CEO INSIGHTS – Week Ending 6 April 2018 By NAOS Asset Management

“We have seen a marked increase in the frequency of securities class actions as well as the average size of the settlement for those class actions. Until about three years ago, you would have expected to see around two securities class actions a year in Australia. In the last two years there have been 18” Chris Colahan, President, Berskshire Hathaway Australasia

As part of the NAOS investment process, we pay particular attention to the comments made by company CEOs 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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NBN

“While recognising that NBN Co does have a degree of flexibility to lower its prices, there may ultimately be a need for pricing relief measures to be taken by the government, such as debt payment concessions or direct budget funding of non-commercial services” ACCC Statement

“5G has the potential to accelerate the extent of fixed to wireless broadband substitution given its ability to provide comparable speeds to fixed broadband services. In doing so, existing business models may be disrupted, with the degree of substitution in part depending on the price and service performance of NBN services” ACCC Statement

“Competition between private companies who separately own the fibre-to-the-premise, fibre-to-the-node, HFC and fixed-wireless assets in metropolitan and regional cities will drive ­further investment and improve the standard of broadband services” Gary McLaren, Co-chief Technology Officer, NBN

Fast Food

“Our Australian Taco Bell is generating revenue that is several million dollars higher than the average US franchise. We’re talking to them about some pretty explosive growth. It’s going to be a top market for us” Liz Williams, President, Taco Bell International

Logistics

“We could be sending meat or fruit and veggies by ship around Australia and reducing long distance truck movements, road damage and the traffic safety risk, but sadly all the administrative fuss and costs can make North Queensland mangoes shipped to Melbourne or Adelaide less competitive than imports” Mike Gallacher, CEO, Ports Australia

“Although there are less than 24 Australian vessels left servicing domestic ports, it’s easier for the foreign flagged ships to dump their load and leave here empty rather than jump through so many hoops just to carry domestic cargo up the coast” Mike Gallacher, CEO, Ports Australia

Agriculture

“We farm in 26 countries but see Australian agriculture as the most innovative in the world. My view is that because Australian farming systems, unlike other leading agricultural nations such as the US and Israel, have never been propped up by agricultural subsidies, that farmers here have been forced to be efficient, innovative and adopt world best practices to compete on world markets” Sunny Verghese, Co-founder, Olam International

“Australian agriculture is very inward looking and only focused on Australia, rather than what is happening around the world. It means you are not capitalising on the expertise edge and innovativeness that you possess — sometimes without realising it — and missing out on opportunities to take your businesses global” Sunny Verghese, Co-founder, Olam International

“Both the Luxury/Prestige and Premium brand segments delivered year-on-year price growth for FY18… However, we experienced some price softness in parts of the product portfolio in H2 FY18 driven by increased competitive dynamics and strength of the Australian dollar” Australian Agricultural Company Market Announcement

“The value of live cattle sales undertaken in H2 FY18 was less than half the amount undertaken in H2 FY17” Australian Agricultural Company Market Announcement

Airlines

“The [interim] result was driven by operating revenue growth of 5%, with robust demand across all markets and particularly strong growth in the short-haul network. Passenger revenue reached an all-time record for an interim result” Air New Zealand Market Announcement

Truck Manufacturing

“The overall dynamics of the truck market are very different; they're structurally different from the rest of the automotive business. The truck market has better underlying growth dynamics and it has a far better underlying margin structure. The installation base is growing and it's growing faster than the rest of the industry. And loyalty is significantly greater than any other segment of the car industry” Mary Barra, CEO, General Motors

Retail

“[Referring to Amazon] It's not the end of retail in our view. Amazon will have an impact but in the last six to 12 months the turnover in our trade in our malls is still strong, and in some cases still growing” Damien Frawley, CEO, Queensland Investment Corporation

“Our thesis is the shopping mall has become more of a destination. As society is going vertical in those big cities, people do want an experience outside of sitting in a two-bedroom home unit all weekend” Damien Frawley, CEO, Queensland Investment Corporation

Skills Shortage

“We are orders of magnitude behind where we need to be in terms of investing for the future. The technology is available – not just at [Amazon Web Services], but across many platforms. It is really that success will be determined by how effectively we skill up the people here to use it” Paul Migliorini, MD, Amazon Web Services Australia & New Zealand

Video Games

“Notebooks are the fastest growing segment of the gaming market, and that continues to be the case, in all regions, gaming notebooks continue to grow” Jeffrey Fisher, Executive VP, NVIDIA

“With the broadband penetration continuing to grow in the emerging markets, the social norms are becoming much more positive towards gaming” Jeffrey Fisher, Executive VP, NVIDIA

Autonomous Vehicles

“We believe that every vehicle will be autonomous” Rob Csongor, VP & General Manager of Automotive, NVIDIA

Housing

“More and more vendors are thinking that the market peak has just passed us and so vendors' expectations have become more bearish and so a number of them who were considering on-selling at the top of the market have decided that … they'd better sell if they want to time their sale to the cycle” Louis Christopher, MD, SQM Research 

Energy

“Overall, I think there is enough gas to supply both our export and domestic customers. The greatest challenge in Australia tends to be about placing the gas in the right place at the right time” Zoe Yujnovich, Chairwoman, Shell Australia

“The [energy retailing] incumbents have strong positions but they are not necessarily the lowest cost or sophisticated in trading or digital market capabilities or IT platforms, which are often from the wrong century. We see ourselves as being able to disrupt existing systems in countries and I don't think we'll settle for less as we try it here” Maarten Wetselaar, Global Director of Integrated Gas, Shell

“We have seen opportunities to improve the efficiencies in the Australian market, from across the wholesale and retail markets” Zoe Yujnovich, Chairwoman, Shell Australia

Iron Ore

“The updated guidance reflects a slower than anticipated recovery in contractual realisations due to Chinese construction activity remaining subdued, the extension of temporary production restrictions in certain Provinces in China as well as speculation regarding the potential impact of global trade tensions” Fortescue Metals Market Announcement

Thank you for reading.

Important information: This material has been prepared by NAOS Asset Management Limited (ABN 23 107 624 126, AFSL 273529) (NAOS) for general information purposes only and must not be construed as investment advice. Certain economic, market or company information contained in this material may have been obtained from published sources prepared by third parties. Nothing contained herein should be construed as granting by implication or otherwise, any license or right to use such third party content without the written permission of the owner.