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Two-Thirds of Industrial Manufacturers Absorbing Higher Energy Costs

July 1, 2006
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NEW YORK-Two-thirds of U.S. industrial manufacturers are absorbing higher energy costs, rather than passing them through to customers, according to PricewaterhouseCoopers' latest manufacturing barometer. These companies predict that energy costs will rise further over the next 12 months, and the majority is concerned that the higher price of energy will serve as a potential barrier to growth.

Sixty-seven percent of industrial manufacturers surveyed by Pricewaterhouse-Coopers are able to pass along some, very little or none of the increased energy costs. Only 27% are able to pass along all or most of the cost-6% did not report. Overall, 63% anticipate further increases in energy expenditures over the next year. The same number-63%-think rising energy costs could hurt the growth of their companies.

In spite of energy concerns, industrial manufacturers remain confident of their financial futures. Those surveyed projected an average revenue growth of 7.8% during the next year, due in large part to international prospects. Optimism about the world economy has increased to 77% of respondents vs. 71% last quarter. Although optimism about the U.S. economy remained high at 67%, the number of optimistic respondents decreased by nine points from last quarter.

"The growing optimism about overseas markets likely stems from increased sales in strengthening European and Asian economies," says Jorge Milo, leader of PricewaterhouseCoopers' U.S. industrial manufacturing practice. "Some companies are probably expecting that the weak dollar will continue to make U.S. exports attractive, while others appear to see local growth opportunities warranting increased operations abroad."

More than half of companies marketing abroad recorded increased sales last quarter, while only 8% had a decrease. International marketers now expect sales abroad to contribute 33% of their total revenue during the next 12 months-up from 30.7% projected last quarter. Thirty-five percent with operations abroad expect to expand to new overseas markets during the next 12 months, and 30% are planning new manufacturing or distribution facilities abroad.

Industrial manufacturers reported a decrease in planned investments. Forty-seven percent expect to make major new investments of capital during the next 12 months, down from 57% in the prior quarter and 60% a year ago. Investments are expected to average 8.4% of revenues vs. 9.8% in the prior quarter. However, increased investments are expected in three key areas: new product/service introductions (53%, up 8 points), research and development (42%, up 8 points), and information technology (38%, up 6 points).

While revenue projections held steady at 7.8%, compared to 7.7% the previous quarter and 6.5% a year ago, executives indicated other reverberations from climbing costs. As a group, industrial manufacturers now expect the size of their workforce to decrease by an average of 1.7% in the year ahead, a turnabout from the positive growth of 2% projected the previous quarter, attributable to several large manufacturers planning sharp employee cutbacks. Currently, 58% are planning to increase their workforce during the next 12 months-similar to 61% in the prior quarter, and ahead of the 52% of a year ago.

"Although strong revenue growth is expected, some industrial manufacturers are taking a more cautious approach concerning investments of capital and human resources, likely due to the lack of stability in energy costs," says Milo.

Escalating energy prices continue to challenge strong, profitable growth for most U.S.-based industrial manufacturers. Of the nearly two-thirds citing energy prices as a potential barrier, growth was estimated at a 7.3% pace vs. 8.8% for their peers, or 17% slower. Overall, 70% say that higher energy prices have had a negative impact on the profit margins of companies in their industry, including 35% citing a strong impact and 35% a moderate one.

Despite increased energy costs, three-quarters of respondents were able to either increase margins, 35%, or at least keep them the same, 40%, during the past quarter.

"These companies are holding the line or even increasing margins, in spite of escalating energy costs," says Milo. "They are expecting solid revenue growth, and if they can continue to find new ways of dealing with increasing energy prices, these companies can continue to thrive."

PricewaterhouseCoopers' manufacturing barometer is developed and compiled with assistance from the opinion and economic research firm of BSI Global Research Inc. The findings from the manufacturing barometer, a quarterly survey report, are based on interviews with 60 senior executives of large, U.S. industrial manufacturers about the business climate. This release summarizes results for Q1 of 2006, from interviews conducted through April 14, 2006.

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