Pricing, inflation and materials

Listening to a company’s quarterly earnings conference can be the equivalent of watching a CEO read a PowerPoint presentation, followed by a group of analysts grilling him on EBIT margins, payout ratios and basis points. Or it can be like panning for gold, with nuggets surfacing about store openings and closings, new products launches, new accounts with retail customers or “terminated” relationships with former customers. Competitors even talk about each other — sometimes by name — with a little prompting from analysts.

January 2011 was not a busy month for conference calls, but five companies that do business in the pro channel — Fastenal, USG, Sherwin-Williams, PPG Industries and WD-40 — held their events within several days of each other. Although they make different products — fasteners, lubricant, drywall and paint — price hikes was a topic of discussion during all of them. Petroleum, plastics, metals, chemicals and many other raw materials that go into building materials are in a state of flux, and it made the analysts nervous. But at least they stopped asking so many questions about payout ratios and EBITDA.

Known for its huge footprint (more than 2,400 locations) and high-touch customer service, fastener distributor Fastenal has no intention of pulling back this year. On tap for 2011 is an additional 150 to 200 stores. Fastenal hired 700 salespeople last year, and it will continue to add people to its stores as sales grow.

Price hikes may also be inevitable, according to the company’s CEO.

Fastenal’s Q4 and year-end earnings conference, Jan. 18, 2011

Analyst: “Just a few questions on inflation. Could you talk about if you had inflation realized in the fourth quarter [and> your expectations for 2011? And then specifically, I think there’s price increases coming in the channel for fasteners, but could you talk about not only fasteners, but non-fasteners, as we’re hearing pressure across other categories as well?”

CEO Will Oberton: “To answer your first question, we didn’t have a lot of inflation in the fourth quarter. There were small price increases coming through from the middle of the year, but for the most part they were smaller categories and we were putting up the arm and holding them back, doing the Heisman on the price increases coming. But with oil prices going up, the plastic products and other products go up. Right now, we are seeing more price increases coming through. We’re mitigating them as well as we can. Going into the year, the costs will go up some.

“On the fastener products, the steel has been a roller coaster lately. One thing I will add is I believe we’ll be able to react much quicker and with better data to the stores, because a big part of it is convincing our stores to go out and raise prices to their best customers. That’s not an easy thing to do, especially when they haven’t seen their costs go up. So to get the source and get out there in front of it I think is a challenge. I think we have people in place that can get that done.”

USG is pinning much of its hopes on its new “Ultralight” wallboard panels, which are easier to transport and sell for a premium. USG executives said they have accelerated the product’s rollout plans for 2011 because of positive feedback. But they wouldn’t disclose its production costs. Analysts jumped right in on the price issue.

USG’s Q4 and year-end earning call, Jan. 26, 2011

Analyst: “With industry putting out price increases in February and March, one of your competitors, in the past few days, put out a price increase letter with no specific amount. Just want to get your take on this strategy and if you feel this is kind of an unusual tactic?”

CEO James Metcalf: "Well, I don’t comment on competitors or competitors’ pricing. What I will say is, we have a price, a wallboard — I’m assuming you’re talking about wallboard.”

Analyst: “Yes.”

Metcalf: “Yes, we have a wallboard price increase announcement on the street, as we speak, for Feb. 7 at 25%. Our salespeople are talking with our customers right now. We’re in a very low utilization market as we speak, but as we got in 2010, we did get price improvement throughout the year. And we’re going to continue to get price improvement at every opportunity we can. We have a value proposition. You brought up UltraLight, which I think is a great new product for the market. We provide great service; we have a full product line. So we’re going to continue to price our products as the value-added products in our value proposition of dealing with USG.”

It was a good year for Sherwin-Williams: Sales increased 9.6% to $7.78 billion (net sales from acquisitions accounted for 8.7% of that), and its residential repaint contractors and DIY customers (through the Sherwin-Williams Paint Stores) showed the greatest improvement. The company opened new stores in 49 new markets, putting its total store count at 3,390 in the United States, Canada and the Caribbean. Plans for 2011 call for new store openings in the range of 50 to 60 locations.

Yet analysts seem to want to focus on Walmart, which replaced Sherwin-Williams last year with AkzoNobel, branding the paint as Better Homes & Gardens. The conversation eventually wound its way around to price increases, which Sherwin-Williams instituted in April, August and December after the costs of its raw materials rose.

Sherwin-Williams’ Q4 and year-end earning conference, Jan. 25, 2011

Analyst: “Just real quickly going back to the pricing issues, you guys are pretty close to your contractor customers. As you deal with them, do you get any ... pushback, saying we just can’t push [this price increase> through our customer base anymore?”

CEO Christopher Connor: “The pricing that we get pushed back on from our contractors is half of 1%. These are not folks that are excited to get these, nor are we excited to pass them on. So they are doing their job as they should, which is to push back a little bit. As we’ve talked about the economics of this industry, you’ll recall that a typical paint job is 80% to 90% labor cost and 10% to 20% material. So as distasteful as these are, their ability to absorb it modestly, raise their pricing and cover their higher material cost is something that’s been easy for them to do.”

Thanks to a 25% sales hike in the Asia/Pacific region, where it surpassed $2 billion in sales, PPG Industries had a great 2010. But its rising volume was matched by higher prices in each quarter, necessitated by inflation in raw material costs.  

PPG Industries’ Q4 and year-end earnings conference, Jan. 20, 2011

Analyst: “Can you talk a little bit about the sequencing you see of raw material inflation? I guess here in recent weeks we started to see oil reaching some new highs and maybe putting some more pressure on the raw materials slate as you go into ’11. So, can you just talk a little bit about the dynamics between price and cost as we go through the year?”

CEO Charles E. Bunch: “On the cost of raw materials, we averaged in coatings mid-single-digit increases for 2010. But obviously that built, so that as we were ending the fourth quarter year in 2010, those were in the higher single digits in terms of percentage increases, and we saw it across a broad range of products. We didn’t see quite as many, although there were still some supply disruptions. But you had it on both the organic and inorganic side, TiO2 (titanium dioxide) being one of them; other pigments, we had some of them. Metals, which play a role in our formulations in protective and marine coatings, they were also up.

“Now starting here in 2011, we’re seeing a little additional raw material pressure. We have started raising our prices, starting in mid-year of last year, working through some of them, but actually the inflationary numbers have continued to move. So, in every one of our businesses today, we have additional pricing actions. In some, we have formal price increase announcements out. In others, we are actively negotiating with customers to pass these price increases on. As I have mentioned in the remarks, typically it does take two to three quarters to fully capture all of these inflationary price increases. I think the fact that we have a little bit of a moving target means that we’re still in a price increase mode in our businesses, but we’re looking as we go through 2011 to fully capture those price increases. In terms of the current forecast, we don’t think things are going to accelerate as aggressively as they did last year, but we are seeing the same trends that you mentioned.”

WD-40 got off to a good start during its first fiscal quarter, with sales of $81 million, a 4% increase over the previous year. But the San Diego-based company also had to contend with the rising costs of petroleum, one of its raw materials, which cuts into margins and profits.

WD-40’s Q1 earnings conference, Jan. 10, 2011

Analyst: “Are you going to increase prices to try to offset the inflation in your lubricant costs, or are you not going to do that?”

CEO Garry Ridge: “We would prefer not to. However, if we need to, we will. Again, we have [some> lag in the impact the way kerosene moves around. What we are looking for is a little stability, because what we can’t do is go to the market with regular rapid price increases. Nor do we want to go too early, nor do we want to go too late. So, we are trying to offset some of the [past> impacts of oil by innovation and other cost-saving measures.

“It’s not a silver bullet. If we do want to [raise> pricing we also [need> the justification to go to our customers and say, ‘This is why.’ We have already planned and we’ll execute some price changes in Europe, but it’s a balancing act that has more than the two parts of just steel and petroleum.”