Company Notes Digest 10.30.15

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.

The Macro Outlook:

The industrial demand environment has been difficult and deteriorating

“I’ll begin by covering the deteriorating and quite difficult demand environment…indicators confirm a considerable slowdown in metal working activity as the quarter progressed.” —MSC Industrial Direct (Industrial Distributor)

Companies planned for a weak environment and it was worse than expected

“we had set our plan not expecting a whole bunch of improvements in those markets…And in fact, what’s happened is they have gone down further…We thought we had [bottomed] and we have not and where the bottom is, we are not exactly sure, but it doesn’t look like we have reached it.” —Cummins (Truck Engines)

The decline may be broadening too

“I would say the answer is more about where it’s not getting worse. It’d be easier to find where it’s not getting worse than where it is. Seriously, I think, we’re seeing pretty much, with the exception of a couple of pockets that I mentioned, it’s pretty broad based.” —MSC Industrial Direct (Industrial Distributor)

Corning saw a slowdown in television and smartphone demand

“Our businesses were slowed by the weakening global economy, the unexpected devaluation of the Chinese currency, and the softening in television [demand]…IT and mobile demand is weaker” —Corning (Glass)

UPS saw B2B business fade

“we have seen some softness in the U.S. economy and in the third quarter B2B faded a little bit and really we are just seeing mixed signals.” —UPS (Package Delivery)

Demand for cranes has weakened

“deteriorating demand for tower cranes…contributed to the shortfall in revenues…The current global economic environment affecting customer demand is unlike any cycle we’ve seen in the recent past.” —Manitowoc (Cranes)

There are some rumblings of layoffs

“visibility remains extremely low. We’re now beginning to hear of layoffs for the first time in quite a while.” —MSC Industrial Direct (Industrial Distributor)

Other companies were more optimistic though

Dupont said that things are soft but it’s not a disaster, just a zero growth environment

“look, things have clearly softened up, just look at every industrial company that’s reported this quarter. Having said that, I don’t think things are in any draconian situation…I don’t see a disaster out there by any means. But I think we’re in a kind of zero growth environment…and that’s fine.” —Dupont (Chemicals)

Outside of the Energy industry, Reliance Steel said that demand isn’t too bad

“customer demand across our business is relatively healthy outside of the energy industry…there were like 170 of our managers [at our national conference], there really wasn’t a lot of sniffling…about demand other than the guys in our energy business, they were all at the bar for quite most of the evening.” —Reliance Steel (Steel Distributor)

Ford sees the US auto industry as stronger for longer

“We would characterize the U.S. industry as healthy…We do see industry sales staying well supported at the current levels through the next few years or in other words we expected to be stronger for longer.” —Ford (Automobiles)

We may have seen the worst of the inventory cycle too

Companies are managing their inventory levels pretty conservatively

“I think inventories are average at best, maybe below average in the value chain. We see buyers only buying what they need. We don’t see them buying ahead.” —Lyondell Basell (Plastics)

The Chinese may have liquidated their lumber inventories. How about other commodities?

“Chinese log decks now are down 30% from where they were earlier in the year. I think they’re starting to purchase wood. They really had a slow purchase rate in the third quarter as they were trying to rebalance it. So even though their fundamental demand isn’t picking up, I think their log purchase activity will start picking up and will feel a little bit better. We’ve seen prices in the Chinese markets firm in the last month or two and turn upwards” —Plum Creek Timber (Timber REIT)


The weaker Euro has made European industry more competitive

“in the power gen segment we have now seen some pricing competition come in, primarily as a result of low Euro. So there is just a number of competitors in the European area that are Euro based costs and so areas where Eurozone exporters can compete with us, we are seeing some price competition” —Cummins (Truck Engines)

As a result, the European economy is a relative bright spot

“GDP growth is also accelerating on the continent…We expect the strong market conditions to extend into next year.” —PACCAR (Trucks)

“I would tell you where we are seen the strongest growth is in Europe. You saw the results this quarter, we expect that continue” —CB Richard Ellis (CRE Broker)

Are there green shoots appearing in China?

“Our view on China is that the government overshot as it worked to slow the country’s economy in 2013-14 and then responded by re-stimulating it this year. We see the effects of those moves kicking in next year and finally with 2016 GDP growth projected to be near 6%” —Jones Lang LaSalle (CRE Broker)

Ford sees a rebound in China

“just a couple comments on the China industry, we are seeing stabilization and as Bob mentioned we do expect to lift from the stimulus package. And as he mentioned we are seeing showroom traffic improve, we are seeing closing ratios improve and unquestionably we see this as a really good opportunity, because 70% of our sales have the engines that are eligible for the stimulus.” —Ford (Automobiles)

Delphi is also seeing an uptick in orders in China

“when we look at sequentially third to fourth quarter, we are starting to see a pickup in orders, a strengthening in the market, sequential growth in vehicle production” —Delphi (Auto Parts)

A lot of companies had negative things to say about China though

“The change in our sales growth guidance is primarily related to two things. The impact of weaker than expected market conditions in China on our business and weak commercial vehicle markets around the world.’ —BorgWarner (Auto Parts)

“weakening economies, particularly in China, and the stronger dollar impacted our businesses…China’s auto and heavy-duty truck production has slowed through the year. China’s auto production is now expected to be flat year-over-year, and heavy-duty truck production is down 34% year to date.” —Corning (Glass)

“China has been slower in terms of market events than we expected” —Whirlpool (Appliances)

The Chinese are trying to move their economy to a “consumption led economy”

“You have a Chinese economy that is only 37% penetrated in terms of consumption relative to more developed countries, you’re looking at – over 60% of their economy is consumption. So there is definitely a secular tailwind driving consumption growth.” —Alibaba (e-commerce)

The Chinese consumer has plenty of savings

“When you look at the individual Chinese consumer, they’re very liquid, they have a lot of liquid cash deposits in their bank accounts. Over the last several years, wage growth has been growing over 10% year-on-year and there is a high savings rate. So people have lots of savings, lots of liquidity and we expect that this is not, so a temporary setback in the macro economy is not going to affect their consumption pattern and in a fundamental way.” —Alibaba (e-commerce)

Chinese consumers are already getting the message. Luxury goods companies have not seen a slowdown

“if I were to shut off my web and shut off the TV and just look how many customers are coming in our stores…I wouldn’t know if there was any economic issue at all in China. And so I don’t know how unusual we are with that…I mean, you really can’t tell the difference, if you look at sort of our daily and weekly numbers.” —Apple (Consumer Electronics)

“In terms of China, as you mentioned, we’re really pleased to be bucking the trends that many of our traditional competitors are reporting” —Coach (Handbags)

“we have not fully accessed the opportunity that the market is presenting in terms of growth in the premium price tiers as consumers look for better, more differentiated solutions, and frankly, higher product quality.” —Procter and Gamble (CPG)

Beware that consumption trends may only carry wealthier parts of the population though

“commercial real estate activity has remained steady in the country’s tier one cities…The shift in growth to services is producing some challenges in tier 2 and more so tier 3 cities.” —Jones Lang LaSalle (CRE Broker)


The big question: What is the state of capital markets after the last two months?

It’s certainly positive that markets have rebounded in October

“it’s certainly a positive that markets have rebounded month-to-date here in October…I’d hesitate to try to claim any kind of victory based on the first three weeks of October, and obviously we’ve got another couple months to go. But I would agree with you that it’s certainly been helpful to see the equity market positive news on the first three weeks of the month.” —State Street (Trust Bank)

But Silicon Valley has clearly felt some lingering effects

There has been a notable slowdown in VC funding

“we can see a slowdown clearly, but we don’t expect anything what I’ll call dramatic.” —Silicon Valley Bank (Bank)

The weakest companies are feeling the impact first

“Although we haven’t seen a trend yet, at some point, companies with more challenging business models, less differentiation or poor traction will have more difficulty raising funds…when I think about the level of the series A or seed round, again it’s slow.” —Silicon Valley Bank (Bank)

There are hints of a flight to quality

“the best companies are getting more attention. They’re raising larger rounds of equity and are staying private longer.” —Silicon Valley Bank (Bank)

Startups are having to re-evaluate their spending plans as capital raising becomes less certain

“[decreased spending is] being talked about. Have we really seen it a whole lot? The answer is no. Yeah, I’d just say we just haven’t seen it yet. Do I expect it to occur? Yes. I do expect that companies are going to be more disciplined as they go into 2016.” —Silicon Valley Bank (Bank)

Private Equity is also getting a little nervous about when to exit their investments, but many still have lots of capital to deploy

“I think everybody is wondering about what their exit time ought to be, if it should be moved up. But boy, the guys that we work with and talk to all the time, I mean, they are still deploying capital like crazy.” —Roper (Technology)

There’s just so much capital looking to invest

“It’s just that there is so much capital that still is keen to invest and it’s not skittish…if you look at the inflows into private equity this year…$130 billion this year. And that money hasn’t yet been put to work. So that will be going into the markets in 2016 and beyond…nothing yet suggests that any of this is slowing up.” —Jones Lang LaSalle (CRE Broker)

And there’s a sense that Silicon Valley will always be more resilient than the rest of the economy

“we’re paying attention to these potential issues and we do not see them having a material impact at this point…Our experience suggests these negative impacts will be short-lived if they occurred, as the innovation economy has repeatedly proven to be more resilient and has shown higher growth over time than the broader economy.” —Silicon Valley Bank (Bank)

These dynamics are making private investments the frothiest areas of this cycle

“that’s one of the benefits of the Fed keeping interest rates low forever is they are creating some other bubbles. You know where they are, in hedge funds, and all kinds of private equity investments.” —Cullen Frost (Bank)


Mall REIT Macerich is anticipating an uptick in retail bankruptcies this year

“Looking towards the end of the year, we are anticipating that bankruptcies are likely to be comparable or higher than in previous years. Many of these retailers are public companies and based on their current stock prices the markets are pricing in a significant risk of bankruptcy.” —Macerich (Mall REIT)


Apple is a Behemoth

“we are proud to report revenue of $234 billion, an increase of 28% and $51 billion over 2014. This is our largest absolute revenue growth ever. To put that into some context, our growth in one year was greater than the full year revenue of almost 90% of the companies in the Fortune 500” —Apple (Consumer Electronics)

Google says that the progress in machine learning has been pretty dramatic in the last two years

“Machine learning is core transformative way by which we are rethinking everything we are doing. We’ve been investing in this area for a while. We believe we are state-of-the-art here. And the progress particularly in the last two years has been pretty dramatic.” —Alphabet (Technology Conglomerate)

Jack Dorsey is focused on making Twitter easier to understand and to use

“what you’ll see from us is against two themes and this is going forward, which is really how do we make Twitter even easier to understand for more people…But also how do we get more power to people who are using it to tweet. And that’s not just Twitter but also our properties like Vine and Periscope. How we giving creators more tools to be more creative and to express themselves in a different way” —Twitter (Social Network)

There are only two enterprise cloud platforms built for massive scale: Amazon and Microsoft

“While many companies are developing commercial cloud offerings, there are really only two driving enterprise cloud platform innovations at massive scale, Amazon and Microsoft.” —Microsoft (Enterprise Technology)

There’s no problem too big for Amazon

“India is a different market and does not have a lot of the same ready fulfillment options that some other countries did. We see that as an opportunity, an opportunity that we can build and we can bring to sellers.” —Amazon (The Everything Store)

UPS thinks that it will be tough for Amazon, or anyone else, to match its delivery network

“I think we have been successful because of our integrated network that creates the efficiencies and the value proposition. It’s very difficult to match. And you have got to keep in mind, that that’s from pickup through delivery, right, where we are almost making a million pickup today a day and obviously delivering millions of packages a day.” —UPS (Package Delivery)

John Legere said that the next 6-12 months will be fascinating for the wireless industry as new competitors likely enter the market

“This is one of several industry structure question that I find fascinating things that are going to make the next 6 to 12 months just a really fascinating time period…If we really believe that that structure will be managed by four wireless carriers vertically integrating and reverse and horizontally moving into the rest of these industry. It’s crazy.” —T-Mobile (Telecom)

Comcast could be the big new entrant

“we believe that wireless obviously is an important area for consumers and how they are in the future…We had told everybody that before, we were going to trial some things and test some things…and we’ll update people as that progresses” —Comcast (Media Conglomerate)


The healthcare industry is undergoing massive consolidation

“There’s no doubt our industry is going through a period of dynamic change. I’ve been CEO of this company for 15 years and in healthcare my entire career.” —McKesson (Pharmaceutical Distributor)

The Walgreens-Boots Alliance is leading the charge

“The global healthcare markets, and perhaps the U.S. market more than any, are ready for change, and open to new ideas and new approaches that throughout provide scale. As the leading global healthcare company, we have the potential to play a defining role in this evolution.” Walgreens (Pharmacy)

Walgreens claims that the Rite Aid acquisition is not about giving it leverage over reimbursements

“Well, we have not done this to increase our negotiating power with payer and PBM. We have done this because we believe that we can extract a lot of synergies, rationalizing the combined company for, I would say, from internal sources and the harmonization of prices” —Walgreens (Pharmacy)

Hospital chain HCA had its margins squeezed by rising drug costs

“The second area that impacted our results in the quarter is the continued increases in pharmaceutical costs. Our pharmacy cost in the third quarter of 2015 were up in total just under 13%” —HCA (Hospital)

But McKesson argues that drugs are the cheapest and most effective way to treat patients

“pharmaceutical pricing trends have become the frequent subject of news headlines as we get deeper into this presidential election cycle. The observation I would make is that this pharmaceutical pricing discussions tend to ebb and flow over time. However, what remains clear is that pharmaceuticals are still the most effective and affordable way to treat patients.” —McKesson (Pharmaceutical Distributor)

Materials, Industrials, Energy:

We may only be in the third or fourth inning of the oil down cycle

“people out there tell us that it historically when they go a down cycle there it usually takes 80 months to get through it and you can pick your starting point of this down cycle but we’re certainly in that I would say probably in the first three or four innings of that cycle.” —Cullen Frost (Bank)

Even though oil producers aren’t drilling, they’re still producing existing fields at close to maximum levels

“We believe many, if not most, North American producers and OPEC countries are producing existing fields close to maximum levels, trying to offset lower revenues due to oil price declines with higher volumes while sharply reducing drilling activity. OPEC and non-OPEC production are up year-over-year. This is not sustainable.” —National Oilwell Varco (Oil Service)

Don’t expect recovery any time soon

“However, with swollen inventories, moderating demand growth with economic weakness in Asia and elsewhere around the globe and an uncertain trajectory for incremental oil exports from Iran, we don’t expect recovery any time soon. Nevertheless, it will come.” —National Oilwell Varco (Oil Service)

Acquisition opportunities should begin to open up as the downturn lengthens

“As the downturn has lengthens, we believe values of potential target companies will become more and more compelling. Thus far, it has been challenging to bring the bid and the ask on potential acquisitions into alignment, but we remain patient and disciplined in these discussions…As we move into 2016, we believe sellers are likely to reduce their expectations and better capital returns on M&A will follow.” —National Oilwell Varco (Oil Service)

But there’s a huge amount of Private Equity money that’s been raised to go after opportunities in oil

“I think, like most people, we still see this extraordinarily large amount of private equity that’s been raised. And most people seem to gravitate around $100 billion as the number that’s been raised and prepared to be committed to the sector over the next couple of years for investment if the right opportunities present themselves.” —Anadarko (Oil E&P)

Operators are getting outbid by PE backed management teams

“unlike the public markets, where you have a little bit different dynamic at work, where we see ourselves today trying to bid on properties in markets where we have interest, we are being pretty consistently outbid. And most oftentimes, we’re being outbid by private equity-backed management teams. And so I’m not sure I’d call that a seller’s market quite like I did previously, but I would say it’s a healthy bid-ask in terms of exactly what’s happening with properties when they come into the market and the receptivity they’re getting.” —Anadarko (Oil E&P)

Farmers are getting hit by another year of robust harvests

“Another year of robust global harvest is putting pressure on commodity prices, and more challenging farm economics has reduced demand for agricultural machinery, especially for larger models.” —AGCO (Agricultural Machinery)

Ag companies are looking to consolidate

“but you’ve seen all the activity in the last six months and one of the other ag players just this week saying they are looking at what they would do with their ag business and I’d also say one of them said everyone’s talking to everyone. That’s a true statement and we’re also — I am personally talking to the CEOs of some of the other companies. Something will give here on the ag side and I would say just looking at it consolidation should happen.” —Dupont (Chemicals)

Miscellaneous Nuggets of Wisdom:

Different industries move at different speeds

“sometimes we forget that different industries move at different speeds. So not everything moves like tech, not everything moves like consumer electronics and mobile consumer electronics. Matter of fact, few things do. So for instance, it is frustrating how long it’s taking us to get widespread adoption of lightweight glazing in automotive. It’s a heck of a good idea, good for consumers, it’s good for the environment, it’s good for safety, it’s good for almost everything. But the industry, even when you’re a highly-valued supplier, as we are, it just takes time.” —Corning (Glass)

Time is our scarcest commodity

“everyone wants to get more out of every moment of their life. After all, time is our scarcest commodity.” —Microsoft (Technology)

Hire people who are team players and not looking for instant gratification

“We look to people who are looking to be part of the team and operate as a team. And it comes out pretty directly when you’re talking about message of compensation et cetera. People elect to either be part of a team or they want to operate individually and we can tell that pretty quickly…we also avoid people who are looking for immediacy. I have a big believe that the value in hiring people is the duration of which you keep those people. There is very I would say it’s a I would say there is very little value and short-term employee no matter how productive they are” —Moelis and Co (Investment Bank)

Exceptional buying opportunities come along once a decade

“I think you could probably measure in decades the number of times a business comes along with such a good business and a market leading position where that can be obtained at a reasonable price.” —Capital One (Bank)

Full transcripts can be found at