Border very closely.", "As we've said, we have the ability, as does the rest of the processors up there, to recover ethane. Now, we need to get Elk Creek in service first before we would have the capacity to do that. But once we have Elk Creek in service, then we've got -- that's a nice option we have as an industry, to be able to lower the BTU content on border, if we start seeing downstream market impacts." ] }, { "name": "Chris Sighinolfi", "speech": [ "Okay. Now, that makes sense. And kind of why have you -- just a follow-up on Michael's earlier question about the export dock, I think you said that the project would have to stand on its own. So in terms of returns, you guys have talked for a while about getting into that market. Michael referenced that they are talking about aggressively pricing their capacity, we shouldn't think about there being maybe a sub-optimal return on getting access to that space made up or through later expansions or anything like that." ] }, { "name": "Terry K. Spencer", "speech": [ "Yeah, I mean I wouldn't think about it that way, you're going to see periods of time where competition for spot space or to the extent that there is excess capacity on these docks, you're going to see some dock-on-dock competition that will pressure margins. But as we think about this project, we're thinking about it long-term contracting, solid returns, even relative to our other investments that we have, obviously the project itself, it would be a strategic move for us, making sure that we have the ability to clear barrels.", "We could have the ability to clear barrels even without a dock longer term, but it's better if we have a dock. So, but as Kevin indicated, we're looking at all our options and again, it's a project that we are investing a lot of time in and certainly it's a capability that would add value to our existing suite of capabilities. Does that help?" ] }, { "name": "Chris Sighinolfi", "speech": [ "Great. Appreciate the time. Yeah. It does." ] }, { "name": "Terry K. Spencer", "speech": [ "Yeah. You bet." ] }, { "name": "Operator", "speech": [ "Thank you. We will take our next question from Michael Lapides of Goldman Sachs." ] }, { "name": "Michael Lapides", "speech": [ "Hey, guys, thanks for taking my question. Actually, I have a couple of them. First of all, your thought for a while about the expansion capability at either Elk Creek and Arbuckle II, just with pumps. How are you thinking about the timeline for when you would potentially implement that and would you do it kind of staggered or you think the market warrants like bigger leaps." ] }, { "name": "Sheridan C. Swords", "speech": [ "This is Sheridan. Obviously as we're starting to get contract up to 200,000 barrels a day, that is really on our mind when we put it in. We have the ability to stagger it, you don't have to go all the way on Elk Creek to the 400,000. There's (inaudible) you can just put a couple of pumps in here and a couple of pumps in there and hit incremental capacity. So, we can do that in stages as we go on, but definitely as we reach this 200,000 barrel a day mark, we are definitely looking at when we want to expand that pipeline because we want to make sure that we have the capacity to meet the customers' needs up there and don't get into an issue where the pumps are delayed by anyway by any means." ] }, { "name": "Kevin L. Burdick", "speech": [ "And the only thing I would add on to that, this is Kevin, is the contracted volumes that we talk about and we report are really C3 plus volumes and they don't assume any ethane being extracted. So as we also think about our capacity on Elk Creek, we want to make sure we've got the ability and have some capacity available that if we -- back to Chris's question that if we do need to pull some ethane out because of downstream spec issues or the issues on Border in the BTU content that we have the capacity to be able to do that. So we factor that into our thoughts on capacity expansions as well." ] }, { "name": "Michael Lapides", "speech": [ "Got it. And then on the debottlenecking projects for the fracs. Can you talk a little bit about how much incremental capacity you think you're adding through that and when you think you get that completed." ] }, { "name": "Terry K. Spencer", "speech": [ "That's where we said we were at 30,000 to 40,000 barrels a day of additional, we think we can get, you will see some of that, maybe 10 to 20-ish that we expect we'll get probably in '19 with the balance in early '20." ] }, { "name": "Michael Lapides", "speech": [ "Got it. And then last thing, the rates of the margin on West Texas, meaning the Permian and the Gulf Coast, you've talked about going from $0.04 to $0.05, and more importantly, you made the comment about it kind of continuing to creep higher. How should we think about that? How do you want investors to think about how much higher that could creep and I mean, are you talking about just kind of slow and gradual, are you talking about moving closer to the rates you're getting in the Mid-Con? I just want to kind of frame that a little bit." ] }, { "name": "Sheridan C. Swords", "speech": [ "This is Sheridan again. What I would say is that it's, I wouldn't say it's going to be slow and gradual. Obviously, we have the next expansion coming on, on West Texas pipeline that is contracted. When those volumes come up, they will almost be contracted at a rate twice as our average when that volume comes on. And then obviously we know that we will be losing some legacy volume as other pipelines come on and we have contracted that space as well. So I think there's two big leaps we will see in that rate going up. One is, when we complete the second expansion of the West Texas and the other one will be when other pipelines are completed out of there and volume comes off and we're able to replace it with volumes that we've contracted at the market rate and not at a below-market rate." ] }, { "name": "Michael Lapides", "speech": [ "Got it. Okay. Thanks, guys. Much appreciated." ] }, { "name": "Terry K. Spencer", "speech": [ "Sure." ] }, { "name": "Operator", "speech": [ "Thank you. We'll take our next question from Dennis Coleman of Bank of America." ] }, { "name": "Dennis Coleman", "speech": [ "Yeah, good morning. I guess I wonder if I might ask a little bit more strategic question. You talk about the export docks and how you enter that market. M&A has been a topic that's come up quite a bit in recent weeks with some of the M&A on the producer side and just some producer activity. How do you think about the M&A market, particularly with your currency being attractive as it is for that." ] }, { "name": "Terry K. Spencer", "speech": [ "Well, as far as the M&A market goes, we think about it quite a bit. The fact of the matter is the challenge there of course is transactability. When you think about the opportunity set that this company has, heavy organic, tremendous returns, low-risk projects relative to say much more strategic or exotic M&A. So we remain focused on this organic growth opportunity set that we have. So it's difficult for us to rationalize the risk associated with some of these transactions that we think about.", "We'll look, we have investment bankers coming to us all the time with their own ideas and hope that makes sense, but no one ever seems to have a deal ready to do. So, we stay focused on what we do and that's build in this infrastructure in these basins where we have these great, great positions. I mean, candidly, when you look at it just purely on an accretion basis, just look at it on a DCF per unit accretion, these organic projects blow away any M&A transaction. So that's why we stay focused and continued to execute heavily on the organic side.", "Did that help you?" ] }, { "name": "Dennis Coleman", "speech": [ "Yeah, it does. Thanks, Terry. That's it from me." ] }, { "name": "Terry K. Spencer", "speech": [ "You bet." ] }, { "name": "Operator", "speech": [ "Thank you. We'll take our next question from Sunil Sibal of Seaport Capital." ] }, { "name": "Sunil Sibal", "speech": [ "Yes, hi, good morning, guys and thanks for all the color on the call. Couple of questions from me. Starting out on the Permian side of things, it seems like, how should we think about the 150,000 to 200,000 kind of barrels per day of NGL volumes on that pipeline contracted rolling over the next 1 to 2, 3 years?" ] }, { "name": "Terry K. Spencer", "speech": [ "Yeah. I think you will be over 200,000, yeah, I think you'd be close to 300,000 barrels a day over the next couple of years on that pipeline moving. You're already today, approaching 250,000 barrels, that's moving on the pipeline. So I think we will be over 300,000 in the next couple of years easily." ] }, { "name": "Sunil Sibal", "speech": [ "Got it. Actually, I was trying to get some color on the legacy contracts that you have on that pipeline, how should those contracts be rolling over in the next 1, 2, 3 years." ] }, { "name": "Kevin L. Burdick", "speech": [ "I think most of them will come off, that we see coming off, will come off in 2019." ] }, { "name": "Sunil Sibal", "speech": [ "Okay. Okay, got it. And then on the CapEx side of things, it seems like on the growth CapEx side, you spent close to $850 million this quarter, how should we think about cadence of that over the remainder of the year." ] }, { "name": "Terry K. Spencer", "speech": [ "Yeah. We -- I mean if you think about our projects, especially the big 4, we are in the heavy construction as we went through the first quarter and we'll continue heavy construction as we go through the second and third quarter. Every project kind of has a natural flow as far as when the capital is spent and as you get toward the end, it tapers off a little bit. So as you see that, but what could change that is again, we're doing everything we can to accelerate these projects that purely from a timing perspective, you might see some dollars if we're above the guidance, we would be -- it would just be a shift from $20 into 2019 or vice versa. It's just literally the timing of how that would play out at the end of the year." ] }, { "name": "Sunil Sibal", "speech": [ "Okay, got it. And then just a clarification on the dividend growth policy. I think previously, the policy has been 9% to 11% annual rate, is there any thought on kind of thinking about that rate on an average basis over the next three years or so, just to kind of manage your CapEx spend, or should we just think about 9% to 11% every year through 2021?" ] }, { "name": "Walter S. Hulse", "speech": [ "The Board is going to continue to take it up on a quarter-by-quarter basis. But what I would tell you is that the fundamental of our business continues to strengthen, giving us plenty of earnings to support our dividend growth, and we have not adjusted our dividend growth guidance and we'll let the Board look at it, but we have strong earnings to support our guidance." ] }, { "name": "Sunil Sibal", "speech": [ "Okay, got it. That's all I had. Thanks guys." ] }, { "name": "Terry K. Spencer", "speech": [ "Thank you." ] }, { "name": "Operator", "speech": [ "Thank you. We'll take our next question from Jean Ann Salisbury of Bernstein." ] }, { "name": "Jean Ann Salisbury", "speech": [ "Good morning. What (inaudible) turnaround from the Bakken, if it is pursued, be overall good or bad for ONEOK, I can kind of see both sides, so I would be interested in your view of the net impact?" ] }, { "name": "Kevin L. Burdick", "speech": [ "Well, I think, this is Kevin, I think, clearly any time there's addition, we don't want to be takeaway constrained, right. And so we're always looking for ways to ensure that we have the takeaway for our customers up there, and so that will involve, you look at residue in a couple of different ways. And so I think it would come down to what type of rate, what type of term it, and what type of volume commitments that would be required to make a project like that work versus alternatives that the basin might have of other ways to handle the residue, which would also include handling some of the residue by recovering ethane. So I think that's still under, as we look through it and we will be thinking through that, but clearly, having, we don't want the basin to be takeaway constrained from the producer standpoint, we want them to be able to continue to drill." ] }, { "name": "Jean Ann Salisbury", "speech": [ "Yes. I agree with that. And that's helpful. And then there's some concern by investors of a fractionation overbuild over the next couple of years, how much of your Mont Belvieu fractionation is take or pay or perhaps otherwise protected?" ] }, { "name": "Terry K. Spencer", "speech": [ "Most of our new stuff coming on has very limited take or pay and that the market in these last couple of rounds has built, has not supported take or pay economics. But what I would say is that for Mont Belvieu fractionation position and we anticipated that 4 and 5 being full, but under the scenario that they wouldn't or not full, we always have the option to take barrels that we're fracking in the Mid-Continent, move them down to the Gulf Coast and collect the additional Conway to Belvieu spread on that piece.", "But I don't think, what I'm seeing today with what's coming on, now, there may be a little bit of short-term overcapacity in the fractionation market. But I think long term, it will be eaten up pretty quickly. And also remember that a lot of the players that are building these fracs today are storing raw feed and they will have to frac that off once they come on. So it's not just new production, it's production that's coming on now that we do not have enough frac capacity today." ] }, { "name": "Jean Ann Salisbury", "speech": [ "Well, that makes sense. Thank you." ] }, { "name": "Operator", "speech": [ "Thank you. We'll take our next question from Craig Shere of Tuohy Brothers." ] }, { "name": "Craig Shere", "speech": [ "Good morning." ] }, { "name": "Terry K. Spencer", "speech": [ "Good morning." ] }, { "name": "Craig Shere", "speech": [ "Three quick questions around Elk Creek, so the growth that we're seeing out of the Bakken or out of the Rockies is being railed and the railed volumes have, if I understand, at de minimis margins currently. So when the southern leg of Elk Creek opens up and we have more capacity upstream on the Bakken NGL line, those volumes kind of immediately get what, a $0.20 plus bump in margin?" ] }, { "name": "Walter S. Hulse", "speech": [ "Yeah, you're pretty close." ] }, { "name": "Craig Shere", "speech": [ "And on the 200,000 a day ultimate capacity that's been contracted in the Rockies, two questions on that. One, how long do you think that that could take to reach full capacity on those contracts. And two, can you break it down between Bakken and DJ?" ] }, { "name": "Terry K. Spencer", "speech": [ "I think we will ramp up to that 200,000 fairly quickly. I would say probably as we get into 2021, we will see that volume be at that rate up to 200,000 barrels. And once again, as Kevin said, that is assuming no ethane. If ethane comes on, you'll reach that a lot quicker. So I think it will take a little bit of time. I think the last piece will come in, the delay on the last piece will be, we got to get the lateral over, which will be completed at the end of 2020 and then would you repeat your last part of the question." ] }, { "name": "Craig Shere", "speech": [ "I wanted to get a sense where it's all sourcing from, in terms of proportion from the Bakken or DJ?" ] }, { "name": "Terry K. Spencer", "speech": [ "I would say about 70% to 80% coming out of the Bakken." ] }, { "name": "Craig Shere", "speech": [ "Great. And one last..." ] }, { "name": "Chuck Kelley", "speech": [ "Craig, just before you move on, really a lot of those volumes are coming out of the powder, not the DJ." ] }, { "name": "Kevin L. Burdick", "speech": [ "Yeah. 80% of the Bakken and almost the rest of it's all out of the Powder River." ] }, { "name": "Chuck Kelley", "speech": [ "Right." ] }, { "name": "Craig Shere", "speech": [ "And last question, I noticed DCF coverage in the quarter was aided by lower sequential maintenance like CapEx and higher sequential other income, can you touch on the repeatability of that." ] }, { "name": "Walter S. Hulse", "speech": [ "I think that the maintenance is just normal timing that comes and goes quarter-to-quarter and when a project gets done or not. The other was a small, non-strategic asset that we sold for a very small amount of money. So that was just a kind of ordinary course cleaning up some assets." ] }, { "name": "Craig Shere", "speech": [ "Great, thank you very much." ] }, { "name": "Operator", "speech": [ "Thank you. This concludes our questions for today. I'll turn it back to Andrew Ziola for closing remarks." ] }, { "name": "Andrew J. Ziola", "speech": [ "Thank you, Todd. Our quiet period for the second quarter starts when we close our books in early July and extends until we release earnings in later July. We'll provide details for the conference call at a later date. Thank you for joining us, and the IR team will be available throughout the day. Have a good week." ] }, { "name": "Operator", "speech": [ "Thank you. Ladies and gentlemen, this concludes today's conference. You may now disconnect." ] } ]
OKE
2020-07-29
[ { "description": "Vice President, Investor Relations and Corporate Affairs", "name": "Andrew Ziola", "position": "Executive" }, { "description": "President and Chief Executive Officer", "name": "Terry Spencer", "position": "Executive" }, { "description": "Chief Financial Officer", "name": "Walt Hulse", "position": "Executive" }, { "description": "Executive Vice President and Chief Operating Officer", "name": "Kevin Burdick", "position": "Executive" }, { "description": "", "name": "Unknown speaker", "position": "Other" }, { "description": "Senior Vice President, Natural Gas", "name": "Chuck Kelley", "position": "Executive" }, { "description": "SunTrust Robinson Humphrey -- Analyst", "name": "Tristan Richardson", "position": "Analyst" }, { "description": "UBS -- Analyst", "name": "Shneur Gershuni", "position": "Analyst" }, { "description": "Senior Vice President, Natural Gas Liquids", "name": "Sheridan Swords", "position": "Executive" }, { "description": "Tudor, Pickering, Holt & Co. -- Analyst", "name": "Colton Bean", "position": "Analyst" }, { "description": "Wells Fargo Securities -- Analyst", "name": "Michael Blum", "position": "Analyst" }, { "description": "Sanford C. Bernstein -- Analyst", "name": "Jean Ann Salisbury", "position": "Analyst" }, { "description": "Seaport Global Securities -- Analyst", "name": "Sunil Sibal", "position": "Analyst" }, { "description": "Goldman Sachs -- Analyst", "name": "Michael Lapides", "position": "Analyst" }, { "description": "Tuohy Brothers -- Analyst", "name": "Craig Shere", "position": "Analyst" }, { "description": "Bank of America Merrill Lynch -- Analyst", "name": "Derek Walker", "position": "Analyst" } ]
[ { "name": "Operator", "speech": [ "Good day and welcome to the second-quarter 2020 ONEOK earnings call. Today's conference is being recorded. At this time I'm about to turn the conference over to Mr. Andrew Ziola.", "Please go ahead, sir." ] }, { "name": "Andrew Ziola", "speech": [ "Thank you Sarah, and good morning, everyone, and welcome to ONEOK second-quarter 2020 earnings call. We issued our earnings release and presentation after the markets closed yesterday and those materials are on our website. After our prepared remarks, we'll be available to take your questions. During the Q&A session, we would appreciate it if you limit yourself to one question and one clarifying follow-up so we could fit in as many of you as we can.", "A reminder that statements made during this call that might include ONEOK's expectations or predictions should be considered forward-looking statements and are covered by the Safe Harbor provision of the Securities Act of 1933 and 1934. Actual results could differ materially from those projected in forward-looking statements. For a discussion of factors that could cause actual results to differ, please refer to our SEC filings. Our first speaker this morning is Terry Spencer, president and chief executive officer.", "Terry?" ] }, { "name": "Terry Spencer", "speech": [ "Thanks Andrew. Good morning and thank you all for joining us today. As always, we appreciate your continued trust and investment in ONEOK. Joining me on today's call is Walt Hulse, chief financial officer, and executive vice president strategic planning and corporate affairs; and Kevin Burdick, executive vice president and chief operating officer.", "Also available to answer your questions are Sheridan Swords, senior vice president, natural gas liquids and Chuck Kelley, senior vice president, natural gas. I'd like to start by commending our employees who are continuing to operate safely and responsibly and remain focused on providing extra customer service in a challenging environment. In recent weeks, we've seen cases of COVID-19 increase across the country. In response, we've asked employees who are able to continue working virtually.", "For those critical employees who are reporting in person to operating sites, we continue to ensure that enhanced safety protocols are in place for their safety and for the safety of their families and communities. Second-quarter results were interrupted by the pandemics effect on worldwide crude oil demand, extensive production curtailments across our operations and low commodity prices. After bottoming out in May and June, volume trends across our operating areas have sharply increased in recent weeks as customers have started to bring production back online with the recent stability in commodity prices providing positive momentum as we enter the second half of 2020. As a matter of fact, many of our facilities during July have returned to pre-COVID levels.", "For example, our July average total NGL raw feed volumes are exceeding first-quarter average NGL volumes, benefiting from higher propane plus volumes in the Permian Basin and increased ethane recovery in the Mid-Continent. Williston Basin volumes have also strengthened significantly off the lows experienced in May. he earnings impact we saw in the second quarter reflects significant production curtailments in the Williston Basin where our earnings on a per unit of throughput are some of the highest due to the broad level of services we provide our customers. As curtail volumes recover to more normalized level, so too will our earnings.", "While volume trends are greatly improving, there remains continued global demand uncertainty due to COVID-19. We expect 2020 earnings to be at the low end of our previously provided outlook ranges which Walt will discuss shortly. Despite these challenges, we continue to deliver value to our investors through the prudent management of our large strategic and integrated assets located in the most prolific NGL rich basins in the U.S. These assets are supported by strong, stable customer base and growing demand for the products we deliver.", "There have been many reports written on the possible implications of a DAPL shut down for ONEOK so I'll get right to it. Many producers in the region are developing contingency plans to address their oil transportation needs. While DAPL does currently provide meaningful crude takeaway capacity from the region, there are alternatives through other pipelines and substantial rail capacity. It wasn't long ago that nearly 800,000 barrels per day of crude were leaving the basin on rail.", "Specific to ONEOK we estimate 30% to 40% of DAPL crude oil volume is from the producers whose gas volumes are dedicated to our gathering and processing business in the Williston Basin. About half of those volumes have alternate methods of crude transportation currently available. This means that approximately 200 million cubic feet per day of nearly 1.5 billion cubic feet per day currently connected to our system is associated with crude oil production that may not have an immediate alternatives takeaway options. From the constant conversations we have with our producer customers in the basin, they remain committed to finding solutions to take away constraints.", "In our view, any impact from a DAPL shutdown would mostly impact 2021 providing some time for more solutions to develop. Even in an extended shutdown scenario, we estimate our 2021 Wilson basin natural gas processing volumes could approach our first-quarter 2020 average of more than 1.1 billion cubic feet per day due to curtailed volumes returning, the capture of flared gas and the completion of drilled but uncompleted wells. Kevin will provide some additional data points during his remarks. At the beginning of 2020, we had all the assets in place to produce annual EBITDA of more than $3 billion.", "Our extensive infrastructure that now has substantial available capacity is still there, providing significant operating leverage to the upside, and no additional capital spending is needed to realize that earnings potential. As it relates to our dividends, with our business improving and volume strengthening, we don't see the need to take action on the dividends. We do recognize that it is a lever we could if our deleveraging expectations are not being met. Financially, we've taken the proactive steps to provide ample liquidity and protect our investment-grade credit ratings during the pandemic while continuing to return long term value to our shareholders.", "Our employees and management team are doing an excellent job in unusual conditions and I have tremendous confidence in them to see us through to the other side of this downturn. They found ways to successfully navigate industry challenges before and they will again. With that, I'll turn the call over to Walt." ] }, { "name": "Walt Hulse", "speech": [ "Thank you Terry. Instead of a typical run-through of our quarterly financial performance which was well detailed in yesterday's news release, I'll walk through a few of the strategic financial decisions we made during the second quarter and how those have positioned us for the remainder of the year. We completed two proactive capital market transactions, raising capital of more $2.4 billion during the second quarter, providing us additional liquidity and balance sheet flexibility in a still uncertain market environment. In May, we completed a $1.5 billion senior notes offering and used the proceeds -- a portion of the proceeds to repay the remaining $1.25 billion of our term loan agreement which was maturing in 2021.", "In June, we completed a public offering of common stock resulting in net proceeds of $937 million. Both of these transactions were undertaken to strengthen our balance sheet and provide a clear and accelerated path toward equity leveraging goals. We still intend to manager our leverage below four times as business strengthens to pre-COVID levels and to maintain 3.5 times as our long-term aspirational goal. Both transactions were successful in that respect.", "As we sit today, we have ample liquidity and balance sheet strength and flexibility at the end of the second quarter with no borrowings outstanding and our $2.5 billion credit facility and more than $945 million of cash. Interest expense increased in the second quarter primarily due to the settlement of interest rate hedges related to the earliest repayment of our term loan resulting in a one-time impact earnings per share of $0.09 in the second quarter. With yesterday's earnings announcement, we certainly expect 2020 net income and adjusted EBITDA results to be at the lower end of our previously provided outlook ranges. As we return to volumes achieved during the early March 2020, we expect our earnings run rate to be in line with our previous expectations and to provide a continued path to deleveraging.", "We also expect total capital expenditures including maintenance capital to range from approximately $300 million to $400 million in the second half of 2020. Total annual capital expenditures including maintenance and growth of $300 million to $400 million will be maintained until producer activity levels provide visibility to volume growth warranting expanded capacity, but we remain flexible with the ability to scale capital back up quickly as our customers' needs. Last week, the board of directors declared a dividend of $0.935 or $3.74 per share on an annualized basis. We continue to look for cost efficiencies across our operations.", "So far this year, we have implemented measures across our systems including optimizing assets, power savings, and discretionary spending reductions totaling approximately $50 million. We expect additional cost-saving measures in the second half of the year to result in total 2020 savings of approximately $120 million compared with our 2020 plan. I'm now going to turn the call over to Kevin for a closer look at our operations." ] }, { "name": "Kevin Burdick", "speech": [ "Thank you all. The backdrop we're seeing related to activity in volumes across our system has greatly improved since second-quarter lows in May and June. Our recent conversations with producers have been focused on bringing wells back online resulting in increasing volumes on our system and in some cases, producers are beginning to add completion crews and door rigs. Comparing our lowest average total monthly volume levels in the second quarter with our highest volumes reached so far in July, we've seen increases of more than 25% in NGL raw feed throughput volume and 20% in natural gas processed volumes.", "Our natural gas pipelines segment continues to provide stable fee-based earnings with firm contracted capacity totaling nearly 95%. The importance of these segment stable and predictable earnings is highlighted during times of market uncertainty and underscores the strong demand for natural gas we continue to see from our customers including electric generation facilities, utilities and industrial markets. Now let's take a closer look at current activity across our operations. In the Rockies region, we've seen a sharp increase in volumes in July, as Terry mentioned.", "Total NGL raw feed throughput volume from the region has reached more than 200,000 barrels per day in July and nearly 50% increase from May lows. natural gas volumes profits in the region have reached 945 million cubic feet per day in July, and nearly 35% increase from June lows. There are approximately 10 rigs currently operating in the basin, with about half on our dedicated acreage. Drilled but uncompleted wells in the basin total more than 950 with approximately 400 on our dedicated acreage.", "Our customers in the basin are some of the most well-capitalized producers in the industry and if communicated they're positioned to resume activity as commodity prices and the demand outlook improves. We're frequently asked what price it would take for producers to bring rigs back to the basin. But the important point right now is the price it takes to bring curtailed wells back online. We believe that if current market condition is sustained the remaining curtailed production will come back online during the third quarter of 2020.", "In the Williston Basin, we had approximately 1.5 billion cubic feet per day of natural gas connected to our system in March which includes volume that had been captured on our system in volumes being flared. The latest data shows 220 million cubic feet per day was still flaring in the basement with 125 million of that on ONEOK's dedicated acreage which provides a continued volume uplift opportunity for us in 2020. Our completed infrastructure is in place to capture this volume and no new drilling activity is needed to reach our pre-COVID volume levels. We are on track to complete the extension of our Bakken NGL pipeline in September of this year earlier than our previous target date of the fourth quarter.", "This new lateral will connect with an expanding third-party plant and will provide NGL takeaway in an area of Williams County which historically had limited NGL transportation options. We expect the lateral will provide additional NGL volume to our system as we enter 2020 and it includes a minimum volume commitment. During the second quarter, curtailments varied greatly across our producers. Some curtailed nearly 100% of their production and some curtailed virtually none.", "The percent of proceeds and fee components also vary across our customer contracts. Curtailments on large producer contracts with higher fees and lower PLP components were the primary contributor to our lower average fee rate. Another factor was that we experienced greater curtailments in our higher fee Rockies region compared with our lower fee Mid-Continent region. Given what we see today, with curtailed volumes continuing to return, we expect the average fee rates for the gathering and processing segment to reach pre-COVID levels of approximately $0.90 per MMBtu in the fourth quarter of 2020.", "In the Mid-Continent region, second-quarter average NGL raw feed throughput volumes of 521,000 barrels per day increased compared with the first-quarter 2020. Volumes from this region had reached over 600,000 barrels per day in July, a 15% increase compared with the second quarter of 2020 average. Ethane volumes in the Mid-Continent averaged 260,000 barrels per day in June 2020, compared with the second-quarter 2020 average of 210,000 barrels per day, a more than 20% increase driven by nearly all our Mid-Continent plant connections entering recovery during the quarter. We expect ethane recovery on our system to continue through the remainder of the year due to strong petchem demand and favorable ethane extraction economics.", "In the Permian Basin, the connection of two new third party processing plants in the first half of 2020 and the full completion of our 80,000 barrels per day, West Texas LPG pipeline expansion in June position as well for future growth in the basin. With the expansion complete, we will continue to transition volumes away from third party offloads on to West Texas LPG. We are currently offloading 25,000 barrels per day which will provide full transportation and fractionation revenue when they move on to our system in the future. Terry, that concludes my remarks." ] }, { "name": "Terry Spencer", "speech": [ "Thank you Kevin. With a challenging quarter behind us, there are opportunities ahead. What we've seen proven time and time again is that producers in the midstream industry are resilient, innovative and able to find solutions when market conditions are tough. We saw it in 2015 and in 2016 when producers were able to drive significant efficiencies in their drilling programs, and again in 2018, when the midstream industry worked together to add Gulf Coast fractionation capacity.", "From the ONEOK perspective, our management team will continue to be proactive and innovative in how we can become even more efficient. We remain focused on creating value for our stakeholders and continue to prioritize the long-term sustainability of our businesses. The events of 2020 have certainly been disruptive but have not distracted us from focusing on the right things. I'm proud of the resilience and focus with which our employees have approached the last several months in keeping our employees and assets safe and I am inspired by the way our employees and the company are navigating important social issues within our communities with compassion, understanding, empathy and generosity.", "We will provide more detail on these important issues and many others in our upcoming environmental, social and governance report which will be available on our website in the coming weeks. This report is particularly important in times like these and staying focused on the right things is more important than ever. The report includes expanded disclosures in each of the ESG categories and will mark an adoption of the savvy sustainability reporting standards. While ESG reporting isn't new to us, this report will be our 12th annual publication.", "Our sustainability journey continues and we remain committed to continuous improvement of our ESG performance and disclosures to our stakeholders. With that operator, we're now ready for questions." ] } ]
[ { "name": "Operator", "speech": [ "[Operator instructions] And we'll go ahead and take our first question from Jeremy Tonet from J.P Morgan." ] }, { "name": "Unknown speaker", "speech": [ "Hey, good morning. This is Charlie on. Appreciate all the color in the opening remarks. Just as you noted with your updated guidance reflecting potential Apple headwinds there, curious if it also takes into account the High Plains pipe that could be shot.", "And also, secondly, I was curious, should Apple shutdown commence, can you address the possibility to temporarily repurpose an NGL pipeline to crude service, if that would make sense, and kind of what the puts and takes of that would be?" ] }, { "name": "Kevin Burdick", "speech": [ "Yeah Jeremy. This is Kevin. The first question, as far as the Apple shutdown, we really don't see much impact at all to 2020. As we said, we see that more as a 2021 issue as curtailed production comes back, we believe there will be another pipeline capacity in rail transportation to handle the volumes that are currently being curtailed.", "And as it relates to the second question, yes, we physically could convert the smaller Bakken NGL pipeline in the crude service. We're evaluating that, and looking at all of our options, and watching that closely. But yes, that is something that's physically possible." ] }, { "name": "Unknown speaker", "speech": [ "Thank you. And then looking at the second half guidance here and trying to parse one half to the second half, how should we kind of think about Rockies and mid Conway connects relative to the first half, given the sort of rig count pricing environment we're in? And then maybe secondly, specific to GMP, what sort of pricing assumptions go into point you toward to what you gave us on guidance. Maybe said differently, that $30 million decline you saw related to the pop exposure contracts, would you expect that to reverse in the back half of this year?" ] }, { "name": "Terry Spencer", "speech": [ "Yeah. There's a couple questions in there. I'll answer your last one first. And yes, like we said, we do believe that if we see this environment sustained, you'll see that that fee rate improved.", "And obviously, that's going to help on the pop side if you get some pricing strength as well. And what was the first question in that second grouping?" ] }, { "name": "Unknown speaker", "speech": [ "It's about well connects in the second half relative to what we saw in the first half, just given what we're seeing on the rig count side and the pricing environment." ] }, { "name": "Kevin Burdick", "speech": [ "Yeah. We are seeing -- I mean, we -- again, the 2020 numbers really aren't dependent on well connects as far as new rigs and things like that. That's more again of a 2021. In fact, we -- again, recent conversations with producers.", "We are there having conversations in this environment about completing ducks, potentially bringing completion crews back. So, we don't have -- it's not like we've got rig counts going there 40 in the next two months or something. Chuck, do you have anything to add to that?" ] }, { "name": "Chuck Kelley", "speech": [ "Yeah. I mean, what I did was based on producer discussions, as Kevin mentioned, if we see on the drill schedules that are provided by our producers to us, ducks are currently being completed here in Q3, as Kevin mentioned. We've also got some line of sight to Q4 with additional completions. And what producers have told us is they want to complete these wells before winter in anticipation of more demand.", "And in addition to that, some of our larger producers have indicated to us that they're going to run one to two rig programs through the remainder of the year on our acreage. So, we've got some line of sight to increase ducks' completions as well as increased well connects forthcoming. So, hope that gives you a little more color" ] }, { "name": "Unknown speaker", "speech": [ "Great. Thank you very much." ] }, { "name": "Operator", "speech": [ "[Operator instructions] We'll take our next question from Tristan Richardson with SunTrust." ] }, { "name": "Tristan Richardson", "speech": [ "Good morning, guys. Just appreciate all your commentary on the new range for EBITDA. But I guess just thinking about higher LPG prices and the volume improvement we've talked about in July, as well as teaching recovery and enhanced well completions, do these timing itself add up to really support a run rate EBITDA as we look toward the end of this year, somewhere much closer to the high-end of that range of outcomes you provided last quarter, namely the $3 billion type of EBITDA range?" ] }, { "name": "Kevin Burdick", "speech": [ "This is Kevin again. And yes, I do think it supports that. If you think about where we were, not necessarily first-quarter average, but you think about where our volumes were right as we entered into the COVID and the OPEC situation, those types of volume levels was what supported that -- kind of the upper end of that range that we talked about. So, as we get to curtail production to come back online, and I think a key point in that is those March numbers included substantial gas that was flaring.", "Since that time, we put additional infrastructure in place, and if the volumes come back, we would expect the flaring numbers to go down. So, that's why we have the confidence in those numbers. If that's what you choose to that run rate that we're looking at, toward the upper end of the range." ] }, { "name": "Tristan Richardson", "speech": [ "Great. And then you were talking about -- on the 2021 capex opportunity being just generally no lower than 2020. Now, we're kind of halfway through the year, so we think of that spend opportunity next year is something sub $1 billion or is there kind of a bookend way to speak about how you're spent?" ] }, { "name": "Kevin Burdick", "speech": [ "No. I just said in my prepared remarks that we would be in that $300 million to $400 million range for 2021 including maintenance and growth. And we will sustain that level of capex as long as producer activity, indelible producer activity, is generating growth that we need to expand capacity. It's very nudging.", "We have all the assets in place to get us back to ready to that EBITDA north of $3 billion. And so, we're in a great position here where you don't have to jump on the capex level until producer activity warrants that for growth." ] }, { "name": "Tristan Richardson", "speech": [ "I appreciate it. Sorry, I missed that figure. Thank you, guys, very much." ] }, { "name": "Kevin Burdick", "speech": [ "Thank you." ] }, { "name": "Operator", "speech": [ "We'll take our next question from Shneur Gershuni with UBS." ] }, { "name": "Shneur Gershuni", "speech": [ "Hi. Good morning everyone. Good to hear everyone is well. Just maybe wanted to just start off with your dividend comments that you made in the prepared remarks.", "You'd mentioned that it could potentially be another down the road and so forth. When you sort of think about things, you've got a lot of headwinds obviously with COVID, potentially with Apple which can impact capex for the basis of your producer customers. I was wondering if you can give us the case studies or scenarios as to how you think about the dividend, either being maintained or potentially being reduced in the $2.6 billion guidance range for this year enough to maintain the dividend. What levels are you thinking about would become an area where you would become concerned as a $2.4 billion run rate? How much does SMP rereviewing your rating matter? Just wondering if you can sort of give us different paths and different outcomes as to how you're thinking and would be recommending the dividend to the board." ] }, { "name": "Terry Spencer", "speech": [ "So Shneur, this is Terry. So I'll just make a comment, and then Walt can follow up. As we think about 2021, I think this gets to the core of your question is, how do we think about this business going forward? And we've looked at a number of scenarios when we've been -- and the key variable -- a key variable of course is Apple. What happens to key questions? Is Apple going to be shut down? Is it going to continue to operate? As we think about that scenario, and we think about 2021, and even with the Apple shutdown, we could see 5mid to high single digit growth in EBITDA over what we've experienced or expect in 2020.", "So, in 2021, we could see that mid to high single digit. If we're fortunate, and Apple doesn't become an issue for 2021, we could see a 12% to 15% EBITDA growth over what we experienced or expect in 2020. So in both of those scenarios, we don't see a need to have to take a dividend action. And as Walt indicated, capital spending would be very, very modest $300 million to $400 million range.", "So, given that outlook, certainly we don't think it's appropriate to take any action at this point in time. Walt, anything to add to that?" ] }, { "name": "Walt Hulse", "speech": [ "We obviously stay in touch with the rating agencies. They saw that the activity definitely equity that's a proactive step to accelerate the leveraging from other real benefit not on that, and we're focused on cultivating, and we're pleased to see the strength that we're seeing in the -- from the producer activity bringing retail volumes back on the trend that that's showing us at this point in time." ] }, { "name": "Sheridan Swords", "speech": [ "It's Sheridan. The only thing I would emphasize, and we've said it a couple of times in our opening remarks, but that is this BPF and a half a day, particularly in the Williston basin, that deliverability is connected to our system and doesn't really depend on a whole bunch of rigs coming back into the basin. As we think about 2021, our growth that is our throughput growth on our GMP business is a function of capturing and accelerating that capture of that BCF and a half a day. So you think about this first-quarter 2020 volume of about 1.1 BCF a day in the BOC, and as you think about 2021, that number we expect to grow as we move throughout the year.", "And it's a function of capturing that BCF and a half a day of deliverability. That's already there. That's a that's the point we can't emphasize enough today." ] }, { "name": "Shneur Gershuni", "speech": [ "Well, I really appreciate that. A better answer than I expected. Maybe it's a good way to transition. You've answered this a little bit in the prior questions to some of the questions you've received in the prepared remarks.", "But when we talked about the drivers for a strong second half recovery, and as we sort of think about '21, as just talked about, if I remember, and I'm dating myself a little bit here, back to the '13, '14, '15 cycle, Bakken they did something in about 200 bps. In the most recent cycle, the Bakken, they did 50 rigs and you could see growth. Do you see that trend on efficiency continuing and that may be worth zeroing in on the wrong type of rig count for the Bakken to be able to generate enough ducks for you to be able to maintain and potentially grow production? Could you see something where 30 is really been one normal run rate that conserve run, 1.4 million, 1.5-million-barrel type market? Just kind of wondering what you're seeing in terms of thoughts on efficiencies and how things are moving around." ] }, { "name": "Kevin Burdick", "speech": [ "Shneur, it's Kevin. I'll start. You were a little muddy, so I'll make sure -- if I don't answer your question, make sure you jump back in here. I mean, we continue to -- the reserves have been fantastic in the Bakken, and producers have been year-over-year delivered better and better wells.", "The rigs have gotten more and more efficient. So, they continually had shown they can deliver more volumes and less capital is what that ultimately goes to. So, I think that's part of the story that over time, you won't need as many wells or completions to keep your volumes at certain levels. I think we've talked about it in that one, four to one five type range of all BCF a day volume.", "You're probably 30 to 40 completions per month on our acreage. And we think that's absolutely doable. And we do believe the quality of the wells will continue to improve. Go ahead Chuck." ] }, { "name": "Chuck Kelley", "speech": [ "Another data point I'd add, Shneur, is we work closely with all of our producers, and a couple of them have been the past six months or so, I wouldn't say experimenting, but working with longer laterals as long as three miles. And based on the results of this, we're being told that less wells will be needed for the increased deliverability that they're seeing through those longer laterals. So for that part of your question, regarding continued either technological enhancements or efficiencies, I would say to producers didn't dialed anything back and we're really seeing some good results from some of these folks with a much longer laterals now." ] }, { "name": "Kevin Burdick", "speech": [ "And sure -- One last thing on this topic, and I apologize. I should have brought this up sooner because we haven't mentioned it in our remarks either. Just to remind everybody, the gas to oil ratios continue to strengthen. So, look at crude oil forecast and you've got to apply the strengthening gas to oil ratios, and you can see some of the materials we provided on the presentation that shows what that's done over time, and it's continued to strengthen to where now it's more 2.2.", "So, that's another factor. We look at the basin of what's going on the GAAP side. Don't just focus on what's going on the crude oil side." ] }, { "name": "Shneur Gershuni", "speech": [ "That makes perfect sense. I really appreciate the color today guys. That was very helpful. Thank you." ] }, { "name": "Operator", "speech": [ "We'll take our next question from Colton Bean with Tudor, Pickering, Holt, and Company." ] }, { "name": "Colton Bean", "speech": [ "Appreciate the comments around from the green shoots of activity and how you might return to those marks level. So I think we will be getting back to the 1.5 BCF a day, understandably, a reversal of shut-ins is a large component of that. But I think the other key that the market is struggling with is what base declines with like. So, can you update us on how the wells that you've had still connected to your system producing over the last couple of months out of the chair, how does it fare?" ] }, { "name": "Chuck Kelley", "speech": [ "This is Chuck. Could you repeat the last part of your question? I didn't quite hear it, from the decline on?" ] }, { "name": "Colton Bean", "speech": [ "Yes, Chuck. I think in terms of understanding what level of completions we might need to see to get back to something that looks like a more stable base and ultimately growth, I think the basic line has been to some there. Interested to see if you guys have a view on when a PDP profile might work across your system." ] }, { "name": "Chuck Kelley", "speech": [ "So, similar to other shale plays, but we see typically or what we run in our models -- and you're wondering 50%, 55%, decline rate year two, and that's 20% to 25%, year three, 15% and then and then just maintaining stuff down from there. So your first year is your -- obviously, as you know, is your larger trial decline in a shale plays. We run at a 50%, 55% range." ] }, { "name": "Colton Bean", "speech": [ "OK, and you all feel comfortable that 30 to 40 completions a month would be sufficient to fully offset that base?" ] }, { "name": "Chuck Kelley", "speech": [ "We do." ] }, { "name": "Colton Bean", "speech": [ "And on planning side of things, I think we've heard from producers that wells that were flaring were preferentially shut in. So if you looked at that $125 million that's been flare on one of the acreage today, would you expect that to increase as you bring wells back online or alternatively, have you still been connecting to wells that are actually shut in today to accelerate that gas capture?" ] }, { "name": "Chuck Kelley", "speech": [ "What we've done here in the second quarter to help people flaring -- you won't really see that until third -- we expect to see the results here in third quarter relative to our flaring percentages, as we've completed some pretty good sized trunk lines into an area air flow that's been very, very limited and been able to get gas egress. So, put a couple of 20-inch trunk lines completed and tied in wells that had been flaring, as well as some new wells that were getting ready to come on. So, some of our infrastructure obviously is going to help on that 125 million a day." ] }, { "name": "Colton Bean", "speech": [ "Understood. Appreciate it." ] }, { "name": "Operator", "speech": [ "We'll take our next question from Michael Blum with Wells Fargo." ] }, { "name": "Michael Blum", "speech": [ "Great. Thank you everyone. Appreciate it. One question I wanted to ask was just about ethane recovery.", "Can you talk about -- I'm assuming you're not seeing much increase in the vacuum, but really wanted to talk about that? And also, to the extent you are seeing increased recoveries in the mid-con, how that's trending and any way to quantify that. Thanks." ] }, { "name": "Sheridan Swords", "speech": [ "Michael, this is Sheridan. You are correct out of Bakken where -- and their targets are not improving, and the economics at this time don't warrant that. But we have, as we mentioned, seen good ethane recovery increases in the midcontinent. And what I'd tell you today is that in June and July, the average percentage of ethane in a wide rig 45%.", "We are up over 60,000 barrels a day more ethane in the mid-comments than we were in the first quarter, and over 50,000 what we experienced in the second quarter. That's for June, and July is continued on that. So I think we -- as mentioned in our remarks, all the ethane or substantially all the ethane within the mid-continent that can come out is coming out of the sun. And we do predict that and continue through the rest of the year." ] }, { "name": "Michael Blum", "speech": [ "Great. And then a somewhat related question. There have been a lot of discussions about the gas dynamics in the Balkan, given the BTU issues. Obviously, that's obviously changed a bit.", "But just curious, your views, if you think any of the proposed expansions including how the northern border -- are any of those still in play or do you think that whole expansion discussion's kind of shelved here for a while until Bakken levels recover?" ] }, { "name": "Chuck Kelley", "speech": [ "Michael, this is Chuck. We answered a similar question in Q1. And at the time again with things in flux and trying to forecast, we're kind of -- as far as we were experiencing or working on expansions, kind of pushed that out a little bit. I think it's fair to say that an expansion should be forthcoming.", "I just can't tell you when. I would say it is pushed out probably 12 months anyway. We just need a better line of sight on some longer-term forecasts, but I think that expansion will definitely be needed in time." ] }, { "name": "Michael Blum", "speech": [ "Great. Thank you so much." ] }, { "name": "Operator", "speech": [ "We'll take our next question from Jean Ann Salisbury, Bernstein." ] }, { "name": "Jean Ann Salisbury", "speech": [ "Good morning. Just a follow-up on the Bakken NGL to create conversion potential; recognizing that it's still in early development, but would this require overland pass to convert to create as well?" ] }, { "name": "Chuck Kelley", "speech": [ "Be able to move through the Bakken pipeline, physically possible, we would probably move it into the currency area." ] }, { "name": "Jean Ann Salisbury", "speech": [ "OK. So, it would just before you hit ever like that?" ] }, { "name": "Chuck Kelley", "speech": [ "Yes." ] }, { "name": "Jean Ann Salisbury", "speech": [ "Great, thank you. And then just a quick one. What's the latest estimate of when you would be a federal cash taxpayer?" ] }, { "name": "Chuck Kelley", "speech": [ "Well, nothing really changed from a tax standpoint, other than the fact that obviously, the rate of the EBITDA is going to be lower than expected in 2020. So, if anything, it smoothed out a little bit because the assets that we ultimately complete and we tried down the road, when growth is back and those are needed, that depreciation will come at a later date and we'll be able to optimize the economy. So, we don't expect to be a LIFO taxpayer for several years. And eventually, we'll get into a situation where there are some limitations that are currently out there on the utilization that allows, but that's still a few years down the road." ] }, { "name": "Jean Ann Salisbury", "speech": [ "Great. That's all for me. Thank you very much." ] }, { "name": "Operator", "speech": [ "We'll take our next question from Sunil Sibal of Seaport Global Securities." ] }, { "name": "Sunil Sibal", "speech": [ "Hi. Good morning, guys. Can you hear me?" ] }, { "name": "Chuck Kelley", "speech": [ "Yes, we can hear you." ] }, { "name": "Sunil Sibal", "speech": [ "So, thanks for all the clarity on the call. I just had one follow-up question on the leverage metrics. In the press release yesterday, you had indicated a covenant-based deleverage tracking at 4.5 times. So it seems like to me that there is a fair bit of project EBITDA baked into that based on projects, which did not contributed to EBITDA yet.", "First, is that correct? And secondly, when you did that EBITDA into the covenant metrics, is that based on cash flows, which are contracted? Or is it more driven by your expectation? And then how frequent is that expectation kind of revised? Thanks." ] }, { "name": "Chuck Kelley", "speech": [ "Could you repeat the first part of your question please?" ] }, { "name": "Sunil Sibal", "speech": [ "So in the press release, you had indicated that the covenant-based leverage was tracking at 4.5 times. So when I looked at your debt balances were -- looked as LTM EBITDA, I come up with a higher number. So I was just trying to reconcile that disconnect?" ] }, { "name": "Chuck Kelley", "speech": [ "The covenant calculation does not trust exactly to GAAP under the bank covenant. There is a provision that allows for an EBITDA assumption associated with capex that's either come into service or will come into service down the road, and that scaled down over a period of time. So, there's a there's a mismatch. There always has been a slight mismatch between the GAAP and the covenant calculation.", "At this point, the covenant calculation is at 4.5 times versus the covenant at five times." ] }, { "name": "Sunil Sibal", "speech": [ "OK, got it. Thanks." ] }, { "name": "Operator", "speech": [ "We'll take our next question from Michael Lapides with Goldman Sachs." ] }, { "name": "Michael Lapides", "speech": [ "Hey, guys. Thank you for taking my question. Can you comment a little bit about what you're seeing in frac volumes at Belvieu? And I'm kind of going back a little bit, just kind of what the trend, could you kind of call that data out a little bit about what you've seen frac wise? And are you saying it does not have any export capacity, especially given LPG exports have kind of held up relatively strong during the last three or four-month period, does not have a dock capacity or export capacity actually impact you at the frac level, your volumes relative to maybe what you think or what you're seeing your competitive peers growing fracs and at Belvieu as well?" ] }, { "name": "Chuck Kelley", "speech": [ "We -- right now, because of the way our system is set up, all our fracs can be a Belvieu frac. So when you look across our system, we have plenty of frac capacity because any of the volume that we frac in the Mid-Continent with the Sterling system, we can make that volume show up in Mont Belvieu. So right now, as we look forward, we have plenty of frac capacity through 2020 or until we see a much better improvement into a producer productivity that we would need to bring MB-5 back on. So we're in pretty good shape on the frac capacity side.", "In terms of do we need an export offer, does that impact us on the frac side, it does not at this time. Right now, there's more export capacity than frac capacity, really. And so we are able to contract and have contracted a lot of volumes in a short period of time to exporters because they need that volume to fulfill their commitments across the DUCs. So at this time, we don't see that it's a hindrance not to have those off.", "Of course, as we look into the future, that's still something on our list that we would like to look at a period of time when we see more supply come online that would warrant additional frac capacity. But at this time, we do not see it as a hindrance or as a disadvantage to us." ] }, { "name": "Michael Lapides", "speech": [ "Yeah. That's super helpful. Can you just talk a little bit about what you think the utilization rate in the quarter was for your fracs and how July is looking?" ] }, { "name": "Chuck Kelley", "speech": [ "Could you repeat that again? We're having difficulty hearing you." ] }, { "name": "Michael Lapides", "speech": [ "Guys, could you talk a little bit about what you think your frac utilization rate was in the quarter and what you're seeing in July? How big of a step up? You kind of gave a lot of detail about what July looked like or cost setup, throughput across multiple basins and in gas. I'd love to just kind of a same level of detail on the frac side." ] }, { "name": "Chuck Kelley", "speech": [ "Right now, we are over 80% on our frac utilization. We've seen a big step up on that because we've bought more ethane on, and that doesn't -- that capacity has always been there. But we're sitting about a little over 80% of what our frac utilization would be. And so, as we continue to grow into the third quarter, we have already seen that volume increase that we talked about in July.", "We still move closer to that -- maybe closer to the 90%, the 85%, 90% which still leaves us plenty of frac capacity." ] }, { "name": "Michael Lapides", "speech": [ "Got it. And then one final one, if I may. Terry, with you in the board, kind of evaluate capital allocation -- I know you talked today about not needing to do anything with the dividend. How do you think about the balance between evaluating the dividends versus evaluating the incremental equity issuances if needed? You kind of have to shell out screening for the forward sale agreement.", "I'm just trying to think about how you and the board think about what's the light source of equity capital if equity capital is needed." ] }, { "name": "Walt Hulse", "speech": [ "A couple of different aspects. It's related to deleveraging any dividend action that would have been considered from a deleveraging standpoint would have taken quite a bit of time to actually have an impact wherewith the equity offering there was an immediate impact from the credit standpoint. The other side of that also as well is that as we see the business going forward in that the COVID has a defined period of time that it will take to play through and provided we know exactly what that defined of time is that to the extent that it's measured in quarters, we didn't believe that that meant that we should be adjusting our dividend for a quarter or two or more disruptions. We needed to make a positive step on the deleveraging standpoint and the quickest way to do that was to do the equity offering.", "Then as we see the strength of the business coming back and that would be there to support that dividend in the long term we continue to get on that path." ] }, { "name": "Terry Spencer", "speech": [ "And Michael, the only thing I'd add to Walt's comments you get from a priority standpoint, maintaining that investment-grade credit rating is extremely important to the company and important to this Board. So it remains a high priority. Certainly, that was in the mix in terms of the capital allocation decisions that we were making." ] }, { "name": "Michael Lapides", "speech": [ "Got it. Thank you, guys, much appreciated." ] }, { "name": "Operator", "speech": [ "We'll take our next question from Craig Shere with Tuohy Brothers." ] }, { "name": "Craig Shere", "speech": [ "Thanks for taking the question. It sounds like a wonderful artwork heading into the second half here. That's great clarity. On potentially repurposing the dock and NGL pipeline, how long would that take and would any concurrent upsizing needed on outreach be done in the same time frame?" ] }, { "name": "Sheridan Swords", "speech": [ "Craig, this is Sheridan. We're still evaluating all the aspects of that, turning it into crude or if that warrants it or what needs to be done. So we continue to look through that. So as we continue to evaluate that more, we'll have a better understanding of what it takes to convert it through." ] }, { "name": "Craig Shere", "speech": [ "Are we looking at something that could be a couple of years? Or could it be comfortably quicker than that if you had to go that route if the market needed it?" ] }, { "name": "Sheridan Swords", "speech": [ "I don't think it's a couple of years, but it will take some time." ] }, { "name": "Craig Shere", "speech": [ "All right, thanks. Walt, I apologize. I guess I'm a little confused about the capex guidance. I thought I read the second half will be an absolute $300 million to $400 million, but then do I understand that's ongoing until there's a lot of more clarity on COVID and upstream volume that the annual rate in the 2021 will be $300 million to $400 million?" ] }, { "name": "Terry Spencer", "speech": [ "That's correct, Craig. Yes. As we finish up 2020, we've got things like the north laterals that as we limit volume commitment, we're finishing up and wrapping up some of those types of projects. But as we get into 2021, we'll be able to continue to keep that $300 million to $400 million range, including maintenance CapEx.", "And obviously a pickup in volumes that would get us above the level that we had been originally forecasting for 2020. So we've got some significant headroom with there, and we can obviously prioritize those cash flows as we go in toward our deleveraging goals." ] }, { "name": "Craig Shere", "speech": [ "Very good. Last question on storage and ethane recovery was spoken of a lot on the first-quarter call. I think we already addressed ethane. I know storage is only maybe 10s of millions of uplift but I don't know Sheridan, maybe you want to talk about when exactly that might be hitting.", "I know it's a hedged position. What should we be looking for into the second half?" ] }, { "name": "Sheridan Swords", "speech": [ "Yes. I think the contango that represented itself or presented itself in the second quarter because of how we sold that product out for, and we will see that benefit show up in the second half of the year." ] }, { "name": "Craig Shere", "speech": [ "Should we see most of that in the fourth quarter?" ] }, { "name": "Sheridan Swords", "speech": [ "Yes, you could see some of that in the fourth quarter. We've sold it throughout the third and fourth quarter so you can see it through the remainder of the year. A lot is going to happen on this week in prices through that period of time but it will be spread through the second half of the year if I can think so far." ] }, { "name": "Craig Shere", "speech": [ "Great, thank you." ] }, { "name": "Operator", "speech": [ "We'll take our final question from Derek Walker with Bank of America." ] }, { "name": "Derek Walker", "speech": [ "Thank, you guys. Wishing you a good new year. Maybe just a couple of clarification questions. If I heard right in your -- earlier in the Q&A portion, referencing kind of a DAPL impact.", "I believe you referenced it due to the extended shutdown, it would be sort of a kind of mid-to-single EBITDA growth year-over-year. And if it won't shutdown, it would be 12% to 15% kind of year-over-year the EBITDA growth rate. And is that also the $2.6 billion number for 2020? Just to make sure I have heard that right." ] }, { "name": "Walt Hulse", "speech": [ "That's correct. That's what you base. Those percentages that I provided earlier are based upon the low end of the range that we provided for 2020. You base it off of that." ] }, { "name": "Derek Walker", "speech": [ "OK, perfect. Then I think the formal market definition proficiencies was it coming from Rodney Vegas with his opposition to power saving captured 50 million for the year and you talk about 120 is relative to your 2020 plan. Like I say, if you start to see things we recover in the second half do you feel most of that profit is sustainable or do you see some not coming back?" ] }, { "name": "Kevin Burdick", "speech": [ "This is Kevin. Yes, we absolutely believe those cost savings are attainable. As we move through the year we've taken -- our team has done a fantastic job of finding opportunities and some of those opportunities you identify them but it takes a little bit of time to actually get in and we've been doing that so. So we do believe, even with the volume strengthening that we'll realize those savings in the back half of the year." ] }, { "name": "Derek Walker", "speech": [ "Got it. Thank you very much." ] }, { "name": "Operator", "speech": [ "That concludes today's question and answer session. Mr. Ziola, I'd like to turn the conference back to you." ] }, { "name": "Andrew Ziola", "speech": [ "Well, thank you, Sara. Our quiet period for the third quarter starts when we close our books in early October and extends until we release earnings in late October. We'll provide details for that conference call at a later date. Thank you for joining us and have a good day." ] }, { "name": "Operator", "speech": [ "[Operator signoff]" ] } ]
OKE
2023-02-28
[ { "description": "vVice President, Investor Relations and Corporate Affairs", "name": "Andrew Ziola", "position": "Executive" }, { "description": "President and Chief Executive Officer", "name": "Pierce Norton", "position": "Executive" }, { "description": "Chief Financial Officer and Executive Vice President, Strategy and Corporate Development", "name": "Walt Hulse", "position": "Executive" }, { "description": "Executive Vice President, Chief Operating Officer", "name": "Kevin Burdick", "position": "Executive" }, { "description": "UBS -- Analyst", "name": "Brian Reynolds", "position": "Analyst" }, { "description": "Citi -- Analyst", "name": "Spiro Dounis", "position": "Analyst" }, { "description": "President, Gathering and Fractionation", "name": "Sheridan Swords", "position": "Executive" }, { "description": "Wells Fargo Securities -- Analyst", "name": "Michael Blum", "position": "Analyst" }, { "description": "Barclays -- Analyst", "name": "Harry Mateer", "position": "Analyst" }, { "description": "", "name": "Unknown speaker", "position": "Other" }, { "description": "Truist Securities -- Analyst", "name": "Neal Dingmann", "position": "Analyst" }, { "description": "Bank of America Merrill Lynch -- Analyst", "name": "Neel Mitra", "position": "Analyst" }, { "description": "Seaport Global Securities -- Analyst", "name": "Sunil Sibal", "position": "Analyst" } ]
[ { "name": "Operator", "speech": [ "Hello and welcome to the ONEOK fourth quarter 2022 earnings conference call. [Operator instructions] Please note, this event is being recorded. I would now like to turn the conference over to Mr. Andrew Ziola.", "Please go ahead." ] }, { "name": "Andrew Ziola", "speech": [ "Thank you, MJ, and welcome everyone to ONEOK's fourth quarter and year-end 2022 earnings call. We issued our earnings release and presentation after the markets closed yesterday, and those materials are on our website. After our prepared remarks, management will be available to take your questions. Statements made during this call that might include ONEOK's expectations or predictions should be considered forward-looking statements and are covered by the safe harbor provision of the Securities Act of 1933 and 1934.", "Actual results could differ materially from those projected in forward-looking statements. For a discussion of factors that could cause actual results to differ, please refer to our SEC filings. Just a reminder for Q&A, we ask that you limit yourself to one question and one quick follow-up in order to fit in as many of you as we can. With that, I'll turn the call over to Pierce Norton, president and chief executive officer.", "Pierce." ] }, { "name": "Pierce Norton", "speech": [ "Thanks, Andrew, and good morning, everyone, and thank you for joining us this morning. On today's call is Walt Hulse, our chief financial officer and executive vice president, investor relations and corporate development; and Kevin Burdick, executive vice president and chief commercial officer. Also available to answer your questions are Sheridan Swords, senior vice president, natural gas liquids and natural gas gathering and processing; and Chuck Kelley, senior vice president, natural gas pipelines. Yesterday, we announced strong fourth quarter and full year '22 performance.", "We met our 2022 financial guidance expectations despite weather-related events and a significant operational incident. We also achieved our ninth consecutive year of adjusted EBITDA growth in 2022. Through the efforts of our workforce and the resiliency of our assets, we have provided exceptional value for our stakeholders and have positioned ONEOK to continue delivering growth in 2023. I believe the term resiliency is a great the scripture -- descriptor of 2022 and will continue to be a focus of our operations going forward.", "Our people, assets, and earnings continued to prove their resiliency, flexibility, and stability. With yesterday's earnings announcement, we also provided 2023 financial and volume guidance expectations. Higher natural gas processing and NGL volumes, and a strong fee-based earnings are expected to contribute to higher earnings in 2023 as we continue to focus on both growing our core business and innovating for future opportunities. There are key differentiators of ONEOK's business that have proven critical to our past success and offer us confidence in the future.", "These differentiators provide stability, resiliency, and unique opportunities for growth. First, our solid and growing base business, which features strategically positioned assets in some of the most productive U.S. shale basins, connected with some of the largest and most well-capitalized producers in the U.S. who provide stable and growing supply to our systems.", "Our margins in our core businesses are approximately 90% fee-based, with minimum direct commodity price exposure because of our proactive hedging strategy. Second, our strong balance sheet and investment-grade credit ratings, which provide significant financial flexibility. We reduced our leverage to below 3.5 times and significant -- a significant milestone for us. We provided investors with more than 25 years of dividend stability and growth, not cutting our dividend during the COVID-challenged years, and recently announced a dividend increase.", "Third, our proven track record of intentional and disciplined growth. We continued to benefit from significant operating leverage across our systems, enabling us to continue focusing on lower capital, high-return projects, and investments to support producer growth across our operations. Our strong return on invested capital is a source of pride for ONEOK and is a key metric for evaluating our management's team performance annually. Our nearly 15% ROIC in 2022 highlights the scrutiny that we place on investments, the efficiency of our capital, and the high quality of our projects' earnings.", "And this disciplined growth also approaches and will continue. Finally, the continued demand of the energy products and services that we provide, which are vital to our national security and the quality of life. And which we believe will play an important role in a transforming energy future. U.S.", "natural gas and natural gas liquids remain abundant and reliable. The products that we move will continue to provide much-needed energy domestically and globally. We entered 2023 from a position of strength, driven by a year of solid financial and operational performance. And as you can see, there are many reasons why we are confident and optimistic about ONEOK's future.", "With that, I'll turn the call over to Walt for a discussion of our financial performance." ] }, { "name": "Walt Hulse", "speech": [ "Thank you, Pierce. As we detailed in yesterday's press release, we expect continued growth in our businesses in 2023 after achieving our 2022 financial guidance, even with some challenging events. ONEOK's fourth quarter and full year 2022 net income totaled $485 million and $1.72 billion, respectively, representing increases of 28% for the fourth quarter and 15% for the full year compared with the same period in 2021. Adjusted EBITDA also increased year over year, totaling $967 million in the fourth quarter 2022 and $3.62 billion for the full year.", "Our strong financial performance was driven by increased producer activity, higher realized commodity prices, higher average fee rates, and higher natural gas storage and transportation services. In January, we increased our quarterly dividend to 95.5 cents per share or $3.82 per share on an annualized basis, marking a return to dividend growth following three years of dividend stability. In November 2022, we completed a $750 million senior notes offering due in 2032, generating net proceeds of $742 million, which was primarily used to repay short-term debt. And just yesterday, we redeemed $425 million of 5% senior notes due September 23 with cash on hand.", "Our year-end net debt to EBITDA on an annualized run rate basis was 3.46 times, in line with our previously discussed aspirational target of 3.5 times or less. As it relates to Medford, we reached an agreement with our insurers in early January to settle all claims related to the incident for total insurance payments of $930 million, which included $100 million that was paid in 2022. We received the remaining $830 million in the first quarter of 2023 and applied approximately $50 million to an outstanding 2022 insurance receivable. We provided a table in our earnings release showing the line-by-line details.", "The remaining $780 million will be recorded as a gain in our operating income in the first quarter of 2023. As Pierce mentioned, with yesterday's earnings announcement, we provided 2023 financial guidance, including a net income midpoint of $2.41 billion and an EPS midpoint of $5.36 per share -- diluted share. We also provided an adjusted EBITDA midpoint of $4.575 billion. Our guidance includes the net effect of the one-time insurance settlement gain of $780 million and future Medford-related costs, primarily third-party fractionation, which we estimate will total $240 million in 2023.", "We expect Medford-related costs to be significantly lower in 2024 due to our ability to fully utilize the MB-5 fractionator to substantially reduce third-party fractionation costs compared with 2023. By taking the full settlement of $780 million, less the $240 million of expected third-party costs in 2023, you get a total approximately $540 million related to the settlement that has been assumed in our $4.575 billion adjusted EBITDA guidance midpoint for 2023. Excluding the effect of the settlement and the third-party costs of $540 million, this still amounts to more than $4 billion double-digit earnings growth, which we referenced on our last earnings call. We also expect double-digit earnings growth at the midpoint for both natural gas liquids and natural gas gathering and processing segments, driven by higher volume expectations across our operations.", "Kevin will provide more detail on each of the operating segments in a moment. Our 2023 guidance assumes producer activity associated with WTI crude oil prices in the range of what we are currently seeing in the market. We expect total capital expenditures of $1.38 billion, which includes growth and maintenance capital. This midpoint reflects the investments necessary to keep up with expected increase in producer activity, the completion of MB-5 early in the second quarter of 2023, and also more than $300 million related to MB-6 this year.", "Excluding the MB-6 expenditures, our total capex would have been lower than 2022. Our 2023 capex guidance does not include the Saguaro Connector Pipeline or any other projects that have not reached a final investment decision. Our routine growth capital accounts for higher number of well connects and our higher return projects such as natural gas storage expansions, pump stations, and compression expansions to meet customer needs. Finally, as it relates to the 15% alternative minimum tax associated with the Inflation Reduction Act, we expect the AMT to have an impact on our cash taxes beginning with the 2024 tax year.", "You can find details in our 10-K when it is filed later today. I'll now turn the call over to Kevin for a commercial update." ] }, { "name": "Kevin Burdick", "speech": [ "Thank you, Walt. We saw a strong full year natural gas gathering and NGL volumes on our system in 2022 despite several weather events during the year, providing continued growth in our primarily fee-based earnings. NGL volumes were particularly strong in the Rocky Mountain region, increasing 12% year over year due to higher activity levels and increased opportunities to recover ethane from the region. Well connects across our operations increased 24% compared with 2021, and we saw a solid return of activity in the Mid-Continent, driving a significant increase in well connections in the region and higher natural gas processing volumes on our system.", "We'll continue to see the benefits of this activity throughout 2023 as volumes ramp. Our natural gas pipeline segment exceeded its 2022 financial guidance range on higher earnings from long-term storage services and higher rates from renegotiated contracts. Customers continue to see the value in our storage assets, and we continue to evaluate opportunities to expand these services. Turning to 2023.", "Key drivers for our higher 2023 guidance include stable producer activity, providing higher natural gas and NGL volumes across our systems, continued strength in fee-based earnings and rates, and higher expected realized commodity prices due to hedges placed at higher price levels compared with 2022. At the midpoint, our 2023 volume guidance would result in a 7% increase in total NGL volumes and an 11% increase in total natural gas processing volumes compared with 2022. In the natural gas liquids segment, we expect volume growth to be driven by strong producer levels -- producer activity across our operations, continuing the momentum we saw from producers in 2022. Higher average fee rates will also contribute to the segment's earnings as contract escalators continue to be realized throughout the year.", "NGL market dynamics point toward a continued improvement in global demand, with China reopening and with lower natural gas prices resulting in an attractive environment for U.S. pet chems. We expect this current market to drive increased activity from the U.S. petrochemical industry relative to global pet chems, while the U.S.", "position being -- with the U.S. position being one of the lowest on the global cost curve. On our system, we expect the Permian Basin to stay in high ethane recovery in 2023 and for the Mid-Continent to be in partial recovery as natural gas prices fluctuate seasonally. We also expect to continue to see opportunities to incentivize ethane recovery in the Rocky Mountain region this year.", "We are on track to complete our 125,000 barrels per day MB-5 fractionator in Mont Belvieu early in the second quarter of 2023. And we recently announced MB-6, which we expect to be complete in the first quarter of 2025. Moving on to the natural gas gathering and processing segment. We expect volume growth again this year in both the Rocky Mountain and Mid-Continent regions, driven by producer activity levels, resulting in more well connections than in 2022.", "In the Rocky Mountain region, we expect processed volumes to grow 11% at the midpoint compared with 2022 and average nearly 1.5 billion cubic feet per day in 2023. Already this year, despite winter weather, we've reached process volumes as high as 1.46 billion cubic feet per day in February, a new record for the segment. We completed construction on the 200 million cubic feet per day Demicks Lake III processing plant this month, providing our customers with needed capacity, as well as operational redundancy. Activity levels in the Williston Basin remain strong, particularly considering we are just entering March.", "There are currently more than 40 rigs and 22 completion crews operating in the basin, compared with just over 30 rigs and 13 completion crews at this time last year. Producers remain committed to the region, and we anticipate a few more rigs will return as we move into spring. At our guidance midpoint, we expect to connect 500 wells in the region this year, a nearly 40% increase compared with 2022. We've already connected nearly 90 wells through February and have remained steady at more than 20 rigs operating on our dedicated acreage.", "Additionally, there remains a large inventory of around 500 DUCs basinwide, with approximately half on our acreage. Keep in mind that in the Bakken, producer economics are driven by crude oil and customers -- our customers are some of the largest and most well-capitalized in the country. This means recent fluctuations in commodity prices and specifically lower natural gas prices have not had an impact on producer activity levels on our acreage. We also expect gas-to-oil ratios to remain strong and continue to trend higher in the future, which can drive volume on our systems even without increased producer activity.", "In the Mid-Continent region, we continue to see positive activity, with approximately 10 rigs currently operating on our acreage and more than 50 across the region. We expect processed volumes to grow 12% at our guidance midpoint compared with 2022 and average more than 700 million cubic feet per day in 2023. Rig activity across the basin will also continue to drive additional NGL to our system. In the natural gas pipeline segment, we continue to expect strong demand for natural gas storage and transportation services in 2023.", "At the end of 2022, nearly 80% of our natural gas storage capacity was contracted under long-term agreements, and our pipeline transportation capacity was nearly 95% contracted. We expect similar levels in 2023. Work continues on a project that will expand our storage capabilities in Oklahoma by 4 billion cubic feet, and we are currently evaluating reactivating previously idled storage facilities in Oklahoma and Texas. Construction also continues on our Viking pipeline compression electrification project.", "The Oklahoma storage expansion and Viking project are both slated for completion this year. Additionally, in late December 2022, a ONEOK subsidiary filed a presidential permit application with the FERC to construct and operate new international border crossing facilities at the U.S. and Mexico border. The proposed border facilities would connect upstream with a potential ONEOK intrastate natural gas pipeline called the Saguaro Connector Pipeline and with a new pipeline under development in Mexico for ultimate delivery to an export facility on the west coast of Mexico.", "Since the announcement, there have been several positive developments related to the potential LNG export project. And a final investment decision on the ONEOK pipeline is expected in mid-2023. Pierce, that concludes my remarks." ] }, { "name": "Pierce Norton", "speech": [ "Thank you, Kevin, and thank you, Walt. We covered a lot today, and we have many reasons to feel confident in our 2023 guidance and our expectations for more growth this year. Everything that we've talked about today, from our 2022 performance to our future expectations and key differentiators for growth, are all underscored by our commitment and focus on safety and environmental performance. Our company and our industry aren't immune to incidents, but I'm proud of how we have responded when challenges do occur and how we continue working to improve our performance going forward, focusing on safety and the health of our employees and the communities near where we operate.", "From our environmental perspective, we've made significant progress toward our greenhouse gas emissions reduction target, achieving reductions that equate to approximately 20% of our total 2030 reduction target. Our employees' dedication to meeting customers' needs while operating our assets in safe, reliable, and environmentally responsible manner continues to drive our strong operational growth and financial performance year after year. And we're set up well for continued growth in 2023. With that, operator, we are now ready for questions." ] } ]
[ { "name": "Operator", "speech": [ "Thank you, Pierce. We will now begin the question-and-answer session. [Operator instructions] Today's first question is from Brian Reynolds with UBS. Please go ahead." ] }, { "name": "Brian Reynolds", "speech": [ "Good morning, everyone. Maybe just start off on the guidance. You know, last year, we had a couple of weather events and a material amount of frac capacity come offline, but, you know, guidance was still achieved. While some activity seems to have gotten pushed to '23 from '22, the '23 guide, you know, eerily seems similar to the 2022 original-based guidance.", "So, perhaps could you just talk about, you know, the puts and takes this year from last year and whether this is, you know, a base guide outperformance or, you know, if we saw some, you know, volumes for G&P and NGL get moved into '23. Thanks." ] }, { "name": "Kevin Burdick", "speech": [ "Brian, yeah, this is Kevin. I think the -- probably the big thing is just like you mentioned, the volume that was offline and really the delays we saw when the volume came offline primarily in April when we had the severe -- just kind of historic weather events in North Dakota that just delayed not only getting volume back online, which hurt our '22, but it delayed some of the well connects as we -- into -- push back into '23. So, that's why we feel really good about our '23 guide. Yes, we've got a significant step up in well connects.", "But when you look at the 90 wells we've already connected to date, which historically is some of our lower months from a well connect perspective, and you look at the momentum we kind of built as we exited '22, we feel really good about where we're at volumetrically in both the G&P and NGL out of Bakken." ] }, { "name": "Brian Reynolds", "speech": [ "Great. Thanks. And as a follow-up, just on capital allocation, it seems like we should have pretty stable capex the next few years with the MB-6 build-out. And just given the already announced dividend raise and leverage targets and payout ratios met at this point, you know, how should we think about use of excess cash going forward? Thanks." ] }, { "name": "Pierce Norton", "speech": [ "Brian, this is a good question to kind of, you know, clear up and really focus on what our key strategies are for capital allocation. The first one is that we want to invest in higher-return organic projects that are adjacent to our existing footprint. The second thing is that we want to maintain and grow a -- what we refer to as a sustainable dividend. And what we mean by that is we want to keep that dividend growth somewhere below our EPS growth percentage.", "And then also focus on our payout ratio, which I would say that, you know, approximately 85% or lower. So, you know, we were above 100%. We've got it down below 100% in our 2023 guidance. And number three, we want to keep our strong investment grade credit ratings, with a target of that 3.5 times debt to EBITDA.", "And assuming that we've achieved all of those kind of capital allocation key strategies, you know, if we do have, you know, excess cash or whatever, we could consider share buybacks. But that's kind of laying it out as to what our priorities are from a capital allocation standpoint." ] }, { "name": "Brian Reynolds", "speech": [ "Great. Thanks. Appreciate the color. I'll leave it there.", "Enjoy the rest of your day." ] }, { "name": "Pierce Norton", "speech": [ "Thanks." ] }, { "name": "Operator", "speech": [ "The next question is from Spiro Dounis with Citi. Please go ahead." ] }, { "name": "Spiro Dounis", "speech": [ "Thanks, operator. Good morning, guys. First question, I wanted to touch on the third-party frac fees. You guys highlighted Mont Belvieu-5, frac 5 coming online and really sort of benefiting 2024 from the third-party frac beat perspective.", "But, you know, I guess just given the fact it does come on or it sounds like it's going to come on early in second quarter, is there any ability to leverage that frac as well in 2023 and to the extent you considered any of that in the '23 guidance?" ] }, { "name": "Sheridan Swords", "speech": [ "Spiro, this is Sheridan. So, when we had the Medford incident, we went out right away and secured frac capacity that we thought we needed going into '23. And we already took into account that MB-5 was going to come up in April. So, our -- what we contracted for frac capacity is obviously heavier in the first part of the year until MB-5 comes on and then drops off.", "And that was all accounted for in the settlement that we had with the insurance company. So, we had that already baked in. And that's why there is not that much movement on the third-party frac that we have. Obviously, MB-5 will help us.", "If volume exceeds our expectation, we will be able to use MB-5 for that in '23." ] }, { "name": "Spiro Dounis", "speech": [ "Got it. Thanks, Sheridan. Second question, multipart one on the Saguaro pipeline. To the extent that does reach FID in mid-'23, I guess, one, would you expect any impact on the '23 capex budget, or is that kind of more of a 2024-plus item? And then if you could just maybe give us any sense of cost of the pipeline that you'd be willing to take on JV partners? And then finally, just on the 2.8 Bcf a day of ultimate design capacity.", "Obviously, it's a pretty big pipe. Should we imagine that that maybe comes on in phases or just how to think about the cadence there?" ] }, { "name": "Kevin Burdick", "speech": [ "Spiro, this is Kevin. The -- still a lot of your questions were that's what we're working through right now. We're not going to provide a capital guide. There'd be a little money that would be spent if we FID this year.", "But obviously, the bulk with it coming on -- the anticipation that come on in, you know, 2025 time frame, that most of the capital is going to get pushed is going to be pushed out." ] }, { "name": "Spiro Dounis", "speech": [ "Got it. Fair enough. Appreciate the color, guys. Thanks again." ] }, { "name": "Operator", "speech": [ "The next question comes from Michael Blum with Wells Fargo. Please go ahead." ] }, { "name": "Michael Blum", "speech": [ "Thanks. Good morning, everyone. So, I wanted to ask you about ethane recovery. You gave some broad expectations for ethane recovery across your footprint.", "But, you know, gas prices are pretty weak. It seems like they're going to stay there for a while. Can you just talk about opportunities for ethane recovery, specifically in the Bakken, and what is actually reflected in guidance?" ] }, { "name": "Sheridan Swords", "speech": [ "Yeah, Michael, this Sheridan. We have a very modest amount of ethane -- incentivized ethane in our guidance, a little bit that we have already contracted and already locked down the spread. We have not done any more than that. As you said, we do see a lot of opportunity in '23 with this low gas price, which Kevin mentioned in his remarks, is making the United States pet chem very advantaged on using ethane as a feedstock going forward.", "And we think that we will continue to see more ethane recovery as we go through the year, especially as more demand comes on internationally, which we will pull the Mid-Continent up to be more in ethane recovery later in this year and will allow us to incentivize more ethane out of the Bakken at wider spreads than what we have done today." ] }, { "name": "Michael Blum", "speech": [ "OK, great. And then I also just wanted to ask another question about the frac market. It seems like everyone's adding frac capacity. And so, I'm wondering if you think that's going to be pressuring rates over time at Mont Belvieu.", "And within that context, how should we think about Frac 6? How much of that is going to be contracted with third parties versus help from your own account? Thanks." ] }, { "name": "Sheridan Swords", "speech": [ "Well, Michael, what I say about frac capacity coming online, in the NGL world, the people that are building those fracs as us, we contract that volume and build our fracs to be able to grow into. So, as these fracs come on, you would probably see the spot market be a little bit weaker than it was when our frac went down. But long term, those fracs are contracted and then -- and as volume comes on, they will fill that. In terms of MB-6, remember, MB-6 is really just replacing Medford.", "And so, MB-6 is completely contracted as Medford was completely contracted. So, we really only look in our -- really add to our frac fleet is the MB-5 that we had substantially contracted before the Medford incident. So, I think you'll see a little bit of softening in rates in the spot market. But long term, I do not think you will see softening of rates." ] }, { "name": "Michael Blum", "speech": [ "Great. Thank you." ] }, { "name": "Operator", "speech": [ "The next question comes from Harry Mateer here with Barclays. Please go ahead." ] }, { "name": "Harry Mateer", "speech": [ "Yeah, thanks. Good morning. You know, on the 3.5 times leverage target, you know, while you've spoken about it as being aspirational for some time. But at this point, with where you closed out '22 and given your '23 guidance, it seems more reality than aspirational.", "So, how are you thinking about it now? Is the plan to hold this level going forward, or are you not ready to commit to that with Saguaro ahead of you and, you know, what is still a pretty good oil price environment?" ] }, { "name": "Walt Hulse", "speech": [ "Well, Harry, I think that we've definitely achieved the goal as we sit here today given the fact that we had an $830 million infusion from the insurance settlement. You know, over the course of the next couple of years, we obviously will utilize some of that cash to build out MB-6, and we would expect to come back into that 3.5 or below in the not-too-distant future. You know, we like that as a spot to give us flexibility going forward. But I think that Pierce walked through our capital allocation thoughts earlier.", "You know, we're not concerned if it trails down a little bit lower as we look for projects. But I would just go back to Pierce's discussion about our capital allocation." ] }, { "name": "Harry Mateer", "speech": [ "OK, thanks. And then, you know, my follow-up is just I know you guys recently redeemed one of your maturities. Later this year, you have another one. You know, any guidance you can give us on, you know, potential financing plans for the year and how you plan to, you know, manage potential debt capital markets needs?" ] }, { "name": "Walt Hulse", "speech": [ "Sure. Well, yes, you're right that we actually did the May call because we could do it at par on the 4.25 for May. The other coupon that we have later in the year is 7.5%. So, the May call doesn't work.", "So, we'll wait until the actual contractual call date, which I think the first time we can do that is early May. You know, I think you can assume that given the fact that we have this cash infusion, that we will take that out for cash at that point in time. And we'll just assess our needs as we go through the year if there is a need for any further issuance. But as we said today, we will cover up our maturities with cash on hand." ] }, { "name": "Harry Mateer", "speech": [ "Great. Thanks very much." ] }, { "name": "Operator", "speech": [ "The next question is from Jackie [Inaudible] with Goldman Sachs. Please go ahead." ] }, { "name": "Unknown speaker", "speech": [ "Hi. Good morning. Thank you so much for the time. First, I'd like just to focus a little bit on the macro front.", "What are your thoughts and comfort level on Bakken gas egress out of the basin? And further, are you seeing the need for Bison River or any other ways to add gas capacity there?" ] }, { "name": "Kevin Burdick", "speech": [ "Jackie, this is Kevin. Just kind of macro, you know, Bakken-related, from a gas takeaway perspective, we've talked before that we do believe there are still 300 million, 400 million cubic feet a day of capacity on Northern Border that the basin will continue to price out. So, in other words, displaced gas currently flowing down from Canada. There has been a 100 million a day roughly project that's kind of moved south and southwest over to -- on WBI and gets down into a Cheyenne market that we've signed up for.", "There's the Northern Border open season on Bison Express that we are actively involved in that TC Energy has said there are work in that project and have been pleased with the results so far. So, there's an opportunity. So, from an egress perspective, we feel good obviously for the next -- you know, that'll get several years out, even with some solid growth. And then obviously, we've got -- on our NGL system, we've got the ability to expand if we need to expand it by just adding pump stations, which is not a lot of capital and does not take a lot of time relative to some of the other projects we're talking about.", "So, basin, overall, feel very good about the macroenvironment. You know, we're -- we do not need to see more rigs show up in the basin to achieve our guidance. The rigs that are there today, when you also look at the, you know, finishing up some DUCs they've got, we're in really good shape to meet the volume guidance in both the G&P and the liquids segments as we think about the basin." ] }, { "name": "Unknown speaker", "speech": [ "OK, great. Thank you. And just one quick follow-up. A little bit more into capex.", "What goes into that upside, downside for the capex range? What sensitivities are there? And could you potentially provide some color on the components or segment-level spend? What's the majority of that spend specifically allocated to?" ] }, { "name": "Kevin Burdick", "speech": [ "We're not going to get into, you know, segment by segment. But like Walt mentioned in his remarks, you know, we're finishing up MB-5. We've got MB -- you know, pretty significant amount of the MB-6 spend that will occur in '23. And then the uptick in activity, when you think about the step up in well connects in both the Mid-Continent and the Bakken, that's going to drive some additional capital needs from a well connect, little horsepower, may need to add some pumps here or there in the NGL segment, those types of things.", "But those are highly, highly efficient capital and typically generate very strong returns. So, those are the types of things that we've seen. And then also, we're seeing -- we've got some of those type projects in the gas pipeline segment as well that we're finishing up when we talked about our storage and some other expansion opportunities." ] }, { "name": "Unknown speaker", "speech": [ "Got it. Thank you. Appreciate the color." ] }, { "name": "Operator", "speech": [ "The next question comes from Neal Dingmann with Truist Securities. Please go ahead." ] }, { "name": "Neal Dingmann", "speech": [ "Hey, morning, guys. At a higher level, we've seen some of the public E&Ps, you know, gobble up some of the private companies and then kind of slow their pace of activity down. So, I was just wondering if you could maybe talk about, you know, any exposure you have public versus private or any observations you've seen if maybe one of these deals has happened with your assets." ] }, { "name": "Kevin Burdick", "speech": [ "Neal, this is Kevin. You know, we really haven't seen the impact. And in some cases, we've seen it go the other way a little bit, where maybe some of the larger publics have shed some of the acreage that they may be considering more Tier 2, Tier 3. And we've seen companies that acquired it go ahead and start drilling.", "So, that's been a little bit of a phenomenon. But we have been -- we've seen very consistent investment from the large publics that we have, and we've kind of got the who's who, especially in the Bakken, but also in the Mid-Continent. They've been incredibly consistent with the capital that's been allocated to those basins." ] }, { "name": "Neal Dingmann", "speech": [ "All right. That's a great point on the flip side of that. And then for my follow-up, in the PRB, one of the large operators has kind of said they were shifting to the Mowry, which comes -- you know, brings a much higher gas cut. So, I just wanted to check and see if you were -- you know, are you seeing -- is that what you're seeing, or is that what you're planning for, or is the kind of guidance for the Rockies more so about the Bakken growth and maybe the PRB just assumes, you know, moderate growth?" ] }, { "name": "Kevin Burdick", "speech": [ "Yeah, the last is what -- is how the way we think about it. We've got a nice position in the G&P segment. We do have a very nice large position in our NGL business. There's been several operators out there that have talked about the Powder and spending more capital.", "So, we do have some modest growth built in. But the driver of the Rockies volumes is going to come from the Bakken." ] }, { "name": "Neal Dingmann", "speech": [ "That's perfect. Thank you." ] }, { "name": "Operator", "speech": [ "The next question comes from Neel Mitra with Bank of America. Please go ahead." ] }, { "name": "Neel Mitra", "speech": [ "Hi. Good morning. I wanted to touch on the implications of building MB-6 to essentially replace Medford. I'm assuming that you're going to flow less purity volumes on Sterling and transition more to Y-grade down to Belvieu on Arbuckle.", "And I wanted to know the runway for Arbuckle on latent capacity before you'd have to consider an expansion for the increased volumes." ] }, { "name": "Sheridan Swords", "speech": [ "Neel, this is Sheridan. Yeah, you're right. As we put MB-6 -- or as we're moving raw feed today, we're not moving as much purity products on the Sterling system. But as it comes to expanding Arbuckle II, we, as we did with other pipes, put in a large diameter pipeline that if we need more capacity, it's very easy to put in a couple more pump stations, and we get hundreds of thousands of barrels more of capacity on that pipeline.", "And obviously, we are watching that, and we can react very quickly. So, it's fair to say, we will not run out of raw feed capacity to Mont Belvieu from the Mid-Continent." ] }, { "name": "Neel Mitra", "speech": [ "Got it. Great. And then the second question related to that. When you look at optimization opportunities, obviously, you'll be -- have less capacity in Conway, and sometimes you're short propane in that market, and you have the ability to send actual gasoline up to Canada.", "How does the higher capacity and Belvieu versus Conway impact the optimization revenues going forward after you get the insurance proceeds?" ] }, { "name": "Sheridan Swords", "speech": [ "Neel, as we look at that, it's going to change it a little bit. But I don't know from a financial impact, it's going to have that big of an impact. We -- as we went back and looked at it as we determined whether or not we were going to build Medford back or do MB-6, we noticed that most of the volume from Medford already flows to Mont Belvieu on average. And so, I think -- I also look at it as this is going to put us back in a position by moving MB-6 down the road the way we were before we did put in the Bushton fractionator order in '08.", "The Bushton fractionator today has enough volume to satisfy the Mid-Continent market with this -- with the deployment it has there. We've transitioned our business to be a little bit more Belvieu anyway. So, I think as we'll be able to take advantage of probably spikes in the Conway market a little bit more than we have in the past, and we'll be able to move -- optimize through our raw feed system down to the fractionators in Mont Belvieu. So, all in all, I don't think it's going to be that big of an impact on our optimization business." ] }, { "name": "Neel Mitra", "speech": [ "OK. Thank you. That's great color." ] }, { "name": "Operator", "speech": [ "The next question is from [Inaudible] with J.P. Morgan. Please go ahead." ] }, { "name": "Unknown speaker", "speech": [ "Hey, guys. Thanks for taking my question today. To start off, kind of a two-parter on the volume outlook. I was wondering if you could provide a breakdown of that 10% G&P inlet growth assumption of '23 between the Mid-Con and Bakken.", "And then the second part of that question was kind of what's the right way to think about volumes and EBITDA growth in '24 if you guys have 20-plus rigs on your acreage for two to three years?" ] }, { "name": "Kevin Burdick", "speech": [ "I think we did provide the breakdown by Mid-Continent versus Rockies in the materials for the guidance range for '23. So, that's in the materials. And as we think about the growth, we've mentioned that, you know, it takes roughly 15 rigs on our acreage to hold volumes flat. So, clearly, if we're sitting north of 20 rigs on our acreage and those rigs stay there, we're going to experience growth.", "And that would include growing 2024 over '23 if the activity levels remain kind of where they're at today in the Bakken. And that would also hold true for the Mid-Continent as well. You've also got the rising gas-to-oil ratios. So, as we move through time, the gas-to-oil ratios have continued to trend up, which is also going to be a tailwind for volume growth as we -- especially if we're keeping these activity levels." ] }, { "name": "Unknown speaker", "speech": [ "Got it. Appreciate that. And then appreciate that you guys spoke on frac fees a bit earlier. But I'm just wondering if maybe you guys could provide a rough sense of what third-party frac fees look per -- look like per quarter in '23 and then maybe for 2024 as well.", "Given like the incremental volume growth, maybe could we think about third-party frac fees in the 100 million range for '24?" ] }, { "name": "Sheridan Swords", "speech": [ "Yeah, I don't -- we're not going to break down our frac fees just for competitive reasons on how we go through '23. But it's very -- just say that what we've got from the insurance company is going to cover what we're going to pay to third-party fracs in '23 and '24." ] }, { "name": "Unknown speaker", "speech": [ "Got it. Thanks for the color." ] }, { "name": "Operator", "speech": [ "Today's last question comes from Sunil Sibal with Seaport Global Securities. Please go ahead." ] }, { "name": "Sunil Sibal", "speech": [ "Yeah. Hi. Good morning and thanks for all the clarity. Just wanted to confirm one thing with regard to your comment on the Medford fractionator.", "I think you mentioned that you considered that to be, you know, fully contracted. So, is it fair to assume that, you know, all your third-party frac needs for 2023 and 2024 are kind of contracted at this point of time?" ] }, { "name": "Sheridan Swords", "speech": [ "Yes. Yeah, that's a good assumption." ] }, { "name": "Sunil Sibal", "speech": [ "OK. Thanks for that. And then on the Saguaro gas pipeline, in addition to the FERC approval, I was curious, you know, what are other kind of, you know, gating items for that project? And could you look at, you know, what kind of JV or a partnership for that pipeline? And then lastly, you know, would you look to finance all of that if that were to move ahead, you know, on your balance sheet or, you know, you could look at some other ways to finance?" ] }, { "name": "Kevin Burdick", "speech": [ "You know, Sunil, this is Kevin. I mean, we're still, again, early in the process from the pipeline's perspective. It would be an intrastate pipeline, so we wouldn't need other FERC approvals as it relates to actually building the pipeline if it did reach FID. As far as partnerships go, you know, we are looking at it as we would own the pipeline at this point.", "But as with anything, if there's a strategic and economic reason for us to have a partner, we would consider that. But again, at this point, we're approaching it like we're going to -- that our pipeline would just be part of that entire pipeline service that would get gas to the to the Gulf Coast -- or excuse me, get gas to the west coast of Mexico." ] }, { "name": "Sunil Sibal", "speech": [ "Got it. And then on the financing side, on the balance sheet or --" ] }, { "name": "Walt Hulse", "speech": [ "Yeah. I mean, so this pipeline is going to be built over a course of several years. In the context of our normal capex, you know, we would just do it on our balance sheet unless we found an attractive source of capital that was more efficient than the normal way. We always are keeping our eyes open for that sort of thing.", "But I don't think it would have a significant change in our capex program going forward. So, not one that we would have to change our ordinary course." ] }, { "name": "Sunil Sibal", "speech": [ "Understood. Thanks for all the color." ] }, { "name": "Operator", "speech": [ "This concludes our question-and-answer session. I would now like to turn the conference back over to Andrew Ziola for any closing remarks." ] }, { "name": "Andrew Ziola", "speech": [ "All right. Thank you, all. Our quiet period for the first quarter starts when we close our books in April and extends until we release earnings in early May. We'll provide details for that conference call at a later date.", "Thank you again and have a good day." ] }, { "name": "Operator", "speech": [ "[Operator signoff]" ] } ]
OKE
2021-08-04
[ { "description": "Vice President, Investor Relations and Corporate Affairs", "name": "Andrew Ziola", "position": "Executive" }, { "description": "President and Chief Executive Officer", "name": "Pierce Norton", "position": "Executive" }, { "description": "Chief Financial Officer and Executive Vice President, Strategy and Corporate Affairs", "name": "Walt Hulse", "position": "Executive" }, { "description": "Executive Vice President and Chief Operating Officer", "name": "Kevin Burdick", "position": "Executive" }, { "description": "UBS -- Analyst", "name": "Shneur Gershuni", "position": "Analyst" }, { "description": "Barclays -- Analyst", "name": "Christine Cho", "position": "Analyst" }, { "description": "President, Gathering and Fractionation", "name": "Sheridan Swords", "position": "Executive" }, { "description": "Truist Securities -- Analyst", "name": "Tristan Richardson", "position": "Analyst" }, { "description": "J.P. Morgan -- Analyst", "name": "Jeremy Tonet", "position": "Analyst" }, { "description": "Senior Vice President, Natural Gas", "name": "Chuck Kelley", "position": "Executive" }, { "description": "Wells Fargo Securities -- Analyst", "name": "Michael Blum", "position": "Analyst" }, { "description": "U.S. Capital Advisors -- Analyst", "name": "Becca Followill", "position": "Analyst" }, { "description": "Credit Suisse -- Analyst", "name": "Spiro Dounis", "position": "Analyst" }, { "description": "Sanford C. Bernstein -- Analyst", "name": "Jean Ann Salisbury", "position": "Analyst" }, { "description": "Tuohy Brothers -- Analyst", "name": "Craig Shere", "position": "Analyst" }, { "description": "Pickering Energy Partners -- Analyst", "name": "Michael Cusimano", "position": "Analyst" }, { "description": "Goldman Sachs -- Analyst", "name": "Michael Lapides", "position": "Analyst" }, { "description": "Seaport Global Securities -- Analyst", "name": "Sunil Sibal", "position": "Analyst" } ]
[ { "name": "Operator", "speech": [ "Good day, and welcome to the second-quarter 2021 ONEOK earnings call. Today's conference is being recorded. At this time, I would like to turn the conference over to Andrew Ziola. Please go ahead, sir." ] }, { "name": "Andrew Ziola", "speech": [ "Thank you, Casey, and welcome to ONEOK's second-quarter 2021 earnings call. We issued our earnings release and presentation after the markets closed yesterday, and those materials are on our website. After our prepared remarks, we'll be available to take your questions. Statements made during this call that might include ONEOK's expectations or predictions should be considered forward-looking statements and are covered by the safe harbor provision of the Securities Acts of 1933 and 1934.", "Actual results could differ materially from those projected in forward-looking statements. For a discussion of factors that could cause actual results to differ, please refer to our SEC filings. [Operator instructions] With that, I'll turn the call over to Pierce Norton, president and chief executive officer. Pierce?" ] }, { "name": "Pierce Norton", "speech": [ "Thanks, Andrew, and good morning, everyone. Thank you for joining us today. We appreciate your interest and investment in our company. For 32 of my almost 40-year career, I had the good fortune to work with the assets and the people through various companies that are now a part of ONEOK.", "I'm excited and honored to be back. This company has a strong experienced management team and a talented workforce, and we are all looking forward to the future. On today's call, we'll be discussing ONEOK's strong performance in the second quarter, and I'll provide a few of my initial thoughts as to how the management team and I will continue to build on the accomplishments of those that preceded me in this role. I'm also looking forward to reacquainting or meeting many of you in the near future.", "Joining me on today's call is Walt Hulse, the chief financial officer and executive vice president, strategy and corporate affairs; and Kevin Burdick, executive vice president and chief operating officer. Also available to answer your questions are Sheridan Swords, senior vice president, natural gas liquids; and Chuck Kelley, senior vice president, natural gas. I'd like to first start off this call by recognizing and congratulating Terry on his retirement and thanking him for his availability to advise me in my new role. ONEOK has seen tremendous growth and success under Terry's leadership the last seven years as he's navigated the company through several growth cycles and industry challenges, including delivering strong results during a pandemic.", "Terry championed many companies' successes, the transition to higher fee-based business model with less commodity price exposure, significant improvements in companywide safety and environmental performance, the successful ONEOK Partners merger transaction and the completion of more than $10 billion in capital growth projects to name just a few of his many accomplishments. The company has grown in many ways since I was here last, and I'm looking forward to building on what Terry, the board, the leadership team and ONEOK's 3,000 employees have achieved. It's been extraordinary. During this first month on the job, I've been refamiliarizing myself with our business, holding strategy and planning meetings with the team and most importantly, listening.", "I've met with my leadership team and many employees to hear more about their focus areas. These introductions and conversations are very important and will continue. What you can expect from me as a CEO is that we will be disciplined and intentional in all that we do and continue to encourage a culture that promotes safety, reliability, employee engagement, value creation and environmental responsibility. These principles have served ONEOK well for decades and will continue to be a key element of our daily operations and business decisions going forward.", "The energy systems today were designed to operate on the consumers' requirements for affordability, reliability and, resiliency. We will continue to focus on meeting our customers' needs while also transforming these energy systems to drive the overall lowering of greenhouse gas emissions. Yesterday, we reported a strong second-quarter financial result, supported by increasing volumes across our system. The energy and economic backdrop continue to improve with producer activity accelerating and demand for NGLs and natural gas strengthening.", "Kevin will talk more in detail about how we're addressing those needs. But first, I'll turn the call over to Walt to discuss our financial performance." ] }, { "name": "Walt Hulse", "speech": [ "Thank you, Pierce. With yesterday's earnings announcement, we updated our 2021 financial guidance expectations. Our view of 2021 continues to improve as we now expect 2021 adjusted EBITDA to be above the midpoint of our guidance range of $3.05 billion to $3.35 billion that we provided back in April. Our outlook for growth in 2022 has continued to strengthen.", "Higher commodity prices, accelerating producer activity and the rising gas to oil ratio in the Williston Basin provide a tailwind into next year. With available capacity across our operations and the completion of our Bear Creek plant expansion later this year, significant earnings power remains across our assets without the need for significant capital investment. The strengthening momentum going into 2022 makes us confident that we will achieve or exceed the '22 outlook we have discussed on previous calls. Now, for a brief overview of our second-quarter financial performance.", "ONEOK's second-quarter 2021 net income totaled $342 million or $0.77 per share. Second-quarter adjusted EBITDA totaled $802 million, a 50% increase year over year and a 3% increase compared with the first-quarter 2021 after backing out the benefit from winter storm Uri. We ended the second quarter with a higher inventory of unfractionated NGLs due to planned and unplanned outages at some of our fractionation facilities. We expect to recognize $12.5 million of earnings in the second half of 2021 as our current inventory is fractionated and sold, the majority of which will be recognized in the third quarter.", "Distributable cash flow was $570 million in the second quarter and dividend coverage was nearly 1.4 times. We generated more than $150 million of distributable cash flow in excess of dividends paid during the quarter. Our June 30 net debt-to-EBITDA on an annualized run rate basis was 4.3 times. And we continue to work toward our goal of sub-four times.", "We ended the second quarter with no borrowings outstanding on our $2.5 billion credit facility and nearly $375 million in cash. In July, the board of directors declared a dividend of $0.935 or $3.74 per share on an annualized basis, unchanged from the previous quarter. Our strong balance sheet, ample liquidity and increasing EBITDA from volume growth in our system provides a solid financial backdrop and flexibility as we enter the second half of the year. I'll now turn the call over to Kevin for an operational update." ] }, { "name": "Kevin Burdick", "speech": [ "Thank you, Walt. Our second-quarter NGL raw feed throughput and natural gas processing volumes increased compared with the first-quarter 2021 and driven by increasing producer activity, ethane recovery and gas to oil ratios that continue to rise in the Williston Basin. We expect these tailwinds to carry into the second half of the year and into 2022. In our natural gas liquids segment, total NGL raw feed throughput volumes increased 17% compared with the first-quarter 2021.", "Second-quarter raw feed throughput from the Rocky Mountain region increased 18% compared with the first-quarter 2021 and more than 85% compared with the second-quarter 2020, which included significant production curtailments resulting from the pandemic. As a reference point, volumes reached approximately 330,000 barrels per day in this region early this month. At this volume level, we still have more than 100,000 barrels per day of NGL pipeline capacity from the region, allowing us to capture increasing volumes on our system including volume from a new 250 million cubic feet per day third-party plant that came online in early July and expansion of another third-party plant that is underway, and our Bear Creek plant expansion, which is expected to be complete in the first half of the fourth quarter this year. Total mid-continent region raw feed throughput volumes increased 16% compared with the first-quarter 2021 and 10% compared with the second-quarter 2020.", "The Arbuckle II expansion was completed in the second quarter, increasing its capacity up to 500,000 barrels per day, adding additional transportation capacity between the mid-continent region and the Gulf Coast. In the Permian Basin, NGL volumes increased 16% compared with the first-quarter 2021, primarily as a result of increased ethane recovery and producer activity. Petrochemical demand continues to strengthen and has seen support from a continuing global pandemic recovery. This led to increased ethane recovery across our system in the second quarter.", "Ethane volumes on our system in the Rocky Mountain region increased compared with the first-quarter 2021 as we continue to incent some ethane recovery on a short-term basis. Continued ethane recovery in the Rockies in the second half of 2021 will depend on regional natural gas and ethane pricing. We have not included ethane recovery from the Rockies for the remainder of the year in our updated financial guidance. Ethane volumes on our mid-continent system increased compared with the first-quarter 2021 due to both favorable recovery economics and some incentivized recovery.", "We continue to forecast partial ethane recovery in our guidance for the second half of the year in this region. Ethane volumes in the Permian Basin increased in the second quarter compared with the first quarter of 2021. We continue to expect the basin to be in near full recovery in the second half of the year. Discretionary ethane on our system or said differently, the amount of ethane that we estimate could be operationally recovered at any given time but is not economic to recover at current prices without incentives, is approximately 225,000 barrels per day.", "Of that total opportunity, 125,000 barrels per day are available in the Rocky Mountain region and 100,000 barrels per day in the mid-continent. Full recovery in the Rockies region would provide an opportunity for $500 million in annual adjusted EBITDA at full rates. Moving on to the natural gas gathering and processing segment. In the Rocky Mountain region, second quarter processed volumes averaged more than 1.25 billion cubic feet per day, an increase of 6% compared with the first-quarter 2021 and more than 50% year over year.", "An outage at one of our plants, which has since come back online, decreased second-quarter volumes by approximately 15 million cubic feet per day. Towards the end of June, volumes reached 1.3 billion cubic feet per day, and we have line of sight to even higher processed volumes later in the year given the recent increase in completion crews and rigs in the basin. Conversations with our producers in the region continue to point to higher activity levels in the second half of 2021 and 2022, particularly in Dunn County, where construction on our Bear Creek processing plant is on track for completion in the first half of the fourth quarter of this year. Once in service, we will have approximately 1.7 billion cubic feet per day of processing capacity in the basin, and we'll be able to grow our volumes with minimal capital.", "In the second quarter, we connected 84 wells in the Rocky Mountain region and still expect to connect more than 300 this year. Based on the most recent producer completion schedules, we expect a significant increase in well connects in the second half of the year with some producers aligning the timing of well completions closer to the completion of Bear Creek. There are currently 23 rigs operating in the basin with nine on our dedicated acreage, and there continues to be a large inventory of drilled but uncompleted wells with more than 650 basinwide and approximately 325 on our dedicated acreage. We expect the current DUC inventory to get work down before we see producers bring back more rigs to the basin to replenish inventory levels.", "As we said last quarter, the eight completion crews currently operating in the basin is enough to reach our well connect guidance for the year. Any additional completion crews would present upside to our guidance. Rising gas to oil ratios and natural gas flaring in the basin continue to present opportunities for volume growth without the need for additional producer activity. Since 2016, GORs have increased more than 75%.", "Recent projections from the North Dakota Pipeline Authority show that even in a flat crude oil production environment, GORs could increase an additional 45% in the next seven years. This could add 1.3 billion cubic feet per day of gas production and approximately 150,000 barrels per day of C3+ NGL volume to the basin during that same time period. Again, this growth in natural gas is only based on increasing GORs and assumes flat crude oil production. Any growth in crude oil would be upside to those projections.", "We've added a new slide in our earnings materials to show these latest North Dakota projections, which include various production scenarios. During the second quarter, the gathering and processing segment's average fee rate increased to $1.06 per MMBtu, driven by higher Rocky Mountain region volumes. We now expect the fee rate for 2021 to average between $1 and $1.05 per MMBtu. The mid-continent region average process volumes increased 4% compared with the first-quarter 2021 as volumes returned following freeze offs in the first quarter.", "While the region has received some attention as commodity prices strengthened, producer activity has been more moderate than other areas. In the natural gas pipelines segment, the segment reported a solid quarter of stable fee-based earnings, the decrease in earnings year over year was driven by a onetime contract settlement that provided a $13.5 million benefit to earnings in the second quarter of 2020. We continue to see increased interest from our customers for additional long-term transportation and storage capacity on our system following the extreme winter weather events earlier this year. Since the first quarter, we have renewed or recontracted additional long-term storage capacity in both Texas and Oklahoma, including a successful open season for more than 1 billion cubic feet of incremental firm storage capacity at our West Texas storage assets.", "We'll continue to work with customers to contract additional long-term capacity as we head into the winter heating season. Pierce, that concludes my remarks." ] }, { "name": "Pierce Norton", "speech": [ "Thank you, Kevin. The results achieved so far this year, only 12 months removed from the unprecedented conditions in the second quarter of 2020 are nothing short of amazing. The resiliency of our assets and our employees and the caliber of our customers, we're able to work with and provide a long-term runway of many opportunities. But key to our success will continue to be operating safely, sustainably and responsibly with the health and safety of our communities and employees at the forefront of all that we do.", "To learn more about our commitment to responsible operations, I encourage you to review our most recent corporate sustainability report, which was just published to our website last week. The report details our most recent environmental, social and governance related to performance and programs and highlights key initiatives underway across the company. It's ONEOK employees who carry out these initiatives every day and who prioritize the safety and well-being of their fellow employees, customers and the public. Thank you for your continued hard work and your dedication to safety to this company.", "Again, I'm excited to be back at ONEOK and looking forward to the opportunities and the challenges ahead. Operator, we're now ready for questions." ] } ]
[ { "name": "Operator", "speech": [ "Thank you. [Operator instructions] We'll take our first question from Shneur Gershuni with UBS." ] }, { "name": "Shneur Gershuni", "speech": [ "Hi. Good morning, everyone. Pierce, nice to hear your voice on a different conference call, and I would like to send a congratulations to Terry on a very successful career and congrats on starting a new chapter. Maybe to position and sorry, Pierce, to put you on the hotspot, hot seat right off the back here.", "But I was wondering if we can talk about your thoughts around buybacks and capex for 2022. And I imagine there's not much on the capex front, just sort of given where you are at this point right now, maybe a completion of the frozen frac at this point just with the higher ethane recovery in Kevin's comments about C3+ with respect to GORs. But outside of that doesn't appear to be much on the capex side. I want to sort of take the soft outlooks that have been presented in the past, a 3.5 billion to 4 billion has kind of been thrown around as a potential '22 run rate.", "It sort of suggests the leverage for what is going to be sub to four times leverage ratio target. Does this set up for buybacks in '22? If so, how should we think about execution around buybacks? Or have I got the thought process wrong on capex. Just curious on your thoughts." ] }, { "name": "Pierce Norton", "speech": [ "So Shneur, first of all, thank you for the welcome back. And we will certainly pass on your comments to Terry, and I think we all echo those as well. I'm going to make some kind of a broad comment and then I'm going to let Walter kind of answer kind of more specifically. But we're in the process of looking at our strategic plan and our earnings projection, not only for 2022, but also for the next five years.", "As a part of that, we'll be assessing what I would consider our capital allocation opportunities. So I don't have a specific answer to exactly for the buybacks for next year. But I would say that that's all a part of our capital allocation plan and the strategy that we're actually currently talking about now. So I'd like Walt to kind of weigh in on any more particulars and insights that he might have." ] }, { "name": "Walt Hulse", "speech": [ "Sure. Thanks, Pierce. Well, sure, basically, I would agree with your assessment of the tailwinds that are behind our business today, and we're excited about the opportunities that are forward. And the cash flows that we'll generate from that will continue to enhance our deleveraging strategy that's been in place for quite some time.", "And we're starting to see some of our end goals in the near-term coming forward. And as we get closer to our goals of sub-four times leverage, then obviously, we will expand the horizon of things that we'll look at from a capital allocation. And I think we spent time with peers. We'll look at all of our options as we go forward.", "You're right that there isn't any major capex project on the horizon here. We really doubled the capacity of our long-haul pipes in the NGL business over the last several years and that gives us a lot of running room going forward. You highlighted that we have a couple of projects that we paused back with the pandemic. And over the course of next year or two as producer activity picks up, I would assume that we'll likely clean some of those up and finish them up to meet our customers' needs.", "But it's really going to be routine growth and some smaller growth projects that are very attractive going forward. So we'll have plenty of free cash flow to continue to deleverage and then look at all of those capital allocation opportunities over the next couple of years." ] }, { "name": "Shneur Gershuni", "speech": [ "Really appreciate the detailed color there. And maybe as a follow-up question here. Just given the fact that Terry has been at the company for so long until we set the strategy and so forth here and coming in now, how are things going to change? Or are they going to stay the same with respect to strategy? Were there any specific margin orders that were given to you from the board upon your arrival? Just kind of curious if you can sort of talk to that kind of holistically." ] }, { "name": "Pierce Norton", "speech": [ "Sure. I'll be glad to answer that. I think it's not so much about what's going to change immediately in the company. I think it's more about what's changing in the energy industry.", "I think we can probably all agree that the energy systems across the United States, it's going to be very important that we continue to transition into a lower carbon energy system across United States. So really, it's about how we at ONEOK and the assets and the people and the skillsets that we have are actually going to transform with that energy system. I view that as a three-step process. First of all, you got to understand what the transformation of the energy systems look like, then you prepare for that -- for what you've learned and what you understand and then you innovate.", "And I think that's the three focus areas that I would say that we have going forward is understanding where we are preparing and innovating for the future, while at the same time, continuing to grow the base business that we have and the use of natural gas and natural gas liquids because I think the global pool, most countries are not where we are in the United States as far as the maturity of our systems and the transparency that we have in the energy systems here in the United States. So I think that's going to continue to pull for natural gas demand as well as natural gas liquids growth. While at the same time, we're going to be able to use the skill sets and the talents that we have in our company to transform. I do think transformation is a better word than transition.", "Transition, to me, indicates that you're going to leave one thing and go to another. Transformation, in my opinion, it means that you're going to use something that you have, and maybe use it a little bit slightly different in the future to meet some of the problems that we have. I do think it's important for the United States to lead in the effort of lower carbon because I think the other parts of the world can learn from what we do, although there's only 6.6 gigatons of CO2 emissions in the United States versus 51 gigatons over the globe. So we're a small percentage, but I think it's important for the U.S.", "to lead in these efforts. And I do feel like that ONEOK is positioned over a long period of time. A lot of these things, as you look at CNG and hydrogen and LNG for long haul, and carbon sequestration, and capturing methane, those are all going to be opportunities that we experience over the next several decades." ] }, { "name": "Shneur Gershuni", "speech": [ "great. Really appreciate the color, and congratulations on the new role." ] }, { "name": "Pierce Norton", "speech": [ "Well, thanks again." ] }, { "name": "Operator", "speech": [ "Our next question comes from Christine Cho with Barclays." ] }, { "name": "Christine Cho", "speech": [ "Thank you. Pierce, welcome back to this side of ONEOK. I thought I would maybe start with an ethane question. This quarter, you guys took up more ethane in the Bakken.", "And you talk about 25,000 barrels per day of ethane extraction being an incremental $100 million, but that's predicated on you collecting the full $0.28 T&F. You haven't been collecting that when you're doing it more opportunistically. And when you do provide more ethane to the market this way, it sort of puts a lid on what prices can be. So curious, how do you balance this and make sure you don't provide too much supply that it negatively impacts the frac spread economics in other basins that you're in? And what really has to happen in order for producers to sign up for long-term contracts for ethane TNS out of the Bakken.", "Is it really only a firm BTU resolution on northern border?" ] }, { "name": "Pierce Norton", "speech": [ "Christine, thanks for the welcome back, and I think Kevin and Sheridan can probably add more color to your question." ] }, { "name": "Sheridan Swords", "speech": [ "Christine, this is Sheridan. I think in your first question on how we determine how much ethane you bring out of the Bakken and what's the right amount before putting a lid on ethane prices. Really, what we try to understand is where the next incremental ethane will come out, is that coming off our system or somebody else's system. And so, if we don't bring it out of our system is somebody else can bring ethane out of their side of the system then we will lose the whole uplift that we'll have from buying it at gas and selling it at ethane value.", "So it's an ongoing process that we look at every month, and we try to make that determination. That's why we don't bring all the ethane out of the Bakken that we could. We could incentivize more, but we just bring what we feel is the right amount of ethane to come out And really on your question of what would it take for producers sign up for ethane, they have already signed up for ethane. They have the option today whether or not to bring ethane on the system or not to bring ethane on the system.", "We have the capacity for them and they signed up for a certain amount of capacity. What it really comes down to now is what is going to drive the price high enough that we would get a full TNF rate or the full $0.28 that the ethane would come out. And what's going to need to happen for that is you're going to need to continue to have a strong ethane to ethylene spread like we have today, very, very widespread, so that ethane can continue to rise, prices continue to rise and the pet kilns can continue to make money off of that. The second thing is you need to have more demand.", "And then, we need to see more exports coming out, there is more export capacity out there, and we need to see more crackers. And in the second quarter of next year, the ExxonMobil SABIC cracker is going to come online as well. So that's going to bring on more demand. And I think the third thing you need to look at is you need to look at the regional gas prices between the Bakken and the other areas.", "So if we would see the Bakken gas prices dip down like we typically see in the summer. I think all those things together if they work that you have a possibility of an opportunity to see ethane come out of the Bakken at full prices." ] }, { "name": "Christine Cho", "speech": [ "Got it. That was really helpful. And then, I guess just moving over to, I guess, guidance. On a prior quarter call, you guys kind of gave a soft '22 guidance of about 3.4 billion.", "Are you guys still feeling good about this? And what sort of ethane extraction assumptions are you including in that?" ] }, { "name": "Pierce Norton", "speech": [ "So Christine, I'd start by saying we haven't issued our 2022 guidance yet. We're in the process of looking at that. But I will let Walt or Kevin chime in on that past comment." ] }, { "name": "Kevin Burdick", "speech": [ "Yeah, Christine. I mean, I think we're still -- that number is still out there that we talked about as far as where we'd be in '22. And since the last quarter, nothing -- everything strengthened since that time. I mean, prices have strengthened.", "The comments and the feedback we get from our producers have strengthened. So that's the way I would frame '22 up, is it is definitely more constructive today than it was three months ago." ] }, { "name": "Christine Cho", "speech": [ "Got it. Thank you." ] }, { "name": "Operator", "speech": [ "Our next question will come from Tristan Richardson with Truist Securities." ] }, { "name": "Tristan Richardson", "speech": [ "Hey. Good morning, guys. Really appreciate the comments on kind of what you're seeing in the second half and particularly the comment on July. I think you noted maybe at one point in time, the system touched 330 a day.", "Is that including some recovery or at least incentivized recovery? So are you seeing some recovery in the Rockies starting in the second half?" ] }, { "name": "Kevin Burdick", "speech": [ "Yeah. Tristan, this is Kevin. Yes, that would include some incentivized recovery, which we talked about in the remarks." ] }, { "name": "Tristan Richardson", "speech": [ "OK. Appreciate it, Kevin. And then, lastly, Walt, I think you in the past have talked about the earnings engine at ONEOK and the potential for this business to produce EBITDA with a forehandle. I mean, without asking about a time frame on, can you talk about some of the conditions necessary to hit that type of potential? And are you seeing some of that as you look out over the near- to medium-term?" ] }, { "name": "Walt Hulse", "speech": [ "Well, I think that the way we framed that up in the past was that we have the assets in place, especially in the Bakken to achieve those types of earnings levels without any meaningful need for capex. As you continue to see gas volumes, there may be at some point in the future a need for another plant up there, but that's not in the near term, we've got plenty of capacity in McKenzie County and now we're going to have capacity down in Dunn County. So we've got room to run, and we've got room to run on the NGL side. As we get closer to those numbers that would start with the floor, we're probably going to have to have some downstream additions with like MB-5 and things like that that would need to be completed.", "But none of those are major, major dollars in the scheme of the earnings power of the company. So we're pretty excited about kind of the operating leverage that we have in the company and the ability to continue to grow significantly with modest capital needs." ] }, { "name": "Tristan Richardson", "speech": [ "Appreciate it. Thank you, guys, very much." ] }, { "name": "Pierce Norton", "speech": [ "Welcome. Thank you." ] }, { "name": "Operator", "speech": [ "Our next question will come from Jeremy Tonet with J.P. Morgan." ] }, { "name": "Jeremy Tonet", "speech": [ "Hi. Good morning." ] }, { "name": "Pierce Norton", "speech": [ "Good morning, Jeremy." ] }, { "name": "Jeremy Tonet", "speech": [ "Also want to send Terry our best going forward into retirement there. Best of luck. Maybe picking up on energy transformation as you laid out there, be it RNG, biofuels, hydrogen, CCUS. Just wondering if there's any specific initiatives that ONEOK is working on right now.", "It seems like there's some things on the R&D side, but just wondering specifically right now, if there's anything medium-term opportunities that ONEOK is focused on." ] }, { "name": "Pierce Norton", "speech": [ "I think you picked up on probably the one that is probably the most likely the quickest and that is the renewable gas opportunities primarily coming from these are kind of listed in order of agriculture, wastewater and landfills. I'm going to kick it over to Chuck here just a second because he can give you some updates on what we're doing as it relates to some of the RNG efforts. But the CNG and LNG for the long haul, I think, is another thing that could be a possibility. Hydrogen is probably out into the future because primarily, right now, you can't take a certain amount of hydrogen based on the tariffs, from the intrastate, and intrastate assets across the United States.", "But I do think that's a developing opportunity. It's left to be seen economically how that stuff plays out. And then, you got carbon sequestration because 24% of all the carbon a minute of the 6.6 gigatons actually comes from electric generation from coal, oil and natural gas, primarily coal and natural gas. So I think that's going to be important to solve that equation.", "And, of course, transportation has about 28% of that 6.6 gigatons. So if you converted all the cars today to EVs, then you just switch the problem from a transportation over to electric generation. And then, so you didn't really solve the problem. So Chuck, I'm going to let you kind of talk a little bit about our R&D opportunities and what we've already done and then are doing." ] }, { "name": "Chuck Kelley", "speech": [ "Sure, Pierce. So a little color, Jeremy. On our interstate pipes, particularly if you think about where they're located, upper Midwest. We've got, as you know, quite a few dairy farms up in that area.", "So you have agricultural waste. We connected three RNG facilities that are originated from dairy farms already up there, looking at another one. And then, here on our intrastate business, particularly in Oklahoma, we've already connected a large landfill waste recycling facility looking at another and then, of course, there's some large feed lots in our Texas intrastate market. So we've been involved in connecting RNG, bringing that gas into our stream, delivering it to customers downstream.", "So this has been ongoing over the past three years, and we're seeing that accelerate. So excited by the RNG aspects that we see out there." ] }, { "name": "Pierce Norton", "speech": [ "So I'd just kind of summarize that by saying that as part of our strategic plan, we look to develop business plans around all these different aspects of these opportunities. But I think more importantly as far as what these opportunities do is they make the existing natural gas pipelines in the United States relevant. Instead of just moving methane that you traditionally get from the wellheads, you're actually capturing methane that is emitted to the air, which is 25 times more potent than the CO2. So you get the uplift in the CO2 equivalents and so you get the extra benefit of removing that.", "And you're using existing assets to help other industries reduce their environmental footprint. So the relevancy of it is the important part as opposed to some great business opportunity to boost your EBITDA. It's really designed around the relevancy of making essentially 2.6 million miles of pipeline in the United States, very important to the energy transformation future." ] }, { "name": "Jeremy Tonet", "speech": [ "That's very helpful. And I just wanted to follow up a little bit as it relates to CCUS because it seems like North Dakota is kind of separate themselves from all the other states, given the multiple initiatives there for CCUS with power generation for actually having primacy on the class six wells and really kind of solving that problem, streamlining, and then kind of really proving up quite a sizable sequestration resource within the state. And just given your positioning in North Dakota, I was wondering if you see an opportunity for ONEOK to play a role in all these developments. It seems like -- since it seems like things are moving more real time in North Dakota than other parts of the country." ] }, { "name": "Kevin Burdick", "speech": [ "Definitely. Tristan, this is Kevin. We absolutely see that as an opportunity. And our -- and have started and have been in, with our presence up there, we've got strong relationships with state university systems, etc., and are involved in projects and analysis to understand the class six permits that much of the storage has up there, the ability that puts you further ahead for those opportunities.", "So we are definitely involved in those conversations and have had a long history and track record of partnering with the state and would expect that to continue as it relates to CCUS." ] }, { "name": "Chuck Kelley", "speech": [ "Got it. Great, Jeremy. Thank you so much for taking the questions." ] }, { "name": "Pierce Norton", "speech": [ "Thank you." ] }, { "name": "Operator", "speech": [ "Our next question will come from Michael Blum with Wells Fargo." ] }, { "name": "Michael Blum", "speech": [ "Thanks. Just wanted to add welcome back, Pierce, as well." ] }, { "name": "Pierce Norton", "speech": [ "Thank you, Michael." ] }, { "name": "Michael Blum", "speech": [ "I wanted to go back to the Bakken for a minute, and you kind of touched on some of this, but just ask it more directly. How much ethane are you voluntarily recovering in the Bakken today? And it looks to us at least like the BTU limits are either closed or have been reached on Northern border. So do you envision at some point here involuntarily recovering ethane out of the Bakken?" ] }, { "name": "Kevin Burdick", "speech": [ "Michael, it's Kevin. We're not going to -- we said last quarter we're not going to get into and talk about the actual volume of ethane we're recovering, other than to say we have incented some ethane to come out. That's been economic driven. With that ethane recovery, that's actually pulling down the BTU level on northern border.", "So it's maybe pushing that out a little bit. But if you just go back to the gross kind of production growth that whether it's GORs or activity levels that are both increasing, at some point, we continue to believe it's just math that that BT -- blended BTU rate is going to go up and become a problem. Northern border, TransCanada continues to have discussions with the various partners and counterparties up there, both on the supply side and the demand side, to understand what a BTU spec might look like. And we expect those conversations with the counterparties and FERC to continue.", "And hopefully, we'll have something a resolution here in the next several months." ] }, { "name": "Michael Blum", "speech": [ "Got it. The other question I wanted to ask was about the mid-continent NGL volumes. It looks like they were up sequentially. Just want to make sure I understand, is that being driven by just the Arbuckle II expansion because in the G&P segment there in the mid-con, you cited production declines.", "So I just want to make sure I'm understanding the dynamics there?" ] }, { "name": "Sheridan Swords", "speech": [ "Michael, this is Sheridan. Obviously, the Arbuckle II expansion helps us move those volumes. But really, what we're seeing is we did incentivize some ethane in the mid-continent more in the second quarter than we did in the first quarter. But we're also seeing some increased producer activity.", "So we've seen our C3+ volumes increase as well. And we're probably back to a level that, on the C3+ volumes, that is equivalent to pretty close to where we were in the fourth quarter of 2019. So we've seen some pretty good recovery from the pandemic, recovery from the ice storm, and some growth. So we're seeing a little bit of activity there.", "Now we are predicting that the mid-continent will stay relatively flattish here going forward, but we have seen a little uptick in volume." ] }, { "name": "Michael Blum", "speech": [ "Great. Thank you very much." ] }, { "name": "Operator", "speech": [ "We'll take our next question from Becca Followill with U.S. Capital Advisors." ] }, { "name": "Becca Followill", "speech": [ "Hi, guys. And welcome back, Pierce." ] }, { "name": "Michael Blum", "speech": [ "Thank you, Becca." ] }, { "name": "Becca Followill", "speech": [ "First question is on the fee rate on G&P. It's up to $1.06. It keeps ticking higher. And it looks like the mix continues to be -- and I realize it's mix-dependent, but it looks like the mix continues to be where the Bakken is going to grow faster than the mid-continent.", "So should we expect that to continue to tick higher? Or is 106 kind of a cap here?" ] }, { "name": "Chuck Kelley", "speech": [ "Becca, this is Chuck. I think in Kevin's remarks, we talked about $1 to $1.05 range. We still believe that somewhere the 1 to 1.05 range is probably a good number for the balance of the year. $1.06 was a little stronger than we thought it would be, frankly.", "And it was driven really by the contract mix in the Bakken." ] }, { "name": "Becca Followill", "speech": [ "OK. Thank you. And then, the second one is on LPG export facilities. You've talked, I think, pre-COVID, it was -- you talked about it.", "But we've got NGLs that hit record levels in May in the U.S. Any current thoughts on an NGL export facility for you guys?" ] }, { "name": "Kevin Burdick", "speech": [ "Becca, it's Kevin. We continue to look at it. It remains a priority for us. It has continued there.", "Clearly, the pandemic and the pullback in production slowed down some of those discussions. But like you mentioned, with exports continuing to be very strong through this and production picking back up, so of the conversation. So we will continue to look at that. And as we said before, whether we're talking LPG or ethane, if we get the right counterparties, the right project, then we'll announce something.", "But still looking at it, and it's still a priority for us." ] }, { "name": "Becca Followill", "speech": [ "Thank you." ] }, { "name": "Operator", "speech": [ "Our next question will be taken from Spiro Dounis with Credit Suisse." ] }, { "name": "Spiro Dounis", "speech": [ "Hey [Inaudible]. First one, Walt, sorry if I missed it. Just curious [Audio gap]" ] }, { "name": "Walt Hulse", "speech": [ "Spiro, you're breaking up a little bit. If you could say whatever you're saying all over again, please." ] }, { "name": "Spiro Dounis", "speech": [ "[Inaudible] on the capex range. Curious if that's trending in any direction either. I would imagine a lot of the higher activity levels are pushing that higher, but maybe not the case?" ] }, { "name": "Walt Hulse", "speech": [ "OK. I think I got it. You're looking at capex in 2021. We continue to stay within our range.", "Obviously, as producer activity picks up, we're going to spend a little bit more on well connect so that might move us toward the higher end of the range, but we're very comfortable with the 2021 range that we have out there at this point." ] }, { "name": "Spiro Dounis", "speech": [ "M&A will be helpful here. I know in the past, you've expressed interest on some of the gas assets that were being marketed by some of the utilities out there. We've seen some of those change hands at this point. So curious if there's still assets out there that could introduce --" ] }, { "name": "Pierce Norton", "speech": [ "So Spiro, just to make a broad comment about M&A. I've been about 30 years in the midstream business, and there's always been some level of M&A activity. It did slow down during the years where most of the assets got picked over into the MLPs. But I guess what I would say about that is, I've only been back for 30 days.", "And I'd point you back to the comments that I made on the -- in the original opening that whatever we do, it's going to be intentional, it's going to be disciplined. So whether or not we do or don't participate in the M&A market, that's going to be our guiding principles." ] }, { "name": "Spiro Dounis", "speech": [ "Understood. Nice work, Pierce. Congrats and good luck, Terry." ] }, { "name": "Pierce Norton", "speech": [ "Thanks." ] }, { "name": "Operator", "speech": [ "Our next question will come from Jean Ann Salisbury with Bernstein." ] }, { "name": "Jean Ann Salisbury", "speech": [ "Is there still any ethane being rejected in the mid-con? Or is this number for the volume, kind of all potential ethane from the mid-con? But as you noted, 100,000 of it is sort of discretionarily being recovered." ] }, { "name": "Sheridan Swords", "speech": [ "This is Sheridan. There still is some ethane being rejected in the mid-continent. But here, as we get into August, that number is quite low. We think we're at or getting close to full ethane recovery in the mid-continent right now.", "But for the second quarter, we did still have quite a bit of ethane off in the mid-continent. So we did incentivize some in the mid-continent in the second quarter. In August, we had very little that we are incentivizing now." ] }, { "name": "Jean Ann Salisbury", "speech": [ "That's really helpful. And then, this new slide nine with the gas production at flat Bakken crude is really interesting. This would suggest an add of like a Bcfd from here over the next five years, even if oil production is just flat. But there's obviously not anywhere near a Bcfd of gas takeaway left out of the Bakken.", "How do you see this getting resolved? And would you participate in a solution for that, if that's what it took." ] }, { "name": "Kevin Burdick", "speech": [ "Jean, this is Kevin. Yeah, that's something we'll absolutely keep an eye on. I mean, the good thing there is we've got time. You've still got some capacity on northern border that can be -- you can displace Canadian gas.", "Going back pre-pandemic, we had talked about looking at other avenues out, whether that was expansions on northern border or moving gas to the West and taking advantage of existing assets that are in the ground to go to the west and south. So my guess is those things would come back up. We'll have those conversations as we see volumes materialize. But the good thing is we do have some time, and we've got some available capacity to get us to that point." ] }, { "name": "Jean Ann Salisbury", "speech": [ "Great. That's all for me. Thank you." ] }, { "name": "Operator", "speech": [ "Our next question comes from Craig Shere with Tuohy Brothers." ] }, { "name": "Craig Shere", "speech": [ "Good morning, team. Pierce, welcome back, and congrats, Terry, on retirement and job well done. Historically, there was some interest in getting into the crude gathering and transportation. Are you just so gangbusters on the wet gas and NGLs, that this is kind of off the table at the moment? Or how does this look going forward?" ] }, { "name": "Pierce Norton", "speech": [ "So Craig, I think our core business is pretty well defined with natural gas and natural gas liquids, and that's the direction I would see in the future." ] }, { "name": "Craig Shere", "speech": [ "Very good. And just what kind of running room do we have for increased mid-con firm capacity demand to avoid further winter market dislocations in terms of maybe ongoing steady state EBITDA uplift that could reduce volatility in the mid-con." ] }, { "name": "Pierce Norton", "speech": [ "So let me kind of rewind us back to winter storm Uri because I saw that up close and personal. And the mid-continent area, which is defined as Southwest Kansas and the Texas Panhandle in Oklahoma, is a net exporter of natural gas even during the month of February, during the middle of winter to the tune of about 3 Bcf a day. That turned back between the demand that we saw in the mid-continent and the lack of production for various reasons to basically only 5% exports. So the real issue is to talk about resiliency of the supply chain and how we can potentially get gas in those kind of situations back from maybe the southeast up into the mid-continent if it ever happens again.", "So those are things that we would be looking at. But it really is looking at not necessarily the capacity that's there today or the contracting of that capacity, we are addressing a little bit of that, which is some uptick in storage and some additional volumes there. But that's not going to get you through a second winter storm Uri. So it's going to have to be a holistic approach between the exploration and production folks, the midstream folks and the utilities to really get us to a point where we can take on another winter storm Uri.", "I will say, volumetrically, there were very, very few customers lost in the state of Oklahoma. And so, that biometrically was a very positive for us. The issue was where the price went to, not necessarily the stability and the reliability of being able to perform. So I think the focus needs to be on resiliency and there's going to be a lot of people that's going to be involved in that process." ] }, { "name": "Craig Shere", "speech": [ "Can this process derisk some of the mid-con EBITDA?" ] }, { "name": "Kevin Burdick", "speech": [ "Craig, this is Kevin. I think -- those assets are highly contracted and have been highly contracted for a long time, and we would expect that to continue. So I think what this does is maybe provide opportunities for expansion. This team has done a really good job of whether it's connecting new power plants or doing smaller projects to bring gas from other areas.", "To Pierce's comments, we've done some of that. We just think there may be more opportunities for that in the future." ] }, { "name": "Craig Shere", "speech": [ "Great. Thank you." ] }, { "name": "Operator", "speech": [ "Our next question will come from Michael Cusimano with Pickering Energy Partners." ] }, { "name": "Michael Cusimano", "speech": [ "Good morning, everyone, and congrats on the new roles. I have more of a strategic question. Hypothetically using Elk Creek 540,000 barrels a day of expandable capacity as kind of a ceiling being filled by even like the 330 you touched on earlier this month and the 125,000 barrels a day of available ethane that you mentioned. That still leaves us about 85,000 of capacity available for the GOR and volume growth opportunities that you mentioned.", "So with that in mind, I'm trying to understand the strategic rationale for Overland Pass today. Is that just spare capacity available for potential growth beyond Elk Creek. Just if you can just talk about just how that fits into the portfolio today." ] }, { "name": "Sheridan Swords", "speech": [ "Yeah, this is Sheridan. I think when you think about the strategic rationale of OPPL, you need to think about Elk Creek as one system and the Bakken pipeline delivering into OPPL as a second system. So to reach the total 540,000 barrels a day of capacity that we could achieve by expanding Elk Creek, Elk Creek will run 400,000 of that, the other 140,000 will be on the Bakken pipeline and delivering that into OPPL and delivering all that into Bushton. So that's where OPPL fits into our strategic plan for volumes out of the Bakken." ] }, { "name": "Michael Cusimano", "speech": [ "OK. OK. So it was more thinking of Elk Creek from Rockies before it touches into where OPPL would connect. That's more like a 400,000-barrel-a-day capacity." ] }, { "name": "Sheridan Swords", "speech": [ "It is if we would put the additional pumps on. Right now, we've stated that that's 300,000." ] }, { "name": "Michael Cusimano", "speech": [ "OK, perfect. Yeah, that's really helpful. Thank you." ] }, { "name": "Operator", "speech": [ "Our next question comes from Michael Lapides with Goldman Sachs." ] }, { "name": "Michael Lapides", "speech": [ "Hey, guys. Just want to wish Terry congrats. And Pierce, congrats to you as well. Look forward to getting together at some point.", "I have a volume question. You made the comment -- someone made the comment on the call about 330,000 barrels a day is kind of what you're seeing right now out of the Bakken. Can you give same data points for what you're seeing right now in the mid-con and the Permian relative to kind of what the second quarter run rate, I think, on Slide four was?" ] }, { "name": "Walt Hulse", "speech": [ "I haven't looked specifically at what we're running right now. I will say that we are running higher on both those systems than we did in the second quarter. But I haven't specifically looked at what we have reached on each one of these systems. But we are trending higher on both of those systems." ] }, { "name": "Michael Lapides", "speech": [ "Got it. And when I look at your guidance, your volumetric guidance across G&P and NGL throughput, do you think there's material upside to this? A little surprised given today's numbers and then the comment on the 330,000 that you didn't kind of do a volumetric guidance raise here?" ] }, { "name": "Kevin Burdick", "speech": [ "Well, Michael, we're still within -- this is Kevin. We're still within the range in both segments. I mean, clearly, as we see strengthening activity that you would see some -- there would definitely be some upside to those numbers. But the other dynamic that's going on is when you look at an annual average, you had a pretty tough first quarter with the winter storm as it related to volumes.", "So I do think you're going to see a much stronger volume in the second half of the year than you did in the first half, but still tracking inside the guidance at this point." ] }, { "name": "Michael Lapides", "speech": [ "Got it. Super helpful. And then, last question, just on frac capacity. Can you talk about -- and I know you had the outage this period, so it may be a little hard what the utilization of your fracs are and when you actually think the earliest you might need new capacity would be?" ] }, { "name": "Sheridan Swords", "speech": [ "Well, right now, the utilization of our fracs is as much as we can get through them because we're trying to back off that backlog of inventory that we had carryover from the second quarter as we go forward. And in terms of adding new frac capacity, we're continuing to evaluate that. We're seeing good strong volume growth in our area. We're trying to understand when the right time is to kick that project off.", "And we're hoping that volumes continue to grow, and we can see that come up pretty quick." ] }, { "name": "Kevin Burdick", "speech": [ "So Michael, I would just add that to add that capacity, all we would be doing is completing MB-5, and you're just talking a couple of hundred million dollars to finish up that project." ] }, { "name": "Michael Lapides", "speech": [ "Got it. But is that something you think could be needed next year? Or do you think it's more longer-term down the road?" ] }, { "name": "Pierce Norton", "speech": [ "Well, it possibly could be needed next year. I think when we get it up, it will take a little bit longer than that to get it up and going. So that's why we kind of need to look at longer than a year. It will probably take us a little bit longer than that to get it up to complete what we need to have done there.", "But there's a possibility it could be needed next year. But still -- I still feel there's quite a bit of capacity in the industry right now that outside frac deals could be done in the short term." ] }, { "name": "Michael Lapides", "speech": [ "Got it. Thank you, guys. Much appreciated." ] }, { "name": "Operator", "speech": [ "And we'll take our final question from Sunil Sibal with Seaport Global Securities." ] }, { "name": "Sunil Sibal", "speech": [ "Yeah, hi. Good afternoon, everybody, and welcome back to Pierce, and then also congrats to Terry on his retirement. A couple of quick questions for me. It seems like there has been a fair bit of debate between the activity levels, public versus private.", "Could you remind us how much of your volumes come from private producers versus public producers in Bakken?" ] }, { "name": "Pierce Norton", "speech": [ "We've got -- obviously, we've got the big -- there's a lot of publics out there. When you think about ConocoPhillips and Continental and ExxonMobil and so forth. So the majority of those are coming from the publics up in the Bakken. But we do have some of our smaller customers are the privates, but we really haven't seen a distinguishing factor between who's bringing rigs back.", "It's really more an independent company just depending on what their financial situation is and how they're viewing their balance sheet, etc. But pretty much across the board, we have seen all those customers talk about increasing activity as we move through the rest of this year into '22." ] }, { "name": "Sunil Sibal", "speech": [ "Got it. Thanks for that. And it seems like when I look at Q2 versus Q1, you had a fairly decent uptick in volumes, but your opex were flattish to lower sequentially. I was curious, is there any specific thing which is driving that? And how should we be thinking about your opex going forward?" ] }, { "name": "Pierce Norton", "speech": [ "No. I think we've had a couple of quarters of a pretty close run rate here. From sequential quarter to quarter, it was really just some timing coming out of the winter being able -- starting to execute on some expense projects that we'll typically do in -- as the weather gets better, and that -- some of that was occurring in the NGL segment. But as we think going forward, other than maybe a little uptick with Bear Creek when it becomes operational, later this year.", "Other than that, kind of the current run rate would probably be a decent number to use." ] }, { "name": "Sunil Sibal", "speech": [ "Got it. Thanks." ] }, { "name": "Pierce Norton", "speech": [ "Thank you." ] }, { "name": "Operator", "speech": [ "This concludes today's question-and-answer session. I will now turn it back to Andrew Ziola for closing remarks." ] }, { "name": "Andrew Ziola", "speech": [ "All right. Well, thank you all. Our quiet period for the second quarter -- for the third quarter, excuse me, starts when we close our books in October and extends until we release earnings in early November. We'll provide details for the conference call at a later date.", "Thank you for joining us, and the IR team will be available throughout the day. Thank you." ] }, { "name": "Operator", "speech": [ "[Operator signoff]" ] } ]
OKE
2019-07-31
[ { "description": "Vice President of Investor Relation and Corporate Affairs", "name": "Andrew Ziola", "position": "Executive" }, { "description": "President and Chief Executive Officer", "name": "Terry K. Spencer", "position": "Executive" }, { "description": "Chief Financial Officer, Treasurer and Executive Vice President, Strategic Planning and Corporate Affairs", "name": "Walter S. Hulse", "position": "Executive" }, { "description": "Executive Vice President and Chief Operating Officer", "name": "Kevin L. Burdick", "position": "Executive" }, { "description": "Senior Vice President, Natural Gas Liquids", "name": "Sheridan C. Swords", "position": "Executive" }, { "description": "Senior Vice President, Natural Gas", "name": "Charles M. Kelley", "position": "Executive" }, { "description": "BMO Capital Markets -- Analyst", "name": "Danilo Juvane", "position": "Analyst" }, { "description": "Jefferies -- Analyst", "name": "Christopher Sighinolfi", "position": "Analyst" }, { "description": "SunTrust -- Analyst", "name": "Tristan Richardson", "position": "Analyst" }, { "description": "Barclays Capital -- Analyst", "name": "Christine Cho", "position": "Analyst" }, { "description": "Wells Fargo Securities -- Analyst", "name": "Michael Blum", "position": "Analyst" }, { "description": "JP Morgan -- Analyst", "name": "Jeremy Tonet", "position": "Analyst" }, { "description": "Bank of America-Merrill Lynch -- Analyst", "name": "Dennis Coleman", "position": "Analyst" }, { "description": "Credit Suisse -- Analyst", "name": "Spiro Dounis", "position": "Analyst" }, { "description": "Raymond James -- Analyst", "name": "J.R. Weston", "position": "Analyst" }, { "description": "UBS -- Analyst", "name": "Shneur Gershuni", "position": "Analyst" }, { "description": "Bernstein -- Analyst", "name": "Jean Ann Salisbury", "position": "Analyst" }, { "description": "Baird -- Analyst", "name": "Ethan Bellamy", "position": "Analyst" }, { "description": "Tuohy Brothers -- Analyst", "name": "Craig Shere", "position": "Analyst" }, { "description": "Seaport Global Securities -- Analyst", "name": "Sunil Sibal", "position": "Analyst" }, { "description": "Goldman Sachs -- Analyst", "name": "Michael Lapides", "position": "Analyst" } ]
[ { "name": "Operator", "speech": [ "Ladies and gentlemen, thank you for your patience in holding. We now have our speakers in conference. [Operator Instructions] At the conclusion of our presentation, we will open the floor for questions and instructions will be given at that time and the procedure to follow, if you would like to ask a question.", "It is now my pleasure to turn this conference over to Andrew Ziola. You may begin." ] }, { "name": "Andrew Ziola", "speech": [ "Thank you, Chantelle, and welcome to ONEOK's Second Quarter Earnings Conference Call. This call is being webcast live and a replay will be made available. After our prepared remarks, we'll be available to take your questions.", "A reminder that statements made during this call that might include ONEOK's expectations or predictions should be considered forward-looking statements and are covered by the Safe Harbor provision of the Securities Acts of 1933 and 1934. Actual results could differ materially from those projected in forward-looking statements. For a discussion of factors that could cause actual results to differ, please refer to our SEC filings.", "Our first speaker this morning is Terry Spencer, President and Chief Executive Officer. Terry?" ] }, { "name": "Terry K. Spencer", "speech": [ "Thanks, Andrew. Good morning, and thank you all for joining us today. As always, we appreciate your continued interest and investment in ONEOK. Joining me on today's call is Walt Hulse, Chief Financial Officer, Executive Vice President, Strategic Planning and Corporate Affairs; and Kevin Burdick, Executive Vice President and Chief Operating Officer. Also available to answer your questions are Sheridan Swords, Senior Vice President, Natural Gas Liquids; and Chuck Kelley, Senior Vice President, Natural Gas.", "It's an exciting time for ONEOK as we begin placing some of the largest capital growth projects in our history into service. Our projects remain on or ahead of schedule and on budget. The southern section of Elk Creek pipeline began flowing NGLs on July 15th from the Rockies region into the Mid-Continent with the northern section still on target to be completed in the fourth quarter.", "Last week, we announced additional low cost expansion projects across our system, which continue to demonstrate ONEOK's ability to incrementally grow with our customers. These projects will help address NGL transportation and fractionation needs of producers and will further address flaring in North Dakota with added natural gas processing capacity.", "All our projects, including these recent expansions are built to meet the needs of our customers and are backed by long-term contracts. We continue to see strong producer activity levels across the basins where we operate with NGL and natural gas volume growth that is in line with our expectations so far this year.", "Now, more than halfway through the year, our confidence in our 2019 financial expectations and 2020 earnings outlook has strengthened significantly. With our projects remaining on or ahead of schedule, we expect accelerated earnings growth leading into 2020 and beyond and additional cash flow to reinvest in our business, reduce leverage and continue to return value to shareholders.", "With that, I will turn the call over to Walt for comments on our second quarter results." ] }, { "name": "Walter S. Hulse", "speech": [ "Thank you, Terry. Our second quarter 2019 net income totaled $312 million, or $0.75 per share, an 11% increase year-over-year. And second quarter adjusted EBITDA totaled $632 million, a 5% increase year-over-year. Distributable cash flow in the second quarter 2019 was $540 million, up 19% from the second quarter 2018, with a healthy dividend coverage of 1.51 times. We also generated more than $180 million of distributable cash flow in excess of dividends paid in the second quarter 2019.", "During the second quarter, we paid a dividend of $0.865 per share. And last week, we announced a dividend increase to $0.89 per share or $3.56 per share on an annualized basis. This increase further underscores our confidence in the increasing cash flow we expect to generate from projects we have recently completed or will complete in the coming months. The dividend is payable on August 14th to shareholders of record on August 6th.", "Our June 30, net debt-to-EBITDA on a trailing 12-month basis was 4.2 times. With the earnings expected from these projects, we expect to be at 4 times debt-to-EBITDA run rate in the fourth quarter of 2020 or first quarter of 2021 with deleveraging continuing in the quarters to follow. Our liquidity remains strong as we ended the second quarter with the full $2.5 billion available on our credit facility and more than $270 million of cash on hand.", "We announced additional natural gas and NGL expansion projects last week where we expect to provide attractive returns for a minimal capital invested. We do not expect these projects to impact our 2019 growth capital guidance range of $2.5 billion to $3.7 billion, as most of the spending will happen in 2020 and 2021. Because of the accelerated timing on some of our projects, we anticipate ending the year towards the higher end of our capital guidance range. As spending on our large pipeline projects winds down early next year, we expect capital expenditures in 2020 to be lower than 2019.", "Producer activity, project timing and additional committed volumes on our system, all add up to an impressive backdrop for ONEOK's growth. As we sit today, we are even more confident in our outlook that our 2020 adjusted EBITDA will increase greater than 20% with an emphasis on the greater than when compared with our 2019 guidance midpoint.", "I'll now turn the call over to Kevin for a closer look at our operating performance." ] }, { "name": "Kevin L. Burdick", "speech": [ "Thank you, Walt. We continue to see strong producer activity across our operations, driving increases in both NGL and natural gas volumes in the second quarter. Total NGL raw feed throughput volume increased nearly 110,000 barrels per day or 11% year-over-year and increased 80,000 barrels per day or 8% compared with the first quarter 2019. Natural gas volumes processed increased more than 150 million cubic feet per day or 9% year-over-year and increased more than 80 million cubic feet per day or 4% compared with the first quarter 2019.", "Let's take a closer look at our volume growth and project timing in each of the basins where we operate. Starting with the Rockies region, producer results remain strong in the Williston and Powder River Basins, North Dakota natural gas production is more than 2.8 billion cubic feet per day and there continues to be around 60 rigs operating more than 500 million cubic feet per day of natural gas being flared and nearly 1,000 drilled but uncompleted wells in inventory. All of these factors provide an inventory of growth for our natural gas liquids and natural gas segments.", "As Terry mentioned, we completed the southern section of the Elk Creek pipeline from the Powder River Basin to the Mid-Continent, and it is currently flowing more than 30,000 barrels per day of NGLs. With the southern section in service, we have moved volumes previously railed on to our pipelines, eliminating higher rail transportation cost. This has also freed up rail capacity, which can be used to address continued NGL growth in the Williston Basin until Elk Creek is fully in service in the fourth quarter.", "As further growth is expected, we will add pumps on Elk Creek as needed to increase capacity. These projects are low cost and can be completed incrementally to address additional volume growth, including the need for potential ethane recovery. Approximately 850 million cubic feet per day of new natural gas processing capacity is coming online basinwide between now and the end of the first quarter 2020, which translates to approximately 110,000 barrels per day of propane plus NGL production when these plants are full. With all of the NGLs from those plants dedicated to ONEOK and more than 30,000 barrels per day already flowing on the pipeline, we remain confident that throughput on Elk Creek will reach approximately 100,000 barrels per day in the first quarter of 2020.", "ONEOK has now announced a total of 600 million cubic feet per day of additional natural gas processing capacity in the Williston Basin expected to come online between now and early 2021. Our latest announcement was the 200 million cubic feet per day expansion of our Bear Creek plant in Dunn County, an area that has recently experienced some of the highest production increases in North Dakota and has a decades' long runway of well inventory yet to be drilled. We expect volumes on the Bear Creek expansion to ramp up over a 12 to 24-month period once in service. This expansion also increases our NGL volumes contracted for natural gas processing plants in the Rocky Mountain region from 200,000 barrels per day to 225,000 barrels per day.", "Our Demicks Lake I plant remains on schedule to open full in the fourth quarter 2019 in conjunction with the completion of the northern section of Elk Creek. Demicks Lake II is expected to be complete early in the first quarter 2020.", "Moving on to the Mid-Continent. Producer activity in the region remains in line with our expectations for the year. In the second quarter, we saw increases in both NGL raw feed throughput volumes and natural gas volumes processed in the Mid-Continent compared with the first quarter 2019. Large well pad completions early in the quarter drove the increase in natural gas volumes processed and two new third-party plant connections contributed to the increase in NGL volumes.", "Arbuckle II is on schedule for completion in the first quarter of 2020 and its contracted capacity now totals 375,000 barrels per day compared with 350,000, previously. Last week, we announced NGL fractionation facility expansions totaling 65,000 barrels per day in the Mid-Continent. These projects will increase our propane-plus fractionation capacity to help address the heavier NGL barrels from the Williston Basin. 15,000 barrels per day of capacity is expected to be completed in the third quarter 2020, with the remaining 50,000 barrels per day completed in the first quarter of 2021.", "These types of projects can be efficiently completed at costs substantially lower than new construction. Recently completed expansion projects in our natural gas pipelines segment continued to drive higher firm capacity contracted in the second quarter compared with both in the second quarter 2018 and the first quarter 2019. These projects increase the capacities of our Mid-Continent and Permian Basin pipeline systems and will continue to provide increased firm transportation earnings going forward.", "Now let's take a look at our Permian Basin and Gulf Coast operations. NGL raw feed throughput volumes in this region increased 20% compared with the first quarter 2019, primarily driven by volume growth on our West Texas LPG pipeline. We continue to expect our average fee rate in this region to trend higher in future quarters as legacy volumes roll off West Texas LPG and are replaced with market-based transportation and fractionation volumes and as expansion of the systems come online, which are contracted at market rates.", "The 80,000 barrel per day expansion of West Texas LPG remains on track to be completed in the first quarter of 2020, with volumes ramping up quickly after it is placed in service. And last week, we announced a third expansion, which will add 40,000 barrels per day of capacity to the system. The expansion is supported by long-term dedicated NGL production from processing plants in the Permian Basin and is expected to be completed in the first quarter 2021.", "Our NGL fractionation capacity given current product composition is approximately 820,000 barrels per day and was approximately 90% utilized in the second quarter. We now expect to complete our 125,000 barrel per day MB-4 fractionator in phases. Phase 1 will provide approximately 75,000 barrels per day of capacity and is expected to be available in the fourth quarter of this year earlier than originally planned. Phase 2 will consist of the remaining 50,000 barrels per day, and is expected to be completed in the first quarter of 2020, as originally announced. MB-5 remains on track for completion in the first quarter 2021.", "Terry, that concludes my remarks." ] }, { "name": "Terry K. Spencer", "speech": [ "Thank you, Kevin. The progress on our capital growth projects this year is setting us up well for a significant volume and earnings uplift in 2020. As Walt emphasized, we are even more confident in our 2020 adjusted EBITDA growth outlook of greater than 20% compared with our 2019 guidance midpoint. The impressive production results across our operations highlight the widespread quality of our operating basins and well capitalized and experienced producers operating there. The volume growth, we've discussed today has high visibility. Both NGL and natural gas volumes are ready and waiting for processing and transportation now.", "Producers are looking to ONEOK to provide the critical infrastructure they need to connect their products with demand markets and we are well equipped and ready to grow our operations efficiently in order to do so. I'd like to recognize our large project teams and operations personnel located both at our headquarters and at our various field locations for their hard work to keep our growth projects on time and on budget. And specifically to those working on our Elk Creek pipeline who are able to place the southern section in service early benefiting many of our customers.", "Thank you to all our employees for your dedication to our customers and dedication to ONEOK. Your continued focus on safe and responsible operations has led to our continued reliability and operational success.", "With that operator, we are now ready for questions." ] } ]
[ { "name": "Operator", "speech": [ "Thank you very much. [Operator Instructions] Our first question will come from Danilo Juvane, BMO Capital." ] }, { "name": "Danilo Juvane", "speech": [ "Thanks and good morning. You mentioned in the press release having significant upside in the second half of the year from the early start of Elk Creek and other projects as well. Where do you see your 2019 EBITDA number was adding relative to the midpoint? And to the extent that you reside higher to the midpoint, do you still see a 20% growth rate between 2020 and 2019?" ] }, { "name": "Walter S. Hulse", "speech": [ "Well, Danilo, we haven't changed any of our guidance and don't expect to do that today on this call. Obviously, as we get through the year, we'll continue to evaluate whether we're going to adjust that. But right now, we're giving that outlook on 2020 off of the midpoint to let people have a basis on which to think about it." ] }, { "name": "Danilo Juvane", "speech": [ "Thanks for that, Walt. DCF was pretty strong during the quarter and it looked like it potentially came from Northern Border, anything going on there?" ] }, { "name": "Walter S. Hulse", "speech": [ "Nothing really out of the ordinary, Northern Border made an off-cycle distribution in addition to our normal quarterly distribution in the second quarter. But nothing -- nothing out of the ordinary course of business." ] }, { "name": "Danilo Juvane", "speech": [ "So we shouldn't expect that to continue going forward?" ] }, { "name": "Walter S. Hulse", "speech": [ "I'm sorry. Can you say that again?" ] }, { "name": "Danilo Juvane", "speech": [ "We shouldn't expect any more off-cycle distributions for the year -- for the balance of the year?" ] }, { "name": "Walter S. Hulse", "speech": [ "No, it's a distribution in excess of earnings for the quarter and that catches us up. So distributions going forward will track with earnings as they have in the past." ] }, { "name": "Danilo Juvane", "speech": [ "Got you. Last question from me, to the extent that you continue to see strong production out of the Bakken for liquids, any thoughts on a potential residue gas takeaway solution?" ] }, { "name": "Kevin L. Burdick", "speech": [ "I think, I mean, clearly there it's something we're looking at, we're paying attention to. And when you look at the capacity that's getting ready to come online across the basin and we do believe we can continue to and the basin will continue to displace gas coming from Canada. But absolutely, there are conversations going on, a variety of different outlets and we're participating in all those conversations." ] }, { "name": "Danilo Juvane", "speech": [ "Thanks, Kevin. Those are my questions." ] }, { "name": "Kevin L. Burdick", "speech": [ "Thanks." ] }, { "name": "Operator", "speech": [ "Thank you very much. Our next question will come from Chris Sighinolfi, Jefferies." ] }, { "name": "Christopher Sighinolfi", "speech": [ "Hey, guys, good morning. Nice continued execution. Thanks for taking my questions. Well, I just want to circle back on that question Danilo had asked about Northern Border. Just for my own verification to understand, I guess what's the mechanism for that as cash build at the JV and then you and your partner make the decision to pay that out on a periodic basis?" ] }, { "name": "Terry K. Spencer", "speech": [ "Yes, to the extent that, over time, we make a regular quarterly distribution, and to the extent that the Management Committee believes that there's a capacity to do more than that, they have the ability to do it in a one time basis. And that's what happened here." ] }, { "name": "Christopher Sighinolfi", "speech": [ "And as it pertained to DCF guidance and things of that nature, this was anticipated to fall this year. Is that also correct?" ] }, { "name": "Terry K. Spencer", "speech": [ "Well, I think that it's fair to say that, as we -- the plans to do this kind of develops throughout the course of the year. So I think on a going forward basis, we would expect distributions more in line with where they have been on a quarter-by-quarter basis." ] }, { "name": "Christopher Sighinolfi", "speech": [ "Okay. All right, great. And then if I could switch and just, Kevin I wanted to touch base, you guys have done a really nice job continuing to contract up Arbuckle II. Seemingly every quarter we get another 20,000 or 25,000 barrels a day of commitments there. And I just wanted to better understand or just I guess, review and remind myself as to where the volume slate now for that pipeline will be sourced I guess between what’s fed to it from Elk Creek what comes from the Mid-Con plants and then what comes from third parties? Is there a rough rule of thumb at this point given all the incremental contract adds you've had?" ] }, { "name": "Kevin L. Burdick", "speech": [ "Well, I mean, it varies as we contract new plants. Obviously if you're getting a plant in the Mid-Continent, a new contracted plant that's going to be tied directly to Arbuckle II. As we get a new Bakken plant, if those barrels are going to all -- go all the way to Belvieu then that will be included in both Elk Creek and Arbuckle II. So that's how we break it down. I mean you, Sheridan, do you have any other thoughts on just in general how --" ] }, { "name": "Sheridan C. Swords", "speech": [ "Well, I think that's right, so definitely you could see that on a very macro sense, the difference between what we've contracted for Arbuckle II and what we've contracted for Elk Creek, that difference is definitely coming out of the Mid-Continent." ] }, { "name": "Christopher Sighinolfi", "speech": [ "Okay. And is it fair then if I look at just the table that you guys have long provided that looks at the bundled rates on your NGL rock feed service. If I -- like I guess what I want to be careful of doing is making sure I'm giving you enough credit and appropriate credit for each of these two assets, but not double counting volume that's moving on Elk Creek that then subsequently moves down Arbuckle II. And so is it fair to just credit the Elk Creek volume with the bundled rate on the Bakken portion and then the incremental volume that I would see above that give that Mid-Continent rate. Is that fair way rule of thumb to think about it or would you advise me to do something different?" ] }, { "name": "Sheridan C. Swords", "speech": [ "No, I think that's a fair way to think about it." ] }, { "name": "Christopher Sighinolfi", "speech": [ "Okay. All right. Great. Thanks for taking my question, guys." ] }, { "name": "Terry K. Spencer", "speech": [ "Thanks, Chris. Sure." ] }, { "name": "Operator", "speech": [ "Thank you. Our next question will come from Tristan Richardson, SunTrust." ] }, { "name": "Tristan Richardson", "speech": [ "Good morning, guys. Just on the expansion project for Mid-Con frac capacity. You talked about that in prepared comments just about the heavier barrel. Is this purely really just optionality for you guys in the customer or just kind of curious could you talk about sort of the need for new capacity there relative to what the projects you have going on at Belvieu?" ] }, { "name": "Terry K. Spencer", "speech": [ "I think it just came down, a lot of it just came down to we had the ability as our teams looked at how we provide more fractionation capacity, that that was a low cost option for us and would drive the best return. With our other pipes, clearly we'll have the ability to move those purity products down to Belvieu once Arbuckle II is up. So we do get that optionality. But it really came down to where we look at where we could provide the lowest cost, most efficient frac capacity." ] }, { "name": "Tristan Richardson", "speech": [ "Great. And then just to follow-up on your -- appreciate your commentary on directionally where 2020 capex might stack up relative to the 2019 range. Should we think about that as just sort of on the projects you have sanctioned today or does that contemplate other projects that you might be looking at that haven't necessarily been greenlit yet?" ] }, { "name": "Terry K. Spencer", "speech": [ "No. I think that our expectation given, everything that we see going forward, both what we've been able to announce. And we're thinking we’d have lower capex in 2020, than it will be in 2019." ] }, { "name": "Tristan Richardson", "speech": [ "Appreciate it. Thank you guys very much." ] }, { "name": "Terry K. Spencer", "speech": [ "Thanks." ] }, { "name": "Operator", "speech": [ "Thank you. Our next question will come from Christine Cho, Barclays." ] }, { "name": "Christine Cho", "speech": [ "Hi, everyone. Great quarter. What is the financial benefit going to be when rail and third-party frac costs roll off? I'm assuming it's all off by first quarter next year when all your assets are online. But could you provide the cadence of the roll off between now and then as well?" ] }, { "name": "Terry K. Spencer", "speech": [ "Well, I guess what we talked about previously, the way to think about that is the barrels that have already rolled off rail. I think we said we save about $0.20 per gallon of transportation costs. So as we put more barrels on rail through the rest of this year, then the next step will be when the full pipeline is in place and all those rail barrels move to the pipe then you'll see another uplift at that point, along with other volumes coming from processing plants when the flare start getting put out when the processing capacity comes online. Did that answer your question, Christine?" ] }, { "name": "Christine Cho", "speech": [ "Yeah, I guess. Okay, but you've moved 30,000 barrels per day off right now with the southern portion coming on. But you're still continuing to rail. So I guess and I'm guessing the rail is still going to increase throughout the end of this year. So at what point does that peak, like how much are you railing today and how much do you expect to rail at the peak between now and year-end?" ] }, { "name": "Terry K. Spencer", "speech": [ "Well, the rail volume when we brought on the southern section, the rail volume at that point in time went to nearly zero. So we pulled pretty much everything down. And then that rail volume -- you have plants coming online between now and when Elk Creek comes and gets in service. So we will use rail, it will start building back up as volumes from those plants start coming online. So it will build back up and then once the full pipeline is in place, all of it will obviously move back over to the pipe." ] }, { "name": "Christine Cho", "speech": [ "Okay, got it." ] }, { "name": "Sheridan C. Swords", "speech": [ "Christine, this is Sheridan. We think by the time we bring Elk Creek back on, when we get the Northern section of Elk Creek completed, we will be railing upwards of 30,000 barrels a day again." ] }, { "name": "Christine Cho", "speech": [ "Okay. Super helpful. And then your contracted levels on Elk Creek is approaching capacity. Can you remind us, how long it would take to expand the pipeline, if you decide to do so. And also discuss at what point you would do that just given it's probably low cost and your numbers assume minimal ethane extraction, and I'm not sure at what point that might change?" ] }, { "name": "Terry K. Spencer", "speech": [ "We look at it continually. Clearly those projects aren't two-year projects like building the pipe. They're measured in terms of months, not years. And we also have the ability to do things like ordering pumps and a lot of the long lead time of -- long lead equipment and other engineering things we can go ahead and do to prepare for that so that it drives the time required to get that done to again just a matter of months." ] }, { "name": "Christine Cho", "speech": [ "Okay. And then last one for me, there was an increase in Bakken processing volumes, but your NGL pipeline volumes remained flat. What was the reason for that?" ] }, { "name": "Terry K. Spencer", "speech": [ "We just drove our ethane rejection just continued to drive deeper and deeper. So to get more throughput through the plants and remain the pipe, the NGL takeaway was at capacity. So we were able to, through our plants drive deeper rejection and run more inlet but not produce as much liquids." ] }, { "name": "Christine Cho", "speech": [ "So, you are doing max rails to the quarter two then?" ] }, { "name": "Terry K. Spencer", "speech": [ "I mean towards the end, yes, that we were pretty much at max rail." ] }, { "name": "Christine Cho", "speech": [ "Okay. Thank you." ] }, { "name": "Operator", "speech": [ "Thank you. Our next question will come from Michael Blum, Wells Fargo." ] }, { "name": "Michael Blum", "speech": [ "Hey, good morning, everyone. I'm curious, if you can just comment a little bit, obviously NGL prices have been pretty volatile. I was curious for your latest views on how you see things trending for the rest of the year and into 2020. And then kind of related to that, if you have any different or updated views on how the Conway Belvieu spread is going to trend here for the rest of the year?" ] }, { "name": "Sheridan C. Swords", "speech": [ "Michael, this is Sheridan. I think as we look at the overall price, if you keep crude at the level it is today, you'll see a little uptick in prices. Obviously, we're seeing more export capacity for propane come online, which should create more demand and you're seeing more crackers come online, that you should see some uptick in absolute price here through the end of the year and into 2020. Not a huge spike but I think you'll see some strength.", "On the Conway to Belvieu spread right now, we think that where it is today is where it's going to be or in this range through the third quarter and start into the fourth quarter. Then you'll get into some seasonality issues that probably will bring that spread in a little tighter than it is today. Then of course, as we've said before, once we bring Arbuckle II online, that spread will go back to more what we have seen historically, which is much narrower than we have today." ] }, { "name": "Michael Blum", "speech": [ "Okay, great. Appreciate that. And then just this recent slate of projects that you just announced. So we just think of the returns on those projects, would you consider those to be kind of within the normal course of your typical return profile or would those be better, because some of them are kind of bolt-on in nature? How do we think about that? Thanks." ] }, { "name": "Kevin L. Burdick", "speech": [ "Yeah, I think -- Michael it is Kevin. I think the plant projects are going to be in our kind of our standard 4 to 6 times, but some of the other just expansions and frac expansions that we've talked about could be done at lower cost and new construction are going to be better than that." ] }, { "name": "Michael Blum", "speech": [ "Thank you." ] }, { "name": "Operator", "speech": [ "Thank you very much. Our next question will come from Jeremy Tonet, JP Morgan." ] }, { "name": "Jeremy Tonet", "speech": [ "Hi, good morning. I appreciate that you guys are not updating guidance at this point. But just curious within the G&P and the gas pipeline segments, it seems like you guys are trending quite strong versus the ranges that you put out there. Is there anything in the back half of the year that could kind of temper this trajectory or is kind of like the high-end or above the high-end, seems like it could be possible for those segments?" ] }, { "name": "Charles M. Kelley", "speech": [ "Jeremy, this is Chuck. We can talk first about G&P. I think we could trend higher. It's going to come down to one, our pipeline infrastructure, some of our field facilities come on. So it's a matter of timing, as we get towards the end of the year. And as you think about our gas pipe business, we've seen very good demand for our -- not only our interoperable volumes, but our balancing services and short-term storage services, which are kind of driving some incremental earnings that we hadn't necessarily planned on. So both of the segments are doing very well right now, demand is up and we're just taking care of customers at this point." ] }, { "name": "Jeremy Tonet", "speech": [ "Great. That's helpful. And then, thinking about the balance sheet here, it seems like I think before the leverage is going to peak, I think at the beginning of 2020, with all the projects coming online. You've added some more to the backlog there and -- or you've FID-ed some more, brought into, what you're going to do? And just wondering how you see leverage, I guess, moving across 2020? Is that still the same peak or any color that you could provide on how that all comes together?" ] }, { "name": "Terry K. Spencer", "speech": [ "Well, Jeremy, our heaviest spending is definitely in the third and fourth quarter of '19. So when you entered that first quarter, we've said that, with Elk Creek coming on in the fourth quarter and the volumetric disclosed, the guidance that we've put out there as it relates to our expectations of how quickly Elk Creek is going to build its volume around that 100,000 barrels. We're going to see a significant uplift in our EBITDA in the first quarter of 2020 and throughout 2020 and that's going to delever us right from the get go in 2020.", "So, as we cross over the year, that'll be our peak. The projects that we've announced to date will be towards the back end of 2020 and into 2021 from a capex spend and will already be well down our road to de-levering. And in my prepared remarks, I gave you some thoughts on where we might end the year. So we're going to see in the same trajectory and still looking for some significant de-levering going forward." ] }, { "name": "Jeremy Tonet", "speech": [ "That's helpful. That's it for me. Thanks." ] }, { "name": "Operator", "speech": [ "Thank you. Our next question will come from Dennis Coleman, Bank of America." ] }, { "name": "Dennis Coleman", "speech": [ "Hi, good morning, everyone. One for me with regard to the fracs, just I'm a little interested in sort of this phasing of bringing on frac 4, if I understand it right. Can you just talk -- I don't really sort of have a concept of how you bring on a frac in stages. So maybe if you could just talk a little bit about how that's happening?" ] }, { "name": "Kevin L. Burdick", "speech": [ "Yeah, Dennis, it's Kevin. Well, in this case with our complex down there, we had some spare capacity for somewhat I'd call it kind of utilities, some refrigeration, some heaters that are typically long lead equipment, long lead time type equipment items. And so we're able to leverage some existing spare capacity, we have to bring up the frac in kind of a partial mode. And then as we've installed the rest of that equipment, that's what will get it up to full capacity in '20." ] }, { "name": "Dennis Coleman", "speech": [ "Okay, so the vessel itself is there, and then just the -- so, I guess the follow on question is, if you're using up that capacity, would -- should we expect that to be a model for frac 5 as well?" ] }, { "name": "Kevin L. Burdick", "speech": [ "We'll evaluate it. We may not have the same type of spare utilities, if you will for frac 5. But that's something obviously we'll take a look at a variety of different things to do but I wouldn't expect that to happen for the MB-5." ] }, { "name": "Dennis Coleman", "speech": [ "Okay, okay. Thanks for that. And then -- I'm sorry about this, but just to go back to this Northern Border distribution, Danilo and Chris both hit on it, but this one-time payment, we should not -- that wasn't included in the guidance, correct? And so we should just use the guidance and sort of use this one-time payment and think of it that way. So if we add that in, we should think about the guidance is, you're going to be above the guidance?" ] }, { "name": "Terry K. Spencer", "speech": [ "It's fair to say that that was not included in the original guidance." ] }, { "name": "Dennis Coleman", "speech": [ "Perfect. That's what I need. Okay, that's it for me. Thanks." ] }, { "name": "Operator", "speech": [ "Thank you. Our next question will come from Spiro Dounis, Credit Suisse." ] }, { "name": "Spiro Dounis", "speech": [ "Hey, good morning, everyone. Just maybe going back to the 20% growth expectation for next year, I'm not sure we've seen you guys highlight that in a while here. Maybe not since the original guidance was provided. So getting the sense of that means you're getting pretty confident of that figure. So curious, how you are thinking about some of the underlying assumptions to get there maybe just around commodity differentials and some of the base business growth. You made some comments earlier just around the differential outlook. But if you could just expand there in the context of that 20% growth next year?" ] }, { "name": "Kevin L. Burdick", "speech": [ "Yeah, this is Kevin. I mean, I think, obviously, the huge driver, there is the backlog of flared gas and the inventory we talked about up in the Bakken. When you think about to just kind of put the math to the 100,000 barrels a day that we expect on Elk Creek by the first quarter, and you put that out over the course of the year, and then you've got a full Demicks Lake I plant running full for the entire year, you got Demicks II ramping up and then you've got growth on the Permian and Mid-Continent as well. But when you just go back to the 500 million cubic feet a day that's flaring in the Bakken across the basin, and the processing capacity that's coming online between now and the first quarter that just generates a significant amount of NGLs, which is the primary driver for the '20 number." ] }, { "name": "Spiro Dounis", "speech": [ "Got it. And so if I'm hearing that, right, it sounds like there's no real major call being made here on big volume growth outside of that or any sort of commodity or differential move. Is that fair?" ] }, { "name": "Kevin L. Burdick", "speech": [ "Yeah, that's fair. In fact, we've been talking very openly as Sheridan mentioned, with Arbuckle-II we expect spreads to come back in much narrower than they are today. And that is included in that -- that assumption is included in that 20%, greater than 20%." ] }, { "name": "Spiro Dounis", "speech": [ "Got it. Got it. Okay, appreciate that. And then maybe just more broadly, and how you're thinking about your Mid-Con footprint longer term. Clear to see that most of your growth is really focused outside that area. And I guess lately, producer commentary, there has been somewhat lukewarm. So just curious, what sort of optionality do you have around that footprint to maybe offset some potential volume headwinds, sort of past 2019 or if you think that's even fair to be cautious on the Mid-Con at this point?" ] }, { "name": "Kevin L. Burdick", "speech": [ "I think, just in general, the Mid-Continent, like we remarked in our prepared remarks, the volumes have been in line with our expectations. Yeah, there may have been a couple of producers that you've seen some things written that were off a little bit, but then you've been -- we've had some that have outperformed our expectations. And I think one of the things we continue to remind people is we kind of have our own expectations, given the footprint and the size of our system, both in the G&P and the NGL side. So as we set our forecasts out there, we're factoring in all that information. So we feel good about it, and we do expect growth out of the Mid-Continent as we move forward. I mean, guys --?" ] }, { "name": "Charles M. Kelley", "speech": [ "Only thing I’d say is that we're still planning on hooking up another two more plants in the Mid-Continent in the second half of this year. So we're still seeing some need for capacity." ] }, { "name": "Sheridan C. Swords", "speech": [ "And what I would add from one of G&P standpoint would be, I think our well connect guidance that we gave were trending as though we're going to exceed, and I think we probably will this year." ] }, { "name": "Spiro Dounis", "speech": [ "Got it. I appreciate that. Just one last quick one if I could and sorry if you guys touched on it. Just around LPG exports, obviously has been considerable amount of new capacity announcements made recently. I imagine that factors into your market outlook. So just how you’re thinking about that now?" ] }, { "name": "Kevin L. Burdick", "speech": [ "I think when we think about LPG exports, we're going to continue to engage the market to understand what the market is and what's going on there. But what we're not going to do is go out there and do an uneconomic project or just build something to say we have an export terminal. So we're continuing to use our capital disciplined, as we evaluate that. But we will always be involved in engaging the market on exports. And when we get to the time that we see that we have an economic project that we want to go forward then we will -- we will go forward at that time." ] }, { "name": "Spiro Dounis", "speech": [ "Got it. Appreciate all the color. Thanks, guys." ] }, { "name": "Operator", "speech": [ "Thank you very much. Our next question will come J.R. Weston, Raymond James." ] }, { "name": "J.R. Weston", "speech": [ "Hey, good morning. Just wanted to ask real quick on Bakken G&P volumes. So far this year kind of relative to the guidance looks like you're tracking pretty well but it looks like you've got almost 60% of the well connects still expected in the second half of the year. So just kind of curious if there are other moving pieces in that guidance or if it seems like maybe you're tracking above expectations there." ] }, { "name": "Charles M. Kelley", "speech": [ "Well, I think we did lag early in the Q1 due to weather and there was, let's face it, not only cold but there's a lot of snow. So it was difficult to get out there and connect wells. Second quarter we obviously strengthened and connected quite a few. I think the remainder of the year we'll hit our guidance on our well connects and some of that is just waiting on some capacities at certain compressor stations. So, I think we're in good shape to hit our guidance numbers for the year on our well connects and the volume guidance." ] }, { "name": "J.R. Weston", "speech": [ "That's it from me. Thanks." ] }, { "name": "Operator", "speech": [ "Thank you. Our next question will come from Shneur Gershuni, UBS." ] }, { "name": "Shneur Gershuni", "speech": [ "Hi, good morning, guys. Maybe just a couple of quick follow ups here, just with respect to the guidance, I mean you’re sort of maintaining this 20%. But in your prepared remarks, you kind of emphasized greater than 20%, was the comment. Until a few days ago ethane has been under severe pressure. And if I remember correctly, you had a big ethane rejection reversal tailwind in the last two years. Your guidance when you originally set it out in saying the plus 20%, did that include some reversal of the ethane rejection, and is that being offset by some better Elk Creek expectations? Just kind of wondering what the moving parts have been positive and negative from the time you set it versus what you sit today?" ] }, { "name": "Sheridan C. Swords", "speech": [ "What I would say in when we look at the NGL volume growth in 2019, that has exceeded our expectations. Part of that is we probably have not seen quite as much ethane come out of rejection as we thought, but we're seeing more ethane on our system than we thought from the growth in other areas. So we are seeing that offset a little bit, but I think the big thing is we are seeing more volume growth than we thought we would see at this time." ] }, { "name": "Shneur Gershuni", "speech": [ "Okay. And then secondly, with respect to announcing a third plant in the Williston, I was just wondering what your flexibility was around the spend in the in-service date? When I sort of look at the flaring numbers that you have out there on your slides for 300 MMcf a day on your acreage, I sort of look at two plants, it sort of looks like it would take care of their flaring plus some growth. We've recently seen a big dip in Williston rig count. If that's just not moving around and that trend continues, do you have some flexibility around the spend to sort of push out the in-service date of this third plant?" ] }, { "name": "Kevin L. Burdick", "speech": [ "Shneur, this is Kevin. I mean, yeah, technically, you would have that flexibility. But we see nothing right now that would cause us to do that. In fact, it's just the opposite. Our customers are -- they need more capacity in this Dunn County area. The results they've seen and these are some large, well-capitalized producers with large acreage blocks, they want to drill this area out and the plant is full. And the only reason they're not deploying more capital down there right now is because of capacity. So we clearly see this as a growth area for us and we started off looking at a smaller expansion and the more color we got from producers, about their immediate plans, we continue to push it up and decided to put a 200 million a day expansion in." ] }, { "name": "Shneur Gershuni", "speech": [ "All right, that sounds great. Thank you very much. Appreciate the color guys." ] }, { "name": "Operator", "speech": [ "Thank you. Our next question will come from Jean Ann Salisbury, Bernstein." ] }, { "name": "Jean Ann Salisbury", "speech": [ "Good morning. Could you give us an estimate of how much ethane is being projected into Northern Border today, and what the maximum you think it can handle it?" ] }, { "name": "Charles M. Kelley", "speech": [ "Yes, this is Chuck. Today there's roughly about 150,000 barrels a day of ethane going into Northern Border. We actually looked at this just the other day and the North Dakota pipeline authority has some information out at their website about it. With forecasts over time depending on the mix between Bakken gas and Canadian gas filling that pipe, you could see it as much as 180,000 to 200,000 barrels of ethane." ] }, { "name": "Jean Ann Salisbury", "speech": [ "Great. That's really helpful. Thank you. And then obviously, there's a lot of crude pipelines that are running open seasons out of the Bakken. Just as a general question, do you usually find the E&Ps when they sign up for crude takeaway tend to pair it with other takeaway, like for example, if they signed a new 10 year contract for crude, would you expect them to be looking for NGL takeaway to match with that?" ] }, { "name": "Charles M. Kelley", "speech": [ "Typically, we don't see that. Where we see people come up need NGL takeaway capacity is when you're looking at building a new plant. So when they build the new plants when they'll secure the NGL takeaway capacity for that complete new plant, and then they'll grow into it as they -- on the crude -- on that side of it. So just because they signed up for a long crude term deal doesn't necessarily mean they're going to sign up for NGLs and vice versa. But you really got to look at when you start seeing more plants being announced, they have either -- are going to sign up for NGLs or have already signed up for the NGL takeaway." ] }, { "name": "Jean Ann Salisbury", "speech": [ "Really helpful, thank you. That's all for me." ] }, { "name": "Operator", "speech": [ "Thank you. Our next question will come from Ethan Bellamy, Baird." ] }, { "name": "Ethan Bellamy", "speech": [ "Hey, good morning, all. There is some concern by investors that the Bakken may decline in the next three to five years, what's your expectation for North Dakota volumes on your acreage longer-term?" ] }, { "name": "Kevin L. Burdick", "speech": [ "Again, Ethan, this is Kevin. We continue to see growth. When you just look at the track record of -- even with rigs in that 55 to 60 range for the basin, we have seen significant gas production growth. And just remember that gas production is growing at a faster clip than crude production because of the GOR and the increases there. So there is a lot of positives about gas production. You'd look at some of the forecast out there. We believe there is definitely growth beyond that horizon you mentioned." ] }, { "name": "Ethan Bellamy", "speech": [ "Okay. That's a good segue to my next --" ] }, { "name": "Kevin L. Burdick", "speech": [ "Well beyond that." ] }, { "name": "Ethan Bellamy", "speech": [ "Sorry, go ahead." ] }, { "name": "Kevin L. Burdick", "speech": [ "No, I just said well beyond that." ] }, { "name": "Ethan Bellamy", "speech": [ "Okay. Thank you. I was just going to ask it looks like we might need a new gas export pipe to handle that volume, do you agree with that and is that a project you're vetting?" ] }, { "name": "Kevin L. Burdick", "speech": [ "Yes. I think we definitely agree with that. And again, as we discussed earlier, there are a variety of projects being discussed in different avenues to get more residue out, but clearly if we stay on a growth trend, you were -- the basin is going to need some additional takeaway capacity over the next two, three, four years." ] }, { "name": "Ethan Bellamy", "speech": [ "Okay. Moving down south, how has the decline in NGL prices impacted, if at all, the rates and negotiations with customers for frac capacity?" ] }, { "name": "Sheridan C. Swords", "speech": [ "It has not impacted them at all. We go in and reprice our services off of alternatives, also what the marketplace is. And remember that NGLs are a byproduct, it needs to be taken away in areas people if they can't get the capacity, they are flaring, what they say. So the absolute price of the NGL does not have an impact on what we can charge for our services." ] }, { "name": "Ethan Bellamy", "speech": [ "And market's still fairly tight?" ] }, { "name": "Sheridan C. Swords", "speech": [ "Markets -- fractionation capacity is still pretty tight, there is a lot coming on. And pipeline capacity obviously is tight because we're building new ones as we come on, as well. So, yeah, the market is still fairly tight in all areas." ] }, { "name": "Ethan Bellamy", "speech": [ "Okay. And then last question. There are a lot of assets on the market and a few whole partnership, what's your appetite for M&A here?" ] }, { "name": "Terry K. Spencer", "speech": [ "Ethan, this is Terry. Not very high, candidly, when you look at the gross slate of opportunities that we have going forward. When you think about it from an accretion standpoint, we are talking dollars a share and additional earnings to come to the company over the next several years. We can really get that from strategic M&A. Now there may be some assets from time to time that we could buy with cash that could make some sense. But right now, we really don't see anything out there that's that compelling or valuations, in particular, that makes sense particularly when you think about the alternative we have to invest organically." ] }, { "name": "Ethan Bellamy", "speech": [ "All right. Thanks you all. Much appreciated." ] }, { "name": "Kevin L. Burdick", "speech": [ "You bet." ] }, { "name": "Operator", "speech": [ "Thank you. Our next question will come from Craig Shere, Tuohy Brothers." ] }, { "name": "Craig Shere", "speech": [ "Good morning. Congratulations on another great quarter." ] }, { "name": "Terry K. Spencer", "speech": [ "Thanks." ] }, { "name": "Kevin L. Burdick", "speech": [ "Thanks, Craig." ] }, { "name": "Craig Shere", "speech": [ "On the G&P unit fee based margins, that look to be a record in the second quarter. Is that sustainable and what's driving that?" ] }, { "name": "Charles M. Kelley", "speech": [ "Craig, this is Chuck. We guided to $0.90 to $0.95, we are at $0.93 today. Obviously, with more Bakken gas coming on, it's higher margin relative to our Mid-Con business, so that's part of the driver. In addition to that, you get in the contract mix, different producers we have different fees. And so is it sustainable? I think we are solid in that range." ] }, { "name": "Craig Shere", "speech": [ "Okay, great. And I just want to understand all the system integration gives and takes as it relates to Arbuckle II and possible kind of modularity of your system, if I could describe it that way. Currently you are coming out of 400,000 and then you have an increase of 500,000 a day. You’re contracted 375,000 [Phonetic], but if you switch Sterling III purity product, any excess light grade that hasn't been fractionated would have to go to Arbuckle II, and then you may wind up putting all the growth that you're seeing in West Texas LPG into the southern Leg of Arbuckle II. So I'm just trying to think through how quickly the entire system can fill up?" ] }, { "name": "Sheridan C. Swords", "speech": [ "Well, that is a good question. We continue to look at how fast can you fill up and we're, as we said, we can add pumps fairly quickly as we go forward. But you're right, we -- if I go back to the original start of your question, the modularity and the optionality we have through our system gives us a lot of flexibility. And the first one is, is actually Sterling III is on raw feed today, we will take all Sterling III's raw feed, put it on Arbuckle and open that up for purities and that's why we believe the spreads between Conway and Belvieuwe will come together.", "And then we will take -- we think hopefully very quickly we will take Arbuckle up to 1 million barrels if all the capacity comes online as we think it's going to come online we see into the future. But we still think above we will -- we will put the pumps and to go to 1 million barrels, we still have some headroom to breach that million barrels that we have not contracted for today. But we should be in the upper end of Arbuckle II and full pipelines are a good thing. And if we need to build another pipeline because we see that kind of volume come out, we'll build another pipeline." ] }, { "name": "Craig Shere", "speech": [ "So Sheridan, a couple of questions. The northern section of Arbuckle II isn't the same capacity as the southern section, right? So if you do take West Texas volumes and go to 1 million barrels, we can't in the Northern section, right?" ] }, { "name": "Sheridan C. Swords", "speech": [ "The Northern section can do 600,000 barrels and the Southern section can do 1 million barrels. So that leads -- and West Texas pipeline is going to come in right where Arbuckle II transitions from a 24 inch or 600,000 barrels to a 30 inch or 1 million barrels. So that leads 400,000 barrels a day that's open for West Texas to fill. That does not impact the volume coming down from the north. And that's how the system was designed. That was our plan in the beginning. So you could -- we are anticipating we could see upwards of 400,000 barrels come off West Texas and go on to Arbuckle II." ] }, { "name": "Craig Shere", "speech": [ "And then if I understand that that would free the southern section of West Texas for potential crude service?" ] }, { "name": "Sheridan C. Swords", "speech": [ "That's correct. Or as we continue to get to 400,000 barrels a day on West Texas, we're going to have to have a complete new line out of the Permian to Arbuckle II, which would free up West Texas from the Permian -- the legacy West Texas system from the Permian to the Gulf Coast to use for some other service, which would include crude." ] }, { "name": "Craig Shere", "speech": [ "I see. And moving the Y-grade from Sterling III to West Texas -- I'm sorry, to Arbuckle II, that's got nothing to do with a 375,000 a day of contract. The 375,000 is all incremental to what you have today, right? And then moving capacity over to take advantage of the purity product is just extra." ] }, { "name": "Sheridan C. Swords", "speech": [ "That is correct. The 375,000 is -- does not include the volume that's moving on Sterling III today." ] }, { "name": "Craig Shere", "speech": [ "All right. Thank you very much." ] }, { "name": "Operator", "speech": [ "Thank you. Our next question will come from Sunil Sibal, Seaport Global Securities." ] }, { "name": "Sunil Sibal", "speech": [ "Yes, hi, good morning, guys, and thanks for all the clarity on the call. Just one quick question on the G&P segment. Obviously, the results were fairly strong and I noticed that your opex in that segment actually fell sequentially as well as versus last year despite a decent pick up in volumes. I'm just curious, was there anything going on there or -- I know sometimes commodity prices, especially the gas prices kind of impact that opex still. So I just was trying to get a little bit clarity on that." ] }, { "name": "Charles M. Kelley", "speech": [ "Yeah, this is, Chuck. No, the -- sequentially we are about $6 million lower and it was pretty much just due to timing between the quarters. So if you average those two quarters together, run rate might be a little bit higher as we progress toward Demicks I and II, bringing on more employees and more field cost, but that's pretty much -- those are good numbers for the year." ] }, { "name": "Sunil Sibal", "speech": [ "Okay. And gas is more like a pass through cost, so that natural gas prices don't really impact that number, correct?" ] }, { "name": "Charles M. Kelley", "speech": [ "No, it does not impact that number." ] }, { "name": "Sunil Sibal", "speech": [ "Okay, thanks for that. And then just trying to understand a little bit better on the LPG export side of things. From what I've been hearing, obviously, there have been a number of dock expansions coming online, which seems like maybe some constraints in moving those LPG volumes to the end customers, ultimately. I was curious if you have a view on that? And also, is there some way that when you're talking to customers on the LPG side, so in some way for you guys who taken -- get an opportunity out of that." ] }, { "name": "Walter S. Hulse", "speech": [ "I mean, again, as Sheridan kind of alluded to on the dock question. Yeah, there have been announcements out there, there's more capacity that's going to be announced. We do see some of the short term rates or spot rates have been pushed down. But like Sheridan mentioned, I think the key is, as we talk to customers, we're looking longer term, we're looking for rates that are going to economically justify a project and that's the way we'll approach it." ] }, { "name": "Sunil Sibal", "speech": [ "Okay, got it. Thanks guys." ] }, { "name": "Operator", "speech": [ "Thank you. Our last question will come from Michael Lapides, Goldman Sachs." ] }, { "name": "Michael Lapides", "speech": [ "Hey, guys. How are you guys thinking about what a 2021 step up looks like versus 2020? I mean you've got a lot of projects that come online in '20. And trying to think about how much that 20% plus captures that for 2020 versus what drives a '21 step up?" ] }, { "name": "Walter S. Hulse", "speech": [ "Michael, I think that we're definitely not going to give you 2021 guidance, and we're stepping out a little further than we usually do to give it in outlook in 2020. So you're going to have to do your own work here. But if you just take the capital that we're investing and recognize that we're in the same multiple in some of these incremental projects or even at better multiples, 2021 is looking pretty good too." ] }, { "name": "Michael Lapides", "speech": [ "Got it. Do you still assume a 4 to 6 times multiple on most of these projects, or do you think some can even be better than that once you get them at full run rate?" ] }, { "name": "Walter S. Hulse", "speech": [ "Well, I think the frac is a perfect example of putting -- adding capacity at about half the price of build is definitely better than a 4 to 6 multiple." ] }, { "name": "Michael Lapides", "speech": [ "Got it. Okay, guys. Thank you. Much appreciated." ] }, { "name": "Walter S. Hulse", "speech": [ "Sure." ] }, { "name": "Operator", "speech": [ "Thank you very much. Speakers, at this time, we have no further questions in the queue." ] }, { "name": "Terry K. Spencer", "speech": [ "All right. Well, thank you, everyone. Our quiet period for the third quarter starts when we close our books in early October, and extends until we release earnings in late October. We will provide details for that conference call at a later date. Thank you for joining us and the IR team will be available throughout the day for your questions. Have a good week." ] }, { "name": "Operator", "speech": [ "[Operator Closing Remarks]" ] } ]
GILD
2019-05-02
[ { "description": "Head of Investor Relations", "name": "Sung Lee", "position": "Other" }, { "description": "Chairman and Chief Executive Officer", "name": "Daniel O'Day", "position": "Executive" }, { "description": "Executive Vice President and Chief Financial Officer", "name": "Robin L. Washington", "position": "Executive" }, { "description": "Executive Vice President, Worldwide Commercial Operations", "name": "Laura Hamill", "position": "Executive" }, { "description": "Chief Scientific Officer, Head of Research and Development", "name": "John Mchutchison", "position": "Executive" }, { "description": "Barclays -- Analyst", "name": "Geoffrey Meacham", "position": "Analyst" }, { "description": "RBC Capital Markets -- Analyst", "name": "Brian Abrahams", "position": "Analyst" }, { "description": "SVB Leerink -- Analyst", "name": "Geoffrey Porges", "position": "Analyst" }, { "description": "Jefferies -- Analyst", "name": "Michael Yee", "position": "Analyst" }, { "description": "UBS -- Analyst", "name": "Carter Gould", "position": "Analyst" }, { "description": "Bank of America Merrill Lynch -- Analyst", "name": "Ying Huang", "position": "Analyst" }, { "description": "Evercore -- Analyst", "name": "Umer Raffat", "position": "Analyst" }, { "description": "Cowen & Company -- Analyst", "name": "Philip Nadeau", "position": "Analyst" }, { "description": "JPMorgan -- Analyst", "name": "Cory Kasimov", "position": "Analyst" }, { "description": "Bernstein -- Analyst", "name": "Ronny Gal", "position": "Analyst" } ]
[ { "name": "Operator", "speech": [ "Ladies and gentlemen, thank you for standing by, and welcome to the Gilead Sciences' First Quarter 2019 Earnings Conference Call. My name is Jonathan, and I will be your conference operator today. At this time, all participants are in a listen-only mode. And as a reminder, this conference call is being recorded. I would now like to turn the call over to Sung Lee, Vice President of Investor Relations. Please go ahead." ] }, { "name": "Sung Lee", "speech": [ "Thank you, Jonathan, and good afternoon, everyone. Just after market close today, we issued a press release with earnings results for the first quarter 2019. The press release and detailed slides are available on the Investor Relations section of the Gilead website. The speakers on the call today will be: Daniel O'Day Chairman and Chief Executive Officer; Robin Washington Executive Vice President and Chief Financial Officer; Laura Hamill Executive Vice President Worldwide Commercial Operations; and John McHutchison Chief Scientific Officer and Head of Research and Development.", "Before we begin with our prepared comments, let me remind you that we will be making forward-looking statements including plans and expectations with respect to products, product candidates financial projections and the use of capital all of which involve certain assumptions, risks and uncertainties that are beyond our control and could cause actual results to differ materially from these statements.", "A description of these risks can be found in our latest SEC disclosure documents and recent press releases. In addition, Gilead does not undertake any obligation to update any forward-looking statements made during this call.", "Non-GAAP financial measures will be used to help you understand the Company's underlying business performance. The GAAP to non-GAAP reconciliation are provided in the earnings press release as well as on the Gilead website.", "I will now turn the call over to Dan." ] }, { "name": "Daniel O'Day", "speech": [ "Thank you, Sung, and good afternoon, everyone. I'm really pleased to join all of you today for my first earnings call at Gilead. Rob and Laura and John will take you through the key highlights of the quarter, but I'd like to share -- and start by sharing some of the perspectives that I gained since arriving here in March.", "As many of you know, when I made the decision to join Gilead, I was drawn to the potential that I saw to build on the legacy of transforming care for people with serious illnesses in a Company that has a deep commitment to patients and science. I now had a chance to see the extent of that potential up close. Let me share some of what I have observed the areas that I focused on up until now and a few thoughts on what you can expect next.", "The first thing I'll say is that it's been really exciting to see the scientific strength from the perspective of being inside the Company. I've taken part in a series of deep dives into the R&D programs in each of our therapeutic areas. This includes spending time at KITE to dig into our work in cell therapy. I'm excited about the progress that we're making in inflammation and with results of the FINCH-1 and FINCH-3 are the studies that were announced at the end of March, John will walk you through the detailed study results later in this call, but I just want to express my enthusiasm for this work as we mobilize the organization for the launch of filgotinib, a medicine that will be a significant step forward for patients with rheumatoid arthritis.", "Inflammation is one of the three emerging areas for us, and we anticipate that filgotinib will be an important future growth driver. As I deepened my understanding of Gilead's therapeutic areas, I've had the pleasure of participating in two scientific congresses beginning with CROI or the Conference on Retroviruses and Opportunistic Infections. And here, I had the opportunity to watch as we share the promising results from DISCOVER -- from the DISCOVER study of Descovy for PrEP. More recently, I attended the International Liver Congress in Vienna, where we presented data from across our liver disease programs and had the chance at both of these conferences to meet with key thought leaders and get their perspectives on our R&D programs.", "During my first two months, I've also began to get to know our shareholders and to understand their perspectives. These conversations have helped me understand the external view of Gilead and this feedback will help inform the decisions that I make to shape the organization and position Gilead for the future.", "As I've settled into my new role, I've been greatly impressed with the people at Gilead and the extent of talent across the organization. I spent a lot of time talking to groups and individuals, and it's great to meet so many really smart, passionate and thoughtful people. I want to close my portion of the call by sharing with you a little bit about what you can expect from me and when.", "In terms of immediate priorities, broadly speaking, I'm looking first at three key areas. Number one, strengthening the pipeline, both internal programs and corporate development opportunities.", "Number two is ensuring optimal commercial delivery both on our current medicines and those that were getting ready to launch. And number three, the organizational piece, ensuring that we have the right people in the right roles and that they are well equipped for success. I want to make sure it will tap into that talent at all levels of the Company.", "In my early days, one area of pressing need has been working to better understand the work we are doing at KITE. Identifying what it needs for short and long-term success in cell therapy. I wanted to take some swift decisions here. And at the end of March, we announced internally that KITE would become a separate business unit.", "We've initiated a search for a CEO of KITE. And once appointed, that individual report to me and will have full accountability for all aspects of cell therapy. I believe that providing KITE with this degree of autonomy will foster agility, innovation and entrepreneurialism. Cell therapy is a critical piece of the puzzle with regards to the long-term future of oncology and a critical element of Gilead's long-term strategy, helping us to build on a legacy of transformational medicines.", "Between now and the end of the year, I will also have a series of meetings with the leadership team and the Board to shape our long-term strategy and vision for the future of Gilead. I anticipate that later this year, I'll be in a position to begin sharing more with all of you.", "Finally, I'd like to thank all the people who have contributed to the excellent progress my colleagues will outline today. Gilead's 11 000 employees, our partners, the scientific community and the patients who take part in our clinical trials. I'm excited to see what we can achieve together in the months and years ahead.", "Before I turn the call over to Robin, I would like to acknowledge the news we shared earlier this week regarding her retirement from her role as CFO. Over the past two months, I've come to know Robin as an exceptional and talented leader. This is a transition that I know she has contemplated for some time and while I had hoped to have the opportunity to work with her for longer she has my full support. I'm grateful to Robin for agreeing to stay at Gilead through March 1st 2020 to see us through the completion of the reporting of the Company's 2019 financial results. Thank you, Robin for your leadership through this period and over the past 11 years.", "I'll now turn the call over to you." ] }, { "name": "Robin L. Washington", "speech": [ "Thank you, Dan, and good afternoon, everyone. We are pleased to share our financial results for the first quarter of 2019. Total revenues for the first quarter were $5.3 billion with non-GAAP diluted earnings per share of $1.76. This compares to revenues of $5.1 billion and non-GAAP earnings per share of $1.48 for the same period last year.", "Turning to product sales. Product sales for the first quarter were $5.2 billion, up 4% year-over-year and down 8% sequentially. This is the first quarter in the past three years, where the Company has posted year-over-year growth and it reinforces our belief that the Company can grow product sales year-over-year on a full year basis.", "In the US, product sales for the first quarter were $3.8 billion, up 8% year-over-year and down 15% sequentially. The sequential decline was primarily due to the anticipated inventory drawdown associated with our HIV products, reflective of the seasonal inventory pattern from the fourth quarter to the first quarter.", "As expected, our HIV payer mix moved more toward public payers, which also contributed to the sequential decline. Combined, inventory and payer mix, contributed an estimated $400 million to the sequential decline.", "Turning to Europe. Product sales for the first quarter were $882 million, down 12% year-over-year and up 8% sequentially. Sequentially, the increase was due to an unfavorable accounting adjustment related to statutory revenue callback reserve reported in Q4. Without these Q4 adjustments, product sales would have been flat.", "On a year-over-year basis, the decline was driven by lower HCV sales, due to lower patient starts and competitive dynamics and the broader availability of generic HIV products in 2019.", "Now turning to expenses. Non-GAAP R&D expenses were $871 million for the first quarter, up 7% compared to the same period last year, primarily due to higher investments to support our cell therapy programs.", "Non-GAAP SG&A expenses were $962 million for the first quarter, up 9% compared to the same period last year, primarily due to higher promotional expenses in the US and expenses associated with the expansion of Gilead's products in Europe and Japan.", "Our non-GAAP effective tax rate in the first quarter was 16.7% compared to 22.8% in the same period last year, due to a $0.09 per share favorable tax settlement. Note that this settlement was reflected in the full year 2019 non-GAAP effective tax rate guidance of 20% to 21% as previously provided.", "Moving to the balance sheet. During the first quarter, we generated $1.4 billion in cash from operations and ended the quarter with $30.1 billion in cash and investments. We repaid $750 million of debt borrowed in connection with our acquisition of KITE, we paid cash dividends of $817 million, and we repurchased 12 million shares of stock for $834 million. As a reminder, the majority of our stock compensation awards are issued in the first quarter.", "2019 is progressing consistent with our expectations as we enter the second quarter of our fiscal year, and we are reiterating our full year guidance, which can be found on Slide 18 in the earnings results presentation.", "As we mentioned in the previous earnings calls, our SG&A guidance included funding to support commercial launch activities for NASH. Given the results of STELLAR Phase 3 studies, SG& A funding for these activities will not be utilized in 2019. We do believe there maybe opportunities to enhance launch readiness for filgotinib that we are monitoring. As such, we will revisit SG&A and our other guidance assumptions mid-year and provide you with an update during our Q2 call.", "We remain committed to vigilant expense management and ensuring that we retain industry-leading operating margins.", "I will now turn the call over to Laura." ] }, { "name": "Laura Hamill", "speech": [ "Thank you, Robin. Good afternoon, everyone. I will provide an update on our commercial performance during the first quarter and share highlights from markets around the world. Beginning with HIV, we continue to see double-digit revenue growth on a year-over-year basis, led by uptake of our Descovy-based regimen and growing use of Truvada for PrEP. In the US, HIV revenue was $2.8 billion in the first quarter up 19% year-over-year and down 17% quarter-over-quarter.", "As Robin noted, the sequential change reflects the anticipated inventory drawdown and payer mix in the first quarter. This trend is a typical pattern that we see between Q1 and the proceeding Q4.", "Underlying prescription demand remains robust, growing 12% year-over-year. We continue to see excellent adoption of Biktarvy. It has become the top-selling product in the US and generated $739 million in revenue. It remains the number one prescribed regimen in both treatment-naive and switch patients. Approximately 80% of Biktarvy's US prescriptions come from switches with about 25% coming from Genvoya and 25% coming from dolutegravir-based regimens. Overall Descovy-based regimens continued to gain share and now account for approximately 80% of Gilead's total US treatment prescription volume.", "In Europe, total HIV revenue was $569 million in the first quarter, down 7% year-over-year and up 11% quarter-over-quarter. The year-over-year decline was driven by the broad availability of generic versions of Truvada across the EU. The decline however is moderating as we continue to see rapid uptake of Descovy-based products, which now account for almost 80% of our total HIV revenue in Europe in the first quarter.", "Biktarvy is now available in Germany, France and Spain. We anticipate launching in the UK and Italy mid-year. We are encouraged by the strong uptake of Biktarvy across all markets, where we have launched.", "In 2018, we launched in Biktarvy Germany in June, and France in November. In both markets, Biktarvy has quickly become the number one regimen for naive and switch patients.", "As you will recall in Japan, we acquired rights to certain products from our HIV franchise from our marketing partner, Japan Tobacco at the beginning of the year. We subsequently received approval for Biktarvy in March and launched earlier this quarter.", "Now moving to prevention. Use of Truvada for PrEP continues to grow in United States, as we work to educate at-risk individuals and treating physicians. We estimate more than 200,000 people were taking Truvada for PrEP at the end of Q1. These estimates reflect an external industrywide restatement from IQVIA, a source that we use to quantify Truvada for PrEP use.", "On a like-for-like basis, we saw 28% year-over-year growth. We were also very pleased to see the outstanding results from the discovery trial presented at CROI. If approved, we believe Descovy for PrEP will bring a meaningful benefit to at-risk individuals, where we have been seeing an increase in persistency of use.", "Now turning to HCV. US product sales for the first quarter were $393 million, down 33% year-over-year and down 4% quarter-over-quarter. The year-over-year US decline was primarily driven to competitive dynamics including an alignment of the Medicare and the commercial pricing at the start of 2019 and lower patient starts.", "Sequentially, revenue in Q1 were positively impacted by the timing of Department of Corrections order, which was originally anticipated later in the year. Over the full year, HCV revenue expectations for 2019 remain unchanged.", "Revenue for HCV generics sold by our subsidiary, Asegua Therapeutics is in line with our expectations. Sales in the first quarter included some wholesaler inventory stocking. Asegua is continuing negotiations with payers and as we previously communicated, we anticipate Asegua launch will continue to gain momentum in the second half of 2019.", "In Europe, HCV product sales for the first quarter were $203 million, down 25% from the prior year, due to declining patient starts and 8% quarter-over-quarter. The quarter-over-quarter increase was primarily due to Q4 accounting adjustments that Robin mentioned earlier. We are continuing to see favorable share trends, particularly with Epclusa in France, Spain and the UK. We launched Epclusa in Japan in late February, and we believe this has the potential to bring meaningful benefit to patients with HCV.", "Now turning to Yescarta. The commercial performance continues to meet our expectations of a steady adoption. Worldwide sales were $93 million during the first quarter, up 90% quarter-over-quarter. Since launched, more than 1,500 patients have been treated with Yescarta, including patients for commercial markets and clinical trials. This is an important milestone for our cell therapy business.", "In the US, hospitals continue to learn how to operationalize CAR-T therapy and physicians awareness of Yescarta's data continues to improve. Our efforts remain focused on educating providers about the profile of Yescarta, working with centers on operational set up and engaging with community oncologists to identify patients for whom Yescarta is appropriate. We're beginning to see benefits of all of these efforts.", "Additionally, we continue to engage with the Centers for Medicare and Medicaid services or CMS, and other stakeholders as we work to improve Medicare reimbursement and access. Last week, CMS released the 2020 proposed rule for Medicare in-patient perspective payment, which contains an increase in the new technology add-on payment. The proposal is currently open for public comments through the end of June. This is a positive step, and while we believe more need to be done, we are very encouraged by the progress.", "In Europe, we are focused on getting site certified. It's early days for Yescarta in Europe, but we have already achieved reimbursement in countries such as Germany, France and UK. Across Europe, we are continuing to build awareness about the therapy.", "Finally, I'd like to acknowledge the strong closing (ph) performance of our cardiopulmonary team as we lost exclusivity for Ranexa and Letairis. Letairis and Ranexa revenue totaled $352 million for the quarter. As expected, we saw generic versions of Ranexa entered the market during the quarter, leading to a drop in revenue. We anticipated generic competition for Letairis during the second quarter as FDA approved the single shared REMS in March.", "The year is off to a great start. I'd like to thank the teams around the world for their incredible effort. With a continued focus on our expanding portfolio of products, we are making wonderful progress.", "Now, I'd like to turn the call over to John." ] }, { "name": "John Mchutchison", "speech": [ "Thank you, Laura, and thank you, everyone for joining us today. Let me start by saying that this has been another important quarter for the R&D part of our organization, and I remain excited about our ongoing program.", "So far this year, we have had five Phase 3 registrational clinical trials readout. I will spend some time discussing these studies and then cover other progress we are making across our pipeline.", "In March, we announced additional positive results from our FINCH program in rheumatoid arthritis. FINCH-1 and FINCH-3 Phase 3 studies of our selective JAK1 inhibitor filgotinib in adults with moderately to-severely active rheumatoid arthritis, each met their respective primary endpoints.", "Taken together with the FINCH-2 data reported last year, the three FINCH data sets support the potential of filgotinib as an important treatment option across the broad range of patient populations with rheumatoid arthritis.", "FINCH-3 evaluated filgotinib in combination with methotrexate and as monotherapy in methotrexate-naive patients. Filgotinib is generally well-tolerated and met the study's primary endpoint in terms of the proportion of patients achieving an ACR20 response at week 24 of treatment.", "In addition, the proportion of patients achieving the primary endpoint was significantly higher for filgotinib 200 milligrams plus methotrexate and filgotinib 100 milligrams plus methotrexate compared with methotrexate alone. Key secondary endpoint, specifically, ACR50 and ACR70 are deeper responses and clinical remission rates at week 24 will also significantly higher with filgotinib plus methotrexate compared with patients receiving methotrexate alone.", "Now the FINCH-1 trial evaluated filgotinib compared to adalimumab placebo on a stable background dose of methotrexate in patients with the prior inadequate response to methotrexate. The safety profile of filgotinib was also consistent with previously reported results. And the study also achieved its primary endpoint for both doses of filgotinib in terms of the proportion of patients achieving an ACR20 response compared to placebo at week 12.", "Similar to results seen through at our FINCH program, FINCH-1 ACR50 and ACR70 deeper responses will also significantly greater for filgotinib compared with placebo at week 12 for both doses. Across the three FINCH trials, we have therefore observed deep, consistent similar to -- responses similar to or higher than other JAK inhibitors and other approved biologic agents. Given the high proportion of patients achieving remission or control of their disease, these responses are encouraging and the safety profile associated with JAK1 specificity continues to be differentiated.", "Based on this data, we will progress the filgotinib rheumatoid arthritis indication filing for regulatory approvals in Europe in the second half of this year. As you know, the MANTA study was requested by the FDA. Now that we have the Phase 3 data in hand from three FINCH studies, we have initiated a request to have further interactions with the FDA. Following those discussions, we will be able to provide greater clarity on a filing timeline in the U.S.", "Now turning to HIV. We are pleased with the results from our DISCOVER trial, a Phase 3 randomized double-blind study of more than 5,000 people evaluating whether once daily Descovy is as safe and effective as once daily Truvada at reducing the risk of HIV infection when used as PrEP or preexposure prophylaxis.", "Late breaker oral abstract presented at CROI in Seattle earlier this year, the trial demonstrated that Descovy is non-inferior to Truvada in terms of preventing new HIV infections, with additional statistically significant advantages with respect to bone and renal safety. So based on these data, last month, we submitted a supplemental NDA to the FDA for Descovy for the PrEP indication as an potential important new option to prevent HIV infection. If approved, we believe this will help contribute to achieving national and global HIV prevention goals. We submitted a priority review voucher with the filing and we would anticipate approval in the fourth quarter of 2019.", "Moving to liver disease in a broader NASH development program. In the last two months, we released top line results from the STELLAR 3 and STELLAR 4 programs, the two Phase 3 studies, evaluating the safety and efficacy of our investigational S1 inhibitor, Selonsertib in patients with bridging fibrosis fibrosis Stage F3 due to NASH and Stage F4 or compensated cirrhosis due to NASH. Both studies did not meet their primary endpoint at week 48 of a greater than or equal to one stage histologic improvement in fibrosis without worsening of NASH.", "Although, this is not the outcome we were hoping for, these were important studies to conduct. There is a significant unmet need for patients with advanced fibrosis in this disease. NASH is also a complex biological disease with multiple drivers of the disease, and we believe the combination therapy will likely be necessary to effectively treat most of these patients.", "To that end, the ATLAS trial, a Phase 2 study evaluating combinations at our investigational compounds in patients with NASH and advanced fibrosis is expected to readout in the fourth quarter of this year.", "At the International Liver Congress in Vienna last month, we had more than 35 abstracts across NASH, viral hepatitis and primary sclerosing cholangitis. In particular, we presented new data supporting our efforts to develop combination therapies targeting different aspects of NASH, to evaluate the utility of non-invasive tests for the identification of patients living with the disease and to advance our overall understanding of the complexities and the burdens of NASH.", "Lastly, as it relates to our NASH program, I would like to highlight two recent agreements that will also augment our effort. A few weeks ago, we announced our intent to enter into clinical collaboration with Novo Nordisk to evaluate the utility of combining their approved GLP-1 drug semaglutide, with both our FXR agonist, cilofexor and our ACC inhibitor, firsocostat for the treatment of patients with NASH.", "We also announced the strategic collaboration with Insitro to discover and develop therapies for patients with NASH. As part of that three-year collaboration, we will leverage Insitro's proprietary platform which applies machine learning, human genetics and functional genomics to create disease models for NASH and discover relevant drug targets that have an influence on clinical progression and regression of the disease.", "We therefore have a broad, deep and strong pipeline in NASH combining both internal program and multiple external collaborations to advance therapies and we remain committed to developing effective combination therapies for patients with the disease.", "Now finally, let's shift gears to cell therapy and the momentum we're seeing there in advancing the next generation of medicine. We're gearing up for ASCA the American Society of Clinical Oncology, the annual meeting in Chicago in a few weeks. I'm excited by the abstracts we will present. Our anticipated data updates include a presentation of the preliminary results of earlier steroid use with axi-cel in patients with relapsed or refractory large B-cell lymphoma. This study is part of a broader clinical effort to optimize the safety and efficacy profile of Yescarta by evaluating various combination approaches, bridging chemotherapy and revised safety management practices.", "I'm also pleased to share that we plan to announce top line results of our ZUMA-2, our registrational trial of KTE-X19 cell therapy in patients with relapsed/refractory mantle cell lymphoma. Pending positive results, we expect to file to the U.S regulatory approval of KTE-X19 in patients with relapsed/refractory mantle cell lymphoma for this indication by the end of 2019. This would represent the first regulatory submission to X19.", "As a reminder, KTE-X19 employs (ph) the same engineered T-cell construct as Yescarta, with a slightly modified manufacturing process to address the specific characteristics of mantle cell lymphoma, acute lymphoblastic leukemia and other diseases, where there is a large burden of circulating tumor cells.", "KTE-X19 was granted breakthrough designation by the FDA. So the application would be considered for expedited review.", "Overall, our commitment to cell therapy is simple. We continue to try to reach more patients in need with Yescarta and to try and optimize the safety and efficacy of the treatment. More broadly, we are focused on creating a path to cure with subsequent generation products that enhance the efficacy and safety of cell therapy for hematological malignancies and ultimately solid tumors. We are also advancing Allogeneic cell therapy, which could offer significant benefits to patients making time to treat quicker and also more convenient.", "As I look across our R&D organization including both our earlier and late stage pipeline, I'm excited about the momentum we have established.", "In closing, I would like to thank our R&D organization and all of our employees around the world for the hard work and commitment to translate into the most important scientific discoveries into the best treatments for patients.", "So let's now open the call for questions. Operator?" ] } ]
[ { "name": "Operator", "speech": [ "Thank you. Today's question and answer session will be conducted electronically. (Operator Instructions) Our first question comes from the line of Geoffrey Meacham from Barclays. Your question, please." ] }, { "name": "Geoffrey Meacham", "speech": [ "Hey, guys. Thanks for the question. And Dan welcome to your first Gilead call." ] }, { "name": "Daniel O'Day", "speech": [ "Thanks, Geoff." ] }, { "name": "Geoffrey Meacham", "speech": [ "So I heard (ph) you've just finished listening tour, but at this point how much of a strategic priority would you say the NASH portfolio or the hep B portfolio is? And if the answer is high, how aggressive you think you want to be on the BD (ph) front to add assets for these two categories? Thanks very much." ] }, { "name": "Daniel O'Day", "speech": [ "Yeah, great. Thanks, Geoff. It gives me a chance to maybe just characterize what I've seen so far. So I've obviously seen as you all of you have the incredible depth of strength in HIV and in HCV, and more broadly from HCV into liver diseases, where obviously NASH and hep B are paramount. At the same time, I had a chance to see the broader portfolio in inflammation with filgotinib at the lead of a comprehensive life cycle management program as well as some very interesting partnerships and earlier-stage molecules in inflammation. And likewise in oncology, of course, with the cell therapy being in a leadership position and all the life cycle managements that go around cell therapy, but also the interesting partnerships around both the biologics and small molecule oncology program.", "So still early days of digging into that, but I've been impressed by the breadth I would say, of the portfolio and the partnerships and some of the recent BD activities.", "Now specifically related to NASH and hep B, I would say that what I've come to understand about NASH is the significant unmet medical need and growing unmet medical need I would say. And although, the results in the first quarter this year didn't turn out as we had expected, it's very clear that this disease need scientific advancements. It's a heterogenous disease, there are challenges with diagnosis. And at the same time Gilead's experts in liver disease make it an area of continued interest for us. And I'm particularly interested in the fact that a disease like this with the challenges associated with it may very well require combination therapies. And of course, we'll have some readouts on our combination approaches in the second half of this year and you've heard already from John some of the partnerships that we're entering to in that front.", "Hep B, similarly, I mean, obviously, we have a treatment for hep B today, which we will continue to focus on. But the opportunity to continue to try to advance the science in hep B, particularly, around moving toward the cure is something that I've been impressed by to see the different scientific approaches that the scientists here at Gilead are looking at. So bottom line, Geoff is that I think that NASH and hep B as areas of liver and with the expertise of Gilead are areas we need to continue to explore, both internally and through partnerships as a part of a broader portfolio of approaches across different therapeutic areas." ] }, { "name": "Operator", "speech": [ "Thank you. Our next question comes from the line of Brian Abrahams from RBC Capital Markets. Your question, please." ] }, { "name": "Brian Abrahams", "speech": [ "Hi. Thanks very much for taking my question. On filgotinib, coming out of FINCH-1 and FINCH-3, where do you see the most differentiation for that product versus currently available in late-stage therapies, in late-stage JAK1 inhibitors? And obviously, you're waiting FDA feedback, but I'm curious your willingness to file prior to completion of the MANTA study. I guess, how do you weigh speed to market for that product in a competitive space versus having to potentially optimize label right off the bat at the launch? Thanks." ] }, { "name": "John Mchutchison", "speech": [ "Well, thanks, Brian. It's John here. Multi-part question. But look we -- let me step back a bit and take time to summarize what we think about the entire data set. We have the full data package now from a Phase 3 clinical trial. We have over 3,200 patients. Look we've shown in terms of categorization and although, it's hard to do head-to-head comparisons across drugs across studies of course.", "What we have seen in our FINCH program is consistent with our Phase 2 program is deep efficacy responses in broad patient population. And if you are practicing rheumatologist, that's what most important to you. You're not getting to ACR20, you're getting strong ACR50 and strong ACR70 responses, remission responses, low activity. And all the FINCH trial show those deep responses when you characterize by those characteristics.", "Look each of the studies achieved all of their primary endpoints, and they showed improvement in functional status. And where we explored it we show that we could slow the rate of structural damage on the X-ray findings. So these are all important additional advantages of the drug of what we showed in our clinic programs So we'll go to -- as I said today on the earnings calls, we have the full data package. We're impressed by the risk benefit. We think it's relevant to patients and rheumatologists. We'll be able to file in Europe in the second half of this year, and we go and have a discussion with the FDA. We have requested that meeting. We will sit down and talk with them about what we have in terms of data from the MANTA studies, what we have in terms of our Phase 3 registrational programs and what we should do.", "And the time -- the timelines around that will play out during that meeting. But look I think it's important to us and Dan has brought this -- with his fresh eyes on the program recently is that there is some degree of urgency for us to get this drug approved as quickly as we can, and obviously in collaboration with the regulators across the world." ] }, { "name": "Daniel O'Day", "speech": [ "Yeah. I would just -- thank you, John. I would just add Brian that I think it's -- I've been impressed by the profile of the product to all three FINCH studies, and the consistency, and the outcome and the results on both the efficacy and safety side. And knowing that, rheumatoid arthritis patients are waiting for highly efficacious medicines that also have good safety and tolerability profiles. I think we're looking forward to the totality now the discussion with the FDA. So we put the request for the meeting. We expect to have that meeting by mid-year and we'll be looking forward to getting back to you and kind of the next steps. But we remain bullish on this and looking forward to bringing this as soon as possible to patients around the world and in the US." ] }, { "name": "John Mchutchison", "speech": [ "And of course, if I could add -- thank you, Dan. But the safety -- I forgot to mention unfortunately the safety profile. We actually had a press release about this, because we thought it was important as well. And again, it's impossible to make cross-drug cross-trial comparisons, but the safety profile we're seeing with this JAK1 specific inhibitor leads us to believe we have an additional benefit for patients as well. We are seeing lower rates of infections, lower rates of discontinuations, herpes zoster, thromboembolic (ph) cardiovascular events and so forth. So we also believe that, that's an important advantage for patients as well." ] }, { "name": "Operator", "speech": [ "Thank you. Our next question comes from the line of Geoffrey Porges from SVB Leerink. Your question, please. Mr. Porges, you might have your phone on mute." ] }, { "name": "Geoffrey Porges", "speech": [ "Thank you very much. Sorry about that. Robin it might be premature to say congratulations. I know you're around through the end of the year, but at the very least, just wondering, if you could help him with some Gmail settings. My storage is getting a little filled up." ] }, { "name": "Robin L. Washington", "speech": [ "I will work on that in 2020 Geoff." ] }, { "name": "Geoffrey Porges", "speech": [ "I'm sure you could take care of that. But seriously, Dan, I wonder if you could comment and perhaps Robin would weigh in on this as well about capital allocation. You effectively returned 100% of your cash flow to shareholders through dividends and share buybacks this quarter. And obviously, that's not really sustainable. But Dan, could you talk about how you feel about dividends versus buybacks? And whether you will be willing to make any firm commitment to a certain proportion of cash flow being returned to investors versus other items? Thanks." ] }, { "name": "Daniel O'Day", "speech": [ "Sure, Geoff. And I know that Robin want to weigh in, in this as well. But let me just say a couple of things. As you noted in my priorities, my top three priorities. Obviously, focusing on the pipeline and understanding both from a internal Gilead perspective and also what's on the outside horizon is my top priority as you can imagine. And therefore, I'm really pleased to get my deep dives into the R&D organization, but equally and I should have mentioned this. I spent a good amount of time with our corporate development organization. And I think it's working really hand in glove with our research colleagues to identify and scan the external environments.", "And you can see the level of activity we've had now over the past year or so, year and half, lots of partnerships and things that are going to supplement that portfolio. So back to the capital allocation. I consider it really to be in the following order in terms of priority. And the first one is, where we can find opportunities to supplement our portfolio through M&A or partnerships that's priority number one. Because we think that's in the best interest of the long-term journey of shareholders in the Company.", "Secondly, then I would say obviously we want to keep an attractive dividend policy. And I think that's been shown by the past behavior that I've seen coming into Gilead.", "And then thirdly, smartly looking at share repurchases when those make sense. So I'm very clear that those are the orders of priority to create value for shareholders in my experience, and also then reinforced on my journey into Gilead. Robin, what do you think about storage capacity -- no, sorry, capital allocation?" ] }, { "name": "Robin L. Washington", "speech": [ "Yeah. I mean, I think as we continued to discuss externally for you, Dan, and I'm going to -- I think we're very aligned in terms of our priorities, Dan, I think you articulated that very well. We've been fairly consistent with continuing to focus on our dividend, that's been the primary shareholder return vehicle and we expect that to continue. And we believe ultimately that, that's very important to our shareholders. And share repurchases, we've leveraged as you said where appropriate.", "So I think we continue to be aligned Geoff. You're right, we haven't necessarily published a specific level of cash flow returns, but I think if you look over the multiple year periods, we've returned about 50% of free cash flows to shareholders in the forms of dividends as well as share repurchase, and that's vary year-by-year as we've made the necessary investments to grow the Company. We believe we have the financial flexibility to retain the dividend and make the investments, if Dan and the rest of the leadership team sees as appropriate to grow and strengthen the pipeline as Dan outlined." ] }, { "name": "Daniel O'Day", "speech": [ "And Geoff, I would just say, in my listening tour, then listening many of you on the phone here and beyond. And I think broadly speaking, there was quite a bit of alignment between capital allocation policy. So hopefully, we're also meeting your needs as well as the Company needs, which should go hand-in-hand. Thank you." ] }, { "name": "Operator", "speech": [ "Thank you. Our next question comes from the line of Michael Yee from Jefferies. Your question, please." ] }, { "name": "Michael Yee", "speech": [ "Hey. Thank you. I wanted to ask question to Dan. You listed pipeline enhancement as a top priority. Maybe just speak a little bit more to that in terms of how you're thinking about prioritizing parts of the pipeline. I mean, at Roche, which obviously you had a long time at. You didn't really do any deals about $8 billion, but maybe just talk about how you think about what maybe different here at Gilead and maybe the appetite for M&A, how you're looking at the environment out there here at Gilead? Thanks so much." ] }, { "name": "Daniel O'Day", "speech": [ "Yeah. Thanks, Michael for the question. I mean, maybe just to expand a little bit from the previous question I would say that, as usual, I think priority number one is to -- is that our M&A activity is led by science at the end of the day. And therefore, one focuses on so many of the expertise that we have within the Company and that would obviously be in the areas of now oncology with the acquisition of KITE and the growing portfolio we have here liver diseases, inflammation, and HIV.", "Not to suggest that we want to be opportunistic on something that has an interesting scientific profile and high unmet medical need, where we think we could bring a transformational difference. So I don't want you to know we're scanning the entirety of the environment and we're science led. But obviously I think overall, you're generally better positioned to identify the opportunities where you have expertise in-house. And I think that was true in my previous company and it's also seems to be true from what I have seen here at Gilead as well.", "And I think again, I think as we all know, I think -- and it's been true here when I looked at the Gilead activity over the past couple of years. The vast majority of the opportunities are kind of in early stage or mid-stage. And I think the opportunity create value exist quite a bit in those areas, particularly when you can find something earlier or more exciting because of the relevance of your science.", "But having said that, we also acknowledge that we need to -- we need to look our late-stage portfolio and pipeline and strengthen that. And I think there is two different ways to do that. One is to look at accelerating the internal programs which I know John and the team are constantly looking at and I've been interested in speaking more about that.", "So there's maybe opportunities to take some risk and to accelerate things and to expedite things to applying resources. And the other thing is of course to bring (inaudible) late-stage assets in. So overall, I think the vast majority of the work that's Gilead has done and arguably they've been quite successful with their late-stage acquisition approach over the course of their 30-year history. I mean, we'll be looking for opportunities like that as well of course to fulfill the pipeline with a keen sense on the science. And I think bolt-on type acquisitions are continue to be in my opinion the highest likelihood in the way that we'll be proceeding.", "John, I don't know, if you want to add anything from your (multiple speakers)" ] }, { "name": "John Mchutchison", "speech": [ "I completely agree, Dan. I think we've always had the philosophy and the success was being led by the science. We feel much comfortable in making those decisions when we have the expertise internally as you articulated. And we are opportunistic and prepared to take risks when we feel the science and the opportunity and the need exists." ] }, { "name": "Operator", "speech": [ "Thank you. Our next question comes from the line of Carter Gould from UBS. Your question, please." ] }, { "name": "Carter Gould", "speech": [ "Great. Good afternoon. Thanks for taking the question. Maybe a follow up Dan on your comments around the KITE organizational structure and separating that as own business unit. Maybe talk about what drove that decision, would you hope that will achieve? And maybe any sort of consequences for future BD focused on cell therapy." ] }, { "name": "Daniel O'Day", "speech": [ "Absolutely, Carter. Yeah. I think the bottom line is that I've been very encouraged by what I have seen at KITE since I have come in and how the Gilead colleagues have approached their entry into oncology in a very significant way. I think the concept of moving toward a new platform, a new technology in the space as an entry point into oncology, having come from a background of deep oncology experience and understanding the depth of the competitive environment is an intriguing way to go.", "So to really go for a future-oriented technology, I think makes a lot of sense. And then to supplement that with interesting partnerships like the one that John and his team have done in bispecific antibodies for instance with that Agenus and/or some of the interesting small molecule that's going on here within the walls of Gilead. So first and foremost, I think one needs to consider the early but interesting oncology work that's going on here at Gilead.", "And then with that context, we said -- I said as I looked out in discussions with the leadership team, that KITE itself in cell therapy oncology is an ultra-competitive area. I think we have a leadership position, but I think we need to maintain that leadership position. And for the reasons of focus, we decided to create KITE as an independent business unit that will wake up and go to sleep every day thinking about how to be the leaders in oncology cell therapy.", "Now that's not to suggest that they won't work for the rest of the organization to complement as we know specifically in oncology, the combination approach and the multi-science approach is absolutely the way to go. But we need to make sure to be secure that leadership in cell therapy, while we complement it with combination approaches in immuno-oncology or targeted therapies or other mechanisms. So that's the context.", "Let's make sure we win in cell therapy and leverage the remaining parts of the Gilead focus on oncology to win in the broader oncology market as well. So -- and it's with that lens that I took the decision to create a separate business unit to focus that and now in the process of recruiting a CEO they were reporting to me, but work very closely with the leadership team for success in oncology.", "Now on the BV side, they've been very active as you know since the KITE acquisition, a very active M&A and partnership work within cell therapy, which I think is fundamental and essential. Because the science is occurring of course within KITE and cell therapy, but all around us as well. So I have been impressed with the landscape analysis that the BD team has done here with the research and development team at KITE and at Gilead.", "And I think we're really well positioned to continue to scan that environment and to complement it with the appropriate pieces of the puzzle that we need to continue to write the next chapter in cell therapy history. And as John articulated, it advances in malignancies, it's moving to solid tumors and it's also getting ready for the future of science, the Allogeneic form as well which has risks but I think lots of opportunities as well. So very comprehensive approach on the BD side and that will continue. John any perspective?" ] }, { "name": "John Mchutchison", "speech": [ "Completely agree, Dan." ] }, { "name": "Operator", "speech": [ "Thank you. Our next question comes from the line Ying Huang from Bank of America Merrill Lynch. Your question, please." ] }, { "name": "Ying Huang", "speech": [ "Hi. Thanks for taking my questions. Maybe for Daniel. Is there anything you actually want to change in the Gilead organization after two months in the job? And then maybe another one for John McHutchison quickly, you decided to have a collaboration with Novo Nordisk in NASH. How does it compare to the other mechanism (ph) of actions in the market today or on the development today if you look at semaglutide data in NASH? Thank you." ] }, { "name": "Daniel O'Day", "speech": [ "Thanks, Ying. And look, let me first say that I've been incredibly welcomed and very impressed with coming into Gilead. So I think I probably know more of what I don't want to change than what I do want to change after two months in the row. And that is the focus on science, I've been really impressed by the science, and the motivation and intelligence of the colleagues at Gilead. I think both the level of expertise that is here in many different areas as well as the intrinsic motivation of our employees is something that I've been deeply, deeply impressed by.", "So in terms of what to change, as I said before, I'm still in the process of evaluating the organization, looking at pipeline, looking at commercial execution, looking at the organizational structure and people. And I think you would agree with me that two months is relatively short period of time to evaluate that which is why I said, there is certain things that I'm acting quickly on and won't hesitate to like the KITE decision and there are other things I think I need to learn a little bit more and understand.", "But there will be an evolution not a revolution and it would be based upon good observations, good discussions with the leadership teams in terms of how we progress here. So stay tuned on that.", "And I think we as a leadership team the and leadership community here at Gilead with the Board and with continuing to have our outside ears open to investors and to thought leaders and to what our patient needs are, we'll continue the evolution of the Company and I'll be articulating better what my priorities are as I go into the later part of this year and we'll certainly inform you as I go. So thank you for the question. And John will you?" ] }, { "name": "John Mchutchison", "speech": [ "Yes. And I really know that Novo Nordisk, Ying, that's a compelling mechanism of action. Novo Nordisk is clearly a leader in the pharmaceutical development of products for patient with diabetes and metabolic syndromes. The mechanism of action is not necessarily directly related to NASH, but it has many of the effects you would want to see in patients with NASH.", "And additionally and importantly as well as all those other metabolic benefits in terms of glucose control, insulin, secretion and so forth is a weight loss component to this drug and -- a significant weight loss component. And that weight loss component we think is very compelling for us to explore with our other mechanisms of action that are really focusing on different and separate drivers of NASH pathogen.", "So we believe it's a very exciting and a very important collaboration. Novo Nordisk brings a lot of people and a lot of depth of knowledge about metabolic syndrome to the table, while we bring a lot of expertise in liver disease. So it's a wonderful collaboration that we're just starting and looking forward to it. So we will combine semaglutide with our FXR agonists and our ACC drugs as well and that will be the initial clinical collaboration." ] }, { "name": "Operator", "speech": [ "Thank you. Our next question comes from the line of umer Raffat from Evercore. Your question, please." ] }, { "name": "Umer Raffat", "speech": [ "Hi. Thanks so much for taking my question. And welcome again Dan for your first Gilead call. I wanted to keep it fairly high level today. And maybe just ask Dan, do you see Gilead as growing top line into 2020s? And also what are the biggest risks and the biggest opportunities that you see at Gilead currently?" ] }, { "name": "Daniel O'Day", "speech": [ "Thanks a lot, Umer for the warm welcome, again, I really appreciate and look forward to working with all of you, and obviously articulating my views and visions for the Company as I go. It is definitely premature to talk about sales in 2020 at this stage. In fact in the first two months, I've really been focusing as you know on pipeline and understanding our current commercial delivery. We will over the coming months of course in the natural process of things start to digest the progress that we have for this year, the opportunities we have for next year and put those into some ideas of a plan.", "So I think it's a bit too premature for that, what I can assure is that, we will give you a sense for that much later in the year. At this stage, I mean -- maybe just to add a little additional color to that from the way that I see the business today. I see the strengths in HIV clearly as a real foundation, of course, of Gilead and a strong and growing business Laura mentioned, the progress in Biktarvy, we -- both Laura and John talked about the really good data on the Descovy and the opportunity there with the DISCOVER trial.", "So I do see good strength in the HIV business. I see the opportunity that HCV is much more predictable at this stage and a much smaller part of the overall revenue and turnover at Gilead. And then I see the future opportunities, such as filgotinib and others that we'll be discussing with all of you as upside to that relatively stable base.", "And the question that I need to digest with the team is to understand how and when those opportunities we'll be hitting? And I just want to give you a little bit more color to how I see the business and I think the opportunities.", "So what are the risks and opportunities? Again, I need a bit more time than two months to come back to you with a comprehensive list, because giving you a bit of an idea on the call here today, I do think that there are tremendous opportunities in the early and mid-stage pipeline and I think we also have a real opportunity with filgotinib.", "I mean, this is a profile of a product in a space that needs -- the patients and physicians need more treatment options, and they're looking for treatment options that are highly efficacious, that are safe and that are convenient. And so I think I have been working with organization, with the leadership team to really think about how can we accelerate some of the plans around filgotinib, how do we get ready for entering this very competitive space. And obviously, with all of these launches comes both risks and opportunities. But I do think that we have a very good profile product on watch to build one of our next legs of success at Gilead, the whole leg of information accordingly.", "Likewise, I'd say, I think we should mention in that same statement around the overall business picture. The ongoing success of Yescarta, the ability to think about moving into other diseases, in hematologic malignancies, lots of readouts on Yescarta. I was just reviewing with John just before the call. There's a lot of interesting readouts that will come in the coming year, two years, three years that I think will help us understand the utility of cell therapy both with and without combination approaches in oncology.", "So I'll give you an even more complete view of the business Umer, later this year from my perspective. But those are some of my early insights into what I've seen so far." ] }, { "name": "Operator", "speech": [ "Thank you. Our next question comes from the line of Phil Nadeau from Cowen & Company. Your question, please." ] }, { "name": "Philip Nadeau", "speech": [ "Good afternoon. Thanks for taking my question. Robin, let me add my congratulations on the announcement of your retirement. Dan, a question for you actually own HIV, just to focus there. Gilead's truly been a leader in HIV treatment for almost two decades. But arguably, you're falling behind in the development of nucleotides para (ph) regimens and long-acting regimens. So you brought fresh eyes talking at your HIV portfolio. How do you see the treatment of HIV evolving over the next five to 10 years? And do you feel like Gilead's HIV pipeline has all the programs that it needs to stay competitive over that period?" ] }, { "name": "Daniel O'Day", "speech": [ "Thanks, Phil. And I welcome John and Laura to feed in on this as well, but I would give you my top line take first. And that is that there is no doubt that Gilead is the leader in HIV, has been for a long time. And to your point, so we need to make sure that we continue to have the most significant the next advance for patients and that certainly been the case with TAF -- from TAF, the regimens and to the Descovy regimens. And now of course with the PrEP data and certainly, there is lots more that we can do in improving the patient experience in HIV, including a long-acting as you mentioned and other approaches.", "So I think there is a very comprehensive life cycle plan around this, and I think the thinking that's gone into this in terms of making sure that the next-generation programs like a long-acting are something that are going to be well received by the patients, that are convenient, easy to take, and really allow for -- if you like the next best advance for a daily oral medicine, which is -- let's face it, the highly convenient to begin with. So I think they really scrutinize the target product profile well, and I think the science that's going on here is well-positioned to continue to take the next meaningful advances for patient into the future.", "But I would ask John, if you want to feed in on this? Great." ] }, { "name": "John Mchutchison", "speech": [ "Sure. Thanks, Phil. Phil, we have lead the field of HIV therapeutic development over a decade. And one of the critical components of that approach and our success has been no resistance. And that has been achieved with effective three drug regimens. So for example, with all the Biktarvy studies as you know, we have no resistance through week 96, which is a critical advantage for anybody, you can't afford to increase the fragility of the regimen by decreasing or diminishing or cutting out one of the components. And theoretically or not theoretically increasing the risk of resistance. So that's very important.", "Now two drug regimens, where adherence is potentially not so important such as an effective long-acting regimen is actually one of the clinical programs internally. And we believe that our ultimate goal with the long-acting regimen should be as subcutaneous at harm, (ph) small volume, non-painful injections, that's probably got two components to it. But it won't have that adherence issue to it and we'd like to be giving it every three months.", "That would be a great advance for patients as well. And in terms of our other activities in HIV, we have many cure programs as you know. We also have programs for those most in need in terms of the highly resistant groups of patients. And then of course we have a lot of our PrEP programs as we discussed on the call today.", "So we are very much laser-focused on maintaining our leadership position scientifically and for patients with HIV and preventing HIV by all of these initiatives.", "So I think the issue of two versus three drug regimens has to be put in context of the decades of history of this disease and where the long-acting ultimate goal should be." ] }, { "name": "Operator", "speech": [ "Thank you. Our next question comes from the line of Cory Kasimov from JPMorgan. Your question, please." ] }, { "name": "Cory Kasimov", "speech": [ "Hey. Good afternoon, guys, and thank you for taking my question. I also have one on HIV, but more from a near-term commercial standpoint. So basically, curious, how you're thinking about potential pricing pressures within the category over the near-to medium-term from both potential US healthcare reform as well as competitors entering the space at substantial discounts to Gilead's regimens? Thanks." ] }, { "name": "Laura Hamill", "speech": [ "Thanks for the questions. This is Laura. So let me start off with the pricing pressures in the US healthcare and I assume you're talking about is maybe the protected class with the Medicare population. So, let me just address that. We've been actively engaged in the discussions around the protected class, this is the Part D benefit for the senior population.", "And all along, I think what's most important for the senior population is to ensure that they have access to safe and effective medicines that are appropriate as per the guidelines. We really want to make sure that there is no prior authorization that impedes rapid treatment and renewal of the long-term treatment for patients.", "And I think that there has been a significant groundswell across the community of efficacy of people, physicians, that really believe that it's important for the Medicare population to have access to the HIV regimens that they're needing to maintain the protected class. So that's specific to the Medicare population.", "As it relates to the commercial population, I would say that we're very pleased with the amazing coverage that we have been able to achieve with Biktarvy. Over 90% of the plans have Biktarvy rapidly available You can see that in the numbers and what we just said in terms of treatment-naIve and switch patients, how quickly patients are moving to Biktarvy, and obviously 80% of our overall prescription is coming from a Descovy-based backbone. So we don't feel significant pressure on the commercial side as it relates to coverage and access.", "As it relates to the overall growth that we see, as I mentioned, we had a 12% prescription growth year-over-year and we've continued to maintain double-digit growth for the last couple of years. So I'm very very pleased with that.", "And then finally, you asked about the competition and pricing pressures. So I think we always try to make sure that we bring innovation into the market, and I believe we're -- for Gilead, it's been 11 products in 17 years. We've always been mindful of the pricing in the market to make sure that our innovation gets rapid access and people can access these new brands.", "And if we look at new entrants, I believe that their pricing is relative to the branded pricing of the component. So for example, Truvada is really the branded price of the two drugs. And I believe Biktarvy has been also priced very competitively within the Descovy-based backbone. So we feel very comfortable with our pricing." ] }, { "name": "Robin L. Washington", "speech": [ "Yeah. Cory, I just add also, remember that for Gilead, our franchise has really been driven by volume, right? Pricing has been frozen in public market since I've been here. So we don't get real upside relative to pricing particularly in the US. And as you know ex-US, it's all pricing decreases as.", "So I'm towing (ph) an agreement with everything were provided in terms of our focus legislatively and competitively. But it's just underlying price has never been a key factor when you take a look at our HIV revenues." ] }, { "name": "Operator", "speech": [ "Thank you. And our final question for today comes from the line Ronny Gal from Bernstein. Your question, please." ] }, { "name": "Ronny Gal", "speech": [ "Good afternoon, everybody. And thanks for fitting me in. Two of them, if I can. One about HCV, I noticed the governments you just head in the UK and the one you head in Louisiana. Can you just explain to us from a financial perspective, how you're thinking about this? There's some implied discount in this contracts, but obviously, you're getting access to other patients, you wouldn't otherwise. So can you just tell us, how are you thinking about this as a strategy? And then coming back to this issue of HIV pricing, I hear you about not raising prices. But Robin, I think you mentioned that with this shift of patients to government programs, you've actually seeing a bit of net decline. And if we look at the revenue reported and divided by IMS script, we are seeing kind of like modest declines year-over-year in your price point. Should that be the baseline assumption going forward, essentially more people going on those programs, you guys not raising prices and that's in effect, we should see a net price decrease little bit per year, the way the market is working right now?" ] }, { "name": "Robin L. Washington", "speech": [ "Yeah, Ronny. I'll take the second part of your question. What I was referring to was just a shift relative to when public buyers purchase, right, and that's about payer mix, right? And typically in Q1 as you made up cycle, we do see that downward shift driven by a payer mix. The biggest overall driver of our sequential decline this past quarter, however, was not pricing at all, it was inventory, right? So I just want to clarify that and happy to follow after the call on that component. Laura, do you even to address the Louisiana and the Washington markets." ] }, { "name": "Laura Hamill", "speech": [ "Yeah. I think you also mentioned UK, if I heard it correctly. If that was UK, maybe Louisiana and Washington? Was it all three?", "Yes. Okay. So let me talk about UK and then also talk about Louisiana. So really our goal is to make sure that we work with governments the best we can whether it's federals or state or country, to be able to provide the appropriate access for patients, and we believe HCV is a huge value to the healthcare system.", "So as it relates to Louisiana, this is particular to the needs of the government and really, if you think about what we're trying to accomplish with Louisiana, they wanted to be able to treat a number of patients, but their annual budget is a certain amount every year. So if you think about five years, you have a certain amount every year, but the need actually is to treat more people earlier on.", "So really the discussions that we're in with Louisiana is how do we basically smooth that out, so you don't have a big peak and then trough from a payment perspective. We can be flexible to try to work within the needs of the budgets and be able to give people access.", "From the UK perspective, we are partnering with the UK as it relates to really in the elimination project in the UK and they're actually a number of governments around the world that Gilead participates in arrangements such as this, an really that's the focus, there is a price and then we're also working to make sure that we find patients and get them properly diagnosed and treated.", "And then finally, the last thing that I wanted to mention, which kind of plays into all of this as you all know is the launch of the AG (ph) by our subsidiary, Asegua.", "And I think that was another opportunity or strategy that was deployed by Gilead to make sure we were servicing the needs of the managed Medicaid market. So we have the flexibility between the Gilead portfolio of so all the Harvoni and Epclusa, that is made available in the commercial market and of course Asegua is also available in the commercial markets. But specifically to address the needs of managed Medicaid market, we have this opportunity to be able to address their particular needs. So hopefully that addressed your question?" ] }, { "name": "Robin L. Washington", "speech": [ "Prefect. Ronny, I also wanted to go back on the other component, that HIV line also includes prevention, right? So to your point, there is that impact on the average price per patient, because it's not the STR you're looking at the Descovy component of that, right? So that would also impact average price per patient as PrEP usage continues to go up as well." ] }, { "name": "Operator", "speech": [ "Thank you. This does conclude the question-and-answer session of today's program. I'd like to hand the program back to Sung Lee for any further remarks." ] }, { "name": "Sung Lee", "speech": [ "Thank you, Jonathan. And thank you all for joining us today. We appreciate your continued interest in Gilead. And the team here looks forward to providing with updates on our future progress." ] }, { "name": "Operator", "speech": [ "Thank you, ladies and gentlemen for your participation in today's conference. This does conclude the program. You may now disconnect. Good day." ] } ]
GILD
2021-04-29
[ { "description": "Vice President, Investor Relations", "name": "Jacquie Ross", "position": "Executive" }, { "description": "Chairman and Chief Executive Officer", "name": "Daniel O'Day", "position": "Executive" }, { "description": "Chief Commercial Officer", "name": "Johanna Mercier", "position": "Executive" }, { "description": "Chief Medical Officer", "name": "Merdad Parsey", "position": "Executive" }, { "description": "Chief Financial Officer", "name": "Andy Dickinson", "position": "Executive" }, { "description": "Chairman and Chief Executive Officer", "name": "Daniel ODay", "position": "Executive" }, { "description": "RBC Capital Markets -- Analyst", "name": "Brian Abrahams", "position": "Analyst" }, { "description": "Cowen and Company -- Analyst", "name": "Phil Nadeau", "position": "Analyst" }, { "description": "Redburn -- Analyst", "name": "Louise Pearson", "position": "Analyst" }, { "description": "Chief Executive Officer, Kite", "name": "Christi Shaw", "position": "Executive" }, { "description": "Bank of America Merrill Lynch -- Analyst", "name": "Geoff Meacham", "position": "Analyst" }, { "description": "Jefferies -- Analyst", "name": "Michael Yee", "position": "Analyst" }, { "description": "Goldman Sachs -- Analyst", "name": "Terence Flynn", "position": "Analyst" }, { "description": "Truist Securities -- Analyst", "name": "Robyn Karnauskas", "position": "Analyst" }, { "description": "Morgan Stanley -- Analyst", "name": "Matthew Harrison", "position": "Analyst" }, { "description": "Sanford C. Bernstein -- Analyst", "name": "Ronny Gal", "position": "Analyst" }, { "description": "Oppenheimer & Co. Inc. -- Analyst", "name": "Hartaj Singh", "position": "Analyst" } ]
[ { "name": "Operator", "speech": [ "Good day, and thank you for standing by. Welcome to the Gilead Sciences first-quarter 2021 earnings conference call. [Operator instructions] Please be advised that today's conference may be recorded. [Operator instructions] I'd now like to hand the conference over to your speaker today, Jacquie Ross, vice president, investor relations.", "Please go ahead." ] }, { "name": "Jacquie Ross", "speech": [ "Thank you, Liz, and good afternoon, everyone. Just after market closed today, we issued a press release with earnings results for the first quarter of 2021. The press release, slides, and supplementary data are available on the Investors section of our website at gilead.com. The speakers on today's call will be our chairman and chief executive officer, Daniel O'Day; our chief commercial officer, Johanna Mercier; our chief medical officer, Merdad Parsey; and our chief financial officer, Andrew Dickinson.", "After that, we'll open up the call to Q&A, where the team will be joined by Christi Shaw, the chief executive officer of Kite. Before we get started, let me remind you that we will be making forward-looking statements including those related to the impact of the COVID-19 pandemic on Gilead's business, financial condition, and results of operations; our plans and expectations with respect to products, product candidates, corporate strategy, financial projections, and the use of capital; and our 2021 financial guidance, all of which involve certain assumptions, risks, and uncertainties that are beyond our control and could cause actual results to differ materially from these statements. A description of these risks can be found in the earnings press release and our latest SEC disclosure documents. All forward-looking statements are based on information currently available to Gilead, and Gilead assumes no obligation to update any such forward-looking statements.", "Non-GAAP financial measures will be used to help you understand the company's underlying business performance. The GAAP to non-GAAP reconciliations are provided in the earnings press release and our supplemental datasheet, as well as on the Gilead website. I will now turn the call over to Dan." ] }, { "name": "Daniel O'Day", "speech": [ "Thank you, Jacquie, and good afternoon, everyone. We appreciate you taking the time to join us today. Before I hand it over to the team to go into the details of our commercial pipeline and financial results, I wanted to share our overall assessment of Gilead's first quarter. 2021 is a pivotal year for Gilead.", "And as you can see on Slide 4, we're off to a solid start. Our first-quarter total product sales were in line with our internal expectations. While our core business was more impacted by COVID-19 than we anticipated, this was offset by higher Veklury sales. In the United States, one in two hospitalized patients are receiving Veklury, and worldwide Veklury continues to play a key role as a standard of care treatment for patients who are hospitalized with COVID-19.", "Given the desperate situation in India, Gilead has been working with the Indian government, health authorities, and our voluntary licensees to increase supply of remdesivir and provide donated medicine. As the trajectory of the pandemic evolves globally, we will continue to invest in multiple clinical studies of Veklury, including alternative formulations. Earlier this month, we received two FDA approvals for Trodelvy, the full approval for metastatic triple-negative breast cancer extended the label to second-line plus patients. This means Trodelvy could help many more patients as there are more than double the number of patients in this category as there are in the third-line setting.", "We also received accelerated approval in second-line plus metastatic urothelial cancer. In March, we announced a new partnership to combine investigational lenacapavir with Merck's investigational islatravir, for long-acting HIV treatment, accelerating the path to the next wave of therapies. While many people living with HIV may prefer a daily regimen like Biktarvy, we believe that broadening their options to include weekly oral therapies and infrequent injections every three months or longer, addresses a significant patient need and sets up strong, sustainable HIV leadership into the late 2030s. Long-acting formulations such as lenacapavir as monotherapy are also likely to unlock further PrEP usage and reach many more people at risk of HIV.", "We are also pleased with our progress in advancing lenacapavir in both treatment and prevention settings as part of our internal clinical development. This past quarter, we reported compelling long-acting efficacy data for lenacapavir in heavily treatment-experienced people with multidrug-resistant HIV. We are fully confident that lenacapavir will be the foundation for our long-acting HIV treatment and prevention portfolio. And while we advanced lenacapavir, Biktarvy usage continues to grow with one in two people living with HIV, starting their treatment on Biktarvy in the U.S.", "In addition, Biktarvy is capturing one and two switches, and approximately half of those are switching from a regimen that includes a non-Gilead agent. In addition to securing regulatory approvals in oncology, we have already achieved several other pipeline milestones, including EMA validation of the Trodelvy MAA for metastatic triple-negative breast cancer, and submission of the supplemental biologics license application to FDA for Tecartus in relapse or refractory ALL. Building on the work we did last year, we continue with the disciplined prioritization of our pipeline across Gilead. To share one example, Kite completed an optimization exercise this past quarter to ensure that resources are focused on the most promising opportunities to make a difference for patients.", "Finally, we're looking forward to a full year of clinical news flow for Gilead. Our pipeline list for 2021 includes over 20 milestones across therapeutic areas. While they are all important steps in Gilead's journey to serve more patients and diversify our business, Slide 5 lists the most significant items so you can track our progress more clearly. These include the phase 3 TROPiCS-02 PFS readout for Trodelvy in hormone receptor-positive HER2-negative metastatic breast cancer.", "Yescarta's phase 3 ZUMA-7 readout for second-line DLBCL, which could result in an sBLA submission later this year. The phase 3 readout for Hepcludex that could lead to BLA filing. ARC-2 Domvanalimab phase 2 or 7 interim readout in non-small cell lung cancer, which could inform an opt-in decision. Magrolimab's phase 1b data readout in MDS, which could lead to a submission for accelerated approval later this year.", "And potential phase 2 initiation of lenacapavir and islatravir as a long-acting oral HIV treatment in the second half of 2021. Our aspirations for patients are bold and our pipeline offers diversity across indications and risk profiles. While execution will continue to be a focus, these milestones give us a great deal of optimism about the future and our ability to deliver therapies that make a meaningful difference for patients. Before I hand off, I want to take a moment to thank Dr.", "Bill Lee, who is retiring from his role as executive vice president of research after 30 years at Gilead. On behalf of all of us, I want to offer my sincere gratitude to Bill for his outstanding contributions that have helped to benefit millions of patients around the world. I would also like to welcome Dr. Flavius Martin, who joined Gilead as the new EVP of Research on April 12.", "Flavius has an impressive track record in overseeing industry-leading research and advancing new therapeutic candidates. With that, I'll invite Johanna to update you on our commercial operations in the first quarter." ] }, { "name": "Johanna Mercier", "speech": [ "Thanks, Dan, and good afternoon, everyone. Starting on Slide 7, it was a solid quarter of execution for the commercial team, with total product revenue of $6.3 billion, up 16% from the first quarter of last year. This was in line with our internal expectations as Veklury sales offset a more substantial pandemic-related impact on our core business than we had anticipated. Excluding Veklury, total product revenue was $4.9 billion reflecting inventory and pricing seasonality, the anticipated HIV loss of exclusivity in the U.S., and ongoing pandemic-related dynamics in HIV and HCV.", "Moving to HIV on Slide 8. Revenue was down sequentially as expected, primarily due to seasonal trends. As a reminder, two things happen every year to our HIV business that contribute to a sequential decline from Q4 to Q1. First, the channel builds inventory in the fourth quarter then draws it down in Q1.", "In the first quarter of 2021, this inventory impact contributed an estimated $410 million to the sequential decline. Second, we've realized lower net HIV prices in the first quarter due to items such as increased co-pay support and Part D discounts, which tend to normalize throughout the rest of the year. This quarter, we had two additional impacts. A year-over-year decline of $335 million in Truvada NHS revenue associated with LOEs in the U.S.", "And a difficult comparison in the first quarter of 2020, given the pandemic-related HIV stocking we saw in March of 2020, as well as the impact of the pandemic on HIV market demand. Our focus is on share-driven by demand. Overall, three and four people living with HIV initiate or switch to Gilead products, highlighting the strength in demand for our life-changing medicines. While the pandemic dampened market size and switched volumes, we maintain share, in line with prior quarters across our total HIV portfolio despite generic erosion.", "In terms of product lines, Biktarvy was up 8% year over year but down sequentially as expected, driven by seasonal inventory and pricing dynamics. Despite the pandemic impact on the new starts and switch volume in HIV, demand fundamental for Biktarvy remains strong with five-share point growth compared to the same time last year and two share point growth just in the last quarter in the United States. As Dan mentioned earlier, one out of two people living with HIV, initiating or switching therapy is prescribed Biktarvy. Further, nearly half of Biktarvy switches come from incremental sources.", "Descovy revenue was down sequentially and year over year, largely driven by seasonal inventory and pricing dynamics. Although PrEP volume continues to be impacted by the pandemic, Descovy share remains stable and strong at around 45% and positions us well as the PrEP market recovers post-pandemic. Moving to Slide 9. HCV's first-quarter revenue was $510 million.", "We continue to maintain a leading share of about 60% in the U.S. and 50% in Europe. Despite COVID continuing to impact patient starts, we did see a very modest sequential improvement overall in-patient volumes, although it remains depressed versus pre-COVID level. HCV also benefited from a pricing adjustment in France.", "As shown on Slide 10, in Q1, HBV and HCV sales totaled $220 million with HBV sales of $214 million, growing 15% year over year, driven by strong and ready demand, most notably in China and in the U.S. We continue to expect the HBV franchise sales to reach $1 billion by full-year 2022. With the completion of the mere acquisition during the first quarter, our portfolio now includes Hepcludex. There are currently no available treatments for HDV making Hepcludex, which has received conditional approval by the EMA, a first-in-class treatment.", "This innovative drug blocks viral entry into liver cell. And we're targeting a BLA submission later this year and are excited by the opportunity to make Hepcludex more broadly available and address the unmet need for people who are infected with HDV. Moving to Slide 11. Trodelvy delivered $72 million in first full quarter as part of the Gilead portfolio.", "In a span of just three weeks this month, Trodelvy received FDA full approval for second-line plus metastatic triple-negative breast cancer, received accelerated approval in second-line plus metastatic urothelial cancer, and had its ASCENT phase 3 data published in the New England Journal of Medicine just a week ago. We can now leverage treatment efficacy data from the full trial population in our discussions with physicians and build even greater confidence to consider this potentially transformative therapy. This more than doubles the patient population, extending our reach to 6,000 second-line metastatic TNBC patients in the U.S., in addition to over 4,000 patients in the third line plus population. Given the poor prognosis and difficulty in treating both second and third-line metastatic TNBC patients, Trodelvy could extend medium overall survival by almost a year, while also nearly tripling the median progression-free survival compared to chemotherapy.", "Outside the U.S., we submitted the TNBC marketing authorization application based on the ASCENT phase 3 clinical study for an accelerated review process. We look forward to continuing discussions with the European Medicines Agency and anticipate approval as early as December of this year. Additionally, Trodelvy TNBC is under review with the U.K., Canada, Switzerland, and Australia as part of Project Orbis. On Slide 12, Christie, who is on the call to answer for your questions shortly, you can see that our cell therapy business had a strong quarter with revenue of $191 million, up 36% from the same quarter last year, driven by growing adoption of Yescarta in Europe with our industry-leading four-year 44% overall survival.", "The recent approval for Yescarta in follicular lymphoma with broaden our addressable patient population and support our ongoing growth. Tecartus continues to see strong launch demand as physicians and patients adopt the first and only cell therapy approved for relapsed or refractory mantle cell lymphoma. Moving to Veklury on Slide 13. First-quarter revenue was $1.5 billion, with demand tracking to hospitalization rates.", "Although we saw lower hospitalization rates and increasing vaccination rates in certain parts of the world, overall progress was more gradual than expected over the first quarter. And as such, we are now assuming a slower pandemic recovery for the second quarter. As the pace of recovery builds momentum in the second half of the year, this should contribute to the modest recovery in patient starts for HCV, as well as HIV franchises. We will continue to play our part to support broader access for eligible patients in need of remdesivir.", "We are working with our voluntary licensees to accelerate production capacity for India, while also donating over 450,000 vials of Veklury to help patients as the supply of licensed generics increases. Our thoughts are with those who continue to tackle the worst of this pandemic. And so with that, I will hand over the call to Merdad." ] }, { "name": "Merdad Parsey", "speech": [ "Thank you, Johanna. As both Dan and Johanna mentioned, we're off to a solid start in a catalyst-heavy 2021, and my comments today will focus on near-term events and changes to our pipeline. A comprehensive update on our broader pipeline is included in the appendix of the slide deck available on our IR website. I'll start with our virology pipeline.", "We remain as focused as ever on driving innovation in HIV therapies, and there are no changes to the expected timelines associated with our lenacapavir programs. In HIV prevention, we're activating sites for our first phase 3 study of lenacapavir as monotherapy for the prevention of HIV and will begin screening patients later this quarter. This study will focus on preventing infection in cisgender men, transgender women and men, and gender nonbinary people who have sex with men. In the second half of 2021, we plan to initiate a study looking at lenacapavir for the prevention of HIV infections in adolescent girls and young women.", "In treatment, we presented additional data from our phase 2/3 CAPELLA trial for lenacapavir at CROI, and we continue to expect our first lenacapavir filing for use with other anti-retrovirals and heavily treatment-experienced individuals in the second half of this year. We anticipate data later this year from the phase 2 calibrate study in the treatment-naive population to support virologically suppressed indication. And we plan to launch a phase 2 trial for a long-acting oral treatment combination of Gilead's lenacapavir and Merck's islatravir in the second half of this year. Both medicines have shown long half-lives and high potency at low doses.", "As such, we believe that the lenacapavir plus islatravir combination is promising, and we're excited by our new partnership and working with our colleagues at Merck to bring the maximum benefit possible to people living with HIV. Based on our commitment to HIV, we continue to work toward a potential cure. We have several early stage programs evaluating combinations to understand the biology and identify path for this important mission. Leveraging our internal expertise, as well as external partnerships, including Aelix and Gritstone.", "On Slide 16, moving on to the oncology pipeline, which has over 20 internal clinical stage programs, including many built around Trodelvy. We're excited to have received full FDA approval of Trodelvy in second-line plus metastatic triple-negative breast cancer based on the confirmatory basically ASCENT trial data. In the U.S. alone, this indication expands upon the accelerated approval for third-line metastatic triple-negative breast cancer to now include second-line patients who've had at least one prior treatment for metastatic disease.", "Trodelvy has the potential to significantly improve overall survival and progression-free survival outcomes for patients. In the U.S., there's a population of 10,000 patients who may benefit from Trodelvy. We also received FDA accelerated approval for second-line metastatic urothelial carcinoma based on positive data from the phase 2 TROPHY study. With almost a third of patients responding to treatment and the 7.2-month median duration of response, Trodelvy offers a much-needed new treatment option for the many patients with metastatic urothelial cancer, whose disease continues to progress despite receiving available first and second-line treatment.", "In the U.S. alone, we estimate there are roughly 8,000 addressable patients. 2021 will continue to be an exciting year for Trodelvy, and there have been no changes to the 2021 timelines we shared previously. We submitted the MAA to the EMA for Trodelvy in second-line plus metastatic TNBC in March, and it's now under accelerated review.", "We continue to target EU approval in the second half of this year. Later this year, we anticipate a phase 3 TROPiCS-02 progression-free survival readout for hormone receptor-positive HER2-negative metastatic breast cancer. Pending data, we'll evaluate and determine the appropriate next steps from a regulatory standpoint. We estimate there are roughly 17,000 patients in the U.S.", "who could benefit from Trodelvy in this setting. We're now actively recruiting additional patients for the phase 2 TROPiCS-03 basket study in solid tumors to expand eligibility to patients regardless of TROPiCS-02 expression. We've already decided to initiate a phase 3 trial in non-small cell lung cancer in the second half of this year, and we'll share updates on additional plan studies later this year. Moving on to cell therapy on Slide 17.", "With FDA's accelerated approval of the Yescarta for patients with third-line plus follicular lymphoma in March, we now have added a third indication for the Kite portfolio. Zuma-5 study data showed the 91% of patients responded to a single infusion with an estimated 74% of patients in continued remission at 18 months. We're working toward making this option available to patients outside the U.S. and continue to target an MAA filing in the next several months.", "There are no changes to the expected timelines for the Zuma-7 study, assessing Yescarta for the second-line diffuse large B-cell lymphoma or DLBCL patients. We expect to announce the top-line phase 3 outcome later this quarter, followed by sBLA and MAA submissions in the second half of the year. Additionally, the FDA has approved the inclusion of the Zuma-1 cohort 4s updated safety data into Yescarta's label for third-line DLBCL. Cohort 4 demonstrated that early use of corticosteroids and/or tocilizumab led to reductions in cytokine release syndrome or neurological events.", "Moving on to Tecartus. We submitted our sBLA for relapsed or refractory adult B-cell precursor acute lymphocytic leukemia, or ALL, just after the end of the first quarter. If approved, Tecartus would add a much-needed treatment option for patients 18 and older. We plan to share the Zuma-3 data at ASCO this summer, and we continue to enroll patients for Zuma-4 to evaluate Tecartus for ALL in the pediatric population.", "Consistent with our ongoing diligence across both Gilead and Kite, we will continue to focus and streamline the Kite portfolio to align with our key strategic priorities and expertise in hematologic malignancies, specifically lymphoma, and leukemia. Moving on to Slide 18. In addition to the previously mentioned milestones for virology, Trodelvy and Kite, we have several other notable upcoming events. First, I want to take a moment to highlight magrolimab's progress and outlook in myelodysplastic syndrome and acute myeloid leukemia.", "In MDS, we expect to see Phase Ib data in the second half of this year, pending results, those data could lead to a BLA submission before the end of the year. If approved, magrolimab will be the first-in-class macrophage checkpoint inhibitor targeting CD47, and Gilead's first run frontline oncology indication. There's a significant unmet need for MDS with no new treatments approved in 14 years despite 15,000 new patients diagnosed each year in the U.S. alone.", "We're also exploring pivotal studies in frontline AML. Additionally, we continue to evaluate multiple solid tumor indications for magrolimab, most recently initiating a phase Ib/II second-line plus solid tumor basket study and a randomized phase 2 study for head and neck cancer in combination with chemotherapy and Merck's Keytruda. Second, in virology, we're thrilled to officially add Hepcludex into our portfolio and look forward to phase 3 data readout later this quarter, with the potential for a BLA filing in the second half of the year. As for potential opt-in programs, Arcus' ARC-7 non-small cell lung cancer study is expected to evaluate an interim data in the second quarter.", "We and the Arcus team have indicated that the interim analysis is targeting an ORR of 50% or greater and a clear separation in ORR from the Zimberelimab monotherapy arm when compared to the Domvanalimab plus Zimberelimab combination arm. Last, on Slide 19, you can see our robust and diversified pipeline across oncology, virology, and inflammation. In addition to the readouts on the previous slide, we have multiple collaboration programs that we're monitoring closely, including Arcus' 8 -- ARC-8 study in pancreatic ductal adenocarcinoma and ARC-6 study for castration-resistant prostate cancer, expect -- both of which expect initial readouts later this year. And the Galapagos 623 Toledo proof-of-concept trials across psoriasis, ulcerative colitis, and RA are expected to have readouts later this year.", "In closing, we're pleased to see how our portfolio has grown from about 30 clinical stage programs two years ago to 47 today while maintaining our focus on disciplined management of R&D expenses. We've also gone from six molecules approved, filed, or in registrational studies to 15. Our teams have worked tirelessly to continuously evaluate and accelerate priority programs. We're thrilled to see how our portfolio is developing.", "And we look forward to accelerating innovation to help transform patient care. With that, I'd like to hand the call over to Andy." ] }, { "name": "Andy Dickinson", "speech": [ "Thank you, Merdad, and good afternoon, everyone. As you can see, we are building momentum in our clinical pipeline, and we expect to have plenty of data to share as we move through the rest of 2021. Moving to Slide 21. The first quarter was a good start to the year, with total product sales in line with our internal expectations overall, as modestly higher Veklury sales offset a slower pandemic-related recovery than we had anticipated.", "In addition to pandemic impacts, our HIV business reflected the inventory seasonality we typically see in the first quarter. Total product sales were $6.3 billion, up 16% year over year, driven primarily by Veklury. The first quarter reflects continued growth from Biktarvy, our first full quarter of Trodelvy sales, and strong growth in HBV, as well as cell therapy. This growth was offset by ongoing COVID-related softness across our business in addition to the Truvada and Atripla LOEs.", "As also indicated by Johanna, there is the difficult comparison to the first quarter of 2020, given the pandemic-related HIV stocking observed last year. As a result, total product sales, excluding Veklury, were $4.9 billion, down 11% year over year. Non-GAAP product gross margin was 86.5%, 60 basis points lower year over year, primarily associated with product mix and a small inventory charge, partially offset by favorable royalty adjustments. Non-GAAP R&D was $1 billion, up 4% year over year, primarily driven by investment in new pipeline products, including Trodelvy and magrolimab, offset by timing of certain clinical studies and lower Veklury-related expenses.", "Non-GAAP SG&A was also $1 billion, down 4% from Q1 2020 due to timing of grants and sales and marketing activities. This was partially offset by higher commercialization investments associated with Veklury, Trodelvy, cell therapy, and HBV, and HIV in China. Moving to tax. We realized a lower rate of 18% for the quarter due to recognition of favorable settlements with tax authorities.", "Overall, our non-GAAP diluted earnings per share were $2.08 in the first quarter of 2021 compared to $1.68 for the same period last year. The year-over-year improvement was primarily due to Veklury revenues, flat operating expenses, and a lower tax rate, offset in part by lower interest income. You can see on Slide 22, that there is no change to our full-year non-GAAP guidance. While the pandemic remains unpredictable, and as we realized a more substantial impact to our core business in the first quarter than we had anticipated, we are nonetheless encouraged by the lower hospitalization rates and increased vaccinations.", "We have modified our assumptions on the timing of pandemic recovery to allow a more gradual improvement starting in the second quarter. We continue to expect total product sales, excluding Veklury, of $21.7 billion to $22.1 billion. We continue to expect full-year non-GAAP R&D and SG&A expenses, each to be flat to down low single-digit percentages year over year. Given our first-quarter results, you can see our R&D expenses are somewhat back-end loaded in 2021 based on the timing of clinical activities, which include the anticipated initiation of the solid tumor study with magrolimab, advancing internal long-acting combinations with lenacapavir for the treatment of HIV and other pipeline activities.", "Our work with Merck on a long-acting treatment regimen for people living with HIV is also under way and will ramp up during 2021, although we are able to absorb this program into our current R&D expense guidance. In SG&A, we are ramping up sales and marketing to support efforts such as the ongoing and expected launches of Trodelvy in the U.S. for bladder cancer and in Europe for triple-negative breast cancer. Additionally, we expect to start seeing higher travel and other costs scale up in the second half of the year as social distancing restrictions lighten up in some geographies.", "Despite the lighter expenses in the first quarter, we're leaving our operating expense guidance unchanged as we expect to catch up on this to some extent later in the year and for now, retain the flexibility to manage the timing of clinical and commercial investments. We continue to expect our non-GAAP tax rate to be 21% for the year. While we are carefully monitoring the discussions on a higher corporate tax rate here in the United States, we believe any impact is more likely in 2022 and beyond, although, of course, a more immediate change could alter our current tax guidance. Finally, with no changes to our revenue or operating expense guidance, we continue to expect non-GAAP diluted EPS of $6.75 to $7.45 for the year.", "We have updated our GAAP diluted EPS guidance and now expect to be in the range of $4.75 to $5.45, down from $5.25 to $5.95, reflecting fair value losses for our equity holdings in the first quarter, donation expenses, and other pre-tax charges, including upfront payments related to collaboration. On Slide 23, you can see that we remain diligent in our capital allocation priorities. Already this year, we have repaid $1.25 billion in debt, and we're on track to pay down at least $4 billion in total by the end of the year. We have also returned $1.2 billion to shareholders through dividends and repurchase of shares.", "To close, we remain committed to delivering for patients and for shareholders as we look to invest in our business and R&D pipeline while paying close attention to our expenses. With that, I'll hand the call back to Dan for a few closing comments. Dan?" ] }, { "name": "Daniel O'Day", "speech": [ "Thanks, Andy. And before we open up for questions, I'd like to thank the broader Gilead team who accomplished a great deal in the first quarter, setting the stage, I think, for quite an exciting year, rich and catalysts across our clinical portfolio. Of course, Gilead would not be the company it is today without the vision of John Martin, Gilead's chief executive officer for 20 years, who passed away in March. Under his leadership, Gilead transformed the treatment of HIV and viral hepatitis and became a global organization firmly rooted in its commitment to science and to patients.", "That commitment will be a constant as we work to take John's legacy forward in Gilead's next chapter. With that, I'll invite the operator to begin the Q&A." ] } ]
[ { "name": "Operator", "speech": [ "[Operator instructions] Our first question comes from Brian Abrahams with RBC Capital Markets." ] }, { "name": "Brian Abrahams", "speech": [ "Thanks so much for taking my question. It looks like you're seeing steady growth in adoption of Trodelvy. So I'm just wondering how should we think about the potential for a near-term inflection and update now that you'd have full approval in triple-negative, the publication out and label expansion into urothelial? And I'm curious, are you starting to see some pull through. And where do you stand with respect to community physician awareness? How important is that, as well for adoption? Thanks." ] }, { "name": "Daniel O'Day", "speech": [ "Thanks, Brian. Johanna, please." ] }, { "name": "Johanna Mercier", "speech": [ "Sure. Thanks, Brian, for the question. And we're really excited with the recent news that we got with Trodelvy. It's really going to help us gain momentum, exactly what you said.", "We have strong awareness in academic centers above 80%. We haven't been able to break through. We're only at about 50% or so in the community. And as you well know, if three quarters of the patients sit in the community, that's an incredible opportunity for us to make sure that we make sure the messages come across.", "We haven't been in a position in the past to promote overall survival in light of the fact that we just had that conditional approval. And so now with the full approval, not only do we get to double the patient population that Trodelvy can actually help, but actually, we also get to promote the overall survival, which is the only agent with overall survival in this setting. So I think it's really going to help us ramp up. And the focus is still going to be despite the urothelial bladder indication.", "We -- the focus is really going to be more like a 90-10, 90% on second-line plus triple-negative breast cancer and then 10% from a promotional standpoint on urothelial cancer. We believe that that's going to work well because there's a high overlap. There's about 70% of physicians that overlap from bladder cancer and also treat TNBC. So we're going to be in good shape to ramp this up.", "This is really the opportunity for Trodelvy right now for this year." ] }, { "name": "Operator", "speech": [ "Our next question comes from Phil Nadeau with Cowen and Company." ] }, { "name": "Phil Nadeau", "speech": [ "Merdad, I had a two-part question for you. You highlighted a couple of oncology events happening in the second half of the year, namely the magrolimab Phase Ib data and Trodelvy data in the ER-positive HER2-negative breast cancer. On magrolimab, can you give us some sense of what data needs to be produced to support a filing? And on Trodelvy, there's been a fair amount of breast cancer data recently. Has anything that you've seen questioned the powering assumptions behind the revised design of the TROPiCS-02 trial? Thanks." ] }, { "name": "Merdad Parsey", "speech": [ "Thanks, Phil. Great questions. In terms of magro, in terms of what we think we need to see. Look, I think the challenge there is obviously that we're looking at external comparisons.", "So we believe that it's really around the strength of the data and its consistency with what we've seen already in that setting with magrolimab. I think our assumption is as long as we are consistent with the data that has emerged that will give us really good grounds to go and approach regulators to discuss a potential filing. So we're -- I would say, reasonably confident there, and our expectation is as long as things continue to go the way they have been, we'll be fine. In terms of the breast cancer data for Trodelvy.", "Yes, I think in terms of our confidence, I think we remain confident that we're really well powered in that study to show benefit, in particular, in PFS, as well as OS in that trial. So I don't think we've seen anything emerge that shakes our confidence around that." ] }, { "name": "Operator", "speech": [ "Our next question comes from Louise Pearson with Redburn." ] }, { "name": "Louise Pearson", "speech": [ "Hi. Thanks for taking my question. On Yescarta, I was just wondering, could you find the incremental effort that would be required on your side to access the second-line DLBCL population should see the 7 readout positively. Just thinking in terms of any overlap, there might be in the sort of centers where these patients are treated? And kind of on a related note has there been much COVID impact on the cell therapy franchise Germany seems to have performed pretty robustly.", "Thank you." ] }, { "name": "Daniel O'Day", "speech": [ "Thanks, Louise. Over to you, Christi." ] }, { "name": "Christi Shaw", "speech": [ "Thank you. So I'll take the last one first, maybe, which is the COVID impact. We did see COVID impact and slowing of our ramp-up that we started doing well Q1 of last year, and there was a slowdown in Q3, Q4. We've seen that rebound in Q1.", "We do believe that that has to do with less COVID impact, especially in the U.S. Europe, in spite of the COVID impact continued to grow over those quarters. Germany and Italy being the exceptions where the COVID impact has been greater on our business there. Overall, though, we're very pleased with what we're seeing from Quarter 4 to Quarter 1 of this year, significant growth and coming off a couple of down quarters for Yescarta, both the U.S.", "and the -- and Europe up quarter over quarter now with Yescarta. And on the second-line DLBCL question. So the good news is, you know, the APCs are already set up, just like with Yescarta's, we're able to launch quickly. So moving up to the second-line doubles the market opportunity, doubles the number of patients that we can serve.", "We also have community reps in the field already, both in Europe and in the U.S. So this referral pattern will continue to be something that we work on. But the belief or my belief is that as we look at patients in the third-line plus, those are typically patients that are going for palliative care and quality of life and short-term quantity of life is being managed, whereas with Zuma-7 in the second-line versus stem cell transplant, physicians and patients are still looking for a cure. So if the study is positive, we're looking at replacing stem cell transplant as a standard of care in second line for curative potential.", "Remember, stem cell only cures 20% of the patients that are sent there." ] }, { "name": "Daniel O'Day", "speech": [ "Thanks, Christi" ] }, { "name": "Operator", "speech": [ "Our next question comes from Geoff Meacham with Bank of America." ] }, { "name": "Geoff Meacham", "speech": [ "Afternoon, guys. Thanks so much for the question. I wanted to ask one on Biktarvy. The adoption has been hugely successful and really for quite some time.", "So the question is, where do you see share maximizing in the U.S.? And what are the bigger growth opportunities? And then in the EU, what has been the primary headwind to greater share? Thank you." ] }, { "name": "Daniel O'Day", "speech": [ "Thanks, Geoff. Over to you, Johanna, please." ] }, { "name": "Johanna Mercier", "speech": [ "Yes. Thanks, Geoff, for the question. Yes, we're really quite pleased with Biktarvy's performance. It just continues.", "And obviously, there's been some ins and out because of dynamics around us from a market standpoint because of COVID and inventory, but, you know, the share growth, 8% year over year, as well as the fact that we continue to grow share and even two points in the last quarter. We also grew two points, not only in the U.S., but we also grew just under two points in Europe and about five points year over year, as well. So we are seeing solid growth in Europe, and we are seeing in other markets as well, like Japan and Canada, we're No. 1 with Biktarvy.", "So I think that as the data continues to show the benefits of the profile that Biktarvy offers for patients. I think there's no stopping us, Geoff. I think we need to continue to grow this business, and we are well poised to get out of this COVID-19 pandemic and hopefully, the markets reset. The market already has reset in the naive patient population.", "We're almost back to pre-COVID levels, which is great, and that's where Biktarvy truly differentiates itself. And in the switch business, we're not there yet. We're about 30% under pre-COVID levels. But again, with a share of close to 50%, also well poised for that to come back on track.", "So I think we continue to expand and continue to gain share over older agents because of the benefits that Biktarvy offers, not just in the U.S. but really around the world." ] }, { "name": "Geoff Meacham", "speech": [ "Thank you." ] }, { "name": "Operator", "speech": [ "Our next question comes from Michael Yee with Jefferies." ] }, { "name": "Michael Yee", "speech": [ "Hi, thank you. And I appreciate the question. Going back to Trodelvy and the TROPiCS-02 study, I think it's fantastic. You guys upsized that and overpowered it.", "I guess I had two questions. One was, can you describe sort of what input went into your powering assumptions for that? And then also, do you guys have a view that higher CDK4/6 matters, given that, that's pretty much standard of care nowadays, and that's certainly evolved over the last few years as you think about the study? Thank you." ] }, { "name": "Daniel O'Day", "speech": [ "Thanks, Michael. I'll take that. So two -- yes, great questions. In terms of assumptions, I think what's safe to say is we've been fairly conservative on our inputs to the assumptions in terms of looking at what the standard of care PFS looks like and using sort of that as our approach.", "And I'd say, actually, that's fairly our general approach. I think we try to take a fairly conservative approach in terms of designing our trials and balance what I would, you know, sort of a statistically significant benefit with a clinically meaningful benefit. And I think that that's -- we keep both of those in mind when we're powering our studies to make sure that we are -- we're hitting not only statistical significance but looking for clinical significance. In terms of prior CDK4/6, I mean, it's obviously something that's come up a fair bit appropriately.", "I think people are looking at some data -- there are a number of hypotheses that are going around, around what it could be there. We're trying to take a very data-driven approach on this. And I guess I would say a couple of things. One is that in our hands and what we've seen so far from the prior studies where we looked at those people who had gotten prior to CDK4/6 compared with standard of care, Trodelvy continues to bring benefit to those patients.", "And as a big caveat, that's a fairly small number of people in that from us when we look at it, but I think we're comfortable that that continues to be the case. And secondly, you know, we are going to look at the data from the upcoming trial, and we will look at that group of patients as a subgroup analysis to see if there is a difference in terms of how they respond compared to the overall population of patients that are going to be enrolled in that. So we'll make sure that we segregate those patients out to make sure we learn from that." ] }, { "name": "Operator", "speech": [ "Our next question comes from Terence Flynn with Goldman Sachs." ] }, { "name": "Terence Flynn", "speech": [ "Hi. Thanks for taking the question. I guess, maybe two-part for me. You mentioned a more gradual recovery now in the second quarter, but you maintained your guidance component.", "So just wanted to understand that a little bit more, that you baked in more of a cushion there when you initially gave the guidance? And then on the PrEP side, how are you thinking about the recovery there in the second half of the year? Thank you." ] }, { "name": "Daniel O'Day", "speech": [ "OK. Thanks. And so Andy, why don't you start? And Johanna might want to add to the PrEP." ] }, { "name": "Andy Dickinson", "speech": [ "Yeah. Hi, Terence, thanks for the question. You're right. At the beginning of the year, we recognize that 2021 was likely to be more dynamic than prior years.", "And when we put together our guidance for the year, we looked at a range of scenarios. We're well within the range of scenarios in the first quarter. We're off to a good start. The mix was a little bit different than we expected with the additional pandemic-related headwinds that you heard about.", "But to be clear, when we think both about our total product revenues, including Veklury, but also our base case revenues -- our base product revenues, excluding Veklury, we're very comfortable with where we are, and we're on target for the year. We'll provide another update, of course, in the middle of the year, but that's how you should think about it at a high level, Terence." ] }, { "name": "Daniel O'Day", "speech": [ "And on the PrEP market -- yes, Johanna." ] }, { "name": "Johanna Mercier", "speech": [ "Yes. Thanks, Dan. So on the PrEP market, as I mentioned, Descovy share is holding at about 45%, 46% in the first quarter. So we're quite pleased with that.", "We've obviously been working closely with payers to make sure that patients and providers had choice in their prevention approach. The market is still dampened because of this pandemic, as you can appreciate with the social dynamics that we are all living with. Although we have seen some uptake in the last month or so, we'll see how that plays out. But again, I think it's going to be in line with what Andy said, which is going to be a bit of a gradual recovery for the PrEP market.", "But I think we're very well poised to make sure that once that market gets back to pre-COVID levels, I think we'll be in very good shape in light of our -- holding our share at this level." ] }, { "name": "Terence Flynn", "speech": [ "Thanks, Johanna." ] }, { "name": "Operator", "speech": [ "Our next question comes from Robyn Karnauskas with Truist." ] }, { "name": "Robyn Karnauskas", "speech": [ "Hi guys, thanks for taking my question. My kids are just sitting in the background there and excited about your earnings call." ] }, { "name": "Daniel O'Day", "speech": [ "We love it." ] }, { "name": "Robyn Karnauskas", "speech": [ "Very excited. They are very, very excited. I have a -- I just want to thank you for your outreach for India. I have a question about your guidance of $2 billion to $3 billion for Veklury.", "How do we think about this? I mean, it doesn't feel like this is going to go on longer outside the United States than we expect. But obviously, some places are cheaper than others. Can you give us some estimates on how do you think of -- general trends on pricing and thanks for what you're doing over there? And then this is a very simple question. You talked a lot upfront about cell therapy.", "You know, there's still, there is also off-the-shelf iPSCs. We talked about that a lot. Can you give us any sense if you're interested in augmenting our portfolio with one of those because those are different technologies? And again, my kids basing." ] }, { "name": "Daniel O'Day", "speech": [ "I appreciate your kids loving us. That's terrific. And thank you for acknowledging the efforts of the company for so many countries out there that are streaking with this. Can I ask Johanna to cover the Veklury question and then Christi to cover the cell therapy?" ] }, { "name": "Johanna Mercier", "speech": [ "Absolutely. Thanks, Robyn, for your question and comment. I think, you know, what we've seen with Veklury is a really directly proportional effect with hospitalization rates. And it's kind of what we've been saying for the last couple of quarters, and we're seeing it.", "Yes. I mean you could literally draw the line with the hospitalizations, both in the U.S., as well as outside of the U.S. Where we've seen sales as in the first quarter, and I think that's going to continue, although to a lesser degree, we've seen hospitalizations really come down in the month of March and kind of hold steady, unfortunately. And hopefully, they'll keep coming down as months go by and vaccination rates increase.", "But what we have seen is sales are really coming out in the U.S., of course, also within our European region, as well as Asia. There's a lot of markets in Asia that are also taking full advantage of the benefits of Veklury for their patients, their appropriate patients. And so we believe -- we've always said that we think the tail is longer. I know nobody wants to hear that, but I think we think the tail is longer than anybody thought originally.", "And I think that's what we're seeing as we go into Q2, and it will be a gradual recovery. So we do believe that Veklury still will have an important role to play within the next couple of quarters and potentially beyond into 2022. As for some of these -- for example, India or other countries that are served by our voluntary licenses. Obviously, those are royalty-free during the pandemic, and that is something at a much lower price level.", "So our price for Veklury hasn't moved. It's well below the value of Veklury for the developed countries. For the developing rolled up, it's obviously quite different. With that, Christi?" ] }, { "name": "Christi Shaw", "speech": [ "Yes. Thanks, Robyn. Thanks for the question. So you heard a little bit in the beginning from both Merdad and Johanna and maybe Dan that we recently took a really hard look at our portfolio review.", "A few things are evolving or transforming, if you will. Kite had such a success story in bringing the first potential cure for lymphoma. We've transformed now to a company that has multiple brands -- franchise, basically, three indications now and with a couple more to come in the next year. As we look at that, we know a lot more now about how to affect leukemia and lymphoma in this area.", "So really taking a focus on making sure that we double down on our life cycle management, improving the risk-benefit profile of what we have, trying to get patients with combination therapies for, etc., to ensure we increase the efficacy. That's really our main focus on our core. We are also looking at disrupting what we have today, whether it's iPSC, allo. We do believe eventually, the market will be, and we'll be trying to drive that way, too, toward a lower cost off-the-shelf, more convenient for patients' treatments.", "But today, unfortunately, from what we've seen at the recent congresses and publications and study results, it's a bit further out than we had anticipated just 12 to 18 months ago. So we really need to focus on improving autologous where we have it today, disrupting ourselves in the future. And lastly, to your question, beyond iPSC -- your question was iPSC, but even beyond that, as we look at solid tumor, we really are the partner of choice with our successful manufacturing process, our ability to deliver reliably in a short period of time. We are looking at transformations, really good transformations where we have proof-of-concept in solid tumors where the market will be the largest in the long term." ] }, { "name": "Operator", "speech": [ "Our next question comes from Matthew Harrison with Morgan Stanley." ] }, { "name": "Matthew Harrison", "speech": [ "Great. Good afternoon. Thanks for taking the question. A question on Galapagos, and I guess there are two parts here.", "First part is, you know, you've got these upcoming Toledo readouts. Merdad, maybe you could just comment on what you're potentially looking to see from those readouts, given that the duration of those trials is fairly short. So maybe what you would view as sort of a positive outcome. And then I guess second question is a more sort of broader strategic question here.", "But if you don't see something that's positive out of those, you know, how do you think about the longer-term relationship there? And given that you're the largest shareholder, you know, what might you consider in terms of that relationship?" ] }, { "name": "Daniel O'Day", "speech": [ "Great. You want to start, Merdad, and then I'll follow." ] }, { "name": "Merdad Parsey", "speech": [ "Yes, sure. It's a great question. And I think you -- Matthew, you mentioned, I think, look, where we are now with the Toledo programs is looking for evidence of tolerability and proof-of-concept, proof of principle for that pathway in multiple indications. And I would describe these early small studies as a place to demonstrate that and look to see where the biggest impact could be.", "I think it's an early part of the longer journey, ranging from -- you know, is there a particular indication that we want to pursue further to confirm and expand on the signal to -- you know, do we have the right molecule for that. So I think we view these, together with Galapagos, I believe, we view these as sort of very early in the story of the Toledo program. So we'll be looking to see what those data look like in the near term. Dan, do you want add?" ] }, { "name": "Daniel O'Day", "speech": [ "Sure. So maybe just to you, Matthew, to just give a little bit of context of people that may not be completely familiar with our relationship with Galapagos. So of course, there was the filgotinib relationship, but then there was a separate relationship that we went into. As you know, a couple of years ago now.", "And that was really based on the research platform. And I would say that nothing has really changed in relation to that. I mean one of the reasons to do that was to diversify our approaches from a discovery research perspective across, if you like, the Gilead Group. I listened hard to the scientists at that time.", "I continue to listen hard to the scientists today. They think they have a very discriminated platform for screening compounds for first-in-class. And I'll remind you, that's really the approach first-in-class, which, of course, comes with some risks, some of which we've seen in the later-stage programs. And of course, Toledo is the most advanced now of those programs.", "But having said that, there are many others within their discovery platform that we continue to be intrigued about. I think it's an important part of our overall inflammation strategy, albeit at an earlier stage for Gilead. But when we think about our strategic approach that really focuses on immunology and virology as our core scientific skills, we have now obviously leaders in virology built up a really significant presence in oncology with inflammatory disorders, really kind of the next step and the next stage of our platform where Galapagos presents, I think one aspect of that, but a very important aspect in terms of first-in-class approach. So we continue to be working very closely with our partners at Galapagos to determine what the next screens are and what the next targets are in the concept of our -- the entirety of our inflammation strategy.", "So thanks, Matt." ] }, { "name": "Operator", "speech": [ "Our next question comes from Ronny Gal with Bernstein." ] }, { "name": "Ronny Gal", "speech": [ "Yeah. Just a question on Descovy. The 22% down on the year over year. I was wondering if you can unpack those for us.", "So how much of that was inventory, COVID impact in price. So when it comes to price, do you think this is like a one-year giveaway? Or should we expect that kind of a pricing decline every year going forward, at least when it comes to the back-class compounds?" ] }, { "name": "Daniel O'Day", "speech": [ "Ronny, just at the very end, what did you say?" ] }, { "name": "Johanna Mercier", "speech": [ "Yes, please." ] }, { "name": "Ronny Gal", "speech": [ "Are we expecting the price declines this year to be a repeating events every year? Or is this essentially expected to be a one-time decline as to Truvada generic center." ] }, { "name": "Daniel O'Day", "speech": [ "Got you. OK. Joanna, you got it." ] }, { "name": "Johanna Mercier", "speech": [ "Yes. Thank you. So, thanks for that. I didn't hear the last part of that question originally.", "Yes. So for Descovy, the year over year, obviously, it does have to do with higher payer discounts. And that was to ensure that patients and providers had choice. And make sure that we didn't have any step at it.", "And now we do have some step at it for some plan. But for most plans, access is very open to make sure that our patients and providers choose which therapeutics is best for them for prevention. And so I think that we will continue to be smart and we will continue to be disciplined in the way that we look at those discussions with our payers, but we're also looking at data that's been pretty clear, that shows that if you basically put a step at it, you don't actually get the patient on a Truvada generic, you actually just lose your patient. And I think, you know, as we think about ending the epidemic, prevention is a big piece of that.", "And so that's why choice is so important, and that we keep people at risk of HIV, making sure that we keep those folks on the medicines that they're on without creating any access restrictions. And so if that's what we need to do moving forward to ensure that that might impact the price as we go. Our intent is obviously to keep the balance between what we do from a payer standpoint, but also what we do from a share standpoint. And that's why we're proud of the fact that we've been able to manage the payer dynamics and actually hold and even grow share in the last quarter." ] }, { "name": "Operator", "speech": [ "Our last question comes from Hartaj Singh with Oppenheimer." ] }, { "name": "Hartaj Singh", "speech": [ "Great. Thank you for the question. And I just want to also echo what Robyn said. I think people forget we donated almost 1 million vials of remdesivir last year around this time, which very few companies have done.", "Just a quick question on your partnership with Merck. What's the logic behind Gilead, I guess, leading the U.S. development for the oral and then Merck on the injectable? What was the thinking that went into sort of the parameters of that and then also the cost-sharing and the revenue sharing assumptions? Any color on that would really help. Thank you for the question." ] }, { "name": "Daniel O'Day", "speech": [ "Thanks, Hartaj, and believe me, it means a lot for you to comment on that for all the colleagues at Gilead, who I think feel very strongly about the intrinsic work we do for patients and donations is just one piece of that, it's part of our DNA. Andy, I think you're going to answer the question." ] }, { "name": "Andy Dickinson", "speech": [ "Sure. Hartaj, thank you for the question. Look, it was relatively simple. You have two outstanding organizations that are deeply experienced at formulation and drug development.", "Gilead, obviously, is one of the leading companies globally in terms of coformulating orals. For a single-tablet regimen, especially in the HIV arena, and it made sense, I think, to both companies that have us take the lead there. And at the same time, we recognize that to keep both programs moving forward quickly, it probably made the most sense to have Merck also lead a program and the injectable formulation program is one that was in their sweet spot. So this is a win-win.", "Both companies will be involved in both programs. And we think by doing that, we're going to be able to advance these programs more quickly than we could individually. As far as the cost sharing, we took on more of the cost-sharing because we have more of the upside, right? So it was a relatively simple. I think we are both bringing great molecules to the collaboration.", "We're both very excited about, you know, what we think these combinations can do in the treatment market, both in oral and the subcu injectable formulations. And we recognize that when you looked at the patent life of the two products, for instance, was different. The franchise that we have in HIV, the impact of these on our existing franchise. When we put it all into the mix, I think there was a clear alignment between the two companies that it made sense at certain revenue levels for Gilead to share disproportionately and more of the revenue or the profits, I should say.", "But in exchange for that, fairly, we had to agree to take a little bit more of the R&D expense, which we are happy to do. So that should, I think, Hartaj, that should answer your question." ] }, { "name": "Daniel O'Day", "speech": [ "And Hartaj, I just want to end by thanking our colleagues at Merck. You know, it's terrific. When you get two companies to come together to put patients first to accelerate treatment options for patients in need. And we have a lot of respect for our Merck colleagues.", "And happy to say that already the collaboration is getting off to a very strong and rapid start. So we look forward to moving fast to make a difference for patients with different treatment options." ] }, { "name": "Operator", "speech": [ "That concludes today's question-and-answer session. I'd like to turn the call back to Jacquie Ross for closing remarks." ] }, { "name": "Jacquie Ross", "speech": [ "Thank you, Liz, and thank you all for joining us today. We appreciate your continued interest in Gilead and look forward to updating you on our continued progress." ] }, { "name": "Operator", "speech": [ "[Operator signoff]" ] } ]
GILD
2020-04-30
[ { "description": "Investor Relations", "name": "Douglas Maffei", "position": "Other" }, { "description": "Chairman and Chief Executive Officer", "name": "Daniel O'Day", "position": "Executive" }, { "description": "Chief Financial Officer", "name": "Andrew Dickinson", "position": "Executive" }, { "description": "Chief Medical Officer", "name": "Merdad Parsey", "position": "Executive" }, { "description": "Chief Commercial Officer", "name": "Johanna Mercier", "position": "Executive" }, { "description": "enior Vice President, HIV and Emerging Viral", "name": "Diana Brainard", "position": "Executive" }, { "description": "Jefferies -- Analyst", "name": "Michael Yee", "position": "Analyst" }, { "description": "JP Morgan -- Analyst", "name": "Cory Kasimov", "position": "Analyst" }, { "description": "RBC Capital Markets -- Analyst", "name": "Brian Abrahams", "position": "Analyst" }, { "description": "Bank of America -- Analyst", "name": "Geoff Meacham", "position": "Analyst" }, { "description": "SVB Leerink -- Analyst", "name": "Geoffrey Porges", "position": "Analyst" }, { "description": "Morgan Stanley -- Analyst", "name": "Matthew Harrison", "position": "Analyst" }, { "description": "Evercore -- Analyst", "name": "Umer Raffat", "position": "Analyst" }, { "description": "Cantor Fitzgerald -- Analyst", "name": "Alethia Young", "position": "Analyst" }, { "description": "Citigroup -- Analyst", "name": "Mohit Bansal", "position": "Analyst" }, { "description": "SunTrust -- Analyst", "name": "Robyn Karnauskas", "position": "Analyst" }, { "description": "Mizuho -- Analyst", "name": "Salim Syed", "position": "Analyst" }, { "description": "Piper Sandler -- Analyst", "name": "Tyler Van Buren", "position": "Analyst" }, { "description": "Cowen & Company -- Analyst", "name": "Phil Nadeau", "position": "Analyst" } ]
[ { "name": "Operator", "speech": [ "Ladies and gentlemen, thank you for standing by, and welcome to the First Quarter 2020 Gilead Sciences Earnings Conference Call. [Operator Instructions] After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions]", "It is now my pleasure to introduce, Senior Director of Investor Relations, Doug Maffei." ] }, { "name": "Douglas Maffei", "speech": [ "Thank you, Andrew and good afternoon, everyone. Just after market close today, we issued a press release with earnings results for the first quarter 2020. The press release and detailed slides are available on the Investor Relations section of the Gilead website. The speakers on today's call will be Daniel O'Day, Chairman and Chief Executive Officer; and Andrew Dickinson, Chief Financial Officer. Also on the call will be Johanna Mercier, Chief Commercial Officer; Merdad Parsey, Chief Medical Officer; Christi Shaw, Chief Executive Officer of Kite; and Diana Brainard, SVP and Head of our HIV and emerging viruses therapeutic area.", "Before we begin with our prepared comments, let me remind you that we will be making forward-looking statements, including risks and uncertainties related to the impact of the COVID-19 pandemic on Gileads business and results of operations. Plans and expectations with regards to products, product candidates, financial projections and the use of capital, and 2020 financial guidance, all of which involve certain assumptions, risks and uncertainties that are beyond our control and could cause actual results to differ materially from these statements. A description of these risks can be found in the earnings press release and our latest SEC disclosure documents. All forward-looking statements are based on information currently available to Gilead, and Gilead assumes no obligation to update any such forward-looking statements. Non-GAAP financial measures will be used to help you understand the company's underlying business performance The GAAP to non-GAAP reconciliations are provided in the earnings press release, as well as on the Gilead website.", "I will now turn the call over to Dan." ] }, { "name": "Daniel O'Day", "speech": [ "Thank you very much, Doug and good afternoon, everyone. Well, as you can imagine, it's been an extraordinary week for Gilead, given the terrific news on our investigation al Antiviral Drug Remdesivir. The news shared yesterday that the data show the potential of remdesivir to help ease some of the burden of the pandemic, is the outcome that we had all hoped would be possible. We're incredibly humbled to think about what this news could mean for patients and communities.", "I'd like to start by sharing my thanks to everyone, who has helped to bring remdesivir to this point, including all those involved in a collaborative clinical trials, the trial investigators, government, hospitals and above all the patients who participated. I want to acknowledge our internal teams that have been working day and night on remdesivir for the past three months, following many years of research long before the outbreak began. Because of the remdesivir news, the original focus for today's call has somewhat shifted. I'm sure, we have a lot of questions on the results and the next steps. We'll provide an overview of what was a strong first quarter for Gilead, but with an abbreviated set of opening comments, so we can leave more time for questions.", "I'll speak briefly about the quarter and remdesivir before turning the call over to Andy to discuss financial details and the impact of COVID-19 on our business. As Doug noted in the opening, Christi, Joanna, Merdad and Diana have joined us today to answer your questions at the end of the call. Gilead has been built to withstand significant challenges. There is a short-term uncertainty for all of us, but the solid foundations that Gilead has laid over the past 30 years and our focus on transformational therapeutics give us confidence in the long-term durability of the business. We will do our best to provide you with a clear picture of where we are and what we expect, as far as the near-term impact of COVID-19, while acknowledging that as we all know, these are uncertain times with many unknowns, not least of which is how long the epidemic will last.", "So turning to the quarter, I'll use the framework we introduced to the start of the year with the three pillars that will shape our future, a strong core business, our internal pipeline, and supplemental growth opportunities that are being enabled through our strategy. Our performance in the first quarter demonstrated the strength of our foundational business once again with double-digit growth in HIV. We reached and in fact exceeded all of our targets. Revenues for our HIV franchise were up 14% year-over-year. This was driven by both treatment and prevention. As Biktarvy remain the number one prescribed HIV regimen in the US during the quarter and approximately 38% of individuals on PrEP are now taking Descovy.", "What I would say in general about where we stand in HIV is this. We are very confident in the underwriting competitiveness of our products and our position as the leader in HIV. Completing the picture in our core antiviral business, we saw sustained revenues from our HCV franchise in the last quarter. Since the introduction of authorized generics in the US, we've regained market share and now hold around 61% of share through Asegua and Gilead.", "So moving from our core business to advance in our pipeline, I'll provide just a brief overview. More detailed information is available as part of our first quarter earnings materials in the Investor Relations section of our website. Filgotinib, as you are aware is under regulatory review in the United States, Europe and Japan. It's a potential treatment for rheumatoid arthritis. Our teams are preparing for a competitive launch and we remain in close contact with regulators to understand the effect COVID-19 could have on review timelines.", "In HIV, we made progress across our pipeline, sharing important data at the Virtual CROI conference with our innovative long-acting antiviral and HIV cure programs, reinforcing our long term commitments to people living with HIV. In cell therapy, the FDA accepted Kite BLA for Kite-X19 as a treatment for relapse and refractory mantle cell lymphoma during the first quarter and granted a priority review designation. As you might recall, the European Medicines Agency valued our application in January. This represents really important progress, patients with relapsed and refractory, mantle cell lymphoma a rare form of non-Hodgkin's lymphoma are in need of new therapies. If approved Kite would be the first company with two cell therapies on the market.", "So I touched on our strong core business and advancing our pipeline, now I want to say a few words about the work we are doing to expand our pipeline through business development, including of course the acquisition of Forty Seven completed earlier this month. Acquiring Forty Seven is a great early example of our strategy in action. We said we would build on our core area of expertise, which, as you know, our virology and immunomodulation, that we would keep a high bar in that our business development efforts we had focused on clinical stage assets, such as magrolimab which we gain is a part of this acquisition.", "We're working to integrate the teams and the programs, a joint effort which I'm leading with Mark McCamish, the CEO of Forty Seven, with the objectives that keeping things moving smoothly with magrolimab and defining a working model that supports continued innovation. Next month, researchers will present data on our next-generation cancer therapies virtually at ASCO, including magrolimab and a number of abstracts that highlight the Kite cell therapy portfolio. The presentations at ASCO underscore the strength of our scientific approach in immuno-oncology and we looking forward to sharing this latest research.", "Beyond Forty Seven, our business development team remains as active as ever. In the last month, we've announced three partnerships, a collaboration with second genome to identify biomarkers and potential new drug targets in inflammation, a licensing agreement between Kite and Teneobio covering a dual targeting CAR-T therapies and a three-year collaboration with Onko-Innate to discover cancer immunotherapy. Overall, we continue to maintain our momentum and I'm pleased with all the progress we've made this quarter.", "I'll now turn to remdesivir. The study results shared yesterday from the randomized placebo-controlled Phase 3 NIAID study, and from our own open label Phase 3 simple study in patients with severe disease, are important progress as we seek to understand the role that remdesivir might play in easing the burden of COVID-19 around the world. These trials are part of a suite of clinical trials investigating the effects of remdesivir. We design the clinical research program to ask multiple questions in parallel, including what groups of patients are most likely to respond and when to treat and for how long?", "Various study designs were used from placebo control to open label to answer very specific questions in each case. We expect that the answers were emerge around the same time and that taken together, they would form a clear picture of how remdesivir might best be used for patients. Yesterday, we answered important questions with the initial results of the NIAID trial and simple trials. The NIAID data demonstrated the patients with COVID-19, who received remdesivir recovered faster than similar patients who received placebo. The results from the Gilead sponsored simple study address a critical question about dosing. The data from the first of the simple studies showed similar clinical improvements in patients with severe symptoms of COVID-19, regardless of whether they received five or 10 days of treatment.", "The ability to shorten duration for severely ill patients is very important. It means patients can go home earlier, hospital resources can be freed up and it has a positive impact of course on our supply. We have calculated having 1.5 million doses by the end of May, amounting to 140,000 treatment courses at a 10-day treatment duration. The Gilead simple study suggest we may now be able to significantly increase the number of courses available with a five-day treatment duration for certain patients. As we announced previously, we are donating our entire existing supply, frankly, because this is the right thing to do at this time and the human health need in the pandemic.", "As you know, we've been ramping up production since January, we've significantly reduced lead times and expanded our global network of partners. As additional raw materials come available, we'll have an exponential increase in supplies toward the latter half of this year. We hope to have produced enough supply to treat over 1 million patients by year-end. We are also working to build a global consortium of pharmaceutical chemical manufacturers to expand global capacity and production. It will be essential for countries to work together to create enough supply for people all over the world and we look forward to these collaborative efforts.", "For access and allocation, we work closely with governments and health-care system to provide access. We intend to allocate our available supply based on guiding principles that aim to direct global access for appropriate patients in urgent need of treatment. We recognize there is a lot of work left to be done and a long way to go and finding medical solutions to end the pandemic. And we'll continue to work with regulatory authorities in the best path forward from remdesivir. At the same time, all of us at Gilead are relieved and grateful that our efforts on remdesivir have led -- let this important progress at a time when we all need a beacon of hope.", "Before I turn the call over to Andy, I want to reiterate how grateful we are for the partnership with many groups outside Gilead to support the work on remdesivir. The collaboration throughout this pandemic has been critical [Technical Issues]" ] }, { "name": "Andrew Dickinson", "speech": [ "It sounds like we've lost Dan. I'll just finish Dan's comments. We also want to say how proud we are of the way our employees have demonstrated such dedication to meeting the needs of patients. Those of COVID-19 as well as those with conditions including HIV, viral hepatitis and cancer, who depend on us for their medications. So with that I will turn to our financial comments and then we'll move to Q&A.", "Good afternoon, everyone. My name is Andy Dickinson, I'm the company's CFO. Before I start, I'd also like to acknowledge the incredible work of our 12,000 employees and what they're doing during these challenging times, their dedication and resilience is really inspiring. In addition from the outset, I'd like to emphasize that our core business is very strong, durable and provides a solid foundation to navigate the current environment. We continue to have confidence in 2020 and beyond. The pandemic has not diminished that view at all, and we remain confident in our long-term outlook.", "I'd like to first briefly share some commentary on our very strong first quarter results, and I'll remind you that the earnings materials posted on our website contain all of the details, including preliminary color on the impact of COVID-19 and our business to-date, as well as our preliminary expectations for the coming months. We are happy to walk through the results and the impact of COVID-19 and our business to-date in detail during the Q&A session.", "Starting with our revenues for the quarter, total revenues for the first quarter were $5.5 billion with non-GAAP earnings of $1.68 per diluted share. This compares to revenue of $5.3 billion with non-GAAP earnings of $1.67 per diluted share for the same period last year. Product sales for the first quarter were $5.5 billion, down 6% sequentially and up 5% year-over-year. I'd like to call out that we believe approximately $200 million of revenues were pulled forward in Q1, primarily for our HIV franchise, due to the COVID-19 pandemic across the US and Europe. This was the result of payers and pharmacies providing greater access to medicines by allowing 90-day refills and in some cases, early refills among other offerings. We expect this to reverse itself out over subsequent quarters.", "Now turning to our expenses. Non-GAAP R&D expense was $1 billion for the quarter, up 8% compared to the same period last year, primarily due to the ramp-up of remdesivir, including manufacturing scale-up and clinical trial costs. Non-GAAP SG&A expense was $1.1 billion, up 4% compared to the same period last year, primarily due to higher promotional expenses in the United States related to our HIV products. As Dan highlighted, we completed our acquisition of Forty Seven this month. We currently expect to incur approximately $120 million in expenses this year related to Forty Seven, primarily in research and development. In addition, I'd like to highlight that the acquisition qualifies as an asset acquisition and as a result, we currently expect to incur approximately $4.8 billion in GAAP R&D expense, primarily related to in-process research and development.", "Turning to our strong balance sheet. During the quarter, we generated $1.4 billion in cash from operations. We ended the quarter with $24.3 billion in cash and marketable debt securities. We repaid $500 million of debt, paid cash dividends of $874 million and repurchased 19 million shares of stock for $1.3 billion. I want to note that we paid approximately $4.9 billion in cash upon closing of Forty Seven in April. Our strong balance sheet and disciplined allocation of capital has positioned us to continue to grow and build our business, despite current environment and associated risks. We remain very confident in the durability of our business and expect to generate significant operating cash flow during 2020.", "I'll turn now to COVID-19 and its impact on our business. Like others, we have anticipated that there could be a short-term financial impact to our company and to the sector as a whole. We continue to carefully review our results to assess the potential magnitude of that impact. Towards the end of the quarter end in April, we did begin to see some effects on our business, primarily as fewer patients access healthcare and the number of new starts in HCV and HIV prevention began to slow. However, to-date, the overall effect on our business has been modest, and it remains unclear what the ultimate impact will be. Given this significant uncertainty regarding the duration and magnitude of the COVID-19 pandemic, we are actively planning for a number of scenarios. And we'd like to focus on our base case assumptions today, which we are making from data drawn from a number of sources, including epidemiologist, economists and public health officials.", "First, these base case assumptions suggest the pandemic will peak between March and July. We would point a recent data from Johns Hopkins, which show trends reflecting a slowing of the rate of new cases since late March in the United States and a declining number of new cases in some critically affected regions of the world. Second, if the virus returns in the fall or winter, the impact will be lessened due to preparedness and hopefully the emergence of therapeutics, including potentially our own remdesivir. Third, the global economy will begin in recovery late in Q2 and a return to the pre-COVID dynamics will be under way by year end. We have of course considered external views that anticipate more or and less favorable scenarios, but we believe this base case provides the best foundation at this time to plan in this uncertain situation.", "Let me share a few qualitative perspectives on potential business implications of this scenario. Please bear in mind the forward-looking statement disclosures we shared at the beginning of the call. I'd also like to highlight again that we have added significant commentary throughout the investor presentation that posted on our website and we would encourage you to review those materials. There are three key takeaways from our perspective. First, we had a very strong quarter. Second, to-date the impact on our business has been modest. And third, we remain very confident in our long-term outlook.", "That said, on the commercial side, driven by lessened healthcare provider access and fewer patient visits, we may see revenues adversely impacted in Q2 and potentially beyond. This would likely be different across our franchises with our HCV franchise disproportionately affected due to the acute care nature of that therapy. We believe that the majority of any revenue decrease in HCV revenue, due to the pandemic could be recouped in a warehousing type effect later in 2020 or into 2021.", "In HIV, early signal suggested switches both for the treatment and prevention patients may be impacted by COVID-19, as people differ healthcare visits. Specifically in April, we are observing reductions in Descovy for PrEP initiations and lower switch volume. PrEP refills may also be affected, but it's still too early to fully understand any trends here. In contrast, our HIV treatment business is less likely to be significantly impacted as we believe patients will continue to prioritize, refilling their prescriptions and access their physicians through telemedicine. In cell therapy, reduced access to authorized treatment centers could unfortunately result in critically ill patients having access challenges, which would impact the business.", "Turning to clinical development. Like many others in our industry, we are pausing enrollment for most trials. The exception of this is studies, where patient outcomes are critically impacted such as our -- such as trials of our HIV capsid inhibitor, in heavily pretreated individuals, who have few other treatment options and some of our type programs that have enrolled patients with cancer who are critically ill. Enrollment in these studies is at the discretion of the investigators. Overall, we expect reduced clinical development expenses in the short term. In addition, the dynamic could lead to delays and potential approvals for pipeline assets over the longer run. With challenge brings opportunity to health and as Dan described earlier, we are excited by emerging results in remdesivir as a potential therapy for COVID-19.", "As we ramp up further development and manufacturing of remdesivir, we will incur additional costs beyond those forecast at the beginning of the year. The magnitude of this investment is dependent on the continued evolution of the data, the duration of the pandemic and other factors. The potential range of this investment for 2020 is upto $1 billion in the accounting treatment of this investment is dependent upon a number of factor, including potential regulatory approvals.", "We are authorized by regulator authorities Gilead will focus on making remdesivir both accessible and affordable to governments and patients around the world. Given the continued uncertainty in the trajectory of the pandemic and in remdesivir clinical data, it's premature to define what the right post donation business model is to create a sustainable long-term supply for global needs. In the context of a strong underlying business in Q1 results, we will continue to monitor the situation and expect to provide additional insights and outlook on our Q2 earnings call.", "I'd like to close by thanking our team for their extraordinary efforts and for delivering a very strong first quarter during these challenging time.", "We can now turn the call over to Q&A. Operator?" ] } ]
[ { "name": "Operator", "speech": [ "Thank you. [Operator Instructions] And our first question comes from the line of Michael Yee with Jefferies." ] }, { "name": "Michael Yee", "speech": [ "[Technical Issues] and Dan, if you're there, [Technical Issues]." ] }, { "name": "Daniel O'Day", "speech": [ "Yeah, I'm back." ] }, { "name": "Michael Yee", "speech": [ "Yeah. Hi, Dan. So my question is for you guys on remdesivir as it relates to [Technical Issues] can you just describe the inputs and how to think about what revenue to the positive remdesivir could have this year? What have been the impacts on that inputs into that? On expenses, you guys obviously don't expense guidance, you kind of walked through that. You described the approach dollars for remdesivir. Maybe just walk through the inputs there and how to think about why would it be on the lower end and comment on that because it makes the model. Yeah, so talk to that [Technical Issues] Thanks." ] }, { "name": "Daniel O'Day", "speech": [ "Thanks, Michael. Appreciate the question and sorry, guys, that I got cut off there before. Thanks, Andy for picking up. The only thing, I want to conclude with this my comments is probably the most important comment is that, really thank the colleagues throughout Gilead, that are working remdesivir and non-remdesivir projects are like, they've really kept the momentum going in quarter one and I'm humbled and proud to be working with them.", "So Michael, thank you for the call. On the revenue side, it is just as Andy mentioned also, and I mentioned it's too premature. There is a lot of moving parts right now. Our focus will be on making sure we come up with a sustainable model that allows us to provide remdesivir to patients around the globe that -- is intent on providing access and affordability. We're just now going through the clinical data, the demand scenarios, the regulatory approvals, all these things are essential for us to inputs into our plan about how that will work post the donation. So we can't really give more insight into that at this stage, but certainly when we can, we will.", "On the expense side, Andy, I mean, obviously you had mentioned already that up to $1 billion and I'm clear on how the accounting will occur, but perhaps you want to add something else to Michael's question?" ] }, { "name": "Andrew Dickinson", "speech": [ "Sure, Michael. At this point, it's too early to tell you where that's going to fall in the P&L during number of scenarios. It could -- those expenses could fall into cost of goods sold. As you know, there could be R&D expenses and in some scenarios, a portion of them could also be SG&A expenses. So at a high level, the expenses that we're referencing as you would expect come from manufacturing predominantly into a lesser extent clinical trials. And I think that's our best -- best good faith estimate at this time based on what we know in terms of the expenses that we see, as we ramp up over the year and we'll do everything we can to provide more color and commentary in particular on our Q2 earnings call." ] }, { "name": "Michael Yee", "speech": [ "I appreciate it. Up $1 billion of expenses and not knowing the revenue. It's an interesting position. Appreciate it. Thank you." ] }, { "name": "Daniel O'Day", "speech": [ "Thanks, Michael. We have the next question please." ] }, { "name": "Operator", "speech": [ "Certainly, our next question comes from the line of Cory Kasimov with JP Morgan." ] }, { "name": "Cory Kasimov", "speech": [ "Hey. Good afternoon, guys. Thank you for taking my question. Wanted to also ask on remdesivir, no surprise. I was wondering if you could talk about the formulation work that's under way to potentially develop an oral and/or an inhaled version of the product like, how far along might you be in this front and when can we expect to see something more there?" ] }, { "name": "Daniel O'Day", "speech": [ "Yeah. Thanks, Cory. I'll start out and maybe others on the call who want to add, but our focus as you can imagine, since January has been on ramping up the supply, particularly, so that we have a lyophilized [Phonetic] version that's appropriate for intravenous administration, the clinical program all of that, so that's really where we've been. At the same time though we have had a team just as with everything with this program, including the supply. We've had teams that have been really since the very day one in January been focusing on success. And so if successful, what -- how else could we potentially develop this medicine. I think that's been taken into account from the totality of the clinical trial program, looking at both critical, severe and moderate patients.", "But likewise, we've done the same thing with other alternative delivery mechanisms, presuming success that might make it more convenient for patients or allowed us to broaden the patient groups that could benefit from a successful antiviral. And that work is -- as you can imagine, still early, but we can say a couple of things. It's not -- this particular medicine, because it's heavily first pass metabolized in the liver, is not really appropriate as an oral formulation. We've known that for years, probably a decade. But we are looking into things like subcutaneous formulation and potentially inhaled formulations.", "And although it's too premature to give you timelines on that, rest assured that we are -- we've been actively working on those. And as soon as we can give some timelines, we will, to see now, particularly because of the efficacy that we've seen this week. We'll continue to pursue those with a great sense of urgency. But timeline is a little premature, just know that we've been working on it now for several months. I don't know Merdad, if you want to add anything? You're, OK. Good. Merdad, is OK. Okay, Cory. I know you need more, but we'll give you more as soon as we can." ] }, { "name": "Cory Kasimov", "speech": [ "No, no. Fair enough. I appreciate you answering the question and good luck with continued progress there." ] }, { "name": "Daniel O'Day", "speech": [ "Thank you, Cory." ] }, { "name": "Operator", "speech": [ "Thank you. And our next question comes from the line of Brian Abrahams with RBC Capital Markets." ] }, { "name": "Brian Abrahams", "speech": [ "Hey, guys. Thanks for taking my question. Two questions on remdesivir, if I could and I appreciate all the work that you guys are doing to bring this treatment to patients. First off, on the NIAID study, can you give us any sense of the proportion of patients who were involved in the interim? Is there any additional update now we should be expecting that could be a gating factor to availability and your level of confidence that differences in baseline risk factors, didn't influence those results as may have happened in the China study. And then just secondly related to supply, any particular subsets of patients across the studies, where you may be seeing the most optimal benefits we might consider working with regulators to direct the AGEN2, while you're scaling up? Thanks." ] }, { "name": "Daniel O'Day", "speech": [ "Yeah. Thanks, Brian. Sorry, just to be clear on your second one related to supply. You said, is there any subset of patients? Can you just complete that one more time?" ] }, { "name": "Brian Abrahams", "speech": [ "Yeah. Any subset of patients where you might be seeing more benefits -- more optimal benefits across the study, where you might consider working with regulators to try and direct the agent to initially, as supply get [Speech Overlap]." ] }, { "name": "Daniel O'Day", "speech": [ "In terms of like an allocation. Yeah, with limited allocation or limited. Yeah. Got it. Got it. Okay. I'm going to turn it over to Merdad and I'll let Merdad take a stab at both of us please." ] }, { "name": "Merdad Parsey", "speech": [ "Hi, Brian. On the first question, I -- this is Merdad. On the first question, we have not seen a lot of the baseline demography in the sorts of data that would help in terms of answering your question on the NIAID study. So I think, we're all going to have to wait for those data to get published and yet put out for us all to review. So I think that's pending and we'll look for that to come out.", "In terms of patient subsets, I think our data and if you look at who's been enrolled in the trials overall, I think we're clearly looking at the hospitalized patient population. And we're looking at patients who are requiring supplemental oxygen is the primary population that we're after, including those that may either become ventilator or may start out mechanically ventilated. Certainly our data support that from our open-label trials. The NIAID study enrolled that breadth of patients. But we have not seen subgroup analysis of the different, different patient populations to give you clarity there. But we believe it will be in that fairly broad population early on." ] }, { "name": "Brian Abrahams", "speech": [ "Got it. Thanks for that." ] }, { "name": "Daniel O'Day", "speech": [ "Thanks, Brian." ] }, { "name": "Operator", "speech": [ "Thank you. And our next question comes from the line of Geoff Meacham with Bank of America." ] }, { "name": "Geoff Meacham", "speech": [ "Good afternoon, guys. I just want to say great job on the whole -- to the whole team really for the remdesivir development. A couple of points here, on COVID-19, have you guys looked at other nukes for earlier stage patients? Just thinking about [Indecipherable] or I know you guys have a lot probably that is there that could be more applicable to, it's a mild to moderate patients. And then on remdesivir access, is there a model to license out IP and our manufacturing. I'm just thinking about how to accelerate perhaps broader access outside the US. Thank you." ] }, { "name": "Daniel O'Day", "speech": [ "Yeah. Thanks so much, Geoff for the thoughts, everybody at Gilead will appreciate your sentiments. Let's start with COVID and the other nukes, I didn't know other whether Merdad or Diana, you want to handle that? Not sure, how you going to." ] }, { "name": "Merdad Parsey", "speech": [ "Sure. I think right now, this is Merdad again, Geoff. Thanks for the question. Right now, we do believe that remdesivir is the best molecule has the best potency against the coronavirus. Anything we do we look at and you know both we and others have been looking for other molecules that could have potency here. But remdesivir is certainly the most potent molecule that we have and that's been our focus. We'll certainly keep looking there. One of the reasons, we are focused on looking at alternative formulations for Remdesivir is to address the question that you asked, which is, how can we get to other patient populations, who may benefit from the drug as outpatients for example. And I think in the short run, I believe that, that's going to be the best -- the short to medium term, I think that will be the best approach for us to go. And then I think your second question was about manufacturing right?" ] }, { "name": "Geoff Meacham", "speech": [ "Yeah." ] }, { "name": "Daniel O'Day", "speech": [ "I mean, Andy, maybe you want to -- do you want to take this question as well and because you're leading a group on this." ] }, { "name": "Andrew Dickinson", "speech": [ "Yeah. And I'd be happy too. Hi, Geoff. Thanks for your comments. Look, on the manufacturing side, I'd say a couple of things at a high level. Is it again, our primary focus is on providing access to patients around the world. So just like we did with our HIV medicines and HCV medicines, we are deeply focused on this. We are -- we have two separate work streams, one is working on our internal supply chain and making sure that we have a robust supply of starting materials intermediates and a strong manufacturing consortium with companies around the world. You've seen some of the references to that and Dan's CEO letters and I would expect that will provide some additional information over the coming weeks and months.", "We do have a second work stream where we are in discussions with large sophisticated companies around the globe, exploring the potential for other companies to help establish separate end-to-end manufacturing supply chains. The difficulty there is, you might imagine is, given the scarcity of some of the starting materials. We want to make sure that we don't do anything to impact our supply chain given that, that is the quickest route be getting product to patients who needed all around the world. But we are looking at alternatives. It's too early to give you any specific guidance or to tell you where we're going to land on it. But we are working with a number of companies around the world that you and others know well to see what we can do together and if there is an opportunity to benefit patients in that way. So I'll leave it at that and then you see." ] }, { "name": "Daniel O'Day", "speech": [ "Yeah. That's great Andy and appreciate your leadership there with your Business Development Head on working with manufacturing. I would just add that we've been a student of other small molecules in this type of setting whether it's Tamiflu in the past and some of -- in terms of some of the scale up and stockpiling that occurred there. Our students of our own work if you like within our HIV portfolio between the developed and the developing world. So we're putting all that knowledge to work as we think about moving fast and wide in terms of our ability to produce supply but also thinking very thoughtfully about a global footprint here, which would allow for this to -- as Andy, said have different geographic representation, which we think is going to be really important. So more to come on that, but we've had teams really focused on that day and night for the past several months, just to give you an idea of that. Thanks, Geoff." ] }, { "name": "Geoff Meacham", "speech": [ "Okay. Thanks." ] }, { "name": "Operator", "speech": [ "Thank you. And our next question comes from the line of Geoffrey Porges with SVB Leerink." ] }, { "name": "Geoffrey Porges", "speech": [ "Thank you very much and I can't help echo the comments and appreciate all the great communication as well from down on down. So on remdesivir, I'll ask a controversial question that's no surprise. But Dan, Gilead has generated attractive returns for our investors and effective return on capital from treating hepatitis C and potentially nearly eliminating hepatitis C from treating HIV and turning it into a chronic disease and building a really important global stockpile, an anti-viral for influenza. So what's special about COVID? Should we assume that the capital returns and the profitability for providing a global treatment for COVID long-term, after the first 200,000 or 300,000 courses are provided donation basis. Should we assume the returns are going to be similar to the returns that you've generate in other parts of the business? And then just quickly, can you give us an update on filgotinib and can you launch this on a virtual basis or do you expect to be out of the virtual basis by the time that approval comes?" ] }, { "name": "Daniel O'Day", "speech": [ "Terrific. So, Johanna, I'll let you handle the filgotinib, but let me start with your first question, Geoff, and thanks again. And obviously, we are conscious of the fact that this is unique, and this is different. You mentioned some parallels to HIV, HCV even Tamiflu. But there's been no other time like this in the history of the planet that any of us been a lot. In terms of the far-reaching effects of this pandemic, both medically from the patient perspective, most importantly but also economically. And so I think there is no guide book out there, there is no rule book out there, other than that we need to be very thoughtful about how we can make sure we provide access of our medicine to patients around the globe.", "And do that in a sustainable way for the company, for US shareholders and we acknowledge that. And so point's well taken and I would -- I guess the short answer to your question is, I don't think there is a precedent for this. And so, we understand that our responsibility and we understand our responsibility to a variety of different audiences as we approach this. So we'll be working back with you and we will certainly be getting feedback from different individuals as we evolve this and as we understand more data around this. But rest assured, we understand our responsibility.", "With that I'm going to turn it over to Johanna, pleased to talk a little bit about filgotinib." ] }, { "name": "Johanna Mercier", "speech": [ "Sure. So, Geoffrey. I think just a quick update on filgo. We basically have hired all of our home office personnel, both in the commercial, medical standpoint. We've hired our sales leadership, field leadership as well and we're monitoring the situation really closely, to be honest with you, because nobody really knows when it ends or what's the new normal and we're not begin. And so we're just kind of monitoring that and planning for success to be honest with you, to make sure that we are ready for launch for the second half of 2020, across all of the market where we will get -- we hope to get regulatory approval with the US, Japan, as well as Europe toward the end of this year.", "I think from a virtual launch standpoint, I think those are considerations that we're looking at in scenario planning. And we haven't made a decision, obviously that will be linked to the timing of this pandemic. Having said that, I will also tell you that a lot of our teams are doing virtual right now. Many of the markets are doing remote detailing, virtual speaker programs, etc., and working through this environment despite obviously the offices and patients not being open at this point in time. So we're working through all that and looking at the different scenarios. But I think we need to know a little bit more information on the timing of this pandemic and how that plays out toward the end of this year." ] }, { "name": "Geoffrey Porges", "speech": [ "Great. Thanks very much for the answers." ] }, { "name": "Daniel O'Day", "speech": [ "Thank you, Geoff." ] }, { "name": "Operator", "speech": [ "Thank you. And our next question comes from the line of Matthew Harrison with Morgan Stanley." ] }, { "name": "Matthew Harrison", "speech": [ "Great. Good evening. Thanks for taking the questions and thanks for all your work with remdesivir. I'm going to ask you on HIV. One, can you just talk a little bit about PrEP conversion with Descovy. I think you said you're at 38%, which is actually fairly close to the target you guys were talking about. Do you think, you can do better than that or not this year. And then I also noticed, in the back of the slides, you were talking about a long-acting bictegravir that you're putting in the clinical studies maybe you could comment on that. Thanks" ] }, { "name": "Daniel O'Day", "speech": [ "Terrific. Thank you so much Matthew for the comments. So, Johanna, yeah, why don't you start and perhaps Diana can add on the development side." ] }, { "name": "Johanna Mercier", "speech": [ "Okay. Great. Thanks for the question, Matt. So HIV overall businesses, of course, another quarter, solid quarter again this year. It's the 8th consecutive quarter of double-digit growth and that obviously driven by both the treatment and the PrEP business. So your question specific to Descovy, yeah, so we just hit 38% and so tracking exactly to our plan, right. We had said anywhere between 40% to 45% toward the end of this year. So we feel confident with that number.", "Obviously, as Andy mentioned in his opening comments, there has been a little bit of a slowdown from a switch standpoint in the PrEP market for obvious reasons, because patients are not going to the physician's offices. But it's modest thus far and we think a lot of those will be able to recoup toward the end of this year when a pandemic got lift. So we feel, still very confident that, yeah, we think we're going to be in the range of the 40%, 45% that we had originally set out and maybe even, if all goes well, and we can get out of pandemic a little bit earlier maybe a little bit north of that.", "So Diana, maybe to address the long acting?" ] }, { "name": "Diana Brainard", "speech": [ "I'd be happy to. Hi, Matt. So, as you probably know, we're really pursuing multiple short-term goals for developing a partner for our capsid inhibitor. We are looking at molecules across different classes and part of that is looking at the integrase [Phonetic] inhibitor class and we've got really what's the best in class ideal integrase inhibitor right now with bictegravir. And so we've -- one of our efforts has been in formulating that such that it could be a long-acting injectable and potential sort of first generation partner for our capsid inhibitor. We've made a lot of progress as you know, we've got great formulation team here. And we're on the verge of getting that into the clinic now most Phase 1 centers globally really have been shut down or pause, so the timing there is a little bit uncertain, but we're ready and helping to have data by the end of the year." ] }, { "name": "Daniel O'Day", "speech": [ "Right. Thank you, Diana. So why don't we go to the next question. Thanks, Matt." ] }, { "name": "Operator", "speech": [ "Our next question comes from the line of Umer Raffat with Evercore." ] }, { "name": "Umer Raffat", "speech": [ "Hi. Thanks so much for taking my question. Dan, we really admired Gilead's efforts during the pandemic and the drug donation etc. But as we go beyond that, it does seem like there will be a commercial business in the broader COVID landscape. And I don't want to peg you to $1 number. But I do want to ask this, do you envision Gilead's product offerings for COVID being beyond remdesivir. For example, PI combinations and/or even partnering with the vaccine companies of sorts. I'm just trying to understand how you envision this category for Gilead, if I may.", "And Merdad, if I may ask you a quick two part question. First, do you have a certain long concentration in mind that you're targeting. And is that much less than the 20 micro-molecules those laid it out in the New England Journal paper. And do we have any data from human on what long concentrations are we actually seeing with remdesivir, with the dose that's in the clinic. Thank you so much." ] }, { "name": "Daniel O'Day", "speech": [ "Thank you, Umer. Thank you for your comments. Thank you for your thoughtful work. Yeah. Getting back to remdesivir, and how do we see this playing out over time. Again, I'm going to have to come back to some of the basis of what I said before, which is we really need some time now to reflect upon a very volatile changing situation to determine both on a clinical side, regulatory side, pandemic side, epidemiology. What's the right sustainable model is, rest assured that we will come back to you as soon as we can digest that and as soon as actually a little bit more time passes, which was also one of the important reasons for the donation to allow us to attain more information as well. What that's sustainable plan and model is.", "But I'll just make a couple of comments on what you said and results have echoed by Dr. Fauci, yesterday, which is with NIH [Phonetic] to be results and the highly statistically significant reduction in time to recovery. This now changes the landscape if you like for drug development within COVID-19. Being that one has to now think about comparing to remdesivir and/or looking at adding to remdesivir, which I think is exactly what the NIH is going to do now.", "And I'm sure all of our collaborators within the drug development space, we have been working with them, we're going to continue to work with them, and the most thoughtful hypotheses around how we might be consider just as one reflects upon the HIV building decades ago that remdesivir become kind of the base therapy and one looks to try to improve symptomatology improvement, mortality improvement, expanding patient populations. And so that is yet another factor that will go into how we determine -- how best to create a sustainable solution for remdesivir. But clearly, all those things we have been thinking about and now we have to accelerate, now that we have these trial results, so more to come on that.", "I will have Merdad you answer the lung question, if you could please, Merdad?" ] }, { "name": "Merdad Parsey", "speech": [ "Yeah. Thanks, Dan. Hi, Umer. So what I would say is the concentration that we're looking for, as you know, we think our EC50 in human cells is in the 10s of nanomolar range. And we know our serum concentration gets in the micromolar range. And so we should be more than adequately covered or by achieving those levels with the current dosing paradigm that we have probably by an order of magnitude or two. Certainly, in the serum and based on model data in non-human primates as well as mice, we see more than adequate concentrations getting into the lung of those animals and in vivo efficacy in those animals. And I think the clinical benefits, we're seeing suggest that that's exactly what, what's happening in humans as well. So I think, we're pretty comfortable with where we are in terms of both dosing and exposure, including in the lung." ] }, { "name": "Umer Raffat", "speech": [ "Thank you very much." ] }, { "name": "Daniel O'Day", "speech": [ "Thank you, Umer. Okay. We have the next question please." ] }, { "name": "Operator", "speech": [ "Our next question comes from the line of Alethia Young with Cantor Fitzgerald." ] }, { "name": "Alethia Young", "speech": [ "Hey, guys. Thanks for taking my question and thank you for your contribution and solving the world's problem. Maybe just one and half for me. Were you surprised, I guess with the severe kind of working as it did with an anti-retroviral that you kind of think that you might need to have people kind of earlier. And the virus for it to work and do you think it works better there. And then the second question is just a little bit around HIV. Are you seeing buying patterns changing in the public markets like the Medicaid, the presence, etc., etc. Thanks." ] }, { "name": "Daniel O'Day", "speech": [ "Thanks a lot, Alethia, again for your comments. I'm going to turn the first question over to Merdad and the second one over to Johanna. But just as I do on your first question. And I think Merdad can fill in the details here. But there's been a surprising consistency across all the different data elements in our clinical program, from compassionate use to interrogating what we know about the China trial to the severe trial to the NIAID trial. And I think that is maybe not something that's completely well understood out there and I think Merdad as a part of your response. I think it'd be helpful for you to reflect upon that as well. If it's OK." ] }, { "name": "Merdad Parsey", "speech": [ "Yeah. I know, of course, I think Alethia, we all -- we're using the parallel constructive influenza for our thinking around remdesivir, right, which was -- you got to get in really early given the viral kinetics in influenza and getting into a probably won't have much of an impact. And I remember in investor call a couple of months ago, where I said that as well and that is certainly our expectation. However the wildcard here and I think we're still learning is what are the viral kinetics in patients with this virus. How long does that last and how quickly does it go up, and how quickly can we have an impact on it.", "So I think the data or the data essentially, we are seeing efficacy across both patient populations. But also across trials that are really all tracking in the same direction as Dan alluded to. So even if you look at the China data, the hazard ratios for improvement are consistently positive. The study was under powered and I think the hazard ratios will probably see from the NIAID study, you're going to be in the same ballpark. But with the an appropriate sample size, they're highly statistically significant. Same -- similarly, I think when we look at the mortality data, when we look at all of those different factors. This virus seems to be behaving differently. remdesivir seems to be having efficacy and relatively broad patient population and so I think we're learning as we go.", "We'll learn more as more data are generated, right? We have our moderate data coming up, where it will be -- we'll be looking at it and even less severely ill patient population. So, there'll be more data coming out in that population that may add to our knowledge base here to understand the spectrum. And as we talked about earlier, understanding the efficacy in the subgroups in the NIAID study will be really interesting in this and we don't have that information yet. So I think all of those data will contribute to our overall understanding of -- do you -- how early do you need to be in, to patients who have symptoms for less time do better. Those are certainly the trends, but there certainly seems to be benefit even in patients who have longer duration of symptoms, right now.", "Maybe I'll hand it out to Johanna for the HIV question." ] }, { "name": "Johanna Mercier", "speech": [ "Yeah. Thanks, Merdad. So Alethia, just a couple of things. We have a couple of moving pieces in the first quarter for HIV. So I just want to -- because it's not just one piece that's making the difference here. And so the first one is obviously the seasonal inventory, right. There's a Q4 load up and then Q1 draw-down. So that definitely happening in Q1. Then, we also had toward late March like I'm sure many did as well. The prescription number of days per prescription rise and inventories rise toward end of March. So had a bit of a mix of those two things. And specifically to government channels that you're acting the buying pattern. We do normally see in Q1, a little bit more of a higher mix toward government channels in the first quarter, and that obviously negatively impacts our payer mix. So that is definitely happening in the first of this year." ] }, { "name": "Daniel O'Day", "speech": [ "Right. Thank you, Johanna. Thank you, Alethia. Can we have the next question please." ] }, { "name": "Operator", "speech": [ "Yes. Our next question comes from the line of Mohit Bansal with Citigroup." ] }, { "name": "Mohit Bansal", "speech": [ "Great. Thanks for taking my question. And I would also add my appreciation for your efforts against COVID-19. A quick one from my side, if you can help me. If you can -- can you please update us on your collaboration programs Galapagos timelines at this point, both for IPF as well as osteoarthritis. And specifically on osteoarthritis program, how important is it for Gilead to see the improved -- see improvement in pain when we see the data for you to take a decision to opt in there. Thank you." ] }, { "name": "Daniel O'Day", "speech": [ "Thank you. Mohit. I'm going to turn it over to Merdad. Thank you, Merdad." ] }, { "name": "Merdad Parsey", "speech": [ "Yeah. Thanks for the question, Mohit. So with the IPF program, there is a scheduled interim analysis that will be coming up early next year, and we think things will stay on track again, I'll put some error bars around the pandemic. But I don't think that should be impacted at least today. So that will be something that will be clearly looking forward to and will be important to how we proceed there. In terms of the osteoarthritis, it's a great question, I think while seeing structural improvement is going to be really important and interesting, certainly thus far the regulatory guidance has included, looking at symptoms like pain for improvement. So we can push on that.", "Obviously, if we see structural improvement and we haven't been powered for example for pain, then we'll have to look at that and think about what the implications of that are and discuss it with the regulators. So I think what we'll be looking for is directionality on all the endpoints that we will be measuring to make the smart decision in terms of moving forward with that program." ] }, { "name": "Mohit Bansal", "speech": [ "Okay. Thank you." ] }, { "name": "Daniel O'Day", "speech": [ "Thanks, Mohit. So let's go to the next question, please." ] }, { "name": "Operator", "speech": [ "Our next question comes from the line of Robyn Karnauskas with SunTrust." ] }, { "name": "Robyn Karnauskas", "speech": [ "Hi, guys. Thanks for taking my questions. And again, great work on all the things that you're doing to help us with COVID. So there's a lot of talk about remdesivir being approved for emergency use. And can you just clarify, does that mean at that point in time versus now or its compassionate use you actually could charge for the drug. And when you say affordable, does that mean positive margin for the product? And lastly, from a sales point of view, help me understand what would it take for some of these drugs are -- your drug on top of other drugs to work in a ventilator patient, do you stick theoretically? Thank you." ] }, { "name": "Daniel O'Day", "speech": [ "Great. So I'll turn the ventilator question over to Merdad and just a second, but thanks so clarify the EUA. So yes, I mean under emergency use authorization, one could charge for the product. We made a decision as you know to donate 1.5 billion files, which is the entirety of our supply through the early summer. And that's for a variety of uses, right. I mean that's for clinical trials, as one would expect not to charge for those of course compassionate use, EAP and other countries, but also available is that supply for regulatory approvals around the world. And we'll allocate accordingly and so as regulatory approvals come online. So yes, it is possible to charge.", "I would just say that our goal here is to get a full approval for remdesivir. We feel the data supports that and in EUA therefore is a step to really a more formalized approval. The reason the agency and we are talking about that is these are extraordinary times right. So weeks would make a difference to be able to get medicine to the patients by an acting in the EUA, if that's what the FDA chooses to do, prior to another form of approval. And so it's a step-wise approach which allows us to immediately address humanitarian need, while still pursuing all the aspects of a normal approval, which we are doing with the FDA. So I think that's probably the most important point.", "And again, I know Robyn and trust us, we will be answering your questions and the sustainable model for remdesivir in the future, in the near future. We just don't have the answers yet and we probably -- we deeply respect and appreciate the fact that when we get into millions of doses, we have to have a sustainable economic model that works here and that achieves access to -- affordability to patients around the world. So more to come on that. If I could turn it over to Merdad on the ventilated treatment approach." ] }, { "name": "Merdad Parsey", "speech": [ "Yeah, Robyn. Excellent question, thanks. The criticality of this comes down to a timing question, right? It really comes down to how long is viral replication ongoing in the lungs of patients and how quickly do patients deteriorate to needing mechanical ventilation. Certainly, what we are seeing is that patients are very, very rapidly deteriorating, some patients deteriorate rapidly well. And so, getting them antiviral therapy in that timeframe, where it seems that there is still viral replication going on, certainly seems to be benefiting those patients. And probably what's going on in this speculation on my part is, by limiting the viral replication, you're going to limit the inflammation, you're going to reduce the number of people who develop lung injury and you're going to get them off the ventilator faster.", "So the discharge rates that we're seeing where the people are being discharged four days earlier for example in the NIAID study, underlying that are patients who are de-escalating need for oxygenation. And that leads them to getting on [Indecipherable] more quickly. And I think there is a time element in all of this that I think is probably where were benefiting these patients. Certainly, if you talk about people who've been ventilated for a week or two weeks, there the question of whether an antiviral would be beneficial. I think seems more difficult to tie into what's going on. But again, it comes down to understanding the viral kinetics here and that's a work in progress, I think for all of us." ] }, { "name": "Robyn Karnauskas", "speech": [ "Thank you." ] }, { "name": "Daniel O'Day", "speech": [ "Thanks a lot, Robyn. Can we have the next question please?" ] }, { "name": "Operator", "speech": [ "Our next question comes from the line of Salim Syed with Mizuho." ] }, { "name": "Salim Syed", "speech": [ "Hey, guys. Thanks so much for the question. And I echo all my peers comments on the great work you guys have done on remdesivir. Dan, maybe just one for me, high-level question here around your involvement, maybe with folks in Washington, your discussions there. So obviously like biotech for some time has been about, from a Washington perspective, drug pricing and the rhetoric has been pretty negative. I'm wondering if the rhetoric has changed at all in your view, when you're dealing with folks there. How it's particularly changed given you guys are so key to this remdesivir and the solution to COVID19." ] }, { "name": "Daniel O'Day", "speech": [ "Yeah. Thanks, Salim. Yeah, these are unusual times for all of us. I'm sure all of your areas of interests, as well as ours. And so, what I can say is that, I think people have come together in a variety of ways and certainly that's also occurred to a certain degree in Washington. And I have spend a decent amount of time in Washington over the past several months, certainly before the shelves are in place. And I think even then, there is some change in the rhetoric. I think for highly innovative research-based companies that have immediately kind of shifted their efforts to solutions in the coronavirus. It's pretty impressive actually to many of the peers in the industry that I stay in very close touch with, have spared no expense to kind of pivot and shift.", "So I think at the end of the day, I think this will certainly help the industry's reputation. I think the ability to solve a human crisis like this, because of the decades of investment and the at-risk investment that's done by so many companies. People I think will -- and the general public will see that and whether that's treatment different types of treatments or vaccines. I think that it will be the case. But certainly, to your point, I think the tone is different in Washington. I think people are very appreciative and concerned about finding solutions here. And it's brought us all together, which I think is a good thing.", "I'm not suggesting that, there won't continue to be focus and pressure on drug pricing, of course, there will be. And we continue to work appropriately to make sure that in particular, the patients that are bearing the brunt sometimes of some of the pharmaceutical pricing that legislation has put into place that supports that. And improves that for patients and that we lean in as an industry and as a company to give more that flows through to patients. So all of those principles, I think still apply. But it's been done now in a way, where we can have an appreciation for the innovation the industry brings.", "So more to come and a lot's of lot still to happen this year with the election coming up and with other things. But I think from a Gilead perspective we stay focused on innovative medicines and making sure we have access programs on leaning into legislation that supports the innovative industry and that supports reducing patient out of pocket costs and that will be our focus accordingly, Salim, so hope that gives a little bit of an insight." ] }, { "name": "Salim Syed", "speech": [ "Super helpful, thanks. Thanks, Dan." ] }, { "name": "Daniel O'Day", "speech": [ "Thank you. Can we have the next question please?" ] }, { "name": "Operator", "speech": [ "Thank you. Our next question comes from the line of Tyler Van Buren with Piper Sandler." ] }, { "name": "Tyler Van Buren", "speech": [ "Hey. Good afternoon. Thanks for everything that you're doing and have a couple of more remdesivir questions, of course. Given your experience -- your expertise in viral infections and all the natural history that you guys are collecting in real time. Wanted to ask you about your best -- latest thoughts on the nature of COVID-19 recurrence. Your base case assumes a peak potentially by July, return in the fall and winter, but a lowered impact. So is it possible to provide a rough quantification of what that lower impact might be? And then also and subsequent years, is this something that you would expect in that base case to peter out or to be with us for potentially the next decade or two.", "And then the second question is just following up on your earlier comments on FDA interactions and potential pathways to approval, which was helpful. Have you guys had labeling discussions? Is there any color you could provide there?" ] }, { "name": "Daniel O'Day", "speech": [ "On remdesivir?" ] }, { "name": "Tyler Van Buren", "speech": [ "Yeah." ] }, { "name": "Daniel O'Day", "speech": [ "Yeah. Okay. Sure. Thanks, Tyler again for the comments and I might ask if Andy and Merdad want to comment on the first question. Let me start with the second. So yeah, we've been in constant dialog with the agency on remdesivir. I just have to really also say how thankful we are for the FDA and other members of the government the coronavirus task force that have really made themselves available, really literally all the time, when we need them and vice versa so it's been a very good collaborative relationship.", "In terms of remdesivir, and the interactions with the FDA, I mean, we have been working with them on the submission. They've been open to receiving parts of the submission, which has been very helpful under a normal process, plus is the whole EUA process that kind of goes on top of that. So yes, the answer is and you can imagine that obviously -- that's been going on for weeks and actually a couple of months now. But in the past 48 hours, it's increasing essentially. So we are -- and the team is in constant kind of Information Exchange with the agency right now and they're getting information from us, obviously from NIH and the NIAID trial and there's a big sense of urgency here. I think FDA understands the importance of reacting quickly to this. And so it's intense right now and we think the FDA will move quite quickly on the decision -- on the labeling side.", "So back to the lower impact in the base case, I don't know Merdad from a scientific perspective or Andy, if you want to provide any other -- I think we don't have a crystal ball I guess.I would say," ] }, { "name": "Merdad Parsey", "speech": [ "Yeah, I think, as you know, Tyler, we are as much a consumer as others. I think we are obviously our data, our snapshot into what's going on. But we use for our modeling, we use the external epidemiology data and use that right now to get the broader picture. So I don't think we have any unique insights today that don't rely on the same sources that everyone else. So that's I think where we are, obviously as we capture more data and maybe that will change. But today I think that's where we are.", "And I'll just echo what Dan said, this has been an unprecedented time in terms of our interactions with the regulators, both here in the US as well as outside the US. It's been really impressive and truly collaborative, working with NIH and the FDA in parallel over the past couple of months. We talk constantly and the same is true with the EMA, same is true with Japan. We're talking to all the regulators in parallel. So it's been a pretty unique situation and I think everyone understands the gravity, so that's been very helpful in moving forward collaboratively." ] }, { "name": "Daniel O'Day", "speech": [ "Thanks, Merdad." ] }, { "name": "Tyler Van Buren", "speech": [ "Thank you very much for taking the questions." ] }, { "name": "Daniel O'Day", "speech": [ "Yeah. Thanks, Tyler. Appreciate it. So, we have time for one last question. Operator, we can have the last question that would be terrific." ] }, { "name": "Operator", "speech": [ "Our last question comes from the line of Phil Nadeau with Cowen & Company." ] }, { "name": "Phil Nadeau", "speech": [ "Good afternoon. Thanks for fitting me in. And let me add my appreciation for your diligence in attacking COVID. Just two more questions on remdesivir. The first is on the upcoming data from the simple trial, the model trial due in May. Can you remind us how the enrollment criteria endpoint definitions differed between the NIAID trial and that upcoming dataset in differ should we expect similar data or are there notable differences? And then second, just a follow-up question on Tyler's, on the FDA approval pathway, Dan your answered to Taylor's question suggests that you may not need any more data to get a formal FDA approval, the NIAID trial might be sufficient. Is that your current understanding of your FDA dialog?" ] }, { "name": "Daniel O'Day", "speech": [ "Yeah. I'll let Merdad also discuss. So yeah, I'm just -- look the discussions are still ongoing in terms of what's required for formal approval. But I meant to infer earlier is that the NIAID data or demonstrate safety and efficacy at a highly statistical level, right, which is usually the barrier for a full approval. So that's what we're working with them on and I don't want to get ahead of the agency on that, if that's, OK. So, but again I do believe that there is most likely kind of a two-step process, the potentially in EUA being granted and then moving on to the full approval. Having said that, can I turn to Merdad or Diana? It's Merdad, OK, on the first question." ] }, { "name": "Merdad Parsey", "speech": [ "Yeah, I was actually going to see if Diana wanted to answer that question." ] }, { "name": "Daniel O'Day", "speech": [ "Okay. Yeah. That's great. Diana. Thank you." ] }, { "name": "Diana Brainard", "speech": [ "Sure, OK. Yeah, so in terms of endpoints, the NIAID study looked at time to clinical recovery. You said the [Indecipherable] retinal scale and the ordinal scale is really tracking for most of the major clinical trials right now, but as our understanding of the disease has evolved. The types of endpoints using that scale has evolved. And so NIAID changed to time to clinical recovery, which basically means no longer requiring medical care within the hospital getting off of oxygen or largest charge. In our moderate study, we're looking -- we're using the ordinal scale as well. But we're looking at the day 11 distribution along that ordinal scale.", "So similar to what we did in our severe study, but looking at day 11 instead of day 14, recognizing that we're looking at our population that's less sick. So the moderate study is looking at patients who are hospitalized, but they're not hypoxic, they're not requiring oxygen. The NIAID study enrolled patients from starting there, but all the way through mechanical ventilation. So slightly different endpoints or slightly different patient populations and most importantly, really looking at different questions, we're looking at treatment duration, they're looking at primary safety and efficacy with the placebo control." ] }, { "name": "Phil Nadeau", "speech": [ "That's helpful. Thank you." ] }, { "name": "Daniel O'Day", "speech": [ "Thanks a lot, Phil. So with that, I think we'll turn the call over to Doug to close. But, let me just say, thank you very much to all of you and we really appreciate your trust and confidence in Gilead and we'll continue to do our best throughout what we do for patients and certainly for COVID-19. So with that Doug, do you have a last word?" ] }, { "name": "Douglas Maffei", "speech": [ "Thank you, Dan. And thank you all for joining us today. We appreciate your continued interest in Gilead and the team here looks forward to providing you with updates on our future progress." ] }, { "name": "Operator", "speech": [ "[Operator Closing Remarks]" ] } ]
GILD
2020-10-28
[ { "description": "Senior Director of Investor Relations", "name": "Doug Maffei", "position": "Executive" }, { "description": "Chairman and Chief Executive Officer", "name": "Dan O'Day", "position": "Executive" }, { "description": "Chief Commercial Officer", "name": "Johanna Mercier", "position": "Executive" }, { "description": "Chairman and Chief Executive Officer", "name": "Dan ODay", "position": "Executive" }, { "description": "Chief Medical Officer", "name": "Merdad Parsey", "position": "Executive" }, { "description": "Chief Financial Officer", "name": "Andy Dickinson", "position": "Executive" }, { "description": "Morgan Stanley -- Analyst", "name": "Matthew Harrison", "position": "Analyst" }, { "description": "Credit Suisse -- Analyst", "name": "Evan Seigerman", "position": "Analyst" }, { "description": "J.P. Morgan -- Analyst", "name": "Cory Kasimov", "position": "Analyst" }, { "description": "Jefferies -- Analyst", "name": "Michael Yee", "position": "Analyst" }, { "description": "SVB Leerink -- Analyst", "name": "Geoffrey Porges", "position": "Analyst" }, { "description": "Cantor Fitzgerald -- Analyst", "name": "Alethia Young", "position": "Analyst" }, { "description": "Barclays -- Analyst", "name": "Carter Gould", "position": "Analyst" }, { "description": "RBC Capital Markets -- Analyst", "name": "Brian Abrahams", "position": "Analyst" }, { "description": "Piper Sandler -- Analyst", "name": "Tyler Van Buren", "position": "Analyst" }, { "description": "Senior Vice President and Head of Virology Therapeutic Area", "name": "Diana Brainard", "position": "Executive" }, { "description": "Evercore ISI -- Analyst", "name": "Umer Raffat", "position": "Analyst" }, { "description": "Bank of America Merrill Lynch -- Analyst", "name": "Geoff Meacham", "position": "Analyst" } ]
[ { "name": "Operator", "speech": [ "Ladies and gentlemen, thank you for standing by, and welcome to the third-quarter 2020 Gilead sciences earnings conference call. [Operator instructions] Please be advised that today's conference is being recorded record. [Operator instructions] I would now like to hand the conference over to your speaker today to Douglas Maffei, senior director of investor relations. Thank you.", "Please go ahead, sir." ] }, { "name": "Doug Maffei", "speech": [ "Thank you, Dilem, and good afternoon, everyone. Just after market closed today, we issued a press release with earnings results for the third quarter of 2020. The press release and detailed slides are available on the Investors section of our website. The speakers on today's call will be Daniel O'Day, chairman and chief executive officer; Johanna Mercier, chief commercial officer; Merdad Parsey, chief medical officer; and Andrew Dickinson, chief financial officer.", "Also on the call and available for question-and-answer will be Christi Shaw, chief executive officer of Kite; and Diana Brainard, SVP and head of our virology therapeutic area. Before we begin with our prepared remarks, let me remind you that we will be making forward-looking statements, including risks and uncertainties related to the impact of the COVID-19 pandemic on Gilead business, financial conditions and results of operations; plans and expectations with regards to products, product candidates, corporate strategy, financial projections and the use of capital; and 2020 financial guidance, all of which involve certain assumptions, risks and uncertainties that are beyond our control and could cause actual results to differ materially from those statements. A description of these risks can be found in the earnings press release and our latest SEC disclosure documents. All forward-looking statements are based on information currently available to Gilead, and Gilead assumes no obligation to update any such forward-looking statements.", "Non-GAAP financial measures will be used to help you understand the company's underlying business performance. The GAAP to non-GAAP reconciliations are provided in the earnings press release as well as on the Gilead website. I will now turn the call over to Dan." ] }, { "name": "Dan O'Day", "speech": [ "Thank you, Doug, and good afternoon, everyone. This has really been a pivotal quarter for Gilead. With last week's closing of the Immunomedics acquisition, we've effectively transformed our near- and long-term growth story. Trodelvy, an improved medicine for third line metastatic triple-negative breast cancer, has tremendous potential for patients today and significant pan-tumor potential for the future.", "We are all excited to deliver on that potential, along with the teams from Immunomedics who became a part of the Gilead family last week. I want to take this opportunity to thank everyone at Immunomedics for the extraordinary work that you've done on Trodelvy to date. It's an honor to work with all of you now to build on those efforts for the benefit of patients with cancer around the world. The acquisition is undoubtedly an inflection point in terms of our growth and adds to the growing pipeline of transformational medicines that we've been strengthening over the course of the year.", "All of this is building on the strong foundation of our core business. We've seen the strength and durability of our HIV business once again in the past quarter, and we're confident in our long-term leadership. I'd like to briefly talk about the changing nature of our growth prospects driven primarily by the acquisition of Immunomedics. I'll also touch on our core business, and I'll say a few words about Veklury or remdesivir, and which just gained FDA approval, and then Johanna and Merdad will pick up with more details.", "I'll start with Immunomedics and Trodelvy. The acquisition of Immunomedics is the largest transaction in Gilead's history and undoubtedly marks the turning point for the company. As you know, Trodelvy is already approved in the U.S. for third line metastatic triple-negative breast cancer.", "The recent data at ESMO underscored its transformative potential for this particularly challenging form of cancer as well as the potential for treating bladder cancer. We will explore expansion into earlier lines of therapy in the short term. And overall, we see Trodelvy as a pipeline and a product. The prevalence of Trop-2 in multiple cancer types means Trodelvy has pan-tumor potential.", "Secondly, in addition to its extensive potential as a monotherapy, Trodelvy stands out because of the way it lends itself to combinations. The early data are promising, and we look forward to exploring combinations with various types of agents going forward. The acquisition gives us an immediate presence in the field of solid tumors and brings us the significant expertise of the teams from Immunomedics. We're complementing our existing strengths in hemologic cancers through our combined Kite and Gilead pipeline and building on the important progress we've already made this year in building our oncology pipeline.", "Including Immunomedics, we have completed a total of 10 transactions in oncology so far this year. I'll just mention two of the significant opportunities that are the results of those transactions. Magrolimab is now in Phase III for MDS and offer some potential first-in-class option utilizing the CD47 pathway to activate the innate immune system. Our partnership with Arcus is progressing well.", "We are particularly excited by the potential of the TIGIT compound, as well as other work that's coming out of that collaboration. In cell therapy, we're now the only company with two FDA approved therapies, Yescarta and Tecartus from Kite. Earlier this month, we received a positive opinion for KTE-X19 from the European Medicines Agency, the committee for medicinal products for human use. I'm also pleased to announce that the FDA has accepted the Yescarta sBLA for relapsed or refractory follicular lymphoma and marginal cell lymphoma after two or more lines of systemic therapy.", "The agency also granted priority review for this application. ZUMA-7, the industry's first ever randomized trial in cell therapy and the only cell therapy in second line with overall survival as an endpoint, will be delayed slightly due to the slowdown in the rates of events. However, we expect the data in the first half of 2021. And based upon that data, we're ready to submit quickly after.", "In summary, we made great progress in building out and advancing our pipeline to drive growth this year, and Trodelvy represents a true growth inflection point, changing our outlook significantly and positioning Gilead as an important contributor in the field of oncology. The foundation for all this additional growth is our durable core business. In HIV, we saw a solid rebound in the third quarter with 14% quarterly sequential growth in the global franchise. While COVID-19 continues to impact our business, there were clear signs of recovery in the third quarter.", "Moreover, the underlying demand is strong as Biktarvy continues to be the treatment of choice for patients and providers. On the prevention side, we exceeded the goal we set at the beginning of the year of switching 40% to 45% of clinically appropriate at-risk individuals on PrEP to Descovy. As of October 1, we were at 46%. Johanna will share more perspectives on our third quarter sales in a few moments.", "Finally, I'd like to briefly comment on remdesivir, which we now refer to by its brand name of Veklury. Veklury received full FDA approval this month for treating hospitalized patients with COVID-19. It's the only FDA-approved therapy for COVID-19, in addition to being authorized or approved for use in more than 50 countries worldwide. We are also now in a position to meet global demand because of the work we've done since January to ramp up our supply.", "But first, stepping back for just a moment to recognize how remarkable it is that we are in this position today. At the start of the year, most of the world had not even heard of COVID-19. The scientific community moved very little about the virus or its devastating potential. Today, less than 10 months later, we have an FDA-approved therapy that is helping patients around the world to recover faster.", "And for some groups of patients, Veklury is lowering the risk of death. All of this comes at a time when the rates of hospitalization, sadly in many places, are increasing. We have repeatedly seen the clinical benefits of Veklury across multiple clinical trials. In the past quarter, these benefits have been unequivocally demonstrated by the gold standard of global clinical trials.", "The definitive results from the fully powered, double-blind, placebo-controlled and randomized NIAID ACTT-1 trial showed an average reduction in recovery time of five days. I sometimes imagine how I would feel if a family member was hospitalized for COVID-19, and I'm sure many of you think of this as well. I'm extremely grateful that a therapy exists that has been validated with all of the rigor required for an FDA approval and whose benefits have been demonstrating peer-reviewed data from a trial that is, without question, the pinnacle of clinical studies today. Merdad will talk about all the recent data on Veklury, including what we've seen from the WHO study and the ongoing development program shortly.", "Johanna will talk about the recent move to a commercial distribution model in the U.S., which is going very well. I'd just like to close on Veklury by stressing my gratitude once again to all the Gilead employees who've put their hearts and souls into this work since January, along with our many partners. On behalf of all of us, I want to say how privileged we feel to play a role in helping with the pandemic and be able to put our antiviral expertise to work for patients with COVID-19. I also want to emphasize that we will continue to do all it takes to fulfill our responsibility with Veklury.", "To wrap up my prepared remarks, I want to emphasize that our portfolio and pipeline are much stronger going into the fourth quarter and 2021. By executing on our strategy in a disciplined way throughout the past 12 months, we have significantly changed the nature of our growth process, especially following the acquisition of Immunomedics, and we have maintained the long-term durability of our core HIV franchise. We're not done, of course, but we made significant progress. And for that, I want to thank all the teams at Gilead and Kite and our many partners worldwide.", "With this, I'll hand the call now over to Johanna." ] }, { "name": "Johanna Mercier", "speech": [ "Thanks, Dan." ] }, { "name": "Dan O'Day", "speech": [ "Thank you." ] }, { "name": "Johanna Mercier", "speech": [ "Good afternoon, everyone. I want to begin by building on Dan's comments about our durable core business. Our results through Q3 amid the ongoing COVID-19 pandemic have been strong. And as anticipated, we continue to see signs of recovery during the quarter in underlying demand trends across our core franchises in U.S.", "and Europe. Looking at our HIV business. We continue to make great progress in both treatment and prevention. Biktarvy in treatment and Descovy for prevention continue to gain share quarter over quarter.", "In treatment, Biktarvy remains the No.1 regimen across key global markets. In the U.S., one in two new patients start on Biktarvy. And roughly one in two patients switching to Biktarvy do so from a non-Gilead single tablet regimen, growing overall Gilead share. In PrEP, despite COVID dynamics, we continue to make progress with Descovy with 46% conversion of clinically appropriate individuals at risk at the end of September, exceeding our stated goal of 40% to 45%.", "Our overall HIV revenue in Q3 was very strong with 14% sequential growth over Q2 and 8% year-over-year growth driven by both strong demand fundamentals and normalized inventory dynamics. The unique quarterly phasing of inventory dynamics this year and the recent Truvada loss of exclusivity will impact our sequential quarterly revenue dynamics in the fourth quarter. With 91% of Gilead's U.S. patients having converted to TAF-based regimens, we will continue to build on our strength in HIV, including long-acting formulations for both treatment and prevention.", "Now briefly on HCV. Our HCV business showed 4% sequential growth over Q2 while down 31% from Q3 last year due to lower patient starts year on year. As markets started to reopen in the U.S. and Europe, we saw an increase in diagnosis and patient starts in Q3.", "Our stock market share across core markets puts us in a position of strength as patients return through the rest of the year and into 2021. I'd like to now highlight some specifics on the initial commercialization of Veklury, which began in the third quarter. As our teams have begun reaching out to physicians and hospital systems, it has been incredibly inspiring to hear their stories of how they have used this medication and what it meant to patients, as well as their loved ones. As a reminder, the commercial model in the third quarter was governed by an agreement with the U.S.", "government to allocate 90% of our supply to patients in the U.S. through a partnership with the U.S. Department of Health and Human Services. During the quarter, we recorded Veklury sales of $873 million.", "A portion of inventory that will be consumed in Q4 was recognized as revenue in the third quarter. As Dan mentioned, we have now pivoted beginning October 1 to a more traditional commercial model, working directly with AmerisourceBergen to provide Veklury directly to U.S. hospitals. AmerisourceBergen will remain our sole distributor of Veklury through the end of the year to ensure consistency and continuity.", "In Europe, we signed a joint procurement agreement with the European Commission on October 8 that enables participating countries in the EU, the European economic area and the U.K. to purchase Veklury to meet both real-time demand and stockpiling needs coordinated by the European Commission. This agreement temporarily removes the need for country-by-country reimbursement processes that typically follow marketing authorization, recognizing the urgency of the current health crisis. It encompasses purchases of Veklury over the next six months and can be extended if needed.", "Predicting the underlying demand of core Veklury continues to be challenging given so many variables, including incidence rates, hospitalization rate as well as future vaccines and emerging treatments. Now turning to Trodelvy. As you know, the Immunomedics deal closed less than a week ago, and we're already working closely with the joint team to ensure the continuity of Trodelvy's strong launch in third line metastatic triple-negative breast cancer and accelerate its future potential. It is a true catalyst for growth, and the joint team is energized as we continue to accelerate the work on this transformational therapy together as one team.", "While not part of our third quarter results, I'd like to highlight Immunomedics Q3 results for Trodelvy in the U.S. Trodelvy achieved $53 million in net sales in Q3, the first full quarter of commercial availability. Total net sales were $73 million in the first five months of commercial launch in the midst of a pandemic. Over 1,000 accounts ordered Trodelvy in the first five months of commercial launch, and of those, that 488 were new and unique in Q3.", "We've seen robust adoption continue in Q3 in both community and academic centers. We look forward to expanding commercialization to Europe and other markets around the world as quickly as possible, starting with an EU submission in Q1 of next year. And to close, a few words on Jyseleca, which is the brand name for filgotinib. Jyseleca has now launched in Germany, and launch planning is well under way across Europe, as well as Japan.", "We anticipate sales in both regions during the fourth quarter. Despite a crowded and competitive marketplace, the teams are well prepared to differentiate Jyseleca. We look forward to updating you on our progress in the future. Merdad will provide a little bit more color on the ongoing regulatory considerations and our thinking there.", "And so with that, I'd like to turn the call over to Merdad." ] }, { "name": "Merdad Parsey", "speech": [ "Thanks, Johanna, and good afternoon, everyone. I'm pleased to share some perspectives on several critical pipeline-related updates and progress. Starting with Veklury. We're very pleased with the recent full approval of Veklury by the FDA.", "Veklury is now approved in the U.S. for the treatment of hospitalized patients with COVID-19-based disease on a strong and consistent body of evidence from three rigorous, randomized, controlled clinical trials over the past six months to inform us about the profile of Veklury. It's the first antiviral treatment proven to help patients hospitalized with COVID-19 recover and leave the hospital more quickly, a significant benefit for patients, their families and society. The results include the double blind, placebo-controlled NIAID Phase III ACTT-1 trial published recently in the New England Journal of Medicine.", "The study met its primary endpoint of time to clinical recovery through day 29, demonstrating Veklury plus standard of care reduced the time of recovery through day 29 compared with placebo plus standard of care from 15 to 10 days with a p-value of less than 0.001. The key secondary endpoint of clinical status at day 15 was also met. Patients receiving Veklury were 50% more likely to have improved by day 15 compared with those receiving placebo, and the effect was maintained through day 29. The secondary mortality endpoint in the overall population only showed a trend toward reduced mortality with a p-value of 0.07.", "Recall that when we started these trials with the NIAID, we knew very little about the disease itself and didn't know which patients might be most likely to benefit from Veklury. Given the range of disease severity in the overall study population and the emerging understanding that clinical outcomes are highly dependent on a patient's requirement for oxygen at baseline, an exploratory post-hoc analysis was conducted to determine whether there were differences in mortality based on patients' baseline clinical status with respect to the requirement for oxygen support. In this post-hoc analysis, in patients requiring low flow oxygen at baseline, the largest subgroup of patients in the trial, over 40% of patients, those who received Veklury had a 72% reduction in mortality at day 15 and a 70% reduction in mortality at day 29, with confidence intervals that do not cross one. These results are what we would have expected and hoped for with an antiviral therapy that should have the most impact when given earlier in the course of the disease before the inflammatory cascade leads to critical illness.", "These data add to the breadth of evidence from two additional randomized controlled clinical trials, establishing the use of Veklury as a standard of care for the treatment of COVID-19 in hospitalized patients. All three of these Phase III trials have been published in peer-reviewed journals, and the raw data was shared with the FDA as part of the NDA review process for them to perform their own independent analyses as is their standard approach. We continue to pursue other ways to expand the utility of remdesivir as a backbone of treatment, including exploring how combinations could be more effective and new means of administering the drug that don't require intravenous administration. Now last week, interim results from the World Health Organization's SOLIDARITY trial were released through a preprint server.", "These results don't alter the demonstration of efficacy observed with remdesivir in the studies I just described. That trial was intentionally designed to be pragmatic and enable participation across a wide range of healthcare settings. There are components of the study design and data that should provide pause. These may be clarified or placed into appropriate context during the peer review process.", "Given that we haven't received the data, nor have there been peer-reviewed -- nor have these data been peer reviewed, it's difficult for us to discuss the study. Some of the issues we and others have identified in WHO's study include the lack of a PCR confirmation of COVID-19 at the time of enrollment, the lack of distinction between patients requiring low-flow or high-flow oxygen in the results, no data monitoring, no data verification and 20% of the data being reported as missing from the preliminary analysis. We can only speculate at this point that these factors may have contributed to the negative outcomes reported in this study. It is, however, important to note that the totality of data generated thus far for Veklury suggests that antivirals are most effective earlier in the disease course.", "As you get sicker, inflammation, such as ARDS or fibrosis, potentially things like vascular blood clots and bacterial pneumonias, could kick in. The NIAID data suggests that patients on low-flow oxygen are those that show the greatest benefit in time to discharge and mortality. An antiviral doesn't clear inflammation or blood clots once they're formed. So this makes sense.", "Sicker patients on high-flow oxygen and mechanical ventilation may need an antiviral, but it will be insufficient to treat the inflammation. In those patients, treatment in addition to antivirals, such as dexamethasone, may be beneficial and have been demonstrated to be that way using WHO data. We look forward to learning more about the SOLIDARITY trial results and sharing this information with regulators once we have the data in hand. Most importantly, at this moment, the world is combating a pandemic that isn't going away.", "As we see infections once again on the rise across the U.S. and Europe, it's critical that physicians have every tool possible at their disposal and that patients are encouraged to seek care for what we know can be a rapidly progressing and deadly virus. We're proud of the role Veklury has played in this pandemic, and I'm proud of and profoundly grateful to the team who's worked so hard to advance this medicine for patients, including those collaborators at the NIAID, the investigators and patients who've been integral to the conduct of these studies. We regularly receive letters of gratitude from people who've been treated with Veklury, and we're grateful for the opportunity to provide this important treatment during this time.", "So now I'd like to turn to oncology. As Dan mentioned, we're very excited now to have the Trodelvy program in-house with the closing of the Immunomedics transaction. We're excited to welcome the impressive Immunomedics team to Gilead. As Dan and Johanna both mentioned, Trodelvy represents a growth inflection point for the company, and I'd like to highlight recent progress that has us excited about the full potential of this medicine.", "You may have seen the ESMO data that Immunomedics presented from the confirmatory Phase III ASCENT study. In this study, despite having received a median of four prior anticancer treatments, patients treated with Trodelvy showed a statistically significant and clinically meaningful improvement in overall survival with a median of 12.1 months versus 6.7 months for chemotherapy and a hazard ratio of 0.48 and a p-value of less than 0.0001. Trodelvy also demonstrated a statistically significant improvement in ORR, 35% versus 5%; and CBR, 45% versus 9%, when compared with chemotherapy. These remarkable results should establish Trodelvy as a new standard of care in patients with third line metastatic TNBC.", "In urothelial cancer, another area of focus, as reported at ESMO last month, Immunomedics released a positive results from cohort I of the pivotal Phase II TROPHY U-01 study of Trodelvy in cisplatin-eligible patients with metastatic urothelial cancer. These results confirm the interim findings in prior Phase I/II study results showing Trodelvy has significant activity and is well tolerated in patients with heavily pretreated metastatic urothelial cancer who progressed despite platinum-based chemotherapy and checkpoint inhibitors. Trodelvy has the potential to be an important new treatment for patients with metastatic urothelial cancer. Based on these exciting data, in terms of the path forward for Trodelvy, the supplemental BLA seeking expansion of Trodelvy's label to include the ASCENT result is expected to be submitted in Q4 to the FDA under the RTOR program.", "The sBLA submission to the FDA for an accelerated approval of Trodelvy in metastatic urothelial cancer is expected in Q4 as well. In addition, the MAA for Trodelvy in metastatic TNBC in Europe is planned for submission to the EMA in the first quarter of 2021. The potential for Trodelvy in earlier lines of therapy and additional tumor types is something we're really excited to explore. Results from studies with combinations of PARP inhibitors and separately checkpoint inhibitors give us even more options to explore the potential of this new treatment for patients.", "Beyond Trodelvy, I'd like to highlight other opportunities in our oncology pipeline that continue to excite us. On magrolimab, our anti-CD47 asset, we continue to pursue options for filing an accelerated approval pathway, from magrolimab in addition to azacitidine and MDS in 2021 based on the ongoing single-arm study. As with all single-arm studies, the risk and the FDA will make a decision based on the totality of the data and whether the data support a substantial benefit from available standard of care. The recent breakthrough designation for magrolimab provides recognition by the FDA the potential for magrolimab and enables us to have more frequent FDA interactions.", "We also have obtained prime designation from magrolimab, another recognition of the potential for magrolimab. We've initiated our enhanced randomized Phase III study comparing magrolimab plus azacitidine versus azacitidine alone in higher-risk MDS patients to confirm the Phase I results for potential full approval. The emerging data from our partner, Arcus, is very exciting, and we look forward to updating you in due course. Moving to antivirals.", "We continue to be excited about lenacapavir, the company's investigational long-acting HIV-1 capsid inhibitor, an injectable administered every six months. The study in evaluating lenacapavir in highly treatment-experienced HIV patients is progressing, and we're on track for a planned filing in 2021. We also recently announced the addition of a new study arm of lenacapavir to the existing planned women's HIV prevention study, evaluating Descovy and Truvada in women at risk of HIV. In parallel, we will also initiate a study of lenacapavir for HIV prevention in men and transgender people who have sex with men.", "Turning to filgotinib. We're excited about the launch of Jyseleca for rheumatoid arthritis in Europe. During the quarter, we shared data from the Phase IIb/III selection trial in ulcerative colitis showing filgotinib 200-milligram induced remission at week 10 and achieved endoscopic histologic and six-month corticosteroid free remission at week 58 with a consistent safety profile. We plan to file filgotinib for ulcerative colitis in Europe before the year-end and Japan early next year.", "As we previously shared, in August, the FDA issued a complete response letter for filgotinib in rheumatoid arthritis, requesting data from the MANTA and MANTA-RAy studies and expressing concerns regarding the benefit/risk profile of the 200-milligram dose. We met with the FDA for a Type C meeting to discuss MANTA, and we'll meet again for a Type A meeting in Q4 to further discuss the CRL. In the meantime, we're pausing screening and enrollment for ongoing trials in psoriatic arthritis, ankylosing spondylitis and uveitis as we believe the FDA meeting will inform the broader filgotinib development program. We continue to believe in the benefit/risk profile of filgotinib.", "I'd also like to highlight that we remain committed to inflammation into our long-term collaboration with Galapagos. Finally, I wanted to highlight that we are focused on ongoing strategic portfolio review and disciplined prioritization of our overall portfolio. We've shared a summary of important upcoming milestones across the pipeline in the materials we've provided. I'll turn over the call to Andy now." ] }, { "name": "Andy Dickinson", "speech": [ "Thanks, Merdad, and good afternoon, everyone. Our third quarter performance was strong, and it reflects the solid underlying fundamentals in our core HIV franchise and the start of the post-donation phase for Veklury. It also reflects the ongoing and dynamic impact of the COVID-19 pandemic. You will find our detailed Q3 results in the press release and materials we have posted.", "In my following remarks, I will review elements of our Q3 performance and provide you with an update on our full-year guidance. Turning now to the financial highlights. Total revenues for the third quarter of 2020 were $6.6 billion, with non-GAAP diluted earnings per share of $2.11. This compares to total revenue of $5.6 billion and non-GAAP diluted earnings per share of $1.64 for the same period last year.", "Non-GAAP diluted earnings per share for the third quarter of 2020 increased 29% year over year, primarily due to higher operating income driven by growth in HIV product sales and our initial Veklury sales as well as lower non-GAAP tax rate. As noted in the earnings press release, on a GAAP basis, the third quarter diluted earnings per share was $0.29, primarily due to $1.2 billion in charges related to our collaborations and equity investments in building out our oncology pipeline as well as a $900 million loss from unfavorable changes in the fair value of our equity investment in Galapagos. Product sales for the third quarter of 2020 were $6.5 billion, up 28% sequentially and up 18% year over year, primarily due to Veklury sales and our core HIV products driven by stronger demand as well as higher volume as channel inventory continues to normalize in the United States. HIV revenues grew sequentially 14% driven by a continued patient uptake of Biktarvy and Descovy for PrEP and increased channel inventory purchases in the United States.", "HIV revenues increased 8% year over year, primarily due to higher demand driven by Biktarvy, and as I said earlier, the normalization of inventory purchases in the U.S., partially offset by lower sales of Truvada. HCV revenues grew 4% sequentially, primarily due to higher patient starts in the United States and Europe, but the revenues were down 31% year over year, primarily due to the COVID-19 pandemic and its impact on patient starts. Cell therapy revenues were down 6% sequentially due to COVID-19 and up 25% year over year driven by continued patient uptake and expansion of Yescarta in Europe. Now turning to our expenses.", "Non-GAAP R&D expense was $1.2 billion for the quarter, down 3% sequentially and up 12% year over year. The sequential decrease was primarily driven by lower investments in remdesivir in the third quarter. The year-over-year increase was primarily driven by higher investments in remdesivir, partially offset by positives or deferrals of certain clinical trials due to the COVID-19 pandemic. Non-GAAP SG&A expense was $1.1 billion, down 6% sequentially and up 5% year over year.", "The sequential decrease in expenses was primarily driven by the second quarter accrual of $97 million related to a Department of Justice matter, which subsequently settled in the third quarter. The year-over-year increase was primarily driven by headcount growth, partially offset by lower marketing spend due to COVID-19. Now moving to the balance sheet and cash flow. We finished the quarter with $26 billion in cash and marketable debt securities.", "During the quarter, we generated $2.3 billion in cash flow from operations. We paid dividends of $861 million. We repaid $2 billion of maturing debt, and we repurchased $201 million of stock. In addition, we issued $7.25 billion of senior notes and arranged a $1 billion term loan, which we drew down in Q4 to partially fund the acquisition of Immunomedics.", "After closing the Immunomedics acquisition, our balance sheet remains strong, and our capital allocation priorities remain unchanged. We have, however, curtailed our share repurchase program in the near term as we focus on paying down debt incurred in the acquisition. As Dan indicated, the acquisition will immediately accelerate our revenue growth and is expected to be neutral to accretive to our non-GAAP EPS in 2023 -- by 2023 and significantly accretive thereafter. Turning now to COVID and its continued impact on our business and the broader business environment.", "As we do every quarter, we've updated our base case utilizing external projections and views. As you know, the pandemic continues to progress in unpredictable ways. The recent uptick of infection and hospitalization rates in the U.S. and Europe is obviously of concern to all and will potentially impact the business environment during the fourth quarter and into 2021.", "Globally, external views suggest widespread vaccination will not become a reality until late in 2021. As a result, we expect the pandemic to continue to impact our business and broader market dynamics, including, in particular, HCV, HIV PrEP and Veklury demand into 2021 and potentially beyond. We also expect that our HIV treatment business will continue to remain largely unaffected and that the remainder of our core business will continue to recover in the fourth quarter and into the first half of 2021. With that as context, let me turn to our updated full year 2020 guidance.", "It's important to reiterate that we are operating in a highly complex and dynamic environment, and the projections are subject to greater uncertainty than has historically been the case. We have reaffirmed and narrowed our revenue guidance range to $23 billion to $23.5 billion, reflecting the latest estimates for Veklury. The guidance range provided during our second quarter earnings reflected underlying uncertainty in demand -- in the demand dynamics for Veklury given the nature of this pandemic, and as Johanna mentioned earlier, factors such as the rate of infections by region, severity, hospitalizations and stockpiling demand, all of which have been difficult to forecast. On the expense side, we're raising our SG&A expense guidance to low double-digit percentage growth, reflecting the Immunomedics acquisition.", "Our full year operating income guidance range is reaffirmed and narrowed and is now USD 10.7 billion to USD 11.2 billion. Our full year non-GAAP EPS range is also reaffirmed and narrowed and is now $6.25 to $6.60 per share. As we think about our performance to date and our guidance, we are encouraged by the significant process we've made in such a challenging environment this year. Before we hand the call off for Q&A, we would like to express our gratitude to our 12,000 Gilead and Kite employees globally.", "Their spirit, dedication and resilience make it possible for us to have a meaningful impact on patients with some of the world's hardest-to-treat diseases. We'd now like to open the call for questions." ] } ]
[ { "name": "Operator", "speech": [ "Thank you. [Operator instructions] I show our first question comes from the line of Matthew Harrison from Morgan Stanley." ] }, { "name": "Matthew Harrison", "speech": [ "I guess on filgotinib, can you guys maybe just describe what you're thinking in terms of the potential outcomes here once you have that Type A meeting? Is this something where you could decide not to launch the drug in the U.S. at all? Or is this more a nuanced approach where maybe you won't move forward with RA but move forward with the IBD indication?" ] }, { "name": "Merdad Parsey", "speech": [ "Matthew, it's Merdad. Yes, I think it's hard to predict what the outcomes are. I do think that both the options you suggested are possible. And I would sort of tend toward your latter approach, which is that if things aren't able to move forward with RA, we'd like to keep the door open for us to continue to move forward in IBD and continue those discussions, obviously, dependent on the MANTA and the MANTA-RAy data outcome." ] }, { "name": "Operator", "speech": [ "I show our next question comes from the line of Evan Seigerman from Credit Suisse. Please go ahead." ] }, { "name": "Evan Seigerman", "speech": [ "Hi guys. Thank you so much for taking the question. I know it's a busy day. So with the recent review of Galapagos' Toledo program, Merdad, what do you really need to see from the proof-of-concept trials to opt in and be comfortable, potentially incorporating this into your portfolio given your focus on portfolio optimization? Thank you." ] }, { "name": "Merdad Parsey", "speech": [ "Yes. Thanks. Great question. They're doing a really great job of exploring the potential of that program in multiple indications.", "And they have a great approach of trying to get there quickly, looking for early signals of activity. On our end, obviously, we would like to see the programs de-risked to the appropriate level at the time that we opt in. That will vary based on the signals we see and the magnitude of the improvement that we see. So obviously, if you saw hypothetically a huge response in one indication that was really unexpected and blew it out of the water, we might opt in more early.", "Whereas if it's more nuanced in a small trial, we might want to flesh that out a little bit more before we opt in. Our contract allows us to continue to work with them as the program's already de-risked, and our desire is to opt in and move as quickly as possible once we have an appropriate level of risk." ] }, { "name": "Evan Seigerman", "speech": [ "Thank you so much, I appreciate it." ] }, { "name": "Operator", "speech": [ "Thank you. Our next question comes from the line of Cory Kasimov from JP Morgan. Please go ahead." ] }, { "name": "Cory Kasimov", "speech": [ "Hey good afternoon guys. Thanks for taking the question. Wanted to ask about remdesivir and the change to guidance now. I guess I'm just trying to better understand kind of what has changed since your guidance in 2Q that leads to the lowering of fiscal year guidance by $1.5 billion, and I mean just given the pace of infections that we're seeing across the country.", "Can you just kind of go into a little bit more detail on why the lowering and kind of how this market is evolving in your eyes?" ] }, { "name": "Andy Dickinson", "speech": [ "Cory, it's Andy. I'll start, and Johanna can jump in as well. I think it's relatively straightforward. I mean it's a dynamic situation.", "It's very difficult to forecast, as we've discussed. And as I think most people understand, the rate of hospitalizations is the biggest factor that has moved around a lot over the last six months, and it continues to move today. So what you're seeing is the latest estimate based on the information that we have. We're pleased with the uptake in the third quarter, obviously, with the formal U.S.", "approval, the joint procurement agreement in place, Johanna and her team, I think, have a better sense of where we see the year. But it's still very dynamic, and it's unusual compared to what you have to typically forecast. Johanna, if you want to add anything to that." ] }, { "name": "Johanna Mercier", "speech": [ "Yes. Maybe just to add to that, Andy, I think what we're also seeing is the severity of the disease. So I think as you saw through the summer months, even though there were surges going through the U.S. mostly, some of those were younger patient population.", "And therefore, the hospitalization rates really dropped over the summer months. We were seeing closer to 12% to 15% late Q2. And as you go into Q3, they're closer to 5%. So we're really tracking those very closely.", "It's not just the incidence. It's really, to Andy's point, the hospitalization rates. And obviously, the assumption is, in light of the surge this fall, both in Europe as well as in the U.S., that those numbers will pop back up a little bit. So that would be one piece of the puzzle.", "The other piece, I would say, is we looked at some of our assumptions around stockpiling. And although we've seen some stockpiling, not at the level that we had originally projected, and so we're adapting to that as well." ] }, { "name": "Cory Kasimov", "speech": [ "OK. Very helpful. Thank you." ] }, { "name": "Operator", "speech": [ "Thank you. Our next question comes from the line of Michael Yee from Jefferies. Please go ahead." ] }, { "name": "Michael Yee", "speech": [ "Hey thanks for the question. I wanted to follow up a little more on filgotinib. Obviously, it's an important driver, and you said you'll have a Type A meeting, and you'll make some decisions. Can you just clarify what you would actually learn from a Type A? And if you were to, as you said, maybe keep IBD, isn't 200 milligrams really important, and so that would tie together with RA being approved at 200? So maybe just explain a little bit where these scenarios would evolve from.", "And could you just make tough decisions to not go forward at all? Thank you." ] }, { "name": "Merdad Parsey", "speech": [ "Sure, Michael. Yes, couldn't agree more. Look, I think the conversation we'll have in the Type A meeting will center around really what level of evidence the FDA would be looking for on both of those issues, right, in terms of trying to get to a better benefit/risk understanding. And so that will depend -- so we need to find that out from the 200-milligram standpoint, and we need to find it out from the MANTA and MANTA-RAy standpoint.", "So those two things we will get guidance from the FDA at the Type A meeting. And then based on that outcome, we will make some decisions how to go forward, whether there's a clear path, whether we have to only go forward in IBD or whether 200 milligrams is not viable until MANTA reads out, MANTA-RAy readout. All those are possibilities, so it's hard to speculate what the outcome of that will be. We'll be transparent obviously as we have that discussion with how we'll proceed." ] }, { "name": "Michael Yee", "speech": [ "OK. Thank you." ] }, { "name": "Operator", "speech": [ "Thank you. Our next question comes from the line of Geoffrey Porges from SVB Leerink. Please go ahead." ] }, { "name": "Geoffrey Porges", "speech": [ "Oh thank you very much. One question, a multipart question on Veklury and then a quick one on Trodelvy. So on the Veklury, could you give us a sense of how many patients have been treated so far at least in the quarter and disclose for us what the inventory stocking was? And then a little bit of color about what proportion of hospitalized patients are getting remdesivir because we get the sense the standard of care. And then Merdad, could you just talk a little bit about the profile of Trodelvy and combinations? It does have some significant safety and tolerability liabilities.", "So which of the combinations do you think it makes the most sense to use it in?" ] }, { "name": "Johanna Mercier", "speech": [ "So let me start, Geoff, with the Veklury question around usage. So what we've seen is, obviously, in Q3, a little bit of an interesting dynamic in light of most of the supply was committed through the HHS to U.S. patient population. So there was a bit of an inventory build through the Q3 that you're going to see play out in Q4 in the U.S.", "specifically. We're also in a situation due to the incredible work that's been done by our manufacturing teams to be in a situation where our current supply now is at a level where it is exceeding global demand. So we feel very confident in making sure we can -- global demand around the world, namely in Europe right now, in light of not only the door procurement agreement, but in light of the recent surge that you're seeing across countries in Europe. I think to your point about percentage of patients, it really varies across countries but also regions.", "And I do think that, that percentage is increasing as we speak. As the FDA approval came out last week, we're already seeing a lot more noise around that, but also in light of the fact that we have a field team, so medical and commercial that are now going out to make sure that physicians are aware and educated on where best to use Veklury. And I think that's one of the pieces that's the most important. So that's playing out as we speak.", "But we have seen probably out of hospitalization rates in many countries anywhere between 40% to 50% in the U.S. usage of remdesivir. And of course, that number will only grow as people better understand the data now that it's been published as well as approved through the FDA. And maybe, Merdad, on Trodelvy." ] }, { "name": "Merdad Parsey", "speech": [ "Yes. And I'll take the Trodelvy question, Geoffrey. Yes, look, I think what we know so far with the Trodelvy [inaudible] combo is a couple of things. One is just looking at the combos where it's been tested, there's data with the parts, and there's data with checkpoint inhibitors.", "And so far, those data seem to support the ability to go forward with combos, and that obviously opens a number of doors there for us to investigate. When we look at the adverse event profile and we talk to the investigators about what they're seeing and how they're managing it, the toxins, largely the neutropenia and the diarrhea, and often that the investigators are saying that, that toxicity seems to be manageable, something they're comfortable managing. And we're getting a lot of encouragement to move earlier in lines of therapy based on that adverse event profile. The individual combinations will be dictated by the indication that we're in, right, whether it's breast, urothelial, lung.", "Those combinations will depend. But I think a big one will probably be the checkpoint inhibitors, where I think we're optimistic and have reasonably good data about being able to combine there." ] }, { "name": "Geoffrey Porges", "speech": [ "Good." ] }, { "name": "Operator", "speech": [ "Thank you. Our next question comes from the line of Alethia Young from Cantor Fitzgerald. Please go ahead." ] }, { "name": "Alethia Young", "speech": [ "Hey guys. Thanks for taking my question. I just wanted to talk a little bit about kind of big picture immunology. So maybe depending on what you decide with filgotinib next year based on some of the conversations, like how are you thinking about the space? Are you still committed? Would you consider doing M&A? Or do you have an internal pipeline that continue to drive potential revenues there?" ] }, { "name": "Dan O'Day", "speech": [ "Thanks, Alethia. I'll start and then maybe Merdad can add as well. But first of all, I mean nothing has changed about our dedication to our three disease areas. As you know, I mean our strategy that we announced at the beginning of the year was based upon two really strong scientific disciplines that we have from a discovery perspective at Gilead and with our partners, and that is antivirals and immunomodulation.", "And we've been firmly focused on that strategy in terms of how it plays out in both antivirals, inflammation and fibrosis and then also oncology. So we think there's a lot of synergies associated with that science. Obviously, immunology, as you know, goes across so many disease states. Immunology plays in the antivirals, for instance, particularly when we look at some of our HBV cure programs.", "But clearly, in the field of inflammation, we've already spoken about where we stand with filgotinib. We have a variety of follow-on agents within our Gilead research, with our partners with Galapagos, and we'll maintain an external view on opportunities to continue to advance our inflammation portfolio in-house. And you can see, of course, what we've done in the oncology field, predominantly immuno-oncology over the past year, really building up our oncology base based upon -- largely based upon immuno-oncology. Trodelvy allows us to have a really strong footprint now into solid tumors in a pan-tumor way, which we think will be very complementary to our first-in-class, best-in-class immuno-oncology portfolio.", "Merdad, maybe you want to add as well your view on that question as well." ] }, { "name": "Merdad Parsey", "speech": [ "I think you hit all the key points, Dan. I think the only thing I'd add is I think we really have a great team here, and I think that team is going to be really great about charting our future in immunology. But as Dan said, we remain committed to that, and we'll continue to look at both near- and long-term opportunities there that makes sense for us in the portfolio." ] }, { "name": "Dan O'Day", "speech": [ "I mean maybe, Merdad, it's just important to emphasize the unmet medical need in that area. It's still a very significant." ] }, { "name": "Merdad Parsey", "speech": [ "Yes. And maybe the only other thing I'd add is that we look at it through a fairly broad lens of what immunology means. There are a lot of indications with a lot of unmet need that persist in that space, and we'll be looking for that transformative profile." ] }, { "name": "Alethia Young", "speech": [ "Thank you." ] }, { "name": "Operator", "speech": [ "Thank you. Our next question comes from the line of Carter Gould from Barclays. Please go ahead." ] }, { "name": "Carter Gould", "speech": [ "Hi, thanks for taking the question. Maybe just to follow up on that same sort of question on portfolio construction. Historically, old Gilead was routinely criticized for not being as disciplined with many of its mid-stage assets. Clearly, the pipeline is much broader.", "You guys highlighted sort of a return to discipline. Yet, it doesn't seem to be apparent, I guess, when we look through the pipeline side. When you think about the size and breadth of the pipeline today, are you comfortable with that? And I guess will we start to see some of those prioritization decisions start to manifest soon? Or if there's things you can point to today, that would be helpful." ] }, { "name": "Dan O'Day", "speech": [ "Yes, Carter. Again, I think the entire team here is dedicated to putting together a portfolio management process that's state of the art. I think your question is very well taken. It's a work in progress, right? So first of all, we've hired a lot of new people into the organization with terrific expertise in different therapeutic areas.", "We're putting processes into place across research and development, into our commercial organization to help us make decisions accordingly. And I think you'll see some of those play out in the near term as well. But the philosophy that Merdad and Johanna and the rest of the team and I are firmly committed to is drawing the line at a level that makes sure that the programs that hurdle that line are really first and best in class. And I'm really pleased with how the organizations progress, both from an operational perspective, but then also from a scientific perspective over the course of the past year.", "But as you know, I mean this is a continual process, and we need to make sure that we're constantly looking at the outside environment, looking at the unmet medical need, going back to where that line is drawn in our organization and making consequential decisions on the portfolio. And we intend to do that. We intend to make tough decisions and fund those most attractive opportunities. I would also say the other thing we're looking very hard at is a balance in our portfolio.", "I think in the past, Gilead has also been -- seen as a company that went after a lot of high-risk/high-reward projects. In some cases, those were not successful in the late stages. I think we're firmly committed to having a balanced portfolio, where we're always holding the bar high for innovation, but making sure we derisk as much as possible earlier in the stages of development such that when you get into the late-stage investments in Phase III, things have been de-risked, and therefore, your ability to succeed rises as well. So these are all very conscious things we're working on together.", "Merdad, again, I apologize. You've trained me well. You may very well have some things to add on that as one of the leaders in organizing this portfolio." ] }, { "name": "Merdad Parsey", "speech": [ "The only thing I'd add, Carter, it's a really insightful question. And it's something as Dan said, we're really committed to doing. And what I would say is that you will see us exercising that discipline. That will be something that will be apparent sooner than later, and recognize that there are a lot of things that are in-flight that it don't make sense to deprioritize because they're already ongoing.", "So we'll let those things read out. So it'll probably take a little bit longer for everything to get taken care of in the wash, if you will. But you will definitely see that playing out with us as data get read out and as new things enter into the portfolio, that we'll be exercising that discipline to make sure we're making some tough decisions." ] }, { "name": "Carter Gould", "speech": [ "Thank you." ] }, { "name": "Operator", "speech": [ "Thank you. Our next question comes from the line of Brian Abrahams from RBC Capital Markets. Please go ahead." ] }, { "name": "Brian Abrahams", "speech": [ "Hey guys. Thanks for taking my question. Question on HIV and inventory and stockpiling. I'm wondering if you could quantify if what you observed in the third quarter was a benefit or just normalization.", "And if you look to fourth quarter and beyond, what should we expect with respect to potential stockpiling just given the newest COVID spike versus inventory drawdowns?" ] }, { "name": "Johanna Mercier", "speech": [ "Thanks. So maybe I'll take that one, Brian. I think that as we're seeing Q3 this whole year, and I'm sure everybody is kind of seeing this, this full year has been really interesting when it comes to inventory because we've seen a pattern that's very different than prior years, obviously, due to COVID-19. The expectation that we have this year is, as you normally see in Q4, you actually do have a lift in product supply at the end of December.", "That plays into our total inventory for 2020. Having said that, that's a little bit also impacted by the fact that Truvada's LOE, and there's now a generic on the market with Teva as of early October. And so we believe that number is a little lower than the norm that we've seen in the past. We haven't assumed a dish stockpiling to your point about COVID-19 because it's usually, Q4 is already on the rise versus other quarters.", "So we've assumed that. What we've seen in Q3 to the first part of your question, I think, is just normalization of the last couple of quarters. And if you recall, Q1 usually draw down on Q4 supply. What we saw is a pickup in March because of COVID-19 that then kind of bled out in Q2, and then we saw a pickup again in Q3, which I think is really the normalization of those three quarters.", "So assuming Q4 is like other quarters in the past, that's what's currently in our current projection. Hopefully, that addresses the thinking there for HIV." ] }, { "name": "Operator", "speech": [ "Our next question comes from the line of Tyler Van Buren from Piper Sandler. Please go ahead." ] }, { "name": "Tyler Van Buren", "speech": [ "Hey good afternoon. Thanks for taking my questions. I was just hoping to get a little bit more precision on the Veklury guidance. I guess if you take the midpoint of the updated guidance relative to the guidance in the beginning of the year and the Q3 sales, it could suggest that sales could be down significantly in Q4 quarter-over-quarter.", "So -- but then obviously, the core business has been impacted a bit by the pandemic, which could offset and make it more flat. So wanted to understand what your modeling for Veklury in Q4 or what your guidance incorporates. And then the second part of the question is, on the outpatient and the inhaled studies, can you give any more granularity on when we should expect that data? And how much do you think demand could increase if those studies are successful?" ] }, { "name": "Dan O'Day", "speech": [ "Great. Thanks. So Andy, why don't you handle the guidance, and maybe we'll go to Diana for the updates on Veklury's next generation." ] }, { "name": "Andy Dickinson", "speech": [ "Sure. Tyler, thanks for the question. Appreciate it. We're not providing specific product guidance, as you know, and we typically don't.", "But as you suggested and as we mentioned earlier, the revision in guidance is tied not entirely, but almost entirely, to expectations around Veklury. Johanna also mentioned that there was some excess inventory in the channel as a result of the terrific work that our manufacturing team did, and you'll see in our materials that we're on track to meet the expectation that we had set in terms of 2 million treatment courses by the end of the year. So as inventory was moving into the channel in the third quarter at the same time that hospitalization rates and the severity of the outbreak in the U.S., at least at that time was coming down, there was less demand in the third quarter than expected. And then you see that play through in the fourth quarter.", "So we didn't recognize revenue for all of the Veklury that was shipped in the third quarter, to be clear. Some of that was constrained, and then you see that playing through in the fourth quarter and the full year guidance. So we can't be more specific than that. Happy to provide any additional color that we can, but we're not going to provide specific product level guidance.", "Maybe over to Diana." ] }, { "name": "Diana Brainard", "speech": [ "Hi Tyler, so our outpatient study is ongoing. We're recruiting actively. And in terms of our predictions, we think that, that study will wrap up early next year, and we should have results in the first quarter. It is harder than is typical to predict the dynamics of trial enrollment for COVID-19.", "So much depends on the number of cases, the competition with other clinical trials. So we're going to have to kind of take it month by month and see how the dynamics go. As you know, we're approved with Veklury for hospitalized patients or equivalent in-patient setting. So in terms of then what that does for us, once we have the trial results, if it were successful, we would then look to getting an expanded label for that population.", "So that would be further down the line. But our first step is to get the study enrolled and see how Veklury performs in the outpatient setting, where we're trying to prevent hospitalization rather than hasten recovery in the hospital." ] }, { "name": "Tyler Van Buren", "speech": [ "Thanks so much." ] }, { "name": "Operator", "speech": [ "Our next question comes from the line of Umer Raffat from Evercore. Please go ahead." ] }, { "name": "Umer Raffat", "speech": [ "Hi guys. Thanks for taking my question. Just two very quick ones. First, on Biktarvy, perhaps.", "The IMS trends don't appear particularly encouraging for the last six months or so. I know it's growing, but not the way it was in the past. I would love to get your take on that. And secondly, on the capsid inhibitor, Merdad, how are you thinking about possible candidates for a combo? I know there are other companies with HIV candidates as well, and this has been an ongoing question.", "Where are you guys headed at?" ] }, { "name": "Dan O'Day", "speech": [ "Sure. Johanna can start, and then take it from there. Johanna, you want to start?" ] }, { "name": "Johanna Mercier", "speech": [ "Yes. Thanks, Umer. So listen, we're really proud of actually the Biktarvy growth. And I think that if you look at the share growth, it's basically eight points of share year on year when you think about as Q3 '19 to Q3 '20.", "And when you look at Q2 to Q3, it's a point of share. So we do think that the growth continues. Where we've seen a little bit more of an impact is from a market standpoint because if you think about the impact of COVID-19, it had a larger impact in our HIV treatment business really when it comes to switches. And so it'll impact disproportionately newer agents in the market because physicians aren't switching to newer agents.", "But obviously, Biktarvy is part of that pool. The overall share of Gilead still remains really strong because of that more than 75% of patients are actually on a Gilead compound. And so therefore, they're just remaining, there's less switches. We've seen that rebound a little bit in Q3.", "We expect that to continue through Q4. But I think, overall, if you think about it in the U.S., which is our larger business, right now, more than one out of two patients starts on Biktarvy. We have about a 56% share of naive patients. And when you think about the switches, although the market for switches are a little bit lower, we're still roughly about one in two patients going to Biktarvy, and they're going to Biktarvy from a non-Gilead single treatment regimen, which I also think is a great place to be.", "So we continue to feel extremely confident in Biktarvy's continued growth because you're seeing it basically happen across all of the markets around the world to really consolidate around Biktarvy, in addition to the fact that COVID-19 is actually for naive patients, a real advantage with Biktarvy because of the rapid start. And that's something that even guidelines are recognizing in light of the fact that there's no genotype testing, there's no HLA testing, etc. So that's also helping to continue to grow our share in the naive patient population. So with that, Merdad or Diana on the capsid." ] }, { "name": "Merdad Parsey", "speech": [ "Yes. I have to take that. Umer, as you mentioned, look, we have both internal candidates for combining with lenacapavir, and we remain open. As you said, there are other agents out there that could potentially be combination partners.", "And we remain definitely open to figuring out what's in the best interest of patients, and we'll continue to be diligent on that front. So I think both possibilities remain there." ] }, { "name": "Umer Raffat", "speech": [ "Thank you guys." ] }, { "name": "Operator", "speech": [ "Thank you. And I show our last question comes from the line of Geoff Meacham from Bank of America. Please go ahead." ] }, { "name": "Geoff Meacham", "speech": [ "I just had a couple on remdesivir. Dan, you've talked about it likely not making a major long-term contribution. So I just wanted to ask, are the investments in nebulized or next-gen programs still a priority in the near term? And the second one related is, how do you manage inventories for when the infection step down happens, which is hopefully sometime next year?" ] }, { "name": "Dan O'Day", "speech": [ "Yes. Thanks, Geoff, for the question. Really helpful, I mean, to hear your context on that. I mean let me say a couple of things, first of all.", "I mean we think Veklury or remdesivir will make a significant contribution certainly to Gilead. I mean it already has, as you've seen in the sales to date, and we think through the end of this year and into 2021, and potentially, on a seasonal basis beyond. I mean one has there's a lot we still don't know about the pandemic, of course. But I think what we do know is that in order to get us all back to normal, this is going to take a variety of approaches.", "Of course, it's going to take vaccines. It's going to take therapeutics in the hospital. It's going to potentially take combinations of therapies in the hospitals, and then it's going to need therapeutics pre-hospitals. So I think we're proud to be at the front end of this with a very potent antiviral, which is a bedrock, I think, of any approach to a pandemic.", "But we'll continue to need investment. We're fully committed to the investment in line extensions here and in seeing where else we might be able to play in that continuum from pre-hospital setting to hospitalized patients. Obviously, we're not going to play in the area of vaccines but in area of therapeutics. We think there's a very good return on that investment.", "I think the challenge we have is, by the way, we used to have a Tamiflu when I was at Roche, is it becomes difficult to predict. And you've seen it already at the half year, of course, we gave quite wide guidance to give us opportunities to understand where the pandemic was going and exactly how this will play a role in it. And now what we've done is we've reaffirmed that guidance, but we've narrowed it. And I think as we go into next year and the year after, we're just going to need to stay adaptable and flexible on how much of a contributor Veklury is to us, but we do feel very strongly that Veklury will contribute to our overall sales, be an important source of cash for our business and allow us to pay down debt and make sure that we continue to invest in the routine part of our business in antivirals and beyond.", "I think the other statement I would make, though, Geoff, is that as a result of both the internal and external portfolio development over the past year, and in particular, the Immunomedics and Trodelvy transaction, excluding Veklury, we're now very confident in our ability to grow in the short and midterm. So I think Veklury will come on top of that and may have year-to-year variability. But I think that's really the story of today's call and the evolution of the course of the past year. And thanks for giving me the opportunity to kind of put that into context." ] }, { "name": "Geoff Meacham", "speech": [ "Thank you." ] }, { "name": "Operator", "speech": [ "Thank you. This concludes the Q&A session. At this time, I'd like to turn the call over to Douglas Maffei for closing remarks." ] }, { "name": "Doug Maffei", "speech": [ "Thank you, Dilem, and thank you all for joining us today. We appreciate your continued interest in Gilead, and the team here looks forward to providing you with updates on our future progress." ] }, { "name": "Operator", "speech": [ "[Operator signoff]" ] } ]
GILD
2019-10-24
[ { "description": "Senior Vice President, Investor Relations", "name": "Sung Lee", "position": "Executive" }, { "description": "Chairman & Chief Executive Officer", "name": "Daniel O'Day", "position": "Executive" }, { "description": "Executive Vice President & Chief Financial Officer", "name": "Robin Washington", "position": "Executive" }, { "description": "Chief Commercial Officer", "name": "Johanna Mercier", "position": "Executive" }, { "description": "Senior Vice President and Head of our Inflammation Therapeutic Area.", "name": "John Sundy", "position": "Executive" }, { "description": "Senior Vice President, HIV and Emerging Viral Infections", "name": "Diana Brainard", "position": "Executive" }, { "description": "Senior Vice President and Head of our HIV", "name": "Diana Brainard", "position": "Executive" }, { "description": "Jefferies -- Analyst", "name": "Michael Yee", "position": "Analyst" }, { "description": "RBC Capital Markets -- Analyst", "name": "Brian Abrahams", "position": "Analyst" }, { "description": "Bank of America Merrill Lynch -- Analyst", "name": "Geoff Meacham", "position": "Analyst" }, { "description": "SVB Leerink -- Analyst", "name": "Geoff Porges", "position": "Analyst" }, { "description": "Morgan Stanley -- Analyst", "name": "Matthew Harrison", "position": "Analyst" }, { "description": "Cantor Fitzgerald -- Analyst", "name": "Alethia Young", "position": "Analyst" }, { "description": "Evercore ISI -- Analyst", "name": "Umer Raffat", "position": "Analyst" }, { "description": "Citigroup -- Analyst", "name": "Mohit Bansal", "position": "Analyst" }, { "description": "JPMorgan -- Analyst", "name": "Cory Kasimov", "position": "Analyst" }, { "description": "Mizuho -- Analyst", "name": "Salim Syed", "position": "Analyst" }, { "description": "Cowen and Company -- Analyst", "name": "Phil Nadeau", "position": "Analyst" }, { "description": "Credit Suisse -- Analyst", "name": "Evan Seigerman", "position": "Analyst" }, { "description": "Piper Jaffray -- Analyst", "name": "Tyler Van Buren", "position": "Analyst" } ]
[ { "name": "Operator", "speech": [ "Ladies and gentlemen, thank you for standing by and welcome to the Gilead Sciences's Third Quarter 2019 Earnings Conference Call. My name is Liz and I will be your conference operator today. [Operator Instructions] I would now like to turn the call over to Sung Lee, Senior Vice President of Investor Relations. Please go ahead." ] }, { "name": "Sung Lee", "speech": [ "Thank you, Liz, and good afternoon everyone. Just after market close today, we issued a press release with earnings results for the third quarter of 2019. The press release and detailed slides are available on the Investor Relations section of the Gilead website. The speakers on today's call will be Daniel O'Day Chairman and Chief Executive Officer; Robin Washington, Executive Vice President and Chief Financial Officer; and Johanna Mercier, Chief Commercial Officer.", "Also in the room are Diana Brainard, Senior Vice President and Head of our HIV and Emerging Viruses Therapeutic Area and John Sundy, Senior Vice President and Head of our Inflammation Therapeutic Area.", "Before we begin with our prepared comments, let me remind you that we will be making forward-looking statements including plans and expectations with respect to products, product candidates, financial projections and the use of capital, all of which involve certain assumptions, risks and uncertainties that are beyond our control and could cause actual results to differ materially from these statements.", "A description of these risks can be found in our latest SEC disclosure documents and recent press releases. In addition, Gilead does not undertake any obligation to update any forward-looking statements made during this call. Non-GAAP financial measures will be used to help you understand the Company's underlying business performance. The GAAP to non-GAAP reconciliations are provided in the earnings press release as well as on the Gilead website.", "I will now turn the call over to Dan." ] }, { "name": "Daniel O'Day", "speech": [ "Thank you, Sung, and good afternoon everyone and thank you for joining today. I'll share a few opening comments and then turn the call over to Robin. And after that Johanna will take you through the commercial highlights of the quarter as well. So let me start by saying I'm very pleased with the progress that we're making on all fronts here at Gilead and a strong third quarter results. Once again we saw significant growth in our HIV business, reaching an all-time high in quarterly HIV revenue. As you know, my time at Gilead I focused on three key areas since coming in; the pipeline, commercial delivery and people.", "And today in my brief remarks I'll focus on the significant progress we've made in two of those areas, the pipeline and the people, and then Johanna will take you and talk to you about the excellent commercial performance later in the call. So let me begin by saying a few words about our pipeline, starting with HIV. As you're aware, we received FDA approval for Descovy for PrEP earlier this month. This is a really important indication for us as it allows us to extend the benefits of Descovy to people who are at risk of HIV.", "To remind you, the approval was based on the DISCOVER trial which demonstrated that Descovy is just as effective of as Truvada and offers advantages in bone and renal safety parameters. We are excited to build on Descovy's status as the most prescribed dual NRTI backbone in the world by advancing its use in PrEP.", "Happy to say we've also received endorsement to begin a study of Descovy for PrEP in cisgender women which will allow us to eventually bring the medicine to a broader group of people. Rest assured, we continue to remain focused on our HIV pipeline beyond our Descovy based regimens as well, on our long-acting antivirals programs, compounds that will treat highly treatment experienced patients and of course on our Cure Research as well.", "So turning to filgotinib we've now filed for approval of filgotinib in rheumatoid arthritis in the EU and Japan, and are on track to complete our filing in the United States by the end of the year. Our teams around the world are preparing for launch and I'm encouraged about the potential of filgotinib to be best-in-class among the JAK inhibitors.", "In addition to rheumatoid arthritis, we're continuing to advance filgotinib together with our partner Galapagos. We have a comprehensive program across a number of other inflammatory diseases, including ulcerative colitis which we expect to have data on next year. And in addition, we were successful in closing our partnership with Galapagos this past quarter.", "I'm looking forward to the American College of Rheumatology coming up in Atlanta so that we can share further updates on filgotinib. Researchers there will present further analysis on the Finch 2 study which evaluated filgotinib in patients with RA who previously were treated with a biologic and then results of the pooled safety of filgotinib across the Finch program will also be presented and updated there.", "Turning to cell therapy, I would like to say a few words about Kite and our work in cell therapy. The teams down in Kite are busy preparing for the American Society of Hematology Meeting, which will happen in early December where in addition to exciting data from our ongoing clinical trials we will share survival data for Yescarta at three years in large B-cell lymphoma as well as results from the registrational study of KTE-X19 in mantle cell lymphoma.", "Recently, we also completed enrollment in the pivotal ZUMA-7 study of Yescarta in second line large BCL lymphoma and we're excited about the potential of this medicine could help for this group of patients. As we discussed also last quarter, we continue to see quarterly variations in Yescarta, but we're very confident and its future and the long-term trajectory of our cell therapy platform.", "Finally, a few comments about our leadership team, which is now complete with two new appointments. Merdad Parsey will join us on November 1st as our Chief Medical Officer. Merdad who previously led the early clinical development program at Genentech will have responsibility for all of our global developments and medical affairs functions. Bill Lee will continue to lead our research organization and he'll report directly to me, working closely with Merdad. Merdad is an outstanding scientist and leader with a remarkable track record of success, and I believe that Merdad will be a tremendous asset to Gilead, maintaining a very high bar for innovation so that we can continue to build on our legacy of transformational medicines.", "I'm also very excited about the appointment of Andy Dickinson to the role of CFO. Andy has been at Gilead since 2016 and currently serves as our Executive Vice President, Corporate Development and Strategy. He transformed the way that the Company approaches corporate developments before I came in and expanding the kinds of transactions executed and implemented a broader more strategic approach to deal making here at Gilead. As of November 1st, Andy will succeed Robin Washington who's retirement we announced earlier this year. Happy that Robin will remain at Gilead in an advisory capacity through early next year while we complete the reporting of our 2019 results.", "I'd also like to take this opportunity to thank Robin for her outstanding contributions, dedication and tremendous commitment to Gilead. We wish her all the best in retirement and I'm sure she will continue to stay busy. I look forward to working with this outstanding group of leaders here at Gilead who bring a strong blend of skills and diverse perspectives to the path forward for our future.", "And in closing, I'm increasingly optimistic about the future and believe we are well positioned as we enter the last part of the year and look ahead to 2020 and beyond. We will continue to build on our success as we replenish the pipeline and bring the next wave of transformational advances to patients. Hopping to leadership team, I want to thank all of our employees and partners around the world for the dedication and hard work that led to the successful quarter and the results that you see here today and whose commitment will continue to make us successful in the future.", "With that, I will now turn the call over to Robin." ] }, { "name": "Robin Washington", "speech": [ "Thank you, Dan, for your kind words. It has been a privilege to serve as Gilead's CFO for the past 11 years and to work alongside such extraordinary colleagues to bring medicines to people around the world. I know the focus on this mission will continue and I look forward to sharing Gilead on in 2020 and beyond. I'm pleased to report the financial results for the third quarter, which were marked by strong execution across our therapeutic areas, led by the continued growth of our HIV franchise and continued predictability of HCV.", "Total revenues for the third quarter were $5.6 billion with non-GAAP diluted earnings per share of $1.75. This compares to revenues of $5.6 billion and non-GAAP diluted earnings per share of $1.84 for the same period last year. As noted in the earnings press release, on a GAAP basis we recorded a loss of $0.92 per share, primarily due to $3.92 billion or $2.40 per diluted share of upfront collaboration and licensing expense associated with our global research and development collaboration agreement with Galapagos.", "Turning to product sales; product sales for the third quarter were $5.5 billion, down 2% sequentially and up 1% year-over-year. In the US, product sales for the third quarter were $4.2 billion, up 4% sequentially and up 2% year-over-year. In Europe, product sales for the third quarter were $804 million, down 23% sequentially and down 8% year-over-year. The sequential performance was primarily impacted by two items.", "First, recall that the second quarter benefited from a $160 million adjustment for a statutory revenue clawback reserve. And second, the third quarter was negatively impacted by a statutory clawback reserve adjustments. These two factors which primarily impacted our HCV and HIV revenues caused an approximately $200 million decline between quarters.", "Turning to cell therapy; worldwide Yescarta sales for the third quarter were $118 million, up 57% year-over-year and down 2% sequentially. US sales were $86 million for the third quarter, up 15% year-over-year and down 13% sequentially. In Europe, Yescarta sales were $32 million, up 52% sequentially as we continued to ramp in the region.", "It is clear that cell therapy is a validated platform with hundreds of patients being treated on a quarterly basis in the US. Yescarta has established itself as a differentiated leader in an increasingly competitive environment. We will continue to focus our efforts on CAR T education in the community oncology study to stimulate referrals of appropriate patients to cell therapy treatment centers.", "We also observe CAR T eligible patients being enrolled in clinical trials at a much higher rate relative to commercial patients. As such, and as Dan outlined, we anticipate further quarterly sales variations, but remain very confident in the future trajectory of Yescarta.", "Now turning to expenses, non-GAAP R&D expenses were $954 million for the third quarter, up 13% compared to the same period last year, primarily due to increased investment in our oncology programs, HIV programs and research projects. Non-GAAP SG&A expenses were $967 million for the third quarter, up 14% compared to the same period last year, primarily due to higher promotional expenses in the US and expenses associated with the expansion of Gilead's business in Japan and China.", "Moving to the balance sheet; during the third quarter we generated $2.6 billion in cash from operations and ended the quarter with $25.1 billion in cash and investments. We paid $5.5 billion in connection with our global research collaboration and equity investment in Galapagos which was classified in our cash flow statement as cash from investing activities and includes a $1.1 billion equity investment. We also paid $1.5 billion of debt used to finance our acquisition of Kite. We paid cash dividends of $804 million and repurchased 3.4 million shares of stock for $223 million.", "Turning to our guidance; as we move closer to the end of 2019, we are narrowing our guidance ranges as follows. Net product sales are expected to be in the range of $21.8 billion to $22.1 billion. Non-GAAP R&D expenses are expected to be in the range of $3.7 billion to 3.8 billion. We expect non-GAAP SG&A expenses to be in the range of $4 billion to $4.1 billion. All other components of our guidance remain unchanged. Our guidance is subject to a number of uncertainties which are outlined in slides 22 and 23 in our earnings call presentation.", "I will now turn the call over to Johanna." ] }, { "name": "Johanna Mercier", "speech": [ "Thanks, Robin, and good afternoon everyone. So as I've had the chance to settle into my role, I have been really impressed with the talent here at Gilead and the potential we have to reach even more patients with our medicines. I want to talk today about a few areas, the continued strength of our HIV business including our recent launch of Descovy for PrEP, durability of HCV and finally touch briefly on our cardiopulmonary business and close by discussing our filgotinib launch preparation. So let's start with HIV.", "Global HIV sales for Q3 were $4.2 billion, up 4% sequentially and 13% year-over-year. This marks the sixth consecutive quarter of double-digit year-over-year growth. As Dan noted, this is an all-time high for quarterly HIV product sales. US HIV product sales were $3.4 billion in Q3, up 6% sequentially and 14% year-over-year. The year-over-year increase was driven by underlying prescription demand growth of 13%, mainly Biktarvy. Biktarvy was the number one prescribed regimen in the US in the quarter. In prevention, there are now approximately 224,000 people taking Truvada for PrEP, an increase of approximately 25% year-over-year of active patients.", "Our teams are now in the field with Descovy with its recent approval in PrEP. We initiated efforts to educate healthcare providers and people at risk for HIV about Descovy immediately following the approval and are really quite pleased with initial and anecdotal feedback from providers.", "Turning to Europe, Q3 HIV product sales were $558 million, down 10% sequentially and 4% year-over-year. The year-over-year decline was expected due to the broad availability of generic versions of Truvada. The impact from generics is starting to wane as the launches of our Descovy-based products, mainly Biktarvy progress.", "As Robin just mentioned, the sequential performance was impacted by an adjustment for statutory clawback reserve in Europe which benefited the second quarter. Biktarvy is now available across the EU5 and continues to grow. It's on track to be the best HIV launch in Europe and is number one in naive and switch across Germany, France and Spain. It recently launched in Italy in the UK and is off to strong start in both those countries.", "Moving on to HCV. Global Q3 HCV sales were $674 million, down 20% sequentially and 25% year-over-year. US product sales for Q3 were $380 million, up 7% sequentially and down 22% year-over-year. The sequential performance was driven by the continued uptake of authorized generics, which has improved our overall competitive position in the US.", "In Europe HCV product sales for the second quarter were $111 million, down 60% sequentially and 45% year-over-year. As anticipated, the sequential performance was negatively impacted by the adjustments for statutory clawback reserve in Europe which benefited Q2. Overall, the HCV market continues to see a more predictable decline in patient starts and perform in line with our expectations.", "Before closing, I wanted to just make a few comments on our cardiopulmonary business, where we have seen generic competition enter the market. As anticipated, significant volume erosion has occurred and as of September we have seen an 85% of erosion of Ranexa and 60% erosion of Letairis, a trend that we expect to continue.", "Finally, I've spent time recently in both Europe and Japan where our teams have completed the regulatory filing for filgotinib in rheumatoid arthritis. Launch preparations are well under way in both regions as well as in the United States where as Dan noted we plan to file before the end of the year.", "I believe that we truly have an opportunity to make a difference in the lives of people with RA and in the future other inflammatory diseases. We're actively preparing for competitive and innovative launch of a differentiated JAK inhibitor across our key markets. I really look forward to working with this great team of people to deliver on the promise of these medicines. So thank you very much for joining today's call. And now let's turn it over to questions. Operator?" ] } ]
[ { "name": "Operator", "speech": [ "Today's question-and-answer session will be conducted electronically. [Operator Instructions] Our first question comes from the line of Michael Yee with Jefferies. Your line is now open." ] }, { "name": "Michael Yee", "speech": [ "Hey guys, thanks for the questions. I had a question for Dan. Obviously, Dan, you've spent a lot of time this year, putting in the right people, getting everything all set up, you did a Galapagos deal to build up the pipeline a bit. I guess and thinking about the pipeline and building that out, where are you focusing your priorities on, how should we think about your next area, whether that's in NASH or oncology, how should we think about that, maybe just give us a little state of union there." ] }, { "name": "Daniel O'Day", "speech": [ "Yeah. Thanks Michael, very much for the question. And the line is that we now have the team coming together for the future. I think it's a really good diverse team with some strong Gilead legacy colleagues as well as combined with some talent from the outside of the organization with different perspectives. And I think it's going to lead through a really strong good team that will help us drive kind of the future chapters of Gilead moving forward.", "Also pleased Michael that we had the Galapagos transaction finalized in the quarter. But we're obviously getting going now on our deeper collaboration beyond filgotinib and as I've said to you in the past and I'll say it again, I mean I think the team here and I have the pipeline as our number one priority, of course. And then we approach that from a variety of different ways. One is the strength of our internal pipeline looking for ways to accelerate differentiated medicines that we can internally and with Galapagos now significantly expanding our research base in addition to other collaborations we have externally that allow us to essentially double our research base of medicines coming into the portfolio, the development portfolio.", "In terms of therapeutic area, I would say our approach to external partnerships and M&A will be very much the same of what you saw in the past. So, first and foremost, it will be driven by science, driven by where we think the most unique opportunities are. Secondarily, it will be informed by our own expertise. As you know we play across four therapeutic areas today and strong scientific understanding in a base in antivirals and immuno modulation. And there is no one size fits all, of course. I mean, at times it makes sense to just do a partnership, but other times it makes sense to do a full acquisition and other times it makes sense to do something like a Galapagos arrangement where we have a deep partnership associated with that.", "So we'll continue on in that area. I think more to come as the team comes together as we continue to evaluate. Certainly, the areas that you mentioned are areas that we're looking at carefully to complement our internal expertise, but we're not driven by any one therapeutic area, we're driven much more by where is the next innovation going to come from in science and how do we complement that portfolio with an acknowledgment by the way that we understand that we have to accelerate the development of our later stage pipeline as well and that can happen by both accelerating our internal pipeline or having partnership arrangements with companies outside of the Gilead today.", "So Michael, more to come. And obviously some of the conferences coming up and into next year, I can be even more specific and articulate about how some of our strategies reforming." ] }, { "name": "Michael Yee", "speech": [ "Perfect. Look forward to that. Thank you." ] }, { "name": "Daniel O'Day", "speech": [ "Thanks, Michael." ] }, { "name": "Operator", "speech": [ "Our next question comes from Brian Abrahams with RBC Capital Markets. Your line is now open." ] }, { "name": "Brian Abrahams", "speech": [ "Hi, there. Thanks very much for taking my question. So you narrowed the R&D and SG&A guidance to the upper end of the previous ranges and so I guess I'm wondering maybe bigger picture, perhaps longer term, especially as we're getting closer now to the filgotinib launch. How do you guys balance the importance of margin preservation and earnings growth against the potential to invest as you build out in inflammation and how might the changes in leadership potentially influence this. Thanks." ] }, { "name": "Daniel O'Day", "speech": [ "Yes, let Robin give her commentary, Brian, and then maybe I'll add as well, so please." ] }, { "name": "Robin Washington", "speech": [ "Hey, Brian, thanks for the question. I'd say we manage them very carefully. As you know, we've always been a very highly efficient organization really focused on operational excellence and ensuring that even as we've grown we've grown profitably as we think about margins and at the same time as you've heard me say before, we are always balancing the need to invest for the long term. And as you know that can have implications in the short term.", "You've seen us with previous launches and with acquisitions make the necessary investments upfront that may yield shorter operating margins in the short term, but ultimately get us to higher revenues and overall margins long-term. So I think that's how we think about our model. There is -- it's not by quarter or by year. It's really ensuring that when we make investments that we make the necessary actions in the short time, ensure the overall ROI on those investments.", "And I'll turn it over to Dan to talk about the future, but I think we're pretty much in line going forward." ] }, { "name": "Daniel O'Day", "speech": [ "That's well said, Robin. And Brian, you may want to hear it from my vantage point as well, just particularly with the CFO transition to make sure you understand the stability from my side as well. So I have really admired Gilead's efficiency as Robin mentioned and the careful management of expenses. And I think that's something that we will continue to make sure that we emphasize here as well.", "I've also been a student of the history here at Gilead and I look back in the past and seen in times of important launches that investment has increased correspondingly in the interest of patients, in the interest of shareholders. And I think that type of philosophy I think will continue and certainly we will also be -- as we have a generic erosion of course coming now this year and next year, we also have the ability to redeploy those resources as we already have done with cardiopulmonary to other areas of focus and interest, including the upcoming or the current the launch for Descovy in PrEP and then we will also make sure that we have a competitive launch of filgotinib because we know that it will be essential to have the right share of voice to get that off to a good start.", "We have one chance to launch a product in this industry and therefore we have to make that accordingly. So as we get into providing you with more guidance in 2020, we can elaborate a little bit further about how we see that expense management for next year, but I hope you get a sense that much of the discipline that Gilead has had in the past, you can expect to have in the future as well, Brian." ] }, { "name": "Brian Abrahams", "speech": [ "Thanks so much." ] }, { "name": "Daniel O'Day", "speech": [ "Our next question comes from Geoff Meacham with Bank of America Merrill Lynch. Your line is now open." ] }, { "name": "Geoff Meacham", "speech": [ "Hey guys, thanks for the question and congrats to Andy and Rob, it's been great to work together, wish you the best. I just wanted to ask about HIV market expansion outside of PrEP. And with Biktarvy the share gains are impressive and with its profile. Are you seeing an uptick though in treated patients on ART overall, I just wanted to ask because HIV market expansion used to be a secondary driver of the market, but I'm not sure about that today and how do you think this differs in Europe? Thanks so much." ] }, { "name": "Johanna Mercier", "speech": [ "So maybe I'll take that one. Geoff, it's Johanna. I think as you were mentioning, the HIV business overall and treatments are huge part of that 80% of our total HIV business, has never been stronger and what we're seeing is a bit of a mix that you're saying, but in both US and Europe, you have about 80% of the patients that are switch patients and 20% are naive patients. So the naive patients is a smaller play and less of a market expansion per se to your earlier point, but much more on the switch. And so where the switch come from are really important to us for Biktarvy and what we're seeing with Biktarvy and that's been our strategy all along and our expectation is we're seeing about 20% to 25% are coming from Descovy-based regimens and about a third coming from Truvada based regimen and then the rest, another third probably from Genvoya.", "And so that's a piece where from a switch standpoint, that's the biggest -- most important piece of the business, both in US and Europe it's quite similar actually. The challenge in Europe is obviously there is more Truvada pieces of puzzle just because of the genericization in Europe. But overall, what we're seeing is very consistent, both in naive and switch and Biktarvy is number one, not just in the US, but also in Germany, France and Spain, and we owned only just part reimbursement in the last quarter for UK and Italy. So -- but those launches are off to the similar, very consistent way of launching than we've seen in the other markets." ] }, { "name": "Daniel O'Day", "speech": [ "Thank you, Johanna. So we go in to the next question." ] }, { "name": "Operator", "speech": [ "Our next question comes from the line of Geoff Porges with SVB Leerink. Your line is now open." ] }, { "name": "Geoff Porges", "speech": [ "Thank you very much. I'm just wondering if you could help me understand a little bit on the research side, you sort of lost over that a bit. First, Dan, could you break out the $4 billion or so in annual spend that you have now between immunology, oncology, hepatology and then research, just give us a sense of those allocations. And then related to that, Dan, could you talk about if you were to contemplate significant M&A or -- for that matter additional licensing, do you envisage that $4 billion run rate will have to go up to accommodate those new programs or do you have some savings from big trials coming to an end and/or other efficiencies that might take the $4 billion down and accommodate incremental programs from outside the Company?" ] }, { "name": "Daniel O'Day", "speech": [ "Terrific. Yeah, thanks, Geoff. I'm actually glad you asked the question because on the previous question I spoke more about how we look at allocation of resources on the commercial side, more so than the research side. So, yeah, let me first of all state that the first part of your question relative to how we allocate that across therapeutic areas, it is not something we disclose accordingly. So I can't help you with that. But I think I can help you with the forward question which is, as we think forward to either partnerships or M&A, how is that going to help or what impact will that have, if you like, on the overall R&D spend.", "Now, I think there is one aspect of that is very important which is you know and you mentioned it a bit but, A, we're constantly prioritizing our portfolio internally and that is based upon making sure that we have the most attractive programs that we're funding. Every organization has to draw a line and I think we also have to do that as well. And of course things change because of the, you know, the nature of data that's read out, competitive environments, a variety of things that happen. So the portfolio is constantly kind of evolving and moving internally based on that portfolio and therefore to your point, there are times when we stop studies, studies come to a natural conclusion and they've been successful and we have those to then reinvest again accordingly.", "Many of the structures that we've looked at in our partnerships have also have been designed to be, first of all, innovation forward but also allow for some balanced risk across the portfolio and spend, for instance with Galapagos. Our relationship with them is that they are covering trials up until Phase II and they take the decisions and they take the risk associated with that and all the diversity and benefit that comes from having another organization look at that differently and then post our opt-in of course then we would start to incur expenses on our R&D line as well.", "So many of our partnerships and collaborations have been designed with that in mind as well and we'll continue to do it that way to be efficient with risk versus investment and I think that's what we'll continue to look at moving forward. So more to come on that. I would just say, I mean the one thing we do disclose Geoff on the R&D line is that around 15% to 20% of the $4 billion goes into research and the remaining is into development human trials accordingly. So that I can give you, but we don't really break it down further by therapeutic area. Does that help?" ] }, { "name": "Geoff Porges", "speech": [ "Somewhat. Thanks, Dan." ] }, { "name": "Daniel O'Day", "speech": [ "As much as I can, I think, but thanks Geoff." ] }, { "name": "Operator", "speech": [ "Our next question comes from Matthew Harrison with Morgan Stanley. Your line is now open." ] }, { "name": "Matthew Harrison", "speech": [ "Great. Good afternoon. Thanks for taking the question. I guess I was hoping you could just talk briefly, I know it's very early in the switch from Truvada to Descovy, but maybe you could talk about your expectations for some of the markers we should be looking for there and then maybe anecdotal feedback as you may be been in the market a couple of weeks already with that. Thanks." ] }, { "name": "Johanna Mercier", "speech": [ "Thanks, Matthew, for the question. So, yes, so only a few weeks been, right, we got the approval early October. But even within a few weeks, we're off to a strong start. I think the team is very excited about it. But more importantly the early feedback from physicians is very positive and we're hearing a lot of enthusiasm from our prescribers. I do want to explain that the PrEP market is a little bit different than the treatment market and that it is much larger in the number of prescribers. So, there is over 50,000 prescribers that have actually written at least one script of PrEP with Truvada.", "So having said that, more than half of the volume that we're seeing in PrEP is actually very concentrated in a couple of thousand specialists who also prescribing treatment. So that has been our number one focus and target physicians that we have been calling on over the last couple of weeks because these are folks that obviously largest volume pool, but also folks that have experienced converting from TDF to TAF and also understand the value of Descovy and its clinical profile specifically around the safety with bone and renal.", "So we assume a very similar conversion than what we've seen in the past. We have a lot of experience here of TDF to TAF conversions and we've seen that same conversion rate will happen with these top prescribers. For the balance of the volume, obviously we are assuming a little bit of a slower uptake with those prescribers just because it's so much more diffuse. But having said that, we've augmented the field team. I think Dan mentioned this earlier, how we've taken out a lot of our field forces from the cardiopulmonary in light of the generics hitting there. We've basically trained train them and moved them over there to supplement the team and also augmented our consumer approach to get really rapid awareness of Descovy both to physicians as well as targeted consumers. So, so far so good, very excited about the launch and probably in the next quarter we will have more to talk about with data." ] }, { "name": "Operator", "speech": [ "Our next question comes from the line of Alethia Young with Cantor Fitzgerald. Your line is now open." ] }, { "name": "Alethia Young", "speech": [ "Hey guys, thanks for taking my question. And I just wanted to talk a little bit about NASH strategy from here. I understand you have the ATLAS study in the fourth quarter but I also saw you starting a semaglutide [Indecipherable] study combination with double and triple. So, can you maybe frame for us on how you think about like what might be your backbone asset in NASH and possibly your plans going forward there. Thanks." ] }, { "name": "Daniel O'Day", "speech": [ "Yes, thank you very much, Alethia. So I think you rightly pointed, kind of an important data point coming up here that will allow us to think about how we pivot our NASH strategy moving forward and that's the ATLAS study that we will be reading out before the end of the year. So those of you that don't know, I mean that's a combination trial that will allow us to look at the results of result of a variety of different combinations on the progression of NASH.", "But as you also know, I mean we've had a number of other collaborations we've looked at with Novo Nordisk on GLP-1 and some of the other ones that you've already mentioned there, Alethia, that are approaching this from different angles as well. So I do think though that the most progressed clinical trial is currently the ATLAS trial and once we can see the results of that and dig into that, then I think it will help us really understand how to progress ahead with NASH in what format and what way.", "I would just mention that as we've always mentioned, we think that NASH is a very high unmet medical need, but also a challenging disease to develop and given the nature of the disease, given the heterogeneity of disease, given the endpoints, and yes, we think a company like Gilead with its expertise in this area, need to be informed by the science and follow the science to see what our path forward will be. So, more on the NASH strategy after the ATLAS trial at the end of this year." ] }, { "name": "Operator", "speech": [ "Our next question comes from the line of Umer Raffat with Evercore ISI. Your line is now open." ] }, { "name": "Umer Raffat", "speech": [ "Hi, thanks so much for taking my question. I wanted to focus on a couple of R&D topics, if I may. One, on filgotinib, I noticed FDA called in the [Indecipherable] filgotinib review documents, FDA effectively implied class labeling on thrombosis risk for the class. And my question is what's your expectation, do you think you'll get a black box on thrombosis and do you think that impacts commercial uptake. And then secondly, there was a program in your pipeline which I was starting to get really excited about perhaps mostly because it was sort of in the exactly in the type of thing Gilead has been very good at, novel [Indecipherable] GS-9131 and it could a form a base of lifecycle management. I noticed it's not in the slide deck this time around and I was wondering if you could catch us up on any learnings from that program. Thank you." ] }, { "name": "Daniel O'Day", "speech": [ "Terrific, Umer. So, we're going to start with John and [Indecipherable] going that we're going Diana [Indecipherable] question." ] }, { "name": "John Sundy", "speech": [ "Sure. Umer I mean, as you know and we've spoken about before, we know that patients with inflammatory diseases are at risk for thrombosis and so it's always a comparison against expected background rates of this event and patients. And we think it's possible that selective JAK1 inhibition as we have with filgotinib may have some advantages, but certainly at this point it will be premature to speculate on what the label outcomes may be. We're going to go through the process. We believe we have a strong story with regard to thrombosis risk and at the same time reassured by the overall efficacy and safety profile. So we've seen this across all of our programs and we are looking forward to having our discussion with the regulators." ] }, { "name": "Diana Brainard", "speech": [ "This is Diana Brainard and I'll speak to your question around GS-9131, which is a nucleoside reverse inhibitor with an improved resistance profile over the currently approved drugs in that class, and this is a compound that we've been excited about and moving through the clinic in early phase studies because we do have a commitment to highly treatment experienced patients who have failed prior regimens and have multidrug resistance. In parallel with the GS-9131 program, as you know our capsid inhibitor program with GS-6207 has also progressed very rapidly and GS-6207 is the first-in-class compound, it's got a novel mechanism of action. It's got an orthogonal resistance profile.", "We haven't seen any pre-existing resistance among all of the samples we've tested from treatment-naive patients and heavily treatment experienced patients, these data have been published at recent conferences. And so because of this novel mechanism of action, because of the potency, because of the lack of pre-existing resistance, we really feel that the capsid inhibitor is the really fast and lead compound to bring forward in highly treatment experienced patients. And in fact its promise was recognized by FDA when they granted us breakthrough designation for this population. And so we're moving ahead with capsid in this population into a registrational trial and therefore won't be bringing GS-9131 forward for this population because we prioritized our capsid inhibitor." ] }, { "name": "Umer Raffat", "speech": [ "Thank you very much." ] }, { "name": "Operator", "speech": [ "Our next question comes from the line of Mohit Bansal with Citigroup. Your line is now open." ] }, { "name": "Mohit Bansal", "speech": [ "Great, thanks for taking my question. So, looking at your slide, you have some plans to develop capsid inhibitor in the Phase II -- started trading Phase II trial with capsid inhibitor. Have you discussed internally about what kind of combination agent you will be using with this long-acting treatment at this point and when can we learn more about your PrEP strategy for capsid inhibitor. Thank you." ] }, { "name": "Diana Brainard", "speech": [ "So we're really envisioning the capsid inhibitor to have multiple different applications for people living with HIV. I've just mentioned it's used for heavily treatment experienced patients where it could be added on to optimized background therapy as is commonly done for this population, but it also has huge potential for people living with HIV who might want to switch to a long-acting regimen because of its ability to be given at least every three months, every six months and potentially in the future longer. And there we are still actively looking for what's the right partner for our capsid inhibitor will be and we have multiple internal programs which are preclinical or in the very earlier stage of assessments in the clinic, and we're looking forward to sharing more details as we have more certainty about what the right combination will be to partner with capsid. What we're prioritizing is ease of administration.", "So we're looking at subcutaneously administered drugs, we're looking at drugs that can go the distance in terms of longer at least monthly, if not longer and match capsid's potential. And so as we prioritize those features and bring forward different compounds, we're really excited actually to share that data." ] }, { "name": "Mohit Bansal", "speech": [ "Awesome. Thank you." ] }, { "name": "Operator", "speech": [ "Our next question comes from Cory Kasimov with JPMorgan. Your line is now open." ] }, { "name": "Cory Kasimov", "speech": [ "Hey, good afternoon guys. Thanks for taking my question. I wanted to see if you could talk a little bit more about the quarter-over-quarter trends for Yescarta. I know you mentioned there are or there were a higher number of potential patients going into clinical trials in 3Q, but how much do you think the sequential drop can also be attributed to the launch of [Indecipherable], are you seeing centers slot that in ahead of CAR T products or potentially any other dynamics taking place. Thanks." ] }, { "name": "Daniel O'Day", "speech": [ "Yeah, absolutely, great, thanks for the question and happy to talk about it. I mean I think it is important that I start out with maybe you know that the team here is really confident with the longer term opportunity with Yescarta and also cell therapy. But as we know, I mean this is a pioneering platform and just to point out some of the dynamics that we're seeing in the market, cell therapy really it literally changes everything fit it touches from patient identification to clinical practice to reimbursement to safety management.", "So I would say some of the growing challenges with getting a pioneering technology in are what we would expect, but what's kind of unquestionable is in the patient set where it has been studied, so relapsed refractory DLBCL so far on the market, I mean the efficacy and durability are unprecedented. I mean, the majority of extremely six patients are alive at two years, and as we know and many of my colleagues and the team, hematology oncology is a data-driven space.", "So I would say that -- and we also have a very strong and good manufacturing capacity, which is critical for this technology. Now you mentioned some of the challenges. Let me talk about some of the drivers and some of the challenges that we're seeing in general in the market. I mean, on the positive side, the NTAP improvement that just went into effect in October 2019 from a reimbursement by CMS of 50% to 65% is a step in the right direction. We -- it does take, there is a lag time before that gets fully absorbed and introduced into the community.", "I would point out the ASH data coming up. We'll have three key events there, the survival data at three years in relapsed-refractory DLBCL, early steroid use and also data on the KTE-X19 and MCL. We're just -- also point out the ZUMA-7 is now fully enrolled. So that's the second line DLBCL, look forward to that trial playing through and hopefully as we go into next year, we can look toward a DRG for CAR T as well. So those are some of the real positive things we're seeing in the market and then to your point, I mean there are still challenges with Medicare reimbursement update. There is a high rate of clinical trial usage in DLBCL which is good news for patients. It's just there is quite a few clinical trials there, still getting the patient referral flow downs.", "We do have some new market entrants early days on those. You mentioned one on the call here today and this whole concept between inpatient and outpatient reimbursement. So I think the team is kind of systematically working through these. And that's why we see some quarter-on-quarter fluctuation in the United States. I would point out that we're now getting going in Europe, which is also terrific and very good growth there and different -- some of these dynamics are different in Europe as well.", "So I think as we learn quarter to quarter on some of the dynamics and as the data matures and develops out there, I think that's going to be a real telltale sign for how we continue to see the uptake here. But taking a big step back, the type of data we're seeing and the duration of response in the patients that we've studied is second to none. So, hopefully as some of this becomes more -- the trends become more clear in future quarters, we'll be able to be more precise about some of these as well, but thanks for the question, Cory." ] }, { "name": "Cory Kasimov", "speech": [ "Okay, thanks, Dan. Appreciate the thoughtful answer." ] }, { "name": "Operator", "speech": [ "Our next question comes from Salim Syed with Mizuho. Your line is now open." ] }, { "name": "Salim Syed", "speech": [ "Hi guys, thanks for taking my question and congrats to Robin, and welcome to Andy. Just one from me on hepatitis B as in boy, if I can. I don't know if you guys could give us an update on the core inhibitor, what's the status there and I know there has been some safety issues for the core inhibitor class predominantly coming from [Indecipherable] and SBA derivatives. So I was wondering if you can just give us a little bit of color, if your core inhibitor, whether it is in development or not in development and whether it is one of those derivatives. Thanks so much." ] }, { "name": "Diana Brainard", "speech": [ "Salim, this is Diana Brainard. Are you talking about the capsid inhibitor?" ] }, { "name": "Salim Syed", "speech": [ "For hepatitis B as in boy." ] }, { "name": "Diana Brainard", "speech": [ "Yes, you're talking about [Speech Overlap]." ] }, { "name": "Salim Syed", "speech": [ "Yes, that's correct. Yeah." ] }, { "name": "Diana Brainard", "speech": [ "Yeah. So I think that we have seen the competitor data regarding capsid and we're looking very closely at our compounds preclinically as well as clinically because obviously with hepatitis B, we've got a lot of experience in this space and we know very well the value of suppressive treatment and the safety of those regimens and the benefit that viral suppression brings in terms of reducing cirrhosis, reducing rates of hepatocellular carcinoma. So while we're committed to cure and recognize that we're going to need combination therapies, we are also really cognizant of the safety barrier that really has to be exceeded to bring combinations forward and I think that's really all we can say about that right now." ] }, { "name": "Salim Syed", "speech": [ "Are you still developing, is it still ongoing. There has been some speculation that it's been terminated in the marketplace?" ] }, { "name": "Diana Brainard", "speech": [ "I think that we're in the process of continually evaluating what our best next steps are and I think in terms of how we prioritize, what we bring forward, we've got the TLR-8 and Phase II and we really want to see the results of those studies before making any final decisions on next steps and future combinations." ] }, { "name": "Salim Syed", "speech": [ "Okay, got it. Thanks so much." ] }, { "name": "Daniel O'Day", "speech": [ "Thanks." ] }, { "name": "Operator", "speech": [ "Our next question comes from the line of Phil Nadeau with Cowen and Company. Your line is now open." ] }, { "name": "Phil Nadeau", "speech": [ "Good afternoon and thanks for taking my question. Just one question on filgotinib, maybe to ask numerous question a different way, you've talked a lot about differentiating filgotinib. How important is a differentiated label to that process commercially, how else -- what other key points will you have in differentiating filgotinib. And then second filgotinib question, we have been expecting data from filgotinib as well as GS-9876 [Indecipherable] in COE in the second half of this year. I noticed in your slides, neither of those programs were mentioned, is there any update on those two Phase II programs. Thanks." ] }, { "name": "Daniel O'Day", "speech": [ "Yeah, Johanna [Indecipherable] concern the commercial side Phil, and then we'll go to John on the development." ] }, { "name": "Johanna Mercier", "speech": [ "Okay. So Phil, more on the competitive concept. So, as you know, this environment is super competitive and many of us know it well, including myself. And so we've really pool together a team that has considerable experience in this field. The piece that you would say about the differentiated level, I think it's twofold. I think from a label standpoint what we've seen thus far from the FDA is a little bit of a more of a class labeling. And so our expectations and we'll go through the process, but we are also being conservative in our expectations. One of the things that I would say is the importance of our data and I think that if you look at the results of the three Finch 3 studies in three different patient groups, those are really exciting for us, both from an efficacy standpoint as well as safety standpoint.", "So a lot of the work that's being done right now is sub analysis to ensure that we can better educate physicians about our data. So that's kind of the plan there. And I do think that the opportunity here is to potentially have a best-in-class JAK inhibitor in that could be also related to the sell activity of the JAK1. So having said that, that's what we're doing, all hands on deck to prepare for a competitive launch, but a differentiated one and an innovative one at the same time. So we're excited about that and obviously we'll know more about the label in the coming months through 2020. So John, maybe on the other?" ] }, { "name": "John Sundy", "speech": [ "Sure, let me update you on the status of the cutaneous lupus in children studies that we conducted. So these were proof-of-concept studies as you probably know. We looked at a couple or even three different drugs in the same trials for these. These studies were exploratory in nature. We set a high bar for ourselves to proceed. And while we did not see or meet the primary endpoints in these studies, I think I would like to point out is that we did see evidence of activity with filgotinib particularly in patients who had markers or evidence of more active disease. So we just got the first look at these data, we're looking at the full set of data from all of these studies and we will determine the next steps that we take in lupus and Sjogren's disease and we'll share those results at upcoming meeting soon." ] }, { "name": "Phil Nadeau", "speech": [ "That's very helpful. Thank you." ] }, { "name": "Operator", "speech": [ "Our next question comes from Evan Seigerman with Credit Suisse. Your line is now open." ] }, { "name": "Evan Seigerman", "speech": [ "Hi there. And thank you for taking my question. And I also want to extend my best wishes to Robin on her retirement. Just one on the KITE franchise. So I'm just wondering if you could help me better understand the rationale for the increased investment, namely with manufacturing facility, but more broadly, how does expansion into cell therapy beyond Yescarta fit within your kind of new strategy for Gilead, Dan. And aside from Yescarta, are there any programs that you think we should be focusing on that could drive near-term value for the franchise?" ] }, { "name": "Daniel O'Day", "speech": [ "Thanks very much for the question. And yeah, again, I would probably start with the investments that you mentioned. I mean I think it's really important that we acknowledge the fact that you know the ability to manufacture and the turnaround time associated with cell therapy is absolutely fundamental to patient benefit and also to the efficacy results that we're seeing. And I think it's a real competitive advantage to be able to have now a network of manufacturing facilities that are state-of-the-art and are able to reduce that turnaround time, including as you mentioned we have made a decision to establish a viral vector facility in one of our current manufacturing sites in Oceanside, California that will allow us to not only support the current products but also future products in the pipeline.", "So look, I mentioned some of the near-term things on CAR-T in addition to, you know what we currently have out there with Yescarta profile today. This data on Yescarta at ASH, I think, it will be important, looking at the three-year data in the early steroid use. The KTE-X19 is now a second product for MCL and we look forward to presenting that data as well. ZUMA-7 goes back to Yescarta and an earlier line setting. So when you think about the long duration of effect, the efficacy and durability that we've seen in the relapsed refractory third line setting, I mean the real question is and the more natural, obviously oncology development avenue is to say, can you bring that effect up into earlier lines of therapy and potentially have this effect with more patients and potentially for longer duration because you're treating them earlier.", "So the strategy is very much to continue to expand out the hematology indications, first and foremost. I think that's where the greatest promise exists for CAR-Ts right now, but we do also have mid to longer-term programs on solid tumors, on allogeneic and those, although riskier and earlier, are also programs we're fully committed to as we look to round out our leadership in cell therapy accordingly.", "So more to come on this. I firstly to the broader oncology strategy, I mean, as I've said before and I'll say it again, I think the concept of Gilead getting deeper into oncology by starting with a pioneering technology I think is a smart thing to do in oncology. I mean, really to think about where you can get long durations of responses with a new technology. Having said that, we also have a great deal of expertise in our home-based technologies such as small molecules and it evolving biologic modality expertise of Gilead. And although I'm not prepared to talk more about that today and look forward to Merdad and others coming into the organization so that we can continue to evolve our oncology strategy, I think there are opportunities certainly that we can look at outside of cell therapy and complementary to cell therapy.", "So, more on that. We're literally in the process of really doing deep dives on this. As you know, we also have some partnerships with other companies where we are fully committed to different aspects of oncology and it's been a common question and I totally accept it and it's one that as we go into next year, we'll be laying out deeper and deeper our holistic strategy around oncology that will include cell therapy, but not be only cell therapy as we move ahead. So more to come on that." ] }, { "name": "Evan Seigerman", "speech": [ "Great, thanks for the question. Appreciate it." ] }, { "name": "Daniel O'Day", "speech": [ "Thanks, Evan." ] }, { "name": "Operator", "speech": [ "Our next question comes from the line of Tyler Van Buren with Piper Jaffray. Your line is now open." ] }, { "name": "Tyler Van Buren", "speech": [ "Thanks guys, good afternoon. Earlier in the session you guys spoke toward your strategic areas of focus for business development and the Galapagos deal makes a lot of sense from a long-term broadening out the pipeline perspective and acquiring additional scientific talent in Europe. But could you guys just speak a little bit further to your urgency to acquire late stage or on market assets particularly maybe within the next year to add to the top line, which as it stands is relatively flat." ] }, { "name": "Daniel O'Day", "speech": [ "So thanks, Tyler. I mean, obviously, we are a company that's firmly focused on differentiated medicines and we will be driven again by the science both internally and externally. And obviously, it won't be too long before we start to talk about the guidance for 2020 and beyond. And I'm not going to talk about that today, but the bottom line is we're -- if I take a big step back and I think about my confidence in the long-term growth potential of Gilead, it is captured within the strength in the HIV business. I mean that same business that you see offsetting some of the patent expiry this year continues to be we think a very durable business for the foreseeable future.", "You have a more predictable [Indecipherable] business at this time. And then we have upside potential in filgotinib launching next year, and I won't repeat, but the Yescarta programs and successes accordingly. Having said that, we understand that we want to find ways to continue to look to increase and accelerate our growth in the coming years and that will happen both through internal strategies associated with the large products and programs I mentioned and then also outside partnerships and M&A. So rest assured that we are looking at everything that could help complement our later stage portfolio out there.", "And yes, and as you've seen, I think our behaviors, we will be disciplined about that. We will make sure that is something that we feel scientifically is very strong, something that we can add something to and provide strength to and when and if those opportunities come up, we certainly have the financial capacity and ability to act. So that's paramount on our mind. We're in it for the short, medium and long term and we're looking to improve all three of those time periods, but clearly the portfolio is absolutely a key for me and a key for the leadership team. So thank you, Tyler, for your question." ] }, { "name": "Tyler Van Buren", "speech": [ "Yeah, thanks very much." ] }, { "name": "Operator", "speech": [ "That will conclude today's question-and-answer session. I'd like to turn the call back to Sung Lee for closing remarks." ] }, { "name": "Sung Lee", "speech": [ "Thank you, Liz, and thank you all for joining us today. We appreciate your continued interest in Gilead and the team here looks forward to providing you with updates on our future progress." ] }, { "name": "Operator", "speech": [ "[Operator Closing Remarks]." ] } ]
GILD
2023-02-02
[ { "description": "Vice President, Investor Relations", "name": "Jacquie Ross", "position": "Executive" }, { "description": "Chairman and Chief Executive Officer", "name": "Dan O'Day", "position": "Executive" }, { "description": "Chief Commercial Officer", "name": "Johanna Mercier", "position": "Executive" }, { "description": "Chief Medical Officer", "name": "Merdad Parsey", "position": "Executive" }, { "description": "Chief Financial Officer", "name": "Andy Dickinson", "position": "Executive" }, { "description": "Cowen and Company -- Analyst", "name": "Tyler Van Buren", "position": "Analyst" }, { "description": "Bank of America Merrill Lynch -- Analyst", "name": "Geoff Meacham", "position": "Analyst" }, { "description": "Jefferies -- Analyst", "name": "Michael Yee", "position": "Analyst" }, { "description": "Piper Sandler -- Analyst", "name": "Guyn Kim", "position": "Analyst" }, { "description": "UBS -- Analyst", "name": "Colin Bristow", "position": "Analyst" }, { "description": "JPMorgan Chase and Company -- Analyst", "name": "Chris Schott", "position": "Analyst" }, { "description": "RBC Capital Markets -- Analyst", "name": "Brian Abrahams", "position": "Analyst" }, { "description": "Wells Fargo Securities -- Analyst", "name": "Mohit Bansal", "position": "Analyst" }, { "description": "Evercore ISI -- Analyst", "name": "Umer Raffat", "position": "Analyst" }, { "description": "Cantor Fitzgerald -- Analyst", "name": "Olivia Brayer", "position": "Analyst" }, { "description": "Redburn Partners -- Analyst", "name": "Simon Baker", "position": "Analyst" }, { "description": "Chief Executive Officer, Kite", "name": "Christi Shaw", "position": "Executive" }, { "description": "Truist Securities -- Analyst", "name": "Nicole Germino", "position": "Analyst" }, { "description": "BMO Capital Markets -- Analyst", "name": "Evan Seigerman", "position": "Analyst" } ]
[ { "name": "Operator", "speech": [ "Good afternoon. Thank you for attending today's fourth quarter and full year 2022 Gilead Sciences earnings conference call. My name is Hannah, and I will be your moderator for today's call. All lines will be muted during the presentation portion of the call, with an opportunity for questions and answers at the end.", "[Operator instructions] I would now like to pass the conference over to our host, Jacquie Ross. Please go ahead." ] }, { "name": "Jacquie Ross", "speech": [ "Thank you, operator, and good afternoon, everyone. Just after market closed today, we issued a press release with earnings results for the fourth quarter and full year 2022. The press release, slides, and supplemental data are available on the Investors section of our website at gilead.com. The speakers on today's call will be our chairman and chief executive officer, Daniel O'Day; our chief commercial officer, Johanna Mercier; our chief medical officer, Merdad Parsey; and our chief financial officer, Andrew Dickinson.", "After that, we'll open the call to Q&A where the team will be joined by Christi Shaw, the Chief Executive Officer of Kite. Before we get started, let me remind you that we will be making forward-looking statements including those related to Gilead's business, financial condition and results of operations, plans, and expectations with respect to products, product candidates, corporate strategy, business and operations, financial projections and means of capital and 2023 financial guidance, all of which involve certain assumptions, risks, and uncertainties that are beyond our control and could cause actual results to differ materially from these statements. A description of these risks can be found in the earnings press release and our latest SEC disclosure documents. All forward-looking statements are based on information currently available to Gilead, and Gilead assumes no obligation to update any such forward-looking statements.", "Non-GAAP financial measures will be used to help you understand the company's underlying business performance. The GAAP to non-GAAP reconciliations are provided in the earnings press release in our supplementary data sheet, as well as on the Gilead website. Now, I'll turn the call over to Dan." ] }, { "name": "Dan O'Day", "speech": [ "Thank you, Jacquie, and good afternoon, everyone. We had the opportunity to connect with many of you a few weeks ago in San Francisco, and I'm excited to be able to reconnect now to share our strong fourth-quarter and full-year results for 2022 in addition to our guidance for 2023. These show the tangible impact of our business transformation, notably the growth trajectory for our HIV portfolio and our fast-growing oncology business. The team will take you through our quarterly results in detail, but I'm very pleased to highlight on Slide 4, the strongest full-year growth in our base business in 2015 when growth was driven by the peak of HCV sales.", "Full-year 2022 sales of Biktarvy grew 20% year over year to $10.4 billion, exceeding $10 billion for the first time. Excluding Biktarvy, our base business in 2022 grew 8% year over year, and I'm pleased to share that our initial 2023 guidance points to base business growth between 4% and 6%. Andy will share our revenue guidance in detail, but I do want to take this opportunity to recognize the Gilead teams for the progress we made in returning to growth. Thanks to their commitment to improving the health of people and communities around the world, Gilead is now poised to extend its reach to more patients and more challenging diseases and conditions than ever before.", "Beyond our financial results, our clinical progress in 2022 reinforces how far we've come. At the end of the year, Sunlenca received its first approval in the U.S. for heavily treatment-experienced adults with multidrug-resistant HIV infection. This follows the European approval in the third quarter.", "Sunlenca is the first six monthly subcutaneous medicine to be approved and we believe it represents the most exciting innovation in HIV therapeutics in recent years with significant potential across prevention and treatment. We look forward to partnering with the HIV community to increase awareness of Sunlenca and to advancing our portfolio of long-acting options. We are anticipating another potential approval any day now with the upcoming PDUFA date for Trodelvy in pretreated HR-positive HER2-negative metastatic breast cancer. We also expect to hear from European regulators later this year.", "In the meantime, Trodelvy's commercial momentum is building with full-year 2022 sales growth of 79%. In cell therapy, we continue to reinforce our leadership and to execute on plans to broaden availability with Yescarta most recently approved in Japan for second-line relapsed or refractory large B-cell lymphoma. Merdad will talk you through our pipeline updates and key milestones in a few moments. For now, I'll simply note the significant expansion in our clinical programs, which have more than doubled in the last four years.", "We continue to add further programs, including our new preclinical candidate to partner with lenacapavir for our long-acting HIV treatment programs, the new Phase 3 OAK CRE study for our novel oral COVID-19 nucleoside and the five Phase 3 trials that we expect to initiate this year. Before I hand over to Johanna, I want to briefly review the clinical goals we shared with you a year ago. The Gilead and Kite teams have done a terrific job in both delivering as planned and acting with agility in response to changing circumstances. We had an impressive year of disciplined and determined execution in 2022 and fully expect to further strengthen our track record of execution in 2023 and beyond.", "With that, I'll hand over to Johanna for a review of our fourth quarter and full-year commercial performance. Johanna?" ] }, { "name": "Johanna Mercier", "speech": [ "Thanks, Dan, and good afternoon, everyone. Before discussing our commercial results, I want to acknowledge our Gilead team for delivering another outstanding quarter and closing out a very successful year. 2022 was an exceptional year for Gilead, with our virology franchise well-positioned to continue its leadership for years to come and significant progress in executing our oncology strategy and bringing new medicines to improve the lives of more patients all around the world. Starting on Slide 7.", "We had a very strong quarter, delivering a total product sales, excluding Biktarvy, of $6.3 billion, up 9% year over year or 12% excluding the impact of FX and the loss of exclusivity of Truvada and Atripla with solid growth in each of our core franchises and growth across all geographies, once again, led by HIV and oncology. Quarter over quarter, sales grew 5%, driven by HIV, Trodelvy, and cell therapy, partially offset by HCV. For the full year, total product sales, excluding Biktarvy were $23.1 billion, up 8% year over year or 11% excluding the impact of FX and the Truvada Tripla LOE, driven by HIV and oncology. As expected, full-year Biktarvy sales were down meaningfully in 2022 compared to 2021.", "That said, Biktarvy's performance has been more sustainable than we previously expected, and it's clear that it continues to play an essential role for hospitalized patients treated for COVID-19. In 2022, Biktarvy delivered $3.9 billion, including $1 billion in the fourth quarter. Overall, full-year total product sales of $27 billion was flat compared to 2021 as growth in our base business was offset by the decline in Biktarvy sale. On Slide 8, HIV sales for the fourth quarter were $4.8 billion, up 5% year over year, driven by higher demand, as well as favorable pricing dynamics.", "This was offset in part by a smaller-than-usual inventory build in the fourth quarter, reflecting our early efforts on seasonal inventory management. Sequentially, HIV sales in the fourth quarter were up 6%, primarily driven by favorable pricing and inventory dynamics, as well as higher demand. For the full year, HIV sales of $17.2 billion were up 5% year over year due to higher demand, primarily related to the continued strength of Biktarvy in addition to channel mix leading to higher average realized price. This was partially offset by inventory dynamics and FX.", "Overall, the HIV treatment market in the fourth quarter grew 1.5% year over year in the U.S. and over 2% in Europe. On an annual basis, the market has grown in line with our expectations of 2% to 3%. Moving to prevention.", "The U.S. PrEP market grew 18% year over year and 3% sequentially in the fourth quarter of 2022, reflecting growing awareness. This code sales for the fourth quarter were $537 million, up 13% year over year and 7% sequentially. Notably, despite generics and other entrants, demand for Descovy for PrEP continues to increase, up more than 20% for the full year in addition to maintaining a stable market share of over 40%.", "With these trends and the PAC IP settlement last year, Descovy position in the growing pet market has only strengthened. Overall, this provides a strong foundation as we look to the potential launch of lenacapavir for PrEP as a true long-acting every six-month regimen in the middle part of the decade. Moving to Trodelvy on Slide 9. Sales for the quarter were $2.9 billion, up 15% year over year, primarily driven by higher demand, as well as favorable pricing dynamics offset in part by lower channel inventory.", "Quarter over quarter, sales were up 6% similarly driven by higher demand, as well as favorable pricing and inventory dynamics. In every quarter since our launch, we've seen Biktarvy continue to gain market share and the fourth quarter was no exception, getting more than three percentage points in share year over year. This continued momentum is a testament to the Biktarvy's differentiated clinical profile, reinforced by the long-term five-year data we presented last year. Notably, in the U.S., Europe, and other major markets, Biktarvy remains the No.", "1 regimen for new starts, in addition to its No. 1 position in treatment switches across most of the major markets, including the U.S. At the end of 2022, there are almost 1 million people managing their HIV with Biktarvy worldwide. Taken all together, this has led Biktarvy for the first time to achieve full-year sales of over $10 billion in 2022.", "Looking ahead, we're confident that Biktarvy will remain the leading medicine for the treatment of HIV in the U.S., Europe, and other major markets for years to come. Now, looking ahead for the first quarter of 2023 for HIV, a few points I just wanted to call out. First, with respect to pricing dynamics, as we enter the new year, we expect the typical first quarter reset in patient co-pay and deductible. As always, these will have an unfavorable impact on average realized price in the first quarter.", "Second, a reminder that we've historically seen inventory buildup in Q4 that has led to notable drawdown by wholesalers in Q1. While we've implemented new processes to better manage inventory dynamics from the fourth quarter into the first quarter, we continue to expect an inventory drawdown to occur in Q1, albeit at more modest levels compared to prior year. So, with this in mind, we expect HIV sales for the first quarter to decline by low teens sequentially from the fourth quarter. This compares to the 18% sequential decline we reported in the first quarter of 2022.", "For the full year 2023, I'd like to remind you that some of our HIV performance in '22 was driven by shift in channel mix that had a favorable impact on average realized price, contributing in part to the 5% year-over-year revenue growth we reported in 2022. We expect channel mix in 2023 to be relatively similar to last year, and therefore, do not expect HIV growth to benefit from changes in average realized price like we saw in 2022. As a result, we continue to expect HIV to grow in 2023, albeit at a modestly lower growth rate than 2022. As we think about the future of the HIV market, Gilead is well-positioned to provide many people living with HIV and those at risk of HIV with multiple options for care.", "To that end, we're excited about the recent approvals for Sunlenca in the U.S. and Europe for heavily treatment-experienced adults with multidrug-resistant HIV infection. This first indication represents only 1% to 2% of people living with HIV, there's a huge unmet medical need. These individuals have cycled through multiple antiretroviral regimen and until now, have had very few, if any, effective options left available.", "Sunlenca is now approved in the U.S., U.K., and European markets, and we're working as quickly as possible with regulators and reimbursement bodies to make Sunlenca available in many more countries. We believe this first launch of Sunlenca represents a key milestone for Gilead and looking forward in the treatment and potential prevention of HIV. With Sunlenca, a true acting regimen is a reality. As awareness and familiarity of Sunlenca's every six months subcutaneous administration grow among healthcare providers, community groups, and people living with and at risk of HIV, we believe Sunlenca is well positioned for the future.", "Turning to HCV on Slide 10. Sales for the fourth quarter were $439 million, up 12% year over year, reflecting timing of Department of Corrections or DOC purchases and favorable pricing dynamics in the U.S. Quarter over quarter, HCV sales were down 16% primarily due to resolution of a rebate claim in Europe in the third quarter of 2022 that did not repeat, as well as other pricing dynamics in the U.S., offset in part by timing of DOC purchases. Going forward, we continue to expect new starts to decline, but are encouraged that our market share remains over 50% in both U.S.", "and Europe. Sales of HPV and HDD for the fourth quarter were $255 million, as shown on Slide 11. Sales were down 4% year over year and down 3% sequentially primarily due to lower vanity demand and pricing dynamics outside of the U.S. Moving to Biktarvy on Slide 12.", "Sales for the fourth quarter were $1 billion with a full year totaling $3.9 billion. It's clear that as the pandemic has evolved, Biktarvy's will in the treatment of COVID-19 has remained unchanged as a key part of the standard of care for hospitalized patients. In fact, Biktarvy is still the only antiviral approved in this setting. And in the U.S., Biktarvy continues to be used in over 50% of hospitalized patients who are being treated for COVID-19.", "We're excited to continue to work on our oral COVID-19 nucleoside, which Merdad will discuss shortly. Moving to oncology and beginning with Trodelvy Slide 13. Sales of $195 million in the fourth quarter grew 65% year over year and 8% sequentially. For the full year, Trodelvy sales were $680 million, up 79% year over year.", "As we continue to broaden access to Trodelvy around the world, we're encouraged by the growing demand in existing markets. Trodelvy is now reimbursed across the major European markets. And in the U.S., demand was up 13% quarter over quarter. Our growth rate almost doubled from the prior quarter, reflecting the solid contribution of our expanded field force and growing awareness.", "We're also excited by the expected decision from the FDA later this month, which could expand Trodelvy's potentially clinically meaningful benefit into the pretreated HR-positive HER2-negative metastatic breast cancer setting. We estimate this represents at least 6,000 addressable patients in the U.S., and our U.S. field force has just wrapped up its launch meeting and is energized for the upcoming approval. The opportunity for Trodelvy to benefit patients with pretreated HR-positive HER2-negative metastatic disease is supported by the recent NCCN Category 1 preferred recommendation for Trodelvy based on the TROPiCS-02 data.", "Additionally, the European Medicines Agency recently validated our marketing authorization application for Trodelvy in HR-positive HER2-negative and we look forward to a decision later this year. Now on to Slide 14 and on behalf of Kristie and the Kite team, Cell Therapy sales in the fourth quarter were $419 million, up 75% year over year and 5% sequentially. Full-year cell therapy sales were $1.5 billion, up 68% year over year. The growth in the fourth quarter and full year were driven by continued uptake of Yescarta in large B-cell lymphoma, notably in the U.S.", "Growing physician familiarity with Yescarta data and Kite's industry-leading manufacturing continue to be key growth drivers. Yescarta sales was $337 million, up 85% compared to the fourth quarter of 2021 and 6% sequentially. We're pleased to see not only strong momentum in second-line LBCL in the U.S. but also continued uptake in third-line LBCL in both the U.S.", "and across European markets. Yescarta sales were $82 million in the fourth quarter, up 2% quarter over quarter with growing volume demand in both mantle cell lymphoma and adult acute lymphoblastic leukemia. Year over year, Tecartus sales were up 44%. We're pleased to see the building momentum of CAR-T cell therapy as a treatment class with curative potential and starting Tecartus as the leading cell therapies of choice globally.", "More patients are getting access due to Kite's industry-leading reliable manufacturing capabilities and the team's expanding footprint of authorized treatment centers around the world. And just last week, U.K.'s National Institute for Health and Care Excellence, or NICE, recommended Yescarta for routing use in third-line large B-cell lymphoma. This makes Yescarta the first CAR-T available for commissioning in England. Approvals and reimbursement into additional indications that are currently available in the U.S., the other markets is expected to continue over the next year.", "Yescarta was recently approved for second-line LBCL in Japan, which has the potential to be the second-largest cell therapy market outside of the U.S., and we look forward to the transfer of the marketing authorization to Gilead and Kite later this year. In the interim, although still early days, we'll continue to work with our partner, Daiichi Sankyo, to make Yescarta available to approximately 7,000 patients in the second-line-plus setting. Kite will begin manufacturing supply for the Japanese market through our El Secunda, California facility. And with that, I'll hand the call over to Merdad for an update on our pipeline.", "Merdad?" ] }, { "name": "Merdad Parsey", "speech": [ "Thanks, Johanna. I'm pleased to be starting 2023 with all the momentum in 2022 behind us. with the positive data readouts for Trodelvy and ondanelumab and the recent approvals for lenacapavir, the team is really excited to progress our programs in 2023 and beyond. Starting with Brage on Slide 16.", "And as I just mentioned, lenacapavir received its first U.S. FDA approval for people living with multidrug-resistant HIV in combination with other antiretrovirals. Marketed at Sunlenca, lenacapavir is the first and only twice-yearly subcutaneous HIV treatment, bringing a much-needed option for people living with multidrug-resistant HIV that until now have limited alternatives. Combined with the approval from the European Commission, the FDA approval is an important validation while we continue to progress our other manocatheler-based treatment and prevention programs.", "For HIV treatment, we currently have 10 partner agents for lenacapavir in various stages of development, including two new integrase inhibitors or [Inaudible] in the pre-IND space. We expect to share data this year from the Phase 1b proof-of-concept study for lenacapavir in two broadly neutralizing antibodies or bNAb directed at HIV. And in PrEP, our clinical development of lenacapavir as a monotherapy for HIV prevention continues to progress with two trials underway and two additional trials expected to achieve FPI in the second half of 2023. Moving to Slide 17.", "We continue to progress our novel oral nucleoside for COVID-19 GS-5245. Treatments such as Gilead Biktarvy and vaccinations have improved the outlook for patients with COVID-19, but there's still a significant need for effective and convenient oral treatment options. We've been working with the FDA and other global regulators to launch a clinical development program that could enable global filings. We've initiated the Phase 2 BIRCHtrial in high-risk patients, defined as unvaccinated patients with one or more risk factors, or vaccinated patients with two or more risk factors.", "The Phase 3 OAK TREAT trial will evaluate standard risk patients, which includes people aged 12 and older with no CDC-defined risk factors. We expect this trial to enroll its first patient in the U.S. in the first quarter, and we'll share progress when we can, which depends in part on the prevalence of COVID-19 near study sites. Moving to oncology on Slide 18 and starting with Trodelvy.", "We continue to build on the momentum of our TROPICS-02 data, and we announced the European Medicine Agency's validation of our marketing authorization application for pretreated HR-positive HER2-negative metastatic breast cancer in early January. As Johanna noted, we expect a regulatory decision of our sBLA in the U.S. later this month and a decision in Europe in the latter part of the year. Trodelvy has already changed the standard of care for many patients with metastatic TNBC and advanced bladder cancer.", "And we expect that these regulatory approvals will be an important step forward in bringing this potentially practice-changing therapy to certain HR-positive HER2-negative metastatic breast cancer patients. Moreover, recently presented data demonstrated Trodelvy's PFS and OS benefit was consistent across a range of tumor TROP2 expression levels. This late-breaking post-hoc analysis presented at the San Antonio Breast Cancer Symposium was consistent with Trodelvy data in metastatic triple-negative breast cancer, where baseline TROP2 expression was not associated with treatment response. Moving on to Slide 19.", "We were pleased to share data from the fourth interim analysis of the ARC-7 trial with our partner, Arcus in December as presented at the ASCO plenary session. ARC-7IS a randomized Phase 2 proof-of-concept study that enrolled 150 patients, the largest data set in anti-TIGIT studies released to date with more than 100 patients across the 2-DOM containing arms. We are pleased to see both DOM-containing arms demonstrate clinically meaningful differentiation compared to ZIM monotherapy across all efficacy measures evaluated, clearly establishing the addition of dombinilumab improved the clinical responses to anti-PD-1 therapy in this population. We are also encouraged by the consistency of the safety data in the DOM-containing treatment arms which showed no unexpected safety signals.", "This is an ongoing trial, and we look forward to sharing updated data at ASCO 2023. While these efficacy and safety data will mature over time, this fourth interim analysis fully supports our joint DOM's clinical development program and the importance of interrupting the TIGIT pathway. Based on the totality of the data seen to date, we're very confident that DOM with an Fc silent design has the potential to be differentiated compared to other anti-TIGIT molecules in this space. The ongoing Phase 3 trials of DOM added to anti-PD-1 treatment in nonsmall cell lung cancer will provide the opportunity to confirm this activity.", "We're moving very quickly with our partners in both proof-of-concept studies, as well as late-stage trials, including the four ongoing Phase 3 trials. Moving to megrolimab, our anti-CD47 therapeutic. On Slide 20, we have three ongoing pivotal trials and six proof-of-concept studies across six solid tumor indications. As we shared last month, the Independent Data Monitoring Committee met to review data from the first interim analysis from the Enhance study in first-line high-risk MDS.", "I'm pleased to share that there were no new safety signals, and the study continues unchanged. As a reminder, based on previous discussions with the FDA, we are now pursuing mature OS data for filing. The study is powered for the final OS analysis and Gilead remains blinded to the data to preserve study integrity. We will update you again in the second half of 2023 after the second interim analysis, noting that these interim analyses are event-driven, so timing is provisional.", "Moving on to Slide 21. And on behalf of Christy and the Kite team, I'm pleased to share details of another strong quarter of clinical progress in our cell therapy programs. At ASH, Kite had more than 25 data presentations, further demonstrating the transformative impact of cell therapies, including three-year follow-up data from ZUMA-5, showing that 52% of patients with indolent lymphomas treated with Yescarta continue to respond. Following the compelling ZUMA-12 data on Yescarta in frontline LBCL shared at ASH in 2021, we expect to achieve FPI in our Phase 3 ZUMA-23 trial in frontline high-risk LBCL in the first half of the year.", "We are also progressing our Phase 2 ZUMA-24 outpatient study in second-line LBCL and look forward to sharing interim safety data in the first half of this year. While there is still so much we can explore with the Yescarta and Tecartus, we are also building up the pipeline to ensure that Kite will extend its leadership into new indications and next-generation cell therapy technologies. In December, we announced a strategic collaboration with our Selex for the late-stage clinical product candidate, CAR-T-DDBCMA, which is currently being evaluated for the treatment of multiple myeloma. If approved, together with our industry-leading manufacturing capabilities, we believe we can reliably and consistently deliver much-needed therapy to patients.", "Additionally, we announced the pending acquisition of Community Therapeutics, which adds an armored CAR T platform and rapid manufacturing technology to Kite. The Arcellx transaction closed earlier this week and community is expected to close later this quarter. Both highlight Kite's continued leadership in cell therapy and our commitment to building a robust and exciting pipeline in cell therapies. Wrapping up on Slide 22.", "We are sharing the key pipeline milestones that we expect in 2023, which, as you can see, spans FPIs, data readouts, updates, and regulatory approvals across oncology and urology. This highlights the progress that Gilead has made on its transformation journey with 59 clinical programs that are well diversified across indications and stage. As the clinical pipeline has grown, our focus on execution has intensified, and we look forward to updating you on our programs as we progress through 2023. With that, I'll hand the call over to Andy.", "Andy?" ] }, { "name": "Andy Dickinson", "speech": [ "Thank you, Merdad, and good afternoon, everyone. Gilead closed out the year with a strong fourth quarter, driven by Biktarvy, Veklury, and oncology. For the full year, our sales, excluding Veklury, grew 8%, which is by far the strongest full-year growth rate Gilead has reported since HCV sales peaked in 2015. Of note and excluding the impact of the Atripla and Truvada LOEs, HIV grew 8% year over year, driven by continued strong performance of Biktarvy, which grew 20% from 2021 to $10.4 billion.", "Biktarvy continues to demonstrate strong potential for further growth in 2023 and beyond. Oncology full-year revenues exceeded $2 billion for the first time and grew 71% from 2021. Moving to our quarterly results starting on Slide 24. The fourth quarter demonstrated another strong performance across our business.", "Total product sales, excluding Veklury, grew 9% year over year despite an approximately $130 million headwind from FX. If we exclude FX in addition to the impact of HIV LOEs, total underlying sales growth for the fourth quarter was 12% compared with the prior year. Moving to Slide 25. Veklury was down, as expected, year over year, although it grew 8% on a sequential basis from the third quarter, highlighting that Veklury will continue to play an important role even as COVID-19 progresses into its endemic phase.", "Non-GAAP product gross margin was 86.8%, up more than 16 percentage points from last year primarily due to a $1.25 billion charge related to a legal settlement recorded in COGS in the fourth quarter of 2021. Non-GAAP R&D expenses for the fourth quarter 2022 were $1.5 billion compared to $1.3 billion in the same period in 2021. Higher R&D expenses were driven by timing of clinical investments, mainly in oncology in addition to the impact of inflation on expenses. Fourth quarter acquired IP R&D was $158 million, primarily reflecting the MacroGenics collaboration and the license amendment with Jounce and lower than prior year due to the $625 million charge related to the exercise of opt-in rights for Arcus assets in the fourth quarter of 2021.", "Non-GAAP SG&A was $2 billion, up 23% year over year, primarily reflecting a charge of $406 million associated with the termination of the Trodelvy collaboration with Everest Medicines. This $406 million charge includes the $280 million that we agreed to pay Everest to acquire the development and commercial rights to Trodelvy in China and other Asian territories in addition to some other termination-related expenses. Excluding this Everest impact, SG&A was down 2% year over year. Fourth quarter non-GAAP operating margin was 37%, down sequentially due to the factors referenced earlier, including the $406 million Everest charge and up year over year.", "Excluding the Everest charge, non-GAAP operating margin was 42%. Non-GAAP effective tax rate in the fourth quarter was 16.8%, lower than the prior year, driven by discrete tax charges recorded in the fourth quarter of 2021. Overall, our non-GAAP diluted earnings per share was $1.67 in the fourth quarter compared to $0.69 in the fourth quarter of 2021. Of note, the Everest contract termination impacted non-GAAP diluted EPS by $0.25 a share.", "This was not reflected in the guidance we shared back in October. Moving to the full year on Slide 26. Total product sales were $27 billion. Excluding Veklury, total product sales were $23.1 billion, up 8% compared to 2021, primarily driven by Biktarvy and oncology.", "Excluding around $380 million of FX headwinds and the $350 million impact of the Truvada and Atripla LOEs, total product sales, excluding Veklury, were up 11% as compared to 2021. I touched on the main P&L impacts in the overview, but we'll highlight on Slide 27 that our non-GAAP effective tax rate for 2022 was 19.3% and non-GAAP diluted EPS was $7.26 per share compared to $7.18 per share reported in 2021. I'll move now to guidance on Slide 28. We recognize that the macro environment continues to be uncertain.", "Our initial 2023 guidance assumes an overall stable macro environment and relatively stable FX at current rates. While inflation is expected to moderate, our 2023 guidance reflects a full year of higher expenses experienced in 2022 associated with inflation. With that in mind, we expect total product sales in the range of $26 billion to $26.5 billion. For total product sales, excluding Veklury, we expect sales in the range of $24 billion to $24.5 billion, representing growth of 4% to 6% for our base business year over year.", "And we expect Biktarvy sales of approximately $2 billion. As always, Biktarvy sales will continue to track hospitalization rates and will remain highly variable depending on the frequency and severity of surges. Notably, we have seen a decline in hospitalization rates in recent weeks, and we'll continue to monitor the landscape carefully. As a result and similar to last year, we will update you on our Biktarvy expectations on a quarterly basis.", "Moving to the rest of the P&L. We expect our non-GAAP product gross margin to be approximately 86%, just slightly below our 2022 results and primarily reflecting the growing contribution from oncology. For non-GAAP operating expenses, we expect R&D to increase by a high single-digit percentage compared to 2022 levels, reflecting our ongoing investment in strategic areas of growth and an increase in activity from later-stage trials. As a reminder, we had eight Phase 3 trials start in 2022, and we expect to have 23 active Phase 3 trials by the end of 2023.", "Looking ahead, we expect R&D growth to moderate although we will step up investments as needed to support promising programs based on clinical data. Acquired IP R&D includes previously announced payments for our Phenex community and milestone payments for existing collaborations. Consistent with our approach in 2022, we will continue to share our expected acquired IP R&D expenses as we announced additional transactions. Finally, we expect SG&A to decrease by a low single-digit percentage compared to 2022.", "However, this is primarily due to some expenses reported in 2022 that we don't expect to repeat in 2023. If we normalize the 2022 SG&A expense for these items, we expect full-year 2023 SG&A expense to increase by a mid-single-digit percentage on a basis of approximately $5.1 billion in 2022. Altogether, we expect our non-GAAP operating income for 2023 to be $11 billion to $11.6 billion. Our non-GAAP effective tax rate is expected to be approximately 20% again this year.", "And finally, we expect our non-GAAP diluted EPS to be between $6.60 and $7 for the full year and GAAP diluted EPS to be between $5.30 and $5.70 per share. Moving to capital allocation on Slide 29. Our priorities have not changed. In 2022, we returned over $5 billion to shareholders.", "This included dividend payments and $1.4 billion in share repurchases. Fourth quarter share repurchases were approximately $800 million. For 2023, we have announced today a 2.7% increase in our quarterly cash dividend, to $0.75 per share, and remain committed to growing our dividend over time in line with earnings growth. You can also expect to see continued judicious investments in our business, both internally and externally through select partnerships and business development transactions.", "Finally, we will continue to use share repurchases to offset equity dilution, as well as additional repurchases on an opportunistic basis. With that, I'll invite the operator to open the call up for questions." ] } ]
[ { "name": "Operator", "speech": [ "Certainly. [Operator instructions] We will pause here briefly as questions are registered. The first question comes from the line of Tyler Van Buren with Cowen. Please proceed." ] }, { "name": "Tyler Van Buren", "speech": [ "Hey, guys. Thanks very much for the question. It's great to see yet another impressive quarter of performance from the core business. At the midpoint, guidance assumes 5% year-over-year growth for product sales, excluding Veklury, yet non-GAAP EPS guidance assumes a decline of 6%.", "So, should we expect roughly flat earnings for the next two to three years as you continue to invest aggressively in the pipeline to set up earnings growth for the second half of the decade? Or is that too conservative? And what levers do you have to increase earnings in the near to midterm?" ] }, { "name": "Andy Dickinson", "speech": [ "Tyler, it's Andy. Thanks for the question. We appreciate it. Look, what we've said and obviously, we don't provide longer-term guidance, but I'll reiterate that the -- as you highlighted, the base business is performing very well.", "We had another good year with Veklury, but we expect, as you heard in our prepared comments that the COVID-19 market will continue to be dynamic. And again, this year, you saw -- if you look at our EPS, the growth of the base business offset the decline in Veklury despite the increase in expenses. Going forward, again, a lot of our shareholders, as you know, focus on non-GAAP EPS, excluding Veklury, based on their assumptions. We expect using kind of that metric for our EPS to grow and for that growth to accelerate over the longer run as our products continue to deliver with additional commercial approvals, expanded indications, new products entering the market, etc.", "So, again, I think what you're highlighting is the difficulty of looking through the impact of Veklury. When we look at the base business, we have a lot of confidence in terms of the health of the business and the growth it's going to deliver over time, both on the top line and the bottom line." ] }, { "name": "Jacquie Ross", "speech": [ "Hannah, may we have our next question, please?" ] }, { "name": "Operator", "speech": [ "The next question comes from the line of Geoff Meacham with Bank of America. Please proceed." ] }, { "name": "Geoff Meacham", "speech": [ "Good afternoon, guys. Thanks so much for the question. I will keep it just to one. When you look at lenacapavir in the U.S., just help us with maybe the expected kind of loss dynamics following the recent approval and just with consideration of the hurdles with regard to payer access.", "And obviously, you guys had a long history here, but wondering if the environment is different today versus sort of pre-pandemic. Thank you." ] }, { "name": "Johanna Mercier", "speech": [ "Thanks, Geoff, for your question. It's Johanna. I think that we're super excited with Sunlenca approval. Do remember, though, it's really for a very specific patient population for the heavily treatment-experienced multi-drug-resistant population.", "And so, that's about 1% to 2% of people living without HIV. That's about 5,000 patients or so in the U.S. So, just to give you a little bit of a perspective on it, that one piece of the puzzle. So far, so we just launched.", "So, it's still early days. and we're excited about it. And I think physicians' response has been very strong as well. I think they really see the innovation of having something every six months coming in and also the promise of what it could mean in future with prevention indication, as well as treatment combination.", "So, more to come on that one. I think it's an incredible opportunity for us to gain awareness for Sunlenca to use it the reimbursement systems. And as to your point about pre-COVID to COVID, I think that actually, we've really normalized the market. I think we're back on track when it comes to HIV, both screening, diagnosis, etc., and treatment.", "So, we do believe that that's probably not in play as we go forward in 2023. But again, small revenue, huge unmet medical need, and an incredible opportunity for patients to have something to ensure that they don't proceed to more like aids disease versus just being HIV positive." ] }, { "name": "Jacquie Ross", "speech": [ "Hannah, may we have our next question, please?" ] }, { "name": "Operator", "speech": [ "Thank you. The next one is from Michael Yee at Jefferies. Please proceed." ] }, { "name": "Michael Yee", "speech": [ "Hey, thanks for the question. Maybe a question for Merdad. On Trop-2, the competitor AstraZeneca Daiichi continues to be quite bullish and actually as a Phase 3 lung cancer study readout and -- the street is quite bullish on Trop-2. Can you explain your thoughts around your differentiation? Appreciating your study readout, I think, and what we should appreciate as to how you will compete there or differentiate and maybe its safety, but maybe walk me through that and help us understand Trop-2 for versus your competitor.", "Thank you." ] }, { "name": "Merdad Parsey", "speech": [ "Yeah. Thanks, Michael. This is Merdad. You're absolutely right.", "We do think that there are a couple of things that we think about when we think about differentiation. The first is that -- we've now been on the market and have several approvals under our belt with Trodelvy. And I think that is an important factor for having now been on the market in important indications. To your point, with lung, we will be somewhat behind where our competition is we do think that the data will have to evolve for us and for them.", "And I think so far, we have been fortunate to not see ILD in our development program so far. And so, we are going to continue advancing our program forward aggressively. We've had a lot of success so far -- and I think our plan is to keep going ahead with the differentiated clinical development program so we can get into the broadest population as possible." ] }, { "name": "Operator", "speech": [ "Thank you. The next question is from Guyn Kim with Piper Sandler. Please proceed." ] }, { "name": "Guyn Kim", "speech": [ "Hi. Thanks for taking my question, and congrats on the quarter. Keeping it on Trodelvy. Merdad, I was hoping if you could provide a little more detail on in pre-chemo HR-positive, HER2-negative breast cancer that you're initiating later this year.", "Just what that study design would look like? And how did you come to conclude that this was the next best study for this population?" ] }, { "name": "Merdad Parsey", "speech": [ "Yeah. Thanks. That's an excellent question. And I think we haven't really talked about the design yet.", "In large part, we are working through both with investigators and regulators on what the best approach is going to be in that patient population. We do think that there is an important need in a large population there. And we want to make sure that we navigate that pathway carefully. So, I think as we develop that program as a protocol gets developed, we'll be able to share more detail over time." ] }, { "name": "Jacquie Ross", "speech": [ "Hannah, may we have our next question, please?" ] }, { "name": "Operator", "speech": [ "Thank you. The next question comes from Colin Bristow with UBS. Please proceed." ] }, { "name": "Colin Bristow", "speech": [ "Yes. Good afternoon, and congrats on all the progress. Maybe one on TIGIT and dompenanumab. Just what is it that gives you the confidence that the Fc silent construct is the right approach when I think at least the animal data suggest that this may not be preferred? And then as you think about the upcoming study, ARC-7.", "Could you talk about the frequency of scanter because this has come up as a point of at least discussion with regards to the comparator trials and the frequency of scans?" ] }, { "name": "Merdad Parsey", "speech": [ "Sure. This is Merdad again. Excellent question. Thank you for that.", "In terms of our confidence, I think to your point, look, I think there was a lot of debate a couple of years ago. We shared in that debate, with what the preclinical data was showing. And as you know, the data they were conflicting preclinical data, including some data that suggested maybe an NFC silent may not work. But which is why we ran the studies the way we did and very importantly, why we ran ARC-7, the objective there was really to establish whether an NFC silent, no would demonstrate a benefit relative to NFC active molecule.", "Part of the hypothesis there is what happens in the periphery and whether depleting effector cells with TIGIT could actually be harmful with NFC competent molecule relative to an NFC nonmolecule. And our confidence really comes from our ARC-7 data. I think the ARC-7 data really answered that question. we clearly show a benefit when added on to a PD-1.", "The PFS data exceed our bar for moving forward. And so, we really think that we've answered that question in the clinic as to whether the FC now matters." ] }, { "name": "Operator", "speech": [ "Thank you. The next question is from Chris Schott with JPMorgan. Please proceed." ] }, { "name": "Chris Schott", "speech": [ "Great. Thanks so much. Just a question on the COVID business. I know it's volatile, and I know at the same time, the Street doesn't seem to model much of a tail for Veklury or GS-5245 at all in numbers beyond this year.", "We've got Pfizer's and others, then talking about more sustainable COVID businesses, I guess, off of 2023 level. So, I just missing your thoughts on just how you're thinking about the business longer term. And is this a meaningful franchise for you over time? Or are you really thinking of this continuing to fade down beyond this year? Thank you." ] }, { "name": "Johanna Mercier", "speech": [ "Sure, Chris. It's Johanna. Yeah. So, definitely, we've changed a little bit.", "Our position on this one has evolved from 2020 to where we are today, obviously. I think we do truly believe that the Veklury business is much more sustainable than we've ever seen before, let alone as we think about kind of where we're going with COVID-19, including the oral that Merdad can speak to. The one piece that we've seen is -- it's maybe a little bit different than some of the orals that you're referring to is One is Veklury has been part of a commercial model since October of 2020. So, we haven't had such big inventory lows at the government level like some others have had.", "So, really, what you see probably 85% to 90% of revenues in 2022 are truly reflecting the demand for Veklury in 2022. And so, therefore, coming into 2023, we feel very strongly that Veklury, because it's still the only antiviral indicated at the hospital level at this point in time because of the fact that in many countries around the world, it is the treatment of choice when they decide to treat hospitalized patients. I think there's really an incredible continuing opportunity for us to ensure that Veklury has is accessible to all these patients. And so, that's why we think the model is quite sustainable moving forward.", "I would also just add that our label has broadened over the last year in some, we have a very strong body of evidence, including mortality, as well as we have guidelines endorsement with the NIH, as well as the WHO. So, all of those pieces together actually make for a strong Veklury color position in '23, but actually and beyond. And maybe I'll just pass it over to Merdad to talk a little bit to how we're thinking about COVID-19 as a whole with the oral." ] }, { "name": "Merdad Parsey", "speech": [ "Yeah. Just two seconds. I think you're right to point out the uncertainties that we all have and that we've seen with outpatient COVID. And we have a lot of confidence in the mechanism of 5245 given what our expertise in the molecule itself and how well-behaved it is.", "And we are going to push forward and do our best with both the high-risk and standard-risk study and the uncertainties in terms of the pandemic will really determine what happens from here. So, we will definitely keep you updated as to how that goes from here on out." ] }, { "name": "Operator", "speech": [ "Thank you. The next question is from Brian Abrahams with RBC. Please proceed." ] }, { "name": "Brian Abrahams", "speech": [ "Hey, good afternoon, and congrats on the quarter. And thanks for taking my question. Maybe continuing on the COVID theme on 5245, the Oaktree study. Can you talk a little bit more about the assumptions you've made in powering the primary endpoint here for the standard-risk patients? And then help us understand how Oaktree and Birch might fit together to support U.S.", "and ex-U.S. approvals across the two populations you're studying. Thanks." ] }, { "name": "Merdad Parsey", "speech": [ "Sure. Very briefly, to your point, one is in the high-risk population, right? So, I think that's important. Those are people who have risk factors, whether or not they've been vaccinated, and then the standard risk, which is people without risk factors. Those are very different populations.", "The endpoints are different in terms of what we're looking for and the high risk we're going to be looking for the ability to prevent things like hospitalization. And the standard risk, it would be looking for things like symptom improvement. And I think, again, I'll just reiterate that I think the uncertainties in terms of those factors and importantly, the underlying event rate is real. And so, we've made a number of assumptions around what that background rate will be.", "And we've built into the trials, checkpoints to make sure that our assumptions are correct. And we have the ability to modify our program based on what the underlying event rates are. So, that sort of helps mitigate the risks and the uncertainties. So, we've gone in fairly eyes open to that." ] }, { "name": "Operator", "speech": [ "Thank you. The next question is from Mohit Bansal with Wells Fargo. Please proceed." ] }, { "name": "Mohit Bansal", "speech": [ "Great. Thanks for taking my question. Congrats on the progress. Maybe if you could comment on your overall market share in HIV space and how it has been progressing.", "What I want to understand is that is there a scenario where your entire business growth could be better than the market growth as you gain share at this point. Thank you." ] }, { "name": "Johanna Mercier", "speech": [ "Sure. Hi, Mohit. It's Johanna. I think as we look at HIV as a whole, we're looking at about a 5% year-on-year growth.", "And of course, that's mostly driven by demand, namely Biktarvy. And so, it's probably important to talk about the share there. So, our total Gilead share is still in the low 70s, and we've been quite stable at that level. We saw a little bit of the dip when we got the Truvada and Atripla LOEs, and that's the only decline that we've seen there and really held steady, where you see nice growth, of course, is Biktarvy.", "Our year-on-year growth for Biktarvy is 20% in 50-year post launch. And I think that's the piece of the puzzle that's really driving the overall HIV business. In addition, to what's going on in PrEP with Descovy? To your point about the market growth, we've seen market growth around 2% to 3% year on year, both in the U.S., as well as in Europe, and we've assumed that we're kind of assuming that for some years to come. And I do think there's still enormous opportunity for continued growth in that market.", "And one of the main reasons why is there's still an opportunity for increasing treatment rates so from diagnosis to treatment, but also further penetration in underserved patient populations. And so, at this point in time, with United Nations goal at 95,95,95 for testing, treatment, and virologic suppression we're only about 70%, 75%. So, if we were to get to those goals, you're looking at over 350,000 more patients into the system. So, I think you're absolutely right.", "I think there's a great opportunity for us to continue to grow Biktarvy and our HIV business at Gilead." ] }, { "name": "Operator", "speech": [ "Thank you. The next question is from Umer Raffat at Evercore. Please proceed." ] }, { "name": "Umer Raffat", "speech": [ "Hi, guys. I have a question on the model today. I feel like consensus models have a lot of operating leverage in the long-term estimates for Gilead. And don't -- consensus doesn't carry more than low single-digit opex growth across SG&A and R&D.", "So, with SG&A growing mid-single digits this year after the one-timers and R&D growing high single digits, I guess, should we assume that given all the collaborations and recent acquisitions that you really do need to be growing R&D meaningfully from current levels? I'm just trying to understand where the opex is heading longer term." ] }, { "name": "Andy Dickinson", "speech": [ "Omar, it's Andy. Thanks for the question. maybe a couple of things. First, I'd highlight that as you'd expect, we are mindful of expenses and don't expect R&D or SG&A to grow indefinitely.", "That said, we're going to continue to invest thoughtfully in the pipeline, and you're already seeing, I'd highlight the tangible benefits of doing that. So, that's a really important point. We started on the R&D side. As you know, we started eight Phase 3 trials this year.", "We're going to -- as you heard, start at least another five in 2023. So, we are in an investment cycle. Over the longer run, and maybe one other thing before I kind of talk about the long-run picture to your question, again, when you benchmark us relative to competitors, as you know, historically, for both SG&A and R&D we underspent. And it's partly why we didn't have the pipeline that would drive the top quartile sustainable growth, that we aspire to, and we think we're on track to achieve today.", "So, we're going to continue to invest. As you've heard and especially in these late Phase 3 trials that have started, we'll continue to do BD not at the same pace or level that we have over the last four or five years as we've rebuilt the pipeline. But our percent -- our R&D as a percent of revenue this past year was below industry averages, I think, right around 19%. Same thing is true for SG&A as a percent of revenue.", "And even our guide suggests, I think, reasonable spend levels relative to comps. In the longer run, to your point, so we think about things over a longer cycle, we will not -- we do not expect to grow R&D or SG&A above the rate of earnings growth. And there is a lot of leverage in the model, we expect over the long run. So, we're getting to the point where you're starting to see that play through, especially at the top line, and then over the coming years, we expect that you'll really see that play through on the bottom line as well.", "So, thanks for the question." ] }, { "name": "Operator", "speech": [ "Thank you. The next question is from Olivia Brayer with Cantor Fitzgerald. Please proceed." ] }, { "name": "Olivia Brayer", "speech": [ "Hey, good afternoon, guys. Thank you for the question. What's the latest thinking with respect to the regulatory path forward for magrolimab? I guess the question really is, could we see survival data from that Enhance interim later this year that's actually mature enough to file on? And is there anything beyond OS benefit that FDA has pointed to for a complete submission package? Thank you." ] }, { "name": "Merdad Parsey", "speech": [ "Hi, Olivia. This is Merdad. Yes. I think maybe it's good to step back and just clarify in the sense of -- how we're approaching interim analysis for our studies.", "So, the pivotal macro study is powered for events at the final analysis. And of course, we run interim analyses, I think, as is norm for the industry to evaluate things like safety, but also, we spend a little bit of alpha in case there is a dramatic improvement in the primary endpoint and offer ourselves the opportunity to start early to benefit patients. So, the OS data continue to mature. The next interim this year dependent on events, of course, is not the final analysis.", "So, it really depends on how big the magnitude of improvement is in OS, whether that leads to a stop in the study or an unblinding in the study. Our expectation is that we go to the final OS analysis. Of course, we always hope an upside surprise at one of the earlier interim analysis. And then in terms of approval, I think we really need to have OS.", "We initially had hoped that we could get, for example, an accelerated approval with CR rates alone. We think we need to do both now to have both a complete response rate, but primarily be driven -- not primarily be driven but importantly, have OS data as well in order to support a file." ] }, { "name": "Operator", "speech": [ "Thank you. The next question is from Simon Baker with Redburn. Please proceed." ] }, { "name": "Simon Baker", "speech": [ "Thank you [Inaudible] on the NICE recommendation. Clearly, that's good from a U.K. perspective, but it's the case that NICE recommendations are closely followed by a much larger range of countries. So, I just wondered if this does indeed have a spillover benefit beyond the U.K.", "for Yescarta. How important is this approval in the U.K.?" ] }, { "name": "Christi Shaw", "speech": [ "Hey there, Simon. It's Christi. Thank you for the question. So, we think it's very important because first of all, it's the number of patients is still very similar at 450, but the process by which patients get approved, obviously should be much smoother and really giving access to -- this recommendation really helps patients get access much more quickly.", "And so, to your point, we do think as you see this approval that this hopefully, will have an influence on other countries, just like we saw with reimbursement as we look at the reimbursement of Yescarta in over 20 countries, it was one at a time. And as certain countries starting to improve. We saw the other currencies also do the same. So, based on the second-line ZUMA-7 trial as well, that will be our next step, to continue to provide the data that giving a patient a one-time treatment can really help the healthcare system and improve patient outcomes.", "So, yes, we're very hopeful that it could have some influence." ] }, { "name": "Operator", "speech": [ "Thank you. The next question is from Robyn Karnauskas with Truist. Please proceed." ] }, { "name": "Nicole Germino", "speech": [ "Good afternoon, and thanks for taking our question. This is Nicole on for Robyn. Are you seeing any safety signals in a sense for a Level 3 with Trodelvy and pembro? Like are the safety probes comparable to both populations? And if so, would this hamper uptake in the first line?" ] }, { "name": "Merdad Parsey", "speech": [ "Hi, Nicole. This is Merdad. We haven't really disclosed anything on the safety. Those studies have really just gotten underway.", "So, I don't think we have anything to share yet. We'll, of course, be following that to see if anything emerges. Your question is exactly the one that we want to make sure we address as we move forward. But I don't -- we don't have enough data at this point to make a comment one way or the other." ] }, { "name": "Operator", "speech": [ "Thank you. Our last question will be from Evan Seigerman with BMO. Please proceed." ] }, { "name": "Evan Seigerman", "speech": [ "Hi, guys. Thanks for taking my question. One for Christi. You're annualizing well above $1 billion for cell therapy products.", "Can you talk about the recent work you've done to expand manufacturing and how you could think that could support further growth this year and beyond? Thank you." ] }, { "name": "Christi Shaw", "speech": [ "Sure. So, that was our focus and has been our focus is really on the supply side and being able to ensure that we have the capacity to provide for patients. I think that's what you're seeing is our industry-leading manufacturing piece. And if you look at GCFO3 here in California, adding the new site to TCFO-4 in Amsterdam and in TCFO-5 in Maryland, we're really able to leverage that footprint to grow not only in the assets that we have today but in future pipeline, especially as we look at the partnership we have now with our select myeloma.", "So, we're very confident about our ability to supply and the capacity that we've built and today and for tomorrow. And really the next focus for us is we've had some really good gains on our margin improvements. But as we look at our operational -- our optimization of our manufacturing footprint. Yes, we need to continue to ensure the capacity, which we feel like we've really done.", "And now we're able to put a big focus too on the optimization piece, which we've made progress on, but we have several levers there to pull as well. So, I hope you're hearing from me a big confidence in our ability to deliver for patients from a capacity standpoint." ] }, { "name": "Operator", "speech": [ "Thank you. That concludes today's question-and-answer session. I will now turn the call over to the management team for any closing remarks." ] }, { "name": "Dan O'Day", "speech": [ "Great. This is Dan. I just want to do a couple of things here. First of all, thank you all for joining and your ongoing interest and questions for Gilead.", "As usual, if we didn't get to all of your questions, please reach out to Investor Relations. As you know, we're very happy to answer those on an ongoing basis. Now, let me just close by emphasizing that Gilead is in a very different place than it was a few years ago, thanks to the work the team has done to transform the company. We're going into 2023 in a very strong position with our current medicines performing well and tremendous growth potential in our neuro therapies, as well as those in development.", "So, what you can expect to see next is quarter-on-quarter execution and even faster progress, and greater impact in the future. Thank you very much for your time today, and we look forward to speaking to you again soon." ] }, { "name": "Operator", "speech": [ "[Operator signoff]" ] } ]
GILD
2022-02-01
[ { "description": "Vice President, Investor Relations", "name": "Jackie Ross", "position": "Executive" }, { "description": "Chairman and Chief Executive Officer", "name": "Daniel O'Day", "position": "Executive" }, { "description": "Chief Commercial Officer", "name": "Johanna Mercier", "position": "Executive" }, { "description": "Chief Medical Officer", "name": "Merdad Parsey", "position": "Executive" }, { "description": "Chief Financial Officer", "name": "Andrew Dickinson", "position": "Executive" }, { "description": "Bank of America Merrill Lynch -- Analyst", "name": "Geoff Meacham", "position": "Analyst" }, { "description": "Wells Fargo Securities -- Analyst", "name": "Mohit Bansal", "position": "Analyst" }, { "description": "J.P. Morgan -- Analyst", "name": "Cory Kasimov", "position": "Analyst" }, { "description": "RBC Capital Markets -- Analyst", "name": "Brian Abrahams", "position": "Analyst" }, { "description": "Goldman Sachs -- Analyst", "name": "Salveen Richter", "position": "Analyst" }, { "description": "Jefferies -- Analyst", "name": "Michael Yee", "position": "Analyst" }, { "description": "Sanford C. Bernstein -- Analyst", "name": "Ronny Gal", "position": "Analyst" }, { "description": "Chief Executive Officer, Kite", "name": "Christi Shaw", "position": "Executive" }, { "description": "UBS -- Analyst", "name": "Colin Bristow", "position": "Analyst" }, { "description": "Oppenheimer and Company -- Analyst", "name": "Hartaj Singh", "position": "Analyst" }, { "description": "Barclays -- Analyst", "name": "Carter Gould", "position": "Analyst" }, { "description": "Morgan Stanley -- Analyst", "name": "Matthew Harrison", "position": "Analyst" } ]
[ { "name": "Operator", "speech": [ "Good day, and thank you for standing by. Welcome to the Gilead fourth quarter and full year 2021 earnings conference call. [Operator instructions] After the speakers' presentation, there will be a question-and-answer session. [Operator instructions] Please be advised that today's conference is being recorded.", "[Operator instructions] I would now like to hand the conference over to your speaker today, Jackie Ross, VP of investor relations. Please go ahead." ] }, { "name": "Jackie Ross", "speech": [ "Thank you, Gigi, and good afternoon, everyone. Just after market close today, we issued a press release with earnings results for the fourth quarter and full year 2021. The press release, slides and supplementary data are available on the Investor section of our website at gilead.com. The speakers on today's call will be our chairman and chief executive officer, Daniel O'Day; our chief commercial officer, Johanna Mercier; our chief medical officer, Merdad Parsey; and our chief financial officer, Andrew Dickinson.", "After that, we'll open up the call to Q&A, where the team will be joined by Christi Shaw, the chief executive officer of Kite. Before we get started, let me remind you that we will be making forward looking statements, including those related to the impact of the COVID-19 pandemic on Gilead's business, financial condition and results of operations; plans and expectations with respect to products, product candidates, corporate strategy, business and operations, financial projections and the use of capital; and 2022 financial guidance. All of these involve certain assumptions, risks and uncertainties that are beyond our control and could cause actual results to differ materially from these statements. A description of these risks can be found in the earnings press release and our latest SEC disclosure documents.", "All forward-looking statements are based on information currently available to Gilead, and Gilead assumes no obligation to update any such forward-looking statements. Non-GAAP financial measures will be used to help you understand the company's underlying business performance. The GAAP to non-GAAP reconciliations are provided in the earnings press release available on the Gilead website. With that, I'll turn the call over to Dan." ] }, { "name": "Daniel O'Day", "speech": [ "Thank you, Jackie, and good afternoon, everybody. As we head into 2022, Gilead is coming off a year of positive clinical momentum and strong financial performance, mitigating the impact of the pandemic on some parts of our business. Higher sales of Veklury more than offset the impact of COVID-19 on HIV and HCV. Veklury continues to play a critical role in helping to treat people with COVID-19, with continued activity against the Omicron variant.", "The FDA recently expanded its use beyond the hospital for patients at high risk of disease progression. In addition, we just initiated the Phase 1 trial of GS-5245, a novel oral COVID-19 nucleoside that once metabolized works in the same way as remdesivir. Our full year revenue for 2021 was 11% higher than the midpoint of our initial guidance in February of 2021. It was also an important year for our transformation to becoming a business that is based on diverse, sustainable growth.", "In 2021, we received seven approvals or accelerated approvals in the US and Europe and submitted an additional six filings. Our approvals included three for Todelvy, with the FDA and MAA approval in second-line triple-negative breast cancer as well as an accelerated approval from FDA for metastatic bladder cancer; two for cell therapy, with Yescarta receiving accelerated approval in relapsed or refractory follicular lymphoma and Tecartus receiving full approval in adult acute lymphoblastic leukemia; and two expanded labels in virology, one for a pediatric label for Biktarvy in the US and an expanded label for Veklury in the EU for adults not requiring supplemental oxygen. Our 2022 plans include a significant increase in clinical development studies across our novel oncology portfolio. We are planning at least 20 additional trials, including seven Phase 3 for trials for Trodelvy.", "And these include the ASCENT-03 trial, which is evaluating Trodelvy in the front-line triple-negative breast cancer in the PDL1 negative population; the ASCENT-04 trial in collaboration with Merck to evaluate Trodelvy and Keytruda in front-line triple-negative breast cancer population in the PDL1 positive population; and the EVOKE-03 trial, which will be led by Merck, to evaluate Trodelvy and Keytruda in non-small cell lung cancer. You will also see ongoing momentum in our virology portfolio as we continue to expand our leadership in antiviral therapies. We are advancing our longer-acting HIV options with lenacapavir as the foundation and look forward to potential regulatory decisions in 2022. If approved, lenacapavir would be the only HIV treatment option administered twice yearly.", "In addition, we'll continue to drive progress across our broader virology portfolio, including hepatitis, COVID-19 and other emerging viruses. This is a really important time in Gilead's transformation journey. After the consistent work to execute on our strategy and expand our portfolio over the last 2 years, you will increasingly start to see this play out in tangible results. We're confident that Gilead has all the elements in place for a strong year and a strong decade.", "Johanna, Merdad and Andy will now take you through the details of our progress and our plans. Now let me hand first over to Johanna to talk about our commercial performance in the fourth quarter and the full year. And I'll be back to you in the Q&A. Johanna?" ] }, { "name": "Johanna Mercier", "speech": [ "Thanks, Dan. Good afternoon, everyone. As you can see on Slide 7, we had a strong end to the year with Q4 total product sales, excluding Veklury, of $5.8 billion, up 7% quarter-over-quarter, driven by favorable pricing and inventory dynamics. This also represented 8% growth year-over-year, driven by continued recovery in the HIV treatment market and favorable pricing dynamics.", "Veklury sales were higher than expected in Q4, reflecting the start of the Omicron surge, but lower than both the prior quarter and prior year and contributing to total product sales of $7.2 billion for the quarter. Moving to Slide 8, total fourth quarter Veklury sales were $1.4 billion, bringing total sales for 2021 to $5.6 billion. Gilead is proud of the role that Veklury continues to play in this pandemic. Veklury has demonstrated activity against the Omicron variant and has helped many patients with COVID-19 in the most recent surge.", "Although symptoms have generally been less severe, the volume of overall cases has meaningfully increased since the emergence of Omicron, and we have seen the total number of hospitalizations increase as well. While we would all prefer to put this pandemic behind us, we expect Veklury to continue to play a critical role in '22 and beyond. As you'd expect, hospitalizations remain a key indicator for in-patient Veklury sales, and we're seeing higher hospitalizations in geographies with lower vaccination adoption, including certain parts of the US as well as Eastern Europe. Additionally, I'm very pleased to highlight that the FDA recently approved the sNDA filing for the use of Veklury in the outpatient setting for patients at high risk of disease progression.", "This approval was based on data generated in the Phase 3 PINETREE study, further solidifying the credibility, importance and role of Veklury. Now Veklury will be able to help even more patients earlier and reduce risk of hospitalization for COVID-19. Next, as shown on Slide 9, total HIV sales were $4.5 billion in the quarter, up 8% sequentially, driven by favorable inventory and pricing dynamics as well as changes to our gross to net estimates in Q4 2021. For the full year, total HIV sales were $16.3 billion, down 4% year-over-year, primarily due to the Truvada and Atripla LOE, in addition to pandemic-related impacts and pricing dynamics.", "The expected impact from the LOEs, which amounted to $1.3 billion, was offset by continued Biktarvy growth. Excluding the sizable LOE impact, HIV total product sales for the full year grew 4% compared to 2020 despite the ongoing pandemic headwinds. We now expect the Truvada and Atripla loss of exclusivity impact to be minimal going forward as the headwind dissipates starting in Q2 of this year. In HIV treatment, we continue to see signs of market recovery although the US market declined 1% sequentially in Q4 following 2 quarters of sequential growth.", "On a year-over-year basis, the overall market in Q4 was up 1.5% in both the US as well as EU5 despite screening and diagnosis rates still below pre-pandemic levels. As you know, favorable dynamics play out in the fourth quarter of every year in HIV and 2021 was no different, with some year-end inventory stocking and favorable seasonal pricing as well as changes in our gross to net estimate in Q4 2021. As you think about 2022, I'll remind you of the normal HIV inventory buildup in Q4 and the New Year reset for patient copays and donut hole payments. Given these factors, along with the favorable pricing dynamics I just mentioned, we expect the sequential decline in Q1 '22 to be greater than Q1 '21.", "Nonetheless, we expect a strong year overall in HIV and expect continued growth in subsequent quarters. Back to Q4, Biktarvy had another record quarter with sales of $2.5 billion, up 11% sequentially and 22% year-over-year. On Slide 10, you can see that Biktarvy US treatment market share has increased over 5 share points in 2021, reaching 42%, which is the highest share that any complete regimen has ever achieved in this market. For the full year, Biktarvy sales were $8.6 billion, growing 19% from 2020, and Biktarvy remains the leading prescribed treatment for naive and switch patients in the US as well as number one in naive in EU5.", "Descovy revenue for the fourth quarter was $473 million, up 9% quarter-over-quarter, primarily as a result of favorable seasonal pricing and inventory dynamics as well as continued demand. We expect Descovy revenue to continue to be driven by PrEP as Descovy has maintained about 45% of overall PrEP market prescriptions in the US. We'll continue to ensure access to support physician choice and expect growing demand and market expansion to offset the impact of increased commercial contracting. Overall, while near-term growth continues to be impacted by local pandemic-related social restrictions, we're encouraged by the growing PrEP market.", "In Q4, the overall PrEP market grew 4% quarter-over-quarter and 31 % year-over-year. Looking forward, we believe lenacapavir, our investigational longer-acting PrEP offering, could potentially catalyze this market well beyond the 25% penetration rate in PrEP that we see today. Moving to Slide 11, it's clear that HCV continues to be part of our portfolio most impacted by the pandemic. Although there was some slight quarter-over-quarter recovery in market starts in the EU5, US market starts declined, resulting in flat total starts overall.", "While Gilead market share increased modestly on a sequential basis in both the US and the EU, this was more than offset by unfavorable pricing dynamics, resulting in Q4 total sales of $393 million, down 8% sequentially and 7% year-over-year. As you can see on Slide 12, our HBV and HDV franchise reported record quarterly revenues of $265 million, up 7% sequentially due to seasonal inventory and favorable pricing. The 9% year-over-year growth was primarily driven by Vemlidy demand. Total fiscal year sales for this franchise were $969 million, up 13% year-over-year.", "Hepcludex reported $12 million of sales in Q4 in Europe, with $37 million '21 sales since our acquisition in late first quarter. Hepcludex is currently available in Germany and France, in addition to a number of early access programs in countries such as Austria, Italy and Greece. In 2022 and as part of our comprehensive commercialization plan, we expect to finalize reimbursement for launch in a number of major European markets. In the US, we filed a BLA in November and FDA granted priority review for accelerated approval, with a PDUFA date set for the third quarter as well as an advisory committee meeting that will be scheduled in the coming months.", "Moving to oncology, first with Todelvy on Slide 13. Global sales were $118 million in the fourth quarter, up 17% sequentially and up 84% year-over-year, compared to full Q4 2020 sales. This reflects growing adoption of the second-line metastatic TNBC indication, which was noted as a preferred regimen in the NCCN breast guidelines updated in September. We're also starting to see stronger, unaided brand awareness, which is resulting in continued market share growth.", "In second-line TNBC, Trodelvy now captures approximately one in four new starts in the US. We've expanded our oncology footprint globally, including tripling our US headcount to further accelerate penetration of Trodelvy and prepare for a potential HR positive and HER2 negative launches. Additionally, EU approval for Trodelvy was granted in late November 2021, and we've already seen strong momentum in France and Germany since their launch. We plan to launch in a number of new countries following key reimbursement decisions this year.", "Now on Slide 14, on behalf of Christi and the Kite team, cell therapy Q4 sales of $239 million reflected 47% year-over-year growth, an 8% increase sequentially. For the quarter, Yescarta sales of $182 million were up 41% year-over-year, driven by continued demand in relapsed or refractory large B-cell lymphoma and follicular lymphoma. Tecartus sales of $57 million in the quarter reflected 68% year-over-year growth based on growing global demand for relapsed or refractory mantle cell lymphoma and early contribution for adult acute lymphoblastic leukemia in the US. As a reminder, FDA granted Tecartus approval in adult ALL in October.", "In just the first few months of launch, there has already been strong demand that we expect to continue in the coming quarters, given the high unmet need. Full year cell therapy sales of $871 million reflected 43% year-over-year growth, driven by continued LBCL and MCL demand globally as well as the new launches. The strong growth we've seen with these recent launches reinforces our belief that cell therapy adoption will continue its positive momentum as more physicians understand the benefits for appropriate patients and therefore increase referral rates to treatment centers. Merdad will elaborate later, so I'll just quickly mention the impressive data Kite presented at ASH in December, 43% overall survival rate after 5 years in third-line LBCL patients.", "The Yescarta data at ASH not only highlighted the long-term real-world safety and efficacy profile in third-line LBCL, but also in earlier lines of therapy. For ZUMA-7 data in second-line LBCL, FDA has set a PDUFA date of April 1, when we hope Yescarta will be granted approval. In the meantime, the Kite team is ramping up manufacturing capacity to meet the anticipated demand. Kite expects the new Maryland facility to begin commercial operations by Q2.", "Combined with the Amsterdam and El Segundo facilities, we expect to increase operational capacity by up to 50% by the end of this year. Christi is here with the team and available to take questions on cell therapy during a Q&A. In closing are oncology sales were $1.25 billion in 2021, and we expect robust growth in the coming years. And so with that, I'll hand it over to Merdad for pipeline updates." ] }, { "name": "Merdad Parsey", "speech": [ "Thanks, Johanna, and good afternoon, everyone. Building on what both Johanna and Dan have said, the Gilead team rounded out a very strong 2021 with further progress across our portfolio. In 2021 alone, we began enrolling patients in 13 oncology, 13 virology and 4 inflammation trials. And we have recently shared the initial details of the ambitious development programs we're targeting for 2022.", "As we look forward, we're confident that we have the foundation to continue to build a robust, diverse portfolio across our three focused therapeutic areas. First, on Slide 16, Veklury continues to play a vital role in the fight against COVID-19. Veklury was the first approved treatment for patients hospitalized with COVID-19, and we recently expanded indication labels in the US and EU. In December, the European Commission approved a variation to the Conditional Marketing Authorization for Veklury for the treatment of COVID-19 in adults not on supplemental oxygen.", "And last month, based on the data from the Phase 3 PINETREE study, the FDA expanded the approval of Veklury to include non-hospitalized patients at high risk for COVID-19 disease progression. These expanded indications speak to the activity of Veklury against the coronavirus variants we've seen so far, including Omicron. We believe there will continue to be a need for Veklury delivered intravenously, especially for higher risk patients. The potential for continued COVID-19 variants and infections highlight the need for more convenient oral formulations to expand the options for outpatients.", "As such, we've just initiated a Phase 1 trial of GS-5245, a novel oral COVID-19 nucleoside that once metabolized works in the same way as remdesivir. Pending data, the evolving pandemic landscape and discussions with regulatory agencies, we're hoping to initiate a registrational trial before the end of the year. Moving to HIV on Slide 17, we shared an overview of some of our long-acting development activities a few weeks ago to highlight the diversity of our portfolio and how it targets the entire HIV lifecycle. We continue to believe that our investigational agent lenacapavir is a unique and foundational asset, given its potential for extended dosing in addition to the compelling efficacy and safety profile highlighted in the CAPELLA and CALIBRATE studies.", "Next, on Slide 18, you can see our current clinical efforts with long-acting HIV therapeutics. As previously announced, the Phase 2 study evaluating the oral combination of lenacapavir with Merck's islatravir is on partial clinical hold, and Merck remains in discussions with the FDA on next steps for islatravir. In the meantime, we at Gilead continue to develop a number of other potential partner agents for lenacapavir in HIV treatment and look forward to sharing some more detail on these program at our Virology Deep Dive later this month. We remain confident and excited about lenacapavir's future potential to deliver options for people living with HIV or those who can benefit from PrEP.", "I want to be very clear that the recent clinical hold for the lenacapavir trials, which the FDA initiated in December, is not associated with the lenacapavir molecule itself. Rather, the hold reflects concern about the compatibility of certain vials with the lenacapavir solution. We continue to work with the FDA to remediate the concern and to agree on a path to resume these trials. We are hopeful this can be achieved quickly.", "As such, we continue to expect an FDA decision for lenacapavir in heavily treatment experienced individuals in the first half of 2022. If successful, lenacapavir will become the first available 6-month, long-acting subcutaneous injection for the treatment of HIV. Next, moving to Trodelvy on Slide 18, I'm pleased to confirm that we now expect to share both top line progression-free survival data as well as the first planned interim analysis of our overall survival from TROPiCS-02 in March. There's been a convergence of events for PFS and OS, such that we will be able to conduct and report a single analysis of these outcomes rather than have two analyses separated by a short interval.", "Gilead remains blinded to the data, and we are excited to be able to share this more complete view later this quarter. We are targeting an sBLA filing in the second half of 2022, depending, of course, on the readout. If the data are positive, we believe that Trodelvy could represent a very important treatment option for HR positive, HER2 negative patients who are hormone refractory and have very limited options. Reflecting our confidence in Trodelvy overall, we are expanding the number of clinical programs in 2022 to evaluate effectiveness in breast, lung and bladder cancers, with plans to initiate study start-up activities for at least seven Phase 3 trials.", "Three of these are expected to enroll their first patients in 2022, including two in front-line metastatic TNBC and another in front-line non-small cell lung cancer study that will be led by Merck. Going forward, we will separately disclose trial start-up activities versus FPI milestones. Additionally, in the first half of this year, we plan to add a combination of Trodelvy with other Gilead portfolio assets as a study or an additional cohort in an existing study. We look forward to sharing more details at our upcoming Oncology Deep Dive in April.", "This is another example of the versatility and tremendous potential that Trodelvy, along with the growing oncology portfolio, can generate. Next slide, onto magrolimab. Early last week, the FDA placed a partial clinical hold pausing enrollment and screening in trials and cohorts in the US evaluating magrolimab in combination with azacitidine following a review of a preliminary data set suggesting an apparent imbalance in investigator-reported SUSARs, or suspected unexpected serious adverse reactions, between treatment groups in our ongoing Phase 3 trial in high-risk MDS. A subsequent partial clinical hold has been placed on the Phase 2 multiple myeloma study and the fully enrolled Phase 2 DLBCL study.", "Importantly, patients currently enrolled in our magrolimab studies can continue treatment, and our compassionate use programs remain open. We are working with FDA to take a comprehensive look at the safety data, and we'll share the outcome as quickly as we can. In the meantime, we remain committed to the magrolimab development program and believe that it has the potential to address an important unmet medical need in these seriously ill patients. As you know, the patients in our ENHANCE Phase 3 trial have a very high unmet need, with a median overall survival of only 1 to 3 years on the current standard of care.", "Separate from and prior to the partial clinical hold, our Phase 1b single arm study in higher risk MDS no longer has a viable path to submission based on regulatory feedback. As such, we'll remain focused on our Phase 3 ENHANCE study and look forward to sharing the 1b data at an upcoming scientific meeting. Next, moving to cell therapy on Slide 21. On behalf of Christi and the Kite team, I'll share a brief update on the impressive data Kite presented at ASH last December.", "First, as you may recall, in 2020, we shared that Yescarta had a 4-year overall survival rate of 44% in third-line LBCL patients. At ASH in December, we presented 5-year data from ZUMA-1 in third-line LBCL patients, showing Yescarta demonstrated a remarkable and durable 43% overall survival rate, stable since our 4-year update. Additionally, 92% of the patients who remained alive at 5 years have not needed any additional cancer treatment since their one-time infusion of Yescarta. It's truly inspiring to see this type of durability for CAR T-cell therapies.", "As announced yesterday, the FDA approved a label update for Yescarta to include use of prophylactic corticosteroids across all approved indications. Adding prophylactic steroid use can improve the management of certain side effects without compromising the activity of Yescarta. For example, the FDA label now shows no grade 3 or greater cytokine release syndrome events occurred using the Cohort 6 protocol as compared to 13% in the original label. This label update compliments data published in 2021 showing 68% of patients had no CRS or neurologic events within 72 hours of the Yescarta infusion.", "As we look to earlier lines of treatment, the landmark ZUMA-7 trial evaluating Yescarta in second-line relapsed/refractory LBCL demonstrated a greater than 4-fold increase in median event free survival, or EFS, compared to standard of care through 2 years of follow-up. As you can see on the slide, the EFS curve for Yescarta is compelling. The sBLA was filed last quarter and we expect an FDA decision by April of this year. In terms of the first-line LBCL data, Yescarta demonstrated 89% overall response rate in high-risk patients and 78% complete response with a median follow-up of 15.9 months.", "Given these encouraging data, the Kite team is in discussions with regulatory authorities on a potential path forward in front-line LBCL. And finally, on Slide 22, we highlight key 2022 catalysts across the portfolio, many of which I have just mentioned. I'd also like to take a moment to highlight the three Arcus milestones in second half of this year. Last quarter, Gilead opted in to the three Arcus programs, which added four assets to our portfolio: domvanalimab, an Fc silent anti-TIGIT antibody; AB308, an Fc active anti-TIGIT antibody; etrumadenant, an adenosine receptor antagonist; and quemliclustat, a small molecule CD73 inhibitor.", "Together with Arcus, we expect to share ARC-7 Phase 2 PFS data in the second half of 2022, which will include data for the zimberelimab monotherapy, zim and dom doublet as well as the zim, dom and etruma triplet arm. We look forward to sharing data when available and are very excited to collaborate more closely with Arcus to accelerate future development plans. On Slide 23, you can see that Gilead's portfolio now encompasses 55 clinical stage programs, nearly doubling since 2019. Given the exciting potential of our portfolio across virology, oncology and early stage inflammation assets, this is just the beginning.", "Our teams are committed to advancing the most promising programs that will help transform patient outcomes, and we look forward to sharing our progress with you over the coming quarters and years. With that, I'll hand it over to Andy." ] }, { "name": "Andrew Dickinson", "speech": [ "Thank you, Merdad, and good afternoon, everyone. It was a strong close to 2021, driven primarily by strong HIV and Veklury revenue in the fourth quarter. For the full year and excluding the impact of the LOEs, HIV grew 4% year-over-year, driven by the continued outperformance of Biktarvy, which achieved record US market share of 42% and sales of $8.6B, up 19% from 2020. Oncology was another highlightfrom both a pipeline and a revenue perspective, with full year cell therapy sales of $871 million, growing 43% from 2020, and Trodelvy sales of $380 million in its first full year.", "By 2030, we anticipate our oncology franchise will represent at least a third of our total revenue. Before I get into the normal P&L review and 2022 guidance, I want to address the EPS results for this quarter up front. Slide 25 highlights two sizable expenses that occurred after we gave our last guidance update in October. First, and subsequent to the exercise of Gilead's opt-in to four Arcus assets in December, our fourth quarter results reflect a net charge of $625 million recorded in R&D.", "This charge reflects our $725 million option payment recognized in Q4, less $100 million that was previously accrued. This impacted our EPS by about $0.38 in Q4 and for the full year. Second, and as part of a legal settlement with ViiV and related parties, we have agreed to make a one-time $1.25 billion payment in addition to an ongoing 3% royalty for future sales of Biktarvy and the bictegravir component of any bictegravir-containing products in the United States. This royalty extends until October 5, 2027.", "The $1.25 billion payment is recorded in our fourth quarter results and reflected in our cost of goods sold. This charge constituted an approximately 17% impact to gross margin in the fourth quarter, and it impacted our EPS by $0.80 for Q4 2021 and the full year. Going forward, we expect the impact of this new royalty to be approximately 1% on our gross margin starting in the first quarter of 2022. Excluding these items and their combined $1.18 impact, our full year non-GAAP EPS would have exceeded the guidance range that we set back in October, helped by stronger than expected Veklury sales.", "Moving back to our quarterly review on Slide 26, fourth quarter revenue in our base business included HIV product sales growth of 7% year-over-year and 8% sequentially. Veklury sales were higher than expected due to start of the Omicron surge. Non-GAAP product gross margin was 70.5%, impacted by the legal settlement that I referenced earlier. And non-GAAP R&D was impacted by the Arcus opt-in, resulting in non-GAAP EPS of $0.69 per share.", "Our non-GAAP effective tax rate for the fourth quarter was 32.2%, reflecting tax expense related to uncertain tax positions and an increase in valuation allowance as well as the impact of discrete tax benefits related to legal settlements with tax authorities in 2020 that did not recur this year. For the full year, on Slide 27, total product sales of $27 billion grew 11%, driven by Veklury. Excluding Veklury, total product sales were roughly flat at $21.4 billion as growth in Biktarvy and oncology offset the $1.3 billion impact of the Truvada and Atripla LOEs in the United States. I touched on the main P&L impacts in the fourth quarter discussion, but I'll highlight that our non-GAAP effective tax rate for 2021 was 20.4% despite the higher effective tax rate in fourth quarter.", "Moving now to Slide 28, our 2022 guidance assumes that the recent Omicron surge represents the only major COVID-19 wave for 2022, and that our HIV business will continue to recover from the pandemic. With that in mind, we expect product sales in the range of $23.8 billion to $24.3 billion. Excluding Veklury, we expect product sales in the range of $21.8 billion to $22.3 billion, representing growth of 2% to 4% for our base business year-over-year. Relative to Q1, I'll remind you to expect HIV revenue to decline sequentially.", "This is a normal dynamic for HIV due to inventory and seasonal pricing impacts. And you'll recall last year, HIV revenue declined 14% sequentially in Q1 '21 from Q4 of 2020. For Q1 '22, we expect a larger sequential decline, given the favorable Q4 '21 changes to gross to net estimates that Johanna mentioned earlier. Nonetheless, we expect a strong year overall for our HIV business and continued growth in subsequent quarters.", "Looking beyond Q1, we expect the impact of the Truvada and Atripla LOEs will be largely behind us starting in Q2, and we look forward to accelerating growth in our HIV business during the remainder of the year. For the full year 2022, we expect Veklury sales of approximately $2 billion. This assumes, as I previously indicated, that Omicron will represent the only major surge for the year, with Veklury revenue heavily weighted in the first quarter. That said, the pandemic continues to be dynamic, and we will update you on our Veklury expectations on a quarterly basis, consistent with our recent practice.", "Moving to the rest of the P&L, we expect our non-GAAP product gross margin to be approximately 85% to 86%, consistent with our historic guidance and allowing for the 3% royalty associated with the legal settlement. For non-GAAP operating expenses, we expect R&D to decline or to decrease by a mid-single-digit percentage compared to 2021 levels. This decline is driven by the net $625 million charge related to the Arcus opt-in in the fourth quarter of 2021. Excluding this, we expect full year R&D expense to increase by a mid to high single-digit percentage compared to 2021 levels.", "We expect SG&A expense to be approximately flat on a dollar basis compared to 2021. Our non-GAAP effective tax rate is expected to be approximately 20% this year. Finally, we expect our non-GAAP diluted EPS to be between $6.20 and $6.70 for the full year, and GAAP diluted EPS to be between $4.70 and $5.20. On capital allocation, our priorities have not changed.", "We continued to invest in our business while, at the same time, we returned over $4 billion in 2021 to our shareholders through dividends and share repurchases. In addition, we repaid $4.75 billion of debt in 2021. For 2022, we plan to repay $1.5 billion of debt, of which we repaid $500 million this morning. With that, I will invite the operator to begin the Q&A.", "Thank you." ] } ]
[ { "name": "Operator", "speech": [ "[Operator instructions] Our first question comes from the line of Geoff Meacham from Bank of America. Your line is now open." ] }, { "name": "Geoff Meacham", "speech": [ "OK, great. Hey, guys, good afternoon, and thanks for the question. Dan or Andy, maybe a higher level strategic question. I wanted to ask about your comment regarding long-term oncology.", "And the question is, are you comfortable with the aggregate assets in the portfolio? Do you think you'll need to be more aggressive on BD either to drive more near-term growth or looking longer term to have higher impact assets? Thank you very much." ] }, { "name": "Daniel O'Day", "speech": [ "Thanks, Geoff. Thanks for the question to the team. And I'll start and hand it over to Andy. So yes, I mean, the guide that we gave at J.P.", "Morgan was that we are confident in our ability to grow and to also have an ecology by 2030 be at least a third of our overall revenue on top of a solid HIV business and virology business overall. I think the answer to the question, Geoff, is we believe we have everything in-house to be able to fulfill on that commitment today. I mean, the number of options that we have with Trodelvy, with magrolimab, with Arcus assets and with cell therapy, from an oncology base, provides tremendous opportunity for us to look alone and in combination that portfolio in the coming years. And that specifically leads to the more than 30 clinical trials we have ongoing right now in our oncology portfolio.", "And our guide that this year will start at least another 20 in the oncology space. So really, that's the armamentarium behind our commitment and our growth. Of course, we'll continue to be opportunistic around business development and look for supplemental options out there that can complement this portfolio as a course of normal businesses as any healthy company should. Having said that, we really do have enough in-house to be able to fulfill upon that commitment.", "So with that, Andy, I may have stolen all your thunder. But I'm sure you'll have some additional perspective." ] }, { "name": "Andrew Dickinson", "speech": [ "Yes. Geoff, thank you for the question. I think it's an important question, especially in the context of the magrolimab clinical hold that maybe underpinning the question specifically. But the answer is relatively simple.", "We have a very strong set of assets already. The guidance that we provided at J.P. Morgan does not actually include all of the assets or all of the indications for all the assets. So there's a lot of ways for us to get there.", "We have complete confidence in where we're going, and we don't expect to change our BD strategy as a result of any of the recent developments. We're actually really excited about where we are. And there's a lot of upside to that of other assets, whether it's some of the earlier Arcus assets or the Tizona or Pionyr assets, as examples, provide additional options for patients. So when you talk about high-impact assets, I would just summarize by saying, we already think that we have a great portfolio of high-impact assets in oncology.", "We're incredibly pleased with what we've put together and nothing that's happened recently has changed that in any way. So thanks for the question." ] }, { "name": "Daniel O'Day", "speech": [ "Thank you. Let's move to the next question." ] }, { "name": "Operator", "speech": [ "Our next question comes from the line of Mohit Bansal from Wells Fargo. Your line is now open." ] }, { "name": "Mohit Bansal", "speech": [ "Great. Thanks for taking my question, and good afternoon. Maybe a question for Merdad. So in the light of new data that are emerging in HR positive and HER2 negative breast cancer, do you have any updated thoughts on how to think about overall survival in the treatment and control arms for TROPiCS-02, vis-a-vis the expectation or the assumptions in clinical trials, which I think, if I'm not mistaken, 12 months for the control and 16.5 months for the treatment? So how should we think about OS? Thank you." ] }, { "name": "Daniel O'Day", "speech": [ "Thanks, Mohit. Directly over to you, Merdad." ] }, { "name": "Merdad Parsey", "speech": [ "Yes. Thanks, Mohit. It's a great question. And I think as I mentioned in my call, I think we're excited that we're going to be able to share the first interim analysis from the OS as well when we do the readout here for the PFS.", "So I do think we'll look at both at the same time. You're absolutely right that there are developments in the HR positive space. But I continue to believe and I think that the impact on both PFS -- on PFS in particular here, but also OS, continues to be, I think, if we see something in the ballpark of what you just described, we're confident that, that remains incredibly clinically relevant for people suffering with HR positive, HER2 negative. It is, as you state, an increasingly competitive area, but we do think that, that remains a key milestone for patients if we can achieve that." ] }, { "name": "Daniel O'Day", "speech": [ "Thank you. Let's move to the next question." ] }, { "name": "Operator", "speech": [ "Our next question comes from the line of Cory Kasimov from J.P. Morgan. Your line is now open." ] }, { "name": "Cory Kasimov", "speech": [ "Hey, good afternoon, guys. Thank you for taking my question. I wanted to follow up as well on the TROPiCS-02 study. And maybe, Merdad, can you talk about how you see the potential significance of this convergence of events that you alluded to when thinking about both progression-free survival and overall survival? Did you see any implications from this? Or is this kind of moving along the lines as you would have expected it to?" ] }, { "name": "Merdad Parsey", "speech": [ "Yes. Great question, and thanks for asking it. I think I'm very reassured I would not read anything into this other than the fact that we've been, as you can imagine, keeping track of the PFS events and the OS events all along. And we've now gotten to the point where those OS events have occurred in a time frame that allows us to look at both of these events at the same time.", "I don't think it really says anything about -- I think what you're getting at is, does it have any implications for the underlying positive or negative or anything like that? And I really don't think there's any way to interpret that right now. It would be pure speculation to think that there's some underlying driver of bringing those endpoints together. And actually, it's not that unexpected. It's a little bit closer than we thought it would be, but not by that much.", "So, I wouldn't read too much into it. I'm just excited we'll be able to do it. It will be a more robust look. And I think as I've said before, we think the regulators are going to want to see those robust looks at the OS to help them with sort of, in a sense, supporting the PFS endpoint." ] }, { "name": "Daniel O'Day", "speech": [ "Thanks, Cory. Can we have the next question, please." ] }, { "name": "Operator", "speech": [ "Our next question comes from the line of Brian Abrahams from RBC Capital Markets. Your line is now open." ] }, { "name": "Brian Abrahams", "speech": [ "Hey, guys. Thanks so much for taking my question. I wanted to better understand the potential signals from magrolimab. I think you guys have said that you haven't observed any clear AE trend.", "I was curious, where is the disconnect versus what the FDA and investigator concerns are here? And maybe talk a little bit about the potential path to resolution. What additional safety data would be needed and your level of confidence you will reach a resolution? Thanks." ] }, { "name": "Daniel O'Day", "speech": [ "That's great. Thanks, Brian." ] }, { "name": "Merdad Parsey", "speech": [ "Thanks, Cory. Yes, I think -- so look, I think the way to think about it is some of -- there have been a couple of events that the agency wants to make sure that they have a chance to look at the overall safety profile. I remain blinded to the safety data. So what is going on is we are gathering the safety data, and we're going to share it with the FDA and with the data monitoring committee.", "I can tell you that we feel that these are temporary challenges right now, and we're going to work through resolving it as quickly as possible. I don't think these challenges really shake our confidence for the portfolio overall, and our overall strategy hasn't changed. We're really committed to the magro development program, and we think that it really continues to have the potential to really address an important unmet medical need. The other thing I'd add is, remember, these are very generally pretty sick patients.", "And with that underlying illness, I think it's appropriate to be cautious and make sure that we're striking the right balance as we go forward. But we'll work through it by looking at the overall safety profile, Brian, and make sure that we are able to resolve those issues with the FDA." ] }, { "name": "Daniel O'Day", "speech": [ "And Brian, we'll keep you informed as that evolves. We have obviously a lot of patients on magrolimab. They continue to be served by magrolimab. So we have a sense of urgency in working with the agency around this.", "Thank you very much, Brian. Can we have the next question, please?" ] }, { "name": "Operator", "speech": [ "Thank you. Our next question comes from the line of Salveen Richter from Goldman Sachs. Your line is now open." ] }, { "name": "Salveen Richter", "speech": [ "Good afternoon. Thanks for taking my question. You referred to the Arcus portfolio. Can you just comment on what you're most excited about outside of TIGIT and when you might start the triplet study?" ] }, { "name": "Daniel O'Day", "speech": [ "Sure. Merdad, why don't you start on that?" ] }, { "name": "Merdad Parsey", "speech": [ "Sure. I think in addition to the TIGIT asset, as you know, the adenosine portfolio, if you will, the two molecules, the two inhibitors of adenosine, both in terms of the synthesis inhibitor, CD73, as well as the receptor blocker, are really interesting to us. They're early programs, but we think that there is a real potential for those assets to provide significant upside to treatment, both in terms of where -- in lung cancer, where we think there's some -- the trial that's ongoing that is looking at the addition of adenosine inhibition to TIGIT plus PD-1 as well as in some of the indications that Arcus is evaluating with monotherapy, in particular, pancreatic cancer. So I think for us, there are a number of opportunities there and the broad potential of adenosine inhibitors to add on to immuno-oncology in general and TIGIT plus PD-1, in particular, really strike us is a really great opportunity that hopefully as the data mature, we'll be able to share more and really underpin the optimism we have around where those programs are headed." ] }, { "name": "Daniel O'Day", "speech": [ "Right. And I think there was a question around when to start the triplet." ] }, { "name": "Merdad Parsey", "speech": [ "And then the triplet study, yes, we haven't announced that yet. We need to work through some details. Thanks for reminding me, Dan. We're working through some approach.", "Really, the question here for us is how to go from the doublet, where we're really looking at a TIGIT inhibitor being an unapproved agent, right, and then potentially bringing in a second unapproved agent. So we have to work through, in a sense, the regulatory complications of how we have to sequence and stage those studies to allow us to assess the contribution of components such that we can move forward aggressively. So we're working really closely with our our adenosine colleagues -- our Arcus colleagues, and we'll work through the regulatory pathways to make sure that we can get to a robust Phase 3 trial with those. So as we do so, we'll certainly share the timing in the pathway." ] }, { "name": "Daniel O'Day", "speech": [ "And Salveen, the only thing I'd add on top of Merdad's very eloquent response is the potential to combine this attractive portfolio for markets with other medicines that we have within Gilead, including Trodelvy and possibly magrolimab and others, so this combination of having access to a PD-1 to TIGIT compounds to adenosine, combined with Trodelvy, provides a rich opportunity to look at rational-based combinations. And we'll be getting more into that as we do a deeper dive in oncology as a starting point in April. And then obviously, throughout the year, we'll continue to update you on that. And it's one of the major reasons why opting in early was important to us because we can work really fluidly now across a very rich portfolio.", "And with the additional expertise and colleagues from Arcus, it really expands all of our potential in clinical science and beyond. Thanks, Salveen, for the question. Can we have the next question, please?" ] }, { "name": "Operator", "speech": [ "Our next question comes from the line of Michael Yee from Jefferies. Your line is now open." ] }, { "name": "Michael Yee", "speech": [ "Hey, thanks. Thanks for the question. Appreciate it. Maybe back to Merdad on Trodelvy, appreciating that I know there's a lot of focus on this interim OS.", "I would love to give you the opportunity to perhaps frame expectations at an interim. Interims have different connotations and there's different interims at different percent of events that have accrued. So could you just explain what percent of events this interim is based on? Do you actually expect to hit stat sig? Or do you just expect a trend of a few months? Maybe just talk to that a bit because I think there's different implications of just an interim.Thank you." ] }, { "name": "Daniel O'Day", "speech": [ "Thank, Michael. And maybe just a suggestion, as you answer Michael's specific question, it might be helpful for the whole audience to hear again kind of your overall view of the potential success of this indication." ] }, { "name": "Merdad Parsey", "speech": [ "Yes. Michael, it's a great question. And I think -- thank you for asking it. So as a reminder, I think from a PFS standpoint, the primary endpoint of the study, we believe we're really well powered to detect a difference there.", "And as I'll remind folks, we did redesign the study a year ago in order to power the study adequately for OS as well. I would -- I think as excited as I am that we will be able to report out that first interim analysis, Michael, you're absolutely right on that. I would not expect statistical significance at this first interim because it is relatively early in the time frame that we're seeing. So my expectation is that, again, pending a positive outcome, that we are well powered to see a PFS improvement at a statistically significant level.", "And the OS will be supportive data at that point that will give us directionality as to where we're headed. And then hopefully, subsequent to that as the events accrue, we'll see where we're headed with OS down the road. It's a great question." ] }, { "name": "Daniel O'Day", "speech": [ "Thanks, Michael. Can we have the next question, please?" ] }, { "name": "Operator", "speech": [ "Our next question comes from the line of Ronny Gal from Bernstein. Your line is now open." ] }, { "name": "Ronny Gal", "speech": [ "Good afternoon, and thank you for taking my question. Switching over to talk a little bit about Yescarta. Can you tell us if there's already impact on the use of Yescarta in second line? Or is it still ahead of us? And you've mentioned you're increasing your capacity by 50%. Are you currently capacity-constrained or demand-constrained? Essentially, will all that demand be used if it comes online?" ] }, { "name": "Daniel O'Day", "speech": [ "Yes. Thanks, Ronny. And as I turn it over to Christi, let me just say how many patients we've been able to impact with cell therapy in 2021 and that being just the beginning, I think, of our promise for the future. We certainly invested in the manufacturing capacity to anticipate demand and success in the second line.", "And Christi can go into the details with you. Christi, over to you." ] }, { "name": "Christi Shaw", "speech": [ "Thanks, Dan. Thanks for the question. Yes, we're very excited about not only the second line, which is the most important to help the most patients, but the continued success of third line plus with the 5-year data that was presented at ASH, where year 4, you saw 43% of patients still alive and at -- 44% of the patients still alive at 4 years and 43% at 5 years, which I think you heard Merdad say. So based on those as well as new indications coming out, we're really seeing an increase in demand.", "Our capacity, we're well-positioned. We have the El Segundo manufacturing site here in California. Amsterdam was approved during COVID and was up to its capacity by the end of last year. And now we have the Maryland site, which will be going online in the first half of this year, where you'll see our automation as well.", "So not only increasing capacity, but also the ability to reduce costs. So things are coming along nicely in terms of our ability to deliver. And we still have that reliability of 97% success when we give the cells back, which is so critically important to patients. So not a capacity issue.", "We had a transparency, a couple of issues last year, where we had a scheduling issue where physicians were asking for the exact same slot all at the same time. And we quickly addressed that and no longer have that concern. So we're doing well and preparing for hopefully what we'll see is helping a lot more patients stay alive a lot longer." ] }, { "name": "Daniel O'Day", "speech": [ "Thanks so much, Christi. And overall, Ronny, we're expecting about a 50 % increase in capacity over the course of 2022, so continued investment there. Thanks, Ronny. Can we have the next question, please?" ] }, { "name": "Operator", "speech": [ "Our next question comes from the line of Colin Bristow from UBS. Your line is now open." ] }, { "name": "Colin Bristow", "speech": [ "Hey, good afternoon, and thanks for the question. On magrolimab, maybe could you explain why the multiple myeloma and DLBCL trials were also on hold, given they're not in combination with aza? And then just somewhat related to that, the $1.50 in acquisition-related expenses in the '22 guide, is there any component of that that's related to the Forty Seven acquisition." ] }, { "name": "Daniel O'Day", "speech": [ "Great. So I'll have Andy answer the second. Maybe you want to touch base on the first, Merdad, also telling about the stage of those 2 trials, DLBCL and magrolimab." ] }, { "name": "Merdad Parsey", "speech": [ "Yes, it's really important to -- I think this may have not been entirely clear. First of all, look, I think whenever there's a safety question, the agency is going to err on the side of being cautious. And so we'll work through with them on how to go forward. And I agree in those studies, we are not combining with azacitidine.", "So again, I think as we share the data and the analysis with the agency, hopefully, we can come to resolution sooner than later. And it's important to note that for the multiple myeloma study, we actually hadn't really started enrolling patients at that point. So I think that was one consideration. And by contrast for the DLBCL study, that stage is completely enrolled.", "So the partial hold there actually doesn't have much of a practical impact on that study because we're going to continue dosing the patients who are already enrolled in that study. So I think -- remember that the way it works and maybe the context here, the holds are placed on an IND, not on a study-by-study basis generally. So this was a hold to the IND. And so that's sort of the context to think about it.", "I'll hand it off to Andy to answer the second part of the question." ] }, { "name": "Andrew Dickinson", "speech": [ "Sure. Hi, Colin. I'm not sure that I fully understood the question, but what I can tell you is none of the updates that we provided in terms of the one-time fourth quarter expenses nor none of our 2022 guidance has anything to do with Forty Seven expenses. So you and I can maybe talk separately to understand what your question is specifically, but there's nothing related to Forty Seven or the Forty Seven acquisition that was either part of our fourth quarter update, year-end update or part of the 2022 guide specifically.", "Thank you." ] }, { "name": "Daniel O'Day", "speech": [ "Thanks, Colin. Happy to take that up separately too. So let's go to the next question, please." ] }, { "name": "Operator", "speech": [ "Our next question comes from the line of Hartaj Singh from Oppenheimer. Your line is now open." ] }, { "name": "Hartaj Singh", "speech": [ "Hey, thank everyone. Thanks for the question. This is just a question on Veklury. You're starting to get a pretty consistent franchise there.", "I mean, unfortunately, COVID-19 is still out there. Various experts have indicated and even some of the companies we cover, we're going from a pandemic to an endemic kind of state over this year into next year. How do you think of Veklury going forward? I know it's difficult to give guidance there, but you've got a year and a half worth of data underneath your belt. How are you thinking of hospitalizations going forward, whether that's through breakthrough infections? Or do you see as unvaccinated individuals get less and less that hospitalization will concomitantly decrease? Any thoughts there? And then assuming the oral program gets approved, how do you see remdesivir IV and then the oral option working together going forward? And again, thanks for the questions, and a really nice quarter." ] }, { "name": "Daniel O'Day", "speech": [ "Thanks, Hartaj. So I think Johanna can start with some of the pandemic, endemic. And then Merdad could also comment a little bit on the forward portfolio. But please, Johanna, over to you." ] }, { "name": "Johanna Mercier", "speech": [ "Thanks, Hartaj, for the question. Basically, what we've seen since the very beginning is how Veklury sales truly track to the hospitalizations. And we've seen that most recently again with the Omicron surge. What we did see as well is the fact that -- despite the fact that Omicron seemed to be maybe less severe impact, unfortunately, the number of cases were much greater, and therefore, just the pure absolute numbers of hospitalizations went up.", "And so we've tracked every single time pretty much in line parallel to the hospitalization rates. And we assume that will continue. We do think the hospitalizations will get impacted by some of the oral compounds, even some of the outpatient use of Veklury, but also neutralizing antibodies as well as the oral treatments as well, like the PI from Pfizer. And so we do think that will decrease hospitalizations over time.", "The one thing we had assumed maybe about a year ago is we really thought the vaccination rates would continue to rise and they didn't. They basically stabilized at around the 60%, 65% rate. And of course, there are variances across the country. So what we've seen is the use of different treatments as well as the vaccination rates are really dictating a little bit kind of the hospitalizations, and therefore, the Veklury usage.", "And yet again, in the December, January time frame, we've really seen Veklury play a critical role here for these hospitalizations. Also having to do with the fact that many of the other previous agents that were on the market were no longer effective against the Omicron variant. And we haven't seen any of that. We've seen very strong efficacy with Veklury, which has also helped that.", "I think most recently, the outpatient data that's just come out in addition to the indication really plays a critical role when there are surges and hospitals are overcapacity, so that they really can look at outpatient setting with Veklury. And we think that will just kind of play hand in hand. And I would propose, as I turn it over to Merdad to address the oral piece of the puzzle, I actually think you need both. I think you need the oral setting, so more players in the oral setting is critical.", "And you still need hospitalizations because, unfortunately, as this -- if it does become endemic, I do think you'll see a steady rate of hospitalizations as we go through. And that's where Veklury plays a critical role. Merdad?" ] }, { "name": "Merdad Parsey", "speech": [ "Yes, thanks. And I guess, I'd make two points. The first is it's very early days with the oral program. And so I would keep that in mind.", "We just started Phase 1, so a lot of things can happen. And so I would just keep that in mind. Obviously, if things go well, we'll move as aggressively as possible. And I agree with Johanna.", "I think that there will always be a role for both oral and IV therapies. There will be a -- what we're seeing now, I think, in terms of how folks are approaching it is that as availability of oral therapies becomes broader, they're used relatively early in the course of disease. Many people may progress and/or not get treated early enough and end up in the hospital. And at that point, I think that's where that hospitalized or carry hospitalization more severe disease is where the role of IV therapies is going to come in and Veklury, in particular, is going to come in.", "So I have too much to add to what Johanna said, but I do think there will be a role for both in the long run." ] }, { "name": "Daniel O'Day", "speech": [ "Hartaj, just to complement what Johanna and Merdad said, I think we clearly see that as this becomes endemic, that there will be potentially a need for multiple mechanisms in the outpatient setting. So that's one of the reasons why approaching it from a pulmonary standpoint as well as to a protease standpoint, we think could make sense over the long term for resistance patterns. And the last thing I'll say is, I think, what we've seen is, whether it's pandemic or endemic, remdesivir is going to firmly trench now as a standard of care in the hospital setting. And so as goes hospitalization, so will go remdesivir over time.", "And we think that's going to be an important part of our ongoing business and our benefit to patients. With that, thank you. We'll move on to the next question, please." ] }, { "name": "Operator", "speech": [ "Our next question comes from the line of Carter Gould from Barclays. Your line is now open." ] }, { "name": "Carter Gould", "speech": [ "Great. Thank you. Good afternoon, and thanks for taking the question. I wanted to come back to Trodelvy but a little bit more from the commercial and strategic angle and wanted to -- just sort of the decision to triple the sales force at this point ahead of TROPiCS-02.", "Is that decision dependent upon positive data from TROPiCS-02? Or could that potentially be revisited depending on that outcome? And then specifically around sort of what you're seeing with the sales, it seems like the growth on an absolute basis quarter-on-quarter does seem to be sort of slowing a bit. Can you maybe just talk about how the real-world duration of use has maybe evolved and if that's sort of in line with what you saw in the pivotal studies? Thank you." ] }, { "name": "Daniel O'Day", "speech": [ "Thanks, Carter. Right over to Johanna, please." ] }, { "name": "Johanna Mercier", "speech": [ "Sure, Carter. Thanks for the question. Just a couple of things. One is the footprint, the geographic footprint that we've just initiated and that ramp-up and the tripling.", "It has really maybe three objectives. One is to further support our initial launches of both metastatic TNBC as well bladder. So that's definitely number one. And that is here now, the potential to support a potential indication in HR positive, which is what you were referring to.", "And the third one is also setting up for the future success of our total oncology portfolio. So assuming positive data, of course, is what we've decided to go for, but having said that, even if that didn't play out, this is the right team for the future for Gilead oncology. So that was the first part of your question. The second part of your question about the growth slowing, I actually think we're quite pleased actually.", "As we got into Q4, what we've seen is the share really drive up post-NCCN breast guidelines update in September. And so we had good data point and share. The last data point we have is October, and that's the 1 in 4 that you heard me talk about earlier. And so that's doubling from where we were in April.", "So we were at about half of that share in second line. And now we're at about 24%, 25% share in second line. So a real nice growth on that front and definitely more to come. I think there's an incredible opportunity for Trodelvy in this patient setting, especially with the high unmet medical need and the incredible OS data that we have with Trodelvy.", "So more to come on that." ] }, { "name": "Daniel O'Day", "speech": [ "Terrific. Thank you so much, Carter. We can take one last question, everybody. Thank you." ] }, { "name": "Operator", "speech": [ "Thank you. Our last question comes from the line of Matthew Harrison from Morgan Stanley. Your line is now open." ] }, { "name": "Matthew Harrison", "speech": [ "Great. Good evening. Thanks for fitting me in. Just one clarification and one question.", "So first, Merdad, can you just clarify, it was unclear to me from your comments whether the FDA had asked for the OS data, and that's why you were including this interim now for the filing or if that had been your plan all along. So if you could just clarify, that would be great. And then second, any comments you can make specifically around the stocking tailwind as well as the gross-to-net tailwind that you have from HIV in the fourth quarter? Thanks." ] }, { "name": "Daniel O'Day", "speech": [ "Thanks a lot, Matthew. Go ahead, Merdad and then Johanna." ] }, { "name": "Merdad Parsey", "speech": [ "Yes, very quickly. I think as I mentioned, we did upsize the study last year for OS because we've always believed, especially in HR positive, that having OS data is going to be important to support a file. It's not the primary endpoint, and we think it's going to be important, supportive data to go. So that didn't really have much to do with this confluence of events here.", "It's a fortuitous event in terms of timing here that will support our data. So hopefully, that answers your question." ] }, { "name": "Daniel O'Day", "speech": [ "The FDA did not ask for it specifically." ] }, { "name": "Merdad Parsey", "speech": [ "Yes. They didn't specifically ask us for it, no. We were always going to take a look at OS with the first PFS data cut at this point in order -- instead of doing a look and then an interim, we're just going to do the PFS and the interim at the same time." ] }, { "name": "Daniel O'Day", "speech": [ "Thanks, Matthew. And Johanna?" ] }, { "name": "Johanna Mercier", "speech": [ "And Matthew, the second part of your question around the Q4 piece of the puzzle. So as you well know, right, as you go into Q4, you usually have a bit of a seasonal inventory build in the subchannel play. And then, of course, that bleeds out in Q1. So that's one piece of the puzzle.", "In Q1, the other difference is, of course, you increased your copay support, your donut hole coverage. And so all those piece -- and your payer mix kind of changes in your first quarter. Having said that, in addition to that, there was some favorability in Q4 of 2021 from a gross to net standpoint, which will then create an even bigger kind of decline in Q1, and that's what we were referring to. So hopefully, that helps a little bit.", "It's a one-time thing in Q4. And it's just more around the comparison versus Q1 over Q4 as we get through the first quarter. And that's what I was trying to signal." ] }, { "name": "Daniel O'Day", "speech": [ "Great, Matthew. And I just want to, before I turn it over to Jacquie, thank all of you for joining from our perspective. We are really excited about the build that we've had at Gilead over the past 2 years and the team and the people that we have on board. We've got a lot to do this year, and we're really teed up for a good strong year and a strong decade ahead with this portfolio.", "With that, Jackie, over to you, please." ] }, { "name": "Jackie Ross", "speech": [ "Thank you, Dan, and thanks to our operator, Gigi, for your help today and indeed to all of you for joining us. We appreciate your continued interest in Gilead and hope that you can join us for our Virology Deep Dive scheduled for Thursday, the 17th of February. Thank you." ] }, { "name": "Operator", "speech": [ "[Operator signoff]" ] } ]
GILD
2022-04-28
[ { "description": "Vice President, Investor Relations", "name": "Jacquie Ross", "position": "Executive" }, { "description": "", "name": "Dan O'Day", "position": "Other" }, { "description": "Chief Commercial Officer", "name": "Johanna Mercier", "position": "Executive" }, { "description": "Chief Medical Officer", "name": "Merdad Parsey", "position": "Executive" }, { "description": "Chief Financial Officer", "name": "Andy Dickinson", "position": "Executive" }, { "description": "Jefferies -- Analyst", "name": "Michael Yee", "position": "Analyst" }, { "description": "Morgan Stanley -- Analyst", "name": "Charlie Yang", "position": "Analyst" }, { "description": "RBC Capital Markets --- Analyst", "name": "Brian Abrahams", "position": "Analyst" }, { "description": "Redburn -- Analyst", "name": "Simon Baker", "position": "Analyst" }, { "description": "Bank of America Merrill Lynch -- Analyst", "name": "Geoff Meacham", "position": "Analyst" }, { "description": "Piper Sandler -- Analyst", "name": "Do Kim", "position": "Analyst" }, { "description": "Chief Executive Officer, Kite", "name": "Christi Shaw", "position": "Executive" }, { "description": "J.P. Morgan -- Analyst", "name": "Gavin Scott", "position": "Analyst" }, { "description": "Truist Securities -- Analyst", "name": "Robyn Karnauskas", "position": "Analyst" }, { "description": "Evercore ISI -- Analyst", "name": "Umer Raffat", "position": "Analyst" }, { "description": "BMO Capital Markets -- Analyst", "name": "Evan Seigerman", "position": "Analyst" }, { "description": "Cowen and Company -- Analyst", "name": "Tyler Van Buren", "position": "Analyst" }, { "description": "Wells Fargo Securities -- Analyst", "name": "Mohit Bansal", "position": "Analyst" }, { "description": "UBS -- Analyst", "name": "Colin Bristow", "position": "Analyst" }, { "description": "Goldman Sachs -- Analyst", "name": "Matt Sykes", "position": "Analyst" } ]
[ { "name": "Operator", "speech": [ "Thank you for standing by, and welcome to the Gilead Sciences first quarter 2022 earnings conference call. [Operator instructions] Please be advised that today's call is being recorded. [Operator instructions] I would now like to hand the call over to your host for today's program, Jacquie Ross, vice president, investor relations. Please go ahead." ] }, { "name": "Jacquie Ross", "speech": [ "Thank you, Jonathan, and good afternoon, everyone. Just after market closed today, we issued a press release with earnings results for the first quarter of 2022. The press release, slides and supplementary data are available on the Investors section of our website at gilead.com. The speakers on today's call will be our chairman and chief executive officer, Daniel O'Day, our chief commercial officer, Johanna Mercier, our chief medical officer, Merdad Parsey, and our chief financial officer, Andrew Dickinson.", "After that, we'll open up the call to Q&A where the team will be joined by Christi Shaw, the chief executive officer of Kite. Before we get started, let me remind you that we will be making forward-looking statements, including those related to the impact of the COVID-19 pandemic on Gilead's business, financial condition and results of operations, plans and expectations with respect to products, product candidates, corporate strategy, business and operations, financial projections and the use of capital, and 2022 financial guidance, all of which involve certain assumptions, risks and uncertainties that are beyond our control and could cause actual results to differ materially from these statements. A description of these risks can be found in the earnings press release and our latest SEC disclosure documents. All forward-looking statements are based on information currently available to Gilead, and Gilead assumes no obligation to update any such forward-looking statements.", "Non-GAAP financial measures will be used to help you understand the company's underlying business performance. The GAAP to non-GAAP reconciliations are provided in the earnings press release, in our supplementary data sheet, as well as on the Gilead website. Now, I'll turn the call over to Dan." ] }, { "name": "Dan O'Day", "speech": [ "Thank you, Jacquie, and good afternoon, everybody. We appreciate you taking the time with Gilead today, and I also want to thank those of you who joined our virology and oncology deep dives over the last few months. These two events provided a more in-depth view of our portfolio, our strategy and the teams behind them. We shared a much broader view of our growing clinical pipeline than we had in the past, highlighting its potential to deliver a number of new therapies to address unmet needs for patients across a diverse range of conditions.", "For those of you who joined, I hope you got a deeper sense of why we're confident of sustaining our leadership in virology and growing our oncology revenue so that it becomes more than one-third of our total revenue in 2030. I'll turn now to our performance this quarter, and I'm pleased to share that the year is off to a strong start in line with guidance, as shown on slide four. Total product revenue was up 3% from last year to USD 6.5 billion, with cell therapy, VEKLURY, TRODELVY, and HIV driving growth. HIV grew 2% year over year, primarily driven by BIKTARVY, which grew 18%, and reported more than 4% market share growth compared to the first quarter of 2021.", "This is notable given the impact of our TRUVADA LOE. Sequentially, HIV was down 18%, primarily as a result of first quarter seasonality. Our growing oncology portfolio performed well, with TRODELVY revenue doubling compared to the first quarter of 2021 and cell therapy delivering another strong quarter of growth. We recently expanded our portfolio of marketed cancer therapies following the FDA approval of Yescarta for second-line relapsed and refractory LBCL.", "I'm also pleased to highlight the FDA approval of our new cell therapy facility in Maryland, which is part of the expected 50% increase in our manufacturing capacity by the end of 2022. The new facility will support our cell therapy growth expectations over the next several years. Moving to the pipeline. We shared the phase three top line readout from TROPiCS-02 in March showing that the study met its primary endpoint with a statistically significant improvement in progression-free survival versus physician's choice in chemotherapy.", "Additionally, the first interim analysis of the key secondary endpoint of overall survival demonstrated a trend in improvement. As you know, we are exploring potential pathways for approval with regulatory authorities to bring TRODELVY to these later-stage patients. The details of the study results will be shared at ASCO in June. At the oncology deep dive earlier this month, we highlighted the broad potential for TRODELVY across multiple tumor types and lines of therapy, with plans to initiate 13 more TRODELVY trials through 2023, including four more in 2022.", "Turning to slide five. As you know, the timing for TROPiCS-02 and the NDA decision for CAPELLA are subject to change. In the case of CAPELLA, this is due to the biocompatibility issue that we're working to resolve, and we're fully confident in lenacapavir itself. Other than that, we are on track with the remaining targeted milestones we shared with you in January.", "We've added some of the newly disclosed trials from our oncology deep dive as well on this slide. Additionally, we're pleased to note that the partial clinical hold for the pivotal magrolimab trials, including ENHANCE-3 for first-line unfit AML shown on the slide have been lifted. I'm also pleased to share that despite the hold, there's no change to the timing of the first interim readout for ENHANCE for first-line high-risk MDS, which we expect in the first half of 2023. Merdad will share more pipeline details later in the call.", "Before I pass it over to Johanna, I just want to take a moment to thank the Gilead and Kite teams who are putting the full way to their expertise, passion and commitment behind all of this work that you're seeing. It's thanks to our 14,000 employees across the world that were delivering for patients with diverse conditions and diseases today and advancing a pipeline of innovative new therapies for the future. We have some bold ambitions for the coming years, and we're confident of achieving them given the level of innovation and capabilities that we have in place today. Now, I'll invite Johanna to share an update on our first quarter commercial performance.", "Over to you, Johanna." ] }, { "name": "Johanna Mercier", "speech": [ "Thanks, Dan, and good afternoon, everyone. So turning to slide seven. We had a solid start to the year with total product sales, excluding VEKLURY, of USD 5 billion for the quarter, up 2% year over year, driven by cell therapy, TRODELVY and HIV, and offset in part by HCV pricing dynamics. Quarter over quarter, total product sales, excluding VEKLURY, were down 14% as a result of the seasonality we typically see in the first quarter of the year, primarily in our HIV business.", "On slide eight, you can see that HIV sales were down 18% quarter over quarter to $3.7 billion, consistent with our guidance, given the seasonality we customarily experienced in the first quarter of every year. First, the channels build their inventories over the fourth quarter and then draw them down during Q1. On a dollar basis, the majority of the sequential decline was associated with inventory drawdown. Second, we realized lower net prices in part due to increased copay support, Part D discounts and other efforts to maintain access and affordability of our HIV medicines as patients' insurance plans reset.", "This is a customary Q1 dynamic that we expect to normalize throughout the rest of this year. Year over year, HIV sales were up 2% driven by market growth for both treatment and PrEP, often in part by the impact of the lost exclusivity for TRUVADA in 2020. The year-over-year impact of this LOE is expected to be minimal starting in this quarter, second quarter of this year. And excluding the LOE impact, HIV sales increased 5%.", "Overall, we're encouraged by the signs of recovery seen in the HIV treatment market despite screening and diagnosis rates still below pre-pandemic levels and the continued impact on market growth due to the Omicron surge in Q1. As a result, both the US and European HIV treatment markets were down slightly on a sequential basis. On a year-over-year basis, the European market was roughly flat, and the US market grew a little over 3%. The PrEP market grew 33% year over year and 3% sequentially.", "Notably, DESCOVY continues to hold approximately 45% market share, and we'll continue to engage with payers to ensure those who benefit from PrEP have access to their preferred regimen. We believe Gilead remains well positioned in PrEP. And as highlighted during our virology deep dive in February, we expect the market to double by 2030, catalyzed by the launch of long-acting regimens such as lenacapavir. DESCOVY sales in the first quarter were $374 million, up 4% year over year, driven by continued PrEP market growth and partially offset by generic competition and switches to newer treatment medicines such as BIKTARVY.", "Turning to slide nine. BIKTARVY sales of $2.2 billion in the first quarter were up 18% year over year, driven by US market growth, and notably, continued share gains in both the US and in Europe. BIKTARVY remains the leading regimen for new starts and switches in the US and new starts in Europe. In fact, BIKTARVY share is up 4.5% year over year to 43% share in the US, almost eight times larger than the next leading promoted medicine and representing the highest share of any complete regimen for the treatment of HIV.", "Moving to slide 10 in HCV. We maintained steady market share, and the 22% decline year over year was primarily driven by unfavorable pricing dynamics. Sequentially, HCV was up 2%, while the overall market and new patient starts continue to be impacted by the pandemic. HBV and HDV on slide 11 were up 7% year over year due to higher demand for Vemlidy, namely in Asia.", "Sequentially, HBV and HDV declined 11% driven by the same HBV seasonal inventory and pricing dynamics impacting HIV. Hepcludex sales were $11 million for the quarter, primarily reflecting sales in Germany and France where full reimbursement has been established. Our discussions with regulatory bodies and other countries across Europe are ongoing. And of course, we look forward to potential approval in the US in the second half of this year.", "VEKLURY revenues in the first quarter were $1.5 billion, as shown on slide 12. VEKLURY utilization tracks hospitalization rates, and therefore, due to the timing of Omicron surges, was lower in the US after January but higher in Europe and Asia later in the quarter. We're optimistic that there will not be another surge this year in the US And overall, we will maintain our readiness to support hospitalized and nonhospitalized patients. There's no change to our commitment to COVID-19 patients globally.", "And in that regard, we were very pleased to receive the World Health Organization's revised COVID-19 guidelines. These guidelines now conditionally recommend VEKLURY for the treatment of patients with non-severe COVID-19 at highest risk of hospitalization. And earlier this week, VEKLURY received FDA approval for the treatment of certain pediatric patients for at least 28 days old, highlighting our ongoing commitment to extend the reach of VEKLURY where we can. Now, turning to oncology.", "TRODELVY sales were up 103% year over year and 24% sequentially, as shown on slide 13. We're encouraged by adoption not just in the US, but notably, in Germany and France, and continue to work with health authorities and reimbursement bodies to extend TRODELVY's reach to patients globally. We've completed the expansion of our field force to support the US and Europe and believe we are now at right scale to support physicians and make TRODELVY available across all approved indications to patients who could benefit from it. We're extremely excited by the feedback from physicians about TRODELVY's impact on patients, both those who are prescribing TRODELVY today and those who expect to have access to it soon.", "With strong physician uptake and our expanded field footprint starting in April, we believe TRODELVY will benefit more than the one in four second-line metastatic TNBC patients we're reaching in the US today. We look forward to sharing more updates as we progress throughout the year. Turning to slide 14. And on behalf of Christi and the Kite team, cell therapy sales for the first quarter of 2022 were $274 million, up 43% year over year and 15% sequentially.", "For the quarter, Yescarta sales of $211 million were up 32% year over year and 16% sequentially driven by continued global demand in relapsed or refractory large B-cell lymphoma, as well as in follicular lymphoma. This highlights the growing recognition of the durable long-term survival benefit showcased at last December's American Society of Hematology Meeting. For Tecartus, sales of $63 million were up 103% year over year due to strong demand in relapsed or refractory mantle cell lymphoma. We're pleased with the strong early uptake for adult acute lymphoblastic leukemia in the US following approval last October, which contributed to the 11% sequential growth in Tecartus.", "The strong momentum we've seen across our cell therapy portfolio continued with the approval of Yescarta in second-line relapsed or refractory LBCL earlier this month, as well as FDA's approval for our new Maryland manufacturing facility announced just last week. Through capacity improvements across our existing in-house CAR-T manufacturing site in addition to the new Maryland site, we expect our manufacturing capacity to increase by up to 50% and support our aspiration to serve a cumulative 25,000-plus patients by the end of 2025. Second-line orders started coming in the day after the FDA approval and have been steady ever since. It is truly heartening to see the immediate help we can provide for patients.", "Given the Yescarta second-line inclusion in the NCCN guidelines and robust clinical data, we expect Yescarta to shift the paradigm in the standard of care for LBCL patients. Christi is here with the team and is available to take any questions on cell therapy during our Q&A. And so, with that, I will hand over the call to Merdad for an update on our clinical pipeline." ] }, { "name": "Merdad Parsey", "speech": [ "Thank you, Johanna, and hi, everyone. 2022 is full of clinical activity here at Gilead, and I hope the virology and oncology deep dives were helpful in highlighting the breadth and depth of our portfolio. By the end of 2022, we expect to have more than 90 clinical trials underway across oncology, virology, and inflammation. With such a broad portfolio, our focus is firmly on innovation and execution to ensure that we fully leverage its potential.", "Moving to HIV on slide 16. We shared exciting one-year data from the CAPELLA trials at CROI in February, reporting 83% virologic suppression and heavily treatment-experienced people living with multidrug-resistant HIV. Given the significant unmet need of this patient population, the lenacapavir NDA was designated Priority Review by the FDA, and we're planning to resubmit the NDA as soon as we resolve the clinical hold and complete response letter. As you know, the basis of these FDA actions was the compatibility of lenacapavir with vials in use at that time, not lenacapavir itself.", "We're in ongoing dialogue with the agency to consider an alternative vial and look forward to updating you of our progress in due course. Separately, we're on track for the HTE MAA approval in Europe in the second half of the year. At our virology deep dive in February, we shared details of the eight internal candidates that could partner with lenacapavir for treatment and highlighted the additional early development or discovery assets shown on slide 17. In addition to our PrEP programs, these assets give us a high degree of confidence that Gilead will sustain its leadership in HIV through the 2020s and beyond.", "In the immediate term, we continue to generate very strong data for BIKTARVY. At CROI, we showed virologic suppression at or above 98% in the M=E analysis and zero cases of treatment failure due to resistance to any components of the single-tablet regimen in two five-year phase three trials. Of note, this five-year duration is unprecedented for an HIV regimen. Moving to slide 18.", "VEKLURY is playing an important role in the fight against COVID-19 and is the only antiviral approved for use in both hospitalized and non-hospitalized patients. Just in the past few days, the FDA approved an sNDA for VEKLURY for the treatment of pediatric patients who are at least 28 days old and either hospitalized with COVID-19 or with mild-to-moderate COVID-19 and considered high risk for progression to severe COVID-19. In addition to VEKLURY, we have an ongoing phase one trial of GS-5245, our investigational oral COVID-19 nucleoside that once metabolized works in the same way as remdesivir. Results from this study could lead to a registrational trial.", "So even while we hope the worst of this pandemic is behind us, we will continue to work to ensure that COVID-19 therapies are available to as many patients as possible. Moving to oncology, and specifically TRODELVY, on slide 19, we'll share more detailed data from the TROPiCS-02 study at ASCO in June. As a reminder, we announced that the study met its primary endpoint with statistically significant PFS versus physician's choice of chemotherapy in late-line patients. And that results are consistent with the TRODELVY arm in the Immunomedics-132-01 phase one/two trial.", "OS showed a trend in improvement at the first interim analysis, and we're now targeting a final OS analysis in 2024, depending on the timing of events. In the meantime, we're engaging with regulatory authorities to explore potential pathways given the high unmet need. As a reminder, TROPiCS-02 targeted a more advanced patient population than DESTINY-Breast04. The encouraging clinical data we've seen in this more challenging patient group has strengthened our excitement in exploring earlier-stage patients.", "As we shared two weeks ago, we're planning a pivotal study for frontline HR-positive/HER2-negative patients, and we'll share more information in due course. In addition to TROPiCS-02, we're targeting First Patient In, or FPI, for a number of new TRODELVY trials this year. In the first half of 2022, this includes front-line studies for non-small cell lung cancer and PD-L1-positive and PD-L1-negative metastatic TNBC. In the second half of the year, we're targeting FPI for the EVOKE-03 phase three trial for first-line non-small cell lung cancer.", "TROPiCS-04 for metastatic urothelial carcinoma is ongoing, and we anticipate a readout in the 2023, 2024 timeframe. As you can see on this slide, shared for the first time in our oncology deep dive earlier this month, we are in the earliest stages of evaluating how TRODELVY, either alone or in combination, could bring new options to people with cancer. In total, we're studying more than 25 combinations, including seven phase three combination studies. On behalf of my Kite colleagues and on slide 20, I'm pleased to highlight the FDA approval of Yescarta for the second-line treatment of relapsed or refractory large B-cell lymphoma earlier this month.", "The approval is based on the ZUMA-7 trial data that showed that two and a half times more patients receiving Yescarta were alive at two years without disease progression or need for additional cancer treatment versus the standard of care. This was the first cell therapy approved by FDA for initial treatment of refractory or relapsed LBCL and within 12 months of initial treatment. Yescarta was also added to the NCCN's B-cell lymphoma treatment guidelines for these patients. Moving to magrolimab on slide 21.", "We're very pleased that the FDA lifted the partial clinical holds for our MDS and AML trials, and we resumed enrollment in our three pivotal studies. I'll note that the remaining partial clinical holds on DLBCL and multiple myeloma are being reviewed by a different division of the FDA, and we're actively working to resolve them as quickly as possible. In the meantime, the impact of these remaining partial holds is limited since the DLBCL trial was already fully enrolled at the time of the partial clinical hold and the multiple myeloma trial had just initiated. Overall, we're excited by magrolimab's potential to be the first new treatment for first-line high-risk MDS patients in 15 years and have completed patient enrollment for the first interim analysis that we expect to share in early 2023.", "In the meantime, we look forward to sharing data from our phase 1b trial for high-risk MDS and first-line TP53 AML with more patients and longer follow-up at ASCO in June. Finally, on slide 22 and noting that the timing for the potential submission of TROPiCS-02 and the NDA decision for CAPELLA are subject to change, there are no updates to the targeted milestones shared with you in January. With our partner, Arcus, we're targeting a number of data readouts in the second half of the year and have added some new trials, including STAR-121, evaluating zimberelimab and domvanalimab in combination with chemotherapy for front-line non-small cell lung cancer and ARC-21 to evaluate the same combination of upper GI malignancies. With that, I'll hand the call over to Andy." ] }, { "name": "Andy Dickinson", "speech": [ "Thank you, Merdad, and good afternoon, everyone. Before I get into the Q1 P&L review and the guidance update, I wanted to touch on the $2.7 billion partial in-process R&D impairment related to assets acquired from Immunomedics in 2020. This had a $1.63 per share impact on our Q1 GAAP results and on our full year GAAP EPS guidance. There is no impact to our non-GAAP EPS in Q1 or to our non-GAAP EPS guidance for the full year.", "With the TROPiCS-02 data readout in March, we have reassessed the value of the assets acquired. While no final decisions have been made pending discussions with regulatory authorities, as a result of the data, we have taken a $2.7 billion impairment to reflect the likelihood of a delayed launch of TRODELVY for third-line plus HR-positive/HER2-negative breast cancer in the United States, as well as Europe and the possibility of a reduced market share in late-line patients given the emerging competitive landscape. Prior to today's update, Gilead was carrying $14.7 billion for the IP R&D indefinite-lived intangible assets acquired with Immunomedics. This now values these assets at $12 billion.", "Recall that the carrying value of TRODELVY reflected four potential indications in progress at the time of the acquisition, triple-negative breast cancer and hormone receptor-positive/HER2-negative breast cancer, bladder cancer, and non-small cell lung cancer. At that time, we knew that TRODELVY's potential extended beyond these indications, but for accounting purposes did not assign value for the incremental opportunities that we are exploring in prostate, endometrial and other solid tumors, as well as potential combinations such as with magrolimab, domvanalimab, and PD-1s like pembrolizumab. As you saw at our oncology deep dive earlier this month, there are 13 TRODELVY programs targeted for initiation through 2023, including a number of incremental opportunities. As a result, we remain confident TRODELVY will deliver an attractive return to our shareholders over time.", "Moving to slide 24. The first quarter was a strong start to the year despite the expected seasonality observed in our HIV business and was stronger-than-expected VEKLURY sales. Total product sales were $6.5 billion, up 3% year over year, with growth in cell therapy, VEKLURY, TRODELVY, and HIV, offset in part by lower HCV revenue. Of note, FX negatively impacted first quarter revenue by almost $100 million, net of hedges, representing approximately 160 basis points of growth.", "Total product sales, excluding VEKLURY, were up 2% from the first quarter of 2021 to $5 billion. In HIV, on a sequential basis, we were impacted, as expected, by the normal seasonality associated with Q1 inventory burn following a build in Q4 in addition to the typical first quarter pricing headwinds that improved throughout the rest of the year. With Q1 now behind us, we expect sequential growth in HIV throughout the rest of the year. Non-GAAP product gross margin was 87.4% for Q1, up 90 basis points year over year, primarily due to lower inventory reserve adjustment.", "First quarter non-GAAP operating expenses were largely consistent with our expectations as we support the expansion of our oncology business. Non-GAAP R&D was $1.2 billion, up 10% year over year. And non-GAAP SG&A was $1.1 billion, up 5% year over year, both primarily due to higher costs associated with TRODELVY. Moving to tax.", "Our non-GAAP effective tax rate in the first quarter was 18.4%. Overall, our non-GAAP diluted earnings per share were $2.12 in the first quarter of 2022 compared to $2.04 for the same period last year, reflecting the higher revenue and higher gross margin, offset in part by higher operating expenses. On a GAAP basis, our effective tax rate and earnings per share were impacted by the $2.7 billion impairment. We are excited about the strong start to the year.", "And as you can see on slide 25, the only revision to our outlook is to our GAAP EPS, primarily to reflect the $1.63 share impact of the impairment discussed earlier. We now expect GAAP EPS in the range of $3 to $3.50 per share from $4.70 to $5.20. On VEKLURY, we note the strong revenue start to the year, but also, fortunately, the significant drop-off in US hospitalizations during the first quarter and into the second quarter so far. With that in mind, we will monitor demand through the second quarter and evaluate our full year guidance in the middle of the year.", "One housekeeping item before we wrap up. Following recent guidance from the SEC, beginning in the first quarter and similar to many of our peers, Gilead will no longer exclude acquired in-process R&D expenses from non-GAAP financial measures. Prior period results have been updated to reflect this new methodology and are shared in our supplementary data posted on the investor relations website. As a reminder, our full year guidance does not include the impact of any future upfront payments related to the normal course of business partnerships or licensing deals.", "Going forward, we plan to update our guidance on a quarterly basis to reflect the impact of any new corporate development transactions closed in the prior quarter. Moving to slide 26. You can see there is no change to our capital allocation priorities. In the first quarter, we repaid $500 million in debt.", "Additionally, we returned $1.3 billion to shareholders through our dividend and repurchase of shares. Finally, on M&A, there is no change to our philosophy here either. We are very comfortable with the breadth and the quality of the pipeline that we have built, acquired or partnered, and the growth that it will enable in the coming years. With that in mind, you can expect us to continue to opportunistically access high-quality assets through partnerships or make smaller acquisitions in the normal course of business.", "With that, I'll invite the operator to open the Q&A." ] } ]
[ { "name": "Operator", "speech": [ "Certainly. [Operator instructions] Our first question comes from the line of Michael Yee from Jefferies. Your question, please." ] }, { "name": "Michael Yee", "speech": [ "Hey, guys. Thank you. Good afternoon. Maybe I could ask about the planned or potential TRODELVY filing.", "You note that it's subject to change. Maybe you could just describe what you think the conversation is with FDA. Is it a combination of a modest PFS and OS trend? And is there a magnitude of OS trend that you think will be attractive and allow a green light to a filing? Maybe just talk a little bit about that and what would drive a filing. Thank you." ] }, { "name": "Dan O'Day", "speech": [ "Thanks, Michael. I'll turn it over to Merdad in just a second, but I'll just remind folks that we will be discussing the data more at ASCO coming up there in early June. We look forward to engaging with regulatory authorities in the coming months to further discuss the data and the path forward. I'll see if Merdad has anything to add on that at this stage, but --" ] }, { "name": "Merdad Parsey", "speech": [ "Yes. Michael, I think as a normal course of business, we'll always discuss the data, the totality of the data with the agency prior to a filing and have that conversation with them. As we've said, the primary endpoint was statistically significant. And so, we will have that conversation with them looking at all the data and come to a conclusion based on the feedback we get." ] }, { "name": "Dan O'Day", "speech": [ "Right. And we continue to look at earlier lines of therapy and plan those trials to move up in lines of therapy given the results we saw in TROPiCS-02 as well and hormone receptor-positive. So thanks a lot, Michael, for that. Can we have the next question?" ] }, { "name": "Operator", "speech": [ "Certainly. Our next question comes from the line of Matthew Harrison from Morgan Stanley. Your question, please." ] }, { "name": "Charlie Yang", "speech": [ "Hi. This is Charlie Yang on for Matthew. So I guess my question is, is VEKLURY being -- currently being used in China and then actually benefit from the COVID outbreak there? And maybe if that's the case, can you talk about what the economics look like over there? Thank you." ] }, { "name": "Dan O'Day", "speech": [ "Thanks for the question. We'll go right to Johanna." ] }, { "name": "Johanna Mercier", "speech": [ "Hey, Charlie. Thanks for your question. So VEKLURY has been used now with over 11 million patients worldwide, which I think is really impressive. And it's still one out of two hospitalized patients in the US What we are seeing, though, is trends of less severe disease, and therefore, less hospitalizations, but also less treatments.", "Specific to your question to China, we don't have approval in China at this point in time. And we're continuing those discussions with health authorities in light of the fact that what's going on in China with the pandemic, obviously. I do think the WHO guidelines being updated just most recently is also going to help those discussions as well. So more to come on that, but not currently in play at this point in time in China.", "Thank you." ] }, { "name": "Dan O'Day", "speech": [ "Thanks. Can we have the next question, please?" ] }, { "name": "Operator", "speech": [ "Our next question comes from the line of Brian Abrahams from RBC Capital Markets. Your question please." ] }, { "name": "Brian Abrahams", "speech": [ "Hey, there. Thanks so much for taking my question. Sticking with the COVID theme. Anything that knew that you're seeing that increases your level of confidence in 5245's potential for success? And are there any ways to potentially expedite future development of that asset? Thanks." ] }, { "name": "Dan O'Day", "speech": [ "Thanks, Brian. I'll hand over to you, Merdad." ] }, { "name": "Merdad Parsey", "speech": [ "Yes. Nothing new to report, Brian. It's a great question. We continue to move along really well in our phase one study that's moving forward expeditiously.", "And we are working with the agency to design a phase two/three program and really moving as fast as possible. We've got a great partnership with the agency and others and are really ready to count. So right now, so far, so good." ] }, { "name": "Dan O'Day", "speech": [ "Thanks, Brian. Can we have the next question please?" ] }, { "name": "Operator", "speech": [ "Our next question comes from the line of Simon Baker from Redburn. Your question please." ] }, { "name": "Simon Baker", "speech": [ "Thanks for taking my question. On HIV, Johanna, you alluded to the market dynamics. I just wondered if you could give us a little bit more color and update us on how diagnosis rates are now compared to the beginning of the year. And also if you are seeing any initial impact from perhaps this launch of CABENUVA.", "Thanks so much." ] }, { "name": "Johanna Mercier", "speech": [ "Sure. So both market and CABENUVA. Thanks, Simon, for your question. So let me start with the market.", "So if you look at the screening and diagnosis levels, they're still somewhat below pre-pandemic, but they're definitely catching up. I think what we saw in the first half '21 was a really depressed market and started picking back up in Q3 and Q4 of last year. What we saw in Q1 of this year despite the Omicron surge that obviously impacts, what we saw quarter over quarter pretty much flat in the US and overall Europe as well. Year-on-year change, though, we have about a 3.6% growth.", "And I think that's really -- that's the signal that we need to watch for and continue to focus on. And since Gilead has close to 75% market share of the total HIV market, I think it's really -- it's part of our responsibility to ensure that we get screening and diagnosis up and make sure we end this pandemic. So more to come on that, but there's a lot of activities the team is taking on to ensure that we get people back in and screened so that we don't have full-fledge case rebate, which, unfortunately, we've seen in the recent past, and you've seen that anecdotally. On the prevention market, it's a little bit different.", "Prevention market bounces back a lot faster post this pandemic, and we've seen that time and time again after every single surge. So what we've seen quarter over quarter was about a 3% growth in the US for prevention. So slightly modest growth, which declined a little bit, but that's because of the Omicron surge in January. Year over year, the growth was 33%.", "And so, I think that's really telling in the sense of how it bounces back much faster post these surges. And that's been kind of consistent year-on-year as we've seen the different, I guess, variants. On your question around CABENUVA, specific to CABENUVA, treatment share in CABENUVA is 0.6%. So no, we haven't seen an impact.", "What we see is new entrants coming into the market. You always see a little bit of switching going on, which is normal. I do think that there's an ask from a patient standpoint, this is the first long-acting, so it is exciting. What we're also seeing is a higher-than-usual drop-off rate with CABENUVA as well.", "And a lot of that share is going to BIKTARVY back. So I do think it's interesting to watch. And I think the more agents on the market, the better, but definitely one that at this point in time very limited impact to the HIV market share for Gilead. Thanks for your questions." ] }, { "name": "Operator", "speech": [ "Thank you. Our next question comes from the line of Geoff Meacham from Bank of America. Your question please." ] }, { "name": "Geoff Meacham", "speech": [ "Hey, guys. Good afternoon and thanks for the question. I had an HIV question for Merdad or maybe even Dan. So you built an increasingly broad pipeline around lenacapavir.", "And I know getting long-acting right is strategically very important to Gilead. So the question is, what's been the main bottleneck so far? Is it a matter of matching up the PK/PD for lena? And would you wait to go into a larger scale trial if there is a candidate that may make an optimal doublet with lenacapavir? Thank you." ] }, { "name": "Dan O'Day", "speech": [ "Yes. Thanks, Geoff. Appreciate it. I'm going to turn it over to Merdad in a second here.", "But just remind, for those of you that didn't have the chance to look at the virology deep dive day, we really did spend a lot of time in the entirety of the portfolio and the many shots on goal we have along with lenacapavir. Lenacapavir is a truly unique molecule and presents opportunities and challenges to find exactly the right partner. But we certainly have many that will be progressing to the clinic. But Merdad, maybe you want to give a little more meat to the --" ] }, { "name": "Merdad Parsey", "speech": [ "Sure. Yes. I mean, maybe I'll start by saying on the PrEP side, we obviously don't need to wait for a partner molecule. And really, at this point, it's about resolving the issues with the clinical hold.", "Once that gets resolved, we'll be back in business with the trials, and we'll move as fast as possible to get the PrEP studies completed and get our filing done. In treatment, you're absolutely right. And again, I think you're right, we've built the portfolio to provide us numerous options to then combine with lenacapavir for treatment in a long-acting mode. And that's a mix of oral approaches where we could have an oral long-acting molecule or a parenteral long-acting agent.", "And for parenteral, we're trying to go for longer than two months. And for oral, we are looking at, hopefully, getting to weekly or thereabouts. So we have a number of candidates that are progressing to show us -- essentially, you said it right, which is do they have the right properties from a PK/PD standpoint for an oral agent? And do they have the right properties parenterally, including things like injection site reactions and tolerability? So it's less about the ability to inhibit HIV replication. It's more about the molecule and the formulation characteristics that allow us to get to long-acting therapy.", "And I'll just say again that lenacapavir is a very unique and special molecule that enables us to do that. Finding another molecule that has those sorts of characteristics is the challenge that we're undertaking." ] }, { "name": "Dan O'Day", "speech": [ "thanks. Can we have the next question, please?" ] }, { "name": "Operator", "speech": [ "Certainly. Our next question comes from the line of Do Kim from Piper Sandler. Your question please." ] }, { "name": "Do Kim", "speech": [ "Hi. Thanks for taking my question. I wanted to ask about Yescarta and the launch in second-line LBCL. Was hoping you could provide some first impressions of the launch and whether your sense of the demand out there is matching with your expectations?" ] }, { "name": "Dan O'Day", "speech": [ "Yes. Thanks, Do. We're delighted to have Christi here with us. So we'll hear it from the source here.", "Over to you, Christi." ] }, { "name": "Christi Shaw", "speech": [ "Thanks, Do. So we're very encouraged. First, before the approval, the NCCN guidelines that changed and now put Yescarta for LBCL second-line as category one which, as you may know, physicians and providers use to identify standard of care. So that happened a month before approval, which is unusual in these times.", "And then, with the approval -- right after the approval, our manufacturing site was approved in Maryland. So we really feel like we're hitting on all cylinders in terms of really bringing this important therapy to patients. And so, the second-line launch was approved on a Friday at about 3 p.m. And on Saturday, orders started to come in.", "So we're already manufacturing commercial product in our site in the Maryland facility. So definitely, it's really early days, obviously, but the demand was building up, I think, when the data came out at ASH in Decembe]r, and we're starting to see the orders come in as soon as we get approval." ] }, { "name": "Dan O'Day", "speech": [ "Thanks, Christi for that color. Jonathan, can we have the next question please?" ] }, { "name": "Operator", "speech": [ "Our next question comes from the line of Cory Kasimov from J.P. Morgan. Your question please." ] }, { "name": "Gavin Scott", "speech": [ "It's Gavin, on for Cory. Just on TRODELVY label expansion opportunities and lung cancer, in particular, with the EVOKE-02 study. It looks like there's multiple cohorts in the study. And we're just curious if, one, is there evidence of synergy with PD-1 inhibitors and do you plan on sharing any of that this year? And then two, are you going to utilize a Trop-2 biomarker in any of these cohorts? Thank you." ] }, { "name": "Dan O'Day", "speech": [ "Thanks for the question. Merdad, why don't you cover that? Probably in lung." ] }, { "name": "Merdad Parsey", "speech": [ "Sure. Yes. On the biomarker side, we continue to evaluate the role of Trop-2 expression in responses. And as we discussed, actually, for the breast cancer study in our experience so far, we are not seeing a big impact of Trop-2 expression on responsiveness.", "But we'll keep looking because lung cancer may behave differently than what we're seeing. And we do expect expression patterns to be different. So maybe there'll be a different cutoff in a different tumor type. So that remains to be seen.", "In terms of synergy, we are -- I think that's the nature of where we're going with the studies. And that in order to see additive benefit, we need to conduct the larger clinical trials. We do think that coming at the tumors with the two different approaches will add. I'm always careful about using the term synergy.", "I think that implies a different mechanistic approach. So I do think we expect additivity of the two components. And yes, we do feel that we will have additivity that TRODELVY should bring additional benefit to patients over and above what the immuno-oncology agents, PD-1, PD-L1 inhibitors, bring to the treatment of those patients." ] }, { "name": "Dan O'Day", "speech": [ "Great. Thanks a lot, Merdad. So let's have the next question, please." ] }, { "name": "Operator", "speech": [ "Our next question comes from the line of Robyn Karnauskas from Truist Securities. Your question please." ] }, { "name": "Robyn Karnauskas", "speech": [ "Hi, guys. Thanks for taking my question and congrat's on the Yescarta data, by the way. So I just want to maybe play double a little bit on your comments around M&A. I think some investors believe that you have all these great programs, but we're not going to see them read out.", "And I think you did a good job highlighting that in the oncology day. So for near-term growth, are you thinking about -- would you be open to acquiring something that would provide some near-term growth to gap you before a lot of your TRODELVY trials and your magro trials like start reading out? How are you thinking about that as a company?" ] }, { "name": "Dan O'Day", "speech": [ "Thanks, Robyn, and I'll start and then maybe Andy can add. But I appreciate you bringing that up. I think it's been a really purposeful strategic approach that we've taken over the past -- last three years to build our oncology portfolio beyond cell therapy, which is obviously now has a history with us for almost five years. And I'd just remind the folks on the phone that in addition to whatever is acquired at the time of the acquisition in terms of trials and potential and capability of that size organization, naturally, when a large organization acquires particularly these pan-tumor potential molecules, you begin really the process of extending the potential for that medicine alone in late lines, earlier lines and in combinations and thoughtful combinations.", "I think actually, Kite is a terrific example of that, going back now five years post the acquisition, and I appreciate, Robyn, that you started out with congratulations on Yescarta. But to see the potential for a technology like cell therapy and the leadership that Kite took by bringing this up into earlier lines of therapy and the number of patients, of course, then that you can impact on with a potentially curative therapy is exactly kind of the playbook that we will be -- we are pursuing right now with TRODELVY, with magrolimab, and obviously, with the combination of Arcus assets, which -- albeit a bit earlier in the process. So I think we always have to remember the timeframe, and which one evaluates the success of M&A. The other thing I would just say is that, of course, we constantly are looking to complement that.", "I mean, the bar is much higher now for Gilead than it was several years ago because the number of possibilities and opportunities we have and the bandwidth that any one company can do, but you see on the bandwidth side, we're also doing a lot of collaborations with other companies, including folks like Merck who are operationalizing, in fact, a study of ours with TRODELVY. So there's different ways, I think, to work on the bandwidth. But we will constantly be looking at different types of opportunities out there that complement our virology, our oncology and our early inflammation program to add those to the growth story that we are creating here at Gilead. I'll just -- I know Andy spends a lot of time thinking about this.", "I'd love Andy's additional thoughts on this as well." ] }, { "name": "Andy Dickinson", "speech": [ "Thanks, Dan. And thank you, Robyn, for the question. Look, I would just go back to start with fundamentally, we have a lot of confidence in where we are in our growth profile today. And I think it's fair to say that the market maybe under appreciates the growth.", "Even, Robyn, if you look at our first quarter results, especially when you adjust for the impact of LOE and FX, there's really reasonably strong growth in our business. And this is just the beginning from our perspective. So there are always things that we can do to work on our growth profile. But when you look at the strength of the HIV business, what we're seeing in our oncology business, hopefully, that gives you a sense of why we as a management team have so much confidence about not only where we are today, but where we're going.", "And we recognize, to your question, that the growth profile should get meaningfully better in the next couple of years as the portfolio matures in the way that Dan was describing. So while we will look at things, including commercial assets, as you know, those are far and few between. Many of them are expensive, and that's not really where our focus is. We really genuinely believe we have everything that we need today to be a leading growth company in the sector, and it's just going to take a little more time.", "But we're definitely seeing all the right signs that we are looking for as a management team. So you should not expect that we're going to go out chasing commercial assets or large deals. The guidance is very clear. It's ordinary course partnerships, maybe smaller commercial acquisitions.", "Again, we'll be opportunistic. But that's not where our focus is today. Thank you." ] }, { "name": "Dan O'Day", "speech": [ "Thanks, Andy. And the last thing I'd say in addition to the molecules and the medicines, the expertise that we're bringing into Gilead is second to none. And hopefully, you saw some of that. And it's just really the -- some representation of that at both virology and oncology deep dive days because that's really critical in any company that we've all -- as the leadership team worked in is really getting the right teams together at the right time to make sure we're making the right choices and decisions on the portfolios as we move forward.", "So that's a really big focus for us, and we're really pleased with the progress we're making there. So with that, lets have the next question, please, Jonathan." ] }, { "name": "Operator", "speech": [ "Certainly. It comes from the line of Umer Raffat from Evercore. Your question please." ] }, { "name": "Umer Raffat", "speech": [ "Hi, guys. I just wanted to expand on a prior question on remdesivir. And Dan, Merdad, it feels like the pace at which this program is moving forward and sort of the timeline to the pivotal trial start and the amount of time it will take, it feels materially slower than how PAXLOVID and molnupiravir were moved. So I guess my question is, what are the expedited pathways you guys are thinking about when talking to FDA? Because presumably, a 505(b)(2) path is not unreasonable given the public health emergency and/or maybe even an active comparator trial versus PAXLOVID established non-inferiority relatively fast given the pace at which infections are happening right now.", "So there's a path where this could all wrap up this summer. Is that too accelerated in your view?" ] }, { "name": "Dan O'Day", "speech": [ "Yes. Umer, I'll start, and then I'll hand it over to Merdad. So first of all, I mean, just to reinforce this message for everybody on the phone, I mean, we are absolutely moving with tremendous focus and speed. And of course, we have great lessons within our organization.", "Remdesivir was arguably the fastest development of an antiviral that's ever occurred from standing still essentially to an approval in the United States. And as you know, we've got a lot of experience from that in terms of working both property groups around accelerating trials, with the FDA around pursuing unique regulatory path. And those learnings and those lessons I just want to say are certainly being put to use now for 5245. Having said that, we're, of course, at a very different stage of the pandemic at this stage.", "And therefore, both from a regulatory perspective and also our ability to recruit clinical trials, particularly with a somewhat raining pandemic in the developed world, has implications on the path we'll take. And with that, maybe I'll turn it over to Merdad on any other details he wants to add." ] }, { "name": "Merdad Parsey", "speech": [ "Yes. I mean, not much to add other than I think our phase one study is moving very quickly. It's moving very nicely without any issues. I know, Umer, you've asked about the 505(b)(2) approach in the past.", "As you can imagine, those are all -- the avenues you've mentioned are all avenues that we've thought about and explored. And so, we will move with the fastest pathway available to us, and that's the nature of the discussions we're having with the agency." ] }, { "name": "Dan O'Day", "speech": [ "Thanks for the encouragement, Umer. Let's seek the next question." ] }, { "name": "Operator", "speech": [ "Our next question comes from the line of Evan Seigerman from BMO Capital Markets. Your question please." ] }, { "name": "Evan Seigerman", "speech": [ "Hi, guys. Thank you so much for taking my question. It might be a combo one for Andy and Merdad. So can you walk me through some of the math behind the $2.7 billion write-down? Maybe how some of the data you've seen inform the magnitude of the impairment? I'm just trying to square how your assumptions may have changed from August 2020 to now based on data updates that we've had." ] }, { "name": "Andy Dickinson", "speech": [ "Hey, Evan, it's Andy. Thanks for the question. It's a great question. Look, it's relatively simple.", "And just to back up, remember, this is an accounting construct that we are required to reassess the value even before we have the discussions with the regulatory authorities. So I just want to back up and reiterate what we said when the data came out. The study was positive. This is strong data.", "There was a range of outcomes that we expected when we did the deal. This was within the range of outcomes, but it wasn't at the point that we had modeled specifically because we are required to when we put together the intangible indefinite-lived asset schedule after the acquisition. So it's a very simple model too. So the key, by the way, is our valuation when we have discussions in the coming months with the FDA could change again, of course.", "And we'll have to continue to look at the valuation of the assets that are still sitting on the balance sheet, which is the valuation attributed to hormone receptor-positive/HER2-negative breast cancer and non-small cell lung cancer over the coming years, as you'd expect, consistent with any business combination transaction. But it's relatively simple. It's your standard probability-weighted discounted cash flow analysis where you look at the probability of approval. We are assuming, Evan, I think this is the key for you.", "We took a conservative approach, and we were looking at this and assume that there is not a path forward based on the PFS data and that we need to wait for overall survival, even though we're not certain that that's the case and we will know more in the coming months. So for purposes -- for the accounting treatment, we had to make a call, and that's the call that we made, and that leads to the $2.7 billion. The other thing I would add is we had TRODELVY-related IP R&D of $14.7 billion at the end of 2021, a little over half of that or $8.8 billion of it related to hormone receptor-positive/HER2-negative breast cancer. The remainder was non-small cell lung cancer.", "And again, we're already -- in the other indications that are approved, we're already amortizing that. Those are now some finite-lived assets. So now we have $6.1 billion relating to the cash flows expected from third line plus, as well as the earlier line, hormone receptor positive breast cancer indication. But hopefully, that gives you a little bit of color.", "And again, I'd reiterate what we said on the call, which is when we did this originally, when we did the acquisition, we highlighted explicitly that we were going to explore other tumor types and combinations that were not part of our deal model. There is no need to build them into the deal model from bottoms up. So when you step back, more importantly, outside of the accounting construct, we continue to believe that there are many, many paths forward to create a lot of value for patients and for our shareholders with this. So I'm happy to take it off-line if it's helpful to give you more color." ] }, { "name": "Dan O'Day", "speech": [ "Yes. Thanks a lot, Andy. I mean, Evan, I think the bottom line is that, again, we took a somewhat conservative approach in the absence of having regulatory discussions so far. We thought it was a prudent thing to do.", "And to Andy's point, I mean, this is an evaluation of value at the time of the transaction, which, of course, several years later in terms of the indications, the combinations, the potential for TRODELVY is never, as you know, reflective in the initial accounting treatment of it. So hopefully, there's plenty of information in there in our press release and more than happy to take it up with you as well. So thanks, Evan, for that. Let's have the next question please." ] }, { "name": "Operator", "speech": [ "Our next question comes from the line of Tyler Van Buren from Cowen. Your question please." ] }, { "name": "Tyler Van Buren", "speech": [ "Hey, there. Good afternoon and thanks for taking the question. Can you please give us your latest thoughts regarding a successful outcome for the domvanalimab seven trial when we get the phase two PFS data later in the year? And related to the readout for the upcoming Roche results, what are you most interested in seeing other than the primary endpoint?" ] }, { "name": "Dan O'Day", "speech": [ "Thanks a lot, Tyler. So over to Merdad, please." ] }, { "name": "Merdad Parsey", "speech": [ "Sure. Excuse me. Hi, Tyler. Yes.", "I think our thinking has been that domvanalimab as a TIGIT agent will add to the ORR. But to your point, it's not only that that we would be looking for. And what we would be hoping for in addition to the overall response rate is going to be the depth of the responses and the durability of responses, right? So those are the factors that we'll be looking for. We will also be looking to see what the Roche data looks like when they -- when it comes out at ASCO to see what they've seen is sort of a benchmark, if you will.", "But those are the various factors we'll be looking for. Obviously, tolerability is going to be in there as well and the overall profile." ] }, { "name": "Dan O'Day", "speech": [ "Thanks, Tyler. Let's have the next question please, Jonathan." ] }, { "name": "Operator", "speech": [ "Our next question comes from the line of Mohit Bansal from Wells Fargo. Your question please." ] }, { "name": "Mohit Bansal", "speech": [ "Great. Thanks for taking my question. Maybe a question for Andy regarding FX. So Andy, you mentioned that in 1Q, there was a $100 million impact.", "And then, since you provided the guidance, I mean, US dollar has been strong, about 7% US dollar to European -- Euro decline. So just what I'm trying to understand is how much of the FX impact you are absorbing in this guidance which you are maintaining right now. From my math, it could be $300 million-plus. But that means that this base business is really stronger than you anticipated, if you could help us understand where this strength is coming from.", "Thank you." ] }, { "name": "Andy Dickinson", "speech": [ "Sure. That's a great question, Mohit. I'm happy to have to take it. Look, it's relatively simple.", "And that you're absolutely right. And even in April, we've seen a continued deterioration of exchange rates or strengthening of the dollar, which impacts the revenues coming from our European business. So to be clear, the $100 million impact was a year-over-year comparison Q1 to Q1. Johanna and I are watching the budget impact of the exchange rates very carefully.", "And part of the confidence in maintaining the guidance is that, yes, there are FX headwinds. There are also, for instance -- related to your question, there's also this change in the accounting treatment of in-process R&D, which will lead to additional expenses from upfront payments that weren't previously part of how we reported non-GAAP earnings. On the flip side, there are parts of our business that are outperforming. Again, you think of the strength of VEKLURY that we've seen so far.", "So Johanna and I and the rest of the management team will look at the puts and takes of this in the middle of the year, and we'll provide a more thoughtful update. But I think the key for you is recognizing the couple of things that have changed that could impact negatively are EPS GAAP and non-GAAP EPS. There are also things that will have additional strength we expect over the course of the year that will offset that to some extent. And so, we'll give you additional color later in the year, but we're very comfortable maintaining our guidance where we are today.", "Hopefully, that helps." ] }, { "name": "Dan O'Day", "speech": [ "Thank you very much, Andy. Let's have the next question please." ] }, { "name": "Operator", "speech": [ "Our next question comes from the line of Colin Bristow from UBS. Your question please." ] }, { "name": "Colin Bristow", "speech": [ "Hey, good afternoon. And thanks for squeezing me in. Just a quick one, just following on, on the TIGIT and adenosine asset. I just wanted to really understand where your -- what is it you're most enthused about and how you're just thinking about this strategically? Is it the TIGIT and PD-1 doublet that you really see the value, but there's some concern about market timing? Or are you absolutely excited about the triplet data? Can you just help me through that?" ] }, { "name": "Dan O'Day", "speech": [ "Thanks, Colin. Merdad, go ahead." ] }, { "name": "Merdad Parsey", "speech": [ "Sure. Look, I think we obviously are going to be looking across all the data across all the assets. Maybe the way I would say it is that we're seeing the TIGIT/PD-1 combination as likely to be sort of the benchmark or the basis for treatment at least in lung cancer and potentially more broadly. And as such, our hope is to have a great combination there to make sure that we then have something to which we can add other potential agents that could bring us to even better responsiveness.", "So whether that's adenosine or TRODELVY or something else in our pipeline, I think those are all options for us to consider. But we're seeing -- I would say the floor is being raised is our belief and that TIGIT/PD-1 combination becomes sort of the baseline that we need to aim for." ] }, { "name": "Dan O'Day", "speech": [ "Thanks. Very nice conceptual there. So out of respect for everybody's time, we'll take one last question. Jonathan, can we have the last question, please?" ] }, { "name": "Operator", "speech": [ "Certainly. Our final question for today comes from the line of Salveen Richter from Goldman Sachs. Your question please." ] }, { "name": "Matt Sykes", "speech": [ "Hey, thanks. This is Matt for Salveen. Thanks for squeezing us in. Just to go back to TIGIT real quick.", "You and Arcus have previously noted that you'd want to see an ORR greater than 50%, but what would you like to see on PFS and, most importantly, OS? It seems like 30-plus months might be sufficient on OS given KEYTRUDA mono data and maybe a year plus for PFS. Just would be great to hear your thoughts on this. Thank you." ] }, { "name": "Merdad Parsey", "speech": [ "Well, what I would say is those milestones, I would agree with the milestones that you've got there. And it's important to remember that those milestones will take time to play out. And we are going to make our bets without being able to look at OS for 30 months, right? We're going to have a less mature data set from which to make that decision. So you're absolutely right that we will be looking at all of those things.", "The driver will be to see that, again, tolerability and a benefit as far as the overall response rate is concerned and look for benefits in the depth and duration of response that we can garner from the data set at the maturity that we will have when we look at it. And there, I would just say we'll be, in a sense, watch our actions because you'll be seeing the studies will be getting underway, and that should give you a sense of our confidence in those assets." ] }, { "name": "Dan O'Day", "speech": [ "With that, I just want to thank everybody. I really appreciate the attention today for the couple of deep dives we've had. We look forward to chatting with you at ASCO and beyond to keep you updated on our progress for the year. And with that, I'll turn it over to Jacquie for some final comments." ] }, { "name": "Jacquie Ross", "speech": [ "Thank you all for joining us today. We do appreciate your continued interest in Gilead and look forward to updating you throughout the year, as Dan said. Have a great rest of your day." ] }, { "name": "Operator", "speech": [ "[Operator signoff]" ] } ]
DG
2023-12-07
[ { "description": "Vice President, Investor Relations", "name": "Kevin Walker", "position": "Executive" }, { "description": "Chief Executive Officer", "name": "Todd Vasos", "position": "Executive" }, { "description": "Chief Financial Officer", "name": "Kelly Dilts", "position": "Executive" }, { "description": "Oppenheimer and Company -- Analyst", "name": "Rupesh Parikh", "position": "Analyst" }, { "description": "Morgan Stanley -- Analyst", "name": "Simeon Gutman", "position": "Analyst" }, { "description": "JPMorgan Chase and Company -- Analyst", "name": "Matt Boss", "position": "Analyst" }, { "description": "Barclays -- Analyst", "name": "Seth Sigman", "position": "Analyst" }, { "description": "UBS -- Analyst", "name": "Michael Lasser", "position": "Analyst" }, { "description": "Goldman Sachs -- Analyst", "name": "Kate McShane", "position": "Analyst" }, { "description": "Gordon Haskett Research Advisors -- Analyst", "name": "Chuck Grom", "position": "Analyst" } ]
[ { "name": "Operator", "speech": [ "Good morning. My name is Robert, and I'll be your conference operator today. At this time, I'd like to welcome everyone to the Dollar General's third-quarter 2023 earnings conference call. Today is Thursday, December 7th, 2023.", "All lines have been placed on mute to prevent any background noise. This call is being recorded. Instructions for listening to the replay of the call are available in the company's earnings press release issued this morning. Now, I'd like to turn the conference over to Mr.", "Kevin Walker, vice president of investor relations. Kevin, you may now start your conference." ] }, { "name": "Kevin Walker", "speech": [ "Thank you, and good morning, everyone. On the call with me today are Todd Vasos, our CEO; and Kelly Dilts, our CFO. Our earnings release issued today can be found on our website at investor.dollargeneral.com under News and Events. Let me caution you that today's comments include forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995, such as statements about our financial guidance, strategy, initiatives, plans, goals, priorities, opportunities, expectations or beliefs about future matters, and other statements that are not limited to historical fact.", "These statements are subject to risks and uncertainties that could cause actual results to differ materially from our expectations and projections. These factors include, but are not limited to, those identified in our earnings release issued this morning under Risk Factors in our 2023 Form 10-K filed on March 24, 2023 and any later filed periodic report and in the comments that are made on this call. You should not unduly rely on forward-looking statements, which speak only as of today's date. Dollar General disclaims any obligation to update or revise any information discussed in this call unless required by law.", "At the end of our prepared remarks, we will open the call up for your questions. To allow us to address as many questions as possible in the queue, please limit yourself to one question. Now, it is my pleasure to turn the call over to Todd." ] }, { "name": "Todd Vasos", "speech": [ "Thank you, Kevin, and welcome to everyone joining our call. Let me start by saying how excited I am to be back at Dollar General. I have a deep passion for this company and for the customers we are privileged to serve. I continue to believe in this model, our future growth prospects, and our ability to deliver value and convenience for our customers, a positive experience for our employees, and long-term value for our shareholders.", "We take our mission of serving others seriously and know that our customer is facing financial constraints, and communities are looking for strong partners in a tough macroeconomic environment. Historically, we've met those challenges head-on and delivered for our customer, and we believe that we are well positioned to do so now. In retail, one of the best ways to diagnose the state of the business is by looking at it through the eyes of the customer. And we know that our customers rely on Dollar General to provide the products they need at great values in convenient, friendly, and easy-to-shop stores.", "We have spent the last several weeks taking a fresh look at all areas of our business, as well as the challenges and opportunities in front of us. We believe that we have a good understanding of what we need to do to address those challenges and opportunities, and we're already taking action. To be clear, this is not about rebuilding a team or organization but about refocusing efforts already underway. This is where I want to spend the majority of our time today.", "I won't share all the details this morning, but I want to provide an overview to highlight our focus on getting back to the basics in our stores, in our supply chain, and within our merchandising. After that, Kelly and I will review our third-quarter performance. I want to start with our stores, where everything begins and ends for our customer. As we drive improvement across our store footprint, we are doing so through the lens of our customers.", "As we have previously announced, we are investing approximately $150 million in store labor hours this year. After review, we continue to believe this level of investment is appropriate. But as we do with every dollar we invest, we must ensure we are spending it to drive the greatest return, which means we are directly helping our store teams support our customers. With that in mind, we have made the decision to redeploy labor hours away from smart teams and, instead, more directly to our store teams and a greater emphasis on customer service and store-level inventory management activities.", "To that end, I want to highlight two areas of focus we believe will drive the greatest improvement in our stores. First, we plan to increase the employee presence at the front end of our stores and in particular, the checkout area. While self-checkout has contributed to the convenient proposition for our customers in certain stores, it does not reduce the importance of a friendly, helpful employee who is there to greet customers and assist while the checkout process is happening. We have already begun by allocating more labor to front-end activities and clearly communicating our expectations around the visible presence of an associate at the front of our stores.", "Second, we are reemphasizing the role played by our store teams in our perpetual inventory management process, which we believe will positively impact our on-shelf availability as well as our customers' convenience perception in our sales. To do this, we are reallocating some of our labor investments toward store level inventory management processes including an even greater focus on getting product on to our shelves more quickly. We are also reducing the span of control for our district managers, which will provide more opportunity for engagement with our store managers and their teams and more consistency and execution across the store base. As we take these actions and focus on the basics in our stores, we believe we will see improved retention at the store manager level where our turnover is currently higher than we'd like.", "And we know from experience that when we stabilize the store manager position, the entire store and team benefit, which ultimately drives a more positive experience for our customers as well as improved sales and shrink results. Overall, we believe these actions will drive improvements in customer satisfaction, including customer service, on-shelf availability, and convenience as well as sales, while our focus on the front end should also reduce shrink. These efforts also should help us improve employee engagement and retention. Next, I want to talk about our supply chain.", "We have made significant progress recovering from the distribution capacity constraints that we had discussed late last year. However, through the lens of the customer, we see additional opportunity for improvement, particularly when it comes to serving our stores. As we focus on getting back to the basics, the goal within our supply chain is for our truck deliveries to be on time and in full, or OTIF. As we continue to drive our OTIF rates higher, we simplify the work for our store teams, which again results in a better overall experience for both our customers and associates, as well as an expectation of higher sales.", "I want to briefly highlight three areas of focus within our supply chain. First, we plan to better optimize the inventory within our distribution centers. As I will discuss in a moment, we are taking steps to reduce inventory, including SKU rationalization, which will allow for the more efficient movement of product for our distribution teams. Second, we are implementing productivity improvement initiatives within our distribution centers.", "While productivity rates have been impacted by both internal and external factors, we are working to mitigate or eliminate productivity impediments for our teams and control the things we can control. These efforts include standardizing system configurations and optimizing the product layout in our facilities, while providing clear communication on performance standards and expectations. And third, now that we're past the capacity constraints we experienced last year, we are reducing the number of temporary outside warehouse facilities being used to store product as inventory flows more effectively to and through our existing distribution centers. By better leveraging these existing distribution centers and taking advantage of the new permanent facilities we have opened over the last year and those we will open next year, we believe we can significantly reduce the amount of temporary warehouse space needed.", "As we've done historically, we likely will continue to maintain a few of these temporary facilities. However, we expect to transition out of many of them in Q4 and into next year. All of these actions within our supply chain should translate to lower distribution and transportation costs, better OTIF rates, and better customer experience and all while improving sales results. Finally, I want to speak to our focus on fundamentals and merchandising.", "Once again, we reflected on our approach to the eyes of our customer. For our merchants, there is no greater priority than offering great value of the products our customers want and need. Our customers are often living paycheck to paycheck and continually tell us that value is the most important factor in their shopping decisions. I am pleased to note that we are in good shape when it comes to our everyday pricing, and we are right where we want to be in our price gaps with our competitors and classes of trade.", "With that said, we are taking a hard look at what else we can do to drive value for our customers in this challenging economic environment, including highlighting private brands and other opportunities for savings, as well as maximizing the effectiveness of any promotional activity to drive traffic and share growth. Beyond these opportunities for our customers, we have also challenged our merchants to consider how they can drive simplification for our stores and supply chain as well with meaningful SKU rationalization as one of the most immediate areas of focus. To that end, we have identified several opportunities to eliminate certain SKUs that have become less productive, first, by moving them out of our DCs and then ultimately to our stores to sell through. As our store teams have fewer SKUs to manage, we can lower our cost to serve, while driving higher inventory turns and higher sales of products that are most important to our customers.", "We believe these actions will help further reduce inventory and shrink, while simplifying operations in both DCs and stores to drive greater efficiencies over the longer term. We all know that driving traffic and market share are essential to long-term retail success. And while our results have been improving in these areas, we are still not satisfied with our current position. We believe we have identified actions that will pay dividends over both the short and long term, as we remain focused on driving profitable sales growth.", "In summary, we are getting back to the basics here at Dollar General across all levels of the organization. Our desired results will not materialize overnight, but we believe we will see some early wins and continue to make progress toward executing on the fundamentals that have been foundational to our success over the past 85 years. As a result, we believe we will significantly enhance the customer experience while driving higher sales and increased profitability in our business. Now, before I turn the call over to Kelly, I want to briefly discuss some of our top-line results for Q3 as well as our 2024 real estate plans, which we announced earlier this morning.", "Net sales in the third quarter increased 2.4% to $9.7 billion, compared to net sales of $9.5 billion last year's third quarter. Within our net sales growth, we again grew market share in both dollars and units in highly consumable product sales, as well as an overall non-consumable product sales. Same-store sales decreased 1.3% in Q3, which was in line with our expectations. The decrease was driven by a decline in average transaction amount, primarily driven by units, and included declines in all four product categories.", "From an overall monthly cadence perspective, same-store sales growth was very similar in all three months of the quarter. However, I'm pleased to note that customer traffic was positive in Q3. After starting the quarter slightly negative, traffic turned positive in the middle period and improved sequentially each period of the quarter. Notably, customer traffic and same-store sales continue to improve in November, which, although early in the quarter, we believe reflects early traction from our work on getting back to the basics here at Dollar General.", "Turning to a quick update on our customer. During our most recent survey work, our customer continues to tell us they are feeling significant pressure on their spending which is supported by what we see in their behavior. Based on these trends and what we see in the macroeconomic environment, we anticipate customer spending may continue to be constrained as we head into 2024, especially in discretionary categories. This further reinforces the importance of the work we're doing today, and we believe our unique value and convenient proposition is as relevant as ever in this marketplace.", "To that end, I want to discuss our plans for real estate growth next year as we look to extend our offering to many more communities. Real estate continues to be one of our core competencies, and we remain pleased with the performance of our real estate projects. As a reminder, we monitor the following five metrics of our new store portfolio, including performance against pro forma sales expectations; new store productivity compared to the mature store base; cannibalization, which overall has remained consistent and predictable; cash payback, which we continue to expect in two years or less; and new store returns, which we expect to be approximately 18% on average in 2024. I want to note that our expectations for new store returns, while still very strong, are down modestly from our historical target of 20%-plus.", "This change is being driven partially by higher new store openings and occupancy cost, which I will discuss in more detail in a moment. We also continue to see strong performance from our remodel stores, which drive comp sales lifts between 8% and 11% for our DGTP format and average returns, which continue to be greater than what we see from our new stores. With this consistently strong performance, we continue to see real estate projects as one of our best uses of capital. In fiscal 2024, we plan to execute approximately 2,385 projects, including 800 new openings, 1,500 remodels, and 85 relocations.", "While this is a significant number of projects, I want to acknowledge a smaller number than we have opened in the recent years due primarily to a couple of considerations. First, we want to ensure that our teams across the company are focused on getting back to the basics and the efforts I discussed a few moments ago. And second, the capital required to execute these projects has increased significantly. For example, the initial opening of our 8,500-square foot store has increased more than 30% since we began rolling out the larger format in 2022.", "Additionally, nonresidential construction costs have increased significantly since pre-COVID. Our team has a number of efforts underway to reduce these costs, including engineering costs out of the projects. And we believe, over time, we will be able to mitigate some of the impact we have seen from inflation. With that said, our pipeline remains robust.", "We continue to see more than 12,000 opportunities for Dollar General bannered stores in the United States. And as we said before, for a variety of reasons, we will not capture each of these opportunities, but we are pleased that the overall number of opportunities remains high. We continue to innovate on store formats as an important element of our real estate strategy, and I want to take a moment to provide some additional color on our plans for 2024. We are placing a heavier emphasis on rural stores in 2024 with more than 80% of our new stores planned in rural communities where we believe we can have the most significant and positive impact for our customers.", "In addition, more than 90% of our new stores and relocations will be in one of our larger store formats, which continues to drive increased sales productivity per square foot as compared to our traditional 7,300 square foot box. These larger stores also provide additional opportunities to serve our customers, including expanded cooler offerings to help them build meals to feed their families more health and beauty products and fresh produce in many stores. Also included within our store plans are approximately 30 new pop shelf locations as we continue to move at a measured pace with this concept in a softer discretionary sales environment. Finally, we've been very pleased with our initial entry into Mexico and our new store plans for 2024 also include approximately 15 new Mi Super Dollar General stores in Mexico.", "Turning to remodels. Nearly 70% are planned to be in our DGTP format, which will provide the opportunity for significant increase in cooler count as well as the potential to add fresh produce in many of these stores. We are excited about our real estate plans for 2024 as we continue to grow the number of communities we are serving, particularly in rural America. In closing, we have tremendous growth opportunities in front of us, which we are uniquely well positioned to capture.", "We are working diligently on getting back to the basics, and we are laser-focused on serving our customers while providing meaningful opportunity for our employees and creating long-term value for our shareholders. With that, I now would like to turn the call over to Kelly." ] }, { "name": "Kelly Dilts", "speech": [ "Thank you, Todd, and good morning, everyone. Now that Todd has taken you through a few highlights of the quarter, let me take you through some of the important financial details. Unless we specifically note otherwise, all comparisons are year over year, all references to EPS refer to diluted earnings per share, and all years noted refer to the corresponding fiscal year. For third quarter, gross profit as a percentage of sales was 29%, a decrease of 147 basis points.", "This decrease was primarily attributable to an increase in shrink, lower inventory markups, and increased markdowns. These were partially offset by decreases in LIFO and transportation costs. Turning to SG&A, which was 24.5% of sales, an increase of 183 basis points. This increase was driven by retail labor, including approximately $29 million of our targeted labor investment as well as depreciation and amortization, repairs and maintenance, rent, professional fees, other services purchased, including debit and credit card transaction fees.", "These were partially offset by a decrease in incentive compensation. Moving down the income statement. Operating profit for the third quarter decreased 41.1% to $433.5 million. As a percentage of sales, operating profit was 4.5%, a decrease of 330 basis points.", "Interest expense for the quarter increased to $82 million, compared to $54 million in last year's third quarter, driven by higher average borrowings and higher interest rates. Our effective tax rate for the quarter was 21.3% and compares to 22.8% in the third quarter of last year. This lower rate is primarily due to increased benefits from federal employment tax credits and an increased benefit from rate-impacting items caused by lower earnings before taxes for the third quarter. These benefits were partially offset by a higher state effective tax rate.", "Finally, EPS for the quarter decreased 45.9% to $1.26. Turning now to our balance sheet and cash flow. Merchandise inventories were $7.4 billion at the end of the quarter, an increase of 3%, compared to last year, and a decrease of 1.8% on a per store basis. In addition, total nonconsumable inventory decreased approximately 15%, compared to last year and decreased 19% on a per store basis.", "While the inventory growth rate has significantly moderated from its peak in the third quarter last year and the quality of our inventory remains good, we continue to believe there is opportunity to optimize and reduce our inventory levels. We continue to review our markdown plans related to the previously announced $95 million investment including associated costs to ensure we are maximizing the impact of these actions. We are focused on optimizing our overall inventory position to better support our customers, stores, distribution centers, and growth plans. Year to date, through Q3, the business generated cash flows from operations of $1.4 billion, an increase of 15.5%.", "Total capital expenditures through Q3 were $1.2 billion and included our planned investments in new stores, remodels and relocations, distribution and transportation projects, and spending related to our strategic initiatives. During the quarter, we paid a quarterly dividend of $0.59 per common share outstanding for a total payout of $129.5 million. As planned, we did not repurchase shares this quarter. Now, I want to take a moment to provide an update on our financial outlook.", "We continue to expect the following for fiscal year 2023. First, net sales growth in the range of 1.5% to 2.5%. Next, same-store sales in the range of a decline of approximately negative 1% to flat, and EPS in the range of $7.10 to $7.60 or a decline of negative 34% to negative 29%. Our EPS guidance continues to assume an effective tax rate of approximately 22.5%.", "Finally, we expect capital spending in the range of $1.6 billion to $1.7 billion, and no share repurchase activity. Let me now provide some additional context as it relates to our outlook for the rest of 2023. While we continue to see a more constrained consumer and softer sales trends than we expected coming into the year, those trends were anticipated when we provided our guidance update in October. We have always been an all-weather brand, and aided by the actions that Todd outlined earlier, we are poised and ready to serve our customer in this challenging economic environment.", "In the near term, we expect continued overall pressure on the sales line, particularly in the nonconsumable categories. Within gross margin, in addition to sales mix pressure in our previously announced markdowns, shrink has continued to be a sizable headwind, and we expect this will remain with us into next year as any shrink improvement typically takes at least a year from a store's most recent count to show up in our financial results. Partially offsetting these challenges, we expect benefits from greater distribution center capacity and performance, lower carrier rates, our private tractor fleet and other distribution and transportation efficiencies. We also continue to expect realizing benefits from our initiatives, including DG Fresh and the DG Media Network.", "Turning to SG&A. We plan to make the remaining $50 million of our planned total labor investment of approximately $150 million in our stores during Q4. Overall, the investments we have previously discussed in retail labor markdowns and other areas to better support our customers, stores, and distribution centers are expected to total up to $270 million in 2023, which is consistent with our previous expectations. We are reviewing every aspect of these investments to ensure we maximize their impact for our customers and stores while driving the greatest return moving forward.Our capital allocation priorities continue to serve us well and guide us today.", "Our first priority is investing in our business, including our existing store base as well as high return organic growth opportunities such as new store expansion and our strategic initiatives. Next, we return cash to shareholders through a quarterly dividend payment. And finally, over time, and when appropriate, share repurchases. Although our leverage ratio is currently above our target of approximately three times adjusted debt to adjusted EBITDAR, we are focused on improving our debt metrics in order to support our commitment to our current investment grade credit ratings, which, as a reminder, are BBB and BAA2.", "With all of that said, cash generation is very important, particularly in this environment, and we are focused on maintaining and improving strong cash flow as we head into 2024. In summary, we remain committed to maintaining our discipline and how we manage expenses and capital as a low-cost operator with the goal of delivering consistent, strong financial performance while strategically investing for the long term. We are confident in our business model and our ongoing long-term financial priorities to drive profitable same-store sales growth, healthy new store returns, strong free cash flow, and long-term shareholder value. With that, I will turn the call back over to Todd." ] }, { "name": "Todd Vasos", "speech": [ "Thank you, Kelly. As we wrap up, let me just say again that we're laser-focused on getting back to the basics. As I mentioned in my earlier remarks, some of these actions will take a little bit more time to deliver the desired results. But we expect to demonstrate significant progress over the coming months and look forward to sharing more with you in the quarters ahead.", "This team is energized, and we are confident in the actions we're taking to drive operational excellence for our customers and employees and long-term value creation for our shareholders. I want to thank our approximately 185,000 employees for their commitment to doing the work necessary to serve our customers and communities every day. I am proud of this team, and look forward to serving our customers together as we move through this busy holiday season. With that, operator, we'd now like to open the lines for questions." ] } ]
[ { "name": "Operator", "speech": [ "Thank you. At this time, we'll be conducting a question-and-answer session. [Operator instructions] One moment please, while we poll for questions. Our first question comes from Rupesh Parikh with Oppenheimer.", "Please proceed with your question." ] }, { "name": "Rupesh Parikh", "speech": [ "Good morning, and thanks for taking my question. And also, welcome back, Todd. So, I wanted to kick it off just with longer-term operating margins. Do you feel like you can sustain a 6%-plus operating margin level longer term? And do you think you can get back to 8%-plus where you have historically operated? And then to get to that 8%-plus, where do you see potentially the bigger buckets of opportunity going forward?" ] }, { "name": "Todd Vasos", "speech": [ "Yes. Thanks for the question. I'll take the second part of that and then pass it over to Kelly. We here at Dollar General have gone back to the basics.", "You heard that in my prepared remarks. And I have to say, it has truly energized this company at all different levels. Everything starts and stops at the store with the customer. And what we've done is actually, again, nothing rocket science here, we've actually gone in and looked at every element of our business that touches our consumer from the lens of the consumer.", "Again, you would think that, that is always an ongoing piece. But sometimes it's good to remind yourself and remind you organization. So, we've done that. And with that, and I won't go through all of that because you saw a lot of it in my prepared remarks, but really getting back to the basics, making sure that the labor that we've already have deployed in our stores and yet to come in the fourth quarter, the $150 million of additional labor is spent in the proper way.", "And again, that redeployment of money from the smart teams directly into our store where it touches our customer each and every day immediately is so important, and that's exactly what we're going to do. And as we do that, and I think it's very important to point out, it also helps the front end of that store. And it helps on the sales line because we've got somebody to meet, greet, and ring up the customer. It also helps on the shrink line because you've got somebody at the front end of the store that is always there to monitor the front end of the store.", "And also, it helps on the convenience side because we had relied and start to reply too much this year on self-checkout in our stores. We should be using self-checkout as a secondary checkout vehicle, not a primary. And so, with all that, it's really going to help. And then when you focus in on our supply chain, getting the right product at the right time to our stores or OTIF, in full and on time, I would tell you that that's going to make a world of difference.", "Again, being an old operator that I am, there's nothing more disruptive in the store than not getting your truck on time and be able to get all the truck up onto the shelf when it comes in; and by the way, having the right items when you do put it on the shelf. And then lastly, really honing in this merchandising piece. We've got probably one of the best merchant groups in all of consumable retailing. But at times, you have to step back and look at what brought you to the party may not always be exactly what you need to do to go forward.", "Sometimes you got to step back to go forward. And I would tell you that's the case here on a couple of levels. One being the number of SKUs we're carrying, SKU rationalization is always an ongoing piece at Dollar General. But I believe that it's time to really step back and energize that even more in 2024.", "And we've already actually have gone deep here, turned off a lot of SKUs. There's going to be a lot more to come. And the idea here is turning off or eliminating SKUs that are more in the secondary or tertiary type of line. So, think about mayonnaise as an example.", "We may have five or six different variants of mayonnaise on the shelf today. We can easily drop one or two of those. The consumer is not going to know the difference, actually is going to make her life a little simpler when she goes to the shelf, going to make the store's life simpler to put product on the shelf. And also, what it's going to do is help our warehouses actually eliminate a lot of holding slots.", "So, a lot of benefit to what we're going to do in SKU rationalization. And all of this, which is fabulous, and I'll pass it over to Kelly, will actually start to move down to the bottom line, some faster than others. But again, being an old line retailer that I am, I know that these actions will fall to the bottom line and also help increase our top line as we go into '24. Kelly?" ] }, { "name": "Kelly Dilts", "speech": [ "Thanks, Todd. And just so everybody knows, our goal is certainly to get back to the historic levels of operating margin and profit that we're used to. While we're not going to give guidance, obviously, for '24 today, I do want to give a little bit of color of '24 just around some near-term headwinds that we're seeing. The first of those is around lapping really significantly reduced incentive compensation as well as stock-based compensation.", "And so, that will just be a near-term headwind as we think about 2024. The other thing that we're looking at right now is we're expecting a higher effective tax rate. And that's really due to lower benefits around the stock-based compensation piece as well as we've seen historically just some higher state effective tax rates as we have moved through the last few years. So, those are near-term headwinds, certainly not anything long term that we need to worry about.", "The other thing is around shrink. And so, as you know, shrink has been pretty significant for us for a while, and it's definitely going to carry into 2024. As I talked about in prepared remarks, it just takes a while to start showing up in your financial results. And just to give you a little bit more color of kind of where we are with shrink on a year-to-date basis, shrink is actually 100 basis point headwind for us.", "And then as we moved into Q3, it's actually running just a little bit higher than that. And so, certainly a pressure near term for us, something that we're looking to hopefully -- we're mitigating along the way, and it'll show up in the financial results later in 2024. And then as we think about just our underserved customers, we're just making sure that we're watching her and whether she gains -- stays gainfully employed. All the actions that Todd just noted and getting back to the basics is certainly going to set us up nicely to be able to serve her, and it doesn't matter what economic environment.", "We've always been an all-weather brand, and we certainly will continue to be so as we move forward. So, that's a little bit of color on '24. We're going to give you a lot more color in March and give you a little bit more holistic view there. But what I'll say is, overall, the fundamentals of this business are absolutely unchanged and this model remains strong.", "And on a longer-term basis, we believe that we're going to get back to the historic levels that this model is accustomed to delivering." ] }, { "name": "Operator", "speech": [ "Our next question is from Simeon Gutman with Morgan Stanley. Please proceed with your question." ] }, { "name": "Simeon Gutman", "speech": [ "Good morning, and welcome back, Todd." ] }, { "name": "Todd Vasos", "speech": [ "Thank you." ] }, { "name": "Simeon Gutman", "speech": [ "Thank you. When you rejoined, you talked about you having an opportunity to revisit the financial profile of the business. And if there was a time to look back and reset and invest deeper, that you could take that opportunity. As the business looks to be forming a bottom in margin and thinking about getting to 7% or plus in a reasonable time frame, do you have any updated thoughts on that? Does it make sense to lean in so that when you start building back, it builds back sustainably? Do you think the business needs a little more investment than you thought 1.5 months ago?" ] }, { "name": "Todd Vasos", "speech": [ "Yes. Thank you for the question. And you're 100% right. The first few weeks back on the deck here, I did take a holistic view across not only our operations, but as you heard, our supply chain, our merchandising areas, looked at everything holistically, and I'll just click off a few.", "But first, let me say before I click it off is that I believe that the investments that have been already talked about this year are $100 million than $150 million in totality labor investments were the exact right thing to do. I don't believe at this point that I see a need that we need to make any other larger outsized investments as we move into '24. I believe, as I indicated, that the right thing to do is make sure that the $150 million is being used appropriately and in the right areas that touches the consumer and helps our stores be able to better serve our consumer each and every day. And that's exactly what we've done now over the last few weeks.", "And that's why I believe taking the smart teams out of the equation, taking that whole bunch of labor that was dedicated to that, putting it directly in our stores to cover the front end of our stores more effectively each and every day, 100% of the time tethered to the front end for customer service and ringing up our customers. And then also one of the first for Dollar General, quite frankly, and that is deploying some of that labor into work that ensures that we keep our perpetual inventory correct and ongoingly correct each and every day. Because once again, if the system doesn't realize you need product, it won't send you product. And unfortunately, over the last year or so, our perpetual inventory numbers have gotten further and further out of whack, quite frankly.", "And we are now in the midst of bringing those back. We've seen a lot of great traction, but the redeployment of hours of this $50 million coming out of the smart teams will really benefit. And again, this is a first for Dollar General, so it will be great to see that as well. And then as I looked into other areas of the company, I feel fabulous about our pricing.", "The great thing when I step back in, our everyday pricing across all channels of trade, including our chief competitor, looks very good and in great position. As a matter of fact, our gaps are right where we would like to see them compared to historical levels. So, very good there. Our promotional activity, while I still believe I would call it semi rational across the spectrum, we have seen an uptick in recent weeks on promotional activity.", "We're watching that carefully. Is that because we're moving into the holidays, or is that something that will sustain as we move into '24? So, we're watching that carefully. But you know us pretty well, Simeon, we're going to take whatever action is needed. We're going to take it quickly, and we'll make sure that our pricing stays exactly where it needs to be to service our customers.", "But at this point, I don't see a need to reinvest any large amounts, sums of money in margin to do anything there. But again, we always reserve the right to be able to do it if that time arises. So, right now, I think the investments we've already talked about over this past year are in the system. I believe they're appropriate.", "They're now being used, I believe, very appropriately in all areas and are deployed the proper way. Now, it's time for execution, and that's what we're doing. We're already starting to see a little bit of benefit, especially as we moved into November on some of our top-line results both in consumables and nonconsumables, quite frankly, as we move through November. So, it's great to see it.", "But again, caution it's very early in the quarter, and it's very early in this new look at how Dollar General is going to go to market. But rest assured, as Kelly indicated, we feel very good about the long-term prospects of getting back to historical levels here at Dollar General." ] }, { "name": "Operator", "speech": [ "Our next question is from Matthew Boss with JPMorgan. Please proceed with your question." ] }, { "name": "Matt Boss", "speech": [ "Great, thanks. Maybe, Todd, at higher level. Could you just help elaborate on some of the recent changes in behavior that you're seeing from the low-end consumer? The traffic versus ticket trends that you cited, I think, are interesting. But maybe as a different way, traffic is improving, what's constraining the comp through the third quarter? Did comps actually turn positive in November tied to some of these initiatives? And then just lastly, on the new stores and the mindset shift to maybe down shift a bit, could you just elaborate on some of those pieces that you walked through, occupancy costs and some of the other moving parts? And just what you're seeing on the new store return to maybe just take a pause here?" ] }, { "name": "Todd Vasos", "speech": [ "OK, sure. As we look at our results as we move through the quarter, as we indicated, each of the periods were very similar, but we did see continued uptick in our traffic as we move through the quarter and then into November. Now, I'm not going to give you a lot of color in November, but to say that we did see a change in trajectory on our comp as well as we moved into November. So, it was great to see.", "And I would tell you that, again, it was both on the consumable and the nonconsumable side of the equation. Now, one would say, \"Well, where is it in the comp?\" Well, I would tell you the comp actually was much better as we move through the end of October into November, but we still have a lot of work to do, Matt, to get back to some historical comp type rights here at Dollar General. I believe the back-to-basic work that we're doing is going to help us get there faster as you move into the back half of Q4 and into Q1 of '24. Making sure our stores are stocked each and every day when the consumer walks in the store, be able to find what they need is going to be very, very important.", "So, more to come. We've already started to see that. We've actually have seen our in-stock rates marketably improve over the last few weeks. We check it and watch it each and every week.", "And I believe that has added to some of that betterment and comp that I talked about in November. So, more to come. I believe the macro still has an effect on us as well as others. But what we've always been and prided ourselves on control, which you can control here at Dollar General, and we're doing just that with back to basis.", "And we believe that we can help overcome some of those shortcomings in the macro environment. We'll be able to control what -- and what the consumer feels and sees when she's in the store. So, more to come. We feel like we're on the right track here, but we've got a lot of work yet to do, but I feel good about that.", "As far as our new stores. As you noted, we did take a little bit of a step back this year. Again, this was one of the areas that I cracked open as soon as I walked in the door. Again, we looked at -- there was no sacred cows.", "We looked at every single piece of this business. One of the things that I do here with the team, every line of that P&L is scrutinized, every single line, including our investments in capital. And as I looked at our new stores, while still wildly the best use of our capital across the board, I feel it was a prudent decision to take a step back. Now, some people would say, \"Boy, still building 800 stores, that's not too big of a step back, that's still a large commitment,\" and it is, Matt.", "But it was a prudent decision for a couple of reasons. One, we talked about the increased cost to build a store today. The interest rates are up. The cost to build a store is up.", "I feel very good about the work the team has done. They've mitigated some of those costs, but we still have a lot of work to do yet to mitigate even further some of these costs. So, why not take a little bit of a step back in new store development, give our teams the opportunity to also get a lower cost to put these buildings in. So, we're doing that as we speak.", "And I believe that it's exactly the right thing to do. And then as you then step a little bit further back, when you look at some of the work we have to do just internally, it's probably a prudent thing to do to step back a little bit as well, so we can go forward faster in the outer years. Now, I believe that this -- while this may or may not be a one-year phenomenon, I would tell you that the way we're looking at it right now, we're not here to give guidance past '24, is that we don't see any reason why we can't up our new store openings as we continue to move forward. We love what we see on still 12,000 opportunities to put a Dollar General out in the continental United States, and we've always prided ourselves on being very quick and first to market to capture the majority and release the oversized portion of those 12,000 opportunities.", "So, nothing yet that we see stands in the way of that. And Kelly, you may want to just touch on the returns just really quickly." ] }, { "name": "Kelly Dilts", "speech": [ "Yes. No, absolutely. And so, an 18% return in this environment is fabulous, and Todd noted it, it's still a great use of capital. The new unit economics are still very strong as we move in into '24.", "And it has a great payback period still of less than two years. And the other thing that we haven't seen is any change in the cannibalization rate. The other thing I'd point out and Dollar General is just fantastic at this. Our real estate group is pretty amazing, and we have an extremely high hit rate of success and you've seen that over the years.", "So, we feel really good about the projects. We feel good about the 18% return. And, of course, as Todd noted, while we're pleased with all of that in typical Dollar General fashion, we're going to work to improve it as we go through '24." ] }, { "name": "Operator", "speech": [ "Our next question is from Seth Sigman with Barclays. Please proceed with your question." ] }, { "name": "Seth Sigman", "speech": [ "Hey, good morning, everyone. I wanted to talk about inventory a little bit. Just in terms of the progress rightsizing your inventory position, can you just give us a little bit more perspective on where you sit today with consumables versus nonconsumables? And then is it your expectation to exit the year clean, or do you feel like you're going to still need some incremental actions into next year? And then I'll just add a second part to the question around the top line. When you look at the improving trends the last few months, to what extent has that been influenced by markdowns and clearance activity? Thank you." ] }, { "name": "Kelly Dilts", "speech": [ "Yes. No, thanks for the question. And inventory reduction is absolutely a priority of ours this year, and it will be a priority as we move into next year. I think the good news for us is that the quality of our inventory is good, but we've talked a lot in the past about the benefits of inventory reduction and just what that does as you reduce the complexities in both the stores and the distribution centers.", "So, I would say our progress is on track in our reduction efforts, and you saw a little bit of that in the numbers today. So, total inventory increase was 3% on a year-over-year basis. But if you look at it on a per store basis, we're down 1.8%. I think the real story here is, is around the nonconsumable piece.", "And so, we are down 15% on a year-over-year basis there, and we're down 19% on a per store basis. I think the other important thing to call out, and we've been calling it out every quarter, but this one is even more significant as we've seen a 58% decrease in our import receipts. And again, that's us buying around that product and making sure that we're selling through it. And so, we feel good about where we're headed for the end of the year.", "Just a little bit longer term, I'd say we have several work streams in place that are working on inventory reduction, but just as important, and this kind of goes to the top line is inventory optimization and making sure that we're going where the customer wants us to go. And so, I would say with all of these things in place, we should feel pretty good about where we're landing at the end of '23, but we're going to feel even better as we see continued improvement in inventory levels as we move through '24." ] }, { "name": "Todd Vasos", "speech": [ "Thanks, Kelly. And as you look at our results in Q3 and how that relates to any activity around clearing this inventory, I would tell you that I feel very good about the balance here. While there was some activity there, actually, some of the bigger activities is really slated for Q4, if needed. And a lot of that will be centered around our sell-through of holiday.", "So, we're watching that very closely. But again, early results would say it's right in line where we thought it would be right now. And actually, in some areas, a little bit better. So, we're watching that carefully.", "But I would also say, as we continue to move forward, what we like and what I've seen since I've been back, is I believe we've done exactly the right thing on moving through some of this inventory. But as I look at the quality of our inventory, it is in very good shape. And actually, as Kelly just indicated, a lot of what we have right now to deal with on an overstock basis is actually more in our core everyday goods. So, this isn't about a bunch of screw drivers and hammers or fashion-type items for holiday that we have to move through.", "This is about having a little bit too much of some basic paper cleaning, food-type items, things like that, that will move through the system pretty naturally as long as we do the right thing with our supply chain and our stores. And that's exactly what back to the basics is meant to address. So, feel very good about that and very good about what we see going into the back half of this year and '24." ] }, { "name": "Operator", "speech": [ "Our next question is from Michael Lasser with UBS. Please proceed with your question." ] }, { "name": "Michael Lasser", "speech": [ "Good morning. Thank you so much for taking my question. And welcome back, Todd. Given everything that was outlined this morning, when is it realistic for us as outsiders to hold the team accountable to getting back to consistently producing a double-digit EPS growth algorithm like Dollar General has done in the past? And as part of that, Kelly pointed to a few factors that are going to weigh on Dollar General's profitability in 2024.", "Could you give more texture and timing around how large those factors are like incentive compensation and shrink? Thank you very much." ] }, { "name": "Todd Vasos", "speech": [ "Yes, thank you, Michael. As both Kelly and I have both said, I don't see anything that gets in the way longer term to getting back to some of our historical ways that we return to our shareholders and our customers. We feel that we're on the right track with our back-to-basics moves here, both in our labor investments, in our inventory investments, as well as in our supply chain and merchandising. So, we feel like we've taken the right appropriate actions now, and we're moving with speed and intent.", "As I said in my prepared remarks, some of it will occur and manifest itself faster, and some will take a little bit more time. But rest assured, we are hitting every single item, and we're monitoring every single item every week here to make sure it's on the right track. And if it happens not to move the way we want, we will then make an adjustment to ensure that it does. We are squarely focused on getting this company back to its historical returns that everyone is accustomed to seeing.", "And most importantly, our customer is used to seeing at store level. Now, as Kelly indicated, there are some near-term term headwinds. As much as I would love, Michael, to give you more color right now, we're not here to give '24 guidance. We wanted to though make sure that you can contextualize at least some of those headwinds as we start to move into 2024, but rest assured, we're going to give you more than you need in the components when we come back and give you the guidance for 2024 to make sure that you can build the models out the proper way.", "But again, I want to make sure you also understand, though, that we're not going to wait till '24. We're taking action now to continue to modify and also continue to ensure that we're addressing any of the gaps that are out there that are well in our control. There'll just be a few things that may not be fully in our control in '24 that will probably be more of a one-time in nature that we'll address at the right time." ] }, { "name": "Operator", "speech": [ "Our next question comes from Kate McShane with Goldman Sachs. Please proceed with your question." ] }, { "name": "Kate McShane", "speech": [ "Hi. Good morning. Thanks for taking our question. We were wondering how you would frame the risk of deflation across your box into next year? And how do you think about the puts and takes across the P&L as a result?" ] }, { "name": "Todd Vasos", "speech": [ "Yes. That's a good question. And there's been a lot written up in certain areas on on deflation. We've seen some deflationary pieces starting to show up, especially in our nonconsumable discretionary type areas.", "Nothing that alarms us at this point as we move into 2024. How we're looking at it is we see some real opportunity to reduce initial costs, especially in our import-related goods, not only from the factory, but also for the transportation side. So, ocean freight, fuel cost, bunker fuel cost, and such have moderated greatly over the last year. So, there's some opportunity to pull cost out.", "Some of that, we will definitely pass on to the consumer as we continue to watch, especially in those commodity areas of the import side of the business because there's always some good. Even in our nonconsumable areas, there are some good commodity-type items in there. From a consumable perspective, while there's always movement in those areas of commodities: milk, dairy-type areas, oils, wheat, we watch that very carefully. We have component pricing here at Dollar General for not only our national brands but our private brands.", "We watch that very, very closely and we monitor that. Now, in saying that, we haven't seen in center of store, if you will, dry grocery, chemical paper, very, very little deflationary pressures. A little bit on those commodities in dairy, as I indicated, some meat items, which we don't -- are not a huge player in. Produce, we're a little bit of a player there in what we've done.", "There's some deflation there. But again, I would tell you, in totality, nothing that alarms us or believes that it will adversely affect the top line as we move into '24, at least nothing at this point shows that." ] }, { "name": "Operator", "speech": [ "Our final question is from Chuck Grom with Gordon Haskett. Please proceed with your question." ] }, { "name": "Chuck Grom", "speech": [ "Hey, thanks. Good morning, and welcome back, Todd, as well." ] }, { "name": "Todd Vasos", "speech": [ "Thank you." ] }, { "name": "Chuck Grom", "speech": [ "Can you talk a little bit about the out-of-stock issue and perhaps quantify the drag that it's been to comps over the past few quarters? I believe it's probably pretty sizable and the measures you're taking to improve that issue? And then on the SKU rationalization, that's interesting. I was just wondering if you could speak to maybe the number of SKUs you have in an average store today? So, say, relative to back in 2019 and how big of an opportunity that can be, and how long do you think you'll take to get back to an optimal level? Thanks." ] }, { "name": "Todd Vasos", "speech": [ "Yes, sure. I would tell you that the amount of stocks we have in our store are probably some of the largest that I've seen in the 15-plus years I've been here. And saying that, there are so many work streams that are now underway, Chuck, that I feel good about where we're headed. As I just indicated a few moments ago, we saw a meaningful change over the last two weeks in our in-stock rates at store level.", "And these are not just on our perpetual inventory system, but this has actually counted inventory from our inventory -- our Washington inventory group that takes our yearly fiscal inventory. So, these are real counts, if you will, real out of stocks and not just out of stocks on the shelf, but out of stocks in the back room, too, so meaning it is not in the system for the consumer at all. So, we saw a meaningful drop in that, meaning more available to the consumer. We believe as we move through the rest of this quarter and into the first, we're going to make even further meaningful advances.", "Why? We're putting hours toward the inventory specialist role that I mentioned earlier. This is a first for Dollar General, to go in and ensure that we keep our on hand or our perpetual inventories more accurate than we have in the past. We've done this activity in the past, but we have come up with and we are teaching and training individuals to do this in a little bit of a different way, taking a fresh look at it, a fresh approach at it, doing more areas of the store on a weekly basis at a time to ensure that we touch every SKU. And by the way, touching every department of the store at least once a month, and the higher velocity areas, more than once a month.", "So, we feel good about the direction. We feel good about how we will be able to quickly pivot and make some adjustments here. Now, on the SKU rationalization side. I would tell you that -- and we've said this in the past, we've got between 11,000 and 12,000 total SKUs in our store today, depending on the format, right? We've got some larger formats, as you know, than our smaller ones.", "But we believe we have an opportunity to take out a meaningful number of SKUs. I'm not going to give you the number right now. We're still in the midst of looking at that. And how we're looking at it again is from that secondary and tertiary type areas that I talked about it earlier.", "We're also, though, taking a fresh approach to look to it from a standpoint of return, right? And so, not only a general look at it, but also looking at it from the standpoint of shrink and other areas of components that go into a SKU. And is it still profitable? With shrink being elevated, a lot of it in our control, some not in our control, there may be SKUs -- and by the way, there are SKUs that we'll be dropping due to the amount of shrink that is in our store as well. So, it's going to be a fresh look across the portfolio SKUs we carry with the consumer in mind first, but also profitability in mind throughout the entire supply chain through our stores. So, more to come.", "I think we can give you a little bit more color as we go into Q1 of next year on both our progress as well as maybe contextualize how meaningful we're talking about here. But rest assured, I wouldn't talk about it on this if I didn't believe it was going to be a meaningful number of SKUs and a meaningful impact to the simplification efforts within our stores." ] }, { "name": "Operator", "speech": [ "We have reached the end of the question-and-answer session. I'd now like to turn the call back over to Todd Vasos for closing comments." ] }, { "name": "Todd Vasos", "speech": [ "Thank you, and thanks for all the questions and your kind words for welcoming me back. As I said last year that serving this team at Dollar General has been the highlight of my professional career, and I feel the same sense of honor today. As you heard this morning, we have some hard work yet ahead of us, but we know what to do. We've done it before, and we are absolutely set on doing it again as quickly as possible.", "I'm excited about the opportunities in front of us and all that we've accomplished together over the years and will continue to do so for our customers, associates, and shareholders. Thank you for listening, and I hope you have a great day." ] }, { "name": "Operator", "speech": [ "[Operator signoff]" ] } ]
DG
2018-03-15
[ { "description": "Vice President of Investor Relations and Public Relations", "name": "Jennifer Beugelmans", "position": "Executive" }, { "description": "Chief Executive Officer", "name": "Todd Vasos", "position": "Executive" }, { "description": "Chief Financial Officer", "name": "John Garratt", "position": "Executive" }, { "description": "Morgan Stanley -- Analyst", "name": "Michael", "position": "Analyst" }, { "description": "Bank of America Merrill Lynch -- Analyst", "name": "Robert Ohmes", "position": "Analyst" }, { "description": "Wolfe Research -- Analyst", "name": "Scott Mushkin", "position": "Analyst" }, { "description": "MoffettNathanson -- Analyst", "name": "Greg Melich", "position": "Analyst" }, { "description": "UBS -- Analyst", "name": "Michael Lasser", "position": "Analyst" }, { "description": "Deutsche Bank -- Analyst", "name": "Paul Trussell", "position": "Analyst" }, { "description": "Guggenheim Securities -- Analyst", "name": "Ryan Kilbane", "position": "Analyst" } ]
[ { "name": "Operator", "speech": [ "Good morning. My name is Jennifer and I will be your conference operator today. At this time, I would like to welcome everyone to the Dollar General Fourth Quarter 2017 Earnings Call. Today is Thursday, March 15th, 2018. All lines have been placed on mute to prevent any background noise. This call is being recorded. Instructions for listening to the replay of the call are available in the company's earnings press release issued this morning.", "I would now like to turn the conference over to Miss Jennifer Beugelmans, Vice President of Investor Relations and Public Relations. Miss Beugelmans, you may begin your conference." ] }, { "name": "Jennifer Beugelmans", "speech": [ "Thank you, Jennifer, and good morning, everyone. On the call today are Todd Vasos, our CEO, and John Garratt, our CFO. After our prepared remarks, we will open up the call for questions. Our earnings release issued today can be found on our website at dollargeneral.com under investor information, news, and events.", "Let me caution you that today's comments will include forward-looking statements about our expectations, plans, future estimates and other non-historical matters, including but not limited to our Fiscal 2018 financial guidance and store growth plans, our planned investments and initiatives, capital allocation strategy and related expectations, future economic trends or conditions, and the anticipated impact of US corporate tax reform.", "Forward-looking statements can be identified because they are not statements of historical fact or use words such as may, should, could, would, optimistic, objective, outlook, will, believe, anticipate, expect, forecast, estimate, guidance, plan, opportunity, continue, focused on, intend, looking ahead, or goal, and similar expressions that concern our strategies, plans, intentions, or beliefs about future matters.", "Important factors that could cause actual results or events to differ materially from those projected by our forward-looking statements are included in our earnings release issued this morning under risk factors, in our 2016 form 10-K filed on March 24th, 2017, and in the comments that are made on this call. We encourage you to read these documents. You should not unduly rely on forward-looking statements which speak only as of today's date. Dollar General disclaims any obligation to update or revise any information discussed in this call except as maybe otherwise required by law.", "During today's call, we will reference certain financial measures not derived in accordance with GAAP. Reconciliations to the most comparable GAAP measure are included in this morning's earnings release, which, as I just mentioned, is posted on dollargeneral.com under investor information, news, and events.", "At the end of our prepared remarks, we will open the call up for your questions. Please limit your questions to one and one follow-up question if necessarily.", "Now, it is my pleasure to turn the call over to Todd." ] }, { "name": "Todd Vasos", "speech": [ "Thank you, Jennifer, and welcome to everyone joining our call. I am pleased with our strong fourth quarter performance and the continued momentum we saw in the business. For the full year, we deliver healthy same-store sales growth driven by an increase in average transaction amount and positive traffic, all while effectively balancing gross margin and exhibiting good underlying expense control.", "During the year, we continued to make progress on the implementation of our key initiatives as we seek to capture growth opportunities over both the short and long-term. Our SG&A investments in 2017 were focused primarily on increased compensation structure and additional training for our store managers, as they play a critical role in our customers' experience and the profitability of each store.", "We also continue to make proactive and targeted investments in support of key strategic initiatives that we believe will help further differentiate us from the competition over time. I'll provide additional details on two of these initiatives pertaining to the digital and non-consumable strategies later in the call.", "Now, let's recap some of the financial results for Fiscal 2017. Full-year net sales increased 6.8% to $23.5 billion compared to net sales of $22 billion in 2016. As a reminder, net sales for 2016 included $398.7 million from the 53rd week. When comparing our fiscal year net sales on a 52-week basis, the Fiscal 2017 full-year growth rate would be higher by approximately 2 percentage points.", "Same-store sales for the year increased 2.7% over the prior year, marking our 28th consecutive year of positive same-store sales growth. Same-store sales for the fourth quarter increased 3.3% over the prior year fourth quarter, driven by positive performance in both our consumables and non-consumable categories, with stronger growth in consumables. Our highly consumable market share trends and syndicated data continue to exhibit strength with mid to high single digits, shared growth in both units and dollars over the 4, 12, 24, and 52-week periods ending January 27th, 2018.", "For the full year, diluted EPS was $5.63 and adjusted diluted EPS was $4.49. Fourth quarter diluted EPS was $2.63 with adjusted diluted EPS of $1.48. In 2017, we generated cash from operations of $1.8 billion, an increase of 12% compared to the prior year, while returning $863 million to shareholders through the combination of share repurchases and quarterly cash dividends. We continue to deploy capital to invest in new stores, relocations, and remodels, while continuing to provide compelling returns. We also invested in infrastructure, such as new distribution centers that support future growth.", "During the year, we celebrated the grand opening of our 14,000th store and opened a record 1,315 new stores, which includes the acquisition of nearly 300 store sights in 2017. We also remodeled or relocated a combined 764 stores. In total, we completed 2,079 real estate projects exceeding our initial target of 1,900 total projects.", "We continue to be pleased with the returns and performance of our real estate program as our new stores are overall yielding returns of 20% even prior to the benefit of federal tax reform. During the fourth quarter, we completed a strategic review of our real estate portfolio. As a result, we closed an incremental 35 underperforming stores, the majority of which were part of our mature store base or stores that we generally define as having been opened five years or more.", "The decision to close stores is always difficult as it impacts our store associates and the communities we serve. Fortunately, we were able to place a majority of impacted employees and direct customers to nearby locations. These 35 store closures resulted in an incremental pre-tax expense of approximately $28.3 million in the quarter or $0.07 per diluted share, primarily attributable to the remaining lease liability on these stores. Overall, we believe our real estate portfolio is in excellent shape and that these actions position us for the future.", "Within our distribution network, we completed our 15th distribution center in Jackson, Georgia and began shipping in October of 2017. During 2017, we started construction on both our 16th and 17th distribution centers in Longview, Texas and Amsterdam, New York. We expect to begin shipping from these locations in 2019. These investments are key to driving the efficiency and speed of our network to support our growing store base while reducing our stem miles.", "In his remarks, John will review our fiscal results or our financial results for Fiscal 2018 guidance, including the benefits of federal tax reform on both. But at a high level, we anticipate a cash benefit of approximately $300 million in 2018 as a result of federal tax reform. Of this amount, we expect -- $75 million in the business this year while returning the balance to shareholders through additional share repurchases and higher anticipated quarterly dividends.", "As you know, one of our ongoing priorities is to enhance our position as a low-cost operator. We have a defined process to address spending that has allowed us to proactively improve our efficiencies and reduce expenses over time. We are doing this while creating flexibility to reinvest savings to drive growth.", "We remain committed to this operating priority as well as continuing to make targeted strategic investments in the business for the long-term. In Fiscal 2018, we anticipate these investments will primarily be focused on the acceleration of our long-term strategic initiative as well as new store expansion and infrastructure to support future growth.", "Similar to 2017, our planned investments in 2018 are strategically aligned with our four ongoing operating priorities. Importantly, we believe we are seeing clear outcomes and benefits from our significant prior year investments, particularly in store manager compensation and training. We also believe that we remain well-positioned from both a wage and everyday low-price perspective as we have been thoughtfully and proactively investing in these areas all along. As a result, we do not currently anticipate the need to invest heavily in those areas in 2018, which is reflected in our financial guidance for the coming year.", "Regarding capital allocation, we continue to be disciplined and remain focused on financial returns and our capital allocation priorities remain unchanged. We will focus first on investing in high-return growth opportunities, including new store expansion and infrastructure to support future growth. We also remain committed to returning significant cash to shareholders through anticipated share repurchases and quarterly dividends, all while maintaining our current investment grade credit rating.", "In 2018, our capital spending is prioritized to new stores, remodels, and relocations as well as to our two new distribution centers that are currently under construction. Additionally, we have plans to accelerate capital spending on select infrastructure projects and other key initiatives which we expect to deliver high returns.", "In summary, we have a long track record of investing in the business, including the significant investments we made in 2017. And while we continue to invest in the business in the short and long-term, we expect the majority of the cash benefit from federal tax reform will flow directly through to our earnings and to our shareholders in 2018. We continue to believe we operate in one of the most attractive sectors in retail and that we are well-positioned to capitalize on the growth opportunities ahead.", "With that, I'll now turn the call over to John." ] }, { "name": "John Garratt", "speech": [ "Thank you, Todd. Good morning, everyone. Now that Todd has taken you through the highlights of 2017, let me take you through some of the important financial details of the fiscal quarter and year. I will also spend some time discussing our 2018 guidance.", "Gross profit as a percentage of sales was 32.1% in the fourth quarter, an increase of 43 basis points from last year's fourth quarter. This increase was primarily attributable to higher initial inventory markups, lower inventory shrink, and a reduction in markdowns. Partially offsetting these items were a greater proportion of sales of consumables, which generally have a lower gross profit rate than other product categories, sales of lower margin products compromising a higher proportion of consumables sales and increase transportation cost.", "SG&A expense increased 159 basis points over the 2016 fourth quarter to $1.3 billion or 21.9% of sales in the fourth quarter. As a reminder, SG&A as a percentage of sales in 2016 was favorably impacted by higher net sales resulting from the Fiscal 2016 53rd week. The 2017 fourth quarter's results reflected increased occupancy costs, increased retail labor expenses given to our previously planned investment and store manager compensation and training and increased incentive compensation cost.", "We also recorded $28.3 million of additional pre-tax expense related to 35 incremental store closures in the quarter, most of which were in the form of SG&A expense associated with the remaining lease liability of these stores. Partially offsetting these increased expenses, was a reduction in advertising costs.", "Our effective tax rate for the quarter was a benefit of 18.9% as compared to an expense of 36.8% in the fourth quarter of last year. The reduction of the federal corporate tax rate due to federal tax reform resulted in a material positive impact on our effective income tax rate in the fourth quarter. This provisional benefit was primarily due to the remeasurement of the first tax assets and liabilities on the balance sheet at the new lower federal corporate tax rate accompanied by benefits associated with a federal corporate tax rate for 2017 of 33.7% compared to 35% in prior years.", "Diluted earnings per share for the fourth quarter were $2.63, excluding the $1.15 provisional benefit from the remeasurement of deferred tax assets and liabilities, adjusted diluted earnings per share for the fourth quarter were $1.48. Both our fourth quarter reporter and adjusted diluted EPS results include an approximate $0.09 provisional benefit due to the reduced federal corporate income tax rate for 2017. This $0.09 provisional benefit was largely offset by an approximate $0.07 charge from the 35 incremental store closures in the quarter.", "Looking at a few items on our balance sheet and cashflow statement, merchandise inventories were $3.6 billion at Fiscal 2017 yearend, a slight increase of about 1.5% on a per-store basis. As we enter 2018, we believe our inventory is in great shape and are comfortable with the quality. Our longer-term goal continues to be inventory growth in line with or below our sales growth.", "In 2017, we generated strong cashflow growth from operations, totaling $1.8 billion, an increase of $197 million or 12% compared to the prior fiscal year. Total capital expenditures for the year were $646 million and included the majority of the cost of our Jackson, Georgia distribution center.", "During the quarter, we repurchased 3 million shares of our common stock for $281 million and paid a quarterly dividend of $0.26 per common share outstanding at a total cost of $70 million. For the full year, we returned cash to shareholders totally $863 million through the combination of share repurchases and quarterly dividends.", "From December 2011 through the end of the 2017 fiscal year, we repurchased $5.1 billion or 81.4 million shares of our common stock. With today's announcement of an incremental share repurchase authorization, we have remaining authorization of approximately $1.4 billion under the repurchase program.", "Turning now to our guidance. For Fiscal 2018, we anticipate net sales growth of approximately 9% and expect full-year comp growths to be in the mid-2% range. As Todd mentioned earlier, in 2018, we plan to accelerate investments in our long-term strategic initiatives. Despite these investments as well as headwinds from increasing wage rates and rising transportation costs, we anticipate our operating margin rate to be relatively unchanged as compared to Fiscal 2017.", "Diluted earnings per share for Fiscal 2018 is forecasted to be in the range of $5.95 to $6.15. Our diluted EPS guidance assumes an estimated effective tax rate of 22% to 23% in 2018, which we expect will result in an incremental cash benefit of approximately $300 million for the year. We plan to invest $50 million to $75 million of our tax savings in the business this year, primarily in capital expenditures to accelerate our strategic initiatives such as digital and non-consumables and other high-return projects.", "Overall, our capital spending in 2018 is expected to be in the range of $725 million to $800 million as we continued to invest in the business to drive and support future growth. In terms of cash distributions to shareholders, as we outlined in today's press release, our board of directors approved of a quarterly dividend of $0.29 per share, an increase of 12%.", "In Fiscal 2018, we also plan to repurchase approximately $850 million of our common stock. In total, we expect to return over $1.1 billion to shareholders this year through the combination of share repurchases and anticipated quarterly dividends, which represent an increase of more than $250 million compared to the prior year.", "As you model 2018, please keep in mind the following -- a record 1,315 new store openings in 2017, including acquired stores, were weighted toward the back-half of the year and the ramp up of the later opened stores is expected to pressure SG&A leverage at the beginning of the year. Additionally, our investment in store manager compensation training began in March of 2017. This too is expected to pressure SG&A leverage in Q1 before we anniversary the investment from the prior year.", "Combined, we expect these two items to result in an incremental impact of approximately 20 basis points of SG&A deleverage as a percentage of sales in the first quarter. As always, we continue to be disciplined in how we manage expenses and capital with the goal of delivering consistent, strong financial performance while positioning our business for long-term growth.", "We remain confident in our business model and our ongoing operating priorities to drive profitable same-sore sales growth, healthy new store returns, strong free cashflow and long-term shareholder value.", "With that, I will turn the call back over to Todd." ] }, { "name": "Todd Vasos", "speech": [ "Thank you, John. As I shared with you over the last several quarters, we are investing in and building momentum behind certain strategic initiatives that we believe will ultimately drive strong sales and profit growth in the years ahead. Today, I'll provide an update on our digital and non-consumable initiatives, which represent two of our more near-term strategic opportunities.", "Starting with our digital initiatives, we are strategically investing in our business to help our customers utilize digital tools and resources for more personalized and convenient in-store shopping experience. With nearly 75% of the US population currently within five miles of a Dollar General, we have a unique opportunity to help shape our customers' digital shopping behavior all while leveraging our more than 14,500 brick and mortar stores to help them save time and money.", "Our efforts are all about making things easier for customers and further enhancing our strong value proposition, providing a unique combination of value and convenience. Our insights indicate that our customers are utilizing digital more to plan their visits and want more options on how they engage with us in-store. These insights have helped to shape our digital strategy, which we have accelerated.", "Earlier this week, we launched a customer pilot of our new Shop and Scan mobile app service in select store locations. This mobile app allows customers to scan items while they shop and pay directly with their phones, allowing for a faster and easier checkout experience. Not only does Shop and Scan help customers save time, it also makes staying on budget easier. Customers can see the price of individual items as they scan them, along with a running total.", "In 2018, we have plans to expand this service to additional stores as we continue to enhance our overall value proposition for our consumers. We see a continued opportunity to improve engagement and build loyalty through further integration of our traditional and digital media mix.", "We continue to develop resources to personalize offerings, such as digital coupons tailored for individual customers and personalized marketing campaigns, which will enable our customers to save even more time and money. Looking ahead, we plan to add more digital tools and services to provide our customers with even more convenient, frictionless, and personalized shopping experiences.", "With the introduction of Shop and Scan and over 900 million digital coupons clipped in 2017 by our more than 12 million digital coupon subscriber accounts, we know we have a great foundation on which to build for the future.", "Turning to our non-consumable initiative, in 2018, we plan to test a bold, new, and expanded assortment in key categories. Our plans include enhancing the treasure hunt experience by Dollar General by first offering a new, differentiated, and limited assortment that will change throughout the year. Second, explain the new offering in high-traffic areas to enhance the in-store experience and create a sense of purchase urgency. And third, continue to deliver exceptional value by pricing the majority of offerings at $5.00 or below.", "While we're expanding our assortment in select categories, the space currently dedicated to non-consumables within our stores is expected to remain the same. We will initially test these changes in approximately 700 store locations as we look -- growing consumable business. We are excited about our plans and believe we are well-positioned to capture market share in a changing retail landscape.", "As we execute these growth initiatives, we remain committed to our ongoing operating priorities -- first, driving profitable sales growth, second, capturing growth opportunities, third, enhancing our position as a low-cost operator, and fourth, invest in our people as a competitive advantage.", "Our first operating priority is to continue to drive profitable sales growth. With a focus on driving both the top and bottom line, our goal is both attract and growth new customers and trips and to capture additional share with existing customers. This includes expanding our merchandising initiatives, which are designed to provide our customers with trusted, simple solutions to help them manage their household budgets and provide them with their everyday needs and even more value.", "In store for 2018, we plan to redesign our snack and beverage aisles to create a best-in-retail shopping experience. This change should enhance customer awareness and further position us as a destination retailer for immediate consumption shop through assessment and every day low prices. Across a second group of stores, we will be introduced an expanded assortment of better-for-you products, which a focus on higher protein and lower salt choices at price points that will be attractive to our customers.", "We will also continue to strategically invest in our mature store base. We are particularly focused on remodeling stores that have fewer than 12 cooler doors, which in relative terms, are expected to drive the highest returns upon remodel. By the end of Fiscal 2018, we anticipate that across our store base, we will have an average of 20 cooler doors, up from 10 in 2012. In total, we expect to install over 20,000 additional cooler doors across our mature store base this year, as we continue to build on our multi-year track record of growth in cooler doors and associated sales.", "Following the success of our health and beauty expansion in 2017, we are launching phase two of this initiative. In 2018, we plan to drive overall category awareness with our customers through improved and more impactful displays, consistent messaging in-store as well as across print and digital media, enhanced quality perception, and superior shopability.", "We see significant runway for this category, particularly given our price advantage relative to some other channels. The expansion of private label offerings with a focus on value, quality, and appealing packaging will continue to play a role in our category management process in 2018. We know that private brands resonate with our consumer as we deliver the right combination of price and quality. Given the significant price gap compared to national brands and other channels, private brands play an important role in helping our customers stretch their budgets.", "We have additional ongoing opportunities for gross margin expansion that includes improvements in shrink, global sourcing, distribution and transportation efficiencies, as well as private brand and non-consumable sales.", "Inventory shrink reduction continues to be a large opportunity within gross margin. In addition to other defensive merchandising tactics, leveraging technology and improving process controls, we plan to expand electronic article surveillance or EAS to an incremental 5,000 stores in 2018, bringing the total stores with EAS to about 10,000 locations. This is a proven high-return project for us to help reduce shrink and drive sales by improving on shelf availability.", "While we have seen carrier rates and fuel costs on the rise, our ongoing efforts to improve efficiencies and reduce expenses are expected to help mitigate these costs in 2018. Some of our ongoing initiatives include further reductions in stem miles, better optimization of our loads, and the expansion of our private fleet to around 210 tractors by yearend, up from 80 tractors at the end of 2017.", "Our goal is to ensure we are highly relevant with our customers through ongoing investments in everyday low prices and targeted promotional activity. Importantly, our pricing surveys continue to indicate Dollar General is well-positioned from a price perspective against all classes of trade and across all geographic regions where we operate. We are committed to being priced right every day for our customers to drive traffic to our stores.", "Our focus on initiatives to capture growth opportunities is our second priority. We have a proven high-return, low-risk model for our real estate growth. Our flexible real estate model allows us the ability to invest in new store growth, enter new markets, deliver new formats, and reinvest in our mature store base.", "We constantly monitor new store productivity and returns to ensure new store growth is the best use of our capital, focusing on the following five metrics. First, new store productivity is a percent of our comp store sales, second, actual sales performance compared to our pro forma model, third, average returns of 20% to 22%, which is an increase compared to our prior target of 18% to 20% due to the benefit of federal tax reform. Fourth, cannibalization of our new stores on our comp store base, and finally, a payback period of less than two years.", "We continue to be very pleased with the overall returns on our new stores as we remain committed to investing our capital effectively to drive strong financial returns. For 2018, we expect to open 900 new stores, remodel 1,000 of our mature store locations, and relocate approximately 100 stores. That's about 2,000 projects in total as we continue to deploy capital to these high-return investments.", "Of the 1,000 planned store remodels for 2018, we expect approximately 400 locations to be in the Dollar General traditional plus format, bringing the total traditional plus store count to about 750 by yearend. These remodels incorporate a cooler set of 34 doors for increased perishable selection. Our cooler door expansion has proven to drive baskets and trips with our existing customer base, while also attracting new customers with an expanded offering.", "Additionally, across about a third of these locations, we are including an assortment of fresh produce, bringing the total number of Dollar General stores with produce to around 450 by yearend. While it's still early, prior year traditional plus remodels are yielding strong same-store sales results. The ability to offer produce, particularly in areas with limited grocery availability represents an attractive growth opportunity for Dollar General in the years ahead.", "Our third operating priority is to leverage and reinforce our position of the low-cost operator. Over the years, we have established a clear and defined process to control spending. All of our spending is filtered through three criteria. First, is it customer facing? Second, does it align with our strategic priorities? Third, how does it impact our risk profile?", "At the store level, our operational initiatives for 2018 are centered on space optimization and ongoing efforts to simplify our operational by reducing unproductive inventory, operating complexity and product movement within the stores. These actions are designed to control costs and allow our store managers and their teams to invest time savings to provide better customer service as well as fast, clean, and an in-stock shopping experience.", "We also have a continued focus on improving the speed of checkout with the goal of reducing transaction time by an average of three seconds. To put this in perspective, a reduction of three seconds of each of our nearly 2 billion annual transactions would result in over 1.6 million in additional time savings for our store teams each year. These time savings can be reinvested by our store managers to deliver a higher level of customers service, which ultimately helps to improve sales.", "To advance our objective of reducing transaction times, in addition to our Shop and Scan offering, we are establishing optimal transaction times for each store based on individual store attributes. We are also tracking customer satisfaction scores at the individual employee level, which increases accountability and creates opportunities for employee recognition.", "Our ability to drive execution across our large and growing store base is a key strength of Dollar General. At the store support center, work elimination and process improvement are ongoing efforts to take cost out of the business. Our underlying principles are to keep the business simple, but move quickly to capture growth opportunities, control expenses, and always seek to be a low-cost operator.", "Our fourth operating priority is to invest in our people as we believe they are our competitive advantage. We believe that significant investment in store manager compensation and training we made in 2017 is paying off as we experienced our lowest level of store manager turnover in five years. For the first time in several years, we are seeing a reduction in both assistant manager and store association turnover.", "Importantly, the reduction in store-level employee turnover are accompanied by an increase in both store manager and hourly applicant flow, which is up substantially over the same prior year period. These results further support our belief we continue to be well-positioned from a wave perspective. Since we have already made wage investments, we can use the vast majority of the benefit from tax reform to invest in other areas of the business and return additional cash to shareholders. We will continue to monitor the environment and invest as needed to ensure we remain competitive in the labor market.", "For the seventh consecutive year, Dollar General was named to Training Magazine's Top 125 Training List, ranking in the overall top-five and the highest ranked major retailer on their most recent 2018 list, which represents our highest ranking to date.", "We are proud of our 10,000+ store managers who have been internally promoted and are excited about how engaged our workforce is across the business. I believe this has helped to contribute to our improvement in overall customer satisfaction scores, which continued to improve throughout 2017 and ended at their highest level of the year.", "In 2018, we will continue to invest in our employees and remain committed to providing attractive career growth opportunities. As we announced last week, we are extending paid parental leave benefits and providing adoption assistance for eligible employees throughout the company. Additionally, we plan to create over 7,000 new jobs as a result of our 900 plan new store openings.", "We are confident that we remain in a leadership position to attract and retain the right talent. We will continue to invest in our people as we believe they are a competitive advantage.", "In closing, we are cautiously optimistic about economic conditions. It is always challenging for our core customer. So, regardless of the economic outlook for our consumer, our goal is do everything we can to provide her with a great shopping experience and to deliver the value and convenience you expect from Dollar General.", "I want to thank each of our nearly 130,000 employees across the company for all their hard work and dedication to fulfilling our mission of serving others. As a team, we look forward to 2018 as we build on our strong performance from 2017.", "With that Jennifer, we would now like to open the lines for questions." ] } ]
[ { "name": "Operator", "speech": [ "At this time, if you would like to ask a question, please press * then the number 1 on your telephone keypad. Your first question will come from Vinny Sinisi with Morgan Stanley." ] }, { "name": "Todd Vasos", "speech": [ "Hi, Vinny." ] }, { "name": "Michael", "speech": [ "Hey, guys. This is actually Michael in for Vinny. Thanks for taking my question. So, I wanted to ask, actually, about that reinvestment rate, which I think I average out to around 20% to 25%. So, that rate's maybe been on the lower side compared to some of your peers in retail and obviously, you guys have been way ahead of the curve with investments in stores and labor. I was wondering about the thought process, how you came to that number. Also, is that kind of incremental spending or pull forward of future planned investments?" ] }, { "name": "John Garratt", "speech": [ "Yeah. So, as Todd mentioned, as we come into the year, because we've been proactively investing all along, we feel we're in a great spot. When you look at the investment we made last year in store manager pay, it's performing as we expected as we see higher applicant flow, higher staffing levels, lower turnover, we're seeing the financial benefits of that, with better customer satisfaction, better sales, and starting to see the lower shrink.", "We're well-positioned also on pricing. So, as you look at those areas, we feel we're well positioned. We really saw this as an opportunity to continue to accelerate strategic initiatives and high-return projects. So, in addition, as you look as how we're breaking it down this year, in addition to investing in 2,000 real estate projects, both the high-return new stores as well as the remodels with additional cooler capacity which is driving great sales benefits and the support infrastructure, we see an ability to accelerate the strategic initiatives.", "Todd mentioned digital and non-consumables to mention two of them and other high-return projects like EAS, which is helping us so much with shrink, expanding our private fleet to help mitigate risks around transportation costs, and LED lighting, which helps us save utility costs. So, we see a lot of opportunities to accelerate these, help the business, and feel we're really well-positioned and comfortable with the allocation here. That allows us to return a considerable amount of money back to the shareholders in the form of a competitive dividend and share repurchases." ] }, { "name": "Michael", "speech": [ "Great. Thanks. Actually, just a quick follow-up on kind of what you just mentioned on the increasing transportation costs -- I wonder if you can maybe kind of quantify that or where you see the cadence of that headwind looking go through 2018." ] }, { "name": "John Garratt", "speech": [ "Yeah. We didn't quantify the impact of that. But as you look at our guidance for the year around overall operating margin, that is factored in and that is one of the key headwinds that we're overcoming. But still, we see ourselves in a position to, despite headwinds like that, and the targeted investments we talk about, keep our operating margin and rate levels.", "We have offsets within that and within gross margin overall. The good thing is there are a lot of levers within gross margin. Within transportation costs, we mentioned we're reducing stem miles. We're optimizing our loads. We're expanding our private fleet to help mitigate that as well as other productivity initiatives in the distribution center. Then, of course, we have other levers within gross margin such as shrink. We're very pleased with the shrink performance there, five consecutive quarters of shrink improvement as the process improvement, the store manager pay, and the investments we've made pay off. The team does a phenomenal job on our product category management and see continued opportunity to expand private label penetration, foreign sourcing penetration, as well as our non-consumables. So, we see a lot of opportunities to help offset that pressure." ] }, { "name": "Michael", "speech": [ "Great. Thanks so much. Very helpful." ] }, { "name": "Operator", "speech": [ "Your next question is from Robby Ohmes with Bank of America Merrill Lynch." ] }, { "name": "Robert Ohmes", "speech": [ "Hey, guys. Thanks for taking my question. Actually, there's two of them. The first was just you guys in the press release called out that traffic comp was slightly negative and if I recall, I think it was accelerating in the third-quarter. I was hoping you could maybe tell us was there a change in trend in the fourth quarter? Maybe discuss that with us a little bit." ] }, { "name": "Todd Vasos", "speech": [ "Sure. As you look at the fourth quarter, we strategically looked year over year at our promotional activity. The main driver of the little bit of a slowdown that we saw in traffic was really a little bit of a pullback in our promotional activity. Quite frankly, it was in one big promotion that we ran the year prior in November leading into the baking season before Thanksgiving.", "So, when you factor that in and then our position that we'll continue to work all levers and deliver profitable sales growth, we saw a little bit of a slowdown there. But again, it was intentional and quite frankly, not completely unplanned. So, we feel good about the long-term prospects of driving traffic. As we look at our 2018 initiatives, they're as robust as ever. I would tell you that I'm very excited about our strategic initiatives, especially the two that I outlined in the call today to help continue to drive that traffic for many years to come." ] }, { "name": "Robert Ohmes", "speech": [ "Thanks. The other question was in the fourth quarter -- maybe it's related to the pullback in the promo activity -- but I was curious where you're seeing less markdowns in the fourth quarter versus last year." ] }, { "name": "John Garratt", "speech": [ "Yeah, it really stems from the promotional activity. We've gotten very targeted on the promotional activity, particularly as we see the headwinds ease and the initiative is performing well. It's just been very targeted around our markdowns." ] }, { "name": "Robert Ohmes", "speech": [ "Got it. Thanks, guys. That's really helpful." ] }, { "name": "Todd Vasos", "speech": [ "Thank you." ] }, { "name": "Operator", "speech": [ "Your next question is from Scott Mushkin with Wolfe Research." ] }, { "name": "Scott Mushkin", "speech": [ "Hey, guys. Thanks for taking my questions." ] }, { "name": "Todd Vasos", "speech": [ "Good morning, Scott." ] }, { "name": "Scott Mushkin", "speech": [ "Good morning. I want to talk about your sales. I think you guys are guiding to the mid-twos in relation to kind of all the initiatives you have going and what looks like probably a little bit stronger inflation backdrop. I just wanted to see are you kind of being conservative there? I'm just trying to gauge it. It seems like every company is baking in additional cost related to the tax cut, but no one's really talking too much about sales. I was wondering if you could give us -- how are things going and what are thinking on that mid-two guide?" ] }, { "name": "Todd Vasos", "speech": [ "Yeah. We're squarely focused on driving that topline. We believe over the long-term, 2%+ is definitely where we can drive. The 2.5% that we're guiding to is our best estimate at this point as we look for the whole year. In saying that, we always strive -- we're retailers and we always strive for more. We'll continue to drive that topline and, again, balance that with profitable sales growth at the same time.", "So, stay tuned. But as I said earlier, I'm very encouraged in our 2018 shorter-term initiatives as well as those longer-term initiatives to sustain a nice comp as we move out into future quarters and years. So, stay tuned, but I can tell you that our merchant team is squarely focused on driving as much comp as we possibly can as we move through 2018." ] }, { "name": "Scott Mushkin", "speech": [ "So, my follow-up question along the same lines -- I know you guys are expanding health and beauty care as one of the key initiatives and, of course, the treasure hunt. I was wondering if you could actually size a little bit for us the healthy and beauty care expansion. How many stores will have the larger set? And then on the treasure hunt, I think you said 700 stores. When does that start? Could you size it from an SKU perspective?" ] }, { "name": "Todd Vasos", "speech": [ "Yeah, sure. I'll try to size it up. On the health and beauty front, this is the second year of this initiative. This initiative really goes across the majority, if almost not all of our stores. It will touch pretty much all of them as we move through 2018. We have a unique position here. We have created a very nice niche for ourselves for our consumers in both health and beauty, especially on that health side of the equation.", "I can tell you that our prices are very, very favorable compared to other classes of trade there and our private brand penetration is among the strongest in some of those categories that we see across all of our categories that we have private brands in. So, it's going to be an initiative that will touch all stores.", "As we look at our longer-term initiative, the non-consumable initiative you mentioned, the 700 stores, that initiative will kick off middle of the year and we'll continue to put stores in as we move toward Q3 as well. But as we continue to see momentum in that, which we anticipate, we'll be able to take pieces of that initiative early on and start to implement them in the chain itself as we start to see things start to materialize in a real positive way, again, which we anticipate seeing.", "I could tell you on a SKU basis there will be hundreds of new SKUs that will be in this. It is a whole different way of going about our non-consumable business. I think it's very smart. As you look at how the consumer is shopping today -- and you know us pretty well. We've always been on the forefront of changing as the consumer changes. She is looking for more of a treasure hunt. She's looking for something new and unique in her shopping experience, especially as it relates to non-consumables. We believe that this will deliver exactly what she's looking for.", "So, stay tuned, more to come. We'll tell you as time goes how that initiative is progressing. But we're looking for some big things out of this as we move forward." ] }, { "name": "Scott Mushkin", "speech": [ "Alright, perfect. You just made a bunch more questions come into my head, but I'll yield. I know there's a lot of people on the call. Thanks very much." ] }, { "name": "Todd Vasos", "speech": [ "Sure." ] }, { "name": "Operator", "speech": [ "Your next question is from Greg Melich with MoffettNathanson." ] }, { "name": "Greg Melich", "speech": [ "Hi, thanks, guys. I just wanted to follow-up on gross margins. You mentioned some of the drivers that could help this year going forward, private label, foreign sourcing. Could you give us an update on where you are right now, percentage of volume or sales that is private label and also what the import percentage is? And call out China in particular, especially, what you might do if tariffs come into play. Thanks." ] }, { "name": "Todd Vasos", "speech": [ "Sure. On our private brands, we continue to see penetration rates between the 22 and 24 percentage point. And that's overall. Some categories are much higher than that, obviously. But we still see it right in that wheelhouse and we feel good about that amount of percentage. We're always looking to increase that. Again, I think as we look at 2018, the initiatives around private brands are as strong as I've seen them in the last couple three years. We feel good about being able to add to that.", "As far as global sourcing is looking at, we still believe we've got somewhere in that $4 billion to $5 billion opportunity on a cost of good basis to bring more goods in through our foreign sourcing efforts. We, like most, are still predominately China-centric. I wouldn't say all, but I could tell you that over the last three years, our reach into other countries has grown tremendously.", "We're now in double digits in the amount of countries that we actually export out of. That will continue to grow over time because we see the opportunity to move some of the goods out of China into other areas that have a very competitive price and have the infrastructure available to meet our needs and to get the goods over here on a timely basis. So, more to come there. I can tell you that our global sourcing folks are squarely focused on moving the needle on our percentage and on the amount that we bring into the country." ] }, { "name": "Greg Melich", "speech": [ "That's great. Thanks a lot." ] }, { "name": "Todd Vasos", "speech": [ "Sure." ] }, { "name": "Operator", "speech": [ "Your next question is from Michael Lasser with UBS." ] }, { "name": "Michael Lasser", "speech": [ "Good morning. Thanks a lot for taking my question. Todd, can you quantify what you've assumed for an average wage rate, maybe an average fuel price? I think there's going to be a lot of debate as the year progresses if you see the wage environment heat up and diesel prices start to put more pressure on your transportation costs, might you have to make some additional investments above and beyond what you originally planned for. So, it would be helpful to kind of help frame that." ] }, { "name": "Todd Vasos", "speech": [ "Yeah. As we look in 2018 -- and our guidance reflects what our current thoughts are and where we think the business is headed -- we feel very good about where we are on wages today. When you look at the investments that we made last year in our store managers -- by the way, the investments we made last year even in our hourly rates, not only the 16 to 18 states and municipalities that mandated a different rate, but also to stay competitive in certain markets, we have upped the rates across the board. We feel that we've been able to manage those very well. We believe we can manage that in 2018 very well.", "Our applicant flow is at the highest we've seen in many years. With our turnover being down at the lowest rate that we've seen in the last five years, we feel very, very confident and very competitive in our wage structure and rates and be able to staff our stores appropriately. So, right now, we don't see a large need to invest heavily, but we'll always invest where we believe we think we need to to continue to stay competitive.", "As we look at gross margin, especially as you indicated with fuel prices on the rise and the carrier rates on the rise, our team has done a great job in supply chain over the years in anticipating -- let's admit it. Fuel prices overall, while up recently, they're still not at their highs that they were a few years ago. We know that fuel rates are going rise. Our teams have been always proactive about ways to mitigate those fuel cost rises. The team is really doing a nice job. Now, we're not going to be able to mitigate all of it, but a portion of it.", "Then, again, with our private fleet and the expansion of that, we feel that taking advantage of the private fleet will also give us a distinct advantage in some of these carrier rate increases that we're seeing. So, more to come -- again, in our guidance, we feel that we've nailed it pretty good right now, but like we always say, we always reserve the right to invest where we need to, whether it be pricing, whether it be waves or others, to continue to drive this business." ] }, { "name": "Michael Lasser", "speech": [ "That's very helpful. I have one follow-up. You're looking for a mid-two comp this year. That would represent a slowdown from what you saw in 2017, the full year basis, despite the fact that last year, you were dragged down by deflation and some of the changes to the SNAP program. Why would this year be better than last year, particularly you see traction with some of your initiatives?" ] }, { "name": "Todd Vasos", "speech": [ "As I mentioned earlier, when you look at our comp, we're very happy where comp came in in Q4. As we look to 2018, we gave our best estimate to what we thought full year 18 is going to look like. But again, we're retailers and arguably, we're one of the best out there at driving that topline and balancing the margin components of that as well. So, we'll continue to try to strike that fine balance, but we'll always try to drive at a higher comp as we move through the year." ] }, { "name": "Michael Lasser", "speech": [ "Okay. Thank you so much and good luck." ] }, { "name": "Todd Vasos", "speech": [ "Sure. Thank you." ] }, { "name": "Operator", "speech": [ "Your next question is from Paul Trussell with Deutsche Bank." ] }, { "name": "Paul Trussell", "speech": [ "Good morning." ] }, { "name": "Todd Vasos", "speech": [ "Good morning." ] }, { "name": "Paul Trussell", "speech": [ "Regarding SG&A overall, you highlighted, I believe, 20 basis points of deleverage in one Q and you called out occupancy and still needing to lap the store manager compensation increase from the last year as the factors driving that. So, should we assume more flattish levels of SG&A rate as we move through the balance of the year? Specific to 1Q, are there enough gross margin tailwinds to more than offset that aforementioned 1Q SG&A headwind?" ] }, { "name": "John Garratt", "speech": [ "Yeah. So, as we mentioned in our call, in Q4 going into Q1, there was some noise putting some short-term pressure on our SG&A. But the way we look at it, our goal remains to leverage SG&A at a sales comp of 2.5% to 3% over time. As we indicated in our guidance, we really looked at operating margin overall, looking to manage all the levers within gross margin and SG&A. The team does a great job of making the right trade-offs there. As we said in our guidance, we see that overall being even for the year and we do see some of the noise of Q4 and the front half of Q1 SG&A normalizing." ] }, { "name": "Paul Trussell", "speech": [ "And on the gross margin for 1Q?" ] }, { "name": "John Garratt", "speech": [ "Yeah. So, we didn't call out anything specifically around gross margin. Again, we focus on the long-term and making the right trade-offs. But again, in our guidance for the year, when we look at the two in total, we see our ability to see our ability to keep that rate even with last year, while making target investments offsetting some headwinds. With all the levers at our disposal, we feel comfortable with the guidance we've provided." ] }, { "name": "Paul Trussell", "speech": [ "Fair enough. Lastly from me, just circling back to same-store sales. I just want to be clear on what drove the strength in ticket in 4Q -- it certainly sounds like there was a little bit less of promotions and also had some markups, but it's still a big number. If you could touch on that, and then just going forward as we think about same store sales in 2018, do you have an expectation that traffic in the home and apparel categories will positively contribute?" ] }, { "name": "Todd Vasos", "speech": [ "So, as you look at our sales -- we were very pleased, as you indicated, we came out with a very strong comp in Q4. That was primarily driven by our initiatives. Those initiatives will continue to carry on as we move into the first half of this year. You couple that with our new initiatives in 2018, that's what gives us the confidence as we move into '18 in that 2.5+ range.", "So, I think it's really everything that we've always done here. That is having strong initiatives leading into the year and then leveraging those as we move through the fiscal year. I see it no different for 2018. As you look at it, it was really comprised of those initiatives. Inflation, actually, was very flattish, if not down a little bit, in Q4 for us. So, it really wasn't inflation that drove that.", "Then when you look at the transactions as well as the traffic, when you look at transactions, we've been doing a lot to move the needle on getting a fuller shop for our consumer. While we're still convenient based and it's definitely a fill-in shop, having her be able to pick up an additional item through our offering is starting to pay off. We're seeing that within our numbers. She's been able to do a little bit of a fuller shop as she comes to us. You couple that ability with a little bit of extra money in her pocket she has and that's usually a winning combination." ] }, { "name": "Paul Trussell", "speech": [ "That's helpful color. Thank you. Best of luck." ] }, { "name": "Todd Vasos", "speech": [ "Sure. Thank you." ] }, { "name": "Operator", "speech": [ "Your final question will come from John Heinbockel with Guggenheim Securities." ] }, { "name": "Ryan Kilbane", "speech": [ "Hey, guys. This is Ryan Kilbane. I'm for John." ] }, { "name": "Todd Vasos", "speech": [ "Good morning." ] }, { "name": "Ryan Kilbane", "speech": [ "So, the strength in traffic-generating categories seems like it's not really translating into the sale of more discretionary items. So, I was wondering is that a function of merchandise content, value or execution? Is this something that you guys expect from your strategic initiatives, from like treasure hunt to help drive?" ] }, { "name": "Todd Vasos", "speech": [ "You know, as you look at our non-consumable business, we always have said that consumables will drive the traffic in. We'll round out the basket with the non-consumable goods. That played out in seasonal, but didn't play out in a couple of the other areas in Q4. That's where we're squarely focused, both in our short-term initiatives leading into 2018, but also those longer-term initiatives, that non-consumable initiative that I talked about, it could really have the juice to really move the needle long-term as we move through '18 and then into '19 because of the different type of a shop that we're moving after in non-consumables.", "Always remember the consumer changes and her preferences change over time. We retailers that recognize that quickly as Dollar General does, and then moves quickly as we do to take advantage of that. That's exactly what we're doing over 2018 and then moving into the long term, '19 and '20, we believe we're positioning ourselves well to capitalize." ] }, { "name": "Ryan Kilbane", "speech": [ "Okay. Thank you. A quick follow-up -- the initial productivity seemed to fall a little bit in the quarter kind of relative to historical levels. Can you talk a little bit about that and then what might be driving, I guess, the implied step up a little bit in 2018 in terms of the implied productivity? Thanks." ] }, { "name": "John Garratt", "speech": [ "We haven't seen material change in the performance of the stores. As we said before, we follow a basket of metrics. We continue to see the new store productivity in that 80% to 85% range, continue to see the store sales and returns perform as hoped, continue to see the returns at the high end of the 18% to 20% range. Now, with the benefit of tax reform, that would be more like a 22%. We continue to see a quick payback, continue to see cannibalization, as expected, relatively level and less than one would expect, just given the proximity of the shops. We feel great about the performance of the new stores and are very excited about the full pipeline of 900 stores we'll open this year." ] }, { "name": "Ryan Kilbane", "speech": [ "Okay. Great. Thank you." ] }, { "name": "Todd Vasos", "speech": [ "Thank you." ] }, { "name": "Operator", "speech": [ "Thank you, ladies and gentlemen, for joining today's Dollar General 2017 Fourth Quarter Conference Call. You may access the replay for today's call by dialing 800-585-8367 and using conference ID 5996418. Again, you may access today's replay by dialing 800-585-8367 and using conference ID 5996418. Thank you. You may now disconnect." ] }, { "name": "Ryan Kilbane", "speech": [ "More DG analysis", "This article is a transcript of this conference call produced for The Motley Fool. While we strive for our Foolish Best, there may be errors, omissions, or inaccuracies in this transcript. As with all our articles, The Motley Fool does not assume any responsibility for your use of this content, and we strongly encourage you to do your own research, including listening to the call yourself and reading the company's SEC filings. Please see ourTerms and Conditionsfor additional details, including our Obligatory Capitalized Disclaimers of Liability." ] } ]
DG
2022-05-26
[ { "description": "Vice President, Investor Relations", "name": "Donny Lau", "position": "Executive" }, { "description": "Chief Executive Officer", "name": "Todd Vasos", "position": "Executive" }, { "description": "Chief Financial Officer", "name": "John Garratt", "position": "Executive" }, { "description": "Chief Operating Officer", "name": "Jeff Owen", "position": "Executive" }, { "description": "Barclays -- Analyst", "name": "Karen Short", "position": "Analyst" }, { "description": "UBS -- Analyst", "name": "Michael Lasser", "position": "Analyst" }, { "description": "J.P. Morgan -- Analyst", "name": "Matthew Boss", "position": "Analyst" }, { "description": "Morgan Stanley -- Analyst", "name": "Simeon Gutman", "position": "Analyst" }, { "description": "Guggenheim Partners -- Analyst", "name": "John Heinbockel", "position": "Analyst" }, { "description": "Oppenheimer and Company -- Analyst", "name": "Rupesh Parikh", "position": "Analyst" }, { "description": "Goldman Sachs -- Analyst", "name": "Kate McShane", "position": "Analyst" }, { "description": "Jefferies -- Analyst", "name": "Corey Tarlowe", "position": "Analyst" } ]
[ { "name": "Operator", "speech": [ "Good morning. My name is Robert, and I'll be your conference operator today. At this time, I'd like to welcome everyone to Dollar General's first quarter 2022 earnings call. Today is Thursday, May 26, 2022.", "All lines have been placed on mute to prevent any background noise. This call is being recorded. Instructions for listening to the replay of this call are available in the company's earnings press release issued this morning. Now I'd like to turn the conference over to Mr.", "Donny Lau, vice president of investor relations and corporate strategy. Mr. Lau, you may begin the conference." ] }, { "name": "Donny Lau", "speech": [ "Thank you, and good morning, everyone. On the call with me today are Todd Vasos, our CEO; Jeff Owen, our COO; and John Garratt, our CFO. Our earnings release issued today can be found on our website at investor.dollargeneral.com under News & Events. Let me caution you that today's comments include forward-looking statements, as defined in the Private Securities Litigation Reform Act of 1995, such statements about our financial guidance, strategy, initiatives, plans, goals, priorities, opportunities, investments, expectations, or beliefs about future matters and other statements that are not limited to historical fact.", "These statements are subject to risks and uncertainties that could cause actual results to differ materially from our expectations and projections. These factors include, but are not limited to, those identified in our earnings release issued this morning under Risk Factors in our 2021 Form 10-K filed on March 18, 2022, in any later filed periodic report, and in the comments that are made on this call. You should not unduly rely on forward-looking statements, which speak only as of today's date. Dollar General disclaims any obligation to update or revise any information discussed in this call, unless required by law.", "At the end of our prepared remarks, we will open the call up for your questions. Please limit your questions to one and one follow-up question, if necessary. Now it's my pleasure to turn the call over to Todd." ] }, { "name": "Todd Vasos", "speech": [ "Thank you, Donny, and welcome to everyone joining our call. We are pleased with our strong start to 2022, and I want to thank our associates for their unwavering commitment to serving our customers, communities and each other. Our Q1 performance was led by stronger-than-expected sales results in our consumable category, where we delivered comp sales growth of 4.6%. This increase was offset by a decline of 15.1% in our combined non-consumable categories, which we believe reflects the challenging lap of the stimulus benefit in Q1 of 2021.", "In addition, we continue to experience headwinds from ongoing global supply chain pressures and rising cost inflation. Despite these challenges, we remain focused on controlling what we can control and the team's disciplined execution was the key to delivering solid financial results that exceeded our Q1 expectations for both sales and EPS, while also advancing our key operating priorities and strategic initiatives. I'm also pleased to report that we have continued to make improvements in our overall in-stock position, which we believe positions us well to drive strong top line performance through the remainder of the year. In addition, while we continue to see ongoing product cost inflation, we feel good about our price position, as our price indexes, relative to competitors and other classes of trade, remain in line with our targeted and historical ranges.", "And with more than 18,000 stores located within five miles of about 75% of the US population, we believe we are well positioned to continue supporting our customers through our unique combination of value and convenience, especially in a more challenging economic environment. Looking ahead, we remain focused on advancing our operating priorities and strategic initiatives as we continue to strengthen our competitive position, while further differentiating Dollar General from the rest of the retail landscape. Now let me recap some of the additional financial results for the first quarter. Despite lapping a difficult quarterly sales comparison from prior year, net sales increased 4.2% to $8.8 billion and comp sales were essentially flat with a slight decrease of 0.1%.", "From a monthly cadence perspective, comp sales were positive in February before turning negative in mid-March as we began to lap the stimulus benefit from prior year. As we move past the most challenging portion of the sales lap from 2021 comp sales turned positive in April, and we are pleased with our strong start to Q2, which has exceeded our initial expectations. As a result of our Q1 outperformance and strong start to Q2 as well as our expectations for the remainder of the year, we are increasing our sales outlook for fiscal 2022, which John will discuss in more detail shortly. Our first quarter sales results included a decline in customer traffic, which was mostly offset by growth in average basket size driven largely by inflation.", "Importantly, we are pleased with our market share gains in highly consumable product category sales for the quarter. These results were highlighted by gains in our frozen and refrigerated product categories, where we have placed a good deal of emphasis over the past few years in an effort to provide customers with an even wider variety of options. I'm also excited to note that we recently published our fourth annual Serving Others Report, which provides several important updates on our ongoing ESG efforts, as well as new and updated performance metrics and targets. We are proud of the team's efforts to serve our employees, customers, communities, and the environment.", "And we look forward to continued progress on our journey as we move ahead. Overall, we are proud of our Q1 results. Our mission and culture remain unchanged, and we believe our strategic actions, which have transformed this company in recent years, positions us well for continued success, while supporting long-term shareholder value creation. We continue to operate in one of the most attractive sectors in retail and our unique value and convenience offering continues to resonate with both new and existing customers.", "I have never felt better about the underlying business model, and I'm excited about the opportunities ahead of us in 2022 and beyond. With that, I will now turn the call over to John." ] }, { "name": "John Garratt", "speech": [ "Thank you, Todd, and good morning, everyone. Now that Todd has taken you through a few highlights of the quarter, let me take you through some of its important financial details. Unless we specifically note otherwise, all comparisons are year over year, all references to EPS refer to diluted earnings per share, and all periods noted refer to the corresponding fiscal period. As Todd already discussed sales, I will start with gross profit.", "As a reminder, we expanded our gross margin rate by 208 basis points in Q1 2021, which was positively impacted by a significant increase in sales, including net sales growth of 16% in our combined non-consumable categories. For Q1 2022, gross profit as a percentage of sales was 31.3%, a decrease of 151 basis points. The decrease compared to Q1 2021 was primarily attributable to a greater proportion of sales coming from our consumables category, a higher LIFO provision, increases in transportation costs, markdowns as a percentage of sales and distribution costs, and higher inventory damages. Of note, while we have seen some moderation from Q4, our Q1 supply chain expenses were significantly higher compared to Q1 2021, resulting in a headwind to gross margin of approximately $85 million.", "In addition, product cost inflation was greater than expected, resulting in a LIFO provision of approximately $61 million during the quarter. These factors were partially offset by higher inventory markups. SG&A as a percentage of sales was 22.8%, an increase of 78 basis points. This increase was driven by expenses that were greater as a percentage of sales, the most significant of which were retail labor, store occupancy costs, depreciation and amortization and utilities.", "These increases were partially offset by reductions in incentive compensation and winter storm related disaster expenses. Moving down the income statement. Operating profit for the first quarter decreased 17.9% to $746 million. As a percentage of sales, operating profit was 8.5%, a decrease of 229 basis points.", "Our effective tax rate for the quarter was 21.8% and compares to 22% in the first quarter last year. Finally, EPS for the first quarter decreased 14.5% to $2.41. Turning now to our balance sheet and cash flow, which remains strong and provides us the financial flexibility to continue investing for the long-term, while delivering significant returns to shareholders. Merchandise inventories were $6.1 billion at the end of the first quarter, an increase of 19.4% overall and 13.3% on a per store basis.", "This increase primarily reflects the impact of product cost inflation, as well as a greater mix of higher value products. Importantly, we continue to believe the quality of our inventory is in good shape and that we are well-positioned with the right mix and balance of products. Going forward, as Todd mentioned, we expect continued improvement in our overall in-stock levels as we move through 2022, underscoring our optimism that we are well-positioned to serve our customers. The business generated cash flow from operations during the quarter totaling $450 million, a decrease of 36%.", "Total capital expenditures for the quarter were $282 million and included our planned investments in new stores, remodels and relocations, distribution and transportation projects and spending related to the strategic initiatives. During the quarter, we repurchased 3.4 million shares of our common stock for $747 million and paid a quarterly cash dividend of $0.55 per common share outstanding for a total payout of $125 million. At the end of Q1, the remaining share repurchase authorization was $1.4 billion. Our capital allocation priorities continue to serve us well and remain unchanged.", "Our first priority is investing in high-return growth opportunities, including new store expansion and our strategic initiatives. We also remain committed to returning significant cash to shareholders through anticipated share repurchases and quarterly cash dividends, all while maintaining our current investment grade credit rating and managing to a leverage ratio of approximately three times adjusted debt to EBITDAR. Moving to an update on our financial outlook for fiscal 2022. Despite the ongoing uncertainties arising from cost inflation and continued pressure in the supply chain, we are confident in the business.", "As a result, and as Todd noted, we are increasing our sales outlook for 2022, as we now expect the following, net sales growth of approximately 10% to 10.5%, including an estimated benefit of approximately two percentage points from the 53rd week, and same-store sales growth of approximately 3% to 3.5%. Additionally, we are reiterating the remainder of our financial guidance for 2022, which includes EPS growth of approximately 12% to 14%, including an estimated benefit of approximately four percentage points from the 53rd week. Share repurchases of approximately $2.75 billion and capital spending in the range of $1.4 billion to $1.5 billion. Our updated outlook reflects our strong year-to-date top line performance and current sales expectations for the remainder of the year, as well as updated margin and expense expectations.", "Let me now provide some additional context as it relates to our outlook. In terms of the quarterly cadence, we continue to anticipate both comp sales and EPS growth to be stronger in the second half of the year than the first half. We also expect our share repurchases to be lower in Q2 and Q3 compared to the Q1 amount, before increasing in Q4, partially as a result of the extra week in our fiscal year. Turning now to gross margin for 2022.", "We expect to continue realizing benefits from our initiatives, including DG Fresh and NCI throughout the year. In addition, we are optimistic that distribution and transportation efficiencies, including significant expansion of our private fleet, can drive additional benefits despite anticipated continued cost pressures in the near term. Offsetting some of these benefits is an expected increase in sales mix pressure, as our sales outperformance has been predominantly driven by growth in our consumables category, which generally has a lower gross profit rate than other product categories. In addition, we expect ongoing supply chain pressures, including higher fuel costs, increased product cost inflation and expect to return to pre-pandemic rates of seasonal markdowns and increased inventory damages, all of which are expected to be headwinds in 2022.", "With regards to SG&A, we expect continued investment in our strategic initiatives, as we further the rollouts. However, in aggregate, we continue to expect they will positively contribute to operating profit margin in 2022, as we expect the benefits to gross margin from our initiatives will more than offset the associated SG&A expense. We also continue to pursue efficiencies and savings through our Save to Serve program, including Fast Track, and we believe these savings in 2022 will offset a portion of expected wage inflation. Finally, our updated outlook includes plans to build on our sales momentum with targeted investments to further enhance the customer experience, including incremental labor hours to drive an even greater improvement in overall in-stock levels and customer service.", "In summary, we are proud of our team's resilience and commitment to execution, which resulted in our strong first quarter results. As always, we continue to be disciplined in how we manage expenses and capital with the goal of delivering consistent, strong financial performance, while strategically investing for the long term. We remain confident in our business model and our ongoing financial priorities to drive profitable same-store sales growth, healthy new store returns, strong free cash flow and long-term shareholder value. With that, I will turn the call over to Jeff." ] }, { "name": "Jeff Owen", "speech": [ "Thanks, John. Let me take the next few minutes to update you on our operating priorities and strategic initiatives. Our first operating priority is driving profitable sales growth. We are off to a great start to the year, as we continue to make good progress across our portfolio of growth initiatives.", "Let me take you through some of the recent highlights. Starting with our nonconsumables initiative or NCI, which was available in more than 13,000 stores at the end of the first quarter. We continue to be very pleased with the strong sales and margin performance we are seeing across our NCI store base, including continued incremental 2.5% total comp sales increase on average in NCI stores in their first year post implementation, along with a meaningful improvement in gross margin rate. We expect to realize ongoing sales and margin benefits from NCI in 2022 and are on track to complete the rollout across nearly the entire chain by the end of the year.", "Moving to our pOpshelf store concept, which further builds on our success and learnings with NCI. As a reminder, pOpshelf aims to engage customers by offering a fun, affordable and differentiated treasure hunt experience, delivered through continually refreshed merchandise, a differentiated in-store experience and exceptional value with the vast majority of our items priced at $5 or less. During the quarter, we opened 11 new pOpshelf locations, bringing the total number of stores to 66. Additionally, at the end of Q1, we had a total of 25 store-within-a-store concept, which incorporates a smaller footprint pOpshelf store into one of our larger format Dollar General market stores as we continue to be pleased with the results.", "We are on track to nearly triple the pOpshelf store count this year, as well as open up to 25 store-within-store concepts, which would bring us to a total of more than 150 stand-alone pOpshelf locations and a total of approximately 50 store-within-a-store concepts by year end. We continue to anticipate year one annualized sales volumes for pOpshelf locations to be between $1.7 million and $2 million per store and expect the initial average gross margin rate for these stores to exceed 40%. Overall, we are very pleased with the results from this unique and differentiated concept, and we are excited about our goal of approximately 1,000 pOpshelf locations by end of 2025. Turning now to DG Fresh, which is a strategic multi-phase shift to self-distribution of frozen and refrigerated goods, along with a focus on driving continued sales growth in these areas.", "As a reminder, we completed the initial rollout of DG Fresh across the entire chain in 2021 and are now delivering to more than 18,000 stores from 12 facilities. The initial objective of DG Fresh was to reduce product cost on our frozen and refrigerated items and we continue to be very pleased with the savings we are seeing. Another important goal of DG Fresh is to increase sales in our frozen and refrigerated categories. We are pleased with the performance on this front, including enhanced product offerings in stores and strong performance from our perishables department.", "Looking ahead, we expect to realize additional benefits from DG Fresh, as we continue to optimize our network, further leverage our scale, deliver even wider product selection, and build on our multiyear track record of growth in cooler doors and associated sales. And while produce is not included in our initial rollout, we continue to believe that DG Fresh provides a potential path forward to expanding our produce offering to more than 10,000 stores over time. To that end, we offered produce in more than 2,300 stores at the end of the first quarter, with plans to expand this offering to a total of more than 3,000 stores by the end of 2022. Notably, DG Fresh has also extended the reach of our cooler expansion program.", "In fact, during Q1, we added more than 17,000 cooler doors across our store base, and we are on track to install more than 65,000 cooler doors in 2022. Importantly, despite the meaningful improvements we have made to date as a result of DG Fresh, we believe we still have significant incremental opportunity to drive additional returns with this initiative in the years ahead. Turning now to an update on our expanded health offering, which consists of up to 30% more feet of selling space and up to 400 additional items as compared to our standard offering. This offering was available in nearly 1,800 stores at the end of Q1, and we are on track to expand to a total of more than 4,000 stores by the end of 2022.", "Looking ahead, our plans include further expansion of our health offering with the goal of increasing access to basic healthcare products and ultimately services over time, particularly in rural America. In addition to the gross margin benefits associated with the initiatives I just discussed, we continue to pursue other opportunities to enhance gross margin, including improvements in private brand sales, global sourcing, supply chain efficiencies, and shrink reduction. Our second priority is capturing growth opportunities. Our proven high-return, low-risk real estate model has served us well for many years and continues to be a core strength of our business.", "In the first quarter, we completed more than 800 real estate projects, including 239 new stores, 532 remodels and 32 relocations. For 2022, our plans remain to execute 2,980 real estate projects in total, including 1,110 new stores, 1,750 remodels, and 120 store relocations. As a reminder, we expect approximately 800 of our new stores in 2022 to be in our larger 8,500 square foot store format as we respond to our customers' desire for even wider product selection. With about 1,200 square feet of additional selling space compared to a traditional store, these larger formats allow for expanded high-capacity cooler counts, an extended queue line and a broader product assortment, including NCI, our larger health and beauty offering and produce in many stores.", "Importantly, we continue to be very pleased with the unit economics of this larger format. While the initial cost to open these larger store is about $300,000, including fixed assets and working capital, we are seeing increased sales productivity and continue to generate returns in the range of 20% to 22%. In addition to our planned Dollar General and pOpshelf growth in 2022 and included in our total new store goal, we are also very excited about our plans to expand internationally. The goal of opening up to 10 stores in Mexico by the end of 2022.", "Overall, our real estate pipeline remains robust, with more US brick-and-mortar stores than any retailer, we are excited about our ability to capture significant growth opportunities in the years ahead. Next, our digital initiative, which is an important complement to our physical footprint as we continue to deploy and leverage technology to further enhance convenience and access for customers. Our efforts remain centered around building engagement across our digital properties, including our mobile app. We ended Q1 with more than four million monthly active users on the app and expect this number to grow as we look to further enhance our digital offerings.", "Our partnership with DoorDash continues to yield strong results, as we look to extend the value offering of Dollar General, combined with the convenience of same-day delivery in an hour or less. This offering was available in about 11,000 stores at the end of Q1 and we continue to be pleased with the early results, including better-than-expected customer trial, strong repurchase rates, high levels of sales incrementality, and a broadening of our customer base. In addition, we are excited about the continued growth of our Dollar General Media Network, which is becoming increasingly more relevant in connecting our participating brand partners with over 90% of our unique customer base. After establishing the foundation over the last few years, we are poised to meaningfully grow this business in 2022 and beyond, as we expand the program and further enhance the value proposition for customers and brand partners, while increasing the overall net financial benefit for the business.", "Most recently, we launched a suite of financial offerings, as we look to further leverage our unique footprint to provide our customers with additional services they want and need. These services include a spendwell-branded bank account and debit card offering, a buy now, pay later pilot in select number of stores, and a test of a rewards redemption program. These offerings aim to provide greater financial empowerment for customers, while driving incremental traffic and profitability within our stores. Overall, our strategy consists of building a digital ecosystem specifically tailored to provide our customers with an even more convenient, frictionless and personalized shopping experience and we are pleased with the growing engagement we are seeing across our digital properties.", "Our third operating priority is to leverage and reinforce our position as a low-cost operator. We have a clear and defined process to control spending, which continues to govern our disciplined approach to spending decisions. This zero-based budgeting approach, internally branded as Save to Serve, keeps the customer at the center of all we do, while reinforcing our cost control mindset. Our Fast Track initiative is a great example of this approach, where our goals include increasing labor productivity in our stores, enhancing customer convenience and further improving on-shelf availability.", "The first phase of Fast Track consisted of both rolltainer and case pack optimization, which has led to the more efficient stocking of our stores. The second component of Fast Track is self-checkout, which provides customers with another flexible and convenient checkout solution, while also driving greater efficiencies for our store associates. Self-checkout was available in more than 8,000 stores at the end of Q1 and we continue to be pleased with our results, including strong customer adoption rates. As a result of the success of self-checkout and popularity with customers, we have recently launched a pilot of stores that are entirely self-checkout.", "While our associates will remain available to assist customers if needed in these stores, we believe this 100% self-checkout option could further enhance the convenience proposition, while enabling our associates to dedicate even more time to serving customers. We plan to ultimately test this layout in about 200 stores throughout 2022. Looking ahead, we are on track to expand our self-checkout offering to a total of up to 11,000 stores by the end of the year, as we look to further extend our position as an innovative leader in small-box discount retail. Moving forward, the next phase of Fast Track consists of increasing our utilization of emerging technology and data strategies, which includes putting new digital tools in the hands of our field leaders.", "When combined with our data-driven inventory management, we believe these efforts will reduce store workload and drive greater efficiencies for our retail associates and leaders. I also want to highlight our growing private fleet, which consisted of more than 950 tractors at the end of Q1 as compared to over 700 tractors at the end of 2021. As a reminder, we are focused on significantly expanding our private fleet in 2022 as we plan to more than double the number of tractors from 2021, which we expect will account for approximately 40% of our outbound transportation fleet by the end of the year. As a result of this planned growth, we believe our private fleet will become an increasingly significant competitive advantage as it gives us greater operational control within our own supply chain, while further optimizing our cost structure.", "Our underlying principles are to keep the business simple, but move quickly to capture growth opportunities, while controlling expenses and always seeking to be a low-cost operator. Our fourth operating priority is investing in our diverse teams through development, empowerment and inclusion. As a growing retailer, we continue to create new jobs and opportunities for personal and professional development and ultimately, career advancement. To that end, we recently began offering access to 100% employer-paid college degree programs for all full-time employees.", "In addition, all Dollar General employees and their immediate family members now have access to online, on-demand, self-paced learning platform that provides college level general education courses at no cost to them, which is intended to help initiate or further their education journey and development. These programs are in addition to several other existing development programs, including our fully paid private fleet driver training program, as well as the ability to earn undergraduate credits through the American Council on Education upon completion of our store manager training program. We continue to innovate on additional development opportunities for our teams to provide ongoing opportunities for career advancement and in turn, meaningful wage growth. Our internal promotion pipeline remains robust as evidenced by internal placement rates of more than 75% at or above the lead sales associate position.", "Additionally, approximately 15% of our private fleet team began their careers with us in either a store or distribution center. We continue to monitor our competitive position in the market closely and we are pleased with our turnover rates, staffing levels, and applicant flow further validating our belief that we are taking the right actions to attract and retain talent. We believe the opportunity to start and develop a career with a growing and purpose-driven company is a unique competitive advantage and remains our greatest currency in attracting and retaining talent. Overall, we continue to make great progress against our operating priorities and strategic initiatives and we are confident in our plans to drive long-term sustainable growth, while creating meaningful value for our shareholders.", "In closing, I am proud of the team's strong performance and we are pleased with our great start to the year. I want to thank our more than 164,000 employees for their hard work as we all focus on fulfilling our mission of serving others every day, and I am excited about our plans for the year ahead. With that, operator, we would now like to open the lines for questions." ] } ]
[ { "name": "Operator", "speech": [ "Thank you. At this time, we will be conducting question-and-answer session. [Operator instructions] Our first question comes from Karen Short with Barclays. Please proceed with your question." ] }, { "name": "Karen Short", "speech": [ "Hey. Thanks very much. Congratulations on a good quarter." ] }, { "name": "Todd Vasos", "speech": [ "Thank you, Karen." ] }, { "name": "Karen Short", "speech": [ "So I wanted to just ask, so obviously, your format is very resilient in a weaker macro and should outperform in general, in a weaker macro. But I think investors have been very concerned regarding discretionary risk as it relates to the comp and also to gross margin. So I was wondering, if you could provide a little more color on how your – with respect to your guidance on how you're thinking about comps with respect specifically to discretionary versus non, and then general gross margin outlook as it relates to both categories. Because I mean, my view, my personal view is that, you're obviously a lot more resilient and people realize – or investors realize in terms of both those segments, comps and gross margins.", "So any color on that would be helpful." ] }, { "name": "John Garratt", "speech": [ "Sure. I'll take that question, Karen. With respect to sales and with both of these, that's obviously factored in with respect to sales, feel very good about the raised guidance that we provided there. We have taken into account that the over performance was really driven by consumables.", "So that's been factored into the margin as well. So we continue to feel great about both sides of the business, but have reflected the fact that it is more driven by the consumables. And the team has done a fantastic job of proactively adjusting the orders accordingly to minimize markdown risk. The other thing I'll note, just to give a little more color on the shape of the year with regard to sales, the way we see this is as we get past the – now past the stimulus lap that has a significant impact on last year, both with sales, but also it's the most difficult mark – it's the most difficult rather mix lap of the year because they had a disproportionate effect on non-consumables.", "Now that we're past that, we see a market improvement in our sales throughout the year relatively, even throughout the year and strongly positive. And then, obviously, you don't have as much while we expect a continued mix toward consumables, the lap isn't is significant now that you're past Q1. And again, that's all been reflected." ] }, { "name": "Karen Short", "speech": [ "OK. And then just to clarify, in terms of April, I meant, 2Q off to a strong start. Any more granularity you could provide on that?" ] }, { "name": "Todd Vasos", "speech": [ "Yes, Karen. We're happy with what – how we ended Q1, and as I indicated in my opening remarks, pretty upbeat on what we have seen in the first few weeks of Q2. And I would tell you, from a consumer perspective, the consumer is behaving intentional in our purchases, I have to say. But in saying that, she still is shopping both sides of the fence, both consumables and non-consumables.", "And I think that really goes to the value that we have in both consumables and non-consumable side of the business. We've done so much work around that discretionary side with NCI and all the other work that we've done that it's a compelling offering. Even when times are tough for the consumer, she always wants a little bit of an indulgence and we offer that ability at a real low price. So yes, we feel good about the equation as we move forward, as John indicated." ] }, { "name": "Karen Short", "speech": [ "Great. Thank you. Appreciate it." ] }, { "name": "Operator", "speech": [ "Our next question comes from Michael Lasser with UBS. Please proceed with your question." ] }, { "name": "Michael Lasser", "speech": [ "Good morning. Thanks a lot for taking my question. How much did trade down contribute -- or customers trading down, those who may be facing some incremental economic stress, contribute to 1Q? How much have you assumed that will contribute to the rest of the year? And in that vein, how much did like-for-like price increases contribute in the quarter? And how much do you expect it to contribute to the rest of the year?" ] }, { "name": "Todd Vasos", "speech": [ "Yes. Thanks for the question, Michael. I'll take that. And I'll tell you that the consumer overall has been fairly resilient through this hyperinflation that we've seen, not only in the products that she has to buy, but the fuel she has to put in her car and other means.", "So I would tell you that the consumer is holding up well, and it really goes toward what I've talked about all along, and that is as long as she's gainfully employed, that makes the biggest difference in how she shops and gives us that confidence to spend. The great thing at Dollar General is that we offer that value that I just mentioned earlier. And we're already starting to see that our core customers start to shop more intentionally, and we're starting to see that next tier of customers start to shop with us a little bit more as well. Matter of fact, when you look at the COVID customer, I would call it, the one that we attracted and now have retained since COVID, it is still running at or slightly above where we thought we would be right now, and that's a little higher-end consumer.", "So that tells you that, that trade down and trade in is well and is starting to probably pick up steam as we move through Q2 and into the back part of the year as things continue to tighten up. Lastly, I'll mention is the gas prices. What would normally also occur and we're starting to see if she starts to shop closer to home, not only our core consumer, but that next cohort up, so that trade in that you mentioned, because let's admit it, right, the gas price is at $4.40, $4.50 a gallon now on average is keeping her closer to home. So those shopping patterns are definitely changing, and we're seeing it happen right before our eyes." ] }, { "name": "Michael Lasser", "speech": [ "Thank you. And at the risk of being a little bit of a downer, and I apologize for that, one of your big competitors this morning announced they're going to be making some investments to narrow the price gap. Do you think you'll need to take down your prices further and maintain that price gap to continue to enjoy the success that Dollar General has achieved?" ] }, { "name": "Todd Vasos", "speech": [ "Yes. Michael, I would tell you, we look at all competitors when we look at our price, and there's some much bigger competitors out there than the one that you are referring to, that we watch really closely. The great thing is, is that our prices are right in our historical ranges, and we feel great about price. We've got plenty of ammunition to do whatever we need to do.", "But I would tell you that we've never felt better about our price position as we continue to move through Q2 and into the back half of the year. We've taken the opportunity, and I've mentioned this before, over the many, many months of – through COVID, to sharpen our prices even more. And I believe that what we're seeing right now, against all classes of trade would tell you that Dollar General is in a great spot and has all of the levers that is disposable to continue to keep that positioning. We don't see anything on the horizon that gives us any concern there at all." ] }, { "name": "Michael Lasser", "speech": [ "Thank you very much. Good luck." ] }, { "name": "Todd Vasos", "speech": [ "Sure." ] }, { "name": "Operator", "speech": [ "Our next question comes from Matthew Boss with J. P. Morgan. Please proceed with your question." ] }, { "name": "Matthew Boss", "speech": [ "Thanks. And congrats on another nice quarter." ] }, { "name": "Todd Vasos", "speech": [ "Thank you." ] }, { "name": "Matthew Boss", "speech": [ "So Todd, on value and convenience, it seems like this is really the key driver that you're citing as one of the main pieces to the continued momentum in the business. I guess, how much do you attribute all of this to company-specific topline drivers? What initiatives do you think that you're the most excited about that still have legs? And then more so as we think about the back half of the year, help us to think about the in-stock opportunity or other key drivers of the business on a year-over-year basis?" ] }, { "name": "Todd Vasos", "speech": [ "Yes, Matt. Thanks for the question. I would tell you that our initiatives continue to push forward and also drive that topline. So if you think of DG Fresh, that continues to be our top driver.", "But one area that we have started to talk about recently, and we'll continue to hear more and more about is our digital initiative. And I would tell you that, that digital initiative will continue to help propel that topline as well. It's driving not only our current customer, but a different cohort of customer into Dollar General.,And that is that cohort that is a little bit more digitally savvy. We have spent some nice capital over the many years, building the platform for this.", "And really, in earnest, in the last six to eight months, have really turned the dial up on moving that digital piece. So while others are worried about fixing fundamentals, we're really moving the needle forward on a lot of those big initiatives. So you think of DG Fresh, self-distribution of produce coming up in our supply chain as well, you think about digital. And then, of course, we're so excited still about NCI and pOpshelf.", "pOpshelf is performing very well, even in a climate that one would consider the non-consumable discretionary side of the business may be challenged. But pOpshelf continues to do well. That's what gives us a lot of confidence as we move forward into the upcoming months and years ahead. So we've got a tremendous amount of drivers, a lot more than value and convenience.", "But when they come into the store through all these other means that we're driving traffic into the store, they are definitely gravitating to value and convenience because everybody loves a deal." ] }, { "name": "Matthew Boss", "speech": [ "Great. And then John, maybe on the gross margin. How best to think about the build for the second quarter and the back half of the year relative to the first quarter. And just with that, if we think larger picture and maybe similar to my topline question, what inning would you say the company-specific benefits that you've seen from DG Fresh, NCI, maybe the private fleet, what inning are these in today as we think about margin benefits?" ] }, { "name": "John Garratt", "speech": [ "Sure. Great questions, Matt. I'll start with the first part of the question, just around how we're looking at gross margin. I'll start by saying, we're very pleased with what we've been able to do to hang on to that gross margin goodness.", "While we were down about 1.5 points this quarter, we were lapping over two points of expansion last year. And if you go back to pre-pandemic levels, we're still one point above where we were. I think it really speaks to the impact of the initiatives. Now certainly, there are some near-term pressures that we called out.", "We talked about on the call, the pressure from supply chain costs, which were an $85 million year-over-year headwind. Now that was down from Q4, which was $100 million. The other thing that we talked about was the LIFO provision of $61 million that we booked based on the anticipated inflation for the full year. And of course, we had the mix challenge.", "But again, as I mentioned before, much more pronounced in Q1 as we lap the significant impact of stimulus. So as we look forward, I mentioned, we expect continued mix pressure on a year-over-year basis, not as much as we saw in Q1 as we get away from stimulus. We also expect continued pressure from supply chain, fuel costs as well as product cost inflation. However, we expect it to improve as we move through the year.", "The lapse ease, particularly in the second half of the year as we lap the very heavy inflation from last year. And we anticipate some moderation. We're seeing some moderation in the cost pressures, due in part to the benefits of the initiatives and the cost reduction actions we've put in place. We mentioned the private fleet.", "We're going to double that in size this year as we convert tractors and trailers in-house that drives 20% savings. And we've done other actions to lock in more third-party capacity to manage our inventory very well, adjust to the changing demand of the customers. So we feel we're very well positioned. And as we look ahead, we're not giving specific guidance on gross margin, but we expect EPS to improve sequentially as we go from quarter-to-quarter throughout the year for the reasons I mentioned and really see ourselves as you look at, again, scaling impact of the initiatives you mentioned, we're in early innings there.", "They vary, but I would say in macro, we're probably on average, third, fourth inning in most of these, on average, both in terms of the sales benefit as well as the gross margin benefit. So as these scale and as we work the other levers we've talked about, as we leverage our scale and as Todd mentioned, is we're in a very good place in price. We see ourselves in a very nice position to, over time, continue enhancing our gross margins." ] }, { "name": "Matthew Boss", "speech": [ "Great color. Congrats again." ] }, { "name": "John Garratt", "speech": [ "Thank you." ] }, { "name": "Operator", "speech": [ "Our next question is from Simeon Gutman with Morgan Stanley. Please proceed with your question." ] }, { "name": "Simeon Gutman", "speech": [ "Good morning, everyone. John, I have a follow-up to that question. It's on overall margin or incremental margins. I think you spoke to gross.", "So this was embedded in the guidance even when you issued it in the fourth quarter that you have the step-up in incremental margin sequentially throughout the year. Sales get better, but if you look at the incremental against the sales, it's still an above average rate for what this business has done historically. So I heard some of the commentary that you just said within the gross and why that gets better. But it seems like cost pressures that were present three months ago, maybe getting worse, not better? And then how do you reconcile that versus accelerating incremental throughout the year?" ] }, { "name": "John Garratt", "speech": [ "No. I wouldn't say we see cost pressures getting worse. We mentioned the cadence around the inflation. I would say the moderation is going to be more gradual than originally thought, but we still are seeing moderation.", "We still expect moderation, and that's why we see that sequential improvement in EPS and overall margins as we move through the year. In terms of SG&A, we don't see any increased cost pressure there in terms of wage inflation. We've talked about that. We expect that growth in wage inflation to be well less than prior year, a little more than pre-pandemic levels, but still manageable, and it's tracking where we expected there.", "We also mentioned making some targeted investments and specifically labor hours. It's really from a position of strength to continue driving the sales momentum to make sure we're good for the customer in terms of in-stock levels and customer experience, but not a material step up there. So we feel very good about the guidance we provided, maintaining the full year EPS guidance despite enhanced, as everyone has called out, inflationary pressures. I think the team has done a great job mitigating those and improving the in-stocks in the right categories to be ready to drive the top line and the bottom line." ] }, { "name": "Simeon Gutman", "speech": [ "And Todd mentioned that there's some tightening that's happening, that the maybe trade down is starting to pick up steam. Are you willing to share -- was that -- that was that built into your plan? Are you seeing it happen quicker than the way your plan was built?" ] }, { "name": "Todd Vasos", "speech": [ "Yes. I would tell you that some of it was built in. We knew that the consumer was going to get tighter in 2022, just because of the lack of stimulus compared to last year. But I would tell you that because of other pressures, more inflation coming through on her everyday needs as well as that fuel that I talked about, has quickened the pace a little bit.", "So we believe that she'll flee even further to value as she moves into the back half of the year, especially as she gets to that holiday time frame, I believe that you'll see that. So we're very prepared for that. The last thing I'll also mention that shows us that she is starting to move that way a little quicker is, one is, she's coming more often in those basket, unit sizes are a little bit smaller. That's the true sign and also the $1 price point that we are really pushing and getting behind has really accelerated as well, and we're seeing that.", "So that would tell you that she's trying to make ends meet, and we'll be there for her because that's what we do best." ] }, { "name": "Simeon Gutman", "speech": [ "Thanks, guys. Good luck." ] }, { "name": "Operator", "speech": [ "Our next question is from John Heinbockel with Guggenheim Partners. Please proceed with your question." ] }, { "name": "John Heinbockel", "speech": [ "Hey, Todd. Maybe start with, right, the business is in a far better place than it was in 2008 and 2009, right? We did extremely well. How does the recession playbook look differently than back then in terms of -- and how quickly do you play that? What do you have to see to want to lean into that playbook?" ] }, { "name": "Todd Vasos", "speech": [ "Yes. John, it's a good question, and thanks for that. I would tell you that we're in a much different spot, not only economically, meaning the consumer is in a little different spot here. And I think the biggest piece is that employment is still very healthy across all cohorts of customers that we serve.", "So I think that's one of the big differences here than 2008, 2009. Now could that roll over? We're watching that, very well could, which would then just quicken the pace that flight to value. But we haven't that yet. But because of the other inflationary pieces we have seen.", "So there really isn't a lean-in in the playbook as much as it is knowing what that customer is going to do from historical times and then servicing I mentioned. And the reason we're leaning into that $1 price point is because we know how important that is during those times. Private brand, we've seen an acceleration in our private brand business as well in recent weeks. That's a true sign that she's starting to feel that pressure.", "So how do we respond? Well, you'll see more end caps, more off-shelf displays of both $1 and private brand as we move through Q2 and then to the back half of the year. So we're really good and nimble, as you know, and to be able to move very quickly, so you'll see more and more of that. I think the important thing here is we're so different as a company than we were in 2008, 2009. I would hate to be fixing fundamentals right now because the opportunity to gain share is going to be tremendous as we, I believe, move through this year.", "And we're so far beyond that with all of the initiatives that we've put in place over the last six, seven years. It's nice to see that we're going to be in a position to take an oversized amount of share, we believe, as we move through the back half of the year." ] }, { "name": "John Heinbockel", "speech": [ "And then maybe secondly, right, on your -- the health and beauty assortment, maybe it's too early to tell. But when you look at those items in the basket or the people who are buying them, what are you seeing, right, in terms of frequency of shop, basket size, co-purchases and that's typically a very loyal customer? Do you think that will drive more frequency? Is that the primary benefit you think you'll see?" ] }, { "name": "Jeff Owen", "speech": [ "Hey, John. This is Jeff, and thank you for that question. As we think about health, we've been saying this for quite some time, the largest share donor we're seeing in our business certainly is from the drug channel. And so that's one of the reasons as you've heard us say before, why we're leaning in here.", "And so certainly with 30% more selling space and 400 additional items, we're really pleased to be in 1,800 stores and being 4,000 by the end of the year. And what we're seeing in the customer's response is very good. And we're excited about what we're seeing not only in our take rates, but also when you break down the basket. So when you think about Dollar General, I think the best way to think about this is this way.", "When you look at our mainstays, like home cleaning and paper where we have closer to a 10 share, and when you think about this particular area when we're closer to a four, it really paints the opportunity for us to continue to grow share in this particular area. And as we've said before, we do classify this as consumable, but it has margins that are akin more to non-consumable. And when you step back and you think about the larger footprint that we talk about, where 80% of our stores in 2022 will be in that larger 8,500 square foot footprint, it gives us the full theater to put this in place. So I think you see from why we're so excited, but also, I think you see the intentional nature of how we layer this into our strategic view of the business and how we look forward and around the corner.", "So I think you'll see more to come there. We're really excited about what we see." ] }, { "name": "John Heinbockel", "speech": [ "Thank you very much." ] }, { "name": "Operator", "speech": [ "Our next question is from Rupesh Parikh with Oppenheimer. Please proceed with your question." ] }, { "name": "Rupesh Parikh", "speech": [ "Good morning. Thanks for taking my questions. So I had two questions on the inflation front. So first, what are you seeing right now from a product cost inflation perspective? And then second, are there any challenges you're seeing right now passing through some of the higher prices?" ] }, { "name": "Todd Vasos", "speech": [ "Hi, Rupesh. This is Todd. Real quickly, obviously, we've seen what others have seen on that. We're a little different spot though, and our product mix is much different than the broader retail spectrum.", "So I would tell you that we're seeing, on average, a lot less cost pressure than what you would find in retail in general. That's number one. The second piece is we have the ability here to trade off items and to trade down sizes, which we've been very active over the last six, eight months on, when we saw inflation starting to move in a little different direction. So we've got the ability to do that.", "That's what we do best on our merch side. And so we've done a lot of that to also push off some of those costs to the consumer. But as it relates to when we do have to put costs out there, I'm sorry, additional retail to cover some of that CPG cost, we've been able to do that because we do it the Dollar General way, right? And we make sure that we can layer it in where the consumer still knows and sees the value of what we offer. And again, as I mentioned in my earlier comment, we haven't felt better about where we are.", "We're right in historical levels of our pricing indexes compared to all classes of trade. So I believe we've got the ability to pass on where we need to. But more importantly, to help defray some of that pass on to the consumer through our category management efforts, which, again, we're probably one of the best in the industry on." ] }, { "name": "Rupesh Parikh", "speech": [ "Great. And then maybe just one follow-up question. Just on your discretionary categories, just given many of the concerns out there, did anything differ versus your expectations during the quarter? I know weather did have an impact potentially on some of the categories. But just curious if you've seen any changes in consumer behavior within those discretionary categories?" ] }, { "name": "Todd Vasos", "speech": [ "Yes. As I mentioned also a little earlier, the consumer is becoming more and more intentional in our purchases. We've seen that. And what that means is taking care of our family a little bit more on the consumable side of the business, where she needs to make sure she buys.", "And then on that discretionary side, obviously, tightening the belt a little bit. So yes, we saw that. We knew that was going to occur just because of the stimulus lap. But as I also mentioned, we saw it probably accelerated a little faster than where we thought it would as well.", "But the great thing is the buying team has been all over this. So what we're already doing is as we see the -- with the third and fourth quarter and be able to yet adjust, we're able to go in and adjust the products that we're selling on that discretionary side as well as making sure that the prices are right on the discretionary side, especially as we get to the important fourth quarter selling season. So we feel like we've seen where that consumer is probably going to land on a mix basis, discretionary versus non, but we also believe we've made the right trade-offs and as John indicated, feel real good about our inventory levels there and not concerned at all at this point on any markdown risk that may be there." ] }, { "name": "Rupesh Parikh", "speech": [ "OK. Great. Thank you." ] }, { "name": "Todd Vasos", "speech": [ "Sure." ] }, { "name": "Operator", "speech": [ "Our next question is from Kate McShane with Goldman Sachs. Please proceed with your question." ] }, { "name": "Kate McShane", "speech": [ "Thanks for taking our question. Our first question was just around the SNAP benefit, just how the SNAP composition has changed at DG over the last couple of quarters and what your projection is for the rest of the year?" ] }, { "name": "John Garratt", "speech": [ "Yes. It continues to be elevated over pre-pandemic levels. The Thrifty Food Plan is still a benefit there. And while you have some states pulling out of the emergency waivers, it's been very gradual.", "And so it's still mixing quite a bit higher than norm, just not at the same peak level it was in middle of last year, but doing very well there, continue to gain share with that customer and serve them very well." ] }, { "name": "Kate McShane", "speech": [ "Question is just about traffic. Is there an expectation of when you think that can inflect positively?" ] }, { "name": "Todd Vasos", "speech": [ "Yes. I would tell you that we actually closed out Q1 with a positive traffic number, which was really good to see. And as I indicated in my opening comments, like what we see on our start to Q2. And I think you can actually take from that that our traffic number is looking much better than it was.", "So we feel, as we get further and further away from that stimulus lap that John referred to, we believe we've got the right products, initiatives, price points, especially in this environment to drive that traffic long term." ] }, { "name": "Kate McShane", "speech": [ "Thank you." ] }, { "name": "Todd Vasos", "speech": [ "Absolutely." ] }, { "name": "Operator", "speech": [ "Our final question comes from Corey Tarlowe with Jefferies. Please proceed with your question." ] }, { "name": "Corey Tarlowe", "speech": [ "Hi. Good morning, and thank you for taking my questions. Firstly, on international. As it relates to Mexico, can you provide an update as to where you are on progress for expansion into that region?" ] }, { "name": "Jeff Owen", "speech": [ "Thanks, Corey. This is Jeff. So in Mexico, I'm really pleased with what the team has been able to accomplish in a relatively short period of time. I would tell you, we have assembled a fantastic team of retailers and folks are really excited about joining the opportunity.", "So first and foremost, the team is incredibly impressive with decades of experience. That's the first point. The second point is is that we continue to make great progress around learning how to serve this customer. And as we've mentioned before, we have a lot of analogs that gave us great confidence to even expand internationally from a lot of the performance and customers we serve along the board, which we've done historically incredibly well here at Dollar General.", "So as we learn more and more about that consumer, we're really excited about what we are able to offer her and tailor it to her needs and also really rely a lot on what we've been able to do so well here in the United States. So I feel great about the assortment and the build that we're doing there. Feel real, good about the supply chain progress. And then also on the real estate, in fact, we've been down there a couple of weeks ago and headed down there here shortly to continue to look at the sites and been very pleased with what we're seeing in terms of our ability to be convenient and be that community serving retailer that we are here in the US and excited about what we're going to be able to do in Mexico.", "And we still feel real good about our initial expectation of up to 10 stores by the end of the year." ] }, { "name": "Corey Tarlowe", "speech": [ "That's great. And then just a follow-up question for John. As it relates to capital allocation, how are you thinking about the balance sheet and cash levels balancing the dividend close to $3 billion in share repurchases and then $1.5 billion in capex?" ] }, { "name": "John Garratt", "speech": [ "Yes. We're still thinking about the same way in terms of the priorities. Our first priority remains investing in the business. When you can get these kind of returns on new stores and the kind of returns we're getting on our strategic initiative that positions us so well, that's where we're going to continue to invest first.", "Then it's paying a competitive dividend, which we increased 31% year over year on a quarterly basis. And then the business generates a tremendous amount of cash, which allows us to buy back shares. And as you mentioned, we're going to target $2.75 billion this year. So really, meaningfully investing in the business, meaningfully returning cash to shareholders in these forms.", "And in terms of capex with these kind of returns, we're going to invest what we need to. But again, I think with that amount, we're doing quite a bit with it. It is up a little bit as a percent of sales from historical norms. But the biggest piece of that is just still inflation.", "And so if you strip that out, it's kind of back down to that historical level of a little over 3% of our sales. So we feel really good about the allocation. It's working very well for us. And I think working very well for the investors." ] }, { "name": "Corey Tarlowe", "speech": [ "Very helpful. Thank you very much, and best of luck." ] }, { "name": "John Garratt", "speech": [ "Thank you." ] }, { "name": "Todd Vasos", "speech": [ "Well, thank you for all the questions and thanks for your interest in Dollar General. I'm proud of our team, which continues to execute at a high level for our customers every day. I'm sure you can tell, I'm more excited about this business than ever before. We are a mature retailer in growth mode.", "And our strategic focus has differentiated us in a discount retail landscape, particularly as we have transformed this company in the last few years. As a result, I believe we are very well positioned to capitalize on the enormous growth opportunities we see in front of us. Thank you for listening, and I hope you have a great day. Thank you." ] }, { "name": "Operator", "speech": [ "[Operator signoff]" ] } ]
DG
2020-03-12
[ { "description": "Vice President of Investor Relations and Corporate Strategy", "name": "Donny Lau", "position": "Executive" }, { "description": "Chief Executive Officer", "name": "Todd Vasos", "position": "Executive" }, { "description": "Executive Vice President and Chief Financial Officer", "name": "John Garratt", "position": "Executive" }, { "description": "Chief Operating Officer", "name": "Jeff Owen", "position": "Executive" }, { "description": "Oppenheimer -- Analyst", "name": "Rupesh Parikh", "position": "Analyst" }, { "description": "J.P. Morgan -- Analyst", "name": "Matthew Boss", "position": "Analyst" }, { "description": "UBS -- Analyst", "name": "Michael Lasser", "position": "Analyst" }, { "description": "Morgan Stanley -- Analyst", "name": "Simeon Gutman", "position": "Analyst" }, { "description": "Jefferies -- Analyst", "name": "Christopher Mandeville", "position": "Analyst" }, { "description": "Deutsche Bank -- Analyst", "name": "Paul Trussell", "position": "Analyst" }, { "description": "Barclays -- Analyst", "name": "Karen Short", "position": "Analyst" } ]
[ { "name": "Operator", "speech": [ "Good morning, my name is Robert and I will be your conference operator today. At this time, I'd like welcome everyone to Dollar General's Fourth Quarter 2019 Earnings Call. Today is Thursday, March 12th, 2020. [Operator Instructions]", "Now I'd like to turn the conference over to Mr. Donny Lau, Vice President of Investor Relations and Corporate Strategy. Mr. Lau, you may begin." ] }, { "name": "Donny Lau", "speech": [ "Thank you, Robert and good morning, everyone. On the call with me today are Todd Vasos, our CEO; Jeff Owen, our COO; and John Garratt, our CFO. Our earnings release issued today can be found on our website at investor.dollargeneral.com under News & Events.", "Let me caution you that today's comments include forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995, such statements about our strategy, plans, initiatives, goals, financial guidance or beliefs about future matters. These statements are subject to risks and uncertainties that could cause actual results to differ materially from our expectations and projections. These factors include, but are not limited to those identified in our earnings release issued this morning under Risk Factors in our 2018 Form 10-K filed on March 22nd, 2019, and in the comments that are made on this call. You should not unduly rely on forward-looking statements, which speak only as of today's call. Dollar General disclaims any obligation to update or revise any information discussed in this call unless required by law.", "We also will reference certain non-GAAP financial measures. Reconciliations to the most comparable GAAP measures are included in this morning's earnings release which as I mentioned is posted on investor.dollargeneral.com under News & Events. At the end of our prepared remarks, we will open the call up for your questions. [Operator Instructions]", "Now it's my pleasure to turn the call over to Todd." ] }, { "name": "Todd Vasos", "speech": [ "Thank you, Donny, and welcome to everyone joining our call. We are very pleased with our fourth quarter results, capping off a strong year of performance across the Company. Notably, our full year results include our best sales comp increase in seven years and double-digit diluted EPS growth. The quarter was highlighted by same-store sales growth of 3.2% despite the lap of an estimated 70 basis point sales comp benefit from the pull forward of SNAP payments into Q4 of last year and double-digit growth in both operating profit and diluted EPS. We're especially pleased that we delivered strong operating margin performance this quarter, even as we continue to invest in key areas, including our strategic initiatives to strengthen our competitive position and support long-term sustainable growth.", "Overall, we are executing well against both our operating and strategic priorities and believe we are well positioned to drive continued growth as we move forward. During today's call, I will first recap some of the top line results for the fourth quarter and full year, John will then review our financial results in more detail as well as discuss our financial guidance for fiscal 2020. Afterwards, Jeff and I will provide an update on our operating priorities and strategic initiatives, including some key actions we've taken that not only contribute -- contributed to our strong results in 2019, but have also laid the ground work for what we expect to be another solid year of performance in 2020. In the fourth quarter, net sales increased 7.6% to $7.2 billion, compared to net sales of $6.6 billion in the fourth quarter of 2019.", "We are particularly pleased with the balanced nature of our sales performance once again driven by meaningful contributions across many fronts including sustained positive sales momentum across new stores and mature store base, strong same-store sales growth in both our consumable and non-consumable product categories and another quarter of strong growth in customer traffic and average basket size. Once again this quarter, we increased our market share in highly consumable product sales as measured by syndicated data with mid to high single-digit growth in both units and dollars over the 4, 12, 24 and 52-week periods ending January 25th, 2020. Importantly, our market share gains continue to increase at an accelerated rate throughout these periods, which we believe speaks to the underlying momentum of the business.", "For the full year, net sales increased 8.3% to $27.8 billion, compared to net sales of $25.6 billion in 2018. Same-store sales for the year increased 3.9%, which as I mentioned earlier, represents our best full year comp sales performance in seven years and includes our highest increase in customer traffic since 2015. Notably 2019 marked our 30th consecutive year of same-store sales growth. This underscores our belief that Dollar General's unique value and convenience proposition continues to resonate with our customers in all economic cycles and speaks to the resiliency of our business model. Collectively, we view these results as further validation that we are pursuing the right strategies to enable more balanced and sustainable growth, while creating meaningful long-term shareholder value.", "We continue to believe we operate in one of the most attractive sectors in retail and are well positioned to advance our goal of further differentiating and distancing Dollar General from the rest of the discount retail landscape. Before I turn the call over to John, I want to note that we are following the coronavirus outbreak closely and our thoughts are with everyone affected. As compared to some retailers, our direct import sourcing exposure is relatively limited, although many of our domestic vendors also source from other countries. We have limited insight into the extent to which our business may be impacted by this operate, and there are many unknowns, but we currently do not anticipate a material impact on fiscal 2020 results from anything that we have experienced to-date.", "Of course, we are continuing to monitor the events closely. We are also mindful of those who were impacted by the devastating tornadoes destruct Nashville and surrounding areas last week and we are actively working to support our people and this community. As I've said before, our business is built on people and their health and safety will always be top priority.", "With that, I'll now turn the call over to John." ] }, { "name": "John Garratt", "speech": [ "Thank you, Todd and good morning, everyone. Now that Todd is taking you through a few highlights of the fourth quarter and full year, let me take you through some of the important financial details. Unless I specifically note otherwise, all comparisons are year-over-year and all references to EPS refer to diluted earnings per share. As Todd already discussed sales, I will start with gross profit.", "Gross profit as a percentage of sales was 31.8% in the fourth quarter, an increase of 60 basis points. This increase was primarily attributable to higher initial markups and inventory purchases and a lower LIFO provision. These factors were partially offset by increased markdowns in the percentage of sales, a greater proportion of sales coming from the consumables category, sales of lower margin products comprising a higher proportion of sales within the consumables category and increased distribution costs.", "SG&A as a percentage of sales was 21.7%, an increase of 13 basis points. These results were driven by increases in store occupancy costs, repairs and maintenance expenses and advertising costs. These items were partially offset by a decrease of approximately $11.6 million in hurricane and other disaster related expenses compared to the 2018 fourth quarter. During the quarter, we invested approximately $20 million in SG&A expense attributable to our strategic initiatives. We are very pleased with the progress on each and continue to believe these investments position us well to deliver meaningful benefits to the business over both the intermediate and longer term.", "Moving down the income statement, operating profit for the fourth quarter increased 12.9% to $721 million compared to $639 million in the fourth quarter of 2018. As a percentage of sales, operating profit was 10.1%, an increase of 47 basis points, which reflects another quarter of operating margin expansion, despite continued investment in our strategic initiatives. Our effective tax rate for the quarter was 23% and compares to a rate of 21.2% in the fourth quarter last year. Finally EPS for the fourth quarter increased 14.1% to $2.10. Overall, we are very pleased with the strong and balanced performance the team delivered during the quarter, which contribute to solid full year GAAP and adjusted EPS growth of 11.2% and 12.7% respectively.", "Turning now to our balance sheet which remains strong, merchandise inventories were $4.7 billion at the end of the fiscal year, an increase of 14.2% overall and up 7.8% on a per store basis. We continue to believe that quality of our inventory is in great shape and remain focused over time on driving inventory growth that is in line with or below our total sales growth. For 2019, we once again generated significant cash flow from operations totaling $2.2 billion, an increase of $94 million or 4.4%. As a percentage of sales, operating cash flow was 8.1%.", "Total capital expenditures for the year were $785 million and included our planned investments in new stores, remodels and relocations continued investments in construction of our Amsterdam, New York distribution center and spending related to our strategic initiatives. During the quarter, we repurchased 2.7 million shares of our common stock for $415 million net dollars and paid a quarterly dividend of $0.32 per common share outstanding at a total cost of $81 million.", "For the full year, we returned a total of $1.5 billion of capital to shareholders through a combination of share repurchases and quarterly dividend payments. At the end of the fourth quarter, the remaining share repurchase authorization was $1.1 billion. Our capital allocation priorities continue to serve us well. Our first priority is investing in high return growth opportunities including new store expansion and our strategic initiatives. We also remain committed to returning significant cash to shareholders through anticipated share repurchases and quarterly dividend payments, all while maintaining our current investment grade credit rating, and managing to a leverage ratio of approximately 3 times adjusted debt-to-EBITDA.", "Moving to our financial guidance for fiscal 2020, we expect another year of solid performance from our core business, fueled by a healthy balance of comparable sales growth and new store development. In addition, we anticipate positive gross profit contribution from our strategic initiatives, specifically, our non-consumable initiative or NCI and DG Fresh. That said, we also expect continued investment in our strategic initiatives, in addition to the ongoing expenses associated with each, as we continue to lay the foundation for long-term sustainable growth.", "With all that in mind, we expect the following for fiscal 2020. Net sales growth of 7.5% to 8%, same store sales growth of 2.5% to 3% and EPS growth of approximately 11.5% or approximately 10% compared to 2019 adjusted EPS and in line with our long-term goal of delivering double-digit EPS growth on an adjusted basis, while also continuing to invest for the long-term. As a reminder, 2019 adjusted EPS excludes a $31 million pre-tax impact related to significant legal expenses recorded in the second quarter of 2019 as discussed in today's earnings release. Our EPS guidance assumes a fiscal 2020 effective tax rate in the range of 22% to 22.5%. Capital spending is expected to be in the range of $925 million to $975 million, as we continue to invest in our strategic initiatives and core business, to support and drive future growth.", "With regards to shareholder returns, as we outlined in today's press release, our Board of Directors recently approved a quarterly dividend payment of $0.36 per share, which represents an increase of 12.5%. We also plan to repurchase approximately $1.15 billion of our common stock this year. Finally, our 2020 outlook for real estate projects remains unchanged from what we discussed with you on our Q3 2019 earnings call.", "Let me now provide some additional context to our current expectations. As I noted earlier, we anticipate continued and meaningful investment in our strategic initiatives this year including ongoing expenses associated with each. We continue to believe these investments will improve operating margin over time, particularly as the benefits to gross margin continue to scale and ultimately outpace the associated expense. NCI and DG Fresh are near-term examples of this dynamic as we expect both will be accretive to operating margin in 2020. That said, these investments will continue to pressure SG&A rate this year as we accelerate their rollout.", "With regard to tariffs, our guidance does not contemplate additional changes to tariff rates or products subject to tariffs beyond those which are currently in effect. Finally, as Tod mentioned, we are closely monitoring events related to coronavirus, including potential impacts on our business. At present, although we anticipate delays on certain goods originating in China, we do not anticipate a material impact on our business or fiscal 2020 financial results and have not taken any such impact into account in our guidance. In summary, we are very pleased with our 2019 result and excited about our plans for 2020. As always we continue to be disciplined in how we manage expenses and capital with the goal of delivering consistent strong financial performance while strategically investing for the long term.", "We remain confident in our business model and our ongoing financial priorities to drive profitable same-store sales growth, healthy new store returns, strong free cash flow and long-term shareholder value.", "With that I will turn the call over to Jeff." ] }, { "name": "Jeff Owen", "speech": [ "Thank you, John. I want to take the next few minutes to update you on our four operating priorities, including our plan for 2020. Our first operating priority is driving profitable sales growth. To that end, the team is executing against a portfolio of initiatives designed to drive continued growth, while keeping the customer at the center of all we do.", "Let me highlight just a few. Our cooler door expansion program continues to be our most impactful merchandising initiatives. Importantly, in addition to being a great sales and traffic driver, the expansion of our cooler door footprint over the years has provided the scale necessary to enable DG Fresh. In turn given our DG Fresh learnings and successes to date, we recently began incorporating higher capacity coolers into our stores, creating additional opportunities to drive higher on-shelf availability and deliver a wider product selection. We expect to further capitalize on these opportunities with the plans to accelerate our growth of cooler doors in 2020.", "In fact, we expect to install approximately 55,000 additional cooler doors this year, which is about 10,000 more than we did in 2019. The majority of which will be in higher capacity coolers, as we continue to build on our multi-year track record of growth in cooler doors and associated sales.", "Turning now to private brands, which continues to be a priority, as we pursue opportunities to further enhance our value proposition, while also benefiting gross margin. We are especially pleased with our ongoing rebranding and repositioning efforts, which contributed to our strong results in 2019, including our highest private brands sales increase in six years. Standouts in 2019 included both our Studio Selection and Gentle Steps product lines. And we had planned to expand each of these brands in 2020. We also believe there is significant opportunity with other brands as well. In fact, our plans this year include the rebranding of several additional product lines, including stationery, laundry, hardware, automotive, pet food and party.", "Also in 2020, we plan to execute a redesign of Clover Valley, our largest and most successful private brand which generated over $1 billion in sales in 2019 as we seek to drive overall category awareness and even greater customer adoption. In short, we are pleased with the continued momentum we are seeing across our portfolio of private brands and believe we are on the right track to deliver even greater value for our customers, while continuing to drive profitable sales growth. I also want to highlight our Better-For-You offering, which continues to resonate with our core customers.", "As a reminder, this product line consists of a variety of Better-For-You options at low prices, and approximately 5,600 stores with plans to expand to more than 8,000 stores by the end of the year. Next, a quick update on our FedEx relationship, which provides customers with convenient access to FedEx package pick-up and drop-off services. This service is currently available in more than 2,500 locations with plans to expand to over 8,500 stores by year end, further advancing our long track record of serving rural communities. Importantly, we continue to explore innovative opportunities to serve our customers, and are excited to be able to leverage our unique real estate footprint to provide solutions for them in convenient locations across the country.", "Beyond these sales driving initiatives we continue to focus on enhancing gross margin. In addition to the gross margin benefits associated with our NCI, DG Fresh and private brand efforts, foreign sourcing continues to represent a significant opportunity for us. Our goals include increasing penetration and diversifying countries from which we source and we are pleased with our progress on this front. In fact, we successfully reduced our direct sourcing exposure to China by approximately 7% in 2019, and are targeting a further reduction of an additional 7% in 2020. We are currently sourcing product from over 35 countries, up from nine countries at the end of 2018 and expect to further increase our countries of origin this year, as we continue to lay the foundation for ongoing success in this area.", "Additionally, while the team has made great progress in recent years shrink reduction remains an important area of focus and opportunity. During 2019, we added more than 6,000 additional Electronic Article Surveillance units completing our rollout to the entire chain. Looking ahead, we plan to build on our success with EAS, as we increase the number of products tagged, while further leveraging technology to drive even higher levels of in-store execution. We also continue to pursue distribution and transportation efficiencies, reducing stem miles is an important contributor to these efforts and the successful opening of our Longview, Texas and Amsterdam, New York distribution centers in 2019 is expected to drive additional efficiencies as we move ahead.", "Our plans also consist of the continued expansion of our private fleet in 2020 as we look to further reduce our dependency on third-party transportation carriers. Overall, we are pleased with the great work the team is doing across the business to further drive profitable sales growth and are excited about our plans for 2020. Our second priority is capturing growth opportunities. Our proven high-return, low-risk model for real estate growth continues to be a core strength of our business and enhances our ability to bring value and convenience to customers across the country.", "As a reminder, our real estate model continues to focus on five metrics, that have served us well for many years in evaluating new real estate opportunities including new store productivity, actual sales performance, average returns, cannibalization and the payback period. Of note, we continue to see very consistent performance across these metrics and with average returns of 20% to 22%, we continue to believe new store growth is the best use of our capital.", "In 2019, we celebrated the grand opening of our 16,000 store and completed a total of 2,099 real estate projects slightly more than we had initially anticipated. For 2020, we expect to open 1,000 new stores, remodel 1,500 stores and relocate 80 stores representing nearly 2,600 real estate projects in total or an average of seven projects per day, as we continue to deploy capital in these high return investments. Importantly, we expect more than 1,100 of our remodels to be in the higher cooler count, DGTP or DGP format, bringing our total number of stores in these formats to approximately 3,500 by year-end. The remainder of our remodels will primarily be in the traditional format, many of which will include the higher capacity coolers, I mentioned earlier.", "We are also accelerating the expansion of our produce offering, which provides the top 20 items typically sold in traditional grocery stores and covers approximately 80% of the overall categories they carry. Our plans now consist of adding produce in approximately 400 stores this year, up from our previous goal of about 250 stores, bringing the total number of stores with produce to more than 1,000 by year end.", "I'm very proud of the team's ability to execute such high volumes of successful real estate projects, and we are excited about the continued growth opportunities ahead. Our third operating priority is to leverage and reinforce our position as a low cost operator. Over the years we have established a clear and defined process to control spending, which governs our disciplined approach to spending decisions. This zero based budgeting approach, internally branded as safe to serve, keeps the customer at the center of all we do, while reinforcing our cost control mindset. At the store level, our operational initiatives for 2020 consist of building on our recent success with Fast Track, which Todd will discuss in more detail as well as ongoing efforts to simplify our operations by reducing unproductive inventory and operating complexities.", "As I highlighted earlier, we are also focused on improving distribution and transportation efficiencies, while at the store support center, work simplification and process improvement are ongoing initiatives to take costs out of the business. In addition to generating significant savings to date, this process has also produced other meaningful initiatives such as our 2019 partnerships with Western Union and FedEx and the income associated with these service offerings. Our underlying principles are to keep the business simple, but move quickly to capture growth opportunities while controlling expenses and always seeking to be a low cost operator.", "Our fourth operating priority is to invest in our people as we believe they are competitive advantage. 2019 was a banner year in many ways underscored by another record low in store manager turnover following a record low the previous year. In addition, we continue to be pleased with our strong applicant flows and the length of time it takes to fill open positions, which we believe further demonstrates that our commitment to investing in our people is resonating in the communities, we call home.", "I'm also pleased to announce for the ninth consecutive year, Dollar General was included in Training Magazine's top 125 list, placing number 1 overall for the second year in a row. And while we are excited about these accomplishments, the team is already focused on additional opportunities to further develop our people in 2020 including enhancing our store manager training program, to include even more hands on learning, increasing the size of our assistant store manager development program and continuing to grow our private fleet driver training program, including the funding and facilitation of training for employees to obtain their commercial driver's license.", "In addition, we continually strive to create opportunities for people to grow and develop at Dollar General. As a result, more than 12,000 of our current store managers were promoted from within, and internal placement rates remain strong across the organization. We believe the opportunity to start and develop a career with a growing company is a unique competitive advantage and remains our greatest currency in attracting and retaining talent.", "In summary, we are executing well and making great progress against each of our operating priorities. We have a robust set of initiatives in place for 2020 and are confident in our plans to drive continued growth in the years ahead.", "With that I will turn the call back over to Todd." ] }, { "name": "Todd Vasos", "speech": [ "Thank you, Jeff. I'm very proud of the progress the team has made in advancing our key strategic initiatives. Let me take you through some of the most recent highlights as well as our plans for 2020. Starting with our non-consumable initiative or NCI. As a reminder, NCI consists of an enhanced and expanded product offering in key non-consumable categories. The NCI offering was available on approximately 2,400 stores at the end of 2019. And our plans include accelerating the rollout to a total of about 5,000 stores by year's end. We're especially pleased with the sustained positive sales and margin performance we are seeing across our enhanced non-consumable product categories.", "We also continue to see a positive halo effect in consumable sales. Overall this performance is contributing an additional 1% to 2% increase in total sales comp compared to a typical remodel, as well as a meaningful improvement in gross margin rate in these stores. And while the NCI store count is still relatively small, compared to our overall store base, we are realizing additional benefits by leveraging learnings from these stores. Specifically we are incorporating select NCI products and full planograms throughout the broader store base, resulting in positive sales and margin contributions across the entire chain.", "Turning now to DG Fresh, which is a strategic multiphase shift to self-distribution of our frozen and refrigerated goods. These goods currently represent approximately 8% of our total sales. The primary objective of DG Fresh is to reduce product cost on our frozen and refrigerated items, by removing the markup paid to third party distributors, thereby enhancing gross margin. And while as expected, this cost of goods benefit was more than offset by initial start-up costs and associated operating expenses in 2019, we continue to be very pleased with the product cost savings, we are seeing.", "In fact, as John mentioned, we expect DG Fresh will be accretive to operating margin in 2020. As the benefits begin to exceed associated expenses and grow in the years ahead, as we continue to scale this transformational initiative. Another important goal of DG Fresh is to increase sales in these categories by enabling the accelerated rollout of our higher capacity coolers increasing in-stock levels and eventually expanding our overall assortment offering. This could include a wider selection of both national and private brands as well as an enhanced offering of Better-For-You items. And while produce is not included in our initial rollout plans, we believe DG Fresh could eventually provide a potential path forward to expanding our produce offering to more stores in the future.", "In total, we are currently self-distributing product to more than 6,000 stores from five DG Fresh facilities. Our goal for 2020 is to capture benefits from DG Fresh in approximately 12,000 stores or about double the current store count, from up to 10 facilities by year's end. In short, we are very pleased with the results we are seeing from this initiative and excited about the potential long-term benefits, it can deliver for our customers and our business.", "Next, our digital initiative where our efforts remain focused on deploying and leveraging technology to further enhance the customer in-store experience. Our strategy consist of building a digital ecosystem that is specifically tailored to providing our core customer with even more convenient, frictionless and personalized shopping experience. To date many of our efforts have centered on further enhancements to the Dollar General mobile app, which now includes digital coupons, a shopping list feature, our cart calculator in-app shopping and budgeting tool and DG GO mobile checkout, now available in approximately 750 stores with plans for further expansion as we look to combine this feature with self-checkout in select stores as we move ahead, providing for even more convenient checkout solutions.", "Our digital offering is clearly resonating as we added 1.5 million users to our monthly active user base on our mobile app, ending the year with 3,000 -- I'm sorry 3.3 million monthly active users, an 83% increase over prior year. Importantly, we know digitally engaged customers checkout with baskets twice as large as the Company average. We are -- also recently launched a pilot of DG Pickup which is our buy online pickup in the store offering.", "DG Pickup is currently available in approximately 30 stores and we are well positioned to scale quickly, pending the outcome of our pilot results. By leading our channel and digital experiences, we believe we can continue to drive in-store traffic, grow basket size and offer even greater convenience to both new and existing customers within our channel.", "Moving now to Fast Track, where our goal will include increasing labor productivity in our stores, enhancing customer convenience and further improving on-shelf availability. The first component of Fast Track is streamlining the stocking process in our stores through rolltainer optimization, which we have now completed at each of our distribution centers with even more shelf-ready packaging. These efforts are designed to reduce the amount of time spent stocking shelves during the truck unloading and restocking process. And we're very pleased with the labor productivity improvements we are already seeing.", "Importantly, we are also seeing increased sales, higher in-stock levels and lower store manager turnover in the initial stores that received optimize rolltainers, which positions us well to drive additional benefits as we move forward. The second component of Fast Track is self checkout, which we believe can further improve speed of checkout while also reducing the amount of labor hours devoted to the checkout activity. We are currently testing self checkout in a small sample of stores and are pleased with the early results, including positive feedback from both customers and employees. We believe this offering will not only further enhance our convenience, proposition for customers, but also drive even greater efficiency in the store.", "To summarize, 2019 was a noteworthy year for Dollar General. As we delivered strong results and made significant progress with our strategic initiatives, while further laying the groundwork for further initiatives and long-term sustainable growth. As a mature retailer in growth mode, we are constantly evaluating what lies ahead for our customers and our business and continue to believe we are pursuing the right strategies to capture additional growth opportunities in an evolving retail landscape.", "In closing, I'm proud of the team's performance and our 2019 results, which demonstrate strong and disciplined execution across many fronts, including a multitude of complex projects. And with the plans we have in place, including continued investment, we are excited about our ability to sustain this growth in 2020 and over the long term.", "I want to offer my sincere thanks to each of our approximately 143,000 employees across the Company for their hard work and dedication to fulfilling our mission of serving others. As a team, we look forward to 2020 as we look to build on our strong performance from 2019.", "With that operator, we'd now like to open the lines for questions." ] } ]
[ { "name": "Operator", "speech": [ "Thank you. At this time, we'll be conducting a question-and-answer session. [Operator Instructions] Our first question comes from Rupesh Parikh with Oppenheimer. Please proceed with your question." ] }, { "name": "Rupesh Parikh", "speech": [ "Good morning. Thanks for taking my question and congrats on another strong quarter." ] }, { "name": "Todd Vasos", "speech": [ "Thank you, Rupesh." ] }, { "name": "Rupesh Parikh", "speech": [ "Just with the coronavirus, just curious what you guys are seeing related to it, in recent days? And what type of changes in consumer behavior are you seeing in store currently?" ] }, { "name": "Todd Vasos", "speech": [ "Yeah, Rupesh, we are like probably other retailers, seeing a stock-up phenomenon happening over the last week and a half to two weeks, accelerated into this week a little bit more. So we're continuing to watch that closely. I'm really proud of our store teams with the additional volume how they've taken care of our customers and our supply chain teams making sure that we have stock in the store for those -- for those customers that come in.", "It is our hope as we move through this, we're able to satisfy the customer need as they continue to shop with us. We're watching that closely as well, because like most stock-ups, there is always a back side to this. So we're watching that as we continue to move through the next few weeks, with the hope that this virus will diminish over time and obviously we'll see the back end, but we'll keep everybody posted as we move forward. Our goal internally here again is to ensure we deliver for our core consumer." ] }, { "name": "Rupesh Parikh", "speech": [ "Great. And then one follow-up question, so you guys again very positive commentary on some of the market share gains you're seeing. Just given some of your initiative with DG Fresh and the non-consumable initiatives, any shift in where you're seeing those shares gains coming from versus recent quarters?" ] }, { "name": "Todd Vasos", "speech": [ "As you take a look at what we've been able to post in 2019 and let's be honest even in years prior we're really taking share from across the Board in many respects, obviously DG Fresh has accelerated. Some of that -- those share gains coming from different disciplines as well that are out there, but the great thing is that DG Fresh is scaling exactly where we thought it would. Our teams have done a fabulous job. As you can imagine, this is a very complex project to rollout, but in true DG fashion, we're rolling that out. We had a very, very high level of execution. So we are looking forward to additional gains in traffic and customer count as we continue to scale that.", "And then the NCI piece is another one that we're seeing some very good traction from -- on our non-consumable side. We posted our best non-consumable sales last year that we've seen in the last four to five years and a lot of it has to do with them, a lot of the work that the team has put in within our non-consumable initiative. And the important thing here is scaling it very quickly up to 2,400 stores and soon to be 5,000 by year's end, but the most important thing is we've been able to take the learnings from that and move it back to the entire chain. So that we saw a great benefit as we move through 2019, we expect the same in 2020." ] }, { "name": "Rupesh Parikh", "speech": [ "Great. Thank you for all the colors." ] }, { "name": "Todd Vasos", "speech": [ "Sure." ] }, { "name": "Operator", "speech": [ "Our next question comes from Matthew Boss with J.P. Morgan. Please proceed with your question." ] }, { "name": "Matthew Boss", "speech": [ "Great. Thanks and congrats on a really nice quarter." ] }, { "name": "Todd Vasos", "speech": [ "Thank you, Matt." ] }, { "name": "Matthew Boss", "speech": [ "Todd, maybe to take a step back, can you talk to the current health of the low income consumer, maybe what you're seeing in the competitive environment? And just anything to consider in terms of the anticipated quarterly cadence of comps as we think about the progression of the year?" ] }, { "name": "Todd Vasos", "speech": [ "Sure. Yeah, as we see the core customer, as you know, we talk to her each and every quarter leading into Q1. So coming out of Q4, our core customer was -- was in really good shape and continues to be in good shape. And probably not much, not very different than what we saw are coming out of Q2 and into Q3. Now obviously with the coronavirus setting in, we're watching that very carefully, we'll be talking to our core consumers here in the next couple of weeks to understand exactly how she is feeling, as she now moves through our Q1 and dealing with the coronavirus.", "But I would tell you that everything was, all systems go as far as we were concerned leading into this virus. So we anticipate that our core consumer will be in pretty good shape. And I think it really goes to show you the -- some of the stock-up sales that we've seen, early on here as I mentioned earlier. Our core consumer is doing a lot of that, and she has the means to do it. And I think that's an important note to take away, is that, in the years past, she may not have had that luxury or that opportunity.", "From a environment standpoint, I would tell you that the promotional environment is very, very stable, again very much like we saw it all the way through 2019. And we feel fabulous about where our everyday pricing is on the shelf. We're in very, very good shape. And again, probably some of the best that we've seen in -- really since I've been here for over 11 years. So we are in very, very good shape there. So right now, we feel good about that customer, we're watching that closely. And John, you may want to talk about the cadence?" ] }, { "name": "John Garratt", "speech": [ "Yeah. In terms of sales, I'll start by saying, we feel good about this business as I've ever felt. I think Todd would agree, the initiatives are firing on all cylinders, so we expect strength throughout the year. Now, obviously there is some lapping differences as you move through the year, the lap gets little tougher, Q3 in particular. As Todd mentioned, Q1, obviously over the last two weeks, we've seen the stock-up, he mentioned. But as he also mentioned, it remains to be seen whether that is just timing or whether that is permanent, because we tend to see that average out over time. So more to come on that. But overall, anticipate a really strong year for sales and feel very good about the guidance provided." ] }, { "name": "Matthew Boss", "speech": [ "Great. And then just a follow-up. John, maybe on the gross margin, help us to think about some of the puts and takes to consider in 2020? And any material difference between your first and second half of the year embedded gross margin assumptions?" ] }, { "name": "John Garratt", "speech": [ "Yeah. As you look at gross margin, I'll start by saying, we're very pleased with where we're at right now, ending the year with 60 basis points of expansion, 14 basis points of expansion in the year, coupled with strong comp and traffic growth. As you look across the year, the things that helped Q4, we expect to continue. The biggest driver in Q4 we called out was higher initial markups, and DG Fresh was the biggest driver of that.", "And as Todd mentioned with DG Fresh and NCI, we're very pleased with what we're seeing there and we continue to see those benefits grow, as we move forward, and NCI has that added benefit of helping the non-consumables across the system as we take the best ideas and implement them elsewhere, and again, having the best year this year and non-consumables that we had in four or five years. We see other opportunities to expand our gross margin, we're very pleased with what we saw in private brands this quarter, with the actions we've put in place. We're getting traction in direct and foreign sourcing, on supply chain as the market has stabilized. We've done a lot of great work there to take advantage of that and driven efficiencies there.", "In shrink, with the investment we made in the EAS units in the latter part of the year adding 6,000 units as we hit those inventories later in the year, that should help. And then, of course you have just the great relationships we have with our vendors and the scale we have with our low SKU model count. So when you put all these together, we feel good about our ability to enhance our gross margin over the long-term, there is a lot of levers here. Now we -- always reserve the right to invest in price when appropriate to drive share. But currently, we're in a great spot on price and happy with the results. So feel good about where we're at, we'll make trade-offs throughout the year as we mentioned. We are investing some SG&A to drive gross margin, but feel that positions us very well, not only for this year but to drive that double-digit EPS growth we strive for over the long term." ] }, { "name": "Matthew Boss", "speech": [ "That's great color. Best of luck." ] }, { "name": "John Garratt", "speech": [ "Thank you." ] }, { "name": "Todd Vasos", "speech": [ "Thank you." ] }, { "name": "Operator", "speech": [ "Our next question comes from Michael Lasser with UBS. Please proceed with your question." ] }, { "name": "Michael Lasser", "speech": [ "Good morning. Thanks for taking my question. Todd, I know you don't have a ton of stores in the Pacific Northwest. But if you look at areas that -- where the coronavirus is spreading more rapidly or in areas where you saw that initial stock-up take place, are you starting to see a slowdown in sales in those areas, either because consumers are engaging in social distancing or because that stockpiling just pulled forward some sales.", "And as part of that, you have a unique customer base and a unique value proposition where you're feeding filled-in trips, and you have a lot of rural locations. So do you think your customer, given those characteristics, might just -- you'll be less exposed because your customer either need your store more often or will engage in less social distancing because they live in rural areas?" ] }, { "name": "Todd Vasos", "speech": [ "Yeah. Michael, thanks for the question. As we look at what's transpired over the last couple of weeks, we've seen a pretty good balance of shopping acceleration across the 44 -- 45 states now that we operate in. And really not specific to the Pacific Northwest, now, as you indicated though, we are less exposed out there, just because of really just growing that store count in California, Oregon and Washington, obviously. So we are we less exposed out there, but seeing the sales really across the Board, as far as the social distancing is concerned, I think it is key to point out and it's not lost on us, obviously that we're within five to seven miles of the majority of the United States over 75% if you will. We are in all these rural communities. But I think the most important thing here is that we're a small box shop close to your home.", "And I think in times like this, where people are probably less apt of travel. We believe that we'll get our fair share of that consumer base, because they just don't want to travel to the big box or don't want to travel great distances. So we're watching that very closely, and I think that phenomenon if play out will be probably in the upcoming weeks, as we see this virus continue to unfold." ] }, { "name": "Michael Lasser", "speech": [ "Okay. And then -- and Todd, I know you have a lot in your plate, if that wasn't enough, one of your competitors, has recently talked about being more promotional. So do you expect to respond to this with increased promotional activity? And what are the chances that there could be an extended period of heightened promotions within the small box value discount retail sector?" ] }, { "name": "Todd Vasos", "speech": [ "Yeah, Michael. We watch all retailers, whether it's directly in our space or in the other areas of drug, grocery or mass retailing. I would tell you, and we track it closely, as you can imagine, we don't see a great deal of promotional activity across the Board. There is always a skirmish here or there, if you will, in certain DMAs, but that's always there, right. And we are squarely focused on controlling what we can control, and we feel we're in a great spot on every day price, on our promotional cadence that we have out there, and we continue to distance ourselves from our nearest competitors. And that's really what we're focused on, and I think we're delivering on that." ] }, { "name": "Michael Lasser", "speech": [ "Thank you very much. Good luck and stay safe." ] }, { "name": "Todd Vasos", "speech": [ "Thank you." ] }, { "name": "Operator", "speech": [ "Our next question comes from Simeon Gutman with Morgan Stanley. Please proceed with your question." ] }, { "name": "Simeon Gutman", "speech": [ "Hi, good morning everyone. My first question is on implied EBIT margins, they look down a little bit in 2020. Is that fair? And can you walk through some of the puts and takes? And bigger picture, I'm a little surprised given that DG Fresh is going to be accretive that the overall EBIT margin is going to be down, so we can talk about -- so can we talk about some of the puts and takes please?" ] }, { "name": "John Garratt", "speech": [ "Yeah, I think when you look at the guidance provided on the top line and the bottom line, guiding toward the approximately 10% EPS growth. I think that suggest a pretty healthy operating profit or EBITDA -- EBIT growth on top of a very healthy one this year. And I would say what we're focused on right now is striking a healthy balance between the near term and the long term. We are investing in SG&A, investing a little bit SG&A to save more gross margin over time. And as we said, Fresh and NCI are going to be accretive this year, but we continue to invest in these initiatives as they scale. But again, we think that's the right trade-off for the long -- for the long term.", "And as we come into the year, it's beginning of the year, there are some uncertainties. You have the uncertainty around coronavirus, election cycle, and what that may mean to the macros. But as Todd had said, we believe we're very well positioned in that event -- of an unfortunate event of a downturn, delivering 30 straight years of consecutive same-store sales growth, I think it just shows the resiliency of the model. And I think we're very well positioned to serve our customers as he mentioned. So feel good about the guidance provided and feel we're striking a healthy balance between the near term and the long term with our eye on continuing to deliver sustainable double-digit EPS growth over the long term." ] }, { "name": "Simeon Gutman", "speech": [ "And my follow-up is also on DG Fresh, if you think about the gross margin drivers for 2020, you probably not going to quantify it, but does it make sense that DG Fresh would be at the top of the list, in terms of initial markups, like it was in the fourth? And then now that you have a little bit more learnings from the initial rollout, can you help or comment on sizing the long-term EBIT margin opportunity from it?" ] }, { "name": "John Garratt", "speech": [ "Yeah, I'll start by saying that you're correct in thinking that DG Fresh is the biggest as I mentioned, there is a lot of drivers to help gross margin, but DG Fresh is the biggest one to point to this year. In terms of sizing that, I think a couple of data points we've provided is that, it's about 8% of our business and it's a growing piece of our business. And as mentioned, it was the leading driver of the leading item we called out in our gross margin expansion for the quarter. So we feel good about where we're at and feel good about what it can contribute, not just on gross margin, but sales as well. I think that's the other thing to point to is -- we see it as a sales driver as well as we remodel stores, add the coolers, that provides a very sizable sales bump.", "And we think as we can improve the assortment, improve the in-stock, as we said before, historically our in-stock on the frozen refrigerated side of the business has lagged, dry by 10 points. There is a very strong correlation, as you know between in-stock and sales. And so we see that as a benefit, as we close that gap, as well as the ability to improve the assortment in the store provide more Better-For-You options, along with that, including produce, we think longer term, this is the unlock for produce. So we think it pencils very well, it is delivering exactly what we thought it would, in terms of as we convert items in stores. It's delivering that sizable cost takeout that we targeted, but longer term, we see it as a big sales driver too." ] }, { "name": "Simeon Gutman", "speech": [ "Okay. Thank you. Good luck this year." ] }, { "name": "John Garratt", "speech": [ "Thank you." ] }, { "name": "Operator", "speech": [ "Our next question comes from Christopher Mandeville with Jefferies. Please proceed with your question." ] }, { "name": "Christopher Mandeville", "speech": [ "Hey, good morning guys. John, just to kind of follow-up on the overall guidance here. If I look at your comp guide of 2.5% to 3%, I could simply hold the two year or three year stack for that matter and come out above that range. So I think you guys are talking about being in a position of strength and receiving momentum. You've got 75 additional stores entering the comp base versus last year, additional cooler expansion, Fast Track and Fresh are already seeing improvements in on-shelf availability. And then you've got some near-term benefit from the coronavirus, at least in the consumables category. Unless maybe we're missing something in terms of a temporary uplift in '19 from maybe competitive closures, can you just help us understand why we should only be looking for 2.5% to 3% comp?" ] }, { "name": "John Garratt", "speech": [ "Well, I'll start by saying, that we feel great where we're at right now. Coming off the year with a 3.9% full year sales comp. As we said before, this model works very well with sales comps in the range of 2% to 4%, we were at the high end of that. Now obviously as we come into the year that's a tough lap, but I could tell you -- as I said before, we feel as good as ever about the strength of the business model, the fundamentals and the initiatives. But we also mentioned, there are some near-term uncertainties with what the coronavirus, election cycle may mean to macro impacts. But we're focused on controlling what we can control and delivering profitable sales growth. It feel like we have great initiatives in place. And with the guidance provided, we are comfortable with it, and it implies a quite healthy two-year stack." ] }, { "name": "Christopher Mandeville", "speech": [ "Okay. And then I guess my follow-up would be, as it relates to just operating expenses with the strategic initiatives, is there any way of framing up that the start-up costs that we should expect in '20 versus '19? And then just on distribution and freight, be it that they're in different line items. Just given the notable decline in crude of late, is there any way have also kind of sizing up that potential benefit on the margin? Thanks." ] }, { "name": "John Garratt", "speech": [ "Sure, I'll start with your question on SG&A, and I think that's a fair comment, that as we shift into scaling these, the cost shift from start-up costs to ongoing operating costs. And I think the perfect example of that is DG Fresh. As we scale that, we have to continue to invest a little bit of labor in the stores to save a lot of product cost. So it's a virtual -- it's a virtuous cycle as this grows and it's accretive. We expect it to be accretive this year, and net benefit grows, as we get more and more efficient. You still do have some start-up costs and some inefficiencies as you start-up new DCs, as you remodel stores for NCI, as we work on digital. But increasingly it shifts more toward ongoing expenses, which I would really classify more as geography between gross margin savings and SG&A with gross margin exceeding -- gross margin savings continuing to pull away from the SG&A providing more and more of a benefit as we move forward.", "So I think that's the right way to think about that, and it's a healthy trade-off. In terms of distribution, transportation costs, there too is a little bit of geography. If you look at our distribution costs we called that out as a drag this quarter, not a significant one, but really the reason for that is -- as we incur additional costs, as we take over the cost of distributing fresh and frozen refrigerated goods. But again, the product cost savings that comes out of that far exceeds the labor and the distribution costs. So if you strip out the impact of taking that additional cost on, as a percent of sales year-over-year, our distribution, transportation costs were lower. And what I would point to on that is -- is several things. The team has done a great job of expanding, diversifying our carrier base. And as the market improved, has been able to take advantage of that with better rates.", "We've also expanded our private fleet and we'll continue to do so this year, primarily around the new fresh DCs. We just opened two new DCs which helps the -- reduce the stem miles, as well as other efforts to reduce stem miles, load optimization and warehouse efficiencies. So when you strip out that extra cost that we're picking up, that net-net is favorable. The team is doing a great job to drive efficiencies on distribution and transportation." ] }, { "name": "Christopher Mandeville", "speech": [ "Very helpful. Thanks, again." ] }, { "name": "Operator", "speech": [ "Our next question comes from Paul Trussell with Deutsche Bank. Please proceed with your question." ] }, { "name": "Paul Trussell", "speech": [ "Good morning. Great results. A heck of a data report. So let's maybe start with your real estate projects. A 1,000 new stores, obviously, you've continued to have really good results out of the new boxes. Maybe just touch a bit more on that. And from your vantage point, how many years of additional 1,000 store openings do you kind of foresee? And then on the remodel front, the majority of your remodels are going into that higher cooler count format. How should we think about the opportunity there? I think you mentioned about 3,500 by year end. What's the runway? Thank you." ] }, { "name": "Todd Vasos", "speech": [ "Sure, Paul. Yeah, we feel very good about our real estate program, it is one of Dollar General's core strengths, and we continue to execute at a very, very high level. As you indicated, we're very pleased with the results we saw in 2019, and it was just another year of adding on to great results, even from past years. We still see an opportunity to -- in the continental United States to put it, Dollar General in about 12,000 locations. And so there is a -- there is still a lot of runway there. DG Fresh obviously opens up some runway for us as well, because of being able to scale our cooler -- our cooler counts and associated product sales including produce, so it opens it up. And we -- all the metrics that we follow on our new stores continue to run at a very, very high rate, on the top of what we see as far as a return of 20% to 22%. So again, very, very strong and we see that 2020 should be the same. And we've come out of the shoot very strong in the early days here.", "As it relates to the higher cooler count, this is again just a continuation of how we see coolers and the associated sales with that. As I've mentioned before and I still truly believe we are still somewhere in that fifth inning of a nine-inning ballgame on cooler counts and be able to really leverage that. And again DG Fresh will be a big, big unlock as we continue to roll that out. These higher capacity coolers can contain and will contain 25% more items and it holds in totality 44% more product. So the holding power is greater and reduces out of stocks, which increases sales. So again, we're very, very happy with our decisions to move to that, and I believe you will start to see those benefits in 2020 and beyond. So again very, very happy. Team has done a great job in executing and we see the same as we go into '20 here." ] }, { "name": "Paul Trussell", "speech": [ "Thank you for that color. My follow-up is just on the pickup test. How is that working so far? And I believe you mentioned 30 stores, that it's been tested in. What are you looking for, from a metrics standpoint? And when you say, can scale quickly, what does that potentially equate to?" ] }, { "name": "Todd Vasos", "speech": [ "Sure. Again, early days Paul, 30 stores up and running, but the great thing here is our IT team and our operating teams collectively stood this up in less than one year. And the app is very, very intuitive, it's great. I use the app myself and I've seen others -- other competitors that have the app. And I would tell you that ours is, as good if not better than most of those.", "Early on, we're seeing above what we thought we would see. We're seeing some conversion from existing customers, but probably some new customers as well. The great thing is our repeat customer base on this is at a very high level, much higher than we thought. So that's a very good sign that, one, she enjoyed the experience, and two, as some of these newer customers were getting repeat newer customers as well. So we're going to continue to monitor that very closely. We think that's one of the key metrics, are we actually attracting a new customer overall. And so we'll watch that as we go.", "A couple of points just to think about here is the average items, is running about seven to eight to nine items, somewhere in there, which is not too dissimilar to what a full checkout experience averages for our core consumer. And if the dollar amount is running about $3 to $5 more depending on the transaction than our normal. So again we're a fill-in, as we've always mentioned. And she is using this DG Pickup at least so far, early on, in 30 stores as additional fill-in. Now as it relates to scaling, we've said this before, we're going to take this slow. But if our consumers continue to resonate the way they have, we're going to be able to turn the dial-up as quickly as we believe we should to scale this appropriately with the appropriate return against it. But we're only going to go as fast as the consumer wants us to go, and also only as fast as our execution levels will allow us. We're very disciplined along those lines, and we'll continue to be. But the great thing here is, we believe there is a real competitive advantage for us, especially in our channel." ] }, { "name": "Paul Trussell", "speech": [ "Thank you. My best." ] }, { "name": "Operator", "speech": [ "Our final question will come from Karen Short with Barclays Bank. Please proceed with your question." ] }, { "name": "Karen Short", "speech": [ "Hi, thanks very much. Just one clarification. I know this is kind of been asked in various different ways, but I just want to be clear. You do you believe that the gross margin benefit from all these initiatives will build throughout the year, correct? But the idea is, we have to keep in mind, SG&A will also be a little elevated leading to the slightly negative EBIT margins, is that the right way to think about it?" ] }, { "name": "Todd Vasos", "speech": [ "Karen, that is the right way to think about that. As we scale these, we see the benefit of DG Fresh, NCI continue to grow. But again, that is partly that is you have the investment costs associated with that. But it continues to be more and more accretive as you move forward and you reach scale." ] }, { "name": "Karen Short", "speech": [ "Okay. And then -- so switching to the virus. I mean, obviously every day is a new day. But it does seem likely we'll be in a much weaker macro for potentially several quarters. Could you maybe discuss how -- I mean obviously you are very resilient as a box -- but could you maybe discuss how you might perform in a weaker macro today? And how it might differ from '08, '09? I'd say in the context of comps, especially, because I think there are many investors who are using '08, '09 as a proxy for how you might be comping in a weaker macro and I think there maybe a few issues with that, as it relates to the comparability. So anything you could talk to on that?" ] }, { "name": "Todd Vasos", "speech": [ "Sure. Obviously we're watching the virus as I mentioned earlier very closely. And if it does lead to a weaker macro environment, we feel we're very well positioned to capture those opportunities as they come. As it relates to 2008 and '09 compared to today, well, we're a much different shop today than we were. In '08 and '09, we were fixing the railroad, raising our gondola heights, doubling our SKU count, a lot of different things, that drove those comps probably to a little bit more of an outstretched comp than what you might see in a downturn in today's environment.", "But in saying that, we still believe very strongly that we're well positioned in a downturn from the product offering that we have as well as the customer that we serve and also we know from '08, '09, which we don't believe this will change is that trade down customer will come into the box as well. And the great thing about that is, maybe she visited us back in '08 and '09 and some obviously may not have come back. When she comes back, she is going to see a completely different box that's even more enhanced then she saw before. So we will watch it carefully, but we think we're well positioned as we move forward here." ] }, { "name": "Karen Short", "speech": [ "Okay. And then, just my last question is, can you just give an update on the comp waterfall from new units and remodels, is it still kind of that 200 basis point to 250 basis point range? Or is it maybe just an update there?" ] }, { "name": "John Garratt", "speech": [ "Yeah, just to clarify what we've said is actually 150 basis point to 200 basis point, now that is net of cannibalization, which has been very consistent as expected. And so as you think about that 150 basis point to 200 basis point range, we have been running at the high end of that, as we've seen not only great results from the stepped-up new units, but just see -- continue to see great results from the remodels, particularly where we have extra cooler count presence. So toward the high end of that 150 basis point to 200 basis point is the way to think about that." ] }, { "name": "Karen Short", "speech": [ "Great. Thanks very much." ] }, { "name": "Operator", "speech": [ "[Operator Closing Remarks]" ] } ]
DG
2021-08-26
[ { "description": "Vice President, Investor Relations & Corporate Strategy", "name": "Donny Lau", "position": "Executive" }, { "description": "Chief Executive Officer", "name": "Todd Vasos", "position": "Executive" }, { "description": "Executive Vice President and Chief Financial Officer", "name": "John Garratt", "position": "Executive" }, { "description": "Chief Operating Officer", "name": "Jeff Owen", "position": "Executive" }, { "description": "Oppenheimer -- Analyst", "name": "Rupesh Parikh", "position": "Analyst" }, { "description": "JPMorgan -- Analyst", "name": "Matthew Boss", "position": "Analyst" }, { "description": "Morgan Stanley -- Analyst", "name": "Simeon Gutman", "position": "Analyst" }, { "description": "Barclays -- Analyst", "name": "Karen Short", "position": "Analyst" }, { "description": "UBS -- Analyst", "name": "Michael Lasser", "position": "Analyst" }, { "description": "Guggenheim Partners -- Analyst", "name": "John Heinbockel", "position": "Analyst" }, { "description": "BMO Capital Markets -- Analyst", "name": "Kelly Bania", "position": "Analyst" }, { "description": "Evercore ISI -- Analyst", "name": "Michael Montani", "position": "Analyst" } ]
[ { "name": "Operator", "speech": [ "Good morning. My name is Robert, and I will be your conference operator today. At this time, I'd like to welcome everyone to the Dollar General Second Quarter 2021 Earnings Call. Today is Thursday, August 26, 2021. [Operator Instructions]", "Now I'd like to turn the conference over to your host, Mr. Donny Lau, Vice President of Investor Relations and Corporate Strategy. Mr. Lau, you may begin your conference." ] }, { "name": "Donny Lau", "speech": [ "Thank you, and good morning everyone. On the call with me today are Todd Vasos, our CEO; Jeff Owen, our COO; and John Garratt, our CFO. Our earnings release issued today can be found on our website at investor.dollargeneral.com under News & Events.", "Let me caution you that today's comments include forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995, such as statements about our strategy, plans, initiatives, goals, priorities, opportunities, investments, guidance, expectations or beliefs about future matters and other statements that are not limited to historical fact. These statements are subject to risks and uncertainties that could cause actual results to differ materially from our expectations and projections. These factors include, but are not limited to those identified in our earnings release issued this morning under Risk Factors in our 2020 Form 10-K filed on March 19, 2021, and in the comments that are made on this call. You should not unduly rely on forward-looking statements, which speak only as of today's date. Dollar General disclaims any obligations to update or revise any information discussed in this call unless required by law.", "We also will reference certain non-GAAP financial measures. Reconciliations to the most comparable GAAP measures are included in this morning's earnings release, which as I mentioned is posted on investor.dollargeneral.com under News & Events.", "At the end of our prepared remarks, we will open the call up for your questions. Please limit your questions to one and one follow-up question, if necessary.", "Now it is my pleasure to turn the call over to Todd." ] }, { "name": "Todd Vasos", "speech": [ "Thank you, Donny, and welcome to everyone joining our call. We are pleased with our second quarter results and continue to be grateful to our associates for their dedication to fulfilling our mission of serving others. Despite what remains a challenging operating environment, including additional uncertainties brought on by the Delta variant and pressures on the global supply chain, our teams continue to successfully adapt and deliver for our customers. Because of their efforts, during the quarter, we saw an improvement in customer traffic as compared to Q1. And once again increased our market share in highly consumable product sales as measured by syndicated data.", "Looking ahead, we remain focused on controlling the things we can control and believe we are well positioned to navigate the current inflationary environment and global supply chain challenges. As always the health and safety of our employees and customers is our primary focus, while meeting the needs of the communities we serve. And with more than 17,500 stores located within 5 miles of about 75% of the US population, we believe we are well positioned to continue supporting our customers through our unique combination of value and convenience. To that end, we recently hired our first Chief Medical Officer. Going forward, our plans include further expansion of our health offering, with the goal of increasing access to affordable healthcare products and services, particularly in rural America. Overall, we remain focused on our operating priorities and strategic initiatives as we continue to meet the evolving needs of our customers and further position Dollar General for long-term sustainable growth.", "Turning now to our second quarter performance. As we continue to lap difficult quarterly sales comparisons from the prior-year, net sales decreased 0.4% to $8.7 billion, followed by a 24.4% increase in Q2 of 2020. Comp sales declined 4.7% compared to the prior-year period, which translates into a robust 14.1% increase on a two-year stack basis. Our Q2 sales results include a year-over-year decline in customer traffic, which was partially offset by the growth in average basket size. From a monthly cadence perspective, comp sales were lowest in May, with July being our strongest month of performance. And I'm pleased to report that Q3 is off to a great start.", "Importantly, we continue to be very pleased with the retention rates of new customers acquired in 2020, underscoring the broadening appeal of our value and convenience proposition. We believe we will ultimately exit the pandemic with a larger, broader and more engaged customer base than when we entered it, resulting in a even stronger foundation from which to grow. Overall, our second quarter results reflect strong execution across many fronts as we continue to strengthen our position while further differentiating and distancing Dollar General from the rest of the discount retail landscape.", "We operate in one of the most attractive sectors in retail, and we believe our unique store footprint further enhanced through our multiyear initiatives provides a distinct competitive advantage and positions us well for continued success. As a mature retailer in growth mode, we are also laying the groundwork for future initiatives, which we believe will unlock significant growth opportunities as we move forward. In short, I feel very good about the underlying strength of the business and we're confident we are pursuing the right strategies to enable balanced and sustainable growth while -- while creating meaningful long-term shareholder value.", "With that, I'll now turn the call over to John." ] }, { "name": "John Garratt", "speech": [ "Thank you, Todd, and good morning everyone. Now that Todd has taken you through a few highlights of the quarter, let me take you through some of its important financial details. Unless we specifically note otherwise, all comparisons are year-over-year, all references to EPS refer to diluted earnings per share and all years noted refer to the corresponding fiscal year.", "As Todd already discussed sales, I will start with gross profit. As a reminder, gross profit in Q2 2020 was positively impacted by a significant increase in sales, including net sales growth of 41% in our combined non consumables categories. For Q2 2021, gross profit as a percentage of sales was 31.6%, a decrease of 80 basis points, but an increase of 87 basis points compared to Q2 2019. The decrease compared to Q2 2020 was primarily attributable to increased transportation costs, a higher LIFO provision, a greater proportion of sales coming from the consumable categories and an increase in inventory damages. These factors were partially offset by higher inventory markups and a reduction in shrink as a percentage of sales.", "SG&A as a percentage of sales was 21.8%, an increase of 138 basis points. This increase was driven by expenses that were greater as a percentage of sales, the most significant of which were retail labor and store occupancy costs. Moving down the income statement, operating profit for the second quarter decreased 18.5% to $849.6 million. As a percentage of sales, operating profit was 9.8%, a decrease of 219 basis points. And while the unusual and difficult prior year comparison created pressure on our operating margin rate, we're very pleased with the improvement in our profitability on a two-year basis. Our effective tax rate for the quarter was 21.4% and compares to 21.5% in the second quarter last year. Finally EPS for the second quarter decreased 13.8% to $2.69, which reflects a compound annual growth rate of 27.7% or 24.3% compared to Q2 2019 adjusted EPS over a two-year period.", "Turning now to our balance sheet and cash flow, which remain strong and provide us the financial flexibility to continue investing for the long-term, while delivering significant returns to shareholders. Merchandise inventories were $5.3 billion at the end of the second quarter, an increase of 20% overall and 13.7% on a per store basis, as we continue to cycle unusually low levels of inventory in Q2 2020 which were driven by extremely strong sales volumes in that quarter. Similar to Q1, we strategically pulled forward certain inventory purchases during the quarter, particularly in select non-consumable categories in anticipation of longer lead times. As a result, we were pleased with our strong inventory position for the back-to-school shopping season and our teams continue to work closely with suppliers to ensure delivery of seasonal and other goods in the remaining back half of the year.", "Year-to-date through Q2 we generated significant cash flow from operations totaling $1.3 billion. Total capital expenditures for the quarter were $518 million and included our planned investments in new stores, remodels and relocations, distribution and transportation projects and spending related to our strategic initiatives. During the quarter, we repurchased 3.3 million shares of our common stock for $700 million and paid a quarterly dividend of $0.42 per common share outstanding at a total cost of $98 million. At the end of Q2, the remaining share repurchase authorization was $979 million.", "Our capital allocation priorities continue to serve us well and remain unchanged. Our first priority is investing in high return growth opportunities, including new store expansion and our strategic initiatives. We also remain committed to returning excess cash to shareholders through anticipated share repurchases in quarterly dividend payments, all while maintaining our current investment grade credit rating and managing to a leverage ratio of about 3 times adjusted debt-to-EBITDA.", "Moving to an update on our financial outlook for fiscal 2021. We continue to operate in a time of uncertainty regarding the severity and duration of the COVID-19 pandemic, including its impact on the economic recovery, global supply chain, consumer behavior and our business. Despite continued uncertainty, including additional pressure throughout the supply chain and cost inflation, we are updating our full year sales and EPS guidance, which reflects our strong first half performance. For 2021, we now expect the following. Net sales growth of 0.5% to 1.5%; a same-store sales decline of 3.5% to 2.5% which reflects growth of approximately 13% to 14% on a two-year stack basis and EPS in the range of $9.60 to $10.20, which reflects a compound annual growth rate in the range of 20% to 24% or approximately 19% to 23% compared to 2019 adjusted EPS over a two-year period. Our EPS guidance assumes an effective tax rate in the range of 22% to 22.5%. Our expectations for real estate projects remain unchanged from what we stated in our earnings release on May 27, 2021. With regards to share repurchases, we now expect to repurchase approximately $2.4 billion of our common stock this year, compared to our previous expectation of about $2.2 billion. Finally, we are increasing our expectations for capital spending in 2021 to a range of $1.1 billion to $1.2 billion to reflect higher equipment costs for store projects in the pull forward of select supply chain investments.", "Let me now provide some additional context as it relates to our outlook. In terms of sales, we remain cautious in our 2021 outlook given the current continued uncertainties arising from COVID-19 pandemic and the impact of the expected end of additional federal unemployment benefits.", "Turning to gross margin, please keep in mind, we will continue to cycle strong gross margin performance from the prior year where we benefited from a favorable sales mix and a reduction in markdowns, including the benefit of higher sell-through rates. Much like our Q2 results, we expect continued pressure on our gross margin rate in the second half, due to a less favorable sales mix compared to prior year, an increase in markdown rates as we cycle the abnormally low levels in 2020 and higher LIFO provisions as a result of cost of goods increases. We also anticipate higher supply chain costs in the second half compared to our previous expectations. Like other retailers, our business is seeing the effects of higher cost due to transit and port delays as well as elevated demand for services at third-party carriers. However, despite these challenges, our team was able to meet strong customer demand during the quarter and we're confident in our ability to continue navigating these transitory pressures. Finally, please keep in mind that the third quarter represents our most challenging lap of the year from a gross profit rate perspective, following an improvement of 178 basis points in Q3 2020.", "With regards to SG&A, we now expect about $70 million to $80 million of incremental year-over-year investments in our strategic initiatives as we further their rollouts. This amount includes $40 million in incremental investments made during the first half of the year. However, in aggregate, we continue to expect our strategic initiatives will positively contribute to operating profit and margin in 2021 driven by NCI and DG Fresh as we expect the benefits to gross margin from our initiatives will more than offset the associated SG&A expense.", "In closing, we are proud of our second quarter results, which are a testament to the performance and strong execution by the entire team. As always we continue to be disciplined in how we manage expenses and capital with the goal of delivering consistent, strong financial performance while strategically investing for the long-term. We remain confident in our business model and ongoing financial priorities to drive profitable same-store sales growth, healthy new store returns, strong free cash flow and long-term shareholder value.", "With that I will turn the call over to Jeff." ] }, { "name": "Jeff Owen", "speech": [ "Thank you, John. Let me take the next few minutes to update you on our operating priorities and strategic initiatives. Our first operating priority is driving profitable sales growth. The team continues to drive strong execution against a robust portfolio of growth initiatives. Let me take you through some of our more recent highlights. Starting with our non-consumables initiative or NCI. The NCI offering was available in more than 8,800 stores at the end of Q2, and we continue to be very pleased with the strong sales and margin performance we are seeing across our NCI store base. In fact this performance is contributing to an incremental 1% to 2.5% total comp sales increase in NCI stores and a meaningful improvement in gross margin rate as compared to stores without the NCI offering. Overall, we remain on track to expand this offering to a total of more than 11,000 stores by year-end, including over 2,100 stores in our light version, with the goal of completing the rollout of NCI across nearly the entire chain by year-end 2022.", "Moving to our newer store concept, pOpshelf, which further builds on our success in learnings with NCI. POpshelf aims to engage customers by offering a fun, affordable and differentiated treasure hunt experience, delivered through continually refreshed merchandise, a differentiated in-store experience and exceptional value with the vast majority of our items priced at $5 or less. During the quarter we opened eight new pOpshelf locations, bringing the total number of stores to 16, including four conversions of a traditional Dollar General store into our pOpshelf concept. And while still early, we remain extremely pleased with our results, which continue to exceed our expectations for both sales and gross margin. We also recently opened our first two store-within-a-store concepts, which incorporates a smaller footprint pOpshelf shop into one of our larger Dollar General market stores, and we are encouraged by the initial results including positive reaction from customers. For 2021, we remain on track to have a total of up to 50 pOpshelf locations by year-end as well as up to an additional 25 store-within-a-store concepts as we continue to lay the foundation for future growth. Overall, we remain very excited about the significant and incremental growth opportunities we see available for this unique and differentiated concept.", "Turning now to DG Fresh, which is a strategic multiphase shift to self-distribution of frozen and refrigerated goods. I'm very pleased to report that during the quarter, we completed the initial rollout of DG Fresh across the entire chain and are now delivering to more than 17,500 stores from 12 facilities. This important milestone is a direct reflection of the hard work and dedication of the team and I want to thank them for their incredible execution over the past 2.5 years. Notably the rollout was completed about six months ahead of our initial rollout schedule. As a reminder, the primary objective of DG Fresh is to reduce product costs on our frozen and refrigerated items and we continue to be very pleased with the savings we are seeing. In fact DG Fresh continues to be the largest contributor to the gross margin benefit we are realizing from higher inventory markups and we expect additional benefits going forward as we continue to optimize our network and further leverage our scale.", "Another important goal of DG Fresh is to increase sales in these categories, and we are pleased with the success we are seeing on this front, driven by higher overall in-stock levels and the introduction of additional products, including both national and private brands. For example, we recently introduced about 25 new and exclusive items under the Armor [Phonetic] brand, as we continue to optimize our assortment, while further differentiating our product offering from others. And while produce was not included in our initial rollout plans, we believe DG Fresh provides a potential path to accelerating our produce offering in up to 10,000 stores over time as we look to further capitalize on our extensive self-distribution capabilities.", "Moving to our cooler expansion program, which continues to be our most impactful merchandising initiative. During the first half, we added more than 34,000 cooler doors across our store base and remain on track to install approximately 65,000 cooler doors this year. Notably, the majority of these doors will be in high capacity coolers, creating additional opportunities to drive higher on-shelf availability and deliver an even wider product selection, all enabled by DG Fresh. In addition to the gross margin benefits associated with NCI and DG Fresh, we continue to pursue other gross margin enhancing opportunities, including improvements in private brand sales, global sourcing, supply chain efficiencies and shrink.", "Our second priority is capturing growth opportunities. Our proven high-return low-risk real estate model continues to be a core strength of our business. In the second quarter, we completed a total of 772 real estate projects, including 270 new stores, 477 remodels and 25 relocations. For the full year, we remain on track to open 1,050 new stores, remodel 1,750 stores and relocate 100 stores. In addition, we now have produce in more than 1,500 stores with plans to expand this offering to a total of more than 2,000 stores by year end.", "As a reminder, we recently made key changes to our development strategy, including establishing our larger 8,500 square foot format as our base prototype for nearly all new stores going forward. We're especially pleased with the sales productivity of this larger format, as average sales per square foot continue to trend well above an average traditional store. In total, we expect to have nearly 2,000 stores in this format by the end of the year, as we look to further enhance our value and convenience proposition particularly in rural America.", "Next our digital initiative, which is an important complement to our brick and mortar footprint, as we continue to deploy and leverage technology to further enhance convenience and access for customers. Our efforts remain centered around building engagement across our digital properties including our mobile app, which continues to grow in popularity. In fact, we ended Q2 with nearly 4 million monthly active users on the app, a 28% increase over prior year. Importantly, as we continue to drive higher levels of digital engagement, our DG Media Network, which we launched in 2018 has become an increasingly more relevant platform for connecting our brand partners with our customers. Of note, during the first half, the number of campaigns on our platform increased 65% compared to the prior year period, and we are very excited about the growth potential of this business as we look to further enhance the value proposition for both our customers and brand partners. Overall our strategy consists of building a digital ecosystem specifically tailored to provide our customers with an even more convenient frictionless and personalized shopping experience, and we are pleased with the growing engagement we are seeing across our digital properties.", "Our third operating priority is to leverage and reinforce our position as a low-cost operator. We have a clear and defined process to control spending, which continues to govern our disciplined approach to spending decisions. This zero-based budgeting approach internally branded as Save to Serve, keeps the customer at the center of all we do, while reinforcing our cost control mindset. Our Fast Track initiative is a great example of this approach, where our goals include increasing labor productivity in our stores, enhancing customer convenience and further improving on-shelf availability. The first phase of Fast Track consisted of optimizing our rolltainers in case pack sizes, resulting in the more efficient stocking of our stores. The second component of Fast Track is self checkout, which provides customers with another flexible and convenient checkout solution, while also driving greater efficiencies for our store associates. Self checkout was available in approximately 4,300 stores at the end of Q2, and we continue to be pleased with our results, including customer adoption rates and higher overall satisfaction scores in stores that include this offering. Our plans consist of a broader rollout this year and we remain focused on introducing self checkout into the vast majority of our stores by the end of 2022 as we look to further extend our position as an innovative leader in small-box discount retail. Our underlying principles are to keep the business simple, but move quickly to capture growth opportunities, while controlling expenses and always seeking to be a low-cost operator.", "Our fourth operating priority is investing in our diverse teams through development, empowerment and inclusion. As a growing retailer, we continue to create new jobs in the communities we serve. As evidenced, we recently launched a national hiring event with the goal of hiring up to an additional 50,000 employees by Labor Day, and I am pleased to note that we are on track to meet our goal. We believe the opportunity to start and develop a career with a growing and purpose-driven company is a unique competitive advantage and remains our greatest currency in attracting and retaining talent, and because over 75% of our store associates at or above the lead sales associate position were internally placed, employees who joined Dollar General know, they have an opportunity to grow their career with us. We also continue to innovate on the development opportunities we can offer our teams, including continued expansion of our private fleet and those associated with DG Fresh as well as pOpshelf.", "Importantly, we believe these efforts continue to yield positive results across our store base, as evidenced by a robust internal promotion pipeline in staffing above traditional levels. We also held our annual leadership meeting earlier this month, resulting in a rich and virtual development experience for more than 1,500 leaders of our company. This is one of my favorite events every year and I was once again inspired by the incredible talent and dedication of our people.", "In closing, I am proud of our team's performance as we continue to advance our operating priorities and strategic initiatives. Overall, we are very pleased with our position as we head into the back half of the year. And I'm excited about the significant growth opportunities ahead. I want to offer my sincere thanks to each of our more than 159,000 employees across the company for their unwavering commitment to fulfilling our mission of serving others.", "With that, operator, we would now like to open the lines for questions." ] } ]
[ { "name": "Operator", "speech": [ "Thank you. At this time, we'll be conducting a question-and-answer session. [Operator Instructions] Our first question comes from Rupesh Parikh with Oppenheimer. Please proceed with your question." ] }, { "name": "Rupesh Parikh", "speech": [ "Good morning, thanks for taking my question. So Todd, I wanted to go back to one of the comments you made in the script. You said Q3 is off to a good start or great start you said. Any more color you can provide in terms of what you guys are seeing?" ] }, { "name": "Todd Vasos", "speech": [ "Rupesh, we are happy with the way Q3 started out. Back-to-school is doing very well for us. We got all of our product that we anticipated getting from overseas as well as domestically, and the consumer has little extra money to pocket. So, as evidenced by our guidance in the back half, we feel pretty good about our sales line as we go forward." ] }, { "name": "Rupesh Parikh", "speech": [ "Okay, great. And then maybe just one follow-up, just on the gross margin line for John. Any more color you can provide in terms of the puts and takes you're thinking about on the gross margin line in the back half of the year? And then if you look at the distribution of freight pressures, would you expect them to persist into next year?" ] }, { "name": "John Garratt", "speech": [ "Yes, so in terms of gross margin, and I'll start by saying, we're very pleased with the performance, up 62 basis points year-to-date, while down 80 basis points in Q2 or up 87 basis points over Q2 2019 as we continue to see initiatives like DG Fresh, NCI and others really contributing. But -- like with our Q2 results, we do expect some continued pressure on gross margin in the second half, due primarily to inflation, which we believe to be transitory but related to higher transportation costs, higher than previously expected, of course, we're seeing elevated demand with the great sales and that's resulting in some transportation and supply capacity challenges with our third-party carriers. And then on top of that, we did mention a higher LIFO provision as a result of product cost increases as some others have seen similar inflation and pass some of that along.", "And then of course, we have a very challenging lap as we talked about with the year-over-year mix. In Q2 we lapped 40% non-consumable sales and so our non-consumable business is still doing fabulously, it's a very difficult lap in the back half and certainly you have a very favorable last year mix profile with that mix and then you also had unusually low clearance activity associated with non-consumables on that high sell-through. So while we expect to continue to do well, it provides a challenging lap. So a difficult lap, near term inflationary pressures, which again we believe to be transitory, but as you look ahead, we believe still that with the growing benefit from initiatives with all the levers at our disposal between private brands or in-sourcing shrink, supply chain efficiencies as we get through the near term pressures and of course, category management and of course our scale. We believe we're in a great position to continue to expand margins over the long-term and believe we're in a great spot right now in terms of price too and don't see the need to invest there. So near term pressure for sure, but the fundamentals of the business or I would say are stronger than ever and we feel very good about the future.", "In terms of how long this persists? We said that we expect this to be elevated through the end of the year, at least through Chinese New Year, it's hard to say how long beyond that. This is really a supply and a demand issue. We would expect this to start to normalize. But it's hard to say. Hopefully, as we push through next year, but hard to say exactly when that will happen." ] }, { "name": "Rupesh Parikh", "speech": [ "Great, thank you. Best of luck for the balance of the year." ] }, { "name": "Operator", "speech": [ "Our next question comes from Matthew Boss with JPMorgan. Please proceed with your question." ] }, { "name": "Matthew Boss", "speech": [ "So Todd, maybe could you speak to new customer acquisition that you're seeing today coming out of this crisis, maybe if we compared it to customer acquisition or customers that shop Dollar General for the first time coming out of the financial crisis. And with that, if you think about the behavior that you're seeing near term, how would you map out traffic versus basket moving forward just, again, given the current customer behavior that you're seeing today?" ] }, { "name": "Todd Vasos", "speech": [ "Yes, Matt, that's a great question. And I'd tell you what we are very, very pleased with what we are seeing with that consumer, especially that new consumer. When you think about -- we launched that retention program back last summer and really pushed the pedal down, if you will, as we move through the back half of last year and we never took our foot off the accelerator. I'm happy to say that, right now, through second quarter what we're seeing is doubled our expectation of that retention rate of that new -- that new found consumer. That is higher by a long shot, quite frankly than we saw in '08 during the financial crisis. So I attribute that quite frankly to the relevancy of this box that we have today, while we made some really nice changes in coming out of that '08-'09 timeframe, this box now is much more relevant. And I think the important piece is, much more relevant across a broad spectrum of the consumer base. And I believe that's why we're keeping that consumer.", "And then when you think about how that mix is looking? As John indicated, we are very, very pleased with our non-consumable or discretionary side and that is really enhanced compared to 2008 when you really go back to take a look at it. So not only our consumable business, but our non-consumable business is doing very, very well. And then as I look at how some of the other components are looking, think about units for a moment. On a two-year stack basis, our units were up 11.5%. That is very, very strong and that's again a real testament to the ability for us to drive that top line with these new consumers and our existing consumers still see that value, obviously that she needs. So we'll continue to watch that as we go forward, our goal, as you know, long-term is always to drive that traffic number and -- but this consumer, especially our core consumer acts a little different when she has a little extra money. Just as a reminder, when she has extra money in her pocket, we saw it in a way, we see it now, she comes a little less often spends more when she comes in and we've seen that on our numbers, matter of fact, our two-year stack traffic number is up about 25%. And again very, very robust. So we believe when things start to normalize and some of this extra money that is in the system through government stimulus may start to wane here, we believe that she will start coming more often and probably spending a little less, getting back to a normal shopping pattern, most likely, Matt." ] }, { "name": "Matthew Boss", "speech": [ "That's great color. Maybe just as a follow-up, Todd, or maybe even, Jeff. I guess, by category, where do you see the most low hanging fruit remaining on the market share front as we think about where you're focusing your initiative efforts coming out of the pandemic from here?" ] }, { "name": "Jeff Owen", "speech": [ "Thank you, Matt. This is Jeff. I'm really proud of the team's ability to really as you know, they do such a great job of knowing what the customer wants, talking to our customers, but also our category management skills, and our supply chain and our operators, give us a lot of flexibility to be able to serve that customer the way she wants to be served. And so, very pleased with our DG Fresh rollout and the ability that gives us to continue to broaden that assortment and that very important category for that customer. So very pleased that the gains that we're seeing there. Of course, also, very pleased that our ability to continue to grow our Health and Beauty business and I'm very pleased that this year we've seen there as well. And quite frankly, as you think about it, very pleased overall at our ability to grow share in the quarter. And when you look at it on two-year basis as well, very pleased it has been strong results. So I would say as we look forward, our goal is always to make this box, the most relevant it can be and to serve the customer the way she wants to be served and quite frankly our teams do that better than anybody." ] }, { "name": "Matthew Boss", "speech": [ "It's great color. Best of luck." ] }, { "name": "Todd Vasos", "speech": [ "Thank you." ] }, { "name": "Jeff Owen", "speech": [ "Thank you, Matt." ] }, { "name": "Operator", "speech": [ "Our next question comes from Simeon Gutman with Morgan Stanley. Please proceed with your question." ] }, { "name": "Simeon Gutman", "speech": [ "Hi, good morning everyone. I wanted to ask on the algorithm into '22. I know it's early and we're not talking guidance. But maybe just some of the puts and takes, on the top line compares will start to ease when you get into next year, but we're also going to be lapping all the stimulus. And then margin picture, some of the pressures could linger into next year. So curious if I don't think you'll commit to any algo, but how the puts and takes look in relation to the long-term algo for this business?" ] }, { "name": "John Garratt", "speech": [ "Yes, Simeon, I'll start by saying that we feel great about the fundamentals that I've never felt better about the algorithm. I'm not going to obviously give any specific guidance on 2022 as we don't normally at this point. Obviously things are fluid in terms of the duration and depth of the pandemic and how long these inflationary pressures persist. But as we said, we do believe these are transitory. The teams doing a great job to mitigate these and that would provide a tailwind at some point as these we believe, as these normalize, as well as we get to more normalized mix levels. Again, that's the other big pressure this year is just lapping unusually high non-consumable sales and unusually low clearance activity.", "But as you look at the fundamentals, as we've said before, we were at the high end of our 2% to 4% algorithm going into this. We are delighted with what we've seen in terms of the stickiness of the new customers we've brought in, even above expectations as well as how we've been able to hold on to these larger baskets. And so I think the brands never been more relevant and I think this really bodes well going forward on the sales momentum with the initiatives really coming together to help the bottom line and the top line, and again what we're doing to hang on to these new customers and bigger baskets with this fuller fill-in trip we've been able to provide with the initiatives.", "And in terms of the gross margin, I would say, we still see benefit -- growing benefit from our strategic initiatives with more to come and still have all the levers I mentioned at our disposal and see a lot of opportunity there as things normalize. So, as we push through these again what we believe to be transitory pressures, we see ourselves in a position to continue to expand our gross margin and again when you tease out the impact of the strategic initiatives to leverage our SG&A at the rates that we have done in the past and then again the business generates a tremendous amount of cash, which allows us to buyback shares. So we feel good all around with the outlook for the business and believe the algorithm is very well intact.", "And when you look at real estate, that's the other piece I would point that bodes very well for the future in terms of upping the potential units for everybody in our space to 17,000 units. We're seeing unit level economics as good as ever. We continue to innovate with new format that continues to extend the runway. So feel great about the algorithm. We'll comment on the specifics of 2022 as we go into the next year." ] }, { "name": "Simeon Gutman", "speech": [ "Okay, thanks for that. And then the follow-up is, regarding the second half, the SNAP and child care tax credits, how much if any is factored into your second half top line guide?" ] }, { "name": "John Garratt", "speech": [ "Yes, what I would say is we've considered all of that and I would say there's a lot of moving pieces here that seemingly are directionally offsetting. You do have the roll-off of the enhanced unemployment benefits, which is a bit of a headwind, but then you have the child tax credit, which is a bit of a tailwind. And then when you look at SNAP, there is puts and takes there that are directionally offsetting the 15% benefit, expires on October 1, but then with the USDA's action with the [Indecipherable] food plan that puts back some enhanced benefits and then they did extend the emergency supplemental benefits which allows waivers -- waivers allows folks to get maximum benefits regardless the income. So as you look at all the pieces, it's hard to say exactly what the net impact would be. But right now it looks directionally offsetting and that's contemplated in the guidance. And we feel very good about the guidance based on what we know now." ] }, { "name": "Simeon Gutman", "speech": [ "Thanks. Appreciate it." ] }, { "name": "Operator", "speech": [ "Our next question comes from Karen Short with Barclays. Please proceed with your question." ] }, { "name": "Karen Short", "speech": [ "Hi, thanks very much. I just -- to -- in guidance and the implied second half. So you obviously raised your top line guidance for the full year, but not obviously raised second half. But when we look at the guidance for the EBIT margin implied guide for the second half that's come down, despite the higher sales. So I realize you did call out one or two things, but I still can't get it to account for the change and what the implied EBIT margin guidance is for the second half. So maybe a little more color there? And then I had another big picture question." ] }, { "name": "John Garratt", "speech": [ "Okay. No, good question. Karen. I'll start by saying we feel good about the updated guidance based on the strong first half results and as you mentioned, we did raise our sales outlook. We raised the floor on EPS held the ceiling on the EPS guidance. But I think when you look at the two-year lap, it's important to look at what this implies in terms of a two-year CAGR and that's a CAGR of 20% to 24%. So we feel great about that outsized performance relative to the algorithm. What I would tell you is we have seen as we mentioned, seen increased pressure from freight and so that is the limiting factor here in terms of the ability to take that up. We did -- as others saw we did see heightened pressures around transportation to a lesser extent. We mentioned with our LIFO provision, we did see higher costs in terms of product cost and that's largely a function of some transportation costs being passed through. So really that's the driver of that. But again, I would tell you, we feel great about the fundamentals of the business. Never been better and we're going to wait and see how things play out, but that's really the pressures as we look at the back half of the year and again we believe them to be transitory in nature and very pleased with the performance based on the guide that the guidance would indicate in terms of being a step change to the top line and the bottom line over the normal algorithm." ] }, { "name": "Karen Short", "speech": [ "Okay, that's helpful. And then I guess there is kind of this view that in general, that the lower end consumer will really struggle next year as all these benefits lap. And I think there is some perspective that that will negatively impact you disproportionately. I'm not sure I agree with that. But how do you think about the puts and takes to DG if that is true in general, in terms of your core customer feeling much more challenged?" ] }, { "name": "Todd Vasos", "speech": [ "Yes, Karen, this is Todd. I'll take that one. I would tell you, we feel very good about this core customer. And also remember the customer that we've retained during this pandemic and continue to retain, we feel very good about keeping her well engaged into next year as well. You couple that with all the initiatives that we have in front of us both in play and as you heard from Jeff some newer ones like healthcare that will in fact start to play out as we go into next year, but even longer term than that. But when you start to think about who we are, right, and who we serve, we are an all-weather brand and always have been and is even more pronounced now, I believe, than ever before, right? So when times are good, we do pretty well and when times aren't so good that consumer needs us more and now we've got that new trading customer that we've gotten, that seemingly will have a little bit more money even when times turn a little negative for our core customer. So once again, we feel good about it. We're not prepared to give guidance yet for '22, but we hear always control what we can control and we feel good about that algorithm over time growing the comp set 2% to 4% over the long-term and that is still our vision and we work toward that each and every day." ] }, { "name": "Karen Short", "speech": [ "Great, thanks very much." ] }, { "name": "Todd Vasos", "speech": [ "Sure." ] }, { "name": "Operator", "speech": [ "Our next question comes from Michael Lasser with UBS. Please proceed with your question." ] }, { "name": "Michael Lasser", "speech": [ "Good morning. Thanks a lot for taking my question. Todd, do you feel like you've worked off some of the assets [Phonetic] that a lot of the consumable retailers experienced during the heart of the pandemic and another way to look at it is your guidance for the back half of the year implies two-year compound annual sales growth rate of 9% to 10% which is largely consistent with what you were doing in 2019 prior to the pandemic. So as other consumable retailers are experiencing a drag from a further return to normalcy unless new occasions at home, perhaps you've faced less of a drag because your workers have been working at the worksite the whole time, you've got new customers and you've got your initiatives such that you've entered into a sustainable sales rhythm from here." ] }, { "name": "Todd Vasos", "speech": [ "Well, we look at all that as you say, Michael and I would tell you that we do feel good about where this consumer is and how she lines up if you will, based on what is ahead of her. But again that whole notion that we control, what we can control is really what we're squarely focused on. But yes, I would tell you, the implied number that you're talking about is that in that 4% to 5% type of a comp rate whether we hit that or not that's still well on top of our algorithm, if you will. So we feel good about it. I don't want to get ahead of our skis and say that it will be even better. But I would tell you with the initiatives that we have and the retention rates we're seeing from that new consumer that's what gives us the confidence to raise that sales guidance in the back half of this year and will propel us into '22." ] }, { "name": "Michael Lasser", "speech": [ "Okay. My follow-up question is on the gross margin. The 87 basis point increase over 2019, is it fair for us to assume half of that was due to your initiatives like DG Fresh and NCI and the other half is from still a favorable environment where promotions have not returned to the level of 2019. And can you quantify this for simplicity sake, John, how much gross margin pressure you are expecting because of these elevated freight costs?" ] }, { "name": "John Garratt", "speech": [ "Yes, in terms of, when you strip out the noise of the freight costs, it is the same fundamental drivers and we continue to see huge benefits from initiatives like DG Fresh, NCI and again we've been talking for several quarters around as we kept calling out the three biggest drivers, it was lower product cost associated with DG Fresh, it was lower markdowns and favorable mix and a big driver of that was NCI. So we're continuing to see there was benefit, that are continuing to grow. I don't want to give a specific number on that, but I would say that continues to be the biggest drivers of when you strip out the noise of what's been the biggest levers to improve our gross margin. So that's not changed. What has changed is, one, the much more difficult lap of NCI from -- of the -- the 40% non-consumable growth we lapped in this quarter and then the heightened pressures associated with freight and to a lesser extent product costs. So the fundamentals are unchanged, that's really the drivers. We didn't give a specific number on freight, but what I would tell you is as we listed out the headwinds that was the number one headwind that we called out and then we did say as we look in the back half of the year, similar to Q2, we expect that to be a -- although we think it's transitory over the longer term, that continued to be a growing headwind for us versus what we previously thought." ] }, { "name": "Michael Lasser", "speech": [ "Got it. Thank you so much." ] }, { "name": "Operator", "speech": [ "Our next question comes from John Heinbockel with Guggenheim Partners. Please proceed with your question." ] }, { "name": "John Heinbockel", "speech": [ "Hey Todd. I get to -- but I want to start with you guys have always said, the biggest share donor to you are the drugstores. I'm curious about your thoughts on healthcare. And then in particular, when you think about services, product, maybe, is there an opportunity to partner with independent pharmacists in a way. How do you think about the sources and magnitude of that opportunity. Does that rise to a NCI type of opportunity do you think in magnitude?" ] }, { "name": "Todd Vasos", "speech": [ "Yes, John, that's a great question and thanks for asking it because we're pretty excited about what this healthcare initiative could hold. But I want to caution everybody, this will be a journey over many years, right. But what we're going to be squarely focused on here is exactly what you talked about those services that rural America today especially doesn't have access to. We talk a lot about grocery deserts or food deserts, there is as equal healthcare deserts out there across the US and we are in all of these communities. And then when you step back from that with my background in health, we really know that there is an opportunity for this service. So whether it be eye care, as an example, whether it be telemedicine, whether it be prescription delivery not by the way not pharmacies in our stores, but build an order and maybe pick up inside of our store, those types of things, mail order, and so could we benefit with a partnership, possibly. We're going to be fishing all that out over the next many quarters. But could it be bigger than NCI? I think this could easily eclipse NCI. I don't want to get in front of our skis, but it could be a really big deal, not only for our top line and bottom line at Dollar General, but even more so making that box even more relevant to those consumers in rural America that have to drive now 30, 40 minutes for an eye exam as an example or even to see a doctor. So we believe that there is some real opportunity here. You could probably tell in my voice, I'm pretty excited about it, but the journey is just beginning." ] }, { "name": "John Heinbockel", "speech": [ "And maybe just as a follow-up to that, right. When you think about doing these store-within-a-store right in the DG markets. I know I ask this all the time, but the [Indecipherable] getting bigger, there is a small version of DG market eventually come on the radar screen again as another format. Would you rather use the 8,500 to accomplish that." ] }, { "name": "Todd Vasos", "speech": [ "No, John. We've got a smaller version of the DG market already and matter of fact, we continue to grow that and the genesis of that was the Walmart Express stores that we bought back a few years ago. And we've cultivated those 44 stores we bought and have grown that format as well. We don't talk about it a lot, because we believe that over time it could be a big piece though of our rural strategy, especially as you just mentioned in that combo piece, because if we -- we already have stores in within -- 75% of our stores within 5 mile of the overall population and if we could give even more options including healthcare, including pOpshelf inside of a smaller box, I believe it could be really powerful and I know Jeff believes that as well. And we'll be working toward that over the next few years." ] }, { "name": "John Heinbockel", "speech": [ "Thank you." ] }, { "name": "Todd Vasos", "speech": [ "You're welcome." ] }, { "name": "Operator", "speech": [ "Our next question comes from Kelly Bania with BMO Capital. Please proceed with your question." ] }, { "name": "Kelly Bania", "speech": [ "Hi, good morning. Thanks for taking my question. Just in terms of freight, just to be clear, how much of that is domestic versus ocean freight and how much are you passing along or not passing along in the current environment?" ] }, { "name": "Todd Vasos", "speech": [ "Yes, I would tell you that the majority of the headwind is coming from the import side of that equation. We have seen some tightness in the domestic market, but pretty manageable overall there. It really is the import side that we feel is the headwind here. And then as far as passing along what we do here at Dollar General probably better than most is, negotiate with our vendors with our size and scale, we've been doing that for many years, it's second nature to us, if you will. But I would tell you that we've been able to offset some of these inflationary pressures that you've seen out there. But yes, we have taken price in some instances, but what I'm happy to say is that our price positioning is as good as it's ever been. As you may remember over the last few quarters, I've been very bullish on our positioning and this is as good as ever. So I would tell you, we've been very thoughtful on passing along price, because we know that our core consumer can ill afford very many price increases, but we have the ability with just 10,000 to 12,000 SKUs to also pick and choose the SKUs that we offer our consumer. And if we have some price increases that we don't believe we should pass on there, we will drop the SKU and move on to something else that in fact she'll need also. And we've done that a lot in the last quarter to two quarters." ] }, { "name": "Kelly Bania", "speech": [ "Great, that's very helpful. And just also wanted to follow-up on a comment you made. You talked about some of the puts and takes in terms of the macro in the back half, including the end of the extended unemployment benefits. I was just curious what you are seeing in some of those states, both from impact on the top line, when those states ended the benefits and also just in the wage and employee environment?" ] }, { "name": "Jeff Owen", "speech": [ "Yes, what we have seen is when you look at the employee environment, I'll start with that. What we initially saw as those states rolled off the enhanced unemployment benefits, what we did see was an initial nice pickup in applicant flow and staffing. The good news now is we're seeing that across the system, and so it's hard to discern that impact now because everything is up. And so that's been helpful. We did see a little bit, not a huge impact, but we did see a little bit of a negative impact in states when the enhanced unemployment benefits rolled off, but then as I mentioned, then you have the benefit of the child tax credit and that's why we said, as we look at all the puts and takes, the way we see it now, we think it's directionally offsetting." ] }, { "name": "Kelly Bania", "speech": [ "Thank you." ] }, { "name": "Operator", "speech": [ "Our last question comes from Michael Montani with Evercore ISI. Please proceed with your question." ] }, { "name": "Michael Montani", "speech": [ "Thank you. Just two things to ask on. One was just, a little bit surprised on some of the discretionary headwind, given the strength that we've seen from some other retailers in that area. So I was just hoping you could help explain a little bit more why that would be a headwind. And then what's the timing for that to kind of roll-off? And then the follow-up was on traffic." ] }, { "name": "Todd Vasos", "speech": [ "Yes, I would tell you, Michael, I think the discretionary headwind that we talk about really stems from the robust number we had last year. Last year other retailers were or either shutdown still, limited hours, one way aisles, I think you remember all of that. We were pretty much in full swing last year helping out all the communities that we serve. So it was really on a two-year stack basis we couldn't be more happy or proud of our discretionary business and matter of fact, we feel very robust about it going into the back half of the year and in years to come, because of our NCI initiatives, because of our pOpshelf initiatives and many other things that we're working on. So, I wouldn't characterize it any other way other than on a year-over-year basis is really the headwind. I would tell you that starts to subside as we move into '22, right. And so watch out for that as we move into '22. But right now we feel good about where we are on the discretionary platform basis." ] }, { "name": "Michael Montani", "speech": [ "Okay, great. And then, just wanted to clarify on the two-year traffic stack for 2Q and 1Q. Was 2Q a high single-digit decline on traffic, if you do a two-year stack. Just trying to see how that's been trending?" ] }, { "name": "Todd Vasos", "speech": [ "Yes, I would tell you, we really haven't said what those numbers were. But as I mentioned earlier, we just have to remember, on the traffic side, you've got two things that are in play here. Number one, you still have a consumer that is contracting her shopping patterns due to COVID right. You still have some of that dynamic going on. Not as much as we saw last year, obviously. And we're starting to see those traffic numbers come back and I'll explain that in a second. What we're starting to see now is as stimulus starts to wane, COVID in many states starting to wane, I know it's flaring in certain states and a little less than others. The consumer is getting out more and we're seeing our traffic numbers start to rebound. And what normally happens with our core consumer is that dynamic takes place, especially around her income levels, what we'll start to see is smaller basket sizes and more traffic, and that's exactly what we're starting to see occur over the last couple of months and we anticipate that to continue as we move through the back half of the year." ] }, { "name": "Michael Montani", "speech": [ "Got it. Thank you and good luck." ] }, { "name": "Operator", "speech": [ "We have reached the end of the question-and-answer session. At this time, I'd like to turn the call back over to Todd Vasos for closing comments." ] }, { "name": "Todd Vasos", "speech": [ "Well, thank you very much for all the questions and thanks for your interest in Dollar General. I want to start by saying how proud I am of this team, which continues to execute at a high level, resulting in another great quarter. As you heard today, we have a number of exciting initiatives in place and we believe we are well positioned to grow same-store sales, new stores, operating profit margins and market share over time, while providing a strong employee proposition. So overall, I'm proud of the year-to-date results, feel very good about the underlying business and very optimistic about the future. Thank you for listening. I hope you have a great day. Thank you." ] }, { "name": "Operator", "speech": [ "[Operator Closing Remarks]" ] } ]
DG
2022-08-25
[ { "description": "Vice President, Investor Relations", "name": "Donny Lau", "position": "Executive" }, { "description": "Chief Executive Officer", "name": "Todd Vasos", "position": "Executive" }, { "description": "Chief Financial Officer", "name": "John Garratt", "position": "Executive" }, { "description": "Chief Operating Officer", "name": "Jeff Owen", "position": "Executive" }, { "description": "Oppenheimer and Company -- Analyst", "name": "Rupesh Parikh", "position": "Analyst" }, { "description": "JPMorgan Chase and Company -- Analyst", "name": "Matthew Boss", "position": "Analyst" }, { "description": "Morgan Stanley -- Analyst", "name": "Simeon Gutman", "position": "Analyst" }, { "description": "UBS -- Analyst", "name": "Michael Lasser", "position": "Analyst" }, { "description": "Goldman Sachs -- Analyst", "name": "Katharine McShane", "position": "Analyst" }, { "description": "Guggenheim Partners -- Analyst", "name": "John Heinbockel", "position": "Analyst" }, { "description": "Jefferies -- Analyst", "name": "Corey Tarlowe", "position": "Analyst" } ]
[ { "name": "Operator", "speech": [ "Good morning. My name is Robert, and I will be your conference operator today. At this time, I'd like to welcome everyone to Dollar General's second quarter 2022 earnings conference call. Today is Thursday, August 25, 2022.", "[Operator instructions] This call is being recorded. [Operator instructions] Now I'd like to turn the conference over to your host, Mr. Donny Lau, vice president of investor relations and corporate strategy. Mr.", "Lau, you may begin the conference." ] }, { "name": "Donny Lau", "speech": [ "Thank you, and good morning, everyone. On the call with me today are Todd Vasos, our CEO; Jeff Owen, our COO; and John Garratt, our CFO. Our earnings release issued today can be found on our website at investor.dollargeneral.com under News & Events.Let me caution you that today's comments include forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. Such a statements about our financial guidance, strategy, initiatives, plans, goals, priorities, opportunities, investments, expectations or beliefs about future matters and other statements that are not limited to historical fact.", "These statements are subject to risks and uncertainties that could cause actual results to differ materially from our expectations and projections. These factors include, but are not limited to, those identified in our earnings release issued this morning under Risk Factors in our 2021 Form 10-K filed on March 18, 2022, and any later filed periodic report and in the comments that are made on this call. You should not unduly rely on forward-looking statements, which speak only as of today's date. Dollar General disclaims any obligation to update or revise any information discussed in this call, unless required by law.", "At the end of our prepared remarks, we will open the call up for your questions. [Operator instructions] Now it is my pleasure to turn the call over to Todd." ] }, { "name": "Todd Vasos", "speech": [ "Thank you, Donny, and welcome to everyone joining our call. We are pleased with our second quarter results, and I want to thank our associates for delivering another quarter of strong performance and for their dedication to serving our customers, communities, and each other. The quarter was highlighted by comp sales growth of 4.6%, a slight increase in customer traffic, accelerated growth in market share of highly consumable product sales, including in both dollars and units, and double-digit growth in diluted EPS. Our Q2 performance was led by stronger-than-expected sales in our consumable category.", "This increase was partially offset by a decline in our combined non-consumable categories, which we believe reflects the evolving consumer demand during a period of inflation and economic uncertainty. During the quarter, and from a position of strength, we made targeted investments in both incremental labor hours and wages to further enhance the customer experience and build on our sales momentum. We believe these investments contributed to an improvement in our overall in-stock position and our strong sales results. And despite challenges from rising product cost inflation and ongoing supply chain pressures, our teams remain focused on controlling what we can control while continuing to deliver value for our customers, which we believe is seen even more important in the current environment.", "To that end, we remain committed to offering products at the $1 or less price point, and we're pleased with the strong performance of this program during Q2, especially in the latter part of the quarter. Importantly, we continue to feel very good about our price position relative to competitors and other classes of trade. And with more than 18,500 stores located within five miles about 75% of the U.S. population, we believe we are well-positioned to navigate the current environment while continuing to support our customers through our unique combination of value and convenience.", "Looking ahead, we remain focused on advancing our operating priorities and strategic initiatives as we look to strengthen our competitive position while further distancing and differentiating Dollar General from the rest of the retail landscape. Now let me recap some of the additional financial results for the second quarter. Net sales increased 9% to $9.4 billion, compared to net sales of $8.7 billion in Q2 of 2021. From a monthly cadence perspective, comp sales were lowest but positive in May, with July being our strongest month of performance, and I'm pleased with the momentum we see so far in Q3.", "In fact, as a result of our first-half outperformance and strong start to Q3, as well as our expectations for the remainder of the year, we are increasing our sales outlook for fiscal 2022, which John will discuss in more detail shortly. Our Q2 results included an increase in average basket size, largely driven by inflation, as we would expect, during a more challenging economic environment. Average units per basket were down, while, as I mentioned earlier, customer traffic increased slightly. As the quarter progressed, we saw additional signs of our core customers shopping more intentionally and closer to need, as well as an increase in trade-down activity.", "For example, during Q2, customers appeared to be making trade-offs of some of their food choices, contributing to an increase in private brand penetration within our consumables business. We also saw growth in the number of higher-income households shopping with us, which we believe reflects more consumers choosing Dollar General as they seek value. Collectively, we view our Q2 results as further validation that our strategic actions, which have transformed this company in recent years, positions us well for continued success while supporting long-term shareholder value creation. We continue to operate in one of the most attractive sectors in retail.", "And given our strong competitive position, further enhanced by our robust portfolio of short- and long-term initiatives, I have never felt better about the underlying business model or our future growth potential. With that said, I'd like to take this opportunity to congratulate Jeff Owen, who will officially take over as CEO in November. No one understands and embodies our culture more than Jeff, and his contributions to our strategic direction over the years have been instrumental to our success. I've had the pleasure of working with Jeff for many years, and I'm confident he is the best and most capable person to lead the next phase of growth here at Dollar General.", "And finally, while Jeff will speak more to this later, I also want to congratulate John Garratt on his well-deserved promotion to president and CFO. With that, I will now turn the call over to John." ] }, { "name": "John Garratt", "speech": [ "Thank you, Todd, and good morning, everyone. First, let me take a moment to thank Todd for his tremendous leadership and passion for our customers, our culture and this company. He has been a wonderful mentor and friend, and we wish him all the very best as he prepares to begin this new chapter. And let me also add my congratulations to Jeff, who I have known and worked closely with for several years.", "He is a highly respected leader throughout the organization, and we look forward to his leadership in the years ahead. Given Todd has taken you through a few highlights of the quarter, let me now take you through some of its important financial details. Unless we specifically note otherwise, all comparisons are year over year. All references to EPS refer to diluted earnings per share and all years noted refer to the corresponding fiscal year.", "As Todd already discussed sales, I will start with gross profit. For Q2, gross profit as a percentage of sales was 32.3%, an increase of 69 basis points. This increase was primarily attributable to higher inventory markups, partially offset by a higher LIFO provision, a greater proportion of sales coming from our consumables category, as well as increases in markdowns, transportation costs, distribution costs, and damages. Of note, product cost inflation was greater than anticipated, resulting in a LIFO provision of approximately $144 million during the quarter.", "SG&A as a percentage of sales was 22.6%, an increase of 82 basis points. This increase was driven by expenses that were greater as a percentage of sales, the most significant of which were retail labor, repairs and maintenance, utilities and payroll taxes. Moving down the income statement. Operating profit for the second quarter increased 7.5% to $913 million.", "As a percentage of sales, operating profit was 9.7%, a decrease of 13 basis points. Our effective tax rate for the quarter was 22.1% and compares to 21.4% in the second quarter last year. Finally, as Todd noted, EPS for the second quarter increased 10.8% to $2.98. Turning now to our balance sheet and cash flow, which remains strong and provide us the financial flexibility to continue investing for the long term, while delivering significant returns to shareholders.", "Merchandise inventories were $6.9 billion at the end of the second quarter, an increase of 31.4% overall and 25.1% on a per store basis. Similar to Q1, this increase primarily reflects the impact of product cost inflation, as well as a greater mix of higher-value products, particularly in the home and seasonal categories, as a result of the continued rollout of our nonconsumables initiative. And importantly, we continue to believe the quality of our inventory is in good shape. As Todd noted, we're also pleased with the improvements we saw in our in-stock levels during the quarter and expect continued improvement as we move through 2022, underscoring our optimism that we are well-positioned to better serve our customers in the back half of the year.", "Year to date through Q2, the business generated cash flows from operations totaling $948 million, a decrease of 28%. Total capital expenditures for the first half were $659 million and included our planned investments in new stores, remodels and relocations, distribution and transportation projects, and spending related to our strategic initiatives. During the quarter, we repurchased 1.5 million shares of our common stock for $349 million and paid a quarterly dividend of $0.55 per common share outstanding for a total payout of $124 million. At the end of Q2, the remaining share repurchase authorization was $1 billion.", "We announced today that our board has increased this authorization by $2 billion. Our capital allocation priorities continue to serve us well and remain unchanged. Our first priority is investing in high-return growth opportunities, including new store expansion and our strategic initiatives. We also remain committed to returning significant cash to shareholders through anticipated share repurchases and quarterly dividend payments, all while maintaining our current investment-grade credit rating and managing to a leverage ratio of approximately three times adjusted debt to EBITDAR.", "Moving to an update on our financial outlook for fiscal 2022. We continue to experience uncertainties with respect to product cost inflation, supply chain dynamics, the evolution of consumer spending throughout the year, and most recently, new store opening delays, which Jeff will discuss in more detail. Despite these challenges, we are confident in the business, and as Todd mentioned, we are increasing our sales outlook for 2022. For the full year, we now expect the following: net sales growth of approximately 11%, including an estimated benefit of approximately 2 percentage points from the 53rd week and same-store sales growth of approximately 4% to 4.5%.", "Additionally, we are reiterating the remainder of our financial guidance for 2022, which includes EPS growth of approximately 12% to 14%, including an estimated benefit of approximately 4 percentage points from the 53rd week, share repurchases of approximately $2.75 billion, and capital spending in the range of $1.4 billion to $1.5 billion. Our EPS outlook also now assumes an effective tax rate in the range of 22% to 22.5%. Let me now provide some additional context as it relates to our outlook. In terms of the quarterly cadence, we anticipate comp sales to be fairly consistent between Q3 and Q4, but EPS growth to be much higher in the fourth quarter, which includes the anticipated benefit from the 53rd week.", "In addition, we expect share repurchases in Q3 to be slightly higher than the Q2 amount before increasing more substantially in Q4, partially as a result of the extra week in our fourth quarter. Finally, as a result of an increase in interest rates and additional borrowings, we expect interest expense will be higher in the second half of the year. Turning now to gross margin for 2022. We expect to continue realizing benefits from our initiatives, including DG Fresh and NCI, throughout the year.", "In addition, we are optimistic that distribution and transportation efficiencies, including continued expansion of our private fleet, will drive additional benefits despite anticipated and continued cost pressures in the near term. Offsetting some of these benefits is an expected continuation of sales mix pressure, as well as sales outperformance, as our sales outperformance has been predominantly driven by growth in our consumables category, which generally has a lower gross profit rate than other product categories. With regards to SG&A, we expect continued investments in our strategic initiatives as we further their rollouts. However, in aggregate, we continue to expect they will positively contribute to operating profit and margin in 2022 as we expect the benefits to gross margin from our initiatives will more than offset the associated SG&A expense.", "We also continue to pursue efficiencies and savings through our Save to Serve program, including Fast Track, and we believe these savings in 2022 will continue to offset a portion of expected wage inflation. Finally, and consistent with Q2, our outlook includes continued investments to further enhance the customer experience, including incremental labor hours and wages, to drive continued improvement in overall in-stock levels and customer service. In summary, we are proud of our team's hard work and commitment to execution, which has resulted in our strong second quarter results. As always, we continue to be disciplined in how we manage expenses and capital with the goal of delivering consistent, strong financial performance, while strategically investing for the long term.", "We remain confident in our business model and our ongoing financial priorities to drive profitable same-store sales growth, healthy new store returns, strong free cash flow, and long-term shareholder value. With that, I will turn the call over to Jeff." ] }, { "name": "Jeff Owen", "speech": [ "Thank you, John. Let me take a moment to express my appreciation for all Todd has done for this company throughout his 14-year career. He's led us through a transformational period and has positioned us extremely well for the future. On behalf of the entire Dollar General team, we want to sincerely thank him for the impact he has made on our business.", "I am fortunate to have been able to learn from him, and I look forward to his ongoing counsel. And as Todd noted, we are excited to announce that John has been promoted to president while continuing to serve as CFO. John has made many significant contributions to Dollar General during his time leading our finance and corporate strategy teams, and I look forward to his continued leadership and partnership as he steps into this new role. Finally, let me also say how humbled and privileged I am by the opportunity to serve this great team as the next CEO of Dollar General.", "I couldn't be more excited about our future and all that we can accomplish together. Now let me take the next few minutes to update you on our operating priorities and strategic initiatives as we continue to create opportunities for meaningful growth. Our first operating priority is driving profitable sales growth. We continue to make progress executing against our robust portfolio of initiatives.", "Let me take you through some of the recent highlights. Starting with our nonconsumable initiative, or NCI, which was available in nearly 15,000 stores at the end of the second quarter. We continue to be very pleased with the strong sales and margin performance we are seeing across our NCI store base. This treasure hunt offering continues to resonate with value-seeking customers as approximately 80% of the assortment is priced at $5 or less.", "We expect to realize ongoing sales and margin benefits from NCI in 2022 and are on track to complete the rollout across nearly the entire chain by the end of the year. Moving to our pOpshelf store concept, which further builds on our success and learnings with NCI. As a reminder, pOpshelf aims to engage customers by offering a fun, affordable and differentiated treasure hunt experience delivered through continually refreshed merchandise, a differentiated in-store experience and exceptional value with the vast majority of our items priced at $5 or less. During the quarter, we opened 14 new pOpshelf locations, bringing the total number of stores to 80, located within eight states.", "Additionally, we opened seven new store-within-a-store concept during the second quarter. This brings the total number of Dollar General market stores, which incorporates a smaller footprint pOpshelf store to a total of 32 at the end of the quarter. We plan to nearly triple the pOpshelf store count this year, and now expect to open a total of 15 store-within-a-store concepts, which would bring us to about 150 stand-alone pOpshelf locations and approximately 40 store-within-a-store concepts by year end. Over the long term, we anticipate year one annualized sales volumes for these stores to be between $1.7 million and $2 million per store and expect the average gross margin rate to exceed 40%.", "Overall, we continue to be pleased with the results of this unique and differentiated concept, and we are excited about our goal of approximately 1,000 pOpshelf locations by year-end 2025. Turning now to DG Fresh, which is a strategic, multiphase shift to self-distribution of frozen and refrigerated goods, along with a focus on driving continued sales growth in these areas. As a reminder, we completed the initial rollout of DG Fresh across the entire chain in 2021 and are now delivering to nearly 19,000 stores from 12 facilities. The initial objective of DG Fresh was to reduce product cost on our frozen and refrigerated items, and we continue to be very pleased with the savings we are seeing.", "Another important goal of DG Fresh is to increase sales in frozen and refrigerated categories. We are also pleased with the performance on this front, including enhanced product offerings in stores and strong performance from our perishables department, which had our strongest rate of comp sales growth during the first half of the year. Looking ahead, we expect to realize additional benefits from DG Fresh as we continue to optimize our network, further leverage our scale, deliver an even wider product selection and build on our multiyear track record of growth in cooler doors and associated sales. And while produce was not included in our initial rollout, we continue to believe that DG Fresh provides a potential path forward to expanding our produce offering to more than 10,000 stores over time.", "Notably, at the end of Q2, we offered produce in more than 2,700 stores, with plans to expand this offering to a total of more than 3,000 stores by the end of 2022. Finally, as I previously mentioned, DG Fresh has also extended the reach of our cooler expansion program. During Q2, we added over 17,000 cooler doors across our store base, and we are on track to install more than 65,000 cooler doors in 2022. Importantly, despite the meaningful improvements we have made to date as a result of DG Fresh, we believe we still have significant opportunity to drive additional returns with this initiative in the years ahead.", "Turning now to an update on our health initiative, branded as DG Wellbeing. The initial focus of this project is an expanded health offering, which consists of approximately 30% more feet of selling space and up to 400 additional items as compared to our standard offering. This offering was available in approximately 2,700 stores at the end of Q2, and we are on track to expand to a total of more than 4,000 stores by the end of 2022. During the quarter, we announced the establishment of a new Healthcare Advisory Panel, which recently convened its first quarterly meeting.", "The panel is composed of highly regarded healthcare industry subject matter experts who will serve as thought partners to our team, including advising on how best to invest resources to better serve our customers in the health and wellness space. Looking ahead, our plans include further expansion of our health offering, with the goal of increasing access to basic healthcare products and ultimately services over time, particularly in rural America. In addition to the gross margin benefits associated with the initiatives I just discussed, we continue to pursue other opportunities to enhance gross margin, including improvements in private brand sales, global sourcing, supply chain efficiencies, and shrink reduction. To that end, we recently announced plans to significantly increase our supply chain capacity by building three new distribution centers in North Little Rock, Arkansas; Aurora, Colorado; and Salem, Oregon.", "Each facility will be approximately 1 million square feet and supported, in part, by our growing private fleet. We expect to begin construction on the Arkansas and Oregon facilities this fall, with both of which will be combo traditional and fresh distribution centers. We have already begun construction on the Colorado facility, which will be a traditional dry goods distribution center. We are excited about these new projects, which we expect will add more than 1,000 new jobs supporting our ongoing store growth and drive additional efficiencies in our supply chain.", "Our second priority is capturing growth opportunities. Our proven high-return, low-risk real estate model has served us well for many years and continues to be a core strength of our business. In the second quarter, we completed a total of 790 real estate projects, including 227 new stores, 533 remodels, and 30 relocations. For 2022, we are updating our real estate plans to reflect adjustments made, primarily in response to ongoing delays related to permitting and the receipt of construction materials associated with the new store openings.", "For 2022, we now plan to execute in the range of 2,930 to 2,980 real estate projects in total, including 1,010 to 1,060 new stores, approximately 1,795 remodels, and about 125 store relocations. We continue to expect approximately 80% of our new Dollar General stores in 2022 to be in our larger 8,500 square foot store format, which allows us for an even greater assortment as we look to serve our customers with products they want and need. Importantly, we continue to be very pleased with the unit economics of this larger format, highlighted by increased sales productivity, and we continue to target returns in the range of 20% to 22%. In addition to our planned Dollar General and pOpshelf growth in 2022, we are very excited about our plans to expand internationally, and we continue to make good progress toward our goal of opening our first stores in Mexico by the end of 2022.", "I am pleased to announce that these stores will be branded under the name The Super Dollar General, which resonated well with customer focus groups and connotes the idea of a local general store focused on serving customers with products they want and need most. In addition, the initial stores will be located in underserved communities in Northern Mexico as we look to initially leverage our brand awareness, while extending our value and convenience proposition to a customer base that is similar to our core customer in the United States. Overall, our real estate pipeline remains robust. And with more U.S.", "brick-and-mortar stores than any retailer, we are excited about our ability to capture significant growth opportunities in the years ahead. Next, our digital initiative, which is an important complement to our physical footprint as we continue to deploy and leverage technology to further enhance convenience and access for customers. Our efforts remain centered around creating a digital front porch to our stores as we look to create deeper and more meaningful connections with our customers. We ended Q2 with nearly 4.5 million monthly active users on the digital app and expect this number to grow as we look to further enhance our digital offerings.", "Our partnership with DoorDash continues to resonate with both new and existing customers as we look to extend the value offering of Dollar General, combined with the convenience of same-day delivery and an hour or less. This offering was available in more than 13,300 stores at the end of Q2, and we continue to be very pleased with the results, including sales above our initial expectations for the first half of the year. In addition, we are also excited about the continued growth of our DG Media Network. We are seeing significant interest in participation from CPG companies and brands who are seeking to connect with the more than 80 million unique customer profiles, especially our rural customers, who represent about 30% of the country and allude the reach of other retail media networks.", "As a result, we are enabling advertisers to both digitally and physically build awareness and drive purchase consideration, while positioning Dollar General as a retailer of choice for customers seeking many of America's most trusted brands. After establishing the foundation over the last few years, we are beginning to meaningfully grow this business, as we expand the program and enhance the value proposition for both our customers and brand partners, while increasing the overall net financial benefit for the business. Overall, our strategy consists of building a digital ecosystem specifically tailored to provide our customers with an even more convenient, frictionless and personalized shopping experience, and we are pleased with the growing engagement we are seeing across our digital properties. Our third operating priority is to leverage and reinforce our position as a low-cost operator.", "We have a clear and defined process to control spending, which continues to govern our disciplined approach to spending decisions. This zero-based budgeting approach, internally branded as Save to Serve, keeps the customer at the center of all we do, while reinforcing our cost control mindset. Our Fast Track initiative is a great example of this approach, where our current goals include increasing labor productivity in our stores and enhancing customer convenience. The first phase of Fast Track consisted of both rolltainer and case pack optimization, which has led to the more efficient stocking of our stores.", "The second component of Fast Track is self-checkout, which provides customers with another flexible and convenient checkout solution, while also driving greater efficiencies for our store associates. Self-checkout was available in approximately 10,000 stores at the end of Q2, and we continue to be pleased with our results, including strong customer adoption rates. We are also excited about our pilot in select stores, which provides customers the option to utilize self-checkout in all lanes, but also choose a staffed register preferred. We believe this full self-checkout option could further enhance our convenience proposition, while enabling store teams to dedicate even more time to serving customers.", "We plan to ultimately test this layout in about 200 stores by the end of this year. Looking ahead, we are on track to expand our self-checkout offering to a total of up to 11,000 stores by the end of the year as we look to further extend our position as an innovative retail and small box discount retail. Moving forward, the next phase of Fast Track consists of increasing our utilization of emerging technology and data strategies, which includes putting new digital tools in the hands of our field leaders. When combined with our data-driven inventory management, we believe these efforts will drive greater efficiencies for our retail leaders and their teams.", "Our efforts to reduce costs have also benefited from our growing private fleet, which consisted of more than 1,100 tractors at the end of Q2. As a reminder, we are focused on significantly expanding our private fleet in 2022 as we plan to more than double the number of tractors from 2021, which we expect will account for approximately 40% of our outbound transportation fleet by the end of the year. Our underlying principles are to keep the business simple, but move quickly to capture growth opportunities, while controlling expenses and always seeking to be a low-cost operator. Our fourth operating priority is investing in our diverse teams through development, empowerment and inclusion.", "As a growing retailer, we continue to create new jobs and opportunities for personal and professional development, and ultimately, career advancement. To that end, we are very pleased with our DG Discover Hiring event in Q2, which exceeded our goal for new hires while adding significant talent to our teams in the field, distribution centers, and private fleet. With regards to development, our internal promotion pipeline remains robust as evidenced by internal placement rates of more than 75% at or above the lead sales associate position. Additionally, approximately 15% of our private fleet began their careers with us in either a store or distribution center.", "We also continue to be pleased with our turnover rates, staffing levels and applicant flow, further validating our belief that we are taking the right actions to attract and retain talent. Ultimately, we believe that the opportunity to start and develop a career with a growing and purpose-driven company is a unique competitive advantage and remains our greatest currency in attracting and retaining talent. We also held our annual leadership meeting earlier this month in Nashville, providing an important collaboration and development experience for more than 1,500 leaders of our company. This event is a high point for me every year, and I am always inspired by the incredible talent of our people and humbled by the way they live out their personal purpose, while fulfilling our mission to serve others.", "In closing, I am proud of the team's strong performance as we continue to make great progress against our operating priorities and strategic initiatives, while creating meaningful value for our shareholders. I want to thank our approximately 173,000 employees for their work every day to make a difference in the lives of our customers, especially at times like this when they need us the most. I am excited about all that we will accomplish together in the second half of 2022 and beyond. With that, operator, we would now like to open the lines for questions." ] } ]
[ { "name": "Operator", "speech": [ "Thank you. [Operator instructions] Our first question comes from Rupesh Parikh with Oppenheimer. Please proceed with your question." ] }, { "name": "Rupesh Parikh", "speech": [ "Good morning. So first, Todd, congrats on all the success over the years. And Jeff and John, congrats on your well-deserved promotions." ] }, { "name": "John Garratt", "speech": [ "Thank you." ] }, { "name": "Jeff Owen", "speech": [ "Thank you." ] }, { "name": "Rupesh Parikh", "speech": [ "So I was hoping to first touch just on your price position. So how do you feel about your pricing position today in light of some of the competitive actions that are taking place right now and are expected to happen going forward?" ] }, { "name": "Todd Vasos", "speech": [ "Yeah. Rupesh, this is Todd. I'll take that one. We feel great about our price position.", "I just want to remind everybody, well over a year ago, we took a very aggressive price stance, as you may recall me talking about over the last 18 months or so. And it positions us so well in the pandemic and now exiting the pandemic time frame. And we feel great about where we are on prices against all classes of trade, and of course, against even our chief competitors, we're in really good shape. And obviously, as we continue to move forward with this environment, we'll continue to look at how we service our customer.", "The fabulous thing is we're in a great position, and our customers are really showing through our increase in trips that we saw for the quarter that they rely on our everyday low price here at Dollar General always first before anything else." ] }, { "name": "Rupesh Parikh", "speech": [ "Great. And then my one follow-up question, maybe for John. So there was pretty significant deleverage on more than 4% comp. So anything unusual to happen in Q2 that doesn't repeat for the back half of the year? And then just any more color in terms of how to think about SG&A for the back half.", "Thank you." ] }, { "name": "John Garratt", "speech": [ "Thanks, Rupesh. As you look at SG&A, nothing unusual there. One thing we had talked about was from a position of strength and given the sales outperformance and momentum that we were going to be making targeted proactive investments to build on that momentum, to help drive sales, as well as an enhanced customer experience. So really, it was consistent with that.", "The most notable one was adding some labor hours to help further improve our in-stock levels, as well as that customer service. We really like what we're seeing there. Also, to a lesser extent, we did make targeted investments in wages in the physical box itself. But I would say more normal course proactive actions to drive the business.", "We also did see some inflation on utilities and did have some higher-than-normal R&M expenses associated with the weather. But I think when you look at just overall operating margin, we feel really good about what we're doing. We feel great about the gross margin expansion. A lot of the investments we make in SG&A really drives that gross margin expansion, which was up 69 basis for the quarter, and importantly, 1.5 points above where we were three years ago.", "So we really like to look at operating profit overall because, as we said before, the geography and the leverage changes a little bit as we spend a little bit on SG&A to drive more on gross margin as you look at the implied guidance with the sales and the strong bottom-line guide for the year, that implies operating margin expansion over the back half. So we feel well-positioned that we're making the right trade-offs and investments to drive that sales growth." ] }, { "name": "Rupesh Parikh", "speech": [ "Great. Thank you." ] }, { "name": "Operator", "speech": [ "Our next question is from Matthew Boss with J.P. Morgan. Please proceed with your question." ] }, { "name": "Matthew Boss", "speech": [ "Thanks, and congrats on another great quarter, guys." ] }, { "name": "John Garratt", "speech": [ "Thank you." ] }, { "name": "Jeff Owen", "speech": [ "Thank you." ] }, { "name": "Matthew Boss", "speech": [ "So first, could you just speak to the top-line acceleration that you're seeing despite the tougher backdrop for low-income households that, I think, broadly, we're seeing. How best to think about the inflection back to positive traffic that you saw this quarter? And what are you seeing from retention of new customers that you've recently acquired?" ] }, { "name": "Todd Vasos", "speech": [ "Yeah, Matt. Thanks for the question. Yeah, I would tell you that, as expected, the customer is reacting just like we thought she would. And that is she's shopping closer to need.", "She's being very intentional in her shopping patterns, as well as her shopping while she's inside the four walls of the Dollar General store. It is a little bit more skewed to need based, which we thought would also occur. But the great thing is what we're seeing is that if we do have the right product out there, which we do, on the discretionary side, she's shopping that as well. As an example, our harvest in Halloween is off to a fabulous start, well over what we expected.", "So again, you got to have the right items at the right value, and that's what Dollar General is all about as you know. With that more intentional shopping, we also see her buying more private brands. So our private brand sales have continued to increase quarter over quarter, as well as year over year. And so we're seeing that.", "And then the all-important $1 price point. By the way, the $1 price point was one of, if not, the fastest-growing subcategory we had here at Dollar General in Q2. And we're seeing that it is so much more important for her today than ever before to be able to feed her family toward the end of the month. So we're definitely leaning in both in private brand and the $1 price point.", "You may remember, I mentioned a couple of quarters ago, that we anticipated this, so we started to bring in more of this type of product, as well as our merchants under Emily Taylor and her group to really highlight that in off-shelf displays, end caps and that has been ongoing. And we'll continue to press forward on that as we move to the back half of the year because, again, we believe that $1 price point will be very, very important. And then lastly, just like we thought, again, trips being up, so she's coming more often, but spending less on each trip. And again, that's a reversal to what we saw there in the pandemic.", "So she's really coming back to where we suspected she would. But the great thing about Dollar General is our price is fabulous. Our price position, as I mentioned earlier, couldn't be better, and she's showing it within those trips that she's bringing to Dollar General. So more to come as we move through the back half of this year and into '23.", "But I would tell you, I've never felt better about our positioning as we are here to help that customer through probably the toughest time she's seen in quite a while." ] }, { "name": "Matthew Boss", "speech": [ "That's great. And then maybe, John, on gross margin. How best to think about the components in the back half if we're thinking about mark on LIFO or mix? And then just larger picture, holding the earnings guide today despite the better sales outlook, so is this solely the targeted investments that you cited that's holding back incremental model flow through?" ] }, { "name": "John Garratt", "speech": [ "Sure. I'll start with gross margin. We didn't give specific guidance on gross margin. But to give you some color around the puts and the takes, we do expect to continue to see mixed pressure over the course of the remainder of the year as sales outperformance exceeds -- on consumables, exceeds nonconsumables, as everybody is seeing.", "And we also do expect to see ongoing supply chain pressures, including higher fuel costs, as well as increased product cost inflation. So we expect that to continue. But I would tell you, on the transportation side and supply chain in general, we are seeing moderation there, and we do get an easier lap in the back half as we lap pretty substantial and growing supply chain inflation last year. And we're doing a lot of good things to help mitigate that.", "As Jeff mentioned in the prepared comments, doubling the size of the private fleet, really has a meaningful impact on that where we save about 20% on a per driver basis there. The other thing we called out was markdowns, but I would tell you, with the markdowns, that's really a function of normalization. We were lapping unusually low clearance markdowns and promotional markdowns last year. If you look at where we're at now, still well below pre-pandemic levels, but that lap will continue to be a bit of a pressure to us.", "But as we look at the back half of the year, in addition to the easing inflationary pressures, particularly on the supply chain and some other areas and the actions we're taking, we're continuing to see growing benefits from our strategic initiatives, which go after the top line and the bottom line, other actions to help mitigate that. And as I mentioned previously, when you look at operating margin overall, it suggests expansion in the back half given all the actions we're taking. So -- and as we look ahead, I think we're very well-positioned to continue to expand our gross margin over the long term. Todd talked about being in a great spot on price position.", "And again, as a limited SKU operator with our growth in size, I think it really positions us well in this environment to serve that customer very well. Be sharp on price, but to continue to expand our margins over the long term. And in terms of the question around why not raise EPS guidance, I would say that, first, very pleased based on the strength of the first half of the year and the anticipated results in the back half to raise the sales guidance, and pleased to reiterate the strong EPS guidance, while others have had to lower it in this challenging environment. We see the business fundamentals is very strong.", "It positions us very well to continue to be double-digit EPS growers over the long term, which we were at 10.8% this quarter. But there are some near-term headwinds. We mentioned the ongoing mix pressure. The overperformance in sales has been on the consumables side, which has lower margins.", "And while we do expect some moderation in inflation in the near term, it remains pressured with elevated supply chain costs, fuel costs and product cost inflation, of course, the LIFO charge, which continues throughout the year as that's spread over the year. Also another piece which you mentioned is the SG&A investment, which I talked about. I wouldn't say that's the only driver, the primary driver. But that is a driver to that.", "But again, we like what we're seeing there in terms of the investment in labor hours to help drive a better customer experience, to help drive sales and we are investing, as I mentioned, a little bit in targeted investments in wages in the box itself. And then the other thing we called out was interest. Interest will be higher in the back half of the year given higher interest rates and higher borrowings. So a number of near-term tailwinds, but we feel really good to be able to maintain that guidance, continue to see ourselves as double-digit EPS growers over the long term.", "And there's a lot of year left but feel good about the guidance we've provided." ] }, { "name": "Matthew Boss", "speech": [ "Congrats again. Best of luck." ] }, { "name": "Operator", "speech": [ "Our next question is from Simeon Gutman with Morgan Stanley. Please proceed with your question." ] }, { "name": "Simeon Gutman", "speech": [ "Hey, good morning, everyone. Probing a bit on the sales guidance for the back half, I recognize that the one-year comp is guided to accelerate. If we look at the three-year stack, it looks like Q2 accelerated quite a bit and that the second half actually doesn't imply much of an acceleration. So curious given the trade down and, I guess, where the customer is going, seems to benefit you right now.", "Any assumptions, other than conservatism, that you're thinking about in terms of sales for the second half?" ] }, { "name": "John Garratt", "speech": [ "Yeah. As you look at sales in the second half, I mean, when you do the squeeze on that that's quite healthy sales, not only on a three-year basis, but as you look at the one-year basis. To your point, we did see accelerating comps, we saw accelerating comps throughout the quarter. So we feel really good about the momentum of the business going in.", "We feel really good about the new customers and basket size growth that we've been able to retain coming out of the pandemic. And we are starting to see signs of more customer trade down, that's contemplated in the guidance. I wouldn't say we have a significant impact from that built into the guidance. But based on what we're seeing, that is contemplated in there.", "We're seeing a bigger impact, as big as ever impact from our real estate with the strong performance of remodels and new units, which are exceeding our pro forma, and the initiatives are delivering. So we feel really good about where we're at, the momentum of the business, the fundamentals, and I think the guidance reflects that, as well as a little bit in there contemplated around that trade down." ] }, { "name": "Simeon Gutman", "speech": [ "And maybe the follow-up, just honing on the gross margin a bit. Q2 was quite good and at a structurally higher level. Can you talk about the sustainability of this? And if there was some -- maybe some puts in and takes, but it feels like we're run rating at a higher level, and not thinking about guidance into '23, but are the drivers actually accelerating? You mentioned some relief on input costs. Are the drivers accelerating such that this is only going to build from here?" ] }, { "name": "John Garratt", "speech": [ "Yeah. Again, I don't want to get too specific around gross margin guidance. But again, as you do the squeeze in the back half, it implies healthy, positive operating margin expansion and gross margin. We feel good about where we're at here in terms of sustainability over the long term to drive that.", "The biggest driver when you look, again, you go back to pre-pandemic levels where we're up 1.5 points in this quarter. It's the initiative is a huge piece of that. The ongoing benefit of DG Fresh and NCI, as we optimize and scale those, that's the gift that keeps on giving other things around the DG Media Network, just while promotional activity was a little bit higher versus pandemic where there was none. We remain very targeted in that and are doing a great job minimizing the clearance activity.", "So I think as you think the fundamental drivers of the initiatives, as you think about the other levers we've talked about, the efficiencies we're driving in supply chain, including the private fleet and the other levers we've talked about. And we do see spots where the inflation is starting to moderate, particularly around carrier rates ocean freight, we're seeing moderation there. It remains to be seen what happens to inflation overall with vendors, but we'd expect over time that growth, that pace of increases to start to moderate as well. And again, as you get to the back half of the year, we're lapping pretty substantial increasing supply chain inflationary laps.", "And so as we see some moderation and get easing laps, that will help as well. And that's all contemplated in the guide." ] }, { "name": "Simeon Gutman", "speech": [ "Great. Thanks. Good luck. Congratulations." ] }, { "name": "John Garratt", "speech": [ "Thank you." ] }, { "name": "Operator", "speech": [ "Our next question is from Michael Lasser with UBS. Please proceed with your question." ] }, { "name": "Michael Lasser", "speech": [ "Good morning. Thanks a lot for taking my questions. Todd, Jeff and John, congratulations on all your new endeavors. My first question is the success of Dollar General over many years has been driven by not only a superior execution and formal strategy, but also some of its competitors in the small-box value retail space being on a long journey to try and find their way.", "And now there could be some changes in the competitive environment. We're seeing Family Dollar make price investments, it could be the perception that you're making investments in store hours, store labor as another way to beef up in the event that you are now going to face a stronger competitor, so the net result of all this could mean that the profit rate, the operating profit rate in small box retail has peaked as now two competitors that are going to be stronger and well-positioned, are fighting a little bit harder against each other. Why or why not is that the case?" ] }, { "name": "Todd Vasos", "speech": [ "I'll start it out, Michael. I would tell you that obviously, you're zeroing in on our chief competitor there. So I'll just say this that it's been not only a long journey for them, I would say it's been even tougher than that. We've heard over the last seven years that they're getting traction and they're doing this and doing that, and we're still talking about that.", "So I think we're still talking about it. What we are here to do, as you know us pretty well, Michael, is controlling what we can control and forging ahead on our initiatives. We have left our chief competitor completely in the dust that will take years, years to catch up. And I would also tell you that we feel very, very strongly that peak margins haven't yet been obtained and that we have a lot of room to grow.", "You've heard from John, not only short term but long term. Our initiatives alone are driving a tremendous amount of that growth and that confidence. And I would tell you that Jeff and the team, as we go forward, have got a lot of initiatives in the hopper that we haven't even talked about yet that are percolating. So we're looking out as we promised everyone six years ago, when we started the strategic journey that we've been on, that we would look out 5 to 10 years down the road and around the corner.", "And I think you've seen from us that we've done that. And I think you've seen the fruits of that as we continue to roll out these initiatives. And to your point, have some of the best execution in the retail industry against initiatives. Lastly, being here for 14 years and thinking back to the last time we had the recession, and we had the customer that was really strained, the one thing that Dollar General had is that we had already fixed a lot of the basic railroad by the time we really hit stride in late '09 and '10.", "I would hate to be trying to fix the railroad right now. It would be like one of the toughest times to do it. And so I would like to just point out that we're in such a great position that as we continue to move forward, we believe we'll be able to capitalize on that trade down that we're already seeing. And that trade down is coming from income levels that are upwards of $100,000 which we really are encouraged in seeing a younger consumer, a little bit more affluent, and again, very digitally and tech savvy." ] }, { "name": "Michael Lasser", "speech": [ "Got it. Super helpful. My follow-up question is on the outlook for this trade down. Your comp in the quarter was obviously well above your algorithm, you're guiding conservatively for the back half of the year seemingly so.", "You have a lot of inventory. Why wouldn't this above algorithm comp continue well into next year, assuming that the macro environment stays where it is, and if it gets a little worse that trade-down benefit will be even greater?" ] }, { "name": "Todd Vasos", "speech": [ "Yeah. So I would tell you that I will first start and just say that we feel that that trade down will continue to come in and benefit us. As it relates to the inventory levels, we couldn't be happier with where we sit today on inventory. We did all the right things early on, Michael, as you would imagine, coming from a Dollar General.", "We were well ahead of any inventory issues that may pop up unlike some of our competitors out there. We canceled orders as early as December because we saw where the customer was headed. We actually have canceled orders not only into Q2, but into the back half of the year. And all of our guidance is contemplated on that.", "So we feel very strong. The quality of our inventory couldn't be better. And as we move forward, we believe that will benefit us as we move into the back half of this year and into next year." ] }, { "name": "Michael Lasser", "speech": [ "Thank you so much, and good luck." ] }, { "name": "Operator", "speech": [ "Our next question is from Kate McShane with Goldman Sachs. Please proceed with your question." ] }, { "name": "Katharine McShane", "speech": [ "Hi. Thanks. Good morning. I just wanted to go back on the trade down commentary.", "If there are certain categories being sought out by the higher-end consumer. And what categories are you seeing heavier trade down to with regards to private label? And then just as a follow-up, with the higher-end consumer coming into the store now, how long do they traditionally stick around and how might you be trying to keep them as more permanent customers?" ] }, { "name": "Todd Vasos", "speech": [ "Yeah. Those are great questions. I would tell you, what we're seeing on that higher-end consumer is that she does shop a more holistic part of the store. And I made mention on the harvest and Halloween as an example, very discretionary, but doing extremely well.", "And some of that comes from that trade down, right? Because that consumer does have a little bit more money to spend. And as you think about how sticky that customer is, well, dial the clock back just a bit to the pandemic and now coming out of the pandemic, we've retained a lot more of those customers than we thought we would. So we're very happy on that retention. So we know that they're sticky because, again, that consumer -- was that consumer making -- the majority of them making that 50 to 75 range.", "So this one extends up to 100. But again, the experience is very, very similar to those, for those consumers when they come in. So we believe that that will be sticky as well. So when you think about our market share in just discretionary items.", "I also want to point out that that was positive as well for the quarter. So we're picking up share even in a very tough environment on the discretionary side. And then lastly, your other question was around what type of items are we seeing as well. Even from our core customer, trading down -- trade down doesn't always mean just trading down from other retailers.", "It also is trading down when you get inside the box, and our core customer has been buying more private brands, that $1 price point, very, very important to her. If you think about things that have accelerated greatly over the last quarter, if you think of basic proteins that our core customer needs, so what we've seen is 15% to 20% increases over the last couple of quarters in canned meat, seafood, dry pasta, soups, rice and beans. So those core proteins, eggs, all those things that the consumer needs to feed her family but can do it at a much-reduced price. So we're seeing that trade down effect as well, and we're in great position to take advantage of that, both from our everyday low retail price stance, as well as our supply chain, is much more healthier there than we were last year at this time." ] }, { "name": "Katharine McShane", "speech": [ "Thank you." ] }, { "name": "Operator", "speech": [ "Our next question is from John Heinbockel with Guggenheim Partners. Please proceed with your question." ] }, { "name": "John Heinbockel", "speech": [ "Hey, guys, congratulations. Todd, I wonder if you can talk to, you referenced this strategic journey, which is one of the most significant things I think you brought in. Where are we on that in terms of the pipeline of things? Well, first of all, I think you're looking out, right, two or three years with that effort. Where is the pipeline versus where it's been historically, right? Is it fuller? And then where do you think -- you're not going to talk specifics, but when you think about kind of functional areas, right, merchandising, marketing, where do you think there's the most fertile ground, right, to use those strategic ideas to further the DG brand?" ] }, { "name": "Todd Vasos", "speech": [ "Yeah. Let me start, and I'm going to turn it over to Jeff as well. But I would tell you that, John, we feel great about those strategic initiatives. And to your point, not only a couple of years out, but 5 and 10 years out is the look.", "And if you look at the majority of them, there -- for instance, NCI, as an example, while we're close to the end of that rollout journey, the next phase of that that optimization phase, is just starting. I would tell you, we're probably in the fifth inning in NCI. We're in the late fourth inning in the fresh piece of the business, with produce being a big unlock yet to come as an example. And then we're just starting the journey.", "We're just getting up to the plate to use the analogy in both Mexico and in our health initiative. And as I mentioned earlier, we've got others we haven't even talked about ready to push into the pipeline. And Jeff, you may want to jump in just briefly." ] }, { "name": "Jeff Owen", "speech": [ "Yeah. I would tell you, John, thank you for the question. And I think, we've never been more excited about the future. And to Todd's point earlier, it's not two to three years out.", "I mean, one of the things you got to think about is our, first of all, our pipeline for growth. I mean, that 17,000 additional opportunities, 13,000 general stores, 3,000 pOpshelf stores and 1,000 DGX. So first and foremost, our pipeline is extremely robust, and we're very pleased with this larger store format that we've been rolling out. 80% of our stores this year will be in that larger store format, and we're seeing the sales per square foot perform extremely well.", "So we're very pleased at how our new store performance is beating our pro forma expectations. And John, you've followed us for quite some time. We have pretty high expectations for our new store growth program. But as you think to the future also, you got to think about digital as well.", "I mean, our digital strategy and our acceleration there is serving us tremendously well. I mean, when you think about over 80 million profiles that we're able to connect with our CPG firms and our brand partners, and we believe we can expand that beyond traditional CPG and brand partners because we have a unique customer, almost 30% of the United States population in rural America, that's really hard to reach. And with our customer profiles, we're able to really connect multiple partners with that unique Dollar General customer that no one knows better than we do. But as you think down the road, Mexico, we're excited to open stores, and we said this before, we wouldn't be going to Mexico if we didn't think it was a huge opportunity.", "And then when you think about health, health is one of these where we're -- we just had our first meeting with our advisory panel. It was incredible. And you're going to hear a lot more about health here in the near term and in the future with our Chief Medical Officer, Albert Wu, his strategy and the way we're going to be able to provide access for a customer that's being underserved right now. So when you think down the road, it's extremely bright.", "And I would tell you, your comment about our teams, where do we have fertile ground? We have the best team in retail. And so when you look at every aspect of this Dollar General team, it's the unique and secret sauce of our success. And our culture has never been stronger. Our teams are energized to continue to move forward.", "So I think you can tell from my excitement, Todd's excitement, John's, that we see tremendous opportunity in the future. And I can't wait to update you guys in the near future on where we're going." ] }, { "name": "John Heinbockel", "speech": [ "Thank you." ] }, { "name": "Operator", "speech": [ "Our next question comes from Corey Tarlowe with Jefferies. Please proceed with your question." ] }, { "name": "Corey Tarlowe", "speech": [ "Hi. Good morning. Thanks for taking my questions, and congrats to Todd on a successful career with Dollar General and to Jeff and John for your new elevated roles. So first, there was an announcement intra-quarter about the three DC openings out west.", "Are we to read into that that there are perhaps the more incremental store opportunity ahead lies in the regions where those new DCs are, in fact, being built out west in the U.S.?" ] }, { "name": "Jeff Owen", "speech": [ "Corey, thank you for the question, and thank you for the well wishes. One of the things we do so well here at Dollar General is we anticipate and look down the road. And we like to think we look around the corner real well, too. So that's exactly what this is.", "Our distribution strategy is in lockstep, as I mentioned just a minute ago. We have 17,000 additional opportunities, and that's across the entire U.S. And so we're very pleased at our ability to expand our distribution network because what it's going to do for us is it's going to continue to allow us to serve our stores better, make it more efficient, be able to pull cost out of the system and enable us to continue to grow. And as you can tell, we have significant growth prospects in the future.", "And that's all this is, is being able to make sure that our distribution is in line with our store opening plans, and those two teams work very, very well together to plan accordingly." ] }, { "name": "Corey Tarlowe", "speech": [ "Great. And then just a follow-up for John. How are you thinking about your expectations for freight expenses throughout the back half of this year within the overall margin guidance that you've given?" ] }, { "name": "John Garratt", "speech": [ "Yeah. As we touched on earlier, we do see improving conditions there. You're seeing additional supply capacity come online. You're seeing, obviously, demand drop as folks cut orders.", "And so when you look at both ocean freight and you look at domestic carrier rates, we're seeing those rates come down. And again, actions we're taking like with the private fleet is helping mitigate that as well. And we're coming up on a time where you're lapping increasing supply chain costs as you went from Q3 into Q4 last year. So I think net-net, we're doing a great job mitigating it.", "And I think that will, over time, switch to a tailwind as we see that moderate." ] }, { "name": "Corey Tarlowe", "speech": [ "Great. Thank you very much, and best of luck." ] }, { "name": "Operator", "speech": [ "We have reached the end of the question-and-answer session. I would now like to turn the call back over to Todd Vasos for closing comments." ] }, { "name": "Todd Vasos", "speech": [ "Yes. Thank you for all the questions, and thanks for your interest in Dollar General. And I do appreciate all the well wishes that you extended. Serving with this team has been the highlight of my professional career, and it's been a blessing and a privilege to serve our customers, associates, shareholders, and communities over the past seven-plus years as the CEO of Dollar General.", "I'm extremely proud of the progress we've made together and look forward to working with Jeff and the team in an advisory and consulting capacity going forward, as well as continue to serve on the board. I believe we have the best team in retail, our mission and culture are stronger than ever, and we are extremely well-positioned to capitalize on the enormous growth opportunities we see ahead. Again, thank you for listening, and I hope you have a great day." ] }, { "name": "Operator", "speech": [ "[Operator signoff]" ] } ]
DG
2018-12-04
[ { "description": "Vice President, Investor Relations & Public Relations", "name": "Jennifer Beugelmans", "position": "Executive" }, { "description": "Chief Executive Officer", "name": "Todd J. Vasos", "position": "Executive" }, { "description": "Chief Financial Officer & Executive Vice President", "name": "John W. Garratt", "position": "Executive" }, { "description": "Oppenheimer & Company -- Analyst", "name": "Rupesh Parikh", "position": "Analyst" }, { "description": "Barclays Capital -- Analyst", "name": "Karen Short", "position": "Analyst" }, { "description": "UBS Group -- Analyst", "name": "Michael Lasser", "position": "Analyst" }, { "description": "Deutsche Bank -- Analyst", "name": "Paul Trussell", "position": "Analyst" }, { "description": "Morgan Stanley -- Analyst", "name": "Vincent Sinisi", "position": "Analyst" }, { "description": "J.P. Morgan -- Analyst", "name": "Aaron Gray", "position": "Analyst" }, { "description": "Citi -- Analyst", "name": "Garrett Klumpar", "position": "Analyst" } ]
[ { "name": "Operator", "speech": [ "Good morning. My name is Thea and I will be your conference operator today. At this time, I would like to welcome everyone to the Dollar General Third Quarter 2018 Earnings Call. Today is Tuesday, December 4, 2018. All lines have been placed on mute to prevent any background noise. This call is being recorded. Instructions for listening to the replay of the call are available in the company's earnings press release issued this morning.", "Now, I would like to turn the conference over to Ms. Jennifer Beugelmans, Vice President of Investor Relations and Public Relations. Ms. Beugelmans, you may begin your conference, ma'am." ] }, { "name": "Jennifer Beugelmans", "speech": [ "Thank you, Thea, and good morning, everyone. On the call with me today are Todd Vasos, our CEO, and John Garratt, our CFO. After our prepared remarks, we will open up the call for questions. Our earnings release issued today can be found on our website at investor.dollargeneral.com under News and Events.", "Let me caution you that today's comments will include forward-looking statements about our expectations, plans, future estimates, and other non-historical matters including but not limited to, our Fiscal 2018 financial guidance, our Fiscal 2018 and 2019 real estate plans, our planned investments, initiatives, and capital allocation strategy and related expectations, and economic trends or future conditions. Forward-looking statements can be identified because they are not statements of historical facts or use words such as may, should, could, would, will, believe, anticipate, expect, assume, outlook, estimate, guidance, plan, opportunity, continue, focused on, or goal, and similar expressions that concern our strategy, plans, intentions, or beliefs about future matters.", "Important factors that could cause actual results or events to differ materially from those projected by our forward-looking statements are included in our earnings release issued this morning under Risk Factors in our 2017 Form 10-K filed on March 23, 2018, and in the comments that are made on this call. We encourage you to read these documents.", "You should not unduly rely on forward-looking statements which speak only as of today's date. Dollar General disclaims any obligation to update or revise any information discussed in this call, except as may be otherwise required by law. At the end of our prepared remarks, we will open the call up for your questions. Please limit your questions to one and one follow-up question, if necessary.", "Now, it is my pleasure to turn the call over to Todd." ] }, { "name": "Todd J. Vasos", "speech": [ "Thank you, Jennifer, and welcome to everyone joining our call. We are pleased with our third quarter results, particularly given the two major hurricanes that devastated communities in some of our most heavily penetrated areas in the southeastern United States. We stayed focused on our initiatives, kept the customer at the center of everything we do, and our financial performance during the quarter demonstrated what this type of focus can produce.", "Before discussing our third quarter results, I want to express my gratitude to all of our teams who have worked so diligently in very difficult circumstances to serve the communities we call home. We recently visited with our field teams in the Carolinas and the Florida panhandle, where the damage was the greatest. I say it frequently, but it bears repeating, I am so inspired by our team's consistent dedication to our mission of serving others.", "Turning now to our third quarter performance. We delivered another solid quarter with strong growth on both the top and bottom lines. On the top line, our same-store sales growth of 2.8% resulted in our highest two-year stack in 11 quarters. This quarter, our comp growth was primarily driven by our customers checking out with larger baskets. We believe this is a reflection of all the work we have done to make the box more relevant for our customers. As our customers' needs evolve, they are telling us they want a fuller shop from us and we're delivering with even more of the products they want at the values they need.", "Year-to-date through the 2018 third quarter, we posted 2.9% same-store sales growth, which continued to be driven by greater customer productivity. We feel good about our 39-week performance as well as the outlook for the rest of the year. We did, however, incur greater than anticipated disaster-related expenses during the third quarter, primarily as a result of the hurricanes. We have updated our full year 2018 operating margin rate and diluted EPS guidance to include the estimated impact of these expenses on the third and fourth quarter results. John will walk you through those details in just a moment. As we continue to execute against our strategic initiatives, we remain focused on our operating priorities and we believe we are in a great position to finish the 2018 year on a strong note.", "Now let's recap some of the topline results for the third quarter. Net sales increased 8.7% to $6.4 billion compared to net sales of $5.9 billion in the third quarter of 2017. We continue to be very pleased with both the productivity from our new stores as well as the performance from our mature stores. Our 2.8% same-store sales increase was, again, led by our strong performance in consumables. We are listening to our customers and providing the products they want and need. This performance allowed us to continue growing market share. We remain well positioned against all classes of trade as evidenced by our market share gain in the 4, 12, 24, and 52-week periods ending November 3, 2018, as measured by syndicated data. We believe these share gains are coming from multiple retail channels and competitors, underscoring the broad appeal of our value and convenience offering. Further, as we continue to execute across our growth strategies and operating priorities, we believe we have an opportunity to capture incremental share from a variety of sources.", "While it's always competitive in discount retail, pricing activity has remained rational and our pricing surveys indicate Dollar General continues to be well positioned across all geographic regions where we operate. We believe this positioning and our commitment to every day low prices contributes to our market share gains.", "We saw improvement in our nonconsumable categories which, overall, comp positively again in the third quarter. This growth was primarily driven by strong sales in our seasonal category, along with our best performance in the home category in 10 quarters. We remain focused on driving sales improvement in the nonconsumable categories, which I will discuss with you in more detail later in the call.", "As we have discussed in recent quarters, overall, we continued to see rational pricing activity across the industry. We know it's always competitive within the discount retail space, but we are committed to being priced right for our customer every day. After John's discussion, I will also provide an update on our execution against our operating priorities and strategic growth initiatives.", "With that, I will now turn the call over to John to provide you with more detail on the third quarter financial results." ] }, { "name": "John W. Garratt", "speech": [ "Thank you, Todd, and good morning, everyone. I will now take you through some of the important financial details for the quarter and year-to-date. Unless I specifically note otherwise, all comparisons are year-over-year.", "As Todd has already discussed sales, I will start with gross profit. Gross profit as a percentage of sales was 29.5% in the third quarter, a decrease of 39 basis points. This decrease was primarily attributable to an increase in the lifeboat provision, the ongoing product category mix shift to consumables, as well as higher sales of lower margin consumable products, higher markdowns, and increased transportation costs. We've recorded a $12.5 million lifeboat provision in the third quarter of 2018, compared with a $0.5 million lifeboat provision in the third quarter of 2017. This lifeboat increase was attributable to cost increases which were primarily due to direct and indirect impacts of both tariffs and the increased transportation cost pressures.", "As you've heard from us and other retailers throughout the year, our business has continued to see the effect of higher transportation costs due to the tight carrier market and higher fuel prices, among other factors. While we have navigated sales mix challenges and markdowns as part of the retail landscape for many years, the headwinds from transportation costs is a relatively more recent challenge impacting our gross margin. We anticipate this trend to continue, primarily as a result of higher carrier rates. These factors were partially offset by another quarter of improved inventory shrink.", "SG&A as a percent of sales was 22.6%, a decrease of 21 basis points. The leverage in the third quarter of 2018 was primarily driven by reductions in incentive compensation, lower advertising and supplies expenses, and lower repairs and maintenance expenses as a percentage of sales. Partially offsetting those decreases were an estimated $14.1 million in hurricane-related expenses, as well as a $5.8 million year-over-year increase in other disaster-related expenses, both of which we greater than anticipated. In total, these hurricanes and disaster-related expenses had a negative 31 basis points impact on 2018 third quarter SG&A as a percent of net sales. Despite the significant negative impact of these disaster-related expenses, we were able to gain SG&A leverage even as we continued to invest in the business and in opportunities for long-term growth. We expect to continue investing in strategic initiatives that we believe will extend our runway for growth.", "Moving down the income statement, our effective tax rate for the quarter was 20%, compared to 35.8% in the third quarter of 2017. This decrease is primarily attributable to the lower federal tax rate in the 2018 period as a result of the Tax Cuts and Jobs Act.", "Finally, diluted earnings per share for the third quarter were $1.26 which includes an estimated negative impact of $0.05 related to the hurricane and disaster-related expenses that I just mentioned. It is important to note that in the fourth quarter, we also expect to report about $0.04 in expenses related to the third quarter hurricanes. These third and fourth quarter expenses are both incorporated into our updated guidance.", "Turning now to our balance sheet, which remains very strong. Merchandise inventories were $4 billion at the end of the third quarter of 2018, up 10.6%, and up 4% on a per store base. We believe our inventory remains in great shape and we are focused over the long-term on managing inventory growth to be in line with or below our sales growth. Further, our ability to generate significant cash flow from operations also continues to be a great strength of the business.", "Throughout the first three quarters of 2018, we generated strong cash flow from operations totaling $1.5 billion, an increase of $371 million or 32.5%. Year-to-date for the third quarter of 2018 total capital expenditures were $551 million and included our planned investments in new stores, remodels and relocations, continued investments in two distribution centers under construction, and spending related to the previously announced acceleration of certain key initiatives.", "During the quarter, we repurchased 2.8 million shares of our common stock for $298 million and paid a quarterly dividend of $0.29 per common share outstanding at a total cost of $77 million. Through the end of the third quarter, we returned a total of $879 million in 2018 to our shareholders through our share repurchases and quarterly dividend payments. From the inception of our share repurchase program in December 2011 through the end of the third quarter of 2018, we have repurchased $5.8 billion, or 88 million shares, of our common stock. At the end of the third quarter, the remaining repurchase authorization was approximately $706 million.", "Our capital allocation priorities remain unchanged and we continue to be disciplined and focused on financial returns. Our first priority is investing in high return growth opportunities, most notably new store expansion as well as infrastructure to support future growth. We also remain committed to returning significant cash to shareholders through anticipated share repurchases and quarterly dividends while maintaining our current investment grade credit rating and managing to a leverage ratio of approximately three times adjusted debt to EBITDAR.", "Finally, moving on to our updated fiscal 2018 guidance which replaces the guidance we provided on August 30, 2018, let me remind you about some of the key drivers as we've noted throughout fiscal 2018 our earnings outlook includes our current expectations regarding the impact of transportation cost headwinds, sales mix margin pressures, and investment in our strategic initiatives. Our guidance also reflects our year-to-date results and outlook for the remainder of the year, including the higher than anticipated disaster-related expenses for both the third and fourth quarters, primarily due to Hurricanes Florence and Michael.", "For fiscal 2018, we now expect net sales growth to be approximately 9%. For same-store sales growth, we expect to be in the middle of our previously provided range of mid to high 2%. For fiscal year 2018, we now expect our operating margin rate to be modestly below our fiscal year 2017 operating margin rate. This reflects the greater than anticipated disaster expenses I mentioned earlier.", "Additionally, we now expect diluted EPS for the full year to be in the range of $5.85 to $6.05. Our diluted EPS guidance now assumes our tax rate will be in the range of 21% to 22%. We are narrowing the range of our expectations for capital expenditures in fiscal 2018 to $725 million to $775 million. Our outlook for fiscal 2018 real estate projects remains unchanged, and we expect to repurchase a minimum of $850 million of shares, but will be opportunistic depending on our cash flow and other factors.", "We are pleased with our position as we enter the holiday season, and we are excited about the business. We believe we are implementing the right actions to help mitigate headwinds and maximize our sales growth opportunities. As always, we are focused on carefully controlling expenses even as we make targeted proactive investments. We continue to be disciplined in our we manage expenses and capital with a goal of delivering consistently strong financial performance while positioning our business for long-term growth. We remain confident in our business model and our ability to drive profitable same-store sales growth, deliver healthy new store returns, generate strong cash flow from operations, and create long-term shareholder value. With that, I will turn the call back over to Todd." ] }, { "name": "Todd J. Vasos", "speech": [ "Thank you, John. We are pleased with our financial results and are proud of the team's focus. I want to take the next few minutes to walk through how we are executing against our operating priorities and give you an update on the progress we are making on our long-term strategic growth initiatives.", "Starting with our first priority of driving profitable sales growth, a portfolio of topline initiatives is contributing to the strong year-to-date performance we have seen through the third quarter of 2018. These initiatives are designed to enhance the value and convenience proposition for our customers, offering them the trusted simple solutions they seek from us every day. Our cooler expansion continues to be an important sales initiative, particularly in mature stores. The team has done a fantastic job increasing the average number of cooler doors across the chain and we are seeing a great return on this investment.", "As of the end of the third quarter, we have installed more than 20,000 cooler doors across our mature store base in fiscal 2018. Based on the success of this initiative, we anticipate continuing our cooler expansion efforts in 2019.", "During the third quarter, we also continued ramp up queue optimized lines throughout select stores. The performance of these queue lines remain very strong, exceeding our own expectations. We now have the queue line enhancement in approximately 7,500 stores across the chain. Given the continued success of this rollout, we anticipate expanding this initiative in 2019, as well.", "We continue to be very excited about the early results from our Better-For-You initiative, which is performing well above our initial goals. We launched Better-For-You just a few months ago in response to feedback from our customers who are starting to look for healthier food options at affordable prices. We are very pleased to be able to provide these product options to our customers at attractive price points that fit their budget. Currently, we have approximately 2,700 stores that are carrying a great selection of Better-For-You products, including several items under our Good & Smart private brand. In fact, over the last 4-week period of the third quarter, half of our top ten unit movers within Better-For-You were Good & Smart branded items. We believe that the Better-For-You products appeal broadly to our customers and that we can roll out this offering to additional stores in 2019.", "In addition to these initiatives, we are excited about the holiday season and our product offerings as well as several exciting sales campaigns we'll be running. In particular, I'm excited to note that we are now offering the Lego toy brand in all of our stores for the first time. Not only are we bringing a trusted and beloved toy brand to our customers during the holidays, but we have also secured the only Lego brand partnership within our channel.", "In addition to merchandising, our store operations teams are hard at work enhancing the customers' shopping experience and driving productivity within the store. We continue to see improvements in overall customer satisfaction scores. We believe this is a direct result of our focus on friendliness, on-shelf availability, store cleanliness, and speed of checkout. We monitor these metrics closely and we are continually talking with our customers. The data show that the improvements in these areas are correlated with improved customer experiences, which we believe fosters greater loyalty and leads to sales growth.", "We have previously discussed our opportunities to further enhance gross margin. Our initiatives related to many of these opportunities are under way and continue to deliver results. For example, our efforts and investments in inventory shrink reduction continued to pay benefits in the third quarter, as we saw our eighth consecutive quarter of sequential improvement in the shrink rate. Shrink improvement remains a near-term gross margin driver, and we are executing on multiple initiatives, including electronic article surveillance, defensive merchandising, and increased use of technology, such as video-enabled exception-based reporting. We believe there is still runway for improvement and we expect to see continued benefit from investments in these shrink initiatives.", "As we noted last quarter, we have successfully reducing shrink while also increasing on-shelf availability. This balance is hard to achieve and can be tough to maintain. To further support our ability to sustain and drive on-shelf availability even higher, we are putting a number of new initiatives in place to support and drive sales growth in fiscal 2019 and beyond. These efforts dovetail nicely with our focus on driving customer traffic, as well.", "In addition, to shrink reduction we also have other longer-term opportunities to enhance gross margin through a number of efforts. Starting with distribution and transportation, we continue to focus on reducing stem miles, improving load optimization, growing and diversifying our carrier base, and expanding our private fleet. With regards to our private fleet, we remain on track to expand from 80 tractors at the end of Fiscal 2017 to approximately 200 tractors by the end of the fiscal year. Two hundred tractors would cover approximately 10% of our outbound freight needs, but we believe the added flexibility and learnings can also help us down the road in the event of future carrier rate fluctuations.", "We continue to evaluate opportunities to drive efficiencies and productivity within our distribution network to support profitable sales growth. Our distribution centers currently under construction in Longview, Texas, and Amsterdam, New York both remain on schedule to begin shipping in the 2019 calendar year.", "Other gross margin opportunities include our efforts around category management and private brands, in particular. Throughout fiscal 2018 we have executed a strategy to promote our portfolio of value-priced high-quality private brands. Our efforts have included a relaunch of our core health and beauty brand, Studio Selection, a refinement of our advertising strategy and shifted more of our circular space to showcase our private brands, and advertising campaigns that highlight compare-and-save options versus national brands. And of course, our money-back guarantee on private brands.", "Foreign sourcing remains an opportunity over the long-term as well. Currently, our efforts include strategies to mitigate the impact of tariffs on Dollar General and our customers. Over the last several years we have directly imported approximately 5% to 6% of our purchases at cost. With the current tariffs in place, including the most recent wave at 10%, we have a relatively low exposure on direct imports. Depending on the scope, a future rate increase or expansion of products subject to tariffs could have a more significant impact on our business and on our customers' budgets.", "Given that backdrop, our team is working diligently to mitigate the impact, where possible, and to minimize the need for price increases. Short-term, we did opportunistic forward buying to get in front of the tariffs on some items. We have long-standing relationships with our vendors and we are working closely with them to find ways, when possible, to reduce cost. This could include shifting manufacturing to other countries, reengineering the products, or finding substitute products that are not subject to these tariffs.", "In addition to the potential tariff impact, we are watching key economic factors that impact our customers. While the overall economy appears to be doing well, we know that our core customer is always challenged. With concerns about healthcare, inflation and rent expenses, and fluctuating gas prices, we know she remains very concerned about her budget. Our customers are at the center of everything we do and we remain committed to serving them with the every day low prices they have come to know and appreciate from Dollar General.", "Our second priority is capturing growth opportunities. Our proven high return, low-risk model for real estate growth continues to be a core strength of the business. In addition to the tremendous contributions from new stores, our remodel program continues to add significantly to our growth. Collectively, these real estate efforts have allowed us to extend our runway for long-term growth. As a reminder, our real estate model focuses on five metrics to ensure that new store growth is the best use of our capital. These metrics include new store productivity, actual sales performance, average returns, cannibalization, and payback period. We have consistently hit our overall goals for these metrics and we are very pleased with our overall new store returns and we remain committed to invest in our capital effectively to drive strong financial returns.", "This year, we shared with you our plan to execute approximately 2,000 real estate projects, including 900 new store openings, 1,000 mature store remodels, and 100 store relocations. We are on track to achieve these goals by the end of the fiscal year. This year, through the end of the third quarter, we have opened 750 stores, remodeled 925 stores, and relocated 92 stores. Of the 925 remodel stores, 359 were remodeled into the Dollar General traditional-plus format, or DGTP, which is the traditional size store with an expanded cooler count. We included a fresh produce section in 107 of these DGTP remodels.", "As a reminder, our remodeled store delivers a 4% to 5% comp lift on average, and a DGTP remodel delivers, on average, of 10% to 15% comp lift. And when produce is included in a DGTP, it delivers a comp lift, on average, at the high end of that range. We currently have approximately 425 stores throughout the chain that carry produce.", "We are excited to announce our plans for 2019 real estate growth. For our fiscal year 2019, we plan to open 975 new stores, remodel 1,000 mature stores, and relocate 100 stores. We are proud of the team's ability to support approximately 2,075 real estate projects in total. Of the 1,000 planned remodels, we expect approximately 500 to be in the DGPT format. We also expect to add produce to approximately 200 of these stores.", "Of our 975 anticipated new stores, we plan to open approximately 10 in the DGX format. As a reminder, DGX stores are about half the size of a traditional Dollar General store and have a product selection that is tailored to vertical living customers. We currently have 3 DGX stores, which overall, are doing well versus our expectations. We are excited to continue investing in this innovative concept.", "Our third operating priority is to leverage and reinforce our position as a low-cost operator. Over the years, we have established a clear and defined process to control spending. We continue to refine our process and have developed a culture highly focused on examining costs and expenses. Our spending is filtered through three criteria. First, is it customer facing? Second, does it align with our strategic priorities? And, third, how does it impact our risk profile?", "We continue to focus efforts in the stores on space optimization and simplifying our operations by reducing unproductive inventory, operating complexity, and product movement within the stores. Our teams are focused on these efforts through optimization of our operations and leveraging technology in new and exciting ways. We will continue to focus on our underlying principles to keep the business simple while moving quickly to capture growth opportunities, control expenses, and always seek to be a low-cost operator.", "Our fourth operating priority is to invest in our people, as we believe they are a competitive advantage. Our investments in wages continued to pay benefits in the third quarter. As of the end of the third quarter, store manager turnover was trending toward our all-time best on record, and our time-to-fill open positions was also at an all-time best. We continue to monitor the wage environment carefully and believe we remain well-positioned across the organization, as illustrated by robust applicant flow at every level. As we have seen the market change, we have proven that we are able and ready to adapt to any change. We have continued to place an emphasis on employee engagement, and our recent actions reflect our commitment to listen and respond to their feedback.", "In 2018 alone, we have expanded the benefits we offer employees to address a number of their needs. For example, we now offer expanded paid parental leave for mothers and fathers, adoption assistance, day-one access to benefits for store managers, and a new dress code policy for store employees that they really seem to like. Coupled with existing benefits, such as tuition assistance and college course credits for our store manager training, we believe we are providing our employees with a comprehensive set of benefits. And perhaps more importantly, we are continuing to communicate directly with our employees and giving them a voice.", "We believe all of these factors have contributed to the increase in employee engagement scores that we have seen. Even with these great benefits, we still believe that the opportunity to grow a long-term career at Dollar General is the most important currency we have to attract and retain top talent. The ability to advance to higher paying and higher responsibility jobs in a relatively short amount of time provides a great opportunity for our employees to grow in meaningful ways, both personally and professionally. Remaining the employer of choice is an important priority for us, and we believe we are well positioned to continue to attract and retain talent.", "Finally, before I open the call for questions, I wanted to quickly update you on our recent progress executing against our digital and nonconsumable strategic growth initiatives. I'll start with our digital initiatives. In the near term, our digital strategy remains focused on using technology to improve the in-store experience by offering customers even more personalization and convenience. Launched earlier this year, the DG GO! app is now live in approximately 250 stores, which completes our rollout for 2018.", "As a reminder, the app allows customers to use their phones to scan items as they shop and then skip the register by using the DG GO! kiosk. We estimate we currently have more than 20,000 active monthly users, and the feedback on the app continues to be positive. It seems to be fitting very nicely with our customers' shopping habits and creating an even more convenient frictionless shopping experience. We know that our customers who more frequently engage with our digital tools tend to shop with us more often and check out with larger average baskets.", "We currently have more than 15 million subscriber accounts within our digital coupon program, including 1.3 million new subscribers in the third quarter alone. These subscribers have clipped more than 700 million digital coupons this year in 2018. Deploying innovative technology across our stores remains an incredible opportunity for us, and we are investing accordingly. We look forward to continuing to test, analyze, and learn as we look to further enhance the use of technology.", "Turning to our nonconsumable initiative, in the second quarter we began a test of a bold, new, and expanded assortment in key nonconsumable classes; home, domestics, housewares, party, and occasions. As a reminder, this initiative is focused on first offering a new, differentiated, and limited assortment that will change throughout the year. Second, displaying the new offering in high traffic areas with improved adjacencies and increased focus on key classes to enhance the in-store experience and create a sense of purchase urgency. And third, continue to deliver exceptional value by pricing the majority of the offerings at $5.00 or less.", "While the amount of space that we dedicate to nonconsumables remains the same, we believe this merchandising strategy will drive greater sell-through and enhance gross margin over time. We have added this assortment to approximately 600 stores and are on track to have approximately 700 total stores up and running by the end of the fiscal year. We are still in the early stages. That said, we are now working through our third replenishment cycle in the first set of stores where we launched this initiative, and we remain encouraged by the results we've seen.", "In closing, we delivered another solid quarter and we're proud of our results. We continue to be excited about our business and believe we operate in the most attractive sector in retail. We have a differentiated business model that leverages our real estate expertise and our low-cost operating experience with our laser focus on delivering value and convenience to our customers.", "I want to thank our more than 135,000 employees across the company for their dedication in fulfilling our mission of serving others. Your commitment was certainly on display this quarter as you rallied around our communities in need. As we enter the busy holiday [audio cuts out] I also want to express my gratitude to all employees for your hard work, helping our customers save time and money every day. You are our most important resource and we appreciate your contributions to Dollar General's success. We are excited about our position and we are working hard to finish out 2018 strong and head into 2019 with great momentum.", "...", "With that, Operator, we would now like to open the lines for questions." ] } ]
[ { "name": "Operator", "speech": [ "Ladies and gentlemen, if you would like to ask a question please press *1 on your telephone keypad now. We'll pause for just a moment to compile the Q&A roster. The first question will come from Rupesh Parikh with Oppenheimer. Please go ahead." ] }, { "name": "Rupesh Parikh", "speech": [ "Good morning. Thanks for taking my questions. So, on the gross margin line, I was hoping for more color in terms of some of the puts and takes as you look out for Q4. And also, just some initial thoughts on what headwinds you think will continue into next year." ] }, { "name": "John W. Garratt", "speech": [ "Yeah, so I'll talk about the performance thus far and then talk about -- address your question in terms of what we see looking forward. You know, as you look year-to-date our gross margin's down 10 basis points. In Q3 we did see some increased year term pressures from carrier rates, tariffs, coupled with the ongoing headwinds we always managed through with mix and markdown pressures. You know, as we look ahead in the near term, I think these pressures will continue with the carrier rates and tariffs. The team continues to mitigate those and have done a really great job of that. But it's hard to say how long those pressures will persist but I would say, as I look over the long-term, we still see an opportunity to grow our gross margin, enhance it, reinvest in the business as needed.", "As we look at the leverage, there's multiple levers within gross margin and SG&A. As you look at gross margin, we continue to see great performance from shrink -- 8 consecutive quarters of sequential improvement there. And with the investments we've made, the process rigor, we see that continuing. We just completed putting 10,000 -- you know, growing our EAF units from 5,000 to 10,000. We're seeing great results there. The team does a great job of category management. We continue to see opportunity to increase our private label penetration, our foreign sourcing penetration, and our nonconsumable sales. We're pleased to see positive comps again on our nonconsumables, and as Todd mentioned, pleased with what we're seeing from the nonconsumables initiative.", "And on the supply chain side, while we do have the headwind of transportation costs facing everybody, the team's doing a great job. Has been proactively mitigating that. We continue to open new DCs -- two opening this year, which will reduce stem miles, continue to reduce load optimization, drive DC productivity. We're very pleased with the results we're seeing from our private fleet as we step that up from 80 to 200 tractors, based on the success we've seen, and continue to expand and diversify our carrier base.", "So, a lot of leverage here within gross margin. And as we look at SG&A, we were pleased to leverage our SG&A again for the second consecutive quarter since we anniversaried the investment we made last year in our store manager compensation, which is paying off very nicely for us. So, as you look across all these, while there's some near-term headwinds, over the long-term we see an ability to enhance our gross margin and operating margin overall as we balance all the levers within operating margins." ] }, { "name": "Rupesh Parikh", "speech": [ "Great. And a quick follow-up. So, lifeboat provision seems to be a bigger headwind this quarter. Do you expect that to continue into Q4?" ] }, { "name": "John W. Garratt", "speech": [ "Yeah, so if you look at the key drivers of the lifeboat provision -- the $12.5 million we recorded -- it was primarily attributable to direct and indirect impacts of tariffs and increased transportation cost pressures. Those do persist but I will say, as you look at Q3 because you're looking at the end of the year -- because a lot of it occurred in Q3 -- you had to reflect the impact through the first three quarters there. There will be an impact in Q4 -- a proportionate amount of that. And to the extent anything else increases or decreases, that'll change the lifeboat provision. And all this, of course, is contemplated in our guidance." ] }, { "name": "Rupesh Parikh", "speech": [ "Great. Thank you." ] }, { "name": "Operator", "speech": [ "The next question is from Karen Short with Barclays Capital." ] }, { "name": "Karen Short", "speech": [ "Hi. Thanks for taking my question. Just wanted to follow up a little bit. So, in terms of looking forward, I guess, I mean I'm talking about '19, it seems that transport should mitigate slightly. And it doesn't sound like you will have to be making any labor investments into '19. Can you maybe just give a little color on that, if that's an accurate way to think about '19?" ] }, { "name": "John W. Garratt", "speech": [ "Yeah. You know, what I'll say is as we look forward -- we'll be coming out with guidance later for next year -- but what I would say is that as we look forward, we continue to see ourselves as a double-digit adjusted EPS grower. To your point, it's hard to say long the carrier rate pressure will continue, but we feel we're very well positioned with the mitigating action that we're taking, as that stabilizes. To your point on labor, as we look at labor costs, we're very well positioned right now. With the investment we made in store manager compensation last year and now we've anniversaried that, we're seeing great results in terms of -- we're on pace for the best we've seen around store manager turnover and applicant flows and staffing levels. And we see throughout the organization at the store level we're very well positioned in terms of staffing and applicant flows.", "And as we look at it, we're competitive -- not just on wages, but the other benefits that Todd mentioned that we've added this year for the overall compensation, as well as when you just look at the growth opportunity within Dollar General. That's a real compelling driver for people who want to join Dollar General, as they could advance rapidly through the organization and they're looking at the career. So, as we look at it, we're well positioned. We'll look market-by-market to make sure we stay competitive, as we are now. But we don't see a major investment on the horizon like we had to make -- we made last year proactively.", "So, as you look at the levers, the fundamentals of the business remain very strong. We continue to see a long runway for growth with nougated development. We continue to see great store-level economics and great returns. We continue to see our returns at the high end of that 20% after-tax IRR, which again, is burdened with the impact of cannibalization. The sales initiatives continue to perform well. We continue to grow units and share and we have multiple levers, as I mentioned, within gross margin SG&A. And in turn, the business generates a tremendous amount of cash which we can reinvest in high return projects like new store growth, strategic initiatives, and the infrastructure.", "So, it's a very strong business model. A very resilient business model. And we still see ourselves as 10% growers over the long-term." ] }, { "name": "Karen Short", "speech": [ "Okay, thanks for that. And I just wanted to ask quickly about traffic. I mean, traffic obviously was positive in the second quarter and then it went to flat this quarter. Maybe just a little color on how we should think about traffic in 4Q, and I'm just wondering if there was any hurricane impact on the traffic." ] }, { "name": "Todd J. Vasos", "speech": [ "Yeah, you know, as you look at traffic, we're squarely focused on driving that top line to include the traffic that you mentioned. Being flat -- we would like to have seen a little bit more on the traffic side -- but I have to say the actions that the team has taken to drive that top line is really paying benefits in a fuller basket shop. And that's really where we're seeing the benefit right now.", "But I could tell you that the team right now, as I mentioned in my prepared remarks, are squarely focused on 2019. As you can imagine, we're six months out or longer, and stay tuned as we roll out our '19 initiatives. There's some really good initiatives around driving both that top line and that traffic number into '19. We feel that long-term, the traffic number being positive is one of our most important currencies." ] }, { "name": "Karen Short", "speech": [ "Great. Thanks very much." ] }, { "name": "Todd J. Vasos", "speech": [ "Absolutely." ] }, { "name": "Operator", "speech": [ "The next question will come from Michael Lasser with UBS. Please go ahead." ] }, { "name": "Michael Lasser", "speech": [ "Good morning. Thanks a lot for taking my question, Todd. Per year-to-date, your comp is trending just below 3% and you have an easier comparison in the fourth quarter and you're guiding to maybe a 2% to 2.5% as implied by your outlook. Why wouldn't it be better than that? Have you seen a slowdown to start the fourth quarter?" ] }, { "name": "John W. Garratt", "speech": [ "Yeah, what I would say is that as you look at -- you know, first looking at Q3 we saw a stable performance throughout the quarter. If you look at the first period of the quarter versus the last period of the quarter, they were comparable and solid throughout and positive on both consumables and nonconsumables. As you look at the full year guidance, it was a minor adjustment. We had said previously that we were looking at mid to high on comp growth and anchored folks toward the middle of that. And I think if you do the math on that doesn't suggest a material change in the trajectory there. And again, we feel very good about the initiatives in place and how they're performing, the fundamentals of the business, and continuing to take share from all channels of retailing." ] }, { "name": "Michael Lasser", "speech": [ "And my follow-up is, you did tweak your guidance on the cost side largely because of the hurricanes. Can you give us some more depth on what's, specifically, driving the $0.09 incremental headwind? How many stores were impacted? Is this mainly due to store damage and lost sales? And is there something else going on?" ] }, { "name": "John W. Garratt", "speech": [ "Yeah, so as you alluded to, with the guidance change it was primarily driven by the $0.09 impact of the unanticipated disaster-related expenses. You know, as we called out, that was primarily driven by Hurricane Florence and Michael, and within that, the type of -- we hadn't disclosed the number of stores impacted, but what I will say is as you look at our footprint, we're particularly dense in coastal Carolinas and coastal Florida, as well as in rural areas where a lot of the heaviest damage was. So, we had a high store concentration there. As you look at the nature of the costs, it was store damage and repairs, inventory damage were the key drivers there. And as we did mention, while hurricanes were the primary driver here, that cost figure that we provided also includes the impact of other disasters -- most notably, floods and fires, again, that were of an unusual nature above and beyond the normal run rate that we [inaudible].", "So, that was the primary driver of the guidance change, as well as just other miscellaneous puts and takes." ] }, { "name": "Michael Lasser", "speech": [ "Were there any other significant callouts that motivated you to adjust the guidance? Or maybe give us a little bit more detail on those." ] }, { "name": "John W. Garratt", "speech": [ "No, you know, I would say that if not for the impact of the disasters, the (inaudible) that impact, we wouldn't have seen the need to adjust guidance within the other penny there, there's various puts and takes that I mentioned including the higher transportation costs and tariffs that had impact on lifeboat, but obviously, within there are a lot of puts and takes on that other penny." ] }, { "name": "Michael Lasser", "speech": [ "Thank you so much, and good luck with the rest of the year." ] }, { "name": "John W. Garratt", "speech": [ "Thank you, Michael." ] }, { "name": "Operator", "speech": [ "The next question will come from Paul Trussell with Deutsche Bank. Please go ahead." ] }, { "name": "Paul Trussell", "speech": [ "Good morning. Still a lot of moving parts regarding the tariff conversation, but could you just give a little bit more detail on how your business has prepared for the potential of incremental tariffs? The impact you're seeing in the P&L today and to what extent you have already mitigated some of those additional potential costs in 2019? And maybe, just taking a step back on gross margins, you outlined earlier, John, a number of positives and [inaudible] on the gross margin front, but if we look back over the last five years, I think gross margins are down roughly 90 to 100 basis points. How should we think about maybe a longer-term opportunity on gross margin and where that can get back to?" ] }, { "name": "Todd J. Vasos", "speech": [ "Sure, Paul. So, as you look at the tariffs, obviously we -- like a lot of folks out there in retail -- we're very proactive around the possible tariff impact that we saw coming down. We took a lot of proactive steps, including as we talk about, mitigating steps to order some products in a little bit early. So, some opportunity to move some product in a little earlier. We did that. We've been working diligently with our community overseas, particularly in China -- our offices there in our vendor community -- to ensure that we can reduce some costs. We've got great relationships, big relationships with those vendors over there, those factories and players. And we've been able to do a lot around reducing some of the costs, to also move around some of these tariffs.", "And then, lastly, we continue to move product and look for ways to move product out of China. You know, that's not a phenomenon that happens overnight, but if you go back, we've been talking about moving product out of China for quite a while and not being so China-centric. We've been working hard at that, so I believe we are a little bit ahead of the game there and we continue to work hard to move product lines and different opportunities to move things out of China itself.", "You know, as you look at gross margins just in general, I would say the team has done a really good job in the environment that is out there right now. I could tell you that we've got a lot of levers that we continue to pull in gross margin, as John has indicated. And we continue to work really hard around making sure that whatever we do at the end of the day is that we've got the right price for the consumer. And that's always top of mind for us.", "And I believe you see through our [audio cuts out] surveys that we are in very, very good shape on pricing, because at the end of the day long-term that will be the real litmus test for the consumer on your health as a company. And we believe our share gains as of late have come because of our pricing and our pricing activity, and that's always been there and always will continue to be there. But we stayed really focused on margins to deliver both that top line and the bottom line. But operating margin is really where our focus is and we'll continue to work all the levers." ] }, { "name": "Paul Trussell", "speech": [ "Thank you very much. And just a quick follow-up, I appreciate you giving your forward guidance regarding store expansion and remodel opportunities. Maybe just quickly, give a little bit more detail around what you see as the white space opportunity. Are these stores being opened in mostly -- these are backfilling current markets? To what extent are you looking to penetrate urban markets? And also, what have you seen in terms of your latest class of stores from a productivity and returns standpoint." ] }, { "name": "Todd J. Vasos", "speech": [ "Sure. You know, as you take a look at it, the team's done a great job over the years. One of our core strengths is finding the right opportunity out there -- the right real estate. And then opening stores. And over the years, Paul, we've done a very good job in really watching the key metrics that we talked about. I can tell you that the latest class of stores in 2018 have been coming right out of the ground just where we thought it would. So, again, right in that upper 90s to 100% of proforma range and that continues to be right where we believe the sweet spot is.", "And, as we continue to look out, we think there's a tremendous amount of runway still to open up stores in the continental United States. The class in 2019 will look very similar to the class of 2018 as far as the makeup between rural, metro, and more urban type settings. So, again, heavily driven toward the -- a little bit more driven toward the rural communities. But yet, over time, we believe that opening more and more stores in metro is the right thing to do, and we have strategic goals and opportunities and initiatives centered around that that we're going to talk about a little bit further as you move into 2019.", "But it suffices to say that our format that we've developed over the years has really given us the opportunity the white space up, and we still believe there's 12,000 to 13,000 opportunities to put a Dollar General store out in the continental United States, and in the areas that are not as familiar, as evidenced by opening 10 next year -- DGX stores is what our goal is. And those are in vertical-living, more densely populated areas in some key cities out there across the U.S. So, we feel as good as ever about our real estate portfolio, and to include our remodel program, which is very, very strong and continues to throw off fabulous comps as we continue to move forward, too. So, we've got a great runway in front of us and we're capitalizing on that very quickly." ] }, { "name": "Paul Trussell", "speech": [ "Thank you for the color. Best of luck." ] }, { "name": "Operator", "speech": [ "The next question will come from Vincent Sinisi with Morgan Stanley. Please go ahead." ] }, { "name": "Vincent Sinisi", "speech": [ "Hey, great, good morning, guys. Thanks very much for taking my question. Just wanted to go back one second just to the revised outlook. You know, kind of the puts and takes and tell me if I'm thinking about this correctly, as well, right? If you kind of take the midpoint of your new guidance on the EPS lines and the commentary around the EBID, you have done a great job of telling kind of what the hurricane impact is. And then, if you kind of add the lower tax rate benefit in there, it seems like there's still a little bit more of a core EBID decline there.", "From the commentary, it sounds like that's largely really around the gross side with the transportation costs and tariffs. I guess, is that kind of a good sum-up? Is that true? And are there any other factors for 4Q, specifically, that we all should be thinking about?" ] }, { "name": "John W. Garratt", "speech": [ "I think that is a good summary. As you stated, the biggest driver there was the hurricane, the disaster-related expenses. And as you look at that other penny, there were puts and takes. You know, in retail you're always battling through mix and markdowns and we've been doing that for years very well. I think the piece that adds a little extra pressure this quarter is, and for the near term, is the higher transportation cost and tariffs. But I think that was a good summary overall. And again, over the long-term we see a lot of levers to not only mitigate these but enhance our gross margin and operating margin." ] }, { "name": "Vincent Sinisi", "speech": [ "For sure. Okay, that's helpful. And then maybe just a follow-up, this is kind of more of a big picture thought. You know, when we're thinking about the future of how you continue to generate solid ticket and traffic -- you know, you talk about numerous initiatives, of course, as well as mix changes and tests and formats. It seems, at least, like with some of the store growth plan and different formats on the smaller ones and the plus, I guess the basic question here is, what are some of the bigger learnings so far? And while maybe '19 store growth is going to be similar to '18, how do you see the mix and also maybe the makeup of the sizes of the stores maybe changing going forward?" ] }, { "name": "Todd J. Vasos", "speech": [ "So, that's a great question. We look at that, obviously, very often internally and we actually build our initiatives around those very thoughts. And I could tell you that we intentionally developed these additional formats to be able to move into certain demographics across the U.S. where a one-size-fits-all mentality is really not the way to be productive and to make the most of your real estate portfolio. And, of course, driving top line and traffic, as you indicated. So, having those opportunities to put stores, for instance, with a produce selection in areas that are more food deserts in the United States -- both in the rural communities and, by the way, in more metro settings -- we find that we can drive a tremendous amount of traffic that way.", "Same thing with our cooler expansion that we've been very, very open about over the last many years. I would tell you that if you're thinking about a baseball game here, we're still probably only in the bottom of the fifth inning when it comes to our cooler expansion opportunities, both in our mature store base and, of course, as we continue to refine our Dollar General Plus and DGPT concepts with broader cooler expansions in them.", "And again, I think as you look at this, our consumers are voting with their pocketbooks. And we're driving nice comps through the box today and when you look at these remodels throwing off 10% to 15% comp lifts in DGPT with these additional coolers, and then the high-end with produce, we feel that we've got a real good runway ahead of us to continue to drive both traffic, tickets, and overall sales very profitable. Which is our first priority out there -- is driving that profitable sales growth.", "So, overall, we believe the portfolio is very strong. Now, as you move in the outer years, you will see a mix change to a -- it won't be a radical change -- it'll be a slow methodical change to a little bit more of a heavier metro mix as we continue to build the portfolio out. But it will be, we'll signal that very well over time and we'll make sure that, in fact, we do it very methodically. And, again, as I indicated, we'll talk in 2019 some initiatives we have around our urban settings and our urban initiatives that we're working on very hard right now out there." ] }, { "name": "Vincent Sinisi", "speech": [ "Okay. Super helpful color. Thanks very much, guys. Best of luck." ] }, { "name": "Todd J. Vasos", "speech": [ "Sure." ] }, { "name": "Operator", "speech": [ "The next question is from Matthew Boss with J.P. Morgan. Please go ahead." ] }, { "name": "Aaron Gray", "speech": [ "This is Aaron Gray on for Matt Boss. Thanks for the question. As you think about your underlying EPS profile, are we right to think that accident impact of hurricanes and tax reform we're still on track to hit roughly around 10% EPS growth for the year? And then, as we look forward, any change to your ability to drive double-digit EPS for the next few years?" ] }, { "name": "John W. Garratt", "speech": [ "No, I think that's the way to look at it. As you look at this year, we feel very good with the guidance we provided that that provides a very strong top line / bottom line performance for the year while reinvesting in our initiatives is consistent with that long-term goal of driving double-digit adjusted earnings-per-share growth. And, as I mentioned earlier, as we look over the long-term, we continue to see ourselves as a double-digit EPS grower with the strong fundamentals of the business on new store growth with the performance Todd mentioned driving comp growth with the initiatives in place, continuing to grow units and shares with the number of levers we have with an operating margin I mentioned. And the tremendous amount of cash this business generates to reinvest -- we see this as a strong resilient business model with the fundamentals unchanged, and I think that's the right way to think about it." ] }, { "name": "Aaron Gray", "speech": [ "Okay, great. Thanks. And then on SG&A, are we still right to think about 2.5% to 3% as the underlying mixed cost hurdle for the fourth quarter? And then also, looking to 2019?" ] }, { "name": "John W. Garratt", "speech": [ "Well, we don't break down guidance specifically between SG&A and gross margin by quarter. We did give the overall guidance for the year, but I would say our goal remains to leverage SG&A in that 2.5% to 3% range. And we're pleased to have done that the last two quarters since we anniversaried that important investment in our store management compensation and over the long-term a lot of leverage to do that, and that's our goal and intention." ] }, { "name": "Aaron Gray", "speech": [ "Okay. Great, thank you." ] }, { "name": "Operator", "speech": [ "The final question is from Gregory van Inwegen with Citi. Please go ahead." ] }, { "name": "Garrett Klumpar", "speech": [ "Hey guys. It's actually Garrett Klumpar on for Greg. It's pretty instant. Just wanted to touch on the DG for the last -- continue to see, you know, pretty good growth there. Just wondering, you know, you called out improving the in-store experience is the biggest near-term on digital, but just wondered if we could get a little more color on what specifically you think are the key areas of improving that convenience offering for customers?" ] }, { "name": "Todd J. Vasos", "speech": [ "Sure. You know, we talk to our customers all the time and, as you know, convenience is measured differently depending on what customer you ask. But I could tell you that we're squarely focused on making the convenience offering within our four walls even more convenient. Again, we're very convenient as far as where we're located. We're very convenient -- you can park at the front door, walk in. You can get in and out of our stores with a five or six item shopping experience in less than 10 minutes -- 5 in most cases. But you know what? Our consumers are also saying, \"How do you even get more convenience?\"", "So, the DG GO! app does that where she can skip the checkout line by checking herself out. And what we've seen is good adoption, so far with that app. Again, only 250 stores, like everything here at Dollar General, we test and we learn before we move and roll out. And we want to make sure that the return is as strong as we believe it will be for this initiative.", "So, stay tuned. More to come. We believe that we're on the right track because, again, it's about making sure that our consumers have a frictionless shopping experience. Quick in and out, and we give her exactly what she wants here at Dollar General." ] }, { "name": "Garrett Klumpar", "speech": [ "All right. Great, thanks so much." ] }, { "name": "Todd J. Vasos", "speech": [ "Thank you.", "..." ] }, { "name": "Operator", "speech": [ "Ladies and gentlemen, we've reached the end of the allotted time for the Q&A session. We thank you for your participation. You may now disconnect." ] }, { "name": "Garrett Klumpar", "speech": [ "More DG analysis", "This article is a transcript of this conference call produced for The Motley Fool. While we strive for our Foolish Best, there may be errors, omissions, or inaccuracies in this transcript. As with all our articles, The Motley Fool does not assume any responsibility for your use of this content, and we strongly encourage you to do your own research, including listening to the call yourself and reading the company's SEC filings. Please see ourTerms and Conditionsfor additional details, including our Obligatory Capitalized Disclaimers of Liability." ] } ]
DG
2023-08-31
[ { "description": "Vice President, Investor Relations", "name": "Kevin Walker", "position": "Executive" }, { "description": "Chief Executive Officer", "name": "Jeff Owen", "position": "Executive" }, { "description": "Chief Financial Officer", "name": "Kelly Dilts", "position": "Executive" }, { "description": "UBS -- Analyst", "name": "Michael Lasser", "position": "Analyst" }, { "description": "Gordon Haskett Research Advisors -- Analyst", "name": "Chuck Grom", "position": "Analyst" }, { "description": "JPMorgan Chase and Company -- Analyst", "name": "Matt Boss", "position": "Analyst" }, { "description": "Morgan Stanley -- Analyst", "name": "Simeon Gutman", "position": "Analyst" }, { "description": "Oppenheimer and Company -- Analyst", "name": "Rupesh Parikh", "position": "Analyst" }, { "description": "Citi -- Analyst", "name": "Paul Lejuez", "position": "Analyst" } ]
[ { "name": "Operator", "speech": [ "Good morning. My name is Robert, and I will be your conference operator today. At this time, I'd like to welcome everyone to Dollar General's second-quarter 2023 earnings conference call. Today is Thursday, August 31st, 2023.", "All lines have been placed on mute to prevent any background noise. This call is being recorded. Instructions for listening to the replay of the call are available in the company's earnings press release issued this morning. Now, I'd like to turn the conference over to your host, Mr.", "Kevin Walker, vice president of investor relations. Kevin, you may now begin your conference." ] }, { "name": "Kevin Walker", "speech": [ "Thank you, and good morning, everyone. On the call with me today are Jeff Owen, our CEO; and Kelly Dilts, our CFO. Our earnings release issued today can be found on our website at investor.dollargeneral.com under News & Events. Let me caution you that today's comments include forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995, such as statements about our financial guidance, strategy, initiatives, plans, goals, priorities, opportunities, expectations or beliefs about future matters, and other statements that are not limited to historical fact.", "These statements are subject to risks and uncertainties that could cause actual results to differ materially from our expectations and projections. These factors include, but are not limited to, those identified in our earnings release issued this morning under risk factors in our 2023 Form 10-K filed on March 24th, 2023 and any later filed periodic report and in the comments that are made on this call. You should not unduly rely on forward-looking statements which speak only as of today's date. Dollar General disclaims any obligation to update or revise any information discussed in this call unless required by law.", "At the end of our remarks, we will open the call up for your questions. Please limit your questions to one and one related follow-up question if necessary. Now, it is my pleasure to turn the call over to Jeff." ] }, { "name": "Jeff Owen", "speech": [ "Thank you, Kevin, and welcome to everyone joining our call. Before we discuss the quarter, I want to address the tragic event of last Saturday. On August 26, we lost one member of the DG family and two customers to a senseless and hate-filled active violence in our store in Jacksonville, Florida. We extend our deepest sympathies to their families and friends, as well as to the greater Jacksonville community.", "It is in times of tragedy when community matters more than ever. Right now, we are focused on providing support, counseling, and resources to our teams and their loved ones. We are evaluating how we can best support the local community during this difficult time, and we stand with our team in Jacksonville and across the organization who are leading with empathy and courage. We are appreciative of local law enforcement's quick response in Jacksonville, and their continued support in protecting our associates, customers, and communities every day across this country.", "Thank you. And with that, we'll now begin today's call. We made significant progress in the second quarter, advancing several important goals. I'd like to give you an update on the actions we have taken to improve execution and better serve our customers.", "While we are pleased with our progress, we are not satisfied with our overall financial results. So, I also would like to walk you through how we plan to do even more in pursuit of these goals in the coming months and how we plan to get there more quickly. We are continuing to improve execution in our distribution centers and stores, providing our customers with even lower prices and an improved shopping experience and working toward rightsizing our inventory levels. Within our supply chain, we are pleased to note that our service levels, in-stock levels and on-time delivery rates from our distribution centers have all returned to the levels we saw before our capacity challenges began last year.", "This improvement has benefited our overall supply chain cost and has also been an important factor in positioning our stores to better serve our customers. As a result of that progress, and as we had previously announced, we accelerated our investment in incremental retail labor during the second quarter. While the investment in labor hours was initially allocated across the store base, we also strategically deployed additional hours to a set of focused stores based on the areas of greatest need and opportunity and also through high-performing teams in each district that could assist in stores where they were needed the most. While early, we are pleased with the impact of these labor investments, including the positive impact on overall customer satisfaction and store standards.", "Finally, I also want to highlight the pricing actions we completed in the second quarter as we make targeted price reductions on key items that matter most to our customers to provide them with even more affordable solutions. We have been pleased with the customer response both in terms of basket size and composition when the basket includes one of these items. These actions have further solidified our strong pricing position relative to competitors and other classes of trade, and we feel great about our strong value proposition. With all that in mind, I want to recap some of our Q2 top-line results.", "Net sales increased 3.9% to $9.8 billion, compared to net sales of $9.4 billion in Q2 2022. Importantly, the quarter was highlighted by growth in market share of both highly consumable and nonconsumable product sales, as well as accelerating unit share growth, all of which we believe is a testament to the improvements and actions I mentioned earlier. With that said, our core customers continue to tell us they feel financially constrained, which we believe contributed to a slight decrease of 0.1% in same-store sales in Q2. While customer traffic was negative during the quarter, it did improve sequentially each period.", "The decrease in traffic was essentially offset by an increase in average ticket, which was primarily driven by the impact of inflation. From a monthly cadence perspective, same-store sales growth was strongest and positive in May before declining in June and July. We have seen this trend continue into August with negative comp sales through the first half of the month. This decline has been driven primarily by lower average ticket as we lap the more significant price increases from 2022.", "While we are not satisfied with the comp sales, we are encouraged by the improvements we saw in overall market share gains and customer traffic during the second quarter, which further support our belief that our actions are resonating with customers. However, we expect continued pressure in the sales line for the duration of this year, particularly in discretionary sales as our customer focuses more on buying for need. With sales and shrink not where we want them to be, we have evolved how we are thinking about the rest of 2023. Our improved execution is driving increased customer satisfaction, and we want to accelerate this progress to serve our customers even better as we head into the holiday season as well into 2024 and beyond.", "As a result, we have made some important changes and have additional plans to more [Technical difficulty] return to the position of strength from which we are accustomed to operating, which are collectively focused on driving sales and lowering our cost to serve. First, we are strategically accelerating the rightsizing of our inventory position by expanding promotional markdowns, primarily in our nonconsumable products. While we expect this to result in an operating profit headwind of approximately $95 million in the back half of the year, we believe it will drive traffic and also more quickly reduce excess inventory. We believe this rightsizing supports our operating priority of enhancing our position as a low-cost operator and that it will accelerate improvement in a number of areas, including store and supply chain efficiencies as well as shrink, damages and cash flow.", "Next, we are increasing our planned investment in incremental retail labor from approximately $100 million this year to approximately $150 million. We like the returns we have seen on this investment to date and believe that this additional investment will support acceleration of our progress and allow us to continue driving in-store improvements through the back half of the year and to begin next year in an even stronger position. Finally, with our strong and growing store base of nearly 20,000 stores, we also plan to invest up to $25 million in other areas such as an improved inventory demand forecasting tool to better support our stores and distribution centers while lowering our cost to serve. Collectively, we believe these investments and actions will further strengthen our position and more quickly restore the strong execution that allows us to deliver on our unique value and convenience proposition for our customers.", "Importantly, all of these actions align with and support our DG Forward strategy. We are managing this business for the long term and our mission of serving others is unchanged. Our vision for the future is clear as we seek to be a force for opportunity for our customers, associates, communities, and shareholders. And we will focus relentlessly on delivering the value and convenience our customers expect and returning to the position of operational excellence that we expect of ourselves.", "We operate in one of the most attractive sectors in retail and this model is resilient and strong. We have a multitude of strategic initiatives to drive future growth, which I will discuss in more detail shortly. Now, I'd like to turn the call over to Kelly." ] }, { "name": "Kelly Dilts", "speech": [ "Thank you, Jeff, and good morning, everyone. I want to say again that all of us at Dollar General are heartbroken over the Jacksonville tragedy and our thoughts remain with all of those impacted. Now, let me take you through some of the important financial details. Unless we specifically note otherwise, all comparisons are year over year, all references to EPS refer to diluted earnings per share and all years noted refer to the corresponding fiscal year.", "Jeff already discussed sales, so I'll start with gross profit. For Q2, gross profit as a percentage of sales was 31.1%, a decrease of 126 basis points. This decrease was primarily attributable to lower markups, as well as increases in shrink, markdowns and inventory damages, and a greater proportion of sales coming from the consumables category. These were partially offset by a decreased LIFO provision and decreased transportation costs.", "SG&A as a percentage of sales was 24%, an increase of 136 basis points. This increase was driven by retail labor, including approximately $40 million of our targeted labor investment, as well as utilities, depreciation, and amortization and rent. These were partially offset by a decrease in incentive compensation. Moving down the income statement.", "Operating profit for the second quarter decreased 24.2% to $692 million. As a percentage of sales, operating profit was 7.1%, a decrease of 262 basis points. Interest expense increased to $84 million in Q2, and that compares to $43 million in last year's second quarter, driven by higher average borrowings and higher interest rates. Our effective tax rate for the quarter was 22.9% and compares to 22.1% in the second quarter last year.", "Finally, EPS for the quarter decreased 28.5% to $2.13. Turning now on to our balance sheet and cash flow. Merchandise inventories were $7.5 billion at the end of the quarter, an increase of 3.4% on a per store basis, which is notably lower than our increase of 14.7% on a per store basis in the first quarter. While inventory growth is still elevated, the pace has significantly moderated from its peak last year.", "As we discussed last quarter, we have sharpened our focus on inventory as we adjusted to evolving customer demand. We made progress toward our goal of reducing inventory growth rates by the end of the year. And with the strategic actions Jeff mentioned, we will be able to accelerate our progress by expanding promotional markdowns, primarily on nonconsumable products in the back half of the year. We expect these additional markdowns and associated costs will result in an incremental headwind of approximately $95 million to operating profit in the back half of the year.", "Although we continue to believe the quality of our inventory is in good shape, we also believe this is the right decision given the current environment to better support our customers, stores, distribution centers, and growth plans. Year to date, through Q2, the business generated cash flows from operations of $727 million, a decrease of 23%. Total capital expenditures for the first half were $768 million and included the following: first, our planned investments in new stores, remodels, and relocations; next, distribution and transportation projects; and finally, spending related to our strategic initiatives. During the quarter, we paid a quarterly dividend of $0.59 per common share outstanding for a total payment of $129 million.", "As planned, we did not repurchase shares this quarter. Our capital allocation priorities have served us well for many years and continue to guide us to today. Our first priority is investing in our business, including our existing store base, as well as high return organic growth opportunities such as new store expansion and our strategic initiatives. Next, we remain committed to returning cash to shareholders through a quarterly dividend payment and, over time and when appropriate, share repurchases, all while targeting a leverage ratio of approximately three times adjusted debt to EBITDAR in order to maintain our current investment-grade rating.", "Moving to an update on our financial outlook for fiscal '23. We are updating our sales expectations for the year to reflect the softer sales trends we have seen to date, as well as what we now anticipate for the back half of the year. In addition, the shrink environment has continued to worsen. We now expect approximately $100 million of additional shrink headwind since last quarter's call.", "While we expect this pressure to continue for the remainder of the year and recognize this is a challenge throughout retail, we are actively working to reduce these levels through multiple targeted action. These include reducing our inventory position, refreshing and refining our processes, leveraging additional tools and technology, and improving execution in our stores. As a result of these changes to sales and shrink and the actions and investments Jeff outlined earlier, we are updating our earnings per share guidance. We now expect the following for fiscal year 2023.", "Net sales growth in the range of 1.3% to 3.3%, compared to our previous expectation of 3.5% to 5%. This net sales growth range continues to include an anticipated negative impact of approximately two percentage points due to lapping last year's 53rd week. Next, we expect same-store sales in the range of a decline of approximately negative 1% to growth of 1%. This compares to our previous expectation of approximately 1% to 2% growth.", "Finally, we expect EPS in the range of $7.10 to $8.30 or a decline of negative 34% to negative 22%. This compares to our previous expected range of an approximately 8% decline to flat year-over-year change. It also includes our actions and investments of up to $170 million or almost $0.60 of EPS. Additionally, our updated guidance includes the same negative impact as our previous guidance of lapping last year's 53rd week and incurring higher interest expense this year, both negatively impacting us by four percentage points for a total of eight percentage points of headwind.", "Our EPS continues to assume an effective tax rate of approximately 22.5%. Finally, we continue to expect a capital spending range of $1.6 billion to $1.7 billion and no share repurchase activity. Let me now provide some additional context as it relates to our outlook. While we are closely monitoring the impact of student loan repayments on our customers, our guidance does not contemplate any significant impact from the restart of these payments.", "With regards to our updated actions and investments that Jeff outlined, we expect the total incremental operating profit headwind of up to $170 million in the back half of the year due to the increased markdown activity, additional retail labor and investments in other areas to better support our customers, stores, and distribution centers. In terms of the back half of the year, we expect comp sales to be negative again in Q3 as we lap the significant price increases from 2022. And while we expect traffic trends to improve, we do not expect positive traffic until the fourth quarter. In addition, our guidance assumes that the benefit of our actions and investments will grow as we move throughout the remainder of the year, which, along with lapping the winter storm impacts from '22, should result in a greater overall sales benefit to the fourth quarter.", "As a result, we expect fourth quarter to be significantly better than the third quarter from both a comp sales and EPS perspective. Turning to gross margin for 2023. In addition to the increased markdowns associated with our inventory reduction plan and additional pressure from shrink, we also anticipate pressure from sales mix and lower inventory markups in this year's back half compared to last year. Partially offsetting these challenges, we expect benefits from greater distribution center capacity and performance, lower carrier rates expansion of our private tractor fleet, and other distribution and transportation efficiencies.", "We also expect to continue realizing benefits from our initiatives, including DG Fresh and DG Media Network. Turning to SG&A. We expect continued investments in our strategic initiatives as we further their rollout, and we plan to make the remaining $80 million of the planned total incremental investment of approximately $150 million in our stores, primarily through additional labor hours. Overall, while our updated actions and plans for investments will pressure our financial results in 2023, we believe they will have a materially positive impact as we drive stronger in-store execution and a better customer experience.", "This positions us well to deliver growth in 2024 and beyond. In summary, we are laser-focused on maintaining our discipline in how we manage expenses and capital as a low-cost operator with the goal of delivering consistent, strong financial performance while strategically investing for the long term. And we are confident in our business model and our ongoing long-term financial priorities to drive profitable same-store sales growth, healthy new store returns, strong free cash flow, and long-term shareholder value. With that, I will turn the call back over to Jeff." ] }, { "name": "Jeff Owen", "speech": [ "Thank you, Kelly. Last quarter, we introduced our DG Forward strategy, which is how we will position Dollar General to be a force for opportunity for our customers, associates, communities, and shareholders. DG Forward is an execution and innovation strategy, and we remain focused on driving execution through our operating priorities, including driving profitable sales growth, capturing growth opportunities, leveraging and reinforcing our position as a low-cost operator, and investing in our diverse teams through development, empowerment, and inclusion. We will sharpen our strategic focus in four key ways.", "First, we are focused on winning in rural. Today, approximately 80% of our stores serve rural communities with fewer than 20,000 residents. Our high-return, low-risk real estate model continues to serve us well as a core strength of the business. In the second quarter, we completed 849 real estate projects, including 215 new stores, 614 remodels, and 20 relocations.", "For 2023, our plan remains to execute 3,110 real estate projects in total in the U.S., including 990 new stores, 2,000 remodels, and 120 relocations. We now expect over 80% of our new stores in 2023, and nearly all of our relocations will be in one of our larger store formats, which continue to drive increased sales productivity per square foot as compared to our traditional store. With regard to remodels, approximately 80% will be in our DGTP format, which provides the opportunity for a significant increase in cooler count as well as the ability to add fresh produce to many stores. One way we continue to serve these locations is through DG Fresh, where our current focus is increasing sales in frozen and refrigerated categories through enhanced product offerings and building on our multiyear track record of growth in cooler doors and associated sales.", "During Q2, we added more than 19,000 cooler doors across our store base, and we plan to install a total of more than 65,000 incremental cooler doors in 2023. And while produce is not currently serviced by our internal supply chain, we continue to believe that DG Fresh provides a potential path forward to expanding our produce offering to more than 10,000 stores over time. We know this offering is important to customers, especially in rural areas. And at the end of Q2, we offered fresh produce in more than 4,400 stores with plans to expand this offering to a total of more than 5,000 stores by the end of 2023.", "Importantly, despite the meaningful improvements we've made and savings we have realized to date as a result of DG Fresh, we believe we still have an opportunity to drive significant additional returns with this initiative in the years ahead. Our second focus area as we move DG Forward is extending our reach. We are striving to expand the DG universe by attracting and serving new customers through new formats, while also reaching existing customers in unique and differentiated ways. Starting with our digital initiative, where we are investing to further extend our digital front porch to build even deeper connections and extend our reach beyond our substantial physical brick-and-mortar footprint.", "We are excited about the growth we're seeing across our digital properties, including an increase of more than 20% in monthly active users since this time last year. Further, we are seeing tremendous success through our partnership with DoorDash, which is now available in more than 15,000 stores and continues to drive significant incremental transactions with customers. Our DG Media Network is also extending our reach with customers with a more personalized experience while delivering a higher return on ad spend for our partners and profitable growth for our business. Overall, our digital strategy consists of building an ecosystem specifically tailored to provide our customers with an even more convenient, frictionless, and personalized shopping experience, and we are pleased with the growing engagement we are seeing across our digital properties.", "Next, we extended our reach beyond the borders for the first time earlier this year with the opening of our first Mi Super Dollar General store in Monterrey, Mexico. We continue to be very encouraged by the customer response and the early results, which include sales results that are significantly exceeding our initial expectations. Looking ahead, our updated goal is to have up to 10 stores serving underserved communities in Northern Mexico by the end of 2023 as we look to leverage our brand awareness while extending our value and convenience proposition to a customer base that is similar to our core customer in the United States. The third way we are extending our reach is through our pOpshelf format which is now nearly three years old.", "This format provides a stress-free, guilt-free shopping experience designed around nonconsumable shopping occasions. During the quarter, we opened 26 new pOpshelf locations, bringing the total number of stores to 190 at the end of Q2 located within 20 states. We are continuing to refine the ideal layout and assortment for these stores, and we have actively leveraged our learnings to develop our 3.0 version, which will begin rolling out next month. Looking ahead, we are taking a balanced approach to opening the right number of new pOpshelf stores in the right locations in this macroeconomic environment and expects to operate a total of approximately 230 stores by the end of 2023.", "Importantly, we still believe pOpshelf adds approximately 3,000 opportunities to our total addressable market over the long term, and we remain excited about the growth opportunity. Finally, we are extending our reach through our health initiative branded as DG Well Being. Our customer research continues to show that not only are our rural communities underserved with basic staple offerings, but they also have trouble accessing healthcare goods and services. In response, we continue to focus on rolling out an expanded healthcare product assortment, which was available in nearly 6,000 stores at the end of Q2, and we now plan to expand to a total of more than 7,000 stores by the end of 2023.", "Looking ahead, our plans include further expansion of our health offering and also of our partnership with a third-party payment platform to allow customers to use health plan supplemental benefits to purchase various health and wellness-related items in their local Dollar General stores. This health benefit option is now available in approximately 13,000 stores but the goal of being available chainwide by the end of the year as we continue to focus on increasing access to basic healthcare products and ultimately services over time, particularly in rural America. Our third area of strategic focus is to fuel our growth. These efforts are comprised of strengthening and modernizing three critical components to improve execution: our supply chain, our operating model, and our IT foundation.", "We plan to fuel our best-in-class growth by investing in high-return projects and resources to enable our team to execute at the highest levels to serve our customers. Within our supply chain, we have made significant progress adding capacity and increasing the productivity and efficiency of operations within our distribution centers. And with three additional facilities under construction in Colorado, Arkansas, and Oregon, we are on pace to add significant incremental capacity in 2024. Furthermore, we recently went live in South Carolina with our first distribution center to feature large-scale automation to replenish stores.", "Once fully ramped, this automation will be able to deliver half of the SKUs served from this facility to over 1,000 stores. Ultimately, this will allow the team to process thousands of additional SKUs while improving our storage per square foot inside the facility and lowering our cost to serve. We are excited about this opportunity to support our growth more effectively and efficiently and look forward to adding automated functionality to more facilities moving forward. We also continue to expand our private tractor fleet, which consisted of more than 1,800 tractors at the end of Q2 and accounted for nearly 50% of our outbound transportation needs.", "As a reminder, we save approximately 20% of associated costs every time we replace a third-party tractor with one from our private fleet. Looking ahead, we plan to have more than 2,000 tractors in our private fleet by the end of 2023. These efforts have been and will continue to be an important driver in lowering our overall transportation costs. Within our stores, we are intensely focused on reducing complexity to create a better in-store experience for customers and associates.", "We have simplified operations by optimizing our rolltainer delivery and rolling out self-checkout option, which was available in nearly 14,000 stores at the end of Q2. Finally, over the past year, we have been working to implement a full end-to-end transformation of our retail operating model, its first major overhaul in nearly 20 years. We recently launched the pilot of this model, and while it's still very early, we believe this will significantly enhance the in-store experience for our teams while also further enhancing our position as a low-cost operator. We will have more to share on this in the coming months, but we are excited about this opportunity as we leverage enhanced technology and innovation to further support and fuel our growth in the years ahead.", "The fourth area of focus with DG Forward is that it's all powered by our people. The strength of our people was on display recently as we hosted more than 1,500 leaders of our company in Nashville, for our annual leadership meeting. This is my favorite week of the year, and I was once again inspired and humbled by the commitment of our people to move DG Forward while fulfilling our mission of serving others every day. The people of Dollar General are our greatest strategic advantage.", "And to further enhance our position, we are investing in our people and creating opportunities for growth and development and amplifying our culture where our people can enjoy a meaningful career where the work they do every day makes a difference. Our commitment to growth and development is as strong as ever. And with our robust footprint, ongoing growth, and strong sense of purpose, we believe there's no better place to start and develop a career than with Dollar General. Our internal promotion pipeline remains robust, as evidenced by internal placement rates of more than 70% at or above the lead sales associate position.", "Additionally, more than 10% of our growing private fleet team began their careers with us in either a store or distribution center. We continue to have great success hiring the talent we need, and we are pleased with our staffing levels and applicant flow. We often note that our customer experience at Dollar General will never exceed the experience of our associates, and we are committed to continuing to elevate the experience for our people as they power our DG Forward strategy. In closing, I want to thank our more than 185,000 employees for their commitment and hard work to serve our customers and the communities we call home.", "Dollar General is an essential part of small towns across America that form the backbone of our country, and we are focused on serving our customers with value and convenience they deserve every day. We are taking the actions and making the investments we believe are necessary to accelerate our progress and return even more quickly to executing with the operational excellence that has long been a hallmark of this company. The opportunities ahead of us are significant, and we are excited about the steps we're taking to drive sustainable long-term growth and shareholder value. With that, operator, we would now like to open the lines for questions." ] } ]
[ { "name": "Operator", "speech": [ "Thank you. At this time, we'll be conducting a question-and-answer session. [Operator instructions] Our first question comes from Michael Lasser with UBS. Please proceed with your question." ] }, { "name": "Michael Lasser", "speech": [ "Good morning. Thank you so much for taking my question. So, you've taken your labor investment for this year from $100 million to $150 million. The perception is that, that is not enough and it will take more than that to resume the type of performance that the market has been accustomed to from Dollar General.", "What evidence would you provide to refute the skepticism that this $150 million is not the right amount, it's going to be much more than that? And as you think about these investments, how is this going to impact the long-term operating margin general given that it's on pace this year to be much lower than it's been previously. And then I have one quick follow-up." ] }, { "name": "Jeff Owen", "speech": [ "Thank you, Michael. This is Jeff. On the labor front, I'll start with that, we feel really good about the labor investments that we've made. I think you got to keep in mind at Dollar General, we've invested in wages and have a strong foundation for quite some time.", "And really at store level, what's important is stability in the supply chain. And when you have stability in the supply chain, that leads to stability inside the store. And so now that we're seeing our supply chain which, quite frankly, we've had some significant challenges over the last couple of years stabilizing, we're seeing that show up in more stability inside the store. And then you combine that with the labor investment that we've made, plus in the second quarter, one of the things we deployed which is new for Dollar General is a smart team in every single district in our company.", "And what a smart team is is dedicated teams that are at the disposal of a district manager to deploy where they need to be deployed most. And we've been very pleased with what we've seen there with that new tool in our toolbox. The stores that these teams have been able to touch, we've seeing the sales accelerate and continue and they haven't plateaued. So, we feel real good about that.", "We see our store standards improving. And we believe now by making the smart team, which is now going to be permanent with this new investment, when you combine that with the other investments we just announced, which is reducing inventory certainly through the markdowns we discussed and also investing in technology to further pull more inventory out of the system, when we have optimized inventory, a stable supply chain, that equals stability inside the store. And so, what we're beginning to see also is our store manager turnover has been benefited from these investments as well. So, we're starting to see the theme of stability, I guess, is what I'm trying to share with you.", "So, that's showing up inside the store, which gives us great confidence that the announcement today of the investments we're making, while we've seen some progress and we're not pleased with the results we've achieved, we believe these are the right amount to get us to excellence that we're accustomed to achieving much faster as we go through the back half of 2023 and, more importantly, in 2024." ] }, { "name": "Kelly Dilts", "speech": [ "That's absolutely right, Jeff. And just to give you a little bit more color on the labor and what gets us comfortable there, we did pull forward a significant amount of our investment into Q2 so that we could do what we always do here at Dollar General, which is test and learn. And so, as we went through that process, we really like, to Jeff's point, the smart teams and what that was paying off. But on the labor hours piece, we did a lot of work around just various store attributing, understanding what the optimal level was of the inventory -- of the labor hours associated with the stores.", "And so, we feel like we did get to that optimal level of investment. On the inventory side, I would say we've made some really good progress on the inventory piece already. And so, if you look at Q2 versus Q1, we're down 8.5% on a year-over-year basis, much better than we were in Q1. But what I really want to highlight is our non-consumable inventory was actually a decline of 4% on a year-over-year basis.", "So, a lot of good work done there. We actually saw a 40% reduction in the inventory receipts for the second quarter as well. And so, that's a lot of good work from our merchandising group, just buying around what the inventory we already had and getting that out to the store and certainly feel good about quality of that inventory. But we are excited to be able to take this accelerated action as we move through that inventory, specifically nonconsumable inventory as we go through the year.", "And as Jeff noted, for many reasons, driving sales is probably the top of the list and then inventory reductions is certainly next on that. So, we feel really good about the level of both of those investments." ] }, { "name": "Michael Lasser", "speech": [ "My follow-up question is, historically, Dollar General has targeted an algorithm of mid-single-digit unit expansion, 2% to 4% comp growth, stable to growing margins and then buying back 4% to 5% of the stock to get to double-digit EPS growth. So, if you take all of the different pieces of that algorithm, especially store growth, is it realistic that Dollar General can get back to that algorithm by 2024 based on what you know now?" ] }, { "name": "Kelly Dilts", "speech": [ "Yes. I'd say, as usual, we won't give '24 guidance. But what I can say is everything that we're doing is focused on the long term and delivering results and delivering what we need to deliver for our customers. So, we feel good about the investments that we're making, the ability for those to set us up for '24 and beyond.", "I'd say this model got, and you pointed it out, just an incredible history of delivering results. And so, we feel good about getting back to driving profitable sales. And we're going to strengthen our foundation and continue to focus on being a low-cost operator. I think that the actions we're taking are really only going to strengthen that great business model.", "You know us well. So, we've got a lot of existing initiatives, as well as some of these new initiatives that will support that. So, we've got significant number of new stores that we still have opportunities in to open in the U.S., and we're still seeing the same fantastic returns of 20% IRRs and cash paybacks of less than two years. We do think we can drive a 2% to 4% comp with our real estate investments and the impact of the actions and the initiatives.", "And then just when we think about the gross margin rate, even in the second quarter with all the pressures that we felt specifically around shrink, we were still 30 basis points ahead of where we were in 2019. And I think that's a testament to all work we've done. And we've still got DG Media Network that's going to keep contributing, private fleet that Jeff talked about. We've got some private brand opportunities as well.", "We've got supply chain efficiencies. And as we lower that inventory, that's only going to benefit us even more. And we're still in the middle innings of Fresh. We've got the health initiative assortment that's still delivering well for us.", "And then you should see us resume back to lower shrink over time. And then I'd say just on the SG&A side of things, we're going to continue to lower our cost to serve. We're ramping up that Save to Serve initiative, and we expect to see those benefits next year. And then we talked just a little bit about taking that end-to-end view of our operating model, and that's really around driving efficiencies and lower costs, but even more importantly, simplicity in our store operations.", "And so, we're excited about all of that. I'd say in the near term, we do have some pressures, so we've got some pressure from interest expense and from share repurchases. But what we absolutely believe is that we will get back to historic levels of operating profit growth, and that our long-term view of this business is excellent." ] }, { "name": "Michael Lasser", "speech": [ "Thank you." ] }, { "name": "Operator", "speech": [ "Our next question is from Chuck Grom with Gordon Haskett. Please proceed with your question." ] }, { "name": "Chuck Grom", "speech": [ "Thanks a lot. Good morning. Just to build off your last comment, new store productivity came in a little bit below 80%, which outside of the pandemic, was really the lowest in maybe 10 years. So, bigger picture, how are you thinking about store growth given some of these issues over the past few quarters, on one hand, volume growth would allow you to fix things currently; but on the other hand, it would obviously impair the compound to a degree.", "So, just any thoughts on store growth over the next few years." ] }, { "name": "Jeff Owen", "speech": [ "Yes. Thanks, Chuck. This is Jeff. Our real estate model continues to be the core strength of this business.", "And I am very, very pleased with the new store returns we're seeing, also the pipeline that we have. And our format innovation really is what's allowed us to really cater to communities. This larger store, we like the productivity we're seeing. And I'm going to tell you, the operational excellence that we're going to return to, especially with the investments we just announced, is only going to benefit not only the core, but it will benefit our new store opportunities as well.", "So, I feel great about the long-term prospects of our real estate model and feel even better that these investments we're talking about, when you think about the value proposition which we feel great about in our stores today since the pricing investments we've made, you think about the stability in the supply chain, we still have a ways to go, but I'm very pleased with what we're seeing -- optimizing our inventory levels, and then that will all lead to consistent and excellent execution at store level. And you combine all those four things together and that's how we achieve the operating profit, which will certainly allow us to continue to lean into our real estate model as we go forward." ] }, { "name": "Chuck Grom", "speech": [ "OK. Great. Thanks, Jeff. And then for Kelly, just looking at the change in the guide, can you help us think about the shape of the back half in a little bit more detail and a little bit more context between the third and the fourth quarter? I guess, would you expect the third quarter comps to be outside of the band that you provided, the down one to up one? And any help on how much compression we should expect to see in both the gross margin line and operating margin line in the third and fourth quarter just so we can true up our models." ] }, { "name": "Kelly Dilts", "speech": [ "Yes. No, absolutely. Happy to help. So, I'd say, first, obviously the actions that we're taking to drive sales and lower our costs will set us up for '24.", "And our revised guide is really a function of the slower transactions that we're seeing and higher expected shrink. We did give a pretty wide range of the negative 1% to 1%. Net sales range is really a function of how quickly our customer responds to our actions and really how they respond, honestly, to their own financial situation in the back half of the year. When you think about the EPS range, it's flow-through of the sales, obviously, the higher shrink in the investments.", "And we also have a little more pressure around damages and then around the markdowns associated with the lower sales. So, it's probably going to take a couple of quarters just to get -- make sure that we're taking all the actions and we get back to that operational excellence. If I break down the quarters, to your point, starting with the third quarter, we should see comp sales lower than our range. What we're seeing now is with Q2, comp decelerated sequentially by period.", "But we did see traffic trends improve. What we're getting pressure from, and we talked about this a little bit in the prepared remarks, is that we're starting to lap the more significant price increases in the back half of last year. This is going to pressure Q3 more than any other quarter in particular. And so to your point, we do expect comp sales to be negative in Q3, and we're running as expected to date.", "Just on the margin piece of Q3, that's also going to be more pressured than what we are seeing in Q4 with our inventory actions as well as shrink. And so, right now, we're expecting Q3 gross margin to be below 30%. And obviously, that would put pressure on Q3 EPS. On the Q4 side, we believe that we're going to start to see the benefit of our actions and our investments a little bit more.", "In Q4, we've also got a tailwind around lapping Winter Storm Elliott. So, we'll see stronger Q4 comp than we would think for Q3 as well as EPS. And then just touching on the timing of the investments, especially the inventory actions that we're taking. We're going to give ourselves a little bit of wiggle room and make sure that we can react to the customer response, and we may choose to pull some of those investments forward into Q3 if it makes sense." ] }, { "name": "Chuck Grom", "speech": [ "That's very helpful. Thank you." ] }, { "name": "Kelly Dilts", "speech": [ "Thank you." ] }, { "name": "Operator", "speech": [ "Our next question is from Matthew Boss with JPMorgan. Please proceed with your question." ] }, { "name": "Matt Boss", "speech": [ "Great. Thanks. So, Jeff, maybe to break down the macro versus micro. I guess, first, how would you assess the low-end backdrop today notably tying in July and August relative to three months ago? Or any change in purchase intentions noted from the customer survey work that I know you guys do? And then on the macro, any change in the competitive landscape as you assess relative comp performance or market share by category?" ] }, { "name": "Jeff Owen", "speech": [ "Thanks, Matt. On the customer, she still is challenged, and we talked about that in the first quarter and that continues. Our customer, what she's telling us is that certainly as gas prices are less than last year, but they're accelerating throughout 2023, and she's still feeling the headwinds of the SNAP reduction and also the lack of tax refunds. And her savings are gone.", "And so, certainly, she is still living with the inflationary pressure. So, certainly, the customers are challenged. But quite frankly, our customers is frequently challenged and we know that. And we've made actions, and I'm very pleased with the actions we took to help her in her time of need, which is exactly why we did it in the first quarter.", "So, we feel good about our ability to offer value to her and also be there for her. And when you think about the execution opportunity we have in front of us, where we've seen initial signs of our progress but also with the actions that we just announced to accelerate that progress, that's only going to allow us to further serve this customer. And she's going to lean on Dollar General even more, like she typically does in times of challenge like this. And we are going to be even better positioned to serve her.", "Certainly, as we improve our in-stock levels, our store standards and certainly, as I said earlier, love what we're seeing with the smart teams we've just deployed. So, as we think about the competitive landscape, Dollar General has been able to compete quite well for quite some time. And this team knows exactly where we need to course correct, we know how to course correct, and we've announced today the actions that are going to of course correct. So, we feel great about our ability to return to the excellence that we're accustomed to achieving even faster than we were before.", "And we don't take it lightly that our sales performance right now is not where we want it to be. But we're pleased with the actions that we're going to see show up and the early signs that we're seeing already. So, looking forward to back half of this year and then certainly into 2024." ] }, { "name": "Matt Boss", "speech": [ "Great. And then, Kelly, with EBIT margin this year forecasted roughly 200 basis points below pre-pandemic, how do the back half investments structurally impact the margin profile for next year or just your margin recapture ability next year? And then secondly, with the balance sheet leverage remaining above your targeted three times, how does that impact the historical double-digit bottom-line algorithm?" ] }, { "name": "Kelly Dilts", "speech": [ "Yes. So, I'll start with the structural piece first and break it down a little bit between gross margin and SG&A. And so, we really think that the current headwinds are more transitory, specifically when we talk about shrink and damages and markdowns. We think we're well positioned on supply chain efficiencies with structural improvements on the horizon, as we talked about a little bit with the automation piece of that and certainly the private fleet continuation.", "DG Media Network should provide significant gross margin opportunity as well and, again, DG Fresh and NCI as we move forward and maybe mix into more non-consumables over the next couple of years. We also continue to see some opportunities in private brands. On the SG&A side, I'd say the labor investment is embedded now in our baseline. But as we go forward, we are really looking at an end-to-end operating model to make sure that we're driving efficiencies in the store and lowering our cost to serve.", "And as Jeff said, we're also looking at inventory management as well to lower our cost to serve over the next couple of years. I think that, that will help us take some cost out of the system. And then we're ramping up our Save to Serve initiative and expect to see benefit of that next year. So, we feel like -- again, not specifically speaking to '24 but to the future, that we'll be able to get back to that operating profit growth.", "But we do -- we will have some near-term headwinds just on the financial strategy side of things around share repurchases in the near term. On the -- remind me again on the balance sheet question." ] }, { "name": "Matt Boss", "speech": [ "Just with the balance sheet leverage above your targeted three times, maybe what's the time line to get back there and how best to think about priorities for cash flow." ] }, { "name": "Kelly Dilts", "speech": [ "Yeah, absolutely. So, I think just going through priorities, we still believe in the capital allocation priorities that we've laid out, making sure that we're investing in the business and high growth opportunities, as obviously our first priority. Next would be dividend payments and then, of course, any share repurchases with the remaining cash available for that. You're right on the leverage ratio.", "Right now, we're above our target. The good news here is that this model has a strong history of generating significant cash flow, and we continue to believe that, that strength will continue over time. We think this leverage ratio will probably be with us for a little while, but we are working to get back to our targeted leverage ratio in the near future." ] }, { "name": "Matt Boss", "speech": [ "Great. Best of luck." ] }, { "name": "Kelly Dilts", "speech": [ "Thank you so much." ] }, { "name": "Operator", "speech": [ "Our next question comes from Simeon Gutman with Morgan Stanley. Please proceed with your question." ] }, { "name": "Simeon Gutman", "speech": [ "Hey, good morning, everyone. Hey, Jeff. Hi, Kelly. I wanted to first ask around the comps and where they're performing.", "If you could put it all together and summarize what you attribute to some of the underperformance, too. It does sound like traffic is underlyingly OK, and it's just lapping some tickets. Curious how you diagnose or rank pricing, if it's merchandising, anything related to the stores. So, how should we think about that?" ] }, { "name": "Jeff Owen", "speech": [ "Yes, Simeon. This is Jeff. What I would say is that when you look at our comps, our opportunities are in driving our in-stock levels inside the store. And that is certainly going to help and we are seeing improvements there.", "But as we've deployed more labor in the stores and as our supply chain gets more stable, we're going to be able to get much more consistent in the stores. And so, I feel really good about the plan on driving continued performance. And I can't underestimate again the labor investment we've made, the signs that we're seeing and, more importantly, that dedicated team that helps a store that might fall off track, get back on track quicker because. That's one of the really exciting things about this model is that we're able to get stores back fast.", "So, I'm pleased with that. But as we think about it, in my experience, this is how the comp will show up. It starts with units. And so, I was pleased with our unit share trends and, quite frankly, pleased with unit share gains.", "And then as units improve, and those generally improve through our in-stock levels and our store standards improving, which we're seeing and our customers saying -- she's seeing it as well, but we have more to do there. It will then -- word of mouth gets out and then traffic will come after that. And then once you see traffic, that's when you really start to see the comps show up. So, as Kelly mentioned, we're lapping some significant price increases.", "But the underlying trends, it starts with units, and then traffic is the next opportunity that I believe the announcement we just announced today with the promotions, specifically around our NCI inventory, we really like what we saw when we've run those this year. This isn't something new. This is stuff we've been testing. And so, we'll have to wait and see.", "But as you think about the back half, our customer will be pressured. But as we move into the holiday, we're excited to offer her these values. And she's really shown up and responded very well to them earlier this year. So, hopefully, as we look to the back half of this year and into next year, the stability in the store will help us drive continued traffic, and that's one of the metrics we're most focused on improving as we go forward." ] }, { "name": "Simeon Gutman", "speech": [ "Fair enough. And then as a follow-up, there's labor investments and you're going to clear some merchandise, it sounds like, in a couple of places. It sounds like the new stores are doing well and the prototypes are great. Just thinking about managing the business from a practicality standpoint, is slowing stores even a consideration just temporarily so that the leverage is managed properly? Nothing to do about how the stores perform in the out years, but just thinking about balancing the SG&A to make the leverage point a little bit lower." ] }, { "name": "Jeff Owen", "speech": [ "Simeon, that's a great question. I can tell you, first and foremost, we're focused on returning to operational excellence. And this model is tremendously successful when we're able to do that. And we have a great value proposition with a stable supply chain, with consistency at store level.", "That generates tremendous operating profit and allows us, quite frankly, the ability to invest back in the business at a rate we're very pleased with. And the new stores, I continue, we're very, very pleased. And we have an opportunity to be first mover, and we want to take advantage of that. And so, we are always balancing, and we will and will continue to do that because we base everything on returns and return on capital, and that's very important to us.", "But the nice thing here at Dollar General is -- is that we're confident we can return to the operational excellence level that we have accustomed to achieving, and you combine that with a tremendous pipeline for growth that we have, and that recipe is incredibly successful and something that I'm very excited to see as we progress through '23 and '24 and our ability to continue to perform at the levels we're accustomed to performing. So, I feel great about the pipeline, and I also feel great about our return to operational excellence." ] }, { "name": "Simeon Gutman", "speech": [ "OK. Thanks, guys. Good luck." ] }, { "name": "Operator", "speech": [ "Our next question comes from Rupesh Parikh with Oppenheimer. Please proceed with your question." ] }, { "name": "Rupesh Parikh", "speech": [ "Good morning. Thanks for taking our question. So, I wanted to go back to the commentary on the $170 million of investments. I was curious what you view as more onetime in nature versus permanent." ] }, { "name": "Jeff Owen", "speech": [ "Yes, Rupesh. I'll start and, Kelly -- but certainly, we've said this before, we believe these investments are going to accelerate our progress. I think as you look at the investments, when we look at reducing inventory, we've made progress on our inventory. It will make it even better.", "We're impressed with the, as I said before, the test we've run around this. So, certainly on the inventory side, I don't think that you'll see us having to do that as we look forward. But certainly, the labor, as you think about the labor, that is certainly something that is going to be embedded and permanent in our model and we like the returns that we're seeing. I think that's the key point there.", "And the other investments are investing in the ability to really be more efficient long term. Specifically, as you think about the demand forecasting tool that we're investing in, that, we believe, will have a tremendous opportunity to make our working capital even more efficient. And over the next, call it, 12 to 18 months, we believe we will be able to pull out meaningful inventory, I mean, ballpark $500 million or more. And we're very, very excited about how all that's going to play throughout the P&L." ] }, { "name": "Rupesh Parikh", "speech": [ "Great. And then maybe just one follow-up question. So, the guidance range is much wider going forward for the annual guide. Just curious what's driving those and just your confidence in be able to deliver within this range." ] }, { "name": "Kelly Dilts", "speech": [ "We have a high confidence level that we're going to deliver in this range. And really, the width is around the sales piece primarily, Rupesh, and just how quickly the customers are going to respond to the actions that we're taking. I mean, we feel good about getting back to operational excellence, that we're doing all the right actions and taking all the right actions that we need to take. And it will just be a function of her response to us.", "But we'll be ready, and we think after a couple of quarters we'll be back to it in 2024." ] }, { "name": "Rupesh Parikh", "speech": [ "Great. Thank you. I'll pass it along." ] }, { "name": "Kelly Dilts", "speech": [ "Thank you, Rupesh." ] }, { "name": "Operator", "speech": [ "Our final question comes from Paul Lejuez with Citi. Please proceed with your question." ] }, { "name": "Paul Lejuez", "speech": [ "Hey, thanks, guys. Curious, what was the inflation impact in 2Q versus 1Q? And what are your expectations for inflation in 3Q and 4Q in the consumables business specifically and just how has that changed versus how you were thinking three months ago? And then just one clarification, I'm sorry if I missed it. But are you expecting a positive comp in 4Q? And I'm just curious what your transaction versus ticket assumptions are around that? Thanks." ] }, { "name": "Kelly Dilts", "speech": [ "Yes. So, starting with inflation, certainly much less than we saw last year. So, inflation over the front half of the year has been about 1.5%. Right now, we expect it to be pretty similar as we go into Q3 and Q4.", "On the comp piece of that in the sales for Q4, we're certainly expecting it to be better than Q3. It could be positive, and we'll just see how this customer reacts to what we're doing." ] }, { "name": "Paul Lejuez", "speech": [ "Thank you. Good luck." ] }, { "name": "Kelly Dilts", "speech": [ "Thank you." ] }, { "name": "Operator", "speech": [ "We have reached the end of the question-and-answer session. I would now like to turn the call over to Jeff Owen for closing comments." ] }, { "name": "Jeff Owen", "speech": [ "Thank you for all the questions, and thanks for your interest in Dollar General. If I could summarize our discussion today, I'd like to leave you with this. We've had our share of challenges in recent quarters, and some of those have been self-inflicted. But the actions that we're taking in response are gaining traction, and we're making good progress against our goals.", "We're taking key steps in making investments to accelerate our progress over the back half of the year as we look to drive sales and lower our cost to serve while solidifying the foundation for growth in 2024 and beyond. We have a tremendously strong foundation and an incredibly bright future and a strong track record of doing what we say we're going to do. And we believe we are well positioned to do so again. Before we sign off, I want to again express that our hearts are with the victims, their families, and the community of Jacksonville.", "We are proud of our Dollar General family for coming together to support each other and our customers during this difficult time. Thank you again for joining us this morning." ] }, { "name": "Operator", "speech": [ "[Operator signoff]" ] } ]
DG
2023-03-16
[ { "description": "Vice President, Investor Relations", "name": "Kevin Walker", "position": "Executive" }, { "description": "Chief Executive Officer", "name": "Jeff Owen", "position": "Executive" }, { "description": "Chief Financial Officer", "name": "John Garratt", "position": "Executive" }, { "description": "Morgan Stanley -- Analyst", "name": "Simeon Gutman", "position": "Analyst" }, { "description": "JPMorgan Chase and Company -- Analyst", "name": "Matt Boss", "position": "Analyst" }, { "description": "Piper Sandler -- Analyst", "name": "Peter Keith", "position": "Analyst" }, { "description": "Truist Securities -- Analyst", "name": "Scot Ciccarelli", "position": "Analyst" }, { "description": "Oppenheimer and Company -- Analyst", "name": "Rupesh Parikh", "position": "Analyst" }, { "description": "Credit Suisse -- Analyst", "name": "Karen Short", "position": "Analyst" }, { "description": "Jefferies -- Analyst", "name": "Corey Tarlowe", "position": "Analyst" } ]
[ { "name": "Operator", "speech": [ "Good morning. My name is Robert, and I'll be your conference operator today. At this time, I would like to welcome everyone to Dollar General's fourth quarter 2022 earnings call. Today is Thursday, March 16, 2023.", "[Operator instructions] This call is being recorded. Instructions for listening to the replay of the call are available in the company's earnings press release issued this morning. Now, I'd like to turn the conference over to Mr. Kevin Walker, vice president of investor relations.", "Kevin, you may begin your conference." ] }, { "name": "Kevin Walker", "speech": [ "Thank you and good morning, everyone. On the call with me today are Jeff Owen, our CEO; and John Garratt, our CFO. Our earnings release issued today can be found on our website at investor.dollargeneral.com, under news and events. Let me caution you that today's comments include forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995, such as statements about our financial guidance, strategy, initiatives, plans, goals, priorities, opportunities, investments, expectations or beliefs about future matters, and other statements that are not limited to historical fact.", "These statements are subject to risks and uncertainties that could cause actual results to differ materially from our expectations and projections. These factors include but are not limited to those identified in our earnings release issued this morning; under risk factors in our 2021 Form 10-K, filed on March 18, 2022; and any later filed periodic report; and in the comments that are made on this call. You should not unduly rely on forward-looking statements, which speak only as of today's date. Dollar General disclaims any obligation to update or revise any information discussed in the call unless required by law.", "At the end of our prepared remarks, we will open the call up for your questions. Please limit your questions to one and one follow-up question, if necessary. Now, it is my pleasure to turn the call over to Jeff." ] }, { "name": "Jeff Owen", "speech": [ "Thank you, Kevin, and welcome to everyone joining our call. I want to begin by thanking our associates for their dedication to serving our customers and communities this year. I am inspired by this team's commitment to our mission of serving others and the passion they have for helping our customers save time and money every day. Our fourth quarter performance was led by strong comp sales growth of 5.7%.", "And while this result was below our expectations, our performance included market share gains in both consumables and nonconsumables and contributed to a net sales increase of 17.9% to $10.2 billion. Our Q4 comp sales were driven by an increase in average basket size, primarily attributable to inflation, and partially offset by a slight decrease in customer traffic, primarily due to a decrease in customer traffic in late December. And similar to recent quarters, average units per basket were down. Notably, both November and January comp sales at 6.7% and 6.5%, respectively, were within our expected range of 6% to 7% for the quarter.", "However, our December sales performance was negatively impacted by Winter Storm Elliott, which had the most significant effect on our stores in the final days leading up to Christmas. The quarter was also impacted by greater-than-anticipated inventory damages, which contributed to diluted EPS results that were below our expectations. While the storm had some damages impact, we also incurred higher damages than expected as we work through the residual impact of the storage capacity constraints and related store and distribution inefficiencies we experienced during the second half of the year. Although we expect some of these related impacts to be with us through the end of Q1, we are pleased to have the storage capacity constraints largely behind us, which we believe positions us well moving forward.", "Turning to a few highlights of the 2022 fiscal year. Net sales increased 10.6% to $37.8 billion and included a benefit of approximately 2 percentage points or $678 million in sales from the 53rd week. Comp sales for the year increased 4.3%, driven by strong growth in basket size. Although a significant portion of the basket growth was attributable to inflation, we were pleased to see an average basket size at the end of the year of more than five items and nearly $17.", "The team accomplished a great deal in 2022, and we closed the year with significant progress on our strategic initiatives and operating priorities while achieving several key milestones in Q4 and the weeks thereafter. We were particularly excited to celebrate the opening of our 19,000th store in Joplin, Missouri in January as we continue to support our customers with our unique combination of value and convenience in their hometown communities. We also completed the initial rollout of our nonconsumable initiative, or NCI, with the offering now in nearly all of our stores across the chain. Finally, we made strong progress in our supply chain, reducing our storage capacity constraints, and improving operations during the quarter.", "More specifically, and as we said we would do, we added significant capacity in Q4, bringing nearly 3 million square feet of distribution capacity online. These efforts culminated with the opening of our newest distribution center in Blair, Nebraska during the quarter. I also want to highlight that we have started 2023 with the opening of our first store in Mexico. And while the store has only been open a few short weeks, we are very encouraged by the early response from our new customers.", "These achievements are a testament to this team's hard work and continued focus on execution and innovation as we continue to deliver on our mission of serving others. Turning now to an update on our customer. In addition to adjusting the mix of their baskets, we continue to see customers shift spending to more affordable options, including our private brands, which represent more than 20% of our total sales. Within consumables, private brand growth, both in absolute dollars and penetration, was the highest in the fourth quarter.", "We also increased our share of wallet and share of trips across all segments of our core customer in Q4. And we believe we will be increasingly important to them in the year ahead. With regard to trade-in behavior, customers in income brackets above our core customers are shopping with us at an increasing rate, underscoring our belief that our value and convenience proposition resonates with a broad spectrum of customers. We remain focused on our goal to be priced at relative parity with mass merchants, and we continue to feel very good about our price position relative to competitors and all classes of trade.", "Furthermore, given the strong demand from customers, we remain committed to offering products at the $1 or less price point. Notably, during Q4, our comp sales were over 30% in our Value Valley set, which is comprised entirely of items at the $1 price point. Overall, we continue to be pleased with the strong performance of this program and the value it offers to our customers. In addition, we believe we are well-positioned to continue serving both new and existing customers, and we are moving with great intentionality to build on our momentum.", "To this end, we are excited about our plans for 2023. Building on the investments we made in 2022, we plan to make a larger, targeted, incremental investment of approximately $100 million in our stores this year. This investment will primarily consist of incremental labor hours to support our expectations regarding consistent store standards while further enhancing the associate and customer experience. In turn, we believe this investment will position us to drive greater on-shelf availability and capture additional market share while amplifying the potential of our initiatives and ensuring our readiness for our growing customer base.", "And with the progress we have made in the supply chain, the prior investments we have made in wages, and the growing customer engagement we are seeing, we believe we are well-positioned to see a meaningful return on this investment. We operate in one of the most attractive sectors in retail, and we believe our innovation will continue to distance and differentiate Dollar General from the rest of the retail landscape. In summary, we are excited about our plans to deliver strong growth in 2023 while also making significant and deliberate investments in the business. We believe our customer and communities will need us even more as we move throughout 2023.", "And as a mature retailer in growth mode, we are well-positioned to serve them while also creating long-term value for our shareholders. With that, I will turn the call over to John." ] }, { "name": "John Garratt", "speech": [ "Thank you, Jeff, and good morning, everyone. Now that Jeff has taken you through a few highlights of the quarter and full year, let me take you through some of the important financial details. Unless we specifically note otherwise, all comparisons are year over year, all references to EPS refer to diluted earnings per share, and all years noted refer to the corresponding fiscal year. As Jeff already discussed sales, I will start with gross profit.", "For Q4, gross profit as a percentage of sales was 30.9%, a decrease of 35 basis points. This decrease was primarily attributable to an increased LIFO provision, a greater proportion of sales coming from the consumables category, and in increases in inventory shrink, damages, and markdowns, partially offset by higher inventory markups and a reduction in transportation costs. Of note, product cost inflation continued as a significant headwind, resulting in a LIFO provision of approximately $164 million during the quarter and approximately $517 million for the full year. SG&A as a percentage of sales was 21.7%, a decrease of 29 basis points.", "This decrease was driven by expenses that were lower as a percentage of sales, the most significant of which were retail occupancy costs, incentive compensation, and retail labor. These were partially offset by certain expenses that were greater as a percentage of net sales in the current year period, primarily utilities. Moving down the income statement. Operating profit for the fourth quarter increased 17.1% to $933 million.", "As a percentage of sales, operating profit was 9.1%, a decrease of 6 basis points. Our effective tax rate for the quarter was 23.2% and compares to 21.2% in the fourth quarter last year. This higher effective income tax rate was primarily due to decreased income tax benefits associated with the stock-based compensation compared to 2021. Finally, EPS for the fourth quarter increased 15.2% to $2.96.", "For the full year, EPS increased 5% to $10.68 and included an estimated positive impact of approximately 4 percentage points from the 53rd week. Turning now to our balance sheet and cash flow, which remains strong and provide us the financial flexibility to continue investing for the long term while delivering significant returns to shareholders. Merchandise inventories were $6.8 billion at the end of the year, an increase of 20.4% overall and 14.3% on a per-store basis. This increase continues to reflect the impact of product cost inflation, as well as a greater mix of higher-value products, particularly in the home and seasonal categories, primarily due to the continued rollout of NCI, as well as the earlier receipt of seasonal goods.", "While inventory growth is still elevated, the pace is moderating, as we expected. Notably, our Q4 inventory growth rate per store was essentially half of what it was in Q3. Looking ahead, we anticipate more normalized growth rates as we move through 2023. Importantly, we continue to believe the quality of our inventory is in good shape.", "In 2022, the business generated cash flows from operations totaling $2 billion, a decrease of 31%, which was primarily attributable to higher inventory levels. Total capital expenditures were $1.6 billion and included our planned investments in new stores, remodels, and relocations; distribution and transportation projects; and spending related to the strategic initiatives. During the quarter, we repurchased 4.5 million shares of our common stock for $1.1 billion and paid a quarterly dividend of $0.55 per common share outstanding for a total payout of $121 million. At the end of the year, the remaining share repurchase authorization was $1.4 billion.", "Our capital allocation priorities continue to serve us well and remain unchanged. Our first priority is investing in high-return growth opportunities, including new store expansion and our strategic initiatives. We also remain committed to returning significant cash to shareholders through anticipated share repurchases and quarterly dividend payments, all while maintaining our current investment-grade credit rating and managing to a leverage ratio of approximately three times adjusted debt to EBITDA. Moving to our financial outlook for the fiscal 2023 year.", "We anticipate the challenging economic and operating environment to continue into 2023, but we believe we are well-positioned to drive strong growth as we move throughout the year. For 2023, we are reiterating the financial guidance we provided on February 23, 2023 and providing additional financial guidance to include the following expectations: net sales growth in the range of approximately 5.5% to 6%, including an anticipated negative impact of approximately 2 percentage points due to lapping the 2022 53rd week; same-store sales growth in the range of 3% to 3.5%; and EPS growth in the range of approximately 4% to 6%, including estimated negative impacts of approximately 3 percentage points due to higher interest expense and approximately 4 percentage points due to lapping the 2022 53rd week. Our EPS guidance assumes an effective tax rate in the range of approximately 22.5% to 23%. We also expect capital spending to be in the range of $1.8 billion to $1.9 billion, which includes the impact of significant inflation in the cost of certain building materials, construction of new distribution centers, and continued investment in our strategic initiatives and core business to support and drive future growth.", "With regard to shareholder returns, our board of directors recently approved an increased quarterly dividend payment of $0.59 per share. We also plan to repurchase a total of approximately $500 million of our common stock this year. This is a lower amount as compared to recent years but consistent with our capital allocation priorities and reflects our commitment to our current credit rating, our continued strong liquidity position, and confidence in the long-term growth opportunity for our business. Let me now provide some additional context as it relates to our outlook.", "In terms of quarterly cadence, we expect EPS growth to be much stronger in the second half compared to the first half. This is due, in part, to our expectation of continued headwinds from sales mix pressure, higher interest expense, and increased shrink and damages as we move through the first half of the year. We anticipate certain of these headwinds to be most pronounced in Q1, including an estimated year-over-year increase in interest expense of approximately $40 million, inventory damages, and residual impacts of the storage capacity constraints, and related inefficiencies that Jeff mentioned earlier. In addition, we expect the year-over-year net impact of the labor investment to be most significant in Q1 as we don't begin lapping last year's smaller investments until Q2, and we believe the benefits of the incremental labor will become more significant later in the year.", "As we move into the back half, we also anticipate a benefit from lapping the significant supply chain costs and winter storm impacts from the second half of 2022. Turning now to gross margin for 2023. In addition to the material benefit from lapping the increased supply chain expenses in the second half of 2022, we expect significant benefits from greater distribution center capacity and productivity, lower carrier rates, expansion of our private tractor fleet, and other distribution and transportation efficiencies. We also expect to continue realizing benefits from our initiatives, including DG Fresh and NCI.", "Furthermore, we anticipate a significant contribution from our DG Media Network, which Jeff will discuss in more detail in a moment. Partially offsetting some of these expected benefits are the anticipated sales mix pressure and increased inventory shrink and damages I mentioned, as well as increased markdowns as we return to rates more in line with historic norms. With regard to SG&A, we expect continued investments in our strategic initiatives as we further their rollouts. However, in aggregate, we continue to expect they will positively contribute to operating profit and margin in 2023 as we expect the benefits to gross margin from our initiatives will more than offset the associated SG&A expense.", "And as Jeff noted, we plan to make an incremental investment of approximately $100 million in our stores, primarily through additional labor hours. While this investment will pressure SG&A in 2023, we believe it is the right thing for the business and will drive stronger in-store execution, positioning us well to build on the momentum we have with our customers. We expect a headwind from inflationary pressures in our business, so we continue to pursue efficiencies and savings through our Save to Serve program, including Fast Track. In closing, we are grateful for the team's hard work to deliver for our customers in 2022.", "Looking ahead, we are excited about our growth plans for 2023, including strong sales and operating profit, while simultaneously making significant and deliberate investments in the business. As always, we continue to be disciplined in how we manage expenses and capital, with the goal of delivering consistent, strong financial performance while strategically investing for the long term. We are confident in our business model and our ongoing financial priorities to drive profitable same-store sales growth, healthy new store returns, strong free cash flow, and long-term shareholder value. With that, I will turn the call back over to Jeff." ] }, { "name": "Jeff Owen", "speech": [ "Thank you, John. Let me take the next few minutes to update you on our operating priorities and strategic initiatives, which have transformed this company in recent years, resulting in strong growth and enhanced profitability. Our first operating priority is driving profitable sales growth. Starting with NCI, with the initial rollout phase now complete, we will focus on continuing to refine the assortment and enhance the treasure hunt offering to provide value to our customers in the nonconsumable categories.", "Overall, we are very pleased with the success of NCI, including market share gains in nonconsumable sales in Q4. Moving to our pOpshelf store concept, which further builds on our success and learnings with NCI. As a reminder, pOpshelf aims to engage customers by offering a fun, affordable, and differentiated treasure hunt experience, delivered through continually refreshed merchandise, a differentiated in-store experience, and exceptional value, with the majority of our items priced at $5 or less. During the quarter, we opened 37 new pOpshelf locations, bringing the total number of stores to 140 at the end of 2022, located within 14 states.", "While sales in this economic environment have been somewhat softer than our earlier results, we continue to be pleased with the customer response. Looking ahead, we plan to more than double the pOpshelf store count in 2023, bringing the total number of pOpshelf stores to nearly 300 by year-end. And we are excited about our goal of approximately 1,000 locations by year-end 2025. Turning now to DG Fresh, which is a strategic, multiphased shift to self-distribution of frozen and refrigerated goods, along with a focus on driving continued sales growth in these areas.", "We are now delivering perishable products to more than 19,000 stores from 12 facilities, and we continue to be pleased with the cost savings from this initiative, and importantly, the significantly enhanced profitability of our perishables offering. In addition to capturing cost savings, DG Fresh also aims to increase sales in frozen and refrigerated categories. We are pleased with the performance on this front, including enhanced product offerings in stores and strong performance from our perishables department, which had our strongest rate of comp sales growth during 2022. Going forward, we expect to realize additional benefits from DG Fresh as we continue to optimize our network, further leverage our scale, deliver an even wider product selection, and build on our multiyear track record of growth in cooler doors and associated sales.", "And while produce is not included in our initial rollout, we continue to believe that DG Fresh provides a potential path forward to expanding our produce offering to more than 10,000 stores over time. To that end, at the end of 2022, we offered fresh produce in more than 3,200 stores, with plans to expand this offering to a total of more than 5,000 stores by the end of 2023. Finally, DG Fresh has also extended the reach of our cooler expansion program. During 2022, we added more than 66,000 cooler doors across our store base, and we plan to install a similar number of cooler doors in 2023.", "Importantly, despite the meaningful improvements we have made and savings we have realized to date as a result of DG Fresh, we believe we still have an opportunity to drive significant additional returns with this initiative in the years ahead. Turning now to an update on our health initiative, branded as DG Wellbeing. As a reminder, the initial focus of this project is an expanded health offering, which consists of approximately 30% more selling space and up to 400 additional items as compared to our standard offering. This offering was available in nearly 4,400 stores at the end of 2022, and we plan to expand to a total of more than 5,500 stores by the end of 2023.", "Looking ahead, our plans include further expansion of our health offering and testing of our mobile clinic, with the goal of increasing access to basic healthcare products and, ultimately, services over time, particularly in rural America. Finally, we also plan to make significant enhancements to our private brand offering in 2023 as we know how important these value offerings are for our customers. We are increasing private brand offerings across many important categories, including candy and snacks, perishables, pet food, and over-the-counter healthcare products. We believe these products will further differentiate Dollar General in the marketplace as we look to provide our customers with tremendous value on quality products.", "In addition to the initiatives I just discussed, as well as the anticipated supply chain efficiencies I mentioned earlier, we continue to pursue other opportunities to enhance gross margin, including improvements in global sourcing, as well as shrink and damage reduction. Our second priority is capturing growth opportunities. Our proven high-return, low-risk real estate model has served us well for many years and continues to be a core strength of our business. In 2022, we completed a total of 2,961 real estate projects, including 1,039 new stores, 1,795 remodels, and 127 relocations.", "For 2023, our goal remains to execute approximately 3,170 real estate projects in the United States across our Dollar General and pOpshelf banners, including 1,050 new stores, 2,000 remodels, and 120 store relocations. Notably, these would be the most real estate projects we have executed in one year. Our ability to innovate on store formats continues to be an important strength of the business, and we expect to leverage multiple formats to drive strong returns in the year ahead. Approximately 80% of our new stores and nearly all of our relocations will be in one of our larger store formats, which continue to drive increased sales productivity per square foot as compared to our traditional store.", "With regard to remodels, approximately 80% will be in our DGTP format, which provides the opportunity for a significant increase in cooler count, as well as the ability to add fresh produce in many stores. In addition to our planned Dollar General and pOpshelf growth, we are excited about our international expansion. We were pleased to open our first Mi Super Dollar General in Monterrey, Mexico last month, and we have been very encouraged by the customer response and community reception we have seen so far. Looking ahead, our goal is to have approximately 20 stores serving underserved communities in northern Mexico by the end of 2023 as we look to leverage our brand awareness while extending our value and convenience proposition to a customer base that is similar to our core customer in the United States.", "Overall, our real estate pipeline remains robust. And with more U.S. brick-and-mortar stores than any retailer, we are excited about our ability to capture significant growth opportunities in the years ahead. Next, our digital initiative, which is an important complement to our physical footprint as we continue to deploy and leverage technology to further enhance convenience and access for customers.", "Our efforts remain centered around creating a digital front porch for our customers as we look to continue building engagement across our digital properties, including our mobile app. We ended 2022 with approximately 4.5 million monthly active users on the app and expect this number to continue to grow as we look to further enhance our digital offerings. Our partnership with DoorDash continues to serve us as an important extension of the value offering of Dollar General, combined with the convenience of same-day delivery in an hour or less. DoorDash is available in nearly 14,000 stores, and we anticipate extending this offering to an additional 1,000 stores in 2023.", "We are pleased with the incremental sales growth attributed to this partnership, as well as its profitability. And we believe we have an opportunity to drive even stronger growth moving forward. In addition, we are excited about the continued growth of our DG Media Network. We are seeing significant interest and participation from CPG companies and brands who are seeking to connect with our more than 90 million unique customer profiles, especially rural customers who represent about 30% of the country.", "We expect our DG Media Network to grow significantly in 2023 as we expand the program and enhance the value proposition for both our customers and brand partners while substantially increasing the overall net financial benefit for the business. Overall, our strategy consists of building a digital ecosystem specifically tailored to provide our customers with an even more convenient, frictionless, and personalized shopping experience. And we are pleased with the growing engagement we are seeing across our digital properties. Our third operating priority is to leverage and reinforce our position as a low-cost operator.", "We have a clear and defined process to control spending, which continues to govern our disciplined approach to spending decisions. This approach, internally branded as Save to Serve, keeps the customer at the center of all we do while reinforcing our cost-control mindset. Our Fast Track initiative is a great example of this approach. The first phase of this initiative, which included rolltainer optimization and self-checkout, is focused on enhancing customer convenience and labor productivity in our stores.", "Self-checkout, which provides customers with another flexible and convenient checkout solution, was available in more than 11,000 stores at the end of 2022, and we continue to be pleased with our results, including strong customer adoption rates. Looking ahead, our goal is to have a self-checkout offering in more than 13,000 stores by the end of 2023, including the full self-checkout option in more than 2,000 stores as we look to further extend our position as an innovative leader in small box discount retail. Moving forward, the next phase of Fast Track consists of increasing our utilization of emerging technology and data strategies, which includes putting new digital tools in the hands of our field leaders. When combined with our data-driven inventory management, we believe these efforts will drive greater efficiencies for our retail leaders and their teams while laying the foundation for additional phases of Fast Track in the future.", "We also continue to reduce costs through the expansion of our private tractor fleet, which is one of the largest private retail fleets in the U.S. Our fleet consisted of more than 1,600 tractors at the end of 2022 and accounted for more than 40% of our outbound transportation needs. Looking ahead, we plan to have more than 2,000 tractors in our private fleet by the end of 2023, which would account for more than 50% of our outbound transportation fleet. Overall, our underlying principles are to keep the business simple but move quickly to capture growth opportunities while controlling expenses and always seeking to be a low-cost operator.", "Our fourth operating priority is investing in our diverse teams through development, empowerment, and inclusion. As a growing retailer, we created more than 10,000 new jobs in 2022 while continuing to drive opportunities for personal and professional development and, ultimately, career advancement. Our internal promotion pipeline remains robust as evidenced by internal placement rates of more than 70% at or above the lead sales associate position. Additionally, more than 10% of our growing private fleet team, which nearly doubled in size in 2022, began their careers with us in either a store or distribution center.", "We continue to have great success hiring the talent we need, and we are pleased with our staffing levels and applicant flow. Ultimately, we believe the opportunity to start and develop a career with a growing and purpose-driven company is what sets Dollar General apart from the competition and remains our greatest currency in attracting and retaining talent. We added incredible individuals across the organization in 2022 as we grew teams in our stores, distribution centers, private fleet, and at our store support center while also adding a local team in Mexico to support our new customers in those communities. In addition to new opportunities, we have made significant investments in our people, including raising average hourly retail wages by approximately 23% over the last three years and investing over 4 million training hours in 2022 to promote education and development.", "The people of Dollar General are our greatest strength and the driving force of this company. In closing, we made great progress against our operating priorities and strategic initiatives in 2022 while making a difference in the lives of our customers. As we enter 2023, we are excited about our robust plans for growth, which we believe will further enhance our ability to serve our customers in meaningful ways. We are the innovation leader in our space, and we are laser-focused on executing at a high level to continue driving long-term sustainable growth while delivering strong returns for our shareholders.", "Finally, I want to thank more than 170,000 employees for their commitment to serving others every day, and I am looking forward to all we will accomplish together in 2023. With that, operator, we would now like to open the lines for questions." ] } ]
[ { "name": "Operator", "speech": [ "Thank you. At this time, we'll be conducting a question-and-answer session. [Operator instructions] Our first question comes from Simeon Gutman with Morgan Stanley. Please proceed with your question." ] }, { "name": "Simeon Gutman", "speech": [ "Hey, guys. First -- sorry about the noise. Open-ended question, Jeff, for you. So, the business has executed well over a long period of time.", "Last couple of quarters, we've had some missteps or things that haven't gone to plan. Not all of that, I think, is clear to us or The Street. And yet, you know, all these growth initiatives are still happening at the same time. So, the open-ended question is, have you debated or is the debate the balance of sort of the growth against investments and focusing on the core?" ] }, { "name": "Jeff Owen", "speech": [ "Well, Simeon, thank you for the question. I'd first want to say, certainly, the last two quarters have been challenging. And I can tell you, we're disappointed in our results. This team takes great pride in delivering on our commitments, and we've been doing that for the almost 30 years I've been here.", "And that is something that is not changing. And I can tell you, we have a tremendously deep and outstanding team that's laser-focused on executing and innovating over the long term. And certainly, we have faced some challenges. But, you know, what we do here at Dollar General is we control what we can control, and that has allowed us to emerge even stronger as we move forward.", "So, as I think about our balance between execution and innovation, one of the things I think it's important to remember is we have a long track record of execution, and this team will continue to deliver on that. And on the innovation front, we don't do things on the side of our desks. And so, as we do innovate, one of the things that our team does more than anything is, as you know, capital is not an issue for us. It's all about organizational capacity.", "And I think the team has done an excellent job of making sure that we've dedicated the resources, the focus, and the time to be able to grow this foundation. And it certainly served us very well. You know, if you think about these challenging times we're in right now, this company is in a much different place. And as our customer has gravitated toward more consumables, the investments we've made in our strategic initiatives have allowed us to serve her even better and more profitably.", "And so, as we look forward, we're excited about some of the investments we announced today, which will be on top of the strategic investments we've made previously, which has put us in a very, very enviable position of having a rock-solid foundation strategically and a laser-focused on execution. And this team is committed to delivering that as we look forward into '23 and beyond." ] }, { "name": "Simeon Gutman", "speech": [ "And the one follow-up to that is the 100 million in wages, I don't think it's a big surprise, but what was maybe in that is hours and not rate. So, can you talk about that trade-off or the balance between those two and where, I guess, you feel comfortable where you are on rate?" ] }, { "name": "Jeff Owen", "speech": [ "Yeah, we absolutely do, Simeon. And that's one of the -- that's a great distinction. You know, here at Dollar General, for the 85 years we've been around, the stores have always been the company. And our ability to serve local communities is something that we do better than anybody.", "And we take great pride in that. And so, when you think about the investment that we're very excited about, the reason why it's in hours rather than wages is because we've been paying competitive wages for many years. And you heard in my prepared comments that our wages have increased 23% over the last three years. So, our ability to attract and retain talent remains one of our core competencies.", "And so, the other thing you got to remember is where our stores are located. They're located in rural communities, 75% are in communities of 20,000 or less. And we prevent -- we provide career growth opportunities that are unmatched in retail, which leads to our staffing levels being very robust, which we mentioned. And that gives us the opportunity because we're in such a good position to invest in the hours.", "And so, as we think about hours, we're pleased at what we believe this will do to elevate our store standards and our consistency, which we believe the customer will benefit and the associate will benefit. And so, as you -- as we move throughout '23, when you combine the improvements we're making in our supply chain, which really gives us the timing to do this, and you combine that with the in-stock improvements, our customers will begin to see our standards improve, our on-shelf availability will improve, and we'll be ready to serve that growing customer base that we're really pleased that we're seeing. And so, that's what gives us the confidence in this. We feel this is the right level of investment.", "And the reason we feel that way is because we've been testing and learning this in 2022. You know Dollar General very well. We don't do things just on a whim. We test and learn.", "And we've been doing that in '22. We liked what we saw, and we wanted to make sure our supply chain was in a position where we could take advantage of the ability to elevate the experience for the customer while we flow goods freely to the stores. And right now, we're in a good position to do that as we enter '23, and we're excited about what this is going to do for the customer and, ultimately, the return we're going to see over time." ] }, { "name": "Simeon Gutman", "speech": [ "Thank you." ] }, { "name": "Jeff Owen", "speech": [ "Thank you." ] }, { "name": "Operator", "speech": [ "Our next question is from Matthew Boss with J.P. Morgan. Please proceed with your question." ] }, { "name": "Matt Boss", "speech": [ "Great. Thanks. So, Jeff, could you speak to recent behavior that you're seeing from the low-income consumer or maybe any changes in the ranking of their priorities from those customer surveys that I know you run regularly? And then, John, how best to think about the cadence of comps as we think about the year or just any color on the first quarter same-store sales or any comments on business to date just relative to that 3% to 3.5% full year forecast?" ] }, { "name": "Jeff Owen", "speech": [ "Well, thanks, Matt. I'll start, and then I'll kick it over to John. As you think about the customer, you know, one of the good things about Dollar General is we're an all-weather brand, and we've shown over the last three decades how we can serve that customer in any economic environment. But what we're seeing right now with our customer is -- the best news we have is that she's still employed.", "And as we've talked about for many years, that is the single most important factor to her economic health. But we are certainly -- as we talk to our customers, and as you know, Matt, we do this very, very frequently, and our digital capabilities allow us to do it in many different ways, which we're pleased, we're seeing that she's worse off financially. And it's primarily due to food inflation. And obviously, as you think about how that changes her behaviors, one of the things we're seeing is she's relying more on savings, credit cards, and also borrowing money, quite frankly, from friends.", "And as that shows up in the store, what we're seeing in the shopping behavior is that translates into our customer coming more often. She's buying fewer items on occasion. And I got to tell you, one of the things we're very, very pleased with is the fact that we are still leaning hard into our $1 price point, and we're there for that customer. And as you saw in our prepared comments, that is resonating extremely well with her, as you saw from the comp sales we're seeing in that category.", "But also, we're seeing her lean into private brands, and we're seeing her shift her purchases more to consumables. But as you know, our core customer, she's the smartest customer, I believe, in retail, and she figures this out over time. And our box is more relevant than ever as a result of the investments we've made over the last several years. And that allows us to go where the customer wants us to go and do it more profitably.", "And that's a very enviable position for us. And I think our market share gains kind of show that. But that's kind of what we're seeing from the customer's standpoint. And certainly, there are some near-term challenges that have just recently emerged, I'll let John talk about that, in Q1." ] }, { "name": "John Garratt", "speech": [ "Yeah. So, in terms of the customer, you know, as Jeff said, we're continuing to see an increasingly economically strained customer, and we're seeing, you know, shopping behaviors indicative of this environment. You know, the two recent events we're monitoring is the termination of SNAP benefits, the emergency waivers in the remaining states, coupled with lower tax refunds in recent weeks. It's possible, you know, this could further pressure the low-income customers somewhat in the near term, remains to be seen.", "You know, we didn't see an impact last year. Some rolled off, but the customer is in a different place now. So, we'll carefully monitor that. But, you know, we continue to believe that the customer needs us even more in tough environments, as history has shown, and our full year guidance is reflective of all we know today.", "In terms of the shape of the year, you know, I'll kind of talk to first half, second half, and then Q1, both in terms of sales, as well as earnings. As you look at the shape of the year, you know, as we indicated, it's really a back half story for EPS growth. Now, we're expecting sales comp to be relatively even between the first half and the second half, slightly higher in the second half. But then we expect continued headwinds, as we mentioned, from sales mix pressure, higher interest expense, and increased shrink and damages as we move through Q1 -- or rather the first half.", "And then in the second half, we anticipate a pretty sizable benefit from lapping the significant supply chain costs and winter storm impacts from the second half of 2022, as well as the benefit of the initiatives that we're driving. Now, as you look at Q1, we mentioned that, you know, we anticipate certain headwinds to be most pronounced in Q1. That includes the estimated year-over-year increase in interest expense, which we quantified as $40 million, as well as inventory damages, and then the residual impact of the storage capacity constraints and related supply chain efficiencies -- inefficiencies we've mentioned. And then the other piece is with regard to the labor investment.", "You know, we expect the year-over-year net impact pressure from that to be most significant in Q1. That's because we don't begin lapping last year's smaller investments until Q2 and believe the benefits of the incremental labor will be more significant later in the year." ] }, { "name": "Matt Boss", "speech": [ "Great. And then maybe just a follow-up, John, on the balance sheet, could you just update us on free cash priorities? What is the multiyear debt leverage target? How best to think about capex as a percent of sales moving forward and just share repurchase as a use of cash going forward?" ] }, { "name": "John Garratt", "speech": [ "Sure. You know, I'll start by saying that our capital allocation priorities have not changed. Our first priority remains investing in the business. You know, when you have high-return growth opportunities like new store growth, remodels, and our strategic initiatives, that's where we focus our capital.", "You know, then our second priority is then returning the excess cash to shareholders based on the excess cash and debt capacity, paying a competitive dividend, as we increased this quarter, and then buying shares with the remaining excess cash and debt capacity. But we remain focused on protecting our current investment-grade credit rating by keeping our adjusted debt to EBITDA around three. In terms of capex, you know, that is up a bit this year. We guided to 1.8 billion to 1.9 billion.", "It really includes the impact of pretty significant inflation, you know, particularly when you think of steel as we accelerate the unit growth story here, the remodels, as well as build. We're working on three distribution centers here, which is going to help our capacity. So, it takes some capital to do that. But we see great returns in these.", "And, you know, as you look at the stores, not only are we doing more stores, we're doing bigger stores. And we love what we see with these bigger stores with most -- more sales, more profit per store. So, a little more capex, but really like the return from these. So, I think that's the way to think about our capital allocation priorities and the drivers." ] }, { "name": "Operator", "speech": [ "Our next question is from Peter Keith with Piper Sandler. Please proceed with your question." ] }, { "name": "Peter Keith", "speech": [ "Hey, good morning, everyone. You commented just in one of the last questions around tax refunds and SNAP as potential headwinds. I was hoping you could also address the Social Security cost of living increase that kicked in at the beginning of the year. Has that been any tailwind to your business that you've noted so far?" ] }, { "name": "John Garratt", "speech": [ "Yeah, you know, I'll elaborate on SNAP a little bit, and then I could talk about tax refunds and then talk about COLA. You know, in terms of SNAP, it's interesting. You know, you had an increase -- pretty good increase in the tender over the last few years since the pandemic as states enacted the emergency allotment benefits. Over the last couple of years, we've seen about 18 states roll off of this, some of our key states.", "And what we saw is with the elimination of this, we saw an offset in other tender methods, and we didn't see an overall impact to our sales. You know, what we are monitoring, though, is that, coupled with the tax refunds, which are lower, in general. They're a little bit ahead in terms of the number of returns filed. But per return, what we're seeing so far, and everybody's seeing, is a lower return overall in terms of the dollars.", "And so, we're monitoring the two. Too early to call, but monitoring if those two and where the customers at right now has a different impact, remains to be seen. In terms of COLA, you know, we did see some bump from COLA, particularly those consumers and those stores, you know, that over-index with that consumer that receives benefits based on COLA. However, I would say, while a benefit, we saw some bump, not a significant impact." ] }, { "name": "Peter Keith", "speech": [ "OK. Thank you very much. And then I wanted to ask you a little bit about the LIFO impact. So, 517 million in the full year is pretty meaningful headwind that you've experienced.", "I guess if the Fed's going to achieve their mission and moderate inflation here over the next year or two, you should probably have less of a LIFO charge. Do you have any LIFO benefit or lower charge here factored in for 2023 at this point?" ] }, { "name": "John Garratt", "speech": [ "Yeah. You know, the way to think about this is very significant LIFO charge last year. We don't expect a deflationary environment this year. So, we do expect a LIFO charge, but we are assuming a more moderate LIFO charge.", "So, less of a headwind this year. I think one thing to just bear in mind as you think about the year over year, you know, we did mitigate where we could the LIFO charge by taking targeted pricing actions as we saw the market move. So, that mitigated the impact of that. So, I wouldn't consider this fully a tailwind, but certainly less of a headwind as we go into this year." ] }, { "name": "Peter Keith", "speech": [ "OK. Thank you very much." ] }, { "name": "Operator", "speech": [ "Our next question is from Scot Ciccarelli with Truist Securities. Please proceed with your question." ] }, { "name": "Scot Ciccarelli", "speech": [ "Hi, guys. First, you know, can you just clarify, John, like, are you expecting earnings to actually be down in the first half or just lower? And then my main question is we've seen a pretty significant decrease in payables to inventory over the last couple of quarters. This quarter, for example, inventory was actually up over $1 billion, payables were actually down year over year. Can you just provide any more color on what's happening there and do you expect that to ramp up to kind of the payables to inventory to ramp up back up to historical levels? Or is there some sort of structural change, whether it's mix or capacity changes, etc., that is influencing that? Thanks." ] }, { "name": "John Garratt", "speech": [ "Yeah. So, in terms of the cadence for the year, what we said is it really is a back half story. You really are going to see the growth in the back half of the year. You know, we're not anticipating a sizable drop in the first half.", "You know, we're looking at it to be, you know, modestly up to flattish. But so then it's really a back half story in terms of the earnings. In terms of the AP to inventory, you know, what we have seen is the driver of that is really higher inventory levels, coupled with the timing of payments. You know, as you look at the timing of payments, one of the things, for instance, that impacts us was the 53rd week, it then pulls in the Week 1 rent payments.", "So, as we look, you know, further, we expect inventory levels to normalize. You know, as you look at in Q4, we saw our inventory per store dropped in half. You know, it went -- it was 14% on a per-store basis, which was about half the growth rate we saw in the previous period -- or previous quarter. And again, it reflects the same drivers.", "It's really the product cost inflation and a greater mix of higher-value products, particularly in NCI as we completed the rollout of that. An important thing to note here is it is seasonal goods -- early receipt of seasonal goods was our other driver. But it's important to note that, you know, these are evergreen-type products, which aren't time sensitive, so we feel really good about the quality of the inventory, the ability to move through that, and expect this to continue to normalize as we move through the year." ] }, { "name": "Scot Ciccarelli", "speech": [ "OK. Very helpful. Thank you." ] }, { "name": "Operator", "speech": [ "Our next question comes from Rupesh Parikh with Oppenheimer. Please proceed with your question." ] }, { "name": "Rupesh Parikh", "speech": [ "Good morning and thanks for taking my question. I also wanted to ask on capex. So, historically, capex has been about 3% of sales. And last year and this year, it's about 4%.", "So, just want to get a sense of where you think the normal level of spending could be in a normalized environment as a percent of sales or any other commentary." ] }, { "name": "John Garratt", "speech": [ "Sure. You know, again, getting back to the capital, a big driver of that was the inflation, as well as the stepped-up real estate and the number of projects we're doing in terms of DCs. You know, working on three DCs in one quarter. So, again, feel great about the returns of these.", "You know, I don't want to speculate on and give future guidance on capex. You know, could see an environment where with the inflation coming down, it would moderate that. But, you know, more to come in terms of the capex. But, you know, what we're really focused on is the returns of these, and feel great about the returns.", "And, you know, we'll see what's required to grow the business going forward, but more to come." ] }, { "name": "Rupesh Parikh", "speech": [ "Great. And then maybe just one follow-up question. So, DG Media, the commentary, very positive there in terms of what you're seeing with your vendors. As you think about the dollars there, how do you think about reinvesting the business versus flowing that through the bottom line?" ] }, { "name": "Jeff Owen", "speech": [ "Rupesh, you're right. We are very excited about what we're seeing on our DG Media Network and, quite frankly, our digital acceleration, in general. You know, one of the things that we've learned over the last couple of years when we started this journey was how digitally savvy our customer is and how much it helps her to be more connected and more loyal to Dollar General. And it shows up in her ability to spend with us.", "Certainly, as you think about the network and you think about what we're able to bring to the market, we're able to bring access to a segment of the population that's really difficult to connect with. And when you think about the rural population, 30% of the United States population, that's meaningful. And that's why our brand partners and our CPG partners are very excited to partner with DG, and we're excited about where the Media Network will go over time. In terms of kind of how we handle the dollars that we're receiving from that, you know, obviously, one of the things that's great about this company is our ability to grow our operating profit and reinvest in the business.", "And this is one of the ways it allows us to do that. And so, that's why we're all very excited about the strategic foundation we've built here, the muscle we've built, and we're excited about some of the initiatives that we're going to bring to the forefront as we look forward, especially in '23 and beyond." ] }, { "name": "Rupesh Parikh", "speech": [ "Great. Thank you." ] }, { "name": "Jeff Owen", "speech": [ "Thank you." ] }, { "name": "Operator", "speech": [ "Our next question comes from Karen Short with Credit Suisse. Please proceed with your question." ] }, { "name": "Karen Short", "speech": [ "Hey, thanks very much. Good to talk to you again. And, John, sad to see you go. It's been great working with you." ] }, { "name": "John Garratt", "speech": [ "Thank you, Karen." ] }, { "name": "Karen Short", "speech": [ "But I just wanted to go back to the overall algorithm for DG. You know, obviously, there's noise in '23, and we all appreciate that. But can you just maybe give a little bit of an update on what you think the long-term algorithm should be as we get beyond '23? And then I wanted to just clarify on the wage investment and/or wage. Can you just let us know what your average hourly wage rate is and how you think about that as opposed to investing more in dollars and realize you need to invest in hours but dollars." ] }, { "name": "Jeff Owen", "speech": [ "Yeah. Karen, I'll take the first part of that question, and then, John, I'll kick it to you for the algorithm question. But, you know, Karen, we don't disclose our average hourly rate. But what I can tell you is, as I said earlier, we have and we continue to pay very competitive wages.", "And I think the one nuance to Dollar General that I frankly believe is underappreciated is the ability to come into this company as a part-time sales associate and grow into a career. And you can do it faster than you can in any other retailer because we're committed to internal development, and we have the opportunity to provide you with growth opportunities because of our dynamic growth. So, I think those two things are the reason why we feel great about our staffing levels, our ability to attract, and our ability to retain our talent. And so, that's why we're investing in hours.", "And right now, we're very pleased to see that wage grow 23% over the last three years. So, we're in a great position, and that's why we're able to put this investment more toward the hours in the store rather than having to catch up on wages. And, John." ] }, { "name": "John Garratt", "speech": [ "As you think of the algorithm, if you just step back and look over the last three years, while it's been, you know, up and down over the last three years in this environment, you know, every element of that, well in excess of the algorithm. If you look at sales comp, well in excess of the algorithm. Expansion of gross margin and operating margin, operating income, EPS, well in excess of the algorithms. So, we feel very good about the performance over this period of time, and we feel the model remains very strong and very resilient.", "We continue to see ourselves as 10%-plus EPS growers over the long term, not every year. Some years, we see it prudent to invest to protect that growth over the long term. But if you look at the business model and fundamentals, they're very strong, with the unique combination of value and convenience resonating as strong as ever. We continue to see very compelling store-level economics and new store returns and then significant bumps from the remodels.", "And we continue to see 16,000-plus new store opportunities for everybody in our space. But obviously, we've been getting an outsized share of that. So, a significant runway for growth. The initiatives are performing very well, helping both the top line and bottom line.", "They're focused on both. And we see, as I mentioned, you know, a lot of levers within gross margin to continue to expand that over the long term. And the business generates a lot of cash to then buy back shares and reinvest in the business. So, we think, you know, top to bottom, the business model and fundamentals remain very strong." ] }, { "name": "Karen Short", "speech": [ "So, is it fair to say or reasonable to think that that's more of a '24 return? I mean, I know you haven't given guidance, but just --" ] }, { "name": "John Garratt", "speech": [ "I don't want to give specific guidance, but I would just say we feel very good about the future and the strength of the business." ] }, { "name": "Karen Short", "speech": [ "OK. Thanks so much." ] }, { "name": "Operator", "speech": [ "Our final question is from Corey Tarlowe with Jefferies. Please proceed with your questions." ] }, { "name": "Corey Tarlowe", "speech": [ "Hi, good morning. Thanks for taking my question and congrats, John, on your retirement announcement. It's been a pleasure to work with you. My first question for Jeff on market share, you talked in your prepared remarks about seeing customers trade in the Dollar General.", "You talked about higher-income consumers trading down to Dollar General. So, I think it's clear that Dollar General is gaining share across income cohorts and categories. And you talked about Value Valley as well, comping up over I think it was 30%. So, maybe could you talk a little bit more about where you think this market share is coming from and where you see it likely to come from even more so as we look ahead?" ] }, { "name": "Jeff Owen", "speech": [ "Well, Corey, you know, first of all, we are very pleased at the market share gains that we've been able to achieve, both on the consumable and on the nonconsumable segments of our business. And, you know, when you think about our customers well, we're also incredibly pleased with the fact that we were able to increase our productivity with really all segments of our core customer. We increased our share of wallet, our share of trips. Those are all really encouraging signs, and I'm very, very pleased to see that.", "It's a credit to our team and their ability to connect with this customer, bring an assortment that she's looking for, and delivered in a consistent fashion. As you think about the donors, it's really the same donors we've had for quite some time. Primarily, drug is our biggest share donor. And so, as we look forward to continuing to refine our assortment, our strategic initiatives really allow us to really bring even more, we believe, relevant assortment to our customer.", "You know, we think we're in the early to mid-innings on many of these initiatives when you think about our treasure hunt with NCI, when you think about DG Fresh and the relevance of the perishable and frozen offering, you think about produce. And we're very pleased on our digital strategy that's allowing us to, quite frankly, through our first-party data, our ability to understand this customer on an even greater level than we ever have before, we'll be able to continue to bring the relevance she's looking for. And when you think about our growing store base, we continue to see our share opportunity very, very optimistically. And we would expect us to continue to take it from the same donors we've seen in previous." ] }, { "name": "Corey Tarlowe", "speech": [ "Great. And then just to follow up for John, so it sounds like there's a couple of moving parts in terms of the gross margin, specifically as you look out over this year. And I recognize it's a first half-second half story, but could you maybe stack rank the drivers that you anticipate from maybe most important to least important to be affecting the gross margin line this year? I recognize mix shift is also a fairly prevailing factor in this. So, how does that also factor into how you're thinking about the consumables mix shift as we look ahead for the next 12 months?" ] }, { "name": "John Garratt", "speech": [ "Yeah. You know, as you think of the headwinds and the tailwinds, I'll start with the headwinds, but then go to what we see as a pretty sizable tailwind -- tailwinds. You know, the ones we talked about were, one, sales mix. You know, that pressure continuing.", "So, we've assumed that. We've also assumed shrink and damages as we move through the first half, in particular. And then increased markdowns. And that's really just getting back to rates more in line with historical norms.", "You know, I wouldn't say, of these, one really stands out significantly over the others, but they all, you know, contribute as headwinds. And then again, the shrink and damage is more of a first half pressure than back half as we see it now. Damages, in particular, a Q1 pressure as you look at the cadence of the year. You know, we mentioned the LIFO impact, and we do think that will provide some benefit.", "But I wouldn't flow the whole thing through because you had the pricing that went with that last year. But then as you think of the tailwinds, you know, the biggest one I would point to and the biggest overall driver I would point to here is the supply chain. You know, we expect a pretty material benefit from lapping the increased supply chain expenses in the second half of last year, as well as, you know, the sizable benefits from greater distribution center capacity and productivity, lower carrier rates, as well as the benefit of expanding our private tractor fleet, which we're growing from 1,600 tractors at the end of last year to over 2,000 by the end of next year. And again, as we make those conversions, it's about a 20% savings, in addition to other benefits that we expect as we optimize DG Fresh, NCI, and then, you know, expect a pretty sizable benefit from DG Media Network, to name a few.", "And then obviously, you know, we intend to leverage our scale as we have as a limited SKU operator, and that's another lever among the other levers we've mentioned in the past. So, again, as you look at the guide for the year, we gave the top line and the bottom line. We didn't give gross margin, but I think it implies pretty healthy operating profit growth and rates overall despite pretty sizable investment in the business." ] }, { "name": "Corey Tarlowe", "speech": [ "It's really helpful. Thank you so much and best of luck." ] }, { "name": "Operator", "speech": [ "We have reached the end of the question-and-answer session. I'd now like to turn the call over to Jeff Owen for closing comments." ] }, { "name": "Jeff Owen", "speech": [ "I'd like to thank you all for your questions and your interest in Dollar General. And while our operating environment is dynamic for our customer and business, we are staying focused on the things that we can control, which is continued innovation and execution in our business. If I could summarize our discussion today, I'd like to leave you with these three things. First, we have a powerful growth strategy.", "Second, we are investing in the future. And third, we are doing this while also planning to deliver strong results in 2023. We're excited about this business, and I am confident we are well-positioned to serve our customers and also create value for our shareholders in the year ahead. Thank you for your listening today, and I hope you have a great day." ] }, { "name": "Operator", "speech": [ "[Operator signoff]" ] } ]
DG
2020-12-03
[ { "description": "Vice President of Investor Relations and Corporate Strategy", "name": "Donny Lau", "position": "Executive" }, { "description": "Chief Executive Officer", "name": "Todd Vasos", "position": "Executive" }, { "description": "Executive Vice President and Chief Financial Officer", "name": "John Garratt", "position": "Executive" }, { "description": "Chief Operating Officer", "name": "Jeff Owen", "position": "Executive" }, { "description": "J.P. Morgan -- Analyst", "name": "Matthew Boss", "position": "Analyst" }, { "description": "Barclays -- Analyst", "name": "Karen Short", "position": "Analyst" }, { "description": "Morgan Stanley -- Analyst", "name": "Simeon Gutman", "position": "Analyst" }, { "description": "UBS -- Analyst", "name": "Michael Lasser", "position": "Analyst" }, { "description": "Citigroup -- Analyst", "name": "Paul Lejuez", "position": "Analyst" }, { "description": "Oppenheimer -- Analyst", "name": "Rupesh Parikh", "position": "Analyst" } ]
[ { "name": "Operator", "speech": [ "Good morning, my name is Rob and I'll be your conference operator today. At this time, I'd like to welcome everyone to the Dollar General Third Quarter 2020 Earnings Call. Today is Thursday, December 3rd, 2020. [Operator Instructions] Instructions for listening to the replay of this call are available in the Company's earnings press release issued this morning.", "Now, I'd like to turn the conference over to Mr. Donny Lau, Vice President of Investor Relations and Corporate Strategy. Mr. Lau, you may now begin." ] }, { "name": "Donny Lau", "speech": [ "Thank you, Rob and good morning, everyone. On the call with me today are Todd Vasos, our CEO; Jeff Owen, our COO; and John Garratt, our CFO. Our earnings release issued today can be found on our website at investor.dollargeneral.com under News & Events. Let me caution you that today's comments include forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. Such as statements about our strategy, plans, including but not limited to our 2021 real estate outlook, our initiatives, goals, priorities, opportunities, investment, guidance, expectations or beliefs about future matters, including but not limited to, beliefs about COVID-19's future impact on the economy, our business and our customer and other statements that are not limited to historical fact.", "These statements are subject to risk and uncertainties that could cause actual results to differ materially from our expectations and projections, including but not limited to those identified in our earnings release issued this morning under risk factors in our 2019 Form 10-K filed on March 19th, 2020 and in our Form 10-Q filed this morning and in the comments that are made on this call. You should not unduly rely on forward-looking statements, which speak only as of today's date.", "Dollar General disclaims any obligation to update or revise any information discussed in this call, unless required by law. We also may reference certain financial measures that have not been derived in accordance with GAAP. Reconciliations to the most comparable GAAP measures are included in this morning's earnings release, which as I mentioned is posted on investor.dollargeneral.com under News & Events. At the end of our prepared remarks, we will open the call up for your questions. Please limit your questions to one and one follow-up question if necessary.", "Now, it's my pleasure to turn the call over to Todd." ] }, { "name": "Todd Vasos", "speech": [ "Thank you, Donny and welcome to everyone joining our call. I'd like to start by thanking our associates for their tireless work over the past several months, in helping our customers and communities impacted by the COVID-19 pandemic. Despite continued significant uncertainty in the operating environment, our team members have been unwavering in their commitment to fulfilling our mission of serving others, by providing affordable, convenient and close to home access to everyday essentials, at a time when our customers need them most. I could not be more proud of their efforts. As always, the health and safety of our employees and customer continues to be our top priority. We continue to closely monitor CDC and other governmental guidelines regarding COVID-19 and are evaluating and adapting our safety protocols as that guidance evolves.", "As one of America's essential retailers, we remain committed to being part of the solution during these difficult times. And we believe we are well positioned to continue supporting our customers through our unique combination of value and convenience, including our expansive network of more than 17,000 stores located within 5 miles of approximately 75% of the US population. At the same time, we remain focused on advancing our operating priorities and strategic initiatives, as we continue to meet the evolving needs of our customers and further position Dollar General for a long-term sustainable growth. To that end, and from a position of strength, I'm excited to share an update on some of our more recent plans.", "First, as you saw in our release, we plan to further accelerate our pace of new store openings and remodels in 2021. In total, we expect to execute 2,900 real estate projects next year, as we continue to lay and strengthen the foundation for future growth. As previously announced, we recently introduced our newest store concept pOpshelf, further building on our proven track record of store format innovation. We opened our first two locations during the quarter and while still early, we are encouraged by their initial results. Finally, one of our core values is representing and respecting the dignity and differences of others. Building on this core value, along with our commitment to diversity and inclusion, we recently updated our fourth operating priority to better capture and express our intent. We will discuss each of these updates in more detail later in the call.", "But first, let's recap some of the results for the third quarter. The quarter was once again highlighted by exceptional growth on both the top and bottom lines. We're particularly pleased that for the quarter, our three non-consumable categories once again delivered a combined sales increase, well in excess of our consumable business. Of note, this represents our 10th consecutive quarter of year-over-year comp sales growth in our non-consumable business, which speaks to the strong and sustained momentum in these product categories. From a monthly cadence perspective, comp sales for Q3 periods range from the low double digits to mid-teens with the best performance in August followed by modest moderation as we move through the quarter.", "Overall, third quarter net sales increased 17.3% to $8.2 billion, driven by comp sales growth of 12.2%. These results include significant growth in average basket size, partially offset by a decline in customer traffic, as we believe customers continue to consolidate shopping trips in an effort to limit social contact. Once again this quarter, we increased our market share in highly consumable product sales, as measured by syndicated data, driven by double-digit increases in both units and dollars.", "Importantly, our data suggests an increase in new customers this quarter, as compared to Q3 of 2019. These new customers skew younger, higher income and more ethnically diverse, further underscoring the broadening appeal of our value and convenience proposition. We are also encouraged by the repurchase rates of new customers and are working hard to retain them, with more targeted marketing and continued execution of our key initiatives.", "We're particularly pleased with the -- and how we delivered significant operating margin expansion, which contributed to third quarter diluted EPS of $2.31, an increase of 63% over the prior year. Collectively, our Q3 results reflect strong and disciplined execution across many fronts and further validate our belief that we are pursuing the right strategies to create meaningful long-term shareholder value. We operate in one of the most attractive sectors in retail and with our unique combination of value and convenience, further enhanced through our initiatives, we believe we are well positioned to successfully navigate the current environment and emerge even stronger than before.", "With that, I'll now turn the call over to John." ] }, { "name": "John Garratt", "speech": [ "Thank you, Todd and good morning, everyone. Now that Todd has taken you through a few highlights of the quarter, let me take you through some of its important financial details. Unless I specifically note otherwise, all comparisons are year-over-year and all references to EPS refer to diluted earnings per share.", "As Todd already discussed sales, I will start with gross profit, which was positively impacted in the quarter by meaningful increase in sales including the impact of COVID-19. Gross profit as a percentage of sales was 31.3% in the third quarter, an increase of 178 basis points and represents our sixth consecutive quarter of year-over-year gross margin rate expansion. This increase was primarily attributable to a reduction markdowns as a percentage of sales, higher initial markups on inventory purchases, a greater proportion of sales coming from non-consumables categories and a reduction in shrink as a percentage of sales.", "These factors were partially offset by increased distribution and transportation costs, which were driven by increased volume and our decision to incur employee appreciation bonus expense. SG&A as a percentage of sales was 21.9%, a decrease of 62 basis points. Although we incurred incremental costs related to COVID-19, these costs were more than offset by the significant increase in sales. Expenses that were lower as a percentage of sales this quarter include, occupancy costs, utilities, retail labor, depreciation and amortization, repairs and maintenance and employee benefits. These items were partially offset by increases in incentive compensation expense and hurricane-related expenses.", "Moving down the income statement, operating profit for the third quarter increased 57.3% to $773 million, compared to $491 million in the third quarter of 2019. As a percentage of sales, operating profit was 9.4%, an increase of 240 basis points. Operating profit in the third quarter was positively impacted by COVID-19, primarily through higher sales. The benefit from higher sales was partially offset by approximately $38 million of incremental investments that we made in response to the pandemic, including additional measures taken to further protect our employees and customers, and approximately $25 million in appreciation bonuses for eligible frontline employees.", "Year-to-date to the third quarter, we have invested approximately $153 million in COVID-19 related expenses including about $99 million in appreciation bonuses for our frontline employees. Our effective tax rate for the quarter was 21.6% and compares to 21.7% in the third quarter last year. Finally, as Todd noted earlier, EPS for the third quarter increased 62.7% to $2.31.", "Turning now to our balance sheet and cash flow, which remained strong and provide us the financial flexibility to further support our customers and employees during these unprecedented times, while continuing to invest for the long term. We finished the quarter with $2.2 billion of cash and cash equivalents, a decrease of $760 million compared to Q2 and an increase of $1.9 billion over the prior year. Merchandise inventories were $5 billion at the end of the third quarter, an increase of 11.8% overall and 5.9% on a per store basis. While out of stocks remain higher than normal for certain high demand products, we continue to make good progress with improving our in-stock position and are pleased with our overall inventory levels.", "Year-to-date to Q3, we generated significant cash flow from operations totaling $3.4 billion, an increase of 103.7%. Total capital expenditures through the first three quarters were $698 million and included our planned investments in remodels and relocations, new stores and spending related to our strategic initiatives. During the quarter, we repurchased 4.4 million shares of our common stock for $902 million and paid a quarterly dividend of $0.36 per common share outstanding at a total cost of $88 million. At the end of Q3, the remaining share repurchase authorization was $1.6 billion.", "Our capital allocation priorities continue to serve us well and remain unchanged. Our first priority is investing in high return growth opportunities, including new store expansion and our strategic initiatives. We also remain committed to returning significant cash to shareholders through anticipated share repurchases and quarterly dividend payments, all while maintaining our current investment grade credit rating and managing to a leverage ratio of approximately 3 times adjusted debt-to-EBITDAR.", "Moving to an update on our financial outlook for fiscal 2020. We continue to operate in a time of significant uncertainty regarding the severity and duration of the COVID-19 pandemic, including its impact on the economy, consumer behavior and our business. As a result, we are not providing guidance for fiscal 2020 sales or EPS at this time and are unlikely to resume issuing guidance to the extent such uncertainties persist. With regards to share repurchases, capital spending and real estate projects, our outlook for the year remains unchanged from what we stated in our Q2 earnings release on August 27, 2020.", "Let me now provide some context as to what we expect in the fourth quarter. Given the unusual situation, I will elaborate on our comp sales trends thus far in Q4. From the end of Q3 through December 1, comp sales accelerated increasing approximately 14% during this timeframe, reflecting increased demand in our consumables business. And while we remain cautious in our sales outlook, we are encouraged with our sales trends, particularly as we move further past government stimulus payments and the expiration of enhanced unemployment benefits under the CARES Act. That said, significant uncertainty still exists concerning the duration of the positive sales environment, including external factors related to the ongoing health crisis and their potential impact on our business. Beyond these macro factors, there are number of more specific considerations as it relates to the fourth quarter. First, we anticipate higher transportation and distribution costs in Q4. Like other retailers, our business is seeing the effect of higher transportation costs due to a tight carrier market, as a result of driver shortages and a greater demand for services at third-party carriers.", "In addition, we are in the process of building, expanding or opening a number of distribution centers across our dry and DG Fresh networks. And while we expect, these investments will enable us to drive even greater efficiencies going forward and further support future growth, these investments will pressure gross margin rates in Q4. Also please keep in mind that the fourth quarter represents our most challenging lap of the year from a gross margin perspective filing 60 basis points of rate improvement in Q4 2019. With regards to our strategic initiatives, we continue to anticipate they will positively contribute to operating margin over time as the benefit to gross margin continues to scale and outpace the associated expense with both NCI and DG Fresh on pace to be accretive to operating margin in 2020. However, our investment in these initiatives will pressure SG&A rates in the fourth quarter, as we further accelerate their rollouts.", "Finally, we expect to make additional investments in the fourth quarter as a result of COVID-19, including up to $75 million in employee appreciation bonuses, which includes our recent announcement to award approximately $50 million in additional bonuses, bringing our full year investment in appreciation bonuses to approximately $173 million, as well as continued investments in health and safety measures.", "In closing, we are very proud of the team's execution and service resulting in another quarter of exceptional results. As always, we continue to be disciplined in how we manage expenses and capital with the goal of delivering consistent, strong financial performance, while strategically investing for the long term. We remain confident in our business model and our ongoing financial priorities to drive profitable same-store sales growth, healthy new store returns, strong free cash flow and long-term shareholder value.", "With that, I will turn the call over to Jeff." ] }, { "name": "Jeff Owen", "speech": [ "Thank you, John. Let me take the next few minutes to update you on our four operating priorities. Our first operating priority is driving profitable sales growth. The team once again did a fantastic job in Q3, executing against a portfolio of growth initiatives. Let me highlight some of our recent efforts. Starting with our cooler door expansion program which continues to be our most impactful merchandising initiative. During the first three quarters, we added approximately 49,000 cooler doors across our store base. In total, we expect to install more than 60,000 cooler doors this year. The majority of which will be in our higher capacity coolers, creating additional opportunities to drive higher on-shelf availability and deliver an even wider product selection.", "Turning now to private brands, which remain a priority, as we look to drive overall category awareness and even greater customer adoption through rebranding, repositioning and expansion of select brands as well as the introduction of new product lines. We're very pleased with the continued progress across these fronts, including the successful rebranding of six product lines and the introduction of two new brands so far this year. And we're excited about the continued momentum we're seeing across the portfolio.", "Finally, a quick update on our FedEx relationship. During the quarter, we completed our initial rollout of this convenient customer package pick-up and drop-off service, which is now available in more than 8,500 stores. We're very pleased with the reception this offering is receiving from our customers and we continue to explore innovative opportunities to further leverage our unique real estate footprint to provide even more solutions for our customers in convenient and nearby locations. Beyond these sales driving initiatives, enhancing gross margin remains a key area of focus for us. In addition to the gross margin benefits associated with our NCI, DG Fresh and private brand efforts, foreign sourcing remains an important gross margin opportunity for us. The team once again did a great job during the quarter, working with our supply partners to ensure product availability.", "Looking ahead, we continue to pursue opportunities to increase our foreign sourcing penetration, while further diversifying our countries of origin. We also continue to pursue supply chain efficiencies including the continued expansion of our private fleet, the opening of additional DG Fresh facilities and the recent purchase of our future Walton, Kentucky dry distribution center, which should contribute to a further reduction in stem miles beginning early next year.", "In addition, we recently began construction on our first ever ground up combination DG Fresh and dry distribution center in Blair, Nebraska. We anticipate this facility will be completed in early 2022, enabling us to drive even greater efficiencies as we move ahead. The team is also executing against additional opportunities to enhance gross margin, including further improvements in shrink, as we continue to build on our success with electronic article surveillance.", "Our second priority is capturing growth opportunities. Our proven high-return low-risk real estate model continues to be a core strength of our business. As previously announced, we recently celebrated a significant milestone with the opening of our 17,000th store. This is a testament to the fantastic work of our best-in-class real estate team as we continue to expand our footprint and enhance our ability to serve even more customers. As a reminder, our real estate model continues to focus on five metrics that have served us well for many years in evaluating new real estate opportunities. These metrics include, new store productivity, actual sales performance, average returns, cannibalization and the payback period. Of note, we continue to see strong performance across these metrics.", "For 2020, we remain on track to open 1,000 new stores, remodel 1,670 stores and relocate 110 stores. Through the first three quarters, we opened 780 new stores, remodeled 1,425 stores, including more than 1,000 in the higher cooler count, DGTP or DGP formats, and we relocated 76 stores. We also added produce in more than 140 stores, bringing the total number of stores which carry produce to more than 1,000. As Todd noted for fiscal 2021, we plan to execute 2,900 real estate projects in total including 1,050 new stores, 1,750 remodels and 100 store relocations.", "Additionally, we plan to add produce in approximately 600 stores. Notably, we expect approximately 50% of our new unit openings and about 75% of our remodels to be in the DGTP or DGP formats. The remainder of our new store openings and remodels will primarily be in the traditional format with higher capacity coolers. Our plans also include having approximately 30 stores in our new pOpshelf concept, which Todd will discuss in more detail by the end of fiscal 2021 up from two locations today. Overall, our real estate pipeline remains extremely robust and we are excited about the significant growth opportunities ahead.", "Our third operating priority is to leverage and reinforce our position as a low-cost operator. Over the years, we've established a clear and defined process to control spending, which governs our disciplined approach to spending decisions. This zero based budgeting approach, internally branded as Save to Serve keeps the customer at the center of all we do, while reinforcing our cost control mindset. We continue to build on our success with Fast Track, which Todd will discuss in more detail later. As a result of our efforts to-date, our store associates are able to better serve our customers during this period of heightened demand, as evidenced by our recent customer survey results where we continue to see overall satisfaction scores at all time highs. Our underlying principles are to keep the business simple, but move quickly to capture growth opportunities, while controlling expenses and always seeking to be a low-cost operator.", "We have three business operating priorities. But at the heart of them is our foundational fourth operating priority. This priority is anchored in our people and it's truly foundational to everything we do at Dollar General. Our fourth operating priority is investing in our diverse teams through development, empowerment and inclusion. As Todd noted, this updated language more fully expresses our values and core beliefs and more closely aligns with the investments we continue to make in the development of our people. Importantly, we believe these investments continue to yield positive results across our store base, as evidenced by continued, record low store manager turnover, record staffing levels, healthy applicant flows and a robust internal promotion pipeline.", "As a growing retailer, we also continue to create new jobs and opportunities for career advancement. In fact, more than 12,000 of our current store managers are internal promotes and we continue to innovate on the development opportunities we can offer our teams. We believe, the opportunity to start and develop a career with a growing and purpose-driven Company is a unique competitive advantage and remains our greatest currency in attracting and retaining talent.", "We also recently completed our annual community giving campaign, where employees across the organization come together to raise funds for a variety of important causes. I was once again humbled by the generosity and compassion of our people. This event truly embodies the Serving Others culture that is so deeply embedded at Dollar General.", "In summary, we are executing well from a position of strength and our operating priorities continue to provide a strong foundation from which we can drive continued growth in the years ahead.", "With that, I will turn the call back over to Todd." ] }, { "name": "Todd Vasos", "speech": [ "Thank you, Jeff. I'm proud of the great progress the team has made in advancing our strategic initiatives. Let me take you through some of the most recent highlights. Starting with our non-consumable initiative or NCI. As a reminder, NCI consist of a new and expanded product offering in key non-consumable categories. The NCI offering was available in 5,200 stores at the end of Q3, and given our strong execution to date, we now expect to expand the offering to more than 5,600 stores by the end of 2020. Including approximately 400 stores in our NCI lite [Phonetic] version. This compares to our prior expectation of more than 5,400 stores at year end.", "We're especially pleased with the strong sales and margin performance our NCI stores once again delivered in the quarter. We also continue to benefit from incorporating select NCI products and planograms throughout the broader store base. And we are pleased with the performance of our lite stores which incorporates a vast majority of the NCI assortment, but through a more streamlined approach.", "As noted earlier, we are also excited about the recent introduction of pOpshelf and the opening of our first two locations, which further builds on our success and learnings with NCI. pOpshelf aims to engage customers by offering a fun, affordable and differentiated treasure hunt experience, delivered through, first, continually refresh merchandise, primarily in targeted non-consumable product categories. Second, a differentiated in-store experience, including impactful displays of our offering designed to create a highly visual, fun and easy shopping experience. And third, exceptional value with approximately 95% of our items priced at $5 or less.", "Importantly, while pOpshelf delivers many of Dollar General's core strengths, including customer insights, merchandise innovation, operational excellence, digital capabilities and real estate expertise, it is specifically tailored to a different shop indication. We'll primarily be located in suburban communities and initially targets a higher income customer, potentially unlocking additional and incremental growth opportunities going forward. We're proud of all of the incredible work the team has done in standing up this concept and with the initial work now behind us, we look forward to welcoming additional customers to pOpshelf, as we move forward, our goal of approximately 30 stores by the end of 2021.", "Turning now to DG Fresh, which is a strategic multi-phase shift to self-distribution of frozen and refrigerated goods. As a reminder, the primary objective of DG Fresh is to reduce product cost on our frozen and refrigerated items, by removing the markup paid to third-party distributors, thereby enhancing gross margin. And we continue to be very pleased with the product cost savings we are seeing. In fact, DG Fresh continues to be the largest contributor to gross margin benefit we are realizing from higher initial mark-ups on inventory purchases. Importantly, we expect this benefit to grow as we continue to scale this transformational initiative.", "Another important goal of DG Fresh is to increase sales in these categories. We're pleased with the success we are already seeing on this front, driven by higher overall in-stock levels and the introduction of more than 55 additional items, including both national and private brands in select stores being serviced by DG Fresh.", "And while produce is not included in our initial rollout plans, we plan -- we plan and continue to believe DG Fresh could provide a potential path forward to expanding our produce offering to even more stores in the future. In total, we were self-distributing to more than 13,000 stores from eight DG Fresh facilities at the end of Q3. We expect to capture benefits from this initiative in more than 14,000 stores from 10 facilities by the end of this year and are well on track to complete our initial rollout across the chain in 2021.", "Next, our digital initiative, where our strategy consist of building a digital ecosystem specifically tailored to provide our customers with an even more convenient, frictionless and personalized shopping experience. In an environment where customers continue to seek safe, familiar and convenient experiences, we believe our unique footprint combined with our digital assets, provides a distinct competitive advantage.", "More specifically, I'm pleased to note that during the quarter, we expanded DG Pickup, our buy online, pickup in the store offering to nearly 17,000 stores compared to more than 2,500 stores at the end of Q2, providing another convenient access point for those seeking a more contactless customer experience. In addition to DG Pickup, our plans include further expansion of DG GO checkout, as we look to make this feature available in select stores that includes self checkout further enhancing our convenience proposition. By leading our channel in digital tools and experiences, we believe we are well positioned to drive more in-store traffic, grow basket size and offer even greater convenience to new and existing customers.", "Moving now to Fast Track, where our goals, including increasing labor productivity in our stores, enhancing customer convenience and further improving on-shelf availability. We continue to be pleased with the labor productivity improvements we are seeing as a result of our efforts around rolltainer optimization and even more shelf-ready packaging. The second component of Fast Track is self checkout, which provides customers with another flexible and convenient checkout solution, while also driving greater efficiencies for our store associates. During the quarter, we accelerated the rollout of self checkout to more than 900 stores, compared to approximately 400 stores at the end of Q2, with plans for further expansion as we move forward.", "And while still early, we are pleased with the initial results, including our customer adoption rates as well as positive feedback from both customers and employees. Overall, we remain focused on controlling what we can control, while taking actions, including the continued execution of our key initiatives to further differentiate and distance Dollar General from the rest of the discount retail landscape. As a mature retailer in growth mode, we are also laying the groundwork for future initiatives and continue to believe we are pursuing the right strategies to capture additional growth opportunities in a rapidly changing retail landscape.", "In closing, we are very proud of the team's performance and our results through the first three quarters of 2020, which further demonstrate that our unique combination of value and convenience continues to resonate with our customers and positions us well going forward. As we are in the midst of a busy and extended holiday season, I want to offer my sincere thanks to each of our more than 157,000 employees across the Company for their hard work and dedication to fulfilling our mission of Serving Others.", "With that, operator, we'd now like to open the lines for questions." ] } ]
[ { "name": "Operator", "speech": [ "Thank you. We'll now be conducting a question-and-answer session. [Operator Instructions] Thank you. And our first question comes from the line of Matthew Boss with J.P. Morgan." ] }, { "name": "Matthew Boss", "speech": [ "Great. And congrats on another nice quarter." ] }, { "name": "Todd Vasos", "speech": [ "Thank you, Matt." ] }, { "name": "Matthew Boss", "speech": [ "Todd, so clearly, the Company is hitting on all cylinders today, what do you think DG takes from this pandemic, following a vaccine, in any categories do you believe the Company is taking multi-year market share. What are you -- what are you seeing from new customer acquisition, just kind of thinking about the after versus obviously the clear momentum that you're seeing today?" ] }, { "name": "Todd Vasos", "speech": [ "Thank you, Matt. That's a great question, because here at Dollar General, we're always focused on that long-term, right. And we believe that through the initiatives that we have in place, including DG Fresh, including our digital assets and Fast Track, including our cooler initiatives that we continue to benefit from and feel that we're still in the early innings of the ballgame on. We feel that those will serve us very well post pandemic and let's hope that post pandemic comes sooner than later. But, as we continue to look forward, we also are encouraged on some of the early initiatives we have around pOpshelf and that concept. because we believe that there is a fair amount of white space out there for a discretionary format like pOpshelf. And again, I think we're encouraged as we look at the first two stores on what that customer response has been.", "On the customer acquisition side of the of the equation, we're very pleased with the amount of new customers that we've seen and what really encourages us is, is that's a little different customer, one that is very adjacent to our core customer, but as I said SKUs a little younger, more digitally savvy and a little bit more ethnically diverse, and that really gives us the opportunity to speak to her a little differently and I'm happy to say that toward the end of Q3, we actually launched our new customer acquisition platform through social media and a few other means, that we won't talk about exactly, I don't want to give away too much. But suffice it to say, we're happy with some of the early response that we've even seen from that. So more to come. We're doing everything that we believe is appropriate right now, while we're in the midst of the pandemic to retain and keep those customers as we move into 2021." ] }, { "name": "Matthew Boss", "speech": [ "Great. And then a follow-up maybe for John. On gross margin, if I look at expansion in the last two quarters, you've shown 150 basis points plus relative to multi-year second and third quarter historical levels. So, maybe could you just elaborate on the fourth quarter factors that you mentioned. And is the point that we should expect moderation in gross margin expansion or do you actually see these headwinds, outpacing the tailwind?" ] }, { "name": "John Garratt", "speech": [ "Great question, Matt. First, I'll start by saying, we're very pleased with the gross margin expansion we've seen with six consecutive quarters of year-over-year expansion, as you mentioned 178 this quarter. I'll maybe start by talking about the drivers this quarter and that can help inform as we look ahead. I think it's important to note that the initiatives like DG Fresh and NCI are really contributing and impactful to the three biggest drivers we saw this quarter.", "First, lower markdowns. With the strong sell-through on non-consumables, we didn't have to take as much clearance markdowns, as well as we've been talking about for a number of quarters now, we're just continue to be more and more targeted on promotional activity and have less promotional activity necessary. Secondly, when you look at higher initial markups, that was primarily driven by DG Fresh. We continue to see that same substantial cost takeout and that only grows as we scale. And then third, the mix benefit. Again the key driver there was non-consumables. Obviously there has been a shift in wallet. But I would say that we really positioned ourselves very well with what we've done to that part of the box, with the impact of NCI and spreading the learnings from that as evidenced by the 10 consecutive quarters of non-comps.", "In addition to that, we did have lower shrink which we were pleased to see as a percent of sales. Now partly offsetting that was higher distribution and transportation costs. So, as we look ahead, as you alluded to in Q4, we're not providing specific guidance given the uncertainty of the environment. But I think factors to consider, as you look ahead, consider, first that we expect -- anticipate higher transportation and distribution costs in Q4 to continue with the tight carrier market and the DC start-ups, also Q2 and Q3, it certainly was enhanced by the mix shift into non-consumables which it's hard to say but when, but it's likely to moderate somewhat over time from those heightened levels.", "And then I think in Q4, it's also important to note that it is the most challenging lap of the year, as we mentioned, as we're lapping 60 basis points of gross margin expansion in Q4. So, while there are some uncertainties and some near term headwinds, we continue to believe there's opportunities to increase our gross margin and operating margin over time. We continue to see a growing benefit from initiatives like DG Fresh and NCI as I mentioned, and those will only grow as they scale. We continue to see opportunities in the levers that we talked about, category management, private brand, penetration, foreign sourcing penetration, supply chain efficiencies and shrink. And while we always reserve the right to invest in price, where needed, where appropriate, we're currently in a great spot on price and don't see the need to make any investments there right now. So believe we're making the right investments and have the levers to continue to improve gross margins and operating margins over the long term." ] }, { "name": "Matthew Boss", "speech": [ "Great color. Congrats again on the performance." ] }, { "name": "Todd Vasos", "speech": [ "Thank you." ] }, { "name": "Operator", "speech": [ "The next question is from the line of Karen Short with Barclays. Please proceed with your questions." ] }, { "name": "Karen Short", "speech": [ "Hi, thanks very much and congratulations from me as well. Thinking, and I hate to focus on 2021, but I think that's what everyone is kind of concerned about, as it relates to the tough compares. And so I wanted to ask a couple of questions. I appreciate there is a lot of unknowns, but is there any way to kind of provide a framework with respect to puts and takes? And I would ask that in the context of, while I understand you definitely can't predict sales, how are you thinking about freight into 2021 year-over-year and then how are you thinking about wages specifically, because you outlined, I guess $173 million in bonuses, but you also probably will have around $53 million in COVID expenses. But once you've offered these bonuses, how do you think about taking them away? Maybe a little color on both of those would be great." ] }, { "name": "Todd Vasos", "speech": [ "Karen, let me start and then I'll have John chime in as well here. As we look out to 2021, what, again, we're really squarely focused on is, controlling what we can control, and that is really in our key initiatives, ensuring that we execute at a high level, retain as many of these new customers as we possibly can, through the means that we have talked about. And also again, with our key initiatives being a nice backdrop to the new consumer, she can do a much fuller shop inside of our store than she ever has been able to do in the past.", "As you start to think about 2021 and the labor side, to your point, wages, again, we don't have a crystal ball, so, we don't know exactly what the pandemic is going to look like in the first part of the year or how fast this vaccine will be given. We've got some hints obviously from the CDC and through the government. But the one thing I think just to take away is that, we are going to do what's right by our employees first, right. And so, we'll continue to watch that, we'll continue to keep them safe through this pandemic until a vaccine is widely available and if we do need to pay additional bonuses to reward our frontline workers for taking care of the customers, then we'll do that. But again, I think it's too early to tell in Q1 exactly what's going to happen at this point." ] }, { "name": "John Garratt", "speech": [ "Yeah, I think the only thing I'll add to that, as you mentioned, it's challenging in this uncertain environment, given the fluid nature of the pandemic and the impact that can have on the economy and the consumer to say, what sales look like, but to Todd's point, what we're focused on is controlling what we can control and that's accelerating virtually all our strategic initiatives, which we feel great about, and are really pleased with what we're seeing them contribute to the top line and the bottom line. And again, those will continue to have an increased impact as we scale those. And so we're focused on that as well as Todd alluded to, doing whatever we can to take care of those customers. Those new customers trading in, to keep them coming back as they have indicated they intend to and also keeping those baskets bigger and I think what we've done to make the box more relevant than ever, providing that fuller fill-in trip positions us well. So, focused on controlling what we can control. In terms of puts and takes, we feel great about, I'll tell you, the fundamentals of the business, the strength of the business model, the initiatives and having a model that performs well in all cycles of the economy.", "In terms of a couple of specific things you mentioned, you mentioned freight and it remains to be seen, I think a big part of freight is the capacity constraint right now, and the heightened volume. So it remains to be seen, that's something that this time of year, with the holiday seasons, it's usually at its peak and certainly all the volume is straining that now. Hopefully that is something that would normalize over time and certainly we have a lot of mitigating efforts to go after that, in terms of further scaling our private fleet, continuing to expand and diversify our carrier base, and then ongoing efforts around stem mile reduction, load optimization and DC productivity efforts.", "And then the other thing I pointed to in Q4 around gross margin is, we have over the last two quarters, gotten additional benefit from that mix shift into non-consumables. We feel fantastic about the non-consumables business as we continue to scale NCI, as we continue to import the best ideas from that to the rest of the chain. So we feel great about that piece of the business, but it remains to be seen if you can continue to get that kind of mix shift in with imagine that that would over time moderate somewhat. And so I think that's just some of the considerations for next year, but I feel fantastic about the fundamentals of the business." ] }, { "name": "Karen Short", "speech": [ "Okay. If I could just ask one more, is there any pattern or anything you could point to, on performance of rural versus urban stores and then in the quarter, but then also with the acceleration that you saw into the quarter-to-date, any pattern to point out there other than consumables accelerating in 4Q?" ] }, { "name": "Jeff Owen", "speech": [ "Hi Karen, this is Jeff. In terms of the rural versus urban, the nice thing about our model is, consistency really across the store base. But specifically to rural, we did see our rural stores perform well and outperformed our urban stores. So, we're pleased with that performance and continue to be real pleased with our remodel program, our new store development program and the fact that, we're within 75% -- 75% of the US population is within 5 miles of our store network, so that unique footprint continues to serve us well.", "You mentioned about the trends in terms of the sales piece, we did mention as John said earlier in our prepared remarks around the sales and so, we're pleased, we're ready for the fourth quarter, I can tell you that, in terms of the team's ability to set holiday, we've made great improvements in our in-stock position on the inventory side, so we are certainly ready to serve that customer and excited about the remaining parts of the fourth quarter." ] }, { "name": "Karen Short", "speech": [ "Great. Thank you." ] }, { "name": "Operator", "speech": [ "The next question is from the line of Simeon Gutman with Morgan Stanley. Please proceed with your questions." ] }, { "name": "Simeon Gutman", "speech": [ "Hey, everyone. Good morning. A little bit along the lines of Karen's question, maybe unanswerable around 2021. I want to ask through the lens of the top line. And in the past, you've been fairly deliberate around some of your sales drivers, like bottoms up, new store remodel, sales initiatives, I think we've talked about our recession uplift. And all of this is on top of, I think normally some inflation, are you still thinking about '21 in this way? Can you share your thoughts on any of these items and then I don't know how you think about stimulus, if that's part of a sales plan or not for next year?" ] }, { "name": "Todd Vasos", "speech": [ "Yeah, Simeon. As we look at the sales number for '21, again way early, we're not giving any guidance here yet by any means. But I would tell you that a lot of the long-term algorithms are still well intact. Our new store algorithm is still very strong. As you saw, we are going to be opening more stores next year at the same -- an accelerated pace. And I think that should show you that we're very, very pleased with our store performance, our new store performance. And quite frankly, our remodel program accelerating next year is also a great sign that we're seeing tremendous value and our consumers are seeing tremendous value coming out of those remodels.", "So all of the fundamentals around the top line, including our initiative drivers are well intact. Stimulus, we'll have to wait and see, we don't want to guess what may or may not come. But any stimulus that does come would be a tailwind for us and I'm sure many retailers. But we'll watch and see what happens there, we're not betting on that right now, until we see it. What we are big on here, and I'll keep saying it is controlling what we can control, and that is driving that top line through our long-term strategic initiatives. And I think they have served us well over the many years and they are set up to serve us well for many years to come." ] }, { "name": "Simeon Gutman", "speech": [ "Thanks, Todd. My follow-up, it's related to margin at the second call out in the release, the initial higher markups. I think we presume that's the DG Fresh, and Todd, I think in your prepared comments you said it's building and that's my question. I wanted to ask if you could talk about the rate of, I guess, sequential momentum there, because I think it was initially called out on last year's fourth quarter and so trying to think about how that ramps into '21, is it ratably or is there some step change that we should expect from that item alone next year?" ] }, { "name": "John Garratt", "speech": [ "Yeah, I think the way to think about that is, and you're exactly right, that that is the primary driver of that initial markup benefit that we've been talking about for a number of quarters now. It's already accretive to the business and to your point, it will grow over time, not only linearly as you add more stores, but you have economies of scale, as you serve more stores from existing DCs, as you get the efficiencies of operating that, the team, it's been amazing how quickly we've gotten this up and running, and gotten quite efficient at this. So, you get both benefit. So, it continues to grow as it scales, both in terms of the gross margin benefit, that substantial cost takeout.", "But then the other thing we talked about is, is the sales benefit. We are already seeing in those stores served by our self-distribution, better in-stocks, better sales and that's, we expect that to grow, that benefit to grow and then the other thing is, now we are free to improve the assortment. We had agreements before which precluded us from carrying certain competing brands and private label, this opens that up and as we mentioned, we're already adding new SKUs there. And then longer-term, it unlock, we see that as the opportunity to unlock further expansion of produce to more stores, and so, we think it's the gift that keeps on giving, both in terms of cost and margin, but also in terms of sales." ] }, { "name": "Simeon Gutman", "speech": [ "Okay. Thanks, John. And have a good rest of the fourth quarter." ] }, { "name": "Todd Vasos", "speech": [ "Thank you." ] }, { "name": "John Garratt", "speech": [ "Thank you." ] }, { "name": "Operator", "speech": [ "Our next question is from the line of Michael Lasser with UBS. Please proceed with your questions." ] }, { "name": "Michael Lasser", "speech": [ "Good morning. Thanks a lot for taking my question. So, Dollar General reported a 17.5% comp quarter year-to-date, if you had to guess, or may be put analysis behind it, how much of that 17.5% is due to market share gains? And then how much is due to other factors like wallet share gains?" ] }, { "name": "Todd Vasos", "speech": [ "Yeah, we're not going to probably, Michael, get into too much of that, due to competitive reasons obviously, but, I would tell you that we're really happy with the share gains that we've seen. Those share gains are -- continue to come from a multitude of different disciplines that are out there, drug continues to be the largest share donor that we've seen, but some new emerging trends that we've seen, and have some evidence of, is that in the discretionary areas, we're taking some share at a rapid rate as well. And in many cases, that's probably from some of the consolidation that has happened on that side of the equation recently and so, couple that with our initiatives around NCI and now pOpshelf, I believe we're well positioned as we move into '21, to capitalize and keep those customers that we're seeing there, and the share gains that we've already gotten in 2020." ] }, { "name": "Michael Lasser", "speech": [ "Got it. And then my follow-up question is around your expectations, your initial follow-ups [Phonetic] on, as there is a slower environment for consumable retail, do, presumably the promotional environment is going to increase and which you use price and all the good margin expansion potential that you have and reinvest that back in price to gain a disproportionate amount of market share in a softer consumer -- consumable environment overall." ] }, { "name": "Todd Vasos", "speech": [ "Well, we always say, we always reserve the right to lower price, to ensure that we keep those footsteps coming out of the Dollar General and more importantly service that consumer. As we sit right now though, Michael, we don't see any evidence and or need to pull a price lever, the promotional activity, the everyday price activity across retail right now, seems to be pretty tame and about the same as it has been for many quarters now. But, as we continue to watch the environment, we will do whatever we have to do to ensure that we're priced right. But I think it's also important to note, in the 12 years that I've been here, this is the best competitive positioning we've ever been, I've been in on price. The very best. So, from a position of strength, we've already lowered price, got it where it needs to be and is -- and are in very good shape as we move into 2021." ] }, { "name": "Michael Lasser", "speech": [ "Thank you very much and have a good holiday." ] }, { "name": "Todd Vasos", "speech": [ "Sure." ] }, { "name": "Operator", "speech": [ "The next question is from the line of Paul Lejuez with Citi. Please proceed with your questions." ] }, { "name": "Paul Lejuez", "speech": [ "Hey, thanks, guys. I'm curious if you could talk about some of the new customers that you've acquired earlier in the year and if there are any retention metrics that you might have, that you can share? And then second, just come back to your comments about lower markdown, just curious if that was true across both consumables and non-consumables and if you could talk about the gross margins within each of those businesses relative to themselves a year ago? Thanks." ] }, { "name": "Jeff Owen", "speech": [ "Sure, this is Jeff. First on the new customer retention metrics you asked about, as Todd earlier stated, we're real pleased with the launch of our retention strategy that we did, the tail end of the -- of Q3. So first, I got to tell you it's a little early, but one of the things here at Dollar General that we do very well is, we measure everything and we are very focused on monitoring our efforts. So, that we can pivot if we need to, or we can accelerate if we need to. And so what I can tell you is, is that initially, we're pleased with what we're seeing from the new customer retention strategy that we put in place. We think it's the right time to do that, when you think about that, not only from when we started acquiring new customers, call it six months or so ago and then also thinking about that as it relates to 2021 and our desire to try to retain as many as we can.", "So, very pleased with the surgical digital approach that we're taking. Rest assured, we are measuring that and I think it at a future date, we'll be able to talk more about that, but right now it's a little bit early. And then, I'll pass it to John on the margin question." ] }, { "name": "John Garratt", "speech": [ "Yeah, on the markdowns, it really is both. We've been talking about lower markdowns as a percent of sales for a number of quarters and the driver of that has been lower promotional activity, the team has gotten very targeted and got very sophisticated in the tools we've put in place, in the processes, to really go after what gives us the biggest bang for the buck, what really moves the needle on true incrementality of traffic and profitability. And so that's been throughout. But with the strength, growing strength of non-consumables and the better sell through there, we have then more recently seen a reduction in the amount of clearance activity required to clear those goods. So it really is both consumables and non-consumables." ] }, { "name": "Paul Lejuez", "speech": [ "Thanks, guys. Best of luck." ] }, { "name": "Todd Vasos", "speech": [ "Thank you." ] }, { "name": "Operator", "speech": [ "Our next question comes from the line of Rupesh Parikh with Oppenheimer. Please proceed with your questions." ] }, { "name": "Rupesh Parikh", "speech": [ "Good morning, thanks for taking my question. So I want to go back to launch of the pOpshelf concept. I was just curious in terms of the decision to launch the new concept right now, during the pandemic, is that driven by maybe more real estate opportunities or just any more color you can provide there?" ] }, { "name": "Todd Vasos", "speech": [ "Sure. As you can imagine, any concept of this magnitude, the work had begun long before COVID, the pandemic or any of that, probably as you really dial the clock back about 18 months or so ago, really started that process. And I would tell you that the plan all along was to launch about this time, that we launched it. So we were very much right on track to our initial launch times. Now, obviously, we didn't anticipate the pandemic, that what we didn't anticipate either was the abundance of available real estate that would be out there and that's been a real positive for us, with some of the consolidation that we've seen from discretionary retailers, that may no longer be in business at this point. We've seen some real opportunity to grab some very good real estate, that we're able to open up this concept in, and that's why we're pretty bullish on the 30 [Phonetic] by the end of 2021, both from a real estate perspective. But also the initial sales of this concept, at least in the first two stores has been very, very strong and exceeding our expectations. So again, hitting on all cylinders on the initiatives so far, but again it's early, but rest assured, we are -- we will do what we do best here at Dollar General, and that's, execute at a high level and continue to refine this new concept to make it the best it can be." ] }, { "name": "Rupesh Parikh", "speech": [ "Great, thank you. Maybe just one follow-up question. Any thoughts you can share in terms of what you guys are seeing thus far, in the holiday season and how it's performing versus expectations. And I know you're quarter-to-date try to accelerate it, if you're to be driven by the consumables category. I was just curious if you think that the November, almost the November performance was -- represent any pull forward [Phonetic] of demand from?" ] }, { "name": "Todd Vasos", "speech": [ "Sure. I think it's a little early to talk about what Q4 is going to look like in totality. A lot of selling last month of December for retail obviously is very big. I don't have to mention that, but I will. But, when you start to look at and our numbers, the great thing that we saw was, our traffic numbers in November started to rebound pretty nicely, really came back to where we saw some of those traffic numbers in Q2. And so, that was a great sign for us that the consumer was out shopping, not only the consumable side of the business, but the non-consumable or discretionary side of that equation as well.", "The other thing, and Jeff alluded to it in part of his comments earlier, we really leaned in on inventory for Q4 around holiday. We knew it's going to be a good holiday season for Dollar General, we went in bought more inventory from the close our market mainly and we are in some of our best inventory positions in holiday than we've been in many years and are very encouraged by the early sell-through what we've seen in holiday. So, encouraged, but a lot of selling left to go." ] }, { "name": "Rupesh Parikh", "speech": [ "Great. Thank you for all the color." ] }, { "name": "Todd Vasos", "speech": [ "Sure." ] }, { "name": "Operator", "speech": [ "[Operator Closing Remarks]" ] } ]
DG
2020-05-28
[ { "description": "Vice President of Investor Relations and Corporate Strategy", "name": "Donny Lau", "position": "Executive" }, { "description": "Chief Executive Officer", "name": "Todd Vasos", "position": "Executive" }, { "description": "Executive Vice President and Chief Financial Officer", "name": "John Garratt", "position": "Executive" }, { "description": "Chief Operating Officer", "name": "Jeff Owen", "position": "Executive" }, { "description": "UBS -- Analyst", "name": "Michael Lasser", "position": "Analyst" }, { "description": "JP Morgan -- Analyst", "name": "Matthew Boss", "position": "Analyst" }, { "description": "Morgan Stanley -- Analyst", "name": "Simeon Gutman", "position": "Analyst" }, { "description": "Evercore ISI -- Analyst", "name": "Michael Montani", "position": "Analyst" }, { "description": "Oppenheimer & Company -- Analyst", "name": "Rupesh Parikh", "position": "Analyst" }, { "description": "Barclays -- Analyst", "name": "Karen Short", "position": "Analyst" }, { "description": "Goldman Sachs -- Analyst", "name": "Chandni Luthra", "position": "Analyst" } ]
[ { "name": "Operator", "speech": [ "Good morning. My name is Robert and I will be your conference operator today. At this time, I'd like to welcome everyone to Dollar General First Quarter 2020 Earnings Conference Call. Today is Thursday, May 28, 2020. All lines have been placed on mute to prevent any background noise. This call is being recorded. Instructions for listening to the replay of the call are available in the Company's earnings press release issued this morning.", "Now, I'd like to turn the conference over to Mr. Donny Lau, Vice President of Investor Relations and Corporate Strategy. Mr. Lau, you may begin." ] }, { "name": "Donny Lau", "speech": [ "Thank you, Robert, and good morning, everyone. On the call with me today are Todd Vasos, our CEO; Jeff Owen, our COO; and John Garratt, our CFO. Our earnings release issued today can be found on our website at investor.dollargeneral.com under News & Events.", "Let me caution you that today's comments include forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995 such as statements about our strategy, plans, initiatives, goals, financial guidance or beliefs about future matters, including but not limited to, beliefs about COVID-19's future impact on the economy, our business, and our customer. Forward-looking statements can be identified because they are not limited to statements of historical fact or use words such as may, will, should, could, would, can, believe, anticipate, expect, assume, intend, outlook, estimate, guidance, plan, opportunity, long-term, look to, committed to, continue, ahead, seek, likely, potential or go, and similar expressions. These statements are subject to risks and uncertainties that could cause actual results to differ materially from our expectations and projections. These factors include, but are not limited to, those identified in our earnings release issued this morning, under Risk Factors in our 2019 Form 10-K filed on March 19, 2020, our Form 10-Q filed this morning, and in the comments that are made on this call. You should not unduly rely on forward-looking statements, which speak only as of today's call. Dollar General disclaims any obligation to update or revise any information discussed in this call unless required by law.", "At the end of our prepared remarks, we will open the call up for your questions. Please limit your questions to one and one follow-up question, if necessary.", "Now, it is my pleasure to turn the call over to Todd." ] }, { "name": "Todd Vasos", "speech": [ "Thank you, Donny, and welcome to everyone joining our call. These are certainly unprecedented times for us all and our hearts go out to the communities and individuals affected by the COVID-19 crisis. On behalf of the Dollar General, I want to express our deepest gratitude to those serving on the front lines and especially to our teammates for their dedicated and efforts in fulfilling our mission of serving others by providing affordable, convenient, and close to home access to essential items at a time when our customers need them most. I'm inspired by the phenomenal work our associates are doing and could not be more proud of how they responded to the needs of our communities.", "In recognition of the essential work performed by our employees, in April, the New York Stock Exchange recognized one of our store managers, Crystal Barrows, during the gratitude campaign where the exchange joined millions of others in honoring the way people on the front lines have responded to the COVID-19 crisis.", "As one of America's essential retailers, we are committed to being part of the solution during these difficult times and are continuing to support these efforts through our expansive network of more than 16,000 store locations currently located within five miles of more than 75% of the U.S. population. Our convenient small box format providing for quick in and out access and limited crowds, both of which are conducive to social distancing. Our broad assortment of everyday household essential items, our ongoing commitment to everyday low prices, our flexible supply chain, our growing digital capabilities, and recent measures taken to further safeguard the well-being of both our team members and customers, and of course, our talented and committed associates. For more than 80 years, Dollar General has served customers through a unique combination of value and convenience, and we will continue to be there for them in both good and challenging times.", "Let me now highlight some of the key actions we've taken in response to COVID-19 with two key priorities in mind. First is the health and safety of our employees, customers, and communities we serve. Second is maintaining the continuity of our business and operations.", "For our employees and customers, we took swift and proactive action to keep them safe, while keeping stores open and running with minimal disruption. We closed an hour early to allow greater time for stocking and enhance cleaning protocols, distributed masks and gloves to all employees, implemented social distancing measures in our stores, distribution centers and at the store support center and completed the installation of nearly 40,000 plexiglass barriers at checkout across the entire chain.", "To further support heightened demand, we have hired over 50,000 people since mid-March, nearly double our normal hiring rate. We are happy to welcome these new employees to our team and our hiring efforts are continuing. We also invested approximately $60 million in employee appreciation bonuses and provided enhanced benefits and resources, including expanded paid leave and greater access to telehealth services. And we contributed to our Employee Assistance Foundation to assist our co-workers during times of need. All of these actions have helped to ensure the continuity of our business at a time when customers need us most.", "To support our communities, we dedicated the first hour of each day to seniors and provided a discount for first responders, medical personnel, and National Guard members. And through the Dollar General Literacy Foundation, Save the Children, an organization working to ensure children in rural America continue to learn and have access to nutritious food during nationwide school closures, will receive a $2 million donation.", "Beyond these actions, we remain focused on advancing our operating priorities and strategic initiatives as we look to further meet the evolving needs of our customers and better position Dollar General to emerge from this crisis even stronger than before.", "Turning now to our first quarter performance. The quarter was highlighted by extraordinary growth in both top and bottom lines. These results reflect significant changes in shopping patterns, which began in March, as consumers reacted to the COVID-19 pandemic. For the month of February, same-store sales increased 5.5%, driven by broad-based performance across many fronts, which we believe speaks to the continued strength and sustained momentum of the underlying business. Again in the March, we experienced a significant surge in demand and sales as consumers began to stock up and category mix shifted even more than usual to our consumable category. For the month in total, comp sales increased 34.5%.", "April sales moderated in comparison to March, but remained elevated as consumers continue to replenish household essentials at a rate greater than normal. During April, we also experienced significant growth in our non-consumable businesses and our three non-consumable categories delivered a combined comp sales increase in excess of our consumable business. For the month in total, same store sales increased 21.5%.", "Overall, first quarter net sales increased 27.6% to $8.4 billion, driven by comp sales growth of 21.7%, including significant growth in the average basket size and a meaningful increase in customer traffic. Once again this quarter, we increased our market share in highly consumable product sales as measured by syndicated data. Importantly, our data suggests a meaningful increase in new customers, underscoring the broadening appeal of our value and convenience proposition. We're particularly pleased that we delivered a significant operating margin expansion this quarter, which contributed to diluted EPS of $2.56, an increase of 73% over prior year.", "Collectively, these results reflect our commitment to doing everything we can to support our employees, customers, and communities during this time, and further validates our belief that we are pursuing the right strategies to create meaningful long-term shareholder value. We continue to believe we operate in one of the most attractive sectors in retail and have an established and even stronger bond with existing customers during these unprecedented times. Combined with the actions we've taken to forge new customer relationships, we believe we are well positioned to drive continued growth even what's expected to be a challenging economic environment.", "With that, I'll now turn the call over to John." ] }, { "name": "John Garratt", "speech": [ "Thank you, Todd, and good morning, everyone. Before I begin, I'd like to echo Todd's gratitude to our employees and note that my thoughts are with those who have been impacted by this crisis.", "Now that Todd has taken you through a few highlights of the first quarter, let me take you through some of the financial details. Unless I specifically note otherwise, all comparisons are year-over-year and all references to EPS refer to diluted earnings per share. As Todd already discussed sales, I will start with gross profit, which was positively impacted in the quarter by a significant increase in sales, including the impact of COVID-19. As a percentage of net sales, gross profit was 30.7% in the first quarter, an increase of 49 basis points. The gross profit rate increase was primarily attributable to a reduction in markdowns as a percentage of net sales and higher initial markups on inventory purchases. These factors were partially offset by increased distribution costs, which were driven by increased volume and our decision to incur discretionary bonus expense.", "SG&A as a percentage of net sales was 20.5%, a decrease of 204 basis points. Although we incurred certain incremental costs related to COVID-19, these costs were more than offset by the significant increase in sales. Expenses that were lower as a percentage of net sales this quarter include occupancy costs, retail labor, utilities, depreciation and amortization, and taxes and licenses. These items were partially offset by increased incentive compensation expense.", "Moving down the income statement, operating profit for the first quarter increased 69.2% to $867 million compared to $512 million in the first quarter of 2019. As a percentage of net sales, operating profit was 10.3%, an increase of 253 basis points.", "We believe the impact of COVID-19 significantly benefited operating profit in Q1, primarily through higher sales, partially offset by approximately $80 million of incremental investments that we made in response to the pandemic, including approximately $60 million in appreciation bonuses and nearly $20 million in measures taken to further protect the health and safety of our employees and customers, as well as enhanced benefits programs to support our store associates, distribution center employees, and private fleet drivers.", "Our effective tax rate for the quarter was 22.2% and compares to 20.8% in the first quarter last year. Finally, as Todd noted earlier, EPS for the first quarter increased 73% to $2.56.", "Turning now to our cash flow and balance sheet, which remained strong and provide us the financial flexibility to better support our customers and employees during these difficult times. The business generated significant cash flow from operations during the quarter totaling $1.7 billion, an increase of $1.2 billion or 202%. This increase was primarily driven by strong operating performance combined with lower levels of inventory as we continue to work closely with suppliers to improve in-stocks for high demand products. Merchandise inventories were $4.1 billion at the end of the first quarter, essentially flat to prior year and a decrease of 5.5% on a per store basis.", "Total capital expenditures in the first quarter were $195 million and included our planned investments in new stores, remodels, relocations and spending related to our strategic initiatives. During the quarter, we repurchased 0.5 million shares of our common stock for $63 million and paid a quarterly dividend of $0.36 per common share outstanding at a total cost of $91 million. At the end of Q1, the remaining share repurchase authorization was $1.1 billion. In light of the COVID-19 uncertainty and out of an abundance of caution, we proactively took steps during the quarter to further bolster our already strong liquidity position, including the temporary suspension of share repurchases and the issuance of $1.5 billion of senior notes on April 3.", "These measures, along with our strong cash flow, put us in an even stronger liquidity position with $2.7 billion of cash and cash equivalents and $1.1 billion of availability under our undrawn revolving credit facility at the end of Q1. Importantly, our capital allocation priorities remain unchanged. Our first priority is investing in high return growth opportunities, including new store expansion in our strategic initiatives. We also remain committed to returning significant cash to shareholders through anticipated share repurchases when it is prudent to do so and quarterly dividends, all while maintaining our current investment grade credit rating and managing to a leverage ratio of approximately 3 times adjusted debt-to-EBITDA.", "Moving to an update on our financial outlook for fiscal 2020. Let me start by acknowledging the inherent and significant uncertainty that continues to exist around the severity and duration of the COVID-19 pandemic, including its impact on the economy, consumer behavior, and our business. In addition, the timing, scope, and impact of both current and anticipated stimulus legislation and other governmental responses to the pandemic remains to be seen. As a result, it is difficult to predict specific outcomes and while we expect to exceed our prior guidance for fiscal 2020 net sales, same-store sales and EPS, we are unable to estimate the extent of such upside with reasonable accuracy.", "Accordingly, we are withdrawing our sales, earnings, and share repurchase guidance for fiscal 2020 that was issued on March 12, 2020 in conjunction with our Q4 earnings call. With regards to share repurchases, we are constantly evaluating our position and intend to resume our share buyback activity when it is prudent and advisable to do so, which may be as early as the 2020 second quarter. Finally, our 2020 outlook for capital spending and real estate projects remain unchanged from what we issued in our Q4 earnings release on March 12, 2020.", "Let me now provide some additional context as it relates to our full-year outlook. Given the unusual situation, I will elaborate on our comp sales trends thus far in May. Since the end of Q1 and through May 26, we have continued to experience elevated consumer demand in our stores, albeit with some intermittent moderation, and in particular, over some of the more recent days. Overall, same-store sales have increased by approximately 22% during this time frame.", "That said, it is important to note that there are a number of factors, which suggests that sales will moderate to more normalized levels beginning during the latter part of Q2, including the duration and impact of shelter-in-place restrictions and social distancing measures, the gradual reopening of other retailers, the tapering of benefits included in recent stimulus legislation, and managing through what is likely to be a more challenging economic environment for our consumers.", "With regards to our strategic initiatives, we continue to anticipate they will positively contribute to gross profit rate this year, specifically, our non-consumables initiative or NCI and DG Fresh. In addition, we also expect continued and meaningful investment in our initiative this year, including ongoing expenses associated with each. We continue to believe these investments will improve operating margin over time, particularly as the benefits to gross margin continue to scale and ultimately outpace the associated expense with both NCI and DG Fresh expected to be accretive to operating margin in 2020. However, these investments will continue to pressure SG&A rate this year, as we accelerate their rollouts.", "In closing, I want to reiterate that we are very proud of the team's execution and service during the quarter. We remain confident in our business model in our ongoing financial priorities to drive profitable same-store sales growth, healthy new store returns, strong free cash flow, and long-term shareholder value. As always, we continue to be disciplined in how we manage expenses and capital with the goal of delivering consistent, strong financial performance, while strategically investing for the long term.", "With that, I will turn the call over to Jeff." ] }, { "name": "Jeff Owen", "speech": [ "Thank you, John. I'd like to start by also thanking our employees for their hard work and dedication as we navigate this difficult time. I want to take the next few minutes to update you on our four operating priorities.", "Our first operating priority is driving profitable sales growth. The team did an outstanding job this quarter executing against a portfolio of growth initiatives despite the challenges surrounding COVID-19. Let me highlight some of our recent efforts. Starting with our cooler door expansion, which continues to be our most impactful merchandising initiative, during the quarter, we installed more than 15,000 cooler doors across our store base. In total, we expect to install approximately 55,000 cooler doors in 2020. The majority of which will be in our higher capacity coolers, as we continue to build on our multi-year track record of growth in cooler doors and associated sales.", "Turning now to private brands, which continues to be a priority as we pursue opportunities to deliver even greater value for our customers, while also driving profitable sales growth. During the quarter, we made great progress with our rebranding and repositioning efforts, including the relaunch of our laundry brand under the true living label. In addition, our Clover Valley redesign has begun rolling out, with over 250 items now available and more to come as we seek to drive greater category awareness and even higher customer adoption.", "Moving to our Better-For-You offering, which is especially important during a time when more food is being consumed at home. This offering is now available in approximately 6,000 stores with plans to expand to nearly 7,000 stores by year-end.", "Finally, a quick update on our FedEx relationship. This service is currently available in approximately 4,800 locations with plans to expand to over 8,500 stores by year-end, further advancing our strategy of leveraging our unique real estate footprint to increase customer access to services in convenient and nearby locations.", "Beyond these sales driving initiatives, enhancing gross margin remains a critical area of focus for us. In addition to some of our strategic initiatives, which Todd will discuss later, as well as our private brand efforts, foreign sourcing remains an important gross margin opportunity for us. Our efforts this quarter were focused on supporting the business in a rapidly changing global environment. The team did a tremendous job of working closely with each of our supply partners to ensure product availability, including pursuing product substitutions and shifting production to other countries when warranted. Looking ahead, we continue to see significant opportunity to increase our foreign sourcing penetration, while also further diversifying our countries of origin, as we seek to provide even greater value and an enhanced assortment offering for our customers.", "We also continue to pursue supply chain efficiencies through the further reduction of stem miles and continued expansion of our private fleet. We're especially proud of the team's efforts during the quarter as we delivered against record volumes, while constantly working with our vendor partners to minimize disruptions to supply. We are also executing against additional opportunities to enhance gross margin, including further improvements in shrink and to our category management process.", "Our second priority is capturing growth opportunities. Our proven high-return, low-risk real estate model continues to be a core strength of the business and enhances our ability to bring value and convenience to even more customers across the country. As one of America's essential retailers, we are committed to providing customers with even greater access to essential goods, especially during these unprecedented times. To that end, in the first quarter, we opened 250 new stores, remodeled 481 stores, including 332 in the higher cooler count, DGTP or DGP formats, and relocated 17 stores. We also expanded the number of stores offering fresh produce, bringing the total number of produce to approximately 750. And despite the added complexities as a result of COVID-19, our best-in-class real estate team has worked diligently with our communities and business partners to keep our real estate plans on track for 2020.", "As a result, we are maintaining our real estate outlook for the year, as we plan to open 1,000 new stores, remodel 1,500 new stores -- excuse me, 1,500 stores, and relocate 80 stores, representing nearly 2,600 real estate projects in total.", "Overall, I'm extremely proud of the team's continued ability to execute such high volumes of real estate projects, which is a testament to their dedication to serving new and existing customers.", "Our third operating priority is to leverage and reinforce our position as a low-cost operator. Over the years, we have established a clear and defined process to control spending, which governs our disciplined approach to spending decisions. This Save to Serve approach has served us well in navigating the current environment, while keeping the customer at the center of everything we do. Our ongoing efforts to further supply our -- to simplify our operations have been an important factor in eliminating unnecessary tasks. In turn, this has allowed for our store associates to better serve our customers during this period of heightened demand.", "Beyond enhancing our ability to serve, this process has also generated significant savings across the business. Our underlying principles are to keep the business simple, but move quickly to capture growth opportunities, while controlling expenses and always seeking to be a low-cost operator.", "Our fourth operating priority is to invest in our people as we believe they are a competitive advantage. The strength and dedication of our people was on full display during the quarter as we heard countless stories of our front line employees going above and beyond the call of duty to serve our customers and communities. As Todd noted earlier, we made a significant investment of approximately $60 million in employee bonuses to demonstrate continued appreciation for their exceptional efforts to serve our customers and fulfill the Company's mission of serving others. We believe these bonuses as well as our other investments and benefits such as additional paid leave were well received.", "In fact, we continue to see record low turnover at the store manager level as well as lower turnover across our associate base. Additionally, we continue to be pleased with our strong applicant flows as evidenced by the hiring of more than 50,000 people since mid-March. We also continue to embrace innovative approaches to training and development and have recently transitioned to a virtual training environment, resulting in the continued development of our people despite the inability to travel. We believe the opportunity to start and develop a career with an innovative and growing retailer is a unique competitive advantage and remains our greatest currency in attracting and retaining talent.", "In summary, we are executing well from a position of strength and these opportunities continue to provide the foundation from which we can drive continued growth in the years ahead.", "With that, I will turn the call back over to Todd." ] }, { "name": "Todd Vasos", "speech": [ "Thank you, Jeff. As I've shared with you over the past several quarters, we're investing in and building momentum behind certain strategic initiatives to strengthen our competitive position and further support long-term sustainable growth. Importantly, as a result of our efforts and investments to-date, we believe we are even better positioned to move quickly alongside our customers as we continue to meet their rapidly evolving needs, further accelerated by COVID-19. Let me take you through some of the most recent highlights, starting with our non-consumable initiative or NCI.", "As a reminder, NCI consists of a new and expanded product offering in key non-consumable categories. The NCI offering was available in more than 3,200 stores at the end of the quarter and we plan to expand the offering to a total of approximately 5,000 stores by the end of 2020. We're especially pleased with the strong sales and margin performance our NCI stores delivered in the quarter. We also continue to realize meaningful benefits from incorporating select NCI products and planograms throughout the broader store base, resulting in positive sales and margin contributions to all of our overall first quarter results. These results reinforced our belief that NCI will continue to be a meaningful sales and margin driver as we move forward and gives us confidence in our rollout plans for 2020.", "Turning now to DG Fresh, which is a strategic multi-phase shift to self-distribution of frozen and refrigerated goods. As a reminder, the preliminary objective of DG Fresh is to reduce product costs on our frozen and refrigerated items by removing the markup paid to third-party distributors, thereby, enhancing gross margin and we continue to be very pleased with the product cost savings we are seeing. Another important goal of DG Fresh is to increase sales in these categories by enabling the accelerated rollout of our high capacity coolers, increasing in-stock levels and eventually expanding our overall assortment offering. Importantly, we are already seeing evidence of success against these goals, including meaningful increase in perishable sales and higher overall in-stock levels in stores being serviced by DG Fresh.", "In total, we are now self-distributing to more than 9,000 stores from six DG Fresh facilities. Our goal for 2020 is to capture benefits from DG Fresh in approximately 12,000 stores from up to 10 facilities, including our first combination facility co-located with our existing dry goods distribution center in Zanesville, Ohio. We continue to believe this initiative will be accretive to operating margin in 2020, as the benefits begin to exceed associated expenses and growing in the years ahead as we continue to scale this transformational initiative.", "Turning to our digital initiative, where our strategy consists of building a digital ecosystem that is specifically tailored to providing our core customer with even more convenient, frictionless, and personalized shopping experience. We believe essential brick-and-mortar retailers continue to serve a critical role and that has never been more evident than in the past few months. We believe our unique store footprint combined with our digital efforts have positioned us well in a challenging and changing retail landscape, particularly, as we consider the possibilities in a post COVID-19 environment. More specifically, DG Pickup, which is our buy online and pickup in the store offering, provides an important access point for those seeking a more contactless customer experience. We launched a pilot of this solution at the end of Q4 and are very pleased with the initial results, including positive feedback from both customers and employees. Importantly, we are well positioned to scale quickly with plans for rapid expansion as we move ahead.", "Beyond DG Pickup, DG GO! mobile checkout is currently available in approximately 750 stores with plans to further expand as we look to combine this feature with self-checkout, providing an even more convenient and contactless checkout solution.", "Moving now to Fast Track, where our goals include increasing labor productivity in our stores, enhancing customer convenience, and further improving on shelf availability. We are pleased with the store labor productivity improvements we are seeing as a result of our efforts around rolltainer optimization and even more shelf-ready packaging. These improvements are particularly notable in the quarter as our teams work diligently and efficiently to keep products on the shelf.", "The second component of Fast Track is self-checkout, which represents added flexibility for consumers who may seek to limit face-to-face interaction, while also driving greater efficiencies in the store for our associates. Self-checkout is currently available in more than 30 stores and our plans consist of a broader rollout later this year, as we look to further enhance our convenience proposition. Overall, we continue to make great progress with our strategic initiatives, while advancing our goal of further differentiating and distancing Dollar General from the rest of the discount retail landscape.", "As a mature retailer in growth mode, we are also laying the groundwork for future initiatives as we are constantly evaluating what lies ahead for our customers and our business. We continue to believe we are pursuing the right strategies to capture additional growth opportunities in a rapidly evolving retail landscape.", "In closing, we are proud of our strong start to 2020. Our results are a testament to the strong execution and disciplined approach of our team. And with our unique combination of value and convenience, further enhanced through our initiatives, we believe we are well positioned to navigate the current environment and come out the other side stronger together with the communities we serve. Importantly, we are very proud of our people, specifically those serving on the front lines, including our store associates, distribution center employees and those in our private fleet. I want to offer my sincere thanks to each of our more than 155,000 employees across the Company for their tireless commitment and dedication to fulfilling our mission of serving others.", "With that, operator, I'd now like to open the lines for questions." ] } ]
[ { "name": "Operator", "speech": [ "Thank you. [Operator Instructions] Our first question comes from Michael Lasser with UBS. Please proceed with your question." ] }, { "name": "Michael Lasser", "speech": [ "Good morning. Thanks a lot for taking my question. You mentioned that your confidence have moderated a bit in recent days. What has been the magnitude of the moderation? And has it been more so due to other stores reopening and shelter-in-place restrictions being lifted or because you're seeing a fading benefit of those stimulus dollars? And then I have a follow-up." ] }, { "name": "John Garratt", "speech": [ "Thank you, Michael. This is John. And providing a little more context here, we alluded to in the prepared comments that through Q1, through May 26, our same-store sales have increased by 22% during this time frame and had mentioned some intermittent moderation over recent days. Given the unprecedented environment and the spirit of transparency, I do think it's fair to give more color on the recent trends. What we've seen in some recent days is some days in the mid-teens, but we've seen it bounce back in recent days into the mid-20s. So things have been fluid, but sales are still very healthy, and we believe we're very well positioned. We're seeing strength in both sides of the box on the consumable side and the non-consumables and I think an interesting stat we've seen floating around is just how much people have their stimulus money still deposited in the banks, which leads you to believe there's some tail to that, but we're still seeing strength in both sides of the business and believe with our unique combination of value and convenience, we're very well positioned." ] }, { "name": "Michael Lasser", "speech": [ "That's really helpful. Thank you, John. My follow-up question is inevitably, and you mentioned that as part of these very healthy comp trends, you've experienced growth from new customers. Are you -- how can you size that contribution? Is it a third, a quarter, maybe half of the overall growth in comp from new customers? But do you think these new customers will be sticky than what you've enjoyed in the past?" ] }, { "name": "Todd Vasos", "speech": [ "Yeah, Michael, this is Todd. Thank you. Yes, we have seen an increase in customers and no surprise, right? When the going gets tough, we know that our customers need us more, and we're there for, but we also know from past recessionary times that -- and in times of these that we have a customer that also starts to trade into Dollar General. We saw that in a very big way in Q1. We can validate that pretty easily through credit card data that we've seen, but also through, as you know, we do extensive quarterly customer interactions and reach outs, and we know exactly where our customer stand as well as new customers. And I would tell you those reach us to our customers have told us this quarter that not only did we trade in, we loved what we saw and we plan to repeat shop if they haven't already.", "So we're really very, very bullish on that, and I think it's a real testament to the work the team has done on this box to make it the most relevant it's been in many, many years. And I would tell you that just like we probably saw in '08/'09 with new customers coming in, they're delighted to see all the changes that we've made. And just like that, I'm very bullish that we'll continue to hold out of those customers for long term." ] }, { "name": "Michael Lasser", "speech": [ "Awesome. Thank you so much and good luck." ] }, { "name": "Todd Vasos", "speech": [ "Thank you." ] }, { "name": "Operator", "speech": [ "Our next question is from Matthew Boss with JPMorgan. Please proceed with your question." ] }, { "name": "Matthew Boss", "speech": [ "Great. Thanks and congrats on a nice quarter guys." ] }, { "name": "Todd Vasos", "speech": [ "Thank you." ] }, { "name": "Matthew Boss", "speech": [ "Todd, maybe could you speak to the overall health of your core consumer today, the push and pull between rising unemployment and your ability to deliver value as we think about the 2008-2009 playbook. I guess, maybe larger, what's the economic sweet spot that you think for your model, and if you had to rank initiatives to take additional market share out of this crisis, what would they be?" ] }, { "name": "Todd Vasos", "speech": [ "Michael, thank you. The customer was feeling very good. I think it was a real testament. She was back to work leading into this crisis. So when you look at our strong comp in the month of February, which really had virtually no COVID-related retail in it. [Technical Issues] very, very -- in a very good shape. Probably the best we've seen in many, many years. What that enabled her to be able to do was to stock up with confidence, and we saw that early on. She came in and really stocked up, first starting like with paper goods and moving into food and then obviously when stimulus started to rollout, we saw obviously like other retailers a surge in our discretionary type categories.", "Right now, I would tell you, because we do talk to her very frequently as I mentioned earlier, she has a lot more trepidation, obviously, just because of what's going on, but I would tell you that she still has money in her pocket, it's evidenced by what she is doing, but I think a lot of that extra money right now is driven through stimulus, both the basic stimulus that was sent out starting middle of April, but also for perhaps any unemployment that may be needed for our core customer, which by the way, there's evidence to show maybe our core customer is not having to capitalize yet on that, because they're most likely front line workers like many of America's customers today out there. And so she has got a lot of money still in her pocket, but we're watching it very, very closely, because that can turn and we understand that and we're watching it, but we're also watching when stimulus starts to taper off, and of course, with additional SNAP benefits that are out there, that's helping as well.", "So, when you put it all together, we feel that we're very well positioned. The sweet spot, I would tell you, we do very good in good times and we do fabulous in bad times. But I would rather see our core consumer, they have money in her pocket and be able to spend equally, both our consumable and non-consumable businesses. But we're very, very bullish on what post-COVID looks like, because again I think we're very well positioned no matter what this economy does to both our core customer and to the customer overall." ] }, { "name": "Matthew Boss", "speech": [ "Great answer. Maybe John to follow up on the gross margin. What's the best way to think about markdowns, markups, and distribution in the second quarter in the back half as we think about the drivers behind your first quarter gross margin expansion? And any other accelerating tailwinds to consider as Fresh continues to ramp or opportunity on the freight side?" ] }, { "name": "John Garratt", "speech": [ "Thanks, Matthew. I'll walk you through the puts and takes. I'll start by saying we're very pleased with the Q1 gross margin expansion of 49 basis points. One of the things we didn't call out as a driver was product mix, not a material impact on margin pressure that really speaks to the surge we saw in non-consumables, particularly as the stimulus payments came out. That, coupled with the mix within the mix, within consumables, we saw strength in categories like health and beauty, which has margin rates more akin to non-consumables. So the combination of those helped to balance out the mix pressure from the initial surge in consumables and made it really not a material impact for Q1.", "What we did see driving benefit in Q1 is what we have been seeing and calling out in recent quarters. One was lower markdowns as a percentage of net sales was the top one. The team remains very targeted on their promotional spending. And then the second one we called out was initial markups and inventory purchases and that's really DG Fresh. We are seeing the substantial cost benefit we expected to see as we self-distribute frozen and refrigerated goods and seeing a growing benefit from NCI as well. So, while it's hard to get very specific around Q2 or the following quarters given the dynamics, the near-term dynamics, what I would say is that we continue to see opportunities to continue increasing our margins over time with the growing benefit of initiatives like DG Fresh and NCI and the other levers we have. The team continues to do a fabulous job with category management. Private brands, where we've seen elevated sales in recent quarters, there's a big opportunity in foreign sourcing. Supply chain, you asked specifically around supply chain, obviously, there is a little bit of geography there as we take over self-distribution of frozen and refrigerated goods, we take on a little bit more cost there, but we save a lot more on the product cost side. But when you strip that out, it's been doing very well driving efficiencies as the team has been working on reducing transportation rates where they've been successful, as we've expanded and diversified our carrier base, expanded our private fleet. We're seeing lower fuel costs and they continue to do an excellent job driving efficiencies to stem mile reduction, load optimization, and DC productivity efforts.", "And then the other one that we didn't really call out this quarter, because it wasn't material with shrink, we continue to see an opportunity for shrink over the long term. We're looking forward to the latter part of the year as we see the benefit -- hope to see the benefit of the EAS units, the 6,000 units we installed completing the chain at the end of last year, looking to see the continued benefit we've seen in the past from those as well as increased tagging now that we've completed the system. So I think when you put all those together, we feel very well positioned. Now, we always reserve the right to invest in price, if needed, but we believe we're in a great position right now with price and believe we're making the right investments to drive margin expansion over the long term and believe we have the levers to do so." ] }, { "name": "Matthew Boss", "speech": [ "Congrats again. Best of luck." ] }, { "name": "Operator", "speech": [ "Our next question comes from Simeon Gutman with Morgan Stanley. Please proceed with your question." ] }, { "name": "Simeon Gutman", "speech": [ "Thanks. Good morning. A little bit of a follow-up to the last one. I mean, there's a lot of dollars coming in right now to the business and I want to ask about reinvestment rate. First, on gross margin, I know, John you just mentioned you feel good about where pricing is. Can you talk about the price elasticity in general, and if you can measure it in this environment and whether it makes sense to lean in? And then related to that, any COVID costs or ongoing wage issue -- wage cost that you're contemplating, bonuses or wages, as far as maybe soaking up some of the reinvestment dollars? Thanks." ] }, { "name": "Todd Vasos", "speech": [ "Hi, Simeon. This is Todd. I'm going to go -- answer your first one and then kick it over to John for the second piece, but the first -- your first question, our pricing is as competitive as it's been in the time that I've been here in the 11 years that I've been here. We are in very, very good shape against all classes of trade, and again, that's one of the cornerstones as you know of this model and what our consumers look for, very close second, the convenient pillar. But I would tell you that right now we don't really needed to -- we don't see a need to lean in any further on price, because we're so well priced today against all classes' trade. Now, we'll continue to watch that if something changes.", "The other thing to keep in mind is that we've been very, very vigilant around price, especially during this time. What we don't want to do is to raise prices to our consumers in a time of need, especially in a pandemic. So we've been very, very cautious about that, only raising prices on a few items as you look at milk, eggs, and a few that have just rapidly increased. Others that may have increased, we've actually held prices down some so that we are able to service the customer the way she needs to be right now, and to your point, we're doing very well and making sure we're passing some of that onto our consumers as well." ] }, { "name": "John Garratt", "speech": [ "On the investment side, first, we continue to make meaningful investment to advance our strategic initiatives as well as remodels and new stores as we're seeing great returns as expected from those and that continues as planned and is on track. In addition, as we go forward, health and safety of our employees and customers is our top priority. And so we will continue to invest some there as needed, making sure there's plenty of masks, gloves, hand sanitizer, thorough cleaning protocols, and of course we just recently finished the installation of the plexiglass shield. So we'll do what's necessary and prudent to ensure their safety. Beyond those things, there's nothing material changes that I see right now." ] }, { "name": "Simeon Gutman", "speech": [ "Okay. And then the follow-up, can you remind us the percentage of stores that are in rural areas versus I guess non-rural and how the -- I guess, the dispersion or range of performance is tracking? I think it was pretty wide at first and if that's continuing or you're seeing normalization as states begin to reopen?" ] }, { "name": "Todd Vasos", "speech": [ "Thank you for the question. Yeah, we're at right around 75% rural, very small town-based. So again, we pride ourselves on serving that underserved customer out there. I would tell you that, that footprint really serves us well, especially during this time and our customers well. Think about being close to home, we're within five miles of 75% of America. You think about that small box that we offer, that 7,200 to 7,400 square feet box, she can shop that with convenience and with confidence that there won't be crowds.", "And then, lastly, we want to make sure that as we make sure that new customers come in that we show her the best that we've got and that's exactly what we've done through this. She's seeing great products and we've seen great comments from our current customers as well as our new customers. So, we feel that we're well positioned. Obviously, we do very well both in our rural locations and our more metro settings, but again rural being the major driver, I would tell you, has seen a little larger increase in sales overall. But again, I'm very proud of both sides of the equation, our rural and our city type stores." ] }, { "name": "Simeon Gutman", "speech": [ "Thank you." ] }, { "name": "Operator", "speech": [ "The next question is from Michael Montani with Evercore ISI. Please proceed with your question." ] }, { "name": "Michael Montani", "speech": [ "Great. Good morning. Thanks for taking the question. I just wanted to ask if I could for a little bit of additional color on the traffic versus ticket trend in the quarter. Sorry if I had missed that. And then also on the geographic side, if there is anything you could call out in terms of different regions of the country and how those trends may have gone?" ] }, { "name": "Todd Vasos", "speech": [ "Yeah, sure. This is Todd. I would tell you, we're very proud that both traffic and ticket were positive in the quarter. And I think that's a real testament once again to the power of the box that we have out there and the ability for the consumer to shop both sides of that. So again, very proud of seeing that. Obviously, the ticket side was the larger driver, but I would tell you a very nice performance on the front side of that too on the traffic side.", "As far as geographics, throughout the quarter, there were some puts and takes every -- it changed depending on the severity of COVID outbreaks. So think about areas like the Northeast, think about areas like the Midwest, Michigan, Wisconsin, those type of areas, we saw big early surges, obviously, in the Northeast, things leveled out for a bit and then resurged again and continues to be elevated. So there was some give and take. But I would tell you when all the dust settled, all of the operating regions were very close together in their performance overall." ] }, { "name": "Michael Montani", "speech": [ "Just for the follow-up, if I could, was on multi-channel. Just curious about the pickup efforts that you all have in place, if there's any incremental color, there maybe in terms of the pace that you might lean into it as well as the mobile app?" ] }, { "name": "Todd Vasos", "speech": [ "Yeah, again, we're just getting going on our buy online, pickup in the store efforts. But I would tell you, I'll give you a couple of nuggets that we have seen early on. One is she's been very pleased with the transaction and her ability to get what she needs. The repeat was very, very heavy, meaning once she uses it once, the repeat was very good on the other side, and again, very high scores even on our repeat.", "We know that the customer as we start to move post pandemic and we all hope we get there sooner than later, that though retail is going to change a little bit, and I would tell you those that have a strong brick-and-mortar presence as Dollar General has, but also have a very good presence of the digital side to include buy online, pickup in the store, to include areas like self-checkout where the customer can feel that if she doesn't want to interact or have contact with and/or the actual payment terminals that she can feel very confident to checkout in our stores.", "I would tell you that I'm so proud of the team and their efforts over the last couple of years because they have set us up for success during this time and we'll flourish as we go forward. So, more to come, as we aggressively rollout buy online pickup in the store in the upcoming months and quarters ahead, because we know that the customer is really looking for that option inside of a brick-and-mortar retailer." ] }, { "name": "Michael Montani", "speech": [ "Thank you." ] }, { "name": "Operator", "speech": [ "Our next question is from Rupesh Parikh with Oppenheimer. Please proceed with your question." ] }, { "name": "Rupesh Parikh", "speech": [ "Good morning. Thanks for taking my questions and also congrats on the nice quarter. So I guess I wanted to start with store traffic. So it's very notable -- noticeable your commentary just about the meaningful increase in store traffic, while many of your competitors actually had declining traffic during the quarter. Is there any more color you can provide in terms of what you think is driving that delta between you and some of your peers?" ] }, { "name": "Todd Vasos", "speech": [ "Yeah, when you look at it, again, it was pretty evenly based in the regions as you look out and backward now in hindsight, but I would tell you that our rural locations did outperform a little bit in that area, and I think that's a real testament again to the rural nature of our box and the ability for customers to stay close to home and shop with confidence in a small box that doesn't have a lot of customers at any given time.", "I also would tell you that I think once they got in for the first time, she repeated those purchases as she continued to restock her pantries throughout the quarter. So once she got in, I think she really liked what she saw, and I would tell you, I think we did some of the best, if not the best, in keeping in-stock on many of the core items. We got a lot of customer complaints in -- on not being in-stock on some items, but they were paled in comparison to the compliments that we got in saying things like we found stuff that we haven't found in other places in weeks and/or months and it was great to hear. So I think just the combination of that strong box and our rural location really help propel those traffic numbers." ] }, { "name": "Rupesh Parikh", "speech": [ "Okay, great. And then maybe just one follow-up question just on the supply chain out of stock. So your inventory was down, I think, more than 5% on the same store basis. How long do you think or when do you think your supply chain will be back to where it needs to be in terms of getting the stores fully stocked?" ] }, { "name": "Jeff Owen", "speech": [ "Well, first of all -- this is Jeff. I'm extremely proud of the way the team responded to the in-stock challenges that all retailers faced, and our merchant team was involved very, very early with our suppliers and partnering with ways to get our fair share of product, but also thinking about creative ways to provide alternative pack sizes or substitute items for our stores and then also we were able to stand up even new SKUs during this period of time. So, merchant team did an outstanding job and then the supply chain, obviously, you can't do that without the supply chain, so they were able to flex up to our demand. And then also they're able to deliver the product to our stores on time. And then finally, as Todd mentioned as well, Fast Track earlier is -- was one of our initiatives that really paid off during this because the stores were able to get the product on the shelf.", "As I think out and when it will end, a lot of that depends on the customer and also depends on the way the economy in terms of the shelter-in-place. So, as you know, many of the nation is opened up for business now. So we'll have to wait and see, but I can tell you this. Our supply chain is ready to deliver the product to the stores when it's available and our store teams are ready to get it on the shelf. So we'll be in a great position for the customer once the products are available." ] }, { "name": "Rupesh Parikh", "speech": [ "Great. Thank you." ] }, { "name": "Operator", "speech": [ "Our next question is from Karen Short with Barclays. Please proceed with your question." ] }, { "name": "Karen Short", "speech": [ "Hi. Thanks very much. I wanted to actually go back to a couple of comments you made in terms of the Fresh. You talked about a meaningful increase in Fresh at the stores that you've rolled the Fresh out to. So wondering, if you could elaborate a little bit on that. My second question is just on the DG Pickup. I don't know if there's any color you can provide on what the average ticket looks like and then I had one other follow-up?" ] }, { "name": "Todd Vasos", "speech": [ "Sure, Karen. Yeah, on DG Fresh, I would tell you that we saw a meaningful difference in our in-stock levels, but also, of course, our sales numbers in the stores that we self-distributed. That's exactly what we're going to see for the long-term here, but it was even more amplified, obviously, during COVID-19 and when customers were out and still out looking to fill their pantries or refrigerators and freezers with goods instead of going out to eat. And so I believe that it's reacting exactly what we -- how we thought it would, but it was great to see it actually in person and an action as we -- as our customers needed the most. So I would say that it gives us even greater confidence that as we continue to move over the next upcoming quarters and years ahead that this is really going to pay a big dividend for us." ] }, { "name": "Karen Short", "speech": [ "And then in terms of the average ticket with pickup, is there any meaningful delta or anything to point to that? I mean, I know it's still early stage." ] }, { "name": "Todd Vasos", "speech": [ "Yeah, it is still early stage, but I would tell you that the average basket is not dissimilar to what we would normally see inside of a store, which we thought, right? So, five to six items could be seven or eight, but let's call it five to eight in total, but closer to that six range with the basket size being a little larger from a dollar amount, but not meaningful. And again, it's doing exactly what we thought it would do. I don't believe our core customer is going to change her shopping behavior over the long-term. I still fully believe that when she comes in, she comes in often and buys five to eight items with a ring of about $12 to $13 basket sizes and we believe that buy online pickup in the store will be no different." ] }, { "name": "Karen Short", "speech": [ "Okay. And then SNAP recently increased pretty meaningfully. I mean, I think it was about a 40% increase in monthly SNAP benefits. I guess the question is how sustainable -- well, first of all, did you see that impact in terms of May on sales and how sustainable do you think that will be in terms of the benefit to the comps, because obviously this is similar to an '08 and '09 increase in terms of percentage?" ] }, { "name": "John Garratt", "speech": [ "Karen, this is John. We have seen the benefit from that. As you know, recent legislation has let states make it easier for families to continue participating has provided emergency supplemental benefits. I think it's up to two months as it stands now. And then also in lieu of the national school lunch program is providing $20.50 per week per dependent. So the combination of those is helping our customer and we are seeing enhanced purchasing power and increased EBT sales. So how long that persists depends on how long these benefits persist. But what I would tell you is we have been growing our share with these customers over time as we serve them well growing EBT share. And we're focused on controlling what we can control and that's taking care of them and we'll see how it plays out in terms of the duration of the legislation, but we are seeing the benefit." ] }, { "name": "Karen Short", "speech": [ "Thanks." ] }, { "name": "Operator", "speech": [ "Our last question comes from Chandni Luthra with Goldman Sachs. Please proceed with your question." ] }, { "name": "Chandni Luthra", "speech": [ "Yes, hi. Thank you for taking my question. Great quarter. Just wondering you know as we go forward, do you see potential to be more aggressive in certain initiatives like private label and DG Fresh in this challenged environment? Is there opportunity to do more produce in your stores? You mentioned meaningful investments in your initiatives. Just want to clarify, is this an acceleration in your investments versus when you last spoke about them during 4Q? And is there an opportunity to double down on some of these initiatives in this challenged backdrop? Thank you." ] }, { "name": "Todd Vasos", "speech": [ "Thank you. That's a great question. The numbers that John alluded to, they weren't a very big acceleration, but I would tell you, the one area that we're -- we have accelerated our thinking as well as our expenditure has been around buy online pickup in the store. We thought it would be a more gradual rollout, but again seeing what we have seen now through COVID-19 and what our customers are telling us about wanting an option if she wants to take advantage of it in that contactless world, I would tell you that buy online pickup in the store has accelerated and our spending against it as well as the rollout into our stores will be vastly different than what we had thought. And our hope would be we would roll out to the majority of the chain by the end of this year as we roll forward.", "As you look at the other area that we would anticipate may be expanding a little bit faster will be our self-checkout. It would be our goal eventually to help self-checkout in virtually all of our stores. It was going to be a few year roll out. We believe we can accelerate that some as we continue to move forward in 2020, but also accelerated in '21 for sure as again the consumer is looking for more of a contactless experience in some cases.", "So those are just a couple, but we're taking a look at DG Fresh as well. We have a very aggressive plan there as you already know, but that produce side is a great question and we continue to evaluate our stores to put produce in and that very well could be an expansion as we move through later this year and into '21 as well." ] }, { "name": "Chandni Luthra", "speech": [ "Great. Thank you so much." ] }, { "name": "Todd Vasos", "speech": [ "Thank you." ] }, { "name": "Operator", "speech": [ "[Operator Closing Remarks]" ] } ]
DG
2019-03-14
[ { "description": "Vice President, Investor Relations & Public Relations", "name": "Jennifer Beugelmans", "position": "Executive" }, { "description": "Chief Executive Officer", "name": "Todd Vasos", "position": "Executive" }, { "description": "Executive Vice President and Chief Financial Officer", "name": "John W. Garratt", "position": "Executive" }, { "description": "Morgan Stanley -- Analyst", "name": "Vincent J. Sinisi", "position": "Analyst" }, { "description": "JPMorgan -- Analyst", "name": "Matthew Boss", "position": "Analyst" }, { "description": "Oppenheimer & Company -- Analyst", "name": "Rupesh Parikh", "position": "Analyst" }, { "description": "UBS -- Analyst", "name": "Michael Lasser", "position": "Analyst" }, { "description": "Piper Jaffray -- Analyst", "name": "Peter Keith", "position": "Analyst" }, { "description": "Wells Fargo Securities -- Analyst", "name": "Edward Kelly", "position": "Analyst" }, { "description": "RBC Capital Markets -- Analyst", "name": "Scot Ciccarelli", "position": "Analyst" }, { "description": "Bank of America Merrill Lynch -- Analyst", "name": "Robert Ohmes", "position": "Analyst" } ]
[ { "name": "Operator", "speech": [ "Good morning. My name is Sia, and I will be your conference operator today. At this time, I would like to welcome everyone to the Dollar General Fourth Quarter 2018 Earnings Call. Today is Thursday, March 14th, 2019. All lines have been placed on mute to prevent any background noise. This call is being recorded. Instructions for listening to the replay of the call are available in the Company's earnings press release issued this morning.", "Now, I would like to turn the conference over to Ms. Jennifer Beugelmans, Vice President of Investor Relations and Public Relations. Ms. Beugelmans, you may begin your conference." ] }, { "name": "Jennifer Beugelmans", "speech": [ "Thank you, Sia; and good morning, everyone. On the call with me today are Todd Vasos, our CEO; and John Garratt, our CFO. After our prepared remarks, we will open up the call for questions. Our earnings release issued today can be found on our website at investor.dollargeneral.com under News & Events.", "Let me caution you that today's comments will include forward-looking statements about our expectations, plans, future estimates and other non-historical matters, including but not limited to our fiscal 2019 financial guidance and real estate plans, our long-term performance goals, our planned investments, strategies, initiatives and capital allocation strategy and related expectations, and economic trends or future conditions.", "Forward-looking statements can be identified because they are not statements of historical facts or use words such as may, should, could, would, will, believe, anticipate, contemplate, expect, assume, intent, outlook, estimate, guidance, plan, opportunity, focused on, long-term, confident, potential or goal, and similar expressions that concern our strategy, plans, intentions or beliefs about future matters.", "Important factors that could cause actual results or events to differ materially from those projected by our forward-looking statements are included in our earnings release issued this morning under Risk Factors in our 2017 Form 10-K filed on March 23rd, 2018, and in the comments that are made on this call. We encourage you to read these documents. You should not unduly rely on forward-looking statements, which speak only as of today's date. Dollar General disclaims any obligation to update or revise any information discussed in this call, except as may be otherwise required by law.", "During today's call, we also will reference certain financial measures not derived in accordance with GAAP. Reconciliations to the most comparable GAAP measure is included in this morning's earnings release, which, as I just mentioned, is posted on the investor.dollargeneral.com under News & Events. At the end of our prepared remarks, we will open the call up for your questions. Please limit your questions to one and one follow-up question, if necessary.", "Now, it is my pleasure to turn the call over to Todd." ] }, { "name": "Todd Vasos", "speech": [ "Thank you, Jennifer; and welcome to everyone joining our call. We ended 2018 on a strong sales note with a 4% comp in the fourth quarter. While we certainly faced various challenges throughout the year, we believe, 2018 was a great year for our employees, our shareholders and we remained squarely focused on taking care of our customers.", "As we head into 2019, we are excited to have so many new opportunities ahead of us. During today's call, I will cover five main topics. I'll start with key highlights from the fourth quarter results; then I'll update you on our progress and outlook for our digital and non-consumable initiatives; third, I'll lay out two new strategic initiatives we are excited to be launching; fourth, I'll give you an update on the results we are achieving with our operating priorities; and finally, I'll finish with our operating plans for fiscal 2019. John will provide you with some 2018 financial highlights, guidance for fiscal 2019 and our perspective on Dollar General's long-term growth.", "Turning to our fourth quarter and full year 2018 financial performance. We delivered a very strong top-line in the fourth quarter with net sales increasing 8.5% to $6.6 billion, compared to net sales of $6.1 billion in the fourth quarter of 2017. For the full fiscal year, net sales increased 9.2% to $25.6 billion, compared to net sales of $23.5 billion in fiscal 2017. The strong net sales performance throughout fiscal 2018 was balanced between performance from both new stores and mature stores.", "During 2018, we continue to gain market share in highly consumable product sales, which was a key driver of our strong sales performance. Syndicated data shows that we had mid-to-high single-digit growth in both units and dollars over the 4-week, 12-week, 24-week and 52-week periods, ending January 26, 2019.", "For full-year comp sales, we posted a 3.2% growth rate for fiscal 2018, marking our 29th consecutive year of same-store sales growth. Given the overall strength of the economy in 2018, this continued growth underscores our belief that our business model can perform well in all economic cycles. We are proud to continue our legacy of serving the underserved by providing them with the value and convenience that they have come to expect from Dollar General. As I mentioned, we finished the year with a very strong 4% same-store sales growth rate in the fourth quarter. This growth resulted in our highest two-year stack in 21 quarters and our third consecutive quarter of accelerated two-year comp stack growth.", "The fourth quarter top-line performance was driven by growth in both average transaction amount and customer traffic. This quarter's average transaction amount growth included expansion in average unit retail and increased units per basket. Driving profitable traffic is paramount to the health of our business over the long term. This quarter, we took steps to continue providing our customers with terrific value and focused on promotional activities that allowed us to take share from multiple classes of trade.", "We believe we can sustain these share gains in 2019 and that these investments attract the customers who will continue to shop at Dollar General. These actions were especially important in the fourth quarter given the increased seasonal sales volume seen across retail industry during this time of year. We achieved our goals of growing traffic and market share and continue to broaden our overall customer base.", "We were also pleased to deliver another quarter of solid growth in non-consumables. We are particularly excited about our performance in the home category, which led overall comp growth in the fourth quarter. The team is doing a great job in this category, which led to our best performance in home in many years. This is the first time in quite a while that we've seen a non-consumable category out-top consumable growth.", "During the fourth quarter, we believe same-store sales benefited from the acceleration of February SNAP payments during the government shutdown. Based upon our analysis of EBT sales, we estimated this created an approximate 70 basis point benefit for same-store sales. As we head into 2019, we believe we have compelling opportunities to gain more market share, drive profitable traffic to our conveniently located stores and deliver more of the products our customer seeks at the value she needs. We remain focused on these opportunities and after John's discussion, I look forward to sharing how we are targeting our efforts in 2019.", "With that, I will now turn the call over to John." ] }, { "name": "John W. Garratt", "speech": [ "Thank you, Todd; and good morning, everyone. I would like to walk you through the financial results for the fourth quarter and full year, and then I'll take a few minutes to discuss our fiscal 2019 financial guidance. I'll also provide you with some thoughts on our long-term business perspective. Unless I specifically note otherwise, all comparisons are year-over-year.", "As Todd already discussed sales, I will start with gross profit, which as a percentage of sales was 31.2% in the fourth quarter, a decrease of 91 basis points. This decrease was partially attributable to higher markdowns. As Todd mentioned, this quarter we proactively invested in promotional activity to drive traffic and market share and we believe we remain well positioned against all classes of trade and across all geographies where we operate. That said, pricing is always competitive in discount retail and we watch the environment very closely.", "In 2019, our strategy is to further optimize our promotional activities, as we focus on driving profitable sales and traffic growth. Gross margin in the fourth quarter was also negatively impacted by lower initial markups on inventory purchases, an increase in the LIFO provision, a greater proportion of sales coming from the consumables category, which generally has a lower gross profit rate than our other product categories, and the sales of lower margin products comprising a higher proportion of sales within the consumables category; partially offsetting these items was lower inventory shrink.", "SG&A as a percentage of sales was 21.6%, a decrease of 34 basis points. The decrease was driven by reductions in repairs and maintenance expenses, benefits costs and incentive compensation expenses, and lower utilities as a percentage of net sales. Partially offsetting those decreases were approximately $11.7 million in hurricane-related expenses due two hurricanes, which occurred during the third quarter of 2018, as well as a $2.2 million year-over-year increase in other disaster-related expenses, both of which were greater than anticipated in our original fiscal year 2018 forecast. As a reminder, 2017 fourth quarter SG&A expense included costs related to accelerated store closures.", "Moving down the income statement. Our effective tax rate for the quarter was an expense of 21.2%. This compares to a negative 18.9% tax rate in the fourth quarter last year, which was a benefit. The benefit in the fourth quarter of 2017 was primarily due to the remeasurement of deferred tax assets and liabilities on the balance sheet at the new lower federal corporate tax rate, as a result of federal tax reform. Diluted earnings per share for the fourth quarter were $1.84, which includes an approximate $0.04 negative impact of disasters, the majority of which was driven by hurricanes that occurred in the third quarter.", "Turning now to our balance sheet, which remains strong at the end of fiscal 2018. Merchandise inventories were $4.1 billion at the end of fiscal 2018, up 13.5% overall and an increase of 7.3% on a per store basis over the end of the 2017 fiscal year. Inventory levels increased in the back half of fiscal 2018, as we brought in inventory to stock our new Longview, Texas distribution center. Additionally, as we discussed with you last quarter, we proactively made some strategic and opportunistic forward inventory buys in part due to concerns over potential tariff increases. These buys aimed at keeping overall costs low, contributed to the higher inventory level at year-end.", "As we noted in recent quarters, we have been successfully reducing shrink, while also increasing on-shelf availability. This dynamic is difficult to both achieve and maintain. In 2019, we are taking action to update our inventory replenishment cycle to support even higher levels of on-shelf availability for our customers every day, while continuing to take actions designed to further reduce shrink. We believe our inventory quality is in great shape and our goal remains to drive inventory growth that is in line with or below our sales growth over time.", "Fiscal 2018 was another year of strong cash flow from operations, which totaled $2.1 billion, an increase of $341 million, or 18.9%. Total capital expenditures for 2018 were $734 million and included our planned investments in new stores remodels and relocations, continued investments in construction for two new distribution centers and spending related to the previously announced acceleration of certain key initiatives.", "During the quarter, we repurchased 3.4 million shares of our common stock for $360 million and paid a quarterly cash dividend of $0.29 per common share outstanding at a total cost of $75 million. For the full year, we returned a total of $1.3 billion in capital to shareholders through the combination of share repurchases and cash dividends. The remaining repurchase authorization at the end of the fourth quarter was approximately $346 million, and yesterday, our Board approved an additional $1 billion in incremental share repurchase authorization.", "Our capital allocation priorities are unchanged and we are focused on financial returns. Our first priority is investing in high return growth opportunities including new store expansion and infrastructure to support future growth. We also remain committed to returning significant cash to shareholders through anticipated share repurchases and quarterly cash dividends, all while maintaining our current investment-grade credit rating and managing to a leverage ratio of approximately 3 times adjusted debt to EBITDAR.", "Turning now to fiscal 2019. This year, we expect our core business to continue to deliver strong growth and allow us to invest in our ongoing strategic initiatives, as well as the two new ones that Todd will discuss in greater detail shortly. Overall, our long-term financial performance goals remain squarely focused on delivering strong growth in net sales, comp store sales, operating profit and diluted EPS, which is also supported by our financial strategies.", "In some years, we will balance the decision to invest with delivering on our long-term goal of double-digit adjusted EPS growth. We believe that net sales, comp store sales, operating profit and diluted EPS are the core metrics that you should be focusing on in order to gauge our progress. I will now provide you with our outlook on these metrics for 2019. For fiscal 2019, we expect net sales growth of approximately 7% and comp sales growth of approximately 2.5%.", "Moving on to profitability, I'd like to share a few insights with you. We are, of course, laser-focused on operating profit and operating profit margin. In 2019, we expect to grow operating profit by approximately 4% to 6%. Our goal is to improve operating profit margin over time, and we believe we are making the right operating decisions and investments to achieve this goal.", "This year, this means that we'll be making investments in strategic initiatives including DG Fresh, a supply chain initiative as well as Fast Track and in-stock productivity and customer service initiative, while both of these initiatives are still in the early test phase, we believe these investments will allow us to enhance our operating margin profile over the long term. The associate investments, however, will pressure SG&A rates in the near term.", "With this as a backdrop, I'll now provide you with a few other insights into overall gross margin and SG&A spend for 2019. First, the changes to our inventory replenishment cycle that I mentioned earlier, will have an initial gross margin price tag, mostly due to the impact on product inventory mix. In addition, there will be a working capital outlays required. There is correlation between on-shelf availability and sales, and we believe these changes will position us to support and drive top-line growth in fiscal 2019 and beyond.", "Second, on transportation; while we have seen some signs of stabilization in a more balanced marketplace, we anticipate that we could see continued transportation cost increases in 2019. Third, on tariffs; our guidance assumes that the government maintains current tariff levels and the guidance does not contemplate any increases in rates or any additional tariff enactment. We believe that the first quarter gross margin will be the most pressured on a year-over-year basis and that we will see improvements in the year-over-year comparison, as the year progresses.", "Regarding SG&A, we will have start-up expenses related to the two new initiatives in addition to ongoing investments in other strategic initiatives. In total, we expect to spend approximately $50 million on these strategic initiatives in 2019, the majority of which will be in our two new initiatives. We expect these investments to pressure SG&A, particularly in the first half of the fiscal year. While these SG&A investments should improve gross margin and overall operating margin over time, they will move our SG&A leverage range above 2.5% to 3%. That said, we believe these investments will be accretive as early as 2020.", "Given these gross margin and SG&A expense factors, we expect operating margins to be more pressured during the first half of the year. Based on these dynamics, we are providing fiscal 2019 diluted earnings per share guidance of $6.30 to $6.50. Our diluted EPS guidance assumes an estimated effective tax rate of approximately 22% to 22.5% in 2019. Overall, our capital spending in 2019 is expected to be approximately $775 million to $825 million as we continued to invest in strategic initiatives and general business need to drive and support future growth.", "In terms of cash distributions to shareholders, yesterday, our Board of Directors approved a quarterly cash dividend of $0.32 per share, which is an increase of approximately 10% compared to the fourth quarter 2018 dividend. In fiscal 2019, we plan to repurchase approximately $1 billion of our common stock. We are pleased with our strong position as we enter the year and we are very excited for our plans for 2019. As always, we continue to be disciplined in how we manage expenses and capital, with the goal of delivering consistent, strong financial performance, while strategically investing in initiatives for long-term growth. We remain confident in our business model and our ongoing operating priorities to drive profitable same-store sales growth, healthy new store returns, strong free cash flow and long-term shareholder value.", "With that, I will turn the call back over to Todd." ] }, { "name": "Todd Vasos", "speech": [ "Thank you, John. I'm proud of the team's execution that led to the strong results this year, and feel confident that we're making the right investments and operating decisions that will allow us to extend our runway for profitable growth.", "Now I'd like to spend a few minutes providing you with an update on the progress we have made on our digital and non-consumable initiatives, and outline two new transformational strategic initiatives that we're launching. Starting first with digital; in 2019, our digital strategy will remain focused on using technology to further enhance the in-store experience. We are confident that we can use technology to create a more personalized and convenient shopping experience for our customers.", "In 2018, we launched the DG GO! App, which allows customers to use their phones to scan items as they shop, see a running total of the items in their basket using our card calculator and then skip the checkout line by using the DG GO! kiosk. The app has been popular with our customers and through the end of fiscal 2018, we had more than 140,000 downloads and exited the year with approximately 25,000 monthly active users, despite only having DG GO! kiosk in approximately 250 stores. Pending performance data, our goal in 2019 will be to expand this offering to more stores.", "We have engaged with our customers to understand how they are using the app to learn how we might improve it further. One key learning is that our customers are using the card calculator frequently, even when they're not using DG GO! kiosk to checkout. We believe they're using the card calculator stay within their budgets and optimize their shopping dollars. Based on this, we recently launched card calculator in approximately 200 stores. Throughout the first half of 2019, we intend to roll out this useful tool for our customers in the majority of our stores. We have invested and upgraded WiFi to facilitate in-store use of this and other digital tools.", "Having a user-friendly and helpful suite of digital tools is becoming increasingly important to our customers, and therefore, to Dollar General. We know that our customers, who more frequently engage with our digital tools, tend to shop with us more often, and check out with larger average baskets. In fact, their baskets, on average, are about twice as large as those of non-digitally engaged shoppers.", "Currently we have more than 15 million digital coupon subscriber accounts and more than 900 million digital coupons were clipped in 2018. Our goals in 2019 are to increase our subscriber base and perhaps more importantly, the frequency of use. We want to make sure that users are engaged with our app more frequently to save time and money. This means that we will be launching digital marketing strategies focused on customer acquisition, retention and engagement. Our goal is to use personalization to drive both sales and gross margin benefit over time.", "Finally, as we continue to test and learn within our digital strategy, we plan to pilot Buy Online Pickup in Store offering in the second half of fiscal 2019. We are in the early stages of many of these efforts within our digital strategy and we are excited about the potential and the opportunities that lie ahead.", "Turning now to non-consumable initiative or NCI. In 2018, we began our test of a bold, new and expanded assortment in key non-consumable categories of home, domestics, housewares, party and occasion. With the amount of space dedicated to non-consumables that remains the same, we believe this merchandise strategy will drive greater sell-through. The NCI offering was added to approximately 700 stores as of the end of 2018 and we plan to have it in approximately 2,400 stores by the end of 2019.", "It is important to note that while it is still relatively early, we have now worked through multiple replenishment cycles and we like the momentum the reset is generating. We are seeing improvements in traffic and sales, as well as meaningful improvement in category mix and gross margin within these stores. We believe this offering will continue to generate excitement for our customers, as it rolls out more broadly.", "Today, I'm excited to introduce two new transformational initiatives that we are rolling out in 2019. The first initiative is one that we call DG Fresh. The DG Fresh initiative is a strategic multi-phase shift to self-distribution of perishable goods, primarily fresh and frozen. We believe this initiative will allow us to accomplish three key goals.", "First, it will allow us to reduce product costs, which can have a meaningful impact on our gross margin in the coming years. Second, it will facilitate higher in-stock levels of these goods, which should help to drive sales. And third, it will allow us to control our own destiny in fresh foods, most notably by distributing perishables ourselves, we can carry more of the fresh products and brands our customers want. These include better-for-you items and national brands.", "Today, there are many items we cannot cost effectively procure through our current model. In addition, self-distribution will allow us to offer a wider selection of our own private brands to provide our customers with even more compelling value. Overall, we expect DG Fresh to allow us to do a better job of tailoring our product selection, to fit the needs of our customers, particularly in rural areas. While our initial focus is on distributing the types of fresh and frozen products we already carry, this approach also provides a potential path forward to expanding our produce offering to more of our stores in the future.", "We launched this initiative early in calendar year 2019, and we are currently distributing to approximately 300 stores in the Northeast from a new cold storage facility we own in Pottsville, Pennsylvania. By the end of this fiscal year, our goal is to be serving as many as 5,000 stores from up to four new DG Fresh distribution facilities. Beyond 2019, our goal is to fully implement DG Fresh initiative chainwide within three to four years, as an annual roll-out phase similar to what you see in 2019.", "As John mentioned, the start-up cost for DG Fresh will be a headwind to SG&A this year. However, we expect this initiative to be meaningfully accretive to sales and operating margin over time. The transition to self-distribution has been relatively smooth, which is a testament to the strong relationships we have with our vendors, the support of our distributors and our proven ability to execute complex projects. We are excited about the potential for this initiative.", "The second new strategic initiative we're introducing today is Fast Track. Fast Track is a two-pronged approach to increasing labor productivity in our stores, enhancing customer convenience and further improving on-shelf availability. Driving our performance higher in these areas will be foundational to our ability to execute on our Buy Online Pickup In Store pilot later this year. In addition, we believe that our success with Fast Track over the long term can create significant SG&A savings. The first key component of Fast Track involves streamlining the stocking process in our stores, which we call one-touch unloading. This new approach is designed to make stocking shelves simpler and faster, reducing the amount of labor needed to complete this task.", "It will begin with fundamental changes at the distribution centers, where we will make -- which will make processes even more store-friendly with products and deliveries sorted by location within the store. Our focus is on reducing the amount of time spent stocking the shelves, following the truck delivery, allowing us to get products on the shelves more quickly. We also believe we can reduce the amount of time that our store associates spend restocking shelves in between deliveries.", "The second component of Fast Track is self-checkout option. This self-checkout will allow customers to scan and pay for their items with little to no assistance needed from our associates. Dollar General is known for value and convenience and our customers have told us that speed of checkout is vitally important to their in-store experience. Ultimately Fast Track should help boost on-shelf availability and free up labor hours that we can dedicate to other in-store priorities such as customer experience. Our goal is to pilot Fast Track in several of our distribution centers and select stores during 2019. Following the pilot, we will determine the best plan for our broader rollout.", "Like the DG Fresh initiative, Fast Track will also have an upfront cost that will impact SG&A. At scale, however, we believe this initiative will be accretive to our SG&A profile and well worth the investment. These are just a few examples of how we continue to be an innovative leader in our channel. We are excited about these long-term strategic growth initiatives, which are fully aligned with our ongoing commitment to our four operating priorities.", "As you will recall, our first operating priority is driving profitable sales growth. We have a robust pipeline of initiatives in place to drive growth in 2019. Our most impactful merchandising initiative continues to be our cooler-door expansion. As we head into 2019, this remains a significant opportunity. Coolers are a great traffic driver and they allow us to offer even more of the products, our customers want. In fiscal 2019, we plan to install more than 40,000 cooler-doors across our store base.", "In 2018, we launched our Better-For-You initiative, which introduced healthier food options in more than 2500 stores. This offering was in direct response the conversations with our customers, who told us they want a healthier options at affordable prices. We are pleased with the initial customer reception and the performance of this product set. We intend to offer the Better-For-You products in approximately 6,000 stores by the end of 2019.", "Our new Good & Smart private brand has gained traction with our customers and we are positioned as a core product line in Better-For-You. In addition to Good & Smart launch in 2018, we had great success with the launch of Studio Selection, our aspirational health and beauty private brand. In 2019, we are planning a similar private brand launch in baby products. I'm also excited to announce that we will be launching a new private brand in cosmetics in April. We remain dedicated to the beauty category at Dollar General, and we believe, we can continue to take share from all classes of trade.", "Having a premier private brand is an important part of our strategy. The new DG private brand will be called Believe and we will include an inspiring lineup of attractively priced cosmetics that we think will be appealing to our customers. This cosmetic line is just one part of our ongoing efforts to capture share in the health and beauty category. From efforts focused on the growing Bath & Body segment to enhancing the shopping experience in this section of the store with more intuitive signing and product placement, we have a lot of opportunity to drive HBA sales.", "Across private brand, we continue to believe, we can increase sales and penetration, which could have a meaningful impact on both gross margin and sales growth over the long term. In 2018, we conducted a holistic review of our private brand portfolio and are incorporating what we've learned into our 2019 go-to-market plan.", "In addition to sales driving initiatives, we continue to pursue opportunities to enhance gross margin. In 2019, we intend to roll out Electronic Article Surveillance units to approximately 3,000 stores. We expect to complete this rollout by the end of the second quarter, bringing the total for the chain to approximately 13,000.", "Beyond this ongoing near-term opportunity, I'd like to give you a brief update on other longer term gross margin opportunities. First, within distribution and transportation, we have continued to execute our strategy to reduce stem miles. I am proud to note that our distribution center in Longview, Texas began shipping in January and it is ramping up very quickly. And we expect our distribution center in Amsterdam, New York to begin shipping later this year.", "As of the end of 2018, we successfully expanded our private fleet to approximately 200 tractors, up from 80 at the end of 2017. In 2019, we plan to expand our private fleet further. While this fleet remains a small piece of our overall transportation needs, we believe it continues to provide strategic flexibility.", "Finally, foreign sourcing remains a long-term gross margin opportunity. We are specifically focused on diversifying country of origin, as well as growing overall foreign sourcing penetration. We believe there are many countries around the world where we can source goods at even greater value for our customers.", "Our second operating priority is capturing growth opportunities. As we enter 2019, our proven high-return, low-risk model for real estate growth is a core strength of the business. We have a long-standing track record of successfully opening hundreds of stores every year that meet our strict return thresholds. The flexibility of our model has allowed us to invest in new formats, store growth and a remodel program, all with strong returns that contribute significantly to our growth. Our store format innovation allows us to expand our addressable market opportunity as well. This innovation will continue to play a key role in 2019, as we plan to open 975 new stores that serve communities across the country.", "Our real estate model continues to focus on five metrics. These metrics help us determine that new store growth remains one of the best uses of our capital. We continue to see great results with new store sales performing at nearly 100% of pro forma expectations and returns near the high end of our 20% to 22% goal.", "We are proud of our track record for executing successful real estate projects. In 2018, we completed a total of 2,065 real estate projects, 65 more than we had originally anticipated. For fiscal year 2019, we plan to remodel 1,000 mature stores and relocate 100 stores. We expect approximately 500 remodels to be in the Dollar General Traditional Plus or DGTP format. We also expect to add produce to approximately 200 stores. The majority of which will be DGTP remodels.", "As a reminder, our traditional remodel stores, which have approximately 22 cooler-doors, deliver a 4% to 5% comp lift on average in year one and DGTP remodels with approximately 34 cooler-doors delivers a 10% to 15% comp lift on average in year one. DGTPs with produce are at the high end of this range.", "Over the past two years, we have conducted an exhaustive pilot of our DGX stores, and during that time, we have refined and enhanced the concept. We are now confident that we can drive profitability in the smaller box and we plan to open approximately 10 DGX format stores this year. DGX stores are about half the size of a traditional Dollar General and have a product selection that is tailored to vertical living customers, particularly millennials. We are excited about these plans for continued growth and innovation in 2019.", "Our third operating priority is to leverage and reinforce our position as a low-cost operator. Over the years, we have established a clear and defined process to control spending. This process has served us well and the entire organization has embraced the cost control mindset. In our stores, we continue to manage expenses through the efforts such as optimizing product assortment, reducing operating complexity and reducing product movement within the stores. One of the reasons we are so excited about our Fast Track initiative is that we believe it has potential to be a significant and incremental driver of store-level efficiency.", "Our fourth operating priority is to invest in our people, as we believe they are a competitive advantage. Our ongoing dialog with our employees is critical and we learn from these conversations to reinforce our position, as an employer of choice. In 2018, we greatly expanded our benefits to include those that resonate most with our employees, including paid parental leave for mothers and fathers, adoption assistance and day 1 access to healthcare benefits for store managers.", "We also launched new training programs, including a private fleet driver training program for distribution center employees to complement other existing educational benefits such as tuition assistance and college course credit for store manager training. And I am very proud to announce that for the eighth consecutive year Dollar General was named to Training Magazine's Top 125 training list. Ranking Number 1 overall on this, the most recent 2019 list.", "In 2019, we are expanding our benefits to include day 1 eligibility for TeleHealth benefits for all employees in our organization. Our part-time employees told us they need help assessing affordable healthcare and we believe, this will be a valuable benefit. We always monitor the wage environment carefully, and believe we are well positioned across the organization, as illustrated by robust applicant flow at every level.", "Our investment in store manager wages and training continued to pay dividends in 2018 and we finished the year with our lowest store manager turnover rate on record. We are also doing very well at the store level where we are seeing our time to fill open positions at all-time best levels for the Company. We think our competitive compensation and benefit package is compelling, but we believe that the opportunity to build a long-term career with a growing retailer is the most important currency we have to attract and retain talent.", "In 2019, we plan to create approximately 8,000 net new jobs. This growth creates an environment where employees have opportunities to advance to higher paying and higher responsibility jobs in a relatively short amount of time. Being an employer of choice is a priority for us and we will continue to seek out opportunities to enhance our employee experience.", "In closing, 2018 was a very good year for Dollar General, the business is in great shape as we enter 2019, and we are excited about the future. As John mentioned, our long-term goal generally remains to deliver double-digit adjusted EPS growth. To do this, we need to make smart business decisions that focus both on growing the top-line and capturing incremental operating margin, where and when we can. Today, I have highlighted how our progress on our initiatives and operating priorities contributed to a great 2018.", "Looking ahead, we believe we are making the right long-term strategic investments from a position of strength. With our business model that leverages our real estate acumen, low-cost operating experience and our laser-focus on delivering value and convenience to our customers, we believe that Dollar General's business is differentiated from the rest of the retail landscape.", "I believe we have the best team in consumable retail and I hold each person on my senior team accountable for delivering today and planning for tomorrow's growth. I am confident that no one on the team will be satisfied with anything less. I am proud of the team's innovative approach to retailing, the strategic initiatives they have put forth in motion and the financial performance we are driving. We continue to be the leader within our channel. We believe we operate in one of the most attractive sectors in retail and we have confidence that our strategy and execution will allow us to continue to reach our goals.", "Finally, a heartfelt thanks to each and every one of our more than 135,000 employees for the hard work that they do every day, which allows us to fulfill our mission of serving others.", "With that, operator, I'd now like to open the lines for questions." ] } ]
[ { "name": "Operator", "speech": [ "(Operator Instructions) The first question will come from Vincent Sinisi with Morgan Stanley. Please go ahead." ] }, { "name": "Todd Vasos", "speech": [ "Good morning." ] }, { "name": "Vincent J. Sinisi", "speech": [ "Hey, good morning, guys. Thanks very much for taking my questions. So, just wanted to go, of course, to the incremental investments on the initiatives this year with obviously still early stages around fresh and whatnot. Can you just give us a little bit more of a sense for that $50 million specifically, like how much at least directionally of maybe a lift to the comps, do you think that could provide earlier on? And then, how much of that maybe recurring as you ramp some of these initiatives going forward? I guess, you know, obviously everyone kind of on the line, today is just saying new, kind of, OK, a bit below the double-digit growth algorithm for this year, but when can that maybe return, if that's, of course, helpful context." ] }, { "name": "John W. Garratt", "speech": [ "Okay. Couple of questions there, I'll start with the first one around the initiatives. As you look at the initiatives, as we said, we see these as being accretive as early as next year, the two new ones we talked about are Fast Track and Fresh, we're very excited about both. As you look at fresh, we see both of them helping the top-line and the bottom line. As you look at Fresh, the immediate impact we see from that is helping our gross margin, helping reduce our product cost. Now that does come with upfront expenses, particularly in SG&A, and there is a trade-off for SG&A for gross margin, but we're very excited about what that can do, not only to our costs, but then also our flexibility and longer term, what that could mean in terms of, as we expand our fresh offerings and in-stock availability there, we think that can be a meaningful sales driver.", "On Fast Track, that has two parts to that, you have the self-checkout piece and then you have the one-touch shelf stocking piece. The latter will have the more immediate impact and we're starting to do that now and we will scale that over the course of the year. The self-checkout will take a little bit more time with the technology involved in driving the adoption on that. So, these are sizable investments this year. They'll pressure the SG&A. But as we look out, we see them as being accretive as early as next year, having a meaningful impact on our overall operating margin, EPS growth and really positioning us with the long-term in mind to drive double-digit EPS growth over the long term." ] }, { "name": "Vincent J. Sinisi", "speech": [ "Okay. All right, perfect. That's helpful. And then if I could, last quarter, you guys had mentioned and we've been getting quite a bit of questions around it. Just kind of your internal surveys, the confidence was looking a little bit shaky potentially for kind of later this year, but it was nice to see, of course, in the release today that ticket and traffic were both positive. So, any updates there, any work, any thoughts around what you're seeing the basket around the health that would be great." ] }, { "name": "Todd Vasos", "speech": [ "Yeah, Vinny, I would tell you, we talk to our core customer each and every quarter and while she is feeling better about having a little bit more money in her pocket, she continues to tell us that it is definitely from productivity, meaning working more hours and in some cases multiple jobs. But what she is also telling us is that she is feeling a little less confident than she was at the middle of last year to the end of last year, which gives us a little bit of pause from the standpoint that we think that our core customers starting to weaken a little bit, which obviously we do very well in all economic cycles. So, we're positioning ourselves for the back half of the year for a little weaker consumer as we move through the year." ] }, { "name": "Vincent J. Sinisi", "speech": [ "Okay, all right. That's helpful. Thank you, guys. Good luck." ] }, { "name": "Operator", "speech": [ "The next question is from Matthew Boss with JPMorgan. Please go ahead." ] }, { "name": "Matthew Boss", "speech": [ "Great, thanks. So, maybe can you speak to the proactive promotional actions that you took in the fourth quarter, any higher level changes in the competitive landscape that drove the change and just how best to think about markdowns and gross margin in 2019?" ] }, { "name": "Todd Vasos", "speech": [ "Yeah, I'll start and then turn it over to John for 2019. We really went after some targeted markdowns in Q4; as you know, Q4 has the highest traffic counts across retail, not only at Dollar General. And we've got a track record here of working the price levers pretty well and we know which ones to work for the stickiness of the customer; meaning, we pulled some promotional levers in the fourth quarter that we believe will sustain that traffic growth in the Q1 without having to be nearly as aggressive. And we saw -- we went added from a position of strength and we saw real opportunity to take share, as we went through Q4. It did exactly what we thought it would do, and positions us very well going into the first quarter here in 2019." ] }, { "name": "John W. Garratt", "speech": [ "And as Todd said, with this helping drive traffic and taking share, in our belief, that we can retain these customers, we believe we're very well positioned going into 2019 to further optimize our promotional activity, while at the same time driving profitable sales and traffic. So we feel we're very well positioned." ] }, { "name": "Matthew Boss", "speech": [ "Great. And then just a follow-up on same-store sales. So how best to think about the cadence this year relative to the 2.5% for the year? It sounds like we should anticipate the first-half better than the back-half just given what you've seen in your surveys. But have you seen the momentum continue in the first quarter despite tax refunds and some pressures that others have cited?" ] }, { "name": "Todd Vasos", "speech": [ "Yeah, I'd start by saying the fundamentals are very strong. We're really pleased with the impact that our initiatives are having and the share we are taking. There is a bit of a timing impact to start the year. We talked about the benefit from the acceleration of SNAP payments from early Q1 into late-Q4, that did have a bit of an impact on the beginning of the quarter; not necessarily dollar for dollar, but I would draw that timing to your attention. Other than that, it's a pretty smooth year in our minds and everything is firing on all cylinders." ] }, { "name": "Matthew Boss", "speech": [ "That's great. Best of luck." ] }, { "name": "Todd Vasos", "speech": [ "Thank you." ] }, { "name": "Operator", "speech": [ "The next question is from Rupesh Parikh with Oppenheimer. Please go ahead." ] }, { "name": "Todd Vasos", "speech": [ "Good morning, Rupesh." ] }, { "name": "Rupesh Parikh", "speech": [ "Good morning. Thanks for taking my question. Just going back to your commentary in the press release about generally double-digit EPS growth going forward, is that more of a reflection this year is going to be below 10% then you expect to get back to potentially next year and beyond? Or is there something that changes your confidence in that metric?" ] }, { "name": "Todd Vasos", "speech": [ "No. The comment we made there -- and I'll start by saying, we continue to see ourselves as double-digit EPS growers over the long-term. That comment just meant to say that we reserve the right in some years to make targeted investments to drive that long-term growth and protect the 10% growth." ] }, { "name": "Rupesh Parikh", "speech": [ "Great. And then just on gross margins, I appreciate the color that you provided on Q1. So, it sounds like, we should expect as comparisons get easier that decline versus what we see in Q1 to progressively get better, as the year progresses. Is that the right way, you guys are thinking about the cadence?" ] }, { "name": "John W. Garratt", "speech": [ "Yeah, I think you're thinking about that's the right way. We've talked about a couple of pressures at the beginning of the year. One of the things we talked about is changes to inventory replenishment. We've seen a very high correlation between on-shelf availability and sales. And as such, we're making an investment at the beginning of the year, bringing more inventory and to make sure we're right in stock. This will have a Q1 price tag due to the impact on product mix, but as we cycle through that, that'll normalize.", "The other thing is, as the year progresses, we expect to start to see some benefits from the initiatives we're putting in place like Fresh and others to enhance gross margin. So, as you look at the year on a year-over-year comparison, we expect that to improve as the year progresses." ] }, { "name": "Rupesh Parikh", "speech": [ "Great. Thank you." ] }, { "name": "Operator", "speech": [ "The next question is from Michael Lasser with UBS." ] }, { "name": "Todd Vasos", "speech": [ "Good morning." ] }, { "name": "Michael Lasser", "speech": [ "Thanks a lot. Good morning, Todd. Thanks a lot for taking my question. So, if you're successful with some of the initiatives that you're rolling out this year, should we expect you to accelerate the rollout of them next year, since the 2020 would be another year of sub-10% EPS growth?" ] }, { "name": "Todd Vasos", "speech": [ "Michael, thanks for the question. As you know, here at Dollar General, we do everything very methodically and we make sure that it has a solid return before we move to a broad scale roll-out. In saying that, we really like what we see from DG Fresh early on and we have great confidence in our Fast Track momentum as well, especially around some of the digital efforts of -- that we have to include the self-checkout option that will be coming. In saying that, as John indicated, we believe that these initiatives will become accretive as we move into next year; so, should help offset some of those pressures as we continue a broader scale rollout, a little bit of a pay-as-you-go, if you will, type of a rollout schedule." ] }, { "name": "Michael Lasser", "speech": [ "So, just to clarify, you're looking at 2019 as more of a transitional year, returning to the algorithm over the longer run, next year?" ] }, { "name": "John W. Garratt", "speech": [ "There is, as we indicated, there is start-up cost associated with this. And as we start to scale these, as Todd said, it's more as a pay for itself as it goes, and we expect these to be accretive as early as 2020." ] }, { "name": "Michael Lasser", "speech": [ "Okay. And then could you break down the gross margin from the fourth quarter in a bit more detail? You outlined the promotion. What piece of the gross margin drag was that? And then initial markups are now a drag on gross margin, how did that work?" ] }, { "name": "John W. Garratt", "speech": [ "Yeah, walking through last year, we articulated the specific Q4 drivers, but I guess stepping back and taking a broader look, if you look at the full year, our gross margin was down 32 basis points. But we are very pleased with the results where we drove traffic, we took share, delivered very good comps. We did invest the margin in opportunistically in promotional activity, as Todd mentioned, but is clearly resonated with our customers allowed us to take share. That was a very high take rate here and help us deliver the sales and we believe that this will stick and we'll be in a position next year to rationalize these investments.", "The other impact with SNAP, while that did benefit our sales with that pull-forward, there was a mix impact that came with, in general, lower mix of those additional sales. And then the team managed through the headwinds of tariffs in transportation costs. As we go into this year, as we said, we believe we're very well positioned, that we can throttle back be even more targeted on our promotional activity, while still driving traffic and sales. We believe we have opportunities to increase margin over time with the new initiatives like DG Fresh and the NCI initiative. Shrink, where we've had nine quarters of year-over-year improvement and the other levers that we've talked about, we think we're very well positioned." ] }, { "name": "Michael Lasser", "speech": [ "Okay. Thank you very much and good luck with the year." ] }, { "name": "Todd Vasos", "speech": [ "Thank you." ] }, { "name": "Operator", "speech": [ "The next question will come from Peter Keith with Piper Jaffray. Please go ahead." ] }, { "name": "Peter Keith", "speech": [ "Hi, thanks. Good morning, everyone. I wanted to dig into the comp that you're getting from new stores and from remodels. Historically, that's been in a range of 1.5% to 2%, but it's interesting with DGTP acceleration and some of the Fresh initiatives, seems like there's an accelerated lift. I'm curious if you're starting to move to the high end of that 1.5% to 2% range or are you potentially above it sort of a structural impact to your comp?" ] }, { "name": "Todd Vasos", "speech": [ "Thanks for the question. I would tell you that we're very happy with not only our new store pipeline, but our remodel relocation pipelines as well. And I think you're thinking of it right in that because of the ramp up of our remodels, especially in the DGTP format to include produce in many of those stores, we're closer to the high end. I wouldn't say that we have broken out of that, the range that we talk about, but we're more at the high end of that range with some of the work that we've done." ] }, { "name": "Peter Keith", "speech": [ "Okay, thank you. I did want to dig into a little bit on how you're talking about the accretion benefits in 2020 from the growth initiatives. I guess, in reality, when we look back at the last three years, the guidance for 2018, you really haven't been at 10% earnings growth in any of the years, if you exclude the tax changes. So, are you seeing that do you think you will be at 10%-plus by 2020 and that these are all initiatives as a whole will be accretive to next year?" ] }, { "name": "John W. Garratt", "speech": [ "Yeah, I'll just reiterate that over the long term, we see ourselves as double-digit EPS growers, we're not giving specific guidance in 2020 at this point. But we do feel very good about the initiatives and their ability to be accretive next year, as you look at the fundamentals of the business model. We feel very good about what we're seeing from our new store growth, with the great returns and the sales from those with what we're seeing on a comp basis with the performance of the initiatives and the comps we are seeing. We see, as we said, a lot of opportunities over the long term to improve our operating margin. We really look at operating margin overall.", "And we believe, we're making the right investments here to enhance that operating margin. It comes at a little bit of a cost now, but we believe this positions us better for the future. We continue to generate a tremendous amount of cash, which allows us to reinvest in these business, while paying back significant amount to shareholders through share repurchases. So, we don't see the future differently." ] }, { "name": "Peter Keith", "speech": [ "Okay. Thank you very much and good luck." ] }, { "name": "Todd Vasos", "speech": [ "Thank you." ] }, { "name": "Operator", "speech": [ "The next question is from Ed Kelly with Wells Fargo. Please go ahead." ] }, { "name": "Edward Kelly", "speech": [ "Hi, guys, good morning." ] }, { "name": "Todd Vasos", "speech": [ "Good morning." ] }, { "name": "Edward Kelly", "speech": [ "I just want to start going with clarification, when you talked about the impact of SNAP in February, not having the same dollar-for-dollar impact, are you saying that the headwind in February was not as big as the benefit that you saw in January?" ] }, { "name": "Todd Vasos", "speech": [ "That's exactly what we're saying. We have not seen a dollar-for-dollar impact. I think that really goes to, what I talked about earlier, some of those investments we made in markdown being very sticky. And we know our customer very well and when you get to change her shopping patterns, she sticks with that and we saw that as we moved into Q1." ] }, { "name": "Edward Kelly", "speech": [ "And then just curious as to, I know, you only have a couple of weeks, but how March has looked given that things kind of normalize there. Refund seems to be picking up. And then just one other question about all this, did you mention that there were some conservatism built into the comp guidance around the back half of the year? I'm not sure if I heard that right?" ] }, { "name": "Todd Vasos", "speech": [ "I'll take the first one, but we really aren't talking really much about Q1 right now, obviously. But I would frame it this way, we feel very confident in our top-line sales due to all of the initiatives that we have in play, including the investment we made in Q4. And just keep in mind March has an Easter shift in it. I think that's important toward the end of the month, but for us, we'll equalize as we move through April. So, we're bullish about the quarter, but we have a lot of quarter left to go. And John, you may want to address the other one." ] }, { "name": "John W. Garratt", "speech": [ "Yeah. Other than the timing impact we mentioned, the overall year comp, we guided to reflect our current view of the year." ] }, { "name": "Edward Kelly", "speech": [ "Okay. And then, Todd, just one quick follow-up for you. On DG Fresh, why now on this, on self-distribution and can you just help us understand the benefits, like what type of margin opportunity is here from doing this yourself, like, why does in-stocks improve with more frequent deliveries? And why don't you tell us about your plans for Fresh?" ] }, { "name": "Todd Vasos", "speech": [ "Yeah. So, why now? I think the best way to answer that is that, we continue to expand our cooler program here. It's been one of the biggest traffic drivers and one of our biggest comp drivers that we've seen. We have a series of distributors out there today across the country and those distributors do a nice job for us, but it comes at a cost and that cost is very high, as you can imagine, in many cases a full service program.", "So, we see a real opportunity from a position of strength right now to take that in-house and control your own destiny and the way we see sales and margin enhancements here is a couple of ways. Number one, on margin, not having to pay that very hefty up-charge. We're going to build a bank, the majority of that with a little labor that we're putting in the stores to help work the goods, again, coming off of the full service program, but margins will be very accretive with this program.", "And then the second thing is sales. What you're going to see is our ability: one, to stay in stock; number two, longer term, what you're going to find from us, as I mentioned in my prepared remarks, is going to be a different assortment that's going to really take into account a lot of our private brand offerings, which will help our margins and our sales, but also on items that we don't carry today because of the distributor network that we have. So, we're very excited about this. This is probably one of the biggest margin opportunities we will have shorter term, to really move the needle here." ] }, { "name": "Edward Kelly", "speech": [ "Thank you." ] }, { "name": "Operator", "speech": [ "The next question will come from Scot Ciccarelli with RBC Capital Markets. Please go ahead." ] }, { "name": "Scot Ciccarelli", "speech": [ "Hi, guys. I guess, I'm still little confused on some of the markdown commentary. So, I know you guys have talked about the pricing environment being pretty benign, and you're comfortable with where your pricing is. So, can you help us understand little bit better why you engaged in that promotional activity that you did, number one; number two, how does it benefit 1Q, even as you pull back promotions? I guess, I'm a little confused on that. Thanks." ] }, { "name": "Todd Vasos", "speech": [ "Yes, sure. So, as the way we look at customer and customer traffic, again, as I mentioned, we talk to our customer every quarter. What she was telling us is that she was feeling a little weaker than she was middle of the year. And we took an opportunity from a position of strength to take share. We saw where we could take share in many different DMAs across the country. And we thought the best way to do that, which turned out to work pretty nicely, was to do it on a promotional basis, because we feel very confident in our everyday shelf pricing that we have today.", "And so we did it on a promotional basis and we know this customer very well, we know if we can change her shopping patterns, especially in the busy fourth quarter, when we have her attention, it is -- she's very sticky, she'll stay with us. And I think we've seen some of that, as we entered Q1, evidenced by the not for dollar to dollar trade-off back on SNAP, as an example. So, we believe that it did exactly what we thought and we've said in the past, we reserve the right to go in and make these investments periodically to continue to drive traffic and continue to take share and that's exactly what we did in Q4." ] }, { "name": "Scot Ciccarelli", "speech": [ "Got it. That's helpful. And then, just curious, was traffic positive kind of throughout the quarter?" ] }, { "name": "Todd Vasos", "speech": [ "Yeah, it was pretty stable throughout the quarter, at the back-half a little stronger than the first. But I would tell you, we're pleased overall with the traffic in Q4." ] }, { "name": "Scot Ciccarelli", "speech": [ "Great. Thanks a lot, guys." ] }, { "name": "Operator", "speech": [ "The final question will come from Robbie Ohmes with Bank of America. Please go ahead." ] }, { "name": "Robert Ohmes", "speech": [ "Hey, thanks for taking my question. Todd, I was just hoping you could talk a little bit more about the long-term profit outlook of DG Fresh. So, can you just sort of create a picture for us, if you do roll this out over the next three to four years, how does the income statement change? Are you expecting a sort of a secularly higher gross margin and kind of permanently higher expense ratio? And what are the kind of long-term assumptions about what store sales productivity levels have to be to make this all work on a large scale basis?", "And you've mentioned some -- how you're taking more of your distribution in-house a little bit. I mean, does that have to accelerate more significantly to support being -- doing Fresh on a very large scale basis? Maybe just help us understand that the 4 -- the three-year to five-year outlook for how much this could change your entire store base. It's probably more complicated to operate this category as well. Thanks." ] }, { "name": "Todd Vasos", "speech": [ "Yeah, that's a great question. And I would first start by saying that, as we look at the DG Fresh initiative, we see a real opportunity to drive both the top-line and the margin. So, I would look at it this way, it will be a significant margin driver as we move into 2020 and beyond. And that's really driven primarily off of the distributor cost that we pay today, which has a substantial up-charge attached to it, substantial.", "And as we work with our vendors, which we've got relationships with all of them, what we're finding in the first 300 stores in first DC that we put in were substantial reductions in cost of goods to move the product into our own DCs and distribute it ourselves. So, I think you need to look at it that way. On the top-line, I think it'll be a meaningful top-line contributor as well as we continue to be better in-stock, because we can -- we know how to distribute goods, fresh shelf-stable, whatever it may be, controlling our own destiny there gives us high confidence that we can execute at a much higher level than we were seeing across the country.", "We had some distribution voids quite frankly across the country and we still do with our distributor network, because it is so complex and so large. By taking it in-house, we believe, it will simplify our network and be able to execute that much better. And as you continue to look out, we see opening these DCs about the same pace as 2019. So, an average of 5,000 to 6,000 stores a year for the foreseeable future until we're built out. And we believe that these Fresh distribution centers, there we will be able to leverage as well some of our dry goods that perhaps we can deliver out of there as well, taking some of the pressure off of our larger DCs. So, we believe it's a win-win across the board, which should see substantial P&L ramifications on a positive side as we move into 2020 and then beyond." ] }, { "name": "Robert Ohmes", "speech": [ "Terrific. Best of luck. Thanks." ] }, { "name": "Todd Vasos", "speech": [ "Thanks you." ] }, { "name": "Operator", "speech": [ "Ladies and gentlemen, we thank you for your participation in today's conference call. You may now disconnect." ] } ]
DG
2023-06-01
[ { "description": "Vice President, Investor Relations", "name": "Kevin Walker", "position": "Executive" }, { "description": "Chief Executive Officer", "name": "Jeff Owen", "position": "Executive" }, { "description": "Chief Financial Officer", "name": "Kelly Dilts", "position": "Executive" }, { "description": "Morgan Stanley -- Analyst", "name": "Michael Kessler", "position": "Analyst" }, { "description": "JPMorgan Chase and Company -- Analyst", "name": "Matt Boss", "position": "Analyst" }, { "description": "UBS -- Analyst", "name": "Michael Lasser", "position": "Analyst" }, { "description": "Credit Suisse -- Analyst", "name": "Karen Short", "position": "Analyst" }, { "description": "Oppenheimer and Company -- Analyst", "name": "Rupesh Parikh", "position": "Analyst" } ]
[ { "name": "Operator", "speech": [ "Good morning. My name is Robert, and I'll be your conference operator today. At this time, I'd like to welcome everyone to the Dollar General first-quarter 2023 earnings conference call. Today is Thursday, June 1st, 2023.", "All lines have been placed on mute to prevent any background noise. This call is being recorded. Instructions for listening to the replay of the call are available in the company's earnings press release issued this morning. Now, I'd like to turn the conference over to your host, Mr.", "Kevin Walker, vice president of investor relations. You may now begin your conference." ] }, { "name": "Kevin Walker", "speech": [ "Thank you, and good morning, everyone. On the call with me today are our CEO, Jeff Owen; our president, John Garratt; and our CFO, Kelly Dilts. Our earnings release issued today can be found on our website at investor.dollargeneral.com under News & Events. Let me caution you that today's comments include forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995, such as statements about our financial guidance, strategy, vision, initiatives, plans, goals, priorities, opportunities, investments, customer, expectations or beliefs about future matters, and other statements that are not limited to historical fact.", "These statements are subject to risks and uncertainties that could cause actual results to differ materially from our expectations and projections. These factors include, but are not limited to, those identified in our earnings release issued this morning, under Risk Factors in our 2023 Form 10-K filed on March 24th, 2023, and any later filed periodic report and in the comments that are made on this call. You should not unduly rely on forward-looking statements, which speak only as of today's date. Dollar General disclaims any obligation to update or revise any information discussed in this call unless otherwise required by law.", "At the end of our prepared remarks, we will open the call up for your questions. Please limit your questions to one and one follow-up question if necessary. Now, it is my pleasure to turn the call over to Jeff." ] }, { "name": "Jeff Owen", "speech": [ "Thank you, Kevin, and welcome to everyone joining our call. In addition to our first-quarter results and updated outlook for 2023, we'll spend our time this morning discussing the significant progress we have made on multiple fronts, including improving execution in our distribution centers and stores, an update on the rapidly changing macroeconomic environment, and the important actions we are taking to support our customers. Despite a more challenging macroeconomic environment than previously anticipated, which has negatively impacted our sales and full year EPS outlooks, we are confident in Dollar General's ability to deliver strong and sustainable growth in the years ahead. As a reminder, Dollar General is uniquely positioned at the intersection of value and convenience.", "Regarding value, although we continue to feel very good about our price position relative to competitors, as well as other classes of trade, we are always looking for ways to better serve our customers and provide them with the items they need at prices they can afford. And right now, we believe our customers need Dollar General more than ever. As it relates to convenience, with more than 19,000 stores located within five miles of approximately 75% of the U.S. population, we believe we are uniquely positioned to provide our customers with convenient access to everyday household essentials, particularly in rural America.", "We delivered progress across multiple fronts in Q1, including our supply chain recovery efforts as we ended the quarter with our best distribution center service levels in nearly two years. With our previously announced investment in incremental store labor hours, we continue to enhance the customer experience, including a material improvement in customer satisfaction scores since prior year-end. And while we are pleased with our progress on these fronts, we are focusing even more structurally, strategically and operationally on serving our core customer. I'll provide more details on these actions in a moment.", "But first, let me provide some details on our Q1 results. The quarter was highlighted by same-store sales growth of 4.3% in our consumables category. This increase was partially offset by a decline of 8.5% in our combined nonconsumable categories as customers continue to shift more of their spending away from discretionary goods. Overall, we had softer-than-expected sales in the quarter, which we believe was primarily driven by deterioration in the macroeconomic environment, including headwinds from lower tax refunds than customers expected and reductions in SNAP benefits, as well as unfavorable weather during the months of March and April.", "Regarding tax refunds, we believe our customers were caught off-guard by the reduced amounts, which exacerbated the inflationary pressures they were already experiencing. Our customers typically use these refunds to repay debt, purchase big ticket items, make repairs, build a safety net in savings, or a combination thereof. The changes this year are contributing to their financial insecurity, and many are using lower refunds to simply afford basic household essentials while others are contracting their overall spending. Turning to SNAP.", "As we mentioned on our Q4 2022 call, we did not see a notable sales impact in states that eliminated the emergency allotment early. Instead, our data suggests that customers who used SNAP simply made up the difference in their basket with another form of tender. However, in the states where reductions occurred in March of this year, we have seen an impact to sales as our customers appear to primarily have reduced the size of their basket instead of using other forms of tender to complete their purchases at the same level. Additionally, these and other customers appear to be shopping closer to payday.", "Finally, like other retailers, the cold and rainy weather also had a negative impact on our top-line performance, particularly in March and April, which created a slow start to the spring season. Now, let me recap some additional financial results for the first quarter. Net sales increased 6.8% to $9.3 billion, and same-store sales increased 1.6%. Our same-store sales results were driven by increased basket size, partially offset by a decrease in customer traffic.", "While we gained market share in nonconsumables again this quarter, our share in consumables was essentially flat as we believe the macro headwinds have had a disproportionate impact on our core customer. From a monthly cadence perspective, same-store sales growth was strongest in February at 4.8% and ahead of our expectations. We continue to see positive results from March at 2.2% growth, even though the back half of the month was impacted by the headwinds I mentioned earlier. This pressure continued into April, resulting in a same-store sales decline of 2% for the last month of the quarter.", "This pressure has continued into May as we continue to see sales performance below the expectations contemplated in our initial financial guidance for the year. However, as our actions have begun to take hold, we have seen an encouraging uptick with positive comp sales through the first three weeks of the quarter, as well as gains in our most recent market share results. As a result of these headwinds and the impact on our top-line performance, as well as an increasingly challenging shrink environment, we are revising our outlook for the year, which Kelly will discuss in more detail shortly. Turning to our customer who is under greater pressure than we have seen in quite some time.", "In addition to the ongoing mix shift I mentioned earlier, we continue to see signs of increasing financial strain on our customers as they seek affordable options, including increased reliance on private brands and items at or below the $1 price point. Being there for our customer is our most important calling at Dollar General. And while past experience suggests our customers will adjust their budgets after a couple of quarters, we are taking action now to better support them both in the near and longer term. First and foremost, we are taking action to provide even more affordable solutions and lower prices for our customers.", "We are doing this in a targeted fashion on the items that matter most as we believe we can be even sharper within our established target range. Next, we are leaning into our save to serve approach as we evaluate opportunities to take costs out of the business while pursuing efficiencies in our cost structure that will allow us to reduce spending without impacting the customer experience. We are also refining our inventory management process, including making some structural reporting realignments within our team to allow us to move more nimbly to respond to customer demand and the needs of the business. Finally, we are prioritizing and optimizing our capital expenditures to maintain flexibility and enhance our focus on the core business.", "Included in these plans, we have made the decision to moderate our rollout of pOpshelf in 2023 as we now plan to open approximately 90 stores compared to our original expectation of approximately 150 openings. We believe this is a prudent reduction based on the current environment. And as other retailers navigate what this environment means for their businesses, we believe there may be more favorable real estate opportunities to come. While we are operating in a different and more challenging environment than previously anticipated, we believe we are taking the right actions to serve our customers and communities.", "And we know that taking care of our customer is not only the right decision for the near term but that it will prove to be the right answer for the long term as well. Despite the near-term headwinds, this business model, which has proven to be successful in a variety of economic environments, remains very strong. And we have multiple strategic initiatives in place to drive future growth while also distancing and differentiating our model from others in the discount retail space. We have a clear vision to be a force for opportunity, which I will discuss in greater detail in a few minutes.", "And most importantly, our mission of serving others is unchanged and is our north star regardless of the external environment. I also want to highlight that we recently published our fifth annual Serving Others Report, which provides updates on our ongoing ESG efforts. Finally, I want to take this opportunity to congratulate John Garratt on his retirement. John is with us in the room today, and I just want to publicly thank him for his service to our customers, employees, and shareholders.", "He has been a wonderful business partner, and we will certainly miss him. With that said, I also want to congratulate Kelly Dilts on her promotion to chief financial officer. Kelly has provided meaningful leadership since joining our team in 2019 and has worked closely with John and myself during this transition process. I am confident she will continue to elevate our team while driving the strong financial discipline we are committed to at Dollar General.", "With that, I will now turn the call over to Kelly." ] }, { "name": "Kelly Dilts", "speech": [ "Thank you, Jeff, and good morning, everyone. I also want to thank John for his outstanding leadership during his time at Dollar General, as well as for his mentorship as I step into this role. It's a tremendous honor to serve as CFO of this great company and work with this incredible team to serve our customers. I'm excited about the opportunity we have in front of us as we drive growth and create long-term shareholder value.", "Now that Jeff has taken you through a few highlights of the quarter, let me take you through some of the important financial details. Unless we specifically note otherwise, all comparisons are year over year, all references to EPS refer to dilutedearnings per share, and all years noted refer to the corresponding fiscal year. Jeff has already discussed sales, so I'll start with gross profit. For Q1, gross profit as a percentage of sales was 31.6%, an increase of 34 basis points.", "This was primarily attributable to higher inventory markup, decreased transportation costs and a decreased LIFO provision. These were partially offset by increases in shrink, markdowns, and inventory damages, as well as a greater proportion of sales coming from the consumables category. SG&A as a percentage of sales was 23.7%, an increase of 94 basis points. This increase was driven by certain expenses that were a greater percentage of sales in the current-year period, the most significant of which were retail labor, including a $27 million targeted incremental labor hour investment, as well as repairs and maintenance and depreciation and amortization.", "These were partially offset by a decrease in incentive compensation. Moving down the income statement. Operating profit for the first quarter decreased 0.7% to $741 million. As a percentage of sales, operating profit was 7.9%, a decrease of 60 basis points.", "Interest expense increased to $83 million in Q1, compared to $40 million in the first quarter of '22, primarily driven by higher average borrowings and higher interest rates. Our effective tax rate for both this quarter and the first quarter of '22 was 21.8%. The effective income tax rate was flat due to a lower state effective tax rate, offset by a reduced benefit from stock-based compensation compared to the first quarter of '22. Finally, EPS for the quarter decreased 2.9% to $2.34.", "Turning now to our balance sheet and cash flow. Merchandise inventories were $7.3 billion at the end of the quarter, an increase of 14.7% on a per-store basis. This increase continues to reflect the impact of product cost inflation. While inventory growth is still elevated, the pace has moderated from its peak last year.", "Looking ahead, we plan to further sharpen our focus on inventory as we adjust to an evolving customer demand, and we continue to anticipate more normalized growth rates as we move through the back half of the year. Importantly, we continue to believe the quality of our inventory is in good shape. During Q1, the business generated cash flows from operations of $191 million, a decrease of 57%, which was primarily attributable to higher inventory levels. Total capital expenditures were $363 million and included our planned investments in new stores, remodels and relocations, distribution and transportation projects, and spending related to our strategic initiatives.", "During the quarter, we also paid a quarterly dividend of $0.59 per common share outstanding for a total payment of $129 million. As planned, we did not repurchase any shares this quarter. Our capital allocation priorities continue to serve us well and remain unchanged. Our first priority is investing in high-return growth opportunities, including new store expansion and our strategic initiatives.", "Next, we remain committed to returning cash to shareholders through quarterly dividend payments and, over time and when appropriate, share repurchases, all while targeting a leverage ratio of approximately three times adjusted debt to EBITDAR in order to maintain our current investment-grade credit rating. Moving to an update on our financial outlook for the fiscal 2023 year. As Jeff noted, we're seeing a much more challenging macroeconomic environment than we anticipated, and this is having a significant impact on our customer spending levels and behavior. We're taking swift and decisive action to adjust to this environment while maintaining our ability to save our customers both time and money.", "We remain confident in the business and our long-term growth prospects. In the near term, we are revising our outlook for 2023 to reflect those headwinds, and we now expect the following: first, net sales growth in the range of approximately 3.5% to 5% compared to our previous expectation of 5.5% to 6%. Both of these include an anticipated negative impact of approximately 2 percentage points due to lapping 2022's 53rd week. Next, same-store sales growth is expected to be in the range of approximately 1% to approximately 2%.", "This compares to our previous expectation of 3% to 3.5%. Finally, EPS is expected to be in the range of an approximate 8% decline to flat. This compares to our previous expectation of growth in the range of approximately 4% to 6%. Both of these ranges include an estimated negative impact of approximately 4 percentage points due to lapping 2022's 53rd week.", "The updated diluted EPS guidance also includes an anticipated negative impact of approximately 4 percentage points due to higher interest expense in fiscal 2023. This compares to the anticipated negative impact of approximately 3 percentage points included in the prior EPS guidance. Our EPS guidance assumes an effective tax rate of approximately 22.5%. This compares to our previous assumption in the range of 22.5% to 23%.", "We now expect capital spending to be in the range of 1.6 billion to 1.7 billion compared to our previous expectation of 1.8 billion to 1.9 billion, all of which include the impact of significant inflation in the cost of certain building materials, construction of new distribution centers, and continued investment in our strategic initiatives and core business to support and drive future growth. We will continue to evaluate our capital expenditures. Our current expectations do reflect reductions in spending that we believe are prudent while we continue to prioritize meeting the needs of the business and supporting our ongoing growth. Finally, in order to maintain financial flexibility and stay in line with our goal to maintain our investment-grade credit ratings and our associated debt leverage ratio target, we do not plan to repurchase shares in 2023.", "This compares to our previous expectation to repurchase a total of approximately $500 million of our common stock. Let me now provide some additional context as it relates to our outlook. In terms of quarterly cadence, we anticipate the EPS decline to be the most significant in the second quarter as a result of continued financial strain on our customer, as well as lapping our strongest quarterly gross margin performance from 2022. We are also pulling forward a larger portion of our labor investment and anticipate more than $40 million of the investment will be made in the second quarter.", "Looking ahead, we expect the fourth quarter to be our strongest quarter from both a comp sales and EPS growth perspective as we anticipate a benefit from lapping the significant supply chain costs and winter storm impact, as well as generating momentum from the actions we're taking this year as we head into 2024. Our sales guidance assumes our customer will remain under pressure for the remainder of the year. While we believe they will ultimately adjust their budgets and recover, the depth and the duration of the current pressure is difficult to predict. Additionally, while we have attracted and retained a significant number of customers in higher income brackets in recent years, our guidance does not assume a significant trade-in benefit for this year.", "Turning now to gross margin for 2023. In addition to the material benefit from lapping the increased supply chain expenses in the second half of '22, we expect the benefits from greater distribution center capacity and performance, lower carrier rates, expansion of our private tractor fleet, and other distribution and transportation efficiencies. We also expect to continue realizing benefits from our initiatives, including DG Fresh. Furthermore, we continue to anticipate a significant contribution from our DG Media Network.", "Partially offsetting some of these expected benefits are increased inventory shrink, as well as pressure from sales mix and higher markdowns throughout the remainder of the year. Regarding SG&A, we expect continued investments in our strategic initiatives as we further their rollout. However, in the aggregate, we continue to expect they will positively contribute to operating profit and margin in 2023 as we expect the benefits to gross margin from our initiatives will more than offset the associated SG&A expense. And we plan to continue making the remainder of the planned total incremental investment of approximately $100 million in our stores, primarily through additional labor hours.", "And as I just noted, we expect this investment to be more heavily weighted toward the first half of the year. While this investment will pressure SG&A in 2023, we believe it's the right thing to do for the business, and it will drive stronger in-store execution, positioning us well to serve our customers even better. Finally, we also expect a headwind from higher interest expense over the next couple of quarters. In closing, we are grateful for the team's hard work as we strive to deliver for our customers.", "We're sharpening our focus and continue to be disciplined in how we manage expenses and capital with the goal of delivering consistent, strong financial performance while strategically investing in the long term. Finally, we're confident in our business model and our ongoing financial priorities to drive profitable same-store sales growth, healthy new store returns, strong free cash flow, and long-term shareholder value. With that, I'll turn the call back over to Jeff." ] }, { "name": "Jeff Owen", "speech": [ "Thank you, Kelly. We have a clear vision for the future of this company, which is to be a force for opportunity for our customers, employees, communities, and shareholders. To bring this vision to life in the years ahead, we have developed a strategic framework to serve as our road map into the future. I want to briefly introduce this framework today, and we'll provide further detail and updates in the quarters ahead.", "We call this road map DG Forward, and it is focused on the powerful combination of execution and innovation. For us, our execution is driven by our operating priorities. While these priorities are not changing, we are going to sharpen our strategic focus in four key ways. First, we are going to focus even more on rural by doubling down on serving and providing our rural customers with what they need when they need it.", "This company was founded to serve the underserved, and today, approximately 80% of our stores, many of which are in rural America, serve communities with fewer than 20,000 residents. Second, we are going to extend our reach. We will focus on expanding the DG universe by serving new customers through new formats or existing customers in new and differentiated ways. Third, we are going to fuel our growth by strengthening and modernizing three critical components to improve execution: our operating model, our supply chain, and our IT foundation.", "We will fuel our best-in-class growth by investing in resources to enable our team to execute at the highest levels to serve our customers. The fourth and most important area of focus with DG Forward is that it's all powered by our people. We believe Dollar General is truly powered by the best team in retail, and we are leaning into three specific areas to double down on this strategic advantage: investing in our people and creating opportunities for growth and development; amplifying our culture; and reinforcing Dollar General as a destination for starting, growing, and enjoying a meaningful career where the work we do every day makes a difference. This DG Forward framework is the lens through which we see the future of this company, and we are excited about what lies ahead.", "You will hear more from us in the quarters ahead about some of the innovation that is well underway, but I want to spend our last few minutes providing a quick update on how we are executing through our operating priorities. Our first operating priority is driving profitable sales growth. We continue to focus on providing value to customers in nonconsumable categories through our NCI offering in Dollar General stores, as well as through the treasure hunt experience in our stand-alone pOpshelf format. During the quarter, we opened 24 new pOpshelf locations, bringing the total number of stores to 164 at the end of Q1, located in 16 states.", "While sales in this economic environment are softer than our earlier results, we continue to be pleased with the customer response. Looking ahead, we are taking a balanced approach to opening the right number of new pOpshelf stores in the right locations in this environment and now expect to operate a total of approximately 230 stores by the end of 2023. As a result of our slower pace of openings, we are reevaluating our plans with regards to our timing of reaching 1,000 stores by the end of 2025 and plan to provide an updated expectation at a later date. Importantly, we still believe pOpshelf adds approximately 3,000 opportunities to our total addressable market over the long term, and we remain as excited as ever about the growth opportunity.", "Turning now to DG Fresh, which has delivered significant cost savings while enhancing the profitability of our perishables offering. Our current area of focus for DG Fresh is increasing sales in frozen and refrigerated categories through enhanced product offerings and building on our multiyear track record of growth in cooler doors and associated sales. During Q1, we added more than 18,000 cooler doors across our store base, and we plan to install a total of more than 65,000 incremental cooler doors in 2023. And while produce is not currently serviced by our internal supply chain, we continue to believe that DG Fresh provides a potential path forward to expanding our produce offering to more than 10,000 stores over time.", "To that end, at the end of Q1, we offered fresh produce in nearly 3,900 stores, with plans to expand this offering to a total of more than 5,000 stores by the end of 2023. Importantly, despite the meaningful improvements we have made and savings that we have realized to date as a result of DG Fresh, we believe we still have an opportunity to drive significant additional returns with this initiative in the years ahead. Turning now to an update on our health initiative, branded as DG Wellbeing. Our expanded health assortment offering was available in nearly 5,000 stores at the end of Q1, and we now plan to expand to a total of more than 7,000 stores by the end of 2023.", "Looking ahead, our plans include further expansion of our health offering and also of our partnership with a third-party payment platform to allow customers to use health plan supplemental benefits to purchase various health and wellness-related items in their local Dollar General stores. This health benefit option is now available in approximately 7,500 stores, with the goal of being available chainwide by the end of the year as we continue to focus on increasing access to basic healthcare products and ultimately services over time, particularly in rural America. In addition to these initiatives, we continue to pursue other opportunities to enhance gross margin, including supply chain efficiencies, private brand enhancements, and improvements in global sourcing. Our second priority is capturing growth opportunities.", "As I mentioned earlier, our high-return, low-risk real estate model continues to serve us well as a core strength of the business. In the first quarter, we completed more than 800 real estate projects, including 212 new stores, 582 remodels, and 22 relocations. For 2023, we are revising our real estate plans to reflect the reduced pace of pOpshelf opening. We now plan to execute 3,110 real estate projects in total in the U.S., including 990 new stores, 2,000 remodels, and 120 relocations.", "We continue to expect approximately 80% of our new stores and nearly all of our relocations will be in one of our larger store formats, which continue to drive increased sales productivity per square foot as compared to our traditional store. With regard to remodels, approximately 80% will be in our DGTP format, which provides the opportunity for a significant increase in cooler count, as well as the ability to add fresh produce in many stores. In addition to our planned Dollar General and pOpshelf growth, we opened our first Mi Super Dollar General store in Monterrey, Mexico in Q1. We have been very encouraged by the customer response and the early results, which include sales results that are exceeding our pro forma expectations.", "Looking ahead, our goal is to have up to 20 stores serving the underserved communities in northern Mexico by the end of 2023 as we look to leverage our brand awareness while extending our value and convenience proposition to a customer base that is similar to our core customer in the United States. Next, our digital initiative, which is an important complement to our physical footprint as we continue to deploy and leverage technology to further enhance convenience and access for customers. We are extending our reach in a variety of important ways, including driving customer engagement through our app and extending our partnership with DoorDash, which is now available in more than 14,800 stores. Our DG Media Network provides another important avenue of growth as we seek to connect our unique rural-based customer network with CPG companies and brands to deliver a more personalized experience for our customers, a higher return on ad spend for our partners, and profitable growth for our business.", "Overall, our strategy consists of building a digital ecosystem specifically tailored to provide our customers with an even more convenient, frictionless, and personalized shopping experience. And we are pleased with the growing engagement we are seeing across our digital properties. Our third operating priority is to leverage and reinforce our position as a low-cost operator. Kelly and her team are rigorously applying our save to serve lens to the business to guide our approach to keeping costs low for our customer.", "As she discussed, we will be particularly focused on managing expenses this year without compromising long-term growth. We continue to focus on driving efficiencies in the organization, including through our fast track initiative. The current phase of this initiative is focused on self-checkout, which provides customers with even greater convenience in our stores. This offering was available in approximately 12,600 stores at the end of Q1, and we are on track to be in more than 14,000 stores by the end of 2023 as we look to further extend our position as an innovative leader in small box discount retail. We also continue to reduce costs through the expansion of our private tractor fleet, which consisted of more than 1,700 tractors at the end of Q1 and accounted for approximately 45% of our outbound transportation needs.", "Looking ahead, we plan to have more than 2,000 tractors in our private fleet by the end of 2023, which would account for more than 50% of our outbound transportation fleet. Overall, we are taking action to drive efficiencies and drive cost savings as our underlying principles are to keep the business simple but move quickly to capture growth opportunities while controlling expenses and always seeking to be a low-cost operator. Our fourth operating priority is investing in our diverse teams through development, empowerment, and inclusion. As I mentioned within our DG Forward framework, everything we do at this company is powered by our people, and we continue to focus on creating opportunities for personal and professional development and ultimately, career advancement.", "Our internal promotion pipeline remains robust as evidenced by internal placement rates of more than 70% at or above the lead sales associate position. Additionally, more than 10% of our growing private fleet team began their careers with us in either a store or distribution center. We continue to have great success hiring the talent we need, and we are pleased with our staffing levels and [Technical difficulty]. Ultimately, we believe the opportunity to start and develop a career with a growing and purpose-driven company is what sets Dollar General apart from our competition and remains our greatest currency in attracting and retaining talent.", "Just recently, we added to the strength of our executive team with the promotion of Steve Deckard to executive vice president of growth and emerging markets, where he will oversee our real estate, data science, pOpshelf, Mexico, and DG Wellbeing teams. His position will facilitate an even sharper organizational focus on driving execution in our core business while also innovating for the future. And there is no one better suited for this role than Steve, who has been a key strategic leader with Dollar General for 17 years, most recently leading our international expansion in Mexico. I look forward to his continued leadership and ongoing contributions to our success.", "In closing, we are focused on delivering our DG Forward strategy to be a force for opportunity for our customers, employees, communities, and shareholders. We believe our short-term adjustments position us well to serve our customers in this environment, and our execution on our initiatives and operating priorities positions us well to drive long-term growth. I want to thank our more than 175,000 employees for their diligence and dedication to fulfilling our mission of serving others every day. Our customers and communities need Dollar General right now, and we are poised and ready to serve when and where they need us most.", "With that, operator, we would now like to open the lines for questions." ] } ]
[ { "name": "Operator", "speech": [ "Thank you. At this time, we'll be conducting a question-and-answer session. [Operator instructions] As a reminder, we ask that you please limit to one question and one follow-up. [Operator instructions] One moment, please, while we poll for questions.", "Our first question comes from Simeon Gutman with Morgan Stanley. Please proceed with your question." ] }, { "name": "Michael Kessler", "speech": [ "Hey, guys. This is Michael Kessler on for Simeon. First question, so Dollar General has encountered some supply chain, labor, macro challenges in the midst of changes in management as well. And it does seem like issues are continuing to kind of creep in a bit.", "As you -- Jeff, as you look backwards over the last six to nine months, can you diagnose maybe what the root -- if there is a root of these issues, if any, of what I just mentioned is intertwined at all? And how do we and investors get comfortable that, I guess, the full extent of the challenges, I guess, are known today?" ] }, { "name": "Jeff Owen", "speech": [ "Yeah, Mike. Thank you for the call -- the question. I'd say when I think back on the supply chain, we mentioned in Q3 and Q4, we had challenges. We said we would get better in Q4 and we did exactly that.", "And we also said we'd improve in Q1. And quite frankly, our supply chain improved at a faster rate than even we expected. And you heard me in my prepared comments talk about we ended that quarter in the best position service level-wise in two years. On the store side, certainly, we tested and learned increasing our labor hour investment in the store.", "We liked what we saw last year. We said we would continue that in 2023, primarily through labor hours. And we liked what we saw in Q1 as well. Our customer is telling us they're seeing the improvement.", "And as a result of that, we're going to do more. And when you think about how we came into 2023 and started the year, we started strong. In February, our comp was actually 4.8%, as we mentioned, and was ahead of our expectations. And in mid-March, as we mentioned on our call, we're watching two significant events that disproportionately, we believe, impact our customer, tax refunds and SNAP.", "And unfortunately, that impacted her even more than we expected and, quite frankly, more than she expected. And so, in March, she simply pulled back. And back half of March, we saw her pull back and really pull out of spending. The good news is in April, she started to return and she continues to return in May as well.", "Now, as you know, at Dollar General, we know our customer, we believe, better than anybody. And she certainly is telling us she's under pressure. And we have always said this and we will continue to do this that we will be there for her when she needs us most. And so, the team is taking action, and I'm pleased to see the actions our team has taken in the short term and really from a position of strength.", "We're going to be there for affordability, primarily through the items that matter most to her. And so, we're going to get even sharper. Even though we're pleased with our pricing position overall and have been for quite some time, we think there's an opportunity to be there for her even more. And so, the team has already taken action on pricing on the items that matter most.", "We're doing it surgically like we always do and very pleased with where we're seeing the customer resonate. But certainly, that will take time to drive traffic as it typically will do. The other action we're taking is we liked what we saw with the labor, and we're going to do more of it. So, we're pulling forward our labor investment into the second quarter.", "And quite honestly, we're pulling it forward because we liked what we saw and our supply chain is improving at a faster rate. So, it allows us to do that and get the returns we're looking for, and quite frankly, make improvements in the store that we need to do and we'll continue to do. So, these actions, certainly on the short term, will help. But also, they're going to help us emerge stronger as we look to the balance of this year and into 2024.", "And also, I continue to be pleased on the progress we're making on our strategic initiatives. We continue to make strong progress in the first quarter. And as I mentioned, we've made further investments in the structure of this to allow us to make even more progress on our innovation front. But also with the addition of our new executive in Steve Deckard, it will also provide us the ability to enhance our focus on the execution of the core DG business, which I'm seeing already and I'm pleased to see as we move forward.", "So, bottom line, we're making improvements. The macroeconomic environment certainly shifted on us in the back half of March. We're seeing her return to us. We're liking what we see, and we're positioned well for the long term." ] }, { "name": "Michael Kessler", "speech": [ "Thank you, Jeff." ] }, { "name": "Operator", "speech": [ "Our next question is from Matthew Boss with JPMorgan. Please proceed with your question." ] }, { "name": "Matt Boss", "speech": [ "Great, thanks. So, Jeff, on the rapidly changing backdrop that you cited, could you maybe speak to the changes in customer behavior that you're seeing today relative more so to three months ago, if we broke it down with traffic versus ticket? And then, can you elaborate on some of the drivers of the May comp improvement? And just where exactly do you stand today relative to that 1% to 2% updated full year comp guide?" ] }, { "name": "Jeff Owen", "speech": [ "Thanks, Matt. If you recall back to the Q4 call, we talked about our customer, and we talked about the fact that her financial situation was getting worse. And quite honestly, what we do in our survey work and talking to our customers as we do and our first-party data that we have really tells us that our customer's even under more pressure as we have progressed into 2023. And quite honestly, it's some of the most pressure we've seen in quite some time.", "The good news is she's still employed. That's always an important factor in her health, so that's a good thing to see. But quite honestly, our customers, some of the details, food inflation continues to persist. And even though it's moderated somewhat, if you think about the two-year stack, it's almost 20%.", "And our customer certainly is seeing that pressure. And then, quite honestly, when you think about the child tax credit and the removal of that and how that impacted her tax refunds, that's an incredible buffer for her, that quite frankly surprised her on the level of refund she did not receive. And in some cases, some of our customers are saying that they're even having to pay taxes this year, which is something that they typically don't have to do. So, when you think about that, they're saying to us, you look at those two shocks to her also with the SNAP benefit and the $95 reduction on a per household basis, last year and last time this happened, we saw through our first-party data, they were able to shift to other types of tender.", "But quite frankly, in this environment, and we have the luxury of having first-party data, we're seeing they're not able to do that. And not only are the states where the SNAP benefits were reduced having an impact but also the states that happened last year, they're also seeing pullback as well. And unfortunately, our customers are saying they're having to rely more on food banks, savings, credit cards. As we all know, credit card rates are at an all-time high.", "So, saying all that, what we're seeing her do is really rely more in the shopping behavior. We're seeing her buy fewer items per basket. We're seeing her really utilize that $1 price point, and we're very pleased that we still offer that. And then we're also seeing her buy closer to payday in the first of the month.", "And -- but what we are seeing through the actions we've taken, we're seeing that our customer's continuing to return to shopping. We're pleased to see our share gains in the month of April and May returning, so we're excited about that. And quite frankly, when you step back and think about share, we grew share in February. Our customer pulled back in March and really pulled out of the spending.", "She returned in April. And even though we had a negative comp, we still gained share and then we gained share in May as well. So, we're pleased to see that not only are customers leaning more on Dollar General as we expected she would, but the actions that we're taking are beginning to take hold. So, we feel good.", "We're positioned to serve our customer in times like this. And with primarily 80% of our stores in communities that's 20,000 or less, we're uniquely positioned to be there for her." ] }, { "name": "Matt Boss", "speech": [ "Great. And then, maybe, Kelly, as a follow-up, so just in light of this backdrop, how do you feel about your pricing position today? What actions might you take? And then, could you just overall walk through the puts and takes that you've embedded in your gross margin forecast for the second quarter or the back half of the year relative to the expansion that we saw in the first quarter?" ] }, { "name": "Kelly Dilts", "speech": [ "Yeah. I'll start with the pricing. We feel great about our pricing position. And just like Jeff said, we're investing in a targeted everyday low-price investment.", "And in this environment, we feel like it's really important to do so on those key items that are important to our customer. And what I would say is that is embedded in our gross-margin guidance. I'm just stepping back on guidance, just taking a look at it from a high level for the full year. Our revised guidance is really a function of the macroeconomic environment, and it's putting pressure on two things, and that's sales and shrink.", "And as Jeff alluded to, we're taking actions to address both, as well as actively managing the rest of the P&L, our working capital and our capital investments. We're not going to sacrifice long-term growth as we do that either. So, we do expect this customer to remain under pressure for the foreseeable future. The depth and the duration of that is really difficult to predict.", "But as history always tells us, they'll ultimately recover and get their budgets back in line. So, when we think about that and think about then the cadence of the year, really I want to focus on Q2. And that's where we're going to see the most pronounced headwinds and probably the highest decrease in EPS. And to your point on gross margin, Q2 is going to be the toughest year-over-year lap on the gross margin rate.", "And then, we've got some other pressures this year to consider. So, one is shrink, and it's going to be the most difficult comparison on a year-over-year basis. And then the other one is that targeted pricing investment will put some pressure on gross margin. So, with that, we're expecting the gross margin rate for the second quarter to be around or somewhat lower than the gross margin rate for the first quarter.", "Adding to a little bit more pressure in Q2 is also just interest expense. We're going to add the most pressure to Q2 versus the remaining quarter just as the cadence of the interest works through. And then finally, the pull forward of the labor investment with over $40 million being spent in Q2 will also pressure Q2. That said, like we talked about, we really like the trends that we're seeing around that investment.", "It gives us a lot of confidence that it's the right thing to do for our customers and for our business, and we're expecting sustained benefits from that investment. And you know it well. So, everything we do is centered around the customer, and we're going to continue to execute on that. And while we do like the momentum that we're building with these actions on price and labor investment, we think that sets us up for the back half of the year because there could just be a little bit of a lag to the full benefit of those investments.", "And then, finally, just importantly, I think it's always good to ground ourselves in history. And history also suggests that we tend to come out of these types of environments even better positioned. And that's as a result of a more productive core customer as well as a trading customer. And that's why we really believe that Q4 will have the best comp of the year.", "And then as we move into 2024, we'll do so in an even stronger position." ] }, { "name": "Matt Boss", "speech": [ "Great. Thanks for the color, and best of luck." ] }, { "name": "Kelly Dilts", "speech": [ "Thanks." ] }, { "name": "Operator", "speech": [ "Our next question is from Michael Lasser with UBS. Please proceed with your question." ] }, { "name": "Michael Lasser", "speech": [ "Good morning. Thanks a lot for taking my question. Jeff, the market had long measured Dollar General's market share against some of its large publicly traded competitors like Walmart, Family Dollar, and others. And on that metric, Dollar General has been a share gainer for a long time.", "Now it's arguably having to work its P&L harder to generate sales growth or not experience share gains. Why is that the case? Is it that Dollar General now has 19,000 stores, invigorated competitors, and it's just much more difficult to gain share or more expensive, and as a result, Dollar General is going to have structurally lower margins moving forward?" ] }, { "name": "Jeff Owen", "speech": [ "Well, thank you, Michael. When you think about the quarter, and certainly, you're right, Dollar General has historically been a share gainer and we will continue to be a share gainer. When you think about this quarter, in the highly consumables area being flat overall, it really was, again, I go back to the comp cadence in a second, but we were flat overall in the highly consumables but we did grow share on the nonconsumable business. So, I want to be clear that I share that with you.", "But as you walk through the comp cadence of the quarter, it really is the story. And when you think about that macro pressure and the fact that we believe our core customer was disproportionately impacted by that, we started to see our share. Actually, when you start the year in February, we actually had a very healthy comp and healthy share gains. And as we went into March, March is when she simply pulled out of the market and had to adjust.", "And she came back in April, as I mentioned earlier, where we saw share gains resume, and we continue to see share gains resume in May. And quite honestly, as we think about being there for the customer, the majority of the actions we've taken as it relates to our ability to pull forward the labor investment, the supply chain improvements we've made and getting even sharper on the price, that really didn't happen until late in the quarter. So, when you think about the share gains and the returns, what we're seeing is our customers coming back to Dollar General as we expect they would. And we believe that the actions we're taking will only make it a more compelling offering for our customer.", "We're there for her in affordability and value, and we'll provide her with the consistency in the shopping experience that she's grown to be accustomed to at Dollar General. We'll make that even better as we move forward. And so, as we think about that, we feel real good about our ability to continue to grow share and also provide healthy operating margins. And as you know, we've made tremendous investments over the years to enable us to structurally be able to do that.", "When you think about the comp and the composition of our sales mix and the highly consumable sales mix that we're seeing, it's pretty impressive that Dollar General's structural profitability has allowed us to continue to be much more profitable even in an environment like that. And we continue to see where areas that we can grow margin and provide us with the ability to not only serve this customer sustainably grow share but also provide healthy returns, and that's something that we are very excited about the ability to do that as we move through this year and then also as we move even stronger into '24 and beyond." ] }, { "name": "Michael Lasser", "speech": [ "And my follow-up question is, Jeff, your discussion around price investments come on the heels of one of your large competitors making price investments last year. And so, this has sparked the narrative within the investment community that there's just going to be a race to the bottom and a never-ending price war within the small value retail sector. How do you prevent that? And recognizing you're not going to provide guidance for 2024 as of yet, can you still make these types of investments and get back to your double-digit EPS growth algorithm within a reasonable time frame?" ] }, { "name": "Jeff Owen", "speech": [ "Yeah. Michael, first of all, as we've said historically and continue to say, our price position relative to competition continues to be strong. And quite honestly, our philosophy on price has not changed. Our pricing goal continues to be at parity with mass, plus or minus, call it 2%, 3%, and we're well within that targeted range, and we feel good about that position.", "But we believe our customer -- and we've said this for many years, that we reserve the right to be there for the customer when she needs us most, and we believe this is a time for that. And we think there's an opportunity to get even sharper on certain items that matter most. And so, we believe, again, this is a very targeted structural approach -- excuse me, targeted and surgical approach to being able to be there for this customer. And we've done this over the last few weeks.", "We're pleased with the response we're seeing. But again, our philosophy and our goal has not changed. We still have the same pricing gap targets that we've had for quite some time, and the actions we've taken are in the guidance that we contemplated. And I'll turn the back half of the question over to Kelly." ] }, { "name": "Kelly Dilts", "speech": [ "You're absolutely right, Jeff. The guidance does contemplate that. And really, the guidance range is a function of the flow-through of the sales scenarios and with that additional shrink risk largely being offset by the costing actions that we're taking in SG&A. And so, we're getting a benefit from that as well.", "I think as we move into the year with all the actions that we're taking, I'm confident in delivering this EPS guidance. And I think with the impact of those actions that Jeff talked about, that we continue to see Dollar General as a 10% EPS grower over the long term." ] }, { "name": "Michael Lasser", "speech": [ "Thank you." ] }, { "name": "Operator", "speech": [ "Our next question is from Karen Short with Credit Suisse. Please proceed with your question." ] }, { "name": "Karen Short", "speech": [ "Hi, thanks very much. Appreciate it. So, actually, just following on that line of thinking, you've basically grown sales per square foot by 15% since 2019, and you're looking at EBIT margins that are below where they were in 2019. So, I guess the question is, what do you think a sustainable EBIT margin actually is? And then, I guess what I'm still confused by is you were pretty adamant in March that you weren't seeing impact from SNAP reductions.", "And I understand that other things kind of came into play. But that obviously changed during the first quarter. So, what -- like what visibility did you not have in March? And then, I guess, sorry, my third question would be, you've obviously always outperformed in a weaker macro with a trade down in your format. So, do you still feel confident that, that's doable?" ] }, { "name": "Jeff Owen", "speech": [ "OK, Karen. I'll try. There are several questions in there, so I'll start with the -- let me try to start with the SNAP question first. And then, we'll talk about the macro.", "And then, I'll toss it over to Kelly to talk about the EBIT margin question. So, when you think about the SNAP, when we sat here in Q4, what we talked about was there are two pending changes that we're watching. And at that point in time, you're right, we had not seen the impact of SNAP. What we did say was we've trended it off our first-party data and what states that had pulled back previously and how that customer responded.", "But we also mentioned and we continue to feel it's in a much different spot for this customer when that actually took place. So, our customer today is certainly in a much worse off position than she was a year ago when those changes happened in those previous states. And so, since then, what really happened was, certainly, we saw the customer pull back, really a combination of two things. I think the tax refund component is the other one we talked about that we had not seen, quite frankly, any impact from that.", "And as you look at our comp cadence, it pretty much matches the tax refund reduction and it's a very high correlation there. So, those are the two things that, quite frankly, we saw that changed in the back half of March and persisted into April. I think the good news is, and you're right. We believe this model is built for all seasons, and it's proven that it can deliver to our customer in any economic environment.", "We continue to believe that. But we also see opportunities, which we see right now for the ability to serve our customer even better than we've served her in the past. And that's what we're doing and that's what we're squarely focused on is responding to the macro environment, taking care of our customer, but also positioning Dollar General long term to be able to continue to serve this customer. And when you think about it, 80% of our stores are serving communities at 20,000 or less.", "So, we're uniquely positioned to be able to do that, and we're squarely focused on delivering on that." ] }, { "name": "Kelly Dilts", "speech": [ "I'd say we're squarely focused on delivering operating margin expansion as well. And I think if you look back to '19, you'll see that we're expecting to continue that expansion as we move into 2024 and get through this macro environment. We have a lot of initiatives in place to drive that operating margin profit, and we are making sure that we invest in those even during these times. So, we feel good about that on a go-forward basis." ] }, { "name": "Karen Short", "speech": [ "So, just a follow-up on that then. What do you think your structural margins -- could EBIT margin could be? Like say not '23 obviously but '24, '25?" ] }, { "name": "Kelly Dilts", "speech": [ "Yeah. I don't want to comment on that year right now but I would just say that everything that we're doing right now sets us up for a successful '24." ] }, { "name": "Karen Short", "speech": [ "OK. Thanks." ] }, { "name": "Kelly Dilts", "speech": [ "Thank you." ] }, { "name": "Operator", "speech": [ "Our final question is from Rupesh Parikh with Oppenheimer. Please proceed with your question." ] }, { "name": "Rupesh Parikh", "speech": [ "Good morning, and thanks for taking my question. So, I just want to go back to the comp shortfall that you saw in the quarter and your updated expectations for the full year. Just curious why you believe it's more -- the [Inaudible] is more driven by macro weather versus changes in competitive dynamics." ] }, { "name": "Jeff Owen", "speech": [ "Yeah. I'll start that, Rupesh, and I'll turn it over to Kelly to add any color. But again, I think it goes back to the comp cadence. I mean, a couple of things.", "First, as I said earlier, our February started out extremely strong. And as you look throughout the quarter, March and April, we saw the pullback in March. We saw April continue and then we've seen it respond nicely in May. So, that's why we -- when you look at the macroeconomic shock to our customer primarily in the two areas I talked about, combined with a really cold and wet spring, we're seeing our customer continue to respond.", "And we're liking what we see as we enter into the second quarter as it relates to her ability to rebound and spend with us. And also, again, I go back to the operational improvements. I mean, our supply chain hasn't been this good since two years ago. Our store conditions continue to improve.", "Our customers are seeing it. They're telling us that. And we haven't seen that movement, quite frankly, in quite some time. Our movement from Q4 to Q1 was significant and we're excited about that.", "We're also excited about how we're seeing the ability to accelerate that in the second quarter because of our supply chain improvements. And then, also, we believe that value is always incredibly important to our customer, and we've been able to show value for many, many years. But we believe now, with the ability for us to be there for her and be even sharper on the things that matter most to her, will drive traffic into the store, will allow us to serve her better and gain share as we've talked about historically doing and we will continue to do here at Dollar General." ] }, { "name": "Rupesh Parikh", "speech": [ "Great. And then one follow-up question. Your inventory balance was up, I think, 20% year over year. Just curious how you feel about the health of the inventory position and opportunities you see to improve from here." ] }, { "name": "Kelly Dilts", "speech": [ "Yeah. We continue to feel good about the quality of the inventory. But I will say inventory management remains a focus for us. So, inventory growth was relatively consistent with Q4, although we had hoped that it would come in somewhat lower this quarter.", "The good news here is what I would say is we made some progress on working down the nonconsumable inventory. It was offset, though, by improved consumable in-stock levels. And as Jeff noted, with the supply chain health, that's where we got those in-stock levels from. So, just a couple of facts for you.", "We reacted pretty quickly to the current environment by reducing nonconsumable receipts. And frankly, I'd say we acted historically as well because some of those receipts were pulled back almost a year ago and in reaction to the discretionary spend trends that we were seeing. So, in Q1, our nonconsumable receipts were actually down over 30%, and we expect that trend to continue into Q2. And with that, what we saw was a 3% reduction in nonconsumable inventory per store from Q4.", "So, nice movement there. And we do expect it to get more normalized levels in the back half of the year. Again, at the same time, our supply chain service levels improved faster than we expected, and that drove some consumable products to the store, which was one of the main contributors, as you look, on either a year-over-year basis or a quarter-over-quarter basis. So, I'd just end with, we know that inventory remains an opportunity for us, and we're going to continue working on reducing those levels with the goal to remain in line with sales, and we believe that the new structure we put in place will make sure that we get that done." ] }, { "name": "Rupesh Parikh", "speech": [ "Thank you for all the color." ] }, { "name": "Kelly Dilts", "speech": [ "Thank you." ] }, { "name": "Operator", "speech": [ "We have reached the end of the question-and-answer session. I would now like to turn the call back over to Jeff Owen for closing comments." ] }, { "name": "Jeff Owen", "speech": [ "Thank you for all the questions, and thanks for your interest in Dollar General. If I can summarize our discussion today, let me leave you with these three things. First, Dollar General is built for times like this, and we have a keen focus on enhancing our ability to serve our customer. We are investing and adapting structurally, strategically, and operationally to serve our customers even better in this environment, which we believe will drive momentum later in the year and into 2024.", "And we have a clear vision and a powerful growth strategy for the future. Thank you for listening, and have a great day." ] }, { "name": "Operator", "speech": [ "[Operator signoff]" ] } ]
DG
2019-08-29
[ { "description": "Vice President of Strategy and Corporate Development and Interim Head of Investor Relations", "name": "Donny Lau", "position": "Executive" }, { "description": "Chief Executive Officer", "name": "Todd Vasos", "position": "Executive" }, { "description": "Executive Vice President and Chief Financial Officer", "name": "John W. Garratt", "position": "Executive" }, { "description": "UBS. -- Analyst", "name": "Michael Lasser", "position": "Analyst" }, { "description": "JP Morgan -- Analyst", "name": "Matthew Boss", "position": "Analyst" }, { "description": "Morgan Stanley -- Analyst", "name": "Simeon Gutman", "position": "Analyst" }, { "description": "Oppenheimer. -- Analyst", "name": "Rupesh Parikh", "position": "Analyst" }, { "description": "Goldman Sachs -- Analyst", "name": "Christopher Prykull", "position": "Analyst" }, { "description": "Barclays. -- Analyst", "name": "Karen Short", "position": "Analyst" }, { "description": "Wolfe Research -- Analyst", "name": "Scott Mushkin", "position": "Analyst" }, { "description": "Deutsche Bank. -- Analyst", "name": "Paul Trussell", "position": "Analyst" }, { "description": "Bank of America -- Analyst", "name": "Robbie Ohmes", "position": "Analyst" } ]
[ { "name": "Operator", "speech": [ "Good morning. My name is Tia and I will be your conference operator today. At this time, I would like to welcome everyone to the Dollar General Second Quarter 2019 Earnings Call. Today is Thursday, August 29, 2019. [Operator Instructions].", "Now I would like to turn the conference over to Ms. Donny Lau, Vice President of Strategy and Corporate Development and Interim Head of Investor Relations, Mr. Lau, you may begin your conference." ] }, { "name": "Donny Lau", "speech": [ "Thank you, Tia and good morning everyone. On the call with me today are Todd Vasos, our CEO; and John Garratt, our CFO. Our earnings release issued today can be found on our website at investor.dollargeneral.com under News & Events. Let me caution you that today's comments will include forward-looking statements about our strategy, plans, goals or beliefs about future matters, including, but not limited to our fiscal 2019 financial guidance and real estate plans.", "Forward-looking statements can be identified because they are not limited to statements of historical fact or use words such as may, will, should, could, would, can, believe, anticipate, expect, assume, intend, outlook, estimate, guidance, plans, opportunities, long term, potential or goal and similar expressions. These statements are subject to risks and uncertainties that could cause actual results or events to differ materially from our expectations and projections, including, but not limited to those identified in our earnings release issued this morning under risk factors in our 2018, Form 10-K filed on March 22, 2019, and in the comments that are made on this call. We encourage you to read these documents. You should not unduly rely on forward-looking statements, which speak only as of today's date. Dollar General disclaims any obligation to update or revise any information discussed in this call unless required by law.", "During today's call, we also will reference certain financial measures not derived in accordance with US Generally Accepted Accounting Principles or GAAP. Reconciliations to the most comparable GAAP measures are included in this morning's earnings release, which as I mentioned, is posted on investor.dollargeneral.com under News & Events. At the end of our prepared remarks we will open the call up for your questions. Please limit your questions to one and one follow-up question, if necessary.", "Now it is my pleasure to turn the call over to Todd." ] }, { "name": "Todd Vasos", "speech": [ "Thank you, Donny. And welcome to everyone joining our call. We are pleased with our second quarter results, driven by strong performance on both the top and bottom lines. The quarter was highlighted by same-store sales growth of 4%, including an increase in average basket size and another quarter of meaningful traffic growth. Our results this quarter were fueled by solid execution across many fronts, including category management, merchandise innovation store operations and continued progress with our strategic initiatives.", "In addition, we remained focused on disciplined cost control, which resulted in another quarter of solid earnings growth. Notably, our second quarter comp performance represents an increase of 7.7% on a 2-year stack basis, which is the highest in 23 quarters and speaks to the underlying strength of the business. Given our first half performance and expectations for the remainder of the year, we are updating our guidance for fiscal 2019. John will provide those details during his remarks. In short, we are executing well against both our operating and strategic priorities and believe we are well positioned to drive continued growth as we move forward.", "Now let's recap some of the top line results for the second quarter. Net sales increased 8.4% to $7.0 billion, compared to net sales of $6.4 billion in the second quarter of 2018. We are particularly pleased with the continued strong performance of our new stores and sustain positive sales momentum in our mature store base. Once again this quarter. Our highly consumable market share trends in syndicated data continue to exhibit strength with mid-to-high single-digit share growth in both units and dollars over the 4, 12, 24 and 52-week periods ending July 27, 2019.", "Our same-store sales increase during the quarter was driven by strong performance in both consumables and non-consumable sales. Our non-consumables sales growth was driven by positive results in seasonal and in home. These quarterly results further validate the belief that our focus on our operating priorities is working and that we are pursuing the right strategies to create meaningful long-term shareholder value. We continue to believe we operate in one of the most attractive sectors in retail and are advancing our goal of further differentiating the Dollar General business from the rest of discount retail landscape.", "Before I turn the call over to John, I'd like to take the opportunity to congratulate Jeff Owen on his recent promotion to Chief Operating Officer. As was announced this morning. Jeff is assuming the responsibility for store operations, merchandising and supply chain. As a large and growing retailer, we believe this alignment further strengthens the Company and positions us well for continued future growth. Jeff has served as our EVP of Store Operation since 2015. During his time in that role Dollar General added more than 3,500 stores and increased sales by over 35%. Prior to serving as EVP, Jeff spent more than 20 years with this Company in increasing roles and responsibility beginning with us as a store manager and eventually rising to SVP of store operations.", "I'd also like to congratulate Steve Sunderland on his promotion to EVP of Store Operations, where he will oversee operations of our nearly 16,000 stores across the country. Steve joined Dollar General team in 2014 as SVP of Store Pperations, where he has led approximately 8,000 stores and nearly 70,000 employees. Steve brings more than 30 years of retail operations experience to the role and I know our teams value his leadership. I'm very proud of both Jeff and Steve and grateful for all they have done for this Company. I am confident they are the right leaders for these positions and I look forward to working with them in their new roles as we continue to drive long-term growth at Dollar General.", "With that, I'll now turn the call over to John." ] }, { "name": "John W. Garratt", "speech": [ "Thank you, Todd. Good morning, everyone. Now that Todd has taken us through a few highlights of the quarter. Let me take you through some of the important financial details of the second quarter. Unless I specifically note otherwise, all comparisons are year-over-year. As Todd already discussed sales, I will start with gross profit. Gross profit as a percentage of sales was 30.8% in the second quarter, an increase of 13 basis points. This increase was primarily attributable to a reduction in markdowns as a percentage of net sales and higher initial markups on inventory purchases. These factors were partially offset by higher shrink, increased distribution cost, a greater proportion of sales coming from the consumables category and sales of lower margin products comprising a higher proportion of sales within the consumables category. We benefited this quarter from a reduction -- continued reduction in promotional markdown activity following targeted increases during the fourth quarter of 2018.", "We continue to believe these targeted actions drove loyalty and contributed to additional share gains as evidenced by our strong sales results during the first half of 2019. SG&A as a percent of sales was 22.5%, an increase of 32 basis points. This increase was driven by expenses of $31 million or 44 basis points in the quarter relating to significant legal matters. Excluding these significant legal expenses, we leveraged SG&A expense with adjusted SG&A as a percent of sales of 22.1% or a decrease of 12 basis points. These results also reflect an increase in expenses for store supplies and were partially offset by lower utilities costs as a percent of sales and reductions in benefits costs and in workers compensation and general liability expenses.", "As previously discussed, we are investing in our four strategic initiatives this year. I am pleased to report that we're making great progress on each and we remain excited about the long-term transformative potential of these initiatives. Year-to-date through the second quarter, we have invested $19 million in SG&A expense attributable to our strategic initiatives. We continue to believe these investments position us well to deliver meaningful benefit to the business over both the intermediate and longer term.", "Moving down the income statement. Operating profit for the second quarter increased 5.9% to $578 million compared to $545 million in the second quarter of 2018. Adjusted operating profit for the second quarter, which excludes the legal expense as I mentioned earlier, increased to 11.6% to $609 million compared to $545 million in the prior year period. Our effective tax rate for the quarter was 22.9% when compares to 21.5% in the second quarter last year. Diluted earnings per share for the second quarter increased 8.6% to $1.65. Adjusted diluted earnings per share for the second quarter, which excludes the after-tax impact of the previously mentioned legal expenses increased 14.5% to $1.74. Overall, we are pleased with the balanced performance the team delivered during the quarter resulting in strong profit growth.", "Turning now to our balance sheet which remains strong. Merchandise inventories were $4.4 billion at the end of the second quarter up 13.4% overall and an increase of 7.5% on a per store basis. As previously discussed, we implemented a change to our inventory replenishment process in the first quarter, which is enabling us to support even higher levels of on-shelf availability and while as anticipated this change is resulting in higher inventory levels overall, we continue to believe this change better positions us to support and drive continued sales growth. In addition to our inventory replenishment efforts, we are implementing enhanced processes focused on improving the in-stock performance in stores that do not meet our standards. I'm pleased to report our efforts drove a 20% improvement in on-shelf availability in targeted stores during the quarter and we believe we can continue to drive improvements in this area as we move ahead.", "Overall, we continue to believe our inventory is in great shape and remain focused over time on driving inventory growth that is in line with or below our sales growth. Year-to-date through the second quarter, we generated significant cash flow from operations totaling $1.1 billion. Total capital expenditures through the first half of 2019 were $293 million and included planned investments in new stores, remodels and relocation, continued investments in construction of our Amsterdam, New York distribution center and spending related to our strategic initiatives. During the quarter, we repurchased $1.4 million shares of our common stock for $185 million and paid a quarterly dividend of $0.32 per common share outstanding at a total cost of $82 million at the end of the second quarter, the remaining repurchase authorization was $961 million.", "Our capital allocation priorities continue to serve us well and remain unchanged. Our first priority is investing in high return growth opportunities including new store expansion and infrastructure to support our future growth. We also remain committed to returning significant cash to shareholders through anticipated share repurchases and quarterly dividend payments, all while maintaining our current investment grade credit rating and managing to a leverage ratio approximately 3 times adjusted debt-to-EBITDA.", "I'll close with an update on our annual guidance for fiscal year 2019. As you know, upon it's effective date, the proposed List 4 tariff recently published by the US Trade Representative will expand the list of products that are currently subject to tariffs, and they now expected rate of 15%. In addition, tariff rates on List 1, 2, 3 are expected to increase to 30% up from 25% effective October 1st. Over the past several quarters, our teams have been diligently working to mitigate the impact of tariffs on our customers and our business. As a reminder, our efforts have focused on four key areas, continued negotiations with our vendors, product substitution, product reengineering and country of origin diversification. We intend to continue these efforts to do all we can to minimize the impact to our customers and remain focused on our everyday low price strategy to provide our customers with the value they need and have come to expect from Dollar General.", "Now, as you may recall the anticipated impact of the May 10th tariff rate increase was included in our prior full year guidance, which we provided on May 30th. Our updated guidance today reflects the anticipated impact of the expected tariff rate increase on List 1, 2, 3, the proposed List 4 tariffs and tariffs previously implemented. Despite these incremental headwinds we are raising our full year financial guidance primarily as a result of our strong first half performance. For fiscal year 2019, we now expect net sales growth of approximately 8% and thanks for sales growth to be in the low to mid 3% range. We are increasing our expectations for operating profit growth of approximately 5% to 7% and expect adjusted operating profit growth of approximately 6% to 8%. And we are raising our outlook for diluted earnings per share to the range of $6.36 to $6.51, or adjusted diluted EPS of $6.45 to $6.60. Our adjusted operating profit growth and adjusted diluted EPS guidance exclude the impact of legal expenses I noted earlier. Both our GAAP and adjusted EPS guidance assumes an estimated effective annual tax rate of approximately 22% to 22.5%. Finally, our fiscal year 2019 outlook for real estate projects, capital spending and share repurchases remains unchanged.", "Let me now provide some additional context on our current expectations. First, our guidance does not contemplate additional tariff increases in tariff rates or the expansion of products subject to tariffs, beyond those which are either currently in effect included in the List 4 proposal or incorporated in the expected 5% tariff rate increase on List 1, 2, 3. Additionally , it does not reflect any tariff related impacts to broader consumer spending. With regards to gross margin, we now expect our rate improvement for the second half to be roughly in line with Q2 when compared on a year-over-year basis relative to our previous expectation of quarterly improvements in the gross margin rate year-over-year comparisons throughout the year, our revised outlook is primarily driven by our strong Q2 performance as well as the anticipated impact of both the List 4 tariff proposal and the expected tariff rate increase on List 1, 2, 3. In terms of SG&A, we now expect to invest approximately $55 million on our strategic initiative this fiscal year, the majority of which will be in our DG Fresh and Fast Track initiatives. We continue to expect this spending will increase sequentially through the third and fourth quarters.", "In summary, I'm pleased with our first half results and excited about what still to come as we look at the back half of the year. As always, we continue to be disciplined in how we manage expenses and capital with the goal of delivering consistent, strong financial performance while strategically investing in initiatives for longer-term growth. We remain confident in our business model and our ongoing financial goals to drive profitable same-store sales growth, healthy new store returns, strong operating cash flow and long-term shareholder value.", "With that I will turn the call back over to Todd." ] }, { "name": "Todd Vasos", "speech": [ "Thank you, John. As I've shared with you over the past several quarters. We're investing in and building momentum behind certain strategic initiatives that we believe will drive strong sales and profit growth in the years ahead. I want to take the next few minutes to update you on the progress we are making. Starting with our non-consumable initiative or NCI. In 2018, we launched a new and expanded assortment in key non-consumable categories including home, domestics, housewares, party and occasion. I'm pleased to report that the NCI offering continues to resonate with customers as evidenced by strong sales performance across our enhanced product categories. Importantly, this performance is contributing to improvements in both sales and gross margin rate in these stores.", "In addition to higher non-consumable sales, we are also seeing a positive halo effect in consumable sales. Overall remodels that include NCI delivered greater sales lifts and improved gross margin rates compared to traditional remodels. These results reinforce our belief that NCI can be meaningful to our sales line and a margin driver as we move ahead. The NCI offering was available in more than 1,500 stores at the end of the second quarter and we plan to expand the offering to a total of approximately 2,400 stores by the end of 2019. And while the NCI store count is still relatively small, compared to our overall store base, we are realizing additional benefits by leveraging learning from these stores. Specifically, we are incorporating select NCI products throughout the broader store base resulting in positive sales and margin contributions across the entire chain.", "Turning now to DG Fresh, which we introduced earlier this year. As a reminder DG Fresh is a strategic multi-phase shift to self-distribution of frozen and refrigerated goods such as dairy, deli and frozen products. This assortment currently represents approximately 8% of our total sales. The primary objective of DG Fresh is to reduce product costs on our frozen and refrigerated items, thereby enhancing gross margin. And while still early, we are very pleased with the progress and gross margin improvements we are seeing. Two other important goals of DG Fresh are to drive on-time delivery and higher in-stock levels. For example, we have historically seen about a 10-point gap in-stock stock levels between our dry goods and our fresh products. We believe we can grow [Technical Issues] DG Fresh, which [Technical Issues] Okay. And I apologize we dropped the line somehow.", "I'll start back with two other important goals for DG Fresh are to drive on-time delivery and higher in-stock levels. For example, we have historically seen about a 10-point gap in our in-stock levels between our dry goods and our fresh products. We believe we can close the gap with DG Fresh, which is supported by results in our early phases of the rollout. In addition to gross margin and in-stock benefits DG Fresh will eventually allow us to control our own destiny on our assortment in these categories. This could include a wider selection of both national and private brands as well as an enhanced offering for our Better-For-You items. And while produce is not included in our initial rollout plans, we believe DG Fresh could provide the potential path forward to expanding our produce offerings to more stores in the future.", "We began shipping from our first DG Fresh facility in Pottsville, Pennsylvania in January and are now shipping from two additional DG Fresh facilities in Clayton, North Carolina and Atlanta, Georgia. I'm also pleased to report that our fourth DG Fresh facility in Westville, Indiana is scheduled to begin shipping in the next few weeks. In total, we are now self-distributing to more than 3,500 stores, an increase of approximately 2,700 stores from the end of Q1. And with an anticipated opening of our fourth facility, we remain on track to capture benefits from DG Fresh in approximately 5,000 stores by year-end. In short, we are very excited about the early results we're seeing from this initiative as well as the long-term potential benefits it can deliver for our customers and our business. We continue to believe it can be as accretive as early as 2020. With respect to our digital initiative, our efforts remain focused on deploying technology to further compliment the customer in-store experience. In turn we believe digital can drive additional traffic as well as increase in basket size. In fact our digitally engage customers checkout with average baskets twice as large as the Company average. Our digital efforts continue to be based on the needs of our core customer.", "Most recently we introduced a new shopping list feature, representing yet another enhancement to our Dollar General mobile app. This tool, not only allows customers to build and save shopping list, but makes it even easier for them to save money through digital coupon push notifications and comparable private brand products suggestions. We also continue to innovate within our DG GO app. As a reminder this app allows customers to use their phones to scan items as they shop, see a running total of the items in their basket using our card calculator tool and then skip the line by using DG GO checkout, which is currently available in more than 250 stores.", "We plan to consolidate DG GO into one primary Dollar General app in Q3 of 2019 further in our efforts of delivering an even more frictionless shopping experience to our customers. We have previously noted that our customers are using card calculator functionality frequently as a budgeting and optimization tool even when they're not using DG GO to check out. Based on this -- Based on this insight, we have made cart calculator available in approximately 12,000 stores, as we continue to leverage customer insights and innovation to deliver on our customers needs.", "Looking ahead, we remain focused on leveraging our current digital infrastructure and Dollar General app to further enhance our value and convenient proposition for our consumers. Our plans include a pilot of DG pick-up in the second half, which is our buy online pick-up in the store offering and we are excited about the additional opportunities that lie ahead. Our digital efforts will continue to be tailored specifically to the Dollar General customer and our important component of our long-term growth strategy.", "Moving now to an update on Fast Track. As a reminder, Fast Track is centered on increasing labor productivity in our stores, enhancing customer convenience and further improving on-shelf availability. There are two key components to Fast Track, first is streamlining the stocking process in our stores through rolltainer optimization and with even more shelf-ready packaging. These efforts should reduce the amount of time spent stocking shelves during the truck unloading and restocking process throughout the week. We continue to make good progress with incorporating more shelf ready packaging and I'm pleased to note that we are well ahead of schedule with our rolltainer optimization efforts. In fact, we have completed sorting one half of our distribution centers and are encouraged by the early results including positive feedback from our store teams. Our goal is to complete the resorting process in all remaining distribution centers by year's end.", "The second key component of Fast Track is self checkout, which we believe can further improve speed of checkout while also reducing the amount of labor hours needed in stores for this activity. Our goal remains to pilot self checkout in select stores in the back half of this year. Overall, we are making great progress on our strategic initiatives enable through focused and disciplined execution. We believe we are an innovative leader in our channel and we are well positioned to capture market share in a changing retail environment. Along with our strategic initiatives, we remain committed to our four operating priorities. Let us take the last few minutes to update you on a few of those efforts.", "Our first operating priority is to drive profitable sales growth. The team has developed a comprehensive plan to drive continued growth with several ongoing initiatives. Let me quickly highlight just a few. Starting with our cooler door expansion program, which continues to be our most impactful merchandising initiative. We began our cooler expansion efforts in earnest in 2013 and believe we continue to have ample runway with this important program. During the first half, we added more than 20,000 cooler doors across the store base. In total, we expect to install over 40,000 cooler doors this year as we continue to build on our multi-year track record of growth in cooler doors and associated sales.", "In addition to being a great sales and traffic driver. The expansion of our cooler door footprint over the years has provided the scale necessary to enable DG Fresh. Importantly our DG Fresh learnings and success to date, we are increasing the capacity of our cooler doors. More specifically, we have recently begun incorporating higher capacity coolers into our real estate program. These coolers provide over 45% more holding capacity than traditional coolers, which will allow us to expand our assortment offering by approximately 25%, creating additional opportunities to drive higher on-shelf availability and deliver a wider product selection. Going forward these higher capacity coolers will be included in the majority of all new remodel, relocated stores and new stores. We believe these efforts better position us to capture additional sales opportunities as we move ahead, including those associated with DG Fresh.", "Turning now to our private brands, which continues to be an important area of focus for us. Our goal is to drive overall category awareness and adoption with our customers through improved and more impactful displays; consistent messaging in-store as well as across print and digital media and enhance quality perceptions. I'm pleased with our continued progress across these fronts, which contributed to our strong second quarter performance. Our Good & Smart brand is especially popular with our customers and remains an important part of our Better-For-You offering. As a reminder, this product line provides customers with a variety of Better-For-You options at low prices, and is now available in approximately 3,900 stores with plans for further expansion as we move forward.", "Another key contributor to our growing private brand popularity is Believe, our new and aspirational cosmetic line, with all items priced at $5 to below, the quality and value perception associated with this brand is generating tremendous buzz, and we are pleased with the early results. We are also seeing positive results from our recent rebranding efforts with our Studio Selection lines within the health and beauty category. And we believe customers will be equally responsive to our most recent rebrand General Steps, which is our new baby products line. Overall private brands remain an important part of our ongoing strategy to drive profitable sales growth, and we are excited by the momentum we are seeing across our portfolio.", "Finally, I want to touch on our recent partnerships with Western Union and FedEx. Western Union is now available chain wide offering our customers the ability to send and receive cash in nearly 16,000 convenient Dollar General locations. Building on the Western Union service is our recent partnership with FedEx, which we announced during Q2. This partnership will provide our customers with convenient access to FedEx pick-up and drop off services at their local Dollar General store. We plan to roll out the service to over 1,500 locations in Q3, expanding to a total of more than 8,000 stores by the end of 2020, further advancing our long track record of serving rural communities. By further enhancing our convenience proposition with new services that our customers want, we believe both offerings can become traffic drivers over time. As you hear from us often, the customers is at the center of everything we do. These are great examples of being able to further leverage our unique real estate footprint to increase access to the solutions our customers want in the communities we call home.", "The only sales driving initiatives, we are continuing our efforts to enhance gross margin. In addition to the gross margin benefits associated with NCI, DG Fresh and private brand efforts reducing shrink remains an important opportunity for us. We rolled out approximately 2,000 additional electronic article surveillance units in the second quarter, bringing the total number of stores with EAS to approximately 12,600. Given the success we continue to see with this program, we are accelerating our efforts. In fact, we now expect to incorporate EAS in all stores by years end, which represents an increase of about 6,000 units compared to our previously target of approximately 3,000 units for the year.", "We also continue to pursue distribution and transportation efficiencies to support our profitable sales growth. Reducing stem miles is an important contributor to these efforts and the successful opening of our Longview distribution center earlier this year is expected to drive additional efficiencies as we move ahead. In addition, the construction of our distribution center and Amsterdam, New York is progressing nicely and we anticipate it will begin shipping later this year. We are also accelerating the expansion of our private fleet, which now intend to add more than 100 tractors this year, up from our previous goal of 75 tractors, bringing our total overall fleet to approximately 300 units by year's end.", "Finally, while tariff impact mitigation is at the forefront of our global merchandising efforts as we noted earlier, foreign source remains a long-term gross margin opportunity. Our goals include increasing penetration as well as diversifying countries from which we source in fact we have already reduced our sourcing exposure to China this year alone by approximately 7% and we continue to lay the foundation for ongoing success in these efforts. Our second priority is capturing growth opportunities. Our best-in-class real estate team continued to deliver strong results and our proven high-return, low-risk model for real estate growth continues to be a core strength of the business. Our real estate model continues to focus on five metrics that has served us well in evaluating thousands of new stores in recent years, these metrics include new store productivity, actual sales performance, rate of return, cannibalization and the payback period.", "Each of these metrics continue to meet or exceed our expectations, reinforcing our belief that new store growth is the best use of our capital. In addition to new store growth, our remodel and relocation program continues to be an important part of our real estate strategy. This year we plan to open 975 new stores, remodeled 1,000 of our mature stores and relocate approximately 100 units. We remain on track to achieve these goals by the end of the year.", "During the first half, we opened 489 new stores, remodeled 653 stores including 254 stores in the Dollar General traditional plus or DGTP remodels and relocated 46 stores. We also added produce in 64 stores, bringing the total number of stores which carry produce to approximately 550. As a reminder, our traditional remodel delivers a 4% to 5% comp lift on average. This compares to an average of 10% to 15% comp lift for a DGTP remodel, which is a traditional store format with expanded cooler count. And when we are able to add produce to a DGTP remodel, it delivers comps at the higher end of the 10% to 15% range. Overall, our real estate pipeline remains robust and we are excited about the continued growth opportunities ahead.", "Our third operating priority is to leverage and reinforce our position as a low-cost operator. A cost control mindset is pervasive throughout the organization and it is an important part of our culture. We have a clear and defined process to control spending, which governs our disciplined approach to spending decisions. We continue to focus our efforts on reducing existing costs where possible through a zero-based budgeting process, I'm pleased with the team's efforts this quarter, which helped to mitigate the impact of the investments made in our strategic initiatives and contributed to the leverage in adjusted SG&A expense that John noted earlier.", "In addition to generating significant cost savings to date, this process also produced other meaningful initiatives including Fast Track, which we believe can significantly reduce cost over time as well as our recent partnerships with Western Union in FedEx and the income associated with these service offerings. Our fourth operating priority is to invest in our people as we believe they are a competitive advantage. As a growing retailer, we continue to create new jobs in the communities we call home, and for those associates already on the team this growth is generating many opportunities for career advancement. In fact, more than 12,000 of our current store managers are internal promotes and we continue to innovate on the development opportunities we can offer to our teams, including continued expansion of our private fleet and those associated with DG Fresh.", "We believe our continued engagement with our employees is the most effective way to understand how we can continue to support them. Importantly, our strong employee engagement metrics continue to demonstrate the effectiveness of this approach. In addition, we analyze a variety of metrics to ensure we remain positioned to attract and retain talent. These metrics include store manager turnover, which continues to trend better than last year's all-time record low. We also continue to be pleased with our applicant flows and time to fill open positions. Reaffirming our belief, we continue to be an employer choice in the communities we serve. We held our annual leadership meeting in Nashville last week and I was once again amazed by the energy and dedication on display for more than 1,500 leaders of our Company from across the country.", "Our time together each year reinforces for me how powerfully the serving others culture is ingrained in our people. In closing, we are excited about our strong position midway through the year. Our first half results demonstrate strong execution across a variety of fronts, and I am proud of the team's performance. We have many exciting projects and initiatives under way to continue driving strong growth through the rest of 2019 and over the long term. As a mature retailer in growth mode, we believe we are uniquely positioned to continue delivering value and convenience to our customers and long-term value for our shareholders. I want to offer my sincere thanks to each of our approximately 141,000 employees across the Company for their commitment to serving our customers and communities and I look forward to working together to deliver a strong second half.", "With that operator, we would now like to open the lines for questions." ] } ]
[ { "name": "Operator", "speech": [ "[Operator Instructions] The first question will come from Michael Lasser with UBS. Please go ahead." ] }, { "name": "Michael Lasser", "speech": [ "Good morning. Thanks a lot for taking my question. Between you and your Dollar Store multi-price competitor, you posted some of the best comps we've seen in a while, particularly on a multi-year stack races. So Todd do you think that this is the right economy for your model or is what you're experiencing just more a function of all the various initiatives that you have in place right now like improving on-shelf availability by 20%?" ] }, { "name": "Todd Vasos", "speech": [ "Yeah, Michael. We've said for many, many years, and we continue to believe that this model works great in good times and in not so good times or even bad times. I tell you, the the success that we're seeing is really -- I mean, I'm really proud of the teams from our merchandising to operations and supply chain teams to delivering on both our shorter-term initiatives and our longer term strategic initiatives. I would tell you, we continue to see a bright future and runway ahead of us on our top line and we will continue to execute and which is one of our strengths executed a high level these initiatives. We believe we've got the right initiatives to drive sales into the future." ] }, { "name": "Michael Lasser", "speech": [ "And what that means Todd, your implied guidance for the back half does look like it would just that comps will slow a little bit? Is that based on what you're seeing now? Or is there any other factor that would drive a slowdown in the business?" ] }, { "name": "John W. Garratt", "speech": [ "Michael this is John. I would tell you that we feel great about the business fundamentals in the continued profitable sales growth we delivered in Q2. We raised our outlook based on the strong year-to-date performance, but there's a lot of year left. There is tougher half -- there is tougher lapse in the back half and there is some uncertainty around the macro environment, but we feel comfortable with the guidance provided and feel great about the way the business is performing." ] }, { "name": "Todd Vasos", "speech": [ "And also, Michael, just remember, we've got six less selling days between Thanksgiving and Christmas this year and also want to remind everybody the SNAP pull forward last year from Q1 into Q4 was about 70 basis points. So that will be a headwind in the Q4 time frame this year. As John indicated, we believe we have adequately put all that into what we believe is our pretty strong guidance for the back half of the year." ] }, { "name": "Michael Lasser", "speech": [ "In fact, you're helpful to provide the number that you've reduced your exposure to China by 7%. Where does that total overall percent reside right now?" ] }, { "name": "Todd Vasos", "speech": [ "Yeah. You know it's no secret, right. I mean those moves have been in effect for or under way for many months now and other parts of Southeast Asia, Mexico and other place that we've seen some success. So we continue to diversify country of origin. The great thing is we've had boots on the ground in Mexico, Vietnam, Cambodia and many other Southeast Asian countries including India as well for many, many years. And so we're just leveraging that capability to an even greater time right now with these tariffs and the uncertainty around those." ] }, { "name": "Michael Lasser", "speech": [ "Okay, thank you very much." ] }, { "name": "Operator", "speech": [ "The next question will come from Matthew Boss with JP Morgan. Please go ahead." ] }, { "name": "Matthew Boss", "speech": [ "Thanks. Congrats on a great quarter and nice execution." ] }, { "name": "Todd Vasos", "speech": [ "Thank you." ] }, { "name": "Matthew Boss", "speech": [ "So John, maybe on the gross margin, can you help walk through the drivers behind the inflection back to the second quarter gross margin expansion? As we look ahead, what inning are we in today as we think about the gross margin opportunity related to DG Fresh and your non-consumables initiative? And just any way to help size up the multi-year gross margin opportunity that may be tied to these initiatives, I think would be really helpful?" ] }, { "name": "John W. Garratt", "speech": [ "Well, thank you, Matthew. I'll start by saying we feel great about the balance Q2 performance with the strong top line while enhancing our margin 13 basis points over last year. If you recall back as we said we would, we continue to be more targeted in promotional activity, leveraging the tools we put in place to be more efficient on the spend to get more bang for the buck and as you saw, delivering strong comps and traffic, while being more efficient with that spend. We're also really excited about what we're seeing from the impact of new initiatives like DG Fresh and NCI. We're seeing the impact of that, and that will scale as we go on.", "We said in our prepared comments, that we expect rate improvement in the second half to be roughly in line with Q2 compared on a year-over-year basis. And while there continues to be headwinds in our environment, we believe we have opportunities to increase margins over time as these initiatives scale, there'll be a bigger and bigger impact on our margin and we have a lot of other levers at our disposal, the team does a great job in category management. We see continued opportunity to increase foreign sourcing penetration.", "As we talked about in our prepared comments, there is a lot of exciting things going on with the private label that can help increase that penetration. There's a lot of opportunities to increase supply chain efficiencies. The team did a great job last year mitigating the impact to that or more stable environment now and there is a lot of leverage there. We have great support from our vendor community and we just believe we're making the right investments to grow operating margin over the long term and believe we have a lot of other levers at our disposal that we've made great trade-offs over time." ] }, { "name": "Matthew Boss", "speech": [ "That's great and then just a follow-up on the expense front, how best to think about SG&A dollar growth versus sales in the back half of the year? Maybe what's the efficiency opportunity you see from Fast Track and obstacles you see to returning to the 2.5% to 3% fixed cost hurdle as we move to next year?" ] }, { "name": "John W. Garratt", "speech": [ "Yeah, there too we're very proud of the first half performance, both Q2 and first half if you exclude the impact of the legal charge, we leveraged our SG&A while investing $19 million year-to-date at SG&A. As we mentioned in our prepared comments, we're accelerating the spend a little bit $55 million this year versus the previous $50 million estimate, and that's really a reflection of accelerating investment in key strategic initiatives like DG Fresh and Fast Track, as we said, there is some front end pressure associated with that, there is some start-up costs, that pressure SG&A. But we like to look more broadly at operating profit and as you look at operating profit, we really believe that these initiatives over time will not just enhance sales, but improve our operating profit over the long term. So we have to work through the start-up expenses. We said that as we go through the year that the expenditures against these initiatives will grow and the majority of which is against DG Fresh and Fast Track, but we're also seeing the benefits of the scale as well such as we get into next year we still expect these to be accretive as early as next year." ] }, { "name": "Matthew Boss", "speech": [ "Great. Best of luck." ] }, { "name": "Todd Vasos", "speech": [ "Thank you." ] }, { "name": "Operator", "speech": [ "The next question is from Simeon Gutman with Morgan Stanley. Please go ahead." ] }, { "name": "Simeon Gutman", "speech": [ "Thanks. So a little bit of a follow-up on the gross margin. In the prepared comments, you said it should -- Fresh could be accretive as early as next year. I wanted to ask what the gating factor is on the timing and the magnitude of that?" ] }, { "name": "Todd Vasos", "speech": [ "Yeah, as you -- as you look at DG Fresh, we are squarely focused on delivering and executing a very high level. And I would tell you that we're very, very encouraged in what we see. We're getting the cost of goods savings we expected with 3,500 initial stores that we've rolled out. And we still feel that it's going to be accretive as early as 2020. Again, we are already starting to see some of this. It was asked earlier, what [Indecipherable], I would tell you, we just got up to the plate and and I think we just hit a good solid double or triple in the first quarter of this DG Fresh rollout. So I think we've got a lot more opportunity ahead of us and it should benefit us both on the sales and gross margin lines as we move forward." ] }, { "name": "Simeon Gutman", "speech": [ "And I think the -- as early as 2020 comment, it sounds like it's going well so far. I guess you need to do more -- more -- a higher percentage of the chain. But if things continue to go as planned, it sounds like that's going to be the inflection point into next year as far as becoming gross margin accretive, is that fair?" ] }, { "name": "Todd Vasos", "speech": [ "I think that's the way to look at it with 3,500 stores against our 16,000 or so store base right now, it is the law of numbers and we'll be up to 5,000 by the end of this year and we don't see that slowing as we've indicated, and so we believe that as we move into '20 it will definitely be accretive." ] }, { "name": "Simeon Gutman", "speech": [ "And just -- and I guess it's still sticking to gross margin, is the magnitude of the benefit you're seeing in the initial rollouts of it -- how is it planning relative to your expectations?" ] }, { "name": "John W. Garratt", "speech": [ "Yeah. As we convert items as we convert stores, it is right where we thought it would be in terms of the cost savings that is substantial cost savings that as we said, as we scale that will be very impactful to helping our gross margins." ] }, { "name": "Simeon Gutman", "speech": [ "Okay, thanks for all the color. Take care." ] }, { "name": "Todd Vasos", "speech": [ "Thank you." ] }, { "name": "Operator", "speech": [ "The next question is from Rupesh Parikh with Oppenheimer. Please go ahead." ] }, { "name": "Rupesh Parikh", "speech": [ "Good morning and thanks for taking my question. Also, congrats on a really strong quarter." ] }, { "name": "Todd Vasos", "speech": [ "Thank you." ] }, { "name": "Rupesh Parikh", "speech": [ "So, maybe to start out, I was just curious to get your thoughts -- latest -- your latest views on the healthier consumer and I was curious as you look at some of your surveys that you do with your consumers, our tower of concerns of popping up at all in the conversation?" ] }, { "name": "Todd Vasos", "speech": [ "I would tell you know as you know, Rupesh, we really talk to our consumers each and every quarter. And she is telling us about the same as we've that we've talked about before. She's still back to work, making a little bit more money, working more hours versus actual average hourly rate being up for her is really more productivity, more hours. She is feeling a little bit more timid just like we've seen in past -- in the past couple of quarters, but I would tell you that tariff has not really been -- she has not called that out and she really hasn't called out a lot of headwinds yet from what she would think about as price increases or inflation. So she really hasn't been calling that out at least up till now, but we're really mindful that with List 4 getting ready to take effect across all of retail, that she still may see some of that. The great thing about this model is that we do good and good times and in bad times right or when she needs us more and and we stand ready willing and able to deliver to her as she may need us a little bit more toward the back half in the early part of next year." ] }, { "name": "Rupesh Parikh", "speech": [ "Great and then one follow-up questions. We've been getting some questions just on some of the proposed SNAP changes out there. I was curious if you have any initial views toward toward those proposals?" ] }, { "name": "John W. Garratt", "speech": [ "Yeah. What I would say, as a reminder that if you look at our SNAP sales tender as a percentage of the total, it's less than 5% and if you look at the guidance we provided we've estimated what we think the impact of that would be and that's all captured in the guidance." ] }, { "name": "Rupesh Parikh", "speech": [ "Okay, great. Thank you." ] }, { "name": "Operator", "speech": [ "The next question is from Chris Prykull with Goldman Sachs. Please go ahead." ] }, { "name": "Christopher Prykull", "speech": [ "Good morning, guys. Thanks so much for taking the questions. I just wanted to ask a little bit about the non-consumable initiative. It sounds like things are going pretty well there. Can you maybe just give a little bit more detail about the categories that you're seeing the most benefit in the halo benefit that you mentioned? Can you quantify the incremental lift that you're seeing in the remodels where that initiative is being added? And then how many more stores could you roll that out to in 2020 and beyond?" ] }, { "name": "Todd Vasos", "speech": [ "Yeah, we're very pleased with the early results. As we indicated, we have up to 2,400 stores up and running by the end of this year. We believe we can do many, many more, if not the entire chain eventually. The way this is starting to play out, we're very happy with the gross margin opportunities that are existing out of this, the stores that we have converted over already are seeing strong gross margin lift for the entire store and sales list for the entire store, which is exactly what we thought would happen.", "So as we continue to scale this, it will continue to have a bigger and bigger impact on our total, our total store gross [Phonetic] margin and top line. The great thing is we're into our fifth replenishment cycle already and are seeing great results from even now into our fifth replenishment and that's from the consumer takeaway. So how our stores and our operators have been able to manage a new muscle if you will in working no planogram, but yet working to treasure hunt environment and they've done a fabulous job with it.", "So we really pleased with what we see and in my prepared remarks, I think you also remember hearing, we've taken some of those learnings, not only items, but in some cases full categories and we have now flushed it through the other part of the chain, so up toward of 16,000 stores. So you're seeing strength, which was the other part of your question in seasonal, and in home, in domestic. Those were some of the areas that we're seeing some of the biggest increases. We saw great increases in party and occasion and and when you think about party, across everything from plates, cups, napkins to balloons, helium balloons doing very, very well for us. So it's really across the board." ] }, { "name": "Christopher Prykull", "speech": [ "Great, that's helpful. And then as a follow-up. Anyway to quantify the impact from your partnerships with FedEx or Western Union, or maybe just some thoughts around the strategic rationale for doing those? Are your locations on average closer to customer households than FedEx or Western Union locations?" ] }, { "name": "John W. Garratt", "speech": [ "This is John. Good question. Well I'll say while not material to 2019, we're very excited about the partnership. If you look at FedEx, we'll be starting out with 1,500 stores in Q3, scaling to 8,000 by the end of 2020. Western Union there too early stages there in all the stores. What we really think this demonstrates is our ability to further leverage our unique footprint and provide services to underserved customer that others have difficulty getting too, and with service partnerships like this and there could be others, we believe we're helping drive traffic, but it also can be effective income drivers to the business as well. So we're excited about what it does for the customer and how it can help our financials going forward.", "Thanks so much. Good luck the rest of the year." ] }, { "name": "Todd Vasos", "speech": [ "Thank you." ] }, { "name": "Operator", "speech": [ "The next question is from Karen Short with Barclays. Please go ahead." ] }, { "name": "Karen Short", "speech": [ "Hi, thanks for taking my question and I'll add my congratulations as well. Great quarter." ] }, { "name": "Todd Vasos", "speech": [ "Thank you Karen." ] }, { "name": "Karen Short", "speech": [ "I just wanted to ask on guidance. So when I look at your operating profit per square foot, the growth that you saw this quarter, I mean it was the best growth rate in what I count is like a 11 quarters. And it just seems that with respect to what drove it this quarter, a lot of those things are actually sustainable due to the back half, and I know you pointed to some areas of conservatism, but maybe you could just parse that out a little bit because it does feel like full-year guidance is being extremely conservative." ] }, { "name": "John W. Garratt", "speech": [ "Thanks, karen. Yeah, I'll start by saying we feel great about the business fundamentals and how we started out the year with a strong top line and bottom line performance. And based on that, raised our outlook. It's important to -- you remember that we did absorb additional tariff increases into our guidance, we're still raising it. So there's a lot of year left, but we feel comfortable with the guidance we provided." ] }, { "name": "Karen Short", "speech": [ "Okay and then just a follow-up. You did call out higher shrink within the gross margin. Any color there obviously because it has been -- has benefited shrink over the last several quarters?" ] }, { "name": "John W. Garratt", "speech": [ "Yes, as you pointed out over the last three years the team has done a great job, significantly reducing shrink. But as we've said before, it's never a straight line to the top. We always look to balance shrink with in-stock and obviously this year as we've said really doing great work around improving our in-stock levels, but we continue to see shrink improvement over the long term. One of the biggest wins we've had lately is EAS. We opened -- we added 2,000 more EAS units in Q2. Based on the successful results we've seen from EAS, as we mentioned we're expanding that rather than adding 3,000 this year, we're now going to add 6,000, finish out the chain, really just given the results we've seen from that. So we expect that to continue to help us reduce shrink over the long term and continue to see opportunity there." ] }, { "name": "Karen Short", "speech": [ "Okay, but nothing specific to point out this quarter?" ] }, { "name": "John W. Garratt", "speech": [ "No." ] }, { "name": "Todd Vasos", "speech": [ "No." ] }, { "name": "Karen Short", "speech": [ "Okay , thanks." ] }, { "name": "Operator", "speech": [ "The next question is from Scott Mushkin with Wolfe Research. Please go ahead." ] }, { "name": "Scott Mushkin", "speech": [ "Hey guys, thanks for taking my question. I just wanted to ask a more strategic question of the team, given the fact that all these initiatives are starting or will start to bear a lot of fruit. I'm just trying to understand where do you think there is some levers? I mean, if I look at Home Depot, they kind of keep their gross margins flat and reinvest pretty heavily to drive sales. And I was wondering what your kind of thoughts are strategically that way. Can you use prices levered? You speed up the Fresh? I mean, what do you do with the -- as it looks like the profit -- profitability, the Company is going to continue to accelerate?" ] }, { "name": "John W. Garratt", "speech": [ "You know, again, we feel very good about the strategic initiatives in total. And we've always said, we reserve the right at any time to continue to reinvest back into the Company. But those of you that know us well, we don't do any of that without a solid return attached to any of those investments. And that's the strength of Dollar General is that, in our execution level. And I would tell you that -- that we feel good about where we are today on the strategic initiatives we have out there. We have a plethora of them as you know, but the great thing is, we're executing at a high level across all of them. And many of them are aimed right at gross margin and some of them are aimed right at the SG&A line to continue. So that we can continue to grow our operating margins and that's really what we're squarely focused on is operating margins." ] }, { "name": "Scott Mushkin", "speech": [ "And Todd. So if you look at it and you look at kind of the modern DG stores, it's evolving. I mean it seems to really replace for a shopper -- could replace the shopper, certainly many trips to the grocery stores, but maybe even to the supercenters. And as a follow-up question to what I just ask you -- I mean do you see this is a vehicle to increase trips and where do you think pricing plays in that as you look at the Company over the next couple of years?" ] }, { "name": "Todd Vasos", "speech": [ "Yeah. If you look at where we are, our pricing is as solid as good as it's ever been against all classes of trade. So we feel very good about that and we watch that each and every quarter. That is the cornerstone if you will, of our value proposition here at Dollar General. We are squarely focused on serving that customer. We are a fill-in-shop. We are not -- we are not a full stock up or a full shop or a big stock up shop. But in saying that we want to make sure that the value and convenience nature of Dollar General was enhanced at all times.", "And in many of these initiatives go right against those type of items to make sure that in fact that convenient level is there for her and we talk to our core customers each and every quarter as I mentioned earlier and she does tell us that she wants more products from us and that's really what we're delivering. And especially in rural America, where options are very limited, so if we can deliver a Fresh offering that strong and a Better-For-You offering, which we're doing in many of these stores, there is a healthy option for her as well in these communities. And if it means that she doesn't have to make another trip to a big box store somewhere in the month, then I think if benefits her greatly and that's how we sort of look at how we're building this Dollar General for the future." ] }, { "name": "Karen Short", "speech": [ "Great, thanks. Thanks for taking my question." ] }, { "name": "Operator", "speech": [ "The next question is from Paul Trussell with Deutsche Bank. Please go ahead." ] }, { "name": "Paul Trussell", "speech": [ "Good morning. And great quarter. just a few quick ones from me. One, with the higher capacity coolers, does that -- does that involve in taking away any allocation of space from other categories and are utilizing that to actually add in some new and incremental SKUs versus just make sure you have increased availability of current items? And then on private label and private brand, certainly sounds like there is success there. Can you quantify at all? Let us know to what extent your private brands are growing relative to national brands? Thank you." ] }, { "name": "Todd Vasos", "speech": [ "Sure, Paul. Yeah, so when you look at the higher capacity coolers, again as I stated earlier, we don't do anything here without a return against it and without testing and learning, that's the core strength of Dollar General and these higher capacity coolers are the exact same coolers that are in the DGTP stores, just not as quite as many doors. So it's the same coolers, the same exact ones. And so, to answer your question specifically, we do lose a little hanging apparel when we go to remodel, relocate or put in a new store with these higher capacity coolers. But once again, as I've been stating for many quarters now, we continue to reduce our hanging apparel for better traffic driving items across the chain. So this is just a continuation and an acceleration quite frankly of our ability to be able to do that.", "It does give you both sides of the equation to your point. It gives you higher capacity so that you're in-stock, especially on a lot of fast moving goods, but it also gives you the opportunity for 25% more new items in these coolers versus the smaller lower capacity ones we had before and that will increase sales. So both your in-stocks will increase sales and the assortment will increase sales again. Our core consumer is asking us for more products in our Fresh, frozen and dairy and deli items and that's exactly what we're going to deliver to her. So we're excited. This is -- this wasn't contemplated in our -- in our earlier roll out this year, but as we continue to see the success of our DGTP remodels, we thought it was the best use of our capital to go in and do those and that's exactly what we're doing.", "And then as it relates to fiber brands, we're very, very happy with all the work that the team has done around private brands in the last couple of quarters. They've been readying us to be able to deliver to the customer and even enhanced value proposition there are believe makeup line is doing phenomenal. It got so much buzz across social media, across CNN this past quarter and it's driven a lot of additional traffic into our stores and again, everything under $5. And so I would tell you that our private brands are growing at a very nice clip and we only see that benefiting our core consumer even greater as time goes on and we continue to relaunch things like General Steps that I talked about in our baby line. So more to come there. I believe that we're in the early innings of what Dollar General can do with private brands in totality. We're really, really happy with what we see and quite frankly a lot of integration in our signing and our advertising also helps. So when the consumer gets in the store, she sees a consistent message and she understands that message." ] }, { "name": "Paul Trussell", "speech": [ "Thank you. And then lastly from me, just on the pick up pilot, can you just tell us how you're going to approach that?" ] }, { "name": "Todd Vasos", "speech": [ "Yeah, we're going to go slow here. We want to make sure that the consumer resonates with that. So remember our average basket size is $12 or less, five items or less on average. So it's a little bit different shop than what you would find in a big box retailer and so buy online pickup in store will be no different. It will be a different shop, but what we believe we can do is offer her another leg of convenience, so that she can come into the store, pick up what she needs, probably add an item or two to her online pick up and then be able to get out very, very quickly and so we're going to test it. We're going to go slow here. We're going to test it in the back half of the year. And as I indicated last quarter, we believe that the customer will resonate with this, but we'll have to wait and see. But again, I think it's important to know here that, that we're not going to sit back and wait for the customer to already be there. We're going to meet her our core customer, where we believe she is going to be and having this ready and ready to roll out in a large scale way somewhere down the line, I think is the exact right thing to do. No different than e-commerce for us. We've had an e-commerce site up and running for the better part of seven years now and and when our core consumer is ready to buy more online, all we have to do is turn the dial-up there and that will be no different than buy online pick up in the store." ] }, { "name": "Paul Trussell", "speech": [ "Thank you. Best of luck." ] }, { "name": "Todd Vasos", "speech": [ "Thank you." ] }, { "name": "Operator", "speech": [ "The final question is from Robbie Ohmes with Bank of America. Please go ahead." ] }, { "name": "Robbie Ohmes", "speech": [ "Oh, thanks for squeezing me in. Todd, I know we've seen in our price studies how well you guys are doing in pricing and you've got all these great initiatives. Just, could you speak to us about the competitive environment? Is anything changed? Are you seeing regional grocers raise prices, which we think we've seen in some cases? Have you seen store closings smaller players that were not able to track, go out of business, any kind of color on that would be fantastic? Thanks." ] }, { "name": "Todd Vasos", "speech": [ "Yeah, sure. Robbie, we -- I would tell you that again we are well positioned on price against all classes of trade than we've been in the 10, almost 11 years that I've been here at Dollar General and it is the cornerstone of that value convenience proposition to our customer. And in saying that we really haven't seen too much of a difference broadly on the pricing, whether it'd be every day or promotional, it's been fairly tame out there, but in saying that we continue to -- to work the price levers to make sure that we're right priced in every DMA that we serve out there across the country.", "And as you look with our scale getting larger and larger each and every year and our ability to keep prices low because of our limited SKU assortment that we have, we continue to be very well priced. And that's exactly what our consumers are looking for and that's why we know that either in good times or bad, those consumers are going to come flocking into see Dollar General. And the last thing I would say is that our fastest growing segment still is the consumer making over $50,000 a year, that's the fastest growing segment we have. And I think that really speaks to every consumer is looking for a value and is looking for convenience. And I believe that all the work we're doing inside of our box to transform it into an all around shop is really resonating with the customer." ] }, { "name": "Robbie Ohmes", "speech": [ "Terrific , thanks so much." ] }, { "name": "Operator", "speech": [ "[Operator Closing Remarks]." ] } ]
DG
2019-05-30
[ { "description": "Vice President of Investor Relations and Corporate Communications", "name": "Jennifer Beugelmans", "position": "Executive" }, { "description": "Chief Executive Officer", "name": "Todd Vasos", "position": "Executive" }, { "description": "Executive Vice President and Chief Financial Officer", "name": "John W. Garratt", "position": "Executive" }, { "description": "JPMorgan -- Analyst", "name": "Matt Boss", "position": "Analyst" }, { "description": "UBS -- Analyst", "name": "Michael Lasser", "position": "Analyst" }, { "description": "Barclays -- Analyst", "name": "Karen Short", "position": "Analyst" }, { "description": "Deutsche Bank -- Analyst", "name": "Paul Trussell", "position": "Analyst" }, { "description": "Oppenheimer -- Analyst", "name": "Rupesh Parikh", "position": "Analyst" }, { "description": "Loop Capital Markets -- Analyst", "name": "Anthony Chukumba", "position": "Analyst" }, { "description": "RBC Capital Markets -- Analyst", "name": "Scot Ciccarelli", "position": "Analyst" }, { "description": "BMO Capital Markets -- Analyst", "name": "Kelly Bania", "position": "Analyst" } ]
[ { "name": "Operator", "speech": [ "Good morning. My name is Howard and I will be your conference operator today. At this time, I would like to welcome everyone to the Dollar General First Quarter 2019 Earnings Call. Today is Thursday, May 30, 2019. All lines have been placed on mute to prevent any background noise. This call is being recorded. Instructions for listening to the replay of the call are available in the Company's earnings press release issued this morning.", "Now, I would like to turn the conference over to Ms. Jennifer Beugelmans, Vice President of Investor Relations and Corporate Communications. Ms. Beugelmans, you may begin your conference." ] }, { "name": "Jennifer Beugelmans", "speech": [ "Thank you, Howard, and good morning, everyone. On the call with me today are Todd Vasos, our CEO; and John Garratt, our CFO. Our earnings release issued today can be found on our website at investor.dollargeneral.com under News & Events.", "Let me caution you that today's comments will include forward-looking statements about our strategies, plans, goals or beliefs about future matters, including but not limited to, our fiscal 2019 financial guidance and real estate plans. Forward-looking statements can be identified because they are not limited to statements of historical facts or use words such as may, should, could, would, will, can, believe, anticipate, expect, assume, intend, outlook, estimate, guidance, plan, opportunity, long-term, potential or goal and similar expressions. These statements are subject to risks and uncertainties that could cause actual results or events to differ materially from our expectations and projections, including but not limited to those identified in our earnings release issued this morning under Risk Factors in our 2018 Form 10-K filed on March 22, 2019 and in the comments that are made on this call. We encourage you to read these documents. You should not unduly rely on forward-looking statements, which speak only as of today's date. Dollar General disclaims any obligation to update or revise any information discussed in this call unless required by law.", "At the end of our prepared remarks, we will open the call up for your questions. Please limit your questions to one and one follow-up question, if necessary.", "Now, it is my pleasure to turn the call over to Todd." ] }, { "name": "Todd Vasos", "speech": [ "Thank you, Jennifer, and welcome to everyone joining our call. 2019 is off to a great start and our strong financial performance illustrates the progress we have already made against our goals for this year. This performance was driven by our innovative merchandising and marketing strategies as well as our focus on operational excellence. We delivered value and convenience across our footprint of more than 15,000 stores and we believe our neighborhood store concept continues to resonate with our customers. As most of you know, we have a lot of exciting things happening at Dollar General and I'm looking forward to updating you on our progress during today's call.", "I'll start with a few key highlights from our first quarter before turning the call over to John for a more in-depth look at our financial results. After that, I'll walk you through the progress we're making on our four strategic initiatives. And finally, I'll highlight the continued momentum our four operating priorities are generating for the business.", "Turning now to our first quarter performance. We delivered comp sales growth of 3.8%. Additionally, net sales grew 8.3% to $6.6 billion compared to net sales of $6.1 billion in the first quarter of 2018. This strong net sales performance in the first quarter of 2019 showed once again that we can continue to drive sales growth from both new stores and mature stores. Additionally, during the first quarter, we continue to gain market share in highly consumable product sales, which was a key driver of our strong and balanced performance. Syndicated data indicated we had mid to high single-digit growth in both units and dollars over the 4-, 12-, 24- and 52-week periods ending May 4, 2019. Our 3.8% comp growth rate for the first quarter of 2019 resulted from both an increase in average basket size as well as our highest customer traffic growth in over a year. Driving profitable traffic to our stores remains a priority and we're pleased to see our efforts delivering during the quarter. We saw another very strong quarter of growth in sales of consumables. Our non-consumable sales growth was driven by strong results in both seasonal and home.", "As part of our ongoing merchandising strategy, we continue to reduce space for hanging apparel in order to reallocate square footage to categories that our customers are shopping most in our stores. As expected, by intentionally downsizing our apparel offering, we saw a negative overall comp in apparel. That said, we believe we are executing the write-back to basics apparel strategy and we are reallocating the square footage to highly productive items that our customers are seeking.", "As we noted in our last call, we believe sales in the fourth quarter of 2018 benefited from the acceleration of certain SNAP payments from February to January. Although, the shift in these payments created a sales headwind for Q1, I'm pleased to note that we only gave back approximately half of the benefit we saw in the fourth quarter. We attribute this result to our strategic promotional activity in the fourth quarter, which we believe drove loyalty and share gains among existing and new customers as we intended. Even as we continue to gain share, we believe there is significant opportunity for us to take even more share. We will continue to keep the customer at the center of everything we do and we're excited about the many opportunities we have to become an even more important partner to her as we move through 2019 and beyond.", "With that, I'll now turn the call over to John to provide you with a little bit more detail on the first quarter financial results." ] }, { "name": "John W. Garratt", "speech": [ "Thank you, Todd, and good morning, everyone. I'm going to walk you through the financial details of the first quarter. Unless I specifically note otherwise, all comparisons are year-over-year.", "As Todd already discussed sales, I will start with gross profit. Gross profit as a percentage of sales was 30.2% in the first quarter, a decrease of 23 basis points. This decrease was primarily attributable to increases in distribution transportation costs, a greater proportion of sales coming from the consumables category, which generally has a lower gross profit rates at our other product categories and sales of lower margin products comprising a higher proportion of sales within the consumables category. Partially offsetting these items were higher initial markups on inventory purchases. As we said we would, we normalized our promotional markdown activity in the first quarter, following targeted increases at the end of fiscal 2018.", "SG&A as a percentage of sales was 22.5%, an increase of 6 basis points. The increase was primarily driven by increased employee benefits and occupancy costs as a percentage of sales, partially offset by lower repairs and maintenance and workers' compensation expenses. As we noted on our fourth quarter call, we are investing this year in our four strategic initiatives. We remain excited about the long-term transformative potential of these initiatives and believe we are making the right upfront investments in 2019 to deliver mid to long-term benefits.", "Moving down the income statement, our effective tax rate for the quarter was 20.8% and compares to 21.6% last year. Diluted earnings per share for the first quarter increased 8.8% to $1.48. The team did a nice job delivering the bottom line in the quarter, despite headwinds from the investments and initiatives and the change we made to our inventory replenishment process.", "Turning now to our balance sheet, which remains strong, merchandise inventories were $4.1 billion at the end of the first quarter, up 14.3% overall and an increase of 8.2% on a per store basis. As we have previously discussed, we began implementing a change to our inventory replenishment process in the first quarter that we believe will allow us to support even higher levels of on-shelf availability. As anticipated, in addition to the gross margin headwind impact in the quarter, the change also contributed to our slightly higher overall inventory levels.", "In addition to our inventory replenishment efforts, we are implementing more rigorous on-shelf availability processes. These processes are focused on improving the in-stock performance of stores that do not meet our standards. In the first quarter, we saw a 26% in-stock improvement in the below standard stores. We know on-shelf availability is a critical component of the overall customer satisfaction and convenience and ultimately sales. We believe that we can continue to drive improvements in this area. We continue to believe our inventory is in great shape and that these tactics position us to support and drive sales growth in fiscal 2019 and beyond. Our goal over time remains to have our inventory growth be in line with or below our sales growth.", "The business continues to generate significant cash flow from operations, totaling $574 million in the first quarter, an increase of $25.5 million or 4.7%. Total capital expenditures for the first quarter were $145 million and included our planned investments in new stores, remodels and relocations, continued investments in construction of our Amsterdam, New York distribution center and spending related to the strategic initiatives. During the quarter, we repurchased 1.7 million shares of our common stock for approximately $200 million and paid a quarterly dividend of $0.32 per common share outstanding at a total cost of $83 million. At the end of the first quarter, the remaining share repurchase authorization was approximately $1.1 billion.", "Our capital allocation priorities have served us well and remain unchanged. Our first priority is investing in high-return growth opportunities, including new store expansion and infrastructure to support future growth. We also remain committed to returning significant cash to shareholders through anticipated share repurchases and quarterly dividends, all while maintaining our current investment grade credit rating and managing to a leverage ratio of approximately 3 times adjusted debt to EBITDAR.", "I want to touch upon our fiscal 2019 financial guidance. As most of you know, tariff rates recently increased from 10% to 25% on certain goods from China. As we have discussed with you on previous calls, we have been executing on a variety of efforts to mitigate the impact of tariffs on our customers and our business. Our efforts have focused on four key areas, continual negotiations with our vendors, product substitution, product reengineering and country of origin diversification. We will do everything we can to minimize the impact of tariffs on our customers. But even with these efforts, we believe our shoppers will be facing higher prices as 2019 progresses.", "Our focus remains on maintaining our everyday low-price leadership, which is a key pillar of our value proposition. Even though the outlook for additional tariffs appeared to be more positive as we entered 2019, our focus on these efforts never waned. As a result of this work and our strong start to fiscal 2019, we believe we can deliver on our current 2019 guidance. With this in mind, we are reiterating the 2019 guidance announced on March 14, 2019. Our guidance does not contemplate the impact of any additional increases in tariff rates or the expansion of additional products subject to tariffs beyond those currently in effect.", "I also want to provide you with some updated color on some of our expectations. We have noted that we are seeing a more balanced transportation marketplace, which has helped alleviate some of the pressure we saw in the back half of 2018. However, fuel costs have risen more than initially forecast and we anticipate these costs could be a gross margin headwind throughout 2019. Despite transportation and tariff headwinds, we continue to believe that we should see improvements in the gross margin year-over-year comparison as we move throughout the year.", "Regarding SG&A, we continue to expect to spend approximately $50 million on our strategic initiatives in 2019. While we expect these expenses to sequentially increase throughout the remainder of the year, we anticipate that the overall impact of these investments will most significantly pressure operating profit in the second quarter. As anticipated, the change we made to our inventory replenishment process resulted in a higher inventory level at the end of the first quarter and we expect to see somewhat elevated levels throughout 2019.", "We are very pleased with our strong first quarter and are proud of the team's execution. We believe our guidance reflects the strong start to the year, while contemplating known headwinds as well as the fact that there is still a lot of year left ahead of us. As always, we continue to be disciplined in how we manage expenses and capital with the goal of delivering consistent strong financial performance, while strategically investing in initiatives for the long-term growth. We remain confident in our business model and our ongoing operating priorities to drive profitable same-store sales growth, helping new store returns, strong free cash flow and long-term shareholder value.", "With that, I will turn the call back over to Todd." ] }, { "name": "Todd Vasos", "speech": [ "Thank you, John. We're very pleased with the first quarter results and the strong start to 2019. We have an innovative, robust portfolio of initiatives that are beginning to gain momentum and I want to take the next few minutes to update you on the progress we made this past quarter.", "Starting with our non-consumable initiative or NCI. As a reminder, NCI is our early stage initiative focused on a new expanded product offering in key non-consumable categories of home, domestics, housewares, party and occasion. The NCI offering was available to more than 1,100 stores at the end of the first quarter and we plan to include it in approximately 2,400 stores by the end of 2019. We have learned a lot from these stores and we are already applying the lessons learned from successes in many non-consumable departments across the chain. We're very excited about the results we're seeing from these stores and have now moved through many replenishment cycles. We are seeing lifts in non-consumable sales, particularly within seasonal and home, but also delighted to be seeing a positive halo effect in consumable sales. Additionally, while it's still early, we are seeing a positive impact on customer traffic in these stores. As a result, we are driving higher sales and seeing improvements in both mix and gross margin in these stores.", "Next, I want to update you on DG Fresh, which is one of the new strategic initiatives we introduced in our Q4 call in March. As a reminder, DG Fresh is a strategic, multi-phase shift to self distribution of frozen and refrigerated goods, such as dairy and deli. We began shipping from our first DG Fresh facility in Pottsville, Pennsylvania in January and we are serving more than 800 stores in the Northeast. While it's still early, we are already successfully reducing product costs on these types of items. We believe that we continue to scale DG Fresh, it will be -- meaningfully improve our gross margin. Two other important goals for DG Fresh are to drive higher on-time delivery and in-stocks and we are encouraged by the early results, which are in line with our projections.", "In addition to the gross margin and in-stock benefits, DG Fresh will eventually allow us to control our own destiny in these categories. This will include a wider selection of both national and private brands that our customers seek as well as enhanced offering of Better For You items. While produce is not included in the initial rollout, we believe DG Fresh could provide a path forward to expanding our produce offering to more stores in the future. We have signed leases on three more DG Fresh facilities that we intend to open in 2019. We plan to begin shipping from our second facility in Clayton, North Carolina within the next few weeks. For fiscal 2019, our goal remains to rollout our self-distribution model to as many as 5,000 stores from up to four facilities. We're excited about DG Fresh and the many benefits it can deliver for our customer and our business, and we believe it can be accretive as early as 2020.", "Turning now to digital. During the first quarter, the team continued to make great strides in deploying technology to further enhance the in-store experience. One great example of this work is our launch of the all new Dollar General app, which redesigned the coupon clipping experience for our customer, removing friction in the clipping process in several ways. Our customers can now search for coupons by product category, type or name and they can also use the app to scan a product and search for any available coupon. In addition, we've introduced new features that help integrate our digital and traditional media, including an interactive circular. We are very excited with the early feedback.", "Our digital coupons continue to grow in popularity with our customers and we now have approximately 17 million digital coupon subscriber accounts and more than 300 million digital coupons were clipped in the first quarter. We also continue to innovate within the DG GO! app. As a reminder, this app allows customers to use their phones to scan items as they shop, see a running total of items in their basket using our cart calculator and then skip the line by using the DG GO! checkout. Through the end of the first quarter, we have had more than 200,000 downloads of DG GO! and are averaging more than 40,000 monthly active users. We have DG GO! checkout in approximately 250 stores and our goal is to have DG GO! in approximately 750 stores by the end of the fiscal year.", "We have previously noted that our customers are using the cart calculator functionality frequently as a budgeting and optimization tool, even when they are not using DG GO! to checkout. Based on this insight, we intend to make cart calculator available in more than 12,000 stores by the end of the fiscal year. As we move through 2019, we will continue to focus our efforts on developing new tools to enhance the value and convenience proposition for our customers. For example, we're working on consolidating our DG GO! and Dollar General coupon apps in the one easy-to-use customer-friendly app. Additionally, we are identifying opportunities to harness the power of the data we have available to us and how we use that data to increase our ability to personalize the shopping experience for our customers. We will continue to evolve our digital suite of tools to serve not only the customers we have today, but also the customers of the future. Our digital strategy is an important component of our long-term growth strategy and we're excited about the many opportunities ahead.", "Our fourth strategic initiative is Fast Track. Fast Track is a two-pronged approach to increasing labor productivity in our stores, enhancing customer convenience and further improving on-shelf availability. There are two key components to Fast Track. First, we are streamlining the stocking process in our stores. This starts with an update of sorting processes at our distribution centers that is facilitating our ability to optimize the way we pack our rolltainers. Our goal is to reduce the number of steps required to get product from truck to our store shelves. To help you visualize this, our goal is that each rolltainer only contain products for one or two adjacent aisles. While this may sound simple, the improved efficiencies from this change are expected to save a significant amount of store labor that can be redeployed to other customer-facing activities or channeled into labor productivity gains. Our goal is to complete the resorting process in all existing traditional distribution centers by the end of 2020.", "As part of our streamline stocking process, we will also look to incorporate more shelf-ready packaging. While this will take a little bit more time to achieve, we believe we can reduce the number of case packs that must be broken apart and thus reduce the amount of time spent restocking shelves between deliveries and/or reduce the number of items mis-characterized as an out-of-stock. This should have a positive impact to us on on-shelf availability. As items that may appear to be out-of-stock that are actually either on our sky shelves or in our backroom.", "The second key component to Fast Track is a self-checkout test, which will allow customers to scan and pay further items with little to no assistance from our associates. We believe this checkout option can further improve speed of checkout for our customers and reduce the number of labor hours devoted to checking out our customers. Our goal is to begin the self-checkout pilot in select stores later in 2019. As John mentioned, while there will be a significant SG&A price tag for Fast Track in 2019 and upfront one, we believe that it can enhance customer convenience and also drive SG&A expense over time. We believe we are the innovative leader in our channel and we are excited about our long-term strategic initiatives.", "We remain committed to our four operating priorities and I want to take our last few minutes to update you on some of the recent efforts. Our first operating priority is driving profitable sales growth. Cooler door expansion continues to be the most impactful merchandising initiative. We began our cooler expansion efforts in earnest in 2013. In addition to being a great traffic and ticket driver, our success in expanding our cooler footprint has provided the scale necessary to initiate DG Fresh. In the first quarter, we added more than 12,000 cooler doors across the chain. We also increased the number of stores with our Better For You offering in the first quarter, bringing the total for the chain to approximately 3,400 stores.", "Our new Good & Smart private brand continues to be popular with our customers and it remains an important part of our Better For You offering. We have many ongoing efforts in the health and beauty area in 2019. Most recently, we launched Believe, our private cosmetic brand with all items priced at $5 or less. We have seen great initial customer response to this aspirational brand and we are excited for more of our customers to try these goods over time.", "The final merchandising initiative I want to highlight today is the partnership with Western Union as we announced in the first quarter. This is a great opportunity to leverage our real estate footprint to offer our customers the ability to send or receive cash in more than 15,000 convenient locations. This agreement creates value for Dollar General in two key ways. First, we receive a commission for each transaction. And second, by delivering a new service that our customers want, we believe that it can become a traffic driver over time. As you'll hear from us frequently, the customer is at the center of everything we do and this new service is another great example of offering her solutions she wants.", "Beyond these sales driving initiatives, we are continuing efforts to capture several gross margin opportunities. In addition to the gross margin benefits of NCI and DG Fresh, reducing shrink remains an important opportunity for us. We rolled out nearly 900 more Electronic Article Surveillance units in the first quarter, bringing the total number of stores with EAS to approximately 11,000. Our goal remains to have EAS in approximately 13,000 stores by the end of the year.", "We also continue to pursue distribution and transportation efficiencies to support our profitable sales growth. As John noted, we are seeing some continued inflation in 2019 in transportation costs, primarily from fuel rates, which further emphasizes the importance of these efforts. For example, we continue to make progress in reducing stem miles and our Longview distribution center has ramped up nicely since we began shipping in January. And we intend to begin shipping from our distribution center in Amsterdam, New York later this year. We're also further expanding our private fleet and intend to grow it by at least another 75 tractors by the end of fiscal 2019. This year's private fleet expansion will be largely focused on our DG Fresh facilities and we believe it remains an important part of our overall transportation strategy.", "Finally, foreign sourcing remains a long-term gross margin opportunity and our goals include increasing penetration as well as diversifying countries from which we source. The team is successfully finding products in key categories that can be sourced internationally and we believe there are many additional products and channels to explore.", "Our second priority is capturing growth opportunities. Our proven high-return, low-risk model for real estate growth remains a core strength for our business. Our real estate model continues to focus on the five metrics that have served us well in evaluating thousands of new stores in recent years. These metrics include new store productivity, actual sales performance, average returns, cannibalization and the payback period. Even as we see changes on the competitive landscape, our real estate projections continue to perform well against these metrics, reinforcing our belief that new store growth is the best use of our capital. Our remodel and relocation program is in -- a great supplement to our new store growth strategy and, overall, we continue to see strong results from our portfolio of real estate projects.", "We made tremendous progress toward achieving our real estate project goals in the first quarter. During the quarter, we opened 240 new stores, remodeled 330 stores, including 128 DGTP remodels and relocated 27 stores. We also added produce to approximately 50 stores, bringing the total of stores across the chain offering produce to approximately 480. As a reminder, on average, our traditional remodel stores, which have an average of 22 cooler doors, deliver a 4% to 5% comp lift and the DGTP remodel, which has an average of 34 higher capacity coolers, delivers a 10% to 15% comp lift, with the addition of produce driving comps to the high end of this range. We have a robust real estate pipeline in place and we are excited about the continued growth ahead of us in 2019.", "Our third operating priority is to leverage and reinforce our position as a low-cost operator. The discipline with which the team approaches spending continues to be a great strength. Our clear and defined process to control expenses, government spending decisions and has resulted in a strong cost control mindset. We continue to focus efforts around the organization of reducing costs where possible through a zero base budgeting process. While this operating philosophy is generally focused on cost reduction, it has also proven to be a great springboard for many of the ideas. In fact, this process was the foundation for both Fast Track and Western Union and we believe it continues to serve us well as we reinforce our position as a low-cost operator.", "Our fourth and final operating priority is to invest in our people as we believe they are a competitive advantage. We believe the opportunity to develop a career with a growing retailer is unique in many of the communities we call home. And we are proud of the thousands of associates who have taken advantage of this opportunity. More than 11,000 of our current store managers are internal promotes and we continue to champion strong development and training programs for our associates to grow. On the supply chain side, our first class of employees has completed their private fleet driving training program. This program pays for distribution center associates to obtain their commercial driver's licenses and furthers their careers.", "To keep a close eye on -- we keep a close eye on key metrics related to our employees -- our people and we are pleased with what we are seeing. We continue to have a robust applicant flow at every level. Additionally, while it's still early in the year, store manager turnover is trending better in 2019 than 2018, which was our best year on record. We are continually engaging with our entire employee base and we believe this dialogue is vital to cultivating the strong Dollar General culture. Remaining an employer of choice is an important priority for us and we believe that we are well positioned to continue to attract and retain talent.", "In closing, we are very pleased with our strong first quarter and excited about our position and outlook for the remainder of 2019. As we said we would, we are driving growth on multiple fronts. And I'm delighted with the team's ability to deliver across so many complex projects simultaneously. Our real estate growth strategy is generating thousands of new store openings and remodels and we have a portfolio of robust initiatives in place that we believe will have a meaningful positive impact on our business for years to come. In short, we are using our mature and stable business as a foundation to drive innovation and growth.", "We believe we operate in the most attractive sector of retail and we continue to differentiate the Dollar General business from the rest of the retail landscape through our distinct combination of value and convenience in a unique real estate footprint. Our mission of serving others guides all we do at Dollar General and the team remains focused on serving our customers every day, while driving long-term value for our shareholders. I want to thank each of our more than 137,000 employees across the Company for all of their hard work every day. I'm excited about what we can accomplish together in 2019.", "With that, operator, we would now like to open the lines for questions." ] } ]
[ { "name": "Operator", "speech": [ "Thank you. (Operator Instructions) Our first question or comment comes from the line of Matt Boss from JPMorgan. Your line is open." ] }, { "name": "Matt Boss", "speech": [ "Congrats on a -- hey. Congrats on a great quarter, guys." ] }, { "name": "Todd Vasos", "speech": [ "Thank you." ] }, { "name": "John W. Garratt", "speech": [ "Thank you." ] }, { "name": "Matt Boss", "speech": [ "So Todd, maybe to start off, you outlined a laundry list of top line initiatives under way. I think you probably could have hosted an Analyst Day for how much is clearly going on. I guess, maybe could you help segment opportunities you think contributed to your first quarter comp? What you are the most excited about maybe into the back half of the year versus initiatives you see accelerating into next year and beyond?" ] }, { "name": "Todd Vasos", "speech": [ "Sure. Our cooler program continues to be one of the key drivers, Matt, to what we've seen in our success so far in 2019 and also what we've seen in the past. What I'm also excited about is what we're seeing in a lot of the initiatives that we continue to work on in our HBA world. As an example, the teams are doing a great job there and the customer is really resonating to our great prices, our values as well as our extensive private brand and national brand offering in those areas. So, they continue to do very well and our new cosmetic line Believe I think will continue to build momentum as we move into the second quarter and back half of this year. As you look at later parts of this year and into next, we believe that many of our initiatives, including NCI, will continue to build momentum and also our DG Fresh initiative, as I look at that over the long-term later this year and into next, it's already starting to deliver the gross margin that we see through better cost of goods, but also it's showing us that we can be better in-stock by controlling our own destiny there. And so we believe that that'll start paying even more dividends as we move to the back half of the year. We're very bullish on what we see in our top line right now and we will continue to push as much as we can to continue to see these great results as we move through the back half of the year." ] }, { "name": "Matt Boss", "speech": [ "Great. Maybe then just a follow-up. On the SG&A front, so excluding the incremental $50 million of initiative spend, any underlying change to the 2.5% to 3% comp as the expense leverage point? And Todd, I guess, larger picture, is it fair to think about this year's strategic initiatives build as a peak level as you kind of look forward?" ] }, { "name": "Todd Vasos", "speech": [ "Yeah. I'll let John start and I'll add a little color." ] }, { "name": "John W. Garratt", "speech": [ "Yeah. In terms of SG&A, we are pleased with the Q1 cost control. We deleveraged 6 basis points, but as we mentioned, we are investing in initiatives for future growth. There was somewhat of a shift from Q1 to Q2, but very pleased with the cost control. In terms of the leverage point, as we discussed before, there is an impact as you are investing in things like DG Fresh, which we see as enhancing our operating margin over time that does put pressure on SG&A as you're investing some labor in the stores and our initiatives like that. But I would say, we remain laser-focused on cost control, we don't see it differently and the main change here is that dynamic of investing in these strategic initiatives, which we see is helping our operating margin and being as accretive as early as next year." ] }, { "name": "Operator", "speech": [ "Thank you. In the interest of time, we ask that you please limit yourself to one question and one follow-up, please. Our next question or comment comes from the line of Michael Lasser from UBS. Your line is open." ] }, { "name": "Michael Lasser", "speech": [ "Thanks for taking my question. Given the success you had in the first quarter, why shouldn't we expect a comp at better than the 2% that's implied at the -- in your full year comp guidance of 2.5% over the next few quarters?" ] }, { "name": "Todd Vasos", "speech": [ "Yeah. Hi, Michael. This is Todd. When I look at the rest of the year, we do feel very good about where the comp is headed. We got a lot of year ahead of us, right. And there is a -- could be a lot of noise out there. We don't know what these -- this last list of tariffs may or may not do to our core consumer and really the consumer base in general. So I think we're -- our guidance reflects appropriate where the -- where we are today and where those risks still may lie, but we're doing everything we can to continue to drive that top line and, of course, drive traffic and our key here is traffic and traffic is king, we know that and we continue to -- all of our efforts around our sales are really guided by that traffic growth." ] }, { "name": "Michael Lasser", "speech": [ "In -- on the subject of tariffs, we know that 5% of your sales come from direct imports with China being one of those countries. Do you have an overall estimate of your cost of goods exposure to China, if the List 4 does go through?" ] }, { "name": "John W. Garratt", "speech": [ "Yeah. So as you indicated, it's about 6% of our purchases measured at cost are tied to direct imports, predominantly China-centric, although, we have been diversifying in recent years. This is an impact facing all retail. Our exposure is relatively lower compared to many and the team has been working very diligently to mitigate this impact, as evidenced by the updated guidance or the guidance that we maintained. The team is working on continual negotiations with vendors, product substitution, product reengineering and continuing to change the origin of country, where it's coming from. We're doing everything we can to minimize the impact on the customers. But as you know, this is -- as others have said, this is probably something that's going to impact the customers, particularly if the List 4 comes out. I'd rather not speculate on what that impact will be. Hard to say how that things will shake out there, but we believe that we are very well positioned to serve our customer as we're priced right, we're conveniently located and we're there to help her in good times and bad." ] }, { "name": "Todd Vasos", "speech": [ "And Michael, I'll just add as well. Remember, we are a limited source -- limited SKU retailer, meaning, we don't have to carry everything and we can make decisions on what to carry and what not to carry depending on cost of goods and what may or may not increase. And I think the team has done a real nice job in the first few lists. And while List 4 is very extensive, that work is ongoing right now as well. So stay tuned. We're hoping that there'll be some resolution here, but make no mistake that this will -- if List 4 goes in, it will cost the consumer on -- during and with her budgets.The great thing is though I believe that Dollar General stands ready to be able to serve that customer because she'll need us more at that time." ] }, { "name": "Michael Lasser", "speech": [ "Sounds good. Thank you so much and good luck." ] }, { "name": "Operator", "speech": [ "Thank you. Our next question or comment comes from the line of Karen Short from Barclays. Your line is open." ] }, { "name": "Karen Short", "speech": [ "Hi. Thanks very much. Great quarter." ] }, { "name": "Todd Vasos", "speech": [ "Thank you." ] }, { "name": "Karen Short", "speech": [ "Just a quick -- just a question in terms of having such a strong 1Q. Obviously, you indicated there will be more SG&A pressure in 2Q. But I guess, any thoughts on keeping kind of the full year overall guidance, given that some of these costs abate in the second half and gross margin compares also get quite a bit easier?" ] }, { "name": "John W. Garratt", "speech": [ "Yeah. I'll start by saying, we feel great about the fundamentals of the business and the strong start to the year. As I did note, there was some investment spending shifted from Q1 to Q2. And importantly, we absorbed the impact of the recently enacted tariff increases not previously assumed into the guidance. And as Todd mentioned, there's still a lot of year left to tap the -- comp laps are a little tougher as the year goes on, but we feel great about the business, we feel comfortable about the guidance we've provided and we're very pleased with the start of the year." ] }, { "name": "Karen Short", "speech": [ "Okay. And then just switching to comps for a second, on the NCI, maybe can you give a little bit of color on the comp lift that you're seeing in the stores and also the margin impact? And then you made a comment on the 26% improvement, I guess, in in-stocks at the below standard stores. Any color you can give us on the comp benefit from having a better in-stock?" ] }, { "name": "Todd Vasos", "speech": [ "Sure. On the NCI program, we are very pleased with the early results there. The team has done a really nice job in procuring goods. We're now into our fourth and fifth replenishment cycle and some of the product that I've seen recently with this newest wave is even better than the previous one. So I could tell you that we feel very good with what we're seeing. We're seeing an overall lift in the store, both in our non-consumable areas and our consumable areas, so we're getting a very nice halo effect out of that. And not only are we seeing those lifts in our top line sales, but we're seeing gross margin benefits, of course, in our non-consumable area, but overall as well for the entire box. So we're feeling very good about where we're going. We'll do up to 2,400 stores this year and looking to see how we accelerate that as we move into 2020 and beyond. But again, we feel very good.", "Your second part of the question was on the in-stock piece. We've been working very hard -- started at the end of last year and relooking at how we look at on-shelf availability and very proud of what the team has done in and around making sure we have product on the shelf for our consumers. Now, it did come with a little bit of cost of some inventory, but as you alluded to and we talked about in our prepared remarks, we're seeing in the 20% range increase of on-shelf availability meaning in-stocks for our customer. And I could tell you that in those stores, it's meaningful and it does add to the comp. So we'll continue to work that, that piece. And as I also talked about, as Fast Track continues to move forward, and this would probably be more into the late '19 and into 2020, we are going to be getting some on-shelf availability benefits from that as well as we continue to reduce those case packs and rationalize our SKU base on the shelf to better keep our in-stock levels on fast movers. And stay tuned for more of that. We believe that will pay some real benefits as we move into the end of the year and in the '20." ] }, { "name": "Karen Short", "speech": [ "Great. That's helpful, thanks." ] }, { "name": "Operator", "speech": [ "Thank you. Our next question or comment comes from the line of Paul Trussell from Deutsche Bank. Your line is open." ] }, { "name": "Paul Trussell", "speech": [ "Good morning and great quarter." ] }, { "name": "Todd Vasos", "speech": [ "Thanks, Paul." ] }, { "name": "Paul Trussell", "speech": [ "The gross margin performance in 1Q was better than my forecast. Just curious, how it stacked up to your expectations? And previously you had mentioned that you expected the most pressure on a year-over-year basis in 1Q. Just want to make sure that guidance still stands and just give some overall puts and takes on GPM." ] }, { "name": "John W. Garratt", "speech": [ "Yeah. We were pleased with the performance in Q1. We'd indicated that on our Q4 call that Q1 will be pressured, but we did say that we expected to see sequential improvement on a year-over-year basis as we went from Q4 to Q1. But nonetheless, we did see pressure from the change in the replenishment process as well as the ongoing pressure of distribution transportation cost and the ongoing mix pressures. However, as we said we would, we were successful in normalizing the promotional markdown costs, while at the same time delivering strong comps and traffic. So we're very pleased with that. The team did a great job managing through the various headwinds. And as we said in our prepared statements, we expect to see further sequential improvement over the balance of the year on a year-over-year comp basis. And longer-term, we believe we have a lot of opportunities to increase, not only gross margin, but operating margin over time. As Todd indicated, we are very excited about the progress we're making on DG Fresh, as we convert items and convert stores, we're seeing the benefits of the cost savings we expected there, very pleased with what we're seeing from NCI in terms of not only the sales lift, but also the improvement that adds to mix. We're investing more in EAS units, we're going to be adding another 3,000 this year, we've seen great success from that and the benefit it has on shrink and there continues to be opportunities for us with category management increasing foreign sourcing penetration, increasing private label penetration and we mentioned the non-consumable opportunity. And then lastly, while we did see pressure from transportation costs in Q1 and fuel remains a pressure, we're very pleased by what we've seen in terms of the proactive efforts of the team to mitigate these efforts and take advantage of an improving environment. So we're optimistic that over the long-term, we can, not only maintain, but enhance overall operating margin over the long-term. That's the way we look at it." ] }, { "name": "Paul Trussell", "speech": [ "Thanks for that color. And just as a follow-up, Todd, could you maybe just speak bigger picture to what your core consumer is saying about their financial health and overall sentiment on the economy? And then maybe rank for us, as you look in your stores, comp gains occurring from your core customer coming more frequently versus shopping the store more broadly versus actually getting that trade down from higher income shoppers. Thank you." ] }, { "name": "Todd Vasos", "speech": [ "Yeah. Sure, Paul. Yeah. When you look at our gains, our core consumer is continuing to tell us, I feel pressure. But again, this core consumer always is under pressure financially, her income levels are on the lower end, as we all know. And saying that, she continues to tell us that she's back to work, she continues to tell us that she has got a little bit more money in her pocket, more so from productivity, meaning, more working, more hours than actual wage growth. But yet, more money. She has headwinds. Make no bones about it. She still has headwinds of healthcare being one of the largest rents continues to be out there for her as a headwind. But as we looked into last year when we started to hear from our consumer that she was feeling a little bit more stressed, we continue to hear that. But what we do very well here is we're able to move our promotional activity, our mix inside the store, our end cap presentations to match where we believe she will be and we did that in the first quarter and I believe very successfully. And we'll continue to do that as our customer tells us where she believes she'll be in her journey as we move through 2019. The -- as you look at our consumers overall, though, I would tell you that our consumer that makes a little bit more money, so that next level up consumer is our fastest growing consumer that we have here at Dollar General, so that trade in is alive and well, but it's not coming at any cost of our core consumer and our core consumer continues to come more often as well as we're seeing that she's spending more when she's in the store. So we're both getting the transaction growth side and that basket side. So we feel very good about our customer segments and where they're headed and the great thing is we're attracting the higher end consumer, I believe, because of all of the work that we've done in this box over the years." ] }, { "name": "Paul Trussell", "speech": [ "Thanks so much. Best of luck." ] }, { "name": "Operator", "speech": [ "Thank you. Our next question or comment comes from the line of Rupesh Parikh from Oppenheimer. Your line is open." ] }, { "name": "Rupesh Parikh", "speech": [ "Good morning. Thanks for taking my question and also congrats on a nice quarter." ] }, { "name": "Todd Vasos", "speech": [ "Thank you." ] }, { "name": "Rupesh Parikh", "speech": [ "So I had two questions on your DG Fresh effort. So I guess, first, anything that has surprised you thus far, I know it's only been a few months at this point. And then as you think longer-term or even in the intermediate-term, how do you think about what flows to the bottom line versus being reinvested in the business from some of the gross margin benefits that you expect to see?" ] }, { "name": "Todd Vasos", "speech": [ "Yeah. Right now, I would tell you that the DG Fresh initiative is really performing about where we thought it would perform. Again, our teams are very good at executing very complex projects. And this, as you could imagine, is one of the big ones. But I would tell you, opening a 1,000 stores a year and remodeling another 1,000 is no easy feat. So we're very good at this type of work. And I would tell you that DG Fresh was no different and it's executing as we thought and are producing the results that we thought. You heard from John, we're seeing the cost of goods savings, we're seeing better in-stocks already at store level and we're only 800 stores in. And so more to come as we move through the next cycles of this. The great thing is the plan is rolling out as designed. We've already got all four of our DCs signed and ready to go. And the next one we will be shipping here in the next few weeks. So we feel good about that. And then as you continue to look at DG Fresh on that margin rate, the great thing about Dollar General is we never took our eye off of price, whether that'd be in our fresh area or our dry areas of the Company. And we're priced very, very well across the board. So I would tell you that we feel very good about that and we feel very good about those margin gains that should come from this over time, should -- the majority of it should drop to the bottom line, which is very exciting." ] }, { "name": "Rupesh Parikh", "speech": [ "Great. And one quick follow-up question. Weather, clearly a challenge last year and it appeared also a challenge in Q1. Just curious, if you guys think you had a negative impact on your business?" ] }, { "name": "John W. Garratt", "speech": [ "What I would say is there are a lot of puts and takes between weather lapse, weather this year and the pull forward of the SNAP benefit. When you net all that together, all that noise together, it's about a push and really the 3.8% comp was a solid 3.8% comp not impacted by any real outside noise." ] }, { "name": "Rupesh Parikh", "speech": [ "Great, thank you." ] }, { "name": "Operator", "speech": [ "Thank you. Our next question or comment comes from the line of Anthony Chukumba from Loop Capital Markets. Your line is open." ] }, { "name": "Anthony Chukumba", "speech": [ "Good morning, thanks for taking my question. So related question on comps. I mean, in the first quarter, obviously, you had the pull forward because of the SNAP benefit of 70 basis points. It sounds you got half of that back. Tax refunds looked like were a little bit lower than people expected. And then, weather was pretty bad. So putting that all together, what do you think allowed you to do close to a 4% comp with those three headwinds? Was it macro or was it more about the positive impact of the -- of a lot of initiatives that you talked about in this call? Thank you." ] }, { "name": "Todd Vasos", "speech": [ "Yeah. I would tell you that our core consumer, again, is -- has a little bit more money in their pocket. But I would tell you, when you look at the performance and as we see it broken down in the categories that we watch very closely here, many of our gains occurred from the initiatives that either we worked through in 2018 that are continuing to still pay off and even some of those early 2019 ones. So it gives us a lot of confidence that we're on the right track and as we move through the rest of this year." ] }, { "name": "Anthony Chukumba", "speech": [ "That's helpful, thanks a lot." ] }, { "name": "Todd Vasos", "speech": [ "Thank you." ] }, { "name": "Operator", "speech": [ "Thank you. Our next question or comment comes from the line of Scot Ciccarelli from RBC Capital Markets. Your line is open." ] }, { "name": "Scot Ciccarelli", "speech": [ "Good morning, guys. So I know a bunch of people have asked about kind of the comp momentum, but, Todd, specifically, you talked about how last year, which -- where we generally saw rising average ticket, but softer traffic was due to the relative health of your core customer and trip consolidation. So I guess what I'm kind of trying to figure out is what specifically changed this quarter? I mean, you had mentioned cooler expansion earlier in the call, but you've been expanding cooler doors for years. So I guess I'm trying to figure out specifically in 1Q maybe what changed on the traffic front? Thanks." ] }, { "name": "Todd Vasos", "speech": [ "Yeah. So I think the best way to look at this is two things. Number one, I mentioned earlier this core consumer started to signal middle of last year that she was feeling a little bit more pressure, not feeling as robust as she did. So I would tell you that this core consumer, her shopping patterns are -- and habits are changing a little bit, we're seeing it, and maybe moving more back to what we were used to seeing with maybe not quite as a fuller -- full basket and coming a little bit more often. Now, one quarter doesn't make a year, so we're going to continue to watch what she does. But in Q1, we saw some start of that normalization back to where this core customer normally is resonating at. The other thing that I would tell you in Q1 specifically is the actions we took in Q4 promotionally to really solidify that customer in Q4 did exactly, exactly what we thought and brought forward that customer in a very sticky manner, if you will, the Q1 and she spent accordingly. So we feel good about that initiative in Q4, it did exactly what we thought in Q1 and I believe that was a big piece of why we only gave back half of that SNAP benefit that we pushed in the Q4 last year from that top line." ] }, { "name": "Scot Ciccarelli", "speech": [ "Interesting. Okay. Thanks, guys." ] }, { "name": "Operator", "speech": [ "Thank you. Our next question or comment comes from the line -- our final question comes from the line of Kelly Bania from BMO Capital Markets. Your line is open." ] }, { "name": "Kelly Bania", "speech": [ "Good morning. Thanks for fitting me in. Just wanted to ask another one about tariff. Sounds like you did a lot of work there to mitigate that and do some substitutions. Just was wondering if you can help us understand how much price you expect to pass along and maybe too early to tell from a competitive standpoint, but how do you think you performed on that mitigation strategy relative to competitors and how much price do you think really we're going to see being passed through broadly?" ] }, { "name": "Todd Vasos", "speech": [ "As -- again, you take a look at Dollar General and again we've been all along many, many years now, we ensure that we have the right price for our consumer. We watch price very, very closely here, but the other thing to keep in mind about Dollar General I mentioned earlier is we don't have to carry everything. We're a limited SKU assorted retailer and we can make decisions based on a lot of different factors to include price, meaning cost of goods and we'll continue to do that as we move through this -- these tariffs. I think our teams have done a great job to-date, but I would tell you, even through the first three lists, if you will, we've seen in the marketplace the consumer is paying a little bit more money across the board in the marketplace. And with List 4 looming out there, which is probably the big -- well, not probably, it is the biggest impacted list, I would have to assume the consumer is going to bear the brunt of some of this as well. And so, we're doing everything we can here at Dollar General to make sure we soften that blow, but again the great thing is this model works so well in good times and not so good times. And if this consumer is having to pay more across the board at every retailer because of these tariffs, we will stand ready to be able to -- with open arms to take her in when she needs us most, and we're positioning ourselves for that as we move through 2019." ] }, { "name": "Kelly Bania", "speech": [ "Okay, thanks. And maybe just a follow-up on the prior question about the stickiness and the promotional activity that you did last quarter. How do you expect that -- or do you expect that stickiness to continue to impact your consumer and the traffic patterns for the rest of the year?" ] }, { "name": "Todd Vasos", "speech": [ "What we see normally is that that stickiness does stay with us for a couple of quarters. So we believe that we'll still see some benefit from that as we move into Q2, may not be quite as much as Q1, but again, we feel very good about where we are and our start to the fiscal year. So we feel that that customer resonates very well with price and value, we know that and we continue to offer that. So even though that we've normalized the promotional activity, you got to remember who Dollar General is and that is everyday low price on the shelf as she can count on. And she sees that when she's in the store each and every day. So again, we feel very good about our competitiveness on price and we feel good about our -- both traffic and ticket as we move into the second quarter and back half of this year." ] }, { "name": "Kelly Bania", "speech": [ "Thank you." ] }, { "name": "Operator", "speech": [ "Thank you. That concludes our Q&A session today. I'd like to turn the conference back over to Management for any closing remarks." ] }, { "name": "Todd Vasos", "speech": [ "Thank you very much and we hope to talk to you soon. Thank you." ] }, { "name": "Operator", "speech": [ "Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may now disconnect. Everyone, have a wonderful day." ] } ]
DG
2020-08-27
[ { "description": "Vice President, Investor Relations and Corporate Strategy", "name": "Donny Lau", "position": "Executive" }, { "description": "Chief Executive Officer", "name": "Todd Vasos", "position": "Executive" }, { "description": "Executive Vice President and Chief Financial Officer", "name": "John Garratt", "position": "Executive" }, { "description": "Chief Operating Officer", "name": "Jeff Owen", "position": "Executive" }, { "description": "Morgan Stanley -- Analyst", "name": "Simeon Gutman", "position": "Analyst" }, { "description": "J.P. Morgan -- Analyst", "name": "Matthew Boss", "position": "Analyst" }, { "description": "Barclays -- Analyst", "name": "Karen Short", "position": "Analyst" }, { "description": "Piper Sandler -- Analyst", "name": "Peter Keith", "position": "Analyst" }, { "description": "BMO Capital Markets -- Analyst", "name": "Kelly Bania", "position": "Analyst" }, { "description": "UBS -- Analyst", "name": "Michael Lasser", "position": "Analyst" }, { "description": "RBC Capital Markets -- Analyst", "name": "Scot Ciccarelli", "position": "Analyst" }, { "description": "Oppenheimer -- Analyst", "name": "Rupesh Parikh", "position": "Analyst" } ]
[ { "name": "Operator", "speech": [ "Good morning. My name is Robert, and I will be your conference operator today. At this time, I'd like to welcome everyone to the Dollar General, Second Quarter 2020 Earnings Conference Call. Today is Thursday, August 27th, 2020. [Operator Instructions]. Instructions for listening to the replay of this call are available in the Company's earnings press release issued this morning.", "Now, I'd like to turn the conference over to Mr. Donny Lau, Vice President of Investor Relations and Corporate Strategy. Mr. Lau, you may begin your conference." ] }, { "name": "Donny Lau", "speech": [ "Thank you, Rob, and good morning, everyone. On the call with me today are Todd Vasos, our CEO; Jeff Owen, our COO; and John Garratt, our CFO. Our earnings release issued today can be found on our website at investor.dollargeneral.com under News & Events.", "Let me caution you that today's comments include forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995, such as statements about our strategy, plans, initiatives, goals, guidance or beliefs about future matters including, but not limited to, beliefs about COVID-19's future impact on the economy, our business and our customer.", "Forward-looking statements can be identified because they are not limited to statements of historical fact or use words such as may, will, should, could, would, can, believe, anticipate, expect, assume, intend, outlook, estimate, guidance, plan, opportunity, focus, confident, long term, look to, committed to, continue, ahead, seek, or go and similar expressions.", "These statements are subject to risks and uncertainties that could cause actual results to differ materially from our expectations and projections. These factors include, but are not limited to, those identified in our earnings release issued this morning under risk factors in our 2019 Form 10-K filed on March 19th, 2020, and our Form 10-Q filed this morning and in the comments that are made on this call. You should not unduly rely on forward-looking statements which speak only as of today's date.", "Dollar General disclaims any obligation to update or revise any information discussed in this call unless required by law. We also will reference certain financial measures that have not been derived in accordance with GAAP. Reconciliations to the most comparable GAAP measures are included in this morning's earnings release, which as I mentioned, is posted on investor.dollargeneral.com under News & Events.", "At the end of our prepared remarks we will open the call up for your questions. Please limit your questions to one and one follow-up question, if necessary. Now, it is my pleasure to turn the call over to Todd." ] }, { "name": "Todd Vasos", "speech": [ "Thank you, Donny, and welcome to everyone joining our call. I'd like to start by thanking our associates for their exceptional work over the past several months, as we continue to navigate this challenging and dynamic operating environment. Throughout this period, our team has remained steadfast in its focus on employee and customer safety, while providing affordable, convenient and close to home access to everyday essentials. I could not be more proud of our team's efforts to serve our customers, our communities and each other. For over 80 years, Dollar General has served our customers [Technical Issues] through a unique combination of value and convenience.", "But it has never been more evident, just how essential our role is as our customers depend on us now more than ever for their everyday household needs. We remain committed to being part of the solution during these difficult times, and believe we are uniquely positioned to continue supporting our customers through our expansive network of nearly 17,000 [Technical Issues] within 5 miles or more than 75% of the US population.", "Our convenient small box format, providing for a quick in-and-out access, our broad assortment of everyday household essential items, our ongoing commitment to everyday low prices, our flexible supply chain, our growing digital capabilities and most importantly, our talented and committed associates.", "Let me now highlight some of the actions we've taken to further protect our employees and customers, while keeping our operations running with minimal disruption. As we discussed on last quarter's call, with the onset of COVID-19, we quickly and proactively implemented numerous safety protocols across the Company, based on recommendations by federal, state and local government agencies.", "We continue to monitor CDC and other government guidelines regarding COVID-19 and are adapting our protocols and policies as that guideline evolves. As announced in today's release, we invested approximately $13 million in employee appreciation bonuses during the quarter, bringing our total incremental investment in appreciation bonuses to about $73 million through the end of Q2.", "Additionally, we expect to invest up to $50 million in additional financial incentives in the second half of the year. Overall, these actions have helped to further ensure the continuity of our business at a time when our customers need us most, while recognizing our employees for their extraordinary efforts. While navigating the challenging times of COVID-19, our country has simultaneously entered a period of deep reflection on its societal values including racial equality and other matters of social justice.", "Our mission at Dollar General is serving others and our core values include, respecting the dignity and differences of others. We are committed to ensuring these values are evident in all we do, including working to promote racial equality and social justice across our communities. To further advance these efforts, we recently expanded our diversity and inclusion team and announced the combined $5 million pledge with the Dollar General Literacy Foundation to support racial and social justice and education.", "Additionally, during the quarter, we published our most recent Serving Others report which highlights many of our efforts on the ESG front. We first published this report in 2019 and expect that it will evolve and expand as we move into the future. Beyond these efforts, we remain focused on advancing our operating priorities and strategic initiatives as we continue to meet the evolving needs of our customers and better position Dollar General for continued long-term growth.", "To that end, and from a position of strength, we are pleased to announce the acceleration of several value-creating initiatives including DG Pickup, DG Fresh and our non-consumable initiatives. We are also increasing our expectation for remodels and relocations in 2020. We will discuss each of these updates in more detail later in the call.", "Turning now to our second quarter performance. The quarter was once again highlighted by extraordinary growth on both the top and bottom lines, as some of the consumer trends we experienced in Q1 related to the pandemic continued in Q2. More specifically, and as we discussed on our Q1 earnings call, we experienced significant growth in our non-consumable business in the month of April and through May 26. These trends continued through the end of Q2, and we're pleased to note that for the second quarter, our three non-consumable product categories in total delivered a combined comp sales percentage increase, well in excess [Technical Issues] of our consumable businesses. In terms of our monthly comp cadence, sales increased 21.5% in May, 17.9% in June and 17.2% in July.", "While we do not typically disclose monthly comp sales, we believe it's helpful in this environment. Overall second quarter net sales increased 24.4% to $8.7 billion driven by comp sales growth of 18.8%. These results include significant growth in average basket size, particular -- partially, excuse me, offset by a decline in customer traffic, as we believe customers consolidated trips in an effort to limit social contact.", "During the quarter, our highly consumable market share trends as measured by syndicated data continued to exhibit strength, including strong double-digit increases in both units and dollars over the 4-week, 12-week, 24-week and 52-week periods ending July 25th, 2020. Importantly, our data suggest another meaningful increase in new customers this quarter compared to Q2 2019, underscoring the broadening appeal of our value and convenience proposition. We are very focused on retaining these new customers, and the incremental spend of current customers through the acceleration of several key initiatives which I noted earlier. We're particularly pleased that we once again delivered significant operating margin expansion, which contributed to second quarter diluted EPS of $3.12, an increase of 89% over the prior year.", "Collectively, we view these results as further validation that we are pursuing the right strategies to enable balanced and sustainable growth, while creating meaningful long-term shareholder value. We continue to operate in one of the most attractive sectors in retail and with the plans and initiatives we have in place, we believe we are well positioned to serve an even broader set of consumers even in a challenging economic environment.", "With that, I'll now turn the call over to John." ] }, { "name": "John Garratt", "speech": [ "Thank you, Todd, and good morning everyone. Now that Todd has taken you through a few highlights of the quarter, let me take you through some of its important financial details. Unless I specifically note otherwise, all comparisons are year-over-year and all references to EPS refer to diluted earnings per share.", "In addition, please note that Q2 2019 adjusted results exclude a $31 million pre-tax impact related to significant legal expenses recorded in the quarter as discussed in today's earnings release. As Todd already discussed sales, I will start with gross profit, which was positively impacted in the quarter by a significant increase in sales, including the impact of COVID-19.", "Gross profit as a percentage of sales was 32.5% in the second quarter, an increase of 167 basis points. This increase was primarily attributable to higher initial markups on inventory purchases, a greater proportion of sales coming from non-consumable categories and a reduction in markdowns as a percentage of sales.", "These factors were partially offset by increased distribution and transportation costs, which were driven by increased volume and our decision to incur employee appreciation bonus expense. SG&A as a percentage of sales was 20.4%, a decrease of 205 basis points or 161 basis points compared to Q2 2019 adjusted SG&A. Although we incurred incremental costs related to COVID-19, these costs were more than offset by the significant increase in sales. Expenses that were lower as a percentage of sales in the quarter include retail labor, occupancy costs, utilities, employee benefits, depreciation and amortization, and taxes and licenses.", "These items were partially offset by increased incentive compensation and charitable giving expenses. As I mentioned, we also recorded expenses of $31 million in Q2 2019 reflecting our estimate for the settlement of certain legal matters.", "Moving down the income statement, operating profit for the second quarter was $1 billion, an increase of 80.5% or 71.3% compared to Q2 2019 adjusted operating profit. As a percentage of sales, operating profit was 12%, an increase of 373 basis points or 329 basis points compared to Q2 2019 adjusted operating profit.", "Operating profit in the second quarter was positively impacted by COVID-19 primarily through higher sales. The benefit from higher sales was partially offset by approximately $38 million of incremental investments that we made in response to the pandemic, including additional measures taken to further protect our employees and customers and approximately $13 million in appreciation bonuses for eligible frontline employees.", "Our effective tax rate for the quarter was 21.5% and compares to 22.9% in the second quarter last year. Finally, as Todd noted earlier, EPS for the second quarter was $3.12, which represents an increase of 89% or 79% compared to Q2 2019 adjusted EPS.", "Turning now to our balance sheet and cash flow, which remained strong and provide us the financial flexibility to further support our customers, employees during these challenging times while continuing to invest for the long term. Merchandise inventories were $4.4 billion at the end of the second quarter, essentially flat overall, and down 6% on a per store basis. Year-to-date through Q2, we generated significant cash flow from operations totaling $2.9 billion, an increase of $1.8 billion or 157%.", "This increase was primarily driven by strong operating performance combined with lower levels of inventory, as our supply chain teams continue to work closely with our vendor partners to improve in-stock levels for high demand products.", "Total capital expenditures through the first half were $424 million and included our planned investments in new stores, remodels and relocations and spending related to our strategic initiatives. Moving on to liquidity and capital structure. We continue to have ample liquidity as a result of the measures we took earlier in the year to further bolster our liquidity position, coupled with our extremely strong cash flow in the quarter.", "As a result, we finished the quarter with $3 billion of cash and cash equivalents and $1.1 billion of availability under our undrawn revolving credit facility. As one of the measures to preserve liquidity at the onset of COVID-19, we temporarily suspended share repurchases during Q1.", "We continue to evaluate business conditions in our liquidity and as a result of this evaluation, we resumed share repurchases in the second quarter. During the quarter, we repurchased 3.2 million shares of our common stock for $602 million and paid a quarterly dividend of $0.36 per common share outstanding at a total cost of $90 million.", "With today's announcement of an incremental share repurchase authorization, we have remaining authorization of approximately $2.5 billion under the repurchase program. Our capital allocation priorities continue to serve us well and remain unchanged. Our first priority is investing in high return growth opportunities including new store expansion and our strategic initiatives.", "We also remain committed to returning significant cash to shareholders through anticipated share repurchases and quarterly dividend payments, all while maintaining our current investment grade credit rating and managing to a leverage ratio of approximately three times adjusted debt-to-EBITDAR.", "Moving to an update on our financial outlook for fiscal 2020. We continue to operate in a time of significant uncertainty regarding the severity and duration of the COVID-19 pandemic including its impact on the economy, consumer behavior and our business. As a result, we are not providing guidance for fiscal 2020 sales or EPS at this time.", "With regards to share repurchases, we now expect to repurchase approximately $2.5 billion of our common stock this year, reflecting our strong liquidity position and confidence about the long-term growth opportunity for our business.", "As Todd noted earlier, we are increasing our expectations for remodels and relocations in 2020. Overall, we now expect to open 1,000 new stores, remodel 1,670 stores and relocate 110 stores representing 2,780 real estate projects in total. Finally, we are increasing our expectations for capital spending in 2020 to a range of $1 billion to $1.1 billion as we accelerate key initiatives and continue to invest in our core business to support and drive future growth.", "Let me now provide some additional context as it relates to our full year outlook. Given the unusual situation, I will elaborate on our comp sales trends thus far in August. Since the end of Q2 and through August 25th, we have continued to experience elevated same-store sales, which have increased by approximately 15% during this timeframe.", "That said, we remain cautious in our sales outlook and recognize the significant uncertainty that still exists concerning the duration of the positive operating environment. In particular, we can't speculate as to whether there will be additional government stimulus or, if so, to what degree, our business would benefit. Ultimately, we expect to see our comp sales trends moderate as we move through the back half, but believe we are very well positioned to deliver positive sales growth for the balance of the year even if broader economic conditions deteriorate.", "With regards to our strategic initiatives, we continue to anticipate they will improve operating margin over time, particularly as benefits to gross margin continue to scale and outpace the associated expense with both NCI and DG Fresh expected to be accretive to operating margin in 2020.", "However, our investment in these initiatives will pressure SG&A rates in the back half, particularly as we further accelerate their rollouts. Finally, we expect to make additional investments in the second half as a result of COVID-19 including up to $50 million in employee appreciation bonuses which Todd mentioned, as well as investments in additional safety measures.", "In closing, we are very proud of the team's execution and service, which resulted in another quarter of exceptional results. As always, we continue to be disciplined in how we manage expenses and capital with the goal of delivering consistent, strong financial performance while strategically investing for the long term. We remain confident in our business model and our ongoing financial priorities to drive profitable same-store sales growth, healthy new store returns, strong free cash flow and long-term shareholder value.", "With that, I will turn the call over to Jeff." ] }, { "name": "Jeff Owen", "speech": [ "Thank you, John. Let me take the next few minutes to update you on our four operating priorities. Our first operating priority is driving profitable sales growth. The team did an outstanding job this quarter executing against a portfolio of growth initiatives while keeping the customer at the center of all we do.", "Let me highlight a few of our recent efforts. Starting with our cooler door expansion program, which continues to be our most impactful merchandising initiative. During the first half we added more than 30,000 cooler doors across our store base. In total, we now expect to install more than 60,000 cooler doors this year compared to our previous target of 55,000 cooler doors in 2020. Notably, the majority of these doors will be in high capacity coolers creating additional opportunities to drive higher on-shelf availability and deliver an even wider product selection.", "Turning now to private brands, which remains a priority as we pursue opportunities to further enhance our value proposition. During the quarter, we made great progress with our rebranding and repositioning efforts including the recent relaunch of our office products brand.", "Looking ahead, our plans include the continued expansion of existing brands as well as the rebranding of several additional product lines as we seek to drive greater category awareness and even higher customer adoption. Moving to our Better For You offering which is especially important for our customers as more food continues to be consumed at home. This offering is now available in approximately 6,400 stores with plans to expand more than 7,000 stores by year-end.", "Finally, a quick update on our FedEx relationship. This convenient, package pick up and drop off service is now available in over 8,000 locations. We now expect to complete our initial rollout to more than 8,500 stores by the end of Q3, further advancing our long track record of serving rural communities.", "Beyond these sales driving initiatives, enhancing gross margin remains a key focus area for us. In addition to the gross margin benefits associated with our NCI, DG Fresh and private brand efforts, foreign sourcing remains an important gross margin opportunity for us.", "During the quarter the team once again did a phenomenal job working with our global supply partners to ensure product availability. Looking ahead, we continue to see opportunities to increase our foreign sourcing penetration, while further diversifying our countries of origin.", "We also continue to pursue supply chain efficiencies through the further reduction of stem miles and accelerated expansion of our private fleet. To this end, we recently announced the purchase of our 18th traditional distribution center in Walton, Kentucky. We anticipate this facility will begin shipping early next year, enabling us to drive additional efficiencies as we move ahead.", "Finally, shrink remains an opportunity as we continue to build on our success with electronic article surveillance. Over the past year, we've increased the number of items tagged by more than 40%, and we continue to focus on leveraging technology to drive even higher levels of in-store execution.", "Our second priority is capturing growth opportunities. Our proven high-return, low-risk real estate model continues to be a core strength of our business. During the first half, we opened 500 new stores, remodeled 973 stores including 704 in the higher cooler count DGTP or DGP formats and relocated 43 stores.", "We also added produce in more than 120 stores, bringing the total number of stores which carry [Phonetic] produce to more than 870. As John noted, we now expect 2,780 real estate projects in total this year, as we continue to deploy capital in these high return investments while delivering an expanded assortment offering to an additional 200 communities in 2020.", "Overall, our real estate pipeline remains robust, and I am very proud of the team's ability to execute such high volumes of real estate product -- projects despite the added complexities as a result of COVID-19. Our third operating priority is to leverage and reinforce our position as a low-cost operator.", "We have a clear and defined process to control spending, which governs our disciplined approach to spending decisions. This zero based budgeting approach internally branded as Save to Serve, keeps the customer at the center of all we do while reinforcing our cost-control mindset.", "Our operational initiatives consist of building on our success with Fast Track, which Todd will discuss in more detail. As a result of our efforts to-date, our store associates are able to better serve our customers during this period of heightened demand as evidenced by recent customer survey results which we are seeing overall satisfaction at all time highs. Beyond enhancing our ability to serve, this process has also generated significant savings across the business.", "Our underlying principles are to keep the business simple, but move quickly to capture growth opportunities while controlling expenses and always seeking to be a low-cost operator. Our fourth operating priority is to invest in our people as we believe they are our competitive advantage. In total, for fiscal 2020, we now expect to invest up to $123 million in appreciation bonuses for eligible frontline employees to provide them with further support and demonstrate our continued appreciation for their exceptional efforts during these difficult times.", "As a reminder, these bonuses follow our 2017 investment of nearly $70 million in store manager compensation and training, as well as prior and continued investments in employee training, benefits and wages. Importantly, these investments continue to yield positive results across our store base, including continued record low store manager turnover, strong applicant flows and a robust internal promotion pipeline as well as record staffing levels over the first half of the year.", "We believe the opportunity to start and develop a career with a growing and purpose-driven Company is a unique competitive advantage and remains our greatest currency in attracting and retaining talent. We also held our annual leadership meeting earlier this month, and I was amazed by the team's ability to seamlessly transition to a virtual event resulting in continued development for more than 1,500 leaders of our Company. This meeting was once again a testament to how our people truly embrace the Serving Others culture.", "In summary, we are executing well from a position of strength and our operating priorities continue to provide a strong foundation from which we can continue to provide continued growth in years ahead. And with that, I'll turn the call back over to Todd." ] }, { "name": "Todd Vasos", "speech": [ "Thank you, Jeff. I'm very proud of the progress the team has made in advancing our key strategic initiatives, which we believe better positions us for long-term sustainable growth. Let me take you through some of the most recent highlights.", "Starting with our non-consumable initiative or NCI, as a reminder, NCI consist of a new and expanded product offering in key non-consumable categories. The NCI offering was available in approximately 4,300 stores at the end of Q2, and we continue to be very pleased with the strong sales and margin performance we are seeing across our NCI product categories.", "In fact, this performance is contributing to an incremental 8% comp sales increase in total non-consumable sales compared to stores without the NCI offering, as well as a meaningful improvement in gross margin rate in these stores.", "We also continue to realize meaningful benefits from incorporating select NCI products and planograms throughout the broader store base resulting in positive sales and margin contributions across the chain.", "As a result of our strong performance in learnings to date, our plans now include accelerating the rollout of our NCI offering to more than 5,400 stores by the end of 2020. By incorporating a lite [Phonetic] version of this initiative into approximately 400 stores. The lite version provides for a more streamlined approach as the full NCI assortment is incorporated into space already dedicated to non-consumable products resulting in less disruption to the stores and the ability to more aggressively scale this initiative as we move ahead.", "We believe NCI will continue to be a meaningful sales and margin driver as we move forward and a very -- and I'm very excited about the additional opportunities to further leverage our success in learnings with this important initiative.", "Turning now to DG Fresh, which is a strategic multi-phase shift to self-distribution of frozen and refrigerated goods. As a reminder, the primary objective of DG Fresh is to reduce product cost on our frozen and refrigerated items by removing the markup paid to third party distributors, thereby enhancing gross margin. And we continue to be very pleased with the product cost savings we are seeing.", "In fact, DG Fresh continues to be the largest contributor to the gross margin benefit we are seeing from higher initial markups on the inventory purchases, which John noted earlier and we expect this benefit to grow as we continue to scale this transformational initiative.", "Another important goal of DG Fresh is to increase sales in these categories. We are pleased with the success we are seeing on this front, driven by higher overall in-stock levels and the introduction of more than 55 additional new items including both the national and private brands in select stores being serviced by DG Fresh. In total, we were self-distributing to more than 12,000 stores from eight -- excuse me, from eight DG fresh facilities at the end of Q2.", "Given our success and strong execution to date, we now expect to capture benefits from DG Fresh in approximately 14,000 stores from at least ten facilities by the end of this year. This compares to our previous expectation of approximately 12,000 stores by year's end. Turning to our digital initiative where our strategy consist of building a digital ecosystem specifically tailored to provide our customers with an even more convenient, frictionless and personalized shopping experience, all of which have become even more important as a result of COVID-19.", "Today, customers are seeking safe, familiar and convenient experiences in many aspects of their lives, and in that regard, we believe our unique store footprint combined with our digital assets are a distinct competitive advantage. During the quarter, we accelerated the rollout of DG Pickup, our Buy Online Pickup in the Store offering to more than 2,500 stores compared to about 40 stores at the end of Q1 with plans for even more aggressive expansion as we move ahead.", "In fact, we now expect to introduce this offering into essentially all of our stores by the end of Q3. In addition to DG Pickup, our plans include the further expansion of DG GO! mobile checkout as we look to combine this feature with self checkout providing an even more convenient and contactless shopping experience.", "Moving now to Fast Track where our goals include increasing labor productivity in our stores, enhancing customer convenience and further improving on-shelf availability. We continue to be pleased with the labor productivity investments we are seeing as a result of our efforts around rolltainer optimization and even more shelf-ready packaging.", "The second component of Fast Track is self checkout which represents added flexibility for customers who may seek to limit face to face interactions while also driving greater efficiencies in the store for our associates. Self checkout is currently available in approximately 400 stores compared to more than 30 stores at the end of Q1. And our plans consist of a broader rollout later this year as we look to further enhance our convenience proposition.", "Overall, we are focused on controlling what we can control, while taking action, including the acceleration of our strategic initiatives to further differentiate and distance Dollar General from the rest of the discount retail landscape. As a mature retailer in growth mode, we are also laying the groundwork for future initiatives, as we are constantly evaluating what lies ahead for our customers and our business.", "We continue to believe we are pursuing the right strategies to drive long-term sustainable growth, while creating value for our shareholders. In closing, we are excited about our position midway through the year. Our extraordinary first half results are a testament to the strong execution and disciplined approach of our team.", "We are very proud of our people, especially those serving on the front lines. And I want to offer my sincere thanks to each of our approximately 157,000 employees across the Company for their tireless dedication in fulfilling our mission of serving others.", "With that operator, we would now like to open the lines for questions." ] } ]
[ { "name": "Operator", "speech": [ "Thank you. At this time, we'll be conducting a question-and-answer session. [Operator Instructions]. Our first question comes from Simeon Gutman with Morgan Stanley. Please proceed with your question." ] }, { "name": "Simeon Gutman", "speech": [ "Thanks, good morning. My first question is, any way you can parse through thinking about the trade-down effect, and which is bringing more customers to your store, which you mentioned, versus the timing of stimulus? And so I don't know how you sort through both of those factors." ] }, { "name": "Todd Vasos", "speech": [ "Sure. Yeah. We obviously talk to our customers each and every quarter. So we've got a real good data from that, but also through our credit card data, we can see that we're getting a trade down at a pretty good clip and we saw that in Q1 and that continued into Q2.", "And of course, as we just talked about the first period, up to just here in Q3. So as we continue to watch this evolve, what we see is very reminiscent of what we saw during the great recession, even though it was more of a financial recession versus where we are today, this one is starting to turn more into and look a little bit like that recession.", "And during that time, obviously, we saw a pretty good trade-down and we've got a nice track record and the playbook to hopefully be able to retain those customers as we continue to move through COVID and hopefully post-COVID. But we are squarely focused on servicing those customers right now that are -- that are coming in, and I would tell you that the information we're getting back through our customer work, our proprietary customer work really speaks to the additional stuff that we've done inside of our store over the last 18 months to two years. DG Fresh being the big one, our cooler expansions and obviously, our NCI and our non-consumable initiatives over the last 18 months to two years have been very, very fruitful for this customer.", "So we're very optimistic that we'll continue to see that trade down, and we're as optimistic that we'll be able to keep a great deal of them as we continue to move forward." ] }, { "name": "Simeon Gutman", "speech": [ "And related to it, can you talk about how you saw the discretionary mix of product evolve during the quarter? And then if you can into the third quarter?" ] }, { "name": "John Garratt", "speech": [ "Sure. As we mentioned in the previous call, it started with the consumables stock up at the beginning of the pandemic. Then in April, as we saw the stimulus money in play and people sheltered in place, we saw a pretty significant shift into discretionary categories like home doing phenomenally, toys seasonal. And that continued all the way through Q2 and it's continued to remain very strong. I think it's important to note our discretionary business was doing very well coming into this. We've had nine straight quarters of non-consumable growth, and I think it really is a testament to what we've done with NCI. Stimulus certainly helped, as well as the changing in shopping patterns where people were sheltered in place, but I think what we've done to make this part of the store more relevant than ever with the rotation of goods, the greater variety in aspirational products has really made it relevant and really helped us capture this additional business." ] }, { "name": "Simeon Gutman", "speech": [ "Thanks." ] }, { "name": "Operator", "speech": [ "Our next question is from Matthew Boss with J.P. Morgan. Please proceed with your question." ] }, { "name": "Matthew Boss", "speech": [ "Great. Thanks, and congrats on a nice quarter." ] }, { "name": "Todd Vasos", "speech": [ "Thank you." ] }, { "name": "Matthew Boss", "speech": [ "Maybe first on the margin side, how best to think about the drivers of gross margin as we think about the third quarter or the back half of the year as we think about IMU, non consumables and markdowns, which drove outsized expansion in the second quarter." ] }, { "name": "Todd Vasos", "speech": [ "Thanks, Matt. Good question. I'll maybe start by talking about the drivers of Q2 and that may help inform the balance of the year. We're not giving specific guidance on Q3, but I think it gives you an idea. And I'll start by saying how pleased we are with the performance, 167 basis points of gross margin expansion in Q2 was phenomenal and that marks our fifth consecutive quarter of year-over-year gross margin expansion. The initiatives like DG Fresh and NCI in particular are really contributing. If you look at the drivers, the top three drivers in Q2, number one was higher initial markups and that was driven primarily by DG Fresh, and that's a benefit we expect to continue to grow as we scale.", "The second one was mix, we saw the benefit of course of stimulus and the changes to shopping behavior I mentioned, but I also believe that as I said, NCI is playing a meaningful contributor to getting more of that non-consumable business. And with that higher non-consumable mix, that was a big driver of the favorable mix. As well as we saw a good mix within the mix with categories like health and beauty doing very well within our consumables.", "And then the third one was higher initial markups, I'm sorry, rather the third one was lower promotional activity. We've been talking about it for a few quarters now. We've been more and more targeted with the tools we've put in place to get more bang for the buck with our promotional activity in this environment, it wasn't as necessary.", "So, that was the three key drivers. You know, as you look ahead, obviously, we got some extra benefit from a pretty, a very significant shift into non-consumables, so I wouldn't expect that kind of shift every quarter. That gave it some extra juice. But as you look at the initiatives we have in place, we expect to see a growing benefit from DG Fresh and NCI. And we have a lot of other opportunities to leverage.", "The team did a great job on category management. We have more opportunity with private brands and foreign sourcing penetration, supply chain efficiencies, there is some near-term pressure from distribution and transportation costs, one, keeping up with the volume, two, the additional bonuses that we've put in place, and then three, there is some carrier rate pressure, but the team is doing a phenomenal job mitigating that with the actions they have in place.", "So, and then the last thing is, we'll always watch price but we feel very good about where we're priced now. So you know, not commenting specifically on Q3, but just in general, we feel very good about what we've done to drive this continued growth and gross margin expansion. And over the long term, I think we're very well positioned in making the right investments to drive gross margin expansion over the long-term and have a lot of levers." ] }, { "name": "Matthew Boss", "speech": [ "That's great. And then a follow-up on unit growth from here. So with the consolidation of brick-and-mortar retailers laterally, and then tying this to the acceleration of real estate projects that you guys cited for this year. Maybe Todd, what are you seeing from new store productivity or metrics out of your new stores? And how best to think about the expansion opportunity or long-term saturation, just given the market share and the white space opportunity that this current crisis seems to be opening up?" ] }, { "name": "Todd Vasos", "speech": [ "Yeah, Matt, that's a great question. And I would tell you that we're very pleased with the continued improvements that we continue to make each and every quarter in our store, in the box, making it more relevant to a broad-based amount of consumers in many different type of settings, all the way from our rule, which is our bread and butter, all the way into vertical living with our DGX box.", "And I would tell you that we still believe we got 12,000 or so opportunities to place a Dollar General out there across the Continental United States. And obviously, with some of the recent COVID activity and some of the displacement that we've seen, that opportunity continues to expand as far as I'm concerned, and we continue to watch that very carefully. And we have actually done a lot of work into -- we're not ready yet to talk about '21, but we've done a lot of work into our '21 pipeline as well.", "So we feel good about where we are. We feel good about that ability to continue to build stores, and attract and retain those customers." ] }, { "name": "Matthew Boss", "speech": [ "Great. Best of luck." ] }, { "name": "Todd Vasos", "speech": [ "Thank you." ] }, { "name": "Operator", "speech": [ "Our next question is from Karen Short with Barclays. Please proceed with your question." ] }, { "name": "Karen Short", "speech": [ "Hi. Thanks for taking my question. Just a couple of things to elaborate on. So first of all, within the NCI, that 8%, I just want to clarify. So those stores are currently comping 27%. Is that how I'm interpreting that statement? And then I guess what I was wondering is, could you talk a little bit about how that's trended over time? And then also how those stores are looking into August? And then I had another separate question." ] }, { "name": "Todd Vasos", "speech": [ "Yeah. So Karen, I think that your back of the envelope is pretty close because we're seeing an outsized benefit in our NCI stores. And the great thing is not only that top line, but of course, that margin line. And the lines will get more and more blurred as we go. And the reason being is that we're moving a lot of the great learnings from NCI into the bulk of the chain as well, which is great because then we're getting benefit in the rest of the chain at the same time that we're growing the NCI piece.", "And we're taking the best of the best there. So we really like what we see, and we continue to be very bullish, and that's the reason why we're expanding that extra 400 stores and doing it in that lite version and that lite version will give all the items that you see in NCI without all the movement inside the store for that disruption. And we believe that that may be the unlock as we move into next year to do more of these remodels." ] }, { "name": "Karen Short", "speech": [ "Okay. And then in terms of the Buy Online, Pick Up in Store, I mean, that seems like a obviously, a pretty -- being at all stores by year-end is a massive acceleration from what the 40 that you were at, at 1Q. So I'm actually wondering if you could talk to what the impact is on the comps for the stores that currently have buy online? And then maybe any color you could give in terms of what the basket looks like at those stores, with the specifically the Buy Online, Pickup in Store." ] }, { "name": "Todd Vasos", "speech": [ "Sure. Sure. Well, first of all, we have to say we're at the very start of this journey, right? So football field, we're on our own 10-yard line, so we've got ways to go here. But again, because of the acceleration, you can imagine, we like what we've seen in the early data. But again, it's so early to draw any large or broad-based conclusions.", "But I would tell you that what we've seen early on in a couple of anecdotes is that the consumer is enjoying the experience, rating the app very high. What we're seeing, we saw a little bit in the test stores, and we're seeing it even in the expanded stores now that we're up to over a couple of thousand and soon to roll out to the chain, is that we're seeing -- when the customer comes in to pick up her order, she's actually buying additional items inside the store, which then is increasing that basket size to above where we normally would see our basket size.", "So we like what we see early on, but we're just -- what we like to say, running water through the pipes right now to make sure everything is working, make sure the customer experience is right. And then we'll really start to market it heavy as we move to the backside of this quarter and into Q4, but also into next year to really start to drive some awareness into it.", "Lastly, we believe this will be a very big benefit for that trade down customer I talked about earlier. Because that trade down customer that we've seen is a little skewed a little younger, more digitally savvy with families. And we believe that this will be right up her alley as well as she continues to learn about Dollar General and grow with Dollar General." ] }, { "name": "Karen Short", "speech": [ "Great. Thanks very much." ] }, { "name": "Todd Vasos", "speech": [ "Sure." ] }, { "name": "Operator", "speech": [ "Our next question is from Peter Keith with Piper Sandler. Please proceed with your question." ] }, { "name": "Peter Keith", "speech": [ "Hi. Thanks, everyone. Great quarter. I was wondering just if you could comment on the geography of the store base with the urban versus rural exposure, if you saw any meaningful differences between the two?" ] }, { "name": "Todd Vasos", "speech": [ "Yeah. This is Todd again. Actually, what we experienced, which was great to see is pretty even performance across our rural store base and more of our city setting store base. So once again, we've done a lot of work around our city and/or more urban settings, with much work being done around those type of stores, including our DGX stores.", "But in saying that, we were very pleased with the overall sales and margin performance was very, very similar in both sides of that. So it was great to see." ] }, { "name": "Peter Keith", "speech": [ "Okay. Helpful. And then it might be the wrong time to ask, but I do want to kind of circle back on your long-term guidance, and it's been a couple of years since you put out that 10% to 15% EPS growth range that you want to achieve annually. How are you thinking about that today? Because it seems like you have a number of initiatives that are all working in conjunction. And perhaps, if anything, that range at this point, looks a bit conservative." ] }, { "name": "John Garratt", "speech": [ "Great question. I'm not going to comment specifically on 2021 or give you any specific predictions. But what I will tell you is we are extremely excited about the fundamentals of the business. We are extremely well positioned. We continue to see ourselves as 10%-plus EPS growers over the long term, as you look at the unit growth opportunity we have and the long runway there and the type of performance we're seeing from these new units. It's the best performance we've seen in years.", "When you look at our sales with all the levers that we have, all the initiatives, really clicking to drive the top line and meaningfully the bottom line when you look at our strategic initiatives and the momentum on the comps. And when you look at gross margin, all the levers that we have and the initiatives going after that, obviously, with the cash we generate, substantial cash flow we've been producing, that allows us to reinvest in what we announced was accelerating these initiatives.", "So we really believe we're extremely well positioned with the initiatives. We really believe what we've been doing to the box has made it more relevant than ever, and believe that we're now providing a fuller fill-in trip for customers coming in. So as we look to make these larger baskets stick to the extent possible, as we look to keep these new customers that we've attracted coming back, we think we're very well positioned with the initiatives we've put in place and more relevant than ever, and very excited about the future." ] }, { "name": "Peter Keith", "speech": [ "Okay. Thanks very much, John. Good luck." ] }, { "name": "John Garratt", "speech": [ "Thank you." ] }, { "name": "Operator", "speech": [ "Our next question is from Kelly Bania with BMO Capital. Please proceed with your question." ] }, { "name": "Kelly Bania", "speech": [ "Hi, good morning. Thanks for taking our questions. I was hoping you could maybe just help quantify. You called out a little bit of SG&A pressures, as you accelerate some of your initiatives in the back half. I think that was separate from the $50 million in COVID-related costs. So maybe you can just give us a little color, if you can, in just in terms of dollars that you're thinking in the second half there?" ] }, { "name": "John Garratt", "speech": [ "We didn't divulge the exact dollar amount. What we did do is we gave new guidance around capital, and so you can kind of extrapolate. That's where a lot of that capital was going toward was these new initiatives -- accelerating the initiatives, as well as accelerating real estate. On the expense side, I would look at it more as an acceleration of money we were already going to spend as opposed to additional investments. And so you could kind of think about the proportionality of what we're doing in terms of advancing these.", "So Todd mentioned the 400 additional NCI stores we're doing. We're going to be serving more fresh stores as we -- we're going to be serving 14,000 at the end of the year instead of 12,000 stores. We're going to be scaling DG Pickup across the chain in Q3 and adding 200 more projects. So I would really look at it more in terms of just proportionately pulling those expenses forward, not additional expenses.", "And again, all these things we do are aimed at high return projects where we're really focused on pulling that benefit forward. So there is some front-end pressure of cost with the start-up and the initial costs associated with that. But the benefits far outpace that, and that's really what we're focused on is pulling more of that benefit forward." ] }, { "name": "Kelly Bania", "speech": [ "Okay. That's very helpful. And then just another quick one on margins. Obviously, DG Fresh going really well. In an order of magnitude, it sounds like the gross margin benefit from that is larger than mix, which is quite incredible. So just was curious if you could just talk about, as you look at your supply chain today, how much more opportunity is there to bring more in-house versus what you have at third-parties? You gave some metrics on stores, but maybe just talk about it a little bit bigger picture." ] }, { "name": "Todd Vasos", "speech": [ "You know, as we continue to always look to be a low cost operator, we're always looking at opportunities. While we're still working DG Fresh, our goal is still by the end of next year to be essentially fully self distributed on our perishable side of the business. But there are some other areas in non-consumables that we'll be looking at.", "But also DG Fresh unlocks even greater opportunity down the road of ensuring that our dry network is efficient as possible. And that may look like some goods coming out of our traditional DCs and moving into Fresh, leaving more room for other goods in our main DCs.", "So think of things like candy and water. Some of the things that we can move into our fresh facilities that makes a lot of sense. And those areas will loosen up a lot of other areas inside of our DCs to make room for other type of goods.", "So we're looking at all that right now. But as you can imagine, we're squarely focused on ensuring we roll out Fresh at the highest level of execution we can. And I can't be more prouder of the team, especially through a very dynamic first half, I think, would be the best way to put it, especially with COVID and everything going on.", "They have executed at a very high level to include our stores and our operators to ensure that we're servicing the customer at a very high level. So I couldn't be more happy with DG Fresh, but there's always more room for opportunity as we continue to move forward in distribution." ] }, { "name": "Kelly Bania", "speech": [ "Thank you." ] }, { "name": "Operator", "speech": [ "Our next question is from Michael Lasser with UBS. Please proceed with your question." ] }, { "name": "Michael Lasser", "speech": [ "Good morning. Thanks a lot for taking my question. Todd, when you make the analogy from the current environment to '08, '09, do you see any major differences? And the reason why I ask the question is in '08, '09, you saw a big spike of sales initially after the recession set in. And then you saw a really healthy comp growth for years even after that. So to use that parallel, wouldn't you expect similar growth in the years ahead even after you've anniversaried some of the really big comp growth that you've seen recently?" ] }, { "name": "Todd Vasos", "speech": [ "That's a great question, Michael. And I want to frame it up to make sure we all remember, and I was the merchant at that time back in '08, '09, '10, and then there. We did a lot of other work to the box, right, to start to really make it very relevant to the consumer. So at the same time, we were seeing a trade in, we were also growing the amount of SKUs. We doubled the amount of SKUs from 2009 to 2011 as an example, right, going from 5,700 to 10,000 to 11,000 SKUs, pretty much where we sit today.", "But I think it's important to also note, we continue to refine that box, and that box is even more relevant today. Now, we don't expect to see probably the same amount of outside sales comps for that long of a time, just because of the initiatives that we had then versus now. But the important thing here is we've got some great initiatives that will, in my opinion, make her much more stickier today than she would have been even in '08, '09 because of DG Fresh, because of our digital initiatives, because of NCI and really showing her a real treasure hunt opportunity on the non-consumable side of the business.", "So I'm very bullish on being able to keep that consumer, probably at a higher rate. We'll just have to see if we get as many of those consumers over the long haul. I'd say we're probably, what, who knows how far we're into COVID. So we'll have to wait until we get to the backside of COVID, before we know exactly how many customers we have received or gotten into the brand. And then we're going to do everything possible to continue to keep as many as we can." ] }, { "name": "Michael Lasser", "speech": [ "Hopefully, we'll get to the other side soon." ] }, { "name": "Todd Vasos", "speech": [ "I'm with you." ] }, { "name": "Michael Lasser", "speech": [ "And my follow-up [Speech Overlap] [Indecipherable] My follow-up question is on, speaking of these new customers, as you look at your credit card data, are you seeing more of the growth in the non-consumable, in the discretionary area coming from those new customers? Because the core DG customer historically has really lived in a tight budget. It doesn't have the excess funds necessarily to buy those non-discretionary goods -- or those discretionary goods, I should say. And is that the way we should read it? So more of the growth coming in the discretionary categories from those new customers?" ] }, { "name": "Todd Vasos", "speech": [ "Yeah, I would tell you that we were very pleased with our core customers' ability to buy non-consumables. I would tell you that's more the driver. And now some of that was stimulus related. But again, I believe a lot of it had to do with our ability to attract new customers as well, but also showing her something different because of our non-consumable initiatives that we've got moving.", "Now as we all know, some of the stimulus has started to wane, but as you can tell by our numbers that we've posted through Q2 and into the -- just about the full force period of Q3, that we continue to see a pretty robust customer on both sides of the equation. So she's liking what she sees. She has a little bit of money in her pocket. I think we're seeing a good trade down, which is helping. But our core customer is spending there as well. And I think it really goes to, again, the amount of work we've done. But plus, she's at home a little bit more. She has a little bit more probably disposable income because she's not doing other things.", "And with that, she really likes what she sees and buying a lot of our products." ] }, { "name": "Michael Lasser", "speech": [ "Thank you very much, and good luck." ] }, { "name": "Todd Vasos", "speech": [ "Sure." ] }, { "name": "Operator", "speech": [ "Our next question comes from Scot Ciccarelli with RBC Capital Markets. Please proceed with your question." ] }, { "name": "Scot Ciccarelli", "speech": [ "Good morning, guys. So obviously, overall sales trends were strong through the quarter, remains strong right now, but really being driven by ticket rather than transactions. So how should we think about the concept of gaining market share and the new customers that you've referenced versus lower overall transaction levels? Thanks." ] }, { "name": "Todd Vasos", "speech": [ "Yeah. Thank you for the question. Yeah, our traffic was down, and I'll give you a little anecdote. It was low single digits, so not dramatically down, but down. And we like to see that up, and we strive for that, obviously, all the time. Now in saying that the -- between our core customer having money to be able to do a fuller shop and the trade down that we've got, well offset any of that.", "So we like what we see from the customer base we have. And she is just consolidating her trips, not as much at Dollar General as you may see in other places, but yet, she's consolidating. And so we continue to offer her more and more so that when she's in, she can do a fuller shop, and she doesn't feel compelled to have to go elsewhere. So I think that's really what you're seeing from our brand. And we'll continue to show her products that she wants and needs, but also products that may be a surprise and delight." ] }, { "name": "Scot Ciccarelli", "speech": [ "So Todd, should we think about the surge that you've seen in discretionary sales is really a function of that fuller shop then? Again, I think a lot of us are trying to get our arms around you always had consumables not outpace discretionary and first time in ten plus years, you saw that kind of reverse this quarter. So I guess I'm just trying to figure out what drove that and maybe it's the fuller shop, maybe it's something else." ] }, { "name": "Todd Vasos", "speech": [ "No, when you look at it -- and I don't want anybody to take the opinion that our consumable business wasn't very healthy. It was very healthy. It was just outpaced by our non-consumable or discretionary side of the equation. I would tell you, I believe fully that it's a couple of things. One, we are seeing that trade down, and she likes what she sees. And we're seeing repeat in the trade down. We can see it in the credit card data. So not only is she shopping us once, she has shopped us multiple times during this COVID outbreak and pandemic that we've seen.", "So it tells us that she likes what she sees, and she's coming back. So she's helping drive and propel that non-consumable business. But also our core consumer likes what she sees. And she was buying some of that product possibly elsewhere. And I think she now sees the benefit of shopping Dollar General there from all the work that we've done.", "So I'm very bullish on what that looks like as we get to the backside of the pandemic because of all the work we've done. But we are continuing to ensure that we're working both sides of the equation, meaning the new customer as well as our existing customer." ] }, { "name": "Scot Ciccarelli", "speech": [ "Great. Thanks a lot, guys." ] }, { "name": "Todd Vasos", "speech": [ "Thank you." ] }, { "name": "Operator", "speech": [ "Our last question comes from Rupesh Parikh with Oppenheimer. Please proceed with your question." ] }, { "name": "Rupesh Parikh", "speech": [ "Good morning. Thanks for taking my question. So Todd, I guess to start out. So as you look at -- if you look at the COVID crisis, how is your team thinking about some of the permanent benefits that is coming out of this for DG?" ] }, { "name": "Todd Vasos", "speech": [ "Well, we're taking it one day at a time, as you can imagine, just like most people, we're hoping that the pandemic winds down sooner than later.", "But in saying that, we have seen that new customer. So we believe that's paramount is to keep her and continue to work that. But also, we're seeing real opportunity on a few other fronts. One is to enable us to accelerate our strategic initiatives, which you heard from both myself and John on, as well as Jeff. And we're very excited about that because, first of all, these initiatives were working well prior to COVID. Now they're working very well, and we know that the consumer is looking both for the goods that we are offering through these initiatives. But also because of being on the forefront of this, not that we knew COVID was coming, but knew that the customer was always looking for more of a convenient and frictionless shopping experience.", "And we were well out in front of this, right, 18 -- 12 months to 18 months ago to create what we've created around our digital efforts and our NCI products and many other things. So we see real opportunities there. Karen talked -- asked about real estate. We see opportunities there that there'll be some real estate opportunities opened up we believe because of this, that we'll take advantage of as well.", "So there's a lot of areas where we know we can take advantage of. But where we're squarely focused on right now is servicing those customers that are coming in because she still really needs us because of this raging pandemic that we hope, again, winds down soon." ] }, { "name": "Rupesh Parikh", "speech": [ "Great. And one follow-up question, just on the supply chain. So one of your competitors called out some challenges with out of stocks during third quarter. So just curious where you guys are from the supply chain, especially in categories like home, where you just had really stellar growth during the quarter?" ] }, { "name": "Jeff Owen", "speech": [ "Hey Rupesh, thank you. This is Jeff. First of all, we've said this before, but our teams are out in front of this very early. So I think it's a testament to the collaboration of our merchant team, supply chain and the operators, and also the great relationships we have with our vendor partners. So we're seeing steady progress.", "And we still have, obviously, work to do, but what I can tell you is that the team has been very creative in finding solutions to get product on the shelf of the customer. You've heard us say before, we've stood up new SKUs during this, items we never carried before. We've looked at different pack sizes. And so real pleased with the progress of the team. And as we look forward, and we're still suffering from some constraints.", "But as we look forward, we see that the supply chain that we have is incredibly nimble. And many of the initiatives we have in place have allowed us to get the products in and out of the supply chain and the distribution center fast. So we'll be ready for that customer when that -- when the inventory is ready for us to distribute to them. So we're pleased with the progress." ] }, { "name": "Rupesh Parikh", "speech": [ "Great, thank you." ] }, { "name": "Operator", "speech": [ "[Operator Closing Remarks]." ] } ]
DG
2021-03-18
[ { "description": "Vice President of Investor Relations and Corporate Strategy", "name": "Donny Lau", "position": "Executive" }, { "description": "Chief Executive Officer", "name": "Todd Vasos", "position": "Executive" }, { "description": "Executive Vice President and Chief Financial Officer", "name": "John Garratt", "position": "Executive" }, { "description": "Chief Operating Officer", "name": "Jeff Owen", "position": "Executive" }, { "description": "UBS -- Analyst", "name": "Michael Lasser", "position": "Analyst" }, { "description": "Morgan Stanley -- Analyst", "name": "Simeon Gutman", "position": "Analyst" }, { "description": "JPMorgan -- Analyst", "name": "Matthew Boss", "position": "Analyst" }, { "description": "RBC Capital Markets -- Analyst", "name": "Scot Ciccarelli", "position": "Analyst" }, { "description": "Barclays -- Analyst", "name": "Karen Short", "position": "Analyst" }, { "description": "Oppenheimer -- Analyst", "name": "Rupesh Parikh", "position": "Analyst" }, { "description": "Goldman Sachs -- Analyst", "name": "Chandni Luthra", "position": "Analyst" }, { "description": "Deutsche Bank -- Analyst", "name": "Paul Trussell", "position": "Analyst" } ]
[ { "name": "Operator", "speech": [ "Good morning. My name is Donna, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Dollar General Fourth Quarter 2020 Earnings Call. Today is Thursday, March 18, 2021.", "All lines have been placed on mute to prevent any background noise. This call is being recorded. Instructions for listening to the replay of the call are available in the company's earnings press release issued this morning.", "Now I'd like to turn the conference over to Mr. Donny Lau, Vice President of Investor Relations and Corporate Strategy. Mr. Lau, you may now begin your conference." ] }, { "name": "Donny Lau", "speech": [ "Thank you, Donna, and good morning, everyone. On the call with me today are Todd Vasos, our CEO; Jeff Owen, our COO; and John Garratt, our CFO. Our earnings release issued today can be found on our website at investor.dollargeneral.com under News & Events.", "Let me caution you that today's comments include forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995, such as statements about our strategy, plans, initiatives, goals, priorities, opportunities, investments, guidance, expectations or beliefs about future matters and other statements that are not limited to historical facts. These statements are subject to risks and uncertainties that could cause actual results to differ materially from our expectations and projections, including but not limited to those identified in our earnings release issued this morning under Risk Factors in our 2019 Form 10-K filed on March 19, 2020 and in our Form 10-Q filed on December 3, 2020, and in the comments that are made on this call. You should not unduly rely on forward-looking statements, which speak only as of today's date. Dollar General disclaims any obligation to update or revise any information discussed in this call unless required by law.", "We also may reference certain financial measures that have not been derived in accordance with GAAP. Reconciliations to the most comparable GAAP measures are included in this morning's earnings release, which, as I mentioned, is posted on investor.dollargeneral.com under News & Events.", "At the end of our prepared remarks, we will open the call up for your questions. Please limit your questions to one and one follow-up question, if necessary.", "Now, it is my pleasure to turn the call over to Todd." ] }, { "name": "Todd Vasos", "speech": [ "Thank you, Donny, and welcome to everyone joining our call. We are pleased with our strong finish to fiscal 2020, and I thank all of our associates for their extraordinary efforts over the past year to support our customers, our communities and each other.", "Despite the challenging operating environment, our team remains steadfast in their dedication to fulfilling our mission of serving others by providing affordable, convenient and close to home access to everyday essentials, and I could not be more proud of their efforts.", "Throughout the pandemic, our priority has been the health and safety of our employees and customers, while meeting the critical needs of the communities we serve as an essential retailer.", "Protective equipment dedicated certain store hours for the most vulnerable members of our communities and, most recently, removed barriers for our frontline associates to receive the vaccine.", "In total, we invested approximately $248 million in response to the pandemic in 2020, including about $167 million in appreciation bonuses for eligible front-line employees to demonstrate our appreciation for their exceptional performance during an incredibly challenging year.", "At Dollar General, we remain committed to being part of the solution, and believe we are uniquely positioned to continue supporting our customers through our network of more than 17,000 stores located within five miles of approximately 75% of U.S. population.", "At the same time, we remain focused on advancing our operating priorities and strategic initiatives as we continue to meet the evolving needs of our customers and further position Dollar General for long-term sustainable growth. To that end, we are excited to share an update on some of our plans for 2021.", "First, we plan to further the rollout of several value-creating initiatives, including our non-consumables initiative, Fast Track and the completion of our initial rollout of DG Fresh. In addition, while still early, we are very pleased with the results of our pOpshelf stores, which have far exceeded our initial expectations for both sales and gross margin. As a result, we plan to accelerate our pace of new store openings for pOpshelf in 2021 and expect to incorporate this concept into a number of our larger format Dollar General locations as we look to capitalize on the significant growth opportunity we see for this differentiated concept.", "We are also pleased to highlight key changes to our development strategy, including plans to build on the success of our Dollar General Plus Store or DGP, and the introduction of two new store formats, which we began testing in 2020. Similar to our larger footprint, DGP concept, the first new format has selling space of approximately 8,500 square feet, which compares to about 7,300 square feet of selling space for our traditional store.", "Beginning later this year, this new format along with our DGP concept will become our base prototype for nearly all new stores, replacing both our traditional and higher, cooler count DGTP format, allowing for a more optimized assortment and room to accommodate future growth.", "Our second new format is even larger with approximately 9,500 square selling feet, and will be deployed opportunistically across new store relocation and remodel opportunities. Notably, on average, our DGP and new store formats are outperforming the chain on a comp sales basis and have considerably higher sales volumes compared to both the traditional and DGTP store, which bodes well for the future as we look to increase their unit counts in the years ahead.", "Finally, we are pleased to provide an update on a number of our new small box store opportunities we see available in the Continental United States, which represents an increase compared to our prior estimate. Jeff will discuss these updates in more detail later in the call.", "But first, let's recap some of the highlights for the fourth quarter and full year. The quarter was once again highlighted by strong growth on both the top and bottom lines. We're pleased that, for the quarter, our three non-consumable categories once again delivered a combined comp sales increase well in excess of our consumable business. Of note, this represents our 11th consecutive quarter of year-over-year comp sales growth in our combined non-consumable categories, which we believe speaks to the strong and sustained momentum in these product categories.", "From a monthly cadence perspective, comp sales in December increased in the high-single digit range with similar mid-teens growth in both November and January. In total, fourth quarter net sales increased 17.6% to $8.4 billion, primarily driven by comp sales growth of 12.7%. These results include significant growth in average basket size and units in particular, partially offset by decline in customer traffic. And while customers continue to consolidate trips, on average, they are spending more with us compared to last year.", "Once again, this quarter, we increased our market share in highly consumable product sales, as measured by syndicated data, driven by a meaningful increase in both units and dollars. Importantly, our data suggests an increase in new customers this quarter as compared to Q4 of 2019. These new customers continue to skew younger, higher income and more ethnically diverse, underscoring the broadening appeal of our value and convenience proposition. We continue to be encouraged by the retention rates of new customers and we are working to drive even higher levels of engagement with more personalized marketing and continued execution of our key initiatives.", "We're particularly pleased that we delivered significant operating margin expansion, which contributed the fourth quarter diluted EPS of $2.62, an increase of 24.8% over the prior year. For the full year, net sales increased 21.6% to $33.7 billion, including net sales growth of 28.1% in our combined non-consumable categories. Comp sales for the year increased 16.3%, representing our 31st consecutive year of same-store sales growth.", "In 2020, we celebrated the opening of our 17,000 store and the launch of our newest store concept pOpshelf. In total, we completed a record 2,780 real estate projects during the year, exceeding our initial target of 2,580 projects as we continue to build and strengthen the foundation for future growth.", "From a position of strength, we also made targeted investments in other key areas, including the acceleration of certain strategic initiatives to strengthen our competitive position and further differentiate and distance Dollar General from the rest of the discount retail landscape.", "Collectively, our fourth quarter and full year results reflect strong and disciplined execution across many fronts and further validate our belief that we are pursuing the right strategies to enable sustainable growth while creating meaningful long-term shareholder value. As a mature retailer in growth mode, we are also laying the groundwork for future initiatives, which we believe will unlock additional growth opportunities as we move forward.", "We operate in one of the most attractive sectors in retail. And in an environment where customers continue to seek safe and convenient experiences, we believe our unique store footprint, further enhanced through our multiyear initiatives, provides a distinct competitive advantage and positions us well for continued success.", "Overall, I am proud of our associates and all that we've achieved over the past year. We feel very good about the underlying business and I'm excited about the opportunities that lie ahead.", "With that, I'll now turn the call over to John." ] }, { "name": "John Garratt", "speech": [ "Thank you, Todd, and good morning, everyone. Now that Todd has taken you through a few highlights of the quarter and full year, let me take you through some of its important financial details. Unless we specifically note otherwise, all comparisons are year-over-year. All references to EPS refer to diluted earnings per share and all years noted refer to the corresponding fiscal year.", "As Todd already discussed sales, I will start with gross profit, which was positively impacted in the quarter by a significant increase in sales, including the impact of COVID-19.", "Gross profit as a percentage of sales was 32.5% in the fourth quarter, an increase of 77 basis points, which represents our seventh consecutive quarter of year-over-year gross margin rate expansion. This increase was primarily attributable to: a reduction in markdowns as a percentage of sales, higher initial markups on inventory purchases, a greater proportion of sales coming from non-consumable categories and a reduction in shrink as a percentage of sales. These factors were partially offset by: increased transportation and distribution costs, which were impacted by increased volume, some of which is attributable to the COVID-19 pandemic as well as higher transportation rates and discretionary employee bonus expense for our distribution center and private fleet employees.", "SG&A as a percentage of sales was 22.2%, an increase of 48 basis points. This increase was primarily driven by incremental costs related to COVID-19, including appreciation bonuses paid to our frontline retail employees and health and safety-related expenses as well as increased incentive compensation expense and hurricane-related expenses. These items were partially offset by certain expenses, which were lower as a percentage of sales, including occupancy costs, retail labor and depreciation and amortization.", "Moving down the income statement. Operating profit for the fourth quarter increased 21% to $872 million. As a percent of sales, operating profit was 10.4%, an increase of 30 basis points. Operating profit in the fourth quarter was positively impacted by COVID-19, primarily through higher sales. The benefit from higher sales was partially offset by approximately $96 million or 110 basis points of incremental investments that we made in response to the pandemic, including approximately $69 million in appreciation bonuses for eligible frontline employees and additional measures taken to further protect our employees and customers. Our effective tax rate for the quarter was 22.7% and compares to 23% in the fourth quarter last year.", "Finally, as Todd noted earlier, EPS for the fourth quarter increased 24.8% to $2.62, which contributed to full year EPS of $10.62, an increase of 59.9%.", "Turning now to our balance sheet and cash flow, which remain strong and provide us the financial flexibility to further support our customers and employees during these unprecedented times while continuing to invest for the long term and provide meaningful returns to shareholders. Merchandise inventories were $5.2 billion at the end of the year, an increase of 12.2% overall and 6.3% on a per-store basis. While a lot of stocks remain higher than we would like for certain high-demand products, we continue to make good progress with improving our in-stock position and are pleased with our overall inventory levels.", "In 2020, we generated significant cash flow from operations totaling $3.9 billion, an increase of $1.6 billion or 73.2%. Total capital expenditures for the year were $1 billion and included our planned investments in new stores, remodels and relocations, distribution and transportation projects and spending related to our strategic initiatives.", "During the quarter, we repurchased 4.3 million shares of our common stock for $900 million and paid a quarterly dividend of $0.36 per common share outstanding at a total cost of $87 million. With today's announcement of an incremental share repurchase authorization, we have remaining authorization of approximately $2.4 billion under the repurchase program.", "Our capital allocation priorities continue to serve us well and remain unchanged. Our first priority is investing in high-return growth opportunities, including new store expansion and our strategic initiatives. We also remain committed to returning significant cash to shareholders through anticipated share repurchases and quarterly dividend payments, all while maintaining our current investment-grade credit rating and managing to a leverage ratio of approximately 3 times adjusted debt to EBITDA.", "Moving to our financial outlook for 2021. We continue to operate in a time of uncertainty regarding the severity and duration of the COVID-19 pandemic, including its impact on the economy, consumer behavior and our business. Despite continued uncertainty, we are providing select annual guidance in an effort to provide the best view we reasonably can, based on what we currently know. That said, there could be a number of potential headwinds and tailwinds this year, which are not incorporated into our guidance as the timing, degree and potential impacts on our business are currently unclear, including, but not limited to: the recently approved government stimulus package; other unknown external factors related to the ongoing health crisis, including its impact on consumer behavior and additional changes to minimum wage rates.", "With this in mind, we currently expect the following for 2021: net sales in the range of a 2% decline to flat; a same-store sales decline of 4% to 6% but which reflects growth of approximately 10% to 12% on a two-year stack basis; and EPS in the range of $8.80 to $9.50, which reflects a compound annual growth rate between 15% and 20% or between 14% and 19% on an adjusted basis over a two-year period, which is well above our long-term goal of delivering at least 10% annual EPS growth on an adjusted basis. Our EPS guidance assumes an effective tax rate in the range of 22% to 23%.", "Capital spending is expected to be in the range of $1.05 billion to $1.15 billion as we continue to invest in our strategic initiatives and core business to support and drive future growth.", "With regards to shareholder returns, as outlined in today's press release, our Board of Directors recently approved a quarterly dividend payment of $0.42 per share, which represents an increase of 16.7%. We also plan to repurchase a total of approximately $1.8 billion of our common stock this year, reflecting our strong liquidity position and confidence about the long-term growth opportunity for our business.", "Finally, as noted in today's press release, our outlook for 2021 real estate projects remains unchanged from what we stated in our Q3 earnings release on December 3, 2020.", "Let me now provide some additional context as it relates to our expectations. Given the unusual situation, I will elaborate on our comp sales trends thus far in Q1. Despite approximately 8,400 lost store operating days as a result of closures due to winter weather across the country, same-store sales for the month of February increased 5.7%, reflecting a healthy comp sales increase of 11.2% on a two-year stack basis. From the end of February through March 16, comp sales decreased approximately 16% as we are in the midst of lapping our most difficult monthly comp sales comparison of the year. As a reminder, comp sales growth for the month of March in 2020 was 34.5%.", "Looking ahead, we remain cautious in our 2021 sales outlook, given the continued significant uncertainty that still exists as well as the unique comparisons against last year.", "That said, as you think about the sales cadence of 2021, our performance is expected to be stronger in the second half, given a more difficult sales comparison in the first half and particularly in Q1.", "Turning to gross margin. In 2020, gross margins benefited from a greater proportion of sales coming from our higher-margin non-consumable categories, driven by a full year net sales percentage increase of these categories well in excess of our consumables business. We expect our sales mix will ultimately shift toward our consumables categories in 2021, resulting in pressure on our rate. However, the timing of when this dynamic may occur and its corresponding impact to gross margin are currently uncertain.", "Gross margins in 2020 also benefited from a reduction in markdowns, including the benefit of higher sell-through rates as a result of significant customer demand in seasonal and other clearance-sensitive non-consumable categories.", "In 2021, we expect our markdown rates will increase somewhat from the abnormally low levels we saw in 2020, which likely will create some gross margin pressure compared to last year.", "In addition, while we continue to see the effect of higher carrier rates and fuel costs, our ongoing efforts to improve efficiencies and reduce expenses, including further expansion of our private fleet, are expected to help partially mitigate these cost pressures in 2021. Also, please keep in mind that the second and third quarters represent the most challenging laps of the year from a gross profit rate perspective, following improvements of 167 basis points in Q2 2020 and 178 basis points in Q3 2020.", "In terms of SG&A, while we expect to incur ongoing expenses related to the pandemic in 2021, overall, we anticipate a meaningful reduction in COVID-19-related costs compared to last year. However, the leverage from these reduced costs is expected to be offset by deleverage associated with lower comp sales and approximately $60 million to $70 million in incremental year-over-year investments related to our strategic initiatives as we further their rollouts.", "With regard to our strategic initiatives, in aggregate, we anticipate they will positively contribute to operating profit and margin in 2021, driven by NCI and DG Fresh as we expect the benefits to gross margin from our initiatives will more than offset the associated expense.", "Finally, we estimate operating profit will be negatively impacted by approximately $35 million to $40 million in Q1 as a result of lost sales from storage closures and expenses related to the widespread winter weather that we experienced in February.", "In closing, we are very proud of the team's execution and performance, which resulted in exceptional fourth quarter and full year results. As always, we continue to be disciplined in how we manage expenses and capital, with the goal of delivering consistent, strong financial performance while strategically investing for the long term.", "We remain confident in our business model and our ongoing financial priorities to drive profitable same-store sales growth, healthy new store returns, strong free cash flow and long-term shareholder value.", "With that, I will turn the call over to Jeff." ] }, { "name": "Jeff Owen", "speech": [ "Thank you, John. Let me take the next few minutes to update you on our operating priorities, including our strategic initiatives and plans for 2021.", "Our first operating priority is driving profitable sales growth. The team did a fantastic job in 2020. [Technical Issues] NCI consists of a new and expanded product offering in key non-consumable categories. The NCI offering was available in more than 5,800 stores at the end of 2020, including nearly 400 stores in our light version. This compares to our prior expectation of more than 5,600 stores at year-end.", "Given our strong performance to-date, we plan to expand this offering to about 5,700 additional stores this year, bringing the total number of NCI stores to more than 11,000 by year-end. This total includes over 2,100 stores in our light version, which incorporates a vast majority of the NCI assortment but through a more streamlined approach.", "Moving to our newest concept, pOpshelf, which further builds on our success in learnings with NCI. pOpshelf aims to engage customers by offering a fun, affordable and differentiated treasure hunt experience delivered through continually refreshed merchandise, a differentiated in-store experience and exceptional value with about 95% of our items priced at $5 or less.", "We opened our first five locations in 2020. And as Todd mentioned, given our strong results to date, we plan to accelerate the rollout of pOpshelf in 2021. In fact, we are now targeting to have a total of up to 50 pOpshelf stores opened by year-end compared to our previous goal of about 30 total locations. In addition to these stores, we also plan to incorporate this concept in up to 25 Dollar General stores in 2021.", "In terms of our store-within-a-store concept, a smaller footprint pOpshelf shop will be prominently positioned in the center of the store, and we will display both Dollar General and pOpshelf branding on exterior entrances to build and maximize awareness.", "From these initial stores, our goal is to test, learn and ultimately expand to more locations over time as we look to leverage the unique strengths of these complementary formats and build on our early success with pOpshelf by making it more available to a broader range of customers.", "Turning now to DG Fresh, which is a strategic, multiphase shift to self-distribution of frozen and refrigerated goods. The primary objective of DG Fresh is to reduce product costs on our frozen and refrigerated items, and we continue to be very pleased with the product cost savings we are seeing. In fact, DG Fresh continues to be the largest contributor to the gross margin benefit we are realizing from higher initial markups on inventory purchases, and we expect this benefit to grow as we continue to scale this transformational initiative.", "Another important goal of DG Fresh is to increase sales in these categories. We are pleased with the success we are seeing on this front, driven by higher overall in-stock levels and the introduction of new products in select stores being serviced by DG Fresh.", "Given our success to-date, we are further accelerating the rollout of additional offerings with the recent introduction of even more products, including both national and private brands as we look to further optimize our assortment while increasing our relevance with customers. And while produce is not included in our initial rollout plans, we believe DG Fresh provides a potential path forward to expanding our produce offering to more than 10,000 stores over time as we look to further capitalize on our extensive self-distribution capabilities.", "In total, we were self-distributing to more than 16,000 stores from 10 facilities at the end of 2020. This compares to our previous expectation of over 14,000 stores at year-end. Overall, we remain well on-track to complete our initial rollout across the chain in 2021.", "Moving to our cooler expansion program, which continues to be our most impactful merchandising initiative. During 2020, we added more than 62,000 cooler doors across our store base. In total, we expect to install more than 65,000 cooler doors in 2021 as we continue to build on our multiyear track record for growth in cooler doors and associated sales.", "As a reminder, in 2019, we began incorporating high-capacity coolers into the majority of our new, remodeled and relocated stores, creating additional opportunities to drive higher on-shelf availability and deliver a wider product selection, all enabled by DG Fresh.", "Next, a quick update on our FedEx relationship. This convenient customer package pickup and dropoff service is now available in over 8,500 stores, with plans to be in a total of over 9,500 stores by year-end, further advancing our long track record of serving rural communities.", "In addition to the gross margin benefits associated with NCI and DG Fresh, we continue to pursue additional opportunities to enhance gross margin, including improvements in private brand sales, global sourcing and supply chain efficiencies.", "With regards to our supply chain, our plans for 2021 include further expansion of our private fleet, which accounted for more than 20% of our outbound fleet at the end of 2020. Reducing stem miles is also an important contributor to these efforts, and the recent opening of our Walton, Kentucky dry distribution center is expected to drive additional efficiencies as we move ahead.", "We also plan to open two additional DG Fresh facilities in 2021 as we look to further optimize our fresh network and support future growth. In addition, we anticipate our combination DG Fresh and dry distribution center in Blair, Nebraska will be completed in late [Technical Issues] contribute to a further reduction in stem miles over time.", "Finally, while we are very pleased with our progress in 2020, shrink reduction remains an important area of opportunity. We continue to build on our success with electronic article surveillance by increasing the number of items tagged while further leveraging technology to drive even higher levels of in-store execution.", "Our second priority is capturing growth opportunities. Our proven high-return, low-risk real estate model continues to be a core strength of our business. In 2020, we completed a total of 2,780 real estate projects, including 1,000 new stores, 1,670 remodels and 110 relocations. Additionally, we now have produce in more than 1,100 stores.", "For 2021, we expect to open 1,050 new stores, remodel 1,750 stores and relocate 100 stores, representing 2,900 real estate projects in total. We also plan to add produce in approximately 700 stores, bringing the total number of stores that carry produce to more than 1,800. In addition, as Todd noted earlier, we continue to advance the evolution of our store base with plans to build on the success of our DGP format, including the introduction of two new format types.", "With about 8,500 square feet of selling space, both our first new format and DGP concept allow for expanded higher capacity cooler counts, an extended queue line and a broader product assortment, including NCI, a larger health and beauty section and produce in select stores. In total, we expect more than 550 of our overall real estate projects this year to be in one of these format types as we look to further enhance our value and convenience proposition, particularly in rural America.", "The second new format consists of about 9,500 square feet of selling space. In addition to an extended queue line and broader assortment, this larger layout also includes nearly 50 high-capacity coolers and expanded produce offering, fresh meat and additional checkout lanes, including a self-checkout bullpen with multiple stations. We believe this even larger format better positions us to meet the growing needs of our customers, particularly in highly underserved markets, and we are targeting more than 100 locations by year-end.", "Overall, these larger formats allow us to incorporate our best and most impactful initiatives and are designed to expand high-growth, traffic-building categories in a more customer-friendly format all while continuing to drive strong returns.", "Moving to an update on the number of new store opportunities. Through a combination of our growing relevance with customers, format innovation, an evolving retail landscape and leveraging new technologies, we estimate there are now approximately 13,000 additional small-box store opportunities in the Continental U.S. which are available for a Dollar General store. This compares to our prior estimate of nearly 12,000 opportunities and is inclusive of our 2021 new unit pipeline.", "Although these opportunities are available to all small-box retailers, as a leader in small-box retail, combined with our proven track record of new unit development and format innovation, we believe we are well positioned to capture a disproportionate share as we move ahead. And while we continue to evaluate, we currently estimate pOpshelf could add approximately 3,000 additional store opportunities in the Continental U.S., with about another 1,000 additional opportunities available for our smaller footprint DGX format. When taken together, we estimate there are a total of approximately 17,000 new store opportunities available across our format types which we believe represents a long runway for new unit growth.", "Overall, our real estate pipeline remains robust, and we are excited about the significant new store opportunities ahead.", "Next, our digital initiative, which is an important complement to our brick-and-mortar footprint as we continue to deploy and leverage technology to further enhance the customer in-store experience.", "Overall, our strategy consists of building a digital ecosystem that is specifically tailored to provide our customers with an even more convenient, frictionless and personalized shopping experience. We made significant progress in 2020, highlighted by the accelerated rollout of DG Pickup, our Buy Online Pick Up In-store offering to more than 17,000 stores providing another convenient access point for those seeking a more contactless shopping experience. During the year, we also saw continued growth in customer engagement across our digital ecosystem, including our digital coupon offering, shopping list feature, cart calculator shopping and budgeting tool, eCommerce site, DG Go! mobile checkout and our mobile app, which ended the year with nearly 4 million monthly active users.", "Looking ahead, our plans include providing more relevant, meaningful and personalized offerings with the goal of driving even higher levels of customer engagement and loyalty.", "Our third operating priority is to leverage and reinforce our position as a low-cost operator. Over the years, we've established a clear and defined process to control spending, which governs our disciplined approach to spending decisions. This zero-based budgeting approach, internally branded as Save to Serve, keeps the customer at the center of all we do, while reinforcing our cost control mindset.", "Our Fast Track initiative is a great example of this approach, where our goals include: increasing labor productivity in our stores, enhancing customer convenience and further improving on-shelf availability. We continue to be pleased with the labor productivity improvements we are seeing as a result of our efforts around both rolltainer and case pack optimization, which have led to the more efficient stocking of our stores.", "The second component of Fast Track is self-checkout, which provides customers with another flexible and convenient checkout solution while also driving greater efficiencies for our store associates. Self-checkout was available in more than 1,600 stores at the end of 2020, with plans for an aggressive expansion as we move ahead. In fact, we expect to introduce this offering into the vast majority of our stores by the end of 2022.", "Our underlying principles are to keep the business simple but move quickly to capture growth opportunities while controlling expenses and always seeking to be a low-cost operator. Our fourth operating priority is investing in our diverse teams through development, empowerment and inclusion. As a growing retailer, we continue to create new jobs in the communities we serve. And for those associates already on our team, this growth is resulting in numerous opportunities for career advancement. In fact, more than 12,000 of our current store managers are internal promotes, and we continue to innovate on the development opportunities we can offer our teams, including continued expansion of our private fleet and those associated with DG Fresh as well as pOpshelf.", "In addition, we transitioned to a virtual learning environment in 2020, resulting in the continued development of our people, including nearly 3 million training hours for our employees, all supported by our award-winning training and development programs. Importantly, we believe these efforts continue to yield positive results across our store base, as evidenced by continued record low store manager turnover, record staffing levels, healthy applicant flows and a robust internal promotion pipeline.", "We believe the opportunity to start and develop a career with a growing and purpose-driven company is a unique competitive advantage and remains our greatest currency in attracting and retaining talent. Overall, we are making great progress against our operating priorities and strategic initiatives. We have a robust set of initiatives in place for 2021 and are confident in our plans to drive long-term sustainable growth while creating meaningful value for our shareholders.", "In closing, I am proud of our team's performance and our 2020 results, which further demonstrate our unique combination of value and convenience, continues to resonate with customers and positions us well going forward.", "I want to offer my heartfelt thank you to each of our more than 157,000 employees across the company for the incredible work they do every day to fulfill our mission of serving others. I look forward to all that we can accomplish together in the year ahead.", "With that, operator, we would now like to open the lines for questions." ] } ]
[ { "name": "Operator", "speech": [ "Thank you. [Operator Instructions] Our first question today is coming from Michael Lasser of UBS. Please go ahead." ] }, { "name": "Michael Lasser", "speech": [ "Good morning. Thanks a lot for taking my question. So it looks like you're guiding to about 60 basis points of operating margin expansion between 2019 and 2021. Why wouldn't it be more than that, given you're comping better than your algorithm would suggest on a two-year stack basis, plus you're benefiting from all these margin-enhancing initiatives like DG Fresh, Fast Track and NCI and others? And how -- within that, how would you expect your gross margin to shake out this year versus 2019?" ] }, { "name": "John Garratt", "speech": [ "Yes, so I'll tackle both those questions, Michael. This is John. First of all, I'd say we're really pleased with what we did in 2020, expanding our operating margin 223 basis points. We didn't give specific guidance on operating margin or the components. But we did call out that some of the headwinds, the biggest headwind being the SG&A deleverage that goes along with lower comp sales this year. We also talked about anticipating a mix shift back toward consumables, which does have a margin impact to both the sales mix as well as markdowns as we would be lapping unusually low clearance markdowns last year. And then we also mentioned higher carrier rates and fuel costs, so these are all costs that pressure operating margin overall.", "Now you also asked about gross margin. As you think about gross margin, again, we feel great about what we did this year, delivering 77 basis points of gross margin expansion. This is our seventh consecutive quarter doing that, 117 basis points for the year. And to your point, initiatives like DG Fresh and NCI are really contributing and impactful to the biggest drivers that we called out. The three biggest drivers we called out were lower markdowns, higher initial markups and the mix benefit, and NCI and DG Fresh were significant contributors to those. But we also, as I mentioned, are seeing, in the near term, higher distribution and transportation costs.", "So as we look ahead in the near term, these will weigh in the near term. But as you look at the longer term, we do feel like we're well positioned to continue expanding -- resume expanding gross margin and operating margin over the longer term for the reasons you mentioned, the scaling of these initiatives that are the gifts that keep on giving and all the levers we've talked about before within gross margin and within SG&A. But at the same time, it's noted that we continue to invest in the business. And so to make sure we sustain our ambition of being 10% double-digit EPS growers over the long term, we are continuing, as we called out, to reinvest in the business. We mentioned $60 million to $70 million that's hitting SG&A next year.", "And then the other thing I'll mention is in terms of COVID expenses, we will continue to have some COVID expenses associated with protecting and ensuring the health and safety of our employees and customers. How much that is going to be varies on what the situation dictates. But we've captured all our best estimates in the guidance for these drivers." ] }, { "name": "Michael Lasser", "speech": [ "Understood. Thank you. That's very helpful. And my second question is very myopic. And we're all just trying to figure out what's going to happen as we get through the next several months. And if we just take the math of down 16% versus the 34.5% in March of last year, it would imply a high teens two-year stack. So can you give us some flavor for how March unfolded last year? Have you -- are you just now entering the toughest compares within the month such that a high teens two-year stack would be kind of a false positive indication on what to expect over the next few months?" ] }, { "name": "John Garratt", "speech": [ "Yes. I can help you there, Michael. I'll start by saying it's bumpy, right? There's a lot of noise. You had the storm in February. And then in March, you're extrapolating over a very short period of time, which was pretty bumpy last year. But to help you out here, we called out, yes, as you mentioned, the negative 16% month-to-date from the end of February through March 16 this year.", "If you look at the corresponding period of time last year, it was not dissimilar to the 34.5% comp where we ended the period, so fairly representative. But again, there's a fair bit of noise within this so I'd be cautious in extrapolating too much based on that. But hopefully, that helps you understand where we were at this point." ] }, { "name": "Michael Lasser", "speech": [ "That certainly does. Thank you so much, and good luck." ] }, { "name": "Operator", "speech": [ "Thank you. Our next question is coming from Simeon Gutman of Morgan Stanley. Please go ahead." ] }, { "name": "Simeon Gutman", "speech": [ "Hey, thanks. Good morning, everyone. A couple of questions. I guess, first, on the comps. The 10% to 12% that you mentioned in the release on a two-year stack, it actually felt like that's a doable number going forward if you take all the initiatives. And so -- yet you're still going to have stimulus, at least in the first part of the year, probably now and for a little while longer. And so I guess the top line feels a little conservative in that regard. Just can you talk about that? Any thoughts around it? Why -- if the 10% to 12%, in our view, is doable, why couldn't the top line end up being a little bit stronger?" ] }, { "name": "John Garratt", "speech": [ "Sure. Let me unpack that for you. And again, just dialing the clock back a little bit, we've said historically that this model works really well at a 2% to 4% comp. That's the engine of the 10%-plus EPS growth algorithm. So with a two-year comp stack of 10% to 12% over two years, that represents a pretty meaningful step-change improvement over that. And I tell you, we feel great about the fundamentals of the business. As you said, the relevance of the brand, the broadening appeal, the new customers we've brought in, the bigger baskets we're enjoying, I'd say the business model has never been stronger. And as noted, the initiatives are really clicking and contributing to this relevance.", "So we feel good about the guidance that we've provided. But we did note that -- and it's based on what we know, but what we did note was that we didn't include the impact of stimulus because it's really relatively unknown what impact it will have, to what degree it might help. So that's not taken into consideration in the guidance. It could be an upside. I hope it is. But there's just a lot of uncertainty when you think about: one, compared to the previous stimulus rounds, which helped us, the economy is opening up now more. And so we are competing with other segments of the economy outside of retail for that share of wallet. So how much we get is uncertain. And then the other piece is surveys of consumers have said that they plan to save more this time. They plan to spend more paying off bills.", "Now a lot of times what people say and do is two different things and so it remains to be seen if that's the case. So we're cautiously optimistic. We didn't build it in. It could be an upside but it's just very difficult to say if it will be upside and to what degree." ] }, { "name": "Simeon Gutman", "speech": [ "Okay, that's helpful. And then my follow-up, and maybe take another shot at something Michael just asked. If you look at the gross margins versus 2019, and John, you mentioned some transportation costs, is there any reason why they shouldn't be higher than 2019?" ] }, { "name": "John Garratt", "speech": [ "Yes. Again, I don't want to get into the specifics of guidance around operating margin for this year. We wanted to get -- there's a high degree of uncertainty. We wanted to give some guidance that, so we gave the top line and the bottom line. I'll just say that we're really pleased with the performance we've been delivering over the last few years, growing our gross margin and the operating margin again over 2 points this year. But again, there's a lot of unknown this year, a lot of potential pressures. With that comp that we mentioned when you look at this year, that does create some deleverage. And again, we are investing in the business.", "Now again, that investment piece is accretive but then you do have other pressures such as carrier rates, and then obviously, you do have other inflationary pressures." ] }, { "name": "Simeon Gutman", "speech": [ "Fair enough. Thank you very much. Good luck." ] }, { "name": "Operator", "speech": [ "Thank you. Our next question is coming from Matthew Boss of JPMorgan. Please go ahead." ] }, { "name": "Matthew Boss", "speech": [ "Great. Thanks. So Todd or John, maybe on the same-store sales acceleration to the mid -- that we've seen so far, what have you seen from discretionary versus consumables? And then on the double-digit two-year stack that you forecasted for this year, how much of the acceleration relative to the past two years do you believe is driven by new customer acquisition or market share gains? Trying to get a sense for that two-year stack of double digits relative to mid-to-high single digits, the trailing two years; how much of this acceleration do you believe is sustainable?" ] }, { "name": "Todd Vasos", "speech": [ "Yes. This is Todd. Yes, I would tell you -- let me take the second part first. I would tell you that that comp, we believe that we are retaining a nice portion of the new customers that we saw come in. We can see that with our data at a pretty good real-time rate. And the great thing is, we've seen them continue to come back so repeat as well. So we feel good about that going into '21. We see them still here in '21, which is really good to see. And again, with all of our initiatives that we've got put together, I would tell you that it gives her a lot of confidence to continue to shop with us.", "So I know I'm not going to give you exactly what you're looking for, but I would tell you that it plays a portion of it. But I would also say that all of our initiatives also really come into play here.", "And then what we've seen so far, just to give you a little bit more color, non-consumables or that discretionary side of the business continues to do very well for us into the early part of Q1 here. And as we move through March, it will become even more meaningful because, as you recall, the stock-up trip from last year with the pandemic, with paper and cleaning and many of the consumable, food, perishable areas really took off last year and non-consumables were a little soft, quite frankly. And we're seeing the opposite, quite frankly, right now. So that's great to see.", "But what we can also see is that our initiatives around non-consumables has really helped because our baskets seem to be a little higher with those non-consumables in them as well. So they're spending at a good rate there, and we believe that she'll continue to do that as we move into the middle part of the year." ] }, { "name": "Matthew Boss", "speech": [ "Great. And then maybe just to follow up, John on the SG&A front. Could you just help quantify what you've embedded in the guidance from a COVID expense perspective just so we can baseline it? And then ex the strategic investments, is there any change to 2.5% to 3%? I think that's roughly been the underlying comp leverage point in the model. Any change to that?" ] }, { "name": "John Garratt", "speech": [ "Yes. I'll tackle both of those. First, in terms of the COVID spend, obviously, we're going to do what's necessary to ensure the health and safety of our employees and customers. The guidance captures the best guess of the spending needs associated with that. That's, of course, going to vary based on the severity and duration of the pandemic. But safe to say, we've built in a considerable reduction of that, assuming an improvement of the situation there. And that's what's captured in the guidance. We didn't give a specific number on that, but it is a considerable step down.", "As you think about SG&A and the 2.5% to 3% leverage point, we've kind of dissuaded people from sticking to that because there is that geography that you noted. One, we are investing in SG&A to drive overall operating margin expansion, particularly gross margin. And so as you look at things like DG Fresh, as we're taking over self-distribution NCI, you spend a little bit on SG&A to save a lot more and drive a lot more benefit on gross margin, so it's very beneficial overall. But it does throw off the math on that. And then there are some other initiatives like pOpshelf and others that are more -- have more of a start-up cost nature. So it pressures that. And then the other thing we've done is we've really stepped up the remodels, and so that puts a little bit of pressure on the front end of that.", "So if you strip all those out, that's a lot to strip out, that as well as the COVID expenses, yes, we're still looking at that 2.5% to 3% leverage point. Nothing has structurally changed. And our -- certainly, our focus on cost containment is sharper than ever. But that's really the only change to that. But for the next few years, as we scale those and we operationalize DG Fresh, you have to put a little bit of labor in the stores, for instance, and a little bit of contract labor to remodel the stores. That's really the big driver of that. But overall, it's accretive from a dollar perspective and a rate perspective." ] }, { "name": "Matthew Boss", "speech": [ "That's great color. Best of luck." ] }, { "name": "John Garratt", "speech": [ "Thank you." ] }, { "name": "Operator", "speech": [ "Thank you. Our next question is coming from Scot Ciccarelli of RBC Capital Markets. Please go ahead." ] }, { "name": "Scot Ciccarelli", "speech": [ "Good morning, guys. So I apologize upfront about another sales-related question. But we do know that the stack comps start to get distorted when we deal with bigger numbers and bigger swings. So if we were to basically dollarize your comps, for lack of a better term, it looks like there really wasn't much of a change in your sales run rate, like from a sales per store perspective between March -- February and March. So two questions: first, is that a fair assumption? And then related to that, assuming you maintain a pretty steady -- are you assuming that you're going to maintain a pretty steady sales per store cadence for the balance of the year? Or are you expecting a deceleration in kind of sales per store during the course of the year as we hopefully enter a more normalized environment?" ] }, { "name": "John Garratt", "speech": [ "Yes. That's a good question. I'll start with the second question. As you look at the guidance we provided this year, we do -- a key element of that is assuming that we retain a considerable portion of the new customers that came in and the bigger baskets that came in, a big piece of that is the initiatives we've put in place like NCI that position us so well to get a piece of that, share of wallet as people came into the brand and like what they saw as well as the coolers that provided a fuller fill in trip when people are looking for groceries.", "So we've assumed a pretty considerable retention of that. But as we've looked at it throughout the year, we've also said that the share of wallet probably will shift a little bit. Right now, there is, concurrent with the pandemic, there is a consolidation of trips and we're benefiting from that, as well as, again, benefiting from that share of wallet.", "So as you go through the year, we assume you do lose a little bit of that tailwind as you're competing with other segments of the economy for that share of wallet. But still very positive on how much we can retain and, again, the fundamentals of the business and the relevance of the brand as people have come in.", "And again, as we said, I don't want to dissect February and March too much because again, it was pretty bumpy with the storms in February and a lot of puts and takes in March. And again, you're extrapolating over a pretty short period of time. So when you strip out all the noise, I would tell you that, again, with the guidance we provided, that contemplates what we've seen up to this point. And I think the wildcard is, again, stimulus and we just didn't put anything in for that because we just don't know what that benefit will be and to what degree." ] }, { "name": "Scot Ciccarelli", "speech": [ "But John, just to be clear, like in terms of sales per store, maybe a different way to look at it, did you see much of a change between February and March?" ] }, { "name": "John Garratt", "speech": [ "No. I would say, as you strip out some of the noise I mentioned, we think the core business is performing similar and performing very well when you look at those stacks." ] }, { "name": "Scot Ciccarelli", "speech": [ "I appreciate that. Thank you." ] }, { "name": "Operator", "speech": [ "Thank you. Our next question is coming from Karen Short of Barclays. Please go ahead." ] }, { "name": "Karen Short", "speech": [ "Hi. Thanks very much. I just wanted to get a little bit of color in terms of how we should think about kind of the composition of traffic versus ticket as we go into calendar '21? I mean, obviously, you saw a pretty meaningful, I think, deceleration in traffic in February, but that's off of a pretty high number in February of the prior year. So wondering if you could talk a little bit about that just broadly.", "And then I wanted to talk a little bit more about '22 as it relates to gross margins. So the question I have on that is, how should we think about the base level of gross margin for '22? Because it seems like you are at a much more permanently elevated base on the gross margin front. And I know '21 is just so hard to talk through because there are so many moving parts, but I wanted to kind of pivot the conversation to '22 on the gross margin front." ] }, { "name": "Todd Vasos", "speech": [ "Thanks for the question, Karen. I'll take the first part and then kick it over to John for the '22 gross margin discussion. So on the traffic side, again, February was pretty choppy. You had the storms that, quite frankly, we -- you saw in the release, 8,500 store hours of lost time. But the bigger thing is we -- for a day to almost two days, we had anywhere from 20% to 30% of our store base close for that time. So it's a little choppy to be able to talk about traffic in February and then what's happened in March. But I think the way to look at it is we feel really good about that traffic number overall, where we see it. It was very similar to where it had been coming out of Q4. As John said, as you start to pull away some of these puts and takes, I think it's important. We saw a little bit of an uptick in traffic when that stimulus came out, the second round of stimulus. And with only a couple of days to measure, we've seen an uptick in traffic and overall sales with this recent stimulus. But again, I caution it's still very early to tell what's going to happen here.", "But I think the bigger picture is we're retaining a lot of those customers, as I mentioned earlier, that we got during the pandemic. And we're still working very hard to keep Dollar General top of mind to those customers, so that when she continues to consider where to shop for her everyday needs and many of these new non-consumable type items that we've got in our stores, she still comes to us. So we believe we're seeing that repeat customer. And there's no reason why -- we deserve and have the right to keep that customer based on our service of her in the past as well as what we believe we can do in the future for her. John, do you want to?" ] }, { "name": "John Garratt", "speech": [ "Yes. And then to the second part of the question, and I agree with you, there's just a lot of noise in 2021. I think one thing I would point to, as you look at over that two-year period, lots of puts and takes. But when you get to the bottom line, a two-year CAGR of 15% to 20%, I think, really speaks to the step-change performance in the top line and the flow-through. It makes you feel good about the future. Now I don't want to give specific guidance around 2022. It's premature for that. But as you unpack the drivers of gross margin in Q4 and for the full year, as I mentioned, it's the strategic initiatives which are the core drivers of that. And those still have a lot of tentacles and legs to those that help us going forward. And we're reloading with other initiatives to help drive gross margin.", "Now the one thing that we mentioned just, 2020 a little bit was the mix. So that's why we cautioned that we expect the mix to normalize or move back toward consumables somewhat, which is a bit of a drag. But the thing -- the other items driving that gross margin expansion, we expect to continue. And so that's why I mentioned that as we get through the noise of this year and would encourage people to look at that two-year stack and push forward, the same drivers are there, that makes you feel good about our ability to continue to grow gross margin over the long term, not only the scaling of the existing initiatives in new ones but really pleased what we've seen with the shrink improvement, the supply chain efficiencies, a lot of opportunities still around private brands, penetration expansion for in-sourcing expansion. The team continues to do a great job with category management.", "Again, when you look at our scale and our growing scale is a limited SKU shop, it really puts us in a very favorable position to get best pricing there and protect our margins while also being well priced. And on the price front, we'll always reserve the right to invest as needed. But as we look at now and as we've seen for quite a while now, we feel like we're in the best position on pricing we've been in and don't see, at least the foreseeable future, the need to invest there. So we feel good about the long-term ability to continue to grow gross margin while also driving traffic and sales." ] }, { "name": "Todd Vasos", "speech": [ "Yes. Karen, I would also just say real quick and then get to the next question, is that I feel as good about this business than I have the 12, almost 13 years that I've been here. And the long-term outlook of this business is stronger than ever. And as John indicated, I think once we get through the noise of '21, I believe that algorithm is very much intact. And as you have seen, even prior to COVID, we were running at the top end of that algorithm and many of the components of it. And there's no reason why that shouldn't continue as we can -- as we go long term." ] }, { "name": "Karen Short", "speech": [ "No, I complete -- I just want to clarify on the 8,400 lost days, I get that to be -- it's about 180 basis points to the comp. Is that fair?" ] }, { "name": "John Garratt", "speech": [ "Well, I think the way to -- yes, I think the way to look at this is, I think we did quantify the impact of the storm on operating profit and a meaningful piece of that was the sales impact. So if you look at the overall dollars we quantified, about half of that was sales flow-through. So maybe that's the way to dimensionalize that." ] }, { "name": "Karen Short", "speech": [ "Okay. Great. Thank you." ] }, { "name": "Operator", "speech": [ "Thank you. Our next question is coming from Rupesh Parikh of Oppenheimer. Please go ahead." ] }, { "name": "Rupesh Parikh", "speech": [ "Good morning. Thanks for taking my question. So I guess, John, first starting with guidance. I was curious what your team is assuming for the promotional backdrop. And as your trends have turned negative and a number of other players are also starting to turn negative, I was just curious if you guys have seen any shifts in the promotional backdrop lately?" ] }, { "name": "John Garratt", "speech": [ "Yes. As you look at the promotional backdrop, we think it remains rational. It's been that way for the last about 1.5 years so things have been pretty consistent. And so as we look forward, we're not assuming any major changes there because we feel like we're very well positioned on price. And Todd, if you want to add anything?" ] }, { "name": "Todd Vasos", "speech": [ "Yes, Rupesh, I would tell you, from a position of strength last year, we've positioned ourselves to be in the best position in pricing that we've been in many, many years. And so if you take a look at our everyday pricing, we are better than we've been across all channels of trade. And as John indicated, the promotional environment has been pretty stable and tame, and quite frankly, has been that way for 1.5 years. So we feel pretty good about where we are. But always reserve the right, if we need to help our consumer out, we'll do that. But right now, we don't see that in the near future." ] }, { "name": "Rupesh Parikh", "speech": [ "Okay, great. And then maybe just one follow-up question. So Todd, just curious on your latest thoughts on what you're seeing from your consumer base on your service. Because it does appear to us, I mean, it is a fairly strong consumer out there, a stimulus is coming. So I just want to get your thoughts there." ] }, { "name": "Todd Vasos", "speech": [ "Yes. I would tell you the consumer -- our core consumers always stretch, as you know, but I have to repeat that each time because she really is. And I would tell you that in the last six to eight months, she's felt the stress of this pandemic probably a little bit more than she was feeling in the early part of the pandemic. And in some cases, because again, lack of work or not working that full 40-hour shift to that full-time that she was doing in many cases. And our core consumer is probably a little bit more stretched at this point. In saying that, what we have also seen, though, is her ability to spend when she needs to and stimulus has really helped that. So we're in round three, and as I indicated, it's very early on in that third round.", "We're bullish on her ability to have some extra money to spend. And we're also bullish when we think about the back half of the year, the child tax credit piece that will be coming out for children from July through December should also benefit our core consumer. And then obviously, the extension of the SNAP benefit piece also helps.", "So there is a lot of tailwind. We just, in our guidance, didn't contemplate any of that because, again, it's so -- first of all, it's so new. We just don't know how to dimensionalize it. But I think the important thing, Rupesh, to keep in mind is that we're well positioned to capture a large portion of that if she's outspending it. And I believe she will spend, that is who our core consumer is. But as John said, there are other -- we're not as concerned about retail. We believe we will get our -- more than our fair share at retail. It's just some of these other areas that are now open, whether it be dining out, whether it be travel, to some degree, that will be competed against. But we still feel good about being able to service her with that extra money." ] }, { "name": "Rupesh Parikh", "speech": [ "Okay, great. Thank you for all the color and best of luck for the year." ] }, { "name": "Todd Vasos", "speech": [ "Thank you." ] }, { "name": "Operator", "speech": [ "Thank you. Our next question is coming from Chandni Luthra of Goldman Sachs. Please go ahead." ] }, { "name": "Chandni Luthra", "speech": [ "Yes, hi. Thank you for taking my question. I wanted to talk about these new banners that you spoke of today. And especially with pOpshelf, you mentioned doing a store-within-a-store concept with signage for both pOpshelf and the Dollar General banner outside. As you think about your core customer, what gives you confidence that the customers will not feel an alienation to the core banner with this double signage outside in a store-within-a-store concept? How do you think about that?" ] }, { "name": "Todd Vasos", "speech": [ "Yes, that's a great question. And I would tell you, first of all, our core consumer is a little bit of a different consumer than the pOpshelf consumer. But in the areas that we're looking to put these store-within-the-store concepts, it is a little higher demographic than our core. So just to give you some color, in these areas, the demographics are more in the $50,000 to $75,000 income range versus our true Dollar General of $35,000 to $40,000 range, somewhere in there. So it's not quite the pOpshelf, where it's $75,000-plus. But I believe that the crossover, there's enough there to entice the consumer to come in.", "The second piece of it is that we believe that -- and we've already proven it with some cross-pollination of items within Dollar General that were in pOpshelf and how well they sold within the box of just a true Dollar General without even having any signage up with pOpshelf. So we know those same items will resonate with even our core consumers.", "So we believe we can capture both sides of that equation, higher end as well as continue to service the lower end consumer with this new box. It is a test, right? So just keep that in mind. It will be 25 stores this year. But if it works, and we believe it will, there could be some additional ones that we do in '22 and many more as we continue to move forward." ] }, { "name": "Chandni Luthra", "speech": [ "Got it. And my follow-up is around new customer retention strategy that you mentioned during your third quarter call around some strategy around basically retaining those new customers. Could you give an update on that as to what you're doing to retain new customers that you gained during this time?" ] }, { "name": "Todd Vasos", "speech": [ "Yes. Thank you. Well, we started that retention effort back in September. We thought it was the right time to start launching it because we knew because of the way we were doing it, this wasn't a pricing item retention strategy. This was a retention strategy to keep Dollar General top of mind with these newer customers. And when the pandemic started to wane, we would keep -- Dollar General would still be in the consideration set. So to be able to do that, it takes months to be able to instill that piece into the customer's mindset. And so we've been working it hard now for the better part of five months, coming on six months. And we believe that we've seen the benefit of that already.", "When we saw the benefits of stimulus start to wane in November and even early December before the second wave came out, we were still seeing that repeat customer come into the store. So that gave us confidence that what we were doing was working. And now even into Q1, as I mentioned earlier, we're still seeing that core customer -- or I'm sorry, that new customer show up within our stores. Even though the pandemic is starting to wane even a little bit more, we're still seeing that customer.", "We will not leave the foot off the accelerator here. We believe that we'll continue to do everything we can to drive that consumer in. And as John indicated, a large part of that comp this year is predicated on retaining a good portion of those consumers, which, again, we believe we have the right to service that consumer based on what we've seen so far." ] }, { "name": "Chandni Luthra", "speech": [ "Thank you so much. Good luck." ] }, { "name": "Operator", "speech": [ "Thank you. We're showing time for one final question today. Our last question will be coming from Paul Trussell of Deutsche Bank. Please go ahead." ] }, { "name": "Paul Trussell", "speech": [ "Good morning." ] }, { "name": "Todd Vasos", "speech": [ "Good morning." ] }, { "name": "Paul Trussell", "speech": [ "You've shared a lot today, so thank you for the color. I guess maybe I'd be looking for just additional details on where you are on some of your initiatives and what we should be thinking about over the course of the next 12 months. Specifically, DG Fresh, would love for you to elaborate there in addition to DG Go! and other ways that you are just overall kind of attacking to keep market share." ] }, { "name": "Jeff Owen", "speech": [ "Hey, Paul, this is Jeff. Thank you for that question, and we are very proud of our accomplishments with DG Fresh. The team has done a fantastic job of accelerating that rollout and the capabilities that it's providing for us. So to be in 16,000 stores-plus is really an accomplishment. And originally, as we talked about, DG Fresh was all about reducing product costs, improving in-stocks and a broader assortment, and we've hit on all three. So that is performing very well. The other thing that we're excited about is the future and what it can potentially provide for us as we continue to grow.", "When you think back for a second on the formats that we also introduced, the reason we're able to build larger stores with more coolers is really dependent on our strategic planning process that started several years ago, and DG Fresh is a certain core to all of that. And so when you think about the future and our new format prototype that we're going to be moving to in the mid part of '21, DG Fresh is going to play a key role in being able to continue to broaden that assortment for the customer. And then as you look to the future, we also believe that DG Fresh plays a key role in unlocking our ability to do produce in over 10,000 stores as we look ahead. So DG Fresh, again, complicated initiative that the team did a phenomenal job of implementing but is going to set us up for the future in a big way.", "On the digital side, I would say remember, on DG Pickup, 17,000 stores-plus going from pilot to full rollout in less than a year is, again, a tremendous accomplishment of the team. But I will say we continue to make great progress there and expanding the assortment. We've optimized our substitution technology. And one thing you got to keep in mind is we're providing optionality for this customer. But our store itself is an incredibly convenient proposition. And when you combine being five miles within 75% of the population and self-checkout that we've got in 1,600 stores right now, the convenience bar continues to rise. But we're very pleased with what we're seeing so far there.", "And then finally, I would tell you, in terms of engagement with the customer, that's the other thing on the digital side she's asking for. And with 4 million active users and growing, we feel real good about what we're doing there as well. So two key initiatives that we look to continue to contribute to our future success." ] }, { "name": "Paul Trussell", "speech": [ "Thanks so much for the color. Just lastly, John, I appreciate the capex and kind of share buyback guidance. Maybe just talk about your approach to cash kind of priorities overall and how to think about that even beyond 2021?" ] }, { "name": "John Garratt", "speech": [ "Yes. I'll start by saying our capital allocation priorities haven't changed. And the first priority remains investing in high-return growth opportunities like new store growth, remodels and the strategic initiatives that just provide fantastic returns. Then it's still continuing to pay a competitive dividend, which we recently increased 16.7%. And then it's buying back shares with the excess cash and debt capacity. But as we've always noted, we want to protect our current investment-grade credit rating so we keep the leverage ratio around 3 times. So we bought back this year. I mean, we're able to do all and buy back $2.5 billion of shares with the extra cash. Next year, we're targeting $1.8 billion. And then I think also meaningfully, what you saw last year is we accelerated virtually every strategic initiative with the extra cash, which is again our first priority, investing in the business. So that served us very well and remains unchanged." ] }, { "name": "Jeff Owen", "speech": [ "Thank you. Best of luck." ] }, { "name": "John Garratt", "speech": [ "Thank you." ] }, { "name": "Operator", "speech": [ "[Operator Closing Remarks]" ] } ]
DG
2021-05-27
[ { "description": "Vice President, Investor Relations & Corporate Strategy", "name": "Donny Lau", "position": "Executive" }, { "description": "Chief Executive Officer", "name": "Todd Vasos", "position": "Executive" }, { "description": "Executive Vice President & Chief Financial Officer", "name": "John Garratt", "position": "Executive" }, { "description": "Chief Operating Officer", "name": "Jeff Owen", "position": "Executive" }, { "description": "Morgan Stanley -- Analyst", "name": "Simeon Gutman", "position": "Analyst" }, { "description": "JPMorgan -- Analyst", "name": "Matthew Boss", "position": "Analyst" }, { "description": "Barclays -- Analyst", "name": "Karen Short", "position": "Analyst" }, { "description": "Wells Fargo Securities -- Analyst", "name": "Edward Kelly", "position": "Analyst" }, { "description": "UBS -- Analyst", "name": "Michael Lasser", "position": "Analyst" }, { "description": "Oppenheimer -- Analyst", "name": "Rupesh Parikh", "position": "Analyst" }, { "description": "R5 Capital -- Analyst", "name": "Scott Mushkin", "position": "Analyst" } ]
[ { "name": "Operator", "speech": [ "Good morning. My name is Melissa, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Dollar General First Quarter 2021 Earnings Call. Today is Thursday, May 27, 2021. [Operator Instructions] I'd now like to turn the conference over to Mr. Donny Lau, Vice President of Investor Relations and Corporate Strategy. Mr. Lau, please begin." ] }, { "name": "Donny Lau", "speech": [ "Thank you, and good morning, everyone. On the call with me today are Todd Vasos, our CEO; Jeff Owen, our COO; and John Garratt, our CFO. Our earnings release issued today can be found on our website at investor.dollargeneral.com under News & Events.", "Let me caution you that today's comments include forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995, such as statements about our strategy, plans, initiatives, goals, priorities, opportunities, investments, guidance, expectations or beliefs about future matters and other statements that are not limited to historical fact. These statements are subject to risk and uncertainties that could cause actual results to differ materially from our expectations and projections, including, but are not limited to, those identified in our earnings release issued this morning, under Risk Factors in our 2020 Form 10-K filed on March 19, 2021, and in the comments that are made on this call. You should not unduly rely on forward-looking statements, which speak only as of today's date. Dollar General disclaims any obligation to update or revise any information discussed in this call unless required by law.", "We also may reference certain financial measures that have not been derived in accordance with GAAP. Reconciliations to the most comparable GAAP measures are included in this morning's earnings release, which as I mentioned is posted on investor.dollargeneral.com under News & Events. [Operator Instructions] Now it is my pleasure to turn the call over to Todd." ] }, { "name": "Todd Vasos", "speech": [ "Thank you, Donny, and welcome to everyone joining our call. We are pleased with our strong start to fiscal 2021, and I want to thank our associates for their unwavering commitment to supporting our customers, communities and each other. As a testament to their efforts, our first quarter results exceeded our expectations, reflecting strong underlying performance across the business, which we believe was enhanced by the most recent round of government stimulus payments.", "The quarter was highlighted by net sales growth of 16% in our combined nonconsumable categories, a 208 basis point increase in gross margin rate and double-digit growth in diluted EPS. Despite what continues to be a challenging operating environment, we are increasing our sales and diluted EPS guidance for fiscal 2021 to reflect our strong first quarter performance. John will provide additional details on our outlook during his remarks.", "As always, the health and safety of our employees and customers continue to be a top priority while meeting the critical needs of the communities we serve. And we believe we are uniquely positioned to continue supporting our customers through our unique combination of value and convenience, including our network of more than 17,000 stores located within 5 miles of approximately 75% of the US population. Overall, we are executing well against our operating priorities and strategic initiatives as we continue to meet the evolving needs of our customers and further position Dollar General for long-term sustainable growth.", "Now let's recap some of the top line results for the first quarter. As we lapped our most difficult quarterly comp sales comparison of the year, net sales decreased 0.6% to $8.4 billion, driven by a comp sales decline of 4.6%. Notably, comp sales on a 2-year stack basis increased a robust 17.1%, which compares to the 15.9% 2-year stack we delivered last quarter. Our first quarter sales results include a decline in customer traffic, which was partially offset by growth in average basket size. And while customers continue to consolidate trips, on average they continue to spend more with us compared to last year.", "From a monthly cadence perspective, comp sales increased 5.7% in February despite a headwind from inclement weather across the country. For the month of March, which represents our most difficult monthly sales comparison of the year, comp sales declined 11.2%. Importantly, beginning in mid-March and in line with the timing of stimulus payments, we saw a meaningful acceleration in sales relative to the first two weeks of the month, especially in our nonconsumable categories. Comp sales declined 4.3% in April, and while year-over-year growth in nonconsumable sales moderated in comparison to March, they were positive overall despite a more challenging lap.", "Overall, each of our three nonconsumable categories delivered a comp sales increase for the quarter. Of note, comp sales growth of 11.3% in our combined nonconsumable categories and 29.8% on a comparable 2-year stack basis significantly exceeded our expectation and speaks to the continued strength and sustained momentum in these product categories, enhanced by the benefit from stimulus. Once again this quarter, we increased our market share in highly consumable product sales as measured by syndicated data.", "Importantly, we continue to be encouraged by the retention rates of new customers acquired over the past several quarters and are working hard to drive even higher levels of engagement with more personalized marketing and continued execution of our key initiatives. In addition, we recently published our third annual Serving Others report, which provides context related to our ongoing ESG efforts as well as new and updated performance metrics, and we look forward to continued progress on our journey as we move ahead.", "Collectively, our first quarter results reflect strong and disciplined execution across many fronts and further validate our belief that we are pursuing the right strategies to enable sustainable growth while creating meaningful long-term shareholder value. We operate in one of the most attractive sectors in retail and believe we are well positioned to continue advancing our goal of further differentiating and distancing Dollar General from the rest of the discount retail landscape.", "As a mature retailer in growth mode, we are also laying the groundwork for future initiatives, which we believe will unlock even more growth opportunities as we move forward. In short, I feel very good about the underlying business and we are excited about the opportunities that lie ahead.", "With that, I'll now turn the call over to John." ] }, { "name": "John Garratt", "speech": [ "Thank you, Todd, and good morning, everyone. Now that Todd has taken you through a few highlights of the quarter, let me take you through some of its important financial details. Unless we specifically note otherwise, all comparisons are year-over-year, all references to EPS refer to diluted earnings per share and all years noted refer to the corresponding fiscal year.", "As Todd already discussed sales, I will start with gross profit, which we believe was positively impacted in the quarter by a significant benefit to sales, particularly in our nonconsumables categories from the most recent round of government stimulus payments. Gross profit as a percentage of sales was 32.8% in the first quarter. As Todd noted, this was an increase of 208 basis points and represents our eighth consecutive quarter of year-over-year gross margin rate expansion. This increase was primarily attributable to: higher initial markups on inventory purchases, a reduction in markdowns as a percentage of sales, a greater proportion of sales coming from our nonconsumables categories and a reduction in shrink as a percentage of sales. These factors were partially offset by increased transportation costs, which were primarily driven by higher rates.", "SG&A as a percentage of sales was 22%, an increase of 152 basis points. This increase was driven by expenses that were greater as a percentage of net sales, the most significant of which were store occupancy costs, disaster expenses related to winter storm Uri, retail labor and depreciation and amortization.", "Moving down the income statement. Operating profit for the first quarter increased 4.9% to $908.9 million. As a percentage of sales, operating profit was 10.8%, an increase of 56 basis points. Our effective tax rate for the quarter was 22% and compares to 22.2% in the first quarter last year. Finally, EPS for the first quarter increased 10.2% to $2.82, which reflects a compound annual growth rate of 38% over a 2-year period.", "Turning now to our balance sheet and cash flow, which remain strong and provide us the financial flexibility to continue investing for the long term while delivering significant returns to shareholders. Merchandise inventories were $5.1 billion at the end of the first quarter, an increase of 24.2% overall and a 17.6% increase on a per store basis as we cycled a 5.5% decline in inventory on a per store basis, driven by extremely strong sales volumes in Q1 2020.", "In anticipation of a more challenging supply environment, we strategically pulled forward certain inventory purchases during the quarter, particularly in select nonconsumable categories to better support the sales momentum we were seeing in the business. And while out of stocks remain higher than we would like for certain high-demand products, we continue to make good progress with improving our in-stock position and are pleased with the overall quality of our inventory.", "The business generated significant cash flow from operations during the quarter totaling $703 million, a decrease of 60% but which reflects a compound annual growth rate of 11% over a 2-year period. This decrease was primarily driven by higher levels of improving inventory positions, including the pull forward of certain inventory purchases I mentioned earlier.", "Total capital expenditures for the quarter were $278 million and included: our planned investments in new stores, remodels and relocations; distribution and transportation projects and spending related to our strategic initiatives. During the quarter, we repurchased 5 million shares of our common stock for $1 billion and paid a quarterly cash dividend of $0.42 per common share outstanding at a total cost of $100 million. At the end of Q1, the remaining share repurchase authorization was $1.7 billion.", "Our capital allocation priorities continue to serve us well and remain unchanged. Our first priority is investing in high-return growth opportunities, including new store expansion and our strategic initiatives. We also remain committed to returning significant cash to shareholders through anticipated share repurchases and quarterly dividend payments, all while maintaining our current investment-grade credit rating and managing to a leverage ratio of approximately 3 times adjusted-debt-to-EBITDA.", "Moving to an update on our financial outlook for fiscal 2021. We continue to operate at a time of uncertainty regarding the severity and duration of the COVID-19 pandemic, including its impact on the economy, consumer behavior and our business. Despite continued uncertainty, as Todd mentioned, we are increasing our full year guidance for sales and EPS due to our strong Q1 outperformance, which we believe was aided by the latest round of stimulus.", "For 2021, we now expect the following: net sales in the range of a 1% decline to an increase of 1%; a same-store sales decline of 5% to 3% but which reflects growth of approximately 11% to 13% on a 2-year stack basis and EPS in the range of $9.50 to $10.20, which reflects a compound annual growth rate in the range of approximately 20% to 24% or in the range of approximately 19% to 23% compared to the 2019 adjusted diluted EPS over a 2-year period, which is well above our long-term goal of delivering at least 10% annual EPS growth on an adjusted basis. Our EPS guidance continues to assume an effective tax rate in the range of 22% to 23%.", "With regards to share repurchases, we now expect to repurchase approximately $2.2 billion of our common stock this year compared to our previous expectation of about $1.8 billion. Finally, our 2021 outlook for capital spending and real estate projects remains unchanged from what we stated in our Q4 2020 earnings release on March 18, 2021.", "Let me now provide some additional context as it relates to our full year outlook. First, there could be additional headwinds and tailwinds this year, the timing, degree and potential impacts on our business of which are currently unclear, including but not limited to the potential impacts from legislation and regulatory agency actions.", "Given the unusual situation, I will now elaborate on our comp sales trends thus far in May. From the end of Q1 through May 23, comp sales declined by approximately 7% as we continue to cycle extremely difficult prior year comparisons. As a reminder, comp sales growth for the month of May in 2020 was 21.5%. And while we are nonetheless encouraged with our sales trends, we remain cautious in our 2021 sales outlook, given the continued uncertainty that still exists, the unique comparisons against last year and the anticipation of fading tailwinds from the most recent round of government stimulus. That said, as you think about the comp sales cadence of 2021, we continue to expect our performance to be better in the second half, given a more difficult comp sales comparison in the first half.", "Turning to gross margin. As a reminder, gross margin in 2020 benefited from a favorable sales mix and a reduction in markdowns, including the benefit of higher sell-through rates in more clear and sensitive nonconsumables categories. As we move through 2021, we expect pressure in our gross margin rate as we anticipate a less favorable sales mix, an increase in markdown rates as we cycle abnormally low levels we saw in 2020 and higher fuel and transportation costs. Also, please keep in mind the second and third quarters represent our most challenging laps of the year from a gross margin rate perspective, following improvements of 167 basis points in Q2 2020 and 178 basis points in Q3 2020.", "With regards to SG&A, while we continue to expect ongoing expenses related to the pandemic in 2021, overall, we currently anticipate a significant reduction in COVID-19 related costs compared to the prior year. Additionally, we continue to expect about $60 million to $70 million incremental year-over-year investments in our strategic initiatives this year as we further their rollouts. This amount includes approximately $23 million in incremental investments made during the first quarter. However, in aggregate, we continue to expect our strategic initiatives will positively contribute to operating profit and margin in 2021, driven by NCI and DG Fresh as we expect the benefits to gross margin from our initiatives will more than offset the associated SG&A expense.", "In closing, we are very proud of the team's execution and performance which resulted in another quarter of exceptional results. As always, we continue to be disciplined in how we manage expenses and capital with the goal of delivering consistent, strong financial performance while strategically investing for the long term. We remain confident in our business model and our ongoing financial priorities to drive profitable same-store sales growth, healthy new store returns, strong free cash flow and long-term shareholder value.", "With that, I will turn the call over to Jeff." ] }, { "name": "Jeff Owen", "speech": [ "Thank you, John. Let me take the next few minutes to update you on our operating priorities and strategic initiatives. Our first operating priority is driving profitable sales growth. We are off to a great start to the year as our team continues to drive strong execution across our portfolio of growth initiatives. Let me take you through some of the more recent highlights.", "Starting with our nonconsumables initiative or NCI. As a reminder, NCI consists of a new and expanded product offering in key nonconsumable categories. The NCI offering was available in over 7,300 stores at the end of Q1, and we remain on track to expand this offering to a total of more than 11,000 stores by year end, including over 2,100 stores in our light version, which incorporates a vast majority of the NCI assortment but through a more streamlined approach.", "We're especially pleased with the strong sales and margin performance we continue to see across our NCI product categories. Notably, this performance is contributing to an incremental comp sales increase in nonconsumable sales of 8% in our NCI stores and 3% in our NCI Lite stores as compared to stores without the NCI offering. Given our strong performance to date, coupled with the added flexibility of a more streamlined approach, our plans now include completing the rollout of NCI across nearly all of the chain by year-end 2022.", "Moving to our newest concept, pOpshelf, which further builds on our success and learnings with NCI. pOpshelf aims to engage customers by offering a fun, affordable and differentiated treasure hunt experience delivered through continually refreshed merchandise, a differentiated in-store experience and exceptional value with the vast majority of our items priced at $5 or less. During the quarter, we opened three new pOpshelf locations, bringing the total number of stores to eight. And while still early, we continue to be very pleased with the initial results, which have far exceeded our expectations for both sales and gross margin.", "In fact, year one annualized sales volumes for our first eight locations are trending between $1.7 million and $2 million per store, with an average gross margin rate of about 40%, which we expect will climb as we continue to scale this exciting initiative. As a reminder, this compares to year one sales volumes of about $1.4 million for a traditional Dollar General store and a gross margin rate of about 32% for the overall chain in 2020.", "For 2021, we remain on track to have a total of up to 50 pOpshelf locations by year-end as well as up to an additional 25 store-within-a-store concepts, which incorporates a smaller footprint pOpshelf shop into one of our larger-format Dollar General market stores. Importantly, we currently estimate there are about 3,000 pOpshelf store opportunities potentially available in the Continental United States. And when combined with pOpshelf's compelling unit economics, we remain very excited about the significant and incremental growth opportunities we see available for this unique and differentiated concept.", "Turning now to DG Fresh, which is a strategic, multiphase shift to self-distribution of frozen and refrigerated products. The primary objective of DG Fresh is to reduce product cost on these items, and we continue to be very pleased with the savings we are seeing. In fact, DC Fresh continues to be the largest contributor to the gross margin benefit we are realizing from higher initial markups on inventory purchases. And we expect this benefit to grow as we continue to optimize our network and further leverage our scale.", "Another important goal of DG Fresh is to increase sales in these categories, and we are pleased with the success we are seeing on this front, driven by higher overall in-stock levels and the continued rollout of additional products, including both national and private brands. In total, at the end of Q1, we were delivering to more than 17,000 stores from 10 facilities and now expect to complete our initial rollout across the chain by the end of Q2, which is ahead of our previous expectation of year-end as communicated on our Q4 call.", "Moving to our cooler expansion program, which continues to be our most impactful merchandising initiative. During the quarter, we added nearly 18,000 cooler doors across our store base and are on track to install approximately 65,000 cooler doors this year. Notably, the majority of these doors will be in high-capacity coolers, creating additional opportunities to drive higher on-shelf availability and deliver an even wider product selection, all enabled by DG Fresh.", "In addition to the gross margin benefits associated with NCI and DG Fresh, we continue to pursue other gross margin enhancing opportunities, including improvements in private brand sales, global sourcing, supply chain efficiencies and shrink.", "Our second priority is capturing growth opportunities. Our proven high-return, low-risk real estate model continues to be a core strength of our business. In the first quarter, we completed a total of 836 real estate projects, including 260 new stores, 543 remodels and 33 relocations. In addition, we now have produce in more than 1,300 stores. For 2021, we remain on track to open 1,050 new stores, remodel 1,750 stores and relocate 100 stores, representing 2,900 real estate projects in total.", "We also now plan to add produce in more than 1,000 stores, which compares to our previous expectation of approximately 700 stores. As a reminder, we recently made key changes to our development strategy, including establishing two of our larger footprint formats, which each comprise about 8,500 square feet of selling space as our base prototypes for nearly all new stores going forward.", "With about 1,200 square feet of additional selling space compared to a traditional store, these larger formats allow for expanded high-capacity cooler counts, an extended queue line and a broader product assortment, including NCI, a larger health and beauty section with about 30% more feet of selling space and produce in select stores. We are especially pleased with the sales productivity of these larger formats as average sales per square foot are currently trending about 15% above an average traditional store, which bodes well for the future as we look to grow these unit counts in the years ahead. In total, we expect more than 550 of our real estate projects this year will be in these formats as we look to further enhance our value and convenience proposition while driving additional growth.", "Next, our digital initiative, which is an important complement to our brick-and-mortar footprint as we continue to deploy and leverage technology to further enhance convenience and access for customers. One such example is contactless payment, which is now available in the vast majority of the chain, further extending our convenience proposition, particularly for those seeking a more contactless shopping experience. Overall, our strategy consists of building a digital ecosystem specifically tailored to provide our customers with an even more convenient, frictionless and personalized shopping experience. And we are pleased with the growing engagement we are seeing across our digital properties. Going forward, our plans include providing more relevant, meaningful and personalized offerings, with the goal of driving even higher levels of digital engagement and customer loyalty.", "Our third operating priority is to leverage and reinforce our position as a low-cost operator. Over the years, we have established a clear and defined process to control spending, which governs our disciplined approach to spending decisions. This zero-based budgeting approach, internally branded as Safe to Serve, keeps the customer at the center of all we do while reinforcing our cost control mindset. Our Fast Track initiative is a great example of this approach where our goals include: increasing labor productivity in our stores, enhancing customer convenience and further improving on-shelf availability. We continue to be pleased with the labor productivity improvements we are seeing as a result of our efforts, both around rolltainer and case pack optimization, which have led to even more efficient stocking of our stores.", "The second component of Fast Track is self-checkout, which provides customers with another flexible and convenient checkout solution while also driving greater efficiencies for our store associates. Self-checkout was available in more than 3,400 stores at the end of Q1, which represents more than double the store count at the end of Q4. And we are pleased with our results including customer adoption rates as well as positive feedback both from customers and employees.", "Our plans consist of a broader rollout this year, and we are focused on introducing this offering into the vast majority of our stores by the end of 2022 as we look to further enhance our convenience proposition while extending our position as an innovative leader in small-box discount retail. Our underlying principles are to keep the business simple but move quickly to capture growth opportunities while controlling expenses and always seeking to be a low-cost operator.", "Our fourth operating priority is investing in our diverse teams through development, empowerment and inclusion. As a growing retailer, we continue to create new jobs and opportunities for career advancement. In fact, more than 12,000 of our current store managers are internal promotes, and we continue to pursue innovative opportunities to further develop our teams, including our recent announcement to partner with a leading training provider to deliver more personalized training solutions to our employees. Importantly, we believe these efforts continue to yield positive results across our organization and are an important driver of our consistent and strong execution.", "At the store level, we continue to be pleased with our robust internal promotion pipeline and store manager turnover, which continues to trend below historic levels. We believe the opportunity to start and develop a career with a growing and purpose-driven company is a unique competitive advantage and remains our greatest currency in attracting and retaining talent.", "Overall, we continue to make great progress against our operating priorities and strategic initiatives, and we are confident in our plans to drive long-term sustainable growth while creating meaningful value for our shareholders.", "In closing, I am proud of our team's performance and we are pleased with our strong first quarter results, which further demonstrate that our unique combination of value and convenience continues to resonate with customers and positions us well going forward.", "I want to offer my sincere thanks to each of our approximately 157,000 employees across the company for their hard work and dedication to fulfilling our mission of serving others.", "With that, operator, we would now like to open the lines for questions." ] } ]
[ { "name": "Operator", "speech": [ "[Operator Instructions] Our first question comes from the line of Simeon Gutman with Morgan Stanley. Please proceed with your question." ] }, { "name": "Simeon Gutman", "speech": [ "Hey, good morning everyone, My first question is on the business, a look maybe a year later or one year after this COVID started. Can you talk about the traffic? I know the rural store bases across retail seem to do well. Can you talk about how you're doing on the lap? And then anything changing in the basket that you're seeing, whether you're doing well and still in the consumables or how the basket may be evolving?" ] }, { "name": "Todd Vasos", "speech": [ "Yes. Simeon, this is Todd. Thanks for the question. Yes, we're very happy with what we're seeing, as you indicated, now a year out of the pandemic or, again, lapping the pandemic maybe the better term. When you look at it, what we've seen is those customers that we were able to bring in during the COVID crisis or the heat of it, we have retained a very large portion, better than what we had anticipated doing.", "As you may recall, we launched a very aggressive, back in that August, September time frame, an aggressive campaign to not only retain but keep her engaged at Dollar General. And that seems to be working very, very nicely. But as we've indicated in the past, when we see that our core consumer has more money to spend and stimulus has given her some of that tailwind, if you will, what she tends to do is contract on the number of visits but spends a lot more and that's exactly what we saw. We saw our basket size increase very nicely with our core consumer as well as with these trade-in consumers that we saw during the heat of the battle of COVID that we've been able to retain.", "So it really sets us up nicely as we continue to move through this year. We feel very good about what we're seeing. And we're staying squarely focused on what we can control here and that's driving profitable sales growth." ] }, { "name": "Simeon Gutman", "speech": [ "And the 2-year stack, I think if I did the math right, if I heard the numbers right, I think it's running now 14 in May, if that's right. What are the puts and takes to that? I think there's a little more stimulus coming. Do you think this could be the run rate that you can hold going forward?" ] }, { "name": "Jeff Owen", "speech": [ "Yes. In terms of -- you're right in terms of the stack in terms of the cadence. If you look at the cadence of the quarter, it picked up nicely with the onset of the stimulus, where we're very well positioned to get more than our fair share of that. You did see sequentially on a 2-year stack basis, it moderates somewhat but remain very strong and very strong across the board when you look at 2-year stacks, both on the nonconsumables as well as the consumables but particularly when you look at the nonconsumables, just a fantastic 2-year stack as we shared.", "And I think that really speaks to the strength of what we've done with the initiatives on both the consumable side of the business to provide that fuller fill-in trip grocery shop as well as on the nonconsumable side to get a fair share of these folks coming in as we take share from specialty retail. As we look ahead, the laps get actually easier in the back half of the year from a comp standpoint but we just feel fantastic about the fundamentals of the business." ] }, { "name": "Simeon Gutman", "speech": [ "Thank you, Good luck." ] }, { "name": "Operator", "speech": [ "Thank you. Our next question comes from the line of Matthew Boss with JPMorgan. Please proceed with your question." ] }, { "name": "Matthew Boss", "speech": [ "Great, thanks and congrats on the performance. So Todd, maybe just take a step back. Could you speak to new customer acquisition that you're seeing in market share that you see driving the performance continuing? And maybe on that taking a step back, how would you compare what you're seeing today to maybe the time at which we were exiting the financial crisis as we think about customer acquisition, new households shopping Dollar General? And then if you were to rank, where do you see market share opportunities by category from here?" ] }, { "name": "Todd Vasos", "speech": [ "Yes, Matt, I'll try to weave all that in. But I would tell you that we're very happy with what we see on that customer acquisition side. Let me try to go to one part of your question, that is financial crisis coming out of that compared to what we are seeing now on the back side of COVID. Very similar from the standpoint that, that consumer is still very engaged. I think the biggest difference here is the amount of stimulus that is in the system right now.", "So our core shopper continues to have a lot more money than she normally would, and she's spending a great deal of that with us, which is great to see. And I think the other side of the equation is that, that trade-in shopper is financially doing pretty well as the economy opens back up. As we can see, it's opening up in a very robust manner. And I think the difference of '08 and now is that, that consumer has more money to spend. And the great thing is she continues to come back to Dollar General, that higher-income shopper and shop with us. And that's exactly what we saw in '08 but in a way, she didn't have a lot of money. This time, she does have money but still continues to shop.", "So I think that just speaks to the relevancy that we've built in this box since that '08 crisis. This box, as you know, has transformed tremendously since then. So we feel good about those trends and our core shopper trends. As it relates to market share, we're seeing gains across the board. Drug continues to be our #1 donor share. Grocery is donating as well as, I think, consumers start to go back to some normal shopping patterns as it relates to food at home. And we're seeing those come back to Dollar General in a nice way.", "And then even in our own space, we're taking share, which is great to see. So it's really across the board. And I think it's a real testament to the initiatives that we put in place years ago. This isn't a -- just because of COVID, this underlying business, as I've said before, is as strong as I've ever seen it." ] }, { "name": "Matthew Boss", "speech": [ "Todd, maybe as a follow-up to that, what inning would you characterize those key initiatives? If we think about DG Fresh, NCI, private label, I think you have a laundry list that you've walked through. But what inning would you characterize overall these initiatives as we think going forward?" ] }, { "name": "Todd Vasos", "speech": [ "No. You heard Jeff's prepared remarks, but if I step back and take a look at NCI as an example, we'll be completely rolled out by the end of '22. So I would tell you, we're probably halfway through the game as we go through this year and then into next, which feels really good. In our cooler initiative and DG Fresh just in general, I would tell you that we're still in the fourth inning, maybe closer to the bottom of the fourth inning but still in the fourth inning. We've got a lot of runway ahead of us there. And that's been the largest contributor on our initiative side that we've seen both on the top line and bottom line. And the great thing is that we've got a lot of runway yet to go there.", "POpshelf, I mean we're just coming up to bat. We're really happy with what we're seeing there. And we supplied a little more color. Hopefully, it was helpful on what we're seeing early on in our sales and margin coming out of there. And we're very, very encouraged there. And I would tell you, as you know Dollar General pretty well, as we start to see more evidence that this is a very good initiative, we can go very quickly. So stay tuned on that.", "And our digital side, this will be an ongoing initiative. But I would tell you, we're in the infancy stages, very early innings on our initiatives there in and around digital. So a tremendous amount of opportunity, both top line and bottom line because these initiatives are aimed at both. And I think that's the important aspect here is that we're controlling every line of that P&L." ] }, { "name": "Matthew Boss", "speech": [ "Great. It sounds like a lot of balls still to play. Best of luck." ] }, { "name": "Todd Vasos", "speech": [ "Absolutely." ] }, { "name": "Operator", "speech": [ "Our next question comes from the line of Karen Short with Barclays. Please proceed with your question." ] }, { "name": "Karen Short", "speech": [ "Hi, thanks very much. I wanted to see if you could give a little color in terms of the May sales trends with respect to discretionary versus consumables. And I do have a question related to how you answer that from a bigger picture perspective." ] }, { "name": "John Garratt", "speech": [ "Yes. So if you look at May, we gave the May 23rd comp sales were down 7%, but obviously, as we mentioned, a pretty strong 2-year stack in the 14th. There was a question also in terms of the debt month-to-date differ from the full month and it didn't change much at all. So strong performance continued and we saw continued strength in our nonconsumables but also the consumables when you look at it on a 2-year stack so very strong performance for both sides of the box." ] }, { "name": "Karen Short", "speech": [ "Okay. So just bigger picture. When I look at your mix in discretionary, you're up almost 200 basis points, well, 200 basis points since 2018 in terms of mix shift in discretionary. And I guess, when you look at your overall gross margins, it seems, and you've talked to the fact that there is significant opportunity on the gross margin front, so I guess what I'm wondering is looking maybe a year or two out, what do you think the discretionary mix could be within your sales? And then how should we think about gross margins as we look into 2022? I mean, I realize '21 has some very tough compares to 2022." ] }, { "name": "John Garratt", "speech": [ "Yes, Karen, I think as you look at the nonconsumables business, obviously, there's some tailwind that you got from during the pandemic and from the stimulus. But I would just point to the ongoing strength that we've shown there. We've delivered comp growth in nonconsumables for 12 consecutive quarters, and I think that just really speaks to the relevance we've put into that piece of the box. And as you continue to see the share we're taking, how we're outperforming others.", "We have noted that the lap does get tougher as we get into Q2. You're lapping sales growth in the nonconsumables category of 40.8% last year. So that's a tough lap, puts pressure on that. But I would tell you, we feel great about the nonconsumables business as we look forward and as we continue to scale that, almost doubling that this year and then taking the best of the best from that, importing that across the chain and then taking the learnings from that and putting that into pOpshelf and then cross-pollinating the best ideas between the 2. We feel fantastic about that business." ] }, { "name": "Karen Short", "speech": [ "And any thoughts on what would be a normalized or not normalized, but how we should think about gross margins going into 2022?" ] }, { "name": "John Garratt", "speech": [ "Yes. Obviously, we're not giving '22 guidance just yet. But what I'd tell you is this is you look at the performance in gross margin. We've delivered 8 consecutive quarters of gross margin growth, up 208 basis points this quarter, lapping 49 basis points this quarter last year. And when you look at the drivers of that, again, there was some tailwind from nonconsumables, from the stimulus.", "But when you look at the drivers, it's the strategic initiatives driving that. The Top 3, we've been talking about these top 3 for several quarters now. It's higher initial markups, that's DG Fresh driving that. And that is a gift that keeps on giving as we scale that, complete that across the chain and then drive efficiency than that.", "The next two we talked about were lower markdowns and the mix benefit. And again, you got some extra tailwind from the stimulus but it's nonconsumables driving that and that's been a consistent driver for some time now. And then you look at shrink, shrink was another benefit. Now as you look at the near term, as I mentioned, we hit a very difficult lap around nonconsumables, which will pressure that year-over-year mix even though we feel great about the nonconsumables.", "And then as others have talked about it, we do see pressures this year associated with transportation costs, but we do believe that's more of a near-term pressure, not something structural that will last forever. And so as we push through those 2 pressure points, we feel good about what we've been doing in terms of driving gross margin and operating margin expansion and our ability to keep doing so, not only with these strategic initiatives I mentioned but then all the other drivers we talk about, not just shrink but private brand penetration, foreign sourcing penetration, supply chain efficiencies we continue to drive to mitigate the pressures that others are seeing and so it's not impactful to us.", "And then we always talk about our buying power. And then last but not least, we will invest in price if needed, if warranted. But I can tell you, we feel like we're in a great pricing position right now and don't see the need to. So we feel good about our ability to drive it higher over time, both gross margin and operating margin overall." ] }, { "name": "Operator", "speech": [ "Our next question comes from the line of Edward Kelly with Wells Fargo. Please proceed with your question." ] }, { "name": "Edward Kelly", "speech": [ "Yeah. Hi, guys, good morning. Nice quarter. Maybe the first one turns out to be a little bit of a follow-up now. But as it relates to product cost inflation, can you just talk about what you are seeing and what you're expecting from product cost inflation standpoint, especially in consumables? And then what are your expectations for pass-through? And to what extent are you in the driver seat? To what extent do you kind of need to follow what Walmart does? Are you seeing anything out there to suggest that you wouldn't be able to pass through higher product cost inflation if that happens?" ] }, { "name": "Jeff Owen", "speech": [ "Ed, this is Jeff. Thanks for the question. Certainly, on the product cost, on the first part of that question, what I would tell you is that our merchants have done a fantastic job of partnering with our suppliers. And this is where the model at Dollar General really performs well in the sense that our scale and our limited SKU assortment allows us the opportunity to really find innovative ways to protect that underserved customer and certainly find ways that we can mitigate the cost pressures. But certainly, as many retailers have talked about, we have seen that. But, again, real pleased with our pricing position.", "We feel really good about where we are. We talked about this before. We've made some strategic decisions last year to get in some of the best pricing position we've been. And so feel good about where we are. We'll continue to fight for that customer every day. As you know, here at Dollar General price and value are so important to her and we're here to serve her. So I'm really pleased with where they are. We'll continue to monitor that but feel good about the team's performance to date on that front." ] }, { "name": "Edward Kelly", "speech": [ "Okay. And then just one on labor cost here. Can you just provide some color on what you're seeing out there? I mean, obviously, a lot of companies have talked about challenges. You grow a lot so you're adding a lot of employees. Has it caused you to rethink wage levels at all? Do you see this as transitory? Just how do we think about the pressure there and how that's changing?" ] }, { "name": "Jeff Owen", "speech": [ "Ed, we have seen some pressure as many retailers have said. But you know what, I'm so proud of what our team has done to respond. And certainly, in April, we've announced our national hiring event with a goal to hire up to 20,000 additional employees. And I'm very pleased that already we have beaten that goal by 50%. So I think it points to the thing we've said all along, and that is Dollar General is such an amazing place to start a career.", "And so again, we feel real good about the opportunity we can provide with over 12,000 store managers internally promoted. We've got a robust internal pipeline. We're still able to attract so we feel real good there. And certainly, as we have always talked here at Dollar General, we're surgical in the way that we respond to different challenges. So the comments you mentioned, we're not seeing it widespread. There are pockets and so we'll certainly tailor our solution to where it makes sense.", "We always pay competitive wages. We have and we will continue to. And still very pleased at our turnover rates that point to this opportunity here at Dollar General to attract folks, provide a great growth opportunity. And so right now, we are certainly making progress mitigating these challenges, and I'm really pleased with the progress I'm seeing." ] }, { "name": "Edward Kelly", "speech": [ "Great, thank you." ] }, { "name": "Operator", "speech": [ "Our next question comes from the line of Michael Lasser with UBS. Please proceed with your question." ] }, { "name": "Michael Lasser", "speech": [ "Good morning. Thanks a lot for taking my question. Your 2-year compound annual growth for consumables grew 12% in the fourth quarter, 12% in the third and fourth quarter last year. It's still lagging in the first quarter the total only by 100 basis points. How much of that slowdown would you attribute to consumers going back out to eat and so they don't need to visit Dollar General as often for those fill-in [Phonetic] trips? Or how much is your expectation is some of that is due to consumers got $1,400 check at least. And so they might go into Walmart or Target or some other discretionary retailer and go buy a big ticket item. And while they are there purchasing other goods that's taking away the trip from Dollar General?" ] }, { "name": "Todd Vasos", "speech": [ "Yes. It was very difficult, Michael, to understand you on the question. But if I got some of the sense of it, yes, we feel good about our consumable and nonconsumable businesses where they're at. And as I mentioned earlier, we continue to take share from all different classes of trade out there. So I feel better than I ever have on being able to continue to drive the top line on both our consumables and nonconsumables side of the business. And if I missed that question or if you like to ask it again, I'm happy to answer it." ] }, { "name": "Michael Lasser", "speech": [ "The question is your 2-year compound annual growth rate for your consumables business slowed modestly from 4Q to 1Q. How much do you attribute that to people going back out to eat, so they don't need to fill in -- do a fill-in trip or if they got a $1,400 check, so now they're going to Walmart to buy a TV, and while they're there, they're filling up their basket, which may also be taking away a fill-in trip from DG?" ] }, { "name": "Todd Vasos", "speech": [ "Yes. I apologize, Michael. Thank you for repeating that. Yes, I would tell you, it's definitely not the latter that we've seen. It's probably more -- the little slowdown that we have seen there was one such a robust last year and even into the fourth quarter. The economy is opening up a little bit. So that consumer has the ability to go do some other things.", "And food away from home, I'm sure, like yourself, a lot of people wanted to get out and get out of the house. So I think that definitely played into Q1. What we're already seeing though in early Q2 is that some of that food at home is being -- it looks like it's pretty sticky. And while I'm not ready to talk about Q2 right now, I can tell you that especially in those areas like DG Fresh, our perishable areas, we're seeing very, very nice sales, robust sales in there. So it really shows that, that consumer still has a propensity to have food at home.", "And I would tell you, just like anything, when things last more than a quarter or two or half a year, they become pretty ingrained. And I think food at home has become pretty ingrained. Now that doesn't mean that they won't go out to eat, but I think they're going to be doing more food at home than they had prior to the pandemic. And we're already seeing that, as I mentioned, start to materialize here in Q2." ] }, { "name": "Michael Lasser", "speech": [ "Got it. On the gross margin of 200-plus basis points, John, you did provide the order of magnitude. But could you put a quantification around how much of the gross margin was due to factors that have been driven by your initiatives like DG Fresh and NCI, which should continue? Is it 100 basis points over the next couple of quarters versus other factors that might be temporary such as mix or lack of promotions within the environment? And are you already starting to see more promotions come back such that that could be a risk factor to offset those factors that you have within your control over the next few quarters?" ] }, { "name": "John Garratt", "speech": [ "Yes, Michael. So as you pointed out, those are in the order of importance and the Number 1 called out, and it was a good bit higher than the other two, although all were quite impactful, was higher initial markups, and that was DG Fresh. And that is something I would say continues and actually improves as we scale that across the system and get the efficiencies.", "As you get to the next two, the lower markdowns, certainly a big piece of that was the higher sell-through on the nonconsumables. But if you recall, we were calling out lower markdowns even before that as we got tighter and tighter around promotional activity. And we've stayed tight on promotional activity. While I would say compared to last year, it's up a little bit because last year, there was virtually no promotional activity, if you compare to 2019, it's down. So we're not seeing that much more promotional activity. We're actually seeing a little bit less if you go back to 2019, there just was none last year. And so things remain pretty tame that way.", "And then on the mix benefit, again, certainly got some extra juice from the stimulus but, again, 12 consecutive quarters of nonconsumable comp growth. And when we were virtually doubling that initiative and putting the best of the best across the chain, we think that continues to help us. And again, shrink, that was a benefit not related to the current environment.", "So it's certainly a mix. It's hard to when you look at nonconsumables to untangle what was stimulus and what was just what we did to make that piece of the box more relevant. I'd say we set ourselves up very well in that regard. And then again, I would like to think that the higher carry rates is more -- is not something structural, it's more of a supply and demand imbalance that should sort itself out later.", "One of the things I'll mention that is a wildcard that's not in our guidance, and that is what impact the child tax credits will have. And so while there's -- we've not assumed any more stimulus, we've not assumed any more child tax credits, just given the number of potential macro puts and takes, including the child tax credits, but then conversely what happens when some of the enhanced benefits are removed. So that's another wildcard in the back portion of the year. But as you look at the gross margin, I would tell you a big chunk of this is structural as evidenced by the strong fundamentals driving it and the track record we've delivered. But as we mentioned, there's just some near-term pressures over the next few quarters." ] }, { "name": "Michael Lasser", "speech": [ "And that's very helpful. Could you I just clarify what -- one point you made that you're seeing promotions better today than they were in 2019? So you're not seeing conventional grocery stores promote more because their sales are on decline as consumers go out to eat more?" ] }, { "name": "Todd Vasos", "speech": [ "Yes. We watch this very closely, Michael. And I would tell you, John hit it right on the head, and that is we're seeing a little bit more promotional activity than we did last year because it was absolutely none last year. But it is substantially, substantially lower than it was in 2019. And so I would tell you that, that tame promotional environment that we've been talking about even prior to the pandemic and through the pandemic still persists. We have not seen that whatsoever." ] }, { "name": "Michael Lasser", "speech": [ "Thank you so much. And good luck." ] }, { "name": "Operator", "speech": [ "Our next question comes from the line of Rupesh Parikh with Oppenheimer & Co. Please proceed with your question." ] }, { "name": "Rupesh Parikh", "speech": [ "Good morning. Thanks for taking my question. So my first question is with the comp guide. I was curious how you guys are thinking about traffic for the balance of the year." ] }, { "name": "John Garratt", "speech": [ "Yes. I think the way you think about traffic, we've been talking about this, there's been quite a bit of trip consolidation. So people have been coming in a little less frequently. They've been putting a lot more in their basket. Now what I would tell you is we looked across recent periods, we've seen the traffic start to pick up. And so what we would expect as the mobility picks up, the traffic will pick up. The baskets will come down somewhat but our goal is to hold as much of that bigger basket that we gained. It's pretty impressive when you look at the 2-year stacks on the growing basket on top of basket growth last year, again, as we position ourselves to that fuller fill-in trip. But what we would expect is that traffic to continue to pick up as people get out more." ] }, { "name": "Rupesh Parikh", "speech": [ "Okay, great. And then maybe just one follow-up on pOpshelf. So clearly, very upbeat commentary in terms of what you guys are seeing so far. So I guess, Todd, what has surprised you so far with the concept?" ] }, { "name": "Todd Vasos", "speech": [ "I'm sorry, what was the question?" ] }, { "name": "Rupesh Parikh", "speech": [ "Yes, on pOpshelf, you guys have seen very strong results so far. So just curious what has surprised you so far with the performance there?" ] }, { "name": "Todd Vasos", "speech": [ "Oh, surprise. Yes. I would tell you that we're very happy with what we're seeing. I believe that the biggest surprise probably was when you launch a brand from ground zero, you don't normally see the amount of traction and sustained traction that we are seeing and repeat customers that we're seeing.", "The other thing that's really a surprise is the customer feedback that we're getting. We're getting promoter scores in the upper 80s and 90% range, which is unheard of. And so that's what gives us great optimist, if you will, optimistic that we will continue to be able to grow this piece. Stay tuned.", "And as I mentioned earlier, because of what we're seeing not only on the sales line, but I think the other nice surprise was on that margin side at 40% margins. And I would tell you, the upside to that is great, very great, quite frankly, as we scale this. So we think that between those two, and you know us well, we'll move fast in store openings once we get another few weeks behind our belt here." ] }, { "name": "Rupesh Parikh", "speech": [ "Great, thank you." ] }, { "name": "Operator", "speech": [ "Thank you. Ladies and gentlemen, our final question this morning comes from the line of Scott Mushkin with R5 Capital. Please proceed with your question" ] }, { "name": "Scott Mushkin", "speech": [ "Hey, guys, thanks for taking my questions. And seeing that pOpshelf is just an insane format, one of the best I've seen in about 20 years, so I look forward to hearing more about it. But my actual question is on DGX, you guys didn't mention it. Maybe not as much sizzle as the pOpshelf but seems like it almost could supplant the normal convenience store, it's about 10,000 7-Elevens. And I look at that store and say, \"Gosh, like, why would I ever go to a 7-Eleven if there was a DGX in the neighborhood?" ] }, { "name": "Jeff Owen", "speech": [ "Scott, thank you for the question. And we are real excited about DGX. And certainly, as we talked before, during the pandemic, as you remember, DGX is situated to locate where you work and play. And certainly during the pandemic, we saw some pullback, obviously, with so much remote and work at home. But we feel real good about what we're seeing now. We've talked earlier about how we're seeing the economy kind of open up and folks get out more and we're seeing that come back nicely in our DGX stores.", "And so you're right. We're very excited. You'll recall last conference call, we talked about the opportunity for 1,000 possible DGX locations across the country. And then you know us well, if we find a concept that can work even better and increase that over time, we'll certainly try to do that. But right now, the offering inside the DGX, we also have very high customer satisfaction scores like the pOpshelf brand as well. We are real pleased with what the customer is saying. And we're also pleased with the opportunity. So stay tuned, but that just gives us yet another leg of growth.", "So you got pOpshelf where we've talked about incremental 3,000 opportunities; DGX, an incremental 1,000 opportunities. And then our traditional fleet where we believe there's 13,000 additional opportunities. So 17,000 opportunities in total gives us great confidence that we can continue to grow this great brand across the country. So we're really excited about what the future holds there." ] }, { "name": "Scott Mushkin", "speech": [ "And if I could have a follow-up, I guess I get a follow-up. On the pricing side, kind of taking that and turning it on its ear a little bit, I mean, if you look at what's going on in your business, you obviously talked about gross margin expansion possibilities as well as labor efficiency possibilities and, of course, the limited SKUs you guys offer. Why wouldn't I think that you can use -- and we've seen this, our pricing surveys kind of coming, the gap coming down with Walmart. Why wouldn't we see that continuing? Like you have a lot of levers to pull." ] }, { "name": "Todd Vasos", "speech": [ "Yes. We watch it very closely. You know us pretty well. And pricing is one of my pet projects here at Dollar General. I'm intimately involved in it because it's so important to our consumer. And I would tell you that, and Jeff alluded to it again, we took 2020 and we quietly got in the best position we've ever been in. We took advantage of that dislocation that was out there. And that advantage continues today. And to your point, we've made inroads even against all classes of trade, including mass. But also especially even in our class of trade here at discount, we've made extreme moves as well.", "So we're happy with where we are. Hey, we always reserve the right to continue to make sure our customer has the ability to shop what she needs. So if that does need to happen, we have the wherewithal to do anything on price that we consider we need to do. But right now, we feel good.", "And as Jeff indicated, even in this environment where we're seeing some price pressure from CPG like other retailers are, we have a lot of levers at our disposal to make sure that we don't have to pass all that on to the consumer. And that's exactly what you've seen here in Q1 so far." ] }, { "name": "Scott Mushkin", "speech": [ "Terrific, guys. Thanks." ] }, { "name": "Operator", "speech": [ "[Operator Closing Remarks]" ] } ]
DG
2022-03-17
[ { "description": "Vice President, Investor Relations", "name": "Donny Lau", "position": "Executive" }, { "description": "Chief Executive Officer", "name": "Todd Vasos", "position": "Executive" }, { "description": "Chief Financial Officer", "name": "John Garratt", "position": "Executive" }, { "description": "Chief Operating Officer", "name": "Jeff Owen", "position": "Executive" }, { "description": "J.P. Morgan -- Analyst", "name": "Matthew Boss", "position": "Analyst" }, { "description": "Barclays -- Analyst", "name": "Karen Short", "position": "Analyst" }, { "description": "Morgan Stanley -- Analyst", "name": "Simeon Gutman", "position": "Analyst" }, { "description": "Morgan Stanley -- Analyst", "name": "Michael Kessler", "position": "Analyst" }, { "description": "Oppenheimer and Company -- Analyst", "name": "Rupesh Parikh", "position": "Analyst" }, { "description": "UBS -- Analyst", "name": "Michael Lasser", "position": "Analyst" }, { "description": "Gordon Haskett Research Advisors -- Analyst", "name": "Chuck Grom", "position": "Analyst" }, { "description": "Wells Fargo Securities -- Analyst", "name": "Edward Kelly", "position": "Analyst" } ]
[ { "name": "Operator", "speech": [ "Good morning. My name is Robert, and I will be your conference operator today. At this time, I'd like to welcome everyone to Dollar General's fourth quarter 2021 earnings conference call. Today is Thursday, March 17, 2022.", "[Operator instructions] This call is being recorded, and instructions for listening to the replay of the call are available in the company's earnings press release issued this morning. Now, I'd like to turn the conference over to Mr. Donny Lau, vice president of investor relations and corporate strategy. Mr.", "Lau, you may begin." ] }, { "name": "Donny Lau", "speech": [ "Thank you, and good morning, everyone. On the call with me today are Todd Vasos, our CEO; Jeff Owen, our COO; and John Garratt, our CFO. Our earnings release issued today can be found on our website at investor.dollargeneral.com under news and events. Let me caution you that today's comments include forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995, such as statements about our financial guidance, strategy, initiatives, plans, goals, priorities, opportunities, investments, expectations or beliefs about future matters and other statements that are not limited to historical fact.", "These statements are subject to risks and uncertainties that could cause actual results to differ materially from our expectations and projections. These factors include, but are not limited to, those identified in our earnings release issued this morning, under risk factors in our 2020 Form 10-K filed on March 19, 2021, and any later filed periodic report, and the comments that are made on this call. You should not unduly rely on forward-looking statements, which speak only as today's date. Dollar General disclaims any obligation to update or revise any information discussed in this call unless required by law.", "We also will reference certain non-GAAP financial measures. Reconciliations to the most comparable GAAP measures are included in this morning's earnings release, which, as I mentioned, is posted on investor.dollargeneral.com under news and events. At the end of our prepared remarks, we will open the call up for your questions. [Operator instructions] Now it is my pleasure to turn the call over to Todd." ] }, { "name": "Todd Vasos", "speech": [ "Thank you, Donny, and welcome to everyone joining our call. We are pleased with our fourth quarter and fiscal year results, and I want to thank our associates for their unwavering commitment to meeting the critical needs of our communities, particularly over the past two years of the COVID pandemic. Our fourth quarter performance was impacted by sustained and rising inflation, ongoing global supply chain pressure and a surge in Omicron cases, which impacted staffing levels at our distribution centers, contributing to elevated out-of-stocks. Despite these challenging conditions, our teams continued to focus on controlling what we can control and being there for our customers.", "Because of their efforts and great execution over the past two years, we believe our underlying business is even stronger than before the pandemic, which positions us well to deliver solid sales and profit growth in 2022 and beyond. And while we expect this challenging environment to persist over the near term, which is reflected in our Q1 and fiscal 2022 outlook, we're confident we are taking the appropriate actions to manage through this period and deliver on our full year plan. In fact, I'm pleased to report our staffing levels are back to 2019 pre-COVID levels in both our stores and distribution centers, and we are seeing a meaningful improvement in our in-stock positions. Additionally, although we experienced higher-than-expected product and supply chain cost in Q4, we are very confident in our price position as our price indexes, relative to competitors and other classes of trade, remain in line with our targeted and historical ranges.", "And because so many families depend on us for everyday essentials at the right price, we believe products at the $1 price point are important to our customers, and they will continue to have a significant presence in our assortment. In fact, approximately 20% of our overall assortment is $1 or less. And moving forward, we expect to continue to foster and grow this program where appropriate. And with more than 18,000 stores located within five miles about 75% of the U.S.", "population, we believe we are well positioned to continue supporting our customers through our unique combination of value and convenience, even in a challenging economic environment. Looking ahead, we remain focused on advancing our operating priorities and strategic initiatives as we continue to strengthen our competitive position while further differentiating Dollar General from the rest of the retail landscape. Turning now to our fourth quarter performance. Net sales increased 2.8% to $8.7 billion, following a 17.6% increase in Q4 of 2020.", "Comp sales declined 1.4% compared to the prior year period, which translates into a robust 11.3% increase on a two-year stack basis. From a monthly cadence perspective, Comp sales were lowest in January, with December being our strongest month of performance. Our fourth quarter sales results include a decline in customer traffic, which was largely offset by growth in average basket size. Notably, our average basket size at year-end was approximately $16 and consisted of nearly six items.", "This compares to an average basket size of about $13 and five items at the end of 2019, which we believe reflects the growing impact of our strategic initiatives and a degree of inflation. In addition, we are pleased with the market share gains as measured by syndicated data in our frozen and refrigerated product categories, where we have placed a good deal of emphasis over the past years in an effort to provide customers with an even wider variety of options. And even as our market share in highly consumable product sales decreased slightly in Q4, we feel good about our share gains on a two-year basis. We are also pleased with the retention rates of new customers acquired in 2020, which continues to exceed our initial expectations.", "For the full year, net sales increased 1.4% to $34.2 billion, which was on the high end of our full year guidance and on top of a robust 21.6% increase in fiscal 2020. Comp sales for the year decreased 2.8%, which translates into a very healthy 13.5% increase on a two-year stack basis. In total, we completed more than 2,900 real estate projects during the year, including the opening of our 18,000th Dollar General store and 50 stand-alone pOpshelf locations as we continue to build and strengthen the foundation for future growth. From a position of strength, we also made targeted investments in key areas, including the acceleration of our pOpshelf concept, as well as our most recent initiatives focused on health and international expansion as we continue to meet the evolving needs of our customers and further position Dollar General for long-term sustainable growth.", "Overall, we are proud of our fourth quarter and full year results, which further validate our belief that our strategic actions and targeted investments positions us well for continued success while supporting long-term shareholder value creation. We operate in one of the most attractive sectors in retail. And while our mission and culture remain unchanged as the foundation for our success, with our robust portfolio of short and long-term initiatives, I believe Dollar General is a much different company and is in a much stronger competitive position than it was just a few short years ago. As a result, I've never felt better about the underlying business model, and we are excited about the enormous growth opportunities we see ahead.", "With that, I'll now turn the call over to John." ] }, { "name": "John Garratt", "speech": [ "Thank you, Todd, and good morning, everyone. Now, that Todd has taken you through a few highlights of the quarter and the full year, let me take you through some of its important financial details. Unless we specifically note otherwise, all comparisons are year over year, all references to EPS refer to diluted earnings per share and all years noted refer to the corresponding fiscal year. As Todd already discussed sales, I will start with gross profit.", "As a reminder, gross profit in Q4 2020 and fiscal year 2020 were both positively impacted by a significant increase in sales, including net sales growth of 24% and 28%, respectively, in our combined non-consumables categories. For Q4 2021, gross profit as a percentage of sales was 31.2%, a decrease of 131 basis points. The decrease compared to Q4 2020 was primarily attributable to a higher LIFO provision, increased transportation and distribution costs and a greater proportion of sales coming from our consumables category. Of note, while we expect some relief as we move through 2022, our Q4 supply chain expenses were significantly higher compared to Q4 2020, resulting in a headwind to gross margin of approximately $100 million.", "These factors were partially offset by a reduction in markdowns as a percentage of sales in higher inventory markups. SG&A as a percentage of sales was 22% in the quarter, a decrease of 16 basis points. This decrease was primarily driven by lower incremental costs related to COVID-19, lower hurricane-related expenses and a reduction in incentive compensation. These items were partially offset by certain expenses that were higher as a percentage of sales, including retail labor, occupancy costs, and depreciation and amortization.", "Moving down the income statement. Operating profit for the fourth quarter decreased 8.7% to $797 million. As a percentage of sales, operating profit was 9.2%, a decrease of 116 basis points. Our effective tax rate for the quarter was 21.2% and compares to 22.7% in the fourth quarter last year.", "Finally, EPS for the fourth quarter decreased 1.9% to $2.57, which reflects a compound annual growth rate of 10.6% over a two-year period. Turning now to our balance sheet and cash flow, which remained strong and provided us the financial flexibility to continue investing for the long term while delivering significant returns to shareholders. Merchandise inventories were $5.6 billion at the end of the year, an increase of 7% overall and 1.4% on a per store basis. Importantly, as Todd noted, we have begun to see a meaningful improvement in our in-stock levels since the end of the year and expect continued improvement as we move through 2022, underscoring our optimism that we are well positioned to serve our customers with the products they want and need.", "In 2021, we generated significant cash flow from operations totaling $2.9 billion. Total capital expenditures for the year were $1.1 billion and included our planned investments in new stores, remodels and relocations, distribution and transportation projects and spending related to our strategic initiatives. During the quarter, we repurchased 2.2 million shares of our common stock for $490 million and paid a quarterly dividend of $0.42 per common share outstanding at a total cost of $97 million. At the end of the year, the remaining share repurchase authorization was $2.1 billion.", "Our capital allocation priorities continue to serve us well and remain unchanged. Our first priority is investing in high-return growth opportunities, including new store expansion and our strategic initiatives. We also remain committed to returning significant cash to shareholders through anticipated share repurchases and quarterly dividend payments, all while maintaining our current investment-grade credit rating and managing to a leverage ratio of approximately three times adjusted debt to EBITDAR. Moving to our financial outlook for fiscal 2022.", "First, I want to remind everyone that our fiscal year 2022 includes a 53rd week which will occur during the last period of the fourth quarter. We also continue to operate in a time of uncertainty regarding, among other things, the impacts on the business arising from the current geopolitical conflict and the recovery from the global COVID pandemic, including recovery of the U.S. economy, changes in consumer behavior, labor markets and government stimulus and assistance programs. Despite these uncertainties, including cost inflation, ongoing pressure in the supply chain and rising fuel costs, we are pleased to provide annual guidance that reflects our confidence in the business.", "With that in mind, we expect the following for 2022. Net sales growth of approximately 10%, including an estimated benefit of approximately two percentage points from the 53rd week, same-store sales growth of approximately 2.5%, and EPS growth of approximately 12% to 14%, including an estimated benefit of approximately four percentage points from the 53rd week. Our EPS guidance assumes an effective tax rate range of 22.5% to 23%. We also expect capital spending to be in the range of $1.4 billion to $1.5 billion, which includes the impact of increases in the cost of certain building materials, as well as continued investment in our strategic initiatives and core business to support and drive future growth.", "With regards to shareholder returns, our board of directors recently approved a quarterly dividend payment of $0.55 per share, which represents an increase of 31%. We also plan to repurchase a total of approximately $2.75 billion of our common stock this year, reflecting our continued strong liquidity position, the benefit from the 53rd week and our confidence in the long-term growth opportunity for our business. Let me now provide some additional context as it relates to our outlook. In terms of quarterly cadence, we anticipate both comp sales and EPS growth to be much stronger in the second half of the year than the first half.", "As a reminder, we are lapping a significant stimulus benefit from Q1 2021, including gross margin expansion of 208 basis points. We also anticipate ongoing cost inflation, including elevated supply chain and fuel costs. While we do not typically provide quarterly guidance, given the unusual lap in the significant inflationary environment in Q1, we are providing more specific detail on our expectations for the first quarter. To that end, we expect a comp sales decline of 1% to 2% in Q1 with an EPS in the range of approximately $2.25 to $2.35.", "Turning now to gross margin for 2022. We expect to continue realizing benefits from our initiatives, including DG Fresh and NCI. In addition, we are optimistic that distribution and transportation efficiencies, including significant expansion of our private fleet, could drive additional benefits over the year despite continued cost pressures in the near term. Partially offsetting some of these benefits are rising fuel costs, as well as an expected return to recent historical rates of markdowns and shrink, all of which are expected to be headwinds in 2022.", "With regards to SG&A, we expect continued investments in our strategic initiatives as we further their rollouts. However, in aggregate, we continue to expect they will positively contribute to operating profit and margin in 2022 as we expect the benefits to gross margin from our initiatives will more than offset the associated SG&A expense. We also continue to pursue efficiencies and savings through our Save to Serve program, including Fast Track. And we believe these savings in 2022 will offset a portion of an expected increase in wage inflation.", "In summary, we are proud of our fourth quarter and full year results in 2021, which are a testament to the perseverance and execution by the team. Looking ahead, we are excited about our plans for 2022, including our outlook for sales and EPS growth, as well as our planned significant returns to shareholders via an increased dividend payout and increased share repurchases. As always, we continue to be disciplined in how we manage expenses and capital with the goal of delivering consistent, strong financial performance while strategically investing in our business and employees for the long term. We remain confident in our business model and our ongoing financial priorities to drive profitable same-store sales growth, healthy new store returns, strong free cash flow and long-term shareholder value.", "With that, I will turn the call over to Jeff." ] }, { "name": "Jeff Owen", "speech": [ "Thank you, John. Let me take the next few minutes to update you on our operating priorities and strategic initiatives, including our plans for 2022. Our first operating priority is driving profitable sales growth. We have a growing portfolio of initiatives which are contributing to our strong results, as well as strengthening the foundation for future growth.", "Let me take you through some of the recent highlights, as well as some of our next steps. Starting with our non-consumables initiative, or NCI, which was available in more than 11,700 stores at the end of 2021. We continued to be very pleased with the strong sales and margin performance we are seeing across the NCI store base. Notably, NCI stores outperformed non-NCI stores in both average ticket and customer traffic, driving an incremental 2.5% total comp sales increase on average in NCI stores, along with a meaningful improvement in gross margin rate.", "We expect to realize ongoing sales and margin benefits from NCI in 2022, and we are on track to complete the rollout across nearly the entire chain by the end of the year. Moving to our newest store concept, pOpshelf, which further builds on our success and learnings with NCI. As a reminder, pOpshelf aims to engage customers by offering a fun, affordable and differentiated treasure hunt experience delivered through continually refreshed merchandise, a differentiated in-store experience and exceptional value, with the vast majority of our items priced at $5 or less. During the quarter, we opened 25 new pOpshelf locations, bringing the total number of stores to 55 and exceeding our initial goal of 50 stores.", "Additionally, we opened 11 new store within a store concepts during Q4, bringing the total number of Dollar General Market stores with a smaller-footprint pOpshelf store included to a total of 25 at the end of the year. And we continue to be pleased with the results. In 2022, we plan to nearly triple the pOpshelf store count and open up to an additional 25 store-within-a-store concepts, which would bring us to a total of more than 150 stand-alone pOpshelf locations and a total of approximately 50 store-within-a-store concepts. We continue to anticipate year one annualized sales volumes for our current locations to be between $1.7 million and $2 million per store and expect the average gross margin rate for these stores to exceed 40%.", "In addition to the early success of pOpshelf, we have been able to take some of our learnings and apply them in our Dollar General store base, particularly in further enhancing our nonconsumables offering. Overall, we are very pleased with the results from this unique and differentiated concept, and we are excited about our goal of approximately 1,000 pOpshelf locations by year-end 2025. Turning now to DG Fresh, which is a strategic, multi-phased shift to self-distribution of frozen and refrigerated goods, along with a focus on driving continued sales growth in these areas. As a reminder, we completed the initial rollout of DG Fresh across the entire chain in 2021 and are now delivering to more than 18,000 stores from 12 facilities.", "The primary objective of DG Fresh is to reduce product cost on our frozen and refrigerated items, and we continue to be very pleased with the savings we are seeing. Notably, DG Fresh was a meaningful positive contributor to our gross margin rate in 2021, and we expect to see continued benefits in 2022. Another important goal of DG Fresh is to increase sales in our frozen and refrigerated categories. We are pleased with the performance on this front, including enhanced product offerings in stores and strong performance from our perishables department.", "In fact, our perishables department had a high single-digit comp increase in Q4 and contributed more comp sales dollars than any other department for both Q4 and the full year. Importantly, the sales penetration of these categories has increased to approximately 9% as compared to approximately 8% prior to the rollout of DG Fresh. In 2022, we expect to realize additional benefits from DG Fresh as we continue to optimize our network, further leverage our scale and deliver an even wider product selection. And while produce is not included in our initial rollout, we continue to believe that DG Fresh provides a potential path forward to expanding our produce offering to more than 10,000 stores over time.", "To that end, at the end of Q4, we offered produce in more than 2,100 stores, with plans to expand this offering to a total of more than 3,000 stores by the end of 2022. Finally, DG Fresh has also extended the reach of our cooler expansion program. During 2021, we added more than 65,000 cooler doors across our store base. In 2022, we again expect to install more than 65,000 additional doors as we continue to build on our multiyear track record of growth in cooler doors and associated sales.", "Turning now to an update on our expanded health offering, which consists of up to 30% more feet of selling space and up to 400 additional items as compared to our standard offering. This offering was available in nearly 1,200 stores at the end of 2021, with plans to expand to a total of more than 4,000 stores by the end of 2022. As we move toward becoming more of a health destination, particularly in rural America, our plans include further expansion of our health offering, with the goal of increasing access to basic healthcare products and ultimately services over time. In addition to the gross margin benefits associated with the initiatives I just discussed, we continue to pursue other opportunities to enhance gross margin, including improvements in private brand sales, global sourcing, supply chain efficiencies and shrink reduction.", "Our second priority is capturing growth opportunities. Our proven high-return, low-risk real estate model has served us well for many years and continues to be a core strength of our business. In 2021, we completed a total of 2,902 real estate projects, including 1,050 new stores, 1,752 remodels and 100 relocations. For 2022, we remain on track to execute nearly 3,000 real estate projects in total, including 1,110 new stores, 1,750 remodels and 120 store relocations.", "As a reminder, we expect approximately 800 of our new stores in 2022 to be in our larger, 8,500 square foot store format, allowing for an expanded assortment and room to accommodate future growth as we respond to our customers' desire for an even wider product selection. Importantly, we continue to be very pleased with the sales productivity of all of our larger-format stores as average sales per square foot are about 15% above an average traditional store. In addition to our planned Dollar General and pOpshelf growth in 2022, and included in our expected new store total, we are very excited about our plans to expand internationally with the goal of opening up to 10 stores in Mexico by the end of 2022. Overall, our real estate pipeline remains robust with more brick-and-mortar stores than any retailer in the country.", "And we are excited about our ability to capture significant growth opportunities in the years ahead. Next, our digital initiative, which is an important complement to our physical footprint as we continue to deploy and leverage technology to further enhance convenience and access for our customers. Our efforts remain centered around building engagement across our digital properties, including our mobile app. We ended 2021 with over million monthly active users on the app and expect this number to grow as we look to further enhance our digital offerings.", "As with everything we do, the customer is at the center of our digital initiative. Our partnership with DoorDash is the latest example of these efforts as we look to extend the value offering of Dollar General, combined with the convenience of same-day delivery in an hour or less. This offering was available in more than 10,700 stores at the end of Q4, and we are very pleased with the early results, including our ability to generate profitable transactions, as well as better-than-expected customer trial, strong repurchase rates, high levels of sales incrementality and a broadening of our customer base. In addition, our DG Media Network is becoming increasingly more relevant in connecting our brand partners with our customers.", "To that end, we significantly grew the reach of this network in 2021, increasing from 6 million unique active profiles to more than 75 million, enabling our vendors to now reach over 90% of our DG customers through the DG Media Network. After establishing the foundation over the last few years, we are poised to meaningfully grow this business in 2022 and beyond as we expand the program and enhance the value proposition for both our customers and brand partners while increasing the overall net financial benefit for the business. Overall, our strategy consists of building a digital ecosystem specifically tailored to provide our customers with an even more convenient, frictionless and personalized shopping experience. And we are pleased with the growing engagement we are seeing across our digital properties.", "Our third operating priority is to leverage and reinforce our position as a low-cost operator. We have a clear and defined process to control spending which continues to govern our disciplined approach to spending decisions. This zero-based budgeting approach, internally branded as Save to Serve, keeps the customer at the center of all we do while reinforcing our cost control mindset. Notably, the Save to Serve program contributed more than $800 million in cumulative cost savings from its inception in 2015 through the end of 2021.", "Our Fast Track initiative is a great example of this approach, where our goals include increasing labor productivity in our stores, enhancing customer convenience and further improving on-shelf availability. The first phase of Fast Track consisted of both rolltainer and case pack optimization, which has led to the more efficient stocking of our stores. The second component of Fast Track is self-checkout, which provides customers with another flexible and convenient checkout solution while also driving greater efficiencies for our store associates. Self-checkout was available in more than 6,100 stores at the end of 2021.", "We continue to be pleased with our results, including strong and growing customer adoption rates and high scores on speed and ease of checkout. In 2022, we plan to expand this offering to a total of up to 11,000 stores by the end of the year as we look to further extend our position as an innovative leader in small box discount retail. Looking ahead, the next phase of Fast Track consists of increasing our utilization of emerging technology and data strategies, which includes putting new digital tools in the hands of our field leaders in 2022. When combined with our data-driven inventory management, we believe these efforts will reduce store workload and drive greater efficiencies for our retail associates and leaders.", "I also want to highlight our growing private fleet, which consisted of more than 700 tractors and accounted for approximately 20% of our outbound transportation fleet at the end of 2021. We are focused on significantly expanding our private fleet in 2022, as we plan to more than double the number of tractors, we expect will account for approximately 40% of our outbound transportation fleet by the end of the year. Importantly, we save an average of 20% of associated costs every time we replace a third-party tractor with one from our private fleet. Moving forward, we believe our private fleet will become an increasingly significant competitive advantage as it gives us greater operational control in our supply chain while further optimizing our cost structure.", "Our underlying principles are to keep the business simple, but move quickly to capture growth opportunities while controlling expenses and always seeking to be a low-cost operator. Our fourth operating priority is investing in our diverse teams through development, empowerment and inclusion. As a growing retailer, we created thousands of new jobs in 2021, providing career growth opportunities for existing associates and the start of a career for many others. In 2022, we now expect to create more than 10,000 net new jobs as a result of our continued growth.", "Our internal promotion pipeline remains robust, as evidenced by our internal placement of more than 75% of our store associates at or above the lead sales associate position. We also continue to innovate on development for our teams to provide ongoing opportunities for career advancement, and in turn, meaningful wage growth. These investments include offering an enhanced college tuition benefit for our associates and their families, as well as continuing to facilitate driver training programs for associates who would like to become drivers in our private fleet. In addition to our focus on development, we continue to focus on further enhancing the associate experience and our strong workplace culture.", "Collectively, these investments continue to yield positive results across our organization, including healthy applicant flow and strong critical staffing levels. We believe the opportunity to start and develop a career with a growing and purpose-driven company is a unique competitive advantage and remains our greatest currency in attracting and retaining talent. Overall, we made significant progress against our operating priorities and strategic initiatives in 2021. These efforts have further strengthened our foundation and position heading into 2022 as we continue to drive long-term sustainable growth.", "In closing, I'm proud of the team's strong and resilient performance in 2021. As we enter 2022, we are laser-focused on executing and delivering our robust plans, which we believe will further enhance our unique combination of value and convenience for our customers while delivering strong returns for our shareholders. I want to thank our approximately 163,000 employees for their tireless dedication to fulfilling our mission of serving others every day, and I am looking forward to all we will accomplish together in the year ahead. With that, operator, we would now like to open the lines for questions." ] } ]
[ { "name": "Operator", "speech": [ "Thank you. At this time, we'll be conducting a question-and-answer session. [Operator instructions] Our first question comes from the line of Matthew Boss with J.P. Morgan.", "Please proceed with your question." ] }, { "name": "Matthew Boss", "speech": [ "Great. Thanks. So maybe to kick off, Todd, with a number of moving pieces between employment and inflation, could you speak to health of your low-income consumer? How do you view the opportunity to potentially take share in this environment? And just drivers of top line improvement that you see as the year progresses within your 2.5% comp guide." ] }, { "name": "Todd Vasos", "speech": [ "Sure, Matt. Thank you for the question. Yes, I'll first start by saying, we've always said here that the health of the consumer, this low-end consumer that we serve the most here at Dollar General, is usually geared and attached to whether they're gainfully employed or not. I'm happy to say that, with the labor market the way it is, that she is gainfully employed, working as many hours as she would like to right now.", "Matter of fact, we believe that approximately $1.20 increase year over year in her wages are in her wallet. So that is a significant amount. Now, to your point, there are some other things, other headwinds here that we watch out for. Obviously, inflation has definitely taken a toll on some of that additional wage growth that she's seen.", "And then, recently, over the last couple of weeks, gas prices are up $0.70 a gallon. So that -- we watch that very carefully. Now, we always also said that once that gas price reaches over $4 a gallon, which it has now, that we normally see the consumers stay closer to home, which bodes very well for that value and convenient message that we have out there for our core consumer and that we deliver every day. That value and convenient message reigns supreme at the end of the day across the company here at Dollar General and with our core customer.", "So again, as you think about it, tougher times for the consumer normally means that she needs us more, and we normally start to see a trade-down once that occurs and we'll be watching out for that. Again, that value and convenience really attract that trade-in, trade-down customer. As far as the drivers of what we believe. Well, our initiatives, Matt, as you know, have been very, very successful over the last six to seven years here at Dollar General.", "And they're the cornerstone of why we feel confident in our guide for 2022. Obviously, a lot of year ahead of us, but those initiatives are truly the cornerstone of that. But then when you think again about that value and convenience message we have, if the market gets a little tighter from a labor perspective or inflation continues to pull more money out of the consumers' wallet, we feel that we're very well-positioned as we move through '22 as well." ] }, { "name": "Matthew Boss", "speech": [ "Great. And then, maybe, John, as a follow-up on gross margin, just to dig a bit deeper. I guess what level of runway remains with DG Fresh in terms of the gross margin opportunity from here? Are you seeing anything in pricing and the promotional landscape as we think about your assumption for markdowns to return to historical levels? And then just last, the net of distribution and transportation efficiencies relative to fuel costs, is that a net headwind, tailwind, neutral? Just kind of trying to size those three up in terms of a net for the year." ] }, { "name": "John Garratt", "speech": [ "Sure. Sure. So a lot of pieces there. I'll try and attack all those as I kind of walk through the puts and takes of gross margins.", "I'll start by saying we're really pleased with what we've done with gross margin in recent years. As you look at 2021, it's up about 100 basis points over 2019 levels. Now, we didn't give specific margin -- gross margin guidance for 2022, but we did mention that Q1 in particular would be pressured as we're lapping a pretty significant expansion last year of 208 basis points that certainly benefited from favorable mix fueled by stimulus. In addition to that tough lap, we have cost inflation continuing in Q1, which is driven by supply chain, fuel and product costs, and to a lesser extent, a return to recent historical rates of markdowns and shrink.", "Still lower than the pandemic levels but normalizing a little bit. So certainly, there's some near-term pressures persisting in Q1 in the first part of the year. But bear in mind, as we move through the year, the lap gets easier in the second half as we're lapping the heavy inflation from this year. And just as a frame of reference, in Q4, we had about 200 basis points of added pressure to gross margin from the combination of supply chain, which was about $100 million incremental year-over-year impact, and the LIFO provision, which was $72 million.", "We don't see this as structural. We anticipate some moderation in cost pressures. We're already seeing this in transportation, supply chain, for instance. Plus, when you look at the benefits of the initiatives and the cost-reduction actions we have in place, we see a growing benefit from that.", "For instance, if you look at private fleet, we mentioned we're going to double that in size from the end of 2021 to the end of 2022. That drives, as Jeff mentioned, about 20% savings each time we switch from a third-party carrier to in-house. And of course, we have the growing benefit of the initiatives that Todd mentioned, which not only helped the top line but the bottom line when you think of DG Fresh, NCI, and pOpshelf. And there's still -- to your other question, there's still a lot of runway there.", "As we continue to optimize DG Fresh, get the leverage from that now that we can negotiate directly on that and we're top three vendors -- or customers, in many cases. NCI, we'll continue the rollout of that and virtually complete that this year. And then, you have the growing benefit of pOpshelf, which we mentioned comes out of the ground with margins north of 40% and should only grow from there as we get scale. And we've talked about all the other levers we have.", "And then, not to mention just our ability to leverage our scale as a limited SKU operator. So we've contemplated all this in the EPS guidance, which we feel very good about. While there's some near-term pressures, especially in the early part of the year, we feel great about the initiatives, the other levers we have. And we still believe we can expand gross margin over the long term." ] }, { "name": "Matthew Boss", "speech": [ "That's great color. Best of luck, guys." ] }, { "name": "Operator", "speech": [ "Our next question comes from Karen Short with Barclays. Please proceed with your question." ] }, { "name": "Karen Short", "speech": [ "Hi, thanks very much. So I wanted to just talk a little bit about the longer-term algorithm and relationship between sales growth and EBIT. So when I look at 2022, excluding the extra week, it looks like 8% -- well, it is 8% for the top line, and about 6% EBIT growth. I just want to get a sense, is that the right relationship or algorithm to think about going forward? So like slight EBIT margin expansion off of the 9.3% that I think guiding you're to, excluding the extra week.", "And then, I had a bigger-picture question." ] }, { "name": "John Garratt", "speech": [ "Sure. I would say, as you think about the 10% plus model, every element of that is very well intact. Starting at the top, we've never had a bigger pipeline of new unit growth with the -- for everybody in discount retail, about 17,000 potential opportunities there, not to mention Mexico. We're still seeing the same rate unit level economics on the top line, the bottom line and the returns -- a ton of initiatives in place to drive sales, as well as we're seeing an outsized bigger impact from real estate.", "Not only we're seeing a 15% increase in sales per square foot productivity in the bigger box stores, but as we've mentioned, we're accelerating the number of new stores we're putting out there, and again, seeing really good impact on comp sales from the initiatives. And as you look at margin overall, operating margin overall, a lot of levers, as I just mentioned on Matt's question, with gross margin, SG&A. We stay laser-focused on that. We mentioned in the prepared comments, our Save to Serve program is alive and well.", "And since 2015, we've saved over $800 million from that. And so, as you look at all the pieces, each year might be a little bit different. But I think that's the way to think about that, is the unit growth we've talked about, we feel very good about and are accelerating that a bit. We're seeing -- we've talked before about the impact of real estate, 150 to 200 basis points.", "And we're seeing the benefit at the high end of that. And then, you have the initiatives on top of that and all the levers. So feel very good about our ability to drive 10% growth over the long term. And I think directionally, you're thinking about it right in terms of ongoing top line strength in that 2% to 4% comp range, and the ability over time, we believe, to hold, and in cases, expand our EBIT margins." ] }, { "name": "Karen Short", "speech": [ "OK. That's helpful. And then, just in general, I think there's definitely been a concern that you're lapping in 2022 tough discretionary comparisons, obviously. You talked about that.", "But wondering if you could give a little bit of color on how you think about that discretionary specifically and baked -- in terms of expectations baked into your guidance. And then, it sounds like you're certainly not leaning away from discretionary in calendar '22. So maybe just some color on that given that that is probably a category that will be pressured in the year, this year." ] }, { "name": "John Garratt", "speech": [ "Sure. As you think about the non-consumable sales and discretionary sales, what we have contemplated in our guidance is some moderation of that. We still continue to feel great about that side of the business, the growing benefit of the non-consumable initiative, as well as the scaling of pOpshelf. But what we have contemplated, given the backdrop from a macro perspective, is somewhat of a moderation of mix back toward consumables, but not going back to where they were.", "So holding on to a lot of the strength in that business and the mix benefit from that, but some moderation." ] }, { "name": "Karen Short", "speech": [ "Great. Thanks very much." ] }, { "name": "Operator", "speech": [ "Our next question comes from Simeon Gutman with Morgan Stanley. Please proceed with your question." ] }, { "name": "Simeon Gutman", "speech": [ "Hey, guys. I'm wondering if you've given any thought to the 20% of the mix being $1. Has there been any debate around that mix moving? And then, Todd, you mentioned that at the customer, this could be a good environment for you. I take it as you haven't seen any sign yet that there's been any sensitivity to the current inflation." ] }, { "name": "Todd Vasos", "speech": [ "We didn't hear your first part of the question, Simeon." ] }, { "name": "Simeon Gutman", "speech": [ "The 20% of the merchandise mix. How do you think about that? Is there debate about changing that?" ] }, { "name": "Todd Vasos", "speech": [ "The $1 mix. Yes. But I would tell you that every time we talk to our core customer, she tells us the same thing, how important that $1 is so that she can round out her month. We've always said here, it's an unfortunate situation, but our customer runs out of money before that month runs out.", "And that $1 bridges that last few days for her, always has, and that continues to do so. So what we've done is, in light of that information, also with some of the inflationary pressures that we're seeing on other goods, we've actually leaned into our $1 price point. And what you'll see, if you come into our stores over the near term, will be even more displays of $1 items on end caps and off-shelf displays and really pushing that side of the business because I think our customers will need us even more there. And we believe that over time, we could grow that where appropriate and not even stay at that 20% level.", "So we feel really good about that $1 price point. And the great thing is our vendor community across the board has leaned into that $1 price point with us as well." ] }, { "name": "Michael Kessler", "speech": [ "Right. Hey, guys. This is Michael Kessler – oh, Simeon, you got this?" ] }, { "name": "Simeon Gutman", "speech": [ "Yes. I just wondered, any signs of trade-down yet? Or there hasn't been any sign?" ] }, { "name": "Todd Vasos", "speech": [ "Yes. Right now, we haven't seen a lot of trade-down yet. The great thing, though, Simeon, is we actually have a lot of that trade-down already embedded in, and I think there'll be more as inflation comes in. And the reason I say it's embedded in is that we are extremely, extremely confident and glad to see that the gains that we got during COVID, so call it the 2020 gains, we've kept a lot more of those customers than we even thought we would have kept.", "And that continues. Actually, we saw a slight acceleration of that as we moved through Q4. So it was great to see. And we know that, based on the credit card data and our marketing against that, a lot of these customers are in that trade-down area that would happen when trade down occurs.", "So we've got some of it already, and I believe we'll get even more as inflation continues to take hold across the U.S." ] }, { "name": "Simeon Gutman", "speech": [ "Thank you very much." ] }, { "name": "Todd Vasos", "speech": [ "Thank you." ] }, { "name": "Operator", "speech": [ "Thank you. Our next question comes from Rupesh Parikh. Please proceed with your question. Excuse me -- with Oppenheimer." ] }, { "name": "Rupesh Parikh", "speech": [ "Good morning. Thanks for taking my question. I was hoping to just touch on, I guess, on the comp line. I want to better understand the building blocks for comp growth this year, whether you can touch on inflation, traffic, the new store contribution.", "And the guidance implies an acceleration on the comp line as the year progresses. So I just wanted to better understand, what gives you confidence to drive that acceleration? So just any color there in terms of the stronger trends in the back half of the year." ] }, { "name": "John Garratt", "speech": [ "Yes. I think you're thinking about it the right way. As we see our comp growth accelerating, as we move sequentially from quarter-to-quarter throughout the year, and we feel great about -- we've said before, this model works very well at 2% to 4% comp. And we feel very good about the 2.5% comp guide, which would imply a pretty healthy three-year stack with that.", "As you look at the building blocks of that, what we're seeing right now is we're retaining -- we're exceeding our expectations in terms of what we've done in terms of retaining the new customers, holding on to those bigger basket sizes. We're seeing a bigger impact from real estate, at the high end of that 150 to 200 basis points we've talked about. And as we mentioned, seeing a growing impact from our initiatives as they scale. And the other thing to point out is we're improving our in-stocks.", "As we improve our in-stocks, that's driving sales as well. Todd mentioned that we're closely watching the consumer. But history tells us that we do very well in all cycles of the economy. And if the consumer is pressured as they are increasingly with inflation, what we've seen is that customer more productive.", "With high fuel prices, we've seen them shop, as we mentioned, closer to home. And we've seen trade in, all of which benefit us. So when you put all these pieces together, we feel great about the fundamentals of the business. And we think we're very well positioned, for this backdrop, to deliver that comp we've guided to.", "And we're going to go after more." ] }, { "name": "Rupesh Parikh", "speech": [ "Great. And then, maybe just one follow-up question on the capex side. So this year, capex as a percent of sales is closer to 4%. And I think historically, you've been in that 2.5% to 3% type range.", "So going forward, is this the right way to think about capex, at a more elevated level?" ] }, { "name": "John Garratt", "speech": [ "No, great question. There's two pieces of that. And we have been, for the last few years, a little above 3%, but rounding down to 3%. This year, we're rounding up to 4%.", "And there's really two things I'd point to there. One is we've stepped up our real estate. We're accelerating our new unit growth, which obviously delivers great returns, and it helps the bottom line, but does add a little bit of capex. That impact is outsized this year really due to inflation, steel inflation.", "It's up substantially, still getting great returns even with that steel inflation factored in, still getting the same returns. We've talked about that 20% to 22% after-tax IRR. But that really is the nearer-term pressure, the commodity pressure from fixtures, HVACs, things like that as we do these projects. That we see that coming back down over time.", "If you exclude the impact of that near-term inflation, that puts us back to a point where we're back to close to where we were, rounding down to 3%. So we don't see something structurally different here other than we have stepped up our real estate, which is a great decision, which we're pleased with. But it's really the difference in the short term, is that commodity inflation." ] }, { "name": "Rupesh Parikh", "speech": [ "Great. Thank you." ] }, { "name": "Operator", "speech": [ "Our next question is from Michael Lasser with UBS. Please proceed with your question." ] }, { "name": "Michael Lasser", "speech": [ "Good morning. Thanks a lot for taking my question. There's puts and takes with your margin outlook for this year. But if you assume you take on a little bit of leverage to buy back stock, it could imply that your operating margin is flat to maybe down 20 basis points versus last year.", "And if that's right, have all the initiatives that you've deployed translated to Dollar General's operating margin now being about 100 basis points higher than it was in 2019? And to what extent could this be eroded moving forward by a return to promotions and discounting in the broader retail environment?" ] }, { "name": "John Garratt", "speech": [ "Yes. Look, I'll answer your question. If I don't, let me know. But what I would start with saying is that we continue to see the initiatives contributing to operating margin at or above what we expected.", "They're delivering across the board. But there are some near-term pressures. We talked about the puts and takes of gross margin. And we -- as you look at the gross margin, the biggest piece of that being inflation.", "Much of which we don't believe is structural. And we see signs of that easing, and certainly taking actions to make sure that eases. When you look at the SG&A side of that, there, too, we don't see a structural change there. We've talked about some geography as we spend a little bit of SG&A to save more gross margin.", "Again, those initiatives are delivering at or above what we expected. Throws off the geography a little bit. The other thing we have talked about is we did see some wage inflation above norm. We've said in the past that our wage inflation was running about 3% to 4% pre-pandemic.", "It was higher this year. As we look ahead to next year, we expect it to be a little bit higher than that 3% to 4%, but lower than what we saw in 2021. And we're already seeing moderation there. And we're in a great spot in terms of staffing levels.", "So as I look at our EBIT, I don't see anything structurally changing there. And as I mentioned to Karen, you see the ability for us over the long term to modestly increase that over time while driving the top line, too. And so, feel very good about the algorithm and our ability to manage all the levers within gross margin and SG&A. Hopefully, that answers your question." ] }, { "name": "Michael Lasser", "speech": [ "It's helpful. My follow-up question is the competitive dynamics in the environment are ever so changing. The mass merchants and the grocery stores have been comping well above Dollar General for the last several quarters, which is unique in recent history. And now there's likely to be some changes at you're a big competitor.", "So how do you see this playing out over the next few quarters? Do you see some of these share changes as just a function of the unique dynamics, and you can reassert the leadership that Dollar General has historically had in the marketplace?" ] }, { "name": "Todd Vasos", "speech": [ "Yes. So Michael, this is Todd. I would tell you that there's nothing that we see that doesn't suggest that our share gains won't start to come back to historical levels as we move through 2022. There's nothing structural that says that our comps won't get back to a more algorithmic level over time.", "And I think you have to look at, we had well oversized gains in 2020. And when you start looking on a two-year stack basis, we stack up pretty well on a comp to our -- to those other classes of trade and by far out-exceeded our chief competitor in the space. So we feel very good. And then, you've heard John and myself already talk about all these levers that we have.", "These are not new, right? These are ones that are well established and some newer ones that are already being embedded in our -- inside of our chain, where we can deliver, we believe, comp sales as we continue to move forward. The first quarter is going to be a little challenged, as we've already said. But as we move through the rest of the year, we feel better and better about where that comp is going to be. And then, lastly, I would tell you that, your first part of the question, the competition, I would say it's very much the way it's been.", "I would tell you, we're on a little over two years now of pretty tame promotional environment. Obviously, we've had to take some price as others have done on an everyday basis due to some of the inflationary pressures that have been well documented out there. Matter of fact, our pricing position has never been better. And as I said in my prepared remarks, our indexes are as good if not better than they've ever been.", "So we feel great about our everyday price. And promotionally, we don't see anything in the near horizon that would say promotional pricing is going to escalate to any large degree." ] }, { "name": "Michael Lasser", "speech": [ "Thank you very much." ] }, { "name": "Todd Vasos", "speech": [ "Sure." ] }, { "name": "Operator", "speech": [ "Our next question is from Chuck Grom with Gordon Haskett. Please proceed with your question." ] }, { "name": "Chuck Grom", "speech": [ "Hey, thanks. Good morning. Todd, could you size up for us the impact that in-stocks have had on comps over the past couple of quarters? Particularly in your traffic trends. And looking ahead, where you are on the restoration of those in-stocks." ] }, { "name": "Todd Vasos", "speech": [ "Chuck, that's a great question, and thanks for it. We believe it had a significant impact in Q4. We called it out in our prepared remarks. And due to many factors, one, obviously, we had some labor challenges in Q3 and Q4, in distribution.", "We're happy to report that we are now back to pre-pandemic levels on staffing. So we feel good about that. But it constrained our inbound and outbound. We also, if you recall, Jeff indicated in coming out of Q3, that we prioritized seasonal to ensure that our seasonal goods got on to the shelf.", "That slowed down our everyday goods onto the shelf and obviously gained more out-of-stocks there. Now, as we move through Q4 and now into Q1, we feel much, much better about where our in-stock levels are. Are we back to historical levels yet? Not quite. But I don't think anybody is.", "The majority of our opportunities still lie within the vendor community in that the constraints from the vendor community has continued into Q1, not nearly at the levels we saw at the end of last year. But we continue to work with our vendor partners to ship on time and in full. And once we get to that point, which we believe we're working toward pretty quickly here, we'll be in much, much better shape as we move through the back half of the year." ] }, { "name": "Chuck Grom", "speech": [ "OK. Great. That's helpful. And then, one for Jeff.", "You called out that sales per square foot in the 8,500-square-foot stores is 15% higher than the typical box. I was wondering if you could just unpack the delta, where you're getting that greater productivity from?" ] }, { "name": "Jeff Owen", "speech": [ "Thanks, Chuck. We are pleased with our larger-format stores and really seeing that sales per square foot productivity. I think it goes back to what we've started a while ago, and that's really providing a fuller fill-in shop for our customers. When you build a bigger store, anybody can do that.", "But you got to have what the customer wants. And you got to have a customer that wants more from you. So this 8,500 and above square foot store allows us to really expand all the best of that merchants have brought to bear. So we've got expanded wellness.", "We've got our NCI in full. We've got our full cooler assortment in these stores as well, an expanded queue line, and quite frankly, room to grow. And so, we also have produced in many of these stores as well. And so, when you step back and you look at that that's really what has driven the productivity in these stores.", "And I can tell you right now that we're just getting started here. And we look to be able to further serve our customer by listening to what she's asking for and leaning on our best-in-class merchant team, our supply chain team and operators that can execute this across a wide, broad group of stores. So feel real good about where that is headed in the future." ] }, { "name": "Chuck Grom", "speech": [ "That's great. Thank you." ] }, { "name": "Operator", "speech": [ "Our final question comes from Edward Kelly with Wells Fargo. Please proceed with your question." ] }, { "name": "Edward Kelly", "speech": [ "Hi, guys. Good morning. Thanks for all the great color today. One quick one to start on SNAP.", "There's been a lot of investor anxiety around reduction in SNAP benefits, what it means for you because it has grown considerably as a percentage of sales. What are you seeing as these payments have decreased?" ] }, { "name": "John Garratt", "speech": [ "Yes. We've seen a modest decrease as we moved through the year. It peaked middle of the year around May. We've seen it come down a little bit as some of the states rolled off the emergency allotments.", "But with the Thrifty benefits -- Thrifty Food Plan benefit still in place, it's remained elevated. So if you look at Q4 this year versus Q4 last, still well above where it had been, just not quite where it was at the peak in May. As we move into next year, we're anticipating it to continue to moderate somewhat. However, that may be tapered just based on the cadence of when states roll off of that.", "So as we look ahead to next year, what we're assuming is that it's down from -- the benefit isn't as much as it was this year, but still elevated to pre-pandemic levels. And again, we've been taking share over a long time with the SNAP customers as we serve them so well, and you'll continue to see that as a key part of our business." ] }, { "name": "Edward Kelly", "speech": [ "Great. And then, just a follow-up on self-distribution. You talked about significant expansion, doubling this year. Can you talk a bit more about the benefits operationally? I think you mentioned significant competitive advantage.", "Maybe more detail on what you mean there. And then, from a P&L perspective, this 20% cost saves, is that 20% of domestic freight? Like is that how we think about what you're saying there?" ] }, { "name": "Jeff Owen", "speech": [ "Ed, this is Jeff. First of all, thank you for the question. Our private fleet is something we started several years ago. And I think you nailed some of the reasons why we're so excited about it.", "First of all, our drivers are on the same team as our store teams, our merchant teams, and that's certainly just brings a better service to the overall operation. But also, it allows us much more flexibility in our control over the environment. And when you think about it right now, with about 20% of our outbound fleet, we're pleased with that, but we're even more excited about where this thing goes. And we like to use that term early innings.", "We're certainly in the early innings of this initiative. And as you mentioned, with the 20% reduction in our outbound transportation every time we convert, it's obviously a very good return. So as you think about this year, we're pleased to be at doubling that to about 40% of our outbound transportation needs. And we look to grow that even further over time as we scale this initiative and really distance ourselves and provide that competitive advantage because it is an incredible lever that we're able to pull.", "And excited that we started this several years ago." ] }, { "name": "Edward Kelly", "speech": [ "Great. Thanks, guys." ] }, { "name": "Operator", "speech": [ "We've reached the end of the question-and-answer session. I'd now like to turn the call back over to Todd Vasos for closing comments." ] }, { "name": "Todd Vasos", "speech": [ "Thank you. And thanks for everyone joining the call and for all the questions. And thanks for your interest in Dollar General. I'm proud of this team, which continues to execute at a high level, even in a consistently evolving environment.", "As you heard today, we're excited about our initiatives and plans for 2022, which we believe positions us well to grow same-store sales, new stores, operating profit margins and market share over time. Overall, a mature retailer in growth mode, we believe this company is in a very strong position, which I think speaks to our strategy, our resilience and the strength of our culture and our people. As I said earlier, I've never felt better about the underlying business model, and I can't wait to see what 2022 holds for Dollar General. Thank you for listening and have a great day." ] }, { "name": "Operator", "speech": [ "[Operator signoff]" ] } ]
DG
2019-12-05
[ { "description": "Investor Relations", "name": "Donny Lau", "position": "Executive" }, { "description": "Chief Executive Officer", "name": "Todd Vasos", "position": "Executive" }, { "description": "Executive Vice President and Chief Financial Officer", "name": "John W. Garratt", "position": "Executive" }, { "description": "JP Morgan -- Analyst", "name": "Matthew Boss", "position": "Analyst" }, { "description": "Oppenheimer -- Analyst", "name": "Rupesh Parikh", "position": "Analyst" }, { "description": "Barclays -- Analyst", "name": "Karen Short", "position": "Analyst" }, { "description": "Wells Fargo -- Analyst", "name": "Anthony Bonadio", "position": "Analyst" }, { "description": "UBS -- Analyst", "name": "Michael Lasser", "position": "Analyst" }, { "description": "", "name": "Unidentified Participant", "position": "Other" }, { "description": "RBC Capital Markets -- Analyst", "name": "Scot Ciccarelli", "position": "Analyst" }, { "description": "Guggenheim Securities -- Analyst", "name": "John Heinbockel", "position": "Analyst" }, { "description": "Gordon Haskett -- Analyst", "name": "Chuck Grom", "position": "Analyst" } ]
[ { "name": "Operator", "speech": [ "Good morning. My name is Tia, and I will be the conference operator today. At this time, I would like to welcome everyone to the Dollar General Third Quarter 2019 Earnings Conference Call. Today is Thursday December 5, 2019. All lines have been placed on mute to prevent any background noise. This call is being recorded instructions for listening to the replay of the call are available in the Company's earnings press release issued this morning.", "Now I would like to turn the conference over to Mr. Donny Lau , Vice President of Investor Relations and Corporate Strategy. Mr. Lau, you may begin your conference, sir." ] }, { "name": "Donny Lau", "speech": [ "Thank you, Tia, and good morning everyone. On the call with me today are Todd Vasos, our CEO and John Garrett, our CFO. Our earnings release issued today can be found on our website at investor.dollargeneral.com under News & Events.", "Let me caution you that today's comments include forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995, such statements about our strategy plans, initiatives, goals, financial guidance or beliefs about future matters. These statements are subject to risks and uncertainties that could cause actual results to differ materially from our expectations and projections. These factors include, but are not limited to those identified in our earnings release issued this morning under Risk Factors in our 2018 Form 10-K filed on March 22, 2019, and in the comments that are made on this call. You should not unduly rely on forward-looking statements, which speak only as of today's date. Dollar General disclaims any obligation to update or revise any information discussed in this call unless required by law.", "We also will reference certain non-GAAP financial measures. Reconciliations to the most comparable GAAP measures are included in this morning's earnings release, which as I mentioned, is posted on the Investor.dollargeneral.com under News & Events. At the end of our prepared remarks, we will open the call up for your questions. Please limit your questions to one and one follow-up question, if necessary.", "Now it's my pleasure to turn the call over to Todd." ] }, { "name": "Todd Vasos", "speech": [ "Thank you, Donny. And welcome to everyone joining our call. We are pleased with our third quarter results, including same-store sales growth of 4.6% and strong performance across the business. The quarter was highlighted by our best customer traffic and same-store sales increases in nearly five years, as well as double-digit growth in both operating profit and diluted EPS. As a result of our performance through Q3 and outlook for Q4, we are raising our full-year guidance for 2019. John will provide these details during his remarks. In short, we are executing well against both our operating and strategic priorities, and we're confident in our plans to drive continued growth.", "On that note I'm excited to share an update on some of these plans, which we believe will further differentiate Dollar General from the rest of the discount retail landscape. First, as you saw in our release, we plan to accelerate our pace of new store openings and remodels in 2020. In total, we expect to execute nearly 2,600 real estate projects next year, which represents an increase of more than 20% over 2019, as we continue to strengthen the foundation for future growth.", "In addition, given the sustained and positive performance of our non-consumable initiative or NCI, we plan to expand the offering to an additional 2,600 stores next year, bringing the total number of NCI stores to approximately 5,000 by the end of 2020, more than double the current store count. Finally, we now plan to begin shipping out of our fifth DG Fresh facility by as early as fiscal year-end 2019. I will discuss each of these updates in more detail later in the call.", "But first let's recap some of the top-line results for the quarter. Net sales increased 8.9% to $7 billion, compared to net sales of $6.4 billion in the third quarter of 2018. We are particularly pleased with the balanced nature of our sales performance this quarter, once again driven by meaningful contributions across many fronts, including sustained positive sales momentum across our new stores and mature store base, strong same-store sales growth in both our consumable and non-consumable product categories and another quarter of solid growth in average basket size and customer traffic.", "Once again this quarter, we increased our market share in highly consumable product sales as measured by syndicated data with mid to high single-digit growth in both units and dollars over the 4, 12, 24 and 52-week periods ending November 2, 2019. Notably, our market share gains, increased at an accelerated rate throughout these periods, which we believe speaks to the underlying strength and continued momentum of the business.", "Our third quarter results further validate our belief that the actions we've taken and the investments we've made are further enabling sustainable long-term growth while continuing to deliver value and convenience for our customers. We continue to believe we operate in one of the most attractive sectors in retail and with the plans and initiatives we have in place, we are well-positioned to drive continued growth in the years ahead.", "With that, I'll now turn the call over to John." ] }, { "name": "John W. Garratt", "speech": [ "Thank you, Todd. And good morning everyone. Now that Todd has taken you through a few highlights of the third quarter, let me take you through some of the important financial details. Unless I specifically note otherwise all comparisons are year-over-year and all references to EPS refer to diluted earnings per share.", "As Todd already discussed sales that will start with gross profit. Gross profit as a percentage of sales was 29.5% in the third quarter, an increase of 1 basis point. This increase was primarily attributable to higher initial markups on inventory purchases, a reduction markdowns as a percentage of sales and a lower LIFO provision. Partially offsetting these items were increased transportation distribution costs, higher shrink, a greater proportion of sales coming from the consumables category and sales of lower margin products comprising a higher proportion of sales within the consumables category.", "SG&A as a percent of sales was 22.5% or a decrease of 13 basis points. The decrease was driven by a year-over-year reduction in hurricane-related expenses, a reduction in expenses for store supplies and lower retail labor costs as a percentage of sales. These items were partially offset by an increase in utilities costs.", "As previously discussed, we are investing in our four strategic initiatives this year. We are pleased with the continued progress on each and remain excited about the long-term transformative potential of these initiatives. Year-to-date to the third quarter, we have invested $33 million in SG&A expense attributable to our strategic initiatives. We continue to believe these investments position us well to deliver meaningful benefits to the business over both the intermediate and longer-term.", "Moving down the income statement, operating profit for the third quarter increased 11.1% to $491 million compared to $442 million in the third quarter of 2018. As a percentage of sales, operating profit was 7%, an increase of 14 basis points, which represents operating margin expansion, even as we continue to invest for the long-term.", "Our effective tax rate for the quarter was 21.7% and compares to a rate of 20% in the third quarter last year. Finally EPS for the third quarter increased 12.7% to $1.42. Overall, we are pleased with the balanced performance the team delivered during the quarter, once again, resulting in strong sales and profit growth.", "Turning now to our balance sheet, which remains strong. Merchandise inventories were $4.5 billion at the end of the third quarter, an increase of 13% overall and up 6.9% on a per store basis. We continue to believe the quality of our inventory is in great shape and remain focused over time on driving inventory growth that is in line with or below our total sales growth. Year-to-date to the third quarter, we generated significant cash flow from operations totaling $1.7 million, an increase of 9.7%. Total capital expenditures through the first three quarters of 2019 were $518 million and included our planned investments in new stores, remodels and relocations, continued investments in construction of our Amsterdam, New York Distribution Center and spending related to the strategic initiatives.", "During the quarter, we repurchased 2.5 million shares of our common stock for $400 million and paid a quarterly dividend of $0.32 per common share outstanding at a total cost of $82 million. With today's announcement of an incremental share repurchase authorization, we have remaining authorization of $1.6 billion under the repurchase program. Our capital allocation priorities continue to serve us well and remain unchanged. Our first priority is investing in high return growth opportunities, including new store expansion and infrastructure to support future growth. We also remain committed to returning significant cash to shareholders through anticipated share repurchases and quarterly dividend payments, all while maintaining our current investment grade credit rating and managing to a leverage ratio of approximately 3 times adjusted debt-to-EBITDA.", "Moving to an update on our annual guidance for fiscal 2019, as Todd mentioned, we are raising our full-year guidance primarily due to our strong operating performance through the first three quarters and expectations for the remainder of the year. For fiscal 2019, we now expect net sales growth in the low 8% range and same-store sales growth in the mid to high 3% range. We are increasing our expectations for operating profit growth to approximately 6% to 8% and expect adjusted operating profit growth of approximately 7% to 9% and we are raising our outlook for EPS to the range of $6.46 to $6.56 or adjusted EPS of $6.55 to $6.65, which translates to a range of approximately 10% to 11% growth on an adjusted basis. Our adjusted operating profit growth and adjusted EPS guidance exclude the $31 million pre-tax impact related to significant legal expenses that were recorded in the second quarter. Both our GAAP and adjusted EPS guidance assume an estimated effective tax rate within the range of approximately 22% to 22.5%.", "In terms of share repurchases, we now plan to repurchase approximately $1.2 billion of our common stock this year, which represents an increase of about $200 million relative to our previous expectation. Finally, our 2019 outlook for real estate projects and capital spending remains unchanged.", "Let me now provide some additional context on our current expectations. First, our guidance does not contemplate additional increases in tariff rates or the expansion of products subject to tariffs beyond those which are currently in effect are included in the list 4B China tariff proposal. As a reminder, we have some sales related headwinds associated with the shortened holiday selling season and the lapping of an estimated 70 basis point sales comp benefit from the pull forward of SNAP payments in the last year's fourth quarter. With regards to gross margin we continue to expect our rate improvement in the second half to be roughly in line with Q2 when compared on a year-over-year basis. As a reminder, we strategically invested in targeted promotional markdown activity in Q4 of 2018, which at this time, we do not plan to repeat . Finally, in terms of SG&A we continue to expect to invest approximately $55 million in our strategic initiatives in 2019.", "In summary, we are very pleased with our results through the first three quarters of the year and are excited about our outlook for Q4. As always we continue to be disciplined in how we manage expenses and capital with the goal of delivering consistent, strong financial performance while strategically investing for the long-term. We remain confident in our business model and our ongoing operating priorities to drive profitable same-store sales growth, healthy new store returns, strong operating cash flow and long-term shareholder value.", "With that I will turn the call back over to Todd." ] }, { "name": "Todd Vasos", "speech": [ "Thank you, John. I'm very proud of the progress. the team has made in advancing our key strategic initiatives, which we believe better position us for the long-term sustainable growth.", "Let us take you through some of the most recent highlights. Starting with our non-consumable initiative or NCI. As a reminder, NCI consists of a new and expanded assortment in key non-consumable categories including home, domestics, housewares, party and occasion. The NCI offering was available in more than 2,100 stores at the end of the third quarter and we remain on track to expand the offering to a total of approximately 2,400 stores by the end of 2019. We recently completed our sixth replenishment cycle and I'm very pleased with the sustained positive sales and margin performance we are seeing across our enhanced product categories.", "We also continue to see a positive halo effect in consumable sales. Overall, this performance is contributing to improvements in both total sales and gross margin rate in these stores. These results reinforce our belief that NCI can be a meaningful sales and margin driver as we move forward. In fact, as I mentioned earlier, our plans include accelerating the rollout of NCI to a total of about 5,000 stores by the end of 2020, as we look to further complement our strong and growing consumable business.", "Turning now to DG Fresh, which is a strategic multiphase -- phased shift to self-distribution of our frozen and refrigerated goods such as dairy, deli and frozen products. These goods currently represent approximately 8% of our total sales. The primary objective of DG Fresh is to reduce product costs on our frozen and refrigerated items, thereby enhancing gross margin. And while still early, we are very pleased with the progress and product cost savings we are seeing.", "Three other important goals of DG Fresh are to drive on-time deliveries higher, increase in-stock levels and eventually expand our assortment offering in these categories. This could include a wider selection of both national and private brands as well as an enhanced offering of Better-For-You items. In total we were self-distributing to approximately 4,900 stores from four DG Fresh facilities at the end of fiscal Q3 and now expect to capture benefits from this initiative in more than 5,500 stores by the end of this year. This compares to our previous expectation of approximately 5,000 stores being serviced by DG Fresh at year-end.", "Given the success we are seeing and great progress by the team, we now plan to begin shipping out of our fifth DG Fresh facility by as early as fiscal year end 2019. We believe this positions us well to capture additional benefits as we move into next year and as we expect DG Fresh will be accretive to both gross margin and operating profit rate in 2020. In short, we are very excited about the results we're seeing from this initiative as well as the long-term potential benefit it can deliver for our customers and our business.", "With respect to our digital initiative, our efforts remain focused on deploying technology to further enhance the customer in-store experience. In total we believe digital can drive additional traffic, as well as an increase in basket size, in turn our digital engaged customers checkout with an average basket twice as large as the company average.", "One important element of our digital strategy is pursuing opportunities to expand our customer relationships, including innovating to meet their increasing desire for convenience. To that end, some of the more recent highlights include the consolidation of our DG GO app into our primary Dollar General app bringing all our customer facing digital tools together in one easy to use application and furthering our efforts to deliver an even more frictionless shopping experience to our customers. The further rollout DG GO checkout now available in more than 700 stores, which allows customers to use their phones to scan items as they shop and then skip the line by using the DG GO checkout. Expansion of our cart calculator in app shopping and budgeting tool to approximately 15,000 stores up from about 12,000 stores at the end of the second quarter.", "And finally, we remain on track to pilot DG Pickup, which is our buy online pickup in-store offering during the fourth quarter. Our digital efforts are focused on making things easier for our customers by providing an even more convenient, frictionless and personalized shopping experience. Importantly, these efforts will continue to be tailored specifically to the Dollar General customer and remain an important component of our long-term growth strategy.", "Moving now the Fast Track, where our goal includes increasing labor productivity in our stores, enhancing the customer convenience and further improving on-shelf availability. There are two key components to Fast Track. First, is streamlining the stocking process in our stores through rolltainer optimization and with even more shelf-ready packaging. These efforts are designed to reduce the amount of time spent stocking shelves during the truck unloading and restocking process and we're pleased with the labor productivity improvements we are already seeing.", "We remain on track to complete our rolltainer optimization efforts by year's end, which is well ahead of schedule and positions us well to drive even greater efficiencies as we move forward. The second key component of Fast Track is self checkout, which we believe can further improve speed of checkout, while also reducing the amount of labor hours devoted to this activity. We recently launched a pilot in select stores and are pleased with the early results. Overall, we are making great progress with our key strategic initiatives enabled through focused and disciplined execution. We believe we are the innovative leader in our channel and remain well-positioned to capture market share in a changing retail landscape.", "Along with our strategic initiatives we remain committed to our four operating priorities. Let me take our last few minutes to update you on some of our recent efforts. Our first operating priority is driving profitable sales growth. The team is executing against a comprehensive plan to drive continued sales and profit growth with several ongoing initiatives. Let me quickly highlight just a few. Starting with our Cooler Door Expansion program, which continues to be the most impactful merchandising initiative. During the first three quarters we added nearly 35,000 cooler doors across our store base in total, we expect to install more than 40,000 cooler doors this year as we continue to build on our multi-year track record of growth in cooler doors and associated sales.", "As a reminder, last quarter we began incorporating higher capacity coolers into the majority of our new remodeled and relocated stores. These coolers provide 45% more holding capacity than traditional coolers, which will allow us to expand our assortment offering by approximately 25% creating additional opportunities to drive higher on-shelf availability and deliver a wider product selection. We believe these efforts not only extend our runway for growth in cooler doors, but also better positions us to capture additional sales opportunities, including those associated with DG Fresh.", "Turning now the private brands, which continues to be an important area of focus for us. We know the private brands represents an opportunity to further enhance our value proposition for customers, while also benefiting gross margin. We are executing a variety of tactics to drive additional growth of these brands, including enhancing our current offerings as well as introducing new product lines.", "One key area of focus is accelerating growth within our existing private brand portfolio, where our plans consist of rebranding and repositioning these products to drive greater customer penetration. We have seen great success with our efforts to-date, including studio selection and general steps and believe there is significant opportunity with other existing brands as well. In addition to our rebranding efforts, we have introduced new brands in certain categories where we see sizable opportunities for growth. Recent examples include the introduction of our popular Believe cosmetic line, as well as our Good & Smart brand, which remains an important part of our Better-For-You offering. In fact, as a result of this of its success Better-For-You offering is now available in approximately 55 -- 5,400 stores with plans for further expansion as we move forward. We are constantly evaluating our private brand portfolio and will look to further enhance our offering when and where we see opportunities. Importantly, we are seeing some of our best private brand sales performance in several years, which reinforces our belief that we are on the right track to delivering even greater value to our customers, while continuing to drive profitable sales growth.", "Finally a quick update on our FedEx relationship. During the quarter, we rolled out this convenient package pick-up and drop-off service to more than 1,800 stores and expect to be in over 8,000 stores by the end of 2020. And while still early, we are pleased with the reception this services offering is receiving from our customers and continue to believe it will become a traffic driver over time. We continue to explore innovative opportunities to serve our customers and we are excited about and able to deliver the leverage our unique real estate footprint allows us, and also the convenient locations across the country.", "Beyond these sales driving initiatives we are also focusing efforts on enhancing gross margin. In addition to the gross margin benefits associated with NCI, DG Fresh and private brand efforts shrink reduction remains an important area of focus for us. We added approximately 1,000 additional Electronic Article Surveillance units in the third quarter, bringing the total number of stores with EAS to approximately 13,600 and we remain on track to incorporate these units in all stores by the end of the year. We also continue to make progress in pursuit of further distribution and transportation efficiencies, as we recently began shipping from our 17th traditional distribution center in Amsterdam, New York. Additionally, we remain on track to reach our goal of approximately 300 private fleet tractors, by the end of the year.", "Finally, while the team has made significant progress with our tariff mitigation efforts, we continue to see opportunities to expand our foreign sourcing penetration while diversifying our countries of origin. Overall, we're pleased with the great work the team is doing across the business to further drive profitable sales growth.", "Our second operating priority is capturing growth opportunities, we celebrated a significant milestone in the third quarter as we opened our16,000 store. This is a testament to the fantastic work of our best-in-class real estate team. Our proven high-return, low-risk model for real estate continue to be a core strength of the business. As a reminder, our real estate model continues to focus on five metrics that have served us well for many years in evaluating new real estate opportunities.", "These metrics include new store productivity, actual sales performance, average returns, cannibalization and the payback period. Of note, our portfolio of new store openings in 2019 continues to perform very well, consistently beating pro forma expectations. For 2019, we remain on track to open 975 new stores, remodel 1,000 stores and relocate 100 stores. Through the first three quarters of the year, we opened 769 new stores, remodeled 928 stores including 480 in the higher cooler DGTP or DGP formats and relocated 75 stores. We also added produce to 65 stores during the quarter, bringing the total number of stores, which carry produce to more than 600.", "As I noted earlier for fiscal year 2020, we plan to open 1,000 new stores, remodel 1,500 stores and relocate 80 stores representing nearly 2,600 real estate projects in total. Additionally, we plan to add produce in approximately 250 stores in 2020. Notably, we expect more than 1,100 of our remodels to be in the DGTP or DGP format, the remainder of the remodels will primarily be in the traditional format.", "As a reminder, our traditional remodel stores, which has an average of 22 cooler doors delivers a 45% comp lift on average. This compares to an average comp lift of 10% to 15% for a DGTP or DGP remodel, which has an average of 34 higher capacity cooler doors. Given the strong results we continue to see from our Remodel program, we are excited about the 50% increase in remodels we are targeting for next year.", "Investing in our mature store base to incorporate our best and most impactful initiatives is an important component of our real estate strategy, as we continue to leverage recent learnings and format innovation to capture additional market share. With regards to new stores we plan to accelerate the rollout of our DGX format next year targeting about 20 additional stores, bringing the total number of DGX stores to approximately 30 by the year-end 2020. The remainder of new store openings will primarily be in the traditional format, the majority of which will include higher capacity coolers. I am very proud of the team's ability to execute such high volumes of successful real estate projects and we are excited about the continued growth opportunities ahead.", "Our third operating priority is to leverage and reinforce our position as a low-cost operator. With the customer always at the center of everything we do, we remain committed to our low-cost approach throughout the organization. We have a clear and defined process to control spending and are constantly seeking opportunities to reduce costs where possible through a zero-base budgeting mindset. This process has produced significant cost savings to-date, in addition to fee generating initiatives such as our FedEx relationship. We believe low costs always drives out high cost and we are steadfast in our pursuit of these opportunities.", "Our fourth operating priority is to invest in our people as we believe they are our competitive advantage. These efforts continue to yield positive results across the business, as evidenced by continued record low store manager turnover, strong applicant flow and a robust internal promotion -- promotional -- excuse me, promotions pipeline.", "We continue to engage directly with our employees and are pleased with the participation rate and valuable feedback received in our most recent employee engagement surveys. We value these conversations and look forward to continuing our work together to further enhance our position as an employer of choice. We believe the opportunity to start and develop a career with a growing company is a unique competitive advantage and remains our greatest currency in attracting and retaining talent. To that end in 2020, we plan to create more than 8,000 net new jobs, importantly, our growth continues to foster an environment where employees have opportunities to advance to roles with increasing levels of responsibility in a relatively short time frame. In fact, more than 12,000 of our current store managers are internal promotes and we continue to seek innovative opportunities to develop our teams. In October we celebrated our 80th anniversary. A lot of change has occurred in 80 years, but the one constant has been our unique culture, which is deeply rooted in our company mission of serving others.", "On that note, we recently completed our annual community giving campaign, where employees across the organization come together to raise funds for a variety of important causes. I'm impressed every year by the generosity and compassion demonstrated by our team members, which reinforces our culture is alive and well and is a competitive advantage for Dollar General.", "In closing, we are pleased with another strong quarter and the continued momentum we saw in the business. As a mature retailer in growth mode, we believe we are uniquely positioned to continue delivering value and convenience for our customers and long-term value for our shareholders. As we are working through the busiest months in retail I want to offer my sincere thanks to each of our approximately 140,000 employees across the company for their tireless dedication to serving our customers every day. Our people truly make the difference at Dollar General, and as I've mentioned, their dedication to fulfilling our mission of serving others is the bedrock of our culture. We are excited about our results in the first three quarters and are working hard to finish the year on a strong note.", "With that operator, we would now like to open the lines for questions." ] } ]
[ { "name": "Operator", "speech": [ "[Operator Instructions] The first question will come from Matthew Boss with JP Morgan. Please go ahead." ] }, { "name": "Matthew Boss", "speech": [ "Great. Congrats on a really nice quarter, guys." ] }, { "name": "Todd Vasos", "speech": [ "Thank you, Matt." ] }, { "name": "Matthew Boss", "speech": [ "Todd, maybe to start off, can you speak to the health of the low-income consumer and maybe how you plan to cap your top-line strength that you're seeing today as we think about the industry backdrop versus your own offensive initiatives, meaning I guess, how confident are you that you can sustain the drivers of today's top-line strength as we look ahead to next year and beyond?" ] }, { "name": "Todd Vasos", "speech": [ "First, Matt, I would say that our core consumer -- we see her about where we had the last couple of quarters, she still has a little bit of extra money in her pocket continues to be employed at a pretty high rate but always remember our core customer is always a little stretched and she looks to us to provide that value and convenience that she has come to known from Dollar General. And as I look into the future, whether it'd be this quarter into next year I would tell you that the continued strength we see in the top-line sales results are really a combination of a good consumer, but I would tell you that that our initiatives are really starting to work for us across the entire portfolio of businesses we have both consumables and non-consumables. So, both are shorter-term initiatives around coolers, health and beauty, queue lines, et cetera. But also you've probably noticed, we've had some of our best non-consumable results that we've had in many years and a lot of that is coming from our longer-term strategic initiatives mainly NCI where we've taken a lot of our NCI learnings and not only have got them in the 2,100 stores that we've already launched it in, but we've also flushed it back into the entire chain many of those very successful planograms that we've set we've actually put them inside of our 16,000 stores, which is really starting to help drive that top-line.", "So we feel very, very good about the sustainability of our of our comps as we, as we go forward." ] }, { "name": "Matthew Boss", "speech": [ "Great. And then maybe just a follow-up for John, on the gross margin. I guess any difference between your gross margin performance versus internal plan this quarter, in the third quarter, and then with the acceleration of DG Fresh and NCI into next year, is there any reason why your gross margin expansion opportunity as we think about next year would not potentially be larger than the performance that we're seeing this year?" ] }, { "name": "John W. Garratt", "speech": [ "Thanks, Matt. I'll start by saying, we feel very good about the balanced Q3 performance as we drove a strong top-line, as Todd mentioned, while increasing our margin rate, slightly, I would tell you that we still see the second half gross margin the same as we did on our last call. We continue to expect rate improvement, as we mentioned, in the second half to be roughly in line with Q2 compared on a year-over-year basis and we see the same basic drivers there in play. As we said we would, we continue to be more targeted and promotional activity and as you can see, we continue to drive very strong transaction growth, great balance in our sales and have been growing our share at an accelerating rate. We also expect to see and are seeing continued growth in benefits from initiatives like DG Fresh and NCI, as Todd mentioned. And as you look forward, I'm not going to comment specifically on 2020, we'll be talking about that in our next call but just more broadly as you look over the long-term.", "There's always headwinds there but we see ourselves in a position to expand our gross margin over the long-term. We see growing impact continuing from initiatives like DG Fresh and NCI, we're really focused in our initiatives on the top-line and the bottom line, we continue to see opportunity with category management as we mentioned in our prepared comments, see a lot of opportunity around foreign sourcing penetration, a lot of great things going on with private label to drive that penetration. On the shrink side we're incorporating EAS and the remainder of the stores this year, as well as operational focus on that it's the opportunity there over the long-term and the team has done a great job on the supply chain side driving efficiencies. So we believe we're making the right investments and we believe we have a lot of levers to improve operating margin over the long-term. While reserving the right we needed to invest in the customer." ] }, { "name": "Matthew Boss", "speech": [ "That's great. Congrats again." ] }, { "name": "John W. Garratt", "speech": [ "Thank you." ] }, { "name": "Operator", "speech": [ "The next question will come from Rupesh Parikh with Oppenheimer. Please go ahead." ] }, { "name": "Rupesh Parikh", "speech": [ "Good morning and thanks for taking my question. Also, congrats on a great quarter." ] }, { "name": "John W. Garratt", "speech": [ "Thank you." ] }, { "name": "Rupesh Parikh", "speech": [ "So I also wanted to ask a little bit more about your acceleration in your real estate plans for next year. So if you could maybe talk a little bit more about your thinking behind the decision to accelerate your real estate projects and how you feel about the organizational capacity to handle both the acceleration on the real estate front and really all the initiatives that you continue to have under way?" ] }, { "name": "John W. Garratt", "speech": [ "Rupesh. Thanks for the question. I would tell you we have really, over the years of built the capability to execute against a very robust pipeline of real estate projects. But even beyond that, we have built the disciplines here and have proven over time that we can handle a lot of complex projects at one time, we have a great group of individuals that work for this company that work hard every day to make sure that we execute at a very, very high level. And that's what really gave us the notion to move a little faster here, knowing the success that we have seen in the recent past. But even more so than that we want to make sure as we continue to take care of the mature store base of this company and touch every store every 7 to 10 years to make sure it's refreshed and has the best and brightest that we have available, we really need to start to accelerate our remodel programs to help facilitate that every 7 to 10 year touch. But again, we wouldn't be able to do that without all the great work that this team is able to produce in any given year." ] }, { "name": "Rupesh Parikh", "speech": [ "Great and then one quick follow-up question. So any initial thoughts in terms of the SNAP rule changes that are going to go into effect next year?" ] }, { "name": "John W. Garratt", "speech": [ "Yeah, there is one that was in the news yesterday around able-body work requirements to take effect April 1, 2020. Based on what we know about this proposal, we don't see this has a material impact next year as we see it. This is something we continue to monitor closely. We've continued to see a long-term trend of reduced benefits over time gradually, but over that time our share has grown as well. So we're still a little under 5% in terms of tender mix, but we're really focused on what we can control, and that's making sure we're prepared to serve those customers as they need it." ] }, { "name": "Rupesh Parikh", "speech": [ "Great, thank you." ] }, { "name": "Operator", "speech": [ "The next question is from Karen Short with Barclays. Please go ahead." ] }, { "name": "Karen Short", "speech": [ "Hi, thanks for taking my question. I just wanted to follow up a little bit on the gross margin in general. So I know you've consistently said and you said it twice on this call that second half gross margin will be similar to 2Q, so that implies kind of almost 30 basis point improvement in gross margin in the fourth quarter. So I'm wondering if you could just provide a little color on why you see that improvement? And then you did call out shrink as a pressure point this quarter as well distribution, transportation but can you elaborate a little bit on what was causing that and is that got anything to do with the acceleration of the Fresh initiative?" ] }, { "name": "John W. Garratt", "speech": [ "Sure. I'll start by talking about gross margin. You're correct in the way you're thinking about the second half that would imply, and that's what we expect is increased gross margin expansion in Q4. The reason we see more gross margin expansion in Q4 versus Q3 the two bullet main drivers that I would point to is one, the acceleration of our strategic initiatives as Fresh scales, as NCI scales we see that playing a bigger and bigger role. The other piece is the promotional activity, we are lapping heightened promotional activity last year. It was targeted. It served its purpose, created a lot of momentum in the business, but we don't see you need to repeat that. And the team has done a really great job being very targeted in the promotional activity, really focused on what moves the needle and we see the ability to do less as a percent of sales this year. That's the two main things I would point to as well as just seeing other opportunities and the other levers that we mentioned there.", "In terms of shrink we've reduced shrink quite a bit over the last three years. But as we've said, it's never a straight line to the top. In Q3 we were lapping a very challenging at the time that was the lowest shrink rate we'd had in many years. What we've been trying to do this year is balance shrink with in-stock improvement levels, we really look to take our in-stock improvement to the next level, which is great in terms of driving sales.", "But it does present a little bit more shrink exposure, but we continue to see opportunity over the long-term to drive further shrink improvement and with the incorporation of the EAS units in all the stores by the end of the year that's been a big benefit to us and we would expect benefits from that as well as leveraging all the other tools and technology and process rigor to drive that down further over the long-term." ] }, { "name": "Karen Short", "speech": [ "So my follow up would be then, as we look to 2020 just generally speaking, it would sound to me, barring anything unforeseen with respect to the competitive environment or the consumer that the tailwind should be greater than the headwinds overall for next year? Is that right?" ] }, { "name": "John W. Garratt", "speech": [ "I'm not going to comment specifically to 2020, I'll just speak to the longer-term and what I would say is, we feel like we have a lot of catalysts in place to drive the top-line. As we've mentioned, we feel like we have a lot of levers within gross margin and SG&A to flow that through. We're very pleased with where we're at this year, delivering double-digit operating profit growth and EPS growth this quarter, while reinvesting in the business. And as we look forward, we'll continue to look at that. We want to make sure that we're delivering strong performance but at the same time reinvesting in the business to protect the long-term health and growth of the business. So I would look at it that way." ] }, { "name": "Karen Short", "speech": [ "Great, thanks very much." ] }, { "name": "Operator", "speech": [ "The next question is from Ed Kelly with Wells Fargo. Please go ahead." ] }, { "name": "Anthony Bonadio", "speech": [ "Yeah. Hey, guys. This is a Anthony on for Ed. Thanks for taking our question and congrats on the solid quarter." ] }, { "name": "John W. Garratt", "speech": [ "Thank you." ] }, { "name": "Anthony Bonadio", "speech": [ "So clearly you guys continue to accelerate you share gains given the comp performance and your initial remarks. Can you just talk about what you're seeing right now in the competitive landscape? And then is there any specific channel that you think this is coming from, or would you say it's been more broad-based?" ] }, { "name": "Todd Vasos", "speech": [ "Yeah, let me start with the second piece first is I would say that it is more broad-based. When you look at the share gains that we've seen and our core consumer continues to be, again, a little bit healthy in that she has a bit more money in our pocket, but I would tell you that as we look out there, a lot of our initiatives are really the key driver behind these share gains and outsized share gains of that and accelerating. And you can really see it in many of the categories that we've really got the emphasis on health and beauty being one, our food and perishable initiatives. You can really see the initiatives really resonating with the consumer and she is voting with her wallet on where she shops and it's great to see. Now, our goal is to continue to be a fill-in and that is exactly how our consumers continue to look to us. But with expanding assortments and fabulous prices, we feel that we give her the opportunity to be able to fill in with confidence." ] }, { "name": "Anthony Bonadio", "speech": [ "Got it. That's helpful. Thanks so much guys." ] }, { "name": "Todd Vasos", "speech": [ "Thank you." ] }, { "name": "Operator", "speech": [ "The next question is from Michael Lasser with UBS. Please go ahead." ] }, { "name": "Michael Lasser", "speech": [ "Good morning. Thanks a lot for taking my question. My question is going to be a little bit of a devil's advocate on the fourth quarter implied gross margin. You've got a pretty easy compare as you mentioned, do you engage in some promotional activities in the year ago period that you're not going to repeat, you've got all these really good gross margin drivers like DG Fresh and the NCI initiative and yet you're only guiding for 30 basis points of gross margin expansion in 4Q to get to, like a 31.5% gross margin, which would be below where you've been over the last few years excluding 2018. So why wouldn't it be better than that?" ] }, { "name": "John W. Garratt", "speech": [ "Yeah, you know what I would say Michael, is as you look at the squeeze on Q4 that as Karen pointed out that implies a pretty healthy gross margin, but you know what I would tell you is that, one, there are some headwinds. We're overcoming tariffs, the team has done a phenomenal job mitigating that such that it's not a material impact. It wasn't a surprise to us. But still, it is a pressure and there is other pressures as well, as well as reinvesting in the business, that's the way we look at is if we can deliver double-digit EPS growth, which is what our guidance implies 10% to 11% while reinvesting in the business to put more catalyst in place for long-term growth. We think that's a healthy balance between the two." ] }, { "name": "Michael Lasser", "speech": [ "Okay. And my follow-up question is it's very -- not maybe much not apparent from the financial performance that you've reported. But given all that you do have going on. Have there been any hiccups with opening any of these new Fresh DCs or engaging in NCI or opening new stores that we should be mindful about as you get further into executing some of these strategies over the next few quarters?" ] }, { "name": "Todd Vasos", "speech": [ "Michael, this is Todd. I would tell you that the team has done a phenomenal job across the board on each of those initiatives you just talked about. And I would tell you that we have seen no showstoppers, obviously, there's always going to be a bump or two but they were very, very manageable. We learned from those and kept moving down the road. And I think it's a real testament to your question here is our notion that we're able to accelerate both our non-consumable initiative into next year, of course, accelerating our -- and growing the Fresh initiative in the next year with up to five different new facilities as we go into 2020. So I would tell you that there has been some learnings, but more -- a whole lot more wins than anything else that we've seen, and it has given us great confidence to move forward." ] }, { "name": "Michael Lasser", "speech": [ "Sounds great. Have a good holiday. I appreciate it." ] }, { "name": "Todd Vasos", "speech": [ "Sure. Thank you." ] }, { "name": "Operator", "speech": [ "The next question is from Simeon Gutman with Morgan Stanley. Please go ahead." ] }, { "name": "Unidentified Participant", "speech": [ "Hey, guys. This is Aeon [Phonetic] on for Simeon, I just wanted to dig in a little bit more on the top-line momentum. Is there any kind of update on the basket size of the number of trips? And then I guess within that you mentioned transactions are growing nicely. So are you gaining new customers or is it kind of the existing customers just coming more frequently? Thank you." ] }, { "name": "Todd Vasos", "speech": [ "Yeah. Thank you. Yeah, I would tell you that our top-line was very balanced, a very good mix of both traffic and ticket. And I would tell you that the average basket size has upticked a little bit over the last quarter or two, as we continue to refine our offering and give our customers more choices as we rollout DG Fresh to more stores. That also enables again an extra item in the basket, if you will. So we're very pleased with both traffic and ticket as we see it. As it relates to the consumer, we continue to see that our fastest growing category of consumer, if you will, is that consumer making $50,000 or above and we continue to believe that that she's shopping with us more often because of all the work that we've done to refine that box and give her an offering at a great compelling price and she's liking what she sees when she tries us, and she sticking with us even after the first few trials. So we're really excited about that. It gives us great confidence as we move into 2020 and beyond that we can drive that top-line." ] }, { "name": "Unidentified Participant", "speech": [ "Got it. That makes sense. And just as a follow-up I guess you're lapping this year in this quarter, the hurricane-related expenses, you mentioned, and so you had some leverage, but maybe if you ex that out. I mean there's not as much leverage on the SG&A with comps came in so much stronger, I guess, why shouldn't we see more leverage on that?" ] }, { "name": "John W. Garratt", "speech": [ "What I would say is that we're proud of the Q3 and year-to-date cost control that we've put in place, while driving strong top-line and investing in our strategic initiatives. Year-to-date we've invested $33 million in our strategic initiatives, yet in Q3 and year-to-date leveraged on an adjusted basis. We're laser focused on cost control, make no mistake, but we're looking more broadly and operating profit and willing to make those trade-offs that deliver the bottom line. So we're pleased with delivering double-digit operating profit growth and delivering the double-digit rate increase making those trade-offs. But as you invest in things like DG Fresh, there is a trade-off between gross margin, SG&A. You have to spend a little bit more on SG&A to save a lot more on gross margin. And when you're at the front end of these initiatives there is more upfront cost but as these grow over time and scale, we see these having great returns. We mentioned in the call, we see DG Fresh as being accretive from a rate and dollar standpoint next year. So we believe that we're making the right trade-offs here and I believe that if we could deliver that kind of leverage, while investing in the business that's the right trade-off for the long-term and we believe these types of investments is what positions us well to be double-digit EPS growers on adjusted basis over the long-term." ] }, { "name": "Unidentified Participant", "speech": [ "Great. Thanks, guys." ] }, { "name": "Operator", "speech": [ "The next question is from Scot Ciccarelli with RBC Capital Markets. Please go ahead." ] }, { "name": "Scot Ciccarelli", "speech": [ "Good morning, guys. John, I know you've bounced around this topic, quite a bit today. But this is also on margins, I guess just kind of taking a step back, we have seen a fairly consistent pattern of the company making pretty sizable investments in the business over the last several years, whether it was price or training, labor initiatives, et cetera. And while there has been a nice payoff on the sales growth these investments have weighed on profit growth and flow-through. So I guess what I'm wondering is, are there any areas as you kind of sit here today that seem right for incremental investments?" ] }, { "name": "John W. Garratt", "speech": [ "Well, as we look ahead, I would tell you that there is nothing specific we see on the time horizon, which would be a substantial increase in investment. I think we've got four really good investments before us. Now those are going to scale and as we grow those more money will be spent on those. But as we've said, we see those hitting a tipping point. We see DG Fresh hitting a tipping point, where it's accretive next year, we're already seeing accretion from NCI, we're investing in digital and we're investing in Fast Track. Fast Track on the labor side, we're seeing benefits there already with what we're doing with making it easier to stock the shelves, we're investing in self-checkout which we see as a great return over the long-term but we're just starting there. So we're pleased with what we're seeing with that test right now in terms of adoption and customer feedback and see that returning over the long-term. So these are various phases but we see all of these providing catalysts to the top-line, but also helping the bottom line, helping that margin rate. And I would tell you, we're not giving specific guidance for next year but don't see any major investments on the horizon beyond continuing down the path we're on, which is working very well for us." ] }, { "name": "Scot Ciccarelli", "speech": [ "That's very helpful and then just a quick follow up here. You had seasonal goods that were up the same amount as the consumables from a growth rate perspective. Just curious if there is something specific that drove that this particular quarter or is a function of NCI program? Any kind of guidance on that, because obviously it helped you sell a richer mix of goods? Thanks." ] }, { "name": "Todd Vasos", "speech": [ "Yeah, sure. I would tell you that the team has done a great job in our seasonal programs, not only seasonal, but many of our home categories are doing very well. And I would tell you that NCI has given us a nice shot in the arm as it relates to the overall top-line. It's even gotten us to look at our every day 16,000 stores a little differently, as we continue to scale NCI. So I would tell you that that's really been the catalyst behind it and we're very proud of the team's performance and our store team's performance in our non-consumable categories. And the other note is apparel did very well, even in a downsizing mode that we are in, in apparel, we've made that even more productive as we expand out on other categories. Apparel is still important to our customers in certain areas and we're capitalizing very well on that." ] }, { "name": "Scot Ciccarelli", "speech": [ "That's great. Thanks, guys." ] }, { "name": "Operator", "speech": [ "The next question will come from John Heinbockel with Guggenheim Securities. Please go ahead." ] }, { "name": "John Heinbockel", "speech": [ "Hey, Todd, let me start with Good-For-You assortment, right, where does that stand now in terms of number of items, where does that go do you think over the next year or two? And is that helping you broaden out your demographic appeal?" ] }, { "name": "Todd Vasos", "speech": [ "Yeah, John, I would tell you that right now we, we see our Better-For-You offering in about 5,400 stores. We see an opportunity to probably double that over time and eventually into the majority of our stores. But everything we do here as you know, it's through the lens of the consumer and as the consumer continues to change and her preferences continue to change, and also as we start to see a little bit more of a millennial customer showing up, which we have, Better-For-You continues to grow with our customer base and we're going to grow with it. The great thing is that we've got upwards of 20 feet worth of product today, the majority of that in our Better-For-You Good & Smart label, which is our private brand label, which makes that very, very accretive for us. But I would tell you that as we continue to scale our Fresh initiative that more and more introductions into frozen dairy and deli will also fall into some Better-For-You type categories and sales opportunities. And I agree with you fully and what we've seen in our data shows it is expanding the reach of the consumers that we have today and will continue to get into the future." ] }, { "name": "John Heinbockel", "speech": [ "All right. And secondly, I know the high capacity coolers, right, 45% more holding capacity. When you think about the productivity, right, the revenue or the volume that high capacity cooler can do versus non, is it similarly 40%, 50% can it do that much more business or it's really a function -- you've got to keep in stock, so maybe it's not that high?" ] }, { "name": "Todd Vasos", "speech": [ "Yeah, I think that's the way to look at it. It does give us more revenue I would tell you that for sure. Not at a 40% rate, but this is really being done two-fold reasons. Number one, we are ensuring that we're in-stock as we roll out our new Fresh initiative. We would rather have it in the cooler on the sales floor than any backstock in the back room in a cooler waiting to be stocked. That's number one. But it does give us 25% more item capability and that's where you're going to see the increase in sales come from in this initiative. And I'm happy to say that the majority of the stores that we put in the ground new next year as well as our remodel and relows, will have those higher capacity coolers in them. So we feel real good John about where this is going to take us." ] }, { "name": "John Heinbockel", "speech": [ "Thank you." ] }, { "name": "Todd Vasos", "speech": [ "Thank you." ] }, { "name": "Operator", "speech": [ "The next question will come from Chuck Grom with Gordon Haskett. Please go ahead." ] }, { "name": "Chuck Grom", "speech": [ "Hey, good morning guys, great quarter. Just Todd, let me talk you a little bit into NCI a little bit more just maybe the number of SKUs you're adding by store, what the lift you're seeing and say in individual store and it seems like the gross margins are starting to nicely contribute. Maybe just sort of unpack that for us a little bit more, because obviously, it's pretty important you talk about the remodel lift historically, but it sounds like NCI something that we may be could start to quantify?" ] }, { "name": "Todd Vasos", "speech": [ "Yeah, I would tell you that -- Chuck that we plan to quantify this a little bit more as we move into next year. But let me try to shape it up a little bit by saying that it is a complete redo of our non-consumable categories in general. And I would tell you that the mix is vastly different in those stores than what you see in our traditional stores. On top of that, it gets refreshed multiple times a year in many of the areas of NCI where our planograms our static, if you will, outside of seasonal in our traditional stores. So it gives something fresh and new to the consumer every time she comes in and again she has been gravitating and resonating to that very, very well. I would tell you that it has been accretive to our remodel sales. Again we will quantify that probably a little deeper as we move forward. But both on the sales line and the gross margin rate line we've seen benefits from this. And as that continues to grow it will start to benefit the entire company, as we continue to grow that. But the point that I did want to again make is that we're taking some of those best of the best planogram learnings and rolling them back into the 16,000 store base and that's really what's given us some of that strength that you've seen over the last quarter to two in our non-consumable categories. So we feel very good about where it's headed, and we're only in the third inning here of build to roll this out." ] }, { "name": "Chuck Grom", "speech": [ "Okay, that's helpful and then just a follow-up, along with the potential margin savings from eliminating the middleman. One of the benefits from bringing Fresh distribution in-house was I believe the ability to get better access to brands. So just wondering if you could elaborate on progress on that front and anything we should expect over the next couple of years, maybe any specific brands that you've been able to bring in recently? Thanks." ] }, { "name": "Todd Vasos", "speech": [ "Chuck, as we continue to scale Fresh, it is a goal of ours to expand the brand offering in the areas that that our customers are looking for. A lot of it in the deli and frozen areas of the store and the one big area that we see opportunities to move forward as well is, even in our own private brand offering, which we were excluded to really playing in any significant way and that would include Better-For-You as we continue to move forward. So that -- while that is a very important piece of the Fresh initiative, the most important piece right now is getting the store is up and running seamlessly, making sure we're in-stock so the consumer driving that in-stock rate which would drive our sales higher, we've already seen that. And then as we master that within the next upcoming year or more we'll start to put in these new brands, which will also then help accelerate that top-line in the Fresh initiative. So we believe we've got a multi-year-pronged approach to this, that should drive that top-line." ] }, { "name": "Chuck Grom", "speech": [ "And just to follow-up, I think you said 5,500 stores, but did you say how many expect end of -- by the end of 2020 ?" ] }, { "name": "Todd Vasos", "speech": [ "Well, I think what we've said, Chuck is that the pace of rollout is going to be a very similar. We'll probably expand that a little bit more, but we plan to be in close to 12,000 or more stores by the time we leave 2020." ] }, { "name": "Chuck Grom", "speech": [ "Okay, great. Thanks a lot, Todd." ] }, { "name": "Todd Vasos", "speech": [ "Thank you." ] }, { "name": "Operator", "speech": [ "[Operator Closing Remarks]" ] } ]
DG
2018-08-30
[ { "description": "Vice President, Investor Relations & Public Relations", "name": "Jennifer Beugelmans", "position": "Executive" }, { "description": "Chief Executive Officer", "name": "Todd J. Vasos", "position": "Executive" }, { "description": "Chief Financial Officer & Executive Vice President", "name": "John W. Garratt", "position": "Executive" }, { "description": "UBS Group -- Analyst", "name": "Michael Lasser", "position": "Analyst" }, { "description": "Deutsche Bank -- Analyst", "name": "Paul Trussell", "position": "Analyst" }, { "description": "Morgan Stanley -- Analyst", "name": "Vincent Sinisi", "position": "Analyst" }, { "description": "J.P. Morgan -- Analyst", "name": "Matthew Boss", "position": "Analyst" }, { "description": "Guggenheim Securities Partners -- Analyst", "name": "John Heinbockel", "position": "Analyst" }, { "description": "RBC Capital Markets, LLC -- Analyst", "name": "Scot Ciccarelli", "position": "Analyst" }, { "description": "Gordon Haskett Research Advisors -- Analyst", "name": "Chuck Grom", "position": "Analyst" } ]
[ { "name": "Operator", "speech": [ "Good morning. My name is Jennifer and I will be your conference operator today. At this time, I would like to welcome everyone to the Dollar General Second Quarter 2018 Earnings Call. Today is Thursday, August 30, 2018. All lines have been placed on mute to prevent any background noise. This call is being recorded. Instructions for listening to the replay of the call are available in the company's earnings press release issued this morning.", "Now, I would like to turn the conference over to Ms. Jennifer Beugelmans, Vice President of Investor Relations and Public Relations. Ms. Beugelmans, you may begin your conference." ] }, { "name": "Jennifer Beugelmans", "speech": [ "Thank you, Jennifer, and good morning, everyone. On the call with me today are Todd Vasos, our CEO, and John Garratt, our CFO. After our prepared remarks, we will open the call for questions. Our earnings release issued today can be found on our website at investors.dollargeneral.com under News and Events.", "Let me caution you that today's comments will include forward-looking statements about our expectations, plans, future estimates, and other non-historical matters including, but not limited to, our Fiscal 2018 financial guidance and store growth plans, our planned investments and initiatives, capital allocation strategy and related expectations, and economic trends or future conditions. Forward-looking statements can be identified because they are not statements of historical facts or use words such as may, should, could, would, outlook, will, believe, anticipate, expect, assume, forecast, estimate, guidance, plan, opportunity, potential, continue, focused on, intend, going forward, goal, over time, look forward, long-term, schedule to, or on track, and similar expressions that concern our strategy, plans, intentions, or beliefs about future matters.", "Important factors that could cause actual results or events to differ materially from those projected by our forward-looking statements are included in our earnings release issued this morning under Risk Factors, in our 2017 Form 10-K filed on March 23, 2018, and in the comments that are made on this call. We encourage you to read these documents.", "You should not unduly rely on forward-looking statements which speak only as of today's date. Dollar General disclaims any obligation to update or revise any information discussed in this call, except as may be otherwise required by law. At the end of our prepared remarks, we will open the call up for your questions. Please do limit your questions to one and one follow-up question if necessary.", "Now, it is my pleasure to turn the call over to Todd." ] }, { "name": "Todd J. Vasos", "speech": [ "Thank you, Jennifer, and welcome to everyone joining our call. We are very pleased with our strong second quarter results, which were driven by robust performance on both the topline and bottom line. A key highlight of the quarter was our 3.7% same-store sales growth. Both basket and traffic growth drove these results, demonstrating what we have long believed to be true. By providing the products, convenience, and value that our customers want, we can continue profitably growing sales. I also want to note that our two-year same-store sales stack for the second quarter of 2018 was the highest in ten quarters.", "Year-to-date, through the second quarter of 2018, we posted 2.9% same-store sales growth, driven by greater customer productivity. Based on our performance in the first half, and our outlook for the rest of the year, we are increasing our net sales and same-store sales guidance for 2018. We are executing against our operating priorities and believe we are well positioned to deliver solid growth in the second half of 2018.", "Now, let's recap some of the topline results for the second quarter. Net sales increased by 10.6% to $6.4 billion, compared to net sales of $5.8 billion in the second quarter of 2017. We are very pleased with the new store productivity and performance from our mature stores. Our 3.7% same-store sales increase was led by our strong performance in consumables. We're proud of this performance and believe we are well positioned against all classes of trade, as evidenced by our market share gains in the 4-, 12-, 24-, and 52-week periods ending July 28, 2018. These gains are measured by syndicated data.", "Within nonconsumables, we also delivered solid overall positive comp growth driven primarily by strong sales in our seasonal category. As we have discussed in recent quarters, overall, we continued to see rational pricing activity across the industry. We know it's always competitive within the discount retail space, but we are committed to being priced right for our customer every day.", "As we continue to execute against our operating priorities, we believe we have opportunities to capture incremental market share. We will continue to work to drive awareness of the value proposition that we offer. After John's comments, I will provide an update on our growth initiatives.", "With that, I will now turn the call over to John to provide you with more detail on our second quarter financial results." ] }, { "name": "John W. Garratt", "speech": [ "Thank you, Todd, and good morning, everyone. Now that Todd has discussed a few highlights of the second quarter, I will take you through some of the important financial details. Unless I specifically note otherwise, all comparisons are year-over-year.", "As Todd has already discussed sales, I wills tart with gross profit. Gross profit as a percentage of sales was 30.6% in the second quarter, a decrease of 7 basis points. This decrease was primarily attributable to the ongoing product category mix shift to consumables as well as higher sales of lower margin consumable products and higher markdowns. Like many other retailers, our business continues to see the effect of increasing transportation costs due to the tight carrier market and higher fuel prices, among other factors. This impact is reflected in the slightly lower gross margin we reported in the second quarter. These factors were partially offset by another quarter of improved inventory shrink as well as positive contributions from initial inventory markups.", "SG&A expense as a percent of sales was 22.2%, a decrease of 8 basis points. The leverage in the second quarter of 2018 was primarily driven by lower repairs and maintenance expenses, a reduction in lease termination expenses as we lap the acquisition of the Dollar Express stores in the second quarter of 2017, lower fixed asset impairment costs, and a reduction in retail labor expenses as a percentage of sales. Partially offsetting those decreases were an increase in professional fees, primarily to support a variety of longer term initiatives, higher incentive compensation expenses, and increased cost to support certain loss prevention initiatives.", "We are pleased with the leverage we gained in SG&A, and our ability to hold operating margin relatively flat this quarter. And, we would note that we achieved this margin despite the transportation headwinds we are facing and while continuing to invest in our current business model and opportunities for long-term growth.", "Moving down the income statement, our effective tax rate for the quarter was 21.5%. This compares to 37.2% in the second quarter of 2017. This decrease is primarily attributable to the lower federal tax rate in the 2018 period, as a result of the Tax Cuts and Jobs Act. Finally, diluted earnings per share for the second quarter were $1.52. We are heading into the back half of the year with a strong balance sheet and expect to continue our track record of generating strong cash flow from operations.", "Merchandise inventories were $3.9 billion at the end of the second quarter of 2018, up 12.5%, and up 3.9% on a per store base. We believe our inventory remains in great shape and we remain focused over the long-term on managing inventory growth to be in line with or below our sales growth.", "Throughout the first half of 2018, we generated strong cash flow growth from operations totaling $1.1 billion, an increase of $311 million or 39.6%. Year-to-date total capital expenditures were $371 million and included our planned investments in new stores, remodels, and relocations, continued investments in our two distribution centers under construction, and spending related to the previously announced acceleration of certain key initiatives.", "During the quarter, we have repurchased 2.1 million shares of our common stock for $200 million and paid a quarterly dividend of $0.29 per common share outstanding at a total cost of $77 million. Through the end of the second quarter, we returned a total of $504 million in 2008 (sic) to our shareholders through our share repurchases and quarterly dividend payments. From the inception of our share repurchase program in December 2011 through the second quarter of 2018, we have repurchased $5.5 billion, or 85 million shares, of our common stock. At the end of the second quarter, the remaining repurchase authorization was approximately $1 billion.", "Our capital allocation priorities remain unchanged as we continue to be disciplined and focused on financial return. Our first priority is investing in high return growth opportunities, including new store expansion and infrastructure to support future growth. We also remain committed to returning significant cash to shareholders through anticipated share repurchases and quarter dividends while maintaining our current investment grade credit rating and managing to a leverage ratio of approximately three times adjusted debt to EBITDAR.", "We are pleased with our position midway through the year and we are excited about the momentum in the business. Based upon our year-to-date performance, we are raising the outlook we provided on May 31, 2018 for both net sales and same-store sales. For fiscal 2018, we now expect net sales growth to be in the range of 9-9.3%, and our same-store sales growth to be in the mid to high 2% range. We continue to expect our fiscal year 2018 operating margin rate to be relatively flat as compared to our fiscal year 2018 operating margin rate.", "We are reiterating our outlook for diluted EPS for the full year, which is $5.95-6.15. As a reminder, our earnings outlook includes the impact of increasing transportation costs, some continued mix pressures, and continued investment in our longer-term growth initiatives. Our diluted EPS guidance assumes our tax rate will be at the lower end of our 22-23% range that we provided. Our outlook for Fiscal 2018 real estate projects, CapEx, and share repurchases remains unchanged.", "For modeling purposes, I do want to take a moment and update you on some of the puts and takes in the back half of the year. First, as we noted last quarter, in the second half of 2017, we opened 741 new stores, driven by the acquisition of the Dollar Express locations, which is a much higher number than our typical cadence. As a result, in the second half of 2018, we will have an unusually high number of stores rolling into the comp base. The anticipated positive impact of these stores should help with the tougher comparisons we face as we move through the latter part of the fiscal year. This expected positive impact is contemplated in our full year guidance.", "Second, while we expect to see pressures mentioned on gross margin continue in the second half of the year, we are executing strategies that we believe could help mitigate the impact of these headwinds over time. Despite the headwinds from transportation and our product sales mix, we are on track to deliver a relatively flat operating margin rate for the full year as we manage all of the levers within gross margin and SG&A. We feel good about our position today because of the actions we are taking to help mitigate headwinds and maximize our sales growth opportunities.", "Turning to operating expense, in the second quarter we spent approximately $8 million to advance our strategic initiatives. Our strong sales growth allowed us to invest in our future and deliver on the bottom line. We expect to continue investing in these important initiatives that we believe will extend our runway for growth.", "Finally, a reminder on interest expense. Your model should include the impact of the bond refinancing we completed in the first quarter. We estimate the net impact of 2018's financing activities to be about $9 million in annualized interest expense going forward. As always, we are focused on carefully controlling costs, even as we make targeted proactive investments. We continue to be disciplined in how we manage expenses and capital, with the goal of delivering consistently strong financial performance while positioning our business for long-term growth.", "We remain confident in our business model and our ability to drive profitable same-store sales growth, healthy new store returns, generate strong cash flow from operations, and create long-term shareholder value.", "With that, I will now turn the call back over to Todd." ] }, { "name": "Todd J. Vasos", "speech": [ "Thank you, John. For the remainder of my remarks, I want to walk through how we are executing against our four operating priorities, which have served us well and placed us in a leadership position within our channel. I will also update you on the progress against certain strategic growth initiatives.", "Starting with our first priority of driving profitable sales growth, our most impactful topline initiatives for 2018 revolve around merchandising and store operations. These initiatives are designed to enhance the value and convenience proposition for our customers, offering them the trusted simple solutions they seek from us every day. We continue to strategically invest in our mature store base. As you know, one of our strategies is to increase the average number of cooler doors across the chain. These types of projects drive high returns by encouraging our customers to make more trips and increase their basket sizes.", "This year, our goal is to install more than 20,000 incremental cooler doors across our mature store base. As of the end of the quarter, we have installed approximately 16,000 cooler doors across the chain and we are well on our way to reaching our year-end goal. By the end of the fiscal year, we expect to have an average of 20 cooler doors per store, up from 10 in 2012.", "During the second quarter, we continued to focus on driving impulse purchases. One of the ways we do this is through our enhanced queue lines. During the second quarter, we added the enhanced queue line to more than 400 existing stores, bringing our total for the chain to approximately 6,800 stores. The queue line retrofit performance remains very strong. We expect to have this enhancement in more than 7,500 stores by the end of 2018.", "In June, we launched phase two of our health and beauty initiative, which is in approximately 7,500 stores today. The goal of this phase is to educate our customers about the high-quality products we carry, both national and private brands, as well as our low prices. We are a well-known leader in value and convenience, but we believe many of our customers are unaware of the value we offer within health and beauty. We are confident that we have the opportunity to take market share from other channels among existing and potential customers. While it's still early, we are encouraged by the favorable response to this initiative thus far.", "We are also very excited about the early results from our better-for-you initiative. We launched better-for-you just a few months ago, and already the value proposition is resonating with our customers who are looking for healthier options at affordable prices. Currently, we have more than 2,000 stores that are carrying, on average, 125 better-for-you products. Within this offering, we have now launched more than 40 items under the Good & Smart private brand, with more in the works. This brand offers our customers a variety of better-for-you options at smart prices, and we are excited to begin building brand equity and customer loyalty for this product line.", "In addition to these initiatives, I have seen the fall season and Christmas lineups, and we are excited about the upcoming seasons and new products, which we believe will resonate with our customers. In addition to these merchandising efforts, our store operations teams are also executing on multiple fronts with a focus on driving sales. First, we continue to reach new heights in overall customer satisfaction. For us, this means concentrating on store cleanliness, on shelf availability, friendliness, and speed of checkout. By hitting our goals, we believe we can drive higher overall satisfaction and cultivate even more loyalty with our customers.", "Also within store operations, we continue to focus on driving inventory shrink down even further. Reducing shrink remains our largest near-term gross margin opportunity. We're very excited about our progress, and we saw our seventh consecutive quarter of sequential improvement in the shrink rate. Our improvements in shrink rate have been supported by a variety of actions, including defensive merchandising tactics, leveraging technology, and new store process controls, and expanding electronic article surveillance or EAS. This year, we have doubled the stores using EAS technology to about 10,000.", "One thing I want to highlight is that, while we have continued to reduce shrink, we have also continued to improve on-shelf availability. As students of retail, you will know how difficult it is to achieve both of these goals at the same time. I am proud to say the team has delivered, as shrink and on-shelf availability both have continued to improve. We also have other longer-term gross margin opportunities. These include many distribution and transportation initiatives, such as reducing stem miles, improving our load optimization, growing and diversifying our carrier base, and expanding our private fleet.", "With regard to our private fleet, we remain on track to expand from 80 tractors at the end of Fiscal 2017 to approximately 200 tractors by the end of this year. While this represents a relatively small percent of our current transportation base, we believe that over time this will give us added flexibility and help insulate us for future carrier rate fluctuations.", "We continue to make strides growing our distribution network as well. The team has done a fantastic job driving this expansion and creating opportunities to further improve our efficiencies. Our distribution centers currently under construction in Longview, Texas and Amsterdam, New York are both scheduled to begin shipping in the 2019 calendar year. We continue to anticipate that we will see a relatively quick and positive impact on stem miles.", "As always, we are continuing evaluating opportunities to drive efficiencies and productivity within our distribution center network to support profitable sales growth. I also want to note that, not only is the team doing a great job finding quality sites for distribution centers, but they are quickly ramping up by hitting productivity goals. For example, our Janesville, Wisconsin distribution center is our second newest DC and is currently the most productive in the chain.", "We also have opportunities to drive gross margin with our global sourcing strategy, category management, and private brands. While we're excited about these opportunities to enhance our gross margin over the long-term, we are also carefully watching the potential for new headwinds to develop, particularly around tariffs. Our merchants and global sourcing teams have been working closely with our vendor partners to identify opportunities to mitigate the impact of current and potential tariffs on both our businesses and our customers' budgets. We have long-standing relationships with many of our vendors and we will continue to work closely with them to find ways to reduce cost. We are keeping a close eye on the situation and we will be looking at all opportunities. As a reminder, our retail operations are solely domestic and we purchase in US dollars.", "In addition to the tariff impact, we closely watch macroeconomic indicators that may affect our customers. While the overall economy seems to be doing well, we know that rising fuel prices, concerns about healthcare, and potential loss or reduction of government benefits may weigh in our core customers' outlook. As always, we remain committed to serving our customers with the everyday low prices they have come to know and appreciate from Dollar General.", "Our second priority is capturing growth opportunities. We have a proven high return, low risk model for real estate, and a track record of successfully opening hundreds of stores every year that meet our strict return thresholds. These new store openings, combined with our successful remodels and relocations have allowed us to extend our runway for long-term growth. We are always looking for opportunities to grow the number of communities we serve using the lessons we've learned in other markets and from the performance of our various formats.", "As a reminder, our real estate model focuses on five metrics to ensure that new store growth is the best use of our capital. First, new store productivity is a percent of our comp sales, which continues to average in the range of 80-85%. Second, in actual sales performance, which continues to track very closely to our pro forma model. Third, average returns, which remain at the high end our targeted 20-22% range. Fourth, cannibalization of our new stores on our comp store base, which has remained relatively constant in our measurements. And finally, new stores have a payback period of two years or less.", "We have consistently hit our overall goals for these metrics. We are very pleased with our overall new store returns, and we remain committed to invest in our capital effectively to drive strong financial returns. This year, we plan to open 900 new stores, remodel 1,000 of our mature stores, and relocate approximately 100 stores. We are excited to be on track to achieve these goals by the end of the year.", "During the second quarter, we opened 241 stores, remodeled 322 stores, and relocated 31 stores. Of our 322 remodel stores, 121 were remodeled in the Dollar General traditional-plus format, or DGTP, which is a traditional size store with expanded cooler count. We included a fresh produce section in 31 of these DGTP remodels. As a reminder, our remodeled store delivers 4-5% comp lift on average, and a DGTP remodel delivers an average of 10-15% comp lift. When produce is included in a DGTP, it delivers comp, on average, at the high end of the 10-15% range. We currently have more than 400 stores throughout the chain which now carry produce.", "This quarter, I had the opportunity to attend the 15,000thstore grand opening celebration in Wilmington, North Carolina. It is truly remarkable to reflect on 15,000 Dollar General stores serving communities around the country. This milestone is a credit to the tremendous work of the team and I remain very excited about the growth opportunities ahead of us.", "Our third operating priority is to leverage and reinforce our position as a low-cost operator. Over the years, we have established a clear and defined process to manage spending. We continue to refine our process and have developed a culture where we are intentional about examining all of our costs and expenses. All of our spending is filtered through three criteria. First, is it customer facing? Second, does it align with our strategic priorities? And, third, how does it impact our risk profile?", "At the store level, our operational initiatives for 2018 are centered on space optimization and efforts to further simplify our operations by reducing unproductive inventory, operating complexity, and product movement within the stores. These actions are designed to control costs and allow our stores managers and their teams to provide better customer service as well as a fast, clean, and in stock shopping experience. All of these actions correlate to higher sales. We will continue to focus on our underlying principals to keep the business simple but move quickly to capture growth opportunities, control expenses, and always seek to be a low-cost operator.", "Our fourth operating priority is to invest in our people as we believe they are a competitive advantage. Our investments in wages and training are well documented, and the returns on these investments continue to exceed our goals. For example, in addition to our strong sales growth, store manager turnover is continuing to improve. We remain committed to further developing this talent pipeline. We are excited about these investments and we believe they can continue to pay benefits over the long term.", "I had the privilege, earlier this month, of spending a week with more than 1,500 leaders of the company at our annual leadership meeting. I'm always impressed by the passion and commitment on display, and reminded of the strength of Dollar Genera's culture. During that week, our teams from around the country have the opportunity to engage and learn from each other, as well as to work through various training opportunities under one roof.", "Our goal is to provide our employees with training opportunities that enhance their career growth and drive improved customer service. We believe that the opportunity to build a long-term career at Dollar General is the most important currency we have to attract and retain talent. We believe the career opportunities, our competitive wages, and the engaging environment we offer, will allow us to remain an employer of choice and keep us well positioned to attract and retain talent.", "Finally, before I open the call up for questions, I want to quickly update you on our recent progress executing our digital and nonconsumable strategies of our long-term growth opportunities. Starting with our digital initiatives, in the near term our digital strategy focuses on using technology to improve the in-store experience by offering customers even more personalization and convenience. In 2018, we are bringing this focus to light with our DG GO! app, which is now live in more than 100 stores. Our goal is to roll out this functionality to an additional 150 stores by the end of the year, with a goal to further expand in 2019.", "As a reminder, the app allows customers to use their phones to scan items as they shop and then skip the register by using the DG GO! kiosk. Our app also alerts customers to potential savings on the items they are purchasing. So far, the feedback on this app has been very positive. We intend to continue integrating even more helpful functionality that delivers on the promise of personalized and convenient shopping experience. We know that our customers who more frequently engage with our digital tools tend to shop with us more often and check out with larger basket sizes. We currently have 14 million subscriber accounts within our digital coupon program. These subscribers have clipped more than 400 million digital coupons year-to-date in 2018.", "Deploying innovative technology across our stores remains an incredible opportunity for us, and we are investing appropriately. In fact, this quarter we created a new Chief Technology Officer role to help drive our digital efforts. We look forward to sharing further updates with you as the year progresses.", "Turning to our nonconsumable initiative, in the second quarter we began our test of a bold, new, and expanded assortment in key nonconsumable classes of home, domestics, housewares, and party and occasions. This initiative is focused on first offering a new, differentiated, and limited assortment that will change throughout the year. Second, displaying the new offering in high traffic areas will improve adjacencies and increase focus on key classes to enhance the in-store experience and create a sense of purchase urgency. Third, continue to deliver exceptional value by pricing the majority of the offerings at $5.00 or less.", "While the amount of space in the store dedicated to nonconsumables remains the same, we believe this merchandising strategy will drive greater sell through. We have added this assortment to more than 300 stores and plan to have approximately 700 total stores up and running by the end of the fiscal year. This is still in the early stages, but we're encouraged by the results in the test stores so far. We believe that, over time, this initiative can help meaningfully improve the trend on nonconsumable sales growth, drive traffic to the store, and positively impact gross margin.", "In closing, we delivered a strong second quarter and we are proud of our results. We are excited about the business and believe we operate in the most attractive sector in retail. We have a differentiated business model that leverages our real estate acumen and our low-cost operating experience with our clear focus on delivering value and convenience to our customers. The economy is doing well. Our customer seems to have a little bit more money in their pocket and this is contributing to our strong results. Remember, though, our customer is always under pressure and looking to stretch her budget. As we have always said, our results illustrate that our model works in good time and in challenging times, as evidenced by 28 consecutive years of same-store sales growth. We believe Dollar General's business is well positioned to continue to succeed over the long term in a variety of economic conditions.", "I want to thank each of our approximately 134,000 employees across the company for all their hard work and dedication to fulfilling our mission of serving others. The entire team is excited about our position and our outlook, and we look forward to building on our progress and driving solid performance throughout the rest of 2018.", "...", "With that, Operator, we would now like to open the lines for questions." ] } ]
[ { "name": "Operator", "speech": [ "Thank you. [Operator Instructions] Your first question will come from Matthew Boss with J.P. Morgan." ] }, { "name": "Matthew Boss", "speech": [ "Congrats on a nice quarter, guys. John, on gross margins in the back half, is it best to model the back half gross margin performance pretty similar to the slight contraction you saw in the second quarter? I guess, just any help on the drivers of gross margin for the back half of the year, maybe versus the second quarter. Anything to consider would be helpful." ] }, { "name": "John W. Garratt", "speech": [ "I'll start by saying we've very pleased with the first half performance. As you look at the balance we struck with strong topline growth and gross profit expansion, we really focus on overall operating margin as we can manage all of the levers within in. So, we guided folks toward that and said that over the course of the year we see ourselves in a position to deliver relatively flat operating margin rate year-over-year.", "There are a lot of puts and takes within there. One of the things we mentioned was increased near term pressure from carrier rates, which could get a little bit worse before it gets better, as well as, while we saw it lessen some during the quarter, we do have ongoing mix pressures. But, we have a lot of levers within gross margins to help counteract that. We were delighted with the performance of shrink. And with seven quarters of sequential improvement there, and with the investments we've made, we see opportunity to continue driving improvement there. The team continues to do a fabulous job with category management. We see a lot of opportunity there.", "We were pleased with the growth of nonconsumables this quarter. We continue to see opportunity around private label and foreign sourcing. And, while there are headwinds on supply chain efficiencies, the team's doing a great job mitigating that and helping offset some of that with stem mile reductions. We opened up more DCs. There are two under construction right now. They continue to drive efficiencies around load optimization, DC productivity, and private fleet expansion. And then, we continue to expand and diversify our carrier base to help mitigate those headwinds.", "So, when you put it all together, we feel really good about our ability, that we've done thus far and through the year, to mitigate those headwinds to deliver a relatively flat operating margin rate for the year, while importantly investing in high return strategic initiatives that we think are going to drive the future growth of this business." ] }, { "name": "Matthew Boss", "speech": [ "Great. Todd, on same-store sales, nice to see the return to positive traffic this quarter. What do you think drove the improvement? Do you see positive traffic as sustainable? Maybe just touch on some of the performance you're seeing from your more mature stores." ] }, { "name": "Todd J. Vasos", "speech": [ "My hat is off to our merchants and operators. They have done a fabulous job over the years to set us up for success. I think you saw that start to come together once again here in the second quarter. When you look at our overall sales performance, we're very encouraged on all of our initiatives that we have in play -- cooler, health and beauty, and the new better-for-you that we now have in thousands of stores across the country, and more to come. When you start to then look at even upcoming initiatives that are in the pipeline, we feel that sustaining positive traffic is exactly what we plan to continue to work toward for the back half of the year. That is always the goal. We know that traffic is key to long-term sustainability of comps. That's where the team is fully focused." ] }, { "name": "Matthew Boss", "speech": [ "Great. Thanks for the color. Best of luck." ] }, { "name": "Operator", "speech": [ "Your next question is from Vincent Sinisi with Morgan Stanley." ] }, { "name": "Vincent Sinisi", "speech": [ "Good morning. Thanks very much for taking my question and congrats on a nice quarter here. We've gotten the question from a couple of folks today -- very strong sales this quarter. Your EPS maintained from a bottom line perspective. How would you respond to that? Is it more of, \"Hey, we feel good. It's a decently wide range.\" There is the freight, mix, and initiatives that you guys called out as headwinds, and it's only at 2Q." ] }, { "name": "John W. Garratt", "speech": [ "I think the last thing you said is the right way to think about that. We're very pleased with the Q2 results, with 41% EPS growth, double digit operating profit growth -- we feel we're in a great spot. We feel that range -- $5.95-6.15 -- is the right range. It's narrower than it used to be as we bought back shares and have a lower tax rate. But, there are a lot of puts and takes within there. We do see some increased headwinds associated with transportation costs. Again, the mix, while moderating, continues to be a bit of a pressure. And the other thing we mentioned, we want to make sure we're reinvesting in the business and making targeted investments in strategic initiatives that will drive high returns. We think this is the appropriate range based on all of that. We think that's the right trade-off for the business." ] }, { "name": "Vincent Sinisi", "speech": [ "Okay. Cool. Going back to when you guys gave the initial outlook for this year, with normal course labor investments, given that you guys had gotten ahead of it several quarters before last year, is that something that's going to be able to stick to the plan? In light of this last quarter, with a lot of other retailers stepping that spend up, have you seen any changes? Do you still feel good about -- in line with your plan and where you are for the rest of this year on labor?" ] }, { "name": "Todd J. Vasos", "speech": [ "Sure. Vinny, like many things, we got ahead of this and made sure we did what was right for our business and our people last year as we invested over $70 million in wages and training. That gift is still continuing to give, if you will, in that we're seeing that our turnover rates are lower than last year, even after we put this in effect. It's been in affect now for well over a year. And, we're also seeing better sales and better shrink results. On a percent basis, we have seen the lowest level in recorded history that we can find of open store manager positions across our company. That really goes to show you that the investments we made are doing well and are sticking very, very well.", "When you couple that with our aggressive pay and our hourly wage that we've always stayed true to and made sure we paid very competitive wages against, we're seeing that applicant flow is the highest that we've seen. As you start to see that, the pipeline is full and we have less open positions, even at the hourly rate in our stores, than we had last year. So, all of that really goes to show us that we made the right decision on wages and we continue to make the right decisions as we move forward." ] }, { "name": "Vincent Sinisi", "speech": [ "Super helpful color. Awesome. Thanks, guys. Good luck going forward." ] }, { "name": "Operator", "speech": [ "Your next question is from Paul Trussell with Deutsche Bank." ] }, { "name": "Paul Trussell", "speech": [ "Good morning. Congrats on a very solid comp performance in 2Q. Following up on the guidance comment, I know you don't give specifics on a quarterly basis, but could you help us think about some of the puts and takes in 3Q versus 4Q, on overall revenues, comps, and margins -- just given the more challenging comparisons? The cycling of the hurricanes, the timing of the Express store openings -- what should we keep in mind as we model?" ] }, { "name": "John W. Garratt", "speech": [ "A couple of things there. In Q3, we do lap the impact of the hurricane, which is reflected in our guidance. I think most people have modeled that in. In Q4, we do lap the closure of some stores last year. But, the other thing we've mentioned, as we look at the back half of the year, one thing that gives us confidence in the sales number we put out -- there is not only initiatives, the traction we're seeing in the initiatives and performance of the mature stores as well as the existing stores, but also while the laps get more difficult, the benefit of the Dollar Express stores roll into that comp base. We opened an unusually large number of stores in the second half of last year. As that rolls into the comp base and we see the performance of those, that will help your comp and offset those tougher laps.", "The other thing we mentioned, with transportation costs, it's a bit of a wild card because who knows where fuel rates will go. But, we are seeing a further tightening of the carrier base, which could make things a little bit worse before they get better around transportation costs. So, that's a headwind we wanted to point out in the second half. And the investments. While we're making very targeted investments, we do want to make sure we're investing in what we see as very high return prospects for the business and the strategic initiatives and other initiatives.", "When we deliver the EPS range that we've guided to here, while investing in the business, we think that's a fantastic EPS growth for the year while investing in the future. We feel really good about our ability to mitigate the headwinds, invest in the business, and deliver a great year." ] }, { "name": "Paul Trussell", "speech": [ "Thank you. That's helpful. To follow-up, if you could just speak to the performance of the new stores and how you're thinking about the waterfall as stores mature. Separately, the apparel performance -- I know you're working on some initiatives there. But, that was still lacking -- apparel and home -- in the first half relative to how well you're performing in consumables. How should we think about the time table of getting a return on those strategic investments?" ] }, { "name": "John W. Garratt", "speech": [ "I'll take the first question with regard to new unit performance. We continue to see great results out of our new units. We've mentioned in the past that we measure a basket of metrics, including new store productivity, where we continue to see our new stores open in that 80-85% productivity range of mature stores. We continue to see the actual sales track very closely to our pro forma model expectations. The team does a phenomenal job picking great sites and projecting the sales of those. They continue to deliver. We continue to see returns at the high end of our 20-22% range. Bear in mind, that's after tax and it includes the impact of cannibalization, which we also track closely and continue to see that to continue to be as expected and consistent. We continue to see a payback period of less than two years, so we're very pleased with the performance we continue to see in those new stores in terms of their contribution to comp.", "In the past, we've said the impact of new stores, relocations, and remodels -- cannibalization is in that 150-200 range. We continue to see that. And, with the great performance lately, actually at the higher end of that." ] }, { "name": "Todd J. Vasos", "speech": [ "Paul, when you take a look at the sales initiatives, as we had mentioned, a lot of them are in and around consumables. But, there are quite a few around nonconsumables as well. As you take a look at our longer-term strategic initiatives around nonconsumables, we're very pleased with our early results there. We have over 300 stores now that we've remodeled with the new nonconsumable look and feel, and they are doing very, very well. It gives us great confidence that the 700 that we have planned by the end of this year, that they'll have the same results as we continue to move forward.", "Now, these are longer term initiatives. As we move into 2019, with this confidence that we're seeing in sales, we'll be able to put that into more stores. Stay tuned into 2019 on how many we do, but at this rate we believe we could do quite a lot of them in 2019 to help continue to move the needle in our nonconsumables. But, even past that, in all of our stores, I think our team has done a fabulous job in being very relevant on our nonconsumable offering, and also continue to show the value. I think that showed -- especially in our seasonal categories Q2 that we just ended, where we had a very strong positive comp in seasonal, which drew a positive comp for the entire nonconsumable category as a whole. So, we feel good about the back half in nonconsumables, and we'll continue to push hard to balance that mix out." ] }, { "name": "Paul Trussell", "speech": [ "Thanks for the color. Best of luck." ] }, { "name": "Operator", "speech": [ "Your next question is from Scot Ciccarelli with RBC Capital Markets." ] }, { "name": "Scot Ciccarelli", "speech": [ "Good morning, guys. It looks like the home and apparel categories are still kind of comping negative. Todd, with the retail environment that have today, I would think that you would have a bit more topline momentum in these discretionary categories. Obviously, it sounds like you're making some merchandise changes, as you previously describe. But, do you have a view as to why, even in this environment, it seemed to be such a struggle to drive positive comps in these categories?" ] }, { "name": "Todd J. Vasos", "speech": [ "As you continue to take a look at nonconsumables, a few things that we have done -- we are making changes in our current lineup. One of the changes we started to make even last year was a reduction in our apparel offering. That was very intentional, to give more room for some consumable areas, but also some other nonconsumable areas, as in some seasonal categories -- which you saw pretty good strength in. So, there is a trade-off there. We knew that going in. But, when you look in totality, you always have to remember, while the economy's doing very well, our core customer continues to struggle. Normally, her expenses outstrip her wage growth. That's what we're really seeing here. When you take a look at our core customer, the headwinds of rent as well as healthcare increases are real for our core customer.", "She continues to buy a little bit more because she does have just a small amount of more income, but not a lot. We continue to offer her great values, both in consumables and nonconsumables, and we're seeing the effects in many, many areas where she is buying more. A lot of it is to benefit her family and to feed her family." ] }, { "name": "Scot Ciccarelli", "speech": [ "Understood. That's all I had. Thank you." ] }, { "name": "Operator", "speech": [ "Your next question is from Michael Lasser with UBS." ] }, { "name": "Michael Lasser", "speech": [ "Good morning. Thanks for taking my question. If you look at the performance of your stores based on this most recent quarter, were there themes or trends you saw, whether it was from a geographic perspective -- urban, rural, suburban -- or from a competitive overlap perspective? Are you seeing some evidence that those incremental discretionary dollars that most consumers have at this point are flowing in to some of your competitors and there may be a bit of a procyclical trade up and you may not be feeling as much of a benefit from that?" ] }, { "name": "Todd J. Vasos", "speech": [ "Let me start by saying that we are very pleased with our sales overall. 3.7% comp was very strong. We saw benefit from all across the country -- every division across the country benefited in that. That was great to see. That really shows that not only the consumer has a little bit more money, but also our initiatives in totality are really paying off. Again, 3.7% comp is pretty strong. And then, as you look at our customer segmentation, we're seeing that, while our core customer -- which we call our best friends forever, or BFFs -- continue to stay very solid and are very good, loyal customers of ours.", "The interesting thing we're seeing is that some of our largest, on a percent basis, growth in customers is coming from higher income. Even though the economy is doing better, it shows us that all the work we've done with the offering inside of our box over the years is even more relevant than ever and is even more relevant to a higher end consumer. Even in a good economy, she's still looking for value and convenience, and she's finding it at Dollar General. That is great to see. We have seen no sign of trade out or trade up from our core customer. That all adds up to that strong 3.7% comp." ] }, { "name": "Michael Lasser", "speech": [ "And the higher end consumer -- are they coming in and mostly buying consumables?" ] }, { "name": "Todd J. Vasos", "speech": [ "We can see them buying a little bit of both. But consumables, especially in food, paper, and cleaning categories -- and, by the way, one of the biggest growths we've seen from that consumer base is in health and beauty. That makes a lot of sense to us, in all the work that we've done around that." ] }, { "name": "Michael Lasser", "speech": [ "John, how much incremental transportation cost pressure have you factored into your guidance for the rest of the year? And, should we expect a wide variance in your comps between the third quarter and fourth quarter?" ] }, { "name": "John W. Garratt", "speech": [ "In terms of carrier rates, we've factored in what we see on the horizon as the anticipated cost there. That's all captured in the guidance. We do anticipate that getting a little bit worse before it gets better and have factored that in. But again, we have a lot of mitigating actions that we've also played in to help counteract the impact of that. So, that's all played in. In terms of sales comps, we don't get into quarter by quarter, but would say that the impact of what we see from the large number of units rolling into the comp base helps counteract some of the laps to smooth it out somewhat over the back half of the year." ] }, { "name": "Michael Lasser", "speech": [ "Thank you so much and good luck with the back half." ] }, { "name": "Operator", "speech": [ "Your next question is from John Heinbockel with Guggenheim." ] }, { "name": "John Heinbockel", "speech": [ "Two things I wanted to get into -- first, produce. When that brings the remodel benefit up to 15%, is that evenly split between traffic and ticket, the incremental price you're getting from produce? And, how many stores do you think ultimately can have produce? What's your shrink experience with that?" ] }, { "name": "Todd J. Vasos", "speech": [ "Those are the same questions that we continue to monitor as we continue to learn more about selling produce outside of our market stores and now into some of our traditional and/or DGTP stores. But, as you look at it, you can definitely see an increase in both ticket and traffic across these remodels. You can see an even larger traffic increase when you have produce, because you're at the top end of the 10-15% scale of increase. So, it's great to see that it helps drive both traffic and ticket.", "To your point, we're managing right now live goods. This is different from selling cans of corn. We're continuing to learn how to manage this in the stores. Our operators have done a great job in working through new processes. So, the shrink is probably a little bit higher than where it'll end up being. But, I think you know us pretty well over the years. We won't do anything that isn't very accretive at the end. We're pretty bullish about where those gross margins in produce can end up as we get more and more developed.", "And then your last question, how many could you do -- we're not prepared yet to say, but we believe that there could be thousands of stores that could have this lineup and we'll continue to work toward that as we learn more and more about produce." ] }, { "name": "John Heinbockel", "speech": [ "This is the first Holiday season without Toys \"R\" Us. You can do a lot of business in toys. How do you think about what you want to do differently, without giving your playbook, this year versus past years? Do you think that's a very significant opportunity to acquire new customers?" ] }, { "name": "Todd J. Vasos", "speech": [ "I believe that, overall, our category management team has done a fabulous job in our seasonal categories and especially in our toy categories. We've continued to make progress there. We're seeing benefits right not from that progress. Is some of it from a competitor that's no longer with us? That could be some of it, but I do have to say that our category management team in and around toys has done a great job. I've seen the lineup for Holiday, and it's very, very strong." ] }, { "name": "John Heinbockel", "speech": [ "Okay. Thank you." ] }, { "name": "Operator", "speech": [ "Your next question is from Chuck Grom with Gordon Haskett." ] }, { "name": "Chuck Grom", "speech": [ "Good morning. Congrats on a great quarter. On the acceleration in traffic here from 1Q to 2Q, could you unpack that for us across the chain? And on the pricing front, how are you guys feeling about your positioning vis-à-vis Walmart. Based on our work, it looks like you're pretty tight. Do you agree with that? Given that you are in a position in strength and do you have some advantages on the margin line, how are you thinking about the ability to chase units and invest more in price, given your positioning today?" ] }, { "name": "Todd J. Vasos", "speech": [ "First of all, we're very happy with the 3.7% comp and very happy to see both traffic and ticket on the positive side. As you take a look at traffic, our consumable business drove a lot of our traffic gains and that's by design. We've always said that our consumable business will drive the traffic and our nonconsumable business will continue to enhance the basket and our margin. That's exactly how we saw Q2 unfold. We believe that, over time, that's how we'll continue to drive both traffic and ticket within our store. As you look at our prices, we are at as good a price today as we ever have been. I've been saying that for multiple quarters now. We're looking very, very good across all classes of trade.", "It's evidenced by our market share gains. Those market share gains are across all classes of trade and across the 4-, 12-, 24-, and 52-week periods. So, this isn't a new phenomenon. We've been stealing share for quite a while, and I believe it's because of that competitive box that we put together. And, I believe we've got the best execution at retail that's out there, when you go across 15,000 stores, and the ability to execute at the high level that we do. So, those are all very additive for us as we look to continue to drive sales and comps in the future.", "Lastly, in price, we've always said we'll continue to work the price lever where we believe it's necessary to continue to drive traffic and/or our consumers are feeling the pinch. We continue to do that today. We're working the price lever in many different parts of the country to continue to engage our consumer and to have her shop with us more often. You'll continue to see that as we move forward. That's part of the playbook and has been for as many years as I've been here, Chuck." ] }, { "name": "Chuck Grom", "speech": [ "John, on the comp in the quarter, can you frame out how the comp trended month-by-month? In terms of August, anything you'd like to share on the start to the third quarter?" ] }, { "name": "John W. Garratt", "speech": [ "We felt very good about the balance we saw in the quarter. Each one of the periods was strong. We saw a good balance across consumables and nonconsumables, too. So, it was a balanced performance for the quarter. We feel great where we are right now with the initiatives in place, firing on all cylinders, and building momentum." ] }, { "name": "Chuck Grom", "speech": [ "Great. Thanks.", "..." ] }, { "name": "Operator", "speech": [ "Thank you, ladies and gentlemen. This does conclude today's conference call. A replay of today's earnings release will be available shortly. [Operator instructions] This does conclude today's call. You may now disconnect." ] }, { "name": "Chuck Grom", "speech": [ "More DG analysis", "This article is a transcript of this conference call produced for The Motley Fool. While we strive for our Foolish Best, there may be errors, omissions, or inaccuracies in this transcript. As with all our articles, The Motley Fool does not assume any responsibility for your use of this content, and we strongly encourage you to do your own research, including listening to the call yourself and reading the company's SEC filings. Please see ourTerms and Conditionsfor additional details, including our Obligatory Capitalized Disclaimers of Liability." ] } ]
DG
2021-12-02
[ { "description": "Vice President of Investor Relations and Corporate Strategy", "name": "Donny Lau", "position": "Executive" }, { "description": "Chief Executive Officer", "name": "Todd Vasos", "position": "Executive" }, { "description": "Executive Vice President and Chief Financial Officer", "name": "John Garratt", "position": "Executive" }, { "description": "Chief Operating Officer", "name": "Jeff Owen", "position": "Executive" }, { "description": "Morgan Stanley -- Analyst", "name": "Simeon Gutman", "position": "Analyst" }, { "description": "JPMorgan -- Analyst", "name": "Matthew Boss", "position": "Analyst" }, { "description": "UBS -- Analyst", "name": "Michael Lasser", "position": "Analyst" }, { "description": "Barclays -- Analyst", "name": "Karen Short", "position": "Analyst" }, { "description": "Goldman Sachs -- Analyst", "name": "Kate McShane", "position": "Analyst" }, { "description": "Oppenheimer -- Analyst", "name": "Rupesh Parikh", "position": "Analyst" }, { "description": "Citi -- Analyst", "name": "Paul Lejuez", "position": "Analyst" }, { "description": "Deutsche Bank -- Analyst", "name": "Krisztina Katai", "position": "Analyst" } ]
[ { "name": "Operator", "speech": [ "Good morning, my name is Robert and I'll be your conference operator today. At this time, I'd like to welcome everyone to the Dollar General Third Quarter 2021 Earnings Conference Call. Today is Thursday, December 2nd, 2021. [Operator Instructions]", "Now I'd like to turn the conference over to Mr. Donny Lau, Vice President of Investor Relations and Corporate Strategy. Mr. Lau, you may begin your conference." ] }, { "name": "Donny Lau", "speech": [ "Thank you. Good morning, everyone. On the call with me today are Todd Vasos, our CEO; Jeff Owen, our COO; and John Garratt, our CFO. Our earnings release issued today can be found on our website at investor.dollargeneral.com under News & Events.", "Let me caution you that today's comments include forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. Such as statements about our financial guidance, strategy, initiatives, plans, goals, priorities, opportunities, investments, expectations or beliefs about future matters and other statements that are not limited to historical fact.", "These statements are subject to risks and uncertainties that could cause actual results to differ materially from our expectations and projections. These factors include, but are not limited to those identified in our earnings release issued this morning under Risk Factors in our 2020 Form 10-K filed on March 19th, 2021, and in the comments that are made on this call. You should not unduly rely on forward-looking statements, which speak only as of today's date. Dollar General disclaims any obligation to update or revise any information discussed in this call unless required by law.", "We will also reference certain non-GAAP financial measures. Reconciliations to the most comparable GAAP measures are included in this morning's earnings release, which as I mentioned is posted on investor.dollargeneral.com under News & Events. At the end of our prepared remarks, we will open the call up for your questions. Please limit your questions to one and one follow-up question if necessary.", "Now it is my pleasure to turn the call over to Todd." ] }, { "name": "Todd Vasos", "speech": [ "Thank you, Donny, and welcome to everyone joining our call. We are pleased with our third quarter results and I want to thank our associates for their unwavering commitment to meeting the needs of our customers, communities and each other. Despite, what continues to be a challenging operating environment, including elevated cost pressures and broad-based supply chain disruptions, our teams remain focused on controlling what we can control, and they are delivering for our customers. We are grateful for their efforts.", "Looking ahead, we believe we are well positioned to navigate the current environment. And although we've experienced higher-than-expected costs, both from a product and supply chain perspective we're very confident in our price position. As our price indexes relative to our competitors and other classes of trade remain in line with our targeted and historical ranges. And because so many families depend on us for everyday essentials at the right price, we believe products at the $1 price point are important for our customers and they will continue to have a significant presence in our assortment.", "In fact, approximately 20% of our overall assortment remains at $1 or less. And moving forward we will continue to foster and grow this program where appropriate. As the largest retailer in the US by store count, with over 18,000 stores located within five miles of about 75% of the US population, we believe our presence in local communities across the country provides another distinct advantage and positions us well for continued success. Overall, we remain focused on advancing our operating priorities and strategic initiatives. As we continue to strengthen our competitive position, while further differentiating and distancing Dollar General from the rest of the discount retail landscape.", "To that end, I'm excited to share an update on some of our more recent plans. First, as you saw in our release, we expect to execute a total of nearly 3,000 real estate projects in 2022, including 1,100 new store openings as we continue to lay and strengthen the foundation for future growth. Of note, these plans include the acceleration of our pOpshelf concept, as we expect to nearly triple our store count next year, as compared to our fiscal '21 year-end target of up to 50 locations.", "In addition, given the sustained performance of our pOpshelf concept, which continues to exceed our expectations, we plan to further accelerate the pace of new store openings as we move ahead. Targeting a total of about 1,000 pOpshelf locations by fiscal year-end 2025. Importantly, we anticipate these new pOpshelf locations will be incremental to our annual Dollar General store opening plans, as we look to further capitalize on the significant growth opportunities we see for both brands.", "We are also now at the early stages of plans to extend our footprint into Mexico, which will represent our first store locations outside the Continental United States. We believe Mexico represents a compelling expansion opportunity for Dollar General given this demographics and proximity to the US, and we are confident that our unique value and convenience proposition will resonate with the Mexican consumer. While our initial entry in the Mexico is focused on piloting a small number of stores in 2022. We expect to seize -- we plan today will ultimately turn into additional growth opportunities in the future.", "Finally, as previously announced, we recently introduced our digital services by partnering with DoorDash to provide delivery in under an hour, in over 10,000 locations. Further enhancing our convenience proposition, while broadening our reach with new customers. Jeff will discuss these updates in more detail later in the call.", "But first let's recap some of the top line results for the third quarter. Net sales increased 3.9% to $8.5 billion following a 17.3% increase in Q3 of 2020. Comp sales declined 0.6% to the prior year quarter, which translates to a robust 11.6% increase on a two-year stack basis. From a monthly cadence perspective, comp sales were lowest in September, with October being our strongest month of performance. And I'm pleased to report that Q4 sales to-date are trending in line with our expectations.", "Our third quarter sales results include a year-over-year decline in customer traffic, which was largely offset by growth in average basket size, even as we lap significant growth in average basket size last year. In addition, during the quarter, we saw an improvement in customer traffic, as compared to Q2 of 2021. And we continue to be pleased with the retention of the new customers acquired in 2020.", "We're also pleased with the market share gains as measured by syndicated data in our frozen and refrigerated product categories. And even as our market share in total highly consumable product sales decreased slightly in Q3, we feel good about our overall share gains on a two-year stack basis. Collectively, our third quarter results reflect strong execution across many fronts. And further validates our belief that we are pursuing the right strategies to enable sustainable growth, while supporting long-term shareholder value creation.", "We operate in one of the most attractive sectors in retail. And as a mature retailer in growth mode, we continue to lay the groundwork for our future initiatives, which we believe will unlock additional growth opportunities as we move forward. Overall, I've never felt better about the underlying business model and we are excited about the significant growth opportunities we see ahead.", "With that, I'll now turn the call over to John." ] }, { "name": "John Garratt", "speech": [ "Thank you, Todd, and good morning, everyone. Now that Todd has take you through a few highlights of the quarter, let me take you through some of its important financial details. Unless we specifically note otherwise all comparisons are year-over-year, all references to EPS refer to diluted earnings per share and all years noted refer to the corresponding fiscal year.", "As Todd already discussed sales, I will start with gross profit. As a reminder gross profit in Q3 2020 was positively impacted by a significant increase in sales, including net sales growth of 24% in our combined non-consumable categories. For Q3 2021, gross profit as a percentage of sales was 30.8%, a decrease of 57 basis points, but an increase of 121 basis points, compared to Q3 2019.", "The decrease compared to Q3 2020 was primarily attributable to a higher LIFO provision, increased transportation costs, a greater proportion of sales coming from our consumables category and an increase in inventory damages. These factors were partially offset by higher inventory markups and a reduction in shrink as a percentage of sales.", "SG&A as a percentage of sales was 22.9%, an increase of 105 basis points. This increase was driven by expenses that were greater as a percentage of sales in the current year period, the most significant of which were retail, labor and store occupancy costs. The quarter also included $16 million of disaster-related expenses attributable to Hurricane Ida.", "Moving down to income statement. Operating profit for the third quarter decreased 13.9% to $665.6 million. As a percentage of sales, operating profit was 7.8%, a decrease of 162 basis points. And while the unusual and difficult prior year comparison create pressure on our operating margin rate, we're very pleased with the improvement of 78 basis points, compared to Q3 2019.", "Our effective tax rate for the quarter was 22.2% and compares to 21.6% in the third quarter last year. Finally, EPS for Q3 decreased 10% to $2.08, which reflects a compound annual growth rate of 21% over a two-year period.", "Turning now to our balance sheet and cash flow which remain strong and provide us the financial flexibility to continue investing for the long-term, while delivering significant returns to shareholders. Merchandise inventories were $5.3 billion at the end of the third quarter, an increase of 5.4% overall and a decrease of 0.1% on a per store basis. And while we're not satisfied with our overall in-stock levels, we continue to make good progress and are focused on improving our in-stock position particularly in our consumables business.", "Looking ahead, we are pleased with our inventory position for the holiday shopping season and our teams continue to work closely with suppliers to ensure delivery of goods for the remainder of the year. Year-to-date through [Phonetic] the third quarter, we generated significant cash flow from operations totaling $2.2 billion. Capital expenditures to the first three quarters were $779 million and included our planned investments in new stores, remodels and relocations, distribution and transportation projects and spending related to our strategic initiatives.", "During the quarter, we repurchased 1.6 million shares of our common stock for $360 million and paid a quarterly dividend of $0.42 per common share outstanding at a total cost of $97 million. At the end of Q3, the total remaining authorization for future repurchases was $619 million. We announced today that our Board has increased this authorization by $2 billion.", "Our capital allocation priorities continue to serve us well and remain unchanged. Our first priority is investing in high return growth opportunities, including new store expansion and our strategic initiatives. We also remain committed to returning significant cash to shareholders through anticipated share repurchases and quarterly dividend payments, all while maintaining our current investment grade credit rating and managing to a leverage ratio of approximately 3 times adjusted debt-to-EBITDA.", "Moving to an update on our financial outlook for fiscal 2021. We continue to operate in a time of uncertainty regarding the economic recovery from the COVID-19 pandemic, including any changes in consumer behavior and the corresponding impacts on our business. Despite continued uncertainty, including cost inflation ongoing pressure throughout the supply chain, we are updating our sales and EPS guidance, which reflects our strong performance through the first three quarters, as well as our expectations for Q4.", "For 2021, we now expect the following: Net sales growth of approximately 1% to 1.5%; a same-store sales decline of approximately 3% to 2.5%, but which reflects growth of approximately 13% to 14% on a two-year stack basis; and EPS in the range of $9.90 to $10.20, which reflects a compound annual growth rate in the range of 22% to 24% or approximately 21% to 23%, compared to 2019 adjusted EPS over a two-year period. Our EPS guidance now assumes an effective tax rate of approximately 22%.", "Finally, our expectations for capital spending, share repurchases and real estate projects remain unchanged from what we stated in our earnings release on August 26, 2021. Let me now provide some additional context as it relates to our outlook. In terms of sales, we remain cautious in our outlook over the next couple of months, given the continued uncertainties arising from the COVID-19 pandemic, including additional supply chain disruptions and the impact of the end of certain federal aid such as additional unemployment benefits and stimulus payments.", "Turning to gross margin. Please keep in mind, we will continue to cycle strong gross margin performance from the prior year where we benefited from a favorable sales mix and a reduction in markdowns, including the benefit of higher sell-through rate. Consistent with Q2 and Q3, we expect continued pressure on our gross margin rate in the fourth quarter, due to a higher LIFO provision, as a result of cost of goods increases, a less favorable sales mix, compared to the prior year quarter, and an increase in markdown rates as we continue to cycle the abnormally low levels in 2020.", "We also anticipate higher supply chain costs in Q4 compared to the 2020 period. Like other retailers our business continues to be impacted by higher costs due to transit and port delays, as well as elevated demand for services at third-party carriers. However, despite these challenges we are confident in our ability to continue navigating these transitory pressures.", "With regards to SG&A, we continue to expect about $70 million to $80 million, an incremental year-over-year investments in our strategic initiatives. This amount includes $56 million in incremental investments made during the first three quarters of 2021. However, in aggregate, we continue to expect our strategic initiatives will positively contribute to operating profit and margin in 2021, driven by NCI and DG Fresh, as we expect the benefits to gross margin from our initiatives will more than offset the associated SG&A expense.", "Finally, our updated guidance does not include any impact from the proposed federal vaccine and testing mandate, including potential disruptions to the business or labor market or any incremental expense.", "In closing, we are pleased with our third quarter results, which are with testament to the strong performance and execution by the team. As always we continue to be disciplined and how we manage expenses in capital with the goal of delivering consistent strong financial performance, while strategically investing for the long-term. We remain confident in our business model and our ongoing financial priorities to drive profitable same-store sales growth, healthy new store returns, strong free cash flow and long-term shareholder value.", "With that, I will turn the call over to Jeff." ] }, { "name": "Jeff Owen", "speech": [ "Thank you, John. Let me take the next few minutes to update you on our operating priorities and strategic initiatives. Our first operating priority is driving profitable sales growth. The team did a great job this quarter, executing against a robust portfolio of growth initiatives.", "Let me highlight some of our more recent efforts. Starting with our non-consumables initiative or NCI. The NCI offering was available in nearly 11,000 stores at the end of Q3, and we continue to be very pleased with the strong performance we are seeing across our NCI store base. Notably, this performance is contributing an incremental 2.5% total comp sales increase on average in NCI stores along with a meaningful improvement in gross margin rate, as compared to stores without the NCI offering.", "Overall, we now plan to expand this offering to a total of more than 11,500 stores by year-end, including over 2,000 stores in our light version. And we expect to complete the rollout of NCI across nearly the entire chain by year-end 2022.", "Moving to our pOpshelf concept, which further builds on our success and learnings with NCI. pOpshelf aims to engage customers by offering a fun, affordable and differentiated treasure hunt experience, delivered through continually refreshed merchandise, a unique in-store experience and exceptional value with the vast majority of our items priced at $5 or less.", "During the quarter we added 14 new pOpshelf locations, bringing the total number of stores to 30. Opened our first 14 store within a store concepts and celebrated the one-year anniversary of our first pOpshelf store opening. For 2021, we remain on track to have a total of up to 50 pOpshelf locations by year-end, as well as up to an additional 25 store with an in-store concepts, which incorporate a smaller footprint pOpshelf shop into one of our larger format Dollar General market stores.", "Importantly, as Todd noted earlier, we continue to be very pleased with the performance of our pOpshelf stores, which have far exceeded our expectations for both sales and gross margin. In fact, we anticipate year one annualized sales volumes for our current locations to be between $1.7 million and $2 million per store and expect the initial average gross margin rate for these stores to exceed 40%. We believe this bodes well for the future as we move toward our goal of about 1,000 pOpshelf locations by year-end 2025.", "Turning now to DG Fresh, which is a strategic multiphase shift to self-distribution of frozen and refrigerated goods. As a reminder, we completed the initial rollout of DG Fresh across the entire chain in Q2, and are now delivering to more than 18,000 stores from 12 facilities. The primary objective of DG Fresh is to reduce product costs on our frozen and refrigerated items. And we continue to be very pleased with the savings we are seeing as DG Fresh remains a meaningful contributor to our gross margin rate.", "Another goal of DG Fresh is to increase sales in these categories. And we are very happy with the performance on this front, as overall comp sales of our frozen and refrigerated goods outperformed all other product categories in Q3, even against a difficult prior year sales comparison.", "Going forward, we expect to realize additional benefits from DG Fresh, as we continue to optimize our network, further leverage our scale, deliver an even wider product selection and build on our multi-year track record of growth in cooler doors and associated sales. With regards to our cooler expansion program, during the first three quarters we added more than 52,000 cooler doors across our store base. In total, we expect to install approximately 65,000 additional cooler doors in 2021. The majority of which will be in high capacity coolers.", "Turning now to an update on our expanded health offering, which consist of about 30% more feet of selling space and nearly 400 additional items, as compared to our standard offering. This offering was available in nearly 800 stores at the end of Q3, with plans to expand to approximately 1,000 stores by year-end. Looking ahead, our plans include further expansion of our health offering, with the goal of increasing access to basic healthcare products and ultimately services overtime, particularly in rural America.", "In addition to the gross margin benefits associated with the initiatives I just discussed, we continue to pursue other opportunities to enhance gross margin, including improvements in private brand sales, global sourcing, supply chain efficiencies and shrink.", "Our second priority is capturing growth opportunities. We recently celebrated a significant milestone with the opening of our 18,000 stores, which reflects the fantastic work of our best-in-class real estate team, as we continue to expand our footprint and further enhance our ability to serve additional customers. Through the first three quarters, we completed a total of 2,386 real estate projects, including 798 new stores, 1,506 remodels and 82 relocations.", "For 2021, we remain on track to open 1,050 new stores, remodel 1,750 stores and relocate 100 stores, representing 2,900 real estate projects in total. In addition, we now have produce in approximately 1,900 stores with plans to expand this offering to a total of over 2,000 stores by year-end.", "For 2022 we plan to execute 2,980 real estate projects in total, including 1,110 new stores, 1,750 remodels and 120 store relocations. We also plan to add produce and approximately 1,000 additional stores next year with the goal of ultimately expanding this offering to a total of up to 10,000 stores over time.", "Of note, we expect approximately 800 of our new stores in 2022 to be in our larger 8,500 square foot new store prototype, allowing for a more optimal assortment and room to accommodate future growth. Importantly, we continue to be very pleased with the sales productivity of this larger format, as average sales per square foot continue to trend about 15% above an average traditional store. Our 2022, real estate plans also include opening approximately 100 additional pOpshelf locations, bringing the total number of pOpshelf stores to about 150 by year-end, as well as, up to an additional 25 store with in-store concept.", "As Todd noted, we are also very excited about our plans to expand our footprint internationally for the first time, with plans to open up to 10 stores in Mexico by year-end 2022. As we look to extend our value and convenience offering to even more communities, while continuing to lay the foundation for future growth. Overall, our proven high-return, low-risk real estate model continues to be a core strength of our business. And the good news is, we believe we still have a long runway for new unit growth ahead of us.", "In fact, across our Dollar General, pOpshelf and DGX format types, we estimate there are approximately 17,000 new store opportunities potentially available in the Continental United States alone. Although, these opportunities available to all small box retailers, we expect to continue capturing a disproportionate share as we move forward. And while still early, we expect our entry into Mexico will ultimately unlock a significant number of additional new unit opportunities in the years to come. When taken together, our real estate pipeline remains robust and we are excited about the significant new store opportunities ahead.", "Next, our digital initiative, which is an important complement to our physical store footprint, as we continue to deploy and leverage technology to further enhance convenience and access for our customers. Our efforts remain centered around building engagement across our digital properties, including our mobile app. Of note, we ended Q3 with over 4.4 million monthly active users on the app, and expect this number to grow as we look to further enhance our digital offerings.", "As Todd noted, our partnership with DoorDash is another example of meeting the evolving needs of our customers, by providing the savings offered by Dollar General, combined with the convenience of same-day delivery in an hour or less. And while still early, we are pleased with the initial results, including better-than-expected customer trial, strong repurchase rates, high levels of sales incrementality and a broadening of our customer base.", "Our DG Media Network, which we launched in 2018 is also seeing strong results, including significant growth in the number of campaigns on our platform. Overall, we remain very excited about the long-term growth potential of this business. And we look to better connect our brand partners with our customers in a way that is accretive to the customer experience. Going forward, our plans include providing more relevant, meaningful and personalized offerings, with the goal of driving even higher levels of customer engagement across our digital ecosystem.", "Our third operating priority is to leverage and reinforce our position as a low-cost operator. We have a clear and defined process to control spending, which continues to govern our disciplined approach to spending decisions. This zero based budgeting approach internally branded as safe to serve, keeps the customer at the center of all we do, while reinforcing our cost control mindset.", "Our Fast Track initiative is a great example of this approach, where our goals include, increasing labor productivity in our stores, enhancing customer convenience and further improving on-shelf availability. The first phase of Fast Track consisted of both rolltainer and case pack optimization, which has led to the more efficient stocking of our stores. The second component of Fast Track is self-checkout, which provides customers with another flexible and convenient checkout solution, while also driving greater efficiencies for our store associates.", "Looking ahead, our plans now include expanding this offering to over 6,000 stores by year-end 2021, and to the majority of our store base by the end of 2022, as we look to further extend our position as an innovative leader in small box discount retail. Our underlying principles are to keep the business simple, but move quickly to capture growth opportunities, while controlling expenses and always seeking to be a low-cost operator.", "Our fourth operating priority is investing in our diverse teams through development, empowerment and inclusion. As a growing retailer, we continue to create new jobs in the communities we serve. As evidenced in 2022, we plan to create more than 8,000 net new jobs. In addition, our growth also fosters an environment where employees have opportunities to advance to roles with increasing levels of responsibility and meaningful wage growth in a relatively short timeframe. In fact, over 75% of our store associates at/or above the lead sales associate position were internally placed. And we continue to innovate on the development opportunities we offer our teams.", "Importantly, we believe these efforts continue to yield positive results across our store base, as evidenced by our robust promotion pipeline, healthy applicant flows and staffing above traditional levels. We believe the opportunity to start and develop a career with a growing and purpose-driven company is a unique competitive advantage and remains our greatest currency in attracting and retaining talent.", "We also recently completed our annual community giving campaign, where our employees came together to raise funds for a variety of important causes. And I was once again inspired by the generosity and compassion of our people. Our mission of serving others is deeply embedded in the daily culture of Dollar General. And I'm so proud to be a part of such an incredible team.", "In closing, we are making great progress against our operating priorities and strategic initiatives. And with the actions and multi-year initiatives we have in place, we are confident in our plans to drive long-term sustainable growth and shareholder value creation. As we are in the midst of a truly unique and busy holiday season, I want to offer my sincere thanks to each of our more than 162,000 employees across the company for their hard work and dedication to fulfilling our mission of serving others.", "With that, operator, we would now like to open the lines for questions." ] } ]
[ { "name": "Operator", "speech": [ "Thank you. At this time we'll be conducting a question-and-answer session. [Operator Instructions] Our first question comes from Simeon Gutman with Morgan Stanley. Please proceed with your question." ] }, { "name": "Simeon Gutman", "speech": [ "Good morning. Hi, everyone. My first question I'd like to put the spotlight on the low income consumer. We have stimulus rolling-off, we're going to be lapping massive stimulus in the first half of next year, and on the other side you have jobs and wages starting to grow. Can you talk about your stance? Are you seeing any signs that the customer is getting stronger or weaker?" ] }, { "name": "Todd Vasos", "speech": [ "Hi, Simeon, it's Todd. I would tell you that our core consumer continues to be in pretty good shape. You're 100% right that, a lot of the stimulus money has now dissipated. But I've always said and our core customer is always said as long as she is gainfully employed, that is probably the biggest driver of her confidence to spend. And there is no doubt that she is gainfully employed right now and can work as many hours as she may or may not want to. But as we look through the remainder of this year and into next, we believe that she will continue to be gainfully employed. And with that, we'll have money to spend.", "And then the other thing to think about with this low-cost consumer to your point, we continue to show great value, right? When you look at how we operate our pricing is as good as ever against all classes of trade. And as we talked about on our prepared remarks, we're not walking away from $1 price point. We believe that's so important to her, as we continue to move forward. Not that we believe it, she tells us that each and every day. So I think that value and convenience message will continue to resonate with our core consumer." ] }, { "name": "Simeon Gutman", "speech": [ "Thanks. And maybe just transitioning to the fourth quarter or more of a near-term financial question. It implies that the fourth quarter EBIT margin is going to be pretty below where it was two years ago, I think by about 80 bps. Even though year-to-date, you're up nicely versus two years ago and even Q3 was as well. So besides the typical conservatism in the way you model, anything else can we speak to discrete incremental expense or investments?" ] }, { "name": "John Garratt", "speech": [ "No, nothing incremental in terms of investments. We noted the $70 million, $80 million of investments in the strategic initiatives, which again are accretive overall. And then the other thing we pointed out is just on the gross margin, you certainly have a continued pressure that we anticipate associated with supply chain, which again we believe that's transitory in nature, it's a supply and demand issue. But we saw that increase as we went into -- from Q2 to Q3, and we expect that to remain elevated year-over-year as we look at Q4.", "And then obviously, the other big piece here is inflation. We're seeing higher prices passed along from vendors and that's showing up in terms of the LIFO provision, which we noted. But that's really the key drivers I would point to -- on a two-year basis. And then on a one-year basis I would just point to the very difficult lap, as we're lapping extremely high sales of non-consumable goods, which have a higher margin, as well as unusually low markdowns around clearance items, just given the extremely high sell-through last year." ] }, { "name": "Simeon Gutman", "speech": [ "Okay. Thanks everyone. Happy holidays. Good luck. Take care." ] }, { "name": "Todd Vasos", "speech": [ "Thank you." ] }, { "name": "Operator", "speech": [ "Our next question comes from Matthew Boss with JPMorgan. Please proceed with your question." ] }, { "name": "Matthew Boss", "speech": [ "Great. Thanks and congrats on a nice quarter." ] }, { "name": "Todd Vasos", "speech": [ "Thank you." ] }, { "name": "Matthew Boss", "speech": [ "So Todd, the high end of your full-year comp guidance implies 12.7% stack in the fourth quarter. I think that's more than 100 basis points improvement from the third quarter. Any drivers behind the recent reacceleration in business? Is this value and convenience as you cited in the face of rising cost of living for your core consumer? Or is this confidence based on what you've seen in November? Just any color on the fourth quarter so far." ] }, { "name": "Todd Vasos", "speech": [ "Matt, thanks for the question, Matt. As you know, right we put out a range and we definitely see that the consumer is still shopping at a pretty good rate. But I would tell you there is a lot of quarter left, so let's make sure we temper that just a bit. But the great thing about Dollar General is that, we have never taken our eye off the ball on what that consumer is looking for. And that gives us that confidence as we move through this year and into next, on our ability to continue to service that consumer. And if there is any trade down that tends to come in, that consumer will also enjoy those benefits.", "And then lastly, we still are very positive on the trade down consumer that came in during the pandemic or trade in is probably a better term for it. And those numbers continue to exceed our expectation on retention rate. So we've got that moving through the fourth quarter and into next year as well. So with all that, that high-end of the guidance is very attainable. But on the other side, we've got a lot of quarter left and that's why we give you that nice range." ] }, { "name": "Matthew Boss", "speech": [ "Great. It's a perfect follow-up I think for my second question. If I use that same math 12.7%, two-year stack in the fourth quarter, again high-end of your guide exiting the year, basically translates to a 6% to 7% one year comp, and that's double your pre-pandemic three-year average, I think was around 3% to 3.5%. So is this new customer acquisition? Is this market share gains? Is this a trade down consumer? I guess, question being is how best do you think about your ability to hold some of these gains as we think about next year and beyond?" ] }, { "name": "John Garratt", "speech": [ "You're right, Matt, this is John. And you're right, as you look at the implied two-year stacks it is a significant outperformance versus pre-pandemic levels. And I'd really point to two things you've mentioned and Todd mentioned the retention of the new customers that came into the brand and the other piece I would point to is the larger baskets, growing our basket on top of basket growth last year and so. I think both of these are really enabled by the strategic initiatives. The strategic initiatives have really increased the relevance of Dollar General, providing a fuller fill-in trip for bigger baskets. You could do more of your grocery shop, you can do more of your home shop on the non-consumable side, purchase services, as well as the broader appeal to these new customers. And I think also, the initiatives really highlight and further enhance the unique combination of value and convenience that we bring to the consumer. That's why I see is the key drivers of that outperformance." ] }, { "name": "Matthew Boss", "speech": [ "Great. Best of luck." ] }, { "name": "Operator", "speech": [ "Our next question is from Michael Lasser with UBS. Please proceed with your question." ] }, { "name": "Michael Lasser", "speech": [ "Good morning. Thanks a lot for taking my question. Recognizing that your multi-stack -- multi-year stacks are much more difficult than other retailers. Your one year stack comps are trailing behind others, suggesting that you might be ceding some market share this year. Why do you think that is? And what actions do you need to take in order to reverse those market share trends?" ] }, { "name": "Todd Vasos", "speech": [ "Yes, this is Todd. I would tell you that the way we've been looking at, this all along this year has been on a two-year stack basis, right, because some of our labs are pretty difficult, as you know, Michael. And -- but we're happy with where our two-year stacks are right now on market share. And quite frankly in some of our key initiative categories like Fresh, it will out pace where we thought it would be on a market share basis. We're confident as we go forward, that will continue to pick up market share at the same rate if not accelerated as we move into 2022 and beyond, with all of the initiatives that we have.", "And keep in mind, that value and convenient message resonates across not only our core customer, but many different customer basis. And that is being preserved at all cost. Our pricing continues to be as good, if not it was as good as I've seen it over the last few quarters and over the last few years. And as we continue to look out, we don't see that change in either promotional environment has been pretty tame. So when you put all that together, we feel that our market share gains will continue to move in a real positive manner with really the same classes of trade being those donors as we continue to move into '22." ] }, { "name": "Michael Lasser", "speech": [ "Understood. And speaking of '22, you're helpful to provide a piece of the formula and the algorithm that you typically target. For next year, would you expect the same-store sales element to be in line with your typical 2% to 4% comp growth, that's part of your long-term algorithm? Or given the stimulus roll-off, along with some of the other uncertainties out there. Would you expect another year of below 2% to 4% before returning to that in 2023? Thank you." ] }, { "name": "John Garratt", "speech": [ "Hi Michael, this is John. I'll take the question. What I'll say is, it's early to provide specific 2022 guidance, we'll do that on the next call. But as you think about next year, I would tell you as we said in our prepared comments we've never felt better about the business model, we feel great about the fundamentals and the initiatives, as well as the performance of the real estate, including the new formats that further boost sales.", "As you think about headwinds and tailwinds for next year, and as you think about the cadence of the year, I would point to as you noted in the first half, Q1 in particular is a difficult -- very difficult lap with stimulus. Certainly, that will be a tough lap, but again, I think we're well positioned with the initiatives and the value and convenience we bring to consumers when they need it most. And then also as you think about next year in general, we come into the year with elevated inflationary pressures. We have -- as we said, expectations that the supply chain costs will continue to be elevated through Q4, and they won't magically drop right out of the gate in Q1, as well as the product cost pressures.", "But we do think there is reasons to think that, this is supply and demand calculation here. And over time it will moderate and that could flip as you move through the year into a tailwind. So more to come on the specifics, but as you think about next year, I would tell you the fundamentals are fantastic. But the beginning of the year will be more pressured than the latter part of the year." ] }, { "name": "Michael Lasser", "speech": [ "Thank you very much and have a good holiday." ] }, { "name": "Todd Vasos", "speech": [ "Thank you." ] }, { "name": "Operator", "speech": [ "Our next question is from Karen Short with Barclays. Please proceed with your question." ] }, { "name": "Karen Short", "speech": [ "Hey, thanks very much. I want to try the EBIT growth question a little differently, so for 4Q implied that is versus 2019. So with the range of basically, up 1% to up 14%, maybe just a little more color there, because even if I back out your LIFO charge, you know you had a range of kind of 48% to 77% EBIT growth in 1Q, 2Q 3Q depending on the quarter. So is this -- how much of this is expectation on LIFO for 4Q versus supply chain versus maybe not passing on cost increases? And then I had a bigger picture question." ] }, { "name": "Todd Vasos", "speech": [ "I'll take that. Karen, here if you look at -- obviously there is a lot of year left, and it's a pretty dynamic environment, certainly there is uncertainties that creates -- that we thought it's prudent to keep what the range wide, although narrowing it into half and taking the top half of our earnings and sales guidance. But as we look at the key pressures and announced in Q4, certainly supply chain remains elevated. And we expect that to remain elevated, it's unclear as the pandemic continues to evolve what that's going to mean specifically in terms of supply chain costs, but we do believe that's going to remain elevated. As well as with the LIFO provision that it also is a pressure, what we have done is a crude year-to-date, based on our projections of full-year inflationary cost passed along to us by vendors, but certainly that could change as well, all the team I think is doing a very good job of mitigating both.", "And I think compared to some of our peers, we've done quite well, in terms of delivering year-to-date the operating margin expansion. So it's really reflective of those key inflationary pressures, which again we believe are transitory in nature, but could still be volatile in the near-term." ] }, { "name": "Karen Short", "speech": [ "Okay. And then just maybe switching gears to unit opportunity. I guess, maybe a little more color on why Mexico maybe what makes a market attractive? Any color you could give on where your first stores will be and how that supply chain will work? And I guess, I asked it also in the context of the fact that, as you point out there is so much growth opportunity domestically, do you really need to go into another -- or another country, I guess?" ] }, { "name": "Todd Vasos", "speech": [ "Hey Karen, this is Todd. We're really excited about that, the potential opportunity. As you stated, we do have a lot of opportunity right here in the Continental United States. And you know, it was pretty well -- we won't take our eye off the ball on that. We are squarely committed seeing 17,000 opportunities in the Continental United States to put a store between pOpshelf and Dollar General, that hasn't changed. And Door has our focus on that.", "I think as you look at Mexico, the intriguing piece is -- there is a couple of things. Number one, as you know going into another country, it's a little bit more complex than going into your 47 state, as an example. So we started working on this, well over a year ago. And it takes many years to cultivate this initiative. And as we indicated, up to 10 stores next year is fairly aggressive, but it will take us many years to build out Mexico, right? And with that thought, even though we've got so many opportunities here why not start now was more our kind of thinking, because it will take many years. We don't want to wait till we're down the road and need to move faster, we do everything pretty methodically here. And we feel that for sure the right thing to do was to start working on it now, with the intent to put many locations down in Mexico. So where will we start?", "Well, we'll definitely start closer to home if you will, you know, then Northern Mexico feels right, so it will be probably more in that area. But it will open up as we continue to look at different opportunities as we go. And then distribution-wise stay tuned, we're not quite ready to talk about all that. But as you could imagine, before you start putting a lot of distribution centers in Mexico, we'll need some more critical mass. So we're working that plan as we speak as well.", "We've got a lot of folks on-board already, the team has done a great job. We're using the term there -- we've been incorporated if you will in the country of Mexico. So we're now hiring and able to transact to Mexico, I think that's very important and that's what we're doing right now. And starting to look at how we build-out that assortment and what it looks like. And stay tuned, we're excited that you could probably tell in my voice, this is a real opportunity for us to continue to grow the brand and continue to move forward with Dollar General in different locations other than just the Continental United States." ] }, { "name": "Karen Short", "speech": [ "Great. Thanks so much. That was really helpful. Have a great holiday everyone." ] }, { "name": "Operator", "speech": [ "Our next question is from Kate McShane with Goldman Sachs. Please proceed with your question." ] }, { "name": "Kate McShane", "speech": [ "Hi, good morning. Thanks for taking our question. Our first question was just on traffic, I know you mentioned in the prepared comments that it was sequentially better, but still down. We're wondering your thoughts on that, is it something that got better throughout the quarter? And have you seen any meaningful change in traffic in the last, a few weeks given the latest variant news?" ] }, { "name": "Todd Vasos", "speech": [ "Yes, this is Todd. Yes, the traffic number continues to be a little bit soft. But I would tell you that, it definitely has been it's sequentially better than it was when you look from Q2 to Q3. And as you continue to think about our core consumer, this is what so important to continue always to keep in mind. When times are good for her -- she has more money. She tends to come less often and spend more. What we've seen our basket continue to be pretty strong throughout. And so that always happens with our core customer in better times economically for her and that's what she is seeing.", "And then as things switch, if they start to switch then you'll see her come more often and spend less, so those smaller baskets tend to then grow, and that traffic number tends to pick-up. We're squarely focused on it, we're definitely not happy with traffic overall, because we love to see positive. But we understand the drivers and the reasons and we'll make sure that as things continue to progress there, we're squarely focused on driving traffic and price and convenience is our big mantra, and we'll continue to make sure that both of those are well intact for our core consumer." ] }, { "name": "Kate McShane", "speech": [ "Okay, thank you. And I just wanted to ask one question on pOpshelf, you'd mentioned several times it's exceeding expectations. We were just wondering if there were certain merchandise categories that have been stronger than expected and is what the quarter looked like for this concept, given the majority of what you're selling is discretionary?" ] }, { "name": "Jeff Owen", "speech": [ "Thanks Kate, this is Jeff. And you're right, we are excited about pOpshelf, and we continue to be very, very pleased with our customers responding, really to the entire box. And very excited that we're going to triple the store count in 2022 and laying the groundwork for 1,000 stores by 2025. So I think you can tell by our bullish news and our excitement just how excited we are with what the customer is telling us.", "When you think about the store in general, there is many areas that she is gravitating toward and responding well. And quite frankly there is more than we have time to talk about. But I would tell you right now, certainly we love what you're seeing around the toys that we've offered. We've got great, in the home area she is really finding ways. When you think about it, the majority, now over 90% of our items are less than $5. She is really finding ways that she can treat herself and has a lot of fun in the shopping environment.And so the team continues -- we're just getting started here, we'll get better and better and better. But right now, that concept is really, really performing great, and we're really excited about how it's going to complement the traditional Dollar General network as we move forward." ] }, { "name": "Kate McShane", "speech": [ "Thank you." ] }, { "name": "Operator", "speech": [ "Our next question comes from Rupesh Parikh with Oppenheimer. Please proceed with your question." ] }, { "name": "Rupesh Parikh", "speech": [ "Good morning, thanks for taking my question. I also had a few questions on the pOpshelf concept. So first if you look at the pOpshelf acceleration, how does that impact your longer-term algorithm?", "And then secondly, as you look at the pOpshelf in-store concept, just curious how you guys think about that in the coming years?" ] }, { "name": "John Garratt", "speech": [ "I'll take the first part of that question, Rupesh. I think it's important to note, and Todd touched on this in his prepared comments that as we look at pOpshelf, we see this is additive to our Dollar General banner growth plans. And the other think we've noted as we see over time as many as 3,000 additional store opportunities from this incremental to the 13,000 DG banner opportunities. We're accelerating it rapidly, effectively tripling the number of stores next year as we add 100 on top of 50. And then look to have 1,000 by the end of 2025.", "So as you think of the algorithm going forward, I don't want to give any specific long-term guidance at this point. But I think it's important to note that it is additive as you look at next year, the 100 additive on top of the 1,000 DG stores, and that's the way we look at that going forward. While in the near-term, you do have start-up costs that offset the near-term benefits. But when you look at the fantastic unit level economics of these stores, and we've talked about these $1.7 million to $2 million sales margins, that we see is 40%. And growing over time, it's just fantastic unit level economics that we anticipate and fully expect to be increasingly accretive to operating profit long-term as we scale it." ] }, { "name": "Todd Vasos", "speech": [ "And Rupesh, I'll talk about the store within a store concept that you mentioned. Like pOpshelf, we're very excited about what we're seeing here as well. This is obviously very new here, just been in-store just a few months. But very pleased with what we're seeing again from the customer. And when you think about this store within a store concept, really what is able to do is, it takes about 70% to 80% of the pOpshelf assortment and right inside this Dollar General market. And so the store within a store as you look forward will continue as we mentioned earlier to expand that.", "But as we think about the long-term here, we recently announced a larger square foot store format, which we've talked about pleased with that productivity. But again, things like that give us the opportunity to create enough theater to perhaps bring some of that merchandise into the broader assortment of the Dollar General network. So we'll have to wait and see long-term, as we look forward. But the team is continuing to refine and look at ways that we can continue to learn from this store within a store, just like we learned from NCI and how it really was the genesis for pOpshelf to begin. So more to come, but very pleased with the store within a store concept and our ability to grow that over time." ] }, { "name": "Rupesh Parikh", "speech": [ "Great. Thank you." ] }, { "name": "Operator", "speech": [ "Our next question comes from Paul Lejuez with Citi. Please proceed with your question." ] }, { "name": "Paul Lejuez", "speech": [ "Hey, thanks guys. Can you talk about, what you tend to see when a drug store closes in your trade area? Any quantification of any lift that are nearby DG store might get? And then second, just one follow-up on pOpshelf, curious about the geographic rollout. Is that going to be, kind of, concentrated as you think about next year's openings or more spread throughout the country? Thanks." ] }, { "name": "Todd Vasos", "speech": [ "Yes, this Todd, I'll take that. If you think about the drugstore business, the drug business has been our biggest donor share over the many years. We've been very vocal about that. And with our health initiatives, we continue to gain more and more share from consumers around health and beauty in general. And so, when any competitor as you can imagine goes out in the marketplace, it does give us an opportunity to garner more share in that area.", "Drug stores tend to exist if you will in the areas that have multiple competitors in them. And that normally spreads out across many competitors, but we're squarely focused on anytime just gaining share and any opportunities, so we'll continue to watch that very, very carefully. But we believe we're in great position just overall, to continue to capitalize on health and beauty in general.", "And then on the pOpshelf question, we'll continue to look -- call it Southern Midwest -- that Southeast is really where we're focused on right now, early on Mid-Atlantic to a degree to, if you think about Mid-Atlantic being -- that Virginia type area down into the Carolinas. Those are the areas right now we're focused on. But over time, we see this across the United States as an opportunity. So we won't be limited to certain geographical areas. But as we always do, we're very methodical in our rollout. We want to make sure that, we're able to supply the goods we need timely and warehousing is important. The great thing about how we've set our warehousing up with this is, is integrated with Dollar General. So we strip all the cost out of that.", "And we use the mothership as we talk about the Dollar General. Mothership the brand, not only in distribution, but in so many different back of the house areas where we can make this very, very accretive as John talked about over the years as we grow the pOpshelf brand." ] }, { "name": "Paul Lejuez", "speech": [ "Thank you. Good luck." ] }, { "name": "Operator", "speech": [ "The next question comes from Krisztina Katai with Deutsche Bank. Please proceed with your question." ] }, { "name": "Krisztina Katai", "speech": [ "Hi, good morning, and thanks for taking the question. I was just wondering if there were any notable patterns or anything that you could point out to as it relates to performance of rural stores versus some of your urban stores in the quarter? And then, also I guess with the implied two year stack in the fourth quarter, pointing to a potential reacceleration, where do you see the greatest opportunity to start to take back market share?" ] }, { "name": "Jeff Owen", "speech": [ "I'll take the first part, this is Jeff. When you talk about the geographic footprint of our stores, first of all we are pleased with the balance in terms of our sales performance, and that's one of the real beautiful things about this company is, just how evenly distributed and how well the company is performing across all geographic. When you think about the rural, earlier in the pandemic we did see outsized performance in our rural stores. But it's beginning to normalize where it traditionally has performed, where we continued to perform better in rural but not to the same degree from a disparity standpoint that we saw early in the pandemic.", "So as things open up, we're seeing performance open up, just like we would expect across all of our store base. So generally speaking we're very pleased with really the performance across all of our geographic regions and the demographic region. So, real pleased with what we're seeing there." ] }, { "name": "Todd Vasos", "speech": [ "And on the second part of the question. Yes, we anticipate as things start to level out in '22, as John indicated, Q1, we still got a pretty big lap with stimulus and other things, the pandemic still in swing in 2021, as we move into '22 early. But as things start to level out, as we get into '22 and into mid -- back end of '22, we believe that the market share gains will probably continue to come from those same areas that were there prior to the pandemic. And so when you think about it, it's almost against all classes of trade, but definitely Drug being one of the larger shared owners over time.", "And again as I indicated earlier, that won't change. We believe that will continue and will probably accelerate as we continue our initiatives around health and beauty. And our health initiatives in general, services and such in the years to come. So we feel good about being lined up nicely for market share gains, but we're squarely focused right now on ending Q4 on a high note and moving into 2022." ] }, { "name": "Krisztina Katai", "speech": [ "That's great. Thank you for the color and happy holidays." ] }, { "name": "Todd Vasos", "speech": [ "Thank you." ] }, { "name": "Operator", "speech": [ "We have reached the end of the question-and-answer session. I'd now like to turn the call back over to Todd Vasos for closing comments." ] }, { "name": "Todd Vasos", "speech": [ "Thank you for all the questions and thanks for your interest in Dollar General. I'll wrap up things by saying, we're very pleased with the third quarter results, which I think speaks to our strategy, our culture and the great execution by our team even in a constantly evolving environment. As we look forward, I'm very optimistic about our robust set of initiatives, including today's announcements to accelerate the pace of new unit growth at pOpshelf and expand internationally for the first time.", "As I said earlier, I never have felt better about the underlying business model. And in fact, I believe this is a much different company than it was just a few years ago. And that we are very well positioned to capitalize on the enormous growth opportunities we see in front of us.", "Thank you for listening. Have a great day and a happy holiday." ] }, { "name": "Operator", "speech": [ "[Operator Closing Remarks]" ] } ]
DG
2022-12-01
[ { "description": "Vice President, Investor Relations", "name": "Kevin Walker", "position": "Executive" }, { "description": "Chief Executive Officer", "name": "Jeff Owen", "position": "Executive" }, { "description": "Chief Financial Officer", "name": "John Garratt", "position": "Executive" }, { "description": "JPMorgan Chase and Company -- Analyst", "name": "Matthew Boss", "position": "Analyst" }, { "description": "Morgan Stanley -- Analyst", "name": "Simeon Gutman", "position": "Analyst" }, { "description": "Jefferies -- Analyst", "name": "Corey Tarlowe", "position": "Analyst" }, { "description": "UBS -- Analyst", "name": "Michael Lasser", "position": "Analyst" }, { "description": "Citi -- Analyst", "name": "Paul Lejuez", "position": "Analyst" }, { "description": "Oppenheimer and Company -- Analyst", "name": "Rupesh Parikh", "position": "Analyst" } ]
[ { "name": "Operator", "speech": [ "Good morning. My name is Robert, and I'll be your conference operator today. At this time, I'd like to welcome everyone to the Dollar General third quarter 2023 earnings call. Today is Thursday, December 1, 2022, [Operator instructions] This call is being recorded.", "Instructions for listening to the replay of the call are available in the company's earnings press release issued this morning. Now, I'd like to turn the conference over to Mr. Kevin Walker, vice president of investor relations. Kevin, you may now start your conference." ] }, { "name": "Kevin Walker", "speech": [ "Thank you, and good morning, everyone. On the call with me today are Jeff Owen, our CEO; and John Garratt, our CFO. Our earnings release issued today can be found on our website at investor.dollargeneral.com, under news and events. Let me caution you that today's comments include forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995, such as statements about our financial guidance, strategy, initiatives, plans, goals, priorities, opportunities, investments, expectations, or beliefs about future matters and other statements that are not limited to historical fact.", "These statements are subject to risks and uncertainties that could cause actual results to differ materially from our expectations and projections. These factors include, but are not limited to, those identified in our earnings release issued this morning, under Risk Factors in our 2021 Form 10-K filed on March 18, 2022, and any later filed periodic report, and in the comments that are made on this call. You should not unduly rely on forward-looking statements, which speak only as of today's date. Dollar General disclaims any obligation to update or revise any information discussed in this call unless required by law.", "At the end of our prepared remarks, we will open the call up for your questions. Please limit your questions to one and one follow-up question if necessary. Now, it is my pleasure to turn the call over to Jeff." ] }, { "name": "Jeff Owen", "speech": [ "Thank you, Kevin, and welcome to everyone joining our call. I want to begin by thanking our entire team for their ongoing commitment to serving our customers, communities, and each other. The quarter was highlighted by strong performance on the top line, led by comp sales growth of 6.8% and included increases in traffic and in market share of both consumable and nonconsumable product sales. During the quarter, we experienced significantly higher-than-anticipated cost pressures, including challenges within our internal supply chain, sales mix pressures, and higher inventory damages and shrink, all of which impacted gross margin.", "We will elaborate more on these cost pressures in a bit. But despite these challenges, we delivered a double-digit increase in diluted earnings per share, along with strong same-store sales growth. As the economic environment continued to evolve during the quarter, we remain focused on serving the needs of our core customer. We continue to see customer behaviors in Q3 that we believe indicate they are feeling increased financial pressure, including reductions in the number of items purchased per basket and in discretionary spending, which was softer than anticipated during the quarter.", "Customers also continued to shift spending to more affordable options, such as items that are dollar price point and private brands, while also shopping closer to payday at the first of the month. Importantly, we are growing more productive with our core customer, as well as seeing an increase in customers with annual household incomes up to $100,000. This growth underscores our belief that our value and convenience proposition resonates with a broad spectrum of customers and will continue to be important to all customers in this challenging economic environment. In turn, we remain focused on delivering value and convenience and continue to feel good about our pricing position relative to competitors and other classes of trade.", "Further, we remain committed to offering products at the $1 price point, and we're pleased with the strong comp sales performance of these products during Q3, as they collectively outperformed the chain average. With nearly 19,000 stores, located within five miles of about 75% of the U.S. population, we believe we are well-positioned to support our customers even in a challenging economic environment. We're building on this foundation, I'm excited to share our real estate growth plans for next year.", "In fiscal 2023, we plan to execute approximately 3,170 projects in the United States including 1,050 new store openings as we continue to lay and strengthen the foundation for future growth. I'll share more details on these plans in just a few minutes, along with an update on our plans for our supply chain as we continue to support our significant growth. But first, let me recap some additional financial results for the third quarter. Our strong comp sales performance helped drive a net sales increase of 11.1% to $9.5 billion.", "From a monthly cadence perspective, the comp sales momentum we saw building in Q2 continued into all three months of Q3, with September being our strongest month of performance. And I'm pleased to note that Q4 sales are off to a strong start as well. Our Q3 comp sales were primarily driven by an increase in average transaction amount, largely driven by inflation. And as we would expect during a more challenging economic environment, average units per basket were down.", "As I mentioned earlier, we were excited to see a second consecutive quarter of increasing customer traffic contribute to the growth. With regards to the supply chain cost pressures I mentioned earlier, I want to touch on what happened and the actions we have taken to address these challenges. As a reminder, since the early days of the pandemic over two years ago, we have seen demand and sales grow at a robust pace. In addition, the overall mix of products we are shipping has evolved significantly with the growth of our nonconsumable initiative in pOpshelf.", "As our distribution needs grew and evolved, we strategically designed permanent warehouse capacity solutions to support our growth. We plan for them to be operational starting in the back half of this year while making greater use of temporary storage facilities in the near term. However, as we move through Q3, we experienced unexpected delays in opening additional temporary storage facilities, primarily due to external challenges such as permitting. At the same time, seasonal goods came in earlier than anticipated.", "The resulting constraints from these factors led to more than $40 million and additional supply chain costs in Q3 compared to what we had previously expected. These costs included retention fees incurred for delays in returning shipping containers. Costs associated with inefficiencies in moving freight within our distribution centers and higher transportation costs as a result of servicing stores from less-than-optimal distribution center alignments. While these issues have resulted in a gross margin headwind in the back half of this year, the team has worked hard to move past these delays with the opening of additional storage and warehouse facilities, which have already begun to relieve some of the capacity pressures.", "In fact, within the past few weeks, we increased capacity by more than 2 million square feet with the opening of two new permanent regional distribution hubs in Georgia and Texas, which will serve as intermediary facilities between import points and the rest of our distribution centers. With the opening of both the temporary and permanent facilities, we believe we are well-positioned to drive continued improvement as we move ahead, as we better optimize store alignment with distribution centers, lower capacity utilization within our existing footprint, and improve the overall flow of goods. Of note, these regional hubs will be followed by the opening of our new combination distribution center in Nebraska, which is scheduled to begin shipping by the end of this fiscal year. In addition, our previously announced facilities in Arkansas, Colorado, and Oregon are expected to come online over the next 18 months.", "Collectively, all of these new distribution centers will ultimately result in a more than 20% increase in total capacity and position us well to support continued growth in the years to come. Overall, while internal supply chain challenges have impacted our EPS outlook for 2022, we believe the significant growth in demand that contributed to these challenges is a testament to the growing relevance of Dollar General. And we are confident in our plans to support this growth going forward. Looking ahead, we remain focused on advancing our operating priorities and strategic initiatives from a position of strength, as we continue to distance and differentiate Dollar General from the rest of the retail landscape.", "We continue to operate in one of the most attractive sectors in retail. And as a mature retailer in growth mode, our transformational strategic actions have positioned us well for continued success, while supporting long-term shareholder value creation. With that, I will turn the call over to John." ] }, { "name": "John Garratt", "speech": [ "Thank you, Jeff, and good morning, everyone. Now that Jeff has taken you through a few highlights of the quarter, let me take you through some of its important financial details, beginning with gross profit. Unless we specifically note otherwise, all comparisons are year over year, all references to EPS refer to diluted earnings per share and all years noted refer to the corresponding fiscal year. For Q3, gross profit as a percentage of sales was 30.5%, a decrease of 27 basis points.", "This decrease was primarily attributable to a higher LIFO provision, a greater proportion of sales coming from the consumable category, as well as increases in distribution costs, markdowns, inventory shrink, and damages partially offset by higher inventory markups. Of note, product cost inflation was greater than anticipated, resulting in a LIFO provision of approximately $148 million during the quarter. And while we believe cost increases are beginning to moderate, we anticipate LIFO will continue to pressure Q4 as well. SG&A as a percentage of sales was 22.7%, a decrease of 23 basis points.", "This decrease was driven by expenses that were lower as a percentage of sales, the most significant of which were retail labor, incentive compensation, hurricane-related disaster expenses, and occupancy costs. These were partially offset by expenses that were greater as a percentage of sales, including utilities, repairs and maintenance, and travel and training costs. Moving down the income statement. Operating profit for the third quarter increased 10.5% to $736 million.", "As a percentage of sales, operating profit was 7.8%, a decrease of 4 basis points. Our effective tax rate for the quarter was 22.8% and compares to 22.2% in the third quarter last year. Finally, EPS for the third quarter increased 12% to $2.33. Turning now to our balance sheet and cash flow, which remains strong and provide us the financial flexibility to continue investing for the long-term, while delivering significant returns to shareholders.", "Merchandise inventories were $7.1 billion at the end of the third quarter, an increase of 34.8% overall and 28.4% on a per store basis. Similar to the first half of the year, this increase primarily reflects the impact of product cost inflation, a greater mix of higher-value products, particularly in the home and seasonal categories, primarily due to the continued rollout of our nonconsumables' initiative, and the early receipt of seasonal goods. Importantly, we continue to believe the quality of our inventory is in good shape, and we anticipate that we will begin to see lower levels of inventory growth beginning in Q4. Moving down the balance sheet.", "We issued $2.3 billion of senior notes during Q3, and we now expect to incur total interest expense of approximately $210 million for the full year, an increase of approximately $53 million over the prior year. Turning to cash flow. Year to date through Q3, the business generated cash flows from operations totaling $1.2 billion, a decrease of 44%, primarily due to higher inventory purchases. Total capital expenditures through Q3 were $1.1 billion and included our planned investments in new stores, remodels and relocations, distribution and transportation projects, and spending related to the strategic initiatives.", "During the quarter, we repurchased 2.3 million shares of our common stock for $546 million and paid a quarterly cash dividend of $0.55 per common share outstanding for a total payout of $123 million. At the end of Q3, the remaining share repurchase authorization was $2.5 billion. Our capital allocation priorities continue to serve us well and remain unchanged. Our first priority is investing in high-return growth opportunities, including new store expansion and our strategic initiatives.", "We also remain committed to returning significant cash to shareholders, to anticipated share repurchases and quarterly dividend payments, all while maintaining our current investment-grade credit rating and managing to a leverage ratio of approximately three times adjusted debt to EBITDAR. Moving to an update on our financial outlook for fiscal 2022. On year-to-date sales performance and our expectations for the remainder of Q4, we are reiterating our fiscal 2022 full year expectations for net sales growth of approximately 11%, including an estimated benefit of approximately 2 percentage points from the 53rd week, and we are updating our expectation for same-store sales growth for Q4, which we expect same-store sales growth in the range of 6% to 7%, which would result in growth toward the upper end of our previous range of approximately 4% to 4.5%. Turning to gross margin.", "We've experienced many challenges over the course of this year, including those related to product cost inflation, supply chain dynamics and the evolution of consumer spending. Since our last update and like many retailers, we have seen an increased headwind from lower-margin consumables, sales mix as customers face growing financial pressure. We expect this headwind to grow in Q4 as our guidance assumes customers continue to feel financial pressures and shift more of their spending to consumable items. And while we are making good progress toward resolving our storage capacity constraints, we expect some of the cost pressures we have experienced as a result of the delays will carry over into Q4, but will be largely resolved by Q1 of next year.", "Finally, we are seeing a greater headwind from inventory shrink and damages than we anticipated for the back half of this year. Overall, while we are confident in the actions, we are taking to address our supply chain challenges, we anticipate the total headwind to gross margin in Q4 from all of these factors will be higher than what we previously contemplated within our financial guidance. With all this in mind, we are updating our EPS guidance. For the fourth quarter, we now expect to deliver EPS in the range of $3.15 to $3.30, which would result in a growth for the full year of approximately 7% to 8%.", "This is compared to our previous expectation of 12% to 14% EPS for the full year. Both the current and previous ranges include an estimated benefit of approximately 4 percentage points from the 53rd week. And our EPS outlook now assumes an effective tax rate toward the upper end of the previously provided range of 22% to 22.5%. We now expect capital spending for 2022 to be approximately $1.5 billion, which is at the top end of our previously stated range.", "Finally, our expectations for share repurchases remain unchanged from what we stated in our Q2 earnings release on August 25, 2022. Overall, despite the near-term challenges, we are confident in the business and our outlook for the remainder of the year. While we plan to share 2023 guidance on the Q4 call, we feel good about the sales momentum going into next year, coupled with moderating cost pressures. Let me provide some additional context as it relates to our Q4 outlook.", "As a reminder, we expect to continue realizing benefits from our initiatives, including DG Fresh and NCI through the remainder of the year. In addition, we expect the significant expansion of our private fleet, will drive additional benefits going forward despite anticipated continued internal supply chain pressures in the near term. With regards to SG&A, we expect continued investments in our strategic initiatives as we further the rollouts. However, in aggregate, we continue to expect these initiatives will positively contribute to operating profit margin in 2022, as we expect our benefits to gross margin will more than offset the associated SG&A expense.", "Consistent with Q2 and Q3, our outlook includes continued investments to further enhance the customer experience, primarily toward incremental labor hours to drive continued improvement in overall in-stock levels and customer experience. Finally, we also continue to pursue efficiencies and savings through our Save to Serve program, including Fast Track, and are seeing savings in 2022, offsetting a portion of wage inflation. As always, we continue to be disciplined in how we manage expenses and capital with the goal of delivering consistent, strong financial performance, while strategically investing for the long term. We're working hard to address the near-term challenges, most of which we believe will be behind us as we enter 2023.", "Importantly, we remain confident in our business model and our ongoing financial priorities to drive profitable same-store sales growth, healthy new store returns, strong free cash flow, and long-term shareholder value. With that, I will turn the call back over to Jeff." ] }, { "name": "Jeff Owen", "speech": [ "Thank you, John. Let me take the next few minutes to update you on our operating priorities and strategic initiatives. Our first operating priority is driving profitable sales growth. We are continuing to make significant progress executing against our robust portfolio of initiatives.", "Let me take you through some of the recent highlights. Starting with our nonconsumable initiative, or NCI, which was available in more than 16,000 stores at the end of the third quarter. With over 75% of the assortment at $5 or less, this treasure hunt offering continues to resonate with customers who are seeking value. We continue to be pleased with the sales and margin performance we are seeing from our NCI offering, including market share growth in nonconsumable product categories.", "Looking ahead, we expect to realize ongoing benefits from this initiative throughout the remainder of the year and remain on track to complete the rollout across nearly the entire chain by year-end. Moving to our pOpshelf store concept, which further builds on our success and learnings with NCI. As a reminder, pOpshelf aims to engage customers by offering a fun, affordable, and differentiated treasure hunt experience delivered through continually refreshed merchandise, a differentiated in-store experience, and exceptional value with the vast majority of our items priced at $5 or less. We recently celebrated the two-year anniversary of the first pOpshelf store, along with our 100th store opening.", "And we are pleased to see the concept continuing to resonate with customers. During the quarter, we opened 23 new pOpshelf locations, bringing the total number of stores to 103 located within nine states. Additionally, we opened 15 new store-within-a-store concepts during Q3, bringing the total number of Dollar General market stores with a smaller footprint pOpshelf store included to a total of 40. We remain on track to nearly triple the stand-alone pOpshelf store count this year, which would bring us to a total of nearly 150 stand-alone pOpshelf locations by year-end.", "Looking ahead, we plan to nearly double the pOpshelf store count next year, as our real estate plans for 2023 include opening approximately 150 additional locations, bringing the total number of pOpshelf stores to about 300 by the end of 2023. Overall, we remain excited about the pOpshelf concept and our goal of approximately 1,000 locations by year-end 2025. Turning now to DG Fresh, which is a strategic, multiphase shift to self-distribution of frozen and refrigerated goods along with a focus on driving continued sales growth in these areas. As a reminder, we completed the initial rollout of DG Fresh across the entire chain in 2021 and are now delivering to nearly 19,000 stores from 12 facilities.", "The initial objective of DG Fresh was to reduce product cost on our frozen and refrigerated items, and we continue to be very pleased with the savings we are seeing. Another important goal of DG Fresh is to increase sales in frozen and refrigerated categories. We are pleased with the performance on this front including enhanced product offerings in stores and strong performance from our perishable department. Going forward, we expect to realize additional benefits from DG Fresh, as we continue to optimize our network further leverage our scale, deliver an even wider product selection and build on our multiyear track record of growth in cooler doors and associated sales.", "And while produce is not included in our initial rollout, we continue to believe that DG Fresh provides a potential path forward to expanding our produce offering to more than 10,000 stores over time. To that end, we offered Fresh produce in more than 3,000 stores at the end of Q3. And looking ahead, plan to add produce in approximately 2,000 stores in 2023, for a total of approximately 5,000 stores by the end of next year. Finally, DG Fresh has also extended the reach of our cooler expansion program.", "During Q3, we added more than 17,000 cooler doors across our store base, and we are on track to install more than 65,000 cooler doors in 2022. Importantly, despite the meaningful improvements we have made to date as a result of DG Fresh, we believe we still have a significant incremental opportunity to drive additional returns with this initiative in the years ahead. Turning now to an update on our health initiative, branded as DG Wellbeing. The initial focus of this project is an expanded health offering, which consists of approximately 30% more feet of selling space and up to 400 additional items as compared to our standard offering.", "This offering was available in more than 3,200 stores at the end of Q3, and we plan to expand to a total of more than 4,000 stores by the end of 2022. As we seek to further connect customers with our expanded health offering, we have recently launched a partnership with a third-party payment platform to allow customers to use health plan supplemental benefits to purchase various health and wellness-related items in their local Dollar General stores. And most recently, I'm excited to announce that we launched a pilot of a mobile health clinic provided by DocGo On-Demand to provide basic preventative and urgent care services at a small number of stores in Q3. We plan to test this offering in select stores over the next few months as we continue to work with customers on how to help bring affordable health and wellness closer to home, while further establishing Dollar General as a trusted health partner in the local community.", "In addition to the gross margin benefits associated with the initiatives I just discussed, we continue to pursue other opportunities to enhance gross margin, including improvements in private brand sales, global sourcing, supply chain efficiencies, and shrink and damage reduction. Our second priority is capturing growth opportunities. Our proven high-return, low-risk real estate model has served us well for many years and continues to be a core strength of our business. In the third quarter, we completed a total of 798 real estate projects, including 268 new stores, 485 remodels, and 45 relocations.", "For 2022, we now plan to execute approximately 2,945 real estate projects in total, including 1,025 new stores, 1,795 remodels, and approximately 125 store relocations. Looking ahead, as I mentioned earlier, we plan to execute approximately 3,170 projects in the United States in 2023 across our Dollar General and pOpshelf banners, including 1,050 new stores, 2,000 remodels, and 120 relocations. Our ability to innovate our store formats continues to be an important strength of the business, and I want to take a moment to provide some additional color on our 2023 real estate strategy. Approximately 80% of our new stores and nearly all of our relocations will be in one of our larger store formats, which continue to drive increased sales productivity per square foot as compared to our traditional box.", "With regards to remodels, approximately 80% will be in our DGTP format, which will provide the opportunity for a significant increase in cooler count, as well as the ability to add Fresh produce in many stores. In addition to our planned Dollar General and pOpshelf growth, we are very excited about our plans to expand internationally, and our goal is to open our first store in Mexico by the end of this fiscal year. As a reminder, these stores, which will be branded under the name MeSuper Dollar General will be located in underserved communities in Northern Mexico. Looking ahead, we plan to have up to 35 stores open in Mexico by the end of 2023, as we look to extend our value and convenience proposition to a customer base that is similar to our core customer in the United States.", "These stores will be incremental to our planned 1,050 new store openings. As we head into 2023, our real estate pipeline remains robust. We see more than 16,000 total opportunities for small box retail stores in the United States, including more than 12,000 for Dollar General stores, approximately 3,000 for pOpshelf, and approximately 1,000 for DGX. With these opportunities and our existing footprint of more U.S.", "brick-and-mortar stores than any other retailer, we are excited about our ability to capture significant growth opportunities in the years ahead. Next, our digital initiative, which is an important complement to our physical footprint, as we continue to deploy and leverage technology to further enhance convenience and access for customers. Our efforts remain centered around creating a digital front porch for our customers, as we look to continue building engagement across our digital properties, including our mobile app. We ended Q3 with over 4.5 million monthly active users on the app, and expect this number to grow as we look to further enhance our digital offerings.", "Our partnership with DoorDash continues to resonate with both new and existing customers as we look to extend the value offering of Dollar General, combined with the convenience of same-day delivery in an hour or less. This offering was available in more than 13,000 stores at the end of Q3, and we are very pleased with the year-to-date sales results. In addition, we are excited about the continued growth of our DG Media Network. We are seeing significant interest and participation from CPG companies and brands, who are seeking to connect with our more than 90 million unique profiles, especially our rural customers, who represent about 30% of the U.S.", "After establishing the foundation over the last few years, we are beginning to meaningfully grow this business. As we expand the program and enhance the value proposition for both customers and brand partners, while increasing the overall net financial benefit for the business. Overall, our strategy consists of building a digital ecosystem specifically tailored to provide our customers with an even more convenient, frictionless and personalized shopping experience. And we are pleased with the growing engagement we are seeing across our digital properties.", "Our third operating priority is to leverage and reinforce our position as a low-cost operator. We have a clear and defined process to control spending, which continues to govern our disciplined approach to spending decisions. This approach, internally branded as Save to Serve, keeps the customer at the center of all we do, while reinforcing our cost control mindset. Our Fast Track initiative is a great example of this approach, where our current goals include increasing labor productivity in our stores and enhancing customer convenience.", "The current focus of Fast Track is self-checkout, which provides customers with another flexible and convenient checkout solution, while also driving greater efficiencies for our store associates. Self-checkout was available in more than 10,500 stores at the end of Q3, and we continue to be pleased with our results, including strong customer adoption rates. We are also excited about our pilot in select stores, which provides customers the option to utilize self-checkout in all lanes, but also choose a staff register, if preferred. We believe this full self-checkout option could further enhance our convenience proposition, while enabling store teams to dedicate even more time to serving customers.", "We are currently testing this layout in approximately 250 stores and are pleased with the early customer and associate response. Looking ahead, we are on track to expand our self-checkout offering to a total of up to 11,000 stores by the end of 2022, as we look to further extend our position as an innovative leader in small-box discount retail. Moving forward, the next phase of Fast Track consists of increasing our utilization of emerging technology and data strategies, which includes putting new digital tools in the hands of our field leaders. When combined with our data-driven inventory management, we believe these efforts will reduce store workload and drive greater efficiencies for our retail leaders and their teams.", "We also continue to reduce costs through the expansion of our private fleet, which consisted of more than 1,300 tractors at the end of Q3. As a reminder, we have been focused on significantly expanding our private fleet in 2022, as we plan to more than double the number of tractors from 2021, which we expect will account for approximately 40% of our outbound transportation fleet by the end of the year. Our underlying principles are to keep the business simple, but move quickly to capture growth opportunities, while controlling expenses and always seeking to be a low-cost operator. Our fourth operating priority is investing in our diverse teams through development, empowerment, and inclusion.", "As a growing retailer, we continue to create new jobs and opportunities for personal and professional development and ultimately, career advancement. Our internal promotion pipeline remains robust as evidenced by the more than 70% of our store employees at or above the lead sales associate position who were placed from within. In addition, approximately 15% of our growing private fleet team began their careers with us in either a store or distribution center. We are pleased with our turnover trends and staffing levels.", "And applicant flow continues to be strong, further validating our confidence that we are taking the right actions to attract and retain talent. Ultimately, we believe the opportunity to develop a career with a growing and purpose-driven company is a unique, competitive advantage and remains our greatest currency in attracting and retaining talent. We also recently completed our annual Community Giving Campaign, where our employees came together to raise funds for a variety of important causes. And I was once again inspired by the generosity and compassion of our people.", "We continue to add incredible talent across the organization in our stores, distribution centers, private fleet, and at our store support center. As this new talent joins our tremendous team, I am continually reminded that the people of Dollar General are our greatest strength. In closing, I am excited about the future as we continue to make great progress against our operating priorities and strategic initiatives, with the number of initiatives we have in place and a unique and strong strategic planning process, we are confident in our plans to drive long-term sustainable growth, while creating meaningful shareholder value. Finally, as we are in the midst of our busy holiday season, I want to thank our approximately 173,000 employees for their commitment every day to serve our customers.", "I am excited about our work together as we head into the final weeks of our year. With that, operator, we would now like to open the lines for questions." ] } ]
[ { "name": "Operator", "speech": [ "Thank you. At this time, we'll be conducting a question-and-answer session. [Operator instructions] As a reminder, we ask you to limit to one question and one follow-up if necessary. [Operator instructions] One moment, please, while we poll for questions.", "Our first question comes from Matthew Boss with J.P. Morgan. Please proceed with your question." ] }, { "name": "Matthew Boss", "speech": [ "Great. Thanks. So, Jeff, maybe first, could you elaborate on what you think is driving the sequential acceleration in same-store sales? I think traffic has now sequentially improved for the second straight quarter. What are you seeing across the income cohort? And then maybe just looking back at past periods of consumer pressure, how sustainable do you see the market share opportunity in front of us?" ] }, { "name": "Jeff Owen", "speech": [ "Hey. Thanks, Matt. We are very pleased with our 6.8% comp sales increase. And as you mentioned, seeing traffic accelerate again for the second consecutive quarter was very nice to see, and also continuing to grow market share.", "We grew market share in our consumables and our nonconsumable business. And so, when you think about that, our outperformance on sales really was driven in the consumables business, and it really is a testament to our going where the customer wants us to go. And that is something we've always done here at Dollar General. And I think it's a testament to the relevance of our box.", "When you think about our box and how we've continued to make it a fuller fill-in shop, it really speaks to our ability to serve a broad spectrum of customers. And as you mentioned, with customers -- our core customer, one thing that is encouraging to see is she's still gainfully employed. And we've long said that is the single greatest factor in her economic health. So, it's encouraging to see that, and it's encouraging to see us grow productivity and share with her.", "And also, the encouraging thing we saw this quarter is we grew share in all income levels. And so that's particularly good to see when you think about the higher income levels. One of the things we've been very pleased at is our ability to retain that COVID customer higher than we expected to over the course of several quarters, and we continue to see that here. And we also saw us grow share and customers in the $100,000 income level.", "So, when you step back and think about it, it again just points to our ability to serve multiple income cohorts. And that will set us up extremely well as we look to the future and our ability to not only make our core customer more productive, but also the ability to retain these new customers. So, we feel real good about that. And as I mentioned around the consumable business, we're pleased with the performance there.", "And I think the thing to keep in mind, as you step back and you think about where Dollar General is today, our consumable business is a much different business from a profitability standpoint due to our strategic initiatives. When you think about NCI, our health offering, DG Fresh, it really has made that business a different business from a profitability standpoint. In fact, in the third quarter, our gross margin is 100 basis points higher than it was in 2019, just to give you a little bit of color there. So again, we feel good about the top line.", "And as we look forward, we feel we're really well-positioned to serve a multiple cohorts of customers in this economic environment. And I'd also say that we're excited to deliver more real estate projects in 2023 than we've ever done at Dollar General. And I think it's a testament to the robust pipeline and then also the strategic initiatives. So, I feel real good about where we are from a sales standpoint and our position to be able to serve our broad customer base as we look forward." ] }, { "name": "Matthew Boss", "speech": [ "That's great. And then maybe, John, on gross margin and just to break down some of the components. So, do you see these warehouse costs and supply chain efficiency is more transitory and contained to the fourth quarter? Help us to think about LIFO going forward relative to the material gross margin headwind this year, should we anticipate should transportation as a tailwind now from here? And just what inning do you see the drivers of inventory markup in today?" ] }, { "name": "John Garratt", "speech": [ "Sure, Matt. I'll start with the question around the supply chain costs. And as we called out versus previous expectations, the supply chain costs were a significant headwind more than $40 million above our previous expectations for Q3. And we do see this as near term.", "And we're making very good progress toward resolving our storage capacity constraints as more capacity comes online. And we do believe some of these cost pressures, nonetheless, will carry over into Q4. However, we do expect this will largely be resolved in Q1 of next year. So, as we look ahead, we anticipate supply chain costs, both internal and external in 2023 to be down quite a bit.", "We're obviously seeing it improving as others market for carrier costs as well. And so that as a potential tailwind going forward. And then LIFO as well. We're seeing the pace that while it will continue to pressure, Q4, we are seeing the pace of cost increases continue to moderate.", "And as we look at next year, we'd expect less pressure from LIFO. So certainly, some near-term pressures between LIFO between the supply chain cost. We also mentioned the sales mix shift and shrink and damages. But as we look to 2023 and beyond, we feel good about, as Jeff mentioned, one, the sales momentum in the business; but also moderating product cost and inflation, particularly around supply chain and LIFO.", "And as you look at the initiatives, we have that continue to contribute the other levers we have, not to mention our scale and where we're at in price, we don't see a need to invest. We feel that we're very well-positioned as we look ahead to the future to continue expanding gross margin over the long term." ] }, { "name": "Matthew Boss", "speech": [ "That's a great color. Best of luck." ] }, { "name": "John Garratt", "speech": [ "You asked about markdowns as well. I didn't want to miss that question. As you look at markdown risk, while up from the unusually low levels last year, markdowns are still well below pre-pandemic levels. If you look at the majority of the inventory growth, it's really driven by inflation.", "The team has done a good job anticipating the mix shift in consumer demand and has proactively been adjusting orders. And as a result, we feel very good about the quality of the inventory, ability to mitigate the markdown risk. As always, we've set aside, what we believe is an appropriate markdown level for the upcoming Christmas season. And of course, this is all reflected in our guidance." ] }, { "name": "Matthew Boss", "speech": [ "Great. Thanks, John." ] }, { "name": "Operator", "speech": [ "Our next question comes from Simeon Gutman with Morgan Stanley. Please proceed with your question." ] }, { "name": "Simeon Gutman", "speech": [ "Good morning, everyone. I think a follow-up, John, for you. So, this year, you were going to grow earnings sort of in line with Algo excluding the 53rd week, and now it's going to be below and yet you're doing more sales. So, there's clearly something coiled up here in the model.", "I know you're not going to guide next year, but the theoretical framework is there should be some recapture. If there is recapture, are you inclined to let that flow? Or do you manage -- do you think the business just manages toward Algo and I don't know if it's to reinvest or maybe we don't see all the recapture that I'm hinting at?" ] }, { "name": "John Garratt", "speech": [ "Sure. So, as you mentioned, we won't be giving specific guidance on this call. We'll certainly share that on the March call. But I'll just start by reiterating that we feel great about the fundamentals of the business, the sales momentum, coupled with the moderating cost pressures that I just articulated.", "And as you called out, it is a one less week next year, that's important to bear in mind. But again, as you look at the fundamentals of the business, they're very strong. We continue to see ourselves as 10% EPS growers over the long term. Now, we will always balance that with investing back in the business for the long term, but feel we're very well-positioned.", "And more to come for next year, but feel great about the momentum of the business fundamentals." ] }, { "name": "Simeon Gutman", "speech": [ "OK. And maybe my follow-up, maybe sticking with you on fourth quarter gross margin. I guess, we're trying to build to the pieces, supply chain, mix, shrink. And we're having trouble getting to the entire magnitude.", "Are you willing to share a little more magnitude by item, by driver? Because it doesn't feel like the consumables mix goes up enough to justify the mix. So there seems like there's something like markdown in there as well." ] }, { "name": "John Garratt", "speech": [ "So, as you look at the drivers of the additional pressure on Q4, it's the same drivers as Q3, the order is a little bit different. As you look at what we anticipate as the key pressures on Q4 margins is still healthy flow-through, but less than previously expected. The big difference is, first the mix shift. We did see a mix shift in the consumables as customers face financial pressures.", "We want to go where the customer goes, and like the sales we're seeing, but it does pressure your margin a little bit with the mix of the sales. The other piece -- we did see -- we mentioned as we progressed through Q3 is a greater headwind from inventory shrink and damages. And that shrink can have a tail to that. Rest assured, the team knows how to deal with this and is taking actions to address it.", "But it does have a tail to it. And then while we are making good progress resolving our storage capacity constraints with the capacity online, we do believe, as we mentioned, that some of this will carry over into Q4, but be largely resolved by Q1. So that's the big versus our previous expectations. Obviously, the other big one is LIFO.", "As you look at LIFO, we called out $148 million in Q3, while we believe the product cost headwind is beginning to moderate. The prior cost increases will continue to pressure Q4 LIFO, and you could do the math as you do -- as you spread that across the year. So that's really the key drivers. But again, I'll just reiterate, many of these are transitory in nature.", "And as we look ahead to the future, we feel we're well-positioned to resume growing our gross margin over the long term with the initiatives, the levers, our scale, and the pricing position we're in." ] }, { "name": "Simeon Gutman", "speech": [ "Thank you. Happy holidays." ] }, { "name": "John Garratt", "speech": [ "Thank you." ] }, { "name": "Operator", "speech": [ "Our next question comes from Corey Tarlowe with Jefferies. Please proceed with your question." ] }, { "name": "Corey Tarlowe", "speech": [ "Hi. Good morning and congrats on the continued top-line momentum and share gains that you've witnessed. So, with that in mind, maybe could you parse out a little bit what you're seeing in terms of how the customer is behaving because it's clear that traffic is up. The customer is visiting the store more and should -- maybe shifting a little bit into private label.", "Could you talk a little bit about what you're seeing in that regard and how you're investing to continue to support the growth in that segment? And then secondarily, as you see that mix shift happen more to the consumable side, how do you marry that with the continued growth that you're likely to see in NCI, which should actually help to underpin, I would say, better profitability as we look ahead?" ] }, { "name": "Jeff Owen", "speech": [ "Hey, Corey, this is Jeff. Thank you for your question. And I'll start with the customer. I'll reiterate the fact that her gainfully being employed is, again, a very important factor to economic health.", "And so, when we talk to our customers, and I feel like our teams do that better than just about anybody. What we hear is she's feeling the pressure of energy prices and fuel and just the everyday needs are -- it's hard to -- for her to make ends meet. And so, she's behaving pretty much exactly the way we would expect her to in times like this. So, what we're seeing from her is, as you alluded to, she's coming to us more often.", "She's buying fewer items on each occasion. And one of the things that we're very pleased is we're being able to help serve her needs through affordability. And our leaning into the dollar price point, our customer is responding incredibly well to that. And I just -- a testament to our team and to our ability to go where the customer wants us to around our $1 price point and affordability.", "But when you think about the consumable business, as you mentioned before, you got again, really step back and think about the strategic initiatives and how that has allowed us to really have a more profitable business there. And we've long used consumables to drive traffic and nonconsumables to build the basket. And so, as we think about our -- excuse me, the nonconsumable, as you mentioned, certainly, we continue to be pleased with what we're seeing on NCI, and its ability to really provide that value. When you think about NCI, 80% of the items are $5 or less.", "And so, when you think about our ability to drive traffic through consumables, and then also see a little bit of our ability to rotate the product, the treasure hunt, our breadth strategy. We feel real good about our ability to help that customer continue to get the things they need and the things that they want. One last thing I'll say around private brand. I mean, we continue to be very pleased with what we're seeing on penetration.", "But the other thing you got to keep in mind is our customer, again, she's very brand-focused as well. And it's very important to her. And that's where it's important to really lean into our scale. As John mentioned earlier, the ability of Dollar General and a limited SKU retailer to be able to trade out brands, if necessary for our customer is a really, really powerful way for us to serve for better.", "And we've said this before, but our customer treats a brand as a brand. And so, it gives us the ability to make sure that we're providing her with the value she needs. And our merchant team does that probably better than anybody in retail, in my view. So, as you step back and think about it, we feel we're well-positioned and really excited about our ability to continue to listen to our customer go where she wants us to go.", "And you combine that with the more profitable consumable business and our strategic initiatives and really set up nicely for us to continue to serve her, as we've done for many, many years in all economic cycles." ] }, { "name": "Corey Tarlowe", "speech": [ "That's great. And then thanks for laying out the new store plans for next year. I think that helps to really provide a little bit more color as to the predictability and stability that we should expect ahead. Could you talk a little bit more about the strong returns that you're continuing to see on those new stores? And what we should expect more so from a continued ROIC standpoint as it relates to some of these new stores as we look ahead?" ] }, { "name": "Jeff Owen", "speech": [ "Yeah, Corey, I'll start and then I'll let John fill in on some of your questions around returns. But our real estate model continues to be a huge strength of this business. I mean the low-risk and high-return model is incredibly powerful. And when you think about the retail landscape today, when you think about some of the challenges other retailers have talked about on the real estate front, I'm just very, very excited and proud of the fact that we're going to deliver more projects than we ever have at Dollar General in 2023.", "And with 1,050 new stores, it continues to just highlight our ability to serve the customer and our ability through format innovation, our real estate model, our technology, we're able to go where the customer needs us to go. And so, feel great about that. And really pleased at the fact, through format innovation, this larger store we're opening, our new store performance has been incredibly positive. And I'm very, very pleased at our ability to exceed our pro formas, and we continue to see that.", "So that larger store format is continuing to deliver higher sales per square foot, which is excited. And as you know, the large majority of our openings are in that larger footprint. But as you think about the next year in the future, I think the other thing that excites us here is the pipeline that we have. And on the U.S.", "alone, we have 16,000 additional opportunities, and we feel great about our ability to capture those. And certainly, our fair share, which we've certainly demonstrated, but 12,000 additional for DG, 3,000 for pOpshelf and then 1,000 for DGX. So, stepping back, you can probably hear in my excitement about the real estate and our ability to continue to grow here. And we feel like we're being very prudent in this environment, I'm very, very pleased with the team's performance here.", "So, I'll kick it over to John for your return question." ] }, { "name": "John Garratt", "speech": [ "Yeah. And just -- echoing Jeff's comments, we're very pleased with the results we're seeing. As he mentioned, we're above pro forma in sales, which puts us ahead of schedule in terms of the IRRs. Again, we target a 20% to 22% after-tax IRR based on the sales.", "And as we outperform in sales, that puts us a little ahead on the returns as well. And feel not only great about the -- and again, it's always important to bear in mind that it includes the impact of cannibalization, which is very minimal, has been very consistent, just given the localized nature of the shop. We continue to see paybacks less than two years. So, it continues to be a fantastic investment that we continue to hit the gas on.", "And we're also really pleased with returns we get on our remodels as well, and we're doing not only a record number of overall projects this year, but a record number of remodels, which really helps drive the comp." ] }, { "name": "Corey Tarlowe", "speech": [ "Great. Thanks so much for all the helpful color and best of luck." ] }, { "name": "John Garratt", "speech": [ "Thank you." ] }, { "name": "Jeff Owen", "speech": [ "Thank you." ] }, { "name": "Operator", "speech": [ "Our next question is from Michael Lasser with UBS. Please proceed with your question." ] }, { "name": "Michael Lasser", "speech": [ "Good morning. Thanks a lot for taking my question. John, I want to hopefully get some frame of reference on two factors that are impacting the gross margin. So, a, you mentioned $40 million of supply chain costs that are above and beyond what you expected, does that go to $30 million in the fourth quarter? And if that's in the right ballpark, you used the term of beat, which you can interpret a lot of different ways.", "I think what most of the market wants to know is, does abate mean you're going to incur $70 million this year that will go away because those are extraordinary costs next year? And as part of that, the other piece of it is the LIFO, which the LIFO headwind because that needs to be $450 million or so if we just add $100 million for the fourth quarter. If there's a linear path of this inflation, meaning it goes from nine, eight, seven, six, and so forth, would that LIFO headwind that's going to be, call it, $450 million this year, be like $300 million next year, so you get a $150 million benefit? Sorry for so many numbers and so much confusion." ] }, { "name": "John Garratt", "speech": [ "No. No. Thank you, Michael. I'll try and tackle each of these.", "In terms of the carryover impact of the supply chain costs. We didn't give a specific number on that. It will be less, but still a meaningful impact to us. In terms of LIFO, the way to think about that is even though we don't anticipate -- we anticipate a slowdown in the number of price increases.", "The way you do that number is at a point in time, we project the full year impact of all the price increases we're aware of, and we spread that across the year. So that gets you in the game of what Q4 looks like. And as we look ahead to next year, it remains to be seen but would anticipate a considerable reduction to that LIFO number. So, as you look at -- as I mentioned, as you look ahead to next year, we think the supply chain costs will be down considerably because we won't have these near-term one-time costs, we don't anticipate because we think that will be resolved in Q1.", "And then the market is favorable in terms of just overall transportation costs, both foreign and domestic. And of course, we continue to stand up our private fleet, which we're going to -- every time we convert, we take 20% out and we're going to double that in size this year. So that's certainly a significant savings driver for us as well. And so, as you look ahead to next year, I think it's safe to assume that there's a number of tailwinds.", "There's certainly some headwinds we mentioned. We'll have to wait and see what the mix does. We want to be there for the customer, and we'll go where she goes. So, we have to see where that goes.", "As we said, shrink has a tail to it. And we're all over it. We know how to attack that, but it does have a bit of a tail. So, as you look ahead to next year, there's some puts and takes.", "But again, we feel like there's a lot of tailwinds when you think of LIFO, when you think of the supply chain costs and all the other levers that we've talked about, not to mention the initiatives." ] }, { "name": "Michael Lasser", "speech": [ "OK. My follow-up question will be less a bit picky. I'm sorry. The -- we've seen now some cost pressure at Dollar General.", "This follows a significant decline in profitability your largest competitor. Should we take these as one-time event? Or is there anything to say that just the overall profitability of the small box value convenience sector is permanently under pressure or long-lasting under pressure because of some of the competitive dynamics? Because of the shift to consumables and other factors? Or would you expect that this is not a trend that's going to be long lasting?" ] }, { "name": "John Garratt", "speech": [ "Yeah. I'll just reiterate, we see most of the pressures as transitory. When you look at the LIFO, when you look at the supply chain, we see that as transitory. We still feel very good about our nonconsumable products, and see this more as a transitory macro pressure.", "Again, we're growing share. We're just kind of following the market trend, which people are just shopping more toward consumables versus discretionary items. But we're taking share and feel that will certainly do very well there as the economy improves. And just structurally, we feel we're well-positioned in terms of -- as we look at wages, we feel we're well-positioned in terms of applicant flow and staffing levels.", "We feel we're investing appropriately in the business. We feel that our pricing is very appropriate. And again, I think it's important to mention that as you look at Q3, yes, we were down 27 basis points in gross margin, but we're still about 1 point above pre-pandemic levels despite all these transitory pressures I mentioned. We're still a point above where we were back in 2019 and Q3." ] }, { "name": "Michael Lasser", "speech": [ "Got it. Thank you so much and have a good holiday." ] }, { "name": "Jeff Owen", "speech": [ "Thank you." ] }, { "name": "Operator", "speech": [ "Our next question is from Paul Lejuez with Citi. Please proceed with your question." ] }, { "name": "Paul Lejuez", "speech": [ "Thanks, guys. Curious on the storage capacity and supply chain inefficiencies. If there was a sales impact during the quarter, as well as the cost impact that you talked about. Maybe if you could frame that, also, same question, if you expect there to be a sales impact in 4Q? And related to that, was the pressure any region in particular where you saw the cost and/or sales impact? And how much of a differential was there in terms of the performance of that region versus your others?" ] }, { "name": "Jeff Owen", "speech": [ "Yeah. Thanks. I'll tell you, as we said before, the delays of our temporary storage facilities, certainly, that unexpected delay did impact the quarter from a profitability standpoint. But again, I reiterate how pleased we were with the strong sales performance we saw.", "And the nice thing is like it normally is at DG, it's pretty broad-based. And so, I think, again, that goes to the consistency of our ability to serve a customer across, not only a broad swath of the United States, but also around the income levels I mentioned earlier. And we're very pleased and excited that our temporary storage facilities are now online. We're also excited that our two new permanent regional hubs that are going to serve us extremely well.", "As we look to the future, they're also online. And of course, those things will take some time to get fully productive and to allow us to catch up. So, again, I would also mention we're pleased that we had in stock improvement year over year in Q3. So again, when you kind of bundle it all together, I think the team did a nice job of overcoming some of these challenges, to deliver for the customer, go where she wants us to go.", "I think that translated into our strong comp, our strong market share gains in both consumables and nonconsumables, and a second consecutive quarter of sequential traffic increases. So, again, feel pleased about the top line and feel pleased about where we have opened up our capacity. And finally, I'll just mention, as you look forward over the next 18 months, bringing on four permanent facilities, that will increase our capacity by 20%. And is something we factored into our strategic plan and feel great about how that's going to serve us well and allow us to continue to grow this business in the years ahead." ] }, { "name": "Paul Lejuez", "speech": [ "Thanks." ] }, { "name": "Operator", "speech": [ "Our last question will be from Rupesh Parikh with Oppenheimer. Please proceed with your question." ] }, { "name": "Rupesh Parikh", "speech": [ "Good morning. Thanks for taking my question. So just going back to your commentary on shrink. I was curious if you can provide more color in terms of what's driving the higher shrink lately opportunities you guys see to reduce that going forward? If there's any way to quantify how you think about the headwind for Q4 or even what you saw in Q3?" ] }, { "name": "John Garratt", "speech": [ "Yeah. So, as we mentioned, we saw increased shrink later in Q3. We believe this is largely -- Rupesh, largely attributable to the inflationary environment, coupled with higher inventory levels. Overall, as you know, retail is seeing higher shrink in this environment.", "Now, this can have a tail. So, we did say we expect this to carry over into Q4. I think it's instructive as we listed out the gross margin drivers, I think that was the last on the list of drivers for Q3. But bear in mind, that was later in Q3.", "So, we anticipate a larger -- probably a larger impact if you have a full quarter of that in Q4. But in Q3, it was the smallest of the items we called out. But again, we've done this drill many times. If you look at our shrink levels, they're still very low from a historical perspective, just not quite as low as we were at record levels recently.", "But the team knows how to execute against this, and I think we're putting the right tactics in place to address it. We're increasing the amount of tagging with -- for our EAS units. We're leveraging technology like exception-based reporting, and we have very good process rigor and focus on this to tame it. But we'll have a little bit of tail until these actions take hold." ] }, { "name": "Rupesh Parikh", "speech": [ "Great. Thank you. And then maybe just one quick follow-up question. So just on trade-in, I know your team expects to trade in to continue into Q3, and I believe Q4 as well.", "At this point, the trade-in that you're seeing, is that consistent with what you'd see in a recession? Or is it -- would you say it's still below what you typically see in downturn?" ] }, { "name": "Jeff Owen", "speech": [ "Yeah. Rupesh, as I said earlier, we're very pleased to be able to see that we're growing share in customers across all income levels. So that's encouraging. And really, again, I go back to the relevance of our brand of our box and our tremendous ability to listen and respond to what our customers are looking for.", "And certainly, I would tell you, the core customer is certainly behaving the way we expected her to. And also, as you think about it, one of the things that we continue to be pleased with is the fact that when we were introduced to that new customer during COVID, we continue to retain her at higher-than-expected levels. So, I would say that as we sit here today, we feel real good about what we're seeing across all the income brackets. We feel real good about seeing the growth there.", "And I think we're very well-positioned to continue to serve them. And I think if you step back and think about Dollar General, we're an all-weather brand, and we've been doing this for many, many years, and we continue to do that. And so -- and we will continue to do that. We'll go where the customer wants us to go, which we did this quarter.", "And we're also positioned to continue to do that as we move forward and continue to deliver on our strategic initiatives that really make a more well-rounded shop and a greater appeal for a broad swath of customers." ] }, { "name": "Rupesh Parikh", "speech": [ "Great. Thank you." ] }, { "name": "Operator", "speech": [ "We have reached the end of the question-and-answer session. I'd now like to turn the call back over to Jeff Owen for closing comments." ] }, { "name": "Jeff Owen", "speech": [ "Well, thank you for all the questions and your continued interest in Dollar General. I just wanted to wrap up with three points. First, while we had some unanticipated challenges within our supply chain during the quarter, we're confident in the actions we've taken to address these near-term issues and expect continued improvement as we move through Q4 and into next year; second, we believe we are well-positioned to keep growing market share, especially in an environment where customers are even more focused on value; and third, we believe our strong value and convenience proposition combined with our robust portfolio of strategic initiatives sets us up for a very long runway of growth. And we couldn't be more excited about where the future is headed.", "I want to thank you again for listening, and I hope you have a great day." ] }, { "name": "Operator", "speech": [ "[Operator signoff]" ] } ]
TTWO
2022-08-08
[ { "description": "Senior Vice President of Investor Relations and Corporate Communications", "name": "Nicole Shevins", "position": "Executive" }, { "description": "Chairman and Chief Executive Officer", "name": "Strauss Zelnick", "position": "Executive" }, { "description": "President", "name": "Karl Slatoff", "position": "Executive" }, { "description": "Chief Financial Officer", "name": "Lainie Goldstein", "position": "Executive" }, { "description": "MKM Partners -- Analyst", "name": "Eric Handler", "position": "Analyst" }, { "description": "Truist Securities -- Analyst", "name": "Matthew Thornton", "position": "Analyst" }, { "description": "Morgan Stanley -- Analyst", "name": "Matthew Cost", "position": "Analyst" }, { "description": "Barclays -- Analyst", "name": "Mario Lu", "position": "Analyst" }, { "description": "Cowen and Company -- Analyst", "name": "Doug Creutz", "position": "Analyst" }, { "description": "Bank of America Merrill Lynch -- Analyst", "name": "Omar Dessouky", "position": "Analyst" }, { "description": "Oppenheimer and Company -- Analyst", "name": "Martin Yang", "position": "Analyst" }, { "description": "Wells Fargo Securities -- Analyst", "name": "Brian Fitzgerald", "position": "Analyst" }, { "description": "Bernstein -- Analyst", "name": "Matti Littunen", "position": "Analyst" }, { "description": "Goldman Sachs -- Analyst", "name": "Eric Sheridan", "position": "Analyst" }, { "description": "The Benchmark Company -- Analyst", "name": "Mike Hickey", "position": "Analyst" }, { "description": "Stifel Financial Corp. -- Analyst", "name": "Drew Crum", "position": "Analyst" }, { "description": "J.P. Morgan -- Analyst", "name": "David Karnovsky", "position": "Analyst" }, { "description": "Raymond James -- Analyst", "name": "Andrew Marok", "position": "Analyst" }, { "description": "MoffettNathanson LLC -- Analyst", "name": "Clay Griffin", "position": "Analyst" } ]
[ { "name": "Operator", "speech": [ "Greetings, and welcome to Take-Two's first quarter fiscal year 2023 conference call. [Operator instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Nicole Shevins, senior vice president of investor relations and corporate communications." ] }, { "name": "Nicole Shevins", "speech": [ "Good afternoon. Thank you for joining our conference call to discuss our results for the first quarter of fiscal year 2023 ended June 30, 2022. Today's call will be led by Strauss Zelnick, Take-Two's chairman and chief executive officer; Karl Slatoff, our president; and Lainie Goldstein, our chief financial officer. We will be available to answer your questions during the Q&A session following our prepared remarks.", "Before we begin, I'd like to remind everyone that statements made during this call that are not historical facts are considered forward-looking statements under federal securities laws. These forward-looking statements are based on the beliefs of our management, as well as assumptions made by and information currently available to us. We have no obligation to update these forward-looking statements. Actual operating results may vary significantly from these forward-looking statements based on a variety of factors.", "These important factors are described in our filings with the SEC, including the company's most recent annual report on Form 10-K and quarterly report on Form 10-Q, including the risks summarized in the section entitled Risk Factors. I'd also like to note that, unless otherwise stated, all numbers we will be discussing today are GAAP, and all comparisons are year over year. Additional details regarding our actual results and outlook are contained in our press release, including the items that our management uses internally to adjust our GAAP financial results in order to evaluate our operating performance. Our press release also contains a reconciliation of any non-GAAP financial measure to the most comparable GAAP measure.", "In addition, we have posted to our website a slide deck that visually presents our results and financial outlook. Our press release and filings with the SEC may be obtained from our website at take2games.com. And now, I'll turn the call over to Strauss." ] }, { "name": "Strauss Zelnick", "speech": [ "Thanks, Nicole. Good afternoon, and thank you for joining us today. I'm pleased to report that fiscal 2023 is off to a great start, highlighted by first quarter net bookings of $1 billion. Our performance demonstrates the quality of our games and our ability to engage audiences across the globe, despite the impacts of various macroeconomic and geopolitical factors.", "This has been a milestone period in the history of our company, as we closed our combination with Zynga. This transaction firmly establishes Take-Two's position as one of the largest pure-play interactive entertainment companies in the world. We are home to the industry's top creative talent, and we own and control an exceptional, diverse portfolio of intellectual properties encompassing all key platforms and genres. We are exceedingly optimistic about the long-term growth potential for the mobile industry, as well as our ability to create greater shareholder value, as a combined entity.", "Over the past few months, we have made significant progress in our integration efforts. Zynga, which is being run by the label's President, Frank Gibeau, established its ongoing leadership structure. Alongside Frank, we are fortunate to have numerous, proven senior executives who will be instrumental in overseeing Zynga's day-to-day operations and taking our combined mobile business to the next level of success. The integration of our corporate functions and systems has been tracking well, and we are pleased that our day-one plans were executed seamlessly, with no disruptions to our business operations or player communities.", "While it's still early, we are confident that we can realize $100 million of annual cost synergies within two years post-close and we are exploring additional areas of efficiencies. Our creative teams are in active discussions about potential projects, and we remain committed to delivering over $500 million of annual net bookings opportunities over time. There are several meaningful drivers in mobile that we believe our teams can begin to activate this fiscal year, including implementing new bold beats, driven by new content and other live-service enhancements; user acquisition optimization; creating a centralized library for development technologies and tools; enhancing the monetization of in-game advertising; and continuing to invest in our adtech platform with Chartboost. Over the intermediate and long term, our vision is to introduce mobile games for some of our most popular and proven intellectual properties that have the potential to be greatly additive to our financial profile.", "We have observed positive signs that some mobile players are looking for more sophisticated and immersive content, and we look forward to participating in this trend that should continue for the foreseeable future. We also see a tremendous opportunity to establish a more meaningful presence in key mobile-first emerging markets. Turning to our first quarter results, on a pre-combination basis, our net bookings of $731 million were within our previously stated outlook range, led by the outperformance of NBA 2K22 and WWE 2K22. Zynga's offerings complemented our results significantly for the period.", "NBA 2K22 continued to dominate as the industry's leading basketball game, with sell-in of over 12 million units to date, exceeding the series' sell-in from the prior year. During the first quarter, engagement with the title remained strong, with average games played per user increasing 16% year over year. In addition, NBA 2K22 Arcade Edition remains the No. 1 game on Apple Arcade since its launch in October 2021, and downloads of NBA 2K Mobile remained robust, driven by the Courtside Pass updates and content surrounding the NBA Playoffs and Finals.", "Our partnership with the NBA remains incredibly strong and we look forward to the launch of NBA 2K23 in September. Throughout the first quarter, 2K and Visual Concepts released a series of DLC packs to support WWE 2K22, which brought even more fan-favorite superstars into the ring for what has been hailed by critics and consumers alike as our best WWE offering in the series. Engagement with the title has been outstanding, with more than 330 million in-game matches played and over 8.5 million hours of WWE 2K22 content viewed on Twitch. We greatly value our partnership with the WWE and are thrilled about the long-term opportunity to grow the franchise further together.", "Rockstar Games capitalized on the momentum from last quarter's releases of Grand Theft Auto V for PlayStation 5 and Xbox series X/S, Grand Theft Auto Online stand-alone, and the launch of GTA+, as the experience continues to captivate players. Latest generation console players of Grand Theft Auto Online grew over 40% this quarter and are monetizing at a rate 36% higher than players on the previous generation. GTA+, the premium membership available exclusively on those consoles, has seen consistent growth since launch. The GTA Online community remains strong, and its audience size is operating at a new normal that is 49% higher than the pre-pandemic first quarter of fiscal 2020.", "Sales of Grand Theft Auto V also remained strong, and to date, the title has sold-in nearly 170 million units. With development of the next entry in the Grand Theft Auto series well underway, the Rockstar Games team is determined to once again set creative benchmarks for the series, our industry, and for all entertainment, just as the label has done with every one of their frontline releases. We were pleased with the performance of Red Dead Redemption 2, which continues to expand its audience and, to date, has sold-in more than 45 million units worldwide. Tiny Tina's Wonderlands exceeded our expectations and continued to sustain healthy player engagement, due in part to its robust post-launch content, which will continue throughout the fiscal year.", "The title has resonated with core fans and new audiences, with nearly 40% of players having never before played a Borderlands title. Additionally, Tiny Tina's Wonderlands launched on Steam in June alongside its previously released DLC offerings. Also in June, 2K and Supermassive Games launched The Quarry, an all-new horror narrative game, where every choice, big or small, shapes your story and determines who lives to tell the tale. The title launched to strong reviews, with NPR declaring it \"this summer's best horror game,\" and Variety calling it \"every horror fan's dream video game.\" And, Private Division released Void Riders, the first expansion for their critically acclaimed skateboarding action title, OlliOlli World, from Roll 7.", "The expansion earned an 87 on OpenCritic, which was even higher than the base game's excellent review scores. Private Division will share more details regarding the game's second expansion later this year. Recurrent consumer spending rose 48% and accounted for 73% of net bookings. This was significantly above our prior guidance due to the inclusion of Zynga for part of the quarter, which was not included previously, as well as outperformance from our core portfolio.", "During the period, Zynga continued to experience strength in player engagement and retention, and we believe that we are maintaining our healthy market share on a global basis. Additionally, we delivered significant growth in advertising net bookings, which was offset by some pressure on in-app purchases due to current macroeconomic conditions and seasonality. Some key highlights of our mobile offerings during the quarter include: Harry Potter: Puzzles & Spells featured an in-game event to celebrate the cinematic release of \"Fantastic Beasts: The Secrets of Dumbledore.\" Empires & Puzzles introduced the game's fifth season, Dynasty of Dunes. Zynga Poker released the Omaha update, giving players a new way to enjoy the popular game.", "Words With Friends introduced Clubs, a new feature that expands the game's social experience by offering shared spaces that players can enjoy together. Rollic launched 11 games in the quarter and Colors Runners! reached the No. 1 top free downloaded games position in the U.S. App Store in June.", "Turning to our outlook, we now expect to deliver net bookings of $5.8 billion to $5.9 billion, which includes Zynga for part of the year. Our pipeline for the year continues to look very strong, and we are excited to expand significantly our mobile presence with a best-in-class platform. Our new forecast also takes into account some movement in our release slate for the year, foreign currency pressures, and macroeconomic uncertainty. Lainie will provide more details shortly.", "Looking ahead, our long-term vision is clearer than ever, and we believe that our combination with Zynga will enable us to capitalize better on the evolving dynamics of the interactive entertainment industry. As we deliver our expansive, diverse pipeline and pursue the vast opportunities that we have identified through our combination with Zynga, we see a path to engage even greater audiences around the world, grow our scale, and enhance our margins. I will now turn the call over to Karl." ] }, { "name": "Karl Slatoff", "speech": [ "Thanks, Strauss. I'd like to begin by thanking our teams for a great start to the year, driven by their tireless passion, creativity, and commitment to deliver the best entertainment experiences in the world. I'll now discuss our recent releases. On July 7, 2K and Supermassive Games launched an update to the popular horror experience, The Quarry, which introduced several new features, including Wolfpack, a new online multiplayer mode where the host can invite other players to help shape the story as a collaborative group.", "In addition, all six episodes of the Bizarre Yet Bonafide podcast featured in The Quarry are now available in-game and in their entirety. The podcast, which was previously available only on select streaming platforms, follows two fictional paranormal investigators as they delve into the troubling secrets of The Quarry. On July 19th, 2K and Visual Concepts released the fifth and final DLC pack for WWE 2K22, entitled \"The Whole Dam Pack.\" The update features pop-culture icon Machine Gun Kelly, social media megastar Logan Paul, and high-flying, hard-hitting WWE Hall of Famer Rob Van Dam, alongside franchise debuts from LA Knight, Xia Li, Commander Azeez, and Sarray. We are very proud to have delivered such a stellar WWE offering this year and to support the title with our fans' most beloved superstars.", "On July 26th, Rockstar Games continued to grow and evolve the world of Grand Theft Auto Online across all platforms with the launch of The Criminal Enterprises, a sweeping update bringing new business prospects for Criminal Careers, plus new, elaborate Contact Missions, auto showrooms to test drive and purchase vehicles, and many other upgrades rolling out all summer long. The update also delivers highly requested experience improvements, as well as increased payouts across a range of gameplay, offering players more choices and freedom as they climb their way up the criminal ranks. We remain incredibly excited about our pipeline for fiscal 2023 and beyond. On August 16th, Private Division and Roll7 will release Rollerdrome, a brand-new third-person, single-player shooter.", "This stylish, high-octane game combines adrenaline-fueled skate stunts with intense combat in a retro-futuristic world. The title will be available on Steam and for PlayStation Plus members for an introductory price just under $20, after which it will retail for $29.99. Additionally, PlayStation Plus Premium members will be able to play a free trial of the game when it launches. On September 9th, 2K and Visual Concepts will launch NBA 2K23, the next offering from our industry-leading NBA series.", "Phoenix Suns' shooting guard, three-time NBA All-Star, and 2021-22 Kia All-NBA First Team selection, Devin Booker, is featured on this year's Standard Edition and cross-gen Digital Deluxe Edition. The Iconic Michael Jordan appears on the cover of the NBA 2K23 Michael Jordan Edition and the brand-new NBA 2K23 Championship Edition, which retails for $149.99 and delivers incredible value by including a 12-month subscription to the NBA League Pass for the first time. In the U.S. and Canada, players can purchase the WNBA Edition as a GameStop exclusive, featuring Phoenix Mercury superstar Diana Taurasi, along with Seattle Storm legend Sue Bird.", "2K has partnered with Every Kid Sports to support greater representation of females in basketball with a $100,000 donation that will enable girls across the U.S. to participate in youth sports. 2K will reveal more details of NBA 2K23 in the coming weeks. We have made the decision to move back the launch timing of Marvel's Midnight Suns to ensure the teams at Firaxis Games and 2K deliver the best possible experience for our fans.", "The title will launch later this fiscal year on Windows PC, Xbox Series X|S, and PlayStation 5. The Xbox One, PlayStation 4, and Nintendo Switch versions will follow at a later date. During the fourth quarter, Private Division and Intercept games will launch Kerbal Space Program 2 on PC. The game's dedicated community can look forward to more information about the game and its new features from the title's ongoing gameplay reveal video series.", "2K's teams at Visual Concepts and HB Studios remain hard at work on their upcoming launches of WWE 2K23 and PGA TOUR 2K23. 2K will have more to share on these annual sports offerings shortly. Zynga has a handful of games that are currently in soft launch, with more on the horizon, and we expect some of these titles will begin launching worldwide in our next fiscal year. This includes Star Wars Hunters, which is continuing to regularly roll out new content updates and features as it progresses through to a more mature phase of soft launch in strategic territories.", "At the same time, Rollic will continue to release a high volume of mobile titles as it has done previously. Turning to eSports, the NBA 2K League Championships tip off will take place in Indianapolis at the Pavilion at Pan Am, with 3v3 play August 17th through the 20th, and 5v5 play August 24th through the 27th. We remain excited about the continued success and growth of the NBA 2K League. In closing, we believe that our company today is the strongest and most diverse it has ever been.", "With approximately 11,000 of the industry's best and brightest talent, the most exciting and commercially successful portfolio of owned intellectual property, and the ability to deliver deeply captivating and engaging entertainment experiences on any platform anywhere in the world, we believe that we are well-positioned to deliver long-term value for our shareholders. I'll now turn the call over to Lainie." ] }, { "name": "Lainie Goldstein", "speech": [ "Thanks, Karl, and good afternoon, everyone. Today, I'll discuss the key highlights from our first quarter before reviewing our financial outlook for the fiscal year 2023 and second quarter. Please note that our first quarter results include Zynga's financial performance for 39 days of the quarter, which impacts the comparability of our results relative to last year, as well as to our prior guidance, which did not include the contribution from Zynga. Also, any references to Take-Two's pre-combination results are referring to our financial performance, excluding the acquired Zynga business.", "Additional details regarding our actual results and outlook are contained in our press release. As Strauss mentioned, this was a momentous quarter for our organization as we closed our transaction with Zynga and made significant progress on our integration efforts. Our teams created detailed plans to realize at least $100 million of annual cost synergies and we continue to expect approximately $50 million to be achieved within the first twelve months post-close. The largest opportunities include reducing duplicative corporate overhead and contracts, consolidating systems, rationalizing our real estate footprint, and leveraging Zynga's marketing functions across our other mobile titles.", "We are also exploring additional areas of efficiencies. At the same time, we delivered strong first quarter results, driven by net bookings of $1 billion. On a pre-combination basis, our net bookings were $731 million, which grew 3% compared to last year and was within our guidance range of $700 million to $750 million. The movement in foreign currency exchange rates negatively impacted our net bookings by approximately 1%.", "We were also pleased with Zynga's contribution for part of the quarter. With consumers today navigating various macroeconomic and geopolitical factors, we believe that our financial performance truly demonstrates the resiliency of our business model, driven by the incredible quality of our games and the significant value that our interactive entertainment experiences provide our players. During the period, recurrent consumer spending rose 48% and accounted for 73% of net bookings. This was significantly above our prior guidance due to the inclusion of Zynga for part of the quarter, as well as the outperformance of our pre-combination portfolio, led by NBA 2K22, Tiny Tina's Wonderlands, and Top Eleven.", "Digitally delivered net bookings increased 41% and accounted for 95% of the total. During the quarter, 77% of console game sales were delivered digitally, up from 73% last year. GAAP net revenue increased 36% to $1.1 billion, and cost of revenue increased 32% to $436 million, which included a $20 million impairment charge related to our decision not to proceed with further development of a title from an unannounced new franchise. Operating expenses increased by 125% to $704 million, primarily driven by the addition of Zynga and a full quarter of Nordeus, business acquisition costs and higher personnel and marketing expenses.", "And our GAAP net loss was $104 million, or $0.76 per share, which was largely impacted by $117 million of amortization of acquired intangibles and $165 million of business acquisition costs. Our GAAP net loss benefited from a reversal of expense of approximately $48 million related to forfeitures of previously granted stock awards. In the first quarter last year, our GAAP net income was $152 million, or $1.30. Our management tax rate for the period was 18% as compared to 16% in the prior year as a result of our combination with Zynga.", "On a pre-combination basis, our management results, excluding the impacts of the Zynga transaction, exceeded the high end of our guidance range by $0.06, despite the impairment charge taken during the quarter and the higher tax rate. We ended the quarter with over $1.3 billion of cash and short-term Investments and $3.3 billion of debt. Turning to our guidance, I'll begin with our full fiscal year expectations. As Strauss mentioned, we are initiating new guidance that includes our combination with Zynga for approximately 10 months of our fiscal year.", "We now expect to deliver net bookings of $5.8 billion to $5.9 billion. Our assumptions take into consideration some shifts in our pipeline for the year, as well as movement in foreign exchange rates and the uncertain macroeconomic backdrop. The largest contributors to net bookings are expected to be NBA 2K, Grand Theft Auto Online and Grand Theft Auto V, Empires & Puzzles, Rollic's hyper casual mobile portfolio, Toon Blast, and Red Dead Redemption 2 and Red Dead Online. We expect the net bookings breakdown from our labels to be 45% Zynga, which includes our former T2 mobile titles, 37%, 2K; 17%, Rockstar Games; and 1%, Private Division.", "We forecast our geographic net bookings split to be about 60%, United States; and 40%, international. We now expect recurrent consumer spending to grow by approximately 110% and represent 77% of total net bookings. Our digitally delivered net bookings are expected to grow by approximately 80% and represent 96% of net bookings. Our forecast assumes that 74% of console game sales will be delivered-digitally, up from 68% last year.", "We expect to generate more than $700 million in non-GAAP adjusted unrestricted operating cash flow, and we expect to deploy approximately $135 million for capital expenditures. We expect GAAP net revenue to range from $5.73 billion to $5.83 billion and cost of revenue to range from $2.74 billion to $2.79 billion, which includes approximately $700 million of amortization of acquired intangibles. Total operating expenses are expected to range from $3.37 billion to $3.38 billion as compared to $1.5 billion last year. This increase reflects the inclusion of Zynga; business acquisition costs; and higher personnel, marketing, and IT expenses, which is slightly offset by our anticipated cost synergies for the year.", "And we expect a GAAP net loss ranging from $398 million to $438 million, or $2.50 to $2.75 per share, which assumes a basic share count of 159.2 million shares. We expect our management tax rate to be 18% throughout the year. Now, moving to our guidance for the fiscal second quarter. We project net bookings to range from $1.5 billion to $1.55 billion, compared to $985 million in the second quarter last year.", "The largest contributors to net bookings are expected to be NBA 2K, Grand Theft Auto Online and Grand Theft Auto V, Empires and Puzzles, Rollic's hyper casual mobile portfolio, and Toon Blast. We project recurrent consumer spending to grow approximately 85% and digitally delivered net bookings to increase approximately 70%. Our forecast assumes that 73% of console game sales will be delivered digitally, up from 65% last year. We expect GAAP net revenue to range from $1.37 billion to $1.42 billion and cost of revenue to range from $700 million to $719 million, which includes approximately $200 million of amortization of acquired intangibles.", "Operating expenses are expected to range from $849 million to $859 million. At the midpoint, this represents a 125% increase over last year. This increase reflects the inclusion of Zynga and business acquisition costs, as well as higher marketing and personnel expenses, which we believe will be slightly offset by the realization of some of our anticipated cost synergies. And GAAP net loss is expected to range from $144 million to $160 million or $0.86 to $0.96 per share, which assumes a basic share count of 166.4 million shares.", "In closing, we had a great start to the year, and we believe that our combination with Zynga will enhance our positioning as one of the top interactive entertainment companies in the world. As our teams continue to leverage the core competencies from Zynga's publishing platform, we believe that we will be able to engage our player base more deeply, add new dimensions to our existing portfolio, and deliver significant long-term growth and margin expansion for our shareholders. Thank you. I'll now turn the call back to Strauss." ] }, { "name": "Strauss Zelnick", "speech": [ "Thanks, Lainie and Karl. On behalf of our entire management team, I'd like to thank our colleagues for delivering an excellent start to the year. And to our shareholders, I want to express our appreciation for your continued support. We'll now take your questions.", "Operator?" ] } ]
[ { "name": "Operator", "speech": [ "Thank you. [Operator instructions] Our first question comes from Eric Handler with MKM Partners. Please proceed with your question." ] }, { "name": "Eric Handler", "speech": [ "Good evening, and thanks for the question. Two questions. First, Lainie, I wonder if you could sort of size the changes in guidance in terms of how we might have been thinking about Marvel's Midnight Sun versus what's changed with FX and macro." ] }, { "name": "Lainie Goldstein", "speech": [ "So for the difference in the pre-combination business, we had some shifts in the pipeline for the year. And then there was a movement in the foreign exchange rates. And then there's also the uncertain macroeconomic backdrop. So I would say that the shifts in our pipeline were the most meaningful to our numbers.", "So I would say we had some titles that moved within the year. And that was Marvel Midnight Sun's and then there was an unannounced title that moved out of the year as well. So I would say definitely the pipeline changes that were the most -- to the change in the guidance." ] }, { "name": "Eric Handler", "speech": [ "Great. Thank you. And then, Strauss, I wondered if you could talk a little bit about the state of the mobile industry right now. There has been a little bit of headwinds with growth for the industry in this year.", "And wondering as you look at Zynga's portfolio and combining it with your portfolio, how fast can you integrate sort of the ad network? Are things changing relative to what you were thinking maybe at the time the acquisition closed or maybe even when you first made the acquisition?" ] }, { "name": "Strauss Zelnick", "speech": [ "Thanks, Eric. There's a lot there. We are seeing some softness in the mobile market. The good news is, I think we're doing better than most, if not all.", "And I think we're seeing an offsetting increase in our market share. I think the reason we're seeing probably a bit more softness in mobile than in console is in console to participate you have to buy. And in mobile, by definition, you're in a free-to-play environment. You can play without paying if you are feeling the pinch of inflation, specifically with regard to nondiscretionary expenditures like fuel and food, you could imagine that if you're playing the game, you might choose to spend a bit less or spend a bit less frequently.", "That said, we think Zynga's highly diverse portfolio of terrific games is a meaningful offset. And as I said, I think we're outperforming the market. That's our belief. We're also seeing growth in advertising revenues.", "And because I think we under-index in advertising, that's an opportunity that will be offsetting to the broader market, even if we see ongoing softness. But as you know, we always call it the way we see it. And what we're seeing is overall some softness in the marketplace. When you have 50% of big bank economists saying we think we might be in a recession in the next quarter or two, my attitude is the market believes we're in a recession right now.", "And as a consumer-facing company, we are seeing some softness. With regard to the integration, I'm not sure you asked about how it's going, but it's going really well. And we expect to meet or exceed our cost synergy expectations, both in terms of magnitude and timing. And more importantly, we fit really well together culturally.", "And I think all of us at Zynga and now all of us at Take-Two are very excited about the combination of the way things are going and how well the teams do fit together. And we had a sense of that during the diligence period, but it's always nice to know post closing that that's the case. And I think you alluded to whether we can sort of create one broader integrated platform. As you know, Take-Two Mobile Games has been folded into the Zynga division, which is operated by Frank Gibeau and his team highly independently, and one of their key priorities is to create an integrated platform that will bring the best out in all of our games.", "So enhance our acquisition and enhance our conversion, enhance our retention, enhance our lifetime value, and also enhance, as I said, our advertising revenue. Zynga has a proprietary adtech platform, driven by their Chartboost division. And we're excited about what that can bring to Zynga and also bring to all of Take-Two." ] }, { "name": "Operator", "speech": [ "Our next question comes from Matthew Thornton with Truist Securities. Please proceed with your question." ] }, { "name": "Matthew Thornton", "speech": [ "Hey, good afternoon. Thanks for the question. Maybe two, if I could. First one, Lainie, I've been wondering if you'd be able to give us what the RCS percentage of bookings was for legacy Take-Two for the quarter.", "I think it was 73% total with Zynga. I'm curious kind of what that number was without the quarter. And then just secondly, Strauss, any movement in the out-year pipeline if we think about how things are progressing and developing. I guess what's your general sense about progress maybe when we last talked three months ago, that would be helpful.", "Thank you." ] }, { "name": "Lainie Goldstein", "speech": [ "In terms of the RCS for the pre-combination, we're not really breaking that out anymore. We're really looking at the business overall as one business. But I can tell you that we did outperform NBA 2K 22, Tiny Tina's Wonderland and top 11 versus our guidance for the quarter. So those three titles did better than we had expected." ] }, { "name": "Strauss Zelnick", "speech": [ "And in terms of the pipeline, yes, as Lainie mentioned, we did have a number of titles that have effect that has been shifting around that affected our pipeline and some of our results for fiscal '23. Generally speaking, we obviously don't take these shifts lightly. We have seen them before. The most important thing for us is always to put up the best game we possibly can because that's what builds franchise value and ultimately, that's what drives the success of our organization.", "So it's worth the wait. Typically, that is the best economic decision that we can make. And I would say that I'd characterize the pipeline shifts as well these things do move around and you may have -- that may affect a specific year. It does -- hasn't really changed at all our overall perspective on the growth in the intermediate and long term." ] }, { "name": "Operator", "speech": [ "Our next question comes from Matthew Cost with Morgan Stanley. Please proceed with your question." ] }, { "name": "Matthew Cost", "speech": [ "Hi, everyone. Thanks for taking the questions. I have two. So I guess just kind of following up on the Chartboost point.", "I think you mentioned in the prepared remarks and then just now in the Q&A about leveraging those marketing capabilities inside Zynga across other titles. I guess what are you envisioning that looks like? And is that something that can be used to promote titles or cross-promote titles on PC and console in addition to mobile? And then just on the commentary, I think, in the press release about the $500 million of synergies now that you kind of have your hands dirty, you've gotten under the hood with Zynga, do you have a sense of how long it will take to establish feasibility and start working through those projects to get a sense of how long they might take? Is it a five-year process to get those done? What might that timing look like? Thank you." ] }, { "name": "Strauss Zelnick", "speech": [ "Thanks. Look, I think to the extent that Zynga succeeds in building a robust adtech platform, then it will affect all of our live services businesses, not just Zynga's live services businesses. And we're really optimistic about that. To be clear, we haven't baked any of that into our cost synergy expectations.", "And as you know, we've not included our revenue synergy expectations in our forward-looking projections. So that's all upside if we're able to achieve that. But I feel very good about the exercise. And yes, we'll cross over to the entire company's live services offerings.", "In terms of the timing for new projects, very hard to call that now. There's a lot of excitement internally. We're working on a lot of interesting potential ideas. And certainly, the development for mobile is much quicker than it is for console.", "-- but it would be premature to state in a particular time. And of course, all product announcements do come from our labels." ] }, { "name": "Operator", "speech": [ "Our next question comes from Mario Lu with Barclays. Please proceed with your question." ] }, { "name": "Mario Lu", "speech": [ "Great. Thanks for taking the questions. Great. The first one is just a follow-up on the full year guidance, the updated one with Zynga.", "I was hoping if you could help kind of clarify what items are kind of moved around within the Zynga side. I know that Star Wars: Hunters got pushed back. It sounds like macro weakness deepened a little bit. So any other color you can provide in terms of the Zynga side would be great." ] }, { "name": "Lainie Goldstein", "speech": [ "Sure. There were some movements in their pipeline. There were some changes in the FX rate. The Russia sales were removed from their financials.", "And then also, there was some overall ad market that the ad market has experienced some pressure. So those are most of the changes that we saw in our numbers over the last few months." ] }, { "name": "Mario Lu", "speech": [ "OK. And then a follow-up on the recurring consumer spending. I just wanted to make sure for mobile advertising revenue, that's all included, right, in RCS? Or is that categorized somewhere else?" ] }, { "name": "Strauss Zelnick", "speech": [ "Yes. It is, indeed." ] }, { "name": "Operator", "speech": [ "Our next question comes from Doug Creutz with Cowen. Please proceed with your question." ] }, { "name": "Doug Creutz", "speech": [ "Yeah. First, I was just wondering if you're willing to share what Zynga's pro forma rev would have been for the entire quarter. And then secondly, Google is implementing some advertising formatting changes. And there's been some speculation that this could negatively impact the hyper casual ad business.", "Just wondering what your take is on that. Do you see any risk there -- you think you can manage through? Thanks." ] }, { "name": "Lainie Goldstein", "speech": [ "So we're going to manage their business as one combined entity. So therefore, we're not going to break out the Zynga piece for the quarter. So it's not been our practice to break out our results for the -- with our prior acquisitions. So we're not going to do that here as well." ] }, { "name": "Strauss Zelnick", "speech": [ "And with regard to a change in ad formats with Google, I don't have a point of view yet about how that may or may not affect us. I would say we're not concerned at the moment." ] }, { "name": "Doug Creutz", "speech": [ "OK. Thank you." ] }, { "name": "Operator", "speech": [ "Our next question comes from Omar Dessouky with Bank of America. Please proceed with your question." ] }, { "name": "Omar Dessouky", "speech": [ "Two questions. So just a little bit of clarification on the business plan for Chartboost specifically. Could you clarify whether you're intending to turn that into a third-party broker advertising network that cross promotes third-party games on third-party ad inventory similar to companies like ironSource, AppLovin, or Unity. Or it's more of an internal advertising technology tool? That's my first question." ] }, { "name": "Karl Slatoff", "speech": [ "So in terms of Chartboost, Chartboost does actually deals third parties today. We certainly haven't announced any changes. But that is one area that we're very excited about. Look, the bigger the business is, the more valuable the platform is going to be.", "It's going to be certainly valuable from a tech perspective internally. But we think it's a great product and whether or not it's got great growth prospects to the third-party market remains to be seen, but that's certainly something that we're -- that is under consideration." ] }, { "name": "Omar Dessouky", "speech": [ "Thank you very much. And then the second question is with regards to the mobile game market and specifically the Zynga assets. If you think about what your outlook for the growth in the expense base was in January when you announced the acquisition versus what you're guiding today, is it about the same? Is it significantly lower given that in the first half, the mobile video game market seems to have not performed terribly well?" ] }, { "name": "Lainie Goldstein", "speech": [ "In terms of the changes in the -- in our guidance, it's -- when we're looking at our opex, there's an increase in terms of our expenses from Zynga, but then also in terms of against our guidance. We have some lower marketing and some lower headcount expenses due to less new hires due to timing. So that's the big changes between our operating expenses between this guidance and last guidance." ] }, { "name": "Karl Slatoff", "speech": [ "And on the revenue side, there are -- obviously, there are some things that happen in the short term that Lainie and Strauss have always spoken about that can affect what our expectations are, where they are today in the short run versus where they were in January. But overall, our mid- to long-term prospects, growth prospects for the business have not changed. We're still very excited about the prospects." ] }, { "name": "Operator", "speech": [ "Our next question comes from Martin Yang with Oppenheimer. Please proceed with your question." ] }, { "name": "Martin Yang", "speech": [ "Hi. Thank you for taking my question. My first question is on your investments into the development resources in the future. Can you maybe talk about your plan for mobile or for Zynga, particularly versus rest of more PC and console facing part of Take-Two in terms of headcount increase or any other support infrastructure you have in plan after integration?" ] }, { "name": "Strauss Zelnick", "speech": [ "I think the good news is that we have a very robust team now. We have 11,000 colleagues around the world. And we have the ability to pursue a very ambitious program of development and publishing. And at the same time, we're a growth business, and we expect to continue to grow.", "So we don't have expectations that we will significantly increase our headcount anytime soon. At the same time, assuming we grow in the way we expect to, and we have an expectation to grow very significantly in the next three years, I assume we will increase our development headcount somewhat." ] }, { "name": "Martin Yang", "speech": [ "Thank you. One more question, if I may. Can you maybe give us more details on the pipeline shift in Take-Two? Are there more conventional reasons like the game is not ready? Or is there any macro factors play into that decision in terms of you feel that market isn't ready for the game, you want to wait until the broader consumer spending environment becomes more friendly to the games released?" ] }, { "name": "Karl Slatoff", "speech": [ "Yeah. I mean, it really is simply that the game is -- to the extent that we're moving games -- shifting later, which is when we have pipeline shifts, that's typically the case. We typically don't move games up. But that is really based on where the game is in development.", "We would not hold a game that's ready to release based on any overall economic trend or something going on in the market. Potentially, we would maybe move a game a week or two, depending on -- for marketing windows. But generally speaking, when the game is ready, that's when we release it." ] }, { "name": "Operator", "speech": [ "Our next question comes from Brian Fitzgerald with Wells Fargo. Please proceed with your question." ] }, { "name": "Brian Fitzgerald", "speech": [ "Hi. A couple of quick ones. Maybe rifting on that macro theme. For a long time, we've accepted the narrative that gaming spend is really resilient in a recession because of the low cost per hour of entertainment.", "But at the same time, the model has shifted toward digital and RCS. Strauss, you hit upon mobile consumer discretionary, mobile advertising. How resilient do you think overall RCS consumer, PC would be if we came into more of a macro environment? It seems that would be a little more resilient than free-to-play type of models on the mobile side. And then a quick follow-up, kind of an odd question.", "Does your PGA Tour business, is it seeing any impact from the Live Tour and the noise around that? Thanks." ] }, { "name": "Strauss Zelnick", "speech": [ "So on your first point, I've been asked about the potential impact of the recession on our business since I started with these conference calls some 15 years ago. And over and over again, I said I don't believe the entertainment business is recession proof or even necessarily recession resistant. And I think we're seeing now the decline in consumer spending and increase in inflation will have an impact on the industry. You've seen it from our report today and from our competitors' reports as well.", "I think conceptually, the impact is probably greater on free-to-play for the reasons that I said earlier in the call, that you can play those titles without spending money. And you may just decide to spend less frequently or less in aggregate. With regard to the console experience, you have to buy the game to play. And so I think if you want the title, you're going to buy it.", "And as you point out, it's a very good value for consumers. And on your second point, no, we haven't seen any impact on our ongoing sales or engagement with PGA Tour based on, as you put it, the noise around this new offering." ] }, { "name": "Operator", "speech": [ "Our next question comes from Matti Littunen with Bernstein. Please proceed with your question." ] }, { "name": "Matti Littunen", "speech": [ "Hello. Good evening. A question on IDFA. Now you pointed out your outperformance on mobile.", "Now I was just wondering if the Chartboost stacked at Zynga would have helped you perhaps navigate some of the headwinds that some of your mobile peers have pointed out in regard to IDFA. So could that user acquisition advantage maybe help there with the outperformance? And then just to check on that macro pressure on the business. Are there any interesting geographic trends in terms of differences, for example, between the U.S. market and elsewhere, as you look at those macro headwinds you're seeing so far this year? Thank you." ] }, { "name": "Strauss Zelnick", "speech": [ "Look, the change in IDFA is the new reality. And we've been operating within that new reality for some time. I do think that our massive consumer database gives us a benefit in that we have all kinds of in-house proprietary information that will help us with our marketing. I do think that the adtech platform that Zynga has and is building further, including Chartboost, will help us, as I said earlier, do even better.", "I don't -- I'm really not concerned about this post-IDFA world. And in terms of the macro trends, no, the world tends to kind of move in lockstep on an economic basis. So we don't see any particular geographic changes that meaningfully influence our company." ] }, { "name": "Operator", "speech": [ "Our next question comes from Eric Sheridan with Goldman Sachs. Please proceed with your question." ] }, { "name": "Eric Sheridan", "speech": [ "Thanks for allowing me to ask a question. Maybe I'll ask a big-picture one. Strauss, we're coming up on the beginning of the third year of this console cycle at the end of this year. Any thoughts about what you've seen from new console adoption and what it's meant for overall gaming habits among your users? And how do you think longer term about aligning some of your more interesting content until we get much deeper into the penetration curve because this console cycle has been very different because of elements around the supply chain dynamic.", "Thanks so much." ] }, { "name": "Strauss Zelnick", "speech": [ "I think you nailed it. It's hard to call what's going on because it would normally be early three years in, but it has been because of the incredible supply constraints. What we have seen though is when people are buying new consoles, they're highly engaged. So the users, for example, of GTA 5 who are on NuGen are much more engaged than prior gen users.", "Now that may simply be because they have new machines, and they're excited about them. But it may also be, and it wouldn't surprise me if this were the case, that because the new consoles offer a better experience, it's a more engaging experience. And that historically has been the case, that our business has grown coincident with the growth and exploitation of increasingly robust technology. And I would expect that to continue for some time to come." ] }, { "name": "Operator", "speech": [ "Our next question is from Mike Hickey with the Benchmark Company. Please proceed with your question." ] }, { "name": "Mike Hickey", "speech": [ "Thanks, Strauss and Lainie. Congrats on the quarter, guys, and congrats on your acquisition, pretty exciting. Two questions for me. First one on your new mobile games from existing IP.", "Are we -- are you sort of thinking casual spin-offs here like a Red Dead Poker or GTA Casino? Are you thinking more core mobile game releases off your IP? If it is core, do you feel like you have the resources now that you've added Zynga just to make kind of core mobile games? Or would you need to be in a position to hire or create new teams or partner? That's sort of the first question. And the second question on Gen Z and Gen Alpha. Besides being very useful when you think about your biggest IP and where you've had the most last year over the decades, curious what you think your biggest opportunities and challenges are for sort of this emerging new generation of gamers.Thanks, guys." ] }, { "name": "Strauss Zelnick", "speech": [ "So thanks, Mike, for your comments and your question. With regard to the creation of new mobile titles based on legacy Take-Two IP, it remains to be seen what those expressions will look like. It will be driven by the passion and the talent of the teams. And to your question regarding whether Zynga has the ability to do that development in-house, I think the answer is unquestionably they do.", "Zynga has many number of talented studios all around the world. That distinguishes Zynga from virtually all other mobile developers and publishers. And it's one of the things that we found most exciting about the company now the label. In terms of the next generation of gamers, I mean, the evidence is that they play more.", "They're more engaged and they play more. And that makes sense because what was new technology 15 years ago, to them, is just part of the landscape. They've grown up and it's like fish in water. People -- kids start playing with smartphones as early as they can play with blocks.", "So I have to believe that interactive entertainment will continue to grow disproportionately to the rest of the audiovisual entertainment businesses. There's ongoing evidence that is and will remain the fastest-growing segment within the entertainment industry. And I think this next generation will just put a finer and finer point on that. In terms of what we have to give them to engage them, that that is still the same, which is the highest quality entertainment experience that is available on the face of the earth, and that's our job, that's our mission and that's what drives us all every day." ] }, { "name": "Operator", "speech": [ "Our next question is from Drew Crum with Stifel. Please proceed with your question." ] }, { "name": "Drew Crum", "speech": [ "OK. Thanks. Hey, guys. Good afternoon.", "Maybe for Strauss or Karl. Guys, are you seeing any changes with the development cycle? And specifically, has COVID in any way elongated the time it takes to complete a game? And is that something that could put the development pipeline at risk? And then separately, guys, what is the company's plan around debt reduction for fiscal '23? Thanks." ] }, { "name": "Karl Slatoff", "speech": [ "So in terms of development cycles, I think development cycles are ever changing. And obviously, it varies game by game. The games are getting bigger. They're getting more complicated.", "There's new technology out there that we can avail ourselves to. So -- and all of that's a learning process. And that learning curve is often very steep. And -- but I would say there's nothing specific about the changing development cycles that we haven't seen before.", "It's just that the games are bigger and they're more complicated and there's more to do. And that's actually what makes our business so exciting." ] }, { "name": "Lainie Goldstein", "speech": [ "In terms of debt reduction, we have a strong cash flow. The business will be generating a lot of cash this year. We look at paying down as much debt it makes sense to at the end of the year. But at the same time, we look at acquisition opportunities as well.", "So if there's something that makes sense for us to buy during the year, we would also look to do that. So I'd love to see what it looks like at the end of the year based on what the needs are during the rest of the year." ] }, { "name": "Operator", "speech": [ "Our next question is from David Karnovsky with J.P. Morgan. Please proceed with your question." ] }, { "name": "David Karnovsky", "speech": [ "Hi. Thank you. Just following up on mobile advertising at Zynga. I think you mentioned you were up year over year.", "Given the overall mobile environment is seeing macro pressure, just wondering how you kind of reconcile that with the advertising gains? Is that about market share? And then I wanted to see if you could just speak to the decision to delay the full launch of Star Wars: Hunters beyond its initial time line? And is that game still slated for a cross-platform just because the platform is listed as TBA in the release? Thanks." ] }, { "name": "Karl Slatoff", "speech": [ "So in terms of the advertising business, yes, the overall advertising market, generally speaking, has experienced year-over-year declines due to adtech consolidation and the lower spend on digital advertising. Our advertising revenues have -- the growth has decelerated from the last quarter, but they grew notably versus last year. And we believe we outperformed the industry trends. We expect this trend to improve over the course of the year with natural seasonality and optimizations we're making in our network mix and pricing.", "So what was the second question? Yes, in terms of Star Wars: Hunters release, it really is just a matter of making sure that the game is delivered at the highest possible quality, and we have not changed anything around platforms." ] }, { "name": "Operator", "speech": [ "Our next question is from Andrew Marok with Raymond James. Please proceed with your question." ] }, { "name": "Andrew Marok", "speech": [ "Thanks for taking my question. Two for me, please. Given the Criminal enterprises in the last few GTA Online expansions have been received pretty well, how should we be thinking about the GTA Online content pipeline or philosophy as development on the next premium GTA ramps and resources are reallocated? And then second, could softness in the ad market create opportunities for lower-cost marketing or changed marketing strategies ahead of some of your frontline releases? Thank you." ] }, { "name": "Strauss Zelnick", "speech": [ "Thank you. The Rockstar Games has been supplying ongoing content updates for Grand Theft Auto Online since its release in 2013. The most recent one was well received, and they continue to put out terrific content. Any announcements about upcoming properties do come from the labels.", "So we don't tend to talk about them here. And a great question about advertising cost. I think it's a fair one, which is if you're seeing softness in the market, does that mean you can market your titles more cheaply going forward? And the answer is we might see some minor adjustment in the cost profile. But at the end of the day, we spend a lot to support our console -- big console launches.", "And I don't think that softness in the ad market would probably have a material impact on that." ] }, { "name": "Operator", "speech": [ "Our next question is from Clay Griffin with MoffettNathanson. Please proceed with your question." ] }, { "name": "Clay Griffin", "speech": [ "Hi. Good evening. Notwithstanding the impact of the higher ASP on the Championship Edition of 2K, I'm just wondering if you're seeing any material change in mix as we head into this kind of preorder window? I guess in light of some of the softness in free-play mobile. I guess the question back, do you have any flexibility to maybe go a bit more aggressively with bundled virtual currency in the preorder window?" ] }, { "name": "Karl Slatoff", "speech": [ "Yeah. I think -- I don't know that there's anything specifically in the market that would change our philosophy on how we package our product. I think we always are trying new models and new pricing practices to try to optimize the situation. But I don't really see a market-driven specific opportunity arising.", "But you'll see us experimenting all the time." ] }, { "name": "Clay Griffin", "speech": [ "And no real change in mix versus last year, normalizing for this championship position?" ] }, { "name": "Karl Slatoff", "speech": [ "There'll be some mix -- changes in mix, but we haven't really talked about it at this point." ] }, { "name": "Clay Griffin", "speech": [ "OK. Thanks." ] }, { "name": "Operator", "speech": [ "We have reached the end of the question-and-answer session. I'd like to turn the call back over to Strauss Zelnick for closing comments." ] }, { "name": "Strauss Zelnick", "speech": [ "We'd just like to thank you, all, for joining us. We're really proud of how the company is performing. Our combination with Zynga is off to a terrific start culturally, financially, strategically, and creatively. And I want to reiterate my appreciation to our colleagues all around the world.", "We'll be talking to all of them tomorrow in our various town hall meetings. These results are thanks to their hard, dedicated, and creative work. Thank you, all." ] }, { "name": "Operator", "speech": [ "[Operator signoff]" ] } ]
TTWO
2020-05-20
[ { "description": "Senior Vice President Investor Relations & Corporate Communications", "name": "Henry A. Diamond", "position": "Executive" }, { "description": "Chairman and Chief Executive Officer", "name": "Strauss Zelnick", "position": "Executive" }, { "description": "President", "name": "Karl Slatoff", "position": "Executive" }, { "description": "Chief Financial Officer", "name": "Lainie Goldstein", "position": "Executive" }, { "description": "Robert W. Baird & Co. -- Analyst", "name": "Colin Sebastian", "position": "Analyst" }, { "description": "Goldman Sachs -- Analyst", "name": "Michael Ng", "position": "Analyst" }, { "description": "Barclays -- Analyst", "name": "Mario Lu", "position": "Analyst" }, { "description": "Wells Fargo Securities -- Analyst", "name": "Brian Fitzgerald", "position": "Analyst" }, { "description": "UBS -- Analyst", "name": "Eric Sheridan", "position": "Analyst" }, { "description": "Bank of America/Merrill Lynch -- Analyst", "name": "Ryan Gee", "position": "Analyst" }, { "description": "Morgan Stanley -- Analyst", "name": "Brian Nowak", "position": "Analyst" }, { "description": "Sanford C. Bernstein & Co. -- Analyst", "name": "Todd Juenger", "position": "Analyst" }, { "description": "MKM Partners LLC -- Analyst", "name": "Eric Handler", "position": "Analyst" }, { "description": "SunTrust Robinson Humphrey -- Analyst", "name": "Matthew Thornton", "position": "Analyst" }, { "description": "Benchmark -- Analyst", "name": "Mike Hickey", "position": "Analyst" }, { "description": "Cowen and Company -- Analyst", "name": "Doug Creutz", "position": "Analyst" }, { "description": "Consumer Edge Research -- Analyst", "name": "Ray Stochel", "position": "Analyst" }, { "description": "Jefferies & Company -- Analyst", "name": "Alex Giaimo", "position": "Analyst" } ]
[ { "name": "Operator", "speech": [ "Greetings, and welcome to Take-Two Fourth Quarter and Full Year Earnings Conference Call. [Operator Instructions]", "I would now like to turn the conference over to your host, Mr. Hank Diamond, Senior Vice President of Investor Relations and Corporate Communications. Thank you. You may begin." ] }, { "name": "Henry A. Diamond", "speech": [ "Good afternoon. Welcome, and thank you for joining Take-Two's conference call to discuss its results for the fourth quarter and fiscal year 2020 ended March 31, 2020. Today's call will be led by Strauss Zelnick, Take-Two's Chairman and Chief Executive Officer; Karl Slatoff, our President; and Lainie Goldstein, our Chief Financial Officer. We will be available to answer your questions during the Q&A session following our prepared remarks.", "Before we begin, I'd like to remind everyone that statements made during this call that are not historical facts are considered forward-looking statements under federal securities laws. These forward-looking statements are based on the beliefs of our management as well as assumptions made by and information currently available to us. We have no obligation to update these forward-looking statements. Actual operating results may vary significantly from these forward-looking statements based on a variety of factor. These important factors are described in our filings with the SEC, including the company's most recent annual report on Form 10-K and quarterly report on Form 10-Q, including the risks summarized in the section entitled Risk Factors.", "I'd also like to note that unless otherwise stated, all numbers we will be discussing today are GAAP and all comparisons are year-over-year. Additional details regarding our actual results and outlook are contained in our press release, including the items that our management uses internally to adjust our GAAP financial results in order to evaluate our operating performance. In addition, we have posted to our website a slide deck that visually presents our results and financial outlook. Our press release and filings with the SEC may be obtained from our website at www.take2games.com.", "And now, I'll turn the call over to Strauss." ] }, { "name": "Strauss Zelnick", "speech": [ "Thanks, Hank. Good afternoon, and thank you for joining us today. Before I begin, on behalf of our entire management team and colleagues around the world, I'd like to express our deep condolences for those who have lost their lives or lost family members during this pandemic. In every corner of the world, heroes in the form of first responders and healthcare workers put their lives at risk to take care of all, preserve life and enable societies to return to normal, for which we're all incredibly grateful. I'm also proud of our entire organization for seamlessly and successfully shifting to work from home environment to keep our company moving forward. And to continue to deliver the best entertainment experiences to our audiences.", "Turning to our business. Our significantly better than expected fourth quarter results concluded another extraordinary year for Take-Two, during which we achieved numerous milestones, including record net bookings of nearly $3 billion as well as record digitally delivered net bookings for consumer spending and earnings. Nearly all of our titles outperformed in the fourth quarter, including NBA 2K20, Grand Theft Auto Online and Grand Theft Auto V, Red Dead Redemption 2, Borderlands 3 and Social Point's mobile games to name just a few.", "During the fourth quarter, both recurrent consumer spending on and full game sales of NBA 2K20 significantly outperformed our expectations. Consumer engagement with NBA 2K remained at record levels throughout fiscal 2020 with daily active users growing 13% and MyTeam users increasing nearly 50%. During the fourth quarter, over 9 million hours of NBA 2K gameplay were watched on Twitch across more than 1,100 channels, representing a 40% increase over the third quarter. This strong engagement began prior to people sheltering at home and resulted in recurrent consumer spending growth of 18% in the fourth quarter, reversing our expectation of a decline.", "This positive trend was driven primarily by the success of February content drops for MyTeam. For the full year, recurrent consumer spending on the NBA 2K franchise grew nearly 30% to a new record and remained the largest contributor to that part of our business. To date, NBA 2K20 has sold in over 12 million units, up 33% over NBA 2K19 in the same period. We now expect the lifetime units recurrent consumer spending and net bookings for NBA 2K20 will be the highest ever for a 2K sports title.", "I'd like to thank Visual Concepts and 2K for doing an incredible job, addressing the prior issues with NBA 2K20 and delivering another year of record results. As part of our broader support of those in need during the COVID-19 pandemic, 2K partnered with the NBA, NBA Players' Association and ESPN to create the NBA 2K players tournament comprised of 16 NBA stars to raise funds for the Arizona Food Bank Network. We are incredibly proud to include this unique program among our worldwide COVID-19 response initiatives.", "The positive momentum for Grand Theft Auto Online continues with superlative performance in both players and net bookings. Since the July launch of the Diamond Casino & Resort update, Grand Theft Auto Online achieved its best ever monthly active users in both July and August 2019 and then grew sequentially each month from December 2019 through March 2020. This exceptional engagement helped to drive recurrent consumer spending growth of 87% during the fourth quarter and 40% for the full fiscal year, new records in both periods. In addition, sales of Grand Theft Auto V surpassed our expectations and the title is now sold in over 130 million units, further cementing its position as the must-have title of the current console generation.", "Red Dead Redemption 2 also exceeded our expectations in the fourth quarter, and to date, has sold in more than 31 million units worldwide. Both engagement and recurrent consumer spending on Red Dead Online continue to gain momentum. Net bookings grew 62% in the fourth quarter and more than tripled for the full year, excluding digital content bundled with the Red Dead Redemption 2 premium additions. Throughout the coming year, Rockstar Games will continue to support both Red Dead Online and Grand Theft Auto Online with more content updates to keep new and returning players excited and engaged.", "Borderlands 3, the latest installment in our genre defining shooter looter series, outperformed our expectations in the fourth quarter and the title is now sold in over 10 million units, up 50% over Borderlands 2 in the same period. On March 13, Borderlands 3 was released on an array of PC retailers, including steam sales of the game exceeded our projections. During the fourth quarter, 2K and Gearbox launched Guns, Love and Tentacles the marriage of Wayne Wright and Hammerlock, the second of four announced paid campaigns that are included in the Borderlands 3 Super Deluxe edition and the season pass or can be purchased separately upon release. The season pass attach rate for Borderlands 3 continues to be the highest in 2K's and the franchise's history and there is more content coming. Borderlands 3's monthly active users have steadily climbed in each month during the fourth quarter, and in March, with the largest influx of new players since the launch due to its release on steam. We attribute this success in parts to 2K's and Gearbox Software's continued effort to support Borderlands 3 as a live service game with weekly events, free content drops and consistent communication with fans which should continue to benefit the title and the series over the long-term.", "During fiscal 2020, Private Division launched their most successful released to date with The Outer Worlds. The title has an immense critical and commercial success and has significantly exceeded our expectations with more than 2.5 million units sold in to date. The Outer Worlds is a perfect example of how Private Division can complement our core portfolio selectively and contribute meaningful results to our bottom line.", "Our fiscal 2020 results were also enhanced by a variety of other offerings led by NBA 2K19, Sid Meier's Civilization VI, Social Point's mobile games and the WWE 2K series. In fiscal 2020, recurrent consumer spending grew 34% to a new record and accounted for 51% of our total net bookings. In addition to virtual currency for NBA 2K, Grand Theft Auto Online and Red Dead Online, recurrent consumer spending was enhanced by a variety of other offerings. In the free-to-play category, Social Point outperformed our expectations in the fourth quarter and remains a significant contributor to our results through its two biggest games; Dragon City and Monster Legends as well as Word Life, Tasty Town and World Chef. Social Point continues to invest in its broad and innovative pipeline of more than 10 new games planned for launch in the coming years.", "WWE SuperCard also outperformed during the fourth quarter, growing 20%. The title has now been downloaded more than 20 million times and remains 2K's highest grossing mobile title. And NBA 2K Online in China significantly exceeded our expectations, growing 37% and 25% during the fourth quarter and full year respectively. The title remains the number one PC online sports game in China with more than 49 million registered users. Add-on content grew 85% in fiscal 2020 led by our offerings for the Borderlands' franchise, Sid Meier's Civilization VI and WWE 2K20.", "Finally, sales of Borderlands 3 premium editions, which include additional content that is allocated to recurrent consumer spending also contributed positively to our results. Looking ahead, our company has the strongest development pipeline in its history, including sequels from our biggest franchises as well as exciting new IP. While fiscal 2021 will be a light year for new releases, we expect to deliver strong results due to the diversity and strength of our catalog and live service offerings.", "The transition to a new console cycle is always a very exciting time for our industry, and our development teams are already taking their creative aspirations to a new level by finding ways to push the limits of this new technology. However, the speed of these transitions can be unpredictable, particularly in the year up ended by COVID-19. And our fiscal 2021 release slate reflects our strategy to bring our creative achievements to the largest possible audience. Our commitment to deliver the highest quality titles and give them optimal conditions to achieve success remains resolute. We have an array of titles that will begin to launch in fiscal 2022, which we expect to drive sequential growth that year. Karl will discuss this in more detail shortly.", "There is no doubt that our recent results have benefited from people sheltering at home as players have sought interactive entertainment to stay connected and engaged with friends and family. The connections and communities built will remain in place once people resume their normal activities and should continue to benefit our industry's results. We're fortunate to work in an industry that can bring some positivity in a difficult time.", "As previously mentioned, all of Take-Two's labels have come together to deliver a portion of proceeds from April and May to COVID-19 charities worldwide. Looking ahead, Take-Two remains superbly positioned, creatively, operationally and financially to capitalize on the many positive trends in our industry and to deliver continued growth and returns for our shareholders over the long-term.", "I'll now turn the call over to Karl." ] }, { "name": "Karl Slatoff", "speech": [ "Thanks, Strauss. I'd like to join Strauss in expressing our condolences to all those who have lost loved ones and are facing adversity during this global pandemic. We at Take-Two are very fortunate to have colleagues around the world who continue to dedicate themselves to our mission, despite a very difficult and uncertain times.", "I'll now discuss our recent and upcoming releases. On April 24, 2K and Firaxis Games released XCOM: Chimera Squad, an all new stand-alone title in the award-winning turn-based XCOM tactical series. Set five years after the events of XCOM 2, Chimera Squad provides a dynamic and unique experience for fans and new players. The title has received strong reviews, including 4.5 out of 5 stars from Screen Rant, who said, chimera Squad is a worthy addition for any turn-based strategy fans collection. Comics and gaining magazine gave the title an 8.5 out of 10 and called it a whole new dimension of strategy.", "Yesterday, 2K launched the Mafia Trilogy for PlayStation 4, Xbox One and PC. The trilogy combines all three previous released Mafia titles into a single package curated by 2K's Hangar 13 Development Studio. Mafia 2 and Mafia 3 are currently available with the purchase of the trilogy, while Mafia 1 will be delivered on August 28, as the game is being completely remade from the ground up, including new technology, new voice acting, new game mechanics and more.", "Starting tomorrow and through March 2021, 2K and Firaxis Games will begin their bimonthly release of six downloadable content packs as part of the all new Sid Meier's Civilization VI-New Frontier Pass for PlayStation 4, Xbox One, Nintendo Switch and PC. Later this year, the new frontier pass will come to mobile platforms and each pack will be available for individual purchase. The new frontier pass will provide eight new civilizations, nine new leaders and a variety of new gameplay modes and content. In addition, Firaxis Games will also provide free updates between packs that feature new maps, scenarios, balance updates and more.", "On May 29, 2K will continue to bolster our offerings for the Nintendo Switch with some of their most popular and successful franchises, including BioShock: The Collection, the Borderlands Legendary Collection and the XCOM 2 Collection. In addition, on June 5, Private Division will release the critically acclaimed player choice-driven RPG, The Outer Worlds for the Switch. On June 16, Private Division will launch Disintegration for PlayStation 4, Xbox One and PC. Developed by V1 Interactive, the independent studio founded by Halo co-creator, Marcus Lehto, Disintegration is a sci-fi, first-person shooter that blends real-time tactical elements to create an entirely new experience. Featuring a thrilling single player campaign as well as frenetic multiplayer gameplay, Disintegration is currently available for pre-order, including an array of bonus cosmetic digital content for use in multiplayer modes.", "Earlier this week, Private Division and Squad announced the partnership with the European Space Agency to launch a new Kerbal Space Program update, entitled Shared Horizons, which is planned to launch on PC on July 1, 2020. The update will also be available later this year on consoles. Shared Horizons celebrates the European Space Agency's outstanding contribution to space exploration and will be a free update for all players of the critically acclaimed space simulation game.", "On August 21, 2K will release PGA Tour 2K21 for PlayStation 4, Xbox One, Nintendo Switch, PC and Stadia. Developed by HB Studios, PGA Tour 2K21 will feature PGA Tour professional Justin Thomas on the cover, officially licensed pro players, courses and gear, the most realistic core scanning to date, play-by-play commentary by Luke Elvy and Rich Beem, a new PGA Tour Career Mode, Online and local multiplayer, course and player customization and online societies.", "In addition, throughout the coming months, 2K will release additional content offerings for NBA 2K20 and Borderlands 3. Additional details will be revealed shortly. And Rockstar Games will continue to provide an array of content and gameplay experiences for the vast open worlds of Grand Theft Auto Online and Red Dead Online, which continues to set engagement records.", "Selectively expanding our sports offerings remains an exciting growth opportunity for our company. In March, 2K announced a partnership with the NFL, encompassing multiple games. The partnership marks the return of football theme games to 2K's stable of renounced sports titles as well as an expansion of video game properties for the NFL. While specific game titles, developers and release dates will be revealed over time, we can confirm that these projects will be non-simulation football game experiences and will launch starting in calendar year 2021 during fiscal 2022. We're thrilled to be back in business with the NFL, which is one of the most successful sports brands in the world. We're confident that our forthcoming NFL offerings will be extremely fun, highly engaging and deeply social experiences.", "Last month, 2K announced that it would be extending the production timeline for the next WWE 2K franchise simulation game to ensure that the development team at Visual Concepts has the opportunity to create the best experience possible. We also believe that there is a meaningful opportunity to expand our WWE offerings. To that end, 2K announced WWE 2K Battlegrounds, a completely new gaming experience that will feature arcade-style action and over-the-top superstar designs, environments and moves. WWE 2K Battlegrounds is being developed by Saber Interactive, the studio behind NBA 2K Playgrounds and is scheduled to launch this fall. 2K will have more to share about the games in the coming months.", "The team at Private Divisions' new Seattle studio remains hard at work on Kerbal Space Program 2, the next generation of the popular space simulation franchise. Due to delays from COVID-19, we are moving the release of the game to fall 2021 in order to provide the team with the time they need to create the best Kerbal Space Program experience possible.", "Turning to eSports. On May 5, the NBA 2K League began its 2020 season, planning at least six weeks of remote gameplay. All 23 NBA 2K League teams are participating in regular season gameplay in their local markets from their homes with games simulcast live on the NBA 2K League's Twitch and YouTube channels. Details surrounding the remainder of the 2020 season schedule and structure will be shared as information becomes available. We are very excited about the continued progress and growth of the League, which has a long-term potential to enhance engagement and to be a driver of profits for our company. In order to build the scale of our organization, we continue to make significant investments to enhance our industry-leading portfolio of intellectual property.", "I'll now provide visibility into our long-term pipeline, which is the strongest in our company's history. Note that we are only including full game releases and not add-on content. Across our internally owned labels and outside development studio partners, we currently have 93 titles planned for release over the next five years through fiscal 2025. Of the 93 titles, 63 are core gaming experiences, including 15 platform extensions of existing titles. 17 are mid-core or arcade-style experiences and 13 titles are casual experiences. 47 of these 93 titles are from existing franchises and 46 are from new intellectual properties.", "In terms of platforms, 72 of the 93 titles are planned for console, PC and/or streaming, including seven that will also be available on mobile and 21 are planned specifically for mobile. With respect to the business models, 67 of the 93 are games that are required to be purchased and 26 our free-to-play. Note that these figures reflect a snapshot of our current pipeline as it stands today. It is likely that some of these titles will not be developed through completion, and we will undoubtedly be adding new titles to our slate. As Strauss mentioned, fiscal 2021 will be a life new release year. However, given our strong pipeline and expectation for increasing recurrent consumer spending, we expect sequential growth to resume in fiscal 2022.", "In closing, we are incredibly excited about the many long-term opportunities for our company to deliver the most captivating and engaging experiences in all of entertainment to audiences around the world. Whether capitalizing on new platforms, embracing new business models and distribution channels and expanding into emerging markets, 2K is exceedingly well positioned to generate value to consumers as well as growth and margin expansion for our shareholders.", "I'll now turn the call over to Lainie." ] }, { "name": "Lainie Goldstein", "speech": [ "Thanks, Karl, and good afternoon, everyone. Today I'll discuss our fourth quarter and fiscal 2020 results and then review our financial outlook for the first quarter and fiscal year 2021. Please note that additional details regarding our actual results and outlook are contained in our press release. I would also like to express my deepest condolences to those who have been affected by the COVID-19 pandemic. I'm also immensely proud of my colleagues around the world to continue to support our organization with the utmost level of professionalism and dedication to both our business and consumer.", "As Strauss mentioned, our significantly better than expected fourth quarter results finished a terrific year for Take-Two, during which we achieved record results. Starting with the fourth quarter, total net bookings grew 49% to $729 million as compared to our outlook of $540 million to $590 million. This outstanding result was driven by the exceptional performance of our titles in the fourth quarter.", "Recurrent consumer spending grew 47% and accounted for 61% of total net bookings as compared to our outlook of over 10% growth. Recurrent consumer spending exceeded our outlook due primarily to the record performance of NBA 2K and Grand Theft Auto Online. Digitally delivered net bookings grew 60% and accounted for 92% of the total as compared to our outlook of over 20% growth. This result exceeded our outlook due to the outperformance of recurrent consumer spending and digitally delivered full games sales. During the fourth quarter, 65% of sales of current generation console games were delivered digitally, up from 57% last year.", "GAAP net revenue grew 41% to $761 million and cost of goods sold increased to $396 million. Operating expenses increased by 9% to $243 million, due primarily to higher R&D expense. And GAAP net income grew $123 million or $1.07 per share as compared to $57 million or $0.50 per share in the fourth quarter of fiscal 2019.", "Turning to our fiscal 2020 results. Total net bookings grew to a new record of $2.99 billion. This extraordinary result was driven by growth from NBA 2K, Grand Theft Auto Online and Grand Theft Auto V and the record-breaking launch of Borderlands 3. Recurrent consumer spending grew 34% to a new record and accounted for 51% of total net bookings. This exceeded our outlook of 25% growth.", "Digitally delivered net bookings grew 35% to a new record of $2.4 billion and accounted for 82% of the total. This too exceeded our outlook of 25% growth due to better than expected recurrent consumer spending and digitally delivered full game sales. During fiscal 2020, 55% of sales of current generation console games were delivered digitally, up from 38% last year.", "Non-GAAP adjusted unrestricted operating cash flow was $615 million as compared to our outlook of over $500 million. During fiscal 2020, we spent $53 million in capital expenditure. At fiscal year end, our cash and short-term investments balance was over $2 billion. GAAP net revenue grew 16% to $3.09 billion and cost of goods sold increased to $1.5 billion. Operating expenses increased by 20% to $1.1 billion, due primarily to higher R&D and marketing expenses. And GAAP net income grew to $404 million or $3.54 per share.", "Today, we gave a strong initial outlook for fiscal 2021. Our operating results are currently expected to be lower than fiscal 2020 due to the reschedule coupled with continued investments in our future pipeline that should enable us to scale further and improve margins over time. When people began to shelter at home, we saw an increase in consumer engagement with our title due to the online accessibility and the social nature of our products. We're continuing to experience this positive trend, which is reflected in our first quarter outlook. We have not included any additional benefit from this trend in our outlook for the back half of the year nor have we assumed a deep recession or further delays in releases which could affect our results.", "Now to our guidance. Starting with the fiscal first quarter. We project net bookings to range from $800 million to $850 million, up 93% from $422 million in the first quarter last year. This increase is being driven primarily by expected growth in Grand Theft Auto Online and Grand Theft Auto V, NBA 2K, Red Dead Redemption 2 and Red Dead Online and the Borderlands franchise. The largest contributor to net bookings are expected to be Grand Theft Auto Online and Grand Theft Auto V, NBA 2K20, Red Dead Redemption 2 and Red Dead Online and Borderlands 3.", "We project recurrent consumer spending to grow by approximately 75%. This growth is expected to be driven primarily by Grand Theft Auto Online and NBA 2K20. We also expect digitally delivered net bookings to double. Our forecast assumes that 81% of our current generation console game sales will be delivered digitally over 75% in the same period last year. We expect GAAP net revenue to range from $775 million to $825 million and cost of goods sold to range from $392 million to $480 million. Operating expenses are expected to range from $267 million to $277 million. At the midpoint, this represents a 10% increase over the last year, driven primarily by higher R&D expense and charitable contribution. And GAAP net income is expected to range from $103 million to $160 million or $0.90 to $1 per share. For management reporting purposes, we expect our tax rate to be 16% throughout fiscal 2021.", "Turning to our outlook for the full fiscal year. We project net bookings to range from $2.55 billion to $2.65 billion. We expect growth from NBA 2K to be offset by lower results from Borderlands 3, Red Dead Redemption 2 and Grand Theft Auto V. Grand Theft Auto Online and Red Dead Online, excluding digital content bundles with the premium edition are projected to be approximately in line with fiscal 2020. The largest contributors to net bookings are expected to be NBA 2K, Grand Theft Auto Online and Grand Theft Auto V, Red Dead Redemption 2 and Red Dead Online, Social Point's mobile games, Borderlands 3, Civilization VI and The Outer Worlds.", "We expect the net bookings breakdown from our labels to be roughly 55% 2K, 35% Rockstar Games and 10% Private Division and Social Point. And we forecast our geographic net bookings split to be about 60% United States and 40% International. We expect recurrent consumer spending to be roughly flat as compared to fiscal 2020, driven primarily by growth from NBA 2K, offset by lower allocated recurrent consumer spending from the Borderlands 3 and Red Dead Redemption 2 premium edition.", "Recurrent consumer spending as a percentage of our business is expected to grow to approximately 60% versus 51% last year. We project digitally delivered net bookings to decline by about 8%. And the percent of our total business, digital is projected to represent 86%, up from 82% last year. Our forecast assumes that 68% of current generation console game sales will be delivered-digitally, up from 55% last year.", "We expect to generate more than $350 million in non-GAAP adjusted unrestricted operating cash flow and we plan to deploy approximately $75 million of capital expenditures. The increase in capital expenditures over the prior year is primarily due to spending on studio and office build-out an IT expense. We expect GAAP net revenue to range from $2.63 billion to $2.73 billion and cost of goods sold to range from $1.19 billion to $1.24 billion.", "Total operating expenses are expected to range $1.1 billion to $1.12 billion. At the midpoint, this represents a 1% decrease over the prior year driven by lower marketing and stock compensation expenses, partially offset by higher R&D expense and charitable contribution. And we expect GAAP net income to range from $299 million to $329 million or $2.60 to $2.85 per share.", "In closing, fiscal 2020 was a record year for Take-Two. Whether delivering incredible stand-alone entertainment experiences, providing engaging live services that captivate and connect communities around the world. Our ability to serve our audiences has never been better. Fiscal 2021 promises to be another great year for our organization, and we are well positioned to both capitalize on the many opportunities within our -- to stray and to navigate the uncertainties of these times.", "We have the strongest development pipeline in our company's history, and we expect sequential growth to resume in fiscal 2022. With our world-class creative assets focused on operational excellence and disciplined approach to capital allocation, Take-Two is positioned to generate significant growth and margin expansion over the long-term. Thank you.", "I'll now turn the call back to Strauss." ] }, { "name": "Strauss Zelnick", "speech": [ "Thanks, Lainie and Karl. On behalf of our entire management team, I'd like to thank our colleagues for their hard work, their commitment to excellence and for delivering another outstanding year, particularly under these circumstances. For our shareholders, I want to express our appreciation for your continued support.", "We'll now take your questions. Operator?" ] } ]
[ { "name": "Operator", "speech": [ "Thank you. [Operator Instructions] Our first question comes from Colin Sebastian with Robert W. Baird. Please proceed with your question." ] }, { "name": "Colin Sebastian", "speech": [ "Great, thanks. Congrats on the strong quarter, and hope you all are doing well. And also, thanks for the visibility on the pipeline, that's very helpful. I was wondering if you could add any color on the linearity of planned releases over that three year or four year time period? And then, Strauss, maybe a bigger picture question. As publisher of the world's most successful open world franchise, I wonder if you think there is a real business opportunity for worse [Phonetic] type environment. I know this is one of the more topical discussion points in certain industry circles right now, but with the next-gen on the horizon and given what we've just been going through, I wonder if you see any potential for that? Thank you." ] }, { "name": "Strauss Zelnick", "speech": [ "By linearity, I think what you're asking, Colin is, should we expect a gentle constant upward sloping curve of our releases, net bookings and cash flow. And the answer is, we really are aiming to have a handful or greater of new significant releases every year from existing franchises and new intellectual property. And as you could tell from Karl's description, we have plenty of great content coming that reflects that desire. But it doesn't mean that in any given year there will be linearity, as you put it. And this year, fiscal '21 reflects that.", "The good news is that with our strong catalog, with our live service offerings and with our annual releases, we can have great strength even in the light year, even though it's not our goal to have a light year. And then do even better in the year where we have -- we're able to launch a number of titles, which is our strategy. And even better than that, if we're fortunate enough to have a blockbuster title, and we have some of those as well. So the variability in our results, I don't think will ever go away, not when you have some of the biggest entertainment properties on earth that don't come out every year. They can't come every year if they are to remain the biggest titles. So that's my view on linearity.", "Definitely our goal is to be smoother and to grow. There will still be some variability. And while I'd love to answer your question more broadly, I really think that's more a label question than anything else. As soon as we get into the nature of the content and what we're doing in the future, those questions are better answered by our labels. We aim to give as much visibility as we can on these calls, but when we get into specific core creative matters, we'll announce that at the label level in due time." ] }, { "name": "Colin Sebastian", "speech": [ "Thank you." ] }, { "name": "Operator", "speech": [ "Our next question comes from Mike Ng with Goldman Sachs. Please proceed with your question." ] }, { "name": "Michael Ng", "speech": [ "Thanks so much. I just had a question about the pipeline visibility. Could you just give us a sense of what the completion rate for games in development have been in the past? And could you just help us think about exactly what a core gaming experience is? I think you guys said 72 games for PC console streaming over the next five years, that's 14 games a year on average. Is this just a significant increase in output relative to what you've done in the past or is there add-on content or something else in those numbers? Thanks." ] }, { "name": "Karl Slatoff", "speech": [ "Just to answer your last part of your question first, we did not include add-on content in those numbers. So those are all full game releases. And how we define -- there is a bit of an art to it, but how we define what our core experience is. Well, we really -- this is not necessarily to say to reflect that means the largest investments that we make. They tend to be bigger investments because core games tend to be bigger games and more engaging, targeting more core gamers, but it doesn't necessarily mean that. And as we said before, there is a lot of new IP. And generally speaking, you can really expect -- on the new IP front, it's much more risky. And generally speaking, our development budgets are going to be lower for new IP.", "So there will be a wide range of investments across all of our types of releases we're doing, including core games. But the core games are really those looking for engaging experiences where you could play anywhere from five minutes to five hours at a time, right? So it's really things that set the -- AAA is probably the wrong way to commentate it because that does commentate investment, and that's not specifically what we're talking about here.", "Then the first part of the question, I forget what it was." ] }, { "name": "Michael Ng", "speech": [ "It was about the percentage of games in development that typically go through completion in the past?" ] }, { "name": "Karl Slatoff", "speech": [ "Yeah. I don't have a specific number there for you. Obviously though, games that are coming out, that are part of existing franchises, the rate of completion on that is obviously much, much higher. For new IPs in various stages of development. I mean, for something that might be in a prototype stage. Maybe it could be anywhere from -- it could be half the time or it could be 75% of the time, it really just depends. And we've got titles that are in various different stages of development in that pipeline that I suggested. And look, the more new projects that we have with new IP, you could probably expect that the completion rate to be lower than if it was just our existing franchises, and we do have a lot of IP in there.", "And just to stress again, those numbers assume that all those things come out, which we know is not going to be the case, but it also assumes that nothing gets added to the release slate, which also is not going to be the case. So this is a larger pipeline that we've had before. We've been talking about this for quite some time. And our expectation is we'd like to keep up this velocity. It's really important for us to build scale, and this is one way that we're doing it. We need more add backs." ] }, { "name": "Michael Ng", "speech": [ "Thanks, Karl. That was really helpful." ] }, { "name": "Operator", "speech": [ "Our next question is from Mario Lu with Barclays. Please proceed with your question." ] }, { "name": "Mario Lu", "speech": [ "Hey, thanks for taking the questions. I have one on NBA and one high level question. So the one on NBA, I noticed that NBA 2K21 is still slated for fall 2020. Any thoughts you could provide on what will happen to that title and its release date if the NBA season continues to be suspended through the rest of the calendar year? And then Strauss, you mentioned in the past that consumers on average watch 150 hours of linear TV and 45 hours of video games, how does has that those hours increased or shifted during the current COVID environment? And what is your vision on what a post-COVID world will look like in terms of time spent on entertainment and video games?" ] }, { "name": "Strauss Zelnick", "speech": [ "And then throw it back to me for the second?" ] }, { "name": "Karl Slatoff", "speech": [ "Sure. This is Karl for NBA. Look, obviously we're all hoping that we're going to have an NBA season. And we have actually been through -- we've had history with NBA seasons not starting on time in the past, we've had a strike situation in the past. So we have familiarity with that. We don't want to say that it would impact the game at all, but we tend to be able to continue our business in a robust way even in the light of delays in season starting or different kinds of seasons starting. So obviously, all of us around the world hope that we've got an NBA season. If we don't for some reason, I think the game as a stand-alone basis is a compelling experience and we'll be fine." ] }, { "name": "Strauss Zelnick", "speech": [ "And this is Strauss. Regarding engagement, Activate, which is a leading media consultancy just provided us with some research. All groups, all age groups, all demographics during this COVID shelter in place time period, time spent with gaming has increased about 39%, while time spent with video, linear entertainment has increased about 43%. So they're in the same ballpark, but linear entertainment did increase more. But what's interesting is their research shows that post-COVID, once people return to their normal routines, they expect time spent with gaming to grow at a greater rate, about 14%, a sustained increase of about 14% versus about an 8% sustained increase in time spent with linear entertainment with video compared to pre-COVID-19 levels.", "So I think it represents a sea change or shift and we're going to begin to see meaningful growth in interactive entertainment that meaningfully outstrips the growth in linear entertainment, a trend that we've seen of late, of course. But I think that the lines are going to begin to diverge in the favor of interactive entertainment. And why do I think that? I think that sheltering at home, tragic as it is, sad as it is, has caused people to look for entertainment. And people have returned to interactive entertainment, new people have come to it. And they realized not only it's beautiful, not only it's engaging, not only is it fun and potentially competitive depending on the game, not only are they great stories and characters, but you can also be engaged with friends and communities all around the world. You can create new friends and communities all around the world while you're playing those games and you can play with those people, because you can connect with them, you can talk to them while you're playing over chat client.", "So this is not a moment for celebration. We're deeply saddened by what's going on in the world. But the view, I think the smart view is that all pre-existing trends have been accelerated by this crisis. And the shift to interactive entertainment and the growth in the sector is one of those trends. Now with all that said, we still have to execute every day. The growth in the sector is not going to help us if we don't make great games, if we don't deliver hits." ] }, { "name": "Mario Lu", "speech": [ "All right. Interesting. Thank you." ] }, { "name": "Operator", "speech": [ "Our next question is from Brian Fitzgerald with Wells Fargo. Please proceed with your question." ] }, { "name": "Brian Fitzgerald", "speech": [ "Thanks guys. I just wanted to ask about what you're seeing on a regional basis. If there is any differentiating engagement dynamics as we kind of meter through areas getting hard hit and then responding a bit, China, and then as places around the world return to some of the normal on the development side, how is your shift to work from home? Was that kind of lock step no real problems? And what are you seeing as regions start to get back to work in Asia-Pac?Thanks." ] }, { "name": "Strauss Zelnick", "speech": [ "Thanks, Brian. I'm sorry for the delay. We're all working remotely. We don't see meaningful differences regionally. And so far, we have not seen meaningful changes as regions have gone back to work. For example, NBA 2K Online in China now has 49 million registered users, remains the number one PC sports title in China and it was up 25% year-over-year, I think it was up 40% in the quarter. So we are not seeing meaningful differences. We are not seeing significant changes as people head back to work. But I think it is fully our expectation that -- and I just -- I reflected that in the research I just quoted that this level of engagement will not stay the same as things return to normal, but we do think it will be higher than it was before.", "And in terms of working from home, look, we're very fortunate. We've got a real wake-up call during Hurricane Sandy when we were not really particularly prepared. And ever since then, which is quite some time ago, we've been a company in addition to being a highly compliant company, but a company who is on disaster recovery and we have state-of-the-art systems. In fact, we had planned completely apart from this crisis to have a work from home test day on March 12, and then it turns out we had to go live right about them. Anyhow, a week after that, we have 5,000 people effectively working from home, completely setup with all the equipment they needed. And because we know when people are connected online, of course, we could see that their productivity, if anything, had increased over working in the office and as people got used to sitting in one place with not much else to do in front of their desktops.", "We're fortunate. We have a incredibly talented hard working group of colleagues who really believe in this company's mission and largely mostly love working together. And we saw it is our mission to uplift people during this very difficult time, and we're very connected with our teams, we're talking to them all the time. I'm doing three town hall meetings next week on Zoom, three different time zones. I hope to connect with almost everyone who works at the company. So it's gone incredibly well, and we really haven't missed a beat.", "Over time, I think it gets harder, but I still don't expect that we will miss a beat. But if it does get harder, I'm not of the view that you start shutting down your real estate and everyone works from home and it's just as effective. I think it's pretty close to as effective in a pinch in a crisis like this where you have no choice and people see it as their obligation of pull together and do great work. But there is no substitute for in-person collaboration and connection." ] }, { "name": "Brian Fitzgerald", "speech": [ "Got it. Thanks, Strauss." ] }, { "name": "Operator", "speech": [ "Our next question is from Eric Sheridan with UBS. Please proceed with your question." ] }, { "name": "Eric Sheridan", "speech": [ "Thanks so much. Maybe I can ask another sort of longer term question on the back of some of the answers you've given on the current environment and what it means for engagement long-term. What you've seen so far, and I know it's a short period of time over the last couple of months and against pretty horrible backdrop. But has that changed at all your view of the way in which game should be distributed or maybe thinking about game development or even more thinking about game monetization over the long-term as you see that type of increased engagement levels may be playing out for interactive team over the medium to long-term moving beyond just the quality of the content, also the form and manner of monetization to make sure they're capturing that surge in engagement? Thanks so much." ] }, { "name": "Strauss Zelnick", "speech": [ "I'm sure there are many things that we have learned already and can learn. We haven't we haven't seen in massive change in our approach. And remember, when we talk about monetization, our goal is always to deliver a phenomenal entertainment experience, first and foremost. And we figure that if we do that, monetization takes care of itself.", "Our goal is not to constantly build monetization. Naturally we need to get paid appropriately so we can share the proceeds with our talented colleagues and create a return for our investors, it's our job to do both. We care about all of our constituents. So we're not a charitable organization or for-profit organization. Obviously, you wouldn't be on the call, if we weren't. But monetization isn't a problem for this organization. When we put out the best entertainment on earth, people show up for it. If we give them something that's incredibly valuable, they pay for it. We take it as axiomatic that the nature of an experience is the intersection of the quality of the experience and whether you feel you receive value for that experience.", "If you go to a phenomenal restaurant and have an incredible meal, but the bill it should have cost, you're not going back. Even if you can afford it, even if your price in elastic, you're not going back, it just doesn't feel good. So we need to make sure that we always deliver more than what we charge. And that's the goal of our company and that's the goal of all of our labels. With all that said, with increased engagement, comes increased monetization. You're seeing the effects of that in these results and in these -- in this initial guidance." ] }, { "name": "Operator", "speech": [ "Our next question is from Ryan Gee with Bank of America. Please proceed with your question." ] }, { "name": "Ryan Gee", "speech": [ "Hey, good afternoon. Thanks guys. A couple of quick ones here, one for Lainie then maybe for Karl. Lainie, if we rewind back to fiscal '18, that's probably the last year you didn't really have any big new AAA titles beyond sports. I noticed that the profit margin, earnings per share was higher than what you're guiding to for fiscal '21, even at the high end. I know the share count and tax rate differences going on, but maybe what's the one or two differences you would call us to as to why fiscal '21 maybe doesn't look as robust as compared to fiscal '18?", "And then Karl, just on Mafia real quick. Can you remind us how material that franchise has been for Take-Two in the past? It sounds like this trilogy is a quasi new game with some ports and remasters along with it. So what's the opportunity we should really think about this type of game, the trilogy in '21? Thank you." ] }, { "name": "Lainie Goldstein", "speech": [ "Hi, Ryan. I don't have the numbers in front of me, but I can tell you off the top of my head, for sure, it's going to be higher R&D expense, it's going to definitely be one of those numbers that are much higher right now. As Karl has talked about, our pipeline of titles has grown significantly over the last couple of years. And seeing the detail about our titles and what we have coming out the next five years, that has been something that we've worked on growing significantly. And as we look at the development, a lot of that is going to R&D expense, which is growing our operating expense line. And since that's going through the opex, that has affected our bottom line margin for the business. And that, as well as our overall G&A expense, which has grown for higher personnel and IT expense for cybersecurity, as well as just overall IT expense for the business and our online games, I think that's probably where you're seeing the biggest increase for the overall business." ] }, { "name": "Karl Slatoff", "speech": [ "And in terms of the Mafia opportunity, Mafia has been an incredibly successful franchise for us over a long period of time between Mafia 1, Mafia 2 and Mafia 3. And just to give you an idea, Mafia III is already sold in about 7 million units or so. I mean, Mafia II is also incredibly successful and Mafia I as well. So it's been a significant contributor for us. We're really excited about the Trilogy. It is the same three games, but it is obviously a much more improvements that are occurring with the game.", "The Mafia I is going to be basically completely remade, I mean fully remade, but there's going to be new tech, there's going to be new voice acting, new game mechanics and a lot more than that. So there is quite a bit of work that's going into bringing out the Trilogy. And we've had great success bringing out these collections. And again, even though they're not brand new experiences, there is always a new audience to catch and then there is always a new experience depending on the generation that each of those individual titles came out where even existing fans can enjoy in a different way. So it's been meaningful for us as a franchise and we're really excited about the Trilogy coming out." ] }, { "name": "Ryan Gee", "speech": [ "Great. Thank you, guys." ] }, { "name": "Operator", "speech": [ "Our next question is from Brian Nowak with Morgan Stanley. Please proceed with your question." ] }, { "name": "Brian Nowak", "speech": [ "Hey guys. Thanks for taking the question. Two on GTA. So recently there has been an offering on the Epic Games store where people have been able to get GTA for free on PC. Can you update us on your thinking about lowering barriers to entry to some of these big RCS-driven games, whether it's NBA 2K or obviously recent thing with GTA? Presumably, getting people into the ecosystem, driving the network effects and engaging them and ultimately monetizing that engagement is such a big part of the business. How do you think about the risk award of bringing people in for free versus charging them for a fun access and has that changed at all recently? And then just following up on something came up earlier in the call, you mentioned 15 platform extensions. Is GTA V one of those 15? Thanks." ] }, { "name": "Strauss Zelnick", "speech": [ "Thanks, Brian for your question. I think your question was also pretty good answer, it's sort of all of the above. Grand Theft Auto V is a seven year old title. Obviously, it's been offered at lower price points than its initial release price point. And we do have obviously online offering and there our monetization opportunities within that offering.", "So specific promotions with specific outlets with specific deals behind them can make sense to us. And we do believe that it's a great idea in general to grow the audience, grow engagement, grow users and with that will come more net bookings and will come more profits. So that was the thesis behind it. We're very, very selective in those kinds of promotions and they typically are only available for limited periods of time when they make sense for catalog titles. And we haven't yet made any announcements that are reflected in today's release. And as you know, we don't talk about specific new titles at these calls, we leave those discussions to the labels." ] }, { "name": "Brian Nowak", "speech": [ "Thanks." ] }, { "name": "Operator", "speech": [ "Our next question is from Todd Juenger with Sanford Bernstein. Please proceed with your question." ] }, { "name": "Todd Juenger", "speech": [ "Hi, good afternoon. Thanks for squeezing me in. For either Karl or Strauss whoever feels like it. I hope you don't mind me going back to the engagement question yet one more time. But I'd love to explore it this way. When you think about the increased engagement recently, can you help us understand how much of that you think is proportionately driven by existing gamers who are playing more versus perhaps lapsed gamers who have come back versus perhaps new people to gaming? And any differences in that answer based on either platform PC versus console versus mobile or by your major franchises? Thanks a lot. I appreciate it." ] }, { "name": "Karl Slatoff", "speech": [ "Hi, it's Karl. In terms of engagement, I'm probably going to give you an answer that's not overly satisfying. But the answer to your question is, it's really both, it's all of those things. It's new gamers, it's existing gamers, it's people coming back to the franchises and we track all of that. We don't publicize it, but we track all of that. And really what keeps people coming, if they're coming back and even new people coming in is a constant release of new content. I mean because every time we come out with new content, there is ultimately some publicity around that and it brings people back in the franchise, it keeps people engaged to who are currently engaged with the franchise and it also brings new folks in. So it really is all of the above.", "And I really haven't seen that changed so much, specifically as it relates to anything going on during the pandemic. But obviously there are other avenues open to us to bring in new folks in, and we were always playing with pricing models. You mentioned we're doing things like putting things into subscription-oriented services or giving things away for a certain period of time. All of that generates new excitement and engagement for our franchises, for our games that is hopefully continues well into the future, it isn't just a temporary thing, and we've seen that time over time. And I'd like to point out, we're still really in experimental mode. We're getting better and better. And our investment in data analytics really allows us to show -- to see in real time what these things do for us, where we get the most engagement, how does a new player coming in and free context or subscription service context or in a low price context compared to someone who came in paying full price. What does that cohort look like. And we're getting better and better at analyzing that so that we optimize all of our promotional activity to maximize our economic opportunities." ] }, { "name": "Operator", "speech": [ "Our next question is from Eric Handler with MKM Partners. Please proceed with your question." ] }, { "name": "Eric Handler", "speech": [ "Yes. Thank you for the question, and I hope everyone is healthy and well. Strauss, when you look at given all of the games that you have in your pipeline now, I'm just wondering if you could talk a little bit about scale and infrastructure? And if even half of those games come to fruition, do you have everything you need in place in terms of personnel to effectively distribute these games and market these games?" ] }, { "name": "Strauss Zelnick", "speech": [ "I thought you were going to ask, do we have everything in place to develop and we still will be building up our development teams. In terms of marketing and distribution, yes, I mean one of the reasons that we've talked about the need for scale in order to have competitive operating margins. We already have competitive gross margins, highly competitive gross margins. To have competitive operating margins, you need scale with the same level of success of your games, and that's our goal here. But the reason you get those higher operating margins with more net bookings is because you don't build up your fixed overhead and your fixed overhead would typically include marketing and distribution expenses.", "I fully expect that our distribution will become more efficient as the world moves more to digital distribution. We already have a highly efficient distribution mechanism. And yeah, with volume you might increase your marketing headcount modestly, but not all that significantly. Naturally our development headcount is part of the cost of making a game. And you should expect with volume that our development expense goes up and you're already seeing that." ] }, { "name": "Eric Handler", "speech": [ "Great. And just as a follow-up, when you think about capital allocation and given all the cash that you have on hand, it doesn't seem like there's much going on from an industry M&A standpoint at this time. But given all the games you have in the pipeline, do you think it lessens the need for you to be thinking about M&A or how are you thinking about balancing what you're currently developing versus external opportunities?" ] }, { "name": "Strauss Zelnick", "speech": [ "We still feel that our capital is used best in three different ways. First, to support organic growth, which has been an incredibly successful story for this company, this year is no exception. Really only done one meaningful acquisition, which is Social Point. The second is to support a return of capital to shareholders, and we've done a great deal of that selectively and we've done it through buybacks, they've been opportunistic. And I think the highest price we have repaid was around $99, if I'm not mistaken. So obviously, so far, we've called that reasonably well. And then we've reserved capital and incredibly strong balance sheet for the possibility of very selective inorganic growth driven by acquisition.", "We're very disciplined. We're looking only for accretive deals. And you're right, there aren't a lot of opportunities. We're hopeful that there will be some opportunity that would move our company forward, potentially diversity its operations a bit and bring in intellectual property and talent. Those have been our rubrics. We expect to stay squarely within interactive entertainment. You shouldn't expect us to diversify outside of it. And those opportunities are few and far between, but they do exist. And done right, the benefit of that would be to have highly competitive operating margins. So we don't need scale for scale's sake, but if we want to be the best in the business, and we do, then our financial results have to reflect that. And that means we have to have highly competitive operating margins, and the only thing standing in the way of that for us is scale. But again, if you buy scale in a foolish way, it won't help you. And if you buy scale and then can't maintain the success of that organization, thereby remain in your gross margins, you obviously would not benefit your operating margins.", "Said another way, if you're going to do an acquisition, it has to be smart, it has to be accretive relatively quickly if not immediately. And then post-closing, you've got to integrate the business soundly and run the business successfully in order for it to make sense. That's a tall order. That's why most corporate acquisitions fail. That's why we are so incredibly disciplined. But we are of the view that there will be opportunities. And certainly coming out of this crisis, there may be more opportunities than we otherwise would have expected." ] }, { "name": "Eric Handler", "speech": [ "Okay. Thank you very much." ] }, { "name": "Operator", "speech": [ "Our next question is from Matthew Thornton with SunTrust. Please proceed with your question." ] }, { "name": "Matthew Thornton", "speech": [ "Yeah. Hey, thanks. Thanks for taking the question. Good afternoon, everyone. Maybe first question, just coming back to the pipeline, title count that you discussed earlier. I'm wondering if you have a label breakdown. I don't think you talked about it in terms of breakdown by label, but wondering if you have one? Secondly, recurring type titles, I guess when we think about that that total count would some of the guys recurring like an NBA 2K, which will come out obviously five times over the next five years. Is that counted five times or is counted one time? And then third question. Strauss, just curious how you think about growth bogeys over a multi-year timeframe? Do you kind of look at the growth rate maybe blockbuster launch or is it over a five year frame or just curious how you think about growth milestones when you look at the business over a multi-your lens? Thanks everyone." ] }, { "name": "Karl Slatoff", "speech": [ "Hi, it's Karl. Yeah, you're right, we did not break it down by label, but there are releases obviously from all of the labels. We don't really have anything to share in that regard, but there are quite a few releases from all of our labels including Private Division, 2K, Rockstar and Social Point as well. And in terms of the breakdown, how that works. So if there is a sequel that comes out, if there is a franchise that's something that comes out every year, this is our view of our entire pipeline. So yes, that would be counted." ] }, { "name": "Strauss Zelnick", "speech": [ "And in terms of how we look at growth, good news is, we're operators, we're also investors, we also are big shareholders. We look at it exactly the way you would. We're looking for growth in net bookings, we're looking for growth in EBITDA, we're looking for growth in recurrent consumer spending because it reflects solidity in the business. It's much less volatile than initial releases could be. And finally, we're looking for growth in our stock price. And that's how we're judged.", "So we're judged from an economic point of view largely on total shareholder return, as we should be. We're not judged at all on EPS. So I think it's a terrible way to judge a management team for obvious reasons. So you can fiddle around with it. Total shareholder return is no place to hide, and that's how we're judged. So I think in exactly the way you would look at it. Scale, because it's correlated with operating margins in the way that I said earlier. The scale of your operating profit or your EBITDA or you're operating cash flow, and of course your stock price. And on those metrics, we've done very well indeed for quite some time." ] }, { "name": "Operator", "speech": [ "Our next question comes from Mike Hickey with The Benchmark Company. Please proceed with your question." ] }, { "name": "Mike Hickey", "speech": [ "Thanks, Strauss, Karl, Lainie, Hank. Thanks for giving guys solid execution in obviously a very difficult environment. I was curious your view on the economy over your fiscal year '21 '22. I think you said you didn't see a deep recession, but I'm curious what sort of recovery you expect and how unemployment or other factors you look at could impact online game sales or live service as it relates to your guidance?" ] }, { "name": "Strauss Zelnick", "speech": [ "Thanks, Mike. We are -- our expectations for fiscal '21 have not been adjusted for the recent success that we've had in this tragic period in the back half of the year. So we're not counting on this level of engagement and spending to continue. Equally though, we are not planning for a deep prolonged consumer recession. So I would say if you had to peg it, we're right there in the middle, which is where we probably should be since we can't call it.", "My own personal view, which does not influence our numbers is that we're going to see a relatively rapid consumer-driven recovery when the dust clears. And my own view is that the dust is probably going to clear sooner than many people think. But I'm an optimist, and we don't plan based on my opinions. So I would say we're right down the middle that we assume relatively stable economic conditions that if we were surprised and there were deep ongoing consumer recession, we would not be in from it and our results could be negatively influenced by it. And equally, if there was a massive unexpected expansion that could benefit our results. So I think we're assuming relative stability. We are not assuming continued enhanced engagement and monetization, the likes of which we have seen recently." ] }, { "name": "Mike Hickey", "speech": [ "Thanks. That's helpful. The last one from me on fiscal year '22, you noted your expectation for a sequential growth, and of course you guys tend to be very conservative, which is a good thing. Maybe I missed it, but broadly speaking, can you sort of talk to the drivers of growth for fiscal year '22? And obviously, it looks like half years in your first quarter guidance for '21, so we think there's probably upside there. Do you expect to grow over fiscal year '20 in '22? Thank you." ] }, { "name": "Strauss Zelnick", "speech": [ "Yeah. Sorry, I think probably not much to add. We expect sequential growth year-over-year in fiscal '22 and that is driven by the release schedule that Karl described and the pipeline that we're investing in. So we expect some releases coming out of that pipeline in fiscal '22 and we expect them to generate sequential growth. So it's simple as that." ] }, { "name": "Mike Hickey", "speech": [ "All right. Thanks guys. Best of luck." ] }, { "name": "Operator", "speech": [ "Our next question is from Doug Creutz with Cowen & Company. Please proceed with your question." ] }, { "name": "Doug Creutz", "speech": [ "Yeah, thanks. Going back 10 years to 15 years ago, there were a lot of successful sports franchises out there, most of the major league supported multiple simulation NRK titles, you had an MOB, there was golf, tennis, extreme sports so on and so on. You go today and there is basically three enormous titles in sports in the market, including NBA 2K, with few other that are kind of hanging on by the skin of their teeth and that's it. Presumably, the other ones are on way because it became uneconomical to make them at diminishing unit numbers. You've got a PGA title, you're working on some NFL titles, you're continuing to invest in WWE. Is it simply a function of getting the cost structure down to a level where they can be profitable at relatively low unit numbers or do you see something in the market where you think there are opportunities opening up that maybe didn't exist, two years, three years, four years ago? Thanks." ] }, { "name": "Karl Slatoff", "speech": [ "Hello, Doug. There are certain sports obviously that are not going to drive the audiences that you're going to get with for example NBA or Fifa or with football. Obviously, we're very excited about moving back into football, the NFL is one of the most powerful brands in the world. We've been in the NFL business before, we've excelled in the NFL business before. Although we're not going into the simulation space, we're very excited about what we can bring -- that we can bring to that market.", "So we think there is significant opportunity for us to expand within that market, just where we are now. But you're right, some of the other smaller sports, you're not going to be able to spend kind of money that you can on the bigger sports to drive your economics, you need to balance it out. So by definition, smaller audiences, smaller sports, you're going to need to balance it with smaller development budgets. But that doesn't mean there is not a lot of opportunity to be -- to generate significant economics because once you actually get people into -- obviously there is correlation between the popularity of the sport and the game itself, but it's not necessarily limited to that. So people who aren't golf fans can play golf games. We've seen that over and over again. And we think that there is an opportunity for us to go into some of these sports and do very, very well. Of course, with a reasonable budget, but to bring best content we can to the consumer, engage them and then the economics will come." ] }, { "name": "Doug Creutz", "speech": [ "All right. Thank you." ] }, { "name": "Operator", "speech": [ "Our next question comes from Ray Stochel with Consumer Edge Research. Please proceed with your question." ] }, { "name": "Ray Stochel", "speech": [ "Great, thanks. A high level question on this topic of scale, and I guess how you guys are thinking about investments in your forward pipeline. I'd love to know more about your green light process. And I guess, if you look at the last 10 or so years plus of video gaming, there has been a lot of focus on really growing in that head content, even you yourselves have seen a lot of success with GTA and NBA. And it does seem like you have a lot of smaller titles, your tuck-in titles are AA titles that are in your pipeline. So how do we think about you green lighting those titles in addition you just talked about with things like NBA and PGA? And what are the unit economics look like for those titles relative to some of the big AAA releases? And I guess, is that something that could eventually lead to lower margin structure on a per unit basis, which would sort of limit the upside of what you're talking about with scale?" ] }, { "name": "Karl Slatoff", "speech": [ "I think what you're really talking about is how our approach to new IP is, because for the most part, we have leaned in the industry, generally speaking, and obviously at Take-Two as well because we've got such a huge powerful franchises. We've leaned into those franchises and generated significant economic results driven by the consumer engagement with them. But we still think it's critical to invest in new IP to keep that fresh pipeline going because you never know where your next hit is going to come from. But you can't -- but you're right, you can't invest in the same way that you do in your franchise.", "So you do have to take a different approach to it. I mean, we're always continuing to seek new innovative ways to enhance our product portfolio, including bringing out new IP that has a chance to be successful. And it doesn't necessarily have to happen in the first iteration. I always like to use the example of Bruce Springsteen, it took him a long time to even hit a gold album, it took him a few releases to get there. You need to curate the pro title.", "So the idea is take as many shots as you can. Do so in such a way that if it doesn't work out, you don't lose your share. But then you create some kind of reaction, there is something great about, something that you did. And maybe the first one is an economically powerful, but the idea is for us is always to grow iteration after iteration. So the second one, when we know we've got an audience, we can invest a lot more and expand that marketing budget, expand that development budget and push that franchise forward. That's what franchise development is all about. You don't have to come out of the debt and be successful at the same level as a Grand Theft Auto and NBA day one. If you take that approach, you'll never launch anything new. I mean, that's just shortsighted.", "And it's tempting, there's no doubt about it to do that because it's very, very efficient and the margin structures are enormous. But I think we're limiting ourselves creatively and economically if we take that path, and that's not what we're doing. But we have to be mindful about our investment levels and be patient and look at franchise development over the long-term. I mean, our franchises, almost in every single case, iteration -- release after release have grown. They don't go the other way, and there's a reason for that, because we take the long view." ] }, { "name": "Ray Stochel", "speech": [ "Got it. Thank you. And then as you have success in some of these new IPs that you'll be putting out there, I mean, how do you think about, let's say, you do have a blockbuster hit off the jump, can you reposition some of your resources toward recurrent spending and rebuilding that model immediately or do you expect to sort of keep these studio paths separate, meaning let's say you do have something that all of a sudden is in the tier of maybe not Grand Theft Auto, but maybe a Borderlands, do you reposition other studios to sort of attack the recurrent spending opportunity or do you remain on this pipeline path that you've laid out?" ] }, { "name": "Karl Slatoff", "speech": [ "Well, to the extent that you've got a title that takes off unexpectedly, you certainly can pivot resources on the go. And if there is a significant opportunity to do so, the recurrent consumer spending, then you can absolutely do that and you can extend the life of a franchise. And Borderlands is actually a great example because when Borderlands 2 took off, Borderlands 1 was successful, Borderlands 2 took off like crazy. Our DLC plan expanded on a daily basis. I mean, I don't remember what our original DLC plan, but it wasn't 10 to 12 releases, which is where we ended up.", "So you can always invest more over time. And you can obviously do that in a game where you've got a robust micro transaction model. But what you can't do is you can't change the nature of the game. That would be suicide because the reason you have a hit is because people like the way it is. So if you get to know audience going and you change the nature of the game, purely with the motivation of creating economic -- of extracting economic value from the consumer, you run the risk of screwing up the franchise. And again, that's not something that we would do." ] }, { "name": "Ray Stochel", "speech": [ "Got it. Thanks so much again." ] }, { "name": "Operator", "speech": [ "Our next question is from Alex Giaimo with Jefferies. Please proceed with your question." ] }, { "name": "Alex Giaimo", "speech": [ "Thanks guys for taking the question. Just for Lainie, circling back to the earlier question on margins and how it relates to the full year guide. I understand the color around R&D expenses being up, but it also looks like the guidance is implying gross margins that are a bit lighter than we expected. Curious if that's just conservatism or something specific to call out. We would think that you would see some gross margin improvement especially with the accelerated shift we're seeing in digital right now. If any color there would be helpful? Thanks guys." ] }, { "name": "Lainie Goldstein", "speech": [ "Sure. So the gross margin is slightly down, basically it's flat from last year. So we do -- we are seeing it come out a little bit from the digital and the recurrent consumer spending mix because recurrent consumer spending is a higher margin business for us, but that's being offset by having less new releases this year. So that's why we're seeing it flat, but it's early in the year. So we'll see how we go toward the latter part of the year and recurrent consumer spending continues to stay strong for us. We should hopefully see that lift up a little bit toward the latter part of the year." ] }, { "name": "Alex Giaimo", "speech": [ "Okay. Thanks, Lainie." ] }, { "name": "Operator", "speech": [ "We have reached the end of the question-and-answer session. I would now like to turn the call over to management for closing comments." ] }, { "name": "Strauss Zelnick", "speech": [ "Well, we just want to thank everyone for attending the call. Once again, we want to extend our best wishes to everyone who is listening today for your health, for your loved ones' health and our condolences for any losses that you or your loved ones have suffered. We know this is an incredibly challenging time. We feel blessed to be able to give some small consolation, but bringing light entertainment to people. We're proud of what we do. Grateful to be able to do it.", "And once again, I want to express my gratitude to our colleagues for their dedication, for showing up with smile on their face, for doing such amazing work. The reason we're able to have these extraordinary results is solely a function of that work. So thank you so much for joining us, and our very best wishes." ] }, { "name": "Operator", "speech": [ "[Operator Closing Remarks]" ] } ]
TTWO
2019-02-06
[ { "description": "-Senior Vice President of Investor Relations and Corporate Communications -- Senior Vice President of Investor Relations and Corporate Communications", "name": "Hank Diamond", "position": "Executive" }, { "description": "-Chairman and Chief Executive Officer -- Chairman and Chief Executive Officer", "name": "Strauss Zelnick", "position": "Executive" }, { "description": "-President -- President", "name": "Karl Slatoff", "position": "Executive" }, { "description": "-Chief Financial Officer -- Chief Financial Officer", "name": "Lainie Goldstein", "position": "Executive" }, { "description": "-Barclays -- Analyst -- Barclays -- Analyst", "name": "Ryan Gee", "position": "Analyst" }, { "description": "-Jefferies -- Analyst -- Jefferies -- Analyst", "name": "Tim OShea", "position": "Analyst" }, { "description": "-Goldman Sachs -- Analyst -- Goldman Sachs -- Analyst", "name": "Michael Ng", "position": "Analyst" }, { "description": "-Merrill Lynch -- Analsyt -- Merrill Lynch -- Analsyt", "name": "Justin Post", "position": "Other" }, { "description": "-BTIG -- Analyst -- BTIG -- Analyst", "name": "Brandon Ross", "position": "Analyst" }, { "description": "-Consumer Edge Research -- Analyst -- Consumer Edge Research -- Analyst", "name": "Ray Stochel", "position": "Analyst" }, { "description": "-Morgan Stanley -- Analyst -- Morgan Stanley -- Analyst", "name": "Brian Nowak", "position": "Analyst" }, { "description": "-MKM Partners -- Analyst -- MKM Partners -- Analyst", "name": "Eric Handler", "position": "Analyst" }, { "description": "-Macquarie Group -- Analyst -- Macquarie Group -- Analyst", "name": "Ben Schachter", "position": "Analyst" }, { "description": "-Piper Jaffray -- Analyst -- Piper Jaffray -- Analyst", "name": "Michael Olson", "position": "Analyst" }, { "description": "-Sanford Bernstein -- Analyst -- Sanford Bernstein -- Analyst", "name": "Todd Juenger", "position": "Analyst" }, { "description": "-The Benchmark Company -- Analyst -- The Benchmark Company -- Analyst", "name": "Mike Hickey", "position": "Analyst" }, { "description": "-Oppenheimer -- Analyst -- Oppenheimer -- Analyst", "name": "Andrew Uerkwitz", "position": "Analyst" }, { "description": "-Stifel Financial Corp. -- Analyst -- Stifel Financial Corp. -- Analyst", "name": "Drew Crum", "position": "Analyst" }, { "description": "-Buckingham Research -- Analyst -- Buckingham Research -- Analyst", "name": "Matthew Harrigan", "position": "Analyst" }, { "description": "-Keybanc Capital Markets -- Analyst -- Keybanc Capital Markets -- Analyst", "name": "Evan Wingren", "position": "Analyst" }, { "description": "-BMO Capital Markets -- Analyst -- BMO Capital Markets -- Analyst", "name": "Gerrick Johnson", "position": "Analyst" }, { "description": "-Cowen & Co. -- Analyst -- Cowen & Co. -- Analyst", "name": "Doug Creutz", "position": "Analyst" } ]
[ { "name": "Operator", "speech": [ "Greetings, and welcome to Take-Two Interactive Software third-quarter fiscal year '19 earnings call. [Operator instructions] As a reminder, this conference is being recorded. I'd now like to turn the conference over to Hank Diamond, senior vice president of IR and corporate communications. Please go ahead, Mr.", "Diamond." ] }, { "name": "Hank Diamond", "speech": [ "Good morning. Welcome, and thank you for joining Take-Two's conference call to discuss its results for the third quarter of fiscal-year 2019 ended December 31, 2018. Today's call will be led by Strauss Zelnick, Take-Two's chairman and chief executive officer; Karl Slatoff, our president; and Lainie Goldstein, our chief financial officer. We will be available to answer your questions during the Q&A session following our prepared remarks.", "Before we begin, I'd like to remind everyone that statements made during this call that are not historical facts are considered forward-looking statements under federal security laws. These forward-looking statements are based on the beliefs of our management, as well as assumptions made by an information currently available to us. We have no obligation to update these forward-looking statements. Actual operating results may vary significantly from these forward-looking statements based on a variety of factors.", "These important factors are described in our filings with the SEC, including the company's most recent annual report on Form 10-K and quarterly report on Form 10-Q, including the risks summarized in the section entitled Risk Factors. I'd also like to note that, unless otherwise stated, all numbers we will be discussing today are GAAP and all comparisons are year over year. Additional details regarding our actual results and outlook are contained in our press release, including the items that our management uses internally to adjust our GAAP financial results in order to evaluate our operating performance. In addition, we have posted to our website a slide deck that visually presents our results and financial outlook.", "Our press release and filings with the SEC may be obtained from our website at www.take2games.com. And now I'll turn the call over to Strauss." ] }, { "name": "Strauss Zelnick", "speech": [ "Thanks, Hank, Good morning, and thank you for joining us today. I'm pleased to report that during the third quarter, Take-Two delivered better-than-expected results, driven primarily by the record-breaking launch of Red Dead Redemption 2, as well as a strong performance of NBA 2K19. We generated significant cash flow and ended the period with $1.6 billion in cash and short-term investments, after deploying $109 million to repurchase 1 million shares of our stock. On October 26, Rockstar Games launched Red Dead Redemption 2, which set numerous records, including achieving the biggest opening weekend in the history of entertainment with over $725 million in sell-through during its first three days.", "In fact, Red Dead Redemption 2 sold in more units in its first eight days than its predecessor sold in its first eight years. The title has exceeded our expectations and to date has sold in over 23 million units worldwide. According to the NPD Group, based on combined physical and digital sales in the U.S., Red Dead Redemption 2 was the best-selling video game of 2018. A testament to Rockstar Games' unparalleled ability to create the highest quality entertainment experiences.", "Red Dead Redemption 2 received near-perfect critical reviews and multiple game of the year awards. The title is tied with Grand Theft Auto V is the highest rated title on Playstation 4 and Xbox One with 97 Metacritic score. In late November, Rockstar Games launched the Red Dead Online beta, a new multiplayer experience set against the backdrop of Red Dead Redemption 2's enormous and vibrant open world. Free with the purchase of Red Dead Redemption 2, the Red Dead Online beta is an evolution of the classic multiplayer experience in the original Red Dead Redemption, blending narrative with competitive and cooperative gameplay in fun new ways.", "Rockstar Games continues to refine the vast world of Red Dead Online and will deliver ongoing updates to grow and evolve this experience. I'd like to congratulate the entire team of Rockstar Games for the phenomenal, critical and commercial success of Red Dead Redemption 2. Grand Theft Auto Online and Grand Theft Auto V remain significant contributors to our results more than five years after their launch. During the third quarter, Rockstar Games supported Grand Theft Auto Online with the Arena War update, as well as Festive Surprise 2018, Halloween-themed content and more.", "During December, combined monthly active users across Grand Theft Auto Online and Red Dead Online took Rockstar to a new record. Rockstar Games will continue to support both products with innovative new content in order to drive engagement and recurrent consumer spending. We're very excited for the future of these two highly robust ongoing living game worlds. Turning to our industry-leading basketball simulation.", "NBA 2K19 exceeded our expectations in the third quarter, driven primarily by strong growth and recurrent consumer spending. Sales of the game also surpassed our outlook. We now expect lifetime unit sales of NBA 2K19 to be slightly up over the prior year's release. According to the NPD Group, based on combined physical and digital sales in the U.S., NBA 2K19 was the best-selling sports title in 2018 and the third best-selling game overall.", "In addition, 2018 marks the third consecutive year that an NBA 2K title was the best-selling sports game of the year. An important part of NBA 2K19 success has been increasing engagement over the prior year's release. NBA 2K19 has generated more than 50% growth in online multiplayer games per day, and both daily active users and the number of games that they play have also increased meaningfully. We've also seen significant increases in engagement with the MyTeam mode for NBA 2K19, with daily average users up 28% and games played up 46%.", "On average, nearly 12 million games of NBA 2K19 have been played daily, which reflects many enhancements the 2K and Visual Concepts introduced this year. As a result of this strong engagement, recurrent consumer spending on NBA 2K grew 39% in the third quarter to a new record and was the largest single contributor to recurrent consumer spending in the period. We expect the net bookings from NBA 2K19, including recurrent consumer spending, will be the highest ever for a 2K sports title. On January 15, 2K announced a significant multiyear partnership expansion with the NBA and the players association.", "The NBA has been an outstanding partner and we're thrilled to be in business with Adam Silver and Michele Roberts and their teams, and we're very pleased with the terms of our partnership expansion, which enables NBA 2K to continue to grow and be highly profitable, both for Take-Two and the NBA. We have a broad range of basketball offerings across console, PC, mobile, online in China and eSports. And I'm confident that we'll continue to find new and innovative ways to captivate and engage fans and expand further the success of the NBA 2K brand. In early October, 2K launched WWE 2K19, the latest installment in our popular sports entertainment series.", "Developed collaboratively by Yuke's and Visual Concepts, the title received improved reviews and has been supported with a series of downloadable content, including the Season Pass. The WWE brand continues to expand worldwide, and we believe there remains a substantial long-term opportunity to grow our WWE 2K series by leveraging further the development expertise of 2K and Visual Concepts. Our third-quarter results were also enhanced by a variety of other offerings, led by Social Point's mobile games, Sid Meier's Civilization VI for the Nintendo Switch, which significantly exceeded our expectations and WWE Supercard. At Take-Two, our goal is to serve our audiences by delivering the highest quality entertainment that exceeds expectations in terms of the value they receive from both the money and time that they spend on our products.", "If we deliver on that goal consistently, we'll engage our customers and drive returns for our shareholders over the long term. A hallmark of our approach is finding new and exciting ways to drive engagement through creativity and innovation. The execution of this philosophy results in our audiences remaining immersed in our titles well after their initial launch and has been a key driver of our ongoing success. This is reflected in a strong growth in engagement and recurrent consumer spending on our titles over the past several years.", "During the third quarter, recurrent consumer spending exceeded expectations growing 31% to a new record and accounting for 22% of total net bookings. The biggest contributors to this outperformance were strong sales of the Red Dead Redemption 2 special edition and ultimate edition, which included additional content that is allocated to recurrent consumer spending, along with robust growth in recurrent consumer spending at NBA 2K. In addition, recurrent consumer spending was enhanced by a variety of other offerings. In free-to-play category, Social Point once again was a significant contributor to our results through its two biggest mobile titles: Dragon City and Monster Legends.", "During the third quarter, combined net bookings from these titles grew sequentially. Recurrent consumer spending on WWE Supercard grew double-digits net of platform fees, and 2K released the fifth season of its popular card battle game and several content updates. WWE Supercard is now being downloaded nearly 18.5 million times and it's 2K's highest grossing mobile title. And net bookings from NBA 2K Online in China more than doubled, driven by the launch of NBA 2K Online 2 in August.", "Total combined registered users for NBA 2K Online 2 and its predecessor currently stands 43 million and the franchise remains the No. 1 PC online sports game in China. Asia remains a significant long-term growth opportunity for our business. We're very encouraged by recent developments in China.", "Add-on content grew 9%, led by offerings for Sid Meier's Civilization, WWE 2K19, and XCOM 2. As a result of our strong performance in the third quarter, we're increasing our outlook for fiscal 2019. Our long-term success has been the result of our creative team's ability to connect deeply with audiences across a myriad of platforms and offerings. As our industry continues to embrace new technologies that enhance consumers' experience with, and access to interactive entertainment, we remain focused on broadening the reach of our content and expanding further globally.", "Take-Two is at better position than ever creatively, strategically and financially to capitalize on the vast opportunities that will shape the future of our business and our industry. I'll now turn the call over to Karl." ] }, { "name": "Karl Slatoff", "speech": [ "Thanks, Strauss. Today, I'll begin by discussing our recent and upcoming releases for the balance of fiscal 2019. On January 31, Social Point launched Tasty Town, our latest free-to-play mobile offering, for iOS and Android devices. This all-new game enables players to fulfill their culinary dreams of designing and managing their own restaurant.", "In Tasty Town, players embark on an incredible journey, from farm to table, to build their gastronomic empire, including experiencing the joy of growing their own ingredients, hiring the best chefs, creating delectable dishes, creating and managing their own restaurant and racing against the clock to serve meals with their food truck. In addition to Tasty Town, Social Point is focused on its robust pipeline of other exciting new games in development. On February 14, 2K and Firaxis Games will release Sid Meier's Civilization VI: Gathering Storm, the second expansion pack for the critically acclaimed and award-winning PC strategy game. Gathering Storm, the largest civilization expansion that Firaxis has ever created for any civilization game, will allow fans to explore and master their franchise's rich and strategic gameplay in all new ways.", "Gathering Storm also adds nine new leaders from eight new civilizations, a new diplomatic victory condition, and a variety of new units, districts, wonders, buildings and more. This spring, 2K and Cat Daddy studios will bring NBA 2K mobile to Android devices. Downloadable for free, NBA 2K mobile was released for iOS on November 19 and delivers console quality graphics and lifelike NBA action on the go like never before. NBA 2K mobile lets gamers experience their favorite NBA movements, collect player cards to build dream teams and step onto the court in five-on-five matchups, including season play and a variety of game modes.", "The team at Cat Daddy studios strives to match the quality bar set by our industry-leading basketball series, and we are excited to deliver this rich mobile experience to basketball fans around the world. Rockstar Games will continue to release an array of new content for both Red Dead Online and Grand Theft Auto Online. Given Rockstar Games' unique ability to keep consumers engaged by delivering innovative content and exciting new modes of play, we believe Red Dead Online is positioned to deliver continued growth in player engagement over both the short and long term. Turning to eSports, preparations are under way for the second season of the NBA 2K League that will kick off this spring.", "Last month, qualifying rounds began with more than 7,000 players across North America and Europe, vying for a spot in combine and draft. This past weekend, in league's first, an Asia Pacific tournament was held in Hong Kong to identify five elite players from the region, who will be eligible for the 2019 draft coming soon. With 21 teams competing in the season, we're very excited about the continued progress and growth of the league, which has the long-term potential to enhance engagement and to be a meaningful driver of profits for our company. Now I'd like to discuss our fiscal 2020 pipeline.", "At The Game Awards in December, Private Division announced The Outer Worlds, an upcoming new IP from Obsidian Entertainment, that is coming to PC, Playstation 4 and Xbox One. The Outer Worlds marks the reunion of Tim Cain and Leonard Boyarsky, the original creators of Fallout, for this new single player si-fi RPG from the renowned team behind Fallout: New Vegas, Star Wars: Knights of the Old Republic II, South Park: The Stick of Truth and the Pillars of Eternity franchise. The announcement trailer for The Outer Worlds has tallied more than 12.6 million views, and the game is featured on this month's cover of Game Informer magazine. Also at The Game Awards, Private Division announced that Ancestors: The Humankind Odyssey will launch digitally on PC, Playstation 4 and Xbox One in calendar 2019.", "Following The Game Awards, Private Division partnered with Gamespot to view the first 25 minutes of the game, which has been viewed more than 2.4 million times on Gamespot's YouTube channel. Ancestors is being developed by Panache Digital Games, an independent studio of 35 talented developers in Montreal, cofounded by Patrice Desilets, original creative director of Assassin's Creed. In addition, Private Division will continue to release updates for new content for the Kerbal Space Program Enhanced Edition for Xbox One and Playstation 4, as well as for the PC version. Going forward, Private Division will seek to add to its already impressive roster of development partners throughout the world, and we look forward to its future announcements.", "In addition, the unannounced title from one of 2K's biggest and most beloved franchise remains on track for launch during fiscal 2020. 2K will have more to share in the coming months. In furtherance of our goal to expand our development capabilities across our labels, on Monday, 2K announced the formation of a new development studio based in Silicon Valley. Industry veteran, Michael Condrey, will serve as President of this yet to be officially named new studio.", "Michael is best known for cofounding Sledgehammer Games and leading development for the Call of Duty franchise, including Call of Duty: Modern Warfare 3. Michael also served as Chief Operating Officer and Director at Visceral Games, where he played an integral role in establishing the popular Dead Space franchise. We are very pleased that Michael has joined our team to redeveloping on a new unannounced project. We are confident that Michael's creative, production and leadership expertise will help position 2K for future success.", "Looking ahead, our labels had a strong government pipeline, which includes titles from our renowned franchises and groundbreaking new intellectual properties. We will continue to support virtually all of our titles with additional content designed to enhance players' gameplay experience and drive engagement. This is an incredibly exciting time for our company and the industry. The promise of new technology, more powerful platforms and emerging distribution in business models, such as streaming and subscription services, all have the potential to enhance our growth rate and provide incremental margin expansion opportunities.", "We remain highly enthusiastic about our future and believe that with our industry-leading creative assets and commitment to innovation, we are well-positioned to capitalize on the many positive trends in our industry and to provide value to our customers and returns for our shareholders over the long term. I'll now turn the call over to Lainie." ] }, { "name": "Lainie Goldstein", "speech": [ "Thanks, Karl, and good morning, everyone. Today, I'll discuss our third-quarter results and then review our financial outlook for the fourth-quarter and fiscal-year 2019. Please note that additional details regarding our actual results and outlook are contained in our press release. As Strauss mentioned, our business delivered better-than-expected results in the third quarter.", "Total net bookings grew 140% to $1.57 billion, a new quarterly record and exceeded our outlook range of $1.4 billion to $1.45 billion, due primarily to the outperformance of Red Dead Redemption 2 and NBA 2K19. Digitally delivered net bookings also exceeded our forecast growing 85% to new quarterly record of $704 million and accounted for 45% of the total. During the third quarter, 31% of our sales of current generation console games were delivered digitally up from 26% last year. Turning to some details from our third-quarter income statement.", "GAAP net revenue increased to $1.25 billion and cost of goods sold increased to $898 million. Operating expenses increased by 46% to $299 million, due primarily to higher marketing spend. And GAAP net income was $180 million or $1.57 per share, up from $25 million or $0.21 per share in the prior-year period. Net income included a $109 million tax benefit resulting from the release of certain valuation allowances on the company's deferred tax assets.", "Without the release of these valuation allowances, the GAAP tax benefit would have been $11 million. This had no effect on our management reporting tax rate which is 20%. Our strong performance converted into significant cash flow. During the nine months ended December 31, non-GAAP adjusted operating cash flow grew 188% to $587 million.", "During that same period, we deployed $262 million to repurchase 2.6 million shares of Take-Two stock. And as of December 31, we have $1.6 billion in cash and short-term investments. Now I will review the highlights of our fiscal 2019 outlook, starting with the fiscal fourth quarter. We expect net bookings to range from $450 million to $500 million, up from $411 million in the fourth quarter last year.", "The increase has been driven primarily by ongoing sales of Red Dead Redemption 2, recurrent consumer spending on Red Dead Online and growth from NBA 2K, partially offset by lower results, Grand Theft Auto Online and Grand Theft Auto V. The largest contributors to net bookings are expected to be NBA 2K19, Red Dead Redemption 2 and Red Dead Online, Grand Theft Auto Online and Grand Theft Auto V, Social Point's mobile offerings and WWE 2K. We expect both recurrent consumer spending and digitally delivered net bookings to increase by around 10% each. Our forecast assumes that 44% of our current generation console game sales will be delivered digitally.", "We expect GAAP net revenue to range from $530 million to $580 million, and cost of goods sold to range from $248 million to $274 million. Operating expenses are expected to range from $205 million to $215 million. At the midpoint, this represents a 21% increase over last year, driven primarily by higher marketing expense. And GAAP net income is expected to range from $76 million to $89 million or $0.67 to $0.77 per share.", "Turning to fiscal 2019. We are increasing our outlook, primarily as a result of our stronger-than-expected third-quarter results, partially offset by the following factors. We believe that some of the forecasted sales of Red Dead Redemption 2 were accelerated into the third quarter. We've adjusted our fourth-quarter expectations accordingly.", "Even with this adjustment, we expect fiscal 2019 sales of Red Dead Redemption 2 to be significantly higher than our forecast prior to launch. We expect new content releases for Red Dead Online to accelerate in the first quarter of fiscal 2020. And therefore, we are shifting some of our net bookings expectations for the title into that period. And we have increased our marketing spend forecast for the fourth quarter.", "We are increasing our net bookings range from $2.89 billion to $2.94 billion from our prior outlook of $2.8 million to $2.9 million. At the midpoint, this represents a 46% increase over fiscal 2018, driven primarily by the launch of Red Dead Redemption 2 and expected growth from NBA 2K, which we forecast to be partially offset by lower results from Grand Theft Auto V and Grand Theft Auto Online. The largest contributors to net bookings are expected to be Red Dead Redemption 2 and Red Dead Online, NBA 2K, Grand Theft Auto Online and Grand Theft Auto V, WWE 2K and Social Point's mobile offerings. We expect the net bookings breakdown from our labels to be roughly 60% Rockstar Games, 35% 2K and 5% Social Point and other.", "And we forecast our geographic net bookings split to be about 55% United States and 45% International. We are increasing our recurrent consumer spending outlook to growth in the mid-teen, and we are maintaining our 30% growth outlook for digitally delivered net bookings. We forecast that 37% of our current generation console games will be delivered digitally up from 34% last year. We expect to generate approximately $740 million in adjusted operating cash flow, up $10 million from our prior outlook, and we plan to deploy approximately $60 million for capital expenditures.", "We've increased our GAAP net revenue outlook to range from $2.66 billion to $2.71 billion, and we expect cost of goods sold to range from $1.51 billion to $1.54 billion. Total operating expenses are forecasted to range from $921 million to $931 million. At the midpoint, this represents a 22% increase over the prior year, driven primarily by higher marketing, personnel, IT and R&D expenses. And we have increased our GAAP net income forecast to range from $354 million to $367 million or $3.07 to $3.18 per share.", "For management reporting purposes, we expect our tax rate to be 20%. In closing, Take-Two is on pace to deliver one of its best years ever, highlighted by record operating results. Looking ahead, with our world-class creative teams focus on operational excellence and strong financial foundation, our company is exceptionally well-positioned to deliver growth and margin expansion for our shareholders over the long term. Thank you.", "I'll now turn the call back to Strauss." ] }, { "name": "Strauss Zelnick", "speech": [ "Thanks, Lainie and Karl. On behalf of our entire management team, I'd like to thank our colleagues for their hard work in delivering another successful quarter. To our shareholders, I want to express our appreciation for your continued support. We'll now take your questions.", "Operator?" ] } ]
[ { "name": "Operator", "speech": [ "Thank you. [Operator instructions] Our first question is coming from the line of Ryan Gee with Barclays. Please proceed with your questions." ] }, { "name": "Ryan Gee", "speech": [ "Yes, Hi. Good morning everyone. Thanks for taking my questions. I guess, first on recurrent consumer spend, it grew 31% in the quarter versus your guidance were flat, so clearly several products outperformed, and your GTA Online and NBA 2K among them.", "So can you talk about the deceleration in 4Q? I know you mentioned Red Dead Online a little bit of that shifting to fiscal '20. But I'm curious why you wouldn't come out maybe a little bit more optimistic around that business, given how well it performed? And then second, if I may, I believe you said Red Dead sold in 23 million units and that's probably as of today. So with roughly two months left in the quarter, what should we expect in terms of reorder demand? Or how is the channel looking at this point?" ] }, { "name": "Lainie Goldstein", "speech": [ "So for recurrent consumer spend in Q3, the outperformance was driven by the strong sales of Red Dead Redemption 2 special and ultimate edition, which includes additional content that was allocated to recurrent consumer spending, as well as growth from NBA 2K's virtual currency. In terms of Q4, we still expect NBA 2K to continue to grow, and that's been offset by lower GTA Online sales that we've talked about being low this year and it was low in Q3 and in Q4. Now for Red Dead Redemption, we still have strong sales and strong demand for the title. The 23 million units in Q3 was higher than what we expected.", "And based on that, we accordingly adjusted Q4." ] }, { "name": "Operator", "speech": [ "Thank you. Our next question comes from the line of Tim O'Shea with Jefferies. Please proceed with your questions." ] }, { "name": "Tim OShea", "speech": [ "Yes. So thank you for taking my question. My question is just about business models, especially free-to-play, EA just Titanfall, Apex Legends. It's the same free model that Fortnite uses.", "And I'm just curious if you could help us understand how full price games can perform in an environment where AAA content has been given away for free? And as you look at your portfolio, what do you think is the right mix of business models going forward in terms of subscription and free-to-play, full price, etc.? Just love to get an updated -- hear your updated thoughts on that?" ] }, { "name": "Strauss Zelnick", "speech": [ "Well, I appreciate it. Look, just in terms of our console play been made available free-to-play, remember that Fortnite came about in a roundabout way. It was originally developed as a AAA game. And the free-to-play version that became such a huge hit and continues to perform well was actually originally in mode and then was developed into what it is now.", "I think that's sort of a stand-alone experience. I think it's hard to replicate, and it would probably be ill-advised to try to replicate it. The truth is that what you deliver an amazing AAA experience, consumers show up for it, and you've seen that with us over and over again and you see it in these results, with the extraordinary results of Red Dead Redemption 2, that continuing amazing result of Grand Theft Auto V and these results of our catalog, which sell pound for pound better than anyone else's catalog, which I say units sold per SKU. We're the best in the business or more recently NBA 2K19.", "So what we found is you give consumers what they want and that's often reflected in reviews and Metacritic scores. Red Dead Redemption 2 tied Grand Theft Auto V with the 97 score. They'll show up and they show up in quantity. So I'm not worried at all about someone else establishing a free-to-play approach, as long as our quality continues to be stellar and that's very big as long as.", "That's what we have to execute against everyday. Consumers aren't actually super price-sensitive, where entertainment is concerned. Or said another way, if we put out something that people don't want, you can kind of price it whatever price you want, they're not going to show up for it. I wish it were different, but it's not like selling groceries or commodities.", "And when you give someone something that's phenomenal, it's our job to deliver vastly more value than what we charge, but price sensitivity declines. So I think this is all about quality. That's our approach and that's why we're delivering these extraordinary results." ] }, { "name": "Tim O'shea", "speech": [ "Thanks, Strauss." ] }, { "name": "Operator", "speech": [ "The next question is from the line of Michael Ng with Goldman Sachs. Please proceed with your questions." ] }, { "name": "Michael Ng", "speech": [ "Great. Thank you for the time. I have three questions. One for Strauss, one for Karl and one for Lainie.", "First, Strauss, I was just wondering if you can comment on the new developments you have in Silicon Valley? Is there a rule of thumb in terms of how long it takes for a studio like that to ramp up? And when could we start seeing content coming out of that studio? And then for Karl, I was just wondering if you could comment on the promotional environment during the holiday, was Red Dead more promoted than expected in the quarter? And then lastly, for Lainie, I think the previous full-year RCS growth was for low teens. And based on the expectation for flat this quarter, I think, that would have implied over 30% growth for the March quarter. Could you just talk about what changed from then to the updated view of 10% growth this quarter?" ] }, { "name": "Karl Slatoff", "speech": [ "Michael, this is Karl. I'll like the first question. So we are very excited to bring Michael Condrey on board for us. I mean, he really follows our pattern of trying to attract and retain and develop the best content -- the best talent in the industry.", "That's obviously something very important part of our strategy. And that we've been able to do that today, and it's not by accident. So Michael joining us is, in my opinion, one of our best hires in a very long time. And we're really excited what he's going to do with the new studio.", "In terms of timetable, we're not talking about timetables. And frankly, every studio is different and every game is different. So it won't really help much anyway if I said something now because it won't end up being that way. But just rest assured that, this is something that's very exciting for 2K and for our company." ] }, { "name": "Strauss Zelnick", "speech": [ "Yes, on the second question, look, Red Dead is flying off the shelves. We sold in over 23 million units. It's performing vastly better than our expectations. It's continuing to sell.", "It's a massive hit. We definitely have market of the title. But if -- by promoted, you mean, discounted, we did not step in and have to price promote the title. The title is, generally speaking, being sold at full price." ] }, { "name": "Lainie Goldstein", "speech": [ "And for the Q4, on recurrent consumer spending, as I mentioned previously, we look Red Dead Online, we expect their new content releases to accelerate into the first quarter, so we shifted some of the net bookings expectations for Red Dead Online into that period." ] }, { "name": "Michael Ng", "speech": [ "OK. Understood. Thank you. That was really helpful." ] }, { "name": "Operator", "speech": [ "The next question comes from the line of Justin Post with Merrill Lynch. Please proceed with your questions." ] }, { "name": "Justin Post", "speech": [ "Great. Thank you. A couple on Red Dead. First, congrats on the great launch.", "When you look at sales since launch and the first couple of weeks, how they trended versus other Rockstar titles? And I'm really trying to get at the reorder potential next year. And then online with Red Dead, are you seeing incremental players to GTA? You mentioned in your prepared remarks, the total highest grown as far as number of players. Can you maybe give a bit more color on that? And how do you feel about the online potential as you look at 2020 as part of recurrent spend for the title based on the users that you're seeing today?" ] }, { "name": "Strauss Zelnick", "speech": [ "So we wouldn't really compare Red Dead to the last release, which is Grand Theft Auto. Grand Theft Auto stands alone. So it is the most important product in entertainment history, the highest grossing product in entertainment history and it's just phenomenal. Red Dead Redemption 2 is also phenomenal in its own way and the sales have vastly exceeded our expectations.", "But I don't think we'd learn much by tracking those sales to -- sales of any other release. Our expectations remain exceedingly high. Consumers are highly engaged. Titles continuing to sell actively.", "In terms of online -- and I'm sorry, in terms of the outlook, this is, again, vastly exceeding our expectations, and we expect it to continue. Of course, that's very hard to call. And that'd be driven by the customers, but we feel great about it. In terms of online players that we've seen so far, remember Red Dead Online is in beta.", "It's really early days. It seems to be developing incredibly well for early days, but it is early days. We have no reason to believe that the overlap between Grand Theft Auto Online players and Red Dead Online players is necessarily substantial, certainly nothing approaching 100%, which is implied in your question. So the answer is absolutely, there are plenty of new players, and we expect that to continue as well.", "And as we mentioned in our prepared remarks, in December, Rockstar Games had the highest level of monthly active users ever had between Grand Theft Auto Online and Red Dead Online. So I think that tells you just how powerful this offering is. Look, stay tune because the title comes out of beta, obviously. We got a lot of content to come, and we expect a pickup activity with content drops and then naturally monetization should follow accordingly in fiscal 2020." ] }, { "name": "Justin Post", "speech": [ "Thank you." ] }, { "name": "Operator", "speech": [ "The next question comes from the line of Brandon Ross with BTIG. Please proceed with your questions." ] }, { "name": "Brandon Ross", "speech": [ "Hi. Just a follow-up on Red Dead Online. I mean, obviously, as you were saying, it's still in beta. Can you talk about what you're seeing in the beta? What changes need to be made before you really launch the online game? And how you compare the player behavior to GTA so far? And then I have a follow-up." ] }, { "name": "Strauss Zelnick", "speech": [ "Yes, thanks. Look, Rockstar is going to talk about that in more detail. But I think as you'd expect, it's great about being in beta, as you get feedback from your consumer and you're able to make improvements. And we've made no bones about the fact that this is work in progress, Grand Theft Auto Online was a work in progress.", "We listen to the market. We listen to consumers, and we develop a great offering. One of the most exciting things about the way our business has evolved from what it was five, six years ago, you work really hard, you make a title, you launch the title and you get great results, good results, bad results, but that you're done. There's very little you can do.", "In an online environment, we can engage with the consumer and we can get better and better and better. And you've seen the effects of that with Grand Theft Auto Online. Five years after its initial launch, it continues to show enormous engagement, and therefore, it also delivers net bookings to us and drives profitability. So we have high hopes and expectations for Red Dead Online.", "It's super early to say that and more details will be forthcoming from the label." ] }, { "name": "Brandon Ross", "speech": [ "OK. And then just bigger picture industry question. We've seen some focus from the tech giants lately Amazon, Google, obviously, a lot more from Microsoft on video game streaming and subscription. How do you expect their focus to affect content creators and publishers like yourself? And do you expect that they will look to acquire content?" ] }, { "name": "Strauss Zelnick", "speech": [ "So remember, streaming is a distribution technology, subscription is a business model, completely different animals. We can have a subscription program right now. You could do with physical discs. That's after all how Netflix started with physical discs.", "So there is nothing magical about new technology with regard to a subscription business model. Will that business model develop? It will develop if it's really good for consumers, and it's really good for people who create product. That -- it has to be good for both. And remember, people consume video games differently than they consume linear programming.", "So the average American household consumes about five hours of linear programming, what we used to call television programming, but through all sources a day, about 150 hours a month. And currently, they consume about one hour and 20 minutes of interactive entertainment programming a day. So about 45 hours a month, very big difference. And of course, the biggest difference is with regard to linear programming, you're very unlikely to watch something twice.", "So in a given month, at five hours a day, you could be watching 75, 100 or depending on the length maybe more than that different products. In the case of the video game business, people may play the same title for the entire month. Maybe they play two or three titles, but they're not engaging with 75 or 100 titles. So you have to ask yourself, whether a subscription model really applies to a video game consumer versus the possibility of engaging with a free-to-play title and paying as you go or engaging with a title for which you pay, for example, like NBA 2K19, where you pay a meaningful price in the U.S.", "about $60 at retail, a little bit more outside the U.S., but you might play that game for a year. And we have people stay engage for a year. And it's a terrific deal if you stay engage for that. So jury that on subscription models, but I would observe our strategy is to be where the consumer is.", "So subscription models do make sense. It could be an opportunity for us, but they need to make sense for everyone involved. Let's turn to streaming technology. Streaming technology should be an opportunity to bring interactive entertainment with virtually no friction to all devices in the world.", "Are there barriers to that? Yes, there are enormous technical barriers because you have to actually do that with low latency in a multiplayer environment, so that if Lainie is sitting here in New York and she is on her Dell Computer and I'm in London on my iPad, we have to be able to play together, and we have to be able to play together without reducing the quality of the gaming experience. Is that doable? Technically, I believe, it will become doable. Currently, it is not doable. How many companies can actually deliver such an experience? Well, you need to have hyper-scale data centers all around the world.", "Who has that? Google has that. Facebook has that. Amazon has that. Microsoft has that.", "Very few other people have it or are going to have it. That gives you a sense of who can be a player in streaming. What will a streaming model look like? Remains to be seen. My guess is, it will look a lot like providing Internet access over cable.", "Everyone here is a cable customer, if you have Internet access at home. I believe that, ultimately, if you want to get stream video games, you're going to be a customer of someone who provides streaming. But in order for you to play those games, you have to interact with us and that business model has to appeal to us. There are those who believe by making available our video games to a broad audience that we will automatically increase the size of our market accordingly.", "I wish I could take that position. I'm not sure I can, but I would observe any time you broaden distribution, it's a good thing for a provider of the products." ] }, { "name": "Brandon Ross", "speech": [ "Thanks so much." ] }, { "name": "Operator", "speech": [ "The next question is from the line of Ray Stochel with Consumer Edge Research. Please proceed with your questions." ] }, { "name": "Ray Stochel", "speech": [ "Thanks for all the color on the call so far. And thanks for taking my question. I'm trying to think about how we should think about your commentary related to Red Dead Online and whether the shift in bookings is more related to a content drop or more related to your expectations for Red Dead Online overall and how that's tracking? And then I would like any commentary of possible on if the recent content drops for GTA Online overall were better or worse in your expectations? And then overall whether or not this content drop was actually meant to be a little bit smaller year over year when we take a look at it versus the Doomsday Heist? It seems as if it's a little bit less content, but we'd love any opinion on your end?" ] }, { "name": "Strauss Zelnick", "speech": [ "So first of all, Red Dead Online early days is going great. Our expectations for what will happen in 2020 are driven by enhanced content drops. We feel terrific about it. It is, however, early days.", "In terms of how GTA Online is doing, it's performing in line with our expectations. The only difference this year versus prior-year is we've had expectations with the title we're moderate in prior years, and we were pleasantly surprised with the upside. We're still incredibly pleasantly surprised because GTA Online continues to perform so well. It is, however, moderating in accordance with our expectations.", "So I would say things are going certainly as good, and in most incidences, it's better than expected. In the case of the most recent content drops for GTA Online, that's going at least as well as expected." ] }, { "name": "Operator", "speech": [ "Thank you. Our next question comes from the line of Brian Nowak with Morgan Stanley. Please proceed with your questions." ] }, { "name": "Brian Nowak", "speech": [ "Thanks for taking my questions. I have two. Just to ask sort of a broader picture question, Strauss, what's sort of the pipeline of the overall company? And how you think about the potential of all the sort of increase the breadth of the number of titles you put out? And even may be increase the cadence of content coming out of Rockstar, given the headcount you have, curious to see -- how you think about the next few years from a pipeline perspective? And then Lainie, just a lot of questions of investors and shareholders just kind of really trying to fully understand the bookings shift. So I know -- as previously mentioned, how you imply 25%-plus RCS growth before, now it's around 10%.", "Are there any other moving pieces there other than the Red Dead shift? Or is that the right way to think about the size of the shift? Thanks." ] }, { "name": "Karl Slatoff", "speech": [ "Hey, Brian, it's Karl. In terms of our pipeline of company and -- look, we are highly focused on increasing our releases. And I think you see our efforts. First of all, our acquisition of Social Point and their robust pipeline going forward brings us a lot of opportunity to bring new releases in the near term.", "We've also got Private Division. We spend a lot of time talking about, which you're going to see the first couple of releases coming out in the near-term future, but there's more to come as well. We talked about the new studio led by Michael Condrey. So just from a project-based prospective, we are highly focused on bringing more titles into the mix for us.", "And you're going to -- and look, not every title is going to come out in the next 12 months, but over time, you're going to see a higher release of cadence from our titles because that's the state of the objective of ours. There's also -- obviously, we're focused on M&A as well, and there's always an opportunity to bring in new projects that way and that's something that we've been focused on from day one. And again, Social Point is one example of that." ] }, { "name": "Lainie Goldstein", "speech": [ "So for Q4, we talked about that, there were units from Red Dead Redemption 2 that were in Q3, so shifted out of Q4. And then it was also offset by higher NBA expectations. So that's the overall change in Q4. It's driven by those items from early." ] }, { "name": "Operator", "speech": [ "Thank you. The next question comes from the line of Eric Handler with MKM Partners. Please proceed with your questions." ] }, { "name": "Eric Handler", "speech": [ "Yes. Thanks for taking my question. This is for Lainie. I want to talk about the gross margin a little bit here.", "In the third quarter, your guidance sort of implied something around 45%. You came in a little below that by about 150 basis points. Was there anything in the gross profit or in the cost of goods sold that resulted in the margin coming in a bit below expectations? And I'm curious as far as the amortization of Red Dead Redemption 2, are you willing to say how much of that amortization remains?" ] }, { "name": "Lainie Goldstein", "speech": [ "So in terms of the margin in Q3, it's really driven by the business mix and it was more weighted toward the new releases than we had expected. They have higher development costs associated with it and also higher internal royalties. So that is the difference in the gross margin. And we should see that for the full year as well.", "And then -- sorry, what was your second question? On the -- oh, the amortization of Red Dead. We don't share that on a title by title basis. But we are amortizing it in line with what the overall expectations are for the sales over a multiyear period." ] }, { "name": "Eric Handler", "speech": [ "OK. And then just a quick follow-up. In terms of your deal with eSports and the NBA. There -- last year, when it entered its first season, there was no presence at all during any NBA games as far as I could tell.", "I'm just curious how some of the marketing plans are evolving for this season?" ] }, { "name": "Strauss Zelnick", "speech": [ "We're -- it's a very early days sort of thing. And we -- the first season was work in progress and we got great results. And we're going to continue to develop. Karl mentioned the fact that we have four more teams.", "We're heading into a draft. We're heading into all kinds of exciting opportunities around the second season and stay tune for more news on promotional opportunities as well." ] }, { "name": "Eric Handler", "speech": [ "Thank you." ] }, { "name": "Operator", "speech": [ "The next question is from the line of Ben Schachter with Macquarie Group. Please proceed with your questions." ] }, { "name": "Ben Schachter", "speech": [ "Hey, a few questions, if I could. First, can you just highlight how you think Fortnite is impacting the industry and your sales? Second question, Strauss, the trade issues related to video games in China. Do you think any of these talks with the Trump administration could have a positive impact on how video games are brought to China? And then finally, on buybacks, you bought back stock at about $108. Stock is indicating below $100.", "Should we expect you to see you in the market in any more meaningful way than you have been in the past?" ] }, { "name": "Strauss Zelnick", "speech": [ "Thanks, Ben. In terms of Fortnite, I've been asked about this before. I will just observe. We continue to have stellar results despite the fact that there are competitive titles in the market, including Fortnite.", "There's also plenty of other competition. We get competition from every form of entertainment and other activities that people engage and that we take them away from consuming our titles. So there is no one-for-one comparison to the titles. I don't believe for a minute that our results when they're great or our results when they're less than great are being influenced positively or negatively by another title in the marketplace.", "It's just not the way entertainment works. So it's not the way the movie business works. It's not the way the television business works or the music business or the software business. So if you have something great, people will show up for it.", "If you don't have anything great, they're not going to show for it. And just by a way of example just to look at the last fiscal year, we had record results for Grand Theft Auto, we had record results for Grand Theft Auto Online and Fortnite was booming. So there is room for plenty of hits in the marketplace. We've just had stellar third quarter.", "Fortnite continues to perform, and we have these amazing results with Red Dead Redemption 2, NBA 2K19 and the rest of our lineup and our catalog. So I don't see any crossover. And I think if you want to step back from it, you'd say it's almost certainly a good thing when there is a multiplicity of hits. It brings in a bigger audience, perhaps a more diverse audience.", "We think that's the case. So we're not concerned about competition. We are very concerned about what we do every day, which is why, as Karl said, we're increasing our development, we're increasing our pipeline and we're utterly focused on quality and we're really proud of the quality of our titles and our recent releases because, frankly, they've been very good for quite a long time. We've had very few, if any, disappointments that I can think of.", "On China, we think Asia is an enormous opportunity, specifically China is a great opportunity. We're gratified that game approvals have been relaunched under new method, and we feel cautiously optimistic that there is great opportunity as a result. Tencent and others are engaging in developing new distribution platforms. And I do think, actually, as we look at trade, our government is focused on the fact that taking care of intellectual property, which is America's second biggest export after aerospace, is important.", "I think it's on the list of important things. So I think you'll begin to see some progress there. So I think there's a wonderful opportunity for us in China. There's wonderful opportunity right now.", "And absolutely if regulations soften, there'd be an even greater opportunity. But we understand we have to work within the environment that we find ourselves in there. Finally, with regard to buybacks, we've made it very clear that we have three uses for our cash. Supporting our organic growth story.", "That has been our story here. 11 years ago when we showed up here, we had net revenue apples-to-apples of around $700 million net -- what we would call net bookings today, and we're going to be knocking on the door of $3 billion today and that is almost all organic. We did buy Social Point. We acquired a few studios, but that is primarily organic growth and that's a great story.", "So we want to support organic growth and support measured risk. And so far our measured risks have all paid off, which is amazing that I get to say those words. We really have nothing that we're concerned about, and we have all these opportunities in front of us. That said, we also think with $1.6 billion cash balance and no debt and plenty of cash flow that we have an opportunity to pursue inorganic growth.", "And certainly given market conditions right now, there's probably more opportunity facing us now than there was six months ago and that's potentially exciting, but we're very disciplined. And if it needs to be said, we're only interested in accretive transactions like Social Point, which is an accretive transaction. And finally, we're interested in returning capital to our shareholders when it makes sense. My philosophy about buybacks is well known, which is you do buybacks when you see deep value in the marketplace.", "And when we have seen deep value in the marketplace, we have acted against, and I'll probably leave it right there." ] }, { "name": "Operator", "speech": [ "Thank you. Our next question comes from the line of Michael Olson with Piper Jaffray. Please proceed with your questions." ] }, { "name": "Michael Olson", "speech": [ "Hey, good morning. Without getting into the specifics of content releases, which I know you can't share, just wondering should we expect somewhat staggered approach to new content in GTA and Red Dead in order to kind of maintain engagement for each title? Or is really the focus to shift resources primarily toward new content for Red Dead? And then just very high level, there's been some increasing chatter about an idea that perhaps the industry is getting closer to kind of a ceiling in what gamers are willing to spend for in-game content? And the concept, I guess, really being that the significant growth of in-game content spend in recent years was may be a low-hanging fruit and now that opportunity is more saturated. I'm guessing, you won't agree with that line of thinking, but just be interested in your take on it?" ] }, { "name": "Strauss Zelnick", "speech": [ "So in terms of content drops for GTA Online, for Red Dead Online or frankly for other titles because we have opportunities to engage post-release with virtually everything that we put out. No, we wouldn't see that there would be any relationship between the content drop for one title inside our organization and any other title. So no, I think they stand-alone and what we're trying to do is engage and captivate consumers for every title and to optimize each one for its own consumer base and to grow that consumer base. With regard to in-game spending, I think you're talking about in-game spending or which really speaks to free-to-play games, I don't think we're seeing any kind of a cap.", "I do think that consumers always pay attention to what they're getting and what they're spending. They're always paying attention to value. And you know you never ever want to be in a position of charging more than what you deliver, and you want everyone to leave the experience feeling great. So you know even anecdotally, if you have a really great experience, but you feel you're charged too much for it, your emotional experience overall is not good, even if the thing itself was good.", "You go to a restaurant, you get a great meal, but if you feel like you're overcharged, it doesn't feel like you had a great meal when you leave the restaurant. So we want to make sure that our consumers always feel like we're taking great care of them. And that our consumers understand that we have to pay our folks in order to deliver content, but we always want to deliver more than what we charge. And I do think that certain of our competitors have gotten that upside down, and they even say it, we're data-driven business and we're trying to maximize our revenue, and then they're back into the entertainment experience.", "We're an entertainment company. We're trying to build incredible experience as we trying to be the most creative company on earth. We believe we have the best creative teams on earth. And we encourage them, in the fact, require them to pursue their passion and not work on anything that they're not passionate about.", "And as a result, we think we have the best creative properties in the business, and people will show up for those. But we have to be totally respectful of our customers, and that means delivering more than what we charge and we're utterly focused on doing that. I think if you do that, there's plenty of room and remember the cohorts are growing. So even if there is a particular pushback on how much any individual consumer will spend on any experience.", "And by the way, we're not seeing that. Then what you have to do is create great experiences and encourage more consumers to get involved, which is happening." ] }, { "name": "Michael Olson", "speech": [ "Thank you." ] }, { "name": "Operator", "speech": [ "Our next question is from the line of Todd Juenger with Sanford Bernstein. Please proceed with your questions." ] }, { "name": "Todd Juenger", "speech": [ "Hi. Appreciate it. At this point in the call, I'll keep it to just one, rather expansive one though. Strauss, I'm loving the conversations on value and pricing.", "I hope you don't mind if I flex it one level even further. I mean, when you talk about some of the premier properties from the Rockstar Games, the Red Dead Redemption, for instance, and you've commented that at a $60 price point, you believe that your consumers probably feel that's a fantastic value. And it doesn't -- you said some things is effective, it doesn't really matter what price you charge if the products are good. So let me challenge you.", "Have you thought about, why $60? I suppose that lots of Red Dead Redemption players would have thought USD 100 was a great value, but on the other end too, right? I wonder what the elasticity really is when you thought about it? If it were free, would you have twice as many players because a bunch of people are not willing to pay $60 to find how great it is? And as we think about revenue miles going forward, I just wonder if there's going to be a lot more dynamism in sort of that upfront pricing relationship and what you really think have you U.S. be fold? Thanks a lot." ] }, { "name": "Strauss Zelnick", "speech": [ "Yes. So I think, there's -- the price discrimination in entertainment is really tricky. The same question -- I was asked the same question when I was in the movie business. You're putting out Home Alone 2 -- I'm aging myself but it's all through.", "And you knew how Home Alone 1 did. So why don't you charge much more at the box office? And the answer is, it's not really how consumers tend to see entertainment, they expect to pay the same price point for frontline entertainment, and their expectations are that it's high quality. And of course, in the video game business, because the Metacritic scores and reviews, they have some path to know typically what they're getting, more so than in many other businesses. So it seems as though your frontline pricing, kind of, has to be within a range without regard to the properties that you develop, especially because we never want a consumer to feel that we're taking advantage of them and that includes even if there is a lot of demand.", "On your second point, your question resonates in great success. But when you don't have any knowledge about where you're going, it'd be very difficult to pursue the model that you said. So the model works great retroactively. It doesn't work at all prospectively.", "Because prospectively, you could be in a terrible position, where your monetization levels are exceedingly low. As they are for free-to-play games typically under 10% if the audience pay, and yet when you went and spent the money to create an enormous frontline experience. So we think you have to find a middle path, which is charge a reasonable amount to get people in the door and give them phenomenal quality for that. And then for the people, who chose to continue along with your additional content, whatever form it takes, an online offering or downloadable add-on content, you want to make the friction for that low as well.", "And of course, over time, typically there's discounting of the frontline product and that will reduce the threshold for people who don't want to initially participate at a higher price. Although in the case of Grand Theft Auto, of course, our retailers maintained a very high frontline price for a long time. So I guess, the answer is we have to find a path in between." ] }, { "name": "Todd Juenger", "speech": [ "Appreciate it. Thanks a lot, guys." ] }, { "name": "Operator", "speech": [ "The next question is from the line of Mike Hickey with Benchmark Company. Please proceed with your questions." ] }, { "name": "Mike Hickey", "speech": [ "Hey, guys. Thanks for taking my questions. Congrats on an awesome quarter. Great release of red dead.", "Just two from me. Curious if you could share with us your relationship with Gearbox, how stable that studio is? It looks like there's a fair amount of disruption internally that you feel this is impacting the development time line for Borderlands 3. My second question on your unannounced 2K game, order been delayed once. It sounds like it's on track.", "We still don't know what it is? I guess, why the lingering mystery on what this game is?" ] }, { "name": "Strauss Zelnick", "speech": [ "Thanks, Mike. Our relationship with Gearbox, which is an external studio, is excellent. The company is stable. And they're doing a phenomenal job as they always do, and we support them greatly.", "In terms of the unannounced 2K title, that is very much on track. And we expect it to stay on track and we have very high expectations." ] }, { "name": "Mike Hickey", "speech": [ "Thanks guys. Thanks a lot." ] }, { "name": "Operator", "speech": [ "The next question is from the line of Andrew Uerkwitz with Oppenheimer. Please proceed with your questions." ] }, { "name": "Andrew Uerkwitz", "speech": [ "Hey. Just real quick on a modeling question, maybe I missed it. You mentioned there's some recurring revenue as pull forward related to RDR. Could you let us know approximately how much that was? And I have one big picture follow-up." ] }, { "name": "Lainie Goldstein", "speech": [ "We don't share that level of detail on a title by title basis, so I can't answer that for today." ] }, { "name": "Andrew Uerkwitz", "speech": [ "Yes. No, no, fair enough. And then Strauss, just had a couple of questions around Private Division. What were some of the -- now that we're getting the two games launched this year, what were some of the industry trends you identified a couple of years that made you want to build Private Division out really aside from a focus on original content? And as a follow-up, how do you think about building a studio as what you do with Mr.", "Condrey versus finding third-party studios like what you're doing with Private Division?" ] }, { "name": "Karl Slatoff", "speech": [ "Andrew, it's Karl. So in terms of the idea behind Private Division, I mean, look, we've had -- obviously, we've been around the industry long time and when you see sort of ebbs and flows in terms of the amount of independent studios that are out there and also talent that's not necessarily associated with other enterprises and just within the last few years we've seen an increase. And most of the people that we have -- that we signed up for Private Division, these are actually folks that got real credibility in the industry and have done things before. And want to try -- and they want to try creative -- a different creative approach than they have in the past and not necessarily work on titles with -- as bigger budgets as they've had in the AAA or Quad-A world.", "So there's just an opportunity -- it's really based on talent and availability of talent. And like I said earlier, we prodded ourselves to be a home where -- and to have the flexibility to be a home for creative talent to allow them to pursue those endeavors. And the key ingredient there is passion. And that really is -- probably 95% of it is passion, do we believe in them? Do they believe in themselves? And can we find a way for it to work within the business model that works for both for us? And that idea is something that was born here.", "And then we actually really believe -- and once we saw it work once, we said this could be a new business model for us. We can grow this out into a much bigger place because there has to be more than one or two of these folks out there that want to pursue this path. And as it turns out, we're absolutely right. And the pipeline has been incredible, and the number of titles that we've looked at is staggering over the past few years.", "I mean, there is no shortage of inbound interest for private division. So it's very [Audio gap]" ] }, { "name": "Operator", "speech": [ "It appears we've lost a caller. Our next question is from Drew Crum with Stifel." ] }, { "name": "Drew Crum", "speech": [ "OK. Thanks. Good morning, everyone. So I wonder if you could talk about your changed view for the NBA 2K for game sales relative to your last update? What's led to the improved performance? Are you seeing an uptick in interest outside the U.S.? And then separately for Lainie, can you talk about the implications for gross margin, given the seven-year renewal with the NBA license? Thanks." ] }, { "name": "Operator", "speech": [ "Ladies and gentlemen, please stand by. We're experiencing technical difficulties.Ladies and gentlemen, please remain on the line. We're experiencing some technical difficulties.Ladies and gentlemen, please remain on line. Your teleconference will resume momentarily.Please continue." ] }, { "name": "Strauss Zelnick", "speech": [ "Sorry, I think we may have lost you. If there are any other people left in the line, apologies. We had a technical lapse, and we'll be happy to continue with the questions, if anyone's here." ] }, { "name": "Operator", "speech": [ "Thank you. Our next questionnaire is Matthew Harrigan with Buckingham Research." ] }, { "name": "Matthew Harrigan", "speech": [ "Thank you. Strauss, you have an unbelievably broad view of entertainment business by watching your background. Do you have any thoughts on how you can better monetize the IP that you enviably have all the rights for in-house, even on the movie side, although one knows how difficult those adaptations can be. And I know this is a low far field, but what's your action to Bandersnatch and that trying to embark on sort of new interactive entertainment genre? I don't know if it's at all pertinent to Take-Two, I suspect it's not, but I'd be curious to sort of get your laboratory reaction on that one?" ] }, { "name": "Strauss Zelnick", "speech": [ "So all good questions. We're very -- we have this wonderful intellectual property, more than 11 franchises that have sold at least 5 million units with one release, something like 60 releases that have sold at least 2 million units. So we have a terrific array of properties, and I think you've correctly noted that we have not exploited those in other media. I think the issue is that, you have to make something great in every medium in which you operate.", "And if you're going to make a motion picture or television show based on the IP, it has to be utterly phenomenal and we'd have to have a lot of creative control, and we're not in those businesses. And they have different economic constraints and opportunities. What we have found so far is that licensing the IP to others with sufficient creative control and appropriate financial participation on our end is very challenging to do and isn't necessarily great use of our time. We also -- we do very, very well in our core business, and it's behooved us to focus on our core business.", "And I'd also just note, it seem to be very difficult creatively to take intellectual properly -- property driven by interactive entertainment, bring it to linear entertainment. There aren't so many examples of that being done successfully and that gives us pause as well. In terms of sort of choose your adventure applied to television, I've always been a little bit skeptical because my concern is that the more engagement you have in the outcome of a linear fiction, the less likely it is that you can maintain the suspension of disbelief. But consumers like it, there could be something there.", "I think we'll find out if it's a novelty, that's as interesting as novelty, or if there is something there that's more long lived. I'd probably fall in the camp of the former, but the whole point creatively is that you got to be open-minded and pursue the passions of your creators. And I would note that the biggest hits are often the most unexpected. So I'd be open-minded." ] }, { "name": "Matthew Harrigan", "speech": [ "Thanks, Strauss." ] }, { "name": "Operator", "speech": [ "Our next question comes from the line of Evan Wingren with KeyBanc. Please proceed with your questions." ] }, { "name": "Evan Wingren", "speech": [ "Thanks. This one is for Lainie. Just a quick one. On Red Dead Redemption 2 and recurrent consumer spending associated with the premium SKU units during the holiday quarter.", "Just wondering if you could give us a sense as to how much of a contributor that was to recurrent consumer spending exceeding your expectations, just recognizing -- don't get specific commentary, but some flavor would be helpful? And second, I think during the technical difficulties, Drew asked the question about -- Drew Crum from Stifel asked a question about, the NBA relationship and implications for margins as you go forward, that was a good question, so hoping you would address that too." ] }, { "name": "Lainie Goldstein", "speech": [ "So during Q3, the special and ultimate editions, additional content that was allocated to recurrent consumer spending was a large portion of why we overachieved during the quarter. About 17% of -- so the special and ultimate editions were about 17% of all of the units that were sold during the quarter." ] }, { "name": "Strauss Zelnick", "speech": [ "And in terms of our relationship going forward with the NBA, we're thrilled to be in a longer-term relationship with the NBA and the Players Association. We're grateful for their trust in us, and we're incredibly proud of what we believe the Players Association and we have achieved in the past years delivering this industry-leading title over and over and over again. In terms of our expectations under the terms of the new deal, there's plenty of room for everyone to do well. That's the best kind of deal, and we expect that our margins will be maintained.", "We do not see any reason to believe that our margins will be changed in a negative way." ] }, { "name": "Evan Wingren", "speech": [ "Thank you." ] }, { "name": "Operator", "speech": [ "The next question comes from the line of Gerrick Johnson with BMO Capital Markets. Please proceed with your questions." ] }, { "name": "Gerrick Johnson", "speech": [ "Hi, good morning. Thanks for the commentary on private division. But can you remind us the economic relationship between Take-Two and the companies in Private Division like Obsidian? And what do you get -- what's your upside potential from outer worlds and games like that? Thank you." ] }, { "name": "Karl Slatoff", "speech": [ "I won't get into the specific economics, but generally speaking, all the -- these are situations where the independent -- the studious that we work with, they actually maintain the ownership of the IP, but we have long-term publishing rights to that IP and we generally will fund developments and marketing of those expenses -- of those titles. And once all of that is recouped and there is typically a profit share. But I can't get into the specifics of how -- what kind of profit share that is, etc, etc." ] }, { "name": "Gerrick Johnson", "speech": [ "OK. Close enough. Thank you." ] }, { "name": "Operator", "speech": [ "The next question is from the line of Doug Creutz with Cowen and Company. Please proceed with your questions." ] }, { "name": "Doug Creutz", "speech": [ "Hey, thanks. One of your competitors has made the decision to do a PC launch when upcoming play title exclusively to the Apex store. Just wondering, how you view the trade off of the potentially better economics there versus the importance of having your content with many distribution platforms as possible?" ] }, { "name": "Strauss Zelnick", "speech": [ "Well, generally speaking, our approach is to be wherever the consumer is, and we distribute very widely. Generally speaking, we have not been a believer in exclusive relationships. I wouldn't comment on any particular store. But for example, the question has been raised about shouldn't you, as a company, be exclusively direct-to-consumer.", "And I think our experience is that consumers want to shop in a place where they get a multiplicity of titles. We have terrific titles coming from all of our labels. We have a very broad offering, but there are other titles besides titles coming through the Take-Two Enterprise that people want. So generally speaking, our strategy is to be broadly distributed.", "There are times when an exclusive distribution relationship can make sense. And I wouldn't be in a position to comment on one of our competitors chose to do. But on balance, we're happy that the Apex is going with the business. We're happy to have someone else at the table." ] }, { "name": "Doug Creutz", "speech": [ "Great. Thank you." ] }, { "name": "Operator", "speech": [ "At this time, I will turn the floor back to management for closing remarks." ] }, { "name": "Strauss Zelnick", "speech": [ "First of all, I apologize for the fact that we lost you for a few minutes there, and we'll make sure that never happens again. Look, we're proud of the quarter that we just reported on. We're incredibly excited that our outlooks says, we're going to have a record year for net bookings and adjusted cash flow provided by operations. We feel like we're firing on all cylinders and the outlook is very strong.", "So we thank you so much for joining us today. I know it was a long call. Thanks for your support." ] }, { "name": "Operator", "speech": [ "[Operator signoff]" ] }, { "name": "Doug Creutz --Cowen & Co. -- Analyst", "speech": [ "More TTWO analysis", "This article is a transcript of this conference call produced for The Motley Fool. While we strive for our Foolish Best, there may be errors, omissions, or inaccuracies in this transcript. As with all our articles, The Motley Fool does not assume any responsibility for your use of this content, and we strongly encourage you to do your own research, including listening to the call yourself and reading the company's SEC filings. Please see ourTerms and Conditionsfor additional details, including our Obligatory Capitalized Disclaimers of Liability." ] } ]
TTWO
2023-02-06
[ { "description": "Senior Vice President, Investor Relations and Corporate Communications", "name": "Nicole Shevins", "position": "Executive" }, { "description": "Chairman and Chief Executive Officer", "name": "Strauss Zelnick", "position": "Executive" }, { "description": "President", "name": "Karl Slatoff", "position": "Executive" }, { "description": "Chief Financial Officer", "name": "Lainie Goldstein", "position": "Executive" }, { "description": "MKM Partners -- Analyst", "name": "Eric Handler", "position": "Analyst" }, { "description": "Truist Securities -- Analyst", "name": "Matthew Thornton", "position": "Analyst" }, { "description": "Morgan Stanley -- Analyst", "name": "Matthew Cost", "position": "Analyst" }, { "description": "Stifel Financial Corp. -- Analyst", "name": "Drew Crum", "position": "Analyst" }, { "description": "Bank of America Merrill Lynch -- Analyst", "name": "Omar Dessouky", "position": "Analyst" }, { "description": "Barclays -- Analyst", "name": "Mario Lu", "position": "Analyst" }, { "description": "Goldman Sachs -- Analyst", "name": "Eric Sheridan", "position": "Analyst" }, { "description": "Cowen and Company -- Analyst", "name": "Doug Creutz", "position": "Analyst" }, { "description": "MoffettNathanson -- Analyst", "name": "Clay Griffin", "position": "Analyst" }, { "description": "Oppenheimer and Company -- Analyst", "name": "Martin Yang", "position": "Analyst" }, { "description": "AllianceBernstein -- Analyst", "name": "Matti Littunen", "position": "Analyst" }, { "description": "The Benchmark Company -- Analyst", "name": "Mike Hickey", "position": "Analyst" }, { "description": "Citi -- Analyst", "name": "Jason Bazinet", "position": "Analyst" } ]
[ { "name": "Operator", "speech": [ "Greetings, and welcome to the Take-Two third quarter 2023 earnings conference call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator instructions] As a reminder, this conference is being recorded.", "It is now my pleasure to introduce your host, Nicole Shevins, senior vice president of IR and corporate communications. Thank you. Nicole, you may begin." ] }, { "name": "Nicole Shevins", "speech": [ "Good afternoon. Thank you for joining our conference call to discuss our results for the third quarter of fiscal year 2023 ended December 31, 2022. Today's call will be led by Strauss Zelnick, Take-Two's chairman and chief executive officer; Karl Slatoff, our president; and Lainie Goldstein, our chief financial officer. We will be available to answer your questions during the Q&A session following our prepared remarks.", "Before we begin, I'd like to remind everyone that statements made during this call that are not historical facts are considered forward-looking statements under federal securities laws. These forward-looking statements are based on the beliefs of our management, as well as assumptions made by and information currently available to us. We have no obligation to update these forward-looking statements. Actual operating results may vary significantly from these forward-looking statements based on a variety of factors.", "These important factors are described in our filings with the SEC, including the company's most recent annual report on Form 10-K and quarterly report on Form 10-Q, including the risks summarized in the section entitled Risk Factors. I'd also like to note that unless otherwise stated, all numbers we will be discussing today are GAAP and all comparisons are year over year. Additional details regarding our actual results and outlook are contained in our press release, including the items that our management uses internally to adjust our GAAP financial results in order to evaluate our operating performance. Our press release also contains a reconciliation of any non-GAAP financial measure to the most comparable GAAP measure.", "In addition, we have posted to our website a slide deck that visually presents our results and financial outlook. Our press release and filings with the SEC may be obtained from our website at take2games.com. And now, I'll turn the call over to Strauss." ] }, { "name": "Strauss Zelnick", "speech": [ "Thanks, Nicole. Good afternoon, and thank you for joining us today. During the third quarter, we continued to execute on our ambition to create the highest-quality, most engaging interactive entertainment franchises in the industry to deliver them across an array of platforms and to captivate our global audiences. All of our new game releases and post-launch content have received significant critical acclaim and we're pleased to have the highest catalog sales based on units sold in the Americas.", "The strength of our portfolio reflects the passion, vision, artistic acumen, and hard work of our world-renowned development teams and studios and we are immensely proud of our long-standing commitment to quality. Notwithstanding our creative achievements, our third-quarter net bookings of $1.38 billion were slightly below our prior guidance. We believe that as a result of macroeconomic conditions, consumers shifted holiday spending toward established blockbuster franchises and titles that were offered with pricing promotions. Our catalog benefited from this trend.", "It affected the performance of certain of our new releases and recurrent consumer spending for some of our console and PC games. Despite the current market, we believe that our long-term success will be driven by our consistent ability to create the best entertainment experiences, including sequels of our beloved franchises and the introduction of engaging new intellectual properties. Sales of Grand Theft Auto V exceeded our expectations during the holiday season. And to date, the title has sold in more than 175 million units.", "During the quarter, Rockstar Games released an array of new content for both Halloween and the holiday season, as well as a new story-driven update Los Santos Drug Wars. The update launched in December and continues to deliver exciting new story and gameplay features to players across the winter season, including a new business tax emissions and much more to come, which is continuing to drive strong engagement with our player race. We were also pleased with the performance of Red Dead Redemption 2, which outpaced our expectations driven by successful holiday promotions and events. To date, the title has sold in more than 50 million units.", "During the quarter, Rockstar Games continued to release new updates for Red Dead Online, including a new Halloween Hardcore Telegram Mission and new Call to Arms locations for Halloween and the holidays. We remain incredibly pleased with the enduring quality of these entertainment experiences. Grand Theft Auto V was ranked No. 3 for units sold in the U.S.", "during calendar year 2022 on all platforms and was No. 2 overall for 2022 on Steam. Additionally, 2022 was GTA V's 10th consecutive year in the NPD top five for unit sales. Red Dead Redemption 2 also continues to resonate strongly with players, ranking as the No.", "1 selling game on Steam for the quarter-end, No. 3 for 2022. NBA 2K23, which remains the No. 1 selling sports title in North America continues to expand its audience and to date has sold in over 8 million units.", "Full game sales for NBA 2K23 are up 3% year over year and MyTEAM users grew more than 50% over last year, as players enjoyed assembling their rosters of the NBA's all-time greatest stars to dominate the competition. In addition, NBA 2K23 Arcade Edition remains the No. 1 game in Apple Arcade since its launch in October. 2K and HB Studios supported PGA TOUR 2K23 with a limited-edition holiday bundle that included NBA 2K23 and new content featuring branded gear from Barstool Sports, 100 Thieves, and Dude Perfect.", "HB Studios will release more content and features, including the addition of Pebble Beach, cross-play functionality, and ranked patch-making. On December 2, 2K and Firaxis Games launched Marvel's Midnight Suns on Windows PC via Steam and Epic Games Store, PlayStation 5, and Xbox Series X|S. The title launched a critical acclaim with BGC rating at a five out of five, calling it a modern strategy classic. PC Gamer said it was completely brilliant, scoring at 88 out of 100 and Rock Paper Shotgun called it one of the best Superhero games.", "The title is being supported with a series of post-launch content that can be purchased individually or as part of the game seasons pass. During the quarter, Zynga's in-app purchases performed in line with our expectations and we saw mobile trends improve from prior lows, particularly during the holiday season. The label continued to experience strong engagement among its active players, and we believe that we're maintaining our global market share. Our advertising business outpaced the broader industry, as we continue to introduce new ad supply and products, optimize our networks to increase ad yields, and roll out Chartboost throughout our inventory.", "A few key highlights of our mobile offerings during the quarter include Empires & Puzzles was a top performer due to strong seasonal content and Black Friday offerings. This is one of our first titles to leverage our direct-to-consumer platform for in-app purchases, which we believe can enhance significantly the margins for our mobile portfolio over the next few years. Rollic's Balls'n Ropes reached the No. 1 spot for most downloaded game in the U.S.", "in December, giving Rollic a look a total of 20 games that have reached the No. 1 or No. 2 spot in Apple's U.S. App Store.", "We acquired Popcore, which offers a unique balance of hypercasual experiences that also prioritize long-term player retention rates. This strengthens our leadership among hypercasual publishers with respect to downloads in revenue. Following the acquisition, Popcore's game Tap Away reached the No. 1 spot for most downloaded game multiple times throughout the quarter in Apple's U.S App Store.", "Zynga's casino titles remained resilient with Game of Thrones Slots posting its best quarter ever. Top Eleven had a strong quarter, driven by various in-game updates celebrating the World Cup. CSR Racing 2 released Race Pass, which features innovative new rewards that are driving stronger retention and monetization. Our combination with Zynga remains highly accretive to our business.", "We remain committed to delivering our planned synergies and we're well on our way to exceed our target of $100 million in annual cost savings within the first two years post close. During the quarter, recurrent consumer spending rose 117% and accounted for 78% of net bookings. Turning to our outlook, we're operating in an environment that is in many ways more challenging than we anticipated. And we're lowering our fiscal 2023 net bookings guidance to $5.2 billion to $5.25 billion to take this backdrop into account.", "To be clear, I take personal responsibility for our revised downward guidance. We believe there's always more to achieve, particularly when we fall short of our expectations. We've embarked on a companywide cost reduction program that will optimize our expense structure, while also positioning us to deliver on our anticipated growth trajectory. We expect to achieve savings in excess of $50 million as a result of this initiative.", "Our balance sheet remains strong, allowing us to navigate these uncertain times with confidence. We've always managed our business for the long term as we achieve the powerful synergies from our combination with Zynga, release new titles from our robust multiyear pipeline, and execute on our cost savings initiatives, we expect to deliver sequential growth and record performance over the next several years. Our business and creative teams have done a phenomenal job during these challenging times, and I'd like to thank all of our colleagues for their tireless work. I'd also like to thank our shareholders for their continued support.", "I look forward to sharing our progress with you on all of our key initiatives. I'll now turn the call over to Karl." ] }, { "name": "Karl Slatoff", "speech": [ "Thanks, Strauss. As we focus on the remainder of the year and beyond, we remain steadfast in our commitment to providing the most captivating and engaging entertainment experiences for our audiences across all platforms and geographies. We believe this is the best strategy and path forward to achieving our goals, driving our expected long-term growth, and bringing value to our shareholders. Turning to our upcoming releases.", "On February 24, Private Division and Intercept Games will launch Kerbal Space Program 2, in Early Access for PC on Steam, Epic Games Store, and other storefronts. KSP 2 will bring an array of content for players to explore, and the title promises to be the most visually impressive game in the franchise. Those that purchased KSP 2 in early access will help inform the future development of the game by providing feedback directly to its creators leading up to the full launch of the title. In addition, Private Division has announced several new projects.", "After us, a riveting exploration debenture game from Piccolo Studios is expected to launch this spring during fiscal 2024 for PC, PlayStation 5, and Xbox Series X|S. Private Division announced a publishing partnership with Bluebird team to develop a new survival horror game expected to launch after calendar 2024. And we unveiled our new Private Division development fund to support smaller independent teams with project financing and mentorship opportunities. On March 17, 2K and Visual Concepts will release WWE 2K23 for PlayStation and Xbox consoles and PC on Steam.", "In celebration of John Cena's 20th anniversary as a WWE superstar, the 16-time World Champion's record-setting philanthropist and WWE 2K23 Executive soundtrack producer will be featured on the cover of each addition of the game. In addition, global music phenom Bad Bunny, 2022's most streamed artist in the world will make his WWE 2K debut as a preorder bonus. Building upon the success of WWE 2K22, this year's installment features a unique take on the 2K showcase, the introduction of the fan-favorite WarGames matches, and expenses to several marquee games. Fans can look forward to a deep roster of WWE Superstars and Legends, including Roman Reigns, American Nightmare Cody Rhodes, Ronda Rousey, Brock Lesnar, Stone Cold Steve Austin, and more.", "2K will support the game with an array of post-launch content and may be purchased individually or through a season pass. Throughout the balance of the fiscal year, Rockstar Games will continue to support Grand Theft Auto Online with additional content updates. And 2K and Firaxis games will continue to release add-on content from Marvel's Midnight Suns and Sid Meier's Civilization VI: Leader Pass. In mobile, Zynga's Rollic studio will release a vast array of titles as they've done previously, while the label's other studios remain at work on a variety of games, including several in soft launch that we expect to release in fiscal 2024.", "We will have more to share on our pipeline when we report our fourth-quarter results in May. I'll now turn the call over to Lainie." ] }, { "name": "Lainie Goldstein", "speech": [ "Thanks, Karl, and good afternoon, everyone. Today, I'll discuss the key highlights from our third quarter, before reviewing our guidance for fiscal year 2023 and our fourth quarter. Please note that our third quarter results include our combination with Zynga, with respect to the comparability of our results relative to last year. Additional details regarding our actual results and outlook are contained in our press release.", "As Strauss mentioned, we delivered net bookings of $1.38 billion, which was slightly below our prior guidance, as consumers displayed more cautionary purchasing behaviors during the holiday season. As in prior periods of economic headwinds, full-game sales from our catalog of industry-leading intellectual properties were relatively resilient. However, we felt pressure on some of our newer releases that are in earlier stages of building their player base, alongside softness in recurrent consumer spending. During the period, recurrent consumer spending rose 117% and accounted for 78% of net bookings.", "Zynga's in-app purchases performed in line with our revised expectations. However, this was offset by weakness in recurrent consumer spending for several of our console and PC games. Digitally delivered net bookings increased 72% and accounted for 95% of the total. During the quarter, 69% of console game sales were delivered digitally, up from 63% last year.", "GAAP net revenue increased 56% to $1.41 billion, and cost of revenue increased 97% to $692 million. Operating expenses increased by 123% to $889 million, primarily driven by the addition of Zynga, as well as higher marketing and stock-based compensation expenses. The GAAP net loss was $153 million, $0.91 per share, which was impacted by $302 million of amortization of acquired intangibles and $24 million of business acquisition costs. Our management tax rate for the period was 18% as compared to 16% in the prior year as a result of our combination with Zynga.", "We ended the quarter with over $1.1 billion of cash and short-term investments and paid down $200 million of revolver borrowings, reducing our debt to $3.1 billion. Turning to our guidance, I'll begin with our full fiscal year expectations. We now expect to deliver net bookings of $5.2 billion to $5.25 billion. Our forecast takes into account the current economic environment and consumer purchasing trends that we have been experiencing and which we expect to continue into the fourth quarter, including lower expectations for some of our recent game releases and softer recurrent consumer spending, as well as the shift of an unannounced mobile title and a focus on enhanced profitability for our hypercasual business.", "The largest contributors to net bookings are expected to be NBA 2K, Grand Theft Auto Online and Grand Theft Auto V, Empires & Puzzles, Toon Blast, Rollic's hypercasual mobile portfolio, and Red Dead Redemption 2 and Red Dead Online. We expect the net bookings breakdown from our labels to be 46% Zynga, 36% 2K, 17% Rockstar Games, and 1% Private Division. We forecast our geographic net bookings split to be about 65% United States and 35% international. We expect recurrent consumer spending to grow by approximately 85% and represents 77% of total net bookings.", "Our digitally delivered net workings are expected to grow by approximately 60% and represent 95% of the total. Our forecast assumes that 74% of console game sales will be delivered digitally, up from 68% last year. We expect to generate more than $400 million in non-GAAP adjusted unrestricted operating cash flow and we expect to deploy approximately $170 million for capital expenditures. We expect GAAP net revenue to range from $5.24 billion to $5.29 billion and cost of revenue to range from $2.53 billion to $2.55 billion, which includes approximately $694 million of amortization of acquired intangibles.", "Total operating expenses are expected to range from $3.4 billion to $3.41 billion as compared to $1.5 billion last year. This increase reflects the inclusion of Zynga, business acquisition costs, and higher personnel compensation and marketing expenses, which we anticipate will be slightly offset by our expected cost synergies from our integration with Zynga. As we've mentioned on prior calls, in light of the current backdrop, we have been evaluating cost savings opportunities that can structurally enhance our margins and make our company more efficient and nimble for the long term. After a comprehensive review, we now believe that we can deliver over $50 million of annual savings, which we will begin to execute on this quarter, opportunities include personnel, processes, infrastructure, and other areas, particularly in publishing and corporate function.", "This program is an addition to the over $100 million of annual cost synergies from our combination with Zynga and is not expected to impact the delivery of our robust multiyear pipeline. We expect the GAAP net loss ranging from $704 million to $721 million or $4.40 to $4.50 per share, which assumes the basic share count of 159.8 million shares. We expect our management tax rate to be 18% throughout the year. Now, moving to our guidance for the fiscal fourth quarter.", "We project net bookings to range from $1.31 billion to $1.36 billion, compared to $846 million in the fourth quarter last year. The largest contributor to net bookings are expected to be NBA 2K, Grand Theft Auto Online and Grand Theft Auto V, Empires and Puzzles, Toon Blast, Rollic's hypercasual mobile portfolio, and WWE 2K23. We project recurrent consumer spending to grow approximately 105% and digitally delivered net bookings to increase approximately 70%. Our forecast assumes that 80% of console game sales will be delivered digitally, up from 75% last year.", "We expect GAAP net revenue to range from $1.34 billion to $1.39 billion and cost of revenues to range from $688 million to $708 million, which includes approximately $198 million of amortization of acquired intangibles. Operating expenses are expected to range from $871 million to $881 million. At the midpoint, this represents a 120% increase over last year. This increase reflects the inclusion of Zynga, business acquisition costs, and higher marketing and personnel expenses, which we believe will be slightly offset by the realization of some of our anticipated cost synergies.", "And GAAP net loss is expected to range from $197 million to $214 million, $1.17 to $1.27 per share, which assumes a basic share count of 168 million shares. In closing, while we are disappointed to have lowered our outlook for the year, we are highly confident in our long-term growth potential. We believe that the actions we are taking now will position us to deliver sequential growth and record performance over the next several years, which we anticipate will drive meaningful shareholder value. I'd like to thank all of our stakeholders again for their support.", "Thank you. I'll now turn the call back to Strauss." ] }, { "name": "Strauss Zelnick", "speech": [ "Thanks, Lainie and Karl. On behalf of our entire management team, I'd like to thank our colleagues for their firm commitment to creativity, innovation, and efficiency as we continue to navigate a challenging economic landscape. I'd also like to express our appreciation to our shareholders for their continued support. We'll now take your questions.", "Operator?" ] } ]
[ { "name": "Operator", "speech": [ "Thank you. We will now be conducting a question-and-answer session. [Operator instructions] One moment, please, while we poll for questions. Thank you.", "Our first question is from Eric Handler with MKM Partners. Please proceed with your question." ] }, { "name": "Eric Handler", "speech": [ "Good afternoon, and thanks for the question. Strauss, I wonder if you could talk a little bit about mobile advertising, specifically, have you been able to integrate advertising into Zynga games that previously had not included advertising? And what about the 2K games prior to the acquisition of Zynga? And then secondly, if you could just talk a little bit more about the direct-to-consumer platform with mobile virtual currency purchasing. Besides Empire & Puzzles, how many other games have integrated the DTC capabilities?" ] }, { "name": "Strauss Zelnick", "speech": [ "Thanks, Eric. I appreciate it. To answer your question, we have enhanced advertising within the Zynga portfolio. Certain titles within that portfolio did not have advertising and now do.", "And at 2K, with regards to their mobile titles, there's no change. With regard to console titles, we have a limited amount of advertising, but there's no change there as well. With regard to direct-to-consumer, that's a new initiative for us and for the team at Zynga that's being rolled out modestly. We are seeing early signs of success.", "And obviously, that has a very significant effect on our contribution margins." ] }, { "name": "Eric Handler", "speech": [ "Thank you very much." ] }, { "name": "Operator", "speech": [ "Thank you. Our next question is from Matthew Thornton with Truist Securities. Please proceed with your question." ] }, { "name": "Matthew Thornton", "speech": [ "Hey, good afternoon, everybody. Maybe two if I could. Coming back to mobile. I don't know if this one is for Strauss, but can you give us maybe your higher-level thoughts as you think about the mobile market? And I know it's hard to tease apart macro versus what's going on the user acquisition side with Apple ATT.", "But I guess putting macro aside, if you think about the mobile market over the next couple of years, how do you think about the growth rate of that business? And how are you thinking maybe different about the mix of in-app purchase versus ad revenue or the right genres or new IP versus existing franchises, the right cost structure, there's more opportunity there. Just how are you thinking about that as that market has obviously been very dynamic? And then I have a follow-up, but I'll stop there." ] }, { "name": "Strauss Zelnick", "speech": [ "Well, I'll see how I do it then you can determine what your follow-up is like. So, in terms of the mobile market, look, the reason we were interested in combining with Zynga is we believe that mobile will continue to be the fastest-growing part of the interactive entertainment business, and we still are of that belief. Yes, there's been some year-over-year pressure, which is, in our view, related to the economy primarily and to a lesser extent, probably sort of post-pandemic changes in demand. But we think those are near term and in fact, the trends recently are quite positive in terms of demand.", "And Zynga has the best portfolio of mobile games in the business. Most of our competitors, good as they may be, have one, two, three, four titles that matter, we have a whole lot more than that. We have these forever franchises. And we also are blessed with phenomenal leadership in that division.", "So, we remain highly optimistic about the growth in the future. I'm not sure I can give you an exact growth rate, but I do think it will continue to be a rapidly growing part of the business. It also diversifies us. We attach a different audience on the mobile side, skews more female, it skews older.", "And by having a diverse company that has console and PC and mobile titles, we address every part of the interactive entertainment business, and we find ourselves as one of the top three pure plays in the business. With regard to our expectations about in-app purchases and ad revenue going forward, look, in-app purchases still are only relevant for about 10% of the market for 90% of the users, that's not something they're interested in. So, if you're selective and careful about how you target it, advertising makes all the sense in the world, because we ought to be able to find a way to monetize all of the viewing, all of the engagement, not just the engagement that leads to spending, particularly because we're not in the toll booth business, we're in the entertainment business. And we want to be able to deliver titles that consumers can enjoy without regard to spending.", "Spending should enhance the experience for sure and it does. But in order to be commercial, we should have a robust advertising business that's not intrusive, that's positive for the consumer than consumer experience and that's exactly what Zynga is building. With regards to new IP -- I'll finish your, I wrote down your questions. So, let me just grab you on new IP, and then I'll stop talking.", "On new IP, that remains the biggest challenge in the mobile business. And making new hits in mobile is really, really, really hard. We're working on a bunch of titles about which we're very excited, but it's super hard to make hits. Hit ratios in the business are low." ] }, { "name": "Matthew Thornton", "speech": [ "Yeah. Just one quick follow-up, Strauss, and that's really impressive that you got all those, by the way. I was keeping note. So, that's impressive.", "On the -- any -- you talked about the next couple of years getting back to record bookings, which you've talked about for a while now. I think you talked about sequential growth. Does that apply to fiscal 2024? I guess just any early thoughts about how we can start thinking about fiscal 2024. And then I'll hop back in the queue.", "Thanks again." ] }, { "name": "Strauss Zelnick", "speech": [ "What we said today is we expect sequential growth and record results over the next couple of years, and that remains our expectations. We'll give you exact outlooks, including guidance in the coming months." ] }, { "name": "Operator", "speech": [ "Thank you. Our next question is from Matthew Cost with Morgan Stanley. Please proceed with your question." ] }, { "name": "Matthew Cost", "speech": [ "Hi, everybody. Thanks for taking the questions. Could you go into a little more detail about where you saw the strength in PC and console versus where some of the softness was? Was it more on recurrent consumer spending or unit sales? And how does that compare to past periods of macro weakness that you've seen?" ] }, { "name": "Karl Slatoff", "speech": [ "So, in terms of the strength of PC and console, really our strength has been in the catalog. I mean, what we have said before is that -- what we've observed over this period of time is that folks that -- the big established franchises, particularly those that have been discounted did quite well over the last quarter and that was our experience as well. So, that part of the business did very well for us. A little bit tougher on sort of new releases that are still establishing their player basis.", "And when folks who're making difficult choices between games if they can afford to play, they're obviously going to gravitate toward things that they know that they're more familiar with. So, a little bit tougher on the new releases for the younger games. In terms of RCS, we already said on the mobile side, our in-app purchases were in line with expectations, and we continue to buck the trend in advertising. And we did experience some softness on the PC and console side in RCS.", "And again, that dynamic is what we expect that dynamic in this kind of economic environment. So, maybe it was a little bit more exacerbated than we originally expected, but we are continuing to see that." ] }, { "name": "Matthew Cost", "speech": [ "Great. Thank you. And then just on the cost savings side, is the cost reduction program, is it particularly focused on the mobile business or various areas? Or is it kind of just general corporate overhead?" ] }, { "name": "Lainie Goldstein", "speech": [ "It's a combination of our corporate departments and also some of our publishing functions. So, it includes all of our labels. And it's outside of the $100 million plus in synergies between Take-Two and Zynga that we've talked about already that has to do with the acquisition of Zynga." ] }, { "name": "Matthew Cost", "speech": [ "Great. Thank you." ] }, { "name": "Operator", "speech": [ "Thank you. Our next question is from Drew Crum with Stifel. Please proceed with your question." ] }, { "name": "Drew Crum", "speech": [ "OK. Thanks. Hey, guys, good afternoon. Just sticking with Zynga, I think you mentioned in your preamble that mobile trends had improved, maybe a little bit more detail there? And can you comment on whether Zynga's net bookings were up quarter on quarter? And if you've seen this improving trend line continue into the current quarter? And then I have a follow-up." ] }, { "name": "Karl Slatoff", "speech": [ "Yes. I think the way to characterize it is we have seen some improving trends and the way to describe it is it's really been some improvement off of the lows that we've seen in the past." ] }, { "name": "Drew Crum", "speech": [ "OK. And then, Strauss, some of your competitors have suggested the market is shifting toward these mega franchises. Curious if you agree with that premise. And does this in any way if you do, impact how you invest across your development pipeline? And are you inclined to hold back with the launch of titles until market conditions become more favorable? Thanks." ] }, { "name": "Strauss Zelnick", "speech": [ "Yes, we emphatically agree. The strategy of our company is to make hits across the board. We believe that we have the best collection of owned intellectual property across console, PC, and mobile in the marketplace. And our approach has always been to bring out new iterations of beloved franchises.", "We have 11 franchises that have each sold over 5 million units in an individual release, well over 65 that have sold over 2 million units in an individual release. I don't think anyone else can say that. And look, we have the highest-grossing entertainment property ever created of any sort of within our four walls, thanks to the folks at Rockstar. So, that is very much our approach.", "And the truth of the entertainment business is, whether you like it or not, the entertainment business is a top 20 business on a good day and top 10 business on a less good day. We need to be there and that has always been our strategy." ] }, { "name": "Drew Crum", "speech": [ "Thanks, guys." ] }, { "name": "Operator", "speech": [ "Thank you. Our next question is from Omar Dessouky with Bank of America. Please proceed with your question." ] }, { "name": "Omar Dessouky", "speech": [ "Hi, everybody. So, I'm looking at your grid, the grid of games that you plan to release from fiscal '23 to fiscal '25, and next to mobile, you have 38 games. And it looks like 10 of them were not Zynga Games. Are you still confident that you can get all those games to scale? And is $100 million in annual bookings still the level that you aspire to as it was for Zynga's forever franchises prior to the acquisition? And then I have a follow-up, please." ] }, { "name": "Karl Slatoff", "speech": [ "Sure. I'll take that one. So, I would say, the aspiration for any title that we released in the mobile context would be the $100 million of annual bookings. But I can tell you for sure that that won't be the case, with that entire release.", "So, our expectation going in, again, the -- how we release mobile is you take it out, you see how it does, you invest a little bit more, you revamp it, you rebalance it, you invest a little bit more, and then you grow from there. What we know that there are going to be titles that we put out that will fall on the mobile side. But the idea is that we need to put the titles out in order to find the ones that can reach that $100 million level or plus. So, that is certainly -- that is the strategy, and that's going to be our path going forward, so that's still our expectation." ] }, { "name": "Omar Dessouky", "speech": [ "OK. And do you think versus when you acquired Zynga, it's going to be harder to get to that $100 million threshold, and will that affect kind of the number of new games that you guys will be potentially launching over the next year or two?" ] }, { "name": "Strauss Zelnick", "speech": [ "No, I don't think the business has gotten easier or harder. I think it's pretty much what we expected. As I said, hit ratios in mobile are low. We feel really good about what's being developed." ] }, { "name": "Omar Dessouky", "speech": [ "And I have one quick follow-up here. So, some experts have noticed that Google has begun sending rejection notices for ads exposures and formats that are not compliant with its new, better ads experience policy. This policy disallows interruptive interstitial ads among other practices, and it was announced back in July. So, are you starting to see the effects of this policy for Rollic hypercasual games on Android?" ] }, { "name": "Strauss Zelnick", "speech": [ "We are not. We're largely compliant." ] }, { "name": "Omar Dessouky", "speech": [ "OK. That's my question. Thank you." ] }, { "name": "Operator", "speech": [ "Thank you. Our next question is from Mario Lu with Barclays. Please proceed with your question." ] }, { "name": "Mario Lu", "speech": [ "Great. Thanks for taking the question. The first one is on RCS, this quarter in terms of the growth came in a bit below expectation. You mentioned that Zynga was in line and the weakness was from console PC.", "Any franchise to highlight that kind of came in below expectations or any factors that led to this underperformance?" ] }, { "name": "Lainie Goldstein", "speech": [ "No, there's nothing really to point out. It was really across several of our console and PC games." ] }, { "name": "Mario Lu", "speech": [ "OK. Got it. And then just a follow-up on NBA 2K. You mentioned that MyTEAM's players were up 50% year on year, which is a fairly large amount.", "So, are there any kind of main drivers to highlight there? And were these gains partially offset by declines potentially in MyCAREER mode? Or was it mostly additive? Thanks." ] }, { "name": "Karl Slatoff", "speech": [ "Yes. I wouldn't say that it would necessarily offset by declines in MyCAREER mode. I think that the goal for NBA is to -- and how we've been growing over the years and how our path to growth in the future is to get more players involved in more modes. So, driving across all of the modes.", "Now, we know that we're not going to get everybody to play the game 100% across every single mode, but that is certainly the goal because the more engagement, the better ultimately the RCS performance is for those titles and also the more loyal the audience and it's a much better path for us to grow. So, our focus has really been on getting players across those modes, and we've had some great success, as you can see on -- not just the MyCAREER area, but across the -- in MyTEAM area but across the board." ] }, { "name": "Mario Lu", "speech": [ "Great. Thank you." ] }, { "name": "Operator", "speech": [ "Our next question is from Eric Sheridan with Goldman Sachs. Please proceed with your question." ] }, { "name": "Eric Sheridan", "speech": [ "Thank you for taking the questions. Maybe two if I could. First, on the mobile front, obviously, we've lapped the launch of IDFA. And I wanted to get your perspective on whether you feel like in terms of driving a mixture of user growth and in-game monetization and in-game engagement.", "Whether you've successfully sort of realigned your marketing strategy in mobile to address a post-IDFA world? Or whether you're still thinking it's sort of a work in progress so that once demand is back in the mobile landscape, you can sort of capitalize on it? That'd be number one. And number two, a competitor of yours talked about withdrawing or pulling back from the mobile shooter market earlier in the earnings season. I'd love to get your perspective on how you think about developing, implementing, and sort of launching AAA titles either alongside traditional PC console titles in the mobile format. Or how we should be thinking about even mobile-only formats of what historically have been AAA-type quality titles? Thanks so much." ] }, { "name": "Karl Slatoff", "speech": [ "So, in terms of the effect of IDFA, we've been living that for quite a while now. And I would certainly say that that has stabilized. And I don't think we're expecting -- there's no surprises down the road that we're expecting at this point. And there's been some improvement in how we are able to target since then.", "So, I think there's been some adjusting going on. I don't want to characterize that as we're sort of back to where we work because that would be a mischaracterization. But we certainly feel like we've got our hands around it, and then we're going in the other direction. So, that's positive in terms of our ability to target.", "I would also mention, too, that in the hypercasual space, it is a much wider funnel and targeting is not -- it doesn't require as much targeting as it does in the normal mobile business. So, that's also helped our ability to attract new audiences." ] }, { "name": "Strauss Zelnick", "speech": [ "Yes. And on the second part of the question, we've said all along, and I said it today, the hit ratios in the mobile business are very low. And when we announced the combination with Zynga, the most current question was, well, obviously, you're going to take to IP to mobile is not great. And my answer was that is potentially a very exciting opportunity, but it's really, really hard to do.", "One of our competitors has done it really well with the title, and we're impressed by that and admire it. But we have a healthy respect for how difficult it is. The vast majority of hits in mobile are native to mobile. They are not based on existing IP.", "They do not come from a console. I'm very optimistic that we're going to give it a try, and I'm really hopeful that we'll do well with it. But it's not a slam dunk." ] }, { "name": "Eric Sheridan", "speech": [ "Thanks so much." ] }, { "name": "Operator", "speech": [ "Thank you. Our next question is from Doug Creutz with Cowen and Company. Please proceed with your question." ] }, { "name": "Doug Creutz", "speech": [ "Hey, thanks. Just in your commentary about some of the new release underperformance, you're essentially attributing it to macro or at least partially due to macro, but there's been two other companies, who have sort of had the same problem. You have several other patters that have had record launches in the quarter, and it seems from the data that's been released, overall console spending was pretty stable versus a year ago. What makes you think the issue is macro-related versus this is just the way the video game industry is going to be from now on? And if that's case, how does that cause you to rethink your pipeline going forward?" ] }, { "name": "Strauss Zelnick", "speech": [ "It's a really good question. What causes us to believe that it's macro-related is that we don't just pull our expectations out of the year. We based our expectations on prior performance of similarly rated titles within that genre. And so, in the case of certain of these titles, we've had great scores and terrific critical acclaim, and yet the unit sales were lower than expected on an apples-to-apples basis by comparison to prior releases and prior periods.", "So, that is -- that sort of leads us to believe, OK, that's probably a macro result. But I don't mean to imply for a minute that quality doesn't matter, quality does matter, and the biggest titles will obviously continue to perform with regard to market conditions. So, what you're saying is, does that mean you should only put out blockbusters and anything that's short of an expected blockbuster, you can't put out. I think the answer is semi-yes.", "We can't put out something that we think is going to be a B title. It's never been the case. We have to put out AAA titles. However, not everything is ever going to be Grand Theft Auto.", "It just isn't going to be that way. And we have shown that we have the ability to launch new franchises. In the case of Borderlands or more recently, Tiny Tina's Wonderlands. Going back further BioShock, and from Rockstar, Red Dead Redemption.", "These are new intellectual properties, and we were willing to take the risk and support our creative team's vision and passion, and we've been able to create big hits. That's not changing. And there's nothing in our recent performance that leads us to say we shouldn't invest in this way to the contrary. I believe we should continue to invest in this way.", "But right now, is the market more selective? Sure. In tougher times when food and fuel is more expensive and people are a little worried, they're going to be more selective. And when they're more selective, they're going to go to promotional titles and they're going to go to blockbusters." ] }, { "name": "Doug Creutz", "speech": [ "Thanks, Strauss." ] }, { "name": "Operator", "speech": [ "Thank you. Our next question is from Clay Griffin with MoffettNathanson. Please proceed with your question." ] }, { "name": "Clay Griffin", "speech": [ "Thanks. Good evening. It sounds like this has been mostly in monetization, as I apologize if I missed it, but it would be helpful just to get a sense of overall engagement in the quarter as a metric for the market right now. It sounds like apart from the new releases that some of your base titles actually had pretty solid engagements.", "Is that fair?" ] }, { "name": "Karl Slatoff", "speech": [ "Engagement has definitely been strong across the board. And I would characterize it certainly as a modernization -- as a monetization issue. And we've seen that not just on the PC or console business, but also in the mobile business as well. So, that is specifically engagement that seems to be -- is not the issue for us." ] }, { "name": "Clay Griffin", "speech": [ "Right. And just a follow-up on that. Is there anything that you guys have seen to suggest that Game Pass may be changing the way people engage with new titles or just a sense of if that has had an impact in terms of engagement in the quarter over the last several quarters?" ] }, { "name": "Strauss Zelnick", "speech": [ "I don't really think so. I mean, we don't make our front-line titles available day and date. We're thrilled to be in business with subscription services for our catalog titles at the appropriate time. We think that's the right way to support subscription.", "And subscription is still a relatively small business -- you're talking about businesses. I think the last announcement of Game Pass was 25 million subs. We're not talking about huge broad-based business yet. And in any case, no, I don't believe the business is cannibalizing our business." ] }, { "name": "Clay Griffin", "speech": [ "OK. Thank you." ] }, { "name": "Operator", "speech": [ "Thank you. Our next question is from Martin Yang with Oppenheimer. Please proceed with your question." ] }, { "name": "Martin Yang", "speech": [ "Hi. Good afternoon. Thank you for taking my question. I have two.", "Can you first give us more details on Zynga's direct-to-consumer effort? Do you see a certain region or user cohort responded more strongly to the channel?" ] }, { "name": "Strauss Zelnick", "speech": [ "No, we're not seeing any regional differences, particularly. I'm not sure we've been looking for them though, because it's really early still." ] }, { "name": "Martin Yang", "speech": [ "Got it. Thank you. My second question is on the impact of more discounting in December. And how would you characterize the environment in the March quarter, is discounting still affecting negatively on the guidance for March?" ] }, { "name": "Strauss Zelnick", "speech": [ "I don't think that discounting, in particular, is driving our expectations for the quarter. What's driving our expectations for the quarter is just our perception of market demand." ] }, { "name": "Martin Yang", "speech": [ "Got it. Thank you, Strauss." ] }, { "name": "Operator", "speech": [ "Thank you. Our next question is from Matti Littunen with Bernstein. Please proceed with your question." ] }, { "name": "Matti Littunen", "speech": [ "Thank you. Just wondering if you changed your typical marketing approach for these new titles that launched in the holiday season. And if not, do you plan to do that in the current quarter in response to what you're seeing in the market trends you discussed? Thank you." ] }, { "name": "Strauss Zelnick", "speech": [ "No, we didn't change our approach to marketing. Our marketing approach varies title by title and reflects our view at any given time for what the opportunity is and in the context of the cost of the marketing programs. But if your question is, did we create a sort of self-inflicted wound by somehow spending less, for example, on marketing and getting worse results? The answer is no. But equally, it's not like we've created a self-inflicted wound by spending more on marketing and not getting results.", "We tailored the marketing to the opportunity. Unfortunately, the opportunity set was a little smaller than we thought." ] }, { "name": "Matti Littunen", "speech": [ "Very clear. Thanks." ] }, { "name": "Operator", "speech": [ "Thank you. Our next question is from Mike Hickey with Benchmark. Please proceed with your question." ] }, { "name": "Mike Hickey", "speech": [ "Hey, Charles, Karl, Lainie, thanks for taking my questions. Two for me. Just curious, specifically, I know you haven't called out titles, but for the quarter on the weakness in recurrent spend the Grand Theft Auto Online and NBA 2K live service, did they meet your expectations for the quarter? And have you changed your forward view of growth from those games? Obviously, they're a big portion of your ex-mobile live service business. And the second question, on your cost reduction plan, $50 million, do you feel like that's sort of a starting point, or you sort of grow that as you think about it more over time? Or do you feel like that's enough? Thanks, guys." ] }, { "name": "Lainie Goldstein", "speech": [ "So, for the quarter, our NBA business was in line with our expectations. Our other titles were a bit lower than what we had expected. As I mentioned, our PC and our console business for RCS was overall lower than what we had expected. And for the $50 million, this is like an ongoing cost reduction initiative.", "So, we expect this number will grow over time. So, efficiency is one of our core tenants as a company. So, we're always looking for efficiency throughout the organization. And these are permanent and structural changes to the organization's overall corporate overhead structure, so these are expenses that we expect to reduce our overall structure over time." ] }, { "name": "Mike Hickey", "speech": [ "Thanks, Lainie." ] }, { "name": "Operator", "speech": [ "Thank you. Our next question is from Jason Bazinet with Citi. Please proceed with your question." ] }, { "name": "Jason Bazinet", "speech": [ "I just had a slightly longer-term question. Can you guys talk a little bit about whether or not you're a believer in sort of cloud gaming moving to the fore over the next five years? And if so, what implications, if any, does it have on how you think about the business, your business? Thanks." ] }, { "name": "Strauss Zelnick", "speech": [ "Yes. I mean, we have been believers in our gaming. We were one of the first licensees, if not first licensee -- licensor, sorry, to Stadia to support that project. But remember, cloud gaming is a technology.", "It's not a business model. It's a distribution technology. And our view is broader distribution is always a good thing in the entertainment business. If we can reach more consumers with our properties, we're happy to do it as long as the terms make sense.", "And I think broader distribution over time probably benefits us in any number of ways, including the cost of distribution, which I believe will go down over time. That said, I've never felt like cloud gaming would be -- would represent a seismic change. Because I think if you're prepared to pay $60 or $70 for front-line title, you're also prepared to buy console. And I think Stadia found that out.", "So, bringing high-quality titles to consumers, who don't have consoles will probably have an effect around the edges, but I don't think it will be a revolution in the business, I think it will be more an evolution in the business. And there's still technical challenges to be addressed." ] }, { "name": "Jason Bazinet", "speech": [ "Very helpful. Thank you." ] }, { "name": "Operator", "speech": [ "Thank you. Our next question is from Matthew Thornton with Truist Securities. Please proceed with your question." ] }, { "name": "Matthew Thornton", "speech": [ "Yes. Thanks. Hey, Strauss, another big-picture question. As you look out over the next several years, maybe in the next five to 10 years, I'm curious kind of your thoughts on how AI can impact the business good or bad.", "Or again, what you see on the horizon as potential disruption opportunity? Just any thoughts there would be helpful, particularly how you're thinking about AI. Thanks again." ] }, { "name": "Strauss Zelnick", "speech": [ "You know, I'm the first person to be skeptical of other people's side. And I would like to note that AI stands for artificial intelligence, and there is no such thing as artificial intelligence. All that said, I'm really excited about what we're seeing right now with ChatGPT and other leaps forward in artificial intelligence and machine learning. And I do think that we'll be and others will be creating tools that will enhance our development and probably reduce some of the costs for what we have to do today.", "But I don't think you're going to see it have an effect on the overall cost structure of the business, because I think it will just raise the bar. I think any time you make things easier, we're going to want to do more and our teams will want to do more. The belief among college students, the ChatGPT is not going to allow them to just make a query in sending their homework. The problem is -- the question is described what actually happened on the night of Paul Revere's ride if that's the question.", "And everyone gets the same question, which you do in class, and everyone uses ChatGPT, whoops, everyone's going to submit the same assay last time I checked. And so, ChatGPT is today's hand calculator. When I was a kid, there was no such thing. I hate to admit, but it's true.", "So, I had to do math longhand. And then hand calculators came along and parents were up in arms that thought, oh, kids won't have to learn math anymore. And the answer is yes, you still have to learn math, turns out. You absolutely have to learn math.", "Like you have a tool that makes it easier to do. And ChatGPT is the same thing. We are ushering in a very exciting era of new tools, and they're going to allow our teams and our competitors' teams to do really interesting things more efficiently. So, we're going to want to do more.", "We're going to want to be even more creative. And no, it's not going to allow someone to say, please develop the competitor to Grand Theft Auto that's better than Grand Theft Auto, and then they will just send it out and ship it digitally and then that will be that. People will try, but that won't happen." ] }, { "name": "Matthew Thornton", "speech": [ "OK. Maybe I'll sneak in a second one if I could, as well. Just really around productivity. Obviously, you guys are pretty far along in the return to office.", "When you step back and think about that big pipeline and all the projects that you've laid out, how do you feel like things are progressing from a productivity standpoint now that, again, you're pretty far along in the return to office? Thanks again." ] }, { "name": "Strauss Zelnick", "speech": [ "We've been pretty flexible about return to office, and our teams have been great. One of the many wonderful things about working at Take-Two, the amazing people that we work with. We're more than 11,000 people strong around the world. And our attrition rate remains much, much lower than the industry average.", "And I think that's because -- this is an extraordinary place to work where we seek the best and the brightest on both the business and the creative side, and we encourage people to pursue their passions and excellence at the same time. So, productivity is strong. Performance is strong. We probably never had a period this long with all of our titles showing up or performing.", "I believe in the last two years, we've had the best reviews and the best scores we've ever had. And that's why the business challenges are a bit frustrating because our people are delivering. And we will deliver over time as long as we keep doing that, and that's the plan." ] }, { "name": "Operator", "speech": [ "Thank you. There are no further questions at this time. I'd like to turn the floor back over to Strauss Zelnick for any closing comments." ] }, { "name": "Strauss Zelnick", "speech": [ "Thank you for joining us today. I wish we were giving you better news across the board. There is so much good news here, and we're really proud of it. As I said just a minute ago, the thing we're most proud of is our phenomenal colleagues all around the world to whom all of us are so grateful.", "And as for our results, we plan to do better. We thank you for your support." ] }, { "name": "Operator", "speech": [ "[Operator signoff]" ] } ]
TTWO
2020-08-03
[ { "description": "", "name": "Hank Diamond", "position": "Executive" }, { "description": "", "name": "Strauss Zelnick", "position": "Executive" }, { "description": "", "name": "Karl Slatoff", "position": "Executive" }, { "description": "", "name": "Lainie Goldstein", "position": "Executive" }, { "description": "", "name": "Mario Lu", "position": "Analyst" }, { "description": "", "name": "Mike Ng", "position": "Analyst" }, { "description": "", "name": "Brian Fitzgerald", "position": "Analyst" }, { "description": "", "name": "Colin Sebastian", "position": "Analyst" }, { "description": "", "name": "Eric Handler", "position": "Analyst" }, { "description": "", "name": "Drew Crum", "position": "Analyst" }, { "description": "", "name": "Matthew Thornton", "position": "Analyst" }, { "description": "", "name": "Matt Cost", "position": "Analyst" }, { "description": "", "name": "Mike Hickey", "position": "Analyst" }, { "description": "", "name": "Eric Sheridan", "position": "Analyst" }, { "description": "", "name": "Todd Juenger", "position": "Analyst" }, { "description": "", "name": "Doug Creutz", "position": "Analyst" }, { "description": "Jefferies -- Analyst", "name": "Alex Giaimo", "position": "Analyst" }, { "description": "Bank of America Merrill Lynch -- Analyst", "name": "Ryan Gee", "position": "Analyst" } ]
[ { "name": "Operator", "speech": [ "Greetings, and welcome to Take-Two first-quarter fiscal year 2021 earnings conference call. [Operator instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr. Hank Diamond.", "Thank you. You may begin." ] }, { "name": "Hank Diamond", "speech": [ "Good afternoon. Welcome, and thank you for joining Take-Two's conference call to discuss its results for the first quarter of fiscal year 2021 ended June 30, 2020. Today's call will be led by Strauss Zelnick, Take-Two's chairman and chief executive officer; Karl Slatoff, our president; and Lainie Goldstein, our chief financial officer. We will be available to answer your questions during the Q&A session following our prepared remarks.", "Before we begin, I'd like to remind everyone that statements made during this call that are not historical facts are considered forward-looking statements under federal securities laws. These forward-looking statements are based on the beliefs of our management, as well as assumptions made by and information currently available to us. We have no obligation to update these forward-looking statements. Actual operating results may vary significantly from these forward-looking statements based on a variety of factors.", "These important factors are described in our filings with the SEC, including the company's most recent annual report on Form 10-K and quarterly report on Form 10-Q, including the risks summarized in the section entitled risk factors. I'd also like to note that unless otherwise stated, all numbers we will be discussing today are GAAP and all comparisons are year over year. Additional details regarding our actual results and outlook are contained in our press release, including the items that our management uses internally to adjust our GAAP financial results in order to evaluate our operating performance. Our press release also contains a reconciliation of any non-GAAP financial measure to the most comparable GAAP measure.", "In addition, we have posted to our website a slide deck that visually presents our results and financial outlook. Our press release and filings with the SEC may be obtained from our website at www.take2games.com. And now I'll turn the call over to Strauss." ] }, { "name": "Strauss Zelnick", "speech": [ "Thanks, Hank. Good afternoon, and thank you for joining us today. I'd like to start by expressing, on behalf of our entire management team, our deepest sympathies for those who have been and continued to be affected by this pandemic. We're immensely grateful to everyone who serves on the front lines caring for people in need and helping the world navigate this crisis.", "Turning to our business. Fiscal 2021 is off to a terrific start with first quarter operating results that significantly exceeded our expectations, including fiscal first-quarter records for GAAP net revenue and net bookings. Our outstanding results were driven by the outperformance of NBA 2K20, Grand Theft Auto V and Grand Theft Auto Online, Red Dead Redemption 2 and Red Dead Online and Social Point's mobile games. I remain incredibly proud of our entire organization, which exemplifies our core tenets of creativity, innovation and efficiency, and continues to deliver industry-leading entertainment experiences to our audiences during these challenging times.", "In the first quarter, NBA 2K20 significantly outperformed expectations and recently achieved a franchise milestone of $1 billion in net bookings since launch. Consumer engagement with NBA 2K continues to increase with daily active users growing 82%, MyCAREER users growing 78% and MyTeam users up a remarkable 108% as compared to the first quarter of last year. Recurrent consumer spending in NBA 2K grew 126% to a new record and remained the largest contributor to that part of our business. To date, NBA 2K20 has sold an over 14 million units, up over 18% compared with NBA 2K19 in the same time frame.", "We expect that lifetime units, recurrent consumer spending and net bookings for NBA 2K20 will be the highest ever for a 2K sports title. Nearly seven years after its initial release, sales of Grand Theft Auto V continue to exceed expectations. The title has now sold in nearly 135 million units and remains the standard bearer of the current console generation. In addition, recurrent consumer spending on Grand Theft Auto Online outperformed our forecast, growing 155% to a new record.", "In April, Rockstar Games released Gerald's Last Play, a series of six new contact missions for Grand Theft Auto Online. The first quarter was the second-best period ever for new player acquisitions since the title's launch in 2013. The unprecedented player volume trend started with the superlative performance of The Diamond Casino & Resort update in July 2019 and drove record average multiplayer MAUs through August 2019, persisted with sequential records in average multiplayer MAUs from December 2019 through May 2020. We now expect Grand Theft Auto Online to establish a new net bookings record in fiscal 2021.", "In addition, the partnership with Epic Games Store for Grand Theft Auto V was offered free for a week in mid-May, was a contributing factor to the strong performance of Grand Theft Auto Online and did not come at the expense of paid sales of the title. In fact, Grand Theft Auto V sold through more units in the period than any first quarter since the title's launch in 2013. And in the six weeks following the Epic Store promotion, Grand Theft Auto V sold more units than in the same period in any previous year. Red Dead Redemption 2 also outperformed, and to date has sold in more than 32 million units worldwide.", "The title sold through twice as many units compared to last year. Engagement with and recurrent consumer spending on Red Dead Online continues to increase. The title acquired nearly twice as many users year over year, and average multiplayer MAUs grew 50%. Net bookings from Red Dead Online surpassed expectations, growing 118%, excluding digital content bundled with the Red Dead Redemption 2 Premium Editions.", "During the first quarter, Rockstar Games added new content to Red Dead Online including six new maps to showdown mode. Through the coming year, Rockstar Games will continue to support both Red Dead Online and Grand Theft Auto Online with more content updates to keep new and returning players excited and engaged. Borderlands 3 continues to expand its audience and to date has sold in over 10.5 million units worldwide, up 69% over Borderlands 2 in the same period. During the first quarter, 2K and Gearbox launched Bounty of Blood.", "The third of four announced paid campaigns that are included in the Borderlands 3 Super Deluxe Edition and the season pass, or are available for purchase separately upon release. The season pass attach rate for Borderlands 3 continues to be the highest in 2K's history, and there's more content coming. In the period, MAUs grew as sales continued at a steady pace with the consistent release of free and paid content. We attribute this ongoing success in part to 2K's and Gearbox Software's continued efforts to support Borderlands 3 as a live service game, which should continue to benefit the title and series over the long term.", "Private Division's critical and commercial success, The Outer Worlds, outperformed expectations in the first quarter and has now sold in 2.8 million units. On June 5, the title was released for Nintendo Switch. In addition, Private Division launched Disintegration, a new sci-fi first-person shooter experience that blends real-time tactical elements for PlayStation 4, Xbox One and PC. During the first quarter, 2K released Mafia II Definitive Edition and Mafia III Definitive Edition as part of the Mafia Trilogy, which combines all three previously released Mafia titles into a single package for PlayStation 4, Xbox One and PC, curated by 2K's Hangar 13 studio.", "Mafia I Definitive Edition will become available on September 25 as Karl will discuss shortly. 2K also bolstered our offerings for Nintendo Switch with some of our most beloved and successful franchises, including Bioshock: The Collection, The Borderlands Legendary Collection and the XCOM 2 Collection. In addition, 2K and Firaxis Games released XCOM: Chimera Squad, an all-new stand-alone title in the award-winning, turn-based XCOM series for PC. Our first-quarter results were also enhanced by a variety of other offerings, led by Social Point's Sid Meier's Civilization VI and the WWE series.", "During the first quarter, recurrent consumer spending exceeded expectations, growing 127% to a new record and accounted for 65% of net bookings. In addition to virtual currency for NBA 2K, Grand Theft Auto Online and Red Dead Online, recurrent consumer spending was enhanced by the following offerings. In the free-to-play category, Social Point outperformed expectations, growing 54% to a fiscal first-quarter record, driven primarily by the exceptional performance of its two biggest games, Dragon City and Monster Legends. The studio continues to invest in its broad and innovative pipeline of more than 10 new games planned for launch in the coming years.", "WWE SuperCard also outperformed during the first quarter, growing 54%. And the title has now been downloaded more than 21 million times and remains 2K's highest grossing mobile title. And NBA 2K Online in China remains a significant contributor to our results. The title is the No.", "1 PC online sports game in China with nearly 50 million registered users. Add-on content grew 135% and outperformed expectations, led by offerings for the Borderlands franchise, Sid Meier's Civilization VI and XCOM 2. As a result of our outperformance in the first quarter, along with a higher forecast for the balance of the year, we're raising our outlook for fiscal 2021, which is well under way to be another great year for Take-Two. Looking ahead, our company has the strongest development pipeline in its history, including sequels from our biggest franchises, as well as exciting new IP.", "We've made great strides to increase the scale of our enterprise, and our current pipeline is more than double what it was five years ago in terms of number of games, including 54% internally developed titles and 46% externally developed titles. In closing, we continue to prepare for our industry's forthcoming transition to a new console cycle, which will provide our world-class development teams with a better platform on which to captivate and engage our audiences. Our company remains superbly positioned, creatively, operationally and financially to capitalize on the many positive trends in our industry and to deliver returns for our shareholders over the long term. I'll now turn the call over to Karl." ] }, { "name": "Karl Slatoff", "speech": [ "Thanks, Strauss. I'd like to begin by thanking our teams for delivering an excellent start to the year. The work being accomplished across our company is a shining example of what can be achieved through our culture of collaboration, which is more important than ever during these challenging times. I'll now discuss our recent and upcoming releases.", "On July 1, Private Division, in partnership with the European Space Agency, launched a new update for Kerbal Space Program for PC-entitled Shared Horizons. The update, which will also be available later this year on consoles, celebrates ESA's outstanding contribution to space exploration and is free for all players of the critically acclaimed, physics-based space simulation game. In addition, Private Division's new development studio, Intercept Games, remains hard at work on Kerbal Space Program 2, which is expected to launch in the fall of 2021. On July 23, Firaxis Games released Ethiopia Pack as part of the bimonthly release of six downloadable content packs for the all-new Sid Meier's Civilization VI New Frontier Pass for PlayStation 4, Xbox One, Nintendo Switch and PC.", "Later this year, the New Frontier Pass will come to mobile platforms, and each path will also be available for individual purchase. On July 28, Rockstar Games released The Naturalist, a massive new update to Red Dead Online, featuring a new frontier pursuit that will introduce players to the secrets of naturalism as part of an all-new role, plus in a new Outlaw Pass, tons of community-requested features and fixes and much more to play and discover in months to come. Launch date for The Naturalist was Red Dead Online's best day ever outside of the holiday period, and the update continues to perform very well. On August 21, 2K will release PGA Tour 2K21 for PlayStation 4, Xbox One, Nintendo Switch, PC and Stadia.", "Developed by HB Studios, PGA Tour 2K21 will feature PGA professional Justin Thomas on the cover, officially licensed pro players, courses and gear, realistic course scanning, play-by-play commentary by Luke Elvy and Rich Beem, a new PGA TOUR Career Mode, online and local multiplayer, course and player customization and online societies. On September 24, 2K will release the next annual offering from our flagship NBA 2K series for PlayStation 4, Xbox One, Nintendo Switch, PC and Stadia. With extensive improvements, best-in-class graphics and gameplay, competitive and community online features and deep varied game modes, NBA 2K21 will offer a one of a kind immersion into all facets of NBA, basketball and culture. In addition, NBA 2K21 will launch this holiday season for next generation platforms, providing unparalleled graphics and loading speeds and will once again redefine the standards for sports simulations.", "Five-time NBA all-star in Portland Trailblazer standout, Damian Lillard, will be on the cover for the current generation versions of NBA 2K21 and the 2019 First Overall Pick and consensus National College Player of the Year, Zion Williamson of the New Orleans Pelicans will be on the cover for the PlayStation 5 and Xbox Series X releases. NBA 2K21 will introduce several initiatives to bridge the two console generations of the game, including MyTeam cross-progression and a shared VC wallet within the same console families. In addition, NBA Legend, Kobe Bryant's lifetime achievement of basketball excellence will be celebrated with the NBA 2K21 Mamba Forever Edition, which will provide players with seamless access to both current and next-generation versions of the game. On September 9, Private Division will release Peril on Gorgon, the first narrative expansion for their award-winning RPG, The Outer Worlds from Obsidian Entertainment.", "In this expansion, players will discover a lawless den of monsters and marauders on the Gorgon Asteroid, and uncover a mystery that will change the Halcyon colony forever. Peril on Gorgon is the first of two narrative expansions that can be purchased individually or bundled at a discount in The Outer World's Expansion Pass. On September 18, 2K will release WWE 2K Battlegrounds, a completely new WWE gaming experience that will feature arcade-style brawling action for PlayStation 4, Xbox One, Nintendo Switch, PC and Stadia. Featuring a roster of more than 70 WWE superstars and legends at launch with additional superstars to be released thereafter.", "WWE 2K Battlegrounds is now available for preorder in digital formats and at participating retailers. September 25, 2K will release Mafia I Definitive Edition for PlayStation 4, Xbox One and PC in the Mafia Trilogy collection, which features all three previously released mafia titles. For the trilogy, Mafia I is being completely remade from the ground up, including new technology, voice acting, game mechanics and more. In the coming weeks, 2K and Gearbox will have more to share on their upcoming content releases to support and further expand the audience for Borderlands 3.", "Rockstar also announced an upcoming summer update to Grand Theft Auto Online, and both Grand Theft Auto Online and Red Dead Online will receive major updates later this fiscal year, featuring an extension to existing Frontier Pursuits for Red Dead Online, as well as Grand Theft Auto Online's biggest update ever, featuring a new take on heists in a new location. Throughout fiscal 2021, we will continue to support our titles with innovative post-launch content that drives engagement and recurrent consumer spending. In addition, Social Point and 2K will continue to broaden our offerings for mobile devices. Looking ahead to fiscal year 2022, Rockstar Games also announced that they will bring their beloved and iconic Grand Theft Auto V to the next-generation of consoles in the second half of calendar 2021.", "The new generation versions of the game will feature a range of technical improvements, visual upgrades and performance enhancements to take full advantage of the latest hardware, making the game more beautiful and more responsive than ever. For the community of Grand Theft Auto Online, the journey through this ever-evolving world will continue on the next-generation consoles with more new updates, including additional content exclusive to the new consoles and PC. There will also be a new stand-alone version of Grand Theft Auto Online coming in the second half of calendar 2021, which will be available for free exclusively for PlayStation 5 players during the first three months. Rockstar Games will share more details on the new versions of Grand Theft Auto V in the months ahead.", "Last week, Private Division announced the signing of three new publishing arrangements -- agreements with top independent developers Moon Studios, League of Geeks and Roll7. These partnerships will expand the label's portfolio of titles that includes Kerbal Space Program franchise, The Outer Worlds, Ancestors: The Humankind Odyssey and Disintegration. Moon Studios, founded in 2010 by Thomas Mahler and Gennadiy Korol, is a BAFTA award-winning studio, best known for developing the critically acclaimed Ori and The Blind Forest and Ori and The Will of The Wisps. Moon Studios is working on creating a compelling new action RPG.", "League of Geeks, founded in 2011 by Trent Kuster, Blake Mizzi and Ty Carey, are renowned for developing the PC game Armello, which combines deep tactical card play, rich tabletop strategy and RPG elements. Located in Melbourne, League of Geeks is looking to expand upon its initial success with an ambitious new intellectual property. Roll7 is a BAFTA multi-award-winning independent studio founded in London in 2008 by Simon Bennett, John Ribbins and Tom Hegarty. Roll7 created the OlliOlli series, Not A Hero and Laser League.", "They are working with Private Division on their next job forward in their mission to create awesome flow state games. The first of these titles is expected to launch in fiscal 2022. Also last week, 2K announced a partnership with OneTeam Partners and the National Football League Players Association that will allow the label to include the names, numbers, images and likenesses for over 2,000 current NFL players in multiple non-simulation football games that are currently in development and set a launch starting in calendar year 2021 during fiscal 2022. We are thrilled to be back in the business with NFL, which is one of the most successful sport brands in the world.", "We are confident that our forthcoming NFL offerings will be extremely fun, highly engaging and deeply social experiences. Turning to eSports. We are very excited about the continued progress and growth of the NBA 2K League, which is currently in its third season. These playoffs will run between August 19 and 22, prior to the finals on August 29.", "The league has been steadily building its portfolio of high-profile partnerships and sponsorships, including Anheuser-Busch, AT&T, Champion Athleticwear, GameStop, HyperX, Jostens, Panera Bread, Raynor Gaming, SAP, Scuf Gaming, Snickers, Stance and Tissot. The NBA 2K League airs live on the League's Twitch channel in addition to select matches airing live on ESPN2, ESPN's digital platforms and the NBA 2K League YouTube channel, as well as on delay on eGG Network in Southeast Asia. Furthermore, in June, as part of multiyear agreement, livestreams of League games has begun airing on Dash Radio's Nothin' But Net channel on the digital network that has more than 12 million subscribers. We are very excited about the continued success and growth of the NBA 2K League, which has the long-term potential to enhance engagement and to be a driver of profits for our company.", "As Strauss mentioned, we have the strongest development pipeline in Take-Two's history, as well as significant potential to increase engagement and recurrent consumer spending. In addition, we are investing on a number of emerging opportunities that has the potential to enhance our growth rate. We remain focused on delivering the highest quality entertainment that captivates and engages audience throughout the world. Whether expanding our offerings on to new platforms, capitalizing on new business models and distribution channels or increasing our presence in emerging markets, Take-Two is exceedingly well positioned to generate value to consumers, as well as growth for our shareholders.", "I'll now turn the call over to Lainie." ] }, { "name": "Lainie Goldstein", "speech": [ "Thanks, Karl, and good afternoon, everyone. Today, I'll discuss our first-quarter results and then review our financial outlook for the second quarter and fiscal year 2021. Please note that additional details regarding our actual results and outlook are contained in our press release. As Strauss mentioned, fiscal 2021 is off to a great start, the first-quarter operating results significantly beating our expectations.", "Net bookings grew 136% to $996 million, which was a fiscal first-quarter record. This result exceeded our outlook of 800 to $850 million, driven by the exceptional performance throughout our portfolio, led by NBA 2K20, Grand Theft Auto V and Grand Theft Auto Online, Red Dead Redemption 2 and Red Dead Online and Social Point's mobile games, partially offset by the underperformance of Disintegration. Digitally delivered net bookings grew 139% as compared to our outlook of 100% growth and accounted for 92% of the total. This result exceeded our outlook primarily due to the outperformance of recurrent consumer spending.", "During the first quarter, 77% of sales of current generation console games were delivered digitally, up from 75% last year. Recurrent consumer spending grew 127% as compared to our outlook of 75% growth and accounted for 65% of total net bookings. This growth was driven primarily by NBA 2K20, Grand Theft Auto Online and Social Point's mobile games. GAAP net revenue grew 54% to $831 million, which was a fiscal first-quarter record, and cost of goods sold increased to $477 million.", "Operating expenses increased by 10% to $272 million, due primarily to our COVID-19 charitable initiative, headcount expansion and higher incentive compensation as a result of the company's performance. And GAAP net income grew to $89 million or $0.77 per share as compared to $46 million or $0.41 per share in the first quarter last year. Now to our guidance, starting with the fiscal second quarter. We project net bookings to range from 775 to $825 million compared to $951 million in the second quarter last year, which benefited from the launch of Borderlands 3.", "The largest contributors to net bookings are expected to be NBA 2K, Grand Theft Auto Online and Grand Theft Auto V, Red Dead Redemption 2 and Red Dead Online, Borderlands 3, Social Point's mobile games, Sid Meier's Civilization VI, and The Outer World. We expect digitally delivered net bookings to be flat, driven by growth in recurrent consumer spending, offset by lower digitally delivered sales of Borderlands 3, which launched last year. Our forecast assumes that 63% for current generation console game sales will be delivered digitally, up from 51% last year. We project recurrent consumer spending to grow by approximately 10%.", "We expect GAAP net revenue to range from 750 to $800 million and cost of goods sold to range from 355 to $381 million. Operating expenses are expected to range from 285 to $295 million. At the midpoint, this represents an 8% decrease over last year, driven primarily by lower marketing expense. And GAAP net income is expected to range from 98 to $110 million or $0.85 to $0.95 per share.", "For management reporting purposes, we expect our tax rate to be 16% throughout fiscal 2021. Turning to our outlook for the full fiscal year. We are increasing our net bookings outlook range to 2.8 to $2.9 billion from 2.55 to $2.65 billion, driven by our outperformance in the first quarter along with an updated forecast for the balance of the year. We are continuing to see elevated engagement and sales from people sheltering at home, which we have included in the second quarter, but have not yet factored into the back half of the year.", "We expect growth in NBA 2K, Grand Theft Auto Online and Social Point's mobile games to be offset by lower results on Borderlands 3, Red Dead Redemption 2 and Grand Theft Auto V. Read Dead Online, excluding digital content bundled with the premium edition is projected to be approximately flat versus fiscal 2020. The largest contributor to net bookings are expected to be NBA 2K, Grand Theft Auto Online and Grand Theft Auto V, Red Dead Redemption 2 and Red Dead Online, Borderlands 3, Social Point's mobile games, Sid Meier's Civilization VI and The Outer World. We expect the net bookings breakdown from our labels to be roughly 55% 2K, 35% Rockstar Games and 10% Private Division and Social Point.", "And we forecast our geographic net booking split to be about 60% United States and 40% international. We now project digitally delivered net bookings to increase by approximately 3% as compared to our prior outlook of an 8% decline. This growth is being driven by our recurrent consumer spending and digitally delivered sales. As a percentage of our business, digital is projected to represent 87%, up from 82% last year.", "Our forecast assumes that 68% of current generation console game sales will be delivered digitally, up from 55% last year. We now expect recurrent consumer spending to grow by 15% as compared to our prior outlook of flat versus fiscal 2020 and to represent 61% of net bookings as compared to 51% last year. This growth is being driven by NBA 2K, Grand Theft Auto Online and Social Point. We are increasing our non-GAAP adjusted unrestricted operating cash flow outlook to more than $500 million, up from our prior outlook of more than $350 million.", "We plan to deploy approximately $75 million for capital expenditures. We expect GAAP net revenue to range from 2.8 to $2.9 billion and cost of goods sold to range from 1.28 to $1.32 billion. Total operating expenses are expected to range from 1.15 to $1.17 billion. At the midpoint, this represents a 3% increase over the prior year, driven by higher headcount, R&D expense and shareable contributions, partially offset by lower marketing and stock compensation expenses.", "And we expect GAAP net income to range from 350 to $380 million or $3.05 to $3.30 per share. In closing, fiscal 2021 is off to a strong start and is poised to be another terrific year for our organization. We remain well positioned both to navigate the uncertainties of these times and to capitalize on the positive trends within our industry. Over the long term, our industry-leading creative assets, firm commitment to operational excellence and strong financial foundation position our company to deliver significant growth and margin expansion for our shareholders.", "Thank you. I'll now turn the call back to Strauss." ] }, { "name": "Strauss Zelnick", "speech": [ "Thanks, Lainie and Karl. On behalf of our entire management team, I'd again like to thank our colleagues for their hard work, commitment to excellence and for delivering an exceptional start to the year. To our shareholders, I want to express our appreciation for your continued support. We'll now take your questions.", "Operator?" ] } ]
[ { "name": "Operator", "speech": [ "[Operator instructions] Our first question comes from Mario Lu with Barclays. Please proceed with your question." ] }, { "name": "Mario Lu", "speech": [ "Great. Thanks for taking the questions. Amazing quarter. So, the first question is on the $70 price point announced for NBA 2K21.", "Any color behind making that decision? And was that decision broad-based? Or title-specific since NBA 2K21 will span two NBA seasons this time instead of one? So in other words, is the higher price point embedded in guidance for all AAA new-gen titles going forward or just NBA 2K? And I have a follow-up." ] }, { "name": "Strauss Zelnick", "speech": [ "Yes. We're definitely announcing pricing on a title by title basis. I would just observe, there hasn't been a frontline price increase for a very long time, although costs have increased significantly. But most importantly, we believe we're delivering the highest quality titles in the business.", "And consumers are staying more engaged than ever. Games have extraordinary playability and replay-ability. And they offer many, many hours of entertainment. We think it's a great value.", "It does rely on our continuing to deliver amazing experiences, and that's our strategy and our goal." ] }, { "name": "Mario Lu", "speech": [ "Got it. And then the second question is on GTA Online. Anything you can share in terms of the normalized growth rate for GTA Online this quarter, so excluding the Epic Store? Or similarly, can you share what percentage of the bookings came from new versus existing players in fiscal 1Q?" ] }, { "name": "Strauss Zelnick", "speech": [ "No. We don't give that kind of granular detail." ] }, { "name": "Mario Lu", "speech": [ "OK. No worries." ] }, { "name": "Operator", "speech": [ "Our next question comes from Mike Ng with Goldman Sachs. Please proceed with your question." ] }, { "name": "Mike Ng", "speech": [ "Hey. Thanks for the question. I was just wondering if you could expand on the GTA V Enhanced Edition for next holiday. It feels a little inappropriate to call it a typical remaster.", "And I was just wondering if you could talk a little bit about whether or not there's an opportunity for a GTA, call it, a replacement cycle, if you will?" ] }, { "name": "Strauss Zelnick", "speech": [ "Well, it's a great question, and I appreciate the sentiment with which it's asked because we've now sold in over 135 million units. And of course, GTA V was created for the last console generation, is the standard bearer in this generation, and now we've announced that it will be available for the next generation of consoles, which is just amazing. Historically, Rockstar always delivers a great new experience with new content and new opportunities to excite, engage and surprise players. And that's true of everything that Rockstar Games releases.", "Any more details, I think, will properly come from the label in due time, but we couldn't be more excited that the title will be available for the next generation of consoles." ] }, { "name": "Mike Ng", "speech": [ "Great. Thank you, Strauss." ] }, { "name": "Operator", "speech": [ "Our next question comes from Brian Fitzgerald with Wells Fargo. Please proceed with your question." ] }, { "name": "Brian Fitzgerald", "speech": [ "Thanks, guys. At Xbox 2020 a couple of weeks ago, two weeks ago, we saw The Outer Worlds, Grounded Evolved. They look great, these are all Private Division titles. So, our question was around this.", "Strauss, when you mentioned I think you said The Outer Worlds in the Switch was 2.8 million units already. How do you see Private Division aggregating up volumes over time? Lainie, I think you said, near term, it's going to hit 10%, that's Private Division and Social Point. So, how should we think about that metering out? Can it be, longer down the road, can it be a bigger percentage? And then the second part to that question was these titles seem to appeal maybe especially to the expanding demographic of gamers that are being pulled in the ecosystem. Can you give us any color or dynamics in terms of how types of players that are engaging with private label versus some of your other studios?" ] }, { "name": "Strauss Zelnick", "speech": [ "Well, thanks for your question. Just to clarify, Outer World is sold in 2.8 million units and it's across all platforms, and so far as recently made available for Switch. And we're very excited about it. Outer Worlds also has more content coming, and that's a very exciting opportunity.", "We think the opportunity for Private Division to be a greater percentage of our overall net bookings is strong. And to state the obvious, it will all depend on the quality of the releases but they continue to sign up and announce great publishing arrangements with first-class independent developers. And so far, their track record is pretty extraordinary, which is amazing. In terms of the demographic to which they appeal, I think that's title by title.", "I don't think there's anything in particular in their strategy that would either limit or expand the scope of their potential audience, except that their titles are created by developers who live outside of the big company system. And does that give them an opportunity to be perhaps more innovative and take more risk? Possibly. Although we pride ourselves on being the most innovative company across everything we do. So, it's a really good start.", "We're incredibly proud of what the team has achieved so far, Private Division, and very optimistic about the future." ] }, { "name": "Brian Fitzgerald", "speech": [ "Great. Thanks, Strauss." ] }, { "name": "Operator", "speech": [ "Our next question is from Colin Sebastian with Robert W. Baird. Please proceed with your question." ] }, { "name": "Colin Sebastian", "speech": [ "Thanks. Congrats on the quarter. I have a couple of questions as well. First off, with the start of the NBA season in Orlando, curious if you've seen any change positively or negatively with respect to NBA 2K? And broadly where markets have reopened, if you've seen any interesting changes or observations with respect to usage trends.", "And then a bigger picture question on digital distribution. Strauss, I know you guys support platforms where your users are, where they want to access games. There are an increasing number of platforms, which seems to add some complexity to the industry. And I'm curious if you have any updated thoughts on a direct-to-consumer offering if you think that makes some more sense now or maybe less sense? But just curious on your thoughts on distribution." ] }, { "name": "Karl Slatoff", "speech": [ "So for NBA 2K, obviously, this has been an incredible year for us, and we've had a really, really nice run, obviously, much better than our expectations. We were originally projecting that it wasn't going to be a record year, and now it's going to be a record year across the board. We obviously have some tailwind with that behind the shelter-at-home. But generally speaking, the game has been improving since the day came out, and it's really generated a huge amount of interest across the board.", "In terms of has that interest changed with the new seasons, etc.? There's really nothing to report there at this point. It's certainly, we're excited that basketball is back at it. It's always a good thing when people are engaged with the NBA. It's an incredible brand and having players in the court is obviously a good thing for us.", "But there's nothing really that we have to report about the results itself specifically related to that." ] }, { "name": "Strauss Zelnick", "speech": [ "And with regard to distribution, yes, I think you captured it well. We said we want to be where the consumer is. We need to find that intersection of what's great for the consumer and what makes sense for us as a producer and distributor. And there are a lot of opportunities.", "We tend to be very supportive of new launches. We were supportive early of Google Stadia. We certainly support what Microsoft and Sony and Nintendo do when they bring out new platforms, and I think that will continue. In terms of direct-to-consumer opportunities, naturally, we have the ability to go direct-to-consumer.", "Rockstar goes direct-to-consumer through their Launcher, 2K goes direct-to-consumer. We have the ability for consumers to buy goods directly from our company, and I expect that to continue. It's still a relatively small portion of our business. And I think our expectation over time is that our goal is not to drive consumers to any particular destination, including one of our own.", "Our goal is to be where the consumer is." ] }, { "name": "Colin Sebastian", "speech": [ "OK. Thank you." ] }, { "name": "Operator", "speech": [ "Next question is from Eric Handler with MKM Partners. Please proceed with your question." ] }, { "name": "Eric Handler", "speech": [ "Yes. Good afternoon and thanks for the question. Wondered if you could talk a little bit about how you're balancing concerns in the back half of the year about how the economy is going to fare versus what you're seeing in engagement in July? Are you seeing much of a falloff versus the months in the first quarter? How is that shaping up?" ] }, { "name": "Karl Slatoff", "speech": [ "So we -- in our Q2 guidance, we have included the fact that we're seeing some benefits continue on our business, some of the similar tailwinds that we've had since starting in the first quarter, actually the end of the fourth quarter as well, so we do see some of that in our Q2 guidance. In terms of the back half of the year, we really haven't factored anything in related to that or even -- or to take into account any sort of recessionary possibilities." ] }, { "name": "Eric Handler", "speech": [ "All right. So, you feel good about the consumer right now, but basically, you don't have a crystal ball for the back half of the year. So, too challenging to predict at this point." ] }, { "name": "Strauss Zelnick", "speech": [ "That's right." ] }, { "name": "Eric Handler", "speech": [ "OK. Thank you very much." ] }, { "name": "Operator", "speech": [ "Our next question is from Drew Crum with Stifel. Please proceed with your question." ] }, { "name": "Drew Crum", "speech": [ "OK, thanks. Hey guys. Good afternoon. Karl, I think you and I have talked about this in the past, but I want to revisit the software development cost balance and reconcile the total against your commentary around the game pipeline.", "It's considerably lower versus recent years. And with more than 90 games in development, does that suggest these are smaller titles, or you're just not as far along? And hence, the pipeline is very back-end loaded?" ] }, { "name": "Karl Slatoff", "speech": [ "Can you just clarify what you mean what's considerably lower?" ] }, { "name": "Drew Crum", "speech": [ "Well, if you look at --" ] }, { "name": "Karl Slatoff", "speech": [ "Balance sheet?" ] }, { "name": "Drew Crum", "speech": [ "Yes. Correct. Yes. Current plus non-sort of --" ] }, { "name": "Karl Slatoff", "speech": [ "Yes. I think, well, look, as we said, our pipeline is twice the size as it was -- more than double the size as it was five years ago, and we're really excited about what that is. Some of these titles are early on in development. Some of those titles are much further along in development.", "Some of these titles are very, very big titles and some of these titles are very, very, very small titles, so there is a big mix there. And in terms of -- so you can't really say, well, there's just more titles or they're less expensive. Because there is such a play between those two elements. But you identified those two elements that, well, those two things will certainly play into how large that capitalized balance sheet moves going forward.", "It's relative to the scale and where we are in development." ] }, { "name": "Drew Crum", "speech": [ "OK. OK. Thanks." ] }, { "name": "Operator", "speech": [ "Our next question is from Matthew Thornton with SunTrust. Please proceed with your question." ] }, { "name": "Matthew Thornton", "speech": [ "Good afternoon everyone. Thanks for taking the question. Maybe for Strauss, can I just get your thoughts three months later since the last call, given the COVID environment, just be interested to hear your thoughts on the lasting impact of all these, whether it's Take-Two kind of operation-specific, whether it's consumer and kind of what you think you can kind of hold on to once things kind of normalize. I'd just be very interested to hear your latest thinking about the lasting impact of this environment longer term? And then just secondly, quickly, you talked about, obviously, GTA moving to next-gen consoles.", "Curious if there's any other nonrecurring franchises that could also see a similar upgrade path?" ] }, { "name": "Strauss Zelnick", "speech": [ "Yes. In terms of the lasting impact of this period of time, it's so hard to predict because most humans tend to believe that whatever is going on right now is what will always continue. And of course, that's not the case. Everything, in fact, generally changes.", "So, we've seen certain companies announced that, from their point of view, everyone should just always work from home. And I know there are people I know who believe they'll never go to the movies again or they'll never fly in an airplane again or stay in a hotel again or eat inside a restaurant again. And I don't see the world that way. So, from our point of view, this tragedy will pass and the world will go back to looking an awful lot like it did before.", "However, it does feel like this has been a period of time where previously existing trends have been accelerated. And I do think that we appreciate the possibility of remote work as needed, where we understand in a disaster scenario, how we can continue to be productive. I think, frankly, it's created a great benefit in our morale as an organization. As any tragedy does, I think tragedy will either pull people together or push them apart.", "I think we have a strong enough culture that it pulled people even more together. It's just my point of view, but I think it's borne out in the level of productivity and the quality of our games and the quality of our operations and hopeful that that continues. In terms of the consumer, I do think that this has intensified a shift from old analog entertainment to new interactive entertainment. And I do think that people have come back to video games and tried video games when they hadn't tried them previously.", "And I think you're going to see a long-lasting increase in demand. Again, that's not reflected in our numbers because we don't build our guidance based on my opinion about things, luckily. But I do believe that's the case. And I think you're seeing a systemic shift in favor of interactive entertainment.", "And there are only a handful of companies on earth who aim to do what we do, never mind, are able to do what we do, so it puts us in a very good position indeed. In terms of your question about other older titles being brought to next-gen consoles. We always leave those announcements to our labels, but I'm sure there'll be more in the future." ] }, { "name": "Operator", "speech": [ "Our next question comes from Brian Nowak with Morgan Stanley. Please proceed with your question." ] }, { "name": "Matt Cost", "speech": [ "Hi guys. It's Matt on for Brian. Two, if I could. So, on GTA on the next gen, can you walk us through the decision to split it into -- in the back half of next year, split it into a separate online mode and then like the upgraded version of GTA V? Obviously, you had tremendous success kind of just packaging those two together when you went from the last generation to the current generation.", "So, what was the opportunity that you saw on next gen to maybe separate those two games? And then just separately, thinking about pipeline now that we're kind of three months into the work-from-home environment. Are you seeing more of an impact on games maybe that are a little farther out in the development cycle? Or do you feel that the pipeline is more or less kind of on track that you expect it to be, you would have expected it to be three months ago?" ] }, { "name": "Strauss Zelnick", "speech": [ "Yes. I mean the decision regarding GTA for next gen is a marketing decision and a production decision by Rockstar Games. And I'm sure they'll have more to say about that in the coming months, but I'll leave it to them as I prefer to do. In terms of the pipeline, we've been very fortunate.", "As I just said, our workforce has been exceedingly productive. And I think we only have announced one delay since this whole tragedy started, that was a delay of Kerbal Space Program 2 to fiscal '22. But apart from that, everything is looking really good and is on track and on target, no issues whatsoever." ] }, { "name": "Matt Cost", "speech": [ "Thank you." ] }, { "name": "Operator", "speech": [ "Our next question comes from Mike Hickey with The Benchmark Company. Please proceed with your question." ] }, { "name": "Mike Hickey", "speech": [ "Hey, Strauss, Karl, Lainie, Hank. Thanks for taking my questions. Congrats on another solid quarter. Just two questions for me.", "I guess the -- curious, the response you've gotten from your player community on The Naturalist experience, latest upgrade or update for Red Dead Online. And also curious about future cadence of content. I think it was December last year when we got the Moonshiner update. So, it seemed like it was sort of an extended period of time before we get an update.", "I'm just curious if that was maybe because of the work-from-home? Or is there something else going on that sort of led to that sort of lengthy time in between updates? And then Strauss, I know you talked on pricing. Just want to -- just curious on how you think about the economy, the $70 price point. Obviously, a lot of people without jobs, how do you think about how it could impact recurrent spend within the game? And if you've done any sort of survey work or what gives you, I guess, the confidence that demand won't slip at that price point." ] }, { "name": "Strauss Zelnick", "speech": [ "Yes. The productivity has been strong across the board and across all of our labels. And as you know, Rockstar Games decides on the cadence of updates, and it's driven by great ideas and the ability to deliver those great ideas into superb experiences. And all of our labels wait to distribute new content until it's nearly business perfect as it can possibly be.", "There is more content coming for both Red Dead Online and Grand Theft Auto Online this fiscal year. So, stay tuned, I think it's going to be awesome. In terms of the price point, this is a very modest price increase. The pricing has been going down on a real dollar basis for the better part of 15 years.", "And we're applying this price point in the case where we think the quality not only supports it, but demands it. Production costs have gone up greatly. But most importantly, the consumer experience is more robust than ever before. And I'm utterly convinced that NBA 2K21 will be nothing short of extraordinary, so I don't expect that there will be any concerns." ] }, { "name": "Mike Hickey", "speech": [ "Thank you." ] }, { "name": "Operator", "speech": [ "Our next question comes from Eric Sheridan with UBS. Please proceed with your question." ] }, { "name": "Eric Sheridan", "speech": [ "Thanks for taking the question. Two, if I can, following up on some of the themes earlier in the call. Based on what you've seen from player behavior through COVID-19, what might some of the key learnings you've gained around lead marketing to older content and sort of reinvigorating players' desire to sort of go back and revisit content and games from a prior generation to continue to sort of drive out lifetime value in that content? And secondly, what have you learned about marketing efficiency as a result of the current environment? And how that might -- how might that carry forward into the next console cycle as well?" ] }, { "name": "Strauss Zelnick", "speech": [ "Yes. I don't think this period of time has led to look at our catalog any differently than before. We're bringing out the Mafia Trilogy. We always bring out legacy content usually in an enhanced format for new consoles on a regular basis or even in the absence of new distribution opportunities.", "And I'm sure that will continue, of course, driven by the demand for our properties. And if I'm not mistaken, we still have the highest sales per SKU of catalog of any of our competitors based on the quality of what we have historically done. We aimed to keep doing that. In terms of marketing efficiency, I haven't really seen a change.", "At any given time, we're trying to be more and more efficient with our marketing. Undoubtedly, in the mobile business, there's going to be a meaningful change in marketing based on changes that have been announced by Apple and other changes that are driven by privacy legislation and privacy concerns, but I don't know that that will enhance efficiency. In fact, it may go in the other direction. So, it's always a challenge to create the best marketing.", "And I wouldn't say it's becoming more or less efficient than before." ] }, { "name": "Operator", "speech": [ "Our next question comes from Todd Juenger with Sanford Bernstein. Please proceed with your question." ] }, { "name": "Todd Juenger", "speech": [ "Hi. Thanks a ton for taking the questions. I also have two, if you don't mind, for whoever wants to fill them. The first, at the risk of being shut down again and just waiting for more from Rockstar, I'd love to explore the topic of the relationship with PlayStation around GTA Online.", "And just, at a higher level, without the specifics, what sorts of factors go into the decision to make such a partnership with a company like Sony? And in particular, what sorts of things would we expect you would get in return from them in order to offer them, the things you've done, including the exclusivity. That's question No. 1. The second one is, it wasn't too long ago, every night, we turned on the TV, we saw NBA celebrities playing against each other on NBA 2K on television.", "I'm just -- I'm really curious as what's it about, what that did in terms of licensing revenues or engagement in the quarter. Although that's interesting, I'm more interested in whether that's opened your mind or any of your development team's mind into how to keep things like that going well into the future? And what that can do in terms of bringing together celebrity and culture and your games in a social and engaging way and sort of driving that whole experience to a whole new level?" ] }, { "name": "Strauss Zelnick", "speech": [ "Yes. I mean, without going into too much detail on confidential arrangements. Typically, we have great relationships with all of our platform partners. And we will sometimes announce a particular situation.", "In many instances, it's driven by marketing support and other benefits that both parties obtain from such an arrangement. And Karl will take the question on basketball." ] }, { "name": "Karl Slatoff", "speech": [ "Yes. In the case of the NBA, the player tournament that we did, obviously, that was an exciting event. And that was an unplanned event, as you could probably tell. It's something that would probably not have happened, but if it were not for the COVID situation.", "So, in a lot of ways, there are some interesting things that come out of these situations when you're dealt with them. This particular one, I wouldn't really think about it as a specific money-making opportunity in the moment. But like any marketing or anything that engages an audience or even creates new audience, it has the benefit of creating interest and engagement with the game. So, we really look at that kind of thing, like we would as any other marketing opportunity.", "Is there a big huge learning from it, something we can keep going? Perhaps. I mean, it was definitely something different than what we've done before, although we have done player-based things in the past, and we've done tournaments in the past, this was just kind of marrying them together. So, that's not to say we can do it every day or that this is something that is going to set some kind of precedent for us. But it certainly is interesting.", "It was a lot of fun to do. And it undoubtedly increased interest and engagement with the game. And as our financial results ultimately reflect all of these things happening for us at once." ] }, { "name": "Todd Juenger", "speech": [ "Fair enough." ] }, { "name": "Operator", "speech": [ "Our next question comes from Doug Creutz with Cowen and Company. Please proceed with your question." ] }, { "name": "Doug Creutz", "speech": [ "Hey. Thank you. A little bit along the lines of the last question. In the last couple of years, you've really extended the life span of NBA 2K very deep into the annual cycle, far beyond where it used to be sort of falling off.", "Do you think NBA 2K League has been an important part of that? If so, is there anything you can point to, specifically, where the league has really helped engage with the overall game? Or do you think the two are incidental to each other?" ] }, { "name": "Strauss Zelnick", "speech": [ "Very hard to point to it. But I think the NBA 2K League is not only an interesting opportunity as a stand-alone, but also forms part of building the brand and building overall engagement. I think you're 100% right. It used to be a three-month experience, then it became a six-month experience.", "Now it's very close toward a year-long experience, and that's very much our goal. And that's really a reflection of NBA 2K morphing from being the highest quality sim in the market to one of the highest quality interactive entertainment experiences of any kind. And it's both a sim and a lifestyle in a world you can inhabit that's constantly evolving and changing. So, that's very much the goal of visual concepts, and you're seeing that goal being realized, and I believe you'll see it be more and more realized.", "Does the league form a part of that? Unquestionably. We also expect it to be very successful on a stand-alone basis." ] }, { "name": "Doug Creutz", "speech": [ "OK. Thank you." ] }, { "name": "Operator", "speech": [ "Our next question comes from Alex Giaimo with Jefferies. Please proceed with your question." ] }, { "name": "Alex Giaimo", "speech": [ "Thanks for taking the question. Karl, a follow-up to a previous question, but the upcoming game pipeline for 93 new titles that you mentioned last quarter that will launch by, I think it was fiscal '25. Should we expect a similar cadence as we've seen in the past of maybe one non-sports AAA title per year? And I think it's 11 franchises in your portfolio now that have sold in at least 5 million units. Is it also fair to assume that the content plate will include sequels to most of those bigger franchises?" ] }, { "name": "Karl Slatoff", "speech": [ "Certainly, the development pipeline certainly does include sequels to the bigger franchises. And in some cases, could include sequels from new franchises to the extent they actually work. So, that -- there's no doubt that that's the case. I'm sorry, what was the first part of the question?" ] }, { "name": "Alex Giaimo", "speech": [ "If in the past, I think the goal has been one non-sports AAA title per year. Is that the cadence we should still think about?" ] }, { "name": "Karl Slatoff", "speech": [ "Yes. I mean, look, it's again, I think, look, one, two, whatever it may be, that is obviously our goal, to come up with more than one -- more than what we have now and to be more consistent with the number of AAA releases that come out every year in addition to our annualized title. So, whether that number is one to three, that certainly would be the goal." ] }, { "name": "Alex Giaimo", "speech": [ "OK. Thanks, Karl." ] }, { "name": "Operator", "speech": [ "Our next question is from Ryan Gee with Bank of America. Please proceed with your question." ] }, { "name": "Ryan Gee", "speech": [ "Yeah. Hey. Good afternoon. Thanks for taking the question.", "So, the 100% plus growth in MyTeam players, certainly consistent with demand we're seeing for expression personalization in games right now. Does this speak to the opportunity for a nonsim game from the NFL? And why 2021 is the right time and place to deliver that game? And then on a related matter, the doubling of the NBA players, I think it was last quarter. Can you speak to how much you've seen in growth in the players brand-new to the franchise? So that as you look forward, even if you lost some of these kind of French casual guys, you'll still be net ahead." ] }, { "name": "Strauss Zelnick", "speech": [ "Yes. I would just observe, as I did previously that the game already offers numerous opportunities that are in addition to the sim, the core sim game. And we'll leave to Visual Concepts, how that will be expressed going forward. But right now, we think NBA 2K offers something for everyone.", "You want the best sim game, it's there. You want an opportunity to experience great music, it's there. Great characters, it's there. Play outside of the sim game, it's there or just experience the world.", "That's a possibility, too. So, I'm sure there'll be much more to talk about, and we'll let Visual Concepts and 2K talk about it. In terms of data around players, we don't tend to go into that much detail. But with 14 million units sold, 18% greater than last year, wonderful engagement and enormous growth in recurrent consumer spending, I think you can safely assume that the audience is expanding." ] }, { "name": "Karl Slatoff", "speech": [ "And also, to answer your question about football, look, we obviously think that there's a significant opportunity for non-simulation gameplay with the NFL, the football business. Otherwise, we wouldn't have done that partnership, and won't be so excited about it. The fact the success of MyTeam isn't necessarily a barometer for that. There are so many different kinds of non-simulation play and whether the MyTeam phenomenon is relevant or not, remains to be seen.", "But in respect of that, the non-sim market is very exciting for us, and that's why we're going forward with NFL with that." ] }, { "name": "Ryan Gee", "speech": [ "That's helpful color. Thank you, guys." ] }, { "name": "Operator", "speech": [ "Ladies and gentlemen, we've reached the end of the question-and-answer session. At this time, I'd like to turn the call back over to Strauss Zelnick for closing comments." ] }, { "name": "Strauss Zelnick", "speech": [ "Thank you so much for joining us today. On behalf of everyone at Take-Two, we appreciate your interest. We appreciate your support, and we'd like to wish you all a happy, healthy and most of all safe summer. Thank you for joining us." ] }, { "name": "Operator", "speech": [ "[Operator signoff]" ] } ]
TTWO
2018-05-16
[ { "description": "Senior Vice President, Investor Relations and Corporate Communications", "name": "Henry Diamond", "position": "Executive" }, { "description": "Chairman and Chief Executive Officer", "name": "Strauss Zelnick", "position": "Executive" }, { "description": "President", "name": "Karl Slatoff", "position": "Executive" }, { "description": "Chief Financial Officer", "name": "Lainie Goldstein", "position": "Executive" }, { "description": " -- Piper Jaffray -- Managing Director", "name": "Mike Olson", "position": "Executive" }, { "description": " -- Jefferies -- Analyst", "name": "Tim O'Shea", "position": "Analyst" }, { "description": " -- MKM Partners -- Managing Director", "name": "Eric Handler", "position": "Executive" }, { "description": " -- Merrill Lynch -- Managing Director", "name": "Justin Post", "position": "Executive" }, { "description": " -- Goldman Sachs -- Analyst", "name": "Chris Merwin", "position": "Analyst" }, { "description": " -- Morgan Stanley -- Managing Director", "name": "Brian Nowak", "position": "Executive" }, { "description": " -- Macquarie Group -- Analyst", "name": "Ben Schachter", "position": "Analyst" }, { "description": " -- Consumer Edge Research -- Analyst", "name": "Ray Stochel", "position": "Analyst" }, { "description": " -- BMO Capital Markets -- Managing Director", "name": "Gerrick Johnson", "position": "Executive" }, { "description": " -- Barclays -- Analyst", "name": "Ryan Gee", "position": "Analyst" }, { "description": " -- Oppenheimer & Company -- Analyst", "name": "Andrew Uerkwitz", "position": "Analyst" }, { "description": " -- BTIG -- Analyst", "name": "Brandon Ross", "position": "Analyst" }, { "description": " -- Cowen -- Managing Director", "name": "Doug Creutz", "position": "Executive" }, { "description": " -- Credit Suisse -- Analyst", "name": "Stephen Ju", "position": "Analyst" }, { "description": " -- The Benchmark Company -- Analyst", "name": "Mike Hickey", "position": "Analyst" } ]
[ { "name": "Operator", "speech": [ "Greetings and welcome to Take-Two Q4 FY18 earnings call. At this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press *0 on your telephone keypad. As a reminder, this conference is being recorded.", "I would now like to turn the conference over to your host, Hank Diamond. Please go ahead." ] }, { "name": "Henry Diamond", "speech": [ "Good afternoon. Welcome and thank you for joining Take-Two's conference call to discuss its results for the fourth quarter and Fiscal Year 2018 ended March 31st, 2018. Today's call will be led by Strauss Zelnick, Take-Two's Chairman and Chief Executive Officer, Karl Slatoff, our President, and Lainie Goldstein, our Chief Financial Officer. We will be available to answer your questions during the Q&A session following our prepared remarks.", "Before we begin, I'd like to remind everyone that statements made during this call that are not historical facts are considered forward-looking statements under federal securities laws. These forward-looking statements are based on the beliefs of our management as well as assumptions made by information currently available to us. We have no obligation to update these forward-looking statements. Actual operating results may vary significantly from these forward-looking statements based on a variety of factors. These important factors are described in our filings with the SEC, including the company's most recent annual report on form 10-K and quarterly report on form 10-Q including the risks summarized in the section entitled Risk Factors.", "I'd also like to note that all numbers we will be discussing today are GAAP and, unless otherwise stated, all comparisons are year over year. Additional details regarding our actual results and financial outlook are contained in our press release, including the items that our management uses internally to adjust to our GAAP financial results in order to evaluate our operating performance. In addition, we have posted to our website the slide neck that visually presents our results and financial outlook. Our press release and filings with the SEC may be obtained on our website at www.taketwogames.com.", "And now, I'll turn the call over to Strauss." ] }, { "name": "Strauss Zelnick", "speech": [ "Thanks, Hank. Good afternoon and thank you for joining us today. I'm pleased to report that during the fourth quarter, Take-Two delivered growth in net bookings driven by increased recurrent consumer spending, including better than expected results from Grand Theft Auto Online.", "Our solid performance marked the completion of another outstanding year for Take-Two, highlighted by growth in net bookings, earnings, and cashflow, along with margin expansion, and of course, our fiscal 2018 operating results greatly surpassed the initial outlook that we provided at the start of the year.", "During Fiscal 2018 and first quarter Fiscal 2019, we returned $308 million to our shareholders through the repurchase of 3.1 million shares of our stock at an average price of approximately $99.00 per share. At fiscal year end, we had over $1.4 billion in cash and short-term investments.", "Grand Theft Auto V and Grand Theft Auto Online continued to exceed our expectations in Fiscal 2018, as they have every year since their release, with combined net bookings from the titles growing year over year. Grand Theft Auto Online broke monthly audience records in June, July, and September, added more new users in the prior year and delivered its biggest year yet for virtual currency sales.", "During the fourth quarter, Grand Theft Auto Online generated better than expected year over year net bookings growth. Rockstar Games achieved these results through the ongoing release of free additional content, including during the past fiscal year four significant updates coupled with a weekly schedule of new content offerings and they have much more planned going forwards.", "Grand Theft Auto V has now old 95 million units worldwide, reflecting its status of the highest-rated title of the current console generation and the must have game for purchasers of PlayStation 4 and Xbox One.", "The incredible ongoing success of Grand Theft Auto V and Grand Theft Auto Online underscores Rockstar Games unparalleled skill at producing iconic entertainment experiences that attract and engage new audiences for years after release. We're confident that Rockstar Games will again set new benchmarks for creative excellent with the October 26th launch of Red Dead Redemption 2, which is our first title developed from the ground up for the current console generation.", "Turning to our flagship basketball series, NBA 2K18 continues to expand its audience and is now our highest selling sports title ever, selling today over 9 million units, up 17% over last year's release. In addition, our NBA 2K series continues to benefit from growing engagement and recurrent consumer spending.", "During Fiscal 2018, the average revenue per user, revenue per hour, and unique multiplayer users all increased double-digits and recurrent consumer spending on NBA 2K grew 34% to a new record. We believe there remains substantial worldwide growth opportunity for NBA 2K, both through traditional and emerging platforms and business models. To that end, earlier this month, the NBA 2K league commenced its inaugural season, which Karl will discuss.", "Our Fiscal 2018 results were also enhanced by a number of other recent releases and catalog titles, including WWE 2K18 and WWE SuperCard, NBA 2K17, Social Point's mobile games, Sid Meier's Civilization VI and its add-on content, and L.A. Noire.", "We remain highly focused on our strategy to deliver innovative ways to drive consumer engagement. During Fiscal 2018, recurrent consumer spending grew 48% to a new record and accounting for 48% of total net bookings. In addition to virtual currency for Grand Theft Auto Online and NBA 2K, recurrent consumer spending was enhanced by a variety of other offerings.", "In the free to play category, Social Point's mobile games contributed meaningfully to net bookings through its two biggest titles, Dragon City and Monster Legends. During the current quarter, we have significant updates planned for both. We've used Social Point as an important long-term growth opportunity for Take-Two.", "Recurrent consumer spending on WWE SuperCard grew over 20% and the game has now been downloaded nearly 17 million times. During the last fiscal year, 2K released the season four update, which enhanced our popular WWE card battling game with over 250 new cards, additional tiers, and more.", "And NBA 2K Online remains the number one PC online sports game in China with over 37 million registered users. In addition, net bookings from add-on content grew more than 40%, lead by offerings for Sid Meier's Civilization, particularly the Rise and Fall expansion pack, XCOM 2, particularly War of the Chosen, WWE 2K, and Mafia III.", "We expect Fiscal 2019 to be another year of profitable growth for Take-Two, including both record net bookings and record net cash provided by operating activities, led by the launch of Red Dead Redemption 2 along with new annual releases from NBA 2K and WWE 2K. We will also continue to support our titles with offerings designed to drive engagement and recurrent consumer spending.", "The highly anticipated from one of 2K's biggest franchises that have been planned for release in the current fiscal year is now planned for launch during Fiscal 2020 to allow for additional development time. We remain as excited as ever about this title and are expected to enhance our results next fiscal year.", "I'd like to take a moment to acknowledge that this year marks the 25th anniversary of Take-Two. Over that time, we've built that company into a diversified and profitable enterprise. In particular, I'm extremely proud that Take-Two is home to our industry's best talent, whose passion and creative vision consistently captivate and engage audiences around the world.", "Take-Two is exceedingly well-positioned to capitalize on the vast opportunities in their industry, including advances in hardware, the ability to drive ongoing engagement through connected experiences and additional content and the continued proliferation of mobile platforms and emerging business models. As a result, Take-Two is poised to deliver growth and returns for our shareholders over the long-run.", "I will now turn the call over to Karl." ] }, { "name": "Karl Slatoff", "speech": [ "Thanks, Strauss. I'd like to begin by thanking our teams for delivering another great year for creative and financial results for our organization. It's your passion and commitment that drives Take-Two and it's reflected in our terrific Fiscal 2018 operating results and record net bookings and cashflow outlook for the current year.", "Turning to our recent and upcoming releases -- last month, Rockstar Games released the Grand Theft Auto V Premium Online Edition for PlayStation 4, Xbox One, and PC. This comprehensive offering features the complete Grand Theft Auto V story experience, the ever-evolving world of Grand Theft Auto Online, and all existing gameplay upgrades and content, including Doomsday Heist, Gun Running, Smuggler's Run, Bikers and much more. In addition, purchasers receive the criminal enterprise starter pack, which provides access to a huge range of content, including properties, vehicles, weapons, and more.", "On October 26th, Rockstar Games will launch Red Dead Redemption 2, the eagerly awaited sequel to one of the label's most critically acclaimed and beloved titles. Two weeks ago, Rockstar Games unveiled a beautiful cinematic trailer for the game that set the stage for what is shaping up to be another massive entertainment event. Player reaction to the trailer was phenomenal.", "Last month, Rockstar Games hosted select media outlets at their Rockstar North studio for an extended look at the game. We have been delighted by their first impressions. We could not be more excited about the upcoming launch of Red Dead Redemption 2. Rockstar Games will have additional details to share about the game in the coming months.", "This fall, the next annual installment of NBA 2K will return to the hardwood court with the series' signature style and deep authenticity. This year marks the 20th anniversary of our industry-leading basketball simulation. We are confident that 2K and Visual Concepts will once again take the series to exciting new heights with the release of NBA 2K19.", "Also this fall, 2K's WWE series will be back with WWE 2K19, bringing gamers into the virtual squared circle with their favorite WWE superstars, gameplay modes and variety of hard-hitting in-ring action.", "Throughout Fiscal 2019, we will continue to support our titles with additional content designed to deepen consumers' experience and drive engagement including updates for Grand Theft Auto Online, WWE SuperCard, and others. In addition, Social Point and 2K will continue to broaden our offerings from mobile devices.", "Earlier this month, the NBA 2K League, our joint venture with the NBA, kicked off its inaugural season. 102 of the best NBA 2K players were drafted by 17 NBA teams and are competing in a 15-week season, which will conclude with NBA 2K League playoffs and finals in August. While each team is living and training together in their home market, all league play and tournaments will take place in New York City.", "In addition, the league has been steadily building its portfolio of partnerships and sponsorships with high-profile brands. Dell is the leagues official PC hardware and monitor partner, featuring its elite gaming brand, Alienware. And Intel is powering all PCs with its state of the art 8th Gen professor.", "Throughout the partnership, Dell and Intel will work with the league to identify new opportunities to innovate and enhance gameplay as the latest technology evolves. Both companies have agreed to make significant marketing commitments, including sponsoring the league's halftime show.", "Twitch has signed on as the league's official livestreaming partner for games throughout the season, including weekly matchups, in-season tournaments, playoffs, and the NBA 2K League finals. The livestream includes various talent providing commentary, analysis, and additional league updates.", "Last week, the league announced two official sponsorships, Scuf gaming controllers and HyperX gaming headsets. We look forward to watching the continued progress and growth of the league, which has the long-term potential to enhance engagement, and to be a meaningful driver of profits for our company.", "China remains another long-term emerging growth opportunity for Take-Two. Building on the popularity of NBA 2K Online, 2K and Tencent are teaming up again to codevelop and release the title's highly anticipated successor, NBA 2K Online 2. This new game is based on the console edition of NBA 2K and features 2K's legendary gameplay, 27 customizable position types, new player trading systems, e-sports optimized features, localized commentary, and more. NBA 2K Online 2 is currently in closed beta testing and is planned for commercial release this fall.", "In addition, we are pleased to expand our successful partnership with Tencent with last month's announcement that Kerbal Space Program will be released on Tencent's WeGame distribution platform as a premium PC game at a date to be determined. We are excited about Tencent's WeGame platform and the opportunity to grow our business in China.", "We are also very enthusiastic about the long-term potential of Private Division, our new publishing label that is dedicated to bringing titles from top independent developers to market. Private Division currently has contracts to publish several upcoming titles based on new IP from renowned industry talent, including Panache Digital Games, The Outsiders, Obsidian Entertainment, and V1 Interactive. Private Division will seek to add to its already impressive roster of development partners throughout the world and we look forward to its future announcements. Next month at E3 in Los Angeles, we will have a corporate booth on the show floor. We will not be showing any new products, but we will be holding business development, investor relations, media and sales meetings throughout the show.", "Looking ahead, we have a strong development of pipeline across our labels, which includes new releases from our popular series along with groundbreaking new IP. With our unwavering commitment to delivering the highest quality entertainment experiences that keep our audiences engaged, Take-Two is better positioned than ever to provide value to our customers and generate growth and profits over the long-term.", "I'll now turn the call over to Lainie." ] }, { "name": "Lainie Goldstein", "speech": [ "Thanks, Karl. Good afternoon, everyone. Today I'll discuss our fourth quarter and Fiscal Year 2018 results and then review our financial outlook for the first quarter and Fiscal Year 2019. Please note that additional details regarding our actual results and financial outlook are contained in our press release.", "As mentioned by Strauss, our solid fourth quarter results mark the completion of an outstanding Fiscal 2018 for Take-Two, during which we delivered operating results that greatly surpassed the initial outlook we provided at the start of the year. These results were driven primarily by the sustained outperformance of Grand Theft Auto Online and Grand Theft Auto V coupled with record results from NBA 2K.", "Starting with the fourth quarter, our operating metric total bookings grew to $411 million and net cash provided by operating activities exceeded our expectations. Digitally delivered net bookings grew 12% to $330 million and accounted for 81% of the total.", "Turning to some details from our fourth quarter income statements, GAAP net revenue decreased by 21% to $450 million and cost of goods sold decreased 40% to $189 million. Operating expenses increased by 19% to $173 million due primarily to higher R&D expenses and a full quarter of expenses from Social Point, which we acquired in January 2017. GAAP net income was $91 million or $0.77 per share as compared to $99 million or $0.89 per share in the prior year period.", "Turning to our Fiscal 2018 results, total net bookings grew 5% to $2 billion, driven principally by growth from Grand Theft Auto Online and NBA 2K along with a full year of results from Social Point, partially offset by our lighter release slate. Of this amount, 68% were digital-delivered net bookings, which grew 25% to a new record of $1.35 billion. Our digitally delivered net bookings were driven by record recurrent consumer spending, which was partially offset by lower full game downloads due to Fiscal 2018's lighter release slate.", "Net cash provided by operating activities grew 19% to $394 million, which exceeded our most recent outlook of $300 million and was more than double our original outlook at the start of the year. And we spent $62 million on capital expenditures. At fiscal year-end, our cash and short-term investments balance was over $1.4 billion.", "As a result of favorable market conditions, we were able to repurchase 1.5 million shares of our stock for $155 million during Fiscal 2018 and an addition 1.6 million shares for $153 million during fiscal first quarter 2019 to date.", "Turning to some details from our Fiscal 2018 income statement, GAAP net revenue increased to $1.8 billion and cost of goods sold decreased by 12% to $898 million. Operating expenses increased by 14% to $759 million due primarily to a full-year of expenses from Social Point as well as higher R&D, stock-based compensation and reorganization costs, which are partially offset by lower marketing expense. GAAP net income increased by 158% to $174 million of $1.54 per share.", "Now I will review the highlights of our Fiscal 2019 financial outlook, starting with the fiscal first quarter. We expect net bookings to range from $215 million to $265 million. The largest contributors are expected to be Grand Theft Auto Online, Grand Theft Auto V, NBA 2K18, and Social Point.", "We expect GAAP net revenue to range from $345 million to $395 million and cost of goods sold to range from $83 million to $109 million. Operating expenses are expected to range from $190 to $200 million. At the midpoint, this represents a 12% increase over last year driven by higher R&D and stock compensation expense. We expect GAAP net income to range from $62 million to $74 million or $0.53 to $063 per share.", "Turning to our outlook for the full fiscal year, we expect net bookings to range from $2.67 billion to $2.77 billion. At the midpoint, this represents a 37% increase over Fiscal 2018, driven primarily by the launch of Red Dead Redemption 2 and expected growth from NBA 2K, which we forecast to be partially offset by lower net bookings from Grand Theft Auto V and Grand Theft Auto Online.", "We expect net bookings from recurrent consumer spending to increase modestly and digitally delivered net bookings to grow by 15% to 20%. The largest contributors to net bookings are expected to be Red Dead Redemption 2, NBA 2K, Grand Theft Auto Online, and Grand Theft Auto V, WWE 2K, Social Point.", "We expect the net bookings breakdown from our label to be roughly 55% Rockstar Games, 40% 2K, and 5% Social Point and other. And we expect our geographic net bookings to be about 55% United States, and 45% international. We expect to generate approximately $710 million in net crash provided by operating activities, up 80% over the last fiscal year, and we plan to deploy approximately $60 million for capital expenditures.", "We expect GAAP net revenue to range from $2.5 billion to $2.6 billion and cost of goods sold to range from $1.41 billion to $1.43 billion. Total operating expenses are expected to range from $885 million to $925 million. At the midpoint, this represents a 19% increase over the prior year, driven by high marketing, personnel, and IT expenses. We expect GAAP net income to range from $180 million to $211 million or $1.53 to $1.80 per share. For management reported purposes, we expect our tax rate to be 20%, down two percentage points from prior years due to the recent tax reform legislation.", "In closing, fiscal 2018 was another great year for Take-Two, our ability to deliver growth in net bookings, earnings and cash flow despite an unusually light release slate reflects the strength of our core franchises and our ability to drive engagement with and earn consumer spending on our titles for years after launch.", "We are very excited about our outlook for Fiscal 2019, which is poised to be a record year for both net bookings and net cash provided by operating activities. Over the long-term, our company has the creative assets, operational discipline, and financial foundation to generate growth in margin expansion for our shareholders.", "Thank you. Now I'll turn the call back to Strauss." ] }, { "name": "Strauss Zelnick", "speech": [ "Thanks, Karl and Lainie. On behalf of our entire management team, I'd like to thank our colleagues for delivering another successful year for our organization. To our shareholders, I want to express our appreciation for your continued support. We'll now take your questions. Operator?" ] } ]
[ { "name": "Operator", "speech": [ "At this time, we will be conducting a question and answer session. Please press *1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press *2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the * key.", "Our first question is with Mike Olson with Piper Jaffray. Please proceed with your question." ] }, { "name": "Mike Olson", "speech": [ "Good afternoon. Did you say that GTA exceed yoyr expectations and grew year over year in the quarter or was that the full year Fiscal 18? And if you were referring to the March quarter where it was that GTA exceed your expectations, given bookings came in at the lower end of the March quarter guidance range, was there something else within the overall mix that disappointed versus your internal expectations?" ] }, { "name": "Strauss Zelnick", "speech": [ "Yes, Mike. In fact, Grand Theft Auto Online was up year over year, was up in the quarter, had another record year. We had previously expanded our guidance for the year. We got it up. In the fourth quarter, NBA 2K Online didn't do quite as well as expected when we guided up." ] }, { "name": "Mike Olson", "speech": [ "Got it. Okay. It sounds like there's not a new content drop for GTA Online in the June quarter. Would that explain the difference between -- obviously you're not in control of what consensus does, but the difference between your guidance and consensus. Is that the right way to look at it, that you have a tough comp off of GTA Online content that hit last year's June quarter?" ] }, { "name": "Strauss Zelnick", "speech": [ "Yeah, you asked and answered the question correctly, which is to say we had the Gun Running update in last year's fourth quarter. It isn't a direct comp. We've said over and over again it's very hard to look at this company by a quarter by quarter comping situation because we're driven by our content. Now, we're very fortunate that we have such a strong catalog and we have such strong customer recurrent spending. The company certainly looks a lot different than it used to look. Even so, we are beholden to what content we create. So, period to period is not often a good comp. That's really the reason we believe that consensus is off." ] }, { "name": "Mike Olson", "speech": [ "Thank you." ] }, { "name": "Operator", "speech": [ "Our next question is with Tim O'Shea with Jefferies. Please proceed with your question." ] }, { "name": "Tim O'Shea", "speech": [ "Yeah. Thank you for taking my question. Looking at the recurrent consumer spending, is it possible to quantify the impact you saw this quarter from Fortnite. Strauss, you mentioned NBA 2K Online didn't do as well. I'm just curious if you attribute that to Fortnite and then if you attribute that to GTA Online specifically, if there was anything that you noticed with respect to engagement or monetization as Fortnite started to gain steam through the quarter. Thanks." ] }, { "name": "Lainie Goldstein", "speech": [ "Okay. You probably want to take the Fortnite part." ] }, { "name": "Strauss Zelnick", "speech": [ "Tim, sorry, with regard to your question about the fourth quarter, first of all, I misspoke earlier. It was NBA 2K, not NBA 2K Online that was not quite at our revised expectations for the quarter. In terms of what the competitive landscape was, there's no doubt there are a couple of big hits in the marketplace, Fortnite and PUBG, they're big hits. That creates a lot of benefits. We think it brings new players into the market. It just shows what a robust industry that we operate in. Naturally, we would like to have all the hits. I don't think that's necessarily a realistic goal.", "It's pretty hard to determine what competitive landscape effects are, however, because entertainment properties compete with each other, with themselves, and with nothing at all. Entertainment is a nice to have, not a must have good. It's impossible to determine whether a particular title had an impact, although I think we've all observed that Fortnite is going to create a lot of activity around it." ] }, { "name": "Tim O'Shea", "speech": [ "Thanks." ] }, { "name": "Strauss Zelnick", "speech": [ "In terms of your question around Grand Theft Auto Online, we had a record year, we had a record quarter, and the title continues to perform extraordinarily." ] }, { "name": "Operator", "speech": [ "Our next question is with Eric Handler with MKM Partners. Please proceed with your question." ] }, { "name": "Eric Handler", "speech": [ "Yes, I'm wondering if you can talk a little bit about Social Point. I remember in last year's guidance based on the percentage of net bookings you were sort of looking for about $100 million, I'm not sure if you ever updated it about where Social Point finished. Now, just doing back of the envelope calculations based on the midpoint of your net bookings guidance, you're looking at about $136 million of revenue. Maybe you could talk about some of the key drivers for Social Point this year. Are we getting more updates? Are we getting any new games and what you expect there?" ] }, { "name": "Strauss Zelnick", "speech": [ "Yeah. Social Point is doing just fine. Dragon City and Monster Legends are their two big hits in the market. Those will continue to drive the results. In the fourth quarter, profits were up from Social Point. The drivers will be how those games perform and potentially how some upcoming titles perform depending on their release schedule, naturally." ] }, { "name": "Lainie Goldstein", "speech": [ "Also, for Social Point and some of our mobile titles, we had some change in accounting where we need to gross up the accounting for it instead of showing it net. That's the difference you're seeing in terms of the growth number for the net bookings." ] }, { "name": "Eric Handler", "speech": [ "Okay. Lainie, just as a follow up for you, just looking at your numbers and the guidance, you're projecting a record operating cash flow number, but it doesn't seem like you're projecting a record EPS. I'm just curious -- is there any accounting reversals or when you think of the puts and takes, the difference between EPS and operating cashflow, what's sort of impacting that?" ] }, { "name": "Lainie Goldstein", "speech": [ "So, since our business mix is slated toward the newer releases, we're having some higher development costs this year and then also the marketing that's associated with it. So, it depends on the timing of the marketing and then also the software development cost if cash is behind us." ] }, { "name": "Eric Handler", "speech": [ "Got it. Thank you." ] }, { "name": "Operator", "speech": [ "Our next question comes from Justin Post with Merrill Lynch." ] }, { "name": "Justin Post", "speech": [ "Great. I'd like to focus on next year's guidance. That definitely seems to imply you might have some acceleration in spend the next quarter and then a big healthy number for Red Dead. Can you talk about if you think some of their recurrent spend growth is going to accelerate in your guidance? Besides the 55% of bookings from Rockstar, any other clues you can give us on your expectations for Red Dead? Thank you." ] }, { "name": "Lainie Goldstein", "speech": [ "So, for Red Dead, we don't share unit expectations, but looking at recurrent consumer spending, we usually have bigger quarters in our second or third quarters of the year. So, you would start to see that be in line with previous years." ] }, { "name": "Justin Post", "speech": [ "Got it. When you think of the quality of releases for Grand Theft Auto Online, the quantity of releases, do you feel like this year is going to compare well to last year? How are you thinking about how much content is coming for that?" ] }, { "name": "Strauss Zelnick", "speech": [ "As you know, our labels comment on their upcoming releases and what they're going to look like and we like it that way. That said, Rockstar Games has said they have much more content coming for Grand Theft Auto Online and they will continue to support it. Obviously, we just continue to enjoy another record year for Grand Theft Auto Online." ] }, { "name": "Justin Post", "speech": [ "Thank you." ] }, { "name": "Operator", "speech": [ "Our next question is from Chris Merwin with Goldman Sachs. Please proceed with your question." ] }, { "name": "Chris Merwin", "speech": [ "I had another one on the guidance for Fiscal 19. It looks like non-GAAP gross margin guidance was just below 50%, which I think is down pretty significantly year on year. of course, you've got Red Dead coming out in the December quarter. So, does the full year guidance reflect the higher software amortization you've got coming out or does it reflect the higher skew of physical revenue compared to last year.", "Maybe as a related question, what does your guidance assume for the digital download mix for Red Dead. Just a quick second one, I'm curious if Fortnite has caused you to maybe think about the potential for cross-platform gameplay. Which of your titles do you think would be more suited for the smaller screen and how long would it take to develop a game like that for mobile? Thanks." ] }, { "name": "Lainie Goldstein", "speech": [ "So, let me take the first one first. When you're talking about next year in our margin, you are correct. It is driven by the software development cost associated with a new title or a big new release. Then also for our blockbuster titles, typically, they have had higher physical sales instead of digital. So, that's also going to move the margin as well." ] }, { "name": "Strauss Zelnick", "speech": [ "Regarding cross-platform availability, we already make many of our titles available on multiple platforms, including over time sometimes mobile platforms -- it all depends on the title -- or VR platforms. We take it on a case by case basis. But I wouldn't say there's anything about the Fortnite experience that would change our view about platforms.", "We're obviously familiar with mobile platforms. We have plenty of games available on platforms, most notably Social Point's games as long as WWE SuperCard and some of our other titles that come from other labels and Rockstar Games has made titles available on mobile platforms as well. It really depends on what the opportunity is title by title. I would say our outlook about making titles available where consumers are has changed. Our strategy is to be where the consumer is." ] }, { "name": "Chris Merwin", "speech": [ "Okay. Thank you." ] }, { "name": "Operator", "speech": [ "Our next question is with Brian Nowak with Morgan Stanley. Please proceed with your question." ] }, { "name": "Brian Nowak", "speech": [ "Thanks for taking my questions. I have two. The first one on the NBA E-League, I appreciate the color on the sponsors, the kind of steps that have been taken. I guess I'd be curious to think about how you all are thinking about the timing when you can really get a meaningful impact from monetization.", "What are the biggest drivers of monetization you see? Then Strauss, how do you think about the potential for e-sports gambling given the change in legislation? Then kind of a bigger picture question around Fortnite -- Strauss, what were your biggest learnings from watching the Fortnite phenomenon pop up as far as the way you think about the potential future for gaming and the ways players come into the gaming ecosystem?" ] }, { "name": "Strauss Zelnick", "speech": [ "So, you have a number of questions there. With regards to the NBA 2K League. We're a couple weeks in. We're excited by the early experiences. There are a lot of people watching on Twitch. We think there's a great opportunity. We've said all along that our risk profile is exceedingly low. The actual exposure if things they don't work out the way we like is de minimis, certainly not material. Any upside we believe is substantial. We haven't included any upside in that outlook. That's sort of the way we tend to conduct business around here. We want to take exceedingly measured risk and we report back on them.", "We don't like to over-promote in advance. In terms of where monetization can come from, I think your expectations would properly be sponsorship, which is going well. It's early days, but it's going really well. And media rights is also going well. Then eventually, depending on the level of success, of course, you can imagine event-related revenue, merchandise, and the like. But again, it's early days. We're gaining new experience as every day passes.", "In terms of the recent Supreme Court decision on the potential for sports gambling, this will now be left for the states. We think it's a good decision. We think there may be an influence and a meaningfully positive influence on our business. However, it's not in our current sites. We don't have any expectations right now, simply observing that there are potential opportunities in the future. I'll be very surprised if sports gambling didn't intersect with the industry at some point in a relatively near future.", "In terms of the learnings around Fortnite, as I said earlier, maybe the biggest learning is reinforcement of the fact that hits, big hits by their very nature are unexpected. What drives a big hit is innovation, not derivation. It's what we're proud of around here. We put out Red Dead Redemption. The conventional wisdom that western titles don't work in the video game business. Red Dead Redemption was a big hit and we have extremely high expectations for Red Dead Redemption 2.", "I think the fact that Fortnite surprised everyone, particularly given where Fortnite came from, after what is now in the market was based on a prior release that did not perform all that well, but it's just a reflection that if you innovate and give consumers what they want, you can get an extraordinary result. While we would love to corner the market in hits -- we certainly see it as our job -- we don't have all of the hits and we shouldn't expect to.", "But what I don't think one takes away from this property is that a particular approach, a particular mode has suddenly redefined the business. I don't think that's the case. I think to the contrary, I think if one changed one's business to follow other people's big hits, you'd constantly be playing catch-up. To say that you wouldn't be in second place is an understatement. You might be in last place. It's our job always to innovate and more often than not, that has driven our success." ] }, { "name": "Brian Nowak", "speech": [ "Very helpful. Thank you." ] }, { "name": "Operator", "speech": [ "Our next question is with Ben Schachter with the Macquarie Group. Please proceed with your question." ] }, { "name": "Ben Schachter", "speech": [ "A few questions -- on Red Dead, should we expect that consumers will be able to access and purchase extra content immediately after release or it will take time for that to evolve? On the NBA, I think you said we should expect growth from that in 2019. What gives you the confidence that we should expect growth and what happened in the March quarter that drove the under-performance.", "Just on the NBA on the league, anything else that was different or unexpected in the launch period? One more, Lainie, in terms of amortizing the capital cost of Red Dead, driven how successful GTA has been over the long-term, should we capitalize those costs for Red Dead over a long period of time than we've seen historically? Thanks." ] }, { "name": "Strauss Zelnick", "speech": [ "So, Lainie, why don't you take the last question first and then I'll dive in." ] }, { "name": "Lainie Goldstein", "speech": [ "So, we don't usually share on a title by title case amortization, but if you think about blockbuster titles and how Grand Theft Auto has performed, it would be something we would look at in terms of how long we would amortize the title over. We usually look at what our estimated life of that title is going to be." ] }, { "name": "Strauss Zelnick", "speech": [ "On Red Dead, obviously Rockstar will give clarity on content drops and the like in due time. We're very excited about the October 26th release. Everyone who's experienced the trailer is also excited and obviously Rockstar will make further announcements in due time. In terms of NBA and recurrent consumer spending in the fourth quarter, we think there were any number of factors that affected the level of monetization of the title and Visual Concepts has plans to address those factors in NBA 2K19.", "We think Fiscal 2019 will be another year of growth for NBA 2K, including both unit sales and recurrent consumer spending. So, our view is look, we always have to get better. We pay attention to what the consumer says. We've had an amazing year for our basketball franchise, just amazing, and we expect it to get even better." ] }, { "name": "Operator", "speech": [ "Our next question is way Ray Stochel with Consumer Edge Research. Please proceed with your question." ] }, { "name": "Ray Stochel", "speech": [ "Great. Thanks for taking my question. Could you talk about the nature of the 2K property delay and anything that you could say to give us some confidence in that title after this delay? Any quantification would be helpful. And then also, under the 2K label, could you talk about all the changes that are happening at Hangar 13 and what are your thoughts on that studio going forward? Thanks." ] }, { "name": "Karl Slatoff", "speech": [ "In regard to the 2K title, it's simply because it needs more time for development at this point. In terms of confidence level of when it's going to come out, we're highly confident that this title will certainly be coming out in Fiscal Year 20, which is what we said in our statements today. So, our confidence level is very high.", "In terms of Hangar 13, Hangar 13 is a long-standing studio for us, a very talented group of folks. We are constantly spending time figuring out where to best put our resources on which projects. What you're seeing there is a reflection of that specifically. We're moving assets around from game to game all the time and the movement that you're seeing is a reflection of just our view on where the best place to deploy our assets are." ] }, { "name": "Operator", "speech": [ "Our next question is with Jared Johnson with BMO Capital Markets. Please proceed with your question." ] }, { "name": "Gerrick Johnson", "speech": [ "Great. Thank you. In your 2019 guidance, are you planning any marketing spend in 4Q for the 2K new title release? Then also in the NBA 2K league, is Twitch paying for streaming rights? If so, can you discuss some numbers there? Thank you." ] }, { "name": "Lainie Goldstein", "speech": [ "So, for our marketing, we do expect to have some marketing for the 2K release for Fiscal Year of 2020." ] }, { "name": "Strauss Zelnick", "speech": [ "With regard to the e-league, our media rights are valuable, so it's appropriate to assume there's an economic cost to media rights, however, we're not talking about giving any specific media or sponsorship deals for the league." ] }, { "name": "Gerrick Johnson", "speech": [ "Lainie, you cut out. I didn't hear the first part of your answer on the marketing spend." ] }, { "name": "Lainie Goldstein", "speech": [ "Oh, sorry. So, for the marketing spend for the 2K release, we do expect to have some marketing in this fiscal year for the titles released next year." ] }, { "name": "Gerrick Johnson", "speech": [ "Great. Thank you." ] }, { "name": "Operator", "speech": [ "Our next question is with Ryan Gee with Barclays. Please proceed with your question." ] }, { "name": "Ryan Gee", "speech": [ "Good afternoon. Thanks for taking my question. Quick question for Lainie -- I think your guidance for your O-margins down a couple hundred basis points year over year, low 20s and that's down from this year. I was wondering if you could update us on what you're thinking about what potential margins are for your company." ] }, { "name": "Henry Diamond", "speech": [ "Ryan, we can't hear you." ] }, { "name": "Lainie Goldstein", "speech": [ "You're breaking up." ] }, { "name": "Ryan Gee", "speech": [ "Okay. Sorry. Hopefully you can hear me. Question for Lainie, specifically on the O-margins -- it looks like guidance were down a couple hundred basis points year over year. I was hoping you can give us an update on what you think for the company is the potential long-term operating margins for the timeframe or some milestones you're thinking about achieving that. Just a quick follow-up on the NBA 2K franchise. You mentioned the new NBA 2K Online too in China with Tencent. Anything you can say as to how significant the original NBA 2K Online is for you guys financially. When that does come out, what are your expectations around that? Thanks." ] }, { "name": "Lainie Goldstein", "speech": [ "Ryan, for our margins, we did talk about that would be slightly down for this fiscal year will be slightly down because we have a big release, so there's higher software development costs with marketing associated with the title. But we expect our margins to expand over the long-term and on a year by year basis, they're going to vary based on our release schedule." ] }, { "name": "Strauss Zelnick", "speech": [ "In terms of the NBA 2K franchise, we have very high hopes for the NBA 2K Online title. We're obviously in business with Tencent. They're a phenomenal partner. It's a great market. NBA 2K Online has been the number one sports title for some time. We have 37 million registered users. We're phenomenally excited about the upcoming release. It's in closed beta now. It's planned for commercial release in the fall. So, stay tuned." ] }, { "name": "Operator", "speech": [ "Our next question is with Andrew Uerkwitz with Oppenheimer Company. Please proceed with your question." ] }, { "name": "Andrew Uerkwitz", "speech": [ "Thanks for taking my question. Strauss, I appreciate your comments around Fortnite and your strategy for developing new games. But if you look at Fortnite, it seems that there's been an expansion of the market around casual gamers and getting casual gamers to play more and potentially spend more. It seems like the Rockstar titles tend to focus more on the harder core players. Have some of these recently titles shaped the way you developed or think about developing games for a broader audience along those lines at all?" ] }, { "name": "Strauss Zelnick", "speech": [ "You know, I think the explosion of -- I'm not sure casual is the right term. I'm not sure people would call Fortnite a casual title. I do think what you're alluding to is right. The free to play revolution, whether that's been mobile or fixed has been transformative to the business. It's massively increased the size of the business. We're in the free to play business, whether it's a mobile platform or a fixed platform. We're in the business in China. We're in that business in 2K. We're in that business with Social Point.", "You're right, it's a huge growth business. What we like about it is some free to play games, particularly mobile games speak more to an older demographic, some speak more to a female demographic. There are a lot of people that believe that Fortnite has welcomed people into our industry some people that didn't play video games. Some of that is anecdotal, but I think that's right. This is all good news. It is news that is not lost on us, hence the Social Point acquisition and emphasis on free to play titles as we grow our core business.", "That said, what has historically been our stock and trade, the highest quality console games, deep immersive, many-hour experiences that are available at a premium price remains a terribly important business. While I think hardcore gamers are excited about both what Rockstar and 2K bring to bear, it's worth noting -- and forgive me for maybe immodest about it on behalf of our company and Rockstar Games -- but Grand Theft Auto has sold over 95 million units and according to others apart from us, it's the highest grossing, most profitable entertainment product ever made of any sort. So, it's not only exciting to a small core. It's exciting to a very, very broad audience.", "I think what Rockstar Games has uniquely shown the ability to do is to make the title easy to approach and difficult to master. You can approach Grand Theft Auto and Grand Theft Auto Online in any number of ways. If you're a hardcore gamer, you can find it super-compelling and if you're a lot more casual, you can find the experience super-compelling. There's so much there now you can very much define your own experience and create that for many, many hours of wonderful entertainment. Do I think that approach to the entertainment business ever becomes antique? I do not. I think that's' the nature of the entertainment business.", "So, this is sort of saying like in a multiple-choice test all of the above. That's how we view our obligations around here. We need to be where the audience is. That's' one of the reasons where we did the Social Point acquisition. That's the reason that we started the Private Division group, which will bring independent titles to bear, we hope meeting another audience need. That's why we acquired Kerbal Space Program and that's why we find ourselves in the position that we're in today with an incredibly strong balance sheet on the one hand and incredibly strong creative team on the other." ] }, { "name": "Andrew Uerkwitz", "speech": [ "Got it. Thank you so much." ] }, { "name": "Operator", "speech": [ "Our next question is with Brandon Ross with BTIG. Please proceed with your question." ] }, { "name": "Brandon Ross", "speech": [ "Thanks for taking the questions, a couple -- another one on the margin side -- can you get a little more granular on the percent or give us any more color on the percent of amortization you expect to take on Red Dead this year on a non-GAAP basis? Then just media is undergoing a pretty massive consolidation wave right now and the video game publishers have not participated to date in that. Why do you think that is and do you expect that to change in the coming months or years? Thanks." ] }, { "name": "Lainie Goldstein", "speech": [ "So, on the margin for the amortization of Red Dead, as I said, we don't give that out on a title by title basis, but if you think about larger titles and what the lifetime potential of them are and how long they would spread out, that's the best way for you to take a look at that." ] }, { "name": "Strauss Zelnick", "speech": [ "And on the consolidation point, I think the consolidation you're seeing or expecting in traditional, so-called traditional media businesses has been driven by a lack of growth frankly and a need to create scale, reduce cost, find cost synergies and the like. I think that just doesn't apply to such a high-growth business, the one we find ourselves in and our competitors find ourselves in.", "Historically the media and entertainment businesses that have tended to consolidate are the ones where a massive portion of your revenue was driven by catalog that's already amortized and doesn't cost that much to continue to create value. In our business, because of technological change and the importance of frontline releases, catalog is still a relatively small part of the business compared to other relatively mature entertainment businesses.", "I think you'll start potentially seeing consolidation if and when we reach a technological asymptote or if and when catalog creeps up well over 50% year in, year out, including big frontline release years. Now, we perform particularly well on catalog, so our numbers aren't necessarily reflective of the industry as a whole, but I think the point stands.", "The other piece is in a business that is frontline-driven, that means if you do consolidate, you are potentially arguing that you're going to have much greater exposure to frontline shelf space, whether that's digital or physical, but it may be realistic to assume. And of course, the day after you close, you still have to invest in frontline production and frontline marketing, which is costly.", "So, I think, as I said, I think you would look for entertainment consolidation as businesses mature and they're either not growing flatter or potentially declining and none of that describes the interactive entertainment business." ] }, { "name": "Brandon Ross", "speech": [ "Do you think there's any merit whatsoever to putting together traditional media asset with video game publishers?" ] }, { "name": "Strauss Zelnick", "speech": [ "Potentially, although so far, we haven't seen it. I definitely would have thought so. I think years ago, I said expected such consolidation and it didn't materialize, but I think the facts force me to change my outlook. I think when you look at the quality of the intellectual property created and owned by ourselves and some of our competitors, it's hard to imagine that there wouldn't be opportunities in other forms of entertainment and indeed some of our competitors have entered other forms.", "So, if it makes sense to other forms of entertainment at which some traditional media companies are already expert, you would imagine that kind of consolidation could have some industry logic, but I would observe that not only has it not occurred, but that some legacy entertainment companies have, in fact, exited interactive entertainment of late." ] }, { "name": "Brandon Ross", "speech": [ "Thank you." ] }, { "name": "Operator", "speech": [ "Our next question is with Doug Creutz with Cowen. Please proceed with your question." ] }, { "name": "Doug Creutz", "speech": [ "Thanks. You mentioned you had four major GTA Online content updates in the last fiscal year. I'm just wondering if you could talk about how you think about the content pipeline shaping up for the next fiscal year. Can you match that kind of cadence? I think in the past several years, you typically started the year assuming GTA Online would be down year over year. Did you build that conservatism into your guidance as well this year? Thanks." ] }, { "name": "Strauss Zelnick", "speech": [ "Yeah. In terms of content updates, Rockstar Games has said that much more content is coming for Grand Theft Auto Online and obviously, they intend to continue supporting the title. Yes, our guidance does reflect an expectation that the results will moderate this year." ] }, { "name": "Doug Creutz", "speech": [ "Thank you." ] }, { "name": "Operator", "speech": [ "Our next question is with Stephen June for Credit Suisse. Please proceed with your question." ] }, { "name": "Stephen Ju", "speech": [ "Thanks. Strauss, did 2K or Tencent handle the development of NBA 2K Online and consequently who will be handling the distribution of this title outside of the Chinese market? Presumably, you may have plans to release the game in non-console territories. Secondarily, there's obviously now hits from studios not affiliate with yourself or some of your publisher peers. So, it says that there are content studios and IP out there that you may think about acquiring and bringing in house, but deals seem to be few and far between. Has the M&A environment become more difficult? Thanks." ] }, { "name": "Strauss Zelnick", "speech": [ "Thanks for your questions. With regards to development of NBA 2K Online with Tencent, that's obviously an arrangement between Tencent and 2K and both titles are actively involved in bringing that title to market. Social Point is not involved with bringing that title to market. With regard to potential acquisitions, we acquired the Kerbal Space Program intellectual property. We're continuing to develop and release around that title. We're excited that we acquired Social Point and over the years, we've made numerous other selective acquisitions, typically where we can acquire intellectual property and a team that goes along with it.", "I don't think the environment is any more challenging than it's been. I think it's been challenging for quite some time because this has been a growth business for quite some time and there have been some hefty multiples paid. I think we feel that our discipline has really paid off. There are a few things that occurred that we think we missed the boat off, but pressure few and we've much more often dodged a bullet than missed the boat." ] }, { "name": "Stephen Ju", "speech": [ "Thank you." ] }, { "name": "Operator", "speech": [ "Our next question is with Mike Hickey with Benchmark. Please proceed with your question." ] }, { "name": "Mike Hickey", "speech": [ "Hey, guys. Thanks for taking my question. Congrats on a strong quarter. I'm curious, still a bit far away here but there's been some speculation that we may have a new console from PlayStation in 2020. Obviously, that's not something that you can talk to -- I don't think, anyway -- but I'm just curious about your perspective on what it means to have a console cycle opportunity or challenge.", "I'm also wondering how you released GTA V at the end of the prior cycle and were obviously very strategic and opportunistic to release the current gen shortly thereafter. So, how you think about how that strategic opportunity potentially coming into maybe a new PlayStation box in 2020? Thanks, guys." ] }, { "name": "Strauss Zelnick", "speech": [ "Thanks, Mike, always nice to hear from you. As you imagine, we wouldn't have an ability to comment on another company's plans. You'll have to ask them about that. I think we've navigated transitions in console releases and other platform releases pretty well around here since we showed up roughly 11 years ago. We're actually really proud of that because historically, as you know, during a transition period, the challenges can be very significant if you bet wrong in terms of what you're up to, whether that's supporting something new or supporting something old.", "Again, what's driven that is less corporate cleverness and more that our labels create the highest quality properties that defy normal behavior in console transition periods. The last transition period, for example, was a lot of noise in the marketplace about how challenging it was for catalog product. This is going back some time, but you've been in the industry a long time, so you'll remember this as I do. We weren't challenged in the least. Why? Because I believe the quality of our catalog was so high and is so high. That's why, I think, our catalog sells more per SKU than I think any other company in the business.", "So, I think because we have a limited number of the highest quality releases and because our titles tend to do well as catalog titles, transition periods create somewhat less risk for us. We're not dealing with a massive tonnage of SKUs that we have to make decisions about. And because our titles are typically high quality, they can continue to perform as new platforms are released.", "So, obviously Grand Theft Auto V was developed for the last generation and yet, it remains the standard bearer for this generation, which is extraordinary and something that we are grateful to Rockstar for and incredibly proud of.", "So, in the event that there are new platforms, we'll make decision on what to support based on our view of potential success. I would observe that the PC platform has become a very, very important part of what we do, driven by digital distribution. That was not the case for so-called console titles ten years ago and it is the case now. Does that mean the business is flattening out and everything becomes open? Not in the least. I wouldn't rule out the possibility of more generations. However, it does get us closer to a point where we truly can be platform agnostic as an industry. I would say we're not there yet, but the will come." ] }, { "name": "Mike Hickey", "speech": [ "Thank you, Strauss. Good luck, guys." ] }, { "name": "Operator", "speech": [ "Ladies and gentlemen, we have reached the end of our question and answer session. I now would like to turn the call back over to management for closing remarks." ] }, { "name": "Strauss Zelnick", "speech": [ "We've kept you all long enough. We're really proud of our results. We're grateful to our creative colleagues who drive these results. We're grateful to our business colleagues who keep the trains running on time. We're grateful to our marketing and distribution colleagues who we believe are the best in the business. This company has a wonderful culture and enjoys terrific results on a consistent basis. We're proud of that and for those of you attending the call today, our shareholders and those who follow us, thanks so much for your support and interest." ] }, { "name": "Operator", "speech": [ "This concludes today's teleconference, you may disconnect your lines at this time. Thank you for your participation." ] }, { "name": "Mike Hickey", "speech": [ "More TTWO analysis", "This article is a transcript of this conference call produced for The Motley Fool. While we strive for our Foolish Best, there may be errors, omissions, or inaccuracies in this transcript. As with all our articles, The Motley Fool does not assume any responsibility for your use of this content, and we strongly encourage you to do your own research, including listening to the call yourself and reading the company's SEC filings. Please see ourTerms and Conditionsfor additional details, including our Obligatory Capitalized Disclaimers of Liability." ] } ]
TTWO
2019-11-07
[ { "description": "Senior Vice President Investor Relations & Corporate Communications", "name": "Henry Diamond", "position": "Executive" }, { "description": "Chairman and Chief Executive Officer", "name": "Strauss Zelnick", "position": "Executive" }, { "description": "President", "name": "Karl Slatoff", "position": "Executive" }, { "description": "Chief Financial Officer", "name": "Lainie Goldstein", "position": "Executive" }, { "description": "MKM Partners -- Analyst", "name": "Eric Handler", "position": "Analyst" }, { "description": "Jefferies -- Analyst", "name": "David", "position": "Analyst" } ]
[ { "name": "Operator", "speech": [ "Greetings. Welcome to Take-Two Interactive Software Q2 Fiscal Year 2020 Earnings Call. [Operator Instructions].", "I would now like to turn the conference over to your host, Mr. Hank Diamond, Senior Vice President of Investor Relations and Corporate Communications. Thank you, sir, you may begin." ] }, { "name": "Henry Diamond", "speech": [ "Good afternoon. Welcome and thank you for joining Take-Two's conference call to discuss its results for the second quarter of fiscal year 2020 ended September 30, 2019.", "Today's call will be led by Strauss Zelnick, Take Two's Chairman and Chief Executive Officer; Karl Slatoff, our President; and Lainie Goldstein, our Chief Financial Officer. We will be available to answer your questions during the Q&A session following our prepared remarks.", "Before we begin, I'd like to remind everyone that statements made during this call that are not historical facts are considered forward-looking statements under federal securities laws. These forward-looking statements are based on the beliefs of our management as well as assumptions made by and information currently available to us. We have no obligation to update these forward-looking statements. Actual operating results may vary significantly from these forward-looking statements based on a variety of factors. These important factors are described in our filings with the SEC, including the company's most recent annual report on Form 10-K and quarterly report on Form 10-Q, including the risks summarized in the section entitled Risk Factors.", "I'd also like to note that unless otherwise stated, all numbers we will be discussing today are GAAP and all comparisons are year-over-year. Additional details regarding our actual results and outlook are contained in our press release, including the items that our management uses internally to adjust our GAAP financial results in order to evaluate our operating performance.", "In addition, we have posted to our website a slide deck that visually presents our results and financial outlook. Our press release and filings with the SEC may be obtained from our website at www.take2games.com.", "And now I'll turn the call over to Strauss." ] }, { "name": "Strauss Zelnick", "speech": [ "Thanks Hank. Good afternoon and thank you for joining us today. I'm pleased to report that Take-Two's positive momentum continued in the second quarter, enabling our Company to generate operating results that significantly exceeded our expectations. We delivered strong Net Bookings, cash flow and earnings growth, fueled by the performance of NBA 2K, Borderlands 3, Grand Theft Auto Online and Grand Theft Auto V, and Red Dead Redemption 2 and Red Dead Online. Once again, our strategy of creating the highest-quality entertainment in the industry translated into outstanding results.", "On September 13, 2K and Gearbox Software launched Borderlands 3, the latest installment in our genre-defining shooter-looter series. The title had exceeded our expectations and sold-in more than 5 million units with the first five days of launch, making it the fastest-selling title in 2K's history and highest-selling title for the label on PC. Within its first five days in market, retail sell-through of Borderlands 3 was up more than 50% compared to its predecessor, and 70% of units were purchased digitally, setting a new record for a 2K cross-platform title. Borderlands 3 received resoundingly positive critical acclaim with Forbes, IGN, Shacknews, Destructoid and Meristation, all scoring the title 9 out of 10. To date, Borderlands 3 has sold-in nearly 7 million units worldwide. I'd like to congratulate the teams at Gearbox and 2K on the stellar launch and taking this beloved series to new heights. Karl will share details about our post-launch content plan that will keep players engaged in the world of Borderlands 3.", "Our industry-leading Basketball series continue to grow during the second quarter, with net bookings up approximately 9%, it's quite a difficult comparison driven by the successful September 6 launch of NBA 2K20. According to the NPD Group, NBA 2K20 is the best-selling game of 2019 to date. It delivered the highest launch month sales for any sports game in history. And the NBA 2k series is now the sixth largest video game franchise in the industry based on dollar sales. Consumer demand for NBA 2k20 remained strong and the title wad sold-in nearly 6 million units to date, generating growth over the five years release.", "During the second quarter, recurrent consumer spending in NBA 2K grew 32% to a new record, and remained the single largest contributor to that category of our business. Engagement with NBA 2K20 also increased, driven by consistent new content schedule with daily active users up almost 20% compared to NBA 2K19, and MyCAREER and MyTEAM growing by more than 30% and 150% respectively. We expect lifetime net bookings from NBA 2K20 to set a new record for the series. In addition, 2K recently announced the NBA 2K20 and Nike Gamer Exclusive Program, an innovative and first-of-its-kind gaming and sneaker partnership. This program provides players with the opportunity to unlock virtual Nike Gamer Exclusive sneakers for their MyPLAYER to wear in-game and to purchase real-life versions of the same shoes from Nike. I'd like to congratulate 2K and Visual Concepts for once again redefining what is possible in sports gaming and capturing superbly every nuance of the NBA and the pop culture that develops with it.", "Grand Theft Auto Online and Grand Theft Auto V once again exceeded our expectations, delivering the best quarter yet with respect to daily, weekly and monthly active users and our best summer ever in terms of new online users and new users overall. Recurrent consumer spending on Grand Theft Auto Online grew 23% to a new record, driven by the July release of the Diamond Casino & Resort update. This update was Grant Theft Auto Online's biggest content launch ever, delivering record player engagement across daily, weekly and monthly active users in July, and then again in August.", "As a result of the title's better-than-expected performance fiscal year-to-date and improved outlook for the balance of the year, we now expect Grand Theft Auto Online to grow in fiscal 2020,. Grand Theft Auto V remains the standard-bearer for excellence in our industry and one of the most revered and successful entertainment experiences of all time. The title continues to expand its audience around the world and has now sold-in more than 115 million units.", "Red Dead Online continues to gain momentum, and grew sequentially during the second quarter. Following the massive content drop in May when the title exited its Beta phase, on September 10th, the world of Red Dead Online evolved further with the release of the Frontier Pursuits update. This update introduced three Specialist roles including tracking down wanted criminals as a Bounty Hunter, searching the world for treasure and other exotic items to sell as a Collector, and building a business as a Trader. Rockstar Games intends to add more new roles in the future, enabling players fully to inhabit their characters as they carve out a life on the Frontier. Rockstar Games also introduced the popular Outlaw Pass, a way for Red Dead Online players to pay to access a wide array of ongoing upgrades, items and perks at a discounted value.", "Throughout the year, Rockstar Games will continue to support both Red Dead Online and Grand Theft Auto Online with many more updates in order to drive engagement and player growth. We remain as excited as ever about the long-term opportunity for Red Dead Online to be meaningful driver of recurrent consumer spending. In addition, Red Dead Redemption 2 continues to grow its audience and to date has sold-in almost 26.5 million units worldwide. Earlier this week, the title launched on PC with an array of features designed specifically for that audience including numerous graphical enhancements, a fully featured photo mode, new content additions for the game story mode and more.", "On August 27, Private Division launched Ancestors: The Humankind Odyssey for digital download on PC. The title is the first release from Panache Digital Games, the studio co-founded by Patrice Desilets, the original creative director of the Assassin's Creed franchise. Ancestors: The Humankind Odyssey was lauded by the media for its sophistication and unique approach to the survival category, and will be available for digital download on PlayStation 4 and Xbox One on December 6.", "Our second quarter results were also enhanced by Social Point's mobile games, the WWE 2K franchise, and Sid Meier's Civilization VI. One of our key strategic priorities is to find new and innovative ways to drive growth and engagement with our titles after their initial purchase. From free to play opening world's to additional chapters and content, we aim to provide consumers with the highest quality offerings that meaningfully add to their overall gameplay experience. To that end, during the second quarter, recurrent consumer spending significantly exceeded our expectations, growing 39% and accounting for 45% of our total net bookings.", "In addition to virtual currency for NBA 2K, Grand Theft Auto Online and Red Dead Online, recurrent consumer spending was enhanced by a variety of other offerings, including sales of the Borderlands 3 premium editions, which include additional content that is allocated to recurrent consumer spending. In the free to play category, Social Point remains a meaningful contributor to our results through its mobile titles, Dragon City, Monster Legends, World Chef, Tasty Town, and Word Life. During the quarter, Social Point added new content, challenges and updates to these games. Our Barcelona-based studio continues to invest in its broad pipeline of new games planned for launch in the coming years.", "WWE SuperCard has now been downloaded nearly 20 million times and remains 2K's highest-grossing mobile title. And recurrent consumer spending on the NBA 2K Online -- on NBA 2K Online in China outperformed our expectations, growing 27% in the second quarter. The title remains the number one PC online sports game in China with more than 47 million registered users.", "Lastly, add-on content grew in more than 60% led by our offerings for Sid Meier's Civilization VI and the Borderlands franchise.", "As a result of our better-than-expected second quarter operating results, we are once again raising our operating outlook for fiscal 2020. Looking ahead, we have the strongest development pipeline in our history, we're continuing to grow our portfolio with the highest-quality entertainment experiences including sequels for our biggest franchises, as well as exciting new IP. In addition, we're actively investing in emerging markets, platforms and business models such as mobile, streaming direct to consumer and subscription in order to expand our audience around the world. With the promise of new consoles and continuous technological advances, our creative teams have an increasingly robust canvas on which to achieve their vision and set new benchmarks for excellence. Take-Two is exceedingly well positioned to generate growth in margin expansion for our shareholders over the long term.", "I will now turn the call over to Karl." ] }, { "name": "Karl Slatoff", "speech": [ "Thanks Strauss. I'd like to begin by thanking our teams for delivering another strong quarter that exceeded our expectations, and I'll discuss our recent and upcoming releases. On October 22, 2K launched WWE 2K20, the latest offering in our flagship WWE franchise for PlayStation 4, Xbox One and PC. Developed by Visual Concepts, WWE 2K20 features several new gameplay modes that celebrate the WWE's thriving women's division as well as an array of fan-favorite superstars, legends and match types. Earlier this year, 2K announced a philanthropic partnership with Leukemia & Lymphoma Society in conjunction with WWE Superstar Roman Reigns, who is a leukemia survivor that helps raise awareness and $500,000 for this important cause. While we are disappointed with the reviews and consumer feedback for WWE 2K20, last week, Visual Concepts released a patch that should address many of the concerns and they will continue to make further enhancements to the gameplay experience. The WWE brand continues to expand worldwide and we believe there remains a substantial long-term opportunity to grow our WWE 2K series by improving the quality of the game.", "On October 25, Private Division launched The Outer Worlds for Xbox One, PlayStation 4, and PC. Developed by Obsidian Entertainment, The Outer Worlds marks the reunion of Tim Cain and Leonard Boyarsky, the original creators of Fallout, who have introduced an entirely new single player sci-fi RPG experience, a critical and commercial success, The Outer Worlds is exceeding our expectations and reviews have been outstanding, with GameSpot giving the game 9 out of 10, Game Informer 9.25 out of 10, and EGM a perfect 5 out of 5. In early 2020, The Outer Worlds will be released for Nintendo Switch.", "As noted by Strauss, on November 5, Rockstar Games launched Red Dead Redemption 2 for PC, which is the first title in the Red Dead Series to be offered on PC. The release of the game also marked the debut of Rockstar Games' Launcher, a new Windows desktop application that enables consumers to quickly and easily access their Rockstar Games PC collection in a single place, across both digital and disc-based titles including purchases from other digital stores, managed cloud saves and more. Players will also be able to use the launcher to shop for new Rockstar Games PC titles. The introduction of the Rockstar Games Launcher underscores our commitment to investing to deliver great entertainment experiences in new ways to our audiences.", "Later this month Borderlands 3, NBA 2K20 and Red Dead Redemption 2 will be available as part of the of Google Stadia initial offerings as full-priced games. Streaming represents an exciting opportunity and has the potential to become a compelling distribution channel for our industry that could expand our market and increase our margins.", "On November 22, Sid Meier's Civilization VI will come to PlayStation 4 and Xbox One marking the first time since 2008 that a civilization game has been available for PlayStation or Xbox consoles. In addition, 2K and Firaxis Games will launch the separate Civilization VI expansion model, which includes all content from the Rise and Fall and Gathering Storm expansion packs. Civilization VI is the fastest-selling title in the history of the series with sell-in to date of nearly 6 million units worldwide.", "Rounding out our holiday lineup will be Private Division's December 6 release of Ancestors: The Humankind Odyssey for digital download on PlayStation 4 and Xbox One.", "Throughout fiscal 2020, we will continue to support our titles with innovative post-launch content designed to drive engagement and player growth including many more updates from Rockstar Games for both Red Dead Online and Grand Theft Auto Online.", "On October 24, 2K and Gearbox Software launched the Bloody Harvest, free seasonal event for Borderlands 3, the first offering in the robust post-launch content plans for the title. We will continue to support Borderlands 3 with free seasonal content updates and rate like events called take-downs. In addition, 2K and Gearbox plan to release four major downloadable campaign expansions available collectively with the purchase of a Season Pass or individually upon release. The first of these DLC pass is scheduled to launch this winter.", "In December, Private Division will launch the Kerbal Space Program breaking ground expansion in PlayStation 4 and Xbox One, which was previously released for PC in May, and throughout the year, 2K will continue to release additional content for WWE 2K20 and other titles.", "We also continue to broaden our slate for mobile devices, including the November 13 launch of Season 6 of our popular WWE SuperCard series. Looking ahead to fiscal year 2021, Private Division announced that Disintegration, a new Sci-fi first person shooter will launch in calendar 2020. In Disintegration, players command their troops as they battle through a thrilling single player campaign and compete and frenetic multiplayer against other pilots and their crews. Disintegration is being developed by V1 Interactive, a new independent studio co-founded by Marcus Lehto, former creative director at Bungie and co-creator of Halo.", "Also, from Private Division, Kerbal Space Program 2, the sequel to the beloved original space sim, is now planned for launch on PC, PlayStation 4 and Xbox One in fiscal 2021, in order to allow more time to make the experience as terrific as possible. The original Kerbal Space Program has sold-in over 3.5 million units and earned a Metacritic rating of 88 and a Steam user score of 91%. Private Division will have more exciting news and announcements in the coming months.", "Turning to esports, qualifying rounds for Season 3 of the NBA 2K League, our joint venture with the NBA, will conclude this week, followed by the combine that will end in December and the official player draft and start of the season in the spring. The NBA 2K League announced that Gen.G, the global esports organization, will launch a new franchise from Shanghai that will join the league for the upcoming season, marking the first team from outside of North America. The team will join the previously announced Charlotte Hornets Venom GT as the two new teams for Season 3 bringing the league total to 23 franchises. We are very excited about the continued progress and growth of the league, which has the long-term potential to enhance engagement and to be a driver of profits for our company.", "In closing, we remain focused on delivering the highest-quality entertainment and providing new and innovative ways for our consumers to stay immersed and engaged with their favorite experiences. We are investing heavily in opportunities to grow our scale, increase our presence in mobile and capitalize on emerging distribution channels and business models.", "The successful execution of this strategy will provide value to our customers and generate strong returns for our shareholders.", "And that's how I turn the call over to Lainie." ] }, { "name": "Lainie Goldstein", "speech": [ "Thanks Karl, and good afternoon, everyone. Today, we'll discuss our second quarter results and then review our financial outlook for the third quarter and fiscal year 2020. Please note that additional details regarding our actual results and outlook are contained in our press release. As Strauss mentioned, our positive momentum continued in the second quarter, enabling us to generate operating results that significantly exceeded our expectations.", "Total net bookings grew 63% to $951 million as compared to our outlook of $860 million to $910 million. This outperformance was driven primarily by better than expected results from Grand Theft Auto V and Grand Theft Auto Online and Borderlands 3. Recurrent consumer spending grew 39% and accounted for 45% of total net bookings as compared to our outlook of over 20% growth. Recurrent consumer spending exceeded our expectations due primarily to the outperformance of Grand Theft Auto Online. Digitally delivered net bookings grew 63% and accounted for 73% of the total, as compared to our outlook of over 40% growth. This result exceeded our expectations due to the outperformance of recurrent consumer spending and higher than forecasted mix of digital sales of Borderlands 3 and Grand Theft Auto V.", "During the second quarter, 51% of current generation console games were delivered digitally, up from 47% last year.", "Turning to some details from our second quarter income statement, GAAP net revenue grew to $858 million and cost of goods sold increased to $468 million. Operating expenses increased by 36% to $315 million due primarily to higher marketing, personnel and R&D costs. And GAAP net income was $72 million or $0.63 per share, as compared to $25 million or $0.22 per share in the second quarter of fiscal 2019. Adjusted unrestricted operating cash flow for the six months ended September 30 2019 increased to $41 million and we ended the period with $1.5 billion in cash and to our term investments.", "Now I will review the highlights of our fiscal 2020 financial outlook, starting with the third quarter. We project net bookings to range from $860 million to $910 million. Tthe largest contributor to net bookings are expected to be NBA 2K20, Grand Theft Auto Online, and Grand Theft Auto V, Red Dead Redemption 2 and Red Dead Online, The Outer Worlds, Borderlands 3, and the WWE 2K-series. We project recurrent consumer spending to grow by approximately 5%. This growth is affected by the difficult comparison due to the allocation from the Red Dead Redemption 2 premium editions last year. Growth is expected to be driven by Grand Theft Auto Online, Red Dead Online, excluding last year's allocation and NBA 2K.", "We are currently projecting single-digit growth in recurrent consumer spending from NBA 2K due to the strength of the title in the third quarter last year. We expect digitally delivered net bookings to increase by about 5%. Our forecast assumes that 50% of our current generation console games will be delivered digitally, up from 31% in the same period last year.", "We expect GAAP net revenue to range from $915 million to $965 million, and cost of goods sold to range from $425 million to $452 million. Operating expenses are expected to range from $312 million to $322 million. At the midpoint, this represents a 6% increase over last year, driven primarily by higher R&D and personnel costs, partially offset by lower marketing expenses.", "And GAAP net income is expected to range from $159 million $170 million or $1.39 to $1.49 per share.", "For management reporting purposes, we expect our tax rate to be 17% throughout fiscal 2020.", "Turning to our outlook for the full fiscal year, we are raising our operating outlook as a result of our better-than-expected second quarter operating results and improved net bookings outlook for the balance of the year. We now expect net bookings to range from $2.75 billion to $2.85 billion, up from our prior outlook of $2.6 billion to $2.7 billion. The increase beyond the second quarter beat is driven primarily by improved expectations for Grand Theft Auto Online and Grand Theft Auto V and Borderlands 3, partially offset by the move of Karbel Space Program 2 into fiscal 2021.", "The largest contributor to net bookings are expected to be NBA 2K, Grand Theft Auto Online and Grand Theft Auto V, Borderlands 3, Red Dead Redemption 2 and Red Dead Online, The Outer Worlds, Sid Meier's Civilization VI, and the WWE 2K-series. We expect the net bookings breakdown from our label to be roughly 60% 2K, 30% Rockstar Games, and 10% Private Division, Social Point and other. And we forecast our geographic net bookings split to be about 60% United States and 40% international.", "We now expect recurrent consumer spending to increase by 25%, up from our prior outlook of mid-teens growth, driven primarily by higher expectations for Grand Theft Auto Online. We now expect Grand Theft Auto Online to grow in fiscal 2020 as a result of its better-than-expected performance fiscal year to date and improved outlook for the balance of the year. We project digitally delivered net bookings to grow by nearly 30%. This is up from our prior outlook of high-teens growth, due primarily to our increased forecast for recurrent consumer spending and a higher mix of digital sales of Borderlands 3 and Grand Theft Auto V. Our outlook assumes that 57% of current generation console games will be delivered digitally, up from 38% last year.", "We expect to generate more than $450 million in adjusted unrestricted operating cash flow and we now plan to deploy approximately $75 million for capital expenditures. We expect GAAP net revenue to range from $2.93 billion to $3.03 billion, and cost of goods sold to range from $1.39 billion to $1.43 billion. Total operating expenses are expected to range from $1.12 billion to $1.14 billion. At the midpoint, this represents a 20% increase over the prior year, driven primarily by higher marketing, R&D and personnel costs. And we expect GAAP net income to range from $388 million to $415 [Phonetic] million or $3.38 to $3.63 per share.", "We have not flow through the entire second quarter management reporting EPS beat to our implied management reporting EPS outlook for fiscal 2020, due to marketing expenses that shifted from the second quarter into balance of the year, highers forecast for marketing. IT, and R&D expense and the move of Kerbal Space Program 2 into fiscal 2021.", "In closing our strong performance during the second quarter has enabled us to increase further our operating outlook for fiscal 2020 which is poised to be another great year for Take-Two. Our positive momentum continues and with our industry-leading creative assets coupled with our management's focus on operational excellence and sound financial foundation, our company is perfectly positioned to deliver strong results for our shareholders over the long term.", "Thank you. I will now turn the call back to Strauss." ] }, { "name": "Strauss Zelnick", "speech": [ "Thanks, Lainie and Karl. On behalf of our entire management team, I'd like to thank our colleagues for their dedication, their hard work, their commitment to excellence and to our shareholders, I'd like to express our appreciation for your continued support. We'll now take your questions. Operator?" ] } ]
[ { "name": "Operator", "speech": [ "Thank you. At this time, we'll be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Eric Handler with MKM Partners. Please proceed with your question." ] }, { "name": "Eric Handler", "speech": [ "Good evening and thank you for the questions. Two quick things. First, with Outer Worlds, I believe you said it was track -- it was selling ahead of expectations. Wonder if you might be able to put some actual numbers to that, if you don't mind? And then secondly, with Red Dead Online, wondered, obviously you don't talk about revenue for that game, but wondered if you might be able to at least talk about some of the trajectory how it compares to RCS for other games or how you found that game to be tracking?" ] }, { "name": "Strauss Zelnick", "speech": [ "Hey Eric. It's Strauss. On Outer Worlds, we're not releasing any specific numbers yet, it's outperforming our expectations handily, got amazing reviews we're super excited about it, but it's very, very early. So as we learn more, we will disclose more. And on Red Dead Online, we did say that we're up sequentially in the quarter. We have a lot of momentum. The new content is definitely performing, people really like it, they're engaged with it. We feel great about it, and that's pretty much where we're at, at the moment." ] }, { "name": "Eric Handler", "speech": [ "Okay, thank you very much." ] }, { "name": "Operator", "speech": [ "Our next question comes from the line of Alex Giaimo with Jefferies. Please proceed with your question." ] }, { "name": "David", "speech": [ "This is David on for Alex. Thanks for taking the question. Hoping to get a little bit of color on Social Point. Last quarter, you said that you had 10 number of games in development. Is that still the number we should be thinking about, or is that changed at all? Thanks." ] }, { "name": "Strauss Zelnick", "speech": [ "Yeah, thanks for your question. I think couple of notes about Social Point. First of all, there are 5 live games that are doing well in the market so Dragon City and Monster Legends but also World Chef, Tasty Town and Word Life. So that's super exciting, and at any given time, we have eight to 10 new titles in development at Social Point. So, yes, that's roughly correct. We're really excited about what is coming to us in the future." ] }, { "name": "Operator", "speech": [ "[Operator Instructions] Since there are no further questions left in the queue, I would like to turn the floor back over to management for any closing remarks." ] }, { "name": "Strauss Zelnick", "speech": [ "Obviously, we've had a great quarter. We raised our outlook for the year. We're really excited about how the company is doing. This company is all about creativity innovation and efficiency. Our goal is to make the highest-quality entertainment in the business and in fact in the entertainment business. More often than not, our creative team succeed at that, and we couldn't be more grateful to them than we are. So, thank you so much for joining us today. We're looking forward to the rest of our fiscal year and then beyond that as well." ] }, { "name": "Operator", "speech": [ "[Operator Closing Remarks]" ] } ]
TTWO
2019-05-13
[ { "description": "Senior Vice President Investor Relations & Corporate Communications", "name": "Henry A. Diamond", "position": "Executive" }, { "description": "Chairman and Chief Executive Officer", "name": "Strauss Zelnick", "position": "Executive" }, { "description": "President", "name": "Karl Slatoff", "position": "Executive" }, { "description": "Chief Financial Officer", "name": "Lainie Goldstein", "position": "Executive" }, { "description": "Jefferies -- Analyst", "name": "Tim O'Shea", "position": "Analyst" }, { "description": "Piper Jaffray -- Analyst", "name": "Mike Olson", "position": "Analyst" }, { "description": "KeyBanc -- Analyst", "name": "Evan Wingren", "position": "Analyst" }, { "description": "Goldman Sachs -- Analyst", "name": "Michael Ng", "position": "Analyst" }, { "description": "MKM Partners -- Analyst", "name": "Eric Handler", "position": "Analyst" }, { "description": "Stifel -- Analyst", "name": "Drew Crum", "position": "Analyst" }, { "description": "Macquarie Group -- Analyst", "name": "Ben Schachter", "position": "Analyst" }, { "description": "Sanford Bernstein -- Analyst", "name": "Todd Juenger", "position": "Analyst" }, { "description": "Merrill Lynch. -- Analyst", "name": "Justin Post", "position": "Analyst" }, { "description": "Consumer Edge -- Analyst", "name": "Ray Stochel", "position": "Analyst" }, { "description": "Barclays. -- Analyst", "name": "Ryan Gee", "position": "Analyst" }, { "description": "Morgan Stanley. -- Analyst", "name": "Brian Nowak", "position": "Analyst" }, { "description": "BTIG -- Analyst", "name": "Brandon Ross", "position": "Analyst" }, { "description": "Benchmark Company -- Analyst", "name": "Mike Hickey", "position": "Analyst" }, { "description": "Buckingham Research Group -- Analyst", "name": "Matthew Harrigan", "position": "Analyst" } ]
[ { "name": "Operator", "speech": [ "Greetings, and welcome to the Take-Two Interactive Software Fourth Quarter Fiscal Year 2019 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. (Operator Instructions) As a reminder, this conference is being recorded.", "It is now my pleasure to introduce your host, Hank Diamond, Senior Vice President of Investor Relations and Corporate Communications. Thank you, sir. You may begin." ] }, { "name": "Henry A. Diamond", "speech": [ "Good afternoon. Welcome and thank you for joining Take-Two's conference call to discuss its results for the fourth quarter and fiscal year 2019 ended March 31st, 2019.", "Today's call will be led by Strauss Zelnick, Take-Two's Chairman and Chief Executive Officer; Karl Slatoff, our President; and Lainie Goldstein, our Chief Financial Officer. We will be available to answer your questions during the Q&A session following our prepared remarks.", "Before we begin, I'd like to remind everyone that statements made during this call that are not historical facts are considered forward-looking statements under federal securities laws. These forward-looking statements are based on the beliefs of our management as well as assumptions made by and information currently available to us. We have no obligation to update these forward-looking statements. Actual operating results may vary significantly from these forward-looking statements based on a variety of factors. These important factors are described in our filings with the SEC including the Company's most recent annual report on Form 10-K, and quarterly report on Form 10-Q, including the risks summarized in the section entitled Risk Factors.", "I'd also like to note that, unless otherwise stated, all numbers we will be discussing today are GAAP, and all comparisons are year-over-year. Additional details regarding our actual results and outlook are contained in our press release, including the items that our management uses internally to adjust our GAAP financial results in order to evaluate our operating performance.", "In addition, we have posted to our website a slide deck that visually presents our results and financial outlook. Our press release and filings with the SEC may be obtained from our website at www.take2games.com.", "And now, I'll turn the call over to Strauss." ] }, { "name": "Strauss Zelnick", "speech": [ "Thanks, Hank. Good afternoon, and thank you for joining us today. Take-Two finished the stellar year with strong fourth quarter operating results, highlighted by the outperformance of Grand Theft Auto and NBA 2K19, and significant ongoing sales of our blockbuster hit, Red Dead Redemption 2.", "For the full fiscal year, we generated record net bookings and adjusted operating cash flow, which exceeded our outlook at the start of the year, along with strong earnings growth, driven by the record-breaking launch of Red Dead Redemption 2, the outstanding performance of NBA 2K and better than expected results from Grand Theft Auto Online and Grand Theft Auto V. Our industry-leading basketball series continues to expand its audience and underscores an NBA 2K has been deep perennial favorite among both basketball and pop culture fans for more than a decade.", "During the fourth quarter, net bookings growth from NBA 2K19 exceeded our expectations, driven primarily by strong recurrent consumer spending. So today, NBA 2K19 has sold in more than 9 million units. During the fourth quarter recurrent consumer spending in NBA 2K grew 79%, and for the full fiscal year, grew 45%. In both periods, recurrent consumer spending in NBA 2K reached a new record and was the single largest contributor to that part of our business.", "Over the past year, we've seen a substantial increase in average games played, with NBA 2K19 outperforming its predecessor by over 20%. In addition, during the fourth quarter, daily active users outpaced NBA 2K team by 13%, due largely to a consistent and robust content schedule.", "We expect that lifetime net bookings from NBA 2K19 will be the highest ever for a 2K sports title, driven by record recurrent consumer spending. The NBA 2K brand continues to expand across a myriad of offerings and we believe that remains a substantial worldwide growth opportunity for the series.", "Turning to Rockstar Games phenomenal hit Red Dead Redemption 2 continues to generate significant sales and to date has sold in more than 24 million units worldwide . The Titan remains tied with Grand Theft Auto V as the highest rated game on PlayStation 4 and Xbox One with a 97 Metacritic score.", "Furthermore, Red Dead Online is poised for success and net bookings grew sequentially in the fourth quarter. Rockstar Games continues to update the beta with a wide array of new content as well as gameplay balancing it bug fixes. We expect Red Dead Online to exit the beta period during the current quarter with significant new content to follow. We're as excited as ever about the long-term opportunity for Red Dead Online.", "Nearly six years after their launch, both Grand Theft Auto Online and Grand Theft Auto V continue to be significant contributors to our results. During the fourth quarter, net bookings from Grand", "Theft Auto Online grew sequentially and exceeded our expectations. Sales of Grand Theft Auto V also outperformed and the title is now sold in almost 110 million units, cementing further its standing as the must have title of the current console generation.", "Throughout fiscal 2019, Rockstar Games supported Grand Theft Auto Online with an array of new content, highlighted by the After Hours and Arena War updates.", "It bears noting that Rockstar's flagship games continue to drive exceptional engagement and results. Grand Theft Auto V and Red Dead Redemption 2, including their online games, had almost 90 million unique player accounts in fiscal 2018 alone. Life-to-date more than 200 million unique players accounts have registered in Rockstar Games Social Club platform as having played these games. Rockstar Games will continue to support both immersive online worlds with innovative content to keep players engaged and drive player growth over time.", "Our fiscal 2019 results were also enhanced by a variety of other offerings led by WWE 2K and WWE SuperCard, Social Point's mobile games, NBA 2K18 and Sid Meier's Civilization VI. In particular, Civilization VI significantly outperformed our expectations due to the popularity of the Nintendo Switch skew, and the titles expansion packs.", "Take Two's core talents (ph) sort of be the most creative, innovative and efficient enterprise in the entertainment industry. With respect to the first two, one of the key drivers of success is our proven ability to sustain long-term engagement with our titles well after their initial launch. As a result, we've generated strong growth in recurrent consumer spending over the past several years.", "In fiscal year 2019, recurrent consumer spending exceeded our expectations, growing 20% to a new record and accounting for 39% of total net bookings.", "In addition to virtual currency for NBA 2K, Grand Theft Auto Online and Red Dead Online recurrent consumer spending was enhanced by a variety of other offerings. In the free-to-play category, Social Point remains a meaningful contributor to our results through its two biggest mobile titles, Dragon City and Monster Legends.", "During the fourth quarter, our Barcelona-based studio launched Tasty Town, a new game within the popular restaurant category, and just last week they launched Word Life, which Karl will discuss.", "Net bookings from Social Point grew sequentially in the fourth quarter, the studio is working hard on its exciting development pipeline, including more than 10 new games and is focused on driving growth and expanding its audience.", "Recurrent consumer spending on WWE SuperCard grew 13% net of platform fees. During the past fiscal year, 2K released the fifth season of its popular card battle games and several content updates. WWE SuperCard has now been downloaded more than 19 million times and remains 2K's highest grossing mobile title.", "And recurrent consumer spending on NBA 2K Online in China exceeded our expectations, growing 74%, driven by the launch of NBA 2K Online 2 last August. Total combined registered users for NBA 2K Online 2 and its predecessor currently stands at 45 million, and the franchise remains the number one PC online sports game in China.", "Asia and China in particular continues to be a significant long-term growth opportunity for our business. In fact, NBA 2K19 for PlayStation 4 was just approved for release in China.", "Lastly, add-on content was a meaningful contributor, led by our offerings for Sid Meier's Civilization, XCOM 2 and WWE 2K19. During the fourth quarter, Firaxis Games released Sid Meier's Civilization VI Gathering Storm, which is the largest and most successful add-on content in the history of the Sid Meier's Civilization series.", "As we closed one of our best years to date and look to the horizon, I'm extremely proud that Take-Two remains the home for our industry's most creative and passionate talent. Their vision and ability to captivate and engage audiences around the world across an array of platforms and offerings, both redefines the possibilities of interactive entertainment and forms the foundation for our continued success.", "This is an incredibly exciting time for our industry with new technologies that enable our teams to advance interactive entertainment, emerging distribution and business models that expand our audience, and the proliferation of communities to participate in or watch connected play. Take-Two is exceedingly well positioned, creatively, strategically and financially, to capitalize on its vast opportunities and to continue to deliver growth and returns for our shareholders over the long-term.", "I will now turn the call over to Karl." ] }, { "name": "Karl Slatoff", "speech": [ "Thanks, Strauss. I'd like to begin by thanking our teams for delivering an incredible year marked by creative excellence, significant growth in consumer engagement and superb financial results for our organization. It's a well coordinated effort and an insatiable drive for success across our entire organization to achieve these results. I'm immensely proud of and grateful for, our thousands of colleagues around the world, which played a role in our Company's outstanding performance.", "Turning to our recent and upcoming releases. On April 3rd, to celebrate the announcement of Borderlands 3. 2K and Gearbox Software released the Borderlands Game of the Year edition for PlayStation 4, Xbox One and PC.", "Borderlands Game of the Year edition features all new Ultra HD visuals, significant gameplay improvements and all four originally released add-on packs. Players who previously enjoyed Borderlands can import their saved progress and pickup exactly where they left off, all in stunning HD. Players should also keep an eye up for new loot drops that include rare weapons, and vault under heads.", "In addition, Gearbox and 2K released the Borderlands Ultra HD Texture Pack, that increases the visual fidelity of Borderlands, the Handsome Collection on consoles and provides a visual upgrade for Borderlands 2, Borderlands: The Pre-Sequel and all the add-ons for both titles on PC.", "On April 17th, 2K and Cat Daddy studios launched NBA 2K mobile for Android devices. Downloadable for free, NBA 2K mobile was released for iOS last fall and delivers console quality graphics and life like NBA 2K action on the go. NBA 2K mobile lets gamers' experience their favorite NBA moments, collect player cards to build dream teams and step onto the court and 5-on-5 matchups.", "On May 9th, Social Point launched Word Life, our free latest free-to-play mobile offering for iOS and Android devices. Word Life is an easy to play game that is filled with thousands of levels and many innovative game modes. Word Life brings a new dimension to traditional word puzzle games, boasting a multiplayer mode through which players can battle with words in exciting match-offs.", "On September 13th, 2K and Gearbox software will Borderlands 3 globally for PlayStation 4, Xbox One and PC. Borderlands 3 is a hilarious story-driven non-stop Galactic thrill ride, filled with colorful characters, epic enemies and literally billions of guns. Franchise, which combines the exhilarating action of a first-person shooter with the rich progression and loot systems of a role-playing game, has sold in more than 43 million units worldwide today.", "Borderlands 2 have sold in 20 million units to date, and more than six years after release, still draws in over 1 million unique monthly users.", "The two-day event in Los Angeles on April 30th and May 1st, 2K and Gearbox software hosted more than 600 global media and live streamers at the Borderlands 3 Worldwide Gameplay Reveal. The event resulted in an overwhelmingly positive reception, with media praising the game for its over the top action and gameplay, amazing loot, stunning art style, compelling characters and evolved approach to progression.", "IGN wrote Borderlands 3 has not lost its unique sense of style or humor over the last five years, since the Pre-Sequel, it's funny and silly in a cartoonist sort of way, which is a breath of fresh air and a genre, that typically takes itself perhaps a little too seriously.", "Additionally, the structural growth, Gearbox amplifying what make Borderlands special a decade ago seems to have molded Borderlands 3 into a game that will be worth playing all these years later. During the live streaming event and the presentation, Borderlands 3 was the number one game on Twitch, amassing nearly 12 million unique views and over 1 million hours watched in a single day.", "Next month at E3 in Los Angeles, Borderlands 3 will have a massive presence at our booth, including a 100 seat demo theater and 100 game playstations, showing new content and giving thousands of fans media and live streamers, the opportunity to experience the game firsthand.", "Also this fall, 2K will launch new installments of our highly successful annual sports franchises with the releases of NBA 2K20 and WWE 2K20. As always, the development teams behind these games are hard at work to deliver our trademark array of exciting new features and innovations that keep players coming back year-after-year. 2K will have more to share about these titles in the coming months.", "Later this calendar year, Private Division will launch two new IPs for PlayStation 4, Xbox One and PC. The Outer Worlds and Ancestors: The Humankind Odyssey. Developed by Obsidian Entertainment, The Outer Worlds marks the reunion of Tim Cain and Leonard Boyarsky, the original creators of Fallout, for an introducing an entirely new single player sci-fi RPG experience. The Outer Worlds will be showcased behind closed doors at E3 for select media and influencers, and more details about the game will be revealed over time.", "Last month, Private Division hosted press events for Ancestors: The Humankind Odyssey, where attendees got to play the game and meet its creators at Panache Digital Games, including the studios, Co-Founder, Patrice Desilets, who was the original creative director of Assassin's Creed. The press' initial reaction was extremely positive. According to IGN, Ancestors is an intriguing mixture of raw survival and community shaping that I find fascinating. And Germany's GameStar said, if Ancestors: The Humankind Odyssey is able to maintain the strong atmosphere in the final game over its entire duration, a remarkable journey back to our origins awaits us.", "In addition, Private Division recently announced that Kerbal Space Program, Breaking Ground, the second expansion pack of a PC version of Kerbal Space Program will launch on May 30th. We are pleased to expand our offerings for Kerbal franchise, which has a vibrant and dedicated community.", "Throughout fiscal year 2020, we will continue to support our titles with innovative post launch content that drives engagement and recurrent consumer spending, including many more updates for Red Dead Online and Grand Theft Auto Online.", "Turning to eSports, the second season of the NBA 2K League, our joint venture with the NBA is currently under way with 21 teams participating, up from 17 in season one.", "On March 5th, the 2019 draft was held at the Barclays Center in Brooklyn, New York. 75 players were selected by the 21 teams, including the first woman ever to be drafted into the league. The 198 players in the draft pool included 22 international players from nine countries.", "On April 2nd, season two kicked off with a roster of new sponsors such as AT&T, Champion Athletic wear, Rainier (ph) Gaming and Stance as well as returning brands including Dell and Intel.", "In addition, the League announced that YouTube will join Twitch as a live stream partner for all of the games this season, including more than 230 regular seasons, tournaments, playoffs and finals games combined.", "Last week, the League held its second tournament of the season, The Turn, powered by AT&T at the HyperX Esports Arena in Las Vegas at the Luxor Hotel and Casino, marking the first time games were held outside of New York.", "We are very excited about the continued progress and growth of the League, which has the long-term potential to enhance engagement and to be a driver of profits for our Company.", "Take-Two will have an expanded presence at E3 next month. In addition to showing Borderlands 3, we will hold business development, Investor Relations, media and sales meetings throughout the conference. Looking ahead, we are investing heavily in opportunities to expand our creative teams and grow our scale, increase our presence in mobile and exploring emerging distribution channels and business models, such as streaming and free-to-play. We will continue to focus on delivering the highest quality interactive entertainment and to seek new and innovative ways to enhance players experience with our games and drive long-term engagement.", "The execution of the strategy will provide value to our customers and generate growth and profits over the long term.", "I'll now turn the call over to Lainie." ] }, { "name": "Lainie Goldstein", "speech": [ "Thanks, Karl, and good afternoon, everyone. Today, I'll discuss our fourth quarter and fiscal 2019 results and then review our financial outlook for the first quarter and fiscal year 2020. Please note that additional details regarding our actual results and outlook are contained in our press release.", "Strauss mentioned, we finished an outstanding year with strong fourth quarter operating results. For the full fiscal year, we generated record net bookings and adjusted operating cash flow, which exceeded our outlook at the start of the year, along with strong earnings growth.", "Starting with the fourth quarter, total net bookings grew 19% to $488 million as compared to our outlook of $450 million to $500 million. Recurrent consumer spending grew 27% and accounted for 62% of total net bookings as compared to our outlook for 10% growth. Recurrent consumer spending exceeded our outlook due primarily to the outperformance of Grand Theft Auto Online and NBA 2K.", "Digitally delivered net bookings grew 26% and accounted for 86% of the total as compared to our outlook of 10% growth. This result exceeded our outlook due to the outperformance of recurrent consumer spending and higher than expected mix of digitally delivered full game sales.", "During the fourth quarter, 57% of sales of current generation console games were delivered digitally, up from 44% last year.", "Turning to some details from our fourth quarter income statement. GAAP net revenue grew to $539 million and cost of goods sold increased to $259 million. Operating expenses increased by 28% to $222 million, due primarily to higher marketing spend, personnel expense and stock-based compensation. And GAAP net income was $57 million or $0.50 per share as compared to $91 million or $0.77 per share in the fourth quarter of fiscal 2018.", "Turning to our fiscal 2019 results. Total net bookings grew 47% to a new record of $2.93 billion, this extraordinary result was driven by the record-breaking launch of Red Dead Redemption 2 coupled with strong growth from NBA 2K. Recurrent consumer spending grew 20% to a new record and accounted for 39% of total net bookings.", "Digitally delivered net bookings grew 33% to a new record of $1.8 billion and accounted for 62% of the total. During fiscal 2019, 38% of sales of current generation console games were delivered digitally, up from 34% last year.", "Adjusted operating cash flow increased 82% to a new record of $715 million, this metric fell short of our outlook by about $25 million due to the timing of tax payments.", "During fiscal 2019, we spent $67 million on capital expenditures and deployed $362 million to repurchase 3.7 million shares of our stock, including $100 million to repurchase 1.1 million shares in the fourth quarter. At fiscal year-end, our cash and short-term investments balance was over $1.57 billion.", "Turning to some details from our fiscal 2019 income statement. GAAP net revenue grew to $2.67 billion and cost of goods sold increased to $1.5 billion. Operating expenses increased by 24% to $938 million, due primarily to higher marketing, personnel and R&D costs. And GAAP net income increased to $334 million or $2.90 per share. GAAP net income included $107 million tax benefit resulting from the release of certain valuation allowances on the Company's deferred tax assets. This had no effect on our management reporting tax rate, which was 20%.", "Today, we gave a strong initial outlook for fiscal 2020 with operating results currently expected to be lower than fiscal 2019, due to the record-breaking launch of Red Dead Redemption 2 and growing (ph) as compared to fiscal 2018.", "Forwardly, (ph) fiscal 2020 will be a year of significant investment in R&D that should enable us to scale further our long-term release date.", "Starting with the fiscal first quarter, we project net bookings to range from $310 million to $360 million, up from $288 million in the first quarter last year. This increase is being driven primarily by expected growth from NBA 2K and ongoing sales of Red Dead Redemption 2. The largest contributor to net bookings are expected to be NBA's 2K19, Grand Theft Auto Online and Grand Theft Auto V, Red Dead Redemption 2 and Red Dead Online, the Borderlands franchise and Social Point's mobile offerings.", "We project recurrent consumer spending to grow by more than 20%. This growth is expected to be driven by NBA 2K and Red Dead Online, partially offset by lower results from Grand Theft Auto Online.", "We also expect digitally delivered net bookings to increased by more than 20%. Our forecast assumes that 70% of our current generation console game sales will be delivered digitally, up from 53% in the same period last year.", "We expect GAAP net revenue to range from $485 million to $535 million and cost of goods sold to range from $165 million to $191 million.", "Operating expenses are expected to range from $246 million to $256 million. At the midpoint, this represents a 35% increase over last year, driven primarily by higher marketing expense and R&D costs. And GAAP net income is expected to range from $74 million to $86 million or $0.65 per share to $0.75 per share.", "For management reporting purposes, we expect our tax rate to be 17% throughout fiscal 2020. This is lower than our prior management reporting tax rate of 20% as a result of completing our analysis of the Tax Cuts and Jobs Act of 2017 as well as incremental R&D tax credits.", "Turning to our outlook for the full fiscal year. We project net bookings to range from $2.5 billion to $2.6 billion. We expect Red Dead Online, NBA 2K and WWE 2K to grow, offset by lower results from Red Dead Redemption 2 and Grand Theft Auto Online and Grand Theft Auto V. The largest contributor to net bookings are expected to be NBA 2K, Red Dead Redemption 2 and Red Dead Online, Borderlands 3, Grand Theft Auto Online and Grand Theft Auto V, The Outer Worlds and WWE 2K.", "We expect the net bookings breakdown from our labels to be roughly 60% 2K, 30% Rockstar Games, and 10% Private Division, Social Point and other. And we forecast our geographic net bookings split to be about 65% United States and 35% international. We expect recurrent consumer spending to increase in the low single digits, driven primarily by growth from NBA 2K, Borderlands 3 and Red Dead Online, partially offset by lower expected results from Grand Theft Auto Online.", "We project digitally delivered net bookings to grow in the low double digits. Our forecast assumes that 49% of current generation console games sales will be delivered digitally, up from 38% last year. We expect to generate more than $450 million in adjusted operating cash flow and we plan to deploy approximately $90 million for capital expenditures. This increase is primarily due to spending on new studio and office build outs, network security and IT.", "We expect GAAP net revenue to range from $2.7 billion to $2.8 billion and cost of goods sold to range from $1.24 billion to $1.29 billion. Total operating expenses are expected to range from $1.06 billion to $1.08 billion. At the midpoint, this represents a 14% increase over the prior year, driven primarily by higher marketing expense and R&D costs.", "And we expect GAAP net income to range from $389 million to $418 million or $3.39 to $3.65 per share.", "In closing, fiscal 2019 was an incredible year for Take-Two. Our ability to deliver consistently the highest quality entertainment experiences, that drive mass consumer engagement was reflected in our achievement of a record operating results.", "We have the strongest development pipeline in our history, including sequels from our biggest franchises along with exciting new IP. In addition, we are actively investing in emerging opportunities such as Private Division, mobile games, eSports and geographic expansion, that have the potential to be enormous drivers of growth.", "We are extremely well-positioned to generate significant growth and margin expansion over the long-term.", "Thank you. I'll now turn the call back to Strauss." ] }, { "name": "Strauss Zelnick", "speech": [ "Thanks, Lainie, and Karl. On behalf of our entire management team, I'd like to thank our colleagues for their hard work and for delivering an outstanding year. To our shareholders, I want to express our appreciation for your continued support. We'll now take your questions. Operator?" ] } ]
[ { "name": "Operator", "speech": [ "Thank you. Ladies and gentlemen, at this time, we will be conducting the question-and-answer session. (Operator Instructions)", "Our first question comes from the line of Tim O'Shea with Jefferies. Please proceed with your question ." ] }, { "name": "Tim O'Shea", "speech": [ "Yes. So thank you for taking my question. My question is about how you think about the free-to-play model. You've obviously had great success selling games for full price. I mean, I think Strauss mentioned 110 million units of GTA V, 24 million units of Red Dead, but for services like Red Dead Online, it seems like a large audience is key. I'm curious, if there is a point where these services could be decoupled from the full priced version of the game, so a player could still purchase Red Dead for $60, but could play Red Dead Online for free. Just love to hear any thoughts on free-to-play. Thank you." ] }, { "name": "Strauss Zelnick", "speech": [ "Well, I think it's a great question and clearly when you have the right title like a Fortnite or Apex Legends, free-to-play can be a powerful model. We also have some great free play games NBA 2K Online in (ph) China with 45 million registered users and recurrent consumer spending was up over 70% in the fiscal year. So we've -- and WWE SuperCard has been downloaded over 19 million times and that's up, net of platform fees I think 13% in the fiscal year. So we have numerous games here that are free-to-play. Social Point's entire business is a free-to-play business.", "That said, I don't really see the business transitioning to a free-to-play model, primarily, because the hit ratios are so very low and the hit ratios for our core business are exceedingly high, because of our attention to quality or at least that's what we attribute it to something like 80% plus hit ratios is pretty unheard of in the entertainment business broadly.", "In terms of your broader question, which is could you imagine a situation, where in maturity you decouple one experience from another, I think the answer is we tend to be very flexible about business models over time and we want to be where the consumer is. Those business model decisions when they -- with regard to a particular title are driven by our labels although, we all are a pretty tight knit group and consult with one another, but you'd want to look to our labels for any updates on how business models might shift. I think the answer is we're open-minded, we want to deliver to the consumer on an ongoing basis." ] }, { "name": "Tim O'Shea", "speech": [ "Thanks." ] }, { "name": "Operator", "speech": [ "Thank you. Our next question comes from the line of Mike Olson with Piper Jaffray. Please proceed with your question ." ] }, { "name": "Mike Olson", "speech": [ "Hey, good afternoon. I realized you let Rockstar speak for itself related to new content, but just conceptually, can you say if it would make sense to see a content drop of some sort that's coincident with the timing of Red Dead Online coming out of beta or should we -- I guess not assume that's the case?", "And then second, industry chatter suggests that next-gen consoles are coming late next year. Do you think about timing of release of titles at least the non-annual released titles at all related to the timing of console releases or is that just not a consideration relative to your new release schedule?" ] }, { "name": "Strauss Zelnick", "speech": [ "Yeah, thanks for your questions. Rockstar has said that Red Dead Online will be coming out of beta in the current quarter and there is content to come on an ongoing basis including when it comes out of beta. So I think we have very high expectations for that title going forward, and I would observe that if you compare how Red Dead Online is doing at this stage of the game in terms of the initial release and the movement into beta, Red Dead Online is performing better than Grand Theft Auto Online did at the same stage of the game.", "So we have terrific expectations as does everyone in the Company, and of course, the folks at Rockstar feel great about the upcoming content drops.", "In terms of next-gen consoles, we certainly pay attention to when new hardware offerings are coming, new business model offerings are coming and that would inform our decision-making around releases. We don't really see the next generation as being particularly disruptive, because technology is pretty fluent -- we're pretty fluent with technology at this point. So the last time we had a cycle that was challenging, I think for us and for the industry, it was not this past one, it was one before where a couple of companies really landed in trouble and that historically been the case for the interactive entertainment business. That didn't happen in this past console shift, and I don't expect it will happen here. So the answer is, of course, we'll be mindful of the change, but it wouldn't be determinant over what we would do." ] }, { "name": "Mike Olson", "speech": [ "Thank you." ] }, { "name": "Operator", "speech": [ "Thank you. Our next question is from the line of Evan Wingren with KeyBanc. Please proceed with your question." ] }, { "name": "Evan Wingren", "speech": [ "Thank you. Just wondering, if you could provide some context on your Borderlands expectations that you've initially embedded within the guidance and perhaps versus the prior game or however you'd like? And second, if you could just remind us how the margins of a license title like that might compare to some of your internally developed titles that would be helpful?" ] }, { "name": "Lainie Goldstein", "speech": [ "We're not providing sales estimates of Borderlands 3, but it's always our goal to grow sales with each new releases from our popular series. Borderlands 2 launched in September of 2012 and by the end of October of 2012, we announced that we had sold in more than 5 million units. And then on October 29th, 2013 a year later, we announced, we had sold in more than 7.5 million units. And today Borderlands 2 has sold in nearly 20 million units. So for Borderlands 3, we have really high expectations and we're really excited about the title.", "In terms of the margins on Borderlands 3 compared to our other titles, it's in line with our internally developed titles." ] }, { "name": "Evan Wingren", "speech": [ "And just to clarify, is that on an EBIT basis or is that a gross margin basis? Or how would you characterize it?" ] }, { "name": "Lainie Goldstein", "speech": [ "It's on both -- it's on both basis." ] }, { "name": "Evan Wingren", "speech": [ "Great. Thank you." ] }, { "name": "Operator", "speech": [ "Thank you. Our next question is from the line of Michael Ng with Goldman Sachs. Please proceed with your question." ] }, { "name": "Michael Ng", "speech": [ "Thanks. I have a -- I have a few. Strauss, could you just talk about your view and willingness to participate in third-party video game subscription products. And then separately, what's your philosophy for (inaudible) hing for streaming products like Google Stadia? It seems like there is a long-term opportunity there to create larger and more powerful games, but it seems like, it's still be early days and I have a quick follow-up." ] }, { "name": "Strauss Zelnick", "speech": [ "Yeah. On subscription services, we're open minded, we want to be where the consumer is. We also have to in a place, where it makes sense for our creative folks and for our shareholders. So you need to find that intersection in business models that serve the customers successfully and also serve everyone else, who participates in the value chain. And that may prove to be a little challenging for subscriptions in the space, because I think people will consume -- people do consume video games differently than they consume linear entertainment.", "To put in context, American households consume on average about five hours a day of linear programming, about 150 hours a month. And about an hour and a half a day of interactive entertainment, so 45 hours a month.", "And if you watch the half hour show or an hour show or two hour movie, you tend to watch it once unless you're kid, who may watch things multiple times, which implies a whole lot of products consumed in a month, so you could imagine and all you could either (ph) offering -- or offerings would be appealing to consumers. In the case of video games, it's possible an average user in those 45 hours might be playing one, two, maybe three titles, certainly not 70 titles. And so in that event, if you play one, two or three titles and you play them for months row, which often happens in our world, then a subscription model may not be such a great deal for the customer.", "So this all remains to be seen, and again, we're open minded, we want to be where the customer is. But I don't think it's a foregone conclusion that subscription will be as massive for interactive entertainment it has proven to be for music and motion pictures and television. But we'll see.", "With regard to streaming technology and what it could mean for us. We're very optimistic about the notion of streaming technology, bringing our titles to consumers, who currently don't have access to them. The promise of being able to sign on to a service, we have virtually no barriers without a box in between and we're being able to play our games on any device whatsoever around the world, and to do with low latency, well, that's very compelling if that can be delivered. And the folks at Google minimally have said it will be delivered and will be delivered in relatively short order.", "Conceptually, we want to be where the consumer is and we'll support new entrants, and we are a believer in streaming services. Again, we need to have business models that make sense for us. And so far, we're pretty optimistic." ] }, { "name": "Michael Ng", "speech": [ "Great. Thank you. And I just had a housekeeping question around RCS. So a 20% growth outlook for the first quarter, low single digits for the year. What can you tell us about the comps in the rest of the year that gets us to low single digits? What's falling? Thank you." ] }, { "name": "Lainie Goldstein", "speech": [ "Yeah. So as we mentioned on Grand Theft Auto Online, it's going to be lower throughout the year and we have growth for NBA 2K and for Red Dead Online. And then we'll also have recurrent consumer spending for Borderlands toward the end of the year." ] }, { "name": "Michael Ng", "speech": [ "Okay. Thank you." ] }, { "name": "Operator", "speech": [ "Thank you. Our next question is from the line of Eric Handler with MKM Partners. Please proceed with your question." ] }, { "name": "Eric Handler", "speech": [ "Yes. Thank you very much. So you talked about significant increase in R&D costs as you continue to invest in your pipeline. I wondered, if you could maybe talk directionally about releases in terms of -- are we at the point, where we might be seeing 2K releases a year a couple private label or private business releases a year and Rockstar release once every other year or maybe you can give a little bit of color around that." ] }, { "name": "Karl Slatoff", "speech": [ "Hi. It's Karl. So yeah, our R&D expense spending is definitely up. And we said it many times before, one of our biggest priorities is building scale in the organization, and we specifically want to do that through our organic initiatives, and all of that is reflected on higher R&D.", "In terms of what you're going to see in the pipeline, it really is all over the entire Company. We've got new investments at Social Point, we've got new investments at Private Division. You're already seeing two new titles coming out in this coming fiscal year in Private Division. So obviously, the pace is starting to pick up in there. There is also a lot of investment at the 2K level. Michael Condrey is coming on board, we haven't said much about that game yet, because it's very early. But it stands to reason that we're not just investing to invest for years and years and years and that actually getting the releases coming out. You will expect to see these investments coming to fruition over the next few years.", "So I think you will in fact see the velocity pick up on this. Exactly what that means, I can't tell you right now, but I can tell you that there is certainly a lot of titles in the pipeline." ] }, { "name": "Eric Handler", "speech": [ "Okay, great. Thank you very much." ] }, { "name": "Operator", "speech": [ "Thank you. Our next question comes from the line of Drew Crum with Stifel. Please proceed with your question." ] }, { "name": "Drew Crum", "speech": [ "Okay. Thanks. Good afternoon, guys. Maybe you could start by talking about the Company's decision to do a timed (ph) exclusive on Epic's Games saw with Borderlands 3 and in addition to the Private Division games. And then separately Lainie, I just want to make sure, I am interpreting your commentary on guidance correctly. You're suggesting that recurrent consumer spending will be up low-single digits. GTA Online will be down, can we assume then that Rockstar Online will be down for the fiscal year versus '19? Thanks." ] }, { "name": "Lainie Goldstein", "speech": [ "So Rockstar Online, the two games together will be slightly down over this year, but the plan is for the two together to be growing over the long-term." ] }, { "name": "Drew Crum", "speech": [ "Okay, got it." ] }, { "name": "Strauss Zelnick", "speech": [ "And in terms of supporting the Epic Games, Drew, look, we think, as I said earlier, more distribution is a good thing. And while it's rare that we'll do exclusives for any period of time, we'll continue to support steam with our title, with catalog and these titles will be going to steam, relatively quickly after their initial availability exclusively on the Epic Games store." ] }, { "name": "Drew Crum", "speech": [ "Okay. Thanks, guys." ] }, { "name": "Operator", "speech": [ "Thank you. Our next question comes from the line of Ben Schachter with Macquarie Group. Please proceed with your question." ] }, { "name": "Ben Schachter", "speech": [ "Hey, guys. A few if I could. First, I noticed in the prepared comments, where you're talking about investing in mobile you're using the word mobile and not just Social Point. So beyond the usual non-Social Point stuff like WWE, are you broadening investment in mobile at Rockstar and 2K? And then separately Strauss, any thoughts on what's going on in Washington, as it relates to China trade talks and how that might impact video games? And then Lainie two for you, anything in the guidance for new platform for Google -- from Google or for others?", "And then just to clarify, when you talk about ramping the R&D spend, I'm a little confused on how that works relative to R&D spending capitalized versus flowing through? Can you help me understand that? Thanks." ] }, { "name": "Karl Slatoff", "speech": [ "Hi. It's Karl. In terms of mobile strategy, yes, obviously, we are investing in Social Point -- in new IP and Social Point and also around their existing games. So that is one component of our mobile strategy. We continue to invest outside of Social Point, obviously Social Point is a significant part of our strategy going forward. But we have been investing in other parts of the Company, at Rockstar and at 2K all along.", "Certainly with 2K and with WWE SuperCard, the idea is to bring our current franchises into mobile environments. And we really do that by coming up with new games, SuperCard is one example of that. Bringing our existing titles on two platforms for that -- for those titles that can actually be played on those platforms from the technological perspective.", "And also companion apps, we've had a number of titles that have app that have companion offerings that can be played alongside of our main games. So we've been doing that all along. And I think you can expect us to continue to do that and invest toward that. But a huge part of our strategy obviously is Social Point." ] }, { "name": "Strauss Zelnick", "speech": [ "Yes. And turning to your question about China. Without regard to the most recent news about tariffs, we remain very optimistic about the opportunities in China, we obviously have the big title there with NBA 2K Online 2 in China with 45 million registered users, we just received approval for the NBA title in China in PS4, it's great news and the approvals have restarted. We have great partner in Tencent, we have other partners there as well. And we think it's a big and growing market. And like everyone else, we feel it's important to have a appropriate resolution on trade (ph) with China. I think it's right that our government is taking it seriously, I probably won't make any other comments about the tactics, but it's not really what I do for a living.", "But I do think it is a serious matter and for the entertainment business broadly a very serious matter, entertainment is America's second largest export after aerospace.", "So we do think it's important that we have appropriate reciprocal trade policies around the world, and we do believe that those issues that we're currently facing will be sorted out, we can't call the timing now." ] }, { "name": "Lainie Goldstein", "speech": [ "So in terms of Google's Stadia as Strauss mentioned, that present some new and exciting opportunities. And as at all platforms, our development teams are hard at work to maximize our product performance, take advantage of US piece (ph) to world-class IP and create unique engagement opportunity to each platform we're offering.", "But that said, we've not formally announced any titles for the platform at this time. And in terms of R&D expense and capitalization, since we have a lot more titles -- projects that we're starting up in our early stages and there will be more going to the R&D expense versus starting to be capitalized at this time for this year." ] }, { "name": "Ben Schachter", "speech": [ "Great. Thanks." ] }, { "name": "Operator", "speech": [ "Thank you. Our next question is from the line of Todd Juenger with Sanford Bernstein. Please proceed with your question." ] }, { "name": "Todd Juenger", "speech": [ "Hi, thanks. If I could just focus my attention and if you don't mind on NBA 2K, clearly having a very strong year this year, you've talked about it growing in your guidance for next year. You also mentioned the big opportunity globally for that franchise and talked a little bit about China. I guess I'd loved it and relative to the global population of basketball and the NBA in particular relative to the size of that game for you. How should we think about your pursuit of what seems like a lot of people interested in basketball, not just in Asia, in Europe and other places around the world, and how do you unlock that and what are you -- is it a marketing effort? Is it a distribution effort? I'm sure you're on it, we'd love to hear your thoughts of how you're trying to capture what seems like a big interest in the sport and opportunity for that franchise? Thanks." ] }, { "name": "Karl Slatoff", "speech": [ "Hi, it's Karl. I agree. I mean the NBA, generally speaking, it is growing leaps and bounds. I guess pun intended (ph) in that regard. And it's really exciting for us. And we'd like to think that we're part of that, because what we do at -- what 2K does at the NBA game is they really are part of the fabric and the culture of that organization and of the fan base. And it's been a very symbiotic relationship between our two organizations. And I think we feed off each other, and it's been a terrific partnership. And it is exciting. When you've got expansion and interest in Europe and in Asia, we try to follow that expansion, and this -- from a marketing perspective, and distribution perspective and also at times and the development perspective, if we think that there is a certain category or certain area or a certain player that resonates in a specific area, then we will try to market toward that player or toward that -- that particular organization like the European leagues et cetera.", "So there's a lot that we can do, not to mention all the localization work that we do as well. So it is really exciting. It still is a predominantly American -- North American business for us, as you would expect, but our international component is growing, and I think that we have an opportunity to over-index internationally." ] }, { "name": "Todd Juenger", "speech": [ "Okay. Thank you." ] }, { "name": "Operator", "speech": [ "Thank you. Our next question is from the line of Justin Post with Merrill Lynch. Please proceed with your question." ] }, { "name": "Justin Post", "speech": [ "Thank you. Strauss, first on the 24 million units of Red Dead sold, can you tell us anything about how those are converting to online players anything on MAUs or how you're seeing the activity levels for those buyers? And then secondly, when you said you're in development for sequels for some of your biggest franchises, just wondering if that includes Rockstar? Thank you." ] }, { "name": "Strauss Zelnick", "speech": [ "So we haven't given out statistics particularly on conversion from people, who purchased Red Dead Redemption 2 into Red Dead Online. But we did say that more than 90 million people were engaged with Rockstar Games titles in the last fiscal year, which is nothing short of extraordinary and the progress looks terrific. So our expectations are high, and we feel really good about how things are going.", "And in terms of, our labels being hard at work on ongoing titles including new IP and sequels, we were talking about everyone, who works around here. Yes." ] }, { "name": "Justin Post", "speech": [ "Thank you." ] }, { "name": "Operator", "speech": [ "Thank you. Our next question is from the line of Ray Stochel with Consumer Edge. Please proceed with your question." ] }, { "name": "Ray Stochel", "speech": [ "Great. Thanks for taking my question. Can you discuss how players have engaged with Roleplay mod within Grand Theft Auto Online, and how that may have impacted results, if that's something that's monetizable for you all? And then my second question would be, is it fair to say that The Outer Worlds has higher booking expectations within fiscal '20 than WWE since you mentioned it first in your prepared remarks? Thanks" ] }, { "name": "Karl Slatoff", "speech": [ "Could you ask your first question just one more time to make sure that we're going to answer it correctly?" ] }, { "name": "Ray Stochel", "speech": [ "Sure. So we've noticed some buzz specifically within Twitch viewership around sort of a role playing mod within Grand Theft Auto Online, and I was wondering, if that in any way impacted results in GTA Online during the quarter?" ] }, { "name": "Strauss Zelnick", "speech": [ "No. We don't monetize that. What was your -- your sorry, your second question?" ] }, { "name": "Ray Stochel", "speech": [ "Sure. And the second question was whether or not The Outer Worlds had higher booking expectations than WWE since it was mentioned first in prepared remarks?" ] }, { "name": "Lainie Goldstein", "speech": [ "Yeah. In my prepared remarks, the titles are listed in order of contribution. So yes." ] }, { "name": "Ray Stochel", "speech": [ "Great. Thanks again." ] }, { "name": "Operator", "speech": [ "Thank you. The next question is from the line of Ryan Gee with Barclays. Please proceed with your question." ] }, { "name": "Ryan Gee", "speech": [ "Yes, hi. Good afternoon. Thanks for taking the questions. A quick one on NBA, and then on Red Dead. So a soccer game from one of your peers are seeing online revenue per payer north of $100 and in game payer conversion kind of in this 30% to 40% range. And so, not sure if you agree that soccer is a good proxy for your NBA business, but assuming that it is. Could you comment maybe on how close you guys are to seeing similar levels of monetization and conversion. Because I think it's a really good gauge of how much runway that franchise has left to grow for you guys?", "And then real quick on Red Dead, Rockstar for the last three games, it had a PC version out, of each one of them, albeit at a later date. So are you guys reserving the right to launch Red Dead 2 on PC maybe later in fiscal '20?", "Thanks." ] }, { "name": "Karl Slatoff", "speech": [ "So in terms of -- in terms of comparing ourselves to other games in the sport business, specifically the soccer, we don't really give out those kind of -- that kind of data that kind of comparison. But I can tell you this, is that we believe that we have a lot of room there to go in terms of our specific opportunity around NBA 2K and our recurrent consumer spending model.", "And it's important to note that our recurrent consumer spending model is also pretty broad. It's not just, it's not just one specific thing, it's not just card battle for example. It's other things as well. And we do believe that, that broad monetization strategy gives us a lot of upside in the future. But in terms of comparing ourselves to FIFA for example, we just haven't done that." ] }, { "name": "Strauss Zelnick", "speech": [ "And in terms of upcoming releases, we do let our labels talk about what's coming next. We leave those announcements to them." ] }, { "name": "Operator", "speech": [ "Thank you. Our next question comes from the line of Brian Nowak with Morgan Stanley. Please proceed with your question." ] }, { "name": "Brian Nowak", "speech": [ "Thanks for taking for taking my questions. Just two. First on NBA 2K, you've had a lot of success driving the in game monetization. Was there -- and could you just give us a couple of examples of different types of content drops, different types of experiences the team has found that have been particularly helpful in driving that business. Where is the team really succeeding?", "And then the second one I think you mentioned Karl, I think you said 10 new games in development on the mobile side or maybe from just one of the mobile businesses or it's mobile side. Just talk to us a little bit about how you think about the types of mobile genres that you think are sort of fit best in the portfolio? Thank you." ] }, { "name": "Karl Slatoff", "speech": [ "Yeah. The reference of the 10 games was to Social Point specifically. So that's what I was referring to. So there is a broad pipeline there, and a lot of games that we -- that are coming out the release. And in terms of the recurrent consumer spending model around NBA, if it does monetize, there are a lot of things you can do to drive content. The most important is to drive engagement. And the most important thing is that you want the players engaged. If people are engaged and they are engaged with the game, then the monetization takes care of itself. And whether that's buying cosmetics or training modes for The Road to 99 or something around Mono 1 matchups. It's pretty, it's well diverse or the card battles. All of these things monetize well and they monetized differently, but that's not really the point. I think the point is -- most people are playing the games and our philosophy is, we want them to play the entire game, not just one mode specifically that may happen to monetize better than another mode. That's -- our focus those is to have people play as much of the game as they possibly can and we worry about the monetization piece later." ] }, { "name": "Brian Nowak", "speech": [ "Okay. Thanks." ] }, { "name": "Operator", "speech": [ "Thank you. Our next question comes from the line of Brandon Ross with BTIG. Please proceed with your question." ] }, { "name": "Brandon Ross", "speech": [ "Hi. Thanks for taking the questions. First, how do you think the lag between the release of RDR 2 and Red Dead Online coming out of beta will affect the success of the online mode? In the world we're in now, do your titles need to have a strong backlog of new content, ready to go before they launch?", "And then I think you spoke to growth in marketing expenditure. Curious why this would be the case when you are comping against RDR 2 from fiscal 2019? Thanks." ] }, { "name": "Strauss Zelnick", "speech": [ "Yeah. I think your question was regarding the initial launch of Red Dead Redemption 2 and then the beta Red Dead Online and then ultimately coming out of beta and how that timing looks. And the answer is, we think it looks just fine. They'll be marketing around the coming out of beta, we'll be marketing around the new content. And as I said earlier, if you compare it to how Grand Theft Auto Online developed, we're ahead of where we were with that title and that's turned out to be a great success. So we feel really good about it.", "Your second question was were we putting together a backlog of content to release later after an initial release, and the answer is sometimes we do, often, we don't. It depends on the title, the nature of the content and which label it's coming from. So it all depends. But generally speaking when we put out a title initially, we're putting out the full release that is a well thought out complete entire start to finish title. We're not holding something back in hopes of monetizing it later in a different way. We're driven by delivering the best experiences known to man. And Karl said this earlier, we believe if we focus on engaging the consumer and giving them, way, way, way more than they expected and way more value than they paid for, then the things will follow including monetization." ] }, { "name": "Lainie Goldstein", "speech": [ "In terms of the marketing expense, we have a greater number of titles releasing this year, which is why the marketing expense is higher. So even with Red Dead Redemption marketing coming down from last year, we have marketing for Borderlands 3, Outer Worlds, Ancestors, ongoing marketing for Red Dead Online, NBA and WWE. So that's why marketing spend is higher this year." ] }, { "name": "Brandon Ross", "speech": [ "Thank you." ] }, { "name": "Operator", "speech": [ "Thank you. Our next question comes from the line of Mike Hickey with Benchmark Company. Please proceed with your question." ] }, { "name": "Mike Hickey", "speech": [ "Hey, Strauss, Lainie, Karl, Hank. Congrats on the quarter, guys. Thanks for taking my questions.", "Just, I guess first, Strauss, you made some comments that RDR Online is performing better than the GTA Online on a similar time period. Just hopefully you could maybe expand on that tidbit for us? And I was also curious if you played the plans content for RDR Online any impressions maybe that you had and how you expect it will monetize out of beta versus GTA Online, obviously, you have a lower player based curious to monetize the same level? And I have a follow up." ] }, { "name": "Strauss Zelnick", "speech": [ "Yeah. I was referring to the nature of the engagement and where we are technically in the process, obviously, we are vastly more experienced today than we did when we launched Grand Theft Auto Online and much more sophisticated infrastructure. So that's what I was really referring to. And on the rest, we don't have any specific information to give. We're very enthusiastic and optimistic. And the next thing, we'll be talking about is how it's doing." ] }, { "name": "Mike Hickey", "speech": [ "All right. Last question from me, on your announced fiscal '20 pipeline, is this your for slate as it relates to your guidance or should we or could we expect another major release or platform expansion coming -- over the coming quarters? And then RDR Online, should we expect a similar cadence of content as what we've seen for a Grand Theft Auto Online and then for Grand Theft Auto Online in fiscal '20, should we kind of expect the same again came to content that we've seen from -- from that online experience historically." ] }, { "name": "Strauss Zelnick", "speech": [ "So just on the content side, there is more to come for obviously for Red Dead Online and for Grand Theft Auto Online. And now Rockstar will make those announcements in the fullness of time, but there is more to come for both, and we feel very good about it. We do have titles coming in the fiscal year that have not been announced yet. They are part of our guidance however." ] }, { "name": "Mike Hickey", "speech": [ "Okay. Thanks, guys. Best of luck." ] }, { "name": "Operator", "speech": [ "Thank you. Our next question comes from the line of Matthew Harrigan with Buckingham Research Group. Please proceed with your question." ] }, { "name": "Matthew Harrigan", "speech": [ "Thank you. There aren't a couple I guess streams questions, people over Europe are concerned about implications for tweets of article 13 and I guess rechristened 17 on copyright for the Internet, do you see any second order effects for the video game industry that would affect you over there? And then secondly, would you have any further comment on Senator Josh Hawley's proposal, him particularly being a Republican, that would seem to raise the risk. I know you're much less dependent on loot boxes than some of your peers, but just I guess in relation those two questions in the year general posture on regulatory developments both States side and overseas? Thanks. Hello?" ] }, { "name": "Strauss Zelnick", "speech": [ "Sorry. Just in terms of Article 17, we haven't heard that it reflects on the video game space at all. So as far as we know, there is no impact whatsoever. On the loot boxes question, just to put in context that mechanic is responsible for less than 3% of our net bookings in the past fiscal year. So it's not material to us. We have used the mechanic in the past. So it is something we've seen and we think it's just fine. There has been some noise around it, particularly internationally, as I said, we think it's perfectly reasonable mechanic, however, it forms a very small part of our business." ] }, { "name": "Matthew Harrigan", "speech": [ "Thanks, Strauss." ] }, { "name": "Operator", "speech": [ "Thank you. We have reached the end of our question-and-answer session. So I would like to turn the floor back over to management for any additional concluding comments." ] }, { "name": "Strauss Zelnick", "speech": [ "Well, I just want to say thank you very much for joining us today. We're proud of the year that just finished. We are incredibly optimistic about the year to come. We have a great lineup and wonderful titles in development and all that's driven by a phenomenal creative and business team, nearly 5,000 people strong all around the world, and those are the people that we want to thank. We're grateful to all of our colleagues for these terrific results. Thank you so much for joining us today." ] }, { "name": "Operator", "speech": [ "Ladies and gentlemen, this does conclude today's conference. Again, we thank you for your participation and you may disconnect your lines at this time." ] } ]
TTWO
2018-08-02
[ { "description": "-Senior Vice President, Investor Relations and Corporate Communications -- Senior Vice President, Investor Relations and Corporate Communications", "name": "Hank Diamond", "position": "Executive" }, { "description": "-Chairman and Chief Executive Officer -- Chairman and Chief Executive Officer", "name": "Strauss Zelnick", "position": "Executive" }, { "description": "-President -- President", "name": "Karl Slatoff", "position": "Executive" }, { "description": "-Chief Financial Officer -- Chief Financial Officer", "name": "Lainie Goldstein", "position": "Executive" }, { "description": "-Bank of America Merrill Lynch -- Analyst -- Bank of America Merrill Lynch -- Analyst", "name": "Justin Post", "position": "Analyst" }, { "description": "-Jefferies -- Analyst -- Jefferies -- Analyst", "name": "Brian Fitzgerald", "position": "Analyst" }, { "description": "-MKM Partners -- Analyst -- MKM Partners -- Analyst", "name": "Eric Handler", "position": "Analyst" }, { "description": "-Goldman Sachs -- Analyst -- Goldman Sachs -- Analyst", "name": "Chris Merwin", "position": "Analyst" }, { "description": "-The Benchmark Company -- Analyst -- The Benchmark Company -- Analyst", "name": "Mike Hickey", "position": "Analyst" }, { "description": "-Consumer Edge Research -- Analyst -- Consumer Edge Research -- Analyst", "name": "Raymond Stochel", "position": "Analyst" }, { "description": "-BTIG -- Analyst -- BTIG -- Analyst", "name": "Mark Kelley", "position": "Analyst" }, { "description": "-Barclays -- Analyst -- Barclays -- Analyst", "name": "Ryan Gee", "position": "Analyst" }, { "description": "-Oppenheimer & Company -- Analyst -- Oppenheimer & Company -- Analyst", "name": "Andrew Uerkwitz", "position": "Analyst" } ]
[ { "name": "Operator", "speech": [ "Greetings and welcome to the Take-Two Interactive Software first-quarter fiscal year 2019 earnings conference call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded.", "I would now like to turn the conference over to your host, Hank Diamond, senior vice president, investor relations and corporate communications." ] }, { "name": "Hank Diamond", "speech": [ "Good afternoon. Welcome and thank you for joining Take-Two's conference call to discuss its results for the first quarter of the fiscal year 2019 ended June 30, 2018. Today's call will be led by Strauss Zelnick, Take-Two's chairman and chief executive officer; Karl Slatoff, our president; and Lainie Goldstein, our chief financial officer. We will be available to answer your questions during the Q&A session following our prepared remarks.", "Before we begin, I'd like to remind everyone that statements made during this call that are not historical facts are considered forward-looking statements under federal securities laws. These forward-looking statements are based on the beliefs of our management as well as assumptions made by and information currently available to us. We have no obligation to update these forward-looking statements. Actual operating results may vary significantly from these forward-looking statements based on a variety of factors.", "These important factors are described in our filings with the SEC, including the company's most recent annual report on Form 10-K and quarterly report on Form 10-Q, including the risks summarized in the section entitled Risk Factors.", "I'd also like to note that all numbers we will be discussing today are GAAP. And unless otherwise stated, all comparisons are year over year. Additional details regarding our actual results and financial outlook are contained in our press release, including the items that our management uses internally to adjust our GAAP financial results in order to evaluate our operating performance.", "In addition, we have posted to our website a slide deck that visually presents our results and financial outlook. Our press release and filings with the SEC may be obtained from our website at www.take2games.com.", "Note that our fiscal first-quarter results reflect our adoption of ASC 606. This does not materially impact our net bookings operational metric but does affect our GAAP results in a number of ways. Prior periods have not been restated. Additional information will be included in the company's quarterly report on Form 10-Q for the period ended June 30, 2018.", "And now, I'll turn the call over to Strauss." ] }, { "name": "Strauss Zelnick", "speech": [ "Thanks, Hank. Good afternoon and thank you for joining us today. I'm pleased to report that fiscal 2019 is off to a solid start, with our business delivering first-quarter operating results that exceeded our outlook. This performance was driven by better-than-expected recurrent consumer spending on Grand Theft Auto Online and NBA 2K18, as well as strong ongoing demand for Grand Theft Auto V.", "During the quarter, we returned $154 million in capital to our shareholders through the repurchase of 1.6 million shares of our stock at an average price of approximately $96, and we ended the period with $1.1 billion in cash and short-term investments.", "Grand Theft Auto Online continued to exceed our expectations in the first quarter as it has in every period since its release. Since April 1, Rockstar Games has released a number of free content updates for Grand Theft Auto Online following on The Southern San Andreas SuperSport Series as well as adding the Madrazo Dispatch Services Mission Series and, most recently, GTA Online: After Hours.", "After Hours had a bigger Week 1 audience than last December's Doomsday Heist, which went on to be a record-breaking update. Rockstar Games plans to bring much more innovative new content to Grand Theft Auto Online in order to drive engagement and to keep its constantly evolving world thriving.", "Sales of Grand Theft Auto V also outperformed our expectations with the sell-in of the title now approaching 100 million units. Remarkably nearly five years after its initial release, Grand Theft Auto V remains the standard-bearer for the current console generation. In April, Rockstar Games released the Grand Theft Auto V: Premium Online Edition, which includes the game's complete story experience, the world of Grand Theft Auto Online, all existing gameplay upgrades and content, and the Criminal Enterprise Starter Pack.", "We fully expect that the October 26 launch of Red Dead Redemption 2 will mark yet another creative milestone in Rockstar Games renowned history and will further illustrate their ability to deliver entertainment experiences that redefine our industry and captivate audiences throughout the world.", "NBA 2K18 continues to attract new fans and the title has now sold in more than 10 million units, up 17% over last year's release. NBA 2K18 is our highest-selling sports title ever and a testament to the tireless hard work and innovation of the team of Visual Concepts.", "In addition, our NBA 2K series continues to benefit from strong engagement and recurrent consumer spending, which exceeded our expectations in the quarter. We believe there remains a substantial opportunity to build on our industry-leading basketball series tremendous success and continue to grow sales, engagement, and recurrent consumer spending throughout the world.", "Our first-quarter results were also enhanced by a number of other recent releases and catalog titles, including Social Point's mobile games, WWE SuperCard, and WWE 2K18, XCOM 2, and Sid Meier's Civilization VI. Finding new and innovative ways to drive ongoing engagement with our titles remains a key strategic priority for our organization.", "During the first quarter, recurrent consumer spending accounted for 63% of total net bookings, up from 59% last year. In addition to virtual currency for Grand Theft Auto Online and NBA 2K, recurrent consumer spending was enhanced by a variety of other offerings.", "In the free-to-play category, Social Point's two biggest mobile titles, Dragon City and Monster Legends, continue to be positive contributors to our results. The studio is hard at work on their strong pipeline of new titles and we view Social Point as an important long-term growth opportunity for Take-Two. Recurrent consumer spending at WWE SuperCard grew 18% and the game has now been downloaded over 17 million times. During the quarter, 2K released a number of updates to the title, which helped drive engagement.", "And NBA 2K Online remains the No. 1 PC online sports game in China with over 37 million registered users. In addition, add-on content contributed significantly, led by our offerings for Sid Meier's Civilization and XCOM 2.", "Fiscal 2019 is poised to be one of our best years yet and we expect to deliver record operating results. We're incredibly excited about the launch of Rockstar Games' Red Dead Redemption 2 as well as the upcoming releases of NBA 2K19, which marks the 20th anniversary of the series, and WWE 2K19. We'll continue to support our titles with offerings designed to drive engagement and recurrent consumer spending.", "As we celebrate a quarter century of phenomenal entertainment, Take-Two is exceedingly well-positioned creatively, strategically, and financially, to capitalize on our industry's many opportunities. Our development team's unmatched ability to deliver the highest-quality entertainment experiences and drive ongoing engagement through connected play is the key ingredient to our ongoing success. As a result, Take-Two is poised to deliver growth and returns for our shareholders over the long term.", "I'll now turn the call over to Karl." ] }, { "name": "Karl Slatoff", "speech": [ "Thanks, Strauss. Today, I'll focus on our development pipeline. September 11, 2K will launch NBA 2K19, which will deliver the series trademark style and NBA authenticity. The Standard Edition will feature Milwaukee Bucks standout and two-time NBA All-Star, Giannis Antetokounmpo, on the cover.", "To mark the franchise's 20th anniversary, 2K will also release a special NBA 2K19 20th Anniversary Edition, featuring three-time NBA Champion, four-time NBA MVP and avid NBA 2K gamer LeBron James on the cover.", "This iconic cover will feature Akron's favorite son alongside an artistic composition of words personally chosen by LeBron, including Strive for Greatness, Driven, and Equality. In addition to the exclusive James-themed content and items, fans who purchase the NBA 2K19 20th Anniversary Edition will receive the access to the game four days early, on September 7.", "Our NBA 2K brand continues to expand its audience throughout the world across both traditional and emerging platforms, providing fans with numerous ways to engage with our industry's most popular and successful basketball series.", "Just today NBA 2K Online 2 entered Open Beta in China. Co-developed by Visual Concepts and Tencent, the sequel to the highly successful NBA 2K Online is based on the console edition of NBA 2K and features 2K's legendary gameplay, 27 customizable position types, new player trading systems, eSports-optimized features, localized commentary and more. NBA 2K Online 2 is planned for full commercial release this fall. We believe that China represents a significant growth opportunity, both for NBA 2K and for our business in general.", "In addition, 2K recently announced that they will be the exclusive publisher of Saber Interactive's upcoming arcade-action sports game, NBA 2K Playgrounds 2. This over-the-top, two-on-two basketball experience will complement our top-selling NBA 2K series and expand 2K's footprint in the basketball video game space. The original NBA Playgrounds was a fantastic throwback to the glory days of arcade-action sports. And NBA 2K Playgrounds 2 will get fans in both franchises an exciting new way to game with friends around the world.", "The title will be released this fall for Xbox One, PlayStation 4, Nintendo Switch and PC.", "The inaugural season of the NBA 2K League, our joint venture with the NBA, is in full swing and heading in postseason play, and we've been very pleased with the League's progress and growing viewership. In addition, fan engagement on Twitch, the League's streaming partner, and its social channels has been strong. Beginning on August 17, the League will hold its first playoffs that will include 8 of its 17 teams and culminate with the finals on August 25. The NBA 2K League championship team will receive $300,000 from the playoff prize pool as part of the $1 million in total prize money and that will be awarded during the season.", "This first season has been a great learning experience for our organization and has provided a sound approach to expanding our presence in a rapidly growing world of esports. We look forward to watching the continued progress and growth of the League, which has a long-term potential to enhance engagement and to be a meaningful driver of profit for our company.", "On October 9, 2K will bring gamers back into the virtual squared-circle with WWE 2K19, which will include their favorite sports entertainment superstars, gameplay modes, and hard-hitting, in-ring actions. AJ Styles, The Phenomenal One, will be the cover superstar of the Standard and Deluxe Editions of the title.", "In addition, 2K will feature 16-time WWE World Champion, global pop culture icon, and WWE Hall of Famer, Ric Flair in the WWE 2K19 Wooooo! Edition. This edition will be limited to 30,000 copies worldwide and offer an impressive assortment of exclusive and collectible memorabilia, as well as robust digital content.", "Players who pre-order WWE 2K19 at participating retailers will receive two playable characters as a bonus, including former WWE Champion, Rey Mysterio and UFC Hall of Famer, Rowdy Ronda Rousey. And this year, for the first time ever, fans will have the opportunity to compete in the WWE 2K19 Million Dollar Challenge, in which the winner of the tournament will face off one-on-one against AJ Styles in WWE 2K19 for the chance to win a $1 million grand prize.", "On October 26, Rockstar Games will launch Red Dead Redemption 2, the eagerly awaited sequel to one of the label's most critically acclaimed and beloved titles. Created by the team behind Grand Theft Auto V and Red Dead Redemption, Red Dead Redemption 2 is Rockstar Games first title developed from the ground up for the recurrent console generation. An epic tale of life in America's unforgiving heartland, Red Dead Redemption 2's vast and atmospheric world will also provide the foundation for an entirely new online multiplayer experience.", "In June, Rockstar Games announced details for the Special Edition and Ultimate Edition of the title, along with extra pre-order bonuses for all three versions and a unique assemblage of real-world collectibles inspired by the game. We could not be more excited about the upcoming launch of Red Dead Redemption 2, which is poised to be another massive entertainment event.", "On November 6, 2K will broaden our offerings for the Nintendo Switch with the release of Carnival Games, the next entry in our popular franchise that has sold-in over 9.5 million units worldwide. Developed specifically for the Switch, Carnival Games is fun for the entire family and can be played alone or with up to four players simultaneously, leveraging the unique accessibility of the console's Joy-Con controllers. The game features 20 exciting reimagined games in four unique alleys that can be played at home or on the go, alone or with family and friends.", "Throughout the year, we will continue to support our titles with additional content designed to deepen consumers experience and drive engagement, including updates for Grand Theft Auto Online, WWE SuperCard and more. In addition, Social Point and 2K will continue to broaden our offerings for mobile devices.", "Looking ahead, we have a strong development pipeline across our labels, which includes new releases from our renowned franchises, along with the groundbreaking new intellectual property. Coupled with our substantial growth opportunity from recurrent consumer spending as well as the many opportunities presented by emerging platforms and business models, we are extremely well-positioned to provide value to consumers and to generate growth and profits over the long term.", "I'll now turn the call over to Lainie." ] }, { "name": "Lainie Goldstein", "speech": [ "Thanks, Karl. Good afternoon, everyone. Today, I'll discuss our first-quarter results and then review our financial outlook for the second quarter and fiscal year 2019. Please note that additional details regarding our actual results, financial outlook are contained in our press release.", "As Strauss mentioned, our business delivered better-than-expected operating results in the first quarter of fiscal 2019. Total net bookings were $288 million, which exceeded our outlook range of $215 million to $265 million, due primarily to the outperformance of Grand Theft Auto Online and Grand Theft Auto V as well as recurrent consumer spending on NBA 2K18. Digitally delivered net bookings were $253 million, accounting for 88% of the total, up from 81% last year.", "Turning to some details from our first-quarter income statement. GAAP net revenue decreased by 7% to $388 million and cost of goods sold decreased 33% to $131 million. Operating expenses increased by 7% to $186 million, due primarily to higher personnel expense. And GAAP net income was $72 million, or $0.62 per share, up from $60 million, or $0.56 per share, in the prior-year period.", "As a result of favorable market conditions during the first quarter, we were able to buy back 1.6 million shares of our stock at an average price of approximately $96 and we ended the period with $1.1 billion in cash and short-term investments.", "Now, I will review the highlights of our fiscal 2019 financial outlook. Starting with the fiscal second quarter. We expect net bookings to range from $500 million to $550 million. We expect high-single-digit growth in recurrent consumer spending and we expect digitally delivered net bookings to be approximately flat.", "The largest contributor to the net bookings is expected to be NBA 2K, Grand Theft Auto Online and Grand Theft Auto V, and Social Point's mobile offerings. The GAAP net revenue to range from $480 million to $530 million and cost of goods sold to range from $191 million to $217 million.", "Operating expenses are expected to range from $235 million to $245 million. At the midpoint, this represents a 15% increase over last year, driven primarily by higher marketing expense. And we expect GAAP net income to range from $50 million to $62 million, or $0.43 to $0.53 per share.", "Turning to our outlook for the full fiscal year. We're increasing our operating outlook despite the strengthening of the dollar since last quarter, as a result of our better-than-expected first-quarter results and a strong outlook for the balance of the year.", "We now expect net bookings to range from $2.7 billion to $2.8 billion, up from our prior outlook of $2.67 billion to $2.77 billion. At the midpoint, this represents a 38% increase over fiscal 2018, driven primarily by the launch of Red Dead Redemption 2 and expected growth from NBA 2K, which we forecast to be partially offset by lower net bookings from Grand Theft Auto V and Grand Theft Auto Online.", "We expect high-single-digit growth in recurrent consumer spending and we expect digitally delivered net bookings to increase by approximately 20%. The largest contributors to net bookings are expected to be Red Dead Redemption 2 and NBA 2K, Grand Theft Auto Online and Grand Theft Auto V, WWE 2K and Social Point's mobile offerings.", "We expect the net bookings break down from our labels to be roughly 55% Rockstar Games, 40% 2K and 5% Social Point and other. And we expect our geographic net bookings split to be about 55% United States and 45% international. Expect to generate approximately $785 million in net cash provided by operating activities.", "Effective April 1, we adopted a new accounting standard, which requires the changes in restricted cash be included within our cash flow statement. As a result, our outlook reflects the $72 million increase from the change in restricted cash during the first quarter.", "We plan to deploy approximately $60 million for capital expenditures. We expect GAAP net revenue to range from $2.5 billion to $2.6 billion and costs of goods sold to range from $1.43 billion to $1.46 billion. Total operating expenses are expected to range from $900 million $940 million. At the midpoint, this represents a 21% increase over the prior year, driven by higher marketing, personnel, stock-based compensation and IT expenses.", "And we expect GAAP net income to range from $169 million to $199 million, or $1.45 to $1.70 per share. For management reporting purposes, we expect our tax rate to be 20%.", "In closing, fiscal 2019 is off to a solid start and is poised to be one of our best years ever with record expected operating results. Over the long term, our industry-leading creative assets, firm commitment to operational excellence and strong financial foundation position our company to deliver growth and margin expansion for our shareholders.", "Thank you. I'll now turn the call back to Strauss." ] }, { "name": "Strauss Zelnick", "speech": [ "Thanks, Karl and Lainie. On behalf of our entire management team, I'd like to thank our colleagues for delivering a successful start to the year. And to our shareholders, I want to express our appreciation for your continued support.", "We'll now take your questions. Operator?" ] } ]
[ { "name": "Operator", "speech": [ "At this time, we will be conducting a question and answer session. Our first question comes from Justin Post of Merrill Lynch. Please proceed with your question." ] }, { "name": "Justin Post", "speech": [ "Great. Thank you for taking my question. Just wanted to revisit Grand Theft Auto: After Hours, you said engagement's up and you're happy with that. Can you talk about how you think that can monetize the franchise? And then, I think Lainie, you guided recurrent spend up in 2Q.", "Could you just remind me what you guided to and what's going to kind of drive that from slightly down this quarter to up in the fiscal second quarter? Thank you." ] }, { "name": "Strauss Zelnick", "speech": [ "Thanks, Justin. In terms of After Hours, it's looking very strong and our focus, of course, is on creating great entertainment and captivating and engaging consumers over a long period of time. That's really everything that we're concerned about. Monetization tends to follow.", "With the significant updates, the monetization results have typically been very strong." ] }, { "name": "Lainie Goldstein", "speech": [ "So for Q2, for recurrent consumer spending, we do expect it to be higher in Q2 and that's due to the growth in the NBA 2K, Social Point and that's offset by a lower GTA Online recurrent consumer spending." ] }, { "name": "Justin Post", "speech": [ "Great. Thank you." ] }, { "name": "Operator", "speech": [ "Our next question comes from Brian Fitzgerald of Jefferies. Please proceed with your question." ] }, { "name": "Brian Fitzgerald", "speech": [ "Thanks. Got a couple of questions. Strauss, it's one of the most competitive holiday seasons in years with big games kind of coming every week in October. How do you think about the market this holiday? And then, when you were wondering and when you think about what kind of dynamics you're seeing around early access programs, around things like Anniversary and Deluxe Editions, has it changed from what you've seen in previous years, maybe from last year with Tip-Off? Any comments around early access.", "Thanks." ] }, { "name": "Strauss Zelnick", "speech": [ "Yeah. Thanks for your questions, Brian. We're always worried about the competition. We never take anything for granted and we don't claim success early.", "We do our best to create phenomenal entertainment and market it effectively, and then we explain what happened. And we have enormously high expectations for October with the launch of Red Dead Redemption 2. We take the competition seriously. We're really excited about the release.", "I would just note, you don't have to go back too many years when holiday season was just inundated, when people basically only released frontline products in holiday season, and this company performed well at that time as well. So, I think it all comes down to quality. In terms of the benefits of early access and other programs, we do have all those kind of programs. We do believe in them as long as you have something great that consumers want.", "So, it's worked well for us." ] }, { "name": "Brian Fitzgerald", "speech": [ "Thanks, Strauss." ] }, { "name": "Operator", "speech": [ "Our next question comes from Eric Handler of MKM Partners. Please proceed with your question." ] }, { "name": "Eric Handler", "speech": [ "Yes. Good afternoon and thanks for the question. Just curious about the NBA. I'm wondering if you're seeing any type of parallel with every 1% incremental units sold in a year or 2% or whatever number you put into it, how much extra digital revenue does that help drive? I wonder if you could give us some metrics around that?" ] }, { "name": "Strauss Zelnick", "speech": [ "Yeah. So, you're right, obviously, as we sell incremental units and have more success, we also have more engagement. Therefore, we typically have incremental recurrent consumer spending. So, success breeds success.", "And we don't actually describe the linear relationship but we are aware of it." ] }, { "name": "Eric Handler", "speech": [ "But is it safe to assume that the percentage growth that you're getting in units and revenue from the core game, you're seeing faster growth on the digital side? So, the digital growth is outpacing the growth of the game itself, or recurrent revenue part of digital is outpacing the game itself?" ] }, { "name": "Strauss Zelnick", "speech": [ "I want to make sure I understand, are you talking about the percentage of full game units that are digitally distributed or are you talking about recurrent consumer spending, or are you talking about both?" ] }, { "name": "Eric Handler", "speech": [ "I'm talking about the recurring consumer spending relative to the core game [Inaudible]?" ] }, { "name": "Strauss Zelnick", "speech": [ "Yeah. As we do a better job with both the game and with opportunities for ongoing engagement, recurrent consumer spending continues to rise." ] }, { "name": "Lainie Goldstein", "speech": [ "And we expect in Q2, recurrent consumer spending on NBA to grow and for it to be up for the full year." ] }, { "name": "Eric Handler", "speech": [ "I'm sorry, Lainie, could you say that again? You're expecting the game to grow...?" ] }, { "name": "Lainie Goldstein", "speech": [ "We're expecting growth in recurrent consumer spending for NBA 2K in Q2 and for the full year." ] }, { "name": "Eric Handler", "speech": [ "OK. Great. And then just one quick question. Have you been buying back any stocks since the end of the quarter? Are you willing to comment on that?" ] }, { "name": "Strauss Zelnick", "speech": [ "We make those announcements after the end of the quarter." ] }, { "name": "Eric Handler", "speech": [ "OK. Fair enough. Thank you very much." ] }, { "name": "Operator", "speech": [ "Our next question comes from Chris Merwin of Goldman Sachs. Please proceed with your question." ] }, { "name": "Chris Merwin", "speech": [ "Hey. Can you guys hear me OK? Hello." ] }, { "name": "Strauss Zelnick", "speech": [ "Yes. We hear you just fine." ] }, { "name": "Chris Merwin", "speech": [ "OK. Sorry about that. Yeah, just a couple of questions, if I could, for Red Dead digital preorders, I noticed that you are giving away GTA Online cash for free and also it looks like there is a revolver that can be used in Red Dead that showed up in GTA Online. So, it seems like there is a strategy there to cross-promote between those two titles.", "I was wondering if you could talk about that strategy a bit more and how you plan to grow both, the GTA and Red Dead online community?", "And then, just along those lines, maybe if you could comment on the digital mix of Red Dead preorders and what that looks like so far relative to the overall digital download mix that you reported for fiscal 2018? I realized you've guided to digital downloads being down in fiscal 2019 from the impact of, I guess, a higher physical SKU of Red Dead units but has that guidance been consistent with what you've seen so far in the preorder data? Thank you." ] }, { "name": "Strauss Zelnick", "speech": [ "Yeah. In reverse order, thanks for your question, we don't really talk about how preorders are stacking up, digital versus physical. And with regard to potential cross-promotion between Grand Theft Auto and Red Dead Redemption 2, Rockstar Games has employed some creative techniques in cross-promotion. I think they're pretty exciting.", "And Social Club has an awful lot of members and there are a lot of avid fans, not just of Grand Theft Auto, not just of Red Dead Redemption but also fans of Rockstar Games. And so, I think it's great that there's some cross-promotion going on but as you know, we always prefer that our labels get more detail on their development and on their promotion and their marketing. And I'm quite certain that Rockstar will do that in the coming months." ] }, { "name": "Chris Merwin", "speech": [ "OK. Thank you." ] }, { "name": "Operator", "speech": [ "Our next question comes from Mike Hickey of The Benchmark Company. Please proceed with your question." ] }, { "name": "Mike Hickey", "speech": [ "Hey, Strauss, Karl, Lainie, Hank. Congratulations on an awesome quarter. Thanks for taking my questions. Yeah.", "Just two. First, a clarification maybe, Karl, on what you said about an entirely new online multi-player experience for Red Dead 2, did I hear that correctly? Is that new to the franchise? Is that new Rockstar? Or if you can you just clarify that or add to that comment, I'd appreciate it." ] }, { "name": "Karl Slatoff", "speech": [ "Yeah. Hi, Mike. It's Karl. There is nothing really more to add to that.", "We just simply said that there is an all-new online experience coming with Red Dead Redemption. There haven't been any other details given other than that." ] }, { "name": "Mike Hickey", "speech": [ "OK. All right. Well, we'll be excited to find out when they announce it. The second question on R&D headcount, it looks like in 2017, you're close to 3,200, which is up pretty dramatically, call it, from 2013, plus 70%.", "And then thinking about maybe headcount within Rockstar, I'm guessing, you're about 1,800, maybe higher R&D professionals, which I'm guessing is maybe up 100% from when you released Grand Theft Auto V. So, I'm guessing you're working hard on RDR 2. And then thinking back, I think it was 2010, you had Red Dead Redemption. In 2011, you had L.A.", "Noire and, of course, that was a co-effort Team Bondi; 2012, Max Payne; 2013, you had Grand Theft Auto V. So four big games, four releases in four years. And now since GTA V, headcount may be up 100% within Rockstar. So, I guess, the question is what does this increase in resources within Rockstar provide you in terms of increasing the pace of future releases from Rockstar, where historically it seems they've [Inaudible] been agreeable to releasing content on an annual basis? Thank you." ] }, { "name": "Strauss Zelnick", "speech": [ "Yeah. And Mike, we don't really give out that much specificity on headcount. We've made no secret of the fact that we've grown our headcount, groupwide, that's focused on development but I think your percentages are meaningfully off. In terms of your question, which I really think has to do with development cadence, if I heard it correctly, business has changed.", "Back 8 [Inaudible], 10 years ago, we had a business that involved spending a lot of resources to create a big stand-alone title, putting the title into the marketplace and moving on to the next title. And Rockstar Games with the release of Grand Theft Auto IV pioneered downloadable add-on content. And ever since that, as you know, our company is focused on finding ways to captivate and engage consumers post-release.", "Now when we don't have a successful title, of course, we don't have that opportunity but with success, and we're fortunate we've had quite a bit of it at both of our core labels, we do have such an opportunity. And the revenue that comes from add-on content, we call it recurrent consumer spending, as you know, and that's transformed our business, it's up to 63% of our net bookings in the first quarter. It's nearly half our business in the last year.", "So, I think we are dealing with a very, very different business and our development teams now continue to raise the bar creatively for what we do, and that was reflected in Grand Theft Auto V, which has now sold-in almost 100 million units. And I'm quite certain it'll be reflected in Red Dead Redemption 2. It's also reflected in the quality of work done at the 2K label, whether that's in our Borderlands franchise or in our basketball program, or in other of our programs, like Civilization. So, I think your expectation should be that our headcount would grow more.", "We've made no secret of the fact that we have some wonderful intellectual property and our constraint is not financial and, certainly, isn't an appetite for growth. Our constraint is that we are insistent on hiring only the best and the brightest, creative talent through our organization. Those people are hard to come by. And if we can grow even more rapidly, albeit, in a disciplined way, that will allow us to develop and launch even more intellectual property based on our existing franchises and based on new franchises.", "So that's a long-winded way of saying our cadence has indeed changed because the opportunity has changed. And our business now is diverse. It includes not just frontline console products, it includes numerous avenues that lead to recurrent consumer spending whether that's a free-to-play title in China, the biggest of its kind, or mobile titles headquartered in Barcelona, or mobile titles coming to you from 2K, or massively attractive record-breaking online title, Grand Theft Auto Online. And that's without talking about what's to come because we don't know what's to come but we're pretty optimistic." ] }, { "name": "Mike Hickey", "speech": [ "Thanks, Strauss. Good luck, guys." ] }, { "name": "Operator", "speech": [ "Our next question comes from Raymond Stochel of Consumer Edge Research. Please proceed with your question." ] }, { "name": "Raymond Stochel", "speech": [ "Great. Thanks so much for taking my question. Can you talk about how you think about discounting within both for the game Grand Theft Auto V but also the in-game currency? And have you had any changes recently? Please correct me if I'm wrong but it does seem like you are a little bit more promotional heading into the after-hours update but certainly that could be LTV driven. Thanks." ] }, { "name": "Strauss Zelnick", "speech": [ "We don't typically spend a whole lot of time talking about our pricing profile. The more successful our titles are, the more price leverage we have, as you'd expect, and we've enjoyed a great deal of price leverage, historically, for our hit titles. When we need to be promotional, we are. I would say, we're exceedingly judicious about physical inventory that we put into the marketplace, which means that we're not under pressure at any given time regarding our pricing policies but beyond that, we don't give much more color." ] }, { "name": "Operator", "speech": [ "Our next question comes from Brandon Ross of BTIG. Please proceed with your question." ] }, { "name": "Mark Kelley", "speech": [ "Hi, guys. This is Mark Kelley on for Brandon. Thanks for taking the questions. Just a couple for us.", "On NBA 2K, recurrent revenue was strong this quarter after a bit of a disappointment last quarter. Can you speak to the strength relative to expectations? And is there anything new Visual Concepts is doing in 2K19 to keep players interested throughout the NBA season? Thanks, guys." ] }, { "name": "Karl Slatoff", "speech": [ "Hi. This is Karl. So, just to answer your first question, which I believe was about Q1. So as Lainie said, recurrent consumer spending on NBA 2K18 exceeded our expectations for Q1 and was down [Inaudible] less than we had forecasted to be.", "And we believe that it has been affected by a couple of potential things, could be some market competition out there, also other games that are in the market. Visual Concepts certainly has plans to address continuing to keep people be engaged in a meaningful way longer into the season. So, I've got no specific to share with you right now but rest assured, Visual Concepts is always working on improving that experience to drive engagement and, ultimately, which helps our economic situation. What was the second question?" ] }, { "name": "Lainie Goldstein", "speech": [ "That was it." ] }, { "name": "Strauss Zelnick", "speech": [ "You covered." ] }, { "name": "Karl Slatoff", "speech": [ "OK." ] }, { "name": "Operator", "speech": [ "Our next question comes from Ryan Gee of Barclays. Please proceed with your question." ] }, { "name": "Ryan Gee", "speech": [ "Hi. Good afternoon, guys. Thanks for taking my questions; two, if I may. First, on mobile.", "There was an announcement this morning from Tencent about one of their studios developing a new mobile game based on popular Western IP. And so, with the announcement today of NBA 2K Online 2 launching for PC this fall over there, I don't believe I heard anything on mobile or that that extends to mobile. So, can you maybe talk about the opportunity for your NBA franchise on mobile with Tencent, whether that's something you guys have considered? Or just maybe any observations around sports on mobile over there. And then, I have a follow-up." ] }, { "name": "Strauss Zelnick", "speech": [ "Yeah. We haven't announced anything. I think the notion of a mobile title for NBA 2K in China or, broadly, in the rest of the world, is always interesting. We, obviously, have a title here.", "So, I think it's an interesting opportunity but we haven't anything, yet to announce." ] }, { "name": "Ryan Gee", "speech": [ "OK. Fair enough. And then maybe thinking longer term, I know end of last year, you guys announced the Private Division and then several projects to go along with those at that time. So, I'm curious if there's any sort of update on any of those projects, and ideally what's the realistic timeline that we might be able to see one or two of those come out? And then, kind of along those lines, if you guys have any plans to add additional studios under that umbrella? Thanks." ] }, { "name": "Strauss Zelnick", "speech": [ "Well, we've mentioned a number of the projects that are pending at Private Division. There are four of them pending. Right now what we have in the marketplace is Kerbal Space Program, which we acquired and which is doing really well. We don't have any releases from Private Division in fiscal 2019.", "And more to come on Private Division but we do have four titles about which we're incredibly excited in development." ] }, { "name": "Operator", "speech": [ "Our next question comes from Andrew Uerkwitz of Oppenheimer & Company. Please proceed with your question." ] }, { "name": "Andrew Uerkwitz", "speech": [ "Hey. Thanks for taking my question, guys. If you could play Monday-morning quarterback for a second and look at the success of GTA Online seems like it continually surprises you. Could you dig down a little bit and share what surprises you? Is it the number of people who continue to buy the game? Is it the number of hours they're playing, or the amount they're spending? And then, as a follow-up, what have you learned from that that you think you could apply to like Red Dead Online? Thank you, guys." ] }, { "name": "Strauss Zelnick", "speech": [ "So, I think we'll do the old multiple choice answer for your first question, which is D, all of the above. The answer's yes, we attribute the long success to the fact that the title just captured the imagination of the public and set a standard not just for our company but for the industry of what a great video game ought to be. And the online experience is so incredibly robust. It allows you to do so many different things and it keeps people engaged on an ongoing basis.", "And then Rockstar Games continues to drop extraordinary unexpected content into the game. So, you're right, it defied our expectations. Part of it is when we first released Grand Theft Auto V and we had Grand Theft Auto Online on its heels, we had never done anything like that. We Take-Two, we Rockstar Games, had never done anything like that.", "We didn't know what to expect. And the cadence of its ongoing extraordinary success too is new to us.", "Does it inform how we look at titles that come after? Well, naturally, it does but the nature of our approach collectively, specifically, the nature of Rockstar Games approach, is never to be derivative and always to shatter expectations. And my belief is that Red Dead Redemption 2 will shatter expectations and that the online experience also will be extraordinary but unexpected. And my view is that all great hits are, by their very nature, unexpected.", "So that's the goal. There is an expectation around the table here, of course, there's an expectation at Rockstar Games, and there's expectation on the part of consumers, but our job is to exceed those expectations. And fingers crossed, that's we're all setting out to do. And we couldn't predict it and didn't presume to with regard to Grand Theft Auto V and we wouldn't presume to with Red Dead Redemption 2.", "So, we're just hard at work, doing the very best job that we can." ] }, { "name": "Operator", "speech": [ "Ladies and gentlemen, we have reached the end of our question and answer session. I would like to turn the call back to management for closing remarks." ] }, { "name": "Strauss Zelnick", "speech": [ "Well, first of all, thank you for joining us today. Secondly, I'd like to just say thanks again to all of our colleagues here in New York and all around the world, many of whom are [Inaudible] and many of whom are listening, we have the hardest working people in the show business, and we think they're very best and we're grateful to all of our colleagues for their extraordinary work that's reflected in these results. We're also grateful to our shareholders for your continued support.", "So, thank you for joining us today." ] }, { "name": "Operator", "speech": [ "This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation." ] }, { "name": "Andrew Uerkwitz --Oppenheimer & Company -- Analyst", "speech": [ "More TTWO analysis", "This article is a transcript of this conference call produced for The Motley Fool. While we strive for our Foolish Best, there may be errors, omissions, or inaccuracies in this transcript. As with all our articles, The Motley Fool does not assume any responsibility for your use of this content, and we strongly encourage you to do your own research, including listening to the call yourself and reading the company's SEC filings. Please see ourTerms and Conditionsfor additional details, including our Obligatory Capitalized Disclaimers of Liability." ] } ]
TTWO
2022-05-16
[ { "description": "Senior Vice President of Investor Relations and Corporate Communications", "name": "Nicole Shevins", "position": "Executive" }, { "description": "Chairman and Chief Executive Officer", "name": "Strauss Zelnick", "position": "Executive" }, { "description": "President", "name": "Karl Slatoff", "position": "Executive" }, { "description": "Chief Financial Officer", "name": "Lainie Goldstein", "position": "Executive" }, { "description": "Jefferies -- Analyst", "name": "Andrew Uerkwitz", "position": "Analyst" }, { "description": "MKM Partners -- Analyst", "name": "Eric Handler", "position": "Analyst" }, { "description": "Truist Securities -- Analyst", "name": "Matthew Thornton", "position": "Analyst" }, { "description": "Barclays -- Analyst", "name": "Mario Lu", "position": "Analyst" }, { "description": "Baird -- Analyst", "name": "Colin Sebastian", "position": "Analyst" }, { "description": "Bank of America Merrill Lynch -- Analyst", "name": "Omar Dessouky", "position": "Analyst" }, { "description": "Deutsche Bank -- Analyst", "name": "Benjamin Soff", "position": "Analyst" }, { "description": "Wells Fargo Securities -- Analyst", "name": "Brian Fitzgerald", "position": "Analyst" }, { "description": "Morgan Stanley -- Analyst", "name": "Matthew Cost", "position": "Analyst" }, { "description": "The Benchmark Company -- Analyst", "name": "Mike Hickey", "position": "Analyst" }, { "description": "Cowen and Company -- Analyst", "name": "Doug Creutz", "position": "Analyst" }, { "description": "Oppenheimer and Company -- Analyst", "name": "Martin Yang", "position": "Analyst" }, { "description": "Raymond James -- Analyst", "name": "Andrew Marok", "position": "Analyst" }, { "description": "MoffettNathanson -- Analyst", "name": "Clay Griffin", "position": "Analyst" }, { "description": "Stifel Financial Corp -- Analyst", "name": "Drew Crum", "position": "Analyst" } ]
[ { "name": "Operator", "speech": [ "Greetings, and welcome to Take-Two's fourth quarter and fiscal year 2022 earnings conference call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator instructions] As a reminder, this conference is being recorded.", "I would now like to turn the conference over to your host, Nicole Shevins, senior vice president of investor relations and corporate communications. You may begin." ] }, { "name": "Nicole Shevins", "speech": [ "Good afternoon. Thank you for joining our conference call to discuss our results for the fourth quarter and fiscal year 2022 ended March 31, 2022. Today's call will be led by Strauss Zelnick, Take-Two's chairman and chief executive officer; Karl Slatoff, our president; and Lainie Goldstein, our chief financial officer. We will be available to answer your questions during the Q&A session following our prepared remarks.", "Before we begin, I'd like to remind everyone that statements made during this call that are not historical facts are considered forward-looking statements under federal securities laws. These forward-looking statements are based on the beliefs of our management, as well as assumptions made by and information currently available to us. We have no obligation to update these forward-looking statements. Actual operating results may vary significantly from these forward-looking statements based on a variety of factors.", "These important factors are described in our filings with the SEC, including the company's most recent annual report on Form 10-K and quarterly report on Form 10-Q, including the risks summarized in the section entitled Risk Factors. I'd also like to note that unless otherwise stated, all numbers we will be discussing today are GAAP and all comparisons are year over year. Additional details regarding our actual results and outlook are contained in our press release, including the items that our management uses internally to adjust our GAAP financial results in order to evaluate our operating performance. Our press release also contains a reconciliation of any non-GAAP financial measure to the most comparable GAAP measure.", "In addition, we have posted to our website a slide deck that visually presents our results and financial outlook. Our press release and filings with the SEC may be obtained from our website at take2games.com. And now, I'll turn the call over to Strauss." ] }, { "name": "Strauss Zelnick", "speech": [ "Thanks, Nicole. Good afternoon, and thank you for joining us today. Our strong fourth-quarter results concluded another highly successful year for our company. We delivered net bookings of $3.4 billion, which reflect our creative team's unwavering commitment to quality and the ability to deliver captivating and engaging entertainment experiences that transcend geographies and generations.", "On behalf of our management team, I'd like to thank all of our colleagues around the world for helping us to achieve these results, especially as we continue to navigate through the new normal following the pandemic. During the year, we positioned our organization strategically for long-term growth. To that end, we bolstered our creative teams by adding nearly 1,000 new developers, including through the acquisition of several talented studios which will help us expand our capabilities and support our growing pipeline of offerings. We broadened our portfolio further with the introduction of new intellectual properties and business models to drive player engagement.", "We agreed upon our pending combination with Zynga, which will grow our audience significantly and increase exponentially our net bookings for mobile, the fastest-growing segment in interactive entertainment, while also providing us with substantial cost synergies and revenue opportunities. As we build our scale, we believe that we can grow our margins meaningfully. Lastly, we advanced our ESG efforts, and I'm pleased that we recently published our first dedicated report, which includes information on our initiatives to date, as well as our road map for the future. During the quarter, our newly released WWE 2K22 and Tiny Tina's Wonderlands outperformed our expectations, as did Red Dead Redemption 2.", "NBA 2K22 continued to grow its audience, with the title selling in over 10 million units to date and exceeding sell-in from the prior year. During the fourth quarter, engagement remained very strong with average active days of playing up 6% on average games per user, up 13% year over year. In addition, NBA 2K22 Arcade Edition continues to hold the No. 1 position on Apple Arcade's top game chart.", "And for the full year, downloads of NBA 2K Mobile increased nearly 25% as compared with fiscal 2021. We see a significant opportunity to add unique and innovative experiences throughout the game and focus on expanding our player base. On March 11, 2K and Visual Concepts returned triumphantly to the Squared Circle with the eagerly anticipated release of WWE 2K22, which achieved the highest Metacritic scores on both Xbox and PlayStation platforms in franchise history. Setting new benchmarks for quality, the title offers more features and enhancements than any prior release in the series, including a redesigned gameplay engine, new controls, foundational improvements, upgraded visuals, and an array of options requested by our passionate player base.", "Notably, WWE 2K22 sell-in for its first four weeks exceeded the levels achieved for both WWE 2K19 and WWE 2K20, even with the revised release window that was not during the holiday season. Consumer engagement with the title has been outstanding with over 140 million in-game matches played to date and over 5.6 million hours of WWE 2K22 content viewed on Twitch. I'd like to thank 2K and the WWE team of Visual Concepts for their commitment to reestablishing this incredible franchise. We greatly appreciate WWE's immense support in launching this year's game and look forward to continuing and building upon our successful partnership in the years to come.", "On March 25, 2K and Gearbox Software released Tiny Tina's Wonderlands, an all-new fantasy-fueled offering that has taken our partnership with Gearbox to new creative heights and is viewed as the best new franchise launch from 2K in several years. The title has resonated with core fans and new audiences alike with nearly 30% of players having never before played a Borderland's title. To date, Tiny Tina's Wonderlands has exceeded our expectations and is being supported with cross-play functionality, an array of post-launch content, and a season pass. I'd like to congratulate 2K and Gearbox on delivering another stellar game, and we look forward to the possibilities for this new franchise in the years to come.", "During the fourth quarter, Rockstar Games expanded the reach of their iconic entertainment experience, Grand Theft Auto 5, with the release of new versions of the game upgraded specifically for PlayStation 5 and Xbox Series X and S. This marked the third console generation for which the game has been made available since its initial launch in 2013. And to date, the title has sold in more than 165 million units. Also, for the first time ever, Grand Theft Auto Online was made available as a stand-alone title for the latest generation consoles.", "Featuring an array of graphical and technical enhancements, a new career builder, new vehicles, and more, these versions were well received by the game's vast community of players. In the period, Grand Theft Auto Online maintained its massive audience size from the prior year, while growing 8% and 74% as compared to the fourth quarters of fiscal 2020 and 2019, respectively. In addition, Rockstar Games launched GTA+, an all-new membership program that's exclusive to Grand Theft Auto Online players on PlayStation 5 and Xbox Series X and S consoles whereby participants can receive a range of valuable player-friendly benefits, including a monthly deposit of GTA dollars and other bonuses designed to help players experience everything Grand Theft Auto Online has to offer, including access to major content packs like last holiday's, The Contract. Initial conversion has been above our expectations, which we believe bodes well for this to be an ongoing engagement driver over time.", "Red Dead Redemption 2 continued to expand its audience and to date has sold in more than 44 million units worldwide. Results for the series were notably above our expectations for the period, which is further proof of the ongoing popularity of Rockstar's blockbuster entertainment experiences. Turning to Private Division. The label's recently acquired studio, Roll7, successfully launched OlliOlli World in February, which received significant critical praise for its unique art style and impressive gameplay mechanics.", "We'll support the title with its first expansion, Void Riders, in the first half of this fiscal year. Championing the best independent talent in our industry, Private Division recently signed four new publishing agreements with leading independent developers, Die Gute Fabrik, Evening Star, Piccolo Studio, and Yellow Brick Games. We look forward to working with these talented teams. During the fourth quarter, recurrent consumer spending declined 6% over last year and accounted for 60% of net bookings.", "Over the past few months, the consumer has seen a wide array of long-awaited high-quality new releases in the market, including several of our own exciting titles that have not deployed significant live service offerings. We believe that this dynamic has impacted our overall recurrent consumer spending. NBA 2K and Grand Theft Auto Online were the largest contributors to our current consumer spending during the fourth quarter, and many of our free-to-play offerings were notable drivers as well. Top Eleven continued to perform very well following our acquisition and was our No.", "1 mobile title during the fourth quarter. Two Dots delivered notable year-over-year growth and posted its best-ever net bookings performance driven by new in-game events and successful marketing activations. Dragon City and Monster Legends delivered a solid finish to the year, supported by enhanced live operations. WWE SuperCard has now been downloaded more than 26 million times and remains 2K's highest-grossing mobile game.", "And NBA 2K Online in China outperformed our expectations. The title remains the No. 1 online PC sports game in the region with nearly 57 million registered users. We're incredibly excited about our future path of growth, including our pending combination with Zynga.", "We believe that this will be a transformative moment for Take-Two as we continue to build upon our core tenants to become the most innovative, the most creative, and the most efficient entertainment company in the world. Combined, we'll create a powerhouse of industry-leading titles that span key platforms and genres across interactive entertainment, developed by some of the most creative and forward-thinking talent within the industry. Later this week, our respective shareholders who will vote on the transaction, which, assuming such approvals are obtained, we anticipate will close on May 23, 2022. On a stand-alone basis, for fiscal 2023, we expect to achieve a new record of $3.75 billion to $3.85 billion in net bookings as we plan to deliver many new, exciting releases during the year.", "Looking ahead and excluding the impact of our combination with Zynga, we expect fiscal 2024 and fiscal 2025 to set even higher records of net bookings for our company alongside a significant ramp-up in profitability. Lainie will provide additional details on our outlook shortly, while Karl will share an update on our exciting diverse multiyear pipeline, including approximately 69 titles that we plan to release through fiscal 2025. In closing, we're highly optimistic about our future. As we continue to expand our enterprise and execute on our growth strategies, we believe that Take-Two remains incredibly well-positioned to increase its scale and prominence within the industry, expand margins and deliver long-term value for our shareholders.", "I'll now turn the call over to Karl." ] }, { "name": "Karl Slatoff", "speech": [ "Thanks, Strauss. I'd like to begin by thanking our teams around the world for delivering another outstanding year for our company. Strong results were driven by our colleagues' passion, creativity, and commitment to deliver value for all of our stakeholders. I'll now discuss our recent first-quarter releases.", "On April 21, 2K and Gearbox Software released Coiled Captors, the first of four exciting downloadable content packs in the Tiny Tina's Wonderlands season pass. Featuring a new environment, boss encounter, and legendary loots, the offering represents an innovative post-launch experience from this exciting new franchise. On April 26, 2K and Visual Concepts launched the Banzai Pack, featuring five playable superstars plus MyFACTION EVO cards for each. This is the first of five downloadable plan content offerings for WWE 2K22, all of which will be available individually and as part of the game's season pass throughout the year.", "Looking ahead, fiscal 2023 will be another exciting year for Take-Two as we deliver captivating new entertainment experiences for our players while also growing our business through our pending combination with Zynga. I'll now provide details on Take-Two's fiscal 2023 pipeline on a stand-alone basis, which includes 18 planned releases. We expect to deliver six immersive core offerings, all of which will be available for purchase. These include The Quarry, an all-new or narrative game from 2K, and Supermassive Games where every choice, big or small, shapes her story and determines who lives to tell the tale.", "Featuring an iconic ensemble cast of Hollywood stars, including David Arquette, Ariel Winter, Justice Smith, Brenda Song, Lance Henriksen, Lin Shaye, and more. The Quarry will launch on June 10 for PlayStation and Xbox consoles and Windows PC via Steam. Marvel's Midnight Suns is planned for release during the second half of calendar 2022 and is one of this year's most anticipated games. The title is being developed by Firaxis Games, the acclaimed studio that brought audience such iconic franchises as Sid Meier's Civilization and XCOM and features the Marvel Universe's most revered heroes and entirely new gameplay experience.", "2K will have more to share in the coming months. Kerbal Space Program 2, which is coming from Private Division and Intercept Games, is now expected to launch on PC in early calendar 2023, and on console later in calendar 2023. Anticipation for the title is high, with more than 12 million views of the announcement trailer. The dedicated Kerbal community can look forward to more information about the game and its new features from the title's ongoing gameplay reveal video series.", "Turning to our annual sports offerings. Fans can expect all new releases from our popular sports series, including NBA 2K23, WWE 2K23, and PGA TOUR 2K23, which will debut legendary golf icon Tiger Woods as the game's executive director. 2K will have more to share about these titles shortly. Continuing with our fiscal 2023 pipeline, we plan to release eight mobile titles, including four from new franchises and four from existing franchises, and three mid-core RK titles for purchase, which include one new sports title from 2K, a new franchise from Private Division and a new tales from the Borderlands game, which will feature new characters and stories set in the Borderlands universe.", "And lastly, we'll have one new iteration of a previously released title available for purchase. Our labels will continue to provide new content and experiences that drive engagement and recurrent consumer spending across many of their hit franchises including NBA 2K, Grand Theft Auto Online, Red Dead Redemption Online, WWE 2K, Tiny Tina's Wonderlands, OlliOlli World, and more. Excluding our pending combination with Zynga, we expect to deliver 51 titles throughout fiscal 2024 and fiscal 2025, which we believe will pave the way for us to achieve a strong acceleration in net bookings and growth and profitability. This includes 18 immersive core releases, seven of which are sports simulation games.", "Sixteen of these will be available for purchase, while two will be free-to-play; 10 independent titles, which will all be avail for purchase; 12 free-to-play mobile games; four mid-core games for purchase, two of which will be sports-oriented; and seven new iterations of previously released titles, which will all be available for purchase. It bears noting that these titles are a snapshot of our current development pipeline. It is likely that some of these titles will not be developed through completion that launch timing may change and that we will also be adding new titles to our slate. In addition to our full game releases, we will continue to offer post-loss content for many of our releases, ranging from virtual currency sales to DLC packs and Season Passes.", "Turning to eSports. The NBA 2K League kicked off its fifth season on March 23 and included new sponsors such as Google and Coinbase. This year, the league has partnered with the City of Indianapolis to bring all tournaments, as well as playoffs and finals to its new home at The Pavilion at Pan Am. The League's overall price pool has increased to $2.5 million this season, the largest since its inception.", "We remain very excited about the continued success and growth of the NBA 2K League, which has a long-term potential to enhance engagement and to be a driver of profits for our company. In closing, as we execute on our organic growth initiatives and unlock new opportunities presented by our pending transaction with Zynga, we believe that we can broaden our portfolio and capitalize further on new platforms, business models, emerging markets, and distribution channels. As we deliver on these growth opportunities, we believe that Take-Two is exceedingly well-positioned to deliver long-term value for our shareholders. I'll now turn the call over to Lainie." ] }, { "name": "Lainie Goldstein", "speech": [ "Thanks, Karl, and good afternoon, everyone. Today, I'll discuss our fourth quarter and fiscal 2022 results and then review our financial outlook for the full year and first quarter of fiscal 2023. Please note that our initial outlook does not include Zynga in our projected results or the interest expense on the notes that Take-Two issued in April to fund the cash portion of our pending acquisition of Zynga. Additional details regarding our actual results and outlook are contained in our press release.", "I'm extremely pleased with the accomplishments that Take-Two delivered during the fourth quarter and fiscal year. We posted strong financial results, took exciting steps to position the company for long-term growth, and announced our transformational pending combination with Zynga, which brings massive potential to our portfolio and financial profile. I'd like to thank our teams for their passion, commitment, and for continuing to help Take-Two deliver its strategic vision. Starting with our fourth quarter, total net bookings grew 8% to $846 million.", "Our newly released WWE 2K22 and Tiny Tina's Wonderlands outperformed our expectations, as did Red Dead Redemption 2. During the period, digitally delivered net bookings grew 4% and accounted for 91% of the total. This exceeded our outlook of a slight increase due to the outperformance of digitally delivered full-game sales. Seventy-five percent of console game sales were delivered digitally, up slightly from last year.", "As Strauss mentioned, over the last few months, there's been a wide array of long-awaited, high-quality new releases in the market, including several of our own exciting titles that have not deployed significant live service offering. Accordingly, our recurrent consumer spending declined 6% and accounted for 60% of total net bookings. GAAP net revenue grew 11% to $930 million, while cost of goods sold increased 43% to $399 million, driven by amortization of software development costs for our fourth-quarter release. Operating expenses increased by 32% to $403 million, driven by the addition of Nordeus, including its earn-out, as well as higher marketing and transaction costs.", "And GAAP net income was $111 million or $0.95 per share, compared to $290 million or $1.88 per share in the fourth quarter of fiscal 2021. Turning to our fiscal 2022 results. Total net bookings were $3.41 billion as compared to $3.55 billion in the prior year. As we expected, throughout the year, our engagement trends are notably higher than they were pre pandemic.", "However, as the world began settling into a new normal, there was a moderation of the trends that benefited our industry during the height of the pandemic. As a result, digitally delivered net bookings declined 2%, slightly outperforming our guidance of a 3% decline and accounted for 91% of the total. Sixty-eight percent of our console game sales were delivered digitally, up from 64% last year, and recurrent consumer spending declined 6%. Non-GAAP adjusted unrestricted operating cash flow was $425 million as compared to our outlook of over $400 million.", "During fiscal 2022, we spent $159 million in capital expenditures. At fiscal year-end, our cash and short-term investments balance was approximately $2.6 billion. GAAP net revenue grew 4% to $3.5 billion, while cost of goods sold was flat at $1.5 billion. Operating expenses increased 24% to $1.5 billion driven primarily by the additions of Playdots and Nordeus, including the revaluation of its earn-out, higher personnel, stock compensation, marketing and IT expenses, and higher transaction costs.", "And GAAP net income was $418 million or $3.58 per share as compared to $589 million or $5.09 per share in the prior year. Today, we provided our initial fiscal 2023 outlook for Take-Two on a stand-alone basis. We project net bookings to range from $3.75 billion to $3.85 billion, which is a new record level for the company and implies strong growth of 11% at the midpoint. We have an exciting pipeline of releases that we expect to bring to market during the year, including six immersive core titles, which is twice as many as we delivered in fiscal 2022.", "The largest contributor to net bookings are expected to be NBA 2K, Grand Theft Auto Online and Grand Theft Auto 5, Red Dead Redemption 2 and Red Dead Online, Tiny Tina's Wonderlands, Marvel's Midnight Sun, and PGA TOUR 2K23. We expect the net bookings breakdown from our labels to be roughly 60% 2K, 30% Rockstar Games, and 10% Private Division and T2 mobile games. And we forecast our geographic net booking split to be about 60% United States and 40% international. We expect recurrent consumer sending to be flat compared to fiscal 2022 and represents 58% of net bookings, which is down from 64% last year due to a greater number of new releases.", "We project digitally delivered net bookings to grow 10% and represent 91% of net bookings, which is in line with last year. Our forecast assumes that 71% of console game sales will be delivered digitally, up from 68% last year. We expect to generate more than $350 million in non-GAAP adjusted unrestricted operating cash flow, and we plan to deploy approximately $120 million for capital expenditures. We expect GAAP net revenue to range from $3.67 billion to $3.77 billion and cost of goods sold to range from $1.66 billion to $1.7 billion.", "Our total operating expenses are expected to range from $1.74 billion to $1.76 billion. At the midpoint, this represents a 17% increase over the prior year. As Karl mentioned, we have approximately 69 titles that we plan to deliver over the next three years, and we will be investing behind our pipeline in key areas such as marketing, personnel, and IT. And we expect GAAP net income to range from $223 million to $252 million or $1.90 to $2.15 per share.", "For management reporting purposes, we expect our tax rate to be 16% throughout fiscal 2023. Now, moving on to our guidance for the fiscal first quarter. We project net bookings to range from $700 million to $750 million as compared to $711 million in the first quarter last year. The largest contributors to net bookings are expected to be NBA 2K22, Grand Theft Auto Online and Grand Theft Auto 5, Tiny Tina's Wonderlands, Red Dead Redemption 2 and Red Dead Online, The Quarry, and WWE 2K22.", "We expect digitally delivered net bookings to increase 2%. Our forecast assumes that 78% of console game sales will be delivered digitally, up from 73% in the same period last year. We project recurrent consumer spending to decline by 10% as we believe that the momentum behind our own exciting titles that have not deployed significant live service offerings will continue into the first quarter. We expect GAAP net revenue to range from $810 million to $860 million and cost of goods sold to range from $307 million to $333 million.", "Operating expenses are expected to range from $387 million to $397 million. At the midpoint, this represents a 25% increase over last year, driven primarily by higher personnel and marketing expenses, as well as transaction costs. And GAAP net income is expected to range from $93 million to $105 million or $0.80 to $0.90 per share. In closing, we have great confidence in our ability to drive accelerated growth into fiscal 2023 and beyond.", "And we believe that our pending combination with Zynga will take our business to an even greater level of scale and profitability. As we execute on our strategic initiatives, we believe that we can deliver sustainable, profitable growth for our shareholders. Thank you. I'll now turn the call back to Strauss." ] }, { "name": "Strauss Zelnick", "speech": [ "Thanks, Lainie and Karl. On behalf of our entire management team, I'd like to thank our colleagues for delivering another outstanding year. And to our shareholders, I'd like to express our appreciation for your continued support. We'll now take your questions.", "Operator?" ] } ]
[ { "name": "Operator", "speech": [ "Thank you. At this time, we'll be conducting a question-and-answer session. [Operator instructions] Our first question comes from Andrew Uerkwitz with Jefferies. Please proceed with your question." ] }, { "name": "Andrew Uerkwitz", "speech": [ "Great. Thank you. Just two quick ones. The first one, on RCS, you look like you're guiding that flat, it was down in fiscal '22.", "Is that more a product of quantity? Or is there something you're seeing in the underlying engagement stats that give you comfort that lapping some tough COVID comps here in the first half are doable? Thank you." ] }, { "name": "Lainie Goldstein", "speech": [ "Yeah. So, the first year is definitely due to the comp against the year with COVID from last year. So, we had a really strong Q1. And so, comping against that quarter was very difficult.", "And then this quarter, we were seeing a lot of people playing the full game that we put out, as well as some of our competitors. So, that also affected RCS in the quarter." ] }, { "name": "Andrew Uerkwitz", "speech": [ "Got it. And then in the guide then, just trying to understand why the guide was flat and for the -- it just seems like it's still fairly tough. So, is it comfort coming back of more CS for '23 or something else?" ] }, { "name": "Lainie Goldstein", "speech": [ "So, in Q1, we're expecting to be down by about 10%, and that's the ongoing of what we're seeing in Q4, which is the players playing the full games of our games and some of our competitors. So, that's continuing. We've seen that in Q1, and we expect to see that. For the full year -- we expect to see it flat for the full year.", "So, some of our new games that are coming out don't have any recurrent consumer spending associated with that. We expect NBA to be up for the year. And then GT Online and Red Dead Online, we expect to be down for the year." ] }, { "name": "Andrew Uerkwitz", "speech": [ "Got it. Thank you so much. And then, Strauss, you did a wonderful podcast earlier in the month, I think, with LionTree. In it, you discussed M&A and the importance of listening to offers.", "Just out of curiosity, with the changing valuations we've seen across the landscape and the market that we're in, what are your broader thoughts on M&A activity here at the current levels and volatility in the market?" ] }, { "name": "Strauss Zelnick", "speech": [ "Well, no one likes to see their stock price experience a drawdown, but we ultimately will always trade on our fundamentals, and that's how we look at the company. So, we have a really strong company. We continue to perform and outperform expectations as we have in this quarter and this fiscal -- this past fiscal year. We've just issued initial guidance, which is a very positive look at our company and at the market.", "So, we remain in a very optimistic place, and I think similarly situated companies probably feel the same way. When the overall market rerates, there's nothing that we can do about it nor something that we would wish to do about it. We don't need to access the capital markets at this price level. We're under-leveraged, under no matter how you look at it.", "We have a small amount of investment-grade debt coming with the closing of the Zynga transaction. And then we have a really powerful company that we expect to continue to fire on all cylinders. So, momentary changes in the market are kind of irrelevant to us." ] }, { "name": "Andrew Uerkwitz", "speech": [ "Got it. Thank you, guys, so much." ] }, { "name": "Operator", "speech": [ "Our next question comes from the line of Eric Handler with MKM Partners. Please proceed with your question." ] }, { "name": "Eric Handler", "speech": [ "Thank you very much and I appreciate the question. Two questions. Strauss, maybe you could start off. Do you think there's any type of shift going on in preferences among gamers to -- for more story mode type of play versus, let's call it, the live services type of play, and people are just sort of craving that story mode a bit more lately?" ] }, { "name": "Karl Slatoff", "speech": [ "Hi. It's Karl. Actually, I think that we never, as an industry, went away from the attractiveness of the story mill content. We've always said that we believe in that kind of content.", "We've always delivered on that as a company. It's the ultimate entertainment experience. And I think what you're seeing is you're just seeing some other games in the market capitalize on that. I think there are a number of them out there right now, so maybe it looks that way.", "But when you look at it over time, story-driven content has always been a significant amount -- a significant portion of the activity and also the economy behind the industry, and we expect that to be the case going forward." ] }, { "name": "Eric Handler", "speech": [ "Great. Thanks. And just as a second question, comparing your guidance to what was in the S-4 from a few months back, I'm curious if there was -- when you look at the sort of puts and takes it looks like the bookings guide is a little lower than your internal budget. The EPS guide is a little better than internal budgets.", "Anything you could talk about maybe what's changed on the margin since then?" ] }, { "name": "Lainie Goldstein", "speech": [ "The projections that we gave on the S-4 were not exactly our guidance because these numbers reflected our internal estimates as of a point in time, which was back in December 2021. So, there's always some fluidity in our release slate, our marketing plans, the overall operating expense needs and those can change our projections over time. Also, like our net bookings guidance was affected by the Russia-Ukraine situation. So, those numbers are not included in our projections, in our guidance right now.", "So, that really affected it. So, there's always shifts in our impact on our software development costs and marketing expenses, which also affected the bottom line. So, those are some of the differences between guidance and the S-4." ] }, { "name": "Eric Handler", "speech": [ "Thanks, Lainie." ] }, { "name": "Operator", "speech": [ "Our next question comes from Matthew Thornton with Truist Securities. Please proceed with your question." ] }, { "name": "Matthew Thornton", "speech": [ "Hit on a little bit, but Lainie, I'm wondering if you can maybe quantify some of the discrete items that have kind of been going on in the last three months. And what I'm getting at there is Russia, as you alluded to, as well as currency. How can we think about that headwind maybe versus where we were three months ago? And then maybe more broadly, I don't know if this is for Strauss or Karl, any latest thoughts on just where you think we are in the \"reopening\"? Are we at a normal run rate? And similarly, just player behavior, obviously, there's a lot going on again on the macro front. I'm kind of curious your thoughts on what you're seeing in the player behavior more broadly.", "Any color there would be very helpful. Thanks, guys." ] }, { "name": "Lainie Goldstein", "speech": [ "So, for the first one, Russia and Ukraine is not a big material number for us, but it is something that did change between the S-4 and our guidance. Probably a bigger difference in the top line with more of some of the fluidity in our release schedule. In terms of the currency, it wasn't a huge change for us between those few months. We have a pretty big natural hedge.", "So, there really isn't a big change between then and now for us. When we set our guidance, we set it based on the spot rate at the time. So, any major changes from the time that we set our forecast, that could be a difference going forward. But as of right now, it's based on that spot rate." ] }, { "name": "Karl Slatoff", "speech": [ "And in terms of the post-COVID outlook, it does feel like we basically are at -- in a normalized situation right now. And actually, things have quite worked out basically as we thought they would. We expected that our audiences would stay with us, and they have. And we also expected that we would see some level of pullback in terms of engagement among that audience, which -- we've seen some of that.", "And I think you can see that reflected across the entire industry. But at this point, I would characterize it as we sort of normalized, we've stabilized, and I think we're back on the growth trajectory that we were all anticipating a year ago when we expect -- that we felt occurred this way." ] }, { "name": "Operator", "speech": [ "Our next question comes from Mario Lu with Barclays. Please proceed with your question." ] }, { "name": "Mario Lu", "speech": [ "Great. Thanks for taking the question. I have two on GTA. So, for GTA 5 products, you mentioned that conversion rate came in above your expectations.", "So, is there a possibility of that subscription kind of being offered to the current-gen players as well in the future? And then secondly, you mentioned that I believe the full-year guide for GTA recurring consumer spending is going to be down this year. So, how should we think about the cadence of update this year for GTA Online and going forward in terms of current gen versus next gen? Thanks." ] }, { "name": "Strauss Zelnick", "speech": [ "Yes, we haven't given have any news about broadening the subscription offering. We're thrilled about how it's been rolled out so far. We're thrilled with the conversion rate. And it's clear that consumers really like the opportunity to engage with GTA Online and they value the -- what we're offering through a subscription.", "And with regard to ongoing content updates, Rockstar has said there's more content coming, and we're excited about that." ] }, { "name": "Operator", "speech": [ "Our next question comes from Colin Sebastian with Baird. Please proceed with your question." ] }, { "name": "Colin Sebastian", "speech": [ "All right. Thanks. Good afternoon, everybody. Maybe just a follow-up on the normalization of usage and engagement monetization trends.", "I guess we're looking at mounting concerns about a recession, maybe even stagflation. I think historically, the industry has performed pretty well in economic slowdowns, downturns. But curious, Strauss, I guess, how you're thinking about the macro environment? Are there scenarios where we could see an impact to the growth in investment strategy on the horizon? And related to that, on the mobile side, I mean, there are concerns that the softening we saw in the March quarter might continue through the year. So, curious if that impacts at all your plans for Zynga integration and the synergies.", "Thanks." ] }, { "name": "Strauss Zelnick", "speech": [ "Thanks for your question. Look, people would like to claim that entertainment is countercyclical or immune to cyclicality, that is not the case. The entertainment business will be affected by an overall economic slowdown. However, we can be seen as resistant to such a slowdown.", "So, for example, if you go back to '08 and '09, the market actually grew in 2008 by 20%. It did decline in '09, but the 12% drop was less pronounced than many other business segments. And after September 11, the U.S. gaming market actually grew by 42% in '01 and 11% in '02.", "So, in the event of the consumer recession and I'm not going to opine on that because I'm not sure my opinion is very valuable. In such an event, I think we will be resistant but not immune, but we can withstand any such slowdown without a problem. And look, if you put out great entertainment, people will come out for it, and they'll come out in good times and in bad, sometimes, they'll come out more in bad times. By the way, I don't think there's any evidence that we're going to have stagflation.", "Stagflation referred to a time when there was both high unemployment and high inflation. And by high inflation, mortgage rates were over 16%. We're not in that ballpark. We're not close to that ballpark, and we have very low unemployment rates in this country right now.", "So, stagflation doesn't seem to me to be a meaningful risk. Some kind of moderate recession, I think, I suppose, is conceptually a risk, but it wouldn't have an impact on this business that we can perceive at the time. In terms of mobile games, T2 Mobile Games did just fine. They're performing incredibly well and continue to perform well in the fourth quarter.", "So, if that's any guide about how we're going to do, we feel just great about the pending combination with Zynga, and we think there's wonderful opportunities there. And we think that some of the challenges, for example, the post-IDFA world actually create opportunities for a company that has the kind of consumer database that we collectively have with Zynga and the data analytics that we have to help us navigate that database." ] }, { "name": "Operator", "speech": [ "Our next question comes from the line of Omar Dessouky with Bank of America. Please proceed with your question." ] }, { "name": "Omar Dessouky", "speech": [ "Hi. Thanks very much. There's been some debate in the market as to the size of the total addressable market for Grand Theft Auto 6, which was discussed in a blog post by Rockstar because it will launch into the Gen 9 console cycle, whereas the Grand Theft Auto 5 launched slightly before PlayStation 4 and Xbox One were launched. So, will such a graphically intensive game be as performance on Xbox One and PlayStation 4 or even the Nintendo Switch as it will be on Xbox X and PlayStation 5? And does streaming technology have the potential to make older generation console and mobile devices capable of a satisfactory performance for such a state-of-the-art game?" ] }, { "name": "Strauss Zelnick", "speech": [ "Well, in reverse order, there are no -- really aren't very many streaming platforms that are up and running right now. Stadia is still up and running. They don't have that many titles and they have relatively small audience. We've been very supportive of Stadia, but it's a tiny portion of our business, to be clear.", "And of course, there's Xbox, but these are not meaningful markets right now. I'm not sure I understood the question. If you're asking like, will the launch of the next update in the Grand Theft Auto series, which has been discussed by Rockstar in a blog post as you pointed out, have a salutary effect on the launch of upcoming platforms. Was that your question when you're talking about --" ] }, { "name": "Omar Dessouky", "speech": [ "No, no, it's really the question of whether the installed base -- we should think about the installed base as the Xbox One -- sorry, Xbox One/PlayStation 4 plus Xbox X/PlayStation 5 or only Xbox X/PlayStation 5 in which case the TAM would be smaller." ] }, { "name": "Strauss Zelnick", "speech": [ "So, Rockstar hasn't talked about any details at all about the next generation of Grand Theft Auto. So, there'll be more information to come. But I have no doubt that when that moment comes, and there is another iteration that we'll be releasing to a very robust market." ] }, { "name": "Omar Dessouky", "speech": [ "OK. Could I just ask you also a quick follow-up? In terms of your capitalized development expenses, do those typically accelerate as you head closer toward the launch of a big game like Grand Theft Auto 6, or are they relatively flat over time?" ] }, { "name": "Lainie Goldstein", "speech": [ "It depends on what games are being worked on and what the -- how big the teams are that are working on the game. So, over time, the balance on the balance sheet will go up and down based on what titles are releasing and how the games are being developed. But it doesn't go in line with any one specific game. There's a lot of games being worked on.", "And as Karl mentioned, there is a large amount of titles that are in the pipeline, and most of those are capitalized other than our mobile titles." ] }, { "name": "Operator", "speech": [ "Our next question comes from Benjamin Soff with Deutsche Bank. Please proceed with your question." ] }, { "name": "Benjamin Soff", "speech": [ "Hey, guys. Thanks for the question. So, just now that the FIFA license is officially kind of up for grabs. I wanted to gauge your interest in building out a soccer franchise, either simulation or nonsimulation.", "And if you've looked into it or thought about it, how do you see the different opportunities and challenges there? Thanks." ] }, { "name": "Strauss Zelnick", "speech": [ "Well, we noticed, and we tend to be thoughtful about our business at all times. We're excited about building out our sports business, and we don't have much else to say at the moment." ] }, { "name": "Benjamin Soff", "speech": [ "OK." ] }, { "name": "Operator", "speech": [ "Our next question comes from Brian Fitzgerald with Wells Fargo. Please proceed with your question." ] }, { "name": "Brian Fitzgerald", "speech": [ "Thank you. Tiny Tina's Assault on Dragon Keep, it was featured in the PS5, PlayStation Plus and it included a preorder from Wonderland. So, just wondering if that Dragon's Keep engagement correspondent with preordering eventually drove conversions, if that was a unique dynamic, if you -- if that was helpful to how the -- that particular marketing program works. And then, Strauss, you highlighted cross-play functionality with Tiny Tina's.", "Is there anything notable to call out with respect to what you're seeing in the cross form -- platform plate there, either versus other prior games or other cohorts of players? Because you've mentioned a nice influx of those who had not previously played Borderlands games." ] }, { "name": "Karl Slatoff", "speech": [ "I'll take the second part of the question first in terms of the cross-play. The cross-play component of Tiny Tina's Wonderlands is terrific. And we're really excited about that. We think cross-play generally is great for the consumer to have people being able to play against each other, with each other, across console and PC.", "That's an ideal situation. And we do think that that ability has helped with Tiny Tina's. I don't have any specific data to share of how many of the new people was because of cross-play, that part I don't have to share. But I can tell you, obviously, it's a good component and is very well executed by Gearbox.", "And I just -- could I ask you just for -- I didn't really quite understand the first part of the question about Assault on Dragons. What was the specific question there?" ] }, { "name": "Brian Fitzgerald", "speech": [ "So, there was -- if I recall correctly, there was a -- it was highlighted -- Assault on Dragon was highlighted in PS5 and the PlayStation Plus, and it included a Wonderlands' preorder screen. So, I'm just wondering if that engagement with Dragon Keep kind of built momentum and drove conversions in terms of people preordering or even engaging with that and then eventually buying Wonderland." ] }, { "name": "Karl Slatoff", "speech": [ "Yeah. I would -- again, I don't have numbers -- specific numbers to share with you, but that was a significant marketing beat for us. Any time that we can reengage a consumer base into a franchise, particularly to launch a new franchise, it's going to have a very positive effect. And obviously, we were blessed to have Tiny Tina's because that's one of the most beloved characters in the Borderlands series.", "So, to have access to that, they put out some content prior to the release of Wonderlands. Obviously, it had a positive impact on us and drove momentum prior." ] }, { "name": "Operator", "speech": [ "Our next question comes from Matthew Cost with Morgan Stanley. Please proceed with your question." ] }, { "name": "Matthew Cost", "speech": [ "Hi, everyone. Thanks for taking the questions. I guess just on the hiring front, you mentioned in the prepared remarks that you added 1,000 developers to the developer base this year. What are you seeing in the way of competition for those developers and wage inflation? And if you are seeing any amount of wage inflation, is that impacting your outlook for hiring for the rest of the year? And then on the M&A front, obviously, you're still in the process of closing the Zynga deal, but it does seem like we're in a moment after many years of running the business with very little leverage and cash on the balance sheet, like there are opportunities out there to go after assets at depressed valuation.", "So, I guess, are you on the hunt post Zynga or more focused on kind of the integration effort in the near term? Thanks." ] }, { "name": "Karl Slatoff", "speech": [ "Sure. In terms of the wage inflation, I think like many other companies, we are feeling the impact of wage inflation and particularly since the labor market is pretty tight right now. That being said, we really do believe that we're very well positioned to attract and retain talent. We offer highly competitive compensation packages, benefit packages, many of which include profit sharing and equity.", "So, when the company succeeds, our employees succeed, and that is very well appreciated. And there's also the element of our culture where people come here because they like to work here. And they can -- and particularly on the creative side, where they have the freedom to pursue their passions in a way that also enables them to enrich themselves at the same time. So, yes, I would say everybody in the entire market is feeling some impact of the tight labor market.", "But I think, generally speaking, we're pretty well-positioned because we consider that a competitive strength of ours." ] }, { "name": "Strauss Zelnick", "speech": [ "And on the M&A side, our story has mostly been an organic growth story for a very long period of time. We've selectively acquired companies that have great intellectual property and great teams. And then, of course, we acquired Social Point, Playdots, and Nordeus in order to enter the mobile business, and most excitingly, we expect to close our combination with Zynga next week. But over the 15-year history that this management team has been here at Take-Two, the bulk of our growth, the bulk of our success has been organically driven.", "And I think that will continue going forward. And we have a great opportunity because combined with Zynga, we have the best collection of owned intellectual property for PC and console, and mobile in the business. And I think the most talented creative people, the most talented executives. Of course, I'm speaking from our perspective, but I believe that, and I think we have to deliver on that promise, and we will do so organically.", "I don't know what opportunities exist given what I hope will be a short-term rerating of interactive entertainment stocks. Ultimately, all securities will trade up on their fundamentals. And the fundamentals in this business are quite strong, and I think will continue to be strong. That said, we have the ability in a highly disciplined way to do more inorganic growth transactions.", "And if they make sense to us, we will pursue them. But it's probably not the first order of business." ] }, { "name": "Operator", "speech": [ "Our next question comes from the line of Matthew Thornton with Truist Securities. Please proceed with your question." ] }, { "name": "Matthew Thornton", "speech": [ "Hey, good afternoon, guys. A couple of quick follow-ups. Just coming back to the capital allocation question there, Strauss. I think a couple of quarters back, it might have been the fiscal third quarter, you actually bought back some stock for the first time in several years.", "I know you guys have typically done that pretty opportunistically. So, my first question here is, given the pullback in the shares after you kind of closed the Zynga deal, would buybacks or opportunistic buybacks be something you'd entertain? Or are you trying to perhaps bring leverage down faster? Just kind of any thoughts there? And then just secondly and relatedly, post close of Zynga, would you wait until the following quarter to issue pro forma guidance? Is that something you might entertain intra-quarter? Just any way for us to think about that would be helpful. Thanks again, everyone." ] }, { "name": "Strauss Zelnick", "speech": [ "Yes. We've said that we believe in returning capital to the shareholders when it makes sense, economically, and we've done buybacks on an opportunistic basis. Generally speaking, when we perceive there to be a deep value opportunity in the marketplace, we perceived such deep value at $158 a share sitting here today, we were wrong about that. But it's still this management team's view that that represents deep value of this company for what that's worth.", "We are heading into a transaction we have put leverage on the company for the first time ever. And so, I think again, buybacks won't be our first order of business, but we do retain the flexibility to pursue buybacks if we decide to do so." ] }, { "name": "Operator", "speech": [ "Our next question comes from the line of Mike -- I'm sorry were you still --" ] }, { "name": "Strauss Zelnick", "speech": [ "Sorry. We still have Lainie to answer the second part of the question." ] }, { "name": "Operator", "speech": [ "My apologies." ] }, { "name": "Lainie Goldstein", "speech": [ "No problem. So, for the guidance at Zynga, we plan to provide consolidated guidance when we report our Q1 results in early August." ] }, { "name": "Operator", "speech": [ "Our next question comes from the line of Mike Hickey with The Benchmark Company. Please proceed with your question." ] }, { "name": "Mike Hickey", "speech": [ "Hey, thank you. Hey, Strauss, Karl, Lainie, Nicole, nice quarters, guys. Congratulations. Two questions.", "The first, I'm not sure how much you can speak to this, but sort of, Lainie, maybe your philosophy on guidance as it relates to mobile, do you think there's much of a delta there in terms of what Zynga has provided to the Street historically? And then more, I guess, the higher view, when you look at the mobile market through the first quarter here, how are you reflecting on growth of mobile? And is it meeting your expectations? And I have a follow-up." ] }, { "name": "Lainie Goldstein", "speech": [ "So, in terms of our guidance process in terms of mobile, we haven't closed the transaction yet. So, we'll start to work with Zynga closely and get a chance to get under the numbers with them and make sure we have a consistent approach toward how we plan all of our business. So, that's the plan right now." ] }, { "name": "Mike Hickey", "speech": [ "And then, Strauss, did you have a view just on mobile market growth, if it's still tracking where you thought it would be or first quarter-end has changed your view at all?" ] }, { "name": "Strauss Zelnick", "speech": [ "Yeah. We don't track growth statistics quarter to quarter. But long term, we believe that there's a wonderful opportunity in interactive entertainment generally and that mobile will continue to be a rapidly growing segment of the marketplace." ] }, { "name": "Operator", "speech": [ "Our next question comes from the line of Doug Creutz with Cowen and Company. Please proceed with your question." ] }, { "name": "Doug Creutz", "speech": [ "Hey, thanks. One of the Zynga's key executives recently left to go to be CEO of another company. Just wondered if you could give any update on your plans for how the mobile business is going to be run assuming that transaction closes. Thank you." ] }, { "name": "Strauss Zelnick", "speech": [ "It's a little early to have that conversation because the transaction has not closed yet. Zynga has been operating successfully as an independent company for approximately 15 years, and they have highly experienced key personnel across all areas of their business under Frank Gibeau's leadership. Zynga has a deep bench of talent, including many executives who aren't exactly public-facing in their roles, but they are running the business on a day-to-day basis. So, we're highly confident that there are plenty of talented executives at the -- what will become the Zynga division of Take-Two, assuming everything goes according to plan.", "And we're very excited about the future together and we'll have much more to say about that company after the deal closes." ] }, { "name": "Doug Creutz", "speech": [ "OK. Thank you." ] }, { "name": "Operator", "speech": [ "Our next question comes from the line of Martin Yang with Oppenheimer. Please proceed with your question." ] }, { "name": "Martin Yang", "speech": [ "Hi, good afternoon. Thank you for taking my question. This is more of a longer-term question for Strauss. Can you maybe share with us how would you characterize the impact of great individual creators? Is there any impact on the commercial outcome of the games? And has that really changed since you started working in the industry?" ] }, { "name": "Strauss Zelnick", "speech": [ "Well, I think we have -- we've put more focus on creative talent here, Take-Two than perhaps any other company in the interactive entertainment business and our success has reflected that choice. It's an easy thing to say, it's a hard thing to do. We truly encourage the most creative people in the industry to come to our company and work on what they're passionate about. And we make decisions that are in service of that approach, that strategy, and our goal to make great art, as well as to make great hits.", "The work is done by teams, all the work here is done by teams, but the leadership is crucial. And we have great creative leadership across the board, and we're really, really proud of that great creative leadership and grateful to them for the results that they continue to deliver here." ] }, { "name": "Operator", "speech": [ "Our next question comes from Andrew Marok with Raymond James. Please proceed with your question." ] }, { "name": "Andrew Marok", "speech": [ "Hi. Thanks for taking my questions. You mentioned that you saw some success in the stand-alone GTA Online version. I guess who are the players that are getting into GTA online at this point? How do they differ from the legacy GTA online players to the extent that you can provide quantitative guide around that as well? And then secondly, is there any update that you guys have to share maybe on your NFL partnership? Thank you." ] }, { "name": "Strauss Zelnick", "speech": [ "Yes. I think on the GTA players, I think what's most interesting is that the market continues to grow, that we've sold in 165 million units of the title. Even though it was launched in 2013, the title has dominated now three console generations. And when we created a stand-alone version of Grand Theft Auto Online, lots of people showed up to play it.", "So, clearly, the market is huge and continues to grow. And I think Rockstar has done a great job in continuing to make the market accessible for people over a long period of time. But no, we don't have anything specifically to say about the particular people who've shown up even though we have a lot of good data. And we don't have anything right now to say about the NFL partnership, although we're excited about it and looking forward to releases that will come in the future." ] }, { "name": "Operator", "speech": [ "Our next question comes from Clay Griffin with MoffettNathanson. Please proceed with your question." ] }, { "name": "Clay Griffin", "speech": [ "Yes. Hi. Good afternoon. Just a point of clarification there.", "I know it was late in the quarter, but the stand-alone price for GTA Online, is that -- I'm assuming that's getting booked at RCS or maybe there's some nuance there just to confirm that. And then just I'm curious if you could maybe put some thoughts around just the strategy around that. I think Strauss, you've called the combination of the full gain online of tethered and free-to-play just how successful that's been in the past, obviously. But any thoughts around -- should we assume that that is kind of the MO, I guess, for future titles of this size or ilk?" ] }, { "name": "Strauss Zelnick", "speech": [ "Sorry, I apologize. If you can, what was your question about pricing?" ] }, { "name": "Lainie Goldstein", "speech": [ "Stand-alone." ] }, { "name": "Clay Griffin", "speech": [ "Just curious if the stand-alone pricing for GTA Online, is that getting booked as recurring consumer spending? Or is that being booked as a full game, I guess, is the first question and the second question --" ] }, { "name": "Lainie Goldstein", "speech": [ "So, the stand-alone game itself is a full game. But if you're playing it online and buying virtual currency, that's RCS." ] }, { "name": "Strauss Zelnick", "speech": [ "And your second question? I'm sorry, I missed the second one as well." ] }, { "name": "Clay Griffin", "speech": [ "Sure. No, just general thoughts on considering the relative success of tying GTA Online to GTA 5, if we should expect that that's the kind of modus operandi for games of this stature, for your biggest IP going forward." ] }, { "name": "Strauss Zelnick", "speech": [ "We have said that we expect to offer opportunities to engage with our titles on an ongoing basis after release. We aim to provide such opportunities and to monetize them when it makes sense. But there are all different ways to do that. That could be downloadable add-on content or that could be an online multiplayer game.", "It really depends on the title and as the labels get ready to market and release titles, that will generally be made clear. So, it varies title by title. There's not going to be just one singular approach going forward." ] }, { "name": "Operator", "speech": [ "Our next question comes from Drew Crum with Stifel. Please proceed with your question." ] }, { "name": "Drew Crum", "speech": [ "Thanks. Hey, guys. Good afternoon. So, I know there's some commentary in the preamble about ramping up profitability in fiscal '24 and '25.", "Is that solely a function of scale? Or do you also anticipate slowing down the investment spend? And where will we see fluctuation in investment spending going forward? Thanks." ] }, { "name": "Lainie Goldstein", "speech": [ "It's a combination of scale and also the investments other than direct marketing, we would expect those to slow down. The direct marketing will be in line with what titles come out. But the other expenses like headcount and IT expenses and rent, we would expect that to slow down." ] }, { "name": "Drew Crum", "speech": [ "Yes. OK. Thanks." ] }, { "name": "Strauss Zelnick", "speech": [ "We want to thank you all for your questions today, for your attention, for joining us and for your support. We really appreciate it. Thanks, all." ] }, { "name": "Operator", "speech": [ "[Operator signoff]" ] } ]
TTWO
2021-05-18
[ { "description": "Senior Vice President of Investor Relations and Corporate Communications", "name": "Nicole Shevins", "position": "Executive" }, { "description": "Chairman and Chief Executive Officer", "name": "Strauss Zelnick", "position": "Executive" }, { "description": "President", "name": "Karl Slatoff", "position": "Executive" }, { "description": "Chief Financial Officer", "name": "Lainie Goldstein", "position": "Executive" }, { "description": "Goldman Sachs -- Analyst", "name": "Michael Ng", "position": "Analyst" }, { "description": "Barclays -- Analyst", "name": "Mario Lu", "position": "Analyst" }, { "description": "Wells Fargo Securities -- Analyst", "name": "Brian Fitzgerald", "position": "Analyst" }, { "description": "Truist Securities -- Analyst", "name": "Matthew Thornton", "position": "Analyst" }, { "description": "BMO Capital Markets -- Analyst", "name": "Gerrick Johnson", "position": "Analyst" }, { "description": "Cowen and Company -- Analyst", "name": "Doug Creutz", "position": "Analyst" }, { "description": "Stifel Financial Corp. -- Analyst", "name": "Drew Crum", "position": "Analyst" }, { "description": "Morgan Stanley -- Analyst", "name": "Brian Nowak", "position": "Analyst" }, { "description": "MKM Partners -- Analyst", "name": "Eric Handler", "position": "Analyst" }, { "description": "Evercore ISI -- Analyst", "name": "Benjamin Black", "position": "Analyst" }, { "description": "Credit Suisse -- Analyst", "name": "Stephen Ju", "position": "Analyst" }, { "description": "Raymond James -- Analyst", "name": "Andrew Marok", "position": "Analyst" }, { "description": "The Benchmark Company -- Analyst", "name": "Mike Hickey", "position": "Analyst" } ]
[ { "name": "Operator", "speech": [ "Greetings, and welcome to the Take-Two fourth-quarter fiscal-year 2021 earnings call. [Operator instructions] Please note this conference is being recorded. I will now turn the conference over to your host, Nicole Shevins, senior vice president of IR and corporate communications. You may begin." ] }, { "name": "Nicole Shevins", "speech": [ "Good afternoon. Thank you for joining our conference call to discuss our results for the fourth-quarter and fiscal-year 2021 ended March 31, 2021. Today's call will be led by Strauss Zelnick, Take-Two's chairman and chief executive officer; Karl Slatoff, our president; and Lainie Goldstein, our chief financial officer. We will be available to answer your questions during the Q&A session following our prepared remarks.", "I'd like to remind everyone that statements made during this call that are not historical facts are considered forward-looking statements under federal securities laws. These forward-looking statements are based on the beliefs of our management, as well as assumptions made by and information currently available to us. We have no obligation to update these forward-looking statements. Actual operating results may vary significantly from these forward-looking statements based on a variety of factors.", "These important factors are described in our filings with the SEC, including the company's most recent annual report on Form 10-K and quarterly report on Form 10-Q, including the risks summarized in the section entitled Risk Factors. I'd also like to note that unless otherwise stated, all numbers we will be discussing today are GAAP and all comparisons are year over year. Additional details regarding our actual results and outlook are contained in our press release, including the items that our management uses internally to adjust our GAAP financial results in order to evaluate our operating performance. Our press release also contains a reconciliation of any non-GAAP financial measure to the most comparable GAAP measure.", "In addition, we have posted to our website a slide deck that visually presents our results and financial outlook. Our press release and filings with the SEC may be obtained from our website at take2games.com. And now, I'll turn the call over to Strauss." ] }, { "name": "Strauss Zelnick", "speech": [ "Thanks, Nicole. Good afternoon, and thank you for joining us today. Our strong fourth-quarter performance concluded an exceptional year for our organization. We delivered net bookings of approximately $3.6 billion, which grew nearly 20% from fiscal 2020 and were the highest ever in our company's history.", "On behalf of our entire management team, I'd like to thank all of our colleagues around the world for helping us achieve these results despite such significant unforeseen and prolonged challenges. It's truly a reflection of our collective resilience and singular commitment to excellence. Our thoughts are with those who have been and continue to be affected by COVID-19. We hope that better days and comfort will come to you soon.", "Throughout the pandemic, our creative teams have delivered consistently superlative entertainment experiences, giving players opportunities to have fun in the most difficult of times and stay connected with family and friends through shared experiences. We grew our online communities meaningfully, including new and returning players, which helped drive recurrent consumer spending growth of 48% to reach a record high and represents 63% of our total net bookings for fiscal 2021. During the year, we enhanced our organization for the long term. We bolstered the depth of our creative teams by hiring more than 700 new developers, including through the acquisition of several talented studios which will help us expand our capabilities and grow our business.", "We also broadened our portfolio of offerings, capitalized on diverse business models, and made significant investments in our operations and infrastructure. Nearly all of our titles outperformed during the fourth quarter, including NBA 2K21, Grand Theft Auto Online and Grand Theft Auto V, Red Dead Redemption 2 and Red Dead Online, and Sid Meier's Civilization VI. The NBA 2K series is known throughout the world for being the most authentic, the most realistic, and the most engaging basketball simulation experience in our industry. In addition to giving consumers the ability to step onto the court of their favorite NBA players or as themselves, 2K and Visual Concepts have created various game modes that offer interactive experiences and enable players to build deeper social connections.", "NBA 2K21 was our first offering built from the ground up for Gen 9 platforms. To date, the title has exceeded our expectations and sold in over 10 million units. During the fourth quarter, net bookings for the series grew 37% and recurrent consumer spending exceeded our expectations significantly, growing 32% and 73% in the period and fiscal year, respectively. Consumer engagement with NBA 2K remains incredibly strong with more than 2.3 million users playing the game daily.", "We see a significant opportunity to grow the franchise further as we provide unique and innovative experiences throughout the game. Once again, Rockstar Games' iconic Grand Theft Auto series exceeded our expectations, expanded its audience, and set new benchmarks in fiscal 2021. Driven by an array of new free content updates and sustained interest in last holidays, Cayo Perico Heist, Grand Theft Auto Online benefited from strong engagement trends during the fourth quarter, including a record number of active players and the second-highest quarter of recurrent consumer spending on record. For the full year, participation levels reached an all-time high from both new and returning players and recurrent consumer spending grew 31%, achieving a new annual record.", "Sales of Grand Theft Auto V also surpassed our expectations. And to date, the title has sold in more than 145 million units worldwide. Red Dead Online exceeded our expectations during the fourth quarter with active players increasing significantly in recurrent consumer spending performing above our plans, due in part to the success of the recently released stand-alone version of the game. Throughout the period, Rockstar Games released new content updates for Red Dead Online, including brand-new missions for solo players, the Outlaw Pass No.", "5, and its new rewards, and more. Red Dead Redemption 2 continued to perform very well and to date has sold in over 37 million units worldwide. During the fourth quarter, 2K announced our acquisition of HB Studios, the developers of our highly successful golf game PGA Tour 2K21, which to date has sold in more than 2 million units. We're very excited about the growth potential for the PGA Tour 2K series, especially as 2K has entered into an exclusive long-term agreement with golf legend and icon Tiger Woods to serve as its Executive Director and consultant, which we believe will enhance the series' ongoing innovation and authenticity.", "During the period, 2K and Firaxis Games released the Vietnam and Kublai Khan, and Portugal packs for Sid Meier's Civilization VI that were the final offerings for the game's incredibly successful New Frontier Pass. Civilization VI's daily active users have grown steadily since the game's release more than five years ago. And to date, the title has sold in over 11 million units. As a result of the engagement from the past, as well as the success of XCOM: Chimera Squad and XCOM 2 on Switch, Firaxis Games had one of its best years ever.", "We expect this growth to continue as the studio has several exciting projects in development that will be revealed this year. During the fourth quarter, Private Division released Murder on Eridanos, the final add-on for their highly successful game in The Outer Worlds, which has sold in more than 3 million units. The add-on will also be coming to switch later this year. Private Division's 2019 release, Ancestors: The Humankind Odyssey has now sold in over 1 million units, marking the third title from the label to achieve the million-unit milestone joining The Outer Worlds and Kerbal Space Program.", "Providing new and innovative ways for audiences to stay engaged with our titles after their initial launch is a key strategic priority of our organization and represents an important long-term growth and margin opportunity. Our record levels of recurring consumer spending were largely driven by NBA 2K and Grand Theft Auto Online during the fourth quarter and were enhanced by the following offerings. Social Point's live games led by Dragon City and Monster Legends exceeded our expectations. Strong seasonal content and features, as well as increased marketing investments, helped drive net bookings growth of nearly 30% for the period and 44% for the year.", "The studio is planning to release three new titles during the second half of fiscal 2022. PlayDots had a strong fourth quarter, driven by the outstanding performance of Two Dots, which achieved sequential growth over the third quarter. We expect PlayDots to be a significant contributor to our results over the long term. And look forward to its new release plan for the fall.", "WWE SuperCard also outperformed, growing 24% during the fourth quarter and 28% during the year. The title has now been downloaded more than 23 million times and remains 2K's highest-grossing mobile title. NBA 2K Online in China grew 6% and 9% during the fourth quarter and the year, respectively, and remains a significant contributor to our results. The title is the No.", "1 PC online sports game in China with more than 52 million registered users. Turning to our outlook. We believe that the pandemic initiated a transformational shift in entertainment consumption, revealing the possibilities of interactive entertainment to a much broader market with interactive entertainment becoming the No. 1 entertainment vertical.", "We anticipate that the overall addressable market for our industry will be notably larger going forward than it was pre-pandemic. However, as the world returns to a new normal, we expect a moderation of the trends that benefited our industry over the past year. We currently expect our fiscal 2022 net bookings to range from $3.2 billion to $3.3 billion, marking the second year in a row with net bookings in excess of $3 billion. We expect to achieve sequential growth in fiscal 2023.", "And over the next few years, we believe that we will establish new records of operating results even above the spectacular performance we delivered this past year. Lainie will share more details about our outlook. As Karl will discuss in greater detail, in fiscal 2022, we plan to deliver an exciting array of offerings including four immersive core releases from proven and new franchises. With the strongest pipeline in our company's history, including many new releases planned for fiscal 2023 and 2024, we're highly optimistic about our growth trajectory, and we'll be making significant investments this year to enhance our enterprise in key areas such as creative talent, IT, and other infrastructure.", "In closing, we remain confident in our proven strategy and talented teams around the world. As we continue to grow our business, we believe that Take-Two is exceedingly well-positioned to deliver long-term growth for our shareholders. I'll now turn the call over to Karl." ] }, { "name": "Karl Slatoff", "speech": [ "Thanks, Strauss. I'd like to begin by thanking our teams around the world for delivering a record year. Since joining Take 2 in 2007, I can't remember a year during which we were tested more greatly and performed as exceptionally as we did in this past year. Our colleagues' commitment, professionalism, and talent are among the best in the industry, and I could not be prouder of what we've achieved together.", "In addition, I want to thank our player communities for engaging with our experiences and making our games part of their lives. I'll now discuss our recent releases. On April 2, 2K and Visual Concepts once again expanded the breadth and depth of the NBA 2K franchise with the release of NBA 2K21 for Apple Arcade, our first offering for the platform. NBA 2K21 is the most advanced basketball simulation game available on Apple devices, featuring an all-new graphics engine that offers the highest possible resolution, updated rosters, and a variety of exciting game modes.", "NBA 2K21 is currently the most popular game on Apple Arcade. On April 7, 2K and HB Studios released the TravisMathew and Puma Golf Gear update for PGA Tour 2K21, which keeps players swinging with swag on the cutting edge of modern golf fashion. The TravisMathew Collection includes new polo shirts, hats, and shoes, marking the brand's PGA Tour 2K21 debut, while Puma Golf introduces an all-new oversized hat and new footwear. On April 8, 2K and Gearbox Software continued to enhance the Borderlands franchise with the release of the Directors cut, the sixth add-on for Borderlands 3.", "2K and Gearbox will release two additional vault cards that will become available for owners of the Directors cut before the end of calendar 2021, and all players can look forward to returning in-game events like Revenge of the Cartels. In addition, the teams are continuing to explore cross-play functionality that will enable fans to play Borderlands 3 with their friends across multiple platforms, and we expect to have more to share in the coming months. Anticipation is growing for Lionsgate's full-length live-action film based on Borderlands. The film is directed by Eli Roth and will feature some of Hollywood favorite stars, including Cate Blanchett, Jamie Lee Curtis, Kevin Hart, Jack Black, and Edgar Ramirez.", "We believe that the film promises to capture the thrills and distinct personality of the series has the potential to introduce new audiences to the beloved world of Borderlands. Looking ahead, we are very optimistic about our growth opportunities in fiscal 2022 and beyond. As Strauss mentioned, we have an exciting array of offerings planned for this year, and our long-term development pipeline represents the strongest in Take-Two's history. For fiscal 2022, we have 21 titles planned for release, including four immersive core releases for purchase, which include two releases from new franchises and two titles from existing franchises; one new independent title, OlliOlli World from Private Division, which will be available for purchase; 10 free-to-play mobile games, including six titles from new franchises and four from existing franchises; and six new iterations of previously released titles, which will all be available for purchase.", "While we are very excited to once again be working with the NFL and NFLPA, our first title under these new partnerships is no longer expected to be released during fiscal-year 2022. 2K will have more to share on their plans for our football offerings going forward. I'll now discuss details on our announced offerings for this year. Rockstar Games has massive new updates coming this summer to both Red Dead Online and Grand Theft Auto Online and will deliver fans' most heavily requested additions in a host of new items, including quality of life updates.", "On May 25, Red Dead Online will deliver eight new races, spanning iconic locations across the game's five states, including standard, open target, and open target races. Later this summer, fans can look forward to a host of new missions for skilled outlaws involving everything from quick holdups to larger, high state robberies for big rewards. Grand Theft Auto Online continues to expand and evolve. On May 27, Rockstar Games will release eight new stunt races, which will introduce an array of white-knuckled for racers in an assortment of vehicle classes.", "Fans of the futuristic Deadline Mode will be happy to have seven new arenas for combat coming soon. Survival mode will also expand to new locations throughout Los Santos and Blaine County. And later this summer, car culture will return to Los Santos in new ways in Grand Theft Auto Online's next major update, offering fans of performance and customization upgrades, new opportunities to get together and show off their rides. This includes a new social space for car meets alongside new races and race types, new vehicles to acquire, and a series of new vehicle-themed multipart robbery missions.", "Notably, these major summer updates will continue to deliver additional surprises in the weeks and months after launch including special benefits for players when the enhanced version of Grand Theft Auto V and Grand Theft Auto Online arrive on Gen 9 consoles this November 11. Rockstar Games will have more details to share about these eagerly anticipated launches in the coming months. This year, we will have two sports releases from our popular franchises. 2K and Visual Concepts are once again aiming to raise the bar for excellence with NBA 2K22, the latest offering in our industry-leading basketball simulation series.", "In addition to making the On-court action even more authentic fans can look forward to new and fun ways to engage with various game modes. Additionally, WWE 2K22 will mark the rebirth of our popular wrestling series. During the broadcast of Wrestle Mania 37, 2K and Visual Concepts revealed the very first teaser video for the game, featuring both live-action and stunning in-game footage of WWE Superstar Ray Mysterio a high-flying Lucha Libre legend and one of the most exciting and decorated superstars in WWE history. The teaser also highlighted WWE 2K22's tag line, it hits different.", "which is reflective of both the new direction of the game and its supporting marketing campaign. We're very excited about the team's fresh approach to the series. And last week, our WWE 2K22 development team at Visual Concepts kicked off a social media campaign presently behind the scenes, sneak peaks of the game, and developer diary videos. 2K will continue to unveil details in the coming months.", "2K will also introduce two releases from new franchises this year, including one from Gearbox. On June 24, Private Division will celebrate the tenth anniversary of the release of Kerbal Space Program. Private Division intends to mark the occasion with a week-long celebration, including free content updates and more. This winter, Private Division and Roll7 will release OlliOlli World digitally for consoles and PC.", "OlliOlli World marks a bold new direction for this critically acclaimed skateboarding franchise and is bursting with personality. Players slip and flow through Radlandia, a vibrant world of full-color characters as they search for the mystical Skate God on their quest for Nirvana. Radlandia and its dwellers are charming, weird, and crafted with a unique art style. Players can enjoy the game's deep combo system and everything it has to offer while pros can really prove their skills and master a vast number of moves with access to millions of unique levels in the game's sandbox mode.", "In addition, players can also compete against similarly skilled rivals around the globe in player leagues. Fiscal 2022 will be a big year for mobile with 10 new free-to-play offerings, including new titles from 2K, Social Point, and PlayDots. We'll also have six iterations of previous release titles, including enhanced versions of Grand Theft Auto V and the stand-alone version of Grand Theft Auto Online for Gen 9 consoles available for free three months for PlayStation 5 players. Both of which will launch in the second half of this calendar year.", "Looking ahead, we expect to deliver over 40 titles across fiscal 2023 and fiscal 2024, which gives us confidence in our ability to reach new record levels of operating results in the next few years. Our current expected pipeline for fiscal 2023 and '24 includes 19 immersive core releases, seven of which are sports simulation games. Fifteen of these will be available for purchase, while four will be free-to-play; five independent titles, which will all be available for purchase; 10 free-to-play mobile games; four mid-core games, which will all be available purchase and three of which will be sports-oriented; and three new iterations of previously released titles, which will all be available for purchase. It bears noting that these titles are a snapshot of our current development pipeline.", "It is likely that some of these titles will not be developed through completion or some may be delayed, and we will also be adding new titles to our slate. In the coming months, you'll start to see our titles come to market and we'll aim to share similar updates going forward when we provide our year-end results. In addition to our title releases, we'll also continue to have significant long-term opportunity to increase engagement and recurrent consumer spending. Our focus on enhancing our data analytics is enabling us to deepen our understanding of our player base and how they prefer to interact with our games, which is helping us to develop the most desirable products, expansions, and new content updates.", "Turning to eSports. The NBA 2K League will kick off its fourth season on May 19 and continue for 16 weeks. The 23 teams will play 28 regular-season games with each team beginning the 2021 season playing remotely in its local market. For the first time, the NBA 2K League will be aligned into the Eastern and Western conferences, games will be simulcast live on the NBA 2K League's Twitch and YouTube channels and will be available on Dash Radio, ES Revolution, Local in India, and Sport1 in Europe.", "Additionally, the league recently announced a landmark multiyear partnership with Sony Interactive Entertainment that makes the PlayStation 5 its official console that will be used by all teams and their 138 players doing all games and events. The partnership marks the first of its kind for PlayStation 5 with an eSports league and the first console partnership for the NBA 2K League. We remain very excited about the continued success and growth of the NBA 2K League, which has the long-term potential to enhance engagement and to be a driver of profits for our company. In closing, We remain incredibly excited about the vast potential for our company to captivate and engage audiences around the world by delivering the very best entertainment experiences, where they're broadening the reach of our portfolio through new platforms, business models, and distribution channels, pursuing organic and inorganic growth opportunities and expanding into emerging markets, Take-Two is superbly positioned to capitalize on the many positive trends in our industry and to provide continued value and returns for our shareholders over the long term.", "I'll now turn the call over to Lainie." ] }, { "name": "Lainie Goldstein", "speech": [ "Thanks, Karl, and good afternoon, everyone. Today, I'll discuss our fourth-quarter and fiscal 2021 results and then review our financial outlook for the full year and first quarter of fiscal 2022. Please note that additional details regarding our actual results and outlook are contained in our press release. As Strauss mentioned, our strong momentum continued into the fourth quarter, and we significantly exceeded our net bookings guidance for the fourth quarter and the year.", "I'd like to thank our talented colleagues around the world for their passion and dedication, which has been inspiring, especially given the challenges that COVID-19 has presented us with. Starting with our fourth-quarter results. Total net bookings grew 8% to $785 million as compared to our outlook of $602 million to $652 million. These outstanding results marked our highest level of fourth-quarter net bookings on record.", "During the period, recurrent consumer spending grew 17% and accounted for 67% of total net bookings as compared to our outlook of 5% growth. Our outperformance was primarily due to the incredible performance of NBA 2K. Digitally delivered net bookings grew 8% and accounted for 92% of the total. This result exceeded our outlook of a 10% decline due to the outperformance of both recurrent consumer spending and digitally delivered full game sales.", "During the fourth quarter, 74% of console game sales were delivered digitally, up from 63% last year. GAAP net revenue grew 10% to $839 million, while cost of goods sold decreased to $280 million, including a reversal of expense of $65 million related to forfeitures of previously granted stock awards. Operating expenses increased to 25% to $304 million, driven by higher marketing, research and development, and IT expenses, as well as the addition of PlayDots. And GAAP net income grew 78% to $219 million or $1.88 per share as compared to $123 million or $1.07 per share in the fourth quarter of fiscal 2020.", "Turning to our fiscal 2021 results. Total net bookings grew 19% to a new record of $3.55 billion. This exceeded our initial guidance by approximately $1 billion. We experienced exceptional engagement during the shelter-in-place conditions and delivered extraordinary results across many of our franchises, including NBA 2K, Grand Theft Auto, Red Dead Redemption, Borderlands, Social Point's mobile games, and Sid Meier's Civilization.", "Recurrent consumer spending grew 48%, establishing a new record and accounted for 63% of total net bookings. This exceeded our prior outlook of 45% growth. Digitally delivered net bookings grew 27% to a new record of approximately $3.1 billion and accounted for 87% of the total. This also exceeded our prior outlook of 20% growth due to better-than-expected recurrent consumer spending and digitally delivered full game sales.", "During fiscal 2021, 64% of console game sales were delivered digitally, up from the 55% last year. Non-GAAP adjusted unrestricted operating cash flow was $920 million as compared to our previous outlook of over $750 million and marked a record level for our company. During fiscal 2021, we spent $69 million on capital expenditures. At fiscal year-end, our cash and short-term investments balance exceeded $2.7 billion.", "GAAP net revenue grew 9% to $3.37 billion, while cost of goods sold was flat at $1.5 billion. Operating expenses increased by 8% to $1.2 billion, driven primarily by the addition of PlayDots, higher headcount, IT, research, and development expense, and charitable contributions, partially offset by lower marketing expenses. And GAAP net income grew 46% to $589 million or $5.09 per share. Our GAAP net income benefited from a $40.6 million gain on the sale of a long-term investment and a reversal of expense of $70 million related to forfeitures of a previously granted stock award.", "Here we gave our initial outlook for fiscal 2022. We expect net bookings to range from $3.2 billion to $3.3 billion, the second-highest level of net bookings in our company's history. This is partly driven by the exciting pipeline of new releases that we have planned for the year with the majority of our titles coming in the second half of fiscal 2022. Additionally, we expect that engagement trends will be notably higher than they were pre-pandemic.", "However, as the return to normalcy continues, we expect the moderation of the trends that benefited our industry over the past year. The largest contributors to net bookings are expected to be NBA 2K, Grand Theft Auto Online and Grand Theft Auto V, Red Dead Redemption 2 and Red Dead Online, as well as some of our new releases that are yet to be announced. We expect the net bookings breakdown from our labels to be roughly 55% 2K, 35% Rockstar Games, and 10% Private Division, Social Point, and PlayDots. And we forecast our geographic net booking split to be about 60% United States and 40% international.", "We expect recurrent consumer spending to decline by 15% as a result of the challenging comparisons from last year. Recurrent consumer spending as a percentage of our business is expected to be approximately 59% versus 63% last year due to more new releases this year. We project digitally delivered net bookings to decline by about 8% as a percentage of our business, digital is projected to represent 87%, which is in line with last year. Our forecast assumes that 74% of console game sales will be delivered digitally, up from 64% last year.", "We expect to generate more than $400 million in non-GAAP adjusted unrestricted operating cash flow, and we plan to deploy approximately $100 million for capital expenditures. The increase in capital expenditures over the prior year is primarily due to continued spending on studio and office build-outs and IT expense to support our investment in talent. We expect GAAP net revenue to range from $3.14 billion to $3.24 billion and cost of goods sold to range from $1.41 billion to $1.46 billion. Our total operating expenses are expected to range from $1.46 billion to $1.48 billion.", "At the midpoint, this represents a 22% increase over the prior year. As Karl mentioned, we have over 60 titles that we plan to deliver over the next three years, and we are making significant investments in key areas such as marketing, personnel, and IT to bring our pipeline to market. Additionally, we will have a full year of expenses for PlayDots. While these investments will impact our operating results this year, we are confident that our growing pipeline will enable us to scale our business further and improve our margins in the next few years.", "And we expect GAAP net income to range from $228 million to $257 million or $1.95 to $2.20 per share. For management reporting purposes, we expect our tax rate to be 16% throughout fiscal 2022. Now, moving on to our guidance for the fiscal first quarter. We project net bookings to range from $625 million to $675 million as compared to $996 million in the first quarter last year, which was the first full quarter of the COVID-related shelter-in-place conditions when we experienced a strong initial surge in engagement.", "The largest contributor to net bookings are expected to be Grand Theft Auto Online and Grand Theft Auto V, NBA 2K21, Red Dead Redemption 2 and Red Dead Online, and Borderlands 3. We project recurrent consumer spending to decline by 30% as we will start to compare against the record levels of engagement that we experienced in the first quarter of fiscal 2021. We also expect digitally delivered net bookings to decline by approximately 30%. Our forecast assumes that 80% of console game sales will be delivered digitally, up from 71% in the same period last year.", "We expect GAAP net revenue to range from $730 million to $780 million and cost of goods sold to range from $277 million to $303 million. Operating expenses are expected to range from $316 million to $326 million. At the midpoint, this represents an 18% increase over last year, driven primarily by higher personnel and stock compensation expenses and the inclusion of PlayDots. And GAAP net income is expected to range from $116 million to $129 million or $1 to $1.10 per share.", "In closing, fiscal 2021 was a record year for our business, and we believe that we can exceed these levels of financial results and establish new record levels of performance in the coming years. Our pipeline is robust, and we couldn't be more excited about our new releases for fiscal 2022 and beyond. As we continue to enhance our business by investing in talent, including growing our development headcount and building our infrastructure, we are positioning our company for long-term growth and success. and we expect to deliver sustainable profitable growth for our shareholders.", "Thank you. I'll now turn the call back to Strauss." ] }, { "name": "Strauss Zelnick", "speech": [ "Thank you, Lainie. We will now take your questions. Operator?" ] } ]
[ { "name": "Operator", "speech": [ "At this time, we will be conducting a question-and-answer session. [Operator instructions] Our first question is from Mike Ng with Goldman Sachs. Please proceed with your question." ] }, { "name": "Michael Ng", "speech": [ "Hey, good afternoon. Thanks for the question. I just have two. First, I was just wondering if you could offer some thoughts about opportunities you see in user-generated content, creator economies, low code, and no code game development.", "Put simply, with the success of platforms like Roblox that pay independent developers, do you see an opportunity for some of your games to go down that avenue? And then second, now that we have the release date for the expanded and enhanced version of GTA V and GTA Online, I was just wondering if you could talk a little bit about whether or not you'd expect this to usher in the next seven-year cycle for GTA Online content updates and RCS growth? Or is the scope more narrow than that? Thank you very much." ] }, { "name": "Strauss Zelnick", "speech": [ "Thanks for your questions. You're right. There's an awful lot of interesting things going on in the world of user-generated content, and there have been for some time. And we're open-minded, and we want to support the community.", "At the same time, it's terribly important that we and others protect our intellectual property. So that's the rub. The rub is to find a way to engage consumers on the one hand and enable them to express their interest and even their creative desires in the context of our properties. And there are numerous ways to go about that, and I believe we will explore many of those ways, again, in the context of protecting our intellectual property.", "With regards to Grand Theft Auto, it may shock you to learn that I'm probably not going to comment much on content to come from Rockstar Games. We're so grateful for the extraordinary results that we've had with all Rockstar titles. And in fact, all titles coming from throughout the organization. Grand Theft Auto Online set another record past fiscal year.", "We sold in over 145 million units. We're very optimistic about what there is to come, including more content. And stay tuned because Rockstar Games will be talking more about that in the future." ] }, { "name": "Michael Ng", "speech": [ "Great. Thank you for the thoughts, Strauss." ] }, { "name": "Operator", "speech": [ "And our next question is from Mario Lu with Barclays. Please proceed with your question." ] }, { "name": "Mario Lu", "speech": [ "Great. Thanks for taking the questions. I have one on the full-year guide and one on GTA. So the first one, on the full-year guide, the bookings number when I compare it to fiscal '19 and '20 is much higher than what you reported, but non-GAAP EPS guidance is well below those at less than $4.", "So just hoping if you could help provide any additional color to kind of bridge the booking strength to the EPS guidance. I know you mentioned investments in creative talent and IT, but any additional commentary would be helpful." ] }, { "name": "Lainie Goldstein", "speech": [ "It's really what I said in my prepared remarks. It's really coming from the operating expense increases, and those are really being driven by our investment in marketing, personnel, and IT. Specifically, about 55% of the increase in the expenses is coming from increases in direct marketing for our titles. So we're really investing in marketing our new titles this year and also marketing for our fiscal '23 titles as well." ] }, { "name": "Mario Lu", "speech": [ "OK. That's helpful. Thanks, Lainie. And then just a clarification question on GTA.", "Excited to play the enhanced version on November 11. So just curious if the exclusion of the PC version simply means there's no additional purchase to play that version? Or is it just coming at a later date? Thanks." ] }, { "name": "Strauss Zelnick", "speech": [ "We haven't announced anything about a changed PC version." ] }, { "name": "Mario Lu", "speech": [ "OK. Thanks." ] }, { "name": "Operator", "speech": [ "And our next question is from Brian Fitzgerald with Wells Fargo. Please proceed with your question." ] }, { "name": "Brian Fitzgerald", "speech": [ "Thanks, guys. Maybe two quick ones. On the Private Division, Outer World's Peril on Gorgon came in February on Switch, and then Murder on Eridanos released in the middle of March on the consoles and PCs. It's coming later on Switch.", "How are you feeling about -- and it released in Steam, I think, in October. So wondering how you're thinking of that particular franchise and in general, how you feel about the breadth and progress with all the studios you have in private label?" ] }, { "name": "Karl Slatoff", "speech": [ "Obviously, we're incredibly pleased with Outer Worlds and everything that it's brought. It was -- I can't say that it was a complete surprise out of the gate, but it certainly was something pleasant for us and a little bit unexpected. The downloadable content has been really very well received, and we think the franchise is in outstanding shape at this point. And we will be participating in the franchise and whatever the future holds for that franchise.", "So we feel really good about it. And we think that it's still building audience and this game itself has a lot of life left in it. And the future -- we'll see what the future holds for it. But we do think it's a long-term franchise, and it is certainly something that we're pleased with the results.", "In terms of Private Division, we really couldn't be more pleased with the way Private Division is going. As Strauss said, we've already had three titles that have sold in excess of 1 million units each, which is unusual for independent releases. We have a lot of titles in process. We've got one coming up this year with OlliOlli World.", "There are a lot of other deals in the pipeline. We've talked about some of them, most of them we have not talked about yet, and they're varied. There are different scales, different sizes, different shapes, different kinds of experiences, which make makes them very exciting. That team is growing, not only from a creative talent perspective in support of Kerbal Space Program but also from a marketing and publishing perspective.", "So we expect the best is yet to come from Private Division, and we love how we're positioned right now." ] }, { "name": "Brian Fitzgerald", "speech": [ "Awesome. Thanks, Karl." ] }, { "name": "Operator", "speech": [ "And our next question is from Matthew Thornton with Truist Securities. Please proceed with your question." ] }, { "name": "Matthew Thornton", "speech": [ "Hey, good afternoon, Strauss, Karl, and Lainie. The comment around sequential growth in fiscal '23 and the next few years and establishing new records, I thought was pretty interesting and sounded very confident for a team that I usually think of as being pretty conservative. So I thought that was very interesting. In that context, can you talk a little bit about how you're thinking about the pipeline given kind of the prolonged stay-at-home COVID impact, tight labor market? Curious just to see how you think you're kind of progressing against those headwinds.", "Secondly, and somewhat related, also just curious your appetite around M&A at this point and just $2.7 billion on the balance sheet at this point, just how that opportunity landscape maybe looks now versus three or six or nine months ago? And then just finally, a quick one on console shortages or tightness this year. I'm just kind of thinking about how impactful that was to your outlook for fiscal '22 or not. Any color there would be great. Thanks, guys." ] }, { "name": "Strauss Zelnick", "speech": [ "So thanks for your three questions. In terms of how we're doing despite the pandemic, look, the team has just performed so well. We were very fortunate. Our IT group had us fully prepared for a disaster, and we could never predict the pandemic, but a week after we had to start working from home, we were all set up remotely, and we were highly productive, and we stayed highly productive ever since.", "We had virtually no slippage. The only title that actually moved as a result of the pandemic was Kerbal Space Program 2, which moved out of this fiscal year, and we're super excited about that title and it will be coming. The rest of our production stayed on target and the quality has been amazing as you've seen in our results. We are highly confident in our pipeline going forward.", "As Karl said, though, the price that we pay for being as transparent about our future pipeline is that certain things will change. We hope that certain things will change to the good, certain things may also disappoint us. At this point in time, we feel very good about the way our production is unfolding and we don't see any concerns on the horizon. With regard to M&A, our strategy remains the same.", "We have a very strong balance sheet. We have the ability to do everything from modest add-on acquisitions. For example, we acquired HB Studios. Two more substantial acquisitions such as the acquisition of PlayDots last calendar year.", "And prior to that, the acquisition of Social Point. There's no secret in that we wish to bulk up our mobile offerings. We're certainly trying to do that organically. We have many titles coming from mobile from Social Point and PlayDots and 2K.", "And at the same time, we're open-minded with regard to acquisitions. Our lens is pretty disciplined. And the result of that disciplined lens is that in 14 years, we haven't had one failed acquisition. I'm sure we've also missed some opportunities by being overly disciplined.", "But on balance, it's worked out well for us. Our capital is used for three purposes: returning capital to our shareholders, which we've aggressively done over many years, although opportunistically; supporting organic growth, which is our story around here; and allowing us to pursue inorganic growth opportunities on a selective and disciplined basis. And I think that will continue to be the case. Finally, with regard to console shortages, there's no doubt that supply chains were disrupted in the pandemic.", "They still remain disruptive. There is a chip shortage. But it's sort of a good news, bad news thing. The bad news, I suppose, is that you can't get a console for lower money.", "The good news is that people really want these new consoles. We had a limited selection of releases for Next Gen NBA 2K21, which is built from the ground up for Next Gen and Borderlands III. We have obviously many more titles coming in the future. We think the supply shortages will be resolved and consumers would be able to buy their dream console.", "So over time, we're not worried about it, and it didn't really hurt us short term either." ] }, { "name": "Operator", "speech": [ "And our next question is from Gerrick Johnson, BMO Capital Markets. Please proceed with your question." ] }, { "name": "Gerrick Johnson", "speech": [ "Hi. Good afternoon. Thank you. I just want to dig into the marketing spend in the quarter a little bit more, up to 30%.", "It's the highest it's ever been in the fourth quarter with really no major releases coming. So what comprised that? And then a second question on the pipeline update. Just to be clear, immersive core versus mid-core, etc., can you just give us an example of what a mid-core game you have in your portfolio is now, so we know what that would look like in the future? Thank you." ] }, { "name": "Lainie Goldstein", "speech": [ "So the marketing in Q4 and into next year, it's really to support the pipeline of titles that we talked about. It's for our recurrent consumer spending titles and also for our titles going into next year. So we're looking at our head count and the need for our teams to really look at our pipeline in the future. It's become more and more important for us to have the right support around the current titles that are out and the titles -- because it's not just titles that are coming out and releasing, they're being supported all throughout their life cycle now.", "So it's a very different type of marketing than it was in the past where we would just market on release. Now, the titles are being marketed all throughout their life cycle. So you'll probably see higher marketing going forward." ] }, { "name": "Gerrick Johnson", "speech": [ "Understood. That makes sense. Thank you." ] }, { "name": "Karl Slatoff", "speech": [ "And in terms of just sort of some examples around what immersive core versus mid-core would be. I'll start with the mid-core. The mid-core will be something like the WWE 2K Battlegrounds would be a good example of a mid-core game. In terms of immersive core, that really is a little more varied, but we do look at it as games that have highly engaging gameplay.", "People who spend hours and hours and hours at it at a time. So these would be examples, things like, obviously, Grand Theft Auto, Red Dead Redemption, Borderlands but also things like our strategy games from Firaxis and also of our sports simulations." ] }, { "name": "Gerrick Johnson", "speech": [ "Perfect. Thanks, Karl." ] }, { "name": "Operator", "speech": [ "Our next question is from Doug Creutz with Cowen and Company. Please proceed with your question." ] }, { "name": "Doug Creutz", "speech": [ "Hi. Thanks. It's been interesting, if you look at Switch viewership of Grand Theft Auto over the last several months, it's really exploded. It's now the most viewed game on Twitch by, I think, a factor of two over League of Legends.", "Is this something that the Rockstar teams have been leaning into at all? Has it sort of sparked any discussions about what Grand Theft Auto Online might become or thoughts about maybe the next iteration of it? Because it is a very interesting trend. Thanks." ] }, { "name": "Strauss Zelnick", "speech": [ "Yes, unfortunately, to answer the question implies some information that we haven't provided and don't expect to provide any time soon. That said, we're gratified by exactly what you talked about, which is how popular Grand Theft Auto is on Twitch. We think the Twitch platform is amazing, and it's a reflection of the popularity of the title. And Rockstar has said they'll continue to support Grand Theft Online with more content to come." ] }, { "name": "Doug Creutz", "speech": [ "OK. Thanks." ] }, { "name": "Operator", "speech": [ "Our next question is from Drew Crum with Stifel. Please proceed with your question." ] }, { "name": "Drew Crum", "speech": [ "OK. Thanks. Hey, guys, good afternoon. Wondered if you'd be willing to discuss your expectations for the GTA V franchise in fiscal '22.", "You typically say this is going to be the year that it declines. And you're also lapping looks to be about 15 million units of the full game, but you also have some new content later in the year. So a number of puts and takes here, where does that net out? And then separately, Strauss, you noted that you've added 700 new developers over the last year. You've turned your investment and -- creative talent for fiscal '22 is significant.", "On an organic basis, should we assume an uptick in fiscal '22? And I know in the past, you guys have noted the scarcity of quality developers. Has that dynamic changed? Or is it changing where the labor market is more favorable and conducive to accelerating hiring? Or is it more where you are in your content cycle? Thanks." ] }, { "name": "Strauss Zelnick", "speech": [ "Yes. Thank you for your question. There is more content coming for Grand Theft Auto Online. And at the same time, as we have said in the past, we do expect recurrent consumer spending to moderate in the year.", "And we'll see how that unfolds. Title has been around for a very long time. And at some time, generally speaking, there is moderation. We've been so fortunate to have had another record year this past year, but it was an awfully unusual year." ] }, { "name": "Karl Slatoff", "speech": [ "And in terms of development capacity, we have been investing for years in our development capacity and both from organic hires and also through acquisition. And we fully expect that that will continue into the future. And it is our plan. We have it baked into our plan to bring on more developers.", "And again, we have -- you're right. Labor markets, they do tighten up. These folks are highly sought after. But we have a really strong track record of attracting and retaining the best talent in the industry.", "And part of that reason is because we provide a creative environment where these folks can flourish. And then we compensate them well in success, and we align that conversation with our shareholders. And we think that's a recipe that works really, really well. And people love coming to take to across all of our labels because that culture permeates the entire organization.", "So it is tough to hire and retain key talent. But that is what we do. And that's the most important strategic advantage, I think, that we have as a company, and that's where we focus." ] }, { "name": "Drew Crum", "speech": [ "OK. Thank you, guys." ] }, { "name": "Operator", "speech": [ "And our next question is from Brian Nowak with Morgan Stanley. Please proceed with your question." ] }, { "name": "Brian Nowak", "speech": [ "Thanks for taking my question. I wanted to ask just about marketing a little bit and landing -- maybe go back to one of your earlier answers. So the first one is now that you've brought on so many new users in the ecosystem throughout shelter-in, I'd be curious to hear about learnings you've had of how you're going to have higher marketing efficiency from all the user data and ways in which you've actually exposed more people to your brands and to your great games. Then the second one, just to sort of go back to that comment you made about 55% of opex being tied to marketing, more recurring marketing spend for the titles.", "So are you saying that you think the marketing intensity for your games is actually going to go up going forward? Or are you more saying that you're spending ahead of new releases to kind of bring new users? And what are you sort of intimating about higher spend even with older games?" ] }, { "name": "Karl Slatoff", "speech": [ "So I'll take the first part. You're right, there are a ton more users in our ecosystem and that's just -- and not only just a number of users, but they're more engaged. So every time somebody is engaging with one of our games, we've got more data points. And the more data points that we have, the more information that we have to know what consumers want, when they want it, what kind of offers are going to make sense for them to make sure that we give the consumer exactly what they're looking for.", "So the bigger that database and the stronger analytics capabilities get and we've invested significantly in those kinds of resources, not just tech, but also human beings. People who really -- data scientists who know how to analyze this data. And in my opinion, We're just scratching the surface. We're pretty good at it, but I think there's a lot of room for us to get a lot better.", "And the bigger that database gets and the more information we get and the more we invest, it has just been returning our investment tenfold. So we expect that to continue this year and well into the future." ] }, { "name": "Lainie Goldstein", "speech": [ "And when it comes to what I was saying about the 55% of the increase of the opex this year was for direct marketing, that's because we have a lot of new releases in this year. So when we have new releases, we tend to have big campaigns around the newer releases. So since we have more new releases this year, that's why we would have more marketing this year. And our marketing is very efficient around our titles.", "We also have a lot of marketing around our mobile titles. So we have a big portfolio of mobile titles as well and mobile titles coming out. So that's also been driving our marketing spend as well." ] }, { "name": "Brian Nowak", "speech": [ "Perfect. Very clear. Thank you. Thank you very much for that." ] }, { "name": "Operator", "speech": [ "Our next question is from Eric Handler with MKM Partners. Please proceed with your question." ] }, { "name": "Eric Handler", "speech": [ "Good afternoon. Thank you for the question. Wondering if you just could drill down on your mobile business a little bit since it is the fastest-growing segment in the community space. I'm curious, is all your mobile development currently within PlayDots and Social Point? Or do you have studios within Rockstar and 2K that are also working on their own mobile games?" ] }, { "name": "Strauss Zelnick", "speech": [ "We have work going on throughout the organization. Obviously, Social Point and PlayDots are dedicated to mobile experiences, both mid-core and casual. We have some mobile titles at 2K as well. In fact, one of our biggest titles is their WWE SuperCard.", "And we have ongoing development throughout, some of which is announced, some of which is not yet." ] }, { "name": "Eric Handler", "speech": [ "OK. And just as a follow-up, the term metaverse has been used a lot in the last three to five months or so. And when you think about all of the people that are playing GTA Online and GTA V but also Red Dead Online. How are you thinking five years-plus down the road in sort of aggregating this pool of players and thinking about how you can create a bigger type of platform experience for them?" ] }, { "name": "Strauss Zelnick", "speech": [ "We're going to create bigger experiences by encouraging our creative folks as always to pursue their passions and to always think of that thing that no one thought of before, which is why our strategy is to be the most creative, the most innovative, and the most efficient company in the entertainment business. I'm always allergic to buzzwords. The buzzword of virtual reality didn't get this industry very far. AR hasn't really improved matters either, 3D hasn't really done much for us.", "What moves the dial in our business is amazing creativity great characters, great stories, great graphics, great gameplay, the ability to enjoy those experiences with other people all around the world. That's what really matters. I think what the metaverse implies is what we already do with Grand Theft Auto Online and with what Red Dead Online, what we do with NBA 2K and what we aim to do with some upcoming titles, an opportunity to exist in that fictional world and express yourself in ways that are challenging, fun, competitive and new and find ourselves in places doing things that we can't really do usually in the real world. I think that's what it means.", "I think when you get into conversations around -- are people going to do conference calls in titles? Well, the answer is they can now. But who were not do, like we could, I guess, do this conference call inside one of our titles, but it's a bit more efficient to do it this way. So the problem I have is that if you sort of take metaverse, SPAC, and cryptocurrency, put them all together. In five years, will any of this matter? I'm not sure it will." ] }, { "name": "Eric Handler", "speech": [ "Thanks, Strauss." ] }, { "name": "Operator", "speech": [ "[Operator instructions] And our next question is with Benjamin Black with Evercore ISI. Please proceed with your question." ] }, { "name": "Benjamin Black", "speech": [ "Great. Thank you for the question. I just have one on Apple Arcade. Curious to hear your takeaway so far on NBA 2K21, has it had positive implications for game sales elsewhere on the platforms.", "I know you obviously support many platforms, but how do you sort of frame the opportunity set for potentially publishing more gains on Arcade? Thank you." ] }, { "name": "Karl Slatoff", "speech": [ "Yeah. As I said in my remarks, we're very happy how NBA is doing on Apple Arcade. It's the most popular game on the service right now. So we can't ask for anything more than that.", "It's still pretty early, ultimately. So is it having a huge impact on selling games across other platforms? Hard to tell at this point. Do we think that that certainly is a possibility? I think absolutely because every time you get people exposed to the game through new platforms or platforms where they otherwise may not have exposure to it, that's a positive thing from a marketing perspective. So stay tuned on that." ] }, { "name": "Benjamin Black", "speech": [ "Thank you." ] }, { "name": "Operator", "speech": [ "Our next question is with Stephen Ju with Credit Suisse. Please proceed with your question." ] }, { "name": "Stephen Ju", "speech": [ "Thank you. So, Strauss, I think I heard Lainie say that I think the forward guidance parameter is baked in, I think, 80% of sales of gains, I think, coming from download. So now that brick-and-mortar retail has completely de-indexed as a relative contributor to your business over the last sort of console cycle. I remember when it was agreeing to have it be greater than 50% and match where the PC industry is today in terms of the mix.", "So do you think this opens up the possibility for you to be more experimental with your pricing, particularly for those titles outside the core Rockstar and the 2K property especially as you think about expanding potential audience, particularly now that there is really a greater ability to monetize those users with recurrent consumer spend? Thanks." ] }, { "name": "Strauss Zelnick", "speech": [ "I think it's a really excellent point. And I think you're right. There is a bit more flexibility when you can move quickly and you don't have to worry about stock that you shipped in or price protection, for example, which can be costly. Undoubtedly, we can move with more agility in terms of promotions.", "So I think there's a benefit. But of course, that benefit is swamped by the simple benefit that our margins are much higher with regard to digital distribution and physical. That's the big difference. And I think the other difference, which we haven't really talked about, but it's obviously something that's going on in the market right now is we expect that the cost of distribution will decline for any number of reasons.", "And that also will go directly to the bottom line." ] }, { "name": "Stephen Ju", "speech": [ "Thank you." ] }, { "name": "Operator", "speech": [ "Our next question is with Andrew Marok with Raymond James. Please proceed with your question." ] }, { "name": "Andrew Marok", "speech": [ "Hi. Thanks for taking my questions. So with another great quarter in NBA 2K in the fourth quarter and as the pandemic engagement surge starts to level out a bit and pardon me for mixing my sports metaphors here. But what inning are we in for monetization of the existing NBA player base? And how much of the franchise's growth comes from audience expansion? Thanks." ] }, { "name": "Karl Slatoff", "speech": [ "Thanks for the question. We get that question a lot, and it's tough to answer because every time, our perspective seems to change. My answer is I feel like we're in the early innings. I'm not going to give you an exact inning.", "We're certainly not in the seventh inning stretch and we're not in the first inning. It's somewhere in between. But I do think, like I mentioned before, our analytics capabilities are getting much more sophisticated. And not to mention we have a lot of modes in our NBA game.", "And we have different ways for people to engage and therefore, we have different ways for it to monetize in those modes. And just getting people to play, people more deeply engage in the game and play across those modes, there's a lot of opportunity right there in and of itself. So we're not just stuck to one type of monetization for card packs, etc., like that. We've got a lot of other opportunities.", "So that and also the fact that we've still got a long way to go in terms of mastering our analytics capabilities makes me believe we're pretty early." ] }, { "name": "Andrew Marok", "speech": [ "Got it. Thank you." ] }, { "name": "Operator", "speech": [ "And our next question is from Mike Hickey with The Benchmark Company. Please proceed with your question." ] }, { "name": "Mike Hickey", "speech": [ "Thanks, Strauss, Karl, Lainie, and Nicole. Thanks for taking my question, guys, and congratulations on a great quarter. Strauss, just curious, this may be sensitive, but wondering on your view on sort of the Epic, Apple Live debate on revenue share. And if you think that this could encourage maybe structural teams into digital stores, mobile and console when you think about revenue share and competition, similar to what we've seen on PC?" ] }, { "name": "Strauss Zelnick", "speech": [ "Yeah. I think I alluded to that in my last remark, mike, so I think we're on the same wavelength. I do believe that distribution costs will decline. Of course, I can't opine specifically on that action because I don't have any particular insight.", "However, between regulatory authorities, investigations, and private concerns, Clearly, take rates are being examined. But at the end of the day, it's the economy that governs, and we are in a broadly competitive distribution environment. And the goal of this organization has always been and remains, be where the consumer is, which means we'll employ a broad array of distribution platforms, including our own direct-to-consumer platform. And what that means over time is it's going to be hard to have a take rate for distributors that is economically too high.", "That leads to an unstable system. And that's what you're seeing now, in my opinion. I think this will be resolved relatively soon, and it will be resolved in a favorable way. And I think that take rates will decline meaningfully, and that will, of course, benefit us.", "It's not in any of our guidance, but it is in my expectations. Of course, we don't organize the company around my expectations. But you asked my opinion, and so I shared it." ] }, { "name": "Mike Hickey", "speech": [ "OK. Thanks, guys. Good luck." ] }, { "name": "Operator", "speech": [ "And we have reached the end of the question-and-answer session, and I'll now turn the call over to Chairman and CEO Strauss Zelnick for closing remarks." ] }, { "name": "Strauss Zelnick", "speech": [ "First of all, I want to thank all of our colleagues all around the world, nearly 7,000 people for these amazing results. Imagine, if you will, the extraordinary work and commitment it has taken to deliver in these difficult times. And our team has just been stellar and has been smiling the whole time despite the challenges and the privations. And in certain instances, tragedies as well, which I know many of you have had also.", "So thank you from the bottom of our collective hearts. And at the same time, we're so optimistic going forward. We're in a better place than we've ever been in before, and we're in a pretty good place now. We're incredibly excited about the upcoming products.", "We work in an organization where we love to show up every day and we're blessed to be able to do so with great colleagues all around the world. So thank you to our colleagues. Thank you to our shareholders for your support, and thank you all for joining us today." ] }, { "name": "Operator", "speech": [ "[Operator signoff]" ] } ]
TTWO
2020-11-05
[ { "description": "Senior Vice President of Investor Relations and Corporate Communications", "name": "Hank Diamond", "position": "Executive" }, { "description": "Chairman and Chief Executive Officer", "name": "Strauss Zelnick", "position": "Executive" }, { "description": "President", "name": "Karl Slatoff", "position": "Executive" }, { "description": "Chief Financial Officer", "name": "Lainie Goldstein", "position": "Executive" }, { "description": "Barclays -- Analyst", "name": "Mario Lu", "position": "Analyst" }, { "description": "MKM Partners -- Analyst", "name": "Eric Handler", "position": "Analyst" }, { "description": "Stifel Financial Corp. -- Analyst", "name": "Drew Crum", "position": "Analyst" }, { "description": "Goldman Sachs -- Analyst", "name": "Mike Ng", "position": "Analyst" }, { "description": "BMO Capital Markets -- Analyst", "name": "Gerrick Johnson", "position": "Analyst" }, { "description": "", "name": "Unknown speaker", "position": "Other" }, { "description": "Sanford C. Bernstein -- Analyst", "name": "Todd Juenger", "position": "Analyst" }, { "description": "Jefferies -- Analyst", "name": "Alex Giaimo", "position": "Analyst" } ]
[ { "name": "Operator", "speech": [ "Greetings, and welcome to Take-Two Interactive Software's second-quarter full-year 2021 earnings conference call. [Operator instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr. Hank Diamond, senior vice president of investor relations and corporate communications." ] }, { "name": "Hank Diamond", "speech": [ "Good afternoon. Welcome, and thank you for joining Take-Two's conference call to discuss its results for the second quarter of fiscal 2021 ended September 30th, 2020. Today's call will be led by Strauss Zelnick, Take-Two's chairman and chief executive officer; Karl Slatoff, our president; and Lainie Goldstein, our chief financial officer. We will be available to answer your questions during the Q&A session on our prepared remarks.", "Before we begin, I'd like to remind everyone that statements made during this call that are not historical facts are considered forward-looking statements under federal securities laws. These forward-looking statements are based on the beliefs of our management, as well as, assumptions made by and information currently available to us. We have no obligation to update these forward-looking statements. Actual operating results may vary significantly from these forward-looking statements based on a variety of factors.", "These important factors are described in our filings with the SEC, including the company's most recent annual report on Form 10-K and quarterly report on Form 10-Q, including the risks summarized in the section entitled risk factors. I'd also like to note that unless otherwise stated, all numbers we will be discussing today are GAAP and all comparisons are year over year. Additional details regarding our actual results and outlook are contained in our press release, including the items that our management uses internally to adjust our GAAP financial results in order to evaluate our operating performance. Our press release also contains a reconciliation of any non-GAAP financial measure to the most comparable GAAP measures.", "In addition, we have posted to our website a slide deck that visually presents our results and financial outlook. Our press release and filings with the SEC may be obtained from our website at www.take2games.com. And now I'll turn the call over to Strauss." ] }, { "name": "Strauss Zelnick", "speech": [ "Thanks, Hank. Good afternoon, and thank you for joining us today. I'd like to begin by acknowledging those who have been affected by the global pandemic. On behalf of our entire management team, I'd like to express our deepest sympathies and shared hope that in time, this crisis shall pass.", "We remain immensely grateful to everyone who serves on the front lines caring for those in need and helping the world navigate these challenging times. I'm pleased to report that our positive momentum continued in the second quarter with operating results that significantly exceeded our expectations. Our stellar results were highlighted by the outperformance of NBA2K, PGA Tour 2K21, and the Mafia Definitive Editions and Mafia: Trilogy. Our ability to deliver the highest quality entertainment experiences to our audiences during these challenging times is a reflection of the professionalism and the passion of our entire organization.", "I'm immensely proud of our teams throughout the world that embody our core tenets of creativity, innovation, and efficiency. On September 4th, 2K and Visual Concepts launched NBA 2K21, the latest installment in our industry-leading basketball simulation series for PlayStation 4, Xbox One, Nintendo Switch, PC, and Stadia. The title is off to a remarkable start and net bookings from the title have outperformed our expectations. To date, NBA 2K21 has sold in over 5 million units.", "As compared with the second quarter of fiscal 2020, net bookings for the NBA2K series grew 28% and recurrent consumer spending significantly exceeded our expectations, growing an incredible 76%. Consumer engagement with NBA2K continues to increase with daily active users, MyCareer users and MyTeam users growing significantly. Moreover, NBA 2K21 users have been more deeply engaged with the game, with average games played per user up 21%, as compared to NBA 2K20 in the same period. Next week, NBA 2K21 will launch for next-gen platforms, which Karl will discuss shortly.", "I'd like to congratulate 2K and Visual Concepts for delivering another outstanding entry in this beloved franchise. Seven years after its initial release, Grand Theft Auto V continues to grow its audience. The title has now sold in over 135 million units and remains one of the most successful and iconic experiences in all of entertainment. In addition, recurrent consumer spending on Grand Theft Auto Online outperformed our second-quarter forecast and was entitled the best second quarter ever in terms of both active players and new players.", "During the month of August, Rockstar Games released the Los Santos Summer Special for Grand Theft Auto Online, featuring an array of new vehicles, co-op missions, business battles, racetracks, the open-wheel race creator, and more. We continue to expect Grand Theft Auto Online to establish a new net bookings record in fiscal 2021. Red Dead Redemption 2 also outperformed and to date, has sold in over 34 million units worldwide. Net bookings from Red Dead Redemption 2 grew an outstanding 124%, including 106% growth in full game sales.", "Engagement with and recurrent consumer spending on Red Dead Online continues to increase with net bookings from the title surpassing expectations, growing 96%. Furthermore, the title grew 28% in audience and growth in new players was 47%. During the second quarter, Rockstar Games added new content to Red Dead Online, including the natural list update, a new specialist role, including the ability to hunt, track, and study legendary animals, as well as, new poaching missions and free roam events, two new weapons, the advanced camera, and more, including the latest addition of Outlaw Pass, The Outlaw Pass No. 3.", "Throughout the coming year, Rockstar Games will continue to support both Red Dead Online and Grand Theft Auto Online with more content updates to keep new and returning players excited and engaged. In late summer, 2K enhanced further our sports simulation offerings with the release of PGA TOUR 2K21 for PlayStation 4, Xbox One, Nintendo Switch, PC, and Stadia. Developed by HB Studios, PGA TOUR 2K21 was universally lauded by consumers and critics, including game and former Golf Digest in U.S. day to day for being an incredibly fun, realistic, and engaging entry into the category.", "The title has exceeded our expectations and to date, has sold in over 1 million units. According to the MTD Group, PGA TOUR 2K21 was the fastest-selling golf game by units over the past 10 years. And in addition, according to Metacritic, the title is the highest-rated golf simulation of the current console generation. I'd like to congratulate the teams at 2K and HB Studios who are continuing to support the game with additional post-launch content.", "During the second quarter, 2K also released WWE 2K Battlegrounds, a completely new WWE game featuring arcade-style brawling action for PlayStation 4, Xbox One, Nintendo Switch, PC, and Stadia. We're very pleased to expand our WWE offerings with a title that provides both casual gamers and die-hard wrestling fans with an over-the-top, pick-up-and-play experience. The title has exceeded our expectations and is being supported with post-launch content. In addition, during the period, 2K released Mafia: Definitive Edition for PlayStation 4, Xbox One, and PC.", "The title, which has exceeded our sales expectations and received significant critical acclaim was comprehensively remade from the ground up. The release of Mafia: Definitive Edition completes the full Mafia: Trilogy, a collection featuring definitive editions of all three Mafia titles. The definitive additions of Mafia, Mafia 2 and Mafia 3 are available individually or as part of the trilogy. To date, these titles collectively sold in over 2 million units.", "Turning to Private Division. During the second quarter, the label released Peril on Gorgon, a narrative expansion for their award-winning RPG, The Outer Worlds, from Obsidian Entertainment. Peril on Gorgon is the first of two expansions that can be purchased individually or bundled at a discount in The Outer Worlds: Expansion Pass. The Outer Worlds continues to outperform our expectations and has now sold in over 3 million units.", "Our second-quarter results were also enhanced by a variety of other offerings, led by Borderlands 3, Socialpoint's mobile games and Sid Meier's Civilization VI. During the second quarter, recurrent consumer spending exceeded our expectations growing 43% and accounted for 64% of net bookings. In addition to virtual currency for NBA2K, Grand Theft Auto Online, and Red Dead Online, recurrent consumer spending was enhanced by the following offerings. In the free-to-play category; Socialpoint's live games, including Dragon City, Monster Legends, World Chef, Tasty Town, and Word Life outperformed during the second quarter, matching the net bookings record achieved in the previous quarter.", "Live games delivered new fresh content, events, and experiences to boost engagement and enhance the customer experience and net bookings grew 55%. The studio continues to invest in its broad and innovative pipeline of more than 10 new games planned for launch in the coming years. WWE SuperCard also outperformed during the second quarter, growing 24%. The title has now been downloaded more than 22 million times and remains 2K's highest-grossing mobile title.", "Later this month, 2K will deliver Season 7 of our popular free-to-play sports entertainment mobile game, and NBA2K Online in China grew 13% and remains a significant contributor to our results. The title is the No. 1 PC online sports game in China with more than 50 million registered users. Add-on content grew 254% and outperformed expectations, led by offerings for the Borderlands Series and Sid Meier's Civilization VI.", "As a result of our better-than-expected second-quarter performance and improved outlook for the back half of the year, we're increasing our outlook for fiscal 2021, which we expect to deliver a new record for net bookings of over $3 billion. In September, as part of our ongoing strategy to expand selectively our portfolio of owned intellectual property and to diversify and strengthen further our mobile offerings, we acquired PlayDots, a long-standing leader in the mobile puzzle genre. Founded in 2013 and based in New York City, PlayDots builds mobile games with unique and thoughtful designs. The studios created three hits, Dots, Two Dots, and Dots & Co., which have collectively been downloaded over 100 million times.", "They're best known for Two Dots, which has been downloaded over 80 million times since its launch six years ago and that continues to engage deeply audiences throughout the world. PlayDot's near-term strategy for growth, includes live ops technology and the addition of numerous features to its core games, such as scavenger hunts and social leader boards, which are driving meaningful long-term consumer engagement. In addition, PlayDots will remain focused on existing IP and will continue to create new properties as they've done since their inception. We're very pleased to welcome Nir Efrat and the entire team at PlayDots to the Take-Two family and are excited by the potential of their development pipeline and positive long-term contributions to our business.", "It bears noting that next week, we'll enter in an exciting new era in the history of our industry. The eagerly anticipated launches of two new gaming platforms from Microsoft and Sony marked the latest technological advances that promise to provide our world-class development teams with better platforms on which to captivate and engage our audiences. We're both prepared and thrilled to take this next step and Karl will have more to share about our offerings for this next generation. As we've seen over the past several months, consumers' appetite for and participation in interactive entertainment has never been stronger.", "We believe that this trend, coupled with the fervor for new gaming platforms, bodes well for the upcoming holiday season, and that interactive entertainment will be among the most popular gift-giving items. Looking ahead, Take-Two has the strongest development pipeline in its history, including sequels from our biggest franchises, as well as, exciting new IP. We continue to make great strides to increase the scale of our enterprise, both organically and through selective inorganic accretive opportunities. In closing, our company remains superbly positioned creatively, operationally, and financially to capitalize on the many positive trends in our industry and to deliver growth and returns for our shareholders over the long-term.", "I'll now turn the call over to Karl." ] }, { "name": "Karl Slatoff", "speech": [ "Thanks, Strauss. I'd like to begin by thanking our teams for continuing their stellar work in achieving strong results that are lining up to deliver a record year for net bookings. Our culture of collaboration, coupled with the company's commitment to creating the best entertainment experiences, is driving our ongoing success and the ability to engage with audiences more deeply than ever before. I'll now discuss our recent and upcoming releases.", "As Strauss mentioned, we are very excited about next week's introduction of two new leading-edge gaming platforms. Through these new robust platforms, our development teams have an even greater ability to captivate and engage audiences with our renowned franchises and new intellectual properties. We are thrilled to deliver at launch two of 2K's most successful and popular franchises, NBA2K and Borderlands for both platforms. NBA 2K21 was built from the ground up for next-generation consoles and will once again redefine the standard for sports simulations.", "In addition to unparalleled graphics and loading speeds, NBA 2K21 will introduce several initiatives to bridge current and new console generations of the game, including MyTeam cross-progression and the shared VC wallet within the same console families. Furthermore, NBA legend Kobe Bryant's lifetime achievement of basketball excellence is celebrated with the NBA 2K21 Mamba Forever Edition, which will provide players with seamless access to both current and next-generation versions of the game. Just yesterday, 2K released the trailer for The City, featuring a completely overhauled [Inaudible] experience, exclusive to NBA 2K21 on next-gen consoles. Originally introduced in NBA 2K14 for Xbox One and PS4, The Park helped push 2K forward by creating a competitive online basketball environment that allowed our quickly growing community to compete against each other outside of the authentic NBA experience.", "This experience has evolved over the years into the neighborhood and now what we have proudly introduced as The City, which is many times larger and more immersive community-based experience, only possible on next-gen consoles. It is Visual Concepts' most ambitious execution of a virtual basketball community. Borderlands 3 has been fully optimized for next-gen consoles, so mayhem will be bigger and bolder than ever before. All players who own the game on current gen will be able to download the next-gen upgrade within the same console family for free.", "This free next-gen upgrade will add a number of exclusive features, including 4K resolution at 60 frames per second in single player and online co-op plus support for three and four player split-screen co-op. In addition, Rockstar Games has announced that they will bring their iconic Grand Theft Auto V to the next generation of consoles in the second half of calendar 2021 during fiscal year 2022. The new generation versions of the game will feature a range of technical improvements, visual upgrades, and performance enhancements to take full advantage of the latest hardware, making the game more beautiful, and more responsive than ever. For the community of Grand Theft Auto Online, the journey for this ever-evolving world will continue on the next-generation consoles with more new updates, including additional content exclusive to the new consoles and PC.", "There will also be new stand-alone version of Grand Theft Auto Online coming in the second half of calendar 2021, which will be available for free exclusively on PlayStation 5 during the first three months. Rockstar Games will share more details on the new versions of Grand Theft Auto V in the months ahead. Driving long-term consumer engagement with our titles after their initial launch, remains a key strategic priority for our organization. There are a myriad of ways that our creative teams strive to do this.", "However, we are always focused on designing games with the goal of giving players experiences that far exceed their expectations, and importantly, are worthy of their time and money. To that end, we recently released an array of add-on content for some of our key titles. Last month, 2K and HB Studios released two updates for our popular golf simulation, PGA TOUR 2K21. The three whole matchmaking update allows players to play a quick multiplayer around with friends.", "Two weeks ago, the team launched the Halloween update, featuring fun holiday theme cosmetic items to customize players and courses. Players can expect additional content to be released for PGA TOUR 2K21 throughout the year. In addition, the Private Division, in partnership with the European Space Agency, released their shared horizon update for Kerbal Space Program for PS4 and Xbox One. The update celebrates the agency's contributions to space exploration and is free for all players of the critically acclaimed physics-based space simulation game.", "Private Division's new development studio, Intercept Games, remains hard at work on Kerbal Space Program 2, which is now planned for release during fiscal 2023. Tomorrow, 2K will release the first update for their new wrestling title WWE 2K Battlegrounds. The update features new superstars and legends that will be made available throughout the month, adding to the game's outrageous in and out of the ring action. 2K will make additional superstores available in December and will share more details in the coming weeks.", "More than a year after the initial launch of Borderlands 3, engagement with the title remains incredibly strong. Next week, due to the immense popularity and success of the title's add-on content strategy in Season Pass, 2K and Gearbox Software will launch a second season pass for the game. The Season Pass 2, which will be available for all previously released and all next-gen versions of the game, will include two brand-new content add-ons. The designers cut add-on will add all new ways to play Borderlands 3 by introducing a new skill tree for each Vault Hunter, a new stand-alone mode called Arms Race and more while the Director's Cut Add-on includes additional missions, end-game content, and behind the scenes extras.", "Designer's Cut will be available for purchase starting on November 10th, while Director's Cut is planned for release in spring of next year. Rockstar Games has announced that both Grand Theft Auto Online and Red Dead Online will receive major updates later this year, featuring an extension to existing frontier pursuits for Red Dead Online, as well as, Grand Theft Auto Online's biggest update ever, which will feature a new take on heists in a new location. Praxis Games will continue to deliver new content for Sid Meier's Civilization VI as part of their New Frontier Pass for PlayStation 4, Xbox One, Nintendo Switch, PC, and mobile, featuring new civilizations and leaders that will be made available on a bi-monthly basis through the end of March 2021. Later this year, the New Frontier Pass will come to mobile platforms and each pass will be available for individual purchase.", "And during the first half of calendar 2021, Private Division will release The Outer Worlds: Murder on Eridanos, the second narrative expansion for their successful RPG from Obsidian Entertainment. The expansion will be available individually or at a discount as part of The Outer Worlds: Expansion Pass, which also includes the previously released Peril on Gorgon. Turning to Esports. The NBA2K League concluded its third season on August 28th with Wizards District Gaming winning the 2020 NBA2K League Championships.", "All 2020 season games aired live on the NBA2K League's Twitch channel in addition to select games airing live on ESPN2, ESPN digital platforms, Sportsnet in Canada, and the NBA2K League's YouTube channel, and on delay on eGG Network in Southeast Asia and local in India. Dash Radio's nothing but net channel also provided live game coverage. The NBA2K League has begun the trial process for its fourth season set to take place in 2021. The new format will include more than 35 program tournaments hosted by league teams as part of the NBA2K League Draft Prospect Series, featuring a first of its kind NBA2K League combine.", "The league will enable 2K fans and players to engage with the league and showcase their excitement throughout the off-season by awarding draft eligibility on a rolling basis to members of the 2K community who excel in the tournaments as part of the Draft Prospect Series. In addition, we continued to develop and showcase female 2K players. The league is involved with several elite all-women 2K teams who are participating in Pro-Am 2K Tournaments throughout the year. We are very excited about the continued success and growth of the NBA2K League, which has the long-term potential to enhance engagement and to be a driver of profits for our company.", "Looking ahead, we have the strongest pipe -- development pipeline in Take-Two's history, as well as, significant potential to drive increased engagement and recurrent consumer spending. In addition, we are investing in a number of emerging opportunities that have the potential to enhance our growth rate. Whether transitioning our audiences seamlessly onto new platforms, capitalizing on new business models and distribution channels or increasing our presence in emerging markets, Take-Two is exceedingly well-positioned to generate value to consumers, as well as, growth and margin expansion for our company. I'll now turn the call over to Lainie." ] }, { "name": "Lainie Goldstein", "speech": [ "Thanks, Karl, and good afternoon, everyone. Today, I'll discuss our second-quarter results and then review our financial outlook for the third-quarter and fiscal-year 2021. Please note that additional details regarding our actual results and outlook are contained in our press release. As Strauss mentioned, we delivered second-quarter operating results that significantly exceeded our expectations.", "Net bookings grew to $958 million. This result exceeded our outlook of $775 million to $825 million, driven primarily by the outperformance of NBA2K, PGA TOUR 2K21, and the Mafia: Definitive Editions and Mafia: Trilogy. Digitally delivered net bookings grew 14% as compared to our flat outlook and accounted for 83% of the total. This result exceeded our outlook, primarily due to the outperformance of our current consumer spending.", "During the second quarter, 59% of sales of current generation console games were delivered digitally, up from 51% last year. Recurrent consumer spending grew 43% as compared to our outlook of 10% growth and accounted for 64% of total net bookings. This growth was driven primarily by NBA2K, Socialpoint's mobile games, Red Dead Online and Red Dead Redemption 2, and Sid Meier's Civilization VI. GAAP net revenue was $841 million and cost of goods sold was $433 million.", "Operating expenses decreased by 7% to $293 million, due primarily to lower marketing expense, and GAAP net income grew to $99 million or $0.86 per share, as compared to $72 million or $0.63 per share in the second quarter last year. Now to our guidance, starting with the fiscal third quarter. We project net bookings to range from $675 million to $725 million, compared to $888 million in the third quarter last year, which benefited from the launch of Red Dead Redemption 2 on PC and The Outer Worlds. The largest contributors to net bookings are expected to be NBA 2K21, Grand Theft Auto Online and Grand Theft Auto V, Red Dead Redemption 2 and Red Dead Online, Socialpoint's mobile games, Borderlands 3, Sid Meier's Civilization VI, and PGA TOUR 2K21.", "We expect digitally delivered net bookings to be down approximately 15% due to lower digitally delivered sales of Red Dead Redemption 2 on PC and The Outer Worlds, which launched last year. Digitally delivered net bookings are projected to account for 82% of the total compared to 78% last year. Our forecast assumes that 71% of our current generation console in sales will be delivered digitally, up from 44% last year. We project recurrent consumer spending to grow by approximately 5%.", "We expect GAAP net revenue to range from $760 million to $810 million and cost of goods sold to range from $291 million to $317 million. Operating expenses are expected to range from $325 million to $335 million. At the midpoint, this represents a 4% increase over last year, driven primarily by the addition of PlayDots, higher research and development and IT expenses, partially offset by lower marketing and stock compensation expenses. And GAAP net income is expected to range from $128 million to $140 million or $1.10 to $1.21 per share.", "For management reporting purposes, we expect our tax rate to be 15% throughout fiscal 2021. We are increasing our full-year outlook, which now includes record net bookings. This will be the third consecutive year that net bookings have grown. Our net bookings outlook range is now $3.15 billion to $3.25 billion, up from $2.8 billion to $2.9 billion.", "This is being driven by our second-quarter outperformance along with an updated forecast for the balance of the year, which has improved primarily due to higher recurrent consumer spending from NBA2K, Grand Theft Auto Online, Red Dead Online, and the addition of PlayDots, as well as, strong performance from Red Dead Redemption 2, PGA TOUR 2K21, and the Mafia: Definitive Edition and Mafia: Trilogy. We expect growth over the prior year from NBA2K, Grand Theft Auto Online, Red Dead Online, and Socialpoint's mobile games to be offset by lower results from Borderlands 3, Grand Theft Auto V, and Red Dead Redemption 2. The largest contributor to net bookings are expected to be NBA2K, Grand Theft Auto Online and Grand Theft Auto V, Red Dead Redemption 2 and Red Dead Online, Social Point's mobile games, Borderlands 3, Sid Meier's Civilization VI, and PGA TOUR 2K21. We expect the net bookings breakdown from our labels to be roughly 55% 2K, 35% Rockstar Games, and 10% Private Division, Socialpoint and PlayDots, and we forecast our geographic net bookings split to be about 60% United States and 40% international.", "We now project digitally delivered net bookings to increase by approximately 15%, as compared to our prior outlook of 3% growth. This growth is being driven by recurrent consumer spending and digitally delivered sales. As a percentage of our business, digital is projected to represent 87% of net bookings, up from 82% last year. Our forecast assumes that 70% of current generation console game sales will be delivered digitally, up from 55% last year.", "We now expect recurrent consumer spending to grow by approximately 30%, as compared to our prior outlook of 15% growth and to represent approximately 63% of net bookings, as compared to 51% last year. This growth is being driven primarily by NBA2K, Grand Theft Auto Online, the addition of PlayDots, Socialpoint's mobile games, and Red Dead Online. We are increasing our non-GAAP adjusted unrestricted operating cash flow outlook to more than $650 million, up from our prior outlook of more than $500 million. We plan to deploy approximately $75 million for capital expenditures.", "We expect GAAP net revenue to range from $3.05 billion to $2.15 billion and cost of goods sold to range from $1.44 billion to $1.49 billion. Total operating expenses are expected to range from $1.21 billion to $1.23 billion. At the midpoint, this represents an 8% increase over the prior year, driven by the addition of PlayDots, higher headcount, research and development expense, and charitable contributions, partially offset by lower marketing and stock compensation expenses. And we expect GAAP net income to range from $372 million to $403 million or $3.22 to $3.49 per share.", "In closing, fiscal 2021 is poised to be another year with record net bookings, despite a late release date. With our industry-leading creative assets, sound financial foundation, and unwavering commitment to operational excellence, our company is superbly positioned to navigate these uncertain times, capitalize on positive industry trends, and to deliver strong results for our shareholders over the long-term. Thank you. I'll now turn the call back to Strauss." ] }, { "name": "Strauss Zelnick", "speech": [ "Thanks, Lainie. Did you all hear that? Sorry, I apologize. Thanks, Lainie and Karl. On behalf of our entire management team, I'd like to again thank our colleagues for their hard work, commitment to excellence, and for delivering another exceptional quarter.", "To our shareholders, I would like to express our appreciation for your continued support and we'll now take your questions and apologies for my failure with the mute button." ] } ]
[ { "name": "Operator", "speech": [ "Thank you. [Operator instructions] Our first question comes from Mario Lu with Barclays. Please proceed with your question." ] }, { "name": "Mario Lu", "speech": [ "Great. Thanks for taking my questions. I have one on NBA and then one high level. So the one on NBA, The City that's on next-gen was pretty amazing and you're also bringing back affiliations, which is exciting.", "I believe this year is all the first time NBA2K will have two different NBA seasons within three months of its release. So with that being said, anything you could provide in terms of the lift unit sales from both The City and the second NBA season and their impact on its fiscal 3Q guide would be helpful. And then -- and then secondly, Strauss, just curious if you have updated thoughts on the overall subscription model within video games? I think I agree with you that subscription may not translate well in this industry since users only play a few titles a year, but we've seen recently companies like Microsoft push hard with its game pass subscription. And then with the overall gaming audience expanding due to shelter-in-place and more casual titles like Fall Guys and Among Us being more popular.", "So just curious if your stance has -- on subscription has changed at all? Thank you." ] }, { "name": "Karl Slatoff", "speech": [ "Hi, it's Karl. I'll take the first question on NBA. Obviously, yes, this is really the first time that we've got this kind of overlap in the season, not only just our own -- not only just the basketball seasons itself, but in our own game. Obviously, with what Strauss has said before, it's had a really positive impact with us because the net bookings for our series grew 28% and recurrent consumer spending grew, I think, it was 76%.", "So these are really incredible results and it's really exciting, but it's a bit of uncharted territory, and I can tell you that we couldn't be more thrilled about it. Because with the new platform coming out and with the NBA 2K21 being built from the ground up and also all of the new features that are coming up, well, I don't have specific lift numbers for you that are associated with The City itself. Obviously, that was a huge commitment made by the team at Visual Concepts and the 2K and we're really, really excited about it. And anytime you do come out with something that could be a game changer for any game, but specifically for our game, we tend to see really excellent results.", "And we've already seen great results and I think it's going to be even better when we launch our next-gen platform and we're very excited about it." ] }, { "name": "Strauss Zelnick", "speech": [ "And Mario, regarding your question on subscriptions, no, I don't think our views have changed much. We're open-minded. We're highly skeptical that subscriptions will be the only way or the primary way that interactive entertainment is distributed. And that's because of the way people consume it and the price point for owning a title, which is very reasonable and very, very low, actually on a per hour basis.", "So I think it's unlikely that subscription sort of supplant frontline video game sales as the primary business model. Subscriptions can play a role in delivering catalog. We've supported numerous subscriptions -- subscription offerings with catalog titles. I imagine we'll continue to do so.", "And in any case, at the end of the day, the consumer will decide and we will be where the consumer is." ] }, { "name": "Mario Lu", "speech": [ "Great. Thank you both." ] }, { "name": "Operator", "speech": [ "Our next question is from Eric Handler with MKM Partners. Please proceed with your question." ] }, { "name": "Eric Handler", "speech": [ "Yes, good evening. Thanks for the question. Wondered if you can give us any updates about your thoughts on pricing. You've announced NBA2K is going to have a $10 price increase console-versus-console system or next-gen versus current-gen.", "How are you thinking with that? And then I have a follow-up question." ] }, { "name": "Strauss Zelnick", "speech": [ "Yeah. Thanks, Eric. Pricing is determined on a title-by-title basis. We already explained that the reason for the price that we set for NBA 2K21 for next-gen reflected the fact that there hasn't been a frontline price increase since 2005 and yet production costs have gone up 200% or 300%.", "On the one hand, also because we believe we deliver vastly more value to the consumer than the price we charge, that's our goal at all times. As I said, on a per hour basis, interactive entertainment is an incredible bargain and the U.S. has the lowest frontline pricing of anywhere on earth. So we think it makes sense and we believe consumers are fine with it as a result." ] }, { "name": "Eric Handler", "speech": [ "OK. And then as a follow-up, PlayDots, looks like it's potentially a very nice tuck-in acquisition. As you look at the M&A landscape, is there much out there for additional acquisitions? It seems like there's more mobile-type deals to be had rather than console-specific type companies, but maybe if you could just give us some color on the M&A landscape." ] }, { "name": "Strauss Zelnick", "speech": [ "Look, we have seen an acceleration in M&A activity. Obviously, Microsoft is acquiring Bethesda, for example, which is a significant, I believe, $7-some-odd billion transaction and so I think you're going to continue to see increased M&A activity just because of the heat around the category and the amount of capital that's being deployed by big companies to pursue it. From our point of view, we have almost $2.4 billion in cash. We have no debt and we are anxious in -- to build our business and aggressively doing so and we use our capital to support organic growth, our primary story at Take-Two.", "We also will use our cash to acquire companies when they're strategically consonant and when those deals are accretive and we return capital to the shareholders on a regular basis through buybacks, and that'll continue to be our approach." ] }, { "name": "Eric Handler", "speech": [ "Thank you." ] }, { "name": "Operator", "speech": [ "Our next question is from Drew Crum with Stifel. Please proceed with your question." ] }, { "name": "Drew Crum", "speech": [ "Thanks. Hey, guys, good afternoon. For Strauss or Karl, can you comment on cross-platform play and how you think about this across your portfolio? And specifically, if the next-gen version of [Audio gap] will feature cross-play? And then I have a follow-up." ] }, { "name": "Karl Slatoff", "speech": [ "Hi, Joe, it's Karl. We do think about cross-play a lot and I think for a lot of games that are out in the market that do support cross-play makes a lot of sense. It's certainly something that's very intriguing to us. It's something that we're capable of doing.", "And obviously, it's not just our decision alone, there's platforms involved as well. We haven't made any specific announcements about cross-play. We are enabling certain cross-generational opportunities within our games, but in terms of cross-play, it's very interesting. I think it's from a player liquidity perspective, it can be a very compelling thing, but it also has some -- for some games, it also has certain limitations.", "If you're cross-playing between mobile and console games, it's not always the best experience for everybody. So there are considerations that you have to make when making those types of decisions. But obviously, we do consider it and it's a great opportunity for our industry in general, going into this next generation." ] }, { "name": "Drew Crum", "speech": [ "Got it. OK. And Lainie, if I heard you correctly, you indicated the RCS would be up 5% in the December quarter. Is that correct?" ] }, { "name": "Lainie Goldstein", "speech": [ "Yes, that's correct, for the third quarter." ] }, { "name": "Drew Crum", "speech": [ "OK. Can you talk about the assumed deceleration and how that aligns with the timing of the big updates for Rockstar Online?" ] }, { "name": "Lainie Goldstein", "speech": [ "So for GTA we have -- for Q3, we have it coming down in the third quarter versus last year. And when we look at GTA, we always sort of look at it being out for seven years and we think about the quarters going forward. And since it's something that has been out for so long, we tend to forecast it as coming down each quarter and it always beats our expectations. So when we go out into the future, that seems to be have -- we guide for that title." ] }, { "name": "Drew Crum", "speech": [ "OK. OK. That's good." ] }, { "name": "Lainie Goldstein", "speech": [ "And the growth in the quarter is coming from the NBA title." ] }, { "name": "Drew Crum", "speech": [ "OK. Got it. Thanks, guys." ] }, { "name": "Operator", "speech": [ "Our next question comes from Mike Ng with Goldman Sachs. Please proceed with your question." ] }, { "name": "Mike Ng", "speech": [ "Great. Thanks. Strauss, I was wondering if you could provide your view on using free-to-play experiences to enhance the reach of your franchises. For instance, in the spirit of Call of Duty: War Zone and Call of Duty: Modern Warfare, would it ever make sense to make a free-to-play component available for GTA or NBA2K? Thanks." ] }, { "name": "Strauss Zelnick", "speech": [ "Well, look, we're pretty open-minded. And at the same time, we deliver the highest quality experiences in the business and we charge much less for them than we believe they are worth to consumers. And then we deliver typically an ongoing component that is free and that's already a great deal of value. Any monetization, of course, is totally optional and unlike many sort of casual titles, the monetization is not necessary to enjoy the experience.", "It's an additional benefit, but youi -- there are no toll booths in any of our online games that are attached to our core games. We have on occasion, promoted our games very cheaply or in a couple of instances, free, which effectively means you have access to the online component free as a promotion and I wouldn't rule out the possibility of doing that. And of course, Rockstar has announced that GTA Online will be a stand-alone experience for next-gen coming in second half of 2021 and that it will be free for PS5 users for about three months. So as you can see, we're open-minded about our business model and I wouldn't rule out the possibility that at some point, certain experiences can become free as a matter of the entry point.", "I like what I consider sort of tethered free-to-play, where 100% of the people acknowledge the value of the title and pay to play it. And on an ongoing basis, you have what is effectively a free-to-play experience attached that can go on for many years. The Grand Theft Auto Online, of course, has been successful for seven years and is expected to set a new record in this fiscal year, amazingly enough. I think that you're also implying another question, which is some of our competitors have taken legacy IP and created stand-alone mobile free-to-play titles related to that IP and branded that IP, and we have not done that yet.", "We have not announced any plans to do it, and in the world in which we would do it, of course, would be when our labels are excited by the opportunity creatively and when we think we can deliver something to consumers that's absolutely stellar." ] }, { "name": "Mike Ng", "speech": [ "OK. That's incredibly helpful. Thanks, Strauss." ] }, { "name": "Operator", "speech": [ "Our next question is from Gerrick Johnson with BMO Capital Markets. Please proceed with your question." ] }, { "name": "Gerrick Johnson", "speech": [ "Great. Thank you and good evening, Strauss, Karl, and Lainie. On NBA2K, I have a two-part question. So you decided to not offer free upgrades on the current to next-gen, but you did release Mamba Forever dual access for $100.", "So what did you see people do? Do you see people mix up immediately to Mamba Forever or maybe delay the purchase of 21 until next-gen comes out, so maybe we see a second wave?" ] }, { "name": "Karl Slatoff", "speech": [ "Yeah. I mean I don't have any specifics to share -- this is Karl, by the way. I don't have any specific -- it's a great question. I don't have specifics to share with you about what activity we've seen.", "And by the way, it's kind of hard to know because we're still pretty early in it and we've sold already 5 million units, and we've had lots of nice action around all of our SKUs, but we don't know what people would otherwise be doing. So it's sort of hard for us to know whether people are waiting or whether they're going for the Mamba now or they're just buying the current gen and they'll buy the next-gen later or just buy current gen. It all remains to be -- it's a little bit of uncharted territory and it remains to be seen. But what we were very gracious for and proud of is the fact that the activity and the engagement around what we've seen so far has been incredible.", "So no matter how much it breaks down by SKU, I think we're looking at a really good release for NBA 2K21." ] }, { "name": "Gerrick Johnson", "speech": [ "OK. Thank you, Karl. And by the way, there's $100,000 worth of virtual currency in Mamba Forever. So how much of that contributed to the 76% recurrent consumer spending growth in NBA?" ] }, { "name": "Lainie Goldstein", "speech": [ "We don't share that level of detail." ] }, { "name": "Gerrick Johnson", "speech": [ "OK. Thanks." ] }, { "name": "Operator", "speech": [ "Our next question is from Brian Nowak with Morgan Stanley. Please proceed with your question." ] }, { "name": "Unknown speaker", "speech": [ "Hi, everyone. Thanks for taking my question. It's Matt on for Brian. So kind of following up on The City content in NBA2K.", "Are you seeing any new types of behavior, particularly, in the last few months inside of the games, whether it's people socializing more rather than just playing games or kind of like new use cases that you're noticing players eke out and is The City's kind of an opportunity to expand on that and sort of like keep users stickier by adding new sorts of in-game activities? And then just secondly, I was just wondering if you could provide an update on the progress with some of the newer studios like 31st Union and Cloud Chamber. Is now everything in place to sort of hit the pipeline you guys shared earlier this year? Thanks." ] }, { "name": "Karl Slatoff", "speech": [ "Hey, Matt, it's Karl. In terms of The City, I think the real quick answer to the question is, really since The Park came back out in '14, we've seen more social activities in NBA generally speaking. And as the environment has got more sophisticated and there is more things to do, that social activity has been increasing all along, and you see big jumps in that as well. When you come out -- when we move from The Park to The Neighborhood, we saw a market difference in how people play in the game.", "You create events, people create their own events within the communities themselves, and the more that you give -- more the new content you give within these communities and within these spaces, within these worlds, it encourages people to spend more time there. And that's a really great thing from an engagement perspective because, number one, I think it does actually -- people love it and driving engagement also drives economics for us and that's one of our objectives and so building out The City was a huge endeavor that VC took on. We think it's going to be really well received. We think people are spending a lot of time in The City and it really will take that whole concept of open world social gaming to another level in the context of NBA.", "So we're very excited." ] }, { "name": "Strauss Zelnick", "speech": [ "Yeah. In terms of how things are going at our studios, particularly, in our new studios, the answer is very, very well. We have an extraordinary pipeline. We've doubled our prior pipeline of releases over the next five years.", "You mentioned two of our studios, I'd really talk about all of our studios and there are many now, and everything is looking great and is on target. We do not expect to see any slippage and while I think working from home is really tough, and I admire our colleagues for doing such a great job doing it. It isn't the same as being in the office and yet we have not seen any slowdown in our expected cadence of releases." ] }, { "name": "Unknown speaker", "speech": [ "Great. Thank you." ] }, { "name": "Operator", "speech": [ "Our next question is from Todd Juenger with Sanford Bernstein. Please proceed with your question." ] }, { "name": "Todd Juenger", "speech": [ "Hi, thanks. One sort of high-level one and then one housekeeping. The higher-level one, just following on, you've been asked so far about subscription and free-to-play and really every permutation of business model and platform. I'm going to ask sort of the mobile question version of that, if you don't mind.", "Especially given you've seen some other AAA publishers be very aggressive and you could argue successful in taking what used to be console IP, finding a big home for it, relatively big home for it in mobile. When you start to think about the role of mobile across your IP portfolio and studios, I wonder if you have any big ideas there. I think that fits for any of your big IP. And if so, do you have the sort of resources you need in-house to make that sort of development effort? Thanks.", "And then the super quick one is, if you don't mind. So I know typically you guys aim to release a AAA frontline title generally every year outside of U.K. NBA2K, you didn't have one this year. I wonder when you look at next year, do the remastered versions of GTA and RDR, does that fit your definition of a AAA console release or not? Thanks." ] }, { "name": "Strauss Zelnick", "speech": [ "Yeah. Thanks. In terms of the portfolio of owned intellectual property, which we're very proud of. We have 11 franchises that have sold over 5 million units with an individual release and over 60 that have sold over 2 million units and they're some of the most extraordinary franchises in the entertainment business, never mind, the interactive entertainment business.", "I think I alluded to this earlier, we wouldn't rule out the possibility of making a stand-alone mobile title based on that intellectual property. It would be driven by the label's creative desire to do so in the belief that we can do an extraordinary job at it. We have a lot of talent in the mobile space now at numerous labels, PlayDots, Socialpoint, 2K, and others, and I don't doubt that we could put together the resources for the properties that make sense. So stay tuned on that topic.", "It is not lost on us that the biggest hits in the mobile business are native to the mobile business. They are not based on licensed IP, they're not based on console IP. The biggest hits are native to the business. And in terms of our on our release schedule, we haven't said very much at all about fiscal '22.", "We have said that GTA Online and GTA V are coming for next-gen in the second half of calendar '21. We said the Kerbal Space Program 2 is coming in fiscal '23, but we will be talking about our release schedule for '22 in due time. And our goal remains the same, but it's too early to comment on what the release schedule will look like." ] }, { "name": "Karl Slatoff", "speech": [ "And to answer your question specifically, Todd, about the platform extensions and whether we consider them the part of our core gaming experience, we do. So we did say before the 93 titles, 63 that we mentioned that are in our pipeline, which is more than double what it was five years ago, by the way. Sixty-three of those are core gaming experiences and that includes 15 platform extensions." ] }, { "name": "Todd Juenger", "speech": [ "Got it. That's helpful and sorry on the redundancy on the mobile there, but I appreciate the additional comments. It was helpful. Thanks, everybody." ] }, { "name": "Operator", "speech": [ "[Operator instructions] Our next question is from Alex Giaimo with Jefferies. Please proceed with your question." ] }, { "name": "Alex Giaimo", "speech": [ "Great. Thanks for the question. Strauss, I think the messaging recently has been -- has still been for growth from the company as we think about next year, as we think about fiscal '22. Does that change at all as you continue to beat and raise expectations this year and the comp gets any more challenging? Or is the expectation still for growth next year? Thank you." ] }, { "name": "Lainie Goldstein", "speech": [ "So for fiscal year '22 given that we now expect net bookings of over $3 billion this fiscal year, it's too early to predict whether our business will grow next year. Our results this year have benefited from sheltering-at-home and it remains to be seen, whether that will continue to last into next year. So it's just a little bit too early to call at this point." ] }, { "name": "Alex Giaimo", "speech": [ "Got it. Thanks, Lainie." ] }, { "name": "Operator", "speech": [ "We have reached the end of the question-and-answer session. At this time, I'd like to turn the call back over to Strauss Zelnick for closing comments." ] }, { "name": "Strauss Zelnick", "speech": [ "Thank you very much. On behalf of everyone at Take-Two, I'd like to wish you all a very happy and healthy holiday season. These are extraordinary times and I wish you all the best through them. And once again, I'd like to thank all of our colleagues for their incredible work and for these extraordinary results.", "Have a great evening." ] }, { "name": "Operator", "speech": [ "[Operator signoff]" ] } ]
TTWO
2021-11-03
[ { "description": "Senior Vice President, Investor Relations and Corporate Communications", "name": "Nicole Shevins", "position": "Executive" }, { "description": "Chairman and Chief Executive Officer", "name": "Strauss Zelnick", "position": "Executive" }, { "description": "President", "name": "Karl Slatoff", "position": "Executive" }, { "description": "Chief Financial Officer", "name": "Lainie Goldstein", "position": "Executive" }, { "description": "Barclays -- Analyst", "name": "Mario Lu", "position": "Analyst" }, { "description": "Goldman Sachs -- Analyst", "name": "Mike Ng", "position": "Analyst" }, { "description": "Morgan Stanley -- Analyst", "name": "Matthew Cost", "position": "Analyst" }, { "description": "Oppenheimer and Company -- Analyst", "name": "Martin Yang", "position": "Analyst" }, { "description": "Stifel Financial Corp. -- Analyst", "name": "Drew Crum", "position": "Analyst" } ]
[ { "name": "Operator", "speech": [ "Greetings and welcome to the Take-Two second quarter fiscal year 2022 earnings call. [Operator instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Nicole Shevins. Thank you.", "Nicole, you may begin." ] }, { "name": "Nicole Shevins", "speech": [ "Good afternoon. Thank you for joining our conference call to discuss our results for the second quarter of fiscal year 2022 ended September 30, 2021. Today's call will be led by Strauss Zelnick, Take-Two's chairman and chief executive officer; Karl Slatoff, our president; and Lainie Goldstein, our chief financial officer. We will be available to answer your questions during the Q&A session following our prepared remarks.", "Before we begin, I'd like to remind everyone that statements made during this call that are not historical facts are considered forward-looking statements under federal securities laws. These forward-looking statements are based on the beliefs of our management, as well as assumptions made by and information currently available to us. We have no obligation to update these forward-looking statements. Actual operating results may vary significantly from these forward-looking statements based on a variety of factors.", "These important factors are described in our filings with the SEC, including the company's most recent annual report on Form 10-K and quarterly report on Form 10-Q, including the risks summarized in the section entitled risk factors. I'd also like to note that unless otherwise stated, all numbers we will be discussing today are GAAP and all comparisons are year-over-year. Additional details regarding our actual results and outlook are contained in our press release, including the items that our management uses internally to adjust our GAAP financial results in order to evaluate our operating performance. Our press release also contains a reconciliation of any non-GAAP financial measure to the most comparable GAAP measure.", "In addition, we have posted to our website a slide deck that visually presents our results and financial outlook. Our press release and filings with the SEC may be obtained from our website at take2games.com. And now I'll turn the call over to Strauss." ] }, { "name": "Strauss Zelnick", "speech": [ "Thanks, Nicole. Good afternoon and thank you for joining us today. I'm pleased to report that we delivered another outstanding quarter, highlighted by net bookings of $985 million, which greatly exceeded our expectations and increased 3% over last year. We experienced consistently strong engagement trends across our key franchises, underscoring the durability of our offerings and the deep relationships that we've established with new, existing and returning players.", "We believe that we can maintain these favorable engagement patterns as we continue to deliver the highest quality entertainment experiences that are driven by our team's passion and commitment to creativity and innovation. We've been taking key actions to execute on our long-term strategic vision. We continue to enhance and diversify our pipeline across an array of platforms, business models and genres. To support this, we're investing in our infrastructure and making key hires, ranging from senior talent at our labels, to the addition of more than 350 new developers during the second quarter.", "We're pleased with the progress of T2 Mobile Games, which is helping us leverage our team's expertise across our enterprise. Additionally, Nordeus has already reached key integration milestones. We continue to build upon our ESG efforts, and we hope to share more in the coming months. Given our strong confidence in our company, we opportunistically repurchased 1.26 million shares of our stock during the second quarter for approximately $200 million with an average share price of $158.67.", "This marks the first time in over two years that we repurchased our stock, underscoring the deep value that we observed in our share price. In November, our board of directors authorized an additional 7.4 million shares that the company is permitted to repurchase, resulting in 10 million shares remaining available for repurchase as of the date of the additional authorization. Turning to our second quarter results. Our better-than-expected performance was driven primarily by Borderlands 3, NBA 2K and Grand Theft Auto V and Grand Theft Auto Online.", "On September 10, 2K and Visual Concepts successfully launched NBA 2K22, with more players hitting the digital hard court in its first month than any prior release of the game. The title enjoyed outstanding initial success with over five million units sold-in to-date. Players are deeply engaged and we're experiencing growth in daily active users and daily games played per user compared to NBA 2K21 in the same period. For the quarter, the NBA 2K series delivered exceptional results that were significantly above our expectations.", "NBA 2K22 experienced growth in recurrent consumer spending, as well as a 4% increase in total in-game purchasers and a 58% increase in new user spending. I'd like to congratulate the teams at 2K and Visual Concepts for once again delivering such a stellar basketball experience. We see a meaningful opportunity to grow the franchise further over the next few years as we provide engaging and frequent content updates throughout the game. Sales of Grand Theft Auto V continue to exceed our expectations.", "And to date, the title has sold-in more than 155 million units worldwide. During the period, Rockstar Games launched another major update for Grand Theft Auto Online's evolving world. The Los Santos Tuners update brought a renewed focus to the underground street racing scene and introduced a host of innovative and highly requested features, including the LS Car Meet, a shared social space where players can get together to modify, test and race their cars, get tattoos and more. Los Santos Tuners also added 17 highly customizable vehicles, a purchasable auto workshop, new robbery contracts and street races and the ability to add music in a new way through collectible media sticks.", "Recurrent consumer spending increased 33% and active player audience increased 11%, representing the strongest second quarter on record for both metrics. The success of Los Santos Tuners demonstrates Rockstar's ability both to anticipate the needs of its players and to respond to player feedback with an ongoing stream of high quality and engaging content. During the quarter, Red Dead Redemption 2 also significantly outperformed our expectations and to date has sold-in more than 39 million units worldwide. Momentum continued in Red Dead Online with the introduction of the Blood Money update in July, which introduced a series of new criminal-themed opportunities; complex new missions, including the game's first train robbery, and The Quick Draw Club, a series of four distinct, rapid-fire passes featuring criminal-themed unlockable rewards, bonuses and more.", "As a result of the Blood Money update, as well as the influx of new players attributable to the stand-alone version of Red Dead Online, we experienced a 26% increase in active players and a 29% increase in new online player acquisition. Recurrent consumer spending for the series was also notably above expectations. In August, Private Division expanded their portfolio with the physical release of Hades for PlayStation and Xbox platforms. The title continues to earn positive praise from the gaming community and is currently Metacritic's highest rated game for the PlayStation 5 and Xbox Series X.", "In September, the label released Murder on Eridanos, the final expansion for The Outer Worlds for the Nintendo Switch. We're pleased that The Outer Worlds continues to grow its audience. And to date, the title has sold-in over 4 million units. Also, in September, Private Division launched Kerbal Space Program Enhanced Edition for Gen 9 consoles, taking advantage of the latest performance and the visual enhancements to provide players an exciting new way to experience this beloved space flight simulation game.", "During the quarter, recurrent consumer spending rose 7%, which was significantly ahead of our expectations of an 11% decline and accounted for 69% of net bookings. As I mentioned earlier, our consumer engagement trends were consistently strong even as people resume more normal socialization patterns and as schools and workplaces began to reopen. We're very optimistic about our continued ability to keep players engaged and to capitalize further on our massive audience size. For the period, NBA 2K and Grand Theft Auto Online were the largest contributors to recurrent consumer spending.", "Many of our free-to-play offerings were also notable drivers. Top Eleven exceeded our expectations driven by strong seasonal live ops and features, optimized marketing activities and enhanced user quality. Dragon City and Monster Legends performed well, thanks to strong live ops, new updates and feature releases and increased marketing investments. Two Dots achieved its highest ever net bookings since our acquisition, which we attribute to new in-game events such as scavenger hunts and curated seasonal content.", "WWE SuperCard has now been downloaded more than 24 million times and remains 2K's highest grossing mobile game. NBA 2K Online in China outperformed our expectations and remains the No. 1 online PC sports game in the region with nearly 55 million registered users. We continue to monitor the regulatory environment.", "It bears noting that China represents 3% of our net bookings in fiscal '21. While we remain optimistic about China and we'll pursue further opportunity there, we believe that our exposure to the region will remain limited in the context of our growing overall net bookings. Turning to our guidance. As a result of our second quarter outperformance, along with our updated forecast for the balance of the year, we're raising our outlook for fiscal year 2022, and we now expect to achieve net bookings of $3.3 billion to $3.4 billion.", "Lainie will provide more details shortly. With the strongest multiyear pipeline in our company's history, we continue to believe that we'll achieve sequential growth in net bookings in fiscal '23 and establish new records of operating results over the next few years. Our focus on bringing new intellectual properties to market will help us diversify our portfolio further and build lasting franchises that we believe will enhance our financial profile for years to come. At the same time, our teams are hard at work developing sequels to many of our beloved franchises that we know our consumers will be eager to play.", "As we execute on our strategic vision and maintain our commitment to an outstanding and collaborative culture, we believe that we will significantly grow our operations and drive long-term shareholder value. I'll now turn the call over to Karl." ] }, { "name": "Karl Slatoff", "speech": [ "Thanks, Strauss. I'd like to thank our teams for all their contributions, as well as their continued passion and dedication to our business. Our unique and collaborative culture continues to be a key driver of our success. I'll now discuss our recent releases.", "On October 1, 2K and Hangar 13 launched the Mafia III: Definitive Edition for Stadia. Previously released on other platforms, the Definitive Edition offers many additional features and post-launch content that has since been incorporated into the game. We're pleased to continue our support for Stadia and expand the Mafia franchise to new audiences. On October 11, Nordeus released Top Eleven 2022 on iOS and Android, the latest installment of the world's most successful soccer management game.", "Top Eleven 2022 delivers a significant update to the gameplay and soccer management experience, pitting aspiring soccer managers against one another in league, cup and friendly matches. Top Eleven 2022 also provides a significant new layer of depth to player development via the Playstyles feature, which helps to enhance the soccer fantasy that Top Eleven has been providing to fans for more than a decade. On October 14, 2K and HB Studios launched the PGA TOUR 2K21 Baller Edition, which includes the base game, all previously released DLC courses and game modes, an assortment of adidas apparel and gear and the Golden Touch Pack that features a gold putter and driver. In addition, PGA TOUR 2K21 offers new multiplayer courses each month designed by a group of international content creators.", "We're thrilled that the community continues to grow with the title selling-in over 2.5 million units to date. On October 19, 2K launched NBA 2K22 Arcade Edition for Apple Arcade, building on the success of its predecessor, which continues to be listed as one of the platform's top games with an average of 4.6 out of five stars across more than 85,000 ratings. NBA 2K22 Arcade Edition expands the franchise's addressable market with new modes and features, including The Association, MyCOURT and more. Rockstar Games continue to provide an array of free content for their vast and growing online communities.", "To celebrate Halloween, Grand Theft Auto Online added a series of random events to shock and surprise players, including driverless phantom killer cars, superhuman slashers, UFOs and more, including bonuses on Alien Survival modes and a new Arcade game. Players will also be able to experience an all-new adventure in the Grand Theft Auto Online later this year as they help some well-known contacts and familiar faces with many more surprises yet to be revealed. I'll now discuss details on our upcoming announced offerings for this year. Rockstar Games will digitally launch Grand Theft Auto: The Trilogy-The Definitive Edition this November 11 for PlayStation 5, PlayStation 4, Xbox Series X and S, Xbox One, Nintendo Switch and the Rockstar Games Launcher for PC.", "The Definitive Edition will feature across-the-board upgrades for all three games, including graphical improvements and modern controls, while still maintaining the classic and distinct aesthetic of the original games. Grand Theft Auto: The Trilogy-The Definitive Edition will launch physically for consoles on December 7 and will release for iOS and Android devices in the first half of calendar 2022. As part of the celebration of the recent 20th anniversary, Grand Theft Auto III fans can also collect an array of special commemorative gear in Grand Theft Auto Online throughout a series of upcoming events this fall. On November 12, 2K and Gearbox Software will release limited quantities of Borderlands 3 Ultimate Edition physically for PlayStation 5 and Xbox Series X.", "Avid Vault Hunters and newcomers alike are sure to enjoy this quintessential Borderlands 3 experience, featuring the award-winning base game, plus all six content add-ons and the full collection of bonus cosmetic packs. The Ultimate Edition is optimized to take full advantage of the Gen 9 hardware's processing power, enabling gameplay at up to 60 frames per second in 4K resolution during single player and online co-op. OlliOlli World, the skateboarding action-platformer developed by Roll7, launches this winter in the fourth quarter of fiscal 2022 on PlayStation 4 and 5, Xbox One, Xbox Series X and S, PC and Nintendo Switch. On March 25, 2K and Gearbox Software will launch an exciting new entry from the Borderlands universe, Tiny Tina's Wonderlands.", "In September, the team unveiled the game's brand-new mechanics and all-star celebrity cast, including Will Arnett, Ashly Burch, Andy Samberg and Wanda Sykes. Fans' reactions to the first look at the gameplay was extremely positive, reflecting the growing excitement for this fantasy-fueled take on the popular looter-shooter genre. In addition, 2K and Visual Concepts remain hard at work on WWE 2K22, which will be released in March. Our partners at WWE have done amazing things with their brand, resulting in a passionate and deeply engaged community.", "And they're providing tremendous support to maximize our campaign through all their platforms, including social media, digital, programming, talent, in-arena and more. Visual Concepts is gearing up for a major reveal of the game's key features in January, which we look forward to sharing with fans, followed by the biggest WWE 2K launch to date. Rockstar Games is thrilled to launch the expanded and enhanced versions of Grand Theft Auto V and Grand Theft Auto Online – Standalone for Gen 9 consoles in March. Players will enjoy a range of technical and graphical improvements across the entire experience, including performance enhancements for select vehicles in Grand Theft Auto Online and much more.", "Rockstar Games will have more details to share about these eagerly anticipated launches in the coming months. As we noted in our earnings release, Marvel's Midnight Suns from Firaxis Games is now expected to be released in the second half of calendar 2022 during our fiscal year 2023. While we don't take delays lightly, we know that our proven success has been rooted firmly in our player-first approach and unwavering commitment to delivering the highest quality entertainment experiences. We believe it is far better to provide the extra time needed for a product, especially a new IP, to reach its full potential and drive long-term success as a permanent franchise in our industry-leading portfolio.", "As gaming platforms continue to evolve, technological advancements allow us to design experiences that are more immersive and engaging than ever before. While this has enabled us to significantly grow our franchises over time, game development has become more complex, especially with many of our colleagues still working remotely. We continue to evaluate and optimize our game creation processes to enhance the ways that our teams collaborate, share best practices and leverage technology and expertise. Turning to eSports.", "The NBA 2K League concluded its fourth season, attracting more than 18 million unique viewers and over 2 million hours of games watched on Twitch. During the playoffs and finals, nearly 4 million unique viewers tuned in as Wizards District Gaming won their second consecutive championship. In addition, the League hosted their inaugural All-Star Game held at Brooklyn Steel in New York. As part of the League's continued global expansion, Mexico's DUX Gaming will launch a team this spring, marking the 24th team and the first to participate from Latin America.", "We are thrilled to see the League continue to grow both its audience and global presence. In closing, we have a strong foundation for success that has helped us curate a portfolio of highly engaging franchises that transcend console and player generations. As we continue to harness and enhance our competitive advantages, our incredible creative talent, best-in-class marketing and technology and strong balance sheet, we will introduce new entertainment experiences that we believe have vast commercial potential and the ability to drive long-term engagement and recurrent consumer spending. We also expect to continue to attract the very best creators who share in our vision to set new benchmarks and captivate audiences throughout the world.", "I'll now turn the call over to Lainie." ] }, { "name": "Lainie Goldstein", "speech": [ "Thanks, Karl, and good afternoon, everyone. Today, I'll discuss our second quarter results and then review our financial outlook for fiscal year 2022 and the third quarter. Please note that additional details regarding our actual results and outlook are contained in our press release. As Strauss mentioned, our business fundamentals remain exceptionally strong across our key franchises.", "Net bookings were $985 million, which was significantly above our guidance of $815 million to $865 million and up 3% as compared to last year. Our outperformance was primarily driven by Borderlands 3, NBA 2K and Grand Theft Auto V and Grand Theft Auto Online. During the period, overall engagement was outstanding, with recurrent consumer spending increasing 7% compared to our outlook of an 11% decline and accounting for 69% of total net bookings. Our outperformance was primarily driven by NBA 2K.", "Digitally delivered net bookings increased 9% compared to our outlook of a 5% decline and accounted for 89% of the total. This result was better than our outlook, primarily due to the outperformance of recurrent consumer spending. During the quarter, 65% of console game sales were delivered digitally, up from 57% last year. GAAP net revenue increased 2% to $858 million, while cost of goods sold increased 6% to $457 million.", "Cost of goods sold included a $53 million impairment charge related to our decision not to proceed with further development of an unannounced title in our pipeline. Operating expenses increased by 30% to $381 million. The variance is driven by higher personnel, marketing and IT expenses; the addition of Playdots and Nordeus and the revaluation of the Nordeus earnout. And GAAP net income was $10 million or $0.09 per share as compared to $99 million or $0.86 per share in the second quarter last year.", "We ended the quarter with approximately $2.3 billion of cash and short-term investments. We repurchased 1.26 million shares of our stock during the quarter for approximately $200 million with an average share price of $158.67. Turning to our guidance. I'll begin with our full fiscal year expectations.", "We are raising our net bookings outlook range to $3.3 billion to $3.4 billion. This is up from our prior outlook of $3.2 billion to $3.3 billion due to our second quarter outperformance, along with our updated forecast for the balance of the year, which includes the move of Marvel's Midnight Suns into fiscal 2023. The largest contributors to net bookings are expected to be NBA 2K, Grand Theft Auto Online and Grand Theft Auto V, Red Dead Redemption 2 and Red Dead Online and Borderlands 3. We expect the net bookings breakdown from our labels to be roughly 50% 2K, 40% Rockstar Games, and 10% Private Division and T2 Mobile Games.", "We forecast our geographic net booking split to be about 60% United States and 40% international. We now expect recurrent consumer spending to decline by 6% compared to our prior outlook of a 9% decline versus fiscal 2021. As a percentage of net bookings, recurrent consumer spending is expected to represent 66% of total net bookings, slightly above 65% last year. We now project digitally delivered net bookings to decrease by approximately 4% compared to our prior outlook of a 6% decline.", "As a percentage of our business, digital is projected to represent 90%, slightly above 89% last year. Our forecast assumes that 73% of console game sales will be delivered digitally, up from 64% last year. We expect to generate more than $400 million in non-GAAP adjusted unrestricted operating cash flow, and we plan to deploy approximately $170 million for capital expenditures. We're raising our GAAP net revenue outlook to $3.35 billion to $3.45 billion, while we now expect cost of goods sold to range from $1.51 billion to $1.55 billion.", "Total operating expenses are expected to range from $1.47 billion to $1.49 billion, representing at the midpoint a 22% increase over the prior year. This increase reflects costs relating to marketing, personnel, stock compensation, IT and research and development to bring our expansive multiyear pipeline to market, as well as incremental expenses due to the addition of Nordeus and a full year of Playdots. Our operating expense expectations have improved compared to our prior guidance driven by lower marketing expenses due to the movement in our release schedule. And we expect GAAP net income to range from $320 million to $350 million or $2.75 to $3 per share.", "For management reporting purposes, we expect our tax rate to be 16% throughout fiscal 2022. And now moving to our guidance for the fiscal third quarter. We project net bookings to range from $800 million to $850 million compared to $814 million in the third quarter last year. The largest contributors in our bookings are reflected to be NBA 2K, Grand Theft Auto Online and Grand Theft Auto V, Red Dead Redemption 2 and Red Dead Online and Grand Theft Auto: The Trilogy-The Definitive Edition.", "We project recurrent consumer spending to be up slightly compared to last year and digitally delivered net bookings to increase by approximately 5%. Our forecast assumes that 61% of console game sales will be delivered digitally, up from 56% last year. We expect GAAP net revenue to range from $840 million to $890 million and cost of goods sold to range from $344 million to $370 million. Operating expenses are expected to range from $378 million to $388 million.", "At the midpoint, this represents a 13% increase over last year, driven primarily by higher personnel, research and development and IT expenses, as well as the inclusion of Nordeus. And GAAP net income is expected to range from $99 million to $111 million or $0.85 to $0.95 per share. In closing, our second quarter results demonstrate the health of our business and our continued ability to engage our players with exciting and innovative new content. As we continue to capitalize on organic and inorganic growth opportunities, we believe that we will greatly expand our scale and deliver long-term growth for our shareholders.", "Thank you. I'll now turn the call back to Strauss." ] }, { "name": "Strauss Zelnick", "speech": [ "Thanks, Lainie and Karl. On behalf of our entire management team, I'd like to thank our colleagues for delivering another strong quarter. And to our shareholders, I want to express our appreciation for your continued support. We'll now take your questions.", "Operator?" ] } ]
[ { "name": "Operator", "speech": [ "[Operator Instructions] Our first question is from Mario Lu with Barclays. Please proceed with your question." ] }, { "name": "Mario Lu", "speech": [ "I have one on NBA 2K, and then another high-level question. So the first one on NBA 2K, I believe you guys mentioned a 58% increase in new user spending. So just curious if you could provide any additional color or specific features that was introduced in this game this year that attributed to this large increase." ] }, { "name": "Karl Slatoff", "speech": [ "It's Karl, Mario. I wouldn't necessarily want to attribute any specific features to the increase. I don't want to tag it, but there have been certainly a lot of additions to the game that we believe have increased engagement. Specifically, just generally speaking, the game is fantastic.", "I mean, the reviews have been great. User feedback has been great. Engagement has been really, really strong. One thing to note is that we did add the seasons feature to MyPLAYER this year, which obviously creates a lot more content drops and a lot more for folks to do.", "Every time you increase content and deliver content, that obviously leads to increased engagement and tends to lead to increased monetization. So it's really a combination of the game just being better. We had a lot of wind in our backs, too, from an increased player base, generally speaking. And it's just been, it's the great execution and people are really enjoying the incremental content." ] }, { "name": "Mario Lu", "speech": [ "Got it. And then, Facebook or Meta recently announced a partnership with Rockstar for GTA: San Andreas on the Quest. Just curious what the background of this partnership was. And do you now think either VR or building a metaverse could be growth drivers for Take-Two as a company going forward?" ] }, { "name": "Strauss Zelnick", "speech": [ "We're really excited about all of our partnerships. So we have numerous partnerships. We've always said that we want to be where the consumer is. And when VR first emerged as a potential technology, while I expressed some skepticism about it becoming a very broad-based consumer application, I also thought it was really exciting technically and said that we would participate.", "Rockstar has already brought L.A. Noire to VR. NBA 2K has come to VR. I'm sure we'll have more VR titles in the future as well.", "So we're always excited when our creative teams can flex their collective muscles and do different things and remains to be seen just how big that can be. We never make projections like that, but we're very excited about the opportunities." ] }, { "name": "Mario Lu", "speech": [ "Got it. Thanks, Strauss." ] }, { "name": "Operator", "speech": [ "Thank you. Our next question is from Mike Ng with Goldman Sachs. Please proceed with your question." ] }, { "name": "Mike Ng", "speech": [ "Hey, good afternoon. Thanks for the question. I just have two. First, with the upcoming launch of GTA: Trilogy on mobile, can you talk a little bit about your ambitions to create immersive core games on mobile and whether this foreshadows more mobile content in the future that may have historically been reserved for PC and console? And then second, just a housekeeping question on the improvement in guidance.", "What's driving the back half improvement? Despite the push out of Marvel Midnight Suns, are there any improved expectations by franchise you'd call out?" ] }, { "name": "Karl Slatoff", "speech": [ "Mike, it's Karl. Just to answer your first question about mobile. We are obviously very excited about The Trilogy coming to mobile devices. It's actually not the first time we've had our franchises doing this.", "We've done this since the very beginning of our mobile days, both on the Rockstar and the 2K side. And we have a long history of bringing our franchises to the mobile space. We've done that in various different ways. Obviously, we've brought older games onto mobile platforms.", "We've done companion apps, and we've brought modified games or different iterations of franchises like WWE SuperCard or NBA SuperCard. So we are no stranger to bringing our core franchises to the mobile space. We definitely think that there's an opportunity for us to do more. Nothing to announce on the call.", "But look, obviously, we've invested significantly in this space, both through acquisition and also organically, and we don't expect that to stop anytime soon." ] }, { "name": "Lainie Goldstein", "speech": [ "In terms of the back half of the year and the forecast, we are seeing a lot of improvement in the forecast. We have a lot of ups and downs, mostly up, and we're netting up. The titles are looking great. Engagement is great.", "So we don't have any specific things to call out. But overall, the titles are doing great." ] }, { "name": "Mike Ng", "speech": [ "Great. Thanks, Karl. Thanks, Lainie." ] }, { "name": "Operator", "speech": [ "Thank you. Our next question comes from Matthew Cost with Morgan Stanley. Please proceed with your question." ] }, { "name": "Matthew Cost", "speech": [ "Hi, everyone. Thanks for taking the questions. I have two. So can you just talk about your expectations over the next, call it, year or two? Obviously, you've brought on a lot of heads.", "You have a lot of content in development. There's a decent amount of it hitting between now and the end of the fiscal year and then obviously more to come in the years following. What do you guys expect at a high level in terms of like the margin impact? I would imagine there would be something along the lines of an increase in marketing as you bring games to market but then sort of benefits from scale as those heads actually produce content that is out and engaging people and monetizing actively. Then just the second question is on China.", "Obviously, you quantified that at about 3% of your business and mentioned how you expect the exposure to remain limited. Should we interpret that to mean that you don't intend to launch games in China in the future or under certain circumstances and sort of what's driving your strategy there going forward?" ] }, { "name": "Lainie Goldstein", "speech": [ "So in terms of the margins in the next couple of years, as you know, this year is a big year of investment for us in terms of our headcount and our space and IT expenses and our marketing expenses. So we have been talking about that a lot, and we've seen that this year. And next year, we'll see some annualization of a lot of those costs as we go into next year. But as we continue to build scale with our pipeline of titles over the next few years, we expect those margins to continue to grow for us.", "So that's our plan for the near and the future over the next couple of years." ] }, { "name": "Strauss Zelnick", "speech": [ "And in terms of China, I was making the point about the percent of our net bookings that come from China. And it's quite small, roughly 3% at the moment. We expect our net bookings to grow. We expect sequential growth.", "We're really excited about our future. And at the same time, we're very focused on the region and particularly on the country in the context of what we're able to do and being compliant with regulations. So we remain highly optimistic about China. We absolutely would be very happy to launch additional and new titles there.", "We expect to do so. In fact, we remain optimistic. I'm simply making the point that it is a small part of our business." ] }, { "name": "Matthew Cost", "speech": [ "Great. Thank you." ] }, { "name": "Operator", "speech": [ "Thank you. Our next question is from Martin Yang with Oppenheimer. Please proceed with your question." ] }, { "name": "Martin Yang", "speech": [ "Thank you for taking my question. I have one. Just curious about your philosophy on remastered games. How do you pick and choose from your pretty substantial library what games to bring back on? And as a follow-up, how does remastering games compete with resources for development of new games?" ] }, { "name": "Karl Slatoff", "speech": [ "Sure. This is Karl, Martin. I'll answer the question. I'll answer the second one.", "They're actually related because the truth is remastering games, unless you really go truly out to third parties, which we've done in the past, but even in that case, you are actually competing with other resources. And therefore, that goes into your decision-making on which ones you bring to market, and it purely is an economic decision. An economic decision based on what we believe the fan base to be. How much is it going to cost for the game to be remastered? Are we going to make other changes to the game to enhance the experience? Because typically just pure remasters without -- just ports don't really perform, as well as something that's truly remastered or truly enhanced.", "So all of those factors go into those decisions. But in the end, it is an economic decision. And it is a resource allocation decision, and that's just math that we do." ] }, { "name": "Martin Yang", "speech": [ "Got it. Thank you." ] }, { "name": "Operator", "speech": [ "Thank you. Our next question is from Drew Crum with Stifel. Please proceed with your question." ] }, { "name": "Drew Crum", "speech": [ "Thanks. Hey, guys. Good afternoon. Maybe a follow-up to an earlier question.", "Some of your peers have suggested challenges around recruiting talent, but it sounds like you've had a different experience. If I heard correctly, you added 350 developers during the quarter. What do you attribute that to? Are labor markets improving? Is reopening helping? And if the macro picture is getting better, is your plan to accelerate new hires? And then I have a follow-up." ] }, { "name": "Strauss Zelnick", "speech": [ "Thanks for your question. Look, we're so grateful that we continue to attract the industry's top talent. In fact, we've hired over 1,500 developers over the last two years, and we've more than doubled our internal developer count in the last five years. And I don't want to overstate the case and so much always has to be done on a daily basis regarding culture.", "But I do think that that's a reflection of who we are. And I think ultimately, everyone knows who you are, people inside and people outside. And we're really proud of the culture that we've built. A culture that starts with creativity, innovation and efficiency, but very importantly, includes accepting everyone as they are, as they show up, as long as they are equally focused on a very high ambition for excellence and hard work, a willingness to be honest and open and transparent and collaborative, and the agreement that we have with one another that we'll treat everyone with decency and kindness.", "And I think at this point, we're known for that. And we're imperfect and there's much more that we can do at any given time. We are highly focused on this culture and it has served us very well." ] }, { "name": "Drew Crum", "speech": [ "And my follow-up concerns the headlines related to FIFA. Just curious around your interest in furthering your exposure to soccer beyond Top Eleven." ] }, { "name": "Strauss Zelnick", "speech": [ "We are so thrilled to have Nordeus in the Take-Two family. And they're just crushing it, which is great. Top Eleven is a great title, a beloved title. And I just couldn't be happier to be in the soccer manager business through Top Eleven with the Nordeus team.", "That's a big step forward for us. We haven't been in that sport before. And I think I'll leave it at that today." ] }, { "name": "Drew Crum", "speech": [ "OK. Thanks, guys." ] }, { "name": "Operator", "speech": [ "Thank you. There are no further questions at this time. I would like to turn the floor back over to Strauss Zelnick for any closing comments." ] }, { "name": "Strauss Zelnick", "speech": [ "Well, thanks, everyone, for joining us. That was an incredibly short call for us. So you all must have better things to do for the rest of the day. We wish you very well.", "We're obviously really pleased with the results. And what that leads me to say is, how grateful everyone here is to our teams who deliver these results, who work hard every day to make the phenomenal entertainment that drives the success of the company on an ongoing basis. It's incredibly hard. We don't take it for granted.", "We never take success for granted. And so, thank you to all of our colleagues who are listening today and the ones who aren't listening because they're hard at work. Thank you also to our shareholders for your ongoing support." ] }, { "name": "Operator", "speech": [ "[Operator signoff]" ] } ]
TTWO
2019-08-05
[ { "description": "Senior Vice President Investor Relations & Corporate Communications", "name": "Henry Diamond", "position": "Executive" }, { "description": "Chairman and Chief Executive Officer", "name": "Strauss Zelnick", "position": "Executive" }, { "description": "President", "name": "Karl Slatoff", "position": "Executive" }, { "description": "Chief Financial Officer", "name": "Lainie Goldstein", "position": "Executive" }, { "description": "MKM Partners LLC", "name": "Eric Handler", "position": "Other" }, { "description": "SunTrust", "name": "Matthew Thornton", "position": "Other" }, { "description": "Macquarie Group", "name": "Ben Schachter", "position": "Other" }, { "description": "Stifel", "name": "Drew Crum", "position": "Other" }, { "description": "Morgan Stanley", "name": "Brian Nowak", "position": "Other" }, { "description": "Sanford Bernstein", "name": "Todd Juenger", "position": "Other" }, { "description": "Piper Jaffray", "name": "Mike Olson", "position": "Other" }, { "description": "Bank of America", "name": "Ryan Gee", "position": "Other" }, { "description": "Goldman Sachs", "name": "Mike Ng", "position": "Other" }, { "description": "Consumer Edge", "name": "Ray Stochel", "position": "Other" }, { "description": "Deutsche Bank", "name": "Clay Griffin", "position": "Other" }, { "description": "Cowen and Company", "name": "Doug Creutz", "position": "Other" }, { "description": "Jefferies", "name": "Alex Giaimo", "position": "Other" } ]
[ { "name": "Operator", "speech": [ "Greetings, and welcome to the Take-Two Interactive Software First Quarter Fiscal Year 2020 Earnings Call. [Operator Instructions]. A question-and-answer session will follow the formal presentation. [Operator Instructions].", "I would now like to turn the conference over to your host, Hank Diamond, SVP of Investor Relations and Corporate Communications." ] }, { "name": "Henry Diamond", "speech": [ "Good afternoon. Welcome and thank you for joining Take-Two's conference call to discuss its results for the first quarter and fiscal year 2020 ended June 30, 2019.", "Today's call will be led by Strauss Zelnick, Take-Two's Chairman and Chief Executive Officer; Karl Slatoff, our President; and Lainie Goldstein, our Chief Financial Officer. We will be available to answer your questions during the Q&A session following our prepared remarks. Before we begin, I'd like to remind everyone that statements made during this call that are not historical facts are considered forward-looking statements under federal securities laws. These forward-looking statements are based on the beliefs of our management as well as assumptions made by and information currently available to us. We have no obligation to update these forward-looking statements. Actual operating results may vary significantly from these forward-looking statements based on a variety of factors. These important factors are described in our filings with the SEC including the Company's most recent annual report on Form 10-K, and quarterly report on Form 10-Q, including the risks summarized in the section entitled Risk Factors. I'd also like to note that, unless otherwise stated, all numbers we will be discussing today are GAAP, and all comparisons are year-over-year. Additional details regarding our actual results and outlook are contained in our press release, including the items that our management uses internally to adjust our GAAP financial results in order to evaluate our operating performance. In addition, we have posted to our website a slide deck that visually presents our results and financial outlook. Our press release and filings with the SEC may be obtained from our website at www.take2games.com.", "And now, I'll turn the call over to Strauss." ] }, { "name": "Strauss Zelnick", "speech": [ "Thanks, Hank. Good afternoon and thank you for joining us today. I'm pleased to report that fiscal 2020 is off to a terrific start with first quarter operating results that exceeded our expectations. We delivered significant net bookings and cash flow growth driven by the performance of Grand Theft Auto Online and Grand Theft Auto V, NBA 2K19, the Borderlands franchise, and Red Dead Redemption 2 and Red Dead Online.", "As we approach the sixth anniversary of their initial launch, sales of Grand Theft Auto V and recurrent consumer spending on Grand Theft Auto Online once again exceeded our expectations in the first quarter. Net bookings from Grand Theft Auto Online grew year-over-year, driven by the increased installed base of Grand Theft Auto V units as well as numerous reward bonus programs tied to game mode events and promotions.", "Grand Theft Auto V also continued its unprecedented level of success, charting in the top 10 games in 5 out of the past 6 months in the US based on combined physical and digital sales, according to the NPD Group. The title is now sold in more than 110 million units and remains one of the most revered and successful entertainment experiences across all art forms of all time.", "Our industry-leading basketball series continues to set new benchmarks for excellence. NBA 2K19 is now our highest-selling sports game ever, with selling to date of nearly 12 million units. During the first quarter net bookings from NBA 2K19 more than doubled, driven by strong recurrent consumer spending, and increased unit sales. Recurrent consumer spending on NBA 2K grew more than 140% and was the single largest contributor to that part of our business. Moreover, engagement with NBA 2K19 continues to increase with average games played and daily active users growing 12% and 23% respectively. This was driven by a variety of factors, including an enhanced mix of game modes that appeals to a broader audience and play styles, the strong performance of recent sales promotions, new player virtual currency bundles and engaging late cycle my team content. We expect the lifetime net bookings from NBA 2K19 will be the highest ever for a 2K sports title, including both record unit sales and recurrent consumer spending.", "Leading up to the eagerly anticipated September launch of Borderlands 3, which Karl will discuss shortly, we've seen a significant increase in sales of our Borderlands catalog offerings. During the quarter, 2K and Gearbox Software released the Borderlands Game of the Year edition for PlayStation 4, Xbox One and PC which features all new Ultra HD visuals, numerous gameplay improvements and all previously released add-on packs. In addition, we launched the Ultra HD texture pack that increases the visual fidelity of Borderlands: The Handsome Collection on consoles and provides a graphical upgrade for Borderlands 2, Borderlands: The Pre-Sequel and all of the add-ons for both titles on PC.", "Turning to Rockstar Games' latest creative and commercial masterpiece Red Dead Redemption 2 continues to expand its audience and to date has sold an approximately 25 million units worldwide. On May 14, Red Dead Online exited its beta phase with a massive update that brought a host of new gameplay modes, including new cooperative story missions, free-roam activities, and the introduction of poker along with a range of updates and improvements that strengthen and stabilize the foundational world of the Red Dead Online experience. In addition, throughout the quarter, Rockstar Games released additional content such as numerous new Weapons, Clothing, emotes, and more. Both engagement and recurrent consumer spending in the game, continue to gain momentum and Rockstar plans to continue to enhance and evolve the world of Red Dead Online with ongoing updates to drive growth over time.", "On July 1st, Rockstar Games and Twitch announced an exciting new program, through which Rockstar Games Social Club members and Twitch Prime subscribers receive free in-game rewards, bonuses, and exclusive discounts in both Grand Theft Auto Online and Red Dead Online simply by linking their Twitch Prime and Social Club accounts. Benefits continue for months to come and include special in-game benefits for both Red Dead Online and Grand Theft Auto Online. Rockstar Games plan to support both Red Dead Online and Grand Theft Auto Online with much more content moving forward and we now expect combined results from these titles to grow in fiscal 2020.", "Our first quarter results were also enhanced by Social Point's mobile games WWE SuperCard and WWE 2K19 as well as Sid Meier's Civilization VI. One of our key strategic priorities is to continue to drive growth in engagement with our titles after their initial purchase. Our ability to achieve this goal consistently results from our firm commitment to providing consumers with opportunities that are compelling of the highest quality and meaningfully add to their overall gameplay experience. To that end, during the first quarter, recurrent consumer spending exceeded our expectations, growing 55% and accounting for 67% of our total net bookings.", "In addition to virtual currency for NBA 2K, Grand Theft Auto Online, and Red Dead Online, recurrent consumer spending was enhanced by a variety of other offerings. In the free to play category, Social Point remains a meaningful contributor to our results through its two biggest mobile titles Dragon City and Monster Legends as well as World Chef and Tasty Town. In May, our Barcelona-based studio successfully launched Word Life, a new crossword game and continues to invest in its broad and innovative pipeline of new games planned for launch in the coming years.", "Recurrent consumer spending on WWE SuperCard exceeded our expectations and the title has now been downloaded nearly 19.5 million times and remains 2K's highest grossing mobile title and recurrent consumer spending on NBA 2K Online in China also outperformed growing 7% driven by the launch of NBA 2K Online 2 in August last year. Total combined registered users for NBA 2K Online 2 and its predecessor currently stand at 46 million and the franchise remains the number 1 PC online sports game in China. Asia and China in particular continues to be a significant long-term growth opportunity for our business.", "Lastly, add-on content grew nearly 135% led by our offerings for the Borderlands franchise and Sid Meier's Civilization VI. As a result of our better-than-expected first quarter operating results and increased forecast for the balance of the year, we're raising our outlook for fiscal 2020, which is anticipated -- anticipated to be another great year for our organization. Looking ahead, we have the strongest development pipeline in our history, including sequels from our biggest franchises, as well as exciting new IP. Take-Two remains exceedingly well positioned creatively , strategically, and financially to capitalize on our industry's many opportunities and to deliver growth and returns for our shareholders over the long term. With the promise of new consoles along with emerging platforms, distribution channels, business models and markets, we have tremendous potential to engage and expand further our global audience to our development team's passion and vision for creative excellence.", "I'll now turn the call over to Karl." ] }, { "name": "Karl Slatoff", "speech": [ "Thanks, Strauss. I'd like to begin by thanking our teams for delivering a strong start to the fiscal year.", "Turning now to our recent and upcoming results. On July 23rd Rockstar Games held the grand opening of the Diamond Casino & Resort for Grand Theft Auto Online. The Diamond is the one-stop destination for quality entertainment, high-end living, and a range of experiences that you won't find anywhere else. Players can engage in a Classic Casino activities such as 3-card poker, blackjack, roulette, and a variety of slot machines or watch virtual horse racing at the inside track lounge. Guests looking for high-end fashion can choose from a variety of new clothing accessories in the casino store.", "Diamond also offers the most luxurious penthouse residences in all of our Santos and owners have the ability to customize the penthouse and enjoy VIP memberships at the resort including exclusive lounges, high-limit tables, aircraft and limousine services and more. This highly engaging update also features a series of new story-based cooperative missions, open board activities and additional opportunities to earn special rewards.", "The Diamond Casino & Resort update was Grand Theft Auto Online's biggest launch ever, delivering record player engagement in daily active users, weekly active users, and monthly active users.", "Now that Red Dead Online has exited the beta phase, Rockstar Games will continue to add more free content to the game.", "Following the massive content drop in May, later this summer, the world will evolve again with the introduction of specialist roles, including tracking down wanted criminals as a bounty hunter, searching the world for treasure and other exotic items to sell as a collector or building a business as a trader.Throughout the year, Rockstar Games will continue to support both Red Dead Online and Grand Theft Auto Online with many more updates in order to drive engagement and player growth. On July 23rd, 2K released the Rise and Fall expansion pack for Sid Meier's Civilization VI on iOS through Aspyr. 2K also announced that they will bring all of the previously released add-on content for Sid Meier's Civilization VI to both iOS and Nintendo Switch later this year. Civilization VI is the fastest selling title in the history of the series -- of more than 5.5 million units worldwide.", "August 27th, Private Division will release Ancestors: The Humankind Odyssey for digital download on PC. The title is the first release from Panache Digital Games, the studio co-founded by Patrice Desilets, the original creative director of the Assassin's Creed franchise. in Ancestors: The Humankind Odyssey, players are challenged to survive and evolve in the harsh yet beautiful land of Africa spanning from 10 million to 2 million years ago.", "Ancestors will also be available for digital download on PlayStation 4 and Xbox One in December. On September 6, 2K and Visual Concepts will launch NBA 2K20, the next annual offering from our industry-leading basketball simulation for PlayStation 4, Xbox One, Nintendo Switch, and PC.The title will also be available for Google Stadia when the platform launches in November 2019.", "The NBA 2K20, standard and digital deluxe editions will feature 6-time NBA All-Star, 3-time All-NBA First Team, 3-time NBA All-Defensive team, and 2012 Olympic gold medalist Anthony Davis on the cover.The NBA 2K20 Legend Edition will feature three-time NBA Champion, 13 time NBA All-Star, 2008 Olympic gold medalist and 2006 NBA Finals MVP, Dwyane Wade on the cover. NBA 2K20 will feature the most expensive soundtrack in the history of the series with 50 tracks from artists such as Drake, Meek Mill, Billie Eilish, Post Malone and the late Nipsey Hussle. Additional sounds will be dynamically added throughout the year across genres spanning hip-hop R&B, electronic pop and rock. On September 13th, 2K and Gearbox Software will launch Borderlands 3 for PlayStation 4, Xbox One and PC. The title will also be available for Google Stadia when the platform launches in November 2019. The Borderlands franchise, which combines the exhilarating action of a first person shooter with the rich progression and loot systems of a role playing game has sold in more than 48 million units worldwide today.", "In June at E3, more than 8,000 consumers are able to experience Borderlands 3 and the reaction was phenomenal. Throughout the show, there was enormous excitement around our massive, high-energy booth with feet -- which featured larger than life statues and photo ops, 100 gameplay stations and a 100-seat demotheater. The global media in attendance lot in Borderlands 3 with more than 50 E3 award wins and nominations including Best-in-Show -- from IGM, game spot, disrupt joint, pars technica -- the E3 Game Critics and more.", "In addition, during the month June, 2K worked with our first-party partners to offer an array of low to no cost engagement opportunities including the release of a new TLC campaign for Borderlands 2, entitled Commander Lewis and they fight for sanctuary, which provides the narrative lead into the events of Borderlands 3. In addition, Borderlands: The Handsome Collection was added to Xbox game pass and was included in the PlayStation instant game collection for the month. On PC, our entire Borderlands Quebec handle was made available at a deep discount for our retail partners.", "These efforts, together with a launch of the Borderlands Game of the Year edition in April has resulted in selling of over 6 million units of Borderlands titles and over 4 million players enjoying the critically acclaimed command -- level of TLC. Later this month, Borderlands 3 will be a Gamescom in Germany impacts Western Seattle, where we will share details on an expansive post launch content plan that will keep players engaged with new experiences well past September 13th.", "The consumer excitement, leading up to next month launch Borderlands 3 is incredibly strong and we very much look forward to the next chapter in the highly successful Borderlands franchise. On October 22nd, 2K's popular WWE series will be back when WWE 2K20 launches for PlayStation 4, Xbox One, and PC. Developed by Visual Concepts, WWE 2K20 includes several franchise first alongside streamline gameplay and a variety of popular modes. Current -- Raw women's Champion Becky Lynch and WWE Superstar Roman Reigns, will service the games cover Superstars and ambassadors for its worldwide marketing campaign Step Inside, which invites players to enter the world of WWE superstars and face a variety of new and exciting challenges in the virtual realm. On October 25th, private Division will released The Outer Worlds, developed by Obsidian Entertainment, the Outer Worlds marks the reunion of Tim Cain and Leonard Boyarsky, the creators of Fallout, who are introducing an entirely new single player Sci-Fi RPG experience. Launching on PlayStation 4, Xbox One, and PC, The Outer Worlds is a dark and witty player-driven story set in a colony at the farthest reaches of the galaxy.", "In addition, the title will be coming to the Nintendo Switch following the launch on the other platforms. At E3 in June, The Outer Worlds received 4 nominations from The Game Critics Award for Best of E3 more than any other game and won the award for best original game, throughout fiscal year 2020, we will continue to support our titles with innovative post with launch content designed to drive engagement. In addition, Social Point and 2K will continue to broaden our offerings for mobile devices. Looking ahead to fiscal year 2021, Private Division announced disintegration, a new Sci-Fi first person shooter from V1 Interactive, the studio co-founded by Marcus Lehto former creative director at Bungie and co-creator of Halo.", "The title will be fully unveiled later this month at Gamescom. Private Division will have more exciting news and announcements in the coming months. Turning to Esports, the second season of the NBA 2K League, our joint venture with the NBA concluded this past weekend. Just prior to playoffs the League announced that Tencent would be their first distribution partner in China and stream condensed playoffs and finals games to the 100s of millions of daily users across Tencent sports, Tencent Video, and Tencent news. NBA 2K League content has generated more than 243 million video views across all NBA and NBA 2K League, social media platforms. In addition, NBA 2K League viewership both live and on-demand continues to rise, with the second season seeing 34% increase in views overseas over Season 1. We are very excited about the continued progress and growth of the League, which has the long-term potential to enhance engagement and to be a driver of profits for our company.", "Looking ahead, we will continue to focus on delivering the highest quality entertainment and to provide new and innovative ways to enhance players experiences with our games. To that end, we are investing heavily in opportunities to grow our scale, increase our presence in mobile and capitalize on emerging distribution channels and business models such as free to play, streaming, and subscription and subscription. The successful execution of the strategy will continue to engage our customers and generate growth and profits for our company over long-term.", "I'll now turn the call over to Lainie." ] }, { "name": "Lainie Goldstein", "speech": [ "Thanks Karl and good afternoon everyone. Today, we'll discuss our first quarter results and then review our financial outlook for the second quarter and fiscal year 2020. Please note that additional details regarding our actual results and outlook are contained in our press release. As Strauss mentioned fiscal 2020 is off to a terrific start. The first quarter operating results that exceeded our expectation. Total net bookings grew 46% to $422 million as compared to our outlook of $310 million to $360 million. This outperformance is driven primarily by better than expected results from Grand Theft Auto Online and Grand Theft Auto V, NBA 2K19 and the Borderlands franchise.", "Recurrent consumer spending grew 55% and accounted for 67% of total net bookings. as compared to our outlook of over 20% growth. The current consumer spending exceeded our expectations due primarily to the outperformance Grand Theft Auto Online and NBA 2K.", "Digitally delivered net bookings grew 51% percent and accounted for 91% of the total, as compared to our outlook of over 20% growth. This result exceeded our expectations due to the outperformance of recurrent consumer spending and higher than forecasted mix of digitally delivered full game sales. During the first quarter, 75% of current generation console games were delivered digitally, up from 53% last year.", "Turning to some details from our first quarter income statement. GAAP net revenue grew to $540 million and cost of goods sold increased to $241 million. Operating expenses increased by 33% to $247 million due primarily to higher marketing and R&D costs and GAAP net income was $46 million or $0.41 per share as compared to $72 million or $0.62 per share in the first quarter of fiscal 2019. Adjusted operating cash flow increased to nearly $47 million and we ended the period with $1.54 billion in cash and short-term investments.", "Now, I will review the highlights of our fiscal 2020 financial outlook. Starting with the second quarter, we project net bookings to range from $860 million to $910 million, up from $583 million in the second quarter last year. The increase is driven primarily by the release of Borderlands 3, the largest contributors to net bookings are expected to be NBA 2K20, Borderlands 3, Grand Theft Auto Online and Grand Theft Auto V, Red Dead Redemption 2 and Red Dead Online and Social Point's mobile offerings. We project recurrent consumer spending to grow by over 20%. This growth is expected to be driven by NBA 2K, Borderlands 3, and Red Dead Online, as well as modest growth from Grand Theft Auto Online. We expect digitally delivered net bookings to increased by more than 40%. Our forecast assumes that 48% of our current generation console games will be delivered digitally, up from 47% in the same period last year.", "That GAAP net revenue to range from $855 million to $905 million and cost of goods sold range from $415 million to $442 million. Operating expenses are expected to range from $312 million to $322 million. At the midpoint, this represents 37% increase over last year driven primarily by higher marketing and R&D costs and GAAP net income is expected to range from $118 million to $130 million or $1.04 to $1.14 per share. For management reporting purposes, we expect our tax rate to be 17% throughout fiscal 2020.", "Turning to our outlook for the full fiscal year, we are raising our outlook as a result of better than expected first quarter operating results and increased forecast for the balance of the year. We now expect net bookings to range from $2.6 billion, $2.7 billion, up from our prior outlook of $2.5 billion to $2.6 billion. Compared to the prior year, we expect NBA 2K and WWE 2K to grow, offset by lower results from Red Dead Redemption 2 and Grand Theft Auto V and Grand Theft Auto Online. The largest contributors to net bookings are expected to be NBA 2K, Grand Theft Auto Online and Grand Theft Auto V, Borderlands 3, Red Dead Redemption 2 and Red Dead Online, The Outer Worlds and WWE 2K.", "We expect the net bookings breakdown from our labels to be roughly 60% 2K, 30% Rockstar Games, and 10% Private Division, Social Point and other and we forecast our geographic net bookings to be about 65% United States and 35% international. We now expect recurrent consumer spending to increase in the mid teens, up from our prior outlook of low single-digit growth, driven primarily by higher expectations for Grand Theft Auto Online and NBA 2K. Importantly, we now expect combined results from Grand Theft Auto Online and Red Dead Online to grow in fiscal 2020. This growth excludes the value that was allocated to recurrent consumer spending from the Red Dead Redemption 2 premium edition.", "We now project digitally delivered net bookings to grow in the high teens. This is up from our prior outlook of low double-digit growth, driven primarily by our increased forecast for recurrent consumer spending and a higher mix of digitally delivered full game South. Our outlook assumes that 55% of current generation console games will be delivered digitally, up from 38% last year. We expect to generate more than $450 million and adjusted operating cash flow and we plan to deploy approximately $90 million for capital expenditures. We expect GAAP net revenue to range from $2.83 billion to $2.93 billion and cost of goods sold to range from $1.3 billion to $1.34 billion.", "Total operating expenses are expected to range from $1.07 billion to $1.09 billion. At the midpoint, this represents a 15% increase over the prior year, driven primarily by higher marketing R&D and personnel costs, and we expect GAAP net income to range from $425 million to $454 million or $3.71 to $3.96 per share.", "In closing, fiscal 2020 is off to a fantastic start. It's poised to be another outstanding year for Take-Two, driven by the talent of our creative teams and our management's unwavering commitment to operational excellence. We have a strong financial foundation that enables us to pursue a variety of opportunities to enhance our strategic positioning and increase our ability to deliver growth and margin expansion over the long term.", "Thank you. I'll now turn the call back to Strauss." ] }, { "name": "Strauss Zelnick", "speech": [ "Thanks Lainie and Karl. On behalf of the entire management team, I'd like to thank our colleagues for their hard work in delivering an excellent start to the year. To our shareholders, I would like to express our appreciation for your continued support and we'll now take your questions. Operator?" ] } ]
[ { "name": "Operator", "speech": [ "At this time, we will be conducting a question-and-answer session. [Operator Instructions]. Our first question comes from the line of Eric Handler with MKM Partners. Please proceed with your question." ] }, { "name": "Eric Handler", "speech": [ "Good afternoon and thank you for the -- thank you for the question. Two things. First, I wondered if you could talk about Red Dead Redemption Online and maybe you could give a few metrics about engagement or the ramp in revenue that you have seen since the game has come out of beta and gone live. And then secondly, wondered if you could give a little color about the private division. Obviously, you made a recent announcement for one game coming out in fiscal '21, but at this point, how many games have you signed up for Private Division and how big of an opportunity do you see that to be over the next 12 months." ] }, { "name": "Strauss Zelnick", "speech": [ "Thanks, Eric. This is Strauss. So on Red Dead Online, we exited the Beta phase on May 14th with a huge update and created a lot of opportunity to enjoy the online world. We also introduced Poker at that time. In addition, throughout the first quarter, Rockstar released additional content including new weapons, clothing, emotes, and others, which I mentioned earlier. We're not giving out any statistics; however, we're really thrilled with the sales of Red Dead Redemption 2 at over 25 million units and we're excited about the continuing momentum with Red Dead Online. We've also said that we expect that Rockstar Online, which is both Red Dead Online and Grand Theft Auto Online should be setting a new record this year. So couldn't be more excited. And Karl will talk about Private Division." ] }, { "name": "Karl Slatoff", "speech": [ "So for private Division, we've announced three titles to date. We've been -- Private Division has been in existence for quite some time and we tend to only announced things when we are ready to announce things about games themselves. We have a lot of other activity that we haven't talked about in Private Division, but those are the three games that we've announced, ancestors with Patrice Desilets at Panache games. We have The Outer Worlds with Obsidian and we also have -- we just announced recently of this integration was V1 which is marketplace of a studio. So that's all we have to say, but you should expect more in the future." ] }, { "name": "Eric Handler", "speech": [ "Thank you very much." ] }, { "name": "Operator", "speech": [ "Our next question comes from the line of Matthew Thornton with SunTrust. Please proceed with your question." ] }, { "name": "Matthew Thornton", "speech": [ "Hey, good afternoon and thanks for taking my question and congrats on the strong results. Maybe just on -- first on Borderlands. Can you help us maybe -- as we think about recurrent revenue on Borderlands 3, how can we think about or maybe compare and contrast Borderlands versus Red Dead this year, yes obviously last year, you talked about Red Dead having about 17% attach rate of premium SKUs obviously the beta took a couple of quarters, although there wasn't a lot of MTX per se, it's out there with Borderlands 3 we'll get a DLC but just any comparing and contrasting on the recurrent revenue for the key frontline release there would be really helpful.", "And then just I'll throw it out there, any high level commentary you'd be willing to offer on -- on the out years plays would be -- would be great as well? Thanks guys." ] }, { "name": "Karl Slatoff", "speech": [ "Hi, it's Karl. Just in terms of Borderlands 3, we haven't discussed too much about our plan for recurrent consumer spending. But its with most our games, if not all of our games. We have a robust plan around delivering post launching gate content to engage consumers. And it's -- it will be quite a bit different than Red Dead Online. For the most part, we've talked about DLP content, so story-driven mission-based content, there'll be some cosmetics with Borderlands 3. But it is a different kind of experience. As we said before, 2K is going to be announcing more about that in the not-too-distant future. So you'll get some more -- a little bit more clarity on exactly what we have to offer. But it's history and we don't really talk about engagement and attach, but I think most of the people on the call know that Borderlands has a very strong history of delivering a lot of downloadable content and having great success with that.", "So obviously, we're very excited about that plan." ] }, { "name": "Lainie Goldstein", "speech": [ "About R&D expenses." ] }, { "name": "Karl Slatoff", "speech": [ "Yeah, in terms of our out-years release schedule, we basically disclosed everything that -- we've already disclosed everything that we're talking about now. So there's nothing more to say about that. Other than the fact that we do have -- and you can see in our numbers, we have to talk about R&D expenses going up particularly in this year, which would be indicative of investment in new titles. So that is in fact what's going on. And we've got a very robust maybe our most robust line -- pipeline of all time for new IP, a lot of that driven a Private Division, but there's new IP throughout the entire company as well.", "So again, you'll be hearing more about that soon in the future." ] }, { "name": "Operator", "speech": [ "Our next question comes from the line of Ben Schachter with Macquarie Group . Please proceed with your question." ] }, { "name": "Ben Schachter", "speech": [ "Hey, guys congrats on the continued great execution. Few questions, one, you raised the year by more than the beat in the quarter. So what specifically are you seeing and then perhaps related to that Rockstar stated that the casino expansion was the biggest effort ever. And I think they were referring to overall players on day-one and during the week. Can you help translate that into how it impacts your monetization and how that influences guidance for the year. And then separately, Strauss heading into the launch of cloud services, the new console of next year and obviously the continued growth of mobile, how do you think platform fees may evolve, should we expect the platform owners to operate similarly to what we've seen in the past, or do you think things are going to change? Thanks." ] }, { "name": "Lainie Goldstein", "speech": [ "For the fiscal year guidance increase, it is driven primarily by the first quarter beat. But we've also updated our forecast for the remainder of the year and the primary increases our GTA V, GTA Online and Borderlands 3." ] }, { "name": "Karl Slatoff", "speech": [ "And in terms of the new casino update. This has been our biggest ever for Grand Theft Auto Online, which is saying a lot and we've seen already is record player engagement in daily, weekly, and monthly active users with a lot of more content coming. So it's looking just fantastic and of course, we're up year-over-year in the quarter, which is great.", "Turning to platform fees, look with competition, I think you have to expect that we will do much better in terms of tick rates. You're already seeing that some recently launched platforms have announced lower fees, and if you go from an oligopoly environment to a broadly competitive environment, I think that has to be your expectations, and I would just note that obviously got benefits the company directly as those fees decline and that's not even counting -- that doesn't even count of course the volume, so I think it's going to be sort of the food is both tasty and plentiful, which is nice." ] }, { "name": "Ben Schachter", "speech": [ "Great. If I could sneak one more in -- just Lainie, I think you mentioned capex was $90 million. Could you remind me where it was last year, and what are you spending the bulk on this year? Thanks." ] }, { "name": "Lainie Goldstein", "speech": [ "Last year it was $60 million for the year and this year, the increase is driven by some development kits , as well as some build outs some new office throughout the organization." ] }, { "name": "Operator", "speech": [ "Our next question comes from the line of Drew Crum with Stifel. Please proceed with your question." ] }, { "name": "Drew Crum", "speech": [ "Okay. Thanks. Hey guys, good afternoon. So Strauss, understand you guys don't provide specific guidance on individual titles. We're coming off a very strong performance for NBA 2K19, this conceptually, what are your thoughts around perennial titles and I guess sports included and how they perform late in a hardware cycle and whether or not they're more susceptible to weaker sales as consumers look ahead purchasing new consoles and then I guess separately for Lainie, maybe I'll ask Ben's question a little bit differently here, you're guiding Rockstar Online to be up in fiscal '20.Does that include growth for GTA Online? Thanks." ] }, { "name": "Karl Slatoff", "speech": [ "Thanks, Drew for your question. We've been blessed by the amazing work that Visual Concepts and 2K do on NBA 2K and we're having a record setting year again this year with NBA 2K19, which has sold in over 12 million units and recurrent consumer spending was of a 140% in the quarter just amazing with extraordinary growth in average games played and daily active users really across the border and I attribute that to, not only that we have the industry-leading same game, but that there -- you can inhabit this game and enjoy its sort of the lifestyle that it offers for -- in addition to playing the same game itself.", "I think 6, 7 years ago, basketball was a 3-month experience and now it's 9-10-month experience and we think it's going to grow to be a full 1-your experience. To address your question, particularly, the last console cycle had no negative influence on us and frankly not really much on the industry, because the entire platform businesses diversifying -- the PC format and particularly since that's now all digital has transformed that business that can be 40% 50% of the release of a console release now if you're out on all those platforms and that will continue to grow. So we expect that the new console generation will be significant net positive and there is nothing about an annualized sports title that would play out differently." ] }, { "name": "Lainie Goldstein", "speech": [ "For Rockstar Online, for the fiscal year '20 growth, you have to expect the two games together to grow. The GTA Online, for the full year will be, will be down over last year, Q1 and Q2 are up over the prior year. So, it's still really early in the year, so we'll see how the rest of the year plays out, but right now the 2 together are up." ] }, { "name": "Drew Crum", "speech": [ "Okay. Very helpful. Thanks guys." ] }, { "name": "Operator", "speech": [ "Our next question comes from the line of Brian Nowak with Morgan Stanley. Please proceed with your question." ] }, { "name": "Brian Nowak", "speech": [ "Thanks for taking my questions. I have two, just to come back to Red Dead Online, another incredible quarter out of GTA Online. I was wondering if you could just talk to us all about any differences you noticed in player engagement or player behavior in Red Dead Online that could change the way you think about the long-term monetization opportunity for game like Red Dead as opposed to a game with GTA, which just continues to surprise to the upside and the second one on mobile, Karl, I think last quarter you talked about, there were 10 games in development at Social Point. Just any update there and how you think about the timing of those releases and what's the impact from those in the full year guide for this year? Thanks." ] }, { "name": "Karl Slatoff", "speech": [ "Well, thanks, with the game like Red Dead, where you can engage significantly with the characters in the games, we think there are wonderful opportunities for players to experience the Red Dead Online World on an ongoing basis, especially as new content has dropped and we don't -- we tend to focus on the experience first, we want to make something that consumers love and engage with and then monetization follows. But we do feel there are and will be plenty of opportunities to create recurrent consumer spending, based on the format of the Red Dead Online World." ] }, { "name": "Strauss Zelnick", "speech": [ "I mean, in terms of Private -- Sorry not Private Division, Social Point. Yeah. As you know, our two main titles continue to perform very, very well and we have announced that we've had approximately 10 games in development, that hasn't really changed. Games can come in and come out, but that sort of reflects what the capacity is for that division in terms of having and things in different stages of the pipeline at any given point. We did launched Tasty Town in January to a global launch and we also launched Word Life in May and so, not every game makes it, but the good news is we've got games that are actually coming out and are worthy of -- global launch. So we continue down that path and like I said you can expect to see new games coming out of Social Point all the time. But that 10-number is still a good number." ] }, { "name": "Brian Nowak", "speech": [ "Great. Thanks guys." ] }, { "name": "Operator", "speech": [ "Our next question comes from the line of Todd Juenger with Sanford Bernstein. Please proceed with your question." ] }, { "name": "Todd Juenger", "speech": [ "Hi, thanks. Thanks for taking the questions. Notwithstanding the long list of sort of double-digit growth rates in the quarter, I did see those, but I'd love to talk a little bit about growth over the horizon. And I guess Strauss or Karl who -- whoever wants to take it. There's not that many examples I can think of of companies in your business of your size or bigger that are able to organically grow over time consistently. I just wonder, I guess do you guys subscribe to a view that at a certain size it gets harder and harder for a company in your business to grow or do you think that's a false cue and it takes a follow on. I'll just keep it to one or two but can -- does it mean that you guys will have to perhaps start introducing more than one frontline title other than NBA 2K a year, does online services sort of change that need or replace extra releases and that sort of growth algorithm and what does that mean for your organization, just thinking over the horizon of how you keep this going? Thanks." ] }, { "name": "Karl Slatoff", "speech": [ "Well, I really appreciate it. And, yes, you're right -- lot of big numbers as the numbers get bigger, of course, growing at the same rate will become more challenging, but we have this wonderful situation in the marketplace, which is the sector has extraordinary tailwinds. And we expect those to continue and that's driven by the growth in the cohort that enjoys video games, remember people consume for the rest of their lives, the entertainment that they love the age of 17, the video game business is about 30 years old, 35 years old effectively and the average player age today is around 37 or 38. So plenty of room for growth as people age, more people come into the market. But people don't stop playing video games.", "So for 20 or 25 years, demographics will grow, will cause the industry to grow and industry participants who do a good job will benefit from that. We're also seeing growth from geographies that we're currently not involved in, for example, Africa and India, to a lesser extent, Russia -- Russia, the Middle East, and of course, China where we currently have a meaningful business, but we think there's a lot of growth opportunity there as well. And third, growth in new business models, new technologies such as streaming and new kinds of games, I would just observe 10 years ago, there was no mobile business and today that's $60 billion marketplace. And at the same time, that sprung up and grown the core console and PC businesses continue to grow at a rapid clip. So this industry is the most rapidly growing industry in entertainment and that's not going to change for the next 10, 20, 25 years.", "Now with that backdrop, can we fail to execute, of course we can. So what are we doing about it. First, our focus is on being the most creative, the most innovative, and the most efficient company in the business. We take that incredibly seriously and the reflection of that are the quality of what we do most of the time and the reflection of that is in the financial results that we're able to deliver more often than not. Right now, we are increasing -- to your specific question, we are increasing our investment in development, we are increasing our R&D investment. We do expect to enhance our release schedule. We launched Private Division, we bought Social Point and I think you can expect opportunities are both driven organically and driven inorganically.", "So finally, when we took over this company roughly 12 years ago, we had $700 million in net revenue. This year we're projecting to $2.5 billion, $2.6 billion in net bookings. That is primarily organic growth. We've done a few acquisitions, but primarily that's organic growth. And I'd be low to give you a prediction of an annual growth rate. I can't really do that, but what I can tell you is we're duty bound to deliver new IP every year and new releases of franchise IP, we're duty bound to deliver the biggest and best titles in the business and it's our job to create hits and more often than not, we do that. If we do that, we're going to have a great set of results and if we can add on some inorganic growth, which is also part of our current strategy selectively in a highly disciplined way, then we can deliver even more growth, and one of the -- I'd like -- I would like to say, you know you can listen to the words, but it's always better to look at the actions because that's probably what will be repeated and our actions are we deliver hits and we deliver organic growth." ] }, { "name": "Todd Juenger", "speech": [ "Really appreciate that. Thanks a lot for the thoughts." ] }, { "name": "Operator", "speech": [ "Our next question comes from the line of Mike Olson with Piper Jaffray. Please proceed with your question." ] }, { "name": "Mike Olson", "speech": [ "Hey, good afternoon. As you mentioned, GTA is performing better than expected and I'm sure the majority of that outperformance has to do with development of compelling content from Rockstar but just curious, while you don't directly monetize some of the things that have been going on with (inaudible) et cetera. How much of the strong recent interest in the title is from those types of -- kind of outside activities positively impacting GTA Online and also helping maintain player engagement or reengage the base?" ] }, { "name": "Karl Slatoff", "speech": [ "We do think it's had a big impact along with the exposure of GTA and the popularity of GTA and Twitch, which has led to this relationship with Twitch Prime that we're super excited about. So it is -- we are all astonished and delighted that 6 years after the initial release Grand Theft Auto V and Grand Theft Auto Online are even bigger cultural phenomena than ever. But as you pointed out, what's that driven by, that's driven by the content that Rockstar continues to deliver to the audience and the respect that Rockstar shows its audience and the desire to keep being on the cutting edge of entertainment. You know that's our goal around here and Rockstar, personifies the execution of that." ] }, { "name": "Mike Olson", "speech": [ "Absolutely. And then as previously discussed on the call here, you've -- you've got some interesting Private Division titles coming out this year and next. I know it's really hard to say and you don't want to give specific guidance, but maybe just qualitatively, what's kind of the best way for investors to think about potential contribution from those titles like how additive, do you think they can be versus some of your other titles?" ] }, { "name": "Karl Slatoff", "speech": [ "The structure of those titles economically are as we -- if we are able to create hits, they have the same pound-for-pound economic benefit than any of our other titles around here. So there is a great opportunity. But that opportunity would be deliver -- delivered to the extent that we deliver hits and we never claim success before we have it ever. That said, our expectations are high. The buzz is very strong. The team there led by Michael Worosz takes the quality part of our strategy exceedingly seriously, they are very disciplined, they are very, very selective and we're grateful that we get to work with some of the best creators on earth." ] }, { "name": "Mike Olson", "speech": [ "Thank you." ] }, { "name": "Operator", "speech": [ "Our next question comes from the line of Ryan Gee with BAM. Please proceed with your question." ] }, { "name": "Ryan Gee", "speech": [ "Yes. Hi. Good afternoon. Thanks for taking the questions. So I wanted to understand the accelerating growth for NBA 2K, I know unit sales are up, but beyond that, how much has it performance there been really a function of getting more players to go online versus really growth in ARPU for the existing players and if it is the latter, what were some of the significant changes you guys have done and how much room do you think there is to push that ARPU button higher and then follow-up, I know you guys called out GTA Online has performed really well since the Casino update in terms of player engagement and users. But I don't recall if you said anything specifically about Red Dead coming out of the beta. So 2 months on what are you guys seeing in terms of players and engagement for that title? Thanks." ] }, { "name": "Karl Slatoff", "speech": [ "So yes, NBA 2K19 is in fact actually exceeding our expectations and it's really changed over the year. I don't know if you recall that we weren't necessarily projecting the units would be higher than they were a year-over-iteration of iteration, now we are significantly. We're already nearly 12 million units at this point. So it is certainly growth in units that always helps. And you've got -- we've got a higher base of people playing a game that creates this virtual -- this virtual circle that obviously has a positive effect on RCS as well.", "So RCS is up 140% quarter-over-quarter -- year-over-year for this quarter. That's a huge change for us, and yes, of course, the number of units in getting more players in had a lots of doing that, but also I think how we're more effectively engaging folks, because the people are engaged and we give them more things to do, then ultimately that leads to positive things from an economic standpoint and some of the things that we've done, because we've learned from the past is that as Strauss mentioned this before as that we're focused on trying to keep people engaged throughout the entire year. I mean through the entire season, certainly through -- through the end -- through the summer in the playoffs, through the end of the season. And then also through the summer and the way that we do that is -- first of all, I think the NBA 2K League has driven more interest and that engages folks ultimately and the league just ended, a few weeks ago. And also just a different mix of game modes that appeals to a broader audience and play styles, there is promotional activity that we've -- that we've tried over the past few months new player virtual currency bundles and also some late cycle content. So it's really a combination of a lot of things that helps drive people to the game, but also giving them more engagement in the game and if they are more engaged in the game, they're are going to spend more money, ultimately and there's a lot of dry powder there. We're still, I would say, we're still in that early innings of learning how to do this the best." ] }, { "name": "Strauss Zelnick", "speech": [ "Yeah and with regard to Red Dead Online, we said that post coming out of beta in May, the title has been performing better and better and gaining momentum, but we don't have any more statistics to share except to say that it's going well, continuing to go better. And then we're very, very optimistic." ] }, { "name": "Ryan Gee", "speech": [ "Okay. Great. And if I could just sneak one more in there. Lainie, I believe that you Borderlands 3, you guys feel better about it. How should we think about the opportunity for that in Fiscal '20 relative to the 25 million plus that I think has sold in life to date that you guys recently disclosed. Thanks." ] }, { "name": "Lainie Goldstein", "speech": [ "So Borderlands 2, we've sold in to-date 22 million units. And it's always our aim to grow each sequel of our franchises from iteration-to-iteration and the consumer excitement is incredibly strong. So we're really excited about the title and when we looked at our numbers for the remainder of the year, we were able to bring up the forecast based on what we've been seeing." ] }, { "name": "Operator", "speech": [ "Our next question comes from the line of Mike Ng with Goldman Sachs. Please proceed with your question ." ] }, { "name": "Mike Ng", "speech": [ "Great. Thank you for the question. I just have one for, Karl, and one for Lainie. Karl, you mentioned that the Borderlands franchise sold in about 48 million units to date and I think that's up from 41 million, as recently as February. Could you talk a little bit about how the 7 million units or so sold in the last 5 to 6 months, inform your view about Borderlands 3 if at all and has that increased your confidence about the title. And then for Lainie, I think you mentioned the combined results for RCS for GTA Online and RDR will grow this year, excluding the premium unit headwind, including that would it still grow? Thanks." ] }, { "name": "Karl Slatoff", "speech": [ "So for Borderlands 3, we are very -- about where things are right now and from a bus perspective, but also from an economic performance perspective. We probably would have never anticipated that our catalog sales for the previous Borderlands releases would have accelerated as much as they did and -- come without real effort and real planning. But I think the response has been -- has certainly outweighed our expectations. So I would say if anything in the past couple of months of activity which not just starting with the various marketing team of 2K has undertaken. But the actual -- just the promotional activity that we've had and the reaction from consumers -- where they're actually opening up their checkbooks and spending money that bodes very, very well for Borderlands 3. So we're very excited about that." ] }, { "name": "Lainie Goldstein", "speech": [ "So in terms of Rockstar Online. Yes, we said it would grow without the special edition VC allocation and it's not growing at this moment, including it. But it's still early in the year. So we'll see how the year stretches out." ] }, { "name": "Mike Ng", "speech": [ "Great. Thank you, both." ] }, { "name": "Operator", "speech": [ "Our next question comes from the line of Ray Stochel with Consumer Edge. Please proceed with your question." ] }, { "name": "Ray Stochel", "speech": [ "Great. Thanks for taking my questions . So digital grew and recurrent spending grew a lot, is there any way that we can think about the gross margin contraction in the quarter, it looks like some heavy software development costs and royalties, and then separately on the expense side, is there any timing that you're calling out around marketing either pushed or pulled forward in the period? Thanks." ] }, { "name": "Lainie Goldstein", "speech": [ "So in terms of digital and recurrent consumer spending, it is continuing to help grow the gross margin and you'll see that on the full year. In the quarter, we have a new release coming out and with that we have additional software expense and development costs, so that would be a little bit higher in the quarter. In terms of the expenses in Q1, there was a little bit of marketing that didn't happen during the quarter, that's going to get pushed out for the remainder of the year. You'll see the biggest marketing in Q2 and Q3 around our biggest releases as and then it'll come down a little bit in Q4." ] }, { "name": "Ray Stochel", "speech": [ "Great . Thanks again." ] }, { "name": "Operator", "speech": [ "Our next question comes from the line of Clay Griffin with Deutsche Bank. Please proceed with your question." ] }, { "name": "Clay Griffin", "speech": [ "Hi. Good afternoon. Look, I know you all like for your labels to take the lead and announcing new content and fully appreciate all the color you guys have given on GTA Online for the year, but I guess, can you just help us think about maybe the relative scale and scope of the content as planned for this year, perhaps relative to the past couple of years?" ] }, { "name": "Karl Slatoff", "speech": [ "Lots more." ] }, { "name": "Clay Griffin", "speech": [ "Okay. Great. And then, I guess just with Stadia, can you maybe talk about the relative ease or difficulty in taking Red Dead and even Grand Theft Auto to that platform from a technical perspective, it would seem like the single player experience at the very least could potentially be very successful there?" ] }, { "name": "Karl Slatoff", "speech": [ "Yeah, it's technically there -- it's relatively seamless. There are some minor challenges, nothing that we can't surmount. We are supportive of Stadia, we feel really good about that release. We've always said that you want to distinguish a distribution technology from a business model, the business model that we're using is one that's tried and true, which is downloading our streaming for sale. And there is not a lot of friction to make our titles available and Google has been exceedingly helpful. We feel very good about the opportunity. It remains to be seen -- how the platform works, they're awfully talented and very, very committed. So fingers crossed that meets and exceeds consumers expectations" ] }, { "name": "Clay Griffin", "speech": [ "Okay. Great. Thanks." ] }, { "name": "Operator", "speech": [ "Our next question comes from the line of Doug Creutz with Cowen and Company. Please proceed with your question ." ] }, { "name": "Doug Creutz", "speech": [ "Hey. Thanks. One of the interesting things about this new console cycle is that you and your peers are going to face the need to migrate these large online gaming communities from one gen to another and one could I think there might be some challenges with that especially for titles who don't come on an annual basis. As far as Red Dead Online and GTA Online, how are you thinking about that transition, do you see any particular challenges or opportunities, is separating the client for the online from the base game something you considered to kind of ease that transition for players, anything you can say and that would be helpful? Thank you." ] }, { "name": "Karl Slatoff", "speech": [ "It's Karl. From a tech perspective, I mean, one thing to keep in mind is generations -- if you look at the releases that happen in the early part of the new generation versus the later part of new generation, it's not necessarily a hugely leap and what you see is generation -- the releases at the end of generation tend to look very different than the releases at the beginning of generation. So when you're talking about track with putting games onto releasing games or preexisting games or even games that existed before and you're doing a sequel. Bring them to the next early on in the generation, there is certainly technical challenge, but you're not necessarily going to be taking advantage of everything that those new generations have to offer. So it's not as disruptive as you may think. It also presents an opportunity to do something more with something that you've got out before, because one thing is for sure, if you just take something and try to coat it over, it's not necessarily going to generate any buzz. And most of the platforms are really talking about backward compatibility this time around as well. So that certainly is not going to resonate.", "So it is -- challenges, but it's not as disruptive as you may think." ] }, { "name": "Strauss Zelnick", "speech": [ "Right. And just, I mean, while it's maybe not a perfect analogy. We launched NBA 2K Online 2 in China and NBA 2K Online, the first version is still in market they are both in market simultaneously and our recurrent consumer spending is way, way up year-over-year. We have the highest registered user base we've ever had. So again, I'm not sure it's a perfect analogy, but when you give people something they love and then you continue to support us, and then potentially offer a new version for -- whether it's a new version of the title itself or new version to reflect, a new distribution platform or technology or console cycle, your audience is going to expand.", "And your second question about would you ever consider splitting your purchase of a game from an online community. When you use the word ever, we will consider anything that's good for the consumer and makes sense for us, we're not a rule-based organization. I would just observe though the metrics around free to play are very different than the metrics around console or PC released with a subsequent online event that's ongoing. And it's nice to be in a position where we deliver something that some such high-quality that consumers are prepared happily to pay an entry price and then will stay engaged with a title that on a stand-alone basis could look a lot like a free-to-play title. But by tethering it to the initial release, we pre-qualify the consumer and the economics are obviously vastly more powerful. So we're open minded about any business model in the fullness of time, but I think our current business model is very receptive to the needs of consumers and also speaks to the needs of the producing organization and our creative folks . And as I've said on numerous occasions, whenever you're trying to assess whether a particular business model works and entertainment, look for that intersection of what's good first and foremost, for the consumer. And then secondly, what's good for the producer and the distributor and you have to find the sweet spot that encompasses both of those things or you will have an unstable environment, an environment that either can't support the consumer or can't support the producer or distributor." ] }, { "name": "Doug Creutz", "speech": [ "Thanks. It's very helpful." ] }, { "name": "Operator", "speech": [ "Our next question comes from the line of Alex Giaimo with Jefferies. Please proceed with your question." ] }, { "name": "Alex Giaimo", "speech": [ "Okay. Thanks for taking the question. Maybe just going back to the question on annualized releases. Do you see an opportunity in the future to bring forward more annualized content outside of the WWE and NBA. I know historically you said you don't necessarily believe in non-sports annualized content, but maybe on the sport side, are there any opportunities you're seeing and maybe some other under-monetized sports that might make sense to pursue. And then quickly if you guys can just provide an update on what you're seeing from the NBA initiatives in China. Thanks." ] }, { "name": "Karl Slatoff", "speech": [ "So what we've said is, we wouldn't expect to annualize any titles other than sports titles. We have represented other sports in the past, we've had baseball, we have boxing, we've had hockey, we currently have golf and we are excited about expanding that business to the extent it makes sense for us and for the consumer, but there really aren't that many powerful sports and right now the REITs are spoken for by some of our competitors. So I don't think you should expect that you're going to see a big array of new titles in the sports environment for us, but we are ambitious and we are open-minded and if REITs became available, I believe we would be at the front of the line given the quality of our development.", "In terms of NBA, the NBA in China. Look NBA is beloved in China and NBA 2K Online in China reflects that and we think there is a lot of opportunity for growth, particularly in mobile and as I've said before, I'm of the view and this has got to be a particularly unpopular view today that the Chinese market will soften, will open up, will be more congenial to all forms of Western Entertainment and while that won't happen overnight, we're good participants in the market, we have great local partners, including Tencent. We comply with government restrictions and we think that it is possible that that market will open up and we intend to be first in line to the extent if it does. We also would love to see some engagement with regard to the NBA 2K League in China and we think there is some potential opportunity there with Tencent." ] }, { "name": "Alex Giaimo", "speech": [ "Thank you." ] }, { "name": "Operator", "speech": [ "Ladies and gentlemen, we have reached the end of the question and answer session. And I would like to turn the call back to management for closing remarks." ] }, { "name": "Karl Slatoff", "speech": [ "We'd like to thank you all for your interest and for joining the call and I think it bears repeating that all of these results are a reflection of the work done by some 5,000 people in our organization worldwide. First and foremost, our extraordinary creative folks across all four of our label groups and then of course, our business folks who distribute and market the products and account for the numbers and provide legal services and keep all the trains running on time. We have an amazing culture here, we have an amazing array of colleagues. We're all aligned, we're all heading in the same direction. We love what we do, we do so with a smile on our faces and all of us here are so grateful for the work of all of our colleagues around the world and I hope that comes across. I just want to also say, it was not clear from this call. We're immensely optimistic about our prospects for the remainder of this year and for the years ahead. It's a challenge every day, but it's a challenge that we relish and we're proud of what we've been able to do so far and we all firmly believe this is just the beginning. So, thanks for joining us today." ] }, { "name": "Operator", "speech": [ "[Operator Closing Remarks]." ] } ]
TTWO
2021-02-08
[ { "description": "Senior Vice President of Investor Relations and Corporate Communications", "name": "Nicole Shevins", "position": "Executive" }, { "description": "Chairman and Chief Executive Officer", "name": "Strauss Zelnick", "position": "Executive" }, { "description": "President", "name": "Karl Slatoff", "position": "Executive" }, { "description": "Chief Financial Officer", "name": "Lainie Goldstein", "position": "Executive" }, { "description": "Barclays -- Analyst", "name": "Mario Lu", "position": "Analyst" }, { "description": "Goldman Sachs -- Analyst", "name": "Michael Ng", "position": "Analyst" }, { "description": "Baird -- Analyst", "name": "Colin Sebastian", "position": "Analyst" }, { "description": "Cowen and Company -- Analyst", "name": "Doug Creutz", "position": "Analyst" }, { "description": "Morgan Stanley -- Analyst", "name": "Brian Nowak", "position": "Analyst" }, { "description": "Deutsche Bank -- Analyst", "name": "Bryan Kraft", "position": "Analyst" }, { "description": "Truist Securities -- Analyst", "name": "Matthew Thornton", "position": "Analyst" }, { "description": "Evercore ISI -- Analyst", "name": "Benjamin Black", "position": "Analyst" }, { "description": "The Benchmark Company -- Analyst", "name": "Mike Hickey", "position": "Analyst" }, { "description": "MKM Partners -- Analyst", "name": "Eric Handler", "position": "Analyst" }, { "description": "Credit Suisse -- Analyst", "name": "Stephen Ju", "position": "Analyst" }, { "description": "Bank of America Merrill Lynch -- Analyst", "name": "Ryan Gee", "position": "Analyst" } ]
[ { "name": "Operator", "speech": [ "Greetings, and welcome to the Take-Two Q3 fiscal year '21 earnings call. [Operator instructions]. It is now my pleasure to introduce your host, Nicole Shevins, senior vice president of investor relations and corporate communications. Thank you, Nicole.", "You may begin." ] }, { "name": "Nicole Shevins", "speech": [ "Good afternoon. I recently joined Take-Two. And I'd like to thank you for joining our conference call to discuss our results for the third quarter of the fiscal year 2021 ended December 31, 2020. I'm thrilled to join the team and look forward to working with all of you.", "Today's call will be led by Strauss Zelnick, Take-Two's chairman and chief executive officer; Karl Slatoff, our president; and Lainie Goldstein, our chief financial officer. We will be available to answer your questions during the Q&A session following our prepared remarks. I'd like to remind everyone that statements made during this call that are not historical facts are considered forward-looking statements under federal securities laws. These forward-looking statements are based on the beliefs of our management as well as assumptions made by and information currently available to us.", "We have no obligation to update these forward-looking statements. Actual operating results may vary significantly from these forward-looking statements based on a variety of factors. These important factors are described in our filings with the SEC including the company's most recent Annual Report on Form 10-K and Quarterly Report on Form 10-Q including the risk summarized in this section entitled Risk Factors. I'd also like to note that unless otherwise stated, all numbers we will be discussing today are GAAP and all comparisons are year over year.", "Additional details regarding our actual results and outlook are contained in our press release, including the items that our management uses internally to adjust our GAAP financial results in order to evaluate our operating performance. Our press release also contains a reconciliation of any non-GAAP financial measure to the most comparable GAAP measure. In addition, we have posted to our website a slide deck that visually presents our results and financial outlook. Our press release and filings with the SEC may be obtained from our website at take2games.com.", "And now, I'll turn the call over to Strauss." ] }, { "name": "Strauss Zelnick", "speech": [ "I'd like to welcome Nicole to our team, and I'm confident that she will enhance our investor relations efforts going forward. On behalf of our entire management team, I'd like to acknowledge those who've been and continue to be affected by the global pandemic. No words can bring comfort to those who've suffered. However, we do remain hopeful that better days lie ahead and that we all may return to and enjoy our lives as we once did.", "We remain immensely grateful to frontline workers who are caring selflessly for those in need ensuring the vaccines are being delivered and administered and helping the world navigate further these troubling times. Turning to Take-Two. Due to an incredibly strong holiday season coupled with our ability to provide consistently the highest quality entertainment experiences especially as many individuals continue to shelter home, Take-Two delivered operating results that significantly exceeded our expectations. The outperformance of Grand Theft Auto Online, Grand Theft Auto V, NBA 2K, the Mafia Definitive Editions and Mafia: Trilogy, and Red Dead Redemption 2 reflects our development team's boundless passion, creativity, and commitment to captivate and engage audiences.", "In the history of the entertainment industry, there's perhaps no experience that's more loved, more expansive, more critically acclaimed, and more successful than Rockstar Games Grand Theft Auto. Grand Theft Auto V remains one of the most iconic titles ever released and continues to exceed our expectations having sold in over 140 million units. In fact, in calendar 2020, more copies of Grand Theft Auto V were sold than in any other year except for 2013 when it first launched on PlayStation 3 and Xbox 360. In addition, recurrent consumer spending on Grand Theft Auto Online outperformed our third-quarter forecast and grew 28% year over year.", "In December, Rockstar Games released Grand Theft Auto Online's biggest update to date, the Cayo Perico Heist. Featuring a radical new approach to heist design, as well as a new tropical island to explore, the Cayo Perico Heist is an all-new Grand Theft Auto Online adventure in which players can choose to take on a heist with a crew of up to four, or for the first time plan, prepare, and execute the daring island heist all on their own. Notably, more than 50% of those playing the Cayo Perico Heist are engaging with this as a new single player experience. Cayo Perico Heist also introduces an array of exciting new weapons and vehicles, a new virtual nightclub, and a social space for players to get together and experience the world's best DJs plus a host of updates across the entire world.", "In addition, overall engagement with Grand Theft Auto Online continues to set new benchmarks as the title had more players in every month and for the entirety of calendar 2020 than in any other year since its launch. 2020 also Mark Grand Theft Auto Online highest participation rate ever by both new players and reactivated players who return to experienced Rockstar Games array of new content offerings. Grand Theft Auto Online is expected to achieve a new net bookings record in fiscal 2021. Red Dead Redemption 2 also outperformed, and to date has sold in over 36 million units worldwide.", "In December, Rockstar Games released a stand-alone version of Red Dead Online on PlayStation 4, Xbox One, and PC that for the first time allows new players who do not already own Red Dead Redemption 2 to experience everything Red Dead Online has to offer, including access to all future content updates. Players also have the option unlocked Red Dead Redemption 2 story mode via an array -- via an additional purchase. In addition, during the quarter, Rockstar Games released an array of content updates for Red Dead Online, including new legendary animals and sightings missions for the naturalist role, action-packed new missions for the bounty hunter role with the addition of the prestigious Bounty Hunter License. Plus the Outlaw Pass No.4, and an assortment of new clothing weapons enhancements, and more.", "As a result of these offerings, engagement with Red Dead Online reached new heights and there were more players, including more new players in the month of December than in any other month since its beta launch in 2018. In addition, Red Dead Online grew its audience and had more overall players in calendar 2020 than 2019. Rockstar Games will continue to support both Red Dead Online and Grand Theft Auto Online with more content updates throughout calendar 2021 to keep new and returning players excited and engaged. Another beloved franchise that's both a perennial favorite among consumers and an integral contributor to our ongoing success as NBA 2K from 2k and visual concepts, renowned for being our industry's leading basketball simulation series.", "Each year NBA2K continues to reinvent how people experience basketball and its rich culture and influence. NBA 2K21 once again raise the bar for the series, and it was our first offering that was built from the ground up for next-generation consoles. The title boasts groundbreaking technological advancements new modes and many exclusive robust features. To date, NBA 2K21 has exceeded our expectations and is sold in over 8 million units across all platforms.", "In addition, during the third quarter net bookings for the NBA 2k series grew 48%, and recurrent consumer spending significantly exceeded our expectations growing 67%. Furthermore, consumer engagement with NBA 2K remains incredibly strong across daily active users, MyCareer users, and MyTeam users. Moreover, NBA 2K21 users have been more deeply engaged with the game with average games played per user up 14%, as compared to NBA 2K20 in the same period. During the quarter, 2k expanded further the breadth of its NBA2K offerings with the releases of NBA SuperCard and NBA 2K Mobile Season 3 for iOS and Android devices.", "During the third quarter, 2k bolstered our initial offerings for PlayStation 5 and Xbox Series X with our beloved shooter-looter titled Borderland 3. The title was fully optimized for next-generation consoles making Mayhem bigger and bolder than ever before. All players who own or purchase the game on prior consoles will be able to download the new platform upgrade within the same console family for free. This free upgrade will add several exclusive features, including4K resolution at 60 frames per second in single player, and online co-op plus support for three and four players split-screen co-op.", "Borderland 3s launch for next-generation platforms was well-received, and we've seen the game's user base grow steadily. 2k is supporting the title with in-game events and new content, including the release of the designer's cut which is the first of two offerings as part of the season past two for all versions of the game. Our third-quarter results were also enhanced by a variety of other offerings led by the Mafia Definitive Editions and Mafia: Trilogy, the WWE series, Sid Meier's Civilization VI, and PGA Tour 2K21. Driving engagement with our titles after the initial launch remains among our most important long-term growth and margin opportunities and is a key strategic priority of our organization.", "We now support virtually all our new releases with innovative offerings to achieve this goal. That said, we're highly mindful that first and foremost, we're an entertainment company, and we're in the service of our audience. We strive to give consumers more of what they love and the ability to stay captivated and engage within their favorite experiences and passionate communities. To that end during the third quarter, we released an array of free and paid add-on content for our popular hit releases, including Kerbal Space Program, PGA TOUR 2k21, Sid Meier's Civilization VI, and WWE 2k Battlegrounds.", "During the third quarter, recurrent consumer spending exceeded our expectations growing 30%, which was double our original outlook and accounted for 58% of net bookings. In addition to NBA 2K, Grand Theft Auto Online, and Red Dead Online and recurrent consumer spending was enhanced by the following offerings, Social Point's live games, including Dragon City, Monster Legends, Word Life, World Chess, and Tasty Town outperform during the third quarter and exceeded expectations. Live games delivered new fresh content, events, and experiences to boost engagement and enhance players' enjoyment and net bookings grew 39%. The studio continues to invest in its broad and innovative pipeline of new games plan for launch in the coming years.", "Playdots completed the rollout of their biggest feature update of the year for their popular Two Dots title including competitive leaderboards. This update played a key role in driving average revenue per daily active user up to 12% as compared with the second quarter of fiscal '21. Two Dots is now experiencing its highest player conversion rates ever as a result of these new and expanded live ops features, which continue to perform very well. We expect Playdots to be a significant contributor to our results and expect growth over the long term.", "WWE SuperCard also outperformed during the third quarter growing 16%. During the period, 2K launched Season 7 of this popular free to play sports entertainment mobile game. The title has now been downloaded more than 22 million times and remains 2K's highest-grossing mobile title. And NBA 2K Online in China grew 49% and remains a significant contributor to our results.", "The title is the No.1 PC online sports game in China with more than 51 million registered users. Add-on content grew 8% and outperformed expectations led by offerings for the Borderland series and Sid Meier's Civilization's VI. As a result of our better than expected third-quarter performance and increased forecasts for the remainder of the year, we're once again raising our outlook for the fiscal year 2021, and we expect to achieve record net bookings of $3.37 billion to $3.42 billion. In closing, Take-Two is exceedingly well-positioned to capitalize further on the positive trends of our industry to pursue our core mission to become the most innovative, creative, and efficient entertainment company in the world and to deliver growth and returns for our shareholders over the long term.", "I'll now turn the call over to Karl." ] }, { "name": "Karl Slatoff", "speech": [ "Thanks, Strauss. I'd like to begin by recognizing the ongoing work of our teams around the world who continue to deliver incredible results that are a testament to taking this unwavering commitment to quality, our deeply rooted culture and collaboration, and a singular drive to achieve our goals. Our unique ability to captivate and engage audiences has never been more evident nor more important than in these challenging times. And we remained immensely grateful to our player communities for making our games part of their lives.", "I'll now discuss our recent and upcoming releases. On January 27, 2K release the fourth roster update for WWE 2K Battlegrounds, which add to the game's outrageous in and out of the ring action. The update features many popular superstars and legends, including Chyna, Mark Henry, Christian, and more. On Wednesday, 2K we'll release the fifth update that will feature even more fan favorites and they will share details shortly.", "On January 28, 2K and Firaxis Games released the Vietnam and Kublai Khan Pack for Sid Meier's Civilization VI as part of The New Frontier Pass for PlayStation 4, Xbox One, Nintendo Switch, and PC. Each pack in this pack features new civilizations and leaders and is also available for individual purchase. The Final Frontier Pass Pack will be released next month and 2K will have more to share about that in the coming weeks. In addition, last week Private Division launched their beloved space simulation, Kerbal Space Program on Tencent's WeGame platform in China.", "We are very pleased to build upon our successful partnership with Tencent and believe that releasing Kerbal Space Program on WeGame represents a great opportunity to expand the global community and bolster our offerings in China. On February 10, Private Division and Obsidian Entertainment will release The Outer Worlds: Peril on Gorgon, the first narrative-led expansion for the critically acclaimed darkly humorous sci-fi RPG for the Nintendo Switch. The expansion was released previously for PlayStation 4, Xbox One, and PC and is available individually or at a discount as part of The Outer Worlds Expansion Pass, which will also include The Outer Worlds: Murder on Eridanos, the second expansion set to launch on PlayStation 4, Xbox One and PC this fiscal year, and on Nintendo Switch later in calendar 2021. This spring, 2K will release the Director's Cut, the new add-on content for Season Pass 2 for Borderlands 3.", "It will be available for all released versions of the game. The Director's Cut adds will include new missions, end game content, and behind the scenes extras. On behalf of our team, I would like to congratulate Gearbox Software on the recently announced merger with Embracer. This marks an exciting new chapter in the studio's history and we look forward to continuing our successful partnership with Gearbox, including the long-term publishing relationship for the Borderlands franchise going forward and some un-announced projects that will be revealed over time.", "Throughout the year, Rockstar Games will continue to support both Grand Theft Auto Online and Red Dead Online with more content updates to keep new and returning players excited and engaged. In addition, during the second half of calendar 2021, Rockstar Games will bring the blockbuster hit, Grand Theft Auto V to the latest generation of consoles. The new charges will feature a range of technical improvements, visual upgrades, and performance enhancements to take full advantage of the latest hardware making the game more beautiful and more responsive than ever. For the expanding community of Grand Theft Auto Online, the journey through this ever-evolving world will continue on the latest generation consoles with additional new updates, including content that is exclusive to the new consoles and PC.", "There will also be a new stand-alone version of Grand Theft Auto Online coming in the second half of calendar 2021, which will be available for free exclusively on PlayStation 5 during the first three months. Rockstar Games will share more details on the new versions of Grand Theft Auto V in the months ahead. Turning to Esports. The NBA 2K League is gearing up for its fourth season that will take place later this year.", "After a series of pro-am tournaments and a first of its kind league combine during the fall, the league is currently prepping for this year's upcoming player draft. As part of the league's continued commitment to identifying the best players in the world, this offseason, the league is hosting a series of online qualifying events for international players and will award draft eligibility to top performers from each event. In addition, I am pleased to share that for the second consecutive year, the NBA 2K League was given top honors at the Tempest Awards as part of the annual Esports Business Summit. I'd like to congratulate League President, Brendan Donohue and his team on these honors.", "We remain very excited about the continued success and growth of the NBA 2k League, which has the long-term potential to enhance engagement to be a driver of profits for our company. Looking ahead, our organization is currently undertaking numerous initiatives that we believe will add scale to our business and drive continued success. As an entertainment company, our lifeblood is our world-renowned creative talent and portfolio of owned intellectual property. With nearly 4,900 colleagues around the world in our development studios that are home to some of the most commercially and critically successful brands in our industry, we are significantly expanding the breadth and depth of our offerings and currently have the largest most diverse long-term product pipeline in our history.", "While we are excited by the potential of these future releases, we are still pursuing our goal of creating a more consistent release schedule and increasing our development capacity. To that end, we continually explore both organic and inorganic opportunities and maintain a highly disciplined approach to ensure that our investments will be accretive to our shareholders and consistent with our strategy. In addition, we have always maintained a willingness to explore and experiment with new markets and business models that can both expand the reach of our content and broaden the scope of our audience. We are investing prudently to advance our global infrastructure and resources that support our creative endeavors, including data analytics and in-game engagement with players.", "Through all these efforts, we believe that Take-Two is poised to generate growth and margin expansion over the long term. I'll now turn the call over to Lainie." ] }, { "name": "Lainie Goldstein", "speech": [ "Thanks, Karl, and good afternoon, everyone. I'll now discuss our third-quarter results, and then review our financial outlook for the fourth quarter and fiscal year 2021. Please note that additional details regarding actual results and outlook are contained in our press release. Net bookings were $840 million.", "This result exceeded our outlook of $675 million, to $725 million driven primarily by the outperformance of Grand Theft Auto Online and Grand Theft Auto V, the Mafia's Definitive Editions and Mafia Trilogy, NBA 2K, and Red Dead Redemption 2. Digitally delivered net bookings declined by 4% as compared to our outlook of a 15% decline and accounted for 82% of the total. This result exceeded our outlook primarily due to the outperformance of recurrent consumer spending. Our third-quarter results last year benefited from the launches of Red Dead Redemption 2 on PC and the Outer Worlds.", "During the third quarter, 56% of sales of console games were delivered digitally up from 44% last year. Recurrent consumer spending grew 30% as compared to our outlook of 5% growth and accounted for 58% of total net bookings. This growth was driven primarily by Grand Theft Auto Online and NBA 2K. GAAP net revenue was $861 million and the cost of goods sold was $346 million.", "Operating expenses increased by 7% to $339 million due primarily to the addition of Playdots, higher personnel costs, and IT expenses, partially offset by lower marketing expenses. And GAAP net income grew 11% to $182 million, or $1.57 per share, as compared to $154 million, or $1.43 per share in the third quarter last year. Our GAAP net income benefited from $40.6 million of realized and unrealized gains on a long-term investment. We ended the quarter with $2.42 billion of cash into our term investments.", "Not included in this balance is the cash portion of our offer to acquire Codemasters, which was included in restricted cash. Had this amount not been considered self-restricted as of December 31, our cash and short-term investment for this quarter-end would have been $2.7 billion. As of January 13, 2021, the offer lapsed and the cash was no longer restricted. Now to our guidance.", "Starting with the fiscal fourth quarter, we project net bookings to range from $602 million to $652 million, compared to $729 million in the fourth quarter last year. Last year's fourth quarter benefited from the recognition of higher license fees from digital partners to provide free downloads of certain games on their platforms and from the launch of Borderlands 3 on Steam. This decline is also due to the initial surge in digital downloads at the onset of shelter-at-home orders in March 2020. So we expect digital delivery net bookings to be down approximately 10%.", "Digital is projected to represent 93% of total net bookings, which is in line with last year. The forecast assumes that 73% of console game sales will be delivered digitally up from 63% last year. We project recurrent consumer spending to be up approximately 5% due to continued engagement in our titles. Virtual currency is driving this increase and is partially offset by lower add-on content due to last year's launch of the second DLC for Borderlands 3.", "The largest contributors to net bookings are expected to be NBA 2K21, Grand Theft Auto Online, and Grand Theft Auto V, Red Dead Redemption 2, and Red Dead Online, Socialpoint's mobile games, Two Dots, Borderlands 3, and Sid Meier's Civilization VI. We expect GAAP net revenue to range from $702 million to $752 million, and the cost of goods sold to range from $267 million to $293 million. Operating expenses are expected to range from $316 million to $326 million. At the midpoint, this represents a 32% increase over last year, driven primarily by higher marketing and research and development expenses and the addition of Playdots.", "And GAAP net income is expected to range from $102 million to $113 million, or $0.88 to $0.98 per share. For management reporting purposes, we expect our tax rate to be 16% throughout fiscal 2021. We are again increasing our full-year outlook, which now includes record net bookings and operating results. This will be the fifth consecutive year that these two metrics have grown.", "Our net bookings outlook range is now $3.37 billion to $3.42 billion, up from our previous guidance of $3.15 billion to $3.25 billion, and original guidance of $2.55 billion to $2.65 billion. This is being driven by our third-quarter outperformance along with an updated forecast for the fourth quarter, which is improved primarily due to higher recurrent consumer spending from Grand Theft Auto Online and NBA 2K, as well as strong performance from Grand Theft Auto V and Red Dead Redemption 2. We expect growth from the prior year from NBA 2K, Grand Theft Auto Online, and Grand Theft Auto V and Social Point's mobile games to be offset primarily by lower results from Borderlands 3. The largest contributor to net bookings are expected to be NBA 2K, Grand Theft Auto Online, and Grand Theft Auto V, Red Dead Redemption 2, and Red Dead Online, Social Point's Mobile Games, Borderlands 3, Sid Meier's Civilization VI, the Mafia Definitive Editions, and Mafia Trilogy, and PGA Tour 2K21.", "We expect the net bookings breakdown from our table to be roughly 55% 2K; 35% Rockstar Games; and 10% Private Division, Social Point, and Playdots. And we forecast our geographic net bookings by about -- to be about 60% the United States, and 40% International. We now project digitally delivered net bookings to increase by approximately 20% as compared to our prior outlook of 15% growth. As a percentage of our business, digital is projected to represent 87% of net bookings, up from 82% last year.", "Our forecast assumes that 63% of console game sales will be delivered digitally up from 55% last year. We now expect recurrent consumer spending to grow by approximately 45% as compared to our prior outlook of 30% growth, and it represents approximately 64% of net bookings as compared to 51% last year. Growth is being driven primarily by NBA 2K, Grand Theft Auto Online, the addition of Playdots, and Social Point's mobile games. We are increasing our non-GAAP adjusted unrestricted operating cash flow outlets to more than $750 million from our prior outlook of more than $650 million.", "We plan to deploy approximately $75 million for capital expenditures. We expect GAAP net revenue to range from $3.24 billion to $3.29 billion, and the cost of goods sold to range from $1.52 billion to $1.55 billion. Total operating expenses are expected to range from $1.22 billion to $1.23 billion. At the midpoint, this represents a 9% increase over the prior year, driven by the addition of Playdots, higher headcount, IT, research and development expense, and charitable contributions, partially offset by lower marketing expenses.", "And we expect GAAP net income to range from $472 million to $484 million, or $4.08 to $4.18 per share. In closing, we are very pleased with the ongoing momentum that we have experienced so far in fiscal 202, including our expectations to deliver both record net bookings and operating results for the full year. We remain extremely confident in our long-term growth trajectory and our ability to deliver shareholder value driven by our key competitive advantages, our incredible portfolio of creative assets, our strong fundamentals, and healthy balance sheet, and of course our industry-leading talent. Thank you.", "I'll now turn the call back to Strauss." ] }, { "name": "Strauss Zelnick", "speech": [ "Thanks, Lainie and Karl. On behalf of our entire management team, I'd like to thank our colleagues for their hard work, commitment to excellence, and for delivering another outstanding quarter. To our shareholders, I want to express our appreciation for your continued support. We'll now take your questions.", "Operator." ] } ]
[ { "name": "Operator", "speech": [ "Thank you. We will now be conducting a Q&A session.[Operator instructions]. Thank you. Our first question comes from Mario Lu with Barclays.", "Please, proceed with your question." ] }, { "name": "Mario Lu", "speech": [ "Great. Thanks for taking the questions. I have one high-level strategy M&A question and the second one on GTA. So, the first one, you guys mentioned more copies of GTA V sold in 2020 than any year since launch, and then similarly, Red Dead Online saw more players in December since launch.", "So, it seems like you guys are benefiting well from the trend that gamers are gravitating toward the largest gaming franchises. So, that being said, curious to hear what your overall view is on growing your core franchises and potentially expanding them into new platforms and business models versus expanding your portfolio with new IP either organically or through M&A. And I have a follow-up." ] }, { "name": "Strauss Zelnick", "speech": [ "Great. Thanks, Mario. It's sort of all of the above. So, it's exciting that we have these extraordinary franchises that keep captivating and engaging consumers many years after launch, and the reason that that's occurring is, first of all, the initial quality, which is unmatched in our business.", "And second, because our labels both Rockstar Games and 2K continue to deliver content on an ongoing basis that further causes captivation and engagement. And if we keep doing that, then we'll continue, we think to have similar results. I think you're right that consumers get really comfortable with and excited by specific franchises. And if you keep delivering great content, they will maintain their involvement on an ongoing basis.", "We're seeing that in all forms of the entertainment business. At the same time, we always have to create new titles, both new iterations of existing beloved franchises, and new intellectual property. And if we don't do that, then we're burning the furniture. So to that end in the next five years, we expect to bring 93 new releases to market, which is more than double what our development capacity was just a few years ago.", "So, we're both excited by the continued growing engagement in our existing entities, as well as what the future can bring with new releases." ] }, { "name": "Mario Lu", "speech": [ "Great. And then the second question on GTA Online. You guys mentioned over half of your players did the recent high solo. So, I'm pleasantly surprised by that number since more and more players are playing games as a means of social connection.", "So how did that percentage compare versus your internal expectations. And does that change how you view single-player opportunities even in an existing online environment like GTA Online." ] }, { "name": "Strauss Zelnick", "speech": [ "Well, no, this wasn't coincidental. I mean the folks of Rockstar Games intended to create a powerful single-player experience, a story-driven experience. And Rockstar has always been known for great stories and great single-player experiences and then developed in addition, a massive multiplayer opportunity over the past years. And I think it's a reminder not that we needed one that Rockstar Games can do both of those things at the highest possible level of execution in our business.", "There was a -- I think there was an argument just a couple of years ago not around here, not in this shop but in some of our competitors' offices that single player is dead, that it's all about multiplayer. We didn't believe that. I said specifically and publicly that we didn't believe that. Our labels don't believe that, and we deliver an array of experiences that range from hyper-casual mobile to the most complex, the most robust single-player, and multiplayer player experiences.", "And we intend to continue doing that." ] }, { "name": "Mario Lu", "speech": [ "That's helpful. Thank you." ] }, { "name": "Operator", "speech": [ "Thank you. Our next question comes from Mike Ng with Goldman Sachs. Please proceed with your question." ] }, { "name": "Michael Ng", "speech": [ "Great. Thank you very much for the question. I just want to talk about how the success of GTA V units this year, as well as any learnings from the stand-alone Red Dead Online experience, informs your view about what GTA-enhanced edition and the stand-alone GTA Online should look like or will look like next year and perhaps, how it should perform. Thanks." ] }, { "name": "Strauss Zelnick", "speech": [ "Well, I really appreciate the sentiment behind the question but I'd sort of put it in the category of how high is up. We don't tend to speculate, and we haven't offered any initial guidance for the next fiscal year either. So, we'll sharpen our pencil in the coming months and of course, we'll create initial guidance, and that will reflect partially that performance. But in general, if history is any guide, it will be very successful indeed and that wouldn't surprise me." ] }, { "name": "Michael Ng", "speech": [ "Great. Thanks. I certainly appreciate that. And just as another question.", "Could you talk a little bit about the Music Locker experience within GTA Online. Obviously, it feels like it's someone's unique. Is there an opportunity for Rockstar, 2K to incorporate even more just for lack of better words, real-world elements, or real-world partners into virtual worlds like GTA Online. Thanks." ] }, { "name": "Karl Slatoff", "speech": [ "Hi, it's Karl speaking. Yeah, obviously, the Music Locker experience is very unique. It's a terrific application in GTA. Music has always been a really, really important part of the Grand Theft Auto franchise, and it will continue to be.", "It's always been part of the culture of the Grand Theft Auto franchise. And people explored and enjoyed and found new music through the franchise over and over again. I don't want to speculate about what's in Rockstar's plans as it relates to music, but rest assured music is always, has always been, and will always be a large part of what GTA is all about." ] }, { "name": "Michael Ng", "speech": [ "Great. Thanks, Carl. Thanks, Strauss." ] }, { "name": "Operator", "speech": [ "Thank you. Our next question comes from Colin Sebastian with Robert W. Baird. Please proceed with your question." ] }, { "name": "Colin Sebastian", "speech": [ "Great. Good afternoon, everyone. Two questions for me. First off, as you look back at the pricing strategy for MBA over the holidays, is it safe to say you feel that that was the right strategy.", "And I guess does it set a new bar for triple-A front line content on next-gen platforms. And then secondly, the bigger picture. Just given the ongoing industry consolidation. Strauss, the interest you've shown in participating in that activity, are you seeing still compelling opportunities out there in the market even as competition for deals seems pretty intense and valuations look like they're also on the rise.", "Any commentary there will be helpful. Thanks." ] }, { "name": "Strauss Zelnick", "speech": [ "Yeah. In terms of frontline pricing for NBA 2K21, I think that worked out very much as expected and as planned. It's a premium offering at the highest possible level. The title was built from the ground up for next-gen.", "It's a first title here that has been created that way and the acceptance by consumers has been nothing short of extraordinary. The titles sold in over 8 million units. Now, we haven't talked about pricing on other titles. So, it would be premature to discuss that.", "We'll talk about that on a title-by-title basis going forward. In terms of consolidation, you've seen a lot of deals out there. Most recently, Embracer is merging with Gearbox, a company near and dear to our heart and we're grateful that we'll still be in business with the Gearbox, and they'll still be working with us on Borderlands on other titles. We acquired Playdots just a few months ago and we're excited about how that deal has gone.", "We lost the Codemasters deal to our friends out West. That was disappointing but reflects our discipline in such matters. So, there is an awful lot going on. I tend to agree, Colin, that pricing can be pretty heavy and we have a stated strategy and a disciplined approach.", "It served us well. We have yet to make an acquisition that hasn't worked out. We're looking for great teams, great intellectual property, and for an arrangement that would be accretive to shareholder value. And we'll look for that and at times aggressively, but we have sort of from -- we have a firm grasp on a hand calculator in one hand, and on our approach strategy and tactics in the other." ] }, { "name": "Colin Sebastian", "speech": [ "All right. Thanks, Strauss." ] }, { "name": "Operator", "speech": [ "Thank you. Our next question comes from Doug Creutz with Cowen & Co. Please proceed with your question." ] }, { "name": "Doug Creutz", "speech": [ "Hey, thanks. You've always been known for -- Take-Two has always been known for putting out some of the deepest and most complex games in the market. And there's been a debate I think, emerging in the industry about whether the current pace of triple-A game development is sustainable both, I think for getting games out the door and then the sense that life services are becoming more and more of an arms race in terms of who can put the most content out the quickest. There was a competing game that came out recently that was highly anticipated where I think it was a clear case of that studio's reach exceeding their grasp.", "What have you been doing and what are you doing sort of operationally, structurally to make sure that your ability to keep raising the bar in your entertainment experiences doesn't run afoul of some of these issues. Thanks." ] }, { "name": "Strauss Zelnick", "speech": [ "Well, first of all, you never want to sit back and just say we've always been able to do it, it's totally fine. It'll be fine going forward. We're always looking over our shoulders. We're always trying to figure out what we can do better.", "We're having the most self-critical group I've ever run into. How do we maintain our commitment to quality, by making sure that are our accretive creative teams pursue what they're passionate about and don't pursue something they're not passionate about. And by maintaining operational and financial discipline at the same time. And the effect of that is we can have long development cycles, and we've been criticized for that.", "But I think the case that you're alluding to reflects the fact that you're always better served to wait for perfection if you can create perfection and all of our labels are seeking perfection, and we don't always succeed. Sometimes we fall short but that's the goal. And if anything these times causes us to sharpen our minds further and sharpen our discipline further and try harder. So yeah, I mean it's great that Rockstar Games continues to put out add-on content and additional content for Grand Theft Auto Online and for Red Dead Online.", "But they put out material that they really believe in, that they're passionate about and that is of the highest possible quality. And that means we're not on a weekly cadence and we're not going to be. It means we don't necessarily know the exact release date. But what we do know is that we will wait for it to be as close to perfect as anything can be and that's true with 2K, and that's true with Social Point, and that's true of Private Division.", "And that's an unwavering commitment and it's part of our strategy and it comes from the top of the company. And we are prepared to accept the results when we fall short in terms of timing or when we sometimes spend a little more than we would like because it always pays off." ] }, { "name": "Doug Creutz", "speech": [ "Thanks." ] }, { "name": "Operator", "speech": [ "Thank you. Our next question comes from Brian Nowak with Morgan Stanley. Please proceed with your question." ] }, { "name": "Brian Nowak", "speech": [ "Thanks for taking my question. I just --Strauss, I wanted to dig a little more into the 93 pipeline number you mentioned earlier tonight again. I think it's very similar to what you guys said last year. So, I guess the question is, is this the same 93 titles we had a year ago or some being shut down and you have new ones in there.", "And then just the way that we can better understand how do we think about breaking that apart from any way you'd like to between categories, between mobile, between triple-A, between more mid-tier games. How should we think about what's within these 93 titles." ] }, { "name": "Karl Slatoff", "speech": [ "Hey, Ryan, it's Karl. I'll take this one. So, to answer the first part of the question. The 93 titles that we put out there it was a snapshot.", "It was a moment in time. And we really haven't given any updates on that since then. Of course, things move in and out all the time. It hasn't really been that long since then.", "So, you can't really expect that there's going to be a significant amount of movement. But I can tell you for sure there are some things that have fallen out and some things that are back in. But generally speaking, these are still pretty good numbers, in general. But again, we do expect that this pipeline will be fluid as we get things to various milestones.", "So, it will be changing over time. But we haven't provided any additional updates other than the 93 initial announcements that we made. And just to break it down a little bit for you, in terms of what comprises that 93. So, on a high level, 63 of those titles of the 93, we would consider core gaming experiences and 17 of them are sort of mid-core arcade-style experiences, and 13 of them are what we would consider being casual experiences.", "About half of them, 47 of the titles are from existing IP or sequels and the rest of them are for our new intellectual property. So, we are making investments in new IP, very important. Strauss spoke about that earlier. And then in terms of platforms, 72 of the 93 titles are planned for console PC or streaming including seven of those that will also be available on mobile.", "So, that would leave 21 that are on the list specifically for mobile. And also from a business model perspective, 67 of the 93 are -- they're required to be purchased and 26 are completely are free to apply. So that's the breakdown as it was the last time we did it, but we do expect that that will be moving around as we go deeper into or go deep into that pipeline and over the next few years." ] }, { "name": "Brian Nowak", "speech": [ "Ok. Thanks, Karl." ] }, { "name": "Operator", "speech": [ "Thank you. Our next question comes from Bryan Kraft with Deutsche Bank. Please proceed with your question." ] }, { "name": "Bryan Kraft", "speech": [ "Hi. Good afternoon. I would love to understand at this point your latest thinking about the mobile gaming opportunity for you in terms of what kinds of IP and games are likely to succeed. How much capital and resources it makes sense to put behind mobile and what the broader strategy is going forward in the mobile space.", "Thank you." ] }, { "name": "Karl Slatoff", "speech": [ "Hi. It's Karl again. So obviously, the mobile component of our business is becoming more and more important with our acquisition of Social Point and Dots. So we are very committed to it.", "Not to mention mobile activity at our label levels specifically 2K with WWE SuperCard, etc, and some NBA properties. So we are highly invested in the mobile business and we expect that it'll be a -- even growing part of our investment going forward. But it really does boil -- our strategy boils down to a few components and the first really is focuses around new -- creating new IP for the mobile space, and that's around our Social Point and Playdots business. So it's IP that's created specifically for the mobile environment.", "And we've been investing in that obviously over the past couple of years specifically through M&A but also now organically now that we've got a pretty sizable platform between those two acquisitions. The second component is bringing our core franchises to the mobile platforms. So, these are games that are more or fewer ports so they could be slight variations of games, existing content that exists. So, we've done that quite successfully for many, many years.", "And we'll continue to do so where it's appropriate. And then the third component is really just bringing our core is integrating a mobile experience with our core experiences. So these are things like companion apps, which we've done effectively with Red Dead Redemption, we've done with Mafias, we've done it with a number of our franchises where you can have a separate mobile experience that you can use and it can be used to enhance your core experience pretty much at the same time or may be offline when you're not in front of your television set or your console. So, those are really the components of our strategy.", "But obviously, it's a growing part of the industry. We're very tapped into it and we're investing more and more." ] }, { "name": "Bryan Kraft", "speech": [ "Thanks, Karl." ] }, { "name": "Operator", "speech": [ "Thank you.[Operator Instructions]. Our next question is from Matthew Thornton with Truist Securities. Please proceed with your question." ] }, { "name": "Matthew Thornton", "speech": [ "Hey. Good afternoon, everybody. Thanks for taking the other question. Maybe two if I could, maybe for either Strauss or Karl, first of which is just a higher level.", "You referred to the pipeline, the 93 projects a little bit earlier. I'm just wondering if there's any color you can offer just as to how we're kind of progressing and maybe it's a little bit early. But just any incremental thoughts as to what the linearity is shaping up to look like there, any color around the pipeline would be helpful there. And then just secondly, PGA Tour, it's fairly a small game but it was well-reviewed.", "So, it looks like a successful buy by all accounts. I'm curious if that was successful enough or large enough where it could actually become a recurring title and join NBA and WWE in that regard. Any thoughts there. Thanks, guys." ] }, { "name": "Karl Slatoff", "speech": [ "So on the first part of the pipeline, I really don't have more information I can give you in terms of the pace of that pipeline and when new titles are coming out. Rest assured you will be hearing a lot more about that in the coming months and as we talk about our release schedule so unfortunate, I don't have any more to give you on that. And then in terms of the PGA Tour 2K, we are incredibly excited about that -- the performance of that title and I'd like to say that we're not surprised but I am personally a little bit surprised. It's done fantastically well.", "We've sold around 2 million units or so which is a fantastic result and we're just really getting started. So we do think that there's a future in this franchise for us. We haven't really announced much about what specifically that means. But without a doubt, this is something that we feel merits investment from our side and that's something that we can really turn into a very profitable and exciting franchise for us going forward for many years." ] }, { "name": "Operator", "speech": [ "Thank you. Our next question comes from Benjamin Black with Evercore ISI. Please proceed with your question." ] }, { "name": "Benjamin Black", "speech": [ "Great. Thank you for the question. So, I always thought the gaming category as a whole has benefited from this extended stay at home provisions. But as we, I mean as we look to count of '21, I'm really curious to hear what data points or trends you're seeing that could give us some confidence and the sustainability as well as trends we're seeing today.", "And then secondly, I was wondering if you could talk a little bit more about the decision to desegregate Red Dead Online in the core game. What are some of the key findings you have there and I'm curious to hear how Red Dead Online is faring relative to GTA Online at a comparable stage of its lifecycle. Thank you." ] }, { "name": "Strauss Zelnick", "speech": [ "Sorry. On the first question, I'm hard-pressed to know what data that would be except that we continue to do very well and engagement is very high. We had not planned in our numbers for the fourth quarter to see growth driven by the pandemic. That has not been our approach.", "But of course, we continue to outperform and the net bookings that we're guiding to for the fiscal now are $800 million higher than our original guidance. So, we're grateful for the growth. I think under any circumstances post-pandemic, and hopefully, there will be post-pandemic, demand will be higher than pre-pandemic demand. I think it's quite clear that that there's been a systemic shift in favor of interactive entertainment and Activate, a media consultancy confirmed that.", "But I don't know whether there'll be some fall-off as people are out and about and doing things outside of the home. It wouldn't surprise me if there were. But as long as we continue to deliver great experiences, I think we'll see continued growth. What was your second question again." ] }, { "name": "Benjamin Black", "speech": [ "My second question was really around the decision to desegregate Red Dead Online. And also how Red Dead Online now is faring relative to GTA Online as a comparable stage of its lifecycle." ] }, { "name": "Strauss Zelnick", "speech": [ "So, they're very different titles and they're really not comparable in any way. They're both massive hits. And the decision I think was based on offering more opportunities to engage with the title. The title's been in the market for some time.", "And Rockstar has shown a willingness to experiment with different marketing models, all in an effort to enhance the size of the audience and to increase customer engagement and enjoyment. And I think it's working out really well. And I'm looking forward to seeing how Grand Theft Auto Online fares when it too is available as a stand-alone experience in fiscal '22." ] }, { "name": "Benjamin Black", "speech": [ "Excellent. Thank you very much." ] }, { "name": "Operator", "speech": [ "Thank you. Our next question comes from Mike Hickey with The Benchmark Company. Please proceed with your question." ] }, { "name": "Mike Hickey", "speech": [ "Hey, Strauss, Lainie, Karl, and Nicole, thanks for taking my questions guys. Congrats on an incredible quarter and guide. I know it's early but as you sort of think about the fiscal year '22 here obviously, you've got a lot of momentum in your live service. It looks like it's back up here and engagement is going to be lasting.", "You do have some visibility on the pipeline. Obviously, you have more. I was just curious if you think you can grow fiscal year '22 and you sort of -- you can't exactly answer that maybe just cheese to grow obviously, growth is generally a good thing we're looking forward to. The second question is, the work from home scenario duration if this continued to sort of extending here, I'm just sort of curious the impact that has had on the developer culture and productivity when you look sort of in the medium term with your pipeline.", "Thanks, guys." ] }, { "name": "Lainie Goldstein", "speech": [ "Hey, Mike. So for the fiscal year 2022 at this point, it's a little early for us to provide fiscal 2022 guidance. We're also currently in the process of completing our detailed budget for fiscal '22. And as you know, we typically guide to the next fiscal year when we report our fourth-quarter earnings in May.", "But it's important to keep in mind that this is clearly a record year for us partly driven by the benefit of individual sheltering at home. And it remains to be seen how long these trends will go on. And when we originally projected sequential growth for fiscal '22 versus fiscal '21, our fiscal '21 guidance was projecting a decrease from fiscal 2020. And now we're expecting record net bookings for fiscal '21, which represents 30% growth of our original guidance and year-over-year growth compared to fiscal '20.", "Also, we expect record adjusted unrestricted operating cash flow over $750 million, which is more than double our original estimate. So we'll see, in May we'll give you a little bit of an update at that point. So that's when we'll give you some more details on '22." ] }, { "name": "Strauss Zelnick", "speech": [ "And, Mike, with regard to working from home, I can't predict how much longer that'll be the case. We follow what government requirements and suggestions are, and we follow the science and the facts. Some of our offices are open. No one is obligated to come to the office if they're uncomfortable in doing so.", "That said, we've been extraordinarily productive. Our IT team did an A-plus job making remote work possible for our company. We've moved over to remote work within a week of needing to shelter at home, and we haven't missed a beat. Not even.", "Not at all. We had one title that was delayed, the Kerbal Space Program 2. That was it. And more importantly, the quality of our releases has been extraordinary.", "I appreciate the question about culture. I think it's actually difficult to build a culture in a remote work environment. But I don't think it's impossible to do that when you've already gotten to know each other when you've built a powerful company with a powerful business model and a powerful team. I think to the contrary in a challenging time, everyone pulled together and knew that it was our collective job to make sure the company didn't have any issues, and in fact, continue to grow.", "And that's exactly what happened. And so, in any case, I think morale may actually be stronger but it's not something that can or should last forever. And it has been taxing. And I think people are actually working harder at home than they did in offices even though there is no commute.", "I think it creates a lot of challenges and I'm looking forward to it ending. So, no, you're not -- you're not one of the companies where we believe like oh, this is a great idea, everyone will just work from home. I think certain people may be able to work from home more if that's truly their interest. I think, generally speaking, we'll benefit from being together as a group." ] }, { "name": "Operator", "speech": [ "Thank you. Our next question comes from Eric Handler with MKM Partners. Please proceed with your question." ] }, { "name": "Eric Handler", "speech": [ "Yes. Thank you and I appreciate the question. Thinking about the Grand Theft Auto franchise and the fact that you've now sold over 140 million units of the game and granted there's probably some overlap where people have more than one copy of the game. But it seems like there is a huge audience of people that have probably never played GTA IV or any of these other prior GTA games that came up before that.", "And I just wonder how do you think about it, obviously, there's a huge appetite for GTA content. And what's your perspective there in terms of thinking about remastering prior games." ] }, { "name": "Strauss Zelnick", "speech": [ "It's a great and encouraging question. I'm kind of inclined to leave it more as a statement than a question. And any updates on our release schedule will come from Rockstar Games." ] }, { "name": "Eric Handler", "speech": [ "Fair enough. Thanks a lot." ] }, { "name": "Operator", "speech": [ "Thank you. Our next question comes from Stephen Ju with Credit Suisse. Please proceed with your question." ] }, { "name": "Stephen Ju", "speech": [ "Ok. Thank you so much. Strauss, over the last few years, I think the industry has gone from needing to acquire customers with massive advertising campaigns every time there was a new iteration of a game to. Now, a setup where you are in front of your user base all the time and you just called out, I didn't get a prior answer of captivation and engagement with what is now basically a perpetual service model.", "So, do you anticipate going forward potentially further operating margin benefits due to what might be a decreased need for marketing spend. And I guess building on one of the M&A questions earlier and this is definitely not an either-or question, but do you think your time and Take-Two's capital are probably better served, adding to the teams you already have at Rockstar 2K where there are already seems to be a pretty good culture of excellence there. Thanks." ] }, { "name": "Strauss Zelnick", "speech": [ "Thank you for the question. I don't think you're going to see a reduction in our marketing spend because we're launching new iterations of existing franchises and we're launching new intellectual property in a highly competitive market. And I think we'll continue to spend -- support those releases. So, I don't think you'll see leverage there.", "Where you see leverage though, of course, is when you sell more units. So, if you make bigger hits and we make bigger hits than anyone else in the market, then obviously you're amortizing that marketing spends across a larger number of units. So, marketing spends as a percent of your net bookings can be lower to the extent that you have greater success and that's certainly our goal. And in that event, of course, we'd have higher operating margins.", "And you've seen that reflected in the growth in our operating margins as you've seen the growth in our hits in the last 14 years. And I would hope that that will continue, but it will be entirely driven by whatever success we have or don't have. I think where you can have a little more confidence around growth and margins would be in the shift to digital distribution, which is inexorable and which is happening and digitally distributed products were 82% of our net bookings in the quarter and we think that the world is heading toward more than that. And that will help our margins as well as our competitors' margins.", "Also, of course, our recurrent consumer spending is higher margin because the cost associated with the content that drives recurrent consumer spending is lower than the cost related to an initial large release. So to the extent that we continue to deliver add-on content to beloved titles, which is our goal, you could see an increase in operating margins coming from that as well. But again, that's reliant upon creating hits and that won't occur if we don't create more hits. So everything comes down to creating bigger and bigger hits.", "And that's our goal and our strategy." ] }, { "name": "Karl Slatoff", "speech": [ "Billing." ] }, { "name": "Strauss Zelnick", "speech": [ "Sorry. And I think on your second question -- thanks for the reminder, Karl. It's all of the above. We're adding to the teams at 2K and at Rockstar as they work on more properties and bigger properties.", "We are adding to the teams at Social Point and Private Division selectively as we work on new properties. And we have shown a willingness to acquire companies and add that way as well very, very selectively. So we're a growth business and you'll see that on our headcount. I'm hopeful that our headcount essentially goes to production capacity, engineering capacity, and doesn't go to fixed corporate overhead." ] }, { "name": "Stephen Ju", "speech": [ "Thank you." ] }, { "name": "Operator", "speech": [ "Thank you. Our last question comes from Ryan Gee with Bank of America. Please proceed with your question." ] }, { "name": "Ryan Gee", "speech": [ "Hey, guys. Thanks for squeezing me in right there. First one for Lainie, we're about a month away from last year when most of us were all sent indoors and we saw that increased demand for gaming content. So just so we're all on the same page here, do you mind refreshing us how much maybe GTA Online, NBA 2K Online, I mean NBA 2K perhaps outperformed your expectations in the March quarter last year, or maybe it's actually more in the June quarter.", "But if you could try and quantify that so that we can have our model set up accordingly. That would be fantastic. And then a question for either Strauss or Karl. You guys acquire Ruffian Games or Rockstar acquired Ruffian late last year.", "I believe that they have a history in the shooter category with the Halo franchise specifically. So are they coming on board to bring in Rockstar's reach to genres like that or what role do you anticipate they'll play in the future of that studio either supporting or more of a lead development role. Thanks." ] }, { "name": "Strauss Zelnick", "speech": [ "We're thrilled to welcome the Ruffian team to Rockstar Games and to Take-Two and we think they're an extraordinarily talented team and we're looking forward to them becoming a part of Rockstar Games. And beyond that, there'll be more announcements in due time." ] }, { "name": "Lainie Goldstein", "speech": [ "And Ryan on the title-by-title on that -- for the fourth quarter last year, I don't have that information in front of me but we can follow-up with you on that. But all of our titles I think overperformed in that quarter but on a title-by-title basis, it was a significant over-achievement specifically on GTA Online and for NBA 2K." ] }, { "name": "Ryan Gee", "speech": [ "Fair enough. Thanks, guys." ] }, { "name": "Strauss Zelnick", "speech": [ "Well, thank you, all very much for joining us today. Obviously, we're really proud of what the entire team has achieved. The results are extraordinary and all of us are so grateful to our colleagues around the world, and of course, we're grateful to you for joining us today. Thanks so much." ] }, { "name": "Operator", "speech": [ "[Operator signoff]" ] } ]
TTWO
2021-08-02
[ { "description": "Senior Vice President of Investor Relations and Corporate Communications", "name": "Nicole Shevins", "position": "Executive" }, { "description": "Chairman and Chief Executive Officer", "name": "Strauss Zelnick", "position": "Executive" }, { "description": "President", "name": "Karl Slatoff", "position": "Executive" }, { "description": "Chief Financial Officer", "name": "Lainie Goldstein", "position": "Executive" }, { "description": "Barclays Investment Bank -- Analyst", "name": "Mario Lu", "position": "Analyst" }, { "description": "Goldman Sachs -- Analyst", "name": "Michael Ng", "position": "Analyst" }, { "description": "Truist Securities -- Analyst", "name": "Matthew Thornton", "position": "Analyst" }, { "description": "Jefferies -- Analyst", "name": "Andrew Uerkwitz", "position": "Analyst" }, { "description": "Oppenheimer & Co. Inc. -- Analyst", "name": "Martin Yang", "position": "Analyst" }, { "description": "Morgan Stanley -- Analyst", "name": "Matt Cost", "position": "Analyst" }, { "description": "BMO Capital Markets -- Analyst", "name": "Gerrick Johnson", "position": "Analyst" }, { "description": "MoffettNathanson -- Analyst", "name": "Clay Griffin", "position": "Analyst" }, { "description": "Wells Fargo Securities -- Analyst", "name": "Brian Fitzgerald", "position": "Analyst" }, { "description": "Stifel Financial Corp. -- Analyst", "name": "Drew Crum", "position": "Analyst" }, { "description": "", "name": "Unknown speaker", "position": "Other" }, { "description": "MKM Partners -- Analyst", "name": "Eric Handler", "position": "Analyst" }, { "description": "The Benchmark Company, LLC -- Analyst", "name": "Mike Hickey", "position": "Analyst" } ]
[ { "name": "Operator", "speech": [ "Greetings, and welcome to the Take-Two Q1 Fiscal-Year 2022 Earnings Call. [Operator instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Nicole Shevins, senior vice president of investor relations and corporate communications. Please go ahead." ] }, { "name": "Nicole Shevins", "speech": [ "Good afternoon. Thank you for joining our conference call to discuss our results for the first quarter of fiscal-year 2022 ended June 30, 2021. Today's call will be led by Strauss Zelnick, Take-Two's chairman and chief executive officer; Karl Slatoff, our president; and Lainie Goldstein, our chief financial officer. We will be available to answer your questions during the Q&A session following our prepared remarks.", "Before we begin, I'd like to remind everyone that statements made during this call that are not historical facts are considered forward-looking statements under federal securities laws. These forward-looking statements are based on the beliefs of our management as well as assumptions made by and information currently available to us. We have no obligation to update these forward-looking statements. Actual operating results may vary significantly from these forward-looking statements based on a variety of factors.", "These important factors are described in our filings with the SEC, including the company's most recent annual report on Form 10-K and quarterly report on Form 10-Q, including the risks summarized in the section entitled Risk Factors. I'd also like to note that unless otherwise stated, all numbers we will be discussing today are GAAP and all comparisons for year over year. Additional details regarding our actual results and outlook are contained in our press release, including the items that our management uses internally to adjust our GAAP financial results in order to evaluate our operating performance. Our press release also contains a reconciliation of any non-GAAP financial measures to the most comparable GAAP measure.", "In addition, we to our website a slide deck that digitally presents our results and financial outlook. Our press release and filings with the SEC may be to table our website at take2games.com. And now I'll turn the call over to Strauss." ] }, { "name": "Strauss Zelnick", "speech": [ "Thanks, Nicole. Good afternoon, and thank you for joining us today. I'm pleased to report that fiscal-year 2022 is off to a great start, highlighted by first-quarter net bookings of $711 million, which exceeded our expectations. As the world has moved toward a safer, new normal, we experienced strong engagement trends across most of our core franchises.", "During the period, we took multiple steps to enhance our organization over the long term. We invested further in talent and core infrastructure, which are important areas to support our expansive multiyear pipeline. Mobile remains a key growth opportunity, and we believe that our acquisition of Nordeus will enhance meaningfully our talents and expertise in this area. With a larger mobile footprint, we've integrated Social Point, PlayDots and Nordeus since T2 mobile games.", "This structure will enable us to realize cost synergies, leverage expertise and share best practices across our teams. I'm also proud that we deepened our focus on corporate responsibility, and we've recently made several key hires to lead our efforts regarding diversity, equity and inclusion. Turning to our first-quarter results. Our better-than-expected performance was primarily driven by Grand Theft Online and Grand Theft Auto V, Red Dead Redemption 2 and Red Dead Online, and Borderlands 3.", "For nearly eight years, Grand Theft Auto V and Grand Theft Auto Online have redefined the creative and cultural influence of interactive entertainment, setting new standards for multiple generations of consumers and gaming platforms. Sales of Grand Theft Auto V were significantly above our expectations once again, and the title has now sold in more than 150 million units. Rockstar Games continue to keep its massive player base engaged with new content updates for Grand Theft Online, including eight new stock races, seven new arenas for deadline mode and regular in-game bonuses and incentives. This helped drive the title to its second highest first quarter on record for player audience in its third consecutive quarter of player growth.", "In comparison to the first quarter of fiscal 2020, Grand Theft Auto Online achieved a 72% increase in its audience size, a 77% increase in new players and significant growth in recurring consumer spending. In addition, Rockstar Games continue to captivate and engage audiences with Red Dead Redemption 2, which exceeded our expectations and has now sold in more than 38 million units. Red Dead Online also enjoyed a strong quarter, thanks to new content offerings, including eight new horse races and a creative array of bonuses and incentives. The game experienced strong performance as compared to the first quarter of fiscal 2020, including 18% growth in its audience size, 26% growth in new players and outstanding growth in recurrent consumer spending.", "This performance was driven by both strong ongoing game sales and the continued influx of new players from the stand-alone version of Red Dead Online. Turning to our sports offerings. NBA 2K21 has sold in over 11 million units and remains the No. 1 sports title in the U.S.", "NBA 2K's community continues to be highly engaged with more than 2.7 million users playing daily. As compared to last year, the game experienced 13% growth in first-time spenders and nearly 30% growth in returning players. We see a significant opportunity to grow the franchise further over the next few years as we provide unique and innovative experiences throughout the game. PGA Tour 2K21 continues to exceed our expectations and expand its audience.", "In June, 2K and HB Studios launched a community driven program that allows the top golf course designers from around the world to create and submit ideas for inclusion in the game's online playlist. This program is enhancing the game's vast replayability while also driving player engagement and growing its global community. Borderlands 3 had a strong quarter. During the period, 2K and Gearbox Software released the Director's Cut add-on providing new missions, characters, daily and weekly challenges and unique rewards.", "The game was also supported with an array of new free content offerings that gave players more ways to perfect and expand their arsenals. 2K interactive games launched Sid Meier's Civilization VI Anthology on Windows PC, providing the ultimate package for players that have yet to experience the award-winning critically acclaimed strategy title. The anthology includes the base game, all previously released DLC, the rise and fall and gathering storm expansions as well as the popular New Frontier Pass. Civilization 6 has sold in more than 11 million units, outperforming its predecessor at the same point in its life cycle.", "Later this year, 2K and Firaxis Games will celebrate the 30th anniversary of the civilization franchise, and I'd like to congratulate our teams on this incredible milestone. Kerbal Space Program, which has sold in over five million units, celebrated its 10-year anniversary in June. To mark the milestone, Private Division released a short documentary video detailing the achievements of the title as well as its impact on the aerospace industry. One of our key strategic priorities is to provide new and innovative ways for audiences to stay engaged with our titles and the communities built around them after their initial launch.", "During the first quarter, recurrent consumer spending declined 25%, which was better than our expectations of a 30% decline and accounted for 69% of net bookings. Overall, all evidence suggests that media consumption patterns are beginning to stabilize to a new normal. And while down from the highs of the previous year, recurrent consumer spending in our products has leveled off and remained significantly higher than the first quarter of fiscal 2020. The largest contributors to recurrent consumer spending in the period were NBA 2K and Grand Theft Auto Online.", "We also experienced strong performance across many of our free-to-play offerings. Monster Legends and Dragon City exceeded our expectations with sequential top line growth compared to the fourth quarter of fiscal 2021. This performance was driven by strong live ops, successful feature releases and significant marketing investments. celebrated its seventh anniversary in June.", "The title performed well with positive momentum continuing from the second half of fiscal 2021. WWE Supercard has now been downloaded over 24 million times and remains 2K's highest grossing mobile title. The franchise has had strong performance, with the last 12 months marking its sixth consecutive year of growth. Following our acquisition of Nordeus, we're encouraged by the performance of potential for top 11, including its use of seasonal live ops and new features.", "NBA 2K online in China outperformed our expectations. The title remains the No. 1 online PC sports game in the region, with nearly 54 million of registered users. Turning to our outlook.", "We're reiterating our prior guidance of $3.2 billion to $3.3 billion in net bookings for fiscal 2022. As we continue to develop our pipeline, there's been movement in some of our planned releases, including two of our more sub-core titles shifting to later in fiscal 2022 than our prior guidance had contemplated. Our approach has always been to allow our labels to determine when projects are ready to bring to market to ensure the best quality and overall experience for players. As Karl will discuss in greater detail, we're excited about our pipeline and the impact of our new releases will have on our business and financial profile in the years to come.", "We believe that we'll achieve sequential growth in fiscal 2023 and establish new record levels of operating results over the next few years. Looking ahead, we remain highly optimistic about the future of the interactive entertainment sector and our competitive positioning. As we leverage our many advantages, our leading talent, focus on creativity, incredible portfolio of owned IP and strong balance sheet, we believe that Take-Two is well positioned to drive long-term growth and shareholder value. I'll now turn the call over to Karl." ] }, { "name": "Karl Slatoff", "speech": [ "Thanks, Strauss. I'd like to thank our team for a strong start to the year and their continued dedication to our business. We continue to believe that fiscal-year 2022 will be a year of investments, as marked by our recent acquisitions of Nordeus and Dynamixyz. We are thrilled to have both teams join our family, and we will continue to evaluate organic and inorganic opportunities to enhance our organization.", "I'll now discuss our recent releases. Rockstar Games continued to provide an array of free content for their vast and growing online communities. In June, Rockstar released seven new arenas for the fan favorite deadline mode to Grand Theft Auto Online. This was followed by the Los Santos Tuners update, the game's major summer launch in July, which delivered an action-packed street racing-themed update into Grand Theft Auto Online.", "The update introduced elements of the tuner car culture to the game world, including the, a new heavily requested shared social space for players to get together to modify their personal vehicles, watch others modify their 200 vehicles in real time, rates and test various vehicles on an underground test track and much more. In addition, the Los Santos Tuners Update features six epic new robbery contracts, six new race types, 10 new highly customizable vehicles, collectible USB sticks offering a new way to hear music from Moody Men and Seth Troxler and a host of quality of life updates, including a new customizable radio station wheel. The launch of the Los Santos Tuners set new records for Grand Theft Auto Online, including the largest number of players and the highest level of net bookings for both day one and during the opening week for any update in Grand Theft Auto Online's history. Looking ahead, the upcoming launch of the expanded and enhanced versions of Grand Theft Auto Online for PlayStation 5 and X Series X|S systems this November will allow for higher top speeds for select vehicles across these more powerful systems.", "In July, Rockstar Games released the bloody money update for Red Dead Online. The update introduced a series of criminal-themed opportunities, complex new missions, including the game's first train robbery, and the Quick Draw claw, a series of four distinct, rapid fire passes featuring criminal theme unlockable rewards, bonuses and more. Blood money success, along with the additional influx of new players, thanks to the launch of the stand-alone version of our Red Dead Online, led to the highest number of players on day one for any update in Red Dead Online history. 2022 is an exciting year for Take-Two as we embark on our multiyear strategy to deliver a slate of releases more robust than any other time in our company's history.", "While there has been some movement in our pipeline, including two of our immersive core titles shifting to later this fiscal year, we remain highly optimistic about our plans, including the introduction of several new franchises. I'll now discuss details on our upcoming announced offerings for this year. On August 13, Private Division will launch Hades on physical disc for Playstation and Xbox consoles. Developed by Super Giant Games, Hades is a road-like dungeon crawler in which players seek freedom by battling their way through the treaters on the world of great myth.", "The physical retail addition will come with additional items for collectors, including a compendium booklet featuring the art of the game and a code to download a soundtrack. We are excited to launch Hades, which previously won over 50 Game of the Year Awards and earn impressive aggregate scores of 93 and 94 on Metacritic and Open Critic, respectively. In addition, during the second quarter, Private Division will launch Murder on Eridanos, the second add-on content offering for The Outer Worlds for the Nintendo Switch. On September 10, 2K and Visual Concepts will once again set the standard for basketball simulations as they've done for the past 20 years with the launch of NBA 2K22 for Playstation and Xbox consoles, Switch and PC.", "Featuring best-in-class visual presentation and player AI, historic teams and a wide variety of groups experiences, NBA 2K22 will place the entire basketball universe in the players' hands. Global phenomenon and two-time NBA all-star, Luka Doncic, will grace the cover of the standard addition and Cross-Gen Digital Bundle, while NBA Legends Kareem Abdul-Jabbar, Dirk Nowitzki and Kevin Durant will be featured on the premium NBA 75th anniversary edition. In North America, players can purchase a special version of the standard edition, featuring six-time WNBA Osar and WNBA Champion, Parker on the cover, available exclusively through Gamestop and EB Games. Parker's appearance is a milestone for the NBA 2K series, marking the first female cover athlete in the history of the franchise.", "In Japan, players can also purchase a special version of the standard edition that will feature Washington Wizards Hachimura, a rising star, who is the first Japanese player to not only be drafted in the first round in 2019, but also to reach the NBA playoffs. The NBA 75th anniversary addition and Cross-Gen Digital Bundle will feature cover artwork painted by renowned Atlanta-based artist, Charlie Palmer; whose civil right series appeared on the cover of time magazine in July 2020. This fall, Private Division will introduce Kerbal Space Program Enhanced Edition for PlayStation 5 and Xbox Series X|S. The title will benefit from multiple hardware advancements, which will provide upgraded resolution, increased frame rate, advanced shaders, better textures and additional performance improvements.", "Players who already own Kerbal Space Program Enhanced Edition for Gen 9 consoles will be eligible for a free upgrade to the new version of the game upon its release. On November 11, Rockstar Games will launch the expanded and enhanced version of Grand Theft Auto V and Grand Theft Auto Online stand-alone for Gen 9 consoles. Rockstar Games will have more details to share about these eagerly anticipated launches in the coming months. This winter, Private Division will release World 7 OlliOlli World digitally for PlayStation and Xbox consoles, Nintendo Switch and PC.", "The title has received outstanding initial feedback from early media impressions, including praise for its bold new direction, unique art style, standout soundtrack and improve game play mechanics. During the fourth quarter, 2K and Gearbox Software will launch an exciting new franchise, Tiny Tina's Wonderlands is an epic adventure full of wise, wonder and high power set in an unpredictable fantasy world for magic, broad sorts and bullets collide. It is an entirely new game and a full stand-alone experience with a rich story driven co-op campaign for up to four players as well as repeatable end-game content. In addition, later this month, 2K will unveil details of another exciting new franchise planned for launch during this fiscal year.", "Through fiscal '22, WWE 2K22 will mark the rebirth of our popular wrestling series. We are very excited about the team's fresh approach to the franchise, including an array of enhancements and new features. 2K and visual concepts have shared a series of behind the scenes videos of their work on WWE 2K22, including entrance and move animations as well as motion capture and facial scanning with much more to come. Turning to mobile.", "We are pleased to expand our offerings, especially given the strong momentum in this market segment. Players can look forward to new releases this year, which our teams will have more to share about in the coming months. In addition, our labels continue to invest in technology and new games that they plan to deliver during the next few years. Turning to eSports.", "The NBA 2K kicked off its fourth season on May 19 that will include on September 4 -- that will conclude on September 4, with the league finals delivered by Door Dash. This season, games have been airing live on the leaks Twitch and YouTube channels and are also available on EGG network in Southeast Asia, ES Revolution, Local in India, Sport 1 in Europe and DASH Radio. The League's continues to grow its audience with more than two million followers on our social media platforms and nearly 470 million video views. We are excited about the League's recent announcement that its 2021 playoffs will mass gaming hub in Dallas, marking the first time that in-person games will be offered since the 2019 NBA 2K League finals in New York City.", "Looking ahead, we believe that the NBA 2K League has the long-term potential to enhance engagement and to be a driver of profits for our company. In closing, we are optimistic about the multiyear growth trajectory ahead of us. We are positioning our business for growth and enhancing our enterprise by investing in talent and infrastructure. With our robust pipeline of titles and content updates, we are confident that we can establish new record levels of operating performance over the next several years.", "I'll now turn the call over to Lainie." ] }, { "name": "Lainie Goldstein", "speech": [ "Thanks, Karl, and good afternoon, everyone. Today, I'll discuss our first-quarter results then review our financial outlook for the second quarter and fiscal-year 2022. Please note that additional details regarding our actual results and outlook are contained in our press release. As Strauss mentioned, fiscal 2022 is off to a strong start, with our first-quarter operating results exceeding our expectations.", "Net bookings were $711 million, which was above our guidance of $625 million to $675 million and marked our second highest Q1 on record. Our outperformance was primarily driven by Grand Theft Auto Online and Grand Theft Auto V, Red Dead Redemption 2 and Red Dead Online and Borderlands 3. During the period, overall engagement exceeded our expectations. Recurrent consumer spending declined 25% as compared to our outlook of a 30% decline and accounted for 69% of total net bookings.", "Our outperformance was primarily driven by Grand Theft Online as well as the addition of Nordeus. This delivered net bookings declined 26% as compared to our outlook of a 30% decline and accounted for 96% of the total. This result is better than our outlook, primarily due to the outperformance of recurrent consumer spending. During the quarter, 73% of console game sales were delivered digitally, up from 71% last year.", "GAAP net revenue declined 2% to $813 million, while cost of goods sold decreased 31% to $330 million. Operating expenses increased by 15% to $313 million, primarily driven by higher personnel and stock compensation expenses as well as the addition of PlayDots and Nordeus. GAAP net income was $152 million or $1.30 per share as compared to $89 million or $0.77 per share in the first quarter last year. We ended the quarter with over $2.5 billion of cash and short-term investments.", "Turning to our guidance. I'll begin with our full fiscal-year expectation. As Strauss mentioned, we are reiterating our net bookings outlook range of $3.2 billion to $3.3 billion. While our first-quarter results outperformed our expectations and our acquisition of Nordeus will benefit the year, this has been being offset by some changes to our release schedule, including moving two of our immersive core titles to later in fiscal 2022 than our prior guidance has contemplated.", "We continue to be very excited about our pipeline and the next phase of growth that it presents for our company. The largest contributor to net bookings are expected to be NBA 2K, Grand Theft Auto Online and Grand Theft Auto V, Red Dead Redemption 2 and Red Dead Online as well as some of our new releases that are yet to be announced. We expect the net bookings breakdown from our labels to be roughly 55% 2K, 35% Rockstar Games and 10% Private Division and Q2 mobile games. We forecast a geographic net booking split to be about 60% United States and 40% international.", "As a result of our outperformance in Q1 as well as the addition of Nordeus, we now expect recurrent consumer spending to decline by 9%, compared to our prior outlook of a 15% decline for this fiscal 2021. As a percentage of net working, recurrent consumer spending is expected to be relatively flat versus last year and represent 65% of total net bookings. We now project digitally delivered net bookings to decrease by approximately 6% as compared to our prior outlook of an 8% decline. As a percentage of our business, digital is projected to represent 90%, slightly above 89% last year.", "Our forecast assumes that 74% of console game sales will be delivered digitally, up from 64% last year. We expect to generate more than $400 million in non-GAAP adjusted unrestricted operating cash flow, and we plan to deploy approximately $170 million to capital expenditures. The increase over our prior guidance relates to the acquisition of two office buildings in the U.K. to support our business in the region.", "We continue to expect GAAP net revenue to range from $3.14 billion to $3.24 billion while we now expect cost of goods sold to range from $1.4 billion to $1.44 billion. Total operating expenses are expected to range from $1.48 billion to $1.5 billion, representing at the midpoint, a 23% increase over the prior year. This increase reflects significant investments in marketing, personnel, stock compensation and IT expenses to bring our expansive multiyear pipeline to market as well as incremental expenses due to the addition of Nordeus and a full-year PlayDots. And we expect GAAP net income to range from $229 million to $259 million or $1.95 to $2.20 per share.", "For management reporting purposes, we expect our tax rate to be 16% throughout fiscal 2022. Now moving to our guidance for the fiscal second quarter. We project net bookings to range from $815 million to $865 million compared to $958 million in the second quarter last year. Our guidance reflects the continued challenging comparisons from last year due to COVID-19.", "The largest contributors to net openings are expected to be NBA 2K, Grand Theft Auto Online and Grand Theft Auto V, Red Dead Redemption 2 and Red Dead Online, Dragon City, Top 11 and. We project recurrent consumer spending to decline by approximately 11% and digitally delivered net bookings to decline by approximately 5%. Our forecast assumes that 64% of console game sales will be delivered digitally, up from 57% last year. We expect GAAP net revenue to range from $740 million to $790 million and cost of goods sold to range from $323 million to $349 million.", "Operating expenses are expected to range from $368 million to $378 million. At the midpoint, this represents a 27% increase over last year, driven primarily by higher marketing, personnel, IT and research and development costs as well as the inclusion of PlayDots and Nordeus. And GAAP net income is expected to range from $41 million to $53 million or $0.35 to $0.45 per share. In closing, our first-quarter results demonstrate the health of our business and the incredible execution from our talented colleagues across the world.", "As we capitalize on our industry's strong talent, combined with our unique business drivers, we believe that our company will deliver significant long-term growth and margin expansion for our shareholders. Thank you. I'll now turn the call back to Strauss." ] }, { "name": "Strauss Zelnick", "speech": [ "Thanks, Lainie and Karl. On behalf of our entire management team, I'd like to thank our colleagues for delivering a strong start to the year. And to our shareholders, I'd like to express our appreciation for your continued support. We'll now be happy to take your questions.", "Operator?" ] } ]
[ { "name": "Operator", "speech": [ "Thank you. [Operator instructions] Your first question comes from the line of Mario Lu with Barclays. Please proceed with your question." ] }, { "name": "Mario Lu", "speech": [ "Great. Thanks for taking the questions too. So being the first of the major game publishers to report earnings this quarter, I wanted to hear your thoughts regarding the recent developments within the industry on gender and equality. If you could share Take-Two's stance on this issue and if there's anything you can share in terms of impacts or change does it expect it to be within the company would be greatly appreciated." ] }, { "name": "Strauss Zelnick", "speech": [ "Thanks for the question. Look, our most important assets here is our people because they create everything that we're able to bring to consumers. We're an asset-light business. We are a business of intellectual property.", "And our strategy, Our stated strategy has always been to be the most creative, the most innovative and the most efficient company in the business. Diversity is key to our success. We need to have a diverse perspective and diverse voices in order to create that quality. So it starts at the top.", "Our Board of Directors is diverse with respect to gender, race and skill set. Our management team is exceedingly diverse from a gender perspective. And our voice as a result are diverse. But we're not stopping there.", "We're also reaching into the community to create a broader, more diverse pool from which we can recruit and our competitors can recruit going forward. So we work together in company-sponsored service projects and the communities in which we operate. We encourage individual volunteerism and giving through philanthropic and matching donation programs. We support organizations that are focused on enhancing diversity.", "We increased the -- in Canada pool through scholarships to design students, contributions to organizations providing STEM opportunities to children and underserved communities. And delivering interview training and career counseling to young adults. And this crosses genders. But in many instances, we're also focused on young females as well.", "So we're trying to do the right thing from the top of the company at the Board level to the management team to even creating a pool from which we can recruit a long time into the future. And even so, I'm sure there's much more that we can do." ] }, { "name": "Mario Lu", "speech": [ "Great. Glad to hear it. And just one question for Lainie on the COVID impact and on the current consumer spending in the quarter. Recurring consumer spending declined 25% versus your guidance, down 30%, which is a smaller beat than usual.", "So given that fiscal 1Q was the first full quarter of comping sheltering place last year, can you give us a little bit more color in terms of how user engagement trended throughout the quarter? Did things go better or worse? And any additional color would be helpful. Thanks." ] }, { "name": "Lainie Goldstein", "speech": [ "So Mario, it's definitely in line with what our expectations were. It's a little bit better. We saw better performance in GTA Online than we expected. We also have the addition of Nordeus, which also helped our recurrent consumer spending in the quarter.", "So we definitely are seeing the engagement in line with what we had expected. So there really isn't any change than what we had guided to from the beginning of the year." ] }, { "name": "Operator", "speech": [ "Our next question comes from the line of Mike Ng with Goldman Sachs. Please proceed with your question." ] }, { "name": "Michael Ng", "speech": [ "Great. Thanks for the question. I also just have two. First, could you talk a little bit about how the success of GTA 5 and GTA Online informs your interest -- or sorry, the interest levels for GTA Enhanced Addition and how that could perform? And then second, just as a housekeeping item, I was just wondering if you're willing to provide the actual growth numbers for GTA Online and Red Dead Online in the quarter? And also, your assumptions, at least directionally, for those businesses in the September quarter guidance for RCS.", "Thank you." ] }, { "name": "Strauss Zelnick", "speech": [ "Thanks, Mike. In terms of our expectations about any upcoming release, apart from where we've given guidance, I don't tend to give any more color than that. Grand Theft Auto V and Grand Theft Auto Online have been out now for some eight years, and the performance has consistently been vastly better than our expectations. I have no doubt in continued addition by consumer.", "I have no doubt absolutely if this will perform, hard to say. This is now the third generation in which the title has existed. I'm an optimist, and I find that you never want to bet against Rockstar Games. So I'm looking forward to the release.", "And Lainie will take the second question." ] }, { "name": "Lainie Goldstein", "speech": [ "So for GTA Online in Q2, our expectations are for it to be up in the quarter due to the update that was just released. We didn't have an update last few years. It is difficult comp because of COVID, but some update are done, not due to the update, but not as up as GTA Online versus last year." ] }, { "name": "Michael Ng", "speech": [ "Great. Thanks, Strauss. Thanks, Lainie." ] }, { "name": "Operator", "speech": [ "Your next question comes from the line of Matthew Thornton with Truist Securities. Please proceed with your question." ] }, { "name": "Matthew Thornton", "speech": [ "Good afternoon. Maybe two quick ones. First, just on the delays, you called out the two immersive core titles. It sounded like maybe there might be some other stuff as well.", "I'm just curious if there's any slippage without getting into specifics around some of the other new mobile titles or extensions kind of planned for the year. Any color there? And then just secondly, I think you just talked a little bit about kind of engagement trends given the pandemic normalization. It sounds like things are trending kind of as you thought three months ago. I don't want to put words in your mouth, but I think that's the interpretation there.", "The other change in the quarter was obviously around the Apple ATT change, changes and the impact on the mobile side of the business. I'm just curious on the mobile side of the business, if you saw any impact there? Or I guess, how that tracked relative to your expectation when we all sat here three months ago? Any color would be great. Thanks, guys." ] }, { "name": "Strauss Zelnick", "speech": [ "Thanks, Matthew. We don't have any other expectations of delays. So we've got -- we've mentioned what we have as we always do. In terms of how things are trending, post pandemic -- if you call this post pandemic, and I hope we can, it remains to be seen.", "The trend is almost exactly what we anticipated and what we've talked about now for over a year, which is we expected post-pandemic demand to be higher than pre-pandemic demand and lower than the demand during the pandemic, which stands to reason because people have, in many ways, return to normal in most of the world. That remains to be seen. And as to what will come in the future, I'm hopeful that, that will continue. But clearly, there's been a systemic shift in favor of interactive entertainment.", "It's now the No. 1 entertainment vertical. It's something like $180 billion market. It's a diverse market in terms of gender.", "It's a diverse market in terms of age. So we couldn't be more optimistic about the market than we are. And in terms of IDFA, it's still early days. It remains to be seen.", "We have not seen any negative impact on our business. And I think that's really because we're big enough that we have lots of access to data. We have a consolidated consumer database across all of our labels, which is very robust. And if you have enough of your own data and you have solid data analytics teams, which we have both at the corporate level and at the label level, then a great deal of the information can be found in other ways.", "And you can do appropriate marketing that protects consumer's privacy without the resources that we had before from Apple. So we're in a good place so far with regard to that change, but it is still early." ] }, { "name": "Operator", "speech": [ "Your next question comes from the line of Andrew Uerkwitz with Jefferies. Please proceed with your question." ] }, { "name": "Andrew Uerkwitz", "speech": [ "Hey. Thank you. I just have two quick ones. First one, I think, for Lainie.", "Could you -- on the increased marketing spend, is the delay effectively you're going to go-to-market with these titles? And then secondly, has the return on marketing spend changed over the last several years, has gotten better, gotten worse? Any color there to kind of -- on how marketing has affected game sales would be useful." ] }, { "name": "Lainie Goldstein", "speech": [ "So the increase in the marketing hasn't really changed. There's a little bit of timing change from Q1 into the rest of the year. And there's a little bit of shift out of the year into next year, but that's being offset by some additional costs due to the acquisition of Nordeus into the year. So there is a little bit of an increase in the overall operating expense in the year versus previous guidance.", "So it's a reduction of a little bit of marketing, offset by the Nordeas expense. And in terms of the return on marketing spend, I wouldn't say there's better or worse. I would say that we're a little bit more targeted on how we're spending our marketing. So I'd say we were getting a better return because we're able to really see how we're spending the marketing in a better way with better analytics over the last few years.", "But the spend continues to be a strong spend in order to do the best marketing for our titles, especially also the mobile titles as well." ] }, { "name": "Andrew Uerkwitz", "speech": [ "Got it. Thank you. And then, Strauss, I just want to go back to the first question a bit. I mean, had some of the issues that popped up as other competitors made you guys kind of rethink how you -- some of your policies, procedures? And then kind of along those lines, I believe employee turnover is all -- you guys have a history of low turnover because people enjoy working at Take-Two.", "Is that still the case? Is turnover is still pretty low?" ] }, { "name": "Strauss Zelnick", "speech": [ "Thanks for the question. Look, what's just positive -- the inclusion, diversity and common decency is of paramount importance to everyone here. And specifically, highly important to me and has been for the 14 years that we've been around. This is nothing new for us.", "The culture of the company is well-known. And well-known internally and reasonably well-known externally. All that said, we can always do better. And I think we're known to be people who always want to be doing better and never want to rest on our laurels.", "We don't think that fostering an appropriate environment is a single set of actions or reflects one day in a new cycle. We think it's a constant process of introspection and improvement. There are always ways that we and the industry can do better. We'll listen to our colleagues, and we'll work on this area over time.", "But I want to be very specific because you asked the question about what we do around here and what we've always done. The first is And I'll say it in his black of white a way as I can, we will not tolerate harassment or discrimination or bad behavior of any kind. We never have. We set those expectations when people come on board here through our code of conduct and our anti-harassment and antidiscrimination policies, all of which our colleagues are required to review and sign when they're hired.", "All of our colleagues take anti-harassment training at hire, and biannually after that. And we make it clear through the training and through our policy that if anyone does experience any inappropriate contact, there are multiple avenues to report that, and they'll never be retaliated against for doing so. Those options include the management chain, anyone in HR, an anonymous complaint by phone or online through our third-party hotline and website reporting too. Take-Two has a director of diversity and inclusion and that includes developing, executing and leading the global DE&I strategy, and that supports our business objectives.", "We also have multiple employee resource groups inside the company and we have more growing all the time, which gives us all a thrill. So that's what we're up to, very specifically. Again, is there more that we could do? I'm certain there is. Do we feel like we're in a pretty good place? We're grateful that we do feel that way right now.", "In terms of retention, our turnover rate is roughly half of the industries. That's been true for about the past 18 months. There have been times when it's been about 70% of industry levels, it's been trending down at a time when I think, in general, turnover is trending up. So we feel good about that.", "And that's another measure of how we're doing, so we focus on it." ] }, { "name": "Andrew Uerkwitz", "speech": [ "Gotcha. Thank you so much for that clarity." ] }, { "name": "Operator", "speech": [ "Your next question comes from the line of Martin Yang with Oppenheimer and Company. Please proceed with your question." ] }, { "name": "Martin Yang", "speech": [ "Good afternoon. Thank you for taking my question. My first one is about how you account for the shifts in business models and player taste for games that have a much longer development cycle than a typical annual releases? And how much input does your central organization have in those directional changes on the market?" ] }, { "name": "Strauss Zelnick", "speech": [ "I'm not sure I entirely follow your question. The development cycles for our core immersive releases are still significant. It takes some time to make what we hope will be the best titles in the business. And the development cycles are not getting shorter for core immersive releases and I wouldn't necessarily expect them to.", "I think what's changed is that in between big releases, we continue to engage consumers with add-on content and with opportunities to engage in online versions of the game in certain instances multiplayer opportunities as well. So that's what created recurrent consumer spending. But much more importantly, recurrent consumer spending reflects consumer activity and engagement. But that doesn't really change development cycles.", "So did I miss your question in some way?" ] }, { "name": "Martin Yang", "speech": [ "No, I think answered it. I have a follow-up for Lainie. In terms of the marketing plan for the year, particularly around expanded enhanced version for GTA, do you treat that game release as a brand-new game around the marketing and campaigns around it? Or do you -- how do you see this enhanced versions in marketing leading to the release?" ] }, { "name": "Lainie Goldstein", "speech": [ "It wouldn't be marketed as a brand-new games. There certainly is marketing around the game, but it wouldn't be as if it's a brand-new release of a GTA property." ] }, { "name": "Martin Yang", "speech": [ "Got it. Thank you" ] }, { "name": "Operator", "speech": [ "Your next question comes from the line of Brian Nowak with Morgan Stanley. Please proceed with your question." ] }, { "name": "Matt Cost", "speech": [ "Hi, guys. It's Matt on for Brian. Thanks for taking the questions. I have two.", "So Strauss, you made a comment about seeing signs of stabilization in media consumption patterns. Obviously, it's understood your comments about how you expected to come to a lower rate post pandemic than you saw during the pandemic. But I guess what are the things that you're seeing right now that are giving you confidence that you're seeing stabilization as opposed to sort of being midway through sort of the normalization process with a floor at some lower level? And then the second question is just on the reorganization of the mobile studios. Are there any new capabilities or new goals for that organization now that you're centralizing all the studios under one umbrella? Is there anything that's new that's possible on the mobile side of the business because of that?" ] }, { "name": "Karl Slatoff", "speech": [ "Thanks, Matt. So in terms of the stabilization of media consumption patterns, really, what we're seeing is we can just see it in the numbers. Obviously, we don't have the same kind of win in our backs as we did during the pandemic itself, but now that the pandemic is hopefully over, some people are getting back to normal. We're experiencing what we expected, but we're also seeing instances like, for example, when the new movies came out for GTA Online, we're seeing record engagement.", "So that in itself shows you that the sort of the moderation that we've seen is really coming to an end because people are engaging when the content is released, and they're engaging in a very significant way. So that gives us a lot of confidence that we may be past the, I guess, you call them headwinds of losing the tailwinds of the pandemic, and we moved on to where the titles are behaving as we would expect in a more normalized environment. So we can see it in the numbers themselves. In terms of centralizing the studios and mobile under one umbrella, we do expect that there will be synergies across the organizations.", "Each of these studios has got something to bring in terms of expertise, whether it's data analytics, whether it's different ways to create content. There are a lot of things that they can learn from each other and bring them together under one management umbrella really gives us the ability -- not to mention also consumer data, really gives us the ability to pursue best practices across the entire organization. So yes, we do expect there to be synergies based on this reorganization." ] }, { "name": "Operator", "speech": [ "[Operator instructions] Next question comes from the line of Gerrick Johnson with BMO Capital Markets. Please proceed with your question." ] }, { "name": "Gerrick Johnson", "speech": [ "Great. Thank you very much. First, I'm just wondering why these titles were delayed." ] }, { "name": "Strauss Zelnick", "speech": [ "We needed more time to polish them and make sure that the best title as they possibly can be." ] }, { "name": "Gerrick Johnson", "speech": [ "OK. So no COVID-related delay then?" ] }, { "name": "Strauss Zelnick", "speech": [ "No. Our team has been incredibly productive throughout the pandemic. And even though we have a lot of work going on its own, productivity is high." ] }, { "name": "Gerrick Johnson", "speech": [ "OK. Great. And is Nordeus accretive?" ] }, { "name": "Lainie Goldstein", "speech": [ "Yes. Nordeus is an accretive acquisition for us." ] }, { "name": "Operator", "speech": [ "Your next question comes from the line of Clay Griffin with MoffetNathanson. Please proceed with your question." ] }, { "name": "Clay Griffin", "speech": [ "Hey. Good afternoon. Strauss, I noted some of these Jim Ryan, specifically calling out Chinese demand for position 5. You've been bullish on the long-term opportunity in China in the sense that it opens up to Western content.", "At the same time, there's obviously been a lot of concern on a regulatory shift in China in the space. I'd love to just get your current thoughts on the Chinese market and how you think Take-Two is positioned to participate in that market over time? Thanks." ] }, { "name": "Strauss Zelnick", "speech": [ "It's a great market for us. We have the No. 1 PC online sports title in China with 54 million registered users. NBA 2K Online continues to grow in China.", "We also have console titles for China, and we have titles that are being approved. We have great relationships in China with Tencent and others. And so we think there's plenty of upside going forward." ] }, { "name": "Operator", "speech": [ "Your next question comes from the line of Brian Fitzgerald with Wells Fargo. Please proceed with your question." ] }, { "name": "Brian Fitzgerald", "speech": [ "Thanks, guys. From Social Point to PlayDots to Nordeus, you guys have always been really highly disciplined in terms of M&A activity. We wanted to ask what you're seeing in terms of valuations on the mobile side of things. Or are platform changes like apples on a T&T, is that making an increasingly harder, Strauss, to your point for small publishers and studios to compete? Is that making it more frothy in terms of the -- just the general environment for acquisitions?" ] }, { "name": "Strauss Zelnick", "speech": [ "We haven't been seeing any change in the market yet, and valuations remain frothy, I think because of the growth of the sector and enthusiasm around the sector. However, our discipline has really paid off in the past 14 years now. We haven't made a failed acquisition. Our acquisitions are accretive, usually right away.", "Sometimes it could take a little bit of time. But we're happy that we've done every deal that we've done. We did miss out on a few that we wish we had done, but frankly, not all that many. I think you raised a good point, which is over time, will it be harder for smaller companies to compete in the space? And I think that will be true.", "The answer will be yes with regard to both mobile and console. The resources required are significant. The risk profile is significant. And the history of the entertainment business is that, over time, those that are very creative, become very successful.", "Those that are very successful become bigger. Those that are bigger, have the opportunity to acquire smaller enterprises. And as long as the focus remains on creativity, innovation and efficiency, as long as the culture that has made the company successful in the first place is maintained, there's an opportunity for continued success even with scale. And that's certainly how we see ourselves and how we envision our future." ] }, { "name": "Operator", "speech": [ "Your next question comes from the line of Drew Crum with Stifel. Please proceed with your question." ] }, { "name": "Drew Crum", "speech": [ "Thanks guys. Good afternoon. OK. So just going back to GTA Online, can you talk about your expectations for the fiscal year? Lainie, I know you said you expect growth in fiscal 2Q.", "You have the stand-alone version coming in November. So with that in place, can GTA Online grow this year? And then separately, I know you guys don't like to guide on specific title, but on Hades, it looks like you had a limited release previously, but managed to ship one million plus copies, very high Metascore. Can you talk about maybe at a high level, what your expectations are for that game and prospects for commercial success?" ] }, { "name": "Lainie Goldstein", "speech": [ "For GTA Online, our expectations for the full year is for -- to moderate. So for the full year, we expect moderation of the trends that benefited us from the industry last year due to COVID and the sheltering at home. So Q1 was down versus last year, we've not beat our expectations. And Q2 is going to be up because of the update, which is doing really well.", "So we do expect Q3 and Q4 right now to be down. But GTA Online always surprises us. So still early in the year, so we'll see what happens. But right now, we do have our expectations as it being moderating for the year." ] }, { "name": "Karl Slatoff", "speech": [ "And in terms of Hades, look, I mean, in a lot of ways, this is one of the ideal projects for Private Division. I mean, we founded the Division based on our effort to hook up with some of the best independent developers in the world. And I would certainly categorize Super Giant as one of those. Hades has obviously had a significant critical and commercial success to date with the digital release.", "And we're really excited to be part of it on the physical side. And we think there's a significant market for that title that has just started. They have sold a good number of copies, but there's a lot of upside for us. So we're thrilled to be in business with Super Giant.", "We think there's a great amount of upside for us, and we're looking forward to the release." ] }, { "name": "Operator", "speech": [ "The next question comes from the line of Benjamin Saf with Deutsche Bank. Please proceed with your question." ] }, { "name": "Unknown speaker", "speech": [ "Hey, guys. Thanks for the question. Just one, if I could. I was just wondering how you guys think about the subscription model in gaming and where and if you see an opportunity there for you guys? Thanks." ] }, { "name": "Strauss Zelnick", "speech": [ "Yes. Our views remain unchanged. We think that a subscription model can make sense for deep catalog titles, but it doesn't really make sense for frontline titles. And for any business model that makes sense in the entertainment business, it has to work for the creators of the entertainment as well as the consumers of the entertainment.", "And I think catalog can make sense for the publishers. It could make sense for consumers who are avid who really want access to a lot of product. But if you're getting into front-line product, then the economics are much more difficult to make sense of. And remember, consumers who are involved with interactive entertainment have different consumption patterns than those involved with linear entertainment.", "Linear entertainment consumers consume something like 150 hours of programming a month. That's probably well over 100 different titles. In the case of interactive entertainment, consumers are consuming something like 45 hours a month, and that may be one, two, three, four titles, but it's certainly not 100 titles. So from a consumer point of view, it's not clear that a subscription model really makes sense for the bulk of consumers.", "That remains to be seen. We're open-minded. We have made catalog titles available for subscription services. Very occasionally, we've made frontline titles available as well.", "But we do see this more as a catalog offering than a front-line offering." ] }, { "name": "Operator", "speech": [ "Your next question comes from the line of Eric Handler with MKM Partners. Please proceed with your question." ] }, { "name": "Eric Handler", "speech": [ "Good evening and thanks for the question. Two questions. First, with regards to the untethering of Red Dead Redemption Online, now that you've had this for a little while. I'm just curious, what are you finding with the game in terms of widening the funnel? Is it bringing new people in that's helping to sell more units of Red Dead Redemption 2? Anything -- any color you can give us would be great." ] }, { "name": "Strauss Zelnick", "speech": [ "It's been good news. We've added players. It's been good for the main game. It's been good for Red Dead Online.", "I think the timing was excellent. Again, I think you can do almost anything from a marketing point of view, if you're mindful of creating appropriate marketing windows." ] }, { "name": "Eric Handler", "speech": [ "Great. And then just as a follow-up. I'm curious with COVID ebbs and flows, are your developers still completely working at home? Are you -- have you brought them back in-house at all? Or where do you stand there?" ] }, { "name": "Strauss Zelnick", "speech": [ "It's a mix. People are back of work in China, for example, and other parts of the globe. We have some people back at work at offices in the U.S. as well.", "We are very mindful of what's going on, our colleague's safety and health comes first. And thankfully, everyone's highly productive wherever they are." ] }, { "name": "Operator", "speech": [ "Your next question comes from the line of Mike Hickey with the Benchmark Company. Please proceed with your question." ] }, { "name": "Mike Hickey", "speech": [ "Congrats on the quarter, guys. Thanks for taking my questions. Two from me. First one, it looks like subsequent quarter end, you started using some CA takedown request to removals in the bottom.", "Just sort of curious the catalyst for doing that in sort of the feedback from the player community. The second question is on the collegiate opportunity. It seems like you sort of have a new frontier here for college sports and athletes. And sorry, I guess your thoughts there and a consideration in your pipeline? Thanks, guys." ] }, { "name": "Strauss Zelnick", "speech": [ "In terms of takedowns, we're pretty flexible, frankly. That said, if the economy is threatened or if there's bad behavior, and we know how to define that, then we would issue or would take to notice. I'm sorry, what was your second question, Mike?" ] }, { "name": "Mike Hickey", "speech": [ "Second question is just on the collegiate opportunity, Strauss, for sports and athletes or games." ] }, { "name": "Strauss Zelnick", "speech": [ "And the opportunity with regard to what, just so I understand your question." ] }, { "name": "Mike Hickey", "speech": [ "NBA, obviously, college basketball would be pretty sweet, I think too. Just sort of, I guess, expansion opportunities for your game portfolio or working with athletes, maybe for marketing or gain from?" ] }, { "name": "Strauss Zelnick", "speech": [ "I'm not sure how to answer it. And so I'm going to be judicious and probably not going to answer it. I will note that we were in business many years ago with the NCAA, and we know longer are and we're always looking for opportunities to grow our business and our sports business." ] }, { "name": "Operator", "speech": [ "Your next question is a follow-up from Matthew Thorton with Truist Securities. Please proceed with your question. Your next follow-up comes from Gerrick Johnson with BMO Capital Markets. Please proceed with your question." ] }, { "name": "Gerrick Johnson", "speech": [ "Great. Thank you. You were in a special time here with next-gen consoles rolling out and you have GTA and NBA both have retailers coming out that will take advantage of those consoles. Are you finding more deferral of those titles in general, waiting for those next versions and the rollout of those consoles?" ] }, { "name": "Strauss Zelnick", "speech": [ "It's awfully hard to measure something like that, but demand for NBA 2K has been very strong this year. We've had a great year. We've sold in over 11 million units. And certainly, ongoing demand for Grand Theft Auto V has been huge.", "We've sold in over 150 million units. So I'm not sure we've seen I'm not sure we could measure it in any case. I don't know -- we have to do tailored research and it still wouldn't tell us that anything that we could do differently. But I remain of the view that the enhanced addition of Grand Theft Auto V will be highly appealing to consumers with next-gen platforms or now car-gen platforms.", "But that remains to be seen." ] }, { "name": "Gerrick Johnson", "speech": [ "Thank you." ] }, { "name": "Operator", "speech": [ "Your next question is the follow from Matthew Thorton with Truist Securities. Please proceed with your question." ] }, { "name": "Matthew Thornton", "speech": [ "Hey, guys. Just two quick follow-ups. I guess, staying on new consoles for a second. I'm just curious how you're thinking about supply as we head into the holiday season.", "And obviously, we've got the next-gen Grand Theft Auto releasing. I'm just kind of curious to the latest thoughts around console, supply and demand. And then just secondly, you guys have talked a lot about the pipeline numbers of releases for fiscal '23 and fiscal '24. You've talked about expecting sequential growth in fiscal '23, and you've talked about getting to new record operating results in the out years as well.", "I'm just curious if that last comment pertains to that window that fiscal '23 to fiscal '24 window or if I'm reading too much into that. Thanks again, guys." ] }, { "name": "Strauss Zelnick", "speech": [ "We know that demand for consoles remains high. That's not in doubt. We're hopeful that supply will be enhanced by year-end, and it will be in a good place. But most importantly, the demand is there.", "And in terms of the pipeline, yes, we said we expected sequential growth in fiscal '23, and we expect to set new operating records in the coming years, and we still have both of those expectations." ] }, { "name": "Operator", "speech": [ "Ladies and gentlemen, we have reached the end of the question-and-answer session. And I would like to turn the call back to Strauss Zelnick for closing remarks." ] }, { "name": "Strauss Zelnick", "speech": [ "Thank you so much for joining us today. I want to, as always, emphatically thank all of our colleagues all around the world. We delivered these great results, and it has been a challenging time to deliver the results and our team shows up and does their best work every day and work continues to pay off. We're so grateful.", "We're also grateful to our shareholders have been so supportive over these years. And I want to wish you all a happy, healthy and safe remainder of the summer. Thanks for joining us." ] }, { "name": "Operator", "speech": [ "[Operator signoff]" ] } ]
TTWO
2022-02-07
[ { "description": "Senior Vice President of Investor Relations and Corporate Communications", "name": "Nicole Shevins", "position": "Executive" }, { "description": "Chairman and Chief Executive Officer", "name": "Strauss Zelnick", "position": "Executive" }, { "description": "President", "name": "Karl Slatoff", "position": "Executive" }, { "description": "Chief Financial Officer", "name": "Lainie Goldstein", "position": "Executive" }, { "description": "Barclays Capital -- Analyst", "name": "Mario Lu", "position": "Analyst" }, { "description": "Morgan Stanley -- Analyst", "name": "Matthew Cost", "position": "Analyst" }, { "description": "Baird -- Analyst", "name": "Colin Sebastian", "position": "Analyst" }, { "description": "Cowen and Company -- Analyst", "name": "Doug Creutz", "position": "Analyst" }, { "description": "Oppenheimer and Company -- Analyst", "name": "Martin Yang", "position": "Analyst" }, { "description": "Stifel Financial Corp. -- Analyst", "name": "Drew Crum", "position": "Analyst" }, { "description": "Truist Securities -- Analyst", "name": "Matthew Thornton", "position": "Analyst" }, { "description": "Wells Fargo Securities -- Analyst", "name": "Brian Fitzgerald", "position": "Analyst" }, { "description": "Deutsche Bank -- Analyst", "name": "Benjamin Soff", "position": "Analyst" }, { "description": "MKM Partners -- Analyst", "name": "Eric Handler", "position": "Analyst" }, { "description": "The Benchmark Company -- Analyst", "name": "Mike Hickey", "position": "Analyst" }, { "description": "Credit Suisse -- Analyst", "name": "Stephen Ju", "position": "Analyst" }, { "description": "Raymond James -- Analyst", "name": "Andrew Marok", "position": "Analyst" }, { "description": "J.P. Morgan -- Analyst", "name": "David Karnovsky", "position": "Analyst" }, { "description": "MoffettNathanson LLC -- Analyst", "name": "Clay Griffin", "position": "Analyst" } ]
[ { "name": "Operator", "speech": [ "Greetings. Welcome to the Take-Two Q3 full year 2022 earnings call. [Operator instructions] Please note, this conference is being recorded. I will now turn the conference over to your host, Nicole Shevins, senior vice president of IR and corporate communications.", "You may begin." ] }, { "name": "Nicole Shevins", "speech": [ "Good afternoon. Thank you for joining our conference call to discuss our results for the third quarter of fiscal year 2022 ended December 31, 2021. Today's call will be led by Strauss Zelnick, Take-Two's chairman and chief executive officer; Karl Slatoff, our president; and Lainie Goldstein, our chief financial officer. We will be available to answer your questions during the Q&A session following our prepared remarks.", "Before we begin, I'd like to remind everyone that statements made during this call that are not historical facts are considered forward-looking statements under federal securities laws. These forward-looking statements are based on the beliefs of our management, as well as assumptions made by and information currently available to us. We have no obligation to update these forward-looking statements. Actual operating results may vary significantly from these forward-looking statements based on a variety of factors.", "These important factors are described in our filings with the SEC, including the company's most recent annual report on Form 10-K and quarterly report on Form 10-Q, including the risks summarized in the section entitled Risk Factors. I'd also like to note that unless otherwise stated, all numbers we will be discussing today are GAAP and all comparisons are year over year. Additional details regarding our actual results and outlook are contained in our press release, including the items that our management uses internally to adjust our GAAP financial results in order to evaluate our operating performance. Our press release also contains a reconciliation of any non-GAAP financial measure to the most comparable GAAP measure.", "In addition, we have posted to our website a slide deck that visually presents our results and financial outlook. Our press release and filings with the SEC may be obtained from our website at take2games.com. And now I'll turn the call over to Strauss." ] }, { "name": "Strauss Zelnick", "speech": [ "Thanks, Nicole. Good afternoon and thank you for joining us today. I'm pleased to report that we delivered another strong quarter, highlighted by net bookings of $866 million, which exceeded our expectations and increased 6% over the prior year. Our outstanding holiday season results were driven by our new and existing titles, as well as strong ongoing engagement from our player communities that continue to immerse themselves in their favorite experiences and exciting new content updates.", "We continue to position our company to deliver on its long-term pipeline, build scale and gain market share. During the quarter, we grew our pool of creative talent with the addition of more than 300 developers. This includes our highly complementary acquisitions of elite3d and Roll7. Based in Valencia, Spain, elite3d is one of the world's leading creative studios that is dedicated to innovative 2D and 3D artwork for the interactive entertainment industry.", "elite3D will form a second office for 2K's 31st Union Studio and serve as a new publishing location for 2K's Global Services Division. Roll7 is the BAFTA award-winning studio behind OlliOlli World, which is launching tomorrow. Going forward, the team will help support Private Division's mission to bring games to market from the industry's top creative studios, as well as to broaden the label's portfolio of owned intellectual property and internal development capabilities. Our most significant recent development was our agreement to combine with Zynga, which we expect to close during the first quarter of our fiscal 2023.", "We're very excited by the prospect of this transformative combination, which will significantly diversify our business; establish us as a leader in mobile, the fastest-growing segment of the interactive entertainment industry; and greatly enhance our positioning as one of the world's top three pure-play publishers of interactive entertainment. We believe there will be tremendous strategic and financial benefits for our company. And we've already identified $100 million of annual cost synergies that we expect to achieve within the first two years post closing and over $500 million of annual revenue opportunities that we can deliver over time. We look forward to welcoming the team Zynga into the Take-Two family in the coming months.", "Turning to our third quarter results. Our better-than-expected performance was driven primarily by Grand Theft Auto: The Trilogy -- The Definitive Edition, Red Dead Redemption 2 and Red Dead Online and NBA 2K22. NBA 2K22 continue to exceed our expectations. And according to the MPT Group, it was the No.", "1 selling title in the U.S. across all new releases in calendar 2021. In addition, the game achieved a new franchise record for experiencing the largest number of users in the shortest amount of time. This performance helped solidify NBA 2K's legacy as the top basketball simulation experience in our industry with over 8 million units sold-in to date worldwide.", "Players remain deeply engaged, and an average of 1.9 million users are playing the game every day, which is up 10% compared to NBA 2K21 in the same period last year. This helped drive better-than-expected recurrent consumer spending growth of 10% year over year even as we face challenging comparisons from the Gen 9 launch of the game last November. In addition, NBA 2K22 experienced an 8% increase in total in-game purchasers and a 30% increase in new-to-franchise spenders. 2K expanded the brand's addressable market further with the launch of NBA 2K22 Arcade Edition for Apple Arcade.", "The title continues to sit at the top of the Arcade's top game chart and has an average score of 4.7 out of five across more than 35,000 ratings. We continue to be pleased with the ongoing innovation the Visual Concepts brings to the series annually and look forward to seeing how they'll deliver new experiences to NBA 2K in the future. Sales of Grand Theft Auto V continue to be strong, and to date, the title has sold-in more than 160 million units worldwide. Since its launch in 2013, Grand Theft Auto V has remained within the top five best-selling titles for each calendar year across the Americas, including the U.S., and over 50 major territories across Europe, the Middle East, Africa and Asia Pacific.", "2021 marked another excellent year for Grand Theft Auto Online with the title matching 2020's record-setting monthly audience size. Grand Theft Auto Online's engagement was driven by an array of free content updates, including new events around Halloween, new vehicles and clothing options for the race creator, and the contract update featuring Grammy award-winning artist, legendary producer in this year's Super Bowl halftime show headliner, Dr. Dre, which were all released during the third quarter. In particular, the contract broke new ground for Grand Theft Auto Online from a design standpoint with its deep story elements and increased access for solo players while also advancing Rockstar Games' unique ability to innovate through incorporating elements of pop culture and music into their experiences.", "The update also features co-op story missions with Grand Theft Auto V Protagonist Franklin and sidekick Lamar's playable characters; a new social space, Record A Studios, where players were able to hang out with Dr. Dre and special guests; a new radio station hosted by global pop stars, Rosalia and Arca, called Motomami Los Santos, named after Rosalia's forthcoming album; updates to two existing radio stations from L.A. DJ royalty, DJ Pooh and Big Boy; six exclusive new tracks by Dr. Dre, which officially released to streaming services this past Friday; and new purchasable properties, vehicles and more.", "In addition, Rockstar Games celebrated the 20th anniversary with the launch of Grand Theft Auto III with the release of Grand Theft Auto: The Trilogy -- The Definitive Addition for current and prior-gen consoles and PC via the Rockstar Games Launcher with the title significantly exceeding our commercial expectations. Red Dead Redemption 2 also had an excellent quarter. The title's outperformance was primarily driven by strong holiday sales and to date, it has sold-in nearly 43 million units worldwide. In addition, Red Dead Online outperformed our expectations due to strong sales of Red Dead Redemption 2 and the continued influx of new players alongside a series of updates, including the fourth installment of the Quick Draw Club, All Hallows' Call to Arms, The Halloween Pass 2 and Holiday Call to Arms.", "2K and Gearbox Software expanded our popular Borderland series further with the release of Borderlands 3 Ultimate Edition. Our teams also rereleased the 2013 fan favorite, Tiny Tina's Assault on Dragon Keep A Wonderlands One-Shot Adventure on a stand-alone basis, which exceeded our expectations and is helping set the stage for next month's eagerly anticipated launch of Tiny Tina's Wonderlands. During the third quarter, recurrent consumer spending rose 2% over last year, which was in line with our expectations of a slight increase and accounted for 57% of net bookings. Our ability to captivate and deeply engage audiences with our offerings remains a distinguishing characteristic of our enterprise.", "NBA 2K and Grand Theft Auto Online were the largest contributors to recurrent consumer spending, and many of our free-to-play offerings were notable drivers as well. Nordeus delivered a strong quarter as its newly released Top Eleven 2022 achieved record-high seasonal net bookings, driven by new features, gameplay improvements and enhanced live operations. Two Dots posted record net bookings results, attributable to additional in-game events, curated seasonal content and successful marketing activations. Dragon City and Monster Legends performance was driven by enhanced live operations, new event types and strong seasonal content.", "2K launched Season 8 for WWE SuperCard, which has now been downloaded more than 25 million times and remains 2K's highest-grossing mobile game. NBA 2K Online in China outperformed our expectations. The title remains the No. 1 online PC sports game in the region with over 55 million registered users.", "Turning to our outlook. As a result of our third quarter outperformance, along with our updated forecast for the balance of the year, we are once again raising our guidance for fiscal year 2022 and we now expect to achieve net bookings of $3.37 billion to $3.42 billion. Lainie will provide more details shortly. Looking ahead, we remain highly optimistic about the future of the interactive entertainment industry and our multiyear growth trajectory.", "We have the strongest and most diverse pipeline in our company's history, comprised of new intellectual properties, as well as sequels to many of our beloved franchises. We look forward to delivering many of these titles in the coming months and beyond. We're also confident that we can emerge as an even stronger player within our industry and deliver long-term value for our shareholders following the anticipated closing of our transaction with Zynga. With greater scale, extensive synergies and a more diversified portfolio of industry-leading titles, we believe that together, our two companies will far exceed our individual goals.", "We'd like to thank all of our stakeholders for their continued support. I'll now turn the call over to Karl." ] }, { "name": "Karl Slatoff", "speech": [ "Thanks, Strauss. I'd like to thank our teams for delivering another outstanding quarter driven by their continued commitment to excellence and dedication to our business. I'll start by discussing our announced offerings planned for the remainder of this fiscal year. Tomorrow, Private Division and our recently acquired Roll7 Studio will launch OlliOlli World on Nintendo Switch, Xbox and PlayStation consoles and Steam.", "This skateboard and action performer has been eagerly awaited by fans and received significant critical praise for its unique art style and tight gameplay mechanics. Reviews for OlliOlli World have been extremely positive with multiple sites recommending or calling the title an essential purchase, with the game currently scoring an 85 on OpenCritic and 84 on Metacritic. We're thrilled to add this popular series to our portfolio and to pursue exciting new projects with the talented team at Roll7. In early March, 2K and Visual Concepts will launch WWE 2K22, which we believe will set a new benchmark in quality for the series.", "The game offers more features and enhancements than any prior WWE 2K release, including a redesigned gameplay engine, new controls, foundational improvements, upgraded visuals and an array of features specifically requested by our passionate player base. WWE 2K22 will hit different, giving players complete control over the game's universe, including a new look and feel, accessible but challenging gameplay and significant replay value. Rey Mysterio, one of the most renowned and respected WWE icons of all time, will grace the cover of this year's game in true Lucha Libre fashion. We can't wait for players to step into the ring with WWE 2K22 and experience all the groundbreaking enhancements on which our teams have been tirelessly working.", "On March 15, Rockstar Games will launch Grand Theft Auto V for PlayStation 5 and Xbox Series S and X, bringing the blockbuster entertainment experience to an unprecedented third-console generation. This new release features new graphics, modes -- features new graphic modes with up to 4K resolution, up to 60 frames per second, texture and draw distance upgrades, HCR options and rate tracing, as well as faster loading times in merchant 3D audio, platform-specific features and much more. We are also excited for new players to join the thriving Grand Theft Auto Online community on the latest hardware when the stand-alone offering is released in March, with Grand Theft Auto Online free on PlayStation 5 for the first three months. PlayStation 4 and Xbox One players eager to continue their journey on the newest generation of hardware will be able to transfer both the Grand Theft Auto V Story Mode progress and our current Grand Theft Auto Online characters and progression to PlayStation 5 and Xbox Series X and S with a one-time migration at launch.", "On March 25, 2K and Gearbox Software will launch an exciting delay tree from the Borderlands universe, Tiny Tina's Wonderlands, the highly anticipated fantasy-fueled and all new take on the looter shooter genre. During the game awards in December, 2K debuted a story trailer introduced on stage by members of Tiny Tina's Wonderlands' all-star celebrity cast. On the heels of the star-studded event, player segment for Tiny Tina's Wonderlands is at an all-time high. We expect the segment to continue to build as we grant access to media and content creators for extended previews and reviews and reveal new gameplay details in the coming weeks.", "We are looking forward to wrapping up our fiscal year with this tent-pole release. Looking ahead to fiscal year 2023. Rockstar Games will launch Grand Theft Auto: The Trilogy -- The Definitive Edition for iOS and Android devices in the first half of calendar 2022. 2K and for access games remain deeply immersed in the development of Marvel's Midnight Suns, one of our most exciting upcoming releases, which will launch this fall.", "The team is diligently working to add more story content, cinematics and overall polish to the game. Given the immense global popularity and cross-media presence of the Marvel Universe, coupled with Firaxis Games proven success in creating deeply immersive games, we believe this title has the potential to appeal to a broad audience that will enjoy experiencing some of comics' most legendary heroes in all new way. Private Division and Intercept Games remain hard at work on Kerbal Space Program 2, the next iteration in our beloved space exploration simulation series. We'll have more to share about our fiscal 2023 pipeline in the coming months and during our fourth quarter call in May.", "Turning to eSports. The NBA 2K League is gearing up for its fifth season, which will provide a thrilling tournament-centric structure, including three-on-one gameplay, amateur teams versus NBA2K League teams and a significantly higher price pool. On February 26, fans can tune in to the latest Twitch and YouTube channels to watch its draft on live stream. In keeping with its ongoing commitment to women and eSports, last month, the League held its third Annual Women in Gaming Development Camp and brought together top amateur female NBA 2K players to compete alongside and learn from League players and coaches and to participate in off-court development sessions focused on amplifying the voices in women and gaming.", "In closing, we believe there is a vast potential for our company to continue captivating and engaging audiences around the world by delivering the very best entertainment experiences. The next few months represent an exciting time for Take-Two as we release many of our new titles and prepare for a transformative combination with Zynga, which brings with it a diverse portfolio of titles, impressive data science capabilities, industry-leading publishing and live operations, a massive customer database and their leading advertising platform, Chartboost. Together, we expect to benefit from substantial costs in publishing synergies while also unlocking significant new revenue streams and reaching new audiences around the world. As we capitalize on these and other opportunities, we believe we will deliver long-term value for our shareholders.", "I'll now turn the call over to Lainie." ] }, { "name": "Lainie Goldstein", "speech": [ "Thanks, Karl, and good afternoon, everyone. Today, I'll discuss our third quarter results and then review our financial outlook for our fiscal year 2022 and fourth quarter. Please note that additional details regarding our actual results and outlook are contained in our press release. As Strauss mentioned, our holiday results were outstanding driven by strong engagement across our key franchises.", "Net bookings were $866 million, which was above our guidance of $800 million to $850 million and up 6% as compared to last year. Our outperformance was primarily driven by Grand Theft Auto: The Trilogy -- The Definitive Addition, Red Dead Redemption 2 and Red Dead Online and NBA 2K22. During the period, recurring consumer spending increased 2% compared to our outlook of a slight increase and accounted for 57% of total net bookings. Digitally delivered net bookings increased 12%, which was above our outlook of a 5% increase and accounted for 88% of the total.", "Our outperformance was primarily due to higher-than-expected digitally delivered full game sales. During the quarter, 63% of console game sales were delivered digitally, up from 56% last year. GAAP net revenue increased 5% to $903 million, and cost of goods sold increased 1% to $350 million. Operating expenses increased by 18% to $399 million, primarily driven by higher personnel and stock-based compensation expenses, the addition of Nordeus and the revaluation of its earn-out, partially offset by lower marketing expense.", "GAAP net income was $145 million or $1.24 per share, as compared to $182 million or $1.57 per share in the third quarter last year. We ended the quarter with approximately $2.5 billion of cash and short-term investments. Turning to our guidance. I'll begin with our full fiscal year expectations.", "We are raising our net bookings outlook range to $3.37 billion to $3.42 billion. This is up from our prior outlook of $3.3 billion to $3.4 billion due to our third quarter outperformance, along with our updated forecast for the fourth quarter. The largest contributors to net bookings are expected to be NBA 2K, Grand Theft Auto Online and Grand Theft Auto V, Red Dead Redemption 2 and Red Dead Online, Borderlands 3 and Grand Theft Auto: The Trilogy -- The Definitive Edition. We expect the net bookings breakdown from our label to be roughly 50% 2K, 40% Rockstar Games and 10% Private Division and TT Mobile Games.", "We forecast our geographic net booking split to be about 60% United States and 40% international. We now expect recurrent consumer spending to decline by 5%, compared to our prior outlook of a 6% decline and represents 65% of net bookings, which is in line with last year. We now project digitally delivered net bookings to decrease by approximately 3%, compared to our prior outlook of a 4% decline. 90% of our net bookings are expected to be digital, slightly above 89% last year.", "Our forecast assumes that 69% of console game sales will be delivered digitally, up from 64% last year. We expect to generate more than $400 million in non-GAAP adjusted unrestricted operating cash flow, and we plan to deploy approximately $170 million for capital expenditures. We are raising our GAAP net revenue outlook to $3.41 billion to $3.46 billion, and we now expect cost of goods sold to range from $1.52 billion to $1.54 billion. Total operating expenses are expected to range from $1.48 billion to $1.49 billion, which at the midpoint represents a 23% increase over the prior year.", "This increase includes investments in marketing, personnel, IT and research and development that will help us deliver our expansive multiyear pipeline. It also reflects the addition of Nordeus and a full year Playdots, as well as an increase in stock compensation expense. Our operating expense expectations are slightly above our prior guidance, primarily driven by the transaction costs associated with our anticipated combination with Zynga. We expect GAAP net income to range from $361 million to $373 million or $3.10 to $3.20 per share.", "For management reporting purposes, we expect our tax rate to be 16% for the remainder of fiscal 2022. Now moving to our guidance for the fiscal fourth quarter. We project net bookings to range from $808 million to $858 million, compared to $785 million in the fourth quarter last year. The largest contributors to net bookings are expected to be NBA 2K, Grand Theft Auto Online and Grand Theft Auto V, which includes Grand Theft Auto V for PlayStation 5 and Xbox Series X and S, Tiny Tina's Wonderlands, Red Dead Redemption 2 and Red Dead Online, Grand Theft Auto: The Trilogy -- The Definitive Edition and WWE 2K22.", "We project recurrent consumer spending to be down 3% compared to last year and digitally delivered net bookings to increase slightly. Our forecast assumes that 77% of console game sales will be delivered digitally, up from 74% last year. We expect GAAP net revenue to range from $835 million to $885 million and cost of goods sold to range from $380 million to $406 million. Operating expenses are expected to range from $389 million to $399 million.", "At the midpoint, this represents a 30% increase over last year, driven primarily by higher marketing expenses to support our fourth quarter release slate, the addition of Nordeus, and transaction costs associated with our anticipated combination with Zynga. GAAP net income is expected to range from $53 million to $65 million or $0.46 to $0.56 per share. Looking ahead, we have many exciting projects underway across all of our labels, and we plan to make continued investments next year to prepare for some of our major launches. With our incredible portfolio of creative assets, our significant growth opportunities, including our robust pipeline and our strong balance sheet, we remain highly confident in our long-term growth trajectory and our ability to deliver shareholder value.", "Before I turn the call back over to Strauss, I'd like to reiterate that we are very excited about our anticipated combination with Zynga. We believe that the proposed transaction will not only bring together our highly complementary portfolios but will also significantly increase take to scale and provide many new growth opportunities. As we disclosed in our January 10 announcement, we expect the combined business to deliver a 14% compound annual growth rate for the three-year period from our fiscal 2021 through 2024, excluding any of the proposed transactions, revenue opportunities or any future acquisitions. In terms of next steps, we expect to file our joint S-4, which includes the proxy statement and prospectus, with the SEC in late February or early March, and our stockholder voting will occur in the spring.", "We continue to expect the transaction to close in the first quarter of our fiscal year 2023. Thank you. I'll now turn the call back to Strauss." ] }, { "name": "Strauss Zelnick", "speech": [ "Thanks, Lainie and Karl. On behalf of our entire management team, I'd like to thank our colleagues for delivering another outstanding quarter. And to our shareholders, I want to express our appreciation for your continued support. We'll now take your questions.", "Operator?" ] } ]
[ { "name": "Operator", "speech": [ "[Operator instructions] Our first question is from Mario Lu with Barclays. Please proceed with your question." ] }, { "name": "Mario Lu", "speech": [ "Great. Thanks for taking my questions. Maybe first on NBA 2K. You guys mentioned that DAUs and bookings were up 10% year on year.", "So just wondering if you could dig a little bit deeper into whether this growth was due to macro-based factors or new modes within the game. Anything that you can point to that suggests that this growth is sustainable long term? Thanks." ] }, { "name": "Karl Slatoff", "speech": [ "Hey, Mario, it's Karl. I'm not sure that there's any macro issues that are going on that I would attribute to the game. I'm sure -- obviously, the NBA is having -- is incredibly successful and is having growth. So that always helps.", "And we're thrilled with that partnership. The games is great. I mean the game is really out of the gate performed fantastically well. I think people are reacting, first and foremost, to the quality of the game and also to the expansive amount of content in the game.", "And we're just really focused on driving engagement. And I think every year, the team at Visual Concepts and 2K continues to add more and more content, more modes and actually enable those most to work more seamlessly together with innovations such as the city, neighborhood, etc. So really for us, it's about the quality of the game and driving engagement through offering more and more and better content. And that's really what we see driving growth.", "And we're not finished. I mean there's -- we're not nowhere near saturation point at this point. There's a lot of greenfield in front of us. And as long as we continue to deliver on the quality of the content, then we expect the growth to continue for the foreseeable future." ] }, { "name": "Mario Lu", "speech": [ "Got it. Thanks, Karl. And then maybe one on GTA. So yes, playing devil's advocate here a little bit.", "So one of the main drivers of outperformance this quarter, you guys mentioned, was The Trilogy. But I believe there were a number of bugs launched that affected gameplay. So one, has this issue been fixed? And then two, more importantly, has there been any changes made to the QA process to ensure that this does not happen to future launches such as GTA Enhanced next month and the next entry in the series thereafter? Thanks." ] }, { "name": "Strauss Zelnick", "speech": [ "Thanks for the question. Yes, we are totally focused on quality here. And we always want to deliver the best possible experience. Very occasionally, we fall short.", "And I think The Trilogy was an example of that. And the title was launched with some issues. We've addressed many of them. There are more fixes to come.", "And going forward, we remain highly focused on quality, and we are exceedingly confident in all of our upcoming releases." ] }, { "name": "Mario Lu", "speech": [ "Great. Thanks, Strauss." ] }, { "name": "Operator", "speech": [ "Our next question is from Matthew Cost with Morgan Stanley. Please proceed with your question." ] }, { "name": "Matthew Cost", "speech": [ "Hi, everyone. Thanks for taking my questions. I have two. So I guess on the 14% CAGR guidance, I think it implies something like $9 billion of revenue for the combined entity in fiscal '24.", "I guess that seems to imply a pretty significant amount of top line growth kind of for the core Take-Two business, excluding Zynga. So I guess what would you call out as kind of the biggest, most important drivers over the next two years to get to that higher revenue base? And which are the most important ones to get there? And then I just guess, secondarily on Zynga. You've talked about the opportunity to drive revenue synergies by maybe using the tools at Zynga to bring some of your tent-pole IPs on to mobile in a bigger way than they have been in the past. How long do you think that would take? What does it look like? How much investment would it take to get there?" ] }, { "name": "Lainie Goldstein", "speech": [ "Matthew, I'll start with the 14% CAGR. And when we're talking about Take-Two's pipeline of titles, we haven't given any detail deeper than that, but we have been talking about the growth of our pipeline over the last couple of years and the 20 titles per year that we've been growing over time. And that's really what's in those numbers. And we talked about more immersive core titles and how we were supporting the pipeline of title, and that's really where that growth is coming from." ] }, { "name": "Strauss Zelnick", "speech": [ "And with regard to bringing Take-Two's core intellectual property to mobile with Zynga's help, look, we think that's one of many great opportunities. We've already said that we expect to achieve $100 million in cost synergies annually over the next couple of years. Additionally, we've identified at least $500 million of annual run rate revenue synergies, many of which are unrelated to new game launches, many of which are unrelated to bringing Take-Two IP to mobile. However, that is an opportunity.", "And while we haven't identified any heroics within there, we do think it's an interesting opportunity on a selective basis in the coming years. The actual investment is not significant compared to our core investment in console and PC IP." ] }, { "name": "Matthew Cost", "speech": [ "Thank you." ] }, { "name": "Operator", "speech": [ "Our next question is from Colin Sebastian with Baird. Please proceed with your question." ] }, { "name": "Colin Sebastian", "speech": [ "Thanks, and good afternoon, guys. I guess, first off, I'm just wondering for -- if you have any industry-level observations on the quarter that just passed. Several high-profile new releases in the industry underperformed expectations. Just wondering if you -- if there was a common denominator that you saw that might explain that or if they were really just title-specific.", "And then secondly, on the mobile business, and I know we're looking past the close of the acquisition, but just curious to learn a little bit more about the road map for converting a bunch of your really strong console and PC franchises to mobile, how quickly you think that can develop?" ] }, { "name": "Strauss Zelnick", "speech": [ "Thanks for your question. Look, this is -- it's really hard to make hits in any entertainment industry. It's really hard to make hit video games. And now and then, we fall short; and now and then, our competitors fall short.", "We don't believe there's any trend in the industry. We just think that, over time, as entertainment industries mature, consumers' expectations always increase, and they should. So it's always our goal to do better with each iteration of a franchise or with each launch of a new intellectual property. And one of the things we're really proud of in our track record is with regard to our franchises, and we have 11 franchises, for example, that have sold over 5 million units with an individual release, each iteration has always sold more than the prior iteration, which is not always true for the industry and lately has really not been true for the industry, but it is true for us.", "But it will only remain true for us if we continue to focus on quality mightily. And that's job No. 1 around here. In terms of bringing Take-Two's core intellectual properties to mobile, that remains a very interesting opportunity.", "As I said earlier, we've identified around $500 million of annual run rate revenue synergies to be achieved in the coming years in the combination with Zynga in addition to $100 million of annual run rate cost synergies. And only a small portion of those synergies on the revenue side are attributable to new releases based on core Take-Two IP. So we have not identified any heroics. We know it will take some time.", "The financial investment in the context of our investing in the console and PC titles is not significant because obviously, the creation of a mobile title is not as heavy a lift. Equally, the hit ratios are not as strong in the mobile space. So I think we have a overview of where we can go in the future. And we're really excited that we think Zynga's extraordinary developers and their extraordinary publishing abilities will enhance our ability to bring core intellectual property to the mobile market." ] }, { "name": "Colin Sebastian", "speech": [ "All right. Thanks, Strauss." ] }, { "name": "Operator", "speech": [ "Our next question is from Doug Creutz with Cowen and Co. Please proceed with your question." ] }, { "name": "Doug Creutz", "speech": [ "Hey, thanks. A couple of questions on RCS. First, if you could just confirm what the RCS growth rate would have been on an organic basis without Nordeus. And then secondly, just to remind, I know that Tiny Tina is shipping with a premium addition that includes access to the season pass.", "How will that impact your RCS bookings in the fiscal fourth quarter? Thanks." ] }, { "name": "Lainie Goldstein", "speech": [ "RCS, I don't -- we didn't -- we don't break that out with Nordeus. So it's -- for the quarter, we had 2% up versus slight increase, but I don't have it broken out without Nordeus. But in total, for the year, we expect RCS to be slightly down by about 5%, and we originally expected it to be 15%. So RCS has been pretty strong for the year and beating our expectations for the year so far.", "So we're pretty happy with the performance for RCF for the year. And for Tiny Tina's, we're not breaking out the premium addition and how much that will impact RCS. So we're not giving that level of detail either." ] }, { "name": "Doug Creutz", "speech": [ "Well, I'm not asking for details, just conceptually, if you sell a prime addition pass that $30 incremental buy-up, presumably, some of that does benefit your RCS revenue in the quarter, correct?" ] }, { "name": "Lainie Goldstein", "speech": [ "Some of it will be added into the RCS." ] }, { "name": "Doug Creutz", "speech": [ "OK. Thanks." ] }, { "name": "Operator", "speech": [ "Our next question is from Martin Yang with Oppenheimer. Please proceed with your question." ] }, { "name": "Martin Yang", "speech": [ "Hi. Thank you for taking my question. I was under the impression that GTA V Enhanced is not available for purchase yet. Can you confirm that? And how do you think about the pricing strategy for the GTA Enhanced relative to GTA V premium, do you intend to use pricing to differentiate the different value proposition between the upcoming Enhanced Edition and the current edition?" ] }, { "name": "Karl Slatoff", "speech": [ "So the next-gen version of GTA V are not, in fact, available for purchase yet, but they will be. And in terms of pricing, we haven't discussed any pricing models around those new releases." ] }, { "name": "Martin Yang", "speech": [ "So conceptually, how would you market the Enhanced Edition versus the Premium Edition? So besides the graphic changes and content, is there any reasons you would give the upcoming potential buyers to purchase the Premium Edition also?" ] }, { "name": "Strauss Zelnick", "speech": [ "Yeah. It's an enhanced version for Gen 9 consoles, and there will be a lot of upgrades and plenty of reason to purchase it. And Rockstar, obviously, will be talking about that in the marketing materials." ] }, { "name": "Martin Yang", "speech": [ "Thank you." ] }, { "name": "Operator", "speech": [ "Our next question is from Drew Crum with Stifel. Please proceed with your question." ] }, { "name": "Drew Crum", "speech": [ "OK. Thanks. Hey, guys. Good afternoon.", "Share with us where the company is in terms of returning the office or studio and your confidence in your label's ability to hit the title count you presented in the slide deck. Do you see ongoing work-from-home as a risk to that? And then separately, I think in past quarters, you guys have said that you expect fiscal '23 to see a reacceleration in growth. Does that guidance still hold? Thanks." ] }, { "name": "Strauss Zelnick", "speech": [ "Yeah. So look, return-to-office is sort of location by location, question depending on the state of affairs in each location and what the local authorities are saying. And obviously, we comply with all local regulations. The expectation is that we're either back now or we will be back in the coming months.", "In any case, the company has proven that we can be very effective without regard to where people are working from. We've had great success in the context of remote work. And while I think all of us are anxious to get back to the office as soon as we possibly can, we're also mindful of the science and the circumstances. We haven't had a quality lapse.", "We haven't had a timing lapse. We haven't had a financial lapse, and we don't expect to." ] }, { "name": "Lainie Goldstein", "speech": [ "So in terms of fiscal year '23, so it's a little early for us to start to give detailed guidance for next year, but we plan to share that on our year-end earnings call in May. But what I can tell you that on a stand-alone basis, we do continue to believe that we will achieve sequential net bookings growth in fiscal year 2023, driven by some of the exciting releases that our labels have been working on. And at the same time, we will make continued investments next year in marketing, talent, in IT and space expansion as we prepare for some of the major launches that our teams have underway, which we project will enable us to deliver record levels of operating performance in the next few years." ] }, { "name": "Operator", "speech": [ "Our next question is from Matthew Thornton with Truist Securities. Please proceed with your question." ] }, { "name": "Matthew Thornton", "speech": [ "Hey, good afternoon, everyone. Obviously, it's been -- fiscal 2022 has been interesting year. And Strauss, I was just wondering if we can get maybe your latest thoughts on maybe where we are in terms of reopening. Obviously, we had data privacy changes that had some impact on the mobile sector.", "Just kind of your thoughts as to maybe where we are there. And then just hiring and retention has been challenging. And I don't think that's gaming-specific. I think that's broad-brush.", "But just curious to get your kind of latest take on some of those countervailing forces this year. Thanks." ] }, { "name": "Strauss Zelnick", "speech": [ "Well, in terms of reopening, as I just said, certain of our offices are fully open. Others will be opening in the coming months, depending on what happens in the marketplaces. We will listen to local authorities. We will pay attention to the science, and we're mostly sensitive to the health and well-being of our colleagues around the world.", "However, my belief is that we will largely be back in office within the next couple of months. But I think the broader point is that working remotely has not been an issue for the company in terms of quality or performance. So we'd all love to be back in the office. Our team today, who is on this call, we're all together in the office today, and we like it that way.", "In terms of data privacy, we have not had any issues coming out from the change in IDFA. And we have an extraordinary customer database. And in the combination with Zynga, we expect to have more than 1 billion customer records, which gives us some massive opportunity from a marketing point of view despite the change in IDFA. So we feel just fine about being able to market and, at the same time, to maintain customers' privacy, which is an important value of ours.", "With regard to hiring, we brought on 300 new developers in the quarter. We continue to grow and grow rapidly, and that's been a good news story because we think people really like working at this company. And with regard to retention, it's an even better story. I think we have one of the lowest attrition rates in the industry, if not the lowest.", "I know our attrition rate is about half that of the industry average. We earn the right to say that every single day. We're really proud of our culture. It's of paramount importance to us." ] }, { "name": "Matthew Thornton", "speech": [ "Hey, Strauss, just one point of clarification, I guess, on the reopening point. I was kind of curious, maybe from the player side, just where you think we are in terms of engagement trends. Are we kind of back to a norm? I'm just kind of curious your latest thoughts there. Thanks again." ] }, { "name": "Strauss Zelnick", "speech": [ "Yeah. I think -- I don't think we're seeing enhanced demand because of the pandemic. I think we're seeing normalized demand at this point." ] }, { "name": "Operator", "speech": [ "Our next question is from Brian Fitzgerald with Wells Fargo. Please proceed with your question." ] }, { "name": "Brian Fitzgerald", "speech": [ "Thanks. We want to ask about the platforms a little bit, maybe like Stadia. Google is reportedly diminishing the gaming focus there. And maybe they just never had enough critical mass in terms of subs.", "Is there just a limit in terms of, hey, market opportunity for that type of device or experience or yet another platform in the market? Maybe gamers are more excited about enhanced versions for the Gen 9 platforms versus cost. And then maybe a related topic, how do you view the recent market activity and the notion of exclusive titles or features of release Windows? Is cross-platforming really just diminishing the need -- actually, the ability to have exclusives?" ] }, { "name": "Strauss Zelnick", "speech": [ "On the first point, look, there's always a marketing story du jour in this business, and we're usually very sober about them. And a couple of years ago, the marketing story du jour was how cloud gaming would completely transform the industry and multiply demand by 20x. And what we said on these calls was we'd love to subscribe to that view, but we didn't subscribe to that view, that we thought streaming and cloud distribution was super interesting but probably wouldn't change the market size materially. And that's exactly what we've seen.", "It's super interesting, and it's not changing the market size materially. So there's broad distribution for our products now for those who want them. And I don't think that anything will occur on the platform side that will significantly change the marketplace going forward. The marketplace will change by virtue of putting out hits or not putting out hits.", "And I think you alluded to that. So as between platform-driven growth or product-driven growth, I'm going with product-driven growth, which means those who are great will do great and those who are good will have problems. Hard for me to opine about exclusive titles. I think in the event that a platform company acquires a label and that label's intellectual property, one could imagine those titles becoming exclusive in certain circumstances.", "I think outside of that, it's less likely, although there may be short-term exclusivity deals still as there always have been. And I do think cross-platform play is the wave of the future, and you're going to see more and more because consumers will demand it." ] }, { "name": "Brian Fitzgerald", "speech": [ "Thanks, Strauss." ] }, { "name": "Operator", "speech": [ "Our next question is from Benjamin Soff with Deutsche Bank. Please proceed with your question." ] }, { "name": "Benjamin Soff", "speech": [ "Hey, everyone. Thanks for the question. I'd like to ask a little bit about RCS. It was sort of in line with your expectations, whereas over the past few quarters, you posted more meaningful outperformance.", "So the question is, were there any surprises, either positive or negative, that impacted RCS this quarter? And I've got a follow-up after that." ] }, { "name": "Lainie Goldstein", "speech": [ "So for RCS this quarter, NBA 2K22 outperformed, as well as Red Dead Online, and GTA Online was in line with our strong expectations. We had some mobile titles that were modestly -- came in below our expectations. So net-net, we were slightly above our expectations. But when we had forecasted for this quarter, we knew that Q2 we had been so much higher.", "So we put some strong expectations on the page. So that's why we didn't over-exceed as much as we did last quarter." ] }, { "name": "Benjamin Soff", "speech": [ "Got it. And then just how should we think about the trajectory of margins for the business over time? Specifically, what are the puts and takes that we should be mindful of as you guys bring to market a much larger number of games in the coming years? Thanks." ] }, { "name": "Lainie Goldstein", "speech": [ "So in terms of our bottom line margins, our expectation is as we build scale for the business is for our bottom line margins to continue to expand. So this year and next year, we have some investments that we're doing in terms of our operating expenses to drive our top line in terms of our organic growth and our pipeline of titles, as we've been talking about. And as that continues to build, our expectations are for our bottom line margins to continue to expand. And we've seen that on years where we've had some big hits, and we continue to expect to have those.", "And we expect to have some record years in the next couple of years. And with that, we would expect to see our bottom line margins expand." ] }, { "name": "Operator", "speech": [ "Our next question is from Eric Handler with MKM Partners. Please proceed with your question." ] }, { "name": "Eric Handler", "speech": [ "Yes, good afternoon, and thanks for the question. I wanted to talk a little bit about Red Dead Redemption 2. It looks like you sold on a quarter-over-quarter basis an incremental 4 million units, your best quarter in a little bit of -- quite some time. I'm curious, was there anything special that led to that increase in unit sales? Or was this sort of seasonality around the holidays? And secondly, I'm just curious what you're seeing from new cohort spending on Red Dead Online versus sort of existing cohort spending?" ] }, { "name": "Lainie Goldstein", "speech": [ "So for Red Dead Redemption 2, we had a lot of holiday promos during the Christmas season, and that really drove a lot of the units, as well as we had a series of updates. So a lot of people are playing the game. So that really drove a lot of those units. And in terms of the new cohort spending, we don't have any real details on that." ] }, { "name": "Eric Handler", "speech": [ "OK. Thank you." ] }, { "name": "Operator", "speech": [ "Our next question is from Mike Hickey with The Benchmark Company. Please proceed with your question." ] }, { "name": "Mike Hickey", "speech": [ "Hey, Strauss, Karl, Lainie. Congrats on the quarter, guys. Thanks for taking my question. Just two.", "I'm not sure if you have given us the engine on this, but the GTA Trilogy for mobile, is that free-to-play? Or is that a premium offering? And then second question, just looking at sort of Microsoft's acquisition of Activision, maybe selling the Activision of -- or excuse me, acquisition of Bungie, thinking about sort of the rise of subscription plans over time, thinking sort of three to five years, how you think that sort of changes the competitive landscape, maybe in particular for sort of the middling budget gains if they can still be competitive outside of that subscription plan that's obviously going with a lot of content. Thanks, guys." ] }, { "name": "Strauss Zelnick", "speech": [ "So we haven't discussed pricing for Trilogy for mobile yet. And on the competitive landscape, hard to know really. I think there are probably puts and calls. I think assuming the Microsoft acquisition of Activision closes, that means there'll be really two very powerful leading pure-play interactive entertainment companies, and we'll be one of them.", "And I think that probably means there are some advantages in terms of attracting talent and being able to invest in really great experiences and to market them powerfully. At the same time, a platform enterprise having an even more robust product slate, there will be benefits. And again, perhaps there'll be some detriments. I think we're very focused on that which we can control, and we tend not to spend a lot of time worrying about things that are out of our control.", "What's within our control is making hits. And as long as we maintain our approach, which is try to be the most creative, the most innovative and the most efficient company in the business, as long as we focus mightily on quality, we'd do well. And if we have a lapse, if we miss a step, if we divert our attention from that strategy, we don't do as well. So we have our work cut out for us, and we're focused on that work." ] }, { "name": "Mike Hickey", "speech": [ "Thank you." ] }, { "name": "Operator", "speech": [ "Our next question is from Stephen Ju with Credit Suisse. Please proceed with your question." ] }, { "name": "Stephen Ju", "speech": [ "Hey, thank you so much. So Strauss and Karl, I want to put you on a spot a little bit. It seems like there has been and continues to be a lot of potential for Private Division publishing opportunities for the company, but there doesn't seem to be a ton of studios out there that you may want to look to acquire maybe. So can you square that dynamic with us? Is it just that access to capital is easy and for the most part, these independent studios value their freedom and maybe want to remain that way? OK.", "Thanks." ] }, { "name": "Strauss Zelnick", "speech": [ "Well, the good news is that Private Division's business model doesn't require us to own the studios we're in business with. In fact, to the contrary. Private Division was set up to offer fantastic publishing marketing services and financing to creators who want to stay independent of the larger enterprises. And Michael Worosz and the team have done a great job building a business that does just that.", "At the same time, we are able to own certain intellectual properties like Kerbal Space Program. And we've just announced that we've acquired Roll7, which makes OlliOlli World, which is being launched tomorrow incidentally and has great Metacritic scores on Switch, and we couldn't be more excited about it. So I think right now, Private Division is able really to offer opportunities for those who want to stay independent and opportunities for those who want to be part of the Private Division system. We obviously have plenty of capital to deploy when the opportunity presents itself to own intellectual property.", "And the sky is the limit. It's still early days for Private Division. We're really excited about what will come in the future." ] }, { "name": "Stephen Ju", "speech": [ "Thank you." ] }, { "name": "Operator", "speech": [ "[Operator instructions] Our next question is from Andrew Marok with Raymond James. Please proceed with your question." ] }, { "name": "Andrew Marok", "speech": [ "Hey, thanks for taking my question. With the performance of the contract so far and its greater emphasis on single player, I guess, how does that inform your road map for future GTA Online content releases? And does it necessarily say anything about the appetite for single-player experiences more broadly? Thanks." ] }, { "name": "Strauss Zelnick", "speech": [ "There was a time when a couple of our competitors were taking a position that single player was dead. We never took that position. We know that there's a role for single player. I believe there will be a role going forward.", "Then there are certain games that are meant to be only multiplayer experiences. Rockstar is known for storytelling. And yes, Rockstar's also known for these fantastic open-world experiences. They clearly do both really well.", "And the contract shows, as you just said, that consumers are really excited about Rockstar's storytelling ability. And at the same time, we had a great quarter with Grand Theft Auto Online. So there's a lot of excitement there. So the answer is sort of all of the above." ] }, { "name": "Operator", "speech": [ "Our next question is from David Karnovsky with J.P. Morgan. Please proceed with your question." ] }, { "name": "David Karnovsky", "speech": [ "Thank you. Just to follow up on a GTA Trilogy question from earlier. I believe work for the game was largely outsourced. And I think you've noted for remasters reports sometimes that's best for -- from a resource standpoint.", "My question is, does the experience with Trilogy lead you to rethink this model at all? Or is this just an isolated case? Thanks." ] }, { "name": "Strauss Zelnick", "speech": [ "We've had precious few quality lapses at this company. So any time that we've fallen short from a quality point of view, it has been an isolated case, and we aim to keep it that way. However, we're not changing our business model." ] }, { "name": "David Karnovsky", "speech": [ "Thank you." ] }, { "name": "Operator", "speech": [ "Our next question is from Clay Griffin with MoffettNathanson LLC. Please proceed with your question." ] }, { "name": "Clay Griffin", "speech": [ "Good evening. Thanks for the question. Strauss, on the Zynga M&A call, you noted kind of one of the key strategic benefits of the deal that now you can address a market that was previously not available to you, i.e. outside of kind of the console market, the high end kind of AAA gaming.", "I suppose like, how do you view that taking shape? I mean, obviously, that market has access to mobile games now. It seems like implicit in that assumption is that you feel that there's demand for kind of what we might call the core Take-Two game experience. But just curious if you view kind of the experiences and the gains that you're thinking about when you think about that market opportunity, if there's any kind of delineation between what you do now, obviously, with AAAs and mobile. Is there a white space kind of in between those two things where you think that's where the real opportunity is? Thanks." ] }, { "name": "Karl Slatoff", "speech": [ "Hey, Clay, it's Karl. I think, look, we've been big supporters and big fans of the mobile market for quite some time. I think that's exhibited in our acquisition strategy over the past few years and obviously with our announced acquisition of Zynga. So it's actually -- it's really exciting for us.", "And it's not just about the casual space or the mid-core space or the core space. We actually think the mobile market has got room for all the above as it relates to that. It's becoming more sophisticated. The technology is getting better.", "There's more cross-platform opportunities. There are more examples of the market for mid-core and core franchises having success. Obviously, Call of Duty is a perfect example of that, Fortnite as well. So we really do think that there's an opportunity for us to play along the entire spectrum of mobile opportunities, which is hyper-casual, which we've never really been involved with that much, to casual to mid-core to even core experiences.", "And look, down the line, I mean one of the benefits of cloud, should that ever come about, which we do hope that it is, is that it does take some of the stress off of the remote device and allows a lot of the intelligence to be done in the cloud. And that enables folks to us to tap into that market all the more easier. In other words, you don't have to buy a console or a high-end PC in order to play sophisticated games. So we really don't think there's any limitation at all in the mobile space for any of our content, whether it be all the way from hyper-casual to our most core assets." ] }, { "name": "Clay Griffin", "speech": [ "Makes sense. And do you think that that takes shape primarily by the way in the way of live services games? Or do you feel like that there's obvious opportunity in kind of the Red Dead Redemption type games as well?" ] }, { "name": "Karl Slatoff", "speech": [ "Yeah. I don't -- look, obviously, most of the mobile space right now is more in the live services business. So there's clearly an opportunity there. But I wouldn't say that single-player story content doesn't have a role in mobile either.", "Again, I wouldn't count out any one of those categories." ] }, { "name": "Clay Griffin", "speech": [ "OK. Thanks very much." ] }, { "name": "Operator", "speech": [ "We have reached the end of the question-and-answer session, and I will now turn the call over to Strauss Zelnick, chairman and CEO, for closing remarks." ] }, { "name": "Strauss Zelnick", "speech": [ "Thanks so much for joining today. We are really grateful to all of our colleagues for delivering another stellar quarter and for the great outlook going forward. Thank you to our shareholders for your continued support, and have a great evening." ] }, { "name": "Operator", "speech": [ "[Operator signoff]" ] } ]
TTWO
2023-08-08
[ { "description": "Senior Vice President, Investor Relations and Corporate Communications", "name": "Nicole Shevins", "position": "Executive" }, { "description": "Chairman and Chief Executive Officer", "name": "Strauss Zelnick", "position": "Executive" }, { "description": "President", "name": "Karl Slatoff", "position": "Executive" }, { "description": "Chief Financial Officer", "name": "Lainie Goldstein", "position": "Executive" }, { "description": "Jefferies -- Analyst", "name": "Andrew Uerkwitz", "position": "Analyst" }, { "description": "ROTH MKM -- Analyst", "name": "Eric Handler", "position": "Analyst" }, { "description": "Truist Securities -- Analyst", "name": "Matt Thornton", "position": "Analyst" }, { "description": "Morgan Stanley -- Analyst", "name": "Matt Cost", "position": "Analyst" }, { "description": "TD Cowen -- Analyst", "name": "Doug Creutz", "position": "Analyst" }, { "description": "Goldman Sachs -- Analyst", "name": "Eric Sheridan", "position": "Analyst" }, { "description": "Barclays -- Analyst", "name": "Mario Lu", "position": "Analyst" }, { "description": "JPMorgan Chase and Company -- Analyst", "name": "David Karnovsky", "position": "Analyst" }, { "description": "Bank of America Merrill Lynch -- Analyst", "name": "Omar Dessouky", "position": "Analyst" }, { "description": "The Benchmark Company -- Analyst", "name": "Mike Hickey", "position": "Analyst" }, { "description": "Wells Fargo Securities -- Analyst", "name": "Brian Fitzgerald", "position": "Analyst" }, { "description": "Deutsche Bank -- Analyst", "name": "Benjamin Soff", "position": "Analyst" } ]
[ { "name": "Operator", "speech": [ "Greetings. Welcome to Take-Two Interactive first quarter fiscal-year 2024 earnings call. [Operator instructions] Please note, this conference is being recorded. I will now turn the conference over to Nicole Shevins, vice president of investor relations and corporate communications.", "Thank you. You may begin." ] }, { "name": "Nicole Shevins", "speech": [ "Good afternoon. Thank you for joining our conference call to discuss our results for the first quarter of fiscal-year 2024 ended June 30, 2023. Today's call will be led by Strauss Zelnick, Take-Two's chairman and chief executive officer; Karl Slatoff, our president; and Lainie Goldstein, our chief financial officer. We will be available to answer your questions during the Q&A session following our prepared remarks.", "Before we begin, I'd like to remind everyone that statements made during this call that are not historical facts are considered forward-looking statements under federal securities laws. These forward-looking statements are based on the beliefs of our management, as well as assumptions made by and information currently available to us. We have no obligation to update these forward-looking statements. Actual operating results may vary significantly from these forward-looking statements based on a variety of factors.", "These important factors are described in our filings with the SEC, including the company's most recent annual report on Form 10-K and quarterly report on Form 10-Q, including the risks summarized in the section entitled Risk Factors. I'd also like to note that, unless otherwise stated, all numbers we will be discussing today are GAAP, and all comparisons are year over year. Additional details regarding our actual results and outlook are contained in our press release, including the items that our management uses internally to adjust our GAAP financial results in order to evaluate our operating performance. Our press release also contains a reconciliation of any non-GAAP financial measure to the most comparable GAAP measure.", "In addition, we have posted to our website a slide deck that visually presents our results and financial outlook. Our press release and filings with the SEC may be obtained from our website at take2games.com. And now, I'll turn the call over to Strauss." ] }, { "name": "Strauss Zelnick", "speech": [ "Thanks, Nicole. Good afternoon, and thank you for joining us today. I'm pleased to report that fiscal 2024 is off to a strong start, highlighted by first quarter net bookings of $1.2 billion, which was at the high end of our expectations, and management results were in line with our plans. Grand Theft Auto Online and Grand Theft Auto V, and NBA 2K23 exceeded our projections, which illustrates the long-lasting benefits of producing the highest-quality offerings and amassing one of the strongest and most diverse portfolios in entertainment.", "In keeping with our core values of creativity, innovation, and efficiency, this quarter, we introduced new intellectual properties, advanced the development of our eagerly anticipated pipeline, and maintained our vigilance with cost management initiatives across our organization. Turning to the results of our titles for the period. Grand Theft Auto V continued to outperform. And to date, the title has sold in more than 185 million units.", "On June 13, Rockstar Games launched San Andreas Mercenaries for Grand Theft Auto Online, which offers six new major story-based missions, as well as new Los Santos operations, hangar upgrades, smuggler source and sell missions, seven new vehicles, and more. The update also includes a range of fan-requested experience improvements and as well as the career progress feature, offering players a new way to track their progress across criminal careers and claim rewards. San Andreas Mercenaries continues to deliver high-value content post launch using a phased approach that is driving sustained engagement and recurrent consumer spending. This June, Grand Theft Auto Online recorded more players than any other June in its history outside of the height of the pandemic.", "GTA+, Rockstar's premium membership service for GTA Online on PlayStation 5 and Xbox Series X and S, offered exclusive options for members to test drive and purchase an array of vehicles, and we're continuing to see strong growth in GTA+ adoption with each passing quarter. We were pleased with the performance of Red Dead Redemption 2, which has sold in more than 55 million units to date. Rockstar Games continues to support Red Dead Online with new bonuses and rewards, including free apparel inspired by the Red Dead Fashion subreddit and seasonal content, such as April's Condor Egg Freemode Event. NBA 2K23 exceeded our plans, and the title has now sold in over 13 million units, representing 11% year-over-year growth, driven by higher demand, especially in Gen9 consoles, as well as a more tailored promotional cadence.", "This incredible performance marks the title's second highest sell-through ever with only NBA 2K20 achieving higher unit sales. Engagement with NBA 2K23 remains strong with approximately 2.6 million daily active users delivering recurrent consumer spending that exceeded our expectations. Our franchise extensions with the NBA continue to perform extremely well, and NBA 2K23 Arcade Edition remains one of the top games on Apple Arcade. WWE 2K23, which is the highest-rated game in our wrestling franchise's history and the second highest-rated sports simulation title of the year, experienced strong engagement throughout the quarter with players logging nearly 22 million hours of gameplay and facing often 170 million matches.", "2K and Visual Concepts continue to support the title with a series of five DLC packs that can be purchased individually or as part of a season pass. 2K also continues to support PGA TOUR 2K23 with additional pros, courses, and clubhouse passes. In May, 2K and Visual Concepts launched LEGO 2K Drive, the first game in a multi-title partnership between 2K and the LEGO Group. Following the launch, our teams released the first of four Drive Pass Seasons for the title, which features 100 levels and new content inspired by the Fast and the Furious saga.", "Also in May, Private Division and Piccolo Studio launched After Us on PlayStation 5, Xbox Series X and S and PC, which has been praised by critics for its striking visuals in game world. Zynga had a solid start to the year, performing in line with our plans, and we're pleased with the ongoing progress of our mobile business. Ad revenue grew approximately 11% year over year, driven by the addition of Popcore and our ability to open new inventory supplies in our portfolio. Toon Blast has been introducing strong feature releases, such as the Toon Race event, which drove outperformance versus our forecast, and helped the game recently surpassed $2 billion in lifetime gross bookings.", "We made excellent progress on our profitability initiatives in mobile. We expanded our offerings on our direct-to-consumer platforms, and we continue to believe that over the next few years, the majority of our mobile games will leverage our highly profitable proprietary distribution channel. We continue to enhance the performance and profitability of our hyper-casual business with multiple new games scaling quickly and several titles generating bookings from in-app purchases, in addition to ads. A few key highlights of Zynga's live services during the period include Empires & Puzzles grew quarter over quarter, driven by the new Path of Giants Battle Pass featuring daily and weekly challenges to unlock rewards.", "Rollic's Twisted Tangle reached the No. 1 free game spot on the U.S. Google Play Store. Social casino again delivered strong results driven by Hit It Rich!'s best quarter in two years and Game of Thrones Casino's second-best quarter in its history.", "Casual games continued to improve participation and engagement with Words with Friends launching the new Clubs Daily Puzzle and Harry Potter: Puzzles & Spells adding bonus levels and Special Delivery price events. With numerous games in development and soft launch across Zynga Studios, we're excited to start delivering several new offerings in the coming months. Turning to our outlook. We're reiterating our prior guidance of $5.45 billion to $5.55 billion in net bookings for fiscal 2024.", "We remain highly optimistic about our future and our ability to deliver record results in the coming years. Lainie will provide more details on our outlook shortly. In closing, as we continue to execute our strategy, we believe that we can increase significantly our scale and prominence within the industry, grow margins, and pursue the vast opportunities to engage even larger audiences around the world. Led by the passion, creativity, and innovation of our world-class development teams, Take-Two is in a powerful position to set new benchmarks for our player communities which we believe will drive long-term returns for our shareholders.", "I'll now turn the call over to Karl." ] }, { "name": "Karl Slatoff", "speech": [ "Thanks, Strauss. I'd like to thank our team for a strong start to the year. Turning to our announced launches for fiscal 2024. Yesterday, Rockstar Games announced that the Bluff Western experiences, Red Dead Redemption and Undead Nightmare, will be coming to the Nintendo Switch and PlayStation 4 for the first time in a new single package arriving August 17.", "In the new conversion by Double Eleven studios, the Switch and PS4 versions bring the two classic afference together again for new players and original fans to enjoy across modern consoles, including backwards compatibility with the PlayStation 5. On September 8, 2K and Visual Concepts will celebrate the 25th anniversary of our industry-defining NBA 2K series and once again redefined basketball simulations with the launch of NBA 2K24, featuring the iconic Kobe Bryant as the game's cover athlete for the second time in the history of the franchise. Players will be able to celebrate Bryant's legacy and replicate his skills in the brand-new Mamba Moments mode. Players in the U.S.", "and Canada can also purchase the WNBA edition of the game exclusively at GameStop, featuring WNBA All-Star Sabrina Ionescu as this year's cover star. NBA 2K24 will introduce cross-play, a community-requested feature for PlayStation 5 and Xbox Series X and S. Available in every multiplayer mode, players will be able to compete with or against others from around the world in dynamic co-op matches, thrilling online tournaments, or casual pickup games between new-generation consoles. The title also introduced ProPLAY, a groundbreaking new technology that directly translates actual NBA footage into gameplay.", "2K will have more to share on NBA 2K24 in the coming weeks. In addition, 2K and Visual Concepts remain hard at work on WWE 2K24, the next installment of our popular wrestling series, which set new creative and critical benchmarks with last year's highly successful release. In June, Private Division and Evening Star announced Penny's Big Breakaway, a new 3D action platformer from the team behind Sonic Mania. This kinetic yo-yo adventure is expected to launch in early 2024.", "Zynga's Star Wars: Hunters, which offers players the opportunity to join the greatest hunters from across the Star Wars Galaxy, is expected to launch later this fiscal year. Players will engage in thrilling third-person combat in a range of competitive game modes across battlegrounds from the iconic world of Star Wars. Also in mobile, Social Point's latest game, top troops, a medieval fantasy-themed title in a PvP merge genre, is progressing well in soft launch and is expected to launch worldwide at this fiscal year. In addition, our hyper-casual studios will release a steady cadence of mobile titles throughout the year, focusing on games that have the potential for enhanced retention rates and a mix of in-app purchases and advertising to drive higher monetization and profitability.", "Our labels will also continue to provide new content and experiences that drive engagement and recurrent consumer spending across many of our offerings, including Grand Theft Auto Online, Red Dead Online, WWE 2K, LEGO 2K Drive, PGA TOUR 2K, Kerbal Space Program 2, and Zynga's mobile portfolio. Throughout fiscal-year 2024, we look forward to launching additional releases from what we believe to be the strongest and most exciting development pipeline in our company's history. I'll now turn the call over to Lainie." ] }, { "name": "Lainie Goldstein", "speech": [ "Thanks, Karl, and good afternoon to everyone. Today, I'll discuss the key highlights from our first quarter before reviewing our financial outlook for the full year and second quarter of fiscal 2024. Our combination with Zynga closed on May 23, 2022, which affects the comparability of our results relative to last year. Additional details regarding our actual results and outlook are contained in our press release.", "We had a strong start to the fiscal year, powered by our portfolio of iconic, industry-leading intellectual properties. As we approach our next phase of growth, our teams continue to make excellent progress advancing our development pipeline and capitalizing on our revenue-driven opportunities and synergies. We also partnered together to maintain our focus on efficiency amid a challenging macroeconomic backdrop and cautious consumer spending trend. I'd like to thank our incredible teams worldwide for their determination and passion for our business.", "Now moving on to our results. We achieved net bookings of $1.2 billion, which was at the high end of our guidance range. In the current backdrop, many consumers are purchasing established franchises and those that offer great value. Our catalog stands at the intersection of these two trends.", "Accordingly, our performance reflects better-than-expected results from Grand Theft Auto Online and Grand Theft Auto V and NBA 2K23. During the quarter, we launched Marvel's Midnight Suns for Gen8 consoles, LEGO 2K Drive, and After Us. Recurrent consumer spending was 38% for the period, which was above our outlook of 35% growth and accounted for 84% of net bookings. The outperformance was primarily driven by Grand Theft Auto Online and NBA 2K23.", "GAAP net revenue increased 17% to $1.28 billion, and cost of revenue increased 39% to $606 million, driven by $187 million of amortization of acquired intangibles. We also recorded an impairment of $80 million related primarily to capitalized software and development costs for an unreleased title, which affected our management results compared to our guidance. Operating expenses increased by 25% to $883 million. On a management basis, operating expenses grew by 46%, which primarily reflected a full quarter of Zynga, higher personnel costs, and depreciation related to office build-outs and capitalized IT expenses.", "Turning to our guidance. I'll begin with our full fiscal-year expectations. As Strauss mentioned, our business is performing well, and we are reiterating our net bookings outlook range of $5.45 billion to $5.55 billion. The largest contributors to net bookings are expected to be NBA 2K; Grand Theft Auto Online and Grand Theft Auto V; our hyper-casual mobile portfolio, Empires & Puzzles, Toon Blast, Merge Dragon, Words with Friends; Red Dead Redemption 2 and Red Dead Online; and Zynga Poker.", "We expect the net bookings breakdown from our labels to be roughly 51%, Zynga; 30%, 2K; 17%, Rockstar Games; and 2%, other. And we forecast our geographic net bookings split to be about 65% United States and 35% international. We continue to forecast recurrent consumer spending growth of 5% compared to fiscal 2023, representing 78% of net bookings. Mobile trends are projected to remain stable, and Zynga's ad business continues to deliver growth.", "We expect to generate approximately $100 million in non-GAAP adjusted unrestricted operating cash flow and deploy approximately $180 million for capital expenditures, primarily to support our office build-outs and larger footprint. We continue to expect GAAP net revenue to range from $5.37 billion to $5.47 billion. Our total operating expenses are expected to range from $3.38 billion to $3.4 billion as compared to $3.45 billion last year. On a management basis, our operating expenses are expected to grow by approximately 15% year over year due primarily to a full year of Zynga, an increase in personnel and marketing expenses, and higher depreciation of office build-outs and capitalized IT expenses, which are being partially offset by the realization of synergies from our combination with Zynga and savings from our cost-reduction program.", "As we announced previously, our teams are taking extensive measures to review our cost structure and reduce discretionary costs whenever possible to offset the current consumer backdrop and inflationary environment while still investing for growth. Now moving on to our guidance for the fiscal second quarter. We project net bookings to range from $1.4 billion to $1.45 billion, compared to $1.5 billion in the second quarter last year. Our release slate for the quarter includes Red Dead Redemption and Undead Nightmare for Switch and PlayStation 4 and NBA 2K24.", "The largest contributors to net bookings are expected to be NBA 2K; Grand Theft Auto Online and Grand Theft Auto V; our hyper-casual mobile portfolio, Empires & Puzzles, Toon Blast, Words with Friends, Merge Dragon; Red Dead Redemption 2 and Red Dead Online; and Zynga Poker. We project recurrent consumer spending to decline by approximately 7%, which assumes modest declines in our mobile business, NBA 2K, driven by changes to its summer promotional cadence, and Grand Theft Auto Online, as well as a reduction in DLC revenue from several titles that were released in prior years. We expect GAAP net revenue to range from $1.26 billion to $1.31 billion. Operating expenses are expected to range from $811 million to $821 million.", "On a management basis, operating expenses are expected to grow by approximately 5% year over year, driven by last year's acquisition of Popcore and higher personnel costs, which are being partly offset by the Zynga synergies and our cost-savings initiatives. In closing, we are confident that the actions our teams are taking this year are preparing us for a strong trajectory of growth. Through our collective efforts, we continue to believe that we are positioning our business for a significant inflection point in fiscal 2025 that will culminate in us delivering new record levels of operating performance next year and beyond. I thank all of our stakeholders for their continued support, and we look forward to delivering on this exciting next chapter.", "Thank you. I'll now turn the call back to Strauss." ] }, { "name": "Strauss Zelnick", "speech": [ "Thanks, Lainie and Karl. On behalf of our entire management team, I'd like to thank our colleagues for delivering a strong start to the fiscal year. And to our shareholders, I want to express our appreciation for your continued support. We'll now take your questions.", "Operator?" ] } ]
[ { "name": "Operator", "speech": [ "Thank you. [Operator instructions] Our first question is from Andrew Uerkwitz with Jefferies. Please proceed." ] }, { "name": "Andrew Uerkwitz", "speech": [ "Yeah, I just have -- I just had one question. Lainie called out consumer weakness kind of continuing. Could you just give an update on where you think the consumer is at? Is there a particular segment that's weaker than others? Just kind of an update on where you think the consumer is at today." ] }, { "name": "Strauss Zelnick", "speech": [ "Yeah. I mean, I love that people are debating whether we're going to be in a recession from the point of view of a digital entertainment company. We've been in a recession for the better part of 18 months. The market for interactive entertainment was down meaningfully in 2022, down for the first time in the history of the mobile business, over 10% pretty much across the board.", "Things are looking a lot better. The year-over-year comps have stabilized. We're seeing growth in the console market. It's early, but we are seeing some growth.", "Mobile, sort of flat, slightly down. We hope that will improve. I do feel like we're all seeing some green shoots across the economy, but it definitely is a mixed picture depending on the U.S. So in the context of the entertainment business, live entertainment is doing great.", "But in the context of entertainment that people consumed at home during the pandemic, it's been challenging for a while. And again, I think it's beginning to normalize, but it's early days yet. When asked a couple of calls ago what I thought would happen in the economy, I said that I thought it would bottom out in June, July. And that by the end of calendar '23, we'd begin to see some good news and that we'd be in a reasonably good position from an economic point of view in early '24, and I continue to believe that that's what will happen." ] }, { "name": "Andrew Uerkwitz", "speech": [ "Got it. And then just one quick follow-up on that with -- around media, I guess. If Hollywood stays in a recession, is that a positive, negative? Or does it not matter for video games?" ] }, { "name": "Strauss Zelnick", "speech": [ "Look, we live within the entertainment ecosystem, so we would never wish for any other industry to have a problem. But if the strike means that new content can't be delivered, then I suppose it could be some small positive benefit for our business. But we aren't counting on that. We're certainly not hoping for it." ] }, { "name": "Andrew Uerkwitz", "speech": [ "Got it. Thank you so much, guys. Appreciate it." ] }, { "name": "Operator", "speech": [ "Our next question is from Eric Handler with ROTH MKM. Please proceed." ] }, { "name": "Eric Handler", "speech": [ "Good afternoon, and thank you for the question. Strauss, I wonder if you could just talk about with mobile advertising, how much -- how many of your games beyond the hyper-casual business have integrated advertising now?" ] }, { "name": "Strauss Zelnick", "speech": [ "Some, and we are moving in that direction selectively. Look, historically, for games where you could make in-app purchases, less than 10% of the audience actually spent. So we are fielding a game for 100% of the audience and monetizing 10% or so, perhaps a bit more, often a bit less. And it's our view that we ought to be monetizing 100% of the audience.", "So if someone's going to spend, that's great. And if they're not going to spend, then we ought to be able to monetize through advertising. The question is how do you do that and create a high-quality experience, and I think the answer is we can do that. We can distinguish among those audiences.", "We're not there yet, but I think we're moving in that direction." ] }, { "name": "Eric Handler", "speech": [ "Thanks. And just as a follow-up, I wondered if you could -- willing to give any specifics about how much of the mobile revenue at this point is on the DTC platform and how that's progressing." ] }, { "name": "Strauss Zelnick", "speech": [ "So we don't actually give out that percentage. Some of our competitors do. And so one of our biggest competitors, I think, has gone on the record to say it's about 25%, and I think that's a good number. We're not remotely in that vicinity.", "There's plenty of room for growth. I would note that Zynga's advertising net bookings were up 11% year over year, so it's really good news. And we're really happy about the growth of our direct-to-consumer platform and what that can mean for consumers and also for us." ] }, { "name": "Eric Handler", "speech": [ "Thank you." ] }, { "name": "Operator", "speech": [ "Our next question is from Matthew Thornton with Truist Securities. Please proceed." ] }, { "name": "Matt Thornton", "speech": [ "Hey, good afternoon, Strauss, Karl, Lainie. Two quick ones for me. Last quarter, we talked about obviously achieving north of $8 billion in bookings next year and north of $1 billion in operating cash flow. I'm just kind of curious if those are still the right bogeys for next year.", "And then just secondly -- and I apologize if I missed this. Any changes to this year's slate? I saw we've got the $18 million impairment charge here. But I guess relative to where we were three months ago, is there any change to this year's release slate? Thanks so much." ] }, { "name": "Strauss Zelnick", "speech": [ "So the answer to question one is yes, and Lainie will answer question two." ] }, { "name": "Lainie Goldstein", "speech": [ "Sure. So for question two, there has been some movements within the back part of the year within the slate, but we're still able to achieve the same guidance for the year, so reiterating our guidance. So just some small changes within the slate, but it has nothing to do with the impairment charge. So the year is still the same." ] }, { "name": "Matt Thornton", "speech": [ "Perfect. Thank you." ] }, { "name": "Operator", "speech": [ "Our next question is from Matthew Cost with Morgan Stanley. Please proceed." ] }, { "name": "Matt Cost", "speech": [ "Hi, everybody. Thanks for taking the questions. Maybe I'll start just by asking about mobile M&A. I mean, that was historically a very big part of Zynga's business.", "It seems like the market may be starting to fall out there in terms of deal activity after D3s for the past year or two. I guess do you see an opportunity to lean back into M&A at the Zynga business, number one? And then number two is just, Lainie, you mentioned in the prepared remarks that some changes to the promotional cadence for NBA 2K. I was wondering if you could just give a little more detail about what those changes are and the size of the financial impact. Thank you." ] }, { "name": "Strauss Zelnick", "speech": [ "So on the deal side, it's hard to know. In terms of our strategy, we think we're in a position to grow organically. We have a lot of new releases coming from Zynga. We're really excited about them.", "As you know, hit ratios are very low in the mobile business, so we're not claiming success until it occurs. But we do feel really good about some new launches. And in terms of the promotional cadences --" ] }, { "name": "Lainie Goldstein", "speech": [ "So NBA 2K24, we expect to be up from 2K23. But 2K23 versus 2K22, there is some less promotional timing in this quarter versus what we did with 22 last year. So that's why we expect the title to be a little bit down versus last year." ] }, { "name": "Matt Cost", "speech": [ "Great. Thank you." ] }, { "name": "Operator", "speech": [ "Our next question is from Doug Creutz with TD Cowen. Please proceed." ] }, { "name": "Doug Creutz", "speech": [ "Hey, thanks. You alluded to this a little bit earlier. You and others have talked about how difficult it is to launch a new mobile title these days. We did see, however, a few months ago, a competitor of yours launched -- Scopely launched MONOPOLY GO!, which has shot to No.", "1 in the App Store charts rapidly, has had a lot of success. As you have observed that, is there anything that you would -- sort of any lessons you would draw from their success that you think could -- you could apply to your own games that you have coming out soon?" ] }, { "name": "Strauss Zelnick", "speech": [ "Look, I think it's an established intellectual property that's been known and beloved for a very long time. And if you combine that with a high-quality expression, I think you can do very well. We don't -- we obviously don't know what they're spending to be in the position that they're in. I do know that we're very focused on profitability, so we're being careful to make sure that our user acquisition spending reflects a high lifetime value for our customer." ] }, { "name": "Doug Creutz", "speech": [ "OK. Thank you." ] }, { "name": "Operator", "speech": [ "Our next question is from Eric Sheridan with Goldman Sachs. Please proceed." ] }, { "name": "Eric Sheridan", "speech": [ "Thanks so much. Maybe just one bigger-picture question. As you continue to sort of integrate Zynga and move further away from the acquisition, curious your updated thoughts on how you're thinking about the elements of AAA titles having sort of cross-promotion, cross-play across elements of console and mobile and how that might inform some of your development cycles in the next couple of years or some of the pipeline dynamics that fed back into some of the bookings longer-term framework from last quarter. Thanks so much." ] }, { "name": "Strauss Zelnick", "speech": [ "We continue to believe there's an opportunity there. We do have titles coming that will offer an opportunity to engage on console and also in mobile, but we don't think it's something that you have to offer. Each title will stand alone. And a question you didn't ask but we've also discussed is the possibility of creating new mobile titles based on core Take-Two intellectual property, and that's something that we're also potentially excited about.", "In all instances, the consumer experience, the quality of the title is what governs, not the business model. So we have to create something great that consumers want. If we do, they'll show up, And if we don't, they won't." ] }, { "name": "Eric Sheridan", "speech": [ "Thank you." ] }, { "name": "Operator", "speech": [ "Our next question is from Mario Lu with Barclays. Please proceed." ] }, { "name": "Mario Lu", "speech": [ "Great. Thanks for taking the question. The first one is on NBA 2K24. You guys mentioned the upcoming cross-play feature was a largely asked one by the community.", "So that being said, curious if there's any data points you could share in terms of how impactful this speech will be in terms of user engagement or recurrent consumer spending? And then is there any reason why it was not included on PC in the last June?" ] }, { "name": "Karl Slatoff", "speech": [ "So this is Karl, Mario. So look, we're very excited about cross-play. It's something that our customers have been asking for and something that's a natural for NBA. So obviously, we don't do anything in -- we don't put any new moats into a game, unless we think that's going to have a significant impact on the experience for the consumer, that's something the consumer is going to love and end up leading to increased engagement.", "And obviously, as we say, when you get increased engagement, you get increased monetization, and then everyone's happy in that regard. So all of these decisions are economic decisions, but it starts off first with the experience itself. And at this point, we're very confident that 2K is tracking well on cross-play experiences, and we're looking forward to that. And as it relates to PC and O-Gen, in terms of -- it's really just again allocation of resources, these decisions." ] }, { "name": "Mario Lu", "speech": [ "Got it. That makes sense. And then just on a separate note, in terms of the topic of charging a higher price for users to get access to a game like early access during the launch, I noticed it wasn't included NBA 2K;s preorder pricing. Is this an opportunity in the future or just something you guys opted out of?" ] }, { "name": "Karl Slatoff", "speech": [ "Yeah. We have -- most of -- it's funny you say a higher price because when we have some early access games in the market right now, we typically would offer them at a lower price because it would imply that there's more to come in the game, and it's not necessarily the final version. We have seen the early access models out there. In terms of holding back access and making people pay more for earlier access, that's not something that we've done to date.", "I would never say never. But honestly, that's a marketing decision. And our priority is really making sure that the game comes out in a timely fashion, is the best experience possible. That's something that makes sense.", "So down the line, we could experiment with it. But to date, that has not been something that we've looked at." ] }, { "name": "Mario Lu", "speech": [ "Got it. Thank you." ] }, { "name": "Operator", "speech": [ "Our next question is from David Karnovsky with J.P. Morgan. Please proceed." ] }, { "name": "David Karnovsky", "speech": [ "Thank you. Just on the bookings by label, I wanted to follow up on the guidance for Zynga. I think that's down slightly on the maintained bookings figure so wanted to see if you could walk through the adjustment there. And then sticking with mobile, you talked about hyper-casual focus on releasing games that retain better, have a higher mix of IP spend.", "Just wanted to see if you could unpack the thinking behind the strategy there, what the traction has been, and maybe how that impacts the ad revenue potentially from Rollic and Popcore. Thanks." ] }, { "name": "Lainie Goldstein", "speech": [ "So for the bookings for Zynga for mobile, there are some game shifts within the year. So there was some reforecasting of some of the existing games, and that's what has changed within mobile." ] }, { "name": "Karl Slatoff", "speech": [ "And then in terms of the hyper-casual business, what we've seen is that there are some gains, particularly with the acquisition of Popcore that are a bit stickier than the typical hyper-casual business. And they have the opportunity to engage consumers for longer periods of time and also potentially lead to not just necessarily monetizing through advertising but also monetizing through in-app purchases. So we're starting to see that. We're starting to experiment with that, and we think that there's a market there for us.", "I think that people have been -- we've been calling as the hybrid casual market where you have the ability to not only monetize with advertising but also in-app purchases, just because the experiences are a bit deeper, and they last a little bit longer. So we think that's very exciting. I don't know that it's going to necessarily impact the advertising opportunity overall, but it certainly creates new opportunities with in-app purchases for us." ] }, { "name": "David Karnovsky", "speech": [ "Thank you." ] }, { "name": "Operator", "speech": [ "Our next question is from Omar Dessouky with Bank of America. Please proceed." ] }, { "name": "Omar Dessouky", "speech": [ "Hi. Thank you for taking my question. So you didn't change your full-year guidance. And I wanted to know -- I think David Karnovsky asked the question and you talked about Zynga a little bit.", "I wanted to know what -- whether your implied like-for-like guidance on mobile has changed at all since the last time you guided. And then within that, do you expect advertising to grow on an organic basis, that is excluding Popcore. And I have one more question." ] }, { "name": "Lainie Goldstein", "speech": [ "So we just mentioned that Zynga has changed a little bit because there was movement in the release schedule and some updates to the forecast, so we did have some changes in the rest of the year. So there were some changes in the release schedule. So there were some ups and downs within the year. But overall, we've kept the entire year the same.", "So we were at the higher end in the first quarter, but we kept -- we reiterated the full year. And then in terms of expecting advertising to grow, yes, we do expect it to grow in the full year." ] }, { "name": "Strauss Zelnick", "speech": [ "Organically." ] }, { "name": "Lainie Goldstein", "speech": [ "Organically, yes." ] }, { "name": "Omar Dessouky", "speech": [ "OK, great. And then the other part of the question I wanted to ask was in terms of your direct-to-consumer channel, I think Strauss said that the majority of mobile games in a few years will leverage that channel. So you have a lot of games. We've counted well over 100.", "Not all of them are your big winners. I think there's a long tail of games. So I guess I wanted to ask, is it that the biggest games are going to be on your DTC platform? Or is it just a sheer number of games? Because I'm trying to get a sense of how much revenue could potentially flow through that channel, if you understand what I mean." ] }, { "name": "Strauss Zelnick", "speech": [ "Yeah, I do understand what you mean. It really varies game by game. So if the game is not suited to direct-to-consumer and it may not be because of its style, its -- the interaction that consumers have with the title, then there may not be an opportunity, even though it's a big title, and then there are other titles where it's a terrific opportunity. Again, we haven't established a number that we're shooting for, but I did quote the number that a competitor has outlined.", "And I think that number is kind of the high end of the possibility." ] }, { "name": "Omar Dessouky", "speech": [ "Thank you." ] }, { "name": "Operator", "speech": [ "Our next question is from Mike Hickey with Benchmark Company. Please proceed." ] }, { "name": "Mike Hickey", "speech": [ "Hey, Strauss, Karl, Lainie, Nicole. Nice quarter, guys. Thanks for taking our question. Curious, Strauss, sort of big picture -- pardon upon, curious what you're thinking on film opportunity.", "I know you're not a train bandwagon guy, so -- but maybe this isn't that. Hard not to notice the results here from Super Mario Bros and The Last Of Us. And this is an area where, historically, it's been a challenge for game IP to have success in new mediums. Looks like the formulas kind of involved the creative piece to the original game and have great story lines.", "And when you look at your portfolio of IP, you've got a ton of opportunities, it would seem like. You certainly have a creative talent. You definitely have a great storyline. So two questions on that, Strauss.", "Curious if your creative teams are motivated to expand their IP into new entertainment mediums, like film or streaming episodic content. And then curious if you think IP expansion into new mediums, like film, can sort of complement your growth strategy over the long term. Thanks, guys." ] }, { "name": "Strauss Zelnick", "speech": [ "Thanks, Mike. We think it's probably a relatively small opportunity economically. We're not going to use our balance sheet to invest in film and television projects. Those are typically very challenged asset classes with which I'm quite familiar.", "And to point out two success, as notable as they may be, lies the fact that there are many, many failures where money was lost. So far, we've taken a very selective approach to licensing, and we do have a Borderlands movie coming from Lionsgate, and we have BioShock movie coming as well. We're excited about both. And selectively, we could see licensing in the future when there's a creative imperative and an economic opportunity.", "I think you're right. The reason there's been success lately was because you had great IP, and then there was a great project that was made from it. And the reason you've had failure in the past is that the expression of the IP just wasn't very good despite people's best efforts. It's a really hard business, and we're not going to bet this company's future or the value of our intellectual property based on someone else's execution in another area of the entertainment business.", "So we'll continue to be very selective indeed. Even if we did take a broad-based approach, in the absence of investing ourselves, the economic opportunity in the context of the much greater economic opportunity for our core business is limited." ] }, { "name": "Mike Hickey", "speech": [ "Thank you." ] }, { "name": "Operator", "speech": [ "Our next question is from Brian Fitzgerald with Wells Fargo. Please proceed." ] }, { "name": "Brian Fitzgerald", "speech": [ "Thanks. Two quick ones. Strauss, not to get wrapped around the axle with semantics, but you said, hey, we had a phased approach when you were talking about GTA Online. Anything to call out there as a difference or an evolution of how you're marketing and delivering incremental content or now it's just more of the normal MO? And then second question is on NBA 2K23 added to PlayStation Plus game of the month.", "That kind -- that definitely contributes to strong engagement, but we're curious whether or not you also see a meaningful uptick in RCS there among those Playstation Plus players, point being if they are waiting to engage with it once it's in a subscription service. Is there a lower propensity to spend in the game? Or no, actually, we see an uptick in RCS there as well." ] }, { "name": "Strauss Zelnick", "speech": [ "So on the first question, by phased approach, I was referring to delivering somewhat smaller chunks of really high-quality content as opposed to waiting for a longer period of time to deliver something that's much larger. And both approaches can work. And of late, the phased approach has been working really well. However, there's not one right approach.", "It varies with what the team has in mind creatively at any given time." ] }, { "name": "Karl Slatoff", "speech": [ "And then in terms of the things like subscription services or game of the month, where the consumer isn't necessarily buying the individual game, obviously, we don't do these things, unless we think there's a significant economic opportunity for us to do so. So you can -- if you see it going in some of those services, you can assume that that math has been done. And yes, we do see an uptick in recurrent consumer spending generally because we bring a lot of new players, and those players are valuable players. And as long as they're engaged with the game itself, the engagement is strong, and the conversion to RCS is very strong.", "It's all about -- and again, it varies cohort to cohort and varies game to game. But if we do drive significant engagement from folks who are coming into the game, we are seeing very favorable reserves as it relates to monetization." ] }, { "name": "Brian Fitzgerald", "speech": [ "Awesome. Thanks, Karl. Thanks, Strauss." ] }, { "name": "Operator", "speech": [ "Our next question is from Benjamin Soff with Deutsche Bank. Please proceed." ] }, { "name": "Benjamin Soff", "speech": [ "Hey, guys. Thanks for the question. Just wanted to dig back into the revenue breakdown by studio. It looks like the percentage for Rockstar and other went up, and I'm just wondering if that's a function of sheer shift from the things you talked about with mobile or if your expectations for those segments, that actually improved.", "And if so, could you talk a little bit more about that?" ] }, { "name": "Lainie Goldstein", "speech": [ "So the update for Rockstar is based on the momentum in their current business. So there's some GTA 5 unit sales, some -- the Red Dead updates and some virtual currency with the GTA Online updating. So it's just overall reforecasting of the business." ] }, { "name": "Benjamin Soff", "speech": [ "OK. Got it. And then just can you talk broadly about the competitive environment in the industry and whether you think it will be sort of at this level more competitive, less competitive, six or 12 months from now? Thanks." ] }, { "name": "Strauss Zelnick", "speech": [ "I think it will be about the same. It's always hard to know. It's a very competitive business at any given time. But ultimately, we're really competing with ourselves because if there's a lot in the market that consumers want, generally speaking, they'll go consume it.", "And if there's nothing that they want, it's not like they consume the next best. They just stay away. So we have to deliver the highest-quality properties. And if we do that, they'll show up in good times and in bad.", "I mean, you're seeing that even in a mixed economy. The best titles still pull bigger audiences." ] }, { "name": "Operator", "speech": [ "We have reached the end of our question-and-answer session. I would like to turn the conference back over to management for closing comments." ] }, { "name": "Strauss Zelnick", "speech": [ "I just want to take a minute to thank our teams again for delivering a superb quarter, and we're really thrilled with the way this year is unfolding. Our titles continue to be of phenomenal quality. We're really excited about our upcoming releases and obviously very excited about the future beyond this fiscal year. And we also want to thank all of you for attending the call, for your great questions.", "And naturally, we're grateful to our shareholders for their continued support. So thanks so much, and have a great evening." ] }, { "name": "Operator", "speech": [ "[Operator signoff]" ] } ]
TTWO
2023-11-08
[ { "description": "Senior Vice President, Investor Relations and Corporate Communications", "name": "Nicole Shevins", "position": "Executive" }, { "description": "Chairman and Chief Executive Officer", "name": "Strauss Zelnick", "position": "Executive" }, { "description": "President", "name": "Karl Slatoff", "position": "Executive" }, { "description": "Chief Financial Officer", "name": "Lainie Goldstein", "position": "Executive" }, { "description": "Jefferies -- Analyst", "name": "Andrew Uerkwitz", "position": "Analyst" }, { "description": "ROTH MKM -- Analyst", "name": "Eric Handler", "position": "Analyst" }, { "description": "TD Cowen -- Analyst", "name": "Doug Creutz", "position": "Analyst" }, { "description": "Raymond James -- Analyst", "name": "Andrew Marok", "position": "Analyst" }, { "description": "Goldman Sachs -- Analyst", "name": "Eric Sheridan", "position": "Analyst" }, { "description": "Stifel Financial Corp. -- Analyst", "name": "Drew Crum", "position": "Analyst" }, { "description": "Bank of America Merrill Lynch -- Analyst", "name": "Omar Dessouky", "position": "Analyst" }, { "description": "The Benchmark Company -- Analyst", "name": "Mike Hickey", "position": "Analyst" }, { "description": "MoffettNathanson -- Analyst", "name": "Clay Griffin", "position": "Analyst" }, { "description": "Wells Fargo Securities -- Analyst", "name": "Brian Fitzgerald", "position": "Analyst" } ]
[ { "name": "Operator", "speech": [ "Greetings, and welcome to the Take-Two Interactive second quarter fiscal year 2024 earnings call. [Operator instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Nicole Shevins, senior vice president of investor relations and corporate communications." ] }, { "name": "Nicole Shevins", "speech": [ "Good afternoon. Thank you for joining our conference call to discuss our results for the second quarter of fiscal-year 2024 ended September 30, 2023. Today's call will be led by Strauss Zelnick, Take-Two's chairman and chief executive officer; Karl Slatoff, our president; and Lainie Goldstein, our chief financial officer. We will be available to answer your questions during the Q&A session, following our prepared remarks.", "Before we begin, I'd like to remind everyone that statements made during this call that are not historical facts are considered forward-looking statements under federal securities laws. These forward-looking statements are based on the beliefs of our management, as well as assumptions made by and information currently available to us. We have no obligation to update these forward-looking statements. Actual operating results may vary significantly from these forward-looking statements based on a variety of factors.", "These important factors are described in our filings with the SEC, including the company's most recent annual report on Form 10-K and quarterly report on Form 10-Q, including the risks summarized in the section entitled Risk Factors. I'd also like to note that, unless otherwise stated, all numbers we will be discussing today are GAAP, and all comparisons are year over year. Additional details regarding our actual results and outlook are contained in our press release, including the items that our management uses internally to adjust our GAAP financial results in order to evaluate our operating performance. Our press release also contains a reconciliation of any non-GAAP financial measure to the most comparable GAAP measure.", "In addition, we have posted to our website a slide deck that visually presents our results and financial outlook. Our press release and filings with the SEC may be obtained from our website at take2games.com. And now, I'll turn the call over to Strauss." ] }, { "name": "Strauss Zelnick", "speech": [ "Thanks, Nicole. Good afternoon, and thank you for joining us today. We delivered another consecutive quarter of excellent results, highlighted by net bookings of $1.44 billion, which was at the high end of our guidance and management results that exceeded our plans. While we expect continued macroeconomic uncertainty, we believe that we're well-positioned for the holiday season and are reiterating our fiscal 2024 net bookings guidance of $5.45 billion to $5.55 billion.", "Looking ahead, I'm exceedingly optimistic about our company's multiyear growth trajectory and our ability to deliver long-term value to our shareholders. Our development pipeline is robust and diverse, and we're getting closer to delivering the groundbreaking titles that our audiences throughout the world have been anticipating eagerly. Our unwavering commitment to being the most creative, the most innovative, and the most efficient entertainment company gives us great confidence that our offerings will surpass our players' expectations and set new standards of creative excellence in our industry. Now turning to the performance of our titles during the quarter.", "Grand Theft Auto V and Grand Theft Auto Online continue to surpass our expectations, an outstanding achievement for two titles celebrating their 10th anniversaries. To date, Grand Theft Auto V has sold an approximately 190 million units. Grand Theft Auto Online experienced continued momentum due to the rollout of new gameplay and items from the San Andreas Mercenaries update with new seasonal events, vehicles, modes, clothes, and weapons, driving sustained engagement and net bookings. Our GTA+ membership program continue to grow, and we're deepening our relationships with our player communities through new offerings, which now include access to a rotating assortment of classic Rockstar Games titles.", "During the quarter, Rockstar Games announced that CitizenFX, the team behind the FiveM and RedM role-playing communities for Grand Theft Auto V and Red Dead Redemption 2, officially joined the label. With their immense passion and creativity, Citizen FX has been pivotal in expanding the possibilities of user-generated content around Rockstar's leading titles. We're excited to see them continue to build these creative communities and help them thrive into the future. We're also thrilled by today's announcement from Rockstar Games founder, Sam Houser, that the eagerly anticipated first trailer for the next Grand Theft Auto will be revealed this coming December.", "As the label approaches its 25th anniversary next month, we congratulate Rockstar Games on their constant innovation in the pursuit of the highest-quality interactive entertainment. Red Dead Redemption 2 surpassed our plans and has sold in more than 57 million units to date. Rockstar Games continues to support Red Dead Online with new content, including bonuses for the naturalist and bounty hunters and new free roam missions and events. In addition, Rockstar Games expanded the audience for the franchise with the launch of Red Dead Redemption and Undead Nightmare for PlayStation 4 and Nintendo Switch.", "On September 8, 2K and Visual Concepts once again redefined the No. 1 NBA simulation experience in our industry with the successful worldwide launch of NBA 2K24. With exciting new features and next-generation enhancements, the title is off to a great start and to date has sold in over 4.5 million units. NBA 2K24 features new season pass options that provide players with the opportunity to earn even more rewards, as well as a new seasonal progression that tracks and combines my career and my team into one linear reward system.", "Engagement has been phenomenal with season pass and virtual currency bookings exceeding our plans and driving double-digit growth in ARPU compared to NBA 2K23. Our franchise extensions continue to perform extremely well, including NBA 2K Mobile, NBA 2K Online in China, and the recently launched NBA 2K24 Arcade edition on Apple Arcade. I'd like to thank 2K and Visual Concepts for continuing to bring innovation and creativity consistently to our beloved franchise. 2K continued to support LEGO 2K Drive with its second Drive Pass Season in the Creators Hub and PGA TOUR 2K23 with additional pros and gear.", "In addition, the label harnessed the power of our industry-leading catalog with the launch of the Borderlands Collection: Pandora's Box, which bundles together all six acclaimed Borderlands games in their previously released add-on content into a single offering at an amazing value. We have great respect for the team at Gearbox, and we value deeply our long-term relationship. Zynga once again delivered solid results during the quarter, and we remain pleased with its ongoing performance. We continue to benefit from Zynga's ability to create engaging new games, which is a distinguishing capability of our mobile business.", "For example, Rollic successfully launched Power Slap based on the world's first regulated and sanctioned slap fighting promotion. The title is highly entertaining and to date has experienced more than 1 billion slaps across training and matches. With the launch of this new mobile game, Rollic has now had 22 titles reached the No. 1 or 2 spot in the U.S.", "Apple App Store. We'd like to thank the entire team over at TKO, including Ari Emanuel and Dana White, for their strong partnership, as well as our colleagues at Rollic, who created this title from inception to release in just eight weeks. Zynga also recently launched Top Troops and Match Factory, both of which delivered excellent KPIs in soft launch and appear to have strong long-term potential for our portfolio. And Star Wars: Hunters continues to hit important milestones as we approach its planned release date in calendar 2024.", "Karl will discuss these titles in greater detail. Other highlights from our mobile business this quarter include our advertising bookings grew year over year, driven by the addition of Popcore, contributions from strategic partnerships, and our efforts to increase adamant inventory in many live games. We continue to make excellent progress in our profitability initiatives, including expanding the number of mobile games to leverage our direct-to-consumer platform. As we convert additional players, we're gaining new insights that we believe will better serve our players' preferences.", "We remain optimistic that over the next few years, most of our mobile games will leverage this highly accretive owned distribution channel. In addition, we continue to enhance the profitability and performance of our hypercasual business with multiple new games scaling rapidly and several games generating revenue from in-app purchases, in addition to ads. Our live games portfolio also continued to deliver. Social casino maintained steady performance coming off a great first quarter, driven by new, bold beat features which drove strong results, particularly in Zynga Poker.", "Additionally, we implemented new updates and events across many games, including Top 11 and Dragon City, which drove audience growth, as well as increased engagement in core systems, leading to better retention and monetization. We stand at an exciting time in our company's history with numerous growth opportunities ahead of us. As we deliver on our strategic priorities, we have the potential to create unparalleled entertainment experiences, engage broader audiences throughout the world and ultimately enhance our scale and margin profile. I'd like to thank all of you for your continued support, and we look forward to delivering our next phase of growth.", "I'll now turn the call over to Karl." ] }, { "name": "Karl Slatoff", "speech": [ "Thanks, Strauss. I'd like to thank our teams for delivering another strong quarter and adding to the ongoing cognitive momentum of our business. I'll now turn to our recent and upcoming launches for fiscal 2024 and beyond. On October 3, Zynga Socialpoint Studio successfully launched Top troops, a new mobile game that blends strategy, RPG, and merge mechanics to create a thrilling Medieval fantasy adventure of combat and conquest.", "This marked the studio's first worldwide launch under Zynga, following our combination last year. The game has seen positive player reception with an average rating of 4.38 on Google Play and 4.5 on the Apple App Store. Engagement has also been fantastic with over 2 million hours played and over 70 million battle spots since its worldwide launch date. 2K and Gearbox Software expanded the audience of our beloved Borderland franchise with the October 6 release of Borderlands 3 Ultimate Edition for Nintendo Switch.", "The game now allows players to make some mayhem at home and on the go in a thrilling high-stakes adventure filled with genre-defining shooter-looter action. On October 20, 2K and Visual Concepts launched the WWE 2K23 Bad Bunny Edition across all platforms. Global phenomenon of Bad Bunny is featured on the cover of the edition, which also includes a new playable version of his in-game character, wearing the apparel that he wore at WWE's Backlash 2023 live event. Zynga's Peak Games studio, the makers of Tune Blast and Toy Blast, released Match Factory, a new puzzle game for mobile where players connect identical items, sort tiles, and clear the board in a mesmerizing 3D environment.", "In soft launch, we observed strong engagement and modernization metrics, as well as very positive player response as indicated by App Store review scores, which gives us optimism about the long-term potential for this new mobile title. Private Division has several exciting releases planned for this fiscal year. On November 28, Roll7 will release their critically acclaimed and wildly imaginative third-person shooter-skater, Rollerdrome, for Xbox Series X and S and PC, as well as Xbox Game Pass for both platforms. Also during the fourth quarter, Evening Star, founded by the industry veterans behind Sonic Mania, will launch Penny's Big Breakaway, a kinetic yo-yo 3D platformer for PlayStation 5, Xbox Series X and S, Nintendo Switch, and PC.", "2K and Visual Concepts are hard at work on WWE 2K24, the next installment of our popular wrestling series, which will launch during the fourth quarter. Looking ahead, we continue to see great engagement and feedback from audiences enjoying Star Wars: Hunters in soft launch across multiple territories. There are several exciting new elements that we are working hard to get into the game, causing us to move the title's worldwide launch window to calendar 2024. Private Division is working with Weta Workshop on Tales of the Shire, a game set in the Middle-earth universe and inspired by the books of J.R.R Tolkien.", "The team recently released a teaser trailer, showing fans a glimpse of the project, which is planned for release in calendar 2024 during our fiscal-year 2025. Also, Zynga plans to globally launch Game of Thrones: Legends, an all-new RPG, puzzle-oriented mobile title. In addition to our full game releases, our labels will continue to provide new content and experiences that drive engagement and recurrent consumer spending across many of our key offerings. Our hypercasual studios plan to release a steady pace of mobile titles for games that have the potential for enhanced retention rates and a mix of in-app purchases and advertising to drive higher monetization and profitability.", "Looking at the balance of this fiscal year and beyond, we are highly optimistic about what we believe to be the strongest and most exciting development pipeline in our company's history. I'll now turn the call over to Lainie." ] }, { "name": "Lainie Goldstein", "speech": [ "Thanks, Karl, and good afternoon, everyone. Today, I'll discuss the key highlights of our second quarter before reviewing our financial outlook for the full year and third quarter of fiscal 2024. Additional details regarding our actual results and outlook are contained in our press release. We delivered another great quarter, which demonstrates the enduring strength of our catalog, our ability to deliver deeply engaging post-launch content, and our commitment to disciplined execution.", "At the same time, our teams continue to make excellent progress advancing our development pipeline, which gives us confidence in our multiyear growth trajectory. I'd like to thank our incredible teams worldwide for their hard work and passion for our business. Now moving on to our results. We achieved net bookings of $1.44 billion, which was at the high end of our guidance range.", "Our performance reflects better-than-expected results from Grand Theft Auto V and Grand Theft Auto Online and Red Dead Redemption 2. During the quarter, we released NBA 2K24, Red Dead Redemption and Undead Nightmare for Switch and PlayStation 4, Borderlands Collection, Pandora's Box, and Power Slap. Recurrent consumer spending declined 7% for the period, which was in line with our outlook and accounted for 78% of net bookings. GAAP net revenue decreased 7% to $1.3 billion, while cost of revenue increased 24% to $884 million, driven by an impairment charge of $220 million and $190 million for amortization of acquired intangibles.", "Operating expenses increased by 3% to $959 million and included $165 million of loan impairment, representing a partial impairment of one of our reporting units. On a management basis, operating expenses were flat year over year, which is favorable to our guidance. This was driven by lower marketing expenditures, some of which shifted to later this year. Turning to our guidance.", "I'll begin with our full fiscal-year expectations. As Strauss mentioned, we are reiterating our net bookings outlook range of $5.45 billion to $5.55 billion. The largest contributors to net bookings are planned to be NBA 2K, Grand Theft Auto Online and Grand Theft Auto V, our hypercasual mobile portfolio, Empires & Puzzles, Toon Blast, Red Dead Redemption 2 and Red Dead Online, Words with Friends, Merge Dragons, and Zynga poker. We expect the net bookings breakdown from our labels to be roughly 49%, Zynga; 31%, 2K; 18%, Rockstar Games; and 2%, other.", "And we forecast our geographic net booking split to be about 65%, United States; and 35%, international. We are projecting the current consumer spending growth of 4% compared to fiscal 2023, which assumes an increase for NBA 2K, as well as Zynga, since we will own the business for a full 12 months this year. Grand Theft Auto Online, virtual currency, and GTA+ Membership is expected to be flat. RCS is expected to represent 78% of net bookings.", "We plan to generate approximately $100 million in non-GAAP adjusted unrestricted operating cash flow and to deploy approximately $150 million for capital expenditures, primarily to support our office buildouts and larger footprint. We continue to forecast GAAP net revenue to range from $5.37 billion to $5.47 billion. Our total operating expenses are now planned to range from $3.53 billion to $3.55 billion as compared to $3.45 billion last year. On a management basis, we continue to expect operating expense growth of approximately 14% year over year due to a full year of Zynga, an increase in personnel and marketing expenses, and higher depreciation of office buildouts and capitalized IT expenses, which are being partially offset by the realization of synergies from our combination with Zynga and savings from our cost-reduction program.", "We remain vigilant in our efforts to optimize our cost structure and reduce discretionary costs where possible while still investing for growth. Now moving on to our guidance for the fiscal third quarter. We project net bookings to range from $1.3 billion to $1.35 billion, compared to $1.4 billion in the third quarter last year. Our release slate for the quarter includes two mobile titles: Top Troops and Match Factory, as well as Borderlands 3 Ultimate Edition, all of which have been released.", "The largest contributor to net bookings are expected to be NBA 2K, Grand Theft Auto Online and Grand Theft Auto V, our hypercasual mobile portfolio, Empires & Puzzles, Toon Blast, Red Dead Redemption 2 and Red Dead Online, Words with Friends, Merge Dragons, and Zynga Poker. We project recurrent consumer spending to decrease by approximately 5%, which assumes a modest decline in our mobile business, which is being partially offset by expected growth in NBA 2K. The Grand Theft Auto Online, virtual currency, and GTA+ Membership is expected to be up. We project GAAP net revenue to range from $1.29 billion to $1.34 billion.", "Operating expenses are planned to range from $826 million to $836 million. On a management basis, operating expenses are expected to grow by approximately 7% year over year, driven by higher personnel and depreciation expenses, which are being partially offset by the Zynga synergies and our cost-savings initiatives. In closing, there are many exciting upcoming catalysts that we believe will enable our company to achieve new record levels of financial performance. Powered by our incredible talent, we believe that our projects in development will set new standards for creativity and engagement in our industry while also significantly enhancing our financial profile.", "We'd like to thank all our stakeholders for being on this journey with us, and we can't wait to share more details with you. Thank you. I'll now turn the call back to Strauss." ] }, { "name": "Strauss Zelnick", "speech": [ "Thanks, Lainie and Karl. On behalf of our entire management team, I'd like to thank our colleagues for enabling us to achieve our goals and to deliver another strong quarter. And for our shareholders, I want to express our appreciation for your continued support. We'll now take your questions.", "Operator?" ] } ]
[ { "name": "Operator", "speech": [ "Thank you. [Operator instructions] And our first question comes from the line of Andrew Uerkwitz with Jefferies. Please proceed." ] }, { "name": "Andrew Uerkwitz", "speech": [ "Great. Thank you for taking my questions. The first one, and I just have one follow-up. The first one, in last quarter, you reiterated your fiscal '25 and '26 guidance.", "I think you announced -- or Sam Houser mentioned, we'll get a trailer for Grand Theft Auto, I think, in December. How are you feeling about those two years? And any reason why you didn't mention those two years in the reiteration of guidance?" ] }, { "name": "Lainie Goldstein", "speech": [ "With shifts in our pipeline, our expectations are that net bookings will now be below $8 billion, but not necessarily. So it really isn't a big change, and we expect growth in '26 as well." ] }, { "name": "Andrew Uerkwitz", "speech": [ "Got it. Thank you. And then kind of just turning to high-level question. The acquisition of 5M seems super interesting, in that it could allow you guys to maybe learn more about user-generated content and find ways to monetize that and expand your audience.", "What's the broader thought of making an acquisition like that and how it fits in, not just with Grand Theft Auto, but maybe the company as a whole?" ] }, { "name": "Strauss Zelnick", "speech": [ "We're really excited about it. I mean, to be clear, this is a small economic opportunity right now and a small cost to us. We want to be where the consumer is and what's going on in role playing and really in two ways: number one, the people are actually playing in role playing servers; and number two, the people are watching what they're doing on Twitch. Both are really interesting.", "The actual people playing is a relatively modest audience. It's in the hundreds of thousands. But the people watching, that's a huge audience. And we're interested in, first of all, making sure that our intellectual property is protected.", "We're also really interested in meeting the consumer where the consumer is. And for certain, consumers bonding is a really important activity. And finally, if people are consuming our intellectual property, we would like to monetize it if we can. We think this gives us an opportunity to do all of the above." ] }, { "name": "Andrew Uerkwitz", "speech": [ "Got it. Thank you." ] }, { "name": "Operator", "speech": [ "Our next question comes from the line of Eric Handler with ROTH MKM. Please proceed." ] }, { "name": "Eric Handler", "speech": [ "Good afternoon. Thanks for the question. I wonder if you could talk a little bit about what you're seeing with players who engage with GTA+. Are they -- are there different -- how they interact with the game versus someone who's not a subscriber." ] }, { "name": "Strauss Zelnick", "speech": [ "We don't see materially different behavior. We think it's a great addition. We're thrilled to engage with our consumers in this way. And it's a learning experience, but it's also gratifying that GTA+ continues to grow and be more and more relevant to more and more consumers." ] }, { "name": "Eric Handler", "speech": [ "Great. And then, Lainie, maybe you can just -- quick clarification. At least on a GAAP basis, advertising was down. Is there a difference between GAAP revenue for advertising and advertising bookings?" ] }, { "name": "Lainie Goldstein", "speech": [ "Yes. There is -- in the GAAP, there is some deferrals, some of the advertising. So that's the difference between us being up in the quarter versus the GAAP showing flat." ] }, { "name": "Eric Handler", "speech": [ "Got it. OK. Thank you." ] }, { "name": "Operator", "speech": [ "Our next question comes from the line of Doug Creutz with TD Cowen. Please proceed." ] }, { "name": "Doug Creutz", "speech": [ "Hey, thanks. Just wondering if you could give any more color on the write-down you took in the quarter. I'm guessing that had to do with some of your mobile assets. But whatever other color you can give, that would be helpful." ] }, { "name": "Lainie Goldstein", "speech": [ "So we recorded an impairment charge of $220 million related to intangible assets and $165 million of goodwill, representing a partial impairment of one of our reporting units. And this is as a result of an updated long-term projection for that reporting unit, but we're not giving any more details, other than that." ] }, { "name": "Doug Creutz", "speech": [ "OK. Thank you." ] }, { "name": "Operator", "speech": [ "Our next question comes from the line of Andrew Marok with Raymond James. Please proceed." ] }, { "name": "Andrew Marok", "speech": [ "Thanks for taking my questions. Over the last couple of weeks and months that -- trying out some different additions of content for GTA+ subs, thinking about the Trilogy in particular, I guess kind of what learnings have you had from the different types of content included in the subscription and how it drives uptake?" ] }, { "name": "Strauss Zelnick", "speech": [ "That's the kind of detail that we typically leave to our labels, so we probably don't have much more to add today, except what I said earlier, which is we are thrilled that Rockstar is offering a subscription to avid consumers. I mean, we think it bodes really well for the future." ] }, { "name": "Andrew Marok", "speech": [ "Right. Appreciate that. And then one more, if I could. I heard a lot about some of the coming titles in mobile, kind of a greater prominence of licensed IP with things like Star Wars, Game of Thrones, Lord of the Rings.", "Just any difference in thinking as to the value of license IP on mobile versus console and PC. Thank you." ] }, { "name": "Karl Slatoff", "speech": [ "So this is Karl. The fact is we do value both. Both can be very, very valuable. Obviously, owning the IP in any context and also in mobile, the margin potential is much higher because you own it full and outright.", "Obviously, with license IP, you have to pay royalties. But the mobile market is tough to break new IP. It's tough to get attention. And it comes out, you can't argue with the fact that having a known brand out there is a way for you to get attention, so it's a give and take.", "I would say our perspective hasn't changed. In a perfect world, we would focus exclusively on owned IP. But the truth is when we see a good license that we think would have -- we have a great idea for a game for and the Zynga folks want to take it to market, then that's something that we're going to continue to pursue." ] }, { "name": "Andrew Marok", "speech": [ "Great. Appreciate it. Thank you." ] }, { "name": "Operator", "speech": [ "Our next question comes from the line of Eric Sheridan with Goldman Sachs. Please proceed." ] }, { "name": "Eric Sheridan", "speech": [ "Thank you so much for taking the question. Maybe one bigger-picture one, first, for strategy. You've seen a lot of media inflation and increases in subscription prices broadly in the media landscape. How do you think about striking the balance between pricing and attracting a wider array of audience when you think about the content pipeline you're going to bring to market over the next couple of years to capture the right mix between those two dynamics? And then second question would be, are there any guardrails we should be keeping in mind in terms of the evolution of the DTC platform? And what piece or cadence that might continue to evolve as a percentage of the mix? Thank you." ] }, { "name": "Strauss Zelnick", "speech": [ "Yeah. I mean, you don't want to generalize our business too much from what's going on in linear entertainment because the increase in subscription pricing and linear entertainment is really a reflection of the fact that too many streaming services were underpricing to acquire customers, and then they realize those customers were not durable, and the LTVs were upside down. So they were basically adjusting their pricing to make sure that the LTVs are potentially positive, and I think there's still more pain to come for some of those services. And I can wax eloquent if you want.", "Although, it has nothing to do with our business. In terms of pricing for any entertainment property, basically the algorithm is the value of the expected entertainment usage, which is to say that the per-hour value times the number of expected hours plus the terminal value that's perceived by the customer in ownership if the title is actually owned, not, say, rented or subscribed to. And you'll see that that bears out in every kind of entertainment vehicle. By that standard, our frontline prices are still very, very low because we offer many hours of engagement.", "The value of the engagement is very high. So I think the industry, as a whole, offers a terrific price-to-value opportunity for consumers. That doesn't necessarily mean that the industry has pricing power or wants to have pricing power. However, there is a great deal of value offered.", "And look, it's our strategy here to deliver much more value than what we charge consumers. It's always been our strategy here. We want to make sure the experience is first class, and the nature of the experience is not just the quality of what we offer, it's also what you pay for. Everyone knows that anecdotally.", "So that's how we look at it. There have been precious few price increases in the business. The price increase, for example, the $70 for certain frontline products was the first price increase in many years after many generations. So again, I think we offer a terrific value to consumers.", "On the second question regarding the direct-to-consumer platform, we think there continues to be a great deal of upside there, again for consumers and also for our margins. It's still a relatively small part of our business. There's a great opportunity for growth. To be clear, we will always work with third-party retailers.", "We want to be where the consumer is. We value our third-party retailer relationships. They do provide marketing support. That's important to us.", "There are times when consumers want to have a direct relationship. We can do both. We can do all of the above. It is not our strategy to bring everything in-house." ] }, { "name": "Eric Sheridan", "speech": [ "Thank you." ] }, { "name": "Operator", "speech": [ "Our next question comes from the line of Drew Crum with Stifel. Please proceed." ] }, { "name": "Drew Crum", "speech": [ "OK. Thanks. Guys, good afternoon. So Strauss, you mentioned that the business is well-positioned for the holiday season.", "What's driving that confidence? And how would you assess the health of your consumer? And then separately, I know it's a subtle change to RCS, but what's behind the adjustment to that figure for the second half, given your fiscal 2Q is in line, it looks like, just based on the commentary around the net bookings mix of Zynga, but just want to confirm that. Thanks." ] }, { "name": "Strauss Zelnick", "speech": [ "So speaking to the confidence of our holiday season, look simply, I think it's the strength of our catalog and the strength of our products, and a lot of our releases are must-have releases. And any time you're heading into a holiday season, and I think everyone around the table and on the phone is helpful that we're going to have a very strong hardware season this year. We do have a lot of titles that we think are sort of go-to titles for people to engage with. And also, you're obviously -- we're also working off of the results that we have to date, which are very strong.", "So the momentum feels positive. We've got a great lineup in place. And it looks like it's going to be a pretty good holiday season from a consumer perspective, particularly in the gaming space." ] }, { "name": "Lainie Goldstein", "speech": [ "And for the RCS, the main driver is the reduction in Zynga's business for the remainder of the year. So we forecasted some of our titles, including a more muted expectation for the holiday based on the current trends, and we're also continuing to focus on profitability in hypercasual, which is reducing our top line but enhancing our margins. And then there's also some shifts in the pipeline, including Star Wars: Hunters." ] }, { "name": "Drew Crum", "speech": [ "Helpful. Thanks, guys." ] }, { "name": "Operator", "speech": [ "Our next question comes from the line of Omar Dessouky with Bank of America. Please proceed." ] }, { "name": "Omar Dessouky", "speech": [ "Hi. Thanks so much for taking the question. I just wanted to get a little bit of clarification on what you said about shifts in your pipeline causing your fiscal '25 guide to be not materially below $8 billion. Is that because of shifts in your very largest AAA games in the pipeline, your smaller AAA games in the pipeline, or your mobile games? If you could provide some clarity on that, I'd appreciate it.", "Then I have a follow-up. Thanks." ] }, { "name": "Strauss Zelnick", "speech": [ "Yeah. We haven't even issued initial guidance for the year. We do that in the spring of the new year, and that's when we'll give a lot more specificity around the release schedule. However, I want to reiterate, we are going to be shy of $8 billion in fiscal '25 but not materially so." ] }, { "name": "Omar Dessouky", "speech": [ "OK. All right. No problem. So then the other question is, obviously, super happy to see Sam Houser's message about the Grand Theft Auto 6 -- next Grand Theft Auto trailer coming soon.", "On September 26, the SAG-AFTRA voted to approve strike authorization for video game performers covered under the union's Interactive media agreement. Now they haven't actually strike yet, but there are negotiations. And I wanted to know whether -- if voice actors and motion capture actors were to go on strike, would it slow down the production of the next Grand Theft Auto at Rockstar? Does Rockstar have the type of employment contracts that would allow the workers, the actors to work through a strike?" ] }, { "name": "Strauss Zelnick", "speech": [ "Negotiations are expected to resume next week. We're optimistic and value all of our talent greatly, and we value excellent labor relations, and we're looking forward to reaching an agreement that serves everyone well. That's always been my approach. I've been involved with labor negotiations in every entertainment industry there is in my career, and they've always worked out just fine.", "In the event that they don't work out just fine. now we are completely protected." ] }, { "name": "Omar Dessouky", "speech": [ "Thank you." ] }, { "name": "Operator", "speech": [ "Our next question comes from the line of Mike Hickey with Benchmark. Please proceed." ] }, { "name": "Mike Hickey", "speech": [ "Hey, Strauss, Karl, Lainie, Nicole, great quarter, guys. Thanks for taking my questions. Two questions. The first one, Strauss, I'd be curious sort of your updated thoughts on AI here.", "It seems like the technology is -- at least the unlock here is accelerating, and some of the use cases that we're seeing in terms of product and productivity seems very remarkable. So just curious what you're thinking there, if that's different or not. And then the second question on the trailer in early December, curious what sort of impact you could think -- you think that might have on other Rockstar product -- catalog product. Obviously, it's already been strong.", "I'm curious if that would be a catalyst boost for your catalog. And I'm curious on Grand Theft Auto Online, what the sort of the strategic value of that live service, given the vitality it has into the release of GTA next. Obviously, that setup, you haven't experienced before. Thanks, guys." ] }, { "name": "Strauss Zelnick", "speech": [ "Thank you, Mike. Look, we've been in the AI business since the dawn of this industry. Our entertainment properties are created largely in and by computers, and we value tools, and we create those tools internally, and we license external tools as well, and the new developments in AI are really exciting. And I've said publicly and repeatedly that I believe that they'll help create efficiency and in certain instances allow us to do things that we haven't been able to do before.", "But it's going to allow that for our competitors as well. So I think the tool sets that come out of these recent developments will be commoditized quickly. And the efficiencies that we see, others will see. Do I think that generative AI is going to make hit games? No.", "Do I think that the need for creative people will go away? Absolutely not. I think, if anything, better tool sets just raise the bar. They give us the opportunity to do more and do better. So the changes will be menial work probably is reduced or eliminated.", "High-level work is enhanced in importance. So I think you'll see shifts in what we can do with our games. So you mentioned product. I think you'll see some shifts in product, positive ones, I hope.", "And you mentioned productivity, and I think you will, for sure, see shifts in productivity, but I'm not sure those shifts will drop to the bottom line because, typically, when we've generated productivity with tool sets, we've just set our sights higher. And that's our story. Our strategy is to be the most creative, the most innovative, and the most efficient company in the business. And AI, I think, probably ticks all three boxes, but don't expect the price tags to go down.", "Just expect everything to get better, and competition probably will become more intense for people who are not able to avail themselves of the resources that we can afford. With regard to the expected trailer that Sam Houser posted about today, we're as excited as anyone else. And do I think there will be an impact on our catalog revenue? Potentially. Things are already going really well in that space.", "And with regard to GTA Online, I mean, it's one amazing story that here are we are 10 years later after the initial release, and GTA Online is going strong. Why is it going strong? Because it's phenomenal and because Rockstar continues to supply content and updates and engage consumers and entertain them more effectively than, frankly, anyone else in the business. As long as we keep doing that, we'll be very well-positioned indeed." ] }, { "name": "Operator", "speech": [ "[Operator instructions] our next question comes from the line of Clay Griffin with MoffettNathanson. Please proceed." ] }, { "name": "Clay Griffin", "speech": [ "Yeah, thanks. Good evening. I couldn't help but notice that Nintendo announced a live action film, Zelda film. I know this question comes up all the time.", "I guess maybe we'll pose it this way. What's your relative willingness and perhaps even Rockstar's willingness to partner and find ways to extend Red Dead Redemption IP, Grand Theft Auto IP, just because it has been so successful from a narrative perspective? Just wanted to get your updated thoughts on that. Thanks." ] }, { "name": "Strauss Zelnick", "speech": [ "We've spoken about this many times. If we're willing to use the company's balance sheet to make a movie or a television show, then in the event of great success, we would benefit from it. But we're not prepared to use the company's balance sheet that way because the risk/reward profile is unappealing to us. Those are very difficult businesses.", "I've been in them successfully. They're super challenging. They're not what we do. We much prefer the risk/reward profile of the business we're in.", "So that means that the only way we can be in that business is through a license arrangement with a third party. And let's put it in context. Mattel announced, they said, that their profits, expected profits from licensing the Barbie IP for a movie would be about $125 million. Now Barbie is a massive, massive hit, and it's extraordinary hit.", "So you don't want to pause a massive hit and look at the numbers that way. Even in a really good news scenario, the license fees would be a fraction thereof for many of our properties, not really enough to be meaningful here. And we have to weigh that, too, against the risk of failure. And the hit ratios in the motion picture business are vastly lower than they are in the interactive entertainment business.", "Our hit ratios for console properties here are in the 80% or 90%. The hit ratio for a well-run movie studio is around 30%, which is to say there's a 70% chance that the movie that we license could fail. And so in success, the number in terms of the benefit to our bottom line is not de minimis. It's not zero, but it's not really material to what we do around here.", "And in failure, we run the risk of compromising the underlying intellectual property. So it's a high bar. We have licensed two properties. We've licensed Borderlands.", "The Lionsgate picture is coming. We've licensed BioShock. We're looking forward to that as well. And we have other titles in discussions, not anything ready to announce, but we're going to be very, very selective and very careful." ] }, { "name": "Clay Griffin", "speech": [ "Makes sense. Thanks." ] }, { "name": "Operator", "speech": [ "And our next question comes from the line of Brian Fitzgerald with Wells Fargo. Please proceed." ] }, { "name": "Brian Fitzgerald", "speech": [ "Thanks. Strauss, we've been seeing more discussion of intrinsic in-game advertising, things like in-game billboards. And it seems like brand advertisers are getting more and more comfortable with in-game advertising. What are your thoughts on the broader opportunity there beyond mobile, beyond games within games, and maybe as well as your outlook for particularly those own ad business and how that evolves.", "Thanks, and congrats on the quarter." ] }, { "name": "Strauss Zelnick", "speech": [ "Thanks. I mean, you understand what we're already doing in mobile, so I don't think you want me to cover that, and you alluded to that. With regard to console titles, we have advertising when it makes sense creatively and feels organic to the title. So for example, in NBA, if you go to a basketball game, you're going to see advertising in the arena.", "So it's perfectly reasonable to see the same kind of advertising in our game. But we're not going to do product placement where it's inappropriate so that we can create a small amount of revenue. First of all, the numbers aren't huge. But secondly, anything that we do that takes our consumer out of the experience is problematic.", "So years ago -- and I don't mean to take a potshot, but I'll do it anyhow. Years ago, there was a Bond movie -- James Bond, everyone knows he only drives an Aston Martin. He's only ever driven an Aston Martin. I don't know which iteration it was, but there was one iteration where they clearly made a deal with BMW, and all the cars in the movie were BMW.", "And look, it ruined the movie for me. Because -- to me, every time I saw a BMW, I was like, wow, look, a little bit of product placement right there, a little bit of an advertisement. That's a disaster. So it's perfectly fine in basketball.", "It's perfectly fine in WWE. It's not perfectly fine in a title where advertising doesn't fit. As a result, I don't think you should expect that the numbers will be really material. Although, again, we do have an advertising business when it makes sense.", "That's completely separate, again, at the risk of being repetitive, from the mobile advertising business. That's a growth category for us. Our mobile advertising was up year over year. We feel really good about that." ] }, { "name": "Clay Griffin", "speech": [ "Thanks, Strauss." ] }, { "name": "Strauss Zelnick", "speech": [ "I think those are all the questions we have. I just want to say thank you again for everyone joining us today. We're thrilled with the results, and the results are driven by the creativity and passion and commitment of our colleagues, all 12,000 of them all around the world. They work really hard every day, and we get to talk about it here.", "But the work is done at the studio level, at the label level, at the corporate level. This is a company of great commitment to our strategy of creativity, innovation, and efficiency, and we have a culture of ambition, hard work, excellence seeking, and kindness. And I'm really proud of that. This is a really unusual place.", "If we pursue our strategy and we do it in a way that's consistent with our culture, we seem over and over again to do well. We're proud of that, and we feel very optimistic about the future. Thank you for joining us today." ] }, { "name": "Operator", "speech": [ "[Operator signoff]" ] } ]
TTWO
2023-05-17
[ { "description": "Senior Vice President, Investor Relations and Corporate Communications", "name": "Nicole Shevins", "position": "Executive" }, { "description": "Chairman and Chief Executive Officer", "name": "Strauss Zelnick", "position": "Executive" }, { "description": "President", "name": "Karl Slatoff", "position": "Executive" }, { "description": "Chief Financial Officer", "name": "Lainie Goldstein", "position": "Executive" }, { "description": "Jefferies -- Analyst", "name": "Andrew Uerkwitz", "position": "Analyst" }, { "description": "Truist Securities -- Analyst", "name": "Matthew Thornton", "position": "Analyst" }, { "description": "Morgan Stanley -- Analyst", "name": "Matthew Cost", "position": "Analyst" }, { "description": "Robert W. Baird and Company -- Analyst", "name": "Colin Sebastian", "position": "Analyst" }, { "description": "Cowen and Company -- Analyst", "name": "Doug Creutz", "position": "Analyst" }, { "description": "MoffettNathanson -- Analyst", "name": "Clay Griffin", "position": "Analyst" }, { "description": "Bank of America Merrill Lynch -- Analyst", "name": "Omar Dessouky", "position": "Analyst" }, { "description": "Oppenheimer and Company -- Analyst", "name": "Zhihua Yang", "position": "Analyst" }, { "description": "Wells Fargo Securities -- Analyst", "name": "Brian Fitzgerald", "position": "Analyst" }, { "description": "The Benchmark Company -- Analyst", "name": "Mike Hickey", "position": "Analyst" }, { "description": "BMO Capital Markets -- Analyst", "name": "Gerrick Johnson", "position": "Analyst" }, { "description": "Deutsche Bank -- Analyst", "name": "Benjamin Soff", "position": "Analyst" }, { "description": "Credit Suisse -- Analyst", "name": "Stephen Ju", "position": "Analyst" } ]
[ { "name": "Operator", "speech": [ "Greetings, and welcome to the Take-Two Q4 Fiscal Year 2023 Earnings Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator instructions] As a reminder, this conference call is being recorded.", "It is now my pleasure to introduce your host, Nicole Shevins, senior vice president of IR and corporate communications. Thank you, Ms. Shevins, you may begin." ] }, { "name": "Nicole Shevins", "speech": [ "Good afternoon. Thank you for joining our conference call to discuss our results for the fourth quarter and fiscal year 2023 ended March 31, 2023. Today's call will be led by Strauss Zelnick, Take-Two's chairman and chief executive officer; Karl Slatoff, our president; and Lainie Goldstein, our chief financial officer. We will be available to answer your questions during the Q&A session following our prepared remarks.", "Before we begin, I'd like to remind everyone that statements made during this call that are not historical facts are considered forward-looking statements under our federal securities laws. These forward-looking statements are based on the beliefs of our management, as well as assumptions made by and information currently available to us. We have no obligation to update these forward-looking statements. Actual operating results may vary significantly from these forward-looking statements based on a variety of factors.", "These important factors are described in our filings with the SEC, including the company's most recent annual report on Form 10-K and quarterly report on Form 10-Q, including the risks summarized in the section entitled Risk Factors. I'd also like to note that unless otherwise stated, all numbers we will be discussing today are GAAP and all comparisons are year over year. Additional details regarding our actual results and outlook are contained in our press release, including the items that our management uses internally to adjust our GAAP financial results in order to evaluate our operating performance. Our press release also contains a reconciliation of any non-GAAP financial measures to the most comparable GAAP measure.", "In addition, we have posted to our website a slide deck that visually presents our results and financial outlook. Our press release and filings with the SEC may be obtained from our website at t2games.com. And now, I'll turn the call over to Strauss." ] }, { "name": "Strauss Zelnick", "speech": [ "Thanks, Nicole. Good afternoon, and thank you for joining us today. I'm pleased to report that we concluded fiscal 2023 by delivering strong fourth quarter results, including net bookings of $1.4 billion, which were above the high end of our expectations. On behalf of our management team, I'd like to thank all of our colleagues around the world for helping us achieve these results and supporting our vision to become a more scaled, diverse industry-leading organization.", "Especially as we navigate in oftentimes volatile and uncertain economic landscape. With fiscal 2024 underway, our initial expectation is to deliver full year net bookings in the range of $5.45 billion to $5.55 billion. We're assuming a continuation of the current challenging consumer backdrop within our forecast. Additionally, the development timelines of some of our titles lengthened especially as we strive to redefine the creative standards of excellence of our industry, which affect our release slate for the year.", "Looking ahead, fiscal 2025 is a highly anticipated year for our company. For the last several years, we've been preparing our business to release an incredibly robust pipeline of projects that we believe will take our company to even greater levels of success. In fiscal 2025, we expect to enter this new era by launching several groundbreaking titles that we believe will set new standards in our industry and enable us to achieve over $8 billion in net bookings and over $1 billion in adjusted unrestricted operating cash flow. We expect to sustain this momentum by delivering even higher levels of operating results in fiscal 2026 and beyond.", "I'd now like to discuss several key highlights from fiscal 2023, which was a milestone year in the 30-year history of our organization. We delivered net bookings of $5.3 billion, which reflects both the transformative evolution of our company through our combination with Zynga and our ability to create market and distribute the highest quality entertainment experiences. We made excellent progress integrating Zynga. The combination has been highly accretive to our business as we've embarked on new revenue-driven opportunities, exceeded our anticipated cost synergies for year 1, and enhance further our mobile platform through select acquisitions.", "As we approach the one-year anniversary of our combination, we're immensely proud of the trajectory of our integration and the strength of our shared culture and values. Our headcount now stands at nearly 12,000 talented individuals, including approximately 9,000 developers in our studios throughout the world, which positions us exceedingly well to reach the full potential of our pipeline. And we've maintained our focus on our core tenet of efficiency. We've taken a rigorous approach to our cost reduction program announced in February, which we believe will surpass meaningfully the $50 million in annual savings that we originally anticipated.", "Our fourth quarter outperformance was led by strong results from Grand Theft Auto V and Grand Theft Online, Red Dead Redemption 2, and Zynga's mobile portfolio. Broadly speaking, the macroeconomic environment remained relatively consistent with what we experienced throughout the third quarter holiday season. While consumers continue to exercise restraint with their purchasing behaviors they prioritize blockbuster franchises and titles that offered great value. As a result, our vast catalog of proven high-quality titles achieved strong results.", "As part of our ongoing portfolio management measures, we made the decision to cancel several unannounced titles in development, which we believe will enable us to tighten our focus and reallocate resources to projects for which our creative teams have higher levels of conviction expectations of success. Excluding the associated write-offs, our fourth quarter and full year management earnings results were above the high end of our guidance. We manage our pipeline actively, sometimes making difficult decisions to ensure that we're meeting our creative standards and achieving financial returns that are consistent with the goals of our company. We believe that an evolving robust pipeline is an essential part of our long-term strategy to expand, enhance and diversify our portfolio to grow our player base and to launch a multitude of new hit franchises across an array of platforms and business models.", "Turning to the performance of our titles for the period. Grand Theft Auto V exceeded our expectations, and to date, the title has sold more than 180 million units worldwide. As hardware supply constraints receded, Grand Theft Auto V and Grand Theft Auto Online adoption on the latest generation of platforms continue to grow. For the first three weeks of Grand Theft Auto Online's Holiday update, PlayStation 5, and Xbox Series X and S consoles grew to 14% of its audience penetration and 25% of its revenue penetration, up from 11% and 20%, respectively, versus last summer's content update for the comparable period.", "During the period, Rockstar Games continue to support the passionate global Grand Theft Auto online community with an array of new content offerings, including the last dose and epic finale at the Los Santos Drug Wars update, as well as the roving Gun Van, Taxi Work missions, a new 50 car garage, new vehicles, clothes, weapons, modes and much more. Los Santos Drug Wars introduced a phased approach to delivering high-value content, creating a much longer tail of sustained engagement in net bookings than we've seen with previous content updates. Additionally, GTA plus Rockstar's premium membership program continues to perform well, driven by a positive response to monthly events since the launch of Los Santos Drug Wars. Red Dead Redemption 2 outperformed our plans and to date, the title has sold in more than 53 million units worldwide.", "We're also pleased with the continued engagement of players with Red Dead Online as demonstrated by its 10% year-on-year increase in new online players on all platforms. NBA 2K23 continues to grow its audience with the title selling over 11 million units to date, a record for the series at this stage, and achieving its highest-ever virtual currency sales. In addition, engagement with NBA 2K23 remained incredibly strong, with approximately 2.3 million daily active users, including growth in the city, my career, and my team users. NBA 2K23 arcade addition continues to bring the best basketball experience to mobile devices and has maintained its No.", "1 position on Apple Arcade. Building upon Visual Concepts' resounding success and reinvigorating our WWE franchise last year, WWE 2K23 enjoys the highest metacritic review score average in the history of the series, engagement with the game has been outstanding, players logging nearly 8 million hours of gameplay and facing off of more than 100 million matches. Tour 2K is supporting the title with a series of add-on content that can be purchased individually or as part of the season pass. We value deeply our relationship with the WWE and look forward to continuing and expanding upon our successful partnership in the years to come.", "Private Division and Intercept Games launched Kerbal Space Program 2 in early access for PC on Steam, Epic Games Store, and other storefronts. Our teams are encouraged by the incoming player feedback, and we've already implemented several updates with more on the way as development continues. Last week, Private Division announced a partnership with Game Freak to publish their upcoming new action-adventure IP, which is one of Private Division's most ambitious projects to date. In addition, Private Division and the Roll7 Studio were recently honored with two prestigious industry awards, the BAFTA for best British game for Rollerdrome and best sports game at DICE for OlliOlli World.", "Zynga's mobile business had a strong finish to the year and app purchases were above our expectations. Momentum has continued and we were pleased to experience strong demand over the Easter holiday. Efforts to increase our advertising business are tracking well with ad revenue growing quarter over quarter and accounting for approximately 27% of Zynga's net bookings. Our teams are successfully increasing advertising supply in our games, investing in optimization, and implementing new ad products, which are helping us monetize a much broader cohort of users.", "Our direct-to-consumer efforts are tracking well with numerous titles currently in our platforms and plans for nearly all mobile games across our labels to leverage our highly profitable proprietary distribution channel over the next few years. A few highlights of Zynga's offerings during the period include Empires & Puzzles, Zynga's highest-grossing title drove engagement through its new in-game event, Season Of Love. Zynga's social casino portfolio had its best quarter in nearly two years, driven by record performance from Game of Thrones Slots Casino and strong overall results from Zynga Poker, Hit It Rich!, and Wizard of Oz slots. Top Eleven had a robust quarter and launched its Proving Grounds England mini game update in February, which challenged players to recreate the greatest moments in English football history.", "The new race pass from CSR Racing 2 continues to drive player engagement, retention, and monetization with innovative new profile banners for players to collect. We remain quite pleased with our hypercasual mobile business. Popcore achieved strong results during its first full quarter under our ownership. Additionally, Roblox has increased its profitability and the studio celebrated several milestones during the period, including the first anniversary of title Fill The Fridge as social media-inspired Pressure Washing Run, reaching the No.", "1 most downloaded spot in Apple's U.S. App Store. In closing, as we continue to pursue our mission to be the most creative, the most innovative and the most efficient entertainment company in the world, we do so incredibly well-positioned with a broader portfolio of owned intellectual property, a deeper pool of the industry's top creative talent, and the sound infrastructure to capitalize on the vast opportunities on the horizon. As we execute on our strategy, we believe that we can increase meaningfully our scale and prominence within the industry, grow margins, and achieve record-breaking operating results for fiscal 2025 and beyond.", "I'll now turn the call over." ] }, { "name": "Karl Slatoff", "speech": [ "Thanks, Strauss. I'd like to thank our colleagues around the world for delivering another momentous year for Take-Two. Our integration with Zynga has gone incredibly well, and we continue to release many of the industry's highest quality, most engaging entertainment experiences, thanks to the incredible passion and talent of our teams. We are extremely excited about our release pipeline, which includes approximately 52 titles through fiscal 2026.", "Our revised plan reflects several title cancellations, as well as the reclassification of our mobile games to include only those titles currently in our plans for worldwide launch. For fiscal 2024, our pipeline includes 16 planned releases. We expect to deliver three immersive core offerings. This includes NBA 2K24 and WWE 2K24, our genre-defining sports titles developed by Visual Concepts.", "Additionally, we expect to release an eagerly anticipated new IP from one of our premier studios later this fiscal year. We plan to release two mid-core arcade titles, which include LEGO 2K Drive, the ultimate driving adventure game from 2K, and Visual Concepts. LEGO 2K Drive brings the iconic LEGO Play experience into a vast open world where players of all ages can go any vehicle, drive anywhere and become a LEGO racing legend. LEGO 2K Drive is the first release in a multi-title partnership between 2K and the LEGO Group.", "We are confident that 2K's proven expertise in creating high-quality and engaging interactive entertainment properties combined with the LEGO Group's unprecedented cultural reach, will evolve the iconic LEGO games experience that fans love in exciting new ways. We also plan to launch two new iterations of previously released titles and three independent titles, including Private Division's planned May 23 release of After Us from Piccolo Studios. Players of After Us will navigate stunning environments in a surrealistic world to salvage the souls of extinct animals and restore life on Earth. And lastly, we expect to release six mobile titles during the year, including Zynga's Star Wars Hunters, which offers players the opportunity to join the greatest hunters from across the Star Wars Galaxy.", "Players will engage in thrilling third-person combat in a range of competitive game modes across battlegrounds that evoke the iconic worlds of Star Wars. Throughout the year, our hypercasual studios will release the steady cadence of mobile titles, focusing on games that have the potential for enhanced retention rates and a mix of in-app purchases and advertising to drive higher monetization and profitability. Our labels will also continue to provide new content and experiences that drive engagement and recurring consumer spending across many of our hit franchises, including Grand Theft Auto Online, Red Dead Online, WWE 2K, LEGO 2K Drive, PGA Tour 2K, and throughout Zynga's mobile portfolio. Looking ahead, we currently expect to deliver 36 titles throughout fiscal 2025 and 2026.", "As always, these plans are a snapshot of our current development pipeline. It is likely that some of these titles will not be developed through completion, that launch timing may change, and that we will also add new titles to our slate. Our release slate for fiscal 2025 and 2026 includes 14 immersive core releases, six of which are sports simulation games, two mid-core games, one of which will be sports-oriented, four new iterations of previously released titles, four independent titles from Private Division, two of which include our previously announced partnerships with Weta Workshop and Game Freak and 12 mobile games. In addition to our full game releases, we will continue to offer post-launch content for nearly all of our titles, including virtual currency, DLC packs and season passes.", "Given the strength of our upcoming release schedule and the high degree of visibility we have into our pipeline, we believe that we'll achieve the record levels of results that Strauss mentioned. Including over $8 billion in net bookings and over $1 billion in adjusted unrestricted operating cash flow in fiscal 2025 with further growth in fiscal 2026 and beyond. As we approach the significant inflection point in our business, we believe our expanding scale and margins will generate industry-leading returns for our shareholders. I'll now turn the call over to Lainie." ] }, { "name": "Lainie Goldstein", "speech": [ "Thanks, Karl, and good afternoon, everyone. Today, I'll discuss the key highlights from our fourth quarter and fiscal 2023 before reviewing our financial outlook for the full year and first quarter of fiscal 2024. Please note that our results include our combination with Zynga, which affects the comparability of our results relative to last year. Additional details regarding our actual results and outlook are contained in our press release.", "I'm so proud of our team for their strong execution and unwavering focus throughout the year. We made fantastic progress on our integration with Zynga delivered incredible high-quality content and announced several exciting new games from our pipeline. Efficiency was also a major area of focus. We announced our cost reduction program in February, and as part of our ongoing portfolio management process, we canceled several titles that we anticipated would not meet our internal hurdle rates.", "We are confident that all these steps will help grow our scale, enhance our long-term margin structure, and ultimately deliver sustainable returns for our stakeholders. As Strauss mentioned, we finished fiscal 2023 with momentum and delivered fourth quarter net bookings of $1.39 billion, which was above our guidance range of $1.31 billion to $1.36 billion. This reflected better-than-expected results from Grand Theft Auto V and Grand Theft Auto Online, Red Dead Redemption 2, and Zynga's mobile portfolio. During the period, recurring consumer spending rose 115%, which was above our outlook of 105% growth and accounted for 78% of net bookings.", "The outperformance was primarily driven by Zynga and Grand Theft Auto Online. Digitally delivered net bookings increase to 76%, above our guidance of 70% growth, and accounted for 97% of the total. During the quarter, 78% of console game sales were delivered digitally, up from 75% last year. GAAP net revenue increased 56% to $1.45 billion, and cost of revenue increased 207% to $1.22 billion which included impairment charges of $465 million related to intangible assets acquired from Zynga, reflecting forecast changes for a few titles and $54 million relating to capitalized software and development costs for unreleased and canceled console and PC title, a lot of which was included in our management results.", "Operating expenses increased by 130% to $926 million, which primarily reflected the addition of Zynga, which is partially offset by lower marketing expenses. And GAAP net loss was $610 million or $3.62 per share, which includes $302 million of amortization of acquired intangibles and $45 million of business acquisition costs. Excluding the $54 million impairment charge, our management earnings would have been above the high end of our guidance range. Turning to our fiscal 2023 results.", "Total net bookings were $5.28 billion, which was above our guidance of $5.2 billion to $5.25 billion. While the challenging macroeconomic backdrop affected certain components of our portfolio, we experienced favorable performance within our catalog of industry-leading intellectual properties and they had a strong finish to the year. Recurrent consumer spending increased 88%, which was slightly above our outlook of 85% growth and accounted for 78% of net bookings. Digitally delivered net bookings increased 63%, which was also above our guidance of 60% growth and accounted for 95% of the total.", "And during the year, 74% of our console game shelves were delivered digitally, up from 68% last year. Non-GAAP adjusted unrestricted operating cash flow was $56 million as compared to our outlook of over $400 million. During fiscal 2023, we spent $204 million on capital expenditures. At fiscal year-end, we had cash and short-term investments of approximately $1 billion and debt of $3.1 billion.", "GAAP net revenue grew 53% to $5.35 billion, and cost of revenue increased 100% to $3.1 billion, which included impairment charges of $465 million related to intangible assets acquired from Zynga and $79 million related to capitalized software and development costs for unreleased and canceled titles, a lot of which was included in our management results. Operating expenses increased by 131% to $3.45 billion, which primarily reflected the addition of Zynga, as well as higher personnel, stock compensation, and IT expenses. And GAAP net loss was $1.12 billion or $7.03 per share, which includes $1.04 billion of amortization of acquired intangibles and $270 million of business acquisition costs. Today, we provided our initial outlook for fiscal 2024.", "We project net bookings to range from $5.45 billion to $5.55 billion. The largest contributors to net bookings are expected to be NBA 2K, and Grand Theft Auto Online and Grand Theft Auto V, our hypercasual mobile portfolio, Empires & Puzzles, Toon Blast, Words with Friends, Merge Dragons, Red Dead Redemption 2 and Red Dead Online, and Zynga Poker. We expect the net bookings breakdown from our label to be roughly 53% Zynga, 31% 2K, 15% Rockstar Games, and 1% other. And we forecast our geographic net bookings site of about 57% United States and 33% international.", "We expect recurrent consumer spending to be up approximately 5% compared to fiscal 2023 and represent 79% of net bookings. Our forecast assumes a 76% of console game sales will be delivered digitally. [Inaudible] generate approximately $100 million in non-GAAP adjusted unrestricted operating cash flow, and we plan to deploy approximately $180 million for capital expenditures. We expect GAAP net revenue to range from $5.37 billion to $5.47 billion and cost of revenue to range from $2.51 billion to $2.54 billion.", "Our total operating expenses are expected to range from $3.39 billion to $3.41 billion as compared to $3.45 billion last year. At the midpoint, this represents a 1% reduction, reflecting lower acquisition costs, the realization of synergies from our combination with Zynga, and savings from our cost reduction program, which are partly offset by a full year of Zynga, higher stock compensation and personnel expenses driven by the annualization of new hires and the effects of inflation on other business operating expenses primarily reflected in IT costs. We expect the GAAP net loss ranging from $477 million to $518 million or $2.80 to $3.05 per share, which assumes a basic share count of 170.1 million shares. For management reporting purposes, we expect our tax rate to be 18% throughout fiscal 2024.", "I'd like to acknowledge that our current forecast for fiscal 2024 reflects the continuation of the challenging economic environment, as well as an extension of the development timelines for several high-profile and long-awaited titles. While this affects our expectations for our current fiscal year, our high degree of visibility into our pipeline gives us confidence that we are approaching a significant inflection point in our business where we will achieve new record levels of results for our business next year and beyond. Now moving on to our guidance for the fiscal first quarter. We project net bookings to range from $1.15 billion to $1.2 billion, which reflects the full quarter of Zynga compared to $1 billion in the first quarter last year.", "The largest contributors to net bookings are expected to be NBA 2K, Grand Theft Auto Online, Grand Theft Auto V, a hypercasual mobile portfolio, Empires & Puzzles, Toon Blast, Merge Dragons, Words with Friends, Zynga Poker, Red Dead Redemption 2, and Red Dead Online. We project recurrent consumer spending to increase by 35%. Our forecast assumes that 79% of console game sales will be delivered digitally, up from slightly from 77% in the same period last year. We expect GAAP net revenue to range from $1.21 billion to $1.26 billion and cost of revenue to range from $572 million to $592 million.", "Operating expenses are expected to range from $827 million to $837 million. At the midpoint, this represents an 18% increase over last year, which reflects the full quarter of Zynga and higher stock compensation, personnel, and IT expenses based on the factors I mentioned previously. And GAAP net loss is expected to range from $161 million to $178 million, or $0.95 to $1.05 per share, which assumes a basic share count of 169.4 million shares. [Inaudible] we believe that we are very well positioned in our industry to deliver the highest quality content, gain market share and enhance our profitability as we grow our scale and maintain our focus on efficiency.", "We're extremely excited about our next chapter of growth, and we look forward to our label, sharing more detail about the many exciting projects we have underway. Thank you. I'll now turn the call back to Strauss." ] }, { "name": "Strauss Zelnick", "speech": [ "Thank you, Karl, and Lainie, and thank you to all of our colleagues for your dedication, your hard work, and these terrific results. We will now take your questions. Operator?" ] } ]
[ { "name": "Operator", "speech": [ "Thank you. We will now be conducting a question-and-answer session. [Operator instructions] One moment please while we poll for questions. Thank you.", "Our first question comes from Andrew Uerkwitz with Jefferies. Please proceed with your question." ] }, { "name": "Andrew Uerkwitz", "speech": [ "Yes, hi. Thanks for taking my question. I guess I'll just skip right to fiscal '25 and '26. It's pretty rare that you guys give to your guide like this and we've seen quite a few delays across the industry.", "Could you just give a little additional color on where the confidence is coming from on being able to provide that to us today?" ] }, { "name": "Strauss Zelnick", "speech": [ "Yeah, you're right. It's very uncharacteristic of us to talk about subsequent years at this time. We're doing so because we've been investing in a pipeline for a long time. And we now have a great deal of confidence that that pipeline will be delivered in the next three years, 12 titles in fiscal '24, 36 in the following two years.", "44% of that is new intellectual property. The rest is new iterations of existing franchises, and that's mobile, console, PC, and numerous business models. We couldn't be more excited fiscal '24 titles look good and as I said, we're very confident in the years to come as well. And we thought it was important to convey that with transparency today." ] }, { "name": "Andrew Uerkwitz", "speech": [ "And then just with the, I think, 44% of new IP, when you're looking this far out, what kind of -- can you walk us through a little bit like how you think about modeling those, the conservatism you're thinking about in some of those? Or just kind of how you come up with the forecast for the new IP? Thank you." ] }, { "name": "Karl Slatoff", "speech": [ "So as you know, new IP is always a little bit of a wildcard, and it's difficult to predict exactly how it's going to behave. Obviously, we're not completely flying blind because we do have a pretty comprehensive process of doing comps in the market, but you really just never know, which is one of the reasons why when we model out in our product investment review process, new IP, we typically -- actually, we never model out big hits with enormous upside. It's really -- I don't want to necessarily call it a conservative approach, but we are not -- we don't look at any sort of outlying success. Obviously, everything that we invest in and everything that we release, we're looking to achieve that outline success, and we know for a fact that not every single one of our titles will achieve that.", "But that is the game we're in, and that's why we're making these investments in new IP, which ultimately is the lifeblood of our industry, and that's why we're still very much dedicated to doing that." ] }, { "name": "Andrew Uerkwitz", "speech": [ "Got it. Thank you so much. Appreciate the color." ] }, { "name": "Operator", "speech": [ "Thank you. Our next question is from Matthew Thornton with Truist Securities. Please proceed with your question." ] }, { "name": "Matthew Thornton", "speech": [ "Hey, good afternoon, everybody. Maybe two from me. Strauss has been another three months and AI remains a hot topic. I'm sure you and team have had more time to digest and think about it.", "I'm just kind of curious of your latest thoughts on how you think it will influence the business and the industry. And then just secondly, as we think about the headcount and the infrastructure that we now have in place, are we kind of at a place where you have what you need to pursue this aggressive pipeline? Or do we still need some more investment? I'm just trying to think about the opex leverage and how to think about that as we kind of flow through the out years." ] }, { "name": "Strauss Zelnick", "speech": [ "Yeah, as you know, I'm usually a skeptic when others engage in hyperbole. In the case of AI, I'm pretty enthusiastic. First of all, despite the fact that artificial intelligence is an oxymoron as is machine learning. This company has been involved in those activities no matter how you -- no matter what words used to describe them for its entire history, and we're a leader in the space.", "So, while the most recent developments in AI are surprising and exciting to many. They are exciting to us, but not at all surprising. Our view is that AI will allow us to do a better job and to do a more efficient job. When you're talking about tools and they are simply better and more effective tools.", "I wish I could say that the advances in AI will make it easier to create hits. Obviously, it won't. Hits are created by Genius and data sets plus compute, plus large language models do not equal Genius. Genius is in the domain of human beings, and I believe we'll stay that way.", "However, I think jobs can be made a whole lot easier and more efficient by developments in AI, and we're certainly looking forward to that. And as I said, we're already putting it in practice every day." ] }, { "name": "Karl Slatoff", "speech": [ "So your second question in terms of costs. So, from a -- I'm not sure exactly what you meant by operating expenses. So, I'll just kind of break it down about overhead. So, publishing, overhead, and corporate overhead.", "I would say, generally speaking, we're kind of at scale. We have what we need. That's not to say -- to achieve our plan over the next few years. That's not to say that we won't still be investing in those areas, and there will be cost increases associated with that.", "We're always looking for efficiencies but people do get raises, and we find needs as new opportunities arise. So, I can't stand here and say that we don't have any more investment in publishing and corporate overhead, but we certainly believe that we're at scale. And we also believe that that's an opportunity for us to expand our margins based on the fact that we are very nearly -- we are at scale or very nearly at scale in that regard. On the development side, we do intend over the next few years to continue to add to our development capacity.", "That's something that we have been able to do successfully about 9,000 developers in-house today. That doesn't include our third-party relationships, which are vast and strong. And we do -- part of our plan is to continue investing in that area." ] }, { "name": "Matthew Thornton", "speech": [ "Thank you." ] }, { "name": "Operator", "speech": [ "Our next question is from Matthew Cost with Morgan Stanley. Please proceed with your question." ] }, { "name": "Matthew Cost", "speech": [ "Hi, everybody. Thanks for taking the questions. The first one is just about the long-term guidance. I think you mentioned growth in fiscal '26 off of a base of fiscal '25 -- off of the base in fiscal '25.", "Presumably, there's quite a few units of new games that are being launched in that year. I guess when you think out into fiscal '26, what are the moving pieces that you see driving growth year over year off of what looks to be based on the numbers you've just provided a very, very strong year in fiscal '25? And then the second question is just on mobile. You announced that you're going to be launching Star Wars Hunters this fiscal year, I think the game has been in development for some time. Are you seeing something in the mobile gaming market as sort of stabilization or improvement of marketing efficiency that makes you feel this is the right time to come out with the game? Thank you." ] }, { "name": "Karl Slatoff", "speech": [ "So in terms of our confidence in talking about what would grow as fiscal '26 over '25. It's the same answer what would grow '25 or '24, which is our pipeline, and it's the makeup of that pipeline. And I don't want to get into too much detail about it -- what title unit expectations are, whether it's unit, it's title units or it's recurrent consumer spending because the fact is it's very -- it's all of the above. But in the end, it's based on us delivering the pipeline that we have on plan and achieving the results that we expect.", "I really don't have much more to say beyond that. You want to do Hunters?" ] }, { "name": "Strauss Zelnick", "speech": [ "Yes. On Star Wars, Hunters, you asked about the market backdrop. We are seeing some improvement in year-over-year comps. Mobile really was under a lot of pressure.", "The market is recovering a bit. It's still down year over year. In certain instances, we appear to be overperforming. And we're excited about many developments at Zynga for example, advertising penetration, advertising that represents 27% of Zynga's net bookings, which is great.", "That will continue to improve. We're excited also about our direct-to-consumer platform, which obviously has an effect on our margins, a beneficial effect on our margins. So, I think the backdrop is stable and perhaps improving a little bit. At the end of the day, what will matter, of course, is the quality of the title.", "Mobile is a very competitive space. We feel really good about Star Wars Hunters." ] }, { "name": "Matthew Cost", "speech": [ "Great. Thank you." ] }, { "name": "Operator", "speech": [ "Thank you. Our next question is from Colin Sebastian with Baird. Please proceed with your question." ] }, { "name": "Colin Sebastian", "speech": [ "Thanks and good afternoon, everybody. Strauss, you talk about setting new standards in the industry, and I know quality is a big piece of that, but would be also curious to know beyond that, what specific areas of innovation within your games, you would say, keep the portfolio ahead of the competition. And then regarding the fiscal '25 commentary, I'd just be curious how of that more than $2.5 billion in incremental bookings next year. What portion of that should we think of as falling into RCS versus, I guess, unit sales? Thank you." ] }, { "name": "Strauss Zelnick", "speech": [ "Yeah. Thanks for your question. In terms of how do you define innovation, if it had one definition, I think it would stop being innovation pretty quickly. But I think our labels are known for leading in new areas, whether that's a 3D view when there wasn't one before, whether that was downloadable add-on content many years ago or in-game purchases, virtual currency or the like that was the neighborhood or the city and NBA 2K, GTA Online, Red Dead Online, what you could do in those online environments, all of those were innovations driven by our labels.", "And everyone who works in the creative capacity at this company is trying to think about how do we engage and entertain consumers in a way that's novel that hasn't been seen before. We actually just had an internal email exchange earlier today talking about the unknown unknowns that we know in the next 10 years, there will be extraordinary changes in this industry. This is a highly dynamic industry. And we need to be not only current, we need to be leading the charge.", "Sometimes historically, we have. Other times, we've missed the boat, and we want to be at the front of the line and our creative folks work in service of their passions to make the best entertainment, anyone creates on earth. And again, we don't always succeed, but often we do. Our track record is pretty great creatively.", "And that's thanks to our 9,000 developers who work here and another 1,500 who work outside of our four walls to do work that Take-Two brings to market. So, I'm sort of highly optimistic on the one hand and very mindful that this is a really ambitious challenge, and the ambition is it's been emotional burden for everyone who works here, but also a great benefit when we succeed. On your second point, I think you asked us to distinguish between RCS and console sales and full game sales." ] }, { "name": "Lainie Goldstein", "speech": [ "Right. So, for fiscal year '25, we are really excited to talk about it. It's a highly anticipated year. And we're really happy to talk about us hitting $8 billion in net bookings, but we aren't talking about what the detail of that is at this time." ] }, { "name": "Colin Sebastian", "speech": [ "Thanks, guys." ] }, { "name": "Operator", "speech": [ "Thank you. Our next question is from Doug Creutz with TD Cowen. Please proceed with your question." ] }, { "name": "Doug Creutz", "speech": [ "Hey, thank you. I just wanted to talk about your adjusted operating cash flow margins for a minute. If I go back to fiscal '18 through fiscal '21, you were pretty consistently in the low mid-20% range. It slipped down below then since then, I think, is a function of you investing against your future pipeline.", "Your fiscal '25 guide is over $1 billion in OCF against over $8 billion in bookings, which is still only about a 12.5% margin, if my math is correct, which seems low. Do you expect that in fiscal '25, you're still going to be investing heavily against future opportunities? Do you expect to get back to that 20% plus range in '25 or thereafter? Any kind of color you've given that would be great. Thank you." ] }, { "name": "Lainie Goldstein", "speech": [ "Sure. It's definitely still going to be investing in the pipeline going forward. And we still have interest payments and tax payments through those years but we definitely will see a lot of the titles that we have been building up on to the balance sheet coming out those years. So, that will definitely be affecting the AOCF in those years as well." ] }, { "name": "Doug Creutz", "speech": [ "OK. Thank you." ] }, { "name": "Operator", "speech": [ "Thank you. Our next question is from Clay Griffin with MoffettNathanson. Please proceed with your question." ] }, { "name": "Clay Griffin", "speech": [ "Hey, thanks for the question. Thanks for taking the question. I guess I'm thinking about the marketing strategies for some of these big highly anticipated title is different now than they were, say, maybe in the Red Dead 2 launch. I mean, notwithstanding the fact that a larger number of titles ought to bring a higher level of marketing support in the aggregate.", "I'm curious if the overall level of marketing efficiency against bookings is materially different now maybe the prior generation, I guess, in other words, awareness of your IP is already quite high. So, just curious on that." ] }, { "name": "Karl Slatoff", "speech": [ "So I would say, Clay, I wouldn't say that the overall marketing spend levels are different. I think we continue to spend in a consistent manner. Although the makeup of that spending and the timing of the spending is definitely different now than it has been in the past. We don't spend a heck of a lot of money on TV, really, if any, at this point.", "Outdoor, a lot of those items are not really in our media plan. We have a lot more social spending than we did before, targeted spending performance marketing, etc. And it also used to be that a big portion of the marketing budget was spent prior to the release in the weeks prior to the release and certainly within the couple of weeks following the release. We still will spend a significant amount of marketing in and around the launch date, but it is much more spread out because we have the ability to monetize for a much longer period of time, and there are certain opportunities for us to market additional content drops.", "So, you would see our marketing budgets are definitely spread out. Longer than they would have been in the past. So, those are really the two changes. But no, I don't really think there'd be a significant change in the scale of what we spend." ] }, { "name": "Clay Griffin", "speech": [ "Got it. And there was some commentary about what sounded like a one-time tax -- cash tax issue in Q4. I just wanted to confirm that. And maybe just give us a sense of I mean what that was, we expect that to repeat? And just kind of general framework for thinking about cash taxes going forward? Thanks." ] }, { "name": "Lainie Goldstein", "speech": [ "It wasn't really like a one-time taxing. It was really like a time -- it was a timing issue. So, it's not something that will repeat, but it is our tax balances for each year. So, it's something that we'll have tax payments every year going forward." ] }, { "name": "Clay Griffin", "speech": [ "But the rate that you guys have been speaking to is there's no sense that that's moving one direction or the other." ] }, { "name": "Lainie Goldstein", "speech": [ "Well, we have -- it's like 18% estimated tax rate is in our management rate and that's in the annual rate that we use for every year." ] }, { "name": "Clay Griffin", "speech": [ "Great. OK. Thank you." ] }, { "name": "Operator", "speech": [ "Thank you. Our next question is from Omar Dessouky with Bank of America. Please proceed with your question." ] }, { "name": "Omar Dessouky", "speech": [ "Hi, thank you for taking my question. So, I guess I was wondering if you could maybe parse out a little bit implied in your operating income guidance, mobile versus PC console. I think a number of your peers guided profits roughly at the same levels for calendar '23 as was calendar '22. And I was just wondering, just for starters, whether your implied guide is up or down, if you could tell me that? And then I have a follow-up question." ] }, { "name": "Lainie Goldstein", "speech": [ "Can you repeat the first question? I'm sorry." ] }, { "name": "Omar Dessouky", "speech": [ "Yeah. No, no problem. A number of your peers that publish only mobile games have guided profits at similar levels in 2023, full year as 2022 full year. And I was wondering whether your guidance implies your profitability for Zynga and your Take-Two Mobile business up or down.", "I realize there's a number of moving pieces such as potential revenue synergies, reducing the cost of advertising and, of course, cost synergies. But are you -- is your implied guide for mobile up or down versus last year? Like-for-like, including 53 days of Zynga." ] }, { "name": "Lainie Goldstein", "speech": [ "Yeah. So, on a like-for-like basis for a comparable 12 months, the Zynga mobile business is up year over year." ] }, { "name": "Omar Dessouky", "speech": [ "OK. OK. Great. And I'm also glad that you guys addressed the $500 million of annual net bookings opportunities in the presentation.", "So, I wanted to dig into that for a second. I think you have -- the first question on that is, can you give us any sense of the cadence of how you might get to $500 million? In terms of like fiscal '24, fiscal '25, fiscal '26. The reason I asked that is because you guys did put out a cadence in the S-4, obviously, that's a long time ago, but any update there would be great. So, the cadence first.", "And then the second, the ramp to $500 million. And then the second one is you have a couple of bullet points here establishing a more meaningful presence in key mobile first emerging markets and introducing mobile games from some of our most popular and proven intellectual properties. So, does that include high-fidelity mobile games? Is that what you're referring to there? And specifically for Asian markets, potentially using some of your PC console IP. Lots of questions I appreciate your responses." ] }, { "name": "Karl Slatoff", "speech": [ "It's Karl. So, in terms of some of the cadence around the $500 million -- the $500 million revenue synergies, obviously, we're still very committed to that, and we feel very good about those opportunities for us. I think in the near term, there are several meaningful opportunities that we believe our teams -- we can actually start to begin to activate this fiscal year. And those are really more around expanding our D2C efforts more meaningfully in some of our other games.", "And also, things like implementing new bold beats, marketing beats across the company, user acquisition optimization, creating centralized library of customer data across the company, integrating the Take-Two databases with the Zynga databases. All those things we're going to be able to start realizing some of that in this fiscal year and then obviously accelerate that into the next few years as well. In terms of the immediate and long term, I think this will answer I think both of your questions. We do have a vision to introduce mobile games to some of some of our most popular properties on the T2 side into the mobile space.", "That's something that we're having conversations right now, nothing to announce specifically but the conversations are happening, and I would characterize them as very positive and people are excited about that opportunity. I'm not really sure I understood the sort of reference to Asia and high fidelity, etc. But these are intellectual properties think about them as some of our more core type games. And by definition, you would expect, and again, I don't have anything to announce right now because we don't have any games necessarily in development in that regard, that those games would be a little bit more upmarket they -- because we do believe that there's a market for that.", "You've seen some success in the mobile space with other folks bringing their titles to market. Call of Duty is a perfect example of that. We think that there is several of our titles that have that kind of opportunity. And I would expect those games to be a little bit more toward the mid-core arena.", "I hope that answers your question." ] }, { "name": "Omar Dessouky", "speech": [ "Absolutely does. Thank you very much." ] }, { "name": "Operator", "speech": [ "Thank you. Our next question is from Martin Yang with Oppenheimer. Please proceed with your question." ] }, { "name": "Zhihua Yang", "speech": [ "Hi, Good afternoon. Thank you for taking my question. First question on Zynga, can you tell us if Zynga's developer headcount growth since it was acquired?" ] }, { "name": "Strauss Zelnick", "speech": [ "Yeah, we don't break out the headcount label by label, but we did say that we have about 9,000 internal development people at the company." ] }, { "name": "Zhihua Yang", "speech": [ "Thank you. The second question is broader. I want to get your broader view on console cycles. When do you stop -- when do you plan to stop supporting past-gen consoles? And what goes into the decision stopping our -- for the past-gen consoles for certain franchise or for Take-Two released games?" ] }, { "name": "Strauss Zelnick", "speech": [ "It really varies. I mean, obviously, our labels will continue to support platforms for which they believe there's a meaningful audience. And if and when the audience diminishes to a point where it's not economical to do so, we stop supporting the platforms. But in general, we're pretty supportive on an ongoing basis.", "Thank you." ] }, { "name": "Operator", "speech": [ "Thank you. Our next question is from Brian Fitzgerald with Wells Fargo. Please proceed with your question." ] }, { "name": "Brian Fitzgerald", "speech": [ "Yeah. A couple of questions on consumer pricing, not with your titles, but we've seen discounting on some of your competitors' recent releases they were anticipated AAA titles, but were being discounted within days and weeks. So, do you think the gamer is still struggling a little bit with coming to terms of $70 price points, maybe still macro impacted? And then the second one related to pricing is, again, you saw a strong RCS performance. Historically, the narrative has been gaming spending is resilient because even in macro because you get that bang for buck, relatively low cost per hour -- per hour of entertainment.", "At the same time, the model is evolving to more live services, more RCS. Is that RCS spend just as resilient as the historical industry consumer spend has been?" ] }, { "name": "Strauss Zelnick", "speech": [ "Yeah. We've talked about this in the past. I mean, to take your second question first. We do think that live services spending is probably more affected by macroeconomic conditions because you don't need to spend.", "If you have the game, you can enjoy the game. There are certain titles that we don't really put into this category where you kind of have toll booths. If you don't pay, you really can't play, but that doesn't describe any of our titles mobile or console. So, we think of spending in a live services environment is a nice to have for the consumer, not a must-have.", "And as a result, if the consumer is feeling a pinch that might be an area that would be more likely to be influenced negatively. In terms of the pricing point that you raised, we're not seeing a pushback on frontline price. What we're seeing is consumers are seeking to limit their spending by going either to the stuff they really, really care about blockbusters or value. And sometimes it could be both.", "And the good news is that we have a bunch of blockbusters, and we have a wonderful catalog. The other news is we also have a robust frontline release schedule and without regard to price, there has been some pressure as a result. If a consumer sees something is interesting but not necessarily yet a huge blockbuster. We think that will change.", "This is a growth business, and this is a unique market. And nothing that's going on now is inconsistent with the view that we outlined during the pandemic. We said at that time, we were benefiting greatly from people being at home and an odd turn of events. And we set our expectations post-pandemic, as an industry being in a better place than pre-pandemic in a worse place than during the time when people were sheltering at home.", "And that's exactly what's happened exacerbated by a challenging mixed economy and what I believe is a recession, at least if you look at it through the lens of people who purvey digital entertainment consumed at home and e-commerce suppliers. There's a lot of pressure in those markets. But the overall tailwinds of the industry will continue. This is a growth business.", "It will remain fastest-growing part of the entertainment business for the next 20-plus years. And we will have those tailwinds. Now we still have to deliver in that context, and we intend to. But to torture the metaphor, the wind at our back." ] }, { "name": "Brian Fitzgerald", "speech": [ "Awesome. Thanks, Strauss. Really appreciate it." ] }, { "name": "Operator", "speech": [ "Thank you. Our next question is from Mike Hickey with Benchmark. Please proceed with your question." ] }, { "name": "Mike Hickey", "speech": [ "Hey, Strauss, Karl, Lainie, Nicole, thanks, guys, for taking my questions. Congrats on your -- I guess it's been at under '25 guide, no pressure, guys, on $8 billion in revenue. Just curious, you didn't guide to profitability [Inaudible] that $8 billion was a little bit above consensus view. Just curious how we should think about profitability, I think consensus for is over $8 in EPS.", "I don't expect you to confirm that either way, but just thoughts on how we should think about profitability on '25, especially given that we have extended timelines now on development and what impact that could have. And then the second question, just another one on AI, Strauss. I'm glad to hear you're positive about it. That's nice.", "Just curious on the mobile side with AI and barriers to entry. Just curious if you think that will have any challenges in terms of more competitors coming to the market. Thanks, guys." ] }, { "name": "Strauss Zelnick", "speech": [ "Thanks, Mike. Well, we basically have indicated profitability by talking about our operating cash flow. You're right, we haven't gotten granular because we're not providing initial specific guidance, but we do expect that fiscal '25, '26 and beyond will be highly profitable years. And we've said repeatedly in these remarks today, we expect to grow our margins.", "That's a big part of what our financial objectives include. With regard to AI and mobile, I think the implication of your question is does generative AI allow people who aren't in the business to make mobile hits by say, ChatGPT? I come up with a great idea for a new mobile hit. Oh, and by the way, please code it for me, too. And while you can do that now, you should give it a try and you'll see what happens because we certainly have tried it around here.", "And let's just say that, no, you will not be able to create hits that way. I mean remember, what you're looking at with AI and what you will always be looking at is a data set compute and at least sitting here today, large language models. And in the future, you may not be looking at large language models or they will change, but you'll still be looking at a data set and compute. And a data set by definition, is backward-looking, and hits in the entertainment business, by definition, are forward-looking.", "And no matter how intelligent, and I use the word in quotes very much in quotes, maybe multiple quotes. \"A machine is a machine is not going to be able to look forward.\" A machine can predict based on data sets and using massive compute and using large language models. We're all super excited about what we see because we haven't seen before the possibility of doing a natural language query and getting a natural language result. That looks incredibly cool.", "But to confuse that result with intelligence and creativity is like confusing a magic trick with magic. It's not magic. It's still a magic trick. So, that's where I'm at on this.", "No AI is not going to allow people to push a button to make a hit. However, AI is going to make certain elements of any process that requires coding easier for everyone, for everyone, not disproportionately for anyone, for everyone." ] }, { "name": "Operator", "speech": [ "Thank you. As a reminder, we ask that you limit to one question to allow for as many questions as possible. Our next question is from Gerrick Johnson with BMO Capital Markets. Please proceed with your question." ] }, { "name": "Gerrick Johnson", "speech": [ "Great, thank you. On the topic of delivering mobile games direct-to-consumer, what kind of share are you targeting for downloads in MPX? And then what kind of margin lift would you see on a game-by-game basis, as well as a consolidated basis?" ] }, { "name": "Karl Slatoff", "speech": [ "So, we're not -- we haven't disclosed what our target is. We do think it's a significant opportunity for us. So, it certainly is greater than zero and less than 100%. We don't think that it makes sense in all cases to go to direct-to-consumer, but we do think there's a lot of room for us to grow from where we are right now.", "I think it's the second question. What was the second?" ] }, { "name": "Strauss Zelnick", "speech": [ "What was the second part of your question?" ] }, { "name": "Gerrick Johnson", "speech": [ "Margin list." ] }, { "name": "Karl Slatoff", "speech": [ "Yeah. Well, I mean, again, I don't think we've talked about the margins, but you can kind of back into them yourself. I mean we're doing it ourselves and the sort of the take rate, obviously, is much, much, much lower because you're really talking about payment clearances and things of that nature when you go to see these other rates that may be in there. Thank you." ] }, { "name": "Operator", "speech": [ "Thank you. Our next question is from Benjamin Soff with Deutsche Bank. Please proceed with your question." ] }, { "name": "Benjamin Soff", "speech": [ "Hey, guys, thanks for taking the question. Just one on the slide. So, LEGO Drive is listed under the mid-core section, but it seems like a $70 price point with a full year of seasonal updates. And to me, that would seem like a AAA title.", "So, do you mind expanding a bit on the difference between immersive and mid-core in your mind? And then apologies if I missed it, but are you expecting both top-line and bottom-line growth in fiscal '26? Thanks." ] }, { "name": "Karl Slatoff", "speech": [ "So in terms of -- it's a funny question you asked because we've debated this exact thing internally, whether or not like a LEGO title, for example, is a mid-core title. Mid-core/arcade or is it immersive? And it really isn't a question of quality and the amount of gameplay that's involved. So, the $70 price point, I would say, is a bit of a red herring. We think that the game is certainly worthwhile with that experience.", "But the experience itself when you look at sort of the over -- if you compare that experience to a Grand Theft Auto, for example, obviously, there's a big difference. In the depth of the storyline, the vastness of the world, etc., LEGO Drive is an open-world driving experiences, but it's not Los Santos, so there's quite a bit -- it's probably not even the city with NBA. So, the term is probably a little bit of art in terms of how we classify things. But in this particular case, just given the look in the field of the game, we thought that mid-core/arcade was the right categorization of it.", "But there's no specific guideline other than kind of in this particular case, it kind of felt that way. And I should also say -- sorry to -- and Lainie was about to answer the other question. Whether it's mid-core or arcade versus core or immersive, that doesn't necessarily indicate our expectations about commercial success because you can have a commercially successful title, that's mid-core or casual." ] }, { "name": "Benjamin Soff", "speech": [ "Yeah. OK. Got it." ] }, { "name": "Lainie Goldstein", "speech": [ "And then for fiscal '26, what we've said is that we expect net bookings and operational results to be higher than fiscal '25. So, that would imply that it would -- both would be growing." ] }, { "name": "Benjamin Soff", "speech": [ "OK, got it. Thank you, guys." ] }, { "name": "Operator", "speech": [ "Thank you. Our next question is from Stephen Ju with Credit Suisse. Please proceed with your question." ] }, { "name": "Stephen Ju", "speech": [ "OK. Thank you. So, Strauss, I certainly do not want to put words in your mouth, but your answer to one of the prior questions. It sounded like you were talking about incremental barbelling of industry dollars, I guess, similar to what you were seeing during the financial crisis.", "And then I guess in an environment where only the AAA and the value games are going to capture dollars and the stuff in the middle maybe in some trouble. So, what are you doing at the studio level that is different now to maybe adjust for that environment? And Karl, like what are you doing at the Private Division level to adjust to what might be the new normal? Thanks." ] }, { "name": "Strauss Zelnick", "speech": [ "I think that's right. But at the end of the day, it just means quality. Just means you have to put out great stuff, and that speaks to Private Division as well. and that's always the case.", "This is less about changing strategy because our strategy is that everything that we put out should be just spectacular and more just a reflection of where the consumer sits. And the consumer will return, and this is going to be a growth business. As long as we make the highest quality titles, we should do just fine. Private Division's approach has never been based on sort of taking a shortcut on quality.", "Its approach has been let's bring into the 10 developers who might not otherwise bring their products to Take-Two. And in certain instances, we can deliver an A+ title on a more economical level than we might be able to do in-house. And that's been proven out and Private Division has generated a lot of successful titles. And in fact, virtually everything they've done, not everything, but virtually everything has been successful." ] }, { "name": "Stephen Ju", "speech": [ "Thank you." ] }, { "name": "Operator", "speech": [ "Thank you. Our next question is from Matthew Thornton with Truist Securities. Please proceed with your question." ] }, { "name": "Matthew Thornton", "speech": [ "Hey, guys. Just a quick follow-up. I'm not sure if this is for Strauss or Karl. We've talked about DTC on the mobile side.", "You guys have DTC experience with the Rockstar launch or on the PC side, if we think out a couple of years, given the scale you're going to be at as the world perhaps starts to take more steps toward streaming, do you see the opportunity to perhaps partner on the back end or white label the streaming back end to go D2C on streaming, again, given the scale you'll be in a couple of years. Just kind of curious if you're thinking about that yet. Thanks, again." ] }, { "name": "Strauss Zelnick", "speech": [ "Our strategy has always been to have the broadest possible distribution. We were a leader in digital distribution in the very beginning. And one of the reasons we did so well is that we basically were willing to do business with everyone whose terms made sense to us and who were good market participants in terms of security and compliance. And to the extent that streaming is a viable business opportunity and technology for our industry.", "Of course, we'll avail ourselves of it. And I'm certain we'll work with third parties as we have in the past. We were I think the first license sort of Stadia, for example, sorry, didn't work out, but we were there to support the effort. And equally to the extent that it makes sense to have our own platform, we will do that, too.", "But we're not very unlikely to be exclusively limited in one direction or the other. We want to be where the consumer is. So, I think that's all the questions we have today. Thank you so much for joining us.", "We're thrilled with these results. We're more than thrilled with our outlook. I want to reiterate our gratitude to our teams around the world who show up every day with more or less -- with smiles on their faces, mostly with smiles. Aiming to do their very best work in pursuing their passions.", "I want to thank our business teams who bring their great work to market and make sure that we run our business in a first-class fashion. And of course, I want to thank our shareholders for their support and confidence in us. Have a great day." ] }, { "name": "Operator", "speech": [ "[Operator signoff]" ] } ]
TTWO
2020-02-06
[ { "description": "Senior Vice President Of Investor Relations And Corporate Communications", "name": "Henry A. Diamond", "position": "Executive" }, { "description": "Executive Chairman And Chief Executive Officer", "name": "Strauss H. Zelnick", "position": "Executive" }, { "description": "President", "name": "Karl Slatoff", "position": "Executive" }, { "description": "Chief Financial Officer", "name": "Lainie Goldstein", "position": "Executive" }, { "description": "Sanford C. Bernstein -- Analyst", "name": "Todd Juenger", "position": "Analyst" }, { "description": "Cowen & Company -- Analyst", "name": "Doug Cruetz", "position": "Analyst" }, { "description": "Stifel -- Analyst", "name": "Drew Crum", "position": "Analyst" }, { "description": "Oppenheimer -- Analyst", "name": "Andrew Uerkwitz", "position": "Analyst" }, { "description": "SunTrust -- Analyst", "name": "Matthew Thornton", "position": "Analyst" }, { "description": "Bank of America -- Analyst", "name": "Ryan Gee", "position": "Analyst" }, { "description": "UBS -- Analyst", "name": "Eric Sheridan", "position": "Analyst" }, { "description": "Barclays -- Analyst", "name": "Mario Lu", "position": "Analyst" }, { "description": "MKM Partners -- Analyst", "name": "Eric Handler", "position": "Analyst" }, { "description": "Goldman Sachs -- Analyst", "name": "Mike Ng", "position": "Analyst" }, { "description": "Consumer Edge Research -- Analyst", "name": "Raymond Stochel", "position": "Analyst" }, { "description": "Jefferies -- Analyst", "name": "Alex Giaimo", "position": "Analyst" }, { "description": "Stephens Inc -- Analyst", "name": "Jeff Cohen", "position": "Analyst" } ]
[ { "name": "Operator", "speech": [ "Greetings, and welcome to Take-Two Interactive Software's Q3 2020 Earnings Conference Call. [Operator Instructions] Please note, this conference is being recorded.", "I would now like to turn the conference over to your host, Mr. Hank Diamond, Senior Vice President of Investor Relations. Thank you. You may begin." ] }, { "name": "Henry A. Diamond", "speech": [ "Good afternoon. Welcome, and thank you for joining Take-Two's conference call to discuss its results for the third quarter of fiscal year 2020, ended December 31, 2019. Today's call will be led by Strauss Zelnick, Take-Two's Chairman and Chief Executive Officer; Karl Slatoff, our President; and Lainie Goldstein, our Chief Financial Officer. We will be available to answer your questions during the Q&A session following our prepared remarks. Before we begin, I'd like to remind everyone that statements made during this call that are not historical facts are considered forward-looking statements under federal securities laws. These forward-looking statements are based on the beliefs of our management as well as assumptions made by and information currently available to us. We have no obligation to update these forward-looking statements. Actual operating results may vary significantly from these forward-looking statements based on a variety of factors.", "These important factors are described in our filings with the SEC, including the company's most recent annual report on form 10 K, and quarterly report on form 10 Q, including the risks summarized in the section entitled risk factors. I'd also like to note that unless otherwise stated, all numbers we will be discussing today are GAAP and all comparisons are year-over-year. Additional details regarding our actual results and outlook are contained in our press release, including the items that our management uses internally to adjust our GAAP financial results in order to evaluate our operating performance. In addition, we have posted to our website a slide deck that visually presents our results and financial outlook. Our press release and filings with the SEC may be obtained from our website at www.take2games.com.", "And now I'll turn the call over to Strauss." ] }, { "name": "Strauss H. Zelnick", "speech": [ "Thanks, Hank. Good afternoon, and thank you for joining us today. Throughout the 2019 holiday season, we experienced robust demand for our offerings that drove third quarter operating results solidly within our increased outlook. Our net bookings were substantially higher than what we included for the third quarter when we gave our original fiscal 2020 outlook last May as well as when we increased our outlook last August. Highlights are the performance of Grand Theft Auto Online and Grand Theft Auto V, NBA 2K20, Red Dead Redemption 2 and Red Dead Online, The Outer Worlds and Borderlands 3, reflecting our ability to deliver some of the most captivating experiences in the entertainment industry. Grand Theft Auto Online once again exceeded our expectations, delivering its best holiday quarter ever for both audience size and net bookings.", "During the third quarter recurrent consumer spending on Grand Theft Auto Online grew 54% driven by Rockstar Games continued release of engaging new content. Grand Theft Auto and lion had its biggest series of back to back updates ever in terms of player numbers, with records and audience size in December and the third quarter following the release of the diamond Casino and Resort update in July, and the diamond casino heist in December. We're now on track to deliver a new record for Grand Theft Auto Online recurrent consumer spending in fiscal 2020. Sales of Grand Theft Auto V also exceeded our expectations, and the title has now sold in more than 120 million units.", "According to the NPD Group, Grand Theft Auto V was the best-selling game of the decade in the U.S. based on both unit and dollar sales. Red Dead Online continues to gain momentum, both in terms of engagement and recurrent consumer spending. Net bookings from Red Dead Online outperformed our expectations during the third quarter, almost tripling, both year-over-year and sequentially, excluding digital content bundled with the Red Dead Redemption 2 premium additions. Red Dead Online hit a new peak in player numbers in December following the release of the latest update, Moonshiners, and exceeded those numbers and set a new record in January. We remain as excited as ever about the long-term opportunity for Red Dead Online to be a significant driver of recurrent consumer spending.", "In November, Red Dead Redemption 2 launched for the PC and Google Stadia to date has sold in over 29 million units. According to the NPD Group, Red Dead Redemption 2 was the top title of the last four years based on U.S. dollar sales. There is noting that the collective lifetime selling of Grand Theft Auto V and Red Dead Redemption 2 is now -- more than 150 million units worldwide with over 250 million lifetime game accounts created across both titles. Rockstar Games total online audience is also its biggest to date, having recorded record numbers in the third quarter. On October 25, Private Division launched The Outer Worlds for Xbox One, Playstation 4 in PC. Developed by Obsidian Entertainment, The Outer Worlds has significantly exceeded our expectations and has sold in more than 2 million units to date. Critical response to the game has been outstanding, and The Outer Worlds has won more than 75 awards, including Game of the Year from the New York Video Game critic circle and Destructoid and Best RPG of the Year from IGN, Shakenews, Gamerex and others.", "The title is also a finalist for the DICE awards outstanding achievement and story and the RPG of the year. We're confident that The Outer Worlds will continue to expand its audience, including through its release on the Nintendo Switch, which is now planned for fiscal 2021. Unit sales of NBA 2K20, the latest installment in our industry-leading basketball series, has outperformed our expectations, and the title has sold in over 8 million units to date, up slightly over NBA 2K19 in the same period. In November, the title was released for Google Stadia. In addition, engagement with NBA 2K20 is reaching all-time highs with average daily active users growing and MyTeam users up more than 35%. In addition, NBA 2K20 has generated more than 276 million views on YouTube and over 8 million hours of content watched on Twitch across hundreds of channels. While this increased engagement led to strong growth in recurrent consumer spending in certain modes of NBA 2K20, we've not experienced the same positive benefits across the entire game due to some specific design changes, which we plan to address in future versions of NBA 2K.", "Because of this, we no longer expect lifetime net bookings for NBA 2K20 to be a record for the series. However, we continue to expect recurrent consumer spending for the NBA 2K franchise to grow in the strong double digits for fiscal 2020. Taking creative risk is part of Take-Two's DNA as we constantly strive to improve the game play experience for our audiences. More often than not, this results in enhancing our growth, which is reflected in the substantial long-term outperformance of NBA 2K.", "Turning to Borderlands 3, the latest installment in our genre defining shooter-looter series continues to expand its audience since its record-breaking launch in September, with more than 50% user growth in comparison to Borderlands 2, at the same time, in its life cycle. 2K and Gearbox are supporting the game with free content as well as 4 downloadable campaign expansions, which are included with the Borderlands 3 Super Deluxe Edition and the season pass or can be purchased separately upon release. The first of these expansions, Moxxi's Heist and The Handsome Jackpot was released during the third quarter and was positively received by critics and consumers alike, helping to drive a season pass attach rate for Borderlands 3 that was a record, both for the series and for 2K at the same point in the title's life cycle. In December, Borderlands 3 was released for Google Stadia, and will be available on steam in the coming months.", "To date, Borderlands 3 has sold in nearly 8 million units, and we expect lifetime unit sales to be a record for the series. Earlier in the quarter, 2K launched WWE 2K20 for Playstation 4, Xbox 1 and PC. WWE 2K20 features several new gameplay modes that celebrate the WWE's thriving women's division, as well as an array of fan favorite superstars, legends and match types. While we're disappointed that WWE 2K20 did not meet our expectations, both in terms of sales and quality, 2K is actively working with visual concepts to ensure that these issues are addressed in the future, and they'll have more to share on their plans soon. The WWE brand continues to expand worldwide, and there remains a substantial long-term opportunity to grow our WWE 2K series by improving the quality of the game. Among Take-Two's core tenets is our aim to be the most creative and the most innovative company in the entertainment industry.", "Today, in addition to delivering the highest quality stand-alone entertainment experiences, we measure our success by our ability to captivate and engage audiences well beyond the title's initial release. To that end, during the third quarter, recurrent consumer spending grew 6% and accounted for 41% of our total net bookings. In addition to virtual currency for NBA 2K, Grand Theft Auto Online and Red Dead Online, recurrent consumer spending was enhanced by a variety of other offerings. In the free-to-play category, Social Point continues to be a meaningful contributor to our results through its mobile titles Dragon City, Monster Legends, World Chef, Tasty Town and Word Life. During the quarter, Social Point added new content, special events and updates to these games. Our Barcelona based studio continues to invest in its broad and innovative pipeline of new games planned for launch in the coming years. 2K launched season 6 of WWE SuperCard featuring all new card tiers and upgraded features.", "The title has now been downloaded more than 20 million times and remains today's highest grossing mobile title. And the hdk online in China remains the number one PC online sports game in China, with more than 48 million registered users add on content grew 135% led by offerings for Borderlands three Sid Meier's Civilization six and WWE to K 20. Finally, sales and Borderlands three premium additions, which include additional content that is allocated to recurrent consumer spending also contributed during the period As a result of our solid third quarter results and outlook for the fourth quarter, we're increasing the low end of our fiscal 2020 operating outlook, while maintaining the high end.", "Fiscal 2020 is shaping up to be another terrific year for Take-Two. Looking ahead, our company has the strongest development pipeline in its history, and we're committed to supporting our titles with offerings designed to drive ongoing engagement. In addition, we're actively investing in emerging markets, platforms and business models that have significant potential to enhance our growth. Take-Two is exceedingly well positioned to capitalize on the many positive trends in our industry, and to generate returns for our shareholders over the long term.", "I'll now turn the call over to Karl." ] }, { "name": "Karl Slatoff", "speech": [ "Thanks, Strauss. I'll begin by discussing our upcoming releases. Throughout the coming months, 2K and Gearbox software will continue to support Borderlands 3 with a robust post-launch content strategy, including all new in-game mini events and 3 additional downloadable campaign expansions. Later this month at PAX East in Boston, 2K will unveil details about their future content offerings Borderlands 3 upcoming release on steam and more. In addition, Rockstar Games will continue to provide an array of content and gameplay experiences for the vast open worlds of Grand Theft Auto Online and Red Dead Online, which continue to set engagement records for the label. In fiscal 2021, Private Division will expand our offerings for the Nintendo Switch with the release of the outer worlds. As Strauss noted earlier, the title is incredibly well received by critics and consumers alike on its original launch platforms. And we are confident that we'll continue to thrill audiences as they immerse themselves in this player of choice-driven RPG on the switch.", "One of our organization's key priorities is building scale by growing the size of our development pipeline. Investing in our world class creative resources and partnering with the best independent studios in the industry enables Take-Two to enhance our industry-leading portfolio of intellectual property, which is the foundation of our strategy to grow our business and expand profitability. In December, 2K announced the formation of Cloud Chamber, which we'll be working on the next-generation of the globally acclaimed BioShock franchise for the next several years. Cloud Chamber is a collective of storytellers eager to push the limits of interactive entertainment by making unique, captivating and thoughtful experiences set in a rich immersive world. The team will be based in 2 locations, 2K's headquarters in Novato, California as well as in Montreal, Quebec, which marks the first ever 2K studio in Canada. Private Divisions is another example of our growing investment in new intellectual property. This year, we benefited from the exceptional performance of The Outer Worlds.", "Our new label is taking a strategic approach to working with some of the industry's best creative talent and is quickly amassing an impressive pipeline for the future. During fiscal year 2021, Private Division plans to release Kerbal Space Program 2 and Disintegration, which just completed a successful technical beta. Private Division will have more announcements about their growing portfolio over time. Mobile, which continues to be the highest growing -- highest grossing and fastest growing segment in the interactive entertainment is an important opportunity for Take-Two. Social Point currently has 5 games active in the market, including Dragon City and Monster Legends, World Chef, Tasty Town and Word Life, and they have more than 10 new games in the various stages of development. In addition, we continue to pursue new mobile offerings and extensions of our existing franchises, such as WWE SuperCard and NBA 2K Mobile.", "The global proliferation of smart mobile devices and high speed data networks represents an exciting entry point into emerging markets, particularly in China, Latin America, Africa, India, Take-Two's development pipeline over the next five years is the largest and most diverse in our company's history, including releases from our biggest franchises, exciting new IT, free-to-play offerings and a diverse mix of casual, mid-core and core gaming experiences. We will have much more to share on this exciting slate of titles in the months to come. In addition to our focus on growing existing and building new franchises, we have a number of emerging opportunities that have the potential to contribute to our growth and margin expansion. Streaming may become a compelling distribution platform for our industry that could expand our market and increase margins. With our frontline of catalog offerings, the highest quality content drives consumer adoption and Take-Two's portfolio is a must-have for any new platform.", "During the holiday season, we released Red Dead Redemption 2, NBA 2K20 and Borderlands 3 for purchase on Google Stadia. eSports remains an exciting new segment for our industry and company. The NBA 2K league, our first foray into competitive gaming and partnership with the NBA, is gearing up for its third season that will begin at the end of this month. The league continues to expand with new teams joining this year, bringing the count to 23, including the first international and non-NBA team, the Gen.G Tigers of Shanghai. The launch of the Gen.G Tigers is the first step in the long-term effort to build a stronger global presence for the league. In January, the NBA 2K league hosted its global invitation match, a series of exhibition matches featuring APAC invitational players and the 2019 NBA 2K league Finals MVP playing against top representatives from NBA 2K Online 2. The games were live streamed in China on Tencent's Penguin Esports, Gen.G streaming partner Douyu and Huya, as well as on the NBA 2K league's Twitch and YouTube channels.", "We are very excited about the continued progress and growth of the league, which has a long-term potential to enhance engagement and to be a driver of profits for our company. In closing, as we begin a new decade, we enter an incredibly exciting period for our industry and company, which should bring technological advancements as well as compelling new platforms and business models. We remain steadfast in our commitment to deliver the highest quality entertainment experiences to captivate and engage our audiences throughout the world and to generate growth and margin expansion.", "I'll now turn the call over to Lainie." ] }, { "name": "Lainie Goldstein", "speech": [ "Thanks, Karl. Good afternoon, everyone. Today, we'll discuss our third quarter results and then review our financial outlook for the fourth quarter and fiscal year 2020. Please note that additional details regarding our actual results and outlook are contained in our press release. As Strauss mentioned, we experienced robust demand for our offerings throughout the 2019 holiday season that enabled us to deliver third quarter operating results, solidly within our increased outlook. Total net bookings were $888 million as compared to our outlook of $860 million to $910 million. Current consumer spending grew 6% and accounted for 41% of total net bookings as compared to our outlook of 5% growth. Digitally delivered net bookings decreased slightly by 2% and accounted for 78% of the total, as compared to our outlook of 5% growth. The decrease was due to very strong fiscal sales of our titles over the holidays.", "During the third quarter, 44% of current generation console games were delivered digitally, up from 31% last year. Turning to some details from our third quarter income statement. GAAP net revenue grew to $930 million and cost of goods sold decreased to $437 million. Operating expenses increased by 6% to $360 million, due primarily to higher personnel and R&D costs, offset by lower marketing expenses. And GAAP net income was $164 million or $1.43 per share as compared to $180 million or $1.57 per share in the third quarter of fiscal 2019. Adjusted unrestricted operating cash flow for the nine months ended December 31, 2019, was $548 million, and we ended the period with approximately $2 billion in cash and short-term investments. Now I will review the highlights of our fiscal 2020 financial outlook. Starting with the fourth quarter. We project net bookings to range from $540 million to $590 million, up from $488 million in the fourth quarter last year.", "The largest contributor to net bookings are expected to be Grand Theft Auto Online and Grand Theft Auto 5, NBA 2K20, Red Dead Redemption 2 and Red Dead Online, Sid Meier's Civilization VI and Borderlands 3. We project our current consumer spending to grow by approximately 10%, driven primarily by growing Grand Theft Auto Online and Red Dead Online. We expect digitally delivered net bookings to increase by over 20%. Our forecast assumes that 66% of our current generation console games will be delivered digitally, up from 57% in the same period last year. We expect GAAP net revenue to range from $635 million to $685 million and cost of goods sold to range from $274 million to $286 million. Operating expenses are expected to range from $247 million to $257 million. At the midpoint, this represents a 13% increase over last year, driven primarily by higher personnel costs and marketing expenses. And GAAP net income is expected to range from $105 million to $128 million or $0.92 to $1.12 per share.", "For management reporting purposes, we expect our tax rate to be 17% throughout fiscal 2020. Turning to our outlook for the full fiscal year. We are raising the low end of our net bookings outlook by $50 million and maintaining the high end. We now expect net bookings to range from $2.8 billion to $2.85 billion. The increase is driven by higher expectations for Grand Theft Auto Online, including record recurrent consumer spending on the title, Grand Theft Auto V and The Outer Worlds, partially offset by reduced expectations for Borderlands 3 and recurrent consumer spending on NBA 2K. The reduced expectations for Borderlands 3 are still consistent with our original high expectations for the title prior to launch.", "The largest contributor to net bookings are expected to be NBA 2K20 and NBA 2K19, Grand Theft Online and Grand Theft Auto V, Borderlands 3, Red Dead Redemption 2 and Red Dead Online, The Outer Worlds and Sid Meier's Civilization VI. We expect the net bookings breakdown from our labels to be roughly 55% 2K, 35% Rockstar Games and 10% Private Division and Social Point. And we forecast our geographic net bookings split to be about 60% United States and 40% international. We are maintaining our forecast for recurrent consumer spending to increase by approximately 25%. We now project digitally delivered net bookings to grow by approximately 25% versus our prior expectation of nearly 30% growth due to a higher mix of physical sales. Note that this is still above our forecast given in August of high-teens growth. Our outlook assumes that 55% of current generation console games will be delivered digitally, up from 38% last year.", "We are increasing our outlook for adjusted unrestricted operating cash flow to over $500 million versus our prior expectation of over $450 million. We now plan to deploy approximately $60 million for capital expenditures versus a prior expectation of $75 million. We expect GAAP net revenue to range from $2.96 billion to $3.01 billion and cost of goods sold to range from $1.42 billion to $1.43 billion. Total operating expenses are expected to range from $1.13 billion to $1.4 billion. At the midpoint, this represents a 20% increase over the prior year, driven primarily by higher marketing, R&D and personnel costs. And we expect GAAP net income to range from $387 million to $409 million or $3.38 to $3.58 per share.", "In closing, our focus on producing the highest quality entertainment delivered strong third quarter results and reaffirmed that Take-Two remains on pace to deliver another terrific year. Looking ahead with our world-class creative teams, firm commitment to operational excellence and solid financial foundation, our company is exceptionally well positioned to deliver value to our customers and returns to our shareholders.", "Thank you. I will now turn the call back to Strauss." ] }, { "name": "Strauss H. Zelnick", "speech": [ "Thanks, Lainie and Karl. On behalf of our entire management team, I'd like to thank our colleagues for their hard work and commitment to excellence. To our shareholders, I want to express our appreciation for your continued support.", "We'll now take your questions. Operator?" ] } ]
[ { "name": "Operator", "speech": [ "[Operator Instructions] Our first question comes from the line of Todd Juenger with Sanford C. Bernstein. Please proceed with the question." ] }, { "name": "Todd Juenger", "speech": [ "Hi, good afternoon. Thank you for taking the question. I hope you understand that I feel I have to ask this question. I'm sure you were expecting it. So you had a significant executive departure at Rockstar. Karl or Strauss, anything you can tell us about succession planning, impact on operations in the pipeline, culture, future plans and competition, whatever you can say on that matter? I'm sure we'd appreciate." ] }, { "name": "Strauss H. Zelnick", "speech": [ "Todd, thanks for your question. This is Strauss. So Dan Houser had been on an extended leave since early spring 2019. The company has been led since its founding by Sam Houser, who's President of the company, and it's an extraordinary team effort and Sam is a great player and coach. The results of Rockstar Games continue to be extraordinary with the launch of the new content for both Grand Theft Auto Online and for Red Dead Online, and it's amazingly gratifying to see Grand Theft Auto V selling at 120 million units and Red Dead Redemption 2 to be up to 29 million units with the launch on PC and Stadia as well as the really extraordinary results of Grand Theft Auto Online, which we now expect to have another record year, more than six years after its initial launch. And of course, Red Dead Online itself was up something like 3 times year-over-year and sequentially in the last quarter. So the label has really never been stronger. We're incredibly optimistic and excited. At the same time, we're grateful to Dan for his contributions, and we wish him well." ] }, { "name": "Todd Juenger", "speech": [ "If you don't mind, if I could ask just a follow-up then more on the business side. So Strauss, I think I've heard you say multiple times publicly that Take-Two aspires to launch a AAA game every year, at least one every year. Should we assume that, that includes calendar year 2020? I'm not asking for any formal announcements of anything, but with this year, should we expect a AAA release this year as well? And anything you could say about -- more about that would be appreciated." ] }, { "name": "Strauss H. Zelnick", "speech": [ "So as we always do, you're going to hear our initial outlook for fiscal '21 in May, and our labels, of course, always make our product releases. We have set our strategy, as you correctly pointed out, is to have a strong frontline release schedule, both iterations from beloved franchises. We have 11 franchises that have sold in at least 5 million units within one release as well as new intellectual property, and we are working on the most robust pipeline in our history. So we're amazingly excited about it. That said, we haven't always been able to achieve our goal of having a strong frontline release schedule in every year, even in the recent past. What has been great, though, is we've now built a company that has these very strong underpinnings of catalog titles and ongoing titles that live on in the hearts and minds of our consumers, generating engagement and generating net bookings and profits.", "So right now, we have titles like Grand Theft Online, Red Dead Online, all the Social Point titles, and there are 5 that are successfully in market, NBA 2K Online in China, WWE Supercard, which has been downloaded more than 20 million times, and the list goes on. And in this past quarter, for example, catalog sales represented about 40% of our net bookings. So we now have a company that season in and season out, we feel confident can generate plenty of net bookings, can engage with consumers and can generate a great deal of profitability. And of course, at the same time, we'll build our business with those frontline new releases. Given that we're a company that depends on our creative teams to make as close to perfect products as possible, we have to be willing to live with the vagaries of product deliveries. And that means, sometimes, we will have thin frontline years. But even in those frontline years, we've been able to deliver really great financial results." ] }, { "name": "Todd Juenger", "speech": [ "I will leave it there. Thank you so much." ] }, { "name": "Operator", "speech": [ "Our next question comes from the line of Doug Cruetz with Cowen & Company. Please proceed with the question." ] }, { "name": "Doug Cruetz", "speech": [ "Thanks, if I recall correctly two years ago, you guys had a bit of a hiccup with NBA 2K, recurrent consumer spending. Obviously, last year was incredibly strong. It seems you're running into a little bit of an air pocket again this year. Could you talk about what's going on? Is that just sort of growing pains as you continue to sort of try to find new frontiers for the franchise to get consumers to spend money? Is it something with the process? Is it something with sort of in the engagement loops? Anything you can say on that would be helpful." ] }, { "name": "Strauss H. Zelnick", "speech": [ "Yes. First of all, I want to make sure that we distinguish between a problem and a high-class problem. So the high-class problem is that we had said in our revised outlook that we thought NBA 2K20 would set another record for net bookings. Then now we're realizing that to say we don't expect it to set another record, despite its very strong unit sales and the great engagement. And that's because one of the parts of the online version has recurrent consumer spending coming in somewhat lower than we had expected. And that's related to a design feature and one that we can address going forward. But it's not really a hiccup because our goal is first and foremost to captivate and engage consumers, and our engagement is up, and our unit sales are up, and the title quality is just phenomenal. It's also true that as a company that doesn't lead with monetization, we lead with entertainment and engagement.", "Now and then, our monetization may not be exactly what we think it will be. So let me take responsibility for the decision to focus first and foremost on the entertainment experience and the consumer and only secondarily on what the monetization is. And that means now and then, we may fall short of setting a record, but failing to set a record isn't exactly a problem when you have a title that is massively successful as NBA 2K20 is, it's an incredibly profitable title for the firm. And incidentally, recurrent consumer spending for the franchise will actually be up in the fiscal year in solid double digits. So the engagement is strong. The spending is strong, and at the same time, there were some design changes that didn't optimize specific recurrent consumer spending in certain modes. And we are confident we'll be able to address those." ] }, { "name": "Doug Cruetz", "speech": [ "Okay, thank you." ] }, { "name": "Operator", "speech": [ "Our next question comes from the line of Drew Crum with Stifel. Please proceed with the question." ] }, { "name": "Drew Crum", "speech": [ "Okay, thanks, guys. Good afternoon what has led to the reduced view on Borderlands 3? Can you comment on how the game has performed on PC to date? And without getting into specific numbers, what are your expectations for the game once it's available on steam?" ] }, { "name": "Strauss H. Zelnick", "speech": [ "Well, Borderlands is actually performing better than our original outlook. It's sold in nearly 8 million units. We've launched one of the downloadable content packs. We have three more expected at the moment. And in fact, the season passes attach rate is a record for the series and a record for 2K at this point of the title's life cycle, and we expect that the Borderlands 3 will set a record in terms of net bookings for the franchise. So our expectations remain solid and very strong. It's a great big hit for us." ] }, { "name": "Lainie Goldstein", "speech": [ "Right. When we went into the Christmas season, we had really seen real excitement for the title, and we've lifted our expectations a little bit higher than we had it at the very beginning of the year, which was very high to begin with. So we didn't meet those -- that higher expectations, but we did meet our original very high expectations for the title. So that's why we're bringing it down slightly, but it's very high from the beginning of the year." ] }, { "name": "Strauss H. Zelnick", "speech": [ "This is -- again, this is a massive hit by any standard. But we've always said this when we guide and when we revise, we aim to be accurate. And sometimes, the vagaries of the entertainment business will be that we don't exactly get it right." ] }, { "name": "Drew Crum", "speech": [ "Okay, fair enough. And just a follow-up. I think in the initial press release, you indicated that the sell-through on PC was quite strong. Again, what are your expectations for the game once it launches on steam?" ] }, { "name": "Strauss H. Zelnick", "speech": [ "We continue to have very high expectations. As I said, we fully expect that Borderlands 3 will set a record for the franchise." ] }, { "name": "Drew Crum", "speech": [ "Got it? Okay, thanks, guys." ] }, { "name": "Operator", "speech": [ "Our next question comes from the line of Andrew Uerkwitz with Oppenheimer. Please proceed with the question." ] }, { "name": "Andrew Uerkwitz", "speech": [ "Thank you for Let me ask a couple of questions here. The first one. Just how should we think about the next kind of next-generation console? Does it add more uncertainty? Or does it actually alleviate uncertainty as we think about the transition to the new console in terms of lot of service games, whether it's NBA or GTA Online or what have you?" ] }, { "name": "Karl Slatoff", "speech": [ "It's Karl. We weren't really excited about the next-generation console. So I think the best part about it is that I think everyone now knows that we are going to have the next-generation console, and there's a lot of anticipation for it. I'll leave the details about what the expectations are to our partners, Microsoft and Sony. But I think so far the buzz about what the concepts are going to be able to do from a technological perspective, is very exciting for us. And so in that regard, I think it eliminates uncertainty because we know we're going to next console cycle and that we believe it will be very robust and a great thing for the industry.", "And again, anytime that you have these kinds of advancements in tech, it creates opportunities for our great -- incredible creative team to push the limits of those -- of that technology and create the experiences that we know consumers are going to want to engage with for very long periods of time, even after the initial sale. So to the extent that we've got the ability to do that, and all indications is that we will, and we expect this will lead to growth for our company. It's a very positive thing." ] }, { "name": "Andrew Uerkwitz", "speech": [ "Even for current ongoing live service games that you have now that were built for older gen?" ] }, { "name": "Karl Slatoff", "speech": [ "Yes. I mean, look, what exactly the transition is going to be from concept -- from each game from -- between the console cycles will vary. But there's no reason to believe that the success that we're experiencing with those services would be any less in the new generation that is than the old generation." ] }, { "name": "Andrew Uerkwitz", "speech": [ "Got it. And then just -- just a kind of higher level question. I think Outer Worlds was on Microsoft Xbox game pass. Do you think that helped or hurt the success of that franchise?" ] }, { "name": "Strauss H. Zelnick", "speech": [ "It's hard to say. I think what we've said all along is that, generally speaking, we want to be where the consumer is. Generally speaking, we think subscription offerings to the extent they exist, are probably better suited to catalog, but we're willing to take experimental chances when it makes sense for a particular title and when the deal underlying that option also makes sense for us. And we're pleased that we have a great partnership with Microsoft, and we're mostly pleased that the title is such a big hit, it's sold in more than 2 million units and it's won 75 game awards. So it's early days for all of these platforms. It's obviously early days for many technologies, including streaming technology. Our goal is to be where the consumer is. We're ecumenical and we're open minded." ] }, { "name": "Andrew Uerkwitz", "speech": [ "Got it. Thank you guys so much." ] }, { "name": "Operator", "speech": [ "Our next question comes from the line of Matthew Thornton with SunTrust. Please proceed with the question." ] }, { "name": "Matthew Thornton", "speech": [ "Hey, good afternoon. Thanks for taking the question, guys. Maybe two quick housekeeping or triangulation questions, and then I'll come back to an earlier question. GTA versus NBA 2K in the back half of the year, I mean, could GTA Online actually be bigger than the NBA? Was it in December? Could it be in the fourth quarter? Similarly, Red Dead, I think the initial expectation this year was recurrent would be down year-on-year when you include some of the premium SKUs from last year's launch. Is that still the case given the success that, that sales having could recur and actually be up year-on-year? And then just coming back, Strauss, to your comment around the recent departure. I just want to paraphrase and make sure that we had the message, right?", "It sounds like this was a fairly isolated departure, no other plans for departure. The culture is still kind of -- as it has been. The pipeline as it has been, the progress is kind of where it has been. I just want to make sure that we have that messaging, right? Because obviously, a lot of investors are asking that question. Any color there would be helpful." ] }, { "name": "Lainie Goldstein", "speech": [ "So in the first one, we have said that the NBA 2K is the highest contributor in recurrent consumer spending for all titles. So we have said that. What is your second question? Sorry, I've missed that one." ] }, { "name": "Matthew Thornton", "speech": [ "On Red Dead Online, if that could actually be up year-on-year, even including the premium SKU kind of contribution last year?" ] }, { "name": "Lainie Goldstein", "speech": [ "Now with including the special editions, it's not up. It's only without including the special edition." ] }, { "name": "Strauss H. Zelnick", "speech": [ "And in terms of your question about Rockstar, I think your question -- I think your question will fall in the category of the stability of the team going forward as well as the culture of the label. So in terms of team stability, Sam Hauser is President of Rockstar Games. He founded Rockstar Games. He's a great player coach and he leads the team of thousands of people every day who are trying to make the most extraordinary entertainment experiences known to man. And that's -- those are their goals. And more often than not, they achieve or even exceed those goals, which is just amazing. It doesn't -- I don't typically speak for other people, but I confidently can speak and say that Sam is highly committed to the organization. And Sam and I work very closely together, and it's an enormous pleasure to be able to be in business with Sam and the entire team at Rockstar.", "Culturally, I've only seen ongoing improvements at Rockstar, frankly, have only seen growth and engagement and innovation. And I think one of the great things about all of our labels and our company as a whole is that we're incredibly self critical, and we're -- we aim to be utterly transparent, and we always try to do better. And I think that's true everywhere, the Take-Two touches and Rockstar Games sets a standard for always trying to improve the quality of its operations, the quality of the way that they work and the quality of their culture. I frankly couldn't be more proud of how effectively that label is operating. I think this year has been one of amazing strength, I mean, dropping content on the same day for both Red Dead Online and Grand Theft Auto Online and delivering content that set records in terms of engagement and player excitement and incidentally revenue and profitability. So things couldn't be better.", "And to be very specific, no, we certainly don't expect other departures. As an organization as a whole, we have an extraordinarily low rate of attrition, vastly lower than the industry average. And I think that's because we offer great place to work at all of our labels and the Take-Two corporate as well. And to the extent that we ever fall short, we always aim to do better." ] }, { "name": "Matthew Thornton", "speech": [ "Great, thanks, guys." ] }, { "name": "Operator", "speech": [ "Our next question comes from the line of Ryan Gee with Bank of America. Please proceed with the question." ] }, { "name": "Ryan Gee", "speech": [ "Yep. Hey, good afternoon. Thanks, you guys for taking the question. So maybe first for Lainie. I guess, with over 60% of the business now coming from recurrent consumer spend, how has that impacted your ability to provide us guidance 1 quarter, one year out, especially as you consider NBA 2K and Borderlands coming in a bit lower? Should we have greater confidence now than in the past in your guidance? Or does this present other challenges for you? That's the first question. And then for Karl, you touched on Cloud Chamber. Can we maybe get an update on the 2K Silicon Valley Studio, maybe Hangar 13, are those likely to also have content out in the next one to two years? Anything you can say there?" ] }, { "name": "Lainie Goldstein", "speech": [ "Well, in terms of forecasting, with recurrent consumer spending, there are some things that I think are easier to predict, but it does present other challenges as well, especially when you have titles that are out in the market for such a long time, and you would expect them to decline. And then one year, they decline, and then the next year, they grow, and there's different content that comes out. It's still pretty difficult to predict that as well as different -- when we're making different -- when we're trying different things and different games, and you don't know how that's going to perform. That can also be another variable.", "So we're definitely getting better at it, and we have a lot more information and analytics that we can use to be more predictive. But there are different things that change every year, that can make it different from year-to-year. So I'd say we're getting better at it, but there are different things that we have in recurrent consumer spending each year. So I wouldn't say that it's a slam dunk, but it's definitely something that we're getting better at." ] }, { "name": "Karl Slatoff", "speech": [ "And in regards to your question about Hangar 13 and also Michael Condrey Studio, I wish I could tell you more about what they're working on because it's very exciting, both the studios. We're incredibly excited to have a team like Hangar 13 led by Hayden and also Michael's yet to be named studio as well, working on new and setting projects. As I said before, our pipeline is very diverse and is very large, and we're going to share with you more about that in the coming months. And these 2 projects are obviously part of that. So you can certainly expect that there will be games coming out of those studios. I wish I could tell you more about them, but stay tuned because they're very exciting, and we're thrilled to be in business with both of those folks and their entire teams. So stay tuned." ] }, { "name": "Ryan Gee", "speech": [ "Okay. And then if I could just follow-up on that last point. So BioShock, still several years out, Borderlands just came. Should we assume that your characterization of a robust slate ahead also includes Rockstar content, not just 2K studios?" ] }, { "name": "Strauss H. Zelnick", "speech": [ "Yes, we're talking about the entire company, all of our labels Rockstar, Private Division, Social Point and 2K." ] }, { "name": "Ryan Gee", "speech": [ "Right. Thank you guys." ] }, { "name": "Operator", "speech": [ "Our next question comes from the line of Eric Sheridan with UBS. Please proceed with the question." ] }, { "name": "Eric Sheridan", "speech": [ "Thanks so much for taking the question. I'm Maybe a bigger picture one. You saw another player in the industry make a larger announcement with Google in the last couple of weeks. Curious how you're thinking about a couple of large secular themes that are playing out in the industry with respect to either owning or outsourcing your own technology infrastructure? How you think about the content you're producing being broadcast, broader over direct-to-consumer channels? And how to think about either owning that or partnering? And the same with respect to cloud computing as a distribution mechanism for gaming. How are you thinking about wrapping what you've been very good at over the years? In terms of content creation and thinking about maybe amplifying that either through your own efforts or through partnerships and relationships?" ] }, { "name": "Strauss H. Zelnick", "speech": [ "So I appreciate the question and the question points sort of points up our focus on expanding the company in this industry that has these extraordinary tailwinds through a focus on new technologies, new business models, new types of entertainment and new geographies or geographies where we're not currently represented. And so it's sort of for a multiple choice question, it would be all of the above. We're focusing on all of them. You specifically asked on the distribution side, how are we looking at that. And the answer is we are very engaged in looking at options that do include direct-to-consumer options. Our strategy has been to be where the consumer is. If I keep choking, Karl is going to have to dig on it. Our strategy has been -- apologies, to be where the consumer is and to be ecumenical about various distribution opportunities and to work with all of the players in the space, and I expect we'll continue to do all of that." ] }, { "name": "Operator", "speech": [ "Our next question comes from the line of Mario Lu with Barclays. Please proceed with the question." ] }, { "name": "Mario Lu", "speech": [ "I have a couple of questions, 1 on GTA and 1 on Red Dead. So GTA V have partnerships with Playstation now late last year and then Xbox's Game Pass in January, which I suspect it added millions of players. So any color you can provide regarding these types of partnerships? And specifically, how much of an uplift they provided to GT Online bookings? And secondly, on Red Dead, glad to hear that Red Dead Online tripled year-on-year. So and then -- I know you mentioned before that GTA Online is in a world of its own. But how confident are you that Red Dead online engagement can maintain or grow for six years plus as well?" ] }, { "name": "Strauss H. Zelnick", "speech": [ "In terms of how specific arrangements with titles pan out, we typically don't go into that level of detail, except to say we enter into those arrangements with a view that they'll benefit the titles. They'll benefit us and that they'll benefit our partners. And more often than not, we are able to do all 3 of those things. In terms of the success of Red Dead Online, we are incredibly excited about the momentum that we're seeing in the quarter. We feel really good going forward. But as I said, when asked Grand Theft Auto Online early on and I was asked a lot about it, we really don't know how high up is. We really don't have any way of knowing where the consumer will take us. What we do know is that we're going to deliver a lot more great content. And so far, it does look like when we deliver great content into these beloved franchises, consumers show up and stay engaged. So we're very optimistic about the future of Red Dead Online, and we're excited about the momentum we see." ] }, { "name": "Mario Lu", "speech": [ "That's unfolding. Thank you." ] }, { "name": "Operator", "speech": [ "Our next question comes from the line of Eric Handler with MKM Partners. Please proceed with the question." ] }, { "name": "Eric Handler", "speech": [ "Thank you very much for the question. actually got two. For your first, wondered if you'd be willing to sort of lift the comodo on the development pipeline a little bit? And talk about how many AAA console games are currently in development and to the extent that maybe you could say how many of those might be released in the next one to three years and how many might be released in the next beyond three years? Anything to sort of give a little bit of a road map there would be greatly appreciated. And secondly, with Red Dead Online, when you originally launched GTA Online, you had a couple of big content drops that really help the development of that business, so gun runners and the first heist that you did. Wondered, have we seen that type of content drop yet for Red Dead Online?" ] }, { "name": "Karl Slatoff", "speech": [ "Eric, it's Karl. Just regarding the pipeline, this question obviously comes up on every single call we had and every single meeting we have with investors. And we are -- like I said, we are going to share more about the pipeline, we do over the coming months. And exact -- give you some more color on exactly what constitutes that pipeline. So I'll give you a little bit more idea of between what we've got going on with new IP and existing franchises, free-to-play games, different business models, casual games, core games, mid-core games. And we're hoping to share a lot more information with you over the coming months regarding that." ] }, { "name": "Strauss H. Zelnick", "speech": [ "And in terms of Red Dead, I don't think you can compare content to content. The last content drops on Red Dead have been fantastically successful. And the latest update, Moonshiners did great and generated all of this excitement that we've seen reflected in the numbers. And then I'm confident that Rockstar Games will continue to deliver great content for Red Dead Online. But there's no real way to compare qualitatively to -- or I suppose, quantitatively to Grand Theft Auto Online content. They're just -- they are different games, and they have different types of content that's dropped. But the goal is to create content that consumers love and engage in and spend against." ] }, { "name": "Eric Handler", "speech": [ "Thank you very much." ] }, { "name": "Operator", "speech": [ "Our next question comes from the line of Mike Ng with Goldman Sachs. Please proceed with the question." ] }, { "name": "Mike Ng", "speech": [ "Hi, thank you very much for the question. I just have one on M&A for Strauss. As a group, it seems like video game publishers have been pretty resistant to making their frontline content available day and date on subscription products. Do you think that could eventually catalyze vertical consolidation to get that content in the future? And I'd also appreciate hearing your thoughts on the prospect of AAA horizontal consolidation as well?" ] }, { "name": "Strauss H. Zelnick", "speech": [ "I think we're -- I'm proud of my crystal ball most of the time, where I really had a very bad crystal ball is when I've been predicting consolidation in the industry. I think I predicted meaningful consolidation in the industry about 10 years ago, and we're still waiting. So it seems that in an industry where you have these extraordinary tailwinds and weak players get washed out and really get sold for scrap, essentially, and strong players only get stronger. It's hard to imagine why you'd see a lot of horizontal consolidation. Horizontal consolidation tends to occur when the industries are under pressure or companies are under pressure, typically, certainly, in the entertainment industry, that's historically been the case. So I'm not sure what you expect. I think your question about vertical consolidation is interesting, even though first -- your first day at business school, they explained to you the vertical consolidation doesn't create value. One could imagine a powerful distributor that's anxious to build an audience could imagine that acquiring exclusive rights to key product would jump-start that.", "The track record of that going well. And the linear entertainment business has been very poor, and tried over and over again. But I suppose it could be tried in the interactive entertainment business. Very hard for us, very hard for us to say. What we do every day is get up and try to do the best job we can, both from a creative point of view and a business point of view, and we try to be of service to our customers, our colleagues and our investors, and that's served us well. And in terms of our own approach to M&A, we have a significant cash balance, just shy of $2 billion. We don't have any debt. And we have a lot of cash flow. In fact, we've revised upward our expectations about adjusted operating cash flow for the year to $500 million up from $450 million. Our Capex is down a little bit as well. So we certainly are in a position to pursue transactions. Our lens is, is it strategically powerful and is financially accretive, and that analysis led us to acquire Social Point several years ago. We're happy we did. And to the extent that an opportunity matches those criteria, we would hope to move forward as well." ] }, { "name": "Mike Ng", "speech": [ "Craig, thank you for your thoughts." ] }, { "name": "Operator", "speech": [ "Our next question comes from the line of Raymond Stochel with Consumer Edge Research. Please proceed with the question." ] }, { "name": "Raymond Stochel", "speech": [ "Great, thanks for taking my question. One on retaining talent, and this isn't really meant to involve Dan Houser, but you can certainly comment on that as well. It's more in thinking about how you're opening up these new studios and even your equity investment in Proletariat. Can you talk about how the changing business models and the changing pipeline that you have as far as bringing new ideas to market is making you think differently about the way that you're incentivizing your employees? I know you think deeply about these matters." ] }, { "name": "Strauss H. Zelnick", "speech": [ "Yes. What we are trying always to think differently about is creativity. We know there will be a next new thing. You haven't seen the final expression of what interactive entertainment or entertainment is here in 2020. You're going to see big innovations, hopefully from us, but certainly from the industry, in the next 1, 2, 3, 5, 10, 20 years. And we're positioned so that we ought to be able to be at the front line of that, and shame on us if we're not. So the creative expression of what we do must evolve, will evolve. But the culture that underlies that here remains unchanged because it works. And part of the culture is compensation. In a for-profit enterprise, you can outline your culture verbally, but your compensation programs either will or will not drive that culture. And our culture is one of sharing, and our compensation programs are one of sharing. We emotionally share success.", "We all take responsibility for failure. And equally, our compensation programs align incentives with our shareholders by making sure that, essentially, we have profit shares, essentially. If we miss our goals, then incentive comp for the team is disappointing or 0. If we exceed our goals, it's good. If we massively exceed our goals, it's very good, but it's self-liquidating because it's driven by an increase in profits. And at the label level, we essentially, although we call it different things, have profit sharing arrangements. So the better the labels do, the better the human beings do, the better the shareholders do. That's our goal, and it's all formulaic because we don't believe in discretionary comp programs. We think they lead to politicking and other bad things. Our comp programs are almost entirely formulaic based on results versus plan and/or actual operational profitability at the divisional level." ] }, { "name": "Raymond Stochel", "speech": [ "Great, thanks very much." ] }, { "name": "Operator", "speech": [ "Our next question comes from the line of Alex Giaimo with Jefferies. Please proceed with the question." ] }, { "name": "Alex Giaimo", "speech": [ "Karl, you mentioned free-to-play as an opportunity in your remarks, you guys have a lot of valuable IP in your portfolio. So just curious if anything in your catalog could work on a free-to-play basis? Or if you were to launch a free-to-play offering? Would it more likely be based on new IP?" ] }, { "name": "Karl Slatoff", "speech": [ "Yes. I mean, I think the short answer is, I'm sure there are lots of things in our catalog that would work on a free-to-play basis. And that doesn't necessarily mean that we pursue that. It really has to be the right mix of the creative goal and what the development team is trying to achieve from a creative perspective and then the business model, etc. Free-to-play games we tend to have the belief that you can't really invest at the same level on a free-to-play experience that you do in a standard ownership AAA type title. They're probably going to be examples in the future where that's not the case, but that's our general philosophy. So -- but that doesn't necessarily mean that an old franchise that was AAA ownership type model couldn't work in a free-to-play context. And certainly, new IP begets opportunities to pursue new business models and among those business models are free-to-play. So the answer really could be both." ] }, { "name": "Alex Giaimo", "speech": [ "Thanks." ] }, { "name": "Operator", "speech": [ "Our next question comes from the line of Matthew Thornton with SunTrust. Please proceed with the question." ] }, { "name": "Matthew Thornton", "speech": [ "Hey, thanks for sticking me back in my question was actually taken, but I'll ask a different one. I think it was Karl, you mentioned talking about the pipeline in the next couple of months here. I'm just curious, number 1, is that just talking about the fiscal '21 slate? Or is that more of a multiyear outlook that you guys are thinking about providing? And then just kind of what venue is that on the next call? Is there a certain venue? Or is this kind of ad hoc by studio? Just how should we think about this information coming to us? Any color there?" ] }, { "name": "Karl Slatoff", "speech": [ "Yes. I mean, our goal is, obviously -- look, we have insight into many years into the future what the pipeline is. And one thing we know for sure is that it will change. And not everything in the pipeline will see the light of day that's currently in the pipeline, and there'll be things that are not in the pipeline that will come out. But our goal is to share as much information as we can, to give you insight into what we see, which is a multiyear pipeline. And when exactly we do that, you'll have to wait and see, but really, it will be in the coming months, and when that information comes, you'll know it." ] }, { "name": "Operator", "speech": [ "Our final question comes from the line of Jeff Cohen with Stephens Inc. Please proceed with the question." ] }, { "name": "Jeff Cohen", "speech": [ "Can you talk about engagement with the Rockstar Games launcher since it went live back in September? And then could you eventually see adding games from other Take-Two studios or even games from third-party publishers?" ] }, { "name": "Strauss H. Zelnick", "speech": [ "Yes, they've had very strong results with the Rockstar Game launcher, and we're excited to see that. In terms of how the company will pursue it broadly, that's part of the work that we're doing now. We obviously do have a central site where you can buy games, and I would hope that our company would work together effectively to pursue various direct-to-consumer offerings. But equally, our labels are highly independent. So I think your expectations are probably that we're unlikely to have only 1 place of any sort to buy anything. We're likely to have multiple outlets. We're likely to have direct outlets. We're likely to be worked with third parties. And we're likely to have multiple opportunities throughout the organization. But the underpinnings within the organization, the technical underpinnings and the business underpinnings will be centralized. We all work together cooperatively so we don't duplicate efforts. So you can see a consumer-facing approach that's quite varied. And then we have a highly efficient approach internally where we have all people working together productively in service of the same goals." ] }, { "name": "Operator", "speech": [ "Ladies and gentlemen, we have reached the end of our question-and-answer session. And I would like to turn the call back over to management for any closing remarks." ] }, { "name": "Strauss H. Zelnick", "speech": [ "Thanks, everyone, for joining us today. We're very proud of the results driven by our creative teams and driven by our business teams as well. We're grateful to our colleagues all around the world. We're very grateful to our shareholders for their support and grateful to all of you who attended and took the time to be thoughtful and ask questions." ] }, { "name": "Operator", "speech": [ "[Operating Closing Remarks]" ] } ]
TTWO
2018-11-07
[ { "description": "Senior Vice President of Investor Relations and Corporate Communications", "name": "Hank Diamond", "position": "Executive" }, { "description": "Chairman and Chief Executive Officer", "name": "Strauss Zelnick", "position": "Executive" }, { "description": "President", "name": "Karl Slatoff", "position": "Executive" }, { "description": "Chief Financial Officer", "name": "Lainie Goldstein", "position": "Executive" }, { "description": "Piper Jaffray -- Analyst", "name": "Mike Olson", "position": "Analyst" }, { "description": "Jefferies -- Analyst", "name": "Tim O'Shea", "position": "Analyst" }, { "description": "Barclays -- Analyst", "name": "Ryan Gee", "position": "Analyst" }, { "description": "MKM Partners -- Analyst", "name": "Eric Handler", "position": "Analyst" }, { "description": "Merrill Lynch -- Analyst", "name": "Justin Post", "position": "Analyst" }, { "description": "-- Analyst", "name": "Analyst", "position": "Analyst" }, { "description": "Macquarie Research -- Analyst", "name": "Ben Schachter", "position": "Analyst" }, { "description": "Morgan Stanley -- Analyst", "name": "Brian Nowak", "position": "Analyst" }, { "description": "KeyBanc -- Analyst", "name": "Evan Wingren", "position": "Analyst" }, { "description": "Sanford Bernstein -- Analyst", "name": "Todd Juenger", "position": "Analyst" }, { "description": "Consumer Edge Research -- Analyst", "name": "Ray Stochel", "position": "Analyst" }, { "description": "The Benchmark Company -- Analyst", "name": "Mike Hickey", "position": "Analyst" }, { "description": "BTIG -- Analyst", "name": "Brandon Ross", "position": "Analyst" }, { "description": "Stifel -- Analyst", "name": "Drew Crum", "position": "Analyst" }, { "description": "Oppenheimer -- Analyst", "name": "Andrew Uerkwitz", "position": "Analyst" }, { "description": "Cowen & Company -- Analyst", "name": "Doug Creutz", "position": "Analyst" } ]
[ { "name": "Operator", "speech": [ "Greetings, and welcome to the Take-Two Interactive Software Second Quarter Full Year 2019 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. (Operator Instructions) As a reminder, this conference is being recorded.", "I would now like to turn the conference over to Hank Diamond, SVP of IR. Please proceed." ] }, { "name": "Hank Diamond", "speech": [ "Good afternoon. Welcome, and thank you for joining Take-Two's conference call to discuss its results for the second quarter of fiscal year 2019 ended September 30th, 2018. Today's call will be led by Strauss Zelnick, Take-Two's Chairman and Chief Executive Officer; Karl Slatoff, our President; and Lainie Goldstein, our Chief Financial Officer. We will be available to answer your questions during the Q&A session following our prepared remarks.", "Before we begin, I'd like to remind everyone that statements made during this call that are not historical facts are considered forward-looking statements under federal securities laws. These forward-looking statements are based on the beliefs of our management as well as assumptions made by and information currently available to us. We have no obligation to update these forward-looking statements. Actual operating results may vary significantly from these forward-looking statements based on a variety of factors. These important factors are described in our filings with the SEC, including the company's most recent annual report on Form 10-K and quarterly report on Form 10-Q, including the risks summarized in the section entitled Risk Factors.", "I'd also like to note that, unless otherwise stated, all numbers we're discussing today are GAAP, and all comparisons are year-over-year. Additional details regarding our actual results and financial outlook are contained in our press release, including the items that our management uses internally to adjust our GAAP financial results in order to evaluate our operating performance. In addition, we have posted to our website a slide deck that visually presents our results and financial outlook. Our press release and filings with the SEC may be obtained from our website at www.take2games.com.", "And now I'll turn the call over to Strauss." ] }, { "name": "Strauss Zelnick", "speech": [ "Thanks, Hank. Good afternoon, and thank you for joining us today. I'm pleased to report that during the second quarter, Take-Two delivered better-than-expected operating results, including growth in net bookings. This outperformance was driven primarily by Grand Theft Auto V and Grand Theft Auto Online, as well as the successful release of NBA 2K19. On September 11th, 2K launch NBA 2K19 to critical acclaim. Forbes noted, there is no such thing as a perfect sports game, but this is as close as it gets. IGN called NBA 2K19, the best of the series. And Game Informer said the title \"isn't just a game, it's a lifestyle.", "During the second quarter, net bookings from NBA 2K19 grew 10% over last year's release driven by better-than-expected growth in recurrent consumer spending. In addition, digitally delivered sales of the game increased significantly. According to The NPD Group, based on combined physical and digital sales in the US: NBA 2K19 achieved the highest launch month, in terms of dollar sales of any Sports game released, since it began tracking the industry sales in 1995; NBA 2K19 represents the biggest launch of any title in the NBA 2K series; and NBA 2K19 is now the best-selling Sports game of 2018 year-to-date.", "Our industry-leading basketball series continues to benefit from strong engagement and recurrent consumer spending. For NBA 2K19, online game is played, percentage of players who buy virtual currency and average revenue per user, all have increased double digits over NBA 2K18. During the second quarter, recurrent consumer spending on NBA 2K grew approximately 70% to a new record. In fact, NBA 2K was the single largest contributor to recurrent consumer spending in the period. We expect the net bookings from NBA 2K19, including recurrent consumer spending will be the highest ever for a 2K Sports title. I'd like to congratulate Visual Concepts and 2K for continuing to innovate our beloved basketball series and setting the standard for sports games and interactive entertainment. Even with it's tremendous success, we believe that there remains a substantial worldwide opportunity for NBA 2K, both in terms of unit sales and recurrent consumer spending.", "Grand Theft Auto Online continued to exceed expectations in the second quarter, as it has in every period since its release. Recurrent consumer spending and the title grew sequentially and was close to flat year-over-year. During the quarter, Rockstar Games supported Grand Theft Auto Online with an array of new content, highlighted by the highly successful After Hours update and they have much more plans going forward. Sales of Grand Theft Auto V also outperformed our expectations and the title is now sold in more than 100 million units.", "Our second quarter results were also enhanced by a variety of other offerings, including Social Point's mobile games, NBA 2K18, WWE SuperCard and NBA 2K Online 2 in China. Delivering new and innovative ways for consumers to stay captivated by and engaged with our titles after their initial launch remains a key strategic priority for our organization.", "During the second quarter, recurrent consumer spending exceeded our expectations, growing 28%, and accounting for 53% of total net bookings. In addition to virtual currency for NBA 2K and Grand Theft Auto Online recurrent consumer spending was enhanced by a variety of offerings. In the free to play category, Social Point once again was a significant contributor to our results through its two biggest mobile titles; Dragon City and Monster Legends, combined net bookings from these two games grew sequentially over the first quarter.", "Social Point remains focused on it's exciting pipeline, which includes 10 new games in development. For current consumer spending and WWE SuperCard grew 47% net of platform fees and the game has now been downloaded over 18 million times. 2K supported WWE SuperCard with three updates during the second quarter and as announced the WWE SuperCard season 5 will be released this fall. And NBA 2K Online in China grew 85% driven by the launch of NBA 2K Online 2 in August. Total combined, registered users for NBA 2K Online 2 and it's predecessor currently stands 40 million people and the franchise remains the number one PC online sports game in China.", "Add-on content also contributed meaningfully led by our offerings for Sid Meier's Civilization, and XCOM 2. On October 26th, Rockstar Games launched it's highly anticipated title Red Dead Redemption 2. Our collaboration among all of Rockstar Games studios worldwide, including more than 2,000 team members Red Dead Redemption 2 features the deepest and most expansive Rockstar World today, and is the labels first experience built from the ground up for the current console generation. Red Dead Redemption 2 has received outstanding reviews, with numerous influential critics awarding the title a perfect score, including IGN, The Guardian, Game Informer, The Telegraph, Digital Trends and others. The Washington Post called it \"Jaw-dropping at every level.\" Hollywood Reporter said, \"What Rockstar has delivered in Red Dead Redemption 2 is not just the best game of the year, but the best game of the decade.\" CNET wrote \"Red Dead Redemption 2 has undoubtedly raised the bar for narrative open-world games and will likely have a lasting impact on how they are made in the future.\" And GQ UK is a \"Red Dead Redemption 2 is Rockstar's best game; a grand, magnificent adventure that's vast yet intimate.", "Red Dead Redemption 2 is now tied with Grand Theft Auto V as the highest rated title on PlayStation 4 and Xbox One, with a 97 Metacritic score. Red Dead Redemption 2 is also exceeded our sales expectations to date. The title has set numerous records, including achieving the biggest opening weekend in the history of entertainment, with over $725 million in retail sell-through during its first three days. Red Dead Redemption 2 sold-in more units in its first eight days than the original blockbuster Red Dead Redemption sold in its first eight years and, as of today, the title has sold-in over 17 million units worldwide.", "I'd like to congratulate the entire team of Rockstar Games for once again raising the bar for what can be achieved creatively in interactive entertainment, as well as delivering a resounding critical and commercial success. As a result of our strong performance in the second quarter and outstanding early results from Red Dead Redemption 2, we are increasing our financial outlook for fiscal 2019, which is also poised to be a record year for net bookings and adjusted operating cash flow. This is one of the most exciting times in our organizations 25-year history. New technologies, business models and distribution platforms are enabling interactive entertainment to reach consumers like never before and allowing our business to evolve further and expand globally.", "Take-Two is exceedingly well positioned to capitalize on all the positive trends in our industry. Creatively, we're home to the best development teams in the business, which have a proven track record of delivering the highest quality entertainment captivates audiences and keeps them engaged. Operationally, we are committed to excellence. We strive to be the most efficient company in our sector. And finally, we have access to the capital needed to pursue all compelling opportunities both organic and inorganic. As a result, Take-Two is better positioned than ever to deliver growth and returns for our shareholders over the long-term.", "I'll now turn the call over to Karl." ] }, { "name": "Karl Slatoff", "speech": [ "Thanks, Strauss. Today, I'll begin by discussing our other recent launches. On October 9, 2K returned to the ring with WWE 2K19, the latest installment in our popular sports entertainment series. Developed collaboratively by Yukes and Visual Concepts, the title received positive reviews from critics, including Bleacher Report, who called the game phenomenal, and IGN who noted, MyCareer this year is fantastic and is exactly what the template should look like in future years.", "WWE 2K19 is being supported with a series of downloadable content, including a Season Pass, as well as the WWE 2K19 Million Dollar Challenge, where one finalist will compete one-on-one against AJ Styles for the chance to win a $1 million grand prize. On October 16, 2K bolstered our NBA basketball offerings with the release of NBA 2K Playgrounds 2. Title the front row back to the classic two-on-two, arcade style basketball that continues to earn worldwide fans and critical acclaim. IGN rated the game an 8 out of 10 and said, NBA 2K Playgrounds 2 proves that pick-up-play arcade basketball is still alive and well. NBA 2K Playgrounds 2 features multiple ways to play on your own, with friends or against the world. The game is being supported with a series of post-launch updates featuring 180 additional players, including NBA legend, Kareem Abdul-Jabbar, as well as additional playgrounds.", "Yesterday, 2K launched Carnival Games for Nintendo Switch, PlayStation 4 and Xbox One. This new offering from our popular franchise that has sold-in over 9.5 million units worldwide is perfectly timed for the upcoming holiday season. Offered at a family friendly price point of $39.99, Carnival Games is fun for gamers of all ages. On Nintendo Switch, the title can be played alone or with up to four people simultaneously, leveraging the unique accessibility of the console's Joy-Con controllers. The game features 20 exciting reimagined games in four unique alleys that can be played at home or on the go, alone, or with family and friends.", "Turning to our upcoming releases. On November 13, in North America, and on November 16, internationally, 2K will release physical versions of The Golf Club 2019 featuring PGA TOUR for PlayStation 4 and Xbox One. Developed by HB Studios, 2K launched the game digitally for these consoles and PC this past summer, marking the franchise's first release featuring the official PGA TOUR license. Within its first two months in market, the title sold in over 30% more units than last year's edition. In addition, critics agreed that The Golf Club 2019 featuring PGA TOUR is the most comprehensive and engaging virtual golf experience to date. With Operation Sports calling it, exciting, fun and authentic, and GameSpot saying, it's a drive forward for the golf simulation series. We're pleased to expand our sports portfolio and we continue to explore opportunities to complement our offerings.", "On November 16, 2K and Firaxis Games will launch Sid Meier's Civilization VI for Nintendo Switch. Civilization VI won both The Game Awards' and DICE Awards' Best Strategy Game 2016. And on Nintendo Switch, the title will include the latest game updates and improvements as well as four additional content packs that add new civilizations, leaders and scenarios. We are confident that gamers will enjoy taking one more turn in our beloved award-winning strategy series on the Nintendo Switch.", "On December 14, 2K and Gearbox Software will bring the critically acclaimed and genre-defining shooter-looter Borderlands franchise to PlayStation VR with Borderlands 2 VR. Available for digital download, the title brings the iconic world of Pandora to life like never before with brand new VR-specific features like BadAss Mega Fun Time, first-person perspective driving, and all new VR specific Vault Hunter skills and abilities and more. Just in time for the holidays, both fans and the press are excited for Borderlands VR arrival with Game Informer former saying, grab your guns and get into Pandora once again with Borderlands 2 VR on PSVR.", "I'd like to take a moment to join Strauss in congratulating Rockstar Games on the phenomenal success of Red Dead Redemption 2. Later this month, Rockstar Games is planning to launch an initial public beta of Red Dead Online, a new online connected experience set against the backdrop of Red Dead Redemption 2's enormous open world. Red Dead Online is an evolution of the classic multiplayer experience in the original Red Dead Redemption, blending narrative with competitive and cooperative game-play in fun new ways. Using the gameplay of Red Dead Redemption 2 as a foundation, the vast world of Red Dead Online will be ready to be explored alone or with friends, and will feature constant updates and adjustments to grow and evolve this experience for all players. Access to Red Dead Online will be free with the purchase of Red Dead Redemption 2 on both PlayStation 4 and Xbox One.", "In the coming months, we will continue to support our titles with additional content designed to drive consumer engagement, including updates for Grand Theft Auto Online, WWE SuperCard and more. In addition, we'll continue to broaden our offerings for mobile devices. Following a successful completion of the NBA 2K Leagues inaugural season, four additional teams have signed on bringing the total to 21 teams that will compete in Season 2. The draft qualification process for Season 2 began last week and will conclude November 26.", "Non-retained players from the first season will automatically be entered into the draft pool for Season 2. The NBA 2K League also plans to conduct one or more tournaments outside of North America to identify additional international players for the 2019 draft pool. We look forward to the continued progress and growth of the league, which has a long-term potential to enhance engagement and to be a meaningful driver of profits for our company.", "Looking ahead, our labels had a strong development pipeline, which includes groundbreaking, new intellectual properties and releases from our renowned franchises. In addition, we'll continue to support our games with offerings designed to enhance players experience and drive engagement. This is an incredibly dynamic time for our company and the industry with vast opportunities presented by emerging platforms, business models, and markets that are enabling us to reach new consumers in all new ways. We're excited about the future and confident in our ability to continue to provide value to our consumers and returns for shareholders over the long-term.", "I'll now turn the call over to Lainie." ] }, { "name": "Lainie Goldstein", "speech": [ "Thanks, Karl, and good afternoon, everyone. Today I'll discuss our second quarter results and then review our financial outlook for the third quarter and fiscal year 2019. Please note that additional details regarding our actual results and financial outlook are contained in our press release. Strauss mentioned our business delivered better-than-expected operating results in the second quarter.", "Total net bookings grew to $583 million, which exceeded our outlook range of $500 million to $550 million, due primarily to the outperformance of Grand Theft Auto V and Grand Theft Auto Online, as well as the successful launch of NBA 2K19. Digitally delivered net bookings grew 20% to $426 million and accounted for 73% of the total. During the second quarter, 47% of our sales of current-generation console games were delivered digitally, up from 35% last year, a result that exceeded our expectations.", "Turning to some details from our second quarter income statement, GAAP net revenue increased by 11% to $493 million and cost of goods sold decreased 5% to $235 million. Operating expenses increased by 11% to $232 million, due primarily to higher marketing spend as well as R&D expense for titles that are not technologically feasible. And GAAP net income was $25 million or $0.22 per share, up from a loss of $3 million or $0.03 per share in the prior year period.", "Now, I'll review the highlights of our fiscal 2019 operating and financial outlook, starting with the fiscal third quarter. We expect net bookings to range from $1.4 billion to $1.45 billion, up from $654 million in the third quarter last year, driven by the record-breaking launch of Red Dead Redemption 2. I would like to join Strauss and Karl in congratulating Rockstar Games for delivering this incredible creative and commercial achievement. The largest contributor to net bookings are expected to be Red Dead Redemption 2, NBA 2K19, Grand Theft Auto Online, and Grand Theft Auto V, and WWE 2K19.", "We expect recurrent consumer spending to be approximately flat and we expect digitally delivered net booking to increase by around 70%. Our forecast assumes that 30% of our current-generation console games will be delivered digitally, up from 26% in the third quarter last year. We expect GAAP net revenue to range from $1.1 billion to $1.15 billion, and cost of goods sold to range from $773 million to $799 million. Operating expenses are expected to range from $290 million to $300 million. At the midpoint, this represents a 45% increase over last year, driven primarily by higher marketing expense. And GAAP net income is expected to range from $36 million to $48 million or $0.31 to $0.41 per share.", "Turning to our outlook for the full fiscal year, we are raising our fiscal 2019 operating outlook primarily as a result of our stronger than expected second quarter results and increased outlook for Red Dead Redemption 2 as well as higher recurrent consumer spending on NBA 2K. These are partially offset by modestly reduced unit expectations for NBA 2K19 and WWE 2K19. We now forecast net bookings to range from $2.8 billion to $2.9 billion, up from our prior outlook of $2.7 billion to $2.8 billion. At the midpoint, this represents a 43% increase over fiscal 2018 driven primarily by the launch of Red Dead Redemption 2 and expected growth from NBA 2K, which we forecast to be partially offset by lower net bookings from Grand Theft Auto V and Grand Theft Auto Online.", "The largest contributor to net bookings are expected to be Red Dead Redemption 2 and Red Dead Online, NBA 2K, Grand Theft Auto Online and Grand Theft Auto V, WWE 2K and Social Points mobile offerings. We expect the net bookings breakdown from our label to be roughly 60% Rockstar Games, 35% 2K, and 5% Social Points and other. And we forecast the geographic net bookings split to be about 55% United States and 45% international.", "We now expect recurrent consumer spending to grow in the low teens and we have increased our digitally delivered net bookings growth forecast to approximately 30%. Our increased forecast for digitally delivered net bookings is driven primarily by a higher full-game download mix for Red Dead Redemption 2 and NBA 2K 2019. We now forecast that 37% of our current generation console games will be delivered digitally in fiscal 2019, up from 34% last year and up from our prior expectation of 32%. We expect to generate approximately $730 million in adjusted operating cash flow, which represents nearly a $20 million increase from our prior implied outlook.", "Adjusted operating cash flow is our new non-GAAP measure and is defined as GAAP net cash from operating activities adjusted for changes in restricted cash. It is equivalent to what we formally reported as GAAP net cash from operating activities prior to our April 1 adoption of a new accounting standard, which requires that changes in our restricted cash be included within our cash flow statement. We plan to deploy approximately $60 million for capital expenditures with GAAP net revenue to range from $2.55 billion to $2.65 billion and costs of goods sold to range from $1.45 billion to $1.47 billion. Total operating expenses are forecasted to range from $890 million to $930 million. At the midpoint, this represents a 20% increase over the prior year, driven primarily by higher marketing, personnel, IT and R&D expenses. And we expect GAAP net income to range from $202 million to $232 million or $1.73 to $1.98 per share. For management reporting purposes, we expect our tax rates to be 20%.", "In closing, during the first half of fiscal 2019, Take-Two produced strong results and we are poised to generate record operating results for the full year. Over the long-term, our industry-leading creative assets, firm commitment to operational excellence, and strong financial foundation position our company to deliver growth and margin expansion for our shareholders.", "Thank you. I'll now turn the call back to Strauss." ] }, { "name": "Strauss Zelnick", "speech": [ "Thanks, Karl, and Lainie. On behalf of our entire management team, I'd like to thank our colleagues for their dedication and hard work and for delivering another successful quarter. To our shareholders I want to express our appreciation for your continued support. And we'll now take your questions, operator?" ] } ]
[ { "name": "Operator", "speech": [ "Thank you. (Operator Instructions) Our first question comes from Mike Olson with Piper Jaffray. Please proceed with your question." ] }, { "name": "Mike Olson", "speech": [ "Hey, good afternoon, and congrats on the results and the launch. I realize we're only 10 days into this and it'll only be relevant over probably a longer period of time. But at this point, do you think you're seeing any material cannibalization of GTA Online from the launch of Red Dead Redemption 2? And somewhat related to that, is it likely that Rockstar will release content updates for GTA V and Red Dead Redemption 2 in a staggered manner in the coming quarters or will they just kind of be released when they're ready? Thanks." ] }, { "name": "Strauss Zelnick", "speech": [ "I've been asked repeatedly over some prior calls about whether I felt cannibalization would potentially be an issue. And my view is that, all games, all products, all entertainment products stand alone. They compete with everything in the market, they compete with themselves, and they compete with nothing at all, because if there's a bunch of good stuff out there, you want to consume it all. And if there's nothing that appeals to you, you don't need entertainment at any given time. The fact that Red Dead Redemption 2 has come from Rockstar Games does not make it more or less competitive with any other title in the marketplace. And specifically to answer your question, we do not see any cannibalization, nor do I expect any." ] }, { "name": "Mike Olson", "speech": [ "Thank you." ] }, { "name": "Operator", "speech": [ "Our next question comes from Tim O'Shea with Jefferies. Please proceed with your question." ] }, { "name": "Tim O'Shea", "speech": [ "Yes. So, thank you for taking my question. I'm just curious, what kind of marketing promotional activity should we expect for Red Dead through the holidays? I'm just wondering if this is the type of game that will be a gifted item. Was this a type of game that could see a nice boost during the holiday shopping season? And just given the strength of the early sales of Red Dead, I'm wondering how strong this game could sell through the rest of the December quarter. Thanks." ] }, { "name": "Strauss Zelnick", "speech": [ "I think you can obviously expect that it will be very supportive of the title on an ongoing basis. More specific details would be given by Rockstar." ] }, { "name": "Operator", "speech": [ "Our next question comes from Ryan Gee with Barclays. Please proceed with your question." ] }, { "name": "Ryan Gee", "speech": [ "Yes. Hi. Good afternoon. Thanks for taking the question. So, maybe for Lainie. If we just do some rough math, it puts Red Dead Redemption somewhere at already around the $700 million net bookings to-date. And that compares to your new guidance for the Rockstar business to do about $1.7 billion, up from the $1.5 billion that was in the guidance last quarter. So, how should we think about that gap being made up by the rest of the Rockstar products? Should we think that that's really in your guidance primarily unit sales, or is it really a catalog of GTA or perhaps the two Rockstar online businesses? Any color you could give there would be great." ] }, { "name": "Lainie Goldstein", "speech": [ "And so what you're preferring to our retail sales, not just what our -- so there would be in our wholesale sales would be for our digital and physical. So those numbers aren't comparative. But, if you think about just Q2 in general, and we've lifted the full year and that is due to the increased outlook for Red Dead Redemption 2. And then higher RPF on NBA partially offset by reduced unit sales expectations for NBA 2K19 and WWE 2K19." ] }, { "name": "Operator", "speech": [ "Our next question comes from Eric Handler with MKM Partners. Please proceed with your question." ] }, { "name": "Eric Handler", "speech": [ "Yes. Thank you very much for the question. A couple of things on Red Dead, Lainie, in particular, I wondered if you can talk about the dispersion between the base SKU and how you did versus the two other premium SKUs. Wondering if you might give a little insight there. And then, also, as you know, when you think about the game and the online portion of the game, can you maybe talk about possibly some similarities in how GTA Online ramped when it first started and how you think that might progress with Red Dead?" ] }, { "name": "Strauss Zelnick", "speech": [ "Hey, Eric, it's Strauss. No, we don't break down, how the different additions have sold. We will break down some details, but we don't intend to break that down. And it's way too early to talk about Red Dead Redemption 2 online hasn't launched yet. It will launch in public beta toward the end of the month. Rockstar will have a lot more to say about it, but we're not making any current predictions." ] }, { "name": "Eric Handler", "speech": [ "Fair enough. And then I guess just one quick follow-up. I wondered, I'm not sure if I missed it or not, but the how Red Dead did in terms of full game downloads versus physical sales?" ] }, { "name": "Lainie Goldstein", "speech": [ "We're not giving the detail by title, Eric, but we did say that we have. I'm seeing a higher proportion of digital sales versus visible that we have already had originally expected. So for the full year, we're expecting on current Gen, our full game downloads to be 37%, up from 34% last year and we had expected it to be 32% when we gave our guidance last time." ] }, { "name": "Eric Handler", "speech": [ "Understood. Thank you very much." ] }, { "name": "Operator", "speech": [ "Our next question comes from Justin Post with Merrill Lynch. Please proceed with your question." ] }, { "name": "Justin Post", "speech": [ "Great. Thank you, and congrats on Red Dead. Now move over to NBA. Can you talk about the dynamics that maybe driving units, a little bit below your forecast, but our CS higher. And then Lanny, I think -- Lainie, I'm sorry, I think you have that 800 million of long-term capitalized software on the balance sheet. I imagine some of that's related to Red Dead. I'm wondering why that's not in the short-term side, and then how that will flow through the income statement for the next few quarters? Thank you." ] }, { "name": "Karl Slatoff", "speech": [ "Hi, Justin. It's Karl. Just to address your first question about the dynamics of the units forecast at this point. So, yeah, I mean, to-date, the units of NBA 2K19 are down modestly versus 2018. So, we're forecasting them down a little bit for the full year. You don't ever have exact answers of why that's the case, but we have seen a higher number of consumers who bought NBA 2K18, continue to be engaged with that title. And they haven't kind of converted over to 2K19 yet, which certainly could have an effect on the unit sales of NBA 2K19. There's also some competitive dynamics that could be affecting as there are a lot of titles in the market now, but 2K continues to pursue strategies to increase the number of units out there. So, we're obviously not taking it sitting down. But in terms of RCS, I mean you're right. I mean consumers are much more engaged. I think the good news on here is that consumers actually are in the title, all the key metrics are much better than they had been in the past. And that just shows you just -- credit to how engaging the title is and how much Visual Concepts' improved that title year-upon-year." ] }, { "name": "Lainie Goldstein", "speech": [ "So, for our cap software for long-term, we wouldn't see Red Dead Redemption move into short-term until the game releases. So, you wouldn't see a movement of that until Q3. And that number that $800 million includes capitalized stock expense and that won't go through our management reporting and you'll only see that go through our GAAP reporting. And once we release the game, we'll be creating a lifetime estimate of the title. And we don't share our lifetime estimates, but a blockbuster title you can imagine, has a bit of a longer life. And that will help you to determine what the amortization period is over the life of the title." ] }, { "name": "Analyst", "speech": [ "Thank you." ] }, { "name": "Operator", "speech": [ "Our next question comes from Ben Schachter with Macquarie Group. Please proceed with your question." ] }, { "name": "Ben Schachter", "speech": [ "Hey, guys. Congratulations on the launch, just really a great experience and I'm personally spending probably too much time chasing the legendary bear. On sales, can you talk a little bit about the international opportunity, where it's done well, where it's not done as well as you would've liked and where you think it could grow? And then separately, Lainie, you listed Red Dead Online second when you talked about a contributor for FY 2019, I believe, in the script. Can you clarify what that means in terms of the magnitude of Red Dead Online for this year's guide? How you're thinking about monetizing there? And then, just one more on the capitalized part. If we assume that the success of GTA was so long, for this one, obviously, it's going to be more than a year of capitalized software amortization, is it two years? Is it three years? And is it straight line or would it be relative to sales? Thanks." ] }, { "name": "Strauss Zelnick", "speech": [ "So, thanks for your questions. I'm glad you like the game, where I actually went into Karl's office right before this meeting, he was playing at, that is the truth. So it's beloved already here. It's selling great around the world, it's incredibly strong everywhere it's doing very, very well in international markets. And in terms of Online, we're not breaking out Red Dead online for the year, and Lainie you will take the third question." ] }, { "name": "Lainie Goldstein", "speech": [ "Sure. So, yes, it's true. GTA did have a really long life and we would look at all of our titles and similar titles to determine the lifetime, but we have to look at history of all of our titles and GTA is definitely a unusual circumstance. But with blockbuster, you would assume that it would be more -- it wouldn't be just one year, it would be a longer life than that. And in terms of how we would amortize, it would probably be over the revenue stream. It's the higher of narrow straight line. And based on the launch quantity, I would assume that it would go over the revenue stream." ] }, { "name": "Ben Schachter", "speech": [ "Thank you. And Just a quick follow-up. So you did say Red Dead online when you're talking about revenues, so should we assume that, that mean the monetization in Red Dead online and that's part of the guide?" ] }, { "name": "Lainie Goldstein", "speech": [ "I didn't say Red Dead online, we're talking about Red Dead, the launch of Red Dead." ] }, { "name": "Ben Schachter", "speech": [ "Okay, thanks." ] }, { "name": "Operator", "speech": [ "Our next question comes from Brian Nowak with Morgan Stanley. Please proceed with your question." ] }, { "name": "Brian Nowak", "speech": [ "Great. Thanks for taking my questions. I have two. The first one, Strauss just as you kind of you step back, you've done a great job last couple of years sort of building up a stable of software engineers and have the ability to put up more content. How do you think about the potential to sort of put out more recurring titles on an annual basis to next two years, three years, four years, where are you now as far as capacity? And the second one, you mentioned that two new games and -- sorry, 10 new games in development that Social Point, a thoughts on timing and all you can share with us, in which genres as of mobile are you most excited about? Thanks." ] }, { "name": "Strauss Zelnick", "speech": [ "So thanks for your question. And regarding our upcoming release schedule, we've said that our goal in any years is to have a handful of really powerful frontline releases and those would be taking advantage of our extraordinary collection of franchises. We have 11 franchises that have each had at least one 5 million unit released. We have over 60 that have sold at least 2 million units in an individual release. So we will certainly bring back beloved franchises to market and we aim to create new intellectual property every year as well. We haven't always been able to do that, but that's our goal. And in so doing, that looks an awful lot like annualizing titles without bringing really high-quality titles or trying to bring the really high-quality titles to market too frequently, which we think is exceedingly difficult to do. We think if you're able to do that right, we should be able to have an incredibly powerful frontline release program without asking too much from either our development teams or the consumers in terms of over and over again bringing a non-sports title to market. Our sports entertainment titles on the other hand are annualized. They worked really well. So I think that's what you should expect going forward. The second question was with regard to Social Point. The games are sort of described as mid-core. They're deeper, they're engaging, they're intended to be deeper and engaging. Beyond that, Social Point will talk about their upcoming releases because it's important that our label speak for themselves from the point of view of developing and marketing. But it's a diverse array of titles that are expected to be highly competitive. We're thrilled that they have hits in the marketplace and we're excited about what is to come." ] }, { "name": "Brian Nowak", "speech": [ "Great, thanks." ] }, { "name": "Operator", "speech": [ "Our next question comes from Evan Wingren with KeyBanc. Please proceed with your question." ] }, { "name": "Evan Wingren", "speech": [ "Thank you. Just wanted to ask quickly about the RCS outlook for 3Q. I think you mentioned that it was flat. Respecting that launch a bit later in the quarter last year for GTA. Just trying to understand the puts and takes, given your comment that NBA 2K is growing, and with respect to Strauss's comment that you don't expect cannibalization, so just trying to understand that dynamic. And then just to be crystal clear, because I was actually a little still confused. You're saying there is nothing in the guide for Red Dead Online. Thanks." ] }, { "name": "Lainie Goldstein", "speech": [ "No, we didn't say there wasn't anything in the guidance. We just said that when I was talking about the amortization of capitalized software talking about the core products of Red Dead Redemption 2 and the full game that was already released. For recurrent consumer spending what we're talking about in terms of the full year is that NBA 2K is going to be up for the full year, we will have Red Dead Redemption 2 launch and that's sometime later this month. And so it won't be like a full quarter. So that's why that number wouldn't be up significantly. And we did say it was offset by GTA online which is reduced, and we had given out original guidance for GTA online to be down for the full year and also for Q3, and for Q2, and it meets our expectations every time the title comes out each quarter." ] }, { "name": "Evan Wingren", "speech": [ "Okay, thanks. And then just one quick one on NBA 2K. Do you have a sense for what, why this title given that it was so well reviewed relative to last year is sort of underperformed your expectation slightly? Thank you." ] }, { "name": "Strauss Zelnick", "speech": [ "Hi. Yeah, the title has not underperformed our expectations at this point. Actually, from a revenue perspective, we still anticipate this is going to be our highest title ever. We did say that the units are a little bit below where we expected them to be at this point in time. And as I said in an earlier question, could be a vast array of reasons. We've got a lot more people engaged in 2K18 for a longer period time that may have not transitioned over. There are a lot of games in the market. But like I said, 2K is obviously focused on trying to bring the audience base as high as it possibly can be and grow it." ] }, { "name": "Evan Wingren", "speech": [ "Thanks for the clarification." ] }, { "name": "Operator", "speech": [ "Our next question comes from Todd Juenger with Sanford Bernstein. Please proceed with your question." ] }, { "name": "Todd Juenger", "speech": [ "Hi, thanks a lot for taking the question. At this point, it's hard not to overlap a bit with some previous ones, but can I go back to the NBA 2K number? I want to make sure I heard it right. I thought I heard 70%, 7-0%, increase in recurring revenue. If I heard that right, that's obviously a very big number. I know you said it had to do with more players higher attach rate, more ARPU. Any more detail about that would be helpful. But I guess more broadly, what do you think about the game is driving such a change in behavior? Was there any change in the game design? Is there some timing issues? Is it just the evolution of just that concept generally being accepted by consumers? Trying to understand what drove that result if I heard it correctly. Thanks." ] }, { "name": "Strauss Zelnick", "speech": [ "You did hear right, up 70% recurrent consumer spending over last year's quarter. And it is great result and it's reflective of a lot more engagement, and the increased engagement, we think is that the consumers who are inside the game are avid consumers. They love what Visual Concepts is bringing to market and they're voting that they love it. So I wish I could give you a better answer. Lord knows, we'd like to know it too. I can confirm that our approach every year is to make the game better, deeper, more entertaining, more captivating, more engaging. That's the goal. And when you see this kind of change in recurrent consumer spending, that obviously is reflective of engagement." ] }, { "name": "Todd Juenger", "speech": [ "Thank you." ] }, { "name": "Operator", "speech": [ "Our next question comes from Ray Stochel with Consumer Research. Please proceed with your question." ] }, { "name": "Ray Stochel", "speech": [ "Great. Thanks for taking my questions. So, a couple here on Red Dead Redemption 2 and Rockstar. So, the first would be, whether or not Red Dead Redemption 2 changes how you're thinking about your current cash position, now that you are sort of through the launch of the game and you know it's been successful? Then, in addition to that, could you isolate any key driver of Red Dead's success relative to your expectations? Would that be review scores or preorders or just the general customer reception? And then, one thing with Rockstar broadly, do you guys think about Rockstar's Social Club as a big competitive advantage? And is there any way that we can think about Social Club in sort of a bigger context? If you have any data points on Social Club, that'd be great? Thanks." ] }, { "name": "Strauss Zelnick", "speech": [ "So, in terms of the successful year that we expect to have affecting our cash position, we expect that adjusted cash flow from operations will be over $700 million and CapEx will be, as expected, around $60 million. We announced that we have cash a little over $1 billion at the end of this quarter. So, you can do the math. We obviously expect to have a significant cash balance at year end. We've said that our expectations with regard to our cash are, first, to support our organic growth on an ongoing basis. That's really our story. This is a company that's been driven by organic growth largely. Secondly, when we find great opportunities to support inorganic growth opportunities, for example, the purchase of Social Point, we look through a very narrow lens though. We want a deal to be accretive, if not immediately, then very quickly. And that does matter to us. And then, of course, we're prepared to return capital to our shareholders. We bought back around $300 million of stock in the last 12 months or so. Those are the three uses of cash, but it's obviously a great place for us to be with no debt. I would observe that if you have concerns about the economy, and I think many of us feel like it's riding high and we don't know when it will change, we do know that at some point it changes, that having a significant cash asset is strategically beneficial. And we do want to be well-positioned for long-term growth. We're not a quarter-to-quarter company.", "So, the second thing, I think, you asked what drives the enormous success of Red Dead Redemption 2. And the answer I think is that Rockstar is known to make the best games in the business. And I think the creation of Grand Theft Auto V, which has really became a threshold event for the industry, for Rockstar, for Take-Two as a whole, because it basically demonstrated that if something is so good as to be breathtaking that you can have amazing results. And I think when consumers understood, which they did, that Red Dead Redemption 2 would be the first game built from the ground up for the next-generation by Rockstar Games, that became a must-have item. Now, when something is a must-have item and you get it home, it's got to be great. And 97 Metacritic score, that ties it with Grand Theft Auto V, basically says it's great. And I promise you if you play video games and you play Red Dead Redemption 2, you will agree, it's great. So, what drives the success of any hit is that it's phenomenal and usually phenomenal in a somewhat unexpected way, as high as the expectations were for this release. I'm not sure anyone could have anticipated just how amazing it is. With regard to the Rockstar Social Club, it's a vibrant and passionate community. The label supports it continuously. It has lots and lots of people who are engaged. We don't give much more detail than that, but we do think it's strategically interesting and beneficial asset." ] }, { "name": "Operator", "speech": [ "Our next question comes from Mike Hickey with The Benchmark Company. Please proceed with your question." ] }, { "name": "Mike Hickey", "speech": [ "Hey Strauss, Karl and Hank, congrats on an awesome quarter guys, and congrats on Red Dead and the Rockstar as well. It's truly amazing success. Curious on Red Dead online. This is a bit of a stretch. Obviously, this competitive gameplay elements to at least, I think that's what you said, you've seen eSports opportunity at all for that game. And I guess more broadly speaking, it's hard to get a read on what Rockstar's they can philosophically, obviously that nailed single player that nailed by service. But do you seem to have any ambition to compete in the eSports market over time?" ] }, { "name": "Strauss Zelnick", "speech": [ "I think, if there is an eSports interest Rockstar will talk about it. I think, as always we want our labels to be out in front with marketing announcements. I would observe that so far Take-Two's eSports ambitions have centered around NBA 2K and the NBA 2K League." ] }, { "name": "Mike Hickey", "speech": [ "Last one from me, you said 17 million units sold and any perspective on what the channel looks like on the physical side, obviously?" ] }, { "name": "Strauss Zelnick", "speech": [ "It's selling rapidly." ] }, { "name": "Mike Hickey", "speech": [ "But it sounds like. Thanks guys. Good luck." ] }, { "name": "Operator", "speech": [ "Our next question comes from Brandon Ross with BTIG. Please proceed." ] }, { "name": "Brandon Ross", "speech": [ "Hi, thanks for taking the questions. Just a follow-up on the capital allocation question from earlier. M&A opportunities seem obvious within gaming, whether kind of bulking up in mobile or console. Maybe you can update us on your -- what your ideal opportunities within gaming would be besides being accretive. And if there are any other strategic opportunities in adjacent businesses that might make sense for you guys. And then on Social Point, you called out Social Point success, this past quarter and the number of titles that are coming. Are there any ways you see them working with 2K or Rockstar to make those mid-core games based on -- I guess, 2K or Rockstar IP now that Social Point is well integrated? Thanks." ] }, { "name": "Strauss Zelnick", "speech": [ "Thanks for your good questions. I know you said, yeah, we know you want acquisitions to be accretive, but believe it or not, that's a relatively unusual approach in our business. And it shouldn't be. It really is relevant because in the absence of thinking about that, you'd look at a whole bunch of things. The precedence of that as a metric, you don't look at so many things at all. Generally, what we've said is an acquisition should bring us owned intellectual property, teams and potentially technology. Doesn't have to bring all three. We've done acquisitions that brought us one of three for -- two of three, three of three would be even better. And we are indeed very selective. Most corporate acquisitions fail. And thankfully, the ones we've done around here at least so far have succeeded. We'd like to keep it that way. To your second question about Social Point, their focus as is the focus of all of our labels is to create their own intellectual property. And I would just note that in terms of the biggest titles in mobile, they're all native to mobile. They were all made for that platform. There's no doubt that we've had success with intellectual property brought to the platform, WWE SuperCard being a great example, but the really huge successes are native. And that's what Social Point is trying to achieve. I wouldn't rule out the possibility of Social Point working with another label inside the Take-Two family, but that isn't the card approach and it wouldn't be our primary approach." ] }, { "name": "Brandon Ross", "speech": [ "Thank you." ] }, { "name": "Operator", "speech": [ "Our next question comes from Drew Crum with Stifel. Please proceed with your question." ] }, { "name": "Drew Crum", "speech": [ "Okay. And hi guys, good afternoon. So could you talk about the frequency of content updates we should expect for Red Dead 2 online. And I think, and I apologize, if I missed the response to the question, I think there was an earlier question on weather Rockstar will stagger the release schedule between Red Dead online and GTA online. And then separately, Red Dead one was not on PC, any updated thoughts on making Red Dead 2 available on PC down the road? Thanks." ] }, { "name": "Strauss Zelnick", "speech": [ "Sorry, could you just repeat the third question." ] }, { "name": "Drew Crum", "speech": [ "Yeah, Strauss, just on making Red Dead 2 available on PC." ] }, { "name": "Strauss Zelnick", "speech": [ "Making it available on PC. So on Rockstar, we normally update everyone on upcoming releases in that would sort of answer all of your questions. But it is still too early to talk about content updates for Red Dead 2 online, because it hasn't launched yet obviously. Historically, obviously, we have updated content for our online offerings. And in terms ongoing releases, Rockstar will talk about what their intentions are going forward with regard to all upcoming products and that the same would hold true for platform. So in this particular instance, I can't really give you too much clarity, apologies." ] }, { "name": "Drew Crum", "speech": [ "Okay. Thanks guys." ] }, { "name": "Operator", "speech": [ "Our next question comes from Andrew Uerkwitz with Oppenheimer. Please proceed with your question." ] }, { "name": "Andrew Uerkwitz", "speech": [ "Yeah, thank you. Thanks, gentlemen and Lainie. One of the big benefits I think GTA 5 experienced was the fact that such a great game that when a new console cycle came people all went out and borrowed again. Sony and Xbox tend to talk a lot about forward backwards compatibility, does that change that dynamic as we approach the next console cycle, because it looks like Red Dead could easily have the legs to last for multiple years. And then as a second question, you showed NBA 2K at the Apple event Civilization VI is the full game, I think is on iPads and iPhones and mobile. Are those devices becoming powerful enough that they become an entire another medium for you to push a lot of your content to? Thanks." ] }, { "name": "Strauss Zelnick", "speech": [ "Yeah. I don't think backwards compatibility is actually all that important. I think the reason that we had such a great experience with Grand Theft Auto V when we brought it to new generation is, first of all, the content was meaningfully updated with amazing new features. And secondly, because the title was so extraordinary that it remained the standard bearer for the new generation straight through until the release of Red Dead Redemption 2 because nothing stood up to it technically or creatively. So, how Red Dead Redemption 2 fares going forward, it's hard to know, but it's certainly off to a great start. But we don't -- our success is not built defensively by managing platform transitions. Those things are really out of our control. Our success is built by making the very best entertainment that we possibly can and we're grateful that at least so far, it appears that it's some of the best entertainment made. And that's the whole drill.", "On your point about technical abilities, and thanks for referencing the Apple event, we're really thrilled to participate for NBA, I do think that it's just a matter of time before mobile devices are every bit as powerful. The question is whether the form factors going to appeal to every kind of title. I'm skeptical that it will. I say that and then you can find people who like to watch movies on their smartphone. So, I'm sure you can find some people who win the platforms are powerful enough, and to be clear, they're not yet. But when they are, we'll be really happy to play our very deep, very robust, very memory-intensive, technologically intensive titles on platforms like iPads or smartphones. But right now, we're not quite there yet. But if you believe in Moore's law, and I do, it's just a matter of time, probably not that long a time before that's the case." ] }, { "name": "Andrew Uerkwitz", "speech": [ "Got it. Thank you very much guys. Appreciate it." ] }, { "name": "Operator", "speech": [ "Our next question comes from Doug Creutz with Cowen & Company. Please proceed with your question." ] }, { "name": "Doug Creutz", "speech": [ "Thanks. This is for Strauss. You were recently named Interim Chairman of CBS and congratulations on that by the way. Is there a company is facing a lot of important decisions over the next two years, both internally and externally and I've even seen your name mentioned in the press release in one spot in conjunction, as being a possible CEO candidate. The responsibilities there at all fact what you're doing it take to is there been any kind of reshuffling responsibilities and how do you think about kind of balancing those rolls off against each other. Thank you." ] }, { "name": "Strauss Zelnick", "speech": [ "The CBS role is specifically interim and non-executive. So, you have to think of it as a board seat with a responsibility to convene meetings. And I'm grateful for any opportunity to be of service to friends in the industry. Take-Two is where my head and my heart remains. Really proud of what the team here has accomplished in the last 11 years. I'm firmly committed to the company. I love what I do every day and it keeps all of us plenty busy. I'd observed that I'm one of only 4,300 team members, and this is a team effort. And I'm really proud of what we together accomplish, but it is not a singular activity. So, it's kind of you you'd to ask the question. But a much more relevant question is how does the team feel about continuing to do this together. And my primary job is to make sure that we constantly have a fantastic strategy backed up by an amazing culture that this remains the place of choice for people who want to do the very best work in entertainment.And that when they are here, they get to pursue what they're passionate about because more often than not, that yields the kind of results that we're talking about today. So, I'm really grateful to be able to do this every day and I'm quite -- and to be specific, entirely committed to continuing to do so." ] }, { "name": "Doug Creutz", "speech": [ "Great, thank you." ] }, { "name": "Operator", "speech": [ "At this time, I would like to turn the call back to management for closing comments." ] }, { "name": "Strauss Zelnick", "speech": [ "Just want to thank everyone for joining us today. We're obviously grateful for a terrific second quarter. We're thrilled that we're able to guide up for the year. And it is a gross understatement to say that we're excited for the initial release of Red Dead Redemption 2. And we have wonderful hopes for how the title will continue to unfold. Thank you again for joining us. We really appreciate your support." ] }, { "name": "Operator", "speech": [ "This does conclude today's teleconference. You may disconnect your lines at this time, and thank you for your participation." ] } ]