The Transcript 11.02.20

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Succinct Summary: Most parts of the economy have normalized and the economic winners are booming.  Technology, cloud service and e-commerce are leading the way and other industries are surging as well.  Financial service firms focused on M&A advisory, trading and restructuring are seeing strong business.  The housing market is also on fire with new home sales up 32% y/y.  This week’s election and a renewed wave of COVID could dampen activity, but for now, the economy is doing remarkably well.  COVID may have led to structurally higher productivity.

Macro Outlook:

Most parts of the economy have normalized

“…now we believe that most markets are in the normalization phase domestically with some approaching growth…our SpendingPulse estimates for quarter three show U.S. retail sales up 1.8% versus a year ago, ex-auto, ex-gas.” – Mastercard (MA) CEO Ajay Banga

“..we’re pleased with the degree to which advertisers really have reactivated their budgets, this in the third quarter, they reacting in part to, I think, evidence that consumers are showing strong demand across nearly all verticals, it’s everything from home and garden to computer to work from home.” – Alphabet (GOOG) CEO Sundar Pichai

The hardest-hit segments are still down but improving too

“Institutional division results also improved from the second quarter as consumer activity within restaurants, hotels and entertainment facilities continued to recover, though foot traffic at them continues to run below last year due to COVID-related restrictions that yielded the lower Institutional results.” – Ecolab (ECL) VP External Relations Mike Monahan.

If you’re a winner, you’re booming

“If you’re a winner in this environment and your stock, you’re booming you might make a decision to change or continue to grow. And if you’re a company that was marginally you’re not in restructuring, but you’re kind of marginally off-center and you weren’t ready for the digital economy maybe you have to do something quick and change your strategy and your go to market.” – Moelis & Company (MC) CEO Ken Moelis

Productivity could actually be surging

“Right now we feel like it’s exceptionally busy and two things are happening, one is we’re getting extraordinary efficiency in the way the bankers use their time — I mean literally our bank — I’ve talked to bankers and they’re on their resume from all the way 7:00 AM to 7:00 at night. I used to ask your banker, were you busy this week? And they said well I had to travel to Germany and then I came back and I had to get to the West Coast and then came back and so they’re literally talking about two-thirds of their — 90% of their work time was getting to or from an airport. I think we’re getting more production per hour — because of that dramatically because of where people are and actually we are getting less expenses, so it’s a pretty interesting what’s going on right now” – Moelis & Company (MC) CFO Amy Shapero

Companies are expecting to return to growth in 2021

“I think, we are in good shape to be playing above 2019 EPS in 2021.” – Ecolab (ECL) CEO Doug Baker

“…our preliminary expectations for adjusted EBITDA for 2021 could look similar to the Company’s original 2020 guidance” – HCA Healthcare (HCA) CEO Sam Hazen

But the rate of economic improvement may be slowing

“We expect our improvement to continue in the fourth quarter, though likely at a slower rate as the second COVID-19 wave impacts reopenings.” – Ecolab (ECL) SVP, External Relations Mike Monahan

There is an election this week

“Well look there’s a lot of volatile — there’s a lot of things up in the air right — there’s an election [this] week and there is a virus out there. But what I’m seeing would lead me to believe we’re in a long-term a M&A cycle two years to three years easy.” – Moelis & Company (MC) CEO Ken Moelis

Options traders are expecting an increase in volatility

“Election uncertainty continues to be seen in the VIX futures term structure. On August 31, the spread between the September and October VIX futures was more than double the previous three presidential elections. So the election in and out of itself is the short-term cause and there’s big blip until we know what administration, what policies are going to carry us out into the New Year.” – Cboe Global Markets (CBOE) CEO Ed Tilly

So far the lapse of stimulus hasn’t had a huge impact

“Even as those payments have lapsed, the positive impact they have had to support the health of the consumer has mitigated the negative impact from economic pressure on the consumers we would normally expect in a period of such rapid increase in unemployment and significant economic stress.” – O’Reilly Automotive (ORLY) CEO Gregory Johnson

We’re also seeing a new wave of COVID

“The COVID-19 pandemic, which we all hoped would be easing by now, is gearing up for an additional wave.” – SAP (SAP) CEO Christian Klein

Which is likely to stay with us throughout 2021

“…we believe, we will continue to treat COVID-19 patients throughout 2021. Over the last two quarters, COVID-19 patients have represented approximately 6% of our admissions. Recognizing that there are many variables that could affect next year, at this point, we believe it is reasonable to estimate around 4% to 5% of our 2021 admissions could be related to the virus.” – HCA Healthcare (HCA) CEO Sam Hazen

“…what we believe is, vaccines will be approved here in short order, but they’re first going to go to frontline workers, second to populations at greatest risk, and then broader populations beyond that. And you need a significant number of the population. Again, it’s going to take quarters to get this out.” – Ecolab (ECL) CEO Doug Baker

International:

Cross border travel remains weak

“…we have seen some improvement in domestic travels in the quarter, including spending in categories such as lodging and restaurants. Cross-border travel, however, remains constrained.” – Mastercard (MA) CEO Ajay Banga

US / Mexico travel has rebounded strongly though

“The trajectory of the recovery, where borders are now open provide some indication of how fast the cross-border business could rebound once most borders reopen. For example, travel from the U.S. to Mexico saw 40 point recovery from the trough in April through July, and the trend continue through the quarter. This corridor actually grew over 20% in constant dollars in September and October.” – Visa (V) CFO Vasant Prabhu

5G is fairly advanced in China

“In terms of the market, their 5G is fairly advanced there. They’re forecasting 600,000 base stations by the end of the year. And so we’re entering the market at a very good time,” – Apple (AAPL) CEO Tim Cook

Construction should be strong in China too

“In China, we expect our construction business to continue to be strong due to government spending on infrastructure and building activity. Based on what we see today, the strength in China should continue going into next year.” – Caterpillar (CAT) CEO Jim Umpleby

Financials & Real Estate:

Investment banks are busy

“Our restructuring-related activity was the highest, it’s ever been exceeding last year’s record third quarter contribution. I think our M&A pace — feels as high as it’s ever been. Our backlog is as strong totally — as it’s ever been.” – Moelis & Company (MC) CEO Ken Moelis

There’s an increased interest in M&A ahead of higher taxes

“In the last six weeks there has been an increased interest in the possibility of doing things between now and end of the year with the potential that there would be President and or Congress that would be in a position to increase cap gains taxes, which means they would want to take some chips off the table and the lower tax structure, tax rate this year.” – Brown & Brown (BRO) CEO Powell Brown

Retail investors are trading heavily, but institutional trading is more muted

“In the third quarter, retail trading led the way to a 42% increase in equity options trading at Cboe with smaller short-term positioning trades…Zero broker commissions and free trading apps ushered in a new generation of retail traders, who continue to contribute to record volumes in 2020. Conversely, market uncertainty continues to dampen institutional trading.” – Cboe Global Markets (CBOE) CEO Ed Tilly

A record number of business creations

“Q3 2020 the United States had a record number of new business creations actually the highest it’s been since 2004.” – Shopify (SHOP) COO Harley Finkelstein

E-commerce is leading to a boom in industrial leasing

“CoStar data tells us that the third quarter 2020 was actually a new record for industrial leasing volume. Amazon obviously led the way, but a deep roster of firms are looking to expand their distribution footprints to catch-up. Walmart and Target have been especially active this year. Along with third party logistics firms, home good retailers and a long list of others.” – CoStar (CSGP) CEO Andy Florance

Consumer:

Holiday shopping has started, but it will likely be a lot different than usual

“I think the Black Friday, Cyber Monday weekend is now becoming an entire season. So, we’re certainly seeing merchants start much faster. We also know that more consumers have already decided to do the majority of their holiday shopping online” – Shopify (SHOP) COO Harley Finkelstein.

“The strength and timing of the holiday shopping season is also likely to play out differently this year than it has historically, with the buying season that may be accelerated and even more digital in terms of advertising and delivery of goods and services than ever before ” – Twitter (TWTR) CFO Ned Segal

“With media reports highlighting potential holiday season bottlenecks, consumers began their holiday shopping earlier this season. We expect earlier holiday marketing and promotional activities as retailers seek to mitigate social distancing and shipping capacity constraints to encourage consumers to stretch holiday shopping over a longer period of time” – Columbia Sportswear (COLM) CEO Tim Boyle

Permanent closures continue as retail traffic remains down

“Overall, brick and mortar store traffic and sales trends remained well below prior year levels, stores and destination locations and tourist dependent markets remain some of the most severely impacted stores. We anticipate traffic in these markets to remain depressed until tourism resumes. We continue to evaluate our own store fleet and have made the decision to permanently close a small number of locations. Year-to-date, we’ve permanently closed eight stores in the U.S. and one in Europe.” – Columbia Sportswear (COLM) CEO Tim Boyle.

“Although we expect to open more stores globally in fiscal 2021 than we did last year targeting approximately 2,150 new store openings compared to about 2,000 in fiscal ’20, we expect store closures to increase versus prior year from approximately 600 in fiscal ’20 to about 1,050 in fiscal ’21” – Starbucks (SBUX)  CFO Pat Grismer

Housing continues to be strong

“The housing market’s strength is evident in a range of economic indicators, including purchase applications were up 24% year-over-year in the recent reporting period. Existing-home sales rose 9.4% in September to a seasonally adjusted annual rate of 6.54 million, the highest since May 2006. And the Commerce Department reported Monday that despite the modest increase in September, sales of new homes increased 32.1% from a year earlier. Clearly, housing has been very strong.” – Freddie Mac (FMCC) CEO David Brickman

“Rates are low, Millennials are buying, you’re seeing people purchasing new homes to get more space to get a pool transitioning out of cities into suburbs, we’re seeing all that kind of mix.” – Intercontinental Exchange (ICE) CEO Jeff Sprecher

Rents are increasing in suburbia

“So already, as John said earlier, already, we’re starting to see rents increase now in suburbia as that dynamic plays out. And they’re reducing in the cities and the areas that have previously had higher rents.” – Essex (ESS) CEO Michael Schall

Technology:

We’re in the early innings in Tech and cloud

“The way I think about the computing landscape going forward is if you sort of said at the highest of levels today as a percentage of GDP, tech spend is 5%. We think it will double in the next 10 years. And if anything, this pandemic perhaps has accelerated that doubling. And in that context, what’s the large — the most secular need, it’s the need for distributed cloud infrastructure. It’s both needed for modernizing existing applications you have, and so that’s why — by the way, 20% penetrated, so there’s more 80% that needs to move. But more importantly, there’s going to be new application starts which need infrastructure. And so, if you sort of add those up, I think that we’re still in early innings.” – Microsoft (MSFT) CEO Satya Nadella

Non-tech companies are talking about deploying AI

“In addition, our autonomous mining trucks continue to gain traction with customers continuing to report improvements and efficiencies and safety on autonomous mining sites. We have over 340 autonomous trucks running now and expect to approach 400 by year end.” – Caterpillar (CAT) CEO Jim Umpleby

“Citibank is assessing our AI platform to determine enhanced capabilities to mitigate credit losses.” – Mastercard (MA) President Michael Miebach

“In Healthcare, we introduced a number of AI-enhanced products to make our customer workflows more efficient” – General Electric (GE) Chairman & CEO Larry Culp

Industrials & Transport:

Manufacturing end markets are still soft

“Most manufacturing end markets, while showing sequential improvements in the quarter, are still soft. Many national accounts are running one shift as opposed to the two or three shifts, they were running pre-pandemic.” – MSC Industrial Direct (MSM) CEO Erik Gershwind

Managing supply chains is a pain

“I’ll just address just pinch points. Supply chain is tight. We’re working actively with all of our suppliers to continue to improve their output levels, but they have a lot of the same challenges we have with manpower. I mean, just managing factories today in the COVID-19 world is — well, I don’t know if there’s an easier way to say it is a pain in the butt. I mean it’s difficult. It’s presented a new kind of layer of complexity there that none of us really need when you’re trying to run a factory, and that extends all the way up to supply chain.” – Generac (GNRC) CEO Aaron Jagdfeld

Capacity constraints in shipping mean more pricing power for UPS

“So as you know, there is a capacity constraint in the industry. It doesn’t matter what supply chain you are there’s a capacity constraint in the industry….When you have tight capacity, it also means that prices tighten.” – United Parcel Service (UPS) CEO Carol Tomé.

Companies are saving a lot of money on travel

“We saved nearly $1 billion in travel this year because travel’s ground to a halt, internal travel, travel on expenses. So there’s things like that will resume at a later date and maybe not get to the same levels as the past.” – Amazon.com (AMZN) CFO Brian Olsavsky

“…we’re currently spending modest amounts on travel. A couple million dollars a quarter used to be probably $10 million a quarter. So there’s an $8 million delta on a quarterly basis. I don’t know how to judge — how much of that is going to have return. I’m assuming that it’s going to be quite a bit less than the full $8 million gap right now.” – Moelis & Company (MC) CEO Ken Moelis

But there has been a modest uptick in business travel

“As we noted in the last night’s earnings press release, we continue to experience healthy leisure demand. Since Labor Day, we’ve seen a modest uptick in business travel demand, while leisure travel has held up better than its traditional post-Labor Day decline.” – Pebblebrook Hotel (PEB) CFO Raymond Martz

Healthcare:

3M will make 2 billion disposable respirators this year.

“…we’ll make around two billion respirators this year. We’ll exit at a run rate of 1.2 billion for the second half, which is nearly 2.4 million to 2.5 billion respirators for 2021. And so, our view is that demand remains strong.” – 3M (MMM) CEO Mike Roman 

Ecolab’s hand sanitizer business up 3x

“Our capacity challenges really have been around hand care in particular, to a lesser extent to some surface sanitizers. It’s all driven by demand. Meaning, our hand sanitizer business is up 300 — 3x. Now, we’ve had to do a lot of work to be able to increase capacity, 3x. And now, we are expanding that beyond that, because demand is greater than that. But, these aren’t easy, easy ramp-ups as you go through this. Right? This is GMP, you’ve got to make this properly.” – Ecolab (ECL) CEO Doug Baker

Sales of masks declined at Etsy

“…masks continue to be a very substantial product in the third quarter. $264 million in GMS and 24 million masks sold. But as masks become more and more ubiquitous available in every retail outlet everywhere in the United States and across Europe, we are seeing sales decline sequentially” – Etsy (ETSY) CEO Josh Silverman

Capacity utilization in the ER is down to 60% from 85%

“…at a Company level, we’re running about 60% to 65% utilization of our ER beds currently. That’s down from about 85% in 2019 ” – HCA Healthcare (HCA) CEO Sam Hazen

Acceleration in the use of blood for cancer testing

“…one of the things that’s playing out through the course of the pandemic is you’re starting to see an acceleration of blood as a sample type for cancer testing. So you’re seeing an acceleration in the growth of liquid biopsies, which we think is a durable dynamic. And it’s not just as a result of the pandemic, but we think that’ll continue to play out in the coming years.” – Illumina (ILMN) CEO Francis deSouza


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