Company Notes Digest 1.7.15

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: Happy New Year

It’s back to work this week, but it was still a light week for earnings calls since earnings season starts next week. Some of the calls in this week’s post were ones that we missed during the holidays.

Interesting datapoints: MSC, an industrial distributor, said that weakness is more than just inventory destocking. Two small steel companies protested China dumping steel on global markets, and Carmax saw an uptick in chargeoffs on auto loans.

The Macro Outlook:

The manufacturing environment has continued to deteriorate

“The environment continued to deteriorate as expected. The root causes for the slowdown remain the same. The rapid and sustained drop in oil prices, the strong U.S. dollar with its negative effect on export demand, and foreign exchange headwinds, are all negatively impacting broader manufacturing activity.” —MSC Industrial Direct CEO Erik Gershwind (Distributor)

The important headline is that demand is down, this is not just inventory destocking

“the results we saw…in terms of the macro…The primary driver there is a reduction in incoming orders in demand in backlogs, not in destocking and I think that’s a bigger headline.”–MSC Industrial Direct CEO Erik Gershwind (Distributor)

Steelcase saw order volumes slow from their largest customers, which is typical when the economy slows

“in the past, when the economy has slowed, we’ve seen the largest customers are often the first to cut back and that’s what we’re seeing this quarter…we probably have more of our business from large customers than the overall industry. So we are probably feeling the effect of the slowing economy a little earlier than others might…The first half of the quarter, five weeks in September and the first two weeks of October, were actually…stronger than we were expecting…then in the last six weeks of the quarter, we saw a 9% decline. And really, it fell off suddenly” —Steelcase CFO Dave Sylvester (Office Furniture)

Other CEOs are seeing the same thing

“I will also comment I am a member of various groups where CEOs come together and talk about what they see. And for these large customer CEOs,, some of the outlooks, for example, business roundtables, commentary recently about business capital spending, would confirm that are large customers are seeing this headwind. So, whether we look at our data or we look at economic data or we just listen to what other CEOs are saying, we’re seeing consistent concerns from that customer group about the economic outlook” —Steelcase CEO Jim Keane (Office Furniture)

According to Darden and Signet Jewlers, the consumer has been holding up

“I would say that the consumer has been consistent quarter-to-quarter in our observations it is still buying a little less on daily using the whole menu. They are buying appetizers, they are buying deserts, they are buying high value items.” —Darden Restaurants CEO Gene Lee (Olive Garden)

“Our holiday sales results were solid…We started off strong as we said at the third quarter announcement, but our performance continued to become stronger and stronger closer to the end of the holiday.” —Signet Jewelers CEO Mark Light (Jewelry)

KB Home saw strong traffic to their open houses

“we actually saw the highest traffic levels per store we’ve seen in many years and I think it’s a combination of the products and locations we have and also that there’s a strong desire among the consumer to be homeowners. That’s very encouraging and that’s normally a good indicator of where things are headed.” —KB Home CEO Jeffrey Mezger (Homebuilder)

And construction activity remains strong

“Demand remains good in the markets that we serve. Being Sun Belt oriented much of the construction activity and strength in construction is south and west oriented.” —Commercial Metals Company CEO Joseph Alvarado (Steel Producer)

But it’s been surprising how many industries have been hit by energy weakness

“I think the overwhelming majority of segments are down and down and have deteriorated over the past few months…just a reminder, our direct exposure to energy is really low, meaning, well under 5%. The indirect exposure is I think what’s taken everybody by surprise not only in MSC but in the broader economy. And it’s ugly.”–MSC Industrial Direct CEO Erik Gershwind (Distributor)

And there may be early signs of credit deterioration. “At some point the tide was going to turn in”

“We saw some tick up in charge-offs during the quarter…the way I characterize it is we have had a long stream of favorable experience and at some point, it was – the tide was going to turn in. Things were probably going to normalize. I would probably characterize it as giving back some of the favorable experience we have had over the last several quarters. It’s too early to tell what that means from a go-forward perspective.” —CarMax CEO Tom Folliard (Auto Dealer)


Chinese consumers sound like they were still spending in December

“in China specifically, as you recall, we spent time resetting the marketplace and we are now seeing the results of that reset really take place. They had an incredible quarter. I was actually just recently there. We are seeing just great growth across the Sportswear, the Running, the Basketball business, the dotcom business is doing exceptionally well.” —Nike CEO Mark Parker (Apparel)

But the government may be patching economic leaks with tactics like dumping steel onto international markets

“China’s economic slowdown and unwillingness to adjust steel output to meet current demand impacted steel markets throughout the world with a significant negative impact on global steel pricing. China’s on pace to export 125 million net tons of steel to other markets around the world with a significant portion coming to the US, thereby impacting US production rates.” —Commercial Metals Company CEO Joseph Alvarado (Steel Producer)

Monsanto spoke positively about the new President of Argentina’s policies

“We are pleased to see the early decisive approach of the new President and we believe that his actions, particularly the lifting of export taxes in grain will create longer-term benefits for agriculture for which we’re well positioned to participate. However, the approximate 35% to 40% devaluation of the Argentine peso is expected to create an estimated $0.20 to $0.25 charge in Q2” —Monsanto CEO Hugh Grant (Agriculture)


Lennar is optimistic that higher interest rates wont hurt housing prices

“Many have been concerned about the relationship between housing and interest rates. We’re quite certain though that modest moves in interest rates in the context of a positive economic environment will be a net positive for housing in general. This has been the case in approximately half of all prior positive interest rate environments.” —Lennar CEO Stuart Miller (Homebuilder)

Land prices may have gotten ahead of themselves though

“land has accelerated in pricing maybe even ahead of itself…we’re seeing that land pricing has recovered at a faster pace than the overall market. Land is still in short supply, so it is difficult to come by and at the best located properties the pricing is more of a retail nature than a deeply discounted nature.” —Lennar CEO Stuart Miller (Homebuilder)


High new car sales today (with a high percentage of leases) will lead to an influx of used cars in a few years

“we are seeing, as you know highest SAAR we have ever seen and the bigger of the increase in the SAAR is related to trucks and SUVs. If I was thinking about that over a long period of time, that means a couple of years from now we will see lot of trucks and SUVs out in the wholesale market” —CarMax CEO Tom Folliard (Auto Dealer)

Frozen food serves an important purpose

“I think the first big picture point on frozen is the consumer need state for frozen food is absolutely undeniable. If you look at income levels in this country, cash flows in this country and the perishability associated with fresh foods and the fact that people have need states most often during the week and frankly it’s the majority of occasions where they are eating by themselves off major kind of breakfast, lunch and dinner hours. The ability to have frozen food that stays ready when you are on hand is absolutely undeniable.” —ConAgra CEO Sean Connolly (Consumer Packaged Foods)

Beer is becoming like wine

“Beer is becoming like wine. The high end of the beer business is a very exciting part of the business because there is huge trading up going on in beer. Okay the consumer is definitely premiumizing, it’s premiumizing into our import. They’re premiumzing into our import brand. And craft you see the high end of the beer business being very robust. You can see it coming right out of the premium part of the beer. We definitely think that that’s going to continue and although the price differential seems big in beer, okay that’s really in percentage terms okay, is still talking about like a super affordable luxury, way, way even more affordable than wine right.” —Constellation Brands CEO Robert Sands (Beverage)


PC inventories may be leveling off

“We think that the PC market, the signs are that channel inventories are leveling off a little bit better that was after the inventory was low. If you look at more specifically to our business DRAM inventory in the channel with the exception of one player, one larger player, DRAM inventory across our channel is pretty low. So the demand seems to be flowing through and replenish of inventory seems — that seems to be dynamic in the PC space. So that’s what behind our view of the world in terms of PC shipments. If you look at the data while not stellar growth certainly better than the first half of calendar year ’16.” —Micron CEO Mark Durcan (Semiconductors)

Materials, Energy:

Consensus still expects oil prices to go higher over the next few years

“By 2018, most of the analysts who are following energy expect a much different energy picture than we see today. And indeed, if there are vantage points in Saudi Arabia, we see that there is a limited amount of time that Saudi’s themselves and others in OPEC can handle these low oil prices. It’s very effective what they’re doing today. They’re succeeding in their goals, but their break-even pricing is much higher than many frack producers in terms of their budgets, their annual budgets. They’ve got very, very low cost oil. So they can afford to do this now. But on longer term they can’t afford to do it, so they’re facing the – they’re facing this in a few years.” —Greenbrier CEO Bill Furman (Railcar Manufacturer)

Carnival Cruise Lines isn’t changing its oil hedging policies

“but so far, with forward pricing, we haven’t seen an opportunity to do anything that we think makes sense. Obviously, nobody really knows, as is evidenced by what happened the last couple of years. But we constantly review it. But at this time, we see no reason to do anything different.” —Carnival CEO Arnold Donald (Cruises)

Beef prices are probably coming down

“here is what I think about where we are in the beef market…We do expect there to be some tailwinds, we do expect to be able purchase beef in a deflationary environment for the next couple of years, as the herds continue to build and the cycle starts to change. I don’t believe that beef is going back to levels that it was at 10 or 15 years, I do believe it’s coming down year-over-year.” —Darden Restaurants CEO Gene Lee (Olive Garden)

Full transcripts can be found at