Brown and Brown 3Q17

Powell Brown – President and CEO

Still a lot of capital in insurance

In summary, there continues to be a lot of capital across the insurance market place. However the recent storms, fires and earthquakes may have implications on pricing in 2018. At the present time, we don’t have a clear view on the potential impact for next year. But there are a lot of discussions about rate increases for coastal properties. If there are proposed increases which we think there will be, the question really is will they stick. Certain markets are testing that philosophy right now.

Guardedly optimistic

Right now I hear and what everybody else is hearing out there about the market place and what people are speculating on. What people are speculating on and what the market will bear are two different things, until we start to see rate increases sticking. I am guardedly optimistic or just guarded in regards to what that would do to our organic growth…But if anybody is telling you they are getting ramped up for a hard market, I believe that’s a little premature.

Economy pretty good

And so I think the economy is pretty good. I think that we’re seeing our clients thinking about it in a manner where they are making investments in their businesses, so that’s a positive.

Reinsurance got pounded

I’m not a reinsurance broker so let met process this. Here’s what I understand and this is how I think this is going to play out. As you know retrocessional reinsurance is reinsurance for reinsurance companies. They got pounded in the storm, and a lot of that is in London, but it’s all over the world. So the retro market got pounded. So that’s going to have to react or try to recoup.

Then you have the reinsurance market, they got pounded. And the reinsurance market, as you know, one of the most damaging ones was actually Mariah. So it’s like keep hitting you when you’re down in that market. And so let’s just say that the rates are – they try to get significant rate in reinsurance. It really depends on the primary carrier and what they’re trying to do.

If everybody’s cat reinsurance program came up at the same time, then I think that there could be a higher potential for rate increases that could stick. Having said that, I know of several carriers which remain nameless who already have their property programs placed prior to the storm. So they’re going to operating from a positon of strength, not a position of weakness.

So, I think there’s a lot of moving parts that go in to it, and I know that there are some people out there that are frothing, because they think this is going to drive the market up. Like I said, I would rather create an expectation that we see flattening and we hear people talking about rate increases, but we’re not seeing any big rate increases sticking like, you might have heard, number one. And number two, really a lot of this change won’t happen until after the year. And the question is on some of these primary carriers, how quickly can the insurance carrier get the message from the head to the foot on what they want to do in executing a pricing strategy or increase.

So time will tell Mark and I wish I could be more definitive. But I do know that the restaurant market and the reinsurance took some severe losses and it will be interesting to see how they react and thus the primary season how they react as well. They will not pass through dollar-for-dollar or per percent increases in to the primary market, it just won’t happen.

Takeaways From Last Week’s Digest 10.3.16

We’re continuing our new experiment this week running a weekly post each Monday to expand upon the quotes that we gather in our weekly digest. The weekly digest is intended to be an unbiased view of what we are hearing from management teams, and our Monday piece will try to interpret those views and hopefully help steer readers towards insights that can have a real impact on investment decisions. This is a pilot project, so please give your feedback!  Click here to receive both posts weekly via email.

1) September economic data could be pretty strong

Readers may have noticed that the macro commentary section of our weekly piece has swung increasingly positive since the middle of the summer.  In our July 22 digest we highlighted a quote from Halliburton’s CEO, Dave Lesar, that “animal spirits are back in North America.”  While Lesar was primarily referring to the energy sector, there have been plenty of quotes in other industries that support the idea that these “animal spirits” are filtering more broadly across the economy.

Last week we highlighted some quotes from consumer facing companies that also continue to say that the consumer is showing strength.  Industrial companies have also noted that inventories have been destocked.  Both of these are preconditions to inventory restocking, which would eventually filter into the economic data as above trend growth if it does materialize.

Animal spirits have been missing from the US economy since the financial crisis, but now that we are 8 years removed from Lehman’s collapse, the emotional memory of that panic is fading further away from view.  While that does not mean that a burst of speculative fervor or heavy consumption is necessarily overdue, the conditions are right for an upside surprise in the economy.  The economy has struggled for the last 24 months and this has led growth expectations to decline significantly.  A return to more normal consumption habits would be surprisingly strong.

A strong economic surprise doesn’t necessarily have to fuel a large rise in stock prices though.  The level of pessimism about the economy and markets is high, yet valuations are still beyond extreme levels.  In past historical periods the levels of pessimism that we currently see would likely have been matched by low teens or perhaps even single digit earnings multiples. Because earnings multiples are significantly higher today, a positive surprise in the economy could actually lead to a decline in securities prices if it is met with rising interest rates.

There is also the possibility though that a better than expected economy could lead to a 1928 or 1999-like situation for markets in which the economic cycle crests with an extreme level of speculation in securities markets.  We continue to believe and hope (as citizens) that policymakers will not allow this to happen.  However, by continuing to prop up markets, it may already be too late to avoid this.

2) The financial services industry is fatally impaired by low interest rates

Nearly all revenue generated by the financial services industry is in some way tied back to the prevailing level of interest rates.  We estimate that the industry is broadly structured for a normalized 5% interest rate environment.  In other words, the infrastructure that it takes to run the US financial services industry requires a 5% interest rate environment in order to meet the expectations of the labor and capital that has supplied itself to the industry.  Below a 5% interest rate, the amount of revenue that is generated by the industry is insufficient to pay the (inflated) salaries that were expected by those who are working in the industry and also insufficient to generate meaningful returns on the capital that has been invested in it.  As a result, the longer that interest rates remain below 5% the more that the financial services industry will continue to shrink.

Last week we highlighted a quote from Factset that shows the symptoms of low interest rates on the industry.  Factset is seeing an increasing number of hedge funds and small buy side firms go out of business.

” We had a record growth in new client acquisitions…but it was mixed with an increased cancellation rate that was what I would call market related. So, it was clients going out of business, hedge funds going out of business, some of the smaller buy side where they have been shedding employees…We definitely saw an increase in the quarter of the market-related cancellations in that buy side sector.” —FactsetDirector Global Sales Scott Miller (Financial Data)

While many may point to the shift to passive investment as the underlying cause of shrinking active management, we would argue that the move towards passive is in large part created by the low interest rate environment as well.  This is because fees become a greater percentage of expected returns when expected returns are low.  In a 10% return environment a client can easily bear a 1% fee.  However in a 4% return environment that fee becomes a greater and clearer burden.  In other words, if client portfolios had been rising in value by 9% per year for the last 15 years (instead of a level well below that) the passive movement would likely not have gained the traction that it has.

3) The Chinese government wants the cruise industry to succeed

We tend to take note any time that an international government has provided specific incentives to a single industry.  When any government puts public resources behind the development of anything, it’s usually a good bet that the government will get what it wants.  This has been particularly true in China, where infrastructure construction was highly incentivized for more than a decade.  During the early 2000s commodity prices boomed as China built roads and skyscrapers.

Now as the Chinese government attempts to shift the economy towards a more “consumption led” economy, investors should expect that consumption focused companies could benefit as much as construction focused companies benefited in the past.  To that end, a statement from Carnival Cruise Lines caught our attention last week:

“cruise is in the 5 year plan for China. So that means the government has committed to developing the Cruise industry. The reason for that is pretty self-evident. We’ll employ, overall with port development and infrastructure, and supply chain, and training as well as ship building that will employ millions, and millions, and millions of Chinese. So the government is very interested and they see cruise as an economic engine going forward. So you’ve got the support of the central government and the various provincial municipal governments, so that’s very important.” —Carnival Cruise Lines CEO Arnold Donald (Cruises)

We are personally skeptical that the Chinese government can shift the Chinese economy without generating serious instability, but some industries are bound to benefit.  The Cruise industry could conceivably be one of them.

Takeaways from Last Week’s Earnings Calls 9.19.16

This week we’re starting a new experiment. We’re going to try to run a weekly post each Monday to expand upon the quotes that we gather in our weekly digest. The weekly digest is intended to be an unbiased view of what we are hearing from management teams, and our Monday piece will try to interpret those views and hopefully help steer readers towards insights that can have a real impact on investment decisions. This is a pilot project, so please give your feedback!

Each week we pack a lot of information into our company notes digest.  Any given week there are probably five or more themes that are worthy of further discussion.  Last week there were a couple of themes that we thought were worth highlighting:

1) Deflation wont last forever

Our most recent struggle with deflation was renewed in earnest in late 2014.  The fall of 2014 was when the Fed began to wind down QE and the dollar began to strengthen.  In turn, the Euro declined and oil prices also collapsed.  We have been living with the consequences of this deflationary episode for the last couple of years.  Because the sharpest legs of the decline happened in late 2014, 2015 was a year in which the “comparisons” to the year before showed the sharpest divergence.  Because of this, the deflation looked most severe in 2015.  These dynamics alone were responsible for the majority of the decline in S&P 500 earnings last year.

So far in 2016 we have continued to experience follow on effects of this deflationary headwind; however the sharpness of the decline has abated and it appears that we may be seeing at least a floor in commodity prices. For this reason, investors should be on the lookout for a reverse dynamic of 2015-16 to come into play in 2017.  Whereas comparisons were certain to be negative in 2015, the low bar that has been set in 2016 makes it easier for comparisons to look larger in 2017.

If we do have small increases in commodity prices next year, it could translate to larger readings in inflation indexes like CPI.  This is especially important considering that the Federal Reserve is now watching inflation closely.  If CPI were to print a 3%+ number next year, then it would be very difficult for the Fed to continue to justify an easy money policy.  Keep in mind that because Fed policy remains mildly accommodative, a perceived need to shift towards a restrictive policy could result in a large swing in interest rates and therefore asset prices.

What could cause price increases next year?  Kroger, which is among the top quality operators in the grocery space explained that price changes have a way of curing themselves over time:

“as we know from past experience, the environment won’t be deflationary forever…historically, I always like to say high prices solve high prices and low prices solve low prices, because capacity will start changing. And if you look at farmers, they’re very smart, and they’ll start producing less of the things where they don’t make money. So historically, that’s what’s caused inflations to swing…as you get toward the latter part of the year and early next year, you’re starting to cycle the deflation. So I would — certainly, we would guess that it would start to moderate just because you’re starting to cycle some of the deflation”

When it comes to inflation or deflation, time really is something that does tend to heal.  Deflationary forces, especially in commodity industries will eventually be corrected by market forces.  Lower prices are met with a supply response that eventually leads to price stability.  We are seeing this play out in the oil industry already.  Rig counts have fallen, leading to lower oil supply growth, which is helping to stabilize price (for now at least).  Oil is a particularly challenged industry, but this dynamic could lead to real lasting price floors in many other industries as soon as 2017.

Investors also shouldn’t discount the impact of policy change on inflation.  The coming change in Presidency could represent a catalyst for a change in inflation expectations.  In particular, a Trump presidency is likely to stoke inflation through trade policy.  If Trump is elected, tariffs would raise the cost of imports to the United States and increase demand for domestically produced goods.  This would not only shift production to a higher cost region, but it would also cause capacity utilization to expand in the US, causing an inflationary surprise.  A Clinton administration could also stoke inflation expectations with continued stimulus or increased government spending and deficits in an attempt to continue to boost a flagging economy.

2) Luxury does not always mean highest margin

Restoration Hardware has lost its appeal as a glamour stock in the last year as growth has not lived up to expectations.  For the last several quarters, management has blamed a slowdown in luxury spending for the shortfall.  However, this quarter management acknowledged that furniture is a tough business even as a luxury player.  Gary Friedman had this to say:

“Designers get 25% to 40% off the business. That’s why we can’t be like a luxury brand like HERMES that has no promotions, right, because at the highest end of luxury apparel, there is no promotions. At the highest end of luxury furniture, it’s 100% on promotion…I have always said…being in the furniture business, it’s an ugly baby, but it’s ours” —Restoration Hardware CEO Gary Friedman (Home Furnishing)

Gary Friedman is an eccentric CEO, but his bold vision for Restoration Hardware always intrigued us (we have no position in RH).  Seeing the challenges for retail, Friedman has been attempting to remake RH’s locations into luxury showrooms to appeal to the highest end clientele.  Friedman has not only invested heavily in flagship stores, but has also built unique supply chains to source “authentic” foreign made merchandise for his customer base.

In most other consumer goods industries this is a recipe for success.  Staking out territory as a truly premium aspirational brand leads to higher margins and durable competitive advantages.  Think Tiffany or Cartier in jewelry, Hermes in apparel and even Apple in consumer electronics.  However, Friedman appears to be finding that this doesn’t seem to hold quite as true in the furniture business.

What we found especially interesting about Friedman’s quote is that one reason that it doesn’t hold true in furniture is because at the luxury price point, furniture is primarily purchased by designers, i.e. professional buyers.  A small group of professional buyers has more buying power than an individual consumer and therefore is able to negotiate for better prices.  This is very different from how jewelry, apparel or a smartphone is purchased.

The interesting point is that this example helps highlight the fact that luxury in and of itself is not enough to guarantee higher margins.  In fact, a better guarantor of high margins is to have a relatively uneducated and disparate customer base that is driven by emotional appeal.

Our theory here is that the professional buyer is driven more by “business-rational” thinking rather than emotional attachment to a product.  Professional buyers conceivably have a better understanding of the cost of production and will therefore tend to push the price of a product closer to its commodity value.

Conversely a single consumer, who is purchasing a product that he or she has limited understanding of, may be less likely to push for the best price.  This is especially true when emotion is factored into the equation through brand.  The reason that Apple can sell iPhones at very high margin is because buyers are less conscious of the cost of production of an iPhone and also generally less educated buyers of technology and therefore value a solution that “ties things together” in a user friendly package.

There is also likely an absolute price component to this dynamic as well.  Consumers are more willing to “overpay” for goods below a certain price threshold because it’s not worth the time to become an educated buyer.  This may explain why consumers frequently overpay for things like soft drinks or chewing gum, but usually negotiate margins much lower on products like automobiles or houses.  When the price tag gets high enough, consumers spend the time to know what is a fair price and therefore negotiate for it.  Luxury home decor may sit at or near that threshold at which a buyer becomes educated or hires someone who is.

VCA Antech (WOOF) Q2 Earnings Call

VCA Antech (WOOF) CFO Tom Fuller said the company is executing

“So in recap, we have a great company and a wonderful, wonderful industry, demand is still very strong, consumer is getting strong, our economy is stable, and people just love their pets. We’re seeing a lot of strength in our hospital and lab business. Internal growth has remained strong and they’re actually increasing in the July, so we’re optimistic for the remainder of the year on our growth rates. Margins are great, 50 basis point improvement in consolidated operating margin.”

VCA Antech (WOOF) CEO Robert Antin said the company is enabling online appointment scheduling

“At some point, the home run’s going to be, we have online appointment book, so people can actually access through the website their own appointments and being able to make it.  Online, it’s one of the great places. One of the gatekeepers in an animal hospital is the appointment book. It’s the domain of the doctor. It’s protected by the desk. And now, just like when you go to a restaurant, you can do it.”

VCA Antech (WOOF) CEO Robert Antin on how they’re thinking about pricing their services

“I think we’ve had steady price increase. I’ve said before when we measure the client feedback through our Client Experience program, we do – there isn’t as much resistance to price increase, I would agree with that. In terms of what we’ve done, we – certainly, we have a number of different pricing grids and we allow the hospitals to have input into them on a local basis so that it reflects the competitive, but I haven’t seen an acceleration in pricing in our hospitals. That hasn’t been our strategy.”

Expeditors International (EXPD) Annual Report Highlights

Expeditors International (EXPD) is seeing the Chinese economy slow in real-time but says they are trying to making the transition to a consumer driven economy
Despite the general economic slowdown in China, it is still one of the fastest growing economies with massive capabilities and infrastructure. It is also increasingly becoming a consumer economy with a very large emerging middle class with wealth and a taste for imports. We believe that presents an opportunity for us as China becomes more than just an export market. We have done a great deal of work aligning origins and destinations on accounts that we target in China and have invested in building infrastructure that supports efforts to increase our import business and focus on customs clearance in China.”
Their biggest concern is slowing global trade
Our number-one concern is that global trade slows significantly, as it did across most markets during the financial crisis of 2008. While we did see slower market conditions in the second half of 2015, we have not seen signs of a return to the severity of the slowdown that we experienced during the financial crisis. Global markets are more interconnected than ever before, and a slowdown in one market can have ripple effects on other markets. While we serve a highly diversified base of customers and industries, which limits our exposure to any one area, we were not immune to the impact of the global market meltdown of 2008. But we have not seen signs of a return of those conditions thus far.”

UnitedHealth Group Q1 2016 Earnings Call Transcript

UnitedHealth Group (UNH) CEO Stephen Hemsley said the company had its highest customer retention ratio in its history

“UnitedHealth Group businesses have steadily strengthened over the last several years and this trend continued in the first quarter of 2016. Our momentum is evident in the highest levels of customer and consumer retention in our history combined with new customer acquisitions driving strong revenue gains across the enterprise; growth in the size, scope and diversity of products and services within our client base; steadily improving metrics for brand and reputation and steadily rising net promoter scores across our businesses.”

Pulling out of most Obamacare exchanges as they aren’t profitable 

“As you know, we have been evaluating public exchanges on a state-by-state basis. We have maintained our regular public dialog with you since November about the individual exchange market and how our own experience and performance have been unfavorable in these markets.  The smaller overall market size and shorter-term higher risk profile within this market segment continue to suggest we cannot broadly serve it on an effective and sustained basis. Next year we will remain in only a handful of states, and we will not carry financial exposure from exchanges into 2017. We continue to remain an advocate for more stable and sustainable approaches to serving this market and those who rely on it for care.”

They’ve tripled their number of prescriptions filled by namely acquiring firms 

“today the business is running at over 1 billion scripts annually up from 350 million in 2012. Since we came together our retention rates have persisted in the high 90%s and we are building our largest ever pipeline of opportunities. We were pleased this quarter to announce an innovative partnership with Walgreens to which we are creating a 90 day at retail pharmacy offering.”

Continuing to find ways to drive hospital admissions and costs down 

“2015 marked our seventh consecutive year of absolute reductions in both admissions and bed days on a per capita basis and that’s true across all of our lines of business. But we also extend that work into other areas with particular focus around outpatient because it’s one of the bigger drivers of cost and making sure that we’re driving care to the most appropriate setting and likewise looking at out-of-network spend.”

Using data analytics to also drive down costs and help patients 

“We fire off 131 billion rule-based decisions every month to help close gaps using our tool like Optum One, which you’ve heard a lot about. It’s really crunching and assessing both clinical and claims data to predict where we’re going to see people that need interventions, and those interventions are additive to the tool and how we’ve extended it in terms of being able to action it where we can actually go out and prove where we’ve shown how our interventions intercede in people having strokes, people having heart attacks, and what that saves not obviously is good for the patient, but obviously good for the system. Our revenue cycle analytics actively are taking out friction between payers and providers, speeding up payment, driving more accuracy and improving the financial conditions of both payers and providers.”

Interactive Brokers (IBKR) Q1 2016 Earnings Call Notes

Interactive Brokers (IBKR) CEO Thomas Petterfly said its most profitable clients are hedge funds and traders

“Our most lucrative accounts are hedge funds and proprietary trading groups. Both of these two financially most sophisticated customer types trade and invest for their own livelihood and depend on our very low transaction cost and prime brokerage capabilities for their income. This is the reason it is so very important for us to keep on top of our order routing algorithms, not to sell our order flow, and not to get into conflicts of interest issues by trading against our customers’ orders.  Hedge funds and proprietary trading are our most important customer segment, comprising 4% of our accounts, 23% of our customer equity, and 26% of our commission income.”

Interactive Brokers clients are increasingly based abroad

“From the point of view of worldwide geographical distribution, it is notable that only 40% of our accounts and only 36% of our new accounts come from the United States. The geographic composition of our client accounts have grown from 20% to 22% in Asia and decreased from 52% to 51% in the Americas, and from 28% to 26% in Europe during the past year.”

Profitability will benefit from any further Federal Reserve interest rate increases 

“With a growing customer asset base, we continue to believe we’re well-positioned to benefit from a rise in interest rates. As noted, the Fed’s 25-basis-point increase in the Fed Funds target rate had a beneficial impact on net interest income. And based on current balances, we estimate that a general rise in overnight interest rates of another 25 basis points would produce an additional $48 million in net interest income annually.”

Sometimes customers can be just downright lazy

“Our biggest enemy is inertia. The issue is that most people with a brokerage account do not want to bother with switching it. So therefore, even if they are — even if we succeed in convincing them that they would have a financial advantage, a large financial advantage, by bringing their account to us they still don’t want to do it, because of just laziness.  And most people in Europe already have an account and most people in the United States already have a broker, right? In Asia, it’s the newly rich, the young people who open a brokerage account for the first time in their lives. So they compare the brokers. And anybody who compares brokers can blindly see that we are by far the lowest cost.”

Half of their customers have less than $24,000 in their account

“I, to tell you frankly, I haven’t been keeping track up until the last two years and it’s been holding pretty steady, because the primary cause of our closing accounts is that people run out of money. And you have to remember that, in spite of the fact that the average account size is $204,000, more than half of our customers have less than $24,000 in their accounts, and a third have less than $10,000.”

Hope to one day take care of all of their RIA’s clients compliance needs

“We are working on automating our Registered Investment Advisor compliance set of rules. Because we want to eventually offer to Registered Investment Advisors that we will take care of their compliance needs from beginning to end. We can do some of that right now and we keep growing that capability.”

Louis Vuitton (LVMHY) CEO & Linkedin CEO Quotes

Linkedin (LNKD) CEO Jeff Weiner said executive decision making ultimately drives the long term success or failure of a business 
At the end of the day, I think one of the most important drivers of long term value within an organization is the speed and quality of its decision making.  And you’ll look back at companies that created outsized value and they’ll be able to count on one hand the decisions that changed the trajectory of that company.” 
Linkedin (LNKD) CEO Jeff Weiner aims to inspire 
There’s a difference between leaders and managers.  Managers tell people what to do, often times without very effective results.  Leaders inspire them to do it.”  
Source: April 2016 Stanford Interview

Louis Vuitton Moet Hennesy (LVMH) CEO Bernard Arnault 

“I always say to my team, you should be thinking that the worst is coming.  You should never be satisfied, we always need to think of what could go wrong.”

McDonalds at Bank of America Conference Notes

Kevin Ozan — CFO

Working to develop a national value platform

“we are focused on working with our franchisees to develop a national value platform that will help have an everyday predictable value platform going forward. Those are the key drivers of our sales that should continue to help us grow sales in the near-term.”

Breakfast was an accelerator of momentum

“All Day Breakfast certainly was a catalyst I would say and I will call it an accelerator of momentum. It’s certainly been well received by customers. It was the number one customer request that we have gotten over the last several years. So, it really was a focus on meeting customer needs. ”

Customers have higher expectations related to quality of ingredients these days

“I think it’s a longer term strategy of knowing that our core menu items are significant part of the menu, and customers have higher expectations these days related to quality and ingredients in those food items and so we are focused on that for the long-term versus just taking advantage of a short-term commodity swing”

It’s a competitive marketplace right now

“I think it’s safe to say it’s a competitive marketplace right now. The positive is that if I think back to the fourth quarter of 2015 that we grew obviously our sales. Our sales were pretty strong in the fourth quarter, but the QSR market also grew. And so that’s a positive. It isn’t like it’s a zero-sum game that people are just trading off customers, but the market is still growing.”

Trying to figure out mobile app pick up

“you have got to figure out if someone orders on their mobile app how do they pick it up, because they are not going to want to get into the same line in drive-through that everyone else is in. So, we have got to figure out from an operational standpoint how can we best deliver that order than to someone who has ordered on their mobile app.”

Food at home inflation is a limiter to pricing power

“I mentioned that we look at food away from home inflation. I should also mention the other thing we certainly keep an eye on is food-at-home inflation, because if food-at-home inflation gets to be too low or deflation, the grocery store becomes our competitor just as much as any other restaurant, if you will. So, we keep an eye on both of those as we think about and look at pricing power. We will keep an eye on both food away from home inflation and food-at-home inflation to make sure that we don’t get too much out of line with that.”

Food inflation isn’t that high

“It’s relatively benign just like all the other food. It’s relatively low, I guess, inflation and so that’s why I say there is a risk of us having the pricing power that we are hoping to have, because both food away from home inflation and food-at-home inflation isn’t very high these days.”

I think the economy is doing fairly well in general

“I think the consumers right now I think are feeling okay, obviously with gas prices down, consumers I think generally are feeling alright. Having said that, we don’t always see a direct correlation between gas prices and our business, so I know some people think that there is a big correlation as gas prices come down, the QSR industry and McDonald’s specifically will see an impact in sales. We haven’t seen a direct correlation with that other than on specific highway stores, I will say, where you see people traveling more by car. But I think in general, what we are seeing consumers are spending a little bit and feeling okay, I think right now, they are certainly a little cautious with – unemployment isn’t too bad right now. The economy I think in general is doing fairly well. People aren’t sure what to make of the political landscape and I won’t even try and enter that arena, but I think in general, consumers are feeling okay. And I think that, that’s contributing to our business certainly. The weather also being positive over the last 6 months around the country probably has helped consumer psyche and our business also.”

We are not the low cost provider in China which makes it a more difficult competitive environment

“It’s a competitive environment in China. It’s very competitive there, more so from local Chinese QSRs even than globally branded QSRs. So, it’s very competitive and we are not the lowest cost provider in China. It’s a little bit different environment than here in the U.S. We are a little bit higher priced compared to some of those Chinese QSRs. And so it’s a little bit more difficult competitively there, but we are extremely bullish on long-term growth aspects.”

It has gotten more competitive in China in the last couple of years

“Yes, it has gotten more competitive. And again, I think a lot of it is the local Chinese QSRs. You have a lot of street vendors there that are competitors. There is a lot of choices there and a lot of low cost food choices that make competition there difficult and competitive. And it has gotten more competitive over the last couple years I think is fair to say.””

Valeant 4Q15 Earnings Call Notes

Valeant Pharmaceuticals’ (VRX) CEO Michael Pearson on Q4 2015

There’s some good news and some bad news

“So as you all know, I have been back from my medical leave for about two weeks and I have had a chance to review what is happening in the businesses and there is a mixed combination of some good news and some bad news, and I just wanted to take a few minutes to sort of give you my assessment and then what we plan to do about it.”

Committed to reducing prices

“First, our approach to pricing. We have already committed to reducing pricing on our brand in dermatology and ophthalmology products, within the Walgreens portfolio an average 10%. This price reduction is on lack, and will impact and will be taken across all channels, not just Walgreens. Other price increases will be modest and in line with market and payer contracts.”

No plans for divestitures

“In terms of divestitures, as a public company, we continue to review our assets in order to maximize shareholder value. We have no current plans to divest any major platform. However, we will continue to look at our non-strategic assets and make appropriate decisions.”

Subject on ongoing investigation

“Finally, we are the subject to several ongoing investigations. These include investigations by the U.S. Attorney’s Office for Massachusetts in the Southern District of New York, the SEC, and Congress. We are cooperating in these investigations and have provided and will be providing documents, information, and testimony in this various investigations; whether pursuing to subpoenas or otherwise.”

Business is not operating in all centers

“So, in summary, our business is not operating in all centers, but we and I are committed to gain it back on track. We have a set of terrific products and brands and a loyal set of physicians, patients, and customers, to both revenue enhancement cost reduction, we are confident that we can and again will be able to begin to deliver the cash flows or shareholders and debt holders are accustomed to.”

We have to earn back credibility

“In terms of management credibility, we have to earn it. And you raised some terrific points, I would argue January, I don’t think we said a whole lot in January, I think it was in a hospital but I do accept your point and it starts with me. So, our team has been working hard and we are deliver on our commitments. So, the world has changed to some degree since December but we have to do a better job. We’ve had some underperforming businesses; that’s on us. Right that’s totally on us. So we have to earn back the credibility we have to deliver on the results, we have to meet or exceed this guidance and I think we are all recognize that. And so it’s a bit of a starting over point at this point for me and the company. And clearly if we don’t deliver, then again that’s on me. And but I can assure you, I am completely committed to making sure that we do deliver and I do think we knew we have a lot more line of sight in terms of managed care at this point.”

I’m not aware of any golden parachute if I get fired

“actually I think I am pretty modest if I got fired. It’s pretty modest they maybe referring to some stock that is invested that’s not delivered until in the future but that’s been divested, I mean, that was. So, David I am not aware of any golden parachute that I have.”

Linda LaGorga

Balance sheet is key priority for 2016

” One of our key 2016 priorities is to focus on our balance sheet. We remain committed to using the vast majority of our cash flow to pay down debts. At our Investor Day in December, we said we expect to pay down more than 2.25 billion of permanent debt in 2016.”

Robert Rosiello

We believe in our mission

“And I think that’s what motivates our team. I think we believe in our mission. We believe in what our company is trying to achieve and that’s what we do day-to-day. The issues surrounding us are distracting and it takes courage to forge ahead to execute our mission day-to-day in the face of all that. So, all I can say is we have fabulous people we are blessed to have them, we believe in them and we think they’ll do the right thing for the business.”