CEO Insights - Week Ending Friday 29/07/16

NAOS Asset Management

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.

Groceries

“We've seen a real material uplift, in particular, in our fresh areas”

Bradford Banducci, CEO, Woolworths

However, this may be because… “Our prices have dropped and we’re getting rhythm from our Every Day Low Price components”

Bradford Banducci, CEO, Woolworths

Which encouraged the RBA to drop rates…

“The weakness in supermarket prices – and prices for household items more generally – was a key reason behind the Reserve Bank's decision to cut interest rates in May”

Shane Oliver, Chief Economist, AMP Capital

Commodities

“We’ve settled down now to a price that is more realistic on the fundamentals of supply and demand, and the reality is that probably one of the markets that will take the longest to come back into balance is the iron ore market”

Andrew Mckenzie, CEO, BHP

“We still expect iron ore prices will continue to be volatile, it’s been heavily sentiment driven with a lot of futures trading”

Nev Power, CEO, Fortescue

“Right now, we don’t see any justification for increased volumes”

Nev Power, CEO, Fortescue

“The metallurgy business ran at a slight loss last year but I am pleased to advise that activity levels are picking up on the back of the strong gold price. We expect to see a better performance in our metallurgy business this year although a full recovery is still a few years away as any uptick in activity will lag the recovery in the exploration sector”

Greg Kilmister, MD, ALS Limited

“The collapse in the iron ore, coal and oil prices have had a significant impact on the sector…Volume reduction, severe pricing pressure from both clients and competitors, and services previously considered essential now seen as discretionary, now define these markets” Greg Kilmister, MD, ALS Limited

“I do remain bullish on the outlook for gold. I think this is a minor correction and I think, in fact, in some ways it's healthy. I think if you look at some of the events which have occurred more recently, we've had Brexits, we've had a potential coup – a failed coup in Turkey. We've had a number of other significant terror attacks, very unfortunate terror attacks. So, in many ways, I still believe that the thesis of gold being a safe haven asset and one which is getting additional and increasing interest from investors is still very much intact” Jacob Klein, Executive Chairman, Evolution Mining

“We continue to see groups like BYD, Volkswagen, Daimler, and other auto manufacturers investing in large-scale electric vehicle production facilities. We can only expect this market to continue to grow”

Tolga Kumova, CEO, Syrah Resources (Graphite)

“In terms of the lithium-ion battery market, we continue to work with a number of battery producers outside of Japan and Korea, mainly in China, the U.S., and in Europe. I'd like to point out that at a particular recent battery conference in Shenzhen, we had in excess of 50 Chinese anode and battery producers requesting our spherical graphite for qualification” Tolga Kumova, CEO, Syrah Resources (Graphite)

Oil & Gas

“The doubling in the WTI oil price since the lows seen in January of this year has led some customers to start moving drilled but uncompleted shale wells out of inventory and into production, with the associated increase in hydraulic fracturing activity”

Paal Kibsgaard, Chairman & CEO, Schumblerger

“Margins are deeply negative and I would say at this stage, more activity at the current margin level is just going to be dilutive to earnings. So I think most companies now will be looking for price increases and, in fact, significant price increases to bring profitability back to breakeven and into positive territory before that activity is particularly attractive in terms of driving earnings back to previous year's levels”

Paal Kibsgaard, Chairman & CEO, Schumblerger

“Activity levels [in oil & gas] are at a decades low point; pricing pressure is very intense as service providers fight for revenue streams to keep operating; and producers continue to postpone or cancel planned activity”

Greg Kilmister, MD, ALS Limited

“It’s a pretty complex market at the moment and it is going to be hard to tell until you have all those LNG trains on line and see what the upstream investment in Queensland will be and whether it will provide sufficient capacity”

Richard Owen, Australian Chairman, Exxon

Brexit

“In the short term, until now, we have not seen any meaningful impact on demand in the UK ”

Luca Maestri, CFO, Apple

“We don’t expect Brexit to have a significant impact on our near-term commodity prices in the UK… We also haven't seen a significant change in consumer demand in the U.K. since the vote. While the long-term impact of Brexit is uncertain, in the near term, the most significant impact on our business will be currency translation”

Kevin Ozan, CFO, McDonalds

Financial Markets

“Macquarie’s capital markets facing businesses experienced mixed trading conditions with subdued market conditions in Macquarie Capital and Macquarie Securities Group”

Macquarie Group Market Announcement

“The first half was dominated by widespread market uncertainty in the run up to the UK referendum. Clients pulled back from investing in European assets and UK property, particularly after the referendum result, but we saw good demand for absolute return and income generating investment styles”

Andrew Formica, CEO, Henderson Group

Global Economy

“We are facing rising labour costs in many of our markets”

Kevin Ozan, CFO, McDonalds

“Both home sales and construction have been gradually improving, and residential investment made a noticeable contribution to GDP growth over the past year” Janet Yellen, Chairwoman, Federal Reserve

“Housing has been supported by low mortgage rates, and while mortgage credit is still difficult to obtain for households with low credit scores or hard-to-document income, those with good credit histories are generally able to borrow at very favourable terms.”

Janet Yellen, Chairwoman, Federal Reserve

“Near-term risks to the economic outlook have diminished”

Federal Reserve Policy Statement

Other

“I'm more bullish in patches as to how corporate Australia is looking… While they recognise the volatility and uncertainty, corporates realise that to grow they need to take well-managed risk. And they are doing so” Tony Johnson, CEO of Oceania, EY

“The digital economy is rapidly changing with disruptive innovation taking place is every industry and region…All companies recognise the key to the future is data”

Greg Kilmister, MD, ALS Limited

“Demand for organic food produce is indisputable. It’s more about how to source the supply. That's the key issue and where our focus has always been”

Jamie Nemtsas, Co-founder, Murray River Organics

“It was a challenging quarter for personal computer sales across the industry with IBC estimating a 4% global contraction”

Luca Maestri, CFO, Apple

Thank you for reading.

Article contributed by NAOS Asset Management: (VIEW LINK)


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