The Transcript 03.02.20

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Succinct Summary:  Worries about the impact of the Coronavirus are at the top of mind for management teams. The positive thing is activity is picking up in China and the impact is not expected to be long-term. Short -term worries persist, but elections may be the bigger long term risk to US markets in 2020.

Macro Outlook:

Everyone is focused on the Coronavirus

“All of our hearts go out to all of the families around the world who have been impacted by the coronavirus and certainly, the world governments and their impact to contain what is possibly going to be a serious pandemic.” – Salesforce (CRM) Co-CEO -Marc Benioff

It’s had a massive impact on travel in China.  Marriott saw a 90%(!) decline in RevPAR there.

“We began to see the impact of the coronavirus on our business in mid-January with occupancy declines gradually spreading from Wuhan to other markets in the Asia Pacific region. In February RevPAR at our hotels in Greater China declined almost 90% versus the same period last year.” – Marriott International (MAR) CEO Arne M. Sorenson

So far there hasn’t been that large of an effect in the US

“we’ve got very very few cases in the U.S. Obviously we’re all watching that to look at. But we’re not really seeing a measurable impact yet.” – Marriott International (MAR) CEO Arne M. Sorenson

Businesses are most worried about the virus’ effect on their supply chains

“We have seen a slowdown, a product that’s flowing out of China, nothing concerning yet. And we’re watching this one very-very carefully… Obviously, the biggest question is going to be about supply chain and what are the effects of supply chains“- Macy’s (M) CEO Jeff Gennette

But people are going back to work in China

“we’re seeing that many of the cities around China, people are actually going back to work. We’re seeing some of the shops in Beijing are opening up. When you’re going on the freeway now, you’re actually seeing traffic jams versus, say, two, three weeks ago, where the roads were pretty empty…we started seeing activity pick up a little bit two weeks ago. And then also, this week, we’re also seeing continued pickup.”- Baidu (BIDU) CFO Herman Yu

“Our major offices in China are now open, and we expect to ramp up normal staffing levels over the next several weeks.” – Fluor (FLR) CEO Carlos M. Hernandez

“So I can also tell you from our daily monitoring of the supply chain and our daily interaction with customers through our power systems business that operations in China are getting back to normal. Our key suppliers, we have a handful of key suppliers in China, the suppliers are all back at work.” – Rolls-Royce (RYCEF) CEO Warren East

“When you look at the parts that are done in China, we have reopened factories, so the factories are working through the conditions to open. They’re reopening” – Apple (APPL) CEO Tim Cook

“So we see that our customers are coming back to work, and we monitor the container retrievals from the container yards. So there, we see a growth of 50%, 60% week-over-week. So people are starting to retrieve containers again to their production sites. These need to be filled now with produced goods or goods produced in the different manufacturing sites. And then eventually, our bookings are increasing as well.” – Kuehne+ Nagel International (KHNGF) CEO Detlef Trefzger

The next few weeks will give us a much better picture of the trajectory of the outbreak outside of China

“Currently, the external consensus is that the outbreak will peak over the coming weeks. And data suggests that, that is true. The numbers for newly infected cases on a daily basis have been coming down over the last three weeks. So that seems to be the trend that we are on. And that means that we could expect a trajectory similar to the one experienced during SARS with – but with a larger magnitude, of course, because China’s impact on global supply chain is just much bigger today and the China’s role in the global economy is much bigger…this prognosis certainly implies that there will be no new outbreaks and certainly no big outbreaks in other countries outside China. So the next two to three weeks will really tell us what track we are on.” – A.P. Møller – Mærsk (AMKAF) CEO Søren Skou

Eventually it will end (hopefully well)

” I think even though that we would expect this will be messy for the next few weeks if not maybe the next few months we’d go back to what we’ve said before and that is that this will end. It’s clear that it will end.” – Marriott International (MAR) CEO Arne M. Sorenson

” we’ve looked at what happened during SARS. I lived there during H1N1 and SARS was clearly a sharp drop, and then a sharp recovery. And then what I saw during H1N1 and other times of China, the key thing to remember is the Chinese government’s ability to stimulate economic growth and activity is unlike any other country.” – Intercontinental Hotels Group (IHG) CEO Keith Barr

Elections are probably a bigger long term concern than Coronavirus

“as we talk to clients, they are obviously concerned about the coronavirus, but I don’t – they don’t – I don’t – they don’t see that as a long-term impediment going forward with their capital expenditure plans.” – Fluor (FLR) CEO Carlos M. Hernandez

“volatility will remain with us, so long as the corona situation is unresolved….we’ll continue to monitor both the corona situation, as well as the upcoming elections ” – Third Point Reinsurance (TPRE) CEO Daniel Loeb

Financials:

Shake up continues in brokerage business as Morgan Stanley acquires E*Trade

“You know, it gives us access to a different demographic. They also have a heavy trading demographic, which we respect and will support, and nothing will change for those folks. So, and then, finally, you know, this platform could be a platform to take internationally. You know, I’ve been very interested in having a digital platform outside the U.S., rather than trying to rebuild massive financial adviser networks.” – Morgan Stanley (MS) CEO James Gorman

Consumer:

Macy’s has shut down 40% of stores in the last 5 years. Only left in A or A+ malls.

“So we’ve shut about 40% of our total stores over the last five years or our plans what we just announced and we believe this is the portfolio that are mostly in A and A plus malls that deserve a level of investment because we believe these malls are going to be vital destinations for generations to come.” – Macy’s (M) CEO Jeff Gennette

The US travel market is 95% domestic

“the U.S. market for example which just as a reminder is basically 95% to 96% domestic travel. So all business in the United States coming from international markets is in the 4% range maybe 4.5%.” – Marriott International (MAR) CEO Arne M. Sorenson

US leisure travel is still outpacing business demand

“We expect leisure demand will continue to outpace business transient demand as there has yet to be a step-up in business investment levels.” – Marriott International (MAR) CEO Arne M. Sorenson

The worries in the retail sector

“If you look to the retail sector, all of the growth is in e-commerce. Direct-to-consumer brands are growing, and our clients are concerned about the growth of Amazon and Alibaba and what it means for how they can reach the consumers, both in terms of threat, but also in terms of opportunity, and all these areas are areas where we are advising our clients.” – WPP (WPP) CEO Mark Read

Technology:

Google will stop supporting third-party cookies in Chrome

“So Google announced that they’ll stop supporting third-party cookies inside Chrome. That’s a position that’s already even taken by Safari. And if you look at prices in programmatic auctions on Safari, they’re lower than they are on Chrome, already, because there’s less data, there’s less value in those impressions. So I think programmatic media will be negatively impacted by this change. And that will make life harder for intermediaries, ad networks, affiliate networks, particularly people that rely on conversion tracking and cost per attribution, or cost per click pricing.” – WPP (WPP) CEO Mark Read

Miscellaneous Nuggets of Wisdom:

This week, we read Warren Buffett’s 2019 Shareholder Letter and watched his CNBC Interview. These were some nuggets of wisdom we picked: 

  • On long-term thinking

“I don’t have the faintest idea what our businesses will be doing six months from now or 12 months from now. I do think that not only our businesses but American business generally will be doing fabulously better 30 years from now or 20 years from now. And the– long-term is very– in my view is very easy to predict in the general way…as desirable as it might be to know what was gonna happen ten minutes from now that’s just– not something I’ll ever be able to master. So fortunately I can come to a pretty firm conclusion that 20 or 30 years from now American business and probably all over the world will be far better than it is now.” –  Berkshire Hathaway (BRK) CEO Warren Buffett

  • On the power of Focus

“We are all duds at one thing or another. For most of us, the list is long. The important point to recognize is that if you are Bobby Fischer, you must play only chess for money.” – Berkshire Hathaway (BRK) CEO Warren Buffett

  • Quoting Keynes on the importance of retained earnings

“Well-managed industrial companies do not, as a rule, distribute to the shareholders the whole of their earned profits. In good years, if not in all years, they retain a part of their profits and put them back into the business. Thus there is an element of compound interest (Keynes’ italics) operating in favour of a sound industrial investment. Over a period of years, the real value of the property of a sound industrial is increasing at compound interest, quite apart from the dividends paid out to the shareholders.” – Berkshire Hathaway ( BRK) CEO Warren Buffett

Full transcripts can be found at Seeking Alpha, the Motley Fool and CNBC.