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The August reporting season demonstrated a healthy corporate sector. Results were above expectations and dividend payments markedly above previous levels. Positive outlook statements also predominated. Specific guidance was withheld by a significant number of companies even while expecting improving financials into the December half.  Companies including Origin Energy and Alumina alerted to uncertainty in the cost or revenue outlooks for the coming period.

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Covid, flooding and the Ukraine war were the main culprits playing havoc with costs and supply chains. A shortage of workers, increased energy costs and logistics were often cited as areas of concern. As inflation surged through economies companies pointed to higher costs for shipping (Adelaide Brighton Cement), compliance (Star Entertainment), feed (Ingham Chicken), wages (Coles), timber (Brambles), energy (Alumina), cheese (Domino’s Pizza) and blood collection (CSL Limited).

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In attempting to manage an unreliable supply chain, managers held higher levels of inventory, impinging on cash flow. That companies were generally able to increase dividends, undertake capital management, hold higher levels of working capital and finish the period with strong balance sheets says a lot about the strength of the reporting season.

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This surge of investment in inventory had the effect of bringing forward revenues for suppliers.  Bluescope delivered a result above expectations as its US-based North Star steel business tripled profits - assisted by customers building inventories. The outlook for the remainder of the year is weaker as customers digest existing stockpiles and steel prices decline accordingly.

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Inflation does not yet appear to have caught up with many companies. Managers were mostly able to pass on cost increases through increased pricing with reasonable margin outcomes. Brambles raised prices charged to customers for its pallets after timber costs went higher. Fletcher Building put through price increases and achieved margin expansion which was also assisted by ongoing efficiencies in manufacturing and across the cost line generally.

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Insurers like IAG and Suncorp put through price increases of 8-11% to improve insurance margins in response to increased claims and unfavourable investment markets.

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Commonwealth Bank, Bendigo Bank and AMP Bank saw their net interest margins decline as rates they charge lenders increased too late in the financial year to cover increased funding costs and competition. A rate driven margin expansion is more likely into the new year provided this is not thwarted by an intensification of competition. Credit costs for the sector were benign.