Company Notes Digest 8.14.15

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:

It’s too early to claim victory, but there may be signs of economic improvement

“in terms of back-to-school, it’s way too early to claim victory, but we do feel good based on the early start” —Macys (Department Store)

Kohls saw some strength in back to school

“we have started see some strength in our back-to-school business as we have been through in August.” —Kohls (Department Store)

Even an industrial company noted positive progress

“if we look back at the quarter, I think month-to-month throughout the quarter, we saw modest positive progressions…It’s early in August, but we would see improvement” —Applied Industrial Technologies (Industrial Distributor)

Department store results were weak, but that may be because consumers are spending on other categories

“The overall growth in the economy is modest to best and we are seeing customers gravitating to restaurants, recreational services, healthcare and electronics rather than to traditional general merchandize apparel and furnishing category.” —Macys (Department Store)

Still, restauranteurs’ confidence may be slipping in the other direction

“Consumer confidence and the outlook of food service operators are at historically high levels, but have slipped somewhat in the summer months…Restaurant spend is up, but traffic is generally flat.” —Sysco (Food Distributor)

Quick Service Restaurants are bracing for increases in minimum wages

“the first labor increase will come in December. There’s no doubt it can take a toll on the entire industry.” —Shake Shack (QSR)

“It’s having a big impact. I will tell you one thing that people are all nervous about it…everybody is now, they know it’s reality and everybody’s trying to figure out a way of redesigning their kitchen.” —Middleby (Kitchen Equipment)

Higher medical costs are pressuring companies too

“the pressure of higher medical cost which I think is probably impacting most companies…we also expect a big increase in medical expense for the full year as well.” —Macys (Apparel)

The good news is that forex comps will start to get easier from here

“The overall economy didn’t do us any favors in the first half of the year. We look forward to the effects of the stronger dollar beginning to year around in the fourth quarter” —Macys (Apparel)

International:

Construction markets are very slow outside of North America

“I think North America, particularly talking about North America, I think we know we can cover the other regions but again I think the main activity in a world right now, construction land is in North America. Europe is doing okay, but I think the relative strength that we are seeing around the world will be primarily in North America.” —Caterpillar (Industrial Equipment)

Adecco sees strength in Europe, especially in manufacturing sectors

“The overall trend in all businesses in Europe has continued to become more positive…what you see now, it’s again a pickup of this activity, automotive, but also aerospace, retail. And I don’t know if we have already mentioned it also in this call the construction sector, which was the biggest segment of this industry in France, went down dramatically and now has stabilized.” —Adecco (temp employment)

Nestle saw some growth in China, but was understandably cautious

“if you look at the last three months we were having mid-single-digit growth in China, which is good, which is satisfactory…That being said, I want to be careful. As you saw and as you read and as you heard over the last couple of days, there is a lot of volatility today in China. So we are satisfied with what we have seen…that being said, we are very careful about the outlook” —Nestle (Packaged Foods)

China was down 3% for Cisco, which was actually the best performance in eight quarters. Brazil was down 45%

“If we go through the five BRICM countries, Brazil actually was negative 45%. Russia was negative 38%. China was negative 3%, which actually was the best performance we’ve had in eight quarters. And we had some bright spots. India was plus 5%. Mexico was plus 26%, and Mexico had just a tremendous year in general.” —Cisco (Internet Infrastructure)

It sounds like Brazil is dealing with a pretty major recession

“I think the short-term for Brazil is a bit daunting…I think the political environment today is a bit rarified and we just have to live with that, as people worry about their jobs, they go out less… I think people in Brazil today are worried.” —Arcos Dorados (McDonald’s Franchisee)

South American economies may be weaker than in 2009

“we did not see as much weakness in 2009, we did not have the currency devaluation that we have seen right now, which are in some cases up to 30% and 35%. So we did not see that in 2009, there was uncertainty in 2009 but the economies were still growing, I don’t have all the figures on my mind right now, but the economies were still growing and actually 2010, 2011 were strong growth years for most of the economies in Latin America.” —Copa (Airline)

The Brazilian government is having to make tough decisions

“I believe that the Brazilian government is doing the right things at this time and taking some very brave decisions, including cutting spending, raising interest rates and that these will have good long-term effects, but certainly they’re very tough in the short-run, but I really commend their bravery” —AES (Power Generation)

Elections in Argentina could finally pave the way for a more positive environment in that country

“elections in October, the two leading candidates either one would be favorable. I think you’ll have a gradual return to market-based pricing and a lifting of the exchange controls…It is basically considerably developed country and quite wealthy. So, it’s again, I think it’s probably on the rebound at this stage.” —AES (Power Generation)

Financials:

It’s tough to find acquisitions that make sense even for a strategic buyer

“it continues to be an unbelievably floppy market out there and it’s very hard to find the right value creating opportunity.” —ICU Medical (Medical Device)

Consumer:

A hiccup in natural foods? Organic and Almond milk growth has slowed 

“organic milk volume growth at retail has decelerated the past five quarters. While the category is still experiencing positive growth, supply issues and retail prices appear to be capping at share of the category…like organic milk, the almond milk category has had similar deceleration in growth rates since early 2014. It also appears to us that almond milk maybe on its way to ending this growth cycle much sooner than soy.” —Dean Foods (Dairy)

For the first time ever consumers spent more money eating out than at grocery stores

“it’s the first time ever that sales, food sales at bars and restaurants surpassed sales at grocery stores according to the U.S. Department of Commerce. Big, big number for us, meaning people spending money eating out has now surpassed in actual dollars people buying food in grocery stores.” —Middleby (Kitchen Equipment)

For the first time Kohls will spend more money on digital advertising than print

“the fall season, for the first time we are going to be spending more money in digital than we are in print. That’s were our customers are doing their research, whether or not they purchase online from whatever device they are using, they are definitely using the research to make their purchasing decision. So that’s important.” —Kohls (Apparel)

Kohls sounds pretty satisfied with the performance of buy online, pickup in store

“BOPUS is the best thing that ever happened in e-commerce…you save the $5 to $6 per package that it costs to ship it to the house and we’re seeing attachment sales of about 20% to 25% depending on the time of the week” —Kohls (Apparel)

We live in an age of “promiscuity” and “disloyalty” towards content creators

“our advertisers can be confident that our readers have connection to our content that is particularly strong in its intensity and its affinity. Both of which are distinctive in an age of digital promiscuity and digital disloyalty.” —Newscorp (Media)

Technology:

What does it mean for core Google that Larry Page would rather spend his time elsewhere?

“Sergey and I are seriously in the business of starting new things.” —Alphabet (Conglomerate)

The Alphabet announcement was also probably a signal that the company wont be returning capital to shareholders

“We will rigorously handle capital allocation…We also like that it means alpha-bet (Alpha is investment return above benchmark), which we strive for!” —Alphabet (Conglomerate)

As Alphabet diversifies away from data, old media companies like Newscorp are just showing up to the data party

“We are not simply a collection of unique powerful assets. We are a company with complementary platforms. And what makes our businesses, so complementary, is how much they have in common; namely, the uncommon power of the news and content and their data, data about customers, businesses and markets that is global in scale and precise in its targeting.” —Newscorp (Media)

By now companies have made mobile investments and can free capital for other projects

“I can’t be a pizza chain that I can’t have our customers order online or text message and be able to track where their pizza delivery is. And they had to invest in all those technologies. And I think we are at the end tail. Maybe it’s another quarter or two, but I’m looking forward to saying 2016 will be a big one for our Kitchen of the Future.” —Middleby (Kitchen Equipment)

Amazon and Microsoft appear to be emerging as the primary winners in cloud platforms

“Azure is a powerful platform…More than 3,000 large enterprise customers have added Azure to their contracts…We also see strong demand for managed services from customers who prefer the AWS cloud platform.” —Rackspace (Cloud Service Provider)

Fossil’s vision for the smart watch is something that looks like a regular watch but has a chip in it

“the third, and probably most significant long-term, is what we call smarter watches, which is just adding chips and additional functionality to existing watches. So we are launching that this year, which is to watch it looks just like a regular analog watch but does have a chip in it that gives measures, activity and sleep and also has notifications in it. So to a certain extent, you could say that what we are doing is moving towards we think someday every watch we make will have some type of technology in it.” —Fossil (Accessories/Apparel)

Materials, Industrials, Energy:

The Texas economy may finally be showing signs of slowing (could just be rain though)

“Texas and primarily the Houston market. I’m sure that’s not any different for most people with significant businesses down there. I spoke with our regional manager down there and I saw obviously some of the weather issues they have with all the rain they had this summer. It hurt a little bit, but that’s a market that’s been tougher for us this year, that’s for sure.” —Kohls (Apparel)

Caterpillar has worked through its oil and gas backlog and doesn’t have orders to replace it

“we had pretty good backlog of recip engines in the oil and gas application throughout about mid-year and so now we’re there right. So that back half of the year, that backlog is largely gone, has been delivered and we haven’t received orders to replace that. So that will be a factor in our sales and profit projection going forward.” —Caterpillar (Industrial Equipment)

Boeing doesn’t see a slowdown in the aerospace cycle, but they’re watching closely

“I look at the makeup of replacement versus growth again. It gives me much more confidence, and I’d say this cycle versus what I’ve seen prior. And obviously we continue to monitor it. But like I said, despite a lot of movement going on in the global marketplace, and we’re watching it, we’re not seeing a slowdown in demand for our products.” —Boeing (Aerospace)

The only way to generate sustainable returns as a commodity producer is to own tier one assets

“There’s no substitute for Tier 1 assets. Across our commodities, we have a portfolio of leading assets, providing robust margins and cash flows. Others who own or develop third or fourth-quartile assets on a highly-geared balance sheet may do okay when prices are high, but it’s extremely challenging for them in the long term, and particularly in today’s environment. Well-run Tier 1 assets backed by a sound balance sheet is the only strategy that can create sustainable shareholder returns” —Rio Tinto (Iron Ore)

Miscellaneous Nuggets of Wisdom:

In technology you have to be uncomfortable to stay relevant

“in the technology industry, where revolutionary ideas drive the next big growth areas, you need to be a bit uncomfortable to stay relevant.” —Alphabet (the company formerly known as Google)

IPO hype can help drive real business for a while, but eventually fades

“next year we may not have IPO hype. We won’t have that IPO hype” —Shake Shack (QSR)

Don’t do things just to check boxes

“I’m not about ticking boxes. I’m not about doing something, because it’s on somebody’s list, or it’s been reported in the media, or whatever. I’ll do it, because it delivers shareholder value.” —Rio Tinto (Iron Ore)

Full transcripts can be found at www.seekingalpha.com