The Transcript 09.14.20

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Succinct Summary: The first few weeks of September are usually filled with conferences where companies talk about long term industry trends.  This year it’s hard to look long term because things have been moving so fast.  Still, the Covid rush seems to have calmed down some and the US is getting comfortable with a new normal.  The big question on people’s minds: do we ever get back to the old normal?

Macro Outlook:

It’s hard to think long term when the world is changing so fast

“…the pandemic hit in mid-March, mid to late March and our revenues dropped by just about 40 points. And in a three month period, little over three months, our demand went from 40 down to 40 up, right, roughly, just directionally. So it’s an 80 point swing…it’s funny I’ve never spent too much time looking at our business kind of day to day. But it changed so dramatically day to day and we are learning.” – RH (RH) CEO Gary Friedman

“In recent months…growth curves that were supposed to play out over years have been compressed into quarters and even months.” – Chewy (CHWY) CEO Sumit Singh

2020 really has been unprecedented

“…we tossed around in 2020 the word unprecedented way too much because it starts to become a little bit numbing. But the reality is we’ve never seen anything like this, even in past pandemics, economies and countries have never really shut down before the way they have in this one” – Delta Air Lines (DAL) CFO Paul Jacobson

But the Covid rush seems to have calmed down some. We’re getting comfortable with a new normal.

“…we went through a period of time where people just got very focused six months ago on…- we need to get things up and going quickly. We need to work in a remote environment…we can’t run our business, we can’t figure them out…while I think there is still some of that for sure that has definitely calmed down.” – DocuSign (DOCU) CEO Dan Springer

“…we think we’re at a better baseline as the conditions start to normalize from here.” – Slack Technologies (WORK) CEO Stewart Butterfield

“I think we are seeing some gradual sort of I guess this return to patterns that customers get comfortable with in a COVID environment as – continue to see large basket sizes and fewer trips” – The Kroger (KR) CFO Gary Millerchip

“As a result of the pandemic we continue to see a slow return to normal from the shutdown period resulting in fewer customer visits, but increased basket size” – The Kroger (KR) CEO Rodney McMullen

“…up to the August timeframe…the consumer…wasn’t in stock-up mode any longer, she still is in somewhat of a replenishment mode, meaning that she uses it in her home. She is replenishing it that same week.” – Dollar General (DG) CEO Todd Vasos

“…now, I would say, we have relatively good visibility if things don’t change drastically from here.” – RH (RH) CEO Gary Friedman

Things are getting better not worse

“…it seems like things are kind of getting better not worse. And so, we think that consumers are used to wearing masks now. People are used to social distancing. In many markets you see, cases going down.” – RH (RH) CEO Gary Friedman

“…some signs of improvement late in the month of August. US debit is still continuing to grow incredibly strong, it’s growing 24% in the month of August, which is down 2 points from July, but which in part is due to lower unemployment benefits, but still incredibly strong growth.” – Visa (V) SVP Investor Relations Mike Milotich

“…we have seen slight increases in the amount of travel, particularly in the leisure set. But as we said back in July, we expect this to be choppy” – Delta Air Lines (DAL) CFO Paul Jacobson

Business spend sentiment has improved

“The Q3 BSI indicates that business spend sentiment has modestly improved, likely as a correction to the acute scenario witnessed during Q1…Although it is important to note that all sectors remain below trend” – Coupa Software (COUP) CEO Rob Bernshteyn

But is likely to remain depressed for some time to come

“We learned that we have to take the opportunity that this crisis is presenting, and that’s really looking at how we operate our businesses. The cost structure of our businesses is just something that we as well as any large corporate is taking a look at that I know of. And we’re also knowing that people can work differently.” – Walt Disney (DIS) CFO Christine McCarthy

“I think as offices and corporate offices start to reopen, we should start to see some pent up demand for corporate travel, maybe as early as next spring. But I think as Ed has said, it’s not going to be the same. It’s probably not going to be for a while the way it was. And there might be some permanent demand destruction on the corporate travel side of it.” – Delta Air Lines (DAL) CFO Paul Jacobson

Small businesses are especially challenged

“…the only real sort of headwind, I’d say, Walter, as we had this phenomenon where some of our small businesses are really being put into an existential dilemma, can they survive?” – DocuSign (DOCU) CEO Dan Springer

The fiscal stimulus cliff poses a risk to economic activity

“There’s certainly a benefit in that population from government stimulus and, to the extent, that benefit doesn’t sustain itself going forward, that could create an impact on one hand.” – Procter & Gamble (PG) CFO Jon Moeller

“Our core consumer always struggles, right?…she has continued to struggle through COVID-19. We’ll have to continue to monitor this as we look at what stimulus will or won’t do as we continue to move through the back-half of the year. But we’re optimistic with what we’ve seen at least up to that August timeframe so far.” – Dollar General Corporation (DG) CEO Todd Vaso

But the Fed stands ready to keep interest rates low for years to come

“We think that the economy’s going to need low interest rates, which support economic activity, for an extended period of time…It will be measured in years.” – US Federal Reserve Chair Jeremy Powell

Many people are expecting to party like it’s 1999 when a vaccine comes

“I would say, I mean, one thing for sure, I’d say post vaccine, people are going to be like ready to party like it’s 1999. At least I will be. So I think getting out doing social events, which I think bodes really well for more makeup wearing” – Ulta Beauty (ULTA) CEO Mary Dillon

But vaccines don’t end pandemics, vaccinations do

“I was listening to a podcast the other day and there was a stark reminder on there, which is vaccines don’t end pandemics, vaccinations do. And I think what we have to remember is that there’s going to be a tremendous supply chain and logistics effort to get people vaccinated. And in this environment we already see polls with people saying, well, I’m not getting vaccinated and others saying, well, everybody has to. It’s going to take a while for those vaccinations to really get disseminated out globally.” – Delta Air Lines (DAL) CFO Paul Jacobson

“…even if the stage three trials go well and the environment, the vaccines are distributed as planned later this year and early next; it’s not going to be a magic bullet that immediately eradicates the COVID-19 virus from the globe and things like this are now a heightened risk in everyone’s mind. And I think that reality is going to live with us for quite some time.” – Honeywell International (HON) CEO John Waldron

Don’t expect a return to an office environment until at least next June

“It would be an understatement to say that we’re all still experiencing significant changes in the way that we work and live as a result of COVID-19…we don’t expect to return to an office environment until June of next year.” – DocuSign (DOCU) CEO Dan Springer

“It’s probably six months after a vaccine. Once we can get a majority of people vaccinated, then it’s probably back in the office.” – Netflix (NFLX) CEO Reed Hastings

“I think if you look at the trends that we’re seeing and the indications of large organizations, especially tech companies, right, which have said that, first of all, they’re not planning to reopen their offices until sometime next summer. We have said that, at least about our U.S. offices will not be opening until next summer.” – Zoom (ZM) CFO Kelly Steckelberg

International:

Europe has seen a strong economic rebound

“The incoming data since our last monetary policy meeting in July suggest a strong rebound in activity broadly in line with previous expectations, although the level of activity remains well below the levels prevailing before the coronavirus (COVID-19) pandemic.” – The European Central Bank

Emerging markets are requiring more strict emissions standards

“…we continue to see this worldwide trend to having more stringent emission standards. And so, we’ve seen that over the last 10 years or so in North America, but we’re seeing more of that in emerging markets. So between India and China, we were moving to kind of an equivalent EPA 2010 Euro 6 emissions regs.” – Cummins (CMI) Director of Investor Relations James Hopkins

Financials:

Prices are high, but companies are engaged in M&A

“We’re continuing to do our good work there in M&A. It’s as pretty challenging environment to do deals right now but nonetheless we are interested and engaged.” – Honeywell International (HON) CEO John Waldron

The market is excited about IPOs like Snowflake’s that are coming up

“We love what they’re doing. We think that they’ll have a fabulous IPO. We think, it creates another tailwind for us. What — as a persistence layer, what they want is compute loads. We make it easy for people to get compute load efficiency in Snowflake” – Alteryx (AYX) CEO Dean Stoecker

Consumer:

Homes have never been more important to American consumers

“I think that customers spend a lot of time around their home, they see a lot of things that they want to do. And at the same time, there’s more wear and tear in the home. Our customers tell us from surveys that home is never more important than it is today.” – The Home Depot (HD) CEO Craig Menear

You have to make your home look nice if you’re going to entertain people at your home

“Honey, we got to redo our home, because we can’t have them over to our home for dinner until we make our home better. You get, the interesting thing about humans, right, we kind of compare and contrast ourselves all the time, what we wear, what we drive, where we live. Our home, the size of our home, all these little things…And your home has got to be all furnished and it’s got to look a hell of a lot better. And because, you just going to have more people over and you are going to be spending more time there.” – RH (RH) CEO Gary Friedman

The Ex-urbs are hot

“…people that are moving to suburbs, in fact, there is kind of new suburbs being formed…So many of the people that they are learning they can work remote more. So they are moving, they are buying homes in palm desert. Palm desert now is kind of getting recapped from a retirement community to a suburb for many people, right. Younger people move where they can get a bigger home, they can have more space.” – RH (RH) CEO Gary Friedman

Consumers are also focused on health and wellness

“In the fourth quarter, workouts reached 76.8 million, up 333% year-over-year, equating to nearly 25 average workouts per connected fitness subscription per month, compared to 12.0 workouts per subscription per month in the fourth quarter of last year.” – Peloton Interactive (PTON) CEO John Foley

“Our data insights show customers are rediscovering their passion for cooking at home and have an aspiration to eat more healthy foods as a result of COVID. When we talk to our customers they tell us they plan to continue to prepare and eat more meals at home.” – The Kroger (KR) CEO Rodney McMullen

“What we see this year is just an acceleration, I just told you, with consumers being really focused on their own health, making sure they take their health in their own hands” – Johnson & Johnson (JNJ) Executive Vice President Thibaut Mongon

Americans have a lot of junk that could be sold online

“The average consumer has $4,000 of goods in their home that they could sell and less than 20% of that is online.” – eBay (EBAY) CEO Jamie Iannone

Lululemon says that physical stores are still extremely important

“…e-com contributed approximately $554 million of top line or 61% of total revenue…We continue to believe physical stores are and always will be an extremely important part of our ecosystem…Our stores are our local hub and communities across the globe…and our portal to bring new guests into our brand, particularly men” – Lululemon Athletica (LULU) CEO Calvin McDonald

Netflix wants to catch Disney in animation

“We keep trying experiments. The business model will be pretty similar in five years. Can we figure out animation? Can we catch Disney in family animation?” – Netflix (NFLX) CEO Reed Hastings

Technology:

Will we ever go back to offices?

“…when you think about the work from home world, I don’t think it’s ever to go back to the old normal. I think there’ll be a new normal, we don’t know exactly what it is.” – DocuSign (DOCU) CEO Dan Springer

“…don’t think we’re ever going back to the way that it was before. I think, first of all, it will be, unfortunately, I believe, a very long time until it’s safe to put people back into offices in the way that we were before with that density” – Zoom (ZM) CFO Kelly Steckelberg

Some things are harder but some things are better with remote work

“…it’s harder to have those personal connections to people, when we don’t have people coming into the office. And each day that goes by a bigger percentage of DocuSign owners have never met personally, one of their colleagues. We’re about to cross over $1,000 DocuSigners that have joined since we were doing remote office work. So it’s going to get tougher and tougher. And I think the real answer is increased communications, we are looking at changing up the mix of communications. And some of the things are harder. But I’ll tell you something else, some of the things are better.” – DocuSign (DOCU) CEO Dan Springer

“I just think that we’ve all seen that this is a very productive, healthy way to work. And people love it. We hear from our customers all the time that they love being able to get up, have breakfast with their kids, go to work all day, maybe take a bike ride at lunch and then be there for dinner. And people don’t regret that they aren’t flying hundreds of thousands of miles a year anymore. They’ve really embraced this way of living.” – Zoom (ZM) CFO Kelly Steckelberg

Reed Hastings doesn’t see any positives

“I don’t see any positives. Not being able to get together in person, particularly internationally, is a pure negative.” – Netflix (NFLX) CEO Reed Hastings

We may end up with a 4 day work week

“If I had to guess, the five-day workweek will become four days in the office while one day is virtual from home. I’d bet that’s where a lot of companies end up.” – Netflix (NFLX) CEO Reed Hastings

Video Games are now written for as many platforms as possible

“…the market has evolved over generations, with the overall consoles…what is key now is the, games are now written to be played across as many platforms as possible.” – NVIDIA (NVDA) CFO Colette Kress

Saas is a form of DIFM (vs. DIY)

“…there has been a trend to an accelerating growth subscription SaaS and cloud. The idea that you run it for me versus me running it. It’s capitalized in your environment versus mine, that’s been a positive trend now for a while.” – VMware (VMW) CEO Patrick Gelsinger

Industrials:

Inventories are being re-stocked

“I think a fair amount of destocking occurred and we’re starting to see a fair amount of restocking. It’s been occurring over the last couple of months, handful of months.” – Union Pacific (UNP) CEO Lance Fritz

There are signs of tightness in transportation markets

“Parcel and truckload, however, have seen double-digit growth in the quarter, driven by e-commerce and inventory restocking. Demand is at or near peak season levels” – Union Pacific (UNP) CEO Lance Fritz

“Certainly with the demand Jason, we’ve seen that truck prices go up. I think it’s a function also there’s a lot of demand out there, but it’s also a supply issue I think in talking to a couple of our customers certainly there’s some concern with respect to drivers. So there’s a shortage there. People who were laid off may not be coming back and not wanting to drive anymore be a truck driver. So there’s a bit of an issue there. And I think you’re starting to see and obviously, we’re seeing the truck prices go up quite significantly.” – CSX (CSX) Executive Vice President of Sales & Marketing Mark Wallace

Healthcare:

Honeywell has increased capacity for n95 masks by 25x

“…we have continued to expand capacity and we haven’t given out specific numbers publicly, but we are going to be well in excess of 25x output by the end of the year that when we started the year, and we’ve opened a number of new facilities around the world in partnerships with the local markets.” – Honeywell International (HON) CEO John Waldron

The market for health and hygiene has fundamentally changed 

“…we think that the market for N95 in particular but health and hygiene and more generally has changed pretty fundamentally. And that we think that there is a long-term durable demand here for what we’re doing.” – Honeywell International (HON) CEO John Waldron

Miscellaneous Nuggets of Wisdom:

Pay up for great people

“When you’re looking at great sports teams, they’re often the teams that can pay high for the best players. We want to have the absolute best players and compensation is one part of that. We’d rather have three outstanding people than four OK people.” – Netflix (NFLX) CEO Reed Hastings

You can create a new market when you do extraordinary work

“…one thing that we’ve learned over time too, if you do extraordinary remarkable amazing work, you actually can create a new market. And people, we’ve learned over time, consumers want better things. If you really do significantly better work, people will pay for it.” – RH (RH) CEO Gary Friedman

When a crisis hits, you’d rather have equity than debt

“…if you had told me a year or two ago that, could be CFO over a $75 billion balance sheet, would have been delighted, because maybe we would have had a comparable market cap, but unfortunately I think I’ve learned enough to know that you’d rather have that in equity than debt.” – Delta Air Lines (DAL) CFO Paul Jacobson

Good CEOs don’t necessarily make decisions

“A good quarter would be one where I made no decisions, a no-hitter. I haven’t had that yet. But mostly my job is to inspire people, excite them: How can we serve the customer better? I’m sort of educating, coaching, cheerleading, guiding. But I’m not making decisions” – Netflix (NFLX) CEO Reed Hastings

Organizations can suffer from over-deference to great leaders

“I made a major error in splitting the DVD and streaming services and increasing the pricing in 2011, called Qwikster. The stock went down 75% over four or five months. It was a big error. And we lost subscribers, etc. And certainly I took ownership of it, and we eventually healed with consumers and now DVD and streaming are separate, but I was just going too fast. And the lesson that we got out of it is not the obvious one of the arrogant CEO who just shoots from the hip. That’s an age-old story. The more subtle one is that all the leaders around me thought it was a bad idea, but didn’t know the other ones thought it was bad and didn’t speak up enough. And their rationale was not fear, the rationale was, “Well, Reed’s made all these hard decisions before that have gone well, so I must be wrong, and I’ll bet Reed is right.” So it was over-deference.” – Netflix (NFLX) CEO Reed Hastings


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