JS Notes: BLK, WFC, FAST, SLP, RMCF

Blackrock (BLK) CFO Gary Shedlin said the the company remains the #1 global provider of ETF’s, followed closely by Vanguard

“Global iShares generated $60 billion of net new business in the fourth quarter and record flows of $130 billion for the year; representing full-year organic growth of 13%. iShares captured the number one share of global, U.S., and European ETF industry flows for both the fourth quarter and the full-year. For the quarter and for the year, iShares captured the number one share of flows in the U.S., Europe globally with 37% global market share for the full-year.”

Blackrock (BLK) CEO Larry Fink mentioned the company’s wide breadth of product offerings as a key competitive strength

“In a more fragmented investment landscape impacted by continual low rate, modest beta driven returns, investors will search for income, they will search for capital appreciation, through a combination of both active and alternative investments, factors, smart beta strategies, and hybrid solutions. No other firm in the world can provide all of these capabilities on a single platform, supported by superior risk management, technology, and investment performance.”

Blackrock (BLK) CEO Larry Fink said their insurance clients have been adding to their fixed income exposure

“Well, the widening in spreads is a blessing for our insurance clients. That’s first and foremost. Insurance companies are adding to their fixed income exposures now. And so, as spreads widen, we expect to see more demand institutionally.”

Blackrock (BLK) CEO Larry Fink said he thinks some companies may have to lower their dividend but he is adamant that they will maintain theirs

“If you look at some of the high paying dividend stocks today, I think you’re going to see quite a few companies are going to have to lower their dividends. One of the histories of our platform, we never lowered our dividends ever even in the financial crisis. And so, to me it’s about a discipline, it’s a commitment. We are always committed of having a proposed dividend rate of somewhere between the 40% and 50% level.”

Wells Fargo (WFC) CEO John Stumpf reminded investors of the magnitude of loans the company made during Fiscal 2015

“Our contribution to the real economy in 2015 was broad-based and included originating $213 billion in residential mortgage loans, $31 billion of auto loans, almost in $19 billion in new loan commitments to our small business customers who primarily have less than $20 million in annual revenue, $34 billion of middle market loans and $29 billion of commercial real estate loans.”

Wells Fargo generates a large majority of its revenue in the U.S. so it is less affected by turmoil in other countries than some of its peers

“Turning to the economic environment, while parts of the global economy have continued to experience stress and the markets have reacted negatively in the early weeks of 2016, domestic economic conditions remain generally favorable. As you know, Wells Fargo is a U.S.-centric company and the strength and diversity of the U.S. economy benefited our results in 2015.”

Automobiles remain a particular area of strength

“While falling energy prices have hurt certain sectors of the U.S. economy, most consumers and many businesses are benefiting from lower power costs which results in more discretionary cash that can be used for other purposes. Auto vehicle sales were the best ever in 2015 and Wells Fargo originated a record number of auto loans during the year. If gas prices continue to remain low, 2016 should be another strong year for the auto market.”

Wells Fargo (WFC) CEO John Stumpf said housing had its best year in nearly a decade and they expect broad real estate prices to remain firm

“The housing market also continued its steady improvement, with price appreciation of 6% helping homeowners build equity and improving the credit quality of our consumer real estate portfolio where net charge-offs were down 44% from a year ago. While December housing data is not yet available, 2015 appears to be the best year for home sales and housing starts since 2007.”

They are able to fund their business with very low cost deposits

“We had $1.2 trillion of average deposits in the fourth quarter, up $67 billion or 6% from a year ago. Our average deposit cost was 8 basis points, down 1 basis point from a year ago and stable with third quarter.”

Wells Fargo (WFC) CEO John Stumpf said he is prepared to operate and adapt to the rate environment regardless of how many times the Federal Reserve hikes interest rates this year

“So we’ve got a one hike, two hike, three hike and four hike scenario that we’re operating with because like you we can’t say for sure what’s going to happen we work very hard to produce the type of net interest income growth that we have in a no hike environment for the last several years so we’ll see what the future holds because it feels a little bit different every day.”

Fastental (FAST) CEO Dan Florness sounded the industrial recession alarm bells when he said a majority of their top customers are seeing a slowdown in their business

“In the first quarter of this year, 72 of our top 100 customers grew. In the second quarter, that dropped to 63. In the third quarter that dropped to 56. In the fourth quarter, that dropped to 49. So in the fourth quarter, half of our top 100 customers grew and half contracted. In the month of December to amplify that a little bit, 41 of our top 100 customers grew and 59 contracted.”

Fastental (FAST) CEO Dan Florness blamed himself for the company’s poor quarter

“This quarter was largely under my watch and I think from an expense standpoint, we frankly did a mediocre job and I put that squarely on my shoulders.”

Fastental (FAST) CEO Dan Florness believes that their tightly knit relationships with their customers is one of their competitive advantages

“Fastenal is uniquely situated, to go after those businesses unlike any other company out there because one of the things that I always tell our folks internally and I try to remember myself is I am world where everybody is talking about building the last mile in this online world, we’re a company that’s built the last mile already. It’s a very efficient last mile and how can we take that last mile, take our employees at the store, take our employees that are supporting the store and together growth a great business and that’s what we focus on.”

Simulations Plus (SLP) CEO Walt Woltosz said the company remains heavily linked to their pharmaceutical customer’s research and development budgets

“So overall we are a major provider of software and consulting services for pharma R&D, all the way from the very earliest drug discovery when a chemist first sits down maybe with MedChem Designer or some other software and draws a molecule or uses a computer program to generate a million molecules automatically that never existed before. We work all the way from there through the preclinical development and laboratory experiments, and animal experiments into – first in human trials and then into phase two and phase three clinical trials, and then even beyond that when a patent expires supporting quite a number of now generic companies.”

And their pharmaceutical consulting business is done on a project by project basis

“As of the end of the first quarter of this year we are working with 19 companies on 32 different drugs and for those products we have a total of 56 projects. 15 of those projects actually started in this first quarter. We’ve expanded the scope of projects with three companies and that happens when as we perform analyses we discover new factors that need to be explored and clients approve the additional expenditures or revenue to delve with some of those questions and issues to address them for regulatory submissions, for example.

And if the consulting project continues to progress, they may end up meeting with the FDA to seek regulatory approval on behalf of their clients

“The most common therapeutic area that we work in now is oncology and that’s followed by neurology and drugs for immunologic disorders. On average, every year about 25 of the work that we do on projects results directly in regulatory interactions and these are either the submissions of new drug applications to regulatory agencies or meetings with the FDA to resolve certain issues or questions that either the FDA or the pharmaceutical companies have about advancing the drug and securing approval.”

Simulations Plus (SLP) CEO Walt Woltosz emphasized their customers high renewal rate of their software products

“Our software renewal rates of 89% based on the number of accounts and 94% based on the fees that those accounts bring in.”

Rocky Mountain Chocolate Factory (RMCF) COO Bryan Merryman cited higher input costs as a reason for the company’s recent poor financial performance

“Also we had higher commodity cost specifically cocoa nuts and dairy. We’re near historical highs during the first six months of year.”

Rocky Mountain Chocolate Factory (RMCF) President Frank Crail said they are selling many of their products outside of their store base

“The sales to customers outside of our system of franchised stores consists of a variety of customers, the bulk of the sales that we have are sold to partners that primarily sell their product over the Internet and that’s what most of our sales are now. Our biggest customer is ProFlowers and we also sell to other companies who feature our product on their websites and recently we’ve started to sell into the food & drug markets as well and we also sell products over our Internet site rmcf.com. So that’s sort of the customer make up of our outside of our system. We also have master licensees, international master licensees that we sell products to and we have co-branded stores that are licensed to sell Rocky Mountain Chocolate Factory, our biggest partner in that area is Cold Stone Creamery and then we also co-brand with a number of our frozen yogurt stores.”

And they expect this channel to remain a growth driver going forward

“That in the future will be we believe most of the growth in the company will come from that area, we think our domestic franchise system right now looks like it all be about the same number of units going forward maybe declined slightly just depending on the economic environment and the availability and financing.”

Rocky Mountain Chocolate Factory (RMCF) President Frank Crail said they do not compete against See’s Candy

“We don’t really compete against See’s Candy, except for during the holiday season. Rocky Mountain Chocolate Factory is an everyday chocolatier, See’s is primarily given as a gift, 90% of their volume during holidays. We’re way, way less seasonal of a concept, we co-exist nicely with See’s in California. See’s is definitely the gift of choice and chocolate in the West Coast less so in the rest of the country and so we have many customers that will buy a gift of See’s to give away as a gift and buy our product for themselves at our stores in California. So we’ve coexisted with See’s, we have more stores in California than in any other state that’s where See’s is strongest. We’ve coexisted with See’s for really the whole 35 year history of Rocky Mountain Chocolate Factory.”

JS Earnings Call Notes SLP, FAST, JPM, WFC

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.

 

Simulations Plus (SLP) CEO Walt Woltosz says the firm continues to see high retention rates amongst its customers

“Our software renewal rates continue to be very, very high, 99% based on fees, based on actual number of licenses that would be slightly lower but typically when we lose a license its an academic license or something that is not being full retail price.”

 

 

 

Fastenal CEO (FAST) Lee Hein says the company continues to sustain its maniacal focus on cost controls

“To execute, you must be disciplined. And so we put a call out to our folks to the blue team we call them and we ask them to scrutinize every expense and to reduce where possible. The reason we did this and we tell our folks over and over why are we doing what we do. And in this point, we look to reduce expenses so we could add energy into the stores.  We’re starting again to show discipline and balance and what we’re trying to do in our growth initiative of offering or getting more energy into our stores, again to offer a high level of service, immediate service when needed to stay in line on these large key customers and to serve our customers on a local level.

Fastenal CEO (FAST) Lee Hein says his customers loathe to switch suppliers

“If I look at that fastener business, a lot of production business in there. The beauty of that business is incredibly sticky. It’s really invasive and complicated and painful to switch a fastener supplier. Because that’s a very tight relationship because I’m supplying you the stuff you need in what your producing and the quality, the source supply, all those things we bring to the table are critical and it’s very, very disrupted to change your supplier.”

And they believe they are taking market share from competitors

“That’s about Fastenal taking market share that’s not about Fastenal being impacted by the economy. We’re out taking market share as fast as we’ve ever done. I look at our signings in the first six months of this year; they are ahead of our signings in the first six months of last year. So, I feel very good about the underlying business as far as our ability to take market share.”

 

 

 

Wells Fargo (WFC) CFO John Shrewsberry did say they saw an uptick of oil & gas firms defaulting on their loans during the quarter

“We had an increase in non-performing loans in our energy portfolio. Oil and gas loans are only 2% of our total loan portfolio and balances in this portfolio declined by approximately $700 million from first quarter reflecting pay downs.  Our energy team completed their spring re-determination process during the second quarter and as expected, the drop in energy prices did impact the cash flow and collateral values of a number of our borrowers leading to downward portfolio migration.”

Wells Fargo (WFC) CFO John Shrewsberry said the firm continues its shift to a digital-centric bank and is thinking about launching it’s own robo investment offering

There are a number of initiatives underway in that business to modernize and to create service capability to attract new investors and to better serve the investors that we have. And that turns up in the – sort of primary systems that our financial advisors use to interact with our customers. It will turn up in our mobile and online offerings that allow people to do more for themselves and at some point, it could even include service or capability that competes with some of the sort of the robo advisory people out there today who rely primarily on technology to construct portfolios and make offerings to customers.”

 

 

 

JP Morgan (JPM) CFO Marianne Lake says the firm intends to further increase profitability by reducing expenses

“We remain focused on our commitment to reduce expenses by $2 billion in 2017 relative to 2014, while continuing to self fund investments in the business. In the first half of this year, expenses were down approximately $0.5 billion versus the same period last year, and our headcount down roughly 6,000 year-to-date.”

JP Morgan (JPM) CFO Marianne Lake said the functionality of the banking branch is changing

And then as you know really looking at the nature of branches as a footprint the way we’re using them, the way we’re staffing them importantly moving them to more advice and less transaction, more automation. So, definitely responses to the evolution in customer preferences and mobile and online is not only a fantastic customer experience evidenced in our experience that, but it’s also a lower cost to serve. So we’re also improving the profitability of the very highly transactional customers. So, I mean I think Gordon used the word omni-channel. It’s, we have a place for everything in our fleet and branches are very important. And we’re just going to be evolving them to continue to meet customer needs.”

JP Morgan (JPM) CEO Jamie Dimon said he continues to see corporations take advantage of low interest rates and issue bonds denominated in Euros

“We’ve almost never seen before in the EU, the volume of American companies financing in euro, because it’s cheaper to do that even if you swap back to dollars. So a lot of American companies go to Europe to do that.”