The Transcript 07.13.20

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Succinct Summary: Infections are accelerating in the US and it’s unclear how or if this has affected economic activity.  The economy seems to be continuing to improve.  Yet distressed borrowers are starting to reach the end of their reserves.  Bankruptcies are likely to begin to surge.  Washington is working hard to pass another stimulus bill to prevent this from happening.

Macro Outlook:

We’re all watching infections accelerate in the US

“…we’re all watching the news and seeing how this virus is continuing to accelerate. Should that happen, I think there’s a good chance there’s going to be elevated needs moving forward and one of the things we put a premium on was getting – you can see our inventory numbers, getting inventory, getting that PPE janitorial inventory into our warehouses.” – MSC Industrial Direct (MSM) CEO Erik Gershwind

There is a lot of uncertainty about how this could affect the economy

“If I were to ask you in the United States what you think is going to happen with the pandemic, it would be a tough question to answer… we don’t have a crystal ball. So, the best we can do is prepare our business to be ready and at the ready to be able to best serve our members given any kinds of restrictions that are thrown our way.” – PriceSmart (PSMT) CEO Sherry Bahrambeygui

“The likelihood that we continue to have serious problems with the infections means that businesses are likely to be disrupted for a longer period of time, so there’s an insurance element against the pandemic, as well as meeting an immediate need of some borrowers,” – Boston Fed President and CEO Eric Rosengren.

At the moment economic activity continues to improve

“They’re not going – you know listen, every day may kind of bounce up and down a couple of percentage points, but the overall trend is an unmistakably positive trend. When I translate that to globally, that trend is absolutely positive on a week-on-week basis.” – Uber Technologies (UBER) CEO Dara Khosrowshahi

“…shortly after the onset of the pandemic, we put a halt to almost all of our capital projects. However, as we have gained a better understanding of the climate we are operating in, we are gradually restarting certain of our previously postponed capital expenditures” – PriceSmart (PSMT) CFO Michael McCleary

“…when it comes to growth investments, we’re accelerating, we’re back to we’ll be hiring BD folks to complete the sales repositioning.” – MSC Industrial Direct (MSM) CEO Erik Gershwind

But there are signs of extreme stress among borrowers

“During the first week of this month, 19 percent of Americans had made no housing payment, while an additional 13 percent paid only a portion of their monthly bill… From June to July, the share of renters who are either “very” or “extremely” concerned about being evicted rose from 18 percent to over 21. Similarly, the share of homeowners concerned about foreclosure ticked up from 14 percent to 17 percent.” –  Apartment List

We’re likely going to start seeing a surge in bankruptcies

“If my expectations are right, there are going to be more firms that start worrying about whether they have sufficient financing… so my expectation is that we will ramp up over time, and we will see more banks and more borrowers,” – Boston Fed President and CEO Eric Rosengren.

Washington is working hard on another stimulus to bridge the gap

“Well, I’m not going to go into the specific details today on that, but what I would say is we do support another round of economic impact payments. You know, in most cases, those are not checks, it’s direct deposits. And we can get that into hardworking Americans bank accounts very, very quickly…I had a very productive call with Mitch McConnell yesterday. Mark Meadows and I spoke to him. And as soon as the senate gets back, we’re going to sit down on a bipartisan basis with the republicans and the democrats and it will be our priority to make sure between the 20th and the end of the month, that we pass the next legislation” – US Treasury Secretary Steven Mnuchin

We’re all hoping that a vaccine will be here by the fall

“For me, [the big moment] was the moment when I saw the data, plus many other data that we haven’t published yet, [that] made me say that until now I was thinking if we have a vaccine. Now I’m discussing when we’re going to have a vaccine…let me be accurate and factual here. One, we will only know if the vaccine works when we have the final study. We have a lot of indications that make me feel that really it should make it … We should be able in the September time frame to have enough data to say if the vaccine works or not. And to submit that to the FDA. So for a potential approval in October, if we are lucky. It’s feasible.” – Pfizer (PFE) CEO Albert Bourla

And that next year will get back to normal

“The response to our [prepaid hotel stay certificates] was phenomenal. We sold 30,000 room nights. We also had a crash on our website and all that kind of stuff. So, we’re going to do more of it. I think demand is huge. And this is the fortunate takeaway for my part of the hospitality business. The results that we’ve gotten back indicates to us that the big majority of people clearly think that by end of this year and early next year, things should be okay. So, that’s a positive side. So, my sense is that unless there is another outbreak, we should see the light at the end of the tunnel, not the exit of the tunnel, but the light at the end of the tunnel, probably by this year end.” – Banyan Tree Holdings(SGX: B58) Executive Chairman Ho Kwon Ping

International:

China has bounced back

“So, our hotels in China all have already come back to some degree of business. Those that are within driving distance of a major metropolitan centre have recovered fully. ” – Banyan Tree Holdings (SGX: B58) Executive Chairman Ho Kwon Ping

“What we saw in Hong Kong is there’s a quick bounce back and Hong Kong is back to pre-COVID or very close to pre-COVID levels essentially positive volumes in many circumstances as well. So, this is something that frankly is not unexpected” – Uber Technologies (UBER) CEO Dara Khosrowshahi

Financials:

M&A activity has slowed

“As you sure can appreciate, when we’re evaluating companies we certainly weren’t saying, ‘oh! Let’s run a scenario where the world shuts down….The deals that are getting done in the current market are less frequently with new platforms and more often with existing portfolio companies that are either pursuing growth initiatives or seeking liquidity.” – Saratoga Investment (SAR) Chief Investment Officer Michael Grisius

Consumer:

Consumers are spending on non-essential goods

“Initially, there was a big surge in demand for basic essential items and now as much interest in discretionary items. As the quarter progressed, we experienced rather abrupt shift towards non-essential products more oriented toward improving amenities at home, such as domestics, exercise equipment, small appliances, and in-home office equipment” – PriceSmart (PSMT) CEO Sherry Bahrambeygui

People fear flying more than hotels

“I don’t think customers are that worried about the hygiene aspect. It’s really the fear of flying that has postponed their ability to come back to hotels. They just can’t get to the leisure hotels that are only accessible by air. We’ve seen everywhere, even in the U.S. or China, immediately, almost like instantaneously after the lockdown eases, people get into their cars and they drive to a resort somewhere. So, it’s not the fear of the hotels, it’s the transportation to get there that is the problem” – Banyan Tree Holdings (SGX: B58) Executive Chairman Ho Kwon Ping

Will business travel be forever changed?

“Certain aspects of hospitality will be fundamentally changed. If you look at the meetings market in particular and business meetings, I do think that’s going to go down by a lot. Big gatherings like World Economic Forum, like other kinds of things which they’re hoping to get thousands of people together, I think there’s going to be a lot more questioning as to whether those things are necessary, especially many of us like myself hate going to conferences because I waste so much time just getting there and spending time in big conferences. But I’ve attended a lot of our webinars now because it’s so easy to do so.” – Banyan Tree Holdings (SGX: B58) Executive Chairman Ho Kwon Ping

“The challenge for us and for all businesses now under a new way of working that we’ve all got used to is to take the fat and the inefficiency out of all that travel and entertainment costs that we were wearing and actually make sure that as we come out of this, we sort of land back a number multiples lower than the number that we went in.” – Micro Focus (MFGP) CFO Brian McArthur-Muscroft

Technology:

COVID has accelerated cord-cutting

“The stay at home environment we currently find ourselves in has also fueled this growth tremendously, creating a once in a generation catalyst that is vastly accelerating the dramatic and permanent cord cutting consumer shift to streaming that was already underway…In 2018, .just 4% of households cut the cord, last year that number rose to 7% and according to research firm Convergence Research that number will reach 9% and may even trend higher this year…we’re seeing an unprecedented shift by consumers to the streaming first consumption profile.” – Cinedigm (CIDM) President of Cinedigm Networks Erick Opeka

Industrials:

Manufacturing end-markets are soft

“…most manufacturing end-markets are quite soft and fundamentals are weak…You got aerospace, obviously, being hit very hard. Automotive continues to hit hard oil and gas. The markets themselves are not strong, so customers are not coming back full strength” – MSC Industrial Direct (MSM) CEO Erik Gershwind

And inventories are bloated

“…before COVID came to the United States, we started seeing the dynamic in February where our bookings outpaced our invoicing. And what we were hearing from customers was some degree of buying up just to prevent supply chain disruptions when COVID was strictly a Chinese event. So, they then shut down. There’s a lot of inventory. So they are cautious….[When COVID hit, consumers] went to the supermarket and they stocked up on needed supplies. A lot of our customers have told us they did the same thing. There was surge buying, and in some cases their eyes were bigger than their stomachs and they’re working that down.” – MSC Industrial Direct (MSM) CEO Erik Gershwind