(Bloomberg Opinion) — Supply-chain pressures and rising costs are threatening to take a real bite out of the industrial recovery.
Results from 3M Co., Rockwell Automation Inc. and Stanley Black & Decker Inc. on Tuesday point to a robust manufacturing revival, with all three companies boosting their outlooks in some form to reflect a stronger-than-expected snapback from the doldrums of the pandemic. But those brightened views also came with worrying asterisks on inflation and shortages. These aren’t new trends: The economy is being asked to grow at multiples of its normal rate as businesses attempt to make up for the Covid slowdown. But these complications also aren’t going away, and it’s not getting any easier for manufacturers to deal with them. Quite the opposite, in fact. While industrial companies are all boosting prices, costs are rising so quickly and so sharply that they’re struggling to keep up.
3M, for example, is “raising prices everywhere,” Chief Financial Officer Monish Patolawala said on a call to discuss the company’s second-quarter results. That means all business units, all geographies. But 3M couldn’t increase prices fast enough to offset the spike in raw materials and logistics costs in the most recent period. The company doesn’t expect to be able to do so in the third quarter, either. 3M now expects prices and costs to balance out better by the fourth quarter. But it’s worth noting that as recently as June, 3M was more optimistic on the pricing environment relative to costs, underscoring just how fast-moving the inflationary pressures have become. Cost headaches and supply-chain bottlenecks are expected to persist throughout 2021, 3M warned, resulting in as much as an 80-cent hit to earnings per share over the full year.
“Crude prices have gone up much heavier than we had thought coming into the year,” Patolawala said. “Ocean rates have gone up a lot in the last three to six months. So it’s really hard for us to come back and say, ‘When does it peak and when does it start coming down?’” There’s a lot of demand right now but not enough supply, he said, and inflation will persist until that dynamic stabilizes. At some point, though, the supply challenges may start to impact the demand side of the equation. There’s no sign yet that customers are balking at price increases, but the pace of escalation is getting heady as manufacturers scramble to cover rising costs. “There is an assumption that industrial activity continues, but currently the supply-chain shortages across the world also put a lot of variability onto what that demand looks like,” Patolawala said, calling the company’s guidance for as much as 9% organic sales growth across its businesses this year “prudent.”
Rockwell is less exposed to raw material costs ,but it does buy a lot of semiconductors, and tight supply chains for electronic components are limiting its ability to hand over products to customers, Chief Executive Officer Blake Moret said in an interview. “We would have shipped more in the third quarter if it had not been for the supply-chain constraints,” he said. The tight labor market is creating additional pressures.
Rockwell had previously forecast organic revenue gains of 5.5% to 8.5% in the fiscal year ending in September. It now expects 8% growth; that’s better than the previous guidance on the whole but also less optimistic than the top end of the earlier range. So far, the supply-chain snags aren’t curtailing demand: Orders were up more than 50% year over year in the most recent quarter to more than $2 billion, a record. But the company is paying close attention to how bottlenecks impact its own ability to convert its backlog of orders into sales. “Certain things are getting better, other things remain highly constrained,” Moret said. “We’re working through it and also trying to guard against new things becoming issues.” Asked what those might be, he said “if we’ve learned anything over the last year and a half, it’s that you have to be prepared for something coming up that was unexpected.”
At Stanley Black & Decker, the company reported organic sales growth of 14% from a year earlier for its industrial-facing business, a figure CEO Jim Loree said would have been higher if not for production delays at automakers because of semiconductor shortages. The disruptions shaved 2 percentage points off of revenue growth for the segment. Meanwhile, the home-improvement spending boom that boosted sales of Stanley tools during the pandemic is showing no signs of letting up, and the company is straining to get its products to where they need to be. Stanley will spend an extra $80 million in the second half of the year on premiums for scarce shipping containers and expedited air-freight services to help it keep up with hot demand for tools and improved outlook elsewhere. Commodity inflation — particularly with respect to steel — is now expected to cost Stanley $300 million this year, up from an estimate of $235 million in April. The company is working to mitigate this by raising prices and wringing out savings from its own operations.
Taken together, the results suggest the manufacturing sector is not yet facing a five-alarm inflation fire. But there’s definitely a lot more smoke than there was even a few months ago.
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Brooke Sutherland is a Bloomberg Opinion columnist covering deals and industrial companies. She previously wrote an M&A column for Bloomberg News.