Welcome to the latest edition of the Q2’22 Trending Earnings season weekly update on trending topics, macro trends and key management commentary. Last week, the Banking sector led the way in reporting within the S&P 500, sharing their thoughts on the current economic backdrop and how they plan to address inflationary headwinds. With Fifth Third Bancorp, Publicis Groupe, KeyCorp, Triumph Bancorp, SVB Financial and Regions Financial among some of the top financial institutions that reported earnings last week, here are some key trending topics that emerged during earnings updates over this period:
- Inflationary Pricing Pressures: As numerous organizations report on higher operating expenses and pricing pressures tied to supply chain disruption and labor among other factors, they are also reflecting on the business impact from elevated costs incurred due to an inflationary environment.
- Loan Growth Resilience: Prominent financial institutions within the S&P500 report on how they’ve benefitted from interest rate hikes, while also capitalizing on continuous loan growth that remains resilient in a volatile consumer economy
- Buyback Initiative: Even though the capital markets continue to experience great volatility, companies are continuing to commit to share repurchases, resulting in greater returns for investors and increases in the current value of their company’s shares.
As numerous organizations report on higher operating expenses and pricing pressures tied to supply chain disruption and labor among other factors, they are also reflecting on the business impact from elevated costs incurred due to an inflationary environment.
PPG Industries – Prepared Remarks
To quickly summarize the quarter, our sales performance was an all-time record, driven by continued realization of real-time price increases that are now fully offsetting total cost inflation.
Total cost inflation includes generational high commodity cost inflation, energy, logistics, and other employee-related cost inflation. In addition to pricing, our top and bottom lines continue to benefit from recent strategic acquisitions, including our traffic solutions business, which delivered a record quarter.
We achieved strong sales results despite softening consumer demand in Europe, longer than anticipated COVID-related disruptions in China, and unfavorable currency translation. While we included the European demand realities and our financial guidance we issued in April, the impact of the extended China restrictions and the currency translation was negative by about $0.10 per share versus our original guidance.
- Michael H. McGarry – PPG Industries, Inc., Chairman & Chief Executive Officer
Philip Morris International – Prepared Remarks
As we anticipated and indicated previously, less unfavorable timing of cigarette shipment also played a role, notably due to replenishment of duty free inventories. Our total organic net revenue per unit grew by plus 3% on a pro forma basis; and by plus 4.1% in total, despite the expected delay of HTU shipments to Japan, as we manage through global supply chain disruption. This incorporates combustible pricing of plus 3.5% on a pro forma basis; or almost plus 5%, excluding Indonesia.
Our Q2 adjusted operating income margin declined organically by 190 basis points on a pro forma basis and by 150 basis points in total. As expected and communicated in our Q1 quarterly results, this reflect four main factors. First, investment to further expand and match the speed of growth in our smoke-free portfolio. This includes the initial higher cost of ILUMA devices and HTUs, and the transitory dilutive margin impact of higher device sales, as we roll out ILUMA and replenish distribution channels as device constraints ease to support reaccelerating IQOS user growth.
Second, the impact of supply chain disruption, notably due to the war in Ukraine, including around $80 million in additional air freight expenses. Third, inflation of around 4% in our cost of goods, driven by the global pandemic recovery and exacerbated by the war, notably for certain direct materials, wages, energy, and transportation costs. And, last, a challenging prior-year margin comparison which included substantial cost of goods sold productivity saving.
- Emmanuel Andre Marie Babeau – Philip Morris International, Inc., Chief Financial Officer
American Express – Prepared Remarks
Of course, we are wary of the uncertainties in the current economic environment and the impact it’s having on our business. Historically low unemployment rates is a positive factor, and it’s helping to drive our strong credit metrics, and we continue to see no significant signs of stress in our consumer base.
Inflation is a bit of a mixed bag. It’s a modest contributor to our strong growth in volumes, but inflation when combined with low unemployment also puts pressure on operating costs. For example, like everyone else, we’re seeing intense competition for the best talent. But because our colleagues are a key driver of our success, we continue to invest in talent, which is having an impact on our operating expenses.
Looking forward, as I’ve emphasized many times before, we run the company for the long term, and our investment strategy is grounded in this principle. As we sit here today, we have an abundance of great opportunities, and we will continue to make our decisions with a longer-term view like we did during the pandemic. That means we will continue to invest at high levels in those areas that will drive sustainable growth, including our brand, value propositions, customers, colleagues, technology, and coverage.
- Stephen J. Squeri – American Express Co., Chairman & Chief Executive Officer
Travelers Companies Q&A
Question – Meyer Shields: Thanks. I guess, first question overall. I was hoping you could take us through how you’re thinking about medical inflation potentially lagging the really high overall inflation that we’ve seen broadly and how that impacts loss trend selection?
Answer: Yeah. Meyer, good morning. A couple of comments on medical inflation. So given that it impacts long-term lines like workers’ comp and GL, you can imagine, one we watch it very closely and two, as we’ve shared before, we take a very cautious approach to reserving those long-term lines.
Having said that, while medical inflation certainly isn’t immune from the broader inflationary environment, the recent trends on the whole continue to be, I’d say, relatively benign.
The other thing is, you got to make a distinction between medical inflation and the types of inflation that impact loss costs. So workers’ comp and GL, for example, are driven by a subset of medical costs. We’re treating workplace injuries. We’re treating accidents. We’re not treating chronic diseases. And those components of medical inflation that impact workers’ cost – workers’ comp and GL are increasing at lower than the headline medical CPI.
Also in terms of workers’ comp, for example, we’ve got fee schedules and other medical management practices that mitigate the types of inflation that could impact those loss costs. So there’s a little bit of a narrative on medical inflation. Hopefully, that’s responsible
- Alan D. Schnitzer – The Travelers Cos., Inc., Chairman & Chief Executive Officer
AT&T – Prepared Remarks
Last quarter, we shared that we’re experiencing additional government sector pressure related to the reallocation of spending priorities. This pressure tied to the timing and restructuring of government spending continued in 2Q. While we’re hopeful that some spending will return and the enterprise infrastructure solutions contract volumes and share gains will offset pricing reductions over time, we consider it prudent to reset expectations. It’s worth noting that approximately 20% of the year-over-year Business Wireline revenue declines in the second quarter were due to government spending impacts.
Lastly, we saw inflation in wholesale network access charges we incur to provide services to customers outside of our footprint due to contractual resets. This cost pressure resulted in more than 20% of the segment’s year-over-year EBITDA decline. This pressure will be managed through opportunities to operate more efficiently, movement of traffic to alternate providers, symmetrical wholesale pricing adjustments and natural product migration trends. Looking ahead, these developments only strengthen our resolve in executing our transformation, including actions to accelerate cost take-outs and simplify our product portfolio.
- John T. Stankey – AT&T, Inc., Chief Executive Officer & Director
Snap Q&A
Question – Ross Sandler: Great. Maybe we could start with the macro environment. You stated in the letter that 3Q is roughly flattish thus far, and that’s a pretty material slowdown from where you guys were 90 days ago, which I guess isn’t surprising given kind of what’s going on with the macro. So could you parse out for us which categories were slowing the most in your ad business?
And you called out in the letter some high growth sectors cutting back. I assume you mean venture-backed startup type companies that buy ads on Snap. How big of a revenue bucket is that for you guys? And how does the trajectory there compare to the larger kind of Fortune 500 marketers on your platform? Thanks a lot.
Answer: …As a result, as many industries and verticals have come under top line or input cost pressure, advertising spending has been amongst the first areas impacted. And to put a finer point on that, we’ve over time worked very hard to make it very easy for our clients to turn on advertising and to ramp their advertising and that’s been particularly good for our business as budgets have grown over time. But in a period where we’re seeing headwinds, it’s also very easy to turn off and very quick to turn off.
So we see this dynamic within our business as advertisers have lowered their budgets and their bids per action to reflect their current willingness to pay. So for example, in some industries where top line growth may remain strong, but the businesses are experiencing input cost pressure due to inflation, we’ve observed reduced marketing spending and lower bids per action. And in certain other high-growth sectors where businesses are seeing higher costs of capital, that’s further reflected in their campaign budgets and their level of bids per action.
- Derek Andersen – Snap, Inc., Chief Financial Officer
Prominent financial institutions within the S&P500 report on how they’ve benefitted from interest rate hikes, while also capitalizing on continuous loan growth that remains resilient in a volatile consumer economy.
Citizens Financial Group – Prepared Remarks
We expect NII to be up 5.5% to 7%, driven by the benefit of higher rates and solid loan growth. We are very focused on optimizing capital deployment…With respect to full year results, we expect PPNR to be in line with our April guidance. From a revenue standpoint, we are seeing higher NII given net interest margin reaching approximately 3.25% in the fourth quarter, driven by higher rates and loan growth within our 20% to 22% guidance range. This will be offset by lower fee revenue, largely in capital markets and mortgage. Expenses will be well controlled, which will result in full year operating leverage of at least 400 basis points and a fourth quarter efficiency ratio of sub 55%. We also expect the net charge-off ratio to come in lower than we guided in April given continued favorable trends.
To sum up on slide 17, this was a very solid quarter and we are optimistic about the outlook for the rest of 2022 and beyond. We are off to a running start in New York with the close of our two acquisitions there. And we expect significant benefits in our net interest income from the higher rate environment and strong commercial loan growth.
- John F. Woods – Citizens Financial Group, Inc. (Rhode Island), Vice Chairman & Chief Financial Officer
Comerica – Prepared Remarks
Today, we reported first quarter earnings of $261 million or $1.92 per share, an increase of 40% over the first quarter. Pre-tax, pre-provision net revenue was up 53%, and our ROE increased to 17%. These results reflect the rising rate environment, including prudent actions we have taken to lock in higher rates. In addition, we produced strong loan growth and generated a solid increase in fee income. While the overall economic environment is uncertain, overall, our customers are generally optimistic about the future. And while they may be seeing some pressure on their margins, they remain in good shape.
- Curtis Chatman Farmer – Comerica, Inc., Chairman, President & Chief Executive Officer
KeyCorp – Prepared Remarks
Importantly, we generated positive operating leverage compared to both the prior quarter and the prior year, and remain confident in our ability to do so for the full year. As Chris mentioned, pre-provision net revenues was up 14% from the first quarter, with a 6% increase in revenue and relatively stable expenses. Higher net interest income was driven by strong loan growth and the way we have positioned our balance sheet to benefit from higher interest rates. Our results also reflect our focus on strong expense management and our strong risk profile.
Turning to slide 6. Average loans for the quarter were $109 billion, up 8% from the year ago period and up 5% from the prior quarter. We continue to add and deepen client relationships across our franchise, which drove strong loan growth in both our commercial and consumer businesses. Commercial loans increased 4% from last quarter, reflecting broad-based growth across our industry verticals.
- Donald R. Kimble – KeyCorp, Vice-Chair, Chief Financial Officer, Chief Administrative Officer, Member-Executive Leadership Team & Member-Executive Council
State Street Corp. – Prepared Remarks
Lastly, in response to industry inflationary cost pressures, we’ve undergone a comprehensive analysis of our pricing across all our product areas. The result of this analysis has led to the decision to begin to adjust our client pricing upwards in certain areas of servicing, where the wage pressure is most acute and industry capacity is stretched. Ultimately, we believe these pricing changes will support the continued investment that allows us to best serve our clients.
- Eric W. Aboaf – State Street Corp., Vice Chairman & Chief Financial Officer
Wells Fargo & Co. – Prepared Remarks
As of yesterday, total deposit balances have remained stable since mid-May, despite the Fed rate hikes that occurred late in the second quarter.
As a result of our loan growth and deposit pricing discipline, net interest income increased 12% sequentially or 15% excluding the impact of PPP, Ginnie Mae, and the securities prepayment penalty income. As we indicated in the investor conference last month, fees were softer for the quarter, reflecting the impact of market conditions on debt capital markets, mortgage, and wealth management. I am, however, quite pleased with the strength and diversification of our underlying fee growth engines.
- Timothy N. Spence – Fifth Third Bancorp, President, Chief Executive Officer? & Director
Truist Financial – Prepared Remarks
As of yesterday, total deposit balances have remained stable since mid-May, despite the Fed rate hikes that occurred late in the second quarter.
As a result of our loan growth and deposit pricing discipline, net interest income increased 12% sequentially or 15% excluding the impact of PPP, Ginnie Mae, and the securities prepayment penalty income. As we indicated in the investor conference last month, fees were softer for the quarter, reflecting the impact of market conditions on debt capital markets, mortgage, and wealth management. I am, however, quite pleased with the strength and diversification of our underlying fee growth engines.
- William Henry Rogers Jr. – Truist Financial Corp., Chairman & Chief Executive Officer
Marsh & McLennan – Prepared Remarks
Adjusted operating income of $1.3 billion was the second quarter record and grew 8% on top of 24% in the second quarter of 2021. Adjusted EPS growth of 8% is notable, given our 33% growth in the second quarter of 2021, costs related to our strategic talent investments, and the rebound of expenses such as T&E. We also completed the highest level of quarterly share repurchases in over a decade, buying back $600 million of stock.
- Daniel S. Glaser – Marsh & McLennan Cos., Inc., President, Chief Executive Officer & Director
Kinder Morgan – Prepared Remarks
Finally, we return the excess cash to our investors in the form of a growing, well-covered dividend and share repurchases. So far this year, we have purchased about 16.1 million shares, while raising the dividend 3% year-over-year. As we look ahead, we have a $2.1 billion backlog, 75% of which is in low-carbon energy services; that’s natural gas, RNG, as well as renewable diesel and associated feedstocks in our products and terminals segment.
Again, all of these are attractive returns. And I want to emphasize, as we’ve said I think many times now, our investments in the energy transition businesses we have done without sacrificing our return criteria, a nice accomplishment.
- Steven J. Kean – Kinder Morgan, Inc., Chief Executive Officer & Director
Pool – Prepared Remarks
Also in May, the board increased our share buyback authorization to $600 million from the $404 million available under our previous share repurchase authorization. We have taken full advantage of the increased authorizations and completed $216 million in share repurchases during the quarter, acquiring 547,000 shares and bringing our year-to-date total share repurchases to $268 million. This is the highest ever commitment from the company on both the dollars invested in the annual period and the number of shares purchased.
- Melanie M. Housey Hart – Pool Corp., Vice President & Chief Financial Officer
Seagate Technology – Prepared Remarks
In fiscal 2022, we generated $1.3 billion in free cash flow, our highest level in four years. And maintained our commitment to returning cash to our shareholders funding $610 million in dividends and repurchasing 9% of our shares outstanding.
- William David Mosley – Seagate Technology Holdings Plc, Chief Executive Officer & Director
Baker Hughes Q&A
Question – Neil Mehta: Thank you, team. I know we’re the top of the hour, so I’ll be quick here with two questions. The first is, what is your latest thoughts around return of capital? The company did buy back stock in the second quarter at a higher price than where we are right now, but of course, you have to weigh that that return of capital with the slightly lower free cash flow outlook that you talked about on the call and economic uncertainty. So, any color there.
And then the second question is just related to thoughts on closing the sum of the parts gap and whether it makes sense to be a combined business or to ultimately break the businesses apart? So, two strategic questions. Thank you.
Answer: Yeah. Neil, I’d say, first of capital allocation. Look our intention to return 68% of our free cash flow back to shareholders through dividends and buybacks is unchanged. And during the first six months of the year, we have bought back $462 million of our shares. So, roughly about $75 per month. We talked about what the average price was, we did VWAP in the quarter, so happy about that. And I would say that we’ll probably continue roughly at the same level that you’ve seen here in the third quarter as the final tranche of the GE sell down happens. And then as we’ve said consistently, once that is done, we’ll take a step back and relook things. For free cash flow, we talked about the impact of Russia in the quarter, but fundamentally no real change to the free cash flow generation capabilities of the portfolio.
- Brian Worrell – Baker Hughes Co., Chief Financial Officer
Thanks for reading this issue of the Earnings Recap blog for the Q2’22 Earnings season. Stay tuned for our trending topics recap next week!
