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Scott Lysakowski, Head of Canadian Equities, Phillips, Hager & North Investment Management, reflects on key takeaways from this earnings season. Scott also shares what his investment teams are looking at to help companies to not only survive, but thrive through these uncertain times. (Recorded August 18, 2020)


Hello and welcome to the Download. I’m your host, Dave Richardson, and it is Stu’s Days. Unfortunately, Stu Kedwell is on vacation, but as I told you, I’ve got a rolodex full of Stus. And so Scott Stewart Lysakowski, who was on the podcast a couple of weeks ago, is joining us for Stu’s Days. Mr. Lysakowski, thanks for joining us.

Thanks Dave for having me. Happy to fill in for Stu. Big shoes to fill, but I’ll take it.

Always big shoes to fill. And because we knew Stu was going to be away last week, he sort of previewed bank earnings. But we were having a chat just before we got on, about the bigger earnings season. It generally came about through July, and crept into early August across most major firms around the world, with a particular focus in the US and Canada. You talked about how you manage earnings seasons as an investment manager, as the announcements are coming, and now you can sit back and take a look at it. I thought it was really interesting. Why don’t you share that with the audience?

As Dave mentioned, we just got through Q2 earnings season. It provides a bit of a low period in the information flow, as we gear up for Canadian bank earnings at the end of the week. But a lot of people ask us, “You must be really busy during earnings?” Earnings are a very fast moving period. Lots of information coming through. You often hear people say, “You’re drinking from the fire hose of information coming at you.” But really, my favourite time is the post-earnings period. It allows you to take some time and reflect on how the underlying businesses are doing. You can dig in to some of the filings that you haven’t had a chance to look at. [You can] read some conference call transcripts or fully go through some of the information that the companies put out — more of it in detail, as opposed to just scanning. Really get an assessment of where the companies are at, not only where they are in the current environment, but where they’re heading into the future. During the earnings season, the information comes fast and furious. There’s a lot of fast analysis by the market and by the sell-side about actual earnings versus estimates. Where was consensus? What did they beat? What did they miss? What were some of the updates to the guidance? What were some material updates that the company gave? All of which is of specific interest in this quarter, because this Q2 was right in the heart of the COVID-19 lockdown period. Lots of close attention was paid to the here and now. It creates a bit of a myopic view. It’s a very important time for businesses, and for companies. But really, we want to think about how is this company reacting over the long term. There’s a term we use in our research process we call fundamental momentum. So, just how is this company doing? We understand the drivers of each business, and we understand the long-term growth trends of the industry, how that company is positioned competitively amongst its peers and the strategic direction that’s coming from management (what are they doing?). And so as we work through this COVID-19 period over the last several months, we worked into a framework of this idea of a survive-versus-thrive spectrum and trying to slot companies where they are and trying to assess where they are. In the early stages of COVID-19, first and foremost, we needed survivors. We needed companies to make it through. So that was job number one. But ultimately, we wanted to look for companies that were going to thrive, and that were actually going to do better coming out of this. A lot of times, we think about how management reacts to the current conditions. You’ve heard Stu talk about this optionality that management allows for a long-term investor. Another thing we think about is how well was the company prepared going into this? These are events that you cannot predict, and the cost of reaction versus the cost of preparedness is quite different. So if you go into a period such as this with a very strong balance sheet, and very well-capitalized access to liquidity, there’ll certainly be opportunities for you to take advantage of. And the returns on those opportunities are going to be much higher than the returns on what you do to react. So different companies find themselves in different circumstances. We’re doing a lot of that assessing and understanding where companies are in terms of their fundamental momentum.

Yes, and you sent me over some documents this morning that we were taking a look at. A piece on one company in particular that you really liked in terms of explaining how they’ve prepared, reacted and adapted their business, given the crisis. And we’re going to get into that with some time next week. But a very interesting perspective from you, as you say, as an investment manager, of that fire hose of news, as company after company is releasing their earnings. Taking the time afterwards to make that assessment, and to assess which management teams have done a really effective job in managing through the crisis. And, as you say, more importantly, getting ready before the crisis so that they could manage effectively through. Obviously, those are the companies you want to own, the companies that are set up to thrive through this type of an experience. One, because they prepared, and second, because they can adapt.

That’s right. And this often provides a period to catch up with management. Of course, all management teams right now are dealing with the here and now of how their business is affected by COVID-19 and recession. But really, we can get a lot more information about what the businesses, what they’re doing to position their business for the future, and how they can take advantage of a period such as this. Because that’s the embedded option value for a long-term investor trying to understand how this company can do better from one cycle to the next.

Excellent. Well, a great, interesting way of thinking about the earnings season, and post-earnings season. And we’ve teed up an appearance next week. We’ll get into specifics on one particular company that you really liked in terms of the way they followed up. So, Scott, thanks a lot for filling in for Stu this week. We’ll look forward to our discussion next week with you on Brookfield.

Thanks, Dave. Thanks for having me.


Recorded August 18, 2020

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