Hereâs what CEOs said on this weekâs earnings calls
Each week we read dozens of transcripts from earnings calls and presentations as part of our investment process. Below is a weekly post which contains some of the most important quotes about the economy and industry trends from those transcripts. Click here to receive these posts weekly via email.
This Weekâs Post: Inventories Destocked?
An industrial recession typically ends when excess inventories have been depleted. Weâre probably not there yet, but weâre getting closer. Thatâs a good sign for the second half of 2016, but tightening conditions in capital markets could create problems of their own.
Industrial companies have been in recession for four quarters now
âwe are now basically in our fourth quarter of the recessionâŠI see at least one more quarter, maybe another quarter.â âEmerson CEO David Farr (Industrial Components)
Eventually they will hit bottom, the question is when
âThis too will bottom weâve lived through a bunch of these. It just our view that weâre not going to see that end in â16âł âEaton CEO Sandy Cutler (Diversified Industrial)
Inventory depletion typically creates a bottom for manufacturers
Where are we in the inventory cycle? Itâs difficult to say
âDestocking has always been difficult for us to see, the magnitudeâŠI would expect destocking to continue through the next quarter. And beyond that, I couldnât comment.â âKennametal CEO Donald Nolan (Machine Tools)
Inventory data is still elevated
âthe U.S. inventory sales ratio has come down slightly but it still remains elevated, certainly indicating we got continued overhang of inventories in the economy. And customers are obviously attempting to work them down.â âUPS EVP Alan Gershenhorn (Delivery)
A lot of companies are starting to sound more optimistic though
Microchip was one of the first companies to enter the downturn and may be one of the first out
âWe believe that our business has stabilized and that the majority of the inventory correction is behind usâŠthe December quarter marks the bottom for us for this correction.â âMicrochip CEO Steve Sanghi (Semiconductors)
LyondellBasellâs CEO noted that inventories are low and weâre approaching a seasonal uptick in demand
âmy sense is inventory is very lowâŠcoming into a March, April, May timeframe, it will bring a seasonal uptick in demand, likely inventory restocking.â âLyondellBasell CEO Bhavesh Patel (Plastics)
Emersonâs CEO said the inventory downward draft is probably over with
âI would say what my knowledge is right now, inventory levels within the channel including ourselves, our levels that, they are pretty good levels, lowâŠI donât see much of a downward draft on that now. I think itâs pretty well over with, probably very minor downward draft.â âEmerson Electric CEO David Farr (Industrial Components)
Eaton said that people have got their hatches buttoned down tight
âI think people have got their hatches buttoned down tight and they too are trying to live through a period of time when growth is less than theyâd hoped it might be a couple of years agoâ âEaton CEO Sandy Cutler (Diversified Industrial)
End markets are shaky though
Praxairâs CFO doesnât see many things getting better
âWhen I look around at the current industrial state of the world, I donât see many things getting better, and a few are getting a little worse. The combination of excess supply and reduced demand, continues to put strain on several industrial end markets.â âPraxair CFO Matt White (Industrial Gasses)
Eaton is not counting on an economic rebound in the second half
âI donât think weâre seeing anything at this point that causes us to think that markets are better than what weâre forecasting hereâŠas we put the plans together this fall were not counting on an economic rebound in the second half.â âEaton CEO Sandy Cutler (Diversified Industrial)
Sysco mentioned âdeflationâ 40 times on their conference call
âwe currently believe that deflation headwinds will persist for at least the remainder of the fiscal yearâŠdeflation impacts the P&LâŠthe reality is, itâs not a great environment because you end up with fewer dollars to pay your expenses with.â âSysco CEO William DeLaney (Food Distributor)
At best, itâs a slow growth environment
âthereâs no doubt, itâs a slow growth environment.â âHoneywell CEO David Cote (Conglomerate)
âWe do think that we are in this frustratingly slow environment that can often cause people to use the recession word, but I think thatâs almost a more of a kind of an emotional issues than it is a the factual basisâ âEaton CEO Sandy Cutler (Diversified Industrial)
âthere is so much time between now and the fourth quarterâ âEaton CEO Sandy Cutler (Diversified Industrial)
Consumer related industries are relatively strong in China
âConsumer related industries are still performing well in China, as we continue to see good demand for things like transportation fuels, food, healthcare, environmental solutions and plastics.â âPraxair CFO Matt White (Industrial Gasses)
But consumer spending is definitely being impacted
âDomestic spending is certainly impacted in China. I was in China last week and you could see it there.â âMastercard CEO Ajay Banga (Payment Processing)
âOur China Chocolate fourth quarter net sales results were less than our expectationsâŠcategory performance is being impacted by macro economic issues and the related impact itâs having on consumer shopping behavior and confidence.â âHershey CEO John Bilbrey (Chocolate)
Industrial markets are very weak
âIndustry demand for medium and heavy duty trucks in China decreased by 24% for the full year as the industrial economy slowed.â âCummins CEO Thomas Linebarger (Truck Engines)
The Chinese are looking to shut down steel capacity equal to US output
âClearly, you have a situation of excess capacity across most infrastructure supporting industries, like steel, glass and cementâŠthe Premier recently here announced their goal to take out about 100 million to 150 million tonnes a year capacity. And just to put that in perspective, thatâs like the entire capacity of the United States.â âPraxair CFO Matt White (Industrial Gasses)
The weakness in China is in lower tier cities
âOur view is that customers in lower tier cities have been more significantly impacted by the softening economy, particularly around the industrial cities, which have been more heavily affected by Chinaâs slowing export trade.â âYum! CEO Greg Creed (Restaurants)
âthe services and technology companies are tending to focus in the largest citiesâŠdemand for retail, logistics and office space in those major cities actually being quite robust. Where thereâs stress in China is in the peripheral tier two cities and in the tier three cities where the industrial base was focused and where you see a clear decline in activity.â âJones Lang LaSalle (Commercial Real Estate Broker)
AGCOâs CEO had some very negative things to say about Brazil and Venezuelaâs governments
âthe government in Brazil is in very bad shape. They donât know what they are doing, they donât have a strategy, they are corrupt, and this damaging not only our business but business in general⊠I think Venezuela is close to complete bankruptcy, the political system doesnât work at all, you canât travel there without being killed. So thatâs really, really a very, very difficult market.â âAGCO CEO Martin Richenhagen (Farm Equipment)
Capital markets look increasingly tight
Widening spreads have affected companiesâ ability to issue debt
âIn total, global bond issuance declined 26%âŠIn January, we saw a continuation of that trendâŠwhere we see spreads going, thereâs a lot of volatility right now. We think that also plays into it, peopleâs appetite for going out. Itâs not really related to the base rate. Itâs related to the spread.â âMcGraw Hill CEO Douglas Peterson (Ratings Agency)
Volatility is likely to affect M&A activity this year
âthe volatile market conditions at the start of this year could affect our 2016 performanceâŠIn our M&A business, while weâre off to a good start, itâll be several months before we know whether volatility has affected deal announcements for the year.â âLazard CEO Ken Jacobs (Investment Bank)
There has been some cooling in demand at the high end for real estate
âWhat we did see is something of a cooling in demand at the high-end, in particular, our investment sales markets, a bit more selective purchasing, buyers not chasing risk as much as they might have done earlier in the cycle.â âJones Lang LaSalle CEO Colin Dyer (Commercial Real Estate)
Itâs a terrible environment to sell assets out there
âI think your point is spot-on. I think itâs a terrible market to be trying to sell most assets out there, particularly obviously oil-related assets. And thatâs why Iâve been pretty circumspect around asset sales.â âChevron CEO John Watson (Integrated Oil)
Sellers are expecting to receive higher prices than buyers are willing to pay
âsellersâ expectations of price have continued to kind of push upwards whilst buyersâ willingness to pay those continuing increased prices have become slightly more hesitant.â âJones Lang LaSalle CEO Colin Dyer (Commercial Real Estate)
âWe have seen a couple of things where the pricing was so over the moon for the outset or the location that they had to backup and ask for a different bid or lower bid. But those are properties, that in my mind â its like â somebody says they are going to sell you a Volkswagen Bug for $80,000, you are probably not going to get a lot of bids. So there is some of that.â âKilroy CEO John Kilroy (Office REIT)
âI would tell you on the â on down â in down cycles, having been through a few, itâs really hard to get the bid and the ask to converge on the way down.â âNational Oilwell Varco CEO Clay Williams (Oil Service)
VC investors are marking down portfolio positions
âI personally spend a lot of timeâŠwith the VCs, the angel investorsâŠand a lot of those folksâŠthere are some people that have been burnt, where the company went from $4 billion to $10 billion, $6 billion or whatever it might be. Feel bad for those investors.â âKilroy CEO John Kilroy (Commercial REIT)
If capital markets freeze some early stage companies are probably not going to survive
âSome companies will fail and deserve to fail, letâs just be honest about this. The nature of technology is that, it rapidly evolves or even increase the revolution, and sometimes that obsoletes some other things.â âKilroy CEO John Kilroy (Commercial REIT)
Many poor performing retailers werenât able to survive the fourth quarter
âwe did experience in â15 a number of bankruptcies of kind of the really poor performing retailers. There was clearly a slowdown in retail sales in the back half of the year. And then when you couple that with the tourism issue, you couple that with the normal weather, I mean it was so to speak a perfect storm, and it took a lot of retailers out.â âSimon Property Group CEO David Simon (Mall REIT)
There are signs of continued strength in labor markets
âweâre simultaneously dealing with pickier clients and pickier candidates. Candidates are getting more counteroffers. Candidates are getting competing offers. Candidates are turning down offers that our clients give them.â âRobert Half CFO Keith Waddell (Staffing)
Casual dining gets hit harder by macro pressure than Quick Service
âweâve seen this not just in China, but outside that casual dining is impacted by macroâŠit always has a bigger impact on casual dining when macros are volatile and changing than it does on the QSR business..â âYum! CEO Greg Creed (Restaurants)
The perimeter of a grocery store is growing much faster than the center of the store
âitâs the perimeter of the store where you are seeing a tremendous amount of growth versus the center of the storeâŠlisten, whether itâs Whole Foods or other retailers, they donât want the center of the store to die. So they are all looking for innovation and working with us on innovation there.â âHain Celestial CEO Irwin Simon (Consumer Packaged Goods)
UPS delivered 612 million packages during the holidays
âcertainly, it was a solid peak season. We delivered more than 612 million packages over the peak period. Itâs the most in the company history, up about 7%.â âUPS EVP Alan Gershenhorn (Delivery)
Peak shipping demand is so high that Amazon has needed to build its own infrastructure to accommodate it
âwhat weâve found is in order to serve â properly serve our customers at peak. Weâve needed to add more of our own logistics to supplement our existing partners. Thatâs not meant to replace them. And those carriers are just not â no longer able to handle all of our capacity that we need at peak. They have been and continue to be great partners. And we look forward to working with them in the future. Itâs just weâve had to add some resources on our ownâ âAmazon CFO Brian Olsavsky (E-Commerce)
Chipotle said it may take 4 or 5 quarters to recover from its food safety issues
âWhen we looked at other events, other companies that have gone through something like this, the recovery typically takes four or five quarters or so.â âChipotle CFO John Hartung (Restaurants)
Alphabet says that it has made great strides in AI
âOn AI, we are obviously seeing incredible progress in this field. We make great stridesâŠItâs always tough to predict what happens over a five-year timeframe, but I do see us making significant strides. Even a year ago, I wouldnât have predicted that we would be in a strong position to mount a serious challenge to the world champion in Go this year. So looking at the pace of progress, I think we will have AI in a form in which it benefits a lot of users in the coming years, but I still think itâs early days, and thereâs a long-term investment for us.â âGoogle CEO Sundar Pichai (Internet)
Companies are seeking cyber-security in the cloud
âSecurity is now a major driver of the cloud adoption. As threats become more frequent and sophisticated, Azureâs unique technology like machine learning empower customers to adapt to these new realities.â âMicrosoft CEO Satya Nadella (Technology)
Marissa Mayer is on the defensive
âIn a turnaround, you must literally turn around declining revenue and get it to grow.â âYahoo CEO Marissa Mayer (Internet)
Aetna said that is has âserious concernsâ about the sustainability of public health insurance exchanges
âwe continue to have serious concerns about the sustainability of the public exchanges. Specifically, we remain concerned about the overall stability of the risk pool, including enforcement of standards related to special election period enrollment, where CMS has made some recent changes, but more needs to be done.â âAetna CEO Mark Bertolini (Health Insurance)
The investment community is concerned about auto sales, but production is expected to stay high
âwe understand the concern that people in the investment community have with respect to where we are in the cycle and what production schedules look like. We see none. I mean weâve seen absolutely no change in production schedules from when we gave guidance originally a month agoâŠweâve seen no change.â âDelphi Automotive CEO Kevin Clark (Auto Parts)
The auto industry has been known to overproduce before though and dealers usually end up suffering
âWeâve taken steps to begin to bring in our inventories. But even if we do that if the industry overproduces and keeps inventory at a high level that means the overall environment is still very difficult.â âAutonation CEO Mike Jackson (Auto Dealer)
There has also been concern about the aerospace industry, but Eaton was positive
âA lot of discussion over the last couple of weeks about whatâs happening in the commercial aerospace activityâŠwe continue to see that outlook being strong as we move into 2016 and 2017.â âEaton CEO Sandy Cutler (Diversified Industrial)
Honeywell also pointed out that flight hours are still increasing
âif you take a look at whatâs happening in the aerospace industry, the biggest thing for us is that flight hours increase. And flight hours last year were up 4% or 5%. Theyâre likely to be up 4% to 6% again this year.â âHoneywell CEO David Cote (Conglomerate)
PACCAR was upbeat about prospects for truck production in North America
â2016 will be another good year for the U.S. and Canadian Class 8 industry truck marketâŠCancellation activity in our operations are very normal. Thereâs nothing unusual that is happening in that arena. And in terms of where weâre at in the cycle, I think thatâs to be determined. The economic fundamentals are positive, and we see that weâre going to track what the demand is, and we think the demand is going to be a good market for 2016.â âPACCAR CEO Ronald Armstrong (Truck Manufacturer)
Companies in the oil space are becoming more realistic
âIt has been challenging and sometimes frustrating to reach agreement with potential sellers. But as the downturn lengthens, everybody in this space is becoming a lot more realistic.â âNational Oilwell Varco CEO Clay Williams (Oil Service)
This environment could last for longer than anyone expected
âwe do think the current environment that weâre in will probably be protractedâŠuntil we see events stabilize and we see oil pricesâŠtake on a new supply-demand dynamic than itâs currently in the market or anticipated in the near future, we will continue to be a very cautious investor in this environment.â âAnadarko CEO R. A. Walker (Oil E&P)
The oil industry may not recover until 2017
âWe are looking at a situation, in my opinion in the oil and gas marketplaces, that will not recover until well past middle of â17, maybe late â17.â âEmerson Electric CEO David Farr (Industrial Components)
Hedging is no longer attractive in this environment
âat $30 and $2, just to use big round numbers, I donât think any company has got a motivation to hedge until itâs probably a negative cost of replacement. So Iâm not sure we or anybody else would find ourselves motivated to lock in prices that are lower than the marginal cost in order to develop.â âAnadarko CEO R. A. Walker (Oil E&P)
Rating Agencies are likely preparing to downgrade oil companies
âthe rating agencies need to do what the rating agencies need to do and they have conservative oil price scenarios out there and I think thatâs understandableâŠif a downgrade does occur, and I think theyâre moving in that directionâŠwe would not be the only one that that would happen to. I donât see it materially impacting our cost of funds or materially impacting our ability to secure financing.â âChevron CFO Patricia Yarrington (Integrated Oil)
Companies are cutting spending where they can, including dividends
âI mean, the dividend, it is costing us about $550 million a year currently. Obviously, there are other things we could do with that cash in the current environmentâŠI certainly do not expect us to eliminate the dividendâŠI donât think thatâs an appropriate step, but the current yield is certainly higher than we would have targeted in a much higher stock price environment.â âAnadarko CEO R. A. Walker (Oil E&P)
âWe have decided to reduce our quarterly dividend by 34%. We believe this level, which represents a payout ratio of close to 100% of 2016 earnings remains highly competitive, but also protecting the long-term financial health and financial flexibility of the company. â âPotash CEO Jochen Tilk (Fertilizer)
Miscellaneous Nuggets of Wisdom:
Never enter into a deal that you donât feel like you can walk away from
âThe way we look at it is, we donât look at any of the acquisition that is a must for us. We have not preceded any of the past acquisitions we have done with the eye towards that itâs an acquisition that we must do. We have done them because we found them, we were able to get them either at a reasonable price or weâre able to build a model where it would make sense but youâve seen us walk away from acquisition, like weâve walked away from CSL, we walked away from many, many other that did not come in the public domain.â âMicrochip CEO Steve Sanghi (Semiconductors)
Full transcripts can be found at www.seekingalpha.com
