Q1’22 Trending Earnings Topics Recap – Week of April 18th, 2022

Q1'22 Trending Earnings Topics Recap - Week of April 11th, 2022

Welcome back to our earnings season weekly update on trending topics, macro trends and key management commentary with highlights from earnings call transcripts of S&P 500 companies for the Q1’22 earnings season. With a busy earnings week for the Financial sector, economic topics are predominant. Also dominating the headlines this week is that Twitter has accepted Elon Musk’s gargantuan $44 Billion cash deal to take the company private by paying off its shareholders at a price of $54.20 per share. Aside from this development, here are some key trending topics that emerged during earnings updates from the week of April 18th, 2022:

Companies across the S&P 500 weigh in on their buyback initiatives to reward shareholders through share repurchases this earnings season

And then we use share repurchases as the mechanism to maintain capital at the optimum level. And that optimum level is informed by things like CCAR and how we think about risk in our book. And of course, we just filed our CCAR submission in April. We’ll hear back in the end of June on that.

And yes, we did ask the board and received approval for $2.5 billion share repurchase program over the next couple of years. The control factor there, Peter, is CET1 that needs to be in the range of 9.25% to 9.75%. That’s what our risk profile tells us. We need to have CET1 in that range. We’re targeting the middle of it at 9.5%.

  • David Jackson Turner, Jr. – Regions Financial Corp., Senior Executive Vice President & Chief Financial Officer

We ended the quarter with cash investments of $8.4 billion compared with $8.6 billion as of December 31, 2021. The sequential reduction in cash and investments in the first quarter primarily reflected share repurchases, capital expenditures and?unrealized losses on interest bearing investments classified as available for sale partially offset by cash from operating activities and proceeds from employee stock plans. During the quarter we repurchased 398,000 shares at an average price of $268 per share for a total expenditure of $107 million.

  • Jamie E. Samath – Intuitive Surgical, Inc., Chief Financial Officer

Capital returns during the period totaled over $1 billion or about 50% of quarterly net income. They consisted of dividends of $137 million and share repurchases of $905 million or approximately 7 million shares. Financial strength remains a critical enabler of Nucor’s ability to create incremental value for shareholders. Our company continues to have the strongest credit rating in the North American steel sector. At the close of the first quarter, our cash, short-term investments and restricted cash holdings totaled $4.3 billion…Lastly, we remain committed to sharing upside returns directly with our shareholders. Specifically, we target a minimum of 40% of our earnings going directly to shareholders via cash dividends and share repurchases.

  • Stephen D. Laxton – Nucor Corp., Chief Financial Officer, Treasurer & Executive Vice President

Net income was $187 million and diluted EPS was $1.65 compared to $1.55 in the first quarter of 2021. We remain committed to returning cash to shareholders through the combination of a growing dividend and share repurchases. Last quarter, we increased our quarterly dividend by 77% from $0.52 a share to $0.92. During the quarter, we returned $400 million to shareholders through the combination of share repurchases and cash dividends.

  • Kurt D. Barton – Tractor Supply Co., Executive Vice President, Chief Financial Officer & Treasurer

As Greg mentioned, our balance sheet and earnings power are extremely strong. From a capital deployment perspective, we will continue to favor organic growth, evaluating strategic non-bank opportunities such as Provide and Dividend Finance, paying a strong dividend and then share repurchases. Practically speaking, given our robust loan growth, we currently anticipate resuming share repurchases in the fourth quarter of 2022.

  • Timothy N. Spence – Fifth Third Bancorp, President

Shifting to first quarter cash generation and deployment on chart 8, free cash flow of $1.1 billion was ahead of our expectations following the very strong $3.7 billion of free cash flow generated during the fourth quarter of 2021. Cash deployment continued to drive value for our stockholders as we returned $2 billion through share repurchases, leaving approximately $2 billion on our existing authorization and outlook for 2022. Combined with nearly $800 million in dividends paid, we returned over 240% of free cash flow to shareholders this quarter. Operational cash remained solid as the business looks to grow quarter-over-quarter through the rest of 2022.

  • Jesus Malave – Lockheed Martin Corp., Chief Financial Officer

Organizations are frequently being asked about their thoughts on the M&A landscape and how they potentially look to invest and expand their portfolio via acquisitions throughout 2022, while also sharing their thoughts on how strategic M&A initiatives are key to ensuring the right fit for their business for long-term profitability

Question – Jack Meehan: Great. And then just a broader question on M&A. It’s been obviously a very choppy macro environment. If you look at the cash flow statement, it was a light quarter for you on M&A. Just curious how you’re seeing assets in the market. Do you feel like expectations have changed at all from sellers and just your own willingness to do M&A kind of in a choppy environment? Thanks.

Well, Jack, I’ll tell you, we’ve excelled in these kind of environments historically from an M&A perspective. These environments of dislocation inevitably show up opportunity, and we feel very good about how we’re positioned with our funnels.

Now, having said that, the volatility that we’re seeing today is – well, it might not feel that way relatively recent, and it’s probably a little too early to see the full impact of that volatility. Having said that, we’re sitting here at by the – with 2x turns, very strong free cash flow of over $7 billion, and over $10 billion of EBITDA. So, we feel like we’re in a very good position both in terms of the strength of our balance sheet as well as the opportunities that lie ahead.

  • Rainer M. Blair – Danaher Corp., President, Chief Executive Officer & Director

Question – Larry Biegelsen: That’s super helpful. And, Robert, you’re in a unique position with your strong balance sheet. I saw you mentioned on the call you bought back, I think, $2.5 billion in stock this quarter. What are your updated thoughts on M&A? And if you can’t find attractive assets, are you going to continue to return cash to shareholders like we saw this past quarter? Thank you.

On the M&A side, yeah, I mean, I’ll sound like a broken record here, Larry, I mean, we’re always looking, we’re always studying, we’re always looking at ways to be able to add to the company, to add to our business, but it needs to be strategic. And from that perspective, I don’t want to dilute our growth rate, I don’t want to dilute our profiles. We need to make sure that we’re looking at assets that will be additive to our growth rate and to our profiles, so – at least on the top line. So that’s always there, and we’re always looking. Regarding the approach, listen, it’s always a balanced approach, Larry. We’re generating strong cash flow. We’ve got a lot of financial flexibility here. We’ll return $3 billion in terms of dividend this year. Bob talked about what we’ve done regarding buybacks, and we’re always going to look at this kind of balanced approach. We’ve made investments in our organic opportunities for growth because I believe that those are great returns for our shareholders, whether it’s Libre, MitraClip, expansion of our Medical Devices, Diagnostics. Those are all opportunities that deliver great returns to our shareholders, and we’ll take that balanced approach. And if there’s an opportunity for more, we’ll do more.

  • Robert B. Ford – Abbott Laboratories, Chairman & Chief Executive Officer

We’re open to both models, but I would say we’re very enthusiastic about building internal capacity. And we’re doing this both from sort of assembling it organically as well as through acquisition, which is a key part of our strategy to be able to build the capacity to produce the games titles that we think are really going to unlock value for our members. And we’re learning more and more every day from the licensed titles that we’ve got, which is helpful.

But you can sort of – there’s an early glimmer of where we’re trying to head with this with the announcement we just recently did with a launch of both a game and an animated series around the Exploding Kittens IP. I don’t know if you’re familiar with this card game, but it’s a super-fun physical card game that we’re now going to bring to form in both an animated series and a game. And we’ll have some interplay between these two different modes for fans of that IP.

But that’s sort of an initial step on a long roadmap we have around thinking about, how do we make the film and series side and then the interactive games experience, sort of the interplay between those, magnify the value that our members are getting from both. So, it’s like a one plus one equals three and then hopefully four and then five situation. So, that’s sort of the multiyear vision that we’ve got behind it. And really to deliver on that, we think the internal development capacity is going to be key because we can obviously have those folks be very specifically focused on the opportunities that we see there.

  • Gregory K. Peters – Netflix, Inc., Chief Operating & Product Officer

So, when I think about the future of M&A, Larry, we’re going to continue to do tuck-ins and to really digitize the patient experience. You heard us talk about CUPTIMIZE as an example around really adding a precise delivery to hip navigation to improve outcomes. You’re going to see us continue to penetrate fast-growing segments like what we have in Neurovascular as an example, 90% of our capital deployment has been to $1 billion or more, but we do intend to make sure that we are well positioned to be in the highest-growth end state (00:33:14) markets.

  • Ashley A. McEvoy – Johnson & Johnson, Executive Vice President & Worldwide Chairman-MedTech

We did three small deals in the quarter, one at Oliver Wyman in Australia, one at MMA here, of course, in the United States, and then we did one at Mercer Marsh Benefits in France. So, yeah, we remain very active in the market. The pipeline, as Dan noted, is pretty solid.

Generally speaking, the pipeline is deepest in the middle market brokerage space and that’s typically where we see some of our best and most attractive opportunities. But I would point out we’ve done some work at Oliver Wyman, did a lot of work at Oliver Wyman of late, not just in the quarter but in the later part of last year. You may have seen that we recently announced that we expect to close on Booz Allen Hamilton’s Middle Eastern business sometime in the second quarter. So, we’ll see how the market evolves. Part of the dynamic here is our reputation as a buyer is very strong in these markets. And so, we get a good look at very attractive assets.

  • John Q. Doyle – Marsh & McLennan Cos., Inc., Group President, Chief Operating Officer & Vice Chair

Earnings Q&A Analysis

The data referenced below is based on Q4’s proprietary analysis performed on the Earnings Call Q&A sessions of over 20 companies across the Banking sector that reported earnings over the last few weeks. The charts below highlights the key topics that analyst queries focused on in these calls, displayed as a % of all questions asked.

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As per the chart above, within the primary topic revolving around “Macro Environment”, Possibility of a Recession continues to be the key trending secondary topic being addressed by companies in the Banking sector, covering 13% of all questions asked. Conversations around NII Growth came in 2nd place with about 7% of questions focused around that topic, primarily tied to the topic of Fed Hikes that are set to be implemented in the near future, while Fed Hikes & NIM, Fed Hikes, Rising Interest Rates & Efficiency Ratio  were the 3rd most frequently mentioned topics by analysts, covering 16% (cumulative) of all questions asked.

Thanks for reading this issue of the Earnings Recap blog for the Q1’22 Earnings season. Stay tuned for our trending topics recap next week!

Reference – in case you’re interested, please feel free to review the prior versions of this blog:

Week of February 11th
Week of February 7th
Week of January 31st
Week of January 24th
Week of January 17th
Week of January 10th

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