This Week in Earnings – Q1’24

Tough Market Conditions Persist across Certain Industries Such as Transportation and Building Products, but Companies are “Controlling the Controllables” and Underlying Conditions Seem to be “Building Momentum” with “Back-Half Strength” a Consistent Theme

• Norfolk Southern ($52.7B, Railroad): “The macro landscape presents a mixed bag with uncertainty regarding inflation and future Fed rate actions overshadowing the recent recovery in manufacturing. However, our improving service product places us in an excellent position to capitalize on growth opportunities, and we also expect to drive incremental volumes.”
• Greenbrier ($1.6B, Railroads): “The economy in North America has been resilient. The probability of a soft landing is increasing, and the Fed has signaled it will likely make three interest rate cuts by the end of 2024. Of course, this year is also a U.S. Presidential Election year, not to mention national elections in the EU and Mexico. In Europe, while the economy is still lagging the U.S., the growth projections have been trimmed once again by the European Central Bank, but we’re building momentum.”
• MSC Industrial Direct ($5.3B, Industrial Distribution): “While macro conditions have not materially improved since the start of the calendar year, we continue to hear a more positive overall sentiment about the coming months from our team on the ground.”
• Crane ($8.1B, Specialty Industrial Equipment): “The uncertainty just remains what’s outside of our control. You have a highly charged political environment. You have wars. We have an unknown inflationary environment and Fed action. There’s just a lot of global uncertainty, that is the right reason to be cautious and be prepared for anything. Having said that, what’s within our control and what we see immediately, it feels high confidence, I would say that I see, if this trend continues, little downside risk with some upside potential opportunity.”
• Ryder System ($5.3B, Rental & Leading Services): “Rate market conditions remain challenging. We continue to believe that 2024 will reflect trough market conditions and used vehicle sales and rental, and our forecast assumes a gradual pickup in the second half of 2024.”
• Owens Corning ($14.4B, Building Products & Equipment): “We’re seeing fairly weak conditions as we have for a while in Europe and in Asia. And, we were down on revenue in both of those regions on a year-over-year basis and it’s really macro driven. It’s driven by the interest rate environment that we’re in, it’s driven by the construction markets in those geographies, and really neither region has recovered quite the same way. We’ve seen the U.S. bounce back from the impacts of inflation and interest rates.”
• Barnes Group ($1.7B, Specialty Industrial machinery): “Our overall sales funnel is healthier. Our overall look into the markets are healthier and it’s resulting in sequential orders increase on all the businesses that we have in industrial. And it’s that momentum and the effect of the full year of the transformation product savings coming into effect that make the trajectory into the second half stronger. We’re not expecting any macro shifts in the markets, but it just our operational performance and execution that will deliver against that and we feel very well positioned to do that.”

Moving Past Notable Inclement Weather Impact in Q1, Commentary Suggests Accelerating Backlog Growth in Coming Quarters; Freight Remains a Sore Spot, though Many Suggest We Have Reached a Bottom

• CSX ($66.2B, Railroads): “You can see the dip [in volume] probably around early February, late January, this is after the winter started, or after we went through the winter storms, and it really impacted our southern corridors. [However], the total demand is very strong against a healthy backlog of large construction projects with infrastructure spending expected to accelerate.”
• Fastenal ($39.2B, Industrial Distribution): “Q1s are seasonally low volume to start, but this year contended as well with severe weather in January and a Good Friday holiday that fell in March for the first time in five years, an impact that was compounded by it falling on the last business day of the quarter. No matter how one treats this noise however, it doesn’t mask that the primary challenge remains poor underlying demand. However, we do believe we are seeing good indications of progress which should reaccelerate market share gains as we proceed through 2024.”
• Vertiv Holdings ($32.3B, Electrical Equipment): “Our orders grew 60% YoY and 4% sequentially. This is an indicator of good market demand and of our very relevant market position. The strength in order drove a very strong Q1 book-to-bill at 1.5x. Important to note, most of the orders overage in Q1 is for deliveries beyond 2024. Most of the acceleration comes from large orders, which typically have longer customer requested lead times. [Also], we anticipate orders will remain strong, but I want to caution 60% order growth is not the new expectation. The comparison will get tougher as 2024 progresses.”
• Fortive ($26.7B, Scientific & Technical Instruments): “We saw book-to-bill of about 1, and we anticipate that book-to-bill as well in Q2. So we’re starting to see the orders come back. Obviously, shipments not yet. The first half is really playing out the way we anticipated. So, in that sense, we’re seeing an order book building. We said last call that we would start to see orders start to move to growth at the tail end of the second quarter.”
• Moog ($5.4B, Aerospace & Defense): “If I look to the backlog, the change in our backlog is really the strengthening on the commercial aerospace side and the defense businesses over the course of the last year. I think a slight weakening on the industrial side as well is reflective of the slowdown in the orders that we have described.”
• Owens Corning ($14.4B, Building Products & Equipment): “We might be at a trough here where we see the opportunity as demand conditions improve, as we go through the back half of 2024 into 2025, we get better volume growth. We can start to run more assets and produce more. And then we see that as a positive on future pricing as we go forward. We see some green shoots of some potential opportunities as we move in the back half of the year as we see that demand environment start to improve and potentially that spot pricing environment improved with better economic conditions.”
• Old Dominion Freight Line ($42.7B, Trucking): “I would say right now, underlying demand has felt relatively consistent, but it does feel like things are improving a bit. We’ve seen some sequential acceleration, and I feel like there’s several factors that are starting to turn. We’ve been in a long, slow cycle for going back to April of 2022. And maybe to borrow a line from Taylor Swift, is it over now? We’re kind of waiting to see. We saw ISM inflect back above 50% for the first time.”
• Ryder System ($5.3B, Rental & Leading Services): “We should be getting closer to the end of this than the beginning. We look at spot rates and spot rates seem to be bumping along the bottom. You are seeing class A production come down. So, the balance of freight and vehicles to move that freight should be beginning to get more in balance. In rental, we’re not as confident yet. What we saw in the first quarter was certainly less demand than we expected. We did bring down our demand expectations for the balance of the year. We’re expecting more modest recovery in Rental in the second half. A lot of that is driven by not only that, [but] demand hasn’t come back the way we’d like, but there is an oversupply of rental trucks in the market right now. The industry has done a pretty good job over time to right-size these fleets, but this one may take a little bit longer.”
• Rush Enterprises ($3.6B, Auto & Truck Dealerships): “Hopefully, the freight recession will be clearing up by the back half of this year. I’ve been watching everybody kick the can for a year about when freight was going to pick back up. So, I’m not going to be in the economist to tell you when.”

Persistent Inflation Leads to Continued Pricing Actions Leads to Persistent Inflation

• Lennox International ($17.0B, Building Products & Equipment): “[Another] aspect of pricing is simply to capture pricing ahead of inflation, because people think inflation has gone away, and it hasn’t. So, as we do price increases, we need to just work with all our channel partners and customers and make sure we get price ahead of inflation, not behind inflation, because inflation continues to impact us, whether it’s SG&A or materials or labor, all of that impacts SG&A.”
• MillerKnoll ($1.8B, Furnishings, Fixtures & Appliances): “We’re kind of back to what I would say are more traditional, more ongoing annual price increases as a cadence. There are still inflationary pressures. They are nowhere near the level that we were seeing when we were having to do multiple price increases per year.”
• Veralto ($22.9B, Pollution & Treatment Controls): “I would say inflationary pressures are there, we are managing them really well, but it’s also about the operating discipline to make sure we are minimizing any kind of spot buys which can really have a big impact on the margin side. [On the] price side, there’s a lot of discipline that starts all the way from operating discipline.”
• Otis Worldwide ($39.4B, Specialty Industrial Equipment): “Favorable pricing and productivity more than offset annual wage inflation.”
• Vertiv Holdings ($32.3B, Electrical Equipment): “We multiple times have indicated and been vocal about our strengthened and continuously strengthening pricing muscles. And that also includes factoring in dynamics on the material cost side of the equation that’s factoring in our target of price cost positivity, [and] better contractual terms that allow us to react to something that is [not] forecasted.”
• CSX ($66.2B, Railroads): “Nothing has changed on the pricing side. Obviously, it’s a tough truck backdrop, that will improve, and we’ll see a lot of benefits from that as we see the cycle hopefully has bottomed here from what we’re seeing. But when you look at the market, what we do on the pricing side is obviously, we’re able to capture that inflation, and I don’t see anything really changing there.”

As Noted in our Recent Industrial Sentiment Survey®, Destocking Woes Enter the Rearview Mirror as Inventory Trends Find a New Normal

• Lennox International ($17.0B, Building Products & Equipment): “With the destocking effect on volume, counterbalanced by price and mix, we delivered 30 bps margin expansion, and we are all glad to see the destocking phase nearing its end.”
• Carlisle ($19.3B, Building Products & Equipment): “What our conversations are showing in Q1 is that really a lot of the channel, while the destock is over, we’re not seeing a huge build in inventory. I think as we get closer to the season, people are still concerned about…the carrying cost of [higher] inventory now than they have been. Maybe a little bit of conservatism around getting burned again on having too much inventory. So if demand holds up, obviously that will need to be addressed and we think we’re in a good position to be able to address that increased demand, even if distributors…and contractors aren’t carrying as much inventory as [we] would like them to have going into the season.”
• Dover ($24.9B, Specialty Industrial Machinery): “The demand trend is getting better now because of the headwind from destocking in the previous comps. If you want a macro comment, even if you look back two years, unitary demand was relatively flat, right? There was a lot of pricing flowing through the marketplace, but the unitary demand was relatively flat. And then because of interest rates, you had a negative headwind last year in terms of destocking. So, going into this year – thinking positively – we’ll see about unitary demand YoY, whether it inflects up, but what we know categorically is that you don’t have the headwind from destocking.”
• Honeywell International ($125.6B, Industrial Conglomerate): “We are starting to see recovery in some areas of our short-cycle portfolio, including consecutive quarters of order growth in productivity, solution and services, while the other short-cycle businesses continue to normalize as the effects of destocking fade, consistent with our second half acceleration framework.”

An Ongoing Challenge, as Labor Issues and Geopolitical Risks Continue to Weigh on Reliability

• Crane ($8.1B, Specialty Industrial Equipment): “We continue to remain somewhat supply chain constrained, with steady but gradual improvement over the last few quarters. As we have discussed previously, this is not just related to on-time deliveries from suppliers, but the broader supply infrastructure spending from raw materials, components, and labor, both availability and supplier, employee turnover, and employee experience levels.”
• RTX Corporation ($134.3B, Aerospace & Defense): “Commercial aero demand is there. But as you all know, the industry is still working through supply chain constraints and other challenges, which is leading to some OE production rate uncertainty. And this will continue to be a watch item for us for the year.”
• MSC Industrial Direct ($5.3B, Industrial Distribution): “Obviously, the Baltimore situation is so new and so tragic. We’re monitoring closely events in the Middle East and some of the supply chain disruptions. So far, impact is projected to be modest.”
• Masco ($16.1B, Building Products & Equipment): “Container costs have decreased slightly, but are certainly an elevated ongoing risk, as I talked about, in the East Coast port negotiations, the Red Sea, a number of other areas as it relates to freight.”
• Barnes Group ($1.7B, Specialty Industrial machinery): “On the OEM side, we have a mix of both supply chain challenges and inputs which are not symmetrical, they’re jumpy, as well as we have some labor productivity [challenges] in the plants with lower tenured employees and inefficiencies… For our second half of the year, we’re projecting that we’ll be able to work our way out of those challenges, just like we did the aftermarket facility. We can’t control the supply chain asymmetries, but we are expecting relief over the course of the second half of the year on some of that supply chain inconsistency that hurts OEM production flow.”

Executives Tout the Benefits of Several Quarters of Cost-Optimization Efforts Coming to Fruition

• JetBlue Airways ($1.9B, Airlines): “In the first three months of the year, our structural cost program delivered $30M in incremental savings, driven by more efficient management of disruption costs and optimizing mid-to end-of-life maintenance spend. With to-date savings of $100M, we remain on track to deliver run rate savings in the range of $175M to $200M by the end of the year, and we expect savings to ramp significantly throughout this year, driven by productivity improvement.”
• Masco ($16.1B, Building Products & Equipment “The team has done a real phenomenal job of lining up a pipeline of productivity initiatives, and this is something that’s been going on for several quarters now and part of the reason why we have the confidence of the overall margin increase YoY.”
• MSC Industrial Direct ($5.3B, Industrial Distribution): “We’ve increased our marketing efforts to generate awareness and demand by featuring the recent enhancements to our value proposition. My conviction is also derived from our ongoing gross margin execution which is a growing pipeline of productivity initiatives that provide runway for operating margin expansion as the business returns to growth. “
• Waste Management ($82.3B, Waste Management): “Our continued adoption of technology and automation initiatives led to substantial reductions in both labor costs and repair and maintenance expenses. On the labor front, efficiency in all three of our collection lines of business improved meaningfully from the first quarter of 2023 as our implementation continues to gain traction. This tool allows us to more dynamically route and it improves our efficiency, which is reducing our cost to serve and improving our asset planning.”