Q1’22 Trending Earnings Topics Recap May 2022

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

Welcome back to the final version of our trending earnings topics recap May 2022, macro trends and key management commentary with highlights from earnings call transcripts of S&P 500 companies for the Q1’22 earnings season. With Bakkt Holdings, Squarespace, New Relic, Owlet, SmartRent and Walt Disney among some of the bigger names that reported earnings last week, here are some key trending topics that emerged during earnings updates from the week of May 9th, 2022:

While headwinds out of Europe and China continue to bottleneck the output of a large number of companies in the global markets, many organizations are still reporting positive growth performance from an international perspective and how additional opportunities should surface in that sector under favorable conditions.

European sales were $416 million, with organic growth of 7% attributed to robust performance in the T&E segment with strategic growth areas, including CAD/CAM, ortho and implants all posting double-digit growth.

Rest of the World sales were $250 million, representing organic growth of 1.4%, with growth in both segments. Resto, CAD/CAM and implants experienced healthy growth in the period. Rest of the World growth was unfavorably impacted by increased government restrictions associated with COVID variants, primarily in China as well as market disruptions in Australia as a result of flooding.

  • Barbara W. Bodem – Dentsply Sirona, Inc., Interim Chief Financial Officer

Beyond targeting specific demos, we are equally enthusiastic about our growth potential in international markets. We currently have over 500 local original titles in various stages of development and production. 180 of those titles are slated to premier this fiscal year, increasing to over 300 international originals per year in steady-state. We believe these premium local originals along with branded content with broad international appeal will attract new subscribers and drive engagement.

One example in production is Nautilus from our EMEA team. Based on 20,000 Leagues Under the Sea, Nautilus is the origin story of the iconic submarine from the perspective of its mysterious commander, Captain Nemo. This is just one example of how our global network of creative hubs can develop and produce original content with worldwide appeal.

And by the end of Q3, we plan to roll out Disney+ to 53 new markets across Europe, Africa, and West Asia, starting with South Africa next week.

  • Robert Chapek – The Walt Disney Co., Chief Executive Officer & Director

Our European business is also off to a solid start and remains on track to grow mid-single-digit for the full year 2022. Italy, France, Spain and Portugal performed strongly to further enhance our retail channel leadership in these countries. We also saw stronger than expected performance across brands such as Creon, Lipitor, Dymista, Lyrica and Brufen. Our thrombosis portfolio continued to grow in line with our expectations.

Hulio, our biosimilar to Humira, which has roughly 20-plus-percent market share of the biosimilar market, is another key contributor to our German and France businesses. Our recently launched generic Revlimid is the first in series of key launches planned for Europe this year.

Our emerging market segment showed a strong quarterly performance. Our ARV franchise performed slightly better versus our expectations this quarter. Key geographies such as South Korea, Southeast Asia, Turkey drove higher volumes while Brazil realized better pricing. Lipitor and Lyrica led the strong growth in this segment and helped the brand category perform better than expectations.

  • Rajiv Malik – Viatris, Inc., President & Director

Taking a look at our revenue from a geographic and end-market perspective, Americas was up 21.4% over the prior-year quarter. Europe was up 25% over the prior-year quarter. Asia was up 27.9% over the prior-year quarter. All end-markets remained strong and were supply-constrained.

Business conditions continued to be exceptionally strong through the quarter. Our Preferred Supply Program, or PSP, backlog continued to grow and remained well over 50% of our aggregate backlog and 100% of our backlog in the most constrained capacity product areas.

  • Ganesh Moorthy – Microchip Technology, Inc., President, Chief Executive Officer & Director

Question – Lisa H. de Neve: Hi. Good afternoon. And thank you for taking my questions. I have two. First one is, can you talk a little bit on how the growth has been evolving in the first quarter through the different regions and how you expect volume growth to develop over the coming quarters or through the year? So, the plus and minuses would be very helpful. And secondly, can you share a little bit what you’re seeing in your innovation pipeline? In what segments are you seeing stronger levels of innovation? And also, do you see sort of any levels of reformulation activity? Thank you.

Answer: Good morning, Lisa. So, relative to the first quarter and balance of the year relative to regions, our strongest areas have been the developed markets. So, a combination of Europe and North America. Laggards has really been actually greater Asia, as well as slower growth in the first quarter. We expect, as we look at the balance of the year, things there to have a little bit of challenges in Greater Asia, particularly China, as we mentioned. Likely, also to see a slowdown, meaningful slowdown in Europe, given what’s happening from an economy standpoint, but are still sort of fairly optimistic on combination of North America and LatAm as well.

  • Glenn Robert Richter – International Flavors & Fragrances, Inc., Chief Financial Officer & Executive Vice President

We have witnessed a continued relaxation of COVID-related protocols across the globe, from air travel to concerts and other indoor activities. And this time around, the cruise industry is an active participant.

First, we are pleased that in late March, the CDC entirely removed its travel health notices for cruise, representing a significant step towards leveling the playing field between cruise and our land-based counterparts.

In addition, the CDC continues to modify elements of its voluntary framework for cruise, relaxing certain requirements, the most recent of which includes reducing required vaccination thresholds from 95% to 90%, which further opens up the important family market to cruising.

Second, as I mentioned earlier, we have seen an acceleration in the reopening of society to pre-pandemic normalcy, which bodes well for travel and leisure sector overall. More ports around the world have opened to cruise and we have seen travel restrictions relax in many areas. And while there are still regions where discussions to reopen to cruise are ongoing, particularly certain countries in Asia, the good news is that we do not have ships sailing in those regions until fourth quarter, giving us additional time to monitor the situation, plan for various outcomes and be ready to adapt as needed.

  • Frank J. Del Rio – Norwegian Cruise Line Holdings Ltd., President, Chief Executive Officer & Director

During the past week, economists from Goldman Sachs have cut US GDP forecasts, noting that they now expect the economy to grow 2.4% (previously 2.6%) in 2022, while EU executives also cut their prediction of the Euro-area GDP to a 2.7% increase this year, compared to the initial outlook of 4%. Relative to these concerning GDP expectations, unstable economic headwinds were being discussed by companies across the S&P 500.

According to IHS, GDP expectations for the full year have been lowered from previous forecasts. Global GDP is now expected to grow 3.2% and US GDP is expected to grow 3%, and the macro environment is expected to be bumpy for the remainder of 2022.

We are continuing to pay close attention to macro elements including COVID-19, upstream supply chain constraints, inventory and inflationary pressures, and the geopolitical environment. Despite this backdrop, we are reaffirming our consolidated financial targets for 2022 driven by our results in the first quarter and the momentum we are seeing in the second quarter.

  • Brian Newman – United Parcel Service, Inc., Executive Vice President & Chief Financial Officer

Question – Brian Meredith: Yeah. Thanks for taking my question. Alan, I want to chat a little bit about Business Insurance a little more broadly speaking here. As we look at GDP in the US, as you guys look back, how closely correlated is exposure growth and RPC relative to GDP in the US? Is there a lag effect? And then, maybe take that also on loss trend and what impact you typically see economic growth or deceleration having on loss trend?

 It’s a really good point, a really good question. We do see exposure growth having a reasonably high, not one-to-one, but a reasonably high degree of correlation with GDP. So, I do think you’re onto something there. Again, it’s within a range and there’s some lag to it. But – and there’s also sort of an over time measure. I don’t think you can look at GDP today, this week, this month, this quarter and say that’s what exposure is going to be. You do need to look at it sort of over time and you generally get there.

When you talk about the impact of economic activity on losses, that’s also going to vary by line and it’s hard to paint with a broad brush. I do think probably just making an observation at a macro level, there is a correlation between an economy heating up and loss trend going up. I think there are several lines that would contribute to that. But you do need to remember, again to the first point, is that as an economy heats up, you do get exposure growth that, to one degree or another, will offset that higher level of loss trend.

  • Alan D. Schnitzer – The Travelers Cos., Inc., Chairman & Chief Executive Officer

Question – Eugene Simuni: Thank you. Good morning. I’ll start with a macro level question. So ADP obviously has its finger on the pulse with a very large slice of the US economy. So it’s always very interesting to hear your guys’ perspective on kind of real-time read of what’s going on across the different pockets of your client base, especially now that we’re experiencing kind of volatile macro environment. Would you mind providing us with a little bit of that commentary, what are you seeing today across your client base, pockets of strength and weakness?

Answer: We obviously keep an eye also on things like GDP, GDP growth. I mean, absolute GDP dollars have already surpassed pre-pandemic levels and they’re kind of in line to get back to trend growth or exceed trend growth on a real basis, right, because you have to factor in, obviously, the fact that we have some higher inflation, now. So I mean, our perspective, generally, is that the economy is very strong, like based on the things that we’re looking at in our business, but we obviously live in the real world that we have to think about the next quarter or two, but also about 12 months from now and 24 months from now; and Finance 101 would tell you that increase in interest rates that are expected from the Fed and that have already been priced in, which are helping our client funds interest on the two year, five year, seven year and 10 years, I think will all slow at some point the economy, which is the intention, I think, of the Federal Reserve to get inflation under control.

  • Carlos A. Rodriguez – Automatic Data Processing, Inc., Chief Executive Officer & Director

On the consumer trends, I mean, that’s the big question out there, right, for everybody, and we watch it closely. It’s particularly impactful to us in bedding and in home furniture and, as you said, some of those more consumer-facing businesses. But we are concerned about the impact of inflation. And as Tyson mentioned that it was holding pretty steady and then with the sort of shock in gas prices in the US and North America, I’d say, and then the conflict overall, the impact on Europe, right, that we did see some softening there.

But we’ll see what’s happened – what will happen, I think that if inflation starts to stabilize and maybe come down a little bit, people have still been spending. I mean, we saw it even in this last quarter with GDP down. When you go through the details, consumer spending was still pretty decent level. So, it is a big question. I think we are, I guess, optimistic that while it might soften a little bit, that it doesn’t just fall apart.

  • J. Mitchell Dolloff – Leggett & Platt, Inc., President, Chief Executive Officer & Director

Question: Richard Anderson: Thanks. Good morning. So speaking of recession, so the GDP print for the first quarter surprising down 1.4%, how do you – you speak about sort of the protection that MAA has offered in the past about tougher economic climates. But I mean, is there reason to be thinking out a couple of years or a year about all the good things that are happening today and being careful not to have sort of a hangover when this is all said and done because I’d argue that this is not a forever thing and karma is a you know what. So how do you manage this in light of the broader economic environment and the change that are going on? Thanks.

Answer: Rich, it’s a good question. And frankly, it’s something we’ve been spending a fair amount of time thinking about because I do agree with you that, I mean, one thing we know is the economy is cyclical and our business is cyclical. And I think that while it’s hard for me to sit here today and see any reason to get particularly definitive about a downturn, there’s a lot of uncertainty out there and there’s changes afoot. But as we think about how do we position the company and prepare for an eventual downturn, there really has always been four things that we have really focused our energy and efforts on. One is just the portfolio strategy itself and ensuring that we are focused in markets that we think can weather downturns better than other regions, other markets in the country. We think that the price point that we have in the portfolio relative to others is an advantage to us should we find ourselves in that kind of situation…The other thing that we focus on, of course, is the balance sheet and the capacity we have on the balance sheet. And even though it’s a long time, Rich, I mean, our balance sheet has never been this strong…The other thing is we continue to monitor very carefully about how much forward funding obligation we’re creating for ourselves through new development. And as Al alluded to, we feel like that no more than 4% or 5% is kind of where we want to be. Right now, we’re well below that and continued and certainly intend to stay there…And then the final thing I’ll point to, if you were to tell me a year from now that we, for sure, are going to recession, what would you be doing from an operational perspective, I would say we’re doing exactly that. This is the time to be pushing for ramps. When you get into a recession, the thing that will cause revenues to hold up better than they otherwise would is that you’ve got baked in performance in your revenues through the rent growth that you’ve been capturing over the prior year or so.

  • H. Eric Bolton, Jr. – Mid-America Apartment Communities, Inc., Chairman & Chief Executive Officer

Moody’s updated outlook for full year 2022 as of May 2 reflects assumptions about numerous factors. These include but are not limited to the effect of interest rates, inflation, foreign currency exchange rates, capital market liquidity, and activity in different sectors of the debt markets. The outlook also reflects assumptions about general economic conditions, global GDP growth, the scale and duration of the crisis in Ukraine, and the impact of COVID-19, as well as the company’s own operations and personnel.

Our updated full year 2022 guidance incorporates the following specific macroeconomic assumptions. 2022 US and Euro area GDP to expand by approximately 3.5% to 4.5% and 2.5% to 3.5%, respectively. And global benchmark rates to increase from historic lows with US high yield spreads moving slightly above the historic average of approximately 500 basis points, and inflation rates to remain elevated and above central bank targets in many countries.

  • Mark Kaye – Moody’s Corp., Executive Vice President-Chief Financial Officer

Consumers on a global scale have readjusted their spending behaviors due to macroeconomic factors that are impacting multiple sectors to varying degrees. Companies are reporting on visible trends apparent within consumer spending and how they’re dealing with any potential headwinds.

As we look back over previous times, where there may have been challenged consumer spending, our industry now, games specifically, have actually done very, very well for two reasons. One, entertainment really is a fundamental human need; and two, the form of entertainment we deliver is extremely high value to consumers, given that you get thousands of hours of engagement when you play one of our games. And so, our expectation is that even in an environment of macro challenge that our industry and our games will continue to do well.

One of the other things that we have, where we’ve gone back and really looked at this though and you study it, is you discover that companies that can invest from a position of strength, going into an environment like the one seemingly we’re moving into, actually benefit disproportionately as you come out of that. And so I think if you take in the fact that we have a growing network, growing engagement, record performance, our games fulfill both entertainment and social interaction, that if you look back in history, our industry has performed very well at times like this.

  • Andrew P. Wilson – Electronic Arts, Inc., Chairman & Chief Executive Officer

Question – Michael J. Harrison: Wanted to see if I could attack this question around underlying market demand a little bit differently. You’ve talked about business travel. You’ve talked about maybe some macro concerns in Europe. I was just hoping to get some color more broadly on what you’re seeing in terms of consumer behavior in an inflationary environment. Are there any signs at this point that inflation is starting to drag on consumer spending? I guess that would show up maybe in restaurant foot traffic. But most of us were not covering this space the last time inflation was this strong, so I guess any historical perspective you could provide would be very helpful.

Answer: Yeah. A few things. First, that kind of inflation, none of us has really experienced that. I guess our parents did. I was not in business last time it truly happened here, 30 or 40 years ago. So it’s totally extreme, totally unusual, as we all know. So a few things here. First, we don’t see a slowdown of demand yet. So that’s the good news. But if we look at restaurants, especially in the US, if I look at the data that we get from the industry, you clearly see a slowdown of demand which is most probably related to inflationary pressure because of oil, because of food, because of mortgages, you name it. But that’s very early, so those are indications that are probably important to follow. The third thing and last thing that I’d say as well here is that when we move to slower times or more extreme recessionary times which we don’t assume it’s going to happen in 2022, could happen in 2023, who knows, obviously. That’s we’ve gone through many times as a company. And the good thing with the Ecolab model is that, yes, the growth slows down, but we are still ahead of the market growth because we gain market share because of all that we discussed in terms of new business, innovation, expansion of offering and so on there. So that helps us grow faster than the overall market and kind of dampen the recession that we might have on our top line

  • Christophe Beck – Ecolab, Inc., President, Chief Executive Officer & Director

March was one of Resy’s best months on record for reservations, up nearly 16% over February. Ultimately, the key metric to gauge customer engagement is spending growth. Overall billed business grew 35% in Q1 globally year-over-year on an FX-adjusted basis and we saw our highest volumes ever in March, surpassing our previous highest of December of 2021. Spending growth was led by the acceleration of volumes from millennial and Gen-Z consumers up 56% and SMEs up 30% on an FX-adjusted basis over last year. Goods and services spending continued to accelerate in the quarter, growing 21% on an FX-adjusted basis over last year. Travel and entertainment spending was up 121% globally on an FX-adjusted basis year-over-year, driven by strong growth in consumer travel spending. Customer retention remains at the very high levels I mentioned at Investor Day, an indication of the value our customers continue to place on Amex membership.

  • Stephen J. Squeri – American Express Co., Chairman & Chief Executive Officer

Turning to our markets, vacancy is at all-time lows in most of our geographies. During the quarter, we signed 60 million square feet of leases and issued proposals on 90 million square feet, and customers continue to compete for the little space that remains. Supply chains have yet to return to normal as measured by in-stock rates, shipment lead times and active dialog with our customers. While the flow of goods has improved, the inventory to sales ratio remains more than 10% below pre-pandemic levels. Inventories need to not only make up for this 10%, but build an incremental 10% in safety stock, and even if retail sales declined 5% as consumers shift their spending to experiences versus goods, we project that the market will still require an incremental 800 million square feet of space in the US alone.

  • Timothy Arndt – Prologis, Inc., Chief Financial Officer

Question – Dara Mohsenian: Hey, good morning. So, I just wanted to focus on top line visibility here. You obviously kept the full year top line guidance despite the Russia impact, so underlying sales are moving up ex-Russia and Q1 was another strong quarter, but clearly there’s risk. Consumer spending might weaken with the unprecedented inflation we’re seeing. So first, maybe just looking backwards, can you give us an update on if you’re seeing signs of consumer stress in terms of impact on your business or pushback to higher pricing around the world either late in Q1 or in April?

Answer: Well, clearly, my act of generosity with Lauren has unleashed a torrent of multi-question questions, but it would be harsh to cut it off at this stage, Dara. Look, a couple of things. We did come in with strong momentum out of 2021 coming into this year. And as I and John and we talked about previously on calls, we believe that pricing for our business has to be earned for the brands. We have to give the consumer and the retailer reason for the price increase and for the value of our brands whether it’s the marketing, the innovation, the execution or the packaging options, we do those. It’s not a cost-plus business, although we do seek, of course, to protect the margin structure by moving through changes in commodities and other costs. But we very much foresee, as experience and history – who was it? Mark Twain said history doesn’t repeat itself, it just rhymes. Well, when you go into high inflation, consumers come under pressure. There’s clearly reductions in real purchasing power going on for some segments of the population, if not everyone around the world, and so our focus is very much to find those packaging and price options by channel, where we can stay connected to people who are coming under purchasing power pressure very much affordability

James Quincey – The Coca-Cola Co., Chairman & Chief Executive Officer

Thanks for reading the final issue of the Earnings Recap blog for the Q1’22 Earnings season.

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

Week of May 2nd

Week of April 25th

Week of April 18th

Week of April 11th

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