5 minute read 1 Sep 2018
A scientist in a lab

How the 2Q18 top 10 themes are impacting advanced manufacturing

By Jerry Gootee

EY Global Advanced Manufacturing Sector Leader

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

5 minute read 1 Sep 2018

Show resources

  • EY am quarterly 2Q18 30 august 2018 (pdf)

    Download 440 KB

Leaders are optimistic about the market, although geopolitical concerns could raise the cost of goods and complicate supply chains.

When advanced manufacturing (AM) leaders look out at the current business environment, they see plenty to feel good about. In our review of quarterly calls with analysts by the leaders of 19 public companies, several themes jump out:

  • As in 1Q18, advanced manufacturing (AM) company leaders are expressing confidence in growing demand for industrial products and services. About half of the peers in our analysis raised their revenue and earnings outlooks for the second half of 2018. Rising revenues are, in turn, supporting margin growth.
  • A persistent issue: the geopolitical environment. Many leaders recognize the potential for tariffs and changes in trade policies to increase market uncertainty, while they have also cited global manufacturing footprints as a strategy to provide agility. Rising costs for raw materials could lead to price increases.
  • Transaction strategy, acquisition integration and identification of competitively priced targets have become a focus. While concerns about high valuations for targets are still a factor, AM peers are prioritizing the acquisition of new technologies and innovations to support the commercialization of market-leading (and market-disrupting) products and services.

Here are the top 10 themes we identified from quarterly earnings calls.

1. Change in financial outlook

Half of peers raised their outlook on revenues and earnings per share, and several leaders expressed heightened confidence for improving performance in 2H 2018. Increased demand in key end markets — particularly defense, commercial aerospace, automotive, transportation, construction and electrical system — is driving expectations for revenue growth. Margins continue to improve based on the success of ongoing productivity programs, boosting EPS.

2. Geographic developments

The growth outlook across regions is generally positive. Statements about growth in Europe were generally more optimistic than in 1Q. Several company leaders see China as an ongoing source of revenue growth, led by expansion in end markets such as consumer products. Chemical peers have experienced supply chain constraints due to tightening environmental regulation enforcement in China.

3. Developments in end markets

Electric vehicle innovations are creating a growth market in segments such as vehicle systems and charging stations. Strong growth in air traffic and a high load factor are continuing to drive demand for commercial aircraft. Expanded defense budgets in many countries are driving demand for military equipment. Demand is increasing for advanced materials and specialty chemicals from semiconductor, nutrition, construction and automotive markets.

4. Geopolitical environment

Trade policy conflicts and the evolution of new tariffs are creating some uncertainty for industrial markets. However, many leaders remain confident that global markets are fundamentally strong. Leaders acknowledge the potential for tariffs to raise costs in the supply chain, particularly for steel and aluminum. Flexibility of global manufacturing footprints is cited as a hedge against higher costs due to restrictions affecting imports from targeted countries.

5. Working capital and cash flow management

Cash flow continues to improve for several peers due to strong prioritization of working capital discipline, often supported by productivity and cost-control programs. Increased pension plan contributions is reducing cash flow for some peers. Other factors challenging cash flow: higher receivables, higher-than-expected inventory levels, and increased expenses related to new aircraft rollouts.

6. Innovation and new product/service launches

Across all subsectors, the focus on digital and analytics, for internal operations and for product and service offerings, continues to strengthen. Several peers described new services for clients based on analytics, ranging from airline crew management solutions to digital farming applications. New product launches and a focus on high-growth segments remain priorities for agrochemical and specialty chemical manufacturers.

7. Cost reduction

Leaders credit ongoing productivity programs for improvements in cost reductions as well as working capital and cash flow management. An increased focus on centralizing business planning and aligning business unit goals is supporting greater agility across enterprises, while continued optimization of back-office functions is reducing staffing costs. Multiple peers are working toward cost synergy targets as they integrate acquisitions.

8. Transaction strategy (future plans)

Following a seasonal pattern also noted in 2017, several peers are sharing more details about acquisition plans in 2Q than in previous quarters. New technologies and innovative processes are attracting buyers looking to improve internal operations and external products/services. Innovation remains a high priority. Valuations for targets remain high, which increases the risk of overpaying for acquisitions.

9. Changes in production rates

Chemical companies are benefiting from new capacity coming online, particularly at facilities in the US and Middle East for petrochemicals and in Argentina for lithium used in EV applications. Aerospace and defense manufacturers are reporting increased unit production in several new aircraft product lines.

10. Business reorganization/restructuring

AM companies continue to reorganize portfolios through spin-offs, acquisitions and divestments to achieve a more focused business structure. Activist shareholders remain active in pressuring leaders to divest operations seen as underperforming, and they are also targeting businesses as potential spin-offs.

  • Scope, limitations and methodology

    This analysis examines key themes from the public 2Q18 earnings calls among 19 global AM peers, including companies from the chemical and aerospace and defense sectors. The identification of the top 10 themes is based solely on an examination of earnings calls held from 18 July through 2 August 2018. 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.


The growth outlook across regions is generally positive, and many leaders have raised their outlook on revenues and earnings per share. Innovation, transactions and geopolitics remain focal points.

About this article

By Jerry Gootee

EY Global Advanced Manufacturing Sector Leader

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