McGraw Hill Financial (MHFI) Q1 2016 Earnings Call

McGraw Hill Financial (MHFI) CEO Doug Peterson said debt issuance started out slow this year but picked up substantially in March

“While January and February had anemic global issuance, however, market conditions improved late in the quarter, and March had the largest monthly debt issuance in the past year.”

April is tracking similar to March so far

“We’ve seen in April so far issuance that stayed similar to the March, especially on investment grade. Investment grade has stayed quite strong. Non-investment grade issuance is still fairly weak into the second quarter.”

Saw particular weakness in the high yield issuance market

“Weak transaction revenue was caused by a 14% decline in global issuance, including a 64% decrease in global high-yield issuance, partially offset by mid-teens growth in bank loan ratings. The high-yield market has been particularly volatile with weak transaction volume since the third quarter last year.

Benefitting from an environment where key decision makers require more and more data in order to take action

“We generally see that there’s a high demand for data across the financial institutions and increasingly as well as corporates. Corporates also are managing balance sheets and have more and more requirements for data and analytics.”

Believes the ECB’s bond buy program is a net benefit to debt issuance 

“We’ve seen that the ECB’s approach to being able to purchase very large portions of new bond issuance, we expect that that could have some positive impact on issuance. At the same time, there’s – the ECB also have some liquidity programs it’s providing to banks that make it actually attractive for them to keep assets on their balance sheet so there might be some increase in loan activity. We’re not quite sure where all of these different initiatives are going to land, but we have seen corporate investment grade issuance in Europe. Even though it was weak, it seems to be picking up a little bit. So we expect there could be some pick up there.”

 

JS Earnings Call Notes 2.11.2016 – Broadridge & McGraw Hill Financial

Broadridge (BR) CEO Richard Daly said they won a large deal with Barclays Bank

“I am particularly pleased to report that we closed Barclays for Europe and Asia under our strategic alliance with Accenture. Barclays is our third client on the Accenture Post-Trade Processing platform, also known as a APTP.  As you know, APTP combines Broadridge’s leading post-trade processing technology with Accenture’s renowned brand and global business process outsourcing capabilities. With the signing of Barclays, APTP is evolving as the common back-office standard across Europe and Asia.”

As well as another large European bank 

“During the quarter, Societe Generale went live in London using our technology through APTP. This achievement is a meaningful proof point to virtually every major bank that APTP is now fully live and the only operating common European back-office versus what appears to be only theoretical competitive proposals.

Their clients are looking to reduce cost

“The target market remains large financial institutions that are looking for ways to dramatically lower their operating costs and increase scalability, thereby allowing them to focus their financial and human capital resources on revenue-generating activities.”

While their client retention remains extremely high 

“Just as important is our revenue retention which we maintain at a solid 98% level.”

Broadridge (BR) CEO Richard Daly said the recent market volatility is not 2008 all over again

Let me take a moment to provide some perspective on the financial markets and what it means for Broadridge. Last month was a volatile time for investors. From where I sit, I don’t see anything that resembles the financial crisis of 2008. Regardless, we’re well-positioned with multiple paths to achieve our goals. At our essence, we remain an asset servicing business, not a trading business. This means short term market fluctuations and volatility don’t have the same impact on us. When you are a managed services leader for the books and records, you don’t meaningfully participate in the upside in strong markets, but you remain critical and necessary in all markets.”

And the company is benefitting from specific macro trends in financial services firms

“We clearly are not solely relying on revenue from market-based activities to fuel our growth. In pursuing the opportunities ahead of us, we have identified three major macro trends — mutualization, digitization and data and analytics — that we believe are both disruptive and transformative to the industry. Each of these brings unique challenges for our clients — challenges that Broadridge, with its decades of experience and unique vantage point at the center of the financial services industry, is well-positioned to address.”

They intend on taking their debt levels higher to increase shareholder returns

To address compelling market opportunities, we’re committed to paying a meaningful dividend and returning capital to stockholders through share repurchases.  In support of our capital stewardship priorities, we will target modestly higher debt levels while maintaining our investment-grade credit rating.”

Broadridge (BR) CEO Richard Daly said one of Broadridge’s core competencies is navigating a changing regulatory landscape

As anyone who has followed Broadridge knows, we’re very experienced at successfully implementing regulatory changes. As always, we will implement effectively and efficiently whatever new policy the SEC ultimately determines to be best for U.S. investors and our capital markets. We remain confident that the SEC will ultimately reach a conclusion that best informs and protects investors in the marketplace while making the process more efficient and cost-effective through the use of technology.”

And scaling a solution is one of their strengths

Scaling is something we do for living. If you’re doing $5 trillion to $6 trillion a day in settlements, you need to scale. You need to understand scale and you need to be able to execute.  We believe that is one of the key reasons why APTP has been successful, in that you take two very strong players, you bring the best they have to offer and again, it’s not a secret that the industry has been talking about the need to mutualize costs.”

 

 

 

 

McGraw Hill Financial (MHFI) CEO Doug Peterson said every operating subsidiary of the company increased their margins

Margin improvement was a big story for the year. Our cost reduction efforts and revenue growth combined for a 280 basis point improvement in adjusted operating margin for the second year in a row. Every business delivered at least 200 basis points of adjusted operating margin improvement.”

The company saw weak global bond issuance in the 4th quarter due to market volatility

The big story during the quarter was weak global issuance.  Let’s take a look at issuance. The two largest markets, the U.S. and Europe, both declined capping a weak second half of the year for issuance. Fourth quarter issuance in the U.S. was down across the board. Investment grade decreased 17%, high yield 41%, public finance was down 21% and structured finance also declined 26%, with the only bright spot being RMBS. In Europe, investment grade decreased 15%, high yield down 10% and structured finance increased 11% with declines in every asset class offset by growth in covered bonds.”

With profound weakness in Asia and Latin America

The rest of the world had even weaker issuance, with Asia declining 47% and the Americas outside the U.S. declining 46%. In total, global bond issuance declined 26% outpacing the 20% decline in the third quarter.”

McGraw Hill Financial (MHFI) CEO Doug Peterson said their indices and data business is benefitting from the global boom in Exchange traded funds

The ETF industry surpassed 2014 record inflows, setting a new record of $351 billion in 2015, a great trend. AUM based on our indices increased 9% sequentially from third quarter 2015 to $815 billion, but below peak levels of the end of 2014. During the quarter, we continued to innovate, launching 233 new indices and 26 new ETFs based on S&P Dow Jones Indices.”

McGraw Hill Financial (MHFI) CEO Doug Peterson anticipates bond spreads widening

With this economic backdrop, we expect global debt issuance to decline 1% in 2016 and for spreads to widen. Within the U.S., we expect speculative grade corporate issuers to see increasing borrowing costs in the coming quarters at the back of the Fed interest rate increase. While most higher-rated corporate entity should continue to have a favorable lending environment as investors could pursue moderate yields while remaining more risk averse.”

And he expects the European area to issue more debt which will benefit their ratings agency

More favorable lending conditions in Europe, supported by continued monetary accommodation by the ECB should result in increased bond and loan issuance in 2016. The Central Bank’s recent measures combined with a softening in the regulatory stance may also bode well for higher issuance of securitized products, with modest increases in borrowing from the public finance sector.”

McGraw Hill Financial (MHFI) CEO Doug Peterson said they are changing the firm’s name

And now I’d like to conclude with some big news. The board of directors has proposed renaming the company S&P Global. This name better leverages the company’s rich heritage and our powerful financial data and analytics brands while signaling that we have a strong global footprint and broad portfolio. The change will be effective pending a shareholder vote on April 27. In addition to changing the name of the company, we will also be changing the names of some of our divisions. For example, S&P Capital IQ and SNL will be renamed S&P Global Market Intelligence.”

McGraw Hill Financial (MHFI) CFO John Callahan says their business is one of ultimately selling data to customers 

“What I would say on maybe a broader level is that we increasingly see the demand for data and analytics growing because of the heightened need for regulatory reporting for – I don’t want to use a cliché, but big data needs of corporations. So banks, insurance companies, asset managers, pension funds, other financial institutions, oil companies, large industrial companies that are managing huge credit books that they used to not have to manage, there is increasing demand for tools and solutions and data for them to manage their risk and make business decisions. And we find that what we are providing is really essential for those decisions. And we are seeing increasing demand. Now, that requires us to have data and high quality and being able to identify those pools of customers et cetera. That’s really part of our future growth plans and how we’re trying to position the entire company.”

McGraw Hill 4Q15 Earnings Call Notes

McGraw Hill Financial (MHFI) Douglas L. Peterson on Q4 2015

Global bond issuance declined 26% in 4Q

“Let’s take a look at issuance. The two largest markets, the U.S. and Europe, both declined capping a weak second half of the year for issuance. Fourth quarter issuance in the U.S. was down across the board. Investment grade decreased 17%, high yield 41%, public finance was down 21% and structured finance also declined 26% with the only bright spot being RMBS. In Europe, investment grade decreased 15%, high yield down 10% and structured finance increased 11% with declines in every asset class offset by growth in covered bonds. The rest of the world had even weaker issuance with Asia declining 47% and the Americas outside the U.S. declining 46%. In total, global bond issuance declined 26% outpacing the 20% decline in the third quarter.”

Recent volatility probably overstates likelihood of a slump

“monetary policy continues to provide a tailwind to economic expansion. Recent stock market volatility probably overstates the likelihood of a slump in global growth this year.”

January has been a continuation of issuance trend

“In January, we saw a continuation of that trend. The total corporate governance issue was down about 26%. Financial institutions were down about 56% but we put together our forecast which you saw on slide 26 which shows about 1% decrease in 2016. We put that together with the combination of looking at the markets, what we expect to see from market issuance, scanning the market with investment banks and corporate banks, et cetera.”

Issuance appetite is related to spreads

“Spreads have recently widened significantly especially in the lower end of the credit spread. CCC type credits are obviously more distressed credits and below, have increased by over 400 basis points. They’re at a 1,225 spread range whereas the AAA, AA level is still around 100, 110 basis points. It barely budged over the year. In fact, as you’ve seen, U.S. Treasuries have tightened. So the spread issue, where we see spreads going, there’s a lot of volatility right now. We think that also plays into it, people’s appetite for going out. It’s not really related to the base rate. It’s related to the spread.”

ECB wants to have more active capital markets in Europe

“we expect that over time in Europe is going to be increased structured finance. This is something that ECB is trying to implement. They want to have a more active capital markets”

Capital requirements for banks will lead to a larger decrease in non-investment grade issuance

“n addition, there’s another very important global trend about financial institutions. They’re all looking at optimal capital structure in addition to the new rules related to capital and there’s this TLAC which is total loss absorbing capacity which is basically senior bonds which have a certain level of subordination to other senior debt depositors that we expect that banks are going to be issuing. So in general, we think that there will be increases in structured finance, increases in financial services and financial institutions, likely decrease in overall corporate issuance globally but probably a larger decrease in noninvestment grade overall especially at the spread levels which I mentioned earlier. ”

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

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.”

JS Notes: CHRW, MHFI, AET, L, SCTY, ICE, CHK, BUD, NOV, MKL

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.

 

C.H. Robinson (CHRW) CEO John Wiehoff says the company played a critical role to helping customers ship their goods effectively and efficiently given the West Coast port shutdown 

“Unlike intermodal, we do believe that the port delays on the West Coast probably helped our global forwarding business a little bit. We do know that several of our customers had difficult opportunities that we were able to help them with, and in some cases where customers were unable to get direct access to ocean capacity, we were able to help them with our capacity. So we do know of examples and believe that our global forwarding results probably were helped somewhat by the West Coast port delays.”

C.H. Robinson (CHRW) CEO John Wiehoff says he would like to do an acquisition in the intermodal or contract logistics space, the firm remains disciplined on finding the right candidate

“With all of the services that we offer, our belief is that our long-term competitive advantage is in the quality of our service and the quality of our people. And when we look at the acquisition opportunities, we want to make certain that we’re not disrupting any of that service capability or continuity and that we have the time and focus to make sure that we improve our competitive position in the marketplace while doing it. So while we’ve been looking at opportunities in both intermodal and contract logistics, we haven’t found what we thought was the right blend of value and integration capabilities to really improve our competitive positioning in the marketplace.”

C.H. Robinson (CHRW) CEO John Wiehoff says he still believes firm’s “asset light” business model is a differentiator versus many of its competitors

“In the longer run, we have belief that our third-party model of separating the capacity ownership and the capital investment from the customer service and go-to-market strategies can be a very effective way and the most effective way to serve a large part of the marketplace.”

But he conceeds more competitors have entered the space in the last few years

“As others continue to invest in that business model and more of the marketplace gets served by a third-party or a logistics-type business model, we think that that just reflects some of the secular changes in how we’re all competing. So the market is more competitive, we’re adapting to how things are changing and with regards to the business model that each of our competitors pursues around a blend of capital and logistics type stuff, we’ll just have to factor that in to how we sell and how we grow in the marketplace.”

Their customer base continues to be diversified 

“From an enterprise standpoint, we have a lot of customers that are around the 1% net revenue, and we’ve shared before from an enterprise standpoint that our top 100 customers are around a third of the business and that our top 300 or 400 customers make up around half of the business.  That’s part of that customer diversification that we feel is the strength of our business model.”

 

 

 

 

McGraw Hill Financial (MHFI) CEO Doug Peterson says the firm’s bond rating unit has benefited from a large number of corporations refinancing before the oncoming Federal Reserve rate hike

“If we turn to issuance, the recent trends in US and European issuance did benefit our businesses. First-quarter issuance in the US was quite strong across all sectors. Investment grade increased 24%.  In the US the improvement in corporate issuance was largely due to a 45% increase in industrials issuance.  Large debt financed M&A transactions also contributed to the lift in issuance.  In addition, a continued thirst for yield has enabled corporate issuers across the rating spectrum to tap the capital market, extending maturities at beneficial pricing and terms. High yield increased 39%, public finance was up 61% over an unusually weak first-quarter in 2014.”

Additionally, the firm remains competitively positioned with its S&P ETF business

“If we turn to the key business drivers, the ETF industry experienced record first quarter inflows of $97 billion.  We believe that once investors place funds into passive investment, these funds tend to stay in passive investment and then they shift between various ETFs based on asset allocation models and decisions.  ETF AUMs associated with our indices increased 22% to $810 billion versus the end of first-quarter 2014 with approximately three quarters of this growth coming from inflows.”

The company’s Platts commodity business continued to grow revenue during the quarter even though client interest in commodity investments remains muted

“During the quarter, Platts continued to grow revenue despite low commodity prices. As we have seen in recent quarters the newer areas of metals and agriculture had the highest revenue growth rate.  Global trading services revenue increased primarily due to license revenue from the steel index derivative activity at the Singapore Exchange.”

The firm continues to benefit from some of the large U.S. banks shedding non-core assets

“We are also encouraged by the facts that banks are probably struggling after the LIBOR scandals with their ability to continue to manage benchmarks inside of their businesses. They might be non-core or they might not really be a business that it makes a lot of sense for them to be in.”

 

 

 

 

Aetna (AET) CEO Mark Bertolini says value based medical care reimbursement as opposed to quantity based reimbursement is now a substantial portion of the business

“Value based contracting now represents approximately 30% of Aetna’s medical spend with a goal to achieve 75% by the end of the decade.”

The firm benefitted from having lower medical insurance claims than expected

“Our commercial medical benefit ratio was 77.4% for the quarter, an excellent result that benefited from higher premiums, moderate cost trends and strong prior year’s reserve development.”

 

 

 

 

Loews (L) CEO Jim Tisch says the company is positioned opportunistically to deploy its large cash balance

“I want to start today by looking at Loews $5.5 billion of cash and investments.  As we have said before, money doesn’t burn a hole in our pockets. While we acknowledge that cash can be a drag on Loews short term returns, we feel that having the flexibility to be opportunistic and not rely on financing markets has served our shareholders very well over the long term.”

Loews (L) CEO Jim Tisch says the market is priced for perfection and he is having a hard time finding undervalued assets

“I think that after all these years of low interest rates and quantitative easing, what we have is markets both fixed income and equity markets that are priced for perfection.  So, my guess is that for the time being businesses look like they’re priced too high for us.  Now one of the things that I always remember is that the world is cyclical. And it’s easy to lose sight of that because we’re now in – firmly in year six of an upcycle for equity prices.  But at some point in time something will happen, people will lose all the confidence that they have and my guess is that opportunities will present itself.  I’d rather be patient and get a good business at an attractive price rather than lose patience and buy a business at too higher price.”

Loews (L) CEO Jim Tisch says that one of it’s oil rig subsidiaries, Diamond Offshore, performed poorly during the quarter but still sees further downside for the industry ahead which he hopes will ultimately lead to a buying opportunity

“I think right now the conditions are bad enough for rig valuations to go down. The problem is they haven’t been bad enough for long enough.  In the next two, three or four quarters, I think we could see that some fifth and six generation rig assets become available for sale.

 

 

 

 

Solarcity (SCTY) Chief Technology Officer Peter Rive says solar installation costs are falling at a dramatic pace which is allowing solar energy distribution to be competitive to electric utilities

“On the residential side, our fully installed solar battery system costs are about one-third of what they were a year ago. We expect cost to decline further at manufacturing sales and over the next five to 10 years these costs reductions will make it feasible to deploy the battery by default with all of our solar power systems.”

Solarcity (SCTY) Chief Financial Officer Brad Buss says access to the capital markets for the solar capital markets is gaining momentum as investors becoming increasingly confident in the business model

“Every six months I only see our credit spread shrinking as we continue to perform as the paper continues to perform. So I am very happy where things are going from that perspective and then obviously on a cost spend of it. It is really is the cost of capital and the cost that’s really driving our success and where I think we will continue to outdistance and be cost efficient.”

 

 

 

 

 

Intercontinental Exchange (ICE) Chief Financial Officer Scott Hill says the company has seen increased volume in its oil contracts and is benefitting from increased volatility in the commodity sector

“This was enabled by an 11% increase in commodity revenues on the strength of our global oil markets.  Brent crude contact revenue  grew 51% year-to-year to a record $74 million. Brent continues to expand its lead as the global benchmark for pricing crude and refined oil products, with open interest up 15% from year-end to a record 4.4 million contracts. Notably, Brent open interest is up 49% from last March, with strong growth due to the ongoing shift of Brent in commodity indexes and longer-term secular trends.”

Intercontinental Exchange (ICE) CEO Jeff Sprecher says he expects to see continued growth in their Asian products over the coming years

Similarly, Asia’s markets are expanding due to greater demand for the type of products we currently offer through our Western exchanges and clearinghouses.  Our work there is foundational, and we will launch ICE Futures Singapore and ICE Clear Singapore this year. We’re seeing a good deal of interest in our newly announced Asian market products and for the increased access to central clearing.  The other interesting thing is there’s also a lot of capital moving towards Asia.  You see it in the demand right now for the linkage between the Hong Kong Exchange and the Shanghai Stock Exchange in equities.”

Intercontinental Exchange (ICE) CEO Jeff Sprecher is optimistic about taking over the LIBOR and gold price benchmark administration from what used to be a consortium of banks that set those price levels 

At ICE Benchmark Administration, in March, the ICE Swap Rate replaced the ISDAFIX, and we successfully launched the gold price with record-level participation. We’ve also undertaken market consultations for both LIBOR and the LBMA Gold Prices to evolve the best practices for determining these prices.”

Intercontinental Exchange (ICE) CEO Jeff Sprecher says the New York Stock Exchange continues to be the global leader in IPO’s and capital raising

The New York Stock Exchange continued to lead in global capital raising, with $50 billion in total proceeds raised in the first quarter. This is more than the next 2 largest exchanges combined. And we continue to attract companies of all sectors and market capitalizations because of our unique market model, combined with our unparalleled visibility and service.”

Intercontinental Exchange (ICE) CEO Jeff Sprecher focuses on profit per share of the company rather than market share

We have, in a very disciplined way, decided to not participate in options volume that does not earn a return for the company.  So the fact that we send uncompetitive business to our competitors is to not concern our shareholders.  And let’s let those competitors have the bragging rights if they have a lot of market share, but there isn’t a lot of income to go along with some of that business.”

 

 

 

Chesapeake Energy (CHK) Executive VP Chris Doyle says the firm is using big data techniques to analyze how to drill the most effective well

“The Operational Support Center (OSC) is manned by 100 industry experts, drilling superintendents, geosteerers, geologists, engineers, lease operators and analysts. OSC is Chesapeake’s central command center. It’s like NORAD in Oklahoma City. But more than just monitoring and supporting, the OSC links our teams executing out in the field with real-time data analytics, industrial analytics and tactical performance-enhancing adjustments.  y identifying optimal drilling parameters based on historical drilling data, every single well had a well plan based on what it took to drill the fastest, best, most competitive well. And any and all trouble time was analyzed, evaluated, all events in the past and so the OSC was able to forewarn our drilling organization, including the drillers on the rig floor, when they were either outside the optimal drilling window or they were headed for a potential issue. The result was optimized drilling performance and elimination of downtime events. That’s how you reduce cycle times from 26 days to 12 days.”

Chesapeake Energy (CHK) Chief Financial Officer Domenic Dell’osso stated that the company has reduced it’s rig count dramatically which will likely hurt oil rig manufacturers

“We started 2015 with around 70 rigs running, including a few spud rig, and averaged 54 rigs during the first quarter. Today, we’re running 26 rigs in total and we’re forecasting to drop to 14 rigs during the third quarter.”

 

 

 

 

Anheuser Busch Inbev (BUD) CEO Carlos Brito said that the Bud Light brand continues to struggle in its attempt to resonate with the U.S. consumer

“We estimate the Bud Light brand was down approximately 20 bps in terms of total market share.  We have a long way to go in stabilizing the share of Budweiser.”

Anheuser Busch Inbev (BUD) CEO Carlos Brito said the company continues to gain market share in China and its various brands now represent almost 1/5 of all beer consumed in China

“We estimate our market share in the quarter reached 18.5% when including our recent acquisitions.”

Anheuser Busch Inbev (BUD) CEO Carlos Brito on how he thinks about the craft brewing movement in the U.S.

“We’re adopting the strategy very clearly of having more regional relevant brands. So that’s the case when we joined with Goose Island, Blue Point, 10 Barrel, Elysian, but also developing our own like Shock Top, and also trying to focus in a few that could be nationally expanded.  In other markets, what we’re trying to do is get the U.S. learnings over to other markets and try to be, of course, ahead of the curve, especially markets where we lead, like Brazil.”

Anheuser Busch Inbev (BUD) CEO Carlos Brito on how they are incorporating social media into their marketing

Social media continues to grow within our mix of media spend between social and traditional. We are learning every day by connecting more with consumers and making our contents relevant. Of course, it’s a very fast paced type interaction with consumers, and we don’t intend to get everything right all the time.”

Anheuser Busch Inbev (BUD) CEO Carlos Brito expects the company to compete effectively in the Vietnamese beer market

So in terms of Vietnam, yes, we’re building a brewery there. We expect to ship beer in May. So this month in Vietnam. We’re very excited about Vietnam. It’s a country, again, demographics, weather, beer culture, 90 million people, a very extensive or a very big high-end segment. And that’s where we want to play with Budweiser, Stella and Corona, also Hoegaarden. So very exciting market, we’re very committed to it, and learning from our experience in China to do a lot of what we did with Budweiser in China in Vietnam.”

 

 

 

 

National Oilwell Varco (NOV) CEO Clay Williams says the pace of the decline in the oil rig count is unprecedented in history

The rate of decline of active rigs, most acute across North America is breathtaking and unequaled in prior downturns. NOV saw activities and orders slow in just about all areas of our business and all of our units are experiencing pricing pressure.”

And the company is under serious pricing pressure to reduce their selling price to customers

“We are also under pricing pressure and requests to cancel work, which we are vigorously opposing. We are seeking to structure discounts around volume-related rebates tied to payments and expanded product purchases, in effect picking our points, to try and win greater share, defend volumes, and improve absorption in our plants. We don’t want our customers to get out of the habit of buying from us, to maximize our market position when the inevitable recovery comes.  We closed three facilities within the unit during the first quarter and continued to reduce costs within our supply chain. North America was hit hardest, but the Middle East and other international markets are more stable.”

 

 

 

 

Markel (MKL) CFO Anne Waleski says the firm remains disciplined on price and will not write insurance in which it cannot earn a reasonable rate of return

“Market conditions remain very competitive, consistent with our historical practices we will not rate business when we believe prevailing market rates will not support our underwriting profit targets.”

Marke (MKL) President Rich Crowley says the reinsurance sector remains ultra competitive with capital as a result of low interest rates

“In the reinsurance segment we saw pressure in terms and rates during the January 1 renewal process. As the year moves forward, while still extremely competitive it does appear that the decrease in rates and terms has slowed to some extent.  In summary and we stated it many times, we’re not going to chase premium when we feel the rates are inadequate. We continue to reinforce this message with our underwriting teams as is reflected in our first quarter’s gross premium numbers.”

Markel (MKL) Chief Investment Officer Tom Gaynor says even though they are earning very little on their short duration bond portfolio due to the low interest rate environment, they think today’s economic and financial climate warrants conservatism

“I’m sure that if we were really smart and clever we could find some alternative investment approach that would increase the yield on our short term portfolio from essentially nothing to something more than that. We’re not that clever or smart, so we won’t try to perform that sort of alchemy. We’ve seen enough of those experiments end badly to dissuade us from going down that path.”