Company Notes Digest 7.29.16

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: No One Ever Called This Expansion

Although there are a lot of reasons to be more optimistic about the global economy, CEOs this week found plenty of reasons to be pessimistic too. Even the companies that felt like they were executing well cited a slow economic backdrop, with “anemic” growth. At least it is growth though, and +1 feels good when you were running at -2 before.

Also in this week’s post, energy companies seem to be increasingly positive about the cycle despite the fact that oil prices have been sliding. Internationally, Brazil may be turning up, but China is still showing signs of weakness. Meanwhile, financial services CEOs are on the brink of tears over low interest rates.

The Macro Outlook:

Everyone’s pleasantly surprised by how the markets have performed post-Brexit

“I think we were all pleasantly surprised…by how the markets have performed post-Brexit…I think we’ve probably…settled down a little bit quicker globally than probably people originally anticipated given the surprise of the vote.” —Lazard CEO Ken Jacobs (Investment Bank)

A lot of people are finding things to be encouraged about

“Most recent data on the U.S. economy continues to be encouraging. Consumer spending remains strong and job creation, wage growth and unemployment trends point to a steady growth environment, although more likely in the 2% GDP growth range as opposed to the 3% plus that we would all like to see.” —United Technologies CFO Akhil Joori (Industrial)

But no one ever said this was an expansionary environment

“I don’t think we’ve ever referred to this environment as being expansionary. And the way I would describe the overall performance and why we say strong: if you take a look at the cash we generated, if you take a look at the operational margin rate improvement” —Honeywell CEO David Cote (Industrial)

It’s just that +1 feels good when you were running at -2

“I sure hate to brag about a sales number that’s around zero, but…the reason it feels better is we were plus 1% organically. For the whole company, we were plus 2% on a volume basis. And the quarters before that, four or five quarters before that, organically, we were kind of running a negative 2%.” —Du Pont CEO Ed Breen (Chemicals)

Confidence is still weak in many areas

“When we were sitting here a quarter ago, we were expecting sales in a range of $40 billion to $42 billion…We’ve taken that down…And the gist of that is just everything that we’re seeing in the economy today around the world…It’s not any one thing, I would say…we have sluggish economic growth throughout the world in general, but not enough to drive growth in our end markets. And the news we’ve seen over the last few months is definitely not giving us more confidence.” —Caterpillar VP Michael DeWalt (Construction)

Starbucks noted a “profound” weakening in consumer confidence

“What we did not and could not have fully anticipated was the profound weakening in consumer confidence in [Q2] that has caused sharp declines in QSR and restaurant traffic overall and has many of our competitors struggling with negative transaction comps…Starbucks is not immune to macro challenges that impact our competitors and retail overall.” —Starbucks CEO Howard Schulz (Beverages)

McDonalds cited a broad level of uncertainty among its customers

“clearly, it’s been fairly well documented on the consumer slowdown across most consumer segments…We’re not immune from what’s happening in the outside world…I think generally, there’s just a broader level of uncertainty in consumers’ minds…people are slightly mindful of an unsettled world. And when people are uncertain, when families are uncertain, caution starts to prevail and they start to hold back on spend.” —McDonalds CEO Stephen Easterbrook (Restaurants)

Venture Capital markets are still soft

“[capital raises] were dominated by a small number of very large rounds to late-stage private companies. At the same time funding to early stage startups…Concern over late-stage valuations and uncertainty in the markets continue to weigh on IPO prospects…As you can hear from our remarks our innovation market is still a little bit soft.” —Silicon Valley Bank CEO Greg Becker (Bank)

Hotel developers are slowing down their pace of construction

“I think in some respects that in a somewhat weaker market…we see that the construction pace has been expanding just a little bit. We are not seeing cancellations of projects however and I think generally what we’re talking about is projects that formally we would have expected to open probably in the fourth quarter of the year opening some time in 2017.” —Marriott CEO Arne Sorenson (Hotels)

There are signs that hiring has slowed

“clients remain cautious. There’s less sense of urgency…the U.S. economy is slugging along in the 1% to 2% GDP path that it has for some time, but as clients have gotten more cautious, our growth rates have slowed.” —Robert Half CFO Keith Waddell (Temp Staffing)

The industrial economy continues to weaken

“We’re seeing cautious customers, and a general reluctance to invest capital across most of our end markets…it really seems like the last six months things have slowed a little bit. I mean, again, it’s not dramatic, and I’m not predicting anything to fall off a cliff. But definitely in the last six months the environment has got a little softer from my standpoint rather than better” —Graco CEO Pat McHale (Industrial Components)

In some cases, business is down almost as much as it was in the Great Recession

“We were actually down 29% in the Great Recession. Excluding acquisitions, we are currently down approximately 20% from the rebound level. So, we’re not where we were in 2009, but we’re probably within about 10% of where we were in 2009 from a pure volume perspective…So, those numbers are in line with what we would have seen since 2009.” —Lincoln Electric CFO Vincent Petrella (Welding Tools)

Growth may be anemic, but at least it’s positive

“you will not be surprised that U.S. economic growth has been slower than we anticipated when the year began…I think as we guided a quarter ago we had an overly rosy view about the strength of GDP in the United States…But it is still positive GDP growth… when you look at the range of economic data that comes out including recent employment reports and consumer confidence reports and corporate profits and some of those sorts of things, it looks to us like it’s a reasonable good bet that the economy will continue to grow, albeit grow maybe somewhat anemically.” —Marriott CEO Arne Sorenson (Hotels)


So far companies aren’t seeing much impact from Brexit

“As I said, we have no strong signs of Brexit so far.” —Volvo CEO Martin Lundstedt (Automobiles)

Trade is functioning as usual

“Trade is still occurring and we’re executing for our customers. While the UK has new leaders in place, trade in some form or fashion will continue regardless of the direction that new government takes, so we aren’t really concerned from that perspective.” —CH Robinson CFO Andrew Clarke (Third Party Logistics)

Brexit isn’t causing any changes in strategy

“There is no reason for us to change the strategy in Europe based on the outcome of the Brexit. No reason for us to do that.” —3M CEO Inge Thulin (Industrial)

Deutsche bank intends to let clients guide them where they need to be

“We basically view this as something that will essentially be client-driven for us. So we wouldn’t intend to do anything ourselves other than we have to respond to our clients’ requirements…if our Eurozone clients in particular increasingly want us to be facing them from locations within the Eurozone, if that proves to be the case, then we are reasonably well-positioned” —Deustche bank CEO John Cryan (Bank)

Export oriented companies benefit from the weak pound

“With the recent weakening of the pound, exchange is forecasted to be a significant tailwind in fiscal 17.” —Diageo CFO Kathryn Mikels (Beverage)

“A weaker pound benefits our core earnings, not just through a stronger topline, but also in the operating leverage across the businesses. We continue to have a higher proportion of our costs in the U.K. than revenues.” —Glaxo Smith Kline CFO Simon Dingemans (Pharmaceuticals)

The British economy is really only a small portion of global GDP anyways

“the British economy is probably about 4% of the global GDP, so even if there’s a wobble inside that economy, it’s going to be really hard for us to be able to detect it.” —Texas Instruments (Semiconductors)

There may be some signs that Brazil is turning up

“I was on the phone with our guy who runs Brazil last week, and I think there are some early signs of optimism perhaps there that they’re expecting things to be a little bit better in 2017. And so we’ll see.” —Kimberly Clark CEO Tom Falk (Consumer Goods)

“In Latin America, specifically South America, Brazil, we’ve seen it flatten out now, no more downward pressure. It certainly seems to be maybe the Brazil is bottoming out” —Axalta CEO Charles Shaver (Paint)

“Brazil is still in a deep recession but interestingly, a modest increase in business confidence is beginning to show signs that the economy may be reaching a bottom.” —Mastercard CEO Ajay Banga (Payments)

The Chinese consumer may not be as strong as advertised

“China…no question, the overall consumer environment is weakening due to the economy’s economic transition… We always knew that for a country as large as China, transitioning to a consumer-led economy was going to have its challenges. Those may have turned out to be more than we expected in the short-term…[there are] strong affordability needs across the rural and blue-collar areas” —Coca Cola COO James Quincey (Beverage)

“We face some challenges in Greater China, as the economic environment has slowed down since the beginning of the year. This is reflected in consumer confidence and retail spending” —Apple CEO Tim Cook (Consumer Electronics)

Nothing is as bad as Venezuela though

“In Venezuela, severe shortages in certain raw materials resulted in us temporarily suspending production at the bottling partners’ plants during the quarters…the most extreme example perhaps is Venezuela, where there was no sugar.” —Coca Cola COO James Quincey (Beverage)


Low interest rates are bringing financial services CEOs to tears

“we have continued low interest rate environment around the world and it’s really gotten to the point that it could almost make your eyes tear.” —WR Berkley CEO Robert Berkley (Insurance)

Customers are trying to cut fees as much as possible

“Faced with political and economic uncertainty, historically low interest rates, and full equity valuations, asset allocators continue to move wealth into high capacity, low fee products” —Artisan Partners CEO Eric Colson (Asset Management)

In turn, the industry is trying to cut costs

“I would say financial services clients…are more focused on controlling their cost than any other sector” —Robert Half CEO Harold Messmer (Temp staffing)

Ultimately you have to accept that the investment environment is what it is

“15 or 18 years ago I wrote a memo called that is what it is, in which I said the investment environment is what it is, if we give in, we can’t change it and we can’t order up the new one, we have to work within it and this investment environment offers us lower prospects than ever…10-15 years ago 10% looked like a modest accomplishment, now it looks like nirvana… you have to be modest about your expected returns and modest about the amounts you can manage. The one thing you can’t do is say well, the capital market line is lower but I want the same returns I used to get with the same risk on the same amount of money.” —Oaktree Chairman Howard Marks (Asset Management)

But many investors have actuarial liabilities to worry about

“As you know, lower discount rates could have a significant impact on our pension expense for 2017 and beyond…as a reminder, every 10 basis points change in the discount rate is around a $30 million profit impact.” —United Technologies CFO Akhil Joori (Industrial)


In the future all food will be delivered

“we’re expanding our delivery business by tapping into growing digital channels, as well as other vendors, to offer added convenience to Chinese customers.” —McDonalds CEO Stephen Easterbrook (Restaurant)

“This is a unique opportunity for our brand and Buffalo Wild Wings was ranked fourth behind pizza and sandwich concepts as the company consumers most wanted delivery from…We have begun delivery in two restaurants and plan to diligently test and evaluate this opportunity.” —Buffalo Wild Wings CEO Sally Smith (Restaurant)

“We’ve come to believe delivery is the Usain Bolt of initiatives at Panera. It’s powerful, it moves very quickly and it’s getting out of the blocks fast…There are going to be a lot of people that view delivery as, shall I say, an opportunity to hop on the newest flavor of the month…and they will do modestly in it…There are others that are going to go at it in a mass-market way as Panera is” —Panera CEO Ronald Shaich (Restaurant)

Social Networks are running out of opportunity to increase ad load

“we anticipate ad load on Facebook will continue to grow modestly over the next 12 months, and then will be a less significant factor driving revenue growth after mid-2017. Since ad load has been one of the important factors in our recent strong period of revenue growth, we expect the rate at which we are able to grow revenue will be impacted accordingly.” —Facebook CFO David Wehner (Social Network)

“while the incremental benefits from ad load itself are more limited given where we’re at, there is a significant opportunity to increase yield over time by driving improvements in targeting, creative and measurement that Adam talked about.” —Twitter CFO Anthony Noto (Social Media)

Pokemon Go found its way to a number of conference calls

“On Pokemon Go, if you’re interested, unfortunately the average utilization of data of one hour of you chasing the monsters, so whatever you call them, is only 20 megabyte per hour. So, while it is a great thing to talk about and to do from a usage perspective, Pokemon Go will not change the future of Vodafone but we are all very amused by this thing.” —Vodafone CEO Vittorio Colao (Telecom)


The machines are learning deeply

“We’ve been piloting robotics and machine learning processes to automate work and eliminate repetitive manual tasks.” —Bank of New York Mellon CEO Gerald Hassell (Trust Bank)

“We’re also using machine learning in many other ways across our products and services, including recommending songs, apps, and news…Deep learning within our products even enables them to recognize usage patterns and improve their own battery life.” —Apple CEO Tim Cook (Consumer Electronics)

“We’ve been applying a lot more machine learning and deep learning to our on-boarding, so we can match people faster to their interests.” —Twitter CEO Jack Dorsey (Social Media)

“This quarter, we announced DeepText, a deep learning based engine that can understand the context of several thousand posts per second across 20 different languages.” —Facebook CEO Mark Zuckerberg (Social Media)

“we’re investing in…hiring very talented data scientists to help us take advantage of this. And then you think you move on from the structured data that we have to the unstructured data, and that’s a language processing and, where we can move the needle there is, again, something for the future that I’m very excited about” —HCA CEO Milton Johnson (Hospitals)

Du Pont’s scientists are using CRISPR to develop new products

“Our scientists today are utilizing the newest technologies like CRISPR-Cas gene editing to develop targeted applications to deliver enhanced solutions and greater choice for our customers.” —Du Pont CEO Ed Breen (Chemicals)

Smartphones sales are going to slow

“As far as the, how do we stimulate phone, smartphone growth? Look, I’ve been saying for over a year now that smartphone growth is going to continue to slow. And we have to look at other areas for that growth” —Verizon CEO Lowell McAdam (Telecom)

Global smartphone penetration is still only 42% though

““The iPhone demand is made up, as you know, of upgraders, switchers and new to smartphone. And so if you take it in reverse order for a minute and look at a new smartphone, smartphone penetration right now around the world at the end of December was 42%. ” —Apple CEO Tim Cook (Consumer Electronics)

Materials, Energy:

More oil companies are talking about seeing the bottom of the cycle

“In the second quarter, market condition worsened further in most parts of our global operations. But in spite of the continuing operational and commercial headwinds, we have now reached the bottom of the cycle.” —Schlumberger CEO Paal Kibsgaard (Oil Service)

Companies are counting on demand to push prices back up

“I still see the demand side…maybe 1.2 million to 1.4 million barrels per annum of additional demand. It will be a demand recovery, not a supply recovery.” —Anadarko CEO R. A. Walker (Oil and Gas)

Recent oil price weakness is largely being written off

“Over the last quarter, we have seen oil prices strengthen in anticipation of this rebalancing, with some weakening primarily due to the strong dollar in the last week or so. The longer-term fundamentals for the industry also remain robust.” —BP CEO Robert Dudley (Integrated Oil)

Companies are penciling in $60 oil

“I am now encouraged that a sustained $60 oil price environment is likely to emerge as we move into 2017. This price level should provide the necessary cash margins and resulting cash cycle improvements to encourage us to accelerate activity and achieve strong returns. In this scenario we would evaluate redeploying some of the incremental proceeds from asset sales towards our highest quality U.S. onshore assets later this year” —Anadarko CEO R. A. Walker (Oil and Gas)

Oil service companies may benefit most from an improving environment

“the current cost per barrel for the oil producers now appears to be significantly lower than what was the case seven quarters ago. However, this should not be confused with a permanent improvement in the underlying industry performance as there has been little to no fundamental change in technology, quality or efficiency…What has taken place over the past 21 months is, instead, a redistribution of the profit and cash flow shortfall from…oil producers to…the supplier industry…the market is also underestimating the potential reaction from the supplier industry, which has temporarily accepted financially unviable contracts to support the operators…It also means that, inevitably, service industry pricing has to recover” —Schlumberger CEO Paal Kibsgaard (Oil Service)

Miscellaneous Nuggets of Wisdom:

Curiosity and courage drives innovation

“To be among the world’s most respected and enduring companies, we must constantly look around corners and let our curiosity and courage drive innovation. With this mindset and purpose, I have no doubt we can continue to grow the company sustainably, and in ways that will continue to make us all proud.” —Starbucks CEO Howard Schulz (Beverage)

Things that really create value take hard work and perseverance

“I found over the many years in building Capital One, just about anything that’s really value creating involves digging a hole before the benefits come. If it weren’t that way, everybody would rush in and do it and actually would kill the opportunity.” —Capital One CEO Richard Fairbank (Bank)

Full transcripts can be found at