More than one-third of S&P 500 reporting earnings are talking tariffs

Daily task force meetings. Weekly reports to senior leadership. Constant contact with suppliers to keep prices at bay. This is the new reality at industrial supply company W.W. Grainger.

Like many companies included in the S&P 500, 90-year-old Grainger is hard at work trying to curb the effects of the Trump administration’s tariffs on a variety of goods imported from across the globe and subsequent retaliation by China, the European Union and others.

And for many of these companies, the third quarter has been the first true gauge of how much the White House’s protectionist policies have affected profits. Caterpillar shares dropped the most since 2011 on Tuesday after the company said the cost of steel and other materials was rising because of the tariffs.

Of the 110 S&P 500 companies that have already reported third-quarter earnings through Tuesday’s close, 41 of them — or 37 percent — have either explicitly discussed or answered questions about the taxes on imported goods and their fallout on their conference calls with analysts, according to a FactSet search. That’s more than one-third of all S&P 500 companies reporting financial results so far.

The administration’s tariffs of 25 percent on steel imports and 10 percent on aluminum imports took effect June 1, two-thirds of the way through the calendar second quarter. The first part of the administration’s 25 percent tariff on $50 billion in Chinese goods took effect July 6, at the very beginning of the third quarter, while the most recent round of 10 percent taxes on $200 billion worth of Chinese imports began on Sept. 24.

That 10 percent penalty will increase to 25 percent at the end of the year, barring forward progress on trade talks between Washington and Beijing.

For many companies, higher input costs are passed on to retailers or customers. Some simply absorb the costs at the expense of the bottom line or look to cut costs elsewhere. Often it’s a mixture of both.

Costco, for example, announced on its own earnings call that it’s introducing a number of strategies to try to cope with rising costs.

We’re “accelerating shipments before tariffs go into effect, recognizing there’s a limited ability to do so. Everybody’s trying to,” said Chief Financial Officer Richard Galanti. “Working with suppliers to see what can be done to reduce and/or absorb some of the costs, and in some cases reducing order commitments on certain impacted items.”

Others, like United Technologies’ CEO Gregory Hayes said that higher costs are almost always pushed on to consumers.

“I would expect pricing will also have to increase next year if these tariffs remain in place,” Hayes said on United’s earnings call on Tuesday. “Ultimately these tariffs, it all gets passed onto the consumer in one form or another. It’s just a tax on the consumer in another way to think about it.”

A growing number of companies are weighing in on the Trump administration’s use of tariffs to help select industries or force trading partners to the negotiating table.

Some, like PPG Industries, are worried that higher input costs could damage their bottom lines, while steel giant Nucor sees the taxes as a way to “level the playing” field for victims of cheaper foreign alternatives.

Here’s what some executive are saying:

W.W. Grainger (GWW)

“With respect to tariffs, we have deployed a cross-functional task force to gain a clearer understanding of the tariff impact, as well as to execute mitigating actions. The team meets daily, reporting to senior leadership at least weekly. Some of their actions include validating tariff increases, working with suppliers to minimize the cost impact including identifying alternative supply and evaluating pricing actions while ensuring that our pricing stays market-based. With respect to quantifying the impact, product directly sourced from China represents about 20% of the U.S. segment’s cost of goods sold.” – Thomas Okray, chief financial officer

Caterpillar (CAT)

“In all, material costs were up about 2% on higher steel prices and the impacts of tariffs. Freight costs continue to be elevated due to a variety of factors including being higher rates, less efficient loads, and expedited freight costs as we ramp up production to meet increased demand. Even though the midyear price increase had only a partial impact in the quarter, the drag of higher input costs and tariffs was just $50 million more than price realization.” – Andrew Bonfield, chief financial officer

Harley-Davidson (HOG)

“Tariff costs increased by $9.9 million driven by higher EU tariffs. During the quarter, approximately 60% of our shipments with EU dealers included tariffs at the increased rates. Our expectation for the impact of recently enacted tariff includes incremental costs of approximately $15 million to $20 million for steel and aluminum and approximately $25 million for EU tariffs. Additionally, China increased its tariffs volume foreign motorcycles produced in the United States by 25 percentage points and the U.S. has increased tariffs on certain products imported from China. We believe this will increase our 2018 cost by approximately $3 million. In total, we now expect to incur approximately $43 million to $48 million of increased costs related to the tariffs during 2018.

With the new China tariffs we look for those to be on the $10 million to $12 million range on an annualized basis, both of which we would look to mitigate those as we figure out the production.” – John Olin, chief financial officer

Nucor (NUE)

“Our industry is also benefiting from the cumulative impact of years of successful trade cases that resulted in anti-dumping and countervailing duties, as well as the very recently imposed Section 232 tariffs. Together, these are removing artificially low-cost foreign imports from the market and restoring a level playing field.

As I mentioned earlier, the tariffs are having their intended impact by curbing unfairly traded imports. They are sending the message that the United States Government is serious about achieving compliance with the rules of trade, but they are also having an important long-term impact. The tariffs are providing leverage to get other countries to the table, to negotiate fairer trade agreements for the U.S.” – John Ferriola, chief executive officer

Costco (COST)

“There are many moving parts and it’s extremely fluid starting with the actions and reactions by both the U.S. and Chinese governments. What actions are we exploring and taking in some short-term and some long-term? Accelerating shipments before tariffs go into effect, recognizing there’s a limited ability to do so. Everybody’s trying to. Working with suppliers to see what can be done to reduce and/or absorb some of the costs, and in some cases reducing order commitments on certain impacted items.

Alternative country sourcing, sure, but again, it’s where possible and feasible, it’s a limited ability, and it takes time. We are, taking advantage of lower pricing on some U.S. items because of the reverse, if you will, such as pork, nuts and soybeans.” – Richard Galanti, chief financial officer

Micron (MU)

“We expect gross margins to remain very healthy in the fiscal first quarter, although lower than fourth quarter levels, and our gross margins will also be impacted in the near term by the announced 10% tariff on $200 billion of imports from China, which will go into effect on September 24. We are working to gradually mitigate most of the impact from these tariffs over the next three to four quarters.

Clearly, tariffs are impacting us probably to the tune of 50 to 100 basis points [on gross margin].” – David Zinsner, chief financial officer

Hasbro (HAS)

“We continue to look at the list and work potentially beyond it. We have markets that have tariffs now and the biggest is Brazil and they’ve been for a while and it just kind of adds to the price that’s on top of what the import costs are and that impacts our consumers. So we continue to watch. We can’t react immediately, but we continue to look at where we’re manufacturing products. Right now about 25% of our product is manufactured in the U.S. We just continued of what’s sold in the U.S. and we continue to look at moving our product to other markets.” – Deborah Thomas, chief financial officer

PPG Industries (PPG)

“The new tariffs are starting to add some modest costs to our raw materials. We expect currency translation to have an unfavorable impact to our sales in the fourth quarter. Based on current rates, the unfavorable impact is expected to be between $50 million and $60 million in the fourth quarter. Specific to our businesses, overall net sales are expected to be lower sequentially due to normal seasonal patterns.” – Michael McGarry, chief executive officer

AutoZone (AZO)

“A larger number of tariffs are slated to be imposed in the next couple of weeks. These tariffs should be more significant. In the short term, we expect to be able to manage our way through any changes and we continue to expect to ultimately pass these costs along as the entire industry would be affected similarly.

If they’re 25% or if they stay for a long period of time, that’s going to drive some significant inflation in our industry. And I will tell you over long periods of time, marginal inflation in our business is good. And by the way we’re seeing inflation at accelerated rates in wages. So, we’re not scared of marginal inflation. What we don’t want to see is shocks that shock the consumer.” – William Rhodes, chief executive officer.

United Technologies (UTX)

“If you think about $0.15 of headwind next year after $0.05 of headwind this year, we have been able to more than offset the tariff impact through pricing this year. I would expect pricing will also have to increase next year if these tariffs remain in place. There is a limit, however, in terms of how far pricing can go. Keep in mind we’ve had I think three price increases so far this year in the U.S. resi business. Ultimately these tariffs, it all gets passed onto the consumer in one form or another. It’s just a tax on the consumer in another way to think about it.” – Gregory Hayes, chief executive officer

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