Commencing the Quarter – Q2’23

Bank Stabilization as well as Expectations for Continued Easing Inflation and Abating Inventory Destocking are Tempered by a Competitive Labor Market, Credit Tightening, and a Weakening Consumer

• TD Synnex (FY Q2’23 – $9.2B, Technology, Electronics & Computer Distribution): “As we contemplate fiscal Q3, while there remains some uncertainty in the macroeconomic environment, we are encouraged by the early signs of stabilization, with the resolution of the U.S. debt ceiling, reduced banking sector concerns, and a serviceable supply chain.”
• H.B. Fuller (FY Q2’23 – $3.9B, Basic Materials, Specialty Chemicals): “Our confidence remains high in a stronger second-half performance as we expect customer destocking activities to fade, EBITDA margins to continue to expand due to price and raw material cost actions, demand in China to improve, foreign currency comparisons to be favorable YoY and restructuring benefits ramp through the end of the year, delivering another strong year of EBITDA growth and setting us up to continue that trend in 2024…We are planning for demand levels to remain weak for the rest of this year and into next year, but improve from current levels as destocking impacts abate.”
• Conagra Brands (FY Q4’23 – $15.8B, Consumer Defensive, Packaged Foods): “We expect to see easing inflationary pressures and improved supply chain operations in fiscal ‘24, which is reflected in our outlook.”
• Paychex (FY Q4’23 – $43.4B, Industrials, Staffing & Employment Services): “Businesses of all sizes continue to navigate the challenges of a very complicated regulatory environment, a competitive labor market, and now tightening credit.”
• Fastenal (FYQ2’23 – $32.4B, Industrials, Industrial Distribution): “We have experienced manufacturing-driven weak sequentials in 3 of the last 4 months. Regional leadership continues to characterize customer sentiment as cautious with greater scrutiny over operating and capital spending and some mention of slower or deferred orders. As usual, we have limited forward visibility, but most indicators seem to be pointing to the immediate outlook remaining soft.”
• Simply Good Foods (FY Q3’23 – $3.6B, Consumer Defensive, Packaged Foods): “The recessionary economy continues to be a concern as shopper traffic shifts away from grocery to more value-oriented channels. We expect our retail takeaway growth will moderate slightly from current levels over the remainder of the year. The overall cost environment is improving, and we’re on a path for gross margin recovery.”
• Helen of Troy (FY Q1’24 – $3.1B, Consumer Defensive, Household & Personal Products): “Consumer pressure includes inflation, interest rates that are expected to stay higher, and increasing household debt, all of which are headwinds to discretionary purchases. On a positive note, we are seeing that the retailer inventory rebalancing is largely normalized following the significant adjustments affecting nearly all consumer discretionary categories over the past year. Our retail partners are now increasingly matching their orders to consumer demand.”

More Cautious Consumer Behavior Patterns and “Leveling” Orders Lead Analysts to Question Underlying Demand Trends and Lead Times

• Lindsay (FY Q3’23 – $1.4B, Industrials, Farm & Heavy Construction Machinery): “The short-term uncertainties have influenced customer behavior and caused an unexpected shift in seasonal order patterns. While market feedback indicated quotation volume remained generally consistent with the prior year, our order volume was impacted by customers who have taken a more cautious wait-and-see approach for the near term.”
• TD Synnex (FY Q2’23 – $9.2B, Technology, Electronics & Computer Distribution): “The volume declines were a little bit larger to get us to the average unit revenue…there’s clearly a continued level of price competition that’s healthy. There is definitely very healthy price competition out there.”
• Walgreens Boots Alliance (FY Q3’23 – $26.8B, Healthcare, Pharmaceutical Retailers): “Similar to other retailers, we’ve been impacted by the rapid softening of the macro environment and a more cautious and value-driven consumer. Our customer is feeling the strain of higher inflation and interest rates, lower SNAP benefits and tax refunds, and an uncertain economic outlook. They are pulling back on discretionary and seasonal spend.”
• MSC Industrial (FY Q3’23 – $5.6B, Industrial, Industrial Distribution): “On the pricing front, conditions have also moderated as expected. We continue to achieve benefits from pricing, but this has narrowed as we lap high price increases in the prior year while higher product costs continue to work through our P&L. As supply chains have normalized, customers are increasing their focus on achieving competitive pricing just as we are doing with our suppliers. Overall, we would describe the environment both on the demand and the pricing fronts as leveling.”
• WD-40 (FY Q3’23 – $3.6B, Basic Materials, Specialty Chemicals): “The recovery of our sales volumes impacted by the disruptions caused by our pricing actions has been slower than we originally anticipated, and we no longer believe that we will fully recover those losses in the back half of this year.”
• Levi Strauss (FY Q2’23 – $6.0B, Consumer Cyclical, Apparel Manufacturing): “In the U.S., it’s really a story of two different channels, U.S. wholesale being very soft, paradoxically U.S. direct-to-consumer much stronger. There are two main drivers to the slowdown of our U.S. wholesale business. First, the macro effects of higher inflation in a slowing U.S. economy has put increased pressure on the price-sensitive consumer. Second, as we have mentioned for several quarters, our inventory backlog created supply chain challenges in our U.S. distribution centers, resulting in our inability to fulfill all demand.”

 Q&A on Demand Visibility and Lead Times

• A lot of companies are saying that this ongoing destocking is making it difficult to know what underlying demand looks like and saying that visibility is very poor right now. You seem to be indicating that underlying demand is solid. Is that based on what you’re seeing in order patterns or on customer conversations? Can you help us understand what’s giving you confidence while other companies are pointing to more limited visibility?”
• “You talked about demand holding up. In terms of visibility, would you say that versus 90 days ago, has visibility improved or has it deteriorated? When we think about forecast from customers, how long of a forecast do you get from them? And has that changed over the years given all of the supply shortages, are customers giving you a longer dated forecast?”
• “[Regarding] the decline in retail inventory…it’s certainly encouraging to hear that the worst is over…but I think for some of us on the outside, it does feel like a bit of a red flag that maybe end user demand isn’t quite as strong as what you had hoped…what gives you the confidence that it’s not necessarily a company-specific dynamic that’s happening there?”
• “Now that backlog levels are still elevated for you and some of your peers, what’s driving this behavior? I would have assumed that your lead times would have come down as there’s been this push and pull in demand. What’s keeping backlog level still quite elevated?”
• “Can you square the idea that you have all this new demand, yet it’s not translating into sales yet? When can we expect that to occur, all that potential to show up in actual revenues on the P&L?”

In Line with the Latest U.S. Economic Prints, Inflation Appears to be Moderating for Some, though Wages Remain Elevated for Many Amid Persistently Tight Labor Conditions

• UniFirst (FY Q3’23 – $3.9B, Industrials, Specialty Business Services): “We’re not seeing things continue to inflate at the same rate as they did over the last year, but we’re still experiencing some of those higher costs. And many of them certainly have not taken a step back.”
• Lindsay (FY Q1’23 – $1.4B, Industrials, Farm & Heavy Construction Machinery): “Compared to the prior year period, inflationary pressures have subsided moderately. Having said that, we’re still taking a cautious approach to managing costs.”
• Carnival (FY Q2’23 – $23.4B, Consumer Cyclical, Travel Services): “[There has been] a slower-than-expected ramp down in inflationary pressures…particularly in port costs, freight, and crew travel due to air cost and crew compensation.”
• Commercial Metals (FY Q3’23 – $6.6B, Basic Materials, Steel): “There is some abatement on the inflation side, save things like labor, which has gone up over the last couple of years.”
• Progress Software (FY Q3’23 – $2.5B, Information Technology, Software): “The inflation that we’re seeing, wage inflation in particular, is something that’s been stubborn for the past two years. Up to this point, we’ve done a good job offsetting it, and I think we’ll continue to do that, but it takes a lot of work, and we need to be scrappy as we work through the back half of the year.”
• Methode Electronics (FY Q4’23 – $1.3B, Technology, Electronic Components): “In the quarter, we continued to face ongoing cost increases due to inflation in material and labor, which continued to be a drag on margins. The ongoing cycle of inflation and subsequent efforts to obtain price increases from customers is a persistent challenge, I cannot stress that enough.”
• General Mills (FY Q4’23 – $43.9B, Consumer Defensive, Packaged Foods): “It’s really important to remember that we still have inflation. There has been a lot of commentary about disinflation or going negative, but we don’t actually see that. And it’s driven by labor cost inflating.”

Companies are Largely Discounting M&A (for now) in Favor of Paying Down Debt and Strategic Growth Investments, Particularly in Automation and Digital Initiatives

• AZZ (FY Q1’24 – $1.1B, Industrials, Specialty Business Services): “We continue to carefully manage cash and capital deployments to ensure that we invest in high-return investments, well above our cost of capital, pay down debt and de-lever the company in a disciplined way. For the balance of this year, we have taken acquisitions off the table as we focus on reducing debt.”
• WLY (FY Q1’24 – $2.0B, Communication Services, Publishing): “We’re focusing on the vertical markets where we have strength, and we’ll continue to invest in those. So, with those as our priorities, we don’t expect to be particularly active this year. In fact, we’ll be extremely conscious this year from an acquisition perspective.”
• Delta Air Lines (FY Q2’23 – $30.7B, Industrials, Airlines): “We’ve talked about paying down debt as a priority here as well as generating cash. Any additional cash that we generate, we will be paying down debt with it. Even in the back half of this year…we’re just going to continue to work down the debt.”
• Conagra Brands (FY Q4’23 – $15.8B, Consumer Defensive, Packaged Foods): “From a supply chain perspective, we expect capex spend of approximately $500M as we continue to make investments to support our growth and productivity priorities, with a focus on capacity expansion and automation.”
• Pricesmart (FY Q3’23 – $1.6B, Consumer Staples, Food & Staples Retailing): “We believe that there are significant growth opportunities in our digital channel, and we will continue to invest in this part of the business to provide an enhanced omnichannel experience and additional value to our members.”
• MSC Industrial (FY Q3’23 – $5.6B, Industrial, Industrial Distribution): “Looking ahead, we are positioning ourselves to capture additional digital and small customer growth with a portion of our accelerated investments being focused on strengthening our digital capabilities.”

China Recovery Largely Falls Short of Expectations; Geopolitical Conditions Continue to Affect Many with Exposure in the Country, While Others Distance Themselves Entirely

• McCormick (FY Q2’23 – $22.4B, Consumer Staples, Food Products): “The timing and pace of recovery in our China business was less robust than [we] anticipated, but it was still strong, and we are confident in the contribution China will provide to our results as the year progresses.”
• H.B. Fuller (FY Q2’23 – $3.9B, Basic Materials, Specialty Chemicals): “While sequential demand in China has improved and we expect that trend to continue in the second half of the year, we are now expecting a longer and slower recovery as opposed to a sharp rebound.”
• Schnitzer Steel Industries (FY Q3’23 – $866.6M, Basic Materials, Steel): “Asia’s weaker demand during the quarter was similarly impacted by higher Chinese steel exports and a slower-than-expected economic recovery in China which dampened market activity.
• Micron Technology (FY Q3’23 – $69.7B, Technology, Semiconductors & Equipment): “The impact of the May 24 decision by the Cyberspace Administration of China on Micron’s business remains uncertain and fluid. Several Micron customers, including mobile OEMs have been contacted by certain critical information infrastructure operators or representatives of the government in China concerning the future use of Micron products…We currently estimate that approximately half of that China headquartered customer revenue, which equates to a low double-digit percentage of Micron’s worldwide revenue, is at risk of being impacted.”
• Helen of Troy (FY Q1’24 – $3.1B, Consumer Defensive, Household & Personal Products): “We are making significant progress on our previously announced nearshore sourcing initiative to grow existing and new supplier capabilities outside of China. This will help us diversify geopolitical risk, enhance our responsiveness, and reduce inventory. These moves also create value as they can provide quicker transit time, greater speed to market, scale advantages and process standardization.”
• Carnival (FY Q2’23 – $23.4B, Consumer Cyclical, Travel Services): “There is no assumption in these numbers that we return to China…we’re very excited about China opening up for international travel with cruise companies, and we think that’s a great thing for the industry. But, the fact is, we’re going to probably be on the sidelines of that for a few years because our assets are right where we want them to be.”

Europe a Relative Bright Spot as Economic Conditions Improve and Trend Toward Pre-Pandemic Levels for Many Companies

• WD-40 (FY Q3’23 – $3.6B, Basic Materials, Specialty Chemicals): “Last quarter, I shared that we had gotten off to a rocky start in the first half of fiscal year 2023 in EMEA. Pricing actions we’ve taken as well as the loss of sales in Russia and Belarus resulted in sales declines over that period. I’m happy to share with you today that we’re seeing a strong recovery in EMEA and sales were up 6% in the third quarter to $52.5M.”
• McCormick (FY Q2’23 – $22.4B, Consumer Staples, Food Products): “In EMEA, our second quarter was our strongest quarterly sales performance in 2 years. Our effective pricing accelerated to contribute double-digit growth, and our volume performance improved sequentially. And in fact, we grew volume in the U.K. and Eastern Europe.”
• Concentrix (FY Q2’23 – $4.5B, Technology, Information Services): “We are hearing different market growth numbers frankly, and it’s more based on region and by industry. And so, for instance, we see Europe growing faster. We are experiencing that ourselves. Clearly, other public companies who have large European exposures are seeing that versus what sort of North America is growing.”
• Carnival (FY Q2’23 – $23.4B, Consumer Cyclical, Travel Services): “Demand for our European brands has continued to strengthen and is now outpacing 2019 booking volumes at a rate that’s comparable to our North America brands and the strength in demand has carried into June. In North America, the booking curve is as far out as we have ever seen it, while our European brands are quickly catching up to 2019 levels.”
• PepsiCo (FY Q2’23 – $259.3B, Consumer Defensive, Beverages): “As you see from the numbers, good pricing levels, but what is also very remarkable in Europe is the levels of productivity that the team has been executing through simplification of the business…so, good work by the European team, both on portfolio managed simplification and then in driving productivity. We feel good about Europe. We have a very strong business in both Central Europe, Eastern Europe and parts of the economy that are growing faster.”