Weekend Wrap: Reporting Season Insights

Hi there! This article is an excerpt from our weekend newsletter – which talks all things markets plus some interesting data insights and memes

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1. Earnings Call Highlights

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Here’s another round of earnings call highlights. Some of my favourite ones include:

• Wesfarmers FY24

• Lynas Rare Earths FY24

• Woodside 1H24

• Guzman y Gomez FY24

• Coles FY24

• Pilbara Minerals FY24

You can see the full list of earnings call highlights here.

This is our first time running earnings call highlights and I’d be keen to hear your thoughts. Did you find them insightful or not quite hitting the mark? Please reply to this email with your feedback.

2. The Big Theme: Cost Control

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The big theme that drove earnings outperformance this reporting season was cost control. This was evident across a number of sectors/companies, including:

• Lynas lowered costs by 17%, whilst production reduced only by 8%

• Coles lifted supermarket gross margins by 50 bps to 26.9%, reflecting a broad range of strategies to tackle theft, spoilage, shrinkage and supply chains

• Super Retail Group improved gross margins by 10 bps to 46.3% as they reeled in promotional activity

• Brambles lifted gross profit margins by 1.8 percentage points, reflecting improvements in asset efficiency

• Telstra is in the midst of a restructure, cutting up to 2,800 jobs

• AMP said it was on track to achieve cost savings of $120m

While effective cost control is impressive, here’s some food for thought:

• There's a limit to how much efficiency a business can achieve: During hard times, businesses will reign in growth and begin to optimise. But these are structural one-off improvements. A miner can’t reduce costs to zero, a retailer can’t continually roll out massive layoffs.

• Diminishing returns: In the words of Wesfarmers CEO “the step change in [productivity] performance in 2024 is unlikely to occur again in 2025 to the same magnitude.”

• Builds leverage: Higher margins lead to more profit, but this requires revenue growth to fuel the leverage. Many sectors are struggling with top-line growth due to weak commodity prices and softening sales.

We’ve got some leaner and more efficient businesses coming out of reporting season. Now we just need the economy to pick up.

3. The Sector Dishing Out Cash

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Retail stocks are absolutely crushing it this reporting season – Earnings are coming in better-than-feared, margins are holding up and companies are returning profits back to shareholders.

To be clear, there is a bifurcation between the high end and low end consumer, and cracks have emerged among sub-sectors such as luxury goods, footwear and automotive.

But as far as our largest retailers like JB Hi-Fi and Super Retail Group are concerned – The consumer remains resilient and poised to benefit from catalysts such as demand for AI-enabled products, Stage 3 tax cuts and looming interest rate cuts.

Both companies delivered an unexpected special dividend, which included:

• JB Hi-Fi – Total ordinary dividend for FY24 of 261 cps plus special dividend of 80 cps

• Super Retail Group – Total ordinary dividend for FY24 of 124 cps plus special dividend of 50 cps

While both stocks aren’t cheap by historical standards, the special dividend is one factor that’s helped the share price grind even higher.

4. The Worst Result So Far

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Inghams might be in the running for the worst result this reporting season – The FY24 result missed on all fronts plus a weaker-than-expected guidance and revised supplier agreement with Woolworths.

• Underlying EBITDA up 30.8% to $240m (but 3.3% below analyst expectations)

• Underlying NPAT up 31.3% to $109.2m (8% miss)

• Total FY24 dividend of 20 cents per share (3.8% miss at a higher payout ratio)

• FY25 EBITDA guidance between $236-250m (5.8% miss at midpoint)

• New multi year agreement with Woolworths will see poultry sales down 1-3% year-on-year

A clean miss will often see a stock open low and finish even lower – In the case of Inghams, the stock fell 9.5% as the market opened (23-Aug) and finished the session down 20%.

Why did it experience such an aggressive selldown? Well for starters, there wasn’t a positive catalyst in sight.

• Earnings for FY24 missed expectations – Bearish for everyone

• Dividend missed expectations – Bad for income investors/funds

• FY25 guidance missed expectations – Bearish outlook

• Worse off Woolworths agreement – Bearish outlook and uncertainty

5. BHP CFO Interview: Betting $7.4bn on Copper

Source: Livewire Markets

BHP is a staple for investors but “The Big Australian” faces growing challenges from declining Chinese exports and volatile commodity prices. Despite these challenges, its FY24 result showed a 3% increase in revenues, though dividends were cut by 14%.

BHP’s CFO Vandita Pant remains optimistic about iron ore’s prospects despite ongoing concerns about China’s economy.

While BHP will always be known for its iron ore, the company is increasing its focus on copper, with $7.4 billion investment planned for FY25.

Watch Full Video

More C-Suite Interviews from Livewire:

• Why Woodside believes its dividend bonanza can continue

• CSL looks within to drive consistent, profitable growth

• Wisetech growth defies gravity, with a $600m war chest

• HUB24 set to grow FUA by 46% over the next 2 years

• Suncorp could deliver the trifecta: Special dividends, buybacks and share consolidation in FY25

6. M&A and NTA Saves the Day

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Australian Foundation Investment Co (AFI) is one of the largest LICs and released its preliminary results earlier this week. Here are some of the key changes within its portfolio:

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Shipbuilder Austal reported a clean sweep of misses for FY24, including:

• Revenue down marginally to $1.46bn (13% miss)

• NPAT of $14.9m compared to $13.8m loss a year ago (but still a 47% miss)

• Nil dividend (vs. expectations of 3 cents per share)

When I see a set of misses like this – I’d expect the stock to trade similar to the above Inghams result.

The stock received a deserving gap down (-6.5%) to $2.13 as the market opened on Friday but quickly rallied back up to breakeven. And here’s why.

• Austal has net tangible assets of $2.45 per share which provides strong valuation support

• Austal received an unsolicited and non-binding takeover from Hanwha Ocean at $2.825 cash per share a few months ago

I guess the only scenario where Austal sells off hard is if the result flags an abysmal balance sheet or the loss of key contracts (both extremely unlikely given its previous guidance/outlook).

7. MinRes’ Real Talk

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No meme this week – Just some of the realest talk from MinRes Managing Director Chris Ellison.

• “There’s no lithium companies making money. We’re just battening down for the downturn … we feel like we’re dragging our feet along the bottom at the moment. So we’re just going to make sure that we throw everything off the deck, as we’ve done many times.”

• “This is the s---tiest time to be the managing director of the company. You’ve got to really cut the costs out of everything you’re doing. You look at every single person.”