The Transcript 05.04.20

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Succinct Summary: This week was the height of earnings season and it was a little surreal to see the magnitude of revenue declines in some industries. These declines weren’t surprising though and many companies said that there were signs of recent stabilization. However, markets have pinned hopes on a V shaped recovery. If we don’t get a V there could be a second wave of volatility. The most concerning data point from this week is that China and Italy are experiencing U shaped recoveries.

Macro Outlook:

It’s still tough to fathom the magnitude of the economic declines

“…we’re continuing to see record low passenger demand and revenue trends here in April and May, with operating revenue down roughly 90% to 95% year-over-year and single-digit load factors.” – Southwest Airlines (LUV) President Thomas Nealon

“…since the third week of March when we initiated widespread closures of stores in the U.S. we’ve seen the comps which include the impact of closures based on how we’ve defined comps for this period of time, it’s been fairly steady in the range of minus 60 to minus 70.” – Starbucks (SBUX) CFO Pat Grismer

“…in the United States, physician office visits across various areas of medicine are currently running down in the neighborhood of 70% versus pre-COVID-19 levels. – Merck (MRK) CFO Robert Davis

“We’re going to see economic data for the second quarter that’s worse than any data we’ve seen for the economy.” – US Federal Reserve Chair Jerome Powell

It’s different from the financial crisis. It’s more severe

“One is the early demand patterns, which we see coming out of the China market, some European markets clearly point toward the U-shape. And it’s very different from financial recession because the depth of the crisis is more severe than financial crisis”Whirlpool (WHR) CEO Marc Bitzer

“…this is very different from ’08, ’09 for a bunch of reasons. I mean, first and foremost, it hit the entire economy, and it’s very dependent on the psychology of the consumer economic actors as to the rate and speed of the recovery.” – Lazard (LAZ) CEO Kenneth Jacobs

Markets are hoping that the economic engine has been idled, not derailed

“In 2008 and 2009 our economic train went off the tracks, and there were some reasons why the roadbed was weak in terms of the banks. This time we just pulled the train of the tracks and put it on a siding.” – Berkshire Hathaway (BRK) CEO Warren Buffett

“This is an exogenous event that, you know, it happened to us. It wasn’t because there was something wrong with the economy.” – US Federal Reserve Chair Jerome Powell

There is some evidence to support this. We are starting to see some leveling off of declines

“…you saw our decline of between 50% to 55% towards the end of the quarter in terms of volume in the last several weeks of March, and we’ve seen that kind of level off” – Laboratory Corporation of America (LH) CEO Adam Schechter

“…we’re seeing some early signs at this point that users are returning to more commercial behavior” – Alphabet (GOOG) CFO Ruth Porat

“It is too early to tell if this uptrend in the second-half of April is the start of a recovery…The reason it’s different in the last two weeks of April, is what we have seen is that as some of these stimulus payments have come through, people are prioritizing pent-up demand in areas like automotive, like home improvement, and they’re not spending it on lower ticket categories, like entertainment and restaurants.” – Visa (V) CEO Vasant Prabhu

“…we’re starting to see a little bit of that stabilization impact come through, for example, in markets like Italy, Germany, Poland, Australia – Austria.” – Mastercard (MA) CFO Sachin Mehra

“…we’ve seen a strong improvement in comparable sales over the course of the month of April.” – Restaurant Brands International (QSR) CEO Jose Cil

“We are already seeing green shoots suggesting that economies and industries around the world are either rebooting or preparing to reboot in the coming weeks.” – Stanley Black and Decker (SWK) President & CEO James M. Loree

“The high-yield bond market has begun to reopen, especially at the higher end of the speculative grade rating scale” – Moody’s (MCO) President & CEO Raymond W. McDaniel, Jr.

Especially give how massive the stimulus have been

“Altogether, stimulus programs could equate to 20% or more of U.S. GDP” – Blackstone (BX) CEO Steve Schwarzman

And that we can only stay in crisis mode for so long

“I like everybody else was a news junkie coming when this thing first broke and you turn on the President’s briefing and the world’s going to end. And so you kind of get hunkered down mentality and as news has come out more and more and more it just you get a sense that it’s not going to be as bad as the initial thought might have been…the mood of the country seems to have improved significantly over the last 30 days” – D.R. Horton (DHI) President & CEO David Auld

However, our desire for normalcy may be outpacing reality. This may be the rare time that we don’t get a V shaped recovery.

“I remain very concerned that this health emergency and therefore the economic fallout will last longer than people are currently anticipating. And while there are massive societal costs from the current shelter-in-place restrictions, I worry the reopening in certain places to quickly before infection rates have been reduced to very minimal levels, will almost guarantee future outbreaks and worse, longer-term health and economic outcomes.” – Facebook (FB) CEO Mark Zuckerberg

“…realistically, we just can’t expect that things are going to be back to normal in 6 or 12 months. I don’t believe that for a minute.” – Southwest Airlines (LUV) Chairman & CEO Gary Kelly

“…what I would exclude right now, I would say, very low probability, the V-shaped recovery.” – Whirlpool (WHR) CEO Marc Bitzer

If there’s a V we can all high-five, but it’s probably not likely.

“And if it’s a V-shape recovery, well, we’ll all high-five each other and we’ll go buy some more airplanes. But I don’t think that’s the most likely outcome right now” – Southwest Airlines (LUV) Chairman & CEO Gary Kelly

Especially if the Fed starts to slow its support for markets

“Our purchases have helped market conditions improve substantially in recent weeks. In light of this improvement, we have slowed our pace of purchases.” – US Federal Reserve Chair Jerome Powell

“We do not make grants; we can’t make grants…I just want to be clear on that. We, you know, we can do what we can do, and we will do it to the absolute limit of those powers…We will keep using our authorities. But there are authorities that we don’t have.” – US Federal Reserve Chair Jerome Powell

Eventually, everything will get back to normal, right?

“I’m not willing to accept yet that the flight experience is forevermore changed. So I don’t agree with that. For this year and until this pandemic is behind us, oh, yes, I think we’re going to be living and operating differently. Going to a restaurant is going to be different. So – but at some point, this will get behind us, and we will get back to normal.” – Southwest Airlines (LUV) Chairman & CEO Gary Kelly

“It’s now clear that once the emergency is past, the world will not look the same.” – Alphabet (GOOG) Sundar Pichai

If the economy doesn’t recover as quickly as people hope, capital markets will likely see a second wave of volatility

“There was an initial burst of activity around restructuring with the advent of the crisis that involved a lot of companies, which were already in a level of distress going into the crisis. That was in the oil and gas sector, some in the retail sector. There was a lot of activity around that very quickly. Then you saw the massive actions of the Fed, which have taken some of the liquidity concerns off the table and bought some time for companies…more activity picking up now as people come to grips with the fact that they still are going to have liquidity problems because this economy may not recover as quickly as people hoped. And so that’s what I would almost call the second wave. And then there’s likely to be more that follows that.” – Lazard (LAZ) CEO Kenneth Jacobs

“…we have seen before during times of extreme market stress, investors de-risk until the event is more clearly defined. When they are better able to assess risk, they reengage. Tragically, this is an ongoing crisis, and we expect to see new permutations of volatility as it continues to evolve.” – CBOE (CBOE) CEO Edward Tilly

International:

China is experiencing a U shaped recovery

“As we monitor the development of COVID-19 cases and its related impact on appliance demand within China, Italy and the U.S., we’ve begun to see similar U-shaped demand patterns emerge. China, we see clear signs of a U-shape demand pattern” – Whirlpool (WHR) CEO Marc Bitzer

“If you looked at the low point for lodging occupancy, it was certainly below 20. It’s now around 35%. So, it’s moving up, but not at a rapid pace. Let’s just say it fell faster than it’s moving up. Hence, my opening comment that we expect more of a U recovery than a V.” – Ecolab (ECL) CEO Doug Baker

“…let’s stick to the idea of with China being in more in the normalization phase than the rest of us. There is a long journey for China through that phase. It’s not done, they’ve just begun. But their local travel has begun.” – Mastercard (MA) CFO Sachin Mehra

“…store traffic is obviously up from where it was in February, but it is not back to where it was pre the lockdown.” – Apple (AAPL) CEO Tim Cook

“For the month of April, comparable store sales in China were down approximately 35%, marking strong improvement from a weekly low of minus 90% in mid-February.” – Starbucks (SBUX) CEO Kevin Johnson

“In China, approximately 25% of restaurants were closed in early February. By the end of March, substantially all restaurants had reopened. However, the market continues to experience a reduced level of demand as consumers have not fully returned to their pre-COVID routines” – McDonalds (MCD) CFO Kevin Ozan

Italy is also seeing a U

“…while Italy’s trends are not as mature as China’s, the demand patterns are well in line…early signs point to similar U-shape demand trend as seen in China and Italy.” – Whirlpool (WHR) CEO Marc Bitzer

Meanwhile, China is still braced for a second wave

“China is still, while they say instances, they’re being very cautious in terms of allowing complete freedom of the population because I think they’re very weary of a double infection.” – Ecolab (ECL) CEO Doug Baker

Keep in mind that forex will be one other headwind to US earnings

“Other items to keep in mind. Foreign exchange is expected to be a 1 ppt headwind to revenue for the quarter and the year.” – Mastercard (MA) CEO Sachin Mehra

“…the crisis did trigger a sharp strengthening of the US dollar against key foreign currencies, creating a much larger than expected negative impact on our reported results.” – Kellogg (K) Senior VP & CFO Amit Banati

“On the latter point alone, since the WHO declared COVID-19 as a pandemic, we have seen in the US dollar appreciate 5% relative to the foreign currencies we do business in” – Facebook (FB) CFO David Wehner

Emerging Markets are definitely going to slow down

“…emerging markets slowdown. We’re already seeing it in large markets like Nigeria where we have a big business. You think about oil-based economies and nobody ever imagined oil would be where it is right now. Well, that’s going to impact these economies. And so we think we can manage through. We’ve got the right playbook, we’ve been here before, but it’s going to have an impact. Emerging markets are going to slow down.” – Kellogg (K) CEO Steven Cahillane

Financials:

There are a lot of bottom feeders in private markets

“…there’s a lot of bottom feeders out there looking for buying opportunities.” – Colliers (CIGI) Chairman & CEO Jay Hennick

But sellers haven’t accepted a new reality yet

“We’re seeing pipelines not as buoyant in terms of new buildings for sale, primarily because the new reality yet has not set in with landowners and even buyers. What is the value of the building going to be worth in the future? I have a shopping mall. The shopping mall is a good shopping mall except that 40% are less of the tenants paid.” – Colliers (CIGI) Chairman & CEO Jay Hennick

Buyers mark to market faster than sellers

“In our experience, financial buyers mark-to-market faster than sellers, and thus, there is likely to be reduced traditional deal activity for several quarters or more until some of this uncertainty abates” – Carlyle (CG) CEO Kewsong Lee

It will take some time for private markets to work through economic dislocations

“Yes, it’s too early. What we’ve done in real estate so far has basically been on the screen. We talked about it. We bought debt at a discount. We bought some public equities. That’s really the initial phase. Then the next thing you’ll see is some rescue capital needs, and we’ll start to address some of that. And then after sort of the weight of this comes through the system, in some cases, there’ll be special servicers you take over assets.People will run through their reserves, then you’ll begin to see assets trade. We saw that happen really, it took a year after the 2001 downturn. It took a year basically after 2008” – Blackstone (BX) CEO Steve Schwarzman

Consumer:

Visa gave a good summary of consumer spending trends in April

“One-fifth of U.S. payments volume is full in drugstores along with Walmart, Costco and target. This is the only category still growing up approximately 20% in April, and essentially all this growth is coming from online spending up over 100% in the last two weeks of April, assisted by the adoption of curbside pickup and delivery.

Another one-fifth of U.S. [transaction volume] is in categories that are less discretionary, like telecom, utilities, insurance, and business supplies and equipment. These are holding up relatively well, shrinking less than 15% at the end of March, and have recovered to flat with the prior April.

A third of our U.S. payments volume is in categories that are declining between 15% to 50%, such as retail, automotive, healthcare, education and government. There are significant variations in performance within these categories with more essential purchases showing more resiliency

About one-fourth of our payments volume is in the hardest hit categories, including travel, fuel, restaurants and entertainment, all declining over 50% in April. The travel decline affects all sub sectors and is the deepest at around 80%…Within restaurants, quick service restaurants are holding up better, in part due to being better equipped for this environment, but apps drive-thru and delivery infrastructures already in place. Within entertainment, amusement parks and movie theaters are especially hard hit, while gaming is a small component of the category is up over 200%.” – Visa (V) CEO Vasant Prabhu

People are still brushing their teeth

“There’s a lot of uncertainties, things jump up and down, but rest assured, people are still brushing their teeth.” – Colgate-Palmolive (CL) CEO Noel Wallace

Technology:

Working from home isn’t that bad for productivity

“I think we’re all somewhat, maybe I am, surprised at how effective we are able to work remotely. But we’re still only touching, I think, the tip of the iceberg there.” – Ecolab (ECL) CEO Doug Baker

“…we continue to recruit and onboard new employees successfully while in a work-from-home environment.” – Facebook (FB) CFO David Wehner

“…we’re not going to rush to get back because, actually, we’re finding that this work-from-home environment is very effective both in terms of our internal communication and also in terms of our ability to communicate with clients. ” – Lazard (LAZ) CEO Kenneth Jacobs

Work from home may be here to stay

“…it’s pretty unlikely that any of us are going to go back to something close – anywhere near 100% workforce in the office anytime soon.” – Lazard (LAZ) CEO Kenneth Jacobs

Digital adoption timelines have been rapidly compressed

“COVID-19 impacts every aspect of our work and life, we have seen 2 years’ worth of digital transformation in two months.” – Microsoft (MSFT) CEO Satya Nadella

Some people are sick of Zoom though

“I know a lot of people are using Zoom and there’s predictions that, that will forevermore change meetings, and I just don’t believe that. I think it’s just one more tool that people have. And if you’re like me, I’m sick of these Zoom calls. I’m ready to go talk to people face-to-face.” – Southwest Airlines (LUV) Chairman & CEO Gary Kelly

It’s almost impossible to compete with Google in search

“…it’s very difficult to have a search engine that competes with Google because everyone is training Google all the time with their searches. So, when you’re searching something and you click on a link, you’re training Google every time you do that. It’s very difficult for any new search engine to compete on that basis” – Tesla (TSLA) CEO Elon Musk

Quarantine seems to be getting to Elon

“I think the people are going to be very angry about this and are very angry, because somebody should really – if somebody wants to stay in their house, that’s great. They should be allowed to stay in the house, and they should not be compelled to leave. But to say that they cannot leave their house, and they will be arrested if they do, this is fascist. This is not democratic. This is not freedom. People back they’ve gotten their freedom” – Tesla (TSLA) CEO Elon Musk

“Tesla stock price is too high imo” – Tesla (TSLA) CEO Elon Musk

Industrials:

It could take 5 years for air travel to recover

“We’re in a recession. And historically, it has taken years, typically 5 or more, for business travel to recover. With some businesses issuing no travel orders, that has to be the expectation going forward that business travel will recover very slowly.”Southwest Airlines (LUV) Chairman & CEO Gary Kelly

“…a full recovery will take years, not months.”Boeing (BA) CEO David Calhoun

“…the world changed for airlines and I wish them well”Berkshire Hathaway (BRK) CEO Warren Buffett

Passenger traffic is forecast to be down 48% this year.

“The latest IATA forecast projects full-year passenger traffic to be down 48% this year compared to 2019”Boeing (BA) CEO David Calhoun

Airlines are not ordering new planes

“…for 2020 and 2021 deliveries, excluding the 16 leased aircraft with third parties, we have reduced our contractual deliveries with Boeing by at least 59 aircraft or roughly half.” – Southwest Airlines (LUV) EVP & CFO Tammy Romo

And the airline industry is particularly bad at dealing with overcapacity

“…the airline business has the problem that if the business comes back 70% or 80%, the aircraft don’t disappear. So you’ve got too many planes So you’ve got too many planes, but it didn’t look that way when the orders were placed a few months ago, when arrangements were made.” – Berkshire Hathaway (BRK) CEO Warren Buffett

The industry is begging for government support

“…we believe that government support will be critical to ensuring our industry’s access to liquidity.”Boeing (BA) CEO David Calhoun

And still planning massive layoffs

“…we are taking action to reduce our workforce by approximately 10% of our roughly 160,000 employees by end of this year, through the combination of voluntary layoffs, attrition and involuntary layoffs as necessary. This is 10% of the total for our enterprise…We’ll have to make even deeper reductions in areas that are most exposed to the condition of our commercial customers”Boeing (BA) CEO David Calhoun

Materials & Energy:

The oil industry is also not expecting a quick recovery

“We do not expect a recovery of oil prices or demand for our products in the medium term”Royal Dutch Shell (AMS: RDSA ) CEO Ben van Beurden

Demand may never go back to where it was

“Will demand ever go back to where it was? That is hard to say”Royal Dutch Shell (AMS: RDSA ) CEO Ben van Beurden

An L shaped recovery is a real possibility for the oil industry as the world shifts to other sources of energy

“I think we could see robo-taxi fleet in operation with the network fleet next year. Not in all markets, but in some.”Tesla (TSLA) CEO Elon Musk

Tyson sounded an alarm on food supplies

“…the food supply chain is vulnerable. As pork, beef and chicken plants are being forced to close, even for short periods of time, millions of pounds of meat will disappear from the supply chain. As a result, there will be limited supply of our products available in grocery stores until we are able to reopen our facilities that are currently closed”Tyson Foods (TSN) Management Team

Cargill said the food system is under strain but resilient

“…the food system is under strain but it is incredibly resilient” – Cargill CEO David MacLennan

And McDonalds hasn’t seen a problem in its supply chain though

“….despite the disruption or business we’ve had no break in supply for any food, packaging materials, toys, equipment, logistics, or other solutions globally.”McDonalds (MCD) CEO Chris Kempczinski

Healthcare:

There’s no turning back on telemedicine

“There’s no turning back, for example, in telemedicine, right?”Microsoft (MSFT) CEO Satya Nadella

Labcorp says that they will be able to do 200k antibody tests per day by mid May

“We also launched serology testing, which helps to determine if an individual has had an immune response to the virus. Currently we can perform more than 50,000 serology tests per day and we expect to perform more than 200,000 tests per day by mid-May” – Laboratory Corporation of America (LH) CEO Adam Schechter

Respirator demand is way higher than ability to supply

“Even with 3M’s accelerated production the stark reality is that global demand for respirators far outpaces the ability of the entire industry to deliver.”3M (MMM) CEO Mike Roman

 

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