5 minute read 31 Jul 2019
Factory engineer inspecting work tablet

How manufacturing leaders remain confident on revenue and margin growth

By

Jerry Gootee

EY Americas Advanced Manufacturing Advisory Leader

Advisory leader with nearly 30 years of experience. Passionate about developing people, building relationships and serving clients. Guitarist and vocalist. Golfer and Cleveland sports enthusiast.

Contributors
5 minute read 31 Jul 2019

Manufacturing leaders face questions about revenue growth strategies as demand patterns are shifting in several key end markets.

Demand patterns are shifting in several end markets in the advanced manufacturing (AM) sector. This has forced AM companies to rethink their revenue growth strategies. During the earnings calls in the first quarter of 2019 (1Q19), 20 AM leaders (including those from the aerospace and defense, industrial products, and chemical subsectors) discussed the themes that are shaping their strategies for the next quarter.

The line-up of topics differed significantly from the last quarter. Leaders gave more prominence to “developments in end markets,” “critical projects,” “cost reduction” and “competitive environment” in this quarter. “Change in financial outlook” and “changes in production rates” were the new topics of discussion. AM leaders continue to be positive fueled by construction growth, and demand for A&D products and services.

The thought process to revenue growth is changing in the AM industry, as illustrated by the discussion points below:

1.   Developments in end markets — key customers in construction and A&D
Many AM companies are now finding key customers in construction, and aerospace and defense (A&D) sectors. However, demand is slowing down in automotive and consumer electronics — the high-growth segments of AM in 2018. The rise in construction activity is driving demand for electrical systems to support projects such as technology-intensive commercial sites and electric vehicle charging stations. Meanwhile, there is a strong demand from A&D companies.

2.   Critical projects —military contracts and innovation centers
New contracts for military aircraft, defense programs and weapon systems have been signed by A&D peers, primarily in the US and the Middle East. Innovation centers are providing spaces for industrial products (IP) companies to connect with customers to demonstrate new technologies and create customized solutions.

3.   Change in financial outlook — revenue forecasts for AM companies now higher
AM leaders are seeing initiatives such as economic stimulus programs in China as new opportunities for business. Revenue forecasts for these companies are now higher, supported by the success of ongoing cost reduction programs. Earnings-per-share forecasts, profit margins and revenue growth are up for several A&D and IP companies.

4.   Geographic developments — revenue growth in India, Vietnam and China
Companies are pursuing growth opportunities in India and Vietnam. Some companies are seeing positive results in the industrial sector in China. Meanwhile, agrochemical demand in North America has been down significantly because of weather-related delays in planting crops. In Europe, growth in demand for industrial products was mixed.

5.   Cost reduction — cost reduction targets higher for second half of 2019
Multi-year programs to reduce manufacturing costs and increase productivity are yielding positive results for many companies. Mergers are also providing cost-saving opportunities. Some companies are increasing cost reduction targets in the second half of 2019. However, rising raw materials costs and foreign exchange rates have affected some companies, particularly in North America.

6.   Working capital and cash flow management — better cash flow with working capital discipline
Strong prioritization of working capital discipline has enabled companies to improve their cash flow. High productivity, cost-control programs and cash flow management have supported this effort. Some companies are considering recent M&A transactions for additional cost synergy opportunities.

7.   Changes in production rates — emergence of supply chain bottlenecks
In response to global trade policy changes, manufacturers are shifting production to countries with lower tariff exposure. This has caused supply chain bottlenecks in specialized areas, such as casting and forging, during high production. As passenger traffic grows, commercial airlines are increasing orders for both wide-body and narrow-body aircraft, driving up production demand and increasing backlogs.

8.   Business reorganization or restructuring — more spinoffs, acquisitions and divestments
Companies are using spinoffs, acquisitions and divestments to achieve a more focused business structure. Centralization of business functions continues to be a key productivity improvement strategy for companies in all subsectors. At the same time, some industrial peers are transferring accountability for product and sales decisions from corporate and geographical leaders to business unit leaders, increasing agility and bringing decision-making closer to the customer.

9.   Competitive environment — revenues and profit margins kept stable
Companies in all AM subsectors are increasing prices in response to rising costs of raw materials and additional tariffs to supply chain expenses. However, they are keeping revenues and profit margins stable by implementing pricing discipline in products and services. Also, manufacturers are giving more importance to quality and innovation to stand out from the competition.

10.   Geopolitical environment — tariff uncertainties affecting business confidence
Leaders feel that ongoing trade and tariff uncertainties are lowering business and consumer confidence, potentially reducing economic growth. Brexit-related discussions have been more muted compared with the previous quarter. However, the situation is still contributing to short-term uncertainty.

  • This analysis examines key themes from the public 1Q19 earnings calls among 20 global AM peers, including companies from the aerospace and defense, industrial manufacturing, and the chemicals sectors. The identification of the top 10 themes is based solely on an examination of analysts’ earnings calls. We view the themes as providing a timely snapshot rather than a universal assessment of importance, revealing insights into the minds of both AM leaders and industry analysts during the quarter.

Summary

Shifting demand patterns in several end markets and higher cost of production are forcing AM companies to rethink their revenue growth strategies. However, leaders are still setting higher revenue forecasts for the next quarter. These forecasts are based on construction growth, and demand for A&D products and services. 

About this article

By

Jerry Gootee

EY Americas Advanced Manufacturing Advisory Leader

Advisory leader with nearly 30 years of experience. Passionate about developing people, building relationships and serving clients. Guitarist and vocalist. Golfer and Cleveland sports enthusiast.

Contributors