Company Notes Digest 11.24.15

Each week we read dozens of transcripts from earnings calls and presentations as part of our investment process. Below is a weekly post which contains some of the most important quotes about the economy and industry trends from those transcripts. Click here to receive these posts weekly via email.

This Week’s Post: Thanksgiving 2015

It’s a light week for earnings calls since it’s Thanksgiving, but we were still able to pull together a handful of interesting quotes.

This week’s post contains more color on the state of the consumer (most companies continue to say that spending is soft).  Tech Data also called out weak IT spending in North America and Donaldson said that global construction markets have weakened further.  

There are some things to be thankful for though…there’s pent up demand in housing markets and bloated inventories are getting right sized.  More importantly, Williams Sonoma’s CEO reminds us that human connection is what really matters.

The Macro Outlook:

The consumer is a bit of a mystery right now

“We certainly spend a lot of time here trying to understand the consumer and they really are right now, it’s a bit of a mystery.” —Cracker Barrel (Restaurants)

We know that the retail environment was challenged last quarter

“as everybody has witnessed over the last quarter, the Retail environment went through a very challenging time in the third quarter…I think given the continued volatility in environment, you are going to see a continued focus on inventory levels, not only in watches, across retailers overall.” —Movado (Watches)

Other consumer industries reported softness too

Cracker Barrel said that restaurant industry performance was weak

“Industry performance was below prior year levels and recent economic signals were mixed. We believe the consumer spending was challenged during the quarter, particularly in October” —Cracker Barrel (Restaurants)

Campbell Soup said consumers remain cautious

“consumers remain very cautious. We’re continuing to see Americans save more and spend less amid the uncertain economic climate.” —Campbell Soup (Packaged Foods)

Dollar Tree’s customer is still under a lot of pressure despite lower gas prices

“I think the customer especially our customer, our middle income, low middle income to lower income customers are still under pressure and they are concerned. They’ve seen lower gasoline prices and that’s helpful. But at the same time it’s not enough for that lower income customer. It’s just not enough to make a change in their shopping habits. At the same time they’ve seen lower gasoline prices. They’ve seen higher food prices. They’ve seen higher rent prices. They’ve seen higher healthcare costs. They’ve seen higher taxes. So they are still concerned, they are still under pressure” —Dollar Tree (Retail)

Other industries are seeing pressure too

IT spending is moderating in the Americas

“We don’t make the market; we don’t create the demand; we respond to the realities of it. And the realities are that IT spending is moderating in the Americas. It’s reflected not only in our results but in all of the results in the ecosystem.” —Tech Data (IT Wholesaler)

The global construction market has worsened

“Since our last update, our outlook for the construction equipment market has worsened…The softening that we see in construction is really we’re talking about from a global perspective. So we saw additional softening in some geographies like China. We clearly see it hard in Brazil right now.” —Donaldson (Industrial Components)

There are potential bright spots too though

There is still a lot of pent up demand for housing

“I am still extremely positive on what the future holds because…there is a tremendous amount of pent up demand…at some point there is going to be some form of a break out and there is going to be much more demand than we are seeing now. But the ultimate question is when, which I just can’t predict.” —Beacon Roof (Roof Supplies)

Small Businesses are investing in IT

“there are still good pockets of opportunity. In the quarter, we just reported, as Chuck described, SMB continued to be a strong area. We delivered double-digit growth in the Americas in SMB. So, there are pockets of strength.” —Tech Data (IT Wholesaler)

Inventories are bloated, but companies are making progress right sizing them

“We would continue to say there is more large row crop tractors in used row crop tractors in the market in the US and Canada than we would prefer. So it does continue to be a focus of ours, as we go through 2016. But we are making progress, so we are seeing that large Ag inventory coming down. In fact if you look at the high point in 2014, we’re down about 18% from that point. So again, making progress.” —John Deere (Farm Machinery)

Hopefully this is just a healthy pause

“It does feel like the economy might be slowing a little bit…It feels like a may be a healthy pause here, I don’t know. Things can certainly get worse. There is a lot of uncertainty in the world that could cause a slowdown in the economic activity. We’re not seeing it yet.” —Eaton Vance (Asset Management)

International:

Tiffany was encouraged by performance in China despite macroeconomic news

“With China in the news so much regarding their economy stock market and currency, we are pleased and encouraged that our total sales in China increased by a healthy amount in the third quarter despite volatility and sensitivity to headline macro events.” —Tiffany (Jewelry)

Financials:

Companies have relied on financial engineering to create growth this cycle

“Generating growth in this environment has been and remains difficult. As a result, the industry continues to respond with consolidation, spin-offs, aggressive cost cutting programs, and other measures to improve operational efficiency.” —Campbell Soup (Packaged Foods)

Consolidation is altering the landscape in many industries

“consolidation and intensified competition are disrupting and altering the landscape.” —Campbell Soup (Packaged Foods)

Bank loan funds have seen an exodus as investors lose confidence that interest rates will rise

“we had a lot of money move into the bank loan asset class in 2013 and anticipation at that point of rising interest rate. Maybe those investors weren’t really fully informed or fully committed about what this asset class was. I think there is a lot of that money is now been flushed out of the asset class.” —Eaton Vance (Asset Management)

Consumer:

Ross Stores expects the retail environment to be very promotional this holiday season

“There is ongoing uncertainty in the macroeconomic environment and, based on the current retail landscape, we expect the upcoming holiday season to be highly promotional. As a result, while we always hope to do better, we believe it is prudent to maintain a conservative posture.” —Ross Stores (Off-Price Retail)

A highly anticipated Star Wars video game has gotten off to a slow start

“I think Star Wars Battlefront got off to a slow start. Given the buzz around the movie, we anticipate that this game is going to be a very strong game…we do think that it is going to rally very strong, as we get to closer to the movie.” —Gamestop (Video Game Retailer)

Campbell Soup has shifted 40% of its advertising budget to digital

“we’re shifting our spend overall to about 40% of our spend in digital, and that is creating a different dynamic between working and non-working media.” —Campbell Soup (Packaged Food)

Technology:

The 4 big IT initiatives: cloud, security, big data and productivity

“these four transformation areas is exactly what virtually every customers looking for. How do I transform my IT environment to a hybrid environment? How do I secure my digital enterprise? How do I enable analytics, big data analytics environment? And how do I drive workplace productivity. And we are aligning software service and hardware or infrastructure to that” —Hewlett Packard (Enterprise Tech)

HP is shutting down its public cloud offering and using Microsoft as a preferred provider

“we announced in October that we will double down on our private and managed cloud capabilities and sunset our public cloud offering. This is the right move. It plays to our strength in private and managed cloud. We will continue to extend our cloud infrastructure leadership and integrate the public cloud element for our customers through a strategic partner-based model…Going forward, Microsoft Azure will become a preferred public cloud partner.” —Hewlett Packard (Enterprise Tech)

Industrials:

Heavy duty truck production is set to slow next year

“The anticipated slowdown in heavy-duty North American truck production next year is well documented…we know that in the U.S. first rate truck builds there is a decline in the future, and we’ve just tried to take a more cautious approach in the second half of our fiscal year and bake that in for the U.S. market.” —Donaldson (Industrial equipment)

Materials, Energy:

Total Energy Services’ CEO thinks that there needs to be consolidation in oil service in North America

“We strongly believe that the North American energy services industry must consolidate to provide the efficiencies in economies of scale necessary to compete in an increasingly global market. We believe this need for rationalization will become more apparent over the next few quarters.” —Total Energy Services (Oil Service)

Good acquisition opportunities may start to appear over the next few quarters

“Our view is things are going to settle out here over the next few quarters, there is going to be a lot of good acquisition and consolidation opportunities we’re going to use the strength of our balance sheet and our abilities to generate substantial cash at low utilizations.” —Total Energy Services (Oil Service)

Jacobs Engineering thinks its downstream energy customers may be close to a bottom

“We do believe that the clients in some of these end markets have either hit or are close to bottom… my comments on hitting the bottom and stabilizing is more from a Jacobs position…most of our activity is focused on refining and chemicals.” —Jacobs Engineering (Engineering & Construction)

Hormel Foods has been able to refill their barns after the Avian Flu, but wont fully recover for another couple of quarters

“We were able to completely refill our barns, but as we talked about before, the primary turkey for most of our value-added items is our tom turkeys. It’s a 22-week market cycle and so we will not been fully back to normalized volumes throughout the earliest of second quarter of fiscal 2016” —Hormel Foods (Meat Packer)

Households have been eating more pork thanks to lower prices

“In the retail channel, we are seeing increase featuring of Pork as pricing has come down. For the most recent year-over-year comparison, fresh Pork volume was up 6% on 2% lower pricing.” —Tyson Foods (Meat Packer)

Miscellaneous Nuggets of Wisdom:

Human connection still matters (especially around the holidays)

“Human connection still matters in the digital age” —Williams Sonoma (Home Goods)

Happy Thanksgiving!

Full transcripts can be found at www.seekingalpha.com

Miscellaneous Earnings Call Notes 11.25.15

Post Holdings’ (POST) CEO Rob Vitale on Q4 2015 Results

Improvement in cereal category

“The cereal category has continued to show improvements in its rate of decline. While we would certainly like to be discussing category growth, the first step in getting there is slower decline. We attribute this improvement to an overall increase in cereal advertising, a modestly improving consumer profile, and simply the lapping of weaker comparisons.”


Dollar Tree’s (DLTR) CEO Bob Sasser on Q3 2015 Results

Combining companies under shared services model

“I mean, we are – as I said we are putting this huge company together into a shared services model. Over time we’re going to be combining both banners under one supply chain, with all of our buildings supplying product for all banners with the ability to supply merchandise for all banners.”

I think our customer is still under pressure

“I think the customer especially our customer, our middle income, low middle income to lower income customers are still under pressure and they are concerned. They’ve seen lower gasoline prices and that’s helpful. But at the same time it’s not enough to do that lower income customer. It’s just on enough to make a change in your shopping habits. And at the same time they’ve seen lower gasoline prices. They’ve seen higher food prices. They’ve seen higher rent prices. They’ve seen higher healthcare costs. They’ve seen higher taxes. So they are still concerned, they are still under pressure”


Beacon Roofing Supply (BECN) Paul Isabella on Q4 2015 Results

I still think there’s a lot of pent up demand

“when you look at our business and look at the market we’re in, I am still extremely positive on what the future holds because I know and/or my view is and my opinion is there is a tremendous amount of pent up. I think folks have deferred a bit and I think it is a function of income ability to take equity and all the things we talk about whether it’s the existing home sales…my view is at some point there is going to be some form of a break out and there is going to be much more demand than we are seeing now. But the ultimate question is when, which I just can’t predict.”


Donaldson FY 1Q16 Earnings Call Notes

Donaldson’s (DCI) CEO Tod Carpenter on Q1 2016 Results

Mining and ag have remained weak and are unlikely to rebound in the near term

“Mining and agricultural end markets have remained particularly week. And perspective from some of our largest OEM customers suggests that build rates are unlikely to rebound in the near term.”

Outlook for construction equipment market has worsened

“Since our last update, our outlook for the construction equipment market has worsened. We now expect that sales will be flat to down 5%, compared with a more stable outlook in our prior guidance.”

Slowdown in heavy duty NA truck

“The anticipated slowdown in heavy-duty North American truck production next year is well documented, and we have been including that in our forecast.”

Our order intake slowed as we got towards the latter half of the quarter

“what we did see is that our order intake slowed as we got towards the latter half of the quarter. And that was one of the considerations when we looked at our guidance, is that we entered the year with a fairly healthy backlog, but as the quarter went on that began to get depleted, even though we were shipping fairly strongly throughout the quarter. So as we ended the quarter, we were less optimistic, particularly in the U.S., with regards to the project inventory, or project-related sales and I think that’s the biggest difference since three months ago.”

The softening we see in construction is from a global perspective

“The softening that we see in construction is really we’re talking about from a global perspective. So we saw additional softening in some geographies like China. We clearly see it hard in Brazil right now. So when we roll it up comprehensively, it’s not necessarily driven for us by an end-market in our comments to you on why we’ve reduced that outlook, it’s more a geographic rolling up to a consolidated number at the company level.”

We know there’s a decline in truck builds coming

“we know that in the U.S. first rate truck builds there is a decline in the future, and we’ve just tried to take a more cautious approach in the second half of our fiscal year and bake that in for the U.S. market.”

Deere FY 4Q15 Earnings Call Notes

Deere & Company (DE) Management On Q4 2015 Results

Expecting 2016 farm receipts roughly flat with this year

“our 2015 forecast calls for cash receipts to be down about 8% from 2014s peak levels. Moving to 2016, we expect total cash receipts to be about $394 billion, roughly flat with this year.”

Unfavorable growing conditions could result in prices moving quickly higher

“global grain stocks-to-use ratios remain at somewhat sensitive levels, even after the abundant harvest of the past two years. Global grain and oilseed demand remains strong, while supplies are now fully adequate. Even so, unfavorable growing conditions in any key region of the world, as well as unknown impacts from any geopolitical tensions could result in prices quickly moving higher.”

Lower sales forecast in China because of economic slowdown

“In China, the governments continued investment in equipment subsidies and mechanization is supportive of agriculture. However, the economic slowdown there and lower commodity prices have lead to a decrease in the industry sales forecast”

Appears there will be continued weakness in the dairy market

“it appears that we’ll continue to have some weakness in the dairy market, as an example as we go well into 2016. And that’s a significant part of the business in Europe. So I think that is probably the biggest difference.”

There’s still more inventory than we would like but we’re making progress

“We would continue to say there is more large row crop tractors in used row crop tractors in the market in the US and Canada than we would prefer. So it does continue to be a focus of ours, as we go through 2016. But we are making progress, so we are seeing that large Ag inventory coming down. In fact if you look at the high point in 2014, we’re down about 18% from that point. So again, making progress.”

Resale values are holding in quite well

“The good news there too is our resale values are holding in quite well. We talked last quarter about if you look over a 2 year kind of horizon, down a small single digit, I’d tell you those used pricing continues – the used pricing continues to remain very steady at those levels and versus competition we’re maintaining a very healthy premium.’

We don’t anticipate a significant decrease in acres planted next year

“We have not at this point disclosed acres and so on for next year’s crop. I don’t think we certainly don’t anticipate a significant decrease in the acres planted. And think I’ll follow up a little bit on the last question you had though, because I think the situation in Argentina with the elections over last weekend could have some impact on that.”

Buildup of used equipment in the UK because usually export to Europe and Euro is weaker

“When you think about used equipment, I’ll split it a little bit. In the UK, certainly we’re seeing some increased levels of used equipment and that’s really coming from the – again it’s FX driven. So the Euro has been impacted more than the British pound and a lot of the used equipment from the UK goes to Europe and into Euro based countries. And so obviously, now with that shift in FX, it is creating more challenge for the export of that used equipment out of the UK.”

HP FY 4Q15 Earnings Call Notes

HP’s (HPQ) CEO Meg Whitman on Q4 2015 Results

HP completed its separation

“On November 1st we completed the historic separation and became two separate independent public companies, HP, Inc. and Hewlett-Packard Enterprise. I couldn’t be prouder of how we executed on the incredibly complex separation.”

We are sunsetting our public cloud offering

“we announced in October that we will double down on our private and managed cloud capabilities and sunset our public cloud offering. This is the right move. It plays to our strength in private and managed cloud. We will continue to extend our cloud infrastructure leadership and integrate the public cloud element for our customers through a strategic partner-based model.”

Microsoft Azure will become our preferred public cloud partner

“Going forward, Microsoft Azure will become a preferred public cloud partner. HPE will serve as a preferred provider of Microsoft infrastructure and services for its hybrid cloud offerings. Overall, the move to a hybrid cloud environment present a significant growth opportunity for us and you can expect to hear more about our approach in coming months.”

PC Market was tough especially in consumer

“The PC market continued to be tough, especially in consumer where industry channel inventory remained elevated in the market. While we saw improved performance in the U.S., EMEA remained weak with market units declining 22% year-over-year in the third calendar quarter”

Expect PC to remain challenged for more quarters to come. Windows 10 has not been a catalyst for sales

“Looking ahead, we expect the PC market to remain challenged for more quarters to come. As expected, Windows 10 has not been a material catalyst for sales yet, but continues to receive favorable reviews.”

Every customer is looking to solve 4 IT problems

“these four for transformation areas is exactly what virtually every customers looking for. How do I transform my IT environment to a hybrid environment? How do I secure my digital enterprise? How do I enable analytics, big data analytics environment? And how do I drive workplace productivity. And we are aligning software service and hardware or infrastructure to that.”

Eaton Vance FY 4Q15 Earnings Call Notes

Eaton Vance’s (EV) CEO Tom Faust on Q4 2015 Results

Custom Beta separate accounts

“Our custom beta separate account initiatives seeks to build on the success that we’ve already had with Parametric’s tax-managed core and EVM’s later municipal bonds separate accounts, the custom beta concept is to provide access to an underlying benchmark of market exposure through direct holdings of individual securities with customization to meet individual client needs and preferences. This is our answer to index investing, low cost, benchmark based separate accounts customized to fit the individual client”

SEC is studying what went wrong with ETFs on August 24

“As many of you are aware, the extreme dislocation and ETF trading that occurred on August 24 of this year has caused market participants and regulators to ask hard questions about the trading efficiency of ETFs, particularly during periods of market stress. Two SEC commissioners have recently issued calls to re-examine the entire ETF trading ecosystem, seeking to determine what went wrong on August 24 and how better to protect investors. We know this is an area of intensive current focus at the SEC”

Had a lot of money flush out of bank loans that was expecting higher interest rates

“we had a lot of money move into the bank loan asset class in 2013 and anticipation at that point of rising interest rate. Maybe those investors weren’t really fully informed or fully committed about what this asset class was. I think there is a lot of that money is now been flushed out of the asset class.”

It does feel like the economy may be slowing a bit but not seeing that in bank loan prices so much

“we have seen a little bit of a sell-off in bank loan prices, which is consistent with your observation of more concerned about credit. Most of those credit concerns in the U.S. have generally been focused on the energy sector. There is not a big energy component of the bank loan market, so that’s not much of a factor. We tend to be of the view that credit conditions remain benign for the U.S. economy probably. It does feel like the economy might be slowing a little bit, but we’re not really seeing that in bank loan prices, a little bit of that, but not a lot of that.”

It feels like there may be a healthy pause here

“It feels like a may be a healthy pause here, I don’t know. Things can certainly worse. There is a lot of uncertainty in the world, but could cause a slowdown in the economic activity. We’re not seeing it yet.”

Tyson Foods FY 4Q15 Earnings Call Notes

Tyson Foods’ (TSN) CEO Donnie Smith on Q4 2015 Results

Big decline in cattle futures at the end of the fiscal year

“in the last couple of weeks of the fiscal year, there was an unprecedented decline in the live cattle futures market, resulting in $70 million in losses from mark-to-market positions and an LCM inventory charge.”

Pork volume up as pricing down

“In the retail channel, we are seeing increase featuring of Pork as pricing has come down. For the most recent year-over-year comparison, fresh Pork volume was up 6% on 2% lower pricing. ”

Beef margins will be pressured because low cattle supply but excess industry capacity

“You’ve got relatively low cattle supply, you’ve got too much — well, not to say too much, probably not the right way to say it, but you’ve got excess industry capacity. And that limits our ability to drive margins above the 1.5% to 3%, we think. ”

We feel good about pork but there is competition from forex impacts

“We feel very good about pork. There’s going to be good hog availability which by the way provides good cheap raw materials for our Prepared Foods business. But this is just a cautionary note on exports and the high dollar and competition from other regions in the world for some primary markets. So that’s the cautionary note there. If some of that changes, then obviously there’s upside in our Pork segment.”

Campbell Soup FY 1Q16 Earnings Call Notes

Campbell Soup’s (CPB) CEO Denise Morrison on Q1 2016 Results

The operating environment remains challenging

“Looking at the operating environment, conditions remain challenging. In the United States, the economic situation is mixed. Unemployment continues to improve, but consumers remain very cautious. We’re continuing to see Americans save more and spend less amid the uncertain economic climate. Outside the U.S., we’re seeing macro-economic challenges in other markets where we have significant operations, including Canada, China and Indonesia.”

The industry is creating value through consolidation, spin-offs and cost cutting

“Generating growth in this environment has been and remains difficult. As a result, the industry continues to respond with consolidation, spin-offs, aggressive cost cutting programs, and other measures to improve operational efficiency. Meanwhile, food retailers continue to respond by reconfiguring existing stores with a focus on the perimeter by launching new, smaller formats and by investing heavily in e-commerce capabilities.”

Consolidation and intensified competition are disrupting the landscape

“these are unprecedented times of change marked by challenging economic conditions. In the food world, consolidation and intensified competition are disrupting and altering the landscape. At Campbell, we remain clear-eyed about our challenges, focused on the consumer, responsive to our customers, and dedicated to delivering against our purpose”

We’re shifting 40% of our ad spend to digital

“we’re shifting our spend overall to about 40% of our spend in digital, and that is creating a different dynamic between working and non-working media. ”

We’re establishing a beachhead in fresh food

“we’re establishing a real beachhead in fresh food, bringing Campbell’s suite of capabilities to that faster growing part of the food business. We are being really transparent about our products with our new website, whatsinmyfood.com. We are talking to consumers about what’s in our food, and the ingredients we use, and how it’s made. And these are just steps that really distinguish us and are very true to activating our purpose with the consumer.”

Hormel Foods FY 4Q15 Earnings Call Notes

Hormel Foods (HRL) Jeffrey Ettinger on Q4 2015 Results

Revenues down 18% in turkey segment because of Avian flu volumes. Have not experienced any new outbreaks

“Jennie-O Turkey Store fourth quarter segment profit declined 23% on an 18% sales decrease. For the full year, operating profit was up 1% and sales decreased 2%. Results were impacted by high pathogen avian influenza as flocks lost earlier this year created large volume shortfalls in operations and sales. We have now completed the repopulation of all of our turkey barns. We’ve not experienced any new outbreaks thus far into the fall migration of wild birds.

Turkey prices remain at record highs due to industry shortages

“While we have been able to purchase some turkey meat to partially offset flock losses, turkey breast prices remain at a record high due to overall industry shortages.”

We were able to refill barns, but will not be back to normal volumes for two more quarters

“We were able to completely refill our barns, but as we talked about before, the primary turkey for most of our value-added items is our tom turkeys. It’s a 22-week market cycle and so we will not been fully back to normalized volumes throughout the earliest of second quarter of fiscal 2016. ”

We should be able to resume our marketing campaigns by second half of next year

“the team has done the best job they can with making sure that we have the product allocated fairly among our customers in terms of what is available. And then ultimately as Jim indicated, if everything continues to go well and we don’t have any further outbreaks, we should be in a position by second half of next year to renew our successful Make The Switch advertising campaign and restimulate growth for Jennie-O Turkey Store brand”

Cracker Barrel FY 1Q16 Earnings Call Notes

Cracker Barrel’s (CBRL) CEO Sandra Cochran on Q1 2016 Results

Consumer spending was challenged, particularly in October

“these results were achieved in a period when industry performance was below prior year levels and recent economic signals were mix. We believe the consumer spending was challenged during the quarter, particularly in October and this is reflected in our comparable store traffic and sales. Additionally, we believe that the industry is reacted with increasingly competitive promotions and aggressive discounting.”

It’s kind of a mystery what’s going on with the consumer right now

“We certainly spend a lot of time here trying to understand the consumer and they really are right now, it’s a bit of a mystery. The variances to some degree depend on which consumer you’re focused on, as it appears to us to be a really mixed macro environment.”

Sentiment is difficult to get a read on. It seems like a lot of consumers are angry

“The sentiment is also difficult to get a read on. It appears as though lot many consumers are angry. They all seem to be not necessarily at the same thing, lots of concern about global issues, concern about layoff and so on. So I would say that right now, the consumer is a mystery.”

I don’t have any reason to believe this is going to abate

“I don’t have any reason to believe it is going to abate. In the environment that we’re in and we believe the industry with a very challenged consumer, we’re certainly all fighting for market share. We believe that in times like these what consumers are looking for are brands they trust, which we believe we all want and experiences that they can have confidence in, which is another thing that we think we do extremely well, which is delivering the guest experience. But I think it’s a very tough environment out there and that many competitors are responding to it by offering deals and by supporting those with a lot of media.”

Don’t think MCD breakfast is impacting us

“when McDonald did launch breakfast all-day, they actually tested it at one of the test market right here in Nashville which we observed pretty closely and do not believe during that that we saw an impact on our sales.”