Earnings: What CEOs say


  • Corporate News
  • Thursday, 30 Apr 2020

Virus run: A driver operates an UPS delivery truck in Kentucky. The company has never been more important as online sales surge due to the Covid-19 pandemic. — Bloomberg

TUESDAY was a jam-packed day for earnings across all sectors. In the industrial landscape, I paid closest attention to 3M Co, Caterpillar Inc and United Parcel Service Inc (UPS), each a bellwether in its own right.

You can find the specifics on earnings numbers in the companies’ statements, but in this time of unprecedented volatility, what CEOs are saying about how they are running their businesses is more telling.

Here are my top takeaways: 3M – like many companies, 3M has suspended its 2020 guidance, given the unpredictable nature of the coronavirus outbreak and rolling economic shutdowns.

However, in an effort to provide more transparency, the maker of Post-it notes is now going to provide monthly sales updates – broken down by geography and business segment – for the foreseeable future.

This follows Emerson Electric Co’s marathon two-hour-plus earnings call last week that featured presentations by not only the CEO and CFO but also the heads of its main business divisions. It’s nice to see companies setting the bar high on disclosures during this period of upheaval; hopefully others follow suit.

The second quarter is expected to bring the worst of the virus impact, and 3M is cutting US$350mil to US$400mil of costs in the period to adjust to lower demand.

Notably, however, much of that involves discretionary spending on things like travel, external services and advertising, rather than cuts to payroll, which 3M said it was trying to minimise. It’s using furloughs, but they’re paid leave, and in other cases, employees are being asked to take a vacation. Bear in mind that 3M had announced a restructuring plan in January, separate from the coronavirus, that would see it eliminate some 1,500 jobs. So, it’s hardly a corporate saint.

But given its sales of N95 respirators, you’d be hard-pressed to find a company that better understands the toll the virus is taking, and 3M seems to legitimately want to do the right thing by its workforce. Like others in the industrial sector, the company also appears wary of cutting too deep and being unprepared for an eventual recovery.

3M is clearly conscious of its image after having its name dragged through the mud by President Donald Trump and billionaire Mark Cuban over production and sales of N95 respirators.

The company devoted an entire slide in its earnings presentation to the topic. 3M has already doubled global N95 output to 100 million per month and is investing in capacity to double that yet again; it’s directed 90% of production to health-care workers, with the remainder going to other critical industries such as food production; and the company has cut loose some distributors who acted “unethically” and is pursuing numerous lawsuits amid allegations of price gouging.

The company also made a point of highlighting its 76 plants and distribution centers across the US in an apparent nod toward calls for a revival of America’s manufacturing might. “3M has never left our home country, ” CEO Michael Roman said on the call.

Caterpillar – the maker of bulldozers and backhoes is also holding off on sweeping job cuts, and it made an interesting argument as to why that’s the case.

Caterpillar held headcount as well as administrative, manufacturing and research spending relatively flat from 2016 to 2019, even as sales increased some 40%. That means there’s less to cut when a downturn hits, CEO Jim Umpleby said on a call to discuss the company’s first-quarter results.

It also means Caterpillar doesn’t have to use up cash to pay out large amounts of severance, and “cash is obviously king in this environment”, Umpleby said. So, the overall effect is that margins and cash flow will be higher than historically, even though the chaotic nature of the coronavirus outbreak and supply-chain disruptions will likely prevent the company from reaching its targets on those metrics.

While Caterpillar has suspended share buybacks and is delaying some research and development and capital expenditure (capex) projects with less visible returns, it made the decision to continue investing in growing its services business and expanding its product offerings because it continues to view those initiatives as key to its longer-term profitability. That’s a positive sign that the coronavirus hasn’t completely zapped CEOs’ appetite for investment.

UPS – the good news for the package-delivery company is that its services have never been more important, as store shutdowns and fear of contagion drive more consumers to online-ordering. The bad news is that the spike in sales is coming at the expense of its profit margin.

Why? It’s partly due to the sporadic nature of residential deliveries, which makes the process more expensive than shipping to businesses, and also because of the increased expenses involved in keeping workers safe. The knock-on costs of the coronavirus – including the expense of doing extra cleaning and providing workers with protective gear –amounted to US$140mil in the first quarter.

That’s an important data point to keep in mind as companies across less essential industries start bringing people back to work. Like Caterpillar, UPS will maintain investments in strategic priorities such as automation to help bolster its longer-term profitability.

An expected US$1bil reduction in capex is going to come largely from a rethink of certain facilities projects and a delay in vehicle purchases. The company is also working with its customers when it comes to investing in their supply chains, as the coronavirus exposes the flaws in far-flung networks. In many cases, that’s going to mean a shift to third-party order fulfillment and logistics services.

This is just an acceleration of a reappraisal that began with the US-China trade war, UPS CEO David Abney said on the earnings call.

A lot remains unknown about the coronavirus pandemic, but the messaging from most industrial CEOs at this point has focused on staying the course, whether that means maintaining most of the workforce or following through on investment commitments. UPS’ Abney may have put it best:

“I don’t know that we’ll ever get back to what we call the old normal, but we’re not ready to declare what we see today as a new normal either.” — Bloomberg

Brooke Sutherland is a Bloomberg opinion columnist covering deals and industrial companies. She previously wrote an M&A column for Bloomberg News. Views expressed here are the writer’s own.

Article type: metered
User Type: anonymous web
User Status:
Campaign ID: 1
Cxense type: free
User access status: 3

Earnings , what CEOs say , UPS , Emerson Electric , 3M , Sutherland ,

   

Did you find this article insightful?

Yes
No

Across the site