JS Earnings Call Notes 10/15/2015 – Colfax, Fastenal, Johnson & Johnson, CSX, Blackrock, Bank of America, Wells Fargo, Winnebago

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Colfax (CFX) CEO Matt Trerotola doesn’t expect a recovery in his industrial end markets until 2017 

We must be more aggressive at managing our cost structure in the short-term as we work through the down cycles in several of our important end markets, especially oil and gas, and marine. Through our strategic planning process, we believe these downturns are cyclical, not structural but the timing of recovery in these markets is uncertain and may not be seen before 2017.”

And they will cut costs to remain lean 

“We’ve identified additional cost structure actions that we can take without limiting our operational capacity to accelerate growth. These actions are broad based across all three of our businesses and address manufacturing, operating and corporate expenses.”

Colfax (CFX) CEO Matt Trerotola said the company is actively looking for acquisitions as prices have come down in the cyclical sector

And as far as the acquisition pipeline, we continue to have an active acquisition pipeline. As I mentioned, we did a small one recently. We have some others in the pipeline as well. And the rate at which we complete any of those will be related to the deal processes but also will be connected to our ability to be comfortable with the value in light of the current dynamic situation in the economy.”

Colfax (CFX) CEO Matt Trerotola said the Chinese government is balancing environmental reform and economic growth challenges

I was over in China a few times earlier this year and there’s a significant amount of tension there right now between a real commitment from the government to make substantial progress quickly on the environmental front or at least a commitment from that portion of the government, at the same time as they’re having the industrial growth challenges and have other parts of the government wanting and needing to work very proactively on those. And so, our challenge is how do we figure out a way to work with customers to get these investments, further up the priority scheme and ideally maybe make them not just about environmental but have some productivity benefits.”

 

 

 

 

Fastenal (FAST) CFO Daniel Forness said their industrial customers are in a recession

Right now in the third quarter, 44 of our top 100 customers are negative. We have not lost any business with that group. They are negative in their spend. In some cases, they are negative because their business is very negative and they are somewhat negative with us. In some case, their business is treading water and they decided to tighten their belt.  The industrial environment is in a recession – I don’t care what anybody says, because nobody knows that market better than we do. You know, we touch 250,000 active customers a month.”

Fastenal (FAST) said the slowdown in the oil & gas sector continues to affect their business

“The first nine months of 2015 were hit hard by a slowdown in our business with customers connected to the oil and gas industry. This connection includes direct industry participants as well as those with a geographic connection.  Our end markets remain choppy, as demonstrated by our weak sequential patterns.”

And they are selectively choosing to open stores again

“After several years of holding back on store openings and even contracting our total store base, we plan to expand our pace of store openings in 2016 with a goal of opening 60 to 75 new stores.”

Fastenal said it would be difficult for their fastener customers to switch to another provider as it would be a time consuming process 

“We have strong capabilities at sourcing and procurement, at quality control, at logistics, and at local customer service. Each of these capabilities is focused on the customer at the end of the supply chain. This business is split about 50% production/construction needs and about 50% maintenance needs. The former is a great business, but it can be cyclical because about 75% of our manufacturing customer base is engaged in some type of heavy manufacturing. The sale of production fasteners is also a sticky business in the short-term as it is expensive and time consuming for our customers to change their supplier relationships.”

Weakness in some of their larger accounts hurt profitability

“The relationship between sales and gross profit depends on our success within our large account business (an area that is still under-represented in our customer mix). The large account end market produces a below company average gross profit; however, as demonstrated in recent quarters, it leverages our existing network of capabilities and allows us to enjoy strong incremental operating income growth. Given the sequential weakness with our largest customers, we saw a sequential improvement in our gross profit. Our gross profit is also impacted by supplier incentives. With weaker net sales growth and our tight management of inventory levels, the growth of spending with our suppliers is lower; hence, our supplier incentives are reduced.”

And they spent some time discussing how they view capital allocation

“Finally, some thoughts on capital allocation: During the latter half of 2014 and the first nine months of 2015, we have been modifying our capital allocation by buying back some stock. This is in response to several factors. The first centers on our external valuation. Our relative stock valuation has weakened over the last several years, which prompted us to reassess our cash deployment.  We are mindful of our shareholders expectations relative to our dividend paying history and have primarily funded this buyback with debt. Over the last three to four years, we had dramatically increased our capital expenditures, relative to our net earnings, for the rapid deployment of distribution automation and industrial vending.”

The company highlighted what makes the economics of the industrial fastener business compelling

“It is helpful to appreciate several aspects of our marketplace: (1) it’s big, the North American marketplace for industrial supplies is estimated to be in excess of $160 billion per year (and we have expanded beyond North America), (2) no company has a significant portion of this market, (3) many of the products we sell are individually inexpensive, (4) when our customer needs something quickly or unexpectedly our local store is a quick source, (5) the cost and time to manage and procure these products is meaningful, (6) the cost to move these products, many of which are bulky, can be significant, (7) many customers would prefer to reduce their number of suppliers to simplify their business, and (8) many customers would prefer to utilize various technologies to improve availability and reduce waste.”

And they view their geographic proximity to their customer base as a competitive advantage

“We believe our ability to grow is amplified if we can service our customers at the closest economic point of contact. For us, this ‘closest economic point of contact’ is the local store; therefore, our focus centers on understanding our customers’ day, their opportunities, and their obstacles.”

 

 

 

 

Johnson & Johnson (JNJ) Chairmen of Medical Devices reiterated the company’s goal of being a market leader in their 

We have a companywide premise that we should be number one or number two in the categories where we’re committed and have a clear technology path to getting through either a number one or number two position.”

And he expects an accelerated pace of acquisitions going forward

“So I think in a disciplined focused approach where we divest we will also look at opportunities to acquire. I think certainly accelerating our pace of tuck-in deals would be a good opportunity for medical device we seek, considering our scale in the market, especially in surgery and orthopaedics is large, and we anticipate accelerating that pace over the next 12 to 18 months.”

 

 

 

 

CSX Chief Financial Officer Frank Lonegro said the company is increasing train length to improve cost & labor efficiency

“To illustrate our progress, in the third quarter we increased overall train length by about 10% versus the prior year, which drove a significant reduction in crew starts.”

And they were able to combat the slowdown in volume by lowering their employee expenses and fuel expenses

“Looking at labor and fringe, we expect the fourth quarter head count to be down approximately 2% on a sequential basis, which reflects about a 6% reduction from the prior year.  Fuel expense in the fourth quarter will be driven by lower cost per gallon, reflecting the current price environment, volume-related savings, and continued focus on fuel efficiency.”

And oil shipments by rail, which was a huge growth segment for the railroads just a few years ago, is down substantially 

“In addition, we expect headwinds in our coal and crude oil markets to increase in the fourth quarter, driven by sustained low commodity prices. As I mentioned earlier, domestic coal volume is expected to be down around 20% versus the prior year. And crude oil volume is expected to decline at least 25% sequentially.”

Intermodal has been an area of strength 

On the domestic side, we are seeing the benefit of the investment and the service product that we are seeing. We have been able to grow that business somewhere between 5 and 10% over last several years. We are seeing a little bit of an enhanced growth here this quarter, as we know one of our customers who has the contractual ability to further diversify their portfolio is doing just that here in the quarter. So we are seeing a little bit of an uptick in the growth with that customer right now, beyond what we would normally see. But we feel good about that business, feel good about the ability to continue to grow that at a multiple economic output for a period of time here going forward.”    

CSX Fredrik Eliasson Executive VP said there is an opportunity to re-price legacy contracts in the coming years

So, I think you know that in our merchandise business, only about half of our business is up on the annual basis. And most of our other businesses, they are mostly 3 to 5 year contracts. We do feel that we will have good opportunities to reflect what the value we have in the marketplace, and with improving service on top of that, we do feel good about our pricing opportunities going forward as well.”

 

 

 

 

 

Blackrock (BLK) CFO Gary Shedlin said the company saw lower fees during the quarter as clients shifted money out of higher fee based products, such as emerging markets & commodities, into lower fee based products, like index funds 

“Sequentially, base fees were down 3% due to lower quarterly average AUM, a seasonal decline in security’s lending activity and the impact of divergent data on our fee rate as emerging and commodities market underperformed developed market.”

Blackrock (BLK) CEO Larry Fink said Blackrock maintains the #1 global market share of ETF’s with 38% of the market

iShares captured the number one market share of the net new business globally in the U.S. and in Europe and in the third quarter year-to-date. iShares flows were driven by fixed income as investors utilized fixed income ETF as an effective tool for diversification and liquidity.  Equity flows were driven by $5 billion into European listed iShares and we saw positive inflows in Canada and Asia Pacific as well.”

Blackrock (BLK) President Robert Kapito said the lower price of ETF’s when compared to traditional funds is only one component of what makes the offering compelling 

But just to step back on the price, please keep in mind that prices are only one reason why people buy ETF. They are looking for precision or what you’re discussing a new approach in smart beta or factored investing, they’re certainly looking for liquidity, which means, you have to have a fund and have some sort of size depending upon the type investor they could get core investor which we call it buy and hold or they are looking to be more active. So, price is important but its only one aspect.”

Blackrock (BLK) President Robert Kapito said ETF’s are now being used as an alternative to futures contracts

So, this is the beauty of ETFs that we constantly have been finding new uses for the products, so as futures becomes more expensive to use than ETFs had opened up a whole new world that we didn’t even think about because of the collateral cost behind futures contracts.  So as you know now ETFs are being use as a surrogate for futures across many institutional accounts, so we think that’s going to continue, how big that can be, just think about the size of the futures markets and certainly regulation is going to play a big role in that as well.”

Blackrock (BLK) CEO Larry Fink said the company could potentially benefit from Department of Labor regulation which may potentially emphasize ETF’s in retirement accounts

I think one thing is very clear how this outplays that it means greater emphasis on beta products and ETFs.  I would also say that if investors feel more confident because of however the DOL reform plays out that if investors feel more confident that they can invest fairly, securely we are all benefited by that. Now, I’m not sure how that will play out, but we’ve always believed that we could have a market place where our clients feel more secure that they have an opportunity to earn a fair return over a long cycle everyone will be benefited by that.”

And their active equity unit, which has been a poor performer over the last several years, is starting to perform 

So where we are starting to see the biggest turnaround is from the fundamental equity business. We spent a lot of time and money I should know in trying to rebuild our efforts there and the teams. And I feel very good about this, certainly in Europe our team there has been together longer. Their record across the board is now very strong and now we are starting to see the same efforts in the U.S. through our capital appreciation fund, our equity dividend fund. So the performance is actually really good.  So when you see better performance it translates directly into flow and we are starting to see those flows or having much better dialogue with our consultants who are now putting us in the mix for proposals and we’re also internally very focused on building out the equity effort and you are going to hear a lot more from us, from our marketing teams and the rest of the teams across the firm, because we are going to be much bigger in the active equity space and we are very happy to have the performance to back that up, so very important part and we’re still adding people but we are getting results at the same time, good positive feedback from our clients.”

 

 

 

 

Bank of America (BAC) CEO Brian Moynihan said the bank’s performance is improving in a tough economic environment

the key message is we continued to make good progress in a tough revenue environment due to low interest rates and a sluggish economic recovery. In addition with the late summer’s volatility, especially the fixed income trading markets are remaining challenging. So with that we produced another good quarter of progress in all the businesses.  We continued to make progress towards our full earnings capacity here at Bank of America, and this quarter represents the fourth consecutive quarter of solid results following the resolution of our large legacy exposures in the third quarter of last year.”

Bank of America (BAC) CEO Brian Moynihan emphasized the evolving nature that the retail bank has with its customers as it seeks to right size their banking branching

As a reminder, our consumer franchise is the largest retail bank in the United States. In our consumer banking business, as you can see, we grew revenue and earnings year-over-year despite the low interest rate environment. We have been restructuring our branch structure, selling some branches, closing some branches, and changing account structures, and with that this quarter our core consumer checking accounts continued to grow. We grew those accounts and improved the percentage of those customers who use us as a primary bank, and importantly the average balance per account continues to grow.”

And mobile banking is becoming a larger and larger component of the customers banking experience

When you go to the change in our financial services business for mobile and digital banking, we now have 18.4 million active mobile customers and 31 million active online customers.  More customers are using mobile device to deposit checks and access their accounts, and now are starting to buy products as well as book appointments. To get a sense of that, we are now booking 15,000 appointments a week off of our mobile devices.”

And mobile banking is more cost efficient for the bank as well 

“Mobile processing is better for us and it is better for our customers. It is one-tenth the cost relative to processing of financial centers and more convenient for customers.”

Bank of America (BAC) Paul Donofrio said the company’s retirement solutions business is gaining momentum from its ability to cross sell products 

The last thing I would note that’s not shown here is referral rates across the company remained strong. For example, our retirement solutions business continues to win in the marketplace. We have won more than 1200 retirement plans year-to-date, many of which were referred from global banking. On a year-to-date basis, this is up more than 40% from 2014.”

 

 

 

 

Wells Fargo (WFC) CFO John Shrewsberry reminded investors that the bank is positioned for interest rates remaining “lower for longer” than most anticipate

As I have discussed previously our view on interest rates has evolved over the past year to be more of a lower for longer expectation for both short term and long term rates. As a result, we’ve been adding duration to our balance sheet, however our balance sheet remains asset sensitive and we are positioned to benefit from higher rates and we expect to be able to grow net interest income over the long term even if the rate environment continues to be challenging.”

Like many of the other banks, they continue investing in their IT infrastructure and effectiveness

We continued to invest in our businesses with particular focus on risk, cyber and technology projects. These investments partially reflected in higher outside professional services expense in the quarter.  Our new and existing customers are increasingly using our digital offerings with active online customers up 8% and active mobile customers up 17% from a year ago.”

 

 

 

 

Winnebago (WGO) CFO Sarah Nielson said the company has decided to exit the bus business

“We made the decision to enter the bus business as announced earlier this week and have sold the related inventory and tooling to our distributor partner at cost. In light of the labor constraints that we have experienced this past year, we determine that our resources were better used to focus on the design and manufacturing of our motor homes. Also, we had not achieved profitability within this operation since the interception. We’ve recorded 1 million in operating losses in fiscal 2015.”  

Winnebago (WGO) CFO Sarah Nielson wants the company to be reactive, as opposed to proactive, in terms of figuring out which RV models the customer wants

We’re going to have to kind of monitor kind of quarter by quarter, what makes the most sense from a production plans. When we plan in an aggregate for the year we’re looking a lot at the labor resources we have to allocate and assuming a certain mix, but it’s a market where we want to be very reactive to what the deals want, what the consumers want. So, we want to be able to change as needed in them, so it potentially could but its hard to predict how all that will play out as we set today for the whole fiscal year for 2016.”