GPM May 2020 Update

May 06, 2020

We hope you are healthy and staying safe. All GPM team members continue to work safely and remotely from our homes. We look forward to returning to our office to be together and engage with clients and others face-to-face. Feel free to call/contact us for any reason. Best regards from the GPM Team.

Select Commentary from Key Leaders of GPM Portfolio Companies 

GPM invests in high quality, U.S. based growth companies that have the size, scale, and agility to compete and win worldwide. We focus on innovative businesses with strong balance sheets and cash flow to support growth and provide flexibility to take care of all stakeholders during economic rough patches including this COVID-19 contraction. We believe strong companies will adjust, invest through, and come out of this stronger.   

Over the past eight weeks, we have been on business update and earnings conference calls with top management of most of the companies we invest in and many others we follow closely. More than 2/3 of our companies have reported first quarter results and not surprisingly, we have been impressed with their continuing agility.   

In the notes below, we share select commentary from key leaders of several of our portfolio companies. In summary, very few CEO’s or other top executives will stick their neck out and make short-term predictions about COVID-19 that are clinical in nature.  They do provide very useful information and opinions about developing business trends and longer-term plans. We start with the CFO of payments technology company, Visa, the world’s leader in digital payments.  Visa is one of GPM’s largest stock positions.  Visa connects the world through the most innovative, reliable, and secure payment network, enabling individuals, businesses, and economies to thrive. Their advanced global processing network provides secure and reliable payments around the world and is capable of handling more than 65,000 transaction messages a second. The company’s relentless focus on innovation is a catalyst for the rapid growth of digital commerce on any device for everyone, everywhere. As the world moves from analog to digital, Visa is applying their brand, products, people, network, and scale to reshape the future of commerce. While, the road ahead will likely be challenging for several quartersVisa is very strong financiallytheir business model is resilient and their strategy to enable the movement of money globally (without actually touching it) is more relevant than ever. Visa’s senior management sees the data in near real-time and measures the pulse.  So, what did Visa’s CFO tell us during the company’s earnings call last week?      

Vasant M. Prabhu, Visa, Inc. - Vice Chairman & CFO (4/30/20 – annual revenue $23.9 billion) 

“Moving now to how COVID-19 might affect the rest of this fiscal year.  This pandemic is global in scope, very significant in its impact, and early in its evolution.  There is a high degree of uncertainty about what happens over the next few months.  As is self-evident, our prior outlook for fiscal 2020 is no longer relevant and it is not possible to provide you with any reliable forecast for the second half.   

Our revenue trajectory over the near term will be driven by three critical variables, first, the depth of the decline; second, the time we stay at trough level; and third, the trajectory of the recovery. Is it impossible to reliably forecast what the depth of decline, time in trough, and trajectory of recovery are going to be over the near term, especially since these variables defer across categories and countries.   

It will depend on many factors which we will be tracking including city, county, state and country decisions on when and how they reopen; the staging of the reopening by business type and category; how permanent the shift in consumer behavior is by category; consumer willingness to engage in activities where social distancing may be harder to execute like dine-in restaurants, mass entertainment, hotel stays, and airline travel; and when borders reopen, consumer confidence in venturing beyond their geographic zone of comfort.   

In the final analysis, this is a health crisis. As such, consumer behavior and the pace of normalization will be significantly influenced by the availability of testing, advancements in therapeutics, and ultimately a vaccine. We have no crystal ball that allows us to reliably forecast revenues in this environment.   

Crises bring with them both risks and opportunities and this one is no different. We've acted fast to mitigate the risks.  We are actively working on identifying and capturing the opportunities. It is very likely that this crisis could accelerate trends that were under already underway like the shift to e-commerce and the shift to digital forms of payment. It is speeding up tap-to-pay adoption, driving growth of new flow use cases we highlighted at our Investor Day, increasing demand for our value-added services, and offering opportunities to add to our capabilities through selective acquisitions. While our short-term performance will suffer a setback, we remain confident in the long-term growth potential of our business.”     

Timothy D. Cook, Apple Inc. – CEO & Director (4/30/20 - annual revenue $268 billion) 

“Given the lack of visibility and certainty in the near term, we will not be issuing guidance for the coming quarter. Over the long term though, we have a high degree of confidence in the enduring strength of our business. Our global supply chain is profoundly durable and resilient. We have shown the consistent ability to meet and manage temporary supply challenges like those caused by COVID-19.  We have continued to deliver innovative new products across multiple categories that appeal to a broad cross-section of customers, including the all-new iPhone SE, which achieved unmatched technological capacity at an incredible value. 

Our teams worldwide have tackled the complexities of this moment with unmatched creativity, good humor, and dedication to our customers. For a company whose business is innovation, there are real upsides in periodically having to figure out how to do just about everything in a brand-new way.  Our long-running investment in our Services strategy is succeeding. This business is growing and is a reflection of our enduring, large and growing installed base. We expect to meet our long-standing goal of doubling our fiscal 2016 Services revenue in 2020. 

We have always run Apple for the long term. We entered this period with unmatched financial strength, a robust cash position and our best product pipeline ever. Major investments, including our 5-year commitment to contribute $350 billion to the economy here in the United States, are moving forward full speed ahead. It's in these moments that we set ourselves apart.  We've always managed through difficult moments by doubling down and investing in the next generation of innovation, and that's our strategy today.” 

Paulus A. Stoffels, Johnson & Johnson – Chief Scientific Officer (4/14/20 – annual revenue $82.7 billion) 

“We began working on the vaccine candidate in early January as soon as the coronavirus sequence became first available. Johnson & Johnson announced on March 30 that we have identified a lead COVID-19 vaccine candidate, along with 2 backups. In order for any vaccine to be manufactured to [Good Manufacturing Practices] GMP in large quantities, it is necessary to first produce a master seed bank, which is then progenitive of all future large-scale vaccination batches. All 3 candidates are now entering premaster seed production. Final selection of start of master seed production is expected in June 2020. 

We plan to begin production at risk imminently, and our goal is to enable the supply of more than 1 billion doses of the vaccine globally.  We are on track to start Phase I clinical trials in early September in the U.S. and Europe with clinical data on safety and immunogenicity expected to be available by the end of the year. This could allow vaccine availability for emergency use authorization as early as early 2021. We are confident in this vaccine candidate because we have now seen good data in animal models.  While we are moving with extreme speed, we are absolutely committed to making sure that our vaccine follows all guidelines with regard to Good Manufacturing Practices and quality controls. We are not cutting any corners when it comes to safety.” 

Kenyatta G. Rocker, Union Pacific Railroad – EVP of Marketing & Sales (4/23/20 – annual revenue $21.6 billion) 

"Many of the auto manufacturing plants are scheduled to be shut down until at least early May.  Already, our auto shipments have been down around 80% in the second quarter so far. Likewise, the recent projections in Mexico indicate that some manufacturing sectors, like autos, will be shut down for similar time periods as well.  However, the CARES Act, that was recently signed, offers some upside to open the economy for business and improve unemployment for Americans. Plus, it's also encouraging to see that much of Asia is restarting production, along with China's recent purchases of U.S. grain." 

Jennifer L. Hamann, Union Pacific Railroad – Executive VP & CFO 

"First, and most importantly, Union Pacific is running at efficiency levels we've never experienced before as a company. For example, we were more than volume-variable on a fuel-adjusted basis in the first quarter 2020 as a result of the strong productivity focus embedded in Unified Plan 2020. We've also taken more than 1,500 basis points off of our operating ratio since the great financial crisis in 2008-09 and that further strengthens our ability to manage through today's challenges and emerge stronger on the other side." 

Kevin Johnson, Starbucks Corporation – CEO and President (5/4/20 – annual revenue $26.7 billion) 

“As we gradually come out of isolation, people will crave the connection and community that are fundamental to humanity.” “With health and safety prioritized, we are defining the future of Starbucks to meet evolving customer expectations and societal change. Starbucks is committed to create a third place experience that is exactly tuned to that need — providing safe, familiar and convenient experiences.  By the end of this week, Starbucks partners will have responsibly reopened over 85 percent our company operated stores across the U.S., and we are expecting more than 90 percent of our stores to be open by early June, under modified operations and hours. The foundation of our approach comes from what we have learned in China, where more than 98 percent of our stores are now open and operating under revised protocols. We have adapted these protocols for the U.S. and our goal is to exceed the standards outlined by the Centers for Disease Control and Prevention for a safe experience, including heightened emphasis on cleaning and sanitizing protocols in our stores. See full letter here.