Price Wise: Breaking the mold

, we learned that the CFO of Poly Wise challenged 'old dog' Ralph the Purchasing Manager to convert their polypropylene supply from an index price - which exposes Poly Wise to higher resins prices and offers little choice but to try to pass along higher costs to customers - to a fair and easily managed crude oil differential price. Ralph says he's up to the challenge, though the CFO has his doubts and is willing to replace Ralph with someone who understands and appreciates the advantages of the new resins pricing paradigm.

To emphasize his point to Ralph, and the rationale for the new pricing paradigm to all his direct reports in Purchasing, Sales, and Finance, the CFO sends out the following email:

Making It Abundantly Clear

"As most of you are aware, Poly Wise is determined to switch from defense to offense on our profit margins so we can wrest control of our success from the market - particularly the resins market, the source of our biggest cost - to ourselves. In short, we are going to break the mold in plastics processing. The 'old mold' and its challenges for processors and customers are epitomized in the following excerpts from recent articles. Read these stories and be prepared to discuss them (particularly the highlighted parts) and the opportunities they present to Poly Wise at our staff meeting next week, where Ralph will also report progress on his efforts."

Old Molds

Bemis Reports 3Q 2011 Results

"Food price inflation has driven grocery store prices higher in 2011, challenging consumers to stretch their grocery store dollars. Most of our customers experienced lower unit sales volumes in many of the product categories for which we provide packaging, and we expect this trend to continue through the fourth quarter.

At Bemis, we have responded to lower volume levels by reducing our workforce. In addition, we are undertaking optimization initiatives that will result in the closing of several small plants globally and leveraging our most efficient facilities and proprietary technologies over the next year. Efforts associated with these activities are expected to reduce fixed costs and optimize our facilities to create a manufacturing platform from which to expand in the future."

Flexible Packaging Business Segment
"Raw material cost increases in 2011 have negatively impacted operating margins as a percentage of net sales, and lower unit volumes across most market categories have resulted in additional negative margin pressure.

We have addressed the raw material cost increases from the first half of the year with selling price adjustments, many of which were implemented during the third quarter. The benefits of these price adjustments were more than offset by the negative impact of generally lower unit sales volumes this quarter."

Silgan Announces 3Q 2011 Earnings

Silgan Holdings Inc., a leading supplier of rigid packaging for consumer goods products, today reported third quarter 2011 earnings. "[The year ahead] is shaping up as an opportunity to showcase how our businesses perform in the face of multiple significant headwinds. We have experienced a stagnant U.S. economy and significant raw material inflation, compounded by an increasingly volatile European economy. Our metal container business benefited from the ... timing of contractual pass throughs of increases in manufacturing costs. Our closures business suffered the negative impact of the delayed pass through of significant spikes in polypropylene resin costs."

Costs Weigh on P&G Results

Procter & Gamble Co. produced solid sales growth in its fiscal 1st quarter as it successfully raised prices even as some competitors held back, though higher commodity costs took a toll on margins. Costs will still pressure results in the current quarter, causing P&G to give downbeat guidance for its fiscal 2nd quarter.

P&G indicated that it planned to spend about $1 billion before tax on restructuring this year, which includes cuts to stay lean. Some analysts have pressed for more and deeper cuts, but P&G instead wants to make the changes over time to address what it acknowledges are high overhead costs.

P&G in recent years has aimed to sell products across the price spectrum. With the higher-end consumer holding up better than lower-income shoppers, who continue to fret about unemployment, P&G has had more leeway to raise prices on its premium products.

Some competitors have held back on price increases for now, causing P&G to lose share in North America and Western Europe. P&G expects those competitors to follow soon with higher prices.

Appliance Sales Tumble

The world's two biggest appliance makers, Whirlpool Corp. and Electrolux AB, are being battered from several directions. Stubbornly weak demand and stiff price competition led both on Friday to disclose dismal results. Whirlpool slashed its profit forecast for the year and said it will close two factories and eliminate 5000 jobs, or 7% of its work force. Electrolux also will cut its production capacity, noting North American demand is 30% below its expectations.

Sales gains in Asia and Latin America are slowing and aren't sufficient to make up for sluggish demand in the U.S. and Europe. Steel and other raw-material costs are up from a year ago. Price-cutting promotions have hurt profits without generating much new demand.

Whirlpool said it would limit price-cutting events this holiday season to about half as many days as last year. Executives said promotions aren't doing much to create demand lately and only reducing proceeds. Whirlpool also said it hopes to push through price increases in January, the third such move within the past year. However, an analyst at Longbow Research says it will be hard to make price increases stick amid tough competition from rivals such as South Korea's Samsung Electronics Co. and LG Electronics Inc.

In response to "recessionary demand levels" and higher costs, Whirlpool is consolidating production and eliminating its highest-cost factories. Whirlpool's planned job cuts include 1200 salaried positions. The company said its restructuring will lead to $500 million of charges, spread out over three years, and reduce annual fixed costs.

Takeaways

The CFO finishes his email with these declarative statements:

"We will not -

We will --

Please be on time and prepared to discuss the above at next week's staff meeting."

Ralph Calls Poly Bon

Ralph gulps after reading the CFO's email. As reported last time, Ralph contacted several polypropylene suppliers and received a positive response from Matt, the Marketing Manager at Poly Bon. Ralph asks Matt if they can meet by the end of the week to discuss a polypropylene supply at WTL + 30 ¢/lb. Matt agrees.

To be continued ...

About the author: Tom Langan of WTL Trading provides risk management services to processors and suppliers to help control commodity costs, secure and improve profit margins, and increase sales.