The Transcript 09.02.19

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Succinct Summary: There are mixed signals about the direction the economy might take from here. Several companies are prepared for a downturn as they investigate what happened in the Great recession: The contact lenses industry grew and the recreational boats industry rebounded quickly.

Macro Outlook:

The economy is sending mixed signals

“We’re seeing a lot of weakness in industrial production and manufacturing. But on the other hand, if you look at services, services are still holding up. Though not as brightly as it was at the start of this year. So, I think it’s a mixed ball of signals.” – IMF Economic Counsellor Gita Gopinath

“the consumer side continued to be good and we had some positive numbers there. So, we have this weakening of the business side in manufacturing. At the same time, strong labor markets and strong consumer sector.” – Cleveland Federal Reserve President Loretta Mester

“We are still positive on the broader consumer sentiment, as key economic indicators remain strong…we recognize the first half of calendar 2019 has been choppy” – Malibu Boats (MBUU) CEO Jack Springer

But there is no risk of a recession

“I don’t see this major recession coming. The environment is slightly worse than it was last year. But I would emphasize the word ‘slightly,’ and last year was a very strong economic year.” – Honeywell (HON) Chairman and CEO Darius Adamczyk

“We have not seen signs in the U.S. of anything related to a slowdown, but we do know these things go in cycles, but right now we’re firing on all cylinders” – Starbucks CEO Kevin Johnson

“Obviously, geopolitical events are slowing some things down…But there is a lot of confidence and there is a lot of capital…Sometimes when a recession is coming, you start hearing that projects are put on hold. We’re not hearing that. There’s a lot of transformation going on.” – EY CEO Did sibio

The consumer is doing fine

“…we really talk to our consumers each and every quarter…She’s still back to work, making a little bit more money, working more hours versus actual average hourly rate being up for her is really more productivity, more hours.” Dollar General Corporation (DG) CEO Todd Vasos

“…[the] consumer seems to be doing well” – Starbucks CEO Kevin Johnson

Expect higher prices and lower discounts on consumer goods

“She really hasn’t called out a lot of headwinds yet from what she would think about as price increases or inflation. So she really hasn’t been calling that out at least up till now, but we’re really mindful that with List 4 getting ready to take effect across all of retail, that she still may see some of that.” – Dollar General Corporation (DG) CEO Todd Vasos

“It is hard to predict how at the macro level, consumers will react to higher prices resulting from tariffs.” – Best Buy (BBY) CEO Corry Barry

“…discounting will not be as strong this year because there is a 10% to 15% tariff that manufacturers and retail partners are trying to absorb….I don’t think you’re going to see as big of a discount over the Black Friday period as you’ve seen in the past,” – JLabAudio CEO Win Cramer

“I don’t think we can expect that the U.S. consumer has the unlimited ability to continue to buy products at any price” – Columbia Sportswear CEO Timothy Boyle

Some companies may need absorb the tariff effects to shield consumers

“the tariffs are ultimately attacks on the end consumer and we need to figure that out how to soften that blow for the consumer. On the footwear side, each of those conversations with our vendor partners is a fluid conversation, right. There is a lot of energy in the industry to try to get the footwear piece of the tariffs postponed or pulled out of the next roll out” – Foot Locker (FL) CEO Richard A. Johnson

There is potential for animal spirits to return

“I actually think that things could take off … economies and the animal spirits return and the investment profile…As much as there could be a risk of recession, there’s also an opportunity for an acceleration in investment.” – Honeywell (HON) Chairman and CEO Darius Adamczyk

The labor market is tight

“…a lot of our businesses were wanting to hire more labor, and they just couldn’t find workers.” – Cleveland Federal Reserve President Loretta Mester

Some CEOs are preparing for a downturn

“While we still believe in the economic metrics and the economy, we recognize the choppiness that we’ve recently seen and we’ve prepared for a cycle downturn whenever it comes knowing that we will be stronger and more powerful upon exit of any cycle.” – Malibu Boats (MBUU) CEO Jack Springer

And are referring to what happened in the Great Recession:

  • Infrastructural spending goes up 

“And also let’s just say there was a protracted downturn. Something interesting happens in those downturns infrastructure spend tends to go up …We’ve done some things in our core design product and our construction portfolio to ensure that we’re good partners to the infrastructure business.” – Autodesk (ADSK) CEO Andrew Anagnost

  • Contact lenses industry grew even in the Great recession

“I still think you go to 2009, the contact lens market in the middle of the recession, grew 3%. I would be really surprised under any scenario to see it get down there or lower.” – Cooper Companies (COO) President & CEO Albert G. White

  • Recreational boats rebounded quickly after hitting bottom

“We expect the next downturn to be similar to those that we experienced prior to 2008. Those downturns resulted in a 20% to 30% loss of units that rebounded quickly within two to three years from the drop” – Malibu Boats (MBUU) CEO Jack Springer

International:

Global growth is fragile

“…global growth is subdued and we describe it as fragile” – IMF Economic Counsellor Gita Gopinath

There is a slowdown in Germany

“…same with the slowdown in the manufacturing base in Germany” –  Autodesk (ADSK) CEO Andrew Anagnost

Suppliers continue to shift production away from China

“There’s a lot that’s moving there…as we’ve already seen, we believe many vendors are going to continue to migrate their manufacturing out of China….many of our vendors are in the process of migrating the manufacturing out of China. Our merchants are also addressing this new context with a view to minimize costs and risks…there will be some short-term volatility” – Best Buy (BBY) CEO Corry Barry

“…those moves have been in effect for or under way for many months now and other parts of Southeast Asia, Mexico and other place that we’ve seen some success. So we continue to diversify country of origin.” – Dollar General Corporation (DG) CEO Todd Vasos

Global concerns are weighing down agricultural machinery

“We experienced a pullback in the revenues in our International segment in the second quarter, which we attribute to farmer concerns over softening European economies, the impact of Brexit, weather issues in some markets and volatility in commodity prices due to trade issues and growing global supplies.” – Titan Machinery (TITN) Chairman & CEO David Meyer

Power generating companies in Singapore are struggling

“…a very difficult market with the power prices, both retail and whole remaining at very low levels. The source of this is the over capacity, there’s too much generation capacity which has existed for a number of years now, but also is a result of the over-supply of gas. There were a number of gas contracts, particularly on the LNG side that were signed up to long term contracts, tenured contracts which brought the market demand and supply balance out of sync. And so it was because of that that the losses, not just at PacificLight, but across all the generating companies within the Singapore market continue to struggle.” – First Pacific (FPAFY) Executive Vice President Stanley Yang

Consumer:

The quarter started slowly for most retailers but has picked up well

“As you heard from many of our retail peers this earnings season, the second quarter got off to a slow start. I’m pleased to report that we experienced monthly improvements as the quarter progressed, enabling us to deliver on our previously issued second quarter outlook. Momentum has continued quarter-to-date with a solid start to the back-to-school season in the US, where comps are positive across brands.” – Abercrombie & Fitch (ANF) CEO Fran Horowitz

Moderate growth expected in retail

“Our inventory levels at Malibu were slightly elevated heading into fiscal 2020. In addition and we believe that this is a meaningful challenge, higher-than-normal competitor inventory remains out in the channel today and will likely impact the promotional environment in the near term. Currently, we expect to see a more moderate growth-retail environment that may appear choppy from month to month.” – Malibu Boats (MBUU) CEO Jack Springer

Regis will be running all its business on a franchising model

“When developing a multi-year transformational strategy for the business, our analysis has suggested that a fully franchised salon portfolio would earn a much higher and sustainable return on capital and provide the most certain path to profitable growth….After considerable analysis and consideration, and given the results of our stabilization efforts in 2017 and 2018, and the successful execution of evolving franchise strategy in 2019, we have now reached a decision to embrace a fully franchise model.” – Regis Corp (Minn) (RGS) President & CEO Hugh E. Sawyer

Technology:

There is increased need for data analysis

“Our customers continue to affirm their need to accelerate their digital transformations to improve business outcomes and customers and employee experiences while reducing cost. Explosion of data will continue to fuel underlying demand for solutions to help protect, store, manage and analyze their data.” – Hewlett Packard (HPE) CEO & President Antonio Neri

Demand is uneven 

“…we continue to see an uneven demand environment largely caused by trade tensions” – Hewlett Packard (HPE) CFO Tarek Robbiati

Materials & Energy:

There is high demand for agricultural equipment

“We are experiencing demand for quality used equipment and we are seeing continued stability in used equipment values.” – Titan Machinery (TITN) Chairman & CEO David Meyer

Concerns about frost dates for crops weighing on farmers

“With the late planting, corn and soybeans are going to need heat, sunshine and later-than-normal freeze dates to reach maturity and yield potential. The uncertainty of the end of growing season frost dates, along with a negative grain prices resulting from ongoing trade issues, are weighing heavily on farmers’ sentiment. On a positive note, the strong corn prices we saw in June and July allowed farmers the opportunity to sell carryover crop and market portions of current year crop” –  Titan Machinery (TITN) Chairman & CEO David Meyer

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