JS Earnings Call Transcript 2.18.2016 – Express Scripts, Brookfield Asset Management, Trupanion, Axalta, Arch Capital, iRobot, Whole Foods

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Express Scripts (ESRX) CFO Eric Slusser said they are focusing on reducing costs

“As a management team, we are focused on improving healthcare outcomes for our patients while reducing costs. We are driven to create efficiencies across the organization. For example, working hand in hand with Chris Houston, who leads our core operations, we are simplifying operating complexities, eliminating redundancies and reducing our cost to fill. We are focused on a common goal to reduce costs within the organization while enhancing the service we provide to our patients and clients.”

Express Scripts (ESRX) President Tim Wentworth highlighted the increasing costs of drug prices as an area of focus

As we look to the future, we see many more ways for us to improve healthcare. When we deliver on the two things our clients need most, controlling costs and achieving better patient outcomes, it is both a growth opportunity for us and a testament to our business model of alignment. We have a strong financial and operational foundation to build upon and we are differentiated with unique solutions that are in high demand and we will always lead, even if it means taking actions others cannot or will not.  While our clients face a challenging environment with rising drug prices and increasingly complex regulations, we stand with them, working together to find innovative ways to strengthen the pharmacy benefit while improving care.”

Express Scripts (ESRX) President Tim Wentworth says the company will grow alongside clients

“We are well-positioned for the short- and long-term for two important reasons: first, the value we provide clients has never been greater, and second, there is a growing appreciation for our unique business model of alignment.”

Express Scripts (ESRX) President Tim Wentworth said they may enter the healthcare information technology segment if they found the right acquisition

I think HCIT, there’s a lot of fragmentation there. We obviously have a lot of internal capabilities that we can invest in, but as we look out both from a payer and a provider standpoint, there may be some interest there.”

Express Scripts (ESRX) CEO George Paz said they’ve been able to save clients money by shifting how they buy their pharmacy drugs

“The savings in that are significant for our clients. So, one of the biggest things you can do to manage your cost is by really focusing your buying on the most efficacious, best-priced products and driving into those areas. I think it’s there that the savings are quite substantial. And there’s other things such as driving mail order and doing Specialty Management properly.”

Express Scripts (ESRX) CEO George Paz discussed the company’s relationship with pharmaceutical manufacturers as it relates to drug inflation

“First of all, just at a macro level, the way Inflation Protection works is that we’re able to go out, we contract with the pharma manufacturers who make commitments around sort of the maximum pricing that they will take above which they will, through us, create value that we can then build back into the programs for our clients. So in essence, we go out, we don’t reinsure because we’re not taking true risk in an insurance sense. What we’re doing is we’re sort of out there contracting with pharma and then passing that back through the program that we’ve got. So it’s a very – it holds pharma accountable, and at the same time, it puts our clients in a great position to the extent that inflation is higher than what we were able to cap it in these contracts.”

And described it as a mutually beneficial relationship

“In effect, we provide an excellent way for those manufacturers to get to market in a way that is responsible, that creates maximum access for their innovative products, that ensures that there isn’t wasteful behaviors taking place”

Express Scripts (ESRX) CEO George Paz says they can still drive out costs from their business as a result of recent mergers

We still have an awful lot of inefficiencies in our mail order service that we can still go after and we think that there’s still a significant room to run there, so I do believe that this is going to be an annual exercise for us. It always has been and it will remain an exercise to focus on costs. What’s adding value to our patients and whatever isn’t, get rid of it. And that will stay our goal.”

 

 

 

 

 

Brookfield Asset Management (BAM) CEO Bruce Flatt says the company is benefitting from client’s increased interest in real assets

Our institutional and sovereign fund partners continue to increase their allocation to real assets.  With each of the funds at least 50% larger than their respective predecessor, this sets us up well for continued growth in the business. To answer the question, many have asked us, we continue to see very strong allocations from institutional clients for real assets from every market in the world, some with large increases to the sector.”

And he sees attractive investment opportunities now in specific emerging markets

With respect to investment opportunities, we’re seeing significant numbers of investment opportunities that meet our investment criteria across the board. This is the result of the accentuated macro themes over the last few years that we’ve been focused on namely, number one, the lack of capital in the emerging markets.”

Also seeing value in the high yield market after recent sell off

Specifically to the U.S. high-yield market, we’ve been and are investing significant amounts of dollars into high-yield bond positions today across most of our funds at what we see as exceptional yields to maturity and some which may turn into further opportunities in those funds.”

Brookfield Asset Management (BAM) CEO Bruce Flatt says the company is benefitting from negative interest rates in Europe as clients look to make investment in real assets that will hold their value

The European market will exhibit very slow growth for a long time and real assets may be the only place to find yield in a market where trillions of dollars of government bonds have been forced to negative yields by quantitative easing.  We’ve been finding exceptional assets to acquire and we’re able to finance them with very long-term low rate financing, generating strong cash yields to equity and we hope to continue to do this.”

Brookfield Asset Management (BAM) CFO Brian Lawson said they are being opportunistic about deploying capital in the oil & gas sector

Probably the biggest [area] that has changed is the oil and gas markets, as you know, have deteriorated very significantly in the last six months and that’s caused a lot of stress in a number of areas, and commodity prices have changed a lot.”

Brookfield Asset Management (BAM) CEO Bruce Flatt discussed the differences between the European credit market and the US credit market

The thing I would say is, there are opportunities around the world. They come in different forms in different places in different types. What the U.S. capital market has versus every where else, is the widest and deepest market. And secondly, most of its credit is listed in trades with CUSIP number. And therefore you can buy it in the second-hand market easily as opposed to as you mentioned in Europe, it’s mostly in a bank market. So they’re just much more accessible opportunities in the short-term versus some opportunities you might otherwise find from a banker something else in Europe. They are just more difficult to access.”

 

 

 

 

Trupanion (TRUP) CEO Darry Rawlings said American consumers are spending more on pets regardless of the economic environment

“Pet owners in the United States love their pets. In fact they spent more than 60 billion on pet products and veterinary care last year.  Their spending level has been increasing even through recessionary periods. As the costs of veterinary care continues to increase, so will the need for our product. There are more than 160 million cats and dogs in the United States and only about 1% currently have medical insurance plans.”

Trupanion (TRUP) CEO Darry Rawlings highlighted the company’s mission driven culture as a competitive advantage

“We talk a lot about competitive advantages but one aspect that we don’t mentioned often enough is our mission driver culture probably because it’s difficult to quantify.  Borrowing from a book that often gets quoted back to me, the plain truth is that talented people work the hardest when they are proud of what they do. When their jobs are interesting and meaningful, and when they and their team members are recognized for their contributions in share and benefits. At Trupanion, we are seeing that in action.

Trupanion (TRUP) CFO Mike Banks said customers continue to see value in the product as evidenced by the high retention ratio

Subscription revenue were up 28% year-over-year, driven by 27% growth in subscription pets and by continued strength in our average monthly retention rate which was 98.64% for the fourth quarter.  Our focus on providing a superior value proposition in customer experience drives strong customer loyalty which Trupanion pet owners staying with us for an estimated six years on average.”

 

 

 

 

Arch Capital Group (ACGL) CEO Dinos Iordanou said the reinsurance business is facing a multitude of headwinds and irrational competitors

To invoke a bit of a sailing analogy, we are facing headwinds in our reinsurance group, overcapacity, pressure on ceding commissions, more excess of loss purchasing at inadequate pricing. So, that describes a bit the reinsurance market conditions. “   

In their opinion, there are too many insurers willing to underwrite policies without being compensated for the underlying risk

 The returns there are just not satisfactory. In our view, capacity is plentiful. In short, the lines of business where we are focusing our efforts still provide us with expected ROEs on allocate capital in excess of 10%, but the days of low hanging fruit are gone. Our reinsurance group net premium written has declined 26% in the fourth quarter of 2015 versus fourth quarter of 2014, led by decreased writings in our short-tailed segment.”

As a result of fierce competition, they are re-focusing on less commoditized product lines

While macro events and the interest rate environment have brought down total ROE expectations to a new normal level, we are positioning ourselves in all of our underwriting units, focusing on specialty niches that have some inherent competitive protection and for which we believe we will achieve our 15% ROE target over the cycle.”

Arch Capital Group (ACGL) CEO Dinos Iordanou said he doesn’t want his underwriters to go to the competition

Let me give you also a little bit of the strategic view that we have when it comes to expenses. I said many, many times in many calls we are not willing to par with our underwriting capability. So we are going to maintain underwriters even if the market might cause us to reduce underwritings because we are going to maintain underwriting discipline and complete commitment to our good people, especially on the underwriting side.  I am not going to give my underwriters to the competition. So, we are going to maintain that, because our view of the market is more long-term than short-term. These are the same underwriters that generated significant profits for us when the market was good for reinsurance and that market will come back again to supply and demand and at some point in time, it will readjust.”

Arch Capital Group (ACGL) CEO Dinos Iordanou said risk analytics are becoming an increased point of emphasis for the company

And if you are not willing to assess risk appropriately and price it appropriately, at the end of the day, you might be subject to adverse selection over time and we don’t want to be in that category.  This is not something that as one of our competitors says it’s just some black box that spits out. It’s a lot of effort, a lot of analytics, a lot of historical data that we have used.  Everyone we have is a quant here, except me. But I keep up with them.”

 

 

  

 

 

iRobot (IRBT) CEO Colin Angle said America & China were its strongest geographical markets during the quarter

As a result of these efforts, Home Robot revenue grew more than 30% in the fourth quarter, driven by sales in United States and China, which were up 46% and more than 70%, respectively, over Q4 in 2014.  We need to better position ourselves in China to capture an even larger share of the rapidly growing market for robotic floor care.”

New distribution channels and effective advertising helped drive sales

Exceptional domestic growth of 46% in Q4 and 25% for the full year over 2014 was driven by investment in ad media, national promotions, launch of the Roomba 980, and the addition of Target as a new channel in the fourth quarter.  Our Roomba marketing programs were highly successful in the United States and we saw significant return on investments.”

They will be spending their incremental marketing dollars in Japan

During 2016, we will focus our marketing efforts on the Japanese market where we have already kicked off several initiatives. If we are successful, we should start seeing impact on demand generation by the end of the year.”

iRobot (IRBT) CEO Colin Angle said they are launching a new home robot this year but remained elusive on what type it will be

We do plan to launch a new Home Robot product in the first half of the year, but I’m not going to provide any additional information on timing or product category at this time.”

iRobot (IRBT) CEO Colin Angle remains optimistic on e-commerce sales in China

We think that long term, China is a tremendous market that could in the relatively short term become our largest market outside of the United States.  We expect to focus primarily on e-commerce. That is the most rapidly growing path to market in China.

They divested their defense and security business to focus solely on the home category

We believe that the growth opportunities in Home are immense and accelerating. And crucial to achieving those growth rates is both product leadership within the Roomba category and the establishment of the second leg on the stool, and within Roomba that means connectivity.  And given our market share, we are scaling the connected robot business at a very, very fast rate and so we’re pushing at sort of the bleeding edge of a lot of different back office technologies for connected product and are also making investments to ensure that the information that the robots are collecting is being done in a way that we can leverage in the future for the performance of the robot and also as part of an important element of the connected homes.”

iRobot (IRBT) CEO Colin Angle addressed privacy concerns related to their home robots

The overarching philosophy that we have relative to privacy on our Home Robot is, let’s be cautious. The 980 robot as is currently architected, all the information collected stays resident on the robot. It is our expectation to slowly allow some information to flow up to the cloud but it will be done with the permission of the owner, because that owner actually wants to enjoy the benefit of that information going up to the cloud.”   

 

 

 

 

 

 

 

Axalta (AXTA) CEO Charles Shaver said the company is benefitting from lower gas prices

We believe that refinished demand will continue to benefit in 2016 for lower fuel prices, which correlates well with increased miles driven, and accident rates as well as the purchase of larger vehicles that consume more paint.”

Axalta (AXTA) CFO Robert Bryant said increased efficiency helped improve margins

The impressive 220 basis points improvement in the adjusted EBITDA margin that Charlie mentioned reflected the volume and price tailwind noted previously, as well as savings from cost improvements and productivity enhancements offset in part by ongoing investment to support growth similar to prior periods.”

As well as increase market share

We are increasing share in global markets as we introduce new products, globalize our existing products and apply discipline and metrics based management to a business that was formally not a focus area for the previous owners. Our success is paired with a persistent focus on increasing productivity and creating a durable operating model that emphasized customer service, while definitely minimizing our cost structure to ensure we can compete effectively.  I think overall we are growing a little faster than the market.  And we are either the number one or number two market leader in most markets.

After the companies leveraged buyout away from parent company Dupont a few years ago, they continue to delever the balance sheet

Regarding our capital allocation plans, we continue to focus our free cash flow on debt reduction, targeting leverage of 2.5 to 3 times net debt-to-LTM adjusted EBITDA.  We are content to reduce our net debt leverage as the primary use of our excess capital.”

Axalta (AXTA) CEO Charles Shaver believes their raw material costs will improve from the drop in oil prices

I think when you look at the drop of oil that really started to occur in the second quarter and then you assume approximately 3 months before you would see that appear in cost of goods sold and flow through your financial statements. It’s probably at the end of the first quarter that we really start to lap some of those benefits, vis-à-vis the lag effect on a weighted average across all of our raw material baskets.”

 

 

 

 

 

Whole Foods Market (WFM) Co-CEO Walter Robb said they are discounting some of their items to broaden their appeal to customers as well as drive traffic and engagement 

We stepped up our value offerings to customers primarily through more and deeper promotions such as our customer appreciation, love fest and three-day sale in supplements, which were supported through social media, digital ads and select radio ads. Over the remainder of the year, we plan to continue our promotional strategy including more personalized offers and increase and broaden our price investments as well.”

And they now offer Whole Foods grocery delivery in 16 different markets

Our instacart sales continue to grow nicely and we now offer delivery in 16 markets with many stores seeing sales as a percentage of total store in the mid-to-high single digits and several stores averaging baskets over $100. We are in the process of expanding the service to more stores and several new markets this year.”

Whole Foods Market (WFM) Co-CEO Walter Robb said they are launching digital coupons for the first time

In our ongoing effort to better understand and offer more value to our customers we have accelerated the first component of our national Affinity program. We are excited to announce today the launch of digital coupons within our Whole Foods Market mobile app expanding the functionality beyond recipes and shopping lists.  Coupons have been the top request among users and now with a simple scan at the register preloaded digital coupons can automatically be applied to matching items in a shopper’s basket.  This is a win for customers, a win for us as well as we will gain actionable customer data on a national scale.”

By increasing their discounting initiatives, they now expect lower margins

Based on our Q1 results, we now expect a year-over-year decline in operating margin for the fiscal year of up to 70 basis points. Reflecting increased value efforts as the year progresses, the year-over-year decline in gross margin excluding LIFO in Q2 through Q4 is expected to be greater than 86 basis point decline in Q1.”

Whole Foods Market (WFM) Chief Operating Officer A.C. Gallo talked about the need to make sure their prices are competitive

I mean there are certain very important categories that we know that we need to be competitive on an everyday basis on. And so we are  working to systematically identify those and move pricing on those to make sure that we’re competitive. There’s a fair number of items we’ve lowered prices on so far this year and have plans to do more as the year goes on.”

They will be focusing on downtown stores in urban areas 

One of the things that you can expect to see going forward particularly as Whole Foods Market is in this transformational shift is you’re going to see the Whole Foods Market stores, they’re going to be larger stores. They’re going to have a lot of innovation in them. There’s going to be a lot of prepared foods. There’s going to be a lot of exciting things about those stores. That’s why when you talk about downtown Miami or downtown LA, we’re talking about fairly large stores that are really exciting, fun stores to be in.”