Company Notes Digest 4.28.16

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: Earnings Avalanche

Earnings season is in high gear this week and next. We read more than 50 earnings calls this week, but there are always more to get to. The calls that we read generally had a similar view of the economy: things are sluggish, people are still cautious, but there’s no reason to believe that a downturn is imminent.

Other takeaways: The Chinese economy is doing better than many people think according to several CEOs. The oil industry will still be under significant pressure even if oil prices rise. And Jeff Gundlach had some ominous words about the macro environment.

There’s a lot that got left on the cutting room floor this week. It’s worth clicking through on the Gundlach interview and Silicon Valley Bank.

The Macro Outlook:

The market threw a tantrum in Q1

“The market tantrum in the first part of the year resulted in lots of dislocation, some of which has normalized, some of which has not…Segments of the debt market still remain under considerable pressure. Investment sentiment is fragile and characterized by significant caution around choppy economic data, negative rates, political rhetoric and other factors.” —Blackstone CEO Steve Schwarzman (Private Equity)

But the industrial economy appears to be stabilizing

Parker Hannifin saw a moderation of declines

“orders during the quarter sequentially got better as we saw January going through March…we saw a number of markets move from accelerating declined to decelerating decline.” —Parker Hannifin CEO Tom Williams (Industrial Components)

AIT also saw improvements throughout the quarter

“we had improvements really each month throughout the quarter, with a couple of days remaining April is consistent with March…we’re seeing a stabilization perhaps as we go…perhaps on through calendar 2016.” —Applied Industrial Technologies CEO Neil Schrimsher (Industrial Distributor)

Chicago Bridge and Iron is seeing better bookings

“Now year-to-date, we’ve already seen improvement in new work bookings early in the second quarter” —Chicago Bridge and Iron CEO Philip Asherman (Engineering and Construction)

Most people are expecting results to improve as the year progresses

“I was just with a lot of our international teams recently at our brand week, and I would say everybody is expecting their results to improve as the year progresses” —Kimberly Clark CEO Tom Falk (Consumer Packaged Goods)

Capital markets still aren’t fully healed though

“I think the stock market has rebounded 95%, 99% of the way back to where it was. And the credit markets are a little slower the spreads are still wide, there is still caution in the market, deals are still being more diligent on covenants and structure. So it’s a little different in the middle market, it’s a little slower on the comeback.” —Moelis and Co CEO Ken Moelis (Investment Bank)

Capital continues to be tighter for venture backed companies

“The tech markets seem to have calmed somewhat following a volatile first quarter, sparked by a long buildup of fears over a possible unicorn bubble. While those fears may have been overstated, valuations have pulled back and capital is tightening, especially for early-stage companies.” —Silicon Valley Bank CEO Greg Becker (Bank)

Auto sales are also showing signs of plateauing and inventories are rising (note: in luxury)

“We continue to see declines in our premium luxury busines…our premium luxury profits declined 13% year-over-year…Industry inventories were elevated with retail day supply outstanding at approximately 80 days. As we indicated earlier this year, the new vehicle market is plateauing” —Autonation COO Bill Berman (Auto Dealership)

“The U.S. new vehicle inventories stood at 31,400 units which equates to an 85 day supply compared to a 69 day supply for the first quarter of 2015. Luxury brand inventories drove much of the year-over-year increase.” —Group 1 Automotive CEO Earl Hesterberg (Auto Dealership)

There are a number of retailers who may or may not go bankrupt

“We are consumer oriented company, and I mean we are the basically the worldwide economy is flattening. There is a lot of stuff out there. And we are just being a lit bit of cautious. And obviously I mean, we all know there is a few tenants out there that may or may not go bankrupt may or may not close the bunch of stores.” —Simon Property Group CEO David Simon (Mall REIT)

There is also mounting evidence that negative interest rates do the opposite of what central bankers expected them to do

“So there is mounting evidence that negative interest rates do the opposite of what the central bankers were hoping for. Negative interest rates are designed to fight deflation. But they are the very definition of deflation: Your money is disappearing. As an investor, you are going to have less money in the future than you have today with negative interest rates. That’s deflation! So negative interest rates are deflationary and they are tremendously negative for monetary velocity.” —Doubleline CEO Jeff Gundlach (Asset Management)

If you’re looking for sentiment to guide you, we haven’t seen extremes in either direction

Things haven’t gotten white hot yet

“in prior cycles, late stage has been indicated by this white hot hyper demand where permanent placement grows at very high double-digit rates. That hasn’t happened…we still don’t see that type of hyper demand that we would typically see late cycle, but instead we continue to slug it out in this relatively sluggish macro environment.” —Robert Half CEO Max Messmer (Temp Staffing)

Nor did anyone really panic in February

“Interestingly, client cash balances remained relatively consistent, they grew pretty much in proportion to organic overall client growth that indicating, I think, the clients really didn’t panic even during that first half of the last quarter.” —Schwab CEO Walter Bettinger (Retail Brokerage)

Tread carefully

“It’s all about capital preservation. If you can get a few percent return in a deflationary environment you’re doing fine…The US stock market seems egregiously overvalued versus other stock markets…also fundamentally, it’s very hard to believe in US stocks. Earnings and profit margins are dropping… the high yield market has enjoyed the easy rally. I think it’s basically over…[high yield bond] are facing enormous fundamental problems…The leverage…is enormous and you’re about to have a substantial increase in defaults. I wouldn’t be surprised if the cumulative default rate in the next five years were going to be the highest in the history of the high yield bond market.” —Doubleline CEO Jeff Gundlach (Asset Management)

International:

Tim Cook said that China is not as weak as people think

“I think China is not weak as has been talked about. I see China as may not have the wind at our backs that we once did, but it’s a lot more stable than what I think is the common view of it. And so we remain really optimistic on China.” —Apple CEO Tim Cook (Consumer Electronics)

Jeff Immelt also saw improvements in China

“I was in China last week and saw improvements in our business. Most of the portfolios are strong and we’re delivering. There’s plenty of business out there to achieve our goals.” —GE CEO Jeff Immelt (Conglomerate)

Caterpillar is seeing an uptick in China for the first time in three years

“This is the first post-Chinese New Year in probably three that we have seen a continued industry uplift for the industries that we serve around construction. It’s not a hockey stick. It’s not a boom. It’s not a 2010. But it is the first time we’ve seen that happen, and we have lifted our schedules as a result of that this year.” —Caterpillar CEO Doug Oberhelman (Construction Equipment)

Caterpillar’s CEO has his doubts about whether the uptick can be trusted though

“I would share the caution in China…Our folks over there were pretty emphatic that that’s going to hold and that this is beyond pre-buy. But I am very cautious about how far that goes…We’re going to have to watch this month by month and see where it goes…I’m not going to declare a bottom in China, I don’t know.” —Caterpillar CEO Doug Oberhelman (Construction Equipment)

Europe’s strength surprised Honeywell’s CEO

“If there was any region that surprised me in this past quarter, it was Europe did a lot better than I expected. I don’t know if this is just a one-time bounce or something that’s going to stay consistent, but I was quite encouraged by seeing that. It was a nice surprise.” —Honeywell CEO David Cote (Diversified Industrial)

Brazil is in the worst recession in its history

“In Latin America, Brazil is still in the worst recession in the country’s history, and of course, economic conditions in Venezuela are deteriorating further.” —Mastercard CEO Ajay Banga (Payments)

Financials:

Companies are relying on M&A to generate “growth” in a low growth environment

“generally speaking the catalyst behind this cycle is pretty powerful, which is this deflationary trend. And M&A becomes a important tool for boards and companies to have in their toolbox to address difficulties or challenges around organic growth and challenges around driving earnings through additional efficiencies in the business” —Lazard CEO Ken Jacobs (Investment Bank)

“I think corporates are back and looking and how they can improve their business. It’s a very low growth environment out there, they still have to look at M&A as a way to either take out cost or increase growth.” —Moelis and Co CEO Ken Moelis (Investment Bank)

Jones Lang LaSalle continues to be positive on commercial real estate markets

“So there’s nothing really out there, which at this point says that even though we are in the fourth quarter here, there is anything imminent that suggests that this cycle is about to turn.” —Jones Lang LaSalle CEO Colin Dyer (CRE Broker)

Bank loan growth has been very strong

“Another item that appears to be an emerging trend in the last six months is stronger loan growth. In the first quarter, loans increased at an annualized rate of 7.6%…It was one of the best first quarter growth rates Zions has posted in the last decade.” —Zions CEO Harris Simmons (Bank)

But loan growth is risky at this stage of the cycle

“the massive amount of growth that we see in the credit market place is not lost on us…we know that in the end the growth…can affect credit with the selection quality of new origination and can impact existing customers who take on more debt from other players.” —Capital One CEO Richard Fairbank (Bank)

Online “robo-advising” ultimately isn’t that differentiated. Everyone will have the offering

“With respect to the digital or online advice…I just think that everybody is going to have…these types of products these types of solutions…I would be surprised if you see major market share move as a result of it because it’s just not that differentiated in many cases from one firm to the other” —Schwab CEO Walter Bettinger (Retail Brokerage)

The hedge fund industry may be on the verge of collapse

“The result of all of this was one of the most catastrophic periods of hedge fund performance that we can remember since the inception of this fund…There is no doubt that we are in the first innings of a washout in hedge funds and certain strategies.” —Third Point CEO Dan Loeb (Hedge Fund)

Consumer:

US diaper buyers have been trading up from private label

“We saw private label shares flat to down in nearly every category that we’re in, which is again another sign of health of the consumer for us, and are probably maybe more bullish on the outlook in North America at this point in time than maybe we would have been even at the beginning of the year.” —Kimberly Clark CEO Tom Falk (Consumer Packaged Goods)

Retailers have invested a lot of money in e-commerce and the returns aren’t showing up

“The Internet is not the panacea. A lot of CapEx have been spent there. It’s not showing the returns for retailers, so I think they are going to — their biggest and best opportunity continues to be bricks and mortar and you know we’ll keep plugging along.” —Simon Property Group CEO David Simon (Mall REIT)

Chipotle said it started to see sales recover in the first quarter

“We begin to see sales recover in the second half of the first quarter as our transaction trends reversed course from the lows we saw in January. Since the beginning of February, we have seen an 18-point improvement in comp transactions compared to the full month of January.” —Chipotle CEO Steve Ells (Burritos)

Advertisers are coming to the conclusion that TV is still an important part of a successful advertising campaign

“I think the emotion of the market has swung pretty dramatically over the last year. I think people have come to the realization that broad television reach is really important in a campaign that digital has a place but television has a big place.” —Comcast CEO Brian Roberts (Media)

The LA Times quoted some hooligan about Comcast’s Dreamworks acquisition

“Comcast is trying to [emulate Disney’s strategy], but they are not getting [the same A+] content,” Krisiloff said. “Studios have always had animation studios, and for whatever reason nobody has ever really been able to copy Disney’s success.” —Avondale Asset Management CEO Scott Krisiloff (Author of the piece you’re reading)

Technology:

Tim Cook said that macroeconomic weakness was primarily responsible for slowing smartphone growth

” In terms of do I think the smartphone market is mature, I think that the market, as you know, is currently not growing. However, my view of that is that’s an overhang of the macroeconomic environment in many different places in the world. And we’re very optimistic that this too shall pass and that the market and particularly us will grow again.” —Apple CEO Tim Cook (Consumer Electronics)

Mark Zuckerberg’s interests appear to be straying from Facebook

“While helping to connect the world will always be the most important thing that I do, there are more global challenges that I also feel a responsibility to help solve to create a better world for my daughter and all future generations, things like: helping to cure all disease by the end of the century; upgrading our education system so it’s personalized for each student; and protecting our environment from climate change.” —Facebook CEO Mark Zuckerberg (Social Media)

Acquisitions have been critical to creating value in the internet sector

“acquisitions have been critical in creating value for the Internet sector, consumer Internet sector over the last two decades. Many of our competitive peers have bought assets at very early stages that have resulted in billions of dollars of value” —Twitter CEO Jack Dorsey (Social Media)

T-Mobile’s CTO vowed to overtake Verizon’s network within the next two to three years

“if I’m Verizon, one…I’m looking over my shoulder because T-Mobile may match my breadth if not exceed it with the largest network in the U.S. before too long…the next two to three years, you will see us push and be the fastest growing, the fastest network and the most advanced network with what we’re doing on LTE” —T-Mobile CTO Neville Ray (Telecom)

Some examples of the way that companies are using the cloud:

“Microsoft announced Azure contracts with BMW and Toyota, to assist in making their cars smarter and more connected. This is in addition to contracts Microsoft has with Volvo and Nissan. BMW is using Azure to power its open mobility cloud for their new BMW connected app. Toyota will use Azure to run Toyota Connected to support in-car services, telematics, Internet of Things, home connectivity and smart city integration.” —Dupont Fabros CEO Christopher Eldredge (Data Centers)

Healthcare:

Express Scripts is using big data to better understand its patient population

“And so we use great amounts of that data to not only in our own book run fraud, waste and abuse, but increasingly for our health plan clients to help power their programs, power their provider networks, power their payment mechanisms by virtue of being able to have a very complete look at prescribing patterns, at patient outcomes and so forth.” —Express Scripts President Tim Wentworth (Prescription Benefits Manager)

Industrials:

Aircraft demand continues to be supported by growing passenger miles

“I’ve said many times the biggest Aerospace driver we have is flight hours. And it’s not tied to OEM schedules or airline profitability or any of that generally. The long-term trend is going to be driven by flight hours. If they’re flying, everything ends up working out.” —Honeywell CEO David Cote (Diversified Industrial)

“passenger traffic is off to its strongest start in eight years, with traffic growing 8% in early 2016. Over the past three years, we have seen passenger traffic growth consistently outpace global GDP and airline capacity growth” —Boeing CEO Dennis Muilenburg (Aerospace)

Industrial companies are putting sensors in everything

“This whole focus on total system innovation going forward, combining hardware with sensors, instrumentation, and software controls, this is the way of the future for the industry.” —Schlumberger CEO Paal Kibsgaard (Oil Service)

“Today, we’ve got 400,000 connected assets and growing. By this summer, every one of our machines will come off the line being able to be connected and provide some kind of feedback in operational productivity to the owner, to the dealer and to us.” —Caterpillar CEO Doug Oberhelman (Construction Equipment)

Materials, Energy:

The oil industry is facing a “full scale cash crisis”

“Activity fell sharply in the first quarter, as the industry displayed clear signs of facing a full-scale cash crisis. We experienced activity reductions worldwide, with the rate of disruption reaching unprecedented levels…our industry is now in the deepest financial crisis on record…This is the toughest environment we have seen for 30 years, and it is likely to get even tougher before the market turns” —Schlumberger CEO Paal Kibsgaard (Oil Service)

Even if prices improve, the industry will still be under considerable stress

“the longer this goes, which it’s going to go, you know, even if prices improve…oilfield service will be under considerable stress for the remainder of this year and a fair amount of next year.” —Zions COO Scott Mclean (Regional Bank)

No one would be excited about oil prices in the 40s if they hadn’t dipped into the 30s

“if we didn’t take a short trip down into low 30s you would think this was a very distress level of oil…So yes there has been a recovery, but it’s still at a price that’s going to cause many companies to have to focus on restructuring their balance sheet” —Moelis and Co CEO Ken Moelis (Investment Bank)

At least one positive is that companies are finally capitulating to the oil price, not expecting it to go higher

“We’ve seen $40 before. We saw it coming down. And so now we’re seeing it going up. But we could be back at $30 again. So we just prefer to err on a more conservative side” —Zions COO Scott Mclean (Regional Bank)

“The story around oil and gas, I guess major OEMs really continue to indicate no significant improvement until the end of calendar 2016 early 2017…It looks like everybody is trying to restructure and look to be profitable around $40 per barrel.” —Parker Hannifin COO Lee Banks (Industrial Components)

Oil companies still have a long way to go though

“in Houston…I attend a lot of meetings and I’m on various Boards with these oil company executives and they still have quite a way to go in restructuring their balance sheet and that’s what happening now.” —Group 1 Automotive CEO Earl Hesterberg (Auto Dealership)

A lot of corn is expected to be planted this year, which could keep corn prices low along with farm incomes

“if the weather is perfect and we get 94 million acres…we’ll continue to see commodity prices at that low end of…that 320 to 420 kind of operating range. And that will continue to put stress on that farm income” —Dupont EVP James Collins (Chemicals)

Miscellaneous Nuggets of Wisdom:

Recessions don’t drive financial markets, it’s the other way around

“We will be on watch for [a recession] in the coming months. But it doesn’t really matter. Recessions don’t drive financial markets. It’s the other way around.” —Doubleline CEO Jeff Gundlach (Asset Management)

Full transcripts can be found at www.seekingalpha.com

Miscellaneous Earnings Call Notes 4.28.16

General Electric (GE) Jeffrey R. Immelt on Q1 2016 Results

Saw improvements in our business in China

” We’re in the midst of a challenging Oil & Gas market. However, we are things sustained strength in Aviation and Power markets. Healthcare is rebounding. I was in China last week and saw improvements in our business. Most of the portfolios are strong and we’re delivering. There’s plenty of business out there to achieve our goals.”


McDonald’s (MCD) Stephen J. Easterbrook on Q1 2016

All Day Breakfast came out hard and then settled but is still exceeding expectations even at the settled stage

“we clearly came out of the tracks hard with All Day Breakfast. It exceeded our expectations through the launch phase, and then hit a more settled rate. Frankly, it’s still exceeding our expectations through the settled stage as well. So we’re incredibly encouraged.”


Honeywell International (HON) David M. Cote on Q1 2016 Results

I’m hopeful for a rebound but we’re not going to count on it. Europe did better than expected

“I’m hopeful that there is a global economic rebound, but we’re certainly not going to count on it. If there was any region that surprised me in this past quarter, it was Europe did a lot better than I expected. I don’t know if this is just a one-time bounce or something that’s going to stay consistent, but I was quite encouraged by seeing that. It was a nice surprise. I mean, we’ll see how much that turns into something. But right now, we’re going to stay with this whole idea that this is a slow growth global environment and it’s just the smart way to plan. And you see that reflected in how we are forecasting the second quarter and how we’re forecasting the total year. I just don’t think there’s any percentage right now on being bullish about it. If it happens, great. I think there’s a greater chance it happens than there is that it doesn’t. But that being said, I don’t see any percentage in being bullish about it.”

Flight hours is the most important driver of the aerospace cycle

“I’d say it comes back to flight hours again. They fly a lot. And that’s really – I’ve said many times the biggest Aerospace driver we have is flight hours. And it’s not tied to OEM schedules or airline profitability or any of that generally. The long-term trend is going to be driven by flight hours. If they’re flying, everything ends up working out. Whatever short-term disruptions or benefits, whatever you’re seeing, over time flight hours ends up being the driver. Flight hours continue to climb, and that’s a good phenomenon for us.”


LyondellBasell Industries’ (LYB) CEO Bob Patel on Q1 2016 Results

Olefin and polyolefin markets are tight

“Looking forward, we see olefins and polyolefins markets remaining tight during the near-term. There are heavy turnaround schedules in both the US and Asia. The recent rise in crude oil prices provides tailwinds for both pricing and demand, as customers no longer feel incentives to delay purchases, in hopes of future declines in product prices.”


Procter & Gamble’s (PG) Q3 2016 Results

Jon Moeller

It’s not enough just to gain market share

“The reason that we’ve talked a little bit about not following share out the window, we can be gaining shares in categories that are declining, and that’s not going to grow our top line. What we need to be doing as innovation leaders in our categories is getting the market growing through that innovation and gaining a share of that growth.”


Twitter’s (TWTR) CEO Jack Dorsey on Q1 2016 Results

Acquisitions have been critical in creating value for the internet sector for two decades

“The first point I would make is that acquisitions have been critical in creating value for the Internet sector, consumer Internet sector over the last two decades. Many of our competitive peers have bought assets at very early stages that have resulted in billions of dollars of value and Twitter has been the same”

Goal is to be one stop shop for advertising

” At end of the day, our goal is to be a one-stop shop for advertising. And having both owned and operated inventory, third party inventory and ad text stock that can serve both of those constituencies is really critical.”


United States Steel’s (X) CEO Mario Longhi on Q1 2016 Results

Favorable trade case results are boosting the domestic steel industry

“Last year, we successfully advocated for the passage of the Level Playing Field Act in the trade adjustment assistance bill. This represents the first time in decade that U.S. trade laws were revised and clarified to align with the original congressional intent. The interpretation and enforcement of these new laws has already been reflected in preliminary determinations in the three major trade cases we elected to pursue with other steel companies in 2015. Yesterday, we announced another step in our efforts to have the rule of law enforced. We filed a complaint with the U.S. international trade commission to initiate an investigation under section (337) of Tariff act of 1930 against the largest Chinese steel producers and their distributors. The 337 complaint alleges illegal unfair methods of competition and seeks the exclusion of all unfairly traded Chinese steel products from the U.S. market. I would like to emphasize that the remedy under section (337) is not a tariff, it is an exclusion of products from the U.S. market. Our complaint alleges three clauses of action, the illegal conspiracy to fix prices, the theft of trade secrets and the circumvention of trade duties by false labeling.”


Third Point 2Q16 Investor Letter Dan Loeb

One of the most catastrophic periods of hedge fund performance since this fund’s inception

“Unfortunately, many managers lost sight of the fact that low net does not mean low risk and so, when positioning reversed, market neutral became a hedge fund killing field. Finally, the Valeant debacle in mid-March decimated some hedge fund portfolios and the termination of the Pfizer-Allergan deal in early April dealt a further blow to many other investors. The result of all of this was one of the most catastrophic periods of hedge fund performance that we can remember since the inception of this fund”

Volatility is bringing excellent opportunities

“As most investors have been caught offsides at some or multiple points over the past eight months, the impulse to do little is understandable. We are of a contrary view that volatility is bringing excellent opportunities, some of which we discuss below. We believe that the past few months of increasing complexity are here to stay and now is a more important time than ever to employ active portfolio management to take advantage of this volatility. There is no doubt that we are in the first innings of a washout in hedge funds and certain strategies. ”

Texas Instruments’ (TXN) Management on Q1 2016 Results

Kevin March

Inventories were up because we expect higher shipments

“We expect that material is going to ship over the balance of the year. And between the increased shipments in 2Q and the shipments of that personal electronics material, we’ll see the days of inventory drift back down comfortably inside our model, very similar to what we saw last year. If you go back and take a look last year, we were also a little bit higher in the first quarter, anticipation of second quarter growth, and then days drifted down as we came through the year.”

Dave Pahl

Weakness came in as expected but broad based strength in other areas

” that portion of demand where we saw weakness came in about as we expected. The strength was more broad-based, and we continue to, obviously, to see strength in automotive and then the improvement in industrial and comms equipment. So, very, very broad-based strength that we saw. So the second part of your question was sequentially. What we saw from the trends there, no surprise that automotive remained very strong, and it was driven by infotainment as well as the hybrid electric and powertrain systems. Industrial, again we had growth across almost every sector inside of industrial. Personal electronics down, with most sectors declining”


Group 1 Automotive’s (GPI) CEO Earl Hesterberg on Q1 2016 Results

Vehicle inventory stood at 85 days vs 69 days in 1Q15

“The U.S. new vehicle inventories stood at 31,400 units which equates to an 85 day supply compared to a 69 day supply for the first quarter of 2015. Luxury brand inventories drove much of the year-over-year increase. We have adjusted orders and expect to bring inventory closer to our target level of 60 days by the end of the second quarter. ”

Oil companies still have a long way to go in restructuring their balance sheets for what’s happened to oil prices

“our new vehicle sales in Houston, we held a 1% decrease for the quarter, so we’re fighting it pretty well, but I attend a lot of meetings and I’m various Boards with these oil company executives and they still have quite a way to go in restructuring their balance sheet and that’s what happening now.”

Hasn’t been a big consumer confidence problem outside of energy impacted markets

“No, I don’t really see weakness outside of the energy belt. David I’d say people are reacting to the fact just not growing as significantly as it had been in recent years. So when it’s flat without it only grow 1% or 2% or 3%, I think it feels for a lot of people like it’s just very slow. But I wouldn’t say I have seen any big consumer confidence crisis anywhere outside of the energy impacted market.’


AGCO (AGCO) Martin H. Richenhagen on Q1 2016 Results

2016 farm income expected to remain below 2015 levels

“estimates call for 2016 farm income to remain below 2015 levels. In North America, relatively young machinery fleet and dealer efforts to reduce inventory levels have contributed to continued decline in industry sales through the first quarter. Weaker demand from the row crop sector resulted in significantly lower industry retail sales of high-horsepower tractors, combines and sprayers.”


Dupont Fabros Technology 1Q16 Earnings Call Notes

A leading enabler of cloud

“A good portion of our leasing in Q1 can be attributed to the exponential growth of our cloud customers. As a leading enabler of cloud, we are encouraged by the continuing evidence of demand for cloud-based services”

CIOs expect to move 50% of their workloads to the public cloud from 16% over the next 5 years

“notably a recent JPMorgan survey of CIOs found that only 16.2% of enterprise workloads are on the public cloud today. The same CIOs expect this to triple over the next 5 years to 50% of enterprise workloads.”

Examples of cloud

“Microsoft announced Azure contracts with BMW and Toyota, to assist in making their cars smarter and more connected. This is in addition to contracts Microsoft has with Volvo and Nissan. BMW is using Azure to power its open mobility cloud for their new BMW connected app. Toyota will use Azure to run Toyota Connected to support in-car services, telematics, Internet of Things, home connectivity and smart city integration. It’s no wonder Microsoft’s datacenter spend is up 65% year-over-year.”

Cloud adoption is expanding in almost every way

“We see cloud adoption expanding at an increasing rate in almost every way. Be it protestant development, storage or compute, the move to the cloud appears inevitable.”

There’s tremendous demand from social media, media, cloud. We’re in the first inning

“there’s a tremendous amount of demand for our product, and it’s the hyperscale cloud providers, it’s social media, it’s media and content, we’re in the very early stages of cloud right now, I’d say we’re in the first inning, so I think demand is going to be healthy over the next coming years.”

Very early stages of cloud

“we are at the very early stages in cloud. So I think you’re going to see more outsourcing to the cloud, that hybrid model that a lot of us talk about, so I would say we’re in the first inning, and two years or three years from now we’ll probably be in the third inning. So I think the pace of lease up is going to continue for the next five years.”

Kilroy 1Q16 Earnings Call Notes

John Kilroy

fundamentals in our markets remain healthy

” Four months into the New Year fundamentals in our markets remain healthy. Rental rates and net absorption continue to increase, while vacancy rates continue to decrease in the innovation driven sub markets of San Francisco, Seattle, Los Angeles, and San Diego.”

You may see a few fewer bidders, but pricing has remained very strong

” You don’t see as many bidders at some of the really core, real Class A sales. Although you still see a dozen or so and then it generally narrows down to two or three in the final round. But pricing has remained very strong. If you look at land, lands being acquired — there is not much acquired in San Francisco, down in the Valley, Mike, it’s very robust, the pricing is strong.”

Construction costs in Silicon Valley have spiked primarily because of labor

“The thing that we’re look at right now is construction costs which have spiked, it’s basically a labor driven. Down in Silicon Valley right now labor costs were up considerably. How long you’ll stay that way we don’t know. We’ve been able to manage cost to where we forecast generally about 5% per year, and we’ve been able to as we mentioned, we had savings on the two buildings we just delivered. But all those factors you have to really keep control of and if you have a project that is you’ve got to start soon, you better make sure you have forecasted your cost correctly”

Mastercard 1Q16 Earnings Call Notes

MasterCard (MA) Ajay Banga on Q1 2016 Results

US economy continues to be solid

“So now let’s take a look at the global economy, and I think it’s largely unchanged from what we discussed last quarter with the US economy remaining solid with inflation and wages growing at a similar pace and the unemployment rate kind of holding steady at 5%. We just saw the unemployment rate numbers coming out this morning as well. However, as we know from the Fed comments yesterday, uncertainty remains about when they might take action as well as the potential impact from the global economy.”

ROW is mixed

“So looking at the rest of the world, the economic outlook continues to be mixed. In Europe, both consumer confidence and economic sentiment declined slightly this quarter. However, recent stimulus measures by the European Central Bank and steady improvement in the unemployment rate I think should continue to drive growth across the region, particularly in the UK and Germany. Asia is still challenged by the continued slowdown in China. Consumer confidence remains cloudy with the exception being India where both consumer and business sentiment remain high. In Latin America, Brazil is still in the worst recession in the country’s history, and of course, economic conditions in Venezuela are deteriorating further. But Mexico is stable and it seems to be driven by solid consumer spending and declining inflation.”

issuer mix was under-performing for many years after the crisis but is now back to growing

” remember for a while, our issuer mix was underperforming soon after and for many years after the crisis. If you look at the reports, you’ll find it so happens that our issuer mix is back into growing its volumes and its businesses, and so we’re kind of riding that tailwind in our sales in addition to all the other stuff that’s going in and out.”

Potlatch 1Q16 Earnings Call Notes

Potlatch Corporation’s (PCH) CEO Mike Covey on Q1 2016 Results

Sold 172k acres in Central Idaho for $114m

“We announced this morning that we have sold 172,000 acres of timberlands in Central Idaho for $114 million. As many of you know, Central Idaho is our realized strategic timberland holding based on productivity and location.”

Norther Idaho generates $117 EBITDA per acre, which is 5x central Idaho

“In addition, the truck-haul distance is shorter in Northern Idaho which results in much higher stumpage values in Central Idaho. For these reasons, our Northern Idaho property generates a $117 of EBITDA per acre, which is over 5 times that of Central Idaho.”

Northern Idaho appraised at $2000 per acre

“As you know, we had an appraisal completed in 2012 when log prices were much lower that concluded the 352,000 core acres of our ownership in Northern Idaho were worth of $2,000 per acre.”

Eric Cremers

We had seen a nice run in lumber prices our expectation is for modest gains going forward

“we had seen a real nice run in lumber prices. Our expectation from here is for continued very modest gains in pricing. We are not really yet to the heart of the building season and with the U.S. dollar continuing to be relatively weak, we think that bodes well for the future.”

Dealers have learned to operate with low inventories

“It’s hard to get good data on where things stand out in the distribution network. Our general feeling is that dealers have learned to operate with very low inventories. It’s more of a just in time kind of a business. So any change in the outlook or demand or lumber or housing starts, shows up very rapidly in the form of price increase or decrease. So I think it’s fair to say that that inventories are – they’re relatively low levels. “

WR Berkley 1Q16 Earnings Call Notes

Robert Berkley

Insurance marketplace more competitive but reinsurance slightly less

“The insurance marketplace continues to become incrementally more competitive while the reinsurance marketplace seems to be coming gradually a little less intensely competitive, though that is a very incremental change.”

Large purchasers of reinsurance started to come back to the market as they realized losses

“finally, we’re seeing a bit of a change in the reinsurance marketplace and if there was ever a part of the industry that deserved a break, it was probably the reinsurance market these days. And that is, a few years ago we started to see a change in buying habits of some of the largest purchasers of reinsurance. Ultimately they ended up increasing their intentions and reduced the amount of reinsurance they bought in a pretty dramatic way. Loss activity has come through and as a result of that it would seem as though they are yet again changing their habits and they are reentering the marketplace as customers.”

There are a lot of organizations that have become inwardly focused

“I think the answer is in some ways the period that we’re going through now is somewhat reminiscent of 2008, 2009, 2010 for different reasons and that is there is a lot of dislocation in the market, there are a lot of people or large organizations that for one reason or another are a very inwardly focused and that creates opportunity for organizations like ours to try and continue to find opportunities and to build and enhance the value of our franchise for our shareholders both organically through expanding our existing businesses as well as starting new operations. ”

There’s a battle for distribution going on between distribution and carriers

“our general observation is this, that the companies are trying to maintain or perhaps grow their margins, the distribution is trying to do the same thing. At the same time if you look at the insurance marketplace, rates are plateaued in all likelihood are gradually going to decrease and that creates tension and pressure and ultimately it would seem as though everyone is so focused on how they maintain their margins and how they keep the world happy every 90 days that is getting the way of distribution and carriers, finding ways to work together to bring more value to the customer.”

If price moves away from us we’re prepared to shrink

” we’re in business to make money not necessarily just to issue insurance policies for the sake of issuing insurance policies. We’re in the market every day trying to provide product and provide continuity to the marketplace in our offering. Having said that ultimately if there are parts of the market that move away from our pricing then we’re prepared to shrink. So yes, the answer is there are parts of our business that are shrinking right now, auto would be an example of that, again that’s just the reality of operating in a cyclical business when you’re focused on profitability and return.”

Ultimately the relationship between distribution and carriers is a partnership. Who is the senior partner shifts

“as my father reminds me and reminds others, that ultimately it’s a partnerships. There are moments in time when the carriers are the senior partner and there are moments in time when the distribution is the senior partner, but ultimately in the long run for us all to survive one needs to be conscious of their obligation to their partnership and their need to survive as well.”

We have grown our Florid exposure, but with significant caps

” first of all yes we have grown our Florida homeowners product and this is through our reinsurance, having said that, there are meaningful event caps and significant exclusions as far as coverage when it comes to natural catastrophes. So I think that while there is a modest amount of cat exposure that comes with it, I would encourage you to think of that less as a cat play. I know that – it shows up in the yellow books and in other filings where it could be misinterpreted so hopefully we been able to rectify the understanding.”

Gene Ballard

Technology is moving to disintermediate the current distribution system

“The long and the short of the situation is the big picture is technology is moving to dis-intermediate the current distribution system to some extent. The fact is that that’s a long term problem and at the same time as we’re moving in that direction, the existing distribution system instead of working with companies to try and find ways to deliver value to the customer is more focused on how to improve their margins and at the same time insurance companies are faced with the need for more underwriting margin because their investment margins are declining. So you have a natural crisis. Everyone wants a bigger piece of a shrinking pie.”

Comcast 1Q16 Earnings Call Notes

Comcast (CMCSA) Brian L. Roberts on Q1 2016 Results

The balance between content and distribution shifts back and forth over time

“As to the relative value, these things evolve and go up and down, and the relationship between the two in terms of carriage disputes and other things, they’re both great businesses. And that was our fundamental premise all along. I think I first learned that being on Ted Turner’s board when Comcast was purely a cable company. It’s a worldwide business, it grows all (25:00) in different ways, but they’re in the same sort of system where together, the value tends to head in the same direction. And at any one time, one part of the ecosystem can be doing better than another part of the ecosystem, but in the end, we’re bringing great experiences to consumers. You need their content, you need innovative distribution technologies, and that’s how we’re running our company. And I hope that’s responsive to your question.”

I think there’s been a big shift to recognize that TV is still an important part of a marketing campaign

“So regarding the upfront, let me talk a little bit about the market. A year ago, a lot of advertisers pulled back and didn’t spend as much in the upfront. I think part of the thinking was we can always spend later and there’s plenty of places to spend our money on digital. I think the emotion of the market has swung pretty dramatically over the last year. I think people have come to the realization that broad television reach is really important in a campaign that digital has a place but television has a big place. And a lot of people, I think, who did not come into the upfront market last year paid significantly more in what has been one of the strongest scatter markets I’ve ever seen. So in terms of market dynamics, we’re going into the upfront season, I think, with a lot of wind at our back, and my prediction is that it’s going to be a strong upfront.”

Haven’t seen much change in cord cutting, cable is still a good business

“So, in terms of cord cutting, cord shaving, we don’t see much change at all. The numbers you – the 2% you talked about is not far off from what we’re seeing, and some of it is shaving and some of it is cutting. And the interesting thing about the Cable Network business is the overall resiliency. If you look at the affiliate stream and the advertising stream and the desire for advertisers to buy broadly-distributed, highly-rated cable channels being stronger than ever. So, as a business, it’s not going to grow – we’ve said before and we’ll say again, it’s not going to grow the way it did 10 years ago. But it’s still a good business for us, and we don’t see any major change, in terms of what’s going on with sub trends.”

It’s getting tougher to get ratings in broadcast, but when you do you get rewarded

” I would not have predicted this 10 or 20 years ago but it feels like Broadcast is getting stronger and stronger in this period. We have to keep putting good shows on and it’s tougher and tougher in a fragmented world to get a rating. But when you do, you do get – you get rewarded for it significantly.”

Neil Smit – President & Chief Executive Officer, Comcast Cable & Senior Executive Vice President

5G still in very early days, but looks like propagation distance is fairly short. We think we’re well positioned

“Let me speak to that. 5G is an exciting new platform, and it’s still in the very early days. We think that the propagation distance is fairly short, about 300 foot radius. The antennas are going to need space and power and backhaul, and it has – the spectrum doesn’t really pass through objects like trees and buildings very well. But we think we’re very well-positioned, because we have space and power and backhaul, as well as a field force to be able to install all the antennas and maintain the services and provide the backhaul that would be required. So we’re going to continue to monitor, it’s still a way – early in the game, and we feel well-positioned.”

Boeing 1Q16 Earnings Call Notes

The Boeing (BA) Dennis A. Muilenburg on Q1 2016 Results

Continue to see a healthy commercial airplane marketplace

” We continue to see a generally healthy commercial airplane marketplace, driven by improving airline profitability, strong passenger traffic growth, and meaningful replacement demand. According to the International Air Transport Association [IATA], passenger traffic is off to its strongest start in eight years, with traffic growing 8% in early 2016. Over the past three years, we have seen passenger traffic growth consistently outpace global GDP and airline capacity growth, a key indicator that the supply and demand dynamic remains positive”

Global air cargo down though

“In contrast to the strength of passenger traffic, the global air cargo market is off to a slow start this year, with air freight traffic declining 2% over the first two months. However, we continue to expect approximately 3% growth for the full year. As always, we continue to keep a watchful eye on global market conditions for both passenger travel and cargo to ensure that supply and demand are balanced.”

Oil prices haven’t changed customers views on future fleet

“With regard to oil prices, while we have seen a rebound from the February lows, prices are still well below the 15-year average. With that said, our customers are telling us that current oil prices have not substantially changed their views on future fleet planning or their commitment to existing delivery schedules.”

Airplane order activity is continuing at a moderated but healthy pace

“Airplane order activity is continuing at a moderated but healthy pace. Meanwhile, requests to change deliveries remain well below the historical average. As a matter of fact, in the past year, deferrals, accelerations, debookings, and cancellations combined for about 1% of our backlog. That is well below the 6% average over the last 15 years.”

Expecting headcount to be down this year as drive productivity

“I will say the overall macro trend that we have for this year is that we expect employment will be net down moderately. I can’t give you a specific number there, but we are on a moderate downward trend enterprise-wide this year as we drive productivity. As I said earlier, we’re also doing that and trying to be very mindful of our employees. And as you know, I have a great deal of respect for our people. They are world-class. They’re the best in the world at what they do. And where we can leverage attrition and the voluntary layoff programs that we’ve put in place, we will, and so far that approach has been very effective for us. And I think that’s good for the business and good for our people, ultimately good for our customers. So that’s our headset on that approach.”

Facebook 1Q16 Earnings Call Notes

Mark Elliot Zuckerberg – Founder, Chairman & Chief Executive Officer

A “foundry light?” company

“Facebook has always been a foundry-light company, so we can focus on our mission and build long-term value. This structure has served our shareholders well. Early on, we received some generous offers for companies trying to buy Facebook, and our structure helped us resist that pressure. More recently, we navigated a challenging transition to mobile. But because we were a controlled company, we were able to focus on improving the user and product experience of our apps first and then build a strong mobile business over time rather than being forced to do something shortsighted. And over the years, our structure has helped us make big bets on acquisitions like Instagram that were very controversial initially but were good decisions for our community and our business.”

Facebook was built by a series of bold moves

“Facebook has been built by a series of bold moves. And when I look out into the future, I see more bold moves ahead of us than behind us. We’re focused not on what Facebook is, but on what it can be and on what it needs to be, and that means doing bold things. A lot of what we’re building today in areas like connectivity, artificial intelligence, and virtual and augmented reality may not pay off for years, but they’re important to our mission of connecting the world. And I’m committed to seeing this mission through and to leading Facebook there over the long term.”

There are more things I want to do that connecting the world

“While helping to connect the world will always be the most important thing that I do, there are more global challenges that I also feel a responsibility to help solve to create a better world for my daughter and all future generations, things like: helping to cure all disease by the end of the century; upgrading our education system so it’s personalized for each student; and protecting our environment from climate change.”

Shareclass split allows me to fund the Chan Zuckerberg initiative

“Today’s board proposal will allow us to maintain and improve the voting structure that has served us well and allow me to fund the Chan Zuckerberg Initiative. In December, I also announced that I won’t sell more than $1 billion worth of stock – Facebook shares per year over the next three years. That’s still my commitment, and I’ll update our shareholders on future plans beyond that”

Bots allow people to interact with businesses with lower latency

“one of the good things about bots that we’ve seen is that it can decrease the amount of time that you have to wait before you get a reply back from interacting with a message. So what we’ve seen – we’ve done some research on this. A lot of people every day in Facebook today are already messaging pages and businesses directly, and the businesses respond. But what we’ve actually also found is that through some of our AI research, we can look at the responses that businesses give to common questions and can confidently provide the right reply a lot of the time. And when we can do that, then that decreases the latency. And predictably, people want to do more of that activity.”

Acquisition strategy is to find things that will be ubiquitous tools and who are the most talented people in the world to build it

“” think that people come up from time to time and suggest, should we buy this company or that. And what we look at are what are the things that we think are going to be ubiquitous tools, and who are the most talented people in the world to build this. And so when you think about something like virtual and augmented reality, that’s how we thought about that.”

We’re focused on building AI that is better than people at things like seeing, hearing, language

“So the biggest thing that we’re focused on with artificial intelligence is building computer services that have better perception than people, so the basic human senses like seeing, hearing, language, core things that we do. I think it’s possible to get to the point in the next five to 10 years where we have computer systems that are better than people at each of those things. That doesn’t mean that the computers will be thinking or be generally better, but that is useful for a number of things.”

Sheryl K. Sandberg – Chief Operating Officer & Director

Consumers have shifted to mobile and businesses know they need to catch up

“First, capitalizing on the shift to mobile. Consumers have shifted to mobile, and businesses know they need to catch up. We hear from marketers that figuring out mobile today is like figuring out TV in its early days. But given where consumers spend their time, the question now is not if they should market on mobile, but how.”

David M. Wehner – Chief Financial Officer

The new voting structure is to allow Mark to fund the Chan Zuckerberg initiative while maintaining an active leadership role at FB

“As Mark mentioned, this structure will allow for the preservation of the voting structure that has served the company well to date while allowing for Mark to fund the Chan Zuckerberg Initiative over the course of his lifetime. Importantly, as part of this proposal, the preservation of the multi-class capital structure would be generally predicated on Mark continuing to maintain an active leadership role at Facebook.’