This Week in Earnings – Q3'24

Mixed Views but With Most Executives Commenting on a Continued “Soft” Industrial Environment; Companies Touting Outgrowth to Offset Weakness and Maintain Guides

• United Parcel Service ($118.4B, Integrated Freight & Logistics): “In the third quarter, we faced a macro environment that was slightly worse than we expected. In the U.S., online sales slowed and manufacturing activity was lower than we anticipated. This slowdown in manufacturing activity was also true outside of the U.S. as we continue to see lower industrial production weigh on volume in certain geographies. But the macro environment didn’t prevent us from growing revenue and profit as we leaned into the parts of the market that value our end-to-end network, and we drove expense leverage through ongoing productivity initiatives.”
• Simpson Manufacturing ($7.5B): “While our third quarter results reflected a challenging environment, we have outperformed U.S. housing starts by ~500 bps on a trailing 12 months’ basis as we’ve invested in improving the customer experience and expanding our offerings. We are focused on balancing our costs in the short term with our growth strategy until we see a rebound in housing starts”
• Enerpac Tool Group ($2.4B, Specialty Industrial Machinery): ”Although our top-line growth decelerated over the course of the year, we believe we continue to outpace the very soft general industrial marketplace, as evidenced by continued positive revenue growth.”
• Lennox International ($21.7B, Building Products & Equipment): “While we are generally optimistic about 2025 revenue growth, it is important to recognize our outlook can be impacted by several end market factors. Uncertain consumer confidence continues to pose challenges alongside a trend towards more value tier products, which may negatively impact mix.”
• AZZ ($2.3B, Specialty Business Services): “As we communicated during our first quarter call, we remain optimistic about public sector spending. Additionally, we believe the recent rate action by the Fed could spur growth in both consumer and private sector We continue to see secular growth trends in reshoring of manufacturing, a migration to aluminum and pre-painted steel, as well as the conversion from plastics to aluminum in the container space that will continue to benefit our businesses.”
• Honeywell ($137.3B, Conglomerates): “While we experienced some headwinds in the quarter, we are confident in our ability to weather the macroeconomic backdrop with the operational rigor you expect from Honeywell. We delivered segment margins and adjusted EPS above our guidance range in 3Q. We have adjusted our outlook to reflect the realities as we now see them in this macro. We continue to make steady progress towards our portfolio optimization as we close out the year.”
• Old Dominion Freight Line ($40.2B): “You have uncertainty, and typically when you look at election years, they haven’t been the best bright years, at least in recent history. There have been plenty of headlines, and we’ve had customer conversations as well, where people are being a bit conservative right now until they know what things may look like and what impact new policy directions may take. I think that’s something that is temporary. At some point, people have got to get back to looking at their business and how they want to grow and expand and do the things that creates freight, and that will create opportunities for us.”

Guidance

• Simpson Manufacturing ($7.5B): “We’ve certainly seen our customers have some real slowdowns in the Southeast from both the hurricanes. There’s also a little bit of concern that the storms are going to take labor that would normally go to new housing starts and take that to the repair and renovation piece. So, we haven’t really dialed in the specific guidance on how that’s going to impact us. But for our business that operates in that area, the forecast for Q4 is definitely lower than we thought it was going to be.”
• Honeywell ($137.3B, Conglomerates): “Given the current uncertainty in the environment across what we experienced…the wars, the upcoming elections in the U.S., and multiple factors, we thought prudent that we [provide 2025 guidance] in January when more facts are known.”
• Hexcel ($5.3B, Aerospace & Defense): “Whereas the overall aerospace supply chain seemed to be recovering in late 2023, new challenges and shortages have developed as 2024 has progressed. As our business is impacted by the near-term slowing of previously planned production rate ramps by our key customers, we now expect FY 2024 sales and adjusted EPS to be at the lower end of our 2024 guidance ranges and will benefit from lower tax rates. Further, given recent developments, the assumptions for future production rates that were the basis for our mid-term guidance in February 2024 are no longer valid. We are therefore withdrawing our previously issued mid-term guidance and will provide guidance for 2025, with our Q4 earnings in January.”
• RTX ($167.1B, Aerospace & Defense): “Demand across the business, including double-digit growth in commercial aftermarket and defense, remains robust, and drove 8% organic sales growth. Based on these results and our expectations for the remainder of the year, we are again raising our full year outlook for adjusted sales and EPS.”
• GE Aerospace ($191.1B, Aerospace & Defense): “Given the strength of our results, growing both profit and cash more than $1 billion YTD, combined with our Q4 expectations, we’re raising our full year guidance. We also continue to coordinate closely with Boeing and are committed to supporting them as they navigate their current dynamics.”

Trends Vary by End Market, With Executives Pointing to Strength in More Highly Valued Products, but a “Sluggish” Environment in Traditional Manufacturing; Transportation Still Slogging through Freight Recession, While Aerospace & Defense Execs Continue to Tout “Robust” Demand and Record Backlogs

• J.B. Hunt ($17.8B, Integrated Freight & Logistics): “We continue to navigate a challenging freight environment while remaining focused on what we can control around our cost, providing exceptional service to our customers, preparing for their future transportation needs, and maintaining our focus on safety. As discussed last quarter, we have seen a return to more normal seasonal demand patterns, as evidenced across our businesses in Q3. We’re going to maintain our focus on excellence for our customers, driving value, and we’re going to battle through the last part of this freight recession. There’s still too much trapped in the market. We need that market to really move more into equilibrium. We’re looking forward to seeing how that plays out into 2025.”
• A.O. Smith ($11.2B, Specialty Industrial Machinery): “It varies by market, but we have distributors that are low single digits up to some that are low single down. But the feedback we’re getting is things have slowed a little bit. Overall, the market is still holding up, but it’s going to be in that kind of flattish zone as we go forward. And [we] don’t see anything changing there right now based on customer feedback…and that goes for both our residential business and our commercial business.”
• CSX ($66.2B, Railroads): “At a high level, market conditions remain a bit mixed. We are seeing continued strength in some of our merchandise markets. And while truck rates appear to have bottomed, it remains a soft market. [In domestic intermodal/trucking], we’re safe to call that it feels like the bottoming. That gives us hope that we’ve reached what the inflection will be and look like. We expect, hopefully, a more normalized peak season, but that’s a watch item for us. We’re optimistic that that will occur, and we’re planning for that.”
• GE Aerospace ($191.1B, Aerospace & Defense): “Demand for our services and products remains robust, highlighted by departures up high single digits YTD and LEAP share of global narrowbody departures increasing over 20%. We’re taking steps with our suppliers to increase inputs. And within our own operations, to expand capacity, ensuring we’re positioned to meet this historic demand. We’re making progress with engine output increasing 22% QoQ, including commercial up 25% and defense up 8%.”
• RTX ($167.1B, Aerospace & Defense): “Demand is incredibly strong. If you think about the $16.6B of bookings this quarter, it’s fantastic. We’ve got some supply chain challenges that we’ve been dealing with. And as those continue to free up, then we’ll see the top line grow commensurately with that. Clearly, a strong backlog going forward. We’ve got to continue to work through the backlog that we have and that’s going to take some time. The supply chain is getting healthier. Capacity is being put into place. Demand is there. We just got to continue to work through this backlog.”
• Lockheed Martin ($137.5B, Aerospace & Defense): “The demand for Lockheed Martin systems and services remains robust across all four of our business areas. We ended Q3 with record backlog of more than $165B, reflecting a book-to-bill ratio of 1.3.“
• MSC Industrial Direct ($4.3B, Industrial Distribution): “Looking to fiscal 2025, the year begins with a continuation of the challenging outlook we faced in fiscal 2024. Conditions remain soft, as evidenced by IP readings, particularly for our top manufacturing end markets, the majority of which are contracting. Automotive and heavy truck, primary metals, fabricated metals, and machinery and equipment are all weak. Aerospace remained positive in the quarter, but expectations have been tempered due in part to the recent strikes in the sector.”
• Fastenal ($43.9B, Industrial Distribution): “The primary challenge remains sluggish end markets. Our reseller end market weakened markedly with daily sales declining 11.3% in Q3 versus declining 6.4% in Q2’24.”

Executives Offset Margin Pressure by Controlling the Controllable and Emphasizing Cost Controls and Pricing Discipline 

• CSX ($66.2B, Railroads): “When you think about price/cost, we’ve been consistent saying that spread between dollars of price and cost of inflation has been positive all year long and about as positive as we’ve seen in the last decade. Overall, we do expect inflation to come down over time, and that would be reflected in some of our price. But we still look for ways to cover our costs and do those things in the right way, but really focus on delivering service. And if we deliver the right service and that service continues to improve, then customers see the value in that and we’re able to price for that service.”
• Enerpac Tool Group ($2.4B, Specialty Industrial Machinery): “There will be some pricing activity. I think it will be more muted than in recent years. Certainly, we’ll take pricing actions as needed to continue to cover and offset, if not more than offset, inflationary pressures that we have seen. And I‘d remind folks, we do continue to see an inflationary environment that’s decelerated, but it’s not deflationary. So there are pricing actions we need to take to cover inflationary costs.”
• RTX ($167.1B, Aerospace & Defense): “We’re working through the backlog where the pricing was not aligned with the cost inflation that we’ve experienced over the last few years and we’re seeing the international mix improve. It’s hard to put a number on it, but we’re going to see that margin improvement. We’re seeing it this year. We expect to see more of that next year.”
• 3M ($69.6B, Conglomerates): “I’m focusing on growth and margin expansion for sure, working the pedals across both of them. But as I step back, driving growth is also a margin driver because of the high drop-through we get on incremental volume. So, that’s kind of the way I see the future playing itself out.”
• J.B. Hunt ($17.8B, Integrated Freight & Logistics): “To update on our cost control efforts, we have made significant improvements across the business to right-size our cost structure, mostly evidenced in our Highway Services businesses, as both JBT and ICS improved their operating margins compared to the prior year period. We remain thoughtful in our approach to managing our costs, focusing on controlling what we can in the near term without jeopardizing our ability to support future growth and our aggregate earnings power potential.”

Boeing Machinists Strike Throws a Wrench in Aerospace & Defense Supply Chain; Onshoring and Supply Chain Stabilization Continues Elsewhere

• Old Dominion Freight Line ($40.2B, Trucking): “We continue to see nearshoring and reshoring activities. That creates a lot of freight demand and opportunity for LTL. We’ve benefited from that over time and would expect that both we and the industry will benefit from those trends.”
• Herc Holdings ($5.9B, Rental & Leasing Services): “When it comes to fleet investments in the quarter, the 34% increase YoY is more reflective of a return to normal seasonal delivery pattern this year, with the supply chain’s recovery.”
• Hexcel ($5.3B, Aerospace & Defense): “Despite the strong demand for new fuel-efficient planes, ongoing and new supply chain challenges, including the strike at Boeing, continue to disrupt planned increases and production rates. Coming out of 2023, there was a sense in the industry that we were finally achieving some stability after the pandemic. By late 2024, however, new challenges emerged in the supply chain, including the supply of engines, castings, seats, and landing gear to name just a few, that have pushed the recovery in production rates further to the right.”
• GE Aerospace ($191.1B, Aerospace & Defense): “Supply chain constraints impacted shipments across narrowbody and widebody, with total engine deliveries down 4%, including LEAP, down 6%.”
• RTX ($167.1B, Aerospace & Defense): “We obviously had a little bit of impact from the start of the strike as well. And what we’ve done is we’ve calibrated a level of impact here in the rest of the year going forward. We think we’ve got that reasonably calibrated. We do expect to resume some shipments later in the quarter. Boeing is going to want to ramp in 2025 and beyond. We want to make sure that all facets of the value stream are healthy enough to do that. So, we haven’t just stopped cold turkey; that just wouldn’t be healthy for the supply chain, wouldn’t be healthy for our factories. By and large, we’ve continued to take in material and build product because we want to be ready when the re-ramp arrives.”
• United Airlines ($24.4B, Airlines): “We’re more focused on the 787 delays, as you might expect us to be. We’re rooting for Boeing, and they are certainly making some smart decisions. But as we see delays on the 787s, we would expect that there’s a bias downward in CapEx if those delivery delays continue. We’re going to have fewer airplanes in the near term than we would have been hoping for, but our eye is focused on the long term. We want them to get through it and build a company that can work for the long term. And then I think we’re in a really good setup.”

China Weakness Continues and the Jury is Out on Stimulus Efforts; Europe Mostly Soft, Albeit with Signs of Recovery; Views on LatAm Vary by Industry, while India Remains a Pocket of Strength

China

• A.O. Smith ($11.2B, Specialty Industrial Machinery): “In China, we believe that the weakness we experienced in the market in Q3 will persist through the remainder of the year. While we are encouraged by the recently announced government stimulus programs, we expect minimal impact from the programs in 2024.“
• Graco ($13.8B, Specialty Industrial Machinery): “Hopefully at some point we get to an equilibrium level, and then business conditions are a little bit better for us in China than what we’ve had over the last 12 months or so. I don’t think that this stimulus is going to have a meaningful impact in the short term. Well, see what happens, but we certainly haven’t seen it so far in our results. Positively, you know, Japan seems to be doing pretty well. Korea is hanging in there and we’re also seeing growth in India.”
• Veralto ($26.6B, Pollution & Treatment Controls): “At an aggregate level, the year is playing out as we anticipated in China, really no meaningful recovery or change in sales and demand profile. We kind of are bouncing along the bottom. We continue to see challenges in funding at municipal customer sites. So, they had a very strong 2H’23, and that is not going to repeat here in 2024.”

Europe

• Honeywell ($137.3B, Conglomerates): “[We have seen] some pockets of recovery in Europe, not so much in China..we do see strong growth in India and Saudi Arabia. Those two countries are becoming catalysts of our growth.”
• PACCAR ($54.4B, Farm & Heavy Construction Machinery): “European volumes have been down a little bit more than the market this year. That was really [evident] in Central and Eastern Europe where the market has been more affected by the war in Ukraine and the economy is a lot slower there than in some other parts of Europe. We expect things to continue at that pace, more or less, as we enter next year and then we’ll see how it progresses during the year.”
• Carrier ($66.5B, Building Products & Equipment): “Orders for much of the year in Germany were constrained, in large part, because the government declared in February that subsidies would not be paid until October. We thought orders would start to pick up in Q3, which they did, just later in the quarter than we anticipated. Encouragingly, recent trends around orders and subsidy applications have improved.”

Latin America

• Lindsay ($1.4B, Farm & Heavy Construction Machinery): “In international irrigation market, softness in Brazil due to lower grower profitability and poor customer sentiment continues to persist. We expect tempered demand to continue in Brazil and Latin America until farm profitability and credit availability improve.”
• The Greenbriar Companies ($1.8B, Railroads): In Brazil, we are observing an increase in demand that aligns with expectations as customers finalize infrastructure investments and transition to purchasing of railcars.”
• Veralto ($26.6B, Pollution & Treatment Controls): “We’ve been really pleased with our performance in Latin America. And we’ve watched this region closely over the course of the last couple of years here. I think what we’re seeing there is the benefit of some reshoring or onshoring activity as some of the customers look to diversify their risk and insulate themselves from any sort of geographical constraints that they might see in China. But we’re also starting to see some benefit from privatization of water utilities in Brazil. This is a region for us to continue to stay focused on. As we said in our prepared remarks, Latin America represents 10% of our total sales, and it’s growing well for us.”