The Transcript 09.16.19

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Succinct Summary:  Global growth has slowed and some companies think that the dark clouds of slow growth will linger with us a bit longer. Others are revisiting their playbook in the Great Recession just so as to be prepared if a downturn happens. 

Editor’s Note: The Transcript will be off next week but will be back on Monday, September 30th.

Macro Outlook:

The dark clouds of slowing global growth will persist for a while

“…you are starting to see some places where the slowing is beginning to hit and I mentioned Germany as an example for Europe. But the channel slowness that we have seen in a few places does definitely continue… I think, as we look out, I think there’s going to be continued cloud for some time.” – Honeywell (HON) CFO Greg Lewis

Specifically, growth in Europe remains subdued

“Incoming economic data and survey information continue to point to moderate but positive growth in the third quarter of this year. This slowdown in growth mainly reflects the prevailing weakness of international trade in an environment of prolonged global uncertainties, which are particularly affecting the euro area manufacturing sector.” – European Central Bank President Mario Draghi

“We are starting to see a bit more softness in Europe. And Germany, in particular, is starting to slow down for us here so we’re being a little bit cautious in that regard.” – Honeywell (HON) CFO Greg Lewis

Positively, consumer spending is still strong

“…we still see consumer spending really strong….the consumer continues to be strong so the caution that we see is really on the commercial side…So the consumer, despite the headlines we all get up and read every day, looks pretty good.” – American Express (AXP) CFO Jeffrey Campbell

And pricing in some segments has improved

“…it doesn’t hurt that we have lots of tailwind with the pricing environment considerably improved from this time last year.” – American International Group (AIG) CEO Brian Duperreault

Some companies like Honeywell are revisiting their recession playbook

” I guess one thing that I’ll tell you from the 2008, 2009 time frame when we went through the last recession, we literally created a playbook….we stepped back after the recession and we spent some time as a leadership team just reflecting on what happened, what we did, which things were effective, what would we do differently. That actually turned into a training regimen that we gave to our teams. So when we talk about having a playbook and dusting it off it’s a literal playbook.” – Honeywell (HON) CFO Greg Lewis

International:

There’s no real recovery in sight for automobiles in China

“It’s also tough for us. So the world markets are really some are really in decline. China there’s no real recovery in sight so far which is a very important market for us. So it will be tough” – Volkswagen (VLKAF) Chairman Herbert Diess

The ECB is ramping up easy money policies

“While labour cost pressures strengthened and broadened amid high levels of capacity utilisation and tightening labour markets, their pass-through to inflation is taking longer than previously anticipated…we decided to lower the interest rate on the deposit facility by 10 basis points to -0.50%…the Governing Council decided to restart net purchases” – European Central Bank President Mario Draghi

Financials:

It’s still a seller’s market for M&A

“I mean just to be clear, we’re not waiting for a recession and then we’re going to spend money. I mean, if we see a great opportunity, we’ll take advantage of it. …We still think it’s a bit of a seller’s market out there. Even though markets have dampened a little bit people are still holding on to their multiples.” – Honeywell (HON) CFO Greg Lewis

Consumer:

Disney owns the very young ones

“It’s no secret to anybody in this room that Disney owns the very young ones. We don’t try to compete for that. We have something for the younger sibling in the family group to do but we are not going to try to go head-to-head. We would rather focus on where we have strength which is in a diverse audience, which is in, not thrill.” – Comcast (CMCSA) Chairman & CEO Universal Parks & Resorts Tom Williams

Technology:

Tech spend used to be cyclical but now it’s a priority

“…in the past, if the business got a cold, tech got the flu, right? We accentuated it. If the business growth rate dropped by a point, tech went negative 5. That kind of effect. Where now, it’s a business priority, line of business, transforming, new customers, new user experiences. So, wherever GDP is, tech is higher. And software tech is higher than that, right, inside of it than cloud service as a software. So, if GDP languishes a bit, hey, tech will languish a bit, but it’s comfortably above GDP. It’s not going to over-accentuate it. And software tech and cloud is comfortably above that here” – VMware (VMW) CEO Patrick Gelsinger

Biometrics are the future of security

“Consumers keep very dumb and simple passwords, which leads to attacks. So we’ve been very focused on introducing biometric technologies to payments” – Mastercard (MA) CEO Ajay Banga

Healthcare

The pharmacy customer is very loyal and profitable

“If you look at the pharmacy customer, that customer is incredibly loyal to Kroger and when you look at their total spend, it’s a fantastic customer to have. When you look at the pharmacy business overall, it continues to be very, very profitable relative to the assets invested and obviously year-on-year there is headwind, but when you look at the total business, it still continues to be a strong business.” – The Kroger (KR) CEO Rodney McMullen

Industrials:

Aerospace is still strong

“Aerospace continues to be very robust overall. The programs that we have are still running nicely. The aftermarket still continues to be robust so Aerospace is doing quite well.” – Honeywell (HON) CFO Greg Lewis

Materials & Energy:

Aluminum inventories are low

“We’re projecting inventories to be at approximately 56 to 59 days of inventory in the aluminum supply chain by the end of the year, which is the lowest it’s been since the global financial crisis.” – Alcoa (AA) Executive VP & CFO William Oplinger

Miscellaneous Nuggets of Wisdom:

Don’t lose the customer and you’ll figure out how to be profitable

“I always tell everybody, job one is to make sure we don’t lose the customer; job two is, we’ll figure out how to make it profitable and we’re indifferent whether somebody shops digitally with us or in a store” – The Kroger (KR) CEO Rodney McMullen

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