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Consumer, industrial companies plan for tariff increase in FY'19 guidance

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Consumer, industrial companies plan for tariff increase in FY'19 guidance

U.S. and Chinese officials have until March 1 to reach agreement on trade, but some companies are already planning on a tariff hike for imports from China in their outlooks for 2019.

Major consumer and industrial companies, from appliance manufacturer Whirlpool Corp. to machinery-maker Ingersoll-Rand PLC, have added costs into guidance for their 2019 fiscal years to offset a potential increase in tariffs on some Chinese-made items to 25% from the current 10%, according to earnings reports and transcripts of calls with analysts collected by S&P Global Market Intelligence. As of Feb. 13, at least 10 companies, primarily in the consumer and capital goods industries, have said that they have added in the increases. Of those, six had a market capitalization of more than $10 billion.

The Market Intelligence analysis included a review of 150 transcripts from Jan. 1 through Feb. 13 across three industry classifications: consumer discretionary, consumer staples and industrials.

The inclusion of higher tariffs in corporate outlooks stands in contrast to companies' reaction to tariffs one year ago, Johan Gott, an analyst at A.T. Kearney, said in an interview. When the Trump administration first began targeting imports with tariffs, many companies were reluctant to add their effects to outlooks, figuring that the proposed tariffs were a "negotiation tactic" that would not be implemented for the long term, Gott said.

"Now, I think they are much more inclined to think that this is a 'more likely than not' possibility," he said. Having seen tariffs hit their profit margins, companies are now more interested in planning for future increases, Gott said.

Whether U.S. and Chinese officials will be able to strike a deal before a March 1 deadline and avoid a tariff hike remains an open question. U.S. negotiators are scheduled to meet with their counterparts in Beijing starting Feb. 14. President Donald Trump had originally planned to raise the tariff on $200 billion of imported Chinese products on Jan. 1 but opted instead in early December for a 90-day negotiation period, delaying the potential tariff increase until March.

Tariffs of all kinds have been a key topic for consumer and capital-goods makers this earnings season. Between Jan. 1 and Feb. 12, the term "tariffs" appeared in about 31% of all earnings calls for U.S. or European companies in the consumer discretionary, consumer staples and industrials industries, according to Panjiva Inc., a division of S&P Global Inc.

About 40% of the 345 transcripts for companies within industrials included a mention of "tariffs," according to the Panjiva analysis. The term appeared in 24% of the 297 calls for companies within the consumer discretionary industry and in 17% of the 115 transcripts for the consumer staples industry.

'Fully factored in'

The tariffs that companies are accounting for in guidance are one of three tranches that the U.S. implemented on imports from the world's second-largest economy after a March 2018 report from the Department of Commerce said that China was engaging in market-distorting practices. Those practices included Chinese policies that forced U.S. companies to transfer intellectual property, technology and other information to Chinese firms, according to the report, carried out under Section 301 of the Trade Act of 1974.

U.S. companies are already preparing for an increase. Benton Harbor, Mich.-based Whirlpool, for instance, has "fully factored in a potential increase of 25%" into its projection for a $300 million increase in tariff and raw material costs for 2019, Chairman and CEO Marc Robert Bitzer said during a call with analysts Jan. 29.

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While the appliance manufacturer has benefited from strong consumer demand in recent quarters, factoring in the potential tariff increase reflects caution, Moody's analyst Kevin Cassidy said.

"They're trying to be as conservative as possible," Cassidy said in an interview.

AB Electrolux (publ), Whirlpool's Swedish rival, is raising prices to head off the higher costs associated with the 25% tariff, President, CEO and Director Jonas Samuelson said during a Feb. 1 call with analysts. The company's imports into the U.S. from China include completed appliances, such as chest freezers, according to Panjiva.

Costs from raw materials and tariffs will total between 1.7 billion and 2.1 billion Swedish kronor in 2019, though the potential increase to 25% is "the biggest individual factor" that will determine actual costs, Samuelson said.

Other consumer-focused companies that have factored a tariff hike into their outlook in the past two months of earnings reports include Spectrum Brands Holdings Inc., maker of Stanley tools and Marineland aquarium fish supplies, as well as cosmetics-maker The Estée Lauder Cos. Inc.

Tariffs tip the pricing scales

Some companies that make goods for industrial and scientific uses are also bracing for an increase to 25%. Ireland-based industrial products maker Ingersoll-Rand is factoring in the increase, though Senior Vice President and CFO Susan Carter said during a Jan. 30 call that analysts "should not anticipate we'll see a windfall gain" if the tariffs do not go to 25%. The company plans to adjust prices to offset the effects of higher tariffs, Carter said.

Graco Inc. and Illinois Tool Works Inc. are among the other industrial-focused manufacturers that have factored in the rise to 25%.

All tariffs implemented so far are expected to add $25 million in costs in 2019 at Mettler-Toledo International Inc., which manufactures scales and other measuring instruments for industries including healthcare and logistics.

Those costs are expected to weigh on the company's full-year 2019 EPS by 3%, CFO Shawn Vadala said during a Feb. 7 call with analysts. While the elimination of all tariffs would lift the company's 2019 EPS by 1%, Vadala added that Mettler-Toledo has already made changes to its supply chain and pricing that would continue to weigh on results for the year.

"We would not recoup the entire 3%," the CFO said.

At least one company is betting that tariffs will not increase.

"Our expectation is that at this stage, we don't see a rate change in the tariffs," Andrew Bonfield, CFO at construction equipment maker Caterpillar Inc., told analysts during a Jan. 28 call with analysts. The company, which sources items including chain link from China, according to Panjiva, booked just over $100 million in costs related to tariffs and higher raw material costs during the fiscal fourth quarter ended Dec. 31, 2018, Bonfield said.

Factoring in the potential increase represents a new challenge for companies in developed economies, A.T. Kearney's Gott said.

"Businesses are very good at addressing changes if they're predictable," Gott said. But companies are facing "a massive level of uncertainty" as they try to estimate future costs without knowing what will happen within the next month, he added.

As of Feb. 12, US$1 was equivalent to 9.26 Swedish kronor.