Company Notes Digest 1.29.16

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: Business as usual?

CEOs struck an optimistic tone on earnings calls this week. While almost every management team mentioned macroeconomic uncertainty, most CEOs (outside of energy) were pleased with business conditions. CEOs were even positive on the environment in China, but it’s a little hard to believe that everything is business as usual.

The Macro Outlook:

CEOs spoke with positive tones because they are seeing positive things

“Well, we’ve a positive tone, because we’re seeing positive things happen out in the market…what we’re seeing going into January gives us a lot of confidence.” —DR Horton CEO David Auld (Homebuilder)

There’s obviously been turmoil in the markets, but most indicators continue to look strong

“there has obviously been turmoil in the markets recently…Having said that, most indicators of the real economy at least in the US continue to look pretty strong…from our own portfolio direct indicators of consumer behavior like payment rates and purchase volume, and from leading edge credit indicators like delinquency flow rates. These indicators all look consistent…they are not giving us cause for concern.” —Capital One CEO Richard Fairbank (Bank)

Credit quality remains solid in all domains outside of energy

“all domains consumer, retail, mortgage, small business, large commercial they all continue to perform well and metrics are all solid.” —Zions CCO Michael Morris (Regional Bank)

Silicon Valley Bank hasn’t seen a slowdown in companies raising capital

“Our innovation clients continue to drive their business forward regardless of the Unicorn Flu that has been going around…just over the last week as this volatility has been obviously very active…the number of rounds that we have seen closed…actually is consistent with what we saw in the third quarter and the fourth quarter of last year…so that’s a very recent data point kind of to give you an example. We haven’t seen any slowdown” —Silicon Valley Bank CEO Greg Becker (Bank)

Texas Instruments doesn’t see any signs that we’re in a traditional semiconductor downturn

“people ask us if we think a semiconductor cycle is underlying what we’re seeing and we just haven’t seen those signs of a traditional cycle. So there are things like our lead times continue to remain short. Our cancellations remain very low. Our distribution inventory continues to hold around 4 weeks.” —Texas Instruments IR David Pahl (Semiconductors)

Apparently even China is strong

“the opening of our year in China on the consumer side of our business has been really quite strong. And I focus my remarks on the consumer side because for us China has really become predominantly a consumer business…I was just there with the China team last week and met with the management over there…they continue to be quite optimistic.” —McCormick CEO Lawrence Kurzius (Spices)

It’s just moving to a consumer led economy from an investment led economy

“We are witnessing two significant trends consistent with Chinese government reforms…First, China is moving from an investment-driven economy to a consumption-driven economy. Consumption-driven growth is clearly more sustainable…Second, China is moving from an industrial manufacturing economy to a service economy. While the manufacturing sector lost jobs in 2015, the service sector added 17 million jobs. Job growth is taking place and it is driven by the services economy. People now have more employment opportunities in technology, commerce, logistics, entertainment, leisure, travel and finance.” —Alibaba Executive Vice Chairman Chung Tsai (E-Commerce)

Macau’s mass market gaming volumes have hit bottom

“I thought we had either hit bottom in the mass market or we are bottoming out. Ever since I said that I’ve been reading the issues, I’ve been reading from analyst reports and from other Sands China reports that I get daily…that people are starting to believe that and some of the numbers put out and experienced through December and January indicate to me that that’s the case.” —Las Vegas Sands CEO Sheldon Adelson (Casinos)

Chinese airline passenger traffic increased 15% last year

“We also continued to see strong growth in Chinese airline traffic. In 2015, passenger traffic in China increased 15% compared to GDP growth of 7%, a steady trend we have seen for the past five years.” —Boeing CEO Dennis Muilenburg (Aerospace)

Is it time to stop wringing our hands about China?

“Every morning we get up, we see CNBC. Everybody wrings their hands about China, but whether China is 7% growth or 6% growth, 6% is way bigger than the rest of the world. It’s a fundamentally strong market for us as our practically all of these emerging markets.” —Abbott Labs CEO Miles White (Diversified Healthcare)

Are people just overreacting to the stock market?

“I think people are over reacting to the stock market. I mean, we had whatever a seven year bull market without a correction. We were like just statistically got to be a way overdue for correction…So, we had a correction, big deal…I think people are overreacting to that.” —Blackstone COO Tony James (Private Equity)

Whatever is happening, it’s not business as usual out there

“we don’t look at it as a crisis but isn’t business as usual out there” —Tupperware CEO Rick Goings (Consumer Products)”

Apple called these “extreme conditions”

“We’re seeing extreme conditions unlike anything we’ve experienced before just about everywhere we look. Major markets, including Brazil, Russia, Japan, Canada, Southeast Asia, Australia, Turkey and the eurozone, have been impacted by slowing economic growth, falling commodity prices and weakening currencies.” —Apple CEO Tim Cook (Consumer Electronics)

It’s very hard to believe that the Chinese economy is doing well when steel output is being slashed

“inventory levels of iron ore at the Chinese ports continue to build over the past couple months heading back to above 100 million tons…Earlier this month, China’s biggest steel producing province announced that that the steel output will be cut this year to ease pollution and help curb oversupply. Three days ago, the Chinese Premier, Li Keqiang, released target numbers for steel production cuts to the order of 100 million tons to 150 million tons.” —Cliffs Natural Resources CEO Laurenco Goncalves (Iron Ore)

In the US, industrial companies are still experiencing challenges

“We continued to experience general industrial activity weakening due to the knock-on effect from natural resource markets.” —Parker Hannifin CEO Tom Williams (Industrial Components)

Large commodity companies are starting to feel acute stress on their balance sheets

“We face serious challenges because of what’s going on in the marketplace and because of the situation with our balance sheet, and we want to convey that we’re addressing this seriously and with a degree of urgency and we’re very focused on it…The situation has developed in a negative way very quickly and aggressively, and we’re responding to it.” —Freeport McMoran CEO Richard Adkerson (Copper)

Decreases in travel and entertainment spending are usually a leading indicator for a slowdown

“I would say the segment that I’ve been most disappointed in has been the corporate segment…the easiest expense category to cut is T&E that’s the first thing you see…as I evaluate 2015, that was an area that…we saw a pretty consistent decline. And certainly what we’ve seen in my 30 plus years experience with the Company is cut backs in T&E tends to be an early indicator for a slowdown.” —American Express CEO Ken Chenault (Payments)

The global cargo market stalled during 2015

“As we highlighted in our rate reduction announcement last week on the 747-8, the global cargo market recovery stalled during 2015 with the air freight traffic growing a modest 2% during the year.’ —Boeing CEO Dennis Muilenburg (Aerospace)

We may be looking at top-ish auto volumes

“I do subscribe to the notion that we are looking at top-ish volumes today…if we went to 16 million, it’s not going to be the end of the world” —Fiat Chrysler CEO Sergio Marchionne (Automobiles)

At best there’s nothing terribly exciting in the economy as a whole

“I think that at the highest level, we think we’re continuing to operate in a relatively weak macro economy as we have been for the last couple of years. So nothing terribly exciting in the economy as a whole.” —Texas Instruments CFO Kevin March (Semiconductors)


There’s still a lot of faith in the long term potential of China

“We are sitting in a business today that, as I said publicly when I was in China last week, that we believe one day could very well be larger than the U.S. business. So anyone on the call who is in any way dissuaded by our commitment or our success in China as a result of a 5% comp in the region is not only mistaken, but you are looking at the wrong metric.” —Starbucks CEO Howard Schulz (Coffee Shops)


There are more opportunities open on the M&A front at the margin

“So, some of the anxiety out here is definitely helping some of the conversations. So, on the margin, we’re a little bit more encouraged than we were 60, 90 days ago on the M&A front.” —Danaher CFO Daniel Comas (Diversified Industrial)

Valuations are still high though

“the pipeline is active, but valuations are still high and I think what you’re seeing is a delay in reality from seller’s expectations…we’re disciplined buyers and we buy things that are in our space, so we understand what the growth rates are…I think as time goes on and people see the new reality that they – it’s maybe not going to grow what they thought it was the previous decade, but those valuations will come more in line and I think our pipeline will become more actionable at that point.” —Parker Hannifin CEO Tom Williams (Industrial Components)

In many cases they are just plain non-economic

“the valuation that property went for was non economic. I mean just plain non economic. I would challenge the buyer to explain where the economic return was in that particular deal. They obviously have their reasons and they obviously saw something rest of us didn’t appreciate…the price of some of these things would be for sale at isn’t prudent, it just isn’t prudent.” —Abbott Labs CEO Miles White (Diversified Healthcare)

Changes are reshaping the payments industry

“our performance comes against the backdrop of changes that are reshaping the payments industry. These include a reset in co-brand economics, regulatory and competitive pressure on merchant fees and intense competition for customers.” —American Express CEO Ken Chenault (Payments)

Alternative capital sources continue to pressure prices in the reinsurance industry

“When we see larger players writing accounts at a 100% of expected model loss providing three months of extra coverage for no charge and readily deploying $100 million policy limits, we have to wonder if discipline will return anytime soon. Memories are short, the paybacks are long in this business.” —RLI COO Craig Kliethermes (Reinsurance)


Birthrates are picking up around the world

“It is going to be the year of the monkey in China which is a good year and so you typically have a little bit of an uptick in the birth rate…the birth rate in the U.S. is actually ticking up.” —Kimberly Clark CEO Tom Falk (Consumer Packaged Goods)

Auto makers need to change the way they view themselves

“But I think that ultimately trying to move the discussion the way from the concept of auto making, trying to re-pitch our future as being involved in the transportation business in the broadest sense of the term” —Fiat Chrysler CEO Sergio Marchionne (Automobiles)

“when you look at where we’re heading we said we were transforming into an auto and a mobility company because it’s really important that we don’t lose sight of our core business” —Ford CEO Mark Fields (Automobiles)

Advertisers are still under-indexed to mobile

“In terms of monetizing time spent, it’s certainly the case that consumers have shifted to mobile and businesses need to catch up…If you ask even our largest clients, our largest clients, if they drew a pie chart of where their consumer spend their time and money and whether they spend their time, we’re still under-indexed.” —Facebook COO Sheryl Sandberg (Social Media)


Sprint has lowered its churn to the lowest level in its history

“If you look at what we have done in churn, it had been three consecutive quarters in which we have had the best churn in the Sprint’s 20-year wireless history.” —Sprint CEO Marcelo Claure (Telecom)

Under Armour is partnering with IBM to help analyze data produced by their connected apparel

“we announced our partnership with IBM and their Watson platform to help build the insights capability for Under Armour Record. Wearables have been effective in telling you how many steps you took or the hours you slept, but they haven’t been effective in giving you proactive information on how to utilize that data to make your life better. Put simply, there was no call to action until now.” —Under Armour CEO Kevin Plank (Apparel)

Tim Cook doesn’t think that VR is a niche

“Yeah. In terms of virtual reality, no, I don’t think it’s a niche. I think it can be — it’s really cool and has some interesting applications.” —Apple CEO Tim Cook (Consumer Electronics)

Tim Cook does not think that smartphone penetration has peaked

“as I look at your…question on saturation, the metrics I see would strongly suggest otherwise. For example, almost half of the iPhones that we sold in China last quarter were to people who were buying their first iPhone. And certainly if you go outside of China into the other emerging markets, our share is much lower and the LTE penetration is so low, I mean in some cases, it’s zero, that it indicates to me that there’s still a lot of people, a tremendous number of people in the world, that will buy smartphones and we ought to be able to win over our fair share of those.” —Apple CEO Tim Cook (Consumer Electronics)

Qualcomm said it saw strong volumes (its stock was down a lot though)

“QCT chipset shipments were near the high end of expectations, with low tier strength across OEMs particularly in China, offsetting some weakness in thin modem sales at a key customer. QTL revenues were higher than expectations on strong 3G/4G device volumes and ASPs ” —Qualcomm CEO Steve Mollenkopf (Semiconductors)


Medical devices and prescription drugs represent 18% of total healthcare spend

“Here in the United States, prescription drugs represent approximately 12% of total healthcare costs and medical devices represent around 6%.” —Johnson and Johnson CEO Alex Gorsky (Diversified Healthcare)

Pharmaceutical companies will probably think twice about raising prices in this political environment

“I would say the political discourse that’s taking place and the congressional inquires relative to pricing practices, I think are obviously going to have people at least pausing perhaps to consider whether now is the right time to take price increase.” —McKesson CEO John Hammergren (Pharmaceutical Distributor)

It’s difficult to get M&A done in the hospital space because there are so many not-for-profit hospitals

“Of course, we do a lot of in-market acquisitions. But as far as the big ones you’re speaking to, things like say Kansas City that happened in 2003, those opportunities are really hard to find. They’re going to come out of the not-for-profit sector. And typically, we may engage in conversation, but many times, these organizations decide ultimately not to sell.” —HCA CEO Milton Johnson


The domestic steel industry may be building some positive momentum

“Well, I think there’s positive momentum, generally. I’m sure Dick can speak to some of it, but the inventory overhang, there’s continued destocking there and it’s becoming balanced. It’s still relatively high, particularly in hot band. But in coated products, in coated sheet, I think it’s getting into a good position. And you speak to a seasonal uptick. I think we’re seeing that as well…On cold roll sheet and coated, I sense a tightness forming in that arena.” —Steel Dynamics CEO Mark D. Millett (Steel)

Washington has helped the industry by placing duties on imports

“I have been generally pleased with the preliminary duties coming from Washington on the steel trade case, especially the extremely punitive percentages placed on China…The impact of the trade case will be real and it has already been started to be realized by the order books of the clients, our clients at least, and we expect that only to improve.” —Cliffs Natural Resources CEO Laurenco Goncalves (Iron Ore)

Industrial companies are excited about the internet of things

“if you take an air-conditioning contractor today, they have a lot of mechanical tools they have to utilize to measure pressure, humidity, temperatures and so this is a patented sensor that we have. It allows you to diagnose and troubleshoot the conditions of that air-conditioning unit much more rapidly…We’ve been very pleased with the initial sales. And that’s a really good example of taking a traditional market and using Internet of Things to make it even better.” —Parker Hannifin CEO Tom Williams (Industrial Components)

“What we are aiming at is quite a bit different than others. I would say we’re aiming at the internet of Caterpillar things, so that when we think about what we’re doing with digital technology, what we’re doing with site preparation and technology, machine guidance technology, machine health technology, it’s all about our installed base of the 3 million machines and engines. Rail, construction, mining the things we do.” —Caterpillar CEO Doug Oberhelman (Construction Equipment)

Materials, Energy:

Energy companies are facing a “financial crisis”

“The worsening market conditions added further pressure to the deep financial crisis throughout the oil and gas value chain and prompt the operators to make further cuts to the already low E&P investment levels. For many of our customers, available cash and annual budgets were exhausted well before the half way point over the fourth quarter, leading to unscheduled and abrupt activity cancellations, creating an operating environment that is increasingly complex to navigate” —Schlumberger CEO Paal Kibsgaard (Oil Service)

This has been the most challenging downturn since the 80s

“Now this has certainly been the most challenging downturn that I’ve seen in my many, many years in business. We expect the market will continue to remain challenged in 2016 and that it will be the first time since the late ’80s that global upstream spending will decline for two consecutive years.” —Halliburton CEO Dave Lesar (Oil Service)

Companies don’t even know what their own Capex spending is going to be

“I’m talking almost every day with the CEOs of our customers and I would say that it’s a real challenge out there….there is sort of a constant revision of budgets going on…clearly with a downward bias…right now, our customers don’t know what they are going to spend, where they are going to spend it and when they are going to spend it…which is why I made the comment earlier we really are trying to run the business on literally a week-by-week, crew-by-crew, unit-by-unit basis until our customers see some stability in pricing where they can then put a stake in the ground.” —Halliburton CEO Dave Lesar (Oil Service)

2016 is going to be a tough slog through the mud

“2016 is simply going to be a tough slog through the mud” —Halliburton CEO Dave Lesar (Oil Service)

Schlumberger doesn’t think that 2017 will be worse, but isn’t ready to say that 2016 will be the trough

“I don’t currently think that 2017 is going to be worse. I think — but with that said, I’m still not ready to say that we are troughing in 2016. I’ll be focusing in on executing basically quarter-by-quarter. I’m still optimistic, and I would hope that 2016 is the trough, but I’m not ready to rule on it yet.” —Schlumberger CEO Paal Kibsgaard (Oil Service)

Core Labs thinks that crude supply and demand should balance by 2H16

“Core believes that the worldwide crude oil supply and demand markets will balance in the second half of 2016.” —Core Labs CEO David Demshur (Oil Service)

Spare capacity in the Middle East is near zero

“on the Middle East, we see spare capacity there across the Middle East at a very low amount. Actually long-term spare capacity, we see near zero. You could probably generate another million barrels or 1.5 million barrels on a short-term basis. But on a long-term basis, we would put spare capacity nearing zero.” —Core Labs CEO David Demshur (Oil Service)

The longer recovery takes, the sharper it should be

“Now there are a number of moving parts in North America and my experience has taught me not to bet on the exact timing of a recovery. But we do expect that the longer it takes, the sharper the recovery will be.” —Halliburton CEO Dave Lesar (Oil Service)

Miscellaneous Nuggets of Wisdom:

Better valuations do not make bad companies into good ones

“one thing about down cycles is better valuations do not make bad companies into good companies. So, our perspective is we haven’t seen good companies to acquire that fit our three segments. So, this recent change in valuation really hasn’t changed that. So, we don’t see acquisitions really adding to this at this moment.” —Core Labs CEO David Demshur (Oil Service)

Make products that your customers don’t even know they need yet

“we focus on creating products you don’t know you need yet; but once you have it, you won’t remember how you lived without it” —Under Armour CEO Kevin Plank (Apparel)

There are no brave old people in finance because they get wiped out when they are younger

“what I figured out is that there are no brave old people in finance, usually it get wiped out by being brave when you are younger.” —Blackstone CEO Stephen Schwarzman (Private Equity)

There may not be a lot of brave people, but disciplined people make it to the finish line

“Our credit quality is healthy because we stay true to our principles and lending disciplines and all market cycles” —Cullen Frost CEO Dick Evans (Regional Bank)

“It has been an enormous privilege and honor to serve this wonderful company for 45 years including almost two decades as Chairman and CEO. This will be as all of you said my final earnings call and I thank our shareholders, our loyal customers and dedicated employees for their support.” —Cullen Frost CEO Dick Evans (Regional Bank)

Full transcripts can be found at