This Week in Earnings – Q4’23

With Nearly a Month Under their Belts, Executives Express Confidence Over Relative Economic Stability, with Several Portending Growth in 2024 Given More Recent Customer Sentiment

• Lindsay ($1.4B, Machinery):”The anomaly this coming year in 2024, if you think back to where we were in Q2 and Q3 of last year, we talked a lot about customers taking a wait-and-see approach in that they were waiting for interest rates to come down, waiting for inflation to stabilize, waiting for paper prices to come down. Right now, we see a lot more stability.”
• MSC Industrial Direct ($5.5B, Trading Companies & Distributors):”As we look forward… we would expect that part of what happened at the year-end here with the belt tightening, the holiday schedule, and the burn-down, that falls off as we move into the calendar year. What we’re hearing on the ground as we move past the first month or two of the calendar year, with interest rates stable and hopefully coming down, confidence is building among our customer base. We’re hearing this from our reps, our customers, and our suppliers.”
• Acuity Brands ($7.2B, Electrical Equipment): “As we look forward to our view on the macro, as I’ve been consistent with this, we don’t have a better crystal ball than you do. We are confident in the current levels and the performance of the order rate. As I said last quarter, we’re comfortable operating in this environment. And as we look forward, we feel pretty good about where things are. Our outlook doesn’t expect things to get materially better or materially worse.”
• PACCAR ($50.8B, Machinery):”We see economic growth in 2024, which we think as the most fundamental principles should be good for the truck market, especially as we continue through the year. And you put that economic growth against that spot rate bottoming that you talked about, and it should set us up for a good year in 2024.”
• AZZ ($1.5B, Electrical Equipment):”We continue to see positive signs… The impact of government spending is going to result in multiyear demand for our solutions on both sides of the house, particularly those focused on critical infrastructure and energy transition initiatives. So, we feel pretty good about the macro.”
• CSX ($68.9B, Road & Rail):”Business conditions in 2023 were challenging for many of our customers with several of our key markets experiencing volatility driven by a number of factors, including inventory destocking. On the positive side, we saw many of these markets show improvement in the fourth quarter… In terms of the macro, we feel pretty confident about our ability to grow even in the face of a macro that’s relatively flat.”

Order Trends are Normalizing, or “At Least Not Worsening”

• Acuity Brands ($2B, Electrical Equipment):”Order rates have normalized and we have found a consistent level of operating performance. So, as we annualize the comps and eliminate the excess backlog impact that happened at the beginning of FY 2023, then you’ll start to see a more normal performance.”
• Delta Air Lines ($23.8B, Airlines): “The Transatlantic, our largest international entity, continues to perform well, with strong demand through the shoulder period [period of time between peak season and the offseason], and we expect unit revenues to grow in the March quarter.”
• Lindsay ($1.4B, Machinery):”What we saw in our first quarter was really demand increase in almost all of our regions… it’s really been broad across all the regions.”
• Lockheed Martin ($106.2B, Aerospace & Defense): ”For the year, we still expect there to be strong demand, and we have a pretty solid line of sight to a book-to-bill that would be above 1 yet again in 2024. So, obviously, these things have to materialize. The budget has to be approved, and all these things have to happen. But the line of sight is there for continued growth in orders as well as in our backlog.”
• General Dynamics ($68.2B, Aerospace & Defense): ”As we go into this year, we feel very good about the demand environment across all of our businesses. It has been some time since I have seen stronger demand signals and better promise of organic growth.”
• J B Hunt Transport Services ($21.2B, Road & Rail): “Volumes came at us in Q4, and our customers were even surprised by that… Because they were surprised by it, that’s why we feel a little bit more unclear right now about what the early part of this year holds… While we are encouraged by the volume trends we are seeing, it is worth reiterating that volume is historically a leading indicator while price is typically a lagging indicator.”
• AZZ ($1.5B, Electrical Equipment): “Quite frankly, I’m not so sure that what we’re just feeling is the normal volume fall off as we get into winter months and slower construction or because it hasn’t worsened and really hasn’t changed much… So we have at least not seen any worsening of volumes.”
• General Electric ($141.4B, Industrial Conglomerates): “This margin pressure is completely offset with benefit from volume, productivity, the strong services growth that we’re expecting.”

Profitability Remains Favorable as Price Normalization — Not Deflation — is the Norm, Input Cost Pressures Continue to Persist for Some

• MSC Industrial Direct ($5.5B, Trading Companies & Distributors): ”I would describe the environment and the word I used in the prepared remarks as stable. It’s been unusual in our history to see meaningful price deflation on our products, and I would say we’re not seeing it now. If anything, there’s more going up than anything, but it’s relatively stable. The price increase is not going to be a major event, but we did want to share it as noteworthy because I think any concern about price deflation, we’re not seeing it.”
• PACCAR ($50.8B, Machinery): ”On the price/cost level standpoint, we think that we have good price against cost right now. We expect that to continue as we look forward. Obviously, there’s a little bit of normalization in the market sizes. That’s really the only thing we see going on.”
• Textron ($15.5B, Aerospace & Defense): ”We definitely expect to continue to see price net of inflation as a positive for us. It won’t be as significant as it was in 2023, but we still have good pricing in the backlog. And it will be a tailwind for us… We still have some of those headwinds that we faced all this year on the operating side, but the combination of improved performance and continued price over inflation is positive. So as you look at 2024, we’re expecting improved margins…. but the trade you’re going to see is there’s probably still positive price over inflation, but not as big a number.”
• Lindsay ($1.4B, Machinery): “A lot of the other inflation is kind of abated… if you go back to last quarter, the view was we would have to give price back if raw materials softened. But, we’re not seeing that situation today. I think where raw materials appear to be headed, as you know, would be supportive of maintaining price.”

“Maybe Not Perfect but Improved”; Inventory Efficiency Returns to Broader Industrials Though Airlines and Aerospace Defense Industries Continue to Face Structural Challenges

• MSC Industrial Direct (5.5B, Trading Companies & Distributors): ”We had two data points on the supply chain front this quarter, freight expense as a percent of sales that came down as it should, given rates, but we saw a nice improvement there; and then the second being inventory efficiency. You’re going to see more from us in the quarters to come on the supply chain front.“
• 3M ($59.7B, Industrial Conglomerates): ”The one area where we continue to note some adjustments is in the industrial channels and as supply chains continue to perform better, they’re reducing their safety stock and that’s been steady.“
• PACCAR ($50.8B, Machinery): ”First of all, our hats off to the supply base. They’ve done a really good job of trying to work through the challenges. And as you note, things have improved, maybe not perfect, but improved, which is good. We’re used to that. And as we look at it, smoother factories are more efficient factories. And so as we look into 2024, if we have a smoother supply provided to the factories, we will have benefits in that regard. So, it could be a tailwind as you word it.”
• RTX ($122.3B, Aerospace & Defense): ”We’re continuing to support the health of supply chain. While we are seeing continued improvements, there are areas that remain challenged where we are dedicating resources including suppliers who provide structural castings and rocket motors, two critical areas that continue to pace our recovery.”
• Lockheed Martin ($106.2B, Aerospace & Defense): ”We have to be brutally honest as an industry and with our suppliers’ inputs with the government and say what is feasible to keep the production rate up. That’s starting to get traction. I hope it gets more traction, because we cannot afford to be over-optimistic in the ability to deliver these technologies as rapidly as one might like. There are real technical and physical challenges to doing this, and our commitment to the government, service chiefs, and our allies is, I will tell you honestly what we think industry can do with the jet. And if you want to push it beyond that, I’ll tell you what the risks are and what the costs might be to do it.”
• Delta Air Lines ($23.8B, Airlines): ”The supply chain, both the cost and the constraints that we see in this industry, continue unabated. We are not making nearly the progress on the supply chain improvements. If anything, every news we get seems to be a bit worse, not better. So that constrains growth and increases cost… All the suppliers in our industry lost a tremendous amount of experience due to the pandemic and have taken time to get that back, to get the turn times down to where they need to be and we have higher turn times that not only delays the entry into service, it also causes costs to go up.”
• United Airlines Holdings ($6B, Airlines): ”We’re still overlapping new labor agreements, and the supply chain challenges aren’t going away anytime soon.”

Radar Remains on Conflicts Overseas and at Home, “Commanding” Executive’s “Attention and Concern”

• Fastenal ($39.8B, Trading Companies & Distributors):”We’ve seen an uptick in recent weeks, a meaningful uptick, in the cost of container. If the existing capacity is going to be consumed on trips for a longer period of time, that’s going to stress the entire global network which is going to impact ultimately our cost as well. And that’s what we’ve begun to see. Again, it’s very early. We don’t know how this plays out, but it’s something we’re watching… I’m not hearing anything to suggest that the environment is moving back to an inflationary one. With possibly one exception. That there’s been a lot of global conflict around the Suez Canal. I hear a lot about very little water in the Panama Canal. And we are beginning to see shipping costs start to tick up again. I don’t know how durable that’ll be. I don’t know how far that will go.”
• Acuity Brands ($7.2B, Electrical Equipment): “To your point on costs moderating, there are some obvious post-pandemic costs which have changed, steel, containers, et cetera. And it’s worth calling out containers as an example, because now we’re dealing with the Red Sea challenges, so container costs that were about $3,000 per container can now rise as much as $6,000 per container. With that in context, at the peak, those were in the $20,000 per container rate, so that gives you an idea of kind of where those differences are. We have a plan to deal with those higher container costs for the remainder of the year.”
• Greenbrier Companies ($1.4B, Machinery): “The broader economy is dynamic, and geopolitical strife again commands our attention and concern. For instance, we’re closely monitoring conditions at the southern U.S. border. While the work performed by our skilled manufacturing and logistics colleagues so far has successfully avoided severe impacts, the current migration response is unsustainable. We have joined many, including railroad leaders, shippers, and even our competitors to draw government attention to this situation. Collectively, we will ensure policymakers hear our concerns and address impediments to commercial activity and trade at our southern border.”
• 3M ($7B, Industrial Conglomerates): “I think there’s a little bit of caution as we go into the new year in areas like Europe, Middle East, Africa, there’s a caution about demand, China, as I already said, but I think generally broader I would characterize it as more stable and in line with what the expectations are.”
• CSX ($68.9B, Road & Rail): “Positive market trends are taking shape as we head into 2024, and we expect the combination of a more supportive market, new conversion opportunities and service offerings to drive year-over-year growth in both the domestic and the international business. We continue to monitor the evolving situations at both the Panama Canal and the Red Sea. To date, we have not been significantly affected by any changes in our customer behavior, but we stand at the ready with the capacity and capabilities to adapt as needed.”