Hot Pricing Down South
The benefit from outsized pricing in Latin America may be about to turn
We have discussed how many companies have drastically increased prices in recent quarters to offset inflation. This has allowed them to post decent headline organic sales growth figures, but closer observation shows that volumes are plummeting as elasticities have kicked in. This has been getting more attention in the press lately with some analysts catching on that many companies may be on the verge of having to downgrade forecasts in the back half of the year as growth from price increases wanes.
Last week’s article was a comparison of the earnings quality of Kimberly-Clark (KMB) and Colgate (CL) which touched briefly on how much of a benefit CL has received from pricing in Latin America which does not seem justified by currency movements.
We see a similar risk being overlooked at other companies with exposure to Latin America. In the past, it has not been unusual to see US-based companies increasing prices rapidly in Latin America. Those price increases were put in place to help offset rapid currency deterioration which is common in many of the countries in the region. We wrote in a February 2022 report Newell Brands and a Little Alchemy of Finance about the comical history of Newall’s Venezuelan operations many years ago which were providing the bulk of the company’s growth despite Venezuela literally falling apart at the time. While not as egregious as the Newell case, we have come across several companies whose organic revenue growth and profits have been receiving material boosts from increasing prices in their Latin American operations at a far faster pace than foreign currency depreciation would seem to justify. When we look at the amount of pricing net of FX that many companies are getting of late, it’s greater than ten percentage points. The problem we see is the longer historical spread is closer to 2-3 percentage points. Many companies could soon see a sizeable part of growth vanish. We will explore four of these below: