Company Notes Digest 6.29.17

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 was a light week for earnings reports since it’s the last week of the quarter and next week is a holiday. Homebuilders sound very positive on housing markets, but office furniture supplier Steelcase saw hesitation from its large customers. In retail, it’s Amazon’s world and everyone else is just living in it.

The Macro Outlook:

We’re seeing a “definitive reversion to normal” in the housing market

“Overall, the attitude of our customers continues to confirm the sense that we have as business operators that the economic environment in general is strong and stable and improving. The slow and steady though sometimes erratic market improvement that we have seen for the entirety of this recovery continues to seem to be giving way to a more definitive reversion to normal.” —Lennar CEO Stuart Miller (Homebuilder)

Animal spirits and confidence have returned

“a lot of what’s driving people to the market is a sense of confidence, it’s animal spirits…the confidence that people bring with them to the table about whether their job is stable and whether there’s going to be a wage increase or there is opportunity for them to move and be mobile to the next job opportunity.” —Lennar CEO Stuart Miller (Homebuilder)

Millenials are forming homes after all

“I think for the longest time it was in great debate. What will this generation do in terms of homeownership. You could certainly see a trend at the time where rental, the household formation…it wasn’t happening. Where was this generation, this millennial going to set their roots. And what we’ve seen is that the cycle essentially was delayed about 6 to 7 years. And right now it’s really starting to come to fruition. And that fruition is as they are now moving into the jobs that they have secured as they are now forming families, as they are now getting their feet underneath them, we’re seeing that formation happen. And we are seeing them move into the homebuying market just as every other generation has.” —Home Depot VP Paul Deveno (Home Improvement)

There’s relatively low inventory

“What remains especially striking is the extremely low levels of resale inventory available. At 4.2 months nationally, and well below that in many of our submarkets, resale inventory is insufficient to meet demand. It is one of the key factors underlying pricing power in most of our markets, and we plan to continue maintaining pace…while increasing price when appropriate.” —KB Home CEO Jeff Mezger (Homebuilder)

And so homebuilders have pricing power

“We continue to feel that limited supply and production deficits from the past years are now intersecting with land and labor shortage and we started to see some pricing power as we have moved through the selling season, somewhat offset however by construction costs increases. Additionally the economic realities of a constrained and supply of housing options and the economic realities of higher rental rates are beginning to have a rational impact on decision making for the first time home buyer as millennials are continuing to come to the housing market.” —Lennar CEO Stuart Miller (Homebuilder)

Business investment may not be as robust as anticipated though

“Our analysis of our orders reveals a significant decline in large projects and large customers…Yet we don’t see any evidence of a broader slowdown in the economy…So, then as we think about it, we say well, what’s going on in our industry, what’s going on with our customers. It could be that some are just pausing, hesitating and we have some anecdotal stories around that. The customers are waiting to see what happens with healthcare reform for example…If you are interested in growing and you need to hire workers in the U.S. you might be interested in immigration reform..So, we have heard anecdotal stories like that.” —Steelcase CEO Jim Keane (Office Furniture)

If Washington doesn’t pass any legislation it could impact confidence

“Not yet, but if this continues to go like this where no major legislation is passed. It will impact confidence, there is no question about that.” —Korn Ferry CEO Gary Burnison (Executive Search)

Wage inflation pressures are mounting

“Labor, we continue to see some pretty good inflationary pressure…there’s 3% to 4% wage inflation in our labor number, right now; we’re able to offset some of that with productivity enhancements. But labor continues to be something that we’re focused on” —Darden CEO Gene Lee (Restaurants)

Is the Fed starting to get concerned about high asset prices?

“…elevated valuation pressures, especially when combined with high leverage, can lead to excessive credit growth. When asset prices are appreciating rapidly and expected to continue to do so, borrowers and lenders are more willing to accept higher degrees of risk and leverage” —Federal Reserve Vice Chair Stanley Fischer (Central Bank)

International:

Europe is doing ok, but there’s uncertainty in the UK

“I met with many-many business leaders in Europe last week actually, I think there’s a great hope in France…and in the UK specifically I think there’s uncertainty…so I would say it’s kind of hopeful in France, steady-as-she-goes in Germany and uncertainty in the UK.” —Korn Ferry CEO Gary Burnison (Executive Search)

Mark Carney is talking about removing stimulus

“Some removal of monetary stimulus is likely to become necessary if the trade-off facing the MPC continues to lessen and the policy decision accordingly becomes more conventional.” —BOE Governor Mark Carney (Central Bank)

Financials:

Open floor plan offices need quiet spaces

“as people move towards open plan there is also a counterforce which is that people are seeking privacy and they are seeking spaces they can create that are flexible as well as reconfigurable that can create rooms for people to – in which they meet or places where people can kind of get away and concentrate for a bit.” —Steelcase CEO Jim Keane (Office Furniture)

Consumer:

Retailers are investing heavily just to tread water

“So it’s unfortunately from a bottom line perspective is that as the world evolves these investments aren’t producing growing earnings but they are sustaining our relative position in the landscape… but these investments need to be made. If we didn’t make these things, we won’t exist today.” —Bed Bath and Beyond CEO Steven Temares (Retail)

Consumers want more heavy packages shipped to them

“We also continue to experience growth in demand for large, heavy package delivery as a growing array of items are now being sold online. Furniture, mattresses, sports and exercise equipment are increasingly moving to the FedEx Ground network for residential delivery. This trend has accelerated over the past 12 months, and we have made adjustments to facilities and investments in sortation technology that enable outstanding service for these larger packages. We’re continuing to analyze pricing and surcharges for oversized packages to ensure that we have appropriate pricing for the service provided.” —FedEx EVP Rajesh Subramaniam (Shipping)

There (probably) wont be just one winner in e-commerce

“there is not just going to be one customer, even though that lot of talk about the Amazon and Whole Foods deal, I mean, all of our major customers have e-commerce components. As we have experienced around the world, there are variety of customers who participate in e-commerce and so it’s not going to be just one winner.” —General Mills CEO Jeff Harmening (Packaged Food)

There (probably) are still some segments of retail that Amazon won’t play in

“the only way Amazon’s in our world right now is through Amazon Prime delivery…Our research tells us that guests still want to come to restaurants. Believe it or not, millennials still want to come to restaurants.” —Darden CEO Gene Lee (Restaurants)

Technology:

Mobile video consumption is growing by 75% per year

“last year we saw video growth grow by 75% as measured by gigabytes on the network. So as an industry, we always hear that 75% to 80% of video, of the data on the network in the next five years is going to be video and we’re seeing it play out.” —AT&T SVP Scott Mair (Telecom)

Miscellaneous Nuggets of Wisdom:

Strive for simplicity

“Don’t underestimate how simplifying our business has helped us improve execution…the key to our guest count growth is better execution through simplicity.” —Darden CEO Gene Lee (Restaurants)

Full transcripts can be found at www.seekingalpha.com

European Central Bank Forum Speeches

Mario Draghi, President of the ECB

Muted inflation expectations

“We see growth above trend and well distributed across the euro area, but inflation dynamics remain more muted than one would expect on the basis of output gap estimates and historical patterns.”

Challenges to reflation

“monetary policy is working to build up reflationary pressures, but this process is being slowed by a combination of external price shocks, more slack in the labour market and a changing relationship between slack and inflation. The past period of low inflation is also perpetuating these dynamics”

Monetary accomodation still needed

“While there are still factors that are weighing on the path of inflation, at present they are mainly temporary factors that typically the central bank can look through. However, a considerable degree of monetary accommodation is still needed for inflation dynamics to become durable and self-sustaining.”

 

Mark Carney, Governor of the Bank of England

Firming global growth

“The Bank of England estimates that more than 80% of the world economy is now growing above potential. Global measures of industrial production and capital goods orders, as well as world trade, have strengthened markedly over the past year…With that more favourable outlook, investment intentions are now rising around the world”

Easing on the horizon

“Some removal of monetary stimulus is likely to become necessary if the trade-off facing the MPC continues to lessen and the policy decision accordingly becomes more conventional.”

 

http://www.bankofengland.co.uk/publications/Documents/speeches/2017/speech986.pdf

https://www.ecb.europa.eu/press/key/date/2017/html/ecb.sp170627.en.html

 

Stephen Poloz, Bank of Canada Governor on CNBC

On the initiatives by the US government

“Well we’ve given up modelling specific initiatives because it’s taking some time to come into focus and we think whenever something concrete is tabled we’ll have then time to do the modelling and understand it. I think at the company level people have just been weighing this extra layer of uncertainty about the future…those uncertainties are holding back investment decisions even though investment is picking up. It’s picking up less than it would without that uncertainty. So it’s a bit of a headwind.”

Speech by Fed Vice Chairman Stanley Fischer

Appreciating asset prices increase the appetite for risk and leverage

“…elevated valuation pressures, especially when combined with high leverage, can lead to excessive credit growth. When asset prices are appreciating rapidly and expected to continue to do so, borrowers and lenders are more willing to accept higher degrees of risk and leverage”

Banks have high regulatory capital

“Regulatory capital at large banks is now at multidecade highs. The largest banks have already met their fully phased-in capital requirements, including the conservation buffer and the capital surcharge for the global systemically important banks….Measures of earnings strength, such as the return on assets, continue to approach pre-crisis levels at most banks, although with interest rates being so low, the return on assets might be expected to have declined relative to their pre-crisis levels–and that fact is also a cause for concern.”

On debt levels

“In the private nonfinancial sector, which includes corporations and households, total debt remains well below its long-run trend, largely driven by subdued borrowing among households. However, the corporate business sector appears to be notably leveraged, with the current aggregate corporate-sector leverage standing near 20-year highs.”

Auto and Student loans are a spot of bother

“Auto loan balances and delinquency rates are high for borrowers with lower credit scores, meaning that the riskiest borrowers are borrowing more and not paying it back as often….Student loan balances keep rising, and delinquency rates on those loans are near historical highs”

We dare not be complacent on risk

“There is no doubt the soundness and resilience of our financial system has improved since the 2007-09 crisis. We have a better capitalized and more liquid banking system, less run-prone money markets, and more robust resolution mechanisms for large financial institutions. However, it would be foolish to think we have eliminated all risks.”

 

https://www.federalreserve.gov/newsevents/speech/fischer20170627a.htm

KB Home FY 2Q17 Earnings Call Notes

Jeff Mezger – Chairman, President and CEO

Extremely low levels of resale inventory

“What remains especially striking is the extremely low levels of resale inventory available. At 4.2 months nationally, and well below that in many our submarkets, resale inventory is insufficient to meet demand. It is one of the key factors underlying pricing power in most of our markets, and we plan to continue maintaining price or pace – sorry – continue maintaining pace while increasing price when appropriate.”

Millenials moving on with their lives

“Certainly there has been employment growth and employment growth creates demand and don’t forget the millennials moving out of the parent’s house. There is a lot of demand being generated right now as millennials move on with their life and get married and dual incomes and all of those things. On the mortgage side, again there was an announcement today out of Fannie on encouraging lenders to loosen up their guidelines a bit. We are seeing little bits around the edges, but no major shifts in the quality of the underwriting.”

June remains good

“Jay, we typically don’t comment within the quarter, because we are so early into it. We did in the first quarter because we do our earnings release half way through the quarters, but we feel we can give you the color I can say in general but the trends remain good just like March, April and May and that’s some specific.”

General Mills FY 4Q17 Earnings Call Notes

Jeff Siemon

New CEO

“And before we get to our usual earnings commentary, I would like to turn the call over to Ken Powell, who last month wrapped up 10 years leading General Mills as CEO and he was continuing on as the Chairman of the Board for an interim period. We don’t have time this morning to cover all of Ken’s accomplishments over the past 10 years nor what he want us to.”

Jeff Harmening

Not going to be just one winner in e-commerce

No, thanks for that question, Chris, I mean, obviously, it’s one that’s on the minds of lot of people these days and has been for us for long time. I think with regard to e-commerce, I think there is couple of key things on a high level to keep in mind. The first is that where we have engaged in e-commerce, whether it’s here in the U.S. Our sales online have broadly outperformed our sales in the store. And so we feel good about our ability to win in e-commerce environment. The second is that if e-commerce is going to be broad across many customers, there is not just going to be one customer, even though that lot of talk about the Amazon and Whole Foods deal, I mean, all of our major customers have e-commerce components. As we have experienced around the world, there are variety of customers who participate in e-commerce and so it’s not going to be just one winner. The third is that we have got great relationship specifically with Amazon and we have got great relationships with Whole Foods. In fact, some people will probably be surprised to know that we are actually vendor of the year for 2 years in a row with Whole Foods and we have our e-commerce growth has been – we have been really pleased with it.

China and Korea highest prevalence of e-commerce

“Well, I think that Chris, I think that the growth in e-commerce, especially here in the U.S., but is going to accelerate. And so to the extent that accelerates, then we will accelerate our investment broadly in e-commerce, but really with the growth of the e-commerce business. But we see growth in e-commerce here in the U.S. as really prevalent in China and Korea. I mean, that’s where we see the highest penetration of e-commerce and food and growth. So, we expect that channel to continue to grow.”

Darden FY 4Q17 Earnings Call Notes

Gene Lee – Chief Executive Officer

Simplification has helped improve execution

“Don’t underestimate how simplifying our business has helped us improve execution. When we look at both Olive Garden and LongHorn where they were three years ago operationally to where we are today, these businesses are much simpler on a trajectory to continue to get even more simple. And we believe that’s the key to our guest count growth is better execution through simplicity.”

There’s still pockets of strength and pockets of weakness

“I would say a couple of comments on the industry. I still say there is pockets that there’s some real strength, there is some pockets where there is some weakness. We’re still seeing an upscale where we used in. You’re seeing real weakness in New York City, which has had a little bit of impact on capital growth. But overall, I haven’t seen a whole lot of change in the competitive landscape. The consumer in our view is not as reactionary to short term incentives, they come in and eat. They’re looking for everyday value, and that’s something that we continue to promote.”

Continues to be labor inflation

“Labor, we continue to see some pretty good inflationary pressure. We’re thrilled that we’re able to think or actually improve our retention rates right now; our team members are staying with us; they’re engaged, but there is some inflation; there’s 3% to 4% wage inflation in our labor number, right now; we’re able to offset some of that with productivity enhancements. But labor continues to be something that we’re focused on.”

The only way Amazon is in our world is through prime delivery

“And lastly, the question on Amazon, the only way Amazon’s in our world right now is through Amazon Prime delivery; we have a test going with them; we’ll continue to partner with them and see if we can make that work; we constantly sit around here thinking about how does Amazon have an impact on our business. Our research tells us that guests still want to come to restaurants. Believe it or not, millennials still want to come to restaurants. I know you all don’t think millennials go to casual dining restaurants, but 30% of all of our guests are millennials versus the 24% — they’re 24% of the population, so we over index. ”

Rick Cardenas

Strategy is to grow price below inflation and take share

“One of the things is we are going to be pricing below our inflationary impacts. And so we’re doing this for the long run. As Gene mentioned, we’re going to leverage Darden’s advantages, leverage Darden’s scale the price below, inflation in our competition to grow market share overtime”

Home Depot at Oppenheimer Conference Notes

Ted Decker

Housing fundamentals are strong

“So we see the overall macro as a positive. Love the job creation in unemployment rate like wages starting to see wages increase, people are getting more spending power, particularly pleased with household formation. So we’ve had 7 or 8 years after the peak of housing six where we were way below historical averages of housing formation which is about 1.2 million units a year. We were in the low hundreds of thousands. So you saw last year housing formation got back up to about that average 1.2 million rate. So that’s obviously good for our business. People moving out and forming households. So that the overall macro is good. And then you get a little more specific in our business beyond housing formation, we see housing turnover starting to get back to that historical average of 4% plus of housing units. So that’s about 5 million transactions and we get bumps in our sales when someone prepares a house for sale as well as when the new owner moves into the house to fix it up the way they want to live in the house. So housing turnover is strong. And then home price appreciation has — we’ve had multiple years now of year-over-year we’re averaging about 5% odd on a reported monthly basis year-over-year house appreciation growth.”

Paul Deveno

Millenials are forming homes

“I think for the longest time it was in great debate. What will this generation do in terms of homeownership. You could certainly see a trend at the time where rental, the household formation, as Ted was talking about earlier, it wasn’t happening. Where was this generation, this millennial going to set their roots. And what we’ve seen is that the cycle essentially was delayed about 6 to 7 years. And right now it’s really starting to come to fruition. And that fruition is as they are now moving into the jobs that they have secured as they are now forming families, as they are now getting their feet underneath them, we’re seeing that formation happen. And we are seeing them move into the homebuying market just as every other generation has.”

AT&T at Wells Fargo Conference Notes

Scott Mair – SVP, Technology Planning & Engineering

We saw video growth by 75%

“last year we saw video growth grow by 75% as measured by gigabytes on the network. So as an industry, we always hear that 75% to 80% of video, of the data on the network in the next five years is going to be video and we’re seeing it play out. That’s exactly what we’re seeing and so it’s our responsibility to keep up with capacity.”

Spectrum is the most cost effective way to deploy capacity

“the most cost-effective way to deploy capacity is through spectrum. So that’s why that spectrum position is so important. And when you look at other LTE capabilities that I mentioned, improving spectral efficiency, improving performance of the network on the LTE roadmap is there as well.”

Millimeter wave is part of the 5G roadmap

“Millimeter Wave is a part of the roadmap that we’re going to have to have for 5G and there will be spectrum available, but again we have what we need now to get into the 5G space and grow it considerably well.”

Small cell will play a part

“small cell absolutely will play a part in the network. We start with a macro network that’s the densest out there right now and then we’ll augment with small cells. Small cells are a great way to provide capacity into areas where it’s very difficult to build cell sites and such. And as you build small cells for the LTE network, it pre-positions you for the infrastructure we’re going to need for 5G as well.”

Pushing for a change in economics at the cell tower

“anytime you see a cost stream in a business that’s growing faster than the business itself, you have to take a look at it. You have to look at the business model and say, what needs to change here and that’s what we’ve actively been doing and the model that we have today from a lot of the major players is one that when the analogy we’ve used is renting an apartment, when I rent the apartment, I’m paying a rental fee, but when I want to buy a new TV and bring it in, a new bedroom set and bring it in, I have to pay incremental dollars on my rent and keep paying. So, the rent keeps going up and the model we’re moving towards that we want to move towards is what we call a real estate model. We want to rent or lease square footage or square inches on a tower and within that space on the tower, be able to do what we need to do for our wireless infrastructure. So, we’ll put up new equipment takedown equipment and of course being limited by the structural requirements of the tower right, that’s a given, but we want to rent the space on that tower and be able to use it freely and we’ve been working with and are starting to work now with some new partners that are subscribing to that model, the real estate model with better set of economics.”

KornFerry FY 4Q17 Earnings Call Notes

Gary Burnison

Washington hasn’t impacted hiring yet, but it could

“Not yet, but if this continues to go like this where no major legislation is passed. It will impact confidence, there is no question about that.”

Hope in France, steady in Germany and uncertainty in the UK

“I met with many-many business leaders in Europe last week actually, I think there’s a great hope in France, but I think we all know it’s hard to take things away from people once they’ve been given it, and in the UK specifically I think there’s uncertainty. In terms of where this is going to shake out, so I would say it’s kind of hopeful in France, steady-as-she-goes in Germany and uncertainty in the UK.”

FedEx FY 4Q17 Earnings Call Notes

Frederick Smith – Chairman & CEO

Amazon is a great company, but there’s way too much focus on that

“I mean, Amazon is a fantastic company, and it delivers things to all of us. And there is — we deliver a lot of things that are ordered over the Amazon website. We move things for Amazon and so forth, but there is far too much focus on that as opposed to the larger part of FedEx’ business. ”

Rajesh Subramaniam

Moderate growth in the global economy

“We see moderate growth in the global economy. We expect U.S. GDP growth of 2.2% in calendar year ’17 and 2.5% in calendar year ’18. Consumer spending is solid. Investment and trade are rebounding, and measures of business confidence remain high. We see industrial production growth of 1.9% this year and 2.5% next year. For the global economy, we forecast GDP growth of 2.7% for calendar year ’17 and 2.8% for calendar year ’18.”

Continue to experience growth in demand for large, heavy packages

“”We also continue to experience growth in demand for large, heavy package delivery as a growing array of items are now being sold online. Furniture, mattresses, sports and exercise equipment are increasingly moving to the FedEx Ground network for residential delivery. This trend has accelerated over the past 12 months, and we have made adjustments to facilities and investments in sortation technology that enable outstanding service for these larger packages. We’re continuing to analyze pricing and surcharges for oversized packages to ensure that we have appropriate pricing for the service provided.”

Alan Graf

Seen wage and benefit increases offset by automation

We have a great balance between wage and benefit increases offset by productivity gains resulting from investments in IT and automation and volume increases. So not an issue for us at the moment.

Robert Carter

We see applications for blockchain

Well, in addition to finance, we see broad applicability of block chain to handle things like identity management, authenticity, pedigree and custody. So we’re deeply engaged in block-chain technologies, understanding their implications for custodial control and for many of the things that we do. It’s an exciting set of breakthroughs in technology, and we’re staying very close to the leading edge of that.