ADM Pricing Spine-ometer:  4 of 5 Vertebrae

ADM, a global food processing and commodities trading corporation, had a banner Q3 in 2022 according to financial reports released on 25 October 2022.  Revenue increased to $24.7 B for Q3 2022 from $20.3 B for the same period last year.  Profits (EBIT) increased likewise to $1,230 M for Q3 2022 from $650 M for the same period last year.

Management discussions state that revenues increased $3.7 B due to higher sales prices and $0.6 B due to higher sales volumes.  Meanwhile, the cost of goods sold increased $3.9 B.

Juan Ricardo Luciano, Chairman and CEO, reported seeing a growing interest among CPG (consumer packaged goods) customers to acquire grains at a premium price when grown in a sustainable manner.  PepsiCo, a customer, was identified specifically for their Regenerative Agriculture offering, a sustainability initiative.  No statement was made regarding the differential value of sustainable versus conventional agriculture products.

To give an idea of the impact of non-conventional agricultural products consider the price of Quaker Maple and Brown Sugar Instant Oatmeal, a PepsiCo product, listed at Walmart.com on 6 November 2022.  The organic version is listed at $64.64 for 6 boxes with 8 packets each.  The conventional version is listed at $51.99 for 6 boxes with 10 packets each.  That puts the organic version at $1.35 per serving and the conventional at $0.87 per serving, or a 55% premium price for organic oatmeal.  And this difference is even larger when including serving size differences.

If sustainable agricultural products can achieve the same premium as organic agricultural products, should we expect ADM to achieve a 55% premium for their Regenerative Agriculture initiative?  Or better yet, the equivalent of a near $0.50 per serving premium? I suspect the achievable premium is much lower.  Yet, ADM management provided no guidance on their management of this issue.

Elsewhere in the financial report we learn of many other impacts on pricing at ADM. (1) Selling prices of many of ADM’s offerings move in relation to the underlying commodity prices of those offerings. (2) Price capture is highly dependent on market volatility outside of the industry’s control, such as higher energy prices, inflationary pressures, supply chain challenges, and armed conflict. (3) Exchange rate fluctuations are managed via a combination of choices in trading currency, financial derivatives, and other means.

I am not personally aware of ADM having a sizable pricing team

Given the attention given to pricing at ADM but acknowledging that prices failed to keep up with costs, we have come to the following measurement based on ADM’s Q3 2022 financial statement.

ADM Pricing Spine-ometer:  4 out of 5 vertebrae.

ADM (Archer Daniels Midland Co.) rose from 89 on the day prior their earnings call to 97 one week later. 2021 revenue of $85 B with a 4% EBIT margin and P/E ratio near 13.

Nucor Pricing Spine-ometer:  5 of 5 Vertebrae

Nucor, a North American steel producer, had a challenging Q3 2022 according to financial reports released on 20 October 2022 compared to the same quarter last year.  Revenue was relatively flat at $10.5 B for Q3 2022 compared to $10.3 B for the same period last year.  Profits (earnings before income taxes and non-controlling interest) decreased to $2.3 B for Q3 2022 from $2.9 B for the same period last year.

Management discussions reveal that prices increased 14% for Q3 2022 over same period last year, yet volumes, measured in tons, decreased 11%.

Decreasing volumes are bad but may be temporary.  Steel customers such as automotive OEMs, residential and non-residential construction firms, bridges, and many other industries have experienced high volatility in the past 24 months due to a pandemic, supply chain challenges, new warehouse construction, inflation, armed conflicts, and the threat of recession.  Business volume may improve in the coming quarters, but volatility will continue.

Al Behr, EVP of Plate and Structural Products stated, “Our strategy is to drive value and is to focus on the profitability of these markets and not just chase cheap tons.”

Rex Query, EVP of Sheet and Tubular Products added, “When you talk about what the discounting is, we look at our business from a margin business. It’s not a fixation on volume. We want to make sure that we offer the value that we have customers willing to pay for. And so what we’re seeing is improved margins in particular with the OEMs and multiyear contract sign-up at this point. I would also comment that we’re seeing the recognition of our varied product mix.”

If the EVP’s are talking about price management, mix, and value delivered to customers in this manner, we strongly suspect Leon Topalian, CEO, is supporting if not cheerleading these pricing best practices.

I am not personally aware of Nucor having a sizable pricing team

Given the attention given to pricing, mix, and value delivered to customers given by management at Nucor and the willingness to take price higher despite losing volume in Q3 2022 compared to the same period year prior, we have come to the following measurement based on Nucor’s Q3 2022 financial statements.

Nucor Pricing Spine-ometer:  5 out of 5 vertebrae.

NUE (Nucor Corp.) rose from 122 on the day prior their earnings call to 135 one week later. 2021 revenue of $36 B with a 19% margin and P/E ratio near 4.

Arrow Electronics Pricing Spine-ometer:  2 of 5 Vertebrae

Arrow Electronics, a global electronic component distributor and solution advisor in smart buildings and enterprise computing, had a strong Q3 2022.  Revenue grew to $9.3 B for Q3 2022 compared to $8.5 B for the same period last year.  Profits (earnings before income taxes) increased to $450 M for Q3 2022 from $370 M for the same period last year.

Contributing to this performance, Arrow Electronics took advantage of shortages in the global supply of components.  Management statements include, “Prices remained elevated during the third quarter of 2022 as supply constraints continued.” Management indicated that investors shouldn’t expect similar circumstances moving forward.

Management also reported selling a stronger mix in APAC and a weaker mix in EMEA and the Americas but did not provide any clarity on actions taken to improve the mix sold.

Sean Kerins, President and CEO, stated, “We still have been able to pass on price increases and haven’t yet seen any real erosion. Unless demand were to drop precipitously, I think prices are going to remain fairly stable, especially in the technology sets still with longer lead times.”

Clearly price and mix are on management’s radar at Arrow Electronics, but is this enough?  Management commentary and statements imply that Arrow Electronics sees itself as a price taker, not as an enterprise with pricing power.  That is a shame considering Arrow Electronics’ role in supplying electronic components and advising on the development of enterprise computing and the internet of things.

I am not personally aware of Arrow having a sizable pricing team

Given the passive stance of management on pricing and mix at Arrow Electronics, but acknowledging the price increases in Q3 2022 compared to the same period year prior, we have come to the following measurement based on Arrow Electronics Q3 2022 financial statements.

Arrow Electronics Pricing Spine-ometer:  2 out of 5 vertebrae.

ARW (Arrow Electronics Inc.) was relatively unchanged at 103 on the days surrounding prior their earnings. 2021 revenue of $34.5 B with a 4% margin and P/E ratio near 5.

Honeywell International Pricing Spine-ometer:  4 of 5 Vertebrae

Honeywell, a global firm operating in the four industries of aerospace, building technology, performance materials, and safety and productivity solutions, navigated the changing economic pressures well over Q3 2022.  Revenue grew to $9.0 B for Q3 2022 compared to $8.5 B for the same period last year.  Profits (earnings before income taxes) increased to $2.0 B for Q3 2022 from $1.7 B for the same period last year.

A major driver to Honeywell’s performance was pricing.  Price increases contributed to an 11% improvement in revenue while volume and foreign exchange rates contributed to a 2% and 3% decrease in revenue respectively, over the same period last year.

Regarding differentiation and value capture, Vimal Kapur, President and COO, stated “So let me start with the pricing in advanced materials. Absolutely, we got strong pricing because we have a differentiated product line. And that proves our focus on new products and differentiated position. But across the board in PMT, our pricing has been strong also in other segments, too.”

Regarding the potential for further inflation or worse, deflation, Greg Lewis, SVP and CFO, stated, “Broadly speaking, we do expect positive pricing next year. As I said, inflation is not going down, it’s moderating.” This is broadly aligned with Wiglaf Pricing’s expectations.

I am personally aware of Honeywell having a sizable pricing team.

Given the performance of Honeywell on pricing and the multiple mentions of pricing as a strategically important issue, we have come to the following measurement based on Honeywell’s Q3 2022 financial statements.

Honeywell International Pricing Spine-ometer:  4 out of 5 vertebrae.

HON (Honeywell International Inc.) has risen to 204 one week after their earning statement from 190 one day before. 2021 revenue of $34.4 B with a 21% margin and P/E ratio near 27.

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