Here’s what CEOs were saying about the economy this week
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.
We may be seeing a significant change in industrial demand conditions
"We’ve seen a significant and swift change in demand conditions since the start of the calendar year. We heard this in a change in tone from many of our customers" ($MSM)
"In one quarter this thing moved pretty quickly"...
"what’s happening across the board is — look, in one quarter this thing moved pretty quickly where you can tell our tone on this call is quite different from just a quarter ago we see that as pretty broad based and not specific to our region.' ($MSM)
Weakness in energy is impacting other industries
"As you know, our business has very little direct exposure to the oil and gas sector. There is little doubt, however, that the dislocation in this sector and the resulting uncertainty is currently impacting broader manufacturing activity, particularly in energy producing states.' ($MSM)
Weak commodity prices are impacting pricing power
"With respective to the pricing environment, conditions remain quite soft due primarily to the lack of commodities inflation." ($MSM)
Companies have also been impacted by the change in export environment
"there has been a double whammy in heavy manufacturing because of oil and gas and then being particularly hit hard by the change in the export environment." ($MSM)
This appears to be more than weather
"while weather was certainly a factor in the quarter, we believe the broader weakness that we’re seen is more than a temporary disruption." ($MSM)
Growth rates dropped significantly in February and did not rebound in March
"As you can see from our monthly numbers, growth rates were solid in December, improved in January, before dropping significantly in February as the environment deteriorated...I think the bigger story with March is the fact that growth rates did not bounce back which I think is more supportive of the case that the Q2 factors were a lot deeper than just weather" ($MSM)
Bed Bath and Beyond also saw a drop-off in February, but cited weather
"our actual results for the fourth quarter remained well within the range of our model for sales and comparable sales until the latter part of February, when the adverse weather conditions worsened in many parts of the United States." ($BBBY)
MSC says the slowdown has been particularly pronounced in energy states
"particularly when we go to manufacturing and look at our numbers and look at manufacturing activity in states that have an oil and gas influence, it’s really pronounced." ($MSM)
But we've heard from many others, including Dave & Busters, that they're not seeing any impact on consumer spending in Texas
"so far so good. We’re seeing very low impact. And again we’re in, primarily in Texas, in the bigger markets, so we’re in more towards in Dallas, we’re in also Austin, San Antonio, two stores in Houston, but we’re just really not seeing very much impact at all to anything going up from an oil patch standpoint, despite some of the layoffs and whatnot in Houston. So, so far so good is our outlook" ($PLAY)
Alcoa also sounded pretty upbeat about prospects for growth in aerospace and auto
"Revenue has been growing year-over-year by 7%. And if you look under the hood, you actually see that this has been driven primarily by the organic growth coming from auto & aero." ($AA)
MSC is still adding headcount, but growing it a little more cautiously than before
"As of now, our trajectory is to increase sales headcount by around 6%, a bit below the 8% to 10% range we previously provided and that could change further either up or down as we assess changes to the environment. ($MSM)
Klaus Kleinfeld says that the Chinese economic team is "unbelievably good"
"I have great admiration for what the Chinese government has done over the last four years. And the smartness of the economic team is unbelievably good. I had a chance to be exposed to them many, many times." ($AA)
Lots of e-commerce still culminates at brick and mortar
"We know that many of our customers start their shopping experience with us online or through a mobile device to research an item, read customer reviews, or compare pricing. The experience does not stop there, as many of these customers visit our stores and interact with one or more of our 60,000 associates to find what they need or to ask questions." ($BBBY)
"Approximately 60% of our eCommerce sales touch a store. Our national footprint is a critical component of our omnichannel platform, and will remain an important driver of growth and profitability over the long-term. ($PIR)
While brick and mortar is still important, it can be scaled down with e-commerce
"But, as we have insinuated before, we don’t need all the stores we have today...As eCommerce becomes a larger contributor to our omnichannel model, we can generate significantly higher returns from our sales by tactically deleveraging the real estate footprints." ($PIR)
Count Pier 1 as another advertiser shifting money away from TV towards social/digital
"we are making significant adjustments to our media spend in fiscal 2016, shifting from TV to our highly productive direct mail and digital marketing campaigns...We are also building a stronger social media platform for the Pier 1 Imports brand, which will include purpose-driven content created for each social platform.' ($PIR)
The telecom network needs to evolve for the next generation of services
"I think if we think about the network that’s been deployed over the last 20 years to 25 years, it’s really a network that was built to support yesterday’s services. That’s not a bad thing. I mean that was our target. We wanted to deliver things like high-speed broadband at a cost effective rate, and we’ve done that. And we wanted to offer things like secure VPNs and mobile internet smartphones, and triple-play services, and all that’s been done. But if we think about the networks that have been deployed, they have been deployed to support those services. And if we think about what’s ahead of us, we have things like 4K video; we have machine-to-machine communication; we have cloud becoming a much bigger factor; and of course mobility. And the question is really where the networks that were designed for yesterday really designed to support those services. And I think we conclude that that’s not the case, and we need to rethink networks." ($CSCO)
Verizon is the recognized leader in telecom architecture among its peers
"I think that Verizon is unique in some sense and that Verizon first of all has incredibly talented group of architects and people who focus on these technologies. And a lot of the industry, a lot of their peers know that and kind of watch what Verizon is doing because they can ride that wave sort of for free. Verizon does a lot of the upfront...And I know that many service providers around the world look to Verizon and will say look if Verizon has invested all that and it works for them, it should work for us." ($CSCO)
Rite-Aid expects generic drug costs to come down this year
"it’s our expectation that our net generic drug cost is going to come down. So we think it’s to us a net deflationary market. We do know that there will be individual drugs that there will be instances where we’ll see some cost increases throughout the year that’s a constant battle that we fight every year. But our overall our guidance reflects the fact that we think we’re going to be overall in a cost reduction environment versus a cost increase environment." ($RAD)
Materials, Industrials, Energy:
Energy companies and analysts are still planning assuming $75 oil
"the difficulty about talking about cash flow is that you have to do it relative to a certain price level, and this morning we’re going to talk about cash flow in terms of 2017 price level that is $75 Brent, $70 WTI and $3.50 Henry Hub. And you remember just on Ryan’s presentation few slides back he showed a range of analyst projections out there people who’re making forecast about all the prices and this is kind of midpoint to below midpoint of where those ranges are.' ($COP)
Even as ConocoPhillips cuts CapEx, they are still planning to grow production
"But even at this lower capital spend we still are going to grow the company. So you see here our plan is to take the company to 1.7 million BOE per day by 2017 and that’s from the base today of about 1.532 million BOE per day." ($COP)
Market prices of commodities are being driven more by sentiment than fundamentals
"The LME price is driven, as we’ve been saying for now years, by sentiment. I mean, it moved up and down depending on what Mario Draghi or Janet Yellen were on a day, right, whereas the regional premium is really driven by the market fundamentals." ($AA)
Meat and Poultry prices have stayed high even as input costs have fallen
"the big culprit for us right now is beef, followed by chicken. So we’re not seeing moderation in the price of that...given the input costs, which in some measure are driven by fuel prices and some of that, should be dropping." ($PLAY)
Miscellaneous Nuggets of Wisdom:
The organization you would create from scratch is not necessarily the organization that evolves over time
"If I gave you a clean sheet of paper and said, go design a product or go design a network you would do that and pretty soon you create bubbles on that clean sheet of paper and say, well as an organization it’s going to do this...But I think you also have to recognize that future generations of an architecture then tend to form around the organization. And so what you see after many generations of that architecture is an organization that is pretty firmly in place and you have to step back and ask, is this architecture taking shape because of the organization that’s in place or taking shape it’s the right answer" ($CSCO)
People are resistant to change
"I think we have to recognize that human beings resist change; they tend to like to get into this comfort zone. And if we don’t challenge this and recognize this that our innovation is going to be merely incremental; and we’re not going to get these major architectural shifts taking place." ($CSCO)
Full transcripts can be found at www.seekingalpha.com
