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


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


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


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


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


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