Company Notes Digest 9.8.16

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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: Back to School

The kids are back to school and so is Wall Street. It’s not earnings season anymore but September is a busy month for conferences. The companies speaking at conferences this week tended to continue to have relatively positive things to say about the economy. Will positive commentary outweigh soft economic data when the Fed meets in September? No one at the Fed has ruled out a rate raise quite yet.

The Macro Outlook:

Walmart hasn’t seen any meaningful change in the consumer

“We haven’t seen a meaningful change in the consumer. I think the consumer generally is okay. There’s things that are working in his favor. whether it’s interest rates, fuel prices, unemployment rate…I think there’s still probably little bit of hesitancy and that stems even back from ‘09 and ‘10 when people remember a tougher time…You continue to see a little bit of that.” —Walmart CFO Brett Biggs (Sam’s Club)

Patterson Dental saw some summer softness but doesn’t see a reason to overreact

“we have seen some summer softness to the market but really don’t want to overreact to it, because when you look at it, there are really multiple signs towards a thesis that this will be short term in nature. I think we have a North American economy with strong consumer confidence….And we also have done some pretty in-depth customer survey data that points to a rather encouraging outlook that our customers have going forward. So we obviously don’t want to overreact” —Patterson Dental CEO Scott Anderson (Dental Equipment)

Industrial CEOs are starting to feel encouraged

“I use the word encouraged because it’s been a tough slog for the last 18 months and it’s been a walk down that has been tough to get through. And I think as I look forward, the range of possible outcomes has certainly narrowed significantly for our company. And so the encouragement is that while I’m not ready to call bottom, I am encouraged by the fact that we’re a little bit more predictable than we have been at any time in the last 18 months.” —Donaldson CEO Tod Carpenter (Industrial Components)

The impact from inventory destocking is becoming less significant

“Overall, we still believe the impact from destocking is becoming less significant; however, there is still enough variability in week-to-week ordering to suggest that both off- and on-road customers have yet to find a stable bottom.” —Donaldson CEO Tod Carpenter (Industrial Components)

There are some laggards still cleaning up inventories

“it’s simply taking longer to right the supply chain, to work the inventory flow through the entire supply chain, including much of this is import merchandise. So, it’s coming from overseas, takes time to bring it over from Asia, receive it into the country, bring it to the distribution centers, receive it into our large distribution centers, and then distribute throughout our network. That does take time. It’s taking more time than we thought.” —HD Supply CEO Joe DeAngelo (Industrial Distributor)

But many industries have worked through their excess merchandise

“we think that inventories have actually been pretty well managed…we don’t see any excess inventory that would create a sort of negative overhang in the environment that we’re seeing right now.” —Micron CFO Ernie Maddock (Memory Chips)

Leaner inventories coupled with stronger demand leads to pricing power

“we are experiencing the ASP improvement in the spot market as well as the contract markets. We’ve seen some nice stabilization in the PC sector and the other markets continue to be robust, the mobile market is robust, graphics, servers, so we’re coming into a good period here.” —Micron CFO Ernie Maddock (Memory Chips)

Wage inflation is above 2% and the decline in food prices is moderating

“I think given the wage pressure, it’s probably slightly above the 2%…I mean, labor is — as Brian mentioned, we’re anticipating between 4% and 4.5% in the second half within that range also in the first half. So it’s a little more and [with] some reduced reduction in cost of sales on the food side, the margin side gets a little harder.” —Dave and Busters CEO Stephen King (Restaurant)

Will the Fed raise rates this month?

“I’m ready to talk about it… knowing what I know today, if the economy in the next few weeks performs consistent with my sense of the economy, then I think we ought to have a serious discussion at the September meeting. So I, in no way, rule out September and look to December or look to even the November meeting.” —Atlanta Fed President Dennis Lockhart (Central Bank)

There’s no sign that the ECB will be raising rates any time soon

“Based on our regular economic and monetary analyses, we decided to keep the key ECB interest rates unchanged. We continue to expect them to remain at present or lower levels for an extended period of time, and well past the horizon of our net asset purchases…monthly asset purchases of €80 billion are intended to run until the end of March 2017, or beyond, if necessary” —ECB President Mario Draghi (Central Bank)

International:

British manufacturing stands to benefit from the weaker pound

“[Jaguar Land Rover’s] revenue more than 80% comes outside the UK from Europe, China, US and other markets. We do source about 40%-50% of our components from EU. Therefore, if we take a combination of these, JLR overtime would benefit from a continued weaker pound as a result of the Brexit” —Tata Motors (Automobiles)

Brazil has stopped declining

“there are a few glimmer spots, I won’t call them bright spots. I’ll call them glimmering spots, but Brazil for example has stopped declining in activity and is doing what it can to make their reserves work in the current economy.” —Halliburton President Jeff Miller (Oil Service)

Financials:

The Federal Reserve is conscious of the damaging effects of low rates to the financial industry

“there could be institutional damage over time with negative interest rates…One is real damage to the financial system…Even in our low-rate environment in the United States, we are seeing some of those institutions really express a lot of stress…When you go to negative interest rates, you can—in theory, at least, you can really do some damage to some important industries” —Atlanta Fed President Dennis Lockhart (Central Bank)

Smaller institutions are hurt more than large ones

“If you take a big bank like Deutsche Bank, you have the ability to withstand negative interest rates much longer as we have a diversified business with asset management fees, transaction fees, trading businesses. And they are less affected or not affected. But our core banking business is. And at these margins with deposits, you will make losses. Because the money is parked at the central bank, you can’t use it elsewhere. For a simpler, more monoline bank that is taking deposits and lending it to clients, mortgages or consumer finance, it is more difficult. They have to charge more on the asset side for lending. Because you can’t really charge retail customers a fee or much of a fee for making deposits.” —Deutsche Bank CEO John Cryan (Bank)

The transmission mechanism for negative rates isn’t working anyways

“I think banks will have to absorb that cost for taking deposits and try making up for some of the costs in charging a little bit more for lending. And that is the reason why I think the transmission mechanism with negative interest rates isn’t working.” —Deutsche Bank CEO John Cryan (Bank)

Consumer:

Coca Cola is seeing a premiumization of the water category

“we are absolutely seeing in many parts of the world is the premiumization of stratification of the water category…smartwater is a runaway success in US.” —Coca Cola President James Quincey (Beverages)

Streaming music services now have 68m paying customers worldwide

“I would like to emphasize the rapid development of subscription services, which were chosen by 68 million subscribers worldwide in 2015 compared to 41 million in 2014. 30% of Spotify’s 100 million customers have already switched to subscription streaming. Apple Music, launched last year, now has 13 million paying subscribers.” —Vivendi CEO Arnaud de Puyfontaine (Media)

Technology:

GM expects that an automated driving system’s manufacturer will be liable in an accident

“in cases where there is an automated driving system on the car, that system we see as being designated as the driver and if there is an incident where the driver is deemed to be at fault then the manufacturer of that automated driving system that would be their responsibility.” —General Motors Chief Engineer Pam Fletcher (Automobiles)

5G will support an explosion of wireless data from new devices

“I think 5G is going to see a transformation of the client environment. It’s going to be move beyond just the simple definition of smartphones and connected PCs and move towards an environment where we’re talking about connected cars, robots, drones, connected factories and connected homes. And that environment is going to see an explosion of data in the client environment for megabytes per hour and gigabytes per day, to more like gigabytes per hour and hundreds if not thousands of gigabytes per month, for example, in the case of a connected car or connected factory.” —Intel IoT President Murthy Renduchintala (Semiconductors)

There’s plenty of demand for VR but not enough supply

“VR [Virtual Reality] is suffering from…a low production that is not meeting demand. But we see tremendous traffic when we run these events in our stores, and another element of just how much demand there is, we had the quickest sell-out of preorders in our history the last time we were able to put up PS VR for preorder, we were out literally in five minutes.” —Gamestop COO Tony Bartel (Video Game Retail)

Materials, Energy:

Halliburton feels that the oil industry is on the road to recovery, though this is the worst downturn they’ve ever seen

“I think the headline reads on the road to recovery. You have to look hard, but if you look at the headline, you’ll see on the road to recovery. But at the same time, I would describe this as sorting through the wreckage of the worst downturn that we’ve ever seen. We see the after-effects just about everywhere that we look.” —Halliburton President Jeff Miller (Oil Service)

There have been more than 350,000 layoffs in the industry

“There have been more than 350,000 layoffs in the industry, mostly weighted towards oilfield services, some companies laying off as much as 80% of their workforce. At Halliburton we’ve laid off about 40% of our workforce. Bankruptcies and restructuring are quite commonplace today and CapEx has been radically reduced and asset sales are now strategy.” —Halliburton President Jeff Miller (Oil Service)

Those layoffs may finally be translating to weakness in oil-centric geographies

” I don’t know that we have exactly divided out Texas per se, but our oil oriented stores still remain under pressure, Oklahoma and Texas somewhat relative to remainder of the stores or the balance of the stores.” —Dave and Busters CEO Stephen King (Restaurant)

Full transcripts can be found at www.seekingalpha.com