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3 Top-Rated mREIT Stocks to Buy Amid Gloomy Backdrop
Yield curve inversion, deleveraging efforts, credit spread volatility and spread widening create profitability challenges for the Zacks REIT and Equity Trust industry. Amid this, STWD, ARI and LADR are poised to navigate industry hiccups. The Zacks REIT and Equity Trust industry has been affected by yield curve inversion due to high rates, credit spread volatility, spread widening, low market liquidity and limited fixed-income demand. This resulted in increased mortgage rates, significantly reducing originations. The mREIT industry is likely to witness book value erosion in the near term, as wider spreads in the Agency market affect asset prices.Nonetheless, the Fed’s decision to conclude its rate-hiking cycle in 2024 indicates easing earnings pressure for highly leveraged mREITs that have been facing rising funding costs. Moreover, Agency markets stand to recover from the interest rate relief. Hence, companies like Starwood Property Trust, Inc. STWD, Apollo Commercial Real Estate Finance ARI and Ladder Capital LADR are well-poised to navigate the market blues.About the IndustryThe Zacks REIT and Equity Trust industry comprises mortgage REITs, also known as mREITs. Industry participants invest in and originate mortgages and mortgage-backed securities (MBS), and provide mortgage credit for homeowners and businesses. Typically, these companies focus on either residential or commercial mortgage markets. Some invest in both markets through asset-backed securities. Agency securities are backed by the federal government, making it a safer bet and limiting credit risks. Such REITs also raise funds in the debt and equity markets through common and preferred equity, repurchase agreements, structured financing, convertible and long-term debt, and other credit facilities. The net interest margin (NIM), the spread between interest income on mortgage assets and securities held, as well as funding costs, is a key revenue metric for mREITs.What's Shaping the Future of the mREIT Industry?Conservative Approach to Impede Returns: The unfavorable scenario in MBS markets, restricted financial conditions and resultant negative fixed-income fund flows have put a strain on credit-risky assets. Hence, companies are making efforts to de-lever and de-risk their portfolios. This is likely to result in lower portfolio growth. Also, numerous companies have resorted to higher hedge ratios to reduce interest rate risks and extension risks. While such moves may seem prudent amid the ongoing uncertainties, those will impede mREITs’ earnings power in the future. We expect robust returns to remain elusive as companies prioritize risk and liquidity management over incremental returns, at least in the short term.Industry Resorts to Dividend Cuts as Book Values Erode: Volatility in the fixed-income markets, high interest rates, and the widening of the spread between the 30-year Agency MBS and 10-year treasury rate are affecting valuations of Agency mortgage-backed securities. Hence, mREITs will continue to see book value pressure in the upcoming period. High cost of funds is another headwind, and might reduce net interest spreads and profitability. This scenario has compelled companies to reduce the dividend to a level, wherein it can be covered by earnings. This may discourage mREIT investors and result in capital outflows from the industry, potentially resulting in greater book value declines for companies in the upcoming period.Purchase Volume Deterioration to Continue: The volatility in mortgage rates has created hurdles for any potential recovery in purchase originations, with buyers and sellers remaining on the sidelines. Housing affordability challenges have increased due to high mortgage rates, affecting seasonal buying trends. Amid this lackluster housing market, mortgage originations are likely to continue to be suppressed. This has caused operational and financial challenges for originators. It may also reduce the gain on sale margin and new investment activity.rZacks Industry Rank Indicates Dismal ProspectsThe Zacks REIT and Equity Trust industry is housed within the broader Zacks Finance sector. It carries a Zacks Industry Rank #169, which places it in the bottom 33% of more than 250 Zacks industries.The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates an underperformance in the near term. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.The industry’s positioning in the bottom 50% of the Zacks-ranked industries is an outcome of the disappointing earnings outlook for the constituent companies. Looking at the aggregate earnings estimate revisions, it appears that analysts are gradually losing confidence in this group's earnings growth potential. The industry’s current-year earnings estimates have moved 13.5% down since March 2023.Before we present a few stocks that you may want to consider for your portfolio, let us take a look at the industry’s recent stock-market performance and valuation picture.Industry Lags Sector and S&P 500The Zacks REIT and Equity Trust industry has lagged the broader Zacks Finance sector and the S&P 500 composite in the past year.The industry has slumped 7.7% in the above-mentioned period against the broader sector’s rise of 17.1%. Notably, the S&P Index has grown 25.7% over the past year.One-Year Price PerformanceImage Source: Zacks Investment ResearchIndustry's Current ValuationBased on the trailing 12-month price-to-book (P/BV), which is a commonly used multiple for valuing mREITs, the industry is currently trading at 0.82X compared with the S&P 500’s 6.25X. Over the past five years, the industry has traded as high as 1.12X, as low as 0.39X and at the median of 0.92X.Price-to-Book TTMImage Source: Zacks Investment Research3 mREIT Stocks Worth Betting OnApollo Commercial: The REIT focuses on originating, acquiring, investing in, and managing performing commercial mortgage loans, subordinate financings and other commercial real estate-related debt investments.The company’s $8.4-billion portfolio of loans is secured by properties located in the United States and European gateway cities. Moreover, 99% of lending book consists of floating-rate loans. This is a key tailwind for the company amid the current high interest rates.The Zacks Consensus Estimate for ARI’s 2024 earnings has been revised marginally downward over the past month to $1.32. Nonetheless, its 2024 earnings are expected to rise 21.1%. ARI has a market cap of $1.55 billion.The company has a Zacks Rank of 2 (Buy) at present. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here. Price and Consensus: ARIImage Source: Zacks Investment ResearchLadder Capital: This mREIT is a pre-eminent commercial real estate capital provider specializing in underwriting commercial real estate and offering flexible capital solutions within a sophisticated platform. It originates and invests in a diverse portfolio of commercial real estate and real estate-related assets, with a focus on senior secured assets.The company’s balance sheet is well-positioned to benefit from a high rate environment. Its lending book consists of significant floating-rate first mortgage loans. With this, its earnings seem positively correlated to high interest rates. We see Ladder Capital’s conservative capital structure and modest leverage as a favorable fit amid the ongoing market disruption. Also, its negligible losses on originated investments since 2008 underline an impressive credit record.In contrast to certain mREITs resorting to dividend cuts to navigate the choppy waters, LADR’s dividends seem well-covered, with 1.4X coverage based on Distributable EPS.The company currently carries a Zacks Rank #2. The Zacks Consensus Estimate for Ladder Capital’s 2024 earnings has been revised marginally upward in the past month. Moreover, its earnings are projected to grow 5.9% in 2025. LADR has a market cap of $1.36 billion.Price and Consensus: LADRImage Source: Zacks Investment ResearchStarwood Property: The Greenwich, CT-based company operates through four segments — Commercial and Residential Lending; Infrastructure Lending; Property; and Investing and Servicing.Starwood Property had a $17.57-billion diverse loan portfolio as of Dec 31, 2023. Multifamily loans, U.S. office loans and hotel loans accounted for 21%, 10% and 8% of its $27.3-billion asset base.STWD leverages its global multi-cylinder platform to make investments. Also, the company had primarily floating-rate assets, positioning it well to navigate the current environment.The Zacks Consensus Estimate for the company’s 2024 earnings has been revised 2.5% downward to $1.95 over the past week. Moreover, its 2024 NII is pegged at $2.09 billion, indicating a year-over-year uptick of 2.15%. Starwood Property carries a Zacks Rank of #2 at present. STWD has a market cap of $6.35 billion.Price and Consensus: STWDImage Source: Zacks Investment Research 4 Oil Stocks with Massive Upsides Global demand for oil is through the roof... and oil producers are struggling to keep up. So even though oil prices are well off their recent highs, you can expect big profits from the companies that supply the world with "black gold." Zacks Investment Research has just released an urgent special report to help you bank on this trend. In Oil Market on Fire, you'll discover 4 unexpected oil and gas stocks positioned for big gains in the coming weeks and months. You don't want to miss these recommendations. Download your free report now to see them.Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report STARWOOD PROPERTY TRUST, INC. (STWD): Free Stock Analysis Report Apollo Commercial Real Estate Finance (ARI): Free Stock Analysis Report Ladder Capital Corp (LADR): Free Stock Analysis ReportTo read this article on Zacks.com click here.Zacks Investment Research.....»»
Prudential (PRU) Up 0.4% Since Last Earnings Report: Can It Continue?
Prudential (PRU) reported earnings 30 days ago. What's next for the stock? We take a look at earnings estimates for some clues. A month has gone by since the last earnings report for Prudential (PRU). Shares have added about 0.4% in that time frame, underperforming the S&P 500.Will the recent positive trend continue leading up to its next earnings release, or is Prudential due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important drivers. Prudential’s Q4 Earnings Miss, Revenues Increase Y/YPrudential Financial, Inc. reported fourth-quarter 2023 adjusted operating income of $2.58 per share, which missed the Zacks Consensus Estimate by 3.3%. However, the bottom line rose 3.6% year over year. Total revenues of $13 billion increased 6.7% year over year. The increase in revenues was due to higher premiums and net investment income. However, it missed the Zacks Consensus Estimate by 0.3%Prudential's fourth-quarter results reflect improved expenses, less favorable underwriting results, net outflows, lower incentive fees and agency income, partially offset by higher asset management fees.Operational UpdateTotal benefits and expenses amounted to $11.7 billion, which increased 7.2% year over year in the fourth quarter. This improvement was due to higher insurance and annuity benefits, interest credited to policyholders' account balances, amortization of acquisition costs, general and administrative expenses. The figure was higher than our estimate of $11.4 billion.Quarterly Segment UpdatePrudential Global Investment Management’s (PGIM) adjusted operating income of $172 million in the reported quarter decreased 25.2% year over year. This decrease primarily reflects higher expenses and lower other related revenues, mainly due to lower incentive fees and agency income, partially offset by improved asset management fees. The figure was lower than our estimate of $200.6 million.PGIM’s assets under management of $1.298 trillion increased 6% year over year. The increase was due to equity market appreciation, partially offset by net outflows.The U.S. Businesses delivered an adjusted operating income of $988 million, which increased 39.1% year over year. The figure was higher than our estimate of $512.4 million. This increase primarily reflects higher net investment spread results and lower expenses, partially offset by lower net fee income.International Businesses’ adjusted operating income decreased 8.1% year over year to $748 million in the fourth quarter. This decrease primarily reflects less favorable underwriting results, including unfavorable policyholder behavior, partially offset by lower expenses.Corporate and Other incurred an adjusted operating loss of $656 million, wider than a loss of $525 million reported a year ago. This higher loss primarily reflects improved expenses, driven by a $200 million restructuring charge in the current quarter.Capital DeploymentPrudential managed to return capital to its shareholders in the form of share repurchases worth $250 million and dividends worth $458 million in the fourth quarter.Financial UpdatePRU exited the fourth quarter with cash and cash equivalents of $19.4 billion, which increased 12.5% from 2022-end. Total debt balance of $19.5 billion decreased 5.7% from 2022-end.As of Dec 31, 2023, Prudential’s assets under management and administration increased 6.3% year over year to $1.63 trillion.Adjusted book value per common share, a measure of the company’s net worth, was $96.64, which increased 2% year over year. Operating return on average equity was 10.9% in the fourth quarter, which improved 40 basis points year over year.Full-Year UpdateFor 2023, the adjusted operating income of Prudential was $11.62 per share. The bottom line increased 12.7% from the 2022 figure. The bottom line missed the Zacks Consensus Estimate by 12.8%. Revenues for the year totaled $50.9 billion, which decreased 15% from the 2022 level. The top line missed the Zacks Consensus Estimate by 6%.How Have Estimates Been Moving Since Then?It turns out, estimates review flatlined during the past month.VGM ScoresCurrently, Prudential has a poor Growth Score of F, however its Momentum Score is doing a lot better with a B. Charting a somewhat similar path, the stock was allocated a grade of A on the value side, putting it in the top quintile for this investment strategy.Overall, the stock has an aggregate VGM Score of C. If you aren't focused on one strategy, this score is the one you should be interested in.OutlookPrudential has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.Performance of an Industry PlayerPrudential belongs to the Zacks Insurance - Multi line industry. Another stock from the same industry, MetLife (MET), has gained 6% over the past month. More than a month has passed since the company reported results for the quarter ended December 2023.MetLife reported revenues of $18.72 billion in the last reported quarter, representing a year-over-year change of +18.2%. EPS of $1.93 for the same period compares with $1.55 a year ago.MetLife is expected to post earnings of $2.05 per share for the current quarter, representing a year-over-year change of +34.9%. Over the last 30 days, the Zacks Consensus Estimate has changed +0.5%.The overall direction and magnitude of estimate revisions translate into a Zacks Rank #4 (Sell) for MetLife. Also, the stock has a VGM Score of B. 4 Oil Stocks with Massive Upsides Global demand for oil is through the roof... and oil producers are struggling to keep up. So even though oil prices are well off their recent highs, you can expect big profits from the companies that supply the world with "black gold." Zacks Investment Research has just released an urgent special report to help you bank on this trend. In Oil Market on Fire, you'll discover 4 unexpected oil and gas stocks positioned for big gains in the coming weeks and months. You don't want to miss these recommendations. Download your free report now to see them.Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report Prudential Financial, Inc. (PRU): Free Stock Analysis Report MetLife, Inc. (MET): Free Stock Analysis ReportTo read this article on Zacks.com click here.Zacks Investment Research.....»»
Royal Bank of Canada (NYSE:RY) Q1 2024 Earnings Call Transcript
Royal Bank of Canada (NYSE:RY) Q1 2024 Earnings Call Transcript February 28, 2024 Royal Bank of Canada beats earnings expectations. Reported EPS is $2.85, expectations were $2.06. Royal Bank of Canada isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here). Operator: Good […] Royal Bank of Canada (NYSE:RY) Q1 2024 Earnings Call Transcript February 28, 2024 Royal Bank of Canada beats earnings expectations. Reported EPS is $2.85, expectations were $2.06. Royal Bank of Canada isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here). Operator: Good morning, ladies and gentlemen. Welcome to RBC’s Conference Call for the First Quarter 2024 Financial Results. Please be advised that this call is being recorded. I would now like to turn the meeting over to Asim Imran, Head of Investor Relations. Please go ahead, Mr. Imran. Asim Imran: Thank you, and good morning, everyone. Speaking today will be Dave McKay, President & Chief Executive Officer; Nadine Ahn, Chief Financial Officer; and Graeme Hepworth, Chief Risk Officer. Also joining us today for your questions, Neil McLaughlin, Group Head, Personal & Commercial Banking; Doug Guzman, Group Head, Wealth Management & Insurance; and Derek Neldner, Group Head, Capital Markets. As noted on Slide 1, our comments may contain forward-looking statements, which involve assumptions, and have inherent risks and uncertainties. Actual results could differ materially. I would also remind listeners that the bank assesses its performance on a reported and adjusted basis, and considers both to be useful in assessing underlying business performance. To give everyone a chance to ask questions, we ask that you limit your questions, and then re-queue. With that, I’ll turn it over to Dave. Dave McKay: Thanks, Asim. Good morning, and thank you for joining us today. Today, we reported first quarter earnings of $3.6 billion, or adjusted earnings of $4.1 billion. Our results benefited from higher fee-based revenue in Wealth Management, including strong flows in our advisory businesses and solid performance in asset management. Broad-based client-driven volume growth in Canadian Banking more than offset escalating competitive growth — in Canadian Banking more than offset escalating competitive pricing pressures. Capital Markets reported strong pre-provision pre-tax earnings of $1.3 billion as we continued to gain market share. Importantly, core expense growth continued to decelerate, demonstrating our ongoing discipline, which Nadine will speak to shortly. The strength of our diversified earnings stream more than mitigated the increase in provisions from credit loss in our commercial real estate and Canadian unsecured retail portfolios. As Graeme will speak to later, we expect PCL and impaired loans to remain within the guidance we provided last quarter. We remain confident in our risk management framework, including our prudent and consistent underwriting and our rigorous monitoring and stress testing processes. Furthermore, our strong capital position and prudent allowances position us well for any further deterioration in credit quality. We added $133 million of PCL on performing loans this quarter, increasing our ratio of allowance for credit losses to 64 basis points, up 11 basis points from pre-pandemic levels. The strength of our balance sheet is further underscored by our robust CET1 ratio of 14.9%, up 220 basis points from last year. Additionally, our liquidity coverage ratio was 132% this quarter, translating to a $94 billion surplus above the regulatory minimum. Our balance sheet strength, diversified business model, and franchise scale position us to continue delivering value for our clients and shareholders through a wide range of monetary and economic scenarios. Slowing inflation suggests central banks are close to achieving the soft landing they’ve been aiming for. However, trends are diverging across geographies. Canada is lagging peers in growth in GDP per capita, partly due to a slowdown in spending on discretionary goods and services, including on an inflation adjusted basis. RBC’s card transaction data suggests average growth in our non-auto retail sales has continued to moderate. Slowing consumer demand and rising unemployment points to a softening in Canadian economic backdrop. In contrast, the U.S. is showing continued strength in labor markets, above-average wage growth, a resilient U.S. consumer, and higher corporate profits, suggesting the effective federal funds rate may remain higher for slightly longer. Nonetheless, we expect more sustained decline in inflation measures to push both U.S. and Canadian central banks to follow recent global examples and pivot to a more dovish stance this year. Bifurcation and trends suggest the Bank of Canada should move on rate cuts earlier than the U.S. Fed. The uncertainty around monetary policy points to 2024 being somewhat a transitional year as markets consider the impact of interest rate trajectories and rising geopolitical tensions on equity markets, credit quality, capital market revenues, and client preferences. With this context, I will now speak to Q1 revenue growth drivers and an outlook across our franchises, where we continue to gain share in key areas. Starting in Canadian Banking, where we continue to benefit from our long-term scale advantages, we reported strong growth in our high-quality deposit franchise, which is the foundation for building premium loan growth and deepening existing client relationships. Q1 2024 was a record quarter with net new-to-bank clients up 29% year-over-year due to our distribution strength, technology investments, and innovative client value propositions, including RBC Vantage and partnerships with Canadian industry leaders. With interest rates remaining higher than pre-pandemic levels, we continue to support our clients’ preference for shifting their assets into term deposits, especially within the higher net worth cohorts. Commercial loan growth remains strong, up 14% from last year with balanced growth across sectors, particularly amongst our existing clients. While our clients remain optimistic, we expect lower CapEx investments in anticipation of slower economic growth. Growth in our leading Canadian credit card franchise was up 13% year-over-year as higher revolver balances significantly outpaced increases in transactor balances. In contrast, mortgage growth declined to 3% year-over-year as a strong retention rate offset continued pressure on home prices. While we anticipate some continued recovery of housing resell activity, we expect mortgage growth to remain in the low-single digits through 2024, as we remain disciplined on pricing and spreads amidst intense competition. Turning to our Wealth Management segment, where combined assets under administration across our Canadian, U.S., and international wealth advisory businesses have grown to nearly $1.6 trillion. Assets under administration in our leading Canadian Wealth Management business were up 12% from last year, increasing to a record level of nearly $600 billion. Assets under administration in our U.S. Wealth Management platform, including the sixth largest wealth advisor in the U.S., increased 12% year-over-year to nearly US$600 billion or over C$800 billion, which is a record. While higher markets are a key driver of client asset growth, our Canadian/U.S. wealth advisory businesses generated $16 billion and $12 billion of net sales, respectively, over the last 12 months. We believe there’s significant opportunity for continued growth and we will continue to invest in advisor recruitment across North America. In contrast, net interest income in our Wealth Management businesses were impacted by similar trends seen in Canadian Banking, namely a shift from deposits into higher-yielding products. RBC Global Asset Management’s AUM increased 6% from last year, benefiting from higher markets. Canadian retail net outflows this quarter were less than 1% of opening AUM, outperforming the industry, which has faced a challenging backdrop over the last year. We are confident that our leading franchises are well positioned to capture money in motion back into investment products, following a shift in the interest rate outlook and risk sentiment, particularly when it comes to fixed income strategies, which is one of our core strengths. There are early signs of these trends with RBC’s retail long-term net flows turning positive in January for the first time since February last year, led by fixed income mandates. Furthermore, RBC GAM delivered over $4 billion of long-term institutional flows this quarter, which is a testament to our deep client relationships. Demand for ETF products was also strong as RBC iShares alliance led the industry with long-term net sales of $5 billion for calendar Q4. Capital Markets reported pre-tax pre-provision earnings of $1.3 billion, the second highest since 2021 and well above our $1.1 billion run rate guidance. Corporate investment banking revenues were up 3% from last year. Our investment banking business ranked eighth globally in the first quarter with a market share of 2.3%, up 30 basis points from where we ended fiscal 2023, with share gains across all our products. We are benefiting from the successful execution of past strategic investments and talent, combined with a focus on increasing banker productivity. Our pipeline remains healthy, and we’re engaging in increased dialogue with corporate clients. Furthermore, we expect private equity activity to ramp up as sponsors sit on significant levels of uninvested client funds. That said, due to evolving market conditions, including this uncertain macro and regulatory environment, it’s hard to predict when deal completions will sustainably rebuild. Global Markets also had a solid quarter. While overall revenues were down compared to a very strong prior-year quarter, we grew origination and secondary client volumes consistent with our strategic focus for the business. We also did not experience any trading loss days this quarter, a reflection of the strong market risk management culture. We also recently launched our U.S. cash management business, and we will look to provide a progress update at the end of this year on the value provided to both clients and to RBC’s funding profile. I will now speak to two areas of interest, namely our planned acquisition of HSBC Canada and the recent developments at City National Bank in the U.S. Starting on Slide 7, we are excited to have received approval from the finance minister and we have targeted a March 28th close. Following this close, we expect our CET1 ratio to be approximately 12.5% by the end of the quarter. With this transaction, RBC will be better positioned to be the bank of choice for commercial clients with international needs, affluent clients needing Wealth Management capabilities, and newcomers to Canada. Furthermore, we look to deepen existing client relationships and build new client relationships. We continue to expect approximately $740 million of expense synergies. And given the nature of the concurrent financial and operational close and convert transaction, we expect nearly 25% of the expense synergies to be realized in the second half of 2024 and 60% by the end of year one of the transaction, largely related to shared service and IT systems. Given the timing of the close, we now expect nearly 80% of the cumulative expense synergies to be realized in 2025, with the remainder in the first half of 2026. We expect to provide further updates on the earnings power of the combined platform on our Q2 earnings call, after the expected close. On to Slide 8. City National has grown considerably since we acquired the bank in early 2016. One of our top priorities over the last couple of years has been to execute against extensive and detailed action plans, including investing in the appropriate risk and control infrastructure, as well as new leadership. Looking forward, our focus at City National is to deliver a more normalized level of net income in 2025, including costs associated with an enhanced operational infrastructure. This includes optimizing its balance sheet to enhance spreads, enhancing its funding profile, creating efficiencies, and redeploying capital to focus on multi-product clients. To close, we’ve had a strong start to fiscal 2024 as we continue to execute on our client-focused strategies, including welcoming new clients and colleagues in a few weeks’ time from the planned acquisition of HSBC Canada. Amidst ongoing macroeconomic uncertainty, our balance sheet remains strong. At the same time, our diversified revenue streams across businesses and geographies, and prudent cost control position as well to continue driving a premium ROE and organic capital generation throughout the economic cycle. Nadine, over to you. Nadine Ahn: Thanks, Dave, and good morning, everyone. Starting on Slide 10, we reported earnings per share of $2.50 this quarter. Adjusted diluted earnings per share of $2.85 was down 6% from last year. Results benefited from higher rates, solid volume growth, increased non-interest revenue, and a lower effective tax rate. These tailwinds, however, were more than offset by higher expenses, including the cost of the FDIC special assessment, increases in impaired PCL were also a headwind as provisions continued to trend upwards, reflecting the impact of higher interest rates and rising unemployment. I will first highlight the continued strength of our balance sheet before focusing on more detailed drivers of our earnings. Starting with our strong capital ratios on Slide 11. Our CET1 ratio improved to 14.9%, up 40 basis points from last quarter, mainly reflecting our strong internal capital generation net of dividends, unrealized gains on OCI securities, and benefits of share issuances under the DRIP. This was partly offset by a modest impact from net regulatory changes, including the impact of IFRS 17. RWA growth, excluding FX, was largely flat this quarter. Higher RWA, primarily driven by operational risk from continued revenue growth, as well as unfavorable wholesale credit migration, was offset by lower market risk RWA in capital markets and net regulatory changes. Going forward, the close of the planned HSBC Canada transaction is expected to reduce the CET1 ratio by approximately 250 basis points. In light of our projected capital position, we have elected to cease the current 2% discount on our DRIP following the delivery of our February 23rd dividend. Furthermore, we do not expect Basel III floors to be binding in 2024. The revenue and expense guidance provided in my remarks hereafter do not incorporate impact from the planned acquisition of HSBC Canada, which we’ll provide updates on next quarter. Moving to Slide 12. All-bank net interest income was up 2% year-over-year or largely flat excluding trading revenue. These results benefited from solid volume growth in Canadian Banking, partly offset by lower treasury services revenue in Capital Markets. On a sequential basis, all-bank NIM, excluding trading revenue was down 7 basis points. The prior quarter included a favorable accounting adjustment in corporate support, which increased NII and lowered other income. This adjustment was reversed in the current quarter. Excluding this quarter-over-quarter adjustment, since Q3 2023, NIM excluding trading revenue is up 5 basis points. Canadian Banking NIM was up 1 basis point from last quarter. As expected, the embedded advantages of our structural low beta core personal banking deposit franchise continued to come through this quarter, underpinned by the latent benefit of recent interest rate hikes. We also continued to benefit from changes in asset mix, largely reflecting strong growth in credit card balances. These benefits were partly offset by intense competition for term deposits. Quarterly movements in Canadian Banking NIM will be impacted by the continued benefit from our core deposit franchise as well as ongoing pricing competition for deposits. Furthermore, there is added uncertainty from the impact of other factors such as interest rate movements, the shape of the yield curve, and changes in balance sheet mix. Turning to City National. NIM was up 20 basis points from last quarter. The increase mainly reflected the full quarter benefit of last quarter’s intercompany sale of certain City National debt securities, partly offsetting corporate support as well as lower levels of FHLB funding. Higher deposit pricing continued to be a headwind this quarter. Moving to Slide 13. Noninterest expenses were up 10% from last year. Expenses were up 6% adjusting for acquisition and integration-related costs to HSBC Canada. Excluding the cost of the FDIC special assessment as well as macro-driven factors such as FX and share-based compensation, core expense growth decelerated to 2% year-over-year, reflecting our ongoing focus on cost reduction. Core year-over-year expense growth was driven by higher base salaries, higher pension and benefits expenses, and increased professional fees, including ongoing investments to enhance City National’s operational infrastructure. Looking forward, we continue to expect all-bank core expense growth to come in the low- to mid-single-digit range in 2024, with revenue related expenses such as variable compensation fluctuating within this range, commensurate with market activity levels. Results this quarter benefited from a lower adjusted effective tax rate of 18.3%, which was down 180 basis points from last year, reflecting favorable changes in earnings mix. Looking forward, we expect the non-TEB effective tax rate to be in the 19% to 21% range for the remainder of the year. Moving to our segment performance, beginning on Slide 14. Personal & Commercial Banking reported earnings of $2.1 billion. Canadian Banking pre-provision pre-tax earnings were up 4% year-over-year. Canadian Banking net interest income was up 5% from last year, mainly reflecting solid volume growth. Noninterest income was up 4% year-over-year as higher client activity contributed to increased service revenue and credit fees. Operating leverage was negative 1% for the quarter, partly reflecting higher marketing costs associated with new client acquisition campaigns. For the full year, we now expect Canadian Banking operating leverage to come at the higher end of our historical 1% to 2% target. Turning to Slide 15. Wealth Management earnings were down 27% from last year, including the $115 million after-tax cost of the FDIC special assessment incurred in the quarter. The segment was also impacted by the partial sale of RBC Investor Services operations. The underlying performance of our Wealth Management advisory and asset management business benefited from higher fee-based client assets across each of our businesses, largely reflecting the benefit from market appreciation and net sales. Higher transactional revenue in Canadian Wealth Management and stronger RBC GAM performance fees also contributed. These factors were partly offset by lower net interest income in our Wealth Management businesses, reflecting lower deposit volumes and spreads as well as lower sweep deposit revenue in U.S. Wealth Management. The segment efficiency ratio increased to 83%, largely due to higher expenses at City National, including the cost of the FDIC special assessment and the ongoing investments in its operational infrastructure. Turning to Slide 16. Capital Markets results were robust this quarter and generated pre-provision pre-tax earnings of $1.3 billion, which more than offset the impact of higher PCL. Corporate & Investment banking revenue was up 3% from last year due to higher securitization financing revenue, improved margins in our transaction banking business, and higher M&A activity across most regions. Global Markets revenue was down 8% from a strong prior year, which benefited from more favorable market conditions and stronger client activity in equity trading. Turning to Insurance on Slide 17. This quarter, we adopted the IFRS 17 accounting standard. Net income was $220 million, driven by favorable investment performance as we repositioned our portfolio for the transition to IFRS 17. The current period also benefited from favorable market conditions. It is important to note that the results in the prior period are not fully comparable as we were not managing our asset and liability portfolios under IFRS 17. Going forward, we anticipate net insurance service result will be more stable under IFRS 17. However, we do know that net investment result was outsized this quarter, and do not expect that magnitude of performance to persist. We anticipate net income growth to be mid-single digits in 2024 off of restated 2023 IFRS 17 levels. To conclude, we generated a mid-teen ROE while holding excess capital related to the planned acquisition of HSBC Canada. Our strong results were underpinned by the depth of our leading Canadian deposit franchise and the strong positioning of our Wealth Management and Capital Markets franchises. Our ongoing progress on cost containment was another key contributor to our performance this quarter. With that, I’ll turn it over to Graeme. Graeme Hepworth: Great. Thank you, Nadine, and good morning, everyone. Starting on Slide 19, I’ll discuss our allowances in the context of the macroeconomic environment. As Dave outlined earlier, the market continues to gain confidence that interest rates have peaked for the current cycle, and the probability of a hard landing for the economy is decreasing. Notwithstanding an improving macroeconomic outlook, we continue to see credit outcomes deteriorating as the lagging impact of interest rate increases takes hold for more clients. In our retail portfolio, delinquencies, insolvencies, and impairments continue to increase, with delinquencies and impairments above pre-pandemic levels. In our wholesale portfolio, we continue to see growth in watchlist exposure, net credit downgrades, and more names being transferred to our special loans team. As a result, and as Dave noted earlier, we added $133 million of provisions on performing loans this quarter. This marks the seventh consecutive quarter where we added reserves on performing loans, translating into a $1.2 billion or 37% increase in our ACL on performing loans over this period. Our provisioning of the performing loans has been consistent with the expected outcomes of a traditional credit cycle. When we started adding reserves in the second half of 2022, provisions were largely driven by a deteriorating macroeconomic outlook, while credit performance remained strong. Through 2023, reserve additions reflected further deterioration in macroeconomic signals and, to a lesser extent, deteriorating credit performance, as clients started to feel the impact of higher rates and slow economic growth. This quarter, an improving macroeconomic outlook drove releases of provisions. However, these were more than offset by reserve additions or deteriorating credit performance. This quarter’s provisions on performing loans were primarily in Canadian Banking, driven by increasing delinquencies and a lower Canadian housing price forecast, partially offset by a release in Wealth Management, reflecting the strength in the U.S. macroeconomic outlook. As Dave highlighted earlier, we remain prudently provisioned, [noting our] (ph) total ACL loans of $5.6 billion is over 2.5 times our PCL and impaired loans over the last 12 months. Moving to Slide 20, provisions on impaired loans were up $146 million or 6 basis points relative to last quarter, with higher provisions in Canadian Banking and Capital Markets. In our Canadian Banking commercial portfolio, PCL and impaired loans of 45 basis points increased by 20 basis points compared to last quarter, and was above pre-pandemic levels. This quarter, we took a large provision on the loan in the automotive sector, where borrowing has been impacted by lower demand for trucking post-pandemic. In our Canadian Banking retail portfolio, provisions on impaired loans were higher across all products, led by credit cards. The increases in unemployment rates we observed through 2023, and the impact of higher interest rates are now translating into losses. The Canadian Banking retail Stage 3 PCL ratio of 29 basis points has largely returned to our average historical loss rate of 30 basis points. In Capital Markets and Wealth Management, over 80% of our PCL and impaired loans this quarter was in the commercial real estate sector, which I’ll discuss further in a moment. Moving to Slide 21, gross impaired loans were up $494 million or 6 basis points this quarter, and our GIL ratio of 48 basis points is now slightly above pre-pandemic levels. New formations were also higher this quarter, primarily in Canadian Banking. In our retail portfolio, new formations were higher across all products, consistent with the trends we’ve observed in delinquencies and insolvencies. In our wholesale portfolio, higher new formations were driven by the impairment of the loan in the automotive sector that I noted earlier, as well as higher new formations in the commercial real estate sector. Given the ongoing headwinds in commercial real estate, as well as the impairments and provisions we took in the sector this quarter, we provided some context on our exposure on Slide 22. Our commercial real estate exposure represents less than 10% of our total loans and acceptances, as originated to sound lending standards. Following a prolonged period of strength in the sector, we have seen impairments and losses increase since the start of the current rate hiking cycle in Q3 of 2022. However, these higher formations and losses have been consistent with our expectations and well within our risk appetite. Since the start of the rate hiking cycle, our cumulative new formations of impaired loans in the sector represent less than 0.2% of our total loans and acceptances, and our cumulative PCL and impaired loans represents just 1% of our pre-provision pre-tax earnings, demonstrating the benefit and strength of our diversified business model. Additionally, we have been prudently and consistently increasing our allowances for the credit losses in the sector. Our downside provisioning scenarios account for a reduction in commercial real estate prices of 25% to 40%. As a result, our ACL ratio on performing commercial real estate loans is approximately 3 times higher than pre-pandemic levels, and our reserves are significantly higher in the U.S., where we’ve seen the large majority of impairments and losses to-date. To conclude, while credit performance was weaker this quarter, it has trended in line with the guidance I provided last quarter. We continue to prudently build reserves on performing loans, while provisions on impaired loans of 31 basis points have returned to historical averages. Moving forward, credit outcomes will continue to be dependent on the magnitude of changes in unemployment rates, the direction and magnitude of changes in interest rates, and residential and commercial real estate prices. As always, we continue to proactively manage risk through the cycle, and we remain well capitalized to withstand plausible yet more severe macroeconomic outcomes. And with that, operator, let’s open the lines for Q&A. See also Real Estate Investing For Beginners: 11 Best Stocks To Buy and Top 20 E-Commerce Companies in the World. Q&A Session Follow Royal Bank Canada Montreal Que (NYSE:RY) Follow Royal Bank Canada Montreal Que (NYSE:RY) or Subscribe with Google We may use your email to send marketing emails about our services. Click here to read our privacy policy. Operator: Thank you. [Operator Instructions] Our first question is from Meny Grauman from Scotiabank. Please go ahead. Meny Grauman: Hi, good morning. Just maybe a question for Graeme to start off. Just in terms of impaired PCL ratio came in higher than expected. We’re seeing that trend at some peers as well. It looks like definitely there’s more stress in the unsecured book across the sector. From your commentary, it sounded like it’s basically in line with your expectations. But I want to clarify that if there is anything that you’re seeing that is different than what you would have expected when you spoke to us in Q4? Graeme Hepworth: Yeah. Thanks, Meny, for the question. In terms of what we saw kind of play out this quarter, maybe I always divide it kind of into wholesale and retail. On the wholesale this quarter, we probably were on the elevated side of what we were expecting in a quarter, but wholesale tends to be lumpy quarter to quarter. We had three specific names, two in the commercial real estate sector and one in the automotive where we took fairly significant reserves. So, those three names themselves accounted for quite a significant tick up in the quarter-on-quarter Stage 3 PCL. We expect wholesale will kind of continue at more elevated levels, but that probably doesn’t persist at this level quarter to quarter. On the retail side, again, it was pretty broad based. I think we’d indicated in previous meetings that we do expect retail to tick up through the year and we saw that kind of coming in play this quarter. Much of what we saw pull-through is what was happening in 2023, the rising rate environment and some of the increase in unemployment was now flowing through into the retail side as well as insolvencies were ticking up. And so that is playing out in products like we expected like cards, and then to a lesser extent, but it is starting to flow through into products like mortgage as well. So, in aggregate, probably a little bit on the higher side than we would have planned for, but I think in the aggregate for what we’re expecting in 2024, reasonably in line. Meny Grauman: And just TransUnion recently published a report highlighting fraud as being a particularly big issue in Canada. I’m wondering how much of a driver is fraud in your impaired performance. Do you see that as a big issue or growing issue maybe? Graeme Hepworth: From a PCL perspective, these would be fairly peer credit numbers, not fraud numbers, if you will. Certainly, fraud is a risk vector that we’re very focused on and we do invest a lot to mitigate those risks to the bank, but that wouldn’t be what’s showing up in PCL, no. Meny Grauman: And then finally just in terms of… Asim Imran: Meny, we’ll go to — we said one question. So, can you re-queue? Thanks. Meny Grauman: Sure. Asim Imran: We’ll get to you. Operator: Thank you. Our following question is from Ebrahim Poonawala from Bank of America. Please go ahead. Ebrahim Poonawala: Good morning. I guess maybe just, Graeme, sticking with you on credit, you mentioned two things around PCL being sensitive to the outlook for unemployment rate. Tell us what you are assuming if even looking out into ’25 where you think unemployment rate goes, higher or lower in ’25? And then, just the importance of the yield curve staying where it is, does a five year at 3.5% plus still create pressure on PCLs and impaired PCLs as we look into next year? Thank you. Graeme Hepworth: Yeah. Thanks, Ebrahim. So, I think as we look forward, I think you hit on some of the key variables. I think some of the key drivers that we’re focused on and that will drive kind of our view of how credit losses will play out in the coming year and into 2025 really are, as you said, the trajectory of unemployment, the kind of trajectory of rates and I would maybe add the kind of the third big one into that is valuations, particularly around HPI and commercial real estate prices. Our current forecast on unemployment is we have that ticking up fairly significantly from where we are now to about 6.6% mid-year 2024. That’s — we’ll see if that plays out like that. Certainly, in kind of recent months here, unemployment in Canada has kind of proven to be a little bit more resilient than we’d anticipated. But then, as to how that plays out in PCL, you think about something like unemployment, there’s definitely a lag factor that comes on the back of that. And so that’s kind of take that — take the pressure of interest rates and the refinancing cycle that’ll play out. So, either way, certainly on the retail side, we do expect that the Stage 3 credit losses will kind of continue to build and kind of peak out more as we get into the latter half of 2024 into the earlier half of 2025. Again, on the wholesale side, we’re seeing some of the benefit of rates maybe coming into play earlier that maybe plays out a bit sooner, particularly on the large corporate side. We’ve been running at more elevated kind of Stage 3 losses there. So, I don’t say we would trend that the same way. But on the wholesale side, on the smaller side, say, under that small business under $10 million commercial is where we would expect to see kind of similar pressures and similar building overall. So that’s kind of the total picture there, Ebrahim. Again, I think you hit some of the key factors in terms of how we see them and kind of the timeline of how we see that playing out a little bit. Ebrahim Poonawala: Got it. And as a follow-up, maybe Dave for you, it looks like CNB is back on track in terms of the actions you outlined and what you’ve already done. Just give us a sense of, I think in January you talked about appetite for Wealth Management, commercial M&A in the U.S. Just where we are in terms of growth strategy? There’s a lot of disruption going in the U.S. across capital markets wealth. Just — are we playing offense? What the thought process there is? Thank you. Dave McKay: Yeah. certainly, I think our focus is on profitability at City National. I think there’s a real opportunity for us to continue to operate this business and build this business out and make more money doing it even with the existing balance sheet. We’ll continue to talk about that. I think to continue to grow sustainably in the U.S., you need deposits. So, our focus is on growing deposits. We have an 85% loan-to-deposit ratio, which is good. But to continue to grow, we want to maintain that and lower that if we can. So, it’s very much from a product perspective, push perspective, you’ll see good deposit growth, which will add to profitability. We are well positioned with our Wealth Management franchise to capture the move out of treasury bills into equities and into investments. So, I think our very strong wealth platform will capture that flow of business, as well as continuing to grow our advisor base. So, we’re still adding teams. We’re still being very successful in growth and productivity per advisor, expanding the product line within the wealth platform. All those are strong growth drivers for us. And on the Capital Markets side, we continue to enhance our team, grow our team, compete very well. You saw the market share we gained on a fee basis up to 8% in Q1. So, very, very strong organic opportunities to grow, very strong profitability enhancements that will be a nice tailwind for us that we’re happy about. And when it comes to M&A, to the last part of your question, we are continuing to think through how do we scale each of our franchises, notwithstanding we would very unlikely to make an acquisition in the Capital Market space. But as I said before, really focused on the wealth space and the commercial space over time. Nothing imminent, obviously. We’re focused on profitability and strengthening our platform, but we continue to think through that space. We rebuild our capital from HSBC acquisition, which we gave you some more color on this morning. And therefore, we think we’re well positioned to continue to grow our U.S. franchise from a scale and profitability perspective. So, no change in strategy and always kind of focused on what’s the right play over time, but nothing imminent as well. Ebrahim Poonawala: Got it. Thank you, Dave. Operator: Thank you. Our following question is from Doug Young from Desjardins Capital Markets. Please go ahead. Doug Young: Hi, good morning. Just on your Slide 7, HSBC Canada, obviously, you look at Q4 results for that business and they deteriorated a bit. Just trying to see if — and it doesn’t look like your accretion or cost synergy expectations has changed. I know you’re going to get more of an update with Q2, but just talk about why you’re still confident with that. And then on the integration timeline, thanks for this. Figured the expense reductions would be more — I guess would be faster given it’s an end market, lots of overlap. Just I’m wondering if there’s anything I should be thinking about or anything I’m missing on that front. Neil McLaughlin: Thanks for the question, Doug. It’s Neil. Yeah, in terms of the cost synergies, we still remain really confident in terms of the $740 million of cost synergies. The closing convert is part of why we have so much confidence around it. The first synergies that will come out will really be technology related. So, those will be towards the front end. In terms of the timing, the timing delays, we really haven’t really, I’d say, changed the sort of the calendar timing of when the cumulative cost synergies will roll in. It’s really from the delay we had in terms of regulatory approval and then having to slide back that closing convert date. So that’s really the driver of the timing. Doug Young: Okay. And then, if I could just follow-up? Dave, on City National, it was obviously profitable. Excluding FDIC charges, I think it was $88 million. The NIM was up. I know you’re investing a lot. You’ve got a new management team in place. Can you talk about the timeline? I think you talked in your prepared remarks about a normalized net income in 2025. Can you talk about the timeline of some of — I guess, like in terms of how you get back to profitability or appropriate profitability? And what is that appropriate profitability for City National? Dave McKay: We’ll go through kind of our targets later on the year as far as each of our businesses and their potential. But for us there, we do believe that City National is at its kind of full run rate this year to complete its platform build-out, and we’ll continue that through the year. And then, as you come through 2025, we expect that to start to moderate and create some tailwinds for P&L. So, as we come through that year, there are other areas where we’re taking out costs in the platform to accommodate profitability growth. We have repositioning, as I said in my prepared comments, of the balance sheet around more multi-product clients and getting a better ROE out of our existing balance sheet as well, which I think you’ve seen me create the analogy with Capital Markets. We had very rapid growth in 2013 to 2016. We spent a lot of time extracting more return out of that balance sheet. We’re doing something very similar now in CNB given the 2.5-fold increase was so quick. We’re not getting the return we want in all our client franchise there. So, we’re focused on that. So that enhancement, you saw the securities that’s — higher-yielding securities that we’re able to put on the balance sheet has helped as well. So, all of that, as we look at our trajectory, gives us the confidence that we’re going to get back to more normalized ROA in ’25 and a tailwind from there. So, we’ll provide kind of a more of a waterfall to that. But when we look at our cost trajectory, revenue opportunities, repositioning of assets, we feel confident of generating strong returns out of this business again in 2025. Doug Young: Appreciate it. Thank you. Operator: Thank you. Our following question is from Gabriel Dechaine from National Bank Financial. Please go ahead. Gabriel Dechaine: Good morning. First question on the RWA output floor. My math agrees with yours that it won’t become effect — hit you until 2025. How do you plan for that eventuality? Do you just eat it? Do you go after more standardized? Do you curb balance sheet growth or de-banking customers, something along those lines? And then, my second question is for Doug. The wealth business, the non-CNB stuff that is, I’m looking at what’s going on in the UK, and one of your peers there is facing some difficulties cutting the dividend and refunding customers and regulator scrutiny is an issue. Wondering what, if any, impact has been on your business. You’ve acquired BlueBay and Brewin Dolphin over the past years. And was there any reason for me to be thinking about that as a potential top-line hit or cost hit, something like that? Nadine Ahn: Well, thanks Gabriel. I’ll start off with the first question around the floor. And it is something that we do closely monitor. I think with every 2.5% increase, you do see a buffer drop by about $20 billion. But we’ve done about over $30 billion of optimization since 2023. And when we talk about optimization, what we’re really focused on is around the data cleanup, because a lot of what you see as it relates to some differential between standardized [and ARB] (ph) comes in part as it relates to getting better clarity on data, whether you’re on collateral or when you’re looking at rated companies et cetera. So, we continue to think that we’ve got more optimization as it relates to that going into 2025 to help benefit and create some room. But we do recognize the fact that it will become binding at a point as it relates to and you just have to continue to manage your optimization across your balance sheet ensuring that you’re profiling your capital out to those business segments to generate where our focus on is really on our strong ROE. Gabriel Dechaine: Okay. Well, probably worth more of a fulsome discussion offline. Anyhow, wealth? Doug Guzman: Yeah. Hopefully, you won’t need a more fulsome discussion on this. I mean, it’s pretty — so you’re talking about the consumer duty focus in the UK, which is similar to many jurisdictions where regulators over time have taken a higher interest in making sure that customers are treated fairly. And the competitor you’re pointing to is a very decentralized model. They had fee scales that were very diverse across customer bases, and they’re having to adjust because of that. We don’t have that. What we liked about Brewin Dolphin, frankly, is the direction of travel for the business model is one that fits with consumer duty. It’s very much advice focused, planning focused with the client. We’ll make some tweaks around fee scales to make absolutely certain that everyone is getting consistent treatment across the different channels, the different target market segments, but we’re quite comfortable. And from an asset management perspective, on the BlueBay side, there’s less acute focus there. It’s now fully integrated with the rest of Global Asset Management. So, over the last 12 to 18 months, there’s been a fair amount of heavy lifting, which we haven’t really highlighted externally to get systems integrated, to get teams integrated, to create a more scalable, leverageable infrastructure around both operations and distribution. And so, that’s really been the focus at BlueBay and it’s a — the consumer duty piece is much more on the distribution side on the advice side. Gabriel Dechaine: All right. Thank you. Operator: Thank you. Our following question is from Mario Mendonca from TD Securities. Please go ahead. Mario Mendonca: Good morning. This question might be appropriate for Graeme. There’s this evolving narrative I’m hearing from our banks that PCLs could move a little higher here in the near term, there would be a transition and then they would start to decline perhaps by early ’25 or mid-’25. What I’m asking about is this, while rates were moving higher, it took some time before it had the effect of causing PCLs to move higher. In fact, we’re only seeing a meaningful increase in PCLs, it seems like, this quarter. That’s quite a long lag from when rates started to rise to when we saw the PCLs. Why would it be the case then that declining rates late this year would lead to such an abbreviated cycle, a period of declining PCLs following shortly thereafter? Why wouldn’t there be a meaningful lag where we see higher PCLs before the effect of lower rates have the desired outcome? Graeme Hepworth: Yeah. Thanks, Mario. It’s a good question. And again, I would just maybe start by saying rates is certainly one critical factor that drives PCL, but it’s not the sole critical factor that’s driving PCL, right? And when you look at a portfolio like ours, it’s very diversified both geographically, sector, consumer, wholesale. Rates plays out differently in each of those segments. And so, in certain rate-sensitive products, whether it be in RCL, in retail, there’s going to be a more concurrent effect, if you will, with rates going up and down than in other products. But likewise, factors like unemployment we talked about previously are certainly a big indicator of where our PCL will go. And so that’s kind of what drives. We bring all those into the mix and we’re kind of considering our forecast and thinking about it going forward. As you said, we’re seeing some of that lag effect happen on rates. That’s why we do and I as indicated earlier between that and unemployment, why we see this kind of grading out kind of through 2024 into 2025. Certainly, what happens kind of beyond that, I mean, we’re starting to get into a forecast period that is highly dependent on how all this plays out. But again, it’s a combination of all these factors and not just rates by itself that I think will ultimately define our trajectory at PCL. Mario Mendonca: Okay. Somewhat related question, it would appear that the Canadian consumer is slowing. Dave, I think you made the point in your opening comments. We’re seeing Canadian consumer slowdown somewhat more abruptly than in the U.S. The contrast, however, is the 3.7% sequential growth in commercial loans this quarter. That confuses me. It confuses me to see the Canadian consumer slowdown somewhat abruptly, but yet Royal and others showing such robust growth in commercial. How do those two things happen simultaneously? Neil McLaughlin: Yeah, I’ll start, Mario. It’s Neil. I mean, if you look at it, we’ve talked about this for a number of quarters. In our commercial strategy, we’ve made quite a pivot to restructure our front office to get our most senior bankers lined up against our larger commercial clients, and that’s where we’ve been adding FTE. So, that has been a multi-year strategy. And the re-segmentation, we’d say, we feel really good. It’s paying off in the way we intended. We’re seeing the growth come from the larger clients, and we also set out in that strategy to make sure we really like the diversification. And we’re seeing that growth across multiple sectors, things like agriculture, things like our auto business is seeing very good growth. So that’s where we would really look at it. We’ve not expanded our risk appetite in that business. In fact, where we look, we’ve — Dave mentioned it, 80%-plus of our growth is coming from existing clients. And where we’ve added new clients, these are actually as good or better rated clients than we would have had in previous years. So, in our business, we would say this is around a purposeful strategy, and it’s led with a front office and it’s led with advice and capability. Mario Mendonca: Okay. Sounds like a Royal thing. Thank you. Dave McKay: Mario, it’s Dave. Just to add… Mario Mendonca: Hey, David. Dave McKay: …a macro color to it, I did also say in my comments as you probably picked up that we do expect CapEx to slow as well as some businesses anticipate in the manufacturing and logistics sector slowing goods and potentially service demand in the economy. Now the one variable — so we are seeing kind of equivalency and macro impact there. One of the dimensions that we all struggle to predict is what’s going to happen with the $350 billion of consumer deposits that largely sit in GICs right now. Some will flow, as we expect, back into equities and back into investment products. Some will create stimulative demand. So, that’s different than the United States where the large part of the surplus deposits of $3.5 trillion have been spent already. Canada sits on that buffer and it’s helped absorb some cash flow challenges from higher rates, but largely remains particularly in the top 40% of Canadians, largely intact from where it was last year. So, we’re watching that carefully to see how that gets deployed. But it can serve all those purposes, right? A buffer for risk, a stimulant for growth and a higher yield into investment product. Mario Mendonca: That’s helpful. Thank you. Operator: Thank you. Following question is from Paul Holden from CIBC. Please go ahead. Paul Holden: Yes, thank you. Two questions. First one is with respect to funding cost pressures. You’ve highlighted funding cost pressures, and I think some of the other banks have as well. It seems to be lasting longer than we would have expected, let’s call it, last quarter. What’s your recent view on when this might abate and what would be, I guess, the key catalysts or triggers for those funding cost pressures to abate?.....»»
Koppers Reports Fourth Quarter and Full-Year 2023 Results; Provides 2024 Outlook
Record Fourth-Quarter Sales of $513.2 Million vs. $482.6 Million in Prior Year Quarter Record Year Sales of $2.15 Billion vs. $1.98 Billion in Prior Year Record Operating Profit of $195.2 Million, 25 percent higher than previous record PITTSBURGH, Feb. 28, 2024 /PRNewswire/ -- Koppers Holdings Inc. (NYSE:KOP), an integrated global provider of treated wood products, wood treatment chemicals, and carbon compounds, today reported net income attributable to Koppers for the fourth quarter of 2023 of $12.9 million, or $0.59 per diluted share, compared to $13.8 million, or $0.65 per diluted share, in the prior year quarter. Adjusted net income attributable to Koppers and adjusted earnings per share (EPS) were $14.5 million and $0.67 per share for the fourth quarter of 2023, compared to $23.0 million and $1.09 per share in the prior year quarter. Adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) for the fourth quarter of 2023 were $53.9 million, compared with $52.1 million in the prior year quarter. Consolidated sales of $513.2 million increased by $30.6 million, or 6.3 percent, compared with $482.6 million in the prior year quarter. The Railroad and Utility Products and Services (RUPS) business delivered record fourth-quarter sales and adjusted EBITDA as a result of pricing increases and higher volumes for crossties, which improved throughput, partially offset by increased raw material and operating costs. In addition, fourth-quarter records in operating profit and adjusted EBITDA from the domestic utility pole business contributed to the favorable performance. The Performance Chemicals (PC) segment benefited from global pricing initiatives, as well as higher volumes. Profitability returned to historical norms as renegotiated customer contracts allowed for price increases to address higher raw material and other operating costs experienced in the prior year. The Carbon Materials and Chemicals (CMC) segment sales and profitability declined from the prior year, primarily due to lower market prices and weaker demand for most products, partly offset by higher carbon pitch volumes. Chief Executive Officer Leroy Ball said, "We finished the year on a strong note near the top end of our adjusted EBITDA range of guidance. Once again, for the things we control, our global team did an amazing job of executing by continuing to provide our customer base with the highest-quality products and services in a challenging environment. Our diversified portfolio drove the strong performance, as our PC and RUPS business segments picked up a struggling CMC segment that continues to work through the trough of its business cycle. As always, I credit our global team for remaining focused on performing safely and at a high level, as our success begins with them." Fourth Quarter Financial Performance RUPS reported record fourth-quarter sales of $216.4 million, an increase of $23.4 million, or 12.1 percent, compared to $193.0 million in the prior year quarter. The sales increase was largely due to $16.0 million of pricing increases across multiple markets, particularly for crossties and utility poles in the United States. In addition, increased volumes for Class I crossties contributed to the sales growth. The increases were partly offset by decreased volumes in utility poles. Adjusted EBITDA, a fourth-quarter record, was $20.7 million, or 9.6 percent, compared with $13.3 million, or 6.9 percent, in the prior year quarter. Profitability increased due primarily to net sales price increases and improved plant utilization, which more than offset higher raw material and operating costs and increased selling, general, and administrative expenses. The domestic utility pole business achieved fourth-quarter records in operating profit and adjusted EBITDA, which contributed to the strong results. PC delivered sales of $164.4 million, an increase of $23.6 million, or 16.8 percent, compared to sales of $140.8 million in the prior year quarter. Excluding a favorable foreign currency impact of $0.4 million, sales increased by $23.2 million, or 16.4 percent, from the prior year quarter. The year-over-year sales growth resulted from global price increases of $15.1 million, or 10.7 percent, particularly in the Americas, for copper-based preservatives. Volumes increased by 6.0 percent globally, including in the Americas, primarily for copper-based preservatives. As a result of these price and volume increases, adjusted EBITDA was $29.4 million, or 17.9 percent, compared with $17.6 million, or 12.5 percent, in the prior year quarter. These increases were slightly offset by higher raw material costs and increased selling, general, and administrative expenses. Sales for CMC of $132.4 million decreased by $16.4 million, or 11.0 percent, compared to sales of $148.8 million in the prior year quarter. Excluding a favorable foreign currency impact of $2.4 million, sales decreased by $18.9 million, or 12.7 percent, from the prior year quarter. The sales decline was driven by reduced market pricing, with $25.5 million of lower sales prices across most products, including carbon pitch, where prices were down 24.3 percent globally, partly offset by higher carbon pitch volumes. Adjusted EBITDA for the fourth quarter was $3.8 million, or 2.9 percent, compared with $21.2 million, or 14.2 percent, in the prior year quarter. The year-over-year profitability decrease was due to lower prices and a $2.8 million bad debt reserve, partly offset by reduced raw material costs and increased volumes, particularly in Europe. 2023 Financial Performance Consolidated sales of $2.15 billion, a record year, increased $174 million, or 8.8 percent, compared to $1.98 billion in the prior year. RUPS delivered a record $897.9 million in sales for the year, an increase of $109.6 million, or 13.9 percent, compared to sales of $788.3 million in the prior year. Adjusted EBITDA was $84.0 million, or 9.4 percent, compared with $53.6 million, or 6.8 percent, in the prior year. PC reported $671.6 million in sales for the year, an increase of $91.7 million, or 15.8 percent, compared to sales of $579.9 million in the prior year. Adjusted EBITDA was $123.1 million, or 18.3 percent, compared with $75.5 million, or 13.0 percent, in the prior year. Sales for CMC, totaling $584.7 million, decreased by $27.6 million, or 4.5 percent, compared to sales of $612.3 million in the prior year. Adjusted EBITDA was $49.3 million, or 8.4 percent, compared with $99.0 million, or 16.2 percent, in the prior year. Net income attributable to Koppers was $89.2 million, compared with $63.4 million in the prior year. Adjusted net income attributable to Koppers was $94.0 million, compared with $88.3 million in the prior year. Adjusted EBITDA was $256.4 million, compared with $228.1 million, in the prior year. Diluted EPS was $4.14, compared with $2.98 per share in the prior year. Adjusted EPS was $4.36, compared with $4.14 for the prior year. Operating cash flows were $146.1 million, a record year, compared with $102.3 million in the prior year. Capital expenditures for the year ended December 31, 2023, were $120.5 million, compared with $105.3 million for the prior year period. Net of insurance proceeds and cash provided from asset sales, capital expenditures were $116.0 million for the current year period, compared with $100.1 million for the prior year period. 2023 Accomplishments In 2023, Koppers continued implementing its value creation strategy and further positioned the company for long-term growth and profitability, as highlighted by the following: Record sales for the 5th straight year. Record operating profit. Record operating cash flow and the 5th consecutive year of more than $100 million. 2nd highest diluted EPS from continuing operations. 2nd best-ever safety rate. 3rd year named to Newsweek's list of Most Responsible Companies. Named to USA Today's inaugural list of America's Climate Leaders. 2024 Outlook Koppers continues to expand and optimize its business and make further progress on the company's strategic pillars toward its long-term financial goals. After considering global economic conditions, as well as the ongoing uncertainty associated with geopolitical and supply chain challenges, Koppers expects 2024 sales of approximately $2.25 billion, compared with $2.15 billion in 2023. Adjusted EBITDA is anticipated to be approximately $275 million in 2024, compared with $256.4 million in 2023. The effective tax rate for adjusted net income attributable to Koppers in 2024 is projected to be approximately 28 percent, slightly above the adjusted tax rate in 2023. Accordingly, 2024 adjusted EPS is forecasted to be in the range of $4.60 to $4.80 per share, compared with $4.36 per share in 2023. Koppers expects operating cash flows of approximately $150 million in 2024, excluding any impact from pension termination. The company is pursuing a termination of its U.S. qualified pension plan and is targeting this effort for completion in the fourth quarter 2024. An estimated $25 million of funding will be required when this is completed, which will impact operating cash flow. Koppers anticipates capital expenditures of approximately $100 million in 2024, including capitalized interest, with approximately $29 million allocated to discretionary projects. Commenting on the forecast, Mr. Ball said, "I feel good about meeting our 2024 targets, as long as demand in our segments meets our projections of flat to slightly up from 2023 in existing markets. Factors driving the 7 percent increase in adjusted EBITDA include some carry-over pricing benefits from prior year; contributions from our Leesville, Louisiana, facility coming online to feed the Texas pole market; and the benefits of a full year of cost efficiencies from our North Little Rock, Arkansas, treating facility. We anticipate softer results in early 2024 versus strong comps from the first quarter of 2023 as we emerge from the bottom of the carbon markets cycle and recover from the intense winter storm activity in the U.S. which affected much of Koppers and our customers' operating network. I expect that as the year progresses, we will make up any ground lost in the first quarter and deliver another year of record performance." Koppers does not provide reconciliations of guidance for adjusted EBITDA and adjusted EPS to comparable GAAP measures, in reliance on the unreasonable efforts exception. Koppers is unable, without unreasonable efforts, to forecast certain items required to develop meaningful comparable GAAP financial measures. These items include, but are not limited to, restructuring and impairment charges, acquisition-related costs, mark-to-market commodity hedging, and LIFO adjustments that are difficult to forecast for a GAAP estimate and may be significant. Investor Conference Call and Webcast Koppers management will conduct a conference call this morning, beginning at 11:00 a.m. Eastern Time to discuss the company's results for the quarter. Presentation materials will be available at least 15 minutes before the call on www.koppers.com in the Investor Relations section of the company's website. Interested parties may access the live audio broadcast toll free by dialing 833-366-1128 in the United States and Canada, or 412-902-6774 for international, Conference ID number 10184851. Participants are requested to access the call at least five minutes before the scheduled start time to complete a brief registration. The conference call will be broadcast live on www.koppers.com and can also be accessed here. An audio replay will be available approximately two hours after the completion of the call at 877-344-7529 for U.S. toll free, 855-669-9658 for Canada toll free, or 412-317-0088 for international, using replay access code 1964782. The recording will be available for replay through May 28, 2024. About Koppers Koppers, with corporate headquarters in Pittsburgh, Pennsylvania, is an integrated global provider of treated wood products, wood treatment chemicals, and carbon compounds. Our products and services are used in a variety of niche applications in a diverse range of end markets, including the railroad, specialty chemical, utility, residential lumber, agriculture, aluminum, steel, rubber, and construction industries. We serve our customers through a comprehensive global manufacturing and distribution network, with facilities located in North America, South America, Australasia, and Europe. The stock of Koppers Holdings Inc. is publicly traded on the New York Stock Exchange under the symbol "KOP." For more information, visit: www.koppers.com. Inquiries from the media should be directed to Ms. Jessica Franklin Black at BlackJF@koppers.com or 412-227-2025. Inquiries from the investment community should be directed to Ms. Quynh McGuire at McGuireQT@koppers.com or 412-227-2049. Non-GAAP Financial Measures This press release contains certain non-GAAP financial measures. Koppers believes that adjusted EBITDA, adjusted net income attributable to Koppers and adjusted earnings per share provide information useful to investors in understanding the underlying operational performance of the company, its business and performance trends, and facilitate comparisons between periods and with other corporations in similar industries. The exclusion of certain items permits evaluation and a comparison of results for ongoing business operations, and it is on this basis that Koppers management internally assesses the company's performance. In addition, the Board of Directors and executive management team use adjusted EBITDA as a performance measure under the company's annual incentive plans and for certain performance share units granted to management. Although Koppers believes that these non-GAAP financial measures enhance investors' understanding of its business and performance, these non-GAAP financial measures should not be considered an alternative to GAAP basis financial measures and should be read in conjunction with the relevant GAAP financial measure. Other companies in a similar industry may define or calculate these measures differently than the company, limiting their usefulness as comparative measures. Because of these limitations, these non-GAAP financial measures should not be considered in isolation or as substitutes for performance measures calculated in accordance with GAAP. See the attached tables for the following reconciliations of non-GAAP financial measures included in this press release: Unaudited Reconciliation of Net Income to Adjusted EBITDA and Unaudited Reconciliations of Net Income Attributable to Koppers to Adjusted Net Income Attributable to Koppers and Diluted Earnings Per Share and Adjusted Earnings Per Share. Safe Harbor Statement Certain statements in this press release are "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995 and may include, but are not limited to, statements about sales levels, acquisitions, restructuring, declines in the value of Koppers assets and the effect of any resulting impairment charges, profitability and anticipated expenses and cash outflows. All forward-looking statements involve risks and uncertainties. All statements contained herein that are not clearly historical in nature are forward-looking, and words such as "outlook," "guidance," "forecast," "believe," "anticipate," "expect," "estimate," "may," "will," "should," "continue," "plan," "potential," "intend," "likely," or other similar words or phrases are generally intended to identify forward-looking statements. Any forward-looking statement contained herein, in other press releases, written statements or other documents filed with the Securities and Exchange Commission, or in Koppers communications and discussions with investors and analysts in the normal course of business through meetings, phone calls and conference calls, regarding future dividends, expectations with respect to sales, earnings, cash flows, operating efficiencies, restructurings, the benefits of acquisitions, divestitures, joint ventures or other matters as well as financings and debt reduction, are subject to known and unknown risks, uncertainties and contingencies. Many of these risks, uncertainties and contingencies are beyond our control, and may cause actual results, performance or achievements to differ materially from anticipated results, performance or achievements. Factors that might affect such forward-looking statements include, among other things, the impact of changes in commodity prices, such as oil and copper, on product margins; general economic and business conditions; potential difficulties in protecting our intellectual property; the ratings on our debt and our ability to repay or refinance our outstanding indebtedness as it matures; our ability to operate within the limitations of our debt covenants; unexpected business disruptions; potential impairment of our goodwill and/or long-lived assets; demand for Koppers goods and services; competitive conditions; capital market conditions, including interest rates, borrowing costs and foreign currency rate fluctuations; availability and fluctuations in the prices of key raw materials; disruptions and inefficiencies in the supply chain; economic, political and environmental conditions in international markets; changes in laws; the impact of environmental laws and regulations; unfavorable resolution of claims against us, as well as those discussed more fully elsewhere in this release and in documents filed with the Securities and Exchange Commission by Koppers, particularly our latest annual report on Form 10-K and any subsequent filings by Koppers with the Securities and Exchange Commission. Any forward-looking statements in this release speak only as of the date of this release, and we undertake no obligation to update any forward-looking statement to reflect events or circumstances after that date or to reflect the occurrence of unanticipated events. KOPPERS HOLDINGS INC. UNAUDITED CONSOLIDATED STATEMENT OF OPERATIONS (Dollars in millions, except share and per share amounts) Three Months Ended December 31, Year Ended December 31, 2023 2022 2023 2022 Net sales $ 513.2 $ 482.6 $ 2,154.2 $ 1,980.5 Cost of sales 416.7 406.5 1,729.7 1,635.9 Depreciation and amortization 14.3 11.6 57.0 56.1 Selling, general and administrative expenses 45.0 36.9 174.1 153.3 (Gain) on sale of assets 0.0 0.0 (1.8) (2.5) Operating profit 37.2 27.6 195.2 137.7 Other income, net 0.2 0.7 0.4 2.5 Interest expense 17.7 12.5 71.0 44.8 Income from continuing operations before income taxes 19.7 15.8 124.6 95.4 Income tax provision 6.7 1.9 34.8 31.6 Income from continuing operations 13.0 13.9 89.8 63.8 Loss on sale of discontinued operations 0.0 (0.1) 0.0 (0.6) Net income 13.0 13.8 89.8 63.2 Net income (loss) attributable to noncontrolling interests 0.1 0.0 0.6 (0.2) Net income attributable to Koppers $ 12.9 $ 13.8 $ 89.2 $ 63.4 Earnings (loss) per common share attributable to Koppers common shareholders: Basic - Continuing operations $ 0.62 $ 0.67 $ 4.28 $ 3.05 Discontinued operations 0.00 (0.01) 0.00 (0.03) Earnings per basic common share $ 0.62 $ 0.66 $ 4.28 $ 3.02 Diluted - Continuing operations $ 0.59 $ 0.66 $ 4.14 $ 3.00 Discontinued operations.....»»
Prudential"s (PRU) Q4 Earnings Miss, Revenues Increase Y/Y
Prudential's (PRU) Q4 results reflect improved expenses, less favorable underwriting results, net outflows, lower incentive fees and agency income, partially offset by higher asset management fees. Prudential Financial, Inc. PRU reported fourth-quarter 2023 adjusted operating income of $2.58 per share, which missed the Zacks Consensus Estimate by 3.3%. However, the bottom line rose 3.6% year over year.Total revenues of $13 billion increased 6.7% year over year. The increase in revenues was due to higher premiums and net investment income. However, it missed the Zacks Consensus Estimate by 0.3%.Prudential's fourth-quarter results reflect improved expenses, less favorable underwriting results, net outflows, lower incentive fees and agency income, partially offset by higher asset management fees.Prudential Financial, Inc. Price, Consensus and EPS Surprise Prudential Financial, Inc. price-consensus-eps-surprise-chart | Prudential Financial, Inc. QuoteOperational UpdateTotal benefits and expenses amounted to $11.7 billion, which increased 7.2% year over year in the fourth quarter. This improvement was due to higher insurance and annuity benefits, interest credited to policyholders' account balances, amortization of acquisition costs, general and administrative expenses. The figure was higher than our estimate of $11.4 billion.Quarterly Segment UpdatePrudential Global Investment Management’s (PGIM) adjusted operating income of $172 million in the reported quarter decreased 25.2% year over year. This decrease primarily reflects higher expenses and lower other related revenues, mainly due to lower incentive fees and agency income, partially offset by improved asset management fees. The figure was lower than our estimate of $200.6 million.PGIM’s assets under management of $1.298 trillion increased 6% year over year. The increase was due to equity market appreciation, partially offset by net outflows.The U.S. Businesses delivered an adjusted operating income of $988 million, which increased 39.1% year over year. The figure was higher than our estimate of $512.4 million. This increase primarily reflects higher net investment spread results and lower expenses, partially offset by lower net fee income.International Businesses’ adjusted operating income decreased 8.1% year over year to $748 million in the fourth quarter. This decrease primarily reflects less favorable underwriting results, including unfavorable policyholder behavior, partially offset by lower expenses.Corporate and Other incurred an adjusted operating loss of $656 million, wider than a loss of $525 million reported a year ago. This higher loss primarily reflects improved expenses, driven by a $200 million restructuring charge in the current quarter.Capital DeploymentPrudential managed to return capital to its shareholders in the form of share repurchases worth $250 million and dividends worth $458 million in the fourth quarter.Financial UpdatePRU exited the fourth quarter with cash and cash equivalents of $19.4 billion, which increased 12.5% from 2022-end.Total debt balance of $19.5 billion decreased 5.7% from 2022-end.As of Dec 31, 2023, Prudential’s assets under management and administration increased 6.3% year over year to $1.63 trillion.Adjusted book value per common share, a measure of the company’s net worth, was $96.64, which increased 2% year over year.Operating return on average equity was 10.9% in the fourth quarter, which improved 40 basis points year over year.Full-Year UpdateFor 2023, the adjusted operating income of Prudential was $11.62 per share. The bottom line increased 12.7% from the 2022 figure. The bottom line missed the Zacks Consensus Estimate by 12.8%.Revenues for the year totaled $50.9 billion, which decreased 15% from the 2022 level. The top line missed the Zacks Consensus Estimate by 6%.Zacks RankPrudential currently carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.Performance of Other Multi-Line InsurersThe Hartford Financial Services Group, Inc. HIG reported fourth-quarter 2023 adjusted operating earnings of $3.06 per share, which surpassed the Zacks Consensus Estimate by 28%. The bottom line climbed 32% year over year. Operating revenues of HIG amounted to $4.3 billion, which improved 7.6% year over year in the quarter under review. The top line beat the consensus mark by a whisker.Earned premiums of Hartford Financial rose 8.2% year over year to $5.43 billion in the fourth quarter, higher than the Zacks Consensus Estimate of $5.41 billion and our estimate of $5.35 billion. Pre-tax net investment income of $653 million grew 2% year over year and beat the consensus mark of $623 million but missed our estimate of $697.6 million. Net investment income witnessed year-over-year growth in each of the segments barring Group Benefits. Total benefits, losses and expenses increased 3.2% year over year to $5.5 billion in the quarter under review, which came higher than our estimate of $5.4 billion.MGIC Investment Corporation MTG reported fourth-quarter 2023 operating net income per share of 67 cents, which beat the Zacks Consensus Estimate by 17.5%. The bottom line improved 4.7% year over year. MGIC Investment recorded total operating revenues of $285 million, which declined 2.1% year over year on lower net premiums written, partially offset by higher net investment income. The top line missed the consensus mark by 6%.Insurance in force declined 0.6% from the prior-year quarter to $293.5 billion. The company missed our estimate of $300.7 billion. The insurer witnessed a 2.8% decrease in primary delinquency to 25,650 loans. Net premiums written declined 5.3% year over year to $219.1 million. The figure was lower than our estimate of $235 million.Net investment income increased 24.7% year over year to $57.8 million. The company beat our estimate of $56.1 million. Persistency, the percentage of insurance remaining in force from one year prior, was 86.1% as of Dec 31, 2023, up from 82.2% in the year-ago quarter. New insurance written was $10.9 billion, down 15.5% year over year due to a decline in origination markets. Net underwriting and other expenses totaled $54.7 million, down 25.5% year over year. For the quarter under review, the loss ratio was negative 4.2% compared with negative 12.8% for the fourth quarter of 2023.MetLife, Inc. MET reported fourth-quarter 2023 adjusted operating earnings of $1.93 per share, which fell short of the Zacks Consensus Estimate by 1%. The bottom line improved 21% year over year. Adjusted operating revenues of MET climbed 21.5% year over year to $18.7 billion in the quarter under review. The top line outpaced the consensus mark by 3.6%. Adjusted premiums, fees and other revenues, excluding pension risk transfer (PRT), were $11.8 billion. The figure rose 8% year over year.Adjusted net investment income of $5 billion grew 11% year over year in the fourth quarter on the back of increased returns from the private equity portfolio and asset growth. Total expenses escalated 33.2% year over year to $18.1 billion. The adjusted expense ratio, excluding total notable items related to adjusted other expenses and PRT, improved 60 basis points (bps) year over year to 20.6% in the quarter under review. Net income of $574 million dropped 63% year over year. Adjusted return on equity, excluding accumulated other comprehensive income (loss) other than foreign currency translation adjustments, improved 170 bps year over year to 13.8%. Zacks Names "Single Best Pick to Double" From thousands of stocks, 5 Zacks experts each have chosen their favorite to skyrocket +100% or more in months to come. From those 5, Director of Research Sheraz Mian hand-picks one to have the most explosive upside of all. It’s credited with a “watershed medical breakthrough” and is developing a bustling pipeline of other projects that could make a world of difference for patients suffering from diseases involving the liver, lungs, and blood. This is a timely investment that you can catch while it emerges from its bear market lows. It could rival or surpass other recent Stocks Set to Double like Boston Beer Company which shot up +143.0% in little more than 9 months and NVIDIA which boomed +175.9% in one year.Free: See Our Top Stock And 4 Runners UpWant the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report The Hartford Financial Services Group, Inc. (HIG): Free Stock Analysis Report MGIC Investment Corporation (MTG): Free Stock Analysis Report MetLife, Inc. (MET): Free Stock Analysis Report Prudential Financial, Inc. (PRU): Free Stock Analysis ReportTo read this article on Zacks.com click here.Zacks Investment Research.....»»
Prudential (PRU) to Report Q4 Earnings: Here"s What to Expect
Prudential's (PRU) Q4 results are likely to reflect favorable variable investment income, higher spread income, improved income from non-coupon investments and growth in indexed variable annuities. Prudential Financial, Inc. PRU is slated to report fourth-quarter 2023 earnings on Feb 6, after market close. PRU delivered a positive earnings surprise in the last reported quarter.Factors to ConsiderThe U.S. business is likely to have benefited from higher spread income, including more favorable variable investment income and lower expenses. The upside is expected to have been partially offset by lower fee income and the increase in earnings in International businesses, which primarily reflected higher spread income.Prudential Financial’s international businesses are likely to have benefited from higher net investment spread results and improved underwriting results. The upside is likely to have been partially offset by higher expenses.Group Insurance business in the to-be-reported quarter is likely to have benefited from higher underwriting results. The upside is expected to have been partially offset by higher expenses.PGIM is likely to have decreased due to lower net asset management fees and higher compensation and operating expenses. The downside is likely to have been partially offset by higher net other related revenues and service, distribution and other revenues.Assets under management are likely to have benefited from equity market appreciation, lower interest rates and tightening credit spreads, partially offset by net outflows.Net investment income is likely to have gained from higher income from non-coupon investments, and improved reinvestment and short-term rates. The upside is likely to have been partially offset by lower realized investment gains from unfavorable derivative settlements. We expect net investment income to increase 16.8% to $4.1 billion in the to-be-reported quarter.Expenses are likely to have increased because of higher general and administrative expenses, amortization of deferred policy acquisition costs and interest credited to policyholders’ account balances. We expect total expenses to increase 4.3% to $11.4 billion.The Individual Retirement Strategies business is likely to have benefited from a rise in net investment income due to improved reinvestment rates and growth in indexed variable annuities and other income. The improvement is likely to have been driven by more favorable short-term interest rates on collateral posted to counterparties. The upside is likely to have been partially offset by a decline in income on non-coupon investments and lower asset management and service fees, as well as a decrease in policy charges and fee income.The company estimates earnings per share to be $2.75 for the fourth quarter of 2023.The Zacks Consensus Estimate for earnings per share is pegged at $2.67, indicating an increase of 10.3% from the year-ago period’s reported figure.The Zacks Consensus Estimate for revenues is pegged at $13.07 billion, indicating an increase of 3.3% from the year-ago reported figure.What Our Quantitative Model UnveilsOur proven model does not predict an earnings beat for Prudential this time around. This is because a stock needs to have the right combination of a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) that increases the odds of an earnings beat. This is not the case here as you can see below.Earnings ESP: Prudential has an Earnings ESP of -1.60%. This is because the Most Accurate Estimate of $2.63 is pegged lower than the Zacks Consensus Estimate of $2.67. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.Prudential Financial, Inc. Price and EPS Surprise Prudential Financial, Inc. price-eps-surprise | Prudential Financial, Inc. QuoteZacks Rank: PRU has a Zacks Rank #2 at present.Stocks to ConsiderSome insurance stocks with the right combination of elements to deliver an earnings beat this time around are:Everest Group, Ltd. EG has an Earnings ESP of +1.18% and a Zacks Rank of 3 at present. The Zacks Consensus Estimate for fourth-quarter 2023 earnings is pegged at $14.63, indicating an increase of 19.8% from the year-ago reported figure. You can see the complete list of today’s Zacks #1 Rank stocks here.EG’s earnings beat estimates in three of the last four quarters while missing in one.Arch Capital Group ACGL has an Earnings ESP of +1.24% and a Zacks Rank of 3 at present. The Zacks Consensus Estimate for fourth-quarter 2023 earnings is pegged at $1.94, implying a decline of 9.3% from the year-ago reported figure.ACGL’s earnings beat estimates in each of the last four reported quarters.Primerica, Inc. PRI: has an Earnings ESP of +0.44% and a Zacks Rank of 2 at present. The Zacks Consensus Estimate for fourth-quarter 2023 earnings is pegged at $4.26, indicating an increase of 22.06% from the year-ago reported figure.PRI’s earnings beat estimates in each of the last four reported quarters.Stay on top of upcoming earnings announcements with the Zacks Earnings Calendar. Zacks Reveals ChatGPT "Sleeper" Stock One little-known company is at the heart of an especially brilliant Artificial Intelligence sector. By 2030, the AI industry is predicted to have an internet and iPhone-scale economic impact of $15.7 Trillion. As a service to readers, Zacks is providing a bonus report that names and explains this explosive growth stock and 4 other "must buys." Plus more.Download Free ChatGPT Stock Report Right Now >>Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report Prudential Financial, Inc. (PRU): Free Stock Analysis Report Primerica, Inc. (PRI): Free Stock Analysis Report Arch Capital Group Ltd. (ACGL): Free Stock Analysis Report Everest Group, Ltd. (EG): Free Stock Analysis ReportTo read this article on Zacks.com click here.Zacks Investment Research.....»»
Rising Net Outflows, Concentration Risk Hurt Lazard (LAZ)
Rising net outflows hurt Lazard's (LAZ) assets under management growth. Also, high dependence on financial advisory revenues is concerning due to growing uncertainty in the global markets. Lazard Ltd’s LAZ high reliance on financial advisory fees for a substantial portion of its revenues is concerning. Continued net outflows will affect the company’s assets under management in the upcoming period. Further, its capital distribution activities seem unsustainable.Analysts are also not optimistic about the company’s earnings growth potential. Over the past week, the Zacks Consensus Estimate for LAZ’s 2023 earnings has been revised marginally lower. Thus, the company currently carries a Zacks Rank #5 (Strong Sell).In the past three months, LAZ shares have gained 23.3% compared with the industry's 19.9% rise. Image Source: Zacks Investment Research Particularly, financial advisory revenues contributed 49.2% to Lazard’s total operating revenues in third-quarter 2023. Financial advisory revenues declined in the first nine months of 2023, signaling weakness in the company’s revenue-generation capacity. The muted global merger and acquisition deal volumes, as well as a slump in capital market activities, are affecting growth in the company's financial advisory revenues.Lazard is anticipated to continue to rely on financial advisory fees for a substantial portion of its revenues in the foreseeable future. This, along with the ongoing weak market conditions, is concerning for the company’s top-line growth in the near term. We estimate the metric to decline 30.4% in 2023.Also, Lazard has been witnessing a steady increase in net outflows for the past several years. In the last four years (ended 2022), net outflows saw a compound annual growth rate (CAGR) of 23.1% mainly due to outflows witnessed in the equity asset class. Nonetheless, in the first nine months of 2023, it recorded net inflows of $8 million. We anticipate net outflows of $839 million, $2.34 billion and $2.05 billion for 2023, 2024 and 2025, respectively. A challenging operating backdrop, highlighted by equity outflows in the emerging markets, is a hindrance for the near term.Also, Lazard’s capital distribution activities make us apprehensive. The company announced a hike in its quarterly common stock dividend of 6% in July 2022. In the first nine months of 2023, Lazard repurchased 2.8 million shares at an average price of $36.67 per share. As of Sep 30, 2023, $200 million worth of share repurchase authorization was available under the said plan.However, its payout rate and debt/equity ratio seem unfavorable compared with the broader industry’s respective averages. The company’s performance over the last few quarters was volatile. Hence, given these unfavorable factors, we believe that the capital-distribution activities might not be sustainable.Stocks Worth a LookA couple of stocks from the same space worth a look are Noah Holdings NOAH and Principal Financial Group PFG.Noah Holdings currently carries a Zacks Rank #2 (Buy). Its earnings estimates for 2023 have been unrevised at $2.16 over the past 60 days. In the past three months, NOAH shares have gained 10.6%. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.Earnings estimates for Principal Financial have been unrevised at $6.42 for 2023 over the past 30 days. Shares of Principal Financial have rallied 15.7% in the past three months. Currently, the company carries a Zacks Rank #2. Zacks Names #1 Semiconductor Stock It's only 1/9,000th the size of NVIDIA which skyrocketed more than +800% since we recommended it. NVIDIA is still strong, but our new top chip stock has much more room to boom. With strong earnings growth and an expanding customer base, it's positioned to feed the rampant demand for Artificial Intelligence, Machine Learning, and Internet of Things. Global semiconductor manufacturing is projected to explode from $452 billion in 2021 to $803 billion by 2028.See This Stock Now for Free >>Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report Principal Financial Group, Inc. (PFG): Free Stock Analysis Report Lazard Inc. (LAZ): Free Stock Analysis Report Noah Holdings Ltd. (NOAH): Free Stock Analysis ReportTo read this article on Zacks.com click here.Zacks Investment Research.....»»
3 mREIT Stocks to Buy Despite Unsettling Mortgage Market
High rates, credit spread volatility, spread widening and yield curve inversion challenge the Zacks REIT and Equity Trust industry. Amid this, LADR, MFA and ACR are poised to navigate industry hiccups. The Zacks REIT and Equity Trust industry has been bearing the brunt of uncertainties in the macro-economic conditions due to high rates, credit spread volatility, spread widening, yield curve inversion, low market liquidity and limited fixed-income demand. This resulted in increased mortgage rates, significantly reducing originations. The mREIT industry should see book value erosion in the near term, as wider spreads in the Agency market affect asset prices.Nonetheless, the Fed’s decision to conclude its rate-hiking cycle in 2024 indicates easing earnings pressure for highly leveraged mREITs that have been facing rising funding costs. Moreover, the Agency markets stand to recover from the interest rate relief. Hence, companies like Ladder Capital LADR, MFA Financial MFA and ACRES Commercial Realty ACR are well-poised to navigate the market blues.About the IndustryThe Zacks REIT and Equity Trust industry comprises mortgage REITs, also known as mREITs. Industry participants invest in and originate mortgages and mortgage-backed securities (MBS), and provide mortgage credit for homeowners and businesses. Typically, these companies focus on either residential or commercial mortgage markets. Some invest in both markets through the asset-backed securities. Agency securities are backed by the federal government, making it a safer bet and limiting credit risks. Also, such REITs raise funds in the debt and equity markets through common and preferred equity, repurchase agreements, structured financing, convertible and long-term debt, and other credit facilities. The net interest margin (NIM), the spread between interest income on mortgage assets and securities held, as well as funding costs, is a key revenue metric for mREITs.What's Shaping the Future of the mREIT Industry?Conservative Approach to Impede Returns: The unfavorable scenario in rates and the MBS markets, restricted financial conditions, and resultant negative fixed-income fund flows have put a strain on credit-risky assets. Hence, companies are making efforts to de-lever and de-risk their portfolios. This is likely to result in lower portfolio growth. Also, numerous companies have resorted to a higher hedge ratio to reduce interest rate risks and extension risks. While such moves may seem prudent amid the ongoing uncertainties, those will impede mREITs’ earnings power in the future. As companies prioritize risk and liquidity management over incremental returns, at least in the short term, we expect robust returns to remain elusive.Industry Resorts to Dividend Cuts as Book Values Erode: Volatility in the fixed-income markets, high interest rates, and the widening of the spread between the 30-year Agency MBS and 10-year treasury rate are affecting valuations of Agency mortgage-backed securities. Hence, mREITs will continue to see book value pressure in the upcoming period. Also, liability-sensitive mREITs will see funding costs repricing faster than asset yields. Hence, we anticipate the cost of funds to be a headwind, and reduce net interest spreads and profitability. This scenario has compelled companies to reduce the dividend to a level wherein it can be covered by earnings. This may discourage mREIT investors and result in capital outflows from the industry, potentially resulting in greater book value declines for companies in the upcoming period.Purchase Volume Deterioration to Continue: The volatility in mortgage rates has served as a hurdle for any potential recovery in purchase originations, with buyers and sellers remaining on the sidelines. Housing inventory has fallen and affordability challenges have increased due to high mortgage rates, affecting seasonal buying trends.Amid this lackluster housing market, mortgage originations are likely to continue to be suppressed. This has caused operational and financial challenges for originators. It may also reduce the gain on sale margin and new investment activity.Zacks Industry Rank Indicates Dismal ProspectsThe Zacks REIT and Equity Trust industry is housed within the broader Zacks Finance sector. It carries a Zacks Industry Rank #199, which places it in the bottom 21% of more than 250 Zacks industries.The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates an underperformance in the near term. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.The industry’s positioning in the bottom 50% of the Zacks-ranked industries is an outcome of the disappointing earnings outlook for the constituent companies. Looking at the aggregate earnings estimate revisions, it appears that analysts are gradually losing confidence in this group's earnings growth potential. The industry’s current-year earnings estimates have moved 10.8% down since December 2022.Before we present a few stocks that you may want to consider for your portfolio, let’s take a look at the industry’s recent stock-market performance and valuation picture.Industry Lags Sector and S&P 500The Zacks REIT and Equity Trust industry has lagged the broader Zacks Finance sector and the S&P 500 composite in the past year.The industry has slumped 2.2% in the above-mentioned period against the broader sector’s rise of 14.1%. Notably, the S&P Index has grown 22.8% over the past year.One-Year Price PerformanceImage Source: Zacks Investment ResearchIndustry's Current ValuationBased on the trailing 12-month price-to-book (P/BV), which is a commonly used multiple for valuing mREITs, the industry is currently trading at 0.97X compared with the S&P 500’s 6.05X. Over the past five years, the industry has traded as high as 1.12X, as low as 0.39X and at the median of 0.94X.Price-to-Book TTMImage Source: Zacks Investment Research3 mREIT Stocks Worth Betting OnACRES Commercial Realty: The company is primarily focused on originating, holding and managing commercial real estate ("CRE") mortgage loans and equity investments in commercial real estate properties through direct ownership and joint ventures. As of Sep 30, 76% of the company’s loan portfolio comprised multi-family-focused CRE. Moreover, it had $104 million in liquidity. Earlier this month, the company’s board of directors authorized an additional $10 million of the outstanding shares of its common and preferred stock under its existing share repurchase program. In November 2021, ACRES was authorized to repurchase $20 million worth of outstanding shares of its common stock. In the nine months ended Sep 30, 2023, ACR repurchased 298,000 shares for $2.7 million. It has $4.1 million of authorization remaining under this program.The Zacks Consensus Estimate for ACR’s 2023 earnings has been revised 12% upward over the past month to $2.43. Also, the company has an impressive earnings surprise history, having surpassed the Zacks Consensus Estimate in three of the four trailing quarters. ACR has a market cap of $80.55 million.The company sports a Zacks Rank of 1 (Strong Buy) at present. You can see the complete list of today’s Zacks #1 Rank stocks here. Price and Consensus: ACRImage Source: Zacks Investment ResearchLadder Capital: This mREIT is a pre-eminent commercial real estate capital provider specializing in underwriting commercial real estate and offering flexible capital solutions within a sophisticated platform. It originates and invests in a diverse portfolio of commercial real estate and real estate-related assets, with a focus on senior secured assets.The company’s balance sheet is well-positioned to benefit from a high rate environment. Its lending book consists of significant floating-rate first mortgage loans. With this, its earnings seem positively correlated to high interest rates. We see Ladder Capital’s conservative capital structure and modest leverage as a favorable fit amid the ongoing market disruption. Also, its negligible losses on originated investments since 2008 underline an impressive credit record.In contrast to certain mREITs resorting to dividend cuts to navigate the choppy waters, LADR’s dividends seem well-covered, with 1.4X coverage based on Distributable EPS.The company currently carries a Zacks Rank #2 (Buy). The Zacks Consensus Estimate for Ladder Capital’s 2023 earnings has been unrevised in the past month. Moreover, earnings are projected to grow 12% in 2023. LADR has a market cap of $1.48 billion.Price and Consensus: LADRImage Source: Zacks Investment ResearchMFA Financial: This leading specialty finance company invests in residential mortgage loans, residential MBS and other real estate assets. Through Lima One Capital, its wholly-owned subsidiary, MFA also originates and services business purpose loans for real estate investors.In third-quarter 2023, Lima One originated a record $671 million worth of loans. Also, its investment portfolio stood at $9.26 billion as of the third-quarter end. In a bid to navigate the challenging macro-economic scenario, the company proactively hedged its duration risk by increasing the interest rate swap position. It also reduced exposure to repurchase agreements, warehouse lines and other forms of short-term funding by issuing fixed-rate securitizations.The Zacks Consensus Estimate for the company’s 2023 earnings has been revised marginally upward over the past month. While 2023 earnings are projected to decline 19% in 2023, the same will rebound and increase 5.7% in 2024. MFA carries a Zacks Rank of #2 at present. MFA has a market cap of $1.19 billion.Price and Consensus: MFAImage Source: Zacks Investment Research Zacks Naming Top 10 Stocks for 2024 Want to be tipped off early to our 10 top picks for the entirety of 2024? History suggests their performance could be sensational. From 2012 (when our Director of Research, Sheraz Mian assumed responsibility for the portfolio) through November, 2023, the Zacks Top 10 Stocks gained +974.1%, nearly TRIPLING the S&P 500’s +340.1%. Now Sheraz is combing through 4,400 companies to handpick the best 10 tickers to buy and hold in 2024. Don’t miss your chance to get in on these stocks when they’re released on January 2.Be First to New Top 10 Stocks >>Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report Ladder Capital Corp (LADR): Free Stock Analysis Report MFA Financial, Inc. (MFA): Free Stock Analysis Report ACRES Commercial Realty Corp. (ACR): Free Stock Analysis ReportTo read this article on Zacks.com click here.Zacks Investment Research.....»»
Canaan Inc. (NASDAQ:CAN) Q3 2023 Earnings Call Transcript
Canaan Inc. (NASDAQ:CAN) Q3 2023 Earnings Call Transcript November 28, 2023 Canaan Inc. misses on earnings expectations. Reported EPS is $-0.41 EPS, expectations were $-0.3. Operator: Ladies and gentlemen, thank you for standing by and welcome to Canaan Inc.’s Third Quarter 2023 Earnings Conference Call. At this time, all participants are in listen-only mode. After […] Canaan Inc. (NASDAQ:CAN) Q3 2023 Earnings Call Transcript November 28, 2023 Canaan Inc. misses on earnings expectations. Reported EPS is $-0.41 EPS, expectations were $-0.3. Operator: Ladies and gentlemen, thank you for standing by and welcome to Canaan Inc.’s Third Quarter 2023 Earnings Conference Call. At this time, all participants are in listen-only mode. After the management’s prepared remarks, we will have a question-and-answer session. Please note that this event is being recorded. Now I’d like to hand the conference over to your speaker host today, Mr. Clark Soucy, Investor Relations Director of the Company. Please go ahead, Clark. Clark Soucy: Thank you. Hello, everyone, and welcome to our earnings conference call. The company’s financial and operating results were released by our newswire services earlier today and are currently available online. Joining us today are our Chairman and CEO, Mr. Nangeng Zhang, and our CFO, Mr. James Jin Cheng. In addition, Mr. Leo Wang, IR Senior Director; Ms. Xi Zhang, IR Manager, will also be available during the question-and-answer session. Mr. Zhang will start the call by providing an overview of the company and performance highlights for the quarter. Mr. Cheng will then provide details on the company’s operating and financial results for the period before we open up the call for your questions. Before we continue, I would like to refer you to our safe harbor statement in our earnings press release. Today’s call will include forward-looking statements. These statements include, but are not limited to, our outlook for the company and statements that estimate or project future results of operations or the performance of the company. These statements speak only as of the date thereof and the company assumes no obligation to revise any forward-looking statements that may be made in today’s press release, call or webcast except as required by law. These statements do not guarantee future performance and are subject to risks, uncertainties and assumptions. Please refer to the press release and the risk factors and documents we file with the Securities and Exchange Commission, including our most recent annual report on Form 20-F for information on risks and uncertainties that may cause actual results to differ materially from those set forth in such statements. In addition, during today’s call and webcast, we will discuss both GAAP financial measures and certain non-GAAP financial measures which we believe are useful as supplemental measures of the company’s performance. These non-GAAP measures should be considered in addition to and not as a substitute for or in isolation from GAAP results. You can find additional disclosures regarding these non-GAAP measures including reconciliations with comparable GAAP results in our earnings press release, which is posted on the company website. With that, I will now turn the call over to our Chairman and CEO, Mr. Nangeng Zhang. Please go ahead, sir. Nangeng Zhang: Hello, everyone. This is NG, the CEO of Canaan. Thank you for joining our conference call. James and I are at the company’s headquarters in Singapore to share our quarterly results with you. During the third quarter of 2023, bitcoin prices continue to decline and remain within a low price range. At the beginning of the quarter, the bitcoin price was around $30,000 and reached its quarterly low point of around $25,000 in September. It then stayed in the range of $25,000 to $27,000 until the end of the quarter. During the third quarter, the total network hash rate remained fairly stable at around 400 exahash per second. Miners faced slim profit margins and there was a lack of motivation and not enough capacity for further investments and the expansion of mining computing power. At the macro level, the U.S. Federal Reserve’s raised interest rates by 25 basis points to 5.5%. The high interest rate environment limited bitcoin prices upward movement and increased miners financing and the interest cost. As a result, the industry’s purchasing and deployment capabilities were impacted. Meanwhile, inventory pressure on in-store mining machine models continued to rise. As mining machine manufacturers reduced prices to clear inventory ahead of upcoming halving event. We observed considerable price concessions in computing power. In the face of this challenging market environment, we achieved total revenue of $33.3 million exceeding our guidance. At the same time, we kept carrying out our development strategies. This includes focusing on product R&D and the intention promoting multi-channel sales strategies and exploring mining partnerships. We also maintain prudent and flexible operational management to ensure a stable cash flow and ongoing business operations. This will help us to prepare for potential market opportunities in the future. Now let me go to more detail. First, we are committed to R&D and the investment in production capacity. This allows us to upgrade our products to achieve risk-loss in machine half-rate performance and energy efficiency. During our 10th anniversary event in mid-September, we officially launched our new generation of mining machines, the A14 series. The [A1466] achieves a hash rate of 150 terahash per second with a power efficiency of 21.5 joules per terahash. At the same time, we introduced the liquid cooled A1466i mining machine, which achieves power efficiency below 20 joules per terahash for the first time and has 170 terahash per second of computing power. Besides our current offerings, we are actively developing new products. Following our euro practice, we will announce their performance once the machine testing is complete. We believe these products in the pipeline will align with next year’s market mainstream production power efficiency level of 10 to 20 draws per terahash. We are also in the process of delivering our air-cooled and the liquid- cooled integrated site solutions, which we have developed in-house. These include a 40-foot and a 20-foot air- cooled mining box container products and a 40-foot liquid cooling Avalon box mining container products. Our products are highly integrated, such as enabling rapid deployment, making them well suited for mining in challenging natural conditions of cold and hot weather. On the sales front, we are boosting sales in a number of channels, including large clients, distribution networks, and online retail. We are also offering favorable prices to reduce inventory. During the quarter, we achieved a total computing power sold of 3.8 million terahash per second. This represents an 8.7% increase compared to the same period last year, contributing about $30 million in revenue. In North America, we successfully completed the delivery of back orders to a Stronghold, a listed mining company. In Southeast Asia, our computing power sales reached 1.3 million terahash per second. This figure was a 90.7% quarter-over-quarter increase achieved through deeper collaboration with channel clients. Our online store achieved computing power sold of 420,000 terahash per second this quarter, a 17% increase compared to the previous quarter. Our online store also expanded its reach to five new regions, including Poland and Peru bringing its total number of regions with customer orders to 42. Following the September release of the A14 series, we have received contract sales orders and prepayments for computing power of about 2 million terahash per second from customers worldwide. In addition, our multi-channel sales efforts are bringing the planning, the stocking of our A12 and below the digital models closer to completion as expected. As per announced, our mining business in Kazakhstan has been temporarily suspended since the third quarter due to the impact of new regulatory policies. and we need to obtain the relevant permits. We have also experienced a breach of contract by a mining project partner in the U.S. As a result, mining revenue for this quarter declined to $3.26 million. However, we believe mining is a strategic part of our business. And short-term setbacks in certain regions will not affect our long-term strategy. We will continue to presently explore cooperation opportunities. During the quarter, we expanded and diversified our mining footprint when we completed the deployment of several new projects in North and South America. Notably, the latest batch of 2000 of our A13446 mining machines was successfully deployed and launched for our drawing mining project with the listed mining company Stronghold in the third quarter. At the end of the third quarter, we had approximately 4 exahash per second computing power deployed. We also hold 860 bitcoins owned by us reaching a historical high with a current market value of over $30 million. Recently, we have been expanding our mining opportunities in South America and Africa. In the Middle East, we carried out our first pilot collaboration with our integrated liquid cooling mining solutions. We have also been addressing some previously announced issues. In Kazakhstan, we worked together with local mining partners to obtain the type 2 license required for mining equipment owners in mid-November. We are currently working to register our locally deployed mining machines and are in the discussion with our mining partners to prepare for the resumption of operations. We expect that our mining projects in Kazakhstan will gradually resume around the end of 2023. For the project I just mentioned, where our U.S. partners bridged the contract, we have successfully taken possession of approximately all the mining machines involved. We have now restored about half of these machines. At the same time, we are carrying our legal procedures to protect our liquid-made rights. The marketing environment in the third quarter was challenging. We endeavored to maintain cash flows and operations and accumulate assets with strong growth potential. This will help us to allocate resources and lay for a foundation of full market after the next halving. We have also recently managed cost more prudently and optimized and adjusted our company’s organization. We have reduced our total headcount to increase operational efficiency and reduced fixed operating cash outflows, smoothly navigating through the market downturn. These measures have been gradually carried out in the fourth quarter. We expected to see potential data reflecting these changes starting from the first quarter of 2024. Meanwhile, due to the overall weakness in the market purchasing power, we further adjust price to quickly clear the inventory and generate cash inflow. However, this adjustments also results in some non-cash provisions and the impairment, leading to a considerable loss of this quarter. In terms of financing, we announced today the sales of convertible preferred shares of up to $125 million, subject to customary closing conditions with an institutional investor. This still ensures we are able to carry out R&D and the mass production of new products in case of tightening cash flow amidst the bear market. This safeguards our product supply and the market share in the future full market. We have not utilized our ATM since the fourth quarter to date. However, we recently adjusted our ATM project by appointing B. Riley as a new sales agent. Looking ahead, the bitcoin price has been a notable rebound since mid-to-late October, which is encouraging. We are closely monitoring the market and flexibly adjusting our sales strategy and supply chain to adapt to changing market demands. However, it’s important to note that sudden price increases in Bitcoin often come with increased volatility. The U.S. Federal Reserve seems likely to keep interest rates high for a while, and a rate cutting cycle may not happen for some time. The financing and operating costs of our downstream mining customers remain high, and the basic landscape remains unchanged. Additionally, with bitcoin halving approaching, market sentiment will likely be more cautious. Taking these factors into consideration, I believe that the fourth quarter has shown signs of improvement compared to the third quarter. However, we shouldn’t expect the best-case scenario of both rising price and volumes to happen quickly. Based on the overall situation mentioned above, we provide a highly cautious outlook for the fourth quarter of 2023. We expect revenue of the fourth quarter of 2023 to be approximately $34 million, slightly higher than the third quarter. This forecast is based on company’s current market and operational conditions, and the actual results may vary. Finally, I would like to discuss our AI business with you. After several years of hard work, we have built a solid foundation of our AIoT chip R&D and sales, especially with the industry recognition since the release of K230. This is a small step in our strategic plan. Given the significant changes in the AI industry over the past few months, we have been strategically discussing the future of our AI business. In light of our current industry and the marketing environment, we believe that the development of our AI business should take a more defined, independent, and long-term direction. So we are internally restructuring the business with the goal to clearly separate the mining machine and the mining teams from AI business as different business units. This prepares us for the future independent operation and potential financing for AI business. Both businesses will have enough scope for their future development. Personally, I’m really excited about this internal organization change. We operate in an industry full of variables and rapid changes creating new history every day. This truly tests our operational capabilities. Over the 10 years since Canaan’s inception, we have run into many difficulties and challenges. We have constantly improved our technical and operational competitive to face and resolve these issues. Amidst a number of uncertainties, one thing is certain, our strong confidence in the bitcoin network. This emerging transaction system has operated remarkably stable over the past 14 years. Its user base and net to our cash rate have both continuously expanded. In recent years, more and more investment institutions have shown increased interest in corporate currencies, especially bitcoin. That have also recognized it as an important asset class. With ongoing process in the regulatory environment to divided between the general public and bitcoin is narrowing. I believe this will be a crucial driver for the next full market. We remain committed to growing alongside cutting-edge technology partners to continuously upgrade cheap features. At the same time, we will support bitcoin system and a range of other beneficial activities with robust computing power. We will continue to deliver superior products and services to our customers while contributing to societal progress. Thank you, everyone. This is – this concludes my prepared remarks. Thank you. I will now turn the call over to our CFO, James. Thank you. James Jin Cheng: Thank you, NG, and good day, everyone. This is James speaking at our Singapore headquarters. As NG started with the call with, I would like to say the market environment in the third quarter of 2023 was still unfavorable. First, after Q1 surge and Q2 calmness, bitcoin price in quarter three showed a downward trend, which declined from $30,000 in July to about $25,000 in September, even though climbed the near to $27,000 by the quarter end. Secondly, the miners’ profits were still limited by the high level of total networking computing power around 400 exahash per second. And the miners’ purchasing power was weakened by the high financing interest cost. Thirdly, along with the product upgrading, the price competition among mining machine manufacturers was more fierce, especially the price of older generation machines continued to decline. These factors should be considered when analyzing our Q3 numbers. Despite the market downward volatility, geopolitical headwinds, regulatory changes, and other unfavorable factors from operation, we continued to execute our strategy and deliver the results through continuous investments in R&D, multiple channel sales development, and prudent cash flow management. Let’s start with profit and loss. Overall speaking, in quarter three, total revenue generated was $33.3 million, which beat our guidance of $30 million, but down 54.9% quarter-over-quarter. Our revenue from machine sales was $29.8 million, and our mining revenue was $3.3 million. Regarding our machine sales, we delivered a total computing power sold of $3.8 million terahash per second, representing a year-over-year growth of 8.7%, but a sequential decline of 38.7%. As the average selling price declined from $9.5 per terahash per second in quarter two to $7.9 per terahash per second in quarter three, the decrease in ASP was mainly due to the reduction in the selling price and the increase in the sales proportion of A12 series in terms of stock clearance. Considering both factors of power sold and ASP, our revenue from mining machine sales was $29.8 million, decreased to 48.5% from $57.8 million in the last quarter. Specifically, for our mining machine sales, we accrued $53.9 million for inventories write-down, prepayment write-down, and provision for reserve for inventory purchase commitments in this quarter. The inventory write-down was recorded based on most recent subsequent selling price when we offered a further price concessions for A13 series. Those write-downs and provisions are made under U.S. GAAP rules, jeopardizing our gross profit and making the quarterly loss bigger, but do not impact our cash status. If the above write-downs and provisions were excluded, we would have a gross profit for our mining machine sales of $1.1 million and a gross margin of 3.9%. Turning to our mining business, our mining revenue was down 79.5% quarter-over-quarter and down 64.6% year-over-year. As we announced in August, we temporarily shut down 2 exahash of our mining computing power in Kazakhstan since July to ensure legal compliance. It caused our total deployed hash rate to decrease to 4 exahash per second and our installed hash rate to decrease to 1.9x exahash per second in this quarter. As NG previously stated already, by our active working with local partners and local government, we’ve already obtained all the relevant licenses in mid-November. Despite these effects, we mined 117 bitcoins in this quarter and achieved 14.5 bitcoins for mining profit. Gross profit margin reached to 10% for our mining business in this quarter. Please note here that mining profit or loss is defined as the proportion of mining revenues deducting costs for energy and hosting in terms of mining revenues without consideration of depreciation Shifting to our AI business, AI revenue was $0.2 million in this quarter. As NG mentioned, we are now restructuring the AI business as a more independent business segment from mining machine and self-mining business, which could benefit our long-term development as well as open the possibility for AI to conduct independent financing. Now, let us look at the expenses. Our R&D expenses were $17.2 million in this quarter compared to $17.9 million in the last quarter and $17.6 million in the prior year period. Our sales and marketing expenses were $2.5 million compared to $2.4 million in the last quarter and $2.1 million in the prior year period. Our general and administrative expenses in this quarter were $21.9 million compared to $26.4 million in the last quarter and $21.7 million in the prior year period. Our operating expenses totaled $43.8 million remaining year-over-year stable and decreasing 10.7% quarter-over-quarter. The sequential decrease was mainly attributable to the reduced staff costs. We have recently optimized and adjusted our organization through a series of measures, including reducing total headcounts, increasing operational efficiency, and lowering operating cash flows. These measures are a move that can help us with near-term operating leverage against the fierce competition. The effects of these measures will begin to be reflected in our operating data from quarter 1, 2024. The next result of the foregoing was an operating loss of $112.8 million for this quarter compared to $119.1 million in the last quarter. Benefited from foreign exchange gain and deferred tax assets, the net loss was $80.1 million compared to $110.7 million in the last quarter. Turning to our balance sheet and cash flow, during quarter 3, we spent $36 million to sustain the wafer supply and the machine production. Other cash payments included $15 million for operations. The cash flow totaling $51 million was partially offset by cash inflow of $26 million from sales. So net-net at the end of the third quarter, we had cash and cash equivalents of $41 million on our balance sheet. We are glad to announce today that our balance is further bolstered with a capital injection up to $125 million in the form of convertible preferred share sales with multiple trenches subject to the customer rates closing conditions. We intend to use the net proceeds from this capital raise to fund the R&D expansion of production scale and other general corporate purposes. As of the end of this quarter, we recorded accounts receivable of $9.8 million declining $0.3 million compared to the end of quarter 2. We did not implement more instalments in quarter 3 and will continuously evaluate market demand and adopt corresponding credit policies with caution. Now turning our attention to our bitcoin assets. We held a record high 860 bitcoins as our own holding asset of September 30, which is 113 more than 747 at the end of June. We also held 378 bitcoins received as customer deposit, which is the same as the balance of June 30. From August 29, 2023, the date we reported our quarter 2 financial results to November 28, 2023, we neither utilized the ATM nor purchased any ADS. On November 10, we terminated the ATM agreement with the former sales agent and we announced on November 13, we have adjusted our ATM project by appointing B. Riley as the new sales agent. In the future, we will prioritize shareholders carefully, monitor cash flows and stock prices and flexibly execute any potential ATM sales or stock repurchases. In quarter 4, we anticipate a revenue of $34 million. In the end of 2023, the price of bitcoin is still facing a challenging environment and the price competition remains intense. Policy changes regarding cryptocurrencies and mining in different countries will also add uncertainty to industry operations. We may face unforeseen obstacles. Based on the above comprehensive situation, we give a cautious expectation for the fourth quarter of 2023. Now, I would like to briefly walk you through our financial results for the quarter. Revenues in the third quarter of 2023 was $33.3 million as compared to $73.9 million in the second quarter of 2023 and $145.5 million in the same period of 2022. Gross loss in the third quarter of 2023 was $69.1 million compared to a gross loss of $70.1 million in the second quarter of 2023 and a gross profit of $32.6 million in the same period of 2022. Total operating expenses in the third quarter of 2023 were $43.8 million compared to $49.0 million in the second quarter of 2023 and $43.1 million in the same period of 2022. Loss from operations in the third quarter of 2023 was $112.8 million compared to a loss from operations of $119.1 million in the second quarter of 2023 and a loss from operation of $10.5 million in the same period of 2022. Net loss in the third quarter of 2023 was $80.1 million compared to a net loss of $110.7 million in the second quarter of 2023 and a net income of $6.3 million in the same period of 2022. Basic and diluted net loss per ADS in the third quarter of 2023 were $0.47. As of September 30 2023, the company had cash and cash equivalents of $40.6 million. This concludes our prepared remarks. We are now open for questions. See also 15 Most Expensive Cities To Heat A Home In Winter and 12 Asian Countries with the Best Economy Right Now. Q&A Session Follow Canaan Inc. (NASDAQ:CAN) Follow Canaan Inc. (NASDAQ:CAN) We may use your email to send marketing emails about our services. Click here to read our privacy policy. Operator: [Operator Instructions] First question comes from the line of Mr. Lucas Pipes from B. Riley Securities. Please go ahead. Mr. Pipes, your line is now open. You may unmute locally. Lucas Pipes: Thank you very much, operator. Good morning everyone. Good evening. My first question is on the marketing side and I wonder in the current environment, could you speak to what you compete on, is it price? Is it financing? Is it the quality of your product? If you could maybe just share a little bit of color on that, I would appreciate it. Thank you. Nangeng Zhang: Yes. Good evening or good morning. I think for this industry, the most important factors are product performance and price. Regardless of the ways of competition, these two aspects should always be a top priority. In addition, it’s a cruel too to establish our unique features. Looking at the current and the future market is essential to make targeted adjustments and customize product designs at the system level based on the specific needs of our customers. For example, we have dedicated a lot of effort recently to ensure our systems can operate reliably in hash environments and this has received a lot of positive feedback from our customers. I believe we are industry leaders regarding product quality and customization. Right now, I think the key focus is on rapidly improving product performance while reducing the cost. Thank you. Lucas Pipes: Very helpful. Thank you for that. And then I wanted to touch on the chip procurement strategy at this time. With where the market is today, how are you looking at making commitments to your suppliers? Thank you very much. Nangeng Zhang: Yes. I think given that we are currently in the process of product integration and considering the volatile market conditions, we have a sales-driven production strategy. This means that we determine the quantity of wafers to be older based on the number of contracts on sales side, certainly with a certain percentage added. Yes. Lucas Pipes: That’s very helpful. Good to hear as well. Thank you. And then one last one for me. I’m just curious how maybe the U.S. market is holding up more specifically and also what some of the key differences you might be seeing between the U.S. and other markets globally. Thank you. James Jin Cheng: In the United States, many customers are formerly institutional clients and their funding often comes from the capital markets. Currently, financing costs in the United States remains relatively high. However, we have observed that financing channels that were almost closed in the past year are gradually reopening. As a result, there are signs of recovery in mining machines demand in the U.S. market along with reopening of financing channels. The U.S. market has a relatively high demand of mining machines and the competition is faring as well. It’s necessary to provide both top performance and competitive pricing. Given that U.S. market has constantly been a sizeable one, it’s become a highly competitive battleground. Yes. Thank you. Lucas Pipes: Thank you very much for all the color. And to you and the team best of luck. Operator: One moment for the next questions. Our next question comes from the line of Michael Donovan from H.C. Wainwright. Please go ahead. Michael Donovan: Thank you, operator. This is Michael Donovan calling in on behalf of Kevin Dede. NG and James, congrats on the quarter. Can you discuss a bit more about the inventory levels of older generation machines? Are they completely gone now? Nangeng Zhang: Yes. As planned, the destocking process of models up to [A4] is now nearly complete. So our focus has recently shifted to clearing stock of the A13 series. Michael Donovan: Okay. Thank you. That’s helpful. Now for the order levels for the new A14 series, what are the trends you’re seeing in the fourth quarter? Nangeng Zhang: Yes. Our newly launched A14 series mining machines have a higher computing power and much greater power efficiency, making them more competitive. Since we start pre-sales in mid-September, we have received future contracts for about 2 million terahash per second. These orders are gradually making their ways into the supply chain for production. Michael Donovan: Okay. Great. Now let’s get switched to self-mining. You have about 4 exahash currently deployed. How much are you generating now in terms of the mid-fourth quarter? And how much more do you have to deploy? Nangeng Zhang: Yes. Mining remains a long-term strategic part of our business. So we continue to explore mining cooperation opportunities with other regions. In the third quarter, the pilot batch of computing power for new projects in North and South America entered operation. So they take the batch of 2000 of our [1,340] previous mining machines and successfully deployed and launched for our front mining project with Stronghold. Yes. So at the end of the third quarter, we have about 4 exahash per second of computing power deployed. Also, recently we have expanded our mining computing power in South America and Africa. In addition, we signed contracts for a new project in the Middle East during the fourth quarter. This includes our first pilot collaboration with our in-house integrated liquid cooling mining solution, which is currently in progress deployment and installation testing. Also, about – yes, also we already obtained the type 2 license for our mining operations in Kazakhstan in mid-November, as required by the country’s new mining policy. Obtaining this license means we are legally permitted to conduct bitcoin mining activities in Kazakhstan. So at present, we are in the process of adjusting the mining machines deployed locally under this license. We are in discussions with our mining partners to prepare for the reception of operations. If all goes smoothy, we can expect our mining project in Kazakhstan and we will gradually resume operations around the end of the year. Thank you. Thank you, NG. I’ll hop back in the queue. Thank you for the questions. Operator: One moment for the next questions. Our next question comes from the line of Michael Legg from The Benchmark Company. Please ask your question. Michael Legg: Thanks. Wanted to touch base on the preferred offering you’re doing of $125 million. Can you talk about some of the terms of that, whether it’s convertible, whether there’s a dividend, board seat, et cetera. Just give us a little bit more information on that, please. Thanks. James Jin Cheng: Thank you, Michael. James speaking. I think today we announced sales of convertible preferred shares of up to $125 million with multiple trenches subject to the customer closing conditions. I think the specific preferred share details are available in the documentation released today on our Form 6-K. I think we intended to use the net proceeds from this capital raise to fund our R&D and expansion of production scale and other general corporate purposes. I think that’s the basic idea of doing this fund raising. Thank you, Michael. Michael Legg: Okay. I’ll check the 6-K for the details. And then just I want to follow up on Michael’s question on the inventory. What percent is finished goods A14s of the inventory and how much of it is still raw materials versus all the models? James Jin Cheng: Michael, currently A14 series is still a purely new product. So we are placing the orders of wafers and then we can get the finished goods in late quarter one. I think that’s the schedule. So currently we don’t have any finished goods. I mean the current stock, we will wait for the wafers coming out and produce the chips and then assemble the machines and deliver to our customers later......»»
Griffon Corporation (NYSE:GFF) Q4 2023 Earnings Call Transcript
Griffon Corporation (NYSE:GFF) Q4 2023 Earnings Call Transcript November 15, 2023 Operator: Greetings, and welcome to the Griffon Corporation Fiscal Fourth Quarter 2023 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Brian Harris, Chief Financial Officer. Thank you. Mr. Harris, you […] Griffon Corporation (NYSE:GFF) Q4 2023 Earnings Call Transcript November 15, 2023 Operator: Greetings, and welcome to the Griffon Corporation Fiscal Fourth Quarter 2023 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Brian Harris, Chief Financial Officer. Thank you. Mr. Harris, you may begin. Brian Harris: Thank you. Good morning. It’s my pleasure to welcome everybody to Griffon’s fourth quarter and fiscal 2023 earnings call. Joining me for this morning’s call is Ron Kramer, Griffon’s Chairman and Chief Executive Officer. Our press release was issued earlier this morning and is available on our website at www.griffon.com. Today’s call is being recorded, and the replay instructions are included in our earnings release. Our comments will include forward-looking statements about Griffon’s performance. These statements are subject to risks and uncertainties that can change as the world changes. Please see the cautionary statements in today’s press release and in our SEC filings. Finally, some of today’s remarks, we’ll adjust for items that affect comparability between periods. These items are explained in our non-GAAP reconciliations included in our press release. With that, I’ll turn the call over to Ron. Ron Kramer: Good morning, everyone. Thank you for joining us. We’re pleased with our results for the fourth quarter and the fiscal year. The record performance of our Home and Building Products, HBP segment drove our results as Clopay and CornellCookson continue to deliver strong free cash flow and operating margins. Our Consumer and Professional Products or CPP segment improved in the fourth quarter, and we’re optimistic about its repositioning for the future. For the year, HBP revenue increased 5% to $1.6 billion, driven by continued growth in commercial volume. As expected, residential volume decreased as backlog levels normalized. HBP had favorable price and mix across all products and channels. HBP’s fourth quarter performance benefited from increased investment in marketing and sales for both residential and commercial channels, following two years of reduced activity due to elevated backlog and extended lead times. HBP also continue to invest in productivity and innovation to further drive growth, including expanding Clopay’s Troy, Ohio sectional door manufacturing capacity and adding advanced manufacturing equipment to better satisfy customer demand for premium products. Turning to Consumer and Professional Products segment, CPP’s results for the year continue to reflect challenging market conditions with revenue decreasing 18% to $1.1 billion. All channels and geographies were affected by reduced consumer demand and elevated customer inventory levels. As we announced previously to address the impact of these market conditions on certain U.S. product lines, CPP is expanding its global sourcing strategy. By utilizing an asset-light structure, CPP’s U.S. operations would be better position to serve customers with a more flexible and cost-effective global sourcing model. The global sourcing expansion project remains on schedule and within budget. By the end of December 2023, operations at two manufacturing facilities and four wood mills will representing over 1 million square feet of space will cease. The remaining affected AMES locations will be transitioned during calendar year 2024. The global sourcing expansion at AMES is a key element of our strategy to improve the margins of the CPP segment, and we are pleased by the progress made so far. We will continue to provide updates throughout the year as we achieve additional milestones in the process. Turning to capital allocation. In fiscal 2023, we took significant actions to deliver shareholder value and strengthen our balance sheet through cash dividends, stock buybacks and debt repayment. In May, we increased our regular quarterly dividend by 25% to $0.125 per share, paid a $2 per share special dividend, and announced a $200 million increase to our share repurchase authorization, bringing the total then to $258 million. At the end of fiscal year September 30, we’ve repurchased more than 4.1 million shares for $151 million. In total, during fiscal ’23, we returned $285 million to shareholder dividends through dividend payment and share repurchases. It’s also important to note we’re able to deliver this value while maintaining our leverage at 2.6x. Since September 30, we purchased an additional 1.1 million shares. And this morning, the Griffon Board announced the $200 million increase to its share repurchase authorization, bringing the current authorization to a total of $262 million. Since April, Griffon has repurchased 5.3 million shares for a total of $196 million or $37.15 per share through yesterday, November 14, 2023. These share repurchases represent 9.2% of the shares outstanding as of March 31, 2023. During fiscal ’23, we also took action to improve our financial flexibility and strengthen our balance sheet. We increased the size of our revolving credit facility from $400 million to $500 million and extended the maturity of the revolver to August 1, 2028. Also in the fourth quarter, we repaid $25 million of our Term Loan B facility. In fiscal ’24, we will continue to use our free cash flow to support our capital allocation strategy with a focus on opportunistically repurchasing shares, reducing debt and supporting our regular quarterly dividend. Also this morning, the Griffon Board authorized a regular quarterly dividend of $0.15 per share payable on December 14 to shareholders of record on November 28, marking the 49th consecutive quarterly dividend to shareholders. This is a 20% increase over our last quarterly dividend and a 50% increase compared to our November 2022 dividend. Our dividend has grown at an annualized compound rate of 18% since we initiated dividends in 2012. These actions reflect the strength of our business as well as our confidence in our strategic plan and our outlook. I’ll turn it back to Brian for the financial update and to provide details about our 2024 guidance. Brian Harris: Thank you, Ron. I’ll start with our fourth quarter performance, and then review our guidance for fiscal ’24. Fourth quarter revenue was of $641 million decreased by 10%, and adjusted EBITDA before unallocated amount of $135 million decreased by 3%, both in comparison to the prior year. The related EBITDA margin was 21%, an increase of 140 basis points over the prior year fourth quarter. Gross profit on a GAAP basis for the quarter was $246 million compared to $250 million in the prior year quarter. Excluding items that affect comparator from the current and prior year period, gross profit was $250 million in the current quarter compared to $253 million in the prior year. Normalized gross margin increased year-over-year by 360 basis points to 39.2%. Fourth quarter GAAP selling, general and administrative expenses were $157 million compared to $166 million in the prior year quarter. Excluding adjusting items from both periods, SG&A expenses were $146 million or 22.8% of revenue compared to the prior year of $148 million or 20.8% of revenue. Fourth quarter GAAP income from continuing operations was $42 million or $0.79 per share compared to the prior year loss of $415 million, which was driven by CPP impairment charges. Excluding all items that affect comparability from both periods, current quarter adjusted net income from continuing operations was $63 million or $1.19 per share compared to the prior year of $60 million or $1.09 per share. Corporate unallocated expenses, excluding depreciation, were $13.5 million in the quarter compared to $14.2 million in the prior year. Net capital expenditures were $34 million in the fourth quarter compared to $9 million in the prior year quarter. The increase was primarily driven by a net $20 million related to the acquisition of the HBP headquarters facility in Mason, Ohio, and the manufacturing facility for ClosetMaid in Ocala, Florida, as we capitalized on the opportunity to acquire these critical facilities below market value. Depreciation and amortization totaled $15.4 million for the fourth quarter compared to $17.6 million in the prior year. Regarding our segment performance. Revenue for Home and Building Products decreased 7% over the prior year quarter, driven by residential volume, partially offset by increased commercial volume. Adjusted EBITDA decreased 9% compared to the prior year quarter, driven by the decreased revenue, coupled with increased labor, marketing and advertising, partially offset by reduced material costs. Consumer and Professional Products revenue decreased 13% from the quarter to $247 million. The reduction in revenue was primarily attributable to reduced volume across all channels and geographies driven by soft consumer demand, elevated customer inventory levels and customer supplier diversification in U.S. CPP adjusted EBITDA increased $14 million from the prior year $7 million, driven by reduced material costs, partially offset by the impact of reduced revenue noted above. In May, we announced that CPP is expanding its global sourcing strategy for products manufactured and sold in the U.S. to address evolving market conditions. Utilizing an asset-light model enables CPP to continue providing high-quality products, strengthen its competitive position and leverage industry-leading service and distribution that our customers and consumers expect. Further, these actions position CPP to achieve target EBITDA margins of 15% and generate substantial additional value for our shareholders. The product remains on time and on budget with completion expected by the end of calendar 2024. In the quarter ended September 30, CPP incurred pretax cash charges of $10 million related to the expansion of its global sourcing strategy. Regarding our balance sheet and liquidity, as of September 30, 2023, we had net debt of $1.4 billion and net debt-to-EBITDA leverage of 2.6x as calculated based on our debt covenants. We remained net debt and leverage neutral with the prior quarter ending June ’23, even after returning approximately $72 million to shareholders via stock buybacks and dividends in the quarter. The prior year-end net debt was $1.5 billion and leverage was 2.9x. Regarding our 2024 guidance, we expect revenue of $2.6 billion and segment adjusted EBITDA of $525 million for fiscal 2024, which excludes unallocated costs of $54 million, charges related to the AMES global sourcing expansion for approximately $25 million, and strategic review retention expenses of approximately $10 million. We anticipate ’24 HBP revenue will decrease 3% to 5% year-over-year due to the first half of ’24 being compared to the prior year, which included volume from significant residential door backlog and the return to normal seasonal demand patterns, which historically has less demand in our second quarter ended March. These factors will be partially offset by market share gains in both residential and commercial. HBP EBITDA margin for 2024 is expected to remain in excess of 30%. The phasing of EBITDA performance will follow the same general trends as discussed with revenue, with an unfavorable comparison to the prior year and the first half followed by a stronger second half. With respect to CPP, we expect 2024 revenue to decrease 3% to 5% year-over-year due to continued soft demand and high customer inventory levels partially offset by normalized weather. The first half is expected to compare unfavorably year-over-year as customer destocking continues with gradual improvement during the second half as inventory levels return to normal. CPP EBITDA margin is expected to see modest improvement year-over-year, particularly in the second half as the AMES U.S. operations transition to an asset-light operating model. Total capital expenditures for fiscal year ’24 are expected to be $70 million. This amount includes the capital required to complete the 100,000 square foot expansion and upgrades at Clopay sectional door manufacturing facility in Troy, Ohio. Depreciation and amortization is expected to be a total of $63 million of which $22 million is amortization. We expect to generate free cash flow for the full year in excess of net income, inclusive of the capital investments. As we have seen historically, we expect a seasonal pattern with cash usage in the first half followed by a strong second half cash generation. This includes the impact of cash outflows related to the global sourcing initiative. We expect interest expense of approximately $103 million in fiscal ’24. Our expected normalized tax rate will be approximately 28%. As is always the case, geographic earnings mix and any legislative action, including new guidance on tax reform matters may impact rates. Now I’ll turn over the call back over to Ron. Ron Kramer: Thanks, Brian. We enter 2024 with a proven strategy, skilled team and strong balance sheet, positioning us for future growth while remaining flexible in an uncertain macroeconomic environment. Before we turn to questions, I want to acknowledge and thank the employees and management teams of our businesses. It’s because of their dedication and effort that Griffon continues to see such strong operating performance. We’ll continue to use the strong operating performance and free cash flow from our business to drive our capital allocation strategy to deliver long-term value for our shareholders. This strategy will continue to include investing in our businesses, opportunistically, we repurchasing shares and reducing debt. These actions underscore the confidence of Griffon’s Board and management in our outlook and strategic plan. Operator, we’re happy to take any questions. See also 20 Countries with Most Prostitutes in the World and 15 Countries With Most Unfaithful Husbands In The World. Q&A Session Follow Griffon Corp (NYSE:GFF) Follow Griffon Corp (NYSE:GFF) We may use your email to send marketing emails about our services. Click here to read our privacy policy. Operator: [Operator Instructions] Our first question comes from Joe Ahlersmeyer from Deutsche Bank. Please proceed. Joe Ahlersmeyer: Hi, everybody. Good morning, and thanks for taking the question. Brian Harris: Good morning. Joe Ahlersmeyer: And congrats on the results and the favorable outlook. I certainly appreciate also the detail around the cash flow. Maybe just to start on the HBP business. Regarding the outlook, I think it makes sense. A lot of it depends or hinging on sort of the comparison versus the first half of prior year. But I was wondering if you could just talk about sequentially what you’re seeing between your two kind of residential and commercial businesses within there? Just sequentially, what’s the momentum in the business looks like? Brian Harris: Sue. We continue to see reduced residential volume, though we expect some market share gains in ’24. On the commercial side, we had volume benefits, increased volume in 2023, and we expect 2024 to continue that trend. We continue to have good order volume in that area. Joe Ahlersmeyer: Sounds good. And then just thinking about the margin guidance in excess of 30%. Certainly, that’s above the long-term guide. Wondering if there’s something to kind of call out there to bridge between that and the guidance, but also if you’re willing to sort of put an upper bound on that guidance rather than just 30% plus. Brian Harris: Sure. So we do have long-term expectations out there of 25% to 28%, even though HBP continues to operate at 30% plus, and we expect it – we were seeing nothing that is going to change that. We have that guidance out there, perhaps a little conservatism and also considering downturns in the market, and that’s what we think is the bottom for our business, those types of margins. Ron Kramer: But 2024, we’re off to an excellent start, and we see the 30% being well within our capabilities. and sustainability. So the business has proven itself to be resilient, the positioning that has happened over a period of years of expanding the residential business, the development of our commercial business. We have an excellent team doing the best in this industry, and we continue to be the leader, and we expect to both grow the business, take market share and maintain our margins for ’24. Operator: Our next question comes from Bob Labick with CJS Securities. Please proceed. Bob Labick: Good morning, and congratulations on a great quarter and a really great fiscal year as well. Brian Harris: Thanks Bob. Good morning. Bob Labick: Yes. So I wanted to start – I’m just sticking with HBP because it’s obviously doing so well. It’s been operating at full tilt. You’ve gotten a lot of stuff out of backlog. And then you just talked a little bit about adding capacity. So maybe my question was going to be before you mentioned Troy, where do you stand in terms of your capacity and where is it going? And then you mentioned the expansion at Troy. So maybe you could elaborate on the expansion of Troy? What you’re using it for and how it will change your throughput and your opportunity? How much you can grow revenue from this, et cetera, et cetera, please? Brian Harris: Sure. So the project in Troy is to expand capacity for the higher end of the products that we make and to make sure we can continue to get that in the marketplace. It also gives us a chance to make sure we have equipment operational in the future and spread out so we can maintain older equipment and get away from running the plants 24/7. It gives us a much more normalized cadence to ensure that we can properly maintain equipment, avoids late shifts and weekend shifts and continues to keep us in a position where we can grow our share. Bob Labick: Okay. That sounds great. And I guess just for my follow-up, you started to answer this on the last question as well. But could you elaborate on the structural changes at HBP that have enabled you to drive margins so high and up to this strong and now obviously impressive and sustainable level. Just give us kind of just elaborate on the changes from then till now and why we obviously have a strong vision for revenues and margins going forward? Ron Kramer: So let’s start with this is 15 years in the making. So go back to 2008 in the global financial crisis. In 2009, we consolidated the plants, and we invested in the business. And we took what was a leading business and made it better. Invested in technology at both the plant level, created software for our dealers to be able to showcase our products for consumers to make it easier to order. We’ve expanded our relationship over the years with Home Depot and Menards, and we bought CornellCookson five years ago and expanded our commercial business. So the margin improvement story is a function of getting the strategy right, getting the operating footprint of this business, modernizing and building the brand at the consumer level, and now Clopay represents the leading brand in residential garage doors......»»
T. Rowe Price"s (TROW) October AUM Declines on Weak Markets
T. Rowe Price's (TROW) October AUM decreases 2.5% to $1.31 trillion due to unfavorable market conditions. T. Rowe Price Group, Inc. TROW announced its preliminary assets under management (AUM) of $1.31 trillion for October 2023. The figure reflected a 2.5% decline from the previous month, affected by unfavorable market conditions.TROW experienced net outflows of $6.3 billion in October 2023.At the end of the reported month, equity products and multi-asset products aggregated $668 billion and $429 billion, down 3.2% and 2.5%, respectively, on a sequential basis. T. Rowe Price registered $364 billion in target date retirement portfolios in October, which declined 2.2% from the prior month. Fixed-income products, including the money market, constituted $168 billion, down 1% sequentially.Alternative products of $47 billion were flat on a sequential basis.A diversified business model, focus on enhancing investment capabilities, broadening distribution reach and improving client partnerships are expected to aid TROW’s long-term growth.However, increased dependence on investment advisory fees is concerning, as market fluctuations and a sudden slowdown in overall business activities are likely to hurt its revenues. Additionally, rising expenses could impede bottom-line expansion.Over the past six months, shares of T. Rowe Price have declined 12.9% against the industry’s growth of 8.9%.Image Source: Zacks Investment ResearchT. Rowe Price currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.Competitive LandscapeFranklin Resources, Inc. BEN reported a preliminary AUM balance of $1.33 trillion for October 2023. This reflected a 2.9% decrease from $1.37 trillion as of Sep 30. The downtick was primarily caused by the impacts of negative markets and long-term net outflows.Total month-end fixed-income assets were $468.9 billion, down 2.9% from the prior month’s level. Equity assets of $410.9 billion fell 4.5% from September 2023. BEN recorded $140.8 billion in multi-asset class, down 2.9% sequentially. Alternative assets aggregated $253.8 billion, down marginally from the prior month.Victory Capital Holdings VCTR reported AUM of $148.89 billion for October 2023. This reflected a 3% decline from $153.51 billion as of Sep 30, 2023.By asset classes, at the end of October, VCTR’s U.S. Mid Cap Equity AUM fell 4.5% from the September level to $26.97 billion. The U.S. Small Cap Equity AUM of $13.64 billion dipped 6.9%. The U.S. Large Cap Equity AUM decreased 2.7% to $11.28 billion. The Global/Non-U.S. Equity AUM was down 2.2% to $14.48 billion. 4 Oil Stocks with Massive Upsides Global demand for oil is through the roof... and oil producers are struggling to keep up. So even though oil prices are well off their recent highs, you can expect big profits from the companies that supply the world with "black gold." Zacks Investment Research has just released an urgent special report to help you bank on this trend. In Oil Market on Fire, you'll discover 4 unexpected oil and gas stocks positioned for big gains in the coming weeks and months. You don't want to miss these recommendations. Download your free report now to see them.Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report Franklin Resources, Inc. (BEN): Free Stock Analysis Report T. Rowe Price Group, Inc. (TROW): Free Stock Analysis Report Victory Capital Holdings, Inc. (VCTR): Free Stock Analysis ReportTo read this article on Zacks.com click here.Zacks Investment Research.....»»
Virtus Investment"s (VRTS) October AUM Dips 4.1% Sequentially
Virtus Investment's (VRTS) preliminary AUM balance for October 2023 declines 4.1% on the back of unfavorable market returns. Virtus Investment Partners, Inc. VRTS recorded a sequential decline of 4.1% in its preliminary assets under management (AUM) balance for October 2023 on the back of unfavorable market returns. The company reported a month-end AUM of $155.82 billion, which reflected a fall from the Sep 30, 2023 level of $162.5 million.The company offered services to $2.4 billion of other fee-earning assets. This was excluded from the above-mentioned AUM balanceIn October, Virtus Investment’s open-end funds’ balance decreased 4.3% from the end of the previous month to $51.8 billion. Also, the closed-end funds’ balance fell 2.2% to $9.26 billion.Further, the Institutional accounts’ balance sequentially slipped 3.8% to $57.9 billion. Retail separate accounts’ balance of $36.8 billion fell 4.8% from the prior month.Elevated operating expenses are expected to hurt Virtus Investment’s bottom line to an extent in the near term. Yet, its integrated multi-boutique business model in a rapidly growing industry is likely to support its performance.Over the past six months, shares of Virtus Investment have gained 13.4% compared with the 9% upside of the industry it belongs to. Image Source: Zacks Investment Research Currently, Virtus Investment carries a Zacks Rank #4 (Sell).You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.Competitive LandscapeCohen & Steers, Inc. CNS reported a preliminary AUM of $72.2 billion as of Oct 31, 2023, which reflects a decrease of 4% from the prior-month level. Market depreciation of $2.1 billion, net outflows of $732 million and distributions of $154 million led to the decline.Cohen & Steers recorded total institutional accounts of $29.8 billion at the end of October 2023, declining 4.6% from the September-end level. Of the total institutional accounts, advisory accounts were $17.3 billion, while the rest were sub-advisory.Victory Capital Holdings VCTR reported an AUM of $148.89 billion for October 2023. This reflected a 3% decline from the $153.51 billion reported as of Sep 30, 2023.By asset classes, at the end of October, VCTR’s U.S. Mid Cap Equity AUM fell 4.5% from the September level to $26.97 billion. The U.S. Small Cap Equity AUM of $13.64 billion dipped 6.9%. Further, the U.S. Large Cap Equity AUM decreased 2.7% to $11.28 billion. VCTR’s global/Non-U.S. Equity AUM was down 2.2% to $14.48 billion. Zacks Names "Single Best Pick to Double" From thousands of stocks, 5 Zacks experts each have chosen their favorite to skyrocket +100% or more in months to come. From those 5, Director of Research Sheraz Mian hand-picks one to have the most explosive upside of all. It’s a little-known chemical company that’s up 65% over last year, yet still dirt cheap. With unrelenting demand, soaring 2022 earnings estimates, and $1.5 billion for repurchasing shares, retail investors could jump in at any time. This company could rival or surpass other recent Zacks’ Stocks Set to Double like Boston Beer Company which shot up +143.0% in little more than 9 months and NVIDIA which boomed +175.9% in one year.Free: See Our Top Stock and 4 Runners Up >>Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report Virtus Investment Partners, Inc. (VRTS): Free Stock Analysis Report Cohen & Steers Inc (CNS): Free Stock Analysis Report Victory Capital Holdings, Inc. (VCTR): Free Stock Analysis ReportTo read this article on Zacks.com click here.Zacks Investment Research.....»»
UBS Group AG (NYSE:UBS) Q3 2023 Earnings Call Transcript
UBS Group AG (NYSE:UBS) Q3 2023 Earnings Call Transcript November 7, 2023 UBS Group AG misses on earnings expectations. Reported EPS is $-0.24 EPS, expectations were $0.23. Operator: Ladies and gentlemen, good morning. Welcome to the UBS Third Quarter 2023 Results Presentation. The conference must not be recorded for publication or broadcast. [Operator Instructions]. At […] UBS Group AG (NYSE:UBS) Q3 2023 Earnings Call Transcript November 7, 2023 UBS Group AG misses on earnings expectations. Reported EPS is $-0.24 EPS, expectations were $0.23. Operator: Ladies and gentlemen, good morning. Welcome to the UBS Third Quarter 2023 Results Presentation. The conference must not be recorded for publication or broadcast. [Operator Instructions]. At this time, it’s my pleasure to hand over to Sarah Mackey, UBS Investor Relations. Please go ahead, madam. Sarah Mackey: Good morning, and welcome everyone. Before we start, I would like to draw your attention to our cautionary statement slide at the back of today’s results presentation. Please also refer to the risk factors filed with our Group results today, together with additional disclosures in our SEC filings. On slide two, you can see our agenda for today. It’s now my pleasure to hand over to Sergio Ermotti, Group CEO. Sergio Ermotti : Thank you, Sarah, and good morning everyone. During the third quarter and as we speak, we continue to see an evolution of the macroeconomic outlook with opinions, forecasts, and market changing at very rapid pace. In addition, we’ve witnessed an even further deterioration of the geopolitical landscape as a result of tragic events in the Middle East. Our thoughts are with those who are suffering and have been impacted by this violence, as well as our affected employees. While we have been very busy executing on our integration plans, our top priority is always to stay close to clients, helping them protect their assets and position their portfolios and businesses for future opportunities. Our wealth management clients remain cautious and defensively positioned. And while some of our institutional clients are taking advantage of short term opportunities, many still remain on the sidelines. Our consistent dedication continues to be rewarded by their confidence and trust in UBS. This was demonstrated by another quarter of strong flows across GWM and P&C. In the third quarter, the first full quarter since the acquisition, we made strong progress and delivered underlying profitability. With respect to the integration of Credit Suisse, we continue to be encouraged by our achievements to-date, in both our planning and execution. In terms of the lessons learned from the events in March, we welcome the recent reports issued by the Basel Committee on Banking Supervision, the Financial Stability Board, and the Swiss Expert Group on Banking Stability. Their findings confirmed our view that the crisis was not a result of insufficient capital or liquidity requirements. Rather, the reports emphasize sustainable business models, risk adjusted profitability, and importantly, the critical role of robust risk management cultures and effective governance. We take comfort in these conclusions as they have been and remain core principles of UBS. Today, we are positioning UBS to be an even stronger and safer global financial institution. It is for this reason that we remain confident the acquisition will allow us to deliver significant value for all our stakeholders, notwithstanding potential macroeconomic or geopolitical challenges. Briefly summarizing our results this quarter, our strong underlying performance was driven by positive operating leverage at the Group level. GWM, P&C, and Asset Management all delivered underlying PBT growth. IB performance was impacted by market conditions that were unfavorable to our business model and investments we expect to be accretive in future quarters. Our capital position remains strong with a CET1 ratio of 14.4% and total loss absorbing capacity of nearly $200 billion. We achieved these results while incurring $2 billion in integration-related expenses and making good progress running down non-core assets. Despite our reported loss in the quarter, we incurred over $500 million in tax expense and paid over $200 million in cash taxes in Switzerland. Our confidence in the ability to successfully integrate Credit Suisse and create substantial long-term value is supported by the strong progress we made in the third quarter. We have now stabilized Credit Suisse and continue to grow our franchise through new client acquisition and share of wallet gains. In addition, our client retention and win-back strategy is working. Net new money in GWM was $22 billion and our strong deposit momentum continued through the quarter. The $33 billion in net new deposits across GWM and P&C also supported our ability to reduce quarterly funding costs by $450 million through the repayments of the public liquidity backstop and the ELA+ that we announced in August. We are pleased to see strong demand for UBS debt in the wholesale market, with transactions priced at similar levels to where UBS papers stood before the rescue of Credit Suisse. We have finalized the perimeter of non-current legacy and our efforts to actively unwind positions resulted in a capital release of around $1 billion. Lastly, we continue to execute our plans to reduce costs in non-core and legacy, restructure Credit Suisse’s Investment Bank and remove duplications across our operations. We have already delivered around $3 billion in annualized exit rate gross cost savings. We expect to make further progress in the fourth quarter. Slide six summarizes well how quickly we have stabilized Credit Suisse and the confidence of clients in UBS. Credit Suisse Wealth Management’s quarterly net new money has now turned positive for the first time in a year and a half, with $3 billion in the third quarter. UBS Wealth Management’s $18 billion in net new money is the second highest third quarter result in over a decade. In addition, it was satisfying to see that our efforts to win back client assets resulted in $22 billion in net new deposits from Credit Suisse clients across GWM and P&C. Following our decisions to integrate Credit Suisse Schweiz, we reached out to our clients to reassure them that we remain committed to delivering the best capabilities of both institutions. In addition, we reiterated that their credit limits across both banks will remain in place. To-date, client retentions have been broadly constructive and – reactions sorry – client reaction have been broadly constructive and net new deposits in P&C were positive in both Personal and Corporate Banking client segments. We are particularly pleased that this was also the case in September, the month following our decision to integrate both franchises. In non-core and legacy, we also made strong progress this quarter. 80% of the sequential reduction in NCL’s credit and market risk risk-weighted assets was driven by actively running down positions executed above marks. Non-operational risk-weighted assets have now been reduced by nearly one-third since Q1, ‘23 and the expected natural runoff profile has improved by $3 billion. While we have some credit risk exposure in certain local emerging markets and other more complicated bilateral positions that resulted in CLEs this quarter, the key risks across the portfolio are well understood, actively managed, and in most cases, well hedged. The majority of our credit risk exposure is with high-quality borrowers. Over 75% of the exposure is rated investment-grade. This provides us with the comfort to continue to pursue our strategy to accelerate the disposal of these assets in a way that optimizes value for our shareholders, while also protecting our clients and counterparties. The finalized perimeter of non-current legacy contains $30 billion in operational risk-weighted assets. As a function of the natural decay across the portfolio, we expect a reduction of around 50% by the end of 2026. Todd will take you through this in more detail. Returning to the integration, let me reiterate that the complexity is not just from managing two GC fees banks. Our immediate priorities since the transaction was announced and closed had to be on stabilizing and restructuring Credit Suisse. This will continue to be the case until the early part of 2024. At the same time, we are executing on our integration plans at pace, and on the left side of slide eight, you can see a selection of our recent achievements. Notably, we have established management responsibilities and operating models across business divisions and legal entities, including in our Swiss franchise. You can also see some of our key priorities through the end of this year and beyond. This includes the merger of our significant legal entities, client migrations across all of our business divisions, and executing on our technology decommissioning plans. Last but not least, we are also working towards finalizing our three-year strategic plan, which we will present in early February. As we continue to progress our plan, the main focus has been on delivering synergies for the combined group. We remain confident that the 2026 goals that we presented last quarter are achievable. But, as I say then, it will not be a straight-line journey. We are pleased that the first phase of gross cost savings has already been executed in 2023. But I am sure we all appreciate the significant costs associated with running and combining two GC fees, one of which is still structurally unprofitable. From an operational standpoint of view, it is clear that 2024 will be a pivotal year. Completing the merger of our significant legal entities before the end of next year is a critical step to enable us to unlock the next phase of our cost, capital and funding synergies, which we expect to realize in 2025 and 2026. Our enhanced scale, leading client franchises and increased future earnings power will position us for growth. Disciplined execution will continue to be an important driver for our performance, and we are on track to deliver on our plans. We are optimistic about our future as we build an even stronger and safer version of the UBS that was called upon to stabilize the financial system in March, and one that all of our key stakeholders can be proud of. With that, I hand over to Todd. Todd Tuckner : Thank you, and good morning everyone. As Sergio highlighted, we are executing on our plans at pace. In our first full quarter since the Credit Suisse acquisition, we have delivered underlying profitability and maintained strong client momentum with impressive net new money inflows in Global Wealth Management and net new deposit growth in our Swiss franchise. We also made substantial progress in de-risking our non-core and legacy portfolio, reinforcing our balance sheet for all seasons. Before I move on to discussing details of our financial performance, let me describe the reporting changes we implemented this quarter and the ones we expect to introduce soon. Today, for the first time, we are presenting the results of our performance segments on a combined basis, reflecting the way we are managing our businesses and engaging with clients. In addition to Global Wealth Management, Personal and Corporate Banking, Asset Management, and the Investment Bank, we are now separately reporting non-core and legacy, as well as group items, all of which reflect the combined performance of UBS and Credit Suisse under IFRS and in U.S. dollars. As I said during the second quarter earnings call, our aim is to be clear and forthcoming in explaining the financial reporting of this complex transaction. Therefore, we’ve introduced underlying performance metrics that primarily strip out the PPA-related pull-to-par effects from revenues in our core businesses and adjust for integration-related expenses across all performance segments. Regarding the pull to par effects in NCL, in the quarter we reclassified most of the positions that Credit Suisse’s Investment Bank and capital release unit historically accounted for on an accrual basis to fair value through P&L, as those positions in NCL are now held for sale. As a reminder, those positions gave rise to the $3.1 billion in future NCL pull to par revenues that we flagged last quarter. Given that NCL generates revenues in various ways, whether from early unwinds of positions and other disposals, mark-to-market on its fair value book, or from pull to par effects, we don’t distinguish among the various accounting classification types. Accordingly, in the quarter and going forward, all sources of NCL income, gain or loss, will be treated as part of its underlying performance. As last quarter’s disclosed IFRS results reflect only one month of Credit Suisse’s operating performance, to improve comparability, we’ve prepared estimated underlying results that reflect all three months of the second quarter. As I go through my remarks, unless otherwise stated, I will compare our underlying third quarter results sequentially to this estimated performance in the prior quarter. We’ll focus on sequential developments until the third quarter of 2024, when we’ll resume year-over-year commentary. Now, onto our plan changes. In the fourth quarter, we will expand our Global Wealth Management asset flows disclosure and enhance comparability with U.S. peers. We will report net new money plus dividends and interest, as well as disclose net new fee-generating assets for the combined franchise. We intend to introduce a growth target for net new money plus dividends and interest when we present our integration KPIs and targets as part of our fourth quarter results early next year. Additionally, starting from the first quarter of 2024, we expect to push out to our business divisions substantially all balance sheet and P&L items that were previously retained centrally in group items. The only exceptions will be for group items that are not directly attributable to divisional activities, including deferred tax assets, cash flow hedges, own credit, and their associated P&L effects. Our business division equity attribution framework will also reflect these changes, whereby the average levels of equity across the business divisions will more closely align to our current group capital targets. Moving on to our financial performance on slide 12. The quarterly profit before tax was $844 million, a $1.4 billion increase from the second quarter, as we delivered strong positive operating leverage with $0.6 billion higher revenues and $0.5 billion lower operating expenses. Additional CLE declined by $0.4 billion sequentially to $0.3 billion, which mainly related to Credit Suisse loans within P&C and NCL, which I cover later in more detail. By comparison, CLE in the second quarter of $0.7 billion included more than $0.5 billion of charges, primarily related to the take-on recognition of ECL allowances on Credit Suisse’s lending portfolios. On a reported basis, the third quarter net loss was $785 million. As $526 million in tax expense arising in profitable entities could not be offset by tax benefits from losses primarily generated by certain Credit Suisse subsidiaries. We expect our effective tax rate to remain elevated until we merge and restructure our most significant legal entities. After that time, the effective tax rate should gradually return to a level below 25%, absent the effects of any remeasurement of deferred tax assets. Moving to slide 13. Revenues increased by 6% this quarter to $10.7 billion, driven by lower funding costs within group items and gains in non-core and legacy, as the team accelerated the unwind of certain positions at attractive prices relative to book values. Revenues in group items increased sequentially, primarily due to the reduction of around $450 million in centrally held funding costs from the Credit Suisse-related liquidity measures that were repaid and returned in the middle of the third quarter. For the fourth quarter, we expect an additional $100 million benefit from these actions. It is worth noting that the cost of replacement funding is being absorbed by the core businesses and is reflected in their sequential NII performance and guidance this quarter. Total revenues reached $11.7 billion, including $958 million that we’ve stripped out of underlying revenues. This amount consisted of $764 million in pull to par effects, as well as $194 million of NII in our core businesses, benefiting from the merger date elimination of the unrealized loss balance associated with Credit Suisse’s cash flow hedge program. On slide 14 we showed the details of pull to par and similar effects that we expect to recognize in future quarters. The pull to par starting balance as the transaction closed was $9.3 billion, excluding the $3.1 billion reclassification in NCL that I described earlier. Considering the pull to par accretion of $1.1 billion recognized since the merger date, including $0.8 billion this quarter, the remaining balance that will accrete into income over future quarters is expected to be around $8.2 billion. We expect the majority of this balance to accrete into income by the end of 2026, barring the impact of any early unwinds, with $500 million expected next quarter. We also expect to recognize around $900 million of additional NII in GWM and P&C, relating to the eliminated cash flow hedge item I mentioned a few moments ago, with $150 million expected in 4Q. As a reminder, these effects are stripped out of our underlying revenues, with about half being CET1 capital accretive. I would also point out that we continue to expect total pull to par revenues, including the reclassified NCL and post-2026 recognized portions, to broadly offset the cost to achieve the greater than $10 billion in gross savings we described last quarter. Having said this, like in the third quarter, we expect there will be timing mismatches in the recognition of these reported revenues and expenses, resulting in headwinds to our reported results, particularly in the fourth quarter and throughout 2024. Moving to slide 15. Operating expenses for the group decreased to $9.6 billion, down 5% as our cost savings initiatives take effect, partially offset by reinvestments to help grow our core businesses. Progress on our restructuring actions led to $2 billion in integration-related expenses. Roughly half of these expenses was related to personnel costs, including severance payments, salaries of employees fully dedicated to integration matters, and the cost of retaining key personnel. The other half was related to non-personnel matters, including real estate impairments and depreciation, onerous contract charges and consulting and legal fees. For the fourth quarter, we expect integration-related expenses in excess of $1 billion, although certain additional costs to achieve may arise if we see opportunities to accelerate savings. While we manage our integration to achieve overall cost reductions without specific headcount targets, I would note that our combined workforce fell by over 4,000 in the quarter, bringing year-to-date reductions to 13,000 or down 9% versus the workforce of both banks as of the end of 2022. Across our cost savings initiatives, we’ve achieved around $3 billion to-date in gross run rate cost saves, with further progress expected in the fourth quarter. Turning to slide 16, in the quarter we maintained a strong capital position with around 200 billion of TLAC and a CET1 capital ratio of 14.4%, mainly as we reduced RWA from the active rundown in our NCL portfolio, which offset reductions in our CET1 capital in the quarter. Our CET1 leverage ratio increased to 4.9% at the end of the quarter. As we previously guided, we expect to maintain a CET1 capital ratio of around 14% throughout the integration timeline, even if our reported performance over the coming quarters remains affected by the costs of winding down the NCL unit and the work needed to achieve cost synergies in our core businesses. During the quarter we issued $4.5 billion of U.S. dollar TLAC, attracting very strong demand and pricing at pre-acquisition spreads in a clear sign of fixed income investor confidence in our name. To further diversify our sources of funding, we successfully placed $3 billion in SEC registered OpCo and just after the quarter, CHF820 million in UBS’s inaugural Swiss covered bond issue, both attractively priced. Regarding liquidity, we maintain a prudent profile in the quarter with an LCR of nearly 200%, supported by $33 billion in total deposit inflows. I would note that these strong deposit inflows across global wealth management and personal and corporate banking increased our overall deposit coverage ratio. Going forward, we expect to continue to operate with a prudent LCR to comply with the revisions to the Swiss liquidity ordinance that will come into effect on January 1, 2024. Regarding the Swiss national bank’s recently announced changes to its minimum reserve requirements and site deposit remuneration policies that take effect next month, we expect an annualized reduction of around CHF80 million to our NII, of which two-thirds will impact P&C and one-third GWM. Turning to the performance in our businesses, beginning on slide 17, in Global Wealth Management, we continued strong momentum with $22 billion in net new money inflows across all regions. We saw particularly strong inflows in both APAC and EMEA with $13 billion and $8 billion in net new money respectively. Importantly, our Credit Swiss Wealth Management Business attracted quarterly net inflows for the first time since the beginning of 2022. In the quarter, we also attracted $25 billion of net new deposits, including $17 billion from the Credit Swiss wealth side. These impressive flows are a true testament to the trust our clients continue to place in us. They also reflect the success of our clear and decisive win-back, retention, and client acquisition actions, as well as intensified client engagement levels since the deal’s completion. We expect to further build on this momentum as the value proposition of the combined firm becomes more tangible to our clients. For instance, all of our clients now have access to the UBS House view from our CIO, and our wealth management product and solution offerings are being unified and aligned across the platforms. As mentioned, from next quarter, we will report net new money plus dividends and interest, as well as net new fee-generating assets for the combined franchise. In the third quarter, inflows based on this new definition were $39 billion, and net new fee-generating assets in solely the UBS portion of our wealth business were $21 billion, with positive flows across all regions. Moving on to GWM’s P&L, profit before tax was $1.1 billion, over 40% higher sequentially, driven by a reduction in costs and credit loss expenses with roughly flat revenues. Excluding the impact of CLE, which included a significant acquisition-related ECL charge last quarter, underlying profit before tax increased by around 20%, supported by lower underlying operating expenses. This quarter, GWM revenues of $5.5 billion were broadly flat, as increases in recurring fees were offset by a decline in NII. Combined net interest income was down 3% on an underlying basis and excluding FX, reflecting continued deposit mix effects due to rotation into higher-yielding deposits and ongoing deleveraging. This was partially offset by sequentially higher deposit balances that served to close the funding gap in the business and strengthen the structural profile of our balance sheet. For the fourth quarter, we expect a mid-single digit percentage decline in NII, mainly from continuing deposit mix shifts. Credit loss expenses in the quarter across GWM were $2 million. Operating expenses declined $0.2 billion to $4.4 billion, mainly driven by lower personnel expenses as reduced headcount levels, which we expect to continue sequentially, began to benefit our underlying earnings. Although it’s early days in terms of synergy realization in GWM, we are already seeing progress from our integration efforts. The division’s underlying cost-to-income ratio in the third quarter dropped by around 3 percentage points to 80%. Turning to Personal and Corporate Banking on slide 18, profit before tax increased by $0.1 billion to CHF773 million, mainly driven by a decrease in credit loss expenses. Excluding CLE, P&C’s PBT was up slightly quarter-on-quarter. Revenues increased to $2.2 billion. With the announcement of the Swiss integration at the end of August, the business is highly focused on client engagement and deposit win-back. Early indications are encouraging, as evidenced by the stability of the revenue line, the resilience of business volume, and the commencement of deposit returns. Net interest income decreased by 4% despite the narrowing funding gap from net new deposit inflows, which mainly came from our corporate clients. A primary driver of the sequential decline this quarter was the additional cost of restoring the structural funding profile of the combined business to UBS’s NSFR standards. For the fourth quarter, we expect a low single-digit percentage decline in NII, mainly due to rotation to higher-yielding deposits. Credit loss expense in the quarter was CHF154 million, almost exclusively from two factors related to Credit Suisse’s Swiss Bank. First, we recognized CLE on loans, mainly to corporate counterparties that were already impaired on the merger date and deteriorated further this quarter, as well as newly defaulted positions. Second, we moved to Stage 2 and provisioned in line with UBS’s coverage ratio standards, all loans, including those as of the merger date, on Credit Suisse’s watch list, as well as those lending exposures that experienced a significant increase in credit risk during the third quarter. Underlying operating expenses were roughly unchanged at $1.2 billion on lower personnel and litigation expenses, with the underlying cost-income ratio down quarter-on-quarter to 57%. Moving to slide 19. In Asset Management, the underlying profit before tax increased to $156 million on higher revenues and lower costs. Revenues were slightly higher at $755 million, with increases in net management fees driven by market performance and FX, and higher performance fees from our hedge fund businesses. Operating expenses decreased to $599 million, mainly due to lower personnel expenses. Net new money in the quarter was negative $1 billion, driven by Credit Suisse outflows, which continue to taper since the acquisition, with inflows expected to gradually return from proactive client engagement. It’s worth noting that the UBS side of the business attracted net new money inflows this quarter in a challenging environment for asset managers. We saw strong demand for our money market, SMA, and real estate and private markets solutions, partly offset by client asset allocation shifts away from China, equities, and hedge funds in the current market dynamic. Net new money, excluding money markets and associates was negative $8.3 billion. Turning to the investment bank performance on slide 20. Since the UBS IB has taken on only select parts of Credit Suisse’s investment bank, and the latter saw little activity in the second quarter, we compare the results of the combined IB with standalone performance in the prior year’s third quarter. We will continue to offer year-over-year comparisons to standalone UBS IB performance in the quarters ahead, while also providing commentary on sequential developments until the third quarter of 2024, as with the other business divisions. The operating loss of $116 million was a result of additional costs related to the retained portion of Credit Suisse’s investment bank, which was only partially offset by standalone profit before tax in UBS IB, as market conditions remain challenging for our business model. Underlying revenues, which exclude $251 million of pull to par accretion and other effects, declined 6% year-over-year to $1.9 billion amid muted client activity due to ongoing concerns around terminal interest rates and geopolitical events. Volatility across asset classes declined significantly from a year ago, and global fee pools remain depressed. Against this backdrop, global banking revenues increased 36%, with particular strength in leveraged capital markets and strong performance in EMEA. Advisory outperformed the global fee pool and was further supported by revenues from the Heritage Credit Suisse franchise. Global markets revenues declined 15% from a very strong third quarter, reflecting lower revenues across macro products and equity derivatives. This was partly offset by growth in financing, supported by increased client balances. Overall, revenues generated from the retained portion of Credit Suisse’s investment bank were $113 million this quarter, primarily in advisory, as well as derivatives and solutions. Operating expenses rose 27%, predominantly from additional personnel costs related to the retained portions of Credit Suisse’s investment bank, as well as higher technology costs and FX. As we manage the investment bank integration, we remain disciplined in our resource management. RWAs at 23% of the group’s resources, excluding NCL, were roughly unchanged sequentially. Looking ahead, as the majority of the onboarding of our colleagues and positions to UBS IB systems is planned for completion by the end of the year, we expect revenues to ramp up over the course of 2024. Given this timing, in addition to current market conditions and seasonality, we expect continued pressure on our underlying profitability in the fourth quarter. Moving to non-core legacy on slide 21. Excluding integration related expenses, NCL generated an underlying operating loss of $1 billion. Quarterly revenues of $350 million consisted mainly of gains from the early unwind of loan commitments, while the portion of the NCL portfolio that remains on the accrual method of accounting was left broadly unchanged this quarter, given recovery expectations on the underlying lending positions. Credit loss expense was $125 million. Additional provisions of $71 million reflect application of the same extended credit watch list approach I described earlier in the context of P&C. We also saw $54 million of charges from Stage 3 and purchased credit-impaired loans that deteriorated further in the quarter. Underlying operating expenses reached $1.2 billion, split roughly equally between personnel and non-personnel costs. Integration related expenses of $918 million consisted of onerous contract charges, real estate related expenses, and personnel costs linked to headcount reductions and retention. For the fourth quarter, we expect the underlying cost base in non-core and legacy to decrease further from additional staff reductions, whose costs are directly housed within or allocated to NCL. As Sergio mentioned, in the quarter we took decisive actions to reduce RWAs. Five of the total $6 billion reduction resulted from active de-risking of exposures across the array of NCL portfolios. LRD was reduced by $52 billion, including $15 billion resulting from lower HQLA requirements and $12 billion from the accounting reclassification of loan commitments from accrual to fair value. During the quarter, we completed the initial impact assessment on our operational risk RWA from the final Basel III standard, which comes into effect on January 1, 2025. Based on this initial study, we expect Group Op Risk RWA to remain broadly unchanged at the current level of $145 billion. We also determined on the basis of our impact assessment, initial levels of RWA to a portion to each of our business divisions, including NCL. The $30 billion of operational risk RWA assigned to NCL this quarter is expected to diminish over time as a function of two considerations, the rundown of the NCL portfolio and the removal of certain legacy litigation matters given the lapse of time. On the basis of natural roll-off in both contexts, we expect operational risk RWA and NCL to decrease to around $14 billion by the end of 2026. As a reminder, we continue to expect a roughly 5% increase from day one effects in 2025 from other final Basel III considerations, mainly FRTB. As we look ahead to the fourth quarter, we expect many of the drivers of underlying profitability to continue to progress. In particular, we expect underlying operating expenses to decline sequentially as our core businesses realize incremental synergies and NCL remains focused on actively running down its portfolio to release capital and accelerate cost saves. In addition to the NII expectations that I described earlier, transactional activity may be affected by seasonal factors, as well as client sentiment in response to the geopolitical landscape. Despite these elements, we are executing on our integration plans at pace and remain on track to achieve our goals of around a 15% return on CET1 capital and a cost-income ratio of less than 70% by the end of 2026. With that, let’s open for questions. See also 15 Best Gins Under $50 and 15 Countries with the Highest Alcohol Consumption in Europe. Q&A Session Follow U B S Ag (NYSE:UBS) Follow U B S Ag (NYSE:UBS) We may use your email to send marketing emails about our services. Click here to read our privacy policy. Operator: [Operator Instructions]. The first question is from Stefan Stalmann from Autonomous Research. Please go ahead. Stefan Stalmann: Good morning gentlemen. Thank you very much for the presentation. I have two questions and they may be linked. The first regarding outstanding SNB funding. I don’t think there’s any update in the disclosure material on where the number has moved to. I think the last disclosed number was CHF38 billion at the end of August. Could you provide an update here? And possibly related to this, it looks to me, looking at SNB data, that there has not been a lot further reduction of SNB funding after August in September. Is that a good interpretation of the data? And is there any connection here between your management of the SNB funding and the new liquidity ordinance that will come into place in January? And is it possible for you to give us the guidance on how your liquidity ratios will look like on the 1st of January under this new liquidity ordinance in Switzerland, please? Thank you. Todd Tuckner : Hi, Stefan. Thanks for your questions. So, in terms of the outstanding SNB funding, no, we still have the – that funding levels are still unchanged at this stage. We are working through our business plans and as well as our funding plans, and we’ll consider the ability to repay some or all of that over the course of the coming months, but your read was correct. In connection with that funding and the liq ordinance, no, I’d say there’s no specific connection with that, and we’re not maintaining that funding, particularly in respect of satisfying the liquidity ordinance per se. That said, the LCR guidance that you’re looking for, as we say, will remain prudent, so you can expect it to remain at levels not terribly far away from where we finished 3Q at. Stefan Stalmann : Great. That was very helpful. Thank you. Operator: The next question is from Giulia Miotto from Morgan Stanley. Please go ahead. Giulia Miotto: Yes, hi. Good morning. Two questions for me. The first one on capital distribution. I know it’s very early. I guess you will comment on Q4, but what are the stepping stones that we should look out for before you can resume a buyback? That’s my first question. And then the second question is with respect to costs. In the quarter, there was an excellent delivery on costs, and the $3 billion target by year end has already been achieved. So basically, where do we go from here? Can we assume that this steady path of cost saves can continue or will there kind of be a pause until there is the legal merger, because you have already basically extracted as much as you could of the low-hanging fruit? Thank you. Sergio Ermotti : Okay. Thank you. So in respect of the capital distribution plan or capital return plans, as you pointed out, you’re going to have to be patient. For the time being, I just can’t reiterate that we are still looking to have a progressive cash dividend policy that will be implemented. And for the rest, what you need to see is the visibility with the plan. So we are finalizing the three-year plan, and that will allow us to really calibrate capital returns. I just want to reiterate that I still believe at this stage, although the plan is not finished, that capital returns and share buybacks is not a matter of years. In my point of view, it could be a matter of quarters, but without having the final plan, it’s difficult to really make a final statement. But that will be addressed in February. And somehow, it’s linked to your second question, because of course, I’m not so sure. I would define the progress we’ve made so far as low-hanging fruits. But I think that it takes effort and time to go through this. I do believe that we still have costs that can be taken out during 2024, regardless of what you are pointing out being the critical issue, is the legal entity merger. The legal entity merger is the triggering point that allow us to go to the next level of cost reduction and synergy realizations from an operational standpoint of view, but also from an IT standpoint of view. So 2024, as Todd mentioned, and I also remarked, is a pivotal year. It’s probably the one time in which we’re going to incur the most cost in order to achieve the synergies that we’ll achieve in 2025 and 2026. So, you see how the two questions are somehow linked. Giulia Miotto: Thank you. Operator: The next question is from Andrew Coombs from Citi. Please go ahead. Andrew Coombs: Good morning. Two questions from me, please. Firstly, on the GWM net interest income trajectory, thank you for the commentary in your pre-prepared remarks. I think you said, after a 3% decline in Q3, you expected mid-single digit percentage decline in Q4, and that was an ongoing deposit mix shift. So that seems to be accelerating rather than decelerating. So can you give us any indication of how much longer you think that trend could continue for? Do you think now that we’re at peak rates. If anything that should slow as we go into 2024? And also, if there’s any implications from your broader deposit pricing that’s also influencing that sequential NII decline? That’s the first question. Second question, there’s been quite a lot of media commentary over the past week ahead of the “Too Big to Fail” review coming out in spring next year. I think there’s been some explicit discussion around potentially introducing more exit fees or more notice periods around deposits. Is there anything you could say with regards to that? And also, what that means for your competitive positioning versus international peers? Thank you. Todd Tuckner : Yeah, thanks. Thanks, Andrew. On the first, in terms of GWM NII trajectory, I think you captured it right in terms of guidance around the mid-single digit decline owing to deposit mix shifts and whether that seems like an acceleration. I’d comment that I think what we’re seeing is a bit of a broadening of that dynamic more across the globe. We saw in most of 2023 that dynamic being very significantly driven by moves from sweep deposits into higher-yielding deposits in the U.S., and we saw less of that in Europe in APAC, as well as in Switzerland. And so while we’re seeing the U.S. taper now, both in the current quarter and as we look ahead, we’re seeing a bit of an expansion of that dynamic in other parts of the globe, and that’s what’s sort of driving that. As I look out into 2024, we’re doing that work now. We’ll come back with a view during February with a view on full year 2024. I would just conclude on the point saying, no, I don’t see pricing having an impact. I mean, this is just a response to the current rate environment as clients are undergoing cash sorting across our client base......»»
Perrigo Company plc (NYSE:PRGO) Q3 2023 Earnings Call Transcript
Perrigo Company plc (NYSE:PRGO) Q3 2023 Earnings Call Transcript November 7, 2023 Perrigo Company plc misses on earnings expectations. Reported EPS is $0.64 EPS, expectations were $0.65. Operator: Good Day and welcome to the Perrigo Third Quarter 2023 Financial Results Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there […] Perrigo Company plc (NYSE:PRGO) Q3 2023 Earnings Call Transcript November 7, 2023 Perrigo Company plc misses on earnings expectations. Reported EPS is $0.64 EPS, expectations were $0.65. Operator: Good Day and welcome to the Perrigo Third Quarter 2023 Financial Results Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator instructions]. Please also note this event is being recorded. At this time, I would now like to turn the floor over to Bradley Joseph, VP and Investor Relations. Sir, please go ahead. Brad Joseph: Good morning, and welcome to Perrigo’s third quarter 2023 earnings conference call. I hope you all had a chance to review our release issued this morning. A copy of the earnings release and presentation for today’s discussion are available within the Investors section of perrigo.com website. Joining today’s call are President and CEO Patrick Lockwood-Taylor and CFO, Eduardo Bezerra. I would like to remind everyone that during this call, participants will make certain forward-looking statements. Please refer to the important information for shareholders and investors and Safe Harbor language regarding these statements in our press release issued earlier this morning. A few quick items before we start. First, unless stated, all financial results discussed and presented are on a continuing operations basis. They do not include any contributions from the divested Rx business, which was accounted for as discontinued operations prior to its sale. Second, organic growth excludes acquisitions, divestitures, exited product lines and currency in both comparable periods. All comments related to constant currency remove the impact of currency translation versus the prior year by applying the exchange rates used in the comparable measurements in the prior year’s financial statements. And third, Patrick’s discussion will focus solely on non-GAAP results, except as otherwise noted. See the appendix for additional details and for reconciliations of all non-GAAP financial measures presented. As for today’s agenda, Patrick will cover our solid quarterly financial results and strong business fundamentals. He will then discuss the evolving dynamics in the infant formula industry followed by our excitement for the anticipated launch of Opill. He will then round out his comments with reflections after four months of CEO, provide an update on our strategy to build a sustainable and value accretive growth engine, and end with area of focus to close 2023. Eduardo will then walk through the financials, including our updated guidance. And with that, I’d now like to turn the call over to Patrick. Patrick Taylor: Thank you, Brad, and good morning, everyone. We delivered another quarter of solid financial results, highlighted by gross margin and operating margin expansion. Net sales grew 2.2% compared to the prior year. Organic net sales declined 1.2%, including an unfavorable impact of 2.8 percentage points from discontinued lower margin SKUs and HRA distributed transitions, both designed to expand margins. Year-over-year gross margin expanded 300 basis points, including a 70 basis point benefit from our supply chain reinvention program to 39.5%. Operating margin expanded 130 basis points to 13.4%. For the fifth consecutive quarter, Perrigo has delivered double-digit growth and gross profit, operating income, and earnings per share. This performance puts us in the top quartile of our peers. Digging a little deeper into quarter three, net sales of our global cough, cold, and pain products increased 7% compared to the prior year, excluding portfolio optimization efforts, driven by seasonal selling, which was particularly strong in Europe. Within CSCI, organic net sales grew 6.2% as we held market share and growing markets and categories. In addition to cough, cold, and pain, growth was broad-based, including skincare offerings and high single-digit growth in our U.K store-brand business. In CSCA, organic net sales declined 5.1% as favorable pricing, the acquisition of Gateway and new products was more than offset by legacy infant formula, 3.6 percentage points from the discontinuation of low margin SKUs, normalizing consumer consumption, and a comparison to the strong and an early cough cold season last year. Importantly, store-brand OTC dollar, volume, and value share grew during the last 13 weeks, as consumer-seek high-quality products had a good value. Turning to infant formula, the background, and for over two decades, Perrigo has successfully and consistently produced high-quality, safe, and effective infant formula as the leading player in store-brand. We have proven we can deliver the most advanced and innovative infant formula on par with the national brands while delivering value for consumers. No one else does this, but it’s tougher now than ever before. We’re extremely proud to play an important role in this essential category. In response to the updated FDA guidelines issued in March and subsequent warning letters to multiple facilities in the industry, we have shortened production campaigns to perform more frequent, major cleanings of our facilities, leading to more downtime between campaigns. In addition, we implemented enhanced product testing and quality procedures, leading to longer inventory holds before product has released to customers. Due to these factors, we have been unable to replenish safety stock, leading to low customer in-stocks, intermittent skew availability, and lost sales. With these changes now implemented and production improving each week, we are focused on rebuilding safety stock for our highest-volume SKUs. I anticipate our operations to normalize by the middle of next year. This improved production continues strong demand store-brand formula, and the annualization of price actions implemented in 2023 positions as well to recapture most, if not all, of the $0.35 EPS impact against our original 2023 expectations. Turning now to Opill, which will be the most unique product launched in the history of Perrigo, forming an entirely new U.S. OTC category. This launch requires an innovative approach to accelerate brand awareness and consumer conversion. We will build one-to-one consumer relationships, leveraging CRM data that will self-learn and get smarter throughout a consumer’s journey to maximize the Opill brand experience and its conversion. To accomplish this, we are partnering with leading technology organizations to build a marketing technology stack that will drive in great engagement through all touchpoints of consumer conversion from awareness to purchase. As we ramp up pre-launch activity, timing the Opill selling to retail customers is now expected in quarter 124 to ensure customer inventory levels meet the build-up of consumer demand. To maximize long-term potential in this category, we will look to extend investment beyond the Opill brand with a franchise of women’s health products. Now, I’d like to reflect on my first four months as CEO. I’ve immersed myself in all facets of our global organization and met with many key stakeholders, including many of you, our shareholders. Coming out of these conversations, I remain confident in our strategy and I’m increasingly excited about the opportunity ahead. Our business is highly unique, marked by significant scale, multiple points of consumer access and value, and is attractively diversified. Let me briefly explain each of these. With an addressable market of $400 billion, the global self-care segment has cemented itself as an independent industry within consumer products. Our scale is unmatched, evidenced by the fact that every second of every day, 2200 doses of our product are consumed around the world, and we’re the only company that can produce most major products across entire categories. We’re a leading provider of value and access through a distinct model across brand, value brand, and store brand. Not only do our offerings drive savings for consumers through value pricing, but also by bypassing doctor visits for their health needs and providing very significant savings for health care systems as well. Lastly, our horizontal category breadth and vertical pricing is a unique advantage. Our offerings extend through nine major OTC product categories with our blended branded portfolio, providing consumers access across the value spectrum wherever their point of purchase. Our portfolio is also well diversified for economic environment shift across geographies and across SKUs, with no one product representing more than 3% of total revenue. This better insulates us from economic slowdowns and seasonal factors in individual categories. My interactions with all key stakeholders have clarified the next evolution of strategic thinking of Perrigo. Throughout these learnings, four key pillars have emerged, culminating in a blueprint designed to deliver the one Perrigo model, a model in which our portfolio, operating systems, structure, and behaviors will be simplified, standardized, and scaled. This will position us to win in self-care through the creation of a sustainable and value-accretive growth engine that will drive Perrigo financial performance for the long term. First, we will consumerize and digitize the company. Second, drive category growth in partnership with our customers. Third, leverage our global supply chain. And four, optimize into one global operating model. To provide a bit more detail on each of these. First, we will deliver consumer-preferred brands through innovation by consumerizing and digitizing Perrigo. The consumerization of Perrigo will focus on bringing consumer-preferred innovation and brands to market in more value-accretive offerings. This will be enabled through the digitization of Perrigo, powering our marketing strategies with digital insights, AI that will offer real-time actionable insights, and end-to-end visibility of the consumer journey. This is a transformation in how we’re going to bring products to consumers. Opill is a great example of this, where we have a stack of marketing and digital tools to enhance the consumer journey and accelerate conversion. Next, we will leverage these consumer-preferred offerings and our strong customer partnerships to drive growth in the OTC categories where we participate by delivering differentiated solutions, benefiting all members of the value chain. All of this will be powered by our global supply chain, allowing for increased manufacturing of higher margin products. Our supply chain reinvention program is already delivering significant benefits, including the reduction of 750 of the 1,000 SKUs planned for this year. Finally, we will evolve to a uniform operating model that will drive consistent focus across our organization on the most value-accretive opportunities. We will simplify, standardize, automate, and globalize our structure to optimize our organization. This will provide tremendous opportunity to reinvest in our business and enhance financial performance by driving brand growth capability and accelerating consumer innovation. The finding key pillars is crucial, and the work to operationalize these is happening now. Execution against these pillars will require skillful sequencing to strengthen our long-term foundation, and we will provide updates on these initiatives as our work continues. To wrap up, we have mobilized around the four key pillars that will create an advance, the sustainable, and value-accretive growth engine to drive Perrigo for the long-term. We must continue to focus on operational excellence and deliver our trusted self-care products. We have begun the selling for the cough-cold season, and there is an opportunity for us to further build retail stock, particularly in the U.S. Also in the Americas, we expect store-brand market share gains to continue while building safety stops in infant formula. In international, we will continue to leverage our brand that are growing and on trend, notably in women’s health and skin care. Now, finally, a few brief comments regarding oral phenylephrine containing products and acetaminophen litigation. As most of you know, an FDA Advisory Committee recently voted that oral phenylephrineproducts do not provide efficacy to consumers looking for decongestant relief. Following the vote, the FDA communicated publicly there are no safety concerns with these products, and if a decision is made to remove or reformulate, the agency will work closely with industry. Recently, a retail pharmacy chain removed single entity phenylephrine products from their shelves. Our sales of this product across all of our customers is de minimis. Sales of phenylephrinecontaining products accounts for approximately and only 2% of total Perrigo net sales, a very low margin in only our U.S. business. We do not currently expect retailers to pull combination products ahead of the cough-cold season, as this could create a shortage. Turning to acetaminophen, we have not been named in litigation, and the FDA reiterated its stance that there is no causality between ADHD and taking these products during pregnancy. Additionally, we have not agreed to indemnify any customers, or indeed they ask. In closing, we delivered another solid quarter of results with double digit growth and gross profit, operating income, and EPS, in addition to meaningful margin expansion. We are single-mindedly focused on improving our cost structure, cash flow, and profitability, and I would like to thank all of our Perrigo colleagues for your commitment to our self-care vision. Now, with that, I will turn over to our CFO, Eduardo, to cover the financials in more detail. Eduardo. Eduardo Bezerra: Thank you, Patrick, and good morning, everyone. Looking at our financials, we’re starting with our GAAP to non-GAAP summary. The company reported GAAP income of $50 million for the third quarter, or earnings of $0.11 per diluted share. Adjusted net income was $87 million, and adjusted diluted earnings per share was $0.64 per share versus $0.56 per share in the prior quarter. A few adjustments to the third quarter pre-tax non-GAAP P&L totalling $88 million were, first, amortization expense of $68 million, second, restructuring charges of $15 million primarily related to our supply chain reinvention program, and third, unusual litigation expenses of $3 million. Full details can be found in the non-GAAP reconciliation table attached to this morning’s press release. From this point forward, all dollar amounts, percentage, and basis point changes are on an adjusted basis unless otherwise noted. Since Patrick, over net sales, I will begin my comments at gross profit. Both gross profit and operating income achieved a strong growth compared to last year, driven by pricing actions and contributions from new products. I will cover margin expansion in a moment. Our adjusted effective tax rate for Q3 was 19.2% versus 21.8% last year, due to changes in the jurisdictional mix of earnings and the impact of benefits not realized on certain pre-tax losses in 2022. These factors led to double digits adjusted EPS growth of 14.3% year-over-year. Year-to-date, EPS has expanded 30.3% compared to last year. Look at a margin expansion in more detail, total Perrigo gross and operating margin increased 300 and 130 basis points respectively versus the prior year. In CSCA, gross margin expansion of 430 basis points was driven by strategic pricing and winning portfolio actions, productivity savings, and the addition of the higher margin gateway acquisition. This led to a 90 basis points improvement in operating margin in the quarter. In CSCI gross margin declined 120 basis points as pricing actions offset the impact of inflation in the quarter, but could not fully overcome unfavorable mix driven by top-line growth in our relatively lower margin U.K store brand business. Operating margin increased 250 base points driven by favorable gross profit flow through and lower advertising and promotional spending. Year-to-date, total Perrigo delivered an adjusted gross margin of 38.5% ahead of our expectations for the year as we continue to benefit from strategic pricing actions, acquisitions, and our supply chain reinvention program. This benefits more than offset infant formula and unfavorable mix in legacy CSCI. Moving on to the balance sheet, cash-on-hand at the end of the quarter was $598 million, an increase of $43 million from the end of the second quarter. Operating cash flow for the quarter was $125 million, a conversion of 143%. Third quarter operating cash flow included outflows of $12 million from restructuring unusual litigation and acquisition related expenses. We also invested $32 million in capital expenditures and returned $39 million to our shareholders through dividends. Looking ahead, we are reaffirming operating cash flow conversion for the full year of approximately 100%. We also continue to make steady progress in reducing our net leverage. We ended the quarter at 4.8 times net debt to adjusted EBITDA versus 5.5 times at the end of 2022 and continue to expect net leverage around three times by the end of 2025. As it relates to capital allocation, we are reviewing reinvestment plans and mechanisms of shareholder return while keeping our commitment to the leveraging our balance sheet. I expect to provide further details next quarter as we finalize our 2024 plans. Now to our full year 2023 outlook. As Patrick discussed, in infant formula we are working to rebuild safety stock and production is improving, while at the same time continue to work through the production changes. Even the totality of the dynamics we now expect fourth quarter total nutrition net sales to be similar to the prior year. We continue to expect a normal cough and cold season in the U.S. and Europe and as a reminder last year’s season was both early and strong. We are in a better inventory position with liquid cough-cold products in the U.S. versus last year which will allow us to capitalize in the event of a stronger season. We remain extremely excited about the long-term potential for Opill and expected on retail shelves in Q1 next year. The updated time of selling to retailer customers is also included in our expectations. Lastly, we are updating our assumption for the recent move in foreign exchange rates which are now expected to have an unfavorable impact in the fourth quarter. Taking all these factors into account, we now expect year-over-year organic net sales growth of 1% to 3% and reported net sales growth of 4% to 6%%. Our accretive initiatives include the supply chain reinvention program and synergies from acquisitions are anticipated to expand total Perrigo gross margin above our original estimate of plus 200 basis points versus prior year. We now expect a full year tax rate of approximately 14% due primarily to the release of tax reserves related to recent audit settlements. While we have updated our expectation for infant formula and currency translation, the strength of our diversified portfolio, greater margin expansion and a lower expected tax rate allow us to maintain the mid-to-lower end of our original 2023 earnings per share guidance range. In closing, I would like to thank our Perrigo colleagues for their tremendous efforts in the third quarter and are working to take advantage of the many opportunities that lie ahead. Now, I will turn the call back to Brad. Brad? Brad Joseph: Thank you, Eduardo. Can we now open the call for questions? See also 10 Cheap Retail Stocks to Buy and 10 Cheap Rising Stocks to Buy. Q&A Session Follow Perrigo Co (Old Filings) (NYSE:PRGO) Follow Perrigo Co (Old Filings) (NYSE:PRGO) We may use your email to send marketing emails about our services. Click here to read our privacy policy. Operator: Ladies and gentlemen, at this time we’ll begin the question and answer session. [Operator Instructions] Our first question today comes from Chris Schott from JPMorgan. Please go ahead with your question. Ethan Brown: Hi, this is Ethan Brown on for Chris Schott. Thanks for taking my question. To start off, you mentioned, I believe, a $0.33 impact to the original 2023 guidance from lower infant formula sales. And just hoping you can talk about the progression through 2024 for that franchise. More color on how you expect to recapture that EPS impact and maybe what normalized sales look like for that franchise going forward? And then I have one more follow up from there. Eduardo Bezerra: Okay. Hi, Chris. This is Eduardo here. Thank you for a question. So as we highlighted and do our numbers, so we saw this impact that’s mainly happening in the third and the fourth quarter. So, as we highlighted there, Q3 was our first full quarter, operating under the new FDA guidelines. So we shortened our production campaigns to perform more frequent major cleanings and we implemented the handset product testing and quality procedures. And because of that we were unable to replenish our safety stocks. We’re now really focusing on rebuilding those safety stocks for our highest volume SKUs and productions improving week-by-week. So we anticipate our operations to normalize by the mid of next year. And then we expect to recapture most, if not all of the $0.35 EPS impact by mid of 2024. Ethan Brown: Okay, great. And then my second question is just – now that we’re a couple of quarters into the margin recovery, can you talk about the expected gross margin progression from here, and how to think about sequential trends for the overall and America’s business? And then how do you think about normalized margins longer term for the company? Eduardo Bezerra: Yes. So as you were able to see, we’re pretty proud of the progress that we have been doing as we highlighted in our Investor Day, we’re expecting about 200 basis points improvement. But as we share today, we expect we’re going to outpace that, given all the focus we have done, both on the winning portfolio, exiting low margin products, but also, really improving the overall margins through strategic pricing and continue to work on the prioritization of our portfolio. So we expect that to go beyond the 200 basis point this year. So as we look into 2024, we continue the same trajectory. So that we originally mentioned we would be achieving 40% gross profit margin by 2025, but given the pace that we’re seeing today, we most likely are going to be able to outpace that objective. Ethan Brown: Thank you. That’s it for me. Eduardo Bezerra: Thank you, Ethan. Operator: Our next question comes from Susan Anderson from Canaccord Genuity. Please go ahead with your question. Susan Anderson : Hi, good morning. Thanks for all the details this morning. It’s very helpful. I was curious. I had a question on the slide on the store brand versus national brand, the latest 13 weeks, the point seven share gain. Was that, I guess overall, or was that in your categories? And then, I guess, just looking at the categories that you play in, did you see share gains across all of them? Or were there any categories where you saw some losses? And then, I have a follow-up? Thanks. Eduardo Bezerra: Yes. So Susan, these numbers that we shared are across the, the categories overall, right? So we’re seeing a consistently over the last 13 weeks a 0.7% there into volume share gains of store brands. And from a dollar standpoint, as you know, because of national brands have been more aggressive on pricing, as we look into the dollar share, we see light gains. As we continue to track that into the latest information that we got in October, that continue the friends. And we believe that’s very, very positive. So it means that, consumers on a volume basis, they’re really trading down. We’re not seeing that extensively because of the differential on price increases. But the positive thing is, as compared to last year, where you remember we had some challenges on having enough inventories, this year we’re in a much strong position......»»
Virtus Investment Partners, Inc. (NASDAQ:VRTS) Q3 2023 Earnings Call Transcript
Virtus Investment Partners, Inc. (NASDAQ:VRTS) Q3 2023 Earnings Call Transcript October 27, 2023 Virtus Investment Partners, Inc. misses on earnings expectations. Reported EPS is $4.19 EPS, expectations were $6.17. Operator: Good morning. My name is Dede, and I will be your conference operator today. I would like to welcome everyone to the Virtus Investment Partners […] Virtus Investment Partners, Inc. (NASDAQ:VRTS) Q3 2023 Earnings Call Transcript October 27, 2023 Virtus Investment Partners, Inc. misses on earnings expectations. Reported EPS is $4.19 EPS, expectations were $6.17. Operator: Good morning. My name is Dede, and I will be your conference operator today. I would like to welcome everyone to the Virtus Investment Partners quarterly conference call. The slide presentation for this call is available in the Investor Relations section of the Virtus website, www.virtus.com. This call is being recorded and will be available for replay on the Virtus website. [Operator Instructions] I will now turn the conference over to your host, Sean Rourke. Sean Rourke: Thank you, and good morning, everyone. On behalf of Virtus Investment Partners, I’d like to welcome you to the discussion of our operating and financial results for the third quarter of 2023. Our speakers today are George Aylward, President and CEO; and Mike Angerthal, Chief Financial Officer. Following the prepared remarks, we’ll have a Q&A period. Before we begin, please note the disclosures on Page 2 of the slide presentation. Certain matters discussed on this call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, and as such are subject to known and unknown risks and uncertainties, including but not limited to those factors set forth in today’s news release and discussed in our SEC filings. These risks and uncertainties may cause actual results to differ materially from those discussed in the statements. In addition to results presented on a GAAP basis, we use certain non-GAAP measures to evaluate our financial results. Our non-GAAP financial measures are not substitutes for GAAP financial results and should be read in conjunction with the GAAP results. Reconciliations of these non-GAAP financial measures to the applicable GAAP measures are included in today’s news release and financial supplement, which are available on our website. Now I’d like to turn the call over to George. George? George Aylward: Thank you, Sean. Good morning, everyone. I’ll start with an overview of the results we reported earlier today before turning it over to Mike to provide the details. In the third quarter, we continued to operate in a challenging and volatile environment and the key highlights of our results included higher retail sales and positive net flows in retail separate accounts, global funds and ETFs, increased net earnings and operating margin, higher return of capital, including our sixth consecutive annual dividend increase, investments in the growth of the business, including in a CLO and in an affiliate, attractive investment performance across strategies and products, both long term and year-to-date and repayment of debt, ending the quarter with a well-positioned balance sheet and modest net leverage. So turning now to the review of the results, total assets under management decreased 3% to $163 billion, primarily due to market impacts in addition to net outflows in retail funds. Sales were $5.8 billion with a 16% increase in retail sales, more than offset by a decline in institutional, which had a large mandate in the prior quarter. In retail, open-end fund sales increased 5% with sequentially higher alternative fixed income and domestic equity and retail separate account sales were significantly higher, up 37% due to strength in SMID-cap. Net outflows were $1.5 billion, down from breakeven last quarter. By product, institutional had net outflows of $0.4 billion compared with net inflows of $2.2 billion last quarter, which included a large mandate. This business is inherently variable on a quarterly basis but has generated organic growth year-to-date and in each of the last 3 calendar years with contributions across affiliates, strategies and geographies. Retail separate accounts generated positive net flows of $0.3 billion and were positive for the year-to-date period. We continue to build out additional strategies and capabilities in retail separate accounts, where we continue to see meaningful growth opportunities. Open-end fund net outflows of $1.5 billion improved from $2.2 billion in the second quarter with a favorable net flow trend across most strategies and notably in alternatives with AlphaSimplex generating positive net flows since they joined us in April. SMID-cap and global equities again generated positive net flows, and we are seeing particularly strong traction in mid-cap again. Within open-end funds, ETFs again generated positive net flows, and we continue to see opportunities to further broaden the product lineup with additional actively managed fixed income funds as well as other distinctive strategies. We also saw positive net flows in global funds, where we continue to expand that product set. In terms of what we’re seeing in October, the trend for retail open-end funds remain similar to the third quarter. For institutional, the pipeline remains strong with one but not funded mandates exceeding known redemptions. As always though, the timing of institutional fundings and redemptions is very difficult to predict and can be lumpy from quarter-to-quarter, especially in this volatile market in which we are seeing a longer funding cycle. Our third quarter financial results reflected higher average AUM levels and our ongoing management of expenses. The operating margin was 33.9%, up sequentially from 32.3% due to higher investment management fees and relatively unchanged costs. This demonstrates the leverageability of the business as was also illustrated by a 78% incremental margin. Earnings per share as adjusted of $6.21 increased 14% from $5.43 in the second quarter due to higher revenues and the stable expenses as well as higher interest income, largely related to a CLO we issued in 2022. Turning now to capital. During the quarter, we invested in the growth of the business, repaid debt and increased capital return. In August, we announced a 15% increase in our quarterly dividend, which we have raised annually for 6 consecutive years, — we also repurchased over 74,000 shares for $15 million, up from $10 million in the prior quarter as repurchases were attractive given the valuation. We also continue to invest in the growth of the business, including $26 million to sponsor a new CLO issued by Sykes and $21 million to increase our ownership in SGA, reflecting equity purchases that were part of the original transaction intended to facilitate succession. We ended the quarter in a modest net debt position after repaying $20 million of our credit facility, and we continue to generate significant cash flow, providing ongoing opportunities to invest in the growth of the business, return capital to shareholders. With that, I’ll turn the call over to Mike. Mike? Mike Angerthal: Thank you, George. Good morning, everyone. Starting with our results on Slide 7, assets under management. At September 30, assets under management were $162.5 billion, down 3% from $168.3 billion at June 30 due to $3.6 billion of unfavorable market impact and net outflows of $1.5 billion. Average assets in the quarter increased 3% to $167.9 billion, with ending assets under management 3% lower than the quarter’s average. Our assets under management represent a broad range of product and asset classes. By product, institutional and retail separate accounts continue to grow as a percentage of our assets with institutional now 37% of AUM, up from 32% a year ago and retail separate accounts at 24% of AUM, up from 23%, while U.S. retail funds represented 29% of AUM, down from 34%. We are also well represented within asset classes. In equities between international and domestic and within domestic nearly evenly split among small, mid- and large cap strategies and fixed income well diversified across duration, credit quality and geography. We also continue to have compelling long-term relative investment performance across products and strategies. As of September 30, approximately 65% of institutional assets and 84% of retail separate account assets were outperforming their benchmarks over 5 years. For our rated mutual funds, 80% outperformed the median of their peer groups over the 5-year period. In addition, approximately 74% of rated fund assets had 4 or 5 stars, up from 62% last quarter and 89% were in 3, 4 or 5-star funds. A person sitting at a desk, their arms crossed, expressing the confidence of asset management and administration. We had 39 funds that were rated 4 or 5 stars, including 11 with AUM of $1 billion or more. I would also note that our managers performed well year-to-date in challenging markets with 67% and 89% of institutional and retail separate accounts AUM, respectively, meeting benchmarks for the period and 73% of mutual funds AUM outperforming the median performance of the peer group. Turning to Slide 8, asset flows. Total sales of $5.8 billion declined from $7.6 billion due to institutional, which included a large mandate last quarter, while retail sales increased 16%. By product, institutional sales of $1.3 billion included the issuance of a $300 million CLO and were down from $3.7 billion last quarter. Retail separate account sales of $1.8 billion increased 37% from $1.3 billion, largely due to SMID-cap. Fund sales of $2.7 billion increased 5% from $2.6 billion with higher sales in alternatives, fixed income, domestic equity and multi-asset. Total net outflows were $1.5 billion, which compared with breakeven net flows in the prior quarter with net outflows largely driven by U.S. retail funds. Reviewing by product, Institutional net outflows of $0.4 billion compared with positive net flows of $2.2 billion in the prior quarter, as flows will fluctuate depending on the timing of client actions. Over the past 4 quarters, institutional has generated a 5% organic growth rate with flows well diversified across affiliates, strategies and geographies. In retail separate accounts, positive net flows of $0.3 billion improved from modest net outflows in the prior quarter and both the intermediary sold and private client channels generated positive net flows. For open-end funds, net outflows improved to $1.5 billion from $2.1 billion in the second quarter. The net outflows were primarily due to U.S. retail funds as both ETFs and global funds continued to generate positive net flows. Within open-end funds, both SMID-cap and global equity generated positive net flows and net flows improved in alternatives, fixed income and domestic equity strategies. Turning to Slide 9. Investment management fees as adjusted of $177.4 million increased $6.3 million or 4%, reflecting the sequential increase in average assets under management. The average fee rate of 42 basis points was relatively unchanged, declining slightly from 42.2% in the prior quarter. A modest decline reflected the full quarter impact of the large institutional funding in the second quarter, mostly offset by a higher average open-end fund fee rate. Performance fees in the quarter of $0.6 million compared with $0.3 million in the second quarter. And looking ahead, we continue to expect the average fee rate to be in a range of 42 to 44 basis points, though given the current environment, we would expect to be at the low end of the range in the fourth quarter. As always, the fee rate will be impacted by markets and the mix of assets. Slide 10 shows the 5-quarter trend in employment expenses. Total employment expenses as adjusted of $98.8 million increased 3% sequentially. The modest increase reflected higher incentive compensation due to affiliate profitability, stronger retail sales and higher noncash performance-based stock compensation. As a percentage of revenues, employment expenses were 50.1%, down modestly from 50.3% of revenues last quarter. Looking ahead, we continue to expect employment expenses to be in the range of 49% to 51% of revenues, albeit at the high end of the range for the fourth quarter, given current market levels. As always, it will be variable based on market performance, in particular as well as profits and sales. Turning to Slide 11. Other operating expenses, as adjusted, were $30.1 million, down $1.6 million or 5% from the second quarter. Excluding the $0.9 million of annual Board grants in the prior quarter, other operating expenses declined 2% sequentially, reflecting continued management of discretionary expenditures. Looking ahead, we would anticipate that other operating expenses, as adjusted, will be in a quarterly range of $30 million to $32 million, down modestly from the previous range. Slide 12 illustrates the trend in earnings. Operating income as adjusted of $67 million increased by $5.4 million or 9% sequentially due to higher average assets under management and flat operating expenses. The operating margin as adjusted of 33.9% compared with 32.3% in the second quarter. With respect to certain nonoperating items, other expense as adjusted improved by $0.9 million, reflecting lower unrealized losses on investments. Total net interest income increased by $1.5 million, primarily reflecting interest income on the CLO issued late last year. Net income as adjusted of $6.21 per diluted share increased 14% from $5.43 in the second quarter. Regarding GAAP results, net income per share of $4.19 compared with $4.10 per share in the second quarter and included a $0.67 expense for fair value adjustments to affiliate noncontrolling interests, and $0.37 of acquisition, integration and restructuring costs. Slide 13 shows the trend of our capital liquidity and select balance sheet items. We ended the quarter with net debt of $84 million, representing net leverage of 0.3x. Our strong balance sheet supported continued balanced capital management in the quarter, including investments in growth, return of capital and debt repayment. Investments in growth during the quarter included $26 million to sponsor a new CLO as well as a $21 million investment to increase our ownership in SGA to 75%. In August, we announced a 15% increase in our quarterly dividend to $1.90 per share. And over the past 6 years, we have increased the dividend by over 300%. We also repurchased 74,015 shares during the quarter for $15 million, up from $10 million in the prior quarter. We continue to pay down our revolving credit facility repaying $20 million in the quarter. We have adequate levels of working capital and modest leverage, providing meaningful financial flexibility to repay debt, invest in the business and return capital. I would also note, as a reminder, that our intangible assets continue to provide a cash tax benefit, which grew with the acquisition of AlphaSimplex earlier this year and with the increase in our ownership of SGA. At current tax rates, we estimate the tax attributes could provide a cash tax benefit of approximately $19 million per year over the next 10 years. With that, let me turn the call back over to George. George? George Aylward: Thanks, Mike. So we’ll now take your questions. Dede, would you open up the lines, please? See also 25 Best US Cities for Solo Female Travelers and Lithium Stocks List: 16 Biggest Lithium Stocks. Q&A Session Follow Virtus Investment Partners Inc. (NASDAQ:VRTS) Follow Virtus Investment Partners Inc. (NASDAQ:VRTS) We may use your email to send marketing emails about our services. Click here to read our privacy policy. Operator: [Operator Instructions]and our first question comes from Michael Cyprys of Morgan Stanley. Michael Cyprys: I was hoping you could talk about the international distribution efforts, how that is progressing. Maybe you can elaborate on how much that’s already contributing just in terms of AUM and flows. So maybe talk about some of the steps you anticipate taking as you look out over the next 12 months or so with respect to international distribution efforts? And then the other question would be just around the pipeline, if you wouldn’t mind just giving a little bit more color on the institutional pipeline. What you’re seeing there? How do you characterize it now versus like last quarter. George Aylward: Sure, sure. On the first, so we’re very pleased with the traction and the outcomes from our non-U.S. institutional distribution team. And as we’ve said before, they’ve really done a great job in terms of getting familiar with all of the capabilities that we’ve had and very early on from the very beginning, very quickly starting to create some opportunities. As we’ve said before, the reason we think the non-U.S. is a great growth opportunity for us is because until a few years ago, a large number of our management really relatively unknown outside the U.S. So we’ve had traction outside the U.S. for a few years. It’s now grown to about 17% or 18% of our AUM. It continues to be a very active part of our pipeline, and we think we have a lot of opportunities. And generally, what we’ve seen over the last few years is obviously a lot of increased activity. But I think in a few quarters, we’ve commented the amount that is actually coming from the non-U.S. client base as opposed to the U.S. client base and how pleased we’ve been that it has been more broadly split between various affiliates as well as strategies, right? And to dovetail that into the pipeline, then I’ll ask Mike to talk a little bit more about the non-U.S. distribution. In terms of the pipeline, the reason — what we like about the pipeline is not always necessarily in terms of the sheer dollars but in terms of the diversity of that. So we continue to see a pipeline that has diversity of equity strategies, of non-correlated strategies, of fixed income strategies. So we think that’s great. We did make some comments and institutional is always going to be lumpy in its nature in terms of when money comes in and when money goes out, particularly as clients are looking to either rebalance their portfolios, et cetera. And we are — we did comment that we are starting to see a little bit more of a longer funding cycle. I don’t think it’s unusual in this type of a market, but it just kind of makes the predictability of that just a little more challenging. Mike, comments on the institutional team? Mike Angerthal: Yes. I think George laid it out pretty well. When we look at recent fundings and the expansion of the international business, we’re certainly getting strong contributions from the global team, not only the team in Europe, but the team in Singapore and Asia and that the pipeline is comprised of opportunities from each of those areas, and it’s across affiliates and across those geographies. And we do have significant contributions in the pipeline from those teams and gives us confidence over the long term. Any quarter can certainly have different results. But when we look at each of the last 3 years as well as trailing 12 months and year-to-date. We continue to be excited about the pipeline of opportunities and about what that team is contributing and the activities that they have upcoming with many of our affiliates. Michael Cyprys: Great. And then just a question on your ETF platform. I was hoping you might be able to speak to how you guys are thinking about continuing to build that out? Any thoughts around mutual fund to ETF conversions as well as scope for launching some new active ETFs as we’ve seen others start to have some success with that across the industry......»»
Herc Holdings Inc. (NYSE:HRI) Q3 2023 Earnings Call Transcript
Herc Holdings Inc. (NYSE:HRI) Q3 2023 Earnings Call Transcript October 24, 2023 Operator: Good morning. My name is Aldra, and I will be your conference operator today. At this time, I would like to welcome everyone to the Herc Holdings, Inc. Third Quarter 2023 Earnings Call. Today’s conference is being recorded. [Operator Instructions] At this […] Herc Holdings Inc. (NYSE:HRI) Q3 2023 Earnings Call Transcript October 24, 2023 Operator: Good morning. My name is Aldra, and I will be your conference operator today. At this time, I would like to welcome everyone to the Herc Holdings, Inc. Third Quarter 2023 Earnings Call. Today’s conference is being recorded. [Operator Instructions] At this time, I would like to turn the conference over to Leslie Hunziker, Senior Vice President, Investor Relations. Please go ahead. Leslie Hunziker: Thank you, operator, and good morning, everyone. Welcome to Herc Rentals’ third quarter 2023 earnings conference call and webcast. Earlier today, our press release, presentation slides were furnished and 10-Q was filed with the SEC, all are posted to the Events page of our IR website at ir.hercrentals.com. Today, we’re reviewing our third quarter 2023 results with comments on operations and our financials, including our view of the industry and our strategic outlook. The prepared remarks will be followed by an open Q&A. Now let’s move on to our Safe Harbor and GAAP reconciliation on Slide 3. Today’s call will include forward-looking statements. These statements are based on the environment as we see it today and therefore, involve risks and uncertainties. I would caution you that our actual results could differ materially from the forward-looking statements made on this call. You should also refer to the Risk Factors section in our annual report on Form 10-K for the year ended December 31, 2022, and our quarterly report on Form 10-Q for the period end September 30, 2023. In addition to the financial results presented on a GAAP basis, we will be discussing non-GAAP information that we believe is useful in evaluating the company’s operating performance. Reconciliations for these non-GAAP measures to the closest GAAP equivalent can be found in the conference call materials. A replay of this call can be accessed via dial-in or through the webcast on our website. Replay instructions were included in our earnings release this morning. We have not given permission for any recording of this call and do not approve or sanction any transcribing of the call. This morning, I’m joined by Larry Silber, President and Chief executive Officer; Aaron Birnbaum, Senior Vice President and Chief Operating Officer; and Mark Humphrey, Senior Vice President and Chief Financial Officer. I’ll now turn the call over to Larry. Larry Silber: Thank you, Leslie, and good morning, everyone. Please turn to slide 4. Our third quarter results were driven by our strong business base improved operating leverage and continued M&A initiatives. Total revenue and adjusted EBITDA were third quarter records, driven by a 6.9% increase in rental rate and above market volume growth. Additionally, we ramped up fleet dispositions in the quarter to adjust to higher OEM shipments in the first half of the year and to take advantage of the healthy used equipment market. Use fleet sales carry lower margin than rental revenue, but if we exclude fleet sales from the equation, rental EBITDA or REBITDA as we call it, generated a significant margin and flow-through improvement in the quarter. Of course, as expected, and as noted on the slide, EBITDA margin in the quarter was impacted by the sale of nearly three times more fleet at OEC and continued disruptions from labor strikes in the studio entertainment industry. In the third quarter, our capital allocation strategy focused on profitable growth investments, supported an incremental increase in ROIC compared with last year. On slide 5, we’re working in a favorable operating environment as the equipment rental market continues to benefit from strong demand across a variety of end markets and geographies. And we continue to outpace market growth as a result of our premium assets, national footprint, broad-based capabilities, and expert services. Our third quarter rental revenue grew another 8% on top of the 35% growth last year. Excluding studio entertainment, rental revenues increased 13% over the prior year quarter. The studio shutdowns continued into the fall as the Actors Guild joined the screenwriters on strike, making the first time in 63 years that the Hollywood writers and actors were striking at the same time. While the writers finally resolve their dispute, the actors remain on strike, keeping most productions idle. Total revenue got a boost in the latest quarter as we significantly increased sales of used fleet. The supply chains recovery in certain equipment categories allowed us to begin addressing the pent-up rotations from the last two years. We headed into the fourth quarter with our fleet better matched to demand after successfully managing through a wave of equipment deliveries in the first half of the year. If you turn to slide 6, in addition to leveraging our scale as a market leader, the successful execution of our growth strategies also contributed to our outsized performance relative to the overall industry. We are increasing revenue in our core categories through fleet investments as well as acquisitions and new greenfield facilities that support branch network optimization. Revenue from our high margin, ProSolutions specialty business grew double digits again in the third quarter, incrementally benefiting from cross-selling synergies, customer wins, and expanding fleet new products like trench shoring. And our innovative customer-facing digital capability called ProControl NextGen continues as a catalyst to new project wins, especially at the national account level. As always, we’re committed to responsible operating practices built on a strong cultural foundation, a safety first protocol, and a pledge to continue to work hard to do more for our employees, customers, and suppliers. In the third quarter, we were a recipient of the 2023 HIRE Vets Medallion Award that recognizes employers who successfully recruit, hire, and retain veterans. We were also named among the Best and Brightest Companies to work for by the National Association for Business Resources. We’re honored to be recognized for these awards as a fan of the testament to our unwavering dedication to our team members and the importance we place on having a best-in-class culture. Finally, between fleet investments, strategic M&A, dividends, and opportunistic share repurchases, we are strategically allocating capital to drive long-term growth and higher returns. Now, before I turn it over to Aaron, let’s move on to slide 7, where I’ll give you some background on our plan to explore strategic alternatives for our studio entertainment business, which we announced in the press release. Let me start by clarifying that our studio management and lighting and grip offering is branded in the TV and film industry as Cinelease. In January 2012, we acquired Cinelease to expand our product offering and our footprint in another fast-growing specialty rental market. Cinelease is one of the largest lighting and grip rental companies in the United States with a scales studio platform. Over the past few years, the industry for renting, lighting and grip equipment to studios has evolved as investment firms began purchasing sound stages and physical studios as attractive ways to diversify their real estate portfolios. These new owners want to offer a single point of contact for studios, studio management, and lighting and grip equipment, thereby making it less of a rental model and more a permanent part of their in-house business. As a result, in order for us to continue to grow the Cinelease studio management and lighting and grip business, Herc would need to add fixed-cost studio real estate to our portfolio offering. And that capital requirement would be a departure from our core rental business model. So at the beginning of the year, we began discussing strategic options for Cinelease that will enable it to continue to maximize its potential, either with Herc or on its own. We determined that exploring external opportunities was prudent, and so that process has begun. As you can see on the slide, our Herc Entertainment Services business will continue to rent our rolling stock equipment to both on location studios, off location productions for TV and film, and live entertainment venues. Mark will share with you our financial performance here today, excluding Cinelease, to give you some perspective on the very strong performance of the go-forward business base. Finally, I’ll just say that Cinelease has been a great business for us. It’s a high-margin, seasonally steady growing platform business with a loyal team of product and service experts, and it open doors for Herc Entertainment Services to continue to flourish in this robust and exciting end market. We are confident that the strategic actions we are announcing today will help ensure that Cinelease and the incredibly strong and dedicated group of colleagues that comprise it are on the best possible trajectory moving forward. And that Herc resources and focus remain on its core strategies for profitable long-term growth. With that, I’ll turn it over to Aaron to share the high-level operational drivers in the third quarter. Aaron? Aaron Birnbaum: Thanks, Larry and good morning, everyone. The solid performance of our operations and field support teams, combined with steady demand across our end markets, continue to provide a favorable environment for us. Thanks to the hard work of Team Herc, we have demonstrated continued progress in our journey to build scale and market leadership through flexibility, efficiency, strategic network, and a customer first mindset. Turning to slide 9, our day starts with safety, which is at the core of everything we do. As you know, our major internal safety program focuses on perfect days. That is days with no OSHA recordable incidents, no at-fault motor vehicle accidents, and no DOT violations. We strive for 100% perfect days throughout the organization. In the third quarter on a branch by branch measure, all our branch operations achieve at least 97% of days as perfect. Equally notable, our total recordable incident rate remains better than the industry benchmark of 1.0, reflecting our high standards and commitment to the safety of our people and customers. On slide 10, let me shift to a progress update on our growth strategies. One of the key initiatives of our urban market growth strategy is expansion through greenfield locations and acquisitions. In the third quarter, we added eight locations to our network, four greenfield locations and four locations from two new acquisitions. As you know, we focus on acquisition opportunities and high growth markets that complement our current branch network and fit our strategic, financial and cultural filters. Of the acquisitions in the quarter, both were general rental companies. One was in Southern California, which includes the largest metropolitan markets in the U.S. and the other was Houston, a top 10 market. These acquisitions support our strategic goal of increased density and resilient urban markets. Moreover, many of the mega projects being announced are in the geographies where we have focused our acquisitions in greenfield locations like Phoenix, Houston, Austin, Detroit, and the Midwest. Through September 30th, we’ve invested $332 million in net cash on acquisitions. Multiple remains steady as we pay a little less for general rental companies and a little more for specialty rental companies. We targeted up to $500 million of our core acquisitions this year and have a strong pipeline of prospects. As always, we’re being disciplined to ensure acquisitions meet our criteria and can add strategic and cultural value. Our acquisition process is now a core competency for us. We are quickly integrating these new businesses and are excited to welcome their teams to Herc while creating value for our people and our customers. On slide 11, in addition to acquisitions, growing our core and specialty fleet through new equipment investments is a key strategy to expanding our share and keeping up with the increasing demand opportunities. Let me start with demand drivers. Revenue growth from both local and national accounts remains strong in the first three quarters of 2023. Opportunities across end markets continue to increase. We are seeing it throughout our network and it’s supported by third party data. An overhead shot of a ProSolutions employee in the process of delivering equipment to a construction site. The exception, of course, is Cinelease where the duration of the labor strikes couldn’t have been predicted. This weight on our performance, masking the underlying strength of our core business this year. Studio entertainment represents just 1% of our rental revenue in the third quarter compared with about 5% a year ago. While the only fleet truly dedicated to those types of projects, especially lighting and grip equipment, we also rent power generation from HVAC equipment and material handling and aerial equipment. In July, we started moving that fungible fleet from the studio operations to other local customers. Although the writer striker is over, we don’t expect that to move the needle much in the fourth quarter since the actor strike is ongoing. Moving on to fleet investments. As we told you on our call in July, our goal for the third quarter was to absorb the unusual wave of fleet deliveries we received in the fourth quarter of 2022 and the first half of this year. I couldn’t be more proud of what the team delivered. By the end of September, we’d significantly close the gap between fleet growth and revenue growth by capitalizing on seasonal volume and generating $124 million in sales of used fleet. The team did an outstanding job of rapidly adjusting to the supply chain recovery. On slide 12, you can see how fleet expenditures and disposals have been trending. Our fleet expenditures at OEC totaled $274 million in the third quarter, about 12% lower compared to last year. Most of that had to do with the fact that supply is still extremely tight for the highest demand equipment classes, like aerial and reach forklifts for example, which caused our suppliers to push out some of those 2023 orders into 2024. On the flip side, we dispose of $309 million fleet at OEC. From an OEC standpoint, that’s almost three times more than in last year’s similar period. The substantial amount of dispositions in the single quarter had us utilizing the auction channels more than we typically would, and that reflected in the proceeds and sales margin. At the same time, the amount of fleet at OEC that was sold to retail and wholesale customers was a quarterly record for the company. So we are continuing to gain traction on our capabilities in those channels. Where we originally planned for fleet rotation of about $600 million that we see for this year, we will probably sell about $800 million by yearend based on the amount of new fleet deliveries we’ve received year-to-date. And the typical seasonal de-fleeting we’ll be able to do in the fourth quarter. From our 2024 fleet planning discussions with vendors, we believe deliveries will return to our more normal seasonal schedule now that supply chain inventories and capabilities are improving. But I will reiterate that the highest category classes for supply continue to be those with the highest customer demand. So while availability in many CAT classes has improved, it’s clear we’re going to have another challenging year getting all the gear we’d like for certain categories. Fleet planning considerations for 2024 CapEx include incremental demand for mega projects, infrastructure and manufacturing reshoring, as well as local market growth and replacement fleet needs. In addition to building a best-in-class fleet, you can see on slide 13 that we have a diverse well-balanced customer mix made of a large national accounts and local contractors operating in North America with a wide range of equipment needs across a variety of end markets. About 36% of our revenue is tied to non-residential construction with 26% related to our industrial customers and 15% coming from infrastructure and municipal projects. Local accounts, which represented 58% of rental revenue in the third quarter, are growing due to Herc’s penetration through our acquisition and greenfield strategy, as well as regional growth in infrastructure, education, maintenance and repair and local utilities. For national accounts, we are capitalizing on what we see as a booming large project pipeline with the federal and funded mega projects, large infrastructure jobs and manufacturing facilities. These mega projects represent the beginning of a multi-year flow of dollars into the industrial and infrastructure space. As one of the largest players in the rental industry, our fleet capacity, digital capabilities, on-site management expertise and broad location networks set us up to win substantial more than of our share of the market’s growth. I want to thank team Herc for their commitment to operational excellence and safety. Their professionalism shows up in the execution of our services to our customers every single day. It’s a valuable differentiator for Herc. Now I’ll pass the call on to Mark. Mark Humphrey : Thanks, Aaron, and good morning, everyone. I’m starting on slide 15 with a summary of our key metrics for the third quarter. Larry and Aaron touched on many of these line items, so I’m just going to provide some additional color. For rental revenue, about two thirds of the growth was organic, and a third came from acquisitions. DOE and SG&A as a percent of rental revenue improved 250 basis points in the quarter, supporting improvements in adjusted REBITDA margin and flow-through of more than 76%. The adjusted REBITDA margin of 49.3% was a record, exceeding our previous peak margin by 200 basis points. Additionally, net income grew 12% while diluted EPS grew 18% to $3.96 per share. Let’s walk through some of the other performance drivers on slide 16. Here, you can see the rental revenue and adjusted EBITDA walks year-over-year. In the revenue chart, rental rate was up 6.9%. Fleet on rent increased 11.5% and mix and lower re-rent revenue was unfavorable by 9.9% compared with the third quarter a year ago. The decline in Studio Entertainment revenue is calculated in mix as is inflation, which together accounted for approximately 90% of the mix impact. Additionally, ancillary revenue was impacted by reduced re-rent revenue in the quarter, primarily reflecting better fleet availability, which positively impacts adjusted EBITDA and REBITDA margins. The catch-up in supply deliveries and the added season mix of fleet received in the first half, combined with the drop-off in Studio Entertainment revenue resulted in dollar utilization of 42.1% in the third quarter, versus 45.3% last year. As Erin mentioned, we work through the quarter to right size the fleet and feel good about where we are heading into the fourth quarter. Additionally, we saw sequential improvement and dollar utilization every month this quarter following the seasonal demand trend. Moving to the adjusted EBITDA waterfall chart on the right, profit benefited from higher rental revenue and significant leverage from lower operating expenses as a percent of revenue but the Studio Entertainment’s top line weakness on its fixed cost base was a partial offset. Adjusted EBITDA margin was impacted by the higher sales of used equipment at OEC and the higher use of the auction sales channel in the recent quarter. On slide 17, we’ve added a summary P&L to the deck that excludes Studio Entertainment in order to give you a better sense of how well the base business has performed in the recent quarter and year-to-date. From this table, you can see the strength of our core rental business when we exclude Studio Entertainment from both periods. For example, rental revenue growth would have been approximately 500 basis points higher in the third quarter at 13.2% and adjusted EBITDA would have grown 26.2% at a margin of 46.5%, a 130 basis point improvement. Also, our already record level REBITDA margin was stronger by another 170 basis points at 51%, with flow-through at 73%, a more than 2,000 basis point increase over the prior year. The base business results reflect strong demand, favorable pricing, benefits from operating leverage and record margin performance. A full reconciliation of performance metrics, excluding Studio Entertainment, can be found on slide 28 and 29 in the appendix of our presentation. Shifting to Capital Management on slide 18, you can see we have no near term maturities and ample liquidity to fund our growth goals as we continue to allocate capital to invest in our business and drive fleet growth into the cycle. We remain confident in our business model and are committed to increasing shareholder value. In the third quarter, we declared a quarterly dividend of $0.6325, which represents $2.53 per share for the year. Net capital expenditures exceeded cash flow from operations in the nine months ended September 30, with cash outflows of $196 million before acquisitions. Our current leverage ratio at 2.5x is well within our 2x to 3x target range and in line with our expectations as we invest in growth. Moving on to slide 19, you can see the continued strength in our primary end markets. In the upper left, the ARA estimate for 2023 North American rental industry revenue is growing to $76 billion based on ARA’s recently revised estimates and is forecasted to grow at a 4% CAGR and over the next three years due to its diversified end markets. On the bottom left is the Architectural Billing Index, which reported below 50 in September, it’s not unusual to see the billing index along with its counterparts, inquiries and design contracts be choppy in the back half of the year. We saw a similar trend in 2022. ABI is just one indicator of future construction activity. We will continue to monitor it in conjunction with other data points over the next 12 months. Two of our key end markets are industrial and nonresidential construction both continue to show strength for 2023. Combined, these end markets reflect about two third of our customer base and both are likely to outperform other consumer-driven end markets due to new mega project construction as the reshoring of U.S. manufacturing capacity continues to gather steam. Taking a look at the industrial spending forecast on the top right, Industrial Info Resources is projecting $409 billion of spend in 2023, the highest level on record and a 16% increase over 2022. In the lower right quadrant is Dodge’s forecast for nonresidential construction starts, you can see in 2023, starts are estimated to be another $429 million on top of last year’s peak $445 billion. Of course, these are also just starts of new projects of multiyear construction builds that will continue into ’24, ’25 and beyond. The dotted line on these charts reflects growth over pre-pandemic levels. You can see that last year and the next three are projected to be the strongest periods of activity that this industry has ever seen. Additionally, there’s another $306 billion in nonresidential non-buildings or infrastructure projects slated for 2023. That’s a 20% increase over 2022. These projects are supported by federal funds approved in the infrastructure package, the Chips and Sciences Act and the Inflation Reduction Act. The current strength in mega projects and infrastructure activity is not particularly sensitive to short-term interest rates and clearly has a structural tailwind. These large projects benefit rental companies of scale with larger, more diverse rental fleet and is one of the leading North American rental companies, Herc stands to benefit more favorably from this trend. We expect to continue to outpace market growth at a rate greater than 2x. As we head into the last quarter of the year, we are fine-tuning our guidance for 2023. This is on slide 20. We’ve narrowed our adjusted EBITDA forecast range to $1.45 billion to $1.5 billion, which represents growth of 18% to 22%. This is on top of 37% growth in 2022. We assume the incremental benefits from opportunistic M&A this year would help offset the significant impact from Studio Entertainment and fewer weather events than originally projected. However, while the pipeline for M&A remains robust, the cadence of the closing activity is extending into Q4 and Q1 of 2024. Dollar utilization in the last quarter of 2023 is expected to be slightly down sequentially from Q3 as the benefits of our realigned fleet are offset by the studio entertainment impact and the probability that we won’t see a big weather event this year, compared with incremental volume from Hurricane Ian in last year’s fourth quarter. And our target for full year 2023 REBITDA flow-through tightens to the mid-50s, which represents continued benefits from operating leverage year-over-year. We’ve also tightened our net fleet CapEx range to $1 billion to $1.1 billion to reflect the lower end of our original guidance, as noted last quarter. The revision is based on a roughly 33% increase in our original plan for used equipment sales at OEC and the fact that some of our planned 2023 growth CapEx was pushed into 2024 to account for OEM supply constraints in certain categories. Interest expense was up 82% in the third quarter year-over-year, reflecting the accumulation of Fed rate increases in our M&A funding. Finally, we expect our leverage ratio to be at the midpoint of our 2x to 3x target range at yearend, we are experiencing all the trends consistent within industry in an up cycle and intend to continue to address the needs of our customers as we execute on our growth strategy. With that, I’ll turn the call back to Larry. Larry Silber: Thanks, Mark. Now please turn to slide 21. Everything we do really starts with our vision, mission and values and a purpose statement that focuses on equipping our customers and communities to build a brighter future. We do what’s right, where it fit together, we take responsibility, we achieve results, and we prove ourselves every day. Now before moving on to Q&A, I want to remind you that we’ll be hosting our next Investor Day on November the 2nd. The event will take place here in Bonita Springs, Florida and will be available via webcast. With market opportunities significantly growing for Herc and having already achieved nearly all of our three-year targets that we set back in 2021, this will be an opportunity to set new guideposts for the future of our growth trajectory. I hope you’ll be able to join us. With that, operator, we’ll take our first question. See also 20 Most Overrated Cities in the US According to Reddit and 20 Biggest Logistics Companies in the US. Q&A Session Follow Herc Holdings Inc (NYSE:HRI) Follow Herc Holdings Inc (NYSE:HRI) We may use your email to send marketing emails about our services. Click here to read our privacy policy. Operator: [Operator Instructions] We’ll take our first question from Rob Wertheimer with Melius Research. Rob Wertheimer: Thanks and good morning, everybody. So my question is really on demand. And I think you’re pretty clear on the big picture outlook. But I want to narrow it down into, I guess, this quarter and last, where you sort of saw rental revenue grow at a slower pace than the fleet. And I wanted to ask if that’s because you didn’t see the pockets of demand you thought you would have for the fleet that was coming in or whether it’s largely an effect of the fact that you’ve got more fleet transition as you’re selling more and bringing more in a seasonal pattern. So really, is it demand didn’t quite show up like you thought? Or is it just transitional cost? Aaron Birnbaum: Yes, Rob, demand landscape is still really good. And even as we look out over the next couple of quarters, it looks good. The fleet revenue balance and what we did in Q3 really was to kind of reset that balance because of the fleet, as I put in my remarks, they came in last year and then the first part of this year with the supply chain that got corrected. And so we wanted to correct our balance and that’s what we did in Q3. But the demand outlook is still good. Rob Wertheimer: Perfect. I think you’re pretty fair on excuse. So does that imply then that as you get to a more normal season or a more normal pattern of fleet coming in and fleet going out that drag of — transitional drag goes away and you kind of revert on some of the time [inaudible] Aaron Birnbaum: Yes, precisely. And we’ll continue to get the operating leverage of the business as that equation with fleet of revenue stays balanced. And that’s how we’ll plan for next year’s fleet adds. And that’s the visibility we see going forward for the next several quarters. Operator: We’ll go next to Jerry Revich at Goldman Sachs. Jerry Revich: Yes, hi. Good morning, everyone. I’m wondering if you could just talk about the pricing environment into October. It’s nice to see a positive variance in pricing in the quarter, I think versus most expectations even with utilization softer. Would you attribute that to the interest rate environment? And any context that you can provide on how the leading edge is tracking in October, if you don’t mind? Larry Silber : Yes. I mean I think the way I would answer that, Jerry, is one, I think that the industry has remained extremely disciplined throughout the first three quarters of this year. And then I think secondarily, right, it’s also an extremely healthy environment. And so I think we’ve posted 7 through the first 9 months of the year. And I think that I would direct you as you sort of look into October and fourth quarter, that would be a mid-single digit sort of pricing lift for fourth quarter. Jerry Revich: And Mark, maybe just to put a final point on that. I mean, normally, seasonally, pricing is up 50 basis points sequentially, October versus September, are we on pace for that normal seasonality? Mark Humphrey: Yes, I would say that all seasonal trends are being followed. Jerry Revich: Okay, super. And then Larry, in your prepared remarks you spoke to just the cadence of CapEx this year versus normal seasonality as we think about that cadence continuing into the early part of ’24, is it fair to expect CapEx to be down year-over-year in that 15% to 20% range in the first half, just given the timing of the deliveries? Or any comments that you would make about the capital budget for ’24, please?.....»»
Northern Trust Corporation (NASDAQ:NTRS) Q3 2023 Earnings Call Transcript
Northern Trust Corporation (NASDAQ:NTRS) Q3 2023 Earnings Call Transcript October 18, 2023 Northern Trust Corporation misses on earnings expectations. Reported EPS is $1.49 EPS, expectations were $1.5. Operator: Good day, and welcome to the Northern Trust Corporation Third Quarter 2023 Earnings Conference Call. Today’s conference is being recorded. At this time, I would like to […] Northern Trust Corporation (NASDAQ:NTRS) Q3 2023 Earnings Call Transcript October 18, 2023 Northern Trust Corporation misses on earnings expectations. Reported EPS is $1.49 EPS, expectations were $1.5. Operator: Good day, and welcome to the Northern Trust Corporation Third Quarter 2023 Earnings Conference Call. Today’s conference is being recorded. At this time, I would like to turn the conference over to Jennifer Childe, Director of Investor Relations. Please go ahead, ma’am. Jennifer Childe : Thank you, Melissa, and good morning, everyone, and welcome to Northern Trust Corporation’s Third Quarter 2023 Earnings Conference Call. Joining me on our call this morning is Mike O’Grady, our Chairman and CEO; Jason Tyler, our Chief Financial Officer; Lauren Allnutt, our Controller; and Grace Higgins from our Investor Relations team. Our third quarter earnings press release and financial trends report are both available on our website at northerntrust.com. Also on our website, you will find our quarterly earnings review presentation, which we will use to guide today’s conference call. This October 18 call is being webcast live on northerntrust.com. The only authorized rebroadcast of this call is the replay that will be made available on our website through November 18. Northern Trust disclaims any continuing accuracy of the information provided in this call after today. Please refer to our safe harbor statement regarding forward-looking statements on Page 12 of the accompanying presentation, which will apply to our commentary on this call. During today’s question-and-answer session, please limit your initial query to one question and one related follow-up. This will allow us to move through the queue and enable as many people as possible the opportunity to ask questions as time permits. Thank you again for joining us today. Let me turn the call over to Mike O’Grady. Michael O’Grady: Thank you, Jennifer. Let me join in welcoming you to our third quarter 2023 earnings call. Our results for the third quarter reflect solid execution against the challenging phase of this interest rate cycle, particularly as rates appear close to be peaking. Third quarter deposit levels were generally in line with seasonal expectations, but funding costs were significantly higher, putting pressure on net interest income. We’re focusing primarily on those areas of the business that are most under our control. Namely trust fees and expenses. In those 2 areas, we’re pleased with our performance. Trust fee revenue was up both sequentially and year-over-year. Expenses were well controlled, and we improved our capital position. Our Wealth Management business grew trust fees on both a sequential and year-over-year basis. We saw ongoing strength in the higher wealth tiers and within our Global Family Office segment, where momentum outside the U.S. continues to be brisk. Families with large and complex truck structures continue to be an area where we excel. Activity with business owners also remains robust, helping them optimize their complex personal affairs while they attend to growing their businesses is a consistent theme. We’re also seeing early success with various new marketing approaches and referral sources. In particular, during the third quarter, we had healthy new business generation with clients with assets over $50 million. In Asset Management, we saw positive flows into our institutional money market platform for the third consecutive quarter. Relative to benchmarks, our tax-advantaged equity product performance remained strong within the quarter cementing its 1, 3 and 5-year track record of out-performance. Importantly, 2 recent large asset servicing wins contain asset management mandates for index fixed income and outsourced investment solutions. Reinforcing our combined strength as One Northern. Within Asset Servicing, we had good momentum in core custody and fund administration and our pipeline remains solidly within historical levels. Our front office solutions is resonating particularly well across regions and different client types. One notable front office solutions win in the third quarter was the $32 billion Abu Dhabi Pension Fund. Our ability to provide a comprehensive view across public and private assets was cited as a key differentiator. Importantly, we were also selected to provide global custody, liquidity management, performance in risk analytics and portfolio optimization. We also had good success in the U.S. asset owner space where we continue to take share. In closing, we entered the fourth quarter on solid footing. Our balance sheet continues to be very strong with ample capital and liquidity, and our credit quality remains excellent. New business momentum is healthy and our pipeline is robust. Expense growth has declined each quarter this year, and I’m confident that we’ll continue to build on this discipline. We’re well positioned to navigate the current uncertain environment including the proposed regulatory changes related to capital and long-term debt and generate value for our stakeholders. I’ll now turn the call over to Jason. Jason Tyler : Thank you, Mike, and let me join Jennifer and Mike in welcoming you to our third quarter 2023 earnings call. Let’s dive into the financial results of the quarter, starting on Page 4. This morning, we reported third quarter net income of $328 million. Earnings per share of $1.49, and our return on average common equity was 11.6%. Our assets under custody/administration and assets under management were down modestly on a sequential basis but up sharply on a year-over-year basis. Unfavorable markets and currency movements more than offset positive asset inflows relative to the prior period. Year-over-year levels benefited from favorable markets, currency improvements and asset inflows. On a year-over-year basis, currency movements had an approximate 90 basis point favorable impact on revenue growth, largely within our Asset Services division and a 100 basis point unfavorable impact on expenses. On a sequential basis, currency impacts were immaterial. Excluding notable items in all periods, revenue was down 2% on both a sequential quarter and year-over-year basis. Expenses were up 1% sequentially and up 5% over the prior year. This reflects an expense to trust fee ratio of 115%, down from 116% in the second quarter but higher than the 112% we posted in the third quarter of last year. Pre-tax income was up 1% sequentially, but down 20% over the prior year. Trust, investment and other servicing fees, representing the largest component of our revenue, totaled $1.1 billion, a 1% sequential increase and a 3% increase compared to last year. All other noninterest income was up 6% sequentially, but down 3% over the prior year. Net interest income on an FTE basis was $469 million. A successful investor smiling confidently, looking over a stock market report. Down 10% sequentially and down 11% from a year ago. Our provision for credit losses was $14 million in the third quarter. Overall, our credit quality remains very strong. We had small net recoveries for the quarter, and there was a modest increase in nonperforming loans. Turning to our asset servicing results on Page 5. Assets under custody and administration for asset servicing clients were $13.2 trillion at quarter end, down 2% sequentially but up 10% year-over-year. Asset servicing fees totaled $626 million. Custody and fund administration fees, the largest component of fees in the business were $428 million. Sequential performance reflects favorable markets and new business activity, offset by weaker transaction volume. The year-over-year strength was due to solid new business activity and favorable market and currency impacts. That were partially offset by lower transaction volume. Assets under management for asset servicing clients were $963 billion, down 3% sequentially, but up 10% year-over-year. Similarly, because a significant portion of our fees are billed on a lagged basis, the sequential decline in AUM will impact our fourth quarter trust fees. Investment management fees within asset servicing were $137 million. Moving to our Wealth Management business on Page 6. Assets under management for our wealth management clients were $370 billion. Trust administration and other servicing fees for wealth management clients were $486 million. Our average balance sheet decreased 4% on a linked quarter basis, primarily due to lower client deposits. Client liquidity was essentially flat during third quarter. Average deposits were $102 billion, down $4 billion or 4% sequentially, in line with our expectations for this seasonably weaker quarter. The decline was seen largely in the interest-bearing channel as clients continue to reallocate cash position. Noninterest-bearing deposits remained stable, down less than $1 billion sequentially, and the mix held steady at 17%. At quarter end, operational deposits remained at approximately 2/3 of institutional deposits and institutional deposits comprised 75% to 80% of the total mix. Shifting to the asset side of the balance sheet. The duration of the securities portfolio reduced slightly to 1.9 years. The total balance sheet duration continues to be less than a year. Loan balances averaged $42 billion and were flat sequentially. Our loan portfolio is well diversified across geographies, operating segments and loan types. Approximately 70% of the loan portfolio is floating and the overall duration is below one year. Our liquidity remains strong. Cash held at the Fed and other central banks was down reflecting the absorption of the deposit decreases, but highly liquid assets comprise more than 55% of our deposits and nearly 50% of total earning assets. Net interest income on an FTE basis was $469 million for the quarter, down 10% sequentially and down 11% from the prior year. NII reflected the impact of several dynamics. We saw some continued client migration into higher-yielding cash alternatives, but the pace moderated as we expected. Deposit cost increases were a slightly bigger factor with funding costs up 46 basis points over the second quarter. Due to the competitive environment, we repriced a small number of meaningful products to ensure we’re protecting deposit volumes. We’re not price leaders, but we’re vigorously defending our deposits with an eye toward playing the long game. We expect to benefit from this strategy when rates decline. Client engagement also led to a combination of specific repricing on existing accounts and a shift to higher paying term deposits. There’s no question that clients want to remain on our balance sheet. But sensing that the rate cycle is close to peaking. They’ve begun to stretch for duration. Our NII in the fourth quarter will continue to be driven by client behavior, which has been less predictable given the speed and extent of this cycle’s rate hikes. Our average client deposits thus far in the quarter are $100 billion. Modest outflows are expected to continue, due in part to client efforts to optimize returns and to some known outflows related to M&A activity and other corporate needs. Pricing should remain under pressure with further NIM compression possible. We currently expect fourth quarter NII to be in the range of $430 million to $440 million. Factors that could swing the outcome include the pace of further deposit outflows, the level of price pressure, the extent to which we see — we continue to see deposit mix shift and the offsetting impact from the repricing of the securities portfolio. As we look out to 2024, there are a wide range of scenarios under which net interest income could trend. Deposit pricing pressure, our securities maturity schedule, investment outlook and other factors provide upside that’s not reflected in the current quarter. Turning to Page 8. As reported, noninterest expenses were $1.3 billion in the third quarter, down 4% sequentially but up 4% as compared to the prior year. Excluding unusual items in both periods, including those noted on the slide, expenses in the third quarter were up 1% sequentially and up over 5% year-over-year. I’ll hit on just a few highlights. Excluding unusual items, compensation expense was down 2% sequentially. This reflected reductions in incentive compensation and head count actions taken year-to-date. The increase over the last year reflects 2023 base pay adjustments. Excluding unusual items in all periods, non-compensation expense was up 3% sequentially. Our expense-to-trust fee ratio improved 100 basis points sequentially to 115%, but remains higher than our targeted range of 105% to 110%. As a reminder, we began the year expecting to take at least 200 basis points off of our 2022 adjusted expense growth rate of 9%. Our first quarter adjusted results were meaningfully better, up 5.8% year-over-year. Our second quarter adjusted results were even better up 5.3% year-over-year. And our third quarter results were in the same range despite unfavorable currency impacts. For the fourth quarter, we expect continued improvement. Compensation expense is expected to be up $5 million. Benefits expense should be our normal fourth quarter lift of $3 million to $5 million. Outside services likely to be up approximately $10 million. Equipment and software should be up approximately $10 million relative to adjusted third quarter levels. And occupancy is expected to increase a few million dollars above adjusted third quarter levels. Other operating expense has many components, including market-driven categories that are not predictable, but it has tended to increase in the fourth quarter. All in, this would put our full year adjusted expense growth rate at approximately 5% or roughly 400 basis points lower than 2022 levels. Our financial model is based upon mid-single-digit trustee growth from a combination of organic growth and market appreciation. Against this backdrop, we hope to generate 100 to 200 basis points in trust fee operating leverage in normal macro environments. Our capital levels and ratios remained strong in the quarter. We continue to operate at levels well above our required regulatory minimum. Our common equity Tier 1 ratio under the standardized approach was up slightly from the prior quarter to 11.4% as capital accretion more than offset the unfavorable impact from higher rates on our securities portfolio. This reflects a 440 basis point buffer above our regulatory requirements. Our Tier 1 leverage ratio was 7.9%, up 50 basis points from the prior quarter. At quarter end, our AOCI was a negative $1.4 billion, a slight improvement over second quarter levels. We returned $159 million to common shareholders through cash dividends of $158 million and common stock repurchases of $1 million. We slowed our buyback activity in order to reserve for the anticipated FDIC special assessment. We’re well positioned to meet the proposed regulatory requirements, that Mike referenced without significant changes to our operating model. And with that, Melissa, please open the line for questions. See also 20 Most Innovative States in the US and 16 Best Investing Podcasts in 2023. Q&A Session Follow Northern Trust Corp (NASDAQ:NTRS) Follow Northern Trust Corp (NASDAQ:NTRS) We may use your email to send marketing emails about our services. Click here to read our privacy policy. Operator: [Operator Instructions] And we can go with our first question from Glenn Schorr with Evercore. Glenn Schorr : That was like the price is right. I like it. Okay. So I appreciate the range of outcomes for NII next year that you can control. So I’ll leave that aside for a second. But you mentioned your expense-to-trust fee ratio, your target and what you can do in terms of operating leverage in a better environment or normalize. I’m curious just what’s the overall approach towards expenses as you enter budget season next year within that mindset of what your goals are? And how do you approach it with that much uncertainty around things that you can’t control? Jason Tyler: Yes. Well, as we enter, this is the time of year where we’re thinking — trying to get a sense of where the launch points will be. And I walked through a little bit of a financial model for you guys to think about. That if we’re — over time, we’ll get lift from the equity markets and we should also have low to mid-single-digit organic growth. If we can get 100 to 200 basis points in fee operating leverage, that sets us up really well based on where our pretax margin is for good EPS growth over time. And so that’s the goal that we — it’s one of the metrics that we look at really closely. And we’re still in an inflationary environment where it’s harder to get that that operating leverage if you’re just looking at fees because the expenses are elevated and you don’t get the benefit from higher rates on the trust fee line. But you can tell that we’ve spent an incredible amount of effort this year working the year-over-year expense growth rates down. And you go back to 2022 and printing a 9% growth. Coming into this year, we knew we had to do better than that, and we’ve been grinding that down each quarter, quarter after quarter. We first tackled it with working hard on labor. And you can see that’s the biggest cost that we have. So we have to get that right. Headcount is down, and then another key element is technology. That shows up in equipment, software and outside services. That’s still elevated above the rest of the company in terms of growth rate, but we’ve had a lot of accomplishments there, too. and expecting to have that growth rate be lower next year than it has historically. And so we think we can have another year next year that’s similar to what we did in this year, which is to work that — could continue to work that year-over-year growth rate down. Glenn Schorr : Exactly what I look for. You have tons of capital and you generate plenty also. But I’m curious, some of the big banks have articulated what they thought as is the RWA impact or all-in impact might be. I’m curious at your first glance — what type of impact are we talking? I know that you mentioned it doesn’t disrupt your model, and I agree. I’m just curious if you can help us box it in, in terms of [indiscernible] impact, if as is? Jason Tyler: Sure. Yes, I’m going to give you a wide range of like 5% to 15% in RWA, and that will — that’s going to be impacted by a few different things. But one of the benefits that we have is the diversification of the business model. And so we’ve got — obviously, the custody business comes with a lot of operational risk. That’s really the most significant driver but we’ll actually get some benefit from an RWA perspective in some of the loan treatments. Just given the nature of our underlying loans. And then there are some other dynamics that we have that should help on RWA as well on a relative basis. But it’s — we’re thinking about it at this point, it could be anywhere from 5% to 15%. As we mentioned earlier, we feel really comfortable, and we see where our CET1 levels are and see where our liquidity is......»»
M&T Bank Corporation (NYSE:MTB) Q3 2023 Earnings Call Transcript
M&T Bank Corporation (NYSE:MTB) Q3 2023 Earnings Call Transcript October 18, 2023 M&T Bank Corporation beats earnings expectations. Reported EPS is $3.98, expectations were $3.94. Operator: Welcome to the M&T Bank’s Third Quarter 2023 Earnings Conference Call. [Operator Instructions] Please be advised that today’s conference is being recorded. I would now like to hand the […] M&T Bank Corporation (NYSE:MTB) Q3 2023 Earnings Call Transcript October 18, 2023 M&T Bank Corporation beats earnings expectations. Reported EPS is $3.98, expectations were $3.94. Operator: Welcome to the M&T Bank’s Third Quarter 2023 Earnings Conference Call. [Operator Instructions] Please be advised that today’s conference is being recorded. I would now like to hand the conference over to Brian Klock, Head of Market and Investor Relations. Please go ahead. Brian Klock: Thank you, Angela and good morning. I’d like to thank everyone for participating in M&T’s third quarter 2023 earnings conference call both by telephone and through the webcast. If you have not read the earnings release we issued this morning, you may access it, along with the financial tables and schedules by going to our website, www.mtb.com. Once there, you can click on the Investor Relations link and then on the Events and Presentations link. Also, before we start, I’d like to mention that today’s presentation may contain forward-looking information. Cautionary statements about this information are included in today’s earnings release materials and in the investor presentation as well as our SEC filings and other investor materials. An investment banker in a power suit entering an exclusive board room with a confident stride. Editorial photo for a financial news article. 8k. –ar 16:9 Presentation also includes non-GAAP financial measures as identified in the earnings release and in the investor presentation. The appropriate reconciliations to GAAP are included in the appendix. Joining me on the call this morning is M&T’s Senior Executive Vice President and CFO, Daryl Bible. Now I’d like to turn the call over to Daryl. Daryl Bible: Thank you, Brian and good morning everyone. Let’s start with our purpose, mission and operating principles on Slide 3. I would like to thank our more than 22,000 M&T colleagues for all their hard work, whether serving our customers or our communities, our employees continue to deliver on our purpose, making a difference in people’s lives. This purpose drives our operating principles. We believe in local scale, that is combining local knowledge and hands-on customer service of Community Bank with the resources of a large financial institution. Our 28 communities are led by on-the-ground regional presidents. Their knowledge allows us to better understand and meet the needs of our customers and communities. And importantly, this approach continues to produce strong results for our shareholders. Our local scale has led to superior credit performance, top deposit share and high operating and capital efficiency over the long-term. Moving to Slide 4. Our seasoned, talent and diverse board are keys to gaining in-depth understanding of our customers’ needs and expectations. We have sound technology solutions, coupled with caring employees, which provide a differentiated client experience. Please turn to Slide 5. This slide showcases how we activate our purpose through our operating principles. When our customers and communities succeed, we all succeed. Our investment in enhancing the customer experience and delivering impactful products, have fueled organic growth. We also believe in supporting small business owners who play a vital role in our communities. Despite operating in only 12 states, we are ranked as #6 SBA lender in the country, the 15th consecutive year M&T is ranked in the nation’s top 10 SBA lenders. And for the first time, we have finished as the top SBA lender in Connecticut, an important milestone following our acquisitions of Peoples United. Our commitment to supporting the communities we serve extends to affordable housing projects, with almost $2.3 billion in financing and over 2,600 home loans for low and moderate income residents. Additionally, M&T Bank and our Charitable Foundation granted over $47 million in support of our communities in 2022 and approximately $30 million so far in 2023. Please turn to Slide 6. Here we highlight our ongoing commitment to the environment. Last year, we invested over $230 million in renewable energy sector and have significantly reduced our Scope 1 and Scope 2 emissions since 2019. Our ESG report was published in July, but I encourage you to review this slide for some of the highlights. M&T’s ESG ratings have improved at Moody’s, MSCI and Sustainalytics. Turning to Slide 8. There are several successes to highlight this quarter. We continue to see growth in auto dealerships as well as specialty businesses. We continue to grow customer deposits despite increasing competition and building on the strong liquidity position and comparative strength of our financial position in the industry allows us to continue lending in support of communities and local businesses. We remain focused on diligently managing expenses. Our third quarter results continue to reflect the strength of our core earnings power. Third quarter revenues have grown 4% compared to last year’s third quarter. Pre-provision net revenues have increased 4% to $1.1 billion. Credit remained stable. Net charge-offs decreased in the third quarter and year-to-date, we still remain below the historical long-term average. GAAP net income for the quarter was $690 million, up 7% versus like quarter in 2022. Diluted GAAP earnings per share was $3.98 for the third quarter, up 13% from last year’s similar quarter. Now, let’s review our net operating results for the quarter on Slide 9. M&T’s net operating income for the third quarter, which excludes intangible amortization was $702 million and diluted net operating earnings per share, was $4.05. Net operating return on tangible common equity was 17.41% and tangible book value per share increased 3% compared to the end of June. On Slide 10, you will see that diluted GAAP earnings per share, was down 21% from linked quarter. Recall our results from the second quarter of last year indicated an after-tax $157 million gain from the sales of CIT business in April. Excluding this gain, GAAP net income and diluted earnings per share were down 3% compared to the linked quarter. On a GAAP basis, M&T’s third quarter results produced an ROA and ROE of 1.33% and 10.99% respectively. Next, we will look a little deeper into the underlying trends that generated the third quarter results. Please turn to Slide 11. Taxable equivalent net interest income was $1.79 billion in the third quarter, down $23 million from linked quarter. This decline was driven largely by higher interest rates on consumer deposit funding. An unfavorable funding mix change partially offset by higher interest rates on earning assets and 1 additional day. The net interest margin for the past quarter was 3.79%, down 12 basis points from linked quarter. The primary drivers of the decrease to the margin were an unfavorable deposit mix shift, which reduced margin by 7 basis points; the net impact from higher interest rates on customer deposits, net benefit from higher rates on earning assets which we estimate reduced the margin by 6 basis points. The remaining 1 basis point was due to higher non-accrual interest, net of the impact of 1 additional day. Turning to Slide 12. Average earning assets increased $1.5 billion from the linked quarter, due largely to the strong deposit growth that drove the $3 billion growth at the Fed. Average loans declined $928 million and average investment securities declined $630 million. Turning to Slide 13 to talk about average loans. Total loans and leases averaged $132.6 million for the third quarter of 2023, down 1% compared to the linked quarter. Looking at loans by category, on average basis compared to the second quarter, C&I loans increased slightly to $44.6 billion. We continue to see growth in dealer and specialty businesses. During the third quarter, average CRE loans decreased by 2% to $44.2 billion. This decline was driven largely by our continued strategy to reduce on-balance sheet exposure to this asset class. We have chosen to modernize our suite of products and services to offer more alternatives to better serve customers and to do so in a more capital-efficient manner possible. Average residential real estate was $23.6 billion, down 1%, largely due to portfolio pay-downs. Average customer loans were down slightly to $20.2 billion. The decline was driven by lower auto loan and HELOC balances, partially offset by the growth in recreational finance and credit card loans. Turning to Slide 14. Average investment securities decreased to $28 billion during the third quarter. The duration of the investment securities book at the end of September was 3.9 years and the unrealized pre-tax available-for-sale portfolio was only $447 million. At the end of the third quarter, cash held at the Fed and investment securities totaled $59.2 billion, representing 28% of total assets. Turning to Slide 15. We continue to focus on growing deposits with our customers and we are pleased with the growth in both average and end-of-period customer deposits. Average total deposits grew $3.3 billion. However, consistent with our experience in prior rising rate environments, increased competition for deposits and customer behavior continues to mix shift within the deposit base to higher cost deposits. Average customer deposits increased $1 billion. The customer deposit mix to migrate to average demand deposits declined $2.3 billion in favor of commercial sweeps and customer money market savings and time deposits. Average broker deposits increased $3.2 billion, while federal home loan bank advances decreased $2.2 billion. On average, brokered money market had now increased $800 million. Brokered time increased $1.5 billion. Broker deposits represent just one of the several funding vehicles that we can employ in our management of the balance sheet. At September 30 of this year, broker deposits represented 8% of our outstanding deposits and short-term borrowings. The pace and reduction in demand deposits seem to have decreased during the quarter. Our determined focus on retaining and growing customer deposits yielded positive results during the quarter. Next, let’s discuss non-interest income. Please turn to Slide 16. Non-interest income totaled $560 million in the third quarter compared to $803 million in the linked quarter. As noted earlier, the second quarter included $225 million from the sale of the CIT business. Excluding this gain, third quarter non-interest income decreased $18 million compared to the second quarter driven predominantly by $15 million related to one month of the CIT trust revenues included in the previous quarter. Other revenues categories were largely unchanged from the linked quarter. Turning to Slide 17 for expenses. Non-interest expenses were $1.28 billion in the third quarter of this year, down $15 million from the linked quarter. That decrease in expense was due to $11 million in lower compensation and benefit costs, reflecting lower average headcount, lower expenses for contracted resources and over time. $6 million lower in other cost of operations, largely reflecting lower sub-advisory fees as a result of the sale of the CIT business, lower legal-related expenses partially offset by losses associated with certain retail banking activities. The efficiency ratio, which excludes intangible amortization and merger-related expenses from the numerator and security gains or losses from a denominator, was 53.7% in the recent quarter compared to 53.4% in the linked quarter after excluding the gain from the sale of the CIT business. Next, let’s turn to Slide 18 for credit. The allowance for credit losses amounted to $2.1 billion at the end of the third quarter, up $54 million from the end of the linked quarter. In the third quarter, we recorded a $150 million provision in credit losses, which was equal to the second quarter. Net charge-offs were $96 million in the third quarter compared to $127 million in the linked quarter. The reserve build was primarily reflective of softening CRE values and the variability in the timing and the amount of CRE charge-offs. At the end of the third quarter, non-accrual loans were $2.3 billion, a decrease of $94 million compared to the prior quarter and represent 1.77% of loans, down 6 basis points sequentially. As noted, net charge-offs for the recent quarter amounted to $96 million, significant charge-offs were tied in 4 large credits, 3 large office buildings in Washington, D.C., Boston and Connecticut and one large healthcare provider operating in multiple properties in Western New York and Pennsylvania. Annualized net charge-offs as a percentage of total loans were 29 basis points for the third quarter compared to 38 basis points in the second quarter. This brings our year-to-date net charge-off rate to 30 basis points, which is below our long-term average of 33 basis points. We continue to assess the impact on future maturities and our investor real estate portfolio due to the level of interest rates, the impact of value declines and emerging tenancy issues. Continued targeted deep portfolio values in office, healthcare and multifamily portfolios are being done to identify any new emerging issues. When we file our upcoming Form 10-Q in the few weeks, we will estimate the level of criticized loans will be up to mid to high single-digit percent as compared to the end of June largely due to increases in investor real estate. Reflective of the financial strength and portfolio diversification of the CRE borrowers, almost 90% of the criticized loans are paying as agreed. Loans 90 days past due on which we continue to accrue interest were $354 million at the end of this quarter compared to $380 million sequentially and total of 76% of these 90 days past due loans were guaranteed by government-related entities. Turning to Slide 19 for capital. M&T’s CIT ratio at the end of September was an estimated 10.94% compared to 10.59% at the end of the second quarter. The increase was due in part to the continuation of the pause of repurchasing shares. At the end of September, based upon the proposed capital rules, the negative AOCI impact on the CET1 ratio from variable-for-sale securities and pension-related components would be approximately 36 basis points. Now turning to Slide 20 for outlook. With three quarters in the books, we will focus on the outlook for the fourth quarter. First, let’s talk about the economic outlook. The economic environment was supportive in the third quarter, and we were cautiously optimistic heading into the last quarter of this year. In the third quarter, the overall economy continued to expand, thanks to the strong consumer spending and steady capital expenditures by businesses, though the housing market continues to struggle in the high-rate environment. Encouragingly, inflation continued to slow in label markets, while still tight improved substantially with steady hiring while age pressures dissipated. Looking ahead to the fourth quarter, we are cautiously optimistic that the economy will continue to grow, but at a slower rate. We expect that, that slower growth will continue reducing inflation pressures. The Federal Reserve has probably reached the end of its hike cycle, given slower inflation and recent run-up in long-term rates. With that economic backdrop, let’s review our net interest income outlook. We expect taxable equivalent net interest income to be in the $1.71 billion to $1.74 billion range. As we noted on the previous calls, a key driver to net interest income continues to be the ability to efficiently fund earning asset growth. We expect the continued intense competition for deposits in the face of industry-wide outflows. We remain focused on growing customer deposits. For the fourth quarter, we expect average deposits to be about the same level with growth of interest-bearing customer deposits but continue to decline in demand deposit balances. This is expected to translate into a through-the-cycle interest-bearing customer deposit beta through the fourth quarter this year to be in the mid-40% range. This deposit beta excludes broker deposits, including broker deposits, would add 6% to the beta. While the percent of the cumulative beta is slowing, we anticipate it will continue rising into the first half of next year. Next, let’s discuss the outlook for the average loan growth, which should be the main driver of earning asset growth. We expect average loans and lease balances to be slightly higher than the third quarter of $1.33 billion level. We expect the growth in C&I, but anticipate declines in CRE and residential mortgages for our consumer loan balances should be relatively flat. Turning to fees. We expect non-interest income to be essentially flat compared to the third quarter. Turning to expenses. We anticipate expenses, excluding intangible amortization and the FDIC special assessment to be in the $1.245 billion to the $1.265 billion range in the fourth quarter. Intangible amortization is expected to be in the $15 million range and the FDIC special assessment is anticipated to be $183 million. Given the prospects of slowing revenue growth we remain focused on diligently managing expenses. Turning to credit. We continue to expect loan losses for the full year to be near M&T’s long-term average of 33 basis points. which implies fourth quarter charge-offs could be higher than the third quarter. For the fourth quarter, we expect tax flow equipment tax rate to be in the 25% range. Finally, as it relates to capital, our capital, coupled with limited investment security marks have been a clear differentiator for M&T. M&T has proven to be a safe haven for clients and communities. The strength of our balance sheet is extraordinary. We take our responsibility to manage our shareholders’ capital very seriously and return capital loan it is appropriate to do that. Our businesses are performing very well, and we are growing new relationships each and every day. We are still evaluating the proposed capital rules so that we believe that now is not the time to be purchasing shares. That said, we are positioned to use our capital for organic growth. Buybacks have always been part of our core capital distribution strategy and will again in the future. In the meantime, our strong balance sheet will continue to differentiate us from our clients, communities, regulators, investors and rating agencies. To conclude on Slide 21, our results underscore an optimistic investment thesis. While economic uncertainty remains high, that is when M&T has historically outperformed its peers. M&T has always been a purpose-driven organization with successful business model that benefits all stakeholders, including shareholders. We have a long track record of credit outperforming through all economic cycles with growth about 2x that of peers. Our strong shareholder returns include 15% to 20% return on tangible common equity and robust dividend growth. Finally, our disciplined acquirer and prudent steward of capital – shareholder capital and our integrated – our integration of Peoples merger is completed. We are confident in our ability to realize our potential post-merger. Now with that, I’ll turn it back to our caller briefly review the instructions. See also 20 States with the Lowest Unemployment Rates and 15 Most Important U.S. Military Bases in the World. Q&A Session Follow M&T Bank Corp (NYSE:MTB) Follow M&T Bank Corp (NYSE:MTB) We may use your email to send marketing emails about our services. Click here to read our privacy policy. Operator: [Operator Instructions] Our first question comes from Manan Gosalia with Morgan Stanley. Please go ahead. Manan Gosalia: Hi. Good morning. Daryl Bible: Good morning, Manan. Manan Gosalia: You spoke about a mid to high single-digit increase in criticized loans this quarter. I was wondering how is the mix changing between hotel healthcare and office. And it also looks like non-accrual loans take lower this quarter. So can you talk about what the drivers are there? Whether there is loan sales or any other underlying drivers? And if that had any benefit to net interest income this quarter? Daryl Bible: Yes, happy to do that. So on the criticized increase, it’s really just more of the same that we’re seeing. It’s more increases just in our IRE portfolio, primarily on the office side for the most part. So nothing really different from trends that we’re seeing as far as non-accrual, there was one large property that was sold in New York that was a primary driver for the non-accruals. We actually had an in that helped margin probably by about $5 million in the quarter. Manan Gosalia: Got it. Thank you. And then maybe just on the buybacks. What is the criteria to resume the buybacks from here? Because it seems like we have more clarity on regulation at this point. Is it a function of M&T issuing more in the debt markets and then starting buybacks? Is it to do with the credit rating agencies? Any color you can throw there would be helpful, especially given how much excess capital you have at this point? Daryl Bible: Yes. So I definitely agree with you, Manan, in that we do have excess capital. But right now, the economy is still kind of unpredictable rates higher for long go, we will probably continue to have stress on clients over the next couple of quarters if that actually comes to fruition. They were just trying to be conservative and cautious at the same time. And it’s also for us to actually have an opportunity to continue to grow organic growth in our commercial and consumer books and our trust folks as well. So I think we’re just trying to be cautious and we know when the economy gets a little bit more comfortable, we will consider repurchases there. It is true to our long corn strategy, the capital distribution back to the shareholders. It’s not going anywhere, but we just want to continue to make sure that we’re strong and can grow and serve our customers right now. Manan Gosalia: Great. Thank you. Daryl Bible: Thank you. Operator: The next question comes from Ebrahim Poonawala with Bank of America. Please go ahead. Ebrahim Poonawala: Hi, good morning. Daryl Bible: Good morning. Ebrahim Poonawala: I guess just want to follow-up Daryl, in terms of – so your NII guidance for fourth quarter is fairly clear, but we are hearing from some of your peers around potential for the margin NII bottoming in the fourth quarter especially if the Fed is done, give us your thought process around – is there something about your balance sheet, why that might get pushed out because of just deposits have been related to the price or the dynamics on your balance sheet or your markets? Any color there would be appreciated. Daryl Bible: Yes. Manan, it’s really the biggest driver for the net interest margin for us right now is really what happens to our non-interest-bearing deposits. We were down $2.3 billion that was better than what we thought it would be. And we think that it’s slowing down. We will see how that plays out in the fourth quarter. But that is probably the biggest determining factor. When you look at our balance sheet, though, I’m actually pretty pleased with how the assets are repricing. If you look at the reactivity rate of some of our fixed portfolios, if you look at this quarter, like our consumer loan portfolio was up 22 basis points. We have home equity in there that is prime related, but that’s a smaller percentage. We have really good repricing and other consumer portfolios like auto was up approximately 300 basis points in what was rolling off versus what was rolling on. If you look at our RV and loan portfolio, that was up approximately 250 basis points of what was rolling off from on, so I think once we get more stability in the disintermediation of deposits, I’m more favorable and the margins stabilizing. I think the asset side is actually performing pretty well. Ebrahim Poonawala: Noted. And I guess just moving maybe give us a mark-to-market in terms of commercial real estate, what you’re seeing around there is some concern whether if we go into next year, given what the yield curve has done, we might see some more pressure flow beyond CRE office into multifamily. So one, give us a sense of like on CRE office has the visibility improved around the level of marks that you might have to take as some of this work through this system and whether or not you’re seeing more pain beyond the office complex? Daryl Bible: Yes. So on the office side, I would tell you, our credit team, we feel really on top of what’s going on there. I think we are actively looking at any credit that could be and have any issues whatsoever. We’re looking at it. I’m trying to put the right valuation in there. We traditionally run with a higher level of criticized assets because we have a lot of long-term clients that have been with M&T for a long time period. They have other sources of cash flow to help carry the loans and are willing to put in equity to help support the loans. When we do find loans that there is not support around, we will probably move to exit those. As far as the valuations go, there is still not a whole lot of specifics out there......»»
BlackRock (BLK) Q3 Earnings Beat, Revenues & Expenses Rise Y/Y
BlackRock (BLK) records an improvement in revenues in the third quarter of 2023. The AUM balance also witnesses growth. BlackRock, Inc.’s BLK third-quarter 2023 adjusted earnings of $10.91 per share handily surpassed the Zacks Consensus Estimate of $8.52. Also, the figure reflects an increase of 14.2% from the year-ago quarter.Results have benefited from a rise in revenues and higher non-operating income. Further, the assets under management (AUM) balance witnessed improvement. However, higher expenses acted as a headwind.Net income attributable to BlackRock (on a GAAP basis) was $1.60 billion, jumping 14.1% from the prior-year quarter. We had projected the metric to be $1.24 billion.Revenues Improve, Expenses RiseRevenues (on a GAAP basis) were $4.52 billion, marginally lagging the Zacks Consensus Estimate of $4.58 billion. However, the top line increased 4.9% year over year. The rise was driven by an increase in total investment advisory, administration fees and securities lending revenues, and technology services revenues.Total expenses were $2.89 billion, up 3.6% year over year. The rise was due to an increase in employee compensation and benefits, direct fund expenses, and costs related to the amortization of intangible assets. Our estimate for expenses was $3.06 billion.Non-operating income (on a GAAP basis) was $171 million, up 3.6% from the year-ago quarter. Our estimate for non-operating income was $130.9 million.BlackRock’s adjusted operating income was $1.69 billion, up 7% from the prior-year period.AUM Balance IncreasesAs of Sep 30, 2023, AUM totaled $9.10 trillion, reflecting a year-over-year rise of 14%. Our estimate for AUM was $9.44 trillion. In the reported quarter, the company witnessed long-term net outflows of $13 billion.Average AUM was $9.40 trillion as of Sep 30, 2023, up 11% year over year. We had projected the average AUM to be $9.43 trillion.Share Repurchase UpdateBlackRock repurchased shares worth $375 million.Our ViewBLK’s continued efforts to strengthen iShares and ETF operations, along with its initiatives to restructure the actively managed equity business, are expected to aid growth. The acquisition of Kreos Capital likely adds to BlackRock's position as the global credit asset manager. However, the uncertain markets due to macroeconomic concerns have led to an unfavorable operating backdrop for the company.BlackRock, Inc. Price, Consensus and EPS Surprise BlackRock, Inc. price-consensus-eps-surprise-chart | BlackRock, Inc. QuoteBlackRock currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.Earnings Dates & Expectations of Other Asset ManagersInvesco IVZ is scheduled to announce third-quarter 2023 numbers on Oct 24.Over the past month, the Zacks Consensus Estimate for IVZ’s quarterly earnings has been revised 2.6% lower to 37 cents. It implies an 8.8% rise from the prior-year reported number.T. Rowe Price Group, Inc. TROW is slated to report third-quarter 2023 results on Oct 27.Over the past 30 days, the Zacks Consensus Estimate for TROW’s quarterly earnings has moved 1.1% lower to $1.79. The figure indicates a 3.8% decline from the prior-year quarter. Zacks Names "Single Best Pick to Double" From thousands of stocks, 5 Zacks experts each have chosen their favorite to skyrocket +100% or more in months to come. From those 5, Director of Research Sheraz Mian hand-picks one to have the most explosive upside of all. It’s credited with a “watershed medical breakthrough” and is developing a bustling pipeline of other projects that could make a world of difference for patients suffering from diseases involving the liver, lungs, and blood. This is a timely investment that you can catch while it emerges from its bear market lows. It could rival or surpass other recent Stocks Set to Double like Boston Beer Company which shot up +143.0% in little more than 9 months and NVIDIA which boomed +175.9% in one year.Free: See Our Top Stock And 4 Runners UpWant the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report BlackRock, Inc. (BLK): Free Stock Analysis Report T. Rowe Price Group, Inc. (TROW): Free Stock Analysis Report Invesco Ltd. (IVZ): Free Stock Analysis ReportTo read this article on Zacks.com click here.Zacks Investment Research.....»»
The Hits Just Keep On Coming: China Suffers Biggest FX Outflow Since 2016 Amid Sudden Surge In Capital Flight
The Hits Just Keep On Coming: China Suffers Biggest FX Outflow Since 2016 Amid Sudden Surge In Capital Flight And the hits just keep on coming for China. With its economy on the verge of a Japanification vicious loop, where record debts, lead to distressed selling, repayment of debt, contraction in the money supply, falling asset prices, a wave of bankruptcies, surging unemployment, a slowing economy and a crisis of confidence, which then leads to money hoarding and deflation... ... not to mention a growing property crisis, shadow banking crisis, a youth unemployment crisis, a record collapse in foreign direct investment... ... China is now also facing a sudden surge in FX outflows: according to Goldman's preferred gauge of FX flows, China's net outflows were $42bn in August, the fastest pace of outflows since December 2016 when China was reeling from the 2015 shock yuan devaluation, vs the already concerning $26bn outflows in July (which we discussed last month). Foreign investors' net selling of equities through the stock connect channel rose materially in August, contributing to the acceleration of outflows. Goods trade related inflows remained robust on the other hand. Here are the key points from the latest data: 1. In August, China experienced $24bn in net outflows via onshore outright spot transactions, and $12bn inflows via freshly entered and canceled forward transactions. Another SAFE dataset on "cross-border RMB flows" showed outflows of $31bn in the month, suggesting net payment of RMB from onshore to offshore. Goldman's preferred FX flow measure therefore suggests a total US$42bn outflows in August, in comparison with US$26bn outflows in July, an outflow which was the highest since July 2022. 2. The current account continued to show inflows. There was a net inflow of $26bn related to goods trade in August, higher than the $18bn in July. Goods trade surplus conversion ratio rose to 38% in August vs 22% in July, in contrast to the continued depreciation of the currency. On the other hand, the services trade deficit was $14bn, more negative than $11bn in July as outbound tourism continued to recover. The income and transfers account showed outflows of $5bn in August, smaller than $6bn in July. 3. Portfolio investment channel saw faster outflows in August. Stock Connect flows showed strong net selling of equities through northbound and net buying through southbound, which implies US$22bn outflows through the Stock Connect channel, vs US$5bn inflows in July. This was the fastest pace of outflows through the Stock Connect channel since January 2021. Foreigners' holding of RMB bonds data are not released yet. 4. Official FX reserves (released earlier in the month) declined to US$3,160bn in August from US$3,204bn in July. By Goldman's estimate, FX valuation effects would have cut FX reserves by $19bn in August, so after adjusting for FX valuation effects, FX reserves still decreased by $25bn in July. While the unfavorable asset price effect likely contributed to this decline, the decline might not be fully explained by asset price declines, suggesting potential usage of FX reserves to manage the currency amid outflow pressures. 5. Goldman forecasts continued monetary policy easing in Q4, including a 25bp RRR cut and a 10bp policy interest rate cut. CNY exchange rate will likely continue to face depreciation pressures in the near term while policymakers maintain tight capital controls and guide market expectations to slow the depreciation trend of the currency. And so, with China's currency the weakest it has ever been, and with FX outflows accelerating sharply, one can't help but remember the panic observed after the August 2015 devaluation, which not only shocked global markets but woke bitcoin from its long slumber as billions in Chinese savings scrambled to the safety of offshore bank accounts via one of the few still open cracks in China's great monetary firewall. How long until we get a rerun? More in the full Goldman note available to pro subs. Tyler Durden Sun, 09/17/2023 - 22:45.....»»