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T. Rowe Price"s (TROW) August AUM Declines 2.2% on Weak Markets
T. Rowe Price's (TROW) August AUM decreases 2.2% to $1.40 trillion due to unfavorable market conditions. T. Rowe Price Group, Inc. TROW announced its preliminary assets under management (AUM) for August 2023. The company’s month-end AUM of $1.40 trillion reflected a 2.2% decrease from the previous month, affected by unfavorable market conditions.TROW experienced net outflows of $7.8 billion in August 2023.At the end of the reported month, equity products and multi-asset products aggregated $730 billion and $457 billion, down 2.9% and 2.1%, respectively, on a sequential basis. T. Rowe Price registered $384 billion in target date retirement portfolios in August, which declined 2% from the prior month.Nevertheless, alternative products of $46 billion were up 2.2% sequentially. Fixed-income products, including the money market, constituted $169 billion. This remains unchanged from the previous month.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 gained 2.3% compared with the industry’s upside of 16.6%.Image Source: Zacks Investment ResearchT. Rowe Price currently sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.Competitive LandscapeCohen & Steers, Inc. CNS reported a preliminary AUM of $80 billion as of Aug 31, 2023, which reflected a decline of 2.8% from the prior-month level. Market depreciation of $2.2 billion and distributions of $157 million were partly offset by net inflows of $12 million.CNS recorded total institutional accounts of $33.5 billion at the end of August 2023, declining 2.7% from the July-end level. Of the total institutional accounts, advisory accounts were $19 billion while the rest were sub-advisory.Virtus Investment Partners, Inc. VRTS recorded a sequential decrease in its preliminary AUM balance for August 2023 on the back of unfavorable market returns. The company reported month-end AUM of $169.4 billion, which reflected a fall of 1.5% from the Jul 31 level.Excluded from the above-mentioned AUM balance, other fee-earning assets were $2.6 billion, to which Virtus Investment provided services. 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 T. Rowe Price Group, Inc. (TROW): Free Stock Analysis Report Virtus Investment Partners, Inc. (VRTS): Free Stock Analysis Report Cohen & Steers Inc (CNS): Free Stock Analysis ReportTo read this article on Zacks.com click here.Zacks Investment Research.....»»
Lazard"s (LAZ) August AUM Falls 2.9% on Challenging Markets
Lazard's (LAZ) August AUM declines 2.9% to $237.3 billion due to a challenging market backdrop. Lazard Ltd. LAZ announced its preliminary asset under management (AUM) balance of $237.3 billion for August 2023. This reflects a 2.9% decrease from $244.4 billion recorded as of Jul 31.The fall in August AUM was driven by a market depreciation of $4.4 billion, foreign-exchange depreciation of $2.3 billion and net outflows of $0.4 billion.Lazard’s equity AUM for August decreased 3.3% from the prior month to $182.8 billion. Fixed-income AUM of $46.1 billion decreased 1.5% sequentially. Also, other assets decreased marginally to $8.4 billion.Lazard’s investment in the Asset Management segment, impressive cost-control efforts and introduction of investment strategies to enhance its competitive edge are strategic fits. However, increased dependence on advisory revenues makes it vulnerable to economic doldrums.Over the past six months, shares of Lazard have gained 1.6% compared with the industry’s upside of 16.6%.Image Source: Zacks Investment ResearchLAZ currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.Competitive LandscapeCohen & Steers, Inc. CNS reported preliminary AUM of $80 billion as of Aug 31, 2023, which reflected a decline of 2.8% from the prior-month level. Market depreciation of $2.2 billion and distributions of $157 million were partly offset by net inflows of $12 million.CNS recorded total institutional accounts of $33.5 billion at the end of August 2023, declining 2.7% from the July-end level. Of the total institutional accounts, advisory accounts were $19 billion, while the rest were sub-advisory.Virtus Investment Partners, Inc. VRTS recorded a sequential decrease in its preliminary AUM balance for August 2023 on the back of unfavorable market returns. The company reported month-end AUM of $169.4 billion, which reflected a fall of 1.5% from the Jul 31 level.Excluded from the above-mentioned AUM balance, other fee-earning assets were $2.6 billion, to which Virtus Investment provided services. 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 Lazard Ltd (LAZ): Free Stock Analysis Report Virtus Investment Partners, Inc. (VRTS): Free Stock Analysis Report Cohen & Steers Inc (CNS): Free Stock Analysis ReportTo read this article on Zacks.com click here.Zacks Investment Research.....»»
Franklin"s (BEN) August AUM Falls 1.9% on Unfavorable Markets
Franklin's (BEN) August AUM balance declines on the back of unfavorable market performance and modest long-term net outflows. Franklin Resources, Inc. BEN reported a preliminary asset under management (AUM) balance of $1.42 trillion for August 2023. This reflects a 1.9% decrease from $1.45 trillion recorded as of Jul 31, 2023.The fall in the AUM balance was primarily due to the impact of unfavorable markets and modest long-term net outflows.Month-end total fixed-income assets were $500.2 billion, down 1.7% from the prior month’s level. Equity assets of $452.3 billion declined 3.4% from July 2023. BEN recorded $149.5 billion in multi-asset class, which dipped 1.9% sequentially. Alternative assets fell marginally from the prior month to $256.3 billion.Nonetheless, cash-management funds totaled $63.1 billion, which increased 1.6% from the prior month’s level.Franklin’s robust foothold in the global market and revenue diversification makes it well-poised for growth in the upcoming period. Also, it is growing through strategic acquisitions. These have helped the company in expanding its alternative investments and multi-asset solution platforms.However, any decline in investment management fees due to market fluctuations and adverse foreign exchange translations remains a key concern for BEN. A strict global regulatory environment is another headwind.The stock has lost 4.4% over the past six months against the industry's growth of 13.7%.Image Source: Zacks Investment ResearchBEN currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.A Competitive LandscapeCohen & Steers, Inc. CNS reported a preliminary AUM of $80 billion as of Aug 31, 2023, which reflected a tumble of 2.8% from the prior-month level. Market depreciation of $2.2 billion and distributions of $157 million were partly offset by net inflows of $12 million.CNS recorded total institutional accounts of $33.5 billion at the end of August 2023, falling 2.7% from the July-end level. Of the total institutional accounts, advisory accounts were $19 billion, while the rest were sub-advisory.Virtus Investment Partners, Inc. VRTS recorded a sequential decrease in its preliminary AUM balance for August 2023 on the back of unfavorable market returns. VRTS reported month-end AUM of $169.4 billion, which reflected a fall of 1.5% from Jul 31 level.Excluded from the above-mentioned AUM balance, other fee-earning assets were $2.6 billion, to which VRTS provided services. Top 5 ChatGPT Stocks Revealed Zacks Senior Stock Strategist, Kevin Cook names 5 hand-picked stocks with sky-high growth potential in a brilliant sector of Artificial Intelligence. By 2030, the AI industry is predicted to have an internet and iPhone-scale economic impact of $15.7 Trillion. Today you can invest in the wave of the future, an automation that answers follow-up questions … admits mistakes … challenges incorrect premises … rejects inappropriate requests. As one of the selected companies puts it, “Automation frees people from the mundane so they can accomplish the miraculous.”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 Franklin Resources, Inc. (BEN): Free Stock Analysis Report Virtus Investment Partners, Inc. (VRTS): Free Stock Analysis Report Cohen & Steers Inc (CNS): Free Stock Analysis ReportTo read this article on Zacks.com click here.Zacks Investment Research.....»»
Virtus Investment (VRTS) August AUM Down on Unfavorable Markets
Virtus Investment (VRTS) reports a 1.5% decline in August AUM, majorly attributable to a fall in open-end & closed-end funds. Virtus Investment Partners, Inc. VRTS recorded a sequential decrease in its preliminary assets under management (AUM) balance for August 2023 on the back of unfavorable market returns. The company reported month-end AUM of $169.4 billion, which reflected a fall of 1.5% from the Jul 31 level.Excluded from the above-mentioned AUM balance, other fee-earning assets were $2.6 billion, to which Virtus Investment provided services.In August end, Virtus Investment’s open-end funds balance was $56.6 billion, which decreased 2.1% from the end of the previous month. Also, the closed-end funds balance decreased 3.7% to $9.9 billion.Further, the Institutional accounts balance fell 1.2% to $62.5 billion. Retail separate accounts balance of $40.3 billion decreased marginally from the prior month.Higher operating costs are expected to weigh on Virtus Investment's bottom line to an extent in the near term. However, its integrated multi-boutique business model in an rapidly growing industry is likely to support its performance.Over the past three months, shares of Virtus Investment have declined 4.7% against the 3.7% upside of the industry it belongs to.Image Source: Zacks Investment ResearchCurrently, Virtus Investment carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.Competitive LandscapeCohen & Steers, Inc. CNS reported an AUM of $80 billion as of Aug 31, 2023, which reflected a decline of 2.8% from the prior-month level. Market depreciation of $2.2 billion and distributions of $157 million were partly offset by net inflows of $12 million.CNS recorded total institutional accounts of $33.5 billion at the end of August 2023, declining 2.7% from the July-end level. Of the total institutional accounts, advisory accounts were $19 billion while the rest were sub-advisory.Invesco IVZ announced AUM for August 2023. The company’s month-end AUM of $1,527.7 billion reflected a decline of 2.7% from the previous month.IVZ’s net long-term flows were break-even in the reported month. Non-management fee-earning net outflows were $4.8 billion, whereas money market net outflows were $9.4 billion. Unfavorable market returns decreased AUM by $23 billion and foreign exchange decreased AUM by $5.4 billion. Top 5 ChatGPT Stocks Revealed Zacks Senior Stock Strategist, Kevin Cook names 5 hand-picked stocks with sky-high growth potential in a brilliant sector of Artificial Intelligence. By 2030, the AI industry is predicted to have an internet and iPhone-scale economic impact of $15.7 Trillion. Today you can invest in the wave of the future, an automation that answers follow-up questions … admits mistakes … challenges incorrect premises … rejects inappropriate requests. As one of the selected companies puts it, “Automation frees people from the mundane so they can accomplish the miraculous.”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 Invesco Ltd. (IVZ): Free Stock Analysis Report Virtus Investment Partners, Inc. (VRTS): Free Stock Analysis Report Cohen & Steers Inc (CNS): Free Stock Analysis ReportTo read this article on Zacks.com click here.Zacks Investment Research.....»»
Campbell Soup Company (NYSE:CPB) Q4 2023 Earnings Call Transcript
Campbell Soup Company (NYSE:CPB) Q4 2023 Earnings Call Transcript August 31, 2023 Campbell Soup Company reports earnings inline with expectations. Reported EPS is $0.5 EPS, expectations were $0.5. Operator: Greetings, ladies and gentlemen, and welcome to the Campbell Soup Company Fourth Quarter Fiscal 2023 Earnings Conference Call. [Operator Instructions] As a reminder, this conference call […] Campbell Soup Company (NYSE:CPB) Q4 2023 Earnings Call Transcript August 31, 2023 Campbell Soup Company reports earnings inline with expectations. Reported EPS is $0.5 EPS, expectations were $0.5. Operator: Greetings, ladies and gentlemen, and welcome to the Campbell Soup Company Fourth Quarter Fiscal 2023 Earnings Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded. It’s now my pleasure to introduce your host, Rebecca Gardy, Chief Investor Relations Officer. Please go ahead. Rebecca Gardy: Good morning, and welcome to Campbell’s fourth quarter fiscal 2023 earnings conference call. I’m Rebecca Gardy, Chief Investor Relations Officer at Campbell. Joining me today are Mark Clouse, President and Chief Executive Officer; and Carrie Anderson, Chief Financial Officer. Today’s remarks have been prerecorded. Once we conclude the prepared remarks, we will transition to a live webcast Q&A session. For us to give as many participants as possible the opportunity to ask questions, we ask that you limit yourself to two questions. The slide deck and today’s earnings press release have been posted to the Investor Relations section on our website, campbellsoupcompany.com. Following the conclusion of the Q&A session, a replay of the webcast will be available at the same location followed by a transcript of the call within 24 hours. Jasni/Shutterstock.com On our call today, we will make forward-looking statements, which reflect our current expectations. These statements rely on assumptions and estimates, which could be inaccurate and are subject to risk. Please refer to side 3 of our presentation or our SEC filings for a list of factors that could cause our actual results to vary materially from those anticipated in the forward-looking statements. Because we use non-GAAP measures, we have provided a reconciliation of each of these measures to the most directly comparable GAAP measure in the appendix of our presentation. On Slide 4, you will see today’s agenda. Mark will share his overall thoughts on our fourth quarter and full year performance as well as in-market performance by division. Carrie will then discuss the financial results of the quarter in more detail and review our guidance for the full fiscal year 2024. And with that, I’m pleased to turn the call over to Mark. Mark Clouse: Thanks, Rebecca. Good morning, everyone, and thank you for joining our fourth quarter fiscal 2023 earnings call. Speaking on behalf of Campbell’s management, I would like to extend our recognition of the dedication and hard work demonstrated by our teams throughout this year. We delivered the fourth quarter consistent with our expectations. And for the full year, we delivered strong growth across all three key financial metrics, coming in well ahead of our initial expectations and advancing many of our strategic initiatives. Collectively, we continue to solidify the foundation that has delivered consistent and dependable results over the past several years. Furthermore, our progress has set the stage for increased momentum in fiscal 2024 that we believe will result in broad-based growth and deliver compelling shareholder value creation. Let me begin with the highlights of the fourth quarter. As expected, we delivered 5% organic net sales growth, led by inflation-driven net price realization and solid in-market performance enabled by an advantaged supply chain and effective marketing and selling investments. Fourth quarter consumption increased 3% versus the prior year and 25% versus four years ago. As expected, we did experience declines in adjusted EBIT and adjusted EPS in the quarter given our planned brand investments and the pension headwind, which we pointed out on prior earnings calls. For the full year, we delivered double-digit organic net sales growth of 10% and strong adjusted EBIT growth of 5%. Adjusted EPS of $3, representing 5% growth versus prior year, was at the top end of our guidance range. As a reminder, the pension headwind was approximately $0.11 to adjusted EPS and four points of growth for the year. Consumption for the full year increased 8% versus the prior year, and reflected share growth across many brands. These strong results reflect the ongoing effective execution of our focused strategy along with the sustained consumer demand for our brands. We have strategically balanced the interplay between pricing and promotional frequency, while enhancing the tremendous equity and differentiation of our brands. We also continued to invest in expanding capacity for the future and enhance our capabilities in supply chain, marketing, sales and innovation. Looking ahead to fiscal 2024, we’re excited about the next stage of Campbell’s growth. The snacks business will continue to deliver on the value proposition of the Snyder’s-Lance acquisition with top line and margin building momentum. Our Meals & Beverage business will be further strengthened and diversified with the planned strategic acquisition of Sovos Brands, which will extend our portfolio into the ultra-distinctive sauces segment and provides significant growth opportunities. This combination will make Campbell as one of the most dependable growth-oriented names in food. Carrie will provide full fiscal 2024 guidance later in the call. Before I review the division results, I’d like to provide some perspective on the current consumer landscape. We’ve spent a great deal of time analyzing the drivers and importantly, the potential implications going forward. We see three factors currently putting some transitory pressure on category in market results. These are primarily impacting our Meals & Beverage businesses, and all influenced Q4 to some extent. The first area is the residual effects of COVID surges from the summer of fiscal 2022. These surges notably benefited categories like soup in the prior year, particularly during the summer, a period which historically has lower sales. We expect this effect to continue into Q1 and greatly diminish as we approach the second quarter of fiscal 2024. Directionally, the impact of this factor contributed about 50% of the decline in soup in the fourth quarter. This dynamic likely helped mitigate price-driven elasticities in Q4 fiscal of 2022. The next factor is lapping of double-digit pricing actions from a year ago. This was a dynamic we expected and one that likely will continue to be a headwind throughout fiscal 2024, but sequentially lessening in the second half of the year. We do also expect sequential volume improvement to mitigate this pricing headwind as we move into Q2 in the second half. The third factor and likely contributing to the limited volume recovery to date is the consumer behavior in response to ongoing economic uncertainty and prolonged inflation. First, consumers began prioritizing categories based on more immediate needs and value leading to fewer categories in the shopper basket. This pattern of behavior resulted in a real focus on seasonal priorities and has obviously created a headwind on categories like soup in the summer. We expect our categories like soup, which is a top 10 category in the fall and winter, to increase in priority, and we’re already seeing some early signs of improvement. The second behavior is a growing shift to more value-driven stretchable meals, which has had a mixed effect on our business. It has undoubtedly been a positive driver on categories like pasta sauce and condensed cooking soups, as well as broth, while also adding pressure on categories like ready-to-eat soup. We expect this behavior to subside as inflation continues to moderate. The positive news as it pertains to our Snacks division is that our brands consistently maintain a strong presence in consumers’ top categories throughout all seasons of the year. Moreover, our Snack power brands have displayed remarkable resilience as consumers, even while prioritizing value continue to sustain their purchases across our differentiated portfolio. Broadly speaking, we see these dynamics as transitional in nature. While we do anticipate the persistence of these dynamics in the near term, we’re confident in the equity and the value of our brands within this environment. In fiscal 2024, we’ll maintain our support of our brands and remain vigilant on value to ensure we remain competitive, but do not see this as a catalyst for dramatic shifts in promotional or margin dilutive actions to chase volume or share. Turning to our division results. Our Meals & Beverages portfolio remains well positioned as consumers employ multiple strategies to stretch their food dollars. In the fourth quarter, we delivered organic net sales growth of 1%. As a reminder, the fourth quarter is the lightest in terms of seasonality for this business, and we’re also wrapping strong performance of 7% organic net sales growth in the prior year, primarily driven by inflation-driven pricing and some of the COVID surges I mentioned earlier. While end market consumption was down in the fourth quarter by 4%, we saw strong performance by Prego, up 5%; and Pace, up 7%; and Pacific, up 11%. Compared to pre-COVID levels, dollar consumption for the division was up 17% overall. Diving more specifically into our Meals & Beverages portfolio, I wanted to highlight the progress we’ve made within several areas of our soup business. This year, we’ve refined our soup portfolio to establish distinct areas for growth and identified areas where scale and optimization will be more of the focus. The great news is our growth focus segments represent over two-thirds of our U.S. soup business and has consistently delivered strong growth and share results even where private label is present. Brands like our condensed icons, our condensed cooking soups, Chunky, Home Style and Pacific soup are compelling areas of consumer relevance even among younger households and continue to demonstrate long-term growth potential. They are also brands where our marketing and innovation efforts have been very effective. In the quarter, our shares in this portion of the business were essentially flat. And versus four years ago, we’ve gained 1.2 share points with consumption up 27%. We’re confident in the trajectory of this business and are committed to continuing to fuel these segments going forward. The optimized portion of our soup portfolio, which represents less than a third of our U.S. soup business, has experienced recent share softness and thus remains an area of opportunity for us. These are areas where the segments are a bit more commoditized or value sensitive, like broth. So they have tended to be where private label or lower cost options have sourced some share. The team remains vigilant in this segment of the portfolio, continuing to ensure we remain competitive without undermining any long-term profitability. Interestingly, this portion of the business represents only 14% of Meals & Beverages and is approximately 7% of Campbell’s total net sales and will become even smaller after the pending acquisition of the Sovos Brands business. Turning to Snacks on Slide 10. We finished the year strong with fourth quarter organic net sales up 9%, driven by our eight power brands. We maintained strong in-market momentum, growing consumption by 8% and 31% compared to four years ago, also driven by the strength of our power brands, which delivered double-digit dollar consumption for the fifth consecutive quarter. Overall, fiscal 2023 was another fantastic year for Snacks, with net sales growing at 13% and operating earnings growth at 24%, these results provide compelling proof that our strategic focus on highly differentiated and relevant brands is working and can lead to sustainable profitable growth. The next slide highlights the impressive performance and continued growth of our power brands, which grew consumption 10% versus the prior year. On a four-year basis, consumption was up 39%, with all eight brands growing double-digits in the quarter while holding volume share. This illustrates the strength of our core portfolio and reflects the continuation of heightened consumer demand for snacking. Turning to Slide 12, our Snacks business has delivered tremendous growth over the past two years. The business has grown net sales at a 7% CAGR with operating earnings growth at a 12% CAGR over a two-year period. In the last fiscal year, we drove a step change in operating margin, growing from 13.1% in fiscal 2022 to 14.4% in fiscal 2023. This is consistent with our Snacks margin road map and gives us increased confidence that we’ll continue to deliver on our long-term goals and show steady improvement in fiscal 2024, where we expect to be north of 15%. I’m excited and very optimistic as we enter the new year with proven strategies and strong fundamentals and advantaged strong supply chain and arguably one of the most focused portfolio stories in the industry. Within Snacks, we continue to expect accelerated growth and to build on the margin trajectory from this year. And in Meals & Beverages, we expect to continue to strengthen the business with sequential and steady improvement throughout the year. This story will only be made stronger following the completion of the Sovos Brands acquisition, adding the most compelling growth story in food to the Campbell’s portfolio. It’s an exciting combination. We understand and have planned for some short-term broad-based category dynamics in the early part of the year, especially in Q1. However, we have strong plans in place and are well positioned to gain momentum and deliver another strong year, adding further evidence of the transformation of the Campbell’s business. With that, I’ll pass it to Carrie, who will review our fourth quarter and full year results and present our fiscal 2024 outlook. Carrie Anderson: Thanks Mark, and good morning everyone. I’ll begin with an overview of our fourth quarter results, which came in largely as expected with a mid-single-digit organic net sales increase and an adjusted EBIT performance that reflected planned fourth quarter investments in sales and marketing, especially in our Snacks business and continued headwinds related to a non-operating item. Fourth quarter organic net sales increased 5% to nearly $2.1 billion, reflecting inflation-driven net price realization, partially offset by some unfavorable volume and mix. Adjusted EBIT of $242 million was a 10% decrease to prior year as higher adjusted gross profit was offset by planned investments in marketing and selling and higher adjusted other expenses related to lower pension and post-retirement benefit income. Adjusted EPS decreased 11% to $0.50, driven primarily by lower adjusted EBIT. The impact of lower pension and post-retirement benefit income reduced adjusted EBIT margin by 40 basis points and adjusted EPS by $0.02 in the quarter. We are pleased with our overall performance for the full year. Our fiscal year net sales results exceeded our initial guidance expectations provided a year ago, finishing the year with organic net sales growth of 10%, driven by higher net price realization. Adjusted EBIT grew 5% and adjusted earnings per share finished at $3, also up 5% and ahead of the top end of our initial expectation range despite a $0.02 greater adjusted EPS impact than originally planned from pension and post-retirement income. Overall, for the year, this non-operating item reduced full year adjusted EBIT by $44 million and adjusted EPS by $0.11. Slide 17 summarizes the drivers of our fourth quarter net sales growth. Excluding the impact of the sale of the Emerald nuts business, organic net sales grew 5% in the quarter. We generated 10 percentage points of growth from inflation-driven net price realization. Volume and mix declined five percentage points across both divisions. Our fourth quarter adjusted gross profit margin of 30.6% was generally in line with Q3 with the year-over-year change in margin driven primarily by unfavorable volume and mix. As shown in the bridge, net price realization and productivity improvements more than offset cost inflation and other supply chain costs. Moving to Slide 19. Our teams continue to successfully mitigate inflationary headwinds that averaged 12% for the year. We saw steady moderation as we move through the quarters with Q4 core inflation finishing at 6% compared to a high of 18% in Q1. Fourth quarter’s rate reflected improved trends in oils and flour as well as improvement in logistics and transportation. Net pricing averaged 13% for the full year, reflecting contributions from three waves of pricing aimed at offsetting double-digit inflation. We ended the year with a fourth quarter net pricing contribution of 10%, still benefiting from the impact of pricing waves three and four with price wave three fully wrapped as of July. In addition to pricing, we continue to deploy a range of other levers to mitigate inflation including supply chain productivity improvements and broader margin-enhancing initiatives, including a focus on discretionary spending across the organization. We are pleased with the progress we have made on our cost savings initiatives. Through the fourth quarter, we have achieved $890 million of total savings under our multiyear cost savings program, inclusive of Snyder’s-Lance synergies. We remain on track to deliver savings of $1 billion by the end of fiscal 2025. Moving on to other operating items. Adjusted marketing and selling expenses increased 9%, driven by higher advertising and consumer promotion expense, or A&C, which increased 23% compared to the prior year, and higher selling expenses, partially offset by increased benefits from cost savings initiatives. The increase in A&C this quarter was primarily driven by the planned increases in our Snacks division. Overall, our adjusted marketing and selling expenses represented approximately 9% of net sales for the quarter and the full fiscal year. And adjusted administrative expenses increased by $11 million or 7% to $164 million due to higher general administrative costs and inflation, partially offset by increased benefits from cost-saving initiatives. As shown on Slide 21, adjusted EBIT for the fourth quarter decreased 10%, primarily due to higher adjusted marketing and selling expenses, higher adjusted administrative expenses and higher adjusted other expenses related to lower pension and postretirement benefit income this year, partially offset by higher adjusted gross profit. Lower pension and postretirement benefit income this year drove an approximate $7 million impact to adjusted EBIT. Overall, our adjusted EBIT margin decreased to 11.7% in the quarter, primarily driven by a lower adjusted gross profit margin, higher adjusted marketing and selling expenses and the impact of lower pension and postretirement benefit income. Turning to Slide 22, adjusted EPS of $0.50 was down 11% or $0.06 per share, compared to the prior year. This was primarily driven by the decrease in adjusted EBIT and slightly higher interest expense, partially offset by a lower adjusted effective tax rate and a reduction in the weighted average diluted shares outstanding. Turning to the segments in Meals & Beverage, fourth quarter organic net sales increased 1%, reflecting net price realization, partially offset by unfavorable volume and mix. Sales increases in foodservice and Prego pasta sauces, were partially offset by declines in beverages, U.S. soup and Canada. Sales of U.S. Soup decreased 2%, primarily due to declines in ready-to-serve soups, partially offset by strong increases in broth and modest increases in condensed. Segment operating earnings in the quarter for Meals & Beverages decreased 18% to $132 million, primarily due to lower gross profit. Fourth quarter operating margin declined to 14.1%, driven by lower gross profit margin, which was largely due to higher cost inflation and other supply chain costs, as well as unfavorable mix between retail and foodservice, partially offset by net price realization and supply chain productivity improvements. For the fiscal year, segment operating margin declined to 18.2%, compared to 19% in the comparable year ago period. In Snacks, fourth quarter organic net sales increased 9% driven by sales of Power Brands, which were up 13%, and reflected net price realization, partially offset by modest unfavorable volume and mix. Segment operating earnings in the quarter increased 12% to $158 million, primarily due to higher gross profit, partially offset by higher marketing and selling expenses as well as higher administrative expenses. Gross profit margin increased due to the impact of net price realization and supply chain productivity improvements, more than offsetting higher cost inflation and other supply chain costs and unfavorable volume and mix. Overall, within our Snacks division, fourth quarter operating margin increased year-over-year by 60 basis points to 14%. For the fiscal year, we were pleased with our margin progress posting a 130 basis point improvement to 14.4%, compared to 13.1% in the prior year. I’ll now turn to our cash flow and liquidity. Fiscal 2023 cash flow from operations was $1.14 billion, compared to $1.18 billion in the prior year, primarily due to changes in working capital partially offset by higher cash earnings. In line with our commitment to return value to shareholders, we have returned nearly $590 million through dividends and share repurchases through this fiscal year. Cash outflows from investing activities reflected capital expenditures of $370 million, $128 million higher than in the prior year, as we invested in key growth areas, particularly in our Snacks division. Our year-to-date cash outflows from financing activities were $723 million, including $447 million of dividends paid and $142 million of share repurchases. At the end of the quarter, we had approximately $301 million remaining under the current $500 million strategic share repurchase program and approximately $104 million remaining under our $250 million anti-dilutive share repurchase program. Our balance sheet ended the fiscal year in a strong position, with net debt of $4.5 billion and with a net debt to adjusted EBITDA leverage ratio of 2.6 times, well below our targeted three times range. This puts us in great shape as we plan for the pending Sovos Brands acquisition. As of year-end, the company had approximately $189 million in cash and cash equivalents and approximately $1.85 billion available under its revolving credit facility, providing a significant excess liquidity and flexibility. Turning to Slide 26, let me walk you through our full year fiscal ’24 guidance. As a reminder, the sale of our Emerald nuts business, which we divested in May of fiscal 2023, is estimated to reduce net sales by approximately 0.5 percentage point and have a $0.01 per share dilutive impact in fiscal 2024. Additionally, the acquisition of Sovos Brands is expected to close by the end of December 2023, and therefore, is not yet included in our current fiscal 2024 outlook. For revenue, we expect reported net sales growth to be in a range of down 0.5% to plus 1.5% and organic net sales growth of flat to 2% for the year. Our expectations reflect improving volume trends throughout the year with an expected lower contribution from pricing and disciplined levels of promotional activity. In terms of phasing, we do expect volume declines to continue in the first half of fiscal 2024 with sequential improvement leading to positive trends in the second half. This dynamic will be most pronounced in Q1, where we would expect top line to be very much in line with consumption. For earnings, we expect adjusted EBIT and adjusted EPS growth of 3% to 5% with an adjusted EPS range of $3.09 to $3.15. We also see the opportunity for modest margin progress. Having exited Q4 with core inflation of 6%, we expect sequential quarterly improvement throughout fiscal 2024 and expect full year core inflation in the low single-digit range. We also expect productivity improvements of approximately 3% and cost savings of approximately $35 million to $40 million towards our $1 billion savings program. As a result of improved second half volume trends and these cost dynamics, earnings growth and margin expansion are expected to be second half weighted. Additionally, in line with our continued commitment to brand investments, we expect marketing and selling expense as a percent of net sales to be at the low end of our targeted 9% to 10% range with a step-up in marketing and selling spend in the first quarter of fiscal 2024, both on a year-over-year basis and sequentially compared to the fourth quarter of fiscal 2023. Division operating margins are expected to improve overall for fiscal 2024 with Snacks operating margins expected to be above 15% and modest operating margin expansion in Meals & Beverage expected in the second half of the fiscal year. Our full year adjusted EBIT and EPS guidance also comprehends an estimated pension headwind of approximately $13 million to adjusted EBIT or $0.03 per share. This is significantly lower than the impact we saw in fiscal 2023 and represents approximately 1% of both adjusted EBIT and adjusted EPS growth compared to the 3% to 4% impact we saw in the prior year. This headwind will be most pronounced in the first quarter. Other key assumptions underlying our guidance included an expected net interest expense of approximately $185 million to $190 million and an adjusted effective tax rate of approximately 24%. As we think about the phasing for the year, we expect the first quarter adjusted earnings growth rate to be the lowest of the year due to the concentration of higher inflation, increased marketing and selling expenses, the highest quarter impact from lower pension income and some costs related to a nonmaterial cyber incident. As you know, we don’t provide quarterly guidance. Given the unique dynamics in Q1, however, we expect first quarter adjusted EPS likely in the upper $0.80 range with momentum building as the year progresses. As I wrap up guidance, capital expenditures are expected to be approximately 4.7% of net sales. Our priorities for fiscal 2024 include select capacity expansion projects, including the recently announced Goldfish investment, our headquarter consolidation and other programs to support our Snacks margin improvement plan as well as important IT and productivity investments. We see great opportunity to reinvest back into the business in support of growth and improve profitability. This is fueling the modest step-up in investment compared to the last couple of years and remains very much aligned with our long-term algorithm and capital allocation priorities. We are also committed to maintaining a competitive dividend and a strong balance sheet. In closing, we are confident that the relevance of our brands, our strength and capabilities in marketing, innovation and supply chain execution provide a solid setup for accelerated growth in the second half of the year and into fiscal 2025. That concludes my prepared remarks, and I’ll turn it over to the operator for Q&A. See also List of 55 Artificial Intelligence Companies in USA and 16 Best High Volume Stocks To Buy Today. Q&A Session Follow Campbell Soup Co (NYSE:CPB) Follow Campbell Soup Co (NYSE:CPB) We may use your email to send marketing emails about our services. Click here to read our privacy policy. Operator: [Operator Instructions] And your first question comes from the line of Andrew Lazar from Barclays. Your line is open. Andrew Lazar: Good morning, everybody. Mark Clouse: Hi, Andrew. Andrew Lazar: Mark, thanks for some of your commentary at the outset on the sort of the current operating environment in the industry and how that sort of impacts your thinking for the year ahead. You talked about a number of impacts and then a bunch of sort of timing factors, right, to keep in mind as we think about the year. So I guess I was hoping maybe you could maybe give us a little bit more color on sort of how you see the phasing, particularly as it relates to sort of volume recovery as you go through the year? And for the — I guess, for the full year, how you would think that organic growth target you’ve laid out sort of breaks out between, let’s say, volume and pricing? And then I guess, secondly just would be, do you feel like the, given it’s a back-end loaded year, and it’s for reasons that I understand, do you feel like you’re giving yourself enough room or flexibility to sort of hit those numbers, particularly in light of some of the very recent or near-term trends that you discussed in the industry? Thanks so much. Mark Clouse: Yes, sure. It’s a great question and one that I think, as you would imagine, we probably spent the greatest amount of time really trying to unpack it. And as you point out, as you rightfully point out, it really starts from getting a good understanding of what we’re experiencing now. And I think we’ve had a couple of quarters where arguably, we’ve seen consistent across, pretty broad-based across the industry some slowdown and perhaps a little less volume recovery than what many of us might have originally expected. And so really digging into that to understand the drivers, I think, are important for getting the confidence or the conviction in the full year. As I laid out earlier, we kind of anchored on three things that we see influencing the numbers with kind of variable impact as it relates to timing or sequence through the year. So, the first one and the one perhaps that for many might not have been immediately on the radar screen is this kind of tail end of COVID impact. And I know that’s perhaps something we didn’t talk a lot about a year ago in fourth quarter. But as we really took time to kind of step back and compare baselines of our categories, especially some of our, let’s call it, less prevalent in the summer categories like soup, you really do see a very tight linkage to where we saw a couple of the surges that occurred in the tail end of fiscal ’22 for us and into the first quarter of ’23. That is really the tail end of it. So although we see that as a fairly material impact on a couple of areas, I do think you’re going, by the time you get really into the later part of Q1 and into Q2, we don’t see that as much of an impact. And in fairness, I think looking back, it was probably a catalyst for helping us deliver even better elasticities than perhaps anyone really expected at that time. Although I would still say, even without it, it was still much better elasticities than what history would provide. So I think that one’s definitely a transitional one. You can see a start. You can see an end. I think we’ll feel that a little bit in Q1. But as we get through the balance of the year, I would not expect that to be a headwind. I think the second area I talked about is pricing. And that one obviously will be with us throughout the year, but the orders of magnitude will sequentially improve pretty significantly after being at kind of the peak, which is about 16% pricing impact in Q1. And as that moderates through the year and gets better from quarter to quarter, I do expect that impact to become less significant just mathematically. But I also think that as you’re continuing to build and support the brands the way we’ve been doing it, I think that your volume and the prediction of volumes improving as you get to that kind of more, I would say, normal environment, I think that’s going to be one of the catalysts that helps the sequential improvement through the year. The last one and perhaps the most interesting, just to talk a little bit about is what’s the consumer behavior because perhaps at the end of the day, that’s going to be the greatest indicator of that recovery. And one of the things that I think has been interesting as we’ve really dug into this, is this bifurcation between seasonal categories. And as consumers’ market baskets are shrinking, what we really see is this kind of two-pronged rationalization. One, first, prioritizing those categories that are more relevant in the season. So those that are more prevalent in the summer tend to hold up better in the consumer’s basket than maybe a soup, for example, where it drops pretty significantly in the summer in household penetration, and we can see that kind of amplified in a little bit of category-to-category comparisons. The great news is when the seasons move into the fall and into the winter, as I think we all understand kind of where the spikes are for soup in general, that jumps up to a top 10 category based on household penetration in those seasons. And that gives us a lot of conviction that the relevance and the prioritization of that in a shopper’s basket will begin to go up. And in fact, even in the more recent trends, although far from perfect, we’ve started to see some of that improvement occurring. I mentioned this on the call, one of the things that’s quite interesting where snacking has been much steadier and more consistent. Part of that fact is because in every season, snacking is number one or number two as far as rating is a priority or household penetration for consumers. So I do think there is this dynamic where consumers are making trade-offs. And I think the second part of that is really this dynamic of consumers trying to stretch their dollar. And what I mean by that is we see a migration to categories and purchases that enable consumers to feed a greater number of family members or a greater number of servings. And so you see things like pasta, rice, pasta sauce for us, our cooking condensed soups hold up and do very, very well, where some of our more single serve, maybe a little bit more individual products have been a little bit more impacted, if you will, by this recent kind of consumer tightening, if you will, that’s not unexpected in the — given the macroeconomic environment and kind of the sustained inflationary period. I think I expect that to continue. But as inflation perhaps moderates through the year, I would expect some of that pressure or some of that more return to normal to be present across the fiscal year, although I do see very much, especially in the first part of Q1, where we’re still in kind of that summer season. But this particular area will continue to impact the business. But when you put together this kind of cycling of COVID, the moderation of pricing and what I think will be a better position for some of our categories relative to seasonality and priority in the basket along with a bit more expected normalizing of inflation, this is why we see the sequence of the year improving. And this is why we also think this is not a moment or a structural change to food that requires you to chase volume or share kind of to the bottom, right? So the idea that we’re going to need dysfunctional promotion to manage what I just walked through is just not what we’re seeing. And that’s why the confidence of the year is laid out the way it is. As far as why were we not more conservative? I think what we’ve always tried to do is appropriately give you the perspective on where we see ourselves and where we see the business with of course, a little bit of flexibility to deal with whatever the inevitable variability may be. But we feel very good about how the year lays out. And even with a relatively tougher Q1 as we expect most of what you saw in Q4 to be more present in Q1, that sequence and that climb is going to be quite positive. Remember, too, this is — I remember when we delivered this imagining, lapping it. But last year Q1, we were 15% up on every metric. So top line, EBIT, EPS, all 15% growth. So our comps in the year are significantly tilted to a favorable first half to back half, which just is another reason as you model and do the math to feel a little better about that sequence. Andrew Lazar: Great. Thanks for the detail. Have a good holiday. Mark Clouse: Yes. Thanks. See you next week. Operator: Your next question comes from the line of Ken Goldman from JPMorgan. Your line is open. Ken Goldman: Hi. Thanks so much. Mark, you discussed some of the reasons for volumes to improve in the second half. I certainly appreciate the reasons why. I’m also curious to hear a little bit more about the plan to maybe improve market share, especially in soup and broth. I’m just curious, how we should think about share trends that we can see in Nielsen. Should we expect them to remain, I don’t know if the word challenged is right, but a little bit underwhelming until we can see some of the maybe bigger declines lapped. Or are there any changes you can make to pricing or other marketing efforts that maybe will help us see some of the scanner data in terms of market share reverse a little bit sooner?.....»»
Mercury Systems, Inc. (NASDAQ:MRCY) Q4 2023 Earnings Call Transcript
Mercury Systems, Inc. (NASDAQ:MRCY) Q4 2023 Earnings Call Transcript August 21, 2023 Operator: Good day, everyone, and welcome to the Mercury Systems Fourth Quarter Fiscal 2023 Conference Call. Today’s call is being recorded. At this time, for opening remarks and introduction, I’d like to turn the call over to the company’s Executive Vice President and […] Mercury Systems, Inc. (NASDAQ:MRCY) Q4 2023 Earnings Call Transcript August 21, 2023 Operator: Good day, everyone, and welcome to the Mercury Systems Fourth Quarter Fiscal 2023 Conference Call. Today’s call is being recorded. At this time, for opening remarks and introduction, I’d like to turn the call over to the company’s Executive Vice President and Chief Financial Officer, Dave Farnsworth. Please go ahead, Mr. Farnsworth. Dave Farnsworth: Good afternoon, and thank you for joining us. With me today is our President and Chief Executive Officer, Bill Ballhaus. If you’ve not received a copy of the earnings press release we issued earlier this afternoon, you can find it on our website at mrcy.com. The slide presentation that Bill and I will be referring to is posted on the Investor Relations section of the website under Events and Presentations. Turning to Slide 2 in the presentation. I’d like to remind you that today’s presentation includes forward-looking statements, including information regarding Mercury’s financial outlook, future plans, objectives, business prospects and anticipated financial performance. These forward-looking statements are subject to future risks and uncertainties that could cause our actual results or performance to differ materially. Alexey Y. Petrov/Shutterstock.com All forward-looking statements should be considered in conjunction with the cautionary statements on Slide 2 in the earnings press release and the risk factors included in Mercury’s SEC filings. I’d also like to mention that in addition to reporting financial results in accordance with generally accepted accounting principles, or GAAP. During our call, we will also discuss several non-GAAP financial measures, specifically adjusted income, adjusted earnings per share, adjusted EBITDA, free cash flow, organic revenue and acquired revenue. A reconciliation of these non-GAAP metrics is included as an appendix to today’s slide presentation and in the earnings press release. I’ll now turn the call over to Mercury’s President and CEO, Bill Ballhaus. Please turn to Slide 3. Bill Ballhaus: Thanks, Dave. Good afternoon, everyone, and thank you for joining us. In this call, I’ll cover 3 topics: first, introductory comments on recent changes, actions taken at the company and my initial impressions; second, our priorities and focus going forward; and third, expectations for our performance both for FY ’24 and longer term. I’ll then turn it over to Dave to discuss our results and look forward to wrapping up with Q&A. Before diving in, I wanted to take a moment to recognize the efforts of the Mercury team. Their demonstrated resilience over time and their dedication and commitment to serving our clients in their important missions. As we’ve discussed throughout the company, with our recent announcements, we are on a very clear path to unlock the intrinsic value of Mercury for our customers, shareholders and employees through enhanced operational focus. As a team, we realized that what we need to do is within our control, and we all recognize that’s a great place to be. Please turn to Slide 4. Let me start by summarizing some of the recent changes at the company. At the end of Q4, the Board concluded its review of strategic alternatives and implemented several important changes to put Mercury on a path of enhanced execution of our strategy. Over the past 2 months, the Board has made positive governance changes, appointing Roger Krone and Jerry DeMuro to the Board, both well-respected industry veterans with CEO experience and appointing Scott Ostfeld to the Board, who brings an important shareholder perspective. I have known these 3 individuals for a number of years, and I’m delighted to have them on the board. In addition, the Board affected a smooth leadership transition with the valuable addition of Dave Farnsworth a seasoned defense technology leader as Chief Financial Officer. And with today’s announcement, I am humbled and excited that the Board has placed its faith in me to lead Mercury through its next phase of value creation. We have significant work ahead of us, and I’m confident based on what I’ve seen over the last year as a Board member and more recently as interim CEO that we can and will make tangible progress toward predictable, profitable organic growth with improved cash conversion in fiscal ’24 and beyond. I also want to take a moment to thank Bill O’Brien for his 15 years of service to Mercury and for his significant leadership in navigating through this recent transition period as Chairman of the Board. Before I go too far, I’ll give you a little background on myself. I began my career as an aerospace engineer designing and building high-powered communication satellites for government and commercial applications around the world, supporting demanding missions and delivering very complex satellite systems. One of my key takeaways from that experience was that as a young engineer, I didn’t need to worry about things outside of my control. I realized that if I just came to work every day, focused on solving the customers hard technical problems better than anybody else, being a good teammate, doing the right thing and delivering programs on cost and schedule, everything else would take care of itself. Customers would be happy, shareholders would be happy, and as employees, we would have a lot of fun outperforming our competitors. That was about the first decade of my career. And over the last 20 years, I’ve led a number of aerospace, defense and technology businesses. Like Mercury, many of these businesses had great fundamentals, but needed renewed focus to restore and drive strong shareholder returns. In each of these situations, I’ve worked with high-performing teams to drive a culture of relentless focus on enhanced execution that led to significant value creation and returns for shareholders. This experience, combined with my knowledge of this leadership team and Mercury’s superb positioning in the market, gives me the utmost confidence that we will be successful in realizing the inherent growth, profitability, cash flow and ultimately, value of this national asset. Since taking on the interim CEO role on June 26, I spent significant time with the team digging into the details of the business in forming an assessment of Mercury and its value creation potential. Specifically, I have visited our major centers of operation and personally led reviews of our challenged programs and expanded those reviews to include 100% of our current development programs, their estimated cost to complete and any roadblocks or risk to completion. I’ve engaged with the growth organization to review the health of our new business pipeline and our approach to accelerate organic growth. The leadership team and I have rapidly assessed our cost structure, taking initial actions to rightsize our organization and improve margins in fiscal ’24 and beyond. And as a leadership team, we have reviewed our major unbilled receivables balances by program and our inventory in detail to establish burn-down plans and drive improved free cash flow conversion. Please turn to Slide 5. Based on the last year plus that I served on the board and my work recently with the team, here are my initial impressions and takeaways. First impression, Mercury’s strategy is sound. We are a national asset in the defense industrial base. At a macro level, we are positioned in an attractive growth market, Defense Electronics. And more importantly, we are situated in the right parts of that market that are experiencing spending growth. At a micro level, we are designed in with sole-source positions on critical defense programs poised for significant electronic modernization. And finally, with enhanced customer focus and execution excellence, Mercury will continue to benefit from increased outsourcing by our defense prime customers. All these factors give me confidence in our ability to grow faster than the market. Second impression, over the past several years, the company grew inorganically into strategically attractive areas, but didn’t fully integrate some of the businesses and mature processes and management systems to align with Mercury’s evolving business portfolio. In my experience, this is not uncommon in businesses that grow rapidly via acquisitions. At Mercury, though, the immaturity and lack of full integration of key functional areas have led to the serious challenges the company experienced forecasting business performance over the past several quarters. That said, maturing in these areas is doable within our control and underway. My third and most important takeaway is that while our recent results are disappointing, the majority of our business is performing well, delivering predictable and profitable growth. However, this solid performance has been masked by approximately 20 programs that are experiencing unique and outsized costs primarily temporary cost growth related to initial development challenges. In fiscal ’23, these few programs impacted our financial performance by approximately $56 million. Said differently, our reported margin in 2023 does not at all reflect a structural shift in our margin profile. It is the composite of a very predictable and profitable core business obscured by an atypically large mix of development programs and cost challenges on a subset of programs that are resolvable and temporary in nature. And looking beyond our recent results, I’m encouraged by 3 factors: first, the majority of our business is performing very well; second, the temporary execution challenges that are masking this performance are occurring on a small subset of programs, most of which are development in nature and are all solvable; and third, the current larger than normal mix of development programs reflects the potential for increased highly predictable and profitable business as the programs transition into production. With those introductory comments, I’d like to now transition to our priorities and focus going forward. So please turn to Slide 6. Our enhanced focus on execution includes 4 priority areas: first, delivering predictable results through improved execution on challenged programs; second, building a thriving organic growth engine that leverages our unique strategic positioning; third, expanding margins through a rationalized cost structure and improved program gross margins; and fourth, driving improved free cash flow conversion and near-term cash release. These priorities are central to unlocking the intrinsic value in the business. Let me provide some additional color on how we’re approaching each of them: first, on delivering predictable results. In assessing our program portfolio, our core business consisting of franchise production programs as well as a large portfolio of performing development programs is healthy and deliver solid gross margins, which gives me a lot of confidence in our long-term business model. Currently, there are 2 factors that have pressured and added variability to our recent results. First, as discussed in Q3, we have been successful winning a number of development programs that has led to a shift in our program mix from 20% development programs in FY ’21 to 40% development programs in FY ’23. We know this mix shift is temporary in nature and a positive leading indicator of future growth as our development programs are a precursor to higher-margin, long-term production contracts. But given that our development programs typically run at approximately 1,000 basis points lower gross margin than our production programs, we have experienced near-term margin pressure tied to this mix shift. Second, as I mentioned earlier, because our management systems and processes have not matured at the same pace as our growth over the last several years to address the complexities inherent in many of these development programs A small number of programs have become challenged, leading to unanticipated and temporary impacts on our overall performance. In FY ’23, execution challenges on approximately 20 programs a majority of which are development in nature, drove approximately $56 million of impact or approximately 580 basis points of margin contraction. We are squarely focused on mitigating the effects from the challenge programs, completing them and transitioning them into production. We have strengthened our program reviews on development programs with increased frequency and internal rigor and tightened program management accountability to drive better performance. Two of these programs moved into production in Q4, 5 more have or are expected to transition in H1, with the majority completing throughout FY ’24. While I can’t promise we are done seeing the impacts from the challenged programs on our results, I can say that these execution challenges are resolvable, temporary in nature and the full force of the organization is focused on overcoming them. As we make progress through the year and as we return toward a more typical program mix, I believe the profitability of the core business will begin to become visible as we progress through FY ’24. And finally, even at the increased levels of investment associated with the challenged programs I’m confident that we’ll see a high return on those programs as they transition from onetime development to ongoing long-term profitable production runs. Our second focus area, delivering consistent industry-leading organic growth requires the tube growth engine that is bidding and winning new contracts at an appropriate level given our scale after years of inorganic growth. Our book-to-bill has averaged slightly above 1.0 over the past 8 quarters, which isn’t adequate to meet our growth aspirations. Going forward, we are focused on driving a higher book-to-bill, which will help meet our long-term growth objectives and above-market growth rates, reflecting our attractive market positioning. Sizing upward growth engine will take some time, but the good news is that we aren’t opportunity constrained given our market positioning. I’ve had the opportunity to successfully work through similar growth scaling exercises several times in my career to accelerate organic growth. There is a consistent progression associated with targeting pipeline and levels of bid activity as leading indicators to revenue growth. We are beginning that work today led by our growth organization, and while it will take time to translate into revenue, I am confident that a healthy growth engine, combined with Mercury’s strong positioning will lead to industry-leading organic growth. Our third area of focus is margin expansion through targeted improvements to both our operating expense and gross margin. As mentioned earlier, we have taken initial actions to simplify our organizational structure, facilitate clearer accountability and aligning to our priorities, including embedding impact processes and execution into the business, streamlining our organizational structure and removing areas of redundancy between corporate and divisional organizations; and reducing SG&A headcount and rebalancing discretionary and third-party spend. This first set of actions will generate approximately $24 million in annual run rate cost savings, including approximately $20 million to $22 million of net benefit to FY ’24. These savings are reflected in our FY ’24 outlook, which Dave will discuss shortly. In the near term, we are evaluating additional efforts to drive further efficiencies in SG&A, R&D investment and manufacturing footprint, among others. Our fourth focus area is driving improved free cash flow conversion and cash release. Over the past 2 fiscal years, Mercury has delivered $333 million of adjusted EBITDA, but generated negative $107 million in free cash flow, which is clearly unacceptable. Since FY ’20, working capital has grown from approximately 35% of revenue to approximately 65% of revenue in FY ’23. This growth has primarily been driven by increases in unbilled receivables and inventory and is a direct result of the temporary execution challenges previously discussed. Our focus in this area is as follows: First, resolve execution challenges and ship and bill against legacy program unbilled balances. Second, continue to improve asset efficiency in our new overtime revenue programs through cash neutral or positive terms and tighter alignment of manufacturing cycles with customer deliveries. And third, better align the receipt of inventory with our manufacturing execution cycles and pursue advanced funding for material where possible. We believe these actions will help return the company to historic levels of net working capital representing a future cash release opportunity of approximately $300 million or more over time. With that description of our focus going forward, I’d now like to discuss our expectations for both our long-term business model and guidance for FY ’24. Please turn to Slide 7. Looking at our model and focusing on margins considering recent history. With 2023 as a reference point, as we improve our program execution and resolve our challenge programs, we will remove approximately 580 basis points of headwind in our margins, which is partially offset on a go-forward basis by approximately $22 million or 230 basis points related to annual incentive plan bonus that was not paid in FY ’23 due to underperformance. Based on recent actions to improve our cost structure, we see another 250 basis points of benefit. We also expect to return to a more normal mix of production versus development programs over time, which will have a natural margin uplift given the 1,000 basis points lower average gross margins on development programs. Assuming we return to our historical 80-20 mix of production versus development programs, we could experience an additional 200 basis points of margin expansion, demonstrating a clear path to 22% adjusted EBITDA margins over time. Beyond that, we have several additional levers to drive margin. We will continue to focus on program execution, not only on our development programs, but on our already profitable production programs to drive gross margin improvement. We’re looking at IRAD efficiency through prioritization and return thresholds. And given our unique strategic positioning and focus on growing faster than the market, we should see operating leverage with accelerated organic growth. Netting all of that together, while we have more work to do prior to communicating specific long-term targets for Mercury, I do see a clear path back to predictable organic growth that delivers mid-20% adjusted EBITDA margins and strong free cash flow conversion. I look forward to coming back to investors later in the fiscal year to review our progress to date and provide more insight into our long-term financial targets. Turning now to our outlook for FY ’24 on Slide 8. While we have taken and will continue to take actions to improve predictability, organic growth, margins and cash flow, fiscal ’24 will be a transition year. Consistent with our go-forward philosophy to deliver on our financial commitments, build credibility and drive long-term shareholder value, we are taking a more conservative approach to guidance for the year. Dave will discuss our guidance in detail, but at a high level, we expect flat revenue at the midpoint with margin improvement throughout the year. While we’re not providing quarterly guidance, I will say that Q1, which is a seasonally low quarter, is expected to be below Q1 last year’s revenue and adjusted EBITDA with negative cash flow. As we continue to work through execution challenges and enhance our visibility through management system and process improvements, we anticipate improved profitability in the second half and positive cash flow for the year. While we are taking a cautious approach to guidance, I want to reiterate that our business model is sound, and I have not seen any challenges that are not resolvable with proper focus and execution mindset and ultimately, enhanced management processes and systems. With that, I’ll turn it over to Dave to walk through the financial results for the quarter and the year, and I look forward to taking your questions. Dave? Dave Farnsworth: Thank you, Bill. I’ll start with a brief introduction then present our fourth quarter and fiscal ’23 results as well as our fiscal ’24 guidance. First and foremost, I’d like to thank Michelle McCarthy for serving as the interim CFO for the last 6 months. I look forward to working closely with her as she steps back into her role as our Chief Accounting Officer. The majority of my career spanning the last 4 decades was at Raytheon, where I served in numerous finance roles up through Vice President and CFO, Integrated Defense Systems and prior to that, as Vice President and CFO of its Intelligence Information and Services segment. The main focus in those roles was on operational finance, managing programs, developing financial plans and forecasts as well as maximizing return on invested capital with a particular focus on net working capital improvement. It was at Raytheon that I worked with Mercury as a supplier. I gained first-hand knowledge of the unique capabilities the company brings, which are critical to mission success. The ability to design and develop affordable open architecture defense electronic solutions reduces risk and accelerates time to market aligning with the drive towards outsourcing in the defense industry. In my initial weeks here, I have been impressed by the agility and drive of the Mercury team. I would also echo Bill’s view regarding the strength of Mercury’s long-term business model and the ability to return to above-average market growth and profitability with an enhanced operational focus. As Bill mentioned, our results for the quarter and the fiscal year were disappointing. Our financial performance throughout fiscal ’23 and especially the fourth quarter obscures the underlying strength of our core business. In fact, the majority of the more than 300 active programs we are managing are performing well and generating margins in line with historical trends of above 40% across production programs and low to mid-30s across development programs. Our financial performance for the quarter and the year is masked by approximately 20 programs that have experienced unique and outsized cost growth, primarily related to development challenges. Specifically, our financial results were impacted by approximately $29 million in the fourth quarter and $56 million in the fiscal year across these challenged programs. We continue to experience minimal net changes across the rest of our program portfolio. As discussed in Q3, our proportion of development programs and execution has nearly doubled from approximately 20% in fiscal ’21 to approximately 40% in fiscal ’23. We have realized risks as certain of these programs have entered final stages of test and qualification in the fiscal year. Given nearly 90% of our program portfolio is firm fixed price contracts, incremental labor and material costs result in negative impacts to revenues and margin in the period recognized. Outside of this small population of challenged programs, we continue to experience predictable and profitable performance across the remainder of the program portfolio. We have taken aggressive and immediate actions to ensure enhanced execution and operational focus across programs to mitigate further risk. With that as background, please turn to Slide 9, which details the Q4 results. Demand remains strong as evidenced by bookings of $294 million with a book-to-bill of 1.16 in the quarter, yielding backlog of $1.1 billion and up 10% year-over-year. Revenues for the fourth quarter were $253 million, down $37 million or 13% on a total inorganic basis as compared to the prior year of $290 million. Revenue was below expectations, primarily as a result of cost growth on the challenged programs. As total program costs increased on firm fixed price contracts that are recognized over time, the measure of progress on those programs decreases. This results in a delay and/or reversal of revenues in the period that the costs are recorded. To a lesser extent, award and material timing also impacted program execution in the quarter. Gross margin for the fourth quarter decreased to 26.6% from 41.3% in Q4 ’22. Gross margin contracted primarily as a result of over 1,150 basis points or approximately $29 million of impact from challenged programs in the quarter. This reflects the reduction in revenues, coupled with incremental charges associated with loss accruals as well as deferred program cost recognition. The remaining contraction in gross margin is a result of the higher than historical mix of lower-margin development programs as well as unfavorable manufacturing variances and reserves. GAAP net loss and loss per share in the fourth quarter was $8.2 million and $0.15, respectively, as compared to GAAP net income and earnings per share of $16.9 million and $0.30, respectively, in the prior year. The year-over-year decrease was a result of approximately $29 million of impact from challenged programs. The fourth quarter operating expenses also included a reduction of approximately $7 million for the forfeiture of stock-based compensation related to the departure of our former CEO. Adjusted EBITDA for the fourth quarter was $21.9 million compared with $71.6 million in the prior year. The decrease was primarily due to lower gross margins resulting from the impact of challenged programs as well as reduced operating leverage. Free cash flow for the fourth quarter was approximately $4 million, including the second payment of $7 million related to the R&D tax legislation and better than our view of breakeven entering the quarter. Turning to our full year results on Slide 10. Fiscal ’23 was a solid year for bookings. Our book-to-bill was 1.10 compared to 1.08 in fiscal ’22, yielding backlog of over $1.1 billion. This backlog supports a high level of visibility as we enter fiscal ’24. Fiscal ’23 revenues were $974 million, down 1% in total and 3% organically. Our fiscal year revenue decline was primarily a result of production award delays due to execution challenges across several development programs. In addition, incremental cost growth delayed progress and therefore, revenue recognition on certain programs. Gross margin for the fiscal year decreased to 32.5% from 40% in the prior year. Gross margin contracted by approximately 580 basis points as a result of approximately $56 million of impact from challenged programs incurred in the year. The remaining contraction in gross margin is a result of the higher mix of lower-margin development programs as well as unfavorable manufacturing variances and reserves. GAAP net loss and loss per share in fiscal ’23 was $28.3 million and $0.50, respectively, as compared to GAAP net income and earnings per share of $11.3 million and $0.20, respectively, in the prior year. The year-over-year decrease was a result of approximately $56 million of impact from challenged programs. Adjusted EBITDA for fiscal ’23 was $132.3 million compared with $200.5 million in the prior year. The decrease was primarily related to lower gross margin and reduced operating leverage. Free cash flow for the fiscal year was an outflow of approximately $60 million, including payments of $26 million related to the R&D tax legislation. The remaining outflow is reflective of growth in both unbilled receivables and inventory as a result of execution delays across our challenged programs. Slide 11 presents Mercury’s balance sheet for the last 5 quarters. We ended fiscal ’23 with cash and cash equivalents of $72 million. We have $511.5 million of funded debt under our $1.1 billion revolver, which provides us with significant financial flexibility. Turning to cash flow on Slide 12. Our billed receivables remained flat, while unbilled receivables increased approximately $6 million quarter-over-quarter. During the quarter, we successfully resolved a critical technical challenge dramatically improving our yields on a product platform common across many of our programs. We began final shipments and converted approximately $20 million of long-standing unbilled receivables to bill receivables on these programs during the quarter. This reduction was more than offset by new unbilled balances recorded in the quarter. More importantly, the resolution on this common product platform will enable the conversion of an additional $50 million of long-standing unbilled receivables over the course of fiscal ’24. We also leveraged our receivables factoring arrangement at levels similar to the prior quarter. Inventory decreased for the first time in 8 quarters as we improved our processes and management systems to better align procurement of materials with manufacturing cycles. Other noncash items, net and other operating assets and liabilities primarily reflect the activity within our tax accounts related to the R&D tax legislation. Working capital continued to grow as a percentage of sales, largely driven by increased unbilled receivables and inventory. We expect continued progress towards the completion of challenged programs to serve as a catalyst for the start of a significant reduction of unbilled receivables. The follow-on production awards associated with these programs will consume inventory, resulting in improved asset efficiency and cash flows beginning in fiscal ’24. I’ll now turn to our financial guidance for the full year fiscal ’24 on Slide 13. We have shifted our guidance approach in fiscal ’24 to guide annually rather than quarterly. While we have taken steps to improve predictability, fiscal ’24 will be a transition year. As such, we’re taking a more conservative approach to guidance for the year. Given our attractive positioning within the defense technology market, our existing franchise production programs and the sole-source nature of approximately 2/3 of our portfolio, we expect the demand environment to continue to support strong bookings. As a result, we expect a positive book-to-bill in fiscal ’24. Our fiscal ’24 guidance for total company revenues is $950 million to $1 billion. This represents flat growth at the midpoint. Our backlog entering fiscal ’24 supports a high level of revenue visibility, providing more than 70% forward coverage over our revenue range. This exceeds historical levels of forward coverage entering a fiscal year. We expect improved revenue linearity between the first and second half of the year as compared to prior years. Gross margins in the first half of the fiscal year will approximate those of fiscal ’23 as we transition through the challenge programs and balance the potential for unknown risks that may materialize through final stages of completion. Gross margins will increase throughout the year as we receive and execute on the expected follow-on production awards and begin to shift from the higher mix of lower-margin development programs. GAAP results are expected to be a net loss for fiscal ’24 in the range of $13.7 million to $5.9 million with GAAP loss per share of $0.24 to $0.10. GAAP results include approximately $9 million of restructuring charges related to the cost savings efforts announced today. We expect fiscal ’24 adjusted EBITDA in the range of $160 million to $185 million, up 30% at the midpoint from fiscal ’23 and reflecting adjusted EBITDA margins of 16.8% to 18.5%. Adjusted EPS is expected to be in the range of $1.14 to $1.48 per share. Adjusted EBITDA and adjusted EBITDA margins reflect a marked improvement in gross margins, although not a full recovery to the historical levels, reflecting the potential for unknown risks materializing as we transition through the final stages of execution on our challenged programs, specifically in the first half of the year. As such, our adjusted EBITDA and adjusted EBITDA margins in the first half will be below the comparative period in fiscal ’23. In addition, adjusted EBITDA and adjusted EBITDA margins reflect net cost savings of $20 million to $22 million associated with the workforce reduction as well as reductions in discretionary and third-party spend announced today. These cost-saving actions will result in annualized net savings of approximately $24 million. We expect positive cash flow for the fiscal year, inclusive of a full year of cash outflows related to R&D tax legislation. Cash flow will be second half weighted as we complete the majority of our challenged programs ship and build final product and convert unbilled receivables to billed receivables and then to cash. We expect improvement in net working capital by the end of the year as we begin to see reductions in unbilled receivables and inventory with more meaningful reductions over the longer term. Looking beyond fiscal ’24, Mercury is well positioned for stronger growth, margin expansion and improved working capital. We expect our current backlog and strong slate of existing programs, coupled with increased defense spending to drive a return to above industry average revenue growth. On the bottom line, as we complete our challenged programs and our mix transitions from the current weighting of development programs to higher-margin production programs, we expect to see a natural uplift in gross margins beginning in fiscal ’24. In closing, our strategy remains sound. The organization is centered around 4 priorities, enhancing execution to deliver predictable performance, building a thriving organic growth engine, addressing our cost structure to improve margin expansion and driving free cash flow release and improved conversion. Executing on those priorities will not only enable a return to historical revenue growth and profitability, but will also drive further margin expansion and cash conversion, demonstrating the full potential of our business model. With that, I’ll now turn the call back over to Bill. Bill Ballhaus: Thanks, Dave. Operator, please proceed with the Q&A. See also 20 Biggest Augmented Reality And VR Companies In The World and 12 Best Virtual Reality Stocks to Invest In. Q&A Session Follow Mercury Systems Inc (NASDAQ:MRCY) Follow Mercury Systems Inc (NASDAQ:MRCY) We may use your email to send marketing emails about our services. Click here to read our privacy policy. Operator: [Operator Instructions] Your first question comes from the line of Seth Seifman with JPMorgan. Seth Seifman: I guess maybe starting off, Bill, if you could talk a little bit about what you’ve seen that gives you the confidence, a, that Mercury is a national asset. And b, with regard to outsourcing, it’s something that the company has talked about for some time, but I was wondering with a fresh set of eyes kind of how you see that opportunity. Is this something you talk about at the — with the senior levels of management at the defense primes about how they want to outsource more of their cost base? Or is it something that you see that happens more on kind of a case-by-case basis? And how you think about that opportunity over time? Bill Ballhaus: Yes, Seth. So thanks very much for the question. And just as a reminder, I’ve been in and around this space for a few decades. So when I speak to some of the trends that I see that are relevant to Mercury, many have been in place for a while or been in work for a while. And I’ve also having been on the Board for over a year, had a perspective coming in. And I’d say that, that perspective coming in was I’ve always felt like Mercury was in an outstanding position strategically in the market from a macro standpoint, based on major funding trends around defense electronics, the growth rates the opportunity to bring capability enhancements to platforms on time constants that matter, make a difference today in missions and serving men and women in uniform and having a difference in their lives. So I knew coming in that Mercury was well situated, favorable tailwinds from a funding standpoint, market growth standpoint and had established program positions on franchise programs with long duration run rates. With respect to outsourcing, that’s been a trend that’s been in work across aerospace and defense and cross contractors who have supported the federal government for decades. In our space, we certainly see it with the Tier 1 primes, who are really forced to focus on what are their core strengths and where are they going to focus? And in turn, where are they going to rely on the supplier base. And that’s where I think we bring a very unique angle with our commercial model of investing in products that have relevance across platforms. It also drives our margin profile along with it. And so I think it’s a trend that’s here to stay. It’s been in work for a long time and it’s certainly relevant to Mercury and our positioning. So I’ve had a chance to see that over time from the outside to think about it certainly coming in when I joined the Board a year ago and now to see it up close and personal, while I’ve been in the interim role over the last couple of months. Operator: Your next question comes from the line of Ken Herbert with RBC Capital Markets. Ken Herbert: Maybe, Bill, just to start off, as we think about the fiscal ’24 guide and you think about the bridge on the EBITDA from sort of the [132] to the midpoint of the guidance range, how much is implied in terms of improvement from the $56 million headwind you had from the 20 programs in ’23 relative to growth of the core business and other cost actions. I mean, I guess, it’d be really helpful if you can help with some detail as the key moving pieces on the EBITDA bridge. Bill Ballhaus: Yes, Ken, I’ll go ahead and start, and then Dave can chime in and maybe if we use Slide 7 as a reference point, if you maybe work right to left on the chart and think about FY ’24 or at least I’ll give you a sense of how we’re thinking about it. I think we have pretty conservative assumptions around the program mix shift over time. So we’re really thinking about a gradual shift in mix as we work our way through FY ’24, maybe exiting the year with a more favorable mix, but pretty conservative assumptions around a gradual shift over time. As you move over to the cost reductions, we’re assuming that we’ll see most of the benefit from those cost reductions but not the full run rate and then we’ll certainly see the normalized comps. So I think that gives you a feel for — from the right-hand side of the chart, how we’re thinking about the midpoint of guidance and implicit in that, how much we’re accounting for unknown unknowns on the development programs as we work our way through the back part of execution on those programs in FY ’24. Ken Herbert: Okay. So I guess just to summarize then, obviously, the guidance implies a fairly conservative view on the improvement on the impact of the challenged programs, which theoretically could be where you could see perhaps the most upside of the guide as we think about ’24? Bill Ballhaus: I think that’s an appropriate way to look at it. And again, I would take as a backdrop, our view on guidance this year, recognizing it’s a transition year, and we’ve got some moving pieces as we’re executing on the back portions of these development programs, we think that’s a prudent way to be thinking about guidance. Operator: Your next question comes from the line of Jonathan Ho with William Blair......»»
Aegon N.V. (NYSE:AEG) Q2 2023 Earnings Call Transcript
Aegon N.V. (NYSE:AEG) Q2 2023 Earnings Call Transcript August 17, 2023 Operator: Good day, and thank you for standing by. Welcome to the Aegon First Half 2023 Results Call. [Operator Instructions] Please note that today’s conference is being recorded. I would now like to hand the conference over to your speaker, Hielke Hielkema, Investor Relations […] Aegon N.V. (NYSE:AEG) Q2 2023 Earnings Call Transcript August 17, 2023 Operator: Good day, and thank you for standing by. Welcome to the Aegon First Half 2023 Results Call. [Operator Instructions] Please note that today’s conference is being recorded. I would now like to hand the conference over to your speaker, Hielke Hielkema, Investor Relations Officer. Please go ahead. Hielke Hielkema : Thank you, operator, and good morning to everyone. Thank you for joining this conference call on Aegon’s first half 2023 results. My name is Hielke Hielkema from Aegon Investor Relations team. With me today are Aegon’s CEO, Lard Friese; and CFO, Matt Rider, who will take you through the highlights of the first half year, our financial results and the progress that we are making in the transformation of Aegon. After that, we will continue with a Q&A session. Before we start, we would like to ask you to review our disclaimer on forward-looking statements, which you can find at the back of the presentation. And on that note, I will now give the floor to Lard. Lard Friese: Thank you, Hielke, and good morning, everyone. We appreciate that you are joining us on today’s call. Today, we present our results under the new IFRS 9 and 17 accounting standard for the first time. But first, let me run you through our strategic developments and commercial momentum. We have a lot to talk about. So let’s move to Slide #2 for the achievements in the first half of 2023. We have started the next chapter in Aegon’s transformation delivering a successful Capital Markets Day in London in June. We closed the transaction with a.s.r. in July and have started the €1.5 billion share buyback program associated with the deal, which we expect to complete before the end of June 2024. In addition, we still intend to reduce our leverage by up to €700 million in the same time frame, and we’ll update you on that when appropriate. On the strategy front, we continue to take steps to transform our business. We have increased our financial stake in our Brazilian joint venture, we expanded our partnership with Nationwide Building Society in the U.K. and extended our asset management partnership with La Banque Postale in France. The sale of our remaining Central and Eastern European businesses have been closed, and we have announced the sale of our stake in our joint venture in India. We are now fully focused on 3 core markets, 3 growth markets and 1 global asset manager. We’re also delivering on our commitments to continue to reduce our exposure to U.S. Financial Assets and to improve the level and predictability of capital generation. Transamerica has been able to execute an additional reinsurance transaction, encompassing 14,000 Universal Life policies with secondary guarantees. This will free up approximately $225 million of capital, which will be used for management actions to further reduce our exposure to Financial Assets over time. It also significantly improves our risk profile, together with the prior similar reinsurance transaction, the total of 25% of the statutory reserves backing these policies have now been reinsured. Turning to our results over the first half of 2023. The operating results now reported under the new accounting standards, IFRS 9 and 17, increased by 3% compared with the first half of 2022. This was driven by increases in the U.S., the U.K. and the International segment, which more than offset a decreasing operating result in Asset Management. Operating capital generation before holding, funding and operating expenses increased by 13% compared with the first half of 2022, reflecting business growth in our U.S. Strategic Assets, together with improved claims experience. Turning to our commercial results. Transamerica performed well. We delivered strong sales growth in all of our U.S. Strategic Assets. The U.K. Workplace Solutions platform continued to deliver strong growth and sales increased in our partnerships in China and Brazil. The results of our Asset Manager and our U.K. Retail business continued to be negatively affected by adverse market conditions. Recently, we have announced our intention to move Aegon’s legal seat to Bermuda. Subsequently, the Bermuda Monetary Authority will then assume the role of group supervisor. Today, we have convened 2 extraordinary general meetings to be held at the end of September to seek shareholder approval for the move. Finally, on our path to increase the dividend to around €0.40 per share over the year 2025, we have increased the 2023 interim dividend to €0.14 per share, up more than 25% compared to the 2022 interim dividend. This is testament to our strong financial position and prospects. Before I move on to the results, I want to recap the priorities we presented at the recent Capital Markets Day in London on Slide #3. We have defined 4 key priorities to create value for our shareholders during the second chapter of Aegon’s transformation. The first of the near-term priorities we announced in June has already been achieved. We have closed the transaction with a.s.r., and we now own a nearly 30% strategic stake in the Dutch market leader. Moving our legal seat to Bermuda is the next step ahead of us on our journey to transform the group, and we are on track to accomplish this. We presented our plans to increase Transamerica’s value and to capture the opportunities in the U.S. middle market. Our ambition is to build America’s leading middle market life insurance and retirement company. Over the coming 3 years, we will increase both the level and the quality of capital generation from Strategic Assets while reducing our exposure to Financial Assets. At the same time, we will continue to strengthen the U.K. and Asset Management businesses, and we will invest in growing the joint ventures we have in International and Asset Management. The final priority announced at our Capital Markets Day relates to our capital management. We will continue to be rational and disciplined allocators of capital looking to utilize our significant financial flexibility at the holding to create value for our shareholders. With the strategic priorities clearly set, let’s move on to our commercial momentum in the first half of 2023, starting on Slide #4. I would like to start with the progress made by World Financial Group or WFG, our vast life insurance distribution network, one of the two focus areas in our U.S. Individual Solutions business. Our ambition is to increase the number of WFG agents to 110,000 by 2027, but at the same time, improving agent productivity. Momentum remains strong with a number of licensed agents having grown to 70,000 by the end of June, an increase of 20% compared with a year earlier. In addition to extending WFG’s distribution reach, we are taking actions to improve the productivity of the agency sales force. The number of multi-ticket agents, these are agents selling more than 1 life policy over the last 12 months, has increased by 12% compared with the year earlier. Transamerica’s market share of life insurance products sold by WFG in the U.S. remains high. This is due to the improvements we have made to the service experience for WFG agents, combined with the continued competitiveness of Transamerica’s products in this distribution channel. Slide #5 addresses the second focus area of our U.S. Individual Solutions business. We are investing in both product manufacturing capabilities and the operating model in order to position the Individual Life insurance business for further growth through WFG and third-party users. As you can see, commercial momentum remained strong in the first half of the new year. New Life sales increased by 17% compared with the first half of last year, largely driven by higher Indexed Universal Life sales within WFG. In the first half of 2023, New Business Strain increased by 12% compared with the first half of 2022. And the Earnings On In-force increased 35%, reflecting the strong growth of this portfolio. So let’s move to Slide #6, where we show the progress made in the U.S. Workplace Solutions retirement plans business. Transamerica aims to increase Earnings On In-force from its Retirement business by leveraging its capabilities as a record keeper with the ambition to materially increase the penetration of the ancillary products and services it offers. Sales momentum remained strong in the first half of 2023. Net deposits for midsized plans increased 32% over the same period last year, benefiting from both strong written sales in previous periods and lower withdrawals. We also saw good growth of our General Account Stable Value products as well as Individual Retirement Accounts, in line with our strategy to grow and diversify our revenue streams with the Workplace Solutions segment. In the first half of 2023, the Earnings on in-force of our Strategic Assets in the Retirement Plans business were USD 45 million, which was an increase of 20%, mainly from the General Account Stable Value product. Let’s move to Slide #7, the United Kingdom. In the first half of 2023, net deposits in Workplace channel amounted to a record high of GBP 1.5 billion, an increase of 36% compared with the first half of last year. Sales momentum in Workplace remains strong. In the Retail channel, on the other hand, commercial results were weak. The macroeconomic environment continued to negatively impact investor sentiment across the industry. As a result, net outflows amounted to GBP 1.1 billion in the first half of 2023, more than in the same period of 2022. Annualized revenues lost on net deposits amounted to GBP 6 million for the quarter. This was predominantly due to the gradual runoff of the traditional product portfolio, which was partially offset by revenues gained on net deposits in the Workplace channel. I’m now turning to Slide #8 to comment on the challenging performance of our Asset Management business. Market conditions remain challenging, which led to third-party net outflows in both Global Platform and Strategic Partnership segments. Combined with adverse market movements and unfavorable currency movements, Assets Under Management declined by 7% compared with the end of June 2022. Encouragingly, we saw improvements in third-party net deposits towards the end of this half year. Operating capital generation declined compared with the first half of 2022. This was driven by lower net deposits and unfavorable market movements despite lower expenses. Let’s move on to our growth markets on Slide #9, where we continue to see steady progress. New Life sales in our growth markets increased by 45% compared with the first half of 2022. This was largely driven by our business in China following the relaxation of the country’s COVID-19 measures. We also recorded good growth in Brazil. Non-life premium production in Spain and Portugal rose 6% as weaker demand for Property and Casualty Solutions was more than offset by growth in Accident and Health insurance. Operating capital generation of the International segment, excluding TOB, increased by 27% as a result of new business growth. On Slide #10, you’ll see that we maintain a high pace on the transformation of Aegon and sharpening of our strategic focus. The transaction with a.s.r. has been closed and disentanglement solutions are in place. As the new combination moves forward, we expect a significant synergy to be realized from which our shareholders will benefit. Aegon U.K. has extended their partnership with Nationwide Building Society and will onboard Nationwide’s advisory business early next year. This supports Aegon’s U.K. strategy to be the leading digital platform provider in the workplace and retail markets and to drive forward our pension and investment propositions. Aegon Asset Management and La Banque Postale have expanded their partnership in the asset manager La Banque Postale Asset Management through 2035. We have also participated in the capital raising to fund La Banque Postale Asset Management’s acquisition of La Financière de l’Echiquier, a French asset manager. The acquisition will consolidate La Banque Postale Asset Management’s strong market position. In Brazil, we have increased our economic ownership stake in the life insurance joint venture, Mongeral Aegon Group from 54% to 59%. This puts us in a stronger position to benefit from the growth in that market. We also took significant steps in our strategy to exit subscale or niche positions. We have closed the sale of our remaining Central and Eastern European businesses, first announced in 2020 and have announced the sale of our stake in the India business. The final topic I want to address on Slide #11, is the intended transfer of our legal seat to Bermuda. Bermuda Monetary Authority or the BMA is to assume the role as our group supervisor after this. Given the importance of this topic, I want to address the rationale behind this development. Following the closure of the transaction with a.s.r., Aegon no longer has a regulated insurance business in the Netherlands. And under EU Solvency II rules, Dutch Central Bank can no longer remain a group supervisor and a new group supervisor is required. Various options were explored. Some options were, however, not feasible for various reasons. For instance, in some jurisdictions, does not have a meaningful business presence. In others, the financial reporting requirements do not align with our accounting framework or prevailing regulatory uncertainty would not provide a stable basis for the execution of our global strategy. After consulting the members of the college of supervisors, which consists of the different supervisors, which regulates our local entities, the BMA informed us that it would become Aegon’s group supervisor if we were to transfer our legal seat to Bermuda. Transferring the legal seat to Bermuda and being regulated at the group level by the BMA is consistent with our strategy outlined at the recent Capital Markets Day. Bermuda has an established well-regarded regulatory regime and has experience in regulating insurance groups and companies with an international presence. The regulatory regime has been granted equivalency status by both the EU and the U.K. and has been designated as a qualified and reciprocal jurisdiction by the U.S. National Association of Insurance Commissioners. The transfer of the legal seat to Bermuda allows Aegon to maintain its headquarters in The Netherlands, where we have the experience and the talent to manage this international company. It also allows us to maintain our listings on Euronext Amsterdam and the New York Stock Exchange, bringing stability to our shareholders and to remain a Dutch tax resident. On Slide #12, this addresses the governance consequences of the intended transfer of our legal domicile. Following the transfer to Bermuda, Aegon N.V. will become Aegon Limited, a Bermudian company. This means that the basis of Aegon’s bylaws will be established on Bermudian law and governance practices. At the same time, we remain committed to applying well-recognized international governance standards. Aegon will preserve its current governance principles to the extent possible and practical in view of the redomiciliation and where appropriate to the context of Aegon’s international footprint. This includes Aegon’s commitment to take into account the long-term interest of the company and all its stakeholders. We conducted an extensive engagement process with our shareholders and other stakeholders following the initial announcement in June. We have listened carefully to the feedback we received and made a couple of changes to the proposed bylaws on the basis of that dialogue. Aside from the other voluntary commitments through strict governance, we had already announced, we have added further binding rights for shareholders in terms of approval of major transactions and on the Board’s remuneration policy. These changes and all other relevant information have been published on our corporate website today as part of the complication documents for the Extraordinary General Meetings during which investor approval for the transfer of the legal seat will be requested. I now hand over to Matt for the results of the first half of 2023. Matt, over to you. Pixabay/Public Domain Matthew Rider : Thank you, Lard, and good morning, everyone. Today, we are reporting our results under the new IFRS 17 and 9 accounting framework for the first time. It’s been a huge endeavor over the past years to prepare for this shift. So I wanted to start off by thanking the many colleagues who are involved in this process. As you can see, we’ve provided a lot of new disclosure and it will likely take you some time to digest it and get comfortable with the new standard. Implementing the new framework also in the context of the a.s.r. transaction, has met some changes to our processes. For example, we’re reporting a week later than we did last year and now half yearly. Beginning with our full year 2023 results disclosure, our financial reporting calendar will move even later to accommodate, bringing in the results of a 30% shareholding in a.s.r. on an IFRS 17 basis. We also will move our expense assumption review process to the fourth quarter for all business units in order to leverage our budgeting process. At this moment, we are not publishing IFRS 17-based sensitivities, but we will do so by the time we publish our 2023 annual accounts. So with that, I want to walk you through the overview of our financial results starting on Slide 14. The operating result increased by 3% compared with the first half of 2022. Increases in the U.S., the U.K. and the International segments were partially offset by a decrease in Asset Management. Operating capital generation before holding, funding and operating expenses increased by 13% compared with the first half of 2022. This was driven by the U.S. and reflects business growth of Strategic Assets and improved claims experience. Free cash flow in the first half of 2023 amounted to €287 million and mainly reflects remittances from the U.S., the U.K. and Aegon’s asset management joint venture in China in the first quarter. Cash capital at the holding decreased to €1.3 billion at the end of June 2023 as planned, as remittances from the units were primarily offset by capital returns to shareholders. Our gross financial leverage was stable at €5.6 billion. The group Solvency II ratio decreased by 6 percentage points since year-end 2022 to 202% due to a number of items, including the deduction of the interim dividend, a reduction of eligible owned funds due to tiering restrictions, previously disclosed onetime items and unfavorable market movements. The latter notably includes the impact of lower real estate valuations in The Netherlands. Nevertheless, our capital position remains strong and the capital ratios of our main units remained above their respective operating levels. Let’s move on to the operating result on Slide 15. The group’s operating result was €818 million, which is an increase of 3% compared to the prior year period. The operating result for the U.S. increased by 4% in the first half of 2023 or 3% in local currency terms. This increase was driven by an improvement in mortality claims experience, but largely offset by a decrease in the net investment result, partly from higher interest expense on short-term variable rate borrowings. The noninsurance operating result benefited from growth in both Retirement Plan and WFG. Over the same period, the operating result from the United Kingdom increased by 24% in local currency. This was driven by an improvement of the net investment result as a result of favorable market movements, which more than offset the impact of the planned transfer of the protection business to Royal London. In our International segment, the operating result increased by 9%, predominantly due to our growing businesses in Spain and Portugal and Brazil. Finally, the operating result from Aegon Asset Management decreased by 34% in constant currency terms compared with the same period of 2022. The decrease was driven by lower management fees in both global platforms and strategic partnerships and despite a lower operating expense, which included reduced variable remuneration accruals. Slide 16 shows the net result over the first half year of 2023. Nonoperating items totaled a loss of €180 million, driven in equal parts by realized losses on investments and net impairments. Realized losses on investments were primarily recorded in the U.S. and stemmed from the sale of bonds in the context of the reinsurance, a part of this SGUL portfolio as well as to facilitate a reduction of short-term borrowings. Net impairments were driven by an increase of the expected credit loss balance in the U.S. due to an update of economic forecasts. Other charges amounted to €870 million. In the U.S., other charges amounted to €574 million. These were driven by investments in the Life operating model and the restructuring of an earn-out agreement with the founding WFG [indiscernible]. It also included the impact of model and assumption updates in the U.S. These impacts were in line with what we had indicated at the recent Capital Markets Day. Other charges also included a €110 million charge related to the first half of 2023 results of Aegon The Netherlands, which was driven by an impairment as a result of the reclassification of these activities as held for sale. Another €110 million charge relates to a book loss on the remaining activities in Central and Eastern Europe following the completion of their disposal. I will now turn to Slide 17 to address the development of Aegon’s Contractual Service Margin, or CSM, in the first half of the year 2023. New business CSM creation amounted to €0.2 billion, mainly driven by growth of the Individual Life portfolio in the U.S., partly offset by the reinsurance of the U.K. protection book. The CSM release of €0.5 billion was mainly driven by the runoff of the Financial Assets in the U.S. and of the traditional book in the U.K. Negative claims and policyholder experience variance was driven by unfavorable experience in Individual Life and unfavorable lapse and utilization experience in variable annuities, both in the U.S. The main driver for the decrease of the CSM in the U.S. was the impact from assumption changes in the Americas, as was previously announced. This includes the removal of the morbidity improvement assumption and an increase in inflation assumptions in Long-Term Care, partly offset by the benefit of the expected premium rate increase program. In addition, the impact of investments we will make into a more customer-focused operating model for Life was reflected in the assumptions and reduced the CSM. Markets had a favorable impact on the CSM for products accounted for under the variable fee approach primarily variable annuities in the United States. At the end of the first half of the year 2023, the CSM stood at €8.3 billion. Let me now turn our view on capital on Slide 18. Operating capital generation before holding, funding and operating expenses increased by 13% compared with the first half of 2022. Earnings on In-force before holding expenses increased by 26% compared with the prior year period. Greece was driven by Transamerica and reflects improved claims experience and growth of our Strategic Assets. The increase in Earnings on In-force was partly offset by higher new business stream compared with the last year, mainly from growth in the U.S. This is in line with our ambition to drive profitable growth in our U.S. Strategic Assets. The release of required capital was broadly stable compared with the first half of 2022. In conclusion, we remain well on track to meet our guidance of at least €1 billion operating capital generation from the units in 2023. On Slide 19, I want to walk you through the development of the capital ratios of our main operating units. Compared with year-end 2022, the U.S. RBC ratio increased slightly to 427% above the operating level of 400%. Operating capital generation contributed favorably to the ratio, more than offsetting remittances to the holding. Market movements had a marginally positive impact with benefits from favorable equity markets being largely offset by fund basis risk. Onetime items had a negative impact. These were driven by the investments made in Strategic Assets and the annual model and assumption updates, which reduced the RBC ratio by 13 percentage points. We guided at the Capital Markets Day for a negative impact of in total around 20 percentage points on U.S. RBC ratio. We, therefore, expect to reflect the remaining negative impact of around 7 percentage points in the RBC ratio in the second half of this year. The impact of credit impairments and rating migrations on the RBC ratio remained negligible in the first half of the year. The solvency ratio of Scottish Equitable, our main legal entity in the U.K. decreased by 3 percentage points to 166%. This reflects the negative impact from market movements and remittance to the U.K. intermediate holding. This remittance was subsequently used in part to fund the acquisition of Nationwide’s advisory business. Let me now turn the page for an update on our Financial Assets on Slide 20. Here, we summarize the continued value creation from our Financial Assets. In July, we reinsured 14,000 Universal Life policies with secondary guarantees, also known as SGUL policies, through a reinsurance transaction, reducing exposure to mortality risk. This has freed up $225 million of capital, which we will use to further reduce our exposure to Financial Assets, in line with our plan to expedite the runoff of these exposures. The benefit of the reinsurance will be recognized in 3Q 2023. Together with the prior reinsurance transaction undertaken, a total of 25% of the statutory reserves backing the SGUL portfolio has now been reinsured. In Long-Term Care, our primary management actions are rate increase programs. Since the start of the year, we have obtained regulatory approvals for additional rate increases worth USD 86 million. This represents 12% of the new target of $700 million worth of premium rate increases that we had announced at the Capital Markets Day. We will continue to work with state regulators to get pending and future actuarially justified rate increases approved. In the first half of 2023, we extended our track record of successfully hedging the targeted risks embedded in our variable annuity guarantees, achieving 98% hedge effectiveness. The capital employed in our Financial Assets was stable compared to the end of 2022 at $4.1 billion. During the first half of 2023, releases were realized on the Universal Life and fixed annuity blocks. These were offset by increases in required capital on variable annuities and the higher allocation of alternative assets to the LTC block. On Slide 21, you can see that cash capital at the Holding decreased to €1.3 billion during the period, which is still in the upper half of the operating range. Free cash flow for the period was in part offset by the impacts of the divestitures and acquisitions Lard talked about earlier. Cash outflows in the first half of 2023 were mostly related to capital returns to shareholders. We completed the €200 million share buyback program and returned a further €232 million to shareholders through the 2022 final dividend. Let me now turn the page for my concluding slide. In summary, we continue to deliver on our plans and the results over the first half of 2023 show that we continue to make good progress and that we are on track to achieve our 2025 financial targets. And with that final note, I now pass it back to you, Lars, for your concluding remarks. Lard Friese: Thank you, Matt. Let me summarize today’s presentation with the final Slide #24. Aegon has entered the next chapter of its transformation from a position of strength. We have concrete ambitions and plans to move forward with our strategy as we presented at the Capital Markets Day in June. Operating capital generation growth was strong in the first half of 2023. Commercial momentum remained strong in our U.S. Strategic Assets, in our U.K. Workplace activities and in our International growth markets. More work needs to be done on Asset Management and our U.K. Retail business. We will address our ambitions here with you in 2024. The next important milestone will be the Extraordinary General Meetings in September to receive shareholder approval for the transfer of our legal seat to Bermuda. We are convinced that the proposed move is in the interest of shareholders and provide stability for the group to continue to execute upon its announced strategy. If you have any questions on this process, we have published detailed documents on our corporate website. Feel free to reach out to the IR team if any questions remain. I want to be clear that the redomiciliation process will not distract us from what is most important: accelerating the execution of our strategy, driving growth and creating value by reallocating capital from Financial Assets to Strategic Assets. Let me conclude by reiterating my confidence that we will deliver on our strategic commitments and financial targets. We are committed to become a leader in investment, protection and retirement solutions, and we have a clearly articulated strategy to achieve this. I would now like to open the call for your questions. [Operator Instructions] Operator, please open the Q&A session. See also Top 20 Most Profitable Energy Companies in the World and Top 20 Most Profitable Banks in the World. Q&A Session Follow Aegon N.v. (NYSE:AEG) Follow Aegon N.v. (NYSE:AEG) We may use your email to send marketing emails about our services. Click here to read our privacy policy. Operator: Thank you. [Operator Instructions] We will now go to our first question. And your first question comes from the line of Andrew Baker from Citi. Andrew Baker : So the first one is on the OCG. Are you Just able to provide moving pieces on the OCG versus the previous €270 million quarterly guidance and what we see the normalized run rate going forward? And I guess within this, can you just talk a little bit about the New Business Strain because my understanding from CMD was that this was expected to grow over time? It looks like 2Q specifically, it declined €20 million or so. So how should we be thinking about this going forward? And then secondly, just on the CSM growth. I look at the new business and interest accretion, this looks lower than the CSM release in the first half. So I appreciate some of this is driven by mix between Strategic and Financial Assets. So just wondering if you are able to provide a sense of the sort of normalized CSM growth expectations for the Strategic Assets versus the Financial Assets going forward? I’m just really trying to get a better picture of how you’re positioning the growth story against sort of the CSM that’s declining from the Financial Assets drag going forward? Lard Friese: Thank you much, Andrew. Matt, over to you. Matthew Rider : Thanks for your questions, Andrew. I can pick up the OCG one, first. So the bottom line, I will just tell you, the guidance that we had provided for last quarter of around €270 million OCG per quarter is still the same guidance, and I can walk you through the moving pieces. So in the — in the second quarter, we reported €328 million of operating capital generation. But within that, we had some very favorable claims experience, €35 million worth, vast majority of which is coming from mortality claims experience in the U.S. We also had that lower New Business Strain of about €10 million that I’ll come back on in 1 minute. And then we also had about €10 million of favorable underwriting variances in the U.K. So if you do the sums, then you’ll come to a — what we think of as a clean run rate for the quarter of €273 million, which is pretty much spot on with the guidance that we gave for the first quarter. Now for your second question, you clearly noted the reduction in the New Business Strain, although it’s actually coming from the Retirement Plans business. So we’re still seeing continued growth in New Business Strain from life insurance, which is where we want to see it because we’re issuing profitable new business there. But in the Retirement Plans business, you may have seen that we had like quite a large net deposit number in the first quarter, and it was lower in the second quarter, and we hold capital against that. So that’s the reason for the lower New Business Strain. On the — let’s go through the CSM interaction here a little bit. And I want to call out — and we’ll do it at a group basis, but it’s largely the same, by the way, in the U.S., the same kind of explanations. What we did at the group level is we added a CSM for new business of about €194 million, and we had a corresponding CSM release of €483 million. So what we’re seeing is that the new business CSM that we’re putting on is lower than the release that we’re getting on the CSM on the in-force block. The biggest driver of that is the fact that the CSM that we actually have, vast majority of it is related to the Financial Assets. And these are closed block assets that are going to run off over time. So just to give you an idea, so we have about, let’s say, in the U.S., about a little bit over €7.1 billion of CSM. Of that, 72% of it is sitting in the Financial Assets and only the balance is sitting in the Strategic Assets. And if you look at the CSM release for the second half of the year, more than 80% of that was driven by the Financial Assets portfolio......»»
Sun Life Financial Inc. (NYSE:SLF) Q2 2023 Earnings Call Transcript
Sun Life Financial Inc. (NYSE:SLF) Q2 2023 Earnings Call Transcript August 9, 2023 Operator: Good morning, and welcome to the Sun Life Financial Q2 2023 Conference Call. My name is Michelle, and I’ll be your conference operator today. All lines have been placed on mute to prevent any background noise. The host of this call […] Sun Life Financial Inc. (NYSE:SLF) Q2 2023 Earnings Call Transcript August 9, 2023 Operator: Good morning, and welcome to the Sun Life Financial Q2 2023 Conference Call. My name is Michelle, and I’ll be your conference operator today. All lines have been placed on mute to prevent any background noise. The host of this call is David Garg, Senior Vice President Capital Management and Investor Relations. Please go ahead Mr. Garg. David Garg : Thank you, and good morning everyone. Welcome to Sun Life’s earnings call for the second quarter of 2023. Our earnings release and the slides for today’s call are available on the Investor Relations section of our website at sunlife.com. We will begin today’s call with opening remarks from Kevin Strain, President and Chief Executive Officer. Following Kevin; Manjit Singh, Executive Vice President and Chief Financial Officer will present the financial results for the quarter. After the prepared remarks, we will move to the question-and-answer portion of the call. Other members of management are also available to answer your questions this morning. Turning to Slide 2. I draw your attention to the cautionary language regarding the use of forward-looking statements and non-IFRS financial measures, which form part of today’s remarks. As noted in the slides, forward-looking statements may be rendered inaccurate by subsequent events. With that, I will turn things over to Kevin. Kevin Strain: Thanks, David, and good morning to everyone on the call. Turning to Slide 4. We delivered good performance during the second quarter. Our results demonstrate the continued resilience of our diversified business mix, the value we are realizing from our recent acquisitions and strategic partnerships, our ability to execute on our strategy and a positive impact we continue to deliver for our clients. We achieved strong underlying earnings for the quarter of $920 million, representing 14% growth over the prior year. The earnings growth was driven by strong results in our Group Health & Protection, and our Individual Protection businesses alongside of resilient wealth and asset management performance. Sun Life Canada achieved record earnings this quarter driven by strong investment results and favorable insurance experience. Sun Life U.S. also had a strong second quarter for results, reflecting balanced contributions across the business. Notably, DentaQuest recorded the largest Medicare Advantage sale in its history bringing sales for the U.S. Dental business to approximately $580 million since closing our acquisition in June 2022. Sales in the second quarter are expected to add approximately 700,000 Medicare and Medicaid members over the next year, supporting our commitment to improve preventative care and oral health outcomes for our clients. We made good progress in Sun Life Asia with individual sales up 51% year-over-year. Most notably, Hong Kong insurance sales grew nearly four times over last year partially driven by pent-up demand with the reopening of the border with Mainland China. This includes contributions from new quality agency teams and the newly opened Sun Gateway Prestige Client center. The fundamentals of our Asset Management businesses remained strong. MFS long-term retail fund performance was strong with 98% and 92% of fund assets ranked in the top half of their respective Morningstar categories based on 10 and five-year performance. While SLC fee-related earnings increased 19% driven by higher AUM, reflecting strong capital raising and deployment across the platform and the AAM acquisition. Assets under management are now $1.37 trillion, and are up 9% over last year supported by increases from both MFS and SLC. Underlying ROE for the quarter of 17.7% continues to trend towards our medium-term financial objective of 18% plus, reflecting our disciplined capital management and sustained emphasis on capital-light businesses. We also ended the quarter with a strong capital position with a LICAT ratio of 148%. Given our strong capital position and capital generation, we announced our intention to launch a normal course issuer bid to purchase up to 2.9% of our outstanding common shares or 17 million, shares subject to regulatory approval. We will continue to maintain flexibility for other potential capital deployment opportunities. Turning to Slide 5. This quarter, we delivered on several key business initiatives that drove our client impact strategy helping clients achieve the health care and coverage they need to remain a top priority, and we are leveraging our digital capabilities and recent acquisitions and strategic partnerships to make this happen. In Canada, we continue to make progress in building a health ecosystem, with holistic solutions and services for our clients. Last month, we announced an agreement to acquire Dialogue Health Technologies, Canada’s leading integrated health and wellness virtual care platform that provides clients, with access to affordable, on-demand quality care. We’ve been in partnership with Dialogue since 2020, and see the incredible growth potential. But more importantly, this acquisition will allow us to play a larger role in Canada’s health ecosystem, and help Canadians navigate and receive care. Sun Life Canada also launched Lumino Health Pharmacy provided by Pillway, an online pharmacy app that helps clients access knowledgeable pharmacists by chat or phone, and have medications delivered right to their door. This service helps clients monitor their medications, usage and refills allowing them to easily access the managed care, from the comfort of their home. In our US Dental business, we expanded Advantage DentaQuest by opening two new dental care practices in Texas. We opened these offices in areas where access to quality oral health care is a challenge for children with Medicaid coverage. In Asia, we continue to leverage our digital capabilities and product innovation, to help clients with healthier lives. In Hong Kong, we introduced eSunPro, a new digital health care platform that offers one-stop comprehensive care. Clients have access to advanced treatment and support from the point of diagnosis to post treatment, all in support of helping our clients focus on recovery and safeguard their health. We’re using our distribution capability to build lifetime security for our clients. Last quarter, we announced an exclusive Bancassurance partnership with Dah Sing Bank in Hong Kong. We’re pleased with the early sales momentum and progress in July, demonstrating early traction from our new partnership and our commitment to leveraging quality distribution to meet the protection, savings and investment needs of our clients. In SLC Advisors Asset Management, our US retail distribution affiliate, which we acquired last quarter announced that we’ll distribute BGO IREIT, a nontraded real estate investment trust launched by BGO, supporting the needs of high net worth individuals. We’re also embracing our responsibility to create a more sustainable brighter future. In line with our commitment to sustainable investing this quarter, we announced our second sustainability bond, issuing $500 million. We intend to invest an amount equal to the net proceeds of this offering into green and our social assets as defined by our sustainability bond framework. Additionally, SLC Management continues to invest in assets that generate a stable and attractive yield, with a positive environmental impact. For example InfraRed recently announced an investment in JOLT, an e-mobility company. InfraRed’s investment in JOLT’s rapid electric vehicle charging infrastructure, supports a low carbon future and contributes to its target of achieving 50% of AUM invested in climate solutions by 2025. Finally, we continue to maintain our position as an empowered and inclusive workplace. This quarter, Sun Life was recognized as one of Corporate Knights Best 50 Corporate Citizens in Canada for the 18th time since 2002, driven in part by strong scores on executive gender diversity and Board racial diversity. In closing, we’re encouraged to see our business continue to grow as we emerge from the pandemic. We’re seeing accelerated growth in Asia, mortality experience being less impacted by COVID and morbidity experience improving. We continue to monitor the macroeconomic environment closely, with interest rates remaining high, particularly at the short end of the curve. But inflation is showing some signs of moderating, the credit environment remains very stable, and equity market performance overall was good in the quarter. Real estate has been a headwind for us and for the industry recently, but we continue to benefit on a relative basis from a rebalanced portfolio, reflecting actions taken over the past five years. Asset management and wealth flows remain challenging but we continue to outperform our competitors. We continue to generate capital to support our organic growth, a healthy shareholder dividend, the ability to execute on the right acquisitions or strategic partnerships like Dialogue and Dah Sing Bank, while also supporting the buyback we announced this quarter. Overall, we continue to deliver a positive impact for our clients whether it’s making health care more accessible creating strong investment performance or providing protection, put simply, helping our clients achieve lifetime security and live healthier lives. With that, I will turn the call over to Manjit, who will walk us through the second quarter financial results. Manjit Singh: Thank you, Kevin. Underlying net income of $920 million and underlying earnings per share of $1.57 were up 14%. Our strong market positions and attractive business mix across Wealth & Asset Management, Group Health & Protection, and Individual Protection helped to generate an underlying ROE of 17.7%. Wealth & Asset Management, which includes contributions from MFS, SLC Management, Group Retirement Services, Individual Wealth, and Asset Management businesses in Asia and Canada generated 40% of underlying earnings. Wealth & Asset Management underlying earnings were in line with the prior year. Lower fee-based income reflecting the impact of declining global equity markets was largely offset by higher investment income, driven by volume growth and higher yields. Group Health & Protection, which comprised 35% of our Q2 underlying earnings, continued to deliver strong earnings growth. This includes our Canadian Group Health business as well as our US Stop-Loss, Employee Benefits, and Dental businesses. Underlying earnings were up $122 million, driven by good premium growth, favorable insurance experience, as well as a full quarter contribution from DentaQuest. Group sales maintained good momentum, more than doubling from the prior year. Individual Protection represented 25% of our Q2 earnings and includes our longer term protection businesses in Canada and Asia as well as our runoff businesses in the US. Individual Protection underlying earnings were up 23% year-over-year. This was driven by improved insurance experience in Canada and the US as well as good sales momentum over the past year in Asia. Total Individual Protection sales were up 45% from the prior year. We also generated new business CSM of $270 million during the second quarter, up 43% year-over-year. Earnings on surplus assets increased across our businesses, reflecting higher net interest income and higher realized investment gains. Reported net income for the quarter was $660 million down 29% from the prior year. Reported earnings for the quarter included market-related impacts acquisition-related costs and amortization of acquired intangibles. Market impacts were primarily driven by unfavorable interest rate experience reflecting a non-parallel shift of the yield curve. Given our current positioning, as the yield curve normalizes, we expect to see favorable interest-related market impacts in reported net income. Real estate returns were relatively flat in the quarter versus our long-term expectations of approximately 2%. We continue to view real estate as a key component of our diversified portfolio. Over the last 10 years, our North American real estate portfolio has generated annualized total returns of over 9%, above our long-term expectations. Our balance sheet and capital position remains very strong. SLF LICAT of 148% was in line with the prior quarter. The leverage ratio of 23% remains low. Holdco cash of $2 billion increased by $1 billion from the last quarter in line with our prior guidance and we continue to expect — we continue to expect capital generation of 25% to 30% of underlying earnings over the medium-term. This is after payment of common share dividends and organic investments. Our strong capital position provides Sun Life with the ability to execute on attractive opportunities as well as the resilience to absorb potential impacts from more volatile market conditions. These are valuable attributes in this environment. Now let’s turn to our business group performance starting on slide 9 with MFS. MFS underlying net income of US$187 million was down 5% from the prior year. This was driven by lower average net assets as well as a higher tax rate. Reported net income of US$187 million was down 18% year-over-year driven by an increase in the fair value of share-based compensation. Pre-tax net operating margin of 37% was up one point from the prior year. AUM of US$589 billion was up 3% from Q1 the third consecutive quarter of sequential growth. Retail net outflows of US$1.7 billion and institutional net outflows of US$2.3 billion both moderated from the prior quarter. Turning to slide 10. SLC Management generated fee-related earnings of $62 million up 19% year-over-year. This reflects good capital raising as well as deployment of capital into fee-earning AUM over the past year. Underlying net income of $44 million was down modestly from the prior year as higher fee-related earnings and seed income was offset by favorable non-recurring items in the prior year. Reported net loss at SLC Management was $3 million primarily driven by mark-to-market losses on real estate held in the surplus account and acquisition-related costs. Capital raising of $2.1 billion was resilient in a challenging environment. Total AUM of $218 billion was up 13% year-over-year. This includes $21 billion that is not yet earning fees. Once invested these assets are expected to generate annualized fee revenue of more than $180 million. Turning to slide 11. Canada delivered record underlying net income of $372 million driven by strong disability experience and higher investment income. Reported net income of $210 million was down year-over-year due to market-related impacts. Wealth & asset management underlying earnings were in line with the prior year as higher investment income was offset by higher expenses. Group Health & Protection underlying earnings increased $48 million year-over-year driven by improved disability experience from lower claim volumes and shorter claims durations. Individual Protection was up $25 million driven by improved insurance experience and higher investment contribution, and earnings on surplus was up from prior year reflecting higher investment income and realized investment gains. Turning to slide 12. US underlying net income of US$160 million was up US$58 million from last year. Reported net income of US$133 million was up US$20 million year-over-year. Group Health & Protection underlying earnings were driven by strong premium growth, a full quarter contribution of the DentaQuest acquisition, favorable but moderating insurance experience and higher investment contributions. The combined after-tax profit margin for Group Benefits in Health and Risk Solutions of 10.2% was a new high watermark for the business. We’re very pleased with the contributions of DentaQuest. We are winning new business, are on track with our integration milestones and are confident that we will achieve our synergy targets. Individual Protection underlying earnings increased $12 million year-over-year benefiting from improved mortality experience and the inclusion of the retained portion of our UK business. Slide 13 outlines Asia’s results for the quarter. Underlying net income of $150 million was up 25% year-over-year on a constant currency basis. Reported net income of $122 million was up from last year due to lower market-related impacts. Wealth and asset management underlying earnings were down slightly reflecting lower fee-based earnings. Individual Protection earnings increased 33% year-over-year on a constant currency basis. The increase reflects higher premiums from good sales momentum during the past year, as well as improved expense and lapse experience in our joint ventures. Individual Protection sales were up 50% primarily driven by strong sales growth in Hong Kong, China and India. New business CSM for Asia was $118 million up 64% from the prior year. This was a good quarter to end the first half of the year. We are entering the second half with positive business momentum. While the operating environment remains uncertain, our core strength of a diversified and attractive portfolio of businesses, a strong capital position and a talented team supported by a great culture we serve as well as we focus on delivering on our purpose for our clients and driving future growth. With that, I’ll turn the call back to David for Q&A. David Garg: Thank you Manjit. To help ensure that all participants have an opportunity to ask questions this morning, please limit yourselves to one or two questions and then requeue with any additional questions. I will now let the operator poll participants. Q&A Session Follow Sun Life Financial Inc (NYSE:SLF) Follow Sun Life Financial Inc (NYSE:SLF) We may use your email to send marketing emails about our services. Click here to read our privacy policy. Operator: Thank you. [Operator Instructions] Your first question comes from Meny Grauman of Scotiabank. Your line is open. Meny Grauman: Hi, good morning. I wanted to ask about the big increase in underlying experience gains, very positive both sequentially and year-over-year. And if I look at the limited history, it would suggest that this is at the upper end of the range a more normalized level would be lower. So really what I want to understand is how sustainable this number is? Is it reasonable for it to head lower? And if I think about earnings from a run rate perspective were there any offsets this quarter that you would highlight on the opposite side to consider as well not just focus on the very strong experience? Kevin Strain: Meny, we’re going to let Jacques start because a lot of the experience comes from the Group Benefits businesses, and then Dan to follow up on the experience in the US. Jacques Goulet: Thank you, Kevin, and Meny thank you for your question. Indeed a very good experience and morbidity in particular on the group side. Just as a quick reminder, I would say important to focus on three main items when we talk about morbidity experience. First is the claims volume, the durations and also the pricing actions, which as you might remember we started taking in 2019. So the claims volume was indeed lower than our expectations and the durations were shorter. So one of the things to keep in mind is we don’t typically fully control the claims volume. But I would point out that there is some seasonality in Q2 usually a little bit lower among the four quarters. On the duration side, we’ve put in place, Meny, a number of items or solutions to help both plan sponsors and plan members. As an example we provide a mental health coach to plan members in Canada. And what we’ve noticed is that durations are shorter for people who use the mental health coach. And sometimes they don’t even go on visibility to start with. So in terms of how sustainable is it all? I mean, I did a little bit of an exercise looking at the last five years and what the experience is on volumes and durations. And we’re not that far from what the five year experience is like. So I would expect that we’re able to continue that. That being said it’s tough to predict. The main item I would leave you with is as what I said earlier the key driver for us to moderate this is the pricing actions we’ve taken. It’s something we continue to remain very vigilant and stay very close to. And when needed we make short-term adjustments. So as I said we’re probably not going to repeat 24% every single quarter from here on. But we feel pretty good on how we’re managing claims overall in morbidity. And I would suggest that we feel very confident about our of course. Dan? Dan Fishbein: Thanks, Jack, and good morning, Meny. This is Dan Fishbein. First of all, I would say that experience gains especially in businesses like Disability, Stop-Loss and Dental are often an indicator of good business results better pricing than expected better claims management and we’ve invested in our businesses to improve our capabilities and we’re certainly starting to see the results of that. As far as specifically in the quarter, the story of the quarter is this is a more normalized result. Really the first quarter since the pandemic began that we’ve seen what we would consider more normalized results. Mortality was on expectations for the first time. And then morbidity as you noted was quite strong. In our Stop-Loss business, I’m sure you’ve noted that the prior quarter and the fourth quarter of last year had exceptional results. As an example we had a 63% loss ratio in the first quarter. We priced the 72.5. So we’ve seen some moderation as you would expect in that result in the second quarter. And in fact the second quarter was still favorable, but more close to our pricing targets. So a more sustainable level. In the group business, we had one of the best results that we’ve ever had in the second quarter. And we’ve said throughout the pandemic that the group business had undergone great improvements it was just hard to see it through the mortality experience of COVID. And now we’re seeing that emerge really quite clearly. So a very strong quarter in Disability especially in the group business and then a strong quarter in Dental as well. Now there’s some seasonality in the Dental results. The first quarter is a high utilization quarter. People using their benefits. Second quarter is a more moderate quarter. So you see some higher results in Dental. But overall, I would characterize this as a more normalized result and you certainly could interpret that as more indicative of future patterns. Manjit Singh: And Meny maybe I’ll chime in on your last part of your question around other items that you should think about relative to these results. So I’d note a couple of things. So obviously as Jack and Dan mentioned, the businesses have done a lot of work to generate the favorable experience that you’re seeing and that’s generating good results. So that’s also factoring into our compensation accruals. So that shows up in our expense line. The other part of that would be is that given the strong results we’re seeing in Canada and the US this year which are higher tax jurisdictions that’s resulting in a higher tax rate, you’ll note that in the quarter this year for this quarter. And the third thing just to remember about this quarter is that we’ve also had the sale of the UK business this quarter. And so that’s showing up on different elements of the DOE this quarter. Kevin Strain: And Meny, I was just going to outline one last thing. If you look at this experience again it’s primarily coming from the group businesses in Canada and the US. In Canada, we’re a market leader and have scale and great digital capabilities and I think Jacques talked about how to think about that. And in the US we’re a top four player, if you look across our businesses and Dan, all of his businesses now with the addition of DentaQuest, we saw having scale and performing well. So again, we have great digital capabilities in the US and added things like PinnacleCare on top. So it’s really driven by the work that Jacques and Dan are doing to drive the business. Meny Grauman: That’s good detail. That’s it for me. Thank you. Operator: Thank you. Our next question comes from Gabriel Dechaine of National Bank. Your line is open. Gabriel Dechaine: Hi, good morning. Just on the CRE negative experience this quarter. It’s a pretty big number and we’ve had four quarters in a row. And you alluded to the long-term track record of generating 9% returns and all that. I’m just wondering if you can give us a sense of what kind of marks have you applied so far over the past several quarters? And how conservative are they? And what the – is it at all possible to give an outlook for what kind of investment experience we could see from the CRE book in coming quarters? Randy Brown: Gabriel, it’s Randy Brown. Thank you for the question. So the negative you’re seeing as you indicated, the difference between the long-term expected return and the actual economic return so we sell value in aggregate on the portfolio, down about 1% on the quarter but the total return essentially was flat because it incorporates income into the total return. So we do have a large and diversified real estate portfolio in different parts would move in different ways. So as you would expect, we did see price declines in office, but we did see industrial up, again really driven by rental growth increase in multi-family retail were essentially flat. If you look at from peak US office, we’ve marked down about 24% and Canadian office down about 16%. So those two markets have different dynamics as you would expect. If you think about – the second part was really the outlook. I guess, I’d start there by saying we like commercial real estate a lot long-term for our portfolio and continue to believe that it’s an integral part of a large diversified portfolio like ours. We’ve invested in the asset class for a decade and really use it to back long-dated liabilities. As I mentioned on prior calls and mentioned in the opening here, we have actively repositioned our real estate portfolio over the last five years to prepare for a market downturn and have delivered returns well above our long-term expectations over the last decade. All that being said, like all asset classes, bonds, stocks and others, prices go up and prices go down. Right now we’re on the downward part of that cycle. It is hard to predict future return, but we do expect a little bit more weakness in office as the impact of COVID and varying return to office policies play out. So one thing to keep in mind, we are not for sellers. We are not levered in our real estate. Our average hold periods are between 10 and 20 years for our buildings in North America. And as a cat buyer, we have the ability to weather these changes in valuation and actually can benefit from our position of strength. So we’re long-term investors. We believe in real estate. We have a well-balanced diversified portfolio and expect it to perform well, especially when you compare us to the broader market. Gabriel Dechaine: Okay. Great. That’s a fulsome response. Just wondering, were there any defaults in the mortgage book, because we don’t — I believe you if there were that would be in the net investment results. Randy Brown: Yes. So the answer there on CML, the portfolio has held up remarkably well. So for the 12th consecutive quarter, we have no — so average LTV of 53%, debt service coverage about 1.7%. No impairments, no arrears. So we have a well-diversified portfolio. Gabriel Dechaine: Okay. Great. And just shifting over to Asia. I heard the sales momentum is improving there. A couple of things. What kind of products are taking off first I guess? And then historically, I believe Sun Life maybe less than 15% of your sales had come from Mainland Chinese. I’m wondering, what your strategy is now in the immediate future? And why or why not that may have changed? Are you targeting? Ingrid Johnson: Hi. This is Ingrid Johnson from Asia in Hong Kong. So, in terms of the product, we’re seeing a similar as in the past where they’re typically traditional life insurance offering that are oriented towards retirement and legacy planning. If we then look at the actual underlying momentum, this is what we hope for and had made preparation anticipation of the border reopening with Mainland China. So in terms of our pre-pandemic level of sales, it was roughly around 10% to 15% as you observed. We’re now seeing this being more than double that with still good momentum. And as Kevin mentioned, the Dah Sing bancassurance relationship agreement is also activated and we’re seeing good momentum together with the opening of our Sun Life Gateway Center in [indiscernible]. So generally, we’ve looked at also innovative products just to make sure that we’re relevant for the society we serve. And then we’re seeing momentum in the other markets principally India and China. Gabriel Dechaine: So why that shift in Mainland Chinese product sales like the strategy is obviously changed? Ingrid Johnson: The strategy hasn’t changed. We’re better positioned to be able to take advantage of that. Gabriel Dechaine: All right. Kevin Strain: Yes. It’s Kevin Gabe. I was in Asia about pre the COVID time and we’ve been building capabilities for the last two, three, four years to tap into this market as it opened. We probably lacked — these capabilities we wish we would have had five years ago that we have today and that’s helped us to gain more Mainland Chinese visitor business. Gabriel Dechaine: Great. I’ll follow-up on that off-line. Thanks. Operator: Thank you. Our next question comes from Doug Young with Desjardins. Your line is open. Doug Young: Hi, good morning. First question is just for Dan. Obviously, with the DentaQuest and the boost in sales this quarter, I mean how are you feeling relative to your accretion expectations from that business? It seems like things are performing potentially better than expected. Is there an opportunity to get more than you had originally anticipated? Daniel Richard: Well thanks. We’re feeling very good about our original projections but there’s various puts and takes and some things a bit different than we had initially projected as you would expect. Probably the biggest headwind and this is well documented is the end of the public health emergency that occurred on May 11 and the recertification by all the states of their Medicaid membership. We had projected losing a certain amount of Medicaid membership as a result of that. But over a 2-year period it does appear that the states are processing those recertifications more quickly than anticipated. The overall projections for membership loss are about the same so far although a bit hard to predict as what we had projected but there could be some short-term pressure there. On the integration side the integration is going very well. We actually are now projecting having more expense synergies than we had built into the model. And on the sales side as you noted, we’re really getting some extraordinary results. In the first 13 months since the acquisition closed, we’ve had $580 million in new sales. The vast majority of that although not all of it is government programs. And we’ve essentially had no lapses on the government program side. And just to put it into perspective that $580 million in new sales is more than 20% of the revenue that was in place as of the date of the close. So we think any issues related to PHE would likely be made up with the very good sales results. Doug Young: I appreciate the color. And then maybe just sticking with you Dan. I mean the U.S. Group Benefits margin it’s just below 10% this quarter. It’s down from the last few quarters but your target is 7%. It seems like we’re migrating down towards that 7%. Is that the trajectory that we should be anticipating given the normalization potentially in Stop-Loss as you renew next year? Like how do we think about that U.S. Group Benefits margin relative to the target over the next year to two years? Daniel Richard: Yes. Well, the Group Benefits margin that we report is does not include Dental right? It historically has it doesn’t include the DentaQuest government programs. So it’s really a Stop-Loss in group margin. And actually, that was 10.2% on a trailing 12 months basis which is the highest that we’ve ever seen. We are considering whether or not we should recast that at some point to include all of the Dental business some changes minor puts and takes under IFRS 17. So more to come on that. But I think the story this quarter is that we’ve seen the emergence of the very strong margins in the group business meaning Group Life Disability and Voluntary. As I mentioned earlier with the relaxation of COVID mortality impacts we’re now seeing the impact of all the great improvements that that team has been making to the business and it’s starting to make a significant contribution to our results including the margin. The Stop-Loss margin obviously this quarter has moderated some versus the prior quarter we would have expected that. But in the aggregate, it drove the margin up to 10.2% with the improvements in the group business. Doug Young: Okay. I’ll leave it there. Thank you. Operator: Thank you. Our next question comes from John Aiken of Barclays. Your line is open. John Aiken: Thanks. I wanted to follow on Gabriel’s line of questioning, Ingrid if I may. Two things specifically about Hong Kong. Can you talk about the bancassurance agreements and in terms of, I know it’s early days but what products are actually being sold through the bancassurance channel? And if that’s, what you want or if you want to ultimately move to a different set of products? And secondly, The Gateway Client Center you mentioned the region. I apologize I’m not familiar with that. Is this specifically for Mainland China visitors, or do I actually have the intentions for that Client Center incorrect? Ingrid Johnson: John, Hi again. It’s good evening, from Hong Kong. So yes, on the products we made sure with our bancassurance agreements in the relationship that we’d have products relevant for different client segments and that they would cover the full range of what clients would need from savings, protection, legacy planning. So it’s a combination of those products that we’re finding are being sold. And it’s through all of the branches that we are present. So we’re really pleased with that. And then, from the Sun is actually on the Kowloon side and it is positioned to attract the Mainland Chinese visitors and individuals that are here, but also high net worth clients. And we have a dedicated team of on-site financial advisers and client support representatives. So this is a very nice presence that we haven’t had before. John Aiken: And Ingrid, the Client Center is this something that your competitors also have, or is this something innovative that is different for Sun? Ingrid Johnson: So it’s something that our competitors have had, but we’ve raised the bar because ours is really beautiful. John Aiken: Great. Thank you very much. Operator: Thank you. Our next question comes from Tom MacKinnon with BMO Capital. Your line is open. Tom MacKinnon: Yeah. Thanks very much. Just a couple of questions. First one is to start off with a line that’s called other expenses. Just looking at these things just quarter-over-quarter Asia is where you had a lot of growth. It’s only up 4%. But if I look in Canada it’s up 6%, US is up 20% in Canadian and U.S. dollars just quarter-over-quarter. And in the Corporate segment it’s up about 11% quarter-over-quarter. So I think you Manjit, you mentioned comp accruals but are there any other items that are driving that, number to be up so much sequentially and probably the highest it’s been over the last six quarters of course? And just some color there, and I have a follow-up. Thanks. Manjit Singh: Sure. So maybe I’ll just — first of all, I’ll start with highlighting what’s in that other line. So there’s, really four main components that go into the other expense line. So the first is non-directly attributable expenses. And these are expenses that are generally related to expenses or initiatives to support the entire business group and therefore are not included in the insurance services, asset management or other fee income lines of the DOE. So some examples of that would include marketing support advertising, and functional support for the business group and strategic initiatives that cut across all the business units within the business group. The second item would be sort of corporate costs that we have. And so those will be costs for groups like enterprise finance risk legal strategy et cetera. Next would be performance-related compensation that you mentioned Tom and the fourth would be debt cost. So if you kind of look at the increase quarter-over-quarter, most of that increase this quarter is related to compensation-related factors. And that was really driven by the fact that we have equity-related compensation and one of the main drivers of that is Sun Life’s relative share price performance versus our peer. And for the first half of the year we were outperforming. Tom MacKinnon: And is this a true-up that happens kind of more seasonal, or is — are we just establishing a new trend here? Manjit Singh: Well, we look at it regularly Tom and when there’s an amount that we think we need to true up for what we do. Tom MacKinnon: Okay. And then if I — thanks for the additional disclosure here on capital generation that’s great. So if I put that together with your one 48 LICAT that includes $2 billion in HoldCo cash. You’ve just launched a buyback. Sun hasn’t done a buyback in a while and I seem to recall that when they’ve had one — they’ve been active. So let’s take us through your thinking with respect to the buyback. And is it just a buyback for window dressing purposes, or do you plan on being pretty active here? Kevin Strain: Tom, it’s Kevin. We certainly wouldn’t announce a buyback that we weren’t planning to execute. So we plan to execute on the buyback over the next 12 months subject to regulatory approval as I mentioned in my earlier notes. So, that is you’ll — as you mentioned, if you look at what we did in the past we were active on our buybacks. Tom MacKinnon: And what about — still sitting on a lot of capital that’s not going to probably chew through too much of it and you’re generating so much. How should we be thinking about that? I mean, a high-class problem to have but thoughts there. Kevin Strain: Well, you make a good comment. I mean, we continue to think that we can do the buyback as we’ve announced and have capital to give us flexibility to add scale and capabilities through M&A when we need to and to support organic growth in our dividend. So we’ve sort of tried to balance all of these factors and that’s how we’ve determined the amount of the buyback. We are obviously looking at our pipeline and we’re — we see everything that happens in terms of M&A in all of our businesses. And we think, we’ve left ourselves with enough flexibility to continue to be active, if there’s things that we need to do to add either scale or capability of course with our financial discipline. So we don’t do M&A unless, it’s going to add to our MTOs and unless we think we can execute. So if you look at the past few years we think we’ve been pretty disciplined in our deployment of capital. Tom MacKinnon: Okay. Thanks. Operator: Thank you. Our next question comes from Mario Mendonca with TD Securities. Your line is open. Mario Mendonca: Good morning. Sort of along the same lines as Tom was going at. The last time Sun Life had an NCIB and actually executed on it was back in 2019. Kevin has something changed more recently that would encourage you to have NCIB and act on it? Is it just that Sun Life’s producing capital at a better clip than it has in the past? What caused the change? Kevin Strain: You remember that during COVID you were not allowed to do a buyback program. So that was part of it. And then we were implementing IFRS 17. And as we came through IFRS 17 you can see our LICAT and capital strength numbers. And so that’s got us to the place that as we look at the pipeline and where we’re at I should also mention we did the DentaQuest acquisition during COVID as well which was a significant user of capital. So the combination of again when we deploy capital we step back and look at what do we need for organic growth what do we need to support the dividend and our dividend growth and what’s our M&A pipeline look like. So that’s the discipline we have, and that’s sort of where we stand at this point. Mario Mendonca: And then maybe for Manjit you referred in your opening comments to when the yield curve normalize as you’d expect you see some kind of those market charges. When you say normalizing do you mean when the yield curve steepens further? Is that what you’re getting at? Manjit Singh: So, maybe I’ll let Kevin Morrissey comment on that. Kevin Morrissey: Sure, Mario. It’s Kevin Morrissey here. Our exposure really is to the yield curve inversion. And what we saw this quarter was more inversion. So the shorter rates went up by about 50 basis points more than the longer rates. So what Manjit was referring to in his opening remarks where if the yield curve flattens from here or normalizes to upward sloping based on our current risk exposure, we would see those gains reflected in reported earnings. Mario Mendonca: Got it. Thank you. Operator: Thank you. Our next question comes from Paul Holden with CIBC. Your line is open. Paul Holden: Thank you. Good morning. So, first question is regarding Advisors Asset Management. Wondering if it’s starting to make a contribution to the sales for SLC? And if it hasn’t yet when should we expect the contribution to start? Steve Peacher: Paul, it’s Steve Peacher. Thanks for the question. So there’s been a lot of activity since we closed with the different affiliates getting new products launched. So, most specifically BentallGreenOak, BGO has gone live with what the Condo [ph] IREIT, which is an industrial non-traded REIT that is through the SEC. We’ve still got to get through some states on the blue sky. Meetings have started. And the process from here once you get the product live and we’re working on one with Crescent that’s a few months behind professionally private BDC where we’re actually already acquiring assets. Then you really start working with the different platforms the wirehouses, the RIAs, the independent broker dealers to get those products approved on their platforms. You can’t really go out and start talking actively to the financial advisers on those platforms until you get the product approved at the home office. And that — we started that product — we started that process before they’re live or I would say, AAM does with the affiliate, but those platforms don’t really engage until they’ve got a product that is kind of ready to go. So we are in the — right in the thick of that now with those different platforms in the wirehouses RIAs IBDs that can — that usually takes longer at the wirehouses tends to be quicker at the RIAs. I would — I think that’s going to take us pretty much the balance of the year. And then I think next year we can really start to see assets moving into those funds. And the other comment I’ll make is the IREIT the BGO product that’s a seed portfolio. That’s over $1 billion. It’s already bought. It’s a great portfolio focused on the industrial sector. So that’s ready go. And as I mentioned with Crescent’s product we’re in the market building a portfolio now and we’re a few months behind BGO in terms of getting that product the SEC. So we haven’t been raising money yet in those products. A few more months to go to kind of get those. The approval process is going. I think it’s 2024 event in terms of money flowing. Paul Holden: That’s helpful. Thank you. And then my second question also related to SLC. I mean we continue to see pretty good AUM growth and you’re well on track to hit your 2025 target. But the — I haven’t really seen the same momentum in underlying net income. Can you give us a sense of when we should expect that to start inflecting higher? And maybe it’s related to the first answer and have to get — work through some of these additional expenses on getting the product approvals. But I’d like to understand that a little bit better. Steve Peacher: Yes. What I would point you to Paul, I mean is, I think the best earnings measure to follow to follow the health of the business. And you see it in the supplement, I think it’s on Page 13 is we report fee-related earnings. And fee-related earnings are really a very common measure in the business for these kind of alternative businesses. And that’s going to flow. And that’s kind of the purest demonstration of our earnings and that’s before minority interests before taxes. It’s also importantly, before seed income and the cost of that — the financing cost of that seed income, all of which also flows through underlying net income. So I would first say, look at fee-related earnings. If you look at that this year, we’re up double digits over last year and that will track generally fee-related revenue. On underlying net income, I think, what you’re going to see a little bit more volatility in that number, because it includes seed income, which I think this quarter is a much more normalized number, but that’s going to bounce around a little bit. It includes — we have some share-based compensation. It’s going to include that, it’s going to include minority interest it’s going to include taxes. So some of those things are going to move that number around a little bit. And I think we saw that this quarter if you look at underlying net income from a year ago, it looks like it was flat. There were a couple one-time positive benefits to the last year’s number, if you normalize for that underlying net income quarter — this quarter over last year was up probably close to 20%. So I hope that wasn’t too convoluted answer, but I would really focus on fee-related earnings to track the earnings. Paul Holden : Let me ask it a different way, because I think the guidance you sort of set out was based on underlying income for 2025 and you bought an AUM target plus the underlying income target. And I just look like profitability if I simply take underlying income relative to AUM is not tracking to those objectives. So is that something changed in the profitability of the business, or again, is it just a matter of maybe execution against strategy and getting past certain costs to improve those profit margins? I guess, that’s what I’m trying to understand or really. Steve Peacher: Well, I would say, our targets and our expectation that we’re well on track to hit those targets that we set on Investor Day, we feel very good about those. And I think in terms of the expansion of the margin, as we’ve been growing the top line AUMs up a lot fee-related revenues up fee-related earnings are up. But at the same time we have been investing to grow this business. And generally in this business that means some investment in systems, but it means a lot of investment in people, our salespeople, our investment people. I mean, our expectations for the potential of SLC are very, very high and we want to make sure we’ve got that foundation. I think you’re going to start to see margins improve over the next couple of years as we can scale back some of those investments to make sure, we’re set up for the future and the revenue from growing AUM starts to increasingly fall to the bottom line. So I think you’re going to see margin improve as we don’t have to invest as much to make sure we have the foundation for future growth. Paul Holden : All right. That’s great. Thanks for your answers. Operator: Thank you. Our next question comes from Joo Ho Kim of Credit Suisse. Your line is open. Joo Ho Kim: Hi. Good morning. And thanks for taking my questions. My first one is with MFS. And I’m wondering if you could comment on the net flows at MFS throughout the quarter. And whether there were any changes in the flows given that equity markets sort of gradually improve over the quarter? So wondering if you saw any improvements in flows as we move through month-to-month in that business? Michael Roberge: Hey, good morning. This is Mike Roberge. The biggest driver this year and relative flows has been what’s going on in the retail channel and this is true in the industry. And so relative to last year where redemptions were elevated given the challenges in both fixed income and equity products we’ve seen redemption rates normalize. But what we’ve not seen yet is sales normalize. And so industry sales are down substantially relative to a couple of years ago and we have not seen those normalize. And where we see that money going is given where cash rates are around the world in the U.S. 5-plus percent in cash; in Europe less than that is clients are sitting on cash relatively safe cash at relatively high levels. We’ve seen this historically. The market’s pricing the Fed to begin to lower rates next year. If in fact that plays out, we think some of that cash is going to make its way back into investment products. We just got to wait for that cycle to kind of play out. But it’s less around, what’s happening in MFS and more around what we see happening in the industry. We track — and this is — in the US, where we have data we track our share of active assets in the US relative to our flows. And our relative net flows are running well below our share of assets, which means we are outperforming relative particularly on the international equity and fixed income side. And so, what’s driving that as an industry, we think that’s not going to normalize back to those levels until the Fed begins to bring policy rates down. Joo Ho Kim: Thank you. And just on other expenses this quarter again, and I apologize if I missed it, but just specifically for that variable compensation I think accruals there. I’m curious, if you could attribute that to different lines of businesses. I’m wondering, if there’s any major drivers of results from certain segments? And what are some — I guess more importantly, what are some levers that you have to sort of pull down or dial out expenses in that other expense line overall going forward? Manjit Singh: So, good morning, Joo Ho, it’s Manjit. So I would say that, it’s really across all the business groups. We’ve had very good performance across all of the businesses, as you’ve heard this morning. And the second factor as I mentioned is, also related to our equity performance, which would also cut across all groups. In terms of just general approach to expenses, I would comment that we have been and are focused on disciplined expense management. That really reflects our owner’s mindset philosophy that we have, in the way that we run our business. But at the same time, we’re investing to support our business growth, ensuring that we are also investing to ensure that we have good business controls and capabilities and also making sure that we’re attracting and retaining the best talent. So, all those show up in the expense line, but they’re also helping to support the business growth that you’re seeing. So, we feel very good about the investments we’re making, and the business growth that they’re driving. But at the same time, we are also keeping a very close eye on expense growth. Joo Ho Kim: Perfect. Thank you. That’s it for me. Operator: Thank you. Our next question comes from Lemar Persaud with Cormark. Your line is open. Lemar Persaud: Thanks. I want to start off on CSM here. So, one of the points on CSM growth year-over-year was 8% from inorganic growth mostly, from management actions. Can you break down exactly, what you’re referring to there? Manjit Singh: Kevin Morrissey, are you on? Kevin Morrissey: Yes. Lemar, I’ll take that question, Kevin Morrissey. What we saw in inorganic is mostly related to the assumption and message changes, and that’s where there was a change in Hong Kong where we had an adjustment to our pricing philosophy and that resulted in an extension of the contract boundary. And as a result of that, we set up more CSM for that business. And that piece alone was about $240 million, but it didn’t have an impact on income because there was an offsetting change on the other actual liabilities. So no, impact from that change on earnings, but a significant increase in the inorganic movement for the quarter. Lemar Persaud: Okay. Thanks. And then sticking with the CSM, I want to start off by saying thanks again for the segment disclosure. It sounded helpful. On the new business CSM growth of $270 million, can you talk to how much of that was driven by the strong sales growth? And how much of that was the mix changes in Asia? Sales growth part we can see, but the mix is still a bit tougher to understand. So, I’m just wondering really is there anything one-time in nature there that we should consider seasonality in that $118 million that went through in Asia, or is that a good starting point for Asia for Q3 and Q4? Ingrid Johnson: Go ahead Manjit. Manjit Singh: No, you go ahead Ingrid, sorry. Ingrid Johnson: So, I was just going to comment on Asia and then Manjit can bring to the whole of the group. So, in Asia we really have been focused on quality products where we’ve been looking at margin expansion, which have been the one contributor and that’s principally in the high net worth business. The second is on sales volumes. So, you’re absolutely right that has driven the underlying momentum and clearly the strong growth in Hong Kong has contributed to that. And then we also affected by the mix. So, you can reverse engineer to see a margin of roughly between 40% to 55% just depending on the mix in the particular quarter but we do see very strong underlying momentum. And the new business CSM growth will be reflective of the sales momentum. Lemar Persaud: Okay, that’s helpful. And then you guys didn’t call out Canada specifically but there was some good growth in new business CSM in Canada as well. Can you provide some color on what drove that? Jacques Goulet: Lemar, this is Jack. I’ll take that question. And yes there’s good growth in new business. It’s predominantly driven by our power products, but there’s also a little bit in Universal Life and in some of our Individual Wealth insurance products. But it’s a lot of it is power. Lemar Persaud: Okay. Thank you. And then just for Dan on my next question. At 10.2% profit margin, we see that number climbed quite consistently over the past year. I would have thought that competition would serve you wrote some of that 10% profit margin in group, but it continues to go higher. It sounds like you referred to some management actions in that profit margin. Can you talk to what some changes you guys made from a management action perspective in the Stop-Loss business? And yes just how material is that to the margin? Dan Fishbein: Sure. We continue to build out capabilities in both the Stop-Loss business and the Group Benefits business. In Stop-Loss and Kevin mentioned this earlier we added Pinnacle Care advisers for example. Pinnacle Care is a health care navigation business that really differentiates our Stop-Loss business from others because instead of just reimbursing claims, we’re actually helping people in those situations that lead to stop-loss claims. We’ve also continued to enhance our digital capabilities and our sales capabilities in the Stop-Loss business. So we continue to earn above market margins. But this quarter the biggest impact was in the group business Group Life Disability and Voluntary. We’ve seen really strong growth over the past year of 13%-plus. And that’s the result of improved claims management capabilities new industry-leading digital capabilities particularly to help employers when they sat up with us as a new account including APIs that integrate us with a number of the leading payroll systems. And we’ve also added staff and expertise to claims management to help get people back to work. So, all of these things contribute to favorable experience and strong margins. Lemar Persaud: Thanks very much, guys. Operator: Thank you. Our last question comes from Nigel D’Souza with Veritas Investment Research. Your line is open. Nigel D’Souza: Hi. Good morning. Thanks for taking my question. Just wanted to touch again on CSM balance at this segment level. When I look at the rate of CSM amortization so the amount of CSM amortized relative to CSM balance it looks like that rate has drifted lower particularly for Canada and Asia. Wondering if there’s anything that you would point to that’s driving that, or is that simply just a function of CSM balance growth? Kevin Strain: Kevin Morrissey, do you want to take that question? Kevin Morrissey: Sure. Nigel, it’s Kevin. I think when you look at the CSM amortization, the thing to keep in mind there is that that amortization vary quite a bit the product mix. And so we see quite a variability across the business group. And so based on the changes in mix and the sales that are coming in you might see a bit of volatility in that from quarter-to-quarter. However, we do expect to see that pretty stable in that range of about 8% to 10% that we quoted. Nigel D’Souza: Okay. That’s helpful. And the last question was more conceptual. Just trying to understand the outlook for experience gains. If that’s expected to be sustainably favorable, just wondering why that wouldn’t eventually show up either as the change in the factorial assumptions and update us factorial risks or in premium pricing and kind of lowering premium rates to gain market share? Just trying to understand longer term if favorable gains favorable experience wouldn’t show from one of those two items? Kevin Strain: This is Kevin Strain. I wonder — yes I was going to say I wonder if you could answer that but I do think that both Jack and Dan gave really good answers in terms of how to think about it for the Group Benefits business. So I wouldn’t want to repeat that. But maybe Kevin you could talk about some of how we look at experience gains. Kevin Morrissey: Sure. Nigel, it’s Kevin Morrissey. I think you have the right concept there that ultimately over time the experience is going to get updated in either the actuarial assumptions that go into the liabilities or through the pricing when that gets renewed. So I think that is the right way to think about it. I think maybe the difference there is just the time horizon. Usually the experience studies are done and we do them every year but we look over a time horizon of multiple years and they can get updated periodically from time to time based on that experience. So over time I think you’re right. But I think over the short to medium-term I think it’s probably best to think about it in the way that it was described by both Dan and Jack. Kevin Strain: Yes. I would add to that that the group businesses are shorter duration businesses. They are repriced on a different sort of way than individual businesses. So you have to think about group and individual differently. Nigel D’Souza: Okay. And just a minor point of clarification. The experience gains is that specific to Sun Life as you’re managing and the claims experience is more favorable because of something specific to you, or is that just reflective of industry experience? Just trying to get a sense of what’s driving the favorability. Kevin Morrissey: Yes. Nigel, I’ll start off commenting from a high level across all the businesses I think it’s really a combination probably of a number of factors which you mentioned. One of them is the overall experience that could across the industry. Some of it is related to our specific risk selection and risk management. And the other dimension is the pricing as well that’s been mentioned that factors into the experience gains. So I think it’s really all three of those that have flipped in our favor. Nigel D’Souza: That’s really helpful. Thank you. Operator: Thank you. We have no further questions at this time. And I will turn things over to Mr. Garg for closing remarks. David Garg: Thank you, operator. This concludes today’s call. A replay of the call will be available on the Investor Relations section of our website. Thank you everybody and have a good day. Operator: Thank you for your participation. This does conclude the program. You may now disconnect. Everyone have a great day. Follow Sun Life Financial Inc (NYSE:SLF) Follow Sun Life Financial Inc (NYSE:SLF) We may use your email to send marketing emails about our services. Click here to read our privacy policy......»»
Delek US Holdings, Inc. (NYSE:DK) Q2 2023 Earnings Call Transcript
Delek US Holdings, Inc. (NYSE:DK) Q2 2023 Earnings Call Transcript August 7, 2023 Operator: Good morning and welcome to the Delek US Holdings Second Quarter earnings 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 […] Delek US Holdings, Inc. (NYSE:DK) Q2 2023 Earnings Call Transcript August 7, 2023 Operator: Good morning and welcome to the Delek US Holdings Second Quarter earnings 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. I would now like to turn the conference over to Rosy Zuklic, Vice President of Investor Relations. Please go ahead. Rosy Zuklic: Good morning and welcome to the Delek US second quarter earnings conference call. Participants on today’s call will include Avigal Soreq, President and CEO; Joseph Israel, EVP, Operations; Reuven Spiegel, EVP and Chief Financial Officer; Mark Hobbs, EVP, Corporate Development. Today’s presentation material can be found on the Investor Relations section of the Delek US website. Slide two contains our Safe Harbor statement regarding forward-looking statements. We’ll be making forward-looking statements during today’s call. These statements risk involve risk and uncertainty that may cause actual results to differ materially from today’s comments. Factors that could cause actual results to differ are included here as well as in our SEC filings. The company assumes no obligation to update any forward-looking statements. I will now turn the call over to Avigal for opening remarks. Avigal Soreq: Good morning and thank you for joining us today. During the second quarter, we delivered solid financial results. Our team executed well and stayed focused on our key objectives. We continue to do what we said we will do. We kept our commitment to return value to shareholders. We target a dividend that is competitive and sustainable. Giving the market outlook, our share buyback program give us the ability to further reward our investors in the near and mid-term. Year-to-date, we have returned $95 million, both dividend and share buybacks. Since June of last year to the end of this week, we have returned close to $275 million to investors. We also recognize there is a value in a strong balance sheet and financial flexibility. We continue to improve the efficiency of our cost structure. G&A improving the quarter and OpEx will follow. I’m pleased with our progress. Rosy will give more details in the financial section. Turning to the operation during the quarter. We ran well to most of our system, improving the safety and liability of our Refining system is fundamental. During the quarter, we made steps in the right direction. We continue to make good progress. Our Refining segment reflects strong contribution for our wholesale and asphalt businesses, driven by local market demand. In addition, our Altus business benefited from higher location differentials. We see these trends continuing. From a macro standpoint, in the month of July, our benchmark US Gulf Coast tax rate improved by approximately $5 per barrel, which further improved our outlook for the year. Crude is also a good story for us. We see the heavy-light differential continue to compress which is favorable for our configuration as our system is fully balanced at 95% light with no excess naphtha. In addition, with the growth we see in the Permian production, we expect to be favorable in the Midland differential. Our Logistics segment delivered strong results, which — with adjusted EBITDA of $91 million this quarter. Our prime acreage is outperforming the Permian Basin. We now forecast around $100 million a quarter from this segment starting in Q4 of this year. Retail also supported a solid quarter. This was driven by higher fuel volume, increased average margin, and higher insights store sales. In closing, our team continued to successfully advance our strategy. I want to thank each and every team member for their contribution. There is still value to unlock as we continue to execute on our strategic initiative. Now, I would like to turn the call over to Joseph who will provide additional color on our operation. Joseph Israel: Thank you, Avigal. In the second quarter, our team safely processed 295,000 barrels per day of total throughput. Supported by favorable market conditions in our markets, the Refining system generated $201 million of adjusted EBITDA. In Tyler, throughput in the second quarter was approximately 77,000 barrels per day. Production margin in the quarter was $13.87 per barrel and operating expenses were $3.78 per barrel. In the third quarter, the estimated total throughput in Tyler is in the 74,000 to 78,000 barrels per day range. In El Dorado, total throughput in the quarter was approximately 73,000 barrels per day, and short of our guidance, mainly due to a third-party transformer failure, which led to a power outage related shutdown. Our production margin was $6.06 per barrel, including an unfavorable impact of approximately $1.50 per barrel due to the power outage. Operating expenses were $5 per barrel. Estimated throughput for the third quarter is in the 76,000 to 80,000 barrels per day range. In Big Spring, total throughput for the quarter was approximately 62,000 barrels per day, approximately 8,000 barrels per day under our guidance, mostly due to unplanned diesel hydrotreater catalyst change and vacuum unit maintenance. Production margin was $11.55 per barrel, including an estimated unfavorable $4.30 per barrel impact from the unplanned events. Operating expenses in Big Spring were $8.91 per barrel, including approximately $0.50 per barrel of the unplanned maintenance activities. Copyright: 3dsculptor / 123RF Stock Photo To support safe and reliable operations in Big Spring, we are investing this year in mechanical integrity and sustaining regulatory items. In the second quarter, approximately $2.30 per barrel of our reported operating expense were related to that important initiative. Our planned cost going forward is approximately $1 per barrel through the third and fourth quarter of this year. The estimated third quarter throughput in Big Spring is in the 64,000 to 70,000 barrels per day range. In Cross Springs, total throughput was approximately 83,000 barrels per day. Our production margin was $6.21 per barrel and operating expenses were $4.74 per barrel. Planned throughput in the third quarter is in the 78,000 to 82,000 barrels per day range. Compared with the first quarter, the system benefited mainly from the improved gasoline crack spreads and reduced RVO cost in the second quarter, while jet fuel and NGL crack spreads provided some evidence. Strong asphalt and wholesale marketing added $82 million to our second quarter Refining segment earnings. Outside of our reported margins at each of the refineries and their associated capture rates, approximately $30 million of that added value was generated in Krotz Springs, driven by light-cycle oil, high sulfur diesel, and alkylate sales. $14 million were generated by Tyler whole marketing. Approximately $27 million was generated in El Dorado, and close to $11 million in Big Spring, both driven by asphalt and wholesale marketing. Overall, estimated systems throughput in the third quarter is in the 292,000 to 310,000 barrels per day range. We continue to focus on safety, reliability, and environmental compliance as our top priorities, and we expect margin capture and cost performance to follow. With regards to DKN, as mentioned by Avigal, we are clearly beneficiaries of the strong Permian Basin growth also at the Logistics business level. The Midland Gathering System volumes have more than doubled from a year ago and our team has demonstrated solid operations and growth, which are well reflected in the financial results. I will now turn the call over to Rosy for the financial variance. Rosy Zuklic: Thanks Joseph. I’ll start on slide five of our presentation material. For the second quarter of 2023, Delek US had a net loss of $8 million or $0.13 per share. Adjusted net income was $65 million or $1 per share, and adjusted EBITDA was $259 million. Cash flow from operations was $95 million. On slide six, we provide a waterfall of our adjusted EBITDA by segment from the first quarter to the second quarter of 2023. The decrease was primarily from lower results in Refining, largely reflecting the decrease in crack spreads. The Gulf Coast 532 crack averaged $25.54 for the quarter, down from $32.55 in the first quarter. Strong performance from our wholesale and asphalt businesses as well as draws on inventory at quarter end, partly offset the lower cracks. Retail improved versus last quarter as crude prices fell, improving pricing at the retail level. In addition, Volumes were higher, consistent with the season. Moving to slide seven to discuss cash flow. We drew $43 million in cash during the quarter, ending the second quarter with $822 million in cash. The $95 million in operating activities includes approximately $80 million of cash outflows for the inventory draws executed late in the quarter. The timing of the inventory draws is the primary reason net debt increased this quarter. We received the cash for these sales in July. Investing activities of $58 million is mainly for capital expenditures. Financing activities of $81 million primarily reflects returns to shareholders. This includes $40 million in buybacks, $15 million in dividends, and $10 million in distribution payments. On slide eight, we show capital expenditures. Year-to-date, we have spent $253 million. We estimate the full year to remain at approximately $350 million. Net debt is broken out between Delek and Delek Logistics on slide nine. During the quarter, consolidated net debt increased by $79 million. The last slide covers outlook items for the third quarter of 2023. In addition to the throughput guidance, Joseph provided, we expect operating expenses to be between $210 million and $220 million. This includes $10 million to $15 million related to the mechanical integrity work at the Big Spring refinery. G&A to be between $65 million and $70 million. D&A to be between $85 million and $90 million, and we expect net interest expense to be between $80 million $85 million. Before we open the line for question, a comment on our cost initiative efforts. Second quarter G&A as reflected on the income statement is $7.8 million. This includes $4.3 million of restructuring costs. Excluding this one-time expense, adjusted G&A for second quarter was in line with the first quarter of 2023. As provided in the guidance, we expect third quarter D&A to be lower in the range of $65 million to $70 million and now expect fourth quarter 2023 to be approximately $65 million. We are on track to meet our annual run rate cost savings of $90 million to $100 million as we exit 2024. We will now open the line for questions. See also 30 Most Important Economies in the World and 20 Most Consumed Beer Brands in the World. Q&A Session Follow Delek Us Holdings Inc. (NYSE:DK) Follow Delek Us Holdings Inc. (NYSE:DK) We may use your email to send marketing emails about our services. Click here to read our privacy policy. Operator: We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Manav Gupta with UBS. Please go ahead. Manav Gupta: Good morning, guys. My only question here is the other inventory impacts was a big number about $96 million. Can you help us understand all the components that went into that $96 million other inventory number? Thank you. Avigal Soreq: Hey, Manav. Good morning. How are you? It’s Avigal. Thanks for joining us today. Manav Gupta: Thank you, sir. Avigal Soreq: Manav, you know, that we are working at FIFO and the whole point of the inventory is to bring us back to LIFO. So, when we are showing the adjusted EBITDA at $260 million, that’s the way to compare us to our peers. So, that’s the headline here, right? The headline is we are FIFO. We want to go back to LIFO to be comparable. That’s what we actually did on the adjustment, simple and easy. Manav Gupta: So, just to be clear, no other adjustments just from FIFO to LIFO. Avigal Soreq: Right. Manav Gupta: Thank you so much for taking my question. Operator: The next question is from Matthew Blair with Tudor, Pickering, Holt. Please go ahead. Matthew Blair: Hey, good morning. Is there any update to the some of the parts efforts, is the goal still to get the DKL debt off the DK balance sheet? Are there some smaller things you can do in the meantime? and is there any update on the timing on all of this? Avigal Soreq: Yes, Matt, thank you for joining us today. I’m going to start and I’m going to let Mark Hobbs who’s sitting here with me to follow. But just to give you a kind of, high level comments, we are extremely focused on some of the parts — some of the management compensation related to some of the parts. And we are very well aware for the inherent value of our asset, mainly logistics, retail, but also W2W and the biodiesel plant we have. We are actively working to execute the plan, but then I would like to — Mark to — Mark Hobbs: Yes, sure. Sure Avigal and thanks for the question, Matt. As we’ve said in the past and this is still the case, we continue to believe that our current share price does not fully reflect the value of our respective business segments and in evaluating the sum of the parts, we’ve analyzed and at all the options that are available to us and we do believe that there’s a clear path on the actions that we need to take and we are working hard to execute on that plan. We’re not in a position to announce anything at this time, but I can tell you that we’re working hard on the initiative and it’s complicated. It takes time. We’re not going to rush into anything across — unlocking the value across any of our business segments as we’ve talked about in the past. But we are committed unlocking the value. We’re committed to doing what’s in the best interest of all of our stakeholders. And so when you think about whether it’s across Midstream, Retail, Wink to Webster, all the things that we’ve discussed in the past, all of those things are things that we’re evaluating and as I said, we do have a clear path forward that we’re working on. I’ll leave it at that. Matthew Blair: Okay. Sounds good. And then the trading and supply contribution of a $115 million, and Q2 seemed quite large, especially relative to the loss in Q1. Could you talk about what drove that gain? For example, was the wholesale side, was that was that due to better, like, Retail fundamentals? And then the asphalt contribution, was that due to just the falling crude price in the quarter? Could you also talk about how that’s trending in Q3? And then finally, would you say that this is your regular business operations, or does it involve taking some risk on your side? Thank you......»»
Assurant, Inc. (NYSE:AIZ) Q2 2023 Earnings Call Transcript
Assurant, Inc. (NYSE:AIZ) Q2 2023 Earnings Call Transcript August 2, 2023 Operator: Welcome to Assurant’s Second Quarter 2023 Conference Call and Webcast. [Operator Instructions]. It is now my pleasure to turn the floor over to Suzanne Shepherd, Senior Vice President of Investor Relations and Sustainability. You may begin. Suzanne Shepherd: Thank you, operator, and good […] Assurant, Inc. (NYSE:AIZ) Q2 2023 Earnings Call Transcript August 2, 2023 Operator: Welcome to Assurant’s Second Quarter 2023 Conference Call and Webcast. [Operator Instructions]. It is now my pleasure to turn the floor over to Suzanne Shepherd, Senior Vice President of Investor Relations and Sustainability. You may begin. Suzanne Shepherd: Thank you, operator, and good morning, everyone. We look forward to discussing our second quarter 2023 results with you today. Joining me for Assurant’s conference call are Keith Demmings, our President and Chief Executive Officer; and Richard Dziadzio, our Chief Financial Officer. Yesterday, after the market closed, we issued a news release announcing our results for the second quarter of 2023. The release and corresponding financial supplement are available on assurant.com. We’ll start today’s call with remarks from Keith and Richard before moving into a Q&A session. Some of the statements made today are forward-looking. Forward-looking statements are based upon our historical performance and current expectations and subject to risks, uncertainties and other factors that may cause actual results to differ materially from those contemplated by these statements. Additional information regarding these factors can be found in yesterday’s earnings release and financial supplement as well as in our SEC reports. During today’s call, we will refer to our non-GAAP financial measures, which we believe are important in evaluating the company’s performance. For more details on these measures, the most comparable GAAP measures and a reconciliation of the 2, please refer to yesterday’s news release and financial supplement. I will now turn the call over to Keith. Keith Demmings: Thanks, Suzanne, and good morning, everyone. Our results in the second quarter were strong and well ahead of our expectations with adjusted EBITDA, excluding cats, growing 21% year-over-year or a total of 6% on a year-to-date basis. Results were largely driven by continued momentum in Global Housing, primarily from higher top line growth and more favorable loss experience from prior period development on claims. Our performance is a testament to the resilience of our global business model, our compelling client offerings and steadfast focus on operational excellence. Looking at our business segments. Global Housing adjusted EBITDA increased 49% year-to-date, excluding catastrophes. These results reflect actions taken to transform our Housing business, including focusing on product lines where we have a strong right to win, dramatically reducing noncore areas and our international catastrophe exposure and aggressively deploying digital solutions to improve customer experience while driving greater operational efficiencies. This underscores our ability to quickly respond to ever-evolving market dynamics driving continuous improvement and better performance over time. During the first half of 2023, top line performance in our Homeowners business increased 18% year-over-year. This reflects higher average insured values and state-approved rate increases to account for higher claim severities from inflationary factors in lender-placed. Policy counts increased double digits this year from expanded loan portfolios of new and existing clients. While policy growth has been a contributor so far this year, we expect to level off from the first half of the year. In our Renters business, our property management company distribution channel has shown strong policy growth year-to-date, increasing 14%. This has been driven by the ongoing rollout of our Cover360 solution, one of the many long-term investments we’ve made in renters that has consistently added value to our PMC partners and customers over the last several years. Our strong growth within the PMC channel has helped to diversify profit pools to partially offset lower contributions from our affinity partners, along with higher non-cat losses, which have returned to more normalized levels. In summary, we’re very pleased with Global Housing’s performance year-to-date and expect strong year-over-year earnings growth to continue into the second half of 2023. Turning to Global Lifestyle. Underlying segment results were solid and demonstrated steady improvement from the second half of last year. Lifestyle earnings for the first 6 months of the year have increased $34 million or 9% over the second half of last year, from improved Connected Living results. Within Connected Living, we continue to invest in our technology platforms as we deepen our focus on product innovation and evolving our service delivery capabilities to improve customer experience. Our focus on innovation and global trade-in capabilities has continued to drive a significant level of interest from existing and prospective mobile partners. As we continue to realize ongoing efficiencies, we’ve implemented actions to mitigate macroeconomic headwinds throughout our global operations. In Europe, these actions have had a positive impact, ultimately helping to stabilize earnings and allowing us to remain focused on growing the top line. Within extended service contracts, we’ve made significant progress with our partners in executing large-scale protection and administration programs. In addition, after several quarters of elevated claim severity, we’ve seen an improvement in the second quarter loss ratio due to rate increases with several clients. In our Global Auto business, consistent across the industry, our repair costs have continued to increase from inflation. We’ve taken decisive actions to improve performance. For example, we’ve implemented prospective rate increases with several key clients, and we’re also partnering with our clients to identify cost savings on claims to improve loss experience for programs where we hold the risk. It’s difficult to predict the timing of an earnings inflection point, but we expect to see continued improvements as new business earned through although improvement may take several quarters to materialize. Overall, Global Lifestyle earnings were in line with our expectations for the first half of 2023. And while we work to create new vectors of growth for Lifestyle, we now anticipate Global Lifestyle’s adjusted EBITDA will be down modestly for the full year. This is mainly due to the headwinds in Global Auto we just discussed and lower international contributions primarily from Japan. Reflecting on the first half of 2023, our results have demonstrated the attractiveness of our compelling business model with clear competitive advantages, including alignment with global market leaders across lines of business, leadership positions with scale advantages in attractive and growing lifestyle and housing markets, demonstrated ability to innovate and differentiate through specialized solutions and a strong track record of taking decisive actions to overcome market challenges and drive performance. Combined, Global Lifestyle and Global Housing should continue to generate strong returns and cash flow, highlighting the strength and resiliency of Assurant. Prior to moving to our enterprise outlook and results, I want to take a moment to discuss the progress we’ve made through our sustainability efforts, a key differentiator for Assurant. In June, we published our 2023 sustainability report, reaffirming our long-term priorities around talent, products and climate. The report highlights our progress in reinforcing our company culture and leveraging ongoing employee listening and feedback to help support our global diverse workforce. The report reaffirms our 2020 to 2025 ESG strategic focus areas of talent, products and climate to build a more sustainable future together with our clients, customers, employees and suppliers. We continue to view our commitment to sustainability as a competitive advantage that delivers short and long-term business value. Of note, we achieved our 2025 supplier diversity target 2 years ahead of schedule. We increased our global gender diversity overall; we expanded coverage for electric vehicle protection products and we repurposed 22 million mobile devices globally. Now let’s turn to our enterprise outlook and capital. Given first half results and anticipated performance for the remainder of the year, we now expect adjusted EBITDA to grow high single digits, excluding cats. This represents an increase from our original expectation of low single-digit growth. Adjusted EPS growth is now expected to approximate adjusted EBITDA growth, each excluding reportable catastrophes, an improvement over our previous expectations for EPS growth to trail our EBITDA growth. The increase is mainly due to our higher-than-expected adjusted EBITDA growth, which is now outpacing the increases to depreciation and tax expenses. From a capital perspective, we upstreamed $180 million of segment dividends during the quarter and $292 million year-to-date, nearly half of segment adjusted EBITDA, including cats. We ended the quarter with $495 million of holding company liquidity, a significantly higher level than at the end of the first quarter. As expected, we resumed share repurchases during the second quarter, repurchasing $20 million of common stock as well as an additional $10 million throughout July. For the remainder of the year, we would expect to gradually accelerate our level of buybacks with the majority weighted toward the fourth quarter, keeping in mind third quarter is hurricane season, and we will look to preserve our capital flexibility. For 2023, we don’t currently expect to exceed the 2022 underlying buyback activity of $200 million. Overall, it’s been a strong first half of the year, and we’re well positioned for the full year. In both Housing and Lifestyle, it will be critical for us to continue to execute through innovation and enhanced customer experience for our clients and their end consumers, which is what differentiates Assurant and supports long-term growth. I’ll now turn the call over to Richard to review second quarter results and our 2023 outlook in greater detail. Richard? Richard Dziadzio: Thank you, Keith, and good morning, everyone. For the second quarter of 2023, adjusted EBITDA, excluding reportable catastrophes, totaled $337 million, up $59 million or 21% year-over-year. And adjusted earnings per share, excluding reportable catastrophes, totaled $4.09 for the quarter, up 26% year-over-year. Let’s start with Global Lifestyle for our segment results. This segment reported adjusted EBITDA of $197 million in the second quarter, an 11% decline year-over-year. However, prior period results included a real estate joint venture gain of $13 million, mainly impacting Global Automotive. If we exclude this prior period gain, adjusted EBITDA declined only 5% or $11 million, in line with our expectations. This decrease was primarily driven by lower results in Global Auto as continued inflationary impacts on labor and parts increased average claim severities. We also incurred increased claims cost on ancillary products as these costs revert to more normalized levels following their post-COVID lows. The Auto earnings decline was partially offset by higher investment income from higher yields and growth in the U.S. across distribution channels. In terms of Connected Living, excluding the prior period real estate gain and $3 million of unfavorable foreign exchange, earnings were roughly flat. In Mobile, earnings were down from soft results in Japan and Europe, as expected. As a reminder, headwinds in international earnings did not materialize until the second half of 2022. In Japan, we continue to experience subscriber declines as our 4-year protection product continues to run off. And in Europe, while we are benefiting from previous expense actions taken in the latter part of 2022 and the beginning of 2023, lower volumes have impacted year-over-year results. U.S. mobile earnings were flat year-over-year as growth in North American device protection programs from carrier and cable operator clients was offset by lower mobile trade-in results. Trading results were impacted by lower volumes due to the timing and structure of carrier promotions and lower fee income from the previously disclosed contract change. However, higher prices on used devices partially offset the decline. Extended service contract earnings increased as U.S. client performance improved, benefiting the rate increases implemented from several clients that began to offset the impact of higher claims costs. Turning to net earned premium fees and other income. Lifestyle was up by $96 million or 5%. This growth was primarily driven by Global Automotive, reflecting prior period sales of vehicle service contracts. Connected Living net earned premiums fees and other income increased 1%. However, this includes an approximate $60 million negative impact from the previously disclosed mobile program contract changes, which had no impact on profitability. Excluding these contract changes, Connected Living net earned premiums, fees and other income grew by 6%. The quarter benefited from growth in mobile subscribers in North America, excluding client runoff and higher contributions from extended service contracts. For the full year 2023, we now expect adjusted EBITDA to be down modestly for Global Lifestyle. Global Auto is expected to be down for the full year as we anticipate loss experience to remain unfavorable for several quarters and the impacts from continued normalization of loss experience for select ancillary products previously mentioned. As Keith described, we’ve taken specific actions such as rate increases on new business, repair cost reduction and changes to client contract structures to help mitigate these impacts, which is why we expect an increase in profitability over time. Higher investment income has and is expected to continue to partially offset these impacts. In Connected Living, we do expect our U.S. Connected Living business to grow modestly for the full year. As a reminder, third quarter results historically include both lower trade-in volumes and higher loss seasonality. These items typically improve in the fourth quarter. In addition, our third quarter results last year included an $11 million onetime client benefit in Connected Living. And while Japan and Europe have stabilized, we are focused on top line growth, which has been slower to materialize than expected. Finally, we will also continue to focus on expenses while investing in growth opportunities, we have strong momentum with clients. In terms of net earned premiums, fees and other income for the full year, Lifestyle is expected to grow as growth in Global Automotive is partially offset by ongoing foreign exchange headwinds. Moving now to Global Housing. Adjusted EBITDA was $155 million, which included $13 million in reportable catastrophes from severe windstorms in the Southeast U.S. and flooding in Florida. Excluding reportable catastrophes, adjusted EBITDA more than doubled to $168 million were up $87 million from both top line growth and favorable non-cat loss experience within homeowners. Top line growth in lender-placed came from higher average insured values and premium rates as well as more policies in force. These together accounted for approximately half of the increase in earnings. Favorable non-GAAP loss experience came from a $40 million year-over-year net reduction in reserves related to prior period development and is comprised of a $28 million reserve reduction in the current quarter plus a $12 million reserve strengthening in the second quarter of ’22. Excluding prior period development, non-cat loss experience increased modestly due to the increase in frequency and severity. Higher investment income also contributed to earnings growth. Turning to our reinsurance program. We completed our 2023 catastrophe reinsurance program in June. We fared well in the market with this year’s total cost increasing less than previously expected and only modestly over 2022. This increase is relatively small due to strategic actions taken, including exiting our international footprint, increasing our level of retention and adjusting our reinsurance coverage. As anticipated, our first event retention increased to $125 million from its previous level of $80 million and the retention level reduces to $100 million for second and third events. We also increased our total program coverage to a 1-in-225-year, probable maximum loss to further minimize our risk from extreme catastrophes. Moving to Renters and Other. Earnings increased largely due to a benefit within our NFIP flood business of $5 million. Excluding this item, results were in line with 2022. For the full year 2023, we expect Global Housing adjusted EBITDA, excluding reportable cats, to grow significantly due to strong performance in homeowners, driven by top line expansion from lender-placed. Regarding the second half of the year, we expect ongoing momentum from a continued gradual abatement of inflation, lower seasonal losses particularly in the fourth quarter and continued revenue strength. This momentum should offset a modest increase in catastrophe reinsurance costs in the absence of both another NFIP benefit and additional favorable reserve development, which can be difficult to predict. Together, these last 2 items contributed $33 million to our first half results. Moving to Corporate. The second quarter adjusted EBITDA loss was $29 million, up $4 million from lower investment income. For the full year 2023, we expect the corporate adjusted EBITDA loss to be approximately $105 million. I would also mention that the investment portfolio continues to perform well with higher interest rates improving both short- and longer-term returns. Turning to Holding Company Liquidity. We ended the quarter with $495 million. In the second quarter, dividends from our operating segments totaled $180 million. In addition to cash used for corporate and interest expenses, second quarter cash outflows included 3 main items: $20 million of share repurchases, $40 million of common stock dividends and $50 million related to previous acquisitions within Global Auto. For the full year, we expect our businesses to continue to generate meaningful cash flows, approximating 65% of segment adjusted EBITDA, including reportable catastrophes. This is consistent with our previous forecast. Cash flow expectations assume a continuation of the current economic environment and are subject to the growth of the businesses, investment portfolio performance and rating agency and regulatory requirements. In closing, we’re quite pleased with our first half overall performance, which continues to demonstrate the strength and the diversity of our businesses and believe we are well positioned to achieve our increased full year financial objectives. And with that, operator, please open the call for questions. Q&A Session Follow Assurant Inc. (NYSE:AIZ) Follow Assurant Inc. (NYSE:AIZ) 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 is coming from the line of Jeff Schmitt from William Blair. Jeffrey Schmitt: Global Housing seems to really be turning a corner here. But just looking at that, you’d mentioned the favorable development charge, I think it was $28 million. When we back that out, the underlying loss ratio was at 44%, which is still sort of high relative to historical levels and especially, I think, considering with the way that housing material and labor cost inflation to move down. So are you just sort of taking a conservative posture there? Or what are you seeing? Keith Demmings: Yes. So maybe a couple of comments. Obviously, really pleased with the progress that the team has made. We talked a lot about it last year, a lot of actions to streamline the business to focus on the core products and obviously put appropriate rate adjustments in place, and certainly, it’s showing through in the first half of the year. And to your point, that’s exactly the way we look at it. We adjust the $28 million of in the quarter. We also adjust for the $5 million FEMA bonus as we look at our overall results, underlying still incredibly strong, $135 million in the quarter. And then to your point, current accident quarter loss ratios are 44%. I think a little under 42% last year. And that’s just a factor of the increased inflationary pressure that we see being largely offset by the work we’re doing on rate but not fully back to the levels that we saw last year. So as we think about the strong fundamental performance in Housing, it’s not a result of unusually low loss ratios. In fact, kind of our year-to-date normalized combined are kind of right in the range of what we would have otherwise expected. But Richard, I don’t know if you wanted to add anything else to that. Richard Dziadzio: Yes, exactly. And I would just say, if we look year-over-year, you’re exactly right, Jeff, with the 44%. That’s a couple of points above last year’s level, same time. And as Keith said, I think we do have some inflation that’s — it’s higher last year than the costs are higher this year than last year. So that’s running through a little more frequency and just also, there was more, I would call, severe convexity storms in the last quarter. And while those storms, most of those storms didn’t make it to reportable cats for us, over $5 million, as you know, we had a very low level in the quarter. Some of them are in the non-cat loss ratio. So we did have our share of those, I would say, overall, and that’s within the couple point increase that we see over the year as well. Jeffrey Schmitt: Okay. That makes sense. And then what was the inflation guard adjustment, I think that goes in maybe once a year, but what is that going to be this year versus last year? Obviously, that’s going to go into premium. And then are you still getting rate sort of above that as well? Keith Demmings: Yes. So we talked about inflation guard going in double-digit levels last July. So we would have put the final adjustments through based on that in June of this year. And then to your point, we do an annual adjustment, it’s 3.1% adjustment that would go in on top of that for July to AIV. And then modest rate adjustments, plus and minus as we think about managing across all of our states, but certainly still have more to earn through from last year’s AIV adjustments and then on top of that, the 3% that we just put in place in July. Operator: Our next question comes from the line of Brian Meredith from UBS. Brian Meredith: A couple of questions here for you. First, can you talk a little bit about the inflationary pressures you’re seeing in Global Auto? And I understand it’s going to pressure margins here through the remainder of 2023. Is this something we’re going to see continuing to pressure margin throughout 2024 just as it takes time for these contract changes to work through numbers? Keith Demmings: Yes, I definitely think there’ll be continued pressure. I do expect ’24 to be improved from ’23, but definitely, we’ll see elevated levels of losses from the inflationary pressure on the parts and labor and auto. As I think about sizing that for you, I’d probably think maybe a little north of $10 million a quarter in EBITDA impact. So if I was going to size it for this year, that’s probably the range that we would put on it. I would say that’s — we expect that to recover over time, both in terms of the rate increases that I mentioned earlier, but also the actions we’re taking to try to optimize the service network to improve access to parts and to try and drive down claim costs as well. And that obviously can have a more near-term benefit and the rate takes a little longer to earn through. What I would say is we’ve taken the actions that we want to take. So we’ve had great dialogue with our clients. There’s only a handful of clients where this is really an impact for us, and we’ve made rate adjustments already in partnership. Our interests are very well aligned with our clients, and we feel confident that we’re going to get this to the right level over time. You’ve seen us resolve issues from inflation in Housing. We’ve resolved issues on ESC. Obviously, auto is the new area of focus, and our team is 100% focused on delivering and executing. Brian Meredith: Excellent. And then second question, Japan, when are we going to lap some of these kind of contract roll things that were going on? When will that finally kind of be done? Is that the end of this year? Is there any kind of going into 2024 as the contract changes in Japan? Keith Demmings: Yes. I think that runs through really this year, and I would expect to see a lot more stability as we head into ’24. And then I do think we’ve got an incredible position in the Japanese market. We partnered with all 4 carriers. There’s a tremendous amount of long-term growth opportunity in that market. And I definitely think we’ll see growth again in ’24 and over the long term. Brian Meredith: So that’s a meaningful part of the headwind you’re seeing is the Japan kind of contractual more than kind of an economic situation? Keith Demmings: Yes. I think the financial performance is still very strong in Japan. I would say the first half of this year stabilized from the second half of last year. We had a very strong first half, both in Japan and Europe in our ’22 results. So from a year-over-year comparison, definitely, they look down. But in terms of sequential, as we look at exiting last year, they’re both very stable. So I’m really pleased with that performance. In fact, Europe is above where it finished the year in Japan very stable to where it finished. But it is a meaningful contributor for us, and it’s an important part of long-term growth. So it will no doubt be a priority. Operator: Our next question comes from the line of Mark Hughes from Truist. Mark Hughes: The fee income, what’s your outlook in terms of kind of programs or trade-in promotions as we think about the balance of the year? Keith Demmings: Sure. And maybe I’ll start and certainly, Richard, if you have other thoughts on fee income. But we saw — and this can be volatile quarter-to-quarter really dependent on promotional activity within the industry. We’re fortunate, particularly in the U.S., we partner with all of the major carriers, which is a great position to be in from a trade-in perspective. We definitely saw lower trade-in volume in Q2, whether you look at it sequentially or year-over-year. And that’s really just a function of the amount of advertising, the promotion and how hard are carriers pushing to upgrade customers to new devices and then how aggressively are they promoting trade-in offers. And that ebbs and flows. It was a little bit down in the quarter. To the extent that as new devices come out in the fall, we certainly expect to see more aggressive marketing campaigns. But it’s a little bit in the control of the hands of our clients, and it’s a very dynamic market, but continues to be important for our clients and something that we’re very focused on. Richard Dziadzio: And typically, Mark, we would, Q3, we’re not expecting big increases typically a higher period would be kind of Q4 for us. So a little bit of what we mentioned in our remarks as well. So there is some seasonality to it, as Keith mentioned, in the second half of the year. Mark Hughes: Yes. Understood. You mentioned the inflation guard up 3%. Any prospect for additional rate on top of that based on the date approved increases? Keith Demmings: I would say some marginal rate increases, certainly state by state. And obviously, we look at our rates very closely. So there’s — there’ll be a little bit of additional rate coming through. But obviously, the big adjustments we put through last year that are still earning through the book. Richard Dziadzio: Sorry, Mark, as we look forward to the second half of the year, we could see slight increases, but we’re not seeing large increases to revenues continuing. I think we’ve kind of gotten there already, plus we’ve gotten out of certain international areas. So overall, the revenues will be impacted a little bit by that. But overall, I think there will be a little more to come, but not — certainly not the levels we’ve seen over the past year. Mark Hughes: Yes. And how about the new money yield on investments versus the portfolio yield? What are the prospects for more improvement there? Richard Dziadzio: Well, I’d divide into a couple of things. I mean, we’ve actually had some nice increase in investment income over the last year. Think Absent the real estate gains, probably $30 million in cash in short term. And then obviously, we didn’t have a real estate gain this quarter. But just on your question on yields, we do have, in the long term, our fixed income portfolio is a 5-year duration. So we get a continuous role on that, and we’ll get a continuous kind of increase in those longer-term yields. We’ve really benefited from short-term rates also, which is — accounts for almost as much as the increase or as much as the increase in the longer-term yields, right, with the Fed increasing interest rates. At some point in the future, those will probably come down. So we’ll see that cash return come down. Who knows when that will happen, but we could see that as well. But on a longer-term basis, we should continue to get some yield increase. Operator: Our next question comes from the line of Tommy McJoynt with KBW. Tommy Griffith: You mentioned the expectations for modest growth in Connected Living this year, and we’ve had a little bit of discussion on sort of U.S., Japan and Europe. Could you dissect those expectations for that modest growth just into any maybe sort of ranges for U.S. x percent, Japan down x percent. Just trying to get a gauge of exactly how much of a headwind in terms of the overall number that Japan and Europe actually are? Keith Demmings: Yes, I’d say if I look at Lifestyle and we think about the outlook for ’23, I would say, domestic Connected Living, I think we had a strong first half, and that will continue consistently for the back half of the year, and that will yield modest growth for Connected Living U.S.. So performance pretty steady, but that’s going to be an increase year-over-year. And again, that’s overcoming the onetime client benefit we had last year in the third quarter for $11 million. In terms of international, I’d say our expectations in the second half would be consistent with what we saw in the first half. So continued stability and obviously then putting our attention to driving longer-term growth opportunities, particularly in Europe and Asia Pacific. And then in terms of the auto side of the business, I’d say auto losses will remain kind of at elevated levels as we saw in the first half. We’ll continue to see the normalization of GAAP and I would expect Auto in the back half of the year to reflect something more similar to what we saw in the second quarter. That would be the simple way for me to think about it, Tommy. Tommy Griffith: Okay. Yes. That’s helpful. And then switching over to some of the line of questioning on Housing. Obviously, there’s been pretty tremendous growth this year. I think you guys have last given your sort of normalized cat load expectations for $140 million for this year. With all the growth that you’ve seen in Housing, been any early indications for what you might consider a normalized cat load as we head into ’24? Richard Dziadzio: Yes. We haven’t really updated our cat load. I mean we put it in for the year and then to be honest, after that, it’s sort of like the weather the cats will get, I would say. So we’re still at that $140 million number so far. But speaking of that, we were really happy with the reinsurance, the cat reinsurance placement that we put into place where we had thought going into the season at the end of last year, we get an increase, a non-negligible increase in our cat reinsurance. And actually, at the end of the day, we’re only going to be modestly up over the year. We’ve done that through a number of things, whether it’s increasing the retention level, working with our reinsurers, exiting some of the international — or exiting the international property footprint that we have. So we’ve done a lot of things to kind of protect the company. We increased the top end as well to 1-in-225-year, maximum probable loss, so we think we’re in good position. So far in — through July, we haven’t had any cats hit us that are reportable so far, so we’ll wait and see. Obviously, we’re in cat season right now, so we’ll see how it comes out. Operator: [Operator Instructions]. Our next question comes from the line of John Barnidge from Piper Sandler. John Barnidge: In your prepared remarks, you talked about new of Global Lifestyle growth. How do you think through that? It sounds like expanding business. Keith Demmings: Yes. Certainly, a couple of thoughts. We’ve got great momentum with clients in Global Lifestyle around the world. If I think about our mobile business and the traction we’ve had over the course of the last 7 or 8 years has been pretty steady. We’ve got relationships with so many of the marquee brands globally, and that yields a lot of opportunity to do new things, introduce new services, innovate with new products, try to find new ways to help them drive success. So I would say we’ve got as much ongoing dialogue with clients today and prospects today as we’ve ever had, and there seems to be a constant interest in innovating and doing new things. And the fact that we’ve got a really wide-ranging capability set, I think, is a huge advantage for us, and we’d look to see that continue to drive growth long term. John Barnidge: And then my follow-up question, you talked about expense reductions across the global franchise. Is that above what was previously contemplated into the Lifestyle input cost trends drive an increase in cost reductions? Keith Demmings: Yes. Maybe I’ll start and then Richard can add on. But certainly, we’ve tried to be very disciplined around expense management. Our goal this year was to hold our G&A expenses relatively flat. That means we have to overcome merit increases, additional costs for health and well-being for our employees. We’ve got to absorb incremental growth and incremental investment and we’ve tried to do that with some of the expense actions that we took in the fourth quarter last year, but also a pretty intense focus on driving digital first and automation through all of our operations, whether they were call center, claims operations or even our depots. That continues to be a huge area of focus for us. And we’re really pleased with the progress we’ve made so far. But Richard, anything else you want to add on expenses? Richard Dziadzio: Yes, I would just say and then turning to the Housing side, in particular, we’ve gotten some really good leverage off our expense base with some of the investments we’ve made in automation and digital capabilities. And you’ve seen in our supplement, the expense ratio go down a number of points over the last year where we’re at 38.8%. Now part of that, we had that NFIP bonus that Keith mentioned. But really, the lion’s share of it is the fact that we’ve had increases in revenues and not a proportionate increase in expenses. So that really demonstrates we are getting leverage out of the business, out of the operations and all of the work that we talked about last year that the Housing area is doing. Operator: Our last question is coming from the line of Grace Carter from Bank of America. Grace Carter: I think that we had previously talked about maybe some seasonality in the Connected Living book in 3Q, just with people more likely to be out in the belt and maybe damaged devices. I was just curious if you could quantify that on a historical basis, just how we’re thinking about how the loss ratio might shape up in the second half of the year? Keith Demmings: Yes. Maybe I’ll offer a couple of thoughts and then I ask Richard to jump in. But definitely, you’re correct. We do see seasonality in Q3. We also see to Richard’s point earlier, lower trade-in volume in the third quarter and higher trade-in volume in the fourth quarter. So as a result, we’d expect to see an improvement in Q4 over Q3 for Connected Living. And to the extent that we’ve got certain mobile programs where we’re on risk, obviously, we see that impact on frequency in our quarterly results in the third quarter. Now we have moved one of our clients to a reinsurance structure, which we talked about, that noneconomic contract change. That certainly will help mitigate some of that impact. But I don’t think we’ve sized what we would expect the delta to be. But Richard, you might want to add some commentary? Richard Dziadzio: Yes. We haven’t sized it, but I would say it’s modest. I mean, really what we wanted to portray is really Q3 is typically a softer quarter from us — for us, for the trade-ins and some claims increase. It’s not hugely material, but it’s enough for us to talk about to really say, hey, when you’re looking at Q3 and Q4, if you’re modeling that, Q3 is going to be softer and Q4 is usually stronger because we don’t have the claims, the increase in claims that we just talked about and then trade-ins are usually higher. Grace Carter: And then I guess on the decrease year-over-year in Global Devices service. To what extent is that driven by the discontinuation of the in-store repair capabilities versus any other factors? Keith Demmings: Yes. That was $400,000 on a year-over-year basis. So you could remove $400,000 from Q2 last year, and that will give you an appropriate comparison. . All right. I think we took all of the questions. So thank you, everyone, for joining today, and we’ll certainly look forward to speaking to you again in November for our third quarter earnings call. And as usual, please reach out to Suzanne and Sean, if you have any follow-up questions. And again, thanks, everybody. Operator: Thank you. This does conclude today’s teleconference. Please disconnect your lines at this time, and have a… Keith Demmings: And Sean, if you have any follow-up questions. And again, thanks, everybody. Follow Assurant Inc. (NYSE:AIZ) Follow Assurant Inc. (NYSE:AIZ) We may use your email to send marketing emails about our services. Click here to read our privacy policy......»»
Koppers Reports Second Quarter 2023 Results; Reaffirms 2023 Outlook
Record Quarter Sales of $577.2 Million vs. $502.5 Million in Prior Year Quarter Second Quarter Diluted EPS of $1.15 vs. $0.55 in Prior Year Quarter Adjusted EPS of $1.26 vs. $0.97 in Prior Year Quarter PITTSBURGH, Aug. 3, 2023 /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 second quarter of 2023 of $24.5 million, or $1.15 per diluted share, compared to $11.7 million, or $0.55 per diluted share, in the prior year quarter. Adjusted net income attributable to Koppers and adjusted earnings per share (EPS) were $26.9 million and $1.26 per share for the second quarter of 2023, compared to $20.5 million and $0.97 per share in the prior year quarter. Consolidated sales of $577.2 million, which was a record quarter, increased by $74.7 million, or 14.9 percent, compared with $502.5 million in the prior year quarter. Excluding a $4.3 million unfavorable impact from foreign currency changes, sales increased by $79.0 million, or 15.7 percent. The Railroad and Utility Products and Services (RUPS) business delivered record quarter sales and higher year-over-year profitability as a result of pricing increases and volume increases for crossties and utility poles, partially offset by higher raw material and operating costs. The Performance Chemicals (PC) segment generated record quarter sales and higher year-over-year profitability driven by pricing increases from renegotiated customer contracts to offset higher costs experienced in the prior year and volume increases on a net basis globally. The Carbon Materials and Chemicals (CMC) segment sales increased from prior year due to increased pricing; however, profitability was unfavorably impacted by higher raw material costs, partly offset by higher pricing and higher volumes in certain markets. President and CEO Leroy Ball said, "Once again, Koppers team members worldwide delivered stellar results even under challenging market conditions. Performance Chemicals continued to have strong year-over-year pricing and recovered most of its higher input costs, while sales volumes remained better than expected. Railroad and Utility Products and Services notched its second-highest profitability quarter in seven years, driven by a favorable pricing environment supported by strong demand in the U.S. utility market. Carbon Materials and Chemicals posted solid results, and at the same time, kept pace in an ever-changing backdrop impacted by the availability of raw materials and demand for end products. I am proud of how Koppers global team continuously exceeds expectations through our unwavering focus on safety, service, quality, and reliability, enabling us to stand out in what has become a much more demanding marketplace." Second Quarter Financial Performance RUPS reported record quarter sales of $234.4 million, an increase of $30.2 million, or 14.8 percent, compared to $204.2 million in the prior year quarter. Excluding an unfavorable impact from foreign currency changes of $0.8 million, sales increased by $31.0 million, or 15.2 percent, from the prior year quarter. The sales growth was primarily driven by $20.3 million of price increases across multiple markets, particularly for crossties and utility poles in the United States. In addition, higher volumes for crossties and utility poles also contributed to the sales increase. Adjusted EBITDA for the second quarter was $22.3 million, or 9.5 percent, compared with $13.2 million, or 6.5 percent, in the prior year quarter. Profitability increased year-over-year due primarily to the price increases and $6.5 million from improved plant utilization, partly offset by higher raw material and operating costs. PC generated record quarter sales of $180.9 million, an increase of $31.3 million, or 20.9 percent, compared to sales of $149.6 million in the prior year quarter. Excluding an unfavorable foreign currency impact of $2.3 million, sales increased by $33.6 million, or 22.5 percent, from the prior year quarter. The year-over-year sales growth was the result of global price increases of $21.0 million, particularly in the Americas for copper-based preservatives as well as an 8 percent increase in volumes globally, driven by the Americas and partly offset by Europe and Australasia. Adjusted EBITDA for the second quarter was $32.3 million, or 17.9 percent, compared with $20.4 million, or 13.6 percent, in the prior year quarter. Compared to the prior year quarter, profitability benefited from renegotiated customer contracts, which allowed for increased pricing in order to recapture prior year cost increases, and higher overall volumes, partly offset by higher raw material costs. Sales for CMC of $161.9 million increased by $13.2 million, or 8.9 percent, compared to sales of $148.7 million in the prior year quarter. Excluding an unfavorable impact from foreign currency changes of $1.3 million, sales increased by $14.5 million, or 9.8 percent, from the prior year quarter. Compared with the prior year period, sales were higher primarily due to $7.2 million in price increases as well as volume increases of refined tar in North America, partly offset by price decreases for certain other products and volume decreases of phthalic anhydride in North America. Adjusted EBITDA for the second quarter was $15.7 million, or 9.7 percent, compared with $21.0 million, or 14.1 percent, in the prior year quarter. The year-over-year decrease in profitability reflected raw material cost increases of $17.2 million, particularly in Europe and North America, partly offset by higher pricing and higher volumes in North America driving improved plant utilization. Capital expenditures for the six months ended June 30, 2023, were $62.6 million, compared with $55.8 million for the prior year period. Net of insurance proceeds and cash provided from asset sales, capital expenditures were $60.6 million for the current year period, compared with $51.1 million for the prior year period. 2023 Outlook Koppers remains committed to expanding and optimizing its business and making continued 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 continues to expect 2023 sales of approximately $2.1 billion, compared with $1.98 billion in the prior year, and 2023 adjusted EBITDA of approximately $250 million, compared with $228.1 million in the prior year. The effective tax rate for adjusted net income attributable to Koppers in 2023 is projected to be approximately 30 percent, which is consistent with the adjusted tax rate in 2022. Accordingly, 2023 adjusted EPS is forecasted to be approximately $4.40, compared with adjusted EPS of $4.14 in 2022. Koppers anticipates capital expenditures of approximately $110 million to $120 million in 2023, including capitalized interest, with $40 million to $50 million of the total allocated to discretionary projects that are expected to generate returns on investment of over 20 percent. Net of cash received from asset sales and property insurance recoveries, the net investment in capital expenditures is expected to be $105 million to $115 million. Commenting on the forecast, Mr. Ball said, "As we close the first half of 2023, I remain confident in our ability to meet and possibly exceed our $250 million adjusted EBITDA forecast for the year. I also believe that we remain on track to reach our $300 million adjusted EBITDA target in 2025, with several attractive opportunities that can take Koppers even further. In the near term, we expect residential treated wood volumes to remain resilient and buck the softening trends seen in most other building products categories. The utility pole market remains as strong as ever, and our customer base is anticipating that the demand strength will continue for the next few years, at minimum. The railroad industry must maintain its infrastructure for safety and reliability; therefore, we are building our inventories and expect to benefit from operational efficiencies associated with higher crosstie treatment volumes. As expected, our current challenge is balancing the volatility in CMC for coal tar and end market demand; however, we are well positioned to manage through it. Serving a diversified mix of infrastructure-related markets through our unique, vertically integrated business model continues to serve us well and remains the biggest driver to our ongoing success." 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 10180228. 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 4206806. The recording will be available for replay through November 3, 2023. 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 and 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; disruption in the U.S. and global financial markets; 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; potential impairment of our goodwill and/or long-lived assets; demand for Koppers goods and services; competitive conditions; interest rate and foreign currency rate fluctuations; availability and costs of key raw materials; 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 CONDENSED CONSOLIDATED STATEMENT OF OPERATIONSAND COMPREHENSIVE INCOME (LOSS)(Dollars in millions, except per share amounts) Three Months Ended June 30, Six Months Ended June 30, 2023 2022 2023 2022 Net sales $ 577.2 $ 502.5 $ 1,090.6 $ 961.8 Cost of sales 464.7 419.4 874.0 789.7 Depreciation and amortization 14.4 13.4 28.4 27.6 (Gain) on sale of assets 0.0 0.0 (1.8) (2.5) Selling, general and administrative expenses 43.7 40.6 85.3 79.7 Operating profit 54.4 29.1 104.7 67.3 Other income, net 0.2 0.4 0.0 1.0 Interest expense 20.3 11.1 34.3 20.9 Income from continuing operations before income taxes 34.3 18.4 70.4 47.4 Income tax provision 9.9 6.8 19.8 16.5 Income from continuing operations 24.4 11.6 50.6 30.9 Loss on sale of discontinued operations 0.0 0.0 0.0 (0.5) Net income 24.4 11.6 50.6 30.4 Net income (loss) attributable to noncontrolling interests (0.1) (0.1) 0.6 (0.1) Net income attributable to Koppers $ 24.5 $ 11.7 $ 50.0 $ 30.5 Earnings (loss) per common share attributable to Kopperscommon shareholders: Basic - Continuing operations $ 1.17 $ 0.56 $ 2.40 $ 1.47 Discontinued operations 0.00 0.00 0.00 (0.02) Earnings per basic common share $ 1.17 $ 0.56 $ 2.40 $ 1.45 Diluted - Continuing operations $ 1.15 $ 0.55 $ 2.34 $ 1.44 Discontinued operations 0.00 0.00 0.00 (0.02) Earnings per diluted common share $ 1.15 $ 0.55 $ 2.34.....»»
MidWestOne Financial Group, Inc. (NASDAQ:MOFG) Q2 2023 Earnings Call Transcript
MidWestOne Financial Group, Inc. (NASDAQ:MOFG) Q2 2023 Earnings Call Transcript August 1, 2023 MidWestOne Financial Group, Inc. beats earnings expectations. Reported EPS is $0.8, expectations were $0.67. Operator: Good morning, ladies and gentlemen and welcome to the MidWestOne Financial Group, Incorporated Second Quarter 2023 Earnings Call. [Operator Instructions] As a reminder, this call is being […] MidWestOne Financial Group, Inc. (NASDAQ:MOFG) Q2 2023 Earnings Call Transcript August 1, 2023 MidWestOne Financial Group, Inc. beats earnings expectations. Reported EPS is $0.8, expectations were $0.67. Operator: Good morning, ladies and gentlemen and welcome to the MidWestOne Financial Group, Incorporated Second Quarter 2023 Earnings Call. [Operator Instructions] As a reminder, this call is being recorded. I would now like to turn the call over to Barry Ray, Chief Financial Officer of MidWestOne Financial Group. Please go ahead. Barry Ray: Thank you everyone for joining us today. We appreciate your participation in our second quarter 2023 earnings conference call. With me here on the call are Chip Reeves, our Chief Executive Officer; and Len Devaisher, our President and Chief Operating Officer. Following the conclusion of today’s conference, a replay of this call will be available on our website. Additionally, a slide deck to complement today’s presentation is also available on the Investor Relations section of our website. Before we begin, let me remind everyone on the call that this presentation contains forward-looking statements relating to the financial condition, results of operations and business of MidWestOne Financial Group Inc. Forward-looking statements generally include words such as believes, expects, anticipates and other similar expressions. Actual results could differ materially from those indicated. Among the important factors that could cause actual results to differ materially are interest rates, changes in the mix of the company’s business, competitive pressures, general economic conditions and the risk factors detailed in the company’s periodic reports and registration statements filed with the Securities and Exchange Commission. MidWestOne Financial Group, Inc. undertakes no obligation to publicly revise or update these forward-looking statements to reflect events or circumstances after the date of this presentation. I would now like to turn the call over to Chip. Charles Reeves: Thank you, Barry and good morning. On today’s call, I will provide an update on the solid progress we have achieved executing our strategic initiatives as we focus on building the foundation for a high performing bank with consistent performance. Len will then provide an update on our major markets and the strong loan growth that we delivered once again this quarter, as well as continued strong results in our wealth management business. Barry will then conclude with an in-depth review of our second quarter financial results. As we discussed on our first quarter call, we have developed a strategic plan as outlined on Slide 4 of our earnings presentation with five key pillars focused on our culture, our strong local banking franchise, expanding our commercial banking and wealth management businesses, expanding into specialty business lines, and improving our efficiency and operations. As outlined on Slide 5, I’m very proud to say that we have made solid progress, executing our plan through the second quarter and what has been a very challenging operating environment. Starting with our commercial banking and wealth management businesses, we are focused on expanding and moving up tier in our major metro markets of the Twin Cities, Denver and Iowa. This is a continuation of the strategy that we have been executing for several years where we have been hiring experienced relationship bankers and wealth management professionals to drive organic growth. That said, we will be doubling down in these markets with a plan to add bankers and expertise targeting revenue companies from 20 million to 100 million. So far this year, we have added several producers in this Twin Cities, and we will continue to add experienced bankers as we work to take share in these attractive markets. This has been a successful strategy as can be seen in our second quarter loan growth of 10% annualized. Overall, we would expect second half loan growth to moderate to mid-single-digits based on the general economic outlook and our own selectivity before reaccelerating, the high-single-digit growth in 2024 and 2025. In our wealth management group, we have also achieved significant assets under management growth driven by the teams recruited in 2021 and 2022, which Len will discuss in more detail. As with our commercial banking business, we will continue to actively recruit wealth management teams in our core markets to drive asset growth and fee income. In our specialty business lines, we are focused on expanding and developing our specialty commercial banking markets or verticals where expertise in customer solutions will drive additional customer acquisition, full relationships and thus drive our company’s profitability. As I discussed on our first quarter call, our plans call for immediate verticals in agribusiness, government guaranteed lending, notably in SBA and commercial real estate. Starting with agribusiness, we have been in the Ag business for a long period of time, primarily focused on small farms in our home state of Iowa. That said, we have been missing significant business opportunities with larger growers and producers as well as suppliers to this industry. To address this opportunity late in the second quarter, we hired an experienced agribusiness lending team from a Midwestern based regional bank. This group has led agribusiness teams for a decade and has strong expertise in relationships across the industry, and they are already beginning to move full relationships to Midwest one. Government guaranteed lending’s also a natural fit for our local and metro bank markets. Our desire is to become one of the leading bank 7A lenders in our footprint. Our SBA leader joined in 2021 and our sales team is being developed. That said, we are seeing momentum building with positive second quarter results, and we anticipate this initiative will be a meaningful fee income contributor in 2024 and beyond. As I mentioned on our fourth quarter call, our Twin Cities commercial banking leader has extensive super regional bank experience in the CRE space, and as leading this segment for the bank, we are designing the CRE vertical for consistency, robust portfolio management and client selection. A key aspect of our strategic initiatives is improving our operational effectiveness, and we are working to identify areas for efficiency gains and cost reduction in order to achieve our goal. Our expectations are to reallocate 2.5% of our operating expense space in the more productive, profitable markets and departments, and then to reduce an additional 2.5% of our Q4 2022 operating expense run rate. That will improve our go forward operating expenses. We initiated the first action in mid-April as we scaled back our mortgage operations, reflecting the current macro environment, as well as a sharpened focus on mortgage originations from Midwest one customers. Additional actions commenced in June, including a voluntary employee retirement program, the expense of which was taken in our second quarter, while the full compensation reduction realization will be the fourth quarter of 2023. We continue to engage with a third-party consultant to review remaining efficiencies with additional opportunities likely in the third quarter. As we drive change across the bank, I could not be more proud of our employees’, continued commitment to our company, customers and communities. We are in the midst of reorienting our culture. One, continue to be focused on our clients and employees. As we increase our focus on innovation, performance and results. I’m very proud of the progress that we are making. It is a testament to our employees in the bank who have been nationally recognized as a top workplace in both our Iowa and Twin Cities markets, as well as Newsweek’s best small bank in Iowa. To conclude, we have made substantial progress, executing our strategic initiatives over a very short period of time. All the while in the midst of a challenging market environment. Though we have much more work to do, I remain confident in our goal of delivering financial results at the median of our pure group as we exit 2025. Now, I would like to turn the call over to Len. Len Devaisher: Thank you, Chip, and good morning everyone. Our sales teams across the bank are clear about our number one priority. Deposit generation, we are seeing the fruit of those efforts. In the first half of this year, we are proud of a net new account growth rate of more than 1%. As Slide 6 illustrates, we were able to arrest the deposit decline in June, and we are pleased to see those balances remain stable in July. Notably, our deposit results in the second quarter are driven by balance growth in our commercial segment, offsetting a runoff of public funds, time deposits, particularly in the month of May. Speaking of our commercial team, they are driving strong growth on the asset side of the balance sheet too. Our nearly $94 million of balance growth in the second quarter was driven by Twin Cities, Iowa Metro, and Denver. These same three regions have led the way in our year-to-date loan growth. Compared to the first half of 2022 new originations this year are up 4% and loan origination fee production is up 22%. Our loan story is about growth, but it is also about profitability and risk. We are pleased that our weighted average coupon of new commercial originations in June was 7.13%, which is up from 6.68% in April. Our credit risk profile with low net charge offs of only nine basis points, stable non-performing at only 22 basis points, and the leading indicator of 30 plus day delinquency at a very low 15 basis points. As Slide 9 shows, we are well positioned with a diversified loan portfolio without undue concentration in CRE and only 3.8% in non-owner occupied office exposure. Turning to Slide 10, the talent investments and wealth also continue to bear fruit. AUM and revenue continue to climb, and we are pleased that our year-to-date new AUM is at $97 million more than twice the same period last year. In our investment services division, second quarter revenue was up 10.6% from the first quarter. Wealth momentum continues to be strong. With that, I’m pleased to turn the call over to our CFO, Barry Ray to discuss our financial results. Barry Ray: Thank you, Len. I will walk through our financial statements beginning with the balance sheet on Slide 12. Starting with assets, loans increased 99.2 million or 10.6% annualized from the linked quarter to $4 billion. Strength in the second quarter was led by commercial loans, which increased 93.9 million or 12.2% annualized from the linked quarter, and the overall portfolio yield was 5.05%, a 10 basis point improvement from the linked quarter. During the quarter, the allowance for credit losses increased 26 million to 50.6 million or 1.25% of loans held for investment at June 30th. The increase was due to credit loss expense of $1.6 million attributable to organic loan growth, which was partially offset by net loan charge offs of $0.9 million. Turning to deposits, the dislocation following the bank failures in March of this year impacted our deposit franchise as we experienced net deposit outflows through April and May. But positively, that trend reversed in June. That said, total deposits decreased $109.7 million to $5.4 billion from the linked quarter. Public funds deposits accounted for nearly $98 million of the net deposit outflows as the cost of retaining those deposits exceeded the cost of alternative funding sources for similar tenors. The rising interest rate environment combined with the residual of those subsiding stress in the banking sector has resulted in firm competitive dynamics for deposits, while also having impacted our cost of funds to incur a further increase during the second quarter. Specifically, the cost of interest-bearing liabilities rose 39 basis points to 1.98% comprised of increases to our interest-bearing deposits, short-term borrowing costs, and long-term debt costs. Finishing the balance sheet, total shareholders’ equity experienced an increase of $0.7 million to $501.3 million, driven primarily by second quarter net income, partially offset by an unfavorable accumulated other comprehensive loss of $3.8 million and cash dividends of $3.8 million. Turning to the income statement. On Slide 15, net interest income declined $3.1 million in the second quarter to $37 million as compared to linked quarter due primarily to higher funding costs and volumes, and a reduction in interest earning asset volumes partially offset by higher interest earning asset yields. Our net interest margin declined 23 basis points to 2.52% in the second quarter as compared to 2.75% in the length quarter. Our NIM in the second quarter continued to be impacted by the Federal Reserve’s rising interest rates resulting in an increase in our funding costs, which significantly outpaced the increase of 12 basis points in our total interest earning asset yields. Non-interest income in the second quarter increased $12.8 million, primarily due to the investment securities losses of $13.2 million in the linked quarter related to our balance sheet repositioning in the first quarter. Finishing with expenses, total non-interest expense in the second quarter was $34.9 million, an increase of $1.6 million or 4.8% from the linked quarter. The increase was primarily due to $1.4 million of one-time expenses related to a voluntary early retirement program and executive relocation expenses. Excluding these one-time expenses, non-interest expense was stable from the first quarter’s level. As Chip mentioned, we remain focused on improving our efficiency and operations, including cost reductions, a key pillar of our strategic plan. Specifically by the end of this year, we expect to reduce our annual expense run rate by approximately $3.25 million and reallocate another $3.25 million of our annual expense base into more productive, profitable markets and departments. We expect our quarterly expense run rate for the balance of the year to be in line with the first quarter. And with that, I will turn it back to the operator to open the line for questions. Q&A Session Follow Midwestone Financial Group Inc. (NASDAQ:MOFG) Follow Midwestone Financial Group Inc. (NASDAQ:MOFG) 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 the line of Brendan Nosal with Piper Sandler. Brendan please go ahead, your line is open. Brendan Nosal: Just to start off here. Maybe to start off on the margin. Can you just walk us through how the kind NIM of trended over the course of the quarter and where it ended up for the month of June, just trying to gauge a good jumping off point in the third quarter. Barry Ray: Yes. Over the course of the quarter, the margin was as follows: We were at 2.64% in the month of April, 2.46% in May and then 2.48% in June, Brendan. Brendan Nosal: Okay. All right. That is super helpful. Maybe one more before I step back. I noticed you drew from the bank term funding program during the quarter. Just take us through the use of that funding source versus other options and expected borrowing needs as we move through the back half of the year. Barry Ray: Yes, we saw an opportunity to take advantage of the attractive features of the bank term funding program. For an instance, we were continuing to see net deposit outflows. And so to the extent that we continue to utilize that in the future, that is really going to be dependent upon what we can see with deposits. As we said, we were pretty happy with deposits stabilizing in the third month of the quarter and on into July. And so that was how we were thinking about the bank term funding program has some attractive features. Len Devaisher: It was a cheaper cost of funds than overnight borrowing at the time that we have done it and likely actually still remains so. Operator: Next question comes from Ben Gerlinger with Hovde Group. Ben please go ahead, your line is open. Benjamin Gerlinger: The loan growth was pretty solid and I think the guidance was for kind of a step down kind of the mid-single-digit range. Just curious more so a function of deposit gathering costs there. Is it risk-adjusted yields that you are just kind of getting competed out on or is it more so just an economic fear in general or obviously, the mix of the three, but I was just kind of just waiting those as sort of the reason why it stepped down in loan growth projections? Charles Reeves: So Ben, this is Chip. I will take a little bit and turn it to Len for more of the market view. I think that step down for us is the origination activity, we believe, will still be extremely solid. But we are being more selective, frankly, in what we are putting on the books and not just from a credit standpoint but from an interest rate. And then in our commercial loan renewals, specifically our maturity schedules, I would say that we are exiting non relationship-driven customers that do not have deposits with us as we cycle through renewal schedules. So as we do that and become a little bit more selective, we see for asset dampening as such from our first half of the year. But overall, solid originations, and I will have Len speak to that. Len Devaisher: Yes. Thanks, Chip. Ben, I would just add, we are very active in managing the pipeline. And when we talk about pipeline, we talk about really three things: origination, funding and payoffs. And so just as we look ahead and think about, what is going to happen, we handicap when we think closings are going to happen if the funding to follow those. And then also on the payoff side, we do have a couple of our commercial customers selling assets, selling a business, those kinds of things that we anticipate in the third quarter. So that impacts that. And then the last variable that really is a little harder to handicap is line usage. I would note that line usage is down for us. When we exited the first quarter at 36%, it is down to 33% as we exited the second quarter. So all of that is factoring in. Benjamin Gerlinger: Got you. That is helpful. And then I get that the expense has some relatively onetime I don’t know it would be the retirements, but you are also hiring some people across the footprint. I guess these kind of more so onetime items could be – you get a clean quarter in 4Q. But all the while, your hiring people as well, just any guidance you can give to kind of what the non-core – excuse me, what a core expense base would be going forward or when we should see just pure core expenses? Barry Ray: Yes. I would say that, as we said in the comments, $33.5 million is kind of what we are thinking of is a core expense run rate in the near term. When we get to that, a lot of the actions that we have been talking about with respect to improving our efficiency of operations are going to be happening throughout this year. So I would say, first quarter of next year is when you are going to see core expense run rate. Operator: Our next question comes from Terry McEvoy with Stephens. Terry please go ahead, your line is open. Terence McEvoy: Maybe a first question for Barry, just managing interest rate sensitivity. How is the bank’s balance sheet position today for the rate cut we just had and maybe one more later this year? And how are you thinking about managing around some potential rate cuts next year if the forward curve is accurate? Barry Ray: We are liability-sensitive, Terry and so if we get rate cuts, I would say that would be a positive for us with respect to the way our balance sheet is positioned. So that is how we are thinking about that. With respect to some of the things that we are doing from a balance sheet management perspective should rates stay where they are, we are continuing to look at – given the fact that we are liability-sensitive, we are looking at balance sheet hedging strategies to mitigate the interest rate risk sensitivity and our liability sensitivity. Terence McEvoy: And then maybe a couple of questions on the banker hires and teams. I guess the new Agribusiness team, do they have a different skill set or business model compared to kind of the existing Ag bankers? So I’m just trying to see if they bring something different or is an expansion of kind of the existing business model and focus. Charles Reeves: Terry, this is Chip. And then again, I will have Len provide some further commentary. There, I think ultimately, across our commercial banking franchise, both in any of the specialty lines that we begin to build, but also just in our core C&I business in our invested markets that we label as investment markets we are really moving up here in terms of our overall strategy and that customer base that we are reaching and the prospect base that we are reaching. So Len, do you want to articulate around the agribusiness team? Len Devaisher: Yes. Thanks, Chip. It really is a story. This team is coming to us from a larger regional that has – they have got the track record and importantly, the relationships that have shown in our footprint to be able to go to that next segment because our legacy business has done a great job serving communities and smaller producers and family farms, those kinds of things. This is really a complement to that legacy. Charles Reeves: And to give you a sense, Terry, our average account size or loan size in our current Ag business space is only about $400,000 to $500,000. And this group typically plays in the $2 million to $10 million space in terms of loan relationship, while we have seen positive activity, and it is not just been on the lending side, this is also full relationship and depository. Terence McEvoy: That is a great color. And maybe if I could squeeze one more in. The government lending group, as that evolves, will that generate a line item on the income statement for fees related to the sale of those loans as well as will you hold the unguaranteed portion and if so, what would be the targeted size over time as a percentage of the portfolio. Barry Ray: This is Barry. I will take the piece. The gain from the SBA loan sale will be included in what we have on our income statement as a loan revenue item. So the $250,000 or so that we generated this quarter is included in that line item. Did that answer your question? Terence McEvoy: And the unguaranteed part on the balance sheet and that will be held on the balance sheet? Charles Reeves: Terry overtime, so let us go into the span of our strategic plan 2025, we could see this being about $40 million a year of annualized originations. If you go 25% being held, that is only $10 million in terms of being held on an annualized basis moving forward. So as a percentage of our loan portfolio, de minimis as a percentage of some of the fee income being generated from gain on sale activity, it would be – end up being a meaningful contributor to us. Operator: The next question comes from Damon DelMonte with KBW. Damon please go ahead, your line is open. Damon DelMonte: Just wanted to start off with a question on the margin kind of as a follow-up here. Barry, thanks for the color on the quarterly levels. as we kind of think about the back half of the year, do you feel you are going to be able to kind of mitigate some of the pressures that you’ve seen in the last couple of quarters? Is it going to start to slow as new loans continue to come on the books or could you just provide a little color around the expected cadence for the back half of the year? Barry Ray: Yes. Thank you, Damon. And some of the things that we have been modeling internally is assuming that the FOMC hits pause on their rate increases and then deposits stabilize as we have experienced over the course of the past couple of months and we continue the loan growth, how we are expecting the margin would be – we expect some continued compression into the third quarter and then stabilizing in the fourth quarter and perhaps inflecting in early part of next year is kind of how we are thinking about the margin based upon our internal model. That is our expectations, Damon. Damon DelMonte: Okay. That is helpful. And then with respect to the agri business hires, how big of a component of your overall loan portfolio do you envision the Ag portion being especially since as you guys noted, bigger credits that they put on versus kind of what the legacy portfolio has? Len Devaisher: Yes. Damon, this is Len. As you know, our Ag portfolio today represents about 7% of our loan portfolio. So I would expect it to move forward and to move up. And what I would say, the other thing is that some of what they’ll be doing is really outside the farm gate, and it is going to show up in the C&I piece as well as we think about the business of agri business. So I think we’d probably cap out in that 10% or less range. Damon DelMonte: Got it. Okay. From the Ag specific, not what goes into C&I as well? Len Devaisher: You got it, 10% or less on the Ag component. Damon DelMonte: Got it. Okay. That is helpful. And then just lastly on the expenses. In the prepared remarks, did you guys say that you expect kind of third quarter level to be similar – more similar to the first quarter level? Did I hear that correctly? Barry Ray: You did, Damon. But again, on a core basis, I would say. Charles Reeves: Yes, just Damon – this is – we are moving through enough just continued review of our efficiency and operations that we may be lumpy. Here, obviously, we had some onetime in Q2. We may have some onetime in Q3 as well. And I think Barry alluded to core should be that 33.5% range and not where we end up being from a stated number, Q4 to Q1 where we will see the settling down of any of the one-timers. Operator: The next question comes from Brian Martin with Janney Montgomery Scott. Brian please go ahead. Brian Martin: So just one follow-up on expenses, Barry. I mean, can you give some kind of thought on where the expenses – will they normalize as you enter next year? It sounds like the next two quarters, it sounds like there is some consultants or some possibility a little bit more improvement here in the back half. But just as you talked about the step down as you get into next year, can you kind of give us a how we should be thinking about expenses for next year as you jump in the first quarter? Barry Ray: Yes. As we have discussed kind of when we think about an actual dollar reduction in expenses, Brian, we have been talking about that in terms of like the $3.25 million on an annual basis. And so I would say that we are going to have some normal expense increases in the first quarter of next year, just for salaries, for example. So whatever you are modeling for that and then the number that we are targeting is the $3.25 million per annual reduction. So if you put those two pieces together, that should approximate a good run rate for beginning of next year. Brian Martin: Got you. Okay. That is perfect. And then how about just the funding of the loan growth in the second half of the year, the contraction you saw in deposits versus the better rates elsewhere, how should we think about you guys funding the loan growth back half of the year and just kind of how that goes along with your outlook on deposit flows? Barry Ray: Yes. We are going to continue to take advantage of – our investment portfolio is continuing to run down, Brian. I think in 2024, we get about $160 million of cash flows off of that and that is going to ramp up a bit more in 2025. So the second half of the year, we will continue to leverage investment portfolio cash flows to the extent that we need to supplement any deposit outflows, we would look at borrowing overnight perhaps, and then what can we do with the hedging strategy with respect to that. Brian Martin: Okay. And the cash flows in the second half of the year, Barry, on the bond portfolio, how much is that or did you disclose that? Barry Ray: I didn’t disclose that, Brian. I don’t have it in front of me, but I can get it to you. Brian Martin: Okay. Yes. Maybe it is about half of you talk about maybe in a range -. Barry Ray: I think we are roughly about $150 million for the year, Brian, so let’s call it, $75 million. Brian Martin: Yes. Okay. That sounds about right. Okay. I appreciate it. And then just the last one for me was on criticized and classified levels. I mean the NPAs were pretty stable, but some increases in both criticized and classified. Maybe can you just give a little thought on that and I guess, how you feel about these credits or kind of the portfolio where else you are seeing some of the stress? Charles Reeves: Sure, Brian. This is Chip Reeves. Gary Sims, our Chief Credit Officer, is with us in the room today, and we will have Gary answer that question for you. Gary? Gary Sims: Yes. Thanks, Chip. Hi Brian, as we did point out, our increase in criticized and classified, it is primarily in that non-owner-occupied category. And like most of our peers, we are seeing weakness in the office space. We believe we have identified the appropriate level of weakness and that office space total portfolio is 3.8% of the overall portfolio. So we feel like it is manageable through this cycle. Brian Martin: Okay. So are the two credits, both office properties, Barry, or I guess the -. Gary Sims: Yes. Yes, Brian, the increase in the classified were both office, non-owner-occupied office. When you take into account the increase in the credit side as well, we did see some deterioration in our senior living credits as well. So from a thematic perspective, senior living and office is where we have seen the weakness so far, Brian. Does that help? Brian Martin: Okay. Yes, yes. And just in general, the senior living, how bigger portfolio is that? Is that relatively small in size versus the office portfolio? Gary Sims: Yes. The office portfolio is 3.8% of our overall loan portfolio. The senior living portfolio is 6.1% of our overall portfolio. Brian Martin: Okay. Okay. And just on credit right now that is past due there or just in criticized? Gary Sims: Right. It is not past due. We did downgrade it to criticized status. And it was one credit that drove most of that increase. There is more than one credit that is in the criticized and classified portfolio in the senior living. Operator: Those are all the questions we have for today. So I will turn the call back to Chip Reeves for closing remarks. A – Charles Reeves: Thank you, everyone, for your time and interest in MOFG. As mentioned today, we are making solid progress on our strategic plan initiatives, and we look forward to sharing more details next quarter. Thanks, everyone. Operator: Thank you, everyone, for joining us today. This concludes our call, and you may now disconnect your lines. Follow Midwestone Financial Group Inc. (NASDAQ:MOFG) Follow Midwestone Financial Group Inc. (NASDAQ:MOFG) We may use your email to send marketing emails about our services. Click here to read our privacy policy......»»
Prudential (PRU) to Report Q2 Earnings: What to Expect
Prudential's (PRU) Q2 results are likely to reflect lower net investment spread results, underwriting results and fee income, offset by higher service & other revenues and fixed income reinvestment rates. Prudential Financial, Inc. PRU is slated to report second-quarter 2023 earnings on Aug 1, after market close. PRU delivered a negative earnings surprise in the last reported quarter.Factors to ConsiderThe U.S. business is likely to have been affected by lower fee income, net of distribution expenses and other associated costs in Individual Retirement Strategies business and lower income on non-coupon investments. The downside is likely to have been partially offset by higher underwriting results and more favorable disability results in its Group Insurance business.Prudential Financial’s international businesses are likely to have been affected by unfavorable net impact from foreign currency exchange rates due to lower net investment spread results and underwriting results.Group Insurance business in the to-be-reported quarter is likely to have benefited from higher underwriting results in group life business, improved underwriting results in group disability business and more favorable claims experience on long-term disability contracts as well as business growth. The upside is expected to have been partially offset by lower net investment spread results driven by lower income on non-coupon investments.PGIM is likely to have decreased due to lower asset management fees, net of related expenses. The downside is likely to have been partially offset by higher other related revenues, net of related expenses, and improved service, distribution and other revenues.Assets under management are likely to have been affected by higher interest rates, equity market depreciation, net outflows and unfavorable foreign exchange rate impacts.Net investment income is likely to have benefited from higher fixed-income reinvestment rates and improved returns on short-term investments based on an increase in short-term rates. We expect net investment income to increase 1.1% to $3.2 billion in the to-be-reported quarter.Expenses are likely to have increased because of higher policyholders’ benefits, interest credited to policyholders’ account balances, dividends to policyholders, and general and administrative expenses. We expect total expenses to decrease 8% to $10.8 billion.The Individual Retirement Strategies business is likely to have benefited from higher net investment spread results due to more favorable short-term interest rates and growth in indexed variable annuities. The upside is likely to have been partially offset by lower fee income, net of distribution expenses and other associated costs, unfavorable equity markets and net outflows.The company estimates earnings per share to be $3.29 for the second quarter of 2023.The Zacks Consensus Estimate for earnings per share is pegged at $3.04, indicating an increase of 74.7% from the year-ago period’s reported figure.The Zacks Consensus Estimate for revenues is pegged at $12.6 billion, indicating a decline of 7.9% from the year-ago reported figure.What Our Quantitative Model UnveilsOur proven model does not predict an earnings beat for Prudential Financial 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 Financial has an Earnings ESP of 0.00%. This is because both the Most Accurate Estimate and the Zacks Consensus Estimate are pegged at $3.04. 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. Quote Zacks Rank: Prudential Financial has a Zacks Rank #3 at present.Stocks to ConsiderSome insurance stocks with the right combination of elements to deliver an earnings beat this time around are:Lemonade, Inc. LMND has an Earnings ESP of +3.10% and a Zacks Rank #3 at present. The Zacks Consensus Estimate for second-quarter 2023 earnings indicates a year-over-year increase of 7.2%. You can see the complete list of today’s Zacks #1 Rank stocks here.LMND’s earnings beat estimates in three of the last four quarters and missed in the other one.American Equity Investment Life Holding Company AEL has an Earnings ESP of +1.12% and a Zacks Rank #2 at present. The Zacks Consensus Estimate for second-quarter 2023 earnings is pegged at $1.65, indicating a year-over-year increase of 68.3%.AEL’s earnings beat estimates in three of the last four quarters and missed in the other one.Brighthouse Financial, Inc. BHF has an Earnings ESP of +0.42% and a Zacks Rank #3 at present. The Zacks Consensus Estimate for second-quarter 2023 earnings is pegged at $3.55, indicating a year-over-year increase of 7.9%.BHF’s earnings beat estimates in two of the last four quarters and missed in the other two.Stay on top of upcoming earnings announcements with the Zacks Earnings Calendar. Top 5 ChatGPT Stocks Revealed Zacks Senior Stock Strategist, Kevin Cook names 5 hand-picked stocks with sky-high growth potential in a brilliant sector of Artificial Intelligence. By 2030, the AI industry is predicted to have an internet and iPhone-scale economic impact of $15.7 Trillion. Today you can invest in the wave of the future, an automation that answers follow-up questions … admits mistakes … challenges incorrect premises … rejects inappropriate requests. As one of the selected companies puts it, “Automation frees people from the mundane so they can accomplish the miraculous.”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 American Equity Investment Life Holding Company (AEL): Free Stock Analysis Report Brighthouse Financial, Inc. (BHF): Free Stock Analysis Report Lemonade, Inc. (LMND): Free Stock Analysis ReportTo read this article on Zacks.com click here.Zacks Investment Research.....»»
Insurance Stocks to Watch for Q2 Earnings on Aug 1: ALL, AFL & More
Improved premiums resulting from rate increases are expected to have driven the Q2 performance of ALL, AFL, AIG, PRU and UNM. An active catastrophe environment is likely to have dented growth prospects. The insurance industry is anticipated to have gained on prudent rate hikes, solid retention rates, new business growth, improved investment yields, a merger and acquisition (“M&A) strategy and continuous technological advancements in second-quarter 2023. However, an active catastrophe environment and continued inflationary pressures are likely to have dampened growth prospects for insurers. Some of the insurers, including The Allstate Corporation ALL, Aflac Incorporated AFL, American International Group, Inc. AIG, Prudential Financial, Inc. PRU and Unum Group UNM, are set to report their second-quarter earnings on Aug 1.The insurance space is housed within the broader Finance sector (one of the 16 broad Zacks sectors within the Zacks Industry classification). Per the latest Earnings Preview, the total earnings of finance companies for second-quarter 2023 are anticipated to rise 13.2% from the prior-year quarter’s reported figure. These companies’ revenues are anticipated to improve 7.4% year over year.Factors Likely to Shape Insurers’ Performance in Q2Revenues of insurance companies are likely to have benefited from an expanding premium base, which resulted from continued rate hikes, exposure growth and solid customer retention rates in the second quarter. Growing premiums bode well for insurers as they account for a significant chunk to their top line.The commercial property insurance rates in the United States witnessed an increase of 10.7% in the to-be-reported quarter, per the Texas-based insurance distribution and underwriting company, MarketScout. According to the same source, rate increases in general liability and inland marine insurance lines registered rate increases of 7% and 5%, respectively, in the second quarter. A solid capital position enables insurers to pursue an M&A strategy to build diversified portfolios, which is likely to have minimized concentration risks and boosted the sale of insurance policies in the second quarter. Higher policy sales might fetch higher premiums to insurers.However, an active catastrophe environment is expected to have created roadblocks for insurers’ underwriting results in the to-be-reported quarter. Per JP Morgan analysts, insured losses from major natural catastrophes are likely to be less than $10 billion in the second quarter, with the majority of such losses stemming from storms in June. Despite its associated share of worries, catastrophe losses usually ramp up the policy renewal rate and prompt insurers to implement rate hikes. Insurers are also equipped with reinsurance covers and favorable reserve development to counter catastrophe losses.For insurers having exposure to rate-sensitive products, an improved interest rate environment is expected to have boosted their investment yields in the second quarter. An aging U.S. population might have sustained the solid demand for insurance and protection products of life insurers, fetching steady premium flows.A higher number of cars plying on roads as a result of receding pandemic effects is likely to have boosted auto premiums of insurers in the to-be-reported quarter. However, persistent inflationary headwinds and uninterrupted claim expenses might have exerted strain on the profits of auto insurers.The resumption of commercial and industrial activities in full swing is expected to have provided an impetus to the demand for worker compensation insurance coverage in the second quarter.The insurance industry frequently resorts to significant technology investments in light of a booming digital era, which are expected to have accelerated claim payments and automated processes. These investments are likely to have curbed costs and aided the margins of insurers in the second quarter. Let’s find out how the following insurers are placed before their second-quarter 2023 results on Aug 1.The Zacks model suggests that a company needs to have the right combination of the two key ingredients — a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) — to increase the odds of an earnings beat. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.You can see the complete list of today's Zacks #1 Rank stocks here.Allstate: Its results are likely to have benefited on the back of higher premiums in the Property-Liability segment resulting from improved average premiums in its auto insurance business and policy growth in the homeowners’ insurance business. Growing market-based investment income are expected to have aided quarterly results. However, elevated loss costs resulting from persistent inflationary pressure and the continued incidence of catastrophe losses might have hurt the performance of Allstate in the second quarter. (Read more: Allstate to Report Q2 Earnings: Here's What to Expect)The Zacks Consensus Estimate for Allstate’s second-quarter 2023 earnings is pegged at a loss of $3.83 per share, wider than the prior-year quarter’s loss of 76 cents. The consensus mark for revenues is pegged at $14.2 billion, suggesting a 9.7% growth from the year-ago quarter’s reported figure.ALL has an Earnings ESP of 0.00% and a Zacks Rank #5 (Strong Sell).Allstate’s earnings outpaced estimates in each of the trailing four quarters, the average surprise being 18.51%. The same is depicted in the chart below:The Allstate Corporation Price and EPS Surprise The Allstate Corporation price-eps-surprise | The Allstate Corporation QuoteAflac: In the second quarter, the results of Aflac are expected to have been driven by growing adjusted net investment income in the Aflac U.S. segment. Aflac Japan might have gained from from the launch of an enhanced cancer insurance product, thereby leading to increased persistency rates and higher sales. Numerous cost-curbing initiatives are likely to have lifted margins in the to-be-reported quarter. (Read more: Is a Beat in Store for Aflac This Earnings Season?)The Zacks Consensus Estimate for AFL’s second-quarter 2023 earnings is pegged at $1.42 per share, indicating a 2.7% decline from the prior-year quarter’s reported figure. The consensus mark for revenues stands at $4.5 billion, suggesting a 16.3% plunge from the year-ago quarter’s reported figure.Aflac has an Earnings ESP of +1.41% and a Zacks Rank #3.AFL’s earnings outpaced estimates in each of the trailing four quarters, the average surprise being 8.23%. The same is depicted in the chart below:Aflac Incorporated Price and EPS Surprise Aflac Incorporated price-eps-surprise | Aflac Incorporated QuoteAmerican International: Revenues of AIG are likely to have benefited on the back of higher premium income as a result of strength in commercial and personal lines businesses. The General Insurance segment might have witnessed rate increases, higher retention rates and new business growth in the second quarter. However, a decline in alternative investment income and lower fee income are expected to have been a roadblock for AIG’s Life and Retirement unit. (Read more: What’s in the Cards for American International’s Q2 Earnings?)The Zacks Consensus Estimate for AIG’s second-quarter 2023 earnings is pegged at $1.54 per share, which indicates a 29.4% rise from the prior-year quarter’s reported figure. The consensus mark for revenues stands at $12.3 billion, suggesting a 12.7% growth from the year-ago quarter’s reported figure.American International has an Earnings ESP of -0.56% and a Zacks Rank of #3.AIG’s earnings outpaced estimates in three of the trailing four quarters and missed the mark once, the average surprise being 9.22%. The same is depicted in the chart below:American International Group, Inc. Price and EPS Surprise American International Group, Inc. price-eps-surprise | American International Group, Inc. QuotePrudential Financial: Its second-quarter performance is expected to have gained from improved underwriting and favorable disability results in the Group Insurance business. Net investment income might have benefited from increased fixed-income reinvestment rates and higher returns on short-term investments. However, assets under the management of Prudential Financial are likely to have been hit by higher interest rates, weaker equity markets, net outflows and unfavorable foreign exchange rate impacts. The Zacks Consensus Estimate for PRU’s second-quarter 2023 earnings of $3.04 per share indicates a 74.7% surge from the prior-year quarter’s reported figure. The consensus mark for revenues is pegged at $12.7 billion, suggesting 7.9% fall from the year-ago quarter’s reading.Prudential Financial has an Earnings ESP of 0.00% and is Zacks #3 Ranked.PRU’s earnings missed estimates in each of the trailing four quarters, the average negative surprise being 13.74%. The same is depicted in the chart below:Prudential Financial, Inc. Price and EPS Surprise Prudential Financial, Inc. price-eps-surprise | Prudential Financial, Inc. QuoteUnum: In the second quarter, Unum’s performance are likely to be aided by strong group product lines results, which in turn, might have resulted from favorable claim trends in group disability. Solid agent recruiting and productive small case sales might have benefited the Colonial segment. However, an elevated operating expense level is expected to have partially offset the upside in the to-be-reported quarter.The Zacks Consensus Estimate for UNM’s second-quarter 2023 earnings is pegged at $1.87 per share, indicating a 2.1% decline from the prior-year quarter’s reported figure. The consensus mark for revenues stands at $3.1 billion, suggesting a 0.8% growth from the year-ago quarter’s reported figure.Unum has an Earnings ESP of -0.06% and a Zacks Rank #2.UNM’s earnings outpaced estimates in three of the trailing four quarters and missed the mark once, the average surprise being 18.61%. The same is depicted in the chart below:Unum Group Price and EPS Surprise Unum Group price-eps-surprise | Unum Group QuoteStay on top of upcoming earnings announcements with the Zacks Earnings Calendar. Top 5 ChatGPT Stocks Revealed Zacks Senior Stock Strategist, Kevin Cook names 5 hand-picked stocks with sky-high growth potential in a brilliant sector of Artificial Intelligence. By 2030, the AI industry is predicted to have an internet and iPhone-scale economic impact of $15.7 Trillion. Today you can invest in the wave of the future, an automation that answers follow-up questions … admits mistakes … challenges incorrect premises … rejects inappropriate requests. As one of the selected companies puts it, “Automation frees people from the mundane so they can accomplish the miraculous.”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 American International Group, Inc. (AIG): Free Stock Analysis Report Prudential Financial, Inc. (PRU): Free Stock Analysis Report Aflac Incorporated (AFL): Free Stock Analysis Report The Allstate Corporation (ALL): Free Stock Analysis Report Unum Group (UNM): Free Stock Analysis ReportTo read this article on Zacks.com click here.Zacks Investment Research.....»»
AllianceBernstein Holding L.P. (NYSE:AB) Q2 2023 Earnings Call Transcript
AllianceBernstein Holding L.P. (NYSE:AB) Q2 2023 Earnings Call Transcript July 28, 2023 Operator: Thank you for standing by and welcome to the AllianceBernstein Second Quarter 2023 Earnings Review. At this time, all participants are in a listen-only mode. After the remarks, there will be question-and-answer session and I will give you instructions on how to […] AllianceBernstein Holding L.P. (NYSE:AB) Q2 2023 Earnings Call Transcript July 28, 2023 Operator: Thank you for standing by and welcome to the AllianceBernstein Second Quarter 2023 Earnings Review. At this time, all participants are in a listen-only mode. After the remarks, there will be question-and-answer session and I will give you instructions on how to ask questions at that time. As a reminder, this conference is being recorded, and will be available for replay on our website shortly after the conclusion of this call. I would now like to turn the conference over to the host for this call Head of Investor Relations for AB, Mr. Mark Griffin. Please go ahead. Mark Griffin: Thank you, Operator. Good morning, everyone, and welcome to our second quarter 2023 earnings review. This conference call is being webcast and accompanied by a slide presentation that’s posted in the Investor Relations section of our website, www.alliancebernstein.com. With us today to discuss the company’s results for the quarter are Seth Bernstein, our President and CEO; and Bill Siemers, Interim CFO, Controller and Chief Accounting Officer. Karl Sprules, Chief Operating Officer; and Onur Erzan, Head of Global Client Group and Private Wealth will join us for questions after our prepared remarks. Some of the information we’ll present today is forward-looking and subject to certain SEC rules and regulations regarding disclosure. So I’d like to point out the Safe Harbor language on Slide 2 of our presentation. You can also find our Safe Harbor language in the MD&A of our 10-Q, which we filed yesterday. Under Regulation FD management may only address questions of material nature from the investment community in a public forum. So please ask all such questions during this call. Now, I’ll turn it over to Seth. Seth Bernstein: Good morning and thank you for joining us today. In the second quarter, equity markets continued to rebound with the bulk of the gains in June led by a small number of large U.S. technology companies. Government bond yields rose amidst generally higher rates and a significant drop in market volatility. We generated net inflows two of three months in the quarter led by U.S. retail and our global fixed income platform, both growing at 9% annualized organically. Our municipal SMA platform continued to gain market share growing for the 11th of the last 12 quarters. Our institutional pipeline grew to $14.4 billion, up 10% sequentially reflecting several active equity wins and our private market AUM ended the quarter at $61 billion, up 13% year-over-year apples-to-apples, as still in CarVal had been owned last June 30 and up 5% sequentially. During the quarter, Equitable Holdings made its second $10 billion commitment to grow this platform in the coming years. Let’s get into the specifics, starting with a firm-wide overview on Slide 4. Gross sales were $22.4 billion, down $1.5 billion or 6% from the year ago period. Firm-wide active net outflows were $4 billion, reflecting $6 billion of pre-announced low fee redemptions early in the quarter. Net flows were positive in both May and June. Quarter end assets under management of $692 billion increased by 7% year-over-year and were up 2% sequentially. And average assets under management of $678 billion, was down 1% year-over-year and up 2% sequentially. Slide 5 shows our quarterly flow trend by channel. Firm-wide second quarter net outflows were $4 billion or a positive $2.2 billion, excluding pre-announced low-fee redemptions of $6.2 billion. Retail growth sales of $16.5 billion declined 5% year-over-year and slightly sequentially. Net outflows were $700 million despite strong demand for taxable and municipal fixed income of 9% and 13% annualized organically, respectively. Our institutional channel had gross sales of $1.5 billion declining from prior quarters. Net outflows were $3.2 billion, reflecting the pre-announced low-fee redemptions. In Private Wealth, gross sales were resilient at $4.4 billion driven by money market funds and private alternatives. Net flows were flat in a seasonally slower quarter. Investment performance is shown on Slide 6. Starting with fixed income, developed market government bond yields rose in all major markets, as most major central banks hiked interest rates given persistent core inflation. Global developed market treasury returns were essentially flat. AB’s fixed income performance showed meaningful improvement in the one-year period, improving to 73% of assets outperforming as both American Income and global high yield funds outperformed. The three and five-year periods remain strong at 76% and 75%, respectively. Investors are showing greater comfort with durations. The Fed appears to near the end of its rate hiking cycle. American Income net inflows in the quarter were positive $1.5 billion or $4 billion year-to-date. We secured our first systematic U.S. investment grade fixed income client with a $100 million win, a validation of the strategy we discussed last quarter, which marries our fixed income technology with our quantitative research. We are initiating a number of other active conversations where there’s a preference for higher quality bonds. Now turning to equities. Global equities advanced in the second quarter led by a narrow group of stocks seen as big winners from the artificial intelligence revolution. During the first half of 2023 just 10 U.S. stocks accounted for 79% of the S&P 500’s gain and 54% of MSCI All Country World Index’s gain. Over this time, medium forward PE ratio of the 10 largest capitalization stocks in the S&P 500 surge by nearly 50% to 28.2x at the end of June compared to a median increase of just 7% for the rest of the market. While we own many of these companies we were wary of the concentration risk of the high benchmark weightings in mega cap tech. A risk highlighted earlier this week when a major benchmark provider carried out a special rebalance of its technology index to reduce the weightings of its seven largest constituents. Near-term equity performance was challenged with just 23% of equity assets outperforming over the one-year period. Our three-year performance improved 48% while five-year declined to 52% of assets outperforming. Importantly, we continue to outperform our peer group with 65% and 71% of our equity assets outperforming the Morningstar peer groups over the three and five-year periods respectively. At quarter end, 62% and 65% of our equity assets under management in U.S. and Lux funds respectively were in funds ranked four and five stars. Now, I’ll review our client channels beginning with retail on Slide 7. Gross sales of $16.5 billion and our retail channel declined 4% from a year ago and were down 2% sequentially. The redemption rate was slightly higher at 27% versus 25% last quarter, resulting in net outflows of $700 million. We continue to see strong growth in U.S. retail, which posted 9% annualized organic growth driven by taxable fixed income equities and munis. Last quarter, we highlighted our belief that we’re in the initial innings of a fixed income reallocation. Our Asia business continued to grow bolstered by American Income, which grew sales at 5x year-over-year, driving taxable fixed income net inflows of $1.3 billion or 9% annualized organic growth. Muni sales inflows also continued to be robust with net inflows of $1 billion or 13% annualized organic growth positive for 11 of the last 12 quarters. Active equity sales were $8 billion, the highest level in four quarters, reflecting strong momentum in U.S. retail for more key strategies. Increased global redemptions resulted in net equity outflows. As shown on the bottom right, we ranked in the top 2% for cross-border flows for fixed income substantiated by Broadridge, which ranked AB first in Asia for year-to-date fixed income sales and net inflows. We’re experiencing a strong start for our ETF launches, for which assets under management reached $800 million, having raised approximately $500 million year-to-date balance between retail and Private Wealth channels with sales from well over 100 distributors. Turning to institutional on Slide 8. Second quarter gross sales were $1.5 billion down from both comparable prior periods. Net outflows were $3.2 billion, reflecting previously announced low fee redemption split between our custom target date and fixed income businesses driven by rebalancing. Our pipeline grew to $14.4 billion at quarter end, up 10% sequentially. Additions included a $1.3 billion U.S. large cap growth mandate, which funded earlier in July, and for which annualized fees exceed those of the pre-announced redemptions. We saw over $300 million of CarVal additions and a number of additional active equity wins. We’re pleased that at the imminent close of its latest Clean Energy Fund, AB CarVal have raised approximately $1.5 billion, which is triple the size of its first Clean Energy Fund. Notably Equitable announced at its May Investor Day, a second $10 billion multi-year commitment to AB’s private markets platform. The initial $10 billion program announced in mid-2021 is now 75% deployed. Moving to Private Wealth on Slide 9. Second quarter gross sales were resilient at $4.4 billion, up 35% year-over-year, while down 23% from a seasonally strong first quarter. We continue to experience strong sales and money market funds in private alts. While second quarter nets were essentially flat on a year-to-date basis, they’ve grown at a 3.4% annualized organically double the rate of the prior year period. Our AUM growth from business sales well outpaced the industry as measured by M&A volumes, and the pre-transaction planning pipeline remains solid. We continue to see sustained growth in the ultra-high net worth $20 million and over category. Year-to-date alternative raises of $1.3 billion were well diversified across strategies including secondaries, private credit, real estate equity, and clean energy, and our proprietary direct indexing strategy grew to $3 billion, posting strong annualized organic growth of 35%. Copyright: olivier26 / 123RF Stock Photo I’ll finish our business overview with the sell-side on Slide 10. Second quarter Bernstein Research revenues of a $92 million decreased by 14% year-over-year and 8% sequentially. Industry-wide global institutional equity trading volumes remain constrained with investors reluctant to turn over portfolios in the face of continuing market and economic uncertainty. Research checks were up at Autonomous for the quarter. We launched coverage from four global sectors this past quarter, three in the EU and one in Japan. Our 39th Annual Strategic Decisions Conference was a resounding success with over 1,200 clients and nearly 150 companies attending. Our joint venture with Societe Generale announced last November is proceeding. The timeframe for closing has been extended into the first half of 2024, and we remain highly confident that we will obtain necessary regulatory approvals. The economics are essentially unchanged and we anticipate disclosing further financial details closer to that time. I’ll conclude by reviewing the status of our strategic initiatives on Slide 11. Performance and fixed income improved, while equities near-term performance lagged versus capitalization weighted benchmarks. The second quarter was led by 9% annualized organic growth in fixed income, and we gained market share across retail, taxable, and municipal categories, including muni SMA. We had several active equity wins, which grew the institutional pipeline. In private markets, we progressed toward the imminent close of AB CarVal’s latest Clean Energy Fund at $1.5 billion 3x its predecessor fund. We were pleased to participate in Equitable’s May Investor Day, at which Equitable announced its second $10 billion permanent capital commitment to growth of our private markets platform. Additionally, we outlined at that meeting that at current market levels we had visibility to 350 basis points to 500 basis points of margin expansion through the 2027 horizon period. This reflects the margin benefit of the Bernstein Research deconsolidation about 200 basis points to 250 basis points, the completion of the Nashville relocation about a 100 basis points to 150 basis points in additions to savings already realized, and the growth of private markets and other investments about 50 basis points to 100 basis points. Second quarter financial comparisons reflected lower assets under management versus the prior year period. Adjusted operating income declined by 3%. Adjusted operating margin was 27%, and adjusted earnings and unitholder distributions were $0.61 per unit down 14% versus the prior year. Now, I’ll turn the call over to Bill Siemers to discuss the financials. Bill? Bill Siemers: Thanks, Seth. Let’s start with a GAAP income statement on Slide 13. Second quarter GAAP net revenues of $1 billion, increased 4% from the prior year period. Operating income of $189 million decreased 2% and operating margin of 18.4% decreased by 420 basis points. GAAP EPU of $0.53 in the quarter decreased by 23% year-over-year. I’ll focus my remarks from here on our adjusted results, which remove the effect of certain items that are not considered part of our core operating business. Our adjusted results now reflect interest expense below the operating income line, whereas previously interest expense was above the operating income line. This was done to improve the comparability of our adjusted operating margins with our peer group. We base our distribution to unitholders on our adjusted results, which we provide in addition to and not as a substitute for our GAAP results. Our standard GAAP reporting and reconciliation of GAAP to adjusted results are in our presentation Appendix, press release and 10-Q. Our adjusted financial highlights are shown on Slide 14, which I’ll touch on as we talk through the P&L shown on Slide 15. On Slide 15, beginning with revenues. Net revenues of $823 million increased 1% versus the prior year period and were down 1% sequentially. Base fees were flat versus the prior year period as 2% lower average AUM was offset by a higher fee rate. The second quarter fee rate of 40.0 basis points increased 2% year-over-year, driven primarily by the addition of higher fee rate carve-out base fees. Sequentially the fee rate was down less than 1%. As we experienced unfavorable mix shift in a risk-off environment with net inflows in lower fee rate fixed income AUM including money markets. Looking forward, we expect the fee rate to improve sequentially based on asset mix reflecting improved markets. Second quarter performance fees of $15 million declined by $3 million from the prior year period due to lower real estate equity and strategic equity fees, partially offset by higher fees on private credit services. Given current marketing conditions, we continue to see full-year 2023 performance fees roughly in line with the prior year level. Second quarter revenues for Bernstein Research Services decreased 14% from the prior year period, driven by a decline in customer trading activity in the U.S., Europe, and Asia as investors remain cautious given the macroeconomic backdrop. This quarter, we are breaking out dividend and interest revenue, which at $46 million increased by $34 million year-over-year, reflecting the higher interest rate environment and higher average balances. Netting against this is broker/dealer related interest expense associated with our Private Wealth brokerage clients. Interest expense of $26 million increased by $17 million year-over-year due to higher interest rates and was down $2 million sequentially. Moving to adjusted expenses. All-in, our total second quarter operating expenses of $601 million increased by 2% year-over-year and we’re up 1% sequentially. Total comp and benefit expense increased by 4% from the prior year period, reflecting a higher compensation ratio of 49.5% of adjusted net revenues as compared with 48.0% in the prior year period, and a 1% increase in revenues. Regarding headcount, excluding the 284 previously outsourced India staff whom we onboarded in the first quarter and the CarVal acquisition headcount declined year-over-year, reflecting the previously announced 4% reduction in February 2023. Taking a step back, global equity markets continue to rally throughout the second quarter, which is encouraging. That said, there is a lag effect as average AUM and revenues catch up, particularly when comparing on a year-over-year basis. As well, we continue to manage the business with a balance perspective, recognizing uncertainty remains in the current environment. We continue to believe that our full-year 2023 compensation to revenue ratio will be towards the higher end of the historical 47% to 50% range. We plan to accrue at a 49.5% compensation ratio in the third quarter, and as we typically do, we’ll true-up the full-year ratio in the fourth quarter as full-year revenues crystallize. We plan to pay competitively based on performance giving our people are the most important asset. Promotion and servicing costs decreased by 10% from the prior year period due to lower trade execution, marketing, advertising and transfer fees. Promotion and servicing costs increased 11% sequentially driven by higher T&E, seasonal firm meetings, including the Bernstein Strategic Decisions Conference in early June. For the full-year, we continue to target promotion and servicing spend to be up lower-single-digits. G&A expenses increased 3% in the second quarter versus the prior year period due to higher office-related expenses and professional fees, which were partially offset by a favorable foreign exchange impact. Sequentially G&A expenses increased 5% due to an unfavorable foreign exchange impact, higher portfolio services, related expenses, office-related expenses, technology-related expenses, and professional fees. For the full-year, we continue to target G&A growth below inflation levels up low-single-digits. Second quarter adjusted operating income of $222 million, decreased by 3% versus the prior year period and was down 7% sequentially. Second quarter operating margin of 27.0% was down a 100 basis points year-on-year. As shown at footnote two on this slide, interest expense, which is now below the adjusted operating margin line increased by $12 million from the prior year period, reflecting higher interest rates and higher average debt balance and increased $1 million sequentially reflecting higher interest rates. As outlined in the Appendix of our presentation, second quarter earnings excludes certain items which are not part of our core business operations. In the second quarter, adjusted operating earnings were $33 million above GAAP operating earnings due to acquisition-related expenses including CarVal intangible amortization and due to interest expense. Non-GAAP EPU was $0.08 above GAAP EPU primarily reflecting acquisition-related expenses. The second quarter effective tax rate for ABLP was 5.3%. Our guidance for effective tax rate in 2023 remains approximately 5.5% to 6%. We continue to expect Nashville relocation will be accretive for the full-year 2023 with compensation-related savings more than offsetting increased occupancy costs. With that update, we are pleased to answer your questions. Operator? See also 10 Conservative Owned Clothing and Luxury Brands and 50 Most Valuable Companies in the World by Market Cap. Q&A Session Follow Alliancebernstein Holding L.p. (NYSE:AB) Follow Alliancebernstein Holding L.p. (NYSE:AB) 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 the line of Daniel Fannon with Jefferies. Please go ahead. Daniel Fannon: Thanks. Good morning. Wanted to follow-up on the longer-term margin outlook as you highlighted at the Investor Day. And maybe if you could bifurcate the segments that, that are going to contribute to that. And as I think about the timeframe given even the quarter push-out of Bernstein as well as I believe most of the national savings should be done by next year. Shouldn’t we really see this kind of transition closer to the 2024 and 2025 as we just think about the natural evolution of those things flowing through your income statement? Bill Siemers: Hey, Dan, it’s Bill. Yes, just to — there’s definitely a timing difference there and that’s what when we said that in the Investor Day that these are end targets by 2027, but yes, the Bernstein pickup of 200 basis points to 250 basis points now that’s not going to be fully realized next year. So there’ll only be a piece of that next year according to when we close. But then going forward in 2025 and beyond that, that would take effect. As to the relocation of 100 basis points to 150 basis points, the most of the Nashville is done. We’re still fitting that out, but primarily the big pickup there is all predicated on the New York move when we get out of 1345 and go to Hudson Yard. And so that’s going to happen in the fourth quarter of 2024. So again, same thing, it’s going to be 2025 forward. And then the Private Wealth and growth investments I mean should start slowly taking effect as soon as we can this year into next year and all that, but we can’t really say when exactly that’s going to be fully realized. Daniel Fannon: Understood. Okay. That’s helpful. And then following-up on your comments on the fee rate outlook, I think you said near-term, some improvement in clearly beta is going to help with the flow through of end of period versus average, but as you look at the backlog, you look at kind of investor trends with fixed income potentially being a bigger source of flows with higher rates, even as your kind of private markets business picks up. Do you still — is there as those trends that that change and investor dynamics shift, do you still see kind of a longer-term fee rate backdrop being constructive if we see more of that fixed income demand pickup? Bill Siemers: I mean, currently we’re seeing, we think we’ll modestly improve throughout the year. I mean that’s in based on the pipeline split between higher fee active equities and alternatives. Right now the pipeline’s at 59 bps, which is about 3x higher than the normal fee rate in the institutional channel. I mean, but at the same time you have to worry about it’s all on timing of the fundings there could be a funding in there of low fee custom target date mandate, which definitely has lower fees. I mean, so it — there is risk in there that is not — it’s not all perfect of active equities and alternatives. Anybody want to add anything further there? Onur Erzan: Yes. Yes. Thanks, Bill. It’s Onur. I’ll add two minor points. Number one, in fixed income, obviously we have a strong Asia taxable fixed income franchise in retail that tends to be pretty high fees in the about 50 basis points level for American Income and definitely even higher for global high yield. So within fixed income, we participate in high peak categories, particularly in Asia. So that should be a factor then, number one. Number two, as you might have followed, our U.S. retail continues to grow at a very high organic rate. So even though we might be adding at times lower fee assets like muni SMAs on an overall basis, it lifts the overall revenue. So we are very pleased with the net revenue additions in U.S. retail, which comes through very high organic growth rate. So that’s the other overlay I would that......»»
Principal Financial Group, Inc. (NASDAQ:PFG) Q2 2023 Earnings Call Transcript
Principal Financial Group, Inc. (NASDAQ:PFG) Q2 2023 Earnings Call Transcript July 28, 2023 Operator: Good morning. And welcome to the Principal Financial Group Second Quarter 2023 Financial Results Conference Call. There will be a question-and-answer session after the speakers have completed their prepared remarks [Operator Instructions]. I will now turn the conference over to Humphrey […] Principal Financial Group, Inc. (NASDAQ:PFG) Q2 2023 Earnings Call Transcript July 28, 2023 Operator: Good morning. And welcome to the Principal Financial Group Second Quarter 2023 Financial Results Conference Call. There will be a question-and-answer session after the speakers have completed their prepared remarks [Operator Instructions]. I will now turn the conference over to Humphrey Lee, Vice President of Investor Relations. Humphrey Lee: Thank you, and good morning. Welcome to Principal Financial Group’s Second Quarter 2023 Conference Call. As always, materials related to today’s call are available on our Web site at investors.principal.com. Following a reading of the safe harbor provision, CEO, Dan Houston and CFO, Deanna Strable, will deliver some prepared remarks. We will then open up the call for questions. Others available for Q&A include Chris Littlefield, Retirement and Income Solutions; Pat Halter, Asset Management; and Amy Friedrich, Benefits and Protection. Some of the comments made during this conference call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act. The company does not revise or update them to reflect new information, subsequent events or changes in strategy. Risks and uncertainties that could cause actual results to differ materially from those expressed or implied are discussed in the company’s most recent annual report on Form 10-K filed by the company with the U.S. Securities and Exchange Commission. Additionally, some of the comments made during this conference call may refer to non-GAAP financial measures. Reconciliations of the non-GAAP financial measures to the most directly comparable US GAAP financial measures may be found in our earnings release, financial supplement and slide presentation. Dan? Dan Houston: Thanks, Humphrey, and welcome to everyone on the call. This morning, I will share key aspects of our second quarter financial results and some notable performance highlights. Deanna will follow with additional details and an update on our current financial and capital position. Our leading position in the US small to midsize business market contributed to healthy growth across our benefits and protection and retirement businesses. Across the enterprise, we continue to balance investing for growth in our business with disciplined expense management and favorable 2023 equity market performance is starting to benefit revenue in our fee based businesses. Starting on Slide 3, we reported $376 million of non-GAAP operating earnings or $1.53 per diluted share in the second quarter, excluding significant variances, earnings per share increased 4% over the second quarter of 2022. Our second quarter results highlight our focus on our growth drivers, the power of our integrated offerings and the value of our differentiated distribution and joint venture partnerships and our deep customer relationships. During the quarter, we delivered on our capital deployment strategy, investing for growth in our business and returning $255 million of excess capital to shareholders through share repurchases and common stock dividends. Our business has generated strong free capital flow in the quarter and we are on track to deliver on our targeted 75% to 85% for the full year. We ended the quarter with nearly $675 billion of total company managed AUM, a 2% increase from the first quarter. Improved market performance and positive impacts from foreign currency more than offset a negative $3.9 billion of net cash flow. Across the industry, active asset managers were challenged by net outflows in the quarter. While our real estate net cash flow was positive in the quarter and year-to-date and was pressured relative to prior periods. Looking ahead, we are beginning to see greater opportunities to deploy new money into real estate marketplace. We have a real estate pipeline of approximately $7 billion of committed yet unfunded mandates that are expected to be invested over the next 12 to 18 months as valuations and market conditions stabilize. The third quarter is off to a good start for global asset management as we are seeing momentum build across high yield and core fixed income, specialty equity strategies, local solutions in our international markets and select real estate property types such as data centers. We are well positioned to capture net cash flow across our platform as investor appetite for risk assets, returns and our yield oriented capabilities become attractive again as we approach the end of the Fed rate hike cycle. As shown on Slide 4, investment performance improved significantly across our Morningstar rated funds and composites, including our fixed income, asset allocation and actively managed equity strategies. We’re continuing to create new products and diversify across investment vehicles. We are bringing to market new ETFs that offer investors additional ways to access some of our most popular solutions. In mid-July, we launched the Focused Blue Chip ETF to offer investors another way to access our large cap strategy, which has generated strong long term returns for our investors. We also launched a new equity strategy with our asset management joint venture, CCB Principal Asset Management. This strategy offers investors an offshore opportunity to invest in the new energy industry in China, including renewable power, electrical equipment, energy storage and electric vehicles. We are working through the final regulatory stages to make the UCITS fund available across much of Asia. With this positive momentum and recovery in our investment performance, we’re optimistic for asset management net cash flow in the second half of the year. In Principal International, total AUM increased 4% and to $174 billion during the quarter, primarily driven by favorable market performance and foreign currency translation. I’ve had the opportunity to engage in person with many of our long-standing global joint venture partners in the first half of the year. We have established deep relationships combining our global expertise with their market leading distribution capabilities. I have great confidence in the differentiated value of these relationships to continue to enable preferred access to global high growth markets. Across US Retirement and Benefits and Protection, revenue is benefiting from strong employment market, especially within the small to mid-sized business segment, though we are seeing moderation in employment growth from record highs, wage growth has accelerated. These employment trends, coupled with strong sales retention are contributing to our continued above market premium and fee growth in Specialty Benefits, which increased 8% over the second quarter of 2022. Capitalizing on opportunities, we launched a Hospital Indemnity insurance product in the second quarter. This product complements our existing core workplace benefits, rounds out the voluntary products portfolio and will further drive supplemental health growth within Specialty Benefits. In Retirement, net cash flow was pressured in the second quarter due to an uptick in large plan lapses. Large plan sales and lapses fluctuate quarter-to-quarter and can have a significant impact on net cash flow, but they generally have a lower overall impact on revenue for our Retirement business. Looking at the SMB segment within retirement, net cash flow was a positive $265 million, driven by a 16% increase in transfer deposits and a 9% increase in reoccurring deposits, stronger results than the overall block compared to the year ago quarter. We expect retirement sales to pick up in the second half of the year with strong full year growth across the SMB and large plan segments. We remain focused on driving profitable growth in RIS leveraging our leading market position and full suite of retirement solutions. We continue to expect to be within our net revenue growth and margin guidance for the full year. Bottom line, we are excited about the growth opportunities across the enterprise. I’m confident that our focus on the high growth markets, combined with our differentiated product suite and distinct set of distribution partnerships, will continue to drive value for our customers and our shareholders. Deanna? Deanna Strable: Thanks, Dan. Good morning to everyone on the call. This morning, I will share the key contributors to financial performance for the quarter, details of our current financial and capital position and an update on our commercial mortgage loan portfolio. Our second quarter results demonstrate the strength and resiliency of our diversified business model. Despite real estate-related market pressures on a number of key metrics, including total company variable investment income, as well as PGI net cash flow and revenue, we’re starting to see signs of recovery and positive momentum in real estate in the broader investor market. Reported net income was $389 million in the second quarter. Excluding income from exited businesses, net income was $325 million with manageable credit losses of $37 million. Credit drift was a positive $5 million in the quarter. On a year-to-date basis, credit drift has been a slight benefit to capital. We still feel good about our full year expectations for credit drift and losses despite the banking sector challenges earlier this year. Excluding significant variances, second quarter non-GAAP operating earnings were $415 million or $1.69 per diluted share. As detailed on Slide 12, significant variances had a net negative impact on our second quarter non-GAAP operating earnings of $53 million pretax, $39 million after tax and $0.16 per diluted share. The significant variances included lower than expected variable investment income in RIS, Principal International and Benefits and Protection as well as unfavorable impacts in Principal International from inflation and noneconomic LDTI discount rate impacts. Variable investment income was positive in total for the quarter and at a similar level as the first quarter. Prepayment fees and real estate sales were immaterial, causing VII in total to be lower than our run rate expectation. Macroeconomics were generally favorable in the second quarter as the S&P 500 daily average increased 5% from the first quarter and 2% from the second quarter of 2022. The benefit to our fee based businesses from this positive performance was partially offset by a decline in daily averages for small cap, mid-cap and international equities as well as fixed income. Foreign exchange rates were a modest tailwind on a quarterly basis relative to the first quarter and the second quarter of 2022, but remain a meaningful headwind of $12 million pretax on a trailing 12 month basis. We continue to focus on managing expenses with pressured fee revenue across the enterprise. Through these efforts, compensation and other expenses have decreased at the enterprise level compared to a year ago despite inflationary pressures on salary levels and other expenses. As a reminder, comparisons to a year ago are impacted by the reinsurance transactions that closed in the second quarter of 2022. Excluding significant variances, revenue growth and margins across the businesses were in line with our second quarter expectations and within our guidance ranges with the exception of PGI revenue growth. Compared to a year ago, PGI performance fees and transaction and borrower fees were down approximately $50 million on a gross basis, pressuring revenue, margin and pretax operating earnings. This decrease was anticipated in our full year guidance ranges. PGI’s quarterly margin of 35% was within our 34% to 37% guided range and improved from the seasonally low first quarter. Specialty Benefits pretax operating earnings, excluding significant variances, increased 29% over the year ago quarter, fueled by growth in the business, including an 8% increase in premium and fees and improved loss ratios driven by strong underwriting and disability and group life. Turning to capital and liquidity, we remain in a strong financial position. We ended the second quarter with $1.2 billion of excess and available capital, including approximately $800 million at the holding company, which is at our targeted level, $340 million in our subsidiaries and $100 million in excess of our targeted 400% risk based capital ratio. We returned $255 million to shareholders in the second quarter, including $100 million of share repurchases and $155 million of common stock dividends and we retired $700 million of long term debt during the quarter using the proceeds from issuances in the first quarter. As expected, we generated strong free capital flow in the second quarter and remain focused on 75% to 85% free capital flow conversion for the full year. Last night, we announced a $0.65 common stock dividend payable in the third quarter. This is a $0.01 increase and is in line with our targeted 40% dividend payout ratio. We remain focused on maintaining our capital and liquidity targets at both the life company and the holding company, and we’ll continue pursuing a balanced and disciplined approach to capital deployment. As shown on Slide 5, our investment portfolio remains high quality, aligned with our liability profile and well positioned for a variety of economic conditions. Specific to our real estate portfolio, it is high quality and positioned well to withstand potential economic stress. We revalued the portfolio again in the second quarter, reflecting the most recent cash flows and other underlying data. The commercial mortgage loan portfolio remains healthy. The current average loan to value is low at 47% and debt service coverage ratio is strong at 2.5 times. This is relatively unchanged from the first quarter and significantly improved from 2008 levels. Turning to our office exposure within the CML portfolio, it is geographically diverse and high quality. 100% of the year-to-date 2023 maturities have been paid off and we are confident in the outcome of the remaining four office loans maturing in 2023. Throughout 2023, we are actively revaluing the entire office portfolio each quarter. As of the second quarter, we have cumulatively reduced the portfolio valuation by 25% from the peak. Our current valuation is approximately 23% below the implied index value, highlighting our conservative approach relative to the broader market. The current loan to value on our office portfolio increased slightly to 57% as we further reduce valuations, while the debt service coverage ratio improved to 2.6 times. We have the experience and a long established track record of navigating real estate cycles. We are confident in the quality of our real estate portfolio and remain diligent in monitoring it and proactive in servicing it. It is high quality, well diversified and a good fit for our liability profile. We continue to be focused on maximizing our growth drivers of retirement, global asset management and benefits and protection, which will continue to deliver long term growth for the enterprise and long term shareholder value. This concludes our prepared remarks. Operator, please open the call for questions. Q&A Session Follow Principal Financial Group Inc (NYSE:PFG) Follow Principal Financial Group Inc (NYSE:PFG) 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 the line of Suneet Kamath with Jefferies. Suneet Kamath: I wanted to start with RIS fee. If I think — if my notes are right, I mean, I think this is the third quarter in a row where we’ve seen some large case outflows. And I get that these sometimes are low fee. But just wondering, is there something common about these outflows that we’ve seen over the past three quarters in terms of the type of cases or where it’s going? Just some additional color on that and what the outlook is for large case flows kind of going forward? Dan Houston: Yes. Good morning, Suneet, really appreciate the call or the question, and I’ll have Chris get right into it. Chris Littlefield: I think there’s a wide range. I think as we expressed in the prior quarters, one of the — they were limited to a couple of large ones. One was a decision that we have made with respect to whether it was a good fit for our business and the other was a choice by the plan sponsor. And so when you look at the reasons for the lapses in the large case, you just see a lot of volatility in the activity and a lot of reasons for the lopses. We see M&A activity that’s impacting it. We’re seeing a difference in the experience following the transition onto the platform, a reluctance to make changes to make the plan more streamlined or a change in pricing. So there’s a wide range of reasons why these lapses are occurring. And so we certainly have seen the increase in large case lapses, that has really been offset by continued strength on the SMB side. So I don’t want to lose the fact that we see much — great resilience there with recurring deposits up 9% and transfer deposits up 16%. And I think the other thing you’re seeing in the first half of the year, you’re seeing a little bit of timing activity. I think as Dan pointed out, we see really good momentum heading into the second half, again, speaking to some of that volatility of large case activity. And so I think we sit really in a good position there. And while we — I mean when we think about the pipeline, we have a healthy pipeline, increase our activity. RFP activity, we see strong sales growth for the full year across SMB and large. But there is that volatility in large plan activity. And we do expect some additional pressure on that lapse activity in the second half. It’s really difficult to give you an outlook because, as you know, the second half is a very active period of time for plan change activity. And so it’s really difficult and you can have things that you think are going to transition in December and move to January. So it’s really hard to predict. But again, we will see strong growth for the full year across SMB and large but we do see some additional pressure in lapses. Suneet Kamath: And then my second question is just on PGI, I guess, would love a little bit more perspective on your confidence in terms of flows improving in the second half. Maybe a read on what you’re seeing so far early in the third quarter. And sort of relatedly, we have noted that the fee rate has been kind of coming down over time. And just curious if that trend — do you expect that trend to persist going forward or should we expect that to sort of inflect? Dan Houston: One thing we know for sure, Suneet, is in that wealth management, retail space, there’s a lot of money that’s gone to the sidelines on money market and bank deposits. And yet as we look through there and look at some of our asset management capabilities that we discussed in our earlier comments — prepared comments, we do feel really good about the second half of the year. But with that, I’ll have Pat respond accordingly. Pat Halter: As Dan mentioned, we are very constructive on the second half of this year in terms of our outlook relative to net cash flow. As you can imagine, the market tone has very much improved. We’re starting to see momentum in terms of capital raising and that’s playing into our strong capabilities and the sort of suite of capabilities that we can offer in a marketplace that now has a little more of a flow toward risk on assets. Let me start off with just some of our capabilities and where I see our capabilities relative to meeting those sort of growing flows. First is in real estate. As you know, we’ve had a very strong, I think, sort of capability in real estate. And that’s really starting to see some increasing activity as the market start to get to a better place in terms of valuations. As Dan highlighted, we have a $7 billion unfunded committed capital position in real estate now, so we’re well positioned to take advantage of the markets as they develop. And you probably will see us increasing our net cash flow reporting in the second half of the year as a regard of that. And there’s probably three areas you’re going to see. The first one is probably in our increased activity in terms of acquisitions. We actually are pursuing a very large portfolio as we speak in terms of an acquisition. That should create, I think, a very strong net cash flow in the second half of the year. You’re also seeing because we are a very strong sort of high performing manager in real estate. We’re actually seeing takeover existing portfolios from poor performing managers. We think that’s a new area for us in terms of potential net cash flow. And then the third is just our normal increase in activities from funding of our institutional funds and institution investors are starting to get back engaged in the marketplace again. So very positive and constructive on that front, and not just in the US but in Europe and also in terms of some of the activity now that we have developed in terms of China with our joint venture in China with CCB, and that’s in the industrial space. On the public market, Suneet, really, the investment performance that Dan highlighted has given us greater confidence that, again, obviously public asset classes, equities and fixed income, but there’s favorable market sentiment that’s developing. And we’re always seeing this in terms of positive net cash flow in July. But we’re seeing money deployed into things like [Aligned] our mid-cap strategy, we’re positive about that, in our income specialty capabilities like high yield, we’re seeing, I think, positive activity there. So I think the results should be less muted sort redemptions, increase in sales, in our mutual funds and hopefully in our SMA strategy going forward. And then I think we’re constructive on that also. PI is actually off to a good start also both in Southeast Asia and in Latin America, particularly Brazil. So I think the second half of the year, if the markets continue to behave relatively well, we are constructive on growth and I think we have some early indicators that we should be constructive on growth. Relative to your second question, Suneet, in terms of base management fees, I think one of the things that we’re very proud of is to manage to that 29 basis point base management fee that we’ve had for many years, frankly. Obviously, as you highlighted, it’s dipped a little bit to 28.4 basis points. I think that’s somewhat due to the quarterly decrease in the flows we had in the second quarter, and that’s driven by the mix of business as net cash flows were leaving at higher rates of return than our average block and that’s why you saw that diminution in the 29% to 28.4%. But as I kind of think about the trailing 12 months and then I look forward, trailing 12 months have been strong at 28.9%. And as I just highlighted in terms of constructive outlook relative to the activity for the second half of the year, back half of the year, we do think we can improve that 28.4% back to the 29% range and that’s our expectation as we look forward into the second half of the year, particularly if the equity markets continue to stay where they’re at and we continue to see the mix of assets that we think we can garner and the net cash flow discussion has provided to you, Suneet. Dan Houston: Just one comment I want to follow up on with regards to Chris’ explanation when he said M&A just for those less informed on this. In the SMB market, there’s not a lot of M&A in the large case market, there does tend to be a lot of that. A lot of times, these are publicly traded companies or large private companies. And when the much larger plan comes in and acquires that smaller organization, we could be the smaller organization, oftentimes, it goes to the acquiring company and there was a fair amount of that activity and that’s probably a new narrative for us as we’ve had more large — as our large plan market has grown at principle. Operator: Our next question comes from the line of Ryan Krueger with KBW. Ryan Krueger: I had a follow-up on real estate. Just I guess, level set, can you give us some perspective on what your real estate flows were in the first half of the year? I think they’re included in the alternatives line that you provide, but I’m not sure if there’s other impacts in there as well. Dan Houston: Yes, that’s exactly right. Pat Halter: So Ryan, in terms of the flows in the first half of the year, they were muted relative to our historical sort of flow analysis. And I would suggest to you that that will change in the second half of the year, as I highlighted in my comments. Those flows were in the $450 million range relative to the net cash flows. If you look historically over the last five, six years, we’ve averaged about $3 billion a year in net cash flow. And I’m anticipating that we could be looking at something along what we typically have had as I think about the full year in 2023. And I hope that gives you a little bit of indication of our constructive view of our second half of the year. Ryan Krueger: And then on buybacks, they came down a little bit in the quarter, and I recognize there was a lot of market volatility probably earlier in the quarter. So just hoping to get a little more perspective on if you may ramp up back a little bit more versus the second quarter level in the second half of the year? Dan Houston: And we have full intentions on delivering on our full year outlook, but I’ll have Deanna provide some additional context on the quarter. Deanna Strable: Ryan, where you ended there is exactly right. Obviously, early in the quarter, we were all seeing heightened credit and macro concerns driven by the banking and the real estate cycles. And obviously, even though we felt confident on our full year free cash flow, we wanted to be prudent as we saw those concerns play out. I think if you look at our excess capital roll forward that does point to strong free cash flow. It also points to the fact that we do still have that. And so again, it’s much more of a timing issue than it is any issue with our capital levels or free capital flow outlook for the rest of the year. So I’d heighten back to what I talked about last year. I think we still feel that approximately $600 million of buybacks for the full year is a good range. And if you then take into account what we’ve done, that does point to slightly higher buybacks in the back half of the year. Operator: Our next question comes from the line of Tom Gallagher with Evercore ISI. Tom Gallagher: Just a question on variable investment income. Pat, just listening to what you’re saying about real estate pipeline and how you expect more of those flows to be coming through. I’m curious if we should also take that to mean transaction activity on your owned real estate might start picking back up again and could drive better variable investment income returns. Curious what you’re thinking there for the back half of the year, would you still expect VII to be below plan or do you think the clouds might be lifting here a bit? Dan Houston: Yes, I’ll tell you what, I think I’ll have Deanna respond accordingly on that one. Deanna Strable: Just a couple of comments there, and then I’ll have Pat add some color. I actually think we’ll see inflows into real estate before we see transaction volume in real estate. So I think our outlook would probably still see some muted results in variable investment income due to real estate sales in the second half of the year. What we’ve seen thus far in VII, very similar results in the first quarter and second quarter, virtually no prepays, virtually no real estate sales, but actually pretty strong and in line returns from our all portfolio. And I think what you would say is it is hard to forecast. Maybe towards the end of the year, we might see some transactions. But again, that might also roll into early ’24 as well. So probably our best guess right now is that third and fourth quarter VII would be similar to what we saw in the first half of the year. But Pat, any thoughts on transactions? Pat Halter: I just mentioned, Tom, that I think, as you know, we have a pipeline of opportunities in terms of investments that we’re developing. And those usually are sort of the merchant build program that allows for variable investment income to be generated in the future. And my anticipation, you’ll start to see more of that in 2024 than in 2023. But there is a pipeline out there and we’re obviously harvesting that pipeline for the right time to sort of to optimize that. But my guess, Tom, would be more 2024 than the next two quarters. Tom Gallagher: And then my follow-up is, I guess, for Chris or Dan, just curious about bigger picture competitive landscape within 401(k) and large case. Are you seeing — when you’re losing these cases, is it mainly going to large asset managers, is it insurance companies? And I heard you mention that’s partly just driven by M&A. But just curious what’s happening on pricing, like are you noticing any more aggressive pricing, is it the same? Just any color on what you’re seeing competitively would be helpful. Dan Houston: Tom, as you very well know, this has been and continues to be a competitive marketplace. We actually differentiate ourselves in leveraging our TRS capabilities, and you see that through the nonqualified deferred compensation growth, you see that through ESOP and our ability to attract these large DB plans as well. As Chris framed earlier, it is M&A. Whether it’s a good fit or not, there’s still a little bit of a shake out relative to the IRT transfer block of business and whether that’s a perfect alignment with our service model. But Chris is closer to it, I’ll ask that he add some additional color. Chris Littlefield: I mean I think it’s a very competitive market. And I think as we’ve expressed in the past, our focus is really managing our profitable growth and maintaining our pricing discipline and driving additional revenue and managing our expense discipline really well. And so that’s where our focus is. I mean not all flows are created equal, and they come with different revenue and profit profiles, and we’re really focused on how do we maximize revenue generation and profitability rather than how do we maximize flows. The competitive environment is competitive but we’re maintaining pricing discipline. I think it really shows up in the fact that we are very confident that we’re going to land within the full year guidance for net revenue and we expect to be in the upper half, the top end of our margin guidance for the year, and that’s how we’re managing the business. Dan Houston: We’ll also say, Tom, just to maybe clean up of this a little bit, among the top three players in this industry, we all keep getting larger. Without naming names, there is a fair amount of swapping of these plans between the relative players, we win from the large players, we lose large players. And TRS is still a big differentiator out there as well as our customer service platform. So hopefully, that helps. Operator: Our next question comes from the line of Erik Bass with Autonomous Research. Erik Bass: I was hoping you could talk a little bit about the net flow dynamics in the RIS spread business. You’re seeing nice wins in PRT and growth in deposits, but flows have been a little bit muted there due to higher withdrawals. Is this just a function of having a larger blocks and needing more sales to offset the natural runoff or are there any other dynamics to think about? Dan Houston: I think to be the biggest dynamic there is to make sure you remain disciplined in your pricing as you attract new business, and there is a steady roll off as you would expect. Chris, you want to add some additional thoughts… Chris Littlefield: On our spread based net cash flow, it was flat in the quarter. We certainly saw the strong PRT sales. I’d point out that those are really nice returns and so we continue to see compelling opportunities there, but that was offset by some of the GA flows due to better equity markets. Certainly, when you see better equity market performance, you see a movement out of capital preservation products, and we certainly saw that in the second quarter. The other trend I’d highlight is, as you know, we run our investment only business, our IO business opportunistically and so the maturities can be lumpy. And we certainly experienced some lumpiness in some outflows in this quarter contributing to the flat performance on spread based net cash flow. Erik Bass: And then going back to PGI. I was hoping, Pat, you can talk a little bit more about the retail demand and flow dynamics that you’re seeing. And in particular, curious as money is coming back to the market, are you seeing it go back into actively managed funds to the same degree as it was before or is [passive] continuing to take share? Pat Halter: Yes, Erik, I think the passive sort of share of the marketplace continues to increase. And that’s why the investment performance numbers that we illustrated in our prepared remarks is so important, because we have to be able to demonstrate that we are producing an active return over those indices. And so we do feel with those numbers improving on the investment side, we should start to see the trajectory, our senior trajectory, frankly, in the first two weeks of July in terms of our ability to get a little more of the mind share of the law in terms of flows going into active mutual funds. It’s a tough sort of marketplace in that yet to deliver really first one third sort of investment profile performance to get that wallet share. With some of our improving investment performance, we’re seeing some of that increased activity, as I mentioned earlier in my prepared remarks on the net cash flow. SMA is a space that we continue to want to grow in. Mutual funds is clearly a place that we’ve been very active with in terms of over the years and really the place where I think we have an opportunity to grow again is in CITs. There has been a little bit of a pushback on CITs in terms of net cash flow because of the flows going into overstate of value back in the [FP] markets. We think that’s sort of a temporary sort of situation. But that’s sort of the landscape of what we’re seeing right now relative to the retail space and the individual space, Erik. Hopefully, that helps. Operator: Our next question comes from the line of John Barnidge with Piper Sandler. John Barnidge: Can you maybe talk about the sales volume in Specialty Benefits? I know there’s the second straight quarter of declines. Is it that ’22 had a bunch of pent-up demand that’s creating tough comparables, or can you maybe — are you seeing other things? Dan Houston: And no doubt, we had a very strong ’22 and ’22 is strong, just not equally as strong. But Amy, you want to go and add some additional color? Amy Friedrich: So John, I think you’re hitting on one of the main points here, which is there definitely was pent-up demand, particularly in the smaller market kind of flowing through 2022 results. So when you look at the sort of fierce labor fight out there, sort of fierce fight for talent, there were smaller market players kind of making some purchases out there that really did represent that pent-up demand. So that was definitely good news in our 2022 results. But to put in perspective, I view our 2023, our second quarter results as really strong. They are down, as you note from 2022, but they are literally the second best second quarter sales we’ve ever recorded. So when I look at those sales, I see really good things for both the current quarter and looking ahead. So when I look ahead at that second half of the year, as Dan mentioned in his comments, we have introduced a new Hospital Indemnity product, it’s performing well, rounding out our supplemental health offering. And when I look at the basics, the fundamentals of our business around staffing, process, technology, distributor relationships, those are really strong right now. So again, I would say it’s more a comparability issue that we’re seeing. I’m very comfortable with both our total premium and fee growth and the sales component of that. John Barnidge: And then my follow-up question, maybe on that Hospital Indemnity product, can you talk about how you think about the maybe TAM or total addressable market and the SMB space for that, and then the product pipeline as well for other products that you may be working on? Amy Friedrich: So when I think about Hospital Indemnity, it really is not one product that’s going to sit out there and kind of do the work by itself, it really is going to sit as a supplement to the core benefits that we already have in place. So what we’re seeing is that it’s a nice offering to fill some gaps. So when people have a hospitalization, when people have other needs that are going to be travel related or outside of something that would get covered by the medical plan, this is going to be something that helps with that supplemental hospitalization costs and pieces. So I see it as a complement. The real power in having this is that it rounds out the rest of our worksite portfolio. So we’ve historically seen much of our organic growth relying on that basic kind of product sets that are going to be dental and disability and life, and I love having those product sets in place. But where we haven’t put our competition out there as much has been in the worksite space. So as we bundle up accident and critical illness and Hospital Indemnity, it’s going to give us the ability to compete on some of those additional worksite sales that we simply haven’t been as competitive in the past. So I like what that says in terms of market applicability. I like what that does in terms of how it can help us grow our total wallet share that we have across our extensive small and midsize business customers. Dan Houston: We do the survey work with employers, it’s small, medium and large. The one thing we consistently hear is health care is probably one of the most important. Second is around retirement, but supplemental benefits like this are strong number three. And so we see this as a real growth driver for our small to medium sized segment. Operator: Our next question comes from the line of Wes Carmichael with Wells Fargo. Wes Carmichael: I just wanted to follow up on the performance fees in PGI. I know in the supplement, you provide that, it’s down quite a bit year-over-year. I know Dan you addressed that. But just curious for your outlook for the remainder of the year, how you think that should trend in, I guess I’m trying to — does that kind of tie to your comments on VII where you need to see the inflows first? I think some of the fees in PGI are related to real estate transaction activity. Dan Houston: Pat can clarify that for us. Pat Halter: So those are the two different sort of discussions between VII and then the performance fees that would come to PGI and be part of the operating earnings profile of PGI. But we do, as I mentioned, because of the activity increases we see in real estate, Wes, we would expect sort of the muted performance fees that we saw in the first half of the year to start to change. And second half of the year, you should see some more sort of robust performance fees coming into the second half of the year. Wes Carmichael: And then on capital in the holding company, sitting at the $800 million level of liquidity. Just curious if you’re kind of expecting to run that near the target there or if you expect to leave some excess there over time? And also just on the leverage ratio, it’s down now when you took out $700 million of debt. Just curious if that’s going to migrate back towards 25% over time or if you want to be a little bit lower towards that target? Deanna Strable: Yes, I’ll answer your second question first. So on a leverage ratio perspective, it was really just an anomaly given the fact that we issued $700 million of debt in the first quarter, and we paid off the $700 million of debt in the second quarter. And so if you would have adjusted for that, we would have been consistent at that 22% level. I think, again, our target is 20% to 25% but I think that 22% is a really good place to be, gives us some dry powder if there is opportunities. And I think that’s what you’ll see us consistently show there. Regarding your other question around the holdco, we actually spent an extensive amount of time with our Board Finance Committee on a quarterly basis, we look at our capital at risk. And given the change in our business mix and some of the transactions that we conducted in 2022, the need to hold a lot of cushion relative to that is not as needed as it has been in the past. And so I think you’ll see that around a pretty tight range around that $100 million Obviously, if we’re seeing big pressures in the market, it might flex a little bit up. But I think given our business mix as well as the high level of free cash flow that we generate, I don’t think you’ll see that move significantly one way or the other. I hope that helps, Wes. Operator: Our next question comes from the line of Jimmy Bhullar with JPMorgan. Jimmy Bhullar: I had a question first on just PGI flows. And I think Pat, in your comments, you mentioned sort of a little bit of an improvement in the overall environment, but wanted to see how much of your optimism on flows improving in the second half is because of actual commitments you received from clients versus maybe the improved performance or just an expectation that activity will get better? Dan Houston: I think it’s two things, I’ll throw out the path quick one. Number one, the investment performance helps out immensely. And then secondly, we already feel good about here in the first month of the third quarter and what we’re seeing with solid flows. But Pat, please? Pat Halter: Just to highlight Dan’s last comment there. Principal International was off to a very strong start in July, so that’s very encouraging in terms of its flows. And then we discussed, we have seen a turnaround in terms of some of the retail flows and it’s looking much more constructive, again, because of investment performance. Obviously one month doesn’t make a trend for the rest of the year. But based on the market sentiment, based on the conversations we’re having with clients and with the markets themselves, there is definitely flows and the increasing flows are out there and so we’re encouraged by that anticipated pipeline of activity. On the real estate side, just to be clear, those discussions I highlighted in terms of acquisition portfolios, taking over existing portfolios, funding in terms of new funds, that’s real capital commitment, that’s actually money that’s been committed. So we’re very encouraged by the opportunities to change that into a strong net cash flow. Jimmy Bhullar: And then on your discussed performance fees, but if we look at asset management fees in the PGI business or just a normal management fee revenues, those are down as well. So are they down more because of just the rates and the impact of that on assets or are there other factors going on that might be more sort of sustainable in nature? Pat Halter: So we discussed earlier base asset management fees and that dip point down from 29% to 28.4%. We did see a little bit of lower transaction fees in the first half of the year, Jimmy. So maybe that’s what you’re also highlighting but that was fairly limited. Our mortgage activity, our mortgage origination activity actually has started to increase in June, that’s increasing again in July. So we’re actually expecting transaction fees to probably get back to more of a historical level than what we’ve seen in the past. And then as I mentioned, performance fees, very light in terms of performance fees in the first half of the year. But we do expect performance fees to probably get more back to the normal level than what you’ve seen in the past relative to PGI. Jimmy Bhullar: And then any comments on just competition and fee pressure in asset management, is that same as before or has there been any change in it? Pat Halter: Yes, there’s always intense competition in the asset management business, that’s why we have to continue to deliver on strong alpha performance, that’s why you have to continue to make sure we have relevant capabilities globally. The fee pressure is absolutely there in the marketplace. So we have to continue to make sure we are building on value to our clients in the eyes of the clients in terms of the capabilities we offer and then the level of performance that those capabulities are generating. Dan Houston: Jim, as you very well know, it isn’t just active like the good old days. With passive taking more of the share, you don’t have value added capabilities, you’re not winning. And the good news in Principal, whether it’s in the high yield space, preferred space, real estate, direct lending, these are areas where we can differentiate. And it is our intentions to continue to build out those unique capabilities to compete in the marketplace. Hopefully, that helps. Operator: Our next question comes from the line of Alex Scott with Goldman Sachs. Alex Scott: First one I have for you all is just maybe a high level question on inflation and how it’s affecting your expenses. I mean, certainly, there’s some help up to the top line from what’s been going on in the market. How do we think through inflation as a potential offset to some of the help that you’re getting just in terms of top line and the economy, or the market potentially continuing to recover a bit versus the inflationary pressures that could offset some of that? Dan Houston: I’ll make some initial comments and then ask Deanna. But you know we’ve talked about this here before as a matter of fact, when inflation started to tick up in particular it relates to wage inflation, which most employers are happy to deal with as it relates to maintaining an attractive recruiting talent. And we see that manifest itself in higher dollar amounts of wages, often translates into higher dollar amounts of life insurance coverage, higher premiums, for disability, all of those again are tied back to wages. Individuals, as I see salary increases, most of those are set in automatic nature and so 401(k) salary deferrals rise accordingly. And on a net-net basis, Principal is always the benefactor, as you pointed out, that top line revenue growth. Principal has its own internal challenges related to inflation as we retain and attract talent. And again, that’s part of our overall expense management responsibility within the business units and something that Deanna works with the CFOs around here every day on. But maybe I’ll have Deanna additional thoughts here. Deanna Strable: I think Dan really talked about well that we do — we are uniquely positioned that when inflation plays through, especially when it plays through on salary levels, we do get benefit in both RIS and benefits and protection and obviously, that plays through from a revenue perspective. We definitely have a proven track record of aligning expenses with revenue. When revenue goes down very fast or goes up very fast, there’s always a natural lag. But one thing I’m really proud of is if you look at our comp and other, whether it be relative to a year ago quarter, relative to last quarter or relative on a trailing 12-month basis, they’re down on all of those comparisons. Probably more — most valid is on the trailing 12 month basis, we’re seeing about a 3% to 4% decrease in adjusted comp and other. And that’s despite the fact that, as you mentioned, we have had to increase salaries because of that inflationary pressure and more on talent, we’ve had other expenses that have been negatively impacted from inflation. And also, we have to make sure that we continue to invest in our businesses to make sure that we can continue to deliver on our promises and drive growth in the future. And so I think that’s the proof of the fact that we do have that track record, and you’ll continue to see that play out as we go forward. Alex Scott: Follow-up question I have is on dental. Just noticing the loss ratio was up a little bit. Are you guys seeing anything around utilization maybe elective procedures, that kind of thing. I guess I’ve heard some of the Managed Care providers talk about this. And I don’t think it was still focused on dental in some of the comments, but I think one of them mentioned dental. So I was just interested if that’s something you’re seeing. Dan Houston: Yes, I’ll have Amy take that. Before I do that, just a reminder, when you compare Principal to other competitors in our set, we’re not a pure play asset manager. So we do have operations and more customer service expense. And so on pure play asset managers when you have more variable expense because it’s incentive compensation and so on and so forth, you see expense reductions perhaps a little bit easier than you do in an organization like Principal when we’re providing a lot of value added services across these fee spread and risk businesses. But I think it’s always important to put that in the proper context when you’re doing your comparable. So with that, Amy, Dental? Amy Friedrich: So just a few comments about dental, definitely feel good about our overall loss ratio and margins. So when you talk about the full suite of products, I feel really good about how they’re operating together. When we dig in just on dental, we are seeing some things happen there that are a little bit, I would call them sort of out of seasonal patterns. And so I think we are still seeing the first half of the year is some definite keeping up on utilization and frequency, people are going to the dentist back to prepandemic levels. But we’re probably still seeing a little more severity flow through our results. So think of that as the higher dollar procedures. The open question out there in the industry is, will that be continuing on, is that setting a new level, or is that something that’s still sort of the last remnant of the pandemic. So my particular belief and the belief on our block of business is that we see that experience moderate through the second half of the year. I think we will continue to see that come down. We might see some elevation still in severity. But the great news about our block is that our block is about 90% of it is going to have an annual ability to get rerated and renewable. So dental is a very responsive product if we need it to be on things that are happening within how it’s being utilized and changed. So great news is that’s a short lipid that does happen. But my perspective is I do think we’ll see that moderate a bit and I think we’re seeing some of the last remnants from the pandemic coverage being disrupted, but more to come. Operator: Our next question comes from the line of Tracy Benguigui with Barclays. Tracy Benguigui: Looking to your comments, it sounds like we’re reaching an inflection point on real estate where you saw some pressure this quarter on some of your key metrics. But then you said you’re seeing signs of recovery and positive momentum in real estate like in PGI or mortgage origination activity is up. What is going on in real estate fundamentals that’s driving that or is it more technical? Pat Halter: So I think what’s driving the sort of activity is there’s places where we’re starting to see the entry points in terms of where the risk return trade-off looks reasonable again. So there’s a sort of an opportunity there, both in terms of core real estate but also manufacturing real estate in terms of turnaround and in the development. We also, I think, are very, I think, mindful that the debt markets have to stabilize. And with the Fed now starting to become, I think, maybe at a place where they may take a pause, I think people are having a little more confidence in terms of being able to understand where the path will be going forward in terms of valuations and debt availability and capital availability. So there is a sort of emerging market developing in terms of this [transaction activity] in general, picking up, it’s still early yet, but being early sometimes is where you actually can really add value to your clients. And so there is an opportunity, as I mentioned, through the three areas that we have been very active in, which is acquiring a portfolio or taking over other managers’ assets or being able to find funding for new creative things to invest in, for instance, like data centers. So there’s a lot of interesting opportunities. I know office has the headline and we’re not in the office, we’re not investing in new office, but we are investing in other asset classes, whether it’s industrial, whether it’s data centers, whether it’s residential. So that’s really the important thing to mention as to where we’re at, what we’re doing as we talk about this increased activity. Tracy Benguigui: A quick follow-up. I just want to touch on the credit cycle. You mentioned credit drift was slight benefit of capital, so you feel good about your full year expectations where you were building in some credit drift. What do you think is going on? This is probably the longest debate on whether we’re going to enter a recession or not. Maybe as far back in 2019 when we saw the credit cycle reach maturation. So what do you think is driving that positive drift? And is this a timing difference where we could see credit drift materializing, but it just may come later? Deanna Strable: Just a few comments there. Let me just frame kind of where we are kind of year-to-date from a drift perspective and ultimately kind of tie it back to your questions there. Both first quarter and second quarter, we actually saw positive capital impacts from drift and modest, about $5 million a quarter. And I think that really comes back to our high quality diversified portfolio. And so even though we are seeing some downgrades across the portfolio, they’re more than being compensated by some upgrades. And again, that could be within the real estate portfolio on some of the asset classes that Pat mentioned or it’s in other parts of our balance sheet as well. And so again, we do think there will be some drift as we go through the rest of the year. But I’d say there’s a couple of things, right? I think the recession is not thought to be as deep as maybe what it was anticipated coming into the year. And then you come back to the quality and the diversification of our balance sheet and I think, again, we continue to see good results there. But I’ll see if Pat has anything to add. Pat Halter: No, I think Deanna has done a nice job of summing that up really well. Operator: Our final question this morning comes from the line of Mike Ward with Citi. Mike Ward: Just on PRT, we’ve been hearing pretty bullish commentary from some of the insurance brokers out there, it seems like more than usual. So just wondering if anything is changing in terms of the returns or — there’s got to be more competition. But any way to sort of size the opportunity from here? Chris Littlefield: I think we see a very strong PRT market place right now. I think industry sales are expected to be in that $30 billion to $40 billion range for the year. Again, as we think about this business, we really focused on the returns we’re getting on the capital we’re investing in that business and so we remain disciplined. And so we’re very comfortable. We feel very good about our performance for the first half, and we’re on track for our plan for the year, and we’re doing so at very nice returns. The other thing I’d say is we do benefit from having our WSRS business. A lot of the activity that we’re seeing, we’re able to take our existing clients’ plans given that client are fully funded. I think Mercer is calling it 105% funding at the end of June. And we’re able to talk to them about planned terminations and the opportunity to write PRT business with them. And then we just look at that overlap between those businesses, about 15% of our premium and about 42% of the cases in our PRT business year-to-date has come from existing clients. So we do see a robust environment there. We’re picking our spots where we can maximize the return on capital and we have some built-in advantages from having an existing client base. Dan Houston: Final question, Mike? Mike Ward: Maybe just on Specialty Benefits. Just wondering what you guys are sort of hearing and feeling from the employers out there, how they feel about the labor market and wages and how they’re — if their attitude is changing in terms of their approach to benefits? Amy Friedrich: So I think the good news there is that the small to mid-sized marketplace is still really vibrant. They understand that they need to keep talent, they understand that a great benefits and savings and retirement package offering for their employees is critical to making that happen for them. And they’re displaying that through their purchasing behavior and their funding and persistence on those plans. And so I think the most interesting piece is that when you look at employment growth and you look at wage growth, wage growth is across all of the segments that we’re seeing equally present in the small market but employment growth, at least in our block of business and I think this is cross over into the retirement business as well has stayed really strong. So our employment growth numbers are twice as strong, 3 times as strong in the smaller market. So those employers are continuing to hire and they’re continuing to indicate that they need great employees to fuel the growth. So we continue to hear sentiment that there’s caution. They’re very confident about their businesses, they’re also very confident about their kind of region or community. They get a little less confident in their sentiment when they head over into total US or total global economy. So that’s where their sentiment begins to start to fall apart, but their actions are usually based on their local or their business sentiment and it remains very positive. Operator: Thank you. Ladies and gentlemen, that concludes our time allowed for questions. I’ll turn the floor back to Mr. Houston for any final comments. Dan Houston: Yes. Thanks again for joining us today. And as I reflect on the quarter, the earnings and the margins aligned with guidance, there’s a path on the free cash flow of 75% to 80% net cash flow. We all know on a macro level, it was a very challenging environment. We’re making changes in the business in order to improve the results. We’re continuing to focus on aligning expenses with revenues and it continues to be a priority while still investing for growth and innovation and the digitizing of our business and making sure that we don’t miss that opportunity, and we continue to execute on profitable growth for our long term shareholders. So thank you for your time and attention today. We’ll see you out on the road. Operator: Thank you. This concludes today’s conference call. You may disconnect your lines at this time. Thank you for your participation. Follow Principal Financial Group Inc (NYSE:PFG) Follow Principal Financial Group Inc (NYSE:PFG) We may use your email to send marketing emails about our services. Click here to read our privacy policy......»»
Raytheon Technologies Corporation (NYSE:RTX) Q2 2023 Earnings Call Transcript
Raytheon Technologies Corporation (NYSE:RTX) Q2 2023 Earnings Call Transcript July 25, 2023 Raytheon Technologies Corporation beats earnings expectations. Reported EPS is $1.29, expectations were $1.18. Operator: Good day ladies and gentlemen and welcome to the RTX second quarter 2023 earnings conference call. My name is Latif and I will be your operator today. As a […] Raytheon Technologies Corporation (NYSE:RTX) Q2 2023 Earnings Call Transcript July 25, 2023 Raytheon Technologies Corporation beats earnings expectations. Reported EPS is $1.29, expectations were $1.18. Operator: Good day ladies and gentlemen and welcome to the RTX second quarter 2023 earnings conference call. My name is Latif and I will be your operator today. As a reminder, this conference is being recorded for replay purposes. On the call today are Greg Hayes, Chairman and Chief Executive Officer: Chris Calio, President and Chief Operating Officer; Neil Mitchill, Chief Financial Officer, and Jennifer Reed, Vice President of Investor Relations. This call is being webcast live on the internet and there is a presentation available for download from RTX’s website at www.rtx.com. Please note except where otherwise noted, the company will speak to results from continuing operations excluding acquisition accounting adjustments and net, non-recurring and/or significant items, often referred to by management as other significant items. The company also reminds listeners that the earnings and cash flow expectations and any other forward-looking statements provided in this call are subject to risks and uncertainties. RTX’s SEC filings, including its Forms 8-K, 10-Q and 10-K, provide details on important factors that could cause actual results to differ materially from those anticipated in the forward-looking statements. Once the call becomes open for questions, we ask that you limit your first round to one question per caller to give everyone the opportunity to participate. To ask a question, you will need to press star-one-one on your telephone. You may ask further questions by reinserting yourself into the queue as time permits. With that, I will turn the call over to Mr. Hayes. Gregory Hayes: Thank you and good morning everyone. It was another strong quarter for RTX with continued strength across all of our end markets. On the commercial aerospace side industry-wide, we saw 1,200 new orders announced around the Paris Air Show. This is the largest number of orders in the history of the air show as airlines look to secure production slots well into the next decade. Global commercial air traffic remains on track with our projections with a very robust summer travel season, driven by incredibly strong consumer demand. This dynamic is supporting strength in the aftermarket and growth across the globe with revenue passenger kilometers now tracking at about 95% of 2019 levels, and long haul international, which has lagged in the recovery is showing strong growth with passenger flight hours up 18 points year-over-year, a good indicator for increasing demand for wide body travel. Turning to defense, we’re pleased that the House defense appropriation bill fully funds many of our programs, including importantly the F-135 engine core upgrade, which is the only engine funded for the F-35 joint strike fighter. Additionally, the bill also recommends the full budget request for other key RTX programs such as LTAMDS, LRSO, hypersonics, and Standard Missile-3. Internationally, we saw the State Department approve a large sale of advanced air defense systems for Poland as it bolsters its security amid the ongoing conflict in Ukraine. This would expand our existing partnership with Poland and make Poland the first international customer for our LTAMDS system, representing a key transition for this next-generation Raytheon franchise. Before we get into details of the quarter, as you saw in our press release this morning, we are working through an issue resulting from a rare condition in powdered metal that will require Pratt & Whitney to remove some engines from service for inspection earlier than expected. I want to make just a couple of comments here at the outset. First of all, it’s important to know that we understand the issue and we have begun to address it through an inspection protocol that we already have in place. That said, clearly this will have an impact on Pratt & Whitney and our customers. Chris and Neil will provide additional color later in the call on how we’re going to address the issue as well as the operational and financial impacts. As you’d expect, we’ll dedicate all the necessary resources to manage this. Now let’s turn to Slide 2 to go through some key highlights from the quarter. Q2 was another strong quarter of strong demand in both the commercial and defense segments of our business with $25 billion of new orders. This brings our total backlog to a record $185 billion. On the commercial side, Collins continues to convert its industry-leading portfolio into solid order strength. As I mentioned, industry-wide there were about 1,200 new aircraft orders announced in Paris. The aggregate amount of Collins and Pratt content on those aircraft will be about $20 billion through the life of the programs. On the defense side across the RTX businesses, we captured $13 billion in net bookings in the quarter, driving a strong book-to-bill of 1.22, and this takes our defense backlog to $73 billion. Contributing to the backlog in the second quarter were a number of significant awards, including $2 billion at Pratt & Whitney for Lot 17 of the F-135 engines and $1.5 billion for 117 sustainment. The Raytheon segment was awarded its largest ever AMRAAM contract for $1.2 billion from the U.S. Air Force and international partners, including Ukraine. The AMRAAMs will work in concert with their existing NASAM batteries to help protect the Ukrainian people. Earlier this month, we executed the business realignment. We are now officially operating as three business units. Our team has done a tremendous job in a relatively short period of time, shifting roughly $3 billion of sales and thousands of employees across our portfolio to better meet the evolving needs of our customers. Of course, our transformation isn’t done. We will continue to develop initiatives to better leverage our scale and breadth and to enable operational excellence and a best-in-class cost structure. Finally, as many of you saw last week, we agreed to divest Collins’ actuation business to Safran. We expect this deal to close in the second half of 2024 with proceeds from the transaction about $1.8 billion. With respect to our full year outlook, we’re going to raise the top line to reflect the strength we’re seeing in our end markets. The new range will be $73 billion to $74 billion. We’re also going to bring up the bottom end of our adjusted EPS range by a nickel to $4.95 to $5.05; however, we are going to reduce our 2023 cash flow expectations by $500 million to $4.3 billion, and this is primarily to reflect the developments at Pratt & Whitney that I discussed earlier. With that, let me turn it over to Neil to walk you through our financial results in more detail. Neil? Neil Mitchill: Thanks Greg. Let’s look at Q2 results on Slide 3. As Greg noted, we had another solid quarter with sales of $18.3 billion, up a strong 13% organically versus the prior year with growth across all four of our segments. Adjusted earnings per share of $1.29 was up 11% year-over-year with strong adjusted segment operating profit growth of 26%, partially offset by lower pension income and a higher effective tax rate. On a GAAP basis, earnings per share from continuing operations was $0.90 per share and included $0.26 of acquisition accounting adjustments, an $0.08 charge related to an airline customer insolvency, and $0.05 of restructuring and segment and portfolio transformation costs. Free cash flow of $193 million was generally in line with what we discussed when we were together in Paris last month, and finally on the capital allocation front, we repurchased $596 million in shares, putting us at about $1.2 billion year-to-date, on track for $3 billion in share repurchases for the full year. Let’s turn to Slide 4 to get into the Q2 segment results. Beginning with RMD, sales were $4 billion in the quarter, up 12% on an adjusted basis and 13% organically primarily driven by higher volume from air power, advanced technology and land warfare and air defense programs. Adjusted operating profit of $427 million was up $79 million versus the prior year, driven by favorable net program efficiencies and drop-through on higher volume, partially offset by unfavorable mix resulting from early stage production programs. RMD had $3.6 billion of bookings in the quarter, resulting in a book-to-bill of 0.92 and a backlog of $35 billion. In addition the AMRAAM award that Greg mentioned earlier, RMD also received a $265 million award for Javelin and a $251 million award for AIM-9X missiles. Year-to-date, RMD has a book-to-bill of 1.17. Shifting to RINS on Slide 5, sales of $3.7 billion were up 2% versus the prior year on an adjusted and organic basis. This was driven by higher revenue from sensing and effects as well as cyber and services programs, which was partially offset by lower sales from command, control and communications programs. Adjusted operating profit in the quarter of $297 million was down $18 million versus prior year, primarily due to unfavorable mix and higher operating expenses which more than offset improved productivity and drop-through on higher volume; however, as I mentioned in June, we still saw unfavorable productivity in the quarter due to a handful of fixed price development programs. In the quarter, RINS had $3.1 billion of bookings, resulting in a book-to-bill of 0.96 and a backlog of $17 billion. Bookings at Q2 in RINS included about $1.1 billion in classified award and $322 million for federal and civil cyber defense services. On a year-to-date basis, RINS has a book-to-bill of 1.15. Turning to Collins on Slide 6, sales were $5.9 billion in the quarter, up 17% on an adjusted and organic basis, driven primarily by strong demand across commercial aerospace end markets which resulted in higher flight hours and higher OE production rates. By channel, commercial aftermarket sales were up 29% driven by a 68% increase in provisioning and a 28% increase in parts and repair, while modifications and upgrades were up 9% organically in the quarter. Sequentially, commercial aftermarket sales were up 7%. On the commercial OE side, commercial OE sales were up 14% versus the prior year, which included growth in wide body, narrow body and business jets, and military sales were up 5% due to higher development volume. Adjusted operating profit of $837 million was up $220 million or 36% from the prior year with drop-through on higher sales volume and favorable mix which more than offset higher production costs, as well as higher R&D and SG&A expenses. Turning to Pratt & Whitney on Slide 7, sales of $5.7 billion were up 15% on an adjusted and organic basis with sales growth across the commercial segments partially offset by lower military volume. Commercial aftermarket sales were up 26% in the quarter due to higher shop visit volume and content in both large commercial engine and Pratt & Whitney Canada businesses. Commercial OE sales were up 22% in the quarter on higher engine deliveries and favorable mix. In the military business, sales were down 3%. The decline in sales was driven by the timing of the F-135 production contract award in the prior year, which was partially offset by higher F-135 sustainment volume this year. Adjusted operating profit of $436 million was up $133 million from prior year, with drop-through on higher commercial aftermarket sales and favorable large commercial OE mix partially offset by higher production costs and higher R&D expenses. Note that both this quarter and the prior year quarter had a similar sized contract benefit of roughly $60 million. With that, before we get into the updated outlook for 2023, let me turn it over to Chris to give some additional color on the Pratt fleet. Christopher Calio: Okay, thanks Neil. Let me share with you what I can at this point about the Pratt matter. As you heard from Greg, Pratt previously determined that a rare condition in powdered metal used to manufacture certain engine parts may reduce the life of those parts. It’s important to note upfront that the current production of powdered metal parts is not impacted and Pratt will continue to deliver both new engines and new spare parts across all product lines. I’ll come back to that in a minute. As a result of this rare condition in powdered metal, Pratt instituted enhanced inspections to be performed at scheduled shop visits; however, based on very recent learnings from these inspections, Pratt has now determined that the timing of these shop visits needs to be accelerated. While powdered metal parts have been widely used throughout Pratt’s product lines for decades, Pratt has bounded the potentially impacted material. It has concluded that this condition was present in rare instances in powdered metal produced from approximately Q4 2015 into Q3 2021. The PW1100 engine fleet which powers the A320 Neo will experience the most significant impact due to production volumes during this period. Based on the current assessment, Pratt anticipates by mid-September that approximately 200 PW1100 engines will be removed for enhanced inspection. Beyond the initial 200 engines, Pratt also anticipates that approximately 1,000 additional PW1100 engines will need to be removed from the operating fleet for this inspection within the next 9 to 12 months, though the exact number of engines and the timing of those removals is not yet finalized. It’s important to note that some of the engines that must be removed for inspection in 2023 and 2024 are already forecasted for a regular shop visit during this time period, and so the incremental impact to the fleet is still under evaluation. Capability to perform the accelerated inspections, which are focused on the high pressure turbine discs, is already in place and Pratt is developing plans to optimize shop visit capacity within its network to complete these inspections as quickly and efficiently as possible. As I said earlier, current production of powdered metal parts is not impacted and Pratt will continue to deliver both new engines and new spare parts across all product lines. This is a result of the combination of extensive improvements that were made to our powder processing to remove possible contamination sources and the deployment of enhanced inspections for improved detection. Pratt is also analyzing any potential impact to other parts of its fleet, but the current expectation is that they will less impacted based upon existing inspections, utilization profiles and maintenance intervals. Let me take a moment to explain the timing of these developments. We proactively monitor the performance of our engines throughout their life cycle. It’s foundational to how we maintain and manage the safe operation of our fleet. We do this in a number of ways: analyzing large amounts of data generated during operation, inspection parts in MRO, destructively testing certain parts to analyze their material properties, and characterizing what we observe. We use learnings from this proactive monitoring to inform our predictive models so we can address any issues before they appear in our fleet. In this case, as Pratt analyzed some recent inspection findings, it determined the need for an accelerated inspection plan even though the fall-out rate from these inspections is expected to be very low. The next step is for Pratt to publish a service bulletin describing the inspections, and the FAA will likely follow up with an air worthiness directive. The financial impact associated with these renewals is still being analyzed and will depend on a number of factors, including the result of the inspections, the amount of work needed to be done in our network shops, and of course the impact on our customers. This is obviously a difficult situation for our customers, especially given the strong demand for travel. We are truly sorry for the impact of this disruption and we will do all we can to support our customers. Safety always has been and always will be our number one priority, and we will never compromise in ensuring the safe operation of our fleet. We will of course continue to keep you apprised as our analysis progresses on both the operational and financial impacts of these accelerated shop visits. With that, let me turn it over to Neil to talk about how this impacts our 2023 outlook. Neil Mitchill: Thanks Chris. Let’s start with the segment outlook. As Chris mentioned, there continue to be a number of evolving assumptions around the financials at Pratt. Let me try to put some additional color around that, starting with the top line. Commercial aftermarket demand remains strong and we are continuing to ramp production. Because of this, we are confident in our prior sales range of up low to mid teens. On the profit side, given the strong first half results and continued top line growth, we still expect between $200 million and $275 million of operating profit growth for the year. Within that outlook for Pratt, here’s what we are assuming as it relates to the increased engine removals and inspections. Given Pratt’s results to date and aftermarket strength, the impact of the first 200 engines is contemplated within the range we just provided. Keep in mind, given the percentage of completion accounting for the aftermarket contracts and the relatively early life of the programs, the P&O impact will be less significant today. However, for the reasons Chris described, the impact of any further engine removals from service for inspection is not currently assumed in our outlook. Moving to Collins, given the strong results in the first half and the continued strength we are seeing in commercial aftermarket, we are increasing the full year sales range from up low double digits to a new range of up low double digits to low teens, and as a result of this increased demand and continued execution, we now expect Collins adjusted operating profit to be up between $825 million and $875 million compared to the prior range of $750 million to $825 million. Turning to the new Raytheon segment, given the strength of the backlog and the accelerating top line, we expect sales for the combined segment to grow low to mid single digits versus 2022. While we have begun to see increased material flow and improved efficiencies, we had lower productivity than we expected in the first half of the year, including costs associated with fixed price development programs, and similar to Q1, we anticipate another contract option exercise that will lead to a headwind in third quarter. With all that said, we’re expecting continued volume growth and second half productivity improvements, and altogether we see adjusted operating profit up between $125 million and $175 million versus prior year. Now let me summarize all this at the RTX level. As Greg mentioned, we’re increasing our full year RTX sales outlook to $73 billion to $74 billion, which translates to organic growth of between 9% and 10%. This is up from our prior outlook of $72 billion to $73 billion. With respect to earnings, we are tightening our adjusted earnings per share range by $0.05 on the bottom end and now expect adjusted EPS of between $4.95 and $5.05, given the first half results and some improvement in below-the-line items. We’ve provided an update on those below-the-line items in the appendices. Turning to free cash flow, the impact of the Pratt matter will be more meaningful on cash flow as we begin to ramp up inspections and MRO activity this year. As a result, we now see free cash flow up approximately $4.3 billion for the year, about $500 million below our prior outlook. Finally, we’ll transition to the new segment reporting here in the third quarter and we’ve provided the re-cast 2022 and 2023 quarterly financials in the appendices. With that, let me turn it over to Greg for some closing remarks. Gregory Hayes: Okay, thanks Neil. Just some closing thoughts before we get to the Q&A. We obviously had a very strong second quarter with $25 billion in new orders, which brings our backlog to a record $185 billion. Sales were also very strong with 13% organic revenue growth. This strength in sales and orders reflects the strength in both our commercial aero and defense markets. RPMs are on track to return to pre-COVID levels as we exit 2023, and military spending globally continues to increase in response to Russia’s aggression in Ukraine and the emerging threats in the INDOPACOM theater. Based on the continued strength in our markets, we are well positioned to deliver on our commitments for 2023 and beyond. With that, let’s open up the call for questions. Q&A Session Follow Rtx Corp (NYSE:RTX) Follow Rtx Corp (NYSE:RTX) 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 the line of Robert Stallard of Vertical Research. Robert Stallard: Thanks very much, good morning. Gregory Hayes: Morning Rob. Robert Stallard: Let’s start with the GTF, shall we? By my count, this is the third issue you’re dealing with at the moment – you have that quality escape noted at Paris, the ongoing time-only issues in these challenging environments, and now the metal problem. Is there a root problem or cause that’s linking these issues, and are you concerned about the potential impact on Pratt’s reputation for reliability? Thank you. Christopher Calio: Yes, thanks Rob, this is Chris. I’ll start. Obviously this is a disappointing development and will impact our customers. Let me just sort of take a step back and kind of walk you through the processes that are in place across Pratt. It’s got a strong process of fleet surveillance, evaluation, and taking corrective action that is used to support the safety of the fleet. In this particular case, the process worked, but I will tell you that, again, we continue to monitor the situation with the fleet, we continue to find learnings in fleet, and then we take those actions and update our models and correct them. But if you step back, this is not a GTF design issue, this is a manufacturing process issue on our part with metal. We very quickly went and enhanced those processes to make sure this doesn’t happen again and put in place the enhanced inspection techniques to make sure that we can continue to find this and address them promptly. We’re taking prompt action. Right now, we’ve got work through how we define work scope and the turnaround time that’s required, and of course do all the impact to the fleet that’s going to be required. Again, we talked about the comments upfront, GTF is going to have a lot of shop visits here in the back half of ’23 and into ’24. We need to figure out how many of those are incremental and what the true impact to the fleet is, but that’s ongoing. But again, we’re going to continue to invest in the GTF in the durability improvements that Shane talked about at investor day in June, and of course the GTF advantage. We will work through this difficult time, but again we continue to believe in the GTF, its architecture and its future. Robert Stallard: Okay, thanks Chris. Operator: Thank you. Our next question comes from the line of Myles Walton of Wolfe Research. Myles Walton: Thanks, good morning. Neil, I’m trying to understand the scaling of the $500 million lower free cash flow to the total population of engines that you’re going to be removing and inspecting. I think you said that the first 200 are encompassed in the guidance, but it wasn’t clear if that was just the segment profit guidance you were talking about. Also, obviously this is lingering into ’24 to get that whole 1,200 population, so should we think about a similar sized cash impact in ’24? Neil Mitchill: Got it. Let me start with what I can tell you now. First, let me remind you, it’s very early in this process. We have begun to investigate what the costs and the work scope and the timing might be, but there will be some learnings over the next 30 to 60 days and we’ll certainly come back and talk to you a little bit about that. As I think about the guidance, the comment I made was with respect to the Pratt guidance. Again, we had a first half that was very strong at Pratt. I think we’re well on track for the year, all else equal; but a couple of dynamics that will likely keep the P&L impact associated with the 200 accelerated inspections manageable for the year. First is we’ve talked about 85% of this fleet is under a long term contract, and we’re less than 5% complete on those programs on average, so as Chris just mentioned, we don’t know exactly how many but some of those 200 are already scheduled for a visit this year. When we think about those two things, that sort of helps us bound what the impact could be for this year with respect to that population. Given the thousand and the fact that a number of those are also already scheduled for a shop visit, we still need some more time to go think through that. As it relates to the cash flow, similar train of thought there – we really do need a little bit more time to go through this, but we’ve put a risk into our outlook because we know that we’ll have some calls on cash over the rest of the year. I would say there’s two things that are impacting the cash flow. The first is what I’d call the direct impact, and the second is what I’d call the indirect. On the direct side, it’s really going to be things like accelerated capital, some inventory to get ready for these inspections, expenses associated with the work that we’ll start to perform during the last quarter of the year, and then obviously customer disruption, so more to go there. Indirectly, there’s other work that this may disrupt in our business, and so we’re contemplating some of that as we look at this year. I think it’s a bit too early to kind of extrapolate that out to ’24 and ’25. Certainly we’ll come back over the next couple of months and provide a better update. Myles Walton: Can you clarify if the powder metal supplier is internal to you? Gregory Hayes: Myles, this is Greg. Yes, so we actually manufacture the powder in our facility in New York. That powder is then processed down in our Columbus, Georgia forge into a number of different parts. The parts we’re talking about here are turbine discs, but they are all internally manufactured with a proprietary powder. Myles Walton: Thank you. Operator: Thank you. Our next question comes from the line of Ronald Epstein of Bank of America. Ronald Epstein: Yes, hey. Good morning. A question for you, Greg. Kind of getting back to Rob’s question, when you look at the litany of issues that have happened here with this engine, everything from hot section issues, manufacturing issues, do you have a cultural issue in your engineering workforce? Are people not talking to each other? I mean, it also begs the question, how could you guys possibly not know about this at Paris when you did this major investor event? Can you just give us all some insight into how people are communicating and what’s going on in your engineering workforce? Gregory Hayes: Yes, you know Ron, we should differentiate between the durability issues that Shane talked about and that I’d call this a manufacturing quality issue. Let’s just take a step back. This is an issue that we first uncovered back in 2020 when we had an incident with a V2500 turbine disc. As a result of that investigation, we determined at that point that we had some contamination in this powdered metal that we make. It occurred very, very rarely, but it did happen, and it actually resulted in the turbine disc failure on an airline. As a result of that, we went through and did two things. First of all, we went out and inspected the V2500 fleet, but we also went back and we took a look at the powdered metal process to determine how this contamination happened. Through a lot of work, through a lot of discovery, we figured out what the contaminants were and by the end of 2021, about a year after that, we were able to manufacture powder that was, I would say, contaminant-free to the best of our ability. At the same time, we knew that this contamination had occurred between late 2015 and late 2020, early 2021, so we knew we had a suspect population in the fleet. We went out and so we started inspecting. We inspected the turbine discs as they were manufactured, we inspected turbine discs as they came back in, not just for the V but for the whole GTF fleet, in fact the entire fleet of Pratt products that were manufactured during this time frame. Those inspections, and there were over 3,000 of those inspections, yielded a very, very small fall-out rate, less than 1%. As Chris said, all of this data goes into our lifing model for the turbine disc, and based upon everything that we knew until very recently, we believe that the life of the turbine disc was such that we would see these discs in the shop and be able to inspect them before we ever had an issue. Now as we looked at the data again over the last couple of months, our safety risk assessment, our safety board went through their process of updating the data based on all the recent findings, and they said, you know what? We’re not absolutely positive that the lifing model is accurate, and so we want to take a look at these discs on a much accelerated basis. I would tell you, that is exactly the way the process is supposed to work, and so we’re going to pull back 200 discs, or 200 engines and look at the discs here in the next 90 days or so. In the next year, based upon those findings from the first 200, we think there’s probably another 1,000 out there, so 1,200 out of a little over 3,000 engines out there have to be inspected. But this is not a manufacture–sorry, it’s not a design issue. In fact, the engineers have been working on this issue hand-in-glove with the safety board and everybody else in manufacturing for the last three years, so I don’t believe that we have an engineering issue. Obviously this was a quality escape back from–you know, sometime between 2015 and 2020, and we are doing, I think, exactly the right thing, which is to bring these engines back, inspect them and ensure the safety of the fleet going forward. I think again, it’s–look, this engine, Ron as you know, has been a challenge since we launched it back in 2015. You guys can remember talking about bode rotors and all the other issues that we had, but if you think about this engine operating at the temperatures that we do, it has been a continuous discovery. This is not one of them. This is simply a quality issue from a manufacturing problem, so I would say, look, we’re on top of it, we’ve got this. It’s going to be expensive. We’re going to make the airlines whole as a result of the disruption we’re going to cause them, and I think we’re going to work ourselves through it. It’s not an existential threat to RTX; it’s not even an existential threat to Pratt. It is a problem, and we have them every day. We’ll solve it. Ronald Epstein: All right, got it. Gregory Hayes: Thanks Ron. Operator: Thank you. Our next question comes from the line of Peter Arment of Baird. Peter Arment: Yes, thanks. Good morning. Greg, thanks for that color there, I appreciate that. On the powdered metal just specifically, when did you make the change? Was it back in 2020 or ’21, just so we can have better clarity on the engines that are being delivered today? Gregory Hayes: Yes, so it was mid to late 2021 where we changed all the processes in terms of the screening of the powdered metal to identify the contaminant, to eliminate the contaminant. Let’s be clear – this is a–these contaminants are microscopic, and unfortunately the original process, as we scaled up production for GTF, it got away from us a little bit. We fixed it, but I would tell you everything that we have shipped, or almost everything we have shipped, I should say, in the last three years, we believe is going to be just fine. That’s why we’re confident we can continue to support Airbus, continue to support customers with new deliveries, as well as with spares this year and next. Peter Arment: Appreciate it, thanks Greg. Gregory Hayes: Thanks Peter. Operator: Thank you. Our next question comes from the line of Sheila Kahyaoglu of Jefferies. Sheila Kahyaoglu: Good morning guys, thank you very much. Just on free cash flow, can we walk through the bridge, $1.2 billion of free cash flow usage in the first half, $4.3 billion expectation for the year? How do you think about the biggest drivers on a segment level basis in working capital? What are you expectations for factoring for the year, whether it’s a benefit or a headwind, and do we think about $500 million of Pratt impact for 200 engines, is that the rate we should assume going forward in future years or is that something you guys are working through? Neil Mitchill: Thanks Sheila. This is Neil, and good morning. I will take that one. First of all on the half a billion dollars, I wouldn’t extrapolate that. We need some more time, as I said earlier in the call, so let’s just focus on ’23. As I look at the walk from the first half to the second half, I’ll also say that we ended the quarter with positive cash flow, pretty much as expected, so the back half of the year is as we expected it to be. Obviously there’s some work to do there to generate the cash consistent with the profile we had last year. The major piece is really our–I’d put it in four major buckets. Obviously we have the rest of the year segment operating profit – it’s a little less than $4 billion or so. We feel pretty good about that, consistent with the guides that we just provided and updated. We’ve got capital, second half capital which is going to be a headwind of about $1.4 billion, and then we’ve got a working capital item that we have to kind of burn down – it’s about $3.5 billion, about $2 billion of that is inventory, I’d say split pretty evenly between Pratt and Collins, and then a billion dollars of the net contract asset liabilities, which is principally in the Raytheon segment, and that lines up to milestone payments we expect to receive in the back half of the year, as well as some international advances similar to what we had last year, that would occur late in the fourth quarter. The rest of the puts and takes are really the things we’ve talked about – pension, taxes, interest and other. The net of that is about half a billion dollars of an outflow in the second half. Again, same profile we were staring at 35, 45 days ago. We’ve layered in the Pratt impact – I think that mostly will impact working capital, it may have some capex as well. Sheila Kahyaoglu: Thank you. Neil Mitchill: You’re welcome. Operator: Thank you. Our next question comes from the line of Kristine Liwag of Morgan Stanley. Kristine Liwag: Hey, good morning guys. Gregory Hayes: Good morning Kristine. Neil Mitchill: Good morning. Kristine Liwag: For the Pratt issue, it seems like the free cash flow impact in 2024, 2025 is still a little bit unclear. How should we think about how this affects your 2025 free cash flow outlook of $9 billion, and is that still the number you’re reiterating or should we think about potential downside risk? Neil Mitchill: Hey, good morning Kristine. I’ll take that to start. Clearly all things equal, the issue we just talked about is going to put some pressure on Pratt margins and would put pressure on cash. I think it’s too early to put a number on that. We’re going to need some time to go through and understand what’s the work scope, how does that intersect with already planned work scope and the profile of those shop visits, and of course we’re always focused on trying to drive more out of our businesses and we would do the same here. I think I’ll leave it at that. We will come back to you over the next couple of months with more detail. Greg? Gregory Hayes: Yes, just maybe the way to think about this is we’re going to pull 200 engines back this year, a bunch of those were going to come back anyways, and then next year it’s another 1,000 and a bunch of those were already planned. Having said that, though, we know right now we’ve got 13 MRO facilities, we’re going to have to–our plan was to go to 19, we’re going to have to accelerate some of the tooling – that’s contemplated in this cash. We’re going to have to dedicate some spares to a rotable pool of engines to support some customers. Those things, again, will be behind us, I would say probably by the middle of next year in terms of the cash outflows associated with that. The big question in everybody’s mind will be, what are we going to have to do in terms of compensation to the airlines. We have contracts and special support agreements that are out there, so we’ll work through that but it’s going to take time. I guess the main point, though, is by the end of next year, this inspection program will be almost all complete and the 2025 outlook really shouldn’t be impacted, other than as Neil said, potential margin impact as some of these costs roll through the GTF support contracts. But again, we’ve got two years to work through that and we will figure that out, but in terms of the cash, really probably not a big difference as you get out to 2025. Kristine Liwag: Great, thank you. Operator: Thank you. Our next question comes from the line of Seth Seifman of JP Morgan. Seth Seifman: Thanks very much, and good morning. I wanted to ask a question about the Raytheon business. It looks like, and I want to make sure I’ve got the right recapped numbers here, but it looks like first half to second half, only kind of a modest sales increase expected but fairly healthy profit increase to get to the 150 of profit growth at midpoint. I guess if you could talk a little bit about what gives you confidence in that, especially in light of the option exercise you mentioned, and then also, I thought there was pretty good top line momentum at RND in the quarter, and the degree to which you do or don’t expect that to continue in the second half. Christopher Calio: Hey Seth, this is Chris. When you look at RND–we’ll break it down into the pieces of the new Raytheon segment. When you look at RND, we started to see some positive momentum in particular around material growth, right – about 14% year-over-year material growth. The kit fill rates that we’ve talked about for some time that were hovering in those mid to low 50s, were up into the mid 70s, so we’re starting to see material flow which is a big part of the continued productivity story at RND. At RIS, I would say, again, less material intensive but very good material flow and kit fill rates. The issues that we’re continuing to grapple with are the fixed price development contracts that we’ve got. We’ve mentioned before, we’ve got a handful of fixed price development contracts that are technologically very complex, that we continue to work our way through. We believe we’ll make significant progress on those here in 2023 and into early 2024, but overall again seeing positive momentum on the productivity front at Raytheon. Neil Mitchill: Thanks Chris. Let me add a couple comments here too regarding productivity. I think the first half of the year was encouraging in some regards – we turned the corner a bit. I think on a year-over-year basis for the first half of the new combined business, we’re essentially flat year-over-year. We are expecting about $100 million of productivity step-up in the second half of the year – think about that as–I’m sorry, on a full year basis, so about $75 million or so in the second half of the year. The material receipts is what makes us have the confidence around that path to the second half of the year. The other encouraging point I would say is particularly at the missile business, we saw the sales tick up on that material receipt and the mix of that material had good drop-through on it, so we’re starting to see the transition of the mix of production from development. We talked about 2023 being the low point. That’s how we’ve calibrated this into this revised outlook. We’ve also taken into account the first half performance as we’ve readjusted this realignment in the second half of the year. Seth Seifman: Thanks. Neil Mitchill: You’re welcome. Operator: Thank you. Our next question comes from the line of Ken Herbert with RBC Capital Markets. Ken Herbert: Yes, hi. Good morning. Neil Mitchill: Morning Ken. Ken Herbert: Maybe Chris or Neil, if you could dig a little bit further into what you bucketed as the other disruptions as we think about maybe an incremental diversion of engines into the spare pool and how we think about stresses on the capacity of the network as you deal with not only the 200 this year but the 1,000 next year. Within that other bucket, where do you see the primary risks or maybe the greatest unknowns as you think about the potential eventual impact on cash? Christopher Calio: Hey Ken, thanks. This is Chris. I’ll start. As we kind of noted upfront, there are a number of variables that are going into the fleet impact, both this year and next: work scope, making sure we define the work scope for these inspections, the turnaround time, trying to get the turnaround time and do this work as quickly and efficiently as possible, making it into a project visit to the extent that we can, and then optimizing the network capacity. You just heard Greg say we’ve got 13 shops across our network today – we’re adding more shops, but how do we go and optimize that network, because obviously we’ve got with today, as you know, as we’re trying to increase output on the GTF MRO, we’ve got to make sure that we’re inducting the right engines at the right time and making sure that we can do this, I’ll call it new work, new inspection work separate and apart to the extent that we can from the ongoing MRO work. All of that, I’ll call it optimization formula, is still being developed and we’re going to need a little bit more time on that. In terms of the other disruptions, Greg mentioned some of them; but again, we’re going to be looking at our network where all of our work is done to try to minimize any disruption on other programs, more mature programs perhaps that are going through the MRO cycle. Again, how do we make sure that those continue to flow uninterrupted while we do this work, those are the types of things we’re continuing to work through. Ken Herbert: Great, thank you. Operator: Thank you. Our next question comes from Jason Gursky of Citi. Jason Gursky: Hey, good morning everybody. You talked a little bit about the capacity in MRO. Can you talk a little bit about the capacity for the part itself, the internal manufacturing capabilities that you have there and whether this is another potential constraint for you all on the GTF? Christopher Calio: Yes, thanks Jason, this is Chris. Greg mentioned upfront that we’ve had this enhanced inspection technique in place for some time and have been doing these inspections. On the V2500 in particular, we’ve had, I think Greg, you said almost 3,000 of those inspections. I will tell you that the fall-out rate from that on this part has been very, very low, and so at this particular time, Jason, we don’t believe that the HPT will be the limiting factor, if you will, in terms of the turnaround time and our ability to work through this as quickly and efficiently as possible. Jason Gursky: Mm-hmm. If you were to go and do one of these inspections today, do you have a sense of–are we talking about weeks or days, or months to do this inspection? Christopher Calio: Yes, so we’re talking HPT discs, Jason, and so that particular module, you can’t necessarily do that on wing. You’ve got to take the engine off wing, you’ve got to disassemble the engine to get to that particular area. Unfortunately, based on the geometry and location of the part, you do have to remove the part to do this enhanced inspection capability, reassemble and then get it back out to the fleet. I think I mentioned before, we’re trying to turn this into, as best we can, what we would call a project visit, not a full interval shop visit, but that work is still underway. Obviously making sure the wing-to-wing turnaround time is as short as possible and doing what we need to do is an important element of understanding the fleet impact and what we need to do from a network perspective. Jason Gursky: Is there any silver lining to this at all, in the sense that you mentioned optimization on how you’re going to deal with these visits and these inspections? Is there an opportunity here to get through some of the durability swap-outs that you need to do anyway, so that you can kill two birds with one stone, so to speak, as you do these inspections? Christopher Calio: Yes, so when you think about that 2024 shop visit population, we’re going to, again, take a look at the utilization on those, the cycle time on those engines, and in working with our customers making a decision, a mutual decision on is this the right candidate for a project visit or should that work scope increase to take on additional work, which will benefit the time on wing and the interval of that engine moving forward several years. That is a decision, that is a conversation that we will have once we better understand again how many of these visits are truly incremental in 2024, and then the related fleet impacts. As you know, Jason, that is a part of the equation. Jason Gursky: Then lastly, do you think you’re going to learn enough by the time we have the October earnings call to provide us a little bit more clarity on things, or do you think this is going to be a discovery process that takes us out a number of months, into the end of the year? Gregory Hayes: Jason, we’re discovering something new every day here, so I think–all I would tell you is that over the next, I would say six weeks as we finalize the inspection protocols, as we finalize the turn times and work with our customers, keep in mind we’re trying to get the first 200 engines back by the middle of September, so I think by the middle of September, we’ll have a much better feel for what is involved here. We’ll have an opportunity to update everybody around that time. I think by the time we get to October, obviously we’ll know even more as we go through some of the initial inspections, so this is a learning process. We understand what it takes to inspect, we understand what it takes in terms of the inductions and the processes, and unless there is some surprise, I think we can have this pretty well bounded in terms of what the cost impact is, in terms of what the cash flow impact is, and so by the time we get to the third quarter call, obviously we’ll have a hell of a lot more knowledge than we do sitting here today. Jason Gursky: Great, thanks guys. Operator: Thank you. Our next question comes from the line of Cai Von Rumohr of Cowen. Cai Von Rumohr: Yes, thank you so much for taking my call. By my calculations, you delivered something like 1,600, 1,700 GTFs by the middle of ’21, so how do we get to 1,200 engines? I mean, are we sure that’s the number? Could it be a larger number, and is this just related to the PW1000 or does it also impact the Vs? Christopher Calio: Yes, so let me start maybe with the second part first, Cai. Our current assessment is that we don’t expect the same type of impact on the V2500. It has had an enhanced inspection fleet plan and management plan in place for some time, and as I noted and as Greg noted, we’ve completed a significant number of those inspections thus far and feel comfortable that this can be managed at this point within the existing shop visit forecast. As Greg noted, we’re still going through that analysis, it will take us into August to finalize that, but that’s our current expectation. Same on the other Neo applications – there are different characteristics and attributes on those engines, whether it be stress on the part, whether it be thrust, that we believe differentiates it from the 1,100, and such our current assessment is those can be managed within the existing shop visit forecast that we have for 2024. In terms of the population, Cai, you heard Greg talk about when we bounded the potentially contaminated material, we put in place the enhanced processes for powdered metal at that time and also put in the enhanced inspection techniques that we’ve talked about. Many of the engines that have come off, all of the engines that come off since that time have gone through this inspection and have been a part of what we would call this better powder processing regime. Ultimately we will inspect parts when they come in for their normal shop visit on down the line, Cai – as you know, these engines will come back for shop visits and we will inspect this, among other things during that time. What we’re talking about right now are those that we need to accelerate the shop visit for. Again, that’s based on all the variables that we talked about. We feel confident that as part of the safety management board that Pratt has, that we’ve got the right population and the right plan in place. Cai Von Rumohr: Just one quick follow-on, we’ve hit on all the negatives, but you just got this announcement of this $2.9 billion potential AMRAAM order from Germany. Can you give us some color on your munitions outlook in the out years, is that substantially better? Gregory Hayes: Yes Cai, it’s nice to talk about something other than GTF. Look – this AMRAAM order is an order that will be for both Germany, really for all of the NATO countries, that will also benefit Ukraine. I would tell you, that is on top of what we expect to see as relatively large order for GEM-T missiles associated with the Patriot air defense system. We have orders there from Saudi Arabia, we have orders coming from NATO. I think in the back half of the year, you’re going to see significant–we’re planning significant order intake on both AMRAAM and GEM-T, as well as of course Excalibur. Neil mentioned we’ve got the Javelin order, we had the Stinger order already – those orders will continue to grow. But I’ll tell you right now, we still have only seen $2 billion of orders associated specifically with Ukraine replenishment. We think there’s probably another $2.5 billion coming in the next 12 months associated with just the Ukraine replenishment on top of the GEM-Ts, and the GEM-Ts, again they’ll go to Germany, they’ll go to Poland, they’ll go to all 18 of those countries that are currently operating Patriot, so I think that’s a very positive sign and that’s why we’re so bullish on the defense outlook for the next couple of years. Cai Von Rumohr: Thank you. Operator: Thank you. Our next question comes from the line of David Strauss of Barclays. David Strauss: Thanks, good morning. Sorry, back to the GTF. Gregory Hayes: Come on! David Strauss: Sorry. I just wanted to ask you about how closely coordinated you are at this point with the regulatory bodies with regard to this, and have they kind of signed off on your plan or is there any risk here of potentially the population or the timeline of these inspections getting accelerated? Christopher Calio: Yes, thanks David, this is Chris. I would say all of this has been very closely coordinated with the FAA. I think you heard me upfront talk about that this will come in the form of a service bulletin that Pratt will publish, and then likely an AD that the FAA will distribute. But our safety management process, whether it be through events that happen in the field, things that we find through our continuous surveillance process or recommendations and assessment like this, are always very closely coordinated with the FAA, and then of course with the other international regulatory bodies as well. FAA of course is where we start, but we of course continue to coordinate with the FAA and those other international bodies, but bottom line, very closely coordinated with them. David Strauss: Okay, and a quick follow-up, you keep mentioning fall-out rate, low fall-out rate. I assume that is where you actually have to replace the high pressure turbine discs. What exactly have you assumed in terms of a fall-out rate, and given it sounds like the inspection here is pretty involved, how much more involved would it be and costly to be to actually replace the high pressure turbine blades versus just the inspection–or discs, sorry? Christopher Calio: Yes, so you’re absolutely right – that’s what fall-out rate means, those that we inspect and decide need to be removed and replaced. Our experience has been that’s been very, very low. If of course we had to replace the turbine disc, then we’d factor that into the turnaround time and that will of course potentially add some time to the process. But as of now, again David, our assumption–and we’re continuing to work through that and through the month of August here, but our assumption based on everything that we’ve seen thus far is that the fall-out rate will be very low, and that’s what’s embedded in our assumptions today. Gregory Hayes: David, keep in mind in order to do the inspection, as Chris said, we literally have to pull the high pressure turbine disc off of the engine and put it through this inspection protocol. Now, whether we put that disc back on or a brand-new one, it’s not a significant impact, and again with a very, very low expected fall-out ratio, I wouldn’t–of all the things I worry about, that would be low on the list. We have plenty of capacity for turbine disc out of Columbus, especially given what we expect to be a very small number of replacements. That is, I would say, the most manageable portion of this. David Strauss: Got it, thanks a lot. Operator: Thank you. Our final question will come from the line of Noah Poponak of Goldman Sachs. Noah Poponak: Hey, good morning everyone. Neil Mitchill: Morning Noah. Noah Poponak: On the powder metal, are you able to bound at this point whether you expect the free cash impact next year to be larger or smaller than this year, and then also following up on the Raytheon defense margins, can you just spend another minute on the fixed price development programs you’re citing – which ones are they, when do they move out of the development phase, and how do they play into the multi-year margin expansion you’re expecting? Neil Mitchill: Sure, yes. First of all on the free cash flow, again Noah, I hate to keep saying this, but we really need a little bit more time to put a finer point on our estimates, and we will come back to you on that part as it relates to ’24 and beyond. But I think we’ve talked at length about what the considerations are there and how we’ll be thinking about that, and that there is a possibility that some of these shop visits are already planned and there will be effects that counterbalance some of this in the out years, so more to come on that front. On the defense margins, you’ll recall back in Paris, I talked about $40 million to $50 million of headwinds we expected from the RINS business, and that happened just as we expected as we closed out the quarter. It’s literally a few contracts – I’d say most of them are classified, so hard to get into the names. The duration, I’d say the most–you know, the period of time that we’re looking at, probably 18, 24 months before those programs are fully behind us. We’re in the test phase, we’re obviously learning through that phase, but I think we have a little bit longer to go here. I think we’ve got it calibrated in the second half of our year outlook, but all the right resources are on it and, like I said, absent that, we are seeing productivity turn in the rest of the business, so it really is a focused set of programs that we’re dealing with. Noah Poponak: Okay, thank you. Neil Mitchill: You’re welcome. Gregory Hayes: Okay, thanks to everybody for listening in. Just to put all this in perspective, I think you need to keep in mind, we have very strong franchises between Collins, Raytheon and Pratt & Whitney, and the $185 billion of backlog. I know this GTF issue, this quality issue is a bit of a surprise. We have been working it for the last, I would say, 10 days or so. We will know a lot more in the next six weeks, and as that information becomes available, we will of course be sharing it with investors. But again, keep in mind this is a small piece of what is a great franchise across RTX. Having said that, Jennifer and her team are obviously going to be available the next couple of days to answer any follow-up questions that you have. Thank you all for listening, and take care. Bye bye. Operator: This now concludes today’s conference. You may now disconnect. Follow Rtx Corp (NYSE:RTX) Follow Rtx Corp (NYSE:RTX) We may use your email to send marketing emails about our services. Click here to read our privacy policy......»»
Northern Trust Corporation (NASDAQ:NTRS) Q2 2023 Earnings Call Transcript
Northern Trust Corporation (NASDAQ:NTRS) Q2 2023 Earnings Call Transcript July 19, 2023 Northern Trust Corporation beats earnings expectations. Reported EPS is $1.79, expectations were $1.62. Operator: Good day, and welcome to the Northern Trust Corporation Second Quarter 2023 Earnings Conference Call. Today’s conference is being recorded. At this time, I’d like to turn the conference […] Northern Trust Corporation (NASDAQ:NTRS) Q2 2023 Earnings Call Transcript July 19, 2023 Northern Trust Corporation beats earnings expectations. Reported EPS is $1.79, expectations were $1.62. Operator: Good day, and welcome to the Northern Trust Corporation Second Quarter 2023 Earnings Conference Call. Today’s conference is being recorded. At this time, I’d like to turn the conference over to Jennifer Childe, Director of Investor Relations. Please go ahead ma’am. Jennifer Childe: Thank you, Jenny and good morning, everyone. Welcome to Northern Trust Corporation’s second 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 Allnut, our Controller, and Grace Higgins from our Investor Relations team. Our second 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 July 19 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 August 19. 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. Mike O’Grady: Thank you, Jennifer. Let me join and welcome you to our second quarter 2023 earnings call. Our results for the second quarter reflect solid sequential performance. Trust fees and assets under custody and management increased sequentially, which included positive organic growth in each business. Net interest income was down modestly on a linked quarter basis, reflecting higher funding costs associated with the highly competitive deposit backdrop. Expenses excluding the neutral items are well controlled, reflecting the rigor of our cost discipline, as well as the impact of various productivity initiatives. We reported $64 million in charges in the second quarter associated with these steps. Our wealth management business modestly grew assets under custody and management and trust fees on a sequential basis. We continue to see strength in the higher wealth tiers and within our global family office segment, where we captured several marquee wins. Our industry leadership position also stood out in the quarter. We held our third annual Northern Trust wealth planning symposium, bringing together legal and financial experts to share innovative strategies and insights to shape the future of wealth management. Sessions averaged more than 1000 participants and included attendees from North and South America, Europe, Asia, Africa and the Middle East. We also released the second family office Trends Report co-authored with the Wharton School. Notably, we received a utility patent for cloud based goals driven Wealth Management Technology during the quarter, and we’re named best digital Innovator of the Year and Best Private Bank for Digital Wealth Planning by the Financial Times Group. In asset management, we saw strong flows into our institutional money market platform in every captured share. We also won a number of key mandates across products including outsourced investment solutions, tax advantaged equity, and quant active. Our new product launches in the quarter focused on alternatives. Within asset servicing, we continue to have good momentum in core custody and fund administration, particularly with asset managers in Europe and our pipeline remains robust. In the U.K., we are reappointed by Brightwell for middle office services. Brightwell is the primary service provider to British Telecom pension scheme, which has more than 50 billion in assets under management. Among asset owners, we clinched several key multimillion dollar takeaway wins in North America, where our front office solutions, which provides a comprehensive view across public and private assets was cited as a key differentiator. As a testament to our capabilities we are recently awarded three prestigious industry awards, including Best Global custodian for asset owners by Asian Investor. In the second quarter, we launched A-Suite, content community and Collaboration Hub for global asset owners. Within the first few weeks of launch, we’ve seen significant client engagement. Going forward, we expect this new communications channel to create relationships with key target audiences and further showcase our expertise in the market. In closing, our balance sheet continues to be very strong with ample capital and liquidity. Our new business momentum is gathering steam and our pipeline remains robust. While there’s still more work to be done, we’re making solid progress following the trajectory of our expense growth. Rationalizing our cost base remains a top priority and the governance and control mechanisms we’re putting in place today should drive sustainable improvements for both the near term and for years to come. We head into the second half of the year well positioned to support our clients and generate value for all of 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 second quarter 2023 earnings call. Let’s dive into the financial results for the quarter starting on page four. This morning, we reported second quarter net income of $332 million earnings per share of $1.56 and our return on average common equity was 12.4%. Currency movements had an immaterial impact on our revenue and expense growth in both periods. Our second quarter results were impacted by two notable items. We recognized a $38.7 million pretax severance charge impacting both our compensation and outside services line items. We recorded a $25.6 million pretax charge associated with the write-off and an COVID investment and a client capability. Notable items from previous periods are listed on the slide. Excluding notable items in all periods, revenue was up 1% on a sequential quarter basis and down 1% over the prior year. Expenses were down 1% on a sequential quarter basis and up 5% over the prior year. This reflects an expense to trust fee ratio of 116% down from 120% in the first quarter, and 122% in the fourth quarter of last year. Pretax income was up 13% sequentially, but down 9% over the prior year. Trust investment and other servicing fees, representing the largest component of our revenue totaled $1.1 billion, which reflected a 3% sequential increase, but a 4% decrease as compared to last year. All other noninterest income was flat sequentially, but down 10% over the prior year. Net interest income on a FTE basis which I’ll discuss in more detail in a few moments was $525 million, down 4% sequentially, but up 12% from a year ago. We had a $15 million credit reserve release in the second quarter due to improved credit quality on a small number of larger loans, which is offset in part by expectations for higher future economic stress and the commercial real estate market. Turning to our asset servicing results on page five. Assets under custody and administration for asset servicing clients were $13.5 trillion at quarter end, up 2% sequentially, and up 5% year-over-year. Asset servicing fees totaled $621 million, which are up 3% sequentially, but down 3% year-over-year. Custody and fund administration fees, the largest component of fees in the business were $427 million, up 3% sequentially, but down 1% year-over-year. Custody and fund administration fees increased on a linked quarter basis for the second consecutive quarter due to solid new business activity, higher transaction activity and favorable markets. They decreased from the prior year quarter primarily due to unfavorable markets. Assets under management for asset servicing clients were $990 billion, up 3% sequentially and up 4% year-over-year. Investment management fees with asset servicing are $134 million, up 6% sequentially, but down 10% year-over-year. Investment management fees increased sequentially, primarily due to asset inflows and favorable markets. They decreased from their prior year quarter primarily due to asset outflows and unfavorable markets. Moving to our wealth management business on page six, assets under management for our wealth management clients were $376 billion at quarter end up 2% sequentially, and up 7% year-over-year. Trust investment and other servicing fees were $475 million, up 3% sequentially, but down 5% compared to the prior year. Sequentially the increase in fees in the regions was driven primarily by favorable markets. Sequentially the increase in GFO fees was driven by net inflows. Relative to the prior year, the decrease in fees in the regions was primarily due to unfavorable markets and product-related asset outflows. Within GFO, the decrease in fees was due largely to unfavorable markets. Moving to page seven, our balance sheet and NII trends. Our average balance sheet decreased 1% on a linked quarter basis, primarily due to lower client deposits partially offset by higher leveraging activity. Earning assets averaged $134 billion in the quarter down to 1% sequentially and down 4% versus the prior year. Money market assets primarily absorbed the decrease. Client liquidity continued to grow during the second quarter. While we saw a decline in average deposits was more than offset by increases in other categories. Relative to the first quarter, our money market funds were up $8 billion or 6% and our CDs were up 29%. Average deposits were $106 billion down $6.6 billion or 6% sequentially but remained consistent with late April levels. We experienced a $2.6 billion sequential decline in noninterest-bearing deposits mostly within the institutional channel as clients continued to shift to higher yielding alternatives. This reduced the mix of noninterest-bearing deposits to 17%. At quarter end operational deposits comprised approximately two thirds of institutional deposits. These tend to be the stickiest deposits, as clients use them to operate their businesses. Approximately three quarters of our average deposits are institutional, with the remainder related to wealth clients including GFO. Shifting to the asset side of the balance sheet, average securities were down 2% sequentially, reflecting the natural runoff which was seen to reinvest at the short end of the curve. Our $50 billion investment portfolio consists largely of highly liquid U.S. Treasury agency and sovereign wealth fund bonds and it’s split approximately evenly between available for sale and held to maturity. The duration of securities portfolio continued to edge down in the second quarter to 2.1 years. The total balance sheet duration is now less than a year. Loan balances averaged $42 billion and were up 1% sequentially. Our loan portfolio is well diversified across geographies, operating segments and loan types, approximately 75% of the portfolio is floating and the overall duration is less than one year. Our liquidity remains strong with cash held at the Fed and other central banks up 9% to $43 billion. More than 45% of our overall balance sheet is comprised of cash, money market assets, and available for sale securities. This translates to $73 billion of immediately available liquidity of more than 60% of the total deposit base. Net interest income on an FTE basis was $525 million for the quarter down 4% sequentially, but up 12% from the prior year. NII reflected the impact of several dynamics. We saw continued client migration out of deposits and into higher yielding alternatives. Noninterest-bearing deposits as a percentage of total deposits slid to 17%. And deposit costs increased with our interest-bearing deposit beta during the quarter reaching 88% and our cumulative beta for the cycle at 68%. The net interest margin on an FTE basis was 1.57% for the quarter down 5 basis points sequentially, but up 22 basis points from a year ago. The sequential decline reflects the impact of higher funding costs partially offset by higher short-term market rates. Our NII in the third quarter will continue to be driven by client behavior which has been less predictable given the speed and velocity of the cycles rate hikes. Our average client deposits thus far in the quarter are approximately $106 billion. Deposit outflows are expected to continue in part due to seasonality as August is typically our low point in the year as European activity slows materially. The pace of the outflows is expected to moderate. Turning to page eight. As reported, noninterest expenses were $1.3 billion in the second quarter 4% higher sequentially and 9% higher than the prior year. Excluding charges in both periods is noted on the slide. Expenses in the second quarter were down 1% sequentially, but up 5% year-over-year. I’ll hit on just a few highlights. Compensation and technology expense continued to be the areas of highest spend. Compensation expense excluding severance charges was down 5% sequentially but up 4% compared to the prior year, was down sequentially due to the payment of our annual retirement eligible incentives in the first quarter. This is partially offset by the impact of this year’s base pay adjustments, which are granted in the second quarter. The year-over-year growth in compensation expense largely reflects the impact from inflationary wage pressures, and last year’s employee expansion, partially offset by lower incentives. Excluding charges, non-compensation expense was up 3% sequentially. The primary driver of the increase was growth in the outside services line which is up 9% sequentially. The increase is largely due to timing, as we reported a sequential decline in outside services of 9% in the first quarter, due to delays in technical services projects. We have heightened focus on expense control, we expect our operating expenses to grow more modestly, and our expense to trustee ratio to show further improvement. Turning to page nine. Our capital ratios remain strong in the quarter we continue to be well above our required regulatory minimums. Our common equity Tier-1 ratio under standardized approach was flat to the prior quarter at 11.3% despite continued common stock repurchases. This reflects a 430 basis point buffer above regulatory requirements. Our Tier-1 leverage ratio is 7.4% up slightly from the prior quarter. We returned $257 million to common shareholders in the quarter through cash dividends of $158 million and common stock repurchases of $99 million. And with that, Jenny, please open the line for questions. Operator: Thank you. [Operator Instructions] And I do have a question from Steven Chubak with Wolfe Research. Please go ahead. 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. Sharon Leung: Hi, good morning. This is actually Sharon Leung coming in for Steven. Just a question on deposit betas. They came in a little bit better than expected this quarter. Can you help us understand how to think about the incremental betas from here? Jason Tyler: Sure. So betas have continued to increase and from here, I think we still have to separate the institutional client base from the wealth client base. We noted that we’re cumulatively across the platform within this quarter in the high 80% range. The institutional channel is likely going to be at 100 at this point. The wealth channel still provides some benefit that there’s the betas there are a lot lower. But at this point, we’re seeing about 100% in the institutional channel, and still much less than that. And well, both of those trends seem to be continuing as we’ve seen early signs in the in the quarter. Sharon Leung: Great. And then as a follow up, you noted you’re out about 17% noninterest-bearing deposits today. I think you had cost closer to about 15% in the ’04, ’06 cycle. Can you help us think through where that potentially goes from here and once that starts to normalize where you see NII exiting the year? Jason Tyler: Well, like you we have looked back a lot where it’s troughed. And the data we have showed it a little higher than the 15%. You mentioned, I think it’s 16%. But I don’t think about that as a floor. There’s nothing structural in the base to consider that a floor. Now that said, it has been moderating significantly. And we haven’t seen much movement at this point. Obviously, there’s a step down this quarter of another percentage point, but it seems to be leveling off at this point. Operator: Next question comes from Alex Blostein from Goldman Sachs. Please go ahead. Alex Blostein: So a couple of questions around expense trends. I guess, one, a little bit more near term. You guys announced some action, obviously, over the course of the quarter, there’s a severance charge. So maybe help us quantify what it means in terms of savings and your just updated views on the overall sort of firm-wide expense growth for the year, I guess excluding the charges occurred in the second quarter. I think last time you talked about bringing that down to below 7%, but maybe an update there would be helpful. And then a bigger picture question. You guys are running at a kind of high 20-ish percent pretax margin that used to be north of 30%. So as you kind of think about the fee environment getting a little bit better with the market, but NII has clearly peaked, as we talked about before. Is there an opportunity to get back to that 30% plus? And how do you see sort of achieving that, if that’s the goal? And what’s the time frame around that? Jason Tyler: Sure. So let me tackle the expense. The compensation related first. First, I’m sure people are curious, where is the base from here. So let me just provide some background on kind of first quarter to second quarter, second quarter to third quarter. I think from here, we’d say flat to down from second quarter ex the severance charge in the compensation line. So if I go back to last quarter, we explained that the significant movements for second quarter would be the $40 million seasonal decline in equity awards and then the $20 million increase in the base pay coming online. That would have put comp at about 575 for the quarter. And obviously, ex the charge, we ended up about $8 million better than that, including currency. So two factors led to that. First, we pulled a lot of levers in the quarter to flatten compensation, including accelerating and close to completing the actions that we launched in fourth quarter of last year. So in January, we communicated that the projected reduction by late ’23 would be about 300 roles. And about $5 million to $7 million in quarterly comp benefit net of reinvestments. So we got a portion of that work done in the first quarter, and we mostly finished it in second quarter and that was a big part of the reason it put us ahead of schedule. Second, as we saw the timing of that first program, accelerating and coming to completion, we launched a new effort during the second quarter, specifically related to what you referenced, Alex, and the severance charge that we announced this morning. We’ve already gotten some benefit of that within the quarter, and that’s reflected in the results. So overall, this new program, to your question, should impact about an incremental 600 roles many of that will be backfilled based on a lens of skills or geography, but same goal, we should be able to get $5 million to $7 million a quarter in run rate savings and a portion of that got embedded in the second quarter. So we’ve got to remember that we did pull lever hard this quarter, so there’s some hiring that’s in the queue, but we also pushed a fair amount back. And so that’s why with various puts and starts, it’s good to think about a flat to down from the comp levels you see in second quarter ex charges going into third quarter. So that’s hopefully helpful background there. To get to your questions for the rest of the year, where do we see expenses? At a high level, we’ve taken about a point out of the curve for the year based on the trajectory that we’re on. To your point, if you take out the notable items, this year on a — each quarter has been under 6, and we think we’ve taken that point out of the curve at this point and that should continue through the rest of the year. To margins, you’re right that we’ve been in the 30s and now in the 20s. Our target has us one of our key performance indicators is for us to be in the 30s. And no way have we lost sight on that. That is where we’re trying to get. That gets impacted largely by what’s going to happen in our minds, we can control the expense side. And obviously, we’re doing a lot of work there. And we’re also getting good benefit because we saw good organic growth in the quarter. And so both levers are working in the right way, but we have definitely not changed our target of being in the 30s from a margin perspective. Alex Blostein: Got it. Thanks. Super comprehensive. Just a quick follow-up around deposits. So good news, you guys were kind of in line with what you updated us on around 105. Sounds like deposits are fairly stable. I think you said 106 right now with a kind of similar noninterest-bearing mix as we saw over the course of the quarter. Can you help just frame the seasonal deposit outflows and any other kind of client conversations you’re hearing that could give us a sense where deposits could ultimately trough in the cycle. It sounds like there’s a little bit more to go, but just curious to hear what the endpoint might be? Jason Tyler: Yes, you heard right. It’s held in quite well so far in July. And we didn’t — June, you see the end of the quarter and there’s a spike there. But in general, June and July have been at about this level and have been holding in well. Our client activity is good. We’ve taken action here to make sure we’re talking to clients aggressively and telling them we want to continue providing good liquidity services for them, whether it’s lending or holding on to their deposits. We talked last quarter about the fact that we think about liquidity broadly. It’s about client liquidity. And it was good to see money market funds up this quarter. That adds to margins really well, too. And even as we think about what clients are holding in brokerage. And so all of the client liquidity seems to be holding in well. On the seasonality dynamic, August is a low point but it’s not — it doesn’t go dramatically. We’ve looked back several years. And so we’re feeling that deposits at these levels seems to be holding in okay. So I can even give a little bit of thought from our perspective at this point, based on our outlook. I think it’s prudent to think about another decline, even though deposits are holding in pretty well, but we see the competition. And so I think it’s prudent to think about another NII decline of about 5% for the quarter. Again, June and July volumes have held in at about $100 billion to $110 billion, but we just have to be conscious of the competitive environment and what the summer tends to hold in terms of volume pressure. Operator: Our next question is going to come from Brian Bedell from Deutsche Bank. Brian Bedell: Maybe just to go back to expenses. I appreciate the color you gave, Jason. Normally start to talk about the seasonal lift that you typically get in the second half in things like equipment and software and outside services. I wonder if you want to comment on any projection there? Jason Tyler: Sure. Well, it’s good to call it out. I think in equipment and software, in particular, we were better than what we thought we were going to be, but that was really two factors led to that. One, we did have some delays in projects coming from WIP into being depreciated. Those will come online, so that’s more timing. And then secondly, we’ve been working very aggressively as far as the productivity office to just negotiate on and then try and push inflation down, and we had some good results there, bringing costs down. And so from here, we think third quarter up $5 million to $10 million in that line item. Fourth quarter, we can even tell because some of it’s baked an additional $5 million to $10 million lift from that perspective and outside services, no update to make there. Brian Bedell: Okay. Great. And then, Mike, you started off the call talking about the new business wins in asset servicing and wealth management. I guess how should we think about that contributing to organic revenue growth? Maybe just broadly, if we’re in a, say, flattish market situation. Would you expect this to have a positive impact in the next couple of quarters and going to ’24 on revenue? Mile O’Grady: Yes, Brian. So the answer is yes. And to your point, we only consider it organic growth once it’s transitioned and in. And yet we know the pipeline of business or mandates that we’ve won that have not transitioned in yet. And in each of the businesses, it’s a little bit different. There’s more of, I’ll call it, forward pipeline with asset servicing, but the pipeline looks very good based on recent activity that I mentioned there. Within Wealth Management. There’s not as much of a forward pipeline, if you will, but similarly there, I would say very steady, steady activity. And as much as anything with wealth management, keeping in mind that this — I’ll say, company, but also that business has been built on doing what’s right for the client. And sometimes, that results in different financial implications for the company, but over time is best for the company and the shareholders. And my point being the discussion around deposits and money market funds and treasuries and managing things like that. They all have different implications for us, but the client activity has been very good. And we’re, I would say, optimistic about how some of the shifts with rates will have implications on where those funds get redeployed. So again, positive on the wealth management front in a steady fashion. And then Asset Management, as Jason mentioned, we’ve seen strong flows into the money market platform there. but that also in some other areas as well. And likewise, I like to see those get redeployed in other ways over time. So good across the board. Brian Bedell: Is it fair to say that revenue growth on the fee side is definitely better than the NII side for the organic growth equation at least now. Mike O’Grady: Yes. No, that’s right, Brian. And I view it as you’re kind of implying there. On the fee side, it tends to kind of grind up more gradually subject to the markets and NII can be more volatile. And the only other area I would just highlight is around our capital markets activity, FX and brokerage and trading there, which has been relatively subdued during this time period with lower volatilities, lower activity, which that can also change and that has different implications to just meaning those can be more profitable. Operator: [Indiscernible] from Wells Fargo. Unidentified Analyst: I guess the first question is on fee growth kind of more broadly. You sort of indicated that you’re the 5% expense growth rate. Does that go down? But do the fees — where do you see fees growing to get up to that expense level so that you could grow fees faster than expenses? Jason Tyler: Well, I mean, in the short run, I don’t think we’re still absorbing an inflationary environment from an expense perspective. And so would like to be able to do better even than what we’re doing right now in the long run from an expense growth perspective. On the revenue side, as you know, the financial model enables us to have lift from 2 different areas. One is the market left, and that’s tended to provide low single-digit growth rates, but it’s a very strong component of the financial model. And then, secondly, the organic growth. And if we can have low single-digit growth in wealth management organically and then mid-single-digit growth in asset servicing, that provides a good model for us to get well above the expense rates that we think we can lead to in the long run and provide good operating leverage. Unidentified Analyst: Okay. And if I could follow up on wealth. You’ve improved growth there as well. Are there any differences in the competitive dynamic among the top end and the low end? Are you having more success, like you said, you are having more success in Global Family Office. I guess can you talk about the funnel of new clients sort of in the middle tier and what you’re doing to grow that? Jason Tyler: Yes. It’s interesting. It’s actually not just the family office but the very top end of wealth advisory and those clients can be similar size. They just happen to not have a family office and are leaning more toward us for wealth advice as opposed to the broader set of more operational and reporting services that the Global Family Office provides. We are doing better at the top end and looking at the new business that came on board and at the pipeline, the accounts above $20 million, just that was where there was more velocity. And that’s been consistent for a while on that business. And so there is something to that dynamic, we seem to be doing better at the top end. That’s where a disproportionate percentage of the growth has come from. Operator: And our next question is going to come from Brennan Hawken from UBS. Please go ahead. Brennan Hawken: Just a quick clarification point. Jason, you referenced a point of expense benefit. Is it right to interpret that as coming off of your prior 7% or better expectation or was that meant in a different way? Jason Tyler: It is correct to interpret that as saying we don’t see 7 at this point. We’ve said 7 or better. And at this point, we should be doing 6 or better. We’ve done that first half, and we see a path to that in the second half as well. Brennan Hawken: Perfect. Thank you for clarifying that. And then, you guys had a write-off of a client capability. I don’t remember seeing that in the past, just a little confusing to me. So maybe if you can help me understand it. When did you build that capability and then what happened that caused you to write it off? Jason Tyler: Yes, I can give you some thoughts on it. Just from a timing perspective, it’s been in the works for many quarters. But one of the pillars of the productivity office is to look at what we refer to as internal investments to ensure that they’re on track to meet our hurdle rates or returns and margins. The charge was a project to build out a new client capability in asset servicing, specifically in the asset owners channel. So after working and eventually discussing with different stakeholders, we didn’t reach commercial agreement on terms that would meet our hurdles. And so we halted the project. I think it’s importantly, I’d presume you’d ask, are there others like this in inventory, absolutely not. This is a large project endeavor that we’ve been working on and didn’t reach resolution that got to our hurdle rates and so stop the project. Brennan Hawken: Okay. Did something happen in the sort of like revenue opportunity that diminished it versus where you planned because I’m sure you guys went through the process before you broke ground, so to speak, at least metaphorically. Or was it that it was really pricey turned out to be more expensive to build. Was it the expense side that hurt the outlook versus plan? Or was it the revenue opportunity? Jason Tyler: Yes. Well, it was more costly to build than we thought, and the revenue dynamics were not at that point, going to get to our hurdle rate. It really is reflective of us taking an extremely disciplined approach on items like this where we’re not going to devote resources to areas where we’re not going to achieve our hurdle rate. And so well before we talked about this, even internally, one of the pillars that we talked about for the productivity office was looking at our internal investments and this fits squarely in one of those areas. We define that as areas where we’re allocating resources, whether it’s capital or expense dollars, and we’re not at our hurdle rate. And so this is one where we were disciplined in saying we’re going to stop now, halt it and not invest more into this. Brennan Hawken: Thanks for explaining that Jason, it’s actually a lot more encouraging than that I interpreted it on paper. Jason Tyler: No, thanks for asking. It probably is help for you to clarify. It’s helpful to others. So thank you. Operator: Our next question comes from Robert Wildhack, Autonomous Research. Go ahead please. Robert Wildhack: Just a bigger picture question on expenses. Where do you want or what’s your target, I guess for that expense to trust ratio over the long run? And then, what are the sort of necessary ingredients to get there? Jason Tyler: Yes. If we can be in the 110 range, then — that’s 105 to 110, then we feel like we’re in good shape to do well. And we’re grinding to get down there. We got down there before. We’ve been well above it. We got down into that range, in fact, even slightly below it for a quarter or 2. And now all the factors we’ve talked about, higher inflation, markets coming down, and the effects of NII going up not helping that metric, we’re outside that range, but it is an important part of our financial model to be in that range. And so it’s the first thing I look at is where are we. And it’s good to see us getting back toward the number that the range that we’ve articulated. It’s another one of the key performance indicators that we talk about internally. Robert Wildhack: Got it. Thanks. And just one follow-up on the positive organic growth commentary this morning. If you saw a big acceleration in organic growth or a sustained period of strong organic growth, multiple quarters even several years. How do you think that would impact expense growth, if at all? Mike O’Grady: Yes. So Rob, your two questions relate to each other which is the primary way that we can drive that ratio to the range that Jason talked about is through organic growth on the fee side and then controlling organic expenses, all right? And to your point, if you have higher organic growth, that is going to require more resources. And to the extent that you don’t achieve that, then you have to make sure that you’re reducing the organic growth on the expense side to get there. But those are the two areas that we control the most. And then you say, okay, but beyond that, as Jason mentioned, on the fee side, it’s going to have the impact of markets and sometimes currency. And on the expense side, you’re going to have the impact from inflation and to some extent, currency. And so try to focus on what you can control the most, which are those two items, organic growth on fees and organic growth on expenses to ultimately drive it to the target range. Operator: And Betsy Graseck from Morgan Stanley is next. Please go ahead. Connell Schmitz: This is actually Cornell Schmitz filling in for Betsy. So just one question, a little bit nuanced on the credit portfolio. It seems like a little bit of an outlier. I know it’s small, but on the reserve release, it seems like an outlier that there’s an improved outlook on your CRE book. Can you just explain what’s going on there and where you see this line item from here? Jason Tyler: Yes. So actually, just to clarify, there was the release, the release as a result of some improvements in a small number of borrowers in that book. But that more than offset an actually worsening outlook that we have overall for CRE. And it’s not dramatic, but our outlook on that portion of the book actually would have caused an increase in the reserve. Connell Schmitz: Got it. Okay. That makes more sense. I guess one other question on the investment portfolio. You mentioned the duration still sub one year and you’re mostly in cash. At what point just given the context of potential future rate hikes, where do you see like this duration heading in the coming months? And how are you planning to mix shift this book in that context to protect NII? Yes. Jason Tyler: Yes, absolutely. So the duration of the securities book is it to one, the duration of the balance sheet is just under one. You’re absolutely right to call out that it is an interesting time in what we think was the evolution of the yield curve. And so we’ve been allowing the maturity of securities to become more liquid as we reinvest them, that’s brought down duration at this point with the yield curve, we are talking about where to go from here. That’s not indicating it’s going to go up. But at this point, we are thinking about where is the yield curve, where is it going? And how does that influence what we want to do as the large securities book continues to mature and provide opportunity for reinvestment. Connell Schmitz: Okay. And then I guess 1 follow-up on that same topic. How should we think about earning asset growth in the context of deposit outflows potentially should those flow out on a one-to-one basis or will you maintain certain balance sheet size or… Jason Tyler: Yes. As deposits come down, the securities can act to obviously, the funding mechanisms for it. That doesn’t move very quickly. And so the deposit size is always going to influence the earning asset size. So what we have to then think about the constraining factor at that point becomes what does leverage look like. And we’ve got a lot of room from a leverage perspective. And so that’s what sometimes will lead us to think about discretionary leveraging just to make sure that we’re not missing opportunities to pick up some NII even if it’s a very thin NIM based on where the size of the balance sheet is because it doesn’t flex super quickly. Operator: And our next question is going to come from Mike Brown from KBW. Please go ahead. Mike Brown: Maybe just actually following up on that question there. We noticed that the complexion of your balance sheet has been shifting on the funding side. naturally, and that makes sense. But your deposits, they declined by 6%, but we saw that the higher cost Fed fund purchased balance actually jumped meaningfully quarter-over-quarter has been growing this year. I guess, why not just let the balance sheet decline more like what’s kind of going on there in terms of the mix? And how could that progress from here should — if the deposits continue to trend down. As you talked about, the Fed funds purchase balance continue to grow as an offset to fund the assets. Jason Tyler: Yes. And part of it is that in this the deposits have just been so volatile and so you don’t want to commit to significant movement in shrinking the balance sheet. And we want to be there for our clients. We’ve got plenty of capital. We’ve got plenty of room for a leverage perspective. And so just not anxious to quickly do any significant moves. And so to that extent, as deposits come down, you have the opportunity to then say, maybe we want to use some discretionary leveraging, again, we printed a 7.4 Tier 1 leverage, which leaves you a lot of room. And so if we hadn’t done leveraging that incremental leveraging would be even higher in the 7s. And at a point, you just have to say it just prudent to make sure you’re taking advantage of the opportunities that exist. So. Mike Brown: Okay. Great. Thanks for the color there. And then I guess maybe just following up on that point there on the capital side. You guys increased the share buyback or you bought back about $100 million or so of stock this quarter. Any expectation on how that could progress from here? What should we think about in terms of your capital return. Jason Tyler: Sure. The overall theme of what you saw in this quarter makes sense in the near term, where you’d see us be in the market for share repurchase. The thing that worked against us, the AOCI actually worked slightly against us this quarter, usually, in a neutral rate environment, the pull to par will give us some lift there. but it did in this quarter, that’s fine. But even so, the $100 million we did is about — it’s kind of — that’s the model we’re thinking about. In the short run, big caveat is that the FDIC special assessment coming online, presumably in third quarter, that would be a similar dollar amount as what we did from a repurchase perspective this quarter. And so you could see us saying hold off for a quarter, get that payment done and then get back to your game plan. Operator: Next question comes from Gerard Cassidy from RBC. Please go ahead. Gerard Cassidy: Jason, can you share with us, I think you gave us the cumulative beta through the cycle of 68% and then the incremental beta, of course, is higher. And I think you touched on it this quarter may be 100%. The question is this, how is the beta behaving relative to past tightening cycles? I don’t know if 2016 to ’18 is cycle that really is that comparable? Maybe I have to go back a little further. And then second, how quickly if the Fed does start cutting rates — cutting Fed fund rates in 2024 sometime, how quickly can you guys reduce your deposit costs? Jason Tyler: Sure. Well, on the first, just to make sure I said it right earlier, the 100% going forward would be for the institutional side of the business, not for the overall deposit base. And to the question of how does that compare historically, this is higher than it has been historically. And there’s different dynamics that you and I could talk about, I think, that are driving that. But there’s very strong competition for deposits right now and for various reasons. And so we want to make sure that we’re there for our clients. And we’ve got the ability to do that. And so we want to make sure that we’re holding on to our fair share and providing that liquidity capability for clients. I think about reductions, the reductions, they can come quickly. And the way we price, the way we the way our agreements work, we get fast movement on the way down. And so we should be able to get deposit costs down quickly as rates come down. Gerard Cassidy: Very good. And then as a follow-up, you also touched on the volatility of deposits. Is it more based on your guys’ experience at Northern, are you finding that this period’s volatility is even greater than past periods? And is it because of quantitative tightening or Fed actions that is causing greater volatility in your guys’ estimate? Jason Tyler: Well, it is more volatile, not just over the long run, and we went from 90 to 138 down to 106 but even within the quarters, a lot of volatility. But I think that’s driven by some of the macro factors and what we saw in early March spooked a lot of depositors, obviously, and then another trend of debt ceiling and then leading to another trend of deposit competition, all of those things are having — or driving significant different preferences that clients have, not just between which bank to go to but whether to use banks versus money market funds versus treasuries. I think all of those factors are what’s leading to the heightened volatility we’re seeing. Operator: Next question comes from Vivek Juneja from JPMorgan. Please go ahead. Vivek Juneja: A couple of questions. I’ll start with noninterest-bearing deposits. The big outflow you saw in the second quarter, which segment did that come more out of and what are you seeing in that trend? Sorry, if I’m repeating a question, there have been overlapping calls just made it, I hope I’m not doing that. Jason Tyler: The significant movements are almost always going to come, well, almost in this case came from asset servicing. Vivek Juneja: Okay. And the stabilization, where are you seeing more of that, which segment? Jason Tyler: The asset servicing segment is actually overall been relatively stable. We’ll see big chunky movements in and out but the overall level has been about the same. The wealth segment is more granular. The GFO client base is much chunkier, but you just think about the amount of clients in the wealth segment, it just makes it more granular. Vivek Juneja: And on the Wealth Management segment, the low single-digit expense growth. Is that because that’s where you’ve done a lot of the headcount cutting that you all talked about? And what are the implications for service there? Jason Tyler: Service has been great. And we didn’t provide detail in the expense allocation between the business units. But just in general, you’ll note that the headcount is down but no impact to service levels whatsoever. The low single-digit growth I referenced was related to organic growth within Wealth Management. Operator: Next question comes from [indiscernible] from Wells Fargo. Unidentified Analyst: Just a quick follow-up. You mentioned that equipment and software you had some projects being delayed. Does that mean that non-comp expense will see some upward pressure in the second half of the year? Jason Tyler: Yes. In certain categories, it will. And so in equipment and software, we’ll see — in that line item, in particular, we’ll see upward pressure, $5 million to $10 million third and fourth quarter. I didn’t reference other line items. We mentioned outside services relatively flat. So that’s really the only forward-looking information we provided, except for the comp number, which you referenced. Operator: And Brian Bedell from Deutsche Bank. Please go ahead. Brian Bedell: Just wanted to clarify on the FDIC special assessment, is that included in that expense guide of 6% or better. And I don’t know if you’re able to frame the size of the essential assessment yet. Jason Tyler: It’s not included in the 6%. And we haven’t talked publicly about what the number is. Jennifer Childe: Okay. Thank you very much for joining us today. We look forward to speaking with you again soon. 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Lazard (LAZ) Hurt by Advisory Revenues, Rising Net Outflows
Over-dependence on financial advisory revenues and continued net outflows are major headwinds for Lazard (LAZ). Lazard Ltd.'s LAZ overdependence on financial advisory revenues and continued net outflows are major headwinds for the company. This, along with unsustainable capital deployments, is a concern. However, cost-containment measures and solid asset under management (AUM) balance offer some support.The over-dependence on financial advisory revenues could affect the company’s financials. Financial advisory revenues contributed 52% to Lazard’s total operating revenues in first-quarter 2023. The metric declined in 2022 and first-quarter 2023, signaling weakness in the company’s revenue generation capacity.The muted global merger and acquisition deal value and volumes, as well as a slump in capital market activities, are affecting advisory revenue growth. We estimate financial advisory revenues to decline 12.7% in 2023.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 of 23.1%, mainly due to outflows witnessed in equity asset class.Nonetheless, in the first quarter of 2023, the company recorded net inflows of around $3 billion. A challenging operating backdrop, highlighted by equity outflows in emerging markets, is a hindrance for the near term. We anticipate net outflows to be $1.44 billion this year.The company has hiked its dividend in the past and has a share repurchase plan in place. However, its payout rate and debt/equity ratio seem unfavorable compared with the broader industry’s averages. These, along with Lazard's volatile performance over the last few quarters, make us believe that its capital-deployment activities might not be sustainable.Analysts also seem pessimistic regarding LAZ’s earnings growth prospects. The Zacks Consensus Estimate for 2023 and 2024 earnings has been revised 51.9% and 6% lower, respectively, over the past 60 days. Further, the company currently carries a Zacks Rank #5 (Strong Sell).Over the past three months, shares of LAZ have declined 4.8% against the industry's upside of 4.9%.Image Source: Zacks Investment ResearchDespite the above-mentioned concerns, Lazard is well placed to grow organically, driven by a solid AUM balance. Further, given its strong financial flexibility, the company has a lesser likelihood of defaulting on interest and debt repayments, even if the economic situation worsens. These efforts are likely to support revenue growth going forward.Finance Stocks Worth a LookA couple of better-ranked stocks from the finance space are Artisan Partners Asset Management APAM and Federated Hermes FHI.The Zacks Consensus Estimate for Artisan Partners' current-year earnings has been revised 3.4% upward over the past 60 days. Its shares have gained 34.4% over the past six months. Currently, APAM carries a Zacks Rank #2 (Buy).Federated Hermes also carries a Zacks Rank #2 at present. The consensus mark for the company's 2023 earnings has been revised marginally upward over the past seven days. In the past six months, FHI shares have declined 0.8%. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here. Top 5 ChatGPT Stocks Revealed Zacks Senior Stock Strategist, Kevin Cook names 5 hand-picked stocks with sky-high growth potential in a brilliant sector of Artificial Intelligence. By 2030, the AI industry is predicted to have an internet and iPhone-scale economic impact of $15.7 Trillion. Today you can invest in the wave of the future, an automation that answers follow-up questions … admits mistakes … challenges incorrect premises … rejects inappropriate requests. As one of the selected companies puts it, “Automation frees people from the mundane so they can accomplish the miraculous.”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 Lazard Ltd (LAZ): Free Stock Analysis Report Artisan Partners Asset Management Inc. (APAM): Free Stock Analysis Report Federated Hermes, Inc. (FHI): Free Stock Analysis ReportTo read this article on Zacks.com click here.Zacks Investment Research.....»»
Top Stock Reports for Novo Nordisk, Home Depot & Walt Disney
Today's Research Daily features new research reports on 16 major stocks, including Novo Nordisk A/S (NVO), The Home Depot, Inc. (HD) and The Walt Disney Company (DIS). Tuesday, June 27, 2023The Zacks Research Daily presents the best research output of our analyst team. Today's Research Daily features new research reports on 16 major stocks, including Novo Nordisk A/S (NVO), The Home Depot, Inc. (HD) and The Walt Disney Company (DIS). These research reports have been hand-picked from the roughly 70 reports published by our analyst team today.You can see all of today’s research reports here >>>Shares of Novo Nordisk have outperformed the Zacks Large Cap Pharmaceuticals industry over the past year (+40.6% vs. +8.9%). The company has one of the broadest diabetes portfolios in the industry. Ozempic and Rybelsus have been performing well in the market. Saxenda and Wegovy sales have been gaining and maintaining momentum.Label expansion of the diabetes drugs is likely to further boost sales. Novo resolved the supply issues with Wegovy, which led to a sales increase in the first quarter of 2023, consequently raising its full-year guidance. The company’s diversifying efforts to develop new treatments are reassuring.However, Pfizer’s successful study on its oral type II diabetes candidate, danuglipron, is alarming. If approved, Pfizer is likely to eat away from Novo Nordisk’s Diabetes care market share. Patent expiry and pricing pressure across the diabetes market also remain a woe.(You can read the full research report on Novo Nordisk here >>>)Home Depot shares have gained +17.0% over the past year against the Zacks Building Products - Retail industry’s gain of +24.2%. The company has been witnessing significant benefits from the execution of the “One Home Depot” investment plan, which focuses on expanding supply chain facilities, technology investments and enhancement to the digital experience.The interconnected retail strategy and underlying technology infrastructure have helped consistently boost web traffic for the past few quarters. The company remains on track with its strategic investments to build a Pro ecosystem.However, shares of Home Depot lagged the industry year to date on dismal performance in first-quarter fiscal 2023. Results were impacted by a more broad-based pressure across the business, driven by softened demand versus expectations. A deflation in lumber prices and unfavorable weather have also hurt the results. HD also provided a conservative view for fiscal 2023.(You can read the full research report on Home Depot here >>>)Shares of Walt Disney have gained +5.4% over the past six months against the Zacks Media Conglomerates industry’s gain of +6.5%. The company is benefiting from growing popularity of Disney+ core, owing to a strong content portfolio and a cheaper bundle offering.Strong line-up of movies that include The Little Mermaid; Indiana Jones and the Dial of Destiny; Haunted Mansion, Poor Things and The Creator bodes well for the Media and Entertainment Distribution segment. Revival in Parks, Experiences and Products businesses is encouraging.Theme Park business is likely to gain from strong demand across both the domestic and international parks. However, Disney+’s profitability continues to be negatively impacted by higher programming and production costs across Disney+, ESPN+ and Hulu. Disney’s leveraged balance sheet remains a concern.(You can read the full research report on Walt Disney here >>>)Other noteworthy reports we are featuring today include AbbVie Inc. (ABBV), Intuit Inc. (INTU) and Automatic Data Processing, Inc. (ADP).Director of ResearchSheraz MianNote: Sheraz Mian heads the Zacks Equity Research department and is a well-regarded expert of aggregate earnings. He is frequently quoted in the print and electronic media and publishes the weekly Earnings Trends and Earnings Preview reports. If you want an email notification each time Sheraz publishes a new article, please click here>>>Today's Must ReadWegovy to Boost Novo Nordisk (NVO), Market Rivalry a WoeHome Depot's (HD) Interconnected Strategy to Boost SalesDisney+ Growth & Revival of Parks Business Aids Disney (DIS)Featured ReportsAbbVie's (ABBV) New Drugs to Make Up for Lost Humira SalesPer the Zacks Analyst, AbbVie has several new drugs in its portfolio, like Rinvoq and Skyrizi, which have the potential to drive its top line and make up for sales lost due to Humira generic erosion.Intuit (INTU) Rides on Product Refresh, Higher SubscriptionsPer the Zacks analyst, Intuit is benefiting from frequent product refreshes, which help it to gain customers. Moreover, increase in subscriptions is driving stable revenue growth for the company.Solid Business Model Aids ADP, Escalating Expenses HurtThe Zacks Analyst is positive about ADP's business model that ensures high recurring revenues, good margins, robust client retention and low capital expenditure. Rising expenses remain a concern.Technology, Loans Support ICICI Bank (IBN), High Costs AilPer the Zacks analyst, ICICI Bank's efforts to digitize operations, rising rates and steady loan and deposit growth will aid profitability. Yet, weak credit quality and higher costs are key headwinds.Progressive (PGR) Gains on Premiums, Cat Loss Woes Linger Per the Zacks analyst, Progressive is set to grow on solid Agency and Direct business, which will drive improvement in net premiums. However, exposure to catastrophe loss remains a headwind.Solid Investments Aid PSEG (PEG) Growth, Weak Solvency WoesPer the Zacks analyst, Public Service Enterprise Group's, also known as PSEG, consistent investments in infrastructure projects may aid its growth. Yet, its weak solvency position remains a bottleneckAspen (AZPN) To Benefit From Diversified Product PortfolioPer the Zacks analyst, Aspen will benefit from increased demand across all business segment and frequent product launches. However, stiff competition is a headwindNew UpgradesStrength in Energy Systems Segment Benefits EnerSys (ENS)Per the Zacks analyst, EnerSys' Energy Systems segment is driven by robust broadband, data center and telecom businesses. The company's shareholder friendly measures are encouraging.Dycom (DY) Rides on Solid Telecommunications Business GrowthPer the Zacks analyst, Dycom is befitting from increased demand for network bandwidth and mobile broadband. Also, new contracts and Engineering & Construction investments bode well.Online Strength & GenNext Plan to Aid Aaron's (AAN) Top LinePer the Zacks analyst, Aaron's has been gaining from cost-reduction initiatives, increased online traffic and strength in GenNext stores. This led to revenue growth of 21.5% in Q1.New DowngradesCallon (CPE) Likely to Get Hurt by Aggressive Capital BudgetThe Zacks analyst believes that Callon's higher 2023 operational capital budget of $1,000 million can affect its profitability. Also, the company's debt-laden balance sheet is concerning.Drop in M&A Activity Affects Revenues, Net Outflow IncreasesPer the Zacks Analyst, slowdown in deal making activity will affect financial advisory revenues. Also, a rise in net outflows and unsustainable capital deployment activities are concerning.Regulatory Requirements, Forex Woes Impairs Catalent (CTLT)The Zacks analyst is worried about Catalent's operation in a highly regulated healthcare industry. Unfavorable currency movement is an added issue. 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 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 Automatic Data Processing, Inc. (ADP): Free Stock Analysis Report Novo Nordisk A/S (NVO): Free Stock Analysis Report The Home Depot, Inc. (HD): Free Stock Analysis Report The Walt Disney Company (DIS): Free Stock Analysis Report Intuit Inc. (INTU): Free Stock Analysis Report AbbVie Inc. (ABBV): Free Stock Analysis ReportTo read this article on Zacks.com click here.Zacks Investment Research.....»»