Strategic Movements March 2023

Applied Materials Pricing Spine-o-meter: 4 of 5 Vertebrae

Applied Materials Inc., a global provider of equipment, services, and software for the manufacture of semiconductor chips, flat panel displays, and solar panels, had a somewhat positive Q1 ‘23. Revenue increased 7.5% to $6.7 billion while earnings before interest and taxes remained unchanged near $2.0 billion compared to the same quarter last year.

To characterize the immediate past and future market performance of Applied Materials, CEO Gary Dickerson discussed the markets served in the 16 February 2023 earnings call.  Applied Materials has positive expectation of ICAPS demand (Internet-of-Things, Communications, Automotive, Power and Sensors), sees continued weakness in consumer-driven markets and resilient demand in high-performing computing, AI, and clean energy.  In response to governmental effort to onshore semiconductor manufacturing, Applied Materials anticipates robust demand for gear.

In terms of investments and priorities, Applied Materials pointed to collaborative efforts with customers to drive focused R&D and an overall goal to improve productivity.

Neither CEO Gary Dickerson nor CFO Brice Hill mentioned any movement of their offering prices or pricing policy despite a growing and resilient subscription service.

Research into the quality of Applied Material’s pricing team indicated a strongly positive state of affairs.  We found pricing professionals at the analyst, manager, and director levels.  We found pricing professionals working on analytics, operations, contract management, product management, and strategic planning.  Many of the professionals addressing pricing challenges at Applied Materials have had specialized training in pricing itself.

Given the importance and capability of pricing at Applied Materials 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 March ‘23.

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

AMAR (Applied Materials Inc.) fell from 117 on the morning of their earnings call to 110 one week later. 2022 revenue of $25.8 B with a 47% gross margin and P/E ratio near 16.  Currently, a 1% improvement in price, holding all else constant, would yield a 3.4% improvement in EBIT.

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.

International Paper Pricing Spine-o-meter: 5 of 5 Vertebrae

International Paper, a pulp and paper company, had a strong FY 2022. Revenue increased 9.3% to $21.2 billion while earnings before interest and taxes increased 17% to $1.7 billion for FY 2022 over the same period last year.

According to management statements and financial reports, price was a key driver to their performance.

In International Paper’s FY ’22 annual report, an earnings bridge, aka Profit Bridge or Price-Volume-Mix analysis, demonstrates that pricing improvements drove profit improvements for the year.  In the Industrial Packaging segment, profits increased $104 million due to higher average sales price net of an unfavorable mix offsetting lower sales volumes and higher costs.  In the Global Cellulose Fiber segment, profit improved $109 million due to higher average sales price, a favorable mix, and higher sales volumes that offset higher costs.  See image taken from International Paper’s 2022 annual report.

In their January 31^st earnings call, CEO Mark Sutton stated “our commercial objective is to improve profitability.”  He mentions that there are multiple ways which this objective can be met.  Based on ’22 performance, he knows price is part of the solution.

Other statements from CFO Tim Nicholls and in the financial reports indicate that International Paper uses indices on some of its offerings to finalize prices to customers.  For products whose cost variances are largely driven by commodity price variances and whose prices themselves are tracked on various US Producers Price Indices, such as that for Pulp, Paper, and Allied Products, this is common.

CEO Mark Sutton and CFO Tim Nicholls also indicated that price realization may take three to nine months to be realized, and that investors should expect 2023 to bring some price reductions in the market.

Some pricing professionals eschew index-based pricing for it can automatically reduce prices as the index declines, but others embrace it precisely for the positive impact of index-based pricing when indices increase.  Deloitte recommends using index-based pricing when (1) it is in the company’s interest to reflect input costs in pricing as soon as possible and (2) to enable companies to make volume commitments in advance of knowing costs.  For some industries, a significant part of the variable costs are volatile.  In these industries, indices are common as a means to de-risk the volatile nature of costs and enable long-term contracting which reduces volatility.

Looking forward, CEO Mark Sutton mentioned initiatives to streamline the organization, drive profitable growth, and leverage data analytics, all of which might require investments in pricing capability.

Research into the quality of International Paper’s pricing team indicated a positive state of affairs.  We found pricing professionals at the analyst, manager, and director levels.  We found pricing professionals working on business intelligence, value creation, customer operations, and national accounts.

Given the importance and capability of pricing at International Paper 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 March ‘23.

International Paper’s Pricing Spine-o-meter:  5 out of 5 vertebrae.

IP (International Paper Inc.) rose from 37.8 on the day prior to their earnings call to 41.2 one week later. 2022 revenue of $21.2 B with a 8.2% operating margin and P/E ratio near 36.  Currently, a 1% improvement in price, holding all else constant, would yield a 12.2% improvement in EBIT.

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.

Becton Dickinson Pricing Spine-o-meter: 3 of 5 Vertebrae

Becton Dickinson, a global medical technology company, had an acceptable Q1 2023. Stripping out fluctuations due to covid and currency, revenue performance metrics were slightly up.  Not stripping out these factors, we learn top-line revenue decreased 2.8% to $4.6 billion and operating profits decreased 6.4% to $1.1 billion over the same quarter last year.

CEO Tom Polen stressed the strategic focus on launching products into higher growth market segments,  simplifying the product portfolio, and empowering employees including Inclusion, Diversity & Equity initiatives in their earnings call held on 2 February 2023.  CFO Chris DelOrefice reviewed the success of specific products and in specific market segments where the weighted-averages market growth rate was high.

Neither of them spoke directly about pricing.

The nearest topic to pricing the CEO and CFO discussed were those related to margins and costs.  Like other companies, BD faced many inflationary pressures on costs related to input supplies and labor wages.  To manage margins when costs increase, many executives have been driving price increases, at BD, Chris DelOrefice stated “we’re absorbing the significant inflationary pressures.”

Research into the quality of Becton Dickenson’s pricing team indicated a positive state of affairs.  We found pricing professionals at the analyst, manager, and director levels.  We found pricing professionals working on data analysis, commercial excellence, contracts, products, regions, and commercial excellence.

Given the importance and capability of pricing at Becton Dickenson 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 March ‘23.

Becton Dickenson’s Pricing Spine-o-meter:  3 out of 5 vertebrae.

BDX (Becton Dickenson and Co.) fell from 254 on the day prior to their earnings call to 245 one week later. 2022 revenue of $19 B with a 17.9% operating margin and P/E ratio near 44.  Currently, a 1% improvement in price would yield a 4.4% improvement in operating profits holding all else constant.

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.

Genuine Parts Company Pricing Spine-o-meter: 5 of 5 Vertebrae

Genuine Parts Company (GPC), a global distributor of automotive and industrial parts, had a strong 2022.  Revenue increased 17% to $22.1 billion and EBIT increased 29.8% to $1.7 billion over last year.

Pricing was identified as a contributor to success.

In the earnings call held on 23 February 2023, Paul Donahue, CEO, drew attention to strategic pricing initiatives at GPC to drive revenue and margin growth.

Will Stengel, COO mentioned the importance of data-driven decision making in strategic pricing.  He stated: “We’re seeing great pricing work happening on both sides of the business, and in particular, in U.S. automotive. I would say, they’re one of the most dynamic teams in terms of the things that they’re doing around pricing. We’ve been at this now for 12 to 18 months in a pretty robust way, both in terms of the technology that we’re using, the data, working with a third party, et cetera. And we are actively thinking through the right way to execute pricing strategies relative to the market. … We study it daily. It’s at the SKU level. We go into different markets, and we’ve got really nice visibility to react accordingly with dashboards and weekly updates as a team to make sure that what we’re doing is beneficial for our customers and our business.”

Paul Donahue clarified the role of pricing in customer decision making and purchasing behavior.  “Having the product on the shelf and available when the customer needs it is still the primary driver and not necessarily price.”

Research into the quality of Genuine Parts’ pricing team indicated a positive state of affairs.  We found pricing professionals at the analyst, manager, and director levels.  We found pricing professionals working on digital transformation, pricing strategy, and pricing software.

Given the importance and capability of pricing at Genuine Parts 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 March ‘23.

Genuine Parts’ Pricing Spine-o-meter:  5 out of 5 vertebrae.

GPC (Genuine Parts Company) from 174 on the day prior to their earnings call to 177 one week later. 2022 revenue of $22.1 B with a 7.7% operating margin and P/E ratio near 21.  Currently, a 1% improvement in price would yield a 13% improvement in operating profits holding all else constant.

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.