Strategic Movements February 2023

Oracle Corp. Pricing Spine-o-meter: 3 of 5 Vertebrae

Oracle Corporation, a global database, enterprise software, and IT infrastructure provider, had a strong Q2 2023 ending 30 November 2022.  Revenue increased 18.5% over the same quarter last year to $12 billion while operating income swung from a loss to a profit of $3 billion.

In their earnings call held on 12 December ‘22, both CEO Safra Catz and Chairman and CTO Larry Ellison attributed the positive performance of Oracle to winning customers with superior technology and solutions, especially with respect to SaaS and IaaS solutions.

The hard financial evidence supports the claim that Oracle is gaining in sales revenue yet does not reveal how these gains are achieved in relation to prices and selling quantities.  Management statements indicate that Oracle is selling more offerings, but we cannot identify how Oracle is managing prices.

That is, Oracle management statements and financial results indicate a continued improvement to Oracle’s customer value proposition, thus putting more money on the table, but do not indicate up or down how Oracle is doing in capturing its fair share.

News surrounding Oracle indicates some dissatisfaction with Oracle pricing, yet vocal complaints are not the same as action. Repeatedly, we have observed customers complain about pricing and high prices in various industries but respond to price changes by purchasing more of the company’s offerings.  Hence, the few news stories regarding Oracle prices and customer responses are not indicative of corporate behavior.

Research into the quality of Oracle’s pricing team indicated a mixed but positive state of affairs.  We found pricing professionals at the analyst, manager, director, and senior vice president levels.  We found pricing professionals working on new offering pricing, pricing analytics, and pricing operations, and priding deal desk.  Yet, considering the size of Oracle and the complexity of its business, we expected to find several more pricing professionals than those identified.

Given the importance and capability of pricing at Oracle as indicated in financial reports, management comments, and our pricing team research, and given their performance, we have come to the following conclusion as of February ‘23.

Oracle Pricing Spine-o-meter:  3 out of 5 vertebrae.

ORCL (Oracle Corp.) rose from 79.9 on the day prior to their earnings call to 88.6 one month later. 2022 revenue of $42.4 B with a 26% operating margin and P/E ratio near 28.

Chart your path to 5 of 5 vertebrae Pricing Spine-o-meter(TM) score and improve your profit resiliency with Wiglaf Pricing. Includes competitive benchmarks, a 67-point corporate inspection, and a three-year pricing improvement roadmap.

Fastenal Pricing Spine-o-meter: 2 of 5 Vertebrae

Fastenal, a multinational distributor of industrial and construction products, had a strong 2022. Revenue increased 16% over last year to $6.98 billion while EBIT rose to $1.4 billion.

Their earnings call held on 19 January ’23 attributed their positive performance to their strategic decisions and efforts to shift from branch locations to onsite locations, use of FMI technology, and e-commerce.

Financial statements indicate that gross margins remained nearly unchanged but slightly down while top-line revenue grew.

What drove the slight margin degradation and should investors be concerned?  Comments by CFO Holden Lewis during the earnings call provide insight.

Holden Lewis indicated a shift in mix sold as a driver to margin changes citing “broader product margin pressure in our non-fastener and non-safety products” than in their fastener offerings.

Holden Lewis also indicated that discount management might need to be improved stating “(In) these categories (non-fastener and non-safety) …  the spend tends to be more unplanned, which when combined with slower demand and a better stock marketplace resulted in broader discounting. We believe this relates more to our actions than the state of the market and have plans to address it in the first quarter of 2023.”

And in that last sentence, we have an indication that pricing and price management are important to Fastenal’s performance, and therefore of increasing importance to Fastenal’s management.

Holden Lewis continued, “We do expect that at some point in 2023, there will be requests to adjust fastener pricing down based on the cost of steel … or the cost of transportation. But our goal would be to really time the cost and the price effectively so that price cost is neutral in 2023.”

To achieve that goal, price changes at Fastenal must be both timely and accurate.  Thus, the importance of price management to Fastenal’s performance is anticipated to grow. Are CFO Holden Lewis and CEO Daniel Florness in a position to execute?

Research into the quality of Fastenal’s pricing team indicated a challenging state of affairs.  We found a few dedicated pricing professionals at the analyst and manager levels but not at the director or vice president level.  We found pricing to be a part of many district managers’ and supply chain managers’ responsibilities, but this isn’t the same as having a strategic pricing capability.  Hence, it isn’t clear Fastenal has the full skill sets internally to execute against that goal.

Given the importance management places on pricing and the capability the organization has in pricing at Fastenal as indicated in financial reports, management comments, and our pricing team research, and given their performance, we have come to the following conclusion as of February ‘23.

Fastenal Pricing Spine-o-meter:  2 out of 5 vertebrae.

FAST (Fastenal Co.) rose from 47.9 on the day prior to their earnings call to 50.3 one week later. 2022 revenue of $6.98 B with a 20.8% operating margin and P/E ratio near 27.

Chart your path to 5 of 5 vertebrae Pricing Spine-o-meter(TM) score and improve your profit resiliency with Wiglaf Pricing. Includes competitive benchmarks, a 67-point corporate inspection, and a three-year pricing improvement roadmap.

Steelcase Pricing Spine-o-meter: 4 of 5 Vertebrae

Steelcase, a multinational office furniture manufacturer, had a strong Q3 2022. Revenue increased 12% over same quarter last year to $827 million and EBIT rose to $20.5 million from $15.9 million.

Management cited strategic pricing actions among many of their performance drivers in their earnings call held on 19 December ’22.

CEO Sara Armbruste cited the importance of pricing to Steelcase in stating “Our industry has experienced extraordinary inflation, and we have responded by taking significant pricing actions.  … While Q3 cumulative inflation still exceed cumulative pricing (action) benefits, once these fully offset … we could see a benefit to earnings.”

CFO David Sylvester reinforced this stating “Our gross margin improvement in the Americas this quarter reflected the benefits from the pricing actions we’ve been implementing in the face of extraordinary inflation levels. On a global basis, year-over-year pricing benefits have exceeded year-over-year inflation for the last two quarters; however, we estimate cumulative inflation over the last seven quarters exceeds the cumulative benefits from our pricing actions by approximately $60 million.  Moving into the fourth quarter and first half of fiscal 2024, we expect continued year-over-year gross margin benefits from our pricing actions, as we aim to recover the cumulative impact of inflation.”

Research into the quality of the Steelcase pricing team indicated a positive state of affairs.  We found dedicated pricing professionals at the intern, analyst, manger, and director levels.  We found dedicated pricing professionals supporting business units across the globe where Steelcase markets.  And we found evidence of pricing professionals working with marketing on product pricing and sales with contract pricing.  The facts identified however didn’t make it clear who at Steelcase is managing its broad pricing team nor what processes and tools it is using.

Given the importance Steelcase management places on pricing and the capability the Steelcase has in pricing as indicated in financial reports, management comments, and our pricing team research, and given their performance, we have come to the following conclusion as of February ‘23.

Steelcase Pricing Spine-o-meter:  4 out of 5 vertebrae.

SCS (Steelcase Inc.) rose from 6.6 on the day prior to their earnings call to 7.4 one month later. 2022 revenue of $2.8 B with a 0.7% operating margin and P/E ratio near 54.

Chart your path to 5 of 5 vertebrae Pricing Spine-o-meter(TM) score and improve your profit resiliency with Wiglaf Pricing. Includes competitive benchmarks, a 67-point corporate inspection, and a three-year pricing improvement roadmap.

ITW Pricing Spine-o-meter: 2 of 5 Vertebrae

ITW (aka Illinois Tool Works), a multinational manufacturer serving markets of automotive OEM, construction products, food equipment, polymers and fluids, specialty products, test & measurement electronics, and welding, had a strong 2022. Revenue increased 10% over the prior year to $15.9 billion and EBIT rose to $3.9 billion from $3.6 billion.

Many initiatives and actions led to this performance, and pricing was identified as one of the contributors in their earnings call held on 2 Feb ’23.

CEO Scott Santi pointed out the importance of pricing in driving profit performance in his introductory remarks on ITW’s earnings call.

CFO Michael Larsen also raised the importance of pricing in driving their future performance expectations stating “Operating margin is expected to improve by 100 basis points or more to a range of 24.5% to 25.5%. This includes approximately 100 basis points contribution from enterprise initiatives and positive price-cost margin impact based on all known and implemented price and cost actions.”

On concerns that cost reductions might drive price reductions, he added “I wouldn’t say price are coming — costs are coming down in a significant way.”  Later CFO Larsen added that only a small portion of ITW’s revenue (~5%) is indexed to raw materials costs.  Overall, ITW management does not expect cost reductions to translate directly into price reductions.

Research into the quality of the ITW pricing team indicated a poor state of affairs.  We did not find many dedicated pricing professionals in the pricing strategy field.  Some people work on transfer pricing and others on pricing administration for sales support, neither of which is strategic.  We did find many people listing pricing as a skill in sales, marketing, and finance, but it is hard to find anyone at ITW focused on strategic pricing per se.

Given the importance ITW management places on pricing and the capability ITW has in pricing as indicated in financial reports, management comments, and our pricing team research, and given their performance, we have come to the following conclusion as of February ‘23.

ITW Pricing Spine-o-meter:  2 out of 5 vertebrae.

ITW (Illinois Tool Works Inc.) rose from 240 on the day prior to their earnings call to 247 one day after. 2022 revenue of $15.9 B with a 24% operating margin and P/E ratio near 26.

Chart your path to 5 of 5 vertebrae Pricing Spine-o-meter(TM) score and improve your profit resiliency with Wiglaf Pricing. Includes competitive benchmarks, a 67-point corporate inspection, and a three-year pricing improvement roadmap.