#$ng

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.

It was another light week this week, but next week earnings season starts to kick into high gear…

The Macro Outlook:

It’s now clear that we’re in a low industrial demand environment

“At the time, I said that it was unclear as to whether we had moved out of a moderate demand environment and into a low one…With another few months under our belts and with the same headwinds persisting, it’s now clear that we are in a low demand environment.” —MSC Industrial Direct (Industrial Supplies)

Low oil prices and exchange rates are impacting manufacturing activity

“Root causes for the slowdown included the impact of the rapid drop in oil prices, softening export demand, and foreign exchange headwinds all of which were impacting broader manufacturing activity.” —MSC Industrial Direct (Industrial Supplies)

The good news is that things have stabilized at low levels

“while things have not continued to deteriorate, they have essentially remained at low levels in what is a sluggish environment…most customers are suggesting that their activity has at least leveled, meaning they’ve not seen further significant declines.” —MSC Industrial Direct (Industrial Supplies)

The pricing environment is very soft

“With respect to the pricing environment, conditions remain extremely soft, due primarily to the lack of commodities inflation. Supplier pricing activity, which is the primary driver of distribution pricing movement, remains well below historical levels.” —MSC Industrial Direct(Industrial Supplies)

Small local distributors are fighting for survival

“the national players, get hit certainly. We get affected when there’s a slowdown. The local distributors that make up the 70% of the market get disproportionately hit. And what we see in times of slowdown is competition. They will get very – the local distributors will get very competitive. So I would say price competition is very high right now. And a lot of that, I mean, that’s really being driven off the local distributors doing what they do when things get slow, which is fight for survival.” —MSC Industrial Direct (Industrial Supplies)

Hiring is slowing

“With respect to sales force expansion, we continued moderating as we had started to do last quarter. This is in response to the softening demand environment, as sales force paybacks lengthen when growth rates slow.” —MSC Industrial Direct (Industrial Supplies)

Alcoa sees strength in US construction though

“When you go to building and construction, actually we do believe in North America continue to believe in the 4% to 5% growth for this year. The early indicators are really positive.” —Alcoa (Aluminum)

International:

Europe is still weak

“Weakness in Europe continues. We anticipate the usual European summer slowdown across all sectors” —Alcoa (Aluminum)

Pepsi’s growth looked strong in constant currency, but big headwinds hit GAAP

“Based on the strength of the quarter, our overall first half results and our outlook for the remainder of the year, we are increasing our full year of core constant currency 2015 EPS growth outlook to 8%…We expect foreign exchange translation to negatively impact net revenue and core earnings per share growth by approximately nine and 11 percentage points respectively, based on current market consensus rates.” —Pepsi (Snack Foods)

What is constant currency anyways?

“Since our results fluctuate due to the changes in foreign currency exchange rates, we also discussed our sales in what we call constant currency. For that we translate the current period results from the foreign subsidiary functional currency in the U.S. dollars at the same period last year exchange rates.” —WD-40 (Consumer Chemicals)

Financials:

Valuations are high but the cost of money is low

“As you know we have been always [indiscernible] with potential acquisitions, so we will if we will have an opportunity we will analyze this opportunity very rationally and we will do it just if this will create additional value. It’s true the market is now quite bullish but it’s also true that the cost of the money is still quite low” —Walgreens Boots Alliance (Drug Stores)

Consumer:

Consumers will spend irrationally just to hit free shipping thresholds

“We always kind of joke around here that customers widely overvalue free shipping these days…free shipping status, we intentionally said it is $75 in order to drive incremental spend.” —The Container Store (Specialty Retail)

Packaged food companies could be the target of government action

“we are also in constructive conversations with governments, to make sure there aren’t any discriminatory taxes or discriminatory action on any of our categories.” —Pepsi (Beverages and More)

Healthcare:

Walgreens expects a substantial wave of consolidation in the healthcare sector

“I have said many times, that I believe that the American markets will go through a substantial wave of consolidation horizontally and vertically. I have said very clearly that we want to be part of this, at the right time with the right partner. We are open to any kind of combination which could improve the value of our company and we are looking actively around us to understand which is the best option for us. But please don’t forget that we are looking actively not just in the U.S. but even in other countries because we consider ourselves a global company.” —Walgreens Boots Alliance (Drug Stores)

Materials, Industrials, Energy:

On average it takes 18 years to bring a mine from discovery to production

“The reality of today’s environment is that mining projects now take an average of 18 years to reach production after discovery.” —Novagold (Gold Mine)

Klaus Kleinfeld is still very bullish on aerospace markets

“you can see that we are really optimistic, as most people are, in where this market is going, right? So, and the fundamentals are there. I mean, and they are very different from what we’ve seen before. We didn’t have an emerging Asia that adds 100 million new passengers every year in the next 20 years every year. We didn’t have a situation where the next-generation aircraft was so much more attractive in terms of fuel efficiency and maintenance costs and where we literally had 600 aircraft per annum retiring every year.” —Alcoa (Aluminum)

Miscellaneous Nuggets of Wisdom:

No one likes to see their share price drop but you can’t be concerned by it

“Nobody likes to see their share price drop. But we’re not really concerned by that. I mean the main decision for NOVAGOLD is two years out into the future, that’s a lifetime in the gold industry, particularly as tumultuous as its been the last four months” —Novagold (Gold Mine)

Employees take care of customers take care of shareholders

“Herb Kelleher Southwest Airlines always said we take great care of our people, they take great care of our customers and our customers take great care of our shareholders and we wholeheartedly agree.” —The Container Store (Specialty Retail)

Nobody likes cost cutting, everybody likes growth

“look nobody likes cost cutting, everybody likes growth.” —Pepsi (Sugar Water)

Each week I read dozens of transcripts from earnings calls and presentations as part of my 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.

The Macro Outlook:

Auto industry sales were flat y/y last month

"we see overall industry sales for March, including medium and heavy trucks totaling in the low 17 million vehicle range...This would mean the industry is just slightly off or perhaps flat compared to a year ago." ($F)

It was a bit of a tough comparison though because last year March was a breakout from the winter doldrums

"a year ago March, the February we were in the deep freeze...March was kind of a breakout month a year ago...I think the comparison is a little bit difficult to March of last because of what happened with the weather and the comparison." ($F)

Ford said that weather impact was minimal this year though

"if there was an impact it was minimal." ($F)

International:

Congress is currently debating a bill that could have big implications for Chinese manufacturing

"As we continue to prepare for an eventual approval by the U.S. Senate of the Trans-Pacific partnership agreement or TPPA. When approved this agreement will provide for duty free imports and exports to major countries, except China and this will have a major implication for the apparel industry in the next three to five year period." ($PERY)

As a result, there could be a continued shift in manufacturing to other regions

"Today our company imports as manly units from Vietnam as we do from China. Going forward there will be an increase in imports of certain apparel products from countries other than China." ($PERY)

Some companies are already preparing to produce more in Africa

"Generally speaking, men’s [apparel] companies are always in the forefront of the changes because we are more conservative “than ladies business” and the men business can take a longer delivery than ladies. So all the big companies today are moving to Africa, for example PVH has established office in Africa" ($PERY)

Financials:

Apparently pension plans outside the US have different funding requirements than US plans

"it’s important to step back and look at the components of our current $24 billion under funded position. More than half of that obligation is outside the U.S. and the majority of that is on the pay as you go basis. We have absolutely no plans to contribute or fund these international pension plans, we will continue to take care of those on the pay as you go basis because it doesn’t make economic sense to contribute to these" ($GM)

Consumer:

Be wary of retailers who claim profitability in omni-channel

"I think the fallacy you hear today and it kind of surprises me as all these companies want to talk about, well their direct business is growing faster and this is happening and their direct channel is their most profitable channel.Well, it all depends on how you’re allocating cost. I don’t know how you make more money when sales shift from retail to direct, right, because your occupancy cost doesn’t go down. Your overhead doesn’t go down. So I think there is a lot of companies that are out there." ($RH)

It is expensive to handle the goods, to ship them and fulfill them

"everybody is all excited because they are growing their direct business and they are missing their earnings, right, because they are finding out that it’s expensive to handle the goods, to ship the goods and so on and so forth and fulfill the goods." ($RH)

The port situation has improved a lot already, should be back to normal by the end of May

"the port situation has definitely improved. We are, I would say that by the end of May on time for Father’s Day, we will be caught up." ($PERY)

Many companies already put mitigation measures in place for the ports a year ago

"I mean, back in April of 2014, almost a year ago we put mitigation plans in place. So we were not that heavily, of course being slowed down, but we diverted a lot of our goods through the East Coast ports." ($RH)

It's really tough to measure advertising's direct impact

"the reality is that following advertising’s direct impact is always a difficult challenge. What we can measure is the level of communication. Web site hits, impressions, conversations around the brand. That we can measure. And so we know we had a lot more conversations generated about cruising. There is no question about that. We would hope that over time that translates to greater demand and ultimately bookings and higher yield' ($CCL)

Carmax is still spending heavily on TV

"continued strong effort on TV, we are pretty much out of print, and have been for a long time, and continuing to try to optimize our paid search, as well as trying to improve our SEO' ($KMX)

WalMart's new(ish) CEO seems to be emphasizing assortment over price

"our game is getting the assortment right. I mentioned that it is the life blood of your business." ($WMT)

If you focus too much on cost then you impact the shopping experience

"we’re not about moving away from low price, really difficult to have low price unless you have low cost. We’ve learned that if you put too much pressure on some cost in your business and read into that stores then you can impact the shopping experience and environment for customers.' ($WMT)

It's not easy to get assortment right

"Building an assortment is actually a combination of art and science, and if any of you have been buyers, you — and a good buy you’ll understand how difficult it is...you begin first of all by understanding the customer, understanding the customer decision tree, you need to analyze the market, you need to understand opening price point, you will need to understand the role of private label will play, you need to understand what products are substitutable and which ones customers are loyalty, you need to make decisions on which ones are deleted, what roll seasonal plays." ($WMT)

GM's balance sheet is a lot different now than it was before the recession

"Simply put, our balance sheet is now at strength as opposed to a significant weakness which it was prior to the last downturn. In 2007 prior to the downturn, we had debt like obligations, automotive debt, post-employment obligations and a net U.S. pension liability of $88 billion. We’ve reduced that by $61 billion, from 88 to 27." ($GM)

Technology:

Micron is moving production capacity away from its PC products as demand fades

"We are allocating less production to the PC segment and continuing to shift more bit stores towards the other faster growing segments." ($MU)

It's not clear what's going on with PCs, but maybe it will get better in the second half

"I am not sure how to call the PC market other than to say that we think it could improve from here because it is not doing so well and we think the back half of the year with Microsoft new OS and holiday and so on so forth we think it’s just got to be better and hopefully than that is today." ($MU)

Other segments didn't show that weakness

"I think if you talk to other people in that business in the PC business the hard drive guys, the CPUs, the unit declined in the PC notebook segment kind of drove some of this and an interesting thing for us is that none of the other segments kind of showed that" ($MU)

And the server business is strong

"We saw continued growth in our server business driven by cloud computing and enterprise. Server DRAM bit growth is forecasted up roughly 40% year-on-year in 2015. The growth in server memory is based on increasing server workloads that require a high DRAM performance and density. We continue to invest in expansion of our server business, as this segment offers a growth demand profile that is less sensitive to price fluctuations.' ($MU)

The DRAM industry has become much more rational over the years

"it’s a more rational industry and with that is coming better behaviour and as Mark talked about earlier we’re going to do the right things to run our business and if that means not selling inventory below acceptable prices we’ll do it." ($MU)

Healthcare:

There are a lot of innovative biologics going off patent over the next five years

"in 2015 to 2020 is this perspective of innovative biologics going off patent. If you look at those two peaks of loss of patent expiry, the first is in the 2015 to 2017 time horizon, which is primarily dominated by the recombinant protein. Then you move to the 2018 to 2020 time horizon, where a lot of the monoclonals start losing their patent expiry." ($PFE)

Biosimilars are different than generics

"biosimilars are not generic...Biosimilars on contrast are proteins and these are proteins that are developed live cell lines or viral platform, so what you have here is the requirement is one proof of quality and similarity. You can’t have an identical biosimilar or they would be called bio identical. Those do not exist." ($PFE)

Because they are not identical to the originals, biosimilars require more robust trials

"The contrast here in terms of the development of a biosimilar is we are looking at a Phase I as well as a robust Phase III clinical trial based most likely one or a few indications with some level of extrapolation.' ($PFE)

Here's an analogy to help understand biosimilars vs. traditional pharma

"a way to explain it just like in common layman term is, if you have two-by-two piece of wood, you can cut that two-by-two and it looks identical, and I think of that as a generic, but then you have a tree, which is your biosimilar, the proteins. If you look afar, all those trees looked the same, but their branches are actually quite different' ($PFE)

If a biosimilar had an adverse event, it would be really bad for the whole class of drugs

"I think one black swan that you might have is if there is one biosimilar that ends up having an adverse event and what does that do to the class effect of biosimilars ' ($PFE)

Some of the innovative biologics were developed 10-20 years ago, the technology has improved since then so costs have come down

"If you think just about innovative assets, they were developed, 10 years, 20 years ago, with the [ph] platform that may not be as robust as the new state of technology that many are using today.' ($PFE)

Materials, Industrials, Energy:

Good agricultural growing conditions lead to oversupply, and are therefore bad for prices & farmers

"Two years of spectacular growing conditions have translated into the current oversupply situation for corn, and in response acres continue to decline" ($MON)

11m acres of corn have come out of production in the last two years

"we now estimate that at least 11 to 12 million acres of corn will have come out of production in the primary markets since 2013.' ($MON)

Miscellaneous Nuggets of Wisdom:

If you give your customer what they want, they'll buy it

"It’s not so much change in consumer behavior as much as us listening to our guests and giving them more of what they want. And if you give them what they want, they will buy it.' ($CCL)

If you wouldn't take your family on vacation somewhere then you probably shouldn't invest there

"jurisdiction is an important issue in the resources sector. One of the key questions that investors will be asking in mining companies is where in the world are your assets located? You wouldn’t take your family there on vacation? Why would you want to invest there?" ($NG)

Be proud enough of your work that you'd show it to your Grandma

"Let’s get ourselves to holiday seasons to a point where, where we’re proud enough to take our mother or grandmother into the store and say hey this is who we work for, our associates are engaged." ($WMT)