Company Notes Digest 05.13.18

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.

As the earnings season fades into the horizon, the assessment is that corporate earnings growth has been strong mostly driven by the tax reform. Tax reform has also boosted optimism though and that has translated into real economic activity. Heading into Q2 and Q3, the general macro outlook remains positive even as rising component prices and costs, especially freight, are expected to reflected in increased prices. 

The Macro Outlook:

The macro outlook is great and is expected to remain so

“On a macro level, positive economic growth is a tailwind, with leading economic indicators remaining high” — Duke Energy (DUK) CFO Steven K. Young

“We do expect the macroeconomic environment to remain positive.” — Siemens (SIEGY) CEO Joe Kaeser

“The overall trends continue to be generally favorable in the United States” — Sysco (SYY) CEO Tom Bené

Our hopes have been realized

“As you may recall last quarter, we were hopeful we would see a pickup in North America economic growth. Our hopes have been realized. It’s time to take the numbers up a bit.” —Marriott International (MAR) CEO Arne Sorenson

Tax reform drove a lot of corporate earnings growth last quarter

“You look at earnings growth across the industry, look at the first quarter results across the U.S. corporate sector and you see great earnings growth.  A big chunk of that is tax and people are paying less in tax and therefore their earnings are moving. But…more often than not you’re also seeing companies report revenue growth. And that’s something that has been missing from the last few years of our economic recovery. “—Marriott International (MAR) CEO Arne Sorenson

But it’s also creating optimism that is leading to real activity

“From the time Tax Reform Act was passed you’ve seen a step up in optimism.  And the query we often give to our customers is, is it just optimism or are you actually seeing improved business conditions? And it’s a majority that say, no, no, no we’re actually seeing improved business conditions.  And we are actually making decisions which are the effect of our more bullish impact. It is not simply about attitude but it’s about things that are actually happening.”—Marriott International (MAR) CEO Arne Sorenson

There was an underinvestment in new capacity this cycle

“we have too much delay, really the slowdown in investments, and we can arrive at a situation where we will have a cycle without strong investment impulse in the private sector. lack of increase in private investment means that corporates work at the top of their production capacities”—ING Bank Slaski (ING) CIO Brunon Bartkiewicz

Tight capacity leads to margin and pricing pressure

“The freight environment obviously continues to be somewhat challenging out there…The more freight on the road obviously creates pressure for everybody. There is driver challenges and there is obviously just capacity challenges.” —Sysco (SYY) CEO Tom Bené

“The labor market is tight, and wages are rising in many markets. This is pressuring hotel operating margins and lengthening new hotel construction timelines”—Marriott International (MAR) CEO Arne Sorenson

Even the oil bogeyman is creeping back into the picture

“Fuel obviously is also up and we know that and we are dealing with the impacts of fuel and the operating expense.” —Sysco (SYY) CEO Tom Bené

Raw material price increases may work their way into consumer prices in Q3

“We are anticipating some significant, meaningful increases [in steel prices] in the back half of the year. We do think that we can offset that with price. We are working on instituting price increases”— The Middleby (MIDD) CFO Tim Fitzgerald

Investors are starting to expect higher yields

“We’re also seeing investor yield expectations increase as interest rates have rise.” —Lending Club (LC) CFO Tom Casey

We’ve been hunting for yield for a long time

“the search for yield will continue.” —Jones Lang LaSalle (JLL) CEO Christian Ulbrich

International:

Regulation has been a headwind in the UK

“The impact of regulation is a continued headwind for our business…The expected cumulative impact over the next three years could be more than £1 billion if we include the potential indirect impacts as well” — BT Group Plc (BT) CEO Gavin E. Patterson

Inflation is rising in Europe too

“We continued to experience acute product inflation in the mid to high single digits across the European business” — Sysco (SYY) CEO Tom Bené

Financials:

In real estate, sellers have high price expectations while buyers are cautious

“Some of the buildings…come with incredibly high expectations with regard to price from the seller side…people are really keen to hold on to their buildings and only if pricing really exceeds their expectations they are a willing seller…they wouldn’t sell because they wouldn’t know what to do with the money otherwise.” — Jones Lang LaSalle (JLL) CEO Christian Ulbrich

“Buyers are looking at the stage of the cycle and say well we..don’t want to be caught as the ones who are buying right at the end of the cycle and pay top prices. So that cautious behavior which we see from some of the buyers, we believe is very healthy….Buyers are very disciplined.” —Jones Lang LaSalle (JLL) CEO Christian Ulbrich

The national housing market has become solely a function of inventory

“The national market is thus become simple to understand, regardless of interest rate increases, stock market volatility, wage growth and consumer confidence, we now view U.S. home sales volume almost purely as a function of inventory. So unless significantly more listings reach the market, we expect U.S. total home sales to be flat at best in 2018.”— Redfin (RDFN) CEO Glenn Kelman

Home buyers are angry

“The people who are buying homes right now are really mad. They’re mad about the market. They’re mad about feeling poor when the economy is doing so well.” —Redfin (RDFN) CEO Glenn Kelman

Rates on credit cards are rising

“Borrowers are starting to see the increased cost of credit as most credit card debt is indexed to prime, which has moved up 75 basis points from a year ago…We have observed a number of lenders increase rates to borrowers…We know that consumers are feeling the increase in rates. Their amounts are repriced.” —Lending Club (LC) CFO Tom Casey

Consumer:

There is weakness in large retailers, strength in leisure and hospitality

“We continue to see some weakness in large retailers as they compete with online offerings. Yet, strength in leisure and hospitality businesses have offset this to some degree. Small business confidence remains high, providing optimism for future growth in this sector.” — Duke Energy (DUK) CFO Steven K. Young

Retail is still trying to adjust to a new world

“How the consumer shops is also changing quickly. The vast majority now engage in an omni-channel journey, mixing online, retail and wholesale channels as they consider a watch purchase.” —Fossil Group (FOSL) CEO Kosta N. Kartsotis

Sales at restaurants are rising despite lower traffic trends

“Improved spend for the Retail and Food Services sectors and somewhat favorable conditions for Food Service operators as sales at restaurants continue to rise offsetting somewhat lower traffic counts.” —Sysco (SYY) CEO Tom Bené

The World Cup should be a boon for pizza deliveries

“with the World Cup happening this year that we do have some high expectations around some activations associated with the World Cup to move the overall business forward there” —Papa John’s International (PZZA) CEO Steve M. Ritchie

Technology:

Capacity constraints may be easing for tech components

“in general, the foundry lead times are normal. We’re able to get the capacity we need from our foundries. We’re able to get the assembly/test equipment that we’re acquiring.” —Microchip Technology (MCHP) CEO Steve Sanghi

But long term deflation in the price of components may be coming to an end

“We’ve been saying for quite a while that the historic industry practice where the prices went down every year, we are really no longer following that trend…We are winning a lot more often at customers not giving them year-to-year price reduction. Five years ago, we’ll succeed some of the time; today we succeed most of the time.” —Microchip Technology (MCHP) CEO Steve Sanghi

NVIDIA seems to benefit from every hot trend–even Fortnite

“The success of Fortnite and PUBG are just beyond comprehension, really…the overall gaming market is just really, is super healthy.”—NVIDIA (NVDA) CEO Jen Hsun Huang

“Cryptocurrency demand was again stronger than expected, but we were able to fulfill most of it with crypto-specific GPUs” — NVIDIA (NVDA) CFO Colette M. Kress

There has been robust demand for midrange smartphones in china

“the whole industry were caught a bit off guard when we saw this big uptick in the China smartphone market 30 days ago or so…we’re seeing a nice pick-up in the phones…fairly robust demand appearing, that’s starting now, and we believe will carry through the balance of the calendar year.”—Synaptics (SYNA) Richard A. Bergman

Industrials:

It’s better to incentivize a sales force to sell through rather than sell in

“[I am] philosophically against sell-in because in sell-in, your relationship with distributors is built on commercial making the deals with the buyers in distribution to stuff the channel essentially. Hey, buy more of my parts, buy more of my parts. In a sell-through, the incentivization of the sales force to your effort is in driving design wins to revenue, so that the parts are going out from distributor shelves to the end customer, and that’s the main difference…[in a sell through model] the amount of managing the quarter that goes on at the end of the quarter by giving distribution deals, from pricing concessions to payment terms to buddy-buddy distribution, please take another $10 million from me, all that happens is really bad behavior, and it doesn’t represent demand.” —Microchip Technology (MCHP) CEO Steve Sanghi

Materials, Energy:

Oil and gas companies are feeling better

“Underlying oil and gas industry demand has been improving.  We looked at the RevPAR performance of our hotels in 40 energy submarkets in the U.S. in places such as Oklahoma, North Dakota and Louisiana to name a few. Excluding Houston, we note that RevPAR for our hotels in these U.S. markets rose 6% in the fourth quarter of 2017 and 8% in the first quarter of 2018. Canadian energy markets were even stronger.” — Marriott International (MAR) CEO Arne Sorenson

Miscellaneous Nuggets of Wisdom:

CEOs don’t have all the answers

“We normally think of CEOs as the people who have the answers, right? I think CEOs are the ones that have the questions. If you can provide the right framework and questions, the consumers, clients, customers, factory managers, supply chain -they have the answers.The important piece is to recognize and learn fast.” —Kraft Heinz CEO Bernardo Hees

Full transcripts can be found at www.seekingalpha.com

Company Notes Digest 05.06.18

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.

Companies express optimism and project a multi year, multi industry upturn. Further, the global outlook remains positive.  Still, most companies are feeling the heat of increasing costs especially on freight which they re seeking to pass on to consumers. 

The Macro Outlook:

CEOs expect this cycle to continue for another several years

“2019 is going to be another great year. And it’s on the back of refining, petrochemicals, gas, LNG. It’s on copper. There’s lot of work that’s coming this year in the mining sector…we’re in a multi-industry multiyear upturn”- Fluor (FLR) CEO David Seaton

“The cycle has not peaked…we’re seeing positive orders on a global basis. I’ve been around a while and I’ve been through three cycles. This cycle has not ended…my visibility in the cycle is solid at least three to four years” – Emerson Electric (EMR) CEO David Farr

Global growth remains strong

“We expect the global economy to remain positive absent any significant impact from geopolitics or trade risks” – Mastercard (MA) CEO Ajay Banga

“the U.S. economy is still on a good growth trajectory” –  San Francisco Fed Chair President John Williams

The labor market is also solid

“If you look at the job growth, it’s been very solid over the last three or four months. Unemployment did come down…Wage growth is still I think on an upward trend, but it’s not picking up fast…Labor market is still very strong and getting stronger” – San Francisco Fed Chair President John Williams

“The labor market has continued to strengthen and that economic activity has been rising at a moderate rate. Job gains have been strong, on average, in recent months, and the unemployment rate has stayed low” – FOMC

Commercial real estate demand is robust

“We are experiencing robust demand from all matter of industries in all of our submarkets. Our tenants are optimistic, aggressive, growing and up keyed about New York” – Vornado Realty Trust (VNO) CEO David Roth

And companies love tax reform

“the new tax legislation enacted in December gives us increased financial and operational flexibility from the access to our global cash” – Apple (AAPL) CEO Tim Cook

On the other hand, companies are experiencing some cost pressures especially on freight

“On the cost pressures, where we’re seeing it most acutely is on freight, like many other companies” – Kellogg (K) CFO Fareed A. Khan

“Our inflationary pressures are really coming from freight and sort of the wage and benefits…freight costs have increased for every company that puts anything on a truck and we are expecting these costs to remain elevated throughout the year…freight costs are up industry-wide” – B&G Foods (BGS) CEO Robert C. Cantwell

“This year we are seeing a more difficult cost environment, particularly we’re still dealing with about 70 basis points of impact from the memory pricing environment that we’re working through.” – Apple (AAPL) CFO Luca Maestri

Which are being passed on to consumers

“We have communicated price increases across the majority of our portfolio to all of our customers….our strategy does not appear to be different than the majority of our competitors who are also wrestling with costs.” – B&G Foods (BGS) CEO Robert C. Cantwell

“Pricing will continue to accelerate as we go through this. But at the end of the day, pricing is going to rise we think throughout the balance of the year” – Ecolab (ECL) CEO Doug Baker

Interest rates should keep rising

“While geopolitical uncertainty and the prospect of a trade war could drive down interest rates, we believe the economic fundamentals point toward rising rates, although not to pre financial crisis levels.” – MetLife (MET) CEO Steven Kandarian

International:

Trade wars aren’t good for anybody

“I think my own view is that China and the U.S. have this unavoidable mutuality where China only wins if the U.S. wins and the U.S. only wins if China wins and the world only wins if China and the U.S. win. And so I think there’s lots of things that bind the countries together and I’m actually very optimistic.” – Apple (AAPL) CEO Tim Cook

“a trade war is not good for anybody…the trade war actually will hurt small businesses in the United States.” – Alibaba Group Holding (BABA) Executive VC Joseph C. Tsai

Emerging market growth should pick up in ‘19, ‘20

“We’re going to see the emerging markets come in and drive faster growth versus the mature markets as we get into 2019 and 2020.”  Emerson Electric (EMR) CEO David N. Farr

Brexit has been less disruptive than expected

“There seems to be a little bit of calm has entered the markets after the kind of shock from the Brexit decision maybe a couple of years back. But it doesn’t appear to be quite as disruptive as perhaps people feared”- McDonald (MCD) CEO Steve Easterbrook

Financials:

Volatility has normalized

“Volatility is alive and well…that scenario of flat volatility doesn’t last long historically. It’s unusual in this instance, but we believe history is what we look back to and we’ll go to a normal upward sloping curve in vol…the market is still in adjustment mode or flat” – CBOE Global Markets (CBOE) CEO Ed Tilly

“Although April market conditions dip below the Q1 trend line, realized volatility remains consistent with a more normal environment”- Virtu Financial (VIRT) CFO Joseph Molluso

Some companies are dipping toes in crypto currencies

“we’ve dipped a toe in, but it’s a very, very small toe… It’s a new asset class we’re excited about it if and when it becomes more regular, regulate and essentially cleared, certainly we will put a big toe and all the little toes will follow and we’ll be a big market maker there.” –Virtu Financial (VIRT) CEO Douglas Cifu

But there’s less interest than there was

“there’s a little less interest than there was in the latter part of the fourth quarter and the first quarter.” – Mastercard (MA) CEO Ajay Banga

Office Reits are selling at substantial discounts to NAV 

“The office companies and all of our brethren are selling at a very substantial discount NAV. Everybody is complaining about it.” – Vornado Realty Trust (VNO) CEO Steven Roth

Consumer:

Millennials are beginning to dominate the economy

“Millennials are expected to become a huge economic force in the coming years that already dominating lot of buying decisions.” – Snap (SNAP) CEO Evan Spiegel

Millennials like frozen foods

“Frozen foods categories are outpacing grocery overall, especially with millennials, who consider frozen closest to fresh and who prize its convenience and value”- Kellogg (K) CEO Steven A. Cahillane

Retailers are still investing in omnichannel

“We keep rolling out the omnichannel capabilities…it’s a new business model, not just for us but also for our partners and that needs to be optimize, that needs to be nurtured as well” – Adidas (ADDYY) CEO Kasper Rorsted

“We are in course of the rollout of our omnichannel services, this means click and collect and order from store.” – Hugo Boss’ (BOSSY) CFO Yves Müller

Restaurants are investing in delivery

“Restaurants are still testing the waters and trying to understand how online ordering and online delivery support their overall growth…every boardroom is asking the management team, what are we doing about online ordering”  – GrubHub (GRUB) Matthew M. Maloney

Technology:

Cloud computing has significantly decreased the cost of starting a tech company

“What also happened in cloud computing is, after this was all said and done, a lot of tiny startups said, hey, like suddenly, I don’t actually need to spend a godly amount of money for service and I can get my product to market at the end of – just using my laptop in a coffee shop. And so the creation of startups became cheaper and therefore, there were more startups.” – Shopify (SHOP) CEO Tobi Lütke

But can tech decrease the cost of creating good content?

“Netflix has demonstrated an ability to turn cash into subscribers but not the ability to turn subscribers into cash” – Greenlight Capital Re (GLRE) Chairman David Einhorn

Humans are better than machines at some things

“So, we had fluffer bot, which was really an incredibly difficult machine to make work. Machines are not good at picking up pieces of fluff. Human hands are way better at doing that” – Tesla (TSLA) CEO

Industrials:

The market for business jets is strong

“I would say we’re seeing this pretty much across all segment of the business as small medium and large, very strong in medium and large. And from a region standpoint, U.S. is good. It’s solid, but we’re seeing also order picking up and increasing steadily…our used inventory level is at the lowest point in over about 10 years. So it gives us confidence now that we are really trending in the right way” – Bombardier (BDRBF) CEO Alain Bellemare

Same with the automotive market

“automotive continues to look very strong” – Cognex Corporation (CGNX) CEO Robert Willett

Materials, Energy:

The price of oil is being supported by balanced supply and demand and geopolitical risk

“What we’re seeing in oil is balance in terms of supply and demand and a lot of political risk most of which everybody suspects is baked into the price”  – Ecolab (ECL) CEO Doug Baker

LNG Supplies are down

“supplies around the world are down. There’s a lot of maintenance activity up in Europe and in other places” – Cheniere Energy (LNG) CEO Jack A. Fusco

Expect some modest price increases on shallow rigs 

“we believe rates for shallow rigs need to increase further and by several thousand dollars per day. If our customers expect industry segments to deliver on the safety and performance they need, rates must increase…The industry is suffering right now.” – Precision Drilling (PDS) CEO Kevin Neveu

Miscellaneous Nuggets of Wisdom:

Two views on moats:

Moats are lame, what matters is the pace of innovation

“I think moats are lame. It’s nice sort of quaint in a vestigial way. If your only defense against invading armies is a moat, you will not last long. What matters is the pace of innovation. That is the fundamental determinant of competitiveness…Whichever company has the highest rate of innovation, unless that company is actively killed by its competitors in some way that’s nefarious, or shoots itself in the foot, it will at some point exceed those competitors” – Tesla (TSLA) CEO Elon Musk

No one ever said you shouldn’t improve your moat

“Certainly you should be working on improving your own moat and defending your own moat all the time. And Elon may turn things upside down in some areas…There are some pretty good moats around…I don’t think he’d want to take us on in candy.” – Berkshire Hathaway CEO Warren Buffett

But moats may not be enough to stop new competitors

“I’m starting a candy company & it’s going to be amazing…I am super super serious…Then I’m going to build a moat & fill it w candy. Warren B will not be able to resist investing! Berkshire Hathaway kryptonite.” – Tesla (TSLA) CEO Elon Musk (via Twitter)

Full transcripts can be found at www.seekingalpha.com