Welcome to the weekly edition of our Q4’22 earnings season update on trending topics, macro trends, and key management commentary. With another busy week of earnings, U.S. Bancorp, Western Alliance, Central Pacific Financial, PNC Financial, First Hawaiian, Heritage Financial, and Sandy Spring Bancorp were some of the notable names in the banking sector. Several high-profile tech and consumer firms also reported, including Intel, Microsoft, Southwest Airlines, McDonald’s, and ADP.
Here are some key trending topics that emerged during earnings updates over the last week:
- Expense Outlook: Companies across the board are reporting on their expense outlook for 2023, as they are accounting for macroeconomic uncertainties that may require relevant pull back on spending. Some are also sharing plans for implementing cost savings initiatives within their respective businesses
- Price Increases: Rising expenses due to an inflationary environment typically leads to increases in product and solution pricing to manage company performance in a lot of cases. Many companies are reporting on price increases that are being administered or have already been in effect and sharing how that will potentially benefit their operations
- Layoff Commentary & Business Outlook: While some companies in the tech sector that had to make the difficult decision surrounding the mass round of layoffs in 2023 will be reporting later in the earnings cycle, other organizations are frequently being asked about their thoughts on workforce reduction initiatives and how it will support the business in the near term
Q4’22 Trending Earnings Topics: Companies across the board are reporting on their expense outlook for 2023, as they are accounting for macroeconomic uncertainties that may require relevant pull back on spending. Some are also sharing plans for implementing cost savings initiatives within their respective businesses
The Sherwin-Williams Co. – Prepared Remarks
As we said on our last call, we anticipated the demand environment would be challenging in 2023, leaving us to get out ahead on cost management with the targeted restructuring we began in the fourth quarter. We estimate the annual savings from this effort to be in the $50 million to $70 million range, with about 75% realized by the end of 2023. And we are reaffirming those estimates today.
Our outlook also assumes our raw material costs will be down by a low- to mid-single-digit percentage in 2023 compared to 2022. We expect to see the largest benefit occurring in the second and third quarters. We expect to see decreases across many commodity categories, so the ranges likely will vary widely.
From an availability standpoint, certain alkyd resins remain a pain point, impacting stains, aerosols, and some industrial products. We expect supply of these resins to continue improving through the first half of the year, in part due to ramping of our own internal production. We expect other costs, including wages, energy, and transportation, to be up in the mid-to-high-single-digit range.
- John G. Morikis – The Sherwin-Williams Co., Chairman & Chief Executive Officer
Charter Communications – Prepared Remarks
As we noted in our December investor meeting, we’re making very targeted adjustments to job structure, pay and benefits, and career paths inside of our operations teams in order to build an even higher skilled and more tenured workforce, which drove the higher labor costs. These adjustments will add some pressure year-over-year to cost-to-service customers expense growth in the first half of this year. But that year-over-year growth should moderate in the second half of 2023. And we continue to expect additional efficiencies in cost to service customers over time as a result of the continued digitization of service, productivity improvements and our network evolution investment.
Marketing expense grew by 6.9% year-over-year, primarily due to the higher staffing levels I mentioned and wages, which included targeted adjustments in our sales channels. Mobile expenses totaled $982 million and were comprised of mobile device cost tied to device revenue, customer acquisition, and service and operating costs. And other expenses increased by 6.6%, primarily driven by higher labor costs and higher advertising sales expense related to higher political revenue.
- Jessica Fischer – Charter Communications, Inc., Chief Financial Officer
Intel Corp. – Prepared Remarks
While we’re progressing toward a $3 billion spending reduction with significant austerity across the company, given the fixed-cost nature of our business, we expect the sequential revenue decline will result in negative operating margin in the first quarter. We’re forecasting gross margin of 39%, a tax rate of 13%, an EPS of negative $0.15 at the midpoint of revenue guidance, inclusive of $350 million to $500 million of operating margin benefit from the useful life accounting change split approximately 75% to cost of sales and 25% to OpEx.
Factory underload charges are projected to impact Q1 gross margin by 400 basis points. We continue to evaluate all investments and will remain laser-focused on optimizing for ROI, adjusting for market conditions across operating expenses and capital assets…We expect FY 2023 operating expenses of under $20 billion, a roughly 10% year-over-year decline, consistent with committed cost-cutting measures totaling $2 billion, adjusting for the depreciation change.
- David A. Zinsner – Intel Corp., Chief Financial Officer & Executive Vice President
Southwest Airlines – Prepared Remarks
Based on the January 20 forward curve, we now estimate our first quarter fuel price to be in the $3.25 to $3.35 per gallon range, up $0.25 from our previous guidance, and our full-year 2023 fuel price to be in the $2.90 to $3 per gallon range, up $0.05 from our previous guidance…We will continue to seek cost-effective opportunities to expand our hedging portfolio in 2024, with the goal to get to roughly 50% hedging protection…
Moving to our non-fuel cost. We experienced a significant cost increase in fourth quarter, primarily as a result of the December operational disruption, including a lower capacity from the flight cancellations. The year-over-three-year negative impact to fourth quarter CASM, excluding special items, fuel, and profit sharing, or CASM-X, was 23 points. In addition to the impact from lower ASM, the majority of this headwind was driven by the estimated redemption value of Rapid Rewards points offered to customers impacted as a gesture of goodwill and travel expense reimbursements to customers. There was also premium pay and additional compensation for employees, but that made up a much smaller portion of the 23-point CASM-X impact…Looking forward, we continue to experience year-over-year inflationary cost pressures, as well as cost headwinds due to operating at suboptimal productivity levels. We now estimate first quarter CASM-X to increase in the range of 2% to 4% year-over-year, which is approximately 2 points higher than our previous guidance of flat to up 2%.
- Tammy Romo – Southwest Airlines Co., Chief Financial Officer & Executive Vice President
Ameriprise Financial – Q&A
Question – Ryan Krueger: Okay. Got it. And then just, I know there was a question on overall G&A expenses. Perhaps AWM is a little bit; you have maybe more insight into the outlook there, given the backdrop from an earnings standpoint. Can you give any sense of your expectation for growth in AWM, G&A expenses in 2023?
Answer – Walter S. Berman: I think, again, we’ll go back to is geared towards making sure we get the payback on that with discipline and as we focus. And so we’ll manage it relative to the revenue and the growth opportunities we see, but we will be very disciplined in it. And I think it will be in ranges that you’ve seen in the past. But again, it’s situational.
Answer – James M. Cracchiolo: Yeah. I mean, AWM this year, remember, we had a bounce back in meetings and other travel and T&E again coming back from a pandemic sort of thing where we cut all those things out as well as we may continue to make good investments in the growth of the bank and bringing in advisors, et cetera. So you’re going to have merit and other things that are there. But I think on a balance basis our expenses will be managed pretty well. And we don’t see that accelerating in any way. But as Walter said, whatever we’re making investments, we’ll get good returns on, but I don’t think that will be at a high level.
- Walter S. Berman – Ameriprise Financial, Inc., Executive Vice President & Chief Financial Officer
- James M. Cracchiolo – Ameriprise Financial, Inc., Chairman & Chief Executive Officer
Rising expenses due to an inflationary environment typically leads to increases in product and solution pricing to manage company performance in a lot of cases. Many companies are reporting on price increases that are being administered or have already been in effect and sharing how that will potentially benefit their operations
Teradyne – Q&A
Question – Krish Sankar: Hi, thanks for taking my question. And, Mark, thanks for all your help, and welcome, Greg. Two quick questions. First one, Sanjay, you mentioned about gross margins in the back half of the year kind of going back up. Kind of curious what gives you that comfort, especially given the fact that if auto does roll over, those are high-margin Eagle testers that get out of the equation, so I’m just kind of curious on the second-half gross margin.
Answer – Sanjay Mehta: Sure. Thanks for the question. So, I think a couple of things are included in our plan. The first thing is we expect to gain some operational efficiencies, some tied to specific programs, I would say, mainly in our IA portfolio. There are also some price increases baked into our – that are rolling through in the second half, and some volume that is anticipated in the second half.
- Sanjay Mehta – Teradyne, Inc., Vice President & Chief Financial Officer
Rockwell Automation – Q&A
Question – C. Stephen Tusa: Right. And the price embedded in those orders, I mean, to get from up, I think you said, 7% this quarter to up 4% in the year looks like that price is, obviously, decelerating. I mean, the comps on price get tougher. Is the price in the orders somewhat similar to the price you’re booking in revenues today? And are you pretty much booked when it comes to future price increases at this stage?
Answer – Nicholas C. Gangestad: Yeah. Steve, as far as the pricing, what – the pricing that we’re going to experience for the balance of fiscal year 2023 is all or virtually all of it already baked into our backlog based on the orders that we have and the pricing we put in that. And that will be showing, sequentially, price improvement from what we’re seeing right now just based on how that backlog is playing out.
In terms of the guide I’m giving for the full year, that is not representing an aspect of price starting to come down from the pricing level we’re seeing in the first half. It’s just a recognition that we had virtually no price growth in the first half of fiscal year 2022, and then we had more significant price growth in the second half of fiscal year 2022. So, that change from – is all based on comp, not on any kind of deceleration there.
Answer – Blake D. Moret: If I could just add to that, we did have an additional price increase in December, so in this fiscal year. And apart from the announcements of specific price increases, we’ve talked over the last year of being more agile in terms of getting the recognition of the prices by changing our methodology with customers and with the channel. And I would just say that it’s proceeding smoothly and with our expectations in terms of being able to be more agile as future price increases are introduced.
- Nicholas C. Gangestad – Rockwell Automation, Inc., Senior Vice President & Chief Financial Officer
- Blake D. Moret – Rockwell Automation, Inc., Chairman & Chief Executive Officer
McDonald’s – Prepared Remarks
Strategic calendar planning from marketing to restaurant execution has enabled our teams to stay laser-focused on what truly matters most for our customers. Higher average check supported by strategic price increases as well as positive guest counts contributed to our performance this quarter. Memorable marketing campaigns, including our collaboration with Cactus Plant Flea Market, Boo Buckets, and McRib brought nostalgia to our customers, fueling top-line momentum with limited added complexity in our restaurants.
- Ian Borden – McDonald’s Corp., Chief Financial Officer & Executive Vice President
PNC Financial Services – Prepared Remarks
Average loans grew 3% during the quarter, driven by growth in both commercial and consumer. For the full year, average loans were up 15%, and we continue to grow our loan book in a disciplined manner. As we look ahead, we are operating our company with the expectation for a shallow recession in 2023.
Accordingly, this outlook drove an increase in our loan loss provision in the quarter and a modest build in reserves under the CECL methodology. Importantly, as the credit environment continues to trend towards normalized levels, our overall credit quality metrics remain solid.
- William Stanton Demchak – The PNC Financial Services Group, Inc., Chairman, President & Chief Executive Officer
Automatic Data Processing – Q&A
Question – Bryan C. Bergin: Hi. Good morning. Thank you. First one I had was on pricing. So just any change in view around ES pricing? Any change in client acceptance to the higher levels that I think you were contemplating when you entered the fiscal year, just given the macro?
Answer – Don McGuire: Yeah, Bryan. Thanks for the question. I think it’s a relatively short answer. The fact is our prices are holding well as a matter of fact. I would say that we are kind of at the high end of the guidance we gave previously, and we’re comfortable with that. I think if we look at our retention, we look at our NPS scores, it appears that those price increases have been understood and accepted as well as could be expected.
- Don McGuire – Automatic Data Processing, Inc., Chief Financial Officer
Q4’22 Trending Earnings Topics: While some companies in the tech sector that had to make the difficult decision surrounding the mass round of layoffs in 2023 will be reporting later in the earnings cycle, other organizations are frequently being asked about their thoughts on workforce reduction initiatives and how it will support the business in the near term
Microsoft – Prepared Remarks
Question – Brad Zelnick: Great. Thanks very much. Amy, I wanted to ask about the expense actions that you announced last week. Obviously, not a decision that you would take lightly. How are you thinking about head count for the remainder of the year and the possibility for further expense actions, if necessary? And what criteria do you consider in making these decisions? Thanks.
Answer – Amy E. Hood: Brad, listen, thanks for that question. Obviously, as we think about the Q4 guidance around low-single-digit operating expense growth, we start to, as you know, sort of lap certain real acceleration points that we had last year, and we lap the acquisitions both of Nuance and Xandr. So by the time that we get to the end of Q4, you’ll see very moderated headcount growth on a year-over-year basis in addition to some of the prioritization decisions we made.
And you’re right, we take decisions, like the one we had to make to get our cost structure more in line with revenue, just incredibly seriously because we have lots of very talented people who are impacted by that. And so I do think that we feel confident in that exit rate. As I said, it will certainly imply that year-over-year growth as we lap some of the investments that we made will be quite small.
- Amy E. Hood – Microsoft Corp., Chief Financial Officer & Executive Vice President
Koninklijke Philips NV – Prepared Remarks
We aim to deliver a free cash inflow between €700 million to €900 million this year, driven by improved earnings and a lower inventory, partially offset by cash-out related to restructuring charges resulting from the further reduction of workforce announced this morning, which we will explain in more detail in a few moments…
Restructuring charges are expected to be around 300 basis points, driven by further workforce reduction that I just mentioned and the rightsizing of our Sleep & Respiratory Care businesses in 2023.
- Abhijit Bhattacharya – Koninklijke Philips NV, Executive Vice President, Chief Financial Officer, Member-Management Board & Executive Committee
We will organize around our business segments, supported by strong regions and leaner functions at the center. These businesses will have end-to-end accountability, including sales and services, direct supply chain support, and more integrated patient- and people-centric innovation resources.
This will also include the difficult but necessary further reduction of our workforce by an additional 6,000 roles globally by 2025; 3,000 roles will be implemented in 2023. This is in addition to the reduction of 4,000 roles announced in October 2022.
- Roy Jakobs – Koninklijke Philips NV, President, Chief Executive Officer, Chairman-Management Board & Executive Committee
Hilltop Holdings – Prepared Remarks
Throughout the challenging year, our team has remained resilient and undertook difficult but impactful cost reduction and optimization actions to help resize the overall business, specifically reducing non-originator headcount by approximately 515 people or 37% during the year. That said, our PrimeLending leadership team remains focused on their two primary objectives; originating profitable loans and continuing to operate the business more efficiently.
- Jeremy B. Ford – Hilltop Holdings, Inc., President, Chief Executive Officer & Director
HomeStreet – Prepared Remarks
These pressures on our funding base have resulted in reductions in our net interest margin, which are expected to continue the trough in the first quarter of 2023. We expect this to be the low point in our net interest margin. Assuming short-term interest rates stabilize in the first quarter and we complete our acquisition of three California branches, among other things. In addition to the above, we have taken steps to reduce staffing levels in line with our reduced loan production activity and reduce controllable expenses to the extent possible without damaging our business. In this regard, full-time equivalent employees ended the year at 913, down from 970 at the beginning of the year. Despite the above challenges, we believe we are positioned to resume growing our balance sheet and increasing our earnings once short-term rates stabilize and uncertainty is removed from the interest rate markets.
- Mark Mason, HomeStreet Inc., CEO, President & Chairman Of the Board
Sandy Spring Bancorp – Prepared Remarks
Income from mortgage banking activities decreased $2.8 million compared to the prior year quarter and $800,000 compared to the linked quarter. The decline is a result of the rising interest rate environment, which continues to dampen mortgage origination and refinancing activity. In light of current origination levels, we did execute a reduction in staff in our mortgage division in the fourth quarter, and we’ll continue to evaluate that going forward.
- Daniel J. Schrider – Sandy Spring Bancorp, Inc., Chairman, President & Chief Executive Officer
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: