CEO INSIGHTS – Week Ending 24 Feb 2017 BY NAOS Asset Management

“In the international market, conditions are challenging. Cheaper oil has led to strong capacity growth on international routes – pushing fares down and impacting all major airlines” Alan Joyce, CEO, Qantas

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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Domestic Economy

“We would like the economy to grow a bit more. If we were to try to achieve that through monetary policy, that would encourage people to borrow more and it probably would put more upward pressure on housing prices. At the moment, I don't think these two things are in the national interest”
Philip Lowe, Governor, RBA

“The reality is that the economy has slowed down a little bit and across the banking sector, revenue growth, asset growth and lending growth has all been a little less than we’re used to”
Shayne Elliott, CEO, ANZ

“We continue to be very positive about Australia's urban outlook with continued strong population growth, as well as growth in tourism, education, technology, and financial services coupled with strong infrastructure spend”
Susan Lloyd-Hurwitz, MD, Mirvac

NBN

"We have had the NBN decision made for us and, as a consequence of that, we lose about a quarter of our earnings over the next four years"
Andy Penn, CEO, Telstra

Retail

“Branded jewellery retailers such as Pandora have recorded strong sales, whilst in general retail the cosmetics growth story continues, with retailers like Mecca and Mac outperforming"
Vanessa Orth, Head of Retail, GPT Group

“We've seen growth across most categories, in particular, jewellery was up 6% and health & beauty was up 3.9%”
Peter Allen, CEO, Scentre Group

“In the retail sector, per capita spending is growing in New South Wales and Victoria. However, trading performance is challenging on a macro level, with some traditional anchors such as discount department stores underperforming. And we're also seeing an increase in select retailer administrations”
Susan Lloyd-Hurwitz, MD, Mirvac

“There's a lot of commentary about retailer's filing [for bankruptcy]. Unfortunately, this has always been a feature of our industry. However, there are many retailers that are growing as the opportunities arise. Our top 30 growth retailers have in aggregate grown their store network from 151 stores to 438 stores in the last five years. These retailers include Bonds, Corner, Political Shoes, Cheap Stuff, Peter Jackson, Mecca Maxima, Nike and Grilled”
Peter Allen, CEO, Scentre Group

“We see that a lot of Australians are using Amazon. There is a lot we have been doing to take into account the changing consumer behaviour, but it's about providing the right spaces. We still have a long way to go”
Peter Allen, CEO, Scentre Group

Insurance & Healthcare

“Industry volume [in health insurance] growth continued to slow, which is indicative of the challenging conditions currently being experienced”
Medibank Market Announcement

“There are  some signs that claims inflation could now be moving higher towards longer term trend lines”
Mark Fitzgibbon, MD, Nib Holdings

“Overall private health insurance participation rates are likely to remain steady at around 50% of the population. Affordability is clearly a factor but so too is a relatively weak retail environment generally with high competition for discretionary consumer spending”
Mark Fitzgibbon, MD, Nib Holdings

“The Australian fertility rate is sitting at 1.8% which is the lowest level in 10 years”
Sue Channon, Virtus CEO

Oil & Gas services

“Conditions have remained challenging and revenue is down for the period, in line with the general market contraction”
Andrew Wood, CEO, WorleyParsons

“Notwithstanding that market conditions remain challenging, customers’ sentiment is improving and they are informing us that their activity levels are not expected to deteriorate further. In some areas, they are beginning to increase activity which we expect to flow through in the medium term”
Andrew Wood, CEO, WorleyParsons

“The resource and energy markets in Australia remain challenging despite a recent improvement in commodity prices. Capital expenditure levels remain at low levels as the rate of major investment in new production slows. Nevertheless, the market continues to invest in high levels of sustaining capital. Opportunities in the broader infrastructure market are expected to grow, particularly in renewable energy and in transport infrastructure sectors”
Robert Velletri , MD, Monadelphous

Other

“I’ve never for one moment believed this balderdash they teach about wide [portfolio] diversification”
Charlie Munger, Vice Chairman, Berkshire Hathaway

Advertising & Media

“In terms of publishing regularity, we have been through the process of structural change. But we all know that print has an end game somewhere down the track”
Gregory Hywood, MD, Fairfax

“We are confident of continued growth in the Out Of Home sector over CY17”
oOh!media Market Announcement

“Domain still delivered 15% growth in digital revenue supported by further depth penetration, yield increases, and strong growth in Media, Developers & Commercial. Domain is also seeing very pleasing growth coming out of the utilities connection. Print advertising was constrained by the listings environment with revenue down 11%”
Gregory Hywood, MD, Fairfax

Property & Real Estate

“Office markets in Sydney and Melbourne have begun their strongest rental upcycle in 10 years, and incentives are reducing. In Perth and Brisbane, tenants continued to migrate to better-quality space, and the deterioration of prime grade net absorption is clearly behind us”
Susan Lloyd-Hurwitz, MD, Mirvac

“On the supply side, approvals have clearly peaked and commencements of high rise projects are already reducing. In these conditions, we're continuing to focus on the release and settlement of our committed pipeline with new acquisitions focused on capital-efficient terms”
Susan Lloyd-Hurwitz, MD, Mirvac

“The supply in the market is performing as expected. There are pockets of new supply entering to the market that it continues to be a mature and very stable operating environment with 2% to 3% supply growth on average. And this is consistent as it has been over the last year or two, and we'll see that continue over the next period, and then possibly a decline as we go into 2019”
Kerry East, CEO, Mantra

“We expect to see a slow-down in residential construction activity, however the pipeline of building work yet to be completed remains reasonably strong to the end of the current financial year”
Tim Salt, MD, GWA Group

Oil & Gas

“If there is gas in Australia and we say it can go overseas, and we don’t have any baseload generation, I think we are going to have an energy catastrophe in Australia”
Paul O’Malley, CEO, BlueScope Steel

“[As power prices rise] the hip pocket cost to energy, large, small and to consumers is going to be substantial. Many people argue that (Queensland LNG export) is a great thing but I query whether increasing the energy cost to all businesses in Australia is actually in the national interest”
Paul O’Malley, CEO, BlueScope Steel

“Natural gas can reduce greenhouse emissions by between 50% to 70% by displacing coal for electricity generation. And it's also a reliable source of clean baseload energy which enables intermittent energy to be integrated into the grid. This makes it the perfect partner for renewables. Global gas demand is forecast to grow by 50% by 2040”
Kevin Gallagher, MD, Santos

“The gas market dynamics [on the East Coast] remain consistent, with the effects of supply and demand imbalances increasingly being felt…The fundamentals have not changed, and it's clear that the solution lies with increased gas exploration”
Matthew Kay, CEO, Beach Energy

Airlines

“In the international market, conditions are challenging. Cheaper oil has led to strong capacity growth on international routes – pushing fares down and impacting all major airlines”
Alan Joyce, CEO, Qantas

“For both Qantas and Jetstar, domestic conditions improved after a relatively weak first quarter, where GDP growth dipped into the negative”
Alan Joyce, CEO, Qantas

“Revenue from resources sector travel has been falling for several years, and that continued in the first half. But the rate of decline is slowing – and we expect that market to be stable by financial year 2019”
Alan Joyce, CEO, Qantas

Tourism

“The increasing affluence and a rising middle class in Asia, combined with greater connectivity and an aging population, we'll see more people traveling [to Australia”
Kerrie Mather, MD, Sydney Airport

“The inbound market in Australia is buoyant, there is no doubt the inbound arrivals or short-term arrival is up circa 11% year-on-year and with that top five markets internationally all increasing over the period, in fact over the 12-month period to December. All top five markets have increased, predominantly led by the inbound markets out of China and Asia, but pleasingly, the Western markets continue to grow also”
Kerry East, CEO, Mantra

Infant Formula & Dairy

“It has been a challenging market.  It has been well documented that there is volatility and uncertainty within the nutritionals part of the marketplace or, more specifically, in infant formula and growing-up milk powders”
Barry Irvin, Chairman, Bega Cheese

“Our infant nutrition range developed in partnership with Bega is steadily growing. Regulatory changes and volatile market conditions have continued to impact progress”
Christine Holgate, CEO, Blackmores

“It’s been very good to see a very rapid improvement in global dairy commodity prices. They have significantly strengthened and we are seeing some benefits flow through to the ingredients business”
Barry Irvin, Chairman, Bega Cheese

“In a period where in some areas we've seen milk supply reduce substantially either due to weather conditions or other factors within the industry, including price, the competition has therefore remained high in terms of acquiring milk”
Barry Irvin, Chairman, Bega Cheese

“Domestic sales, excluding Chinese-influenced sales, returned to modest year-on-year growth. Destocking issues as we noted in quarter one have eased and sales influenced by Chinese consumers purchasing in Australia are down, as those buying patterns continue to evolve, and at Blackmores, we continue to build a successful China business to better serve these customers and more directly”
Christine Holgate, CEO, Blackmores

 

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