Q2’22 Trending Earnings Topics Recap – Week of August 1st, 2022

Welcome to the latest edition of the Q2 2022 earnings season weekly update on trending topics, macro trends and key management commentary. Over 80% of the S&P 500 companies have now reported their results. With yet another busy week of earnings that saw companies such as Uber, Yelp, Western Union, Pinterest, Electronic Arts, Chegg and Cloudflare report, here are some key trending topics that emerged during earnings updates over this period:


Prompted by the ongoing war in Europe, along with the uncertainties around COVID restrictions in China and a grim economic backdrop, companies are reporting on significant disruptions and backlog in their supply chain that has impacted regular business operations.

Aptiv- Prepared Remarks

Let’s now turn to our second quarter results. Revenues totaled $4.1 billion, up 9% from the prior year driven by strong demand across our portfolio of safe, green and connected technologies. Operating income and earnings per share totaled $213 million and $0.22, respectively, reflecting strong revenue growth more than offset by material inflation, incremental costs related to supply chain disruptions, shutdowns in China, and some softening in vehicle production schedules in Europe.

Turning to slide 4. Revenue grew 8 points over underlying vehicle production, which increased 1% in the quarter. North America production remained strong, while Europe experienced significant weakness from a combination of semiconductor chip supply and macroeconomic factors. China had a very strong finish to the second quarter despite a slow start due to COVID-related production disruptions.

While our team is doing an excellent job keeping production going in this very volatile environment, the challenges we’re facing continue to have a meaningful impact on our business. With supply chain disruptions and persistent inflation continuing to translate into incremental costs, and the increased likelihood of disruption of the gas supply into Europe, we’ve accelerated several initiatives to increase our agility and resiliency, and improve our profitability in the near term

  • Kevin P. Clark – Aptiv Plc, President, Chief Executive Officer & Director

Eaton Corporation – Prepared Remarks

Moving to page 4, we show the financial results for the quarter, and I’ll just note a few items here. First, our revenues were flat year-over-year with 11% organic growth offset by the net impact of acquisitions and divestitures of some 9%, and 2% from negative FX. And we’re certainly very pleased with this level of organic growth, but I would also note that growth could have been much better but for persistent shortages of electronic components and COVID-related lockdowns in China.

Second, currency headwinds were worse than we expected in our guidance and almost $150 million impact versus prior year. And as you’ll see in our forward guidance, we expect this number to get worse in the second half. The FX headwinds will also reduce our adjusted EPS by approximately $0.05 in the quarter. Lastly, I’d like to emphasize that we really did achieve a number of all-time records in the quarter including segment operating profits, segment operating margins, and adjusted EPS.

  • Craig Arnold – Eaton Corp. Plc, Chairman & Chief Executive Officer

Johnson Controls International – Prepared Remarks

Segment EBITA declined 3% with margins down 110 basis points to 15.1%. Favorable price cost and the benefit of our ongoing SG&A and COGS programs were offset by 104 basis points margin headwind from lower volumes and supply chain-related challenges.

EPS of $0.85 increased 3% year-over-year, benefiting from positive price/cost as well as lower share count, and absorbed a $0.03 FX headwind versus our guide assumptions. Free cash flow was down in the quarter, as we continued to manage supply chain disruptions in order to meet customer demands.

  • Olivier Leonetti – Johnson Controls International Plc, Chief Financial Officer & Executive Vice President

Sealed Air Corporation – Prepared Remarks

Food volumes were down 2% with Americas down 3% and EMEA down 2%, partially offset with APAC up 1%. Lower volumes are primarily attributed to continued supply disruptions across all regions. If you exclude these constraints, we would have been in line with volumes reported in Q2 last year. Protective volumes were down 8%, with declines in all regions given tougher comps relative to Q2 2021 COVID-related economic recovery and vaccine distribution tailwinds. We also experienced lower volumes due to the COVID-related lockdowns in China during the quarter.

On slide 14, we present our consolidated sales and adjusted EBITDA loss. Having already discussed sales, let me comment on our Q2 adjusted EBITDA performance. Q2 adjusted EBITDA of $293 million, increased $30 million or 12% compared to last year with margins of 20.7%, up 90 basis points. Strong price realization and favorable mix have limited the margin impact of lower volumes and higher operating costs.

Unfavorable operating costs of approximately $58 million were driven by higher nonmaterial inflation and the impact of continued supply disruptions. Productivity gains totaled $7 million in Q2, and we now expect approximately $45 million for the full year, down from previous expectations of approximately $60 million due to continued supply disruptions and labor challenges.

  • Christopher J. Stephens, Jr. – Sealed Air Corp., Chief Financial Officer & Senior Vice President

Trimble – Prepared Remarks

The year-on-year rate of product cost inflation eased modestly in the quarter and came in better than our expectations. And supply chain initiatives implemented over the last several quarters have allowed us to reduce our reliance on both expedited transportation and the expensive broker market for scarce parts. We are seeing meaningful improvement overall in the reliability of our supply chain, but significant issues remain, and we don’t expect a fully normalized supply chain environment until well into 2023.

We faced a number of critical part shortages that reduced our ability to meet customer demand in the second quarter, and those issues will continue to modestly constrain our revenue for the remainder of 2022. EBITDA and operating margins for the quarter were 24.2% and 22.4% respectively. Operating costs grew versus year ago levels driven both by the gradual normalization of travel expenses and by the planned investments we are making against our strategic growth initiatives.

Net income and EPS were both lower than prior year levels, yet ahead of our expectations. Over the last 12 months, we’ve generated $470 million of free cash flow, and through the first half of 2022, we generated just over $173 million of free cash flow, both of which are below our long-term goal of generating cash flow in excess of our non-GAAP net income. The main two factors impacting second quarter cash flow are the buildup of inventory, driven by supply chain disruptions, and tax payments related to the elimination of upfront tax expensing of R&D costs in the US. We expect both of these items to normalize over time. Meanwhile, we are operating with negative working capital.

  • Robert G. Painter – Trimble, Inc., President, Chief Executive Officer & Director

Microchip Technology Q&A 

Question – Christopher Brett Danely: I guess just a question on capacity and the shortages. So, are you seeing any improvement in the shortage or capacity situation? Can you talk about trying to squeeze a little bit more both internally and externally? Has your projected capacity gone up a little bit over the last few months as you’ve been able to maybe hunt around and find a few more parts out there? Maybe just give us a little more color on that supply-demand imbalance situation.

Answer: Yeah. So for our internal factories, we have been investing in CapEx for many quarters. We made progress in our backend factories first because it was a shorter cycle time and easier to bring on. We have been making progress on our frontend factories and still have many quarters of capacity that we think we can bring on. As we are able to get equipment and some of the equipment that we have needed has been delayed, as we’re unable to hire people and it has been harder in some prior quarters, but we’re getting better in terms of being able to fill our positions in the factories, et cetera. So clearly, internal capacity is growing and helping us support some of the backlog that we’re unable to support at this point in time.

We have had incrementally more constructive capacity improvements from our external partners although it is still very small in the grand scheme of what we need in terms of that, and we are hopeful that some of perhaps the weaknesses that may be out there in other segments will in fact help free up some of the capacity we need, although it’s not an exact mix between where things are getting freed up and where things are that we require. But I think incrementally it will be constructive and positive for us.

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

Unlike many industries that are facing the continuous challenges of inflation and a recessionary environment among other headwinds, companies tied to the tourism sector are displaying strong growth through accelerating consumer demand.

Expedia Group – Prepared Remarks

Let me begin by saying that we were very pleased with our financial results in the quarter on the back of a continued recovery in all markets and products and our expanding margins. We’ve seen strong consumer demand for travel this summer and are encouraged that travel remains a top spending area even as other parts of the economy seem to be showing cracks.

We posted our highest-ever lodging bookings this quarter and the highest revenue and adjusted EBITDA for any second quarter and we continue to further strengthen our liquidity with a strong free cash flow and the early redemption of an additional $1 billion of debt.

We delivered these strong results despite the current macroeconomic backdrop and the limitations and disruptions we’ve seen in air travel around the world. Of particular note, while domestic flight capacities have recovered close to 2019 levels, international flight capacity is lagging, with long-haul capacity still down roughly 30%. While these disruptions and shortages don’t appear to be abating soon, we do look forward to when these long-haul capacities return as this has always been a relative strength of ours.

  • Peter M. Kern – Expedia Group, Inc., Vice Chairman & Chief Executive Officer

Booking Holdings – Prepared Remarks

Now we recognize that there is uncertainty around the macroeconomic environment and questions about the strength of consumer demand through the end of this year and into next year. And while it is extremely difficult to accurately predict the near-term economic environment, I’m as confident as ever in consumers’ strong desire to travel, the attractive long-term growth profile of the travel industry, and our improving longer-term competitive position.

With our industry-leading margins, high-quality earnings, strong free cash flow and liquidity position, and solid balance sheet, we believe we are well-positioned to navigate any potential near-term economic uncertainty and continue our work attracting customers and partners to our platform while making progress on our key strategic priorities of Payments and the Connected Trip vision.

In terms of attracting customers to our platform, our unique active customers at Booking.com surpassed 2019 levels in the second quarter, driven by very strong growth in returning customers who have not made a previous booking in over a year, as well as growth in repeat customers. Our mix of customers booking directly on our platforms reached its highest second quarter level ever.

We aim to build on increasing our direct mix through several initiatives including by continuing to enhance the benefits of our Genius loyalty program, further building out our Connected Trip vision to increase engagement with our customers, and driving more of our customers to download and utilize the mobile app.

  • Glenn D. Fogel – Booking Holdings, Inc., Chief Executive Officer & Director

Marriott International – Prepared Remarks

Occupancy on Fridays and Saturdays was fully recovered, and occupancy on Thursdays and Sundays, typically known as shoulder nights, was close to 2019 levels. With nearly all major countries around the world having opened their borders, rising cross-border travel was another key driver of the solid recovery during the quarter.

However, cross-border travel is still not fully back to pre-pandemic levels. So there is still additional upside, especially from Greater China, where stringent travel restrictions remain in place. While we are closely monitoring consumer and macroeconomic trends, we have yet to see signs of a slowdown in global lodging demand.

On the contrary, the pent-up demand for all types of travel, the shift of spending towards experiences versus goods, sustained high levels of employment and the lifting of travel restrictions and opening borders in most markets around the world are fueling travel.

And as Leeny will discuss, we expect to see continued RevPAR recovery through the end of the year. As travelers get back on the road in increasing numbers, our 169 million Bonvoy members are more actively engaging with our powerful loyalty platform.

  • Anthony G. Capuano – Marriott International, Inc., Chief Executive Officer & Director

FLEETCOR Technologies – Prepared Remarks

Tolls was up 19% compared with last year as the business continues to perform. New sales are solid, driven by our expanded product utility and differentiated value proposition and we’re well positioned as we head into the seasonally strong summer travel season in the Southern Hemisphere.

Lodging continued to perform exceptionally well, up 42%. Our workforce lodging business has improved with higher new sales and better volumes as our programs are viewed as more valuable as hotel costs are rising. Airlines again outperformed with organic growth of 88%. The travel recovery continues with domestic travel leading the way. International travel, which tends to garner higher revenue per transaction, still has more room to recover, particularly in Asia.

  • Charles Richard Freund – FLEETCOR Technologies, Inc., Chief Financial Officer

Fidelity National Information Services Q&A

Question – David Mark Togut: Good morning, Gary. For the second half of this year, what have you incorporated into your Merchant Solutions revenue growth from the global air travel related rebound? Heritage Worldpay is very UK-centric and there’s been a lot of press about London Heathrow Airport limiting capacity as well as British Airways. So just very curious for your thoughts there?

Answer 1: Yeah, I’m happy to take it. So you’re right, we have some strength in travel and airlines, British Airlines and Heathrow is very immaterial in terms of the broad portfolio. So you can certainly see the weakening of the pound impacting us overall on an FX standpoint. But travel and airlines has been obviously a rebounder for us over the last couple of quarters. We aren’t seeing any concerns around the issues with the airlines and Heathrow, et cetera. It’s not material to the portfolio at all. So not expecting anything in the back half to be impacted by any of that.

  • Stephanie L. Ferris – Fidelity National Information Services, Inc., President

Answer 2: Yeah. I would say, David, at the end of the day, we’re kind of returning now to a more normalized environment. Really, it’s the strength of our balanced portfolio. Is travel and airlines growing faster than we thought going in throughout this year? Yes. We’ve got some other portfolios that are growing slower than we thought. But the balance of the portfolio is really strong.

And that really kind of gets back to Lisa’s question around recession. It’s really around where consumer spend goes. But we do believe that travel and airline is going to continue to be a strong piece of the book in the back half of the year and modeled that. We think there are some other industries that will continue to be under some stress. But we’re confident with the strength of the overall portfolio. We’re very pleased where the growth is, I mean, at 14% constant currency on the quarter and very pleased where we’re seeing it shape up for the full year.

  • Gary A. Norcross – Fidelity National Information Services, Inc., Chairman & Chief Executive Officer

Cost pressures driven by inflation is evident as organizations evaluate the subsequent rise in their operating expenses and reflect on the impact it has on their results and outlook.

Caterpillar – Prepared Remarks

Compared to the second quarter of 2021, sales to users declined 3%. For Machines, including Construction Industries and Resource Industries, sales to users decreased by 4%, while Energy & Transportation was flat overall.

Sales to users were below our expectations largely due to the impact of supply chain constraints. These constraints were mostly due to component shortages, which resulted in production delays and shortfalls against our schedules. For example, engine control modules have continued to be one of the most significant bottlenecks, mostly due to the shortage of semiconductors. We were unable to completely satisfy strong customer demand for our machines and engines and continue to incur additional costs due to factory inefficiencies and freight expenses.

  • D. James Umpleby III – Caterpillar, Inc., Chairman & Chief Executive Officer

Monster Beverage Corporation – Prepared Remarks

During the 2022 second quarter, the company experienced a significant increase in cost of sales relative to the comparative 2021 second quarter, primarily due to increased freight rates and fuel costs, including costs relating to the importation of aluminum cans; increased ingredient and other input costs, including secondary packaging materials and increased co-packing fees; increased aluminum can costs attributable to higher aluminum commodity pricing; geographical and product sales mix; and production inefficiencies.

The company estimates that of the increase in cost of sales in the 2022 second quarter of $250.3 million, approximately $164.4 million was comprised of: one, approximately $66.7 million due to increased freight rates and fuel costs, including costs relating to the importation of aluminum cans; two, approximately $45.9 million due to increased ingredient and other import costs, including secondary packaging materials and increased co-packing fees; three, approximately $27.5 million due to increased aluminum can costs attributable to higher aluminum commodity pricing; four, approximately $15.1 million due to geographical and product sales mix; and five, approximately $9.2 million due to production inefficiencies.

The company continued to experience additional global supply chain challenges, including the lack of adequate shipping containers and port congestion, which resulted in shortages of certain ingredients and finished products. As a result, the company continued to air freight substantial quantities of certain ingredients internationally, particularly to EMEA, Asia-Pacific, and Latin America at additional costs and inefficiencies.

Furthermore, the company experienced significant increases in distribution expenses, including increased fuel, freight and warehousing costs, which adversely impacted operating expenses. The company continued to address the challenges in its supply chain as it navigates through the uncertainty of the current global supply chain environment.

  • Rodney C. Sacks – Monster Beverage Corp., Chairman and Co-Chief Executive Officer

Air Products & Chemicals – Prepared Remarks

You note the significant improvements over the years, and please also note that about three quarters of the recent decline is due to higher pass-through energy costs that increased our sales but not our profits. I have, as usual, included the slides number 7, 8, 9 and 10, to emphasize our continued commitment to the basic management principles that have guided our performance up to now and will continue to be the key principles that we will follow in the future.

Slides number 11, 12 and 13 represents our new sustainability commitments that we shared on Monday, July 25 at a conference call. The transcript of that call explains all of these slides in detail. So I do not plan to go through that again today. But I do want to reiterate that sustainability is our growth strategy at Air Products. And we are committed to improving our performance and enabling our customers to do the same. We are proud to have set additional ESG goals and increased our total capital expenditure for projects driving the energy transition to $15 billion or more.

  • Seifollah Ghasemi – Air Products & Chemicals, Inc., Chairman, President & Chief Executive Officer

Kellogg Q&A

Question – Pamela Kaufman: Got it, okay. And maybe if I could sneak one more in, can you provide an updated input cost inflation outlook for the year? Is the recent moderation in commodity prices expected to translate into more moderate inflation next year? Or are there offsets like higher labor cost, supply chain issues, that you would expect to keep inflation higher?

Answer: So we continue to look for gross inflation on input costs to be in the high-teens for the full year. In fact, if anything, it’s now towards the absolute top end of that range.

So incorporated in our guidance is an acceleration – a continued acceleration in inflation. I think while the spot rates have moved down in some commodities, we are largely hedged for 2022, so we’re not going to see any benefit in 2022.

It’s important also to note that while they moved down, the spot rates have moved down, they’re significantly higher. They continue to be higher than our averages for this year. And so, we’ll continue to see and plan for inflation into 2023.

  • Amit Banati – Kellogg Co., Chief Financial Officer & Senior Vice President

Molson Coors Beverage – Prepared Remarks

Underlying cost per hectoliter increased 11.5%, driven by cost inflation, including higher input and transportation costs, mix impact from premiumization and factored brands in EMEA and APAC as well as deleverage. This was partially offset by lower depreciation expense.

Underlying MG&A in the quarter increased 7.5%. G&A was up due to higher people-related cost including increased travel and entertainment, while marketing investment increased as we continued to provide strong commercial support behind our core brands and new innovation.

As a result of these factors, underlying net income before income taxes decreased 22.8%, which was at the favorable end of our outlook range of down 20% to 30%. While we discuss our business performance on a constant currency basis, on a reported basis, our second quarter results were negatively impacted by the strength of the US dollar. This impacted our reported net sales revenue by 280 basis points and our underlying income before income tax by 150 basis points in the quarter.

  • Tracey I. Joubert – Molson Coors Beverage Co., Chief Financial Officer

Thanks for reading this issue of the Earnings Recap blog for the Q2’22 Earnings season. Stay tuned for our final trending trending topics recap for the Q2 cycle next week. Feel free to review the prior iterations of our weekly blog for this quarter below:

(Visited 52 times, 1 visits today)
0 Shares:
You May Also Like