Text Analytics Uncovers the Question Executives Have Been Dreading in 2019

Reading the body language of corporate management is a central component in the role of a fundamental analyst. It is vital in a face-to-face meeting, but what if you could get body language from text? Deception is one of the hundreds of financial events captured in Amenity Analytics’ core NLP model. It specifically identifies linguistic patterns defined as evasive, attempting to spin a negative, creating tension with the analyst community, and other similar language.

Amenity’s Deception Monitor is then able to identify when these patterns deviate from prior quarters, shine a light on the most uncomfortable and controversial exchanges on earnings calls, and even point to the topics and questions that triggered the deceptive response.

We used the Deception Monitor to answer this question…

What Question Has CEOs and CFOs on Tilt This Year?

To answer the question we used our Deception Monitor as a tool to pinpoint the moments in quarterly earnings calls when management is uncomfortable, uncertain, hostile, or even outright evasive. Our NLP model then identified which types of questions drove these “deceptive” responses.

Deception associated with questions on China has skyrocketed this quarter, up about 50% from last quarter and more than double a year ago:
Note: data includes all English language earnings calls for companies with market cap greater than $5 billion

Which companies stood out? We highlight A.O. Smith, Herbalife, Lear Corp., and Albemarle

A.O. Smith (1/29/19):

"We had originally said that the we thought the second half of the year would be better in China. We are not forecasting that now. This is based on kind of a level the economy stays weak. Then when we look at next year now, the assumptions are that our sellout, if you will, is kind of level with ’18, so we’re not going to have much of a pickup. We’re going to see some recovery in air purifier, water treatment because of the new products, etc, but you’re right, the first quarter is difficult. And the first quarter is difficult because last year we picked up our inventory build occurred in the first quarter and we’re saying that it’s not..."

"What we’re really saying is last year’s first quarter probably had, let’s say, $40 million to $50 million of inventory build in it, and we’re saying that’s not going to repeat itself. So no, I don’t think this flushes out the inventory,because we’re having a weak quarter. It’s just, I’ll say a very difficult comp because we built the inventory up last year, and we’re saying we’re not going to build it up."

"So we’re only talking about channel inventory, and that’s why we can’t be exact,right? I don’t know exactly what’s at my customer, inventory levels."

"I would tell you, from a macro perspective, we don’t know exactly how that would parcel out.One, there has been a slowing down in China. But certainly, if you just take it back from a consumer point of view in tariffs, your market starts to slow down and just simply the way we’ve described it is the Chinese consumer is no different than a U.S. or any other consumer when their job has slowed down, when they’ve seen maybe some layoffs in various parts of the industry and their friends, they simply just pulled back. And so we believe that tariff has had some impact on consumer confidence, on their spending patterns just for the fact that that’s what we would do here in the U.S.  And my comment is if the tariffs and when the tariffs get resolved, it will take some time, but that will move that one uncertainty for the consumer and that should free up."

Herbalife (2/19/19):

"So in Q4, it was a tough comp, right? We went from a negative growth in Q3 of last year to almost the 10% growth in Q4. So if you look at the 2-year stack, we’re pretty comparable to where we were in Q3 and still much ahead of where we were in Q2. But I do think it primarily had to do with just people working really hard during the year and just relaxing toward the end of the year, because it’s really towards the end of the year where we saw some weakness in China. So it did underperform our expectations, but I don’t think it’s anything systemic. Having said that,when you look into Q1, there is this 100-day program. It was not directed atus, but us and a lot of other competitors have, as a result, canceled most if not all of our meetings during the first quarter, and that could and will, we expect to have an impact on Q1, it doesn’t change our expectations beyond Q1."

"It’s hard to tell because it (the 100-day plan) started in January and it definitely impacted January sales, but then February 5 through the 15th was the Chinese New Year. And during that time period, which just ended, our sales are always weak. And so it’s really tough to tell how it’s going to bounce back. So I just – it’s our expectations that Q1 will be a challenging quarter for our China business. And again, just to clarify earlier, it’s not even a direct selling challenge. It’s both direct selling and nondirect selling regarding products that are healthcare and functional foods."

Lear (1/25/19):

"A primary piece of that was in China and in Europe, the areas that we had seen at the end of last year to have some volume weakness."

"I don’t – to kind of give you a little bit of the success we’ve had even with the domestics, we’ve done a great job of growing with the domestics in China. And obviously, we’re competing against the local domestics today. And so we continue to see success in our growth. And obviously, you heard the same comment. I don’t know exactly what that means, but I do know that it doesn’t – from my perspective, we have to compete every single day, and we’ve been competing against domestics for the long time. And I think that at the end of the day, our customers want the best quality, low-cost producer, and we are absolutely confident that we can deliver that."

"I mean, there is a lot of headwinds, but I really appreciate what we all did as a team. And remember and would say this over and over again, focus on what we can control. There is a lot of noise out there, but we’re really good at what we do internally, and let’s just remember to stay focused."

Albemarle (2/21/19):

"You’re right, the Chinese automotive market has been choppy. The global market has been choppy. It’s been down, as Scott has pointed out."

"I don’t know that there’s really seasonality in buying patterns. There is an ever increasing demand, so you are going to see demand increase as we go through each year being larger at that second half of the year. There are certainly effects in China, in the January and February time frame that has to do with the lunar new year festivals, of course, but outside of that there’s no seasonality."

"It’s also a reflection of the fact that the Chinese accounts customers have been reluctant for some time to commit to longer-term agreements. So that – and periods of time when there is uncertainty in their home market and certainly there has been macroeconomic weakness in China and changing subsidies."

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Please note: This in no way represents investment advice. All transcript text provided by S&P Global Market Intelligence.

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