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More Insights from 4Q Calls
More interesting insight from statements from KO, KDP, CHD, ABT, and WBD
Below are some more interesting insights we came across while doing our quarterly reviews of conference calls. Note that while the paywall is up for our reports digging into company earnings quality, we will continue to bring our free subscribers content such as this and occasional educational pieces on the subject of earnings quality analysis.
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Topic- More evidence it’s getting tougher for staples companies to keep pushing through price increases
Church & Dwight (CHD) was especially candid about the situation:
Matthew Farrell- CEO
“We already have pricing in place that's going to be in the marketplace in February and March, but it was sold in already. So we don't have anything ahead of us with respect to, hey, we got pricing planned in the second half or in the fourth quarter because it's going to be -- it's becoming exceedingly more difficult in order to push price through and get away.”
later in the call:
“Yes. Well, I'm sure you know the way it works is in order to raise price, you have to have a cost story. And without the cost story, you don't get the price. And the retailers have all the data about what's going on in the marketplace with respect to commodities, transportation, et cetera. So it's -- it is a negotiation about, hey, this is what we're seeing on the cost side. We need this price increase and then there's a debate.”
On the need for more promotional spending which will limit net pricing:
“If you look at unit dose, it was 28% sold on deal in Q2, and it's 33% in Q4. So it's 500 basis points move. And then the other category that's a lot of promotion is litter. So litter was 11.5% sold on deal in Q2, and it's 14% in in Q4. So you've seen a move up. Now historically, liquid laundry detergent is kind of mid-30s sold on deal. Litter, however, is still low. It's typically high teens.
So things have heated up a little bit in the last couple of quarters, but it hasn't gone to the point where it's a rocket ship or it's a big spike. It's sort of gradual. And as we look ahead to 2023. I would say our sold on deal were probably similar to what we did in Q4 evenly throughout the year. So if anybody wants to chime in, you can.”
Richard Dierker- CFO
“I would also say year-over-year, yes, it's a drag because we're lapping a period where we didn't really have as much promotion. Fill levels were low. And so now as we get back to normal levels of promotion, is it a year-over- year drag, yes. Is it offset is off base from what our historical levels have been now.”
Keurig Dr Pepper (KDP) boosted EPS by cutting marketing and taking price hikes – here it is on 4Q22 earnings call:
“The combination of moderating inflation and continued pricing realization means that we expect year-over-year improvement in gross margin in 2023, but not yet returning to 2019 levels. With higher gross margins in view for 2023, the conversation shift the demand. A key focus point for us in 2023 is the financial health of American consumers and its impact on price elasticity for the categories in which we compete.
Therefore, we believe it's prudent to expect that lower, but still positive of year-over-year pricing realization combined with modest elasticities will yield KDP net revenue growth of approximately 5% in 2023. It's also important to be proactive in ensuring the continued strength of our brands by increasing our investment in growth in 2023. As we are all aware, industry marketing budgets were reduced during COVID and many haven’t yet been fully restored.
While we have learned to be significantly more efficient with our brand spending, 2023 is the right time to increase our absolute investment behind key segments and brands, as well as the support a strong lineup of innovation.”
Coca-Cola’s CEO (KO) echoed the same:
“Exactly how that turns out in the second half will depend on the environment or the dynamics and whether we do see both inflation moderating as we go through 2023 and of course, our own pricing PMO beginning to moderate as we go through '23 in part because, the input costs inflation is moderating, but also because we begin to cycle some of the price increases from 2022. inflation does moderate, how much pressure the consumer does come under. Our central view is we will continue to see unit case growth in the second half, combined with price/mix moderating.
Yeah. So we're certainly planning for China to become more normalized, reopening ala the US and Europe. And so we will see a more normal level of volume in China and a recovery to the 2019 or growth on the 2019 numbers as time come through as we go through the year in China. And then in terms of the carryover, clearly, there's some carryover, particularly in the first half from 2022. But we will be taking pricing in 2023.
Now having said we will be taking pricing, the world is very different. I mean, there are countries where inflation is well over 50%. So pricing is taken multiple times a year. Argentina is an obvious example. So in the developed markets, it's likely we'll trend more back towards more standard cycles of pricing, but there will be price increases across the world in 2023 to reflect both the continuing inflation in import and SG&A costs. Obviously, we need to, as I talked about in the previous answer, earn the right to that pricing, but there will be pricing in 2023.”
Topic 2- Outsized hedging gains may not repeat next year
Abbot Laboratories (ABT) from their 4Q call:
Bob Funck- CFO:
“We realized pretty significant hedging gains last year that won’t repeat this year. And you can really see the impact of those hedging gains on our 2022 results. Last year, there was a pretty significant exchange headwind on sales, a little over 5% or $2.1 billion, but a fairly modest impact on earnings as it was less than dime. And that was really the benefit we realized last year on those hedging gains that won’t repeat in 2023. That’s not a unique dynamic that we’re seeing. We’re seeing that from some other multinationals as well.”
Topic 3- While we see value in Warner Brother Discover (WBD), investors should watch to companies lowballing targets as the company did in its 4Q call. A slight miss means a large disappointment. Likewise, a company that meets or beats such expectations represents even poorer earnings quality if it has to pull a few levers to do it.
“As you look out to '23, I think Gunnar kind of touched on some of the potential tailwinds, but it sounds like you're walking away from close to $12 billion in EBITDA to maybe low to mid-$11 billion in EBITDA. I'm just wondering if you can talk about some of these assumptions. Clearly, you still have some macro challenges, but what could go right? What's in there for upside, which is something that you didn't really talk about that much, but it's new?
Gunnar Wiedenfels - CFO
“Yes. And on the 2023 outlook, look, it's early in the year. And there's a number of uncertainties as you wouldn't be surprised to hear. And I'm very, very glad that we put out some targets in the summer of last year, and we were able to hit those targets. We're putting these targets here out for 2023 with the same mindset that we want to hit or outperform that guidance. We've gone through a couple of the puts and takes here. The biggest unknown continues to be in the ad sales environment. We have a lot of points to be very excited about. We're going to be releasing 12 films, 6 games. One of them is off to a very good start.”
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