CEO INSIGHTS – Week Ending 1 September 2017 BY NAOS Asset Management

"I'm a brand guy and Australia is an awesome brand. One of the biggest opportunities for innovation and brand-building in the future is food. And living in Australia, you are leading this opportunity more than anybody else. You're sitting on a gold mine” Hamdi Ulukaya, Global CEO, Chobani Yoghurt

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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Airlines

“Qantas is in its best shape in its 97 year history” Alan Joyce, CEO, Qantas

Mining Capex

“We continue to see green shoots in the [mining] sector, particularly where customers are looking for additional volumes; it does remain, however, a tough market” Grant Fenn, MD, Downer Group

Rail

“Over the past four years, the rail business has been very tough particularly in the freight and locomotive space. Fleets of locomotives have been parked up, very few new locomotives have been purchased, and the maintenance and overhaul has been deferred. Whilst there are some signs of improvement in the freight space and our restructuring efforts are starting to pay dividends, this market remains challenging” Grant Fenn, MD, Downer Group

Oil & Gas

“Total sales volume were maintained in a challenging market. Sales volume growth continues across total premium products, whilst base unleaded petrols continue to decline” Julian Segal, CEO, Caltex

“We continue to evolve our business operating model to meet the competitive landscape and the market challenges the industry faces. Caltex operates in markets where the demand for fuel is relatively flat and in the short term the impact for Caltex is compounded by Woolworths’ intention to sell its fuel business to BP” Julian Segal, CEO, Caltex

Domestic Economy

“We can hear some of the information that’s coming out from other sectors like retail that are seeing weakness there. But in reality we haven’t seen weakness, certainly in the last year. We’ve actually seen some strength across the board” Alan Joyce, CEO, Qantas

“We spent a lot of time in the second half of 2017, understanding the key concerns of our residents and it was no surprise that cost of living increases were a particular concern, which included rent or housing expense and utility costs. These concerns are not confined to just our residents. It's a wider macro issue for an aging population” Trent Ottawa, CEO, Gateway Lifestyle

Infrastructure & Construction

"I look at underlying factors which will tell you there is strong underlying demand for infrastructure and housing in Australia and there is strong underlying demand for infrastructure and housing in the US” Mike Kane, CEO, Boral

“In FY17, there was a continuation of strong activity in most of our key markets. In Australia, the increase in roads, highways, subdivisions and bridges across all regions, but particularly in NSW [which] is benefiting Boral and has more than offset softer activity elsewhere. Other engineering activity has continued to soften, which has impacted Boral with the completion of the LNG projects” Michael Kane, MD, Boral

“Non-residential construction was estimated to be 3% lower than last year, but was still relatively strong. And similarly, residential construction has slowed, but still remains strong. Total housing is estimated to have been 216,000 starts in FY 2017, following a record high 234,000 starts in FY 2016. Market forecasters are expecting approximately 190,000 starts in FY 2018, still well above long-term average levels and the normal peak of the cycle, which will be 180,000 starts” Michael Kane, MD, Boral

“We continue to invest in our facilities, products, services, people, and the outlook is very positive for this business with increasing demand for product innovation, smart asset management, and intelligent infrastructure. So the growth in transport infrastructure will provide a buoyant market for number of years in construction and product supply” Grant Fenn, MD, Downer Group

Tourism & Travel

"We are starting to see improvement in the [Gold Coast hotel] market. The Commonwealth Games are on the Gold Coast early next year so it’s not a market we are nervous about. We are positive about the outlook moving forward" Bob East, CEO, Mantra

Residential Housing

“[Housing] affordability is like an elastic band — it will stretch further than you think, then it will hurt you…Winter is coming, we just don’t know when”  Bill Moss, Former Head of Property, Macquarie Group

“Million [dollar] sales in Mount Druitt [43km west of Sydney’s CBD] are now commonplace. Five years ago, it would have been $650,000 or less” Brian White, Chairman, Ray White

“Average unit resale prices were up 11%, reflecting the broader strength of the residential and retirement living market, and the quality of the portfolio” Stephen Barry McCann, CEO, Lendlease

“Demand for our communities remains positive, and sales rates seen in the second half of 2017 have continued in the early part of FY 2018” Trent Ottawa, CEO, Gateway Lifestyle

Healthcare

“We expect strong growth in our Australian hospital business to continue in FY18 fuelled by ongoing growth in hospital utilisation rates as well as uplift from our brownfield development program… [The] public hospital system will continue to be under pressure [and] will continue to provide opportunities for us as a private operator” Craig McNally, MD, Ramsay Health Care

“The backdrop for the industry is continued demand growth well into the future, which is underpinned by: an ageing population, a growing population; increased chronic disease; innovative treatment and new technologies which give people access to more healthcare opportunity” Craig McNally, CEO, Ramsay Health Care

Retail

“[The] solid growth in franchisee sales reflects an economy where retail spending remains above decade averages, particularly in NSW and Victoria, underpinned by strong housing sector activity, lower levels in unemployment, a net increase in overseas migration, and the wealth flow-on effect from higher home prices” Harvey Norman Market Announcement

“We do not see digital commerce as a threat. On the contrary, as a customer-centric organization, we see it as a fantastic opportunity to increase reach and engagement with our consumers” Hilton Brett, CEO, RCG Corporation Limited

“I think that there is no question that if when retail conditions are tough, there are a number of retailers that react to price, but I mean, that's a downward spiral at the end of the day” Hilton Brett, CEO, RCG Corporation Limited

“As you are aware, in the US, there is about 2.5 times capacity in terms of population in terms of malls compared to Australia. So obviously in the US, there are a lot more malls that are closing, which are causing the challenges” Hilton Brett, CEO, RCG Corporation Limited

Vitamins

“The Australian retail market has been very competitive and that has put some pressure on our profit but really consumer demand moving between channels in Australia particularly the consumer demand driven by the Chinese consumers has been quite a volatile part of our business this year” Richard Henfrey, CEO, Blackmores

“The demand for Blackmores’ products in China remained strong throughout the year although the route to serve it has changed significantly” Blackmores Statement

Telecommunications

“There is no doubt that the mobile sector is experiencing intense competition” Julian Ogrin, MD, Amaysim

Agriculture

“[It’s been] very difficult times; the recent shortage [of stock] and high prices of livestock have had a devastating effect on Churchill Abattoir. Without the capacity to pass on increasing costs, our customers [mainly Woolworths] have struggled to maintain cattle numbers. Without [throughput] numbers we do not have a sustainable business” Barry Moule, Director, Churchill Abattoir

Gaming

“Growth in international markets was offset by a weaker domestic performance” Daniel Gladstone, CEO, Ainsworth Gaming

Food

"I'm a brand guy and Australia is an awesome brand. One of the biggest opportunities for innovation and brand-building in the future is food. And living in Australia, you are leading this opportunity more than anybody else. You're sitting on a gold mine” Hamdi Ulukaya, Global CEO, Chobani Yoghurt

Thank you for reading.

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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.