Welcome back to our earnings season weekly update on trending topics, macro trends and key 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 IT sector, a volatile market led to notable challenges being reported by top tech organizations like Alphabet, Amazon and Apple, while on the flip side, other tech giants like Microsoft and Meta announced strong quarterly growth. With Snap, Pinterest, Coursera, Tyler Technologies and ADP among the additional tech names that reported earnings last week, here are some key trending topics that emerged during earnings updates from the week of April 25th, 2022:
- Organizational ESG Commitments: While the ongoing market volatility signals a potentially recessionary environment, organizations are still committed to maintaining their focus on ESG initiatives to counteract climate change and have a positive impact with a sustainability focus on a global scale
- Demand & Profit Headwinds : Whether it be due to supply chain constraints, the ongoing economic uncertainty, or company-specific factors at play, several organizations reported headwinds due to a variety of factors when it comes to consumer demands and operating profit, and how they’ve attempted to offset that throughout the past quarter
- Impacts of COVID-19 Surge in China: China has recently been experiencing a surge of COVID infections, leading to country-wide lockdowns and restrictions, which in turn has increased inflationary pressures and supply chain disruptions globally. Companies are reporting on how China’s COVID situation along with global political tensions arising from the Russia-Ukraine conflict has impacted their businesses and how they’ve coped so far
While the ongoing market volatility signals a potentially recessionary environment, organizations are still committed to maintaining their focus on ESG initiatives to counteract climate change and have a positive impact with a sustainability focus on a global scale
In another example, Aon Business Services is equally powerful, supporting our work with clients in ESG, an increasingly wide ranging topic for our clients. Our ESG practice with the Human Capital Solutions specializes in assessing and prioritizing risks and opportunities for our clients across their stakeholder base and their business.
Our ESG risk assessment tool allows clients to monitor key risks in real time and is focused on specific client priorities, given their business, geography, industry and competitive landscape. The tool links those risks to Aon insight experts and commissions to drive sustainability, model their climate risk, better navigate the D&O, or cyber landscape, and reinforce their culture to strengthen their people strategy. And specifically on environmental risk, we’re using our proprietary climate analytics to quantify the impacts of climate change on our clients’ physical assets, which then helps inform risk mitigation and improve resilience.
- Gregory C. Case – Aon Plc, Chief Executive Officer & Executive Director
Within the report, you will find our first disclosure of consolidated EEO-1 data for American Water, based on feedback from shareholders at ESG best practices, we made a commitment in our recently filed proxy statement to begin disclosing this data annually in 2022 and thereafter. This action will deliver on that commitment. We are also pleased to be publishing in May the second annual installment of our ESG Data Summary, which will be found on the Sustainability page of our Investor Relations website. The data summary will share numerous metrics for calendar year 2021, including Scope 1 and Scope 2 emissions and progress toward our greenhouse gas emissions reduction target.
As many of you know, American Water has achieved significant greenhouse gas emission reductions over the last decade. Due to the nature of our business and our emission reductions over the years, we are in a great position relative to a large majority of our utility peers. For example, we’re able to talk about our emissions footprint in hundreds of thousands of metric tons, whereas most other utilities talk in terms of millions of metric tons. Last year, we came closer to achieving our current goal. We began the process of evaluating new greenhouse gas emission targets.
- M. Susan Hardwick – American Water Works Co., Inc., President, Chief Executive Officer and Chief Financial Officer
We continue to play offense on ESG and sustainability. The combination of the upcoming Toshiba acquisition and our newly announced European heat pump design center of excellence position us favorably to enter the attractive European residential heat pump market. This will complement our leadership in global commercial heat pumps.
As an example, our low GWP heat pump chiller orders in Europe were up over 30% in the first quarter. Electrification is equally critical in transport refrigeration, where we recently added Woolworths, Australia’s largest supermarket chain. We now have more than 10 countries where our Vector eCool all-electric reefer units are in service.
- David L. Gitlin – Carrier Global Corp., Chairman & Chief Executive Officer
During the first quarter, Digital Realty was named one of America’s Most JUST Companies and third overall in the real estate industry by JUST Capital and CNBC. We also maintained our status as a member of the FTSE4Good Index, which measures the performance of companies demonstrating strong ESG practices, continuing our record of recognition for our leading sustainability initiatives.
- Arthur William Stein – Digital Realty Trust, Inc., Chief Executive Officer & Director
Moving on, we continue to build on our position as a recognized global leader in ESG with our commitment to investing in multiple Climate Tech and ESG-focused funds. These investments should help identify both in the apartment home and property-wide solutions to better address climate change and lower our carbon footprint.
Similarly, our commitment to adopt SBTi this year, along with extensive company-wide resources we already dedicated to enhance our sustainability, will help to further refine our long-term ESG strategy.
- Thomas W. Toomey – UDR, Inc., Chairman & Chief Executive Officer
ur Risk & Broking segment launched ESG analytics and diagnostics, which provides a multi-source comprehensive analysis of a firm’s ESG performance. We also introduced a bespoke Reputational Risk solution designed to help our clients understand, manage and recover from reputational crises. Both products address ESG risk, which is an area of rapidly growing importance for our clients. Our ongoing product innovation continues to drive growth in our risk and analytics business within Risk & Broking.
- Carl Aaron Hess – Willis Towers Watson Plc, Chief Executive Officer & Director
Whether it be for supply chain constraints, the ongoing economic uncertainty, or company-specific factors at play, several organizations reported headwinds due to a variety of factors when it comes to consumer demands and operating profit, and how they’ve attempted to offset that throughout the past quarter
Advanced Surgery performance was up 8% at constant rates, driven by year-over-year improvement in the rate of surgical procedures following depressed rates due to the pandemic. Renal Care rose 1% at constant currency rates, with a mid-single digit growth in the US, partially offset by a low-single digit decline internationally. Growth in the quarter was driven by global demand for our home peritoneal dialysis products, partially offset by lower sales of dialyzers internationally.
As we have discussed previously, PD patient demand has been constrained due to the pandemic driven factors, including higher mortality rates for kidney disease patients and the lower rate of new patient diagnosis.
- José E. Almeida – Baxter International, Inc., Chairman, President & Chief Executive Officer
Our strong pricing was a highlight in the face of high inflation. Similar to the fourth quarter, 1Q also had difficult year-over-year comps with lower COVID-related mask demand, impacting growth by 2 percentage points and the timing of sales and warehouse automation dampening our growth rate.
- Gregory P. Lewis – Honeywell International, Inc., Chief Financial Officer & Senior Vice President
Volume was slightly lower as expected due to seasonally lower demand in North America and the impact of Omicron in the early part of the first quarter. In Global Cellulose Fibers, fluff pulp shipments were constrained by the ongoing vessel delays. Operations and costs are an $0.08 headwind in the quarter. Our mills and converting system performed well, and we made excellent progress normalizing containerboard inventories across our network. We received $20 million of insurance recovery or about $0.04 per share related to Prattville. In Global Cellulose Fibers, ongoing logistics constraints impacted operating cost by about $25 million or $0.05 per share in the quarter.
- Tim S. Nicholls – International Paper Co., Senior Vice President & Chief Financial Officer
In the first quarter of 2022, our net revenue yield declined 5.2 basis points to 36.6 basis points, yet our operating margin has improved to 39.5%. We’ve been building out our product suite to meet client demand; and client demand has been skewed towards lower fee passive products, as evidenced by the mix shift between active and passive AUM.
Realizing our business mix is shifting, we continue to be focused on aligning our expense base with these changes. This is enabled the firm to improve and maintain a strong operating margin despite the client demand driven decline in net revenue yields.
- Laura Allison Dukes – Invesco Ltd., Senior Managing Director & Chief Financial Officer
Diagnostics adjusted operating income for the quarter was $683 million, or 27.8% of revenue, compared to $992 million, or 36% last year. The decrease in adjusted operating income and margin was primarily due to a reduction in COVID testing. COVID testing margins were down compared to last year due to lower testing demand, while the company continued to maintain capacity. Base Business margins were down slightly, due to higher personnel expenses and other inflationary costs, partially offset by organic growth and LaunchPad savings.
- John Q. Doyle – Marsh & McLennan Cos., Inc., Group President, Chief Operating Officer & Vice Chair
Our results for the first quarter flagged challenges that we experienced on the volume side with supply chain constraints and network fluidity. These were offset by record success in revenue per unit.
Overall, our volume decreased 5% year-over-year in the first quarter, driven by declines in our intermodal, automotive and steel franchises. But despite these volume declines, total revenue improved 10% year-over-year to $2.9 billion due to higher revenue from fuel surcharges and strong price gains.
Within merchandise, volume declines were led by automotive and steel for chip supply and equipment cycle time challenges significantly inhibited our ability to drive growth. Partially offsetting these decreases were gains in agri fuels, feed and aggregates due to increased gasoline consumption, higher demand for agriculture products, and rising levels of construction spending. Higher fuel revenue and price improvement more than offset the headwinds from volume and mix to generate 4% revenue growth year-over-year, along with record level revenue per unit.
- Claude E. Elkins – Norfolk Southern Corp., Chief Marketing Officer & Executive Vice President
China has recently been experiencing a surge of COVID infections, leading to country-wide lockdowns and restrictions, which in turn has increased inflationary pressures and supply chain disruptions globally. Companies are reporting on how China’s COVID situation along with global political tensions arising from the Russia-Ukraine conflict has impacted their businesses and how they’ve coped so far
Overall, the first quarter proved to be a tougher-than-expected operating environment globally and we believe our results primarily reflect three key factors; the continued impact of COVID-19 waves in every region and especially in China, with its restrictions and lockdowns under their zero-COVID policy; a weaker economic environment and waning consumer confidence driven by increasing inflationary pressures and supply chain disruptions; and the military conflict in the Ukraine and fallout across Europe.
- Joseph M. Hogan – Align Technology, Inc., President, Chief Executive Officer & Director
Question – John Walsh: Just kind of wanted to understand, the change in the sales guidance. So, sounds like it’s being driven by price, but what kind of gave you the confidence to take it higher, given that supply chains are still tough. You have the China, COVID impacts. Just I understand that demand is really robust and you have the strong backlog, but kind of what gave you the confidence that you’ll be able to get the parts you need to kind of hit at higher top line?
I’d add to it as well, versus the second half of last year, labor has improved in its availability. Freight has improved modestly. And I say, modestly, from the rise in COVID in China. The lockdowns will have some implications. We’ve got some exposure but it’s not major. And I think, particularly on the mechanical input to our business, redesign, qualifying sector suppliers has really strengthened our confidence. That leaves the electronics element. As we think about going forward and our guide, that’s based on allocations. If chip availability gets better across the board, we’ll be even stronger.
- David D. Petratis – Allegion Plc, Chairman, President & Chief Executive Officer
Labor and physical space are no longer the bottlenecks they were throughout much of 2020 and 2021. However, we continue to face a variety of cost pressures in our consumer business. We’ll break these into two buckets: externally driven costs, primarily inflation; and internally controllable costs, primarily productivity and fixed cost deleverage.
The externally driven costs are a result of intensifying inflationary pressures throughout Q1. Linehaul air and ocean shipping rates continue to be at or above the rates in the second half of last year, which were already much higher than pre-COVID levels. Some of this is due to the impact of the Omicron variant in China and labor shortages at point of origin, and the start of the war in the Ukraine has contributed to high fuel prices.
- Brian T. Olsavsky – Amazon.com, Inc., Chief Financial Officer & Senior Vice President
During the first quarter, we proactively worked with our distributors to ship product into the market in advance of potential COVID-19 disruptions which most recently is impacting transportation in certain regions. While our customers have ample inventory in place, our tracking of consumer demand in April across our portfolio and geographies is indicating a year-over-year reduction of 35% to 40%.
Our outlook assumes the COVID-19 related shutdowns in China subside during the second quarter of 2022. Despite the economic headwinds to our business in China, I’m very pleased with the quarterly performance of our China team who are taking great steps to right-size the business, manage discretionary spend while investing in new product development.
- Kevin J. Wheeler – A. O. Smith Corp., Chairman, President, & Chief Executive Officer
The mobile devices market represented 10% of our sales in the quarter. Sales increased by 7% from prior year, with strength in tablets, smartphones, wearables as well as laptops. Sequentially, our sales decline was less than we had expected, declining 27% from the fourth quarter. As we look into the second quarter, we now anticipate a low-double-digit sequential sales decline from these levels, driven by typical seasonality as well as by some impact from the recent COVID-related shutdowns that have been occurring and continue to occur in China.
- Richard Adam Norwitt – Amphenol Corp., President, Chief Executive Officer & Director
As for our own operations, they were minimally impacted by COVID restrictions in Q1. That said, the recent lockdowns in the Greater Shanghai area constrained our materials businesses ability to produce for much of April, reducing revenue by roughly $20 million for the month. Fortunately, these restrictions are now easing and we expect all plants will be operational imminently.
LGM’s margin was strong in the quarter though down from prior year as expected. Sequentially, margins expanded more than 1 point, as we accelerated pricing actions to reduce the lead time between inflation and pricing. And while pricing is catching up with inflation relative to the beginning of the broader cycle, we continue to see further inflation as we move into Q2 and continue to raise prices accordingly. Importantly, we are on track to further increase our returns in EVA for this year in this already high return business.
- Mitchell R. Butier – Avery Dennison Corp., Chairman, President & Chief Executive Officer
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 April 18th
Week of April 11th
Week of February 7th
Week of January 31st
Week of January 24th
Week of January 17th
Week of January 10th