Retailers Pivoting To ’What’s Your Walmart Strategy?’ in 2018: Ed Yruma

Podcast on Apple Podcasts, SoundCloud, and Bloomberg dot com. This year has been one of relative pain for the retail industry, at least outside of Walmart and Amazon, with a lot of brick and mortar stores closing, companies reconsidering their balance sheets. What will next year bring with us to discuss his

Eddi Ruma. He's an equity research analyst covering retail in e commerce for key Bank Capital Markets in New York and just comes from the Key Bank but the Market's Consumer conference which went from through today and ed, we're so happy to have you and what are you looking

for for next year? Glad to be here. Look, I think one of the things that's been an interesting takeaway from the conferences that results seem to have gotten a little bit better towards the end of this year, and so we think that you know better demand plus hopefully inventory levels that are aligned should drive a much better alright, a much better that's a very general statement. What are the pressures that you see afflicting the retailers on a day when we find out that Walmart is even taking

the words stores out of their name. It is an interesting move by Walmart. I mean certainly, Um, you know, Amazon is the innovator in retail today and we've seen, as you pointed out, a Walmart that has been incredibly innovative as well, and you know is racing to catch up. And I think what we've been hearing from retailers here at the conference and even prior to the conferences that continued focus on e commerce, right, this is a business

that requires a constant investment the consumers. No of what e commerce is or should be is changing. Uh. And certainly those best in class competitors like an Amazon or Walmart continue to get better. Okay, But did you say, did you hear anything at your conference that made you think, gee, this is something I hadn't thought of before, or these guys have really figured out a way to do something that no one else has. What have you learned from

the conference? You know, one thing that we've heard that's pretty interesting is there's been this rush of companies to sell on Amazon, and I think there's a lot of discussions today on is that actually the right decision for my business? And what I mean by that specifically is Amazon is a great place if you're not seeing promotions other places in the market, but if one competitor promotes,

Amazon matches it and that drives down price. So we're now hearing retailers and apparelmenters rethink whether having their product in having that on the Amazon platform is the way to go. Well. Having said that, though, I was reading a story today that Publicist, w PP and Omnicom, these are the big ad firms. They plan to boost ADS spending with Amazon between forty and one hundred percent next year.

WPP says that it's currently spending around two hundred million that could increase about fifty Publicists spends anywhere from two to three hundred million on Amazon, and on the COMES spends about a hundred million dollars a year. They say they could double that amount next year. So I mean, is that something that the companies at your conference didn't recognize or are they going in another direction? I think it's certainly recognized that Amazon is the dominant force in retail.

The question is is it best to have your products on Amazon or is it best to try to have them be sold directly on your website. I'd also had We've heard a lot of conversation here about Walmart and what they're doing with Lord and Taylor and whether it makes sense for more partners to uh be on that Walmart platform that quite frankly is in a much earlier

stage of development. What they say, I think they're very open to it, you know, I think they clearly like Lord and Taylor, Lord tailors, lots of existing relationships, and to be on that Walmart platform, which traffic could be very exciting. So I heard from numerous companies here that this is something that they were actively involved in discussions around. So you hear constantly what's your Amazon strategy? We think next year you're going to hear more of this, what's

your Walmart strategy? So just shifting gears a little bit, are more people going to be wearing yoga pants to work next year? Certainly, comfort is a big theme that we're continue to hear. What's interesting is that that comfort that used to only get in the yoga pant is now you're able to get that in denim that stretches, You're able to get that in other types of apparel, and so a certainly comfort is going to continue to

be big. Is that specifically yoga pants? Time will tell, Well, I'm talking specifically at leisure because I know there were some pretty disappointing earnings this year from the likes of Nike and under Armor. And you're gonna get Lulu Lemon results after the market closes today, So we'll be watching for that some of those transparent yoga pants. But what's your what's your sense for at leisure? But there's certainly

a little bit of pressure, you know. I think this has been a great growth market for almost ten years now, and certainly as the market's load, we've we've seen a little bit of change and performance. Um. We had Kevin Plank doing a talk yesterday and I think he was pretty forthrighting the challenges that his businesses faced both in seventeen uh and as his market continuous see that level of disruption. So uh, no all clear yet in in sports and and and athletic um, but you know, we

are hopeful that at least this very very well. Seventeen uh ends up being leading a path to hopefully I'm more calm eighteen ed. Where are we with respect to brick and mortar store closures? How many are you expecting? Are people in the industry expecting next year? Uh? This is one area where the train is likely not to change. We continue to hear retailers talking about store closures, examining,

you know, kind of what's the optimal store footprint? UM and so I think eighteen will be a repeat of seventeen. I I continue to think that we're going to see focus shift to eat com I think though the offset, and this we did hear quite frequently, it's that the store fleet that you do have should be compelling, it should be engaging, it should bring a sense of community. So we had companies like Shinola, which is um largely direct brand, talking about the strength of having a store fleet.

So clearly the number of stores are coming down, but hopefully the stores that remain in existence are more interesting. Just quickly, Harmon International, which is owned by Samsung, they announced that they've got a combination with under Armor for what's called the U A sport wireless flex headphones. Is that the kind of thing that under Armour and companies like that apparel makers should be focused on. Obviously, the convergence of technology is impacting all industries, but certainly in

apparel um under Armor understands, you know. They they've got a great data platform, so they know how long your run is, they know what you've been eating, and sort of capitalize on that by giving other tech products around that I think are really important. But ultimately, what's to drive the success of underarmers selling more shirts and shoes and that that's been a that's been a challenge for them. The shares of under Armore down more than fifty so

far this year, Thanks very much. Eduma. He is equity research channelists covering retail and e commerce for a key bank Capital Markets. President Donald Trump is set to make a statement on Jerusalem from the Diplomatic Reception Room in the White House that will take place at one pm Eastern time. Will of course bring that to you live and to speak more about the topic of foreign relations, we have with US Caitlin Weber or Bloomberg News, government

analyst for Bloomberg Intelligence, and Nick Wadhams are foreign policy reporter. Nick. Let's be again with you, what do we expect the president to say in any detail about Jerusalem as the capital of Israel. Well, he will say that the US recognizes Jerusalem as Israel's capital, and he will also direct the State Department to begin the process which is expected to take many years, you know, at least four or

five years of the process of building an embassy there. Um, he will continue to sign a waiver as required under US law, Um that he'll keep the embassy for now in Tel Aviv. But really this is a symbolic move where he will declare that the US recognizes that Jerusalem is the capital of Israel. Nick and Caitlin, I'm going to get you at one in one second. But Nick, you say it's a symbolic move, but it's one that's

gotten a lot of attention worldwide. Of course, the Middle East has been a spot of incredible tensions, and the U s allies are coming out sharply critical of this move, saying that it will hinder any attempts to broker a peace agreement just quickly. Uh, do you think that this could have a much bigger consequence that it might seem

just based on its sort of symbolic nature. Yeah, I mean, the concern about from allies UM about this move is that it will basically pre judge negotiations over the status

of of Jerusalem has worked out in any negotiation. And then also it would UH sort of cast doubt on the idea that the US is a neutral uh and unbiased arbiter in these negotiations, that the US is willing to recognize Jerusalem is the capital as Israel's capital, than uh, it is biased towards Israel and against the Palestinians in these negotiations and can't be seen as a sort of

an honest and neutral broker. So it's it's important also to think that the relationship that the US has with its allies will also UH dictate some of the path of the ongoing tensions with North Korea. Kaitlin, can you just bring us up to up to speed with respect to the state of play in North Korea, the UH, the sort of exercises that have been going on with South Korea and the US and kind of where are

allies stand right now. Yeah, over the past year, we've really seen tensions between the West and North Korea kind of ebb and flow. UM. Earlier, this fault looked like they were sort of um decreasing. They had been, you know, a couple of months, but when North Korea didn't launch any any missile tests, that all changed last late last month, UM, when North Korea really escalated, UM it's test launching. They they potentially the furthest reaching I CBM missile it had

UM had so far. So you know, looking sort of you know to next year, we think it could be potentially a really decisive year in that conflict. UM. Some people think it might be the sort of the last chance to prevent North Korea from becoming really a full

fledged nuclear weapons power. And there's an number of released sensitive events on the on the calendar next year, UM, including the Olympics in South Korea in February, and then also the the end of the the the anniversary of the end of the Korean War, and the anniversary of the founding of North Korea. Those are both events that

are often marked with missile tests. Caitlin, if you could comment on the perhaps not bipartisan and the more unilateral approach on the part of US foreign policy under President Donald Trump, because I believe that allies such as UK Prime Minister Theresa May coming out and offering negative comments about the upcoming speech that President Trump is going to make detailing a Jerusalem as the capital of Israel. So he's got allies who do not agree with that stand.

I think in terms of North Korea, UM, the Trump administration has sort of gone back and forth between whether or not they want to UM work with China and the U N in terms of pressuring Piong Yang I sort of come into line. UM. You know, the there was un sanctions about six months ago that went into place UM, and since then the US has passed UM much stronger unilateral sanctions, something that was really looked at UM negatively by the Chinese government. It's it's unclear, UM.

You know what going forward what the Trump administration stands will be, whether they want to continue to go it alone or or work sort of more multilaterally. I think, you know North Korea, before it agrees to talks, is it's likely going to you know, going to have to be a high level multilateral effort. Nick, come on in here. I want to talk about just generally the U S foreign policy. I know there's been a lot of criticism aimed at Rects tillersting questions about whether he will remain

in place as Secretary of State. I'm just wondering, is there behind the scenes more cohesion among the foreign policy walks in this administration than perhaps it might seem from the outside It My impression is there is not cohesion. And and one of the challenges that we've faced in reporting out the foreign policy priorities of this administration is, uh, you never really know who is calling the shots or

or what the priorities are. I mean, if you look at North Korea, for example, Uh, you saw the U. S. Investador to the UN, Nicky Hamley, make remarks at a Security Council meeting last week where she basically gave a sort of policy prescription that was different from what the State Department said. She said, country should cut off all ties with North Korea and uh, sever all diplotic ties.

When we question the State Department spokeswoman on that um a day later, she said, uh, she wouldn't go that far. She said that essentially they're encouraging countries to reduce ties, but she wouldn't say they wanted countries to cut off all ties. So, I mean, that's just a small example

of something we face all the time. Where you never quite know who is speaking for the President, who is speaking for US US policy, because in the different branches and the different agencies there are substantive differences on what various people say the US is doing and should be doing. Is there is there any surprise that the oil prices

are actually lower today as a result of this. I mean, normally you would say, all right, there's turmoil in the Middle East and they're going to be problems because of some policy change on the part of the United States. You don't see any any reaction in the market. Well, I mean, we will see. I think we really have to wait until after the President speaks. Everybody I've been talking to it the State Department says, wait till you wait, wait till you hear what he says. It will be

a more nuanced speech than you than you think. Um. But so far, yes, there people are saying that they have not seen a great deal of protests outside US embassies on the street in places like Cairo. Uh So a muted response so far. But the real test will be after the President delivers his speech. And of course we're also looking at what the trade ramifications will be with some of our allies stemming from the tax plan, because it evidently is not being met with some criticism overseas.

Caitlin Webber, government analyst for Bloomberg Intelligence focusing on US trade policy, as well as well as Nick Waddam's foreign policy reporter for Bloomberg News. Both of you thank you so much for your insights. Definitely a lot of moving piece is hard to get your arms around, but really, Pim and when we talk to people, what's going to affect the markets? Are some of these trade tensions that

are picking up. Well. The company is Transao, and it's chief executive is Chris Poppas, and he joins us here in our eleven three oh studios and Transio Well, it has its fingers in many different industries, automotive building as well as electrical medical packaging. It's in the plastics business as we remember. Chris, thank you very much for being here.

Much appreciated. I wanted to just skip ahead to Hurricane Harvey and the rebuilding efforts that have gone on because I know that several of your facilities were affected by the hurricane, and I wonder if you could just give us a quick update on what's going on. Well, we had in our case actually no real impact on our facilities. We were a distance from the hurricane and Louisiana, So in our case, UM we had a short term lift because our facilities are up and running while others were not.

But more broadly, the hurricane, while devastating a course for the region, UM is going to stimulate construction activity post for rebuilding and automotive you know, something like a million cars will have to be replaced over the course the next year or so, so aside from blips or sort

of temporary effects from the hurricanes. I'd love to get your take just overall of what you're seeing with respected demand, because Trina really has a pretty amazing view of the economy since the products are and everything from automake automobiles to smartphones to anything else that you buy that has plastic components. Right. We we cross over many applications as you mentioned, you know, including carpet construction, packaging, and we

do it globally, so we have a good view. Now sixty sixty two percent of our sales are in Europe, so I have a better view of Europe, of course than the Americas. We have twenty in Asia, but you know, we're pretty constructive on all of those segments. Um. And when we gave our guidance, for example, for next year, which we just just came out with about seven dollars and ninety cents of share of earnings, we did not forecast any real uplift in the economy from seventeen to eighteen.

We generally felt the economy of eighteen would be similar to seventeen, which is pretty modest actually in terms of actual growth. And you're talking global here, and we're talking global here, so we're thinking in a two two and alf Uh, you know, economic growth agenda to drive our earnings growth. But if we had more than that, if the economies in fact grew faster, because we're in so many different segments, we would generally see a rise across

all those segments. I'm fascinated by this because we've been hearing from a number of strategists saying that the FED is going to hike four times next year, that we're reaching the synchronized global growth story. Uh, this forecast that you just gave out their flies in the face of that, Why are you bearished? No, we're not bearish. We're saying that we can see a rise in our earnings this year. We forecast about seven sixty a share next year seven nine.

We're saying that we can see a rise in our earnings independent of whether there is in fact a global lift. So we gave our guidance. We were just saying that on the basis of today's economic activity, we could see earnings next year of seven dollars ninety cents. If in fact the economy grows globally, then we would in fact have generally higher earnings in that so we're not barished. We just wanted to make that reference to our forecast, to our earnings guidance. I just want to make it

even simpler. You make the plastic that makes lego blocks, isn't that right? Well, that's an application that we are in, of course, along with many, many, many many others. No, No, I clearly, but I mean you know everybody knows. Or yogurt cups would be another example. Very good, Um, tell us about a business in China, because I know that you've just really started production there at a new plant. We have a new plant. We've been in China for years.

We're in China, or in Korea, we're in Indonesia with with assets with plants and sales, of course, but we just started up a new plastics facility and ABS plant we call it, which is used in engineered applications, automotive apply and smartphones, and we put it in China, and we just started up a month ago on time, on budget because of the growth in that particular region for those markets and the kind of material we make there

is relatively unique compared to others, and our customers, mainly automotive, want us to be where they're going to be building their cars, which of course is in China. So in that scenario, it made sense for us to put that asset in China, which we did. Which product do you

think will be the biggest growth story next year? I think too are rubber products for high performance tires, where we also have a new plant coming up in January in Germany, and our engineered performance plastics where we have the new plant in China. Those two will be our growth story for next year. Now. We on our investor Day about a year and a half ago, we suggested a hundred million dollars of EBITDA growth in performance plastics

and we outline investments that would drive that. Two of those are the rubber plant in in Germany and the A B. S plant in China. So we're delivering on those investments as we described in November of two thousand six. Is it easy to raise money we have, Well, we have a fantastic balance sheet, you know, we're our leverage is one point three times. We're generating. We have the highest free cash flow yield of anybody in the chemical space at about so we have very strong cash flows.

We just refinanced our balance sheet just a few months ago. Um, we have a terrific balance sheet in our case. But the answer your question is it is easy to raise money if you need to raise money. In our case, we have a stellar balance sheet, lots of free cash flow, lots of capability to grow anymore without having access the capital markets. We just complete our first acquisition successful nice comping in in Italy that makes some term plastic glastomers.

Very nice product line. We're looking. But it's hard, it's really hard. Valuations are high, very hard to do acquisitions. In our view, in today's market, high valuation is tough to do. Chris Pappas, thank you so much for joining us. A pleasure speaking with you. Chris, Pappas is chief executive officer of Trinco, which is based in Pennsylvania but has

plants and sells products all over the world. It's amazing how big the market is for all this stuff that you buy, all the components, the plastics, uh and and such. A year ago, if you asked too many credit fund managers, they would say, we're in the eighth, maybe ninth inning this year. Perhaps we're in the seventh inning, or perhaps we're in the eleventh inning. We're gonna go extra innings to fifteen. Here to talk about that. As Frank oh

c No. He has senior portfolio manager at new Fleet Asset Management, which oversees twelve billion dollars and it's based in Hartford. Thank you so much of Frank for joining us. I want to start with how close we are to the end of this credit cycle, because we have gotten a couple of calls recently from some pretty high profile credit investors that were getting towards the end. Yeah, sure, thanks for having me. I would say we're in a

very long seventh inning right now. Whenever we have a benign credit environment, historically, it's very easy to say that the end is two years out. Uh, you know five we were talking about two in fifteen, we were talking about two thousand and seventeen being the end. What we're seeing right now is fundamentally, uh, we're in good shape. It's still a benign credit environment. The faults are low, balance sheets are in good shape, there's not a lot

of debt do an. Interest coverage is strong. Um, we are starting to see some late cycle behavior, aggressive terms loosening of credit standards, but by and large a two and a half percent GDP. You know, environment is good for fixed income in and for credit. So are you holding less cash than you had been perhaps a year ago? We are, We are fully invested. Our view is that this fundamental environment is good for credit. Layer onto that

a strong technical environment. There is a strong bid for yield globally, and so when there are investors looking for yield, there are buyers of loans and high yield, which is where we traffic, and so we want to take advantage of that by being fully invested. Have you also gone further down the credit spectrum into lower rated high yield dead like triple C, single B. That's a good question. We are a fundamental bottoms up credit shop at New fleet.

We started adding credit risk in the summer of two thousand sixteen. We were risk off in fifteen and late fourteen. Started adding risk around the summer of sixteen when valuations we were attractive, not only in the loan market, in the high yield market as well. We added single bs

and some triple cs. We started adding energy. UM Today, I would say that we're UM less risk on a pure relative basis, but I'm gonna stick with our credit quality, UH band Right now, what if you could tell people a little bit about the vertics new fleet dynamic credit et F and how if you're an issuer, how do you get your attention to actually buy some debt to go into that e t F. Sure. So that's an e t F that we launched last December h b l H wise the ticker symbol UH. That is a

product that was born out of a few things. UH. First, we'll take the market. What we found was that the loan market, in the high yield market has slowly been converging. If they're not brothers and sisters are definitely cousins. Uh. There are loans now that look like bonds. There are bonds that the bond market, the high yield market, for example, is secured now and soft of the borrowers have both

a loan and a high yield security. And so our view was that we ought to have a product that can look at the entire capital struck sure of a borrower, rather than a fund that can just buy loans and a fund that can just buy bonds. If we like a particular part of the capital structure, we want the ability to buy it. What we also found was that the client was moving in this direction as well. Clients are not willing to outsource the complexity of allocating between

the two. They want to put a dollar into leverage finance, allow us to do the allocation, and then allow themselves to frankly, run their run their practice. Frank in the notes that you sent over, you said that it's important for this asset class to be a permanent part of people's portfolios. How do you square that idea of investing truly investing in a company for the long term with an e t F that is frequently used for traders

who want to be able to get in and out. Yeah, the e t F that we manage is active, and so from our perspective, we manage the t F very similar to we do then we would a mutual funds, right, but so it is active and it's un clearer at any given time with the underlying composition will be the way that'say, H, Y, G or J and K would uh.

But the point of an e t F in large part is taking in this case assets that don't trade all that frequently and UH sort of pulling them together and then having them sort of backing a share that trades like a stock and people can get out quickly. Does that concern you? It's not too dissimilar than the mutual fund market. Right. Every morning we come in and we have an inflow or outflow from the day before. The real difference is that we can create units on the e t F side at any time of the day.

But if there is an environment where people are selling loans in high yield, will have an outflow in the mutual funds and we'll have a redemption unit in the e t F. So from my perspective, we're managing liquidity the liquidity risk UH really very similarly in both products. I wonder if you could just go back to the Vertus new Fleet Dynamic Credit e t F because I just want to understand what guides your action? How do you know what to buy? What do you need to

know to put? You know, different different issues in there. Because you've got one Walter Investment Management, right, that's currently in bankruptcy, that's right, right, But then you've got others like Gates Global that's I believe a Blackstone deal. How what what sort of drives your decision making? Sure? So we have a team of eleven credit analysts UH and those analysts look at the entire capital structure of a borrower.

So the banks, the arranging banks syndicate whether it's a loan or a high old issue, and we do our own fundamental credit analysis. What makes us different is that Walter Investment Management is a great, great example. We own the loan rather than the hot than the bond issuance. The bonds in the fifties. The loan is in the mid nineties and will be a part recovery. So we actively decided to be up the capital structure in that name.

Um As as an example, there are borrowers that don't have bonds there, you know, on the shores that don't have loans. We now have the ability to look at the entire opportunity set to trillion plus of loans in high yield rather than individual markets. I'm looking at the composition of the fund and there is a certificant proportion that's rated triple C or lower or single B or lower.

And I'm just wondering. You know, we've seen that, say with UH with third avenue, right, the idea of what happens if there are a sudden rash of redemptions, even if it's a mutual fund. UH, what's your sort of game plan if there were to be some kind of crisis. Yeah, I would not categorize the single b's and triple cs that we own here as the third avenue. Event um,

these are single b by and large loans. The triple cs might be larger loans Walter Investment Management, for example, it would would be one of those stress situations UM. In et F form, UH, there are liquid the guidelines. We need to have a certain market cap public market cap, the loan issue has to be a certain size. We manage a similar product on the mutual fun size that has roughly seventy of the issues are over a billion dollars, and so we're actively managing that type of liquidity rather

than a one off distress situation. Uh like like many of the names that maybe we're in the Third Avenue deal. Thanks for being with us, much appreciated, very educational. Franco Sino is the senior portfolio manager for New Fleet Asset Management, helping to manage about twelve billion dollars in assets. They are a bill. They are based in Hartford, Connecticut. Thanks for listening to the Bloomberg P and L podcast. You can subscribe and listen to interviews at Apple Podcasts, SoundCloud,

or whatever podcast platform you prefer. I'm pim Fox. I'm on Twitter at pim Fox. I'm on Twitter at Lisa Abramo. It's one before the podcast. You can always catch us worldwide on Blueberg Radio.