The Q4 2021 Earnings Season Recap with Sentieo

Key Takeaways

Podcast recidivist Nick Mazing of Sentieo returns for a look at trends in Q4 2021 earnings calls and earnings releases. Catherine, Steve, and Nick discuss what public companies are saying about Ukraine, inflation, and the disease that shall not be named. Plus, what’s the most-searched item on Valentine’s Day?

Steve: Hello, and welcome to Off the Books, where we surf the uncharted waters of accounting, finance, risk, and wherever else the waves take us. This episode is brought to you by Workiva, the risk, reporting, and compliance platform that simplifies your complex work and can make you the next financial reporting star on TikTok. Check it out at workiva.com/podcast. My name is Steve Soter, accounting enthusiast and Diet Coke aficionado. I'm looking forward to debiting a great conversation and having you with us. I'm also happy to have Catherine Tsai joining me. Catherine, can you please tell the fine folks who you are?

Catherine: Yes, I'm not an accountant or Diet Coke aficionado, but I like asking questions, learning new things, and writing about them later. So I'm here to learn.

Catherine: Well, thank you again, Catherine. So we've just wrapped up the earnings season for Q4 of last year. How did OTB or the Off the Books stock ticker do?

Catherine: Well, Steve, I hear OTB stock is off the charts in the private markets. It's grown 100 times in value since our last episode, which isn't too hard when the value is zero. But something else that's off the charts is being able to catch up with Nick Mazing from Sentieo to break down all the takeaways from earnings releases over the last few weeks.

Steve: And I should mention for our listeners that in this episode, we ask Nick a question about proxy statements. In a simplified explanation, a proxy statement is an annual report that discloses corporate governance information, executive and board of director pay, and a lot of other stuff outside of financial reporting. Nick also references 8-Ks in this episode, and these are SEC filings that discuss and disclose current matters, such as a change in executive leadership, a big acquisition, or, as we'll learn, an earnings release. So let's now take a listen to Nick Mazing from Sentieo.

Catherine: Nick, welcome back to the podcast. You don't need an introduction, but we'll ask you anyway: can you tell our listeners a little bit about yourself?

Nick: Hi, my name is Nick Mazing. I'm the director of research at Sentieo. We are a Workiva partner, and we help SEC reporting teams dig through other companies' filings through our AI-powered search.

Steve: Well, Nick, you are no stranger to this podcast, and we certainly appreciate you coming back yet another time. The original podcast recidivist, as we like to say. As we were talking before in preparation for this, you brought up four major things to cover, the first, and by far the biggest is, of course, inflation. And now we've certainly got the conflict in Ukraine literally and quite tragically blowing up. Nick, what can you tell us?

Nick: Ukraine, certainly a lot of unfortunate developments there very recently. We're seeing it as a topic in transcripts. It's already above and beyond anything historically in the month of February. A lot of companies are talking about it. If you look at the 10-K risk factors of the number of companies, they do mention Ukraine. Interestingly, a number of technology companies discuss this. It's a very common outsourcing destination for technology type jobs. So we're in touch with our — we have a design team there. We've been in touch with them. We have Ukrainian colleagues. So we've been obviously certainly very taxing time. When you look at how it ties into one of the big Q4 topics, which is inflation, Ukraine is really a major exporter of agricultural products. About a quarter of the exports are agriculture. They are a top five exporter of things like wheat and corn. And we've already seen a lot of food commodity inflation working itself through the system as a part of the broader inflation. It obviously makes things much worse. And then when we look at other things like fertilizer, Russia and Belarus would very likely to have sanctions, are combined they're the largest exporter of fertilizers. So I think that that situation is highly unfortunate. Obviously, the effect of any sanctions and so on remains to be seen. Looking at inflation before the conflict, it was already a problem. The number of 8-Ks that mention the term inflation is double or triple versus what they were a year ago. So it is obviously a very big topic in SEC reporting. Specifically, one thing that I have been doing is I've been reading 8-Ks to get a read on what is happening with inflation on products that I know and I use. Because when you look at CPI, it is at 40 year high, which is at around 7.5 percent. The producer price index is much higher than that, which is more of a kind of a B2B index, and you're seeing a lot more disclosures around that. So when you look at the 8-Ks, some things like, Tyson reported beef prices are up around 30 percent. Wingstop - chicken wings were up almost 30 percent for Valentine's Day. They actually ran a boneless chicken wing promotion rather than the actual wings. When you look at housing, the housing component of CPI is around 40 percent of that bucket, and most of this is the rent and owner equivalent rent, and then there is utilities and things like that. When you look at the numbers reported by the residential REITs, the blended inflation in rents, which is a combination of new rents, new leases, and renewals, is running in the teens for Q4. While the CPI index for shelter is at around 5 percent. On the housing market, Redfin reported that the average home buyer payment when you combine the spike in the median listing, which was around 16-17 percent year over year. With the increase in mortgage rates, the average new homebuyer payment is up around 25 percent year over year. I also look at gasoline since there is a number of chains that are traded like I look at Murphy. They report their average gasoline price for the quarter was up around 63 percent. Used cars. Same thing, CarMax. When you look at their 8-K, used car prices are up between 30 and 60 percent, depending whether this is a used versus kind of wholesale prices. They report different numbers. But I think 8-Ks are a great source where you can find company data on the categories that you consume every day.

Catherine: And Nick, I also wanted to ask because I think we're also seeing some inflation in some sectors in wages. And if you go to someplace for lunch or someplace for happy hour, it always seems like they're short staffed. Are other companies talking about that as well?

Nick: Labor has been fairly tight after COVID, and there is a number of factors that obviously in general the economy in the U.S. Has been strong. You have had people leaving the labor force. When you look at where the labor force was before COVID versus now, there is fewer workers, and you can see this in the tight employment numbers. In addition to this, industries where traditionally you have high turnover, such as food service, as you pointed out, because of the turnover, these companies end up paying market price. I would say that the U.S. restaurant labor market is probably the most liquid labor market in the world. And in fact, this is where you're seeing food service workers, I think the latest data was that the year over year hourly income was up in the teens, which is typically low income. So it's a good thing, but that is about the only group that is getting compensated above inflation on a year over year basis. In white collar professions, salaries are much stickier, so you're not seeing that sort of increase. Interestingly, again, I love reading 8-Ks. I love redlining 8-Ks. Chipotle in their 8-K, they added in the disclaimers, they said increasing wage inflation, and Chipotle obviously being a major chain, has a very good read on what goes on in this market. And again, through 8-Ks, you get the idea of what has happened. Also added avocado shortage problems, which actually hit the news a couple of weeks later. Actually their 8-K was a preview in that. And what is also interesting is that you're seeing questions regarding competition for labor popping up in unrelated industries because of the growth of Amazon that has happened, and essentially Amazon is the bid for let's call it, low prerequisite or entry level labor. And there was a question on one of the publicly traded gas station chains. They asked them how they're competing with Amazon, which is not something I would have expected to see on a conference call even two years ago.

Steve: It's interesting to think about that. But yeah, if Amazon is opening a warehouse everywhere in the country right next door to you, naturally, right, for that type of labor, well, that probably is your baseline. Nick, on an earlier podcast, we think we were talking about the Q3 earnings recap, I mentioned I was in California, and I could see the cargo ships lining up for miles to get to port. Curious, have supply chains eased at all? Was that a theme that came out during this last earnings season?

Nick: Supply chains continue to be an issue. There is a little bit of, there was a Twitter debate the other day. If a ship is x miles offshore do we still count it as waiting on Long Beach or not, even though they are? But one of the questions really is, and it's interesting to see, what is a normal level of inventory if you were a COVID winner the way, let's say, Peloton was. And we had a chart in DealBook with their days' inventory. I never thought I would see a days inventory chart in a major publication. This is only for accounting geeks! But it was our users there, and they're obviously very sophisticated, and their days inventory went from like 60 to 180. Right. And they changed their CEO and so on. But what is normal inventory for these COVID beneficiaries? And in addition to this, we're seeing some things, and I've seen in The Wall Street Journal and some other publications, there are specific choke points that end up holding up things like housing completions. So there was an article on garage doors. Home builders cannot deliver homes because they cannot source garage doors. That's the choke point. Was that result? I'm sure that's going to be something else. But in general, the completion times that are discussed are much higher. And I sound like an expert in everything, but there is a bunch of other industries where there's other stuff going on that I'm not aware of! Like everybody can see in the car lots full of Ford Broncos and things like that, waiting for chips that will hopefully work itself out. But you know, now there is new headlines and new disruptions really that started very, very recently. So we'll see how that goes.

Catherine: There's still plenty more to talk about with Nick, but first, let's take a short break for this commercial.

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Steve: And we are back with Nick Mazing from Sentieo. Let's take a listen.

Catherine: You mentioned COVID briefly there, so I have to ask you what effect Omicron had on earnings releases.

Nick: I really don't talk about COVID anymore. I'm over it.

Catherine: Same!

Nick: With Omicron, the signals were mixed, so I looked at the number of earnings releases, and some companies commented that we had good numbers despite Omicron. Right? Airbnb and some other companies where they didn't seem to be affected. Some of the restaurants were affected. So for example, if you look at, there is one quick service restaurant that has a heavy concentration in New York. New York had a big COVID drop. I live in New York City. I monitor the numbers. They or we, I should say, went from under 1,000 cases of COVID to over 40,000 cases of COVID, seven day moving average. And then it declined just as quickly. So Omicron, I think, it was being discussed, but it was not at the level of panic or negativity that we have seen with the original wave.

Catherine: I don't want to jinx anything, but I hope we're turning the corner. I guess, are you seeing any upcoming trends for the upcoming proxy season?

Nick: Yes. So what what happened this year with the early proxy filers, and we worked with the Financial Times on an article to cover that. Companies that don't have their fiscal year-end align with the calendar year already filed their proxies. So, for example, we focused on Apple, Disney, and Starbucks. And what is a really big change this year is that the named executive officers at these companies are getting ESG goals built into their compensation. And I'm going to highlight Starbucks because they went the furthest compared to Apple and Disney. And I strongly recommend anybody who's preparing proxy statements to read Starbucks and Disney's. They were both filed in January. In Starbucks' the compensation structuring is affecting both the short-term bonuses and the long-term bonuses with substantial weight, a double digit percentage, dedicated to ESG goals, and these ESG goals are listed for all the named executive officer, and they include a number of initiatives such as replacing the plastic straws with biodegradable ones. Now that's a catchy headline that the Starbucks CEO got a bonus for eliminating plastic straws, and I think it's a little bit of, well, misleading because he didn't eliminate the plastic straws. They were replaced with a specific type of biodegradable straw. They also have goals around people retention, like 90 percent retention for under-represented minorities. There are other initiatives around plant-based menu offerings. So things like oat milk. There are initiatives around farm level methane, low carbon footprint coffee roastery, and so on. I think it's very interesting to see how a major company like this is addressing ESG, not in the shiny ESG report, but is actually building in those ESG goals into the named executives' annual compensation. And just the other day, Chipotle issued a press release that they will be doing the exact same thing when their proxies filed. So it's certainly a big, big, big change.

Steve: Yeah, I think it may have been two years ago, maybe a little bit more, but I remember when I think it was the Clorox Company made a similar announcement tying ESG goals, I think those were climate-related, to their named executive officer compensation structures. And it just occurred to me how much of a ground shift that really is and then how real, by definition, ESG improvements are going to need to get for those companies, right?

Nick: In the case of, let's say, Apple, it was 10 percent of the bonus. But because they had already overachieved their goals for the year, they didn't apply the 10 percent. On the other hand, the level of disclosure is lower than Starbucks. On the other hand, when you look at Starbucks, you can see how they did, let's say, with a retention rate and so on, you can see how they were, you know, whether that was also -- for example, the CEO of Starbucks was 102 percent of the individual goals, and you can see, goal by goal, what was done. Which I think is very interesting. And it's like you said, it's very real because a 2050 zero emission goal is extremely abstract and very far out, unlike this, which is happening this year.

Steve: And it makes me wonder as you start to see whatever is going to come out of the SEC with respect to climate disclosures, interesting to see how the disclosure of that data, which is presumably at least reviewed, if not audited in many cases, how that might tie to these goals, because now you could actually, you know, have external published data in an SEC filing that inherently has a little more liability and, you know, a little more importance to it then being attached to these goals, and you wonder if that might change what some of these executive goals are going to look like relative to ESG metrics. Super interesting.

Nick: Another notable event around the early proxy filers: Costco lost a shareholder proposal. Or I should say, the board of directors recommended to shareholders to vote against. But the shareholders voted for exactly a greenhouse gas related proposal, which certainly after the Exxon situation last year, it's certainly making news and people are taking note of that, that these environmental proposals that, you know, maybe a few years ago may have been brought by "fringe groups" are now actually winning.

Steve: Yeah, yeah. Well, Nick, one last question I had to to slide in here before we get to our actual closing question of the day. I had referred to that earlier podcast earlier that we had for the Q3 earnings recap. I remember you were very supportive of my decision to buy half a cow. And incidentally enough, my wife actually just happened to tell me a couple of weeks ago like, Hey, we got to do that again because this was awesome, you know, to have all that beef in the freezer. I'm just curious, Nick, I don't mean to put you on the spot, but if you could tell me, how has that investment paid off? I mean, was this still a good idea?

Nick: I don't know if the Soter household uses some sort of mark to market accounting or something like that when you're calculating your net worth in your personal finance software.

Catherine: Maybe, yeah, maybe. I don't know

Nick: I would say it was a very good trade, provided you didn't eat any. Tyson said it's 30 percent, so it will probably keep going higher because the beef prices are linked to feed quite a bit because beef is the least efficient protein for how much food the animals need to eat versus how much meat you get. It's around 9:1 versus chicken, which is about three to one, which is incidentally why you see every single culture around the world eats chicken, and there are cultures around the world that don't eat pork or beef that are the less efficient meats.

Steve: Interesting. Well, as it happens, yes, we've eaten quite a bit of it, which I'm pretty sure it was behind my wife's comment, like, Hey, we need to do that again because we're out ofroast. And as it happens, we are out of roasts.

Catherine: I'm glad your beef investment is paying off, Steve.

Steve: Well, thank you.

Catherine: And hopefully for our audience, their investment in this podcast is paying off. But before we wrap up, let's get to the closing question of the day. So, Nick, Valentine's Day wasn't too long ago. Did you search online for anything related to Valentine's Day?

Nick: I'll probably get in trouble again if I said that my wife and I don't do gifts. I hope she doesn't listen to this one again. But here there is a very interesting search gathered around Valentine's Day that I wrote about on our blog. When you look at the seasonality in Google search trends, the week of Valentine's, there is a spike in searches for roses. And then there is a secondary spike around Mother's Day, which in the United States is in May. I think the first or second Sunday in May. Incidentally well, not incidentally, but a week later in February, there is a spike in the searches for Plan B, which is a brand for emergency oral contraceptive. And then a few weeks later in March, there is a spike. It's kind of the yearly high of searches for pregnancy tests. So using Google data, you can kind of figure out what goes on with a very big number of people around Valentine's Day.

Steve: I got to move to Bing apparently. No, I'm just kidding.

Catherine: In November and December, are we going to see a spike for diaper searches? Bibs? Rompers, baby rompers?

Nick: Well, fertility rates have been extremely low around the world, so I think we may see some policies there. And you know, previously there was a publicly traded company in the United States called mead Johnson. And you know I was a shareholder in that. So I've been I've been tracking those statistics pretty closely, and it doesn't look good for the world.

Steve: Catherine, did you do any Valentine's Day searches yourself?

Catherine: Oh, I think I looked for some restaurant places. Hot restaurants in Denver. How about you, Steve?

Steve: You know, I actually didn't search for anything. As it happens, my wife and I had been on a trip the previous week, which we had sort of determined was going to be kind of our Valentine's Day thing. So getting back into town, I needed to go to the grocery store, which I did and found some roses, and then I actually went home and arranged them and put them in a vase and put them on the kitchen table. And it was well-received. So I guess I got the benefit of having done a gift without needing to do the searches. Well, Catherine, as we've learned from Nick yet again, people certainly are predictable. As much as I love my kids, I'm hoping the next baby that I hold in diapers is a grandkid.

Catherine: A grandkid. How old are you, exactly?

Steve: Well, I'm old enough not to be having babies anymore, that's for sure. And that's all you need to know.

Catherine: And all our audience needs to know is that we thank Nick Mazing from Sentieo for joining us today, especially with everything that's happened this past week in Ukraine. And we thank you, dear listener, for surfing along with us. I'm Catherine Tsai. That was Steve Soter. And this has been Off the Books, presented by Workiva. Please subscribe. Leave a podcast review. Tell your buddies if you liked the show, and feel free to drop us a line at offthebooks@workiva.com. Surf's up, and we'll see you on the next wave!