The Transcript 10.07.19

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Succinct Summary:  The fundamentals of the US economy are strong with confident but cautious consumers. The trade war is causing trade flows to shift causing margin pressures as companies struggle to reposition containers and compete for the remaining business. 

Macro Outlook:

The overall economic fundamentals remain strong

“overall fundamentals of the economy have remained strong.” – Lennar Corporation (LEN) Executive Chairman Stuart Miller

“The economy is actually doing pretty well overall….Unemployment rate is at a 50-year low. The job growth is pretty consistent with trend job growth and still above trend job growth but slowing from last year.” – Cleveland Federal Reserve President Loretta Mester

“the industry continues to be – actually quite solid, despite lots of issues flaring up in the news almost daily, that you would think would cause volatility or downside pressure, but we just haven’t seen it…the solid industry is being supported by the consumer who remains very confident. Unemployment is at historic lows, and we have real wage growth.” – Ford (F) Vice President Mark LaNeve

“we’ve had pretty good consumption. Wealth is still pretty good. Personal income is pretty good. So, there are a lot of factors that you would normally think dominant for the consumer that actually still are indicating that we should see strong consumption” – Boston Federal Reserve President Eric Rosengren

As the trade war persists, trade flows are shifting, 

“we have seen a change in trade flows…year-on-year we have seen a drop of 65% reduction of shipments from China to U.S., and a 35% reduction from the U.S. to China – huge, and that has caused an imbalance of the fleet not only for us but for everyone. You have a build-up of tank containers in both China and the United States because of the different trade flows, and that has resulted in huge competition of whatever business is available to reposition those tanks…You also see that we have spent much more on empty repositioning than the last quarter.” –  Stolt-Nielsen (SOIEF) Niels Stolt-Nielsen

Hence, some segments are experiencing margin pressures

“The shift in trade flows is adding margin pressure in some markets where inventory is built up, and ocean freight rates are expected to increase…tighter ocean freight capacity in certain markets.” –  Stolt-Nielsen (SOIEF) Niels Stolt-Nielsen

The costs are being passed on to consumers 

“Good progress is being made in passing cost increments to our customers, so of the contracts that have been renewed into 2020, 50% of them have a full pass-through of costs.-  Stolt-Nielsen (SOIEF) CEO Niels Stolt-Nielsen

“most of the tariffs is reflected in our price increase and we saw just as many users as we thought we were going to previous to that.” – Costco Wholesale Corporation (COST) CFO Richard Galanti

Despite the slowdown in activity, 

“the U.S. market is slightly weaker, reflecting the impact on the ongoing U.S.-China disputes and a general slowdown in the economy.” –  Stolt-Nielsen (SOIEF) CEO Niels Stolt-Nielsen

the overall demand for beverages has not reduced

“we’re not seeing a reduction in demand for our categories on a global level.” – PepsiCo (PEP) CEO Ramon Laguarta

but labour shortages and overall caution persists

“On the labor side of costs, the severity of the labor shortage in the construction industry has not abated” – Lennar Corporation (LEN) President Jon Jaffe

“the overall environment is still cautious, and customers are trying to maintain minimum inventories and ordering with short lead times.” – SMART Global Holdings (SGH) CEO Ajay Shay

Consumer:

Consumers are after smaller packs in beverages

“I think there is a fundamental change in demand or consumers are going for smaller packs. And that’s driving a change in the price per liter of the category and price per unit.” – PepsiCo (PEP) CEO Ramon Laguarta

The housing market is becoming more affordable

“We clearly saw traffic and sales continue to strengthen in the third quarter, as a combination of lower interest rates, together with slower price appreciation, have positively impacted affordability. And that together with low unemployment, wage growth, consumer confidence and economic growth, drove the consumer to return to a more affordable housing market..lower interest rates, together with slower price appreciation, have positively impacted affordability.” – Lennar Corporation (LEN) Executive Chairman Stuart Miller

Costco is having exceptional membership renewal rates

“In terms of renewal rates, at Q4 end, our U.S. and Canada membership renewal rate came in at 90.9%, up 0.2% from 90.7% as of the end of the last quarter. And worldwide, the renewal rate was 88.4%, up from 88.3% a quarter ago. Both of these figures at all-time highs.” – Costco Wholesale Corporation (COST) CFO Richard Galanti

Technology:

Growth in online delivery driving growth in Ford’s van business

“To be a leader in the vans segment and achieve this kind of growth is unprecedented. It connects back to what I mentioned in some of our previous calls about the growing activity we are seeing in e-commerce and the need for delivery vehicles. When you have van leadership, changing market conditions can and do impact the business. In this case, our vans have become a major beneficiary of the growth in e-commerce and the increased need for package delivery vehicles of all kinds.” – Ford (F) Vice President Mark LaNeve

Industrials:

Car industry fundamentals look good

“It has been my experience and despite all the noise when people have jobs, and they feel secure in those jobs and confident about the future then they’re buying vehicles. Also, gas prices and interest rates remain at historically low levels. All of these tailwinds are combining to support our industry to 17 million plus level for what is now the fifth straight year.” – Ford (F) Vice President Mark LaNeve

Customers dealing with a high channel inventory

“now we’re dealing with the customers and more of their products are going through channels, and so definitely there’s a lot of channel inventory out there for them. And so, we are looking at signals from our customers, we expect that that business will start to slowly recover here in 2020, as they start working down their channel inventory issues.” – SMART Global Holdings (SGH) CEO Ajay Shah

Miscellaneous Nuggets of Wisdom:

Asking the difficult questions

“The journey to fundamentally transform our business began several years ago, when we started closely assessing changes across the marketplace and asked ourselves a basic question, what will the wholesale and retail food businesses look like a decade out? We saw the acceleration of consolidation, changing consumer buying habits, the proliferation of better for you products, fewer store openings and retailers looking to combine their distributor relationships to improve their cost.” – United Natural Foods (UNFI) CEO Steve Spinner

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