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cf9474b450850a1e0bc29eddb0291157
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Great. Yes, I guess, just going back to the last set of questions. So first off, it looks like your average price was around $8,200, and that was made up of the $4,200 of spot. And I think -- I don't know, I think you said $9,500 on contracts. So maybe you can just reiterate what you said on the LTAs as an average price. And then so you do see that trending up. I guess what's the cadence we should expect there? I mean there's been a lot of cost pressure in the market that we're seeing. Does that have any impact on pricing? Or is it mainly supply/demand-driven? And do you have any escalators within your contracts to deal with some of that inflation? That's my first question, I guess.
|
So let me begin by asking Quinn to validate the pricing and numbers that were in the release.
Sure. Thanks, Dave. Sure, Arun, just to reiterate, the LTA price we realized in the first quarter was $9,500. And the non-LTA price we realized in the first quarter was $4,200. And 26,000 tons were sold under LTA and 11,000 tons were sold under non-LTA. And then if you do the averages of that, then that's approximately $7,900 per metric ton as a weighted average price of those 2, of the LTA and the non-LTA. And then maybe while I'm giving some color, I can give some color on your cost question. As you mentioned, there are some pressures on cost. We had a decrease in cost in our Q1 results relative to our Q4 results. It's about a $400 decrease relative to Q4 and about a $300 decrease relative to the full year. The pressures that we're seeing on cost would be freight cost, that's kind of a pressure we see globally. We have two plants in Europe. The euro is a little bit stronger. It's about 7% stronger than 2019, early 2020. So with our two of our three plants in Europe, we feel some pressure there.
But generally speaking, Arun, what I would say going forward is that I would expect Q2 costs to be similar to Q1. In the back half of the year, we might have a little more pressure with a rising third-party needle coke. We'll try to manage that and we will manage that very proactively. So generally speaking, I would say, Q2 being similar. Probably the back half being similar with maybe a little bit of pressure upwards from third-party needle coke.
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Great. And then maybe you can also just reiterate your priorities on cash use from here. Obviously, you've done some deleveraging. Is there any interest or potential for reinstating a larger dividend? Or would you opt for buybacks as you go through the year?
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Yes. Thanks, Arun. Yes, as we noted on our last conference call and also in our remarks today, we will continue to focus and prioritize the majority of our cash flow this year for debt reduction. As I've mentioned before, absolutely, we monitor our capital allocation strategy very closely. We discuss with management every quarter. We discuss with the Board of Directors every quarter. And we'll continue to monitor that for future in terms of shifting that a little bit more toward returning capital to shareholders. But for this year, we've indicated that the majority of our cash flow will be to reduce debt.
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Thankyou for taking my question I just wanted to ask a little bit about the -- just the change of control provision you mentioned with Brookfield. I think you said below 30% and there are payments made by GrafTech to Brookfield. Is that correct?
|
No. That's -- you've got the first part of it correct. The change of control language kicks in when Brookfield moves below 30%. And there is an LTIP plan that covers a few of the employees or a number of the employees that were in place at the time that Brookfield purchased GrafTech as a retention mechanism. Those payments get made directly to those employees, not to Brookfield.
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7a4c2c29114986cdf95130366d537026
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I'm sorry, those payments get made directly to -- I'm still confused. They are made to the GrafTech management?
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Yes. Yes. They get paid to the members of GrafTech management that were in place at the time of the buyout back in 2015.
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Okay. That's what I thought. And so then related to that question, with -- is there -- are there any other triggers or anything else that we should think about? Or do those payments just automatically happen right when it goes below that 30% threshold?
|
More or less, there's a slight, I think, a 30-day delay. But for all intents and purpose, it is immediate. Now we do reference this, David, to be -- in the spirit of full transparency, we also commented, and it was in Quinn's comments during the prepared remarks, there's also some restricted -- some stock and some options that gets accelerated to the tune of a net worth of about just over $15 million. But that's a noncash payment. That's a noncash item.
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Okay. Understood. And then just the last part of this, are there any retention requirements? Or are those people that have received those payments free to take the money and leave on day one theoretically?
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There are no retention requirements. The intent of those payments was to season through to this point. But I would share with you that GrafTech has a solid succession planning program and there is no worries about whatever people elect to do.
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5390a6a4bbcf7e28f2ec27624e51cc05
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Okay thanks. And then in terms of -- not talking about this year, but more sort of structurally, I mean what do you think is a normalized sales volume for GrafTech? And just for context, back in 2018 or the beginning of 2019, you were selling about 45,000 tons a quarter. But subsequent to that, it turned out that customers had overstocked, right, which suggests that, that number may be too high to think about as sort of a normalized shipment number. So any comments that you would have around that would be helpful.
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Sure, Alex and Neil, thanks for your question and interest in our firm. So you're in a way asking me to try obviously to predict the future and to some extent provide guidance, which I won't provide direct guidance. But what I would point out to you is that during this same period, there's been growth of the electric arc furnace industry globally. And if you think just specifically to the United States, SDI is going to bring their furnace online in a number of months. I believe that North Star Bluescope will as well. And I think if you look at the numbers over the next 12 to maximum 18 months, there's about 14 million tons of additional capacity coming online just in the United States. Then in addition to that, some of the areas that have been lagging, South America seems to be -- particularly Brazil, despite the COVID difficulty, is coming along nicely. So our previous numbers that you talked about do not -- certainly do not frighten me.
And I think that there's no reason that we can't get back to those kind of values going forward. Now the exact timing of that, it all depends upon, obviously, steel recovery still being strong as it is, et cetera. But I'm not frightened by any prospects to get back to the values that we were at. Look, I think we're going to -- I think things are in our favor. Heck, the steel guys are selling at $1,500 a ton of margins that they never dreamed of in their wildest dreams. So why shouldn't some of that trickle down to the graphite electrode boys?
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I hope so. And then just one other question. I don't know how much you can comment on this, but are you seeing any -- with the market coming back, are you seeing any pressure from electrodes coming out of China in any of your markets? Or is -- because there was a period of time where exports out of China were starting to emerge when prices were a lot higher than they were today. Are you seeing any of that? Any color there would also be appreciated.
|
Well, sure. I mean the Chinese were in the market before. And admittedly, a lot of that presence was in label electrodes. Though they have made some progress in the UHP space, the quality still is not, for the most part, as good as ours. But I think it's a natural evolution for them. So I wouldn't -- they are a factor that we need to be cognizant of. I also remain optimistic because we still believe quite -- I think the facts support us, is that with the commitment of the Chinese government to the environment, that they're going to grow their electric arc furnace industry and easily get to 200 million tons by 2025. And the evidence is there. They're on that trajectory. And we're encouraged by some of the recent moves, including allowing scrap imports. That, along with their environment moves, tells us that they're on that trajectory, if not more. And that trajectory is going to require graphite electrodes. So I think there will be some moderating effect by the domestic improvements within China. But as I said, we have to be cognizant of China as being a competitor and we will continue to do so.
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You mentioned your view that your Assisted volumes can improve their trajectory this year, maybe you could just add a little bit more color around your confidence around that specifically given you reiterated again your plans to not increase price this year?
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Hey, Jeff, it's Jeff Jones. Thanks for the question. As Tony mentioned in his prepared remarks, we've been on a trajectory year-over-year of improving our performance in the Assisted business. As you may know, last year, we made a conscious decision about eliminating Free EZ which we knew would cost this client, but step that aside, we know we kept pace with the industry.
So when we take a step back and think about all the things we continue to do this year, year two of upfront transparent pricing, all the work we're doing on operational excellence in standard operating procedures, continuing to build on the marketing effectiveness that we started last year and into this year, to be honest, the culture and excitement with the field and franchise organization, you know we think about retention, obviously, we already have a high retention market, about 73%, and I'm eager to see how our client satisfaction scores from last year might translate into retention this year. But you put all that together and we feel really good about the plans we have in place to continue on that trajectory. And as Tony said, our goal is ultimate growth, and this year we expect to maintain share in the category.
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Expenses were a little bit higher than we were expecting this quarter, and it seems to be centered on a step up in other wages line item. So is there anything one time to call out there or somewhere else, and is there any change to how you're thinking about the expense page for the remainder of the year.
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Yeah. Thanks, Jeff. This is Tony. Yeah, there was several items in other, I mean, a lot of the Wave expenses related to some of the variable cost, show up in other. We also have some legal expenses that occurred during the quarter that are showing up in other, there's a number of moving parts. But as I said in my opening comments, when you look at the full year, we expect a fair amount of benefit to occur during our fourth quarter, not only will -- the vast majority of our revenue growth occurred during that quarter, where we have some identified expense roll off that will also hit that will allow us to grow EBITDA during that quarter, grow EBITDA for the full year, and hit the overall guidance that I outlined.
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Was there anything on the other wages line item specifically though?
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Yeah, I mean, we've got build wages which obviously picks up the vast majority of our field network in the US, as well as some of our international businesses. Wave wages that we picked up during the quarter would be showing up in other wages that would probably be a significant portion of that increase, as well as the investments we're making in their technology roadmap, and hiring additional IT professionals would also show up in that line item.
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Do you think there are any variables in the upcoming tax here that maybe the market isn't considering that could impact returns positively or negatively?
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Yeah. Ryan, this is Jeff Jones. Last year was obviously a unique year with the government shutdown, the delayed season which turned into extensions. When we look back over history of growth rate, that's why we see the industry this year kind of returning back to about 1%. There is nothing that we know of at this point that would impact that number, obviously not trying to predict what the government may or may not do, but there is nothing that's on our radar at this point that we see impacting that growth for upcoming season.
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I wanted to ask you a little bit about the marketing budget, especially as you have Wave now and maybe what the anticipation is, if you -- if you're going to maintain kind of marketing budget, where it is and just -- and take some and add it to Wave or you expect overall marketing budget to increase and increase both the tax side and for Wave?
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Hey Kartik, let me pull the part a little bit. Overall, our marketing budget for the year is reflected in our guidance, and what we are absolutely focused on is spend effectiveness that you may remember last year, I talked a lot about the changes we were making in performance marketing, etc., we saw great results there, that will continue.
With respect to Wave, at the highest level, we think Wave has an incredible value proposition, and they have been able to grow effectively really through that three propositions relying primarily on SCO. They have started to experiment with SEM marketing, and are really at the beginning of learning that effectiveness added to their mix. We think there is a lot of opportunity to grow awareness, and you'll see us take a few steps this year, you know things like Shopify integration help. We are now co-merchandising them on H&R Block's website. We are now emailing qualified H&R Block clients about Wave. We'll be emailing qualified Wave clients about H&R Block. So inside the installed base, we think there is a lot of opportunity that doesn't rely on a lot of incremental investment and that's where we're focused for fiscal '20.
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Maybe the growth in Wave customers and revenue?
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Yeah. So at this stage, we're not really guiding on customers, but I will say that the top of the funnel remains very healthy for Wave. They grew revenue this quarter about 40%. As we said last quarter, for years now, they've been growing 40% plus on the revenue line, they did that again this quarter. It was a little softer than we would have like based on some mix of payment type, but overall, still feel very, very good about the health of the business, the way they're thinking about serving small business owners and the simplicity of their product, and the way they're thinking about the product roadmap and what's to come.
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I just wanted to ask about some of the operational excellence that even though I know you reiterated margins for next year, but just curious, excluding that cost impact from Wave, the underlying margin trend and sort of where you're targeting and achieving any potential through operating efficiencies that could impact margins going forward beyond the sort of impact with Wave?
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Yeah, as I shared in my opening comments, all of the Wave operating loss will be offset with other cost reductions as well as revenue growth which will allow us to grow EBITDA dollars for the year. I also said that the revenue line will grow a little bit fast, and the EBITDA line, which will cause a slight contraction in EBITDA margin. We feel really good that EBITDA dollars are going to improve in a year that we did a really strategic acquisition for a company that is currently operating at loss, but we know over time, you know it will be accretive to H&R Block.
When we talk about operational execution, it's not only focusing on the P&L, but also in our offices and a number of the changes we're making there and how we serve clients, how we staff our offices, all of the -- all the way that we lead and manage our offices, all those changes that we really focus on to make sure that every client is getting the best experience possible, and that's been a lot of our focus over the last year. And frankly, it has resulted in an improvement in NPS scores and client satisfaction scores that Jeff mentioned should result in retention improvement over the long term.
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Any sort of thoughts on the -- the sort of fixed cost base, whether it's real estate or any other cost otherwise, how you are sort of thinking about that?
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Yeah, I mean, we try to make a lot of those decisions on a year-by-year basis. I mean, we've been focused on growing. Obviously, the last couple of years, we did a number of changes last year and resetting our baseline resetting margin levels, optimizing our footprint, resetting price, and now we're focused on how do we take that new base and grow both in the Assisted side, DIY, and now through Wave, which should result in improved EBITDA dollars over time. And as those EBITDA dollars improve, that's really the main focus of what we're focused on over the next few years.
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Jeff, could we start on the technology roadmap. It's -- clearly you have one, I'd love to get a progress update. On the outside we don't really know the roadmap, you have that and so could you just kind of summarize where you are along the path, what's been accomplished, what's yet to go and is it trending financially, I guess, now on the cost side as you would expect it and are you starting to see benefits?
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Yeah, hey Scott. Great question. And I'm sorry that that feels opaque to you. So the technology roadmap that we talked about a year or so ago has a lot of different dimension. I think at the top is what we refer to as the omni-channel tax engine or a tax platform, that's a major initiative to move from three engine to one engine, that is a multi-year effort. It's an effort that the Company had attempted in the past and we are on track with that initiative. The team has found some great breakthroughs and the omni-channel tax engine is on track.
The second piece, a major piece of the roadmap is cloud migration. Obviously, this is a place where given the seasonality of our business and given resiliency, I think there's a lot of benefit of cloud, this too is a multi-year move from our data centers to the cloud, that roadmap is also on track.
The other one speak more to things like Dayton architecture, information security, and those are less about a defined number of years and just to continue its focus on improving them, really nothing to report there. They are super important priorities, but they're less of a roadmap. So what I can report today is, our initiatives are on track. They are going to take several years to complete. When they are complete, we expect to see run rate benefit in the cost reduction and also greater ability to serve clients. So I feel really good about the intent of why we launched them, and I'm happy to say they are on track, but they do still have a couple of years to go.
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It looked like legal expenses was increased, you guys discussed a little bit, but curious is that Free File Alliance focused or other, just whatever you can elaborate? And then my other question, it's a quickie is, will you be providing volume updates throughout the tax season? You have a large competitor in the tax base who is not going to do it this year after they had been in the past. So just curious what your plan is for that?
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Yeah. So we'll take them in the reverse order. On your second question, we absolutely believe that -- that we should be and will be as transparent as possible with you in our business, in our transformation, in our initiatives, and we have no plans to change how we provide updates to you throughout the season that will continue.
Yeah, I'll take the legal expenses Scott. I mean, FFA was a driver during the quarter. We also had some Wave expenses that hit. We provide a lot of detail in our 10-Q, which we'll file later this week, that talks about all of our legal matters. As you know, we typically don't comment on the details of those pending matters.
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Is it going to remain elevated or no on the legal front?
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Yeah, I mean, obviously, when you see a quarter bump up, it's probably not going to go to zero on a year-over-year basis the following quarter, but we did contemplate that in our EBITDA margin outlook that I provided earlier in the call.
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I wanted to dive deeper into the cost reductions that you're planning to make to help offset the Wave operating losses. Now that you're further along into the year, can you just elaborate a little bit more on where these savings are coming from and if you've identified additional savings you didn't have earlier in the year and what the potential impact of executing on those savings could be to save revenues and market share performance?
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Yeah. Thanks, George. As I said, there is -- most of those are going to occur during the fourth quarter. You will see in our release that we released before the call that our EBITDA loss is up slightly for the first six months, but for the full year we still expect EBITDA dollars to improve on a year-over-year basis, driven by really two factors.
One, the growth in revenue, which as you know, over 75% of our annual revenue occurred during the fourth quarter. So it's all about that quarter as well as some planned cost reductions that have already been identified. It's just a matter of those rolling off, which will occur during the fourth quarter. So there is some compensation efficiencies, there is some promotional expenses in the marketing budget that will roll off earlier -- earlier in the year, we already had some one-time expenses related to our footprint consolidation that occurred last year that rolled off in the first half of this year. So those are probably the three biggest drivers.
Your question on, what else have we identified, and it's obviously a fluid conversation as we think about how the results are coming in. We're off to a good start to the first half of the year, but we still feel like the ranges that we provided in both revenue and EBITDA margin are on point.
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I know you've talked about pricing for Assisted at length, but now again you're further into the year. What's the likelihood that you'll flex pricing as a lever or are you fully committed to sustaining flat pricing for this upcoming tax season? And then separately on DIY, it looks like pricing is coming lower, can you share some thoughts -- just additional thoughts on how you plan to go to market from a pricing perspective in DIY?
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Hey, George. We will tag team. On Assisted, we are fully committed to holding that flat for fiscal '20. When we reset pricing, we do not believe we need to reset pricing further. This is all about getting our pricing in line so clients can see and experience the value. We feel really good about how our clients judge that last year and the scores they gave us. And over time, once that value prop gets clearer and tighter, and we feel like we're back on a path to growth, we expect and hope to be able to get back to inflationary level price increases in the Assisted business.
Yeah. Then as regards to DIY, you know George for the last couple of years we price competitively, which has really been a key to part of our growth, we want to grow awareness for building a great product. The pricing is a key element to it. I'm not sure if you caught in my opening remarks, but we actually expected net average charge in DIY to be up this year. So pricing will not be lower and we expect it to be flat and the positive mix led by online assist will actually lead to a higher overall net average charge in DIY.
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So that the pricing increase is going to be driven more by mix, is that correct?
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That's right. I mean, it's dynamic. As you know, pricing changes throughout the season, whether it be first half or second half in byproduct, but we don't have any planned price reductions in DIY, and we believe that there is going to be positive mix led by online assist.
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Maybe one to start, when you announced the CIT deal, you put up an illustrative $70 per share in 2022. I know it's only been three months or so since then. But I wonder if you could just kind of talk anything that's going better or worse than you expected relative to those original assumptions, and especially maybe in the context of the deposit growth and credit quality performance? Is there anything that's kind of maybe trending a little better than that $70 originally assumed?
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We have not updated those pro formas and we're going to -- and we will be doing that here soon. We do acknowledge that the economic outlook in general has improved since we established our original marks and established those pro formas. We are also encouraged with CITs fourth quarter results. We did create our marks and assumptions based on the best information we had at the time in the fall of last year. And again, we plan to establish final marks at transaction close, and we'll consider the facts and circumstances at that time. But right now we're not ready to provide additional guidance, but we are -- I can tell you we are encouraged. Our eyes are on the ball in integrating CIT. And we don't think, things have gotten any worse.
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Probably the most common question I get on your stock is because you have a little bit of an unusual set up and I hesitate to call it, things that could be shareholder-friendly because ultimately a stock that goes up and outperforms over time is the ultimate shareholder-friendly set up, and you guys have certainly delivered on that. So the existing set up has served you well over time. But maybe if I call it like shareholder-broadening and things like the Class A, Class B, the level to dividend, index inclusion, all the things that would go in that bucket, I wonder if you could just share your outlook, what things are under consideration, and anything that's not on the table or not subject to change over time. Just, if you think about the next two or three years, what could that shareholder-broadening transition look like?
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I think in terms of shareholder-broadening, we look forward to having a much broader shareholder base with our friends, with combining with our friends at CIT. If you're asking a question about, are we planning something that would change our share class structure A to B, we have no plans for that. But thank you for your compliment on our total shareholder returns. I believe we have done a reasonable job there and thank you for that recognition. You asked a -- a part of your question also was about dividend. And I would say we have a long history of having a very modest dividend. And while we demonstrate that we move it nominally occasionally, I think we have no intention of changing our path from having a modest dividend.
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I guess, one other question I get a lot is on your owner-occupied CRE. I mean, certainly your ability to grow core loans right now is a pretty nice differentiator. I think, maybe it's not always as clear to people the differences in the owner-occupied CRE book you have and even sometimes I kind of scratch my head on some of the opportunities you might be finding now. I wonder if you could just talk about, as you look at the recent owner-occupied CRE growth over the past three, six, nine months and help us understand a little bit where that opportunity is coming from and what makes it different than the typical retail or hotel or whatever that might be a little bit COVID concerning right now.
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We have had nice growth this past year in that category and our focus is on small business, medical, professional activities and owner-occupied as compared to non-owner occupied, obviously, as that credit -- the business cash flow repays the credit. So it's supporting the housing of the business that, that business needs to operate. We continue to see opportunity in that area across all sectors of -- including our medical and professional activity, small business, primarily outside of that restaurant COVID-impacted category. And a lot of that has to do with consolidation within the industry, merger and acquisition that creates opportunity for us.
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I guess maybe to follow on, I mean, is it -- if I think about that kind of stereotypical medical property that is the owner-occupied CRE or a piece of it, is it about growth in the market right now or is it about gaining market share or new geographies? I mean, where are you finding the incremental growth in that portfolio?
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I think it's a little bit of both because we are seeing that growth both in our -- what we would consider our legacy footprint of North Carolina, South Carolina, Virginia, and also in our other markets as well. So it's a combination of gaining new clients along with growth within our existing client base, where they continue to expand and grow. And so those opportunities are on both sides of the ledger.
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I guess, on the one hand, earnings for both you and CIT are coming in pretty good, maybe that CET1 ratio -- the marks might improve, so maybe that CET1 ratio come higher, but you did reference the Tier 1 leverage being a little depressed right now by PPP, by cash on the balance sheet. As we think about post-deal close, which one do you think will be the limiting factor, number one? And then number two, when you do reemerge into an excess capital position, how do you think about the relative attractiveness of maybe a buyback versus maybe another deal or other uses of capital? So I guess what's the limiting factor, post the deal close, and then whenever you get back into an excess position, what's kind of the waterfall of priorities?
|
With respect to both CET1 and leverage, we really don't see either as a limiting factor. We are comfortable operating within those ranges or within that level. It falls within our ranges. So we're comfortable operating there, and we do see both rebounding nicely as we start with the earnings stream of the combined company starts to kick in. So we have no concerns operating at those levels. With respect to acquisitions and repurchases, our first priority in 2021 will be to integrate CIT. So you wouldn't see, certainly, anything in that -- activity in that right away, but we certainly see in a long -- our long-term strategy is to be opportunistic with M&A opportunities, and that would include buying back our own stock.
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intermediate
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[
"direct",
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B
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1a0ad577e875fa8db09e56d2c0faeeae
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Your non-interest bearing deposit, your domestic growth this year was pretty phenomenal on the order of 50% year-over-year. And I'm assuming PPP played a part in that, maybe some companies getting cash and not fully using it yet. I wonder if you kind of have any thoughts on the stickiness of those non-interest-bearing deposits going forward and once you get fully past PPP, any kind of insights you have into how much of that might stick around, or could you actually continue to grow from these levels.
|
I think you mentioned PPP growth. When we look at the PPP program, we initially had $3 billion in growth, resulting from the PPP program. However, when looking at by the end of the year, using sort of a watermark approach on that, those balances were down to about $1 billion. So of the $9 billion we grew for the year, about $1 billion came from that PPP program. When looking at it another way, of that $9 billion total deposit growth, we did see $2.5 billion of that coming from new clients with -- that was not clients with us going into 2020. So I think it's a little bit of both. We're seeing both existing clients, going back to Craig's point earlier, holding more cash on their balance sheet, which resulted in about $6.5 billion of the growth and then $2.5 billion, which was a very strong year for us where we were able to capitalize on some opportunities and add new clients as well on top of that.
|
intermediate
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[
"direct",
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B
|
cf1d81b395e1d833ac757dc461546144
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Maybe you could just expand a little on one of the points that you raised about the liquidity. And, yeah, how do you see it actually working in terms of the deploying your excess liquidity into CITs book? Like what's the process? How long will it take? I assume that you'll have to, at some point, get rid of some of the funding that they've got on the assets. I mean, can you just talk through like what that will look like [Technical Issues] from the second quarter on?
|
I think the way we were thinking about it is, I think we've been very clear on sort of from a business perspective. We're not looking to make any changes there. We're excited about the opportunities from the direct bank and some of the broader client footprint that CIT brings to the table. However, obviously, when looking at the balance sheet, assuming we can accomplish the deal structure as proposed, the waterfall for us really starts with looking at some of the senior debt opportunity, some of the non-core sort of funding thesis and see what we can do there to replay with ideally with the low cost deposits. I mean, we mentioned, we're at 10 basis points total deposit cost for the year. So obviously that provides potential synergistic opportunities for us in the future as we're able to reposition that. The maturity schedule of those mean that not all that comes in early, it's something that will be phased in over time as we start looking at those -- that instruments come up for maturity.
|
intermediate
|
[
"direct",
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B
|
42bff429fc76ff930f8018baf45c4c0e
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Yeah. Thanks. Good morning. I wonder what you can say in terms of signals you're getting about the economy when you look at your insurance operations, also the ventures, you say construction is doing pretty well, and curious whether you're seeing any kind of signs of things may be slowing?
|
Yeah. Thanks, Mark. It is an incredible value to have the windows that we have both through what each individual underwriter would see and what we see through the various businesses that we're in across the economy. And what I'll tell you is it's hard and it's challenging. And every single business is dealing with labor issues, supply issues, and inflationary pressures. But at the same time, we continue to increase prices in response to increased cost, and there's plenty of business to be done. So, it keeps on keeping on.
|
intermediate
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[
"direct",
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B
|
32823e674b838ddc077d253e6043ac0a
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Very good. I think when you look at the reinsurance segment, obviously, post-property is hardening up. Is that spilling over into other lines? And is that going to create opportunity within reinsurance or insurance in the insurance segment as well?
|
Hey, Mark, it's Jeremy. Maybe I'll start on that. I think you're right to point out, and property is certainly part of the story. I think marine and aviation lines because this year's events are also part of the story. So, we see it if we're on the table relative to our outworks programs, and we see where we're at the table from our inwards programs. The conversations are definitely a little more intense. And I think capacity is a little more scarce, and I think that is creating a little bit of a firming opportunity. So, I would anticipate that, that has broader implications across casualty and specialty lines as well. So, we're going to see it learn a lot more, I think, in the next few months. But we've seen a little bit of a gap differential over the last couple of years between house where the primary insurance space is working and the reinsurance space. And I would say it's certainly hardening more right now in the reinsurance space.
|
direct
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[
"direct",
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A
|
1bd052bb35e5a2dd20e621e310881a7e
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Didn't really think about your growth in insurance, the 21% in written this quarter. I hear your description of in pockets of price competition, you've been careful about inflation. You also say the pricing increases are moderating, but you're still seeing -- in looking at the written premium growth that you're seeing a lot of good opportunity. Any way to kind of square all of that? The optimism in the P&L versus the caution in the language and description here?
|
I think the way to square it is, is your right, Mark, things are good and language in the way we speak, we're inherently conservative people. We always have been, we always will be. So, we never want to take things for granted. We never want to sugarcoat things, but things are pretty good. And Mark, maybe, it's Jeremy, I'll add to that. I mean I think this is a demonstration of the work that we've been hard at across our insurance operations for quite some time. So, I think we benefit from broad product diversification, global capabilities, strong trading relationships, a multi-distribution platform. We are achieving rate. We got new product innovation. So that's allowing us to grow, but what we're laser focused on is growing profitably. So, at the same time, I think we have the ability to act with a high degree of discipline. That squares comments about the importance around rate adequacy, the importance of discipline and the importance of knowing when we got to push away from the table or put the pen down with the opportunity for us to grow at present, as well as what I think that portends for future quarters. And that's what we've been hard at work at.
|
direct
|
[
"direct",
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A
|
59df1a68d88e6a3a36ad4bcd33d89bd5
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Yeah. Good morning. Let me start with an accounting question. The $53.4 million of reserve release that is related to CATCo, am I correct understanding that you guys were effectively just a pass-through for that? It passed through one line and then back out through the minority interest. Or was there any other plus or minus that was caught up somewhere else in the results that may not have been obvious?
|
Mark, it's Jeremy. Well, you make a great account. So yes, you're exactly right. It's really just geography. So that is a straight pass-through any -- we continue to wind down the reserves. We continue to execute computations where we can, where there are savings that passes through to the benefit of the original investors. We see that the sort of the benefit come through as favorable in the other expenses. The offset is a noncontrolling interest kind of below the line. Just be aware of that.
|
direct
|
[
"direct",
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A
|
441f6908dcfa139fc807a3ea462546f1
|
Right. OK. And my old accounting professor would be proud that I retained any of them. So anyway, the second question that I have and this may be probably for Jeremy and Richie. I mean you've talked about your increasing caution on the reserving and on the loss picks. Yet, we've got some pretty decent pricing still, and we obviously have inflation. Can you just talk kind of -- for year-to-date, we're still an improved accident year margin. Can you just talk about kind of the evolution of your thinking on that over the course of the year? And I guess all else equal, I mean, could it -- I guess it could have been better had inflation not been as severe as it's been. Is that the right way to think?
|
Yeah, Mark, I'll start and maybe Richie will jump in. I think that is a good way to think. And won't necessarily get into numbers or certainly a line by line of view. But overall, I think we feel that rate and underwriting actions are keeping just ahead of trend. And that expands to our acknowledgment that in an inflationary environment, exposure has an effect of acting like rate to a certain degree as well. So that is why we are incredibly focused on rate adequacy. If we were in an elevated inflationary environment, without a doubt, the results would even be stronger. I think you know us well and Richie touched upon this earlier, we have a very long-standing philosophy with regards to how to approach reserves. Focused on more likely redundant than deficient, focused on reacting to bad news, if you will, very quickly and taking a much more measured view to good news. That's anywhere over time where we are in a cycle, but I think that's even more so the case now. So, like despite inflationary environment, right, we can take those actions that Richie and I were mentioning. We can still generate favorable prior-year development. We can, in fact, maintain or improve our confidence in our loss reserves, and we can still generate certainly on an ex-cat basis, a combined 90 or better, that's a pretty good place, I think, for us to be at this stage. Yeah. I'll just add a -- just real quickly, Mark, I'll just add. It's been a while since anybody has seen inflationary pressures like the ones we've seen recently. And so, we're having to kind of reeducate underwriters, actuaries, accountants, everybody. I mean, Tom and I have seen this kind of inflation, but a lot of the rest of the people around here have not. So, it's safety first at Markel, and it always has been that way in terms of the reserves. And we'll we're more than happy to make sure the reserves are at the confidence level that we want. And if that means there's potentially some reserve decreases down the road, that's great. But I think that's how we're trying to view this current situation.
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direct
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[
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A
|
5692c4e2366ca065c74464fce839f793
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I appreciate those comments. And I guess with that in mind, it kind of raises two maybe follow-up questions directly to that point. So, if you're kind of at conservative plus in terms of thinking about accident year picks and reserving, what are the signposts you're looking for that would move you back to just merely conservative? That would be the first question. And then the second, I mean, as you weigh up the pricing environment now, the inflationary trends that you're seeing, would it still be the case that more likely than not accident year margins would improve next year? Or you're not willing to go that far?
|
Yeah. I think it's hard to say whether things -- accident market -- margins improve because we got a lot of unknown variables, right? We don't know what the rate increases are going to be next year, and we also don't know what the true rate of inflation is. I know you're going to hate this answer, but the true thing that we need to be able to start potentially reducing our loss picks and increasing prior-year releases is time. We need to see it. So, I think it's just a matter -- it's going to be a matter of time. And given current risk factors, I think it will take more time. Yeah. I'll jump in just, Mark, with some formal accounting comments here. You remember the movie, My Cousin Vinny, there was a scene in there where the character that was played by Joe Pesci was hustling some pull and he got into a little bit of a match with some of the locals there, and they wanted to bet. And he said, "Well, where's your money to back up that bet." He asks them to show them the cash of the stakes that they wanted to bet for. And of course, they didn't have it. And it was a recurring risk and they came back and they had a big lot of money and he says, "Well, how do I know that isn't just a bunch of ones with the 20 wrapped around it and it turns out that's exactly what it was." Well, the good news when we're debating and trying to think about how this reserve -- how the reserves might develop over time, remember, we did collect the premiums upfront. We do have the cash for what we're talking about. Now we'll see how they develop over time. But we do hold the cash. And we are investing the cash at higher and higher rates of return. So, we continue to operate in the belief that we want our reserves to be more likely to be redundant and efficient. And we have the cash while we're waiting for, as Richard said, time, just to say the claim is settled, it's done, we know. In the meantime, economically, we're earning the returns from our capital.
|
intermediate
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[
"direct",
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B
|
5eabf8098a969283ff83e13ffa44cf6e
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Yes. Good morning, everyone. First, congratulations on the reinsurance results. I have a number of questions for Tom. Tom, you've been holding on to about $2 billion of short-term investments for quite some time and another $3 billion of cash. And there's been no opportunity cost for doing that. But today, there is although short-term rates, you can make a decent return. Can you talk about the opportunity cost today? And would you invest some of that cash and short-term investments and increase the yield going forward?
|
Well, the good news is, while there's a lot of chatter and conversation about that issue over the last year or so. With hindsight, in retrospect, it looks like a pretty good decision. So, the rates of return on that cash are going up. And we are deploying it, as we talked about in terms of buying equities and repurchasing our own stock. And given the profitability, the capital position, what we'll do is to continue to invest in a methodical and disciplined way. I'm not going to chuck it into the market all at once. We'll do the same thing we always do, just steady, steady, steady, steady, steady, incremental, incremental, incremental, iterate, iterate, iterate to a better and better return. But I have no market forecast, I have no crystal ball. Well, we are putting them into work.
|
intermediate
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[
"direct",
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] |
B
|
8f289a725360803087e3a4dbc135d5a6
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Yeah. I guess $2 billion of short-term investments, right? Could that be $1.5 billion and $600 million of corporates where you could earn 5%, 6% on pretty short duration? Like are you thinking about that? Or we're getting 4%, 4.5% on short term and that's OK.
|
Yeah. It's not awful, especially compared to what it had. Yeah, John, I can recall a conversation with you many, many years ago where you made the comment about Markel that they may not always do what you want them to do, but they will always do what they say they will do. So, you and I are in agreement, and we might pace it a little differently than you would if our roles will reverse, but we're doing the same thing.
|
fully_evasive
|
[
"direct",
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] |
C
|
006cdd2bb4349a219380ff3f2e830e9a
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Your answer is very clear. Thank you. The other point on investment income and sometimes on these calls, we get an interesting lecture on account. And I would say that -- and I like your reaction to this. I think your net investment income is actually doing better than you suggested. If I read the Q correctly, the $108 million of net investment income includes about $5 million of marks from Hagerty.
|
Yeah, I think it's actually more than that. So the equity method investing. And believe me, that's one of those that starts around here with -- I used to be an accountant, and those conversations -- so yes, both -- so for instance, there was one investment that we made probably 10 or 12 years ago. And I cannot recall with precision whether it was $25 million or $50 million, but it was one of those two numbers. And I think we've recognized cumulative gains and losses of well over $100 million each way of gains and losses over time, depending on the mark-to-market that quarter. It's the same thing that happened when we go to credit default swap that we ended up having a wonderful experience with long time ago. The quarterly swings that come through equity method accounting do indeed obscure what's really happening in fundamental economics. So, you're reading the Q right, and that's why I used the new term of recurring, recurring net investment income this year. I think through the first nine months, the number is about $50 million in total on the equity method things. If you took that out of the mix and with the recurring, recurring net investment income, it is going up at a faster rate than what was reported in this quarter's results. John, it's Jeremy. Just to piggyback, John, just to piggyback off Tom's comments. All of our equity method investments are included in that line item. So, it's not just Hagerty. So, I want to make that point. And then Tom is exactly right. The year-over-year shift is $50 million. So instead of on a nine-month basis being down $10 million, would be up $40 million.
|
direct
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[
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A
|
9c15b1eb91ee24a8d9ef9312eb44d489
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And to add insult to injury on the Hagerty piece, it's worth about $0.5 billion more than what's on the financial statements, right?
|
That is correct. Yeah, a point John, so call it $0.5 billion. The only thing we've ever recognized is our losses.
|
direct
|
[
"direct",
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A
|
1b829849a595c68d435b87c45940ed84
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Right. OK. And then, Tom, final question for you. On the venture side, if I look at the products, I take the products' revenue and subtract the expenses, it's about a 1% margin, which is, I'm sure, not reflecting a reality. Could you talk about anything what went on there in the third quarter? Is there anything unusual? Or is that seasonality?
|
Yeah. I don't know. I know one of the things that would be going on in terms of the EBITDA profitability of the book and the set of businesses is to the extent that we have distribution businesses, those are high volume, low margin, but a wonderful return on capital. And the mix is skewing a bit that way at the moment. But I have to look at it and think about the exact thing you're asking about, don't know.
|
intermediate
|
[
"direct",
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B
|
e0385465f70d1e3ce65cd30c530b8f27
|
OK. Great. And then, Richie, for you. Typically, ILS has had a big fourth quarter. That's been their best quarter for profitability, I guess as things get trued up from the investment year. Do you expect that to happen again this year? Or with the hurricane is that off the table?
|
I guess I'd have to say, John, I don't know. The fourth quarter is usually when you look hard at the side pockets and see if they can be released and that releases trapped fees. I don't know where that will stand this year just simply because of -- like you say, Ian, I think there's going to be quite a bit of focus on making sure you get reserves correct for Ian also in terms of this is the cap time that you do capital raising. So, I guess, sorry, the answer is I don't know.
|
fully_evasive
|
[
"direct",
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C
|
116c4ae01d627fbc178badec0f90e80e
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I wanted to just to start with -- maybe you talked about, there's obviously still some savings to come on the interest expense side of the equation, but you also managed the balance sheet that aided the margin in the fourth quarter. Can we just talk for a second about the expectations for loan growth in 2021? And then one of the things you might be doing with the balance sheet to help manage that margin higher?
|
Yes. I mean, on the loan side, what we expect to do is, like many other institutions out there, we have quite a bit of excess liquidity still on the balance sheet, a lot of cash. And that will allow us to really grow the loan portfolio without necessarily growing the balance sheet. So we continue to deploy. As you've seen, we had -- we grew the healthcare finance portfolio that portfolio may not grow as much year-over-year, but we still expect some solid growth there.
We are having a lot of success on the construction side, which has higher yielding product there and the small business lending side as well. Even though we are selling quite a bit of the guaranteed piece of that, we'll still grow the unguaranteed piece, and those are coming on at, yields of 5.50% to 6%. So really the -- managing the loan yield on that side, and I guess the all-in earning asset yield is really going to be a function of deploying excess liquidity, some more renewable cash into the portfolio.
|
direct
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[
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A
|
c3b49ea21905cf4fab43aa37971f5546
|
Okay. That's helpful. I mean, it looks to me like the margin can get to kind of a 2.25 run rate at some point this year. Does that seem fair to you guys?
|
Yes. That's a good forecast, Brett.
|
direct
|
[
"direct",
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A
|
326cb5cba52c43f93c9b17124d402955
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Okay. And then the other thing I wanted to just touch on was expectations for expenses. I know you're going to have somewhat of a reset in the first quarter. Can you just talk about the expense bill this year, which you might be investing in? How we should think about managing the efficiency ratio?
|
Yes. I mean, on the personnel side, you're going to see an increase in compensate. Here if you look at year-over-year forecast for annual compensation cost, you're going to see an increase there just simply because of the investments we've made in the small business unit. We've brought on a lot of talent there over the course of the year. Obviously that's not fully baked into a 2020 number. But you're going to see an increase in compensation there.
And again, we also continue to add folks in other areas across the bank as well. But that comp in salaries number will be up. And we obviously continue to invest in. We'll have some marketing initiatives on the table this year to help build some of the -- contribute to the small business checking and small business money market growth. Probably marketing may go up a little bit this year as well. Even though we expect mortgage to remain strong, we'll probably have to increase some marketing costs on the mortgage side as well.
|
intermediate
|
[
"direct",
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B
|
10fe42748bd4f87d38def91a2955ff38
|
Okay. That's helpful. And then if I -- I want to make sure I heard the number correctly. I thought I heard you say the ROI you're expecting was at 95 to 105?
|
Yes, 95 to 1. We'll probably be, like I said, first quarter, we'll have probably some of the expense resets that you normally see a lot of them on the salary and the comp side of things with employee benefit resets, merit increases that type of thing. So first quarter maybe a little bit lighter, but certainly as we get into the second and in the back half of the year, third and fourth quarter are looking at a solid kind of one range.
One other issue that might bump was just that we did in the first quarter on the SBA side. Everybody knows there's another round of PPP coming to the marketplace for both first time and second time. Folks on the borrowing sides are redoing some of the rules on the 7(a) programs, a little bit of confusion in the marketplace right now and focus on the SBA side. They're also going to come back on new loans after the 1st of February with some payment deferrals or payments being actually made by the federal government, not really deferrals. So they'll make cash payments like they did last spring.
So a lot of folks are kind of setting on their hands right now and the SBA world and they're also helping insurance levels to 90% of the loans, et cetera. So a lot of activity there on the back office side, that might slowdown a little bit of origination, but when it's all said and done, we think it'll help tremendously in the balance of the year. So it might be just a tad bit of a slow start, but it should come on strong in the second, third and fourth quarters.
|
direct
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[
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A
|
326702e3b7e16ddfa1856dc1f71f7733
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I was hoping to start on credit. I got on kind of late. I apologize. But we're still looking for any other details on that single-tenant relationship that went over to where you allocated that specific reserve in the quarter, and just any other thoughts on just the provision outlook as we enter 2021?
|
Technically it was not a new relationship, Nate. It's the one that we had put reserves against back in the early part of last year at couple of ShopKo Stores that had closed. We have a personal guarantee and we validated that the owner of the properties is more than able to cover that personal guarantee on the loans. So we did not reserve against that. Year-end regulators or year-end auditors came in and didn't like our position. So just to back it up in safety, we added another $1 million in reserve on that loan, but we do anticipating getting that full $1 million back from the owner of the properties. So it's really not a new problem. It's a old loan that the audit team just wanted us to reclassify a little bit.
And I was going to say, Nate, just for the outlook for the year on the reserve or on the provision levels, I think, we've done a pretty good job of bumping our coverage levels over the course of the year with the allowance in terms of gross dollars as well as the coverage going up almost a third. Also as we said in the prepared comments, net charge-offs has remained relatively low and right now we're not necessarily forecasting a lot of credit losses on the horizon. So I would expect, at least, as we sit here today, probably the level of provisioning will be down relative to what we did this year, but we still expect to continue building the reserve and expect by year-end, we'll be well above coverage ratio in excess of 100 basis points on the portfolio.
|
direct
|
[
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A
|
ca3f1b2319a060efd470438cd162ddeb
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Okay. Great. Very helpful. And then just switching over to fees, I think the NDAs forecasting volumes to be down 20%, 22% in 2021. Any expectations just in terms of, you guys need you can kind of outperform that level or just generally how you're thinking about that line entering 2021?
|
Yes. I think when we look at the forecast for this year, obviously, we did $23 million plus of mortgage revenue this year. In our forecast and some of the numbers we provided earlier on ROA outlooks and stuff, we are certainly not forecasting that. In fact, we have our cut, we're cutting it by a third in our forecast this year. A lot of that, again has to do with the NDA outlook as well as just more competition in the market. Last year, there was so much demand out there that mortgage originators were able to [Indecipherable] margins a little bit and just to dial back just to be able to handle the workload and with originations forecasted to be down this year, probably margins will come down a bit too.
So we're trying to take, even though I think our forecast for 2021 on mortgage is still -- it would be extremely strong by historical standards. It's coming down from what we did this year. And fortunately, we're in a position with the investments we've made in SBA that we have a clear pathway to backfilling that. So as I said in the comments, we really don't see a decline in overall non-interest income. It's just the mix in those line items is going to be a little different.
|
intermediate
|
[
"direct",
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B
|
fd1f03551a7472fd6602c72dd0609e22
|
Got it. That's helpful. Makes sense. And if I could just ask one more housekeeping question on the tax rate going forward. Is the 4Q level a good run rate to use going forward?
|
It is probably a little bit inflated just when you think about, we had record pre-tax earnings and record revenue and taxes in the first part of the year were pretty light. So there was a little bit of catch up there this quarter. I think the run rate going forward is probably a high teen number, is probably the right number to put in your model.
|
direct
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[
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A
|
6c3398747b2688e30fb08f8e80df6006
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David, in your prepared comments, you mentioned that you continue to identify and capitalized on opportunities last year. And I would point out SBA and PPP were two of those. I'm curious how you're thinking about particularly on the identification of opportunities and what sort of other things you might be pursuing this year that might not be obvious to us?
|
George, we continue to look at opportunities. Obviously, there's a lot of verticals we're not in, in kind of specialty finance lending side of things. We're chatting with a group in California at the current time about potentially another vertical. So we're actively looking and tell all you guys, have you got somebody out there, send them our direction, particularly anything that can be done on a national footprint basis like we've done with SBA and the other verticals that healthcare services that we've gotten into.
I know there's a lot of forecasts in the industry about the stepped up M&A activity here in 2021. For us to go, as we discussed in the past, pick up a traditional bank doesn't make a lot of sense, but there are a lot of banks that have a particular franchise and a given vertical of lending and/or specialty finance companies out here, we're continually -- we probably signed one to two NDAs a month of opportunities we're taking a look at. Some of them have some very inflated pricing, but we're constantly looking at opportunities. I would tell you that the current time there's nothing close to being finalized. But Ken and I spend a lot of time looking at new space and new opportunities for us.
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So let me ask the same question in a different way. I now give you good credit for running the bank on a very conservative basis last year given the pandemic and economic challenges. But with things starting to prove, I think what I'm hearing from you is a willingness to potentially hit the accelerator, just hitting the accelerator if you find the right opportunities. Is that a fair way to summarize it?
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That's a fair way to summarize it. Yes.
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Regarding the deposit portfolio, when you look at other, like digital challenger banks, many of them offer checking and high yield savings accounts as opposed to CDs. I was just wondering if there is any opportunity or any strategic plans to accelerate the remix of the deposit portfolio toward more of that makeup.
|
That's kind of taken place through the course of 2020. I don't know whether you caught it about a month ago, the Newsweek magazine rated us as the Best Small Business Checking Account in America. We put on a concentrated effort to bring in money market in small business checking accounts. Consumer checking accounts, we spent a fair amount of money at the latter part of 2019 to upgrade the onboarding process for new accounts. We had some pretty antiquated software from Fiserv that was taking 17 to 20 minutes for a person to get through an application. We've now got that down to three to five. We brought those same tools over to the small business product in the latter half of 2020. So if you go back and look the CDs as Ken reported in his statistics, dropped, and the checking and money market accounts are picking up.
If you look at most of the FinTech opportunities out there, our products are very, very comparable to those. We're not able to go quite up the food chain that they are on some of them because of the cost of funds. And obviously you guys are looking for a bottom line from our side that doesn't have brackets on it that they have. So the marketing expense and the fees, quite honestly the rates that they're paying today, that will make sense for us.
But there is still millions of consumers out here, particularly in the consumer small business because of the pandemic. Over the course of the past year, millions and millions of people could not get to the branch had to move to the Internet or the mobile phone, electronic devices to get access to the financial information. Obviously, we've been doing that for 20 years plus. As I stated, we didn't have to worry about all of the branch problems this past year that our peers did. So that enabled us to stay focused on the business, make some good money and increase our customer base.
So as those consumers and there's a number of surveys out here show that 90% of them do not want to go back to banking the way they used to pre-pandemic. So once they figure out that their institution doesn't really have feature functionality that they're looking for, we're picking them up, we're setting records on new account openings and services through the second half of the year. So I think that's going to continue into 2021 and you'll see that product mix even shuffle a little bit more.
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ca06446f477c128f237435793acbfa8e
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Thanks for that color. And you guys mentioned $14 million to $15 million number for SBA gain-on-sale in 2021, but can you just provide some color on your long-term growth expectations for that business line, say two, three years?
|
At the current time, I was asked the same question by one of the employees on a meet the CEO call yesterday afternoon. I don't think we really have a cap on the small business opportunity. As Ken and I have stated in previous calls, as the SBA comes onboard, we have the option of selling the insured piece, which generates non-interest income or we can maintain it. We're picking up account balances. The SBA product just fits our bank phenomenally well. And I think that customer mix is great for us.
From a personal standpoint, being a 40-year entrepreneur myself, I love the idea of helping small businesses all across the country. So we went from about a $100 million this year to $225 million next year. I think Mark Gibson who kind of heads up our sales team is on this call. If I tell you it's going to be $300 million plus, a year after that he's probably feigning on the other end of the line right now. But I really don't think we have a limit. And if we can continue to find good people and good opportunities, that one really fits.
We can grow SBA exponentially without straining our capital, without straining the balance sheet and just continue to put great earnings to the bottom line. So it's a tremendous niche for us and we've product that has a lot of niches, and there's a lot we can do with that, and I anticipated growing pretty geometrically over the next few years.
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Firstly, with the NDA filing for IV Korsuva accepted in February, when do you expect to know whether the drug is granted priority review? And secondly, are you able to provide an update on progress made by Vifor on TDAPA reimbursement discussions? And does the fact that there are numerous renal drugs seeking to that inclusion make these discussions any more difficult?
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Okay. Hi, Avatar. Thanks for that. Yes. So on the first question on the NDA. So we had confirmation from the FDA this week electronically that the NDA was accepted and filed, but within that confirmation for filing the FDA also indicated that the official filing letter was still in process. So that was in process. We have not yet received that letter. And therefore, we don't yet have information on priority review or indeed the PDUFA date. So we expect that letter to arrive soon. But the FDA being the FDA, there is no prediction on timing yet unfortunately.
On the reimbursement question, of course, you're aware that TDAPA reimbursement is not discretionary. We qualified for TDAPA reimbursement by meeting the criteria that are legislatively defined in the ESRD legislation. So we're across when NDA were approved after January 2020. And we're going to be used in the dialysis setting. So that we're very confident upon and we have a good team at CARA who continues to lead our interactions with CMS and discussions, not only related to TDAPA, but reimbursement beyond TDAPA. Now, we started to include our partner there in those discussions and they will obviously enter as we progress those discussions. But TDAPA is something we qualify for and we will be applying for that after we get approval of Korsuva Injection.
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And does the sort of desire for many companies to be included into that look sort of complicate those discussions or timelines?
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Well, I don't think so. The way the legislation was defined was to encourage innovation for hemodialysis patients and if those companies' compounds meet those criteria for an innovative compound for the treatment of hemodialysis patients, then they would qualify for TDAPA.
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4fd7d3bf1b0de2e875ed32a53b2e1f9c
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So I have two questions. The first one is, if you could speak a little bit about the dosing decisions in the CKD, AD and neuropathic pain studies? And whether this corresponds any differences in disease severity? So specifically, we're interested in what led to your decision to choose 2 milligrams versus 1 milligram twice daily in the neuropathic pain study.
The second question would be around, if there's any relevant differences in the characteristics or underlying biology resulting in pruritus in the CKD and AD populations? And what the key supportive evidence is, that gives you confidence for success in AD?
|
Yeah. Thanks, Brian. The dosing question is actually really related to PK and availability of the drug. So for the CKD studies, oral studies, as you know, KORSUVA is eliminated almost entirely via the kidney.
And so, we looked at the PK exposures, and specifically Stage 3 to 5 CKD patients to define what tablet strength and frequency of dosing would match the AUCs, we know were highly efficacious from our IV studies. And that's why we come up with the dose of 1 milligram qd for the CKD patients.
When we move to atopic derm there, those patients, of course, have normal kidney function. And so to meet -- and again, we look to the PK and normal individuals and to match that desired AUC, there we needed to get twice-a-day dosing at the 1 milligram level. So that was the rationale, really on those two studies.
On the notalgia paresthetica, we really view this as a proof-of-concept trial. And we know, particularly in preclinical models, looking at neuropathic pain, different modality, but actually same system in terms of peripheral nerve transmission via the DRG, that we require slightly higher drug dosage in those neuropathic type models. And so that was partially the rationale behind pushing up the doors there when we look at neuropathic related pruritus. And, also, as a proof-of-concept trial, we'd rather use a higher dose and see what level of efficacy we can achieve their single dose. And as you know, we've dosed this drug up to 10 milligrams a day orally with no safety concerns. So it's well within the range we've used before.
And then you're -- your second 30,000-foot question on mechanism, we've indicated this a few times. I think, when we look at the mechanism for KORSUVA, actually related to activation of kappa receptors directly on the C fibers and the epidermis and dermal, the relay of the pruritus. That mechanism is really agnostic to the initiating pathology. So whether that's a CKD and organ disease, and we know the cytokine profile there, and it's certainly different in the dermatological inflammatory state. That really should make a difference based on our mechanism of action to efficacy.
And that's certainly something we've seen in preclinical models of various pathologies. And we've took this drug all the way to transgenic models associated with, for example, atopic dermatitis and showing good efficacy in those validated predictive models. So we have high confidence in the mechanism there, we should really be agnostic to the initiating pathophysiology. But we don't -- the good news, Brian, as we don't have too long to wait to actually get the answer on that empirically. So that's upcoming, and we're looking forward to that.
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Yeah, I guess, they're just kind of curious to get your thoughts, Amgen's update on Parsabiv kind coming out of the TDAPA space guiding to, I think, a 40% or 50% year-over-year decline in revenue. Is this how investors should be thinking about sort of drugs coming out of this TDAPA space, where there's maybe a better price point, just kind of trying to reconcile that versus the CARA's consensus where there's growth in year three and year four of the launch? But just wondering, how to think about that price reset dynamic that we've talked about in the past.
And then, second question is just curious about -- thinking about the Parsabiv launch a little bit more closely, wondering if you have any perspective on why the uptake was low with large dialysis organizations versus small dialysis organizations. Is there a concern among the LDOs, that once you start using these medications, it's difficult to kind of pull back in the copay component? This could be something that the LDOs typically absorbed. So wondering, if you can comment on those two dynamics that we start to think about commercial here?
|
Yeah. Thanks. Thanks, Jason. I think the first thing to see right up front that you're well aware of Jason, that Parsabiv was an entirely different class here, and directed at an entirely different issue associated with dialysis patients, for which there are existing alternatives already out there, and including [Indecipherable]. So I think that has a lot to do with the point you're raising on revenue decline, as the availability of a number of alternatives out there that are quite frankly much cheaper than Parsabiv was, that will not be the case with KORSUVA, as you know, we're a breakthrough drug. We're really going to be the first drug approved for CKD pruritus. And there are no alternatives for efficacious, certainly nothing we've seen very effective in an RCT in that patient population. So I think, it's quite a bit of apples and oranges there in terms of Parsabiv change for TDAPA.
Your question related to the views of LDOs versus the more midsize and independent dialysis organizations. Again, I think, Parsabiv might be specific -- has specific issues related to those, I can't really speak to the smaller organizations, we don't really have their view, but as you know, we've worked with Fresenius for a couple of years, and we know the enthusiasm that they've relayed, and the need for this therapeutic for their patients. And as you know, they're all striving as part of their assessment on reimbursement to improve patient standard of care. And they see this as a huge unmet need, and they're very keen to get involved and moving this drug along.
So, that doesn't answer the question to the independence and the differentiation there with Parsabiv. But we know from our experience with a large dialysis organization. They're very keen to get in with KORSUVA and use the drug. And of course, they have their own databases related to prevalence of pruritus within their patients.
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I was wondering if you could detail there the -- where Oral KORSUVA or atopic dermatitis, where do you see that fitting into the current treatment paradigm? And then, as a follow up for the upcoming Phase II readout, is it fair to think about comparisons to some of the Phase II data from the oral JAK in terms of itch NRS reduction and also a 4-point improvement in Itch NRS response rates?
|
Great. Thanks, Joe, and congrats on the new position at Needham. Yeah, so when we think about atopic dermatitis, of course, provided this is the defining symptom for that disorder. And that level of pruritus, high level of pruritus occurs really regardless of the degree of pathophysiology there. So we can recruit and have done in our clinical trials, patients with very high levels of pruritus is only qualifying this moderate-to-severe whether they have mild-to-moderate pathology associated with their atopic dermatitis or indeed moderate-to-severe pathology. So this is a primary symptom across the whole spectrum of atopic dermatitis.
Today's therapeutics for the mild-to-moderate are really confined to topical medications. And the medication has been developed in the atopic that are beyond topical. Of course, we have difelikefalin approved as a IL-4, IL-13 biologic, and we have the JAK inhibitors, as you indicate coming through are really targeting the moderate-to-severe pathology, that's their niche, that's where they're going to be reimbursed. And that's where dermatologists are most likely to be willing to use those and accommodate the associated safety risks that are going to issue from both biologics and particularly JAKs.
So those molecules coming through are really focused on about 20%, roughly, of the US atopic dermatitis population. KORSUVA, on the other hand, we see positioned has been broadly applicable from mild-to-severe pathology, so it's a much broader applicability. And, frankly, we see it particularly in the mild-to-moderate population has been a candidate for first line therapy. There may be after some topical usage or in combination with the topical.
In the moderate-to-severe range, again, I think it could be monotherapy for those patients. And also, theoretically combined with any other modalities, biologics or JAKs, for the more severe patients, and as you know, we've talked about a number of times there's no antimetabolites with this drug. It's excreted whole via the kidney. There's no potential for drug-drug interaction. We can see those used in combinations with any other classes of medications. So that's how we see it being positioned as a much broader applicability potential first line therapy for the whole of the AD populations.
And then getting to the AD readout, yes, we will be-I think, we've discussed this before in the dermatological situation. It certainly dogma of the derm division at a 4-point responder analysis would be the appropriate registration endpoint. We're certainly looking at that as one of our major endpoints in the atopic derm trial. And as you know, we designed our interim analysis focused on a 4-point as well as our mean NRS change from baseline. So we are looking at that readout in terms of level of response, I think depicts them is in the 40% responder rate, some of the JAKs are a little higher, but really only at the very highest of dosages for those compounds, they may creep into the 50%.
So a win for us is separation from placebo that's our primary end here. And again, this is sort of an entirely different profile. So we'd like to see a nice appropriate biological window here. But again, we're looking for orally available, and well tolerated safe medication, which is really something that, as you well know dermatologists are looking toward as the desire profile for that patient population. So efficacy, but with improved safety is going to be the profile that's going to win against, particularly JAKs that are coming through for the moderate-to-severe population.
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Yeah, thanks. In terms of the Phase III design, I'm hesitant to go too far into that. As you know, we haven't yet had an end of Phase II. And we're awaiting our readout from our dose ranging trial. We have started to think about that and prepare for that.
And we do see that as a normal Phase III program for a chronic use drug and we are planning two simultaneous US trials. I can't tell you the ultimate size of those, because I need my Phase II data to look at effect size there. But that's our thoughts and exposures that would be in line with ICH guidelines for chronic-use medication.
At this point, we're not-again, I don't want to get into promising not to do something and then try guessing with the FDA. But at this point, we're not planning on extensive trials, including co-administration of other medications. And that might be something that comes up particularly with topicals. But at this point, we're not particularly planning on that.
And then, I guess, the easier question for your first-answer for your first question on the Phase II design, yeah, we watch and have watched these patients that evolve medications as an entry criteria into the Phase II trial. So that's really as a pure monotherapy trial with no influence of background medications there.
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And if anyone did take systemic risk there, they would be dropped from the efficacy calculation for that trial. So that is going to be a pure trial with no co-medications there for the patient.
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Hi, thanks for taking my questions and for all the details on the clinical development. I just have a quick question. And maybe you may not be able to answer this. But what is your sense of vaccine uptake among trial center employees, personnel and maybe prospective of Oral KORSUVA trial patients or even currently enrolled ones? I'm just wondering if the increased supply that's expected to come on board over the next few weeks could be a tailwind for your expectations on enrollments.
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Thanks, Ben. I think you're right, on your assumption that I'm not sure I can answer that question for you. I am not even sure we've looked at that particular metric in our clinical trials. So I really don't know what the vaccine uptake is at this point in our trials. It may be something we learn at the end of the day for our ongoing trials, but I really don't have any data on that metric right now.
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fully_evasive
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Looking forward to commercialization, what level of visibility will we have on the underlying IV KORSUVA sales, both U.S. and ex-U.S.? I understand that we're going to be seeing profit share, revenue reported in the top-line. I'm just wondering if there's going to be other confirmatory data available.
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Sure. Thanks, Ben. So as Vifor will be recognizing the top-line revenue on their side, so net sales will be recorded on their books. So there'll be visibility on that end. And correspondingly, based off the profit share that we receive back, that will be recognized as revenue on our end. So there'll be visibility into the revenues based for that mechanism.
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fa6246d8abbf0a52f64554498f72b570
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Puerto Rico's margins are back to almost 50%. And [Indecipherable] in the past that sort of the, the leading up benchmark there. How much upside opportunity is there at Chile in Cable & Wireless, and how much of the operational benefits you've been putting in place that we've seen thus far. And secondly, you mentioned the 1.9 [Phonetic] billion in liquidity and your neighbors in the building just got a very large check. Can you talk about what the M&A landscape looks like and also your views on potential collaboration with Liberty Global.
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Thank you, James. Good morning. And so the first question on the operations, we are quite focused on operational efficiency, but structurally, the different market, they're just different. In the Cable & Wireless, you have numerous islands that somewhat fragmented, so I doubt if I, you know, be straight up, but I doubt we'll ever get to those kinds of margins in some of those islands that we operate in. Both Chris and I feel very strongly and my management team as well that there's at least quite a few points that we can gain on the opex efficiencies to get us the number that, I think, you'll like. Now on the second question on the liquidity, well, we don't comment on M&A and in -- but we feel that the pipeline in our region is strong. There are quite a number of assets that I think would be very attractive to us. But we are quite patient and as you can see from 2018, we -- there were a lot of deals that were rumored that we were engaged in and it didn't come to play and it's mostly because we know how to do the math and and we'll be very disciplined on the M&A front. As to Liberty Global, that's really up to them. You'll probably hear more from them tomorrow. And just to add, James, on the, on the OCF margins, I mean, a key target that we have is that opex efficiency to the low 30s as a group. So as you saw in the slides, we were kind of upper 30s as a company. So we have a number of points to continue to get at with a decent amount of that [Indecipherable] fits within the Cable & Wireless this year.
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One of your operations have been more than satisfactory, and I'm sure you're surprised about where your stock price is. I mean, clearly, it's a function of the emerging market macro and all that. You don't have an authorization in place for buybacks unlike your predecessor company. Given where your stock price is, is there an imperative to get something going there. And then secondly, on the technology side, I think when you first came out with the blocks, I mean, you're talking about a lot of commonalities with Liberty Global, your sister company, and Horizon and all that. I think in your markets on the middle income side, it feels like you're probably inclined to put a little less silicon into the home now and be a little more fast on some of the strategy there. Can you talk about how your technology strategy and how it's kind of diverging a little bit from Liberty Global as an indicator what markets you operate in.
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Sure. The first question on the current leases, yes, we certainly do think it's tremendously undervalued, but it's kind of self-serving [Phonetic] to say that, but we know our LRP, we know plan, and we see the upside coming [Indecipherable]. As to the buybacks, we do not have a board authorized buyback plan at this point. And if we needed to put one in, we can put one in very quickly. But as we look at our capital allocation, it's back to buyback [Indecipherable]. It's one of the three things we will look at. We have tremendous internal projects that deliver great IRRs like a new build and as well as the inorganic opportunities in our region. And like I think I said that in the last call as well. I mean, we will evaluate all of them against our stand-alone plan. And if the stock gets to a point where the IRR is a lot better than a stand-alone plan, I mean and -- or some of the other alternatives, we can get an authorization in very quickly and move quickly on that. On the technology front, I think we have a slightly different roadmap than Liberty Global in some areas, but for the most part, we try to keep together with Liberty Global because of the combined scale. So buying DOCSIS modems, the combined scale makes a lot of sense. We are more heavily on mobile, so there's a lot of things that we do on mobile that some of our sister companies do not do. So we will continue to innovate in that front. I think you'll hear some really interesting things of really positive things in the next quarter call. We are keeping it ourselves for now. And on the video front, we are on the same road map as Liberty Global. We are going to launch the EOS box in Chile and some other areas where we are quite fragmented. We are looking at other options as well that I think in the next call or the call after that, I think we'll be ready to announce those. But my Chief Technology Officer, Vivek Khemka, is very busy. He also runs our product teams and and he's got a lot cooking up in the pipeline.
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Balan, in Panama, could you update us on the consumer broadband, competitive dynamic and your go-to-market strategy there?
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Thanks, Kevin. In Panama -- Panama a tale of two [Phonetic] stories, the fixed network and a mobile network. In our fixed network, we are an attack in the market. In the mobile network, we are the incumbent. In lot of cases, we carry the highest ARPUs, and as you know, and I've talked about this before as well, it's a core player market and it's one place to do many in that market. So consolidation will come and we think rational mobile -- rationality will come back into the mobile marketplace, but our management team is focused on the higher end of mobile in Panama. You'll see the net adds fluctuate back and forth, and most of the net adds move in Panama, it's mostly the low and prepaid, and there's lots of low and prepaid these days because of what some of the competitors are doing in the marketplace. So if you're chasing net adds, a very quick way to chase in Panama is just offer one box for seven days unlimited, and you can get a lot of net adds, but it's really to a very low end, it's just turning back before. On the fixed side, I think we are an attacker and it's a positive story. And for the longest time, our competitor there has been cherry-picking our customers, and our management team is fighting back and and we're seeing the early results, three cable guys, and we have fixed guys in many ways. And this is our bread and butter. And we know that business in and out, we know how to price it, we know have to go for it, and and you're starting to see that in that place and as well as the other markets as well. It's not unique to Panama. It's across our operations. But in all of these operations, we have good competitors. We learn from them. We compete with them effectively, and we are very rational in these markets.
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8c99e9ef868e0f56f716ce63d1fdee43
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So just on the updated guidance. The roughly $25 million reduction to your full year EBITDA guidance seems to be a 100% Murray related. So is there any Foresight impact from -- baked into that guidance change? And also, are they -- has Foresight continued to pay its take-or-pay?
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We have and you're correct the updated guidance reflects substantially the Murray situation.
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intermediate
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b631401be5168e82c6f71fe509e540d8
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Okay. And then -- so I guess, big picture question. As we try to think about 2020, you've got, obviously, the impact of Murray, potentially some additional impact if Foresight goes down a similar path. And then I think on the coke side, hopefully, you'll have some acceleration or some improvement at Indiana Harbor. Any way for us to think about the net of those three sort of large moving parts around EBITDA for 2020?
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Matt it's premature really for us to be providing any kind of guidance for 2020. We will do that when we announce our fourth quarter results. The comments you make are appropriate. We've continued to experience excellent results from the rebuild ovens at the Harbor works. We expect to complete that rebuild project here in late November of this year and have the full capability of 1.2 million tons available to our customer next year. So that's a good positive for us and one that we've talked about at some length in the past. The new situation is the, the change in circumstance at CMT, with regard to both Murray and potentially felt. So as that situation, which is quite fluid evolves, we'll -- we'll reflect that in our guidance for 2020 at the appropriate time.
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3ac0ea653a29915ba1cda7b0462981cf
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Okay. And then on capital allocation, thanks for the detail on that. I guess just as I think about priorities, from a debt perspective, you've said that you'll maintain -- you've achieved and you'll look to maintain or even improve that 3 times gross leverage. Based on the $240 million to $250 million of EBITDA guidance, assuming you were able to maintain that in 2020, that would imply that you'd still want to take out some additional debt to get down to sort of 3 times growth. So would that be a priority over share buybacks? Would you look to achieve and maintain that gross leverage target before you were aggressive with buying back shares?
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Matt, it's good question. It has been a priority of our company to get to this 3 times and perhaps below and it remains so. So having appropriate level of debt for our company is a priority, has been a priority and will remain a priority. Your point about if our EBITDA were to be 250 next year, that's your number not mine, we would expect to maintain our debt ratio of 3 times. And as you suggest that would require us to pay down additional debt.
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Yes. Okay. One last one for me just on the coke side. Obviously, there's questions out there around some of the more near-term contract maturities. I think you've got some coming up with Arcelor sooner than later. Any -- I mean, are those conversations that you're having currently? Any high-level insight as to when we might expect some news on those near-term maturities?
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The maturities you refer to are at the end of 2020. And as you might well expect we've begun discussions with our customer and beyond that we can't comment.
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intermediate
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Hey guys, was -- just for housekeeping purposes, can you give us the effect of currency on the Brazil Coke segment?
|
It's very nominal. And so I think it -- I think on an annual basis, it's less than a couple of hundred thousand dollar.
Michael G. Rippey -- President and Chief Executive Officer
Completely immaterial.
Fay West -- Senior Vice President and Chief Financial Officer
Yes.
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Okay, great. Thank you. And then on the debt reduction front following on Matt's question it kind of -- we're looking at a 2020 where Murray and Foresight are meaningfully less to your results based on potentially new contract struck as a result of restructuring. Do you think of 3.0 times, as still the bogey with meaningful -- meaningfully less coal exposure? And does that still require you to buyback or reduce debt like, you know, you said you would still go into that 3 times target.
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Three times is the target has been and will be.
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Okay, great. And then obviously good -- you did a good amount of bond repurchase in the quarter [Indecipherable] with bonds and the low to mid 80s at this point, is that something you'd expect to accelerate or continue?
|
We'll look to maintain the leverage ratio of three times in the most cost effective manner available to us.
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Okay, great. And then just trying to triangulate cash flow for 2020 although it's still early. Based on your '19 capex guidance and we kind of exclude Indiana Harbor and some gas sharing is 65 to 70, the way you see kind of a base sort of maintenance capex level for SunCoke?
|
I think that's the right number over a period of time. So $65 million to $75 million ongoing maintenance capex. You may have depending on specific projects, a year where you higher and a year where you're lower. We will be giving kind of full some guidance on both EBITDA as well as capex in January, February timeframe for 2020. But if you know -- if you wanted to use that as a rough estimate over a number of years that's a good number.
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Hi. So the implied EBITDA guidance for Q4 in the logistics business, I believe is around $10 million with that be kind of a combination of FELP and then the river terminals, or am I missing something there?
|
Yes, that's all in. So our CMT guidance on a full-year basis is what we're estimating between $31 million and $33 million on a full-year. So guidance for CMT is in the fourth quarter is between $5 million and $7 million.
Lucas Pipes -- B Riley -- Analyst
And so, --.
Fay West -- Senior Vice President and Chief Financial Officer
And the balance then to get to that full-year number, Lucas, it's going to be from the River terminal.
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It's very helpful. Thank you. And in terms of FELP, do you have receivables balance?
|
So FELP has been shipping tons through the facility all year. As we stand today, they're continuing to move product here in the fourth quarter and they are current on their receivables.
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Very helpful, thank you for that. And then just kind of longer term thinking about CMT, Murray made some comments about the economics of exports in their filing. How do you think about CMT kind of beyond the current volatility, where is its place in the Gulf, where do you see market rates, any sort of color, comments on the long-term outlook for this asset would be very much appreciated. Thank you.
|
CMT is very low cost facility in a very highly automated, it's unique in many ways, with its ability to receive rail very far down the river as well as its large capabilities. So the asset itself, we believe is a low cost provider down on in the region. What you alluded to Lucas, I think is the challenging conditions that traditional customers find themselves with API2 prices being down in the mid 50s and as we've said in the past numbers above 70 really provide better opportunities for our producers. So it's a very challenging environment right now and it's most evidence with the bankruptcy we have seen, most notably for us, Murray this year so, notwithstanding the fact that we're a low cost provider it's a very challenging market for exporters of coal into the international marketplace right now.
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How easily could this capacity allocated toward other commodities?
|
Well, that's the challenge obviously that we face today. Over the past few years, we've been incrementally building our business down there. That's in the presence of 10 million tons of contract to take-or-pay business for the coal customers. Now with the filing of Murray, we have a substantial ability to go out into the marketplace and then fill that capacity. That's going to be our focus now that obligation is in present to us. As we've said in the past, the supply chains are quite sticky and they will remain so. So we've got our work to do and we will do our work, but it's not like flipping a light switch that we simply replace these volumes on short notice. It's going to take a significant effort on our part to replace these volumes and as you can well imagine we're already about that process, but it's going to take time.
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That's, that's very helpful. Thank you, Mike, for that commentary. And then just following up on some of the earlier comments regarding debt repurchases, leverage ratios, share buyback obviously all connected. Could you maybe describe opportunistic and a little bit more detail, do you have a certain, expect -- do you have an expectation around how much capital you will be for example returning by year-end or a monthly kind of run rate in terms of the share buyback that how -- when we think about the share repurchase authorization of the size of it how quickly do you anticipate to execute against that? Thank you.
|
We can't comment on that point Lucas. Clearly, the Board authorized a new program with the expectation that we would complete the existing program. So through November, we've given the exact numbers of repurchase that we've done. I believe the number and somebody can help me if I screw it up is $23 million of repurchases through November 1. We have approximately 14 to go -- 16 to go relative to the existing program. So we have a program that continues and we didn't authorize $100 million new program, if we didn't think we would exhaust the existing program.
Fay West -- Senior Vice President and Chief Financial Officer
[Speech Overlap] I was just going to say -- we're not -- we can't be terribly prescriptive on how we're going to execute that, but it's you know we need to just remember that we've established a dividend. We put something in place that was sustainable and we believe, and the Board will go through this kind of process as it normally does to establish a dividend, but that is something that is sustainable for our company. And even in light of kind of the situation that we find ourselves in with CMT. We also were really kind of clear on our desire to maintain that three times leverage target, right. And so -- and we'll have more information as we develop our 2020 plan, as we develop our 2020 free cash flow and our capex. But clearly the maintenance of the dividend, the maintaining our leverage ratio of three times and then executing against the share repurchases opportunistically, those are our priorities and there will be some fluidity to that.
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e340e4ef770456e3ecb3b01bace18097
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Hey, sorry for the follow-up. I appreciate the color on the share repurchases through November 1, have you repurchased any bonds through November 1 as well?
|
What we disclosed is what we've purchased.
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Maybe just starting off with the application. Can -- you mentioned that it will be completed by the end of this month. Have there been any sort of further discussions with the regulatory agency on the way to the completion of this application, Adam? Or is it pretty much all in -- ball's in your court at this point? And then as you -- as the application gets reviewed, do you anticipate sort of back and forth? And ultimately, I think I've asked you this in the past, but I want to know if there's any changes? Do you anticipate any sort of a panel discussions potentially coming out from it? And ultimately, by the end of the year, assuming an approval, can you just remind us what sort of -- how we should be thinking about the commercial opportunity as you build it out? I know you're doing the disease-awareness campaigns, and there's a lot of things happening right now, which I'd love to get some more color on. But ultimately, when you're launching, how does that launch look for you guys?
|
Yes certainly. I'll go through the questions. Thanks for all those, Ren. The -- to start with -- about the application, the FDA was very clear. We had a very good pre-NDA meeting, and it was very clear to us what was required of us. They -- there was a great deal of clarity during that meeting. They specifically wanted us to focus on presenting data around the 200-milligram twice a day dosing of pacritinib in severely thrombocytopenic patients. So that's what we -- that has been the center of the focus of the NDA and will be the focus of the label, the draft label that we will submit very shortly. There has been some correspondence with the FDA, but really mainly during the review process, clarifications of points, there hasn't been any major dialogue with them with regard to the NDA. Because I think, as I said, they were extremely clear to us as to what was expected of us, and we have addressed -- I believe we have addressed all their concerns in an application that is very thorough and very complete. With respect to the panel, currently, I think the data shows that we are very similar to the other drugs in the disease area and advertising kinase inhibitors with respect to our safety profile. And our efficacy data we think is pretty clear with the 29% versus 3% SVR rate that I just referred to. So at the moment, we don't see there being a panel. However, that is at the discretion of the FDA. And we will -- we are -- we will prepare for that eventuality, until we hear otherwise from the FDA. Currently, if we file by the end of the month, we should hear from them by the end of May, whether they've accepted the filing. And at that point, they should indicate whether they believe there should be a panel or not. And then the commercial opportunity. I'd rather not go into too much detail about the commercial opportunity at the moment because Bruce Seeley, who's with me, still working on that. At the moment, we're -- suffice to say, we have hired the key leadership in sales, marketing, medical affairs and market access. And we have done a considerable amount of work identifying our -- where the patients are, so we understand how we can deploy our field force over the coming months. But at this point, I'd rather not go into too much detail on that and just leave it at that.
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I guess just leaving -- one last question for me regarding GvHD. You mentioned updated data later this year. Is it fair to assume by ASH of this year? Is that how we should be thinking about it? And then maybe related to that, how does -- like we see how pacritinib threads the needle in MF, but there's -- the landscape is changing quite a bit in GvHD. Can you talk a little bit about how you envision pacritinib threading the needle in GvHD?
|
Well, as I said in the opening remarks, I -- we're very interested in the graft-versus-host data. The publication for that data is going to come out very shortly. And I think it's an exciting opportunity for us to expand the use and potentially expand the label of pacritinib. The data -- the study is being conducted by the University of Minnesota and the Moffitt center. And they've indicated as the enrollment of the Phase 2 study is going well. And I would expect there to be some data by ASH to answer your question. With respect to the broader use of acute graft-versus-host. I think this -- the proof-of-concept of using pacritinib in this setting has been very positive. And we are, as a team, expanding other ways of using the drug in graft-versus-host. But for the time -- our main focus at the moment is the acute graft-versus-host syndication.
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You had mentioned labeling. I'm just wondering whatever is appropriate that can be discussed at this point given where you are about your thoughts on labeling. I know in the past, this was discussed as a way of addressing past safety concerns. Just want to make sure we have your latest thoughts on that.
|
Yes. Thank you, Chad. It's nice to speak to you again. The labeling, we spent an awful lot of time in the labeling, and we've gone through the safety data, the entire data safety -- data set include, primarily though, the data from the less than 50,000 population, which is what the FDA is most interested in. And we think in the labeling, we can address previous safety concerns at the FDA in the Warnings and Precautions section, particularly around any bleeding or any cardiac events. After reviewing the data in a great deal of detail, we do not think there is a justification for black box warning. So we have -- in our proposal draft label to the FDA, we're not going to include a black box warning for hemorrhage. But obviously, this will be a negotiation once the FDA has started to review the data. But overall, I was very -- when we looked at the integrated data, all the data together, I was very encouraged and very pleased to see that the side effect profile of pacritinib was very manageable and very predictable. And we think we can address the concerns in -- with normal label language as others have within the warnings and wrecautions section of a label.
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We've touched base on this before, but just wondering here on the eve of filing with FDA, if you've had any further thoughts on just general EU strategy?
|
Well, the EU has indicated previously that they would like the Pacifica Phase 3 trial for completion -- to be complete before we submit. We're continuing to review our position on that. And obviously, with the U.K. breaking away from Europe, the U.K. is now a separate entity. The focus -- to be honest with you, given the size of our company, the focus over the last six months has been the NDA. But once the NDA is in place, myself and my regulatory colleagues, we will take some time and look at -- reassess our regulatory strategies in other territories.
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And then just -- and I'd like to get your thoughts here on cash position obviously, in the 2Q is not super enviable. But if -- just looking back at my notes from the last quarter that, that runway appears to have shortened. Just wondering if there's a particular reason for that? And anything you can say about the options you're considering to address?
|
Yeah. We're not going to comment on that today except for the numbers that David has already presented, Chad. But thank you for your question.
David Kirske -- Chief Financial Officer
And just one point, Chad, in terms of our accelerating costs, that's associated with commercialization as we build on that, that infrastructure.
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On the PRE-VENT study, Adam, I think you had increased the interim patient group up to 200 patients. Is that still the right number we should be thinking about?
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Yes. That's correct, Thomas.
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And then could you remind us -- with the study going on in GvHD, what your options are? Do you have full access to all the data that, that's being generated by the UFM and Moffitt team? Or can you just remind us what your relationship is with that team doing that research?
|
It's a good relationship. We do have access -- well, we don't have -- currently , we don't have access on the Phase 2, but we will be -- when the data is mature, we will be able to look at it. That's in the agreement with the Moffitt and Minnesota who are good partners here. They want to move this forward as much as we do. So we'll be able to look at the date. And then the options for us is, at that point, the drug will have reached the -- at the end of Phase 2. We're going to look at the data set, and we're going to see if there is a potential approval pathway for acute graft-versus-host with pacritinib. And that may be based on Phase 2 data, that may be the current Phase 2 data, it may be based on us generating additional data. We won't know until we have a discussion with the FDA.
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And then just a couple on the run-up to potential launch here by the year-end. As we're thinking about spending, what's your trigger for kind of mass hiring of sales reps and kind of junior marketing folks that I'm sure there's going to be a bolus of people coming into the company. Is that going to be once you have an acceptance to file at the end of May?
|
The bulk of the hiring is after we have acceptance for higher. I'll let Bruce comment on that briefly.
Bruce Seeley -- Chief Operating Officer
Yeah. Thomas, you're right. The gate is predominantly the validation of the filing, as Adam mentioned, at the end of May. And then as far as the sales force is concerned, we're going to bring them on closer to the PDUFA date.
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And just on that, have you guys settled on a final number of sales reps that you need? I don't know if you've completed that exercise with ZS or whoever you're using?
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No, we have not finalized that. It's in process now.
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And then just one final one for me. With respect to drug supply, where -- how do we stand with that?
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Manufacturing has always been a very well established, a very strong component of the company. We had plenty of drug product actually, who we manufactured some years ago. And we have no concerns about the manufacturing. There will be -- we have plenty of drug supply patients within the first year. And then -- and as things -- first you have commercialization and if things progress, we'll start manufacturing additional drug.
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Couple of questions, first, with respect to your large data center customer within any CIS, can you talk about how you expect that revenue to ramp up during fiscal '22 and what you think the overall potential book of business could look like on an annual basis for that customer compared to prior peak levels.
|
Yeah, good morning, Matt. Good question. So we've been on, as you know, the last few quarters have unfortunately been year-over-year decline than we've been entering a period here where in the quarter, we had very little in the way of actual sales to the customer. And Q4 as well will have very little in the way of sales in total. And then, as I mentioned, we're working now on the testing and development of what they're going to use in next generation for the next generation product. We're starting to see those purchase orders and construction plans come in place. With a ramp in our Q4, we'll actually start building products in our March quarter as well, little hard to forget the actual timing of shipments and revenue.
But we see that being the inflection point and then from where we come from we're running significantly below this year, where we were two years ago. Last year was cut in half and this year was again cut in half. So without going into too much in detail, I can't provide in a public setting, what I can tell you is next year -- next fiscal year would be a significant increase in planned volumes in production, at almost about like a double run rate. So a real significant rebuild. And even at that run rate, next year would be well below our high watermark. So we're optimistic, we're talking to that customer about an opportunity. From there, about another significant increase to get back to where we peaked out probably more than a year/year and a half ago.
So again, probably another quarter here of slow sales and then the activity is really ramped up. And production beginning in our Q4, next year we see a significant jump in sales. And at that point, we're still well below where we kind of peaked out and an opportunity to go significantly higher from there.
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Got it. And then just as a follow-up, can you talk about what you anticipate the impact will be as it pertains to steel prices moving higher as well as you mentioned some sort of tariff action, maybe if you could provide a little bit more detail on that. But if you could sort of parse that out and be a little bit more granular about what that impact is going to look like. Thank you.
|
Yeah, yeah, for sure. So two things as we think about the second half of the year and I'll try to quantify it for you. One, as we've seen recently arrived in raw material prices that you referenced, we estimate for the second half versus first half that those metal prices will be $4 million to $5 million net cost increase impact to us, again second half. And then a few weeks ago, maybe just a couple of weeks ago, the news that of tariffs announced on aluminum products, and one of the highest tariffs was products coming out in Germany at almost 50% tariff rate.
We do have some material coming out of Germany and we've got plans in place now to adjust for that. But we anticipate in the second half of the year. That's about another $3 million cost impact to us. For that one, we think we have a path forward to go between different logistics and procurement strategies of eliminating or reducing that cost. But for now in the second half, it would be about $3 million from tariffs and $4 million to $5 million from net metal.
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So can we first start with the auto sale that was announced. Can you give us just kind of a full view on what are the avoided cash costs that are part of the deal in total, just to kind of, was it to put the true value of what you're receiving for this division?
|
Yes, Mike. So a couple of things that as we know has made it more of a complex story since the day one. We know in a part of our automotive exit strategy that this business is down a low EBITDA business of 4% or 5% type in total margin business and very high capital spending. We spent an average of $40 million a year just on capital expenditures in auto as a segment, not to mention other restructuring costs. And the last few years, we've had almost $25 million of restructuring costs and tens of millions of dollars of impairments as we painfully know well.
The $300 million-ish-type business, the liquid-cooled that we announced the sale of, that has been historically, neutral'd the negative free cash flow business, depends on the year and exactly and all the different --going into it. As I said, at the beginning, generally the lower margin and low level of EBITDA that this business has been throwing out has been all consumed by a large amount of capital spending. So just as an ongoing basis, we've had struggles to generate positive cash flow.
And then, our biggest strategy going forward and belief on this business, as I also mentioned, is that we think the right owner, the right place for this business is for a strategic buyer or company that will make the investments required to improve that margin profile, reduce the cost profile. So to your question, a big part of liabilities in costs, in future cost investments we're avoiding all relate to what we would view as additional plant moves, plant expansion, severance charges and ongoing capital investments that in this business is a liquid-cooled has has been averaging around $25 million a year.
So that's the biggest value driver of the business, if you want to think about it that way, or challenge in selling it. But also the opportunity for Modine as we go forward is avoiding all the additional cash investments we would need to put this into a profile that drives value for our shareholders.
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Yeah. And is that plus the pension that you also discussed?
|
Yeah. So, yeah. You know, part of that came with, I mentioned it's about $15 million of pension and then on top of that I mentioned, all along we've always talked about since we had first announced this, if we don't feel that engine the amount of potential social costs and social liabilities that could come our way are enormous. So, we view it as a huge step forward for us. And I even mentioned management. The last year, the amount of management time and money we spent also on separating and running this business has been enormous.
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Okay. Can you also just maybe give us the broad outline of was it a go-forward capex for Modine, and in the next few quarters prior to the oil sale closing, will that area have any capex associated with it in the very near terms.
|
Yeah, so good question. We mentioned that balance in the year for Modine, two things where our guidance. Our outlook is based on the assumption that we still have the liquid-cooled automotive business and the air-cooled even though we're looking at alternatives there. And so earnings and cash flow, I will assume that those stay with Modine. There is always a chance that transaction closes before our fiscal year. And the other issue is we clearly have a responsibility to run that business between the signing of a deal and closing in a normal course of business for us.
I would say the next two quarters for us average about $15 million a quarter of capital spending. That may be a little bit high. We'll just see how -- you know in the next few months shake out and through year-end. I'm talking total company. After the automotive divestiture, we see Modine running more in a $15 million'ish-type capital spending run rate annually, we've been 70-80 so very well could be running a little below 50, maybe a little bit ahead depending on the year. But in totality, going from a company spending 70-80, and again I'm excluding restructuring, which will make it even higher to more like a 50 run rate point.
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And does that 50 run rate include or exclude the liquid part that's still left to sell?
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Yeah. The air side, we anticipate very little future capital spending. Basically the majority of that volume has run out of one plan that fully capitalized. So it's been a material amount of capital spending tied to air-cooled.
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Okay. I also wanted to turn to some of the Building HVAC business, you had mentioned some good heating business in your slides and also --. I was curious whether the heating business, technically they do with outdoor heating or areas for outdoor dining or anything. If you got any kind of positive orders or sales from people shifting to dining outdoors.
|
Yes. We've seen a lot of those opportunities. We don't make a product that's the standard standing heating unit that you would think of. We do make some infrared products that you see hanging often as you enter a hotel or something. We have seen a nice increase in the heating market on our side as well. But we think that's a lot of time to what's going across the market in general, home construction and home repair/remodeling. In fact, our Hot Dawg units have been selling quite nicely.
We're also optimistic about our win rate on school products. There's been some good news coming out recently there. So I mentioned on the call lots of opportunities. We're doing some additional product development and we're getting in-inbound calls as you can imagine for our ventilation side of equipment. Commercial applications and school applications for improved ventilation and filtration we think could be a good opportunity for us going forward.
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Got it. And also will you give us kind of one pin point number for the quarter. Obviously, it was a great performance on EBITDA level. I'm just kind of curious if you give us some sense of how much of that in total would you attribute to some temporary stuff going on around COVID.
|
Yes. That's a good question. I would say when we look at the quarter there was about $11 million or so of benefit between cost of goods and SG&A. That I would classify as temporary in nature, there are things -- everything from salaries to short work weeks and furloughs. So I view it, I call it normalized EBITDA margin more and 9.5% rate for the quarter, Mike.
Clearly well above what we did last year, just under eight and on lower volumes, so kind of like you said, I view it as 12% really good. But we actually had volumes better than we were planning for the worst and we got a little bit better on the volumes and we had all the cost saving. So we won't be able to continue that at least in the next couple of quarters until we see a significant rebound in revenue.
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[
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"intermediate",
"fully_evasive"
] |
A
|
b714a70831a0cd893c7a9aa530f3d071
|
Okay. Thanks for that Mike. Maybe I could just throw one last one in there and that is the question on the EV outlook. Can you give us a little bit of sense as to what your engineers are kind of working on in the EV world. Are some of these miles coming faster than expected in the second half of '21, somewhere in '22 and '23 launches. But I was curious what Modine seated at that table and some of your development projects and some of the outlook for that in your business.
|
Yes. The answer is probably two fold. On the commercial vehicle side, I can tell you that Modine continues to have a seat at the table with all of those discussions in development work. There is a lot of request for development time and resources to work on electrification projects on truck. There is some concern we have or I'd say we're monitoring and along with some of our customers that we talked to about the actual timing and it may be a longer run rate to see significant volumes and commercial trucks.
The other side, which has been really exciting is on the bus and specialty vehicle side, where we'd a tremendous quarter to here and it's continuing to grow with the rate that it looks like boxes that are converting to full EV hybrid. Even thinking about fuel cell-type vehicles. And those are not only development activities, those are real in-production orders. And so that's exciting. We see soft specialty vehicle coming first, and then in the near term. I'd say in a year or two Mike, this is more development work on the truck side.
|
direct
|
[
"direct",
"intermediate",
"fully_evasive"
] |
A
|
588bee53716934b4bf10b82470268831
|
I just wanted to ask we'd a couple of questions around it, but there is such a focus on air quality currently given the health crisis, but this may catalyse as longer term thinking about the need to have cleaner indoor air as you're looking at your HVAC segment, you know it's not your biggest revenue source but it's a good profit source. How do you see this focus you're talking about shifting the ventilation for school and the healthcare market.
Can you give us any sense of how large that business is in this segment now and where do you think it might be able to go in the medium term. And as you mentioned, you're getting some inbound calls, can you just maybe share some color about the products that you're selling and where the interest is and how you think that's going to develop over the next couple of years.
|
Yes, great. I appreciate the question. For Modine, right now ventilation is about 4% or 5% sales of the company. And you're right, it historically hasn't gotten as much attention obviously as the vehicular side, I can tell you in the last -- you know, starting with the announcement to exit auto but even ramping up the last six months, even pre-COVID. We see this area and it's a big area. I think it -- you know, the way we would define it and products we sell and market and channels, $900 million to a $1 billion market.
And then on top of that, you add in COVID-related concern and we think this is a great opportunity. Again, we're focused on commercial application. Previous to this -- a big part of our growth plan this year was in the hospitality side and we've been making a lot of inroads. But from a product development side, what the team is mostly focused on now is that there is a combination of alternatives and based out there and how much of it is putting more air into a building or a room and how much of it then is recirculating or filterating air in that same space. And we have products that can kind of fill both avenues.
So we're super excited that this is becoming a bigger deal for schools. We want some significant business in a large community and the referendum was just passed, so we're excited about seeing those orders come through. And then secondly in the office space you lined up, I think I'll just say over the top of that is is the exciting part for us and I mentioned with Mike in the call a little while ago, there's been so much effort spent in the last year of monumental effort for the company to take a billion dollar segment of vehicular segment and split it into two pieces, between automotive and heavy duty and then go through a year sale process. The more we can continue to focus our resources and our capital on these opportunities, I think it is a huge opportunity for the company.
|
direct
|
[
"direct",
"intermediate",
"fully_evasive"
] |
A
|
46db7602d347c18eb8a8d3983dc58b38
|
In your prepared remarks, you did mention that in June you put more contract dollars on the books for the rest of 2020 than you did last June in 2019 for the rest of the 2019 year. I'm just wondering if you could comment on the pacing of that between Q3 and Q4 in 2020?
|
Good question. I think the best way to answer it is to repeat that our pacings are showing that sequentially we're getting a little stronger every month. So that would indicate that Q4 is the beneficiary of a lot of that contracts. But anecdotally, our customers are still a little skittish, they're buying a little shorter term. So I would say, ratably, not too much difference between Q3 and Q4 in terms of sequentially where those contracts landed. Hopefully that answers your question?
|
direct
|
[
"direct",
"intermediate",
"fully_evasive"
] |
A
|
1a83e8c5fd724c515879cd70a524e77d
|
Can you talk a little bit about pricing versus occupancy trends, and perhaps, how this disruption compares to the Great Recession?
|
Good question. So we think -- and you know the script isn't 100% written yet. We believe we're going to be able to hold on to pricing a little better than we did during the Great Recession. Pricing was very, very, very difficult to hold on to in '08 and '09. Now that said, there is divergence in pricing in our largest DMAs versus what's going on in our smaller and middle markets. So we're probably having a little more difficulty holding on to pricing in places like New York, Chicago, Atlanta, Dallas, etc. Unfortunately, 80% of our business looks like Tallahassee and Little Rock and Baton Rouge in smaller and middle markets where pricing is holding up much better.
|
intermediate
|
[
"direct",
"intermediate",
"fully_evasive"
] |
B
|
15cafd8e639d5b4b81e8bf47007701c5
|
It sounds you're in good shape, I know you guys mentioned some possible M&A. What do you see out there in the current climate? You guys do a lot of tuck-ins. Is there something larger coming down the road, more of the similar room? And then also on capital, how should we think about when digital deployment is expected to resume?
|
Yeah. So I'll tackle the first one first. We are beginning to lay in our plans for 2021. And our initial planning is to take care of the sort of backlog of digital that didn't get built this year, push them into next year and also have 2021 be a standard year. So I'm hopeful that in our November call we'll be able to report that we're planning to put up, let's call it, 300 or so in 2021. That's what our thinking is now. We've got a little bit of pent-up demand given that we shut it down in Q2. The M&A pipeline is real stand right now. Billboard assets are durable, they're valuable. And most sellers don't want to have to sell in a distressed environment that we're in right now. So we're seeing a little bit of activity, but nothing even close to what a normal year would be.
|
direct
|
[
"direct",
"intermediate",
"fully_evasive"
] |
A
|
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