I’m going to start today with comments from maybe a company you haven’t heard of, Packaging Corp of America (PKG) as they are the 3rd largest producer of containerboard products and a top maker of uncoated freesheet paper in North America. As they make the boxes too that contain a lot of the packages we get to our homes each day, it’s a finger on the pulse of economic activity and comes ahead of what Amazon will say on Thursday. As their earnings call is this morning, I took this from their earnings release: “Packaging segment demand was below our expectations for the quarter. Consumer spending continues to be negatively impacted by higher interest rates and persistent inflation along with consumer buying preferences skewed more towards services versus durable and non-durable goods. After a strong start in January, consumer spending was increasingly softer as the quarter progressed, similar to our box shipments during the quarter.”
Coca Cola’s (a stock we own) earnings call took us around the world: “In Asia-Pacific, the reopening of China has led to an increase in consumer activity, but consumption is still recovering to pre-pandemic levels. India’s economy remains resilient with a strong job market and robust consumption. In Japan, consumers are feeling inflationary pressure for the first time in many years. In Europe, the recent banking crisis added to last year’s energy spike, driving further uncertainty to purchasing behaviors, and consumers continue to increasingly seek out affordable and private label options across many categories. In North America, the picture is a mixed bag, with unemployment low, gas prices improved, and savings holding up, but inflation and higher mortgage rates are top of mind concerns for many consumers. In many developing and emerging markets in Latin America, Africa and the Middle East, consumers continue to face varying levels of inflation and volatility in the macroeconomic conditions.”
This is what the CFO said about inflation, “Inflationary forces are moderating in some respects. Spot prices have come down in oil and freight rates are more favorable. That said, many commodities we’re exposed to, have been sticky and we have some advantageous hedges that will be rolling off to less favorable rates during the year. Based on current rates and hedge positions, we continue to expect per case commodity price inflation in range of a mid-single digit impact on comparable cost of goods sold in 2023. Additionally, we expect wages and inflation in media will continue to remain elevated.”
Pepsi is following Coke and all other consumer product companies now for many quarters in having sales drive all the revenue growth. Organic sales (taking out FX and acquisitions/divestitures) rose 14% while volumes of beverages rose 1% and convenient food volumes declined by 3%.
From Sherwin Williams earnings release whose paints go on so many things: “While our first quarter was strong, it is also a seasonally smaller quarter, and our outlook for the full year remains unchanged at this time. Visibility remains limited, and we continue to expect a very challenging demand environment in the back half of 2023 against difficult comparisons. On the architectural side of the business, we are seeing demand softness in new residential and the Consumer Brands Group DIY. On the industrial side, Europe and China have yet to fully recover, and we’re seeing increased pressure in North America.”
The April Dallas manufacturing index yesterday was pretty weak and follows the deeply negative Philly survey and the surprise positive print from NY. Its index fell to -23.4 from -15.7 and that was twice the estimate of -12. The 6 month business outlook also deteriorated further. I’m going to go straight to the comments of note with the internals always so volatile.
Computer and Electronic Product Manufacturing:
“The first quarter came in about as expected; all markets weakened with the exception of automotive. There are signs that inventories are building quickly in auto, so expect that market to weaken soon.”
Me: we’ve seen for the past few quarters that auto has been the only standout in the industrial/semi space because of the inventory rebuild and it was inevitable that things were going to slow once the inventory needs were satiated and that now looks close to be the case.
Fabricated Metal Product Manufacturing:
“We have already been notified that our credit line renewal may be difficult. Our monthly increase in costs (rate) is at highs not seen since 2007.”
Me: Rising cost of capital bites.
Food Manufacturing:
“Some customers are pulling back due to high raw material costs.”
“Funding has dried up to purchase our products.”
Me: Inflation sticky, credit crunch.
Machinery Manufacturing:
“There is a definite slowdown. New orders virtually stopped.”
“We are starting to see a real slowdown. We are hoping it is short lived.”
Me: A recession is here.
Paper Manufacturing:
“A slight decrease in material costs is offset by a continued increase in labor costs.”
Me: Inflation is sticky
Primary Metal Manufacturing:
“Almost all of our customers have high inventories from overbuying last year. So, they are all cutting back on ordering new inventory. Business is slow as customers are waiting to see when recession starts. Most customers, when pressed, think the recession will start in summer. We are getting ready for our 2nd layoff in the last four months.”
Me: The labor market is next shoe to drop.
Printing and Related Activities:
“Business has gotten stupid slow, and we estimate having many days of just a few hours’ work due to low volume. This is crazy – as busy as we were last year, and now for this year to have it turn off so quickly, it is hard to understand why. We hear from many others in our industry, and they are all saying the same thing: that it’s gotten slower without any signs of turning around in the near term.”
Transportation Equipment Manufacturing:
“We are in the trucking industry. There has been some continued degradation of indicators in our market, such as dropping freight rates. We are still planning on a solid business year but with some decrease compared with the past 12 months.”
Overseas, Hong Kong’s exports fell 1.5% y/o/y in March vs the estimate of no change. South Korea’s economy grew by .8% y/o/y, about as expected but the slowest pace since 2009 not including Covid.
In the UK, the CBI industrial orders index was unchanged m/o/m in April at -20 as forecasted.
END