Company Notes Digest 8.26.16

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: Dog Days of Summer

The last two weeks of August are typically two of the slowest weeks of the year for the business community. Not many companies were speaking this week, but the comments seemed to reflect the seasonal mood. Although the economic weakness from the beginning of the year has bottomed out, the upswing doesn’t seem too exciting. It’s worth noting that upswings never do feel exciting until the wall of worry has been climbed. Still, it’s difficult to see how we get an acceleration in growth rates without inflation. The most optimistic actors seem to be focused on just trying to control what can be controlled.

The Macro Outlook:

Companies continue to find ways to be pleased with relatively anemic growth

“In our domestic segment, revenue increased a greater than expected 0.1%…driven by comparable sales of 0.8%…As it relates to…our expectations, maybe our expectations were too low. But the other thing is that frankly our team is executing extremely well.” —Best Buy (Consumer Electronics)

CEOs are trying to stay optimistic that good execution can carry the day in a tough environment

“The consumer is going through a period around the world of uncertainty…but ultimately at the end of the day if we can deliver a better experience day in and day out in our restaurants, we’re confident we can win that market share fight.” —McDonald’s CEO Steve Easterbrook (Fast Food)

“the retail environment has softened since we last talked, and our sales are being impacted by a more cautious consumer…As always, our focus is on what we can control, which includes our supply chain and inventory initiatives…” —Williams Sonoma CEO Laura Alber (Home Goods)

“I think we’re going to be in a more moderate growth world for a long time and a low — lower interest rate environment for a long time, but I still think that you’ll be able to — good investors will still be able to make a lot of money.” —Brookfield Asset Management CEO Bruce Flatt (Asset Management)

Sentiment can swing rapidly when your baseline growth is close to zero

“the early part of the [fiscal] third quarter where sentiment was a bit more positive as those commodity prices were up…that can change in a hurry, and it certainly with the commodity prices coming down, I think it’s fair to say the overall mood would be less positive than it was a couple months ago even.” —John Deere (Farm Equipment)

There continues to be a glut of inventory in a number of capital goods industries

“there continues to be a glut of trucks entering the market. And so it’s been transportation, construction, and we’re still seeing a decline of pricing on oil and gas related equipment. And also anything tied to mining as well” —Ritchie Bros Auctioneers SVP Doug Olive (Used Industrial Equipment)

Retailers are carrying less inventory but they may still be carrying too much

“I still believe that even with less inventory, there’s so many uncertain factors out there, the macroeconomic environment, political environment, even though stores are positioned perhaps with less inventory than they have last year, that doesn’t necessarily mean that, that sales will materialize” —Ross Stores CEO Barbara Rentler (Off Price Retail)

There are shortages developing in some parts of the technology supply chain though

“we are seeing on the horizon some shortages, particularly around LCDs, DRAM and Flash memory. And it’s not so much coming from the PC industry. It’s more coming from adjacent categories going to – glass going into televisions, memory going into phones that are likely to double density, which is putting pressure on the overall industry.” —HP Inc. CEO Dion Weisler (Printers)

Wages also continue to rise

“I think we’ve done a good job so far as Michael Hartshorn said in absorbing those wage rate increases in the last couple of years. But that’s probably a limit to how much we can absorb. ” —Ross Stores President Michael O’Sullivan (Off Price Retail)

Shortages and wage increases can lead to higher inflation. The Fed is signalling that it is closer to making a move

” Employment has increased impressively over the past six years since its low point in early 2010…core PCE inflation, at 1.6 percent, is within hailing distance of 2 percent–and the core consumer price index inflation rate is currently above 2 percent. So we are close to our targets.” —Federal Reserve Vice Chair Stanley Fischer (Central Bank)

International:

The British economy appears to have emerged from the Brexit vote unscathed

“we haven’t seen a Brexit effect at this point in time. It doesn’t mean something couldn’t come down the road, but we haven’t seen that at this point.” —Nordson CEO Michael Hilton (Industrial Components)

Europe seems very healthy to PVH

“Europe seems much healthier as a market to us. I know all the headlines about Europe and what you see. But as far as the consumers being – spending discretionary money, it’s very healthy there.” —PVH CEO Manny Chirico (Apparel)

There may have even been a bit of a boost

“interestingly we saw an uptrend in the UK sales almost immediately following the vote. We believe that the weakening of the pound has made London a more attractive tourist shopping destination.” —Tiffany IR Mark Aaron (Jewelry)

It’s really too early to tell though

“we saw very, very limited impact from Brexit….so, Q3 was really a non-event. On a go-forward basis, it’s unclear exactly what the impact is going to be. We are definitely seeing and, in some cases, following with our own pricing increases. What’s less clear is…what is going to be the impact on demand…And it’s just too early to tell.” —HP Inc. CFO Cathie Lesjak (Printers)

Canadian regulators are taking a closer look at home price appreciation

“Regulatory bodies are also responding to the combination of rising house prices and record levels of consumer leverage. We support the Canadian federal government’s recent action to form a working group to study the housing market and develop appropriate recommendations.” —Royal Bank of Canada CEO David McKay (Bank)

The impact of currency fluctuations on financial results are starting to balance out

“There was no translation effect on total sales as the stronger yen offset the negative translation effects from the stronger US dollar against other currencies.” —Tiffany IR Mark Aaron (Jewelry)

Financials:

The financial industry is being very cautious with capital spending

“discretionary spending in the banking sector remained soft, weighed down by macroeconomic concerns and a prolonged low interest rate environment…We see the banking sector being more cautious in spending over the near-term.” —Cognizant Technology Solutions (IT Consulting)

Consumer:

There may be some weakness in the high end consumer

“There’s obviously some strength out there in different parts of retail. In apparel specifically, the environment remains challenging, and quite frankly, it remains most challenging in the higher end of the market.” —Gap CEO Arthur Peck (Apparel)

“We can only speculate on why domestic US consumer spending at the high end has been generally soft, but we believe that macro market and political uncertainties are likely playing a role in restrained consumer behavior.” —Tiffany IR Mark Aaron (Breakfast)

If there is weakness at the high end, Toll Brothers isn’t seeing it though

” While there has been a lot of discussion about weakness in the luxury new home market, we just aren’t seeing it based on this quarters contract growth across all of our regions” —Toll Brothers CEO Douglas Yearley (Homebuilder)

The retail landscape continues to be very promotional

“when the industry’s on sale 365 days a year, when there’s free delivery, when there’s 70% off merchandise, I don’t think the promotional activity can get much stronger.” —La-Z-Boy CEO Kurt Darrow (Home Goods)

More athletic apparel is sold for fashion than function

“the facts are that most of the basketball shoes that we sell never see a basketball court, most of the running shoes that we sell never see the roads or the trails of the track to run in, they just look really good and they are part of the sneaker culture that we really support” —Foot Locker CEO Richard Johnson (Apparel)

PVH believes that it is close to profitable scale in e-commerce

“And I think from a pure profitability point of view, the only issue we’re dealing with on our own e-commerce sites is scale. As that business continues to grow…we’re 12 months away from going from a loss position on those businesses to a profit position on those businesses…we truly are becoming agnostic about where the customer shops.” —PVH CEO Manny Chirico (Apparel)

Priceline likes Facebook

“I think we would like to spend more money on Facebook going forward. We have a good relationship with them, and we’ve found that a number of things that we’ve done on Facebook works well, particularly retargeting, which really is more of a performance-based analysis the way we look at it. So, I would look for us to be doing more. As you could see by Facebook’s announcement, the scale of their advertising business is growing, and while it traditionally has been more of a brand advertising platform, we like to work closely with Facebook to find ways to make more performance-oriented placements work for us. ” —Priceline CEO Jeff Boyd (Travel Agency)

Technology:

Small businesses have been slow to move their accounting software to the cloud

“we have done work with our customer base in the desktop to figure out why they aren’t interested in the cloud. And reasons one through five are all basically, I am not ready to move to the cloud. I don’t want to put my data in the cloud. I don’t want to move to a subscription service. My current product is working just fine. My accountant is working with me and they have got a desktop version.” —Intuit CEO Brad Smith (Accounting Software)

Materials, Energy:

Banks feel confident that any issues caused by $35-$40 oil are now well known and behind them

“we are well past the stress test days and we actually know every part of our portfolio and see how it performs in a low oil price environment…I think a lot of the issues that the $35-$40 oil would have indicated are behind us. But it also depends on how long the prices remain depressed.” —Bank of Montreal CRO Surjit Rajpal (Bank)

There are no new coal mines being built around the world

“the big thing we got to look at in coal is no new supply in the world which is a very important issue. You don’t see anyone building new mines or increasing production of mines…So a significant decrease coming down from Indonesia, no new supply from Australia, from Colombia, South Africa, et cetera, that’s all relatively stable and no new big mines being built anywhere in the world.” —Glencore CEO Ivan Glasenberg (Metals and Mining)

Full transcripts can be found at www.seekingalpha.com

PVH 2Q16 Earnings Call Notes

PVH’s (PVH) CEO Manny Chirico on Q2 2016 Results

US market most volatile

“In the second quarter, the US market continued to be our most volatile market that we operate in. Similar to the first quarter, our US wholesale business continued to grow and show improvement. For the first half, we are running well ahead of our wholesale plans and our prior year actual results.

However, our US retail businesses have not seen much improvement in trend from the first quarter and continued to experience soft traffic and higher promotional trends. Specifically, our international tourist traffic and spending continues to weigh on our US retail business. And as we began August, these sales trends have not improved.”

UK business continues to show strong momentum despite short lived slowdown

“Moving to our European business, we saw solid performance in all major European markets, demonstrated by an 8% comp store increase in Europe for our retail business, with strength across all major markets. I think it’s important to comment that our UK business continues to show strong momentum despite a short-lived slow down around the Brexit vote. We continue to be encouraged by the healthy comp trends we have experienced so far in the third quarter, which continue to run up high single-digits throughout Europe.”

No material improvement in US retail business

“Turning to our US retail business, unfortunately, we have not seen a material improvement in this business year to date with comps running down year to date about 8%. The business continues to be under pressure driven by weakness in traffic and consumer spending in the international tourist stores. As a reminder, we’re taking a prudent approach and are not forecasting for the first half trends to improve for the balance of this year.”

Macy’s store closures shouldn’t be too big of an impact

“So I think what’s critical, I guess, first, let’s start with the Macy’s 100-door closure. I think Macy’s spoke to it as a net impact of about $1 billion. I think it’ll be relatively immaterial to our top line as we move forward as that happens over a period of time. I think it may put a little bit of pressure on top line, but from a profitability point of view, these obviously weren’t Macy’s most profitable stores and they weren’t our most profitable margin stores. So I think the opportunity is to have a healthier presentation and healthier profitability in the brick-and-mortar side of the business.”

Expanding digital growth on partner sites like AMZN

“From a positioning point of view, for the last 24 to 36 months, we’ve been really trying to drive our digital growth, both our only site, but also our partner sites, Macy’s.com, our key players there, and also couple – a number of the pure plays globally, be it Amazon, Zalando, Alibaba, Tmall.”

Margin is strong in everything e-commerce except for our own e-commerce

“Sure, I’m not going to speak to specific customer, but I will just say that our e-commerce wholesale business where we are selling to our pure plays and all – where we are selling to our pure plays and to our department store partners is a very profitable business, consistent with all of our other businesses. The only business that is a challenge for us from a profitably point of view is our own e-commerce businesses, which we’re truly running as flagship sites. We don’t over promote on those sites. It’s very event-driven. We don’t do flash sites and flash selling on our own sites. We don’t drive excess product through our sites. We really view that as flagship sites where the consumer comes to our sites, be it Tommy or Calvin. They investigate the brand, better understand the brand. They can buy on our sites or we will drive them to our retail partner’s sites, or they’ll use that investigation to shop in department stores as we move forward. So we see it as a very cohesive strategy that works together.”

E-commerce just lacks scale right now

“And I think from a pure profitability point of view, the only issue we’re dealing with on our own e-commerce sites is scale. As that business continues to grow, we’ve talked about the kind of growth rates we’re seeing, we’re 12 months away from going from a loss position on those businesses to a profit position on those businesses. And each incremental sale that we make online is as profitable as an incremental sale in wholesale on our own retail stores. So from that perspective, we truly are becoming agnostic about where the customer shops.”

Europe is healthy

“Europe seems much healthier as a market to us. I know all the headlines about Europe and what you see. But as far as the consumers being – spending discretionary money, it’s very healthy there. I think the fact that the dollar has strengthened has only made our – the pressure that puts on our US business, I’ve talked about, the flip side of that is it really significantly helps our international businesses as people travel or people stay closer to home in Europe, within Europe and buy when they’re on vacation or on holiday that’s really been a big win for us as well. “

Tiffany 2Q16 Earnings Call Notes

Tiffany’s (TIF) Management on Q2 2016 Results

Mark Aaron

6% decrease in sales in line with what we anticipated

“Worldwide sales were close to what we anticipated, declining 6% on both a GAAP basis and on a constant exchange rate basis, and generally continued to reflect the soft trends across regions that we’ve experienced for several quarters, which we attribute partly to domestic customer spending, but also to lower tourist spending, predominantly by Chinese tourists. However, we had a solid increase in gross margin and experienced less deleveraging of SG&A expenses than we had anticipated due to a slight SG&A expense decline, and our balance sheet remains strong. Looking forward, while the results for the quarter were a little better than we expected, we think it’s prudent to maintain our existing outlook for the full year. ”

Decline reflected softness in all regions

“So looking at second quarter sales results in more detail, the 6% decline in worldwide sales reflected varying degrees of softness in all regions. There was no translation effect on total sales as the stronger yen offset the negative translation effects from the stronger US dollar against other currencies. In the Americas, both total sales and comparable-store sales declined 9%, which we attribute to generally soft demand in US customer spending, as well as lower spending in the US by Chinese and other tourists, especially in New York and in other high tourism markets.”

We believe macro and political uncertainties softening high end

“We can only speculate on why domestic US consumer spending at the high end has been generally soft, but we believe that macro market and political uncertainties are likely playing a role in restrained consumer behavior.

Softness in asia but strength in China

“In the Asia Pacific region, total sales and comparable-store sales declined 6% and 12% in the quarter. The sales declines were due to a combination of lower average price, lower unit volume, and a shift in mix and reflected softness across much of the region. We were pleased with healthy total and comparable store sales growth in China, as well as in Korea. However, continued meaningful sales declines in Hong Kong, Taiwan, Macau, and Singapore contributed to the overall regional softness.”

Interestingly saw an uptrend in sales following the vote

“There’s obviously uncertainty and anxiety regarding the economic implications of Brexit, but, interestingly we saw an uptrend in the UK sales almost immediately following the vote. We believe that the weakening of the pound has made London a more attractive tourist shopping destination.”

HP (HPQ) Q3 2016 Results

Dion Weisler – President and Chief Executive Officer

From market share to maximizing profits

“We were more challenged in our business ink products where we drove pricing discipline and lost some share. While our Japanese competitors are talking about shifting their focus from share to profits due to the strength of the yen, it is not broadly evident yet that this is showing up in less aggressive pricing.”

Managing the supplies business

“…we made a strategic decision to evolve how we run and manage our supplies business in recognition of the changing market dynamics, giving global price transparency. To harmonize pricing, we determined an increase in marketing, combined with a reduction in channel inventory levels, was necessary. And we took the first step in the third quarter. With continued support from our channel partners, the execution is on track.”

Some shortages in supplies expected in adjacent segments to the PC industry

“With regards to shortages in supplies, I don’t believe, in Q3, we saw any material shortages that we had to with. However, as you know, these are long supply chains and we are seeing on the horizon some shortages, particularly around LCDs, DRAM and Flash memory. And it’s not so much coming from the PC industry. It’s more coming from adjacent categories going to – glass going into televisions, memory going into phones that are likely to double density, which is putting pressure on the overall industry.”

Cathie Lesjak – Chief Financial Officer

Too early to tell on the Brexit effect

“For Q3, we saw very, very limited impact from Brexit. And this is largely as a result of the fact that we were largely hedged by the time the Brexit vote actually happened. And so, Q3 was really a non-event. On a go-forward basis, it’s unclear exactly what the impact is going to be. We are definitely seeing and, in some cases, following with our own pricing increases. What’s less clear is not so much what the currency impact is and how we adjust to the currency impact, whether it’s through hedges or through price increases, it’s really what is going to be the impact on demand, what is GDP going to actually do, both in the UK and then, frankly, if it spreads broader to EMEA. And it’s just too early to tell.”

Inventories down, marketing investments up

“…supplies channel inventories is down over the course of the half by $450 million and we were also going to increase our marketing investments.

Intuit’s (INTU) Q4 2016 Results

Brad Smith – Chairman and CEO

A strong financial year

“To sum it up, fiscal 2016 was a strong year from start to finish. The QuickBooks Online ecosystem is driving Small Business growth and our tax businesses are celebrating a successful season. We are heading into fiscal 2017 with the wind at our backs, and we have some exciting plans underway as we look ahead.”

A healthy growth rate

“So, for those who are looking at the fact sheet, the total paying customers were up 23%. We saw healthy growth across the board. We saw QuickBooks Online subs at 41%. We saw the desktop customers growing 8%…And so there is just healthy growth across the board. ”

…Customers are slow to move to the cloud

“…the number of migrations who moved from desktop to QuickBooks Online this year within our own customer base was up 25%. So we have done work with our customer base in the desktop to figure out why they aren’t interested in the cloud. And reasons one through five are all basically, I am not ready to move to the cloud. I don’t want to put my data in the cloud. I don’t want to move to a subscription service. My current product is working just fine. My accountant is working with me and they have got a desktop version.”

They are ready to work with whoever wins  the US election

“…at this point, we just want to remain focused on working with whoever ends up winning the election. We are big supporters of tax simplification. That’s the business we are in. We are big supporters of voluntary compliance, which is helping people voluntarily file their taxes. And if the government disagrees, let the government contest that. And at the end of the day, we want to make sure we are helping people keep their hard earned dollars in their pocket, only pay the stuff that they owe the government. And so whether it’s a Republican, a Democrat, an independent, we have a lot of years of working with both sides to try to make sure that we keep those three things front and center.”

Some modest price increases done

“…we did just pass through a modest price increase in QuickBooks Online. It’s gone out to the new customers. And we are in the process of rolling it out to existing base. ”

La-Z-Boy (LZB) 1Q17 Earnings Call Notes

Despite possibility of some cannibalization, opening more stores in certain markets will grow sales and profitibility

“There are a number of markets where we need more stores based on the demographics of that particular market. When we have a store to satisfy that demand, the existing store or stores in the market may lose some sales but net-net, the market overall is performing better and contributing to sales and profitability at both the wholesale and the retail level.” Kurt Darrow – Chairman, President and CEO

 

Marketing is not just increasing promotional activity, it’s about using different channels to reach the consumer

“Well, I answer that question very similarly all the time when the industry’s on sale 365 days a year, when there’s free delivery, when there’s 70% off merchandise, I don’t think the promotional activity can get much stronger. A lot of it is about how you find the customer today. So the traditional newsprint and TV, which was so prevalent in the industry, now all of us are doing marketing in 10 or 15 different channels and I think that’s the thing that we need to continue to work on is, where does our customer want to be reached and how do we most effectively reach her?” Kurt Darrow – Chairman, President and CEO

 

This quarter was down for the industry as a whole, not just LZB

“Well, I wish I could give you a – I wish we could pinpoint exactly why, because we’re seeing the slowdown which we don’t think is going to continue forever but we’re seeing it across all channels, across all geography. So it’s not like the West Coast was strong and the East Coast was poor, anything like that…So it was a myriad of things and it was with a multitude of customers, and we’re digging into it. But there’s no silver bullet that shows up that this is our core issue.” Kurt Darrow – Chairman, President and CEO

 

Canadian acquisitions took advantage of a downturn

“And we worked on what is a fair arrangement given the downturn in his business and he was agreeable to that. And we’re thrilled to have this business.” Kurt Darrow – Chairman, President and CEO

Williams Sonoma 2Q16 Earnings Call Notes

Williams­Sonoma’s (WSM) CEO Laura Alber on Q2 2016 Results

Retail environment has softened

“Despite this progress on our strategic initiative, the retail environment has softened since we last talked, and our sales are being impacted by a more cautious consumer. While we are confident in our long-term strategies across the company, we believe it is prudent to modify our outlook for the remainder of the year. Julie will provide more details about our guidance later in the call. As always, our focus is on what we can control, which includes our supply chain and inventory initiatives, delivering innovative products at the best value, our marketing strategies to increase new customer acquisition, and enhancing the retail experience.”

Digital has become our largest marketing channel

“In March, I spoke with you about how we would transform our marketing. One key area of focus is digital innovation. We’re seeing a transition in the marketplace that plays into our strengths and competitive advantages. We have advanced multi-dimensional attribution models that guide our investments and it has led us to surgically cut our catalog circulations to rebalance and to optimize our investments into digital channels as they continue to evolve. As a result, digital marketing has become our largest investment channel, outpacing our catalog and store-based marketing investments.”

Innovation in digital

“A big part of our digital story is our innovation. Our proprietary modeling, based on customer profiles and interactions, drives our ability to target audiences more effectively and profitably. We know that relevant marketing drives engagement with targeted audiences converting at 3x that of non-targeted audiences at half the cost. The breadth, depth, and detail in our house file provide us with a material advantage, and we are partnering with great companies to help to advance and take advantage of emerging personalization capabilities for custom segmentation and targeting. ”

Digital strategy does not include twitter

“While we leverage our existing marketing strategies for the parent, there are a number of digital-only tactics we use to capture the increasing purchase influence of the youth audience, including Facebook, Instagram, YouTube, and Snapchat.”

We know mall traffic’s down

“We know mall traffic’s down. Certain categories are more challenged than others. On the flipside, housing metrics appear to be strong, and we also are seeing growth in some of our smaller businesses. Our approach has always been the same. We’re going to focus on the things that we can control, and we would prefer to be self-critical.”

I’m not an economists so not going to go through the reasons

“I would say that it’s both. In retail, there’s reported reduced traffic from all the counter aggregate data you see. And then the customers’ just more careful right now. I’m not an economist, so I’m not going to go through all the reasons that could be.”

Customers are savvy

“Customers are savvy. As I said earlier, they know a value when they see one, including if it’s a higher price point type of item. So a sofa that’s a great value, maybe a lot more money than a candle. The truth of the matter though is that the candle a lot more people can afford. So, as I said earlier, we have to make sure that we are not just driving our furniture business but bringing in really innovative decorating and entertaining ideas into all of our brands. ”

Glencore 2Q16 Earnings Call Notes

Glencore’s (GLCNF) CEO Ivan Glasenberg on Q2 2016 Results

12 fatalities

“Regrettably, we’ve had 12 fatalities from four incidents at our mines and once again these fatalities have occurred at our focused assets and while these are Kazakhstan, Zambia and DRC. And we’re already putting in maximum effort to improve the culture and the mining operations in these focused assets and we’re already working hard to ensure we have zero fatalities across the board.”

No new coal mines being funded around the world

“Where do we see coal going forward over the next 12 to 24 months, the big thing we got to look at in coal is no new supply in the world which is a very important issue. You don’t see anyone building new mines or increasing production of mines, so I would say we’ve got to look carefully at supply. You don’t see new supply coming into any of the markers, okay, China we will talk about separately but you do see Indonesia and countries like that producing the export of their coal, and we see in Indonesia reduce from the top 421 million tonnes of exports during 2014 and they dropping this year on to 350 million tonnes. So a significant decrease coming down from Indonesia, no new supply from Australia, from Colombia, South Africa, et cetera, that’s all relatively stable and no new big mines being built anywhere in the world.”

We don’t develop greenfield projects

“Yes, regarding exploration as you know we are not lovers of Greenfield projects, so we don’t have an exploration team going out there, exploring and looking for new discoveries, that’s definitely not part of us. Where we do have a bit of exploration is around our existing asset base to ensure that we always got replacement and we are not losing production at our existing asset base and extending the life of our existing assets and that’s what we are always looking to do and we know around our existing assets there is a lot of reserves around which haven’t been fully explored and that’s where we will really do the exploration. So it’s obvious that’s why we have a lot lower exploration costs than our peers who are looking for big and new discoveries, that’s not part of our game because we have no intention of developing a new Greenfield project.”

Royal Bank of Canada 3Q16 Earnings Call Notes

Royal Bank of Canada’s (RY) CEO David McKay on Q3 2016 Results

Regulatory bodies are responding to the combination of rising house prices and record levels of consumer leverage

“On housing, we continue to closely monitor the greater Vancouver and Toronto areas. A short supply of single family homes in both cities, coupled with strong demand fueled by household formation including net immigration has driven strong price [appreciation] (Ph). We have prudent underwriting practices in place with the necessary technology to closely monitor these markets and quickly react as situations may materialize. Regulatory bodies are also responding to the combination of rising house prices and record levels of consumer leverage. We support the Canadian federal government’s recent action to form a working group to study the housing market and develop appropriate recommendations.”

Mark Hughes

Moderate increase in oil prices provided some relief to clients

“With the moderate increase in oil prices over the last quarter, now in the high 40s has provided some relief to our clients. It remains well below 2014 level and continues to challenge the profitability of the sector. A number of our clients took proactive measures to strengthen their financial position. This included selling assets, reducing expenses, accessing capital markets to raise additional funds and refreshing hedges at higher oil prices. In particular, we saw an increase in asset sales in the drilling and services sector.”

Sustained low oil prices impacting retail portfolio in oil exposed provinces

“The sustained low oil prices and higher unemployment rates continue to impact our retail portfolio in oil exposed provinces and we have seen an increase in provisions in delinquencies in these regions. However, it has been more than offset by improvements in economic conditions in other regions such as Ontario and BC as reflected by reduced delinquencies on a national basis, which demonstrates the benefit of our diversified portfolio.”

We remain comfortable with our exposure to Canadian housing market

” Greater Vancouver and Toronto markets are being closely monitored due to alleviated house prices. However, we consistently have the highest customer credit scores in these markets. We also continue to closely monitor our mortgage portfolios in oil exposed regions. Overall, we remain comfortable with our exposure to the Canadian housing market for the following reasons. We did not participate in the second lien market and do not originate sub-prime mortgages. We utilized proprietary channels for mortgage origination allowing for a centralized credit adjudicating process and enhanced monitoring. We are diligent in income verification, which is a key component of our mortgage approval process.”

Alberta does see continued softness but Ontario and BC are strong

“I would say on the Canadian banking side, it’s a matter of two halves a little bit, we have Alberta, which does see continued softness. The unemployment rate in Alberta is certainly higher, but in the rest of Canada particularly Ontario and BC, we continue to see very strong growth and that is performing well.”

Vancouver has cooled off a bit in recent weeks

” Certainly from our view of Vancouver and/or Toronto is the same, obviously with the house price deprecation that we have seen over the previous quarters. We are monitoring it quite close, Vancouver has actually cooled off a little bit in recent weeks. But I think in our case, it’s just really about continuing to maintain our discipline and risk posture as to how we approve loans and the type of origination that we put on.”

Unlikely that the price of oil goes above 100 any time soon

“The chances of getting back to a 100 in the foreseeable future I think would be fairly slim unless there is a change in some of the producers globally and in their attempts to maintain their production levels. So 40 to 60 level I would have thought would be the range we would expect to see if it goes below 40, it’s a tougher environment, if it goes above 60, it’s maybe a bit more of a positive environment.”

Bank of Montreal 3Q16 Earnings Call Notes

Bank of Montreal’s (BMO) CEO Bill Downe on Q3 2016 Results

Digitalization of information makes compliance more reliable

” Contrary to any suggestion that investment in the future has moderated, I would say that the regulatory and supervisory agenda which has being big for all banks, it’s being complementary to the things I just spoke about because the digitalization of information and process makes compliance more reliable and brings down the costs and I would say that there is some repurposing, if you like, of investment dollars that we’re really focused on getting to a high level of capability now being more available to apply to both customer experience and then contributing to the flow through in efficiency.”

Surjit Rajpal

Credit quality is good

“As Bill said, overall credit quality is good. For the quarter both the GIL ratio and the delinquencies remain stable.”

Don’t have any reason to believe that 30 day early stage delinquency tick up is more than a temporary thing

“Some of it could be attributed to that, but I’m not sure at this point in time. But nothing with the quality. From a quality perspective in fact when I look at the rates that we’ve had from the loss perspective this quarter our PCL rates have gone down and I don’t see the 30-day early stage delinquency as anything other than an indicator of perhaps the first point I made which is the weekend ”

Problems caused by $35-$40 oil are behind us

” We’ve gone to our portfolio, now we are well past the stress test days and we actually know every part of our portfolio and see how it performs in a low oil price environment. And with the slowdown in our formations to the level it is, that should give you — point to the fact that we, I think a lot of the issues that the $35-$40 oil would have indicated are behind us. But it also depends on how long the prices remain depressed.”