Saying “no” to a customer

“At our company, we used to have a rule that you never say no to a customer. If you felt like you shouldn’t do something, you would get somebody else above you to make the decision. This would go all the way up to the manager before anyone would say no to a customer.”

Mr. Eisenberg – Mr. Feinstein
Founders of Bed, Bath & Beyond

Bad weather, good reads

Stormy weather in Istanbul gave me more time to read in the weekend. Below are the summary of the remains of the week in my notebook:

> Foodservice Recovery in the US

With its defensive characterics in staples, food distribution also benefits from growth in relatively discretionery segments.

Restaurants -%60 of the overall foodservice=$600Bn– proved to be more resilient than we thought during the pandemic: Only 11% were permenantly closed and the industry fully recovered pre-COVID level sales in 2021. Although its growth in 2022 has been entirely price-driven, greater productivity per unit is encouraging.

Point to note: Independent restaurants are 4x profitable for foodservice companies than overall restaurants channel on the back of higher penetration of private label, higher service levels and dynamic pricing.

Retail ($71Bn) is expected to be fastest growing part of the market with 7-8% growth p.a.

Travel & Leisure represents $63Bn part of the market and still down 40% vs 2019 levels! The segment is expected to grow around 3-4% p.a for the next decade.

Healthcare ($31Bn) is highly resilient and captured all of the pandemic sales losses.

Education ($34Bn) is another resilient part of the market that fully recovered to 2019 levels and expected to grow by 2-3% p.a. for the next decade.

Looking at the valuation of major players, current levels (9,5x-13,0x EV/EBITDA) are much lower than pre-pandemic levels (16,0x-21,0x) and considering M&A track-record of the major players (CYY, USFD, PFGC) looks reasonable.

> Fast-growing Apple Pay adoption is threathening PayPal

As per #Salesforce eComm data covering 1.5bn shoppers globally, global eComm has fallen 2% in November 22. UK & Ireland eComm are weakest in Europe, followed by Germany and France.

Interestingly, Apple Pay grew 59% (makes up 6% of US eComm) in November in the US while PayPal (15% of US eComm) adoption has fallen 8% yoy.

Unpleasent take for PayPal shareholders: Extremely benefited from pandemic era surge of eComm, PayPal shall possibly continue to face strong competition from Apple Pay in the next years.

> Electric Smelter Furnaces’ (ESF) advance in steelmaking

Direct Reduced Iron (DRI) is put forward as main tool for decarbonisation of steel making in Europe. Problem is that it requires high grade iron ore pellets which is rare in the proven reserves (c.3%). A solid alternative could be ESF which is tried in the pilot applications across Europe by #thyssenkrupp and #tatasteel.

ESF uses same converter (no certification changes), cheaper electrodes, creates much more slag and use a wide array of iron ore feedstock.

If ESF proves to be a preferred way to decarbonise, met coal demand deceleration could gain further monentum. Met coal producers are possibly very good examples of #valuetrap in the market.

Act, while waiting for Godot

Auto OEMs has been valued at low multiples despite their resiliently high cash flows in last 3-4 years. (Hard to understand for me!) Pandemic, #semi shortages and EV #disruption by new (and mainly Chinese) entrants have been among the reasons for investors/analysts to justify low multiples. (None is credible in my view.)

The news is that US is waking up to the EV race and Inflation Reduction Act shall possible be instrumental in this. IRA includes an array of incentives (similar to Chinese incentive scheme) for electric vehicles and clean energy investments in the US.

$7,500 EV tax credit, formally known as the clean vehicle credit, is introduced by IRA and this figure is split into two equal halves of $3,750. In order to be eligible for the new credit, vehicles and consumers must meet certain requirements: 

  • A vehicle is eligible for one-half of the total credit ($3,750) if the vehicle has battery components that are manufactured or assembled in North America. 
  • To be eligible for the other $3,750, a vehicle must have critical minerals that were extracted or processed in the U.S. or countries with which the U.S. has a free trade agreement, or use critical minerals that were recycled in North America. 
  • Final assembly must take place in North America for a vehicle to be eligible. 
  • Only cars under $55,000 or SUVs, vans, and pickup trucks under $80,000 are eligible for the credit. 
  • On the consumer side, the income cap to be eligible for the credit is $150,000 for single filers, $225,000 for head of household and $300,000 for joint filers. 
  • There will be an option to apply the new credit at point of sale starting in 2024 and will end by 2032.
  • The new credit requirements for battery components and critical minerals will take effect January 1, 2023.

Interestingly, The IRA also establishes an unprecedented credit for used EVs ($4,000 or up to %30 of the vehicle price, whichever is lower).

As expected, EV charger credit has been extended through 2032. The credit is available for both individual and commercial uses to help cover the cost of charging stations.

Main motivation of these incentives are to accelerate US EV factory buildout and initial feedback from OEMs showing that could be achieved. The incentive package is well-timed for OEMs as EV demand in two largest EV markets (China and Europe) has been sluggish. Even limited upside in US EV demand would offset the downside risks for EV demand and roll-out (which were exagerated in my view, as in the case with all ‘hot topics’).

OEMs are nowadays busy with securing their place in EV battery and equipment supply chain:

> Tesla and VW is trying to internalizing some of EV battery production while majority of other OEMs are building JVs with battery cell makers.

> VW and GM announced battery material JVs on cathode/procursor areas.

> Long-term agreements with miners become a common practice (STLA, Renault, GM, Ford) in last two months, securing supply for lithium, zinc and other critical raw materials.

> Tesla, GM and BMW also shown interest to enter lithium refiningas well as material recycling.

All these efforts shows to me that OEMs’ managements finally decided to put aside their waiting mode for emerging battery technologies and act on what is currently available in terms of technology and materials.

One should also act, en attendant Godot.

My view of Stellantis (in 6 sentences)

$stla StellantisNV.

+ YTD pricing power (will it continue in 2H?). High FCF

+ relatively slow EV rampup plans vs. comp (later margin dilution)

+ limited exposure to China vs. comp

+ lower breakeven vs. comp

– reliance on large vehicles (SUVs) in times of sky rocket oil prices

– deterioration of the auto demand in europe.

Hyper growth and other stories…

Growth by itself does not create value. If ROIC is lower than cost of capital, growth destroys value.

As there is no return in most of “#unicorns”, these are extremely successful at #value destruction.

Have a look at Gorillas: “Over the past 12 months, it was, on average, losing more than €1.50 for every €1 it generated in net revenue”