By Joel Eneogwe
Rising input costs related to commodity and transportation price increases are likely to lead to lower gross margins for building products companies in the United States in 2018, according to a report by Fitch Ratings.
The report further asserts that most companies should be able to respond to this development by increasing selling prices, cutting cost and realizing greater selling, general and administrative leverage, partially mitigating the potential operating margin compression and credit effect.
It added that its stable outlook for the sector continues to be underscored by strong free cash flow and relatively low leverage.
According to Fitch, sharper-than-anticipated input cost inflation in first quarter 2018 is likely to persist, at least through the second quarter with rising global commodity prices linked to stronger demand growth being one of the key factors contributing to a spike in input costs so far this year.
“The rise in input costs has outpaced that of corresponding price increases by many Fitch-rated building products companies that have reported first quarter earnings, resulting in the average gross margin for these companies falling about 190bps in the first quarter 2018 compared with first quarter 2017. A compression in gross margins has also been reported by industrial companies, the report noted.
Rising transportation costs has been the other key factor driving higher costs, fuelled by a combination of rising energy prices linked to global oil, new safety regulations and a labour market shortage for truck drivers, Fitch further explained.