JS Earnings Call Notes 7.21.2015 – Bank of New York Mellon, IBM, Halliburton, Pentair, Travelers, United Technologies

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Jeremy S., an investment analyst here in Southern California, has started to contribute to Avondale’s company notes database. Below are quotes from some of the calls that Jeremy has read this week.

 

 

Bank of New York (BNY) CFO Todd Gibbons said the firm was able to increase revenue while reducing firmwide expenses for the first time in many years

Expenses were down 1% year-over-year and 1% sequentially as our business improvement process and the stronger US dollar are driving lower expenses in almost every category. Our ability to grow revenue and control expenses resulted in more than 460 basis points of positive operating leverage year-over-year.”

Bank of New York (BNY) CEO Gerald Hassell said the firm won a large back-office contract with T Rowe Price during the quarter and elaborated on the trend of asset managers outsourcing their back office functions

We do actually see it as a long term trend where investment managers in general are really trying to focus on their investment management process and less focused on providing — doing the mid-office and back office services internally. We do see it as a long term trend. We want to be very thoughtful about which clients we take on and make sure we’re leveraging our platforms and driving profitable revenue growth for ourselves rather than just taking on any one at any time. T. Rowe is a fantastic client. It’s a great partnership. We worked on this together for well over a year and we think we have a good rapport with them and a very similar culture. We feel good about this one.”

And CFO Todd Gibbons discussed what’s driving that trend of outsourcing

“But there is a fundamental trend where asset managers, just like other financial institutions in a high regulatory change, lower growth environment, are getting back to basics and fundamentally focusing on the investment process as their value proposition and relying more on firms like us to verbalize their middle office costs and actually their front office technology cost.”

The firm’s various alternative investment offerings continue to garner fund flows from investors

“We’ve had eight straight quarters of growth in alternatives and those have been strategies where clients are either getting uncorrelated exposures or they are getting absolute returns on asset allocations strategies that give them better diversified portfolios exposure.”

 

 

 

IBM CFO Martin Schroeter said the BRIC (Brazil, Russia, India, China) countries, who were the darling of the investment world just a few years ago due to their higher structural growth rates, saw decelerating growth during the quarter 

“The BRICs impacted IBM’s overall revenue growth rate by 2 points in the second quarter or said another way our revenue excluding the BRICs would have been up 1%. So let me start there, within the BRICS only India had modest growth building on improved operational performance and services. The other three countries were down at a double-digit rate. Brazil was down 16% though our revenue in Brazil last year was up over 20%, so was a very tough compare. The volatility of our results in Russia continued and our revenue in China was down 25% with fewer large transactions in the quarter.”
IBM CFO Martin Schroeter reminded investors that IBM is deeply embedded in some of the world’s largest companies 
“Nine of the top 10 U.S. retailers and each of the top 10 global banks run an IBM’s commerce solutions. IBM commerce now powers 30,000 organizations globally.”

Halliburton (HAL) CEO David Lesar believes a significant portion of the industry is operating unprofitably 

“We believe many of the smaller service companies are now operating below cash breakeven levels, which leads to the conclusion that pricing cannot stay at these levels for an extended period.”

And, much like their closest peer Schlumberger, they don’t expect the oil services market to recover until 2016

“We are not expecting a meaningful activity increase until sometime in 2016, depending on the pace of production declines and where commodity prices settle out in the coming quarters. Therefore, what we are continuing to do is manage our cost, service our customers that are engaged in this flight to quality, and prepare for the Baker transaction.”

 

 

 

Pentair (PNR) CEO Randall Hogan said he sees customers buying patterns as more cautious than last quarter

“While second quarter results came in close to our expectations, with Technical Solutions and Water Quality Systems delivering strong organic growth, we exited the quarter with increased concerns about our Valves & Controls segment. We now have a more cautious outlook on spending in energy and industrial and the ability of our Valves & Controls segment to navigate this more difficult environment in 2015.”

With particular weakness in certain geographies 

In particular, we saw a continued slowdown in spending, including MRO [maintenance, repair, operations] in chemical and petrochemical in Europe and Asia. We also saw a further pause in buying decisions in North American chemical and petrochemicals. The projects in the backlog, while delayed, still appear to be moving forward.”

Pentair (PNR) CEO Randall Hogan said he hopes his company can do several M&A transactions in order to drive consolidation in the sector

“So we are logically the right consolidator. It was part of the vision as we looked at it to build the company and get scale and have this advantaged structure. And we want to put it to work. We want to put it to work across the segments in a way that creates shareholder value going forward. We think we are aligned with shareholders on creating shareholder value. We’re not happy. We’re not satisfied at all with recent performance, and we’re open to all kinds of ideas. And we believe we’ve earned the right to be a consolidator, and we want to be.”

 

 

 

Travelers (TRV) CEO Jay Fishman reiterated his thesis that the insurance industry is acting less cyclical than previous decades due to rational participants

“We continue to believe that the amplitude of the cyclicality that our industry will deal with is much less than would have been the case historically and you can trace that comment back to our Investor Day in May of 2007; and of course while things can change, so far so good.”

Travelers (TRV) CEO Jay Fishman said that the insurance industry participants are acting more rational in pricing their policies 

“So the simple arithmetic of taking a lower rate on a large book in the hope of driving revenue synergies is often a fool’s errand. Now it isn’t always. Some people can do perhaps elegantly, but there haven’t been too many of them. So I suspect that the market will continue to think about interest rates and weather and the cost of capital and all of it seems to be incorporating as it prices its product with an unknown cost of goods sold. I don’t expect a lot of change. Could be dead wrong, but that’s one person’s view.”

And the industry’s emphasis on data analytics has helped insurance underwriters better price the various risks in their policies

“Any one company if it’s large enough and is willing to accept subpar returns over time can affect the marketplace from a pricing perspective, that’s not been the case, it’s not been the case for a long time. Now why that is, I actually think a lot of it is data and analytics and the fact that people actually understand their returns better than they did 10 years ago. No one would open knowingly say, well I’m pricing this to produce subpar returns, I think that happened to some extent accidentally, not intentionally and so I think the data is different than the business, it’s been different for some time. I get asked all the time, are we pleased or not that other people seem to be getting good at it? I think it is great. I think the more people understand the cost of goods sold in our business and the risks associated with it, the more we look like a normal financial services business and less of one that’s operating in the dark. So, I think that we may have led this and I’m sure we did, but the fact is that you see it in virtually everyone’s reporting, greater reliance on analytics and return focus and that’s I think what’s causing it. We’re allowing it to happen perhaps is a better expression.”

 

 

 

United Technologies (UTX) CEO Greg Hayes said the Otis elevator business has lost significant market share and needs to shift strategies

“The key for Otis really, is to regain market share. Over the last 10 years or 15 years, we’ve seen a continued erosion of Otis market share as we have pursued margin expansion, and I think we have taken margin expansion to the point now where we’re not terribly competitive based on new equipment pricing. And quite frankly, you’ve got to feed the service business with new equipment orders. There’s also the issue of course, of service in Europe, and that is probably the biggest issue. Otis has 1.9 million elevators under service, about 1.1 million of those are in Europe. And that’s where we’ve seen the biggest pricing pressure, and we’ve seen no growth in that market for the last couple of years. So we’ve got to return to growth on new equipment, and we’ve got to stem the service degradation and pricing that we’ve seen in Europe as well.”