Maybe this time isn’t all that different for industrial companies.
In a normal economic cycle, consumer-facing manufacturers feel the effects of a slowdown first, followed by industrial operations that can convert bookings into sales relatively quickly. Eventually, the impact filters down to businesses with longer delivery wait times, including aerospace and process automation, whose order backlogs offer more resilience. Almost $200 billion of manufacturing construction spending — at an annualized pace — in the US isn’t normal, though. Nor is the amount of money being funneled by governments to support the energy transition and national industrial priorities, including semiconductor production. But it’s possible that those forces are both real and meaningful over the long term and subject to macroeconomic ebbs and flows in the short term.
Amid all the optimism about “megaprojects,” reshoring and a manufacturing super-cycle, the current slackening in industrial markets is actually playing out more or less along the lines of historical paradigms. This dynamic was on full display Tuesday during a deluge of earnings reports from companies across the industrial universe.
Pentair Plc said sales of its pool products declined 21% on an organic basis in the third quarter relative to the same period a year ago. Distributors built up a glut of inventory as consumers shifted spending away from their backyards and supply-chain disruptions distorted ordering patterns. Most of the excess supply has now been cleared but higher interest rates are weighing on demand for new construction and remodeling, Pentair Chief Executive Officer John Stauch said on the company’s earnings call. While the third-quarter performance is an improvement from the 28% sales slump Pentair reported for the pool segment in the second quarter, the company now expects revenue in the division to be down by a high-teens percentage overall in 2023, a deeper rout than it anticipated at the last earnings update in July.
The slowdown is spreading to shorter-cycle industrial companies. Dover Corp., a maker of fluid-transferring equipment, garbage trucks and gas station fuel pumps, said sales fell 2% in the third quarter, excluding the impact of currency swings, acquisitions and divestitures. The company lowered its full-year earnings guidance to reflect a “more conservative outlook for the remainder of the year” amid a more sluggish-than-expected recovery in demand from biopharmaceutical customers, an abrupt dropoff in the market for heat pump components, a strike at Mack Trucks and the knock-on effects from rising interest rates.
“If we look at our forecast of the year, we were just wrong about biopharma,” CEO Rich Tobin said on the company’s earnings call. “We were getting indications from our customers that there was going to be some nascent recovery. We actually did see some order upticks. But quite frankly, it just never turned into much.” Up until the final stretch of the third quarter, demand for Dover’s heat exchangers was so robust it exceeded the company’s manufacturing capacity. Suddenly, “the market's come to a halt” amid uncertainty about future subsidies for climate-friendly technologies in certain European countries, Tobin said. There’s now too much-finished inventory of heat exchangers that needs to be bled off first before orders rebound, he said.
“There are a lot there's a lot of headwinds in the system,” Tobin said. “I don't want to get on a personal soapbox, but the amount of liquidity that's being withdrawn is going to show up somewhere. And this notion that we're all going to wait on the government to bail us out because there's this wave of government spending coming, I find that a problematic strategy.”
3M Co., the maker of Post-it notes, automotive adhesives and electronic components, officially cut its forecast for organic sales growth this year after warning in September it would be at the low end of its previous range. The company now expects revenue to decline by 3%, even as aggressive cost cuts help boost its profit outlook. The sales drag is still primarily concentrated in the company’s consumer and electronics businesses, but the performance in its US industrial operations is mixed, “reflecting some areas of strength, but also some, I would say, caution and uncertainty around broader economy,” CEO Mike Roman said on the company’s earnings call.
On the other end of the spectrum, the aerospace sector still has a supply problem, rather than a demand one. RTX Corp. is reeling from a quality control issue involving its geared turbofan jet engine that will cost as much as $7 billion to fix and require a significant chunk of in-service models to be hauled in for accelerated and enhanced inspections over the next three years. Still, the company boosted the adjusted sales outlook for the Pratt & Whitney division that makes the GTF. General Electric Co. also raised the organic sales outlook for its aerospace arm even as it acknowledged it would fall short on deliveries of its Leap jet engine because of supply-chain problems. “We saw sequential challenges in the third quarter; despite the fact that we were up double digits in terms of material input, we were up more in terms of supplier delinquencies,” CEO Larry Culp said in an interview. “We need to get more out of the supplier base and that’s a broad statement. We’re working hand in hand with a number of suppliers and we’re making some progress but not nearly enough in light of the demand we have.”
Other industrial businesses with longer selling cycles and robust backlogs should fare similarly well this earnings season. But if the historical pattern continues to hold, it would suggest that more capital-intensive manufacturing businesses are next in line for a slowdown. Spending on electric vehicles, batteries and heat pumps needs to surge if the world is serious about tackling the problem of climate change. That doesn’t mean it will do so on a steady timeline, as Dover’s commentary on heat exchangers shows.
Li-Cycle Holdings Corp., a battery recycling startup that went public via a 2021 merger with a blank-check firm, announced this week that it was pausing construction on a planned facility in Rochester, New York, amid rising costs. Shares of the company fell by more than 45%. The Li-Cycle announcement comes as Tesla Inc., Ford Motor Co. and General Motors Co. rethink the timing of new electric vehicle production capacity. GM separately on Tuesday backed off some of its near-term EV output targets as it takes a more disciplined approach to ramping up the business. The announcements are the latest reminder that even factories that are far along in the planning process can still be delayed or rethought.
The timeline for a US manufacturing renaissance is at risk of being stretched, rendering any kind of spending surge more of a boost than a boom when it comes to industrial bottom lines.
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