Colfax (CFX) Q1 2016 Earnings Call

Colfax (CFX) CEO Matt Trerotola said their end markets remain choppy 

“We continue to make good progress on our cost-reduction efforts, but our progress on growth initiatives has been offset by the end-market environment, which remains choppy with a mix of positive and negative indicators and no clear sign of recovery in the near term.”

Continuing to find ways to cut costs in order to right size the business

“Our previously announced cost-reduction activities are on track to deliver $50 million of incremental cost-savings this year. As we have discussed, the majority of these savings will be from SG&A and we expect the read through to improve in the second quarter. Our plant consolidations and other cost-savings projects will add to the quarterly savings as we move through the year.”

China is slowing their power plant infrastructure build out 

“There are changes in the China power market that may impact 2017 and beyond.  The high number of new coal-fired power plant permit approvals in 2015 combined with the slowing pace of the industrial economy has the Chinese government increasingly concerned about overcapacity for electricity generation. In response, China has announced the delay or reconsideration of certain power projects in several provinces, which may reduce order rates this year and newbuild activity next year.

Seeing customers delay their orders 

“There’s a degree of caution that I think has people dragging their heels. We’ve seen projects pushed from 1Q to Q2, some others pushed from Q2 to Q3. And it remains to be seen whether they’ll get traction in Q2 and Q3 and those projects will go through to fruition or whether they’re going to continue to push back. That’s going to be a critical thing that we’ll be watching here in the second and third quarter.”

In regards to acquisition candidates, buyers and sellers are still too far away on price to reach an agreement 

“But our primary focus on the capital allocation front is around the acquisition pipeline. We’ve been driving a pipeline of more bolt-on acquisitions. And if we can find the right ones to do there, we’ll be moving forward with bolt-on acquisitions. It is a bit of a tough environment right now with the choppy markets in terms of buyers and sellers.”

JS Earnings Call Notes 10/15/2015 – Colfax, Fastenal, Johnson & Johnson, CSX, Blackrock, Bank of America, Wells Fargo, Winnebago

Colfax (CFX) CEO Matt Trerotola doesn’t expect a recovery in his industrial end markets until 2017 

We must be more aggressive at managing our cost structure in the short-term as we work through the down cycles in several of our important end markets, especially oil and gas, and marine. Through our strategic planning process, we believe these downturns are cyclical, not structural but the timing of recovery in these markets is uncertain and may not be seen before 2017.”

And they will cut costs to remain lean 

“We’ve identified additional cost structure actions that we can take without limiting our operational capacity to accelerate growth. These actions are broad based across all three of our businesses and address manufacturing, operating and corporate expenses.”

Colfax (CFX) CEO Matt Trerotola said the company is actively looking for acquisitions as prices have come down in the cyclical sector

And as far as the acquisition pipeline, we continue to have an active acquisition pipeline. As I mentioned, we did a small one recently. We have some others in the pipeline as well. And the rate at which we complete any of those will be related to the deal processes but also will be connected to our ability to be comfortable with the value in light of the current dynamic situation in the economy.”

Colfax (CFX) CEO Matt Trerotola said the Chinese government is balancing environmental reform and economic growth challenges

I was over in China a few times earlier this year and there’s a significant amount of tension there right now between a real commitment from the government to make substantial progress quickly on the environmental front or at least a commitment from that portion of the government, at the same time as they’re having the industrial growth challenges and have other parts of the government wanting and needing to work very proactively on those. And so, our challenge is how do we figure out a way to work with customers to get these investments, further up the priority scheme and ideally maybe make them not just about environmental but have some productivity benefits.”





Fastenal (FAST) CFO Daniel Forness said their industrial customers are in a recession

Right now in the third quarter, 44 of our top 100 customers are negative. We have not lost any business with that group. They are negative in their spend. In some cases, they are negative because their business is very negative and they are somewhat negative with us. In some case, their business is treading water and they decided to tighten their belt.  The industrial environment is in a recession – I don’t care what anybody says, because nobody knows that market better than we do. You know, we touch 250,000 active customers a month.”

Fastenal (FAST) said the slowdown in the oil & gas sector continues to affect their business

“The first nine months of 2015 were hit hard by a slowdown in our business with customers connected to the oil and gas industry. This connection includes direct industry participants as well as those with a geographic connection.  Our end markets remain choppy, as demonstrated by our weak sequential patterns.”

And they are selectively choosing to open stores again

“After several years of holding back on store openings and even contracting our total store base, we plan to expand our pace of store openings in 2016 with a goal of opening 60 to 75 new stores.”

Fastenal said it would be difficult for their fastener customers to switch to another provider as it would be a time consuming process 

“We have strong capabilities at sourcing and procurement, at quality control, at logistics, and at local customer service. Each of these capabilities is focused on the customer at the end of the supply chain. This business is split about 50% production/construction needs and about 50% maintenance needs. The former is a great business, but it can be cyclical because about 75% of our manufacturing customer base is engaged in some type of heavy manufacturing. The sale of production fasteners is also a sticky business in the short-term as it is expensive and time consuming for our customers to change their supplier relationships.”

Weakness in some of their larger accounts hurt profitability

“The relationship between sales and gross profit depends on our success within our large account business (an area that is still under-represented in our customer mix). The large account end market produces a below company average gross profit; however, as demonstrated in recent quarters, it leverages our existing network of capabilities and allows us to enjoy strong incremental operating income growth. Given the sequential weakness with our largest customers, we saw a sequential improvement in our gross profit. Our gross profit is also impacted by supplier incentives. With weaker net sales growth and our tight management of inventory levels, the growth of spending with our suppliers is lower; hence, our supplier incentives are reduced.”

And they spent some time discussing how they view capital allocation

“Finally, some thoughts on capital allocation: During the latter half of 2014 and the first nine months of 2015, we have been modifying our capital allocation by buying back some stock. This is in response to several factors. The first centers on our external valuation. Our relative stock valuation has weakened over the last several years, which prompted us to reassess our cash deployment.  We are mindful of our shareholders expectations relative to our dividend paying history and have primarily funded this buyback with debt. Over the last three to four years, we had dramatically increased our capital expenditures, relative to our net earnings, for the rapid deployment of distribution automation and industrial vending.”

The company highlighted what makes the economics of the industrial fastener business compelling

“It is helpful to appreciate several aspects of our marketplace: (1) it’s big, the North American marketplace for industrial supplies is estimated to be in excess of $160 billion per year (and we have expanded beyond North America), (2) no company has a significant portion of this market, (3) many of the products we sell are individually inexpensive, (4) when our customer needs something quickly or unexpectedly our local store is a quick source, (5) the cost and time to manage and procure these products is meaningful, (6) the cost to move these products, many of which are bulky, can be significant, (7) many customers would prefer to reduce their number of suppliers to simplify their business, and (8) many customers would prefer to utilize various technologies to improve availability and reduce waste.”

And they view their geographic proximity to their customer base as a competitive advantage

“We believe our ability to grow is amplified if we can service our customers at the closest economic point of contact. For us, this ‘closest economic point of contact’ is the local store; therefore, our focus centers on understanding our customers’ day, their opportunities, and their obstacles.”





Johnson & Johnson (JNJ) Chairmen of Medical Devices reiterated the company’s goal of being a market leader in their 

We have a companywide premise that we should be number one or number two in the categories where we’re committed and have a clear technology path to getting through either a number one or number two position.”

And he expects an accelerated pace of acquisitions going forward

“So I think in a disciplined focused approach where we divest we will also look at opportunities to acquire. I think certainly accelerating our pace of tuck-in deals would be a good opportunity for medical device we seek, considering our scale in the market, especially in surgery and orthopaedics is large, and we anticipate accelerating that pace over the next 12 to 18 months.”





CSX Chief Financial Officer Frank Lonegro said the company is increasing train length to improve cost & labor efficiency

“To illustrate our progress, in the third quarter we increased overall train length by about 10% versus the prior year, which drove a significant reduction in crew starts.”

And they were able to combat the slowdown in volume by lowering their employee expenses and fuel expenses

“Looking at labor and fringe, we expect the fourth quarter head count to be down approximately 2% on a sequential basis, which reflects about a 6% reduction from the prior year.  Fuel expense in the fourth quarter will be driven by lower cost per gallon, reflecting the current price environment, volume-related savings, and continued focus on fuel efficiency.”

And oil shipments by rail, which was a huge growth segment for the railroads just a few years ago, is down substantially 

“In addition, we expect headwinds in our coal and crude oil markets to increase in the fourth quarter, driven by sustained low commodity prices. As I mentioned earlier, domestic coal volume is expected to be down around 20% versus the prior year. And crude oil volume is expected to decline at least 25% sequentially.”

Intermodal has been an area of strength 

On the domestic side, we are seeing the benefit of the investment and the service product that we are seeing. We have been able to grow that business somewhere between 5 and 10% over last several years. We are seeing a little bit of an enhanced growth here this quarter, as we know one of our customers who has the contractual ability to further diversify their portfolio is doing just that here in the quarter. So we are seeing a little bit of an uptick in the growth with that customer right now, beyond what we would normally see. But we feel good about that business, feel good about the ability to continue to grow that at a multiple economic output for a period of time here going forward.”    

CSX Fredrik Eliasson Executive VP said there is an opportunity to re-price legacy contracts in the coming years

So, I think you know that in our merchandise business, only about half of our business is up on the annual basis. And most of our other businesses, they are mostly 3 to 5 year contracts. We do feel that we will have good opportunities to reflect what the value we have in the marketplace, and with improving service on top of that, we do feel good about our pricing opportunities going forward as well.”






Blackrock (BLK) CFO Gary Shedlin said the company saw lower fees during the quarter as clients shifted money out of higher fee based products, such as emerging markets & commodities, into lower fee based products, like index funds 

“Sequentially, base fees were down 3% due to lower quarterly average AUM, a seasonal decline in security’s lending activity and the impact of divergent data on our fee rate as emerging and commodities market underperformed developed market.”

Blackrock (BLK) CEO Larry Fink said Blackrock maintains the #1 global market share of ETF’s with 38% of the market

iShares captured the number one market share of the net new business globally in the U.S. and in Europe and in the third quarter year-to-date. iShares flows were driven by fixed income as investors utilized fixed income ETF as an effective tool for diversification and liquidity.  Equity flows were driven by $5 billion into European listed iShares and we saw positive inflows in Canada and Asia Pacific as well.”

Blackrock (BLK) President Robert Kapito said the lower price of ETF’s when compared to traditional funds is only one component of what makes the offering compelling 

But just to step back on the price, please keep in mind that prices are only one reason why people buy ETF. They are looking for precision or what you’re discussing a new approach in smart beta or factored investing, they’re certainly looking for liquidity, which means, you have to have a fund and have some sort of size depending upon the type investor they could get core investor which we call it buy and hold or they are looking to be more active. So, price is important but its only one aspect.”

Blackrock (BLK) President Robert Kapito said ETF’s are now being used as an alternative to futures contracts

So, this is the beauty of ETFs that we constantly have been finding new uses for the products, so as futures becomes more expensive to use than ETFs had opened up a whole new world that we didn’t even think about because of the collateral cost behind futures contracts.  So as you know now ETFs are being use as a surrogate for futures across many institutional accounts, so we think that’s going to continue, how big that can be, just think about the size of the futures markets and certainly regulation is going to play a big role in that as well.”

Blackrock (BLK) CEO Larry Fink said the company could potentially benefit from Department of Labor regulation which may potentially emphasize ETF’s in retirement accounts

I think one thing is very clear how this outplays that it means greater emphasis on beta products and ETFs.  I would also say that if investors feel more confident because of however the DOL reform plays out that if investors feel more confident that they can invest fairly, securely we are all benefited by that. Now, I’m not sure how that will play out, but we’ve always believed that we could have a market place where our clients feel more secure that they have an opportunity to earn a fair return over a long cycle everyone will be benefited by that.”

And their active equity unit, which has been a poor performer over the last several years, is starting to perform 

So where we are starting to see the biggest turnaround is from the fundamental equity business. We spent a lot of time and money I should know in trying to rebuild our efforts there and the teams. And I feel very good about this, certainly in Europe our team there has been together longer. Their record across the board is now very strong and now we are starting to see the same efforts in the U.S. through our capital appreciation fund, our equity dividend fund. So the performance is actually really good.  So when you see better performance it translates directly into flow and we are starting to see those flows or having much better dialogue with our consultants who are now putting us in the mix for proposals and we’re also internally very focused on building out the equity effort and you are going to hear a lot more from us, from our marketing teams and the rest of the teams across the firm, because we are going to be much bigger in the active equity space and we are very happy to have the performance to back that up, so very important part and we’re still adding people but we are getting results at the same time, good positive feedback from our clients.”





Bank of America (BAC) CEO Brian Moynihan said the bank’s performance is improving in a tough economic environment

the key message is we continued to make good progress in a tough revenue environment due to low interest rates and a sluggish economic recovery. In addition with the late summer’s volatility, especially the fixed income trading markets are remaining challenging. So with that we produced another good quarter of progress in all the businesses.  We continued to make progress towards our full earnings capacity here at Bank of America, and this quarter represents the fourth consecutive quarter of solid results following the resolution of our large legacy exposures in the third quarter of last year.”

Bank of America (BAC) CEO Brian Moynihan emphasized the evolving nature that the retail bank has with its customers as it seeks to right size their banking branching

As a reminder, our consumer franchise is the largest retail bank in the United States. In our consumer banking business, as you can see, we grew revenue and earnings year-over-year despite the low interest rate environment. We have been restructuring our branch structure, selling some branches, closing some branches, and changing account structures, and with that this quarter our core consumer checking accounts continued to grow. We grew those accounts and improved the percentage of those customers who use us as a primary bank, and importantly the average balance per account continues to grow.”

And mobile banking is becoming a larger and larger component of the customers banking experience

When you go to the change in our financial services business for mobile and digital banking, we now have 18.4 million active mobile customers and 31 million active online customers.  More customers are using mobile device to deposit checks and access their accounts, and now are starting to buy products as well as book appointments. To get a sense of that, we are now booking 15,000 appointments a week off of our mobile devices.”

And mobile banking is more cost efficient for the bank as well 

“Mobile processing is better for us and it is better for our customers. It is one-tenth the cost relative to processing of financial centers and more convenient for customers.”

Bank of America (BAC) Paul Donofrio said the company’s retirement solutions business is gaining momentum from its ability to cross sell products 

The last thing I would note that’s not shown here is referral rates across the company remained strong. For example, our retirement solutions business continues to win in the marketplace. We have won more than 1200 retirement plans year-to-date, many of which were referred from global banking. On a year-to-date basis, this is up more than 40% from 2014.”





Wells Fargo (WFC) CFO John Shrewsberry reminded investors that the bank is positioned for interest rates remaining “lower for longer” than most anticipate

As I have discussed previously our view on interest rates has evolved over the past year to be more of a lower for longer expectation for both short term and long term rates. As a result, we’ve been adding duration to our balance sheet, however our balance sheet remains asset sensitive and we are positioned to benefit from higher rates and we expect to be able to grow net interest income over the long term even if the rate environment continues to be challenging.”

Like many of the other banks, they continue investing in their IT infrastructure and effectiveness

We continued to invest in our businesses with particular focus on risk, cyber and technology projects. These investments partially reflected in higher outside professional services expense in the quarter.  Our new and existing customers are increasingly using our digital offerings with active online customers up 8% and active mobile customers up 17% from a year ago.”





Winnebago (WGO) CFO Sarah Nielson said the company has decided to exit the bus business

“We made the decision to enter the bus business as announced earlier this week and have sold the related inventory and tooling to our distributor partner at cost. In light of the labor constraints that we have experienced this past year, we determine that our resources were better used to focus on the design and manufacturing of our motor homes. Also, we had not achieved profitability within this operation since the interception. We’ve recorded 1 million in operating losses in fiscal 2015.”  

Winnebago (WGO) CFO Sarah Nielson wants the company to be reactive, as opposed to proactive, in terms of figuring out which RV models the customer wants

We’re going to have to kind of monitor kind of quarter by quarter, what makes the most sense from a production plans. When we plan in an aggregate for the year we’re looking a lot at the labor resources we have to allocate and assuming a certain mix, but it’s a market where we want to be very reactive to what the deals want, what the consumers want. So, we want to be able to change as needed in them, so it potentially could but its hard to predict how all that will play out as we set today for the whole fiscal year for 2016.”

Miscellaneous Company Notes 10.15.15

PrivateBancorp’s (PVTB) CEO Larry Richman on Q3 2015 Results

We see our clients remaining appropriately cautious

“Certainly our clients are mindful of geopolitical and other macroeconomic events and we see them remaining appropriately cautious. We are seeing our clients performing well and seeking new ways to build their businesses and this provides opportunities for us. The banking environment remains competitive in pricing and structure. It is important that we remain selective and disciplined. ”

Pressure points not manifesting in credit deterioration

“it’s really tough right now, Steve, to see where there is the next pressure point. You can point to various issues that all of us read about on the first page of the paper week-to-week that props up, whether it be energy, leverage loans, state of Illinois, all kinds of things that are out there, but we are just not seeing any of that at this stage really manifest into any systemic issues for us.”

LIBOR curves are not fun to look at

“I looked at the futures this morning for the 30-day LIBOR as they go out the end of 2016, the end of 2017 and they are not fun to look at.”

Credit quality is business as usual

“So we are at a very good place. I am very pleased with what I am seeing. I think the movement here is largely business as usual.”

Del Frisco’s Restaurant Group’s (DFRG) CEO Mark Mednansky on Q3 2015 Results

Restaurants affected by slowdown in energy economies

“comparable sales decreased 1.4% during the quarter, driven by lower guest count. The slowdown was partially related to the ongoing energy related issues affecting Texas and to a lesser extent Colorado, which together comprise a third of the brand’s comparable restaurant feed. ”

Lower cost of sales not enough to offset higher labor, operating and occupancy

“Lower cost of sales due to favorable prime beef costs and solid controls, was not offset enough for the higher labor, operating and occupancy expenses. ”

People want things a little quicker today

“today’s dining guests, unless they’re celebrating an occasion, or they want to linger a business meeting to have more time to discuss business, people want things a little quicker today and that’s one of the reasons we built the Grille brand…New cooking technology in the new stores has helped. We are starting to move some of that into the core group”

Colfax’s (CFX) CEO Matt Trerotola on Q3 2015 Results

Need to presume that markets would recover in 2017 at the earliest

‘ we’re seeing tough trends in the market and we think we need to presume that 2017 would be the earliest market base recovery. We’re going to be working hard also on our relative performance in those markets and trying to make sure that we perform as strongly as possible against that market backdrop.”

We’ve seen some more challenging trends on the oil and gas front

” recently we’ve seen some more challenging trends that are on the oil and gas front. And so we’re trying to — that’s one of the number of things that have taken some of the proactive cost actions to make sure they we’re prepared for whatever might be coming in the future. But I can’t say more than that in terms of where things might go in that sector.”

Oil and Gas and Marine are two of the highest users of welding

“the highest users have welding having some significant cyclical downturn, the oil and gas and marine being two of the key ones there. And so that combination of factors on the external and the currency challenges really stacks up to be a significant portion of our challenges this year.”

First Republic Bank’s (FRC) CEO Jim Herbert on Q3 2015 Results

Big banks are getting more aggressive in mortgage lending

“Yes, Erika, they are getting more aggressive. They are cutting both pricing and to a modest extent, standards. Their loan-to-value advanced ratios up to $2 million or $3 million have climbed into the 80% range. We are not following them. And that’s the cause for us losing some business. But as you can see, the volume has held up pretty well in the quarter, we’re happy with them. So we’ll compete on price, but we will not follow a change in terms or conditions.”

KeyCorp’s (KEY) CEO Beth Mooney on Q3 2015 Results

We’ve called rates wrong

“In the past and we’ve called this wrong, we continue to expect that interest rates would be going up, say 12 months down the road and we haven’t seen that yet. And so we’ll continue to reassess and we have the flexibility to manage that overall rate risk position fairly quickly with the change in interest rate swap position.”

Achieved a lot of loan growth simply because we have more bankers than we did at this point last year

“On the Community Bank side, we have achieved a lot of loan growth simply because we have more bankers than we did at this point last year. We have made a significant investment in commercial bankers, putting more feet on the street and we’re starting to see dividends coming from those investments”

Capital markets deals got pushed out a bit

“clearly the disruption in the market in the last part of the third quarter caused some of our deals and probably everybody else’s deals to be pushed out a bit. So there’s no question.”

UnitedHealthcare Group’s (UNH) CEO Stephen Hemsley on Q3 2015 Results

Risk pool served by exchanges would require more medical services than originally expected, so raising prices

“Like others we observe market-wide data this past spring that suggested the risk pool served by public exchanges would require more medical services than original expectations. Rather than wait for our own experience with our new members to fully developed, we increased rates and repositioned certain products market by market for 2016, and we expect improved performance next year.”

Raising prices double digits

“Average increases across the country are in the double-digits, and we also took steps to eliminate some products and reposition other products.”

JS Earnings Call Notes 7.26.2015 – UNP, CFX, CNI, CLB, CBI

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.


Union Pacific (UNP) CEO Lance Fritz said the shipment of coal remains a weak spot for railroads

“Solid core pricing gains were not enough to overcome a significant decrease in demand. Total volumes in the second quarter were down 6%, led by a sharp decline in coal. Industrial products and agricultural products also posted significant volume decreases.”

Union Pacific (UNP) CFO Rob Knight said the company was able to raise prices above inflation

“A 4% core price increase was a positive contributor to freight revenue in the quarter.  Core pricing continued at levels that are above inflation and reflects the value proposition that we offer in the marketplace. Of the 4% this quarter, just under a half percent can be attributed to the benefit of the legacy business we renewed earlier this year, and this includes both the 2015 and 2016 legacy contract renewals.”

Union Pacific (UNP) CFO Rob Knight said the company will increase its buyback when its share price is weak

“To your point on the share buyback, if you look at the first half of this year compared to last year’s first half, we’re up about 10% in terms of our share buyback, and we will continue to be opportunistic, and at the prices that we’re seeing right now, we think those are nice entry points. So we will – we are certainly, as we always have, buy more when it’s down, less when it’s up.”

Union Pacific (UNP) Vice President Eric Butler discussed their primary competitor, Burlington Northern Railroad, and competing with trucks

“Not only is the Burlington a tough competitor, but we compete with other railroads and other markets. We also compete with trucks. Trucks are also a tough competitor, and lower fuel prices are helping them.  It’s our goal to have the best service and value proposition in the industry. If we do that, we think we’ll be able to price appropriately for our value.  Clearly lower fuel prices will incrementally make truckers more competitive, and clearly as the shale play has gone down, there appears to be what we think is a temporary alleviation with some of the driver shortages or a temporary reduction, I should say. There still are long-term driver shortages out there, but some of the move of labor from that to truck drivers has alleviated some of the shortage. So trucks continue to be a competitive option.”

Union Pacific (UNP) Vice President Eric Butler thinks the U.S. is now a relatively low cost place of production

But long term, North America is still kind of a strong, productive, secure, relatively low cost place of production. It’s also a huge consumption market. Those things will continue to drive us being in the sweet spot for our transportation services, whether it’s export or import. “





Colfax (CFX) CEO Steve Simms says he wants to focus the company more on the profitable after-market

Despite the lower short-term CapEx cycle in several of our end markets, one of our key growth initiatives is to capture higher aftermarket content from our growing installed base. And we’ve seen encouraging traction in several areas of our business.

And he sees the global economy continuing to decelerate 

“As we look at it, I think that we have seen an industry which has softened further beyond what we anticipated in quarter one and we see that softening occurring really on a global basis. The softening that we have seen is driven by really two factors, one, virtually any end market that’s tied to oil and gas, the oil pipeline work, offshore oil wells, OSV, we’ve seen significant further deterioration in those trends and accelerated in to second quarter.”






Canadian National Railway (CNI) CEO Claude Mongeau said the firm is adjusting efficiently to lower volume

“We’re recalibrating our resources to drive efficiency. As Jim will describe to you, all of our core metrics are in line or better than last year, and that’s very important because that’s all we can do when the environment is a little tougher from a volume standpoint. It’s how fast and how efficient you are at reacting that makes the difference.  We responded quickly to the lower workload by decreasing dwell, cutting back on active cars, rightsizing our locomotive, increasing our end-to-end velocity; key that we didn’t concentrate on one piece but end-to-end and nice to see that again.”

But the pricing of their services held up well  

“Solid same-store pricing came in at 3.9%.  In short, the deceleration in carload and fuel surcharge revenue was wholly offset by solid pricing and by gain in foreign exchange.”

While “crude-by-rail” has slowed dramatically for all rails during the quarter, many of the rails are including Canadian National Railway are seeing a pickup in natural gas by rail shipments

Industry-wide, crude by rail economics were challenged by narrowing crude spread and by improved pipeline supply/demand balance. NGL volume grew nicely, reflecting ongoing opportunity to sell stranded Alberta NGL as merchant liquid in tank car into better-paying market than leaving it in the natural gas.

Canadian National Railway (CNI) CFO Luc Jobin said the company said a quarterly performance record in a tough volume environment

Our operating ratio was 56.4%, a record level for a second quarter. This represents a 320 basis points improvement over last year.  Our Q2 operating ratio was a record all-time, not just for CN, but for the industry.”

Canadian National Railway (CNI) Chief Marketing Officer Jean-Jacques Ruest discussed how the company thinks about pricing

So, we’re into a long term and we like compounding effect of inflation plus pricing. And you look at our chart for the last 10 years that Janet has, it shows the effort and the mindset of compounding effect. And so, we try to stay away from the commodity type approach of commoditizing rail freight as you would tend sometime to do in export coal or crude by rail because of the downside of that midterm, right? So what we have, 3% to 4% above inflation, steady Eddie. That’s the game plan for 2015 and 2016.”

Canadian National Railway (CNI) Chief Marketing Officer Jean-Jacques Ruest discussed how they incentivize their sales force to optimize for profitability

By the way, our salespeople, one-third of their sales bonus is related to pricing, so it’s not just about top-line revenue. It’s one-third top-line revenue, one-third pricing and one-third other initiative and that’s the balance that we like to have going forward.

Canadian National Railway (CNI) Chief Marketing Officer Jean-Jacques Ruest discussed why the firm is not willing to cut pricing on their “crude by rail” shipments in order to gain volume

“Regarding crude by rail pricing, there’s always some pressure on pricing from customers. And the crude by rail is an example where the spread is all over the map. The crude producers are under financial distress. Of course, they want something better. And these are big volume that sometime they’re more like the mirage because they’re big, but you never quite get there. As you get closer to them, you find that there was really no lake, it’s just another pile of sand.”

Canadian National Railway (CNI) CEO Claude Mongeau acknowledged the Canadian economy has slowed materially in the first half of the year

“The general economy in Canada has been more sluggish than what we’ve seen in the U.S.  I think what Canada is facing, is people probably understated the impact of the energy complex cutback on capital expenditure.  But we don’t see Canada in a recession. We see Canada in a technical slowdown that happened to take place for the first six months of the year.”

Canadian National Railway (CNI) Chief Marketing Officer Jean-Jacques Ruest discussed the cost competitiveness of trucking vs railroads

So, the cheaper energy makes the trucking a little more competitive versus rail. The spread – the cost between the two is obviously narrowing. Then you get back down to the basic of how many drivers there is being the number one bottleneck of our growth for the trucking side.  I think the future of intermodal long haul is extremely viable.”






Core Labs (CLB) CEO David Demshur sees a V-shaped recovery

“Core sees the V-shape recovery, led by higher commodity prices and followed by worldwide drilling activities, starting to increase in early 2016.”

Core Labs (CLB) Chief Accounting Officer Chris Hill said they have increased their share buyback to such a pace that their shareholders equity could go negative

Depending on our share buyback activity in the coming quarter, we may actually see book equity go to zero, below zero.  Clearly, book equity does not represent the solvency of a company. And, we note that several S&P 500 Companies who generate significant levels of free cash, also have negative book equity, because, they return that free cash to their owners, just as we have done. We do not have debt or contracts compliance requirements, to report positive net worth.”

Core Labs (CLB) CEO David Demshur discussed the notion that oil companies are re-directing capital expenditures to producing more from discoveries already made rather than exploring for new oil

“If you look at some of the comments made by the major operating companies in the deepwater, Conoco being the most recent, they talked about creating value from discoveries that have already been made.  So, as opposed to looking at CapEx for drilling exploratory wells, CapEx is now being focused on development. We’re seeing a lot of the CapEx dollars that were going for exploration which as you know from Core, really is not of a high interest to us, going right into our wheelhouse in the development of these discoveries that have been made, over the last 3 years to 5 years.”





Chicago Bridge & Iron (CBI) CFO Michael Taff said the company took advantage of favorable debt markets and borrowed heavily to buyback shares 

“Following the close of the quarter, we entered into financing agreements to amend or extend our existing credit facilities and establish additional financing capacity based on our assessment of an attractive lending environment, the ongoing growth in our end markets, and our strategic initiatives.  These changes strengthen our ability to execute our long-term backlog, return capital to shareholders, and pursue additional growth initiatives while maintaining adequate funds for our working capital needs. Moreover this is an important strategic step towards an efficient and optimal capital structure, allowing us to extend the maturities of our total debt and positioning us to implement a formal capital allocation policy in the near future that should be favorable to our shareholders. On that topic, as Phil mentioned, since the close of the second quarter, we have repurchased approximately 4 million shares of our stock.”
Chicago Bridge & Iron (CBI) CEO Phil Asherman said international turbulence is delaying some of their customers spending plans 
“Russia and China are a big part of our markets for many of our technologies. And of course with the foreign exchange and the ruble to the dollar as well as the sluggishness in the Chinese economy, many of those opportunities that we saw in the first half of the year seem to be shifting to the right.”
Chicago Bridge & Iron (CBI) CEO Phil Asherman said the international competitive environment is tougher than the domestic environment 
“We have a number of European and Japanese firms competing for that as well. So it’s a little bit tougher environment. You probably see more pricing pressure on that. So we’re very cautious on those jobs. We’re very selective in terms of locations. Most of work that we see are particularly in the Gulf region as opposed to other parts of the Middle East. So we’re seeing those. But again, there’s no indication that those won’t go forward.”
Chicago Bridge & Iron (CBI) CEO Phil Asherman is optimistic about winning construction projects outside of the U.S. 
“So we see some interesting opportunities in the Middle East and elsewhere. Again, East Africa I can’t talk enough about the impact it’s going to have on us long-term, but certainly we will see, I think some more LNG coming in this next year with some of the projects I mentioned as well as some additional combined cycle awards as well as everything outside the mix of work that we have, or the mix of businesses we have.”



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.


Amazon (AMZN) CEO Jeff Bezos highlights several characteristics of what makes an attractive business in the company’s annual report

“A dreamy business offering has at least four characteristics. Customers love it, it can grow to very large size, it has strong returns on capital, and it’s durable in time – with the potential to endure for decades. When you find one of these, don’t just swipe right, get married.”

Bezos cites Amazon’s unique culture as one reason it has been able to excel in the cut throat competitive landscape of retail

“We’ll approach the job with our usual tools: customer obsession rather than competitor focus, heartfelt passion for invention, commitment to operational excellence, and a willingness to think long-term.”

Bezos believes the Amazon Web Services cloud computing unit has decades of growth ahead of it

“Similar to the way I think about Amazon retail, for all practical purposes, I believe AWS is market-size unconstrained.   its current leadership position (which is significant) is a strong ongoing advantage.”




Chicago Bridge & Iron (CBI) CEO Phillip Asherman on how the decline in oil is affecting their energy infrastructure construction business 

“The volatility in the oil prices as we said at the end of last year when analyzing our potential pipeline of new awards we saw, I think at that time we said less than 5% of those new prospects that could be affected by changes in the oil pricing and that’s still our position.  We still see the petrochemical projects going forward.”

Chicago Bridge & Iron (CBI) CEO Phillip Asherman says the company, along with its construction partner Chioyda, is involved in about half of all the liquid natal gas (LNG) capacity build outs in the world

“As far as LNG, we’re well positioned to that particularly well with our collaboration with Chiyoda between the two of us we’ve probably been involved in probably 40% to 50% of the LNG capacity in the world.”

Chicago Bridge & Iron (CBI) CEO Phillip Asherman says the firm has benefitted in the labor market from the downturn in oil prices as they have been able to hire a large number of skilled workers 

“We are actually benefited from some of the changes in oil services and some of the offshore production platforms with reduction in force from much of that workforce. For example, many of the people that are involved in offshore production whether they be welders or engineers or other skilled crafts, the difference in rates are very nominal. The skill sets are same, so we’ve actually benefited from hiring those.”




Google (GOOGL) Chief Business Officer Omid Kordestani says 90% of commerce still takes place “off-line” which is an ongoing opportunity for e-commerce to capture additional market share 

“Mobile also enables us to help drive the 90% of commerce that still takes place off-line, which is a massive opportunity that are partners are really excited about.”

Google (GOOGL) Chief Financial Officer Patrick Pichette says ads served up on the Youtube platform offer a terrific return on investment for advertisers

“We’re just seeing a real acceleration at YouTube, and that’s why we thought it was important because we saw this change.  We tuned these ads to make sure that people want to watch them so that they are very effective, and when they do, then people watch a lot more of them. And so over the last quarter, over the last couple of quarters, we’ve seen the real takeoff.  The number [of advertisers] grew 45% in 2014. And all of the top 100 global brands have run TrueView ads over the past year.”




Colfax (CFX) CEO Steve Simms believes the company has a huge growth opportunity in front of it as China tries to clean up its air and pollution

“The passage of environmental legislation in China to take on the issues of particulate emissions throughout the country. As we’ve said before, those standards are to be passed at the very end of 2015, or early 2016. Our teams are now beginning to see inquiries on our response plan to that impending opportunity or pending opportunities.”




Mead Johnson (MJN) CEO Kasper Jakobsen says approximately 25% of the firm’s overall revenue is based in US dollars  

70% of our business is in emerging markets and more than 75% of sales in non U.S. currencies. Any change in exchange rates has a significant impact on our top line.”

Mead Johnson (MJN) CFO Charles Urbain sells the company is benefitting from a weaker Euro as a large percentage of their manufacturing base resides in the region

“A weaker euro helps to reduce the impact on our earnings. We have a large manufacturing operation in Europe that when combined with the relatively low local revenue base makes us a net beneficiary of euro weakness.”




Graco (GGG) Pat McHale sees strong growth for their products in the home and paint supply stores 

“In the first quarter both paint stores and home centers grew strong double digit. Our outlook for in the Americas for both of those segments is strong and we think that we’ll do better in the regions in the next nine months than we did in the last nine months.  The construction market in the U.S. is continuing to strengthen and we are riding that wave.”




Hershey (CEO) John Bilrey said his company saw growth slowing significantly in China

“Chocolate was one of the few categories in Chinese that grew in the first quarter although less than last year. In China, Hershey’s slightly outpaced the category and gained market share. However, the pace of growth slowed significantly.  Some of this softness is most likely due to government policy related to gifting, however macroeconomic news indicates things have significantly slowed and this could be impacting overall consumer confidence.”

Hershey (CEO) John Bilrey added that his company is likely to benefit from the urbanization trend in China 

“I think the structural changes favor CPG categories in terms of urbanization as well as a more consumer oriented economy versus exports, so I do see given to see that evolution, we’re structural, I think helps us.”




Starbucks (SBUX) CEO Howard Schulz says the company intends on launching a new, super premium coffee brand 

“Our intent with the roastery from day one was to create and build a new ultra-premium coffee brand and business unit. The additional small batch coffee roasting capacity provided by the roasteries enabling us to source roast blend and market spectacular limited availability, microlot coffees from around the world and to meaningfully elevate the super-premium coffee experience we deliver to our customers.”

Starbucks (SBUX) COO Kevin Johnson believes the company has reached the point in economies of scale in which the firm’s size and mobile offerings are a significant competitive advantage 

“Enhancing our in-store experience with customer focused digital experiences like mobile order and pay creates a positive flywheel effect on our business and attracts more My Starbucks Rewards (MSR) members. Each new MSR member represents a deeper more personalized customer relationship and more personalized customer relationships allow us to better serve customers and grow our business as evidenced by the significant increase in the number of active MSR members we are serving.”

Starbucks (SBUX) Chief Digital Officer says the new mobile order and pay platform is bringing in brand new customers 

“The answer is yes, we are seeing new customers coming in are using mobile app and also use mobile order and pay. So this is not just leveraging the strong base and you already have in our mobile commerce platform.”




Lazard (LAZ) CEO Ken Jacobs says the firm has seen strength in mergers and acquisitions activity for transactions valued over $10 billion

“We continue to be leader in a large, strategic, complex and multinational transaction that characterize the current M&A cycle.  We are advising on almost a third of global announced transaction valued at $10 billion and over. And we are the sole advisor to H J Heinz on its combination with Kraft Foods, the largest transaction of the quarter.”

Lazard (LAZ) CEO Ken Jacobs says the confidence level from CEO’s in Europe is improving

“QE is in a positive from the standpoint of obviously the cost of financing and valuation in Europe. And generally speaking the European economic outlook has improved mildly overall since before QE, generally speaking I would say our sense is that confidence is improving at the decision maker level in Europe CEOs.”




Verisign (VRSN) CEO James Bidzos expects new generic top level domains (such as “.business” or “.shopping”) to drive growth in the next couple of years

“Gaining more momentum, we do have dot realtor and dot jobs as backend, .realtor is a good performing name but those names are available for the first year for free to all, all of accredited realtors. So we’re seeing some good growth there and we hope that will continue.”