At the Forefront of Best Practice

February 16, 2024

February 16, 2024

This Week in Earnings – Q4’23

The Sector Beat: Materials

12 min. read

In today’s thought leadership, we cover:

Key Events this week
Earnings Snap, covering the S&P 500 stats to date
Spotlight on Materials in The Sector Beat – a must read if you’re interested in gleaning insights into broader economic indications for 2024

Key Events

Inflation

The consumer-price index (CPI) climbed 0.3% in January from the prior month and increased 3.1% from a year earlier, an uptick from December’s 0.2% monthly gain. (Source: Labor Department)

Labor

In the week ending February 3^rd, seasonally adjusted initial jobless claims decreased 8,000 to 212,000, while the 4-week moving average increased 5,750 to 218,250. Continuing claims, a proxy for layoffs, totaled just shy of 1.9M, up 30,000 on the week and higher than the 1.88M estimate. (Source: Labor Department)

Retail

Advance retail sales declined 0.8% for January, down from a 0.4% gain in December and worse than the estimate for a 0.3% drop. Sales at building materials and garden stores were especially weak, sliding 4.1%. Miscellaneous store sales fell 3% and motor vehicle parts and retailers saw a 1.7% decrease.” (Source: CNBC)

U.S. Congress

The Senate passed a $95.3B package backed by President Biden that contains a fresh round of aid for Ukraine and funds for Israel and Taiwan, overcoming Republican objections, but facing an uncertain future in the GOP-run House. The new aid package provides about $60B related to Ukraine, marking the largest single infusion of aid to the country since the Russian invasion in early 2022 (Source: WSJ)

UK

The UK economy shrank for the second consecutive quarter, the shorthand definition of a recession. The UK’s statistics agency Thursday said GDP fell at an annualized rate of 1.4% in the final three months of 2023, compared with a 3.3% increase in the U.S. over the same period. (Source: WSJ)

Earnings Snap

79% of the S&P 500 has reported earnings to date

Q4'23 Revenue Performance

64% have reported a positive revenue surprise, below the 1-year average (67%) and the 5-year average (68%)
Blended revenue growth (combines actual reported results for companies and estimated results for companies yet to report) is 3.3%
Companies are reporting revenue 1.1% above consensus estimates, below the 1-year average (+1.6%) and the 5-year average (+2.0%)

Q4’23 EPS Performance

80% have reported a positive EPS surprise, above the 1-year average (77%) and the 5-year average (77%)
Blended earnings growth (combines actual reported results for companies and estimated results for companies yet to report) is 9.6%
Companies are reporting earnings 6.9% above consensus estimates, above the 1-year average (+5.7%) but below the 5-year average (+8.5%)

The Sector Beat: Materials

Materials Guidance Trends

We analyzed annual revenue and EPS guidance provided by calendar-year U.S. Materials companies with market caps greater than $1B that have reported to date.¹ Below are our findings.

For comparison purposes, we provide an “All Company Benchmark”, which tracks in real-time² a basket of companies larger than $1B in market cap across all sectors that have reported to date.

Full Year 2024 Guidance Trends

Revenue

More companies Widened the range, 29%, relative to last year
All midpoints are above 2023 actuals

EPS

More companies Widened the range, 29%, relative to last year
Just 27% of midpoints are above 2023 actuals

Earnings Call Analysis

We analyzed the earnings calls for this group and the broader Materials sector universe to identify key themes.

At a fundamental level, performances out of the Materials sector have garnered the unfortunate distinction as being the only sector outside of Energy who’s blended (reported and estimated) S&P 500 results have culminated in negative YoY top- and bottom-line growth in Q4’23 (-18.9% and -5.7%, respectively). And has been the case across many companies this earnings season, 2024 is being characterized as a “transition year” for much of the sector, but not without its glimmers of upside potential.

While executive commentary has stopped short of characterizing the broad-based slowdown in inventory destocking as a “volume recovery”, early indications through January suggest there are reasons to be optimistic that demand will normalize as the year progresses. Indeed, many outlooks are baking in an uptick in dynamics through the back half of 2024. Focus has thus shifted toward boosting volumes and generating operating leverage, particularly as the price lever is becoming more difficult to pull in the face of weak demand. As a result, productivity enhancements aimed at bolstering profitability, including cost and facility restructuring, are a clear and common theme throughout calls.

The combined level of bullish and bearish sentiment registered toward Materials was the lowest among all surveyed sectors in our Q4’23 Inside The Buy-Side® Earnings Primer® published on January 11. While there remains an overall lack of conviction in the sector, outright bearishness for these names has also receded to five-year lows.

Key Earnings Call Themes

Outlook

2024 Anticipated to be a “Transition Year”, with Demand Improvements Expected to be Largely Back-Half Weighted

Sensient Technologies ($6B, Specialty Chemicals): ”I’d like to set the floor of where we’re going to be, and I feel very confident that unlike 2023, where there was a tremendous amount of volatility and destocking and all these other factors, our guidance signals that we believe that that is over, and the magnitude of our new wins would be able to overcome any market dynamics.”
Berry Global ($7B, Packaging & Containers): ”We have a number of reasons… why we feel confident in our second half. It’s much more about ongoing cost reductions and pricing actions that accrue more so to the second half. From a volume standpoint, we basically are where we thought we’d be. We expected a certain amount of destocking to still be occurring. We don’t know exactly how to peel that out and quantify how much is that versus just the consumer demand being down.”
O-I Glass ($5B, Packaging & Containers): “The biggest challenge is that we were negotiating prices over the last few months in the backdrop of pretty soft macro conditions. What you’re seeing right now is a fairly acute short-term softness that will correct itself because it’s substantially supply chain-driven, but it also occurred at the same time that we’re out in the marketplace negotiating prices. And that’s why we’re confident as we go and volume is more normalized over the course of the year and into the future, that the competitive backdrop will improve and allow us to be able to price through inflation going forward.”
FMC ($4B, Agricultural Inputs): “The dynamic this year is going to be the reverse of last year where we had very, very strong pricing as we went through the first half of 2023. Obviously, as we go through this year, we’re going to start to lap those price increases so that differential gets a little different. 2024 is a bit of a transition year. We finished 2023 lower than we expected. We were not going to hold a number that we thought was unrealistic just because we set it in November. We don’t think that’s the right way to run this business. Now, when you look at 2025 and 2026, particularly 2025, we have a lot of headwinds that are temporary right now that are impacting us in 2024. They will go away.”
Corteva ($9B, Agricultural Inputs): “When you look at it globally for 2024, the overall global industry most likely will be down LSD. And that is really a function of price. Volumes seem to be stable and growing and we expect that in 2024. And then our early look is the first half is going to be fairly tough. Things should normalize and stabilize in the second half of the year. And then as we look to 2025, we believe that 2025 will look more like the historical industry, so LSD return to normal growth is how we’re sizing up 2025 and then that growth will be off of a new lower base.”

Inventory

Balancing Optimism with Caution, Executives Taper Industry Characterizations of a Recovery, but Note Destocking is “Largely Behind Us”

Silgan Holdings ($7B, Packaging & Containers): “There is some continued destocking in Q1. We’re being a little cautious because as we’ve seen in other categories, that destocking does linger on just a bit longer. As we think about it for the year, you’ve got some destocking activity that will cause a difficult comp for us in Q1, and we will see growth through the remainder of the year.”
O-I Glass ($5B, Packaging & Containers): ”We’re seeing the destocking activity pretty much over with. The categories that are still to complete that cycle are spirits and wine, which we expect will improve over the course of Q2 and should be more normalized by the middle of the year. Our inventories increased last year and we are taking all the actions to bring those inventories back down as per our current business plan for 2024.”
Corteva ($9B, Agricultural Inputs): ”If you think about the overall situation, last year was a pretty tough year. Where we think we are this year is that broadly speaking, there’s still imbalance, but only in a few regions. [In] the U.S., the destocking is largely behind us now and the market is functioning quite normally, and I’d say is healthy.”
International Paper ($9B, Packaging & Containers): ”We have not seen restocking yet broadly. That’s our estimate of what’s happening in the marketplace. We think destocking is obviously over, or there are certain segments that may be bouncing back and forth. And so I feel very good about the inventory levels in the market.”
Dow ($7B, Chemicals): “We actually experienced strong demand right through [December]. I don’t think that’s an indication of restocking, but I do think it’s an indication that inventories are low through the supply chain and the consumer demand was resilient. And so, people had to buy to keep their supply chains moving. So, I would say through the value chains today and almost all the businesses, it looks like there’s not an excess of inventory out there. And as demand has come in, people are having to buy to keep the chains full.”
Eastman Chemical ($9.6B, Specialty Chemicals): “From a green shoots point of view…it’s way too early to call markets recovering in the consumer discretionary world, so cars, building construction, consumer durables, electronics. There may be some improvement there, but I don’t think I have enough data to make that declaration. But the stable markets are definitely growing.”
Packaging Corp of America ($14.8B, Packaging & Containers): “I would say that the restocking has been quite conservative to date. Nobody jumped up and said, ‘I’m going back to where I was during COVID’ or anything like that. They’re trying to be reasonably conservative going forward. And we saw a little bit of a jump as a result of that, but nothing like we saw on the destocking side.”

Growth

After a Dismal 2023 and Abundant Destocking, Executives Speak to Signs of Reemergent Pockets of Volume

Minerals Technologies ($2.3B, Specialty Chemicals):“I would say that our growth in 2024 is going to be much less price-driven than it has been the last two years. We see good volume growth; Household & Personal Care staying strong, pockets of a few markets recovering from where they were in 2023. So, the growth going forward, we expect to be much more volume driven.”
Silgan Holdings ($7B, Packaging & Containers): “The price recovery was really the focus for our customers… in 2023. And that conversation has shifted now more to a volume recovery in 2024 and you’re seeing again the promotional activity, advertising, etc., in support of that.”
Berry Global ($7B, Packaging & Containers): “What we hear [our customers] talking about in their earnings calls, those that are public, is definitely a pivot toward trying to ignite and grow volume where we’ve been in this inflation recovery, price taking mode.”
Ashland ($6B, Specialty Chemicals): “The other dynamic that’s coming into play is the price mix piece. There is some interplay there around price, raw materials, and volumes. And so, we’re trying to make sure that we strike the appropriate balance as we do compete for some volume in the marketplaces, as demand has more normalized right now.”
Warrior Met Coal ($3.2B, Coking Coal): “Our full year outlook encompasses a favorable landscape, and we believe 2024 should be another strong operational year for Warrior, primarily driven by higher volumes.”

Cost Cutting & Restructuring

To Backfill Profitability amid Pricing, Executives Tout Productivity Enhancements

DuPont de Nemours ($9B, Specialty Chemicals): “Overall, full year, we have about a 1% price decline in total on the top line. And we expect carryover benefit from further raw material logistics and energy savings to offset that to be neutral from a spread perspective for a year. Destock will be mostly complete in the second half. And then, we’ll have improved factory absorption from the hits we’ve been taking there to keep inventory in line, along with more of the cost savings from the restructuring program.”
Crown Holdings ($8B, Packaging & Containers): “Our volume dollars in Q4 were down on the order of 3.5%. And for the full year, we’re down on the order of 8.5%. That’s volume dollars. But obviously, as you can tell by the income results, it was significantly offset by cost reduction activities and better price/cost management.”
Albemarle ($14.6B, Specialty Chemicals): “In manufacturing, we continue to implement initiatives on overall equipment effectiveness, including improvements to recovery and utilization with the expected benefits of $80M. In procurement, we are targeting benefits of $150M by pooling corporate spend and continuing our strategic sourcing to recognize lower raw material pricing. And finally, after restructuring certain back-office functions and with three prioritized projects, we expect to realize $50M of productivity improvements.”
Silgan Holdings ($7B, Packaging & Containers): “The five [facility closures] that we’ve announced today go a long way to supporting our cost-out initiatives. As we said, we’re going to rightsize our capacities to market demand, and we’ve done that.”

Inflation

While Many Acknowledge Significant Moderation, Executives Point to Persistent Input Cost Inflation, Including Labor and Energy, with Recent U.S. CPI Data Continuing to Cloud the Picture

Dow ($37.6B, Chemicals): “As we enter 2024, we expect near-term demand to remain pressured by elevated inflation, high interest rates, and geopolitical tension, particularly in building and construction and durable goods end markets. That said, we are seeing some initial positive indicators. While inflation is still elevated compared to pre-COVID levels, its growth rate is moderating, supporting more stable economic conditions.”
Sensient Technologies ($6B, Specialty Chemicals): “With respect to input costs, many have moderated, some of them linger. On the negative side, there’s still elevated energy costs in parts of the world. Labor is still an elevated dimension of input costs.”
O-I Glass ($5B, Packaging & Containers): “Inflation, we’ve been seeing coming down. Last year was MSD. We’re targeting about 3% this year. We see the majority of our cost inflation now being labor-related inflation, which is pretty set, given contracts and unions and things like that, but you could see some variation in the remaining component.”
Warrior Met Coal ($3.2B, Coking Coal): “Inflationary cost in the mining sector continues to persist and pressure cost structures for labor, supplies, materials and equipment.”
Innospec ($9B, Specialty Chemicals): “There are still some difficult situations with raw materials. You still have, and you just saw the CPI numbers that came out yesterday, some inflationary problems in the marketplace. But overall, we’ve filtered through most of the high-cost inventory.”

Supply Chain Recalibration

Supply Chain Recalibration: Reshoring and Nearshoring Drive Manufacturing Trends with a Focus on Mexico: “This is Actually Happening”

Martin Marietta Materials ($0B, Building Materials): “If we’re looking at manufacturing, the reshoring that we mentioned is pretty significant. We continue to see more activity in that space.”
AptarGroup ($0B, Medical Instruments & Supplies): “We are improving the competitiveness of our North America supply chain. And we are actually expanding capacity in Mexico as more and more of our customers want to do nearshoring and reroute some of their supplies in the U.S., so we are expanding our capabilities in Mexico to make the U.S. supply chain more competitive.”
Cabot ($5B, Specialty Chemicals): “It’s pretty clear that there is a level of onshoring back to regions and an effort to try to de-risk global supply chains. And so, this business has always been regionally driven, but I would say the importance of that has only gotten stronger.”
Steel Dynamics ($5B, Steel): “We’re seeing a lot of incremental demand on the manufacturing side. We’ve been talking about onshoring. That is actually happening, and that does have a good impact on the steel joist and deck market. The continued nearshoring of manufacturing in the U.S. is very apparent with the investments we see in Mexico and the customer base there.”
PPG Industries ($1B, Steel): “We talked in May about being bullish on the Mexico economy. That has come through in spades for us in the region. We continue to see reshoring of industrial activity into Mexico. The second economy for us that’s well outpacing most other regional economies is India. And we’ve got good position in India as well, and that’s supported by reshoring into India or reshoring into India that is just starting.”

In Closing

The boom-and-bust nature inherent in Materials has played out over this Covid-induced cycle, with commentary and investor sentiment on 2024 suggesting economic conditions are poised to improve as the year progresses. Still, headwinds persist.

We view the Materials sector as a canary in the coal mine and will continue to monitor performance, as a rising tide for this sector tends to lift most ships as they are a leading economic indicator.

In the meantime, we’ll be back next week with an earnings snapshot and key events, followed by our Closing the Quarter piece at the start of next month to round out the reporting period.

Thank you to you, our valued clients, for your continued trust and partnership.

As of February 15, 2024
Based on company guidance provided at the time of publication; total number of companies differ across revenue and EPS