The Newsletter
The Transcript 09.09.19
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Succinct Summary: Earnings season has slowed but many companies are speaking at conferences for analysts and investors. The energy industry is underperforming, but overall, the US consumer is doing very well.
Macro Outlook:
The consumer is healthy and feels pretty good
“So we are seeing a healthy consumer” – Starbucks (SBUX) Executive Vice President and CFO Patrick Grismer
“…all of our data and all of our surveys with our customers are saying that they feel pretty good about the economy and where they are…Their financial stability, their employment, all those things are pointing to positive from our customer base.” – Walmart (WMT) Chief Merchandising Officer Steve Bratspies
“While you hear a lot of choppiness in the news about the global environment, we actually continue to see strength throughout the system…the health that we see in the environment is strong” – Delta Air Lines (DAL) CFO Paul Jacobson
The tight labour supply is pushing up costs
“Unemployment remains at historic lows and labor supply remains exceedingly tight with a more competitive hiring landscape and higher turnover, cost pertaining to recruitment, training and onboarding are increasing.” – ABM Industries (ABM) CEO Scott Salmirs
Price increases from tariffs are being passed on to the consumer
“We have seen market prices come up in Q2 and we have begun surgically increasing certain prices as a result.” – At Home Group (HOME) Chairman & CEO Lee Bird
“…only where we cannot mitigate it, we will pass along cost to consumers.” – Cisco Systems (CSCO) Head of Investor Relations Marilyn Mora
But the industry is cautious in the face of increased uncertainty
“We’re also beginning to see uncertainty with the economy impact client decision making. There are instances where award cycles are more prolonged as clients want time to assess the rising wage environment and see clarity on whether there will be a down turn in the U.S. economy.” – ABM Industries (ABM) CEO Scott Salmirs
International:
HP is seeing growth deteriorate in EMEA and China
“…we did see a deterioration of growth, particularly around our EMEA region.We also saw a deterioration over the past couple of quarters in China. That being said, we’re also seeing some real pockets of growth. Japan was a great performer for us in our third quarter” – HP (HPQ) CFO Steve Fieler
Digital delivery higher in China than in the US
“…the Chinese consumer is much more digitally engaged. So we see higher levels of pickup in delivery overall for China and that just maybe level set.” – Starbucks (SBUX) Executive Vice President and CFO Patrick Grismer
Consumer:
Airline demand is strong
“The demand remains strong… Revenue environment remains solid…We are seeing some pressure on non-fuel costs.” – Delta Air Lines (DAL) CFO Paul Jacobson
Technology:
Cloud service providers are asking Intel for increased customization
“So roughly a couple of years ago, we were running at about 18% of our SKUs were custom SKUs for cloud service providers. This year, we’re north of 50% on Cascade Lake, which is our latest CPU on 40 nanometer, roughly a 60% increase from prior gen” – Intel (INTC) General Manager Jason Grebe
There is opportunity in cloud security
“…there is not a customer who is not talking about the cloud…the best security, you can get is some cloud data security offered by an individual platform provider, but we actually don’t have comprehensive cloud security that allows you to make that journey to the cloud in a more comfortable and happy fashion…as we see this cloud market go to potentially $1 trillion over the next five years, there is a huge opportunity for cloud security to play a relevant role in allowing these customers to make their cloud journey over the next three to five years.” – Palo Alto Networks (PANW) CEO Nikesh Arora
A decline in unit PCs expected
“In the more short-to-medium term, the industry analysts, I believe, are calling out a unit decline in PCs in the next fiscal year or next calendar year.” – HP (HPQ) CFO Steve Fieler
Materials & Energy:
The energy industry is struggling
“It’s no secret that energy equities including independent E&Ps have underperformed in the marketplace for the last few years. It’s also no secret as to why this has been the case. Bottom line enterprise-level returns have languished. The E&P sector hasn’t generated any free cash flow including during the most recent quarter when WTI prices averaged $58 per barrel” – Marathon Oil (MRO) CEO Lee Tillman
Companies are focused on capital discipline
“And in the wake of our sectors’ underperformance there’s been a lot of talk across the industry about capital discipline, with many companies and investors having different visions of what capital discipline should look like.” – Marathon Oil (MRO) CEO Lee Tillman
The industry may be under-investing
“Our peers are at lower levels than they’ve historically spent at, which comes back to this question that you asked earlier about if industry is under investing.” – Exxon Mobil (XOM) CEO Darren W. Woods
“…attrition is happening if capital – if new capital is not being invested, equipment is working hard, it is not being replaced.” – Halliburton (HAL) CEO Jeff Miller
“It doesn’t look like anybody’s building equipment, we are seeing maintenance CapEx where a lot of your competitors are well below kind of when we think what’s sustainable level” – Barclays Bank (BCS) Analyst David Andersson
Energy companies still feel good about long term fundamentals
“…the world’s rising demand for energy must be met. Over the next two decades, the world’s population is expected to grow by 20% and the middle class to nearly double. This is expected to result in a 20% increase in global energy demand….India and China account for half of the new global demand, resulting in increases across most energy sources.” – Exxon Mobil (XOM) CEO Darren W. Woods
“Long-term growth fundamentals for our sector is strong as U.S. shale industrializes and eventually matures. International spending has returned and in my view will continue to grow.” – Halliburton (HAL) CEO Jeff Miller
An upturn favors those who have been aggressive in the downturn
“…to survive the downturns, it’s best not to knee jerk – take knee jerk decisions based on something happening in short-term. And for instance, not reduce the rig count. So I’d rather be able to drill through the cycles. I mean, the majors drill through the cycle. And generally, the best time – I’ve been in the business for over 40 years. Historically, the last 20 years, the downturns have some of the best times to be drilling, because your service costs are really low at that point in time and oil price always comes back” – Pioneer Natural Resources (PXD) CEO Scott Sheffield
Miscellaneous Nuggets of Wisdom:
Investing in having the right product strategy is essential
“We spent the last 12 months, focusing. …I spent 10 years at Google, the one thing I did learn at Google is the first and foremost, you have to get your product strategy right. So poor Lee Klarich, our Head of Product; Nir, our CTO, and many of our product colleagues has spent many a nights sitting with me, writing and rewriting product plans, looking at competition, looking at our strategy, looking at whether we are set up to win or not. And literally re-architecting many of our products and our strategy is to make – we set ourselves up to win.” – Palo Alto Networks (PANW) CEO Nikesh Arora
Company culture:
“…culture is not something you put on a memo and dictate to the organization that this will be our culture. Culture is ultimately what’s borne out of the values of the company. And as we focused on serving others and we focused on serving each other that’s where the culture is born.” – Delta Air Lines (DAL) CFO Paul Jacobson
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