JS Earnings Call Notes 10.27.2015 – Roper, Comcast, IAC, Dupont, Waste Management, WR Berkley

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Roper (ROP) CEO Brian Jellison said it may not look like it from the outside but under the surface, the company is moving very quickly

“if you look at the income statement, we are sort of laughing, because it’s the old story about the ducks on the pond and they are moving along nicely, but underneath, these are moving wildly.”

Roper (ROP) CEO Brian Jellison reminded investors of the company’s emphasis on cash flow

“The compounding of cash flow, if there is any theme around here, it would be that. We are in base, a compounder.”

Seeing strength in nuclear test business after several years of lackluster revenue in the segment

We had strong growth in our nuclear test business on improving market conditions. There is a good deal of activity that’s emerging, both in China and Korea based opportunity in the Middle East, and startups again in Japan for their nuclear activity. So that’s going to be a material improvement for us in the fourth quarter, and into 2016.“   

Roper (ROP) CEO Brian Jellison is excited about their acquisition of a software company called Aderant

Aderant has a really end-to-end platform of mission critical software, that primarily goes to law firms now, but could be expanded to other professional services organizations.  It has 3,000 of the world’s largest law firms and professional services organizations, and they really do a full suite of activity, all the way from time capturing and billing to docketing.  If you look at our acquisition criteria on the right, you will see it has got an excellent management team. In fact, we are retaining everyone.  Over 95% customer retention, strong cash flow characteristics, asset life, well once again, negative working capital, so people pay us in advance for work that we are going to eventually perform.”

Roper (ROP) CEO Brian Jellison said they are seeing heavy competition from Private Equity firms for deal flow 

There has been a lot of stuff for sale, but there is always a lot of stuff in the pipeline.  People are going to start to worry about their exit multiples versus what their entrance multiples order. So I think everybody is wondering about what their exit time ought to be, if it should be moved up. But boy, the guys that we work with and talk to all the time, I mean, they are still deploying capital like crazy.  So you see them making big bets with very high trailing multiples at least, for what they hope will be able to grow into.”

 

 

 

 

Comcast (CMCSA) CEO Brian Roberts said the movie segment of the media conglomerate had an excellent quarter  

At film, the third quarter was remarkable in many ways and continued the terrific run we’ve had this year. Minions and Jurassic world sustained our box office streak into the third quarter.  On August 5, we surpassed the prior record for the highest grossing year ever for a movie studio in worldwide box office. And this is the first time any studio has had three films crossed the $1 billion mark and theatrical receipts in the same year.”

Comcast (CMCSA) CFO Michael Cavanagh said the company is experimenting with cable & internet packages at different price points

A final comment on video, we are responding to different customer preferences, segmenting the market effectively with a variety of video packages and offers, like our Internet Plus offering to appeal to customers that might otherwise choose to purchase only broadband from us. Providing the right introduction to our products allows us to better retain our customers and potentially migrate them to higher end packages over time, improving our customer lifetime value.”

As you might expect in an era of emphasis on the digital age, broadband internet customer acquisition was strong

“The strong momentum in our high-speed data business continued. Revenue increased 10.2% during the quarter, making it again the leading contributor to overall cable revenue growth, driven by impressive growth in our customer base, as well as rate adjustments, and an increasing number of customers taking higher-speed services. We added a combined 320,000 data customers during the quarter with 73% of our customers now receiving speeds of 50 megabits per second or greater.”

Their venture capital arm has made investments in next generation content platforms

As we talked about the millennials, we talk also about NBC and investments in Vox and BuzzFeed and the ability to now hopefully have advertising that can take some of our content and their content and bring it to advertisers.”

 

 

 

 

IAC (IACI) CEO Joey Levin said ad blockers aren’t affecting the companies advertising business as much as many had feared

“On mobile it has been negligible. I think, we would see less than 1%-type impact. On desktop, we see an impact maybe measuring something in the teens, not accelerating, but the probably somewhere in the teens impact.  I think, we under indexed towards relative to the general internet on ad blocking. I think partially, because we drive lot of traffic through advertising. By definition if we acquire the user through an app, then they are going to see an ad when they get to our site, also because just our demographic is less likely to be adopting ad blockers.  The industry has to pay a lot of attention to and the solution is going to be adjustments in ads, better ads.”

And their video site, Vimeo, continues to gain subscribers

On Vimeo, the business today is substantially weighted toward subscription, but VOD business is growing much faster and growing very nicely. It is still small, but it is growing very nicely. If I look at many years, I see VOD being a, whether it is transactional VOD or subscription VOD, I see VOD being a huge portion of that business if we are doing things right over time. It is just a massive market and I think given our structure we ought to be able to take a piece of that.”

With the upcoming IPO of subsidiary Match.com, CEO Joey Levin explained the company’s stance on spinning off companies

Most companies, when they have a business like Match.com, and or businesses like we have had in the past which are leaders and their categories and doing very well, they hold on to those businesses. Our philosophy is when you get those businesses and when they reach that level of scale and when they have that sort of independence that we give them their own currency and set them up on their own and because we think that generally best for shareholders.”

 

 

 

 

 

 

New Dupont (DD) CEO Ed Breen, who broke up Tyco last decade, comes to Dupont with a mindset to improve the company’s focus and returns while potentially reducing capital expenditures

“I think we can have a better rigor around our return metrics across all of our products and platforms and programs that we’re working on. So we’re clearly on instituting that. So I don’t just highlight that to R&D. I think that’s across the board on how we spend on CapEx and certainly R&D is a big piece of that, but it’s across the board. I think more rigor around R&D is needed. Having said that, R&D is one of the great strength this company, but more rigor around that and that process I think could be very helpful for us and we’re starting to put some more of that in place.”

And he’s predicting consolidation in the sector

“Having said that, I’m not naive about what’s going on in the ag space right now. I do think at some point there’s consolidation here that will occur. You saw some other announcements just this week from others. And so we need to be very cognizant of that.  I am personally talking to the CEOs of some of the other companies. Something will give here on the ag side and I would say just looking at it consolidation should happen.”

New Dupont (DD) CEO Ed Breen cited some key characteristics as to what sets the company apart

here are so many great things here and I told the employees that were really working off a very solid foundation. First of all I’ve been in many companies and the one thing I can say is the employees are really dedicated. As I said in my prepared comments, they want to win. So there is a great spirit here and a great drive and you can’t make up for that.  Obviously this is a great science and R&D company and a lot of great things come through that. And this company is also very focused on its customers with an extensive global sales force that really is very impressive. So that’s a great foundation to have. The areas where I think there’s improvement needed are more operational. At this point time anyway especially with the environment we’re in, I think there’s a nice opportunity on the cost side.”

And he wants to make the company significantly more competitive and agile by reducing costs

also think from a CapEx standpoint we’ve been spending around $1.5 billion a year. I think that number is too high. We’ve pretty much zeroed in on what our numbers going to be for 2016.  that gets back to a rigor around returns on invested capital and what programs really makes sense which ones are marginal. And we’re going to do a lot that have great returns with them. And I’d say the other area where there’s improvement needed is working capital.”

 

 

 

 

Waste Management (WM) CEO David Steiner likened the switching dynamics in the waste disposal industry to the cable industry

And so, I always liken it to the cable companies. We all get a flyer every week that offers us lower price for cable. There’s probably a lot of people that accept that and say, let’s take it every time we can get it. But 90% of the folks say, you know what, the cost of changing out is too high, so I’ll accept the fact that this price might be a little bit higher, but I’ll accept it because the pain of switching is too high, until the cable starts going out or the satellite dish starts going out. And then all of a sudden, that price offer looks pretty attractive.”

And they put computers on each of their trucks which will help improve efficiency and route optimization

“over the last few years, we put on-board computers in all of these trucks. And I would tell you, we’re only kind of at halftime with respect to using the onboard computer to its fullest capability. For example, we can route our trucks dynamically. But that doesn’t do any good unless the driver follows the route that the computer generates, and we’re only following that route – if you think about best-in-class, a FedEx or a UPS probably follows the route 95% or 97% of the time. We’re kind of about 80% of the time. So, while that may seem like, pretty good, and it is okay, that last 15 to 20 percentage points is worth a lot of money.”

Waste Management (WM) CEO David Steiner said they are open to an energy waste deal if the prices is right even though they aren’t currently actively looking for a deal in the space 

On the energy services side, I’d tell you that if we were to do a deal in energy services, we’d do an opportunistic deal. We are not actively looking to go out and expand our footprint dramatically in the energy services businesses like we have been in the past. But if we can find some deals that are opportunistic and at the right price, we certainly think that long-term, energy services is going to be a good line of business. It’s not going to be a good line of business for the next year or two. So we’ve got to see something on the long-term horizon at an opportunistic price, if we’re going to invest in energy services.”

They have had to give price concessions to some of their customers in the energy space

Yeah. I mean they’ve come back to us over the last, probably 12 months, and asked for the price concessions. In some cases we’ve made some price concessions, in some cases we haven’t. It’s as much of as anything a function of where our assets are relative to the drilling that’s taking place. But certainly there has been some real pressure in that business, and that’s why our revenue will be down probably 30% for the year.”

 

 

 

 

Incoming W.R. Berkley CEO (WRB) Robert Berkley described where they are finding attractive places to deploy capital and places they are staying away from 

“As far as the domestic insurance market goes, as we’ve said over the past couple of quarters, workers’ compensation, general liability and many of the professional lines remain very attractive and we think are sensible places to be deploying additional capital. On the other hand, aviation, much of the marine market, cat-exposed property as well as offshore energy are product lines that we are increasingly concerned about and do not see a lot of rational behavior in those parts of the market.”
And they’re finding more competition in their international markets 
“Moving onto the international market, it is a bit more competitive; no different that it’s been in the past few quarters. One of the things that we’ve seen over the past few years has been many organizations have been looking to increase their footprints in some of the international markets that we have been operating in have become more and more crowded.  And the international insurance markets tend to be a bit more dependent on the reinsurance markets and that is due to the fact that much of the international market uses much larger limits on a day to day basis than we typically see in the middle and small commercial market in this country.”
The reinsurance market is extremely competitive 
“On the topic of reinsurance, certainly again a topic we’ve discussed with you all in the past, the marketplace remains exceptionally competitive. Having said that, it would seem as though the pace of competition seems to be not moving or increasing as quickly as it has over the past several quarters. I don’t think that we’ve necessarily touched bottom, but it would seem as though we continue to get closer as again the pace of erosion is slowing.  we do believe that capacity is becoming more and more commodity with every passing day and ultimately it boils down to the expertise that you can bring from a value perspective to your clients and focusing on clients that actually do value expertise and don’t just deal with commodity.”
Lower interest rates on their bonds hurt their investment income
“Turning to investment income, our investment income was $133 million this quarter, compared with $179 million in the third quarter of 2014. Earnings from our core portfolio including arbitrage trading declined 8% to $110 million, due primarily to lower reinvestment rates available for maturing bonds. The average bond yield for the first nine months of 2015 was 3.3%, down 0.2% from 3.5% in 2014.”
They don’t focus on GAAP accounting results but rather risk adjusted returns 
“These are especially interesting times. We really do focus on risk adjusted return. It means, we do some things that some of our competitors don’t do. We don’t focus truly on accounting results, because we’re focused on creating shareholder value more than reported earnings per se. That means, we start businesses instead of buying them, because that’s a better economic return; it’s not a better accounting statement return.”