Company Notes Digest 3.11.16

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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: Strong February

The management teams that we listened to this week were relatively unanimous in their assessment that the US economy showed strength in February. Consumers are spending and January’s volatility seems to be a fading memory. Still, February had a lot of things to make comparisons easier. Better weather was one factor and an extra day did make the month 3.6% longer than last year. Winter months usually don’t give clear reads on the economy either. March and April should be more telling.

The Macro Outlook:

February looked “very, very” strong

“I would say February looked very good in North America. I mean, it looked very, very strong…so, very positive in North America” —Korn Ferry CEO Gary Burnison (Executive Search)

It’s business as usual and maybe even a little better

“I think it’s business as usual. In fact, we are very excited” —Middleby CEO Selim Bassoul (Kitchen Equipment)

Customers continue to spend on high quality merchandise

“In the past few months, we’ve seen the top economic concerns shift from rising healthcare costs to the stock market…That said, an interesting insight is that our customers continue to spend with us. If you look at some of our high quality offerings…it is clear that customers across all demographics want a great food experience.” —Kroger CEO Rodney McMullen (Grocery)

Consumers are spending on leisure too

“Our Colorado resorts continue to deliver very strong results, with solid growth above our record prior year. Our U.S. destination visitation has remained strong throughout the year at all of our mountain resorts, as we saw the benefited from the appeal of our resorts to high-end leisure travellers; we are reaching through our more sophisticated marketing efforts and the strong U.S. economy.” —Vail Resorts CEO Robert Katz (Ski Resorts)

There’s no sign of slowdown in the auto industry

“I have to tell you I just don’t see the clouds on horizon right now for the new car business. I mean I probably spend more time with the automakers than anybody…the business ought to be robust and it certainly feels pretty good right now.” —Sirius XM CEO James Meyer (Satellite Radio)

This strength is a lot different than many people expected in January

“In the US, park attendance, advance bookings all very strong, the advertising marketplace is much stronger than we expected it would be…we gave some numbers that were certainly indicative of either a consumer or an economy that was stronger than a lot of people had considered. So, we’re feeling actually fairly bullish about our business prospects in this market” —Disney CEO Bob Iger (Magic Kingdom)

Was January just an overreaction?

“we saw the last three weeks in January slow significantly in the United States, actually not that dissimilar from what I believe Cisco referred to on their call. And I don’t have a good explanation of that except for one or two things. One is, remember the opening week in the market in 2016 was really tough, right? And I think companies are quite now extra sensitive to volatility in the market. They are quite quick to be cautious and pull back purchases.” —HP Enterprises CEO Meg Whitman (Enterprise Tech)

Did better weather play a role in February’s strength?

“almost every week or really every day when we get ID sales, it seems there’s some geography that was up against weather last year and no weather this year. That’s going to flesh itself out.” —Kroger CFO Michael Schlotman (Grocery)

“we’ve had basically a warm winter throughout, even in Chicago. We’ve had a few days, but it’s been mostly warm in comparison to the previous years. And it’s having people spending in restaurants.” —Middleby CEO Selim Bassoul (Kitchen Equipment)

We’ll have to wait and see

“I know, month of February was a decent month for excavator sales but we’re trying not to get overly excited about that. You always have to consider the timing of the Chinese New Year. January was not a very good month. So I think it’s still wait-and-see.” —Caterpillar VP Mike DeWalt (Construction Equipment)

International:

There is less strength outside of the US

“In Europe, there is still some softness…Asia, Hong Kong has been soft” —Disney CEO Bob Iger (Magic Kingdom)

“Asia has obviously been challenged for sure. You can see that in the numbers. Europe was in line with my expectations…South America, very challenged, obviously.” —Korn Ferry CEO Gary Burnison (Executive Search)

“Risks to economic activity are biased to the downside. And in that sense with today’s information, I think that the likelihood of having the 1.8% growth scenario for this year is becoming more likely.” —Bancolombia (Colombian Bank)

Financials:

There continue to be deflationary overhangs in the economy

“Beyond gasoline price deflation…we have seen a little additional deflation across many merchandise categories…I can give you crazy numbers on given items. On a year-over-year basis, when you look down, just candy. M&Ms down 10% year-over-year. American single slices of cheese down 15%. Bacon down 20%” —Costco CFO Richard Galanti (Membership Retail)

But there may be some inflationary pressures too

Costco is raising starting wages for the first time in nine years

“This year we’re also changing the starting level or entry level hourly wages. This is the first change to the entry level wages in nine years.” —Costco CFO Richard Galanti (Membership Retail)

Rising wages are Restaurant operators’ number one concern

“we continue to see the pressure on labor wages. That’s number one. You get labor wages rising, and it’s an unstoppable aspect of a restaurant. Their costs are going to go up on labor wages…they’re worried about it” —Middleby CEO Selim Bassoul (Kitchen Equipment)

The housing market in the Bay area remains frothy

“given the frothy market conditions in the San Francisco Bay area, which are resulting in lofty, almost speculative land prices…We’ll wind down our operations in the Bay area in Northern California by selling and delivering the homes in our existing communities.” —Hovnanian Enterprises CEO Ara Hovnanian (Homebuilder)

High yield market weakness is impacting companies’ ability to refinance debt

“In September of 2015 we shared various illustrative models…for repairing our balance sheet. The scenarios assumed we refinanced our near term debt maturities, which to date have not occurred. Unfortunately, the high yield market changed and continues to be extremely challenging.” —Hovnanian Enterprises CEO Ara Hovnanian (Homebuilder)

Korn Ferry voiced concern about executive search activity in the financial services industry

“Look, I think there is some concern about financial services. When we look year-over-year there’s growth in the business for us that was driven by asset management, wealth management, private equity. But, yes, we certainly are hearing some concern.” —Korn Ferry CEO Gary Burnison (Executive Search)

Consumer:

The IRS is taking longer to get people their tax refunds

“in 2015, the IRS had processed and refunded $66 billion in tax refunds by February 6th. This year, that number had dropped 11% to $59 billion. And the average time for taxpayers to receive their refund has increased from 10 days last year to 13 days this year.” —H&R Block CEO William Cobb (Tax Preparation)

Millenials are moving into their prime spending years and they love a good deal

“[millenials] are moving into prime spending years…They started a little slower in household formation, they are moving faster and are in that time right now…They are the most value driven generation that was seen in my life time…they are very, very focused to value to lines for Wal-Mart” Walmart Chief Merchandising Officer Steve Bratspies (Big Box Retail)

Urban Outfitters’ CEO blamed a lack of new fashion for the underperformance of the apparel industry

“why then was apparel the outlier? To me, the answer is simple: fashion, or more accurately, the lack thereof…Without a fashion need to drive her purchases, the customer can easily defer her apparel spend…the good news is I see more fashion excitement this spring than I’ve seen in quite a few years.” —Urban Outfitters CEO Richard Hayne (Apparel Retail)

AirBnB is diminishing hotels’ pricing power

“So if you look at business around marathons as an example, where we used to have really intense compression and an ability to price that maybe what the customer would describe as sort of gouging rates. I’d say we’ve lost a lot of that ability at this point within the major markets where these events take place.” —Pebblebrook Hotels CEO Jon Bortz (Hotels)

Consumers have lost their patience for anything that’s not intuitive

“all consumers, we have lost patience when it comes to finding things and using things. And as soon as you hit a speed bump between yourself and something that you want, whether you’re searching for something or whether you want to watch something or buy something, as soon as you hit a speed bump, technologically or digitally, you go elsewhere.” —Disney CEO Bob Iger (Magic Kingdom)

Technology:

The Apple product line has grown a lot in the last few years

“Remember, our Apple business is much broader than just the iPhone. It’s the notebooks. It’s the desktops. It’s iPads. It’s Beats. It’s Apple TV. It’s Apple Watch. The Apple product line has gotten much broader than what it was a few years ago.” —Tech Data CEO Robert Dutkowsky (IT Distributor)

Startups like Box have been able to win big customers over time

“More than 3,000 new customers chose Box in Q4. We now have over 57,000 total paying customers. We had major wins and expansions with leading companies like AIG, Bain Capital, Campbell Soup Company, The GAP, Genentech, The Home Depot, Intuit, Unilever and USAA.” —Box CEO Aaron Levie (Cloud Storage)

Uber called out its Chinese competitor for irrational pricing

“We’re profitable in the USA, but we’re losing over $1 billion a year in China. We have a fierce competitor that’s unprofitable in every city they exist in, but they’re buying up market share. I wish the world wasn’t that way. I prefer building rather than fundraising. But if I don’t participate in the fundraising bonanza, I’ll get squeezed out by others buying market share.” —Uber CEO Travis Kalanick (Ride Sharing)

Companies may have caught up on their technology spend and could be free to spend more on other areas

“the last five years, restaurants have done a lot of investments in online — basically ordering, social media, texting, ability to text an order and receive it…They’ve made so much investment, and those investments are already done and sunk. Now you are seeing more money being freed up back to the back of the kitchen” —Middleby CEO Selim Bassoul (Kitchen Equipment)

Verizon says that it will outspend its competitors to win in 5G

“when you talk about closing the gap, I’m investing $12 billion a year. People who say they’re closing the gap are investing $4 billion a year. And then, we have people saying well 5G is not coming for any time soon, I don’t know why people are worried about that. That’s because they’re still trying to build out their LTE network.” —Verizon CFO Fran Shammo (Telecom)

Sprint says that spectrum is critical to 5G

“We are not building a network that is 4G, 4G is almost a thing of the past. We are building a 5G network for the future, and 5G networks are funded fundamentally different to 4G networks. They’re all around high capacity, and the more spectrum you have the more capacity you have.” —Sprint CFO Tarek Robbiati (Telecom)

Industrials:

If demand is declining then inventories still need to come down

“I think our inventory in general at dealers…is right in the overall normal range. But our sales forecast this year is down $5 billion from last year, and I think as a result of that, dealer inventory will need to step down a little bit to keep that ratio of inventory to sales in line. So, yes, I think this will be another year where we’ll under-sell end market demand a little bit.” —Caterpillar VP Mike DeWalt (Construction Equipment)

Materials, Energy:

Oil companies have continued to lower operating costs

“Over the past three years we have seen our operating costs drop by nearly 30%. A portion of this reduction has come through an intensive effort to use technology and by making key changes to process.” Peyto Gas & Exploration CEO Darren Gee (Oil and Gas Exploration)

Joy Global said that its end markets continue to deteriorate but is seeing hopeful signs in Australia

“The past quarter, our end markets took another step down…as we ended 2015…we saw our utilization drop in that 35% on that footprint…we’ve seen in probably Australia…we’re seeing that service starting to look up, the slots being booked and we have visibility…the Australian fleet has been aging and they’re going to have to do some of those rebuilds and we just see that happening, because they’re already scheduled.” —Joy Global CEO Ed Doheny (Mining Equipment)

Miscellaneous Nuggets of Wisdom:

A crisis is a time when you are focused on survival

“Is this a crisis or is it a cycle? Well they are different. In a crisis you’re trying to survive” —Enterprise Products Partners CEO Jim Teague (Oil Pipelines)

Strive for perfection

“we’re pushing really hard for perfection. We are demanding basically to make things better. I learned a lot from Steve Jobs and from Ed Catmull and John Lasseter in Pixar and how they make their films and how they have a director and the idea comes from the director’s heart and passion, but when that director makes the film, he puts that film up in front of his peers and the peers go to work on giving him the feedback that he needs to make the film even better.” —Disney CEO Bob Iger (Magic Kingdom)

Search for the soul of a company

“I spent a lot of time thinking about it in all three [acquisitions], what was the essence of the business, how did they create their value, what was the creative soul of these businesses, was it people, was it the brand, how they made things and tried really hard not to screw all that up, but to basically leverage – keep protected and leverage it.” —Disney CEO Bob Iger (Magic Kingdom)

Full transcripts can be found at www.seekingalpha.com