Breaking down the supply chain – Apple, Maersk, Home Depot & more| Quartr Reporting Season

Bryce: [00:00:53] Welcome to another episode of Equity Mates, a podcast that follows our journey of investing. Whether you're an absolute beginner or approaching Warren Buffett status. Our aim is to help break down your barriers from beginning to dividend. My name is Bryce, and as always, I'm joined by my equity buddy Ren. How are you going?

Alec: [00:01:10] I am very good. Bryce. I often say that I am excited for this episode, but it's tough to be excited at the moment with everything going on. We've got the situation in Ukraine. We've got floods back here at home. Thankful that we get to do this show and I think we're not going to cover those situations much. There are far, far better people to listen to and to read about than us on that. We're going to stick to our very narrow line and talk investing. But yeah, just thankful that we're here and, you know, we're safe and we get to do this. 

Bryce: [00:01:44] Yes, I absolutely agree with those comments. Ren. And if you are doing it tough out there, we are thinking about you. Not a great time of the year, but quarter. 

Alec: [00:01:54] We're back. Yeah. How are you going to bring it out of that? 

Bryce: [00:01:56] Yeah, it's a tough one to say. 

Alec: [00:01:58] Going out. Well, I think, you know, as the well, everything going on in the world. One, there are three things that are constant death, taxes and a never ending reporting season in the United States of America.

Bryce: [00:02:10] Yes. So last Monday, we heard from some of the big CEOs and C Suite executives of tech companies that are experiencing slowing user growth. And this time we're going to be breaking down the supply chain, looking at some of the companies that have been impacted by supply chain constraints and hearing from some of their say so. We've got some big ones brambles, ups, we've got Apple Nurse, Wesfarmers, Home Depot and some of the semiconductor manufacturers as well. And this is all thank you to quarter one of our favourite apps. It's Quartr. If you're interested quartr dot com or you can download it on Google Play or Apple iTunes. They are bridging the gap between companies and retail investors. 

Alec: [00:02:59] Ren Apple, iTunes 

Bryce: [00:03:01] Yeah, or Apple, the App Store, Apple 

Alec: [00:03:03] Store. They don't use iTunes anymore. 

Bryce: [00:03:05] I definitely don't know any. 

Alec: [00:03:07] Anyway, you can try and find it on iTunes. You'll have more success on the App Store, but it's worth finding because it is a great yeah.

Bryce: [00:03:15] Access to conference calls from some of the biggest companies around the world reports transcripts all in one place, and they've done a great job on updating the app since we last used it. And it's it's 

Alec: [00:03:26] great. It's just if you remember, like a year 11 or year 12 history, there's primary sources and secondary sources and Equity Mates and all of our podcast competitors and all of our news competitors like the AFA and Bloomberg were all secondary sources. What kind of gives you access to as a primary source you hear directly from the companies? The CEO is CFO is themselves. So I'm going to say it's a great complement to Equity Mates. 

Bryce: [00:03:50] Yes, absolutely. 

Alec: [00:03:51] Yeah, yeah. And what we've done in this episode, as we did last Monday, is just pull out some companies from around the world to give you a sense of what you can hear from the companies themselves. When you listen to these earnings calls, so we've got some updates from the CEOs and then we've got some analyst questions across a mix of points in the supply chain to give you an idea of how these companies themselves are talking about the supply chain crisis. You know, we all we've all heard about the issues across the world with moving ships and moving goods. 

Bryce: [00:04:28] Sure, that's 

Alec: [00:04:29] tough. Yeah, yeah, yeah. So let's start with a company that I think is the hidden. You love this. I do love this company. It is. It is one of the best businesses I have come across. They slap a couple of nails into a couple of planks of wood paint, pineapple blue and charge people an arm and a leg. That's Brambles owner of ship pallets who if you move something in Australia and more and more if you move something around the world, you probably move it on one of their their pallets. 

Bryce: [00:05:01] That's it. What have they said? To be

Alec: [00:05:03] clear, there's multiple other competitors around the world, but let's start with some comments from the leadership team talking about the operating environment, which brambles have found themselves in 

Brambles: [00:05:16] across all of our markets. Supply chains experienced significant disruptions associated with shipping delays, transport and raw material shortages, as well as labour availability, challenges and changes in demand due to the emergence of the Delta and Electron variants of COVID 19. These shortages and disruptions resulted in record levels of input cost, inflation and inefficiencies across global supply chains. Notably, retailers and manufacturers have been holding increased safety of their inventory to protect their own customers and consumers against supply volatility. For Brambles, ongoing lumber availability and supply issues have led separate manufacturing constraints and have impacted new pallet supply. In response to these disruptions, we've been working with retailers, manufacturers and others in the supply chain to improve pallet flow and availability to optimise service levels across our customer base. We've implemented demand management initiatives as well as increased pallet purchases to improve availability. We've also deployed advanced data analytic tools and enhanced asset recovery processes to increase pallet collections and returns. We expect pallet availability will remain challenging for the rest of the financial year and into the first half of 2023, and we will continue to increase pallet purchases and work with our customers in all regions to service demand. 

Bryce: [00:06:43] So Ren they touched on record levels of input cost inflation and manufacturers and retailers holding higher levels of safety stock. Given what's been going on, 

Alec: [00:06:53] which I think is an interesting trend to watch and something that we heard throughout these earnings calls for years, we've seen we've seen companies play just in time inventory. Yeah, more and more they're playing. I don't know if this is what the alternative saying is 

Bryce: [00:07:10] almost in time 

Alec: [00:07:11] more than in time, 

Bryce: [00:07:13] just enough out the back in time, 

Alec: [00:07:15] just early. But yeah, and they expect this behaviour of holding safety stock to continue. And you know, that means that retailers are tying up more of their working capital in inventory. But it does mean if there are further supply chain issues, they're going to have better availability on their shelves. So let's move to a second clip from the Brambles earnings call, where they spoke about this cost inflation and what it meant for revenue. 

Brambles: [00:07:43] All segments delivered revenue growth in the period, contributing to overall group revenue growth of eight percent. Pricing contributed eight points to revenue growth, reflecting increased cost of sales across our businesses. Group volume was broadly in line with the prior year, with pallet availability constraining volume growth during the half while volumes were flat. Net new business growth of two percent was offset by two points of organic volume decline as the business cycle Covid related demand in the prior year. The net new business growth was largely driven by customer wins in central, eastern and southern Europe and includes roll over benefits from a large APAC region, or PC contract, which commenced in the prior financial year. 

Bryce: [00:08:32] So love say it Ren revenue up in all segments eight per cent revenue growth, but organic growth has slowed a little. 

Alec: [00:08:38] Well, yeah, eight percent revenue growth, but no volume growth. Yeah, they didn't move anything more. It was just that cost inflation went up eight percent and their revenue went up eight percent as a result. And that is important because as I started this conversation with brambles, they touch everything. If you move something, you move it, at least if you move something in Australia, you move it on a ship or Alaskan pallet. And if ships prices are going up because of inflation, it means the cost to move. Anything is going up. It's that silent cost input kind of like oil. It just it's in everything. Well, then 

Bryce: [00:09:11] that leads to the question will the pricing revert Ren? Will we see see it come back to where it has been? 

Alec: [00:09:18] Yeah, I don't want to say this is the most important clip of the episode, but it was one of the more revealing clips that I listened to when we were prepping for this. An analyst asked the question That's really on so many people's minds at some point. Is this pricing going to come back or is this a new normal? 

Speaker 4: [00:09:38] obviously very strong pricing in the half, as current availability remained tight outside of pricing for the homeless lines. Is there a mechanism for pricing to revert customers when availability availability doesn't prove or just do we think about this is the new high watermark for pricing. 

Brambles: [00:09:57] I think I'll go back and say to some things, which I think really two or three years ago about what are the environments where you could expect a lot of support for a higher pricing environment. And I think the three there are three things. One is you need to have rational competition, which I think we're seeing and and have seen for some time. The second is that needs to be there a balance between supply and demand. And if anything, it's sort of a shortage on the on the on the supply side, which of course we're seeing is significantly at the moment. And then the third one, which you said some time ago, was because to have a bit of cost inflation, of course, we're seeing that some extreme examples now. So if you put all those three things together, there's no reason to suppose that that the the support for elevated pricing is not going to continue for some time. Now, having said that, and I. I think when you look at the split between how we have increased prices, we're very clear that some of it is through the surcharge mechanism, which absolutely will reverse when the appropriately the underlying commodity price goes down. But the that the general price increases that we've been putting through the business over the last few years, those are largely reflects an increase in costs in terms of complexity of supply chains and having a better handle on on the relative cost. So for higher and higher risk, low risk lines. So there's no reason that those would go down. The only thing you would you would anticipate is if you start having irrational competition, a massive surplus of pilots in the market. And then, yes, that would put pressure downwards pressure schools. You can imagine the sort of the competitive dynamics changing, but we don't see that happening in the foreseeable future. And our objective is to continue to make sure that we are recovering costs to serve an inflationary cost. And at the same time, we've got to recognise that our customers are facing a huge amount of pressure at the moment. So what we're trying to do with on that front is whilst we're trying to keep them supplied as best we can, given that the scarcity of talent is also ensuring that we're doing our best on operational efficiency so that we're not passing everything through to our customers and trying to find ways of using technology to make the whole supply chain more efficient, which clearly will benefit everybody. So I think it's a long winded answer saying no. I think what we've achieved so far, apart from the surcharge phase, will be here to say the UK is quite a complex, quite complex situation. I think the other thing is really important and we've said this before the recent sort of shortage of pallets. We must also start showing our customers that we're delivering value in other ways. So to justify our premier position and that the other value we give them, the discount being large and having having the best network in any industry. So that that's something that spreads sentiment. 

Bryce: [00:13:00] So Ren, it's clear the answer to the question is not for a while at least the prices won't revert. The CEO thinks that these prices are here to stay. It is hard to see companies putting prices up, experiencing revenue growth without fundamentally changing the volume that they're pushing through the number of products and then reverting back. 

Alec: [00:13:23] Yeah, yeah. I mean, you know, when there's a duopoly of pallets here, you've got Red Laskar and Blue Ship. If they're both elevating their prices, you don't expect that to come down. So maybe it will mean competition comes in. Maybe some of the big retailers like Coles and Woollies will put pressure on them. But brambles seem to think that these prices are here to stay, and that's going to matter because they're an input in most things. 

Bryce: [00:13:51] That's it. So let's keep moving. Next one is UPS United Parcel Service. Over in the States, we're going to hear from Brian Newman, their chief financial officer, as he speaks to the Q4 results and some of the impacts that have weighed on growth. 

UPS (Brian Newman): [00:14:09] Consolidated revenue increased eleven point five percent to twenty seven point eight billion dollars. Consolidated operating profit totalled $4 billion, thirty seven point seven percent higher than last year. Consolidated operating margin expanded to fourteen point two percent, which was 270 basis points above last year for the fourth quarter. Diluted earnings per share was three point fifty nine cents, up 35 percent from the same period last year, and full year EPS was twelve dollars and 13 cents per diluted share, an increase of 47 point four percent year over year. 

Alec: [00:14:47] I Bryce let's go from that first clip of Brian Newman, UPS's CFO, to a second clip where he talks about how the business performed in these supply chain. 

UPS (Brian Newman): [00:14:57] Challenged conditions and supply chain solutions increased operating profit by $649 million, up sixty one point three percent and delivered operating margin of 9.8 percent 280 basis points above 2020 2021 was an outstanding year for UPS. Which brings us back to our outlook for 2022. Global GDP is expected to grow 4.2 percent. We are continuing to pay close attention to and manage through several external factors, including COVID 19 inflationary pressures, upstream supply chain constraints and labour shortages. As a result, we expect the environment to remain dynamic in 2022. Most importantly, within this backdrop, we will focus on controlling what we can control and continuing. To advance our strategic initiatives. And as Carol stated, we expect to deliver our 2023 consolidated financial targets one year early, so Bryce 

Alec: [00:16:01] my biggest takeaway from that. They expect global GDP to grow at 4.2 percent. 

Bryce: [00:16:06] Yeah, that is good. Ren great for everyone involved if if we do see that, but challenging times ahead. So Ren, we've done supply chain with brambles. We've set ups delivery and now we're stepping up it, stepping up the delivery side of things, going to Maersk. One of the largest, it's a Danish shipping company, one of the largest in the world. You probably would have seen their logo on the sides of many shipping containers. And look, we know that shipping prices have inflated considerably over the last year or so, and we're going to hear from the company as they discuss the forecast for 2022. 

Maersk: [00:16:46] We don't frankly have a lot of experience coming out of a pandemic, which is a challenge when we have to provide guidance. And for that reason, we have decided to be more specific on the assumptions for the behind the guidance than we would normally be. So our guidance for the full year 2022 is based on the assumption that we will have a strong first half, starting with the first quarter on par with the fourth quarter last year, and that a normalisation in ocean will occur early in the second half of the year as labour returns to work bottlenecks, open up capacity held up in port, congestion is freed up and new capacity delivered. Based on these assumptions, we see an underlying EBIT around $24 billion and underlying Ibid of around 19 billion and free cash flow of above $15 billion. In other words, a result very much in line with 2021 on the demand situation ocean. We expect that we will grow in line with the global market demand of around somewhere between two and four percent in two thousand twenty two. But also, of course, here the outlook is uncertain on cabbie's guidance. The expectation for 2002 22 to 23 accumulated capex of nine or 10 billion, driven by intensified growth in logistics and services. And these investments and Kepa's guidance for 2021 to 2022 remains unchanged at seven billion. 

Alec: [00:18:14] So Bryce a few big takeaways from that Musk clip. They think that the ocean supply chain will unwind in the second half of 2022, which is good means that we've got this story, this supply chain story lasting a little bit longer. And that does align with the commentary we heard from Brambles in the first clip, where they expect the supply chain issues to last into the start of twenty three. So the end of calendar year 2022 seems to be where a lot of these companies think things will unravel 

Alec: [00:18:49] cynically, they're wrong. No. Well, I was going to say maybe they just don't want to try and forecast beyond that. 

Bryce: [00:18:55] Yeah, I mean, it looks pretty, pretty silly to be, oh, star of 2024. Yeah, say everything online. 

Alec: [00:19:01] Yeah. Two other things that I took from that. So I think demand will grow between two and four percent in 2022, sort of in line with the global economy. That's in line with the UPS prediction for global GDP. GDP growth around four percent. So it's interesting you start to listen to more of these earnings calls and you start to see a lot of those numbers sort of line up a little bit. But the final thing was just free cash flow of $15 billion. Ocean shipping is a good business to be in 

Bryce: [00:19:28] if you're in the right one. It would be a 

Alec: [00:19:30] tough year in the in tough business to manage, like I couldn't imagine being the CEO of. Yeah, I don't even know how many massive container ships Musk run. Can't be too upset of $15 billion free cash flow and Bryce one point that wasn't in this clip. There wasn't related to supply chains per se, but was really interesting, so people can download the quarter up and have a listen. Musk, one of the most ambitious companies in terms of carbon neutrality and like greening their fleet, which is surprise. It surprised me for a container ship company. 

Bryce: [00:20:05] I mean, it's pretty rookie if they don't publicly say that they're making some sort of so. 

Alec: [00:20:11] But they're not just they're not paying lip service to it like they are investing big dollars. 

Bryce: [00:20:17] But are they actually changing their fleet or buying, you know,

Alec: [00:20:20] they're building, I think, hydrogen powered ships, or maybe not hydrogen. Maybe it was something else and was in the earnings call again. But yeah, they're building new ships and they're retrofitting old ships. They plan to be carbon neutral by 2040. I mean, the Danish. So you know, that pressure in Europe and that focus in Europe is a lot more focussed than anywhere else in the world, I would say. But it was pretty impressive to hear what they like. They were serious about it. 

Bryce: [00:20:48] Yeah, it's good. So. The next one, Ren Apple, a company that continues to just beat records quarter on quarter. It's astounding. Despite supply constraints from Covid, they've done it again. And here we're going to hear from Tim Cook. A couple of the big numbers today. 

Tim Cook: [00:21:07] We are proud to announce Apple's biggest quarter ever through the busy holiday season. We set an all time revenue record of nearly $124 billion, up 11 percent from last year and better than we had expected at the beginning of the quarter. And we are pleased to see that our active installed base of devices is now at a new record with more than 1.8 billion devices. We set all time records for both developed and emerging markets and saw revenue growth across all of our product categories, except for iPad, which we said would be supply constrained. As expected, in the aggregate, we experienced supply constraints that were higher than the September quarter. Before I discuss our results in greater detail, I want to first acknowledge the toll that COVID continues to have on communities around the world. In many places, case counts are higher and health systems more strained than at any point throughout the pandemic. On behalf of all of us at Apple, I want to extend our deep gratitude to the scientists, doctors, nurses and so many others on the front lines of combatting COVID 19. This is our eighth quarter reporting results in the shadow of the pandemic. And while I can't say it gets any easier, I can say I'm incredibly proud of the way our teams have come together and continue to innovate on behalf of our customers. 

Bryce: [00:22:40] So Ren, as I said, always delivers. Time and time again, record quarter 124 billion in rev up 11 percent virtually records across all of their categories by the iPad. Amazing stuff. 

Alec: [00:22:52] Not surprising. I don't buy the iPad now. The iPad has a place, but yeah, I don't pay it. Yeah. What's next? Yeah. All right. Let's move on. Let's not get bogged down in talking about the merits of different Apple products are next is a company that's close to my heart, my former employer, some of the best executives and capital managers in Australia, a company that owns some of the two the two best retail businesses in Australia. Bunnings claims Wesfarmers, and they are obviously feeling the supply chain crunch across all their retail businesses, but all in different ways. Interestingly enough, and Rob Scott, the CEO of one of Australia's greatest executives, talks about this in this clip here. 

Reporter: [00:23:40] Do you think there's a risk that these inflationary pressures are transitory and while the consumer's in a reasonably good place now and presumably could take some price increases if you do eventually need to start to lift price, the consumer's not in as good of a place and elasticity would be bigger. And you spoke a bit about margins, but would you be willing to tolerate short term earnings declines to maintain your value, your position across your retail business? 

Rob Scott: [00:24:10] Well, Michael, it's Rob here. I'll talk at a high level and probably there are slightly nuanced answers across the different categories and so forth. I think the first point to note is that the cost pressures are coming through in different ways, in different timings. And yeah, as Ian mentioned there, if you look at look at the result in the first half, there really wasn't given the very long lead time associated with a lot of Kmart products and the fact that we control the sourcing process. We didn't really see much in the way of pressures, but our cost pressure. But we are seeing it as we look a year ahead now. We can't predict what's going to happen beyond the next 12 months, but we do know that there are raw material cost pressures coming through in businesses like Bunnings. As Mike has said in the past, there there have been some very noticeable cost price pressures that have flowed through for various reasons, such as timber, timber, steel two to very common ones that we've talked about. And then Sarah has also talked about some of the constrained supply constraints globally around semiconductors and some of the cost pressure on things like in containers and in tech generally. So, you know, it's hard for us to predict what's going to happen beyond the next year or so. But we, you know, as I said, we think that this is going to inflation pressure will create some challenges for consumers. We are very confident in our ability across our businesses to deliver the best value possible in the market. And by doing that, we're confident that we'll be able to grow, you know, grow volume better than others perhaps would. And look, it's once again, it's really hard to predict what margin is, we don't we don't run our business by trying to back solve to a margin. We run our business, trying to set our set our prices at a level that's really competitive for our for our customers. And then if we get that right, given the overall health of the economy and the overall health of the Australian consumer, I think there is plenty of opportunity to grow margin Dollars over the long term. 

Reporter: [00:26:18] If inflation was acute enough to put pressure on earnings, would you tolerate short term earnings declines to improve market share and maintain your value position? 

Rob Scott: [00:26:33] It depends on a whole range of range of factors, Michael. I guess the point I'd just continue to emphasise is that there are two ways of approaching this in consumer based business. One is to be really focussed on short term margin. And I think having looked at many everyday low price retailers over multiple cycles all over the world, the companies that do that and try and know, try and artificially maintain a short term margin outcome, it generally ends up very bad for them from a shareholder value point of view. So we'll continue to manage our businesses for the long term. We don't get overly hung up by monthly, quarterly, even half year margin percentage numbers. We're very much focussed on growing margin Dollars over the long term. So I'm sorry, I'm not answering your question, but it just that's not, you know, we don't think of it the way that you're you're saying it. 

Alec: [00:27:26] So Bryce a few key things, I think to take away from there. But the headline for me is how Wesfarmers aren't going to be drawn on that short term margin discussion. They're, you know, focussing on the long term, focussing on growing their margin over the long term, just not willing to engage with the analyst question, right? Yeah, I'd 

Bryce: [00:27:47] love to hear that. Alright, Ren. Well, we've got Home Depot, Taiwan Semiconductor Manufacturing Company and ASML coming up. So before we jump into those, let's take another break here from our sponsors. So we went from Wesfarmers retail to now a great retail company over in the states, and that is Home Depot Ren, and let's hear from them about what they're currently thinking on all things supply chain and inflationary pressures. 

Home Depot: [00:28:17] My first question is on inventory. As you sit here, it's a little more than 50 percent over 2019 levels, sales up a little less than 40 percent. Just how are you thinking about that gap and and what the right level of inventory is as we move through 22? I know it was a comment earlier about landing product earlier. So just maybe talk us through the kind of the inventory situation where you sit right now and how you see that flow for the year. Are a couple of a couple of comments. I mean, first of all, we feel good about the makeup of our inventory. As John said, we we are working to bring goods in early to make sure that we're ready for spring. You know, that's our busiest time of the year. I think an important thing to step back and look at is we deliver 5.2 turns that turn level was higher than pre-pandemic levels, which ran for nine. So we feel really good about the inventory productivity that we have in place. Last year's five eight was off of a scenario where we just didn't have a level of goods for a good portion of the year that we that we wanted to have. And then finally, as it relates to the inventory, you know, as it's been referenced on the on the call here, we're in a still in many categories Red Storm like environment. The more goods we get, the more we sell. The merchants and the supply chain team have been working like crazy to continue to build inventory to find out what the high level of demand actually is. So we're kind of watching the productivity. At the same time, we're not concerned about the inventory build at five billion at all. 

Bryce: [00:29:55] So interesting Ren that they're feeling pretty good about their inventory levels. They're heading into the spring, which is the busiest time of year. The more goods we get, the more we sell. So they've been working under the pump and they're feeling pretty good. I mean, 

Alec: [00:30:08] Home Depot is in a great position at the moment. Like as they came out of Covid, there was that whole timba. You remember when timber spiked to stupid levels and like, they couldn't keep it on the shelves. But what we're seeing in the states is just a homebuilding bonanza as as house prices go up, as housing supply is too low and a lot of people are staying at home and renovating because they can't afford to move or because they're worried they won't be out to buy a house if they sell their own. So new home building home renovations. Home Depot Of course, they're not worried because everything housing is just so hot in America at the moment, so I wasn't surprised by how not concerned they were. This next clip, though, touches on some of the investments that they're making in such a hot market. And so let's let's listen to how they're approaching it at the moment.

reporter: [00:31:03] So I was hoping you could give an update just on the one supply chain strategy that you had discussed back at the Analyst Day in 2019. And what were you ultimately able to get done in those last two years? Adding species already is meadows. I mean, there were a lot of facilities that were planned and the capex outlook, and I'm sure there was some disruption due to COVID. So just curious how much of that capex outlook for 22 might include some of those one supply chain investments, 

Home Depot: [00:31:30] as Ted called out, Our supply chain is an important component of the ecosystem we are building to better serve our customers and drive productivity. As you know, the intent of our supply chain transformation was to build the fastest, most efficient and reliable delivery network for home improvement products, reaching approximately 90 percent of the population with same or next day service for parcel big and bulky and flatbed deliveries. Our original supply chain investment plan called for approximately 150 new facilities, and while many of these facilities will be complete by the end of 2022, some will take a bit longer due to the constraints we've seen as it relates to Covid and also taking into account our recent acquisition of HD Supply. In terms of our market delivery operations or Maddow's, we expect to have approximately 85 of the 100 that we plan fully operational by year end. In terms of our market delivery centres, we have a handful open today, but expect those will take a bit more time to rollout given the acquisition of HD Supply, which we require that we briefly paused the rollout in order to determine how. Could see HD supply assets would factor into our broader supply chain plans. This led us to the decision to rethink the scope of our MDC facilities, which were originally intended to carry the most delivered storage queues, as well as MRO's queues. We decided that we would leverage the Legacy HD supply network for our MRO fulfilment, freeing up capacity in our MDC so that we can better operate as a local direct fulfilment centre for store based SKUs. Lastly, in terms of our flatbed distribution centres, we expect to end the year with approximately 15 for about half of our intended goal. 

Bryce: [00:33:43] So Ren we did a Deep Dive on Home Depot a year or two ago and did speak about the thing as part of our community stock picture. Something made moment, maybe three years ago. 

Alec: [00:33:53] I think you did 

Bryce: [00:33:54] Yeah, and it was at the time that they were really putting a lot of this supply chain investment into place and focussing on home delivery and the technology. So it's good to say that it's starting to play out. 

Alec: [00:34:04] Yeah, reaching 90 per cent of the population with the same or next day service, that's pretty impressive. Yeah. You compare it to Bunnings, who, you know, I just gave Wesfarmers a massive rap about how good a retailer they are. Chill out. Bunnings was late to the the online and yeah, big time. 

Bryce: [00:34:19] Yeah, yeah, yeah. All right. A couple to ago Taiwan semiconductor manufacturing company TSMC, there's been a lot of pressures on these guys. Semiconductors have been in short supply, and we're going to hear from the company CFO about the demand and expected spend for 2022. 

TSMC: [00:34:42] Every year, our capex is spent in anticipation of the growth that will follow in the future years. We are witnessing a structural increase in underlying semiconductor demand underpinned by the industry megatrends of 5G related and HPC applications. In 2021, we spent 30 billion US dollars to capture the strong demand and support our customers growth in 2022. Our capital budget is expected to be between 40 to 44 billion US dollars on up to 40 to 44 billion capex for 2022. Between 70 and 80 percent of the capital budget will be allocated for advanced process technologies, including two nanometre, three nanometre, five nanometre and seven nanometre. About 10 percent will be spent for advanced packaging and mask made me, and 10 to 20 percent will be spent for speciality technologies. Our depreciation expense is expected to increase by low to mid-teens, 

Alec: [00:35:54] so Bryce in news that will surprise no one. Semiconductor demand just continues to grow and go from strength to strength. High performance computational systems, HPC applications, 5G. It's basically just like 

Bryce: [00:36:10] existence

Alec: [00:36:11] go. If there's one, if there's one industry that is just going to be the linchpin for the global economy for the next 20 years or longer, it's how much silicon can we jam into everything we make right now? Cars, fridges, phones, computers just get more chips in there. 

Bryce: [00:36:32] And then to close out Ren. Look, if we're experiencing a lot of demand for silicon and semiconductors, then companies that feed into these companies and supply the semiconductor industry, you would imagine, are experiencing plenty of demand as well. And one company that is experiencing that is ASML. I think they're listed over in Amsterdam from memory. And here we have got the CEO. Peter went in IC and he's chatting about the unprecedented demand that they're seeing and how it impacts the impact of COVID on their workforce and supply chain, 

ASML: [00:37:08] but also the reliability in 13 weeks, where close to 200 hours of continuous working without the system having to stop once. So Deep Dive extremely important for our customers and for our business, and we are working off a high maturity base which helps our customers to get more wafers out with an ever increasing complexity in the production process, where Deep Dive will also help, you know, see the what we call the overlays. The positioning accuracy from a Deep Dive layer to an EUV layer is getting tighter and tighter and tighter. And also, dare we make big progress to help our customers manage the complexity? Now I talked about wafer capacity, talk about output and what do you do in a market where we are significantly under shipping? The demand of the market, we have to basically give the customer more wafers. So how do we do that? We do that by shipping more systems and by making the system more productive. So when you look at this slide, you look at Deep Dive, it's on the left hand side and you've on the right hand side. We're planning to increase the number of units from 2020 to 2025 with 50 percent, but also make them more productive so that the number of waivers out is double what EUV. We're going to get twice the number of systems out. Yeah, and increasing the wafer capacity three fold because the productivity goes up. Now these are numbers that we are internally challenging.

Alec: [00:38:33] So Bryce, who would have known that a lithography machine, which is the machines that ASML make, just become the most important thing? I know. But anyway, that it is the joy for me of investing that I get to learn about these things. I remember the first time I ever heard about ASML and lithography machines. I wonder, was it the same for both of us? 

Bryce: [00:38:57] Nick Griffin, Nick Griffin, Nick Griffin best you've never heard of? 

Alec: [00:39:01] Yeah, yeah, yeah. And so people can go and listen to that episode. It's in our Equity Mates feed. But those first time we heard about the company, probably a year ago, a bit more. And they have just become so central to everything since. So it's great that we can hear directly from the CEO and from the company leaders. That's a big thanks to quarter to making these earnings calls that traditionally were so inaccessible on demand, easy to access from your phone with a whole bunch of other features around. So a good one to finish on a really interesting work. Supply chains. I don't know how I feel about supply chain and what it's going to do to inflation. It feels like there's a lot more to go in this story after hearing those clips. I don't know what you feel. 

Bryce: [00:39:48] Well, yeah, I think it's obvious that the companies are a bit unsure themselves trying to forecast, you know, forecast quite quite a fair way out. But there's absolutely no doubt that this is impacting a lot of the price inflation that we're seeing 

Alec: [00:40:04] in the yeah, and it's going to materialise if it keeps going like this is going to materialise in two ways, either. Cost inflation, you know, look, we're going to pay more for things or companies will allow their margins to fall. They'll wear the cost kind of like what Wesfarmers were talking about. So, you know, as investors, we might be paying more for things or the companies we own might say smaller profits. Some companies, like Brambles, might benefit. They don't have to do anything more. They just charge eight percent more for it. And so it depends on where your companies are sitting in the supply chain, how they're going to be impacted. But it's a fascinating I mean, there's always something going on in the investing world, and this is one of the big stories for the moment. 

Bryce: [00:40:45] Yeah, it is absolutely fascinating. So that brings us to the end of our episode. Thank you to quarter. Q you a TR icon, make sure you go and check it out. If you're interested in listening to many more earnings calls, checking out their reports, having a look at the transcripts, it's a great resource. Links to to download it and to their website will be in our show notes, but otherwise Ren where we're going to continue with our final instalment of earnings season next Monday. But this Thursday, we are lucky enough to be hearing from one of our returning guests, Tobias Carlisle, a deep value investor who for a long time has been slugging it out as growth companies have just gone an absolute tear. And we caught up with him and boy, was he in good spirits. 

Alec: [00:41:31] Yeah, yeah, yeah. So we've now I think we named him our US correspondent and our value investor correspondent. Yeah. So a good, good look at a different side of the market, one that we normally talk about. [

Bryce: [00:41:44] That's it. Can't wait. And thanks for your support. Make sure you right and review us if you can, and we'll pick it all up next week.