The Transcript 03.30.20

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Succinct Summary: It is quite clear by now that we are in a recession. The hope is that this is a different kind of recession and that we will be out of it quickly. But that depends on the trajectory of containing the virus. The good news is that things in China look better after containing the virus.

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Macro Outlook:

We are definitely in a recession

“We may well be in a recession” – Federal Reserve Chair Jerome Powell

Some are saying it could be worse than 2008

“…the outlook for global growth: for 2020 it is negative—a recession at least as bad as during the global financial crisis or worse.” IMF Managing Director Kristalina Georgieva

Others are optimistic that we will rebound in the second half

“We are modelling an improvement in the trajectory of economic activity later into the second half of calendar 2020, with a further rebound in economic momentum into 2021.” – Micron Technology (MU) CEO Sanjay Mehrotra

“We know that economic activity will decline probably substantially in the second quarter, but I think many expect and I would expect the economic activity to resume and move back up in the second half of the year” – Federal Reserve Chair Jerome Powell

“In our best scenario, we start to see some improvements early in the second half with no improvement in our worst-case scenarios through to ’21.” – IHS Markit (INFO) CEO Lance Uggla

There has certainly been a massive amount of stimulus
“I signed the single biggest economic relief package in American history and I must say, or any other package…It’s a 2.2 trillion dollars [relief package]. ” – US President Donald Trump

“While great uncertainty remains, it has become clear that our economy will face severe disruptions. Aggressive efforts must be taken across the public and private sectors to limit the losses to jobs and incomes and to promote a swift recovery once the disruptions abate.” – Federal Reserve

“These are extraordinary circumstances. Many countries are already taking unprecedented measures.” – IMF Managing Director Kristalina Georgieva’

And companies are reassuring employees that their jobs are safe

“We don’t want our teammates to worry about their jobs during a time like this. We told them all, there’s no issue, you’re all going to be working now through year-end. No layoffs, no nothing.” – Bank of America (BAC) CEO Brian Moynihan
“…we want to commit to you that there will not be a reduction in force at Morgan Stanley in 2020…your jobs are secure.” – Morgan Stanley (MS) CEO James Gorman

“Yesterday I pledged to my 20,000 Visa colleagues that we will have no COVID-19 related layoffs in 2020. There is enough sadness in the world and already too many families impacted by job losses. I have no interest in contributing to that” – Visa (V) CEO Alfred Kelly

“Salesforce is pledging to its workforce Ohana not to conduct any significant layoffs over the next 90 days.” – Salesforce (CRM) CEO Marc Benioff

But this is different from other recessions

“…but again I would point to the difference between this and a normal recession. There’s nothing fundamentally wrong with our economy. Quite the contrary. The economy performed very well right through February. We’ve got a 50-year low in unemployment for the last couple of years, so we start in a very strong position. This isn’t something that’s wrong with the economy. This is a situation where people are being asked to step back from economic activity, close their businesses, stay home from work” – Federal Reserve Chair Jerome Powell

“Well, this is a very different animal than the Great Depression. The Great Depression, for one thing, lasted 12 years. It came from human problems, monetary and financial shocks that hit the system, hit the global system. This has some of the same feel, some of the feel of panic, some of the feel of volatility you’re talking about. But it’s much closer to a major snowstorm or a natural disaster than it is to a classic 1930s style depression. So, it’s quite different.” – Federal Reserve Former Chair Ben Bernanke

The trajectory of the economy depends on the trajectory of the virus

“…we expect recovery in 2021. To get there, it is paramount to prioritize containment and strengthen health systems—everywhere. The economic impact is and will be severe, but the faster the virus stops, the quicker and stronger the recovery will be.” – IMF Managing Director Kristalina Georgieva

“Very hard to say precisely when that will be, and it will really depend on the spread of the virus. The virus is going to dictate the timetable here….Dr. Fauci said the virus is going to set the timetable. That sounds right to me” – Federal Reserve Chairman Jerome Powell

“…whether or not we’ll snap back depends on a couple of things. Depends first of all on the course of the virus. Will our social distancing strategy work? Will the virus begin to die down? Will it perhaps be less dangerous in warmer weather? Will we bend the curve enough that the hospital system can handle the number of cases? So, the length of time that we’re shut down will be important.” – Federal Reserve Former Chairman Ben Bernanke

There are some signs that mobilization is helping to slow the spread

“We have seen in a number of countries – and the Director-General had a very important meeting today with many ministers who shared what works and what works is this; what works is case finding, is contact tracing, is mobilising your population and communicating with your population, it’s making sure that you have arrangements in place so that people who need to be cared for can be, so that healthcare workers are protected, so that PPE is used appropriately and they’re saved for front-line workers and utilised by those that need it most – World Health Organization COVID-19 Response Technical Lead Dr. Maria Van Kerkhove

Things will eventually get better

“This is going to be tough and in many parts of the world I know it is going to get worse before it gets better, but it will get better.” – Booking.com (BKNG) CEO Glenn Fogel

Stay Safe

“People are suffering all around the world. And some of you might be worried about a friend or family member who is personally affected by this. And if so I truly hope they recover quickly. And I hope everyone else stays safe.” – Steelcase (SCS) CEO James Keane

International:

Containment took 5-6 weeks in China, Japan and South Korea

“…we’re looking at things through the lens of four phases to this; containment of the outbreak, the first; second, recovery period when stores reopen; third, normalization when things get back to growth from the prior year; and then fourth return to growth. And the data from actually China, Japan and Korea was fairly consistent. Containment took five to six weeks.” – Nike (NKE) CEO John J. Donahoe

Manufacturing  in China is approaching full capacity and retail is opening back up

“…all three markets [China, Japan and Korea] are through what we’re calling recovery that is retail is opening back up, consumers are back on the streets and we’re seeing, as we move into normalization, retail traffic is coming back. Consumers are in the stores. Today, nearly 80% of our stores in China have reopened with more coming back online every day. In fact, just last week, we reopened our first store in the Wuhan area and the results are encouraging.” – Nike (NKE) CEO John J. Donahoe

“…most of the factories in China that we work with are operational and approaching full capacity as the virus has leveled off there.” – At Home Group (HOME) CFO Jeffrey R. Knudson

“Already China is returning..The domestic travel is returning. They are talking to us about future orders. I really do believe when we get through the curve and we starting getting to the other side, this economy will slowly, steadily recover. I just want everybody to be ready for it” – Boeing (BA) CEO Dave Calhoun

“We are also encouraged to see manufacturers in China increasingly returning to full production, and we have recently started to see China smartphone manufacturing volumes recover.” – Micron (MU) CEO Sanjay Mehrotra

“China (from our point of view) has recovered” – Huawei’s Consumer Business Group CEO Richard Yu

“The vast majority of our stores in China and most of Asia are currently operating and showing improved performance each week since reopening.” – Lululemon Athletica (LULU) CFO PJ Guido

“All our stores are now open in China except for one in Wuhan, which actually we just received notification that it will be opening next week. So we will have all doors open next week in China which I think is positive and continue sort of the positive trend that’s is happening in that market place with the COVID-19” – Lululemon Athletica (LULU) CEO Calvin McDonald

The new normal in China and Asia is wearing masks and social distancing even at work

“…we’ve experienced this already in China, where people are coming back to the offices and people are coming back to the factories and business is beginning to resume. Although it is important to note that it’s not coming back to the way it was before, not exactly. So as people come back, they’re far more aware of infection control, they’re far more aware of social distancing protocols. There’s not a lot of gatherings of people…I think we enter a kind of a period of new normal.” – Steelcase (SCS) CEO James Keane

“Today, our people are mostly back in the offices and they managed this through a very serious use of social distancing, hands washing, use a mask. People that don’t wear the masks are shunned at in Asia and the ones that wear them are respected. We have the opposite problem here in the U.K., and I think you have it in North America…people are very careful about their social distances and cleanliness in terms of masks and hands but they’re back working together” – IHS Markit (INFO) Chairman & CEO Lance Uggla

But the Chinese economy will be weaker for a while

“I’m sure the overall Chinese economy will be weaker for a while than it was. I’m not saying we’re back to normal yet, but it’s perhaps not as negative there as you might think. That said, we don’t know what the experience in the rest of the world will be like China.” – Steelcase (SCS) CEO James Keane

Emerging markets need help as they see unprecedented capital outflows

“…many emerging markets and low-income countries face significant challenges. They are badly affected by outward capital flows, and domestic activity will be severely impacted as countries respond to the epidemic. Investors have already removed US$83 billion from emerging markets since the beginning of the crisis, the largest capital outflow ever recorded. We are particularly concerned about low-income countries in debt distress” – IMF Managing Director Kristalina Georgieva

“African countries, by contrast, lack the wherewithal to make similarly meaningful interventions. Yet if the virus is not defeated in Africa, it will only bounce back to the rest of the world” – Ethiopia Prime Minister & 2019 Nobel Peace Prize Laureate Abiy Ahmed

Consumer:

Customer demand for grocery items driving mid-teens QTD comps for Grocery Outlet

“Beginning in March, we saw customer demand both traffic and ticket beginning to build in conjunction with concern surrounding the coronavirus. As a result, comp sales increases have been significant across regions. And as we’ve discussed, the entire organization is working hard to satisfy customer demand. With less than one week remaining in our fiscal first quarter, we are currently standing at a quarter-to-date comp, which is in the mid-teens.” – Grocery Outlet (GO) CFO Charles Bracher

But the trend will moderate soon or even decline as pantries get full

“…elevated customer demand as shoppers are in the store stocking up their pantries, ostensibly, those trends will moderate at some point, as again the refrigerators and pantries are full. And then, on the backside of that, there could be a negative impact as the shoppers work through all that inventory they’ve gotten at the home.” – Grocery Outlet (GO) CFO Charles Bracher

Homebuilding demand held steady the first two weeks of March then slowed.

“…demand held steady for the first two weeks of March with our net orders up 7% relative to the comparable prior year period. As news of the Coronavirus intensified and we temporarily closed our sales centers, as I mentioned earlier. Traffic and sales slowed in the third week of March, with net orders now down a cumulative 5% quarter-to-date as compared to the prior year period.” – KB Home (KBH) CEO Jeff Mezger

Social distancing is pushing out production times

“Because of the protocol, and the social distancing there’s fewer subs working in the homes today. So we are expecting that our – as we get deeper into the production cycle, build times will extend a little bit in that you can’t have three or four different contractors in the home, at any one time” – KB Home (KBH) CEO Jeff Mezger

Technology:

Remote working trend is probably here to stay

“And it doesn’t mean that remote work or work at home will go away. I think it will take people who have gotten used to it, have learnt how to do it better.” – Steelcase (SCS) CEO James Keane

But working from home may not be for everyone

“…as it relates to what that means for offices, first of all, we learned that – in China that the idea of working from home when everyone is forced to, is not as great as people might think it is. So we know from our own research and from again the experiences in China that there’s a lot of issues with that, that people experience loneliness, that they experience a sense of separation. Some of the work can be done without really any interruption, but there’s a lot of work that can’t be done as productively when people aren’t together. Studies by other people have pointed out the same thing, as significant loss in productivity when people are working remotely. And so I think everyone is going to be glad to be able to connect together.” – Steelcase (SCS) CEO James Keane

Seeing increases in demand for PCs/Tablets/Notebooks to support online learning

“Looking to the third quarter, as these trends also take shape worldwide, data center demand in all regions looks strong and is leading to supply shortages. In addition, we are seeing a recent increase in demand for notebooks used in the commercial and educational segments to support work-from-home and virtual learning initiatives occurring in many parts of the world.” – Micron (MU) CEO Sanjay Mehrotra

“…our PC/tablet demand has increased a lot, and yes people need more PCs or tablets for kids, for family, or for work. But we also see the smartphone is getting more important, with people spending time at home. We still feel the demands on us to launch new flagship devices, with 5G and improved camera features. Our devices also work together as one seamless solution – such as PC and smartphone. We feel we still have a strong demand.” – Huawei’s Consumer Business Group CEO Richard Yu

Some things are hard to do virtually

“While we can do virtual implementation for many of our products, our clients may not have the technology to enable us to execute successfully.” – FactSet Research Systems (FDS) CFO Helen Shan

Industrials:

It’s survival of the fittest for the airline industry (or most connected to government aid)

“In this very difficult period, it will only be the survival of the fittest”- Qatar Airways CEO Akbar Al Baker

Miscellaneous Nuggets of Wisdom:

You must strive to keep morale high in a crisis

“…it is morale-boosting that jobs are assured, that they’re not being laid off in bad times. So, I think the psychological effect of assuring the staff is more important than the dollars and cents. How much do I save? $10 million? But the impact of a morale drop is much more serious. I take the point that you must keep the morale high in a crisis, just as in a battle.” – Changi Airport Group Chairman Liew Mun Leong

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