What CEOs Said Last Week: Global growth remains modest

by Scott Krisiloff, Avondale Asset Management

Each week we read dozens of transcripts from earnings calls and presentations as part of our investment process. Below is a weekly post which contains some of the most important quotes about the economy and industry trends from those transcripts. Click here to receive these posts weekly via email.

When I first sat down to compile this week’s quotes, I thought that the picture was going to be a positive one.  However, as I assembled the piece, I realized that the commentary from this week was mixed at best.  In particular, comments from consumer facing businesses are somewhat troubling.  Robert Half’s commentary about temp staffing trends is also not encouraging (you should click through on that post, there’s more there).

Capital markets CEOs are optimistic for next year though.  After the election, some uncertainty may be lifted and activity could pick back up.  Capital markets do tend to lead the rest of the economy, so one would expect these CEOs to have the most forward looking commentary.  If that’s true then 2017 should be an improvement on 2016.

The Macro Outlook:

Global growth remains modest

“global growth has continued to be modest. In the U.S., consumer fundamentals remain healthy and account for most of the economic expansion while the outlook for industrial production remains weak..” —UPS (Logistics)

2% GDP growth would be an improvement

“if the world believes we’re going to get 2% plus GDP in 2017, we would see that as an improvement not a decline”  —Robert Half (Temp Staffing)

There was some troubling commentary about the consumer

Visa said that the global economy is not improving

“On the negative side, the global economy is not improving. Geopolitical tensions are high. The U.S. election is a wild card, and we continue to watch the impact of Brexit. ” —Visa (Payments)

McDonald’s also sees weak consumer confidence

“I think there are broader macroeconomic issues of consumer confidence and just uncertainty of wage increases, the slight squeeze on discretionary spend with gas prices aging back up and healthcare costs going back up. So, I think those are sort of things that we see affecting customers and basically the spare cash they have in their pocket” —Mcdonald’s (Fast Food)

The casual dining segment is broadly challenged

“Just as we said last quarter, these continue to be challenging times across casual dining. We’re already seeing some of the weaker players struggle with their viability in this choppy environment… there are some examples of concepts that are shrinking.” —Brinker (Chili’s (Baby Back Ribs))

Du Pont sees slightly slower housing and auto markets next year

“I mean, it looks like all forecasts say that housing is dropping off…not significant, but it looks like there’s a little bit of a rollover off of kind of that 1.1 million to 1.2 million starts…And then on the auto side of the business, it looks like auto builds are going to be down in the couple percent range going into next year.” —DuPont (Chemicals)

Caterpillar still sees weakness for its construction equipment

“the decline for construction is particularly North America…The problem we find ourselves in, I think, is the larger projects, the infrastructure, the infrastructure spending is maybe not quite as robust as housing would be right now, and that’s a bigger sweet spot for us.” —Carterpillar (Construction Equipment)

Robert Half waved a red flag for the service sector

“in September, we didn’t see the lift we typically get, instead, it was sequentially about flat. And then again, traditionally we get even more lift yet again in October and we didn’t see that lift either…clearly [clients] remain cautious with little sense of urgency. It’s in part due to macro uncertainty, in part due to election uncertainty. They cite budget pressures, they cite cost control measures… the general trends that I described also apply to tech…which is where we had seen most of our growth, that’s now where our growth is most under pressure…I’d say Accountemps we saw more softness in the accounting operations positions and those are the ones that are typically more client demand sensitive, more client volume sensitive. So it’s consistent that if you were to see softness in accounting due to macro conditions you’d see it in accounting operations” —Robert Half (Temp Staffing)

Activity in commercial real estate is down

“I would say around the world…There is significant activity, but against the backdrop from last year where we and the market grew dramatically. It seems fairly muted…there is uncertainty in the marketplace which is putting pressure on the results relative to what they were a year ago.” —CBRE (Real Estate Broker)

But advertisers are still spending

“So let me just start by saying the advertising market remains very strong. Scatter is as strong as it’s been really in a long time, and that’s a continuation. Really, we’ve had quarter-after-quarter of very strong scatter, and we had a super strong upfront in May.” —Comcast (Media Conglomerate)

And capital markets CEOs are optimistic

Venture Capital markets are regaining health

“Overall, the markets for us and our clients are healthy, despite some lingering impact from the VC market recalibration in the first half of 2016. Venture capital continues to perform strongly, although activity remains concentrated on larger funds and larger later-stage investments…In spite of an emphasis on later-stage companies, early-stage investing is alive and well, although it has been dominated for the last few quarters by a growing group of angels and micro-funds making seed investments.” —Silicon Valley Bank (Bank)

Moody’s expects that debt issuance will be strong next year

“Looking out into 2017, we think that issuing conditions are probably going to be attractive and that may encourage pull forward from 2018 and beyond. Part of the reason why we are optimistic about the current outlook for issuance conditions is driven by the fact that we think the default rate in the speculative grade arena is probably peaking right about now over the next month or so…So even if official rates are moving up somewhat, we think there is an opportunity for spread tightening and an attractive issuance environment.” —Moody’s (Credit Ratings)

Slow growth is helping M&A

“My commentary on the market is similar to what we discussed last quarter. While there have been declines in M&A volumes across the board, our M&A dialogue remains healthy. Fundamentals remain in place for continued activity and the current steady low growth environment is actually very conducive to M&A.” —Moelis & Co (Investment Bank)

The industrial economy is still weak but recovering

“we saw a decelerating rate of decline in sales on a year-over-year basis…North America is still weak but slowly recovering…order rates reinforced our previously communicated view that we’re progressing towards stabilization in many of our key markets.” —Parker Hannifin (Industrial Components)

“I’m very positive that we, now we start to see Industrial turning the corner as we move forward. And we will see the first quarter happen here in Q4.” —3M (Diversified Industrial)

Inventories are running leaner

“So if we look into the distribution channel inventory is actually decreased by about a half a week and it’s currently very, very low levels at about four weeks and that’s pretty similar to what we saw a year-ago.” —Texas Instruments (Semiconductors)

Capacity utilization is rising

“with industry wide capacity utilization now moving up from the mid to the upper 80s and supply-chain inventories as Mike had mentioned remained very well, we think, lumber prices are well supported here.” —Potlatch (Lumber)

That should lead to price increases

Rising commodity prices will be passed through to end customers

“Well, we’re still working those price increases…but for sure we’ve talked with our marketing teams about monitoring the steel price increases, and understanding that we need to make sure our pricing offsets that completely next year.” —AGCO (Agriculture Equipment)

If not then they eat away at companies’ gross margins

“Commodities were a modest hurt to gross margin in the quarter. Feedstock costs for propylene, ethylene, and tropical oils are up as much as mid-teens since we set our initial budgets for the year. Wage inflation is also an increasing challenge in many developing markets.” —Procter and Gamble (Consumer Products)

Eventually we will have to get inflation because it’s the only real way to repay our debt

“I am concerned about inflation, because ultimately, the only solution to repayment of deficits for governments is inflation.” —WR Berkley (Insurance)

This election will probably impact on how fast we get there

“Yes. I’d just add that I spend a lot of time talking to executives of other companies and many of our clients and the elephant in the room probably is the election. Nobody really knows exactly what the impact is. They just know it is much different.” —Robert Half (Temp Staffing)


The strong dollar eventually becomes the new normal

” we’re a company that generates two thirds of our revenues outside the United States…at some point, the strong dollar becomes the new normal and we need to work with that”  —Apple (Consumer Electronics)

Brexit has had little impact on the UK economy

“In terms of our business trend see the referendum, there has been no significant impact in any of our consumer markets. In the corporate sector, we have seen some impact as businesses have deferred elements of their investment and borrowing both pre-and post-referendum, given the uncertainty. However, the aggregate volume effect has been relatively limited.” —Lloyds Banking Group (British Bank)

British companies feel that the government is communicating adequately

“in terms of the UK government position, I think first of all there is a very good dialogue going on between the industry and government. Of course, the overall strategic framework of the UK’s exit from Europe is not clear or defined, so inevitably there is an absence of black and white decisions and clarity if I can put it that way.” —GlaxoSmithKline (Pharmaceuticals)

Manpower saw pickup in Northern Europe

“in Northern Europe, there is some slight acceleration on an organic constant currency basis into the fourth quarter…we are anticipating underlying growth to pickup” —Manpower (Temp Staffing)

Tax credits are boosting the Chinese auto industry, but they may expire next year

“Obviously, this year the industry is running stronger than we expected, because of some uncertainty around the purchase tax incentive, if that was to end and the government was to announce an end to that, our planning assumption would be that – there could be some volatility in maybe the first quarter and second quarter of next year” —General Motors (Autos)

Elevator sales for Otis are down 10% in China

“new equipment orders on a sales basis in China were actually down 10% in the quarter. A tough market right now” —United Technologies (Conglomerate)

Things change quickly there

“To give you one example, a very small example, but it’s symptomatic of how fast China can change. If you go to the cafe channel in China, there are all the noodle shops up and down the streets. People go there at lunchtime. Last year, they were packed with people. This year, you go, they’re a third empty. You go, okay, maybe the economy has slowed down. No, that’s not what’s happening. The explosion of online to offline ordering and the availability of lots of people on motorbikes to deliver stuff” —Coca Cola (Soft Drinks)

Brazil and Argentina’s economies may be gaining steam

“Market conditions in South America have been difficult during the first nine months of 2016. More recently demand is starting to stabilize in Brazil where solid farm fundamentals are beginning to overcome previous weakness caused by political and economic challenges. More supportive government policies in Argentina have also contributed to higher sales in that market”  —AGCO (Agriculture Equipment)

Emerging markets in general may be picking up pace

“emerging markets are doing significantly better than mature markets. In those markets we are seeing a stronger growth, mainly high interest rates that allow us to generate a better revenue stream or growing revenue stream that is much more difficult to get in what we so call mature markets.” —Banco Santander (Bank)


Legal battles are still materializing eight years after the financial crisis

“As we disclosed in today’s earnings release, on September 29 we received a letter from the Department of Justice indicating that it is preparing a civil complaint against Moody’s alleging violations of the Financial Institutions Reform, Recovery and Enforcement Act in connection with ratings MIS assigned to RMBS and CDOs leading up to the 2008 financial crisis.” —Moody’s (Credit Ratings)

Those legal battles are causing big problems for some companies

“the quarter was clearly overshadowed by the attention paid to our negotiations concerning the US Department of Justice’s initial settlement proposal relating to RMBS matters. This has created uncertainty. Uncertainty that affects the market’s view of Deutsche Bank as an investment. Uncertainty that affected some clients’ view of Deutsche Bank as a counterparty” —Deutsche Bank (Bank)

Compliance costs are not likely to abate

“But in terms of overall regulatory and compliance costs, if I look forward, John, I don’t think that in the short- to medium term I would think of regulatory costs in general abating or declining…I don’t see realistically that anybody in the industry is going to see regulatory and compliance costs fall off.” —Suntrust (Bank)

Credit card lenders are re-entering subprime markets

“So, at times I think you hear from some players, subprime we don’t do that. Well, all I’m saying is 31% of all the growth is subprime, and somebody is doing it. And so, yeah, that has our attention.” —Capital One (Bank)


Many retailers chased e-commerce at the expense of their brick and mortar locations

“I think what unfortunately what I think a number of retailers, they’ve not invested in their product, okay. Or they’ve chased the holy-grail of internet sales to the determent of what they should be doing with the physical product, as still people want to go physical shopping. And when they go physical shopping, you’ve got to have a nice physical environment.” —Simon Property Group (Mall REIT)

Returns are bad for e-commerce retailers, but good for UPS

“when you look at the ecommerce market, it could be one in five or one out of every six packages that are shipped to a consumer get returned…Those packages are highly profitable. First of all, many of those packages get dropped off and don’t have to be picked up because the consumer finds it more convenient to drop them off at UPS stores or UPS Access Points or hand them to a UPS driver. So there’s very little cost when it comes to pick-up. And then obviously, the deliveries are going back to businesses, and we could be delivering tens or hundreds of packages back to these businesses. So it’s a highly profitable B2B delivery with very little pick-up cost.” —UPS (Logistics)

90% of Canadian McDonald’s have self service kiosks

“In Canada…We now have dual point service and self-order kiosks in almost 90% of our traditional restaurants” —McDonald’s (Fast Food)

Twitter now thinks of itself as a news network

“we’re focused on building the most useful open and comprehensive news network on the planet” —Twitter (News)


John Legere trolled AT&T’s purchase of Time Warner

“if you look and you compare and contrast their earnings and what’s happening, for example, with ours, you understand why they are trying to do a vertical integration…An interesting factoid for you, which is when they announced in Q2 of 2014 the DIRECTV acquisition, they have not added a postpaid phone customer ever since. So one of the things pertinent to T-Mobile is, I would say, the great news is that they’re going to be further defocused than they are now, and the upside opportunity to continue to acquire business in this space for us is tremendous.” —T-Mobile (Telecom)

Smartphone growth in India has been stifled by infrastructure, but that’s changing

“The smartphone has not done as well in India in general. However, one of the key reasons for that is the infrastructure hasn’t been there. But this year or this year and next year, there are enormous investments going in on 4G and we couldn’t be more excited about that.” —Apple (Consumer Electronics)

Ride share platforms will be the first home for autonomous vehicles because they can be geo-fenced

“As we look at launching autonomous into the marketplace, we believe it will first happen in a controlled environment, in a ride-sharing environment…that’s because it will be geo-fenced, you’re going to have limitations with speed and other limitations, and that’s why the ownership will stay with the company in these first models as we continue to learn.” —General Motors (Autos)

Don’t question Elon Musk’s autonomous driving solution

“First of all, I would separate what Tesla says from, say, some supplier of ours is issuing, bullshit. Okay? The blog that I wrote was very clear that radar is moving from a supplemental to also a primary sensor. It is not to the exclusion of vision, but it is also a primary sensor…Much as a person who might take action based on whether you hear something or you see something, but you don’t need to both hear it and see it…There are obviously skeptics out there. Well, I suggest that they do not bet against us.” —Tesla (Autos)


The election will impact Medicaid expansion

“Gary, I think most everyone would agree, if the Republicans gain control of the White House and what have you, there will be pressures and probably less opportunities for states to expand Medicaid. If the Democrats are in place there, I do believe that there will be consideration, hopefully. Maybe see some additional incentives, maybe a little more flexibility in bringing some states to bear.” —HCA (Hospitals)


Wide body aircraft orders are slow, but narrow-body orders are strong

“there’s hesitation in the wide body marketplace right now as we think through a number of factors around the world. Slow GDP growth around the world, hesitation in cargo traffic, geopolitical questions. There are a number of factors that are causing our customers to be somewhat hesitant in wide bodies in particular…while again it’s all in the context of some broad global economic concern, the ordering activity and the robustness of narrow body growth continues to be very clear, fueled by traffic growth” —Boeing (Aerospace)

The defense department is shifting to address “near peer” threats from counter-terrorism

“The third bucket is really coming directly from the Department of Defense, obviously for all regions in the global area to be able to essentially come up from 20 years of fighting wars of insurgency to now dealing with near-peer threats that potentially have capabilities that are at or potentially in some cases maybe better or perceived to be better than what the U.S. has, and so it’s a big catch up area there.” —Raytheon (Defense)

Materials, Energy:

Schlumberger is confident that we’ve reached the bottom of the energy cycle

“After seven quarters of unprecedented activity decline, the business environment stabilized as expected in the third quarter, confirming that we have indeed reached the bottom of the cycle… the period of oversupply and inventory build is over and that market segments should soon change, paving the way for an increase in oil prices and subsequently E&P investments. ” —Schlumberger (oil service)

A sustainable recovery requires mid to upper $50s oil though

“we continue to believe that oil prices in the mid to upper 50s are required for a sustainable recovery in North America. Our customers also need to be more confident on the durability of those oil prices before making any significant change to their spending patterns.” —Baker Hughes (Oil Service)

Other commodity markets are still weak

“we don’t think commodity prices are still quite good enough to drive substantial sales increases next year. We would like to see commodity prices rise more next year. And if that happens, that, we think, logically would be upside for the second half of next year; if that doesn’t happen, probably not upside then” —Carterpillar (Construction Equipment)

Miscellaneous Nuggets of Wisdom:

Your operating leverage is only as good as your top line

“Prior to last year’s issues, Chipotle had the strongest economic model in the industry. Of course, this model has been weakened due to lower sales volumes that we’ve seen this year. While it’s critical to fully restore sales volumes and keep improving them from there, we also know that we need to improve our economic model now so that we can provide healthy returns even at lower volumes.” —Chipotle (Burritos)

Businesses move up in weight class as they grow

“our growth now gives us opportunities to move up in weight class and we find ourselves well-positioned at this moment in time to compete for long-term relationships with athletes, teams and league affiliations that we previously could not justify.” —Under Armour (Apparel)

It takes time to realize the benefit of any investment

“In terms of payout on sampling…the lifetime benefit from that relatively modest investment can be significant, but it is a lifetime benefit. A consumer will take a period of time just to use the product that you’ve sampled them with. And so that’s not an investment endeavor that we typically see immediate returns in.” —Procter and Gamble (Consumer Products)

“A salesperson really isn’t productive enough in his first year on the job…when you hire salespeople there’s training and familiarization that has to go on. So they’re not immediately productive. It’s the sort of thing that shows up in the future.” —Honeywell (Conglomerate)

Full transcripts can be found at www.seekingalpha.com



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