Inflation — Subsiding or Accelerating?

Recent government reports (April jobs report, PPI, and CPI) suggest inflationary pressures may be subsiding. Meanwhile, many businesses continue to report rising wages, costs, and pricing. Who should we believe? That of course is up to each investor.

Many investors, economists, and policy makers depend on government economic data to form their macro beliefs. Personally, I prefer viewing the economy through the eyes of business, or from a bottom-up perspective. Regardless of how you develop your macro opinion, I thought it would be interesting to review what many of the companies I follow are saying about inflation.

Below are several examples of rising costs and pricing actions I gathered from my quarterly earnings review process. There are more, but I wanted to keep it concise 🙂

W.R. Berkley Corp (WRB): So, inflation from our perspective is clearly the topic of the day, I think it is the topic of the day across many industries and the insurance industry is certainly included in that. I think for some, it is a moment that people have been speculating or waiting for some extended period of time and it is upon us. Some of the obvious questions are how much, how quickly is it going to get here and how long will it stay. Obviously from our perspective there is – the impact that will come along is with a rising interest rate environment.

AptarGroup (ATR):  Look, I think everybody who is following the current environment sees inflationary pressures coming. And there is no way to escape that.

…we are recognizing increasing inflationary environment in the US and in Europe and are implementing price increases in the coming months in addition to our normal resin pass-through mechanisms.

But clearly these price increases will happen, and that’s just the current reality.

Fastenal (FAST): …as you all know, there is a meaningful inflation going on in our business.

In the local fastener business, we are seeing inflation in that product. Unfortunately, in that business, we’re not matching the inflation in our sale price. And we gave up about 130 basis points of gross margin, 130 to 140 in that 15% of our revenue. That’s disappointing and that’s a habit. And that’s a habit we need to fix. 

But, we did nice job growing the business. I challenged them on our fastener pricing at the local level. I challenged them on our freight that we charge at the local level. Fuel prices, as you all know are going up, and that impacts us like it does everybody else.

Our labor costs continue to rise.

I believe your propensity to charge freight in this environment goes up because every time I turnaround, I read an article about folks can’t add trucks and drivers and capacity fast enough. And so, freight is becoming more expensive and we were structural advantage there and we need to price for that.

United Natural Foods (UNFI): While we did leverage our expenses against our strong topline growth, we continue to have higher labor expenses in several of our distribution centers that are capacity constrained.

Additionally, our inbound freight rates have increased incrementally during the quarter, driven primarily by market supply constraints.

That the transportation industry is under a lot of pressure, capacity is scarce. The labor market is difficult. And we’re prepared to move forward in the back half.

Hubbell (HUBB): As you know, we’re targeting offsetting material cost increases with price, but typically with a three to six month lag.

So that’s the – you can’t with this much inflation, you can’t catch up overnight, but you got to be vigilant and really be disciplined about it. And so, I think it is, I think it will take us the whole year to fight that battle.

RPC Inc. (RES): Everyone pretty famously knows about shortages of skilled labor and employment issues. We think that’s just caused some friction throughout the oil field.

Forward Air (FRWD): Because you can have all the equipment in the world, but if you don’t have a fanny to put in that seat, it’s of no value. So we really are focused on drivers. I think if you talk to the most of the companies in the business, they’re focused on drivers and not on trucks.

Casey General Store (CASY): The average retail price of fuel during this period increased over 13% to $2.40 a gallon compared to $2.12 from the third quarter last year.

Darden Restaurants (DRI): Restaurant labor was 130 basis points unfavorable last year due to several factors…we continue to see elevated wage inflation of approximately 4%

…in January, we announced the $20 million investment in our workforce this fiscal year…

…the real change that we’re seeing, as we analyze the benchmarks is that the check average appears to be growing and has picked up some steam.

The one place we are seeing a little bit of inflation in the food is on the distribution side. It’s getting a little bit tougher and tougher to find people to drive trucks. So, we’re seeing a little bit of distribution expense, but that’s driven by labor, not necessarily the food cost.

We’re still seeing in the 4% to 5% wage inflation.

Kirby (KEX): In the inland marine transportation business, we saw a positive change in market dynamics during the quarter. Spot market pricing increased approximately 10% to 15%

Tree House Foods (THS): Everyone is talking about how tight the freight market is right now. Not only are freight costs continuing to increase with no sign of short-term relief, but we’ve also seen our carrier acceptance rates decline about 25% over the last year. Declining acceptance rates forced us into the spot market, so it is critical that we become the customer of choice for our carrier partners.

If you’ll remember, commodities and pricing for commodities is something we started talking about with you last November. Our teams did a nice job getting after it and the remainder of that pricing will show up in Q2.

I think what we’re seeing is you can’t dodge these commodities, everyone is facing them.

So, I think we’re in an environment where most people are seeing the same kind of pressure. We have seen a number of customers, when confronted by what is a material amount of pricing, put us out to bid to check the market. But I think that’s just sort of prudent reaction to what’s really been the first across-the-board pricing for many years of this company and in the industry, I think.

Patterson UTI (PTEN): Average rig operating costs per day were also higher-than-expected at $13,970, due primarily to higher-than-expected labor cost….

Sherwin Williams (SWW): We did see an acceleration of raw material cost increases in our first quarter, and it predominantly impacted our Performance Coatings Group. And as you can imagine, when they go up that quick, it’s very hard for us to react and put another price increase into the market. That being said, we do have pricing implemented…if we see another increase that warrants a price adjustment, we’ll do that. So pricing actions are in progress.

Briggs and Stratton (BGG): …like many manufacturers, we have experienced fairly significant increases in freight rates beginning in calendar 2018. The availability of trucks has struggled to keep up with demand subsequent to the launch of electronic driver logs this year.

Higher commodity costs were offset by pricing increases

Chipotle (CMG): Comp sales were driven by higher average check, primarily from the price increase taken since Q1 of last year. The price increases averaged about 5% across the menu…

Labor costs for the quarter were 27.8%, 90 basis points higher than last year. Wage inflation of 5%

Labor is kind of the same story in terms of wage inflation continues. We expect it to continue…

Steelcase (SCS): Back in the fall, we took a decision based on inflation we have seen through that date to initiate a pricing action in February. And since then, we have seen inflation up through the February price adjustment and after the February price adjustment up through just a week or two ago we have seen even additional inflation…that last piece of inflation is what we are going to start to feel more significantly in the second quarter.

We know with our customers that the best time to talk about the price adjustment is when you have inflation and we have inflation right now.

MSA Safety (MSA): We’re seeing some of the shipping expense going up slightly. There’s a little bit on our material cost, some increases there. But we’re doing a nice job from a pricing standpoint and managing that and we’re very mindful of that.

We talked about a supply chain, some supply chain issues. So those orders came in late cycle in the fourth quarter. We were caught a little bit off guard with one of our suppliers not being able to ramp up quickly enough for us …

…we have rational competitors in the market place and we believe that as we see some increases we’ll pass some of those along and maintain our margin profile as we go forward.

We’re starting to see a big of wage inflation and so we’re taking a really close look at price increases in ways that we can mitigate an offset that inflation in our business.

I think the bigger trend to watch is inflation which Nish’s has talked about…inflation and what we’re seeing with the cost increases in certain areas of our supply chain and raw materials, electronic components, high density polyethylene.

Union Pacific (UNP): 5% improvement in average revenue per car drove a 7% increase in freight revenue.

In some of the more challenging labor markets, we are currently offering signing bonuses to make these jobs more attractive,

Domino’s Pizza (DPZ): Yeah, Chris, so just on food basket inflation, we’re still anchoring to the 2% to 4% for 2018, but what the stores in the U.S. will experience lines up pretty much with what we’re seeing in the rest of the industry.

As far as delivery cost of the supply chain system that we have, we were pressured in Q1 on some labor and delivery costs.

As you know, there are places that we’re at that have some pretty significant minimum-wage pressures, other regulatory pressures, that are a real headwind for the business.

HNI Corp (HNI): We are seeing higher than expected input costs across the board. As Stan mentioned, we are working to offset these pressures with additional cost savings and price increases. These higher costs will have a negative impact on the remainder of the year, particularly in the second quarter.

So we put price increases in January for the inflation that we knew about at that time for the majority of the business. And we’re also putting a secondary price in for the back half to compensate for this recent round of inflationary pressures we’ve seen.

The inflation is the big bet, and we think we have a good perspective on inflation going forward. But I think anybody who’s following the economy is trying to figure out exactly where will inflation settle out.

Convergys (CVG): We see wage pressure. We have seen some wage pressure in Europe that we have been pretty effective at addressing through working with our clients and then working with our teams in the region to do that. We have certainly seen some wage pressure in the U.S.

CH Robinson (CHRW): First, we are in a unprecedented freight environment. The healthy economy and rapid growth in e-commerce is driving a significant increase in the demand for freight. At the same time, driver shortages and enforcement of the electronic logging device mandate is motivating carriers to be increasingly selective in the loads they are willing to carry, resulting in a tightened capacity environment. The result is a very fluid and dynamic market. To illustrate this point, costs in our North America truckload business increased 21.5% this quarter, the largest single quarterly increase in our 21-year history as publicly traded company.

I think what you’re seeing in the current market is that we believe that the material or significant price increases are going to stay with us for the remainder of the year.

KB Home (KBH): 7% increase in our overall average selling price

Old Dominion Freight Line (ODFL): It’s obviously been a very favorable pricing environment and we’ve just continued to execute on our long-term pricing philosophy and trying to get the necessary increase to achieve or offset our cost inflation

Carter’s (CRI): …our teams are in Asia now negotiating spring 2019. We’ll have more visibility to those costs in July. We are assuming over the next five years that we’ll start to see some modest inflation. Our experience in recent years has been consistently lower product costs every year. But for modeling purposes, we’re assuming modest inflation in product cost and we expect to offset that inflation with better price realization.

AO Smith (AOS): Pricing actions in mid-2017, primarily due to higher steel and installation costs as well as higher demand for the company’s gas tankless water heaters and water treatment products, contributed to higher sales…

As a result of significantly higher steel prices and inflation in freight and other costs, we announced a price increase up to 12% on U.S. water heater products effective in early June.

The biggest issue both on the residential and commercial is getting labor.

Packaging Corp of America (PKG): We also anticipate continued price inflation in chemical and freight costs, incremental wage pressure with a tighter labor market or slightly lower recycle fiber costs and improving energy costs that will move into the seasonally milder weather.

A lot of freight contracts are coming due – most of my understanding kind of come due in that April-May timeframe. Do you have a sense as to what you’re seeing freight being up on a year-over-year basis? Is it in that 10% to 15% range?

That’s a good number, to your point, and it’s varying by region, by lane.  But nevertheless, we are facing those inflationary cost pressures. I think that’s a good number.

Well, I think, again, it’s a matter of there’s more competition for general labor. And so part of that is it’s a competition based on willingness to pay several wages, and then the environment in terms of are you in a metropolitan region? Are you in a rural region? And so I think we have a good story to tell. But nevertheless, we are dealing in a highly competitive labor market currently which is not all bad.

But that said, there’s no question that labor is a key element that we’re looking at since knowing full well that the costs are going up and that the quantity is going to be somewhat limited, so at least for the short-term.

UniFirst (UNF): In addition, employee wages continued to be impacted by the low unemployment environment. As we continue to invest in our people and infrastructure, we anticipate higher payroll costs as a percentage of revenues. Rising energy prices are also forecast to provide a headwind in the second half of the fiscal year.

Pool Corp (POOL): We — we’ve known for a while there has been a, a very tight market on the freight side, particularly when we’re talking about third party freight carriers and the cost for those services. So that’s kind of rolled into our expectation from an, from an expense standpoint.

My pivot here is with respect to our costs of products and there has been some raw material cost pressures on our suppliers specifically, I had mentioned I think last quarter about some of the components that are used for the manufacturing of the basic sanitizer for pools.

And most recently I saw, recently I saw that one manufacturer announced a 5% price increase effective in June. And I expect that others will follow as their costs pressures are driving them to do that.

I also expect later in the year to be additional price increases products that are affected by one raw material or another.

H.B. Fuller (FUL): We have three areas of focus as we enter the second quarter: first will be to realize over $50 million in annualized pricing to offset last year’s raw material inflation.

And I think, we see further inflation. So there is very much a potential for further price increases. But this is a nice catch-up quarter, if you will, on the margin.

I think logistics cost, especially in the U.S. are up significantly I think every business is seeing that right now. So I was probably little more than anticipated when we started the year…

KB Home (KBH): One, is that 5% cost inflation still what you expect to flow through?

Stephen, we are expecting similar cost. As this year goes forward, there’s pressure on a few of the commodities and we’re all dealing with some of the labor pressures that have been in the news.

Watsco (WSO): Yes, we have been seeing price increase announcements coming from most of the major OEMs. They’re – they range – it’s pretty much up to 6%, 7%, 8%, but obviously, they’re not going to realize that full amount.

I think this is going to be a trial balloon. I’ve been the industry many, many years and it’s unusual for us to have a midseason price increase. I can’t remember the last one, so I have no basis to say whether it will hold or not. I hope it does.

PotlatchDeltic (PCH): In general, I’d say costs are going up in trucking about 10% per year, but like I said at the start we’re really passing those costs along to our customers.

Pulte Group (PHM): Our revenue growth for the period reflects the combination of a 10% or $38,000 increase in average sales price of $413,000 combined with a 9% increase in closings to 4,626 homes.

Scotts Miracle Grow (SMG): The change in our outlook reflects the impact of rising commodity and transportation costs.

Murphy USA (MUSA): Higher gas prices, I mean, if you buy with a $20 bill, you’re going to have fewer gallons per trip. So you have more trips associated with that and we’re absolutely seeing that as well. And so there are pluses and minuses to a higher price environment.

Rent-A-Center (RCII): Same-store sales in the Core segment were positive 0.3% driven by better collections from lower promotional activity and a higher portfolio balance due to an increase in the average ticket.

Bemis Corp (BMS): That’s a normal part of our business. Processes, as contracts come up for renewal, customers are expecting lower input and that’s part of our strategy, is we are constantly working on lightweighting, downgauging and other initiatives, recognizing that that’s an expectation of their customers.

FARO Technologies (FARO): This increase was mainly due to a strong increase in our product gross margin reflecting higher average selling prices in our 3D Factory segment…

Regis (RGS): These benefits were partly offset by minimum wage inflation, healthcare cost increases that were substantially in our stylist community…

…one of the things I’m most concerned about as a – not specifically it reaches across the service industries is the ability to attract employees in a virtually a zero unemployment environment. And our challenge is to find young and men and women or more experienced stylists

TPX: We also absorbed $12 million of commodity cost inflation during the quarter as our price increase did not take effect until mid-March.

And as we think about the rest of the year, if I were to digress for a moment, is that the industry typically has been very successful at passing along commodity cost increases in the form of price with a bit of a lag. As we – now turning back – as we talked about commodities for the full-year going into the year, we quantified it in around $30 million. And as we sit here today, we have seen commodity cost inflation. And we’re thinking about it more in the $45 million range. So, we’ve seen a bit of an increase…

Lowe’s (LOW): We recently announced plans to expand our employee benefits and a one-time bonus of up to $1,000 for our more than 260,000 hourly employees in the U.S.

WDFC: we are making some proactive price adjustments in the coming months to ensure our gross margins will remain within our target ranges over the long term.

Krogers (KR): This will be our first contract under Restock Kroger, and it includes an added investment in wages, raising the starting pay to at least $10 an hour and accelerating rate progression to $11 per hour after one year of service. These are the kinds of things we contemplated when we allocated $500 million to the talent portion of our Restock Kroger plan.

Hanesbrands (HBI): As we look out into 2019, we’ve begun communicating the pricing actions that we’ll take to offset the rest of this inflation, and we would expect to have those in place in early 2019.

Werner Enterprises (WERN): The driver recruiting market is increasingly challenging…

World Fuel Service (INT): Consolidated revenue for the first quarter was $9.2 billion, that’s up 12% compared to the first quarter of 2017. This increase was principally due to a 22% year-over-year increase in oil prices…

Brinker (EAT): Restaurant labor increased 50 basis points as we experienced higher insurance claims during the quarter that added to the ongoing market-driven wage rate pressures which continued in the 3% to 4% range.

Church & Dwight (CHD): And with respect to the pricing environment, 8 of our 11 power brands had flat or lower percentage of products sold on promotion in Q1 2018 compared to Q1 2017, and still we grew.

As everybody knows, commodities and transportation costs are rising. That’s tempering the appetite to compete on price. Of course, to take price, typically you need a strong position in a category and a cost story to the retailer.

…the trade optimization plans and we have less couponing planned for the year.

And there’s lots of ways to get price. As I mentioned, there’s trade optimization. There’s also less couponing. There’s also pack sizes and how much product you put in the pack. So there’s lots of ways to do that without messing with the list pricing…

Core-Mark (CORE): Transportation continued to be a challenge and was the largest cost overrun…

Badger Meter (BMI): Now copper…from $2.50 a pound in the first quarter of last year to over $3 now, that’s a pretty big jump, and that did hit us for 100 basis points.

Sonoco Products (SON): Moving over the price, you see that prices were higher year-over-year by $22 million, driven by price increases both to cover higher material costs, as well as our other efforts to push through no- contract increase.

Even in Europe where pricing has been difficult for many years, the paper systems have tightened up allowing for price increases to stay.

In addition, resin prices were up 10% to 15% year-over-year in the quarter and some of the increase going into the second quarter. We have increased prices to contractual pass through mechanisms and by direct price increases. So while we’re somewhat behind the price cost curve we fully expect to catch up later in the year.

But we still have work to do to meet our growth and margin improvement targets for the year. Inflationary cost pressures and freight, labor, energy and material costs, particularly resin are requiring us to drive recovery through price increases in many of our businesses.

Valmont Industries (VMI): Steel cost volatility carried into the first quarter. Our historical experience has shown that over time we recover inflationary costs as all market participants face the same cost increases. We have been proactive in raising prices in all of our business…

Despite an inflationary raw material cost environment, we were able to mitigate much of this pressure through a combination of affected supply chain and factory management, as well as pricing actions.

Lincoln Electric (LECO): We will continue to aggressively manage the business against inflationary headwinds.

And I think that the challenge is that the inflationary pressures we’re seeing are really global. So we’ve got a price increases going in across the portfolio,

We’re in a very rapidly increasing inflationary environment.

Tennant Company (TNC): We remain confident in our ability to get adequate pricing pricing. We do — we feel we’re being successful in the market.

Crane (CR): From a price perspective, things are tracking according to plan. We had pricing put in our plans for this year from a guidance and plan perspective. And if anything, we’ve only — we’re only doing a little bit better, I would say, as we’re offsetting much of any material cost headwinds that we’re experiencing.

Astec Industries (ASTE): …price increases that you asked about and we have done that on the pricing side. How much of that sticks remains to be seen, we did that mostly late in the first quarter, our competition by and large is doing the same because the steel cost is a real thing.

Welders and fabricators we haven’t had as much trouble as we have with machinists. Probably the toughest labor market haven’t just gone to almost all of our places in the US and Canada last three weeks, I think South Dakota is probably our toughest labor market.

…most of our divisions are running some level of overtime right now. Some of our capacity constraints…

Alamo Group (ALG): And so, I mean, I think selectively, we’re buying a little inventory ahead of demand, where – especially – it’s not only where we think price increases are coming, but even more so where we think our lead times are getting longer.

Kennametal (KMT): Also, it’s important to note that we have relatively high utilization levels in some of our facilities currently due to strong market conditions. This affords us the ability to be more selective taking on certain sales, allowing us to liberate capacity to improve fill rates on our high-volume highest-profit products.

The first topic is pricing ability and general raw material cost increases. I think most of you on the call know that the three main raw material costs for Kennametal are tungsten, cobalt and steel, in that order, with tungsten by far being the most important. Raw material cost increases continued in the third quarter. That said, like the first two quarters in the fiscal year, we have been able to cover the raw material cost increases year-to-date and we expect that trend to continue through the fiscal year.

Franklin Electric (FELE): The decline in gross profit margin percentage is primarily due to product and geographic sales mix shifts as we believe the global realized price has offset material cost inflation in the quarter.

Standex (SXI): …we experienced high labor costs from overtime and travel for high value service workers to meet growing customer demand.

CIRCOR (CIR): …we raised prices in our pump businesses globally affecting about one half of the revenue.

Papa John’s (PZZA): So, we’ve had some pressure over the last couple of years on closures, most specifically the West Coast and the Northeast where we’ve had some wage pressures that’s driving some of the unit economic challenges

Dick’s Sporting Goods (DKS): But as far as getting deeper discounts or deeper into a new price battle, we don’t see that right now.

Stein Mart (SMRT): We are encouraged by the sales trend we saw in February and early March driven by very strong regular-priced selling…

Aaron’s (AAN): We have pursued this trade-up strategy which has led to higher ticket items…

We have our own fulfillment centers and we use outside shippers, so shortage in drivers and increases in fuel costs absolutely affect us. And we’ve seen a little bit of that in the first quarter and we continue to monitor it as we go into the year…

Sykes Enterprises (SYKE): We continue to execute on various actions to address labor tightness and wage inflation crosscurrents in the U.S. These entail employing a combination of tactics ranging from negotiating price increases where feasible, to shifting some existing and new client demand to either better position facilities or to at-home agent model or to other international geographies.

Transcript source: Seeking Alpha