Company Notes Digest 7.31.15

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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.

The Macro Outlook:

Who the heck knows where we are in the cycle?

“in terms of the bigger, in terms of where we are in the cycle, who the heck knows?” —Kilroy (Commercial Real Estate REIT)

There’s lots of uncertainty out there

“The global economy has never been as uncertain in my recollection. Not that there’s a huge crisis here, but there’s lots of uncertainty” —WR Berkley (P&C Insurance)

There is plenty to worry about

“this relative tranquility belies the fact that there’s still plenty to worry about. The U.S. economic recovery remains tepid. Interest rates are poised to rise sometime in the coming year, and the global economic environment is quite unsettled with the overhang of the Greek debt crisis and a slowing Chinese economy.” —Oaktree (Asset Management)

UPS saw softening in the US economy

“The U.S. Domestic business is on track with its revenue management and efficiency gains; however, we are seeing some softening in the economy…We think the economy was certainly slower for sure.” —UPS (logistics)

Visa sees very little improvement in the US Consumer

“we continue to see very little change in the overall global economy, with a few exceptions. We are hopeful, but not counting on an improvement in the US economy, but we see very little improvement with the US consumer in our numbers thus far, if any.” —Visa (Payments Processing)

But Mastercard sees a healthy environment

“Overall, the environments in the U.S. and Europe have continued to improve, as key economic indicators remained healthy. But the U.S. consumer is still not spending all of their gas savings….in July through the 21st. Most of our business drivers are showing a higher growth rate compared to what we saw in the second quarter.” —Mastercard (Payments Processing)

Demand for polyolefins has been strong

“I mean at this point we still see demand as being relatively strong…demand has grown through the first half year over year in polyolefins globally in the 3% to 4% range. And the U.S. demand growth has been quite strong as has Asia” —Lyondell Basel (Chemicals)

PACCAR saw strong demand for trucks

“PACCAR delivered 41,600 trucks during the second quarter, an 8% increase versus the first quarter this year and slightly ahead of our expectations. The improvement reflects increased truck deliveries in North America and Europe due to economic growth and strong freight demand.” —PACCAR (Truck Manufacturer)

Marriott says that it doesn’t see RevPAR growth slowing any time soon

“Undoubtedly a slower pace of RevPAR growth is likely to occur at some point in North America as economic growth matures. Trees don’t grow to the sky…While this slower pace is likely at some point, we think it is premature to call it today. Based on our data, we believe North American industry RevPAR growth will be solid for the foreseeable future” —Marriott (Hotels)

Last quarter Steve Wynn warned about Las Vegas, but now says it’s “comfortable”

“In Las Vegas, we’re enjoying a comfortable business, I think is the right word for it. It’s not an aggressive growth by any means, but we are enjoying non-casino revenue that is acceptable.” —Wynn (Casinos)

Labor markets are tight, especially for skilled professionals

“revenue growth rates were the strongest in the United States, where skilled professional talent is currently at a premium as a result of the tightening labor market.” —Robert Half (Temp Staffing)

We’re starting to see the development lights come back on

“we’re starting to see the development lights come back on. If you look at the Urban Land Institute at their most recent meeting, there were a lot of developers there starting to talk about opportunities, growing their business, capital flows coming into their businesses and that sort of thing.” —Plum Creek (Timberland)

We’re six years into the recovery, but can it last longer?

“I think we’ve got some apprehension as a marketplace, in part maybe driven by the fact that we’re in the sixth year of a strong lodging recovery. I think all of us kind of wonder how long can it last and we’re constantly looking for clues that maybe we’re reaching a point where we can somehow say that we’re transitioning to a different phase, and I understand that.” —Marriott (Hotel)

International:

The Canadian economy has slowed more than the American economy

“The general economy in Canada has been more sluggish than what we’ve seen in the U.S. I think what Canada is facing, is people probably understated the impact of the energy complex cutback on capital expenditure. But we don’t see Canada in a recession. We see Canada in a technical slowdown that happened to take place for the first six months of the year.” —Canadian National Railway (Railroad)

Don’t expect Chinese construction markets to rebound any time soon

“it’s obvious I think that the Chinese economy is going through a change and their governments are very serious about making this change. So, I don’t I’m not optimistic that we are going to see a big pump up in any of our end markets in a hurry because I think that Chinese government is going to try to keep going on this change of their focused in the government not so much on infrastructure and not so much on build and export a little bit more on consumer and a little bit more disciplined in the provinces” —Cummins (Heavy Duty Engines)

Most people seem to expect that the effects of the strong dollar are temporary

“The stronger dollar has slowed U.S. lumber and log exports, and more Canadian supply has been directed towards U.S. markets. This, combined with slow demand growth, put pressure on lumber prices. Our customers recognize these market forces as temporary and remain committed to their investment plans” —Plum Creek (Timberland)

Financials:

Oaktree says that outside of commodities, high yield companies are doing fine

“apart from the weakening commodity and energy sectors, the credit fundamentals of the high yield bond market remain sound. Issuers of the bonds held in our funds in that strategy continue to post top line growth and solid EBITDA gains.” —Oaktree (Asset Management)

Moelis said that the restructuring market will eventually pick back up, we just don’t know when

“there’s certain sectors where you’re starting to see some volatility and that could help, but in general, very low interest rates, kind of a decent economy, I think is — I don’t see a short term reason why [the restructuring] market would pick up, but I know from being alive in Wall Street for 35 years, it will. I just don’t know when.” —Moelis and Co (Investment Bank)

One area of stress is in Taxi medallion loans

“We built allowance over the last three quarters in anticipation of increasing risk in oil and gas and taxi medallion loans.” —Capital One (Bank)

Consumer:

Whole Foods played the victim card on its conference call

“It’s just something that went viral in the media, and it has hurt our trust and yet, we do feel like we’re victims of – we don’t know exactly why the DCA went after Whole Foods like this, and we’re not sure why the media went crazy with it, but it did happen. We are taking steps to not give cause for this in the future.” —Whole Foods (Grocery)

This analyst was pretty unhappy with P&G’s management

[*Analyst Comment*] “So you sound very different than I would have hoped on the call today or on CNBC this morning. There’s still a lot of defiance. There’s still a lot of confidence, it feels like. And look, all the frustration we’re all feeling, I feel as well probably times 10. You’re kind of brushing off the tough questions and maintaining this trust us, it’ll turn, it’ll turn. But just let me offer you a look through the lens of a shareholder, right, who you are as well. And you see what the stock price has done, and you look at organic sales growth and it’s dismal and it’s getting worse” —Procter and Gamble (Consumer Packaged Goods)

There are a lot of new retail entrepreneurs and they are much more sophisticated than they used to be

“the amount of new concepts and new entrepreneurs coming into our environment is at a high… the new retailers we are dealing with is that they are substantially more sophisticated than the crop of new retailers we dealt with say 10 years ago, better financed, much more focused on their niche and it’s been much easier to deal this new crop of entrepreneurs than might have been the case.” —Simon Property Group (Mall REIT)

The pace of expansion in B2C shipping has slowed, but secular trends are still in place

“The pace of B2C expansion continued slowing, while B2B gains were due to omni-channel and return services in the retail sector…I think the secular trends are still in place” —UPS (Package Logistics)

Technology:

Last quarter was the largest for venture funding since 2000

“This was the sixth consecutive quarter of more than $10 billion of venture capital invested in a single quarter and the highest quarter of investing since 2000.” —Silicon Valley Bank (Bank)

The competitive environment in the Bay is heated

“The competitive environment remains heated. Strong funding and exit markets have increased the amount of liquidity in the markets and borrowers have money options. As a result some vendors up here are willing to go to any length to win business regardless of whether that risk justifies that return.” —Silicon Valley Bank (Bank)

San Francisco is running out of office space

“San Francisco Bay area is once again on pace to outperform most U.S. real estate markets in 2015. In San Francisco, rental growth remains strong. The supply of large blocks of space is very limited and demand continues to grow. JLL reports that there are now more than 35 tenants in the market for office space greater than 50,000 square feet and only three available blocks of space of that size…one thing about San Francisco remember it’s 45 square miles, a share less than 10% can be developed for non-residential…you have this incredible kind of economics 101 of supply demand imbalance… So rents I think are going to continue to go up” —Kilroy (Commercial Real Estate REIT)

Amidst the fervor, two high profile internet stocks had tough quarters

It’s not a good sign that Yelp’s chairman is stepping down

“I would like to take a moment to thank Max Levchin, Chairman of Yelp who has decided to step down from the board to pursue other interests. Given the demands on his time, we have mutually agreed this is the right time for him to transition off the board. Max provided the seed capital to start Yelp and I am forever grateful for all of his contributions and wish him all the best going forward.” —Yelp (Small Business Reviews)

And it’s also a red flag when people don’t use your product because they don’t know why they need it

“The number one reason from our market research that users don’t use Twitter because they don’t understand why to use Twitter. They don’t understand the value that Jack and I both talked about and we need to clearly communicate what that value is.” —Twitter (Micro-Blogging)

Perhaps those are company specific, but even Facebook is expecting its revenue growth to slow

“Since the first quarter of 2014, we have seen year-over-year advertising revenue growth rates decline each subsequent quarter. We expect this trend to continue in Q3 and Q4 as we continue to grow off a much larger base and face currency headwinds due to the strong dollar.” —Facebook (Social Media)

Meanwhile, the “unicorn bubble” is driving up the cost of good engineers

“As to the unicorn bubble question and we certainly are feeling those impacts…the cost in a couple of these areas have gone up, in particular, product and development as a percentage of revenue continued to creep up and that’s a function of compensation in the marketplace.” —Yelp (Small Business Ratings)

What will happen if valuations fall and stock based compensation goes with it?

“We continue to expect stock-based compensation in 2015 to be in the range of $3 billion to $3.3 billion, approximately half of which is related to our prior acquisitions, most notably WhatsApp.” —Facebook (Social Media)

Not everyone is going to survive

“We’ve always said, there is going to be some failures, the nature of — it’s just like baseball. Not everybody gets up and it’s a homerun and not every team with a winning season wins every game. I don’t mean to be cute here, except for there are going to be companies that fail, this is the nature of it…I think if anybody thought that all these companies are going to survive, they’d be smoked at some point.” —Kilroy (Commercial Real Estate REIT)

People are consuming more and more data

“we continue to see data growth per handset to be significant. And it’s been running at kind of the 50% year-over-year increase for a while.” —AT&T (Telecom)

Data use could explode as more people move from linear TV to Over-the-top

“Typical subscribers watching OTT video delivered across the Akamai platform could consume 10 megabits per second or more of traffic while they’re watching. This means that an audience size of only 5 million users, which is the equivalent of about four Nielsen points, could generate 50 terabits per second of demand, far more than we deliver today for all of our customers combined.” —Akamai (Content Delivery Network)

Middle market companies have increasingly complex IT staffing needs

“Middle market accounts, we’re seeing more complex IT staffing needs that have been the case in the recent past and with that there is demand for mobility, cloud, security, app and web development, data analytics, the type of demand you typically have seen only at larger companies.” —Robert Half (Temp Staffing)

Materials, Industrials, Energy:

National Oilwell Varco sees energy markets stabilizing

“Pricing appears to have stabilized across North American markets as the rig count has more or less stabilized…There’s a lot of conversations underway around land rigs. And I think generally, our land rig customers are much more optimistic about recovering commodity prices driving higher levels of activity.” —National Oilwell Varco (Oil Services)

Lower prices are leading to better than expected gasoline demand

“we certainly expected some price demand elasticity for gasoline with the fall in flat price. And we’ve seen that, and we didn’t really know exactly what the magnitude of the pent-up demand would be. And it’s been a very pleasant surprise, and I think we do expect that that response will continue into the future.” —Valero (Oil Refinery)

But supply has been surprisingly resilient despite the drop in rig count

“I think we’ve been surprised with the decline in rig count, production still seems to be holding.” —Valero (Oil Refinery)

That’s partially because producers are using the rigs that they have more efficiently

“we’ve driven our drilling cost down in the Wattenberg field by almost 35% in the last six months and doubled our rig efficiency over the last year, drilling the same number of wells with half the rigs…I think there is a lot of things we’ve done that are permanent…it’s not just price reductions from various service vendors” —Anadarko (Oil E&P)

And there could be plenty of pent up supply as companies are drilling wells and waiting to complete them

“because we have drilled the wells, we are going to have a significant uplift in what we would call the DUCs, the drilled but uncompleted. We went in last quarter saying we’d probably carry over 125 into next year and as we see it now, we’re probably going to do – carry over around 200” —Anadarko (Oil E&P)

High inventories (coupled with refinery maintenance) could also keep pressure on oil prices in the back half of the year

“We’re sitting on a pretty good overhang of crude oil inventory here in the U.S. We’re 90 million barrels above where we were last year. So with that overhang and then heading into a typical maintenance period where refiner demand is down, you would think that that would add pressure on the price of crude oil.” —Valero (Oil Refinery)

Sentiment has turned negative in the oil and gas space, but not negative enough quite yet

“The psychology is starting to turn negative, but it’s just beginning and we haven’t dived in yet by any means. We have a lot of dry powder and we are right now accessing opportunities that again are structured to basically minimize the risk. But we also want to take advantage if now happens to be in retrospect the right time to step in for part of the opportunity. So our instinct is that it’s not time to dive into the water completely, but it is time to take advantage of low oil prices and gas prices.” —Oaktree (Asset Management)

Amazingly, it’s still a seller’s market for assets

“we see time and again, people coming in there and buying things at prices that surprise us. I will also say that we’ve been – we fought fairly aggressively on a couple of things and were bid or rather were outbid by 2X. So to Bob’s comment, it seems to be a seller’s market” —Anadarko (Oil E&P)

Arch Coal says that a lot of smaller mines in Central Appalachia are probably closing for good

“From what I’ve seen in Central App, a lot of these mines that are closing, particularly the smaller ones, I think are going for good. And the cost to reopen them, I think, is going to be very difficult when you look at regional natural gas pricing.” —Arch Coal (Coal)

Cliffs’ CEO doesn’t seem to have the highest opinion of investment analysts

“Spreadsheet specialists and computer screen wizards do not know a good pellet from a bad one and have never built a pellet plant within a realistic budget and against a real tight timetable.” —Cliffs Natural Resources (Iron Ore)

He is pretty entertaining though

“I know it’s a tough battle here; I knew coming in. I wasn’t even invited to come in. I came in because I wanted and the shareholders elected me to come here. But a difficult war like that will take a lot of difficult decisions and I’m ready to take them at the right time…You’re going to have to sit still, sit tight, and continue to see Lourenço in action, as you have seen for a long time at Metals USA and you are seeing for a year here. It will be fun to watch…Lots of people are looking forward to my – for Lourenço to crash to the ground. It’s not going to happen. Any other questions, Tony?” —Cliffs Natural Resources (Iron Ore)

Miscellaneous Nuggets of Wisdom:

Let your winners run

“when we see a positive surprise we double down on it. That’s kind of our policy” —Amazon (E-Commerce)

Only 2 out of 3 people check their smartphones first thing in the morning

“Two out of three smartphone users check their phone as soon as they wake up in the morning.” —Facebook (Social Media)

No matter how big you get, it pays to maintain a local feel

“I think the thing we have done really, really well and it’s quite a challenge is, how do you get big and stay small? How do you maintain intimacy and trust with your customers and your brand when you are as ubiquitous as Starbucks has become? And the way you do that is through local relevancy and the kind of product design and experience that we’ve now been able to create around the world.” —Starbucks (Coffee)

There’s no reason to be big just for the sake of being big

“our objective is to get better not bigger, and if getting bigger allows us to get better then that’s okay” —Anadarko (Oil E&P)

“big for the sake of big is not a thing that I subscribe to” —Wynn (Casinos)

Pay attention to the performance of the underlying company, not the stock price

“We don’t pay very much attention to our stock price per se, we pay attention to the underlying performance of the company, and those factors associated with performance that are within our control, which is why every week we grind on everything in this building from the use of every square foot of our real estate and our structures, to our plans for the future.” —Wynn (Casinos)

You can buy anything for a price, but 2+2 had better equal 5

“M&A is the kind of option that of course always exists. I mean for a price you can buy anything, I suppose, and some people find it in their mutual best interests to join up from time to time, because the net result is that two and two equals five. But really it has to be two and two equals five. If two and two equals four, it seems to me a lot of trouble for nothing. I’d rather build our own stuff.” —Wynn (Casinos)

Look forward, not backward

“I’m more interested about tomorrow’s newspaper than yesterday’s newspaper.” —Wynn (Casinos)

Full transcripts can be found at www.seekingalpha.com