BUE Report 2018 - Q2

BUE Research, LLC
The Bottom-Up
Economist Report
Second Quarter 2018
www.thebottomupeconomist.com
The Bottom-Up Economist Report© studies the public commentary
and financial reports of Corporate America. We aggregate and analyze the
disclosures made by hundreds of executive management teams to identify
fundamental insights for investors.
Sourced from publicly traded businesses and their senior executives as
they discuss their companies' results, outlooks, industries, suppliers, and
customers, the Bottom-Up Economist Report© provides investors with an
alternative source of economic data when compared to analyzing traditional
top-down sources of research such as industry, trade, or government reports.
This unique approach to analysis can be useful in discerning economic or
industry-specific trends before they are reflected in top-down government
data - or become common knowledge to investors and financial media.
In This Issue:
Second Quarter 2018 Summary................................... 3
BUE "Tear Sheet".......................................................... 7
Overall Results - Q2 2018............................................ 8
Cost Inflation Trends.................................................... 10
Pricing Power................................................................ 11
Tariffs and Trade War Discussion............................... 12
Consumer Trends......................................................... 13
Industrial Trends........................................................... 14
Financials...................................................................... 15
Transportation Trends.................................................. 16
Energy Investment........................................................ 17
Quick Hits....................................................................... 18
The Bottom-Up Economist
Second Quarter - 2018
T
he economy strengthened during the second quarter. manifested in a large number of companies raising their
Industrial activity remained strong, with few signs 2018 guidance and outlooks during Q1 reporting season.
of deceleration. In addition, Q2 represents the fourth Many management teams dedicated additional time to
consecutive quarter of improving consumer fundamentals. discuss the drivers underlying their increased optimism
Management teams again communicated increased (which included positive effects from tax reform, regulatory/
optimism in their revenue and profit outlooks. budget certainty, wage growth, emerging pricing power,
Cost inflation remained elevated and pervasive, noticeably and the spill-over from energy investment growth).
influencing companies’ cost structures and corresponding The rise in management confidence we noted and
financial results. After four quarters of rising cost pressures, documented was largely proved out in Q2. While there
management teams are beginning to discuss and plan their was likely some weather-related benefit late in the quarter
businesses around structurally higher cost assumptions. following the conclusion of the cold winter and spring,
Accordingly, companies are becoming more assertive in underlying consumer and industrial demand continued to
communicating and implementing price increases. accelerate from Q1. The majority of fundamental trends
Based on management commentary, the economy is showing throughout the major sectors of the economy remained in
increased signs of tight labor, transportation, supply chain, place and strengthened in magnitude.
and productive capacity, which is beginning to impact labor
and inventory procurement practices – as well as capital “...all our key economic drivers remained strong.
investment trends. Tariffs (and related geopolitical risks The healthy global economic fundamentals
such as a potential trade war) are topics of high interest, but we've seen in the past few quarters have
are viewed as manageable by most companies. largely continued. Payments volume growth
on a constant dollar basis of 11% accelerated
Economic Growth Broadens and Accelerates in modestly versus the prior quarter...”
Q2, Driving Increased Optimism - Visa Inc. (VISA)
Last quarter, evidence emerged of a shift in the collective
psychology of management teams throughout corporate Specifically, consumer companies experienced their fourth
America. Specifically, as a result of robust industrial activity quarter of sequentially improving demand trends. Top-line
and gradually improving consumer trends, a growing results began to stabilize for consumer companies in 2H
number of companies communicated an improvement 2017 (following a period of highly uneven trends during 1H
in confidence and optimism. The increased confidence 2017), gradually improved in Q1 2018, and accelerated...
INSIDE THIS ISSUE:

Q2 Results Show Economic Acceleration Cost Inflation Remains Persistent
Consumer Results Continue to Strengthen Consumer Companies Increasingly Raising Prices
Strong Industrial Growth Trends Sustained Industrial Pricing Power Remains Strong
Capacity Tightened Meaningfully in Q2 Energy Outlooks Improve, Service Costs Dampen
Labor/Inventory/Capacity Investment Grew Tariff Impact Minimal to Date
3 www.thebottomupeconomist.com
Bottom-Up Economist Report Second Quarter - 2018
...in Q2 2018. Importantly, positive margin trends also
“No question that the comps in Q4 are more
remained in place as many consumer companies continued
difficult. We had quite substantial growth in
to benefit from lower inventories and a less promotional
the fourth quarter last year. That's why we're
competitive environment.
talking about kind of mid-single-digit growth…
The current trends of strengthening demand, cleaner So there's some variability there, but it's only to
inventories, and reduced promotional competition has the upside, I think.”
caused consumer companies to communicate their - Roper Technologies Inc. (ROP)
willingness (or ability) to introduce higher prices to offset
their rising operating costs. While there were increased Rather than raise guidance (as in Q1), a growing number of
examples of companies planning to implement higher companies expressed their rising confidence by signaling
prices last quarter, this trend broadened in Q2 and is now enhanced visibility on current bullish trends into 2019. In
much more uniform throughout the consumer economy. The addition, there was evidence during the quarter that the
overall tone on pricing power among consumer companies improved visibility and optimism is now translating into
is becoming increasingly confident and assertive. real corporate action and investment.
“With an improving economy, low unemployment Capacity in the Economy Tightens, Begins to
and the benefits of the new tax law, including Influence Investment and Sourcing Behavior
higher take-home pay and the doubling of tax Following the strong results of the second quarter, the
credits for families with young children, we emerging signals and discussions regarding tight capacity
believe our new pricing for spring 2019 will be in the economy intensified from Q1. Specifically, there was
supported by consumers.” a noticeable rise in broad production constraints involving
- Carter's, Inc. (CRI) labor availability, high plant utilization, electronic
components, and trucking capacity. As capacity constraints
The momentum in the industrial economy continued. have broadened, existing pressure on labor, transportation,
Strong results and outlooks were broad-based, with many and material costs are being amplified, and – in some
industrial businesses generating growth rates well above cases – are impacting the ability of companies to service
GDP. Even several of the few challenged sub-industries incremental demand.
demonstrated improved results and emerging optimism
during Q2 (agriculture and power generation specifically; “Labor and raw material shortages impacted our
auto production remains subdued). The heavy industries operational productivity in the quarter, resulting
– such as infrastructure, non-residential construction, from the competitive market environment in
mining, etc. – continue to demonstrate strong growth and which we operate.”
outperformed the overall industrial economy for the second - Tennant Company (TNC)
quarter in a row. In addition, pricing power for industrial
companies remains securely in place - industrials are now During the quarter, a large number of companies reported
passing through higher production and labor costs with ease their intentions to invest in wages, inventories, and supply
and much less “lag” than at the beginning of the year. chain flexibility in order to maintain production levels in
line with rising demand. In addition, companies are adapting
“So based on what we're seeing right now, based their inventory sourcing methods (there were numerous
on the orders, long cycle, short cycle that we're mentions of companies pre-buying inventories due to
seeing, there's every reason for me to continue concerns about availability or ahead of price increases)
to be bullish on our growth.” and freight modes (rail companies are experiencing strong
- Honeywell International Inc. (HON) intermodal pricing trends as truck freight rates boom) to
maintain pace with customer demand as well as moderate
Overall optimism is strong and is essentially uniformly higher input costs.
positive throughout the consumer and industrial portions
of the economy. It is difficult to find industries where “So looking ahead to the fourth quarter, we
results and outlooks are not meeting or outperforming expect inventory to increase as we protect
management expectations. While many industrial against some longer lead times and also buy
companies acknowledge tough comps exist in 2H 2018, ahead of expected price increases.”
they remain optimistic due the underlying momentum in - MSC Industrial Direct Co. (MSM)
demand and backlogs.
Perhaps most important – many companies are now
raising investment in capacity expansion following the “This is really inflation driven increases that
increased discussions that occurred last quarter. Supporting are across input costs, and as we go out and
the increased commitments announced during Q2 is the communicate those, our retailers are really
corresponding acceleration and resulting outperformance seeing it come through their supply chains
of capex-driven industries during 1H 2018. as well. So there's not a surprise when we've
discussed these price increases with them, and
we feel we're well down the path to getting those
“Businesses right now in North America are
communicated and in place.”
actually getting back to peak performance in
last cycle in its actual sales…we're having - Hanesbrands Inc. (HBI)
to put people in place, we're having to make
investments both from the capacity and from a As discussed above, industrial pricing power remains
capital standpoint and to take care of some of strong. Most companies are now reporting reduced or zero
this growth.” lag between rising input costs and price increases – cost
increases are being accepted readily up the value chain.
- Emerson Electric Company (EMR) Industrial companies are much more concerned about
having the capacity to service high and growing demand
Cost Inflation Remains Elevated, Pricing Power than the rising costs required to do so. Through their
Emerges for Consumer Companies management commentary, companies have also made it
Since emerging as a topic management teams began clear that they expect to maintain their ample pricing power
discussing approximately a year ago, cost inflation has 1) through the second half of the year.
accelerated in each period since; 2) is discussed at length Based on:
by most companies on our extensive review list; and 3)
is now showing up clearly in financial results. It remains • strong fundamental demand trends throughout the
broad throughout all portions of the economy and among economy
categories (labor, transportation, and materials) – and • tight labor and supply chain capacity
strengthened again during Q2. While there are indications
• increased pricing power among consumer companies
that certain materials costs (such as lumber and copper)
may have plateaued, companies are communicating that …there is evidence that 1) there is further cost inflation
they view wage and transportation inflation as structural in the pipeline that would exacerbate current trends and
headwinds for the foreseeable future based on the tight 2) inflation is beginning to emerge from the supply chain
supply fundamentals for each. and is increasingly being passed on to the consumer. To
date, higher material, component, construction, labor, and
“We thought inflation was going to be in the low transportation costs (not to mention gasoline prices and
2%. As I just quoted, we finished at 3.8% this interest rates) have had little noticeable adverse impact on
year. So clearly, much more of a headwind than demand or investment activity.
we anticipated at that time…”
“We've seen the carbonated soft drinks move
- Conagra Brands Inc. (CAG) from 2 for $3 to 2 for $3.29 and those price
increases have happened, and consumers
Importantly, consumer company reactions to cost inflation have not shifted behaviors...And so I think
continued to evolve in a positive way. As discussed above, we're going to continue to see those kind of
companies expressed much higher confidence during Q2 increases.”
in their ability to raise prices to cover rising costs without
- Murphy USA Inc. (MUSA)
triggering unfavorable elasticity in demand. In addition,
CPG companies and retailers are now communicating
their willingness to move prices higher almost in lock- "The new stuff's all going to be vetted with
step, reducing the risk of creating incremental price gaps what we think is higher construction cost... And
that could negatively impact market share. Supporting I wouldn't call it material yet or deal-breaking
this assertion is the fact that many early “first movers” on by any stretch of the imagination. But we are
raising prices tended to report the strongest results during confronted with higher construction cost.”
Q2 due to higher ticket growth. - Simon Property Group Inc. (SPG)
This is perhaps the greatest indicator of the current strength Energy Production and Investment Remains
and momentum in the economy. It also creates the incentive Strong, Service Costs Moderate
for companies to increasingly pass rising costs on to end Overall rig count and energy investment trends continued
users. We continue to think there is evidence that current to rise during Q2. These trends, along with consistently
reported inflation data and expectations (which have improving well productivity, drove most companies to
increased somewhat this year) are under-representing the outperform production expectations in 1H 2018.
true level of inflation risk in the economy.
The strong operating results and – more likely – the fact
“While inflation has recently moved up near that oil has maintained the $60-$70 level throughout 2018
2 percent, we have seen no clear sign of an drove many producers to tweak 2018 capital budgets
acceleration above 2 percent, and there does higher by 10% to 15% (many of which were set when oil
not seem to be an elevated risk of overheating.” was approximately $50 per barrel). Like in the rest of the
- Jerome Powell, Fed Chairman (8/24/18) economy, strengthening fundamentals are driving increased
Consumer CPI and PPI optimism – with many companies looking past 2018 and
Producer Price
Price Index Jan. 2017 to July 2017 Index (Final Demand)
signaling visibility into 2019 budgets (this was not the
case at this time last year). International investment also
4%
continues to show signs of a rebound.
3% WTI Oil Prices
(Jan. 1st to Aug. 20th, 2018)
2% $80
1% $70
$60
0%
Jan '17 Jun '17 Dec '17 Jun '18 $50
Tariffs Dominate Discussions, But Companies $60
Forecast Minimal Impact $30

The emergence of tariffs and the related geopolitical Jan. 1 Mar. 31 Jun. 30 Aug. 20
risks were widely discussed during Q2 reporting season.
However, most companies noted the impact of tariffs to Production growth has been so strong that constraints (a
date on their business and outlooks had been minimal. At shortage of pipeline takeaway capacity) have now emerged
this point, most businesses are communicating plans to in the Permian Basin – the largest driver of oil growth in
treat the tariffs as an incremental driver of cost inflation and the US. However, most producers and servicers indicated
plan to manage future headwinds through a combination this will not slow down industry investment plans and that
of supply chain adjustments (primarily changing sourcing companies will likely shift their drilling capital to other
from outside China) and passing higher costs up the value regions to take advantage of higher oil prices. However,
chain – similar to how they are treating other cost pressures. capacity constraints in the Permian have changed the trend
in service cost inflation, as it has dampened what were
“Tariffs are included in our number. And frankly, very high utilization rates and pricing trends for energy
the reason why we're not breaking those out service companies. Compounding this factor is the fact
separately is we really think of tariffs as just a that increased servicer capacity recently came online,
form of inflation, and when you look at the direct exacerbating the recent oversupplied conditions and further
impact, that's not really the most significant moderating service pricing (most noticeably in pressure
piece.” pumping services).
- Pentair PLC (PNR)
“So we hear all of the looming concerns
Despite the near-term confidence, companies acknowledge
surrounding takeaway capacity in the Permian,
that tariffs could intensify with time and are watching trade
but we aren't seeing indications of a pullback...
discussions closely as they evolve. Given the strength of
We are also seeing improved rig activity in other
current fundamental business trends, many management plays as well.”
teams view the emergence of a full-blown trade war as the
biggest risk to their confident outlooks. - Helmerich & Payne, Inc. (HP)
The Bottom-Up Economist "Tear Sheet"
Second Quarter - 2018
Q2 Results Showed Continued Expansion; Outlooks are Very Positive and Visibility Into
Optimism is High Throughout the Economy Strengthening Demand is Rising...
Columbia Sportswear Company (COLM) Ducommun Incorporated (DCO):
“United States business grew 13%...both the brick-and-mortar and “Revenue for the quarter rose nearly 10% year-over-year to $154.8
e-comm businesses exceeded our expectations in the first half.” million as we benefited from strong demand across nearly every aspect
The Blackstone Group LP (BX): of our business...We ended the quarter, once again, with strong backlog of
“What I would say is, if you look at our overall private equity portfolio $823 million, leaving the company well positioned for growth and further
in the first half of the year, we're seeing EBITDA running, call it, about performance improvement heading into 2019.”
10% up, sort of since the start of the year...When you talk to our CEOs,
and we survey them. Their optimism is as high as it's been.” ...With Increased Signals of Tight Labor,
Consumer Trends are Gradually Accelerating
Transportation, and Supply Chain Conditions...
Simon Property Group Inc. (SPG) Martin Marietta Materials, Inc. (MLM)
“We're pleased to announce that retail sales momentum continued to pick “...railroad service issues, finite truck availability and contractor labor
up in the second quarter… an increase of 4.6%, which is a large increase, shortages slowed overall second quarter Heritage Aggregates volume
the largest actually over the last 4 years. Retail sales were strong across growth to 3%. This is still solid growth, but not enough to satisfy demand
the portfolio, with sales productivity increasing each month throughout for our products at this time.”
the quarter.” Curtiss-Wright Corporation (CW)
“…we have seen a shortage of electronic components, which is causing
Industrial Growth Continues to Outperform some delay in deliveries to our customers and also some increase in cost...”
Clean Harbors Inc. (CLH)
“The industrial economy remains robust and the expansion activity in ...Driving Companies to Increase Investment in
several of our key verticals, particularly chemical and manufacturing, is Labor and Capacity to Service Demand
driving greater wate volumes.”
Emerson Electric Company (EMR)
Packaging Corporation of America (PKG)
“But right now, we're having to put people in place, we're having to
“Overall, corrugated products and containerboard demand remained make investments both from the capacity and from a capital standpoint
very strong during the quarter....we achieved a new all-time record for and to take care of some of this growth.”
quarterly box shipments, which were higher in total by 8.3%...”
Cost Inflation Remains Pricing Power in Corporate Tariffs Viewed as
Elevated and Broad America is Strengthening Incremental Cost Pressure...
Sonoco Products Company (SON) Rising Confidence at Consumer Firms Watts Water Technologies Inc. (WTS)
“We are facing inflationary cost pressure from Central Garden & Pet Company (CENT) “We announced price increases...to address
higher freight, wages, energy and material costs, “We believe that we can take pricing in private inflation and the impact of enacted tariffs...
particularly resins...” Given the existing cost pressures and
label or when input costs are going up because
potential incremental tariffs, we believe
Texas Roadhouse Inc. (TXRH) it would be safe for our competitors who are
the market will accept the price increase.”
bidding with us.”
“...labor dollars per store week were up 7.5%
compared to the prior year period.” Carnival Corporation (CCL) ...With Little Near-Term
“Strength in underlying demand for our cruise
Oil-Dri Corporation of America (ODC) offerings fosters greater ticket prices...”
Impact Unless Trade War
“...freight costs were up about 15% per ton.”
Texas Instruments Incorporated (TXN)
Industrials Pricing in Costs with Ease “So at the end of the day, we don't see a major or
Lennar Corporation (LEN) The Crane Company (CR) even any direct impact...Now, anything against
“Direct construction costs were up about 7% to “We believe that we'll be able to offset any free trade between the two largest economies in
$59.64 per square foot driven by a 7% increase incremental pressure from tariffs or commodity the world, that could eventually have a macro
in labor and an 8% increase in material costs.” costs.” effect that would be detrimental to everybody.”
THREE QUOTES TO REMEMBER

PepsiCo, Inc. (PEP): “Every part of the business in North American Beverages is showing sequential improvement. In the second part of
Q2, we saw significant improvement in performance, and as we go into Q3, we feel good about the trend rate. We are playing a very responsible
game in terms of advertising and pricing. And with commodity inflation, we will continue to play a responsible, take a responsible position in this
marketplace by pushing through pricing.”
Casey's General Stores, Inc. (CASY): “But obviously we had taken a price increase, or will be taking a price increase in July. We also, by
the way, took a series of price increases starting in May as well, and so that will continue to benefit us going forward as well...it's just a little over
a month, we haven't seen any elasticity in the pricing changes that we made starting in May.”
Wabtec Corporation (WAB): “We try to be conservative and, at the same time, responsible about our projections. But I think the trends in the
market are very positive right now...The economy is, right now, strong, and we're anticipating it's going to continue to be that way, and we think
there's upside opportunity there.”
Overall Results - Q2 2018
While there was likely some weather-related recovery from a cold Q1, underlying
results accelerated throughout corporate America during Q2
Church & Dwight Co., Inc. (CHD): “Q2 was an outstanding quarter for our company. Organic sales growth was 4.4%, which exceeded
our outlook of 3%.”
PepsiCo, Inc. (PEP): “In the quarter, organic revenue growth accelerated sequentially from the first quarter...Weather is clearly a factor. I
mean, I would be lying if I didn't tell you that hot weather helps the beverage business. But I think on top of that, our brand health metrics
are all trending the right way. The business is trending the right way. And pretty much all of our franchises we are seeing sequential
improvement in performance.”
Lincoln Electronic Holdings, Inc. (LECO): “We've seen just a very nice continued progression of the demand model globally. One of the
things that I was very happy with within the broad portfolio in the second quarter was the number of our entities around the world which
showed a positive progression. So I don't think I'd get into any one area around the world that we're targeting. We've seen very solid, strong,
broad geographic improvements.”
Carter's, Inc. (CRI): “After a challenging April due to unseasonably cold weather throughout much of the country and the shift of Easter
into the first quarter, we achieved a very strong comp in May as spring-like weather arrived around the country….We saw a particularly
strong rebound in U.S. Retail sales beginning in late April with very strong traffic and comp sales in both the store and online channels.”
MSA Safety Inc. (MSA): “Looking closer at head protection, we saw sales increase 12% across these end markets in the quarter. Notably,
our incoming orders in hard hats this quarter were the highest level we've ever experienced, which we believe is a proxy of global economic
strength...I'm pleased with the strong demand we're seeing in our key end markets, including energy, fire service, construction and general
industrial applications.”
Confidence among management teams throughout the economy continues to build.

Optimism is broad-based and growing throughout most industries
Target Corporation (TGT): “Given our current trends and our plans going forward, we expect that our comparable sales growth will
accelerate in the second quarter into the low- to mid-single-digit range.”
HNI Corporation (HNI): “So overall, the furniture space, from our vantage point, has got strong momentum and we like what we see...
The small and medium business activity is strong. And that translates to really core day-to-day business as we look at it. So I see that
momentum continuing...We have momentum in each of our businesses and expect mid-single-digit organic growth for the second half of
the year.”
The Crane Company (CR): “Overall, most of our major end markets are performing well, with a few tracking better than we expected...
Looking ahead, we are very encouraged by our backlog, which rose 16% sequentially and 34% compared to last year, with the strength
broad-based across our business lines.”
Intel Corporation (INTC): “Our results for the quarter were outstanding, marking a record second quarter on our way to what we expect
will be a record 2018...Revenue of $17 billion was up 15% year over year...demand is broad-based across all the segments that Bob talked
about. And it's also broad-based in terms of our product portfolio.”
Packaging Corporation of America (PKG): “Yes, through 14 days of July, we're up about 5.5%...If I look across our almost 20,000
customers, I can tell you that for the most part, they are reporting strong demand.”
Some companies are actively discussing what are optimistic outlooks for 2019
based on current demand, orders, and backlog trends
Plexus Corp. (PLXS): “As we look to 2019, you're correct - we are striking a bullish tone from a growth standpoint. We are in the latter
stages of our annual planning process, really just about ready to wrap that up, and it looks like 2019 will be another solid growth year. So
we are optimistic there.”
Ducommun Incorporated (DCO): “Revenue for the quarter rose nearly 10% year-over-year to $154.8 million as we benefited from strong
demand across nearly every aspect of our business...We ended the quarter, once again, with strong backlog of $823 million, leaving the
company well positioned for growth and further performance improvement heading into 2019.”
Honeywell International Inc. (HON): “We expect the sales momentum to continue throughout the second half of the year as our long-
cycle orders were up 11% and our long-cycle backlog was up 14%... So obviously, as I look forward to 2019, although I'm still focused on
2018, we've got a couple quarters to go, but there's no question that based on what we're seeing, the things are shaping up nicely for another
strong year in 2019 based on current activity.”
Caterpillar Inc. (CAT): “We feel good about the state of our business. Most of our markets continued to improve in the second quarter.
Our order rates in the backlog remain strong. For certain applications, particularly in oil and gas and mining, we are taking orders for
delivery well into 2019.”
Overall Results - Q2 2018 (cont'd)
As economic growth continues to accelerate, companies experienced more
instances of tight labor, supply chain, and production capacity compared to Q1
Martin Marietta Materials, Inc. (MLM): “Our second quarter results illustrate this point as railroad service issues, finite truck
availability and contractor labor shortages slowed overall second quarter Heritage Aggregates volume growth to 3%. This is still solid
growth, but not enough to satisfy demand for our products at this time.”
Emerson Electric Company (EMR): “But right now, we're having to put people in place, we're having to make investments both from
the capacity and from a capital standpoint and to take care of some of this growth...Many of Mike's businesses right now in North America
are actually getting back to peak performance in last cycle in its actual sales. So, what that means is we're having to get our plants geared
up, we're having to get the people geared up, and that's something that we got to make sure we stay ahead of.”
Plexus Corp. (PLXS): “We were able to achieve these results despite a highly constrained supply chain market that is limiting revenue
upside ability...In the fiscal third quarter we had upside demand of an additional $10 million they could not be realized within the quarter
due to component shortages...We are seeing a lot of these upside requests and it's becoming more and more difficult to do that.”
Pool Corporation (POOL): “The constraint is primarily weighted on the more heavy, more labor-intensive portions of the business. So
for example, since you opened the door with the new pool comment, it could very well be given the late start of the year. And given just
labor constraint in general, that new pool construction may be flattish this year. It isn't because of demand.”
Curtiss-Wright Corporation (CW): “…we have seen a shortage of electronic components, which is causing some delay in deliveries to
our customers and also some increase in cost because of the supply and demand we have to expedite and pay little bit more money to get
what we need.”
These production constraints are driving further wage/transportation cost inflation,

triggering price increases and driving aggressive sourcing behavior
Watsco, Inc. (WSO): “There's been a lot of conversation in the press about truckers and the lack of drivers. And to date, knock on wood,
yes, there was a little bit of an issue that Carrier had. We compensated for it, obviously, by prebuying the inventory and bringing it in to
stock in anticipation of the trucking shortage.”
Carter's, Inc. (CRI): “To help mitigate the exposure to rising product costs, we have invested in new inventory management and
pricing capabilities. We believe the margin opportunity from these investments is meaningful. We have "sold-in" our spring 2019 product
offerings to the major retailers in the United States. They understood and accepted our pricing proposals.”
Watts Water Technologies Inc. (WTS): “The sales increase is partially attributed to the pre-buy impact of our July price increases."
BB&T Corporation (BBT): “One construction CEO told me that in certain cases he was having to raise prices 25% to get the kind of
people that he needed. So my takeaway from that, from an economic perspective, is we can expect higher inflation.”
Diebold Nixdorf Inc. (DBD): “On the services front, around why that we simply improve pricing, we continue to have a very robust
pricing strategy on that front and continue to look at every opportunity to leverage pricing to offset labor pressure.”
To date, rising costs and production constraints (and interest rates) have not impacted
demand or investment trends. Rather, the increasingly tight capacity in the economy bodes
well for further growth in capacity expansion and labor investment
Murphy USA Inc. (MUSA): “We are seeing strong fundamental performance from the business even in a higher fuel price environment,
which can typically create challenging headwinds…We've seen the carbonated soft drinks move from 2 for $3 to 2 for $3.29 and those
price increases have happened and consumers have not shifted behaviors...And so I think we're going to continue to see those kind of
increases.”
Simon Property Group Inc. (SPG): “We're covered in the stuff that's under construction because we generally do a guaranteed max price
contract. But the new stuff's all going to be vetted with what we think is higher construction cost...And I wouldn't call it material yet or
deal-breaking by any stretch of the imagination. But we are confronted with higher construction cost.”
KB Home (KBH): “And between the strength of our pace and the ability to raise price, it tells you the market is still out there to capture
price. So I can't think of a single market we're in today where I would say that there are signs that the consumer can't afford it or that
pricing has hit the wall.”
Intel Corporation (INTC): “In response to the stronger demand, we are raising gross CapEx $0.5 billion to $15 billion...we're working
closely with our customer base, both on the server and the PC side, and very closely with our internal teams to make sure we're not a
constraint to the extent that demand in the second half of the year continues to go up like it has through the first six months of the year...”
Corning Incorporated (GLW): “We're continuing to bring additional capacity online in the second half to support committed demand.”
Target Corporation (TGT): “And to support our team as they do more and more for our guests and our business, we're taking a leading
position on wages. In the first quarter, we increased our national starting wage to $12 or more, in support of a commitment to reach a
$15 national minimum by the end of 2020. With these commitments, we're already seeing the benefit in our business as we ensure Target
remains an employer of choice in a very tight market.”
Cost Inflation Trends
Cost inflation remains broad among labor, transportation, and materials - and continued
to strengthen for the fourth quarter in a row
Oil-Dri Corporation of America (ODC): “We have experienced higher freight, manufacturing and packaging costs in fiscal '18 than in
fiscal '17… freight costs were up about 15% per ton.”
Lennar Corporation (LEN): “Direct construction costs were up about 7% to $59.64 per square foot driven by a 7% increase in labor and
an 8% increase in material costs.”
Sherwin-Williams Company (SHW): “The raw material inflation for the industry in second quarter was slightly above our expectation,
and that puts it just above the high end of our 5% to 6% inflation range for the full year.”
Central Garden & Pet Company (CENT): “As far as inputs go, we're going to probably echo a lot of what you are hearing from our
competitors, delivery, trucking expenses are up, we're seeing labor going up and then we're seeing some raw materials go up, particularly,
in the fertilizer area with respect to urea and potash.”
Texas Roadhouse Inc. (TXRH): “Restaurant margins continued to be pressured by increasing labor costs…Labor as a percentage of total
sales increased 93 basis points to 32% and labor dollars per store week were up 7.5% compared to the prior year period. The main drivers
were wage and other inflation of approximately 4.3%, including the impact of increasing managing partner base pay and growth in hours
of approximately 3.2%.”
EnerSys (ENS): “I would add that the cost of commodities that flow through our P&L this quarter were higher than any quarter in fiscal
year 2018, as well as the highest in seven years.”
All indications point to cost pressures remaining at elevated rates going forward,
although some materials categories may have moderated from peak levels
General Mills, Inc. (GIS): “We expect input cost inflation to be approximately 5%, 1 point higher than fiscal '18 levels…Our logistics
cost, we expect to be higher than that 5%.”
Darden Restaurants, Inc. (DRI): “For fiscal 2019, we anticipate… total inflation of approximately 2%, with 0% to 1% commodities
inflation and 3.5% to 4.5% of total labor inflation, which includes approximately 5% hourly wage inflation…”
Texas Roadhouse Inc. (TXRH): “We continue to expect labor dollars per store week growth to be in the mid-single-digit range, excluding
the impact of higher guest count. Our labor expectation includes an estimate of increases due to mandated state wage rates, ongoing market
pressure, restaurant-level compensation increases and growth in labor hours due to certain hiring initiatives.”
The J.M. Smucker Company (SJM): “Overall, commodity costs are projected to be higher with lower coffee cost expected to be offset
by increases across a number of our key commodities and other raw materials, including peanuts, protein and packaging.”
KB Home (KBH): “There's still pressure on cost. Lumber did peak. It's come down a little bit in random lengths.”
Labor and transportation headwinds are being viewed as more structural

in nature by management teams
American Woodmark Corporation (AMWD): “From a housing industry growth perspective, numerous macroeconomic factors remain,
including high land cost, labor shortages, material inflation and freight capacity. Labor and freight are also evolving into macroeconomic
factors given their potential impact on America's growth as a whole. Nearly every industry is facing the same constraints.”
J&J Snack Foods Corporation (JJSF): “But we are focusing on our logistics, that would be trucking and warehousing as a major task
and challenge for us...it took us a solid 9 months to realize it that these increases are indeed being permanently secured with metal bolts to
our cost…We expect the cost challenges in logistics to be there for a while.”
UniFirst Corporation (UNF): “We also expect the ongoing low unemployment economy to result in related headwinds for us to
overcome, including staffing and recruiting challenges as well as the related salary and wage pressures.”
Hostess Brands Inc. (TWNK): “We believe the inflationary pressures of the CPG industry are systemic and here to stay for the balance of
'18 and into '19.”
Texas Roadhouse Inc. (TXRH): “So we keep watching, obviously, there's a difference between labor and food, meaning, labor much less
cyclical. Labor generally more permanent, wage rates go up. They generally don't come down. Whereas, food goes up and down. So the
labor is a bit more concerning…”
Ball Corporation (BLL): “We'll continue to see headwinds on freight for the foreseeable future unless there's any kind of underlying
changes.”
Carter's Inc. (CRI): “We now have more visibility to Spring 2019 product costs. After several years of consistently lower product costs
driven, in part, by the success of our direct sourcing strategy, we are forecasting higher product costs beginning in the fourth quarter this
year... Longer term, we are assuming a more inflationary cycle with low single-digit increases in product costs and consumer prices.”
Pricing Power
Consumer companies - for the second quarter in a row - communicated much higher
confidence about pricing to offset their rising cost structures. Their tone about pricing
power is noticeably improved from 2H 2017 when these cost pressures emerged
Oil-Dri Corporation of America (ODC): “They're going to be a major reason behind our 8/1 price increases that we will be taking,
and it will all be around break inbound materials that we're buying and outbound on materials that we're shipping, but it's a nationwide
pandemic. So we're not the only one experiencing at all, all of our competitors are as well.”
General Mills, Inc. (GIS): “I think it's because the external environment has changed and we're all seeing higher inflations, whether it's
on logistics or whether it's on labor cost and manufacturing or whether it's on input cost...But when you get to levels of inflation for us that
reached 4% in this current fiscal year and we're projecting at 5%, you need a little bit of pricing in addition to all of those other cost levers
to offset it, and I think we're seeing that broadly.”
Proctor & Gamble Co. (PG): “We're taking a price increase of around 4% on Pampers diapers in North America. Just yesterday,
we began notifying customers across North America that we're taking a list price increase on Bounty, Charmin's and Puffs brands,
which averages around 5% across the category on an annual basis… These are aimed to address commodity costs the entire industry is
experiencing.”
The Scotts Miracle-Gro Company (SMG): “We've communicated to our retail partners that dropping 300 basis points of gross margin
in a single year is not acceptable… higher freight costs, commodity inflation and tariffs are not something we can simply absorb going
into 2019. We will be more aggressive-than-normal in seeking price increases. This is not an option… it's too early to give you exact
numbers on what we're looking for as far as pricing. But I can say, we'll be meaningfully higher than we've taken in most years.”
Church & Dwight Co., Inc. (CHD): “And like our competitors, we have determined that in certain categories, pricing actions are
necessary to help offset our cost increases. We are in the process of discussing those decisions with our retailers right now... Productivity
gains have been outrun by cost increases and that's why you're seeing people reaching for pricing finally.”
Hanesbrands Inc. (HBI): “From the standpoint of visibility, we are certainly out now communicating our planned price increases for
2019...This is really inflation driven increases that are across input costs, and as we go out and communicate those, our retailers are really
seeing it come through their supply chains as well. So there's not a surprise when we've discussed these price increases with them, and we
feel we're well down the path to getting those communicated and in place.”
Industrials continue to pass along rising costs with ease. And with an earlier start on
flexing pricing power (relative to consumer companies), are at this point mostly passing
cost inflation fully up the value chain
Alamo Group, Inc. (ALG): “The sales increase was the main reason for our earnings growth, but it was also nice to see our margins
go up as well during the quarter, particularly given that the cost increases we are experiencing this year are above the average of the last
several years.”
Sonoco Products Company (SON): “We have also been successful in raising prices...with all regions reporting a favorable year-over-year
spread on price/cost.”
Illinois Tool Works Inc. (ITW): “Overall, our teams are working to offset raw material cost increases on an ongoing basis, and through
the first half, we have offset the impact of those raw material cost increases on a dollar-for-dollar basis.”
Sealed Air Corporation (SEE): “We delivered favorable price/mix of 4%. Price/mix was favorable in Food Care and in Product Care due
to previously announced price increases, formula pass-throughs and continued shift to value-added solutions, all of which more than offset
higher input and freight cost.”
Watsco, Inc. (WSO): “So we had OEMs going up in June, July, May, August...The acceptance obviously has a little bit of a snarl to it,
but generally speaking, the customers are accepting price increases. There's such strong and compelling evidence out there with the tariff
change, with some of the freight issues that we're all running into to justify and rationalize an increase in price.”
Pentair PLC (PNR): “We are seeing increased inflation across the portfolio, and as a result, we are implementing price increases in all 3
segments during the third quarter. We have announced the price increases and we are currently implementing them.”
MSA Safety Inc. (MSA): “We tightened up special pricing request globally and we are implementing price increases in the business to
mitigate the inflationary impact we're seeing from some of our suppliers. We were successful in offsetting that impact this quarter, which
drove solid expansion in organic product margins.”
Lincoln Electronic Holdings, Inc. (LECO): “Diligent price management, improved mix and supply chain and operational productivity
initiatives offset inflation on a dollar basis in the quarter.”
Hubbell Incorporated (HUBB): “We continue to trend well overall. Certainly saw a little bit more headwind from material costs
than previously anticipated, but that's more than offset by the additional pricing actions, which we're seeing good traction on in the
marketplace.”
Tariff and Trade War Discussion
The impact of tariffs to date has been minimal
Energizer Holdings (ENR): “Overall, we expect the impact from tariff activities in fiscal year 2018 to be minimal, in fiscal year 2019 to
be less than 50 basis points of headwind on our gross margin rate absent pricing actions.”
Plexus Corp. (PLXS): “It's a pretty minimal impact from a dollar standpoint of the components and products that we are involved with
in general... But second, we are not seeing any real difference in customer behavior as of this point, although it is something we are
monitoring very closely.”
Nordson Corporation (NDSN): “I don't think it's having an impact on any decisions customers are making in the near term. So we're not
necessarily seeing any project delays or anything like that as a result of the tariff discussions.”
Dover Corporation (DOV): “We are keeping a close look at our exposure to China in terms of our revenue base, clearly. And not only
our exposure from a revenue point of view, but also the mismatch between what we make in China and sell into China versus what we
import/export. So we're running the traps on all of that. It looks manageable at this point, so I don't see any significant issue.”
The Home Depot Inc. (HD): “I would say at this point that the tariff environment is manageable.”
MSC Industrial Direct Co, Inc. (MSM): “Like many others, we're watching the tariff developments closely. We have not yet seen
tariffs impacting customer demand, although they are now top of mind for both customers and suppliers and are beginning to impact
manufacturing input costs. We're just beginning to see cost pass-throughs from some suppliers, but as of now, it's still way too early to
predict any longer-term implications.”
Most companies view tariffs as an incremental driver of cost inflation, and plan to adjust
their supply chains and raise prices accordingly in response to any future impact
Tractor Supply Company (TSCO): “We would look to mitigate potential tariffs through a combination of alternative sources of supply
or adjustment of our consumer pricing as appropriate.”
Pentair PLC (PNR): “Tariffs are included in our number. And frankly, the reason why we're not breaking those out separately is we really
think of tariffs as just a form of inflation, and when you look at the direct impact, that's not really the most significant piece. What we're
really looking at is...how suppliers are going to use that as an opportunity potentially to raise price to us. So we factored all of that into our
inflation assumptions for the back half of the year and for next year as we think about the price increase that we put in place here.”
Watts Water Technologies, Inc. (WTS): “We announced price increases that went into effect at the beginning of July to address inflation
and the impact of enacted tariffs. As the third quarter progresses, we'll be able to assess the market reaction to these price increases,
However, given the existing cost pressures and potential incremental tariffs, we believe the market will accept the price increase."
Hillenbrand, Inc. (HI): “At this point, we do not have a significant direct impact from the tariffs. However, we are seeing the knock-on
effects of the tariffs in steel and other commodity cost inflation. We're working to offset these negative effects, direct or indirect, through
pricing actions, and by optimizing the structure of our supply chain over the long term.”
EnerSys (ENS): “But I think the most important comment that Mike made is that we have suppliers, we have factories inside the
China and outside of China and so it's really just for us the aggravation of moving things around and really may be moving some of the
European customers into China and some of the U.S. customers out of China into Vietnam or Thailand or somewhere else. So, it’s easy
enough for us to do.”
Fastenal Company (FAST): “I'm not overly concerned about the direct impact to tariffs...We would expect to be able to shift product
perhaps from China to Taiwan or Vietnam or other sources.”
Sonoco Products Company (SON): “We are projecting tariff costs in the second half that could be in the range of $7 million to
$9 million, primarily for steel and aluminum, including foil laminates and labels. This does not include any impact from recent
proclamations, which have not yet been put in place. This increased cost is requiring us to drive recoveries through proactive price
increases in many of our businesses, including our recently announced 4% increase on rigid paper containers in the United States.”
Companies are confident in their ability to manage tariff impacts, but acknowledge
it does introduce near-term uncertainty. However, their primary concerns are the
emergence of a full-blown trade war
Emerson Electric Company (EMR): “I don't like the way it's unfolding and hopefully things will settle. But right now, it's manageable
as we told the Board... it's creating an inflationary environment which helps us both at the top line, faster growth, but also forces us to do
a lot more material containment around it. So, it's very manageable at this point in time even with the current actions underway and I have
much bigger issues in the world than that.”
Texas Instruments Incorporated (TXN): “So at the end of the day, we don't see a major or even any direct impact other than some
minimal impact...Now, that's not to say that at a macro level, that could have an impact, but that's a very macro comment that goes beyond
TI and beyond the semiconductor industry that free trade, anything against free trade between the two largest economies in the world, that
could eventually have a macro effect that would be detrimental to everybody.”
Consumer Trends
Top-line momentum continues to build for consumer companies. Fundamental results
improved for the fourth quarter in a row and are clearly accelerating
Kohl's Corporation (KSS): “Comp sales for the quarter increased 3.6% on a fiscal basis, our third consecutive quarter of positive comp
growth…”
Simon Property Group Inc. (SPG): “We're pleased to announce that retail sales momentum continued to pick up in the second quarter…
Reported retailer sales per square foot for malls and outlets was $646 per foot compared to $618 in the prior year period, an increase
of 4.6%, which is a large increase, the largest actually over the last 4 years. Retail sales were strong across the portfolio, with sales
productivity increasing each month throughout the quarter.”
Columbia Sportswear Company (COLM): “United States business grew 13% in the first half, benefiting from strong, continued strong
direct-to-consumer performance as well as improved performance of our wholesale business, which was up high single digits percent...In
our direct-to-consumer business, both the brick-and-mortar and e-comm businesses exceeded our expectations in the first half...”
Texas Roadhouse Inc. (TXRH): “Comparable sales in the second quarter were up 5.7%, including traffic growth of 4.3.”
Margin tailwinds also remain in place, as inventory reduction initiatives and improving
demand trends are keeping discounting and promotional competition at low levels
Macy's Inc. (M): “Average unit retail was up 4.6%. These metrics reflect strong regular price selling, helped by our disciplined inventory
management.”
Hibbett Sports, Inc. (HIBB): “We expect significant improvement in product margin due to fresher product... Inventory decreased 8%
from last year and was 7% lower on a per-store basis.”
Tailored Brands, Inc. (TLRD): “We're allocating a growing share of our marketing spend on brand storytelling and reducing our
promotional advertising... Inventories were down $141 million or 14% below last year. Retail inventories were down $130 million or 15%
with the largest reduction at Joseph Bank.”
Conagra Brands, Inc. (CAG): “Our promotion levels remain reduced and our pricing is ahead of our categories on average.”
Church & Dwight Co., Inc. (CHD): “Eight of our 11 power brands had a lower percentage of products sold on promotion in Q2
compared to Q2 2017 and still we grew. And this is the second quarter that we've seen this and we don't expect that to change...”
The strengthening top-line and margin trends are continuing to drive improved outlooks
Carnival Corporation (CCL): “Despite the impact of fuel and currency, the midpoint of our original December guidance of $4.15 has
become the floor for our current full year guidance, reflecting continued strength in the business.”
Shoe Carnival Inc. (SCVL): “Sales of our spring product categories accelerated as we ended the quarter…I am also happy with the way
our second [fiscal] quarter has begun, with both sales and margin exceeding our expectation…”
Macy's Inc. (M): “Based on the first half performance, our strong execution and the anticipation of continued healthy consumer spending,
we are raising both sales and earnings guidance for the year.”
The Sherwin-Williams Company (SHW): “We exited the quarter with strong sales momentum...we expect third quarter consolidated
sales to increase at a mid- to high single-digit percentage rate compared to the third quarter of 2017.”
The rising confidence is translating into pricing power, which became much more
pronounced following Q1. Importantly, results have improved the most for companies
that were "first movers" on pricing, creating incentive for others to move in lock-step
Carter's, Inc. (CRI): “With an improving economy, low unemployment and the benefits of the new tax law, including higher take-home
pay and the doubling of tax credits for families with young children, we believe our new pricing for spring 2019 will be supported by
consumers.”
Carnival Corporation (CCL): “Strength in underlying demand for our cruise offerings fosters greater ticket prices year-to-date.”
Casey's General Stores, Inc. (CASY): “We also, by the way, took a series of price increases starting in May as well, and so that will
continue to benefit us going forward as well...it's just a little over a month, we haven't seen any elasticity in the pricing changes that we
made starting in May.”
Kimberly-Clark Corporation (KMB): “We have seen some early indications of some pricing moves by competitors.”
Central Garden & Pet Company (CENT): “We believe that we can take pricing in private label or when input costs are going up
because it would be safe for our competitors who are bidding with us.”
Tractor Supply Company (TSCO): “Comparable store sales increased 5.6% in the second quarter with comp average ticket increasing
3.7%...It is the best average ticket increase we have had in the last 6 years.”
Industrial Trends
Trends throughout the industrial economy remain very strong, and continue
to accelerate and broaden
Franklin Electric Co. (FELE): “Overall, our second quarter results were strong. Our Water Systems units in the U.S. and Canada grew
organically by about 12%, and our Fueling Systems organic revenue growth was 18%.”
Illinois Tool Works Inc. (ITW): “Underlying demand trends remained strong as evidenced by all 7 business segments in major geographies
delivering positive organic growth in the quarter… And you can see the good growth momentum we're building, with 5 out of 7 segments
improving sequentially.”
Snap-On Incorporated (SNA): “In the critical industries, double-digit improvement around the world strengthened places like aviation,
natural resources, military and general industry progress in almost every sector.”
Union Pacific Corporation (UNP): “Industrial revenue was up 8% on a 6% increase in volume...Construction carloads increased 8%...
Metals volume increased 18%... In addition, strong industrial production drove growth in various other commodities, including industrial
chemicals, plastics and forest products.”
Fastenal Company (FAST): “Our nonresidential construction business is accelerating. In June, we hit 17%....I was very pleased with the
progress we saw in the second quarter. Our manufacturing demand is stable at very healthy levels. Roll that together, we grew our sales
13.1% in the second quarter. That's our fifth straight quarter of double-digit growth.”
Heavy industries - such as construction, infrastructure, etc. - continue to outperform the

already strong general industrial environment
Astec Industries, Inc. (ASTE): “It feels a little bit like a traditional summer on the infrastructure side. Our customers are busy. They have
a lot of work. The ones that I've talked to talk about how big their backlog is. They're feeling really good, they're feeling good about next
year. The quote levels are very good.”
Caterpillar Inc. (CAT): “North America also continued to be a bright spot for Construction Industries in the quarter, with sales up about
$400 million or 18%. Much of the sales increase was driven by investment in nonresidential construction and oil and gas-related projects,
including pipelines.”
Hubbell Incorporated (HUBB): “On Industrial, in particular, we're seeing a very nice rebound on the heavy side, very welcome volume
coming back to us there as Industrial is growing.”
Martin Marietta Materials, Inc. (MLM): “We expect increased levels of building activity and continued favorable pricing trends in the
second half of 2018 and into the future as the construction recovery strengthens. This sentiment is echoed by our sales teams, customers and
suppliers.”
While companies are acknowledging difficult comps in 2H 2018, confidence and

optimism continue to grow. Outlooks remain almost uniformly bullish
Roper Technologies Inc. (ROP): “No question that the comps in Q4 are more difficult. We had quite substantial growth in the fourth
quarter last year. That's why we're talking about kind of mid-single-digit growth…So there's some variability there, but it's only to the
upside, I think.”
Emerson Electric Company (EMR): “Comparisons are getting tougher and tougher. But overall, I feel very good about the momentum, the
pace of business is not slowing down, our growth and opportunities are out there, and we're seeing our customers continue to spend.”
Alamo Group, Inc. (ALG): “We saw organic new order growth of about 4%. This reflects continued strong new order bookings in
our Industrial Division…I think our markets are in pretty good shape. I think in our Industrial Division, which as you know, is mainly
governmental-oriented spending, that governmental budget seems to be in pretty good shape.”
The Flowserve Corporation (FLS): “The awarded work is broad-based and represents a 6.8% increase year-over-year. Oil & gas,
chemicals, and general industry markets all contributed growth over 10%.”
That optimism applies to pricing power as well, and industrials foresee no issues with
continuing to pass along rising costs with ease
The Tennant Company (TNC): “Yes, I mean, one of the things that I would comment on is we've done a really nice job through the first
part of the year that we are certainly covering inflation. And as we've seen and we aggressively took price, and that was on top of reasonable
pricing last year. And we've enacted pricing through the first 6 months of the year and anticipate continuing to get that in.”
The Crane Company (CR): “At this point, we believe that we'll be able to offset any incremental pressure from tariffs or commodity costs.”
Franklin Electric Co. (FELE): "So we have some nice price achievement, sequential improvement in both Fueling and in Water
Systems...200 basis points is not a bad outcome from our perspective for the second quarter. But given the inflation, the tariffs that are
coming in, it has to be better than that in the second half. And we think the actions that we have taken and or planned will get us that.”
Financials
Results and commentary at financial companies continue to signal strength and
optimism about further economic growth
The Blackstone Group L.P. (BX): “What I would say is, if you look at our overall private equity portfolio in the first half of the year, we're
seeing EBITDA running, call it, about 10% up, sort of since the start of the year.”
BB&T Corporation (BBT): “I'll point out Community Bank was up 3.5%. That's a big deal because you recall, over the last several
quarters, I've been talking to you about how for the last number of years, Main Street has been kind of dead in the water, and we've been
expecting it to recover. Well, it is recovering. Optimism is strong; equipment purchases and other types of acquisitions and purchases are
happening.”
Regions Financial Corporation (RF): “We would point to $500 million more or less in deposit declines that we think have been directly
related to customers putting that to work. That's a more specific number than, it ought to be more of a round number, I guess. But that kind
of the runoff that we've seen has, I think, largely been, we believe, used by customers to invest in their businesses.”
Fifth Third Bancorp (FITB): “Average credit card balances were up a very healthy 7% year-over-year, while card purchase volume was up
10% year-over-year.”
The Blackstone Group L.P. (BX): “When you talk to our CEOs and we survey them. Their optimism is as high as it's been. And I think that
bodes well, of course, because CEOs are thinking about CapEx and hiring and so forth. We saw that in the hiring numbers in the U.S., up
17% year-to-date. So I think the forward outlook, at least on the ground in the U.S., it feels pretty good. And frankly, globally, there seems to
be a fair amount of confidence.”
As banks indicated last quarter, growing loan pipelines have started to translate to loan
growth as consumers and companies show more confidence in the economy's acceleration
PNC Financial Services Group, Inc. (PNC): “You would have seen we grew loans on both the corporate and consumer side… Total loans
grew by 1% linked quarter and 3% compared to the same quarter a year ago...Yes, I'd say that when we look at the second half of the year, as
I mentioned, the pipelines for loan and C&IB growth is healthy.”
BB&T Corporation (BBT): “We've seen the turn that we've been expecting, so we had 3.5% growth in loans, very strong in C&I, which
was up 6.3%...I would also point out that our end-of-period loans are up $3 billion greater than end-of-period loans for the first quarter,
which is 9% annualized.”
Fifth Third Bancorp (FITB): “But let me remind you, we had a record quarter of production in corporate banking, we had a record
quarter of growth in middle-market outstandings, one of the highest production quarters that we've had in years in middle-market banking.
Our pipelines continue to be very strong. I think, a lot of the economic environment, the tax reform and other geopolitical issues are very
positive.”
SunTrust Banks, Inc. (STI): “We saw a pickup in both capital markets revenues and commercial lending activity as was anticipated by the
pipelines we had leading into the quarter...Looking ahead, we've got good momentum across both commercial and consumer lending, and
our pipeline supports this...what was really encouraging is that it was very broad-based. It was more business investment and M&A, less
refinance, so seems more sustainable.”
Pinnacle Financial Partners (PNFP): “Second quarter was a great quarter: loan growth, 18% annualized; core deposit growth, 18%
annualized....We continue to organically grow loans at a mid-double-digit pace.”
Cullen/Frost Bankers, Inc. (CFR): “During the second quarter, average loans were $13.5 billion. This represents an increase of more than
$1.2 billion or just over 10% versus the second quarter last year. C&I loans grew 10%, and commercial real estate loans grew 11%.”
Credit quality remains in great shape

Washington Federal Inc. (WAFD): “Asset quality remained strong and the ratio of non-performing assets to total assets improved to 0.46%
as of June 30, 2018 compared to 0.50% at June 30, 2017.”
PNC Financial Services Group, Inc. (PNC): “We improved in every measure. Compared to the first quarter total nonperforming loans
were down $123 million or 7% and continue to represent less than 1% of total loans. Total delinquencies were down $28 million or 2%
linked quarter, driven by a decline in consumer delinquencies past due 90 days or more.”
BB&T Corporation (BBT): “Credit quality was just great. NPA ratio was 0.28%, decreased 2 basis points. Charge-offs were 30 basis points
versus 41 in the first, and 37 last year. So great credit quality.”
Regions Financial Corporation (RF): “We experienced another quarter of broad-based improvements in credit quality and continue to
expect modest improvement throughout the remainder of the year...Nonperforming, criticized and troubled debt restructured loans as well
as total delinquencies all declined. Nonperforming loans, excluding loans held-for-sale, decreased to 0.74% of loans outstanding, the lowest
level since 2007.”
The Carlyle Group (CG): “And right now, when we look at our portfolios, be it on the private equity side, but also as we track very
carefully all the loans and all the credits we have throughout our credit platform, performance continues to stay on track, and delinquencies
and defaults are kind of in line with what we want them to be.”
Transportation Trends
Positive trucking trends of strong demand and sharply rising freight rates continued
Werner Enterprises, Inc. (WERN): “Second quarter 2018 freight demand in our One-Way Truckload fleet was much stronger than
normal. Demand was consistently strong each month of second quarter 2018 and was broad-based geographically. Freight volumes thus
far in July 2018 continue to be strong.”
FedEx Corporation (FDX): “Ground segment revenue also saw double-digit growth at 12% in Q4, with volume and yield each up 6%...”
Marten Transport, Ltd. (MRTN): “We expect to deliver continued growth with increasing compensation for our premium services.”
Werner Enterprises, Inc. (WERN): “Average revenues per tractor per week increased 9.5% in second quarter 2018 compared to second
quarter 2017 due to a 13.3% increase in average revenues per total mile... Our average revenues per total mile increase expectation for the
full year 2018 compared to 2017 is between 9% to 12%.”
J.B. Hunt Transport Services, Inc. (JBHT): “An increase in revenue per load of 12% and load growth of 4% in Intermodal (JBI), a 17%
increase in revenue producing trucks and a 10% increase in truck productivity in Dedicated Contract Services (DCS), a 38% increase in
volume and a 13% increase in revenue per load in Integrated Capacity Solutions (ICS), and a 14% increase in rates per loaded mile in
Truck (JBT) contributed to the increase in consolidated revenue compared to prior year.”
Rail volume trends began to improve and better track the economy in Q2, confirming
the optimism that rail operators had last quarter. Signs of rising capacity investment
also continue
Union Pacific Corporation (UNP): “Total volume increased 4% in the quarter compared to 2017. Premium and industrial carloadings
both increased 6%, while agricultural products and energy volumes were both down 1%...Domestic intermodal volume increased 7%,
driven by continued strength in parcel and stronger demand from tight truck capacity.”
Norfolk Southern Corp. (NSC): “Merchandise revenue grew 8% in the second quarter with increased oil and gas drilling activity,
driving volume expansion of frac sand and NGLs, along with strong growth in ethanol, fertilizers and crude oil.”
Wabtec Corporation (WAB): “Freight rail traffic is up more than 5% year-to-date.”
Norfolk Southern Corp. (NSC): “Robust economic conditions and a historically tight truck market led to record-breaking revenue and
volume in intermodal.”
Wabtec Corporation (WAB): “Across the industry, parked locomotives continue to improve, ending the quarter down about 31% since
last year...Demand for new locomotives and freight cars is also improving.”
L.B. Foster Company (FSTR): “The North American freight rail market currently has several positive indicators, one of which is capital
spending which rose approximately 4.5% as reported by the public Class 1 operators.”
Rail pricing continues to benefit under the umbrella of rising trucking rates
Norfolk Southern Corp. (NSC): “Pricing remains an emphasis and an opportunity, benefited by increased truck rates, higher fuel prices
and tight transportation conditions across all modes.”
Union Pacific Corporation (UNP): “Ag products revenue was up 5% as the 1% volume decrease was more than offset by a 6% average
revenue per car increase…. Energy revenue increased 5% for the quarter on a 1% decrease in volume and a 6% increase in average
revenue per car...We also saw an acceleration in intermodal price per load in this segment during the quarter.”
Norfolk Southern Corp. (NSC): “Intermodal RPU was up 11% year-over-year with increased fuel surcharge revenue, strong pricing and
positive mix. Given the projected demand for the NS intermodal product, the strength in the pricing environment is expected to continue.”
The CXS Corporation (CSX): “Pricing for merchandise and intermodal contracts that renewed in the second quarter were strong,
exceeding same-store sales pricing growth... I think what we're trying to help you understand is that the environment's a strong
environment, and that's why we're seeing the contract renewals come in higher than the same-store sales pricing. I think the last public
number we have out there is in the Q3 of 2017 at 2.2%. For merchandise and intermodal, what we can say is that we have seen sequential
improvement every quarter since then in same-store sales and that the discretionary renewals in Q1 were better than that and the
discretionary renewals in Q2 were better than that.”
Energy Investment
Higher rig counts and enhanced productivity continue to drive strong production growth
RPC, Inc. (RES): “The average U.S. domestic rig count during the second quarter of 2018 was 1,039, a 16.1 percent increase compared
to the same period in 2017, and a 7.6 percent increase compared to the first quarter of 2018.”
Apache Corporation (APA): “We achieved second quarter company-wide adjusted production of approximately 390,000 barrels of oil
equivalent per day, a 16% increase from the same period a year ago, and up 6% from the first quarter 2018..Based on this performance, we
are raising our full year 2018 U.S. production guidance to 260,000 barrels of oil equivalent per day...”
Whiting Petroleum Corporation (WLL): “Despite challenging wet weather this spring, second quarter production came in at the high
end of guidance, and we continued to generate robust free cash flow. We have adjusted our production guidance upward to reflect the
strong performance.”
Continental Resources (CLR): “Production was 26% higher than the second quarter of 2017 at just over 284,000 BOE per day.”
Occidental Petroleum Corporation (OXY): “Total reported production for the second quarter was 639,000 BOEs per day, coming in
above the midpoint of our guidance...This was driven by strong execution and well productivity in Permian Resources, which exceeded
the top end of the guidance range by 3,000 BOEs per day, representing a year-over-year increase of 46%.”
As oil prices sustain the $60 to $70 range, companies have begun to tweak capital
budgets higher. Higher confidence is driving some to offer visibility into 2019 spending
Apache Corporation (APA): “We anticipate maintaining an investment pace in the second half of the year that will bring our full year
2018 capital outlook to approximately $3.4 billion versus our prior guidance of $3 billion…As we look further ahead, our progress this year
brings a significant upside bias to our 2019 and 2020 production guidance, both in the U.S. and internationally.”
ConocoPhillips Corporation (COP): “We're adjusting our 2018 operating plan to account for our higher production performance and the
significantly higher prices we're continuing to see compared to our reference price of $50 a barrel WTI at budget time.”
Whiting Petroleum Corporation (WLL): “We plan to exit 2018 with 26 rigs, up 3 rigs from the 23 rigs we have drilling today... Our 2019
outlook continues to remain very strong, with current expectations for production to grow 15% to 20% year over year.”
Helmerich & Payne, Inc. (HP): “Oil prices have hovered in the mid-$60s to low $70s during the quarter, and we believe most E&P budgets
in the current year reflect a $50 to $55 per barrel oil price. Therefore, we are optimistic that E&P spending in 2018 is not fully reflecting the
potential increase in CapEx and rig count in 2019.”
Emerson Electric Company (EMR): “We are seeing that CapEx numbers are starting to lean forward, grow positively. I think there's
outlook and expectations for that. I think those will firm up as people start talking about their 2019 year here in the next quarter or two.”
Growth has been so strong that pipeline constrants have emerged in the Permian.
However, this has not dampened enthusiasm about overall activity growth
Hess Corporation (HES): “I will conclude with some views on how we are dealing with Permian takeaway and realization issues. We
are clearly in a period of tightening takeaway capacity and therefore, widening differentials.”
Halliburton Company (HAL): “There's much talk in the industry about offtake capacity, but during the last few weeks, I visited with
customers in the Permian, and they don't look like a group that's backing down. Don't get me wrong, I'm not naïve to the math around that
offtake issue. But as we've seen so far, our customers will not all react in the same manner.”
Helmerich & Payne, Inc. (HP): “So we hear all of the looming concerns surrounding takeaway capacity in the Permian, but we aren't
seeing indications of a pullback in the strong oil price environment that we've experienced of late. We are also seeing improved rig
activity in other plays as well.... H&P continues to experience strong demand and we are adding rigs accordingly.”
The pause in Permian growth until takeaway capacity is installed has driven excess
servicer capacity and moderated service cost inflation from elevated levels. Additional
capacity investments have also recently come online
Halliburton Company (HAL): “However, increasing competition has limited the ability of oilfield service companies to raise prices at
the present time... Our competitors' new and uncontracted equipment is also creating pricing pressure in some areas.”
Patterson-UTI Energy, Inc. (PTEN): “The market for pressure pumping was also softer late in the quarter due to what we believe is a
result of some oversupply versus the current demand.”
Schlumberger Limited (SLB): “In North America Land, we continue to deploy additional fracturing fleets during the second quarter,
while pricing stayed flat as industry capacity additions matched the growth in customer activity.”
Optimism towards the recovery in international investment continued

Schlumberger Limited (SLB): “The broader base recovery in the international markets has now finally started, which led us to record
sequential revenue growth in almost all GeoMarkets and nearly all product lines in the second quarter.”
Quick Hits
Several of what are the few lagging industrial sectors (agriculture, power generation) saw
optimism improve during Q2. Auto production remains the primary laggard
Woodward, Inc. (WWD): “In power generation, industrial gas turbine market continued to decline but inventories are decreasing. We are
optimistic that we're nearing the bottom.”
Caterpillar Inc. (CAT): “Power generation is experiencing a demand increase following the multiyear downturn in sales.”
AGCO Corporation (AGCO): “In North America, all crop farmers are beginning to replace their equipment after years of weaker demand.
North American industry retail sales were up in the first 6 months of 2018 compared to the same period in 2017.”
Gentex Corporation (GNTX): “Actual light vehicle production in North America declined approximately 3%, which resulted in lower-than-
expected unit shipments and revenue during the quarter.”
Nordson Corporation (NDSN): “And we've seen that slow down if you look at the overall global statistics from the automakers. Last year was
a little softer than year before and this year is a little softer, again.”
Defense and Aerospace continue to be one of the strongest categories of the economy
Curtiss-Wright Corporation (CW): “Overall, we experienced a 19% increase in sales to our defense markets, while sales to our commercial
markets increased 3% year-over-year...We've seen strong order growth, stemming in part from the fiscal year 2018 defense budget, which
drove more than $150 million in new orders in the second quarter. As a result, we now expect aerospace defense sales to grow between 11%
and 13%.”
Ball Corporation (BLL): “Our aerospace business continued to add to it already record high backlog and its prospects have only grown with
time. With contracted backlog at record levels and our won-not-booked backlog at $4.3 billion, the future looks bright for aerospace for the
next 3 to 5 years.”
Housing remains the strongest consumer-related category

The Home Depot Inc. (HD): “In the second quarter, transactions over $1,000 were up 10.6% compared to the second quarter of fiscal 2017.
A few drivers behind the increase in big-ticket purchases were vinyl plank flooring, appliances and strength with our Pro customers.”
American Woodmark Corporation (AMWD): “Looking specifically at new construction for the quarter, we grew our business 20%.”
Lennar Corporation (LEN): “We have seen new orders, home deliveries and margins exceed expectations this quarter.”
Technology and Telecom investment has improved meaningfully in 1H 2018

Tech Data Corporation (TECD): “Demand was stronger than what we anticipated. And I think you've heard that common thread through
the reports of not only our competitors, but our vendor partners and our publicly traded customers that have reported their results. Each of
those spoke to strong demand.”
EnerSys (ENS): “Telecom and broadband are really key and we have been talking about for several quarters consecutively now, what we see
are these customers preparing for higher amounts of data track and whether it’s from 5G, the broadband markets...They are really spending
money right now.”
Looking forward, companies expect the rising dollar to turn currency impacts from a
tailwind to a headwind. Higher interest expense was also increasingly mentioned
Hanesbrands Inc. (HBI): “Since our last update in May, the dollar has strengthened, creating a $30 million revenue headwind in the second
half as compared to our prior guidance.”
Sealed Air Corporation (SEE): “We now forecast currency to have a negative impact on net sales of $20 million. This updated forecast
assumes currency headwinds, primarily on Food Care results, due to exposure to Europe, Latin America, Australia and New Zealand.”
J.B. Hunt Transport Services (JBHT): “Interest expense in the current quarter increased due to higher interest rates compared to the same
period last year.”
Companies continue to reference tax reform as a major driver of growth investment

PepsiCo, Inc. (PEP): “We reinvested tax benefits in additional media for NAB and wherever the businesses needed investment, we put it in...
we also reinvested some of the tax benefits in our frontline bonus, so that especially people in the United States where the tax benefits really
accrued can benefit from the upside.”
The Blackstone Group L.P. (BX): “Well, I would say on the ground talking to our CEOs and other companies we interact with, tax reform
has increased, in many cases, their cash flows and has made them more confident. And so I do think it's having some impact. You can see it
in the numbers. S&P CapEx spending in the first quarter, I think, was up close to 20%. S&P earnings are up 20%. And so when companies'
earnings are up, they tend to be more inclined to hire. They tend to be more inclined to spend CapEx. They tend to be more inclined to travel
and you've seen that in the hotel business where there has been a reacceleration of same-store sales in that sector as an example. So I would
say what we're seeing on the ground is positive and some of that, I think, has to be attributed to the tax reform.”
BUE Research, LLC
BUE@thebottomupeconomist.com
Copyright 2018 BUE Research, LLC. The Bottom-Up Economist Report is protected by United States and international
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BUE Report 2018 - Q2

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INSIDE THIS ISSUE:

Consumer Results Continue to Strengthen Consumer Companies Increasingly Raising Prices

Capacity Tightened Meaningfully in Q2 Energy Outlooks Improve, Service Costs Dampen

Labor/Inventory/Capacity Investment Grew Tariff Impact Minimal to Date

Tariffs Dominate Discussions, But Companies $60

Forecast Minimal Impact $30

THREE QUOTES TO REMEMBER

Confidence among management teams throughout the economy continues to build.

These production constraints are driving further wage/transportation cost inflation,

Labor and transportation headwinds are being viewed as more structural

Heavy industries - such as construction, infrastructure, etc. - continue to outperform the

While companies are acknowledging difficult comps in 2H 2018, confidence and

Credit quality remains in great shape

Optimism towards the recovery in international investment continued

Housing remains the strongest consumer-related category

Technology and Telecom investment has improved meaningfully in 1H 2018

Companies continue to reference tax reform as a major driver of growth investment

The Bottom-Up Economist Report is published at: www.thebottomupeconomist.com

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