iRobot (IRBT) Q2 2016 Earnings Call

iRobot (IRBT) CEO Colin Angle said the company has chosen Amazon Web Services’ cloud to expand their capabilities 

“We recently announced a new relationship with Amazon Web Services that we believe will enable iRobot to address significant opportunities within our consumer business and the connected home.  AWS is a managed cloud service – solution that enables connected devices to interact easily and securely with cloud applications and other devices. The AWS Cloud will enable iRobot to scale the number of connected robots it supports globally and allow for increased capabilities in the smart home. This is a huge step forward for us as we address strategically important cloud robotics technologies. With its broad, rich services and world-class infrastructure, the AWS Cloud will enable iRobot to more efficiently develop connected robot technologies and expand the value of robots within the smart home.”

They believe we’re in the first inning of robots within the home

“Robots are going to become an incredibly important part of our ongoing strategy. We talked a little bit about competition earlier. One of our tools in ensuring long-term leadership is connecting our robots, and all of the features and capabilities have been connected and the maps that the robots are building can deliver. We are at the beginning stages of what’s going to be a very interesting future of robotics with more and more technology being brought to bear on Home Robot based on cost effective ways of putting computation on data storage and the cloud.”

Sold 23,000 robotic vacuum cleaners in 6 hours on Amazon Prime Day 

“It continues to be strong and the Prime Day performance, I think thrilled everyone. We had a special SKU that was sort of truly strip down from an accessory perspective version 600 and we sold 23,000 in under six hours.”

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

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.”

 

JS Earnings Call Notes 10.22.2015 – Halliburton, RLI, United Technologies, Bank of New York, Travelers, Pentair, iRobot, General Motors

Halliburton (HAL) President Jeff Miller says their business remains pressured but they ultimately expect a recovery in their end markets

“The pumping business in North America is clearly the most stressed segment of the market today, but it’s also the market that we know the best. We know our approach works when the market turns, and it will. This is the segment that we expect to rebound the most sharply.”

They expect oil drilling activity will remain tepid for the rest of the year

“We believe these prices are clearly unsustainable, but as we have been saying all along, pricing cannot stabilize until activity stabilizes. Looking ahead to the fourth quarter, visibility is murky at best. Based on current feedback, we believe most operators have exhausted their 2015 budgets, and will take extended breaks, starting as early as thanksgiving. Therefore our activity levels could drop substantially in the last five weeks of the year.”

They remain in active negotiations with the Department of Justice to gain regulatory approval to complete their Baker Hughes acquisition

During the quarter, we announced the second tranche of businesses to be marketed for sale in connection with the acquisition of Baker Hughes, and we expect that marketing process to begin shortly. On the first tranche of divestitures, we have now moved into the negotiation process. On the regulatory front, during the quarter, the timing agreement with the DoJ was extended by three weeks, and accordingly, Halliburton and Baker Hughes agreed to extend the closing date to December 16th.”

Halliburton (HAL) CEO David Lesar said their customers always want to drill 

And I think one of the things that our customers demonstrate, and believe me, we love all our customers. If they have cash they are going to spend it.”

Over half of the equipment is idled right now

If we look at the amount of horsepower that’s idled right now, just on the side lines, about half of it is on the sidelines today in terms of stacked equipment. And that’s equipment that’s not getting any maintenance, and it’s being cannibalized for parts.  The other factor that we see now, service intensity continues to increase actually on a per well basis. And so, that’s yet again harder on the equipment that is working. So if we look at what’s stacked today, we think about half of that equipment stacked today will not be ultimately serviceable. So that maybe in their estimates four to six million horsepower out of the market in ’16.”

Halliburton (HAL) CEO David Lesar ultimately expects the pricing of their services to recover

There are some key customers as Jeff said in key basins that have been very loyal to us, and we want to stay loyal to them. We know they are going to survive. We know they have good assets. We know they are going to get a budget reload, and we know that they want to take advantage of the services pricing that’s out there today, even if I don’t like that service pricing, it is there. It’s a fact of the market. This is a long-term game we are in. These are long-term customers we have. We typically make good money from them in good times, and I’m not going to walk away from them in the kind of times we are in today because it will pay off in the long run, and I think that’s in my view the smart way to approach this.”

 

 

  

 

RLI Executive Vice President Craig Kliethermes said the firm’s superior underwriting continues to shine

RLI was founded on the promise of finding really smart disciplined insurance professionals and aligning their interest with shareholders. The culture of underwriting excellence will continue to be the focal point of our organization.  We posted an 81 combined ratio for the quarter which leaves us at 83 year-to-date. All of our segments came in under a 90 combined ratio.”

And they have been able to slightly increase rates  

Rates overall have been slightly up about 1% to 2% for the quarter and year-to-date mostly led by rate increases on all wheels based businesses.”

One of the strongest sectors of their business has been automobiles and trucks where they have an excellent reputation 

In casualty we continue to be led by our transportation business. We grew over 40% in the quarter and are up over 20% year-to-date while margins remain good. Rates were up nearly 10% for the quarter driven mostly by the public auto sector. While many have suffered terrible fates in the wheels business our results have evidenced, our underwriting discipline, and that relationships and expertise really do matter in this business. We had several large customers return to us this quarter as a result of poor service and claim handling by our competition.”

Catastrophe pricing remains weak  

Cat pricing continues to be down double-digits, went down a little more than quake. A very challenging environment to write much new business, the focus is to keep the best renewal accounts.  The broader market in general does not seem rational and disciplined to us.”

RLI Executive Vice President Craig Kliethermes reiterated what separates his company from the competition

We regularly see flights to markets that appear to produce exceptional underwriting results. It isn’t that easy, whether it be surety or more generally to specialty space, it isn’t the title specialty business that automatically earns you good underwriting results. You can’t get specialty results without specialists. That is what we have at RLI, specialists with a narrow and deep expertise and underwriting and handling claims that in a particular niche market that should differentiate us in all market cycles particularly in the more difficult troughs.”

 

 

 

 

United Technologies (UTX) CEO Greg Hayes said the sale of the Sikorsky helicopter unit reduces the company’s overall reliance on government spending

“When the Sikorsky sale is complete, the UTC portfolio will be focused on its core businesses, and that is supplying innovative game-changing technologies for the buildings and aerospace systems industries. Going forward, UTC will have a better organic growth profile, along with higher operating margins and a stronger, more predictable cash flow. And defense exposure for UTC goes from 19% to 13% on Sikorsky.”

United Technologies (UTX) CEO Greg Hayes highlighted some of the secular growth trends which will fuel their end markets 

“Thinking about Buildings and Aerospace portfolios, we’re very well positioned. Otis is the best elevator business in the world. And I say that because we’ve got 1,800 branch offices, we’ve got 3 million unit installed base and we service over 1.9 million elevators on a daily basis.  Our Aero backlogs are at their highest levels ever, giving us confidence that Pratt and UTAS can deliver the strong revenue growth goals that they’ve laid out.  The long-term outlook remains solid, innovative products, industry-leading franchises, global scale and solid market fundamentals in our core businesses, driven by revenue passenger mile growth and the global expansion and continued urbanization of the middle class.”

While China continues to decelerate  

In Asia, we continue to see the China market weakening. Growth in fixed investments has slowed considerably. Otis new equipment orders in China were down 19% in the quarter after being down 11% in the first half of 2015.”

And they expect next year will remain a challenging sales environment as well for the entire company

“Net-net, as Greg said last month, 2016 will likely be another challenging year. Earnings in three of the four segments – Otis, Pratt, and UTAS – will be flat to down even with the pension benefit.”

United Technologies (UTX) CFO Akhil Johri said almost half their revenue is recurring

Also we have a significant base of recurring revenues, which today account for about 45% of UTC sales.”

United Technologies (UTX) CEO Greg Hayes said the company operates with a 30 year time horizon

It’s simply a recognition that while we have to make investments in the short run, this is really a 30-year time horizon. We’re investing in engines today, we’re investing in elevators today that we’re going to service for 30 and 40 years.”

United Technologies (UTX) CEO Greg Hayes acknowledged they have lost market share to elevator competitors, such as Kone

And so to your point, KONE has gained share on us in China. We’re not happy, we’re going to go after that and not just China, really it’s globally.  It’s about having great product and a great service team and great leadership and we’ve got that across-the-board in Otis today and I’m confident we’re going to be able to regain share without sacrificing a lot of margin.  The loss in China market share, to some extent, was driven by a conscious decision on our part not to play in certain segments.”

And they are remaining disciplined when evaluating potential acquisition opportunities 

“We have not seen or found an asset of quality that we like quite yet, but we continue to look. And it ultimately comes down to, can we buy a business and create real value for the shareowners without having to give all of that value to their shareowners in the firm  in the form of a very high takeover premium.  I think what’s off the table today is the bigger deal. We’ll do deals in kind of that $1 billion to $5 billion range, things that we can finance with existing cash or cash flows or what we have on the balance sheet.  So over time, as the UTC share price recovers back to towards where intrinsic value is, we may think of a bigger deal.  We’ve closed on a couple of deals and we’ve walked away because the value wasn’t there at the end of the day after we did due diligence and we did the right thing.”

 

 

 

 

Bank of New York Mellon (BK) CEO Gerald Hassell said the firm is finding it a difficult environment to grow revenue so they are focusing on what they can control which is namely operating expenses

Our priority is executing on our business improvement process that leverage our scale and expertise to deliver efficiency benefits to clients, while reducing our structural costs. Our success on this approach is reflected not only in lower expenses in nearly all categories, but in our industry leading market positions across all of our businesses.  And we have also been analyzing our current real estate portfolio to reduce cost. And we are selecting locations and workplace standards that enable collaboration and innovation.”

Bank of New York Mellon (BK) CFO Todd Gibbons said due to negative interest rates in Europe, the bank is charging some of its customers to hold their deposits

There is a slight decline, in deposits since we initiated that strategy, but not much. We did up the charge for some of those deposits in the third quarter, late in the third quarter. And I would say just seeing a modest decline, if any.”

And they plan on improving their advisor retail offering

“Absolutely, what I would point you to is that while we are the sixth largest asset management in the world, in terms of U.S. mutual fund families, we are currently 37th. So we have all of the investment capabilities or a large majority of the investment capabilities in-house that is used by investors that use mutual funds, financial advisors and individuals, ultimately as the end users. But our platform to reach advisors is below where we think it should be or where it could be to really improve our distribution of our investment capabilities through that channel.”

 

 

 

 

Travelers (TRV) CEO Jay Fishman said analytics and pricing policies appropriately have been a huge competitive edge for the company

But as I reflected on this quarter’s earnings as well as the string of quarters that we put together over the recent past, my hypothesis is that the competitive advantage of analytics, risk selection and pricing management have had a meaningful effect, particularly cumulatively. I can’t prove it to you because I don’t know what our results would have been if we weren’t just good as we are. But I do believe that one of the important factors that has led us to produce industry-leading returns is the fact that we have managed the changing rate environment over the last five years as effectively as we have.  I am certain that it has mattered and you should know that the commitment to analytical insight that produces these advantages is very much a part of the DNA of this place.”

Travelers (TRV) CEO Jay Fishman said their customers tend to be some of the older demographics

And we know that for example from our experience of being the GEICO partner for as many years as we have been, the customers that buy directly are on average, now it doesn’t mean that we are on lots of exceptions but on average they are younger, more single, more single cars, more minimum limits, they are a different driver than a higher end older, importantly older driver, the sort of type that was typically been a Travelers customer. So you can speculate and it’s all it is, is it possible that distracted driving is impacting that younger group disproportionately relative to the older drivers.”

Travelers (TRV) CEO Jay Fishman reiterated the company’s acquisition strategy 

And I would just add that in the context of acquisitions, we’ve been actively engaged with anything that’s transpired, we’ve established views of value and where value can be created, and points at which it can be and if we would have find the transaction, that would fit strategically, that would enable us to either reduce the volatility of our own returns or potentially even improve them and of course, that’s hard being the highest return competitor in the industry, but if we can find that, we’re not uncomfortable moving ahead, where we have done a few transactions in our lives and feel that we have got the skill base to execute and so we will always keep looking.  

 

 

 

  

Pentair (PNR) CEO Randall Hogan said customers are delaying their purchases and deferring maintenance

“Core sales in all four Valves & Controls sub-verticals were down double digits with the steepest declines in mining. We also saw weakness in our short cycle business, which is further evidence that customers will not only cut capital expenditures this year but are also deferring some maintenance turnarounds and operational expenses.”

Pentair (PNR) CFO John Stauch elaborated on 2 distinct distribution strategies for the company

Our customer buys from us either in a short cycle, I need it quickly, I want it for a installed based or MRO aftermarket application, or I’m seeking an engineer to order application or a project. So, our sales force has been working to meet those customer needs in that regard.  So, what we’ve done is we’ve aligned the two value streams to support that within the business around those two buying proposals, which starts to identify the needs to serve the short cycle, which means I need local inventory, I need to get it to you in 24 to 48 hours, I have to have service centers to be able to give you the service you need. And then on longer projects, I can generally ship that from anywhere in the world, and I can begin to work and then engineer the order to the customers’ needs.  The standard is obviously a higher margin, and you’re buying something that you need on a like-for-like basis.”

 

 

 

 

iRobot (IRBT) CEO Colin Angle said the business saw weak sales in Japan

Q3 revenue met our expectations, due to continued strong growth in the United States and China, partially offset by softness in Japan. Third quarter earnings exceeded expectations, primarily because we decided to curtail the planned incremental Japan marketing investment, as the overall economic climate in the region was dampening its impact.  While we are experiencing weakness in a few isolated international markets, we expect the macro impact to be temporary.”

Despite increased competition into the robot vacuuming category, they claim they are still leading the category

While we are experiencing weakness in a few isolated international markets, we expect the macro impact to be temporary. Global spending in robot vacuum cleaners continue to grow, and we are maintaining our leadership position in the market, despite several recent entrants in the category.  As the vacuuming market continues to grow, there are new entrants, but they have not impacted our share, and so I think that that’s the key message that we have been able to successfully raise our performance bar swiftly enough that, we feel like we are increasing our performance lead over the competition, and the market share figures support that confidence and the performance of our products.”

iRobot (IRBT) CEO Colin Angle referenced one of their products high ratings on Amazon as a validation of the quality of the end product

And the performance of the robot has been outstanding, and it is a huge amount of technology that we just put on the marketplace, so that the fact that we are getting very high ratings on Amazon, suggest that the tremendous amount of work we went into ensuring that connecting the app and the ease of use of the app and the navigation technology ability to function in real world environments, is all proving out in a very positive fashion.”

And they are collecting data direct from their robots on how and when the products are being used

We actually feed back to our customers, the ability to monitor when the robot came out, and how much area that it covered. Those are things that we also can collect and understand. So just plain usage data and run time data are two of the earliest things. Also if you call our customer service line, with an issue on the robot, the robot will be able to give us some information, as to its own state. And so, those are all very-very helpful in order to improve customer confidence and customer experience.”

 

 

 

 

General Motors (GM) CEO Marry Barra cited the company’s improved emphasis on investment returns as opposed to the old strategy of sales volume

“Adjusted automotive free cash flow of $0.8 billion reflects seasonality and the settlement of several uncertainties, and our 26% return on invested capital based on a trailing fourth-quarter average demonstrates that our disciplined capital allocation is paying off. It had $3.3 billion in EBIT adjusted with an 11.8% EBIT-adjusted margin. These are both records for North America.”

Truck & SUV sales were strong and they picked up additional market share

“Clearly, trucks, crossovers and SUVs drove strong sales gains. U.S. retail market share in Q3 was up nearly 1 percentage point from a year ago, 16.5% compared to 15.6% in 2014. GM’s share of the entire retail full-size pickup segment is approximately 40%, up 2 percentage points from a year ago.”

General Motors (GM) CEO Marry Barra intends to use their scale to drive further efficiencies and higher profitability

We’re leveraging our scale across the value chain to develop this new vehicle family that will require less capital, generate more volume, and drive more profitability.  And as we look at cost efficiencies, we continue working across the entire value chain to make sure that we are as efficient as possible so we can enhance the customer experience and also drive shareholder value.  As we talked about in the Global Business Conference, we have identified $5.5 billion of savings from the 2015 to 2018 timeframe. And that’s from purchasing initiatives, manufacturing, driving for efficiencies and reducing administration expenses.”

General Motors (GM) CEO Marry Barra said the company continues to focus on selling vehicles in smaller Chinese cities as opposed to competing in the hyper competitive large urban marketplaces

And despite the slower growth, there is still significant growth potential for China. Much of the growth will be in the Tier 2 to 4 cities and that currently represents 85% of GM’s volume. We will continue to focus on sustaining strong margins between 9% and 10% through the sales growth that is afforded by MPVs, SUVs, and Cadillac.”

General Motors (GM) CFO Chuck Stevens said they are combatting the slowing growth in China by managing their mix

And as we’ve talked about on a number of occasions, we’ve been able to generate these results specifically because the team in China has been proactively managing the market risk with several actions such as optimizing mix – and you saw the results with the September sales being up significantly from an SUV perspective – aggressively reducing cost by rolling out cost-down-efficiency-up initiatives and really working to manage our inventory levels and ensure that we’re aligning supply and demand.”

And they’ve been able to generate a substantial amount of savings by altering their material cost

But if you look just one of the components of that, this year we’ve talked about non-raw-material performance of $2 billion. We’re very, very much on track to deliver that.”

General Motors (GM) CFO Chuck Stevens said the entire car industry is acting more rationally than in the past by utilizing less discounting of end products

Overall, the dynamics in the industry remain reasonably rational.  One of the things that we talked about and if you look at the share performance year-to-date is our real focus on shifting our volumes out of fleet and into retail because retail is more profitable than fleet.”

JS Earnings Call Notes 7.22.2015 – iRobot, Interactive Brokers, MarketAxess

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.

 

iRobot (IRBT) CEO Colin Angle said people bought Roomba vacuum cleaners for their parents on Mothers Day & Fathers Day

“Promotions we ran for Mother’s Day and Father’s Day coupled with our new marketing campaign in the U.S. helped drive 24% increase in domestic revenue over Q2 of last year and strong sell through at our retailers.”

iRobot (IRBT) CEO Colin Angle told investors that a new home navigating robot will be launched in the 2nd half of the year

In addition, the long-anticipated navigating home robot will be launched in the second half as promised. I’m not going to say anything more about the product, launch timing or features but we are very excited about it.  ”

iRobot (IRBT) CEO Colin Angle emphasized that their business strategy is to focus on the premium end of the market (similar to Apple) 

We’ve quite rapidly taken over the premium price point category, which is our business model.  There is a significant lower price robot vacuum cleaning segment which we do not compete in nor do we plan on competing in, that is in existence to a larger degree than it exists in other nations. So that’s a interesting, unique feature of the China market. But we are very pleased by the growth we are seeing and we are succeeding with our strategy of taking over that higher end premium position.”

 

 

 

Interactive Brokers (IBKR) CEO Thomas Petterfly said his firm is benefitting from the trend of investors searching for investment opportunities around their globe irrespective of the customer’s current location

“IBKR is a global broker. Our special strength in addition to our technology and very low pricing is the fact that any client no matter where they are located they can trade or invest anywhere around the world.  Clients can manage their address of those currencies and asset classes all in one account. Indeed outside of the U.S. very few of our clients open account with us just for the purpose of investing in their local markets. Most of them carry internationally diversified portfolios.  As a result when local market stock perceives as less desirable to investing, people begin to search for international investment capabilities and we experience the rising demand for our services.”

Interactive Brokers (IBKR) CEO Thomas Petterfly pondered what would happen to financial markets in a cybersecurity scenario where the internet went down

I think that security is a very-very big issue and I’m not as much worried about ourselves but I’m worried about the entire infrastructure and what happens if that comes on so we have our backups we are continuously besting it to make sure that it is operational but I’m afraid of what would happen if the whole Internet came down or if the banks operation got disrupted or all kinds of things can happen.”   

 

 

 

 

MarketAxess (MKTX) CEO Rick McVey stated the firm has benefited tremendously from increased corporate bond issuance 

The boom in corporate — over the last five years has lead to a significant increase in a number of corporate bond issuers and a number of corporate bonds outstanding. This has caused the markets become more fragmented with more issues trading each month and less concentration of volume in the actively traded 1,000 corporate bonds.  The increase fragmentation in the market combined with the increased bank regulations places further strength on secondary market liquidity.”

JS Notes: WTM, IBM, VZ, TRV, PNR, IRBT, MKTX, BK

We’re excited to announce that 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.

 

White Mountain (Ticker: WTM) CEO Ray Barette says book value and share price have grown at nearly the same rate since the firm’s IPO 30 years ago

“2015 marks the thirtieth anniversary of the Company’s IPO. Since then, we have grown book value per share and share price by 14% and 13% per year, respectively, including dividends.”

White Mountains thinks about the insurance business in a way that’s materially different than a majority of their insurance peers

We have achieved these results by remaining focused on creating shareholder value per share, often giving up short term upside to avoid big downside. Our results have been lumpy, often disappointing, for extended periods of time. The key to success in the insurance business is to avoid big mistakes.”

Nonetheless, they have made some strategic mistakes along the way

“We made three big mistakes in the last ten years that have significantly reduced our overall performance.  We have learned from those lessons, and I believe we have improved our approach to managing those and other major risks. The challenge has been in not becoming overly risk averse. In practice, we have substantially de-risked your Company.”

They are still experiencing soft pricing in some insurance lines

“The influx of capital from peers and alternative markets is putting pressure on prices and terms and conditions, mostly in peak cat zones and some specialty areas.”

A large portion of their investment portfolio is in conservative, short duration bonds which has hurt their investment returns 

“The short duration positioning of the fixed income portfolio left money on the table but protected our capital position from what we continue to perceive as an asymmetrical risk to rate movements.”

The company has nearly $1 billion of cash sitting on the balance sheet and is no hurry to put it to work given current valuations 

“Intellectually, we really don’t care much about leaving our capital lying fallow for years at a time. Better to leave it fallow and to wait for the occasional high-return opportunity. Frankly, sometimes shareholders would be better off if we all just went to play golf.”

The firm prioritizes underwriting for profitability rather than underwriting in order to grow revenues

“An insurance enterprise must respect the fundamentals of insurance. There must be a realistic expectation of underwriting profit on all business written, and demonstrated fulfillment of that expectation over time, with focused attention to the loss ratio and to all the professional insurance disciplines of pricing, underwriting and claims management.”

 

 

 

IBM CFO Martin Schroeter reminded the financial community of the mission critical work & transaction data that are run using IBM’s servers

“Let me give you a real example of what we’re talking about. If you are UPS, one of the largest logistics companies in the world, you have to manage nearly 5 billion deliveries a year with highly seasonal changes in demand. Your customers expect their packages to arrive on time, and they expect to schedule, manage and track shipments anywhere, anytime, and increasingly through their mobile devices.  These mobile transactions can lead to dramatic increases in overall traffic as customers complete transactions at will. This requires a system that can handle the growth and scale seamlessly when activity spikes, maintaining a secure system that’s always available. That’s why UPS chose to upgrade to the IBM z13 mainframe because it could meet the expanding demands of the mobile economy.  I don’t think that mainframe is fully appreciated for the essential nature of the work it does.”

“Financial services sector is obviously one where the mainframe plays a pretty vital role in how the world banks run and when you get a new mainframe, particularly when so relevant to them shifting their business into mobile, particularly one where counter fraud is such an important part of what they have to think about every day.  And again you need scalability, you need reliability. You have to run all the time.”

 

 

 

Verizon (VZ) CFO Frank Shammo says the company is willing to let the most price sensitive customers defect to other carriers

“If the customer who is just price-sensitive and does not care about the quality of the network, or is sufficient with just paying a lower price, that’s probably the customer we’re not going to be able to keep”

 

 

Travelers (TRV) CEO Jay Fishman on the firm’s insurance underwriting pricing discipline 

“We don’t pressure underwriters for volume, we don’t. If you do, you will get volume; you won’t like what you get; that’s been our philosophy but you will get it. We let them run their business with tremendous amounts of data like adults making thoughtful decisions managing it for the long-term.”

Travelers CEO Jay Fishman says that low interest rates require clients to pay higher premiums than usual in order for Travelers to earn a decent return on capital

“Fixed income returns remain at historical lows and as a consequence, we must continue to be mindful that this challenging environment has already lasted far longer than most would have assumed and we will continue to factor that environment into our pricing strategies.”

 

 

Pentair (PNR) CEO Randall Hogan says the company saw  a significant slowdown in all parts of their business  

“We do not see this to be a Pentair specific issue as this broad-based decline was across virtually every business, every geography and every market.”

Pentair CFO John Stauch says he sees deflation in his sector

“I think clearly global commodity prices are not increasing.  We don’t want to use the word deflation yet but it feels like we are heading a little bit more into deflation area environment and so we are put our main suppliers on notice that we all have to work competitively to reduce our cost structures.”

 

 

iRobot (IRBT) CEO Colin Angle says robot vacuuming is becoming more of a substitution to traditional vacuuming 

“I think that one of the driving factors is the demand for robot vacuuming is showing very strong continued signs of growth, so that we have an underlying improvement in demand for our products. The robot vacuuming is becoming more and more mainstream. The skepticism, barriers to purchase continue to be reduced. And I think that our marketing programs continue to improve and as we more efficiently learn how to speak to our customers.  We believe that we’re approaching a mainstreaming of robot vacuuming, where our household penetration is still quite low relative to where we believe it’s going.”

 

 

MarketAxxess (MKTX) CEO Rick McVey says his firm is taking market share from clients who traditionally call a banks sales & trading desk to buy or sell bonds   

“Accelerating market share gains across high-grade, high-yield emerging market and euro bond products drove our record results. Our estimated adjusted U.S. high-grade market share was 15.6% for the quarter up from 13.4% a year ago.”

 

 

Bank of New York Mellon (BK) CEO Curtis Farrell says the firm is leveraging technology to increase efficiency on a profit per employee basis    

“Our goal as part of our business improvement process is to drive down the labor component of our company and use technology as the strategic asset. So, one of our goals is to get to revenue per employee up, the employee expense down and use technology as a strategic asset to get there. So clearly part of our plan is to reduce that employee headcount per revenue.”