Company Notes Digest 8.18.16

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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: Higher Utilization

Excess capacity and excess inventories have played a big role in weak inflation. Recently we’ve been through a rough economic patch that exacerbated the problem. However, there were signs this week that inventories have been destocked and that industry is ready to start cautiously restocking again. Greater production must be met with greater demand though. If inventories are restocked but demand doesn’t rebound to meet it then companies will find themselves in a precarious position again in short order.

The Macro Outlook:

Industrial trends are attempting to show continued improvement in August

“our sales per day trends included declines in April and May with improvement in June. July somewhat as expected with seasonality, softer than June. And through the early days of August, we’re seeing sequential improvements in that.” —Applied Industrial Technologies CEO Neil Schrimsher (Distributor)

Companies may run factories at higher utilization the rest of the year

“around July…I think many [customers] had preventative maintenance productivity-type projects going…Now, as they’re back up and running…we see that brake fix demand coming through. And then…for those that would have planned downtimes…towards the end of the calendar year, they would be slating projects that would positively impact their uptime and their productivity.” —Applied Industrial Technologies CEO Neil Schrimsher (Distributor)

Maersk is operating at very high utilization rates

“Our network is now almost as full as it can be. We are operating at very high utilization rates in the head-haul freights, but also our roundtrip utilization is pretty high, as high as it’s ever been” —AP Moeller Maersk (Shipping)

Inventories are leaner at retailers

“we’re in one of the best inventory positions we’ve been in, in many years.” —Nordstrom President Blake Nordstrom (Department Store)

” We are very comfortable with our inventory levels and the quality of our merchandize” —Dick’s Sporting Goods SVP Joseph Oliver (Sporting Goods)

“inventories are extremely tight and in amazing shape” —Perry Ellis CFO Anita Britt (Apparel)

Companies may be getting back some pricing power

“Our average ticket was also positively impacted from slight commodity price inflation, mainly from building materials and lumber.” —Home Depot EVP Ted Decker (Home Improvement)

“We increased prices across the portfolio in H1 by 5%.” —Carlsberg CEO Cees ‘t Hart (Beer)

“the pricing environment remains challenging…We expect stronger pricing in H2 though. We started to take selective price increases in some categories and geographies.” —Nestle EVP François Roger (Packaged Food)

Consumers are willing to spend on their homes as long as they see value increasing

“Consumers continue to view their personal finances and home values favorably, with half of homeowners believing the value of their home is increasing. We believe this positive sentiment around home value is driving home improvement spending. Consequently, we continue to see home improvement spending outpace overall consumer spending, as well as positive home improvement project intentions, including strong engagement in big ticket discretionary projects.” —Lowe’s CEO Robert Niblock (Home Improvement)

But the consumer may only be spending selectively. Target sees cautious consumers

“I think we have seen this environment persist now for well over a year. It’s a very cautious consumer. And if we look at the overall trends within retail, we have certainly seen on a rolling 12-month basis a slowdown in retail sales growth, but that’s not an excuse for us.” —Target CEO Brian Cornell (Big Box Retail)

Walmart is cheering 1.6% comps

“We exceeded our Walmart U.S. comp sales guidance this quarter, with Walmart U.S. delivering comp sales of 1.6%, driven by a traffic increase of 1.2%. This was our 8th consecutive quarter of positive comp sales and our 7th consecutive quarter of positive traffic.” —Walmart CEO Doug McMillon (Big Box Retail)

Restaurant spending has been trending downward

“The current sentiment for customer spending and meals away from home seems to be trending slightly downward…I just think it’s a little bit of a malaise…it just feels a little bit softer out there.” —Sysco CEO Bill DeLaney (Restaurant Distributor)

The west is doing better than the east

“The West was our best-performing area of the country…the North was our weakest-performing division. There was almost 500 basis point spread in comps between those two divisions. ” —Lowe’s CEO Robert Niblock (Home Improvement)

“We have seen particular strength in many of our West Coast markets…We have seen pockets of softness on the East Coast.” —Target CEO Brian Cornell (Big Box)

International:

Two apparel companies cited little impact from Brexit

“On the U.K question, frankly…our sales did not go down. We’ve the loss because of the conversion. Our sales in pound have been the same or what we projected. So there have not been a slowdown.” —Perry Ellis Chairman George Feldenkreis (Apparel)

“Urban’s European business also experienced strong comp gains with seemingly little impact on the business from the Brexit vote” —Urban Outfitters CEO Richard Hayne (Apparel)

ThyssenKrupp is only cautious because European steel demand has been so strong for so long

“from a demand side on the steel, we are quite optimistic…The reason why we are a little bit cautious…is because we’re already running at a very, very high rate for many years. So, we do not see it negative. But, as we have already such a strong demand…we do believe that the upside beyond that, let’s say, strong demand probably is rather limited. ” —ThyssenKrupp CEO Heinrich Hiesinger (Steel)

It would be foolish to jump to conclusions from the last six weeks though

“The thing that’s important to note, clouds were already gathering over the global economic outlook before the U.K.’s vote to leave the EU took place. It will take time for the full-effect of the vote to be felt and understood. In my view, it would be rash to extrapolate from the economic and political noise of the last six weeks.” —Standard Life CEO Keith Skeoch (Insurance)

Commercial Real Estate investors do seem concerned

“In recent weeks, UK commercial real estate exposure has received a lot of attention from the investment community. In short, we don’t feel overly exposed. Given our history, we’ve had a cautious new business risk appetite in the sector, and we’ve dramatically shrunk our legacy exposure.” —RBS CFO Ewen Stevenson (Bank)

The Chinese food and beverage market growth has stalled

“In China, the food and beverage market overall saw its growth decelerating to basically zero growth. ” —Nestle EVP François Roger (Packaged Food)

Video advertising revenue growth has slowed for Tencent

“In terms of our video advertising revenue growth, I think that both, for the industry as a whole and for Tencent video, there has been a deceleration in growth” —Tencent CSO James Mitchell (Chinese Internet)

Financials:

There are major challenges facing the asset management industry

“I outlined some of the major challenges facing the asset management industry. These include a shift in investor demand from active to passive strategies, pressures on fees in both active and passive, a growing industry regulatory burden and rising costs of doing business. Unfortunately, nothing has changed over the last three months to lead me to believe that these challenges are going to abate anytime soon.” —Eaton Vance CEO Tom Faust (Asset Management)

Consumer:

Urban’s CEO sees a wave of new fashion happening

“I saw more fashion excitement in spring than I’ve seen in quite a few years…this is the fashion change that’s happening and my experience is once it starts to happen, there is not much that stops it.” —Urban Outfitters CEO Richard Hayne (Apparel)

Promotional activity has stabilized

“I think it’s fair to say that the promotional activity has stabilized a bit here in the last quarter or so…there’s vendors out there choosing to participate in different ways than they may have in the past with our competitors.” —Nordstrom EVP Peter Nordstrom (Department Store)

E-commerce is lower margin

“obviously we run lower margin in dot-com. The actual margin on the product is roughly equal to our brick-and-mortar. But when you put in shipping, it has a negative impact” —JC Penney CFO Edward Record (Department Store)

A couple of companies talked about social media engagement, but didn’t mention Twitter

“Our Instagram followers exceeded the 5 million mark during the quarter…Snapchat is important in our consumers’ life and we’re also seeing fast growth” —Urban Outfitters CEO Trish Donnelly (Apparel)

” we have a very strong social media footprint on Snapchat, Facebook, on Instagram. In the second quarter, we drove 27 million impressions on social media alone” —Lowe’s CCO Michael Jones (Home Improvement)

Technology:

Target called out Apple for weak performance in electronics

“we have to improve electronic performance. It was a significant drag, 70 basis points on our overall comp declines in the quarter. And Apple played a significant role there. So we over indexed with Apple products.” —Target CEO Brian Cornell (Big Box Retail)

Tim Cook doesn’t sound too concerned about skeptics though

“It doesn’t bother me. Because honestly, they were saying that about Apple in 2001. They were saying it in 2005. They were saying it in 2007 — ‘this stupid iPhone, whoever dreamed up this thing?’ Then they were saying that we peaked in 2010, then it was 2011. We got to $60 billion [in revenue], and they said you can’t grow anymore from this. Well, last year we were $230 billion.” —Apple CEO Tim Cook (Consumer Electronics)

Telecoms around the world are spending less on their networks

” you look at some of the analyst reports on Service Provider CapEx, we actually saw exactly what the analysts have talked about. I saw one report that discussed double-digit declines outside of the United States and maybe flat to slightly up inside the U.S.” —Cisco EVP Kelly Kramer (Networking)

Deep learning is the “Thor’s Hammer” of computing

“Deep learning, you may have heard, is a new computing approach. It’s a new computing model, and requires a new computing architecture… deep learning was really ignited when pioneering researchers around the world discovered the use of GPUs to accelerate deep learning…Deep learning is really machine learning supercharged, and deep learning is really about discovering insight in big data, in big unstructured data, in multi-dimensional data…it’s Thor’s hammer that fell from the sky, and it’s amazing technology that these researchers discovered.” —NVIDIA CEO Jen-Hsun Huang (GPUs)

Materials, Energy:

BHP says that the low cost producer will still generate a lot of cash from iron ore even if China slows

“We sit pretty close to the bottom of the cost curve on iron ore and although there is going to be fierce competition to claim the bottom of the cost curve crown between ourselves and the other three low-cost operators, we will be playing that game to win. Therefore, even in, as you say, reduced demand out of China, we still see this as potentially being a business with a very high margin and a big cash generator going forward” —BHP Billiton CEO Andrew Mackenzie (Mining)

Miscellaneous Nuggets of Wisdom:

Plan three years at a time

“I’ve never been sucked into a guidance or into a quarterly or even a yearly corporate guidance. What we’ve always looked back is the trend good over the next 3 years, not the next 10 years or next 5 years. I’m talking the next 3 years.” —Middleby CEO Selim Bassoul (Restaurant Equipment)

I spent some time studying the Watergate era this week. I thought this quote was worth posting.

“We think that when someone dear to us dies, we think that when we lose an election, we think that when we suffer a defeat, that all is ended. We think, as T.R. said, that the light had left his life forever. Not true. It’s only a beginning always . . . Because the greatness comes not when things go always good for you, but the greatness comes when you’re really tested, when you take some knocks and some disappointments, when sadness comes. Because only if you’ve been in the deepest valley can you ever know how magnificent it is to be on the highest mountain . . .” –Richard Nixon, one day after resignation, addressing White House staff

Full transcripts can be found at www.seekingalpha.com