Welcome back to our weekly update on trending topics, macro trends and key management commentary highlighted from earnings call transcripts of S&P 500 companies for the Q4’21 earnings season. With Amazon, Parker-Hannifin, Eli Lilly, Merck, Starbucks and AbbVie among the larger companies that reported results last week, here are some trending topics that emerged during earnings updates from the week of January 31st, 2022:
- Investment Expenditure Benefits: Companies across the S&P 500 are reporting significant investment expenditures and detailing their investment allocation, as well as the benefits that the spend has generated in 2021. They are also sharing their investment expenditure outlook for 2022, with a primary focus on maintaining a robust product pipeline to drive improvements to their product & service portfolio and ultimately drive revenue.
- Tight Labor Market Pressures: Amazon reported Q4’21 earnings last week, highlighting a price increase for their U.S. Prime Membership attributed to labor costs and not being able to meet hiring demands. Other organizations across the sector are reporting tight labor costs and noting heightened demand and competition in the hiring market and how that is impacting their businesses.
- Earnings Q&A Analysis: We delved into analyst FAQ’s of S&P 500 companies who have reported 4Q 2021 earnings thus far. Read on for a detailed summary of the topics that are generating the most questions in the Pharmaceuticals and Biotechnology industries.
Companies across the S&P 500 are reporting significant investment expenditures and detailing their investment allocation, as well as the benefits that the spend has generated in 2021. They are also sharing their investment expenditure outlook for 2022, with a primary focus on maintaining a robust product pipeline to drive improvements to their product & service portfolio and ultimately drive revenue.
We expanded our margins in a highly inflationary environment. We levered well on the previous investments we made to optimize our cost position and executed on our productivity funnel. We maintain positive price/cost, albeit at a compressed level versus historic performance.
We remain diligent in controlling our discretionary spend and used our 80/20 principles to allocate resources to our most promising opportunities…We acquired ABEL Pumps and Airtech and made a collaborative investment in a technology company driving advancements in connected products. We also invested across the portfolio to support growth and productivity. We optimized our cost position within our Fluid & Metering Technologies segment through a consolidation of our Italy facilities and our energy businesses, and delivered on operational productivity projects across the segments.
- Eric D. Ashleman – IDEX Corp., President, Chief Executive Officer & Director
We’d expect $23 million to $26 million of the 2022 investment spend to directly drive incremental revenue growth at Cboe. We believe that approximately $10 million is needed for infrastructure enhancements to support and scale our business for greater levels of activity in the future. I think it’s important to spend some time illustrating how some of our recent investments have led to higher levels of revenue growth. Most recently, Cboe has invested purposely in Data and Access Solutions, European clearing and derivatives, and the expansion of core products set with initiatives like 24×5 and our planned launch of Nanos.
While we are by no means finished, we are already seeing attractive returns that contributed to today’s 41% year-over-year growth in EPS for the fourth quarter and record results for the full year. More specifically, in Data and Access Solutions.
- Brian N. Schell – Cboe Global Markets, Inc., Executive Vice President, Chief Financial Officer & Treasurer
We also leaned into incentivized customer acquisition tactics to a much greater extent than we ever have in our history. At the same time, we’ve continued to focus on and invest in areas that deepen our engagement with our customers, particularly as we continue to add new products and services.
To assess the effectiveness of these strategies, we look at the impact on customer behavior in the months that follow account creation, in essence looking at the ROI or return on that investment spend from their expected contribution to TPV, revenue and operating income. These programs are very successful in generating account creation, but overall, these customers have lower engagement and a higher propensity to churn and have not met our required level of return. This dynamic compounds over time as it requires increasing investment simply to keep minimally engaged users on our platform.
- John D. Rainey – PayPal Holdings, Inc., Chief Financial Officer & Executive Vice President-Global Customer Operations
We’ve highlighted our new five-year $14.3 billion customer investment plan. This translates to 7% annual rate base growth and supports the two key focus areas of our strategy, making our electric and gas systems safer and more reliable, and paving the way with clean energy future with net zero carbon and methane emissions. You will note that about 40% of our investment mix is aimed at renewable generation, grid modernization, and main and service replacement on our gas systems that support the clean energy transformation.
Furthermore, we continue to increase our investments in what our customers count on us for every single day, safe and reliable electric and natural gas systems. You will also see that we continue to plan conservatively and have ample upside in projects not factored in this plan, such as our IRP and Voluntary Green Pricing program.
- Garrick J. Rochow – CMS Energy Corp., President, Chief Executive Officer & Director
Amazon reported Q4’21 earnings last week, highlighting a price increase for their U.S. Prime Membership attributed to labor costs and not being able to meet hiring demands. Other organizations across the sector are reporting tight labor costs and noting heightened demand and competition in the hiring market and how that is impacting their businesses.
As we mentioned in the last earnings call, we did see more than $4 billion in costs from inflationary pressures and loss productivity and disruption in our operations. The inflation primarily relates to wage increases and incentives in our operations as well as higher pricing from third-party carriers supporting our fulfillment network. Loss productivity and network disruptions were driven primarily by labor capacity constraints due to challenges in staffing up our facilities for peak. This is driven by the very tight labor market in the second half of 2021 and more recently by the emergence of the Omicron variant. We do expect these cost challenges to persist into Q1, albeit adjusted for lower seasonal volumes relative to the fourth quarter.
- Brian T. Olsavsky – Amazon.com, Inc., Senior VP & Chief Financial Officer
It’s hard to know in the current environment when does adjustment mechanisms that we have stop. It’s an inflationary environment. We know that our suppliers are facing that inflation. They are passing on that inflation to us. There are large capital costs that they have incurred. There’re large capital costs we are incurring that are building into the cost structure. The labor costs have gone up quite significantly. The material costs have gone up quite significantly. And that hasn’t stemmed as of yet. And I don’t know if a year from now we might be in better times from an inflationary standpoint, but as long as that inflation is there and cost increases are passed on to us, we will pass them on as price increases.
- Ganesh Moorthy – Microchip Technology, Inc., President, Chief Executive Officer & Director
Adjusted operating expenses as a percentage of revenue increased 150 basis points year-over-year to 63%, with commodity-driven impacts from recycling brokerage rebates and fuel totaling 100 basis points. The remaining increase was related to higher labor costs as overtime increased due to the highest number of COVID-related absences we have seen, as well as some risk management costs.
- John J. Morris Jr. – Waste Management, Inc., Chief Operating Officer & Executive Vice President
First off, from an inflation perspective, you’re right, US inflation is probably the biggest portion of the inflation, but we have seen inflation in Mexico as well. Mexico, frankly, Jan 1, they increased minimum wage, entry level wage by 22%. And frankly, this is one of four minimum wage increases we’ve seen in Mexico since 2019. So, there’s issues outside of the US as well. But the majority of the inflation is in the US. And in our larger compressor plant, for example, we’ve seen wage inflation, particularly entry level wages, go up by 20% to 25% over a couple of steps. We’ve had to do that to remain competitive and have the labor availability to work down our backlog.
- Ram R. Krishnan – Emerson Electric Co., Chief Operating Officer & Executive Vice President
All of our under construction projects remain at or below our budgeted construction cost, but we continue to see increased and broad-based material shortages and delivery delays. In addition, we’ve begun to see some level of labor shortages in the market. Our construction team has done a great job navigating these challenges and minimizing the impact to schedules and the economics of our projects, but this is an area we’ll need to actively monitor throughout the year.
We expect these challenges to add 60 days or so to any new starts this year, and we expect a 30-day delay at our Val Vista and Westglenn projects. We’ve adjusted our construction schedules, as noted in the supplemental, to reflect the delay at these two properties.
- A. Bradley Hill – Mid-America Apartment Communities, Inc., Executive Vice President & Director-Multifamily Investing
Earnings Q&A Analysis
The data referenced below is based on Q4’s proprietary analysis performed on the Earnings Call Q&A sessions of S&P 500 organizations within the “Pharmaceuticals” sector (JNJ, CTLT, MRK, LLY), as well as the “Biotechnology” (VRTX, BIIB, ABBV, GILD) sector, that reported earnings last week. The charts below highlights the key topics that analyst queries focused on in these calls, displayed as a % of all questions asked.
As per the chart above, Tirzepatide (A glucagon-like-peptide 1 (GLP-1) receptor agonist, being developed by Eli Lilly and Company) was the key trending topic being addressed by Pharmaceuticals, covering 13% of all questions asked. Company-specific products and initiatives like KEYTRUDA, Donanemab, 483, Bettera and Islatravir came in 2nd place with about 25% of questions focused around that topic.
Additionally, the chart above displays the most frequently mentioned topics being addressed by companies in the Biotechnology sector. Queries on the Aesthetics business came in 1st with 5% of questions highlighting this topic, while company-specific products and initiatives like Magrolimab, ADUHELM, Sickle-Cell Research/Therapy, Trodelvy, VX-147, TROPICS-02 and Humira were most frequently mentioned by analysts during the earnings Q&A session (28% cumulative mentions).
Thanks for reading and stay tuned for next week’s updates!
Reference – in case you’re interested, please feel free to review the prior versions of this blog from earlier this quarter:Week of January 24th
Week of January 17th
Week of January 10th