The Newsletter
The Transcript 02.10.20
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Succinct Summary: Companies are now growing increasingly worried about the short-term impact of the Coronavirus. Those with exposure to China are issuing wider-than-normal guidance. Despite this, most are cautiously optimistic about overall growth.
Macro Outlook:
Companies are being cautiously optimistic
“Macroeconomic data from most major economies is increasingly favorable” – ON Semiconductor (ON) CFO Bernard Gutmann
“Global GDP growth decelerated steadily over the course of 2019, but our data provides clear signs that growth rates have stabilized. While we haven’t seen a rebound as of yet, we are cautiously optimistic that we will eventually see such an upturn later this year.” – Carlyle Group (CG) Co-CEO Kewsong Lee
as they expect a negative short-term impact from the Coronavirus
“We are in that reentry blackout period for China right now. We do not know what we don’t know at this point in time. …So for people not to think that it would not be a negative short term, I don’t think they’re thinking straight…It will be a negative for the global economy. It will be, potentially, bigger, if it doesn’t get started.” – Emerson Electric (EMR) CEO David Farr
“Longer term, we don’t think the coronavirus will have any impact whatsoever. Our experience with the SARS and the avian bird flu five, six years ago was that actually it was mildly good for the short-haul business here in Europe. More people were likely to holiday in Europe rather than travelling long-haul to Asia, etc, and we would think that will play out again. But we should be wary on the short-term impact.” – Ryanair (RYAAY) CEO Michael O’Leary
“right now, the markets are trying to get to grips with the impact of the virus outbreak in China. Will it impact overall economic growth? Will there be demand disruption? I think very short-term, immediately, as we are talking, the answer is yes. No doubt. Because China is slowing down and sometimes stopping activity.” – Total (TOT) President, Strategy & Innovation Helle Kristoffersen
Several companies are issuing wider-than-normal guidance range as a result
“…the wider-than-normal guidance range is to help account for the uncertainty associated with the evolving coronavirus situation.” – Microchip (MCHP) CEO Steve Sanghi
Notably though, manufacturing activity is picking up
“While macroeconomic data points to moderately improving manufacturing activity, we haven’t seen significant improvement in order activity from our industrial customers. It appears that industrial customers are still in the process of realigning their inventories” – ON Semiconductor (ON) CEO Keith Jackson
“industrial activity is showing signs of modest improvement.” – ON Semiconductor (ON) CFO Bernard Gutmann
International:
The UK market is still a bit foggy
“The U.K. remains – the cork is still in the bottle. It didn’t go off last Friday. Money is still sitting on the sidelines. I think it may start to come, but I don’t think we’d be calling that as like the last Friday doesn’t – is only the beginning, not the end. And there are other challenges in the U.K. market, so the U.K. is probably the area across the industry which is the most difficult at the moment.” – Janus Henderson Group (JHG) CFO Roger Thompson
The Indian economy is not doing well
“…in India…the economy stagnates, the employment rate worsens, which slows down personal spending.” – Honda (HMC) COO Seiji Kuraishi
Financials:
Slightly elevated debt levels are maturing in the next 5 years
“[From] the latest global refinancing study…the total amount of global debt maturing in this study is $10.8 trillion over the next five years. This is up slightly from the $10.6 trillion highlighted in last year’s study…[the global high-yield debt maturing over the next five years] totals to $2.5 trillion, up from $2.3 trillion in last year’s study. The report notes that maturities appear largely manageable in the near term, as monetary easing by multiple central banks contributing to favourable funding conditions for companies, particularly those with higher credit quality and about 77% of the debt through 2024 is investment grade.” – S&P Global (SPGI) Douglas Peterson
Global private fundraising is healthy
“The global fundraising environment remains very healthy. Private capital continues to post attractive relative performance to other asset classes. A large percentage of investors, estimated at over 40%, are increasing allocations to the various private capital asset classes. The largest institutional investors continue to reduce their number of GPs to focus on a smaller number of larger strategic relationships. And certain investors such as sovereign wealth funds, high-net-worth individuals and insurance companies are growing their private capital portfolios even faster than the rest of the market.” – Carlyle Group (CG) Co-CEO Kewsong Lee
Outflows from active to passive ETFs continued in 2019
“…continuing outflows from actively managed U.S. mutual funds into index-based ETFs and mutual funds. There are several reasons for this trend, including growing institutional retail adoption, search for transparent lower-fee investments, globalization of passive investing and growing need for more complex passive solutions.” – S&P Global (SPGI) CEO Douglas Peterson
The 2020 M&A environment feels positive
“you just look at the kind of the regional variations in M&A, it’s been a relatively quiet period for some years in Europe relative to the U.S…The environment for M&A activity currently feels positive across the regions that performed well for us in 2019, and our current book of assignments in Europe indicates the potential for a very substantial rebound in revenue there this year.” – Greenhill (GHL) CEO Scott Bok
Consumer:
Disney+ is off to a strong start
“The launch of Disney Plus, where we announced today that we had 26.5 million by the end of the quarter..although we will not provide specifics, is that we are pleased to report that both conversion from free to pay and churn rates were better than we expected.” – Walt Disney (DIS) CEO Bob Iger
Companies are responding to consumers who increasingly care about sustainability
“…the consumer increasingly cares about sustainability. And so, they’re looking to companies like Nike to lead in this dimension. And therefore, we’re stepping in with significant investment.” – Nike (NKE) CEO John Donahoe
Spotify is bullish on podcasting
“…we’re very pleased with the overall growth of podcasting, with 200% year-over-year growth in engagement. And that’s a global phenomenon. It’s not just a U.S.phenomenon…podcast users not only are more engaged overall, but because of that engagement, they’re also listening to more music. So it’s really just a very, very healthy user trend that we’re seeing. And that user trend, we think leads to higher lifetime values as well.” – Spotify (SPOT) CEO Daniel Ek
Technology:
Semiconductor industry demand is normalizing
“…in addition to the normalization of the supply chain, improving demand across most end markets is driving improved order rates. Based on our order rates and conversations with customers, we believe that the pace of recovery is moderate, rather than a sharp upturn in demand” – ON Semiconductor (ON) CFO Bernard Gutmann
Strong growth 5G deployment is still a few quarters away in China
“The 5G infrastructure, the expectations of really strong growth comes from China. And clearly, there is a churn going on in China right now, not only with the suppliers but also with the different standards and the different combination of carriers and their technology…it looks like it’ll still be a couple of quarters out before we’ll see strong growth in 5G deployment. We clearly see that it’s coming, just don’t see it in the near term.” – NXP Semiconductors (NXPI) CEO Rick Clemmer
Industrials:
What is the future of hybrid vehicles?
“I got to say hybrids suck, right?… They’re complicated. Consumers don’t seem to want them. Toyota can barely give their patents away. Governments like the U.K. are starting to exclude them from credits. I think the U.K. has outlined them by 2035. Other cities are likely to fall. They don’t make money…Explain to me why are you throwing hard-earned money after these powertrains that really have no future?” – Morgan Stanley (MS) Analyst Adam Jonas at Fiat Chrysler Automobiles (FCAU) Q4 Presentation
“There is no doubt that there is a few and a growing percentage of the vehicle buying public that have the luxury of garages and other places that they can charge. The vast majority of people are still waiting for that infrastructure we put in place.So developing a platform that enables us to as cost-effectively and capital efficiently as possible to be able to flex our mix to meet compliance going forward, even if it is a three, four, five-year window, I think is absolutely vital as we make this transition. You and I are completely aligned as we get beyond 2025 full battery-electric partly driven by – I mean London’s banning everything from 2035 will become the norm.” – Fiat Chrysler Automobiles (FCAU) CEO Mike Manley
There is pent-up demand in the trucks sector in North America
“We believe there is pent-up demand in this sector, which is likely to continue as a tailwind from a demand standpoint for the next several years. A proof point for you is the growth we have seen in the last few years. In the past five years alone, this segment has grown about 6% on an annualized basis. Compare that with the rest of the industry where we’ve seen a decline of about 50 basis points. So again, this is a segment where because of the age of the fleet, the installed base and the growth that we’ve seen here, we do expect a healthy level of demand to continue in the foreseeable future” – General Motors (GM) CEO Dhivya Suryadevara
Airbus has a lead over Boeing on aircraft orders
“Airbus have had now a 12 and 18 month kind of lead over Boeing in terms of aircraft orders.” – Ryanair (RYAAY) CEO Michael O’Leary
Technicians are at a premium
“…the average dealer in the United States retains less than 55% of the service work for every car that they sell. So upside potential across the industry is huge. The logical question is, why aren’t you growing at double-digit rates if there’s that much capacity out there? It’s a very competitive market space. Technicians are at a premium. The amount of technicians you add to your staff have a direct impact on the growth of the business, so to speak.” – Asbury Automotive Group (ABG) CEO David Hult
There is a trend towards larger SUVs in China
“I think the other trend that’s happening China is the movement toward larger SUVs. A couple of years ago, the largest SUVs in the market were probably what we would call C segment SUVs. And now C segment SUVs are gaining acceptance. So there is a movement toward larger vehicles.” – General Motors (GM) China President Matt Tsien
Materials & Energy:
Markets nervous about the impact of Coronavirus on oil demand
“For 2020 now, the IEA January report forecasted a pickup in demand growth for this year to 1.2 million barrels per day…But the real question is how many barrels will be lost and for how long. The markets are very nervous about these questions right now.” – Total (TOT) President of Strategy & Innovation Helle Kristoffersen
“In recent weeks, growing concerns over the potential impact of Coronavirus on economic growth and global oil demand growth have also weighed on the oil price in the short-term.” – BP (BP) CFO Brian Gilvary
“…we’re still projecting something on the order of 1 million barrels a day of demand growth, as we go through 2020. Now that’s probably down 100,000 barrels or 100,000 to 200,000 barrels a day because of the current issues that we’re facing with coronavirus in China. So we do see some impact of that.” – ConocoPhillips (COP) CEO Ryan Lance
US gas prices currently challenged
“The US gas price has been impacted by continued supply growth, a mild winter and softer demand growth than that seen in 2018. We expect price to be driven by the balance between continued supply growth versus supply disruption in light of the current challenging price environment” – BP (BP) CFO Brian Gilvary
Healthcare:
Let’s end on a positive note: Gilead Sciences has an investigational drug for Coronavirus
“Remdesivir as demonstrated in vitro and in vivo activity in animal models against the viral pathogens, MERS and SARS, which are structurally similar to the current strain of the Coronavirus. However, there are no antiviral data that show activity against this strain. We’re working with the government and non-government organizations and regulatory authorities to develop a strategy to provide Remdesivir to patients with Coronavirus for emergency treatment and the absence of any approved treatment options. And to support clinical trials to determine whether it can safely and effectively be used to treat the current strain of Coronavirus. As a reminder, Remdesivir is an investigational agent. It is not approved anywhere globally and has not been demonstrated to be safe or effective for any use.” – Gilead Sciences (GILD) CEO Daniel O’Day.
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