The Transcript 09.21.20

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Succinct Summary: This has been an incredibly difficult operating environment but we’re all learning to live in a world with Covid.  Economic activity is much better than anyone expected and government officials are pushing for even more stimulus.  The Fed expects to keep interest rates at zero until 2023.

Macro Outlook:

This environment is as difficult as it gets

“I’ve been in this business for forty years. I’ve never seen a more difficult operating environment from the one we are in. We are dealing with a 100 year pandemic, absenteeism as a result in certain facilities. Wildfires, hurricanes, social unrest unlike anything I’ve seen since the 60s. And I live through the 60s, so I remember it. All of that places some pretty difficult challenges on an operation when you are trying to run a national network.” – FedEx (FDX) Ground CEO Henry Maier

But we’re learning to live with Covid

“What’s happening is basically we’re learning to live with…COVID which still spreads. And we’re learning to engage in economic activity.” – Federal Reserve Chair Jerome Powell

Things look better than anyone thought they would

“I’ll start by saying that things look better than we thought they would. The data looks pretty good relative to what we would have thought at second quarter earnings. But, importantly, we still haven’t seen the typical recessionary indicators that you would expect to see at this point.” – JPMorgan Chase (JPM) CFO Jen Piepszak

“The recovery has progressed more quickly than generally expected, and forecasts from FOMC participants for economic growth this year have been revised up since our June Summary of Economic Projections.” – Federal Reserve Chair Jerome Powell

“…what you see now with customers who are starting to enter this next phase where things have stabilized a bit and companies are really looking to return to growth.” – (CRM) EVP & GM of Sales Cloud Doug Camplejohn

“I think for the whole industry, it’s probably a little too soon to say that things are better than previously forecast. They’re probably not worse than previously forecast.” – Wells Fargo (WFC) CFO John Shrewsberry

“…we are encouraged about the recovery we are seeing in most of our markets…Our full-sized and SUV plants are running all out and our other facilities are operating in line with market demand. We are selling every full-sized truck and SUV we can produce as demand remains strong and our inventories remain lean.” – General Motors (GM) CEO Mary Barra

“Outside of the U.S., recovery has taken hold as well as coronavirus-related restrictions have been loosened. Manufacturing output is improving off the April low…global trade volumes which declined 10% in the first half of calendar year 2020 have resumed sequential growth.” – FedEx (FDX) CEO Fred Smith

“I’ve been exceedingly pleased with the strength of the consumer. I think, part of it certainly is stimulus checks that have gone to people’s bank accounts. And that’s influenced perhaps some of the shift to owned money versus owed money. But, it’s been sustained at higher levels. And I don’t know if that’s maybe in part sort of behavioral shifts of people sort of in the period of time that we are maybe with macroeconomic uncertainty, maybe using their money differently, but it stayed at an elevated level” – PayPal (PYPL) CFO John Rainey

Clearly we are having a great rebound

“Clearly we are having a great rebound. We are going to have a very strong third quarter.” – Treasury Secretary Steven Mnuchin

The Economy has remained resilient even as the CARES act has lapsed

“So far, the economy has proven resilient to the lapsing of the CARES Act unemployment –enhanced unemployment benefits. But there’s certainly a risk.” – Federal Reserve Chair Jerome Powell

But we want more stimulus!

“…my sense is that more fiscal support is likely to be needed. Of course, the details of that are for Congress, not for the Fed. But I would just say there are still roughly 11 million people still out of work due to the pandemic, and a good part of those people were working in industries that are likely to struggle.” – Federal Reserve Chair Jerome Powell

The US government is not worried about deficits or bubbles

“Now is not the time to worry about shrinking the deficit or shrinking the fed balance sheet. There was a time where the fed was shrinking the balance sheet and coming back to normal. The good news is that gave them a lot of room to increase the balance sheet, which they did.” – Treasury Secretary Steven Mnuchin

“I would say if you look at the long experience of…quantitative easing and low rates for seven years…I would say it was notable for the lack of the emergence of some sort of a financial bubble…The popping of which could threaten the expansion. That didn’t happen. And frankly, it hasn’t really happened around the world since then…I don’t know that the connection between asset purchases and financial stability is a particularly tight one.” – Federal Reserve Chair Jerome Powell

And the Fed is going to keep rates low for (ever?)

“…we will keep policy where it is now, keep the rate policy where it is now until…labor market conditions reach levels that are consistent with the committee’s assessments of maximum employment, until inflation reaches 2 percent and until it’s on track to go above 2 percent moderately for some time.” – Federal Reserve Chair Jerome Powell

There are risks

“And so, while things do look a little bit better than we thought they would, we’re still dealing with an enormous amount of uncertainty looking ahead…Obviously, we have an election. We have a potential second wave. We have tapering of stimulus, as you said. There’re still lots of things to be worried about.” – JPMorgan Chase (JPM) CFO Jen Piepszak

“…what do corporate taxes look like? We’re all. – we’re all operating in a lower tax rate environment today than we were just a few years ago. And I don’t think it takes a lot of imagination to imagine a higher U.S. corporate tax rate in the future, depending on, on where things go. And that will have an impact at the margin, on the whole industry.” – Wells Fargo (WFC) CFO John Shrewsberry


The Chinese economy is seeing a strong recovery

“In China, the industry continues its recovery and our JVs have been seen improved sales since the deepest impact of the virus in February. Our retail sales were up over 10% year-over-year in each of the past two months.” – General Motors (GM) CEO Mary Barra

“…while not everybody has seen the same progression to the same level like we have in China, which has now gotten to a really extraordinary occupancy in August in greater China at 65%, you still have seen a really nice steady progression.” – Marriott International (MAR) CFO Leeny Oberg

“China is in many ways up and running in a very, very normal way. We look at our businesses there. People are walking around without mask. People are back in the office. So we are really seeing that part of the world kind of coming back up to normal. Even in parts of Europe, particularly around Denmark and places like that, we have seen life return to the new normal.” – Herman Miller (MLHR) CEO Andi Owen

“…our second lead growth market, which is our business in China, you can see that our business there is approaching full sales recovery. We’ve posted flat comps in August, up from minus 10% in July.” – Starbucks (SBUX) CFO Pat Grismer


Banks may not start seeing credit losses until 2021

“…we’re not seeing anything that you would typically expect to see at this point in a recession…on the wholesale side, given the amount of liquidity that’s out there…we may see some losses there later this year, but more likely really see that start to emerge in the first half of 2021. On the consumer side…I think it’s easy to see that, that could be the back half of 2021 before we really start to see those losses realized in a material way.” – JPMorgan Chase (JPM) CFO Jen Piepszak

It’s hard to tell whether losses will be less severe or just delayed

“…the actual loss taking or charge off activity is getting pushed out on the consumer side. And these deferral programs are certainly a big part of it. And then all of the liquidity in the system and other forms of state and federal government support are having the effect of either making things better or at least pushing losses for the future. So we’re not anticipating those losses being worse sitting here in the third quarter, but it’s hard to know whether they’re going to be better or just further out in the future.” – Wells Fargo (WFC) CFO John Shrewsberry

There’s a hunger for yield

“There’s a hunger for yield, so investors are coming off the sidelines — there’s still a lot of money on the sidelines, actually — and looking for investments that they can get some kind of returns.” – Blackstone (BX) CFO Michael Chae

Capital markets are open even for commercial real estate

“But from a general standpoint, as you’re well aware, the M&A activities picked up. The financing activity is strong. It slowed down a little bit. It’s now picked up back to where it was in April, May in terms of investment-grade and especially high-yield issuance, and so you’re seeing that go on.” – Bank of America (BAC) CEO Brian Moynihan

“…commercial real estate…even in that market, that capital markets are open for customers, there was a CMBS deal priced a week or so ago at levels that reflect the pre-COVID environment.” – Wells Fargo (WFC) CFO John Shrewsberry

The 20s could be a lost decade for equity returns

“I think you can have disappointing long term earnings growth with multiples coming in a little bit, and I can see anemic equity returns over the next five to 10 years…I think this could be a lost decade in terms of equity appreciation” – Blackstone (BX) CFO Michael Chae


Consumers have shifted spending from services to goods

“In the U.S., spending that would normally have gone into services has shifted towards goods with goods spending boosted further by pent-up demand. Retail sales are growing again year-over-year and eCommerce is building at holiday level.” – FedEx (FDX) Executive VP Chief Marketing and Communications Officer Brie Carere

Consumers always find a way

“I think you know, consumers consume, right. They’re going to figure out a way to live their life and enrich their lives.” – American Express (AXP) CFO Jeff Campbell

FedEx is preparing for a holiday peak like none other

“I think this is going to be a peak like none other.” – FedEx (FDX) President Raj Subramaniam

Changing dating trends

“There are going to be long-lasting, consequential changes after this period where, you know, people are going to be using video more, the definition of a first date may change. Maybe the fact that geography is a constraint to finding love is going to be less important going forward.” – Match (MTCH) CEO Shar Dubey


2020 has been a historic year for digital adoption

“…this is a year where I think many of us will want to forget 2020 for lots of good reasons. But I think it’s also a year where people will look back and go, this was the time, for all the sort of tragedy that’s been associated with it, that the real birth of digital transformation kicked off and went into high mode.” – Microsoft (MSFT) COO Kirk Koenigsbauer

Digital shifts have been sticky

“So as regions around the country come back at different levels, the good news, we’re seeing our digital business is staying at 70% to 80% of where it, I would say, peaked, okay, even while dining rooms are coming back.” – Chipotle Mexican Grill (CMG) CEO Brian Niccol

“Some of what we’ve seen we think are fundamental shifts in consumer behavior. People just don’t want to handle money anymore. And what has probably gone from initially what would be described as pantry packing and stimulus checks, we think has become a much more profound and durable shift in consumer behavior. And one of the reasons we think that is because in areas where some of the shelter-in-place or social distancing measures have been relaxed, we’re still seeing much more elevated levels of e-commerce activity.” – PayPal (PYPL) CFO John Rainey

Customers are thinking longer term again

“…was it was very, very much a mad dash I guess, I would say. In the last few months, I think the tenor has changed…folks now are looking for the long-term. What’s going to be really durable? How much is.” – how much of what we’re doing now is going to stick? How much is going to really change? And so they’re thinking, I think a lot more long-term, as opposed to firefighting in terms of what is going to be the durable technology platforms that they’re going to go by.” – Microsoft (MSFT) COO Kirk Koenigsbauer

Sales people are adapting to a digital sales process

“You’ve kind of lost that walking through the halls and getting a feel for rep activities or meeting customers face-to-face and getting body language beyond what you just get above the waist. But on the plus side, you know we’re seeing that these reps are getting access to prospects for these 30-minute Zoom meetings that they may not have even been able to get to.” – (CRM) EVP & GM of Sales Cloud Doug Camplejohn

Business customers are expecting consumer features

“You know the B2B buyers are bringing their B2C expectations. You know what is it like to do one-click checkout on Amazon and have transparent pricing and reviews or recommendations from Netflix. They are bringing those expectations to the B2B party and the reps have to change from this kind of always-be-closing mentality ABC to kind of always-be-helping.” – (CRM) EVP & GM of Sales Cloud Doug Camplejohn

Cord-cutting accelerated, streaming hours moderating

“…the cord-cutting trends have accelerated. They were already accelerating pre-COVID, that’s further accelerated it….The streaming hours spiked up dramatically in the first phases of the lockdown. In late Q1 and Q2, they remain — they’re moderating a bit from those significant spikes that they’re still above the pre-pandemic levels” – Roku (ROKU) CFO Steve Louden


Moderna’s expects to have vaccine trial results in November

“…as we’ve said all along, we anticipate the base plan for readouts in November. There’s a high case scenario of earliest in October. I know, people have asked September.” – September is not in the cards. The math does not work for September.” – Moderna (MRNA) CEO Stéphane Bancel

Distribution is going to be a big challenge

“…from a distribution standpoint, obviously, the challenge that SARS-CoV-2 presents, COVID-19, is we’re trying to vaccinate the world’s population, 7.5 billion people likely…I don’t want to underestimate how big the distribution challenges are. In some ways, they are more germane than the scientific challenges.” – Merck (MRK) CMO Mike Nally


Domestic package volume is running 3 years ahead of plan

“Pre-COVID, we projected that the U.S. domestic market would hit a 100 million packages per day by calendar year 2026. We now project that the U.S. domestic parcel market will hit this mark by calendar year 2023 pulling volume projections forward by three years from the previous expectation.” – FedEx (FDX) Executive VP Chief Marketing and Communications Officer Brie Carere

There’s been a large reduction in air cargo capacity with passenger declines

“The first key trend is the dramatic reduction of air cargo capacity as a result of the significant loss of commercial airline capacity. Current estimates indicate that freighter capacity now accounts for 66% of total air capacity on the Transatlantic lane, 83% on the Transpacific and 80% on the Europe to Asia lane. This compares to pre-COVID freighter capacity of 33% for Transatlantic, 59% for Transpacific and 50% for Europe to Asia. FedEx Express is incredibly well positioned to benefit from a constrained air capacity market.” – FedEx (FDX) Executive VP Chief Marketing and Communications Officer Brie Carere

No signs of life in cross-border travel

“You would see airlines a little weaker than that 70%. And as many people have commented, you’re seeing a little bit of domestic travel, but the dollars, big dollars come from cross-border travel, and there’s so many restrictions around the globe, quarantine restrictions, et cetera. In cross-border travel, just you don’t see many signs of life yet. And that’s important for the long run” – American Express (AXP) CFO Jeff Campbell

Miscellaneous Nuggets of Wisdom:

Create a culture where your team is encouraged to voice their opinions

“In the fall of 1991, Fred took a chance on a 38 year old treasurer despite a significant amount of pressure to bring in a proven, seasoned CFO. When he told me he wanted me for the job, he said he had a tremendous amount of confidence in me and challenged me always think long-term and strategically. Among other things, Fred was very clear that I should always communicate what I thought no matter how against the grain it might be.” – FedEx (FDX) Retiring CFO Alan Graf

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