The Transcript 07.06.20

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Succinct Summary: The economy has had a strong rebound, but the rising virus cases in some states are a cause for worry.  Consumers are fatigued from the virus but starting to accept that it may take a while for things to get back to normal.  And the old normal may never return.  Technology companies have been major beneficiaries of quarantine.  Companies are “splurging” on tech.

Macro Outlook:

The economy continues to rebound

” US manufacturers have reported a marked turnaround in business conditions through the second quarter, with collapsing production and demand in April at the height of the COVID-19 lockdown turning rapidly to stabilisation by June…A record upturn in business sentiment about the year ahead likewise hints that business spending and employment will start to revive” – IHS Markit (INFO) Chief Business Economist Chris Williamson

“initial sales trends as stores reopened were stronger than we modeled with a few encouraging signs. In most stores, we saw a steady, modest improvement in sales on a weekly basis…our customers were very happy to be back in our stores.” – Macy’s (M) CEO Jeff Gennette

“We’ve also begun to see some business travel return in our markets and at our hotels. Some entertainment businesses returning in West LA, as production restarts with some farm production returning to LA. We’ve also begun to see some project business return and other business, which can only be conducted locally or in person. A few small groups have met for business, and a few small weddings have moved forward” – Pebblebrook Hotel Trust (PEB) CEO Jon Bortz

“to date, we have experienced a week-over-week improvement in our business since hitting the bottom in mid-April. As we enter fiscal 2021, there are signs of tentative economic recovery underway.” – FedEx (FDX) EVP, Chief Marketing and Communications Officer Brie Carere

“We are encouraged by the gradual restart of economic activity in the U.S. and globally, which support stronger macro trends of higher scrap demand, supply flows, and prices.” – Schnitzer Steel Industries (SCHN) CEO Tamara Lundgren

“In April, we continued to experience a steep decline in [elective] procedures of somewhere between 60% and 70% of normal across the portfolio of direct products. We did see a more rapid return in May and June than we initially anticipated, with May’s volume nearly doubling versus April and June approaching levels we saw earlier in the year.” – RTI Surgical Holdings (RTIX) CEO Camille Farhat

“We had a significant drop and we had a good recovery. I’m pretty optimistic that we will see now, definitely in June, a good recovery in Europe and the Americas. All these take some time, but overall, the trend is definitely heading in the right direction” – Deutsche Post (DPW) CEO Frank Appel

But rising virus cases in some states and countries are a cause for worry

“Again, I can’t tell you much about 2021 because I just don’t have a feel for what’s happening as – nor does anyone else. I mean, the virus is seemingly coming back in a lot of states, openings are slowing down. People are delaying their openings. Microsoft shut-in retail stores. Just a lot of things that are going on here that make it extremely difficult to answer that question” – FedEx (FDX) Alan Graf

“While the PMI currently points to a strong v-shaped recovery, concerns have risen that momentum could be lost if rising numbers of virus infections lead to renewed restrictions and cause demand to weaken again.” – IHS Markit (INFO) Chief Business Economist Chris Williamson

” Although many countries have made some progress, globally the pandemic is actually speeding up” – World Health Organization Executive dirtectorTedros Adhanom Ghebreyesus

” So I think what you’re going to seeing barring some major [ph] lockdown is that you’re going to have more waves of this virus, that’s for sure.” – Korn Ferry (KFY) CEO Gary Burnison

We all want this to be over.  Fatigue is setting in.

“We all want this to be over. We all want to get on with our lives. But the hard reality is that this is not even close to being over. Most people remain susceptible, the virus still has a lot of room to move.” – World Health Organization Executive dirtectorTedros Adhanom Ghebreyesus

In the first couple of weeks, you had this kind of momentum. And everybody’s like, okay, we got to do this and we are all in this together. And let’s go and figure it out. …But as time goes by, people are getting really fatigued with this..I think a lot of people are realizing that post-vaccine, it will be a lot better but it won’t be perfect.” – Steelcase (SCS) CEO Jim Keane

Will fatigue lead to a change in the US government? A change would have big implications for business.

“Scott, who is going to be President of the United States? That will help me a lot with the tax rate. ” – FedEx (FDX) CEO Fred Smith

International:

Automobile sales in China were down ~45% in Q1

“According to China Association of Automobile Manufacturers, automobile production and sales in China decreased by 45.2% and 42.4%, respectively, for the first quarter of 2020 as compared to the same period last year.Due to the severe impact of COVID-19 pandemic, the macroeconomic conditions were exacerbated sharply resulting in ceased auto production and slack consumer market…It has a ripple effect and impact throughout China auto supply chain.” – China XD Plastics (CXDC) CFO Taylor Zhang

China’s birth rate is slowing

” Data from China’s National Bureau of Statistics show that newborn numbers in China and the Group’s operating markets continue to trend downwards in 2019. Despite a flatter downward slope, judging by the general direction in the past three years and our first-hand observations from the field, we anticipated that the newborn pool in fiscal 2021 will continue to shrink.” – Global Cord Blood Corporation (CO) Corporate Finance VP Cathy Bai

Financials:

Demand for homes is high but supply is limited

“While we’ve seen a strong v-shaped recovery in homebuyer demand, mortgage applications and pending sales, lack of supply remains the biggest impediment to home sales growth…Buyers can only buy what’s for sale and sellers have been a bit slower to come back to the market. Though we have seen strong weekly improvements in new listings coming on the market, there aren’t enough new listings to satisfy demand, creating more competition and pushing prices higher.”- Redfin (RDFN) lead economist Taylor Marr

“Over 90% of our agents are telling us that their markets across the U.S. have a shortage of listings, and over 80% are saying there is pent-up demand. ” – Coldwell Banker CEO Ryan Gorman 

The office has been pronounced dead before

“We have all seen articles suggesting the office is dead, and we will all work from home. Those types of articles were being written 20 years ago, and they were wrong then and they are wrong now…Over 20 years, we have occasionally seen customers announce large-scale work from home programs and then two or three years later, those programs are quietly dismantled and employees are asked to return to the office. It takes a while for the problems to show up, but they always show up.” – Steelcase (SCS) CEO Jim Keane

It may not die but it will definitely look different

“We believe as we emerge from this crisis, working from home will be embraced by more companies as part of a holistic approach to more effective work…but the office is far from dead. In fact, we believe customers and their employees will expect more from the office as we look to the future, and that’s where our conversations are centered. Meeting spaces will need to more fully support remote participants. When employees need to really focus on individual work, spaces must provide privacy and separation without compromise.” – Steelcase (SCS) CEO Jim Keane

Consumer:

Burger King comps are now flat y/y vs -30% in mid-March

“In our home market as of last week, nearly all Burger King restaurants are open and comparable sales are now trending approximately flat to last year compared to the negative mid-30s in mid-March. This is driven by strong performance in drive-thru given most of our dining rooms throughout North America remain closed or offer reduced seating.” – Restaurant Brands International (CAD) CEO Jose Cil

Consumers are still stocking their pantries

“While there certainly was a stock up in March, and you can see that in the data, consumers are clearly still buying and eating through the stock that they have on hand…at least in North America, we believe that the majority of the product that we’ve moved to consumers has been consumed. We do believe that consumers are keeping slightly higher levels of inventory in their pantry, but we do expect that to continue.” – General Mills (GIS) Jon Nudi

Travel may never ever be the same

“I will go on the record to say that travel will never, ever go back to the way it was pre-COVID; it just won’t. There are sometimes months when decades of transformation happen… In the past, with what he called “mass tourism,” travelers limited themselves “to like 50 or 100 cities. You know, everyone goes to Rome, Paris, London, they stay in the hotel district, they get on the double-decker bus. They wait in line to get a selfie in front of a landmark. I think that’s going to get smaller as a percentage of travel in the future, and I think it’s going to get somewhat displaced, or at least balanced, by people visiting smaller communities.”  –  Airbnb CEO

Consumer purchases are happening in waves

“We saw in that first phase what we were calling ‘carbs and calories’ where people were looking for comfort foods… [and then] we went into this nesting phase…people wanted to make their home their castle…Now we’re sitting in this outdoors, get fit phase.”  – SamsClub CEO Kath McLay 

More alcohol consumption as people stay at home

“And the food-grade business is very strong and we’re doing very well. I guess, we tend to consume more alcohol during when we sit at home in a lockdown.” – Stolt-Nielsen (SOIEF) CEO Niels Stolt-Nielsen

Technology:

The pandemic has accelerated technology adoption trends

“The pandemic is driving rapid change in consumer and corporate practices around the world…Clearly, certain trends that would have taken two to four years to develop have been accelerated into months…Consumers are significantly increasing online activity, including e-commerce, gaming and video streaming…The faster pace of digital transformation in the economy is here to stay.” – Micron Technology (MU) CEO Sanjay Mehrotra

Even those over 65 are finally moving spending online

“I believe that e-commerce change is structural. We have seen a huge uptick in the categories that people are willing to purchase online, certainly moved into a higher value. We saw this trend obviously pre-COVID, but it has accelerated when you think about things like furniture, large packages, high-value electronics..we saw a huge change in who is buying online, over 65 finally moved to online.” – FedEx (FDX) EVP, Chief Marketing and Communications Officer Brie Carere

Remote work/learning is driving demand for PCs

“If you want to work efficiently from home or if you want your kids to learn efficiently from home, it is very clear you need a PC. And this is a big long-term opportunity for us…Remember in the past when the goal was to have one PC per household? We’re evolving that goal to be to have one PC per person–which, in the long term, opens up big opportunities for PCs..Clearly, there’s lots of demand for notebooks, driven both by working from home but also by learning from home” – HP (HPQ) CEO Enrique Lores

Cloud is still in its early innings

“when you look at long-term trends, I mean long term cloud is still actually in early innings and long-term trends for cloud are strong because AI as well as 5G, 5G driving more intelligent devices at the edge, growing more data opportunities, it’s really the virtuous cycle between cloud and intelligent devices at the edge.” – Micron Technology (MU) CEO Sanjay Mehrotra

The volume of cybersecurity incidents is exploding too

“The volume of cybersecurity incidents has risen, causing significant disruption to IT and business processes. At the same time, the percent of organizations that reported achieving a high level of cyber resilience increased from 35% in 2015 to 53% in 2020, growing 51%.” – IBM (IBM) Cyber Resilient Organization Report

“Breaches are occurring at a huge volume on a daily basis…We’re seeing a huge increase in spam, over 6000% since March” – IBM (IBM) X-Force Threat Intelligence VP Wendi Whitmore

Businesses are splurging on technology

“All of our customers had a splurge of spending to get through this transition to work from home.” – Cisco (CSCO) CEO Chuck Robbins

Healthcare:

Gilead has halved Remdesivir’s production time

“from the moment that we knew that this medicine may be effective in COVID-19, we begin to ramp up a very complicated supply chain which used to take 12 months from start to finish. And now as we enter into the second half of the year, we’ve reduced that down to around six months. What that means is that as we go into the second half of the year, we have kind of an exponential increase in supply” – Gilead (GLD) CEO Daniel O’Day

Energy/Materials:

Farmer sentiment is weak

“This past quarter has seen several unfavorable factors such as, reduced ethanol use that has driven commodity prices to a lower level…we have seen farmer sentiment reflect this significant decline in commodity prices, [but] our year-to-date sales in the domestic business is on par with the prior year.” – Lindsay Corporation (LNN) CEO Tim Hassinger

 


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