Company Notes Digest 6.27.14

A digest of some of the top insights that I’ve gathered from this week’s earnings calls.  Full notes can be found here.

The Macro Outlook

Inflation was a hot topic this week

“we’ve seen a…shift from historical patterns of deflation in generic drug cost to inflation…in some cases these increases have been significant…we didn’t quite anticipate it…This was really kind of snuck up I think on the industry and us” ($WAG)

“input cost inflation was a bit above our forecast.” ($GIS)

“There is some upward cost inflation specifically in commodities like pepper and vanilla and we’re working with our CCI programs to help to try to offset those” ($MKC)

While the inflation was somewhat unexpected, companies tended to downplay it

“wouldn’t say it’s all around the drug inflation.” ($WAG)

“We also of course are seeing some moderating dairy inflation…we’re encouraged by what we are seeing on that front…we [are modeling] 3% inflation as you know we have a fairly broad market basket” ($GIS)

“we’re not anticipating [taking price] in our consumer business at this point…Obviously if [inflation] gets excessive then we’ll readjust our thinking. But certainly we’re not anticipating anything before the end of 2014.” ($MKC)

If there is inflation there are some barriers to getting it to the consumer. Retailers are sacrificing margins to give consumers deals

“This decrease in the gross profit margin as a percentage of net sales was primarily attributed to an increase in coupon expense resulting from an increase in redemptions and a slight increase in the average coupon amount” ($BBBY)

Lennar blames slow housing market on limited supply and tight credit

“Generally speaking, the market continues a slow and steady recovery that is driven by limited supply of available homes both new and existing that are on the market, limited supply of land available to add to the supply of these homes and constrained demand from purchasers who would like to buy, but are unable to access the mortgage market.” ($LEN)

Lennar argues that banks are still afraid of getting penalized for making aggressive loans

“to the extent that [banks] see put-back risk is great and really political and social risk is also great…it’s hard for the lenders to get back in the business lending on a rational and reverted to normal kind of underwriting standard.” ($LEN)

And says that we are far from 2006

“Every time I hear that we don’t want to go back to excesses of 2006, the fact that they throw that caveat in there is reflective of the fact that they don’t realize just how far field we are from that.” ($LEN)

Still, Lennar argues that fundamentals are strong and that rising rents (more inflation?) will push housing prices higher

“I’ve said a number of times that I think it’s really relevant that rental rates continue to run higher than fully loaded monthly payments on for-sale product and rental rates have continued to move up. So, there seems to be kind of a push on pricing across kind of the platform.”

Several companies had positive things to say about Europe

“We’re definitely very pleased to see the rebound we had in EMEA, which is something we’ve been watching very carefully this last quarter…what I am particularly pleased with is when you look at the countries contributing to EMEA growth both from a consulting and outsourcing standpoint, we have quite largest markets in the country and countries in Europe and think about France, Italy, Germany the U.K.” ($ACN)

“if you look at Europe in particular, the booking patterns have improved. So, people are booking further ahead than they did the prior year. Occupancy is up, yields are up, so that’s all very positive stuff.” ($CCL)

“our EMEA business exceeded our expectations. It’s very good news to see this business beginning to show some top line growth after our prolonged recession in the region” ($SCS)

Chinese quick service restaurants are recovering

“In China what we are seeing is a recovery in QSR, driven I think a lot by our customers having an increased frequency promotions and limited time offers to bring consumers back to the stores.” ($MKC)

Brazil is rebounding too

“we were watching carefully what was happening in Brazil. We had excellent performance for many years and we had a kind of pause almost a year ago literally.So again it’s very encouraging to see that through all the efforts made by our Brazilian leadership, Brazil is back with high single digit growth this quarter” ($ACN)

Financials

Two examples of good old fashioned financial engineering:

Monsanto taking advantage of favorable debt markets to fund a share buyback

“Given the strength of our current balance sheet and our confidence in our growth prospects, we have decided to take advantage of the favorable debt market. By the end of FY ‘15, we intend to target the net debt to EBITDA ratio of 1.5. And one of the ways we will immediately put that structure to work is through a new 10 billion share buyback authorization” ($MON)

Walgreen mulling tax inversion, but it’s not necessarily a no brainer

“We’re looking at everything from what the timing, best timing would be, what the capital structure should be, what our tax structure or what the structure could do to as far as our effective tax rate. So, and that’s complex stuff I guess is what I would say Ricky as we work through this. We are working around the clock to try to understand all the above so that we’re able to make the right decision for the company.” ($WAG)

Consumer

The Millenial homebuyer hasn’t defined themselves yet

“today’s millennial generation has not yet quite defined itself. Is it going to be focused on something that’s more in the middle the city focused or are they going to be building their family by getting married and having children maybe a little bit later in life, but nonetheless still looking for suburban lifestyle.” ($LEN)

Land should be ~20% of the cost of a home

“If you look at our land cost as a percentage of ASP it stayed relatively constant in that 20% to 21% of sales price which allows to have a really strong margin.” ($LEN)

Companies are starting to crack the code on digital marketing:

It’s about creating a dialogue

“An ongoing two-way dialogue with consumers is also a critical element of our digital ecosystem….Through our social media platforms, we leverage the power and passion of sport to deepen our relationship with our consumers.”

Because digital marketing is about creating a dialogue, we may start to see “public relations” take share from “advertising” 

McCormick calling out “Digital and PR” as an advertising category

“Where we are spending our money is about half in TV half in digital and PR and so we are encouraged by what we are seeing.” ($MKC)

Consumer definitions of health are changing–more focus on protein

“The consumer definition of health is changing in the cereal category. Clearly, they are interested in protein, clearly there are things that they – some consumers want to avoid like gluten, and so you’re going to see us build on those trends with new product offerings and continued renovation” ($GIS)

People are snacking more

“clearly snacking is a trend, a positive trend, and so maybe that is a key factor of that and we’re very focused on the snacking trend, and it’s not just the snacks in our snack businesses, we see yogurt becoming more and more of a snack food” ($GIS)

“Our snack customers are continuing to do pretty well and continuing to innovate and we’re seeing that reflected.” ($MKC)

Packaged foods struggling to maintain wallet share

“Our packaged food customers are struggling with core volume and part of the way that they are trying to overcome that is with new product innovation that we are working with them on” ($MKC)

Branded food companies are seeing more startup competition

“what we are seeing is very small inroads from a number of small and regional competitors that are gaining one-tenth of a share point or two-tenths of a share point. Their overall share base is still less than 1% or 2%” ($MCK)

“Our view is just the sheer number of new items and number of new competitors certainly in a – for instance in yogurt space, just lots of people coming in with new items. And so the competition for a limited number of quality display options, I would say is increasing.” ($GIS)

Technology

Among other things, Accenture’s customers are focused on creating industry specific applications

“our clients are focused on four main themes, the digital customer, efficiency in cost optimization, industry specific solutions and advancing the technology agenda, including new technologies, extending ERP and network optimization.”

Athletes want more real time feedback on performance

“Athletes are demanding more real time personalized feedback on their performance. They want easy access to products and services that will help them improve. And they want to be part of a community where they can share and compare information” ($NKE)

Nike an early adopter that sees revolutionary potential in 3D printing

“In New York at the Super Bowl, we launched the Vapor Carbon Elite Cleat, our first cleat to take advantage of the revolutionary potential of 3D printing.” ($NKE)

Healthcare

Still early days for the Affordable Care Act

“it’s still very early to tail around ACA. I mean obviously publicly they have announced 8 million people have joined the ACA. We certainly feel like we’re getting our share of that 8 million people, but certainly some of those folks were former cash paying customers that are now in the exchange.” ($WAG)

Materials, Industrials, Energy

Accenture’s resources segment sees moderate improvement

“we saw moderate improvement in resources with 2% growth. Energy continues to generate strong growth globally, but we did see some moderation from previous quarters, particularly in North America.” ($ACN)

Corn had an ok year from a planting standpoint

“I think corn had a good year not a great year…if you look across the Americas we saw acreage contract and I think a big piece of our numbers reflects that contraction.” ($MON)

Lots of corn acres shifted to soybeans, which are having a record year at Monsanto

“our soybean business is having an absolutely record year driven by course of new products in soybeans and the build out of Roundup Ready to Yield, but also the portfolio advantage we have is those corn acres shifted to bean acres and we picked up on that.” ($MON)

Agricultural productivity will be increasingly important over the next 20 years

“f you look forward than the next 20 years, there are no new acres. With one or two exceptions, there are no new acres and then sustainable intensification yield becomes more and more important. And the way you unlock that on a sustainable basis is providing better advice to the grower that allows him or her to get more bushels on that same footprint.” ($MON)

Miscellaneous Nuggets of Wisdom

Consumer products companies are marketing companies

“We are marketing company so our job is to understand the change and capitalize on it” ($GIS)

Marketing is about understanding what your customer wants and giving it to her

“[having] a better understanding of what exactly the consumer wants there, we will get better at giving them, giving those products to her” ($GIS)

You have to earn your relationship with your customer every day

“The key to unlocking this potential is and always has been to focus on the consumer. Our relationship with the consumer is something we need to earn every day.” ($NKE)

At its core, cost cutting is about raising labor productivity and reducing wasted materials

“there is a whole range of supply chain and manufacturing initiatives in place all the way from the evolutionary to the revolutionary. And the objective there is to raise the productivity of labor to reduce waste of materials and produce even more premium product.” ($NKE)

New business units should need to prove success to earn additional investment dollars

“We’ve again taken the philosophy that we…we pay as we go. So as the business earns its ability to invest then we’ll make the investment” ($MKC)

There’s always room to take price when you have a strong brand

“we think we can continue to raise prices, particularly around product innovation and brand strength.” ($NKE)

Steelcase 2Q14 Earnings Call Notes

This post is part of a series of posts called “Company Notes.” These posts contain quotes and exhibits from earnings calls, conference presentations, analyst days and SEC filings.

US Furniture industry contracted in Q1

” Overall we expected a better quarter. Our Americas business missed our revenue expectations by $10 million to $15 million but our 6% organic growth still appears to have outpaced the U.S. furniture industry which seems to have contracted in March and April.”

Industry contraction was a surprise vs. expectations

“That industry contraction was also a surprise versus what we expected three months ago but now we know the overall U.S. economy had negative GDP growth in the first quarter of the calendar year so perhaps this makes sense in hindsight.”

EMEA business doing better

“Meanwhile our EMEA business exceeded our expectations. It’s very good news to see this business beginning to show some top line growth after our prolonged recession in the region”

Strong and weak sectors

“With respect to vertical markets in the Americas we experienced order growth in the technical professional, manufacturing and energy information technology and insurance services sectors while healthcare government, financial services and education declined against the prior year.”

going forward encouraged by the pipeline

“As I look out to the future we feel good about the kind of projects that are in the pipeline, the quality of the projects and I would also say that at NeoCon this past month the quality of the discussions we’re having with customers is very high. We had probably a higher percentage of — I can’t quantify, but high percentage of customers with [real] [ph] projects that are on the books that’s being planned for this year and next year was actually quite good.”

We were really surprised by what happened in Q1

“as you can tell we were surprised ourselves if you think about our projections from three months ago. we could feel momentum building. We were surprised that orders weren’t as strong in March and May. At first you wonder is there something going on in your own business but as you have seen more data now about the industry and data about the U.S. economy including even this week’s restatement of first quarter calendar year growth by the Commerce Department. We can maybe say okay there is something really going on in the economy, maybe it’s related to weather, maybe it’s related to other factors something that caused the interruption but it doesn’t change my perspective on the future. I still believe that this coming quarter and the rest of the year has a lot of positive signs in the U.S.”

Nike 2Q14 Earnings Call Notes

This post is part of a series of posts called “Company Notes.” These posts contain quotes and exhibits from earnings calls, conference presentations, analyst days and SEC filings.

Growth, gross margin expansion

“Here are the fiscal ‘14 highlights. Nike Inc. revenues grew 10% to nearly $28 billion. Gross margin increased 120 basis points to 44.8%. SG&A rose 12% reflecting continued strategic investments in our brands and operations. And despite significant currency pressure, diluted EPS rose 11% to $2.97 for the full year.”

Five brands, six categories, eight geographies

“When I look within and across our five brands, six geographies and eight categories, I see tremendous untapped potential. ”

Earn your relationship with your consumer every day

“The key to unlocking this potential is and always has been to focus on the consumer. Our relationship with the consumer is something we need to earn every day.”

Vapor carbon elite cleat using 3D printing

“In New York at the Super Bowl, we launched the Vapor Carbon Elite Cleat, our first cleat to take advantage of the revolutionary potential of 3D printing.”

Real time personalized performance feedback

“Athletes are demanding more real time personalized feedback on their performance. They want easy access to products and services that will help them improve. And they want to be part of a community where they can share and compare information, find performance tips and motivate each other. We are building an integrated system of digital services that will provide seamless access to our products, a full array of services and the most advanced digital tools to measure, motivate and inspire.”

Social media a centerpiece of marketing

“An ongoing two-way dialogue with consumers is also a critical element of our digital ecosystem. It provides us insights that drive innovation, strengthens consumer connections to our brands, and provides a platform for consumers to interact with each other. Through our social media platforms, we leverage the power and passion of sport to deepen our relationship with our consumers.”

Flyknit has big potential to lower manufacturing costs

“Flyknit you mentioned has enormous potential. We are getting tremendous response to that product we are improving or extending the scope of Flyknit across multiple categories. I think you will see over the next couple of fiscal years Flyknit and some of the other investments we are making in manufacturing innovation really starts to make a more sizable impact on our product cost reduction.”

Raise prices around innovation

“working to optimize that price value equation, we think we can continue to raise prices, particularly around product innovation and brand strength. And then the second thing is migrating consumers to premium product. So, that is definitely a trend we have seen both on the footwear and the apparel side”

Raise productivity of labor and reduce waste of materials

“as Mark indicated earlier, there is a whole range of supply chain and manufacturing initiatives in place all the way from the evolutionary to the revolutionary. And the objective there is to raise the productivity of labor to reduce waste of materials and produce even more premium product.”

Dot com is going to be a bigger and bigger portion of the business, China no exception

“Certainly we are very bullish on dot-com not only in China but around the world. We think that’s just going to continue to be a bigger and bigger percentage of business going forward and China is certainly no obsession. Very digitally connected country consumer and that channel for us that medium for commerce is absolutely the future. So we are going to be as bullish there as we possibly can.”

Lennar 2Q14 Earnings Call Notes

This post is part of a series of posts called “Company Notes.” These posts contain quotes and exhibits from earnings calls, conference presentations, analyst days and SEC filings.

Housing market steadily recovering, but supply is limited, consumers would like to buy but can’t get mortgages

“Generally speaking, the market continues a slow and steady recovery that is driven by limited supply of available homes both new and existing that are on the market, limited supply of land available to add to the supply of these homes and constrained demand from purchasers who would like to buy, but are unable to access the mortgage market.”

Fundamental drivers still in tact

“We continue to believe that the fundamental drivers of improvement in the housing market remain a steadily improving economy with a slowly improving employment picture unlocking pent-up demand while supplies remain constrained to meet that demand.”

Shortage will continue to drive housing recovery forward

“We continue to believe that there remains a production deficit of both single and multifamily dwellings from the underproduction that took place during the economic downturn and up to and including this year and last. This shortfall is likely to continue to define the housing markets for the foreseeable future and will drive the housing recovery forward.”

Strategy to focus on the move-up market

“We have continued to focus on homebuilding strategy on the move-up segment of the market as the first time home purchaser has not yet been able to access the mortgage market.”

Blame weak first time buyer activity on the mortgage market

“we are strategically positioned with both land and product to capture the first time home buyer demand when it is enabled by the mortgage market and it emerges with inevitable strong and pent up demand.”

Rents are moving up going to push pricing

“I’ve said a number of times that I think it’s really relevant that rental rates continue to run higher than fully loaded monthly payments on for-sale product and rental rates have continued to move up. So, there seems to be kind of a push on pricing across kind of the platform. ”

General trend of pricing still towards the upside

“there is not a lot of land available to replace communities that are depleted. So, as rental rates are moving, it’s kind of dictating a little bit, where pricing is going on the for-sale side of the business. The for-sale side could probably ramp up volume a lot more, if it held pricing back, but the replacement of communities is very difficult. Land values as you know are stronger than they have been, so that balance of pace and price is a very local matter, each market is a little bit different. But if you take kind of a 30,000 foot view the general trend is still towards the upside.”

Land prices are a function of what you can build on it

“I think you always have to keep in mind that land value is a residual of what you can build on it. Land values don’t really just move aggressively on their own, sometimes they get ahead of themselves just like any other pricing mechanism. But at the end of the day it’s all a residual calculation of what you are going to be able to build on the land, what market is going to desire a particular location that’s going to drive what products you build on the land and what you can afford to pay for it. ”

Land cost should be 20-21% of the total cost

“If you look at our land cost as a percentage of ASP it stayed relatively constant in that 20% to 21% of sales price which allows to have a really strong margin.”

Long lead time to build an apartment community

“I think about our apartment business as kind of a manufacturing plant. It has a fairly long lead time in production and the startup period which we are going through now takes probably 2.5 years to from start to stabilization and sale of an apartment community.”

Banks are still afraid of penalties

“We still have the stickiness I think of a banking and mortgage banking industry that is having difficulty getting over the penalty phase of the downturn that we have endured and that penalty Phase is really relevant and because to the extent that people see or they put back risk is great and really political and social risk is also great meaning reputational risk it’s hard for the lenders to get back in the business lending on a rational and reverted to normal kind of underwriting standard.”

We’re really far from the excesses of 2006

” have listened to a number of people speak recently from various parts of the government and there is this kind of consistent reframe that we need to loosen mortgage standards. But we don’t want to go back to the excesses of 2006. Every time I hear that we don’t want to go back to excesses of 2006, the fact that they throw that caveat in there is reflective of the fact that they don’t realize just how far field we are from that.”

Millenial homebuyer hasn’t really defined themselves yet

“We also recognized that today’s millennial generation has not yet quite defined itself. Is it going to be focused on something that’s more in the middle the city focused or are they going to be building their family by getting married and having children maybe a little bit later in life, but nonetheless still looking for suburban lifestyle. We have developed a land strategy that’s really crafted on creating as much optionality for ourselves in that space as possible looking at different alternatives and preparing products for when that market presents itself.”

Multifamily starts at a normal level, single family just so low

Right now, multifamily is making up about a third of all starts, which is an historical high, but realistically, multifamily is operating or trending to exactly its traditional zone of 300,000 to 400,000 starts per year. It’s just that single-family is awfully low right now.”

Home ownership rate has fallen by 500bps

“if you think about the math we have trended in homeownership from a high of 69.2% homeownership rate down to something like a 64.7% homeownership rate. And every 1 percentage point move in homeownership rate translates into 1.3 million households either doubling up or looking for a rental.”

Accenture 2Q14 Earnings Call Notes

This post is part of a series of posts called “Company Notes.” These posts contain quotes and exhibits from earnings calls, conference presentations, analyst days and SEC filings.

Very pleased with results

“We are very pleased with our financial results for the first quarter. We generated strong revenue growth and earnings per share, grew operating income, returned substantial cash to our shareholders and delivered another quarter of very strong year bookings.”

Solid growth

“New bookings were $8.8 billion, bringing us to $27.6 billion for the first three quarters of the year. We generated revenues of $7.7 billion, a 7% increase and above our guiding range. We delivered earnings per share of $1.26, up 11% from adjusted EPS in the third quarter last year.”

Customers focused on four areas

“our clients are focused on four main themes, the digital customer, efficiency in cost optimization, industry specific solutions and advancing the technology agenda, including new technologies, extending ERP and network optimization.”

Bank client revenue grew 5%

“Financial services grew 5% consistent with last quarter. We’re particularly pleased with the significant growth in banking and capital markets in EMEA and Asia Pacific.”

Resources segment improved

“we saw moderate improvement in resources with 2% growth. Energy continues to generate strong growth globally, but we did see some moderation from previous quarters, particularly in North America.”

Tax rate just 25%

“Our effective tax rate for the quarter was 25% compared with an adjusted tax rate of 24.8% for the third quarter last year.”

Examples of projects in Energy, Finance, Technology

“We are helping Baker Hughes a leading oil field services company transform its finance and accounting operations across 90 countries, delivering more than $50 million in annual cost saving so far.”

“For large European banks, we are providing application development and management services to support the bank’s repositioning to a new digital platform. This is a major strategic IT transformation designed to increase productivity by up to 20%.”

“And we are working with the leading global software company leveraging our analytics and technology capabilities in finance and accounting to deliver cost savings of more than $150 million over the next seven years.”

Acquired a company specializing in industry specific applications

“i4C specializes in tailored industry and function specific applications to speed up the delivery of new insights and business outcome. ”

Lots of opportunity but ongoing macro uncertainty

“we have an environment that has an abundance of opportunities, but it also is one that has ongoing — I am talking about the macro environment has ongoing challenges and uncertainty.’

Managing the business for 10-30bps of margin expansion. Forecasting the low end of that for this year

“we feel like if we’re moving the margins up year-over-year in that 10 to 30 basis points range, that’s very consistent with what our objectives have been and we think that’s a reasonable place for us to land and we’re balancing many things within that including investments in our business, which include the impact of acquisitions just to name that as one.”

We have an ebb and flow to our business in terms of margins

“we have ebb and flow or operating margin across our operating groups as their portfolio mix just evolves right. And so a swing of a point or two in either direction shouldn’t be over read at that level because sometimes it’s just the ebb and flow of the portfolio and then the time of kind of balance the overall expenses associated with that.”

Payroll efficiency is a key profitability driver

” job number one for us in driving our profitability objective going forward is to get payroll efficiency right.”

Pleased with the rebound in Europe

“We’re definitely very pleased to see the rebound we had in EMEA, which is something we’ve been watching very carefully this last quarter…what I am particularly pleased with is when you look at the countries contributing to EMEA growth both from a consulting and outsourcing standpoint, we have quite largest markets in the country and countries in Europe and think about France, Italy, Germany the U.K.”

“And it is very encouraging to see that with the slow recovery of Europe that seems to show some sustained ability on this slow recovery in Europe is creating more confidence with investors and this is what’s explaining the pickup of our business in Europe”

Brazil rebounding too

“as you know and we signaled that in the prior quarters, we were watching carefully what was happening in Brazil. We had excellent performance for many years and we had a kind of pause almost a year ago literally.

So again it’s very encouraging to see that through all the efforts made by our Brazilian leadership, Brazil is back with high single digit growth this quarter”

Japan strong with momentum

“Japan is sustaining a very strong double-digit growth and it’s not the story of a quarter. It’s been true this last quarter.”

South Africa, dependent on resources is most challenging

“South Africa as you know which is a country, which is very dependent on natural resources and very consistent what David mentioned previously natural resources, very cyclical challenging industry.

South Africa very dependent on natural resources and it’s a country where we are most challenged. ”

14% employee attrition is normal

“that 14% is well within our tolerant zone and there is ebb and flow and so just frankly there really isn’t a story behind that. It’s just kind of the normal flow of how attrition goes.”

McCormick and Co 1Q14 Earnings Call Notes

This post is part of a series of posts called “Company Notes.” These posts contain quotes and exhibits from earnings calls, conference presentations, analyst days and SEC filings.

Weather was unfavorable for grilling

“There was a later start to the grilling season. The weather was not favorable for grilling. We’re expecting a pretty good grilling season as we go through the summer and we’re planning to extend it through the third quarter and even through Labor Day and to tailgate season so we’re pretty encouraged.”

Seeing some share creep from tiny branded spice companies

“Private label is more flat. Most of the — we have one larger branded competitor and that competitor is relatively flat. And so what we are seeing is very small inroads from a number of small and regional competitors that are gaining one-tenth of a share point or two-tenths of a share point. Their overall share base is still less than 1% or 2%, I think as I looked at the most recent period.”

Strong growth international, weak growth domestic

“We had the strong growth in the international markets and then we had obviously the U.S. consumer results that you saw as we reported. It’s too early for us to be that specific”

Half TV half digital and PR for marketing spend

“Where we are spending our money is about half in TV half in digital and PR and so we are encouraged by what we are seeing. What you’ll see in the back half is additional support for our big programs like holiday, fall cooking and also some digital initiatives that will help to drive some of our new product sales.”

UK is particularly tough for them

“Yeah the UK market is specifically tough market. There has been a lot of press on the large customers there and some of their challenge is specific to what we’re doing in our business. It’s very similar to what we’re doing in the U.S. with new products and with supporting our brands with advertising.”

There is some inflation, but not anticipating taking price

“we’re not anticipating any near term pricing, any new near term pricing in our consumer business at this point…There is some upward cost inflation specifically in commodities like pepper and vanilla and we’re working with our CCI programs to help to try to offset those. Obviously if it gets excessive then we’ll readjust our thinking. But certainly we’re not anticipating anything before the end of 2014.”

Anticipating 2-3% inflation

“We said it was in the low single digits, 2% to 3%.”

Snack foods customers innovating

“Our snack customers are continuing to do pretty well and continuing to innovate and we’re seeing that reflected.”

Packaged foods not doing so well

“Our packaged food customers are struggling with core volume and part of the way that they are trying to overcome that is with new product innovation that we are working with them on.”

Customers are pushing more innovation into the pipeline

“We have a stronger innovation pipeline this year than we had at this time last year. So we continue to have a good outlook on that obviously as customers adjust their thinking and focus more on promotional spending or on driving different core products, they may change that.”

Recovery in China QSR

“In China what we are seeing is a recovery in QSR, driven I think a lot by our customers having an increased frequency promotions and limited time offers to bring consumers back to the stores. ”

New businesses should be grown with a pay as you go philosophy

“we think India is certainly a longer term play…We’ve again taken the philosophy that we generally take in a market like this that we pay as we go. So as the business earns its ability to invest then we’ll make the investment”

Can Banks Keep Releasing Reserves?

Over the last four years reserve releases have added more than $100 B to bank earnings.  However, this boost to earnings may be starting to diminish.  The banking system’s loan loss reserve has fallen to 1.7% of assets from 3.7% of loans in 2010. 1.7% is not far from a normalized level of reserves.

The current reserve is above the 1.2% level that the banking system reached before the financial crisis; however after the severity of the last cycle, it will be interesting to see if regulators allow banks to continue to decrease their reserves relative to their loans.

If regulators pressure banks to hold their reserves here, then provisions could start to increase again to match charge-offs or at least hold steady (if charge-offs fall to meet provisions), which would be a headwind to bank earnings growth.

If regulators allow reserves to fall back to the 1.2% level it could happen in two ways.  Banks could either release another ~$37 B in reserves or could grow loans without adjusting reserves.  The banking system would need to grow its loan portfolio by ~7% per year for the next five years in order for reserves to fall back to 1.2% of loans.

Loan Loss Reserves

Source: FDIC data

A bank’s loan loss reserve is a balance sheet item that is a contra asset against its loan portfolio.  Banks add to the loan loss reserve by “provisioning” money on the income statement.  They subtract from the loan loss reserve through “charge-offs” which is not a consolidated financial statement item.  When charge-offs exceed provisions, the loan loss reserve (balance sheet item) declines.  This is referred to as a “reserve release.”  When provisions exceed charge-offs, it is referred to as a “reserve build.”

During the financial crisis, banks built reserves heavily in anticipation of loan losses.  Since credit quality has improved they have been releasing reserves as charge-offs were taken against existing reserves and the expectation for future charge-offs declined.

In the old days, the loan loss reserve was viewed as a “cookie jar” for banks.  Banks would over-provision in good times and under-provision in bad times in order to smooth earnings.  Some people argue that Sabanes-Oxley took away the cookie jar by forcing banks to set aside fewer reserves in good times.  Many argue that this exacerbated the financial crisis because banks had to compensate for low reserve levels and incurred inflated income statement losses in the process.

Bed Bath and Beyond 2Q14 Earnings Call Notes

This post is part of a series of posts called “Company Notes.” These posts contain quotes and exhibits from earnings calls, conference presentations, analyst days and SEC filings.

Overall environment challenging

“While the overall retail environment has been challenging, we believe we are making the necessary investments for our company’s long term success.”

42.7m sqft, 1% growth

“On May 31, 2014, consolidated store space net of openings and closings for all our concepts was approximately 42.7 million square feet, an increase of approximately 1.2% over the end of last year’s first quarter.”

1500 stores

” we currently offer 1,504 stores, consisting of 1,016 Bed Bath & Beyond stores in all 50 states, the District of Columbia, Puerto Rico, and Canada; 268 stores under the names World Market, Cost Plus World Market, or Cost Plus; 92 buybuy BABY stores; 78 stores under the names Christmas Tree Shops, Christmas Tree Shops andThat!, or andThat!; and 50 stores under the names Harmon or Harmon Face Values.”

Can get to 1300 bed bath locations

“We believe that throughout the United States and Canada there is an opportunity to operate in excess of 1,300 Bed Bath & Beyond stores”

GM contraction due to increase coupon expense, free shipping and mix

“Gross profit for the fiscal first quarter was approximately 38.8% of net sales compared to approximately 39.5% of net sales in the corresponding period a year ago. This decrease in the gross profit margin as a percentage of net sales was primarily attributed to an increase in coupon expense resulting from an increase in redemptions and a slight increase in the average coupon amount; an increase in net direct to customer shipping expense, which was impacted by our free shipping threshold; as well as a shift in the mix of merchandise sold to lower-margin categories.”

Modelling lower GM for remainder of year on continuation of headwinds

“we are modeling deleverage for both gross profit and SG&A for the fiscal second quarter and full year. Contributing to the modeled gross profit deleverage are an assumed continuation in the shift of the mix of merchandise sold to lower-margin categories, an increase in coupon expense, and an increase in net direct to customer shipping expense.”

Monstanto 2Q14 Earnings Call Notes

This post is part of a series of posts called “Company Notes.” These posts contain quotes and exhibits from earnings calls, conference presentations, analyst days and SEC filings.

More than just a seeds company

“just as we led the seeds revolution, we are driving the industry to expand the view on how we deliver yields and productivity to our grower customers.”

Expecting to double EPS over the next five years

“we are willing to back our confidence and long-term growth with a new target to at least double our ongoing EPS over the next five years.’

10-12m acres of soybeans

“while it’s early, we are very comfortable being able to target 10 million to 12 million acres in the upcoming season. That’s our biggest second year step up in soybeans.”

100m acre opportunity

“The majority of this next year’s expected step up will be in Brazil, but we will also begin commercial launch across Argentina, Paraguay and Uruguay passing another key strategic milestone in this 100 million acre opportunity.”

1B acre runway, $20 B opportunity for precision ag

“This year is a pivot point. We have some important proof points this year that increase our confidence in the ramp up to what we see as a 1 billion acre runway and a $20 billion market opportunity. As farms are increasingly digitized, precision ag can become an integrating point for information, seed, equipment and other inputs.”

Corn had a good but not great year

“I think corn had a good year not a great year. Beans picked up a lot of that slack, but if you look across the Americas we saw acreage contract and I think a big piece of our numbers reflects that contraction.”

Soy beans are having a record year

“our soybean business is having an absolutely record year driven by course of new products in soybeans and the build out of Roundup Ready to Yield, but also the portfolio advantage we have is those corn acres shifted to bean acres and we picked up on that.”

Take advantage of cheap debt to buyback stock

“Given the strength of our current balance sheet and our confidence in our growth prospects, we have decided to take advantage of the favorable debt market. By the end of FY ‘15, we intend to target the net debt to EBITDA ratio of 1.5. And one of the ways we will immediately put that structure to work is through a new 10 billion share buyback authorization, which includes our intent to use 6 billion in the near-term through an accelerated buyback program.”

seeds and traits business to drive growth

“Roundup is a great product, it’s a great cash generator, but for more than 2019 looking back it’s going to be our seeds and traits business that really drives that growth is the integration of the Climate Corp platform and how we integrate those two pieces together and that’s really going to be the central, that’s the central core of our growth story at Monsanto going forward.”

No new acres 20 years from now

“if you look forward than the next 20 years, there are no new acres. With one or two exceptions, there are no new acres and then sustainable intensification yield becomes more and more important. And the way you unlock that on a sustainable basis is providing better advice to the grower that allows him or her to get more bushels on that same footprint.”

General Mills 2Q14 Earnings Call Notes

This post is part of a series of posts called “Company Notes.” These posts contain quotes and exhibits from earnings calls, conference presentations, analyst days and SEC filings.

Promotional spend less effective, input costs above expectations

“In the fourth quarter, promotional spending in developed markets was less effective than we planned and input cost inflation was a bit above our forecast.”

Revenue up slightly, operating profit down, EPS up

‘Net sales for 2014 grew 1% to reach $17.9 billion. On a constant currency basis, net sales increased 2%. Adjusted segment operating profit fell 2% to $3.2 billion. Net earnings attributable to General Mills, totaled more than $1.8 billion and diluted earnings per share were $2.83. Adjusted diluted EPS grew 4% to reach $2.82.”

More an more players competing for shelf space

“It really for us related to execution. We just see more and more of the players interested in getting merchandising. There are limited number of places in the store to get that high quality that we want, which is really good placement on end-aisle displays coupled with the feature support that we know drives efficient merchandising.”

Consumer definition of healthy cereals is changing…more focus on protein

“The consumer definition of health is changing in the cereal category. Clearly, they are interested in protein, clearly there are things that they – some consumers want to avoid like gluten, and so you’re going to see us build on those trends with new product offerings and continued renovation.”

More competitors

“Our view is just the sheer number of new items and number of new competitors certainly in a – for instance in yogurt space, just lots of people coming in with new items. And so the competition for a limited number of quality display options, I would say is increasing.”

Dairy inflation moderating

“We also of course are seeing some moderating dairy inflation; and it’s always hazardous to predict what commodity prices are going to do as well, as you know. But we’re encouraged by what we are seeing on that front.”

Modelling 3% inflation for 2015 FY

“Yes, we have 3% inflation as you know we have a fairly broad market basket”

Snacking is a trend

“clearly snacking is a trend, a positive trend, and so maybe that is a key factor of that and we’re very focused on the snacking trend, and it’s not just the snacks in our snack businesses, we see yogurt becoming more and more of a snack food and in fact one of the reasons for the resurgence of our core Yoplait businesses is that we’re seeing more snack usage and we’re actually talking about the product and its snack versatility in advertising.”

We are a marketing company, understanding the changing consumer is our job

“We are marketing company so our job is to understand the change and capitalize on it, find opportunity there, and so I think it’s more than one change, as I tried to say. But it’s more snacking, it’s changing definitions of health and wellness, but as we get clear, I think, understanding of those and better understanding of what exactly the consumer wants there, we will get better at giving them, giving those products to her and these again should become opportunities for us.”