Meta Earnings
A renewed focus on the metaverse
Succinct Summary: Big tech reported earnings last week. We learned that Facebook has changed its name to Meta and is now, together with other companies, focused on building the metaverse. Beyond that, the US economy is booming but continues to struggle with extreme supply chain challenges and inflation. Both challenges are broad-based and show few signs of getting better. Chip shortages may last through 2022. Labor shortages are particularly acute. For now, the economy is hot enough that consumers are accepting price increases.
Editor's note: Welcome to this week’s edition of The Transcript. Parts of the quotes which have been blocked are only available to our paid subscribers. Subscribe to access them:
The Transcript this week is sponsored by Quartr.
Quartr allows you access to conference calls, investor presentations, transcripts, and earnings reports straight from your iOS and Android devices. Quartr is available for free and covers companies from 15+ markets including the US, UK, Canada, India, and all the Scandinavian countries. Try out the app today:
Macro:
US economic growth remains robust
"In the U.S., economic growth is generally robust and a strong recovery appears likely to continue into next year. In Europe, recovery remains on track as business conditions normalize." - Lazard (LAZ) CEO Kenneth Jacobs
Concerns from the Delta variant are mostly behind us
"The good news is the Delta variant has really sort of run its course in our factories, and we're confident, at least as we stand today, that the worst is behind us." - Lennox International (LII) CEO Todd Bluedorn
"We are continuing to pay close attention to and manage through several external factors, including COVID-19, inflationary pressures, and inventory and labor shortages. Despite these challenges, consumer demand is expected to be strong during peak season and in the fourth quarter" - United Parcel Service (UPS) CFO Brian Newman
The aftershocks are also diminishing
"...the caveats of who knows what will happen with variance and potential lockdowns but we do see the world emerging from the crisis a bit like an earthquake. You get more aftershocks, but the consequent aftershocks tend to be smaller than the early ones. And that's how we see '22." - Coca-Cola (KO) CEO James Quincey
Supply chain challenges are the only thing holding us back
"...with respect to the macro-environment, it's unique. It's uniquely strong. You take a look at inventory sales ratios, historic lows, and the consumer has a healthy balance sheet and the retail sales are continuing to increase, and so that inventory replenishment cycle is going to be a boost to transportation demand into -- well into 2022. PMI is at 61.1, which is well into expansionary phase right now. Demand is really high, the only thing that indicates that -- the only thing holding it back are supply chain challenges, which we need to help solve for our customers." - Norfolk Southern (NSC) CMO Alan Shaw
"...definitely most important thing right now. Well, we are seeing talking of everyone on our platform. The challenges are, of course, real. There are pressures in supply chain, increasing logistics costs and things like this." - Shopify (SHOP) President Harley Finkelstein
Labor issues are at the center of the supply chain challenges
"...we have a certainly domestically but potentially globally, a real challenge with labor participation, and truck driver shortage, warehouse labor shortage, port labor shortage, rail yard and labor shortage. I mean, that labor issue permeates throughout the entire supply chain. And it's really driving fluidity out which causes many of these backups. And so I don't know what the magic bullet is so to speak, that solves for that Jordan, but I do believe because labor sits at the center of this in virtually every single node, that it's going to be slow to develop." - C.H. Robinson (CHRW) CEO Robert Biesterfeld
"Our employee tenure is -- has shortened dramatically, and so it's changing how we staff because we have to staff more people to get the product out the door." - Kimberly-Clark (KMB) CEO Mike Hsu
"Ancillary charges associated with ocean containers, such as demurrage and detention have escalated to unreasonable levels. The lack of truck drivers and warehouse workers available to pick up, unload and return containers, combined with minimal free days from shipping carriers have intensified these ancillary charges." - Flexsteel Industries (FLXS) CEO Jerry Dittmer
"In Q3, labor became our primary capacity constraint, not storage space or fulfillment capacity... In short, our operations are normally well-staffed and optimized to be in-stock and to deliver to customers in one to two days. Labor shortages in supply chain disruptions upset this balance and resulted in additional costs to ensure that we continue to maintain our service levels to customers." - Amazon.com (AMZN) CFO Brian Olsavsky
Not everyone is having labor issues though
"We're at full employment in the field. It's probably the statistic that I am most proud of. Our clubs have been at full staffing for probably over three months." - Sam's Club CEO Kathryn McLay
"We really had essentially no problem in attracting -- talent. The people that provide service are what makes the company so successful. They are the ones that the guests love. We’ve had no difficulty recruiting and -- I think it’s because we’re just seen as such an attractive job for people all over the world,” - Royal Caribbean (RCL) CEO Michael Bayley
We're in a broadly inflationary environment
"Obviously, we're in a more inflationary environment broadly. Thank you, Federal Reserve and the US Congress, for fiscal and monetary stimulus. We could debate transitory or otherwise.But those things are translating into broadly a more highly inflationary environment. And that applies to us too, and that obviously is helping from a pricing power point of view." - Hilton Worldwide (HLT) CEO Chris Nassetta
"In the fourth quarter, we expect to incur several billion dollars of additional costs in our Consumer business as we manage through labor supply shortages, increased wage costs, global supply chain issues, and increased freight and shipping costs" - Amazon.com (AMZN) Third Quarter Results Press Release
"I would tell you that we are seeing a significant increase in freight costs. And I would assume that that is pretty consistent across different companies. And so, we’re clearly seeing some inflation there." - Apple (AAPL) CEO Tim Cook
"When you have an inflationary environment that's indexed around raw materials, you tend to have everyone looking to take pricing in the market, and that makes it more conducive certainly from a category standpoint and making sure that everyone takes pricing that the volume continues to go along with that." - Colgate-Palmolive (CL) CEO Noel Wallace
But the economy is hot enough that people are accepting price increases
"Last quarter, I think I talked about how we were seeing roughly a 6% increase year-over-year in the U.S. We are still seeing that and that -- that's pretty much the level we expect for the full year 2021 over 2020 right around that 6%...We haven't seen, I’ll say, any more resistance to our price increases than we've seen historically. So that the 6% has been pretty well received by customers." - McDonald's (MCD) CFO Kevin Ozan
The Fed can slow inflation, but it will be painful
"The Fed has the tools to deal with inflation, but those tools generally don't feel good when they have to be applied -- if they have to raise rates quickly to offset it, that can have an impact on the economy, which traditionally is not pleasant. But the reality is that if they can stay ahead of it, it works -- But you'd rather have that challenge being thought through as loans are growing, deposits are growing, consumers are spending more, the economy is as big as it was. And so taking the accommodation out of the economy by slowing down purchases or raising rates is different in that kind of strong backdrop." - Bank of America (BAC) CEO Brian Moynihan
Will the inflation be transitory or not?
"As far as inflation is concerned, look, there are 2 camps here, 1 which is essentially -- we're -- this is a inflation transitory weaker economic growth is going to alleviate some of the pressures. The supply chain issues will diminish and the Fed will be able to control it. Largely speaking, the bond market until recently was more or less in that camp. I think the other camp is the supply chain is here to -- supply chain disruptions are going to last longer. Consumer demand is driving up prices. The Fed is behind the Eightball on this. And that we’re in for a longer period of inflation. Frankly, I think the debate is wide open at the moment, and we’re going to have a better feel for that as we enter into early next year. And the second quarter weakness, perhaps some weakness in China, you could argue on one hand is going to keep it in check. On the other hand, clearly, the supply chain disruptions as we heard last night from Amazon and Apple are concerning." - Lazard (LAZ) CEO Kenneth Jacobs
International:
Good news from Asia: Vendors are reopening
Quotes Hidden. Subscribe to Read
International travel is picking up
"European airlines have seen large bookings spikes following the U.S. decision to open the vaccinated foreign travelers in November. Passenger traffic in other parts of the world, particularly Southeast Asia, remains significantly lower due to continued travel restriction, uncertainty, and case rates." - Boeing (BA) CEO David Calhoun
"We're also seeing a general trend toward the opening of travel corridors, notably inbound into the U.S. and some easing of restrictions in Asia. Now, turning to our business. While the pandemic is not fully behind us, we're now in the growth phase in most markets domestically and in many markets in cross-border spending as well." - Mastercard (MA) CEO Michael Miebach
The recovery in Europe is being underestimated
"So first on Europe, we could -- I think the recovery in Europe, by and large, is underestimated in the U.S. by most observers, both from an economic standpoint as well as in terms of activity levels. We're seeing a record level of activity, at least for our business across Europe right now, which is very encouraging." - Lazard (LAZ) CEO Kenneth Jacobs
Financials:
Robinhood growth has slowed down
"In Q3, we saw considerably fewer new funded accounts and lower revenue as compared to Q2 -- In Q3, crypto activity came off record highs leading to fewer new funded accounts and lower revenue as expected. Historically, our growth has come in waves. The surges have come during periods of increased volatility or market events." - Robinhood (HOOD) CEO Vlad Tenev
There's been strong issuance of high yield and LBO debt
"The combination of global leveraged loan and high yield issuance in the third quarter, continued to be very strong, surpassing every quarter in 2018. '19, and '20..The surge in activity is entirely due to M&A, LBOs, buybacks, and dividends." - S&P Global (SPGI) CEO Doug Peterson
Consumer:
Brick and Mortar isn't dead
"As the world begins to reopen, shoppers are returning to stores. Brick and mortar aren’t dead. Instead, omni -channel is in full force. Searches for open now near me are four times globally versus last year. Strong growth in Local Shopping queries means people are researching the visits to stores more often before they go. As a result, we've seen more adverti
ers include in-store sales alongside e-commerce goals to drive omni -channel growth. Adoption has nearly doubled over the past year." - Alphabet (GOOG) SVP & CBO Phillip Schindler
"...merchants need to be where their buyers are. This past quarter, more buyers were in stores as brick-and-mortar reclaimed some of its share of retail." - Shopify (SHOP) President Harley Finkelstein
The future is retail everywhere
"We think that commerce is not just going to be done across every country, but it's also going to be across every surface area. The reason why you hear us talking about things like TikTok, for example, or Spotify or Roku, because we think that the future of retail is going to happen everywhere." - Shopify (SHOP) President Harley Finkelstein
e-commerce growth has slowed down
Quotes Hidden. Subscribe to Read
Economic conditions are impacting digital ad spend
Quotes Hidden. Subscribe to Read
Buy now for Christmas
"If you want to buy Christmas presents, you should buy now...There will be racks in retail that are more empty than you’d like when you go Christmas shopping,” - Puma (PMMAF) CEO Bjorn Gulden
A lot of renters are getting ready to move
"In August, we surveyed more than 20,000 renters about their moving intentions. As a result of that survey, we expect the apartment market will experience increased turnover, more out of market moves and lower renewals as we head into 2021 -- 2022. When asked, when do you think you will next move into a new residence, 53% of survey respondents said they will move by winter. When asked, what do you plan to do when your current lease expires, only 24% of renters expect to renew within the same community, down from 47% pre-COVID. This all makes sense given the huge affordability changes and changing work-from-home policies." - CoStar (CSGP) CEO Andy Florance
Technology:
Facebook is serious about the Metaverse
"The next platform will be even more immersive -- an embodied internet where you’re in the experience, not just looking at it. We call this the metaverse, and it will touch every product we build. The defining quality of the metaverse will be a feeling of presence -- like you are right there with another person or in another place. Feeling truly present with another person is the ultimate dream of social technology. That is why we are focused on building this." - Facebook (FB) Metaverse VP Vishal Shah
There are opportunities in the Metaverse
Quotes Hidden. Subscribe to Read
iOS 14 created some long term challenges
Quotes Hidden. Subscribe to Read
Customers do love privacy
"The feedback from customers is overwhelmingly positive. Customers appreciate having the option of whether they want to be tracked or not. And so, there’s an outpouring of customer satisfaction there on the customer side." - Apple (AAPL) CEO Tim Cook
Technology is a deflationary force
"Digital technology is a deflationary force in an inflationary economy...I mean in an inflationary environment, the first place any business should go to is how to really ensure that they're able to get productivity gains and even dealing with constraints." - Microsoft (MSFT) CEO Satya Nadella
For instance, Waymo is hoping to alleviate trucking shortages next year
"Waymo began welcoming riders to its trusted tester program in San Francisco in addition to its fully autonomous ride-hailing service currently in Phoenix. Next year, Waymo will open a dedicated trucking hub in the Dallas Fort Worth area, helping support commercial freight droughts across the Southwest." - Alphabet (GOOG) CEO Sundar Pichai
Industrials and Transport:
These supply chain challenges are not normal
"Based on a myriad of calls and questions we have received, I think it's hard for everyone to appreciate the full magnitude of the issues we're facing when you're not dealing with them on a day-to-day basis. For some products, it's simply the materials aren't available. Sometimes you can switch to an alternative. But when you can, you wait. For others, it's changing lead times where order fulfillment has gone from 6 weeks to 16 weeks, back to 11 weeks and then back to 16 weeks -- Literally, paint suppliers don't have paint, so we're asking people to drive to go buy paint in retail stores. That's not normal. It's not the way we do business." - Pultegroup (PHM) CEO Ryan Marshall
It's like playing whack a mole
"I'm not sure we're yet in a place where we would say that things are stable. We may have line of sight, we may have improvements in one commodity or in one business, but almost without fail. The next day, a commodity, a supplier, a logistics provider that we thought was good for the next 6 weeks or the next 6 months, offers up a revision to that outlook. So I think I've used a phrase I probably shouldn't, but I'll repeat it and it really is akin to playing whack-a-mole. By business, by commodity, by geography, it just seems like every day there's new news to battle with -- It's probably more challenging than I've ever seen in my career." - General Electric (GE) CEO Larry Culp
The chip shortage is going to last for a while
"With or without the CHIPS Act, we think we still have some rough road in front of us. And I've said we believe the chip shortage is at its worst right now. It will get incrementally better as we go through '22, but we expect the shortage to persist into 2023. It just takes that long to build capacity," - Intel (INTC) CEO Pat Gelsinger
"...that someday when the supply normalizes clearly that will occur. We continue to be surprised by the duration of the supply shortage. And I was told by the top executives of our suppliers that they don't see it getting better till at least third quarter of next year." - Group 1 Automotive (GPI) CEO Earl Hesterberg
"We're doing everything we can to get our hands on as many chips as we can. But we do see that running through 2022, it could extend into 2023, although we do anticipate the scope and severity of that to reduce as we move through 22 into 23." - Ford (F) CFO John Lawler
Automobile inventories won't start rebuilding until 2023
"But I would say that we should be back up and running based on what we're seeing today, our run rate, the end of next year into '23. And then in 2023, we'd start to rebuild our inventories. But it's dynamic, Rod, and it's hard to make a pinpoint call at this point in time." - Ford (F) CFO John Lawler
Container costs are up 8X!
"Containers are scarce to find; the container costs have increased 8X. Ocean freight has increased 8X. A typical container used to cost a couple of thousand dollars is now $16,000. So, there's a lot of stress on logistics, lot of stress on the supply chain situation." - Enphase Energy (ENPH) CEO Badri Kothandaraman
“Container capacity, container rates and port congestion continue to be areas of concern. We expect these issues to continue well into 2022. Our container prices on the spot market continued to increase during the quarter.” - Haverty Furniture (HVT) President Steven Burdette
Steel prices are at record highs
"Steel prices are at record highs in a really weak auto environment. So, think about what happens when auto starts a rebound next year and potentially you sprinkle on a little bit of an infrastructure package before the mid-terms, and we expect to have a robust environment for our product, our consumer-facing franchise next year as well." - Norfolk Southern (NSC) CMO Alan shaw
Materials & Energy:
2/3 of Google's data centers are carbon free
"Two - thirds of the electricity consumed by Google data centers in 2020 was matched with local carbon-free sources on an hourly basis." - Alphabet (GOOG) Q3 CEO Sundar Pichai
Larry Fink says that there will be a lot of unicorns that come from green tech
“It is my belief that the next 1,000 unicorns -- companies that have a market valuation over a billion dollars -- won’t be a search engine, won’t be a media company, they’ll be businesses developing green hydrogen, green agriculture, green steel and green cement," - Blackrock (BLK) CEO Larry Fink
Nuggets of Wisdom:
Empathy as the source of all innovation
“To me, what I have come to realize, what is the most innate in all of us is that ability to be able to put ourselves in other people’s shoes and see the world the way they see it. That’s empathy. That’s at the heart of design thinking. When we say innovation is all about meeting unmet, unarticulated, needs of the marketplace, it’s ultimately the unmet and articulated needs of people, and organizations that are made up of people. And you need to have deep empathy. So I would say the source of all innovation is what is the most humane quality that we all have, which is empathy”- Microsoft (MSFT) CEO Satya Nadella