The Transcript 05.18.20

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Succinct Summary: Economic activity is trending positively as shelter in place orders are slowly lifted around the economy. The data is better than it was but still very bad for any other environment. Markets have discounted a quick return to normalcy, but this week’s comments suggest that business leaders expect the recovery to take longer. For the hardest-hit industries, it could be years before they are operating at peak levels again. And even if demand snapped back today it could take months for the supply side of the economy to rev back up. Importantly, employment will likely rebound slower than the rest of the economy, which is a big deal for the demand side of the economy given how high unemployment numbers are.

Macro Outlook:

Negative trends have bottomed

“To state the obvious, we are operating in a very challenging environment. However, the glimmer of good news is that overall negative trends appear to have bottomed in most regions around the world” – Marriott International (MAR) Arne M. Sorenson

“In the past few weeks, we have seen the number of impacted suppliers drop by more than half, which is a very good sign” – Ingersoll-Rand (IR) CEO Vicente Reynal

But the data still isn’t good

“The coronavirus has left a devastating human and economic toll in its wake as it has spread around the globe…A Fed survey…reflects findings similar to many others: Among people who were working in February, almost 40 percent of those in households making less than $40,000 a year had lost a job in March.1 This reversal of economic fortune has caused a level of pain that is hard to capture in words, as lives are upended amid great uncertainty about the future” – Federal Reserve Chair Jerome Powell

“I think what we’re seeing across the United States is folks are tiptoeing out of their homes a bit more the last few weeks. We’re probably seeing occupancy click up 1 point a week or something like that the last few weeks…That’s not enough to put a stake in the ground and declare that we’ve got momentum toward recovery, given how low the numbers actually are, but it does tell you that the early travelers…are interested in sort of getting out there and reliving their lives.” – Marriott International (MAR) Arne M. Sorenson

“…let’s start with 2020. 2020 is a wasted year. At a minimum, the industry is going to go the entire Q2 without a penny of revenue, impossible to overcome.” – Norwegian Cruise Lines (NCLH) CEO Frank Del Rio

“…let’s just use Texas as an example with 25% capacity. The stores opened up and still because of a weary consumer…there’s a lot of debate of whether or not it was really safe to go out eat…So I think that message created a little bit of a slower pickup to dine in…the early going is kind of all over the place.” – Denny’s Corporation (DENN) CEO John Miller

“The good news is I guess that consumer is coming back. I think the bad news is that it’s taken a little longer than we would wish.” – Under Armour (UAA) CEO Patrik Frisk

“While I say the automotive recovery is underway, I think 2020 is a very unpredictable year…So, I’m not going to give a number for 2020 other than saying if I go back a month, a little over a month ago, we were looking at – we were down 50% and where we’re going to be down 90% or was it going to be something else. Today, we’re only down 20%.” – AutoNation (AN) CEO Michael Jackson

It could be years before things get back to normal

“I would say though we’re not going to get back to where we were quickly. We won’t get back to where we were by the end of the year. That’s unlikely to happen.” – Federal Reserve Chair Jerome Powell

“The strains on households and business balance sheets from the economic and financial shocks since March will likely create fragilities that last for some time,” – Federal Reserve Financial Stability Report

“…whether you get back to full operation, full load factor, full pricing, sometime in 2022 I personally don’t believe. I think the runway will be longer. But 2021 will be a transition year. And then you can start the rebuilding in earnest in 2022 forward. And whether you get back to 2019 levels in late 2022 or in 2023 and if you’re really pessimistic in 2024 there’s so many details involved.” – Norwegian Cruise Lines (NCLH) CEO Frank Del Rio

“Traffic levels will not be back to 100%. They won’t even be back to 25%…Maybe by the end of the year we approach 50%.. I believe it’s three full years before we return to the traffic levels that we had just in 2019, and then probably another two before we begin to return to the growth rates that we used to have.” – Boeing (BA) CEO Dave Calhoun

“We do not expect to see a full recovery until the second half of our fiscal 2021 [CY 1H21] on elective procedures.” – Cardinal Health (CAH) CEO Mike Kaufmann

“We do not expect things to return to where they were at any time soon.” – Denny’s Corporation (DENN) CEO John Miller

“I would say in a four to five-year timeframe we could be looking at controlling this,” – World Health Organization Chief Scientist Soumya Swaminathan

Employment will lag the pace of the recovery

“…if I look back to 2008 and 2009, I would observe it was the re-staffing trailed the improvement in business. That’s the way you have to think about it. And what other efficiencies and effectiveness around digital is figured out…whether that leads fact that we hire everyone when we ultimately have a full recovery in our back, well, I can’t answer that today, other than I can say, rehiring will trail the growth of the business.” – AutoNation (AN) CEO Michael Jackson

Even if demand fully recovered today, it would take some time to turn things back on

“…given that we have 28 vessels, if you bring back an average of five vessels a month, it’s going to take about six months to get all ships back operating.” – Norwegian Cruise Lines (NCLH) CEO Frank Del Rio

“Obviously you have to get momentum with staff. Employees need a certain number of hours a week to make it worth it to come off unemployment.” – Denny’s Corporation (DENN) CEO John Miller

“It’s not as if we have one or two economies that they are having a problem. We are talking about almost the entire world. Too many parts of the chain have been broken. And, therefore, I don’t think that anyone should be in a position to be talking about speedy recovery” – Diana Shipping (DSX) Interim CFO Ioannis Zafirakis

”…unemployment rates have experienced steep increases likely to weigh on consumer spend levels” – Henkel (HENKY) CFO Marcco Swoboda

“There is no interest or excitement on my part to having a half-full dining room while everyone is getting their temperature taken and wearing masks, for not much money,” – Union Square Hospitality CEO Danny Meyer

We’re relaunching companies almost from scratch

“We’re talking about just – it’s almost like relaunching a company from scratch…we got to have patience. It took decades to build this industry. And in a matter of weeks we dismantled it” – Norwegian Cruise Lines (NCLH) CEO Frank Del Rio

Some aren’t going to survive

“…like in many industries that are facing the kind of challenges we’re facing there’s going to be survivors and there’s going to be some that don’t survive” – Norwegian Cruise Lines (NCLH) CEO Frank Del Rio

We may never go back to where we were

“We will not go back to where we were when the pandemic started. That is pretty certain. But that is the only thing that is certain. Everything else is up for grabs. I do not think anybody knows how capitalism will evolve.” – Soros Fund Management Chair George Soros

But there’s pent up demand

“There continues to be demand for cruise vacations, particularly beginning in the fourth quarter of 2020 and accelerating through 2021 with the company’s overall book position at this time and pricing for 2021 within historical ranges…There is pent-up demand let’s not forget that. People only talk about the negative, but the fact that the industry has been shutdown now over four months. There’ll be pent-up demand. People will want to cruise again.” – Norwegian Cruise Lines (NCLH) CEO Frank Del Rio

And 2021 is likely to be better than 2020

“I’m highly confident that 2021 will be better than 2020.” – AutoNation (AN) CEO Michael Jackson

International:

Demand is coming back in China

“I know there’s lots of debate about whether or not there is a resurgence of the virus in China. We’ve got tens of thousands of associates working in our hotels and basically have a way of tapping into that community and listening to both their sentiment and to some extent the data. And by and large, what we hear there is reassuring, that in fact, demand is coming back.” – Marriott International(MAR) Arne M. Sorenson

“So as I did outline to start maybe with China where also then we saw the first impact from the pandemic. In China, we are more approaching normal levels and that we see also across the industries over there” – Henkel (HENKY) CFO Marco Swoboda

But still challenged

“Occupancy levels in Greater China are currently just over 30%, up from the lows of under 10% in mid-February.” – Marriott International (MAR) Arne M. Sorenson

“…as of today, substantially all owned and wholesale locations in China have reopened. That said, traffic in these locations while continuing to see progressive recovery in recent weeks, continues to be down year over year.” – Under Armour (UAA) CEO Patrik Frisk

Government:

Trump has exceeded Soros’ expectations

“I have put my faith in Trump to destroy himself, and he has exceeded my wildest expectations.” – Soros Fund Management Chair George Soros

Xi is powerful but vulnerable

“When Xi abolished term limits and named himself, in essence, president for life, he destroyed the political future of the most important and ambitious men in a very narrow and competitive elite. It was a big mistake on his part. So, yes, he is very strong in a way, but at the same time extremely weak, and now perhaps vulnerable.” – Soros Fund Management Chair George Soros

Financials:

Investor pessimism is still unusually high

“Pessimism is at an unusually high level for the 10th consecutive week. On six of those 10 weeks, bearish sentiment has been at or above 50%.” – American Association of Individual Investors (AAII) AAII Staff

And the risk-reward ratio is not good

“The risk-reward for equity is maybe as bad as I’ve seen it in my career…The wild card here is the Fed can always step up their (asset) purchases.” – Duquesne Family Office CEO Stanley Druckenmiller

We may have bottomed but can still fall far

“There might have been a bottom put in … but that doesn’t mean you can’t fall significantly from these levels” – Appaloosa Management Founder David Tepper

Financial institutions are in better health than ’08

“The financial institutions today are in vastly better health than they were back in the Great Recession.” – Marriott International (MAR) Arne M. Sorenson

Fed support of bond markets helped large public companies put themselves in a good enough financial position to survive for a while without revenue

“These actions will enable us to weather the unlikely scenario of over 18 months in a zero revenue environment and still have enough liquidity to relaunch operations when conditions allow.” – Norwegian Cruise Lines (NCLH) CEO Frank Del Rio

Consumer:

Housing is particularly strong

“In the last five weeks, home-buying demand has come roaring back. For the seven days ended May 10, demand was 5.5% higher than it was before the pandemic…The v-shaped recovery in home-buying demand is powered by record-low mortgage rates and the loosening of stay-at-home orders in some states.” – Redfin (RDFN) Chief Growth Officer Adam Wiener

Hotels are better off staying open at 10% capacity

“…by the time you get to 10% occupancy or so, you’re probably better off from a purely financial perspective to stay open that the losses will be lower than the losses associated with being closed.” – Marriott International (MAR) Arne M. Sorenson

Consumer behaviors are changing

“…we are experiencing significant changes in consumer behavior and demand in many categories. Social distancing and lockdown decisions triggered stockpiling of products regarded essential and the continued very high usage of hygiene-related products such as hand soaps, bleaches or sanitizers. We see increased usage of household cleaners, auto, and hand dishwashing or laundry detergent since people are at home and eat at home. In contrast, categories such as cosmetics or styling suffer.” – Henkel (HENKY) CEO Carsten Knobel

Ad spending is taking a hit

“Due to a global reduction in advertising spending, revenues from advertising-supported streaming services is decreasing and revenue from the licensing of music and TV commercials is decreasing, a delay in the production of motion pictures and TV shows is also causing a decline in music licensing revenue.” – SONY (SNE) CEO Hiroki Totoki

Technology:

Some industries lagged in digital adoption. Coronavirus is dragging them into the 21st century.

“I think for digital, this whole disruptive period with corona is an inflection point from which there’s no turning back.” – AutoNation (AN) CEO Michael Jackson

“I think a lot of the consumers’ mindset is already very much on mobile internet, but the businesses – there is some sort of inertia for them to make changes. But having experienced COVID-19, I think the imperatives for change would be much stronger.” – Tencent Holdings (TCEHY) President Martin Lau

“…if we look at what happened in the last few months, I’ve got to say that to me it was amazing to see new innovation happen so quickly. We’ve seen grocery stores that move online. .And we have seen so many new things that is happening in this short amount of time that it is incredible.” – Wix.com (WIX) CEO Avishai Abrahami

The future of work may be a mix of home and office

“I think you’ll see many employees that will continue to work from home, you’ll have many that will get back to the office and then you’ll have some that’ll do a little bit of both” – Cisco (CSCO) CEO Chuch Robbins

Companies are getting comfortable with employees’ ability to work remote

“I think this has given us confidence that we can hire talent anywhere and have them participate productively on teams, regardless of their location. I think it will affect how companies think about their commercial real estate footprint.” – Cisco (CSCO) CEO Chuch Robbins

Working from home helps to prioritize what’s important

“I will say one thing about the COVID situation when we all get forced to work-from-home, you do find ability to prioritize what is really, really important and what is not so important when you’re dealing with all of these types of things. And you’ll also find a way I think to be faster than you normally would.” – Cardinal Health (CAH) CEO Mike Kaufmann

Time spent inside games has received a boost

“There is an uplift in the use of time spent on games. Going – I don’t want to be more granular, the games are seeing the biggest uplift are generally those that have longer session lengths because people now have more time to play the longer session length games and also the games that are somewhat team based in nature, which I think reflects people realizing that, perhaps surprisingly it actually missed their work colleagues and they want to socialize with them, and one way of doing that is through games, through team-based games” – Tencent Holdings (TCEHY) Chief Strategy Officer James Mitchell

Demand for 5G infrastructure and data centers is holding up well

“Starting late in 2019, we reported a resurgence of orders driven primarily by optical fiber communication used in 5G infrastructure. We are happy to report that this trend is accelerating, and we now also see data center orders rebounding. Based on customer forecasts, we anticipate strong quarter-over-quarter growth in this market through the remainder of 2020” – Tower Semiconductor (TSEM) CEO Russell Ellwanger

“Based on the visibility that we have today, the underlying demand for semiconductor equipment is robust. And even when COVID-related effects are taking into account, we still believe that our semiconductor business can deliver strong double-digit growth for our fiscal year” – Applied Materials’ (AMAT) CEO Gary Dickerson

“…cloud, data center, PC, com infrastructure, are still showing signs of strength” – Applied Materials’ (AMAT) CFO Dan Durn

Industrials:

The automotive recovery is underway

“The automotive recovery is underway…In the month of April, we began to see a recovery in our sales.” – AutoNation (AN) CEO Michael Jackson

There is a developing shortage of cars

“…what we’ve also seen now with the disruption to production on new, is the customer can’t find what they’re looking for new…you know I’m a hawk about watching for overproduction and oversupply. But we have shortages already.” – AutoNation (AN) CEO Michael Jackson

Shortages create pricing power

“…we see opportunity on the new side, where there are shortages in terms of vehicles where we will adjust pricing upwards.” – AutoNation (AN) CEO Michael Jackson

A prolonged crisis will decimate the air industry

“…[if ]the crisis will be very long… then the impact will be absolutely detrimental to all the balance sheet in the industry.” – Air France-KLM (AFRAF) CFO Frédéric Gagey

Materials & Energy:

The CEO of BP can’t be certain that we’re not seeing peak oil. Wow.

“It’s gotten more likely to have oil be less in demand…I don’t think we know how this is going to play out. I certainly don’t know…Could it be peak oil? Possibly. Possibly. I would not write that off.” – BP (BP) CEO Bernard Looney

Healthcare:

Healthcare companies (and probably other industrials) will be re-evaluating China supply chain post-Covid

“So as far as the supply chain goes, as you can imagine with COVID-19, we are evaluating our overall supply chain…It’s hard to believe that China won’t be part of an overall global sourcing strategy going forward but the percentage of the products that are made there…we’re going to take a look at that and make sure that we have the type of infrastructure that as we go forward not only in this situation but in future situations probably is more diversified and not as dependent as the US was on certain categories in China at this time. So absolutely we’ll be taking a look at that.” – Cardinal Health (CAH) CEO Mike Kaufmann

PPE demand surged 2-12x during the Covid outbreak

“Demand for mask and other facial protection, gowns, and gloves have spiked 2 to 12 times normal levels in the last 90 days.” – Cardinal Health (CAH) CEO Mike Kaufmann

It will take a long time to develop a vaccine

“It will take a long time to develop a vaccine. And even after we have developed one, we will have to learn how to change it every year, because the virus will most likely change.” – Soros Fund Management Chair George Soros