Aiera Investor Event Recap — Week of September 20, 2021

Supply chain struggles persist, executive teams continue to address current and impending impacts of the delta variant, and much more from this week.

Supply Chain Commentary Remains Most-Focused on Shipping/Transportation Costs

Shipping/transportation cost pressures continue to be the most discussed supply chain impact, though mentions of rising labor costs accelerated meaningfully beginning last quarter.

Supply Chain Situation “Deteriorates”

“Consumer demand for Nike remains at an all-time high, and we are confident that our deep consumer connections and brand momentum will continue. However, we are not immune to the global supply chain headwinds that are challenging the manufacture and movement of products around the world. Previously, I had shared that we were planning for transit times to remain elevated for the balance of fiscal ’22. Unfortunately, the situation deteriorated even further in the first quarter, with North America and EMEA seeing increases in transit times due primarily to port and rail congestion and labor shortages. Additionally, several of our factory partners in Vietnam and Indonesia were required to abruptly cease operations in the first quarter…Our experience with COVID-related factory closures suggest that reopening and ramping back to full production scale will take time… We now expect fiscal ’22 revenue to grow mid-single digits versus the prior year versus our prior guidance of low double-digit growth, due solely to the supply chain impacts that I just described. Specifically for Q2, we expect revenue growth to be flat to down low single digits versus the prior year as factory closures have impacted production and delivery times for the holiday and spring seasons. Lost weeks of production, combined with longer transit times, will lead to short-term inventory shortages in the marketplace for the next few quarters.”

• Matthew Friend, Executive VP & CFO, NIKE, Inc. | Q1 2022 Nike Inc Earnings Call, Sept 23, 2021

“Labor shortages have had 2 distinct impacts on our business. The competition for talent, particularly for our frontline workers, have driven wage rates higher and pay premiums higher. While wage rates are higher, the more significant impact is the widespread inefficiencies in our operation from constrained labor markets. To illustrate this, I’d like to share a brief example from FedEx Ground. Our Portland, Oregon hub is running with approximately 65% of the staffing needed to handle its normal volume. This staffing shortage has a pronounced impact on the operations, which results in our teams diverting 25% of the volume that would normally flow to this hub because it simply cannot be processed efficiently to meet our service standards. And in this case, the volume that’s diverted must be rerouted and processed, which drives inefficiencies in our operations and, in turn, higher costs. These inefficiencies included adding incremental line haul and delivery routes, meaning more miles driven and a higher use of third-party transportation to enable us to bypass Portland entirely. Now that’s merely one example. Across the FedEx Ground network there are more than 600,000 packages a day being rerouted. We anticipate the cost pressures from network inefficiencies such as the one I just illustrated to persist through peak as we navigate the labor market and impacts of new COVID waves. Overcoming these staffing and retention challenges is our utmost priority as they not only affect our cost structures and operational efficiency but also have a negative impact on service levels. As such, we are taking bold action across the enterprise to hire and invest in our frontline team members as we prepare for the peak season ahead. These actions include targeted pay premiums, particularly for weekend shifts; increased [cut] reimbursement sponsorship of a national hiring Day on September 23 as we seek to hire 90,000 additional positions ahead of peak; detailed volume and demand planning with customers to drive additional sorts to alleviate congestion; and expanding network capacity, which I will touch on shortly. Based on these actions, combined with our expectations for improving labor conditions, we do anticipate gradual improvement in our operational efficiency as we turn into the new calendar year.”

• Rajesh Subramaniam, President, COO & Director, FedEx Corporation | Q1 2022 Earnings Call, Sep 21st, 2021

“From a supply chain perspective, the factors pressuring supply chains and inflation include port delays, container shortages, COVID disruptions, shortages on various components, raw materials and ingredients, labor cost pressures and trucker and driver shortages — trucks and driver shortages. [E]ven on the domestic side, various major brands are requesting longer lead times, in some cases, difficulty in finding drivers and trucks on short notice. Lead times on ingredients and packaging have been extended in some cases… Also, we’re putting some limitations on key items, like bath tissues, roll towels, Kirkland Signature water, high-demand cleaning-related SKUs related to the uptick in Delta-related demand. Furniture delays and some shortages have caused traditional rollout times to go from 8 to 12 weeks — from 8 to 12 weeks up to 16 to 18 weeks. In some ways, we think that’s an advantage. We’re selling out generally merchandise once it’s received within 2 weeks on most items. And we’ve ordered more and earlier. Same thing with toys, we’re bringing in some of the items early. Chip shortages impacting many items, as I mentioned in the last call. Examples of impacted items, computers, tablets, video games, major appliances. Feeling is from the buyers as this will likely extend into 2022. Again, we’re ordering as much as we can and getting it in earlier. And I think as evidenced by the most recent sales results, we’re doing okay with this. Despite these issues — sorry, in terms of transportation costs, they’re increasing. We’re reading about it every day. Containers, trucks and drivers all are impacting the timing of deliveries and higher freight costs.”

• Richard A. Galanti, Executive VP, CFO & Director, Costco Wholesale Corporation | Q4 2021 Earnings Call, Sept 23, 2021

“Our first quarter FY ’22 adjusted earnings per share of $4.37 was negatively impacted by approximately $800 million in year-over-year headwinds. And while Raj covered the operational impacts of these challenges, I will detail the financial impacts to the quarter. Of these headwinds, the difficult labor market had the largest effect on our bottom line, representing an estimated $450 million in additional year-over-year cost, the majority of which impacted our FedEx Ground business. As we look into the impact of labor cost in the business, I want to break this impact into 2 components: higher wages and the impact of network inefficiencies. Of the $450 million, we estimate that $200 million was incurred in higher wage and purchase transportation rates. This included higher wage rates and pay premiums for team members and higher rates paid for third-party transportation services. In addition to the higher wage rates, we estimate that network inefficiencies of approximately $250 million contributed to the total impact of labor shortages on the business. These costs include additional line haul, higher usage of third-party transportation, cost to reposition assets in the network, overtime and recruiting incentives, all to address staffing shortages.”

• Michael C. Lenz, Executive VP & CFO, FedEx Corporation | Q1 2022 Earnings Call, Sep 21st, 2021

“On the cost side, Jeff mentioned that we expect input cost inflation and other supply chain costs will be more of a headwind in fiscal ’22 than compared to our initial outlook where we shared on our Q4 earnings call. We expect input cost inflation will be between 7% and 8% for the year, up from our original outlook of roughly 7%. And we expect labor shortages will drive higher-than-planned costs across the supply chain, from sourcing to internal and external manufacturing and distribution.”

• Kofi A. Bruce, CFO, General Mills, Inc. | Q1 2022 Earnings Call, Sep 22nd, 2021

“And if you think about the discussion we’re having on the supply chain blockage, it’s really making the inventory situation worse for the consumer, not better. Our industry is way behind in the number of homes we’ve built versus what demographics and demand would support, and you have this restriction now on homes being built because of the supply chain blockage. So we don’t think you’re going to — there’s so much demand for the limited supply. We don’t think you’re going to see, for a while, a customer that says, we can afford that. We’re seeing no signs today. It’s a very strong environment out there.”

• Jeffrey T. Mezger, Chairman, President & CEO, KB Home | Q3 2021 Earnings Call, Sep 22nd, 2021

Disney Cautions on “Noisier” Quarter-to-Quarter Disney+ Sub Growth vs. Street Estimates

“I think people looked at our projections last December and said “oh, they want to get to 230 to 260” or whatever numbers are, and then divided by the number of quarters said, they need to add X per quarter. What we’re finding out, as you’ve seen from our last several quarters, in terms of earnings is that these numbers tend to be a lot noisier than a straight line, they’re not a straight line relationship quarter-to-quarter-to-quarter. And indeed, we’ve seen some of that this current quarter. We’re very confident about our long term sub growth, as we have been. In Q4, I think what you can expect to see is that our global paid subs will increase by low single digit millions of subscribers versus Q3. But importantly, our core market sub growth will continue both domestically and internationally in Q4, but we hit some headwinds. Two of the headwinds I already talked about, about Latin America again trying to mobilize the partners, get that thing going just like we saw with Disney+. In India, the IPL shift, and the fact that you have got to go back and reclaim all your subscribers all over again, which we’re confident we can do, but obviously, it’s sort of a day by day… It’s a clawback. The third one is something that’s actually impacting us across the globe, and that’s the impact of COVID induced production delays, which then is a kick in the supply chain for new content coming to the service. Now this is very short term, in fact it is so short term that right now our studio alone has 61 new movies in production and they’ve got 17 different episodic programs that are in production. Our TV group has hundreds of new programs in production and we’ve got 200 local productions across the globe in production. So the supply chain is healthy just like we talked about last December, it’s flowing, but the resurgence of COVID in Delta did impact some of our production so that we’ve got a lighter product quarter in Q4 than we might’ve expected. All to say, again, we’re very bullish and confident about our long term sub growth, but we’re going to see a little bit more noise than I think maybe the street expects in terms of our ultimate projections quarter to quarter.”

• Robert A. Chapek, CEO & Director, The Walt Disney Company | Goldman Sachs Communacopia Conference, Sep 21, 2021

Small Delta Variant Impacted Identified at DIS Parks, Followed by Swift Rebound

“Right well the last time I commented on this I believe was our last earnings call and at that point, we hadn’t really seen much impact at all from Delta and then the following few weeks, we saw a bit of an impact in terms of a slowdown of our guests coming to our parks, but then labor day happened and all of a sudden things started to recover quite nicely. So it was a very short sort of impact and we like the recovery that we’re seeing. [We’ve] not really frankly seen any pushback from the guest as we re-instituted mask requirements in our indoor facilities. Our guests have been extraordinarily agreeable and compliant I guess to the health and safety measures that we have sort of led the way with….”

• Robert A. Chapek, CEO & Director, The Walt Disney Company | Goldman Sachs Communacopia Conference, Sep 21, 2021

“Well, we’re glad to see that our reservations at both of our domestic parks in Q4 are greater than Q3, so that’s really encouraging. And when it comes to our cruise ships, we see that demand in the second half of ‘22 in terms of bookings is actually greater than the first half of ‘22.”

• Robert A. Chapek, CEO & Director, The Walt Disney Company | Goldman Sachs Communacopia Conference, Sep 21, 2021

Salesforce Provides Upbeat Revenue and Op Margin Outlook at Investor Day

“So since we initiated guidance for revenue back in December of last year, we have already raised, including today our guidance for this year by $800 million. And this also shows that 4 of the 5, the last quarters, we have had growth above 20%. Now I am even personally more excited to say that we have also raised operating guidance. We initiated at 17.7% back in late February, and we have now raised up to 18.5%. This is a testament to the revenue generation we have seen. It’s a testament to institutionalizing our success from anywhere on the lessons of the pandemic, and it’s also a tribute to disciplined decision-making. So let’s look at FY ’23. This morning, we initiated guidance of $31.8 billion. Our first time in the 30s for next year in revenue. Again, this is a testament to the performance this year, the demand environment and the execution of our distribution team. Now typically, at this time, we only give revenue guidance. We do not give operating guidance until after we make it through Q4, seeing how the year is looking and give you that guidance at that point. This year, all of us, the management — entire management team, we felt it was very important to be able to give you greater guidance into where we are headed in the near future with operating guidance. And very, very happy today to initiate guidance for FY ’23 at 20%. This 20% operating guidance comes while we absorb an estimated 125 to 150 basis points headwind from Slack.”

• Amy E. Weaver, President & CFO, Salesforce.com, inc. | Salesforce.Com Inc Investor Day, Sep 23rd, 2021

“It did, but this was also at the time that we were making some of our most important additions to our product portfolio, the additions of MuleSoft, the additions of Tableau, Demandware, ExactTarget. But as we are focusing now on integration, I am happy to see that this arrow is now continuing to go up and to the right. The third pillar of our financial model is that we have an incredible model that generates substantial cash flow every year. And as we continue to focus on driving our CapEx lower from 6% of revenue in FY ’17 to a guided 3% this year, we are going to continue to see free cash flow grow both on a total and a per share basis.”

• Amy E. Weaver, President & CFO, Salesforce.com, inc. | Salesforce.Com Inc Investor Day, Sep 23rd, 2021

“[S]tarting in FY ’14, I actually joined the company about 3 weeks before Dreamforce that year. At that point, hoping to get to $4 billion, the real buzz though was whether someday, we might be able to hit 10. Well, over the next 7 years, we have increased our revenue by more than 400%. And that $10 billion with today’s guidance, we’re going to almost add an additional $10 billion just in these most recent 2 years.”

• Amy E. Weaver, President & CFO, Salesforce.com, inc. | Salesforce.Com Inc Investor Day, Sep 23rd, 2021

Uber Raises Guidance as Supply Growth Initiatives Drive Faster Path to Profitability

“[W]e’re very pleased with our path to profitability. We committed to investors that we would get there, and it looks like we’re going to get there sooner than we thought thanks to the good work of the teams. The — in order for us to hit profitability, first of all, the mobility business has to be in really good shape. And we leaned in, in Q2 last quarter, pretty aggressively into supply, especially in the U.S. as we saw that sessions and demand for rideshare was growing substantially faster than supply hours were growing. And we felt like in order to keep the quality of the service and the dependability of the service at levels that we believe are satisfactory, especially as people are going out again, we had to dig in deep on the supply front and really invest, especially in driver incentives, in order to get momentum behind supply.”

• Dara Khosrowshahi, CEO & Director, Uber Technologies, Inc. | Goldman Sachs Communacopia Conference, Sept 21st, 2021

“Our session growth continues to grow. August session growth, which is more of a measure of demand, paused a little bit with the latest COVID issues. But September, we’re seeing section growth growing. And happily, we’re seeing the momentum that we started building as it relates to driver supply in the U.S. increased significantly, and the momentum continues now. Just actually in the past couple of weeks, supply hours were up by 9% only in 2 weeks. So we were able to get momentum going on the supply front through a number of factors, resurrecting drivers who have elected to stay at home, incentives, guarantees, et cetera. And to some extent, we needed to overinvest in order to understand what worked in our ML algorithms, to teach ML algorithms, what worked, what didn’t work. And now the algorithms are kind of taking over and they’re optimizing so that for every dollar that we spend, we get a better return. And for perspective, we think in order to hit the minus $25 million to $25 million in EBITDA in Q3, we’re essentially going to come in at mobility margins that are comparable to where we were in Q4 of ’19. That’s pre-COVID. Volumes are 30% lower than where they were, so that kind of tells you the core work that we’ve done in terms of the profitability of the business.”

• Dara Khosrowshahi, CEO & Director, Uber Technologies, Inc. | Goldman Sachs Communacopia Conference, Sept 21st, 2021

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