Welcome back to the final weekly Earnings Topics Week of May 8 Q1’23 earnings season update on trending topics, macro trends and key management commentary. As of last Friday, May 12, 89% of S&P 500 companies had reported their quarterly earnings results. Some notable companies that reported last week were Tyson Foods, International Flavors & Fragrances, Akamai Technologies, Skyworks Solutions and Electronic Arts.
Here are some key trending topics that emerged during earnings updates over the last week:
- Volatile Demand Environment: The ongoing uncertainty due to macroeconomic conditions have led to softening demand across a variety of sectors. Companies are frequently being asked to share their thoughts on potential headwinds in the demand environment and how respective businesses are navigating through such volatility
- Cost Reduction Initiatives: Inflationary pressures have led many organizations to review their operating expenses and identify areas of cost savings to weather the economic downturn. This quarter, many companies have been reporting on their cost-cutting efforts and how such initiatives are promoting stability in their business operations.
The ongoing uncertainty due to macroeconomic conditions have led to softening demand across a variety of sectors. Companies are frequently being asked to share their thoughts on potential headwinds in the demand environment and how respective businesses are navigating through such volatility.
Skyworks Solutions – Q&A
Question – Ambrish Srivastava: Hi. Thank you very much. Kris and Liam, you guys have spoiled us. I have to go back, I don’t know, 8, 10 years to see a full handle on gross margin, and you have navigated through many quarters of sequential decline. I’m going back 10-plus 15, 20, and you’ve still been able to hold margins. So my first question is, what’s going on the margin front? Is it pricing? Is it something structurally different this time versus going back to last 8, 10 years?
Answer: Yes. Ambrish, I will take that question of you. And so first of all, Q2, we delivered 50% gross margin, which was within our guidance range. But we started already seeing some of the underutilization charges hitting our income statement in the second quarter.
For fiscal Q3, we guided 47% to 48%, as we are experiencing 400 to 500 basis points of underutilization charges, which are partially offset by ongoing cost reductions and operational efficiencies that we are driving. And the reason for the underutilization charges is a slower than expected recovery in the Android smartphone market, as they continue to work down inventory, their internal inventory, in a somewhat soft demand environment.
Initially, we were anticipating a stronger second half of the fiscal year and calendar year. But we do see some signs of recovery, although I would say, later and slower than initially anticipated. As a result of that, we are adjusting our factory utilizations across all our factories. That’s resulting in those 400 to 500 basis point of underutilization charges.
- Kris Sennesael – Skyworks Solutions, Inc., Chief Financial Officer & Senior Vice President
Fox Corp. – Q&A
Question – Benjamin Swinburne: Thanks. Good morning. I just want to ask about advertising as you guys look into the rest of the year and head into the up-front. Does Tubi give you guys an advantage as you go into what is, at least I would describe as, a soft demand environment for advertising and trying to drive pricing kind of across your properties, particularly with the new Tubi Media Group. Just wondering if you think that’s going to matter enough this year for us to maybe notice as we head into the fall.
Answer: Hey. Thanks, Ben. I’m glad Robert left you a question, but know this – on advertising, look, I think you’ve alluded to a softness in the market. We’re really not seeing that across our major platforms, and I’ll give you a bit of a detail. In the national market, the sports market for us is very strong, very robust. Obviously, as we enter the summer, it’s our slower, quieter, always is a quieter period for us until the fall when our key marquee sports programming is on air. But we’re seeing pretty robust demand for time and availability in the sports market. So, we’re very confident with sports.
- Lachlan Keith Murdoch – Fox Corp., Executive Chair & Chief Executive Officer
Tyson Foods – Prepared Remarks
Sales in our beef segment decreased 8.3% compared to record high sales in the second quarter last year. Price was down 5.4% due to reduced domestic demand and softer export markets and volume was down 2.9% due to fewer heads processed. Live cattle costs increased approximately $305 million on like-for-like volume in the quarter as the reduction in the beef cattle herd continues to tighten supply and increase competition for cattle. The margin compression resulting from reduced sales and increased cattle costs led to a segment operating income of $8 million and an operating margin of 0.2%, down from the historically high second quarter margin of 12.7% last year.
Looking next to the pork segment. The volume gain of 1.1% driven by improved hog availability was more than offset by the 10.3% decline in average sales price due to the soft global demand environment, leading to a decrease in overall sales of 9.2% versus the second quarter last year. The pork segment posted an operating loss of $31 million for the quarter which was driven by the industry headwinds compressing pork packing margins and inflationary pressures on operating costs.
- John R. Tyson – Tyson Foods, Inc., Executive Vice President & Chief Financial Officer
International Flavors & Fragrances – Prepared Remarks
In Nourish, sales were flat on a comparable currency neutral basis, with growth in Food Design and Flavors offset by continued volume declines in Ingredients. As Frank shared, Nourish Ingredients, which includes protein solutions, emulsifiers and sweeteners, core texturants and cellulosics and food protection, had the most pronounced volume declines in the quarter, representing approximately 60% of our total company volume decline…
Turning to slide 12, we recognize that we continue to face a challenging environment, including reduced visibility on consumer and customer demand outlook and the path of inflation. However, we remain intently focused on what we can control with the goal of continuing to strengthen IFF’s operating foundation and execution performance. As we discussed, there are a few top operational priorities that will enable IFF to not only manage these complexities, but also to drive long-term profitable growth.
- Glenn Robert Richter – International Flavors & Fragrances, Inc., Executive Vice President, Chief Financial & Business Transformation Officer
Occidental Petroleum – Q&A
Question – John M. Royall: Hi, good afternoon. Thanks for taking my questions. So my first question is on chemicals. You were in line in 1Q, but you raised your full year guide. So you’re seeing something that’s giving you more confidence in the remainder of the year, but it does feel like there should still be some challenges to the housing market. So just looking for some color on the guidance raised in Chem so early in the year in what appears to be an uncertain environment?
Answer: Yeah, John, I think you’ve characterized it actually pretty well in your question. So if you look at domestic PVC demand through the first quarter compared to last year, it’s down about 18% year-over-year. However, what we’ve seen is the export business has picked up that slack in the first quarter and it’s up almost 80% year-over-year. So we end up with a combined demand for PVC that’s up about 2.5%, 2.7% for the country versus last year.
And that driving on that softness in domestic demand, as we discussed on prior calls, is really being driven by housing and construction sector. We still believe that inventories remain low for many PVC buyers, as we’re entering sort of the heart of construction season. But no doubt, there’s encouraging macro conditions between inflation, mortgage rates and regional bank issues have converters a little more reluctant to build what would be typical inventories for this time of the year for construction.
So our guidance reflects that continued uncertainty and the trajectory of the global business, both – in the domestic business. We still firmly believe there’s a lot of pent-up demand for construction, but they’re just cautious with the macro conditions.
- Robert Lee Peterson – Occidental Petroleum Corp., Senior Vice President & Chief Financial Officer
Electronic Arts – Q&A
Question – Andrew Uerkwitz: Got it. Okay. That’s great. Yeah, thank you. And then just kind of big picture, some of the trends that I think you saw in the previous quarters around kind of weakness in smaller titles, I think you guys or some of your peers called out this idea that gamers are kind of coalescing around the biggest titles. Are you still seeing that?
Answer: Yeah, thank you, Andrew. I think it’s a great question. As we look at the marketplace and as we look at consumer trends, I think there’s two things happening right now. One, which – and both kind of end us in the same place. But I think one is more short term and one has as much longer-term – more longer-term ramifications.
The first is that any time through the history of our industry that there is any kind of consumer softness or consumer trepidation around spending, also (20:29) macroeconomic uncertainty, what we typically see is consumers move towards the biggest brands and the biggest titles and the most recognizable experiences. And that really comes down to kind of general consumer behavior, which is they have less, less money that they’re willing to risk against new things or smaller things or unknown things.
And typically, our brands like FIFA, like Madden, like The Sims have performed very well at these times. That, however, is a moment in time, and our expectation is that as we move through this particular phase, and as consumer spending continues to strengthen over time, that there will be opportunities for new titles and new brands.
- Andrew P. Wilson – Electronic Arts, Inc., Chairman, Chief Executive Officer & Director
Inflationary pressures have led many organizations to review their operating expenses and identify areas of cost savings to weather the economic downturn. This quarter, many companies have been reporting on their cost-cutting efforts and how such initiatives are promoting stability in their business operations
News Corp. – Prepared Remarks
We began to see meaningful improvements compared to the prior quarter with certain macro and sectoral trends more positive and our cost-cutting program beginning to gain traction. For context, these earnings follow record revenues and profitability in fiscal 2022, and we have been confronting the challenges of foreign exchange volatility, a surge in interest rates, persistent inflation and ongoing supply chain disruptions. Our results demonstrate the fundamental differences in the character of News Corp compared with other media companies…
As for the company-wide cost reduction drive, we are well advanced in taking the difficult but necessary step of reducing headcount by 5%, which is now expected to yield more than $160 million in annualized savings by the end of this calendar year. In addition, we are strictly scrutinizing spending across all categories and expect further savings as we strive for efficiency and efficacy.
- Robert James Thomson – News Corp., Chief Executive Officer & Director
Gen Digital – Prepared Remarks
Our single ERP integrated quote-to-cash processes, unified go-to-market structure, and functional organization structures are all in place. We’ve already realized two-thirds of the cost synergies as we exited fiscal year 2023. This was no small feat given the size, scale, and complexity of the two businesses. Overall, we have accelerated the integration process and we are on track to achieve the $300 million-plus annual cost savings exiting fiscal year 2024.
Our integration efforts helped us deliver another point of sequential operating margin improvement in Q4, reaching 57%. In fiscal year 2023, we scaled operating profit to $1.8 billion, up 24% year-over-year and more than doubled compared to three years ago. This profit margin and the resulting unlevered free cash flow gives us great confidence that we can navigate through the short-term volatility and uncertainties of the global economy.
- Vincent Pilette – Gen Digital Inc., Chief Executive Officer & Director
STERIS Plc – Prepared Remarks
As anticipated, gross margin for the quarter decreased 240 basis points compared with the prior year to 43.1%, as pricing and currency were more than offset by unfavorable mix and approximately $15 million of excess material and labor inflation. We incurred approximately $90 million in higher material and labor costs during fiscal 2023.
We achieved approximately $10 million of cost synergies from the integration of Cantel Medical in the fourth quarter, bringing our full year total to just over $55 million. We are proud of the work our folks did to integrate Cantel Medical into STERIS, overachieving our projected total cost synergies ahead of schedule. We have substantially completed the integration process. And going forward, we will no longer be tracking and reporting cost synergies from Cantel.
- Michael Joseph Tokich – STERIS Plc (Ireland), Chief Financial Officer & Senior Vice President
Tapestry – Prepared Remarks
On SG&A expenses, we anticipate deleverage for the year, reflecting growth driving initiatives, including increased marketing expenses to fuel long-term customer value, investments in digital and the opening of our new fulfillment center in Las Vegas, partially offset by proactive actions we’ve taken to reduce our expense base.
Moving to below the line items. Net interest expense for the year is anticipated to be approximately $30 million, a significant decline versus fiscal 2022, reflecting the benefit of our cross-currency swap agreements. The tax rate is expected to be approximately 19%, which is below our prior forecast given the lower actualization in the third quarter due primarily to geographic mix.
- Scott A. Roe – Tapestry, Inc., Chief Financial Officer & Chief Operating Officer
Ventas – Prepared Remarks
Moving on to expenses, operating expenses grew 5% year-over-year, which is in line with expectations. Within OpEx, labor, which is 60% of the spend, is playing out as expected, as the permanent employee base is increasing and replacing contract labor, that hiring has continued its positive trend for six consecutive quarters, causing contract Labor to reduce by 59% year-over-year. We believe there is still room for improvement in this area which will result in cost reduction and also improve the consistency and quality of care delivery.
- J. Justin Hutchens – Ventas, Inc., Executive Vice President-Senior Housing & Chief Investment Officer
Thanks for reading this issue of the Earnings Recap blog for the Q1’23 Earnings season. Stay tuned for our trending topics recap next quarter!
Feel free to check out the previous iterations of this quarter’s recap blogs below: