Podcast transcript: How manufacturers are exploring every avenue to stay resilient

12 min approx | 30 October 2020


Welcome to the EY Advanced Manufacturing and Mobility Business Minute podcast series, where EY practitioners explore the critical business issues impacting our industry today.


Here with us for this episode of the Advanced Manufacturing Quarterly Update is Julia Rosenthal, EY Global Analyst for our Advanced Manufacturing sector.

By way of a quick explanation, the Quarterly Update is a review of the top 10 themes discussed by leaders of advanced manufacturing sector companies during public earnings calls. Included in our analysis are sector companies from aerospace and defense, industrial products, and chemical subsectors.

For this discussion, we’ll briefly address first quarter observations, then delve into what transpired in the second quarter of the year and wrap up with a brief update from what lies ahead as we start our third quarter earnings analysis.

Without further ado, welcome Julie and thanks for joining us today.

Julia Rosenthal 

Thank you for having me.


So let’s dive in with our first question. With the global pandemic, which hit all industry sectors across the globe, how did the manufacturing sector respond to the crisis?


The fallout from the crisis across all industries was nothing like we’ve ever experienced.

As COVID-19 became a global threat in the first quarter of 2020, manufacturers had to make some very complex decisions in a business environment that was changing daily.

Employees needed to be supported, whether they were working in manufacturing facilities or out of their homes.

Liquidity needed to be preserved and supply chains needed to deliver.

Aerospace and defense, industrial products, and chemical companies had to find ways to address all of these at once.

And from our analysis of first quarter earnings calls, we saw three key themes at that time that were top of mind.

The first one was financial initiatives. As COVID-19 evolved from a regional to a global threat, manufacturers took immediate measures to increase their access to cash and reduce their near-term debt obligations.

The second theme that we heard discussed was talent and culture. Many earnings calls opened with statements from leaders about commitments to employee safety. New protocols were being implemented at plants to reduce the possibility of virus transmission. Leaders were also praising their workforces for delivering greater levels of productivity than expected, especially under very challenging circumstances. In fact, the ways in which workforces stepped up and delivered during this time have had a major impact on culture at many companies. It’s likely to lead to long-term change in manufacturing workplaces. Though headcount reduction continues to be a part of a cost control process at some companies, leaders made it clear in the first quarter that the layoffs would be a last resort.

Lastly, supply chain management came to the fore. Companies in all regions become more aware than ever of the importance of transparency and flexibility in their supply chains, and where their own systems needed improvement.


Thanks Julie. That was a great summary to first quarter observations. So please share with us what second quarter earnings calls revealed.


Gladly! So, no surprises here, second quarter was still very difficult for manufacturers. This was the quarter in which some of the most widespread lockdown activity was taking place around the world. We saw manufacturers reduce costs and shift their focus to long-term growth as COVID-19 caused many of their customers to shutdown operations.

Even when revenues are down, one of the levers that a company always has is to lower its costs. To do this, manufacturers are using all tools at their disposal. Some companies are taking services that are normally sold to their clients so things like robots, software, and even building HVAC systems and implementing them within their own facilities. Companies were also more willing to reduce headcount in the second quarter, something that many would have been more reluctant to talk about in the earlier days of the pandemic. These headcount reductions are expected to continue into the second half of 2020 as leaders face some exceptionally complex workforce management questions.


Julie, did specific themes come to light that you can expand on?


Yes, certainly. We saw some important updates on financial initiatives, operating costs, and, again, culture and talent.

On financial initiatives, we heard more in the second quarter about R&D spending. Some manufacturers said that they would remain committed to their R&D investments to keep their innovation pipelines full. When recovery comes, these companies want to be ready. Other companies pulled back as part of a cost-reduction strategy to help channel funds to other areas of the business. We also saw share buyback and dividend activity picking up as short-term liquidity pressures have stabilized since the first quarter. Share buybacks and dividends were very quiet last quarter.

The second theme we heard about was operating costs — again, a continuation of what was discussed in the first quarter. Many companies raised their targets in their cost management programs. We heard leaders talking about strategies like restructuring programs, more offshoring of operations and new automation efforts. I mentioned earlier that companies are starting to roll out their client-focused solutions in-house now. This could lead to some service quality improvements and some innovations, because companies are, essentially, becoming their own customers.

We also want to call out culture and talent as our third theme. Leaders were still speaking up about the importance of the safety and the well-being of their employees. This is becoming a more direct force for them as many are facing COVID-19 outbreaks at their facilities and workers are becoming more concerned about risk. At the same time, when leaders talked about their workforces on second quarter calls, they were somewhat less likely to make comments about employee impact. Overall, there was a greater focus on enterprise-level cost savings from reduced headcount.

Travel restrictions are easing some overhead costs but also creating difficulties in contract fulfillment, especially for aerospace and defense companies where contracts are often very specific about where the work needs to be done. This is challenging for the manufacturing sector, because companies have been facing a tight labor market for years. Leaders that lose sight of the value of their talent really could be at risk of losing their competitive edge when markets recover.


Julie, we’ve touched on these top three themes from second quarter, can you share some insights to other observations that were churning or cause for concern?


Yes. Let’s talk about financial outlooks. In the first quarter, we saw many companies pull their outlooks because uncertainty levels were so high at that point. Those conversations were happening in late April and early May, when lockdowns had been in place in many countries for weeks, but not months. It was almost impossible to say at that point what the world was going to look like in a quarter or, certainly, for the rest of 2020. That changed in the second quarter: we saw many companies put their outlooks back in place. Some of those forecasted numbers were not pretty. Some industries are planning for recovery in 2021, but there are a few sectors, like automotive and aerospace, that aren’t expecting to see pre-COVID levels again for years.

Automotive is looking at 2022; for aerospace it’s 2024. But the fact that companies were ready to start quantifying what they thought would happen in the second half of the year was a sign that they felt that they had a better handle on how they were going to respond. It was a positive sign on the whole, even if the numbers themselves were often down.

We also heard discussion about working capital. This is always a substantial topic on earnings calls, but the tone of the conversation was a little different in the second quarter. Inventory management has been a priority for manufacturers for several quarters now, but it became a much bigger one last quarter as many customers were closing their factories and orders were down. Manufacturers have also been focusing a lot on receivables. In the second quarter, companies had to consider the potential effects on their customers if they were to take a hardline position on receivables. So, there was more recognition that companies needed to take the long view and make sure they didn’t put excessive financial pressure on their customers.

One topic that just barely missed our top 10 list this quarter was supply chain management. It was number seven in our first quarter analysis. At that time, companies were getting a lot of questions from analysts on the calls about what was happening with their supply chains as different parts of the world were locking down. Our analyst team thought it was interesting that we didn’t hear as many questions about this on the second quarter calls. We don’t take that as a sign that this isn’t an important topic. It’s still very much top of mind for manufacturers. Our thought is that supply chain is likely to become more of a long-term, strategic issue. So, in future quarters, we would be more likely to hear leaders talking about investing in new supply chain management systems and the savings that would come from these investments.


Julie, great insights into what second quarter earnings calls revealed. As third quarter just closed recently, can you share any initial observations that are surfacing? And of course, we look forward to a deeper dive once Q3 analysis has been completed.


It’s hard to believe that the third quarter of 2020 just closed! We’ve already talked about supply chain. We could hear some more updates on M&A activity. It’s easier to talk about buying and selling assets when it’s once again possible to go and visit those assets in person. And, as economies around the world are making their way back to higher levels of activity, we hope to see more growth in revenues.


Julie, thank you for your valuable insights and we hope you’ll come back and share with us Q3 observations in a few weeks’ time.


Thank you for having me today and I definitely look forward to our next podcast update.


Thanks for listening to today’s EY Advanced Manufacturing and Mobility Business Minute podcast. We hope you found it engaging and informative. To listen to other Business Minute podcasts, you can find them at ey.com\ammpodcasts.