JS Earnings Call Notes 11.3.2015 – Potash, Varian, AIG, Loews, Discovery Communications, McGraw Hill Financial, AB Inbev, Starbucks, Novo Nordisk, LKQ, Ellie Mae, & DistributionNow

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Potash (POT) CEO Jochen Tilk said the agricultural chemicals market remains weak

“Looking ahead, macroeconomic headwinds, including lower GDP growth in emerging markets and the erosion of many currencies relative to the US dollar, contributed to a weaker commodity environment in 2015 that affected our sector as well. In light of these broader factors, we have lowered our expectation for 2015 global potash shipments to approximately 59 million tonnes and our sales volumes to a range of 9 million to 9.2 million tonnes. While potash demand held up relatively well in the face of emerging market uncertainty, prices have been less resilient.”

He said they continue to rebalance the portfolio and take costs out of the business to stay competitive

“First, our focus is on striking the right balance between flexibility and cost. We have some of the best, most efficient potash assets in the world and we continue to take steps to even further improve efficiencies and lower our costs. We began with operation workforce reductions in 2013 when we reduced our potash operating capability by approximately 3.5 million tonnes or 30%. This was central to marrying our capability with expected market conditions.”

Potash (POT) CEO Jochen Tilk said they will continue to maintain the high dividend even though it means they are paying out a significant percentage of their net profit

“our objective is to maintain our dividend. When we raise the dividend over recent years, we did this both thoughtfully and cautiously. The value of the dividend, $1.2 billion annually, was stress tested in a number of downside scenarios and we remain comfortable that even amidst a more challenging macro environment, it is very well-supported and can be sustained at current payout level.”

With new Potash supply coming online soon from mines that were built a few years ago when prices were higher, they continue to believe the supply demand balance remains tight

“So the question on our expectation of supply and demand going forward in next year and the year thereafter, we continue to believe that supply/demand is actually relatively tight and we think we understand new production coming online.

Even though the microeconomic environment is challenging, demand for the end product continues to grow

“The one thing that, even in spite of these difficult conditions, potash demand, globally, has remained pretty resilient. Our estimate for this calendar year on global demand in that 58 million to 60 million tonnes will represent the second best year of potash demand globally and that doesn’t go unnoticed by us.”

Given the recent weakness in the share price of Potash, CEO Jochen Tilk said he is still not comfortable buying back his own stock

“If you contemplate a share repurchase program, it has to be meaningful, it has to be significant. I don’t think leveraging the balance sheet up at this point, at this stage, with those concerns that have been raised would make sense.”

 

 

 

 

Varian (VAR) CEO Dow Wilson said they gained market share against all of the competitors during the year

“We gained share against the competition in all three regions of the world for the year. In North America alone, we estimate that we generated over $150 million in orders during the year to replace hardware and software products from our competitors.”

Varian (VAR) CFO Elisha Finney said currency movement had a massive impact across both reported revenues and how their competitors are behaving

“Before I walk you through the numbers, let me just say that exchange rates wreaked havoc on our 2015 results. Currency driven price erosion had a huge impact on our imaging components
business.”

When asked if he would divest the struggling image component segment of the business, CEO Down Wilson said there is significant synergies with the oncology equipment business thus he is not currently interested in divesting

“The profitability of that business hasn’t changed, but it’s very cyclical. We like the fact that we’re the leader in digital imaging technology. And so, we’ve got both a strong product portfolio as well as scale in the business. And there are synergies with our oncology business. The oncology is the second largest customer of that business. About 10%-12% of the product cost of our oncology business comes from our components business; over 1500 tubes and panels a year. So, there is some vertical integration that we look at.”

Varian (VAR) CEO Dow Wilson said the company’s equipment provides the lowest total cost of ownership

“As we go into an environment that’s uncertain from a reimbursement point of view, total cost to ownership is everything, and Varian’s advantage is there. There is nobody close to us with that. There will be some niche products out there that probably get some play in some segments, but I think people are still going to be looking at value for money and how to stretch their capital dollars.”

 

 

 

 

AIG CEO Peter Hancock responded first thing in the company’s earnings conference call to a public letter from Carl Icahn to split up the company

“But before I do I’d like to comment on the recent letter we received from Carl Icahn. The letter outlines a plan that includes separation of Life and P&C. Management and the board have carefully reviewed such a separation on many occasions including in the recent past and have concluded it did not make financial sense. We of course will meet with him to further share our conclusions and give him an opportunity to elaborate on his views.”

AIG CEO Peter Hancock highlighted some technology trends which are affecting the insurance business

“We’ve been investing, and we’ll continue to make investments that will give us a competitive advantage in an ever changing landscape. The current mega trend that we see in artificial intelligence, digital, the Internet of Things, and Big Data require us to make these investments with a constant eye on innovation in order to be relevant.”

AIG CEO Peter Hancock said their mortgage insurance business is a strong contributor to the company

“So UGC is a business which was for sale for virtually nothing back in the crisis days. And since then we’ve invested in it, modernized it, and taken it from number five to number one in its industry, and it’s performing very well today. We’ve kept it as a very modular unit, so it gives us strategic flexibility. But today it is a core business making a significant contribution to the company.”

AIG CEO Peter Hancock said he sees the company having a lower headcount in the next few years due to increased automation

“I think that there will be fewer people, because a lot of those jobs will eventually be replaced by automation. We also, beyond the head count numbers that you see, have a very substantial number of contractors. And that number will also decline. So between contractors and head count in total we’d expect that number to be substantially lower. And our technology would be a bigger part of the spend and the scalable infrastructure that gives us, will lower our unit costs substantially.”

AIG CFO David Herzog said the S&P rating agency gives them a diversification benefit for being in multiple non-correlated lines of insurance

“I think the S&P – the explicit diversification benefits, I don’t know that we have disclosed publicly, but it is quite substantial. It’s north of $5 billion in diversification benefits.”

 

 

 

 

 

Loews (L) CEO James Tisch began the call by focusing on the recent decline in the company’s stock price and their plans to buyback a significant amount of shares

“Since I’m not in the habit of ignoring the elephant in the room, I want to start today’s discussion by focusing on the stock prices of Loews and our subsidiaries. You certainly don’t need me to tell you that the stock market performed terribly in the third quarter. In general, we believe that the stock market is undervaluing our shares and those of our subsidiaries. Despite being frustrated, rather than complain, we look at this as an opportunity to create value for Loews’ shareholders by buying back our stock, and we did.”

Loews (L) CEO James Tisch discussed his thinking process on buying a hotel outright versus partnering with an operator

“Listen, I like capital light. So, management is always number one, but with management, you don’t control the asset, and in some ways, you don’t control your own fate. A partnership is the next best thing because that’s not capital light, but it’s capital lighter, so that we don’t have to put up all the money for the hotel. And the third alternative is for us to buy a 100% of the hotel, which we have done a number of times. What we look to do when we buy a 100% of our hotel is that over the next one year to two years we look to sell down a percentage interest in that hotel so we don’t have as much as cash invested in the property.”

Loews (L) CEO James Tisch said he sees a lot of value being produced by its hotel subsidiary even though it currently isn’t generating large earnings

“I’d say that with respect to Loews Hotels, it doesn’t have a lot of earnings, but it does have a lot of value. The hotels in our portfolio, many of them are the envy of a lot of people in the hotel business. And the goal of Loews Hotels is to continue building the value of the company. As I said, it may be difficult for you to see in the form of net income. We do show adjusted EBITDA as a measure to help give you some ability to get value of the business. But I’d simply end by saying that – as I’ve said before, I love all my children, I love all our businesses, and I think each one of them is doing well within the context of their industry.”

 

 

 

 

 

 

Discovery (DISCA) CEO David Zaslav says they were able to raise their prices even in a challenged environment for TV content companies

“On the affiliate side, revenues rose 12% in the third quarter. We continue to see the benefits of the strong price increases we have secured through the current renewal cycle, of which we are now 80% complete here in the U.S. The price escalators are locked in for years to come.”

Advertising growth showed particular strength

“Turning now to the operating units, despite all the talk about domestic secular concerns, our U.S. Networks grew revenues an impressive 8% this quarter, as we benefited from another quarter of strong distribution growth of 12% and a significant acceleration in advertising growth to up 6% year-over-year. We are extremely pleased with our third quarter ad sales performance. As David mentioned, our ratings outperformed the industry and this outperformance helped us benefit from robust scatter pricing and volume as well as stronger overall demand.”

And they are seeing increased viewership in international market

“At our Investor Day, I also said that our leading global distribution platform is Discovery’s secret sauce. That’s once again true in the third quarter. International viewership grew mid-single-digit overall with ID, TLC and Eurosport up double-digit or better. Our ability to increase share of viewership internationally helped drive strong organic advertising and affiliate growth. Organic ad sales rose 12% and organic distribution growth also was strong, up 8%. These figures demonstrate our strong international growth profile and best-in-class platform.”

Discovery (DISCA) CFO Andrew Warren said the company is adjusting its view on repurchasing its own shares

“On our last earnings call, we stated that we were unlikely to repurchase additional shares through the end of 2015 in an effort to retain capital allocation flexibility for strategic transactions as well as to pay down debt to lower our leverage ratios. But given our solid and better-than-expected third quarter revenues and bottom-line results, the successful Comcast renewal, our significant higher level of confidence in our ability to drive accelerating free cash flow, our high and growing cash flow-to-total debt yield, the continued favorable interest rate environment, and finally, that we find the return of buying our shares at these levels to be extremely attractive, we have adjusted our view on leverage. After very careful consideration, we are now comfortable with increasing our gross debt to adjusted OIBDA ratio to the 3.25 times to 3.4 times range versus the 2.75 times target we previously outlined, all while being highly committed to remaining an investment-grade debt issuer.”

Discovery (DISCA) CEO David Zaslav says they’re starting to take their content direct to consumer

“The direct-to-consumer business is something we’re just getting started with, but we have invested over the last year and a half primarily through our Eurosport partnership and in Northern Europe with the Eurosport app and with Dplay. We’re learning a lot. Both of those platforms are growing meaningfully. We do have a target in place which we’re calling March to a Million. We have 200,000 subscribers right now. And if we can get to a million at the $6 to $8 a month, we could generate close to $100 million in revenue.”

Discovery (DISCA) CFO Andrew Warren said they are making it a point of emphasis to have the highest debt load in the industry

“To answer your question on the leverage, we expect to kind of accrete our leverage up to the 3.25, 3.4 times by year-end 2016. It’s just so important to highlight that even at that level, our free cash flow to debt yield is still going to be mid teens to high teens, the highest in the industry. Our interest coverage ratio is going to be the highest in the industry. And we feel extremely comfortable given our growth profile of cash flow, that’s the right leverage target and capital structure for us.”

Discovery (DISCA) CFO Andrew Warren said he’s seeing pockets of growth across various geographies

“We still see aggressive growth, meaningful growth in Latin America, particularly Brazil and Mexico, although Brazil has slowed down a little bit with the economy, and India, we’re seeing meaningful growth in Eastern Europe.”

 

 

 

 

 

McGraw Hill Financial (MHFI) CEO Doug Peterson said with the recent intention to divest the J.D. Power business, the company is now focused on global and scalable businesses

“Our portfolio is now increasingly focused on businesses with a common set of attributes. The businesses are scalable; they are global; all have market-leading positions and fantastic brands; and serve growing markets. These businesses are increasingly interrelated and serving the capital and commodities markets. Together, it’s this unique collection of great assets with these world-class brands that distinguishes McGraw Hill Financial.”

McGraw Hill Financial (MHFI) CEO Doug Peterson said ratings services were weak during the quarter as customers turned cautious amid macroeconomic uncertainty

“Now, let me turn to Standard & Poor’s Ratings Services. Issuance outside the U.S. was weak as concerns related to China’s declining growth, falling commodity prices, and the Fed’s impending interest rate hike hindered issuance activity.”

With very specific weakness in global issuance in Asia & Latin America

“Asia and Latin America issuance decreased by 58% and 72%, respectively. This led to a 20% decline in global issuance overall. To put that in perspective, both Asia and Latin America had their lowest quarterly issuance since 2008. Due to the turmoil in the Asian markets and the devaluation of the Chinese yuan, year-over-year quarterly revenue from China experienced a decline for the first time in the last five years. In addition, this was Europe’s lowest issuance quarter since the third quarter of 2013.”

 

 

 

AB Inbev (BUD) CEO Carlos Brito admits they have mismanaged the Bud Light brand and they plan to refresh the image of the brand

“We are going to have what we think is going to be revolution in terms of trying to understand where the brand came from and trying to learn from its amazing 20 plus years history from zero to a market leader in the U.S. and playing that back in a more contemporary way playing back to some of these rituals. There will be also some packaging refresh and visual identity. So, I mean, lots of things that’s only fair for a brand of this size. So we think we have been unfair for the brand, so our fault, not the brand’s fault. We don’t believe in anything about brand having cycle. We believe in brands that are well managed and brands that could be better managed. And Bud Light is one of those that could be better managed and that’s what we have for next year.”

He added that the structure of the beer market is very regionalized

“We believe beer has been a very local brand, local business, different than any other consumer goods you look out there. So I think there is an amazing opportunity for us to drive these three global brands and really capture what consumers in all markets today want in some occasions, which is more of a global citizen type brand.”

Their Chinese operations outperformed their peers during the quarter and gained market share

“Moving now to China, in China economic headwinds and poor weather led to decline in industry volumes in the quarter. We estimate industry volumes were down almost 7% in the quarter and down over 5% year-to-date with most of the impact being felt in the value and core segments. Our own beer volumes declined by 1.3% in the quarter and were up 0.5% year-to-date with our focus on the faster growing core plus and premium segments leading to an estimated market share gain of 104 bps to 18.7% in the quarter.”

And they continue to focus on certain segments of the market such as women drinkers

“In China, we are outperforming the industry and gaining share based on our strategy of focusing on the women’s segments and channels.

AB Inbev (BUD) CEO Carlos Brito said their partnership with the NFL which allows them to put team logos on bottles continues to be beneficial

“We are very happy with NFL’s agreement that we have in the sponsorship. Of course, as consumer change, the media habits and the way they interact with sports and the NFL. We are also changing together with the league on properties and things we can activate. And the NFL has been a very good partner in agreeing with us on changes that we need to do to continue to be relevant with that consumer base. So again, a great partnership, we respect them a lot. They have a great business. And again, the number one sports in the country could all be associated with the number one beer in the country. ”

And he continues to see a lot of room to grow the business in Mexico

“So, I think the other fact in Mexico will be like in any other market of ours, a function of three things, revenue management initiatives, premiumization, and in Mexico specifically like Brazil if we increase our own distribution. I mean, premium in Mexico is only 3% of the industry volume.”

 

 

 

 

 

Starbucks (SBUX) CEO Howard Schulz highlighted the shift away from brick and motor retailing

“We are delivering quarter after quarter of record-breaking financial results despite the accelerating shift in consumer behavior away from traditional bricks-and-mortar retailing and despite difficult macroeconomic retail and consumer headwinds that continue to challenge traditional retailers.”

Starbucks (SBUX) CEO Howard Schulz emphasized that by investing in their employees, via increased salary & benefits, it leads to a better customer experience and lower employee turnover

“And the investments we make in our partners pay tangible dividends in the form of more satisfied and engaged partners, deeper connections among partners, and with customers and improved in-store efficiency, all of which contribute to an elevated in-store Starbucks experience for everyone, partners and customers alike. Noteworthy is that today we are seeing improvements in partner attrition, a direct result of our partner investments at a time when the industry overall is actually moving in the opposite direction. And we are seeing a direct correlation between reduced partner attrition and our business results. Our comp results are strongest where we are having our greatest success in reducing turnover. ”

Starbucks (SBUX) CEO Howard Schulz highlighted their customers loyalty to the brand

“Our customers trust us and reward us with unparalleled frequency and loyalty, as demonstrated by the robustness of our business, the unprecedented increases in global traffic we are seeing, and the amount of currency preloaded on our customers’ mobile devices. We continue to leverage all these assets in ways that are accretive to our business and to the heritage of our company. Never in our 23 years as a public company has the Starbucks brand or our business been more relevant or been stronger.”

Mobile pay accounts for nearly 1/4 of all store transactions

“Mobile payment now accounts for 21% of all transactions in our U.S. company-owned stores, and although we only completed the rollout of Mobile Order & Pay across our system 7500 U.S. company-owned store portfolio in September, we were already operating at a run rate of over five million transactions per month.”

Starbucks (SBUX) COO Kevin Johnsaid 1 out of every 7 Americans received a Starbucks gift certificate last year

“You may recall that last year, one in seven Americans received a Starbucks Gift Card over the holidays, generating over $1.6 billion in card loads in our first quarter of fiscal year 2015.”

Starbucks (SBUX) CEO Howard Schulz said they are in the business of creating experiences

Well, I think the equity of the Starbucks brand throughout our public life has been defined by the culture and values and guiding principles. I said from day one that we are in the experience business, and our brand is defined by the people who wear the green apron. The entire DNA of the company goes back to equity in the form of stock options, comprehensive health insurance, 25 years ahead of the Affordable Care Act, and this year alone groundbreaking benefit of college achievement of providing all of our people with a four-year education.

Starbucks (SBUX) CEO Howard Schulz emphasized the importance of how important mobile is to the business

“I think we also believe very strongly that we had to seamlessly integrate the Starbucks experience with all things mobile. And as I said in my prepared remarks, we are living in a mobile-first global economy and we’re witnessing that kind of change.”

The China business accelerated during the quarter

“we went back to work on that and I think we also believe very strongly that we had to seamlessly integrate the Starbucks experience with all things mobile. And as I said in my prepared remarks, we are living in a mobile-first global economy and we’re witnessing that kind of change. In addition, what we saw during the quarter was that comps actually accelerated month to month. And in China, we see that comps are continuing to accelerate into the month of October, which is great news for us.”

 

 

 

 

 

Novo Nordisk (NVO) CFO Jesper Brandgaard said robust performance of certain drugs are being offset by macroeconomic conditions

“We are seeing intensifying competition within both diabetes and biopharmaceuticals and challenging market access as well as macroeconomic conditions in China and a number of markets in International Operations.”

Novo Nordisk (NVO) CEO Lars Sorensen expects their China business to remain challenged

“In regards to China, we are impacted by increasing local competition. And we are impacted by a segment shift, much like we have historically experienced the same in Japan, where we have a strong position in premix market, China used to be a premix market. The only real solution to this is of course that we get Tresiba into the Chinese market, so that is a couple of years out. So, I think we will be facing relatively tough market conditions in China for a couple of years. We expect China to come back. But here in the immediate future, we expect lower growth.”

 

 

 

 

 

LKQ (LKQ) CEO Robert Wagman said increased vehicle miles driven is providing a tailwind to their business

“New vehicle sales increased the size of the car park, which equates to more insured cars on the road, the likelihood of increased accidents and more repairs. These trends help drive North American organic growth for parts and services.”

The declining prices the company received for various scrap materials hurt their earnings

“While we have been dealing with falling scrap steel prices for a while, during Q3, we also experienced a material decline in the prices received from other metals that are a residual of our recycling activities, including aluminum, copper, platinum, palladium and rhodium, which were down materially compared to the third quarter of last year.”

LKQ (LKQ) CEO Robert Wagman reminded the investor community of the firm’s mission statement and core competency

“We’re laser-focused on our mission statement of being the leading global value-added distributor of vehicle parts and accessories by offering our customers the most comprehensive available and cost-effective selection of parts solutions, while building strong partnerships with our employees and the communities in which we operate. I am encouraged by the trends in miles driven, the continued growth in the average number of parts per claim, the increase in the per unit share of APU, the increased costs of repairs pushing carriers to seek alternative parts to lower their costs and the consistent pipeline of acquisition opportunities we’re witnessing across all of our business lines.”

The average age of cars on the road in Europe is increasing which benefits LKQ

“The average age of the car part in the UK is 7.8 years old, but it’s expanding. And on the continent, it’s 8.6 years old and expanding. So we think as these cars get older, it’s going to provide a nice tailwind.”

 

 

 

 

 

Ellie Mae (ELLI) CEO Jonathan Corr said his company continues to benefit from the increased regulation and compliance associated with mortgages

“Shortly after the close the Respa Tila Integrated Mortgage Disclosure rule became effective. We’ve received positive feedback on the comprehensive solutions support and training our team provided customers as they significantly reengineered their business processes to meet these new requirements. The services and education we provided through our readiness initiatives further distinguished Ellie Mae from our competitors and helped build our pipeline of expected customers. With these new regulations in effect and more expect to become over the next couple of years the need for an all-in-one mortgage solution and a team that excels in compliance is greater than ever, and we’re seeing that reflected in the sustained demand for Encompass.”

And they’ve now partnered with both Fannie Mae & Freddie Mac directly

“We’re excited to announce a strategic partnership with Freddie Mac to further integrate their risk management tools into Encompass. These integrations will allow Ellie Mae customers to more easily originate loans within Freddie Mac guideline. You’ll recall that we also announced the strategic partnership with Fannie Mae in July. By partnering with both GSEs we’re making the entire loan process even easier for our lenders from application to post-closing.”

Ellie Mae (ELLI) CEO Jonathan Corr discussed how he thinks about when to raise prices on his software

“Historically, we have raised prices on base fees and loan fees, over time as we’ve added more and more value to the platform. We don’t take a position, although obviously we have a big position in the market and a big market share. We don’t use that to just raise the prices based on our market pie, we really look to as we’re adding more value to the platform, raise those fees over time and over last four years the base fee has just gone from 50 to 60 to 70 it was up to 75 for new customers as of — earlier in 2015. And we’ll keep doing that and the idea is again adding greater value rather than using our pricing power, is our approach.”

 

 

 

Distribution Now (DNOW) CEO Robert Workman says many of their manufacturers of steel pipe are in distress after steel prices went below their 2009 low

“We have begun to see some bankruptcies from the pipe mills and further shutdowns. I would like to think that we are near the lows regarding steel prices, but the factors previously mentioned make it difficult to predict our manufacturers’ price bottom or their input costs.”

“Regarding the market environment, we are in a decline like no other I have experienced, not only in my 24 years in this business, but also as a kid growing up in the energy industry. I was born and raised in a small town in the Permian Basin where my parents owned an oilfield service company. I never thought the market could decline again as sharply and severely as it did in the 1980s while I watched my parents struggle to make payroll, but I have clearly been proven wrong. We continue to see rig counts being reduced, projects being canceled, budgets being slashed, and inventory being cannibalized.”