Company Notes Digest 7.8.16

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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: Implications of Brexit

It’s another light week for earnings, but reports will begin to pick up soon as earnings season kicks off officially next week. There were some interesting quotes though, including statements from MSC Industrial that conditions continued to slow through June. There were also some early reactions to Brexit. However, the consensus is that it’s too early to tell what the impact will be.

For what it’s worth, I attended a wedding outside of London last week and the political-mood was dour. The wedding was between two Oxford alums, so the guests were mostly well educated millennials. Almost everyone who gave a toast cited the “uncertain times” that we live in. The tone of the conversations that I had were pretty similar to what one might expect to hear in the US if Trump were to be elected in November (disbelief and distress). One cab driver that I had said that he might as well “light himself on fire” because “it would be less painful than the slow death his business will suffer” as a result of the vote. Still, hopefully any British readers can take solace in the fact that Britain has seen much worse times than these. Everything will turn out ok. It may just be a bit of a painful transition.

The Macro Outlook:

MSC Industrial said that conditions have continued to grow more challenging through June

“Conditions remained quite difficult and in fact grew even more challenging as we progressed through our fiscal third quarter and into June. On our last call, we described a tough environment. And in talking to our customers and looking at the macro indices, commented that we saw the potential for some stabilization on the horizon. Unfortunately, that did not materialize and in fact things weakened…I mean I can just anecdotally tell you that for the month of June, what we heard from customers and particularly, what I heard from some of our key supplier partners that June was a really bad month.” —MSC Industrial Direct CEO Erik Gershwind (Industrial Distributor)

The company also said that ISM has not been an accurate gauge of manufacturing for the last several years

“The ISM, I would tell you that it’s been – to be honest we sort of scratched our head at the latest reading. But I think we have been – we and the rest of the industry have been scratching our head at the readings over the last several years, so really not surprising.” —MSC Industrial Direct CEO Erik Gershwind (Industrial Distributor)

Still, this year’s macro environment has been more stable than many companies expected

“When we give guidance, our intention is always to hit it and perhaps beat it. Now that we’re halfway through the year, I think we’ve seen two things. One, the macros are operating in a consistent steady way, so there has not been a deterioration, which, obviously, is to our benefit relative to our expectations.” —Pepsi CEO Indra Nooyi (Snack Food)

Labor markets have tightened

“I’ll close by saying, and maybe preempt some other questions on labor, is that labor market is tight and it continues to be tight in specific markets, which is driving a little bit more inflation…We’re seeing 2.5% to 3.5% wage inflation depending on where we are.” —Darden CEO Gene Lee (Restaurants)

International:

Everyone is trying to understand what impact Brexit will have on the global economy

Most agree that it’s too early to tell

“The situation is very volatile at this time. For sure, the period of uncertainty will be quite long whatever happens because even if the U.K. will leave the Euro, it cannot happen overnight, it will take at least two years. And the consequence of it will be much longer than two years. So, I believe that once the emotional impact is gone, things will settle down and we will have an idea of what is happening, but for now really — it’s really too early, too soon we have seen in the stores days — very good days, bad. So in a few months probably we will be able to say something.” —Walgreens Boots Alliance CEO Stefano Pessina (Pharmacy)

It’s probably a net negative

“I think post Brexit…I mean I think like everybody else, our customer suppliers kind of scratching their head, not sure exactly what to make of it, so a lot of uncertainty. Look I think the general sense though is net-net a negative, not a positive and that it creates a headwind given both the potential for the stronger U.S. dollar, which hurts exports and then the potential for weakening underlying European demand that would also hurt exports. So, I think the sense would be net negative, but uncertain as to how big of a headwind and how much to make of it.” —MSC Industrial Direct (Industrial Distributor)

But many expect that Brexit wont have much impact at all

“Brexit has no immediate impact on our business and it has not reduced our appetite or interest in Europe. The UK is a relatively large part of our business and in the end British consumers will still want the same products and services.” —Liberty Global CEO Mike Fries (European Cable Company)

For now the obvious impact is on currency values

“Regarding last week’s referendum outcome on Brexit, the immediate impact to our business will be currency rates. Early this week, we reevaluated our guidance and determined that a 3% impact from currency is our best estimate at this point in time. Any longer term impact on our business will depend in part on the outcome of tariff, trade and regulatory negotiations. As a point of reference, our sales in the UK were 8% of total company sales in fiscal 2015.” —McCormick CFO Gordon Stetz (Spices)

Rest assured that Britain will endure

“The UK can handle change. It has one of the most flexible economies in the world and benefits from a deep reservoir of human capital, world-class infrastructure and the rule of law. Its people are admired the world over for their strength under adversity. The question is not whether the UK will adjust but rather how quickly and how well. Nonetheless, the decision to leave the European Union marks a major regime shift. In the coming years, the UK will redefine its openness to the movement of goods, services, people and capital. In tandem, a potentially broad range of regulations might change. Uncertainty over the pace, breadth and scale of these changes could weigh on our economic prospects for some time. While some of the necessary adjustments may prove difficult and many will take time, the transition from the initial shock to the restructuring and then building of the UK economy will be much easier because of our solid policy frameworks.” —BOE Governor Mark Carney (Central Bank) [special thanks to Erick Mokaya for contributing these notes. Other contributions are welcome!]

Financials:

A 3% yield is a good dividend yield in this environment

“it’s interesting to Google dividend stocks because as you see interest rates so low and returns so low, more and more capital is seeking higher yields, we think a 3% yield is an attractive yield in today’s market.” —Greenbrier Companies CEO Bill Furman (Railcars)

Consumer:

The beverage market has fragmented, which means that controlling distribution is even more important

“Now, let me just say, the marketplace is fragmenting. Forget Pepsi or Diet Pepsi or the cola category, any new category that’s expanding is becoming niche, more fragmented. And that’s why it was important for us to own the distribution system because once you have control over the distribution system, you can pump a lot of niche products through it, all our craft products, all of those are low-volume products. So we have to learn how to handle complexity, not walk away from it.” —Pepsi CEO Indra Nooyi (Snack Food)

Free shipping is a promotion like any other

“we look at free shipping as just being one of the promotional offers which we can use and we try and balance free shipping along with all the other. I mean free shipping is just another discount and we just look at it alongside all the other discounts opportunities that we have.” —Pier One Imports CEO Alexander Smith (Home Furnishing)

There has been a rise in “sport culture” throughout the world

“we are all seeing the growing power of sports. Participation is increasing all over the world. People are leading healthier, more active lives. At the same time, the rise in sport culture is bringing fitness and style together. Profoundly influencing what we all wear everyday.” —Nike CEO Mark Parker (Apparel)

Technology:

Micron was optimistic about improvements in channel pricing of DRAM

“With recent data points indicating some improvement in channel pricing…we remain confident about our opportunities.” —Micron CEO Mark Durcan (Semiconductors)

Materials, Energy:

Have commodity prices finally bottomed?

“after more than two years of strong declines commodity prices appear to have reached the bottom during the first quarter of 2016.” —Star Bulk Carriers CEO Petros Pappas (Dry Bulk Shipping)

Miscellaneous Nuggets of Wisdom:

You can learn a lot by visiting the companies that you are investing in

“I spent a full day at Pixar thanks to Steve Jobs and John Lasseter and Ed Catmull when I had broached to Steve the idea of buying Pixar. We began a conversation and I said, “I need to spend a day there. I need to go into the tent for a day.” And he said, “Absolutely.” I went completely alone. I didn’t have a piece of paper and a pen. I had nothing to take notes on. I met every director; they each pitched me seven or eight films. I met everyone. And my takeaway was that there was a culture there that was extraordinary. And that the worst thing that we could do as a company would be to destroy or damage it in any way.” —Disney CEO Bob Iger (Media)

Keep your focus on your own performance rather than the performance of others

“I won’t speak for the entertainment industry. I speak for Disney. I’ve seen people in the industry come to work every morning paranoid about what the other person or other company is doing. That means you’re spending time and focus on somebody else’s business instead of your own.” —Disney CEO Bob Iger (Media)

Full transcripts can be found at www.seekingalpha.com