CEO Insights - Week Ending Friday 26/08/16

As part of the NAOS investment process, we pay particular attention to the comments made by company CEO’s and business leaders in order to gain a greater understanding of the current investment environment and key trends that may be emerging. Below are quotes from the week which in our view detail some of the most important and prominent industry trends and economic factors impacting their businesses.
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“Tourism is now Australia's fifth largest export and one of the fastest growing. The value of inbound tourism is 11% higher than it was a year ago, and it's experiencing the fastest growth since 2007”


Kerrie Mather, MD, Sydney Airport



“Lower fuel prices, Sydney and Australia's increasing competitiveness as a destination, increased aviation capacity and improved economic conditions in overseas markets are expected to support continued growth positioning tourism as a major exporter now”


Kerrie Mather, MD, Sydney Airport



“Fares are still very cheap, and there's been slightly lower seat utilisation year-to-date than last year, so there is pricing pressure which is good for customers”


Graham Turner, MD, Flight Centre



“Across the industry, we're seeing double-digit growth in some markets, with a strong trend driven by the Chinese inbound market which grew 23% for FY16. This is now our single largest market by expenditure in a very short period of time and this will start to grow quite significantly”


Bob East, CEO, Mantra Group



“As expected, some markets have softened due to the mining resource boom coming off, particularly out of Perth. However, we’re also starting to see weakness in Darwin and to a degree in Brisbane as well. The Sydney market is enjoying reasonably solid corporate demand and its certainly benefiting from the inbound trends particularly as the major tourism gateway, especially out of Asia”


Bob East, CEO, Mantra Group



“We have focused our growth in Asia, the market where we see the strongest passenger demand now and into the future”


Alan Joyce, CEO, Qantas






“Affordability [of health insurance] remains a concern for customers driven by constant upward pressure on healthcare costs, in particular, premium rate increases. As a result, industry growth is at its lowest level in a decade and currently running at just over 1% in volume terms, and the hospital participation rate has declined by 40 basis points in the last financial year to 47%...the first financial year decline in over a decade”


Craig Drummond, CEO, Medibank Private



“Population growth has slowed. As a consequence, the number of lives covered by private hospital insurance actually fell in June. Against this backdrop, the market has become increasingly competitive and FY17 premium revenue growth will be impacted”


Craig Drummond, CEO, Medibank Private



“The fundamentals of the healthcare sector in Australia remains unchanged. People are getting older, lifestyle and degenerative diseases are rising, advances in technology are increasing treatment options, and the public hospital system remains under constant pressure. All these factors will continue to underpin long-term growth in our sector”


Robert Cooke, MD, Healthscope





“Freight revenue was challenged with flat global cargo demand in a subdued macroeconomic climate…and we have Australia's two largest freight customers in Australia Post and the Toll Group”


Alan Joyce, CEO, Qantas





“In international markets, it's clear that with sustained lower fuel prices, many carriers including Qantas are sweating their assets to add profitable capacity. In the second half, we saw more competitive industry pricing as a portion of the benefit from lower fuel was passed on to the customers”


Alan Joyce, CEO, Qantas



“A major trend is the opening up of bilateral air rights, which have historically restricted airline access. These are often artificial constraints on seat supply, and therefore in the short-term restrict passenger growth from certain markets. But that's changing as government seeks to capture the associated economic benefit from accelerated tourism growth”


Kerrie Mather, MD, Sydney Airport





“I think that everyone keeps forecasting the value of iron ore. There's little appreciation for the real supply-demand side. I don't see the supply coming into the market anywhere near as much as what everyone was singing about 12 months ago. I expect a number of operations are going to drop off over the next 12 months and Chinese operations have faded much more than everyone anticipated, so the supply side is much weaker. I don't know if people appreciate that. And, certainly, the demand has remained quite robust”


Christopher Ellison, MD, Mineral Resources



“While a lot of the commodity prices have credited challenging conditions to the asset owners, we're seeing outsourcing opportunities for operations and maintenance services increase as owners look to drive greater cost efficiencies across their existing plants and facilities”


Ross Taylor, MD, UGL Limited



"I don't expect the high [commodity] prices to last. I still expect them to moderate in the near term"


Graham Kerr, CEO, S32



“Supply side reforms in China are progressing, and we see them as underpinning the strengthening of the steel sector for the longer term. Looking forward, we remain confident in the strength of the Chinese market, with infrastructure investment increasing 19% year-on-year during the first seven months of this year and real estate investment increasing more than 5% over the same period. Urbanization in China continues at a steady pace, and there is an estimated 300 million people yet to move from rural to urbanized living in China, particularly through the Central and Western provinces over the next decade”

Neville Power, CEO, Fortescue Metals



“There's slowing demand for Engineering Construction, and our surplus capacity of service providers in resources and energy sectors continue to impact sales revenue and margins. Although overall market conditions have remained challenging throughout the year, we have seen an upturn in Maintenance Service volumes. So our sales revenues were offset by reduced pricing, driven by lower unit costs”


Robert Velletri, MD, Monadelphous



“We expect the uranium price to be at a level that sustains global mining uranium production and even provides for some growth. And that level is the $60 to $70 per pound uranium price. Now, we've always said we don't know how long it could take for the market to normalize but we know that it needs to normalize before 2020”


Alex Molyneux, CEO, Paladin




Oil & Gas


“Resources and energy market conditions will remain challenging over the medium term with customers maintaining their focus on improving productivity and reducing costs. Opportunities for new major construction contracts in our core markets are likely to remain at low levels. The outlook for maintenance continues to be positive as new operations come on-stream, particularly in the onshore and offshore oil and gas sector”


Robert Velletri, MD, Monadelphous



“I think oil prices are near the bottom. I don’t think they will go significantly lower than where they are now, fluctuating around that $45-$55 a barrel type range. I think I am a reasonable pessimist about the future over the next 12-18 months”


Peter Botten, CEO, Oilsearch



“Ongoing low oil prices have continued to challenge our business and the oil and gas industry as a whole. However, the long-term outlook for gas remains strong, driven by population growth, global urbanization and the need for a cleaner energy mix”


Kevin Gallagher, MD, Santos



“We’ve seen activity in all of our hydrocarbon subsectors. We enjoyed a resurgence in our power business, particularly our renewables and nuclear subsectors. Again, renewables remains one of our fastest-growing subsectors”


Andrew Wood, CEO, WorleyParsons



Food, Liquor & Agriculture


“It’s been one of the most challenging periods in the history of the Australian dairy industry”


Barry Irvin, Executive Chairman, Bega Cheese



“The challenge for us during the period has been volume. There has been weakness in global dairy market; and as a result, we have seen lower demand from our major dairy customers in the period, which has particularly impacted sales in our international segment”


Richard Betts, CFO, Pact Group Holdings



“We’ve seen the falling away of lower-end [infant formula] products and I think the simple fact is that consumers in China do want the very best and they're prepared to pay. Whilst super-premium will continue to grow, they will actually see the number of brands in the total market start to decline over the next year and a half as the regulatory framework comes into place”


Shona Ollington, CFO, Bellamy’s



“We are seeing a drop in demand for agricultural chemicals, impacted by weather conditions. And we have also seen a drop in demand for oils and lubricant products in Australia and China”


Richard Betts, CFO, Pact Group Holdings



Domestic Economy


“It's a low-growth environment, the media market is flat and the economies in Australia and New Zealand are not that robust”

Mike Connaghan, CEO, WPP AUNZ



“In Australia and New Zealand, we continue to see strong demand by retailers for space. Moreover, we're seeing growth across nearly all categories, in particular, Jewellery up 8.9%, Leisure up 4.3% and Health & Beauty up 3.7%”


Peter Allen, CEO, Scentre Group



“The resource market continues to weaken, impacting the Qantas Domestic revenue in particular, we estimate it was in excess of A$120 million for this year. In the fourth quarter, we saw general demand weakness in the lead up to the federal election”


Alan Joyce, CEO, Qantas




Global Economy


“The growth environment globally is tougher in a low interest rate, low growth, and lower inflationary environment. So, I have no doubt that every dollar of growth, as you go forward, is harder to achieve than the dollar that you achieved in the last five years. This applies to every company”


Stephen McCann, MD, Lendlease






“While we had good growth across the eastern states, this was partially offset by the market slowdown in WA, where construction has been considerably weaker. What's also clear is that the larger area of market growth has been in the multi-residential sector, driven by the investor market”


Patrick Gibson, CFO, GWA Group



“We expect Renovations & Replacements, which is the largest segment of the market, to be relatively stable over FY 2017. Confidence remains above the long-term average and is generally holding up okay, while unemployment continues to remain relatively low, particularly in the eastern states. And while the banks are imposing more stringent lending restrictions, particularly for foreign property buyers, these restrictions don't apply to existing dwelling upgrades. In addition, money has never been cheaper. All up, I think these factors tend to support the R&R market remaining relatively stable”


Tim Salt, MD, GWA Group




Labour Market


“We see structural changes in the global labour force where there is a move to more flexible work arrangements, short-term, and on-demand labour”


Andrew Bassat, CEO, Seek






“There will be a natural decline in classic revenues, a function of converting assets from classic to digital. However, classic billboards and signs will continue to play a huge role in Out of Home”


Brendon Cook, CEO, Ohh!media






“We believe active lifestyle still has significant growth and upside potential”


Arthur Peck, CEO, GAP Inc


Article contributed by NAOS Asset Management:  (VIEW LINK)

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