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The Transcript 03.29.20: Higher Confidence

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Succinct Summary: Confidence is high in the US thanks to strong vaccination rates. What will the new normal look like though? Offices could re-open by summer, but how much will we continue to work from home? And how much will we travel for business? Supply chains are still bottlenecked, leading to inflation pressure. The blockage of the Suez Canal won’t help that.

Macro Outlook:

Confidence is high that the world will be fully back to normal by summer
“I really believe we’re seeing the positive impact of the rapid rollout of the vaccine in the U.S. CEO confidence is very high as measured by the business roundtable. Many CEOs are getting the vaccine themselves and promoting it to their employees because they see it as key to getting fully back to work. Previously, many were targeting September 1 as a return to office day. And now we’re hearing more talk about early summer or even spring as the beginning of their first waves of returning.” – Steelcase (SCS) CEO Jim Keane
“We think the vaccines are getting put out. And certainly, by summer, I think, most of the people that want to get a vaccine will be able to get one.” – Phillips 66 (PSX) CEO Greg Garland
People are busy
“The project opportunities we track and the customer RFPs we received saw double-digit increases in February versus January, and our customer visits to Grand Rapids, including both physical and virtual visits, more than doubled. And those trends have continued through the first few weeks in March. So, our salespeople are very busy. Our pricing and quoting people are busy. And our leadership team is busy as customers want to know how we see the new workplace emerging. We’re hearing the same thing from the design firms we work with. They are busy and expect to continue to get busier through the spring.” – Steelcase (SCS) CEO Jim Keane
And that’s creating inflation pressure
“Well, certainly, at a high level, we are preparing for higher inflation…for the full year, we are still expecting about 3% inflation…inflation is very broad-based and it’s actually global. So we are seeing it across the globe we are seeing inflation and it’s broad-based across commodities, across logistics, across things like aluminum and steel.” – General Mills (GIS) CEO Jeff Harmening
“We are also facing some higher costs due to commodity inflation and because of a number of temporary global supply chain challenges” – Steelcase (SCS) CEO Jim Keane
“…with respect to near-term actions, look as we had in the past, when we see major inflationary pressures like we’re seeing with steel, we’ve had success implementing price increases to help offset that. That is, in fact, what we’re doing. We’ve announced a price increase.” – Herman Miller (MLHR) CEO Andrea Owen
Supply chains are still trying to recover from last year
“The supply chain is still catching up and trying to rebuild inventory levels in particular in the North American market…So some of those supply chain issues have been well-documented, in particular the semiconductor shortages…There are some other challenges, right? So there was a bout of severe weather in the southern US a few weeks ago. That has actually created a shortfall of chemical feedstocks. That’s also impacting the supply chain. There was a fire last week in Japan in a major semiconductor plant. So all of these are sort of impacting our customers. But in the end, it’s delaying the recovery, but the recovery is coming back.” – IHS Markit (INFO) EVP-Transportation Edouard Tavernier
The blockage of the Suez Canal won’t help
“For every day the canal remains blocked, the ripple effects on global capacity and equipment continues to increase. We have already started to proactively manage our capacity and will not be accepting cargo where we cannot ensure space. While efforts to dislodge the Evergreen vessel from the Suez Canal continue, hundreds of ships are caught up in the traffic snarl in both directions” – A.P. Møller – Mærsk (AMKBY) Management
“Companies should expect the Suez blockage to lead to a constriction in shipping capacity and equipment, and consequently, some deterioration in supply chain reliability issues over the coming months. There’s no doubt that the current Suez Canal blockage is going to result in one of the biggest disruptions to global trade in recent years, and we are working around the clock to manage our fleet and services so we can keep cargo moving and keep trade flowing as best we can under the circumstances” – Mediterranean Shipping (MSC) SVP Caroline Becquart
“We are moving towards a just-in-case supply chain, not just-in-time. This incident will make people think more about their supply chains,” – A.P. Møller – Mærsk (AMKBY) CEO Soren Skou


The US economy is getting a boost from rapid vaccine distribution
“On the commercial side, certainly the advantage in the U.S. has been an accelerated rollout of vaccinations and different strategies in terms of lockdowns, et cetera. That’s allowed a little bit more of the economy to start rolling a little bit faster. And I think you’re going to see that more going forward. I think you’re going to see the commercial side in our U.S. business grow at a little slightly faster pace than that then it would in Canada.” – Bank of Montreal (BMO) Group Head, North American Personal & Business Banking Ernie Johannson
Are NFTs the future or folly?
“In a nutshell, NFTs make it possible to own a piece of digital media in the same way that you are able to own a digital currency like Bitcoin. NFTs enable you to monetize directly with your superfans, someone who really wants to patronize your work can do so and pay a ton of money to you directly and probably more money than you might ever make, even with a billion views or listens on Spotify. That’s the day one incentive for creators to try out this new marketplace.” – Variant Founder Jesse Walden
“[NFT] is an alternative digital emerging asset. I don’t think we could find many more risky categories of assets at this point. I think it’s probably, at this stage, akin to going into the casino. You know you’re going to spend money but maybe you’re doing it for enjoyment, for the experience. If you win, you’ve got lucky and I think it’s the way we need to think about it at this point; it’s in its initial phase… What I think we’ve seen increasingly over the past few months is people trying to register NFT-based ownership over other people’s copyrighted tweets… We’ve seen many instances of artists having their works effectively plagiarized by people minting NFTs of their work even though they weren’t the creators…I do expect NFTs to be some of the bedrock economic infrastructures within the virtual economy as it emerges over the next ten years, especially as that virtual economy begins to emerge out into the real world.” – BNP Paribas (BNPQF) CEO John Egan

Banks warn of significant possible losses from the default of US hedge fund

“A significant U.S.-based hedge fund defaulted on margin calls made last week by Credit Suisse and certain other banks. Following the failure of the fund to meet these margin commitments, Credit Suisse and a number of other banks are in the process of exiting these positions. While at this time it is premature to quantify the exact size of the loss resulting from this exit, it could be highly significant and material to our first-quarter results, notwithstanding the positive trends announced in our trading statement earlier this month” – Credit Suisse (CS)

“Nomura Holdings, Inc. today announced that on March 26, 2021, an event occurred that could subject one of its US subsidiaries to a significant loss arising from transactions with a US client. Nomura is currently evaluating the extent of the possible loss and the impact it could have on its consolidated financial results. The estimated amount of the claim against the client is approximately $2 billion based on market prices as of March 26. This estimate is subject to change depending on unwinding of the transactions and fluctuations in market prices.” – Nomura (NMR)


Comps up 23% at GME
“2021 is off to a great start, led by positive 23% comparable sales in February as we continue to benefit from the launch of new consoles and the accessories in games that come with that product…Global E-Commerce sales increased 175% and represented 34% of total sales in the fourth quarter versus 12% of net sales in the prior year period.” – GameStop (GME) CEO George Sherman
General Mills thinks out of home dining will recover more slowly
“I would envision an environment where demand is not as high as it is today in at-home eating, but it’s higher than it was pre pandemic. And I think some investors and some analysts feel as if volume is just going to snap back to the way it was before the pandemic. And what we’ve seen outside the U.S., what we’re currently seeing in our current channel will lead us to believe that any return to normal will be more elongated, and that return to norm will eventually be different.” – General Mills (GIS) CEO Jeff Harmening 
Millenials and Gen Z are becoming 50% of the workforce
“All 14,300 people at Phillips 66. So we’re approaching 50% Millennial/Gen Z, Paul, as a company.” – Phillips 66 (PSX) CEO Greg Garland
Fire your marketing department?
“Tesla is the fastest growing most valuable car company in the world. They’ve never had a TV commercial. Think about that. People line up for Teslas, right? So we say inside our company, like, for example, we don’t have a marketing department, and that may shock a lot of people…We don’t have a marketing department because marketing a lot is about putting lipstick on a pig, right? It’s like taking an average idea and trying to dress it up and spin it and make it something better than average” – RH (RH) CEO Gary Friedman


Citi is implementing Zoom Free Fridays
“The blurring of lines between home and work and the relentlessness of the pandemic workday have taken a toll on our well-being It’s simply not sustainable. Since a return to any kind of new normal is still a few months away for many of us, we need to reset some of our working practice…After listening to colleagues around the world, it became apparent that we need to combat the ‘Zoom fatigue’ that many of us feel, so I overcame my initial resistance to this idea,” – Citigroup (C) CEO Jane Fraser
We’re consuming 7x as much information as we did 20 years ago
“I read a study and I think it’s about a year ago that humans are consuming 700% – 7 times the information than they were 20 years ago and it’s an astonishing number if you think about that from 20 years ago we’re consuming 7 times more information because of these devices we have and the amount of information, the amount of platforms we’re communicating on and the ease of communicating to us.” – RH (RH) CEO Gary Friedman
Intel is going back to its roots
“Innovation is alive and well and we’re far, far from done. Intel is back. The old Intel is now the new Intel…We’re bringing back the execution discipline of Intel. What I’ve called the Grove-ian culture that we do what we say that we’re doing to do. Things are moving rapidly as we restore execution, rebuild the Grovian culture, and I’ll say the new Intel starts today,..Intel is back. The old Intel is the new Intel. We’re going to be leaders in the market and we’re going to satisfy the new foundry customers, because the world needs more semiconductors and we’re going to step into that gap in a powerful and meaningful way.” – Intel (INTC) CEO Pat Gelsinger

Industrials and Transport:

Semiconductor supply remains bottlenecked
“…there’s a massive global bottleneck when it comes to the supply of semiconductors. That’s a general problem in the automotive industry. What caused it is mainly like the clear increase in demand from consumer electronics and other similar industries. As Peter Kössler has said, we adapt our production in a very flexible way. My assumption is that supplies will remain volatile this year as well.” – Audi (AUDVF) Board Member-Management Procurement & IT Dirk Grosse-Loheide
What will business travel look like post-pandemic?
“…we are including in our own calculus for what is yet to come back and of course through COVID, travel has been significantly reduced, in some cases to almost nil. Now that will stay that way forever, but I can also tell you that Andi and I are pushing the organization to think differently about travel in the future. I think we’ve all learned some new ways to do work. And so with that, we don’t expect to return to necessarily pre-COVID levels anytime soon. But you can’t run a global business without some people moving around” – Herman Miller (MLHR) CFO Jeffrey Stutz


Demand for gasoline may have peaked in 2019
“…the international energy agency yesterday predicted that the demand for petrol engines will never reach the level of 2019 again.” – Audi (AUDVF) Head of Communications Dirk Arnold
“…we see the profiles for North America and Europe, probably for gasoline, ultimately, flattening to declining, just given improved auto efficiencies, given bios, given EVs in that space.” – Phillips 66 (PSX) CEO Greg Garland
The EV charging market will grow with EVs
“Vehicles on the right side starting from very low numbers, eVehicles will continue to replace conventionally powered vehicles over the coming years. The annual global markets is expected to grow approximately 10 fold. Accordingly the market for EV charging solutions in which SMA is active, should see an average year on year growth of more than 30%.”  — SMA Solar Technology (SMTGF) CFO Ulrich Hadding

Real Estate:

Wework is back through a SPAC
“There’s going to be a huge shift in coming back to work, and we’re a flex provider, so we’re completely the person who would see it first because we’re plug-and-play…We see green shoots today. We’ve got 33 markets that are up double digits in the last 60 days all around the world, starting off in Asia and going all the way to America. I think people are making bets that, effectively, you’re getting a company at a pre-vaccine price for a post-vaccine company. They’re seeing a huge rebound in the business of flexibility,” – WeWork CEO Sandeep Mathrani 
CEOs are eager to get back to work
“CEOs are eager to put their real estate investments back to work. We were having conversations about the post COVID workplace with our customers throughout the year. But when January came, the rising confidence in the vaccine brought more urgency to those conversations. And now we’re seeing an increase in actual projects.” – Steelcase (SCS) CEO Jim Keane
Only 17% of CEOs think they will downsize their footprint
“In KPMGs recent CEO outlook post survey shows only 17% of CEOs think they will downsize their footprint compared to 69% back in August of last year. We agree completely with the principles of a hybrid workplace. But as employees returned to offices, companies will discover that hybrid is hard to get right. Every meeting might have a remote participant, but it’s not going to feel the same as when everyone was remote. It’s not the same as when everyone was in the same room. Individual work will be different too, as it will often include the need to jump on a video call without distracting others.”- Steelcase (SCS) CEO Jim Keane
Housing supply is virtually nonexistent
“As to overall market conditions, supply remains tight with existing home inventory down nearly 30% year-over-year. Resale home availability is sitting at record low levels, representing two-month supply and further below that level in many of our markets. This, combined with the underproduction of new homes over the last decade has resulted in supply being virtually nonexistent.” – KB Home (KBH) CEO Jeff Mezger

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