Company Notes Digest 4.25.13

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Below is a digest of some of the top insights that I’ve gathered from this week’s earnings calls.  Full notes can be found here.

Macro

US Economic Commentary:

“Domestically, we’re fairly confident that the U.S. economy will be stable, if unexciting. Internationally, the trade flows have been very volatile, and so we have to stay attuned to that.” (UPS)

“It’s unlikely there is going to be any change in sequester in the next few months. We assume it’s going to take the full year, the fiscal year ’14 budget. It gives them — Congress and the administration, a chance for maybe a grand bargain.” (Raytheon)

“I think all the mess in the United States, on the sequester and everything else, it just creates a level of anxiety and concern there, but I think it helps to mute a construction cycle that started to gain some momentum in the second half of last year that we were hoping for.” (ABB)

International Economic Commentary:

Europe:

“when we go to Greece, you see volume that looks like that it is bottoming out now and that is a positive news…it feels that after three years of having declined double-digit declines in Greece, we are seeing the bottom of the market.” (Heineken)

“We have continued to see improvement in our wholesale impairment levels in Spain, in particular, and we signaled that to you previously.” (Barclays)

“Looking at the major units, we can see a clear stabilization of NPLs in most of them, which account for 70% of our portfolio increases; we’re concentrated in Spain and Portugal where trends have remained at the same level as in the previous quarters.” (Banco Santander)

Asia:

“March on the other hand was better [in China]…And while that’s a move in the right direction and we are encouraged by it, it’s probably still a little too soon to call it a trend” (Caterpillar)

“So I think most of the increase in China production is because we’re getting to the end of the inventory decline or hopefully anyway over the next quarter.” (Caterpillar)

“international sales increased 6% to $382 million from $359 million last year, driven in part by a 40% gain in sales in China, with a continuation of double digit comps” (Coach)

“our viewpoint is, that there is a good chance there will be success in Japan. So sometime in the future whether it’s a year out or two, interest rates will eventually rise…We think it’s critical we follow what’s happening in the monetary and fiscal side in Japan and always reflect on that.” (Aflac)

“Remember, these dollar-to-yen ratios are not historically. I mean, it’s — obviously, the yen has been much higher in that sense, but we, from an overall historical standpoint, we see kind of yen levels before, so I think it’s just taking some of the pressure of the Japanese exports, but I don’t think it’s a phase change at all.” (ABB)

“you do see a trend to more localization efforts. And I think that’s not driven purely by the yen movement, that’s the result of some of the natural disasters that were suffered there. So I think that’s a been playing out over the last year or so where we’re seeing, particularly in North America, the Japanese OEMs looking to increase local content and I think that’s playing out in that.” (BorgWarner)

“Japan has been one of our most difficult markets as far as negative [industry trends]” (McDonalds)

“there is a focus [at the pentagon] on the Asia-Pacific region. There’s been 60 years of peace there. And the United States wants to make sure our allies and our friends over there continue to enjoy another 60 years of peace. That doesn’t mean, from a standpoint, that the threat is China, some people predict. That’s more of, how do we make sure that North Korea and others don’t threaten the well-being of our friends and allies over there.” (Raytheon)

EMEA:

“On Egypt, the situation is pretty stable company and as we’ve said at the full year, it has recovered and in the first quarter, not much has changed. So, in that sense, the situation is still pretty positive and albeit that you never know what will happen going forward, there’s a volatile environment, but so far, so good.” (Heineken)

“we are absolutely convinced and we are positive on the longer-term outlook of Nigeria” (Heineken)

Lot’s of companies talking about weather:

“we normally don’t talk about weather at all, but we know in the month of April, last quarter – the first quarter of last year, we saw very favorable weather.” (McDonalds)

“the weather remains unpredictable and just more uncertain than it has in many years, and that’s been the case for the last several years and that’s been driving much of our action” (Travelers)

“Europe experienced record low temperatures up to 5 degrees lower in the UK, France, and the Netherlands, and a record rainfall in Spain and Portugal 2x to 3x the level of last year” (Heineken)

Financials

Seeing signs of pricing pressure in bank loans:

“we saw further pricing pressure on loans. Beginning in February and continuing in March, some of the nation’s largest banks cut prices on most loan types in most of our markets…it’s pretty well-known that the refi boom was a very large source of earnings for those banks last year and that, that party is ending pretty rapidly. So I would speculate that looking anywhere and everywhere, I probably would be too, to replace that.” (Zion)

Construction loans are being made again, but once bitten perhaps twice shy:

“new construction commitments have been fairly strong for several quarters, as we increased our exposure to commercial construction projects when pricing terms and covenants have been some of the best our bankers have seen in their careers…However, because of concentration limits that we’ve adopted as part of our portfolio risk management, we are being disciplined about the new loans we make.” (Zion)

Banks don’t necessarily want to release reserves, but GAAP accounting forces them to:

“GAAP…places limitations on our ability to be conservative. We’re not trying to milk the reserve from earnings; quite the opposite. But the facts are leading to a decline” (Zion)

European banks are focused on liquidity, but still substantially wholesale funded compared to US banks:

“Loan-to-deposit ratio for these businesses improved further from 102% to 98%. This has reduced our total wholesale funding requirements.” (Barclays)

Insurers are starting to really have a difficult time in this investment environment:

“the low interest rate environment is also beginning to have a real impact on investment income and consequently, overall profitability for the industry, and people are beginning to recognize the issue and react. There has been a lot of talk about this over the past couple years, but we’re now beginning to see it translate into action in the form of greater discipline on the underwriting side.” (WR Berkley)

“our investment portfolio continues to mature, the effect of reduced interest rates will continue to push the fixed portion of net investment income down over the next several years.” (Travelers)

“as part of our investment strategy, we have said we would invest about one-third of our cash flow in JGBs. However, with 10-year JGB yields hitting historic lows, we want to be flexible in our asset allocation.” (Aflac)

Technology

The smartphone opportunity is huge and still growing:

“the smartphone market for example IDC estimates that this market will double between 2012 and 2016 to an incredible 1.4 billion units annually” (Apple)

“Gartner estimates that approximately 700 million smartphones were sold in calendar 2012, up 44% year over year. Further, they estimate that in 2017 more than 1.7 billion smartphones will be sold, representing an approximate 20% compound annual growth rate versus a 2012 base.” (Qualcomm)

28nm is good enough?

“I think the general view is that the 28 nanometer node is likely to be the node that exists for a long time, and will probably sort of the mass market node for some time. We kind of felt that we got on that earlier than anybody else.” (Qualcomm)

Maybe the Personal Computer isn’t dead?!

“We believe that if anything the huge growth in tablets may wind up benefiting the Mac, because it pushes people to think about the product they’re buying in a different manner and people maybe even more willing to buy a Mac where today than may be buying a PC. And so we’re going to continue making the best personal computers. our strategy is not changing.” (Apple)

Consumer

Don’t get too excited about same day delivery for e-commerce:

“I think that’s what it is right now, an experiment, trying it out. I’m not sure yet the economic feasibility is going to be there for this to be a big service ongoing…same-day is really going to be a niche offering that’s out there. The real story is about omnichannel.” (UPS)

There’s a difference between selectivity and exclusivity:

“Our strategy is obviously very different than the traditional European luxury brands who are much more focused on exclusivity. Coach is much more focused on being a selective brand” (Coach)

Good content opens doors:

“We have identified a very substantial number of people who are very interested in subscription to The Times, but at a somewhat lower price point.” (New York Times)

Energy/Mining

Maybe there is some reason to believe that mining companies are getting ahead of the curve in cutting back on capital spending:

“customers are using the equipment that’s out there and they are repairing the equipment that’s out there. It’s not a great economic climate but it’s good enough to keep commodity production going…In my time I have not seen this. I mean the reduction in the purchase of new equipment is substantially more than certainly the decline in commodity consumption would suggest.” (Caterpillar)

“Let me start mark, on the mining side, just to stay there. I don’t claim to say that I can see the future in this sense, but we’ve been pleased with the level of CapEx that we’ve seen in these kinds of things like mine hoist and gearless mill drives…Mine hoist just means you’re going lower or you’re bending your mine. So it just says that they’re working the mines harder. And I think we’ve seen the whole issue with the write-offs of what went on in the mining industry last year, the changing of a lot of the CEOs and leadership there, and I think the leadership teams that are put in place around the mine companies today…I think that leadership that’s in place is really dedicated in to sweating assets more, not dong greenfield, being more responsible from an operational standpoint” (ABB)

Oil is still a relatively tight market, with price support in the $100 area:

“we still expect very strong support around the $100 per barrel…if you look at 4 million barrel of spare capacity on about 90 million barrels of production, it is around 4% and it is still about 1 million barrels below where we stood prior to the Libya conflict, right. So I don’t think this is an excessive spare capacity. I think its, if anything, probably relatively tight.” (Schlumberger)

Offshore oil drilling is still being affected by the aftermath of the BP spill:

“in the past, I think, if you had redundancy, if one didn’t — one pod didn’t check out, you were okay. Today, nobody’s going to run in the hole unless everything checks out perfectly…I’m not going to try to guess when our government and our customers are going to get on the same page. And right now, it’s affecting us.” (Baker Hughes)

“Over the past month or so, we’ve participated in court-facilitated settlement discussions with some of the parties included in the multidistrict litigation…These discussions are at an advanced stage, although they’ve not yet resulted in a settlement…we believe that an early and reasonably valued resolution is in the best interest of our shareholders…we continue to believe that…BP is contractually required to indemnify us.” (Halliburton)

Unconventional drilling technology expanding internationally?

“Across the Europe, Africa, and CIS region, we’re seeing an uptick in the adoption of unconventional technology. For example, we’re seeing increased use of multistage fracturing across the region, and expanded application of rotary steerables and sliding sleeve technology in developing the tight oil fields of Russia.” (Halliburton)

Natural gas making its way into more areas of the economy:

“I would expect as you see CNG become more and more popular for over the road vehicles that there’ll be an infrastructure built out for CNG. So I would think, Michael, that over time we’re going to be able to convert the whole fleet…But over the next five years it’ll probably go at about 1,000 trucks a year. Right now we are at about 12.5% on the fleet.” (Waste Management)

Miscellaneous Notes

There is a major difference between hedging transactional and translational risk for foreign operations:

“the one thing that I would remind you is that there is a distinct difference between foreign currency transactions and foreign currency translation. We are certainly interested as Robin indicated in hedging economic events like capital being remitted from Japan to the United States. But we don’t think it makes sense to enter into an economic contract to hedge a financial reporting event. Largely Japan is a yen denominated entity that’s self-funded. We collect premiums in Yen. We pay benefits and expenses in Yen. We back our Yen liabilities with Yen assets, but to the degree that this year’s Yen rate differs from last year’s influences how those Yen get reported in dollars. So again when we think about hedging, we’re really focused on the economics of the business as opposed to financial reporting of the business.” (Aflac)

Things change pretty quickly, and no one has a crystal ball:

“I mean certainly we don’t have an outlook for 2014 so we are not going to…go out with new assumptions…about that today. And what I would caution everybody that…if we go back a year ago and we put ourselves in April of 2012, whatever predictions we made a year ago about 2013, the market has certainly changes since then. It may change between now and the end of the year, it may not. It’s just too soon, I think, to make a call on 2014.” (Caterpillar)

Companies are prepared for economic volatility:

“this is the from [’97] probably the fourth or fifth major cycle for this company. And I would like to think as kind of negative and perverse as it is, we are getting pretty good at it. And while I don’t like a three-year cycle…If that’s what we are living with, we are going to learn how to manage it.” (Caterpillar)

Companies putting analysts in their place:

“We just — we don’t agree with — at least for us, I’ll speak about Travelers. We just don’t believe that, we don’t do it. We make our best estimates all the time. They are estimates for loss — for loss estimates are not driven by the revenue straight [ph] of that business. They’re just not.” (Travelers)

“when you are in the brand building business, it is very dangerous to start to react on quarters.” (Heineken)

“Well, that’s part of the debate, George. And I guess we’ve given you our best guidance. And I’ve been around here for a long time and I think Raytheon’s been pretty accurate, at least in my last 10 years, about predicting where things were going to go.” (Raytheon)

One analyst got pretty direct with Jeff Immelt on GE’s complexity:

“I listen to you guys explaining what’s going on here, it’s mind boggling how many moving parts there are here, especially again in GE Capital. At what point do we again kind of maybe evaluate the size and complexity of the organization and make, I guess, a tougher longer term decision on the structure of the company?” (General Electric)

Global trade is not dead:

“As the world shifts, and we look at what’s manufactured in China, now we see a lot of that manufacturing going down to Vietnam. After Vietnam it could be Indonesia. After Indonesia, India…So we’re very bullish on the fact that there will be manufacture all around the world. Global trade will certainly increase, although it’s been a little choppy here for the last few quarters. And that will require air freight. And that’s perfectly in our sweet spot.” (UPS)

Depreciation is real, especially in some industries:

“the issue that you have with [recycling] glass is that it more than any other commodity it hurts your equipment, right? As you process the glass it puts a lot of wear and tear on the equipment.” (Waste Management)

The metric system could probably make financial analysts lives easier too:

“the stocking in France, we said in the annual call that it was around 250,000 hectoliters.” (Heineken)