Higher operating costs, lower worker productivity, and new, more costly local sourcing are hurting industrial margins now, and will likely continue to in a post-coronavirus world. Lower profit margins, however, don’t have to be the new reality, and a farming-related company might hold the answer as to why.
A common theme of first-quarter earnings conference calls has been lower profit margins, partly because of extra costs related to the Covid-19 pandemic, such as extra cleaning, screening, and higher logistics costs.
Tyson Foods (ticker: TSN), for instance, has seen “absenteeism, reduced production speeds, and selected idling of plants,” CEO Noel White said on the company’s recent earnings conference call. Chemical producer
told Barron’s it has spent more to provide personal protective equipment for employees and to do more sanitization between staggered shifts.
Higher costs are manifesting themselves in other ways, such as global sourcing and logistics.
(ZBRA) CEO Anders Gustafsson told Barron’s the company had to reconfigure its outsourced supply chain rapidly amid first-quarter shutdowns in China. That supply chain disruption resulted in higher shipping costs and sales declines.
All the Covid-19 expenses are adding up: General Electric (GE) CEO Larry Culp told Barron’s the new expenses are more than “nuisance level.” That poses a new challenge for management teams who need to offset these costs if they hope to see the earnings growth—and valuation multiples—that prevailed before the pandemic hit.
One company tied to farming,
(CTVA), has a few ideas about managing costs and supply chain risks. Its gross profit margins actually increased during the first quarter, and it didn’t experience excessive trouble manufacturing its products, which include agricultural seeds and chemicals for farmers.
“We have facilities in Hubei province,” CEO Jim Collins told Barron’s in an interview reviewing first-quarter earnings. “We were having problems in January.” But the company has a dual-source strategy, meaning it makes many key ingredients in two locations. So Europe picked up the slack when China went down due to Covid-related restrictions early in 2020. And then China came back when Europe began to struggle.
Collins says about 80% of Corteva’s crop chemical sales are dual-sourced and adds “productivity hasn’t suffered much.” Other companies might have some products made in multiple locations, but Collins believes Corteva’s percentage is unique, at least in his industry. Dual-sourcing can help a company keep costs the same in times of turmoil, rather than suddenly having to develop an alternative supply chain.
Corteva, of course, has implemented working from home, as well as safety and social-distancing measures in recent months—all things that will be de rigueur for most businesses in the future. Flexible sourcing will also become the norm and, if done right, dual-type sourcing strategies can mitigate the worst cost impacts of having to rapidly redo global supply chains.
Corteva stock got a bump from solid first-quarter results, rising about 6% on Thursday. Numbers were better than Wall Street expectations, but investors might also have been impressed with sales growth and expanding profit margins—rarities in a Covid-19 world.
Write to Al Root at firstname.lastname@example.org