Somewhat Slower than Anticipated
Market conditions remained soft, with demand lower than we anticipated
Summary: We’re all expecting a soft landing and for the Fed to start lowering interest rates soon, but economic activity seems to be slowing some and inflation isn’t fully extinguished yet. We saw several consumer-facing companies mention that performance was slower than anticipated including Nike, Walgreens, and Lamb Weston.
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Macro
The consumer remains cautious
"Having said that, we are seeing indications of more cautious consumer behavior around the world in an uneven macro environment. Total retail sales across the marketplace fell short of our expectations with softer demand outside of the key consumer moments. While NIKE's store traffic continued to grow, we saw softness in digital traffic and higher levels of promotional activity across the marketplace." - NIKE (NKE 0.00%↑) CFO Matthew Friend
"Consumers are certainly still stressed right now, they feel the impact of inflation over the past few years, and we certainly understand that." - General Mills (GIS 0.00%↑) CEO Jeff Harmening
"We are navigating the accumulating consumer pressures from inflation and depleted savings and somewhat slower-than-anticipated market trends in pharmacy script volumes, including impacts from a weaker respiratory season and Medicaid redetermination. Retail customers in the United States are under stress and making deliberate choices to seek value evidenced in our brands up 90 basis points in the quarter, while demand for seasonal and discretionary categories remains weak." - Walgreens Boots Alliance (WBA 0.00%↑) CEO of Evernorth Cigna Corporation Timothy Wentworth
Consumer spending has been slowing down
"Looking through the balance of the year, we expect Q3 reported revenue to be slightly negative as we again compare to double-digit growth in the prior year and Q4 reported revenue to be up low-single digits with full-year reported revenue now growing approximately 1%." - NIKE (NKE 0.00%↑) CFO Matthew Friend
"...our initial sales forecast has turned out to be more aggressive than our current estimate, reflecting recent restaurant traffic demand trends as consumers continue to absorb the cumulative effect of inflation. As a result, we have purchased more potatoes than we need to meet our current sales targets and have taken a charge to write off the estimated excess...Although overall demand growth is slower than we anticipated a year ago, it remains resilient. Fry attachment rates in the U.S. are stable and in line with what we projected in January 2023." - Lamb Weston Holdings (LW 0.00%↑) President of Commercial Foods, Conagra Foods Thomas Werner
But consumer credit is still strong
"We feel good about consumer credit as long as employment levels stay there, it's a little hard to believe that you'd have it now, lower FICO scores; you hear people talking about little more noise, but the general consumer is basically a prime borrower, and they're doing fine." - Bank of America (BAC 0.00%↑) CEO Brian Moynihan
Labor markets have softened
"The macro environment and labor environment continue to be challenging for small and mid-sized businesses. Our small business employment watch continues to show moderation in both job growth and wage inflation, which is indicative of a stable macro environment and that the actions taken by the Fed are having their desired impact. While we haven't seen any normal signs of a recession in our data, we started to see some softening in seasonal hiring in the quarter, particularly in our large client segments, including our HR outsourcing businesses, many of which typically add seasonal employees at this time of the year…I read that as a macro environment because we're not seeing anything in our data that would say mass downsizings or reductions" - Paychex (PAYX 0.00%↑) COO John Gibson
People are expecting the Fed to start lowering rates soon
"I thought that it's unlikely the Fed would cut rates this year, but inflation has moved down pretty materially quickly, that it's now become more likely. So first of the year, I suspect nothing back out for the year. They could easily move a couple. They could move a couple of times." - Morgan Stanley (MS 0.00%↑) Outgoing CEO James Gorman
"In their submitted projections, almost all participants indicated that reflecting the improvements in their inflation outlooks, their baseline projections implied that a lower target range for the federal funds rate would be appropriate by the end of 2024…Several also observed that circumstances might warrant keeping the target range at its current value for longer than they currently anticipated." - FOMC Minutes
Most think we have achieved a soft landing
"The economy is fine. I mean, there's there's this obsession with the R word, recession. I mean, you have recessions. They come and go when you get imbalances between unemployment rates and economic growth. So, no, the economy's doing fine. I personally think it is unlikely we'll have a recession, very unlikely. We'll have a hard landing, but we'll see. But the odds are clearly in favor of soft landing." - Morgan Stanley (MS 0.00%↑) Outgoing CEO James Gorman
But inflation isn’t fully extinguished either
"What we do see is that, I think importantly, we see an inflationary environment ahead of us. I know there's been talk of deflation in some cases. And that may be true for things like commodities like milk and eggs. but it's only not true for restaurants. Their inflation is actually outpacing ours. And we see inflation in the low single digits. If you look at the category pricing, and it's somewhere in the 2% to 3% range. So we see continued inflation even at a lower level. And usually, pricing tends to follow inflation because that's the basis on which we which we increase prices if we see an inflationary environment." - General Mills (GIS 0.00%↑) CEO Jeff Harmening
"We're still seeing lease rates continuing to go up fairly sizably. A lot of our lease renewals. Keep in mind, that some of those leases were done a couple of years ago, and so they're catching up to today's rates. But we are still seeing deep into the 20%, 25% increases in cars across the board. As far as if you were to look at point-to-point, maybe the last few months, we're continuing to see increases even on some of those as well. So the trajectory is still, lease rates are still appreciating." - The Greenbrier Companies (GBX 0.00%↑) Chief Commercial and Leasing Officer Brian Comstock
International
A stronger US Dollar is a headwind for earnings
"This new outlook reflects increased macro headwinds, particularly in Greater China and EMEA…a stronger US dollar that has negatively impacted second half reported revenue versus 90 days ago." - NIKE (NKE 0.00%↑) CFO Matthew Friend
Geopolitics is causing disruptions to shipping routes
"Now what we have then seen, of course, to the news is a lot of disturbances in the Red Sea, potentially in the future then causing more disturbances in the logistic flow between Asia and Europe. And obviously, from history, we know that can get very congested and very troubled with all of the traffic now then being circumvented with a much longer route" - Outokumpu Oyj ($OUTFF) CFO Pia Aaltonen-Forsell
"We have therefore decided that all Maersk vessels due to transit the Red Sea / Gulf of Aden will be diverted south around the Cape of Good Hope for the foreseeable future." - Maersk
"What we can say for the moment [is] we don’t see the passage through the Red Sea and the Suez Canal as safe. We had an attack in December, you can’t imagine how hard that was, not only for us as a company but especially for our crew. There were several attacks in the last days and as long as the passage through the Red Sea and Suez Canal is not safe, we won’t pass" - Hapag-Lloyd ($HPGLY) Head of Corporate Communications Nils Haupt
China faces some profound demographic challenges
"China has some fundamental challenges. First and foremost is demographics. The one-child policy guaranteed the population is going to shrink. And right when you need more productive working people coming through to support the older generation, they've got fewer of them and they don't have good immigration. So I think China has some profound challenges on demographics." - Morgan Stanley (MS 0.00%↑) Outgoing CEO James Gorman
Financials
Fed interest rate changes will help boost capital markets activity
“The shock of the rate increase recently has put a damper on banking deals [and] capital markets deals. And that is [because] everybody doesn’t really know what their cost of financing is. The minute the Federal Reserve has concretely signalled that they’ve stopped raising rates, let alone the point at which they first do a rate cut, these markets will take off" - Morgan Stanley (MS 0.00%↑) Outgoing CEO James Gorman
“Anticipation of the U.S. Federal Reserve holding off on interest-rate changes will encourage more companies to spend on capital investments again. As budgets get approval after the start of the calendar year, this should help drive investment and increase manufacturing activity once again.” [Computer & Electronic Products]" - ISM in December
"The market is beginning to thaw a little bit. I think a lot of sponsors are beginning to bring assets to market as they need to show some returns to their clients. I don't know about the multiples coming down part, but still to be determined." - FactSet Research Systems (FDS 0.00%↑) CEO Frederick Snow
Last year’s banking crisis was just about poor decision-making at a few banks
"...people kept telling me we have a banking crisis. No, we know we had a crisis among three banks. It was a crisis for their shareholders and their employees. It's not a crisis for the market. The core banking system is in rude, good health, to use a British expression." - Morgan Stanley (MS 0.00%↑)Outgoing CEO James Gorman
Consumer
Consumers are stretching budgets but discretionary spending has remained resilient
"What's very interesting is how sticky some of this away-from-home spending has been even though we've seen a challenged consumer who is making trade-offs to stretch their household balance sheet. The one place that they've been fairly resilient is in their away-from-home spending. Should consumers’ stress increase from here? That is historically the first place that you would see an additional behavior shift is, you would see a reduction in away-from-home spend and you would see an equal and opposite response in home eating. That has not happened yet. But as we think about the calendar year 2024, certainly, that is a potential positive if the environment remains stressed and the consumer decides they need to make further shifts." - Conagra Brands (CAG 0.00%↑) CEO Sean Connolly
"We reached an all-time high in booking volumes for the 2 weeks around Black Friday and Cyber Monday and ended the year in the best-booked position we have ever seen on both price and occupancies setting 2024 off to an amazing start. We now have nearly 2/3 of the business on the books for 2024 and at considerably higher prices." - Carnival Corp (CCL 0.00%↑) CEO Joshua Weinstein
Companies are lapping the end of SNAP emergency allotments
“The thing that we -- that's more discrete really is the lapping of the SNAP emergency allotments benefits from last year. And those kind of go state by state, but they took place last year between January and March, and that may be a 1-point benefit to the categories that we're in." - General Mills (GIS 0.00%↑) CEO Jeff Harmening
Consumers want snacks that are high in protein, low in carbs and sugar
"Nutritional snacking category continues to be resilient with top tier volume growth propelled by the consumer mega trends of healthy snacking with a nutritional profile that is protein-rich, low in carbs and sugar. This profile has broad appeal to consumers across all generations, but particularly with Gen X, Gen Z and millennial consumers that look to our brands as a means of helping them achieve their goals." - The Simply Good Foods (SMPL 0.00%↑) SVP of Growth & Consumer Engagement, The J.M. Smucker Company Geoff Tanner
Technology
We are still in the early stages of AI
"We are in the very early stages of a multiyear growth phase catalyzed and driven by generative AI, and this disruptive technology will eventually transform every aspect of business and society. Memory is at the heart of GPU-enabled AI servers, and we are already seeing strong demand driven by early deployment of AI solutions, which will only accelerate over time...Generative AI use cases are expanding from the data center to the Edge with several recent announcements of AI-enabled PCs, smartphones with on-device AI capabilities as well as embedded AI in the auto and industrial end markets.The proliferation of on-device AI at the Edge offers a host of benefits such as enhanced privacy, lower latency, improved performance, greater personalization, and competitive costs for a wide range of use cases from content creation to productivity." - Micron Technology (MU 0.00%↑) CEO Sanjay Mehrotra
The US leads china in AI
"When you think about AI, there are three things: compute capabilities, data availability, and innovative research algorithms. The U.S. has clearly led in computing power. Data? You’d think China would have an advantage there. But, in fact, the openness of the U.S. has clearly made lots of data sets available. Then third is our way of innovative life. The open, almost rebel-like characteristics that we have. I’m an entrepreneur. I can do this. And so on. You don’t do that in China. Chinese policies have become more regressive, not more enabling for entrepreneurs and data access. And how do you measure AI innovation? Based on the number of references of top peer-published AI papers, the U.S. dominates. The number two contributor today for major AI publications is the U.K., not China. Every major AI innovation has occurred in the West—bar one or two—over the last decade. I don’t see that changing." - Intel (INTC 0.00%↑) CEO Pat Gelsinger
Smartphone demand is showing signs of recovery
"In mobile, smartphone demand is showing signs of recovery, and we forecast smartphone unit shipments to grow modestly in calendar 2024…We expect smartphone OEMs to start ramping AI-enabled smartphones in 2024 with an additional capacity of 4 to 8 gigabytes of DRAM per unit." - Micron Technology (MU 0.00%↑) CEO Sanjay Mehrotra
Pricing for NAND and DRAM expected to rise in 2024 due to demand-supply imbalances
"And with respect to the pricing, we, of course, expect pricing to continue to strengthen during calendar 2024, and this is because of the healthy demand-supply balance as we discussed in the context of our script. As you have seen, there have been significant cuts in supply growth in the industry. Customer inventories have normalized supplier inventories are improving as we have discussed, our own inventory here as well. And pricing will continue to improve as a result through the course of the year." - Micron Technology (MU 0.00%↑) CEO Sanjay Mehrotra
Is Intel back?
"Anytime your competitor is talking about you it confirms you’re real at this point. Two years ago, nobody was even saying we’re in the game. We announced two major innovations with 18A: a new transistor and backside power. I think everybody’s looking at the transistor of TSMC’s N2 versus our 18A. It’s not clear that one is dramatically better than the other. We’ll see who’s best. But the backside power delivery, everybody says Intel, score. You are years ahead of the competition. That’s powerful. That’s meaningful. It gives better area efficiency for silicon, which means lower cost. It gives better power delivery, which means higher performance. So, I have a good transistor. I have great power delivery. I think I’m a little bit ahead of N2, TSMC’s next process technology in time. And TSMC has given a very high-cost envelope that I think I easily fit underneath to be margin accretive for Intel." - Intel (INTC 0.00%↑) CEO Pat Gelsinger
Mobileye expects Q1 2024 revenues to be down a ~50% YoY due to excess inventory at its customers
"As a result of our standard planning process for the upcoming year, including discussions with our Tier 1 customers to determine potential orders for 2024, we have become aware of excess inventory at our customers, which we believe to be 6-7 million units of EyeQ® SoCs. Based on our discussions, we understand that much of this excess inventory reflects decisions by Tier 1 customers to build inventory in the Basic ADAS category due to supply chain constraints in 2021 and 2022 and a desire to avoid part shortages, as well as lower-than-expected production at certain OEM's during 2023. As supply chain concerns have eased, we expect that our customers will use the vast majority of this excess inventory in the first quarter of the year. As a result, we expect that first quarter 2024 revenue will be significantly below first quarter 2023 revenues and that we will see revenue normalized during the remainder of 2024." - Mobileye
Industrials and Transport
US freight volumes have declined for 10 consecutive quarters
"Looking at the US, market conditions remained soft, with Q2 demand lower than we anticipated. The industry has now experienced 10 consecutive quarters of decline in US domestic average daily volume. Additionally, International market pressure continued. Despite this pressure, our Europe and EMEA teams did a great job of growing parcel volume…One is that the industrial production around the world continues to be weak, and again, that's reflected in our Express Freight numbers and even in our domestic Express numbers. Even though we are growing faster than the market, we -- these are headwinds to the industry -- for the industry volume." - FedEx (FDX 0.00%↑) Chief Marketing & Communications Officer Brie Carere
Inventory destocking is over
"On consumer spending, I think the mix between goods and services, I think now that's nearly back to the pre-pandemic levels. As far as inventory is concerned, we believe that the inventory destocking phase is over. And but the restocking phase is yet to begin in earnest." - FedEx (FDX 0.00%↑) CEO Rajesh Subramaniam
More companies moving to work from office
"We remain optimistic about the growing number of companies in the United States that are emphasizing physical presence in their offices for a minimum number of days per week, as we believe it has positively impacted order levels over the last three quarters in our business." - Steelcase (SCS 0.00%↑) CFO David Sylvester
There is constrained supply of scrap metals
"On this slide, you can see some of the economic factors that underlie the constrained scrap generation that we are experiencing. First, U.S. PMI has dropped below pre-COVID levels. And second, the average age of vehicles on the road has reached the highest level on record leading to materially lower scrappage rates. In addition, a decline in durable goods orders, along with increased scrap collection costs and higher interest rates have contributed to tighter scrap supply flows. We expect scrap generation to expand as manufacturing and construction activity improves and inflation and interest rates decline from their current levels." - Schnitzer Steel Industries (RDUS 0.00%↑) CFO Tamara Lundgren
Materials & Energy
There’s high interest in nuclear energy
"Having been in this industry for decades, I've never seen such strong support for nuclear power. However, while policy and legislative changes are extremely important, big industrial energy consumers are not waiting for those government decisions and are moving much more quickly. A number of private companies are taking action now with plans to support the expansion of clean nuclear energy today and in the years to come. We've also seen new reactor technologies on the midterm and long-term horizon that have the potential to make nuclear energy even more accessible. A number of small modular reactors and small advanced microreactors are in development, including those from Westinghouse" - Cameco Corp (CCJ 0.00%↑) CEO Tim Gitzel
The tone has shifted dramatically in the uranium market
"Let me start with just a brief overview of developments in the uranium spot market. I think over the last few years, we have definitely seen the tone shift from an oversupplied market where the price was driven by material destocking where sellers were motivated to sell, motivated to move material and the offers tended to follow the bids. I think in the market today, we're seeing supply that is tightly held, buyers that are looking for scarce material, sellers that are looking for a higher price and bids are tending to follow the offer. So the tone has tightened dramatically." - Cameco Corp (CCJ 0.00%↑) VP of Marketing David Doerksen
Strong oil demand in 2024
"We're seeing demand to be fairly strong. Depending on whose forecast you look at, I think IEA has come out and said that they believe there's going to be a demand increase of 1.1 million barrels per day next year. OPEC is a little bit more aggressive, they're thinking 2.2 million barrels per day demand growth next year. Take whichever one you want. I guess for us, it means demand is going to continue to grow and be strong next year." - EOG Resources (EOG 0.00%↑) President Billy Helms
US rig counts are down a lot y/y
"I think last year, the rig counts were up at the start of last year. They are basically are down 20% year-over-year. Frac crew count is down about the same amount. And so you had a lot of the privates stepping up last year and increasing a lot of activity and brought a lot of supply on. Since then, yes, rig count's down, frac fleet count is down, DUC counts down. And on top of that, bringing on a lot of production last year, you've got a steeper decline to offset this next year. So that tells you that U.S. production is not going to be able to continue to grow at the pace that it did last year." - EOG Resources (EOG 0.00%↑) Goldman Sachs Energy, CleanTech & Utilities Conference
Nuggets of Wisdom
CEOs do a lot of prep for earnings calls
"I definitely have an element of a little bit of paranoia that I do everything I can to prepare myself for the best possible outcome. I remember my first earnings call as the CEO. I was up late reading the materials and I was up early reading the materials again because I wanted to be, not just a little prepared, but overprepared and, I'm into my sixth year of doing this, and I still probably over prepare for some of these moments. But it's I think it's really important to be prepared so that you can ensure you get your best effort. And the thing I worry about most, David, is I hate leaving something. If I didn't give it my best effort, it's and the only way I know how to do my best effort is do everything I can to be prepared and it's that's what gets me anxious. It's have I done everything I can to be prepared for this? Am I walking in with my best effort? The outcome is going to be the outcome. But I'll be critical of myself if I think ah, I could've been better if I would've just done X. And it's one of those things that drives me." - Chipotle (CMG 0.00%↑) CEO Brian Niccol
Stay focused on a few big things
"I didn't write [a checklist] this year. I did that when I was CEO for 14 years, and it gave me a framework for focusing on a few big things that matter because, in these jobs, there are thousands—literally thousands—of issues that come at you. And you can easily lose sight of the stuff that actually matters, which is a few big things. One of them was always ‘no new mistakes,’ which I defined as things that cost us more than a half-billion of capital. Sometimes they were personal, like ‘stay fit’ or ‘get fit,’” he said.
“Sometimes I’d write: ‘Development and leadership with our top team" - Morgan Stanley (MS 0.00%↑) Outgoing CEO James Gorman
"Concentrate your resources on a small number of high-conviction bets; this is easy to say but evidently hard to do. You can delete more stuff than you think." - OpenAI CEO Sam Altman
Make mistakes and learn from them
"But you can’t do these jobs and not make mistakes. When I see a mistake, I embrace it. You know, it’s like Kipling, those travelers of success and failure—you’ve got to embrace them both. I never see a mistake as a negative, I just see it as something you learn from and move forward. Because if you’re not making mistakes the chances are you’re not doing enough" - Morgan Stanley (MS 0.00%↑) Outgoing CEO James Gorma