Latest / Bloomberg Intelligence / Treasuries, ETFs, GE, and Private Credit (Podcast)

Transcript

Treasuries, ETFs, GE, and Private Credit (Podcast) · Bloomberg Intelligence

0:00
Speaker 1: Welcome to the Bloomberg Markets Podcast. I'm Paul Sweeney, alongside
0:04
Speaker 1: my co host Matt Miller. Every business day, we bring
0:06
Speaker 1: you interviews from CEOs, market pros, and Bloomberg experts, along
0:11
Speaker 1: with essential market moving news. Find the Bloomberg Markets Podcast
0:15
Speaker 1: on Apple Podcasts or wherever you listen to podcasts, and
0:18
Speaker 1: at Bloomberg dot com slash podcast. Still, you know, we're
0:21
Speaker 1: talking about earnings, but let's be honest, the Fed has
0:24
Speaker 1: really been moving this market is likely to continue to
0:26
Speaker 1: do so for some time. So that means we have
0:29
Speaker 1: to talk to Ira Jersey. Whether we want to or not,
0:31
Speaker 1: we have to talk to Ira Jersey because he is
0:33
Speaker 1: the go to guy. He's the chief US interest rate
0:36
Speaker 1: strategist for Bloomberg Intelligence. So Ira, you know, what do
0:40
Speaker 1: you expect from your Federal Reserve Here? The talk is
0:43
Speaker 1: kind of really ramped up on. Hey, we only need
0:45
Speaker 1: twenty five basis points this time. Yeah, I still think
0:48
Speaker 1: that they'll they'll do twenty five basis points and they'll
0:51
Speaker 1: leave the door open to doing one or two more
0:54
Speaker 1: um interest rate hikes. Remember, we don't get a summary
0:56
Speaker 1: of economic projections this time, so there won't be any
0:58
Speaker 1: new Dot plot or anything like that. But but it
1:01
Speaker 1: will be parsing very carefully j Powell's post meeting statement
1:05
Speaker 1: next Wednesday, because um, you know, we want to get
1:07
Speaker 1: a hint of what their reaction function is based on
1:10
Speaker 1: incoming data, Like will they potentially stop at the March meeting. Um,
1:15
Speaker 1: we don't think that they will, but um, but it's
1:17
Speaker 1: going to be a very close call thereafter, we think so. Um,
1:21
Speaker 1: And it will be very data dependent. So if if
1:23
Speaker 1: inflation keeps on the down trajectory that has been on
1:27
Speaker 1: in recent months, then you know, we might be very
1:30
Speaker 1: close to nearing the end of interest rate tykes. Um,
1:33
Speaker 1: that's a big if, right, because as China reopens and
1:37
Speaker 1: Europe seems to avoid a deep procession, there could be
1:41
Speaker 1: a lot more a lot more spending on commodities that
1:44
Speaker 1: could push prices up and that could come through an inflation. Yeah,
1:48
Speaker 1: that's true, man. You know, I think one of the
1:50
Speaker 1: one of the risks though, and one of the one
1:53
Speaker 1: of the key factors that's helping the inflationary environment right
1:56
Speaker 1: now is is base effects. Right. So, so the spring
1:59
Speaker 1: of last year, when you saw the largest month on
2:01
Speaker 1: month increases in a lot of prices and now you're
2:05
Speaker 1: going to see some of those base effects roll off,
2:07
Speaker 1: so you'll actually have, um, you know, somewhat of a
2:10
Speaker 1: stabilization on a year on year perspective. UM. But but
2:13
Speaker 1: but you're right, like and and one of the things
2:15
Speaker 1: that we've often noted is, look, if if the Federal
2:18
Speaker 1: Reserve hikes to five percent, you know, plus or minus points,
2:21
Speaker 1: so let's say it's five percent UM then and and
2:24
Speaker 1: you wind up having the PC deflator more or less
2:28
Speaker 1: five percent, which seems like it's very likely going to
2:31
Speaker 1: happen over the next couple of months. UM. Then really
2:34
Speaker 1: the Federal Reserve will say, Okay, look, our job is
2:36
Speaker 1: not done, but we're we're just not cutting policy. And
2:39
Speaker 1: what's still amazing to me is that even though the
2:42
Speaker 1: Fed's been very consistent for the last six seven months,
2:45
Speaker 1: with almost every member saying, look, once we reach the peak,
2:48
Speaker 1: we're going to stay there for a long period of time,
2:50
Speaker 1: the market still doesn't believe that. Right. The market is
2:53
Speaker 1: still pricing in cuts that I don't want to sit
2:56
Speaker 1: around with five percent inflation. I mean, base effect was
3:00
Speaker 1: the mantra that we heard at the beginning of twenty two,
3:03
Speaker 1: and it still didn't slow inflation down that much. Right,
3:05
Speaker 1: if you look at year over year cp I, it
3:07
Speaker 1: averaged seven percent in two thousand twenty one, it averaged
3:10
Speaker 1: six and a half percent in twenty two. So let's
3:13
Speaker 1: say we get down to five and a half percent
3:15
Speaker 1: in twenty three. I don't want to look forward to
3:17
Speaker 1: five percent in four like, get it done. Well, that's
3:20
Speaker 1: and that's the reason why they're not going to be
3:22
Speaker 1: cutting right, So I think, you know, the we we
3:24
Speaker 1: have to well, they they're not going to probably raise
3:28
Speaker 1: much more than five and a half percent or five
3:30
Speaker 1: and a quarter um in part because the the some
3:34
Speaker 1: of the underlying inflationary pressures are coming down. So you
3:37
Speaker 1: mentioned things like commodities and and um uh and and
3:41
Speaker 1: good prices, and good prices have already been falling, right,
3:44
Speaker 1: So so I think we we throughout all of this,
3:46
Speaker 1: we've actually missed the fact that core goods prices are
3:49
Speaker 1: actually falling on a month a month basis. What's continuing
3:52
Speaker 1: to rise significantly is our services prices, and those are
3:56
Speaker 1: driven in large part by by wages and wage games um.
4:00
Speaker 1: And obviously the employment situation continues to be um, you know,
4:04
Speaker 1: reasonably good. So so the federal Reserve will be pretty happy,
4:08
Speaker 1: I think to maintain interest rates this year. Look if Matt,
4:11
Speaker 1: if you if you're you know, you're right, And there
4:13
Speaker 1: is a large portion of the market that still thinks
4:16
Speaker 1: that the Federal Reserve is behind the curve and they
4:18
Speaker 1: need to continue to hike well beyond five there's a
4:21
Speaker 1: whole another part side of the market that's actually, you know,
4:24
Speaker 1: clearly winning saying that hey, we're going to be in
4:26
Speaker 1: a recession in the second half of the year, and
4:28
Speaker 1: because of that, the Fed is going to be cutting
4:30
Speaker 1: sooner rather than later before um uh, you know, and
4:34
Speaker 1: even before year end. We we actually did a piece
4:36
Speaker 1: yesterday looking at what options markets are pricing and option
4:39
Speaker 1: and even though the market is currently pricing for about
4:41
Speaker 1: forty basis points of interest rate cuts by the end
4:44
Speaker 1: of the year, it's what the market is really pricing
4:47
Speaker 1: for is either one cut or four or five six cuts, right, So,
4:51
Speaker 1: so we're really pricing this bimodal distribution of of uh,
4:55
Speaker 1: but but all leaning toward cuts and not much more
4:58
Speaker 1: in terms of hikes. So so, even though there were
5:00
Speaker 1: some that are sympathetic to your view, Matt Well, um
5:03
Speaker 1: that most of the market is not and and that
5:05
Speaker 1: we're priced for four cuts and which I personally thinks
5:08
Speaker 1: won't happen. I just want them to take care of
5:10
Speaker 1: inflation before we get into such a deepercession that my
5:15
Speaker 1: boss isn't willing to give me a raise to keep
5:18
Speaker 1: up with inflation. Right, this is a bad situation. And uh,
5:23
Speaker 1: it's been going on for too long already. And if
5:25
Speaker 1: they continue just to let it go on, it's going
5:28
Speaker 1: to get much worse. Because until now, wage gains have
5:30
Speaker 1: almost kept up with inflation. They they still have been
5:33
Speaker 1: outpaced by inflation. But if you get into a situation
5:36
Speaker 1: where inflation keeps smoldering and not only you know, we
5:40
Speaker 1: see three m like starting to fire people, they're definitely
5:43
Speaker 1: not giving any raises. Now. You know the the FC
5:47
Speaker 1: Central New Jersey tickets that cost me twenty dollars last
5:51
Speaker 1: year and thirty dollars this year, that cost me forty
5:53
Speaker 1: dollars next year. I'm not gonna be able to afford
5:54
Speaker 1: to go anymore. Well, and and that's one of the
5:56
Speaker 1: reasons why, and that that the Federal Reserve, I think
5:59
Speaker 1: is not is going to take away and see approach
6:02
Speaker 1: once they once they reached the next couple of a
6:05
Speaker 1: couple of meetings and they reached that five percent level.
6:07
Speaker 1: That not that that five percent levels any kind of
6:09
Speaker 1: magic number, UM, but they they know that there is
6:13
Speaker 1: starting to see a slowdown in the in economic activity.
6:16
Speaker 1: And usually slowdowns in economic activity are followed by UM,
6:21
Speaker 1: followed by slower price gains and and uh, and inflation
6:24
Speaker 1: tends to come down. So that's the reason why I
6:27
Speaker 1: think that the Fed is going to take a little
6:28
Speaker 1: bit of a wait and see approach. And UM, you know,
6:31
Speaker 1: if if, certainly, if if inflation re accelerates in a
6:34
Speaker 1: major way, UM, then the Federal Reserve at that point
6:37
Speaker 1: would be able to hike more. But but I think,
6:39
Speaker 1: you know, taking a pause and then trying to maintain
6:42
Speaker 1: rates at five five and a quarter percent is what
6:46
Speaker 1: they intend on doing, right And and look, my job
6:49
Speaker 1: also met is not to not to tell them what
6:51
Speaker 1: to do and not to give my opinion, but trying
6:54
Speaker 1: to point out what they should be doing. What they
6:56
Speaker 1: will do, and what I think that they will do
6:59
Speaker 1: is maintain interest rate. It's for the rest of this year,
7:00
Speaker 1: probably into because if the employment situation is strong enough,
7:05
Speaker 1: they'll have the ability to do that. That's what we
7:07
Speaker 1: need though, someone to tell us what they will do.
7:10
Speaker 1: You don't need to hear from me and Vince tell
7:12
Speaker 1: them what they should do. Good stuff. We'll get to
7:15
Speaker 1: a soccer discussion at another time. IRA Jersey, Chief US
7:18
Speaker 1: Interest rate strategist for Bloomberg Intelligence. We wove in the soccer, Yeah, yeah,
7:22
Speaker 1: we woven into a little bit f C United FC
7:25
Speaker 1: Central Jersey or something like that, Central Jersey or something
7:28
Speaker 1: like that Rayal Center, New Jersey, Real Central New Jersey.
7:31
Speaker 1: All right, there we go. I have a buddy, uh,
7:37
Speaker 1: David Auerbach. He's a managing director at Armada E T
7:41
Speaker 1: F Advisors and also a fellow Fish fan. Oh. We
7:45
Speaker 1: actually went to see the New Year's Eve shows together,
7:48
Speaker 1: one of them ye at Madison Square. Wasn't it was amazing?
7:53
Speaker 1: That's it. It was fantastic. But the funny thing is,
7:55
Speaker 1: so we're sitting there and we had a suite, a
7:59
Speaker 1: couple of couple of c eats, um great view. The
8:02
Speaker 1: light show is insane, and in the second set we
8:05
Speaker 1: get into this deep, like spacey discussion about Mall Reads
8:11
Speaker 1: and I thought, you know what, in this entire stadium,
8:14
Speaker 1: in all of MSG, nobody else is talking about Mall ranks.
8:17
Speaker 1: Right now, let's bring in David on the phone, joining
8:19
Speaker 1: us out of Texas. UM great to have you on
8:21
Speaker 1: the program. David, Let's start by talking about the situation
8:25
Speaker 1: that that the real estate industry, or the residential real
8:29
Speaker 1: estate industry funds itself in right now. We'll get to
8:32
Speaker 1: the malls later. But you run house h a U S,
8:36
Speaker 1: which is an e t F and actively managed e
8:39
Speaker 1: t F that invests in publicly traded reads. Talk to
8:41
Speaker 1: me about the state of your industry. Well, good morning,
8:45
Speaker 1: thanks for having me back on the air, and of
8:47
Speaker 1: course I'd rather talk about our fun experience. But you know,
8:50
Speaker 1: right now, in the world of publicly traded reads, you know,
8:53
Speaker 1: we see really a lot of upside as you know,
8:56
Speaker 1: after the ball told results, you know, a lot of
8:59
Speaker 1: the reats are coming out basically forecasting we're not going
9:02
Speaker 1: to have as great of a year and o Y
9:04
Speaker 1: growth and you know, really crushed it like we did
9:07
Speaker 1: last year, because last year was almost unprecedented for some
9:09
Speaker 1: of the residential reeths. But these guys are still forecasting
9:13
Speaker 1: growth and in the wake of rising interest rates and
9:16
Speaker 1: rising inflation, we're focused on that end rental payment. We
9:20
Speaker 1: call it the residential reat income ets because we say
9:24
Speaker 1: that the rent payment goes into your pocket as income
9:27
Speaker 1: in the form of dividends, and pretty much across the board,
9:30
Speaker 1: these residential reeths have been raising their UH dividends over
9:35
Speaker 1: the past couple of years through COVID. That's great for Paul, Paul,
9:39
Speaker 1: how good is you? You You love dividends stuff. So
9:44
Speaker 1: has the residential real estate market, I mean, is it's
9:48
Speaker 1: still adjusting to this higher mortgage rate environment. Has it steadied?
9:52
Speaker 1: What are we seeing here? Yeah, it's definitely adjusting, there's
9:56
Speaker 1: no question about it. You know, some of the home
9:58
Speaker 1: sales numbers that have been coming out recently, though there's
10:01
Speaker 1: somewhat kind of dated results, are showing somewhat of a
10:04
Speaker 1: turnaround compared to what we had seen, you know, in
10:06
Speaker 1: the mid second mid second half of the year last year.
10:10
Speaker 1: I hate to use the term, and everybody kicks around
10:12
Speaker 1: that new normal. Look. Interested interest rates have gone from
10:15
Speaker 1: zero to four and a half percent. Mortgage rates you know,
10:18
Speaker 1: went from like two to six three to six percent
10:21
Speaker 1: last year. We're in this six percent mortgage range right now,
10:25
Speaker 1: and so I think people are accepting it. The problem
10:27
Speaker 1: is that you know, hey, I get this great job
10:29
Speaker 1: opportunity to move from Dallas, Texas to New York, and
10:32
Speaker 1: I'm trading my two seven five mortgage for a six
10:34
Speaker 1: and change mortgage in New York. I'm you know, I'm
10:37
Speaker 1: basically locked in. I'm kind of geographically constrained at that point.
10:41
Speaker 1: And so from the rental payment from the rental side,
10:44
Speaker 1: you know, unless you're in the market to go out
10:46
Speaker 1: and buy that house right now, you're really focused on
10:48
Speaker 1: what's my end rent payment going to be next month?
10:51
Speaker 1: Is it going up ten percent or is it going
10:53
Speaker 1: up a hundred percent? Well, and I mean so many
10:57
Speaker 1: people who haven't been able to buy have been and
10:59
Speaker 1: put in that position. And in terms of the investment though, David,
11:02
Speaker 1: for those listening who don't quite get the E t F,
11:06
Speaker 1: you know, functionality, How does that work when when when
11:10
Speaker 1: you get paid dividends by the public reads you invest in.
11:12
Speaker 1: How does say Paul buys a share of house, how
11:15
Speaker 1: does that come through to him? Uh, It's it's a
11:18
Speaker 1: great question. And basically it's passed through directly to the
11:21
Speaker 1: end shareholder. We pay a quarterly dividend and it's basically
11:26
Speaker 1: a culmination of the income received from our underlying constituents.
11:30
Speaker 1: Our fund owns twenty five publicly traded reefs. Those are
11:33
Speaker 1: comprised of apartment reads, single family rental reads, manufactured housing,
11:38
Speaker 1: senior housing. All these companies are reporting monthly and quarterly dividends.
11:42
Speaker 1: That adds up and that basically event goes into your
11:45
Speaker 1: pocket at the end of the day as a shareholder
11:47
Speaker 1: on the phone of the dividends. So it's just like
11:49
Speaker 1: any other stuff. So Paul calls this guy at pain
11:51
Speaker 1: Weber or wherever and says around for a while and says,
11:55
Speaker 1: you just reinvest those dividends or they just cut him
11:58
Speaker 1: a check every quarter. That's right, right, And you know,
12:00
Speaker 1: past seem probably more like a you know, day one
12:03
Speaker 1: Robin Hood type of guy who is well ahead of there.
12:07
Speaker 1: But yes, that is correct. Again. Ets are publicly traded vehicles.
12:10
Speaker 1: They trade just like stocks. Bid ask spreads trade during
12:13
Speaker 1: the market hours, you know, and we highlight that liquidity.
12:17
Speaker 1: You know, Matt, you and I talked about the private
12:19
Speaker 1: versus public and what we've been seeing in some of
12:20
Speaker 1: the private resets out there, you know, talking about gaining redemptions,
12:24
Speaker 1: investors having a hard time pulling their money out. You know,
12:27
Speaker 1: they're never going to be able to get out of
12:28
Speaker 1: this maze of you know, trying to capture their investment.
12:33
Speaker 1: And so for us, we're highlighting the liquidity of publicly
12:36
Speaker 1: traded reafs and ets. You want to put a million
12:39
Speaker 1: dollars into house, thank you very much. You can pull
12:41
Speaker 1: out a million dollars of house very quickly, just as
12:44
Speaker 1: well versus you may have a harder time at some
12:46
Speaker 1: of these private vehicles right now, So, David, talk about
12:49
Speaker 1: mortgage rates up that six percent range, is the expectation
12:52
Speaker 1: that you know, a lot of folks are saying if
12:53
Speaker 1: it's going to be cutting rates at the end of
12:55
Speaker 1: this year early next year, So is that Are the
12:58
Speaker 1: mortgage folks you talked to saying, hey, the mortgage rates
13:00
Speaker 1: will come back down along with the Fed. Yes, the
13:04
Speaker 1: answer is yes. Mortgage rates staly traditionally do tend to
13:07
Speaker 1: move hand in hand with interest rates. If we do
13:10
Speaker 1: see that correction coming back in later in the back
13:13
Speaker 1: half of the year, yes, I would expect to see that. However,
13:16
Speaker 1: at the end of the day though, until we really
13:18
Speaker 1: see the mortgage rates go back from let's say six percent,
13:20
Speaker 1: so you know, a more manageable level of four percent.
13:23
Speaker 1: I still think we're gonna see, you know, some popsy
13:25
Speaker 1: turbunus in the housing market. What does this? What are
13:30
Speaker 1: these big changes? And I mean I don't know when's
13:33
Speaker 1: the last time the FED raised four fifty basis points
13:36
Speaker 1: in a year? Um? What do they do to e
13:40
Speaker 1: t F s and net asset values? I mean, they're
13:43
Speaker 1: bigger and bigger divergences, right, how do those fix themselves? Well,
13:48
Speaker 1: you know, for us again, we're looking for us at
13:50
Speaker 1: the residential reefs and focusing on the underlying constituents themselves.
13:55
Speaker 1: I will highlight that many of these reefs took advantage
13:58
Speaker 1: during COVID to re capitalized, you know, their balance sheets,
14:01
Speaker 1: and we're able to lock in very long term debt
14:04
Speaker 1: at a very attractive rates. So unfortunately, you know, I
14:08
Speaker 1: can't control as I as I tell people, I can't
14:11
Speaker 1: control my et F stock price. I can't control my
14:13
Speaker 1: constituent stock price. All I can focus is on the narrative,
14:17
Speaker 1: highlighting how well capitalized these companies are, and I focus
14:21
Speaker 1: on the fundamentals. And usually at the end of the day,
14:23
Speaker 1: matters we talked about. I take, you know, pick your
14:25
Speaker 1: favorite Wall Street stock reets, Apple, Microsoft, whoever, take your
14:30
Speaker 1: fore fait, your favorite company, and I try to boil
14:33
Speaker 1: it down to four bullet points. What do you want
14:34
Speaker 1: a good company to do well? At the end of
14:36
Speaker 1: the day, It's very simple. You want them to grow revenues,
14:40
Speaker 1: grow profits, grow dividends, and grow guidance. And that's pretty
14:44
Speaker 1: much what you have been seeing from the residential reads
14:47
Speaker 1: across the board over the past year two years coming
14:50
Speaker 1: out of COVID, and so from the fundamental perspective, the
14:54
Speaker 1: bottom line is, these guys are in a pretty solid
14:57
Speaker 1: position right now. Let's just CLEI really touch on malls
15:00
Speaker 1: for a second, because I thought it was such a
15:03
Speaker 1: cool conversation that we had um in an extended version
15:07
Speaker 1: of Tweezer. It wasn't It wasn't really tweezer. What what? What? What? What?
15:12
Speaker 1: What is up with that business? Like? Can it ever
15:14
Speaker 1: come back? Um? What do they need to do? And
15:18
Speaker 1: what do you think about it? Ecap Rates in the
15:21
Speaker 1: mall sector have been going backwards down the number line.
15:23
Speaker 1: To throw another reference at you, and when we look
15:26
Speaker 1: at some of the high quality properties versus you know
15:30
Speaker 1: you and I spent a lot of time talking about
15:32
Speaker 1: American Dream and uh in fact. Bloomberg Opinion ran a
15:35
Speaker 1: great piece yesterday talking about how mall landlords are spending
15:40
Speaker 1: huge dollars to offer these exponential type experiences and indoor
15:44
Speaker 1: ski malls and the retail location as an example. And
15:48
Speaker 1: the question is if you if you build it, will
15:51
Speaker 1: they come? And you know, at the end of the day, Look,
15:54
Speaker 1: there is no place like the mall. I have fond
15:57
Speaker 1: memories and going to the arcade, going to Mrs Fields
16:00
Speaker 1: Cookies and you know that was where we spent our weekends.
16:03
Speaker 1: And I know it's a different generation, but the mall
16:05
Speaker 1: guys are trying to reach out towards that next generation,
16:08
Speaker 1: whether it's through e sports venus. I do see the
16:10
Speaker 1: mall isn't going away. I think we're going to see
16:13
Speaker 1: an evolution of the mall space. I'm looking forward to it.
16:16
Speaker 1: Good stuff. I hope they put in pickleball. Pickleball, you're
16:18
Speaker 1: a big pickleball fan. Yeah, all on and whatever the
16:20
Speaker 1: latest fat is. David auerback Managing Director Armada E. T
16:24
Speaker 1: F S giving us his thoughts on the residential real
16:26
Speaker 1: estate market in their Residential reet Um Income et F
16:31
Speaker 1: H A U S House. Uh So we'll see how
16:35
Speaker 1: that goes, but mortgage rates at six percent makes it
16:37
Speaker 1: tough for some buyers. Now, let's talk about some industrial America,
16:45
Speaker 1: agricultural equipment, turbine engines, all that kind of good stuff.
16:49
Speaker 1: We can do that with Karen Herbal Hall Hubal Heart.
16:51
Speaker 1: She covers all that industrial stuff for Bloomberg Intelligence. Uh,
16:55
Speaker 1: Karen lots to talk about. Let's start with one of
16:58
Speaker 1: your all time faves. You've been following this company for decades, Ge,
17:01
Speaker 1: what do we learned today with their earnings and kind
17:04
Speaker 1: of what's their story going forward? Uh, well, you know,
17:07
Speaker 1: um on just briefly on the fourth quarter, I guess, uh,
17:10
Speaker 1: there was positive surprises and negative surprises on aerospace. That
17:14
Speaker 1: was kind of in line power, which is a big
17:17
Speaker 1: turnaround story. They did much better than expected on margins
17:21
Speaker 1: um double digit margins, which they haven't done in four years. UM. However,
17:25
Speaker 1: they lost that in renewables, which is um uh you know,
17:28
Speaker 1: an ongoing issue for them. UM. As far as the outlook, uh,
17:33
Speaker 1: you know, again it's going to be driven by aerospace.
17:36
Speaker 1: The outlook was lower than people expected on EPs spaces.
17:40
Speaker 1: I think they're probably low bowling on air on aerospace,
17:43
Speaker 1: and they're giving themselves the room for problems again in renewables,
17:47
Speaker 1: although the long term out look is good for renewable,
17:49
Speaker 1: so we might want to talk about that a bit.
17:50
Speaker 1: So all right, let's talk about that, and let's talk
17:53
Speaker 1: about the longer term outlook for General Electric for the stock.
17:56
Speaker 1: What do you think? What do you think? You know?
18:00
Speaker 1: I think is gonna be another wishy washy year because
18:03
Speaker 1: A they've still got a spin off Power Power, the
18:06
Speaker 1: energy business now called Veranova. That is a problem. It's
18:10
Speaker 1: going to lose money again this year. They're gonna try
18:12
Speaker 1: to get it out the door in the spin in
18:14
Speaker 1: the first quarter. So that's gonna be hovering over while
18:17
Speaker 1: we have the overlay of their ongoing business. Aerospace is
18:22
Speaker 1: going to have you know, over growth, uh you know, uh,
18:25
Speaker 1: you know, high double digit margins. And then the big
18:28
Speaker 1: issue that came up in the quarter, it was probably
18:30
Speaker 1: eight of the ten questions, was on what is free
18:32
Speaker 1: cash we're gonna look like next year? Um? What is
18:37
Speaker 1: look like? Okay, here we go, okay, um on that Okay,
18:40
Speaker 1: on that front, um, free cash. So it's gonna look
18:43
Speaker 1: good for airspace, but renewables and and powers since they
18:47
Speaker 1: have it's a very long term business. When they get orders,
18:50
Speaker 1: they have to disperse UM money up front on these
18:52
Speaker 1: long term projects, and they're gonna pay out three to
18:55
Speaker 1: four billion dollars in disbursements for projects in the renewable
18:59
Speaker 1: busines this which is really going to significantly impact free
19:03
Speaker 1: cash flow. They are gonna have positive free cash flow,
19:06
Speaker 1: it will be up from this year, but there's a
19:09
Speaker 1: lot of uncertainty about the timing and magnitude of the
19:11
Speaker 1: renewable up from payments. They will get that money back.
19:16
Speaker 1: But again, um, eight out of the ten questions were
19:19
Speaker 1: on how does free cash flow look next year? So
19:22
Speaker 1: I think that's what the focus is going to be
19:23
Speaker 1: on this, Karen. I like to look at, especially with
19:26
Speaker 1: big behemoths like this. I like to look at a
19:28
Speaker 1: comp screen CEMP on the Bloomberg. It automatically pulls up
19:31
Speaker 1: the stock over a five year window. And if I
19:34
Speaker 1: pull up GE over a five year window, put them
19:36
Speaker 1: up against Honeywell, Semens A, b B, what dogs, What
19:41
Speaker 1: a horrible, horrible investment it's been. Um, is it is
19:46
Speaker 1: that going to change? I mean, do I need to
19:49
Speaker 1: start from square one, wipe out the last four years
19:51
Speaker 1: and and and start my comp screen from you know
19:53
Speaker 1: yesterday or this month's yeah, you know once this you know,
19:58
Speaker 1: I think the long term picture for GE Aerospace is
20:01
Speaker 1: tremendous and that is gonna be GE core once everything
20:05
Speaker 1: else is gone. Um their market leader in engine in
20:08
Speaker 1: in the commercial engine business. They have um, you know
20:12
Speaker 1: a good position in military as well, but the focus
20:14
Speaker 1: will be commercial airspace. That recovery is still in very
20:17
Speaker 1: early phases. It's got a long way to go. Um,
20:20
Speaker 1: that business can probably plus margins. It's at eighteen percent. Now,
20:25
Speaker 1: that's story they're gonna when when they divest power the
20:28
Speaker 1: problem business. I mean, um, you know, energy, the power business,
20:31
Speaker 1: it's gonna be a high quality aerospace play and it's
20:35
Speaker 1: going to be a very interesting story. All right. One
20:37
Speaker 1: other stock that has done almost as poorly as GE,
20:42
Speaker 1: well maybe even worse depending on the window you look,
20:46
Speaker 1: UM is three M. I mean, over five years, three
20:49
Speaker 1: M has managed to underperform g E. How do you
20:52
Speaker 1: how do you do worse than General Electric? But they've
20:55
Speaker 1: done it. Why is it so bad? When you know
20:59
Speaker 1: other company is like that create that build big equipment
21:02
Speaker 1: in America like Caterpillar and Deer have done so much better.
21:07
Speaker 1: Three M has a huge overhang of UM litigation issues
21:11
Speaker 1: with UM T fast and or they have and also
21:15
Speaker 1: an air plug UM litigation T FAST is that forever chemicals.
21:19
Speaker 1: It's also affecting DuPont, etcetera. And that could be our
21:22
Speaker 1: litigation guys say that could be dollar overhang on the
21:26
Speaker 1: start for a while. Um they'll be they'll be litigating
21:29
Speaker 1: that for years and then they'll be paying it out
21:31
Speaker 1: over a long period of time. They can't get out
21:33
Speaker 1: from under that cloud. On top of that, the operating
21:35
Speaker 1: performance has been disappointing. So every you know, everywhere you look,
21:39
Speaker 1: it's not been great news for three MS. So I
21:41
Speaker 1: mean there's stock looks as bad as buyer. You know,
21:43
Speaker 1: the German chemical companies. Three M went public I p O.
21:48
Speaker 1: January nineteen o one, just before the crash and just
21:55
Speaker 1: before that, so that's when three M went public. So
21:57
Speaker 1: Karen pulling back the lens a little bit when they're
21:59
Speaker 1: firing and they're are we going to see those are
22:03
Speaker 1: we gonna see those kind of headcount cuts at Caterpillar
22:06
Speaker 1: at Deer Uh? Well, first, I think that's a signal
22:10
Speaker 1: um to the broad industrial sector because three M, with
22:14
Speaker 1: the breath of their product line in industrials and consumers,
22:17
Speaker 1: they kind of are g d P and they're kind
22:19
Speaker 1: of signaling that. And they did see they have expectations
22:22
Speaker 1: of declines and organic growth in every business but healthcare
22:26
Speaker 1: next year. So I think that's a signal to the
22:28
Speaker 1: broader industrial sector. However, Deer and Caterpillar are driven have
22:33
Speaker 1: a very good outlook in the commodity markets and they
22:36
Speaker 1: are really going to distinguish themselves in twenty three. Like
22:39
Speaker 1: you know, um, add equipment is going to be strong,
22:42
Speaker 1: mining is going to be strong. Uh you know, So
22:45
Speaker 1: that's why those docks are are are breaking away because
22:48
Speaker 1: they're in a commodity cycle that uh is going to
22:52
Speaker 1: continue to be strong. So there your industrial agricultural companies
22:58
Speaker 1: that we've been talking about, what did they do in
23:00
Speaker 1: a recession? Because it clearly boy All that they're going
23:03
Speaker 1: to see it right away they probably have seen it.
23:05
Speaker 1: Do they cut people? Do they cut they shut plants?
23:09
Speaker 1: What do your companies do? Well? You know, if if
23:12
Speaker 1: you're talking agg that's kind of a cycle of its own,
23:15
Speaker 1: and um, you know, given what's gone gone on bring prices,
23:18
Speaker 1: there's a good story there. Um. Chris Gilno covers that
23:21
Speaker 1: and can do that in more detail. But but on
23:24
Speaker 1: on the on Cat and Dear they're both in the
23:26
Speaker 1: construction equipment business as well, and there will be some
23:30
Speaker 1: minor hit to that business, but less than a normal
23:32
Speaker 1: recession because all the money the government spending. So that's
23:35
Speaker 1: the other thing. They have the Infrastructure Bill, the Inflation
23:38
Speaker 1: Reduction ACTOM, the Infrastructure Bill, money is starting to flow.
23:43
Speaker 1: Demand for that equipment is very very strong um and
23:46
Speaker 1: then that will continue as the Inflation Reduction Act starts
23:49
Speaker 1: to contribute later in the year. So they've got a
23:51
Speaker 1: lot of wind behind their sales um in in the
23:54
Speaker 1: construction side, and then the mining side looks good, and
23:56
Speaker 1: then the agg side looks good, so that those two
23:58
Speaker 1: companies that you've named, you know, have a very favorable album. Alright,
24:03
Speaker 1: good stuff, coluber Heart. She follows all that industrial stuff
24:07
Speaker 1: for that's medical America. That's it, dude. I mean, I reason,
24:11
Speaker 1: you know enough of this, enough of this Twitter junk,
24:16
Speaker 1: you know, enough of this cloud service exactly exactly. Even
24:21
Speaker 1: a wheelbarrow I'd be happy with. You know, Yeah, you
24:24
Speaker 1: got a Craftsman wheelbarrow. That's what you need, right, Well,
24:27
Speaker 1: I don't know about Craftsman but you've got your own
24:29
Speaker 1: brand loyalty and wheelbarrels. Does snap On make wheelbarrows? I
24:32
Speaker 1: don't know Mac Tools and knows. That's Coluberhart from Bloomberg Intelligence.
24:40
Speaker 1: It's kind of rough when you look under the foot
24:42
Speaker 1: of the of the dow of the s and P
24:44
Speaker 1: five three M is the biggest loser in percentage terms,
24:48
Speaker 1: they're down five and a half percent. I wonder what
24:50
Speaker 1: they thought, you know, when they said we're gonna cut
24:53
Speaker 1: jobs and they started preparing the press release. Do we
24:57
Speaker 1: buy these shares now because they're probably gonna pop tomorrow open.
25:01
Speaker 1: You're not a tech company. When the tech company's report
25:03
Speaker 1: job layoffs, the stock goes up. When you're just up
25:04
Speaker 1: playing old American industrial company, that's not People worry about demand, Hey,
25:09
Speaker 1: worry about demand, all right. A lot of folks like
25:11
Speaker 1: to talk about private equity, but we like talking about
25:13
Speaker 1: private credit. That's been an asset class, just really getting
25:16
Speaker 1: a lot of assets, a lot of attention over the
25:17
Speaker 1: last several years. It's been a really good business, particular
25:20
Speaker 1: when rates were lower. Now with the rates going higher,
25:22
Speaker 1: what's the outlook there for all things private credit? We
25:25
Speaker 1: welcome our good friend Randy Schwimmer, he's go ahead of
25:28
Speaker 1: senior lending and senior managing director over there at Churchill
25:31
Speaker 1: Asset Management. So, Radio, what does this asset class look like?
25:35
Speaker 1: What is your outlook for private credit in a world
25:38
Speaker 1: that's no longer you know, zero percent interest rates? We'll
25:41
Speaker 1: tell you if you liked private credit in two you
25:44
Speaker 1: are gonna love it in because what's happening is essentially
25:47
Speaker 1: the same thing that happened then, Rates going up, inflation
25:51
Speaker 1: coming down in the second half of the year, seemingly
25:53
Speaker 1: continue in the first quarter. UM strong economy, strong economy,
25:58
Speaker 1: yields up, so we're at practically record yields in terms
26:02
Speaker 1: of private credit for senior debt close to UM. Haven't
26:06
Speaker 1: seen that in a long long time, and it doesn't
26:09
Speaker 1: look like that's going away because the FED looks like
26:10
Speaker 1: they're gonna stick around for a while. So what do
26:13
Speaker 1: you expect from the Fed? And how key is that too?
26:16
Speaker 1: UM the asset class. What we know is that we
26:18
Speaker 1: don't really know where they're gonna end up because we
26:20
Speaker 1: don't have the data yet. They're taking it seems like
26:23
Speaker 1: a slower approach basis points. Looks like the outlook for
26:27
Speaker 1: the next hike. Um. What the FED members are saying is,
26:32
Speaker 1: let's see what the data brings. Let's get it up
26:34
Speaker 1: to four seventy five, which would be the next hike,
26:37
Speaker 1: get up to five percent and see what happens. Then
26:40
Speaker 1: the question is will we continue to see a strong
26:43
Speaker 1: economy which is bedeviling the FED right now because they're
26:45
Speaker 1: trying to slow things down. They've started to take the
26:49
Speaker 1: punch away from the punch bowl, away from the party,
26:51
Speaker 1: where they have to start turney lights on, dismissing the
26:54
Speaker 1: dj you know, telling people to leave the room. That
26:58
Speaker 1: would happen if you get up to a six percent
27:00
Speaker 1: FED funds rate, which would really slow things down. Paul,
27:02
Speaker 1: have you looked at con lately? Yes, I, thanks to you,
27:05
Speaker 1: I do. It's condition positive territory. It's it's looking good.
27:09
Speaker 1: Are great. The economy seems to be humming along just fine,
27:13
Speaker 1: and maybe that argues for a bigger push. How much
27:16
Speaker 1: does it matter, Randy? I mean, when the FED peaks,
27:19
Speaker 1: is that a problem for private credit because it's been
27:21
Speaker 1: on fire as they've been raising rates. We'll think about
27:23
Speaker 1: that level of interest rates. So the typical so first
27:27
Speaker 1: spread on senior credit right now six six on top
27:31
Speaker 1: of what let's say as a five to you know difference,
27:34
Speaker 1: a five percent benchmark and at six percent, now you're
27:36
Speaker 1: talking twelve percent cost twelve percent interest rates for senior debt.
27:41
Speaker 1: You know that all of a sudden makes the calculus
27:44
Speaker 1: tricky for private equity sponsors who are looking at their
27:46
Speaker 1: equity investments and saying, well, I'm trying to get yield
27:50
Speaker 1: on my equity, and now the senior dick guys are
27:52
Speaker 1: costing me. You know, how does that? How does that
27:56
Speaker 1: math work? So at some point that interest cost gets
27:59
Speaker 1: to be a real burden on these borrowers UM, and
28:01
Speaker 1: you're starting to see interest coverage shrink. We never paid
28:04
Speaker 1: attention to that in one because interest was basically zero.
28:09
Speaker 1: But now you're you're you've doubled interests, spreads and total costs.
28:14
Speaker 1: Now the interest coverage is tightening, and particularly with the
28:17
Speaker 1: have nots in the economy. So you've been talking about industrials,
28:20
Speaker 1: which in many cases are the halves in this in
28:22
Speaker 1: this economy right now doing very well, but in some
28:24
Speaker 1: of the have nots, with retail, some retail businesses, UM energy,
28:29
Speaker 1: some some heavy consumer facing businesses, those businesses are going
28:33
Speaker 1: to have a challenging time with higher interest rates. All right,
28:37
Speaker 1: So when a sponsor comes to you guys now with
28:39
Speaker 1: the deal, Um, are the covenants tighter? Are the you know,
28:44
Speaker 1: the leverage ration is different, the coverage races. Yeah, because
28:48
Speaker 1: because because coverage is tighter than the amount of debt
28:51
Speaker 1: that they can put on these companies is smaller. So
28:54
Speaker 1: that's come down anywhere from half to a full turn
28:56
Speaker 1: of leverage, which is really good for investors because lower leverage,
29:00
Speaker 1: lower risk, higher yield is better returns um. But from
29:04
Speaker 1: the issuer's perspective, it's going to be more costly. They're
29:07
Speaker 1: gonna have to watch their margins. So the businesses we
29:10
Speaker 1: like tend to be more high margin businesses, low capex,
29:13
Speaker 1: more defensive like business services. So as you look at
29:18
Speaker 1: your portfolio right now, I presume presume your credit guys
29:21
Speaker 1: are really shopping in their pencils saying, how is our
29:24
Speaker 1: portfolio set up right now for rising interest rates? What
29:27
Speaker 1: maybe a recession kind of what are you seeing here? Well,
29:31
Speaker 1: the way that our portfolio is constructed, it's mostly defensive
29:34
Speaker 1: industries as I mentioned, with high free cash flow um ratios,
29:38
Speaker 1: and so the business is generally speaking and doing quite well.
29:41
Speaker 1: In fact, for the third quarter. We don't have fourth
29:43
Speaker 1: quarter yet. Third quarter numbers for our portfolio, we call
29:46
Speaker 1: it the Griffin Index after after our mascot Churchill Griffin
29:50
Speaker 1: UM is up in revenues and cash flow over twenty
29:55
Speaker 1: Now those include companies that are doing add on so
29:58
Speaker 1: M and A is part of that. But these businesses
30:00
Speaker 1: are growing UM. To your point when you started about
30:02
Speaker 1: the economy, certainly in those areas that are more defensive,
30:06
Speaker 1: those businesses are doing well. Our portfolio companies are doing well.
30:09
Speaker 1: That seems to be the case in general in when
30:12
Speaker 1: you look at the more business services arena UM. And
30:17
Speaker 1: that's both the challenge and the opportunity that we have
30:20
Speaker 1: because if our portfolio continues to perform, it means we
30:23
Speaker 1: can continue to lend. So private equity firm comes to
30:26
Speaker 1: us and says, hey, we got a deal. We look
30:28
Speaker 1: at if it fits the kind of parameters that we
30:30
Speaker 1: like for these businesses. We have the capital to invest
30:33
Speaker 1: in and what is the deal flow like now you're
30:36
Speaker 1: seeing So we had a good January, good first part
30:40
Speaker 1: of January, some of its kind of leaked over from
30:41
Speaker 1: the end of the year UM. But the forward pipeline
30:46
Speaker 1: is slowed down, no question about it. What's helpful about
30:49
Speaker 1: direct lending is that the ratio of deals that are
30:52
Speaker 1: being done in the private credit space versus public is
30:55
Speaker 1: now foward and one in favorite private because of long
30:59
Speaker 1: term capital and the ability of folks like Churchill to
31:01
Speaker 1: commit large dollars and get deals done typical term loan
31:04
Speaker 1: from your typical deals like length. Yeah, so it's it's
31:08
Speaker 1: basically five to seven years. Um. Now, they don't last
31:11
Speaker 1: for that long because these companies tend to get reefinancier bought.
31:14
Speaker 1: So the average you know, ten or is probably two
31:17
Speaker 1: and a half to three years. You guys are doing
31:18
Speaker 1: small and mid size. Maybe these are companies that are
31:21
Speaker 1: between you know, fifty million revenues five million revenues. That's
31:25
Speaker 1: not kk R type deal, is it? Whose sources? So
31:27
Speaker 1: these are middle market private equity sponsors there. You know,
31:31
Speaker 1: we have two fifty that are in our stable that
31:34
Speaker 1: come to us all the time, and you know we're
31:36
Speaker 1: top one of the top lenders in the space. All right,
31:39
Speaker 1: A couple of things I want to ask about your
31:41
Speaker 1: business specifically, Um, you have a wildly popular newsletter to
31:45
Speaker 1: lead Left Left, and I feel like that could also
31:48
Speaker 1: be um and and an indicator as to the interest
31:51
Speaker 1: in the asset. Right, So what's it looks like? Well,
31:54
Speaker 1: what's interesting is we had an M and A webinar
31:57
Speaker 1: last week. We had seven hundred registrants. You know, not
32:00
Speaker 1: quite the Bloomberg radio audience for Paul and Matt, but
32:04
Speaker 1: but basically people going online and listening to what's going on.
32:07
Speaker 1: The short story from five top middle market investment bankers
32:11
Speaker 1: who came on this webinar to talk about business is
32:13
Speaker 1: it's a world of the haves and have nots. The
32:15
Speaker 1: haves being the companies that we talked about earlier, the
32:17
Speaker 1: defensive businesses the have nots, or the businesses that are
32:21
Speaker 1: more retail focused, higher capex and so forth. For those
32:25
Speaker 1: have not so there's no bid. If you're a seller.
32:28
Speaker 1: It's like if you you have a five dollar apartment,
32:31
Speaker 1: you want to get your five d thousand, somebody offers
32:33
Speaker 1: you four hundred. You know what, I'm gonna wait. So
32:35
Speaker 1: a lot of those sellers are waiting for the good businesses.
32:38
Speaker 1: And you know, you have an apartment to people like
32:39
Speaker 1: it's a nice area in Manhattan, they say, you know what,
32:41
Speaker 1: I'll give you that five I don't even need financing.
32:44
Speaker 1: I can close tomorrow. You're gonna sell that business. So
32:47
Speaker 1: we're seeing the haves getting traded, the haves not have
32:50
Speaker 1: nods not And the big factor now is the wait
32:53
Speaker 1: and see that we talked about with the Fed. What's
32:55
Speaker 1: the Fed gonna do, What's gonna happen with interest rates?
32:58
Speaker 1: And most importantly, what's gonna happen with valuations, Because for
33:01
Speaker 1: the haves, evaluations are okay, we we only have a minute.
33:04
Speaker 1: But I know one of the other questions, what's going
33:06
Speaker 1: to happen with the debt ceiling? We're gonna start talking
33:08
Speaker 1: about it every day and I'm already sick of it.
33:10
Speaker 1: I can't wait. But what do you what do you
33:12
Speaker 1: think about it? How does it impact Well, remember in
33:15
Speaker 1: UM it was a big deal. I can't believe that
33:17
Speaker 1: was twelve years ago. UM, and you know the mark
33:20
Speaker 1: public markets, we had a real strong reaction. We lost
33:24
Speaker 1: it a letter, we lost an A from the triple
33:26
Speaker 1: A to a double A UM. And I think it
33:30
Speaker 1: feels like government has become more fraught than it was then,
33:34
Speaker 1: and so it's gonna be a Can you believe government
33:36
Speaker 1: is more dysfunctional now than it was then. So here
33:40
Speaker 1: we are and we're gonna be all hopeful that a
33:42
Speaker 1: resolution is in place. I know we have till I
33:44
Speaker 1: guess June to figure it out. So I can't wait
33:46
Speaker 1: to listen and hear on Bloomberg Radio. All right, if
33:49
Speaker 1: I was coming out of the Chase credit program today
33:52
Speaker 1: like I did back in the day, I'd go work
33:54
Speaker 1: for these guys. I think Private Church is a place
33:56
Speaker 1: to go. Absolutely some of your resume and green sending
34:00
Speaker 1: my resume from one. I think I'm not even fifties,
34:04
Speaker 1: so I'll come over. Experience matters, Thank you, all right.
34:08
Speaker 1: Randy Scharmmer, he's cohed of Senior Lending. He's a senior
34:11
Speaker 1: managing director Churchill Asset Management. We love talking to Randy
34:14
Speaker 1: a because he's nearby and he can come to the studio.
34:16
Speaker 1: That's a plus. But we like just talking about private credit.
34:19
Speaker 1: It's a growing asset class and it's just where a
34:21
Speaker 1: lot of funds are going. Um it's where you know,
34:25
Speaker 1: you get some of these deals in the small midsize
34:27
Speaker 1: space on the M and A side, and it's a
34:30
Speaker 1: great capital structure these guys can put on you. We
34:32
Speaker 1: gotta get the lead left on the Bloomberg terminals where
34:34
Speaker 1: we have to Oh, that would be a good idea.
34:35
Speaker 1: Right now, you can go to lead Left dot com.
34:37
Speaker 1: But maybe we can include it in your Bloomberg subscription. Yeah,
34:40
Speaker 1: we'll take a look at that, all right. Randy Schremmer,
34:41
Speaker 1: thanks so much for joining us. Love talking about that stuff.
34:46
Speaker 1: Let's talk our c suite conversation of the day. Let's
34:49
Speaker 1: talk online grocery shopping. We can do that with che Hwang,
34:54
Speaker 1: CEO and co founder of a box that is a
34:56
Speaker 1: New York Stock Exchange listed company the tickers b O
35:00
Speaker 1: x D. Put that into your Bloomberg Professional terminal and
35:03
Speaker 1: take a look at that. So Shae, thanks so much
35:06
Speaker 1: for joining us here. Inflation is kind of the topic
35:09
Speaker 1: of the day for all consumers. Um, and boy, I'll
35:12
Speaker 1: tell you the place I feel it the most. I
35:14
Speaker 1: think is in the supermarket, is in the grocery store.
35:17
Speaker 1: Talk to us about how it's impacting your business. I
35:21
Speaker 1: wish I could say I was immune from it, but
35:22
Speaker 1: as a consumer, I feel it as well. And it's
35:25
Speaker 1: not just the topic of the day, but probably the
35:27
Speaker 1: topic of the year as well. Um. You know, it's
35:30
Speaker 1: been rampant throughout the industry first we had supply chain.
35:33
Speaker 1: Now we just have general inflation, uh kind of problems.
35:37
Speaker 1: But overall, it's not an easy time being a consumer
35:41
Speaker 1: in those grocery aisles, in store or online. So what
35:46
Speaker 1: um kind of experiences boxed offering consumers? And is it
35:49
Speaker 1: just consumers? I feel like you have a B to
35:52
Speaker 1: B component as well. Yeah, absolutely so. Traditionally, um pre
35:57
Speaker 1: covid O, our business was seventy beata see B two B.
36:02
Speaker 1: So anyone who wants wholesale consumables delivered to their doorstep,
36:06
Speaker 1: whether they live out in rural areas or they they're
36:09
Speaker 1: in a city office, we can service them anywhere in
36:12
Speaker 1: the lower forty eight states. But why, what's what's the
36:15
Speaker 1: unique selling point here? I mean, do I pick a
36:18
Speaker 1: box of stuff? Do I put all the stuff I
36:21
Speaker 1: want in my box? Um? Do you deliver it quickly?
36:24
Speaker 1: What's what separates you from other online grocers? Yeah? I
36:28
Speaker 1: think the answer is yes to everything you just said.
36:31
Speaker 1: So we've built a business on allowing folks to build
36:34
Speaker 1: a basket of these goods. So the typical consumer buys
36:36
Speaker 1: eight items and so we ship it to you generally
36:39
Speaker 1: in two days or less. Many folks get it overnight
36:42
Speaker 1: direct your doorsteps, so you don't have to lug all
36:44
Speaker 1: this stuff all around and without a membership fee. You know.
36:47
Speaker 1: On top of that, because folks generally buy so many
36:50
Speaker 1: items at once, we can admortise that shipping price for
36:53
Speaker 1: individual items over that giant box that you get. So
36:56
Speaker 1: we actually offer pretty compelling prices compared to other online
36:59
Speaker 1: folks when you compare the unit price. And if you
37:01
Speaker 1: think about us not charging a membership so you talked
37:05
Speaker 1: to us about the membership fee aspect, what's the strategy there,
37:07
Speaker 1: How does it compare against others membership fee? Right? Right? Right?
37:11
Speaker 1: So I just want to get a sense of kind
37:12
Speaker 1: of what's the strategy behind that and how that, you know,
37:16
Speaker 1: comparis to your competitors. Yeah, so a lot of competitors
37:19
Speaker 1: out there do charge a membership fee, uh, in order
37:22
Speaker 1: to shop, but we just decided not to do that.
37:24
Speaker 1: I think when you look at other ways that we've
37:27
Speaker 1: been able to lower prices, whether it's getting folks to
37:29
Speaker 1: buy a lot in a single card as I just mentioned,
37:32
Speaker 1: or partnering with manufacturers in order to get some advertising
37:36
Speaker 1: on our site to subsidize those prices. Uh. You know,
37:39
Speaker 1: we've been doing a pretty good job. I think, and
37:41
Speaker 1: consumers time and time and again come to Box, whether
37:44
Speaker 1: you're a business or consumer, not only for kind of
37:46
Speaker 1: the fast shipping, the ease of use, but also pretty
37:50
Speaker 1: sharp pricing as as well. So I've was living in
37:54
Speaker 1: Berlin for the past few years, and over there, Uh,
37:57
Speaker 1: you order online groceries, they get to you in like
38:00
Speaker 1: ten to twelve minutes. Um. Guerrillas was one of the brands.
38:05
Speaker 1: Flicker Flinker was another one. Is how come that isn't
38:08
Speaker 1: picking up here in the US? UM? I think it
38:12
Speaker 1: had quite a brief kind of flash in the pan moment.
38:16
Speaker 1: I would say probably a year ago. Um, at least
38:18
Speaker 1: here in New York where I'm standing right now. You know,
38:20
Speaker 1: there were ads everywhere. UM. I think you know, for
38:23
Speaker 1: what it's worth. UM, it does have its place sometimes
38:26
Speaker 1: you just need something in the next ten minutes. But
38:30
Speaker 1: for the most part, I think your general bigger shops
38:33
Speaker 1: are probably taking place once a week, uh, and for
38:35
Speaker 1: the wholesale stuff maybe once every other week. UM. So
38:38
Speaker 1: I think the future really will be dominated by whoever
38:42
Speaker 1: solves that end to end kind of experience. I I
38:44
Speaker 1: need wholesale in a week, but I need Uh, something
38:48
Speaker 1: an ingredient for my my recipe in thirty minutes, but
38:51
Speaker 1: I need my weekly shop in two hours right now.
38:54
Speaker 1: As simple as that sounds, no one has that end
38:57
Speaker 1: to end, seamless experience, and I think that's what everyone
38:59
Speaker 1: in grocery is trying to chase. So how has your
39:03
Speaker 1: business evolved during the pandemic over the last several years. Oh,
39:09
Speaker 1: it's it's involved quite a bit. So I know, we
39:11
Speaker 1: just talked about B two B. So B two B.
39:13
Speaker 1: I mean we saw major headwinds. Uh during the depth
39:17
Speaker 1: of COVID. You can imagine we serve at small do
39:20
Speaker 1: medium sized offices, transportation companies. Um, those folks just weren't
39:24
Speaker 1: ordering UM. But we're seeing that rocket back. So UM
39:29
Speaker 1: B two B. If we're gonna talk numbers, hard numbers.
39:32
Speaker 1: Through Q three of last year, it was up a
39:34
Speaker 1: blended over fift So folks are really coming back and
39:37
Speaker 1: ordering more UM. And also all this technology that underpins
39:41
Speaker 1: our whole business. We wrote it ourselves, whether it's the
39:44
Speaker 1: middle where the automation hardware. We then extracted it and
39:48
Speaker 1: now we began to license that technology to folks all
39:52
Speaker 1: around the world. So we've evolved quite a bit throughout
39:54
Speaker 1: that time as well. So UM one of the very
39:58
Speaker 1: successful pieces of UM grocery business are private labels, right,
40:05
Speaker 1: UM shop Rate has bowl and basket Costco has Kirkland. UM.
40:11
Speaker 1: What do you what are you doing in in that uh?
40:15
Speaker 1: In that regard at box. Yeah, you know, I love
40:18
Speaker 1: the question because you guys have covered it so much
40:20
Speaker 1: in terms of just the inflationary environment, how it affects
40:23
Speaker 1: the consumer, how how it affects businesses. You know, one
40:26
Speaker 1: of the things that I think UM hasn't been said
40:30
Speaker 1: by by some of the previous guests that you guys
40:32
Speaker 1: have been on is actually how people behave in previous
40:35
Speaker 1: kind of recessionary or inflationary environments. And that's folks trading
40:39
Speaker 1: up or trading down. So they generally trade down to
40:42
Speaker 1: dollar stores, hard discounters if they're looking for just a
40:46
Speaker 1: better deal on a whole dollar basket UM, or they
40:49
Speaker 1: trade up. So I'm sure you know, folks at Bloomberg
40:52
Speaker 1: Radio consume a lot of salts or water just like
40:54
Speaker 1: I do. And if that's the case, then you know,
40:57
Speaker 1: if you have the wherewithal, you're gonna buy that giant
41:00
Speaker 1: hack instead of buying a single can every single day. Now,
41:03
Speaker 1: once you go in the store, Um, you're also going
41:06
Speaker 1: to trade up sometimes or trade down, you know, uh,
41:09
Speaker 1: depending on the price point for certain items. And a
41:12
Speaker 1: way you can trade down in terms of price but
41:14
Speaker 1: not quality is private brand and private brand everyone out there,
41:17
Speaker 1: if you haven't tried, not only us, but our others
41:20
Speaker 1: out there. This is not the generic brands of like
41:23
Speaker 1: ten years ago. There has been billions of dollars invested
41:27
Speaker 1: into the manufacturing of these products, and their quality is
41:30
Speaker 1: actually quite good these days. So I'm looking at the
41:33
Speaker 1: f A function on the Bloomberg terminal, give me some um,
41:35
Speaker 1: and it shows me some of the forecasts out there
41:37
Speaker 1: from Wall Street here doesn't show you, guys turning EPs
41:41
Speaker 1: positive anytime soon. What's what's kind of your financial outlook?
41:44
Speaker 1: Has it released the profitability because that seems to be
41:46
Speaker 1: what the market really wants these days. Yeah, yeah, Um.
41:50
Speaker 1: So we've been trying our best and and pulling in
41:53
Speaker 1: that profitability number. So in Q two, in our earnings
41:56
Speaker 1: call last year, we told folks, hey, we get it. Um,
42:00
Speaker 1: I think we could do a better job on fully
42:03
Speaker 1: and profitability. We executed and as of our last earnings call. Um,
42:07
Speaker 1: just in one short quarter, we announced an eight eight
42:10
Speaker 1: percent rise uh in um uh in gross profit over
42:14
Speaker 1: a five basis point rise and gross margin on our
42:17
Speaker 1: retail business, and of course we have the software business,
42:20
Speaker 1: which is traditionally gross margin. And as we begin to
42:23
Speaker 1: recognize some of that revenue, I think you're just see
42:26
Speaker 1: that flow through the p n L. So it's just
42:28
Speaker 1: like every other technology company out there, we're really trying
42:30
Speaker 1: to rein in profitability and costs. All right, A good stuff.
42:33
Speaker 1: Appreciate that. Cha Huang, CEO and co founder of A
42:36
Speaker 1: Box that's online retailer uh the New York Stock Change
42:40
Speaker 1: symbols b o x D. At a banner day last
42:43
Speaker 1: week they got funding I think uh ten or twenty
42:47
Speaker 1: million dollars in funding and the shares went up. Um.
42:52
Speaker 1: That was Monday. That was Monday. All right, good stuff.
42:55
Speaker 1: Not a bad day. Not a bad day. If you're
42:57
Speaker 1: a shareholder there. Thanks for listening to the Bloomberg Markets podcast.
43:04
Speaker 1: You can subscribe and listen to interviews of Apple podcasts
43:07
Speaker 1: or whatever podcast platform you prefer. I'm Matt Miller. I'm
43:11
Speaker 1: on Twitter at Matt Miller three pt on Fall Sweeney
43:15
Speaker 1: I'm on Twitter at pt Sweeney before the podcast. You
43:18
Speaker 1: can always catch us worldwide at Bloomberg Radio