Let’s Dance
Let’s Dance
"I want people to know that we made Google dance" - Microsoft CEO
Succinct Summary: We’re picking up signs of deflation in the economy. Companies are slowing down price increases and labor markets are getting less tight. Consumer spending is still strong though. Mastercard measured 8.8% growth in spending in January, which suggests that there’s still a significant amount of inflation in the system. The Fed expects the disinflationary process to take some time and potentially get bumpy.
Other items this week: Microsoft launched an assault on Google, PC demand may be starting to rebound, and Jerome Powell should be reading the Transcript.
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Macro
We’re seeing signs of disinflation
“...there is disinflation in the market. So inflation will be lower than the prior year” - Watts Water Technologies (WTS 0.00) CFO Shashank Patel
"So, as we head into 2023, obviously, we're seeing inflation starting to taper off in terms of overall cost.... Now, as we head into 2023, that stronger cost inflation we saw in 2022 is starting to subside, especially on the purchase transportation side, that will become as tailwind through the course of the year" - XPO Logistics (XPO 0.00) CEO Mario Harik
"We told you either 2 calls ago or last call, we are not going to be taking any more price increases. There's a little bit of it that will flow through in the first half of the year. And then we're stopping the price increases across the group. For the time being, we're going to take a pause." - Capri (CPRI 0.00) CEO John Idol
"(Walmart) said to us, 'From here, our consumer is challenged, we're going to be looking out for consumers, so you're going to have to have really good reasons if you're going to price up from here. Because the consumer is now under more pressure, and Walmart is under pressure, that sets up a dynamic where there's probably not a lot of pricing going forward.’" - Edgewell Personal Care (EPC 0.00) CEO Rod Little
Labor markets are getting less tight
"We continue to replace third-party employees with Hertz badged employees at lower cost including project engineers, where we are seeing a broader pool of talent at more affordable price points, aided by current dynamics at large technology firms." - Hertz Global (HTZ 0.00) CEO Stephen Scherr
"I'm also happy to see an improvement in turnover with December being one of our best months in the past 2 years for both hourly and salary turnover rates. And our staffing levels continue to improve with 90% of our restaurants fully staffed." - Chipotle Mexican Grill (CMG 0.00) CEO Brian Niccol
"If you asked the question a year ago about what's it like to hire tech talent a year ago, 18 months ago, 24 months ago, it was very hard. Today…we're able to get great talent and it's just shorter time frames between opening a job and finding great people to come on board in this current environment." - Equifax (EFX 0.00) CEO Mark Begor
But the consumer is still strong
"Right now, the consumer is still quite good. But we also have to plan for multiple scenarios. And in the back half of the year, given interest rates are as high as they are, it wouldn't be shocking if there were a mild recession in the U.S. and in some of our developed markets" - PepsiCo (PEP 0.00) CFO Hugh Johnston
"Look, the consumer demand, especially if we use kind of our in-store experience right now, looks to be there. Especially as you look at the higher-income consumer, their purchase frequency has actually gone up" - Chipotle Mexican Grill (CMG 0.00) CEO Brian Niccol
"We continue to view the health of our customers as strong, supported by extremely low unemployment and robust growth in wages over the past 2 years." - O'Reilly Automotive (ORLY 0.00) Co-President Brad Beckham
"The demand trends here and now are really strong. And while there's a lot of noise out there…the reality is we're not seeing it." - Hilton Worldwide (HLT 0.00) CEO Chris Nassetta
Mastercard measured 8.8% growth in consumer spend in January
"Consumer spending remains resilient in the first few weeks of 2023. Mastercard SpendingPulse insights show that the overall retail story remains largely positive with January posting a solid month of growth across the country…U.S. retail sales excluding automotive were up +8.8% year-over-year in January.” - Mastercard (MA 0.00) Senior Advisor Steve Sadove
So inflation is still elevated
“But inflation remains quite elevated, and so more needs to be done. Although economic activity slowed in 2022, I expect the Fed will need to keep a tight stance on monetary policy for some time to slow activity further in 2023. Though we have made progress reducing inflation, I want to be clear today that the job is not done.” - US Federal Reserve Governor Christopher J. Waller
“I think we are not done yet with raising interest rates, and we will need to keep interest rates sufficiently restrictive” - US Federal Reserve Governor Lisa Cook
We’ll have to wait and see how far above 5% the Fed will need to go
“I think it's perfectly reasonable for Fed to go to five and wait a while and see what the, you know, since it's a lag effect. But, you know, if inflation comes down to two, two and a half percent, people will declare victory. We're on our way to a soft landing. But you know, if it comes down to three and a half or 4%, I eat sticky. You may have to go higher than 5%” - JPMorgan (JPM 0.00) CEO Jamie Dimon
The Fed doesn’t think that the process is going to be smooth
"So our message really was this process is likely to take quite a bit of time. It's not going to be - we don't think - smooth. It's probably gonna be bumpy. And so we think that we're gonna need to do further rate increases, as we said…We have a significant road ahead to get inflation down to 2%. I think there has been an expectation that it'll go away quickly and painlessly and I don't think that's at all guaranteed…It will take some time, and we'll have to do more rate increases...If we continue to get, for example, strong labor market reports or higher and higher inflation reports, it may well be the case that we have to do more and raise hikes more than is priced in” - US Federal Reserve Chair Jerome Powell
International
The Chinese consumer is happy to be free
"I think, listen, China, obviously, we're seeing the consumer happy to be free kind of. And the consumer will obviously spend more. I think that's obvious." - PepsiCo (PEP 0.00) CEO Ramon Laguarta
“I think just China coming back on its own from kind of this artificial COVID thing alone is going to help with demand. And remember, we’re high on electronics in that market in general. So I think we will see a boost there." - DuPont de Nemours (DD 0.00) CEO Edward Breen
People are back in the office in Europe
"Office usage in Europe hasn't gone through the fits and starts that we've seen in the U.S. with respect to getting people back to the office. People are back in the office in Europe. People are using office space. You have similar concerns in Europe to the U.S. vis-à-vis concerns over recession, not recession, though, I would say the concerns in Europe are a little bit more concentrated, i.e., it's tied to, for the most part, energy prices. So I would say on the office side in Europe, we've stuck to major cities and have generally been quite pleased with the performance of the portfolio." - Apollo Commercial Real Estate Finance (ARI 0.00) CEO Stuart Rothstein
Financials
Private capital markets are improving but still volatile
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Credit quality is holding up
"...we're just not seeing -- we're not seeing any uptick. If you look at the headline, there was some peak-up CECL adjustments, which were just sort of accounting required, but don't reflect actual credit losses. But the actual changes in the reserves, incidence of any stress and actual realized losses coming through, we're just not seeing it across resi loans, commercial loans, asset backs, any other asset class." - Apollo Global Management (APO 0.00) CFO Martin Kelly
But restructuring activity may be rising
"Restructuring activity is increasing, but this cycle will be longer to fully develop. However, it might also be more sustainable over a longer period of time. Companies took advantage of attractive debt markets between 2019 and 2021 to refinance their debt and are now just beginning to see the impact of higher interest rates." - Moelis & Company (MC 0.00) CEO Kenneth Moelis
More people are betting on interest rate volatility
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Sometimes the Fed Chair gets advance data the night before an FOMC meeting
“Sometimes we get data just the night before and it's only me. And not on all pieces of data. It's a very small amount of data and we get it just the night before.” - US Federal Reserve Chair Jerome Powell
Consumer
Consumers aren’t trading down
"...we just really haven’t seen evidence of a significant trade-down to drive us to think that there was tremendous cost pressure on the consumer. Some of the trade-up, trade-down, trade-across, as I have said in previous quarters, was about inventory availability. Perhaps we didn’t have the particular brand they wanted. But a lot of that subsided with the improvement in our supply chain. So, really haven’t seen any evidence of elasticity or trade-down." - O'Reilly Automotive (ORLY 0.00) CEO Gregory Johnson
Luxury consumers are doing particularly well
"We're seeing pretty good -- very strong ordering patterns throughout the portfolio, both at our premium X line all the way through our midline and NXT models. So -- and the consumers continue to option up the boats and put different features on.“ - MasterCraft Boat (MCFT 0.00) Chief Revenue Officer George Steinbarger
"The retail environment remains resilient with strong demand carrying the tide for our premium boats. While we see no worsening of our expected outlook, we are paying close attention to the evolving macroeconomic conditions. During the quarter, we have seen incremental improvements in the lingering supply chain disruptions and are optimistic about our production capabilities and normalizing dealer inventories." - Malibu Boats (MBUU 0.00) CEO Jack Springer
"We are not seeing significant levels of down trading in 2022, and internal studies have shown that the L'Oréal consumer is skewed towards upper middle classes, who are less vulnerable to inflationary pressures." - L'Oreal (LRLCF) CEO Nicolas Hieronimus
"But the consumer in the U.S., on the high end, we're actually seeing more frequency from that consumer, and we're seeing possibly driven by a little trade down into our brands, which is all good" - Yum! Brands (YUM 0.00) CEO David Gibbs
But price elasticities might get worse in H2 23
"Listen, the way, the way we feel about the consumer is based on employment data and wage growth around the world is positive. In our assumption for the year, we're thinking elasticities might get worse going into the second half of the year based on multiple scenarios that we have…that's why we're guiding to a 6%." - PepsiCo (PEP 0.00) CEO Ramon Laguarta
Some consumers are working more hours to beat inflation
"In terms of driver supply, driver supply levels are very, very healthy, right? Drivers are up 35% on a year-on-year basis. New driver count is up 34% on a year-on-year basis. And we have heard from our drivers that inflation is a factor that they consider, about 70% of them that are coming on to the platform are coming on to make more money so that they can afford to live in what has been an inflationary world. So we certainly think that the economic environment could be a tailwind there." - Uber Technologies (UBER 0.00) CEO Dara Khosrowshahi
Retailers are keeping inventories lean
"Retailers continue to take a conservative approach across many categories, including home fitness, as a result of inventory positions and uncertainty in the near-term economic environment. So while sell through to consumers at retail is progressing, we are seeing lower levels of reorders" - Nautilus (NLS 0.00) CEO James Barr
"Our retail partners remain focused on inventory reductions as their own inventory levels remain higher than the prior year." - Spectrum Brands (SPB 0.00) CEO David Maura
Consumer demand for cruises is still strong
"Overall, we continue to see robust demand, financially healthy, highly engaged consumers that are excited to sail on our brands…Growth in cruise search has outpaced general vacation searches, resulting in double the number of visits to our websites compared to 2019…the seven biggest booking weeks in our company's history all occurred since our last earnings call. Our commercial apparatus is full speed ahead, and all channels are delivering quality demand above 2019 levels." - Royal Caribbean Cruises (RCL 0.00) CEO Jason Liberty
The streaming content industry is in transition to focus on profitability
"...our priority is the enduring growth and profitability of our streaming business…we were as a company in a global arms race for subscribers….in our zeal to go after subscribers, I think we might have gotten a bit too aggressive in terms of our promotion and we are going to take a look at that" - Walt Disney (DIS 0.00) CEO Bob Iger
"The streaming world is transitioning to an environment for which we've been preparing: more rational content spend, a focus on profitability instead of chasing subscribers and greater receptivity to bundling and packaging." - Lions Gate Entertainment (LGF.A) CEO Jon Feltheimer
Consumers have a lot of power in streaming
"streaming is…the ultimate ala carte proposition for the consumer. It gives the consumer so much more authority than they ever had before because in reality, it gives them the ability to watch programs, not channels, not even bundles when you think about it. And because you are signing up in most cases for a 1-month subscription, you can sign up for one program, pay a relatively small amount of money and then end up basically unsubscribing. That’s tremendous change" - Walt Disney (DIS 0.00) CEO Bob Iger
Studios are slowing spend on original content
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Uber is doing better than Lyft
"We ended 2022 with our strongest quarter ever, with robust demand and record margins. Our global scale and unique platform advantages position us well to accelerate this momentum into 2023." - Uber Technologies (UBER 0.00) CEO Dara Khosrowshahi
“…we anticipate Q1 revenues of roughly $975 million, relative to Q4, this is a decline of approximately $200 million. About one-third of the sequential decline is due to seasonality, while the remainder is due to less prime time and lower base prices” - Lyft (LYFT 0.00) CEO Logan Green
Technology
Microsoft launched a direct attack on Google's search business with the launch of ChatGPT-Powered Bing
"Google is the 800-pound gorilla in search. I want people to know that we made them dance….Believe me, I’ve been at it for 20 years, and I’ve been waiting for it. But look, at the end of the day, they’re the 800-pound gorilla in this. That is what they are. And I hope that, with our innovation, they will definitely want to come out and show that they can dance." - Microsoft (MSFT 0.00) CEO Satya Nadella
"I think it’s fabulous for both of us. I think there’s so much upside for both of us here. We’re going to discover what these new models can do, but if I were sitting on a lethargic search monopoly and had to think about a world where there was going to be a real challenge to the way that monetization of this works and new ad units, and maybe even a temporary downward pressure, I would not feel great about that." - OpenAI CEO Sam Altman
There are signs that the PC market may be rebounding
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Channel inventories are improving
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Organizations are still cautious about IT spend
"During the month of December, we witnessed a further slowdown in deal closing and increased customers' optimization efforts in cloud usage. As we closed the quarter, we saw our customers exercise caution in this uncertain environment. This is evident in the number of deals that pushed from Q4 into 2023 and that now require C-level budget sign-offs." - JFrog (FROG 0.00) CEO Shlomi Ben Haim
Healthcare
Covid medicines demand declining fast
"...we anticipate a very substantial decline in demand for our COVID medicines in 2023" - AstraZeneca PLC (AZN 0.00) CEO Pascal Soriot
Industrials and Transport
Supply chains are getting better
"As we enter 2023, cotton prices are down approximately 40% from their 2022 highs and are expected to continue to decline in 2023, container costs are now approaching pre-pandemic rates, and we have effectively eliminated the use of air freight in 2023 as the worldwide supply chain moves back in line with historical norms. While we still need to work through inventory in the front half of 2023 that has these higher input costs embedded in it, beginning in the back half of 2023, the combined impact of these three input cost reductions is expected to result in an annualized benefit to our operating results of more than $100 million." - The Children's Place (PLCE 0.00) CEO Jane Elfers
The North America truck market remains strong
"Demand for our products remains strong across all of our key markets and regions with the notable exception of China, resulting in strong revenues in the fourth quarter. Fourth quarter revenues totaled $7.8 billion...it’s just not been a typical cycle for us because, for the last two years, we’ve been undersupplying to the market demand. They’ve been using that equipment. We’re seeing that reflected in very high aftermarket demand which continues, and these new trucks provide efficiency benefits to the fleet. So, we continue to expect a strong North America truck market." - Cummins (CMI 0.00) CEO Jennifer Rumsey
Materials & Energy
Oil demand continues to grow, but supply is tight
"...the reality of our world is that the oil demand continues to grow, and that we need to face, in fact, we have the supply…On the supply side, we don't see a lot of, I would say, margin. We see we are entering into this year with very low inventories of products, in particular, very low compared to the last 10 years...when you look to this landscape, I think, from our perspective, there is more support to, I would say, a higher price than $80 and a lower one. And so looking to -- we'd not be surprised to see $100 per barrel coming back." - TotalEnergies SE (TTE 0.00) CEO Patrick Pouyanné
“...when you look at the fundamentals of the market, there's potentially still tightness going forward when you look at growing demand, China coming back in, for example, East unlocking. We did lose a lot of demand through winter, warm winter. That's something that we'll continue to watch going forward. So I think we're looking at the supply-demand balances. We're looking at all of the factors." - BP (BP 0.00) CEO Bernard Looney
Energy conversations in Europe have shifted
"If you sat in any meeting in Europe in the 2019 period and talked about energy, there was one conversation: It was about energy emissions. Today, on the back of a pandemic, on the back of a war, on the back of a cost-of-living crisis, on the back of an energy crisis, [it] has shifted to a much more balanced conversation" - BP (BP 0.00) CEO Bernard Looney
Nuggets of Wisdom
Jerome Powell should be reading the Transcript
“I will say that I do believe that anecdotal information is very useful. And one of the things the Reserve banks are great at is all 12 of them have big operations where they talk to businesses and nonprofits, universities, every sector of the country and the economy, and they bring that back to the FOMC meetings and they talk about what they're seeing because staring at data is great, but you need to have a story. And I think hearing the stories that people tell, it does help me to assess what's going on out there.” - US Federal Reserve Jerome Powell
(If any of our readers know him, please feel free to forward!)