Q3’22 Trending Earnings Topics October 31st, 2022 Weekly Recap

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Welcome back to the latest edition of our Q3 2022 earnings season update on trending earnings topics October 31st 2022, weekly recap, including macro trends and key management commentary. With a busy week of earnings that saw over 25% of S&P 500 companies report, Airbnb, Starbucks, Eventbrite, Cloudflare, AMD, and Yelp were some of the notable names. Here are some key trending topics that emerged during earnings updates over this period:

Rising inflation on a global scale continues to drive the narrative behind companies reporting earnings this quarter. Many organizations are sharing their thoughts on inflation and how it has impacted their businesses so far.

Ball Corp – Prepared Remarks

Year-to-date and third quarter sales were up due to the pass through of higher aluminum prices, higher volumes with improved price mix and higher aerospace performance partially offset by currency translation and inflation in Europe.

Comparable year-to-date and third quarter diluted earnings per share reflects strong results in North America and aerospace, and a lower share count offset by higher interest expense, higher comparable effective tax rate, comparable operating earning declines in EMEA attributable to the sale of our Russian business. Cost inflation and unfavorable earnings translation and lower comparable operating earnings in South America continued to be driven by regional customer mix.

  • Scott Charles Morrison – Ball Corp., Chief Financial Officer & Executive Vice President

Kellogg – Prepared Remarks

In Snacks, which represent more than a third of our annual net sales in Latin America, we continued to drive very strong consumption growth in key markets, including double-digit growth and share gains for Pringles in the key markets of Mexico and Brazil.

In Cereal, the net sales in consumption growth was led by Brazil, Colombia, and Mexico.

Productivity and revenue growth management actions helped to mitigate the impact of high cost inflation, adverse transactional foreign exchange, and supply disruptions, leading to solid growth in Latin America’s operating profit. In the remaining quarter this year, Latin America should sustain sales and profit growth, even as we expect price elasticities to rise gradually as we work to offset continued cost inflation and supply challenges.

  • Steven A. Cahillane – Kellogg Co., Chairman & Chief Executive Officer

Corteva – Q&A

Question – Vincent Stephen Andrews: Hi. Thank you and good morning, everyone. Just wanted to see if you could give us any sense on inflation for next year in both Crop Chemicals and Seed, sort of any order of magnitude versus this year that we should start thinking about in the model? And maybe more specifically in Crop Chemicals, could you talk about when you think raw material costs will peak and if there’s the potential for any deflation at some point in 2023?

Answer – David John Anderson: So, Vincent, this is Dave. Good morning. Thanks for participating. So, let me give you sort of a broad statement and then, Robert, if you’d like to fill in a little bit more on the details on the Crop side, Tim, obviously, anything you want to add on the Seed side. But broadly, obviously, this year is shaping up to be much larger than anybody ever anticipated. Right now, if you look at our implied numbers that sits in, around 10%, 10% to 11% on a full year basis in terms of overall cost inflation to include commodity costs as well as input or ingredient costs, freight and logistics, just incredible. And again, just want to reinforce what we’ve been able to do this year in terms of execution, pricing, productivity, what Tim and Robert combined, have been able to do to be able to deliver the performance.

For 2023 and specifically to your question we – as we said in our prepared remarks, we anticipate that inflation is going to continue, that it’s going to continue to be a headwind. We are anticipating moderation in the rate of inflation. It’d be too early right now for us to say precisely or even without kind of a guidance range where they could be, we’ll provide that together with obviously more details around 2023 when we provide a formal guide. 

  • David John Anderson – Corteva, Inc., Chief Financial Officer & Executive Vice President

Fortive Corp – Prepared Remarks

We banked $3.5 billion in adjusted gross profit for the quarter, up 17.3% versus last year. Adjusted gross margin improved 17 basis points to 18.2% for the first quarter. GP per case grew in all four segments versus prior year, marking the fifth consecutive quarter of such growth. Our gross profit and margin improvement reflected our ability to continue to manage product inflation, which was at 9.7% at the total enterprise level, consistent with our guidance, as well as incremental progress from our strategic sourcing efforts as we continue to partner with our suppliers. U.S. Broadline inflation was 12% in the quarter. Our inflation metric is in dollars, so the enterprise metric was reduced by the local currency declines against the dollar.

Overall adjusted operating expenses were $2.7 billion for the quarter, or 14.2% of our sales, a 30-basis-point increase as a percentage of sales over the same quarter in the prior year. Costs this quarter increased in workers’ compensation, pension expense, healthcare and some operational elements, like shrink, all of which are being addressed. We have more to do in this area, but believe that our supply chain and North American teams have Sysco on the path to improving our operating expense profile.

  • James A. Lico – Fortive Corp., President, Chief Executive Officer & Director

The Estée Lauder Companies – Prepared Remarks

Currency is also projected to be a significant drag on our reported results in the second quarter and for the full year as the US dollar has continued to rapidly strengthen against key currencies. As we entered fiscal 2023, we took strategic pricing to mitigate higher-than-normal inflation. Both the magnitude and speed of currency movements experienced thus far combined with inflation have further suppressed our expectations for the balance of the year. Specifically, based on mid-October spot rates of €0.978 for the euro, £1.122 for the pound, RMB 7.29 for the Chinese yuan, and KRW 1,436 for the Korean won, currency translation is anticipated to continue to negatively impact reported sales and diluted EPS growth for the second quarter and for the full year.

We expect organic sales for our second quarter to fall 11% to 9%, primarily reflecting the continued risk of disruption in Hainan leading to further tightening of inventory and continued tightening of inventory by certain retailers in the US. Currency translation is expected to be dilutive to reported net sales by 7 points with an additional 2 points due to the impact of certain foreign currency transactions in key international travel locations. The impact of sales from certain designer license exits are expected to dilute reported growth by approximately 1 point.

  • Tracey Thomas Travis – The Estée Lauder Companies, Inc., Executive Vice President & Chief Financial Officer

In a tumultuous macroeconomic environment, companies are frequently assessing and prioritizing customer feedback on new and existing products and services to ensure that they have visibility on market demand and prospect conversations in an effort to continue driving growth.

Illumina – Prepared Remarks

Finally, low throughput shipments were up 13% year over year. These instruments continue to provide a great entry point to sequencing. This continued demand for our sequencing platforms across the throughput spectrum will contribute to a larger install base and drive future consumables revenue.

We’re also receiving positive feedback from early access customers of Illumina Complete Long-Reads and Complete Long-Reads with Enrichment, and we’re expanding to additional customer sites. Customers appreciate Illumina’s unique ability to deliver a high quality, cost effective and complete view of the genome on a single platform, enhancing utility across our install base.

  • Francis A. deSouza – Illumina, Inc., Chief Executive Officer, President & Director

Charles River Laboratories International – Prepared Remarks

We have been continuing to add capabilities to our extensive portfolio to support the manufacture of biologics, including the addition of new cell and gene therapy assays.

The initiatives that we have implemented to improve the performance of our CDMO business are beginning to gain traction and earn positive feedback from clients. It’s still early, and we don’t expect the financial performance to meaningfully improve until next year, but we’re pleased with the initial progress.

Our creation of Centers of Excellence for cell therapies, viral vectors, and plasmids has been well received. And coupled with our focus on CDMO business development efforts, we are generating new client interest.

  • James C. Foster – Charles River Laboratories International, Inc., Chairman, President & Chief Executive Officer

Zimmer Biomet Holdings – Prepared Remarks

And I got to tell you, our existing product portfolio kept up the momentum as well. Demand continues for ROSA both in knee and hip. Persona Revision traction in the US remained strong and our limited launch of Persona IQ is driving positive feedback in interest, and we’re focused on aggressive data collection so that we can establish clinical use benefits. And we expect to build on this momentum with new product launches in the coming months, including as we talked about, our new Persona cementless form factor, additional launches in our S.E.T. category and a hip product launch that we’re excited about in early 2023. And I can tell you that all of these product innovations coupled with our ongoing efforts to reshape our business and accelerate ZB’s transformation position us very well for future growth.

  • Bryan C. Hanson – Zimmer Biomet Holdings, Inc., Chairman, President & Chief Executive Officer

Apple – Prepared Remarks

Overall, we believe total company year-over-year revenue performance will decelerate during the December quarter as compared to the September quarter for a number of reasons. First, we expect nearly 10 percentage points of negative year-over-year impact from foreign exchange. Second, on Mac, in addition to increasing FX headwinds, we have a very challenging compare against last year, which had the benefit of the launch and associated channel fill of our newly redesigned MacBook Pro with M1. Therefore, we expect Mac revenue to decline substantially year-over-year during the December quarter.

Specifically on Services, we expect to grow, but to be impacted by the macroeconomic environment, increasingly affecting foreign exchange, digital advertising and gaming. 

  • Luca Maestri – Apple, Inc., Chief Financial Officer & Senior Vice President

Incyte – Prepared Remarks

Over 62,000 units of Opzelura were shipped in the quarter, representing a growth of 32% versus Q2. The positive feedback loop between patients and physicians, driven by the efficacy of Opzelura, continues to fuel the uptake in atopic dermatitis. Opzelura in vitiligo has been well received by both physicians and patients and is adding further to growth in demand. Opzelura access continues to improve as NDC blocks are removed and payers continue to add Opzelura onto their formularies.

  • Barry P. Flannelly – Incyte Corp., Executive Vice President & General Manager-North America

IDEXX Laboratories – Prepared Remarks

Customer survey work in Germany and France demonstrates that customers have had an overwhelmingly positive experience during the first year of the new commercial ecosystem. Over 90% of customers in Germany, for example, indicate that their commercial experience is the same or better than a year ago with the highest satisfaction rates and practices to receive continuous commercial engagement. This feedback highlights the benefit of our high-touch commercial model, where diagnostic subject matter experts partner with practice centers and staff to drive practice patient care and business objectives.

  • Jonathan J. Mazelsky – IDEXX Laboratories, Inc., President, Chief Executive Officer & Director

To combat ongoing inflationary pressures along with supply chain constraints, companies are frequently reporting on price increases to maintain revenue margins and profitability.

Monster Beverage – Prepared Remarks

The depletion of our higher cost imported cans will continue over the next few quarters. However, our main promotion in the third quarter was executed with lower-cost, locally sourced cans in the United States and globally. We estimate that of the increasing cost of sales in the 2022 third quarter, approximately $84.2 million was comprised of approximately $40.1 million due to increased ingredient and other input costs, including secondary packaging materials and increased co-packing fees, to approximately $24.4 million due to increased freight rates and fuel costs, including costs relating to the importation of aluminum cans; three, approximately $11.5 million due to increased aluminum can costs attributable to higher aluminum commodity pricing; and four, approximately $8.2 million due to geographical and product sales mix…

Gross profit as a percentage of net sales for the 2022 third quarter was 51.3% compared with 55.9% in the 2021 third quarter, and 47.1% for the 2022 second quarter. The decrease in gross profit as a percentage of net sales for the 2022 third quarter was partially offset by pricing actions, including the implementation of our general price increase in the United States effective September 1, 2022, price increases in certain international markets and reductions in promotions. Such pricing actions positively impacted gross profit margins in the 2022 third quarter.

  • Rodney C. Sacks – Monster Beverage Corp., Chairman and Co-Chief Executive Officer

Molson Coors Beverage – Prepared Remarks

Now I know that some of you are skeptical, but we have several tailwinds that give us confidence. We are benefiting from strong pricing in the US, Canada and EMEA&APAC. In the US, by far our largest market, our recent actions mean pricing will be up close to 10% on average versus the fourth quarter of last year as opposed to our historical 1% to 2% annual price increase, and we will see that pricing benefit for the entirety of the quarter.

  • Gavin D. K. Hattersley – Molson Coors Beverage Co., President, Chief Executive Officer & Director

Fortinet- Q&A

Question – Fatima Boolani: Thank you. And Keith, just a clarification on the services revenue trajectory and more broadly thinking about next year. So, we saw the reacceleration this quarter in services revenue. So, wondering if you can give us a quick update on how the delayed registrations from earlier in the year and transactions from earlier in the year are trending and how we should think about that filtering and flowing into our models for next year. Thank you.

Answer – Keith Franklin Jensen: Yeah. I think we’ve been messaging throughout the quarter at various conferences that – and even in the prior quarter that we had a clear expectation that service revenue growth has accelerated. So, we’re very pleased to see that. I think there’s a number of things that are providing a tailwind into that. Customer registering units is part of that. I think also the price increases making its way first into orders and deferred revenue and now into the income statement. Keeping in mind that we have contracts that sometimes are as long as five years, that would give you a sense of how long the tailwind may relate to price increases as we will continue to cycle through renewals at old prices and replace them with new contracts. So I think we feel good about the direction of the service revenue and the margins that it provides together with the fact that it’s 60% of our business.

  • Keith Franklin Jensen – Fortinet, Inc., Chief Financial Officer

Global Payments – Prepared Remarks

Taking a closer look at our performance by segment, Merchant Solutions achieved adjusted net revenue of $1.45 billion for the third quarter, a 10% improvement on a constant currency basis and approximately 11% excluding the impact of Russia. We delivered an adjusted operating margin of 50% in this segment, an increase of 80 basis points year-on-year on a foreign-exchange-neutral basis.

Our combined US Payments and Payroll business delivered another strong quarter, led by our integrated channel which again reported mid-teens growth and we continue to see strong momentum in our POS software solutions which grew nearly 30% this quarter, on top of over 70% growth in Q3 of 2021 as well as our HCM and Payroll business, which grew mid-teens in the quarter.

Our worldwide e-commerce and omnichannel businesses also delivered growth in the teens on a constant currency basis this quarter, as we continue to see strong demand for our omnichannel solutions across our business. And our vertical market solutions again achieved double-digit growth compared to the prior-year, led by strength (00:15:19) in our school solutions business and Zego while bookings trends remain solid across the portfolio.

  • Joshua Whipple – Global Payments, Inc., Senior Executive Vice President & Chief Financial Officer

Thanks for reading this issue of the Earnings Recap blog for the Q3’22 Earnings season. Stay tuned for our trending topics recap next week.

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