So Q1 was a write-off and there is zero visibility on business outlook.
But I believe there is value in looking at what CEOs, the people who actually run companies, are saying, to get a better sense of any unique or emerging trends within the downturn, and whether these trends may persist.
As of this week, we’re about 25% through the S&P 500 in terms of earnings reports. Normally this is a highly choreographed process with most companies beating the analysts’ forecasts, which the companies themselves have already had a strong hand in guiding. For the record, according to Factset, earnings to date are in aggregate about 5% below what had been forecast.
But the numbers don’t matter and guidance is cancelled.
In the face of the pandemic and the downturn, that’s the only honest response.
But we can look at the currents beneath this overall bleak picture. What are CEOs telling us?
Front line sectors, such as Airlines, are getting hardest hit. Oscar Munoz, CEO of United Airlines said that travel demand into 2021 was ‘essentially zero’. They flew 200,000 people in the last two weeks. The corresponding number for 2019 was 6 million – a decline of 97%. The company has cut its capacity to 10% of what it had previously planned. United see demand depressed into 2021, with one of the longer term impacts from the pandemic being less flying with more use of remote sessions and less business travel overall for what Munoz describes as “hand-shake” meetings. Cost cutting at companies will probably drive this also.
Coke is another consumer stock that saw its sales knocked but James Quincey the CEO sets a more positive tone believing that the back half of 2020 will see an improvement. The company has seen a 25% decline in global volumes this month alone – fully driven by the measures adopted by governments to tackle the pandemic. What Coke calls “away from home” sales – cinemas, sports venues etc. represent half the company’s revenue and have clearly disappeared. Home buying and “pantry building” (as Coke describe it) did not make up the gap and really it’s not that clear that it will in the near term.
It has been a similar picture for the management team at Heineken. Jan Francois van Boxmeer highlighted the 14% decline in their volumes in March and sees recovery being wholly dependent upon lifting of restrictions. Heineken’s response is to double up efforts on the retail side as they believe pubs aren’t coming back soon. So look for a bigger presence and profile from the likes of Heineken in your local supermarket!
Some company chiefs while not complacent, took more comfort from the resilience of their business model and less substantial exposure to discretionary spending. Arvind Krishna, CEO at IBM, while not giving guidance stressed the resilience of their customer base – 70% of their customers would come from healthcare and telecommunications – so perhaps less affected by the lock-downs and lack of travel. IBM focus on stress testing their business model and driving their cloud business. If business budgets were to be severely reined in, it would no doubt impact, but the message from IBM is; we’re not there yet.
Even companies whose products have been flying off the shelves look to strike a cautious tone in their comments. Mike Hsu, CEO at Kimberly Clark, maker of Andrex toilet rolls, spoke mainly about health and safety of staff and security of supply chain while acknowledging that their cash flow in the quarter more than double to over $700M. A degree of stock piling saw their global sales of toilet tissue up by 17% outside the US. Hard to imagine that was in their corporate planning assumptions!
Some company results highlighted the difference between the US experience and the more stark picture earlier in the year in China and Europe. Hershey,the chocolate manufacturer, pointed out how they had a solid start to the year, and in fact for the quarter as a whole saw reasonable demand in the US. However, chocolate demand in China declined by 8%. The company are alive to how consumer behaviour and social distancing protocols in the US may impact on their bottom line as the pandemic has spread. But as CEO Michele Buck pointed out, as a chocolate maker, their key “ability is to be able to make moments of goodness during this time when physical connection is limited.”(!)
One of the high profile names who has a better experience in this first quarter and gained a lot of attention was Netflix. They added nearly 16m subscribers, well over double what had been forecast. However there was little triumphalist in their letter to shareholders though, as they rightly acknowledged how tough the environment is for jobs and activity in the overall entertainment industry. The company notes how it is in a fortunate position and has contributed funds to support many of those who will find themselves out of work. Netflix also see a time, as home confinement ends, that their stellar subscription growth rate falls back – and they look forward to it!
It is very much a mixed tapestry of experiences for companies in the current situation and some are clearly more exposed than others. There is also a clear tone of corporate responsibility underlying a lot of what CEOs are saying. The speed and severity of the virus has impacted on all, but as many of the comments reveal – it may have taught humility but not helplessness.
Tradewinds 