Welcome to the weekly edition of our Q4 22 Trending Earnings Topics on trending topics, macro trends and key management commentary. As of last Friday, 66% of the S&P500 had reported their quarterly earnings results. Philip Morris, International Flavors & Fragrances, S&P Global, Fortinet, Paycom Software & Baxter were some of the notable names that reported.
Here are some key trending topics that emerged during earnings updates over the last week:
- ESG & Sustainability: Adherence to ESG standards and sustainability practices are increasingly becoming a priority for businesses and investors alike. Organizations are under growing pressure to demonstrate their commitment to sustainability by reporting on their ESG performance, mitigating environmental risks and embracing sustainable practices. Companies across the board are reflecting this trend as they report on their focus on ESG and sustainability initiatives and how such efforts have led to recognition and subsequent benefits for their businesses
- Customer Behavior & Spending: Companies are frequently analyzing customer behavior to better understand the impact of the changing economy and market conditions on their businesses. They are reporting on how customer behavior and spending is affecting the company’s performance, as well as the strategies being employed to adapt to shifts in these trends, primarily by monitoring consumer preferences, shifts in spending patterns, and the impact of macroeconomic factors on the broader market
- Guidance Conservatism: Many companies are taking a more cautious approach to guidance, with a focus on providing realistic and achievable projections for the future. This reporting cycle, discussions of guidance conservatism often center around a company’s approach to forecasting, the challenges they are facing in light of current conditions, and their strategies for mitigating risk to meet expectations for their performance in the near term
Q4’22 Trending Earnings Topics: Adherence to ESG standards and sustainability practices are increasingly becoming a priority for businesses and investors alike. Organizations are under growing pressure to demonstrate their commitment to sustainability by reporting on their ESG performance, mitigating environmental risks and embracing sustainable practices. Companies across the board are reflecting this trend as they report on their focus on ESG and sustainability initiatives and how such efforts have led to recognition and subsequent benefits for their businesses
FMC Corp. – Prepared Remarks
FMC continues to make substantial progress on our sustainability and net-zero goals. For example, we reduced Scope 1 and 2 greenhouse gas emissions at our operating sites by at least 2% in the last year while at the same time delivering record growth. The consistent progress we have made on various ESG metrics was recognized by several raters that moved us up on their rankings in 2022. FMC now stands at or above industry average across these raters.
- Mark A. Douglas – FMC Corp., President, Chief Executive Officer & Director
Philip Morris International – Prepared Remarks
Our goal for best-in-class ESG performance is aligned as we seek to address the environmental impact of our product, eradicate child labor, reduce our carbon footprint, and provide a more inclusive and empowered working environment for all our employees.
In December, we published a stand-alone report detailing our new biodiversity and water ambitions. For biodiversity, we aim to achieve no net loss on ecosystem connected to our value chain by 2033 and contribute toward a net positive impact on nature by 2050. For water stewardship, we aim to scale solutions toward a positive impact on water resources by 2033 and contribute toward a positive impact on water resources by 2050.
I am also proud to share that, for the third consecutive year, we have been awarded CDP’s Triple A. CDP score nearly 15,000 company on their climate change, forest, and water security disclosures, of which only 12 received this prestigious score. In addition, I am excited to share that we are included in the 2023 Bloomberg Gender-Equality Index for the third year running.
- Emmanuel Andre Marie Babeau – Philip Morris International, Inc., Chief Financial Officer
Interpublic Group Of Companies – Prepared Remarks
At the holding company level, as you know, we have a long-standing commitment to ESG and DE&I as key strategic priorities. And as you may have seen last week, we announced that IPG has been included on the Bloomberg Gender Equality Index for the fourth consecutive year and was recognized for the first time as a top rated ESG performer by Sustainalytics.
We are also once again included in the FTSE4Good Index and Newsweek’s America Most Responsible Companies 2023 and Forbes featured us on both its America’s Best Large Employers list, as well as the World’s Top Female-Friendly Company for 2022.
As a business in which human capital is so vital to our success, our culture including an intentional approach to ESG has long been an important part of our strategy for attracting and retaining top talent, whether in strategic, creative, data analytics or engineering roles, or across a range of other skill sets that have become key to our evolving offerings.
- Philippe Krakowsky – Interpublic Group of Cos., Inc., Chief Executive Officer & Director
International Flavors & Fragrances – Prepared Remarks
As a result of these efforts, we are building a stronger financial profile for IFF and are targeting sales growth of 4% to 6% and adjusted operating EBITDA growth of 8% to 10% on a comparable currency neutral basis over 2024, 2025 and 2026. We also remain committed to deleveraging our balance sheet below the 3 times net debt to credit adjusted EBITDA objective for 2024.
Underpinning these efforts will be an intense focus on enhancing our ESG leadership and accelerating our efforts to contribute to a more sustainable world through our operations and initiatives. We will also continue efforts to optimize our portfolio, ensuring we have the offering needed to support future growth, while pursuing non-core divestitures, like our recent announced sale of our Savory Solutions business to improve our capital structure. Doing so will allow IFF to reinvest in the high-growth areas of our business, while ensuring we’re operating most efficiently as an organization. Lastly, we continue to take steps to evolve our board in line with best-in-class governance standards, with plans to reduce the size of our board from 14 to a target of no more than 10 IFF directors, and 1 Icahn Capital designee director by the 2023 Annual Shareholder meeting.
- Franklin K. Clyburn – International Flavors & Fragrances, Inc., Chief Executive Officer & Director
Dominion Energy – Prepared Remarks
Before transitioning to comments on the business review, let me also highlight progress around our sustainability goals. I’m pleased to report that through 2021, we’ve reduced Scope 1 carbon emissions from our electric operations by 46% since 2005, and Scope 1 methane emissions from our gas operations by 38% since 2010. Notwithstanding the strong performance, we recognize the need to look holistically at our company’s footprint, which is why, during 2022, we expanded our Net Zero commitment to include all Scope 2 emissions and the material categories of Scope 3 emissions. These new commitments align with our focus on helping our customers and suppliers decarbonize. Finally, we increased the diversity of our workforce to 37%, an increase of nearly 4 percentage points since 2019, while also increasing our procurement spend with diverse suppliers to over $1.3 billion, representing 17% of our supplier spend, an increase of 4 percentage points since 2019.
- Robert M. Blue – Dominion Energy, Inc., Chairman, President and Chief Executive Officer
Q4’22 Trending Earnings Topics: Companies are frequently analyzing customer behavior to better understand the impact of the changing economy and market conditions on their businesses. They are reporting on how customer behavior and spending is affecting the company’s performance, as well as the strategies being employed to adapt to shifts in these trends, primarily by monitoring consumer preferences, shifts in spending patterns, and the impact of macroeconomic factors on the broader market
Xylem – Q&A
Question – Michael Patrick Halloran: So just following up on that last little bit there. Patrick, you gave some context on the Applied backlog. It seems like you’re expecting normalization as you work through the year. It makes sense. I mean, it’s a short cycle business. Maybe some thoughts on how you’re thinking about the backlog tracking for the other two segments. And if you think that there’s a chance for normalization, either of those as we move towards the end of the year or towards a more consistent run rate or more consistent balance between how you think about orders and backlog and revenue conversion?
Answer – Sandra E. Rowland: Mike, I think, we are already starting to see some normalization. If you look at the orders rate that we’ve had in the second half of the year, particularly as the pockets where the supply chain has stabilized, we’re seeing some of our customers there return to normal behaviors. I’d say Water Infrastructure is a great example of that. We’ve had a more stable supply chain there. And so that’s where we’ve seen more normal order patterns. And we don’t see a backlog that has been as elevated. We still have quite a bit of our backlog that’s past due in M&CS. And we do accept to start eating into some of that in 2023. And I think that’s a good thing because that means our projects are getting deployed.
- Sandra E. Rowland – Xylem, Inc., Chief Financial Officer & Senior Vice President
Take-Two Interactive Software – Prepared Remarks
As Strauss mentioned, we delivered net bookings of $1.38 billion, which was slightly below our prior guidance, as consumers displayed more cautionary purchasing behaviors during the holiday season. As in prior periods of economic headwinds, full-game sales from our catalog of the industry-leading intellectual properties were relatively resilient. However, we felt pressure on some of our newer releases that are in earlier stages of building their player base, alongside softness in the current consumer spending.
During the period, recurrent consumer spending rose 117% and accounted for 78% of net bookings. Zynga’s in-app purchases performed in line with our revised expectations. However, this was offset by weakness in recurrent consumer spending for several of our consoles and PC games. Digitally-delivered net bookings increased 72% and accounted for 95% of the total. During the quarter. 69% of console game sales were delivered digitally, up from 63% last year.
- Lainie Goldstein – Take-Two Interactive Software, Inc., Chief Financial Officer
O’Reilly Automotive – Q&A
Question – Gregory Scott Melich: Got it. And then my second question is on mix shift. You mentioned that as being a slight headwind to gross margin. I’d love to have a little more detail on that and color within DIY and pro. Is there any trade down occurring? What sort of behaviors are you seeing from your customers on both sides of the house?
Answer – Brent G. Kirby: Yeah. Greg, this is Brent. I can start on that and then others can chime in. We really – net overall, we haven’t seen a lot of trade down. In some categories, we’ve actually seen trade up as cars become more sophisticated and OE requirements on batteries as an example, with AGM and some of the higher price points that are required on a lot of replacement batteries today. So we’ve seen a lot of that actually move the consumer from the best to the better in a lot of cases – or better to best rather.
We have seen a little bit a category where we still had some – a lot of inflation in the oil category. And we’ve had majors that have still struggled with their supply chains. In some cases, we’ve seen customers trade down to some of our proprietary brands on oil. And quite frankly, they’re happy with what they’re getting and we’re seeing some stickiness there with those customers with some of our proprietary brands, which long-term is a good thing for us. But net-net, we haven’t seen any violent move one way or the other in terms of trade up or trade down.
- Brent G. Kirby – O’Reilly Automotive, Inc., Co-President
Fortinet – Q&A
Question – Ray McDonough: You talked a little bit about the momentum in large deals and enterprise deals in 2022, but given the macro environment, could you compare and contrast, maybe Keith or Ken, the behavior you’re seeing from larger customers and maybe those on the smaller end of the spectrum? Are you seeing more deal delays upmarket, more propensity to consolidate functionality at the lower end? Anymore color would be helpful.
Answer – Ken Xie: Yeah. It’s definitely helping the customer lower the total cost of ownership, both on the management cost and also on the product service cost, which we have huge advantage over the competitors. So, that’s where we see a lot of big enterprise customers. They definitely want to – when they see the renew, when they see all these – need to add additional protection for the infrastructure, they do see it’s like how to have a better total cost of ownership; and at the same time leverage single integrated platform, automated platform to offer better security and networking together.
Even there’s a trend to merge the traditional network operating team and security operating team together, so making the stock and knock kind of combine together and also converge of the traditional networking and security together. So, we do see some trend happening in the big enterprise, which we kind of developed technology and the long-term investments starting to see – I mean, starting to have benefit for the trend.
- Ken Xie – Fortinet, Inc., Founder, Chairman & Chief Executive Officer
Paycom Software – Q&A
Question – Brian Schwartz: Hi, Chad and Craig. Thanks for taking my questions. Congratulations on a real nice job with the business on 4Q. Chad, I just wanted to ask you a question about either the business activity or the pipeline momentum by customer size. Are you seeing any differences in terms of the demand or the behavior of the large organizations that are flowing through the pipeline versus, say, the smaller companies?
Answer – Chad R. Richison: Well, we definitely continue to creep up as we have done even since IPO as we’ve continued to increase our target market. In fact, last year, revenue was up 60% with clients that had 2,000 employees or more. So, we are definitely seeing a demand continuing to be pulled higher, especially as businesses are looking to deploy Beti so that their employees can actually do their own payroll.
- Chad R. Richison – Paycom Software, Inc., Founder, Chairman, President & Chief Executive Officer
Many companies are taking a more cautious approach to guidance, with a focus on providing realistic and achievable projections for the future. This reporting cycle, discussions of guidance conservatism often center around a company’s approach to forecasting, the challenges they are facing in light of current conditions, and their strategies for mitigating risk to meet expectations for their performance in the near term
Baxter International – Q&A
Question – Robert Marcus: Great. Good morning and thanks for taking the questions. Jay, maybe to start, I think it’d be helpful for everyone to try and get a sense of what’s conservatism in the guide with some of the new philosophy you talked about. What’s – and what’s actually being contemplated? There’s $300 million in cost savings, but margin is down, as you just talked about. So, really just help us understand what are some of the negative assumptions in there that you’re putting in to help add more cushion on the bottom after the 2022 cadence?
Answer – James K. Saccaro: Sure. Listen, as I mentioned in my prepared remarks, Robbie, we were disappointed with performance in 2022, clearly. And frankly, as we reflect back, it was a highly volatile and dramatic environment that we were faced with and that we were operating through over the course of the year.
As we put together guidance for this year, I would say a couple of things. We’ve taken levels in terms of indices as they currently sit today. We’ve reflected continued supply constraints in things like electromechanical components and then in addition to that, we’ve added margin of safety in terms of contingency to offset, which is why you see a much wider range than we’ve had previously.
- James K. Saccaro – Baxter International, Inc., Executive Vice President & Chief Financial Officer
Hilton Worldwide Holdings – Q&A
Question – David Katz: Hi, everyone. Thanks for taking my question. Just following on some of the earlier discussions about the thoughtful conservatism baked into the guidance. Could we talk about the capital returns a bit and just how you thought about pulling that together? And is that necessarily a kind of firm number in view of how the guidance is set up? And what could push that up or down going forward?
Answer – Kevin J. Jacobs: Yes, David, I have to say that, yes, it’s a firm number or we wouldn’t have given it to you. I assume that goes without saying, but I can’t help myself. So yeah, as of now, it’s a firm number. That’s what we think it’s a range for a reason. There’s a lot of year left and a lot could happen. I think if I – I did read your note this morning, so I think I know where you’re going with this – is it does – right now, we’re a little bit lower than our historic range of leverage. That range does assume effectively no borrowing for the year, because we think that the borrowing – and we don’t like the borrowing environment right now.
It’s very choppy, rates are higher than we’re used to. And so that assumes that leverage stays roughly flat to slightly down for the year. And that’s what – and yes, that’s what the range of guidance and EBITDA will spit out for capital return, again, recognizing that we’re a very high free cash flow business. And we don’t do – other than what we were just talking about with a little bit of key money and a little bit of capital we don’t do much else with the money other than pay a small dividend and use it for buybacks. And so that’s the range for now.
- Kevin J. Jacobs – Hilton Worldwide Holdings, Inc., Chief Financial Officer & President, Global Development
Illumina – Q&A
Question – Daniel Brennan: Great. Thanks. Thanks for taking the questions. Joydeep, congrats. Maybe first on the guidance, I believe at JPMorgan, you guys talked about the 2023 guide reflected a conservative approach. I’m just wondering just given the history in the back half of 2022, have you learned anything? Has the process changed in terms of how you’re guiding? Could you just walk through a little bit about the conservatism or however you want to quantify it that’s within the 2023 guide? I know, Francis, you guys quantified a fair number of kind of headwinds. Just wondering how much maybe you baked in cumulatively for those headwinds or however you would kind of discuss the process and the conservatism.
Answer – Joydeep Goswami: Yeah, Dan, first of all thank you. So, in terms of 2023 guidance, we have as we mentioned earlier, right, pulled in a few things that were visible, of course, is, one, the transition to NovaSeq X. We have mentioned that this is – demand is going to outstrip supply. And we also told you about linearity that we do expect the second half to be – for revenue to step up in each quarter as the NovaSeq X gets out to market and people start bringing up the instrument and ordering NovaSeq X consumables. We also expect that we placed a large number of mid-throughput instruments late in 2022 and continue to expect to place additional NextSeq 1000/2000 instruments throughout 2023. So, as those come online, right, then you would expect an increase in the consumables ramp up as we get through the year.
Also in 2023, we have talked a little bit about the recovery in China in the second half of the year. So, we had seen China going into the end of 2022 and then even the first quarter of 2023 with some COVID hangover and rollover from last year. So, right now, we believe that those should abate, and we also have a lower impact of FX from first half – from obviously from first half into second half of the year. So, for all those reasons, we do expect even after taking into account some of the slowdown in recruitment that we have seen in large PopGen projects that we will see linearity and revenue step-up throughout 2023.
- Joydeep Goswami – Illumina, Inc., Chief Financial Officer & Chief Strategy and Corporate Development Officer
Royal Caribbean Group – Q&A
Question – Steven M. Wieczynski: And then, it does seem, based on your current strong visibility, that if your customer base stays pretty much status quo, it would seem to us that your EBITDA for this year would not just exceed 2019 levels, but, I mean, pretty well exceed 2019 levels. And I just want to understand if that’s fair and your guidance maybe incorporates some conservatism around maybe consumer trends.
Answer – Jason T. Liberty: …I think our teams have put together a forecast that we believe is achievable, and it is based off of what we believe is very strong visibility on the revenue side as well as our ability to manage our cost structure.
We do expect to exceed handsomely our EBITDA that we generated in 2019. And clearly, if we see patterns continuing to accelerate in the way that they are, there’s certainly opportunity for us to have a better outcome for the year.
But I think we’re thoughtful, in just how we’ve always been. We’re very thoughtful on how we guide. We’re thoughtful on how we’re seeing these different products and markets operate. And so, we feel really strongly about 2023. And, quite frankly, we feel very strongly when we consider the acceleration towards Trifecta.
- Jason T. Liberty – Royal Caribbean Group, President, Chief Executive Officer & Director
Thanks for reading this issue of the Earnings Recap blog for the Q4’22 Earnings season. Stay tuned for our trending topics recap next week. Feel free to check out the previous recap blogs for this earnings cycle below:
