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Find the Bloomberg Markets Podcast on Apple Podcasts or wherever you listen to podcasts, and at Bloomberg dot com slash podcast. All right, a lot of economic data to digest this week on the inflation front, and you know we've got the CPI yesterday, PPI today. My guest to take away for a lot of folks is pretty darn good as it relates to the Federal Reserve. But let's talk to somebody who does this stuff for living. Jennifer Lee, Senior
economists and Managing director at BMO Capital Markets. Jennifer, again, a lot of inflation data this week, what is your takeaway?
First of all, good morning, and thanks for having me on.
My takeaway is that finally, finally, finally, all of these Fed rate hips are making an impact on inflation, bringing it down to that what I used to think was the elusive two percent target is finally starting to happen. By down a two year low for the headline PPI we saw this morning. I was just like glancing at some of the details, but looks pretty good.
Only up a.
Tenth for both the headline and the core and down to I think it was like three year lows or something for the year of your basis. So again, all those FED rate hikes are starting to kick in, and we're finally starting to see the fruits of their labor.
We're finally starting to see it, but we are still not at that two percent number. What do you think might be the catalyst to finally get us down to the FEDS desired inflation rate.
I think you will have to take well, first of all, just in terms of our FED rate outlook. I mean, we're still looking for that FED rate hike next or in two weeks, I guess on July twenty sixth. You know, even though we're seeing this, you know, promising inflation data, the fact that we just are still arising, running pretty hot. Job demand is still pretty strong, Housing is still has already found a footing.
Business investment is decent.
Consumer spend took the leave of breather last month, and but the month before that they're reading hot as well. All that sort of sets the stage I think for another rate hike in July, and this slower inflation data I think gives them the door to or gives them the leewage to sort of talk about moderating the pace of rate hikes, needing more time to assess that economic landscape that they've been talking about lately, and this will
do it. And of course, but keeping rates at these restrictive levels will help bring down that level back down to our inflation back down to two percent eventually. But you know, definitely not a rate cut story just yet, all.
Right, So that's kind of where I think the market's probably trying to go. I think the market is probably discounting, you know, a July rate hike and then you know, a pause again.
The question then.
Becomes how long is that pause? And is that a twenty twenty four event that we might stay at these levels of rates.
So our again first official pecast is just one more rate hike and that will be it again base case, but then staying at these levels, and so I don't think rate cuts are going to be a story until probably mid twenty twenty four. We used to talk about, you know, early twenty twenty four for rate cuts. But now we're thinking a little bit later, and that's because we're also shifting our call for that elusive slow down again.
So now we're looking for more softer growth.
In around Q four Q one now, so around that trend of the year, as opposed to Q three and Q four.
So you just can't argue with the data.
It's been very resilient overall, you know, it's again difficult.
To argue with it. So we're pushing out that that slow down a little bit by quarter.
Yeah, and another thing that you note is that the greenback is struggling a little bit following some of this economic softness, hitting a fourteen month low. I believe to what extent is dollar weakness part of your calculation for what our economy is going to look like in the second half of the year.
The US dollar has been or had been running super strong up until you know, yesterday, and so we're finally going to see that dollar week to start kicking in, and we're seeing it. And it's also helping because a lot of the other central banks are not yet ready to hit the pause button just yet, you know, aside from the bank handa, you know, I think we're they're probably that's probably it for the Bank Canada for the for the rest of this year. RBA looks like they're
almost done. But you've got the ECB in the Bank of England or is still going whole hog on that rate tightening front, so that's also going to boost there. That's so that's also helping their their currencies the same time with the flip with the flip side of the weaker greenback.
So can we take the recession talk off the table right now?
Official recession? Yeah, it's possible.
I mean, we've always been in that soft, soft landing, mild recession, moderate recession camp, but.
We were never in that hard landing camp.
And now I means it is quite possible that we will see and some people always say, what the heck does that mean?
But you know, no landing. At the very beginning, I used to say landing.
Soft landing, no landing, And it's possible that we could start seeing things glide and you know, like nothing is impossible, but this is kind of looking more possible. But at the same time, the longer they able rates up in the in that restricted territory in order to get CPI back down to two percent, we will probably need to have that breaking in the economy.
Well, there's the recession for all of us, and then there's the markets, right, and they don't always agree. Do you envision us seeing a little bit more of a risk on trade in the second half of the year after the Fed does potentially start to tone down and soften the rate height cycle that we're seeing.
We could see that's a good question.
So we could see risk on because of the fact that the Fed is going to stop start talking about leaving rates as is more firmly as opposed to talking about needing more time. But at the same time, why are they talking about needing more to aura staying on hold is because the economy is finally starting to slow and again this is when you're going to start to
see softer data. We're starting to talk about the debt recession again, or at least that soft landing coming into play in the fourth quarter or so.
So it's it's gonna be a little a little bit of mix.
I don't know which one is going to oweigh the other, because again, yes, it's good news for the markets that the Fed's not going to keep tightening, but at least at the same time, it's bad news because that means the economy is slowing and it's not needed anymore.
So I guess one of the issues for a lot of investors is just kind of you know, we think beyond twenty four, I mean, yeah, beyond twenty three into twenty four to twenty five, what kind of economic growth do you think is reasonable for an economy that has dealt with this much inflation?
So we're probably going to see at least some sub below average at least for a little while. So we you know, for this year, we have about one point seven percent growth, and that was a little bit higher than we had originally because of this delayed slow down. But for next year, we've got I think it's a half percent growth, which is obviously very sluggish. And then for the year after we're going to start seeing some
improvement as the rate cuts start kicking in. But again, I think we're probably going to see some sub average growth at least over the next few years.
And where do you think that that sub average growth is going to be the most prevalent in the coming years.
In terms of where? By by country or.
Yeah, yeah, like in terms of demo and geographic.
So I think the US will probably be just again because America is you know, it's still going to be the strongest with all the different positive fundamental factors behind it. I think the US will still emerge, probably stronger than emerge at a faster pace. I guess from this recept from the slowdown than everyone else. The areas where I'm going to be a little bit more worried will be Europe and the UK, only because you know, they've already had the other issues you know that are not related
to pandemic, you know, like Brexit for example. At the same time, you also have higher inflation and higher interest rates staying longer higher for longer there, and they're again they're still going a whole hog on tightening front. I think the ACB minutes today we're alluding to the fact that you know, there are more governing Council members from
the ACV are thinking about September. I think it's a bit early, but you know that's something that you know, it's becoming more of a reality, possibly in the next in the next little while.
Jennifer, you also got another initial job as claims number today came in better than expected, uh and showing a decline from from from last week. Again, just another data point on what is kind of a very solid labor market. What do you make of this labor market? Is this surprised you at all?
The strength.
Broadly?
No, And then I mean it's still strong. At the same time, it is starting to soften, you know that. You know, two hundred thousand, nine thousand increases that we saw on perros was still below expected. But like I said before, any during any other given year, it's still
a very solid number. But I think there are still some other issues that are coming in play, like again demographics, people retire, changing retirement patterns, people retiring earlier, people having the fewer kids, you know, so all and of course the aging of the of the of the global population. All that feeds into tighter lot but labor markets. So this is an issue I think that's going to be
playing on for some time. It's not going to be like what we saw earlier, like half a year ago, but at the same time, it's not going to be.
As loose, I guess, as you know, one would expect. It was interesting. I was looking at the NFI the survey earlier this week.
I was looking at like over the past decades, Like you know, the they were talking about the single biggest problem that you're reporting. So over the last decade, I think the inflation. Of course it was like up and down, but overall it was still pretty modest, being the inflation being the number one problem, but.
Labor market labor quality was like still owned around the.
Yeah, Jennif're gonna have to wrap it up right there just because of the time, but appreciate getting your thoughts. Jennifer Lee, Senior economist at BMO Capital Markets.
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Tech Talk Today a good one.
We have folks at Huawei Technologies Steve Geisler, US Chief Intellectual Property Council and Andy Perty, Huawei USA Chief Security Officer. They joined us for a roundtable in Huawei's twenty twenty three Innovation and IP form at its Chinese headquarters today. Steve, before we get to kind of what you guys are doing at your forum today in Shenzhen, China. Talk to Steve what it's like at your company dealing with sanctions, just particularly the US. How has that impacted your business?
So my business, I'm a lawyer within the Huawei corporate family, so for me personally, it means more work.
It does.
However, me as an American, I have to always be mindful of the export control and the distanctions laws. Because I work in intellectual property. That does, of course put some constraints on me. But by and large, my day to day job deals with patents which are publicly known.
Of course, the word patent means open, so I deal with technologies once they've already become public, and I deal a lot with licensing with other companies, and so my day to day job is not impacted nearly as much as if I were, say an engineer working within the Huawei corporate family.
Okay, well, because you're a lawyer, I know that you are not going to answer this question, Steven, but just to throw it to you, what does Huawe's return to the five G phone market look like? And what does the smartphone business continue to look like for Huawei given these sanctions?
I will definitely give you the lawyerly answer, but the correct answer. My job really is not to predict it. It's just to prepare. So if Huawei were to return to the five G phone market, I need to make sure that we have the licenses in place, such as the five G Standard Essential Path licenses with our licensing partners to make sure that we would allow for that. Quawei previously did have five five G phones, so we have most of those patents patent license agreements already in place.
So I my part, my role in terms of preparation for such a contingency is already underway. But in terms of predicting and in the sales visibility of our product mix, people like Andy certainly can can address that.
But for me, I prepare.
I don't predict, all right, so let me job.
So Andy, let's let's let's bring you in here.
Andy Purtty, chief Security Officer or Huawei Technologies in the US. Talk to us about what you guys are doing, uh with this innovation in ip form in Shenzen today. What are some of the big products and services you guys are talking about here.
Yeah, this is a part of our bigger effort that you touched only with Steve A moment ago. Given the situation that we face in the United States and around the world, we've been trying to and we've been successful at adjusting our business strategy and changing our portfolios with a huge historic investment in R and B over twenty five percent of our global revenues, so that we can customize our products for our carriers, our enterprises, and our consumers.
But the three key things of technology that we are embracing that are part of that are digitalization, intelligence, and carbon neutrality. So our focus company has been on connectivity, computing devices, intelligent auto solutions, and digitalization of power. And you can see that in the example we talk about AI, the pengu Ai three dot zero that we're going to be talking about in this conference, which is heavily focused on weather and the Nature magazine has just issued a
major article about weather prediction. It's very exciting about how AI is making going to make every industry more productive and efficient and it's going to reshape all industries with a focus is really on industry industry AI.
So Andy just.
From the technology standpoint, the commercial standpoint, what are your leaders in China telling you about, you know, kind of their strategy for dealing with the West, whether as customers, as supply chain, what scenario you're operating under, like how you create a three to five year business plan.
Well, as I said, we have, we're leveraging the convergence of technologies five G, cloud, censor technology, AI, catalyzing the digitalization of industries that we've been working on, and actually moving toward five point five G, which is some of the other things we're going to be talking about today.
So we're heavily investing in what we can do in terms of develop technologies to help the telecom carriers raise their capabilities to supply five G and hopefully five point five G, and to help the customers and industry spectors around the world, such as you can see the benefits the Panglo three dot ZHO.
So, given that, I'm curious if this kind of overall push into IP licensing, does that mean that your focus is more on back end technology versus more consumer facing products.
Steve, you may want to touch on this also, but no, it's the smartphone issue has been what was dramatically affected the ability of American companies to sell the nonsensitive five G five G chips for our phones. So everything else we've been emphasizing with the digitalization, and we've been able to our enterprise business by thirty percent in twenty twenty two.
Using the themes of digitalization and digital transformation. We've leveled off that drop in our consumer business and we expect our carrier business to meet expectations.
Steve, you have any thoughts there as to kind of how you guys are navigating some of the from a patent perspective.
Yeah, so, as any said, so, the IP actually is somewhat detached, and that's not completely detachedble we typically are going to be patenting the same technologies that would be in our product mix. However, just because we don't sell a product in the United States does not mean we're not going to get a US patent.
So, for instance, as of the end of.
Last year, we had one hundred and twenty thousand patents globally that were active, including about twenty two thousand active US patents. We had about forty thousand Chinese and European patents each at the.
End of last year.
But in terms of the patenting, we just for instance, Wi Fi six, which is the new version of Wi Fi that is now being commercialized that's out on the market. Quawei has about twenty percent nineteen to twenty percent of the standard essential patents that would be used when someone is making, using, or selling a Wi Fi six enabled product.
So that is the type of R and D that as And said, we actually have increased R and D funding up to twenty three billion US dollars last year alone, and so Bawa has no choice but to continue to innovate and still has product sales. However, those products sales geographically, the footprint has changed since five years ago, and also the product mix. There's a different focus for sure within various industries.
Andy, in our final minute with you here, given what Stephen was just talking about with ideation and R and D, what do your plans look like for five G chip procurement domestically in China.
Well, we have.
Been continuing to emphasize the diversification our portfolio of our supply chain so that we can meet the needs of our customers. I don't have any comment yet on the explosion of news stories on what we're talked about, but we are proceeding on the assumption that we have certain limitations and we're going to continue to grow our businesses in other areas such as small finding, smart roots, smartboards, electric power railway and moving into five point five, which
is very exciting. Frankly, you know, when you talk about the one piece of the technology innovation our leaders of Ken who are vice chairman, is estimated we look at AID ninety eight percent of all AI is going to be industry and some agriculture, and only two percent is consumer. And the focus recently has been on consumer, the generated AI, but it's going to be much more important than that to the world.
All right, Andy, thank you so much for joining us.
Andy Purty, chief security officer for Huawei Technologies in Steve Geisler, US chief Intellectual Property Council, and I know both of these gentlemen got their law degrees from the University of Virginia.
So wahu wa.
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We're welcoming Randy swimmer into the studio as well. Always left chatting with Randy.
He's co head of senior Lending and he's a senior managing director Churchill Asset Management. Randy, one of the many reasons we love speaking to you because you're an expert in this private credit business out there, which has been such a hot market getting lots of capital and has really become a big part of the capital market. It's
really passed since the Great Financial Crisis. How is your business today in what appears to be a market that is seeing inflation moderate maybe taking the recession story off the table a little bit.
How's that?
How are you seeing that in your business of directly lending?
Yeah, first of all, thanks again for having me on. So I did some homework just for you, Paul. So looked for the first half numbers for our business to sort of get a sense for how we're doing. Turns out, and we have a senior debt business and a junior capital business all with you know, under the Churchill banner. We did one hundred and seventy five deals in the first half of the year. Okay, five billion dollars across those two platforms.
Right, So, I was like whoa, that's your firm, by the way.
So we're like total committed capital of about forty six billion, and then you throw our Arkmont sister company in Europe, they're another twenty twenty five billion, so you know. But the thing that surprised me a little bit is that despite a lot of the softness in M and A that we saw on the first half, what's driving our deal flow is the kind of migration from public credit to private credit because the banks have been a bit
offline with some of the liquid loans. They don't have clearing price, they don't have COLO formation, a lot of the cache is coming out of retail funds not going in, and so they're a bit offline, and so a lot of that activity has come to the direct lender, so that's helping us. And then we have the scale we can commit you know, four or five hundred million dollars per deal and get stuff done. So those combinations of things makes it right now pretty attractive.
So so back when the FED was a zero in the ten year, wasn't even at two percent, the demand for private credit from investors was very high because a huge, huge premium with not a whole lot more risk for better returns. Now that you get five percent plus on corporates and unis are not that far behind, how does that affect your investor base? What are they looking at in the world of private credit as a as an asset class.
So Barry, that's exactly the question that comes up at these investor meetings, and the answer is that the opportunity in private debt is not necessarily a timing thing, because to your point, it was very attractive two years ago. It's more attractive from a pure yield perspective today relative still relative to corporates. The question is how long will
that attractive corporate and high yield bond trade last. If what Paul says, it's true, and we're starting to see a little softening in the numbers which we saw today, and it looks like the FED might you know, maybe they raised once, maybe they you know, maybe once and done. Then at some point rates are going to start to
come down. What's going to happen for investors who are looking for long term income streams is they're going to see those corporate bond rates start to come back down again, and eventually whether it goes back down to where bonds were kind of three to four percent the way they were two years ago or something in between where they are now. It's going to come down. Whereas the illiquidity premium that investors in private debt get has been the
same throughout that period, roughly three hundred basis points. So whatever liquid is getting, we're getting three percent more.
We've been discussing the window that has been opening up to extenduration lock in higher rates after the better part of a decade of you know, bonds not really generating a lot. Suddenly, whether it's private credit or corporates vis this whole asset class has become a whole lot more attractive. But who knows how long that window is going to be open.
For correct And so the thing about private debt is that you can trace the higher yields and better structures and all the things that you know back for decades. So the opportunity really isn't a timing issue. It's more of a strategic issue. You decide that you are going to have some part of your portfolio always in private debt. And so what we're seeing now with our investors and increasing number of them are saying, you know, I want five, ten, fifteen, percent,
whatever that number is always in my overall portfolio. I have room for fixed income, I've got room for public equities, I've got room for real estate, but I really want some core assets in private debt.
But does that allocation start to change as people maybe get a little bit of FOMO for things like an AI rally for example.
Well, what's happening in the public market is that things will come and go depending on where the current trade is. To your point, and we saw obviously rally and technology stocks and so forth. But what happens is depending on what's going on with the rest of the economic climate, some of those opportunities tend to fade. We certainly saw that with crypto. We've seen that, you know in other areas, the Spack rally for example, that we were talking about
here in the studios a year or two ago. And the thing that investors really want to focus on now is stability. Okay, so yield is great, but stability of income is even more important to them, and so going into it with an manager that has a track record to deliver these stable, higher returns is probably foremost in their minds.
Right now, what sectors do you guys like these days he did a Conjigian transactions in the first six months, or some sectors you're you really like here, or some of you're invoiding.
I know you're gonna ask this question, and so I went back and that by far and away, it's business services because things that companies like landscaping companies. I like to use this because regardless of whether building is occupied or not, you still have to modilawn, plow the snow, had you trim the hedges, and so landscaping escaping companies because they have to be there. Twenty four to seven
alarm companies, same thing. Security businesses, anything where you have consistent cash flow and growth over a long period of time. Those are the kinds of companies we like. Healthcare, technology, software,
logistics businesses, anything that requires moving boxes around. Right now, I mean, I don't know about you, but my family's ordering more boxes, delivering to the front door, and all the support, the back office, the middle office related to those kinds of businesses are doing well right now.
Really quite interesting. You know, last year, before we really had a firm grasp of exactly how fast and far CPI would would fall, a lot of people piled into private debt, especially with a lot of younger companies. You guys have been around for a long time. I'm wondering how you look at the competition in the space and how many people kind of top ticked the market last year.
Yeah, So one of the questions from a credit perspective is, you know, did you go in with companies that are now hurting as a result of some of the dynamics inflation wise you've talked about. And the advantage that we have is that we are we invest only with private equity backed companies, and so the amount of cash equity that they're putting into these businesses is like sixty five percent of the total capital structure, which is a record high. The other thing is, you know, they have their own
money at stake. They're helping us to find the best companies, and even in that universe, we're still just kind of picking the best of the best. So we see a thousand deals a year and we do sixty and so from that perspective, what we're looking for is to sift through the ones that don't have that long track record, sift through the ones that are not cyclical, that don't have customer concentration. We just turned a deal down this morning. Because the business has only been around for five years
and had customer concentration with three main customers. If you lose any one of those three, you're in trouble. So our job is to really pick winners.
I understand your tennis fan.
Yeah, going to Wimbledon this weekend, are you what are you gonna What are you gonna say?
Women's finals, women's finals, Yes, sir, all right.
We had one of the semifinals that just got done earlier, so we have one finalist in there.
It's funny. That should be great. That's have you been there before.
I've known this my first time.
It's awesome. You're gonna love it.
I'm not playing, but I launch all right, very good.
H Randy schwimmert cohed of Senior Lendy and he's just senior managing director Churchill Asset Management.
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We are really excited about our next guest here because we've got Laura Mody coming on. She is the CEO and co founder of Bobby. This is an infinite formula company. It's organic. They've got some big name investors on the list here with Gwyneth Paltrow at twenty two million dollars, and we're excited to talk with them, Paul and Barry, because they've got some big news for us, this company
acquiring Nature's One. We don't have the exact details in terms of the finances here, but it was a seventy million dollar Series C round of funding to acquire Nature's One, and this is part of their overall strategy to kind of diversify their holdings here.
So I think we have Bobby.
We've got Bobby CEO on the phone here, Laura Mody. Thank you so much for joining us, Laura, as I was just explaining this acquisition of Nature's One.
How does that acquisition.
Factor into your our strategic push to increase domestic access to infant formula here in the US.
Yeah, Hi, lovely to be back with you guys again. Look, this acquisition is so much greater than Bobby and Nature's One. The significance of our two companies coming together is the biggest diversification move in the history of USNS and formula and after last year's shortage, this is what the industry needs. We need more competition, we need more options, and this allows us to be able to serve more of the market over the coming years.
So what does Nature's want do?
So talk to us about this distract what this company does and kind of how it dovestail dovetails in with kind of your business at Bobby and the baby formula delivery business.
Yeah, so nature is One is actually you know, pioneers in the world of organic impurity. They've been around for the last twenty six years. They've spent the majority of their time and focused on the popular formula. I would actually refer to their founder and CEO really as the godfather of formula here in the US, an organic formula.
He had the foresight back in two twenty and nineteen to build a state of the art infant formula facility in Ohio, and he had no idea what would come in twenty twenty two when we were hit with the national infant formula shortage. But in twenty twenty two, at the end of last year, it got completed and he became the first new infant formula facility to be built in forty years from the ground up.
In the US.
Laura Barry Riddholts here, So it sounds like putting together a couple of these parts. You're going for scale so that if there is any sort of disruption in the future, you'll be able to meet consumer demand. How large do you have to be to avoid the sort of problems that we saw during the pandemic and the lockdowns.
Question.
This is not just about and building one facility and calling it a day. We need to build redundancy. This industry needs resiliency so that we don't go through this again. So today we've been using a contract manufacturer to make our product, and we're going to keep doing that. We're going to double down with them. We're going to stay with them longer while we also build the resiliency to get our own facility up and running to also produce more products. The downside of last year was that there
was few facilities making too few products. So when one of those facilities is no longer able to produce product, we're going to be experiencing a shortage. Now, I will admit that Bobby is not going to be the cure solution to ensure that we avoid this. But I'm going to do my damn best to make sure the Bobby's never in the center of another shortage again.
And as many of our listeners know, we started speaking with Laura back in the pandem again when this shortage came to the fore and we needed to get real smart on the baby formula business real quick, and Laura was kind enough to speak with this several times during that process. So it's great to see Laura and Bobby continue to grow here. So Laar, give us the lay of the land today. How have things changed in the greater you know, baby formula business as it relates to logistics.
Are we in a better place today than we were you know, a year ago, two years ago?
Well, i'd like to say chester yesterday's acquisition, we are. The shortage itself is beginning to subside, which means shells are getting stocked and there's access to more formula, but it's spotty, and it's spotty because consumer buying behavior has also changed, so there may be some shelves that remain
out of stock while others are plentiful. What we need to do is we need to adjust to this changing landscape and consumer behavior, which includes what are the products that they need now and where do they need them? That I would say is we're still somewhat in a crisis. From that respect. The other thing that hasn't changed is we're still putting out products from the same few facilities.
We are not in a position of the country where we can turn around and confidently say that it's another bacteria hits the facility that we wouldn't be in this again. I actually think we are truly one bacteria away from having another shortage like last year, and the only way to get out of that is through the incentives and investment made in further domestic manufacturing.
In our final couple of minutes with you, Laura, I want to switch gears a little bit because I'm so interested in your history and your previous life before Bobby, when you were working at Google, and you've talked about day trading as an important part of your time there that helped you to buy your first home, and that's why it was so important to you to kind of open up investment into Bobby for women in particular, talk to me about the other ways that being a trader
yourself has impacted the way that you run the business.
Great question. Did not see that coming here.
I'm a big fan of the Cut because I used to work there, so that's where I'm getting that.
I love it. Look, my passion is really in women having financial independence, and I think in a lot of ways, whether it's trading or just understanding the financial system, women are often left in the dark and behind. It can be sometimes seen as an old boys club, whether it's from the nomenclature to just the tools that exist. So one of my deep passions is making sure that we're in we are growing a business to allow women to become financially savvy, and you see that in many of
our practices today. One of those is that I think it was in our fundraise for our series day we opened up a small portion of the round to allow our own customers moms to invest in the business. And instead of how having a minimum dollar to be able to put in, we actually created a cap that allowed several hundred moms to be able to invest in business.
Yep, that's a fat, I mean fascinating story all around here. We're glad we get to stay in touch with you, Lara and keep us up today. What's happening in your business and your industry? Law Mody, CEO and co founder of Bobby.
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We'd be streaming on that thing called YouTube.
Just go to YouTube and search Bloomberg Global News and that's you get the video feed there all right. The absolute top media analyst on Wall Street in my opinion, and it's an informed opinion. Michael nathan SI, founding partner and senior Research Channels at Moffat Nathanson joins us via zoom. Michael, thanks so much for taking the time. I got to start with Disney. You know, back in the day, I told a professor Buddy Mine and Harvard Business School, I got a case study for you how to really do
an effective UH succession planning? And that was Bob Ayger the Walt Disney Company. I'm thinking the Tom Staggs Jay Russolo set up that nice race.
We thought everybody on the street was happy with it. We thought, boy, these are two good people.
And then it didn't work out, and Bob kept extending and extending, and all the executives left and here we are again. So what do you make of what's going on at Disney?
Yeah, thanks Paul, pretty nice, nice comments. That really means a lot, So thank you for that. There's a lot to unpack here, right, So start with where you began, which is believe or not. There's there's not a bench yes year that's ready to take over leadership. I think part of it is that the company is in such different businesses in different birth life cycles. Right. So Parks, the guys you mentioned stagger In Resulo you know Staggers a CFO. Rosulo was the head of Parks. Parks has
a different type of business model than Media. Now streaming is their their big bet is. Streaming is a completely different business model. So it's such a broad set of assets, and you need someone who's who has got creative sensibilities or trustworthiness. It's it's a hard job. But to your first point, yeah, it's kind of amazing that this lead into it. There hasn't been a bench of emerging candidates besides Bob Kaipik in hindsight, was the wrong person. We
thought that almost right away. So that continues, right the hunt for the next executive continues. We've got more time on his hands. But that's just part of the story, I think.
And so, Michael, the bigger issue, well not the big issue, but the operating issue for Bob Byger and the management team is, boy, how do you manage this transition from the traditional business where you had cable companies and salt companies, you know, giving you a steady profit, to now the streaming business where the economics are really uncertain. Let's start with ESPN. What would you recommend to Bob Eyer on the board that they do with ESPN?
Yeah, so Paul started ESPN and is right. You know when you covered the stock way back when it was it was a driver of free cash flow and the driver profitability ESPN and you'll laugh if and to us a it's really unclear how ESPN could work on a standalone basis as a drifting consumer service. Right, the price point has to be quite high, the will be more
seasonal than it is now. We think the best idea is to either create a sports only bundle with other sports led programmers, or put sport into the Disney plus Food bundle. Right, so you either have to go all in on sports or use sports strategically. It's unclear at this point what Disney wants to do. I think they really want to maintain an ESPN brand as a standalone APT we think, but even today when Baba's was talking about it, it's unclear what the path looks like going forward.
We studied ESPN for a long time, you know, we used to be more sanguine about the future of ESPN, but cork cutting has gotten so bad and a cost of sports keeps rising that it's not an easy, clear answer that you you know, for your question. Our best bet is to try to keep the bundle alive by shrinking it down to sports only. When hit the bundle, what remains the PATV bundle, So shrinking down to sports only.
So when you talk to institutional investors, Michael just about you know, the big media companies, how confident are you that they can make this transition broadly speaking, the industry to a streaming economic model. Because if I'm an investor, I'm like, I just don't know, and as a result, I'm not going to invest.
Yeah for people, So if you're head our work, we had a Noe doubt today where my partner Robert Fishman covers a lot of media names equated today's linear TV to radio and exactly. And it feels like that, right, Paul, where the uncerting, the uncerting index is so high for the future and the pivot here seems so complicated that we're finding just a lack of interest even for Disney. Right, So we upgraded Disney when Box came back in ninety, Bucks stock went to one twenty. That's our price targets
back to ninety again. But even Disney has lost kind of the goodwill of the instrutional investors that are out there, Right, So there's just a lack of interest here, like radio, which is a sad commentary. But a lot of this, Paul and I've talked over the many years, has been self inflicted. Right, didn't have to be this bad. They licensed their content to Netflix. They then all pivoted hard to streaming without much thought about profitability, and they've killed
the golden goose. Right, It's really sad, like, there'll be a textbook written about how this was. You know, a lot of this was self inflicted in terms of the wounds in the industry.
I think in your next life you can write that book in your spare time. Michael, Hey, let's talk about a name that just jumps out of a lot of investors, maybe of some interest, Paramount. What does this company do? What does Sherry Redstone really want to do with this company? Because you know, we kind of thought that they didn't have this scale before. Nothing's changed, maybe even it's become more pronounced that risk.
No, so we and Robert has a we have a sell on Paramount. You may be shot to know or not know that they generate no pre cash flow and they're highly leveraged. And the bullet caase is simply that someone is going to buy them. Yeah, you Warren Buffett's an investor, and like that's hoss. Like if that's what you have as a bullet case, and then we're worried about it. We think just they're over leveraged to cable networks, the lack of profitability and streaming.
It's just a.
Tough hand they have. And I think, you know, they just got to give them a quarter, and I think if you moved to like this arms dealer or you start selling your content, I'm not sure there's a there there. At the end of the day, eventually you're seeing Netflix, Amazon, Apple make their own content. So maybe they'll buy the mission impossible. Maybe they'll buy, you know, the top gun from you, but they won't license all your content because they don't have to anymore. I think you picked that one,
and that's a tough handpong. We're quite negative on the outcome there.
Hey, Michael, this is Madison a question about this, and it's funny.
I was talking to my friends last.
Night who all really hate the paramount app so not a great sign for them. But when you look at a Netflix in particular, they've really gone all in on creating this really cheap reality TV content that can.
Air for them and does really, really well.
Disney doesn't really have an option for that necessarily.
Do you see Disney.
Going into a cheaper content creation strategy in order to compete with the likes Netflix.
It's funny. We've studied that question by looking at Netflix. Netflix the viewership that eight and ten percent of the viewership would be unscripted reality every every month, every quarter, eight ten percent. It's not a big number, but to your point, the stuff they have probably out punches, you know what the costs are making it. Disney has National Disney Plus, is that Geo Whoo has The Bachelor. Our vision is that at some point Disney Plus and Who
will get combined. Now Geo really hasn't sparked. It looks like the same level of engagement that Netflix's reality shows have. But we think that at some point when they combined Disney Plus and Whulu to your comment, didn't have to lean more into unscripted reality. You know, again the Bachelor, it's made by warners, but it's it's a good observation. The opposite side, Warner Brothers has now Max has great HBO stuff and now all the Discovery content. They probably
have almost too much reality programming there. So as I think Netflix has figured out the perfect blend, I think to your point, others will have to follow that blend.
And if there isn't enough headwinds for just strategically for the industry, now they've got, you know, potentially a pair of strikes, one from the writers and now potentially one from the actors. Boy, how big of a problem is this for the industry? Michael, do you think these things get resolved.
I think it's a huge problem. I think it's happening at a time of great difficulties for the industry, a kind of structural change. The directors have settled, the writers have not, and the actress likely will go on strike. I think it's gonna be really damaging. And the problem, I think is that the sides are so far apart, given that the writers are still in strike and the economicy industry is we've just talked about it really really challenging. So I think there needs to be some realization that
the music common ground here, something has to give. I worry that this goes on through the summer is going to really affect the fourth quarter and all the new programming for broadcasts and some of the broadcast networks that we cover will be in a really bad position. And it's also going to hurt streaming companies that are looking for new, fresh content by the first half of next year. But it has real implications here. But it doesn't seem
to us to be settling anytime. In the fact, feels like it could drag on Paul, which is not It's not a good outcome for anybody.
Hey, Michael, just lastly, love to just get your your top pick here. What are you guys in your team kind of out there with your clients.
Okay, So in media all separate media and Internet, right, so we keep adding coverage, So Robbins Media World, our top picks would be Fox because Fox is just sports and news, and Disney for a larg term view that ninety bucks I share. You know, if Bob Ayer can be successful, you know, we think there's thirty dollars of upside, So Disney Fox top we have paramounts is short. In Internet, we keep pushing Meta has been a really great nice year for us and Alphabet because we think the AI
fears the chat, GPT killing Google Search will overstated. So you know, we stay with those behemoth and you know that's been an easy call. And we think that there's this real dispersion of digital advertisements going to put up really nice growth and linear networks going to have a early heart iime growing Paul all our radio back when when you and I were young, we were younger men.
That's right, exactly, all right, Michael, thanks for giving us a couple minutes of your time. We really appreciate it. Michael Nathanson again one of the the the top analysts covering the media space, or just in a Wall Street and General founding partner senior research analysts at Maffatt Nathanson.
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We had some arnings today Pepsi. I'm a coke guy, but I'm just as happy drinking Pepsi. I'll be honest with you. I have no real loyalty Ken Shay. He does this stuff for a living. He follows all these consumer companies. He's a senior equity analyst to Bloomberg Intelligence. Ken, thanks so much for joining us here on zoom What did you learn from Pepsi today.
Hi, Paul, Well, we learned again the power of Pepsi's brands. You know, I think everyone respects their brands and their ability to pass on price increases. But I think there may have been some underlying skepticism that it could continue for so long, and it has, and you know, the second half of the year, the company is mentioning that commodity costs may ease a little bit, it may not be as aggressive with pricing. I think that's giving people
a little relief. You know, pricing has been in double digit for a while now with this company, but they're investing in the brands. So what we learned is that the company has really powerful brands. They're not afraid to invest in them and price accordingly.
And to what extent do you see that price power, pricing power continuing through the second half of the year, because in the last earning cycle they were sort of like bragging about their ability to increase prices.
Is that going to keep happening?
You that's the million doile of the question. You know, I'd be reluctant to bet against them, though, you know, this earnings report was their eighteenth beat in a row. They have an ability better than their peers to manage their volume and pricing such that revenues keep coming in strong. They invest quite a bit. Their capecks is a little bit higher than their peers, but they invest or a manufacturer, they own their bottlers too, They invest in productivity. It's
really showing in the bottom line. So if they can continue that top line strength and can continue to what they're doing in the second half, then we're looking at you know, another high single digit kind of EPs gain in the second half.
Hey can this there's still any vestages left of that old Cold war of years gone past, and they still fight for market chair Coke and Pepsi or is it kind of fizzled out for lack of a or.
Well, you know, they they don't speak about it that much, PepsiCo market share because they really are a full, you know, sweet portfolio beverage company, whether it's the Gator Raye sports drinks or now they're investing heavily in energy drinks. The juice is still tease now alcoholic beverage, you know, a venture with Bustin Beer. It's small, but they don't get caught up too much in the carbonate cola aisle share like co Cola is much more concentrated in as much.
All right, we've got like twenty seconds left with you here. But in those final twenty seconds, I did want to ask you about.
The downside of the dollar. Do you think Pepsi's incredibly excited about that? Or am I overblowing that.
A little bit?
No, you're not. I mean is it's been a Kurche's been a drag for the last all year two or so. You're still seeing a modest drag in the in the second half. They may be a little conservative given a dollar weakness of late, and we think there's still gonna be a slight drag, but we think it's a good thing for them.
You know.
All that's being equal, Let's drag it better, all.
Right, Ken, thanks so much for joining us, Ken Shay, senior equity analysts. It covers all the consumer products companies, a lot of the beverage companies, to tobacco companies, the weed company, So he's got the whole portfolio there, and we appreciate getting a few minutes of his time there.
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Madison Mills, Paul Sweene Here in our Bloomberg Interactive Workers studio, a little bit of an M and A trade here today exce on to by Denbury for four point nine billion dollars in CO two pipeline push. Get the latest on this transaction. Kevin Crowley joins this senior US oil reporter for Bloomberg News.
Kevin, are you based in?
Are you in Houston?
That's right?
Yep?
I mean Houston yet where Egxon is just relocated you.
Okay, how hard is it going to be in Houston today?
I think it's I think we're going to be a one hundred, but it feels like it's more than one hundred and ten or so. So we're staying firmly inside in the air conditioning.
And judging by your accent, you're not a Houston native. I mean, you don't know you're genetically you're not made up for this weather, are you.
That's that's right, that's right. Once it gets to about eighty, I start to start to melt.
Ha hang out in the air conditioning there, talk to us about this Exon deal. What is Denbury and why is Exxon sholling out four point nine billion dollars?
So it's a it's a really interesting deal. It's really it's really a low carbon play for for for Exxon, Denbury was is a what's called an enhanced oil recovery specialist. So they they move, they use carbon dioxide in old wells in order to produce more more oil. Now they have a key asset here, which is the which is a thirteen hundred one hundred mile pipeline network, which is the largest carbon dioxide pipeline network in the US. And Eggson really wants this pipeline network in order to boost
its its carbon capture business. It's a really it's a really unique asset that Egxons saw as critical to its to its whole low carbon strategy, and that's why it's really paying this five billion dollars.
What is a carbon dioxide pipeline? What is it?
Transfers carbon dioxide? But from where to wear and for what reason?
I don't understand?
Right, that's right, trans right, it transports carbon dioxide. So so Denbury Denbury used to use carbon dioxide to push into old oil wells in order to extract crude. This is this is a very mature business. It's a very reliable business, but it's a very high cost business. And actually Denbury got Denbury went bankrupt in twenty twenty and so has been on the recovery track for the last three years.
Now.
With the world's focused now on carbon emissions and particularly the passing of the Inflation Reduction Act, these pipelines that move carbon dioxide are now being repurposed for carbon capture. So Egxon's plan here is to capture carbon emissions along the Gulf coasts, which is full of refineries, chemical plants, from the biggest concentration of industrial missions in the country. They want to capture those carbon emissions, move them along the Denbury pipelines and then bury them.
In the ground, bury carbon dioxide.
That's right, that's right. It's called carbon it's called carbon capture and sequestration. It's the sequestration part of it, which is which is where the magic happens really, whereas instead of emitting carbon dioxide into the air, you can capture it and you can bury it underground where they say it will stay forever. So it's it's it's a way of it's a way of being able to keep a refinery or chemical plant going, but without the without the emissions.
Okay, so you mentioned the Inflation Reduction Act.
How much of this acquisition is directly related to that legislation.
Yes, it's absolutely critical. So I spoke. I spoke to the Eggson executive kind of leading this this morning, Dan Aman, who used to be at General Motors. He said, he said the the Inflation Reduction Act was it was a key catalyst. And without the Inflation Reduction Act, I think this deal would have been a bit more, a bit more challenged. And and what the what the Inflation Reduction Act is that does really is it provides tax credits
for this whole process. I talked about capturing carbon and then burying it, and you know Eggson can do this. Eggxon think want to do this on a on a really large scale, and those tax credits will be really critical for Exon to really justify it to their shareholders as to as to why they're doing it and to ultimately make profits from this process.
Kevin kind of help us understand the differences to the extent there are differences between how maybe some European energy companies like British Petroleum or Total view the transition to clean energy versus American energy companies like an Exxon Mobile. What are the differences in how they're pursuing it, how they view it?
Right, So, there was there was a key split really around sort of four to five years ago where the European majors, particularly BP, SHELL Total to a lesser extent, decided that they were going they were going to go
hard into renewable energy. They were not going to be oil and gas companies anymore, they were going to be energy companies, and they were going to really focus on things like winds, things like solar become big in power generation, whereas the US oil majors were very much slow to embrace like zero targets and things like that, and they they've decided to really stick much more closely to oil and gas, and their low carbon strategies were much more
about things that they were specifically good at, and eggs on C's carbon capture is one of those things, which is which which it has unique capability in it. Now what's interesting now is we've seen this year in particular, the European majors have somewhat sort of pivoted their strategy to to come much more closely towards the towards the US players, because they found that investing in renewables was very very competitive, and that and that the returns were
really not as good. Is in, there are plenty of people who can do wins, there are plenty of people who can do solar. There are plenty of existing power utilities all across the world. And BP and Shell really found that, you know, competing with those large established players and specialists in those areas was was not really a very high return business model. So they've decided to pivot bit more back to oil and gas and focus on the low carbon areas where they can add some unique value.
That's certainly that's certainly Exon strategy.
It sounds like a critical part of Exon's future proving strategy as well. But I'm curious, then, why are we seeing a little bit of negativity when it comes to the day's trade on the news the stock is down by just over two percent at the moment.
Well, yeah, well they're paying they're paying all in stock, so they're playing five billion dollars in stock, So that's dilutive for the for the shares. So I think that's probably the technical reasons why Exton is trading is trading down today.
Now.
Exon's been buying back an enormous amount of stock of the next eighteen months now. They had a record record profits last year, so they're buying back a lot of stock. So this obviously dilutes that, that loutes that mechanism. So that's that's why eggsll is trading down today. It was interesting is Denbury is trading down and normally the acquired
company would trade up. Some commentary in the in the markets that some aolysts think this is higgs on, this is paying is paying kind of a too lower price for Denbris. So that's that's that's certainly an interesting one to watch.
All Right, So Kevin, you're an Englishman in Houston, but in Houston it's energy is business and job one. It's business number one. I got w T I crudal oil just under seventy six dollars a barrow here a little bit of a rally. What is it when you go to the local pub equivalent in Houston? What are the folks talking about in terms of where they think oil is going?
In terms of the price.
Everyone thinks it's going up. It's an oil town. It's always going up. We think it's going to the moon. One hundred dollars, one hundred dollars a barrel. It's it's it's just it's just a matter of time. So yeah, people people very very very very very very British as usual, and I think I think you kind of have to be to be in the oil business. It's a it's a tough it's a tough business, lots of lots of booms and busts. So it's certainly it's certainly the place for for optimists.
How about nat gas, I mean natural gas has been a different story.
What's the feeling about that?
Yeah, Well, that gas is we've basically got too much of it. You know, there's huge amounts of gas comes out of comes out of the permium basin, which is primarily an oil basin, so natural gas is the essentially a byproduct. So so really people are really waiting for the liquefied natural gas export facilities along the Gulf coast
to come online. We had a huge project stanctioned just last night actually, Brian Brownsville, South Texas, eighteen point four billion dollar project, massive, so that's that's gonna that's going to swallow up, so some of this excess gas and exports it around the world. There's been three other final investment decisions made, two other final investment decisions made on
such similar facilities this year alone. And really the whole, the whole goal of this is to get sort of US gas on on the water around the world, you know, helping to replace Russian supplies, especially to Europe.
All Right, great reporting as always, Kevin Crowley, Senior US oil reporter for Bloomberg News.
Again an Englishman in Houston. Good luck with that.
Before that he was in Johannesburg and then before that in London, so he's been all over the place for Bloomberg News.
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