How an American Toolmaker Boosts Profits in the Face of Inflation and Shortages

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By Timothée Aeppel

April 27 (Reuters) – Soaring inflation and tight supply lines have hit U.S. makers like Snap-on Inc over the past year but have so far not hurt profits.

The toolmaker, which turned 102 this year, just posted its second-highest quarterly operating profit margin ever, at 20.3%, slightly below the record 21% set a quarter earlier. First quarter sales were 19% above the pre-pandemic level.

Chief executive Nick Pinchuk, speaking to Reuters, said the company had weathered the headwinds of inflation by raising prices, limiting discounts and finding creative ways to cut costs – including, in some cases, redesigning products to work around shortages of key materials or parts.

“The biggest problem these days is not inflation,” he said. These are the continuing waves of supply chain disruptions.”

Many companies – including other major US industrial companies – have also seen their profits surge amid the chaos, and investors are watching the influx of quarterly earnings reports this week and next to see if that trend continues. continues.

Pursuing these gains could become more difficult. Companies now face the added challenge of rising interest rates as the Federal Reserve tightens monetary policy, as well as a war in Ukraine. On Tuesday, General Electric Co said further shutdowns in China and war in Europe had increased supply chain disruptions and inflationary pressures, jeopardizing its full-year earnings outlook.

Still, S&P 500 companies are expected to increase earnings by 9% this year, according to Refinitiv IBES.

At Snap-on, Pinchuk said he doesn’t see significant relief from inflation and supply issues anytime soon. Both problems, he added, are directly linked to the pandemic – and he expects them to persist as long as waves of disease remain a barrier to normal flows of trade and production.

For now, much of that focus is on the shutdowns in China. Pinchuk said he had a manager who recently had to take a ride in a vegetable truck to Shanghai airport because many other means of transportation were restricted.

“If Shanghai opens soon, people can start catching up,” he said. But now the shutdowns are spreading, including recent moves to curb activity in Beijing.

Snap-on has an advantage in times of shortage, Pinchuk said, because they sell directly to consumers. Snap-on trucks, which carry up to 4,000 different items, visit auto repair shops and other businesses to sell directly to technicians and mechanics. Customers can order thousands of additional items through this mobile sales fleet.

Having this close connection to end buyers has allowed Snap-on to move quickly over the past year to limit promotions on hard-to-produce items, while encouraging sales of items that don’t. are not, Pinchuk said. He speaks of “invisible pricing”.

The company has also rushed to redesign products — or manufacturing processes — to circumvent shortages and other bottlenecks at factories. Take toolboxes. The company has long used stainless steel to construct the drawers for these storage units because they could be molded into shape and provide durability without special coatings and other added treatments.

Since stainless steel was rare and extremely expensive, Snap-on started using cold pressed steel instead for these parts. This meant the added cost and complication of coating and painting the metal to be rust resistant.

“But that’s the environment we find ourselves in,” Pinchuk said. “We’re in short supply and costs are rising – and we’re going to focus on disrupting our processes to deal with that.”

(Reporting by Timothy Aeppel; Editing by Dan Burns and Lisa Shumaker)

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