Miscellaneous Earnings Call Notes 12.11.15

Universal Health Services (UHS) Presents at Bank of America Merrill Lynch 2015 Leveraged Finance Brokers Conference

Steve Filton

Behavioral health business is more recession resistant

“if you’re seeking — and you’re seeking acute care treatment, you need a hip implant or you need some sort of ENT surgery et cetera, you may think about the economics of that; you may choose to postpone that because you don’t want to come out of pocket for a co-pay or deductable or because you don’t want to be out of work frankly during a tough economic climate. But if you try to commit suicide or you overdose on drugs and alcohol, you are not going to be in a position to decide whether you should or shouldn’t be admitted to the hospital. That decision is really being made generally by somebody else who is effectively economically insensitive to what your economics of the situation or concerns might be. So, I think that’s another reason why the behavioral business has generally proved to be more, I’ll call it, recession resistant.”

Optimum occupancy in behavioral care is in the low to mid 70s

“occupancy rates and our behavioral facility peaks in the mid 80s, right around 84% in about 2005-2006. What we started to do at that point because we have a view probably the ideal occupancy rate in this business is somewhere in the low to mid 70s. And so, when we were at 85% in about 10 years ago, we’re turning away a lot of patients at that point because obviously if we’re averaging 85%, it means that there’s a lot of days when we’re at 90 and 95 and even a 100% occupancy. It also means that because of some of the constraints that we have, we have put male and female patients; we don’t put adults and children together, we don’t certain diagnoses together. So, as a consequence, it’s difficult for facilities to really run at something close to full occupancy.”


Silicon Laboratories Presents at Credit Suisse Technology, Media & Telecom Conference

Tyson Tuttle

Low power for IoT requires innovation

“if you look at the energy efficiency that’s required. If you’re handset only has 10% battery life left, and I know that when mind says 10% battery life, I’m like looking for a charger. But if you imagine that amount of power needs to power an IoT device for five years. So that’s essentially the amount of energy that’s in the little coin cell and they want that device to sense the environment. Let’s say every few minutes it needs to communicate that when something happens. This type of energy consumption requires a lot of innovation. And if so this is what we are focused on doing.”

From a macro perspective, wireless markets suffering but infrastructure business doing well

“I think a lot of people that we are selling into wireless were suffering, especially in China, we were not exposed to that at least on our infrastructure business, we had a little bit of exposure on the microcontroller side and some of the optical modules that did hold back our growth in IoT in the second half. But on infrastructure we see that it’s pretty solid globally. And this is more of a reflection of core network in data center roll outs.”


Barnes & Noble’s (BKS) CEO Ronald Boire on Q2 2016 Results

Have seen increased traffic so far in Q3

“the challenges were greater than anticipated and reduced traffic as well as conversion. During the second quarter, we implemented a significant number of website fixes to increase traffic, improve the overall user experience and stabilize the site. So far during Q3, we have seen increased traffic and have stabilized the site for the holiday season. We plan to implement additional improvements after the holiday season to further upgrade the overall user experience.”


The Cooper Companies’ (COO) CEO Bob Weiss on Q4 2015 Results

Had a bumpy ride from mid September through the end of November

“August was a good month and things dropped off in October a lot, particularly in the U.S. and some of the problems we ran into in Europe exacerbated the most. We thought we’re in pretty good shape in early September, found out we weren’t in as good shape as we thought by mid-September and had a bumpy ride with our integration if you will in Europe, from mid September until pretty much the end of November. Having said that, we had what we call a very respectable November”


Toronto-Dominion Bank’s (TD) CEO Bharat Masrani On Q4 2015 Results

Mark Chauvin

Are starting to see stress in consumer credit portfolios in energy-impacted provinces, but within expectations

“Next, with respect to our oil and gas exposure, we were not surprised by the level of impaired loan formations this quarter. Ongoing analysis indicates that the oil and gas nonretail credit portfolio continues to perform within expectations, given the current level in near-term outlook for commodity prices in this sector. We are beginning to see signs of deterioration in the oil impacted provinces consumer credit portfolios, which again are well within our earlier expectations. Based on ongoing stress tests conducted against the credit portfolios, I remain comfortable that the potential impact of low energy prices on the bank’s credit losses remains well within the range of a 5% to 10% increase over 2015 levels.”

Seeing a gradual increase in delinquency rates over last 4-5 months in oil impacted provinces

“we have been watching it very closely, especially the impacted provinces, which would be Alberta, Saskatchewan and Newfoundland. And what we are seeing in two categories, being the indirect auto but the non-prime segment primarily and then in the card segment, we have seen a gradual increase in delinquency rates over the last four or five months.”

Customers affected are early indicator, the type of customer that would be more challenged than the typical customer

“So in many respects we look at that as an early indicator because that would be the customer that maybe would be more challenged than the typical customer. Now, I would stress that these two categories are less than 1% of our total book and that we expected to see losses of this level.”


Sprint’s (S) Management Presents at Bank of America Merrill Lynch Leveraged Finance Brokers Conference

Tarek Robbiati — CFO

Wireless data is much cheaper in some other markets than the US

” I think the – look at the U.S. wireless market, it’s the biggest one in the world by value. And the reason why it is the biggest one in the world by value is because we have 300 million people and you have a very, very high ARPU…when you really look at some of their – the size of their bills, it’s quite extraordinary. I mean you compare this with Hong Kong which is a market that I am very familiar with. In Hong Kong you can get very, very decent data packages on 4G networks for less than $5 postpaid, which is quite extraordinary.”


Comcast’s (CMCSA) Management Presents at UBS Global Media and Communications Conference

Mike Cavanagh–CFO

No new comments on wireless plans. We believe the cheapest way to transmit data is to get it to the hardwire as soon as possible

“we have no news on this topic today. What we have decided is that it’s certainly worth at this point triggering the MVNOs that we can work on exploring what kind of offering we could bring and go deeper to learn and experiment. That’s the state of play on the MVNO. And that sits in the context of having been big believers in WiFi. So, you have seen us invest in and continue to invest in the WiFi as an extension of the value of the broadband pipe, which is still the kind of best and cheapest way to transmit data we believe is to get it to the hardwire as soon as possible. So, with the progress we have made on our WiFi product and broadband, we think it makes complete sense to be exploring on – what possibilities the MVNO offering has to add value to our customer relationships. That’s as much as we know. There is no – it will take time to draw any conclusions from what we are now going through.”


Vail Resorts’ (MTN) CEO Robert Katz on Q1 2016 Results

Our labor markets are tight

“think ensuring that we have enough, ensuring that we are providing the right employee experience, attracting enough of the right labor, retaining labor and then a part of that is obviously being able to have housing for everyone that works here, I think it is probably our number one concern right now in terms of ensuring that we can continue to drive success. And so, I mean that’s led us over the last couple of years to continue to invest to make sure that we can do that. I’d say where we feel right now is that our markets are tight. We think it is a challenge.’

Upper income US remained strong

“Colorado in particular is the strong market, continues to be a strong market given the economy here, Utah, the Bay Area and California so that obviously is the big help right there but then I would say we are seeing pretty broad based strength from all of our major destinations across the United States, I would say even places like Los Angeles, like Seattle which are not typically our strongest markets in terms of size, we’re seeing real strength there too”…

“I would say right now I think the domestic, the U.S. economy on the domestic side is very strong, the upper income portion of that remained strong ‘


AutoZone’s (AZO) CEO Bill Rhodes on Q1 2016 Results

DIY auto spending has benefitted from lower gas prices

“I think clearly we are seeing some industry strength currently. I think a part of that has to do with what’s going on with gas prices. And while gas prices initially went down, you didn’t see the initial correlation with miles driven increasing. But in more recent months, starting really strong in this summer, and continuing through September, the latest date that we have available, it’s showing nice strength. Over long periods of time we’ve seen that has a nice correlation with our DIY industry growth.”


Cisco Systems (CSCO) Presents at Barclays Global Technology Brokers Conference

Hilton Romanski

Customers are looking for a hybrid cloud

“what we’re hearing from customers fundamentally is that they want to see the benefits and the economics of public cloud in their private cloud environment. So that would suggest to us that ultimately there is a hybrid cloud solution out there for enterprises where some of those benefits across multiple types of workloads across their own environments that are private as well as those that are being hosted in a public cloud is going to co-exist.”


Dave & Buster’s (PLAY) CEO Steve King on Q3 2015 Results

Couldn’t be happier with how 2015 is shaping up

“we couldn’t be happier in terms of how 2015 is shaping up, while we’ve achieved so far as we look forward to a strong finish in the fourth quarter.”


Halliburton’s (HAL) Management Presents at Wells Fargo 2015 Energy Symposium Brokers Conference

Christian Garcia — Interim CFO

North America looks like it could be marginally better than expected, but international looks marginally worse

“North America does look like it’s going to be marginally better than what we said in the third quarter call and international looks like it’s marginally worse and in total, we’re in line with our expectations as we left the third quarter.”

2016 is clearly going to be another down year but we don’t know the magnitude yet

“2016 is still opaque. E&P the E&Ps have not announced their budgets, but clearly it’s going to be another down year. The question is the magnitude of the decline.”

Argentina had elections that could lead to positive economic reforms

“Argentina just had elections and we think that new president elect will usher in a new era of economic reforms achieved among that would be probably a potential depreciation of their over valid currency which will in the short term provide some little need to some dislocations but I think in the long term would be actually help that economy boot that economy and would invite for investors.'”


HCA’s Management Presents at Opperheimer 26th Annual Healthcare Broker Conference

Bill Rutherford, Chief Financial Officer

Seeing higher turnover of nurses as demand for nurses strong

“We think you know we are seeing higher turnover of recently than we’ve historically had. And we think there is a lot of other supply in the marketplace and demand for nurses. We’ve got a host of efforts around recruiting. We talked about on our call our efforts to hire nurse graduates and putting them in orientation and onboarding them a little bit differently so that they have — the retention is longer for those new nurses.”

See continued strong economies in the majority of our markets

“We see continued strong economies in the majority of our markets and I think that provides really fundamental momentum for the company and those trends don’t appear quickly, nor do they disappear quickly. So, we are optimistic that our market trends, we are seeing has some durability to it in the future.”


Comerica’s (CMA) CEO Ralph Babb on Goldman Sachs U.S. Financial Services Brokers Conference

Energy reserves at 3% of total energy related loans

“if prices remain low for longer, we expect to see continued negative credit migration and losses to emerge yet we believe they will be manageable. We have increased our reserves for energy loans in each of the past four quarters, as a result of an increase in criticized loans and sustained low energy prices. Because investors have been particularly interested in the size of our energy reserve allocation note that at the end of the third quarter, we had reserves amounting to more than 3% of our total energy and energy related loans.”


U.S. Bancorp (USB) Presents at Goldman Sachs US Financial Services Brokers Conference

CFO, Kathy Rogers

Planning for three interest rate increases in the next 12 months including next week

“as we look out into 2016, I do think that we are seeing an economic environment that is somewhat similar to what we saw this year, may be slightly improved. As we think about the interest environment, we are projecting in our plan, a potential for two interest rate hikes next year, and then December 1 of this year; so a total of three if you look out over the course of the next 12 months.”

Not seeing any deterioration of credit outside of energy

“the simple answer is no. We’re really not. Outside of energy, it’s really relatively benign, no significant change.”

We’ve probably gotten to a point where reserves will start building again (but not necessarily because of credit deterioration)

“I think one of the things that you’re going to see is that we are getting to that point in the cycle where many banks, including ourselves, have enjoyed a nice outcome of reserve releases. And I do think we’re coming to the end of the cycle. And I think that you’ll start to see reserves starting to build as we move out into later quarters.”


Lululemon Athletica’s (LULU) Laurent Potdevin on Q3 2015 Results

Start of Q4 has been mixed

“In line with macroeconomic trends, the start of Q4 has been mixed. We saw lower traffic in the final weeks of Q3 and into the first couple of weeks of Q4, with steady improvement in Thanksgiving. Given the current environment, we’re taking a conservative stance with revenue in Q4, while taking the necessary actions to manage inventory and control expenses.”


Moody (MCO) Barclays Global Technology, Media and Telecommunications Conference

Mark Almeida, who is the Head of the Moody’s Analytics Business

November was a good month from an issuance standpoint and December has gotten off to a strong start as well

“November was a good month from an issuance standpoint, and December has gotten off to a pretty good start as well. So I think things have firmed up a bit, since some of the weakness that we saw in the summer time.”


Korn-Ferry’s (KFY) CEO Gary Burnison on Q2 2016 Results

Even in a digital world, it still pays to have people housed in the same location

“I think that creating connectivity of people and clients in an environment of collaboration is incredibly important and although we live in a virtual world, I fundamentally believe that the people need, to the extent possible, need to be housed in the same location.”

Gregg Kvochak

“global demand for our Executive Recruitment services remained strong in the second quarter.”


McGraw-Hill Companies’ (MHFI) CEO Doug Peterson Presents at Goldman Sachs U.S. Financial Services Conference

Issuance is down 30% year to date

“we’ve seen a choppier market, issuance is down during the quarter and year to date overall issuance is down globally about 28% and in the quarter its down again over 30%, 35%, 37%, depending on which element of the markets that you look at. So we’ve seen some volatility in the ratings business.”


Avnet (AVT) Presents at Raymond James Technology & Communications Investors Brokers Conference

Kevin Moriarty, CFO

Our product is service

“Avnet’s product is, our product is service, has been and always will be. Models change the way we get compensated for that service. We need to continue to be nimble and agile to be able to move with that”

We feel pretty good about the environment

“I would characterize the current lead times as stable, short. We haven’t really seen any significant changes in push outs, cancelation rates. So we feel pretty good. EM, we continue to experience growth within our European business. I would characterize the Americas as sluggish overall on the component side.”


ConocoPhillips’s (COP) CEO Ryan Lance on 2016 Capital Budget and Operating Plan

We see dividend as highest priority

“Despite the tough market, our dividend remains the highest priority use of our cash. We view the dividend level as a long-term decision. And we’ve been in the current low price cycle for relatively short period of time”

Capital budget down ~25% from last year, -54% from 2014

“We’re announcing a 2016 capital budget of $7.7 billion that’s $2.5 billion lower than 2015 capital guidance and more than $9 billion lower versus 2014. In setting our budget, we’re flexing capital down appropriately for the price environment without losing opportunities or sacrificing the safety or integrity of our operations.”

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

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

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

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

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

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

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

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

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

Over half of the equipment is idled right now

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

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

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

 

 

  

 

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

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

And they have been able to slightly increase rates  

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

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

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

Catastrophe pricing remains weak  

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

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

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

 

 

 

 

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

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

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

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

While China continues to decelerate  

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

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

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

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

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

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

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

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

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

And they are remaining disciplined when evaluating potential acquisition opportunities 

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

 

 

 

 

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

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

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

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

And they plan on improving their advisor retail offering

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

 

 

 

 

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

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

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

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

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

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

 

 

 

  

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

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

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

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

 

 

 

 

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

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

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

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

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

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

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

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

 

 

 

 

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Halliburton 3Q15 Earnings Call Notes

Activity level could drop substantially in the last five weeks of the year as operators have exhausted 2015 budgets

“Based on current feedback, we believe most operators have exhausted their 2015 budgets, and will take extended breaks, starting as early as thanksgiving. Therefore our activity levels could drop substantially in the last five weeks of the year.”

We’ve never had less near term visibility

“In my 22 years in this business, I’ve never seen a market where we’ve had less near-term visibility. In reality, we are managing this business on a near real-time basis, customer-by-customer, district-by-district, product line-by-product line, and, yes, even crew-by-crew”

First quarter should be the bottom of this cycle

“Our view is that the first quarter could end up being a mirror image of the fourth quarter. So, just as the fourth quarter is facing a speed drop-off post thanksgiving, we expect to see a slow ramp up beginning in January, and improving from there, suggesting that the first quarter could be the bottom of this cycle.”

Reduced borrowing capacity for operators

“In North America, the prospects of reduced borrowing capacity for operators, and a prolonged holiday season make the fourth quarter challenging and difficult to predict.”

Rig count could drop more

“So far, the average horizontal rig count is down a little less than 10% from the third quarter average. If these headwinds play out, we estimate that the fourth quarter average horizontal rig count could drop about 15% to 20% sequentially.”

Pumping is obviously the most stressed

“Obviously, the most stressed part of our business is pumping. Now, this is the business that we know the best. It’s the business that recovers the fastest. It’s the business that recovers the most sharply”

Game plan is stick with customers we know

“we know what that path looks like. It looks like this. It looks like staying with the fairway players in the basins that we know. It does not mean chasing every stake. It looks like staying with the customers that are loyal, even if that means working at a price that we don’t like, collaborating on our path forward that lowers their costs per BOE”

Budgets will be reloaded in Q1. When our customers have cash they will find a way to spend it

“there will be a budget reload that takes place in Q1. I think the big question mark is how fast do our customers go back to work once they do reload their budgets, given off what we think we will be a relatively low rig count volume in the latter part of the quarter, especially in December? So it really depends on the bounce back, but the cash will be there. And I think one of the things that our customers demonstrate, and believe me, we love all our customers. If they have cash they are going to spend it.”

Unconventional wells decline so quickly that many companies are in drill or die mode. If they don’t start drilling, they’re going to have to dismantle infrastructure

“with the high decline curves that exist on these unconventional plays. They are really are in drill or die mode. So if you go a year without drilling a well, and your production starts to turnover, you are going to have to start drilling or you are going to have to take your infrastructure apart that you’ve built up as a company. So I think that as we get to the end of the year, if these guys have money, they are going to drill it up, and that’s just the fact that it is.”

Halliburton at Barclays Conference Notes

Hal at Barclays conference

Jeff Miller – President and Chief Health, Safety & Environment Officer

Christian Garcia – SVP-Finance & Acting CFO

With the end of the quarter, I had indicated that we expected North America to scrape along the bottom, and it certainly has. Following a 56% drop in the rig count over a six month period, U.S. rig count appeared to have stabilized at about a 56% drop.

We don’t know what’s in store for 2016, but customers are telling us, their production isn’t sustainable clearly at the current activity levels, and recent EIA reports support this, showing decline around 300,000 barrels per day from April to June, even with the typical annual maintenance cycle factor, end of June’s number, oil production is rapidly approaching the Q4 2014 levels.

there is no question that economics are challenged in deepwater today; and partly because, we have never seen really the cost-curve bend in deepwater, the same way that we have seen that achieve in unconventionals.

the reality is, a large part of global production today is still mature. In fact, we estimate about 70% of production today is in a mature field. And this affects large companies, and it also affects large economies.

So what’s most interesting about this technology, is that we have seen an increased uptake during the downturn. Collectively these technologies, highlighted by the yellow dot on the adoption curve, are really still quite young. And what we believe, is that after years of drilling and drilling efficiency, that it is quite frankly technology that will drive the next leg in efficiency.

Over the long term, the growth areas will be unconventionals, mature field, and deepwater, albeit they face economic challenges right now. HAL plays a key role in unlocking all of these.

JS Earnings Call Notes 7.21.2015 – Bank of New York Mellon, IBM, Halliburton, Pentair, Travelers, United Technologies

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.

 

 

Bank of New York (BNY) CFO Todd Gibbons said the firm was able to increase revenue while reducing firmwide expenses for the first time in many years

Expenses were down 1% year-over-year and 1% sequentially as our business improvement process and the stronger US dollar are driving lower expenses in almost every category. Our ability to grow revenue and control expenses resulted in more than 460 basis points of positive operating leverage year-over-year.”

Bank of New York (BNY) CEO Gerald Hassell said the firm won a large back-office contract with T Rowe Price during the quarter and elaborated on the trend of asset managers outsourcing their back office functions

We do actually see it as a long term trend where investment managers in general are really trying to focus on their investment management process and less focused on providing — doing the mid-office and back office services internally. We do see it as a long term trend. We want to be very thoughtful about which clients we take on and make sure we’re leveraging our platforms and driving profitable revenue growth for ourselves rather than just taking on any one at any time. T. Rowe is a fantastic client. It’s a great partnership. We worked on this together for well over a year and we think we have a good rapport with them and a very similar culture. We feel good about this one.”

And CFO Todd Gibbons discussed what’s driving that trend of outsourcing

“But there is a fundamental trend where asset managers, just like other financial institutions in a high regulatory change, lower growth environment, are getting back to basics and fundamentally focusing on the investment process as their value proposition and relying more on firms like us to verbalize their middle office costs and actually their front office technology cost.”

The firm’s various alternative investment offerings continue to garner fund flows from investors

“We’ve had eight straight quarters of growth in alternatives and those have been strategies where clients are either getting uncorrelated exposures or they are getting absolute returns on asset allocations strategies that give them better diversified portfolios exposure.”

 

 

 

IBM CFO Martin Schroeter said the BRIC (Brazil, Russia, India, China) countries, who were the darling of the investment world just a few years ago due to their higher structural growth rates, saw decelerating growth during the quarter 

“The BRICs impacted IBM’s overall revenue growth rate by 2 points in the second quarter or said another way our revenue excluding the BRICs would have been up 1%. So let me start there, within the BRICS only India had modest growth building on improved operational performance and services. The other three countries were down at a double-digit rate. Brazil was down 16% though our revenue in Brazil last year was up over 20%, so was a very tough compare. The volatility of our results in Russia continued and our revenue in China was down 25% with fewer large transactions in the quarter.”
IBM CFO Martin Schroeter reminded investors that IBM is deeply embedded in some of the world’s largest companies 
“Nine of the top 10 U.S. retailers and each of the top 10 global banks run an IBM’s commerce solutions. IBM commerce now powers 30,000 organizations globally.”

Halliburton (HAL) CEO David Lesar believes a significant portion of the industry is operating unprofitably 

“We believe many of the smaller service companies are now operating below cash breakeven levels, which leads to the conclusion that pricing cannot stay at these levels for an extended period.”

And, much like their closest peer Schlumberger, they don’t expect the oil services market to recover until 2016

“We are not expecting a meaningful activity increase until sometime in 2016, depending on the pace of production declines and where commodity prices settle out in the coming quarters. Therefore, what we are continuing to do is manage our cost, service our customers that are engaged in this flight to quality, and prepare for the Baker transaction.”

 

 

 

Pentair (PNR) CEO Randall Hogan said he sees customers buying patterns as more cautious than last quarter

“While second quarter results came in close to our expectations, with Technical Solutions and Water Quality Systems delivering strong organic growth, we exited the quarter with increased concerns about our Valves & Controls segment. We now have a more cautious outlook on spending in energy and industrial and the ability of our Valves & Controls segment to navigate this more difficult environment in 2015.”

With particular weakness in certain geographies 

In particular, we saw a continued slowdown in spending, including MRO [maintenance, repair, operations] in chemical and petrochemical in Europe and Asia. We also saw a further pause in buying decisions in North American chemical and petrochemicals. The projects in the backlog, while delayed, still appear to be moving forward.”

Pentair (PNR) CEO Randall Hogan said he hopes his company can do several M&A transactions in order to drive consolidation in the sector

“So we are logically the right consolidator. It was part of the vision as we looked at it to build the company and get scale and have this advantaged structure. And we want to put it to work. We want to put it to work across the segments in a way that creates shareholder value going forward. We think we are aligned with shareholders on creating shareholder value. We’re not happy. We’re not satisfied at all with recent performance, and we’re open to all kinds of ideas. And we believe we’ve earned the right to be a consolidator, and we want to be.”

 

 

 

Travelers (TRV) CEO Jay Fishman reiterated his thesis that the insurance industry is acting less cyclical than previous decades due to rational participants

“We continue to believe that the amplitude of the cyclicality that our industry will deal with is much less than would have been the case historically and you can trace that comment back to our Investor Day in May of 2007; and of course while things can change, so far so good.”

Travelers (TRV) CEO Jay Fishman said that the insurance industry participants are acting more rational in pricing their policies 

“So the simple arithmetic of taking a lower rate on a large book in the hope of driving revenue synergies is often a fool’s errand. Now it isn’t always. Some people can do perhaps elegantly, but there haven’t been too many of them. So I suspect that the market will continue to think about interest rates and weather and the cost of capital and all of it seems to be incorporating as it prices its product with an unknown cost of goods sold. I don’t expect a lot of change. Could be dead wrong, but that’s one person’s view.”

And the industry’s emphasis on data analytics has helped insurance underwriters better price the various risks in their policies

“Any one company if it’s large enough and is willing to accept subpar returns over time can affect the marketplace from a pricing perspective, that’s not been the case, it’s not been the case for a long time. Now why that is, I actually think a lot of it is data and analytics and the fact that people actually understand their returns better than they did 10 years ago. No one would open knowingly say, well I’m pricing this to produce subpar returns, I think that happened to some extent accidentally, not intentionally and so I think the data is different than the business, it’s been different for some time. I get asked all the time, are we pleased or not that other people seem to be getting good at it? I think it is great. I think the more people understand the cost of goods sold in our business and the risks associated with it, the more we look like a normal financial services business and less of one that’s operating in the dark. So, I think that we may have led this and I’m sure we did, but the fact is that you see it in virtually everyone’s reporting, greater reliance on analytics and return focus and that’s I think what’s causing it. We’re allowing it to happen perhaps is a better expression.”

 

 

 

United Technologies (UTX) CEO Greg Hayes said the Otis elevator business has lost significant market share and needs to shift strategies

“The key for Otis really, is to regain market share. Over the last 10 years or 15 years, we’ve seen a continued erosion of Otis market share as we have pursued margin expansion, and I think we have taken margin expansion to the point now where we’re not terribly competitive based on new equipment pricing. And quite frankly, you’ve got to feed the service business with new equipment orders. There’s also the issue of course, of service in Europe, and that is probably the biggest issue. Otis has 1.9 million elevators under service, about 1.1 million of those are in Europe. And that’s where we’ve seen the biggest pricing pressure, and we’ve seen no growth in that market for the last couple of years. So we’ve got to return to growth on new equipment, and we’ve got to stem the service degradation and pricing that we’ve seen in Europe as well.”

Halliburton 2Q15 Earnings Call Notes

Pricing has fallen to unsustainable levels

“We anticipate margin compression in the third quarter, but believe it will be driven more by the full impact of pricing declines that we gave up in the second quarter and from lower activity levels more than continued price erosion. In fact, we believe that service pricing for the industry has fallen to unsustainable levels.”

Don’t expect meaningful increase in activity until sometime in 2016

“looking ahead, we could begin to see a modest uptick in activity during the second half of this year, which could include increased refrac activity, which Jeff Miller will detail later. However, we are not expecting a meaningful activity increase until sometime in 2016, depending on the pace of production declines and where commodity prices settle out in the coming quarters. Therefore, what we are continuing to do is manage our cost, service our customers that are engaged in this flight to quality, and prepare for the Baker transaction.”

Service intensity has doubled in the last couple of years, which means that equipment has higher attrition rates

“What’s unique about this cycle is how service intensity has evolved since 2013. Over the last two years, average job size has essentially doubled. And at the same time, both average pump rates and pressures are also up. On the plus side, bigger jobs mean more revenues and better equipment utilization for us. The downside is we believe larger completions are taking their toll on pumping equipment. In fact, these factors point to higher equipment attrition rates for the industry.”

This is a damn tough market

“To sum things up, this is a damn tough market, one of the toughest ones that I have ever been through. And I don’t believe anyone on the call can accurately predict when commodity prices will rebound and rig counts will recover in the U.S. or the international markets, and neither can I. What I do believe is that when the recovery occurs, North America will offer the greatest upside and that Halliburton will be the best positioned to lead the way.”

Equipment attrition is tough to see, but it’s there

“If you think about attrition, it’s happening all of the time, but it’s not necessarily apparent all of the time. And by that, I mean it’s – you don’t see it until there’s a call on the equipment, and we really saw this last time. So as competitors consume more equipment on location to do the work, you don’t feel the tightness. But as that equipment is called on for even a little bit of incremental activity, that’s when it’s seen. So recalculating the 50% overhang is difficult to do until there’s a call on it, but we’re certain that it’s happening today.”

International pricing never recovered from 2008

“I think pricing internationally, all the customers ask for discounts, but the reality is there’s not much to give. We never recovered from the 2008 cycle internationally’

THe last three weeks hasn’t changed much, we’re just scraping along the bottom

” over the last three weeks, it hasn’t changed that much. I mean, we think about the rig count, it has puts and takes. And so it was seeing some improvement, but then Friday, I suppose those gains were erased. So I would describe where we are today as scraping along a bottom. And scraping along a bottom means that we don’t anticipate dramatic change of any sort, certainly over the very near term.”

Analyst comment: used to be 4-5 rigs per pressure pumping crew was rule of thumb

if you think about the job sizes increasing, is there something that we could tie to a rig count? I know the rule of thumb used to be sort of four or five rigs per pressure pumping crew. Is it something lower than that today that you’re experiencing in your fleet? Or are the increased efficiencies that you’re able to realize offsetting that?”

Well count has become more important than rig count because the rigs that are out there are so efficient

“I would say just one additional thing is although the rig count has been decimated this year, the rigs that are running today, keep in mind, are the most efficient rigs that are out there. And therefore, they are drilling more wells sort of per rig than we’ve ever had in the past. So I think the fixation on rig count, yes, it’s important to the industry, but I think well count is another thing that folks need to look at and concentrate more on, because it’s the well count that ultimately drives how much completion work is done.”

Analyst Q: “Why carry so much incremental cost here?” A: We’re not cutting costs because the cost to carry assets outweighs the cost to replace them

“If you look historically, the cost to carry something ultimately outweighs the cost to have to replace it, go out and get people, retrain those people, rebuild your infrastructure and all of that. So it’s a decision I made. It’s on me if you disagree with it, but I think that it’s easily defendable and I think it’s certainly the way we need to go here, and I’d tell you, it’s going to pay off once we get this deal done.”

Halliburton 1Q15 Earnings Call Notes

Speed of this downturn has been historically high

“Looking back over the last several major cycles, the speed of this downturn has been historically high. Because of the lack of available work driven by the rig count decline and the resulting overcapacity and available equipment chasing the work that remains, this is an extremely competitive market. We’re seeing substantial pricing pressure in all of our product lines and the significant amount of service capacity is looking for work.”

Historically it’s taken about three quarters to move from peak to trough rig count

“We’re not going to call a bottom but historically it’s taken rig count three quarters to move from peak to trough. Once we see activity stabilized, the healing process can begin but it takes time. Our input costs can then start to catch up with service pricing declines and our efficiency programs and well solutions can start driving margins upwards.”

The speed at which this is happening is unique

“What is not unique about this downturn is the customer service company and supplier behavior is pretty much as you would expect. What is unique is the speed at which this is happening. We believe that the operators, vendors and service companies who deal most effectively with the velocity of this downturn will be those who profit the most when it turns. We fully expect Halliburton to be one of those winners and so will the vendors who work with us to get through it.”

We think inventory wells will be good for Halliburton as customers complete and drill when the cycle recovers

“There has been a lot of discussion around inventory wells. Operators choosing to drill but not complete wells and then defer production until commodity prices become more favorable. Third-party estimates put this number around 4000 wells. It is our view that although inventory wells can exacerbate the short-term activity declines per completions, it essentially defers the revenue opportunity. When our customers decide to increase activity levels, this will be beneficial for Halliburton as they are likely to increase completions in tandem with new well drilling, which could accelerate our rate of recovery during the upcycle.”

Reduced headcount by 10% over last two quarters

“Over the last two quarters, we’ve reduced our headcount by approximately 9000 employees, more than 10% of our global headcount. As Jeff indicated, we’re continuing to take a hard look at our operations.”

Pricing has reached a point that isn’t sustainable

“at this point in time as I said in my prepared remarks, simply don’t believe that this is sustainable in terms of pricing. And so it’s a point as service capacity sorts itself out we clearly expect clients to return to making better wells which is right in our wheelhouse.”

Halliburton 4Q14 Earnings Call Notes

This post is part of a series of posts called “Company Notes.” These posts contain quotes and exhibits from earnings calls, conference presentations, analyst days and SEC filings. Full transcripts can be found at Seeking Alpha

You want to head into a downturn from a strong position

“you want to head into any industry downturn starting from an extremely strong financial and operating platform and that’s certainly is where we are performing today.”

Our customers are excited about the BHI acquisition

“We’ve also heard from many of our customers who have expressed enthusiasm about the combination, those who see the broader, cost effective offerings that we will be able to provide”

It’s damn hard to put companies together

“I’m not naïve how hard it is to put two companies together. It’s damn hard.”

NA rig count has fallen by 15% in last 60 days

“The North America rig count and activity levels held up with most of the fourth quarter as customers executed against the reminder of their 2014 budgets. However, over the last 60 days the U.S. land rig count has fallen by 250 rigs or close to 15%.”

CapEx budgets slashed 25-30%

“Capital expenditure budgets from our customers remain fluid, but so far an average have been reduced 25% to 30% as they adjust their spending to operate within their cash flows in response to a continued drop in commodity prices. As a result, we expect activity declines for North America land to accelerate further in the first quarter, impacting all of the key liquids basins.”

Price reductions now occurring

“while we did not experienced price weakness during the fourth quarter, price discount discussions with customers did begin in the fourth quarter and have accelerated over the last past several weeks and price reductions are now occurring across all product lines.”

Less pricing erosion will be needed to reduce capacity

“This up cycle did not last long enough for us to see the kinds of net pricing that would have enabled margins to recover to historically strong levels. Therefore, less pricing erosion will be needed to eventually reduce service capacity if market weakness persists.”

First quarter of downturn is toughest to predict

“The first quarter of any severe downturn is almost always the most challenging quarter to predict, because pricing concessions usually impact our results in real time. Volume declines can be erratic as customer’s rig plans are uncertain and can change daily.”

Costs adjust less quickly

“here is typically a delay in realizing input cost savings from our suppliers. There is two reasons for this. One, discussions with vendors are dependent on them truly believing we have a reduction in ongoing activity levels, before we can have the kinds of tough renegotiations that results in significant input cost reductions.

Second, there is a timing issue as to the expenses that flow through inventory like sand, propane, chemicals and cement. It takes a while to see lower input pricing fully reflected in your average inventory cost, because you have to work off your higher priced inventory.”

Halliburton’s positioned to outperform

“In this very uncertain environment, we believe Halliburton’s more efficient crews and differentiated technologies are best suited to outperform. Additionally, being aligned with the right customers, those with assets in the sweet spot of the reservoir, becomes more important as we expect to see those customers continue to work through the cycle.”

Offshore exploration projects have been put on hold

“Declining oil prices have caused our customers to reduce their budgets and defer several of their new projects, particularly around offshore exploration.”

May take until the back half of the year to see uS crude production decline

“Depending on the ultimate trajectory of the rig count declines and the backlog of well completions, we believe that North America crude production could begin to respond during the back half of the year.”

any sustained period of under-investment could lead to an increase in prices

“Consequently, we believe that any sustained period of under investment due to reduced operator spending could lead to an increase in commodity prices. And this largely ignores the possibility of short-term disruptions due to geopolitical issues.”

Customers continue to revise their budgets

“we’re talking to our customers every day. And of course initially the discussions have been around reductions in the 25% to 30% range. However, as commodities continue to move, they are all revisiting their budgets. I mean, arguably for the next couple of quarters this will be — North America will look a bit like a chocolate mess in terms of where it winds up.”

You have to keep innovating through these declines

“I don’t have a crystal ball that will allow me to absolutely predict it. I know on my experience that you have to invent through these things. You want to keep your business franchise strong.”

Halliburton 3Q14 Earnings Call Notes

This post is part of a series of posts called “Company Notes.” These posts contain quotes and exhibits from earnings calls, conference presentations, analyst days and SEC filings. Full transcripts can be found at Seeking Alpha

Sand delivery delays led to some missed opportunities

“Now a hot topic today is obviously profit in sand logistics, and we did experience some disruptions early in the third quarter where work was delayed because we were waiting on sand deliveries. And we did in fact miss some jobs, as did nearly every other service company. But I can tell you we have great people who helped us manage through this challenge each and every day, and we have now taken actions to get ahead of this issue going forward”

We don’t believe that current oil prices are sustainable

“before I close, I have to recognize that there is currently a concern about the recent decline in commodity prices. I’m not going to predict what the oil price is going to be, but on a longer term, we believe industry fundamentals suggest that these lower prices are not sustainable. What we might be in a slight oversupply situation right now, remember demand is still growing. Therefore considering North America and OPEC production expectations, the continued tightness in global spare production capacity, and potential geopolitical impacts on non-OPEC production, we believe that supply and demand will essentially be back in balance in a relatively short period of time.”

Customers have not indicated that they will slow their activity levels

“Nevertheless, we are keenly aware that there is a risk of a moderation in activity if oil prices remain weak for an extended period of time. What I can tell you is that in recent conversations with our North America customers, we have not received any indication of activity levels slowing as we transition into 2015. For example, last week the IEA [ph] commented that approximately 98% of North America liquids projects have a break even price below $80 per barrel and over 80% work below $60 a barrel. On the international front, the majority of our NOC customers have not indicated that their activity levels will slow down at all.”

We can’t be in denial about what is happening today though

” That being said, we can’t be in denial about what is happening in the market today. As you know, I have been around the block a few times and I can tell you our management team is well equipped to handle this kind of uncertainty. We will control what we can control in areas such as cost management, contract price renewals, and managing customer relationships. We know that we can do these things very well. My experience has taught me that if we keep the franchise strong and growing, and I can tell you we’re going to do that, aligned with the right customers, which we’ve already done, and take care of our employees, we will be fine in the long run. Whether this uncertainty lasts for a few months or longer, we are ready for any market. I think we are well positioned as a company to capture all of the market upside potential for you while giving you protection to any downside”

Customers are experimenting with larger completion volumes

“While the rising rig count was predominantly a Permian Basin phenomenon, our customers are experimenting with larger completion volumes in almost every basin. This is a fundamental change in well design that we believe is part of a continuing trend.”

Outlook on North America remains very positive

” I mean, our outlook today is very positive. We’re in the heavy part of our renewal period now, and I would tell you that renewals are rolling up, not down. And as of last week, I talked to a lot of customers, and, you know, budgets are moving up, not down. So in terms of activity, everything I see looks like it’s increasing into 2015″

” we’re not feeling, hearing, seeing anything that says this momentum is going to change that we had coming out of Q3.”

Commentary on a project in Iraq. Nice example of the way the company thinks about the attractiveness of an opportunity at a more micro level

” Why would we want that work? The fact is we’re a lot smarter in that market than we have ever been. I think we were early into that market and underestimated the risk around logistics and a few other things. We really like the contract, the way this one looks in terms of terms and conditions. So we feel good about that. The project itself, I won’t name the project, but it’s solid. It’s a great project. It’s four rigs to drill 120 wells over the next probably three years. And we have invested heavily in putting our IPM team together, and they are really executing. And so if I think about how we execute on mature fields longer term, these are the kind of projects that we’re going to do.”

Halliburton 2Q14 Earnings Call Notes

This post is part of a series of posts called “Company Notes.” These posts contain quotes and exhibits from earnings calls, conference presentations, analyst days and SEC filings. Full transcripts can be found at Seeking Alpha

Record company revenue

“I am obviously very pleased with our second quarter results and here are the headlines, record company revenue this quarter of $8.1 billion, double-digit sequential revenue growth and new quarterly records in both North America and Middle East/Asia.”

We are past the turn in North America

“Thanks, Jeff. In North America, we are past feeling the turn, we are in the turn and we will be accelerating our Q10 build in the order to meet customer demand. ”

Planning to buy back 10% of the company

“our increase in stock buyback authorization to a new total of $6 billion, which represents approximately 10% of our market cap today.”

capacity is starting to tighten

“We’re seeing all the right signs as capacity starts to tighten which we’ve seen fall below sort of 10% spare capacity. We see activity increasing at breakneck rate, we’re seeing some pass through, cost increases at this point and probably most importantly we have clarity of our frac calendar through the end of the year. So all of those things give it a lot of confidence in adding our equipment because we see where that’s going to go work.”

We stay in the manufacturing business to control our equipment supply

“one of the reasons we stay in the manufacturing business, it gives us the ability to flex more quickly and then put the equipment when and where we need it.”

Held off on retiring equipment because the activity levels were so great

“we did during the second quarter stop the retirement of some of our equipment just because of the activity levels were so great and we were rolling Q10s out, the ability to leave some of the older equipment out there allowed us to basically gain a spread or so to sort of address some of that activity. From a capital standpoint we’re building to contract. We’re building to what we can see. There is the ability to dial that further if the market accelerates further, but we think that this build schedule is aggressive enough to make sure that we’re addressing the market as we see it that will be a lesson for Halliburton over the next 18 months or so.’

Can get inflationary pressures in front of customers

“we have got great visibility into the inflationary pressures, we are — and because of that I think we have the ability to respond to those quickly and get those in front of our customers.”

Analyst comment: No one wants to see you building capacity because then pricing doesn’t increase

“investors don’t want anybody in the industry adding capacity. If anybody adds capacity it slows down the pricing improvement so some people are going to see your acceleration of capacity adds as a negative. ”

Seeing some slowdown in approvals in Iraq

“what we are seeing happen today are delays and getting contract approvals through the government and the extensions of contract I have to believe that, that rights itself over a period as long as two years because of the importance of hydrocarbons in that markets and to the government et cetera.”

Some factors impacting margins

“we are constantly as Jeff has alluded to managing logistics challenges we are managing inflation across a number of cost categories and so that really is ultimately is pushing against us.”

We’re not going to go crazy overbuilding

“et me just add one last comment to what Jeff said because I think it’s been important one and that, and it goes back to the issue that the question Jim Wicklund had around our market expectations in adding pumping capacity. Of course we’re not going to be crazy enough to add equipment into the market if we see that it’s going to have an impact on our margin expectations from the direction that they’re had it right now. We build to market expectations. We build to the customer base we have. We build to the market share we believe that is efficient to support our business in North America.”