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The Transcript 04.26.21: The economic dam is bursting
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Succinct Summary: The economic dam is bursting and the economy is booming. Demand in the US was described as “very, very strong” and “phenomenal” thanks to strong consumer balance sheets and vaccinations. Supply chains are still disrupted and there are significant inflation pressures.
Macro Outlook:
Reopening continues around the globe
“…we see continued progress being made in the health crisis. More businesses are now opening up. Unemployment continues to decline. Consumers are spending at record levels. We are optimistic that expanding economic activity will in turn fuel loan growth as companies borrow, build inventory invest and hire more employees.” – Bank of America (BAC) CEO Brian Moynihan
“China appears to be the furthest along in terms of reopening, with activity levels largely back to normal. The US is not all the way back just yet, but is moving in the right direction. And an increase in vaccination rates across the country appear to be driving some of this progress. Europe is improving broadly. And while certain areas have recently experienced setbacks in the process of reopening, we’ve not seen any material impact.” – Danaher (DHR) CEO Rainer Blair
The US is very, very strong
“I would say the U.S. was very, very strong.” – ManpowerGroup (MAN) CFO Jack McGinnis
“I saw some commentary sort of questioning demand. Demand out there is absolutely phenomenal, across almost every sector. Very, very strong and it would appear to be there for the rest of this year going into next…So we see strong demand, tight supply, record low supply chain inventories across the space.” – Steel Dynamics (STLD) CEO Mark Millett
“And you heard us before talking about consumer demand, to be honest, in all the years I’ve been doing the earnings call, this is probably the year that I’m most bullish about mid-and long-term consumer demand trends in North America. So I’m not worried about consumer demand. ” – Whirlpool (WHR) CEO Marc Bitzer
Consumers have healthy balance sheets
“Our FICO scores stayed extremely stable as have our debt-to-income levels. So it’s showing us that the buyer and the consumer is healthy today. And there are still plenty of people out there that can afford to buy a house.” – D.R. Horton (DHI) VP, Investor Relations Jessica Hansen
The economic dam is bursting
“I think as you see the vaccine spread, this economic dam is really starting to burst and it’s going to be widespread in terms of an increase in activity and revenues across most businesses.” – The Blackstone Group (BX) COO Jon Gray
There are rapidly rising inflation pressures
“…the inflationary pressures, particularly surrounding some of our key commodities, looks like it is going to be more of a headwind in ’22” – Coca-Cola (KO) CFO John Murphy
“…we’re watching and seeing SG&A inflation in different parts of the world and in different parts of the business, ranging from wage inflation in selective geographies. You’ve got global logistics inflation. You’ve got commodity inflation.” – Genuine Parts (GPC) President William Stengel
“In the first quarter, global semiconductors and resin shortages amplified existing supply constraints, and thus impacted our product availability. Further, we are faced with rapidly rising inflationary pressures, primarily in steel and resins. To address these issues, we swift the responses with the necessary actions to protect margins and product availability. We announced significant cost based price increase in various countries across the globe ranging from 5% to 12%” – Whirlpool (WHR) CEO Marc Bitzer
What a difference a year makes
“…what a difference a year makes. Last year at this time, demand was almost completely shut down. And we’d been burning up to $100 million per day.” – United Airlines (UAL) CEO Scott Kirby
International:
Europe is slow to reopen
“…markets particularly in Europe continue to experience COVID-19 related difficulties which are resulting in the need for more restrictions and which is impacting the rate of recovery.” – ManpowerGroup (MAN) CEO Jonas Prising
Many emerging markets are getting hit hard by Covid
“The health situation in markets like India, Brazil, Turkey is worse than it’s ever been. The number of new cases, the number of hospitalizations, the number of deaths, unfortunately, was higher in the last week and over the weekend than has ever been the case. These markets do not have the healthcare infrastructure nor the financial means to provide subsidies to their citizenry. And as a result, when this happens, employment is affected. Consumption is affected. GDP is down significantly in some of these markets.” – Procter & Gamble (PG) COO Jon Moeller
Interactive brokers said that new account openings are slow in China
“So no, the slowdown is the fastest in China and Hong Kong. It must have something to do with the Chinese government cracking down on banks that send out money. So our customers find it difficult to fund accounts. And our China and Hong Kong used to be our fastest growing region. And it suddenly has become practically our slowest growing region. So yes, the answer is that’s where the greatest change has occurred” – Interactive Brokers Group (IBKR) Chairman Thomas Peterffy
Netflix’s international shows are finding global audiences
“…this quarter was our biggest new series on Netflix in the world was Lupin from France. And the show was not like a Waterdown French show. It was a very French show. And what’s really been great about it is as you tell stories from around the world. Those to the more authentically local they are, the more likely they are to play around the world because people recognize the authenticity of the storytelling.” – Netflix (NFLX) Co-CEO Ted Sarandos
Financials:
Q1 was a spectacular quarter for retail stock trading
“Q1 was an absolutely spectacular quarter. I have never seen anything like this in over 50 years on Wall Street… While we have had some other very active quarters in the past, there were two unique features about this one. First, that it seemingly happened in parallel and in tandem across all geographies around the globe; and second, that the feverish activity appeared to be led much more by individual investors than by institutions.” – Interactive Brokers Group (IBKR) Director, Investor Relations Nancy Stuebe
But trading activity has been subsiding since the end of February
“The activity started to rise slowly, along with the advancement of the virus in March 2020, picking up speed towards the end of the year. It reached its crescendo towards the end of February and has been subsiding since.” – Interactive Brokers Group (IBKR) Director, Investor Relations Nancy Stuebe
SPACs are probably not going away
“In terms of the competitive dynamic, I think in some cases, yes, SPACs are providing some competition to us…It feels like there will probably be fewer IPOs of SPAC in the coming months, but I don’t think they’re going away. I think you’ll see some changes, maybe in terms of their disclosure, maybe some changes in terms of alignment, but I think we’ll see SPAC in the market for some time to come.” – The Blackstone Group (BX) COO Jon Gray
Consumer:
Netflix has lots of room to grow
“…outside of China, I think pay television peaked about 800 million households. So lots of room,” – Netflix (NFLX) Co-CEO Reed Hastings
Technology:
AI represents the automation of automation
“AI is a watershed moment for the world. Humans’ fundamental technology is intelligence. We’re in the process of automating intelligence so that we can augment ours. The thing that’s really cool is that AI is software that writes itself, and it writes software that no humans can. It’s incredibly complex. And we can automate intelligence to operate at the speed of light, and because of computers, we can automate intelligence and scale it out globally instantaneously. Every single one of the large industries will be revolutionized because of it. When you talk about the smartphone, it completely revolutionized the phone industry. We’re about to see the same thing happen to agriculture, to food production, to health care, to manufacturing, to logistics, to customer care, to transportation. These industries that I just mentioned are so complex that no humans could write the software to improve it. But finally we have this piece of this new technology called artificial intelligence that can write that complex software so that we can automate it. The whole goal of writing software is to automate something. We’re in this new world where, over the next 10 years, we’re going to see the automation of automation.” – Nvidia (NVDA) CEO Jensen Huang
IBM is trying to focus on two lines of business
“We are reshaping our future as a hybrid cloud platform and AI company.” – International Business Machines (IBM) CEO Arvind Krishna
Semiconductor shortages are stretching into 2022
“It’s stretching into 2022…We are totally dependent on TSMC putting new capacity in place. We’re working closely with them. And we will update you on each quarter on the progress.” – Nordic Semiconductor (NDCVF) CEO Svenn-Tore Larsen
It takes 2-3 years to build a semiconductor factory
“…it takes 2 to 3 years to build a semiconductor factory, and put it into action.” – ASML (ASML) CEO Peter Wennink
“The unprecedented demand for semiconductors has stressed supply chains across the industry. We have doubled our internal wafer capacity the last few years, but the industry is now challenged by a shortage of foundry capacity, substrates and components. We expect it will take a couple of years for the ecosystem to make the significant investments to address these shortages.” – Intel (INTC) CEO Pat Gelsinger
Governments are focusing on “technology sovereignty”
“…the third trend, which we are starting to see now and which we will likely continue to see longer term, is the desire for more technology sovereignty which includes semiconductor and silicon based technology, leading to a geographical decoupling as different governments put initiatives in place to localize supply chains and become more self-sufficient. This inevitably will create some level of inefficiency in the semiconductor supply chain and creates additional equipment demand as more fabs are strategically built across the globe.” – ASML (ASML) CEO Peter Wennink
“Governments around the world are recognizing the critical nature of semiconductors and the need to increase advanced chip manufacturing capacity and prepare for the future.” – Intel (INTC) CEO Pat Gelsinger
Industrials and Transport:
Seeing strengthening manufacturing markets
“…we’re now seeing strengthening demand also for talent within the manufacturing sectors as evidenced by the strong manufacturing PMI data in March.” – ManpowerGroup (MAN) CEO Jonas Prising
There are signs of labor shortages
“In addition to actual like chips and rubber and things like that, there’s also the issue with labor shortages. We do hear from a lot of our customers that if they had qualified people to fill jobs that they would be at higher production levels.” – Reliance Steel & Aluminum (RS) President Karla Lewis
“…labor is in very high demand across all construction segments. And this continues to pressurize the industry keeping demand greater than supply, which we have seen for many years. Crews are working longer and the fair weather has helped expand capacity for the industry, but the labor market tightness is something that we continue to watch.” – Pool (POOL) CEO Peter Arvan
“As we announced earlier this month, we recently restarted the process of hiring pilots and have already announced plans to bring on over 300 as demand continues to rebound. We expect to train more than 5000 pilots over the next decade. We recognize that the competition for the best pilot talent is only going to heat up. So we aren’t standing still” – United Airlines (UAL) President Brett Hart
Supply chain bottlenecks will work themselves out eventually
“On the metal side, it sounds like the mills are ramping up, which is a good thing, so that should help with that. And as far as the the supply chain issues, I’m assuming you’re referring to computer chips and rubber, and all the other things in freight and all those types of things that are existing right now. And all those things have a tendency to work themselves out. I don’t think that will change, it’s just a matter when they all work up.” – Reliance Steel & Aluminum (RS) CEO Jim Hoffman
“Is lumber pricing here to stay? I think a lot of it was driven by mills shutting down during COVID. I do think as they reopen these mills and increase the capacity to deliver wood, you’re going to see some improvement, some – a little less pressure on it. I think opening up international trade may relieve some pressure on it. But right now, to date, the demand is so strong.” – D.R. Horton (DHI) CEO David Auld
Materials & Energy:
Oil markets are rebalancing as demand recovers
“We are off to a good start this year. The world is reopening and even though some regions still experience lockdowns, overall economic and demand recovery continues to build. Oil demand is increasing globally. Oil inventories are down near their five-year averages, and OPEC+ actions continue to support commodity prices.” – Halliburton (HAL) CEO Jeff Miller
“I think I believe it’s clear that we are about to enter demand-led recovery. And I think the macro factor, both economic growth and what we are seeing, indicates that the oil demand recovery will reach 2019 level by or before the end of 2022. In this context, I believe that we are ready and starting at, and during the second-half of this year, facing the beginning of demand-led recovery that will trigger multiyear recovery cycle and industry upcycle. In this context, if you look at the recent period of underinvestment, look at the structural constraints in North America due to capital discipline, I believe that this will create the condition to create a significant pull on international supply.” – Schlumberger (SLB) CEO Olivier Le Peuch
“Without any doubt our work has substantially improved even from just a few weeks ago. Global excess [ph] inventories of crude are rapidly declining. Demand for crude continues to recovery trending towards pre-pandemic levels as the global economy gradually opens.” – Precision Drilling (PDS) CEO Kevin Neveu
The Biden Administration wants to deploy 30GW of offshore wind this decade
“The Biden administration has set a goal of deploying 30,000 megawatts of offshore wind power by 2030. This could require as much as 8 million tons of steel.” – Nucor (NUE) CEO Leon Topalian
Real Estate:
Real estate and construction-related markets are robust
“Honestly, the market strength today is extremely robust, and we don’t really need anything to increase demand further or put more pressure on home prices, which is ultimately what more buyers, with a limited supply in the market, can drive.” – D.R. Horton (DHI) VP, Investor Relations Jessica Hansen
“What we’re seeing right now is the demand is a sustained and multiyear demand trend. It’s not a blip. It’s a strong upcycle. And in particular, for North America, you have the general consumer trend of investing in the home, people also going forward will spend more days at home. Just think about all these flexible work policies. People will spend more time at home, which ultimately drives higher investments in the home and accelerated use of appliance in the home. Couple that with the housing market in the U.S., which I think some people refer to as golden age of housing. Housing demand will not slow down in the next couple of years, if at all, will increase. So put that together, you will have multiyear strong consumer demand in the U.S.” – Whirlpool (WHR) CEO Marc Bitzer
Seeing some irrational behavior in land purchases
“…we’ve seen on a very limited basis some erratic behavior on the land front, where a builder has positioned themselves where they just don’t have adequate or even non-adequate supply of lots. They are buying out of desperation. But it hasn’t been consistent across all the markets. And even with end [ph] markets where I have seen it, it’s not impactful to the overall land valuation.” – D.R. Horton (DHI) CEO David Auld
Nuggets of Wisdom
On the importance of owning the customer relationship
“I think when you effectively offer your products as the low-cost provider to somebody else who owns the relationship, you’ve just — you sold your soul to the devil. It’s the beginning of the end of your franchise in whatever space you’re playing. We need to own the customer relationship, and we need to deserve to own the customer relationship through an offering that doesn’t need to have fintech platform on the front end. It’s the alternative to that, right? And this is — you heard Jamie talk about this as well. If tech gets into the space and owns client relationships, then we become a commodity provider industry with 5,000 participants, it’s a disaster. You can’t default to that end game. You have to own the customer” – PNC Financial Services (PNC) CEO
