New Year, Same Issues
Omicron is leading to continued supply chain challenges and inflationary pressures
Succinct Summary:
The Transcript is back for 2022 just in time for the start of the Q4 2021 earnings season! Since we’ve been gone, Omicron has surged but the economy seems to be only mildly affected. People aren’t changing their behavior too much although travel may be impacted. The biggest impact of Omicron is that companies are having trouble keeping their teams fully staffed. This is leading to continued supply chain challenges and inflationary pressures. The Fed is reacting with hawkishness.
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Macro:
Omicron has thrown a wrench into the global economy
“As everyone is aware, the Omicron variant has significantly impacted our people, our customers, and our operation as well as most parts of society over the last three weeks. The combination of the rapid spread of the variant at the peak of a strong holiday demand period and in the face of extreme winter condition in parts of the country created some of the most difficult travel conditions that we ever remember experiencing.” – Delta Airlines (DAL) CEO Ed Bastian
"...we believe that the significant acceleration of COVID-19 cases associated with the Omicron variant has negatively impacted our results along with the broader travel sector as we expect certain guests reconsidered travel plans and were impacted by related flight cancellations." - Vail Resorts (MTN) CEO Kirsten Lynch
"As everybody, we've seen a slowdown in procedures in December due to Omicron, and we don't think that that will change versus pre-COVID levels until we go through the Omicron surge," - Johnson & Johnson (JNJ) CEO Joaquin Duato
But it’s not expected to last long
“Based on how quickly the case counts have risen, our medical team expects cases to peak in the U.S. over the next few days, followed by a steep decline in cases. And we are already starting to see that happen amongst our own staff. Given the high transmissibility and lower severity of Omicron, this variant is likely to mark the shift in COVID-19 from being a pandemic to a manageable and ordinary seasonal virus, which should accelerate the path to a normalized environment.” – Delta Airlines (DAL) CEO Ed Bastian
And the economy is still doing well
“We are watching the impact from Omicron on consumer spending. And while there is some softening in restaurant, travel, and entertainment in recent weeks, overall spending remained strong in the first week of January with credit card up 26% and debit card up 29% versus the same week in 2020." - Wells Fargo & Company (WFC) CEO Charles Scharf
“The economy continues to do quite well despite headwinds related to the Omicron variant, inflation, and supply chain bottlenecks. Credit continues to be healthy … and we remain optimistic on US economic growth as business sentiment is upbeat and consumers are benefiting from job and wage growth…" - JPMorgan Chase (JPM) Chairman & CEO Jamie Dimon
People are not really changing their behavior
"We haven't seen any big change I would just say that there's significant COVID fatigue out there, and it's going to take a lot to modify a certain percentage of the population's behavior. There's a certain percentage of the population that is going to react to this, but there's a certain set of it that's just going to continue on. All you got to do is look at stadiums and concert halls to see who those people are." - Darden Restaurants (DRI) CEO Eugene Lee
The hardest part about Omicron is keeping up with staffing needs
“We now have twice as many people out because of omicron than during any other time of the pandemic. That’s a big deal.” - Portillo’s (PTLO) CEO Michael Osanloo
"The virus meaningfully impacted our TAG workforce, including store managers, field sales reps, and drivers, resulting in reduced staff availability, store hours, and deliveries in some districts, particularly in the last 2 weeks of the year. Multiple suppliers and customers also reported increasing rates of labor absenteeism in the quarter due to the virus. January is off to a slower start as availability and COVID headwinds are persisting" - Sherwin-Williams (SHW) CEO John Morikis
This is helping to keep supply chains in disarray
"On the other hand, supply chain and labor constraints remain tight, creating ongoing challenges with scarcity of supply, inflation, and continuity of operations. We're hearing that supply and shipping constraints may ease in the coming quarters, although we've not seen much evidence of this ourselves to date. Labor shortages remain severe. In fact, hiring and staffing even our own operations is a challenge." - MSC Industrial Direct (MSM) CEO Erik Gershwind
"...the supply chain environment is as challenging as we've seen in decades. We, like the rest of the industry, are facing rising input cost inflation. In fact, our North American market basket has reached its highest point in recent history. To add to the challenge, industry-wide shortages in the labor market are impacting every part of the supply chain at significant costs that are above and beyond inflation. We're seeing record levels of disruptions across our raw material suppliers, internal and external production facilities, our own distribution centers, our customers' warehouses, and the logistics networks required to connect each of these elements of the supply chain. These disruptions are resulting in service challenges and elevated costs across the industry. For example, when suppliers' labor shortages limit their ability to deliver a key ingredient to one of our factories, we either need to shut down our lines or reposition that ingredient from another manufacturing location, both of which increase costs…what we provision and expect in the back half is is not much of an improvement to be candid." - General Mills (GIS) Group President of North America Retail Jonathan Nudi
Which means that inflation pressures remain high
“...inflation has reached a 40-year high as we see several structural changes take hold. Consumer demand has shifted from services to household goods as people are spending more time at home and benefiting from higher levels of savings. Labor shortages are causing supply chain bottlenecks as people have more choice in the gig economy. The quit rate in the United States has ever been higher reflecting the confidence of employees." - BlackRock (BLK) CEO Larry Fink
Labor inflation
“We’ve seen a somewhat elevated attrition and a very dynamic labor market, as the rest of the economy is seeing,” Barnum said. “It is true that labor markets are tight, that there’s a little bit of labor inflation, and it’s important for us to attract and retain the best talent and pay competitively.” - JPMorgan Chase (JPM) CEO Jamie Dimon
“We have seen some pressure in what one has to pay to attract talent. You’ve even seen it at some of the lower levels, I should say entry levels in the organization." - JPMorgan Chase (JPM) CEO Jamie Dimon
Cost inflation
"...let me just provide some context on inflation. First, the cost increases are real, right? We are seeing it in our supply base. I think they're seeing it in ingredients, packaging, transportation, labor, and we are seeing it in our own business when you think about even our own brand’s program and such. So the cost inflation is absolutely real." - Albertsons (ACI) CEO Vivek Sankaran
"...we expect product costs to rise in the second half due to higher macro input costs. We're also planning for supply chain costs for the full year to increase relative to our estimates 90 days ago, with a greater impact in the second half." - Nike (NKE) Executive VP & CFO Matthew Friend
All of this is keeping pressure on the Fed
"The Fed, you know, you can say that they should have started doing QE a little bit early and stuff like that. But you know, if we’re lucky, they can engineer a slowdown and you’ll see inflation coming down. You know, a lot of people project inflation to be 2.3% at the end of this year, I don’t. I think it’s going to be higher. But you know, if we’re lucky, the Fed will slow things down, we’ll have what they call a soft landing. You know, and it’s going to be a little bit like threading the needle. So you can’t look at anything and say, “That’s my projection,” because you really don’t know. It is possible inflation is worse than they think and they raise rates more than people think. I’d personally be surprised if it is just four increases next year. You know, I think that four increases of 25 basis points is a very, very little amount, and very easy for the economy to absorb." - JPMorgan Chase (JPM) CEO Jamie Dimon
International:
It’s getting tougher to be a foreign operator in China
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Financials:
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Consumer:
Q4 retail comps were strong
"Comparable sales were as follows: On a reported basis, in the U.S., the 5 weeks is up 15.9%, 18 weeks 15.4%; in Canada, the 5 weeks was up 16.5%, 18 weeks 16.7%; Other International, the 5 weeks was up 6.4%, 18 weeks 11.0%; total company, the 5 weeks is up 14.5%, 18 weeks 14.9%; e-commerce, the 5 weeks is up 17.8%, 18 weeks 14.4%." - Costco (COST)
“Additionally, our U.S. retail comps were very strong in the first quarter, and we have seen this momentum continue into the second quarter" - Walgreens Boots Alliance (WBA) Global CFO James Kehoe
January is off to a slower start though
“Since early January, the company has seen a softening of traffic and sales trends which it believes, in addition to adverse weather conditions, has been significantly driven by the rapid spread of the Omicron strain of Covid-19 and its impact on consumer behavior” - Big Lots (BIG) President & CEO Bruce Thorn
Price increases are coming
"As we enter 2022, demand remains strong across the majority of our end markets, though we expect raw material availability in COVID issues to persist through the first quarter. Raw material and other costs remain elevated, and we continue to respond with aggressive pricing in every group, including a 12% price increase in the Americas Group effective February 1." - Sherwin-Williams (SHW) CEO John Morikis
Will price increases affect consumer behavior?
"As of now, what we are seeing trends, even recently, is that we have a strong consumer. And we haven't seen a dramatic change in their pattern of consumption, still engaging on fresh product and still engaging overall in the store. Now what we don't know is if inflation continues to go up, does that behavior change as we go through the calendar 2022? We don't know that." - Albertsons (ACI) CEO Vivek Sankaran
Housing market fundamentals are strong
“Market conditions remain very healthy as favorable demographics, loan mortgage interest rates and an extremely limited supply of homes particularly for first-time buyers continue to drive demand.” - KB Home (KBH) CEO Jeffrey T. Mezger
"In housing, affordability is supported by mortgage rates that are hovering near all-time lows while income continues to rise. But with the onset of COVID last year, several new demand drivers developed that we expect to persist. There's been a longer-term shift in the consumer mindset about the importance of the home. A view of the home as a sanctuary that may need to serve several multiple purposes, residents, office, school, gym, and a gathering place for indoor and outdoor entertainment. And given the extension of remote work, we are expecting a permanent step-up in the repair and maintenance cycle. And as a reminder, approximately 2/3 of Lowe's' annual sales come from repair and maintenance activity. Finally, we're seeing both younger and older generations more focused on homeownership. Millennial household formation has accelerated at the same time that baby boomers are increasingly looking to age in place in their own homes." - Lowe's (LOW) CEO Marvin Ellison
However, the home improvement market may slow down this year
"Looking ahead to 2022, the home improvement sector is likely to contract modestly given that the industry benefited from both higher inflation and government stimulus this year. While it still remains difficult to predict the market performance precisely, we are expecting a demand decline of mid-single digits on a mix-adjusted basis." - Lowe's (LOW) CFO David Denton
Digital fitness has also seen a challenging environment
"As you know, 2021 has been a challenging year for digital fitness. And as I mentioned on our last earnings call, we have seen increasing pressures on CAC that are impacting the entire industry." - Lululemon Athletica (LULU) CEO Calvin McDonald
Organized theft is a real issue for retailers
"I think Congress needs to step up a little bit here because the magnitude of the problem is -- it's enormous. We've had, I don't know, 10 years where shrink is at -- And I'm not going to -- it sounds precise, it's not the exact number. It's a little over 2% of shrink, 2.25%. It's currently running at 3.25%. That's a 40 -- we estimate the shrink is about 40% to 50% higher on a percentage basis than it was prior to -- sorry, back prior to '19 -- sorry, prior to '20. So this is over the last 2 years. We're absorbing a 52% increase in shrink. And it's organized crime. This is not petty theft. It's not somebody who can't afford to eat tomorrow. These are gangs that actually go in and empty our stores of beauty products. And it's a real issue for the -- as with all of our peers, it's a real issue." - Walgreens Boots Alliance (WBA) Global CFO James Kehoe
Technology:
Semiconductor shortages could last into 2023
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Companies are learning to navigate a multi-cloud world
"If you ask customers today, 75% of businesses today use two or more public clouds, and almost all of them use private cloud, and 40% use three or more public clouds. And the reason is simple, Brent. The reason is that customers want to innovate using the best of the best services from different clouds, and they want to avoid blocking. And when you look at that kind of an environment, the multi-cloud creates tons of customer challenges, because of all of a sudden, what are the customers’ options, if they have to run different applications across different clouds, whether it's Oracle, Google, AWS, Microsoft, they have to start building their own practices on how they're going to run these applications, how they're going to operate them, how they're going to develop them, how they're going to network them, how do you can secure them, and building that siloed vertical strategy per cloud is not viable from a customer's perspective. So customers are coming to us and saying that they started out with a cloud-first strategy, which was they're going to build new applications onto cloud, rather than building it on datacenters. And now they're saying instead of having cloud-first strategy, they're going to have what we often sort of call with customers cloud smart strategy, which applications is going to run on which cloud and then have a platform to then be able to operate, secure and manage these applications across different clouds in a unified fashion, by providing a unified experience to developers." - VMware (VMW) President Sumit Dhawan
“And we feel that we're uniquely positioned with the explosion of data that's occurring in the world. And kind of this new age of multi-clouds that is emerging…what customers are realizing they sort of start this process. They say, oh, I'm going to be cloudflex. I'm going to everything to the public Cloud. They're usually thinking about one, public cloud, and then they kind of figure out that, well, as it really works, I've got to have multiple clouds and not all the workloads. You know, fit well in one cloud or another, and then I've got to have it all work together. And at some of the stuff doesn't even make sense to move it, and now I've got the edge, so they're like, can you make all this work for me? You know, how do I, how do I make sense of all that some some some workload there, you know, security issues. There's kind of data sovereignty issues and cost issues. And so, you know, almost all companies are adopting a multi-cloud architecture.” - Dell (DELL) CEO Michael Saul Dell
No single dominant CPU architecture
"Well, ARM is a new phenomenon. I think the CPU architecture no longer been dominant by one architecture. Multiple architecture provided their better integration with software, provide a much wider application of CPUs. And that no matter what the CPU, which architecture they are, currently, we are engaging to all CPU architecture customers." - Taiwan Semiconductor (TSM) Chairman Mark Liu
Healthcare:
There’s been a big surge in testing demand
"But retail, in particular, has outperformed in the fourth quarter, and that's really what's driving that particular level of outperformance. And it's probably about 80% of that overall performance. Within that, more than half of that is COVID vaccines and the level of vaccines, which were much higher than we had expected, particularly in November and December. The other part of that is COVID testing, both sort of the traditional testing we've been doing, but now the OTC testing, and that really took off in December. So those 2 things make up about 80% of the outperformance." - CVS Health (CVS) CFO Shawn Guertin
"We all saw this Thanksgiving, Christmas, very big surge in testing both, I would say, on symptomatic testing, and you see that in PCR, you see it in our rapid molecular testing also, the use of those technologies to be able to kind of do rapid diagnosing. And then on the screening side with the rapid antigen test also big, big demand also there. So big surge, whether it's here in the U.S., internationally, also very strong surge again also for both diagnosing and screening. The challenge here is it's going to be, okay, how does this play out over time throughout the year? And we'll be getting to that in a couple of weeks when we go through guidance. I think it was good to watch and see how testing has evolved over this last month, 1.5 months. And I think having that information is going to allow us to have a better sense as to how we're going to guide for 2022, but we've got plenty of capacity and we've got strong leadership positions, as I said, across all the platforms." - Abbott Laboratories (ABT) CEO Robert Ford
It will ramp down at some point
"I think the bigger picture here is, obviously, there will be -- it will be -- testing will eventually ramp down, but there will be a portion that will be sustained. And I think that's probably for me, and I talked about this in some of our earnings calls also, the importance and the bigger picture of what we've been doing throughout this, right, which is the acceptance and the growing of this category, this rapid point-of-care, rapid testing, OTC testing." - Abbott Laboratories (ABT) CEO Robert Ford
But there will likely be a long tail
"There are currently 5 different variants that are battling each other for dominance, if you will, circulating in the global population. And it's going to take some time for the global population to get to herd immunity, especially as these antibody titers tend to wane over time after vaccination. So we see an endemic vaccination and therapeutic need for years to come. On the other hand, we also see that the drug development pipeline is more robust than ever. We see not monoclonal antibodies, as I mentioned, the funnel there is 50% higher than it was 5 years ago. Gene and cell therapy, it's an order of magnitude larger the funnel than it was just 5 years ago. And so that puts an extraordinary amount of opportunity out there, both in terms of the capacities required for clinical trials, but also ultimately for those drugs that gain approval and get commercialized. So we see this as an incredible time where science is advancing what's possible in therapeutics, in biopharma, in particular, and the capacities will be required here for the long term”- Danaher (DHR) CEO Rainer M. Blair
"I think governments and certainly the customer base seems to be preparing for is that it's at least relevant into 2023. That doesn't mean it's not relevant in 2024. It just means that when you think about the planning cycle and what people are using and planning to produce, that gives you that… I think there's a scenario, which I know others have talked about, which is that you're thinking of this like the flow, where you kind of have this in perpetuity." - Thermo Fisher Scientific (TMO) CEO Marc Casper
Industrials and Transport:
Delta’s revenues are at 80% of 2019 levels
“Full-year revenue of $27 billion in 2021 improved nearly $11 billion or 67% from 2020, with the rate of recovery accelerating from only 25%, as measured against 2019 at the start of the year to a close of the year of nearly 80% as we exited December." - Delta Airlines (DAL) CEO Ed Bastian
There’s high demand for EVs
"It's been -- it's really a remarkable industry. I mean it's probably the most dynamic industry I've seen in the 30 years that I've been in this industry…we came out of the pandemic, the industry did, with growth that exceeded what we thought we would see this year. We are seeing EV sales now up over 100% year-on-year versus the last year. In countries like China, it's 200%. Our outlook has increased versus last year for 2025 and 2030" - Albemarle (ALB) President of Lithium Global Business Unit Eric Norris
GM is investing heavily in battery production
"To meet the demands for batteries, we believe that we have one of the most vertically integrated supply chains for battery production in the industry. Two of our battery plants are already under construction today in Ohio and Tennessee and 2 more U.S.-based plants are also being planned as we build the scale that will enable us to lower the cost of EVs to make them accessible to everyone." -General Motors (GM) CEO Mary Barra
Materials & Energy:
Transition to clean energy will take a long time
“...if we move to a green economy tomorrow without new technology, it's going to lead to an unfair and unjust transition. And as we witnessed in so many places already with rising energy prices, we've seen governments capping energy costs to the consumer. Even the European countries that are so focused on sustainability like France and Spain have caps and heating and other things like that. So this is going to be a very long as I discussed over the years, a very long transition and very -- and it's not going to be a straight line. The opportunity then is to be working with traditional hydro (inaudible) companies who are going to be part of the solution. It's going to be working with agricultural companies who are part of the solution. It is investing in new start-ups whether it is to create blue or green hydrogen or blue or green ammonia to find new solutions for green cement and steel for investing in new opportunities and sequestering of hydrocarbons” - BlackRock (BLK) CEO Larry Fink
2022 could be a good year for oil companies
"...we think 2022 is going to be great. You’ve got this unleashed pent-up demand coming out. You’ve got trillions of dollars of stimulus coming into the economy, we think that’s all good on the demand side. Put the supply side on refining, probably 4.5 million barrels a day if capacities kind of come out. That’s more than we’ve seen in any other economic downturn, and that’s more than the capacity was added in 1920 and 1921. And then capacity coming on in the next couple of years is muted. So the supply and demand dynamics look very favorable coming into 2022. The other thing is inventory [indiscernible], gasoline, distillate, fuel oil, jet are all at the bottom of the five-year range. So that seems really good. So we think we’ll be at or above mid-cycle margins already finding business coming into 2022." - Phillips 66 (PSX) CEO Greg Garland