The Newsletter

The Transcript 03.16.20

Welcome to The Transcript, your weekly digest of quotes from earnings calls.

Click Here to Receive The Transcript by Email. 
Succinct Summary:  The Transcript this week is all about the Coronavirus that is rapidly spreading globally and crippling the global economy.  This is not only an economic setback but also a major humanitarian crisis. We hope, as do many, that the effects are transitory and that this will be our finest hour!

Macro Outlook:

COVID-19 is now a global pandemic with Europe as the epicenter

“We have therefore made the assessment that COVID-19 can be characterized as a pandemic. Pandemic is not a word to use lightly or carelessly…Europe has now become the epicenter of the pandemic with more reported cases and deaths than the rest of the world combined apart from China” – WHO Director-General Tedros Adhanom Ghebreyesus

Daily life has come to a halt in many places

“Daily life has come to a halt, it certainly appears if you are a human being on this planet.” – Korn Ferry (KFY) CEO Gary Burnison

This is a fear-based event more akin to 9/11 than 2009

“I think this event is very similar to 9/11 in terms of the psychology of what’s driving it. It’s a fear based event” – JetBlue Airways (JBLU) CEO Robin Hayes

“This is a fear event, probably more akin to what we saw at 9/11 than necessarily what we saw in 2009. I think you’re seeing a suspension of activities, whether it be corporate activities, group activities, events where people get together in large numbers, all of which impact our demand set. So, I think it’s really premature to try to be drawing too many corollaries.” – Delta Air Lines (DAL) CEO Ed Bastian

“We are in a situation which is exceptional in every respect…more exceptional than at the time of the banking crisis, I would say.” – The German Chancellor Angela Merkel

with significant demand deterioration for airlines worse than after 9/11

“when I look at how the demand has deteriorated last couple of weeks, it appears to be worse than what we saw after 9/11.” – JetBlue Airways (JBLU) CEO Robin Hayes

The rapid spread presents a major shock to the global economy

“the spread of the coronavirus (COVID-19) has been a major shock to the growth prospects of the global and euro area economies and has heightened market volatility…a crisis that is fuelled by a supply shock, followed by a demand shock, and with great financial uncertainty.” – ECB

“The coronavirus outbreak has harmed communities and disrupted economic activity in many countries, including the United States. Global financial conditions have also been significantly affected.” – The Federal Reserve

“…risky asset and commodity prices have fallen sharply, and government bond yields reached all-time lows, consistent with a marked deterioration in risk appetite and in the outlooks for global and UK growth. Indicators of financial market uncertainty have reached extreme levels.” – The Bank of England

Airlines have had significant declines in bookings and expect more revenue erosion

“2009 was a very different animal. Here we have an event that’s triggering a decline in both business and leisure. And the declines have been across the board in both…two weeks ago, our revenue trajectory changed dramatically as the virus spread meaningfully outside of Asia. Since then, we have seen a 25% to 30% decline in net bookings and are prepared for it to get worse. We expect demand erosion will continue in the near term and have built a plan that prioritizes free cash flow generation and preserves liquidity.” – Delta AirLines (DAL) CEO Ed Bastian

“We are seeing the most challenging trends were close in travel so for travel for March or travel for this week or next as we are seeing the biggest challenges in terms of high refunds compared to normal, as well as lower new bookings compared to normal….in terms of what is relatively the most challenged, we are seeing TransCon markets and sort of long-haul that nature being the most challenged.” – JetBlue Airways (JBLU) Vice President for Sales and Revenue Management Dave Clark

“With bookings softness and increased cancellation rates, we expect our March full month domestic load factor will be closer to 65 to 70. This would be down roughly 20 points over last year, but people are still flying.” – Delta Air Lines (DAL) CEO Ed Bastian

(Note: The above quotes are from early last week)

No wonder the US declared this a national emergency

“Using federal emergency authorities, the FDA approved a new test for the virus. We did this within hours after receiving the application from Roche, a process that would normally take weeks. We therefore expect up to a half a million additional tests will be available early next week” – The US President Donald Trump

And the Fed cut rates to Zero and restarted QE

“The effects of the coronavirus will weigh on economic activity in the near term and pose risks to the economic outlook. In light of these developments, the Committee decided to lower the target range for the federal funds rate to 0 to 1/4 percent.–ver coming months the Committee will increase its holdings of Treasury securities by at least $500 billion and its holdings of agency mortgage-backed securities by at least $200 billion.” – The Federal Reserve

“the Monetary Policy Committee (MPC) voted unanimously to reduce Bank Rate by 50 basis points to 0.25%.” – The Bank of England

Companies are trying to help as much as possible

“So we’ve put protocols in place, whether that’s social distancing, we have established a corporate emergency team, we have limited travel, we’ve limited internal meetings, office visitors, we’ve closed a selected number of offices, we have some employees working from home, and we are in daily communication with our colleagues.” –  Korn Ferry (KFY) CEO Gary Burnison

“we’ve increased our production at our manufacturing facilities around the world, including those that make respirators to really – to help meet the demand related to the coronavirus.” – 3M (MMM) CEO Mike Roman

And are beginning to quantify the impact

“we currently estimate the Q1 impact in those markets will be a reduction of approximately $100 million in sales.” – Gap (GPS) CFO Teri List-Stoll

“Our current dire scenario planning option is for revenue to be down 70% in April.” – United Airlines (UAL) President Scott Kirby

Above all though, this is a humanitarian crisis that needs swift action

“this is a humanitarian crisis, let’s be honest. And so I think when people are worried, look, I’m doing the same thing that everybody else does. Right? You go into grocery store and there is no toilet paper, and panic buying, we get panic buying, panic selling, we get panic selling.” – Korn Ferry (KFY) CEO Gary Burnison

“You need to react quickly. Everyone is afraid of making a mistake, of the consequence of error. But the greatest mistake is not to move, to be paralyzed by the fear of failure…If you need to be right before you move, you will never move” – WHO Executive Director Dr Michael Ryan

Most view the economic impact as significant but transitory

“We view the impact of the coronavirus as a transitory event and fully expect consumer spending globally to come back once this event has passed.” – Mastercard (MA) CFO Sachin Mehra

“This demand disruption, like all others, is temporary. The reasons that people fly have not changed” – Delta AirLines (DAL) CEO Ed Bastian

“I don’t think the secular demand will change that much…But certainly, the immediate demand has changed.” – Berkshire Hathaway (BRK) CEO Warren Buffett

“Even if ultimately temporary in nature, it will have a significant impact on economic activity. In particular, it will slow down production as a result of disrupted supply chains and reduce domestic and foreign demand, especially through the adverse impact of the necessary containment measures.” – ECB

Small businesses are suffering the most

“right now small business is suffering from both sides. One is there’s been disruption in their supply chains in terms of receiving their goods that they need. And, the second, the other side is that there’s uncertainty from the demand side in terms of what the future holds.” – Citigroup (C) Michael Corbat

” What we need to focus on is particularly the small businesses, who are going to have big, big issues.”- The US Treasury Secretary Steven T Mnuchin

“Temporary, but significant, disruptions to supply chains and weaker activity could challenge cash flows and increase demand for short-term credit from households and for working capital from companies. Such issues are likely to be most acute for smaller businesses.” – The Bank of England

Markets seem to be pricing in a recession with worsening near-term outlook

“A combination of the coronavirus and the rapid market correction suggests that the same roller coaster effect could impact both 2020 and 2021 with current market levels in my view pricing in a global recession.” – Standard Life Aberdeen (SLFPF) CEO Keith Skeoch

“Given all the news and near-panic about the virus, none of this is shocking; but the velocity and the severity of the decline is breathtaking…There is no question this is a severe recession for our industry and for us. And, it is a financial crisis.” – Southwest Airlines (LUV) CEO Gary Kelly

“The latest indicators suggest a considerable worsening of the near-term growth outlook. The disruption of supply chains is impeding production plans in the manufacturing sector, while necessary containment measures against the further spread of the coronavirus are adversely affecting economic activity.” – ECB President Christine Lagarde

Meanwhile, the central banks and world governments are willing to do whatever it takes in response

“This is the bazooka, and we will use it to do whatever it takes..We are making an unlimited pledge, to the smallest businesses, from taxi-drivers, to the creative industries, to really big firms with tens of thousands of workers” – German Finance Minister Olaf Scholz

“We will do whatever is necessary to support the Europeans and the European economy”- European Commission President Ursula von der Leyen

“I can assure you, we will use whatever tools we need to make sure that the industries that are impacted by this get through this.” – The US Treasury Secretary Steven T Mnuchin

Not everyone is experiencing weak demand though.  The demand for medical supplies is extremely strong.

“we will quickly adapt to what we see as the markets unfold including any actions we need to really get in line with changes in that demand. It’s been both sides of it to this point…We’ve seen some impact on softer demand in areas like China and then we’ve seen of course, the ramp up and demand on respiratory protection.” – 3M (MMM) CEO Mike Roman

Grocery demand is also surging

“we believe that retail demand will remain elevated in the near term, especially in regions in metropolitan areas where there are escalating numbers of cases.As demand will likely remain high, our nationwide distribution network and supply chain is prepared to take care of our customers in a timely and safe manner.” – United Natural Foods (UNFI) CEO Steve Spinner

But supply chains are not prepared for these demand shocks

“Thanksgiving, you have six months to ramp up the cost, you hire the people, you get the trucks.In the case of COVID-19, we did not have that luxury. And so when you look at year-over-year growth, over the last two weeks, we’ve – our business is up double-digit versus prior year. That’s a big number…Are we going to see more and more people leaving the restaurants and eating at home? That’s possible. Are consumers loading their pantries? That’s possible.” – United Natural Foods (UNFI) CEO Steve Spinner

The good news is that China is plateauing

“at every testing clinic we went to, people would say, “It’s not like it was three weeks ago.” It peaked at 46,000 people asking for tests a day; when we left, it was 13,000. Hospitals had empty beds.I didn’t see anything that suggested manipulation of numbers. A rapidly escalating outbreak has plateaued, and come down faster than would have been expected. Back of the envelope, it’s hundreds of thousands of people in China that did not get Covid-19 because of this aggressive response.” – WHO Assistant Director-General Dr. Bruce Aylward

“Of the 118,000 cases reported globally in 114 countries, more than 90% of cases are in just four countries and two of those, China and the Republic of Korea, have significantly declining epidemics. ” – WHO Director-General Dr. Bruce Aylward

It basically took 8 weeks to recover to normalcy

“If you just take China for example, it’s really taken eight weeks essentially, and there was a new year in there too. But eight weeks for things to get back to kind of the new normal and the new normal is not the old normal. And whether it is a V or a U or any other alphabet letter you want to pick, I think what you’re seeing is the concept of aftershock.” – Korn Ferry (KFY) CEO Gary Burnison

And it took a societal scale response

“From all over society. A highway worker might take temperatures, deliver food or become a contact tracer. In one hospital, I met the woman teaching people how to gown up. I asked, “You’re the infection control expert?” No, she was a receptionist. She’d learned…I talked to lots of people outside the system — in hotels, on trains, in the streets at night. They’re mobilized, like in a war, and it’s fear of the virus that was driving them. They really saw themselves as on the front lines of protecting the rest of China. And the world ” – WHO Assistant Director-General Dr. Bruce Aylward

How long will it take to get a vaccine? 

“the process of developing a vaccine is one that is not that quick. So we go into phase one, it’ll take about three months to determine if it’s safe. That’ll bring us three or four months down the pike. And then you go into an important phase called phase two, to determine if it works. Since this is a vaccine, you don’t want to give it to normal healthy people with the possibility that A, it will hurt them and B, that it will not work. So the phase of determining if it works is critical. That will take at least another eight months or so. So when you’ve heard me say we would not have a vaccine that would even be ready to start to deploy for a year to a year and a half, that is the timeframe.” – US National Institute of Allergy and Infectious Diseases Director Dr. Anthony Fauci

Our hope:

“we’re all hoping that the COVID-19 virus is contained as quickly as possible, and that we can return to some level of normalcy.” – United Natural Foods (UNFI) CEO Steve Spinner

” We’re going to come back. We’re going to turn around, but it is going to be a difficult journey”- Allianz (ALV) Chief Economic Adviser Mohamed El-Erian

“This will be our finest hour” – Epsilon Theory Creator Ben Hunt


The markets will not close

“I heard rumors yesterday which I think are ridiculous about New York City closing down and markets closing day. They aren’t. quite the opposite. We intend to do everything we can to keep markets open. Now I have heard yesterday I heard there were some issues and off the run treasuries and liquidity. We’re working on that. I’ve heard there’s issues in the CPP We’re working on that.” – The US Treasury Secretary Steven Mnuchin


Airlines are having to make some tough adjustments

“we’re implementing cost reduction initiatives and are taking out $1.8 billion of expense versus our plan. This includes capacity-related expenses, as well as incremental cost initiatives that include a hiring freeze, offering voluntary leave options and lowering maintenance expense by temporarily grounding aircraft.” – Delta Air Lines (DAL) CEO Ed Bastian

“we’re also placing the appropriate constraints on any and all discretionary expenses such as management hiring, outside consultant fees, nonoperational training and other such expenditures. And we’re reassessing all capital expenditure projects with an eye toward deferring any projects that may be inconsistent with the current environment.” – American Airlines Group (AAL) CEO William Parker Presents

“SAS is forced to temporary work reductions which comprises up to 10 000 employees, which is equivalent to 90 percent of the total workforce.” – SAS Airlines (SAS)


Covid-19 will accentuate the digital engagement of companies and consumers

“this if anything will accentuate the need to engage digitally not just internal to the corporation to keep the corporation going, but externally, in order to engage with customers.” – Adobe (ADBE) CEO Shantanu Narayen

“With regard to the virus situation and its impact on traffic, we did see traffic grow significantly since the break…. as one of the consequences of this now pandemic, I think that at least the society in China has adapted pretty quickly into a more online mode for a lot of things including learnings, so we are seeing trends across the board.I mean, in terms of age group from kids to kids – well, students to college students to adults to spend a lot more time learning a lot, which we think is a positive signal in terms of what the societies please – accessibility to quality education. And I think that’s the right direction and that started moving anyway, moving toward anyway. But with the virus situation, it’s definitely accelerating a lot.” – Laix (LAIX) CEO Yi Wang

Materials & Energy:

Saudi Arabia started an oil price war leading to lower oil prices that are good for some

“Oil is a very important raw material, feedstock for us. And the model that we’ve talked about and still holds true is about every $10 in the price of oil is about $0.02 to $0.03 of EPS impact for us when you look at the percentage of our raw materials that are based on oil.” – 3M (MMM) CEO Mike Roman

But a worry for many others

“My main worry today is not on shale. It is mainly on some of the major oil-producing countries who have not — despite the calls from the IEA many, many times — diversified their economies.”-  International Energy Agency (IEA) Fatih Birol

Miscellaneous Nuggets of Wisdom:

On dealing with a pandemic

“Everything we do before a pandemic will seem alarmist. Everything we do after a pandemic will seem inadequate. This is the dilemma we face, but it should not stop us from doing what we can to prepare. We need to reach out to everyone with words that inform, but not inflame. We need to encourage everyone to prepare, but not panic.” — Former US Dept of Health & Human Sevices Secretary Michael Leavitt.

Full transcripts can be found at Seeking Alpha, the Motley Fool and CNBC.