CEO INSIGHTS – Week Ending 19 January 2018 By NAOS Asset Management

“Tax reform gives us the opportunity to be more competitive globally and to accelerate plans for the U.S. Some guiding themes are clear and consistent with how we've been investing — lower prices for customers, better wages and training for associates and investments in the future of our company, including in technology” Doug McMillon, CEO, Walmart

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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Domestic Economy

“When people have this much money to spend on horses, rest assured the economy is doing absolutely fine” Gerry Harvey, Chairman, Harvey Norman

“When I look through the tick up in investment and investment expectations, plus the recent growth numbers, you can paint a story that 2018-19 looks better for Australians” Craig Drummond, CEO Medibank

Meat

“If this is the new level of supply, which is 5 to 6 per cent higher than this time last year, then to get prices up we have to continue to grow demand. That has worked well, it is just that supply growth has started to overtake demand growth” Andrew Spencer, CEO, Australian Pork Limited

“If you look at farm gate prices, beef and lamb have become very expensive and are at quite a different level to chicken and pork. But if you look at what happens on the shelves in the supermarkets, the differences aren't as apparent because the supermarkets do a lot of work in margin adjustment to try to keep the offering to their customers fairly consistent” Andrew Spencer, CEO, Australian Pork Limited

Heavy Industry*

“The concept that labour is the fault of the decline in industry is now being overcome by technology. As long as you have demand and you have products consumed in the country, these (heavy) industries are well placed because with new technology you can make them very competitive and compelling” Sanjeev Gupta, Founder, Liberty House Group

* Heavy industry is industry in which large machines are used to produce raw materials or to make large objects (source: Collins English Dictionary).

Mining Capital Expenditure

“I think the market is heating up, you are hearing about more [infrastructure] projects in Australia…. We're seeing and hearing cost pressure more in the infrastructure space” Andrew Cole, MD, Oz Minerals

Oil & Gas

“Recently, we have been seeing increasing storage values. Some of that has been driven by the impact of recent weather. But we also think there are some signs of perhaps a lasting improvement there” Steven Kean, CEO, Kinder Morgan

Commodities

“In aluminium, we finished last year with strong demand growth above 5%, and we continue to see strong demand growth in 2018 in the range of 4.25% to 5.25%. Outside of China, we are expecting even higher primary aluminium demand growth in 2018 relative to 2017” Roy Harvey, CEO, Alcoa Corporation

“We estimate that more than half of Chinese smelting production was unprofitable in the fourth quarter. While Chinese smelting margins have improved somewhat in January, economics like this make it more likely that we could see additional economically-driven curtailments in China in 2018” Roy Harvey, CEO, Alcoa Corporation

US Tax Reform

“On the indirect side of the [us tax reform] equation there is clearly the potential for increased business activity. Potential benefits could take many forms including heightened M&A activity, increased financing volumes, or the most important indirect benefit to our business: economic growth” Martin Chavez, CFO, Goldman Sachs

Domestic Tax

“Lowering company tax rates would improve the prospects for wage growth. It would also help our retailers compete against international competitors operating on lower tax rates, which is good for jobs in Australian retail” Rob Scott, CEO, Wesfarmers

Retail

“What I would advise to competitors is to find products that are unique to you, and make sure you offer an experience that's unique and different than what the online experience would be. That's where all of us need to move more aggressively towards” Terry Lundgren, Executive Chairman, Macy’s

Pubs

“I have been saying for a while, if you are going to sell a pub now is the time to sell it. I can't see prices going much higher. Some people are paying silly prices” Arthur Laundy,  Laundy Hotels

“One of the important differences is the gap between the risk-free rate [borrowing rate] and current pub yields. Pre-GFC the gap in some instances was sub-100 basis points, which made no sense” George Ajaka, Head of Investments, White & Partners

“Child-friendly pubs are a big driver of bistro revenue at the moment. Strong construction activity, particularly infrastructure projects, is also unprecedented. This translates into tradies being 'cashed up' and contributing to hotel profitability” George Ajaka, Head of Investments, White & Partners

Outdoor Media

“The Out of Home (OOH) industry has today announced an increase of 6.03% on net media revenue for 2017, posting $837.1 million, up from $789.5 million for 2016 – signifying the industry’s eighth consecutive year of growth” Media Release by Outdoor Media Association

“Digital OOH (DOOH) revenue accounts for 47.3% of total net media revenue year-to-date, an increase over the recorded 40.2% for the same period last year” Media Release by Outdoor Media Association

Miscellaneous

“Fresh foods were up in the high-single digits. We saw growth across each of the departments: meat, bakery, deli and produce. Within the ancillary businesses, gasoline, hearing aids and optical had the best comparative sales increases in December” David Sherwood, Assistant Vice President, Financial Planning & Investor relations, Costco

Global Financial Market Activity

“The environment in 2017 turned out to be mixed. Continued strength in global equity and credit markets coincided with lower levels of market volatility and client trading activity” Martin Chavez, CFO, Goldman Sachs

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.