3 stories from reporting season

Sascha: [00:00:02] Welcome to The Dive, the podcast that says whose head business news needs to be all business. Today it's a returning favourite because it's earnings season. This is when all the companies gather their shareholders and tell them what they did for the last three months. What went well, what didn't go so well, and what is coming up. You told us how much you love this format before. So we're back this time with three themes to explore. It's Monday, the 7th of August. And today I want to know just what are the stories this reporting season? To talk about this today, I'm joined by my colleague and the co-founder here at Equity Mates. It's Alec Renehan. And Alec, welcome to the dive. 

Alec: [00:00:41] Sascha. Good to be here. 

Sascha: [00:00:42] This is a favourite. Do you enjoy digging into all reporting earnings season goals and information and trying to find those surprises? 

Alec: [00:00:52] Well, we've chosen to do a finance podcast as our career, so I would hope so. 

Sascha: [00:00:59] Yeah, very true. I think it's you coined the phrase like Christmas comes once a year, but earnings, seasons, therefore times, it's is obviously a real favourite of yours. 

Alec: [00:01:08] I'm glad that people are now quoting phrases of coins. Feel like I've made it. 

Sascha: [00:01:13] Yeah, definitely. You can put that one on the buyer. Look, let's get into the three companies that you've chosen today. You've pitched Ford, Meta and Rio Tinto, which you said gives us insights into three big themes electric vehicles, artificial intelligence and decarbonisation. 

Alec: [00:01:35] Yes. So Ford had a great quarter. They had total revenue of $45 billion, up 12% from the same time last year of $40.2 billion. They made a profit of 1.92 billion, up about three times from where they were last year at 667 million. Pretty happy with that. A lot of profit, a lot of cars sold when it comes to earnings season or reporting season, as it's known here in Australia. There are two things you want to do. Number one, you want to actually grow. Number two, you want to beat the expectations that the investment community have for you and for did both of those things. They grew as we touched on before, and they significantly beat what Wall Street was expecting. Now, Ford have been really quite aggressive in their plans for electric vehicles. Last year they came out and said they're investing more than $50 billion in electric vehicles globally through to 2026. That's not a lot of time and that's a lot of money. They had plans to manufacture 600,000 electric vehicles globally by late 2023, or at least be on an annual run rate of 600,000 EVs by 2023 and a run rate of 2 million electric vehicles a year by 2026. So Ford kicking goals with their quarterly report, and they came out very aggressively last year with an electric vehicle strategy. The question is, is this electric vehicle strategy working? 

Sascha: [00:03:14] You're asking me, Alec, but it's just exactly what I'm going to flip back on you. 

Alec: [00:03:19] The answer is the answer is no. 

Sascha: [00:03:21] Yeah, I was going to say that's that's huge. $50 Billion in 2026. Sometimes you lose track of just how close those dates are. 

Alec: [00:03:30] Yeah, it is a staggering amount of money. And, you know, it'll be one of the biggest changes in this company's history up there with the Model E. But right now, what we've learned from this quarterly report is that maybe consumers aren't quite ready for it.

Audio Clip: [00:03:50] Ford Model E, first generation electric vehicles revenue there. It did increase 39% the second quarter sequentially, revenue more than doubled. But Farley did point out to Jim Farley, CEO, that they're bringing out the near-term piece of EV adoption that will be a little slower than expected. He's framing it that that's actually going to benefit some of the first movers within the space like Ford. 

Alec: [00:04:11] So in their results, they made the note that electric vehicle adoption is taking place slower than the company expected. Now, in part, this is because of higher costs associated with electric vehicles associated with some of the key commodities Ford need to make, electric vehicles and batteries and the like. But Ford restructured their business last year, and it now gives us a really good insight into the different parts of the business and how they're making money. So Ford Blue is the traditional Ford internal combustion engine part of the business division. It earned 2.31 billion in profit during the quarter. Pretty good. Ford Pro is its commercial business. So, you know, like leasing tech companies, stuff like that. It earned 2.39 billion. So also a very profitable division for the quarter. The third division for Ford is its model, a electric vehicle division. It lost over $1,000,000,000 in the quarter. 

Sascha: [00:05:15] Yeah. Okay.

Alec: [00:05:17] Not great. 

Sascha: [00:05:17] Not great. 

Audio Clip: [00:05:18] The automaker now expects full year losses in its Model E unit to hit four and a half billion dollars. Previously, it saw losses of $3 billion. 

Alec: [00:05:27] So, Sascha, I think the takeaway here is that as much as there is excitement about electric vehicles, both Ford and its crosstown rival, General Motors, had really strong reports but had really strong demand for traditional internal combustion engine vehicles. So the electric vehicle adoption story, you know, the world sort of needs it to play out quicker than it is. And these quarterly results are showing that at least in America, they're not playing out as quickly as we want. Flick over to China and you look at some of their companies like day and the like. It's happening a little bit quicker. Go to Europe, it's happening even quicker there. Every internal combustion engine vehicle that is sold today will be on the road for the next 15, 20 years. And that takes us to what, 2023 now, 2043. 

Sascha: [00:06:18] It's a really obvious story, but just that cost factor, they're more complicated to put together and therefore there's more costs for both the producers and the consumer on the other end. And that's always going to be as much as we all dream of driving electric cars around. Cost is a really hard factor to walk past, I think. 

Audio Clip: [00:06:41] We're still waiting on more details here. But the fact that you do have a top line beat for Meta daily. Active people, up 70%, monthly active people up 6% year over year.

Sascha: [00:06:50] All right, Alec, let's move to the second story. And this is all about Meta. And the real one that you're going to dig into here is artificial intelligence. But before we dig into that, can you give me the headline numbers? 

Alec: [00:07:03] Yes. A Meta has had a pretty incredible turnaround. 2022 was brutal for Meta. They lost about two thirds of their share market value. Everyone was worried about TikTok. Everyone was worried about the metaverse. Let's put a pin in that because we'll get to it. And the stock had a terrible year. 2023, It's been an incredible story. It's up 159% year to date before this report compared to the S&P 500. America's stock market index up 19%. So a pretty incredible run going into reporting season. And Metro had a great quarter. Revenue increased 11% from a year before. Now, that's the first time Meta has reported double digit revenue growth since the end of 2021. So it's been a couple of slower years for Metta, but they have turned it around. In the quarter. They brought in $32 billion of revenue. Profit was 7.79 billion, up from 6.69 a year earlier. But here are the numbers that just continue to blow my mind. Sascha Daily Active Users 2.06 billion monthly Active users over 3 billion. The world's population is what nine Yeah. 88. something and Meta's got more a little bit less than a half a bit more than a third as monthly active users.

Sascha: [00:08:30] It's crazy. Yeah. Just wasting their time away on a facebook feed. Jealous of their neighbours. 

Alec: [00:08:35] Yeah well, you know WhatsApp is massive in certain parts of the world. Instagram, obviously you're a big thread's head as you keep telling us. 

Sascha: [00:08:44] Obviously. 

Audio Clip: [00:08:45] Well, what we've seen as what we expected, which is we started with cost cutting and cost rationalisation and they had excess employees and they had projects that were very, very unprofitable. So they did all that. And then we were in a recession for digital advertising and now we're coming out of that recession. We're starting to see better numbers. 

Sascha: [00:09:08] Look, Alec, those numbers are staggering. But I want to dig into this age story. And it's kind of interesting because last year was all about the metaverse and they even changed their name and now they're saying it's about artificial intelligence. Are they going to change the name again? We're going to have artificial intelligence, psy or something like that where it is moving now. Look, I'm not a brand expert. That was not a great name.

Alec: [00:09:36] But look, the metaverse is still in Zuckerberg's mind, but it is certainly less front of mind. And in his earnings call, he did defend the metaverse and he spoke about how they want to make really long term bets. And he said, you know, that he still thinks it's the future of computing. He had some quote that today 1 to 2 billion people on Earth wear glasses and he believes those glasses will be smart glasses in the future. So, I mean, it's actually tough to argue with that point. Like he's probably right when that will be and whether that will be Zuckerberg's version of the metaverse remains to be seen. Yeah, but look, the metaverse is still a going concern at Metta. It's housed within their Reality labs unit. That unit brought in $276 million in sales in the quarter. So pretty good. It did lose 3.7 billion, though, so it spent a lot more. 

Sascha: [00:10:38] That's all relative, isn't it? A billion years there?

Alec: [00:10:42] Well, for a company like Meta, it's yeah, you know, they can afford it. Metta said in a press release that unit losses in the Reality Labs unit will continue to, quote, increase meaningfully year over year due to our ongoing product development efforts in augmented reality, such visual reality and investments to further scale our ecosystem. So they are still investing in this space. Now, Sascha, here is the number to keep in mind when you're thinking about Mira's investments in the metaverse. To date, Reality Labs has lost over $40 billion. 

Sascha: [00:11:21] Wow, that's a lot of money. And I think it further emphasises your point of it's like it really is a long term play. It's like a long term vision because the glimpses I've seen so far of the metaverse don't inspire me, and they certainly don't match up to a 40. Million dollar price tag. 

Alec: [00:11:40] Yeah, I agree. 

Sascha: [00:11:44] So $40 billion. That's what you've told me to keep in mind, Alec. That's not even the biggest investment that they're making at the moment. 

Alec: [00:11:53] No. It is artificial intelligence, just like every other tech company to have been using artificial intelligence for a little while now. I actually went to Instagram university at meetings, Sydney offices yesterday as we're recording this. 

Sascha: [00:12:10] Congratulations. 

Alec: [00:12:11] Yeah, I graduated. I got my diploma at Instagram. 

Sascha: [00:12:15] Did you get a certificate of Memes? 

Alec: [00:12:18] No. And they also said we wouldn't make the Instagram global head of memes, which is an actual position in the company that didn't make him. 

Sascha: [00:12:27] They're not just telling you I'm just checking their No no. 

Alec: [00:12:29] I looked him up. He's a real person. I don't know how he got that job, but I would love it. So anyway, they started using artificial intelligence in 2016. They switched your feed from being chronological to being algorithmic, and they use A.I. to serve up things that will keep us engaged longer. So we look at more ads, but they have really been investing in large language models. They've got an open source language model that they've pushed out to the world in partnership with Microsoft. I think it's called Lamba to apologise if I've got that pronunciation wrong. But they're investing heavily in this space. Last quarter they said they anticipated capital expenditures in the range of 30 to 33 billion for the following year as they further build out their capacity in the most recent quarter, they've revised that estimate down. So it's gone from 3233 billion to 20 7 to 30 billion. Still a pretty big number. 

Sascha: [00:13:27] Still a lot of billions. 

Alec: [00:13:29] Mm hmm. But, you know, if there's any company that is benefiting from artificial intelligence at the moment, it's Meta and its social media peers. 

Sascha: [00:13:39] Yeah. I mean, I know I'm biased because I listen to all of our shows here at equity mates, but when you talk about artificial intelligence has to go hand in hand with the data set that you have access to, who has a bigger data, set them better. It's hard to imagine. 

Alec: [00:13:54] Exactly.

Audio Clip: [00:13:55] Let me tell you a secret. Ideas don't come out fully formed. They only become clear as you work on them. You just have to get started. 2]

Sascha: [00:14:05] All right, Alec. Let's take a quick break there. And then when you get back, it's your third story. And I'm pretty excited about this one because we have recently done an episode on Mining's decarbonisation opportunity. You're going to give me the numbers of Rio Tinto. Welcome back to the Dive. We're doing our earnings season wrap up. It's a favourite of mine, very excited. We've talked about artificial intelligence and metre. We've talked about electric vehicles and Ford, Alec. But turning to mining now, give me the headline for Rio Tinto. 

Alec: [00:15:02] Yes, so Rio Tinto, we've spoken about how mining has this massive decarbonisation opportunity. We've spoken about the absolute demand for green metals. We've spoken about how Australia has a lot of those green metals and we've spoken about how Australia's two big miners, BHP and Rio Tinto, have pivoted their portfolios in the past five years. They've got out of fossil fuels and they've tried to push into battery metals. So given all of that, you would think that these miners would start to see the benefits of the push towards decarbonisation and the demand for battery metals. 

Sascha: [00:15:40] Absolutely. I was kind of like. All the factors are there. What's going to stop you? Let's have these record profits roll in. 

Alec: [00:15:46] Yeah, well, Rio Tinto's half year profit has fallen 34%. They've lost about a third of their profit in a year. Rio Tinto reported earnings or profit of 5.1 billion USD. For comparison, in the heady days of 2021, when they were enjoying record iron ore prices, they delivered a half year profit of 12.16 billion USD. So it's more than halved from those days. 

Audio Clip: [00:16:15] Yeah. Look, first of all, you're right. Our results are lower than the first half last year, but they are actually higher than the second half of last year. We have had a fairly good first half. 

Alec: [00:16:27] And this is really a story of these miners. As much as their commodities are in demand, they're still subject to commodity prices. You don't have a lot of pricing power if you're digging stuff out of the ground and shipping it to other people to refine. And the story is really clear in iron ore. So Rio's iron ore division actually shipped 6% more volume than in the same period last year. It achieved its most productive start to the year since 2018 in terms of how much iron ore it was able to get out of the ground, get on a ship and get to wherever it needed to go. More often than not, China. So 6% more volume in the same time last year. But iron ore prices were down 11%. That was 11% lower than the same period last year. And so the price just offset the increased volume. Copper, another mineral that Rio Tinto mines, the copper price was down 12% from the same time last year. And aluminium prices are, as our American friends call them, aluminium prices were down 25% from the same time last year. And so what that meant was that the profits of the various divisions within Rio Tinto all fell. The iron ore division down 6% to 9.8 billion in terms of a better or slightly adjusted profit. So not too bad. The Aluminum segment was down 60%. Copper was down 29% and then the remaining minerals was down 45%. So, you know, these are critical minerals in demand. But commodity prices move in cycles and Rio Tinto as a price taker. 

Sascha: [00:18:14] Yeah, it's just that word cycle. That's always the thing that you come back to when these fascinating stories about the decarbonisation opportunity come up and you think, Wow, this is such an opportunity. But you've always got to remember that resources have that cyclical kind of face to them and it's not always just on the up and up. All right. Alec seems like a good place to leave it for today. A reminder, if you think there's any of the stories in the earnings season that caught your eye that you think we missed, why don't you just let us know? Our contact details are right there in the show notes below. And, of course, a small favour for me to ask of you If you could please send the Dive to a friend who you think would enjoy it. Smallest action for me makes the biggest difference to us and we really do appreciate it. Alec, thanks so much for joining me on the Dive today. 

Alec: [00:19:01] Good to be here, Sascha. 

Sascha: [00:19:02] Excellent. Until next time.