Company Notes Digest 1.29.15

Each week I read dozens of transcripts from earnings calls and presentations as part of my investment process. Below are some of the most important quotes about the economy and industry trends from the transcripts that I read this week. Full notes can be found here.

The Macro Outlook:

2015 may be shaping up to be a much tougher year than expected

“Now for the 2015 outlook, well it’s shaping up to be a much tougher year than we were expecting when we went through our preliminary view of 2015 with you all last October.” ($CAT)

Caterpillar is readjusting its sales forecast from flat to down 9%

“As I’m sure you picked up from our financial release this morning, we are more negative on prospects for 2015 than we were three month ago…Back in October, we expected sales and revenues with the flat to slightly up. Our current view is that sales and revenues will be about 50 million and that’s down over 9% from 2014.” ($CAT)

This will be the first time sales have declined for three straight years since the depression

“Based on our outlook for 2015 sales and revenues, 2015 is going to be our third consecutive year of sales decline. And to put that in some perspective, that’s happened only one other time in the history of our company and that was during the great depression in 1930, 1931 and 1932.” ($CAT)

The US is still positive, but not as positive. The rest of the world is challenged

“U.S. is still a positive but probably not quite as positive as we thought before. Almost everyplace else in the world to some degree negative. We are still not getting any decent economic growth in Europe. The developing countries Brazil, China are still let’s just say challenged.’ ($CAT)

In Caterpillar’s case, the headwind is primarily oil

“Without a doubt, the impact of substantially lower oil and gas prices is the most significant reason we’re expecting lower sales in 2015.” ($CAT)

For other multi-nationals, currency is the main problem

“This is the most significant fiscal year currency impact we have ever incurred…a 14 percentage-point drag on the quarter” ($PG)

“Obviously, what we’ve seen during Q1 has been unprecedented movements in currencies” ($AAPL)

“Like other multinational companies, we’re facing significant currency headwinds…currency is likely to hurt our bottom line by more than 15% in 2015.” ($KMB)

“the U.S. dollar…will be a substantial headwind for us in 2015” ($DD)

“we expect that FX will negatively impact revenue growth by approximately four points in [FY]Q3.” ($MSFT)

Multi-nationals will try to offset currency impacts by raising prices where possible

“the primary ways that we’ll offset currency headwinds will be by raising selling prices where we can, delivering cost savings, and controlling our overhead spending’ ($KMB)

It will be easier to take price in geographies where there have been sharper moves

“Where you’ve seen big currency moves, like Russia, Argentina, you’ll see a disproportionate amount of pricing in markets like that. If you see a market like Australia where you’ve had currency weakness, or the euro zone where you’ve seen currency weakness, it will be much tougher to get pricing in those markets” ($KMB)

For now, the affects of a strong dollar are mostly translational, but in theory a rising dollar will not be good for US manufacturing volumes either

“…Rising dollar and I will expect that 2015 would see more of that will not be good for U.S. manufacturing nor the U.S. economy.’ ($CAT)

So far order volumes have not been affected at GE though

“I would in the short run here we’ve seen very little that I am aware of, very little impact on our order performance as a result of currency.’ ($GE)

On the bright side, a stronger currency can be good for costs

“the stronger dollar was negative for our sales is positive for costs overall and that’s because of our non-US operations and our material purchases outside the U.S. and overall that’s expected to be a positive for profit.’ ($CAT)

On the other hand, companies have other cost headwinds to navigate

McDonald’s sees low inflation, higher minimum wage and healthcare costs impacting margins this year

“Having said that, we are in a relatively low inflation environment, so pricing as I noted in my commentary, pricing will still be probably below our average if you assume the low inflationary environment continues. At the same time, multiple states are increasing minimum wages. We’ve got National Healthcare impacting 2015 for the first time. That’s going to hit the McOpCo margin for about 20 basis points.” ($MCD)

Oil based costs have not fallen as quickly as the price of oil

“On the commodity front, the outlook has improved some in the past three months, but at this point we are not planning for a big commodity windfall. Oil-based costs have started to fall recently, but not nearly as much as the drop in oil prices.” ($KMB)

Don’t forget that agriculture is in for a tough year too

“In agriculture the fundamentals are challenging. Farmer net income has declined and we anticipate lower corn planted area as farmers favor soybeans over corn.” ($DD)

There were some positive comments in a mostly negative week:

The weather has been better this year. (SK Comment: Remember Q1 was pretty bad last year, so that could help comps)

“I think weather patterns have been better this year and last year, I mean, we didn’t gave a weather report last year, but I do think that weather impacted people’s ability to get out and buy else.” ($DHI)

Despite a gloomy sales forecast, Caterpillar does not see credit issues in their financing business

“at this moment, I would say that we don’t have any concerns relative to our portfolio performance and past dues coming off another year of improvement and I’d say we’d pretty stable heading into ’15.’ ($CAT)

McDonald’s saw negative trends in Germany starting to abate

“over to Germany; negative trends are beginning to moderate with the month of December marking the highest comparable sales performance in more than two years.” ($MCD)

Financials:

Competition among banks is intense but rational

“the competitive environment in the card business, I would describe as – intense, but consistent and fairly rationale.” ($COF)

Digital banking is transforming the financial industry

“I haven’t seen anything remotely like this in terms of the ability to transform how a business works. The only parallel is the thing that led me to go out and build Capital One in the first place, was looking at how information and technology we’re going to transform starting with the card business and ultimately banking.” ($COF)

Spring selling season is on the horizon for the housing industry

Spring is not even really here yet. But we’re in line with our expectations and we would expect that we’re going to get every margin of dollar that every dollar of margin we can as we move to the spring and as our pace and absorptions stay on track.’ ($DHI)

DR Horton hasn’t seen a big impact to Texas from oil prices quite yet

“We saw our Texas operations perform in line with the company and our expectations for the first quarter and into the first few weeks of January so far. So, while we would expect that there could be some general slowdown in Texas at some point, specifically perhaps Houston and Midland, we haven’t exactly seen it yet, and we’re very encouraged seeing the results inline with the expectations right now.” ($DHI)

Technology:

It’s hard to comprehend how good Apple’s iPhone sales were

“This volume is hard to comprehend. On average we sold over 34,000 iPhones every hour, 24 hours a day, everyday of the quarter’ ($AAPL)

The boost from the PC refresh cycle has ended

“As expected, the one-time benefit of Windows XP end-of-life PC refresh cycle has now tailed off.’ ($MSFT)

There is progress in the consumer segment though

“I actually think we agree with most of the benchmarks in terms of PC unit health across business, which has been stable since FY ’13 and across consumer where we see meaningful progress made in unit growth both last quarter and especially this one.’ ($MSFT)

Healthcare:

The healthcare industry now has more visibility than it’s had for several years

“as I see hospital CEOs when I travel the circuit, you just get a lot more positive in terms of their ability to know what the next few years are going to be like to do their planning, to do their growth plans and things like that and that didn’t exist let’s say 24 months ago.” ($GE)

Materials, Industrials, Energy:

Most people still don’t think that oil prices are going to stay here long term

“Nobody that I can find expects that this is going to be a long term trend and certainly no one at this point in time has made any decisions to alter long term capital, facility expansions, or things like that. I think it’s just way too early to see if this is sustainable trend in energy prices.” ($UNP)

It’s worth remembering that natural gas prices already collapsed several years ago and things were ok

“it is also worth recalling that natural gas prices also fell significantly in the 2008-2009 period, and those prices have not rebounded fundamentally. Gas production was a very significant component of most exploration companies and impacted energy service companies’ revenues as well at that time.’ ($ZION)

Even if oil prices stay low, intermodal railroad traffic may still grow because of truck driver shortages

“I think the factors that we’ve been talking about are still there or even growing. The factors being driver shortages, I think that is still a factor that is going to drive conversions.” ($UNP)

Lower oil prices probably shouldn’t impact alt energy sources

“So we don’t see that, a short-term blip in oil is taking the PV industry office long-term kind of projection.” ($DD)

Farmers will likely plant less corn this year

“we’re expecting corn acres to be down…So it’s hard to size the shift, but we do expect the decline in corn acres and a slight increase in soybeans” ($DD)

Metallurgical coal markets may finally be coming into balance after four years of imbalance

“In 2015, we forecast that seaborne metallurgical coal demand growth will outpace supply increases for the first time since 2011.’ ($BTU)

Miscellaneous Nuggets of Wisdom:

Volatility in equity value is different from credit risk

“I think sometimes people think about that valuations — if a valuation — company goes from $100 million to $250 million or $300 million and it goes back from $300 million back to $100 million, that all of a sudden the credits — there’s a risk to the credit. And for the most part, that’s actually not true. So we look at credit, and as Marc has articulated, we feel very good about where we are from a credit perspective of keeping with our underwriting standards, et cetera.” ($SIVB)

When underwriting a deal, it’s sometimes best to assume that nothing changes

“As we look forward will underwrite a land purchase, we assume flat pricing on the homes as well as flat pricing on the cost develop if it’s a land parcel to be developed as well and stick and brick. It just too hard to start predicting, this is going to go up by this percent, these costs to go up by that percent. It’s much for us controllable underwriting process to look at pricing on a flat basis and then understand what that performance we expected to be to make the investment decision.’ ($DHI)

Spending money on innovation is more productive than discounting

“promotion is the last place we would like in most cases to spend a dollar, we would rather spend it on equity or innovation and if you just look at the drivers of our top line growth over time, I think that it bears that out.’ ($PG)

Full transcripts can be found at www.seekingalpha.com

Apple FY 1Q15 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. Full transcripts can be found at Seeking Alpha

This volume is hard to comprehend

” Demand for iPhone has been staggering, shattering our high expectation, with sales of over 74 million units, driven by the unprecedented popularity of iPhone 6 and iPhone 6 Plus. This volume is hard to comprehend. On average we sold over 34,000 iPhones every hour, 24 hours a day, everyday of the quarter”

Apple may have accounted for half of all mobile activations globally

“Mac units were up 14% to $5.5 million, while the rest of the PC market continued to decline. App Store revenues was up a remarkable 41%. Demand was strong around the world. Flurry estimated that Apple products accounted for over half all mobile device activations globally from December 19th to December 25th.”

Watch should start shipping in April

“Development for Apple Watch is right on schedule and we expect to begin shipping in April. ”

Huge growth everywhere

“Our growth was broad based across the world, with revenue from developed countries up 20% and revenue from emerging countries up 58%. The performance of our Greater China segment was particularly impressive, with revenue up 70%”

iPhone revenue grew 57% y/y

“iPhone ASPs were $687, an increase of $50 over the year ago quarter. This led to iPhone revenue growth of 57% year-over-year, with quarterly sales exceeding $50 billion for the first time ever.”

Our customers love their iPhones

“Our customers love their iPhones. A December ChangeWave survey measured a 97% customer satisfaction rating for iPhone. A study published by Chitika Insights last month indicated that iPhone accounts for 53% of North America smartphone web traffic, almost twice the level of the next closest brand. And in the corporate market ChangeWave found that among IT buyers planning to purchase smartphones in the March quarter this year, 77% intend to purchase iPhones.”

Unprecedented currency impact

“Obviously, what we’ve seen during Q1 has been unprecedented movements in currencies. I would say during the course of the quarter the biggest impact came from the Japanese yen, the Russian rubel, but also from euro, Australian dollar, Canadian dollar. Our revenue growth during Q1 would have been four percentage points higher on a constant currency basis.”

Currency headwinds will be stronger in Q2 than Q1

“the foreign exchange headwinds will be stronger in Q2 than they were in Q1 for two main reasons. The first one is the fact that the U.S. dollar has continued to appreciate against foreign currencies during the last few weeks. And the other one is the fact that our existing hedges expire.”

Our hedges will continue to expire too

“our hedges continue to expire, they get replaced by new hedging contracts at current levels and so — and there is the impact that we would see during the course of the year.”

Just got to supply balance in Jan

“Just recently we became in supply demand balance on the 6 and 6 Plus in January. We were not able to reach a balanced state during our fiscal Q1.”

Lots of people still need to upgrade, lots of new customers. Very bullish on iPhone

“We believe that it’s the best smartphone in the world. Our customers are telling us that. The market is telling us that. We’re doing well in virtually every corner of the world. And so we’re very bullish that it does have legs. I would point out that only a small fraction of the installed base has upgraded. And so there is a lot more people within the installed base. But I would also point out that we had the highest number of customers new to iPhone last quarter than in any prior launch. And also that the current iPhone line up experienced the highest Android switcher rate in any of the last three launches in the three previous years.”

Very high expectations on the watch

“My expectations are very high on it. I’m using it every day and love it and I can’t live without it. So I see that we’re making great progress on the development of it. The number of developers that are writing apps more for it are impressive and we’re seeing some incredible innovation coming out there. ”

I think this is the year of Apple Pay

“given that we’ve launched in October, I’m actually unbelievably shocked, positively shocked at how many merchants were able to implement Apple Pay in the heart of their holiday season, because generally most people sort of lock down and don’t do very much. But we were able to get this in a lot of different merchants and I give them a lot of credit for that. But I think we’re just on the front end. And I think that this is the year of Apple Pay. ”

There are still a lot of potential new customers

“given there are fair amount of Android units out there, there is also an enormous amount of Android customers that could switch. And I’d also remind you that there is a lot of people that have not yet bought a smartphone. And I know it doesn’t feel like that when you’re sitting in the United States, but from a worldwide point of view there’s still lots of them. “

Quantifying the Oil Stimulus

Last week on Suntrust’s conference call, the bank’s CEO noted that the decline in oil prices should give the US consumer an income benefit roughly equivalent to the size of a tax refund.  That comment got me thinking about another stimulus of days past: the Bush administration’s 2008 stimulus checks.

Back in February of 2008, as the recession was just getting started, congress passed the Economic Stimulus Act of 2008 which gave a $300 check to almost every man, woman and child in America.  The total cost of that stimulus was projected to be $152 Billion.  Despite much fanfare, it’s not clear that the program ever made much of a difference to the magnitude of the ensuing recession.

By comparison, today’s oil stimulus could be in the range of $250-$300 B depending on what numbers you use.  According to EIA estimates, the US will spend $259 B less on oil in 2015 vs. 2014.  According to retail sales data, Americans spent $533 B at gas stations last year, which means a 50% decline in spend would be $266 B.

Unlike the 2008 checks though, 2015’s oil decline isn’t pure stimulus.  The money comes out of the pockets of the oil and gas industry.  The US is a net importer of oil, so it’s true that net-net, falling oil prices should be a benefit.  However, if oil and gas company capex spend falls by 25-30% this year (as many oil services companies were talking about last week), that would be an $80-$100 B headwind to the US economy.

If you net those two numbers out, you get an oil stimulus that is roughly equivalent in size to the Bush stimulus checks.

Bush vs. Oil Stimulus

 

Source: CBO, EIA, Oil and Gas Journal

Procter and Gamble 4Q14 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. Full transcripts can be found at Seeking Alpha

4Q was another challenging quarter from a macro standpoint

“October and December was another challenging quarter from a macro standpoint with significant foreign exchange headwinds, modest market growth and continued political and economic volatility”

FX was a 14 point drag on earnings

“All-in sales were down 4% versus the prior year including a 5 point headwind from foreign exchange and a 1 point reduction from minor brand divestitures. Including FX which was a 14 percentage-point drag on the quarter, core earnings per share were $1.06 down 8% versus the prior year.”

A primer on how FX impacts results

“ First, transaction impacts increased the cost of non-ruble denominated inputs. We import as an example Gillette blades and razors into Russia from Germany. Widening of the cross-rate between the euro and the ruble increases the Russian units cost of razors and reduces profit. Similarly, the local cost of plastic bottles which are denominated in euros and imported into Russia for the production of Fabric Care and Hair Care products have increased significantly. This transaction cost impact affects all manufacturers, multi-national and local, whose materials or finished products are imported from similar sources and are similarly denominated.

We attempt to recover these cost increases through pricing when local legal requirements and market realities allow it though there is a lag between the time the currency devalues, the costs are incurred and the pricing is taken and executed through our channels of distribution.
Second, we need to revalue transaction related foreign currency working capital balances. This includes the revaluation of working capital balances related to transactions between P&G legal entities that operate in different currencies. To continue the prior example while razors produced in Germany are being transported and are moving through the customs process into Russia, our Russian books hold a euro-denominated payable.

At the end of every quarter, working capital balances are revalued at current spot rates. Gains or losses from revaluing transactional working capital balances typically flow through SG&A and are included in core earnings per share. The only exception is the case of a fixed exchange rate currency that is also hyperinflationary. In this case, we need to revalue not just the foreign currency transactional balances, but also the local currency working capital balances. All of these impacts are reported in non-core earnings. The Venezuelan bolivar is the only currency that currently fits this definition.

Third, income statements of foreign subsidiaries like Russia that did not use the U.S. dollar as their functional currency are translated back to U.S. dollars at new exchange rates. Just the Russian ruble transaction, balance sheet revaluation and translation impacts have been and are projected to be significant at about $150 million, $100 million and $300 million after-tax, respectively for a total as I said earlier, of $550 million after-tax for the year.”

This is the most significant fiscal year currency impact we have ever experienced

“Across all currencies, foreign exchange hurts totaled $450 million after-tax in the December quarter, $650 million fiscal year-to-date and are forecast to be at $1.4 billion after-tax profit curve [ph] over the course of the fiscal year. This is the most significant fiscal year currency impact we have ever incurred. The currencies of six countries, Russia, the Ukraine, Venezuela, Argentina, Japan and now Switzerland account for over $1 billion of the $1.4 billion after-tax headwind from FX.”

Breakdown of the impact

“Of the $1.4 billion hurt, about 30% is from transaction, about 20% is from balance sheet revaluation and the remaining 50% is from translation, because of these impacts the outlook for the fiscal year will remain challenging.”

More than 30% of our working media is now Digital

“ We have quietly strengthened and invested in all of our digital capabilities including mobile, search and social with a wide range of partners. More than 30% of our working media is now digital.”

We need to stay balanced

“In a time of unprecedented currency devaluation that impacts our company more than any other in our industry, it’s important to stay balanced. We need to balance doing what’s right for the short, mid and long term. We need to balance the focus on delivering operating cash flow in the short term and continuing to deliver good returns for shareholders with continuing to invest in our businesses, brands, products, capabilities and people for the mid- and long term health of the company.”
Promotion is the last place we like to spend money
“promotion is the last place we would like in most cases to spend a dollar, we would rather spend it on equity or innovation and if you just look at the drivers of our top line growth over time, I think that it bears that out.”

Peabody Energy 4Q14 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. Full transcripts can be found at Seeking Alpha

Global commodity selloff has affected coal

“ The recent sell-off in the commodities sector has resulted in significant declines in copper, iron ore and oil due to concerns over global economic growth and supply. The mining and energy sector downturn has further impacted global coal fundamentals that have been weakened by strong seaborne supplies and slowing import demand.”

Met coal demand will grow faster than supply for the first time since 2011

“In 2015, we forecast that seaborne metallurgical coal demand growth will outpace supply increases for the first time since 2011. This is based on a moderate rise in global steel production along with Australian metallurgical coal export growth that will be offset by supply reductions from the U.S. and Canada. Drilling down on metallurgical coal demand, Indian imports grew nearly 20% in 2014 and are expected to continue to rise as the economy grows and infrastructure continues to be buildout. In China, metallurgical coal import demand is expected to stabilize as the year progresses. And over time Chinese seaborne demand is anticipated to expand as domestic production is rationalized and greater amounts of high quality coal imports are required”

15 m tons of met coal supply cuts will come in the first half of the year

“Regarding global metallurgical coal supply, we expect some 15 million tons of already announced cuts will be realized in the first half of the year, with additional reductions likely based on the current pricing. A sizable percentage of global metallurgical coal is uncompetitive at current prices. And U.S. production is likely to be disproportionally impacted leading to at least 10 million ton decline in the U.S. metallurgical coal exports this year.”

No one is investing in coal supply, there are going to be supply shortfalls eventually

“It’s clear that investments in metallurgical coal projects have all been dried up in the past two years and new projects can take years to bring online. Yet this is a depleting resource and we expect that the sharp pullback in investments, declining production and increased coal demand will result in supply shortfalls over time.”

PRB coal will be competitive with Nat Gas. Projecting increase in utility coal consumption by 2017

“Looking forward, we see 2015 U.S. coal demand declining 50 million to 60 million tons in total due to lower natural gas prices, but at the same time, we believe PRB coal will remain competitive with natural gas leading to PRB consumption rising up to 20 million tons this year. By 2017, we’re projecting a total increase in utility coal consumption of 10 million to 30 million ton as coal rebounds to approximately 40% of U.S. electricity. More importantly for Peabody, we expect PRB and Illinois Basin demand to grow 50 million to 70 million tons during this time.”

Still demand from low cost basins

“Demand for these low cost basins is anticipated to represent a greater share of the U.S. coal generation profile as gas prices increase, demand from other regions has displaced and coal plant retirement are offset by higher plant utilization rates at the remaining coal fleet.”

Australia has some competitive advantages

“We believe that Australia holds a number of inherent competitive advantages by other supply sources. It has high-quality products that are location advantaged with shorter rail hauls and shipping distances to the high growth base in marketplace. Clearly, the currencies of wind at our back right now. Australia is also in the process of completing a free-trade agreement with China that will provide a further advantage compete with other production regions.”

Plum Creek 4Q14 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. Full transcripts can be found at Seeking Alpha

Sawlog customers were cautious last year

“During 2014, Southern lumber producers were generally cautious in their production decisions. For some producers, construction activity at their mill and startup challenges with new equipment disrupted their production. We expect these production headwinds to shift to tailwinds in the latter half of 2015, as they work out the kinks in their new equipment.
Other customers are in the midst of their capital projects and we expect this increased capacity will come online over the course of the next two years. All this investment bodes well for southern sawlog demand in the coming years

Packaging customers remained healthy and competitive

“Packaging customers remained healthy and competitive the other customers who bought the bulk of our southern pulpwood production, some new pulp mills began taking deliveries towards the end of 2014 and others are scheduled to begin production over the course of 2015. As these mills move up the start up curve, we expect them to exert healthy competition in their local pulpwood markets.

3.5-3.8m tons of timber for 2015 in Northern Segement

“Looking forward to 2015, we are planning to harvest between 3.5 million tons and 3.8 million tons of timber in the Northern segment, with roughly a 60-40 mix of sawlogs and pulpwood. We expect to see the normal seasonal variation in harvest volume, with the second quarter harvest being the lowest of the year.

15m tons in the south

“For 2015, we are expecting harvest between 15.5 million tons and 16.2 million tons of timber in the South. We expect the mix to be similar to 2014’s harvest, approximately 42% sawlogs, 58% pulpwood.

Timberland selling for 2k per acre in the south

“n the South, where well-managed industrial timberlands are being valued in excess of $2,000 per acre, the price premiums associated with HBU lands have compressed to the point where the current premiums are not as compelling. In these markets, we are inclined to hold these properties off the market for the time being and allow the HBU premiums to bill to the point where the value differential is more substantial.

Maybe some slowing from China but western markets very tight

“As we think about Asia, we are seeing probably slightly slower demand coming from China here early in the year for the first six months. Inventories in Asia have come down significantly from where they were six months ago. I think there is still a little bit of rebalancing there to take place and then we will probably see a better feel for their underlying demand, but our Western markets, they remain very tight.

The Chinese just need to get their inventories in line

“Clearly, we have seen the shiploads in the last few months going from the west coast to China have come down significantly.
I think the inventories were as high as 4.5 million cubic meters. They are down to 3 cubic meter and 3.4 meters 3.5 meters now, still above where they like them and there is a different balance in each port, but I think it’s the next six months, where the Chinese really get their inventories in line and then we will see activities normalize.

Zions 4Q14 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. Full transcripts can be found at Seeking Alpha

We feel like we’ve done a good job on the energy side

“We expect some deterioration in the portfolio as a result of the sharp decline in energy prices, particularly if price levels remain low for a long period of time. However, we’re also feeling very confident that we’ve maintained strong underwriting discipline and risk management throughout the last several quarters and several years for that matter, and that in combination with our strong capital position and loan loss reserves, we should navigate this bump reasonably well.

Our capital ratios are among the best in the industry

“Today our capital ratios are among the best in the industry, both in quality and quantity and we’ve made significant progress in reducing the cost of such capital. To the extent that we see further slowing in the global economy, we believe we are very well positioned to weather that well.

Technology driving labor efficiency

“On the expense front, related to our technology initiative, we’re very focused on expense control. As technology advances we’re able to reduce certain labor intensive tasks.

We expect loan growth in 2015 to be in line with 2014, although Texas may be slower

“We also expect growth in 2015 to be about in line with 2014. We see improved economies in most of our footprint, although Texas and Amegy Bank may likely produce slower growth this year than last, in part due to potential effects of the decline in energy prices and energy related activity.

Worth noting that gas declined this much and never came back and everything was ok

“it is also worth recalling that natural gas prices also fell significantly in the 2008-2009 period, and those prices have not rebounded fundamentally. Gas production was a very significant component of most exploration companies and impacted energy service companies’ revenues as well at that time. And in many cases, it was more than 50% of total production back then. So losses from that period are certainly relevant to the current outlook.

Only 30% of exposure is to public companies, the rest is to private sponsors

“Approximately 30% of our exposure in the energy portfolio is to public companies and approximately 45% have private equity sponsors. And the private equity firms we partner with have exceptionally strong experience in the industry and understand the cyclicality as opposed to generalist firms or younger, less experienced firms. Additionally, the remainder of our portfolio generally has private sponsors, very high net worth families that have been highly involved in the energy industry over the years.

People pivoted from gas to oil in ‘09

“ would say then if you looked at the entire portfolio, it was probably 60% gas in terms of the borrowing base collateral, 40% oil and you’ll recall the word pivot was used significantly following that. People were pivoting away from gas and they pivoted to oil. You’ll now start reading about people pivoting back away from oil ever so slightly.

We wont really know the impact to credit quality until Q3 or Q4

“One possible pattern over the course of the year is that there will be some shift from the qualitative into the quantitative part of the reserve, as we get financial information from the borrowers. But the — that process won’t be complete certainly by the end of Q1. We’d probably get the first real financials that began to show an impact sometime in Q3 — Q2 and I would expect even if prices don’t move at all, we’ll — we won’t have fully kind of seen the impact until maybe Q3-Q4. But again there may be some, there potentially will be some downgrades, but some of this will be absorbed potentially by a shift from the qualitative into the quantitative portion of the reserve. We just don’t know yet.

If prices stay low for a couple or three years then we’ll start to see some impairments

“If this goes on for — as Scott said, for an extended period of time, a couple of years, three years, where oil prices remain very low, there will almost undoubtedly, based on our sensitivity analysis be some additional increments to the provision related to that, and some [indiscernible] classified — more criticized and classified loans and it will begin to shift again toward the quantitative side is as we

4Q was strong for energy companies because everyone was using up their budget for the year

“he fourth quarter for many energy services companies was one of the strongest quarters in their recent history; and secondly for reserve based companies, most of our reserve base clients had very robust drilling budgets in 2014, and generally in the industry, they are drilling hard in the fourth quarter to drill up the budgets that they have.

Brown and Brown 4Q14 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. Full transcripts can be found at Seeking Alpha

Seeing construction depending on the region

“I would tell you that we see pockets of it regionally, but as a general rule we’re starting to see more construction starts. So let me give you an example, you might think as an example Phoenix, which was an area that slowed down a lot it started growing or seemingly growing more rapidly last year early in the year and the prior year and I would tell you that Phoenix it maybe got a little ahead of itself, meaning the metro area, so they are not seeing as much growth as maybe you might have seen right out of the blocks that doesn’t mean that is not growth, but that’s an example. If you come to South Florida there are so many cranes in the sky in Miami it’s kind of unbelievable. So depending on the city and what they are building in certain areas Josh we’re seeing more rental housing apartments being built than single-family homes, those are just some broad statements.

Three ways to use cash

“What I would say is this, we are thinking about how we best invest in our business and we can return or invest in that business one of three ways as you know. We can hire new teammates of which we are doing constantly and consistently. Number two, we can go out and acquire businesses which we are doing and we had the highest year of total annualized revenue acquired last year. And then three, we are returning to shareholders either in the form of dividend increases or through share repurchases.

A little bit of color on the acquisition process

“As you know we don’t budget acquisitions and so we are always out talking to the agency community about the possibility of joining the team at Brown & Brown and as you know the average agency owner today is 57 years old, doesn’t have a necessarily clear succession plan, doesn’t necessarily want to retire, but they actually would like to take some chips off the table. So if they fit culturally with us and we can come up with a financial terms and conditions that make sense for both parties we want to do it. And so I would tell you that we’re always talking to people in terms of when and why people sell those are different across the board. We would say that pricing continues to, I would say be on the higher end of the range and on certain instances we have seen acquisitions trade up in areas that financially we would not go to. And so we have a financial discipline that we employ when we evaluate acquisitions.

People are not hiring quite as much

“ would say that you have hit on an interesting point which is we’re not seeing that many people hire lots of new employees as a general statement. So to your question, we’re seeing more people doing more with the same amount of employees or very cautiously adding new employees.

A lot of businesses are having to think about how ACA impacts them this year

“I think that in the last year and probably in the future in this coming year there has been a lot of transitions as ACA impacts different employer groups in terms of size. And so some of the smaller firms are thinking about their options, I am not saying that they are mandated to go an exchange but an exchange could be a private exchange like the private exchange that we use

Dupont 4Q14 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. Full transcripts can be found at Seeking Alpha

A science company

“In 2015 DuPont will continue its transformation as a dynamic science company driven by innovation, executions and global reach.

stronger dollar will be a substantial headwind

“the U.S. dollar continues to strengthen against most currencies and will be a substantial headwind for us in 2015

Agriculture fundamentals are challenging

“In agriculture the fundamentals are challenging. Farmer net income has declined and we anticipate lower corn planted area as farmers favor soybeans over corn.

Hard to say how much corn acres will be down

“Yes so as we look at ‘15 clearly we’re expecting corn acres that the soybean corn price still favors soybean, so we’re expecting corn acres to be down, but it’s very difficult to size and those final decisions are being made by growers closer and closer to the season. So it’s hard to size the shift, but we do expect the decline in corn acres and a slight increase in soybeans

No impact to solar from lower energy prices

“We haven’t heard that yet and I think first of all solar is still pretty small, so having growth rates of 20% still can occur. They’re also being put in the places where it is from a grid parity standpoint in places like China where they are just a — and they have come out to say that by 2030 they’re going to be capping CO2 emissions and some of that start to come from an increase in their renewable energy sources, and solar is a big part of that as they’re the largest producer of solar modules. So we don’t see that, a short-term blip in oil is taking the PV industry office long-term kind of projection.

Caterpillar 4Q14 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. Full transcripts can be found at Seeking Alpha

2015 shaping up to be a much tougher year than we thought

“Now for the 2015 outlook, well it’s shaping up to be a much tougher year than we were expecting when we went through our preliminary view of 2015 with you all last October. It’s been definitely a developing story as oil prices have continued to decline. “

More negative on 2015

“As I’m sure you picked up from our financial release this morning, we are more negative on prospects for 2015 than we were three month ago when we provided you with our preliminary view of 2015 sales and revenues.

Now expecting revenues down 9% instead of flat

“Back in October, we expected sales and revenues with the flat to slightly up. Our current view is that sales and revenues will be about 50 million and that’s down over 9% from 2014.

All because of lower oil prices

“Without a doubt, the impact of substantially lower oil and gas prices is the most significant reason we’re expecting lower sales in 2015.
“”
Significant reduction in oil producer capex

“With the oil this low, we expect substantial reductions in producers CapEx and that it will be negative for our sales.

Direct and indirect exposure to oil and gas industry

“The oil and gas exposure is however diverse. They’re on the front-end with engines for drilling, engines transmission and pressure pumps for well servicing. We have engines that go into compressor sets for gas gathering, we’ve engines and turbines that move oil and gas along the pipeline. And our turbines are used extensively on offshore production pipelines.
Now in addition to those direct exposures in energy and transportation, there are some indirect exposures that are real but a little more difficult to put a specific number on.
For example, we saw marine engines and some go into vessels that service offshore oil and gas platforms on the rail business with services and locomotives and oil transport has become an increasing business for our rail customers.

Oil and gas represents half of the sales decline projection

“Order of magnitude roughly half of our expected year-over-year decline in sales is from these – both direct and indirect impacts from the fairly dramatic decline in oil prices.

The other half is currency and mining has taken another leg down

“Now in addition to the impact of oil and gas, there are several other factors that are contributing to the decline in the sales and revenues outlook. Year-over-year we expect the stronger dollar to be a sales headwind. Commodity prices in mining have also taken another leg down over the past few months.

Weakness in agriculture too

“With weakness in agriculture, we’re also expecting lower sales of industrial engines and we expect our rail business to be down in 2015 after a great year in 2014. Now that’s not a new development

Expectations for China are lower too

“our expectation for the construction industry in China is also lower.

Stronger dollar bad for sales but good for costs

“the stronger dollar was negative for our sales is positive for costs overall and that’s because of our non-US operations and our material purchases outside the U.S. and overall that’s expected to be a positive for profit.

Add higher pension expense on top of that

“We also have higher pension expense for our defined benefit plans and that’s a result of lower interest rates at the end of 2015 and an revision in the estimate of lifespans for the folks in our plans.

2015 should be the third consecutive year of sales declines. That’s only happened one other time, the depression

“Based on our outlook for 2015 sales and revenues, 2015 is going to be our third consecutive year of sales decline. And to put that in some perspective, that’s happened only one other time in the history of our company and that was during the great depression in 1930, 1931 and 1932.

US is still a positive but not as positive

“U.S. is still a positive but probably not quite as positive as we thought before. Almost everyplace else in the world to some degree negative. We are still not getting any decent economic growth in Europe. The developing countries Brazil, China are still let’s just say challenged.

There will be a delay in sales decline because we’ll be selling out of backlog

‘So I guess this is what we are hearing from customers is a decline in order rates for oil and gas. It probably won’t show up in our sales for at least a quarter maybe a bit more than a quarter in the second half of the year particularly for re-step engines, piston-based engines for drilling and well servicing. Our sales are likely to fall off quite dramatically for that kind of product in this – certainly in the second half of the year.

Rising dollar is not good for US manufacturing

“Rising dollar and I will expect that 2015 would see more of that will not be good for U.S. manufacturing nor the U.S. economy.
How that is offset against the lower oil, diesel, gasoline price, I don’t know how it worked out but certainly anybody producing in Japan, the U.K. or Europe particularly Germany is going to have, it has had quite an advantage over their American competitors and I would expect that they have an impact on the U.S. in some way.

There have been some order cancellations

“But yeah, we’ve had actually some cancellations, so the backlog has come down. There’s been some cancellations, but that seems to have tailed off. So, we’re scheduled out reasonably for the first quarter.

The prospects for a mining rebound are just not there

“But yeah, we’ve had actually some cancellations, so the backlog has come down. There’s been some cancellations, but that seems to have tailed off. So, we’re scheduled out reasonably for the first quarter.

We’re positive on US construction

“I will start by saying we’re actually pretty constructive about U.S. construction. So we have U.S. construction actually going up.

Don’t expect credit problems at CAT Financial

“at this moment, I would say that we don’t have any concerns relative to our portfolio performance and past dues coming off another year of improvement and I’d say we’d pretty stable heading into ’15.