Lower Prices and Industrial Earnings: Q2 Analysis

Impact of Lower Commodity Prices on Cost Structures

Lower commodity prices have led to favorable manufacturing costs for companies like Caterpillar, offsetting some profit impacts from lower sales volumes. Additionally, Deere & Company anticipates moderated agricultural fundamentals due to these lower prices, affecting cost structures across major markets.

"The decrease was mainly due to the profit impact of lower sales volume of $217 million and unfavorable other segment items of $24 million, partially offset by favorable price realization of $173 million and favorable manufacturing costs of $38 million." --- (CAT, sec filing, 2024/Q1)

"Agricultural fundamentals across all our major markets are expected to moderate in 2024 due to rising global stocks, lower commodity prices, elevated interest rates, and weather volatility." --- (DE, sec filing, 2024/Q2)

"The decrease was mainly due to the profit impact of lower sales volume of $278 million, higher SG&A/R&D expenses of $26 million and unfavorable other segment items of $7 million, partially offset by favorable price realization of $199 million and favorable manufacturing costs of $86 million." --- (CAT, sec filing, 2024/Q1)

"This is better than we had expected on stronger price and favorable manufacturing costs, driven mainly by lower freight costs." --- (CAT, earning call, 2024/Q1)

"Jerry Revich: Jim, Andrew, I'm wondering if you could just talk about in construction industries, in prior cycles the industry has passed through lower input costs in terms of lower prices to customers when input costs have declined." --- (CAT, earning call, 2024/Q1)

Supply Chain Costs and Disruptions

Supply chain costs and disruptions have significantly impacted industrial earnings. UPS experienced a revenue drop due to lower volumes with USPS. Tesla anticipates higher expenses from global trade changes and labor issues. FedEx saw reduced yields from lower fuel surcharges. GM focuses on cost reduction through supplier collaboration, while Amazon faces challenges from macroeconomic factors and supply chain volatility.

"Revenue from other businesses within Supply Chain Solutions decreased, driven by a reduction of $69 million from lower volumes under contracts with the USPS." --- (UPS, sec filing, 2024/Q1)

"At the same time, we are likely to see heightened levels of capital expenditures during certain periods depending on the specific pace of our capital-intensive projects and other potential variables such as rising material prices and increases in supply chain and labor expenses resulting from changes in global trade conditions and labor availability." --- (TSLA, sec filing, 2024/Q1)

"Lower fuel prices negatively affected yields through lower fuel surcharges and drove a decrease in fuel expense during 2024 at all of our transportation segments." --- (FDX, sec filing, 2024/Q4)

"And I regularly meet with our supply base as they get together and we have quarterly calls with the entire supply base over 20,000 suppliers in the that support General Motors, of bringing their best ideas to us so we can take cost out." --- (GM, conference, 2024/05/30)

"Overview Macroeconomic factors, including inflation, increased interest rates, significant capital market and supply chain volatility, and global economic and geopolitical developments, have direct and indirect impacts on our results of operations that are difficult to isolate and quantify." --- (AMZN, sec filing, 2024/Q1)

Demand Fluctuations and Revenue Impact

Stabilized demand and healthy markets, supported by U.S. government infrastructure spending, have mitigated revenue impacts. However, supply chain issues have frustrated customers, affecting sales volumes and profit margins. Despite these challenges, strong commercial demand and national security focus have driven growth, as indicated by favorable book-to-bill ratios.

"Industry fundamentals remain vastly unchanged with stabilized demand supported by visibility into the balance of the year, and markets continue to be healthy as the U.S. government infrastructure spending further increases." --- (DE, earning call, 2024/Q2)

"So demand feels pretty good now. We have frustrated and disappointed our customers because of some of the production supply chain issues that we're up against. And while I understand that" --- (BA, conference, 2024/05/23)

"The increase was primarily due to the absence of the impact of the divestiture of the company's Longwall business in 2023 of $586 million and favorable price realization of $575 million, partially offset by the profit impact of lower sales volume of $268 million." --- (CAT, sec filing, 2024/Q1)

"So that's the one that's – just given the supply chain challenges, given the demand dynamics with the air framers, so we continue to watch that inventory level and can we drive the same level of inventory reduction that we had initially planned that we've started the year." --- (GE, earning call, 2024/Q1)

"AT had book-to-bill of approximately 1.1 in the quarter as commercial demand and benefits from the impact of an increased global focus on national security support a strong growth trajectory." --- (HON, earning call, 2024/Q1)

Pricing Strategies in Response to Lower Prices

Companies are employing diverse strategies to counteract lower prices, including pricing actions, discounts, and price realization. Honeywell focuses on price/cost discipline and productivity, while Deere & Company balances discounts with price realization. Caterpillar benefits from geographic mix, and Boeing manages cost pressures in fixed price programs.

"Our mitigation strategies include pricing actions, longer term planning for constrained materials, new supplier development, material supply tracking tools, and direct engagement with key suppliers to meet customer demand." --- (HON, sec filing, 2024/Q1)

"We talked about the discounts that we accrued this year. But again, we're managing that balance and that dynamic and then feel good about the 1.5 points price realization that we're going to maintain through the course of the year." --- (DE, earning call, 2024/Q2)

"Compared to our expectations, sales volume was slightly lower while price realization, including geographic mix, was better than we anticipated." --- (CAT, earning call, 2024/Q1)

"1, fixed price development programs showing a little bit of cost pressure. And then secondly, the factory actions that are happening in the Puget" --- (BA, conference, 2024/05/23)

"We anticipate our overall segment margin to expand 30 to 60 basis points this year, supported by improving business mix, price/cost discipline and productivity actions including our precision focus on reducing raw material costs." --- (HON, earning call, 2024/Q1)

Impact on Profit Margins

Despite lower prices, industrial companies like Caterpillar, 3M, and General Electric reported strong profit margins in Q2, with Caterpillar and 3M achieving margins above 21%. However, Honeywell experienced a slight decrease in segment margin percentage, indicating varied impacts across the sector.

"Adjusted operating profit increased by 5% to $3.5 billion and the adjusted operating profit margin was 22.2% an increase of 110 basis points versus the prior year which was slightly better than we had expected." --- (CAT, earning call, 2024/Q1)

"Segment profit increased $2 million and segment margin percentage decreased 70 basis points to 19.8% compared to 20.5% for the same period of 2023." --- (HON, sec filing, 2024/Q1)

"We posted strong adjusted results in the quarter, including sales of $7.7 billion, operating margin of 21.9%, earnings per share of $2.39 and free cash flow of over $800 million." --- (MMM, earning call, 2024/Q1)

"So CES margins of 27% in Q2 versus Q3 – versus Q1 of 2023 implies that the core service margin improved about 1,000 to 1,500 basis points depending on what you want to choose, so 25% to 35% plus." --- (GE, earning call, 2024/Q2)

"So turning to slide 18, let me summarize. The strong operating performance continued in this quarter, with the adjusted operating profit margin at 22.2%, and record adjusted profit per share of $5.60." --- (CAT, earning call, 2024/Q1)

Competitive Landscape and Market Share

Deere & Company leverages its strong dealer network to navigate an expanding competitive landscape, while Honeywell and General Electric highlight their competitive advantages and market positions in digital twins, predictive maintenance, and airborne wind energy markets. Deere also notes resilience in the earthmoving and road building sectors despite competition.

"So, while the competitive landscape continues to expand in the region, we feel confident not only in our ability to deliver additional value to our customers via our integrated solutions, but also through the strong dealer network that we've worked hard to build out. These dealers are providing industry" --- (DE, earning call, 2024/Q2)

"Competitive Landscape The major players operating in the digital twins and predictive maintenance market are ABB Ltd, Ansys, Inc., Aspen Technology, Inc., Autodesk, Inc., Cisco Systems, Inc., Dassault Systèmes SE, General Electric Company, Hitachi, Ltd, Honeywell International Inc., International Business Machines Corporation, Microsoft Corporation, Rockwell Automation, Inc., SAP SE, Schneider Electric SE, Siemens AG, ." --- (HON, press release, 2024/04/22)

"Competitive Landscape The major players operating in the airborne wind energy market are Alphabet Inc., Ampyx Power, Aviantis Energy Group, Ecoloop, Enercon GmbH, EnerKite GmbH, Envision Group, General Electric Company, Goldwind Science & Technology Co., Ltd., KiteGen Venture, Kitemill AS, Kitenerg, Kitepower, KiteX, Nordex SE, NTS Energie- und Transportsysteme GmbH, Siemens Energy AG, SkySails Power GmbH, Suzlon Energy, TwingTec AG, Vestas Wind Systems A/S, Windswept and Interesting Ltd." --- (GE, press release, 2024/06/06)

"In particular, we saw resilient earthmoving and road building market that exceeded our expectations despite a tough competitive environment." --- (DE, earning call, 2024/Q2)

"Those five elements of what we truly feel are competitive advantages for us, combined with the market outlook, combined with where I think we are in terms of our tailwinds that we have on our growth opportunities. And that's why for me it's a really exciting" --- (HON, conference, 2024/05/14)

Future Outlook and Earnings Predictions

Deere projects a net income of approximately $7 billion for fiscal 2024, while 3M and Honeywell emphasize the importance of predictive statements and adjusted earnings per share in understanding future performance and trends.

"Today, we'll take a closer look at Deere's second quarter earnings, then spend some time talking about our markets and our current outlook for fiscal 2024." --- (DE, earning call, 2024/Q2)

"Next, please note that during today's meeting, we'll make certain predictive statements that reflect our current views about 3M's future performance and financial results." --- (MMM, event transcript, 2024/05/14)

"We believe adjusted earnings per share is a measure that is useful to investors and management in understanding our ongoing operations and in analysis of ongoing operating trends." --- (HON, press release, 2024/06/03)

"For fiscal year '24, our outlook for net income is now expected to be approximately $7 billion." --- (DE, earning call, 2024/Q2)

"During today’s conference call, we will be making certain predictive statements that reflect our current views about 3M’s future performance and financial results." --- (MMM, earning call, 2024/Q1)