Latest / Bloomberg Intelligence / EM Investors Are Very Worried About China: Van Eck’s Fine

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EM Investors Are Very Worried About China: Van Eck’s Fine · Bloomberg Intelligence

0:05
Speaker 1: Welcome to the Bloomberg p m L Podcast. I'm pim Fox.
0:08
Speaker 1: Along with my co host Lisa Bramowitz. Each day we
0:11
Speaker 1: bring you the most important, noteworthy, and useful interviews for
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Speaker 1: you and your money, whether you're at the grocery store
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Speaker 1: or the trading floor. Find the Bloomberg p m L
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Speaker 1: Podcast on Apple Podcasts, SoundCloud, and Bloomberg dot Com. We're
0:27
Speaker 1: very lucky right now to be joined by Eric Fine,
0:29
Speaker 1: portfolio manager and Emerging markets fixed income at Strategy at
0:33
Speaker 1: van Eck Global. He just returned from I MF meetings
0:37
Speaker 1: in Bali. He got back Sunday night. He's been going
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Speaker 1: to these meetings for twenty years. This one, this one
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Speaker 1: was different for you. How so um this Well, first,
0:49
Speaker 1: what's different is they're crowded, um, and there are a
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Speaker 1: lot of people and it speaks to the amount of
0:53
Speaker 1: investment that's going into the e M and e M
0:55
Speaker 1: bonds and and that's a good thing. Um. But uh,
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Speaker 1: I think the biggest thing is, uh, this is one
1:01
Speaker 1: of the most if not the most you know, uh
1:04
Speaker 1: worried meetings in the sense of, you know, I go
1:06
Speaker 1: to the meetings and then I spend time with the
1:08
Speaker 1: old timers afterwards and see you know you are you
1:10
Speaker 1: leaving here as more of a seller or more of
1:11
Speaker 1: a buyer because you have to have a bottom line
1:13
Speaker 1: on everything obviously, and uh um and and and and
1:16
Speaker 1: a seller, but uh much more concerned about China. That's
1:20
Speaker 1: really the thing China set up is. Though you could
1:22
Speaker 1: have said a lot of the things that are being
1:23
Speaker 1: said now a year ago, two years ago, five years ago,
1:26
Speaker 1: um um and uh and I think that's fair. The
1:28
Speaker 1: issue is when is it relevant? Wise it matter? And
1:31
Speaker 1: that's why I care. Is it now for reasons I
1:33
Speaker 1: can get into. But now it's elevated as a concern. Well,
1:36
Speaker 1: that's where I wanted to go. Is this matter of
1:38
Speaker 1: China's economy accelerating it slowdown? Or does this have to
1:41
Speaker 1: do with trade tensions with the US? Um? I think
1:44
Speaker 1: I think you can't disentangle the issues, um um, even
1:47
Speaker 1: though uh you know it's trade is a big jobs
1:51
Speaker 1: generator in uh in China and the current account uh
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Speaker 1: surplus is declining and uh that's a that's an important
2:01
Speaker 1: uh as I said, poor generator jobs, which it's important
2:03
Speaker 1: generative confidence. Why do I say that the set up
2:06
Speaker 1: for China, I don't. I think China is a country
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Speaker 1: that has for twenty years been disciplined by equity investors.
2:11
Speaker 1: What do equity investors want? Growth growth, growth, growth, growth growth.
2:15
Speaker 1: Bond investors are very different. They're happy with recessions, they
2:19
Speaker 1: welcome recessions. They worry about over leverage. Right, so they've
2:22
Speaker 1: gotten the growth. But with the growth, they've gotten the growth.
2:25
Speaker 1: With with with the growth came immense leverage. So the set up,
2:28
Speaker 1: the initial conditions are bad. They're not bad in the
2:30
Speaker 1: traditional sense of oh my gosh, they owe a lot
2:32
Speaker 1: of dollars and they don't have them. It's a very
2:35
Speaker 1: different setup, and that's why people have been calm, and
2:37
Speaker 1: that's also essentially why I think the market has been
2:39
Speaker 1: right to sort of say, you know, it's not really
2:41
Speaker 1: it's a problem, but not really a problem for today
2:43
Speaker 1: and not something here. The issue there is domestic claims.
2:46
Speaker 1: The most acute phase of EM crisis, in my experience,
2:49
Speaker 1: is when locals lose confidence and all the money M zero,
2:53
Speaker 1: the money in your pocket, M want a short term
2:55
Speaker 1: claim like a demand deposit or M two, something like
2:57
Speaker 1: include savings accounts UM. When that when people start closing
3:01
Speaker 1: that and saying I want the dollars. I want the reserves.
3:04
Speaker 1: And that ratio in China is basically the worst in
3:06
Speaker 1: the world. Um, the amount of domestic claims on dollars
3:09
Speaker 1: and you know what you're getting for a tenure bond
3:11
Speaker 1: in China and the local currency three and a half
3:14
Speaker 1: percent in a tenure Do I need to say anything else? Right?
3:17
Speaker 1: That's the issue. And oh if the argumacy, Oh they
3:20
Speaker 1: can hike interest rates, high interest rates, what is that
3:22
Speaker 1: going to do to growth? Right? And and if the
3:24
Speaker 1: growth gets hit, this is an economy that depends on
3:26
Speaker 1: significant investment, almost half of GDPs and investment. So those,
3:30
Speaker 1: I think are the issues that are coming to the fore.
3:32
Speaker 1: But they're coming. The trigger is, as you're suggesting, is trade. Um.
3:37
Speaker 1: But this broadening of this tense of the relationship with China,
3:40
Speaker 1: or the tense points on to beyond trade, I think
3:42
Speaker 1: is is settling it in people's minds. And there and
3:46
Speaker 1: and uh, it's a new big risk. When you talk
3:48
Speaker 1: about a new big risk. There is a headline in
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Speaker 1: the South China Morning Post several weeks ago six trillion
3:56
Speaker 1: dollar debt bubble which Chinese local authorities have built up.
4:05
Speaker 1: Go ahead, you know everything unwind that without a lot
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Speaker 1: of pain. Yeah. Look, I I and and today's announcement
4:13
Speaker 1: is more sort of new products, right, more and more
4:15
Speaker 1: and more leverage. And I was struck by how more
4:18
Speaker 1: leverage and stimulation is seems to be. My sense is
4:23
Speaker 1: that it's viewed as a legitimate policy option. More stimulation,
4:27
Speaker 1: stimulating and then having your currency weakend is not stimulating, right,
4:30
Speaker 1: that that's that's spinning your wheels, right, and trying to
4:33
Speaker 1: get out of something. Um. Every time we've looked at
4:35
Speaker 1: the Chinese financial system um um. And when we seem
4:39
Speaker 1: that we feel like we get a handle on it, um,
4:42
Speaker 1: some new balance sheet with leverage comes up, and so
4:45
Speaker 1: that's a real problem. The one thing that we've consistently said, though,
4:49
Speaker 1: and that is probably still the case, is the Chinese
4:51
Speaker 1: authorities are extremely impressive when you bring up these problems.
4:55
Speaker 1: If you brought up that problem, they are not denying it.
4:58
Speaker 1: That's the other thing that characterizes free crisis. They know
5:00
Speaker 1: these they have tools to do. They come up with
5:03
Speaker 1: tools to deal with it. Um. It's just that what
5:06
Speaker 1: they need to do might be bigger than what they've fought.
5:09
Speaker 1: So you know, you've got to give them the benefit
5:11
Speaker 1: of the doubt. But these issues are are are come
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Speaker 1: up and they're real, and so far the government's had
5:17
Speaker 1: the credibility to say, look, don't worry about it, We're
5:20
Speaker 1: doing something. So I want to go back to those
5:21
Speaker 1: I m F meetings that you had with the old
5:23
Speaker 1: time ers, as you said, how much are they considering
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Speaker 1: that a possible disruption in China? How much of an
5:31
Speaker 1: impact would that have on the rest of the emerging
5:33
Speaker 1: markets complex in which countries would get hit the hardest?
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Speaker 1: And are they staying away from as a result of
5:39
Speaker 1: this uncertainty. Short answer, profound impact and all right, um now, yeah,
5:44
Speaker 1: but but I don't think that means run for the hills, right,
5:48
Speaker 1: Argentina has already been through a lot. Right, you can
5:50
Speaker 1: find short dated bonds with high yields where right or
5:53
Speaker 1: wrong in the world. If they mature and they pay
5:55
Speaker 1: their care, you're going to be fine. So kudos to you,
5:58
Speaker 1: because when you came in here you basically called the
6:00
Speaker 1: bottom of the Argentinian bonds sell offs to carry on.
6:02
Speaker 1: Thanks thanks, notice So, but there are there are a
6:05
Speaker 1: lot of countries that are being stressed out by tougher
6:07
Speaker 1: financial conditions and the trade trade conflict UM and UH UM.
6:11
Speaker 1: And so one one straightforward answer is there's you know,
6:14
Speaker 1: there's there's some cheap things to do in UH in
6:17
Speaker 1: in emerging markets, UM and and and those are those
6:20
Speaker 1: of them. But China has been opening for forty years. UM.
6:23
Speaker 1: For the last forty maybe the thirty plus years, you've
6:25
Speaker 1: had declining inflation and inflation expectations and rising trade. UM,
6:31
Speaker 1: they've been related, right. I mean, it's, you know, the
6:34
Speaker 1: the economic logic of globalization, optimizing global outcomes and reducing
6:39
Speaker 1: inflation and is correct. UM doesn't mean it's right, but
6:43
Speaker 1: it's it's certainly correct UM and UM. I think that's
6:47
Speaker 1: at risk this thirty year trend. Thanks very much for
6:49
Speaker 1: being with us, and we look forward to having you
6:52
Speaker 1: in the future. Eric Fine lots to talk about portfolio
6:55
Speaker 1: manager emerging markets fixed income strategy for van eck Loobal.
7:03
Speaker 1: For much of this week, the news in Washington, d
7:06
Speaker 1: C was dominated by Saudi Arabia and US relations and
7:09
Speaker 1: what would happen now that there was a disappearance that
7:13
Speaker 1: resulted in the most likely death of a journalist who
7:16
Speaker 1: worked for the Washington Post. But is that the big
7:19
Speaker 1: takeaway from this week? Marty Schanker joins US now chief
7:21
Speaker 1: content officer for Bloomberg News. Definitely, Uh, the news out
7:25
Speaker 1: of Washington, d C. Is moving so quickly that you
7:27
Speaker 1: blink you miss it. How much lasting power will the
7:30
Speaker 1: Saudi Arabia US story have going forward or will people
7:34
Speaker 1: just sort of forget about this doesn't have legs. It
7:36
Speaker 1: definitely does have legs, and uh, you know, it continues
7:40
Speaker 1: even today. There's somewhat of a lull. It's a it's
7:44
Speaker 1: the Sabbath in the region, in the Mid East, so
7:47
Speaker 1: there isn't a lot of news. But in the the
7:51
Speaker 1: issue as it relates to Donald Trump's response is still
7:54
Speaker 1: very top of mind. Um in the politics of Washington.
7:59
Speaker 1: Whether or not at actually resonates into the mid term
8:02
Speaker 1: elections is another question. Why because I think that mid
8:07
Speaker 1: term Why Why is it resonating so strongly politically? Because
8:13
Speaker 1: it in some ways, and I think the news channels
8:17
Speaker 1: reflect this. It speaks to Donald Trump's unconventional way of
8:23
Speaker 1: conducting foreign policy and the transactional nature of his presidency.
8:28
Speaker 1: You know, immediately people have gone to the whole issue
8:31
Speaker 1: of what kind of business relationship does Donald Trump have?
8:35
Speaker 1: Why isn't there a sense of complete outrage. Why aren't
8:38
Speaker 1: we taking very concrete steps to sever our close relationship
8:44
Speaker 1: with Saudi Arabia? And in Donald Trump's defense, it is
8:48
Speaker 1: a much It is a very complicated issue. And many
8:54
Speaker 1: people have commented on the fact that, uh, because o
8:58
Speaker 1: Ji's death, will try magic hundreds of thousands of people
9:02
Speaker 1: being killed in Yemen, and no one says a word
9:04
Speaker 1: about that. Indeed, And just to kind of add a
9:08
Speaker 1: little bit more to the story, there was a report
9:12
Speaker 1: that Secretary of State Mike Pompeo initially did hear the
9:17
Speaker 1: audio that the Turkish government claims they have, when in fact,
9:21
Speaker 1: a State Department spokeswoman came out yesterday and said noe
9:25
Speaker 1: had neither heard the audio nor the transcript. So my
9:30
Speaker 1: question then is what do you think Secretary of State
9:34
Speaker 1: Mike Pompeo was doing in Saudi Arabia and is there
9:39
Speaker 1: a potential for conversations about succession planning in Saudi Arabia. Well,
9:45
Speaker 1: I can't speculate about what mom Mike Pompeo was thinking,
9:49
Speaker 1: but clearly all the participants in this controversy are trying
9:54
Speaker 1: to figure a way out um that includes Donald Trump,
9:58
Speaker 1: that includes this the Saudi government UM in a way
10:04
Speaker 1: that provides some accountability for what happened in the in
10:08
Speaker 1: the Saudi embassy and Anchora, while still having repercussions. And
10:14
Speaker 1: Donald Trump did hint at that that there would be
10:18
Speaker 1: severe consequences if it was determined that there was a
10:21
Speaker 1: murder uh in some way connected to the Saudi government.
10:26
Speaker 1: But it is true that the Saudi the Saudis are
10:31
Speaker 1: critically important to the strategic interests of the United States,
10:35
Speaker 1: and you have to balance that against you know, this
10:39
Speaker 1: obviously outrageous action, UM, and they're all trying to figure
10:43
Speaker 1: a way out. So let's talk about the political fallout.
10:47
Speaker 1: There definitely has been vocal criticism from fellow Republicans in
10:51
Speaker 1: the Senate and elsewhere. There are reports that Nicki Haley
10:55
Speaker 1: may have resigned from the u N Post as a
10:59
Speaker 1: result of this. Is there any truth to that? Well,
11:01
Speaker 1: we're you know, that is the big question. No one,
11:06
Speaker 1: as far as I can tell, have definitively said why
11:09
Speaker 1: Nikki Halley decided to resign and why she decided to
11:12
Speaker 1: resign now, UM. None other than Steve Bannon, who's not
11:18
Speaker 1: should not be underestimated in terms political acumen, said that
11:22
Speaker 1: this was a horrible thing to do, terrible timing, you know,
11:28
Speaker 1: like less than a month before mid terms. She was
11:31
Speaker 1: at the Al Smith dinner last night and actually joked
11:33
Speaker 1: a little bit about it. Um, but it could have
11:37
Speaker 1: been a factor. But then there are you know, multiple
11:39
Speaker 1: things that could also. There was also a report that
11:42
Speaker 1: it was Kavanaugh, which she denied. Anyway, she has her
11:46
Speaker 1: reasons and maybe ultimately we'll find them out. So let's
11:51
Speaker 1: shift gears a little bit because we are heading into
11:53
Speaker 1: the midterm elections and I'm just wondering how important it
11:57
Speaker 1: is to sort of watch what comes out of President
11:59
Speaker 1: Trump's Twitter feed to figure out his agenda over the
12:02
Speaker 1: next couple of months or next couple of weeks ahead
12:05
Speaker 1: of the midterm elections. Right, and we've already got a
12:06
Speaker 1: lot of discussion about UH, immigration and the and the margin.
12:11
Speaker 1: What should we pay attention to him? Well, I think
12:14
Speaker 1: if you looked at his uh, if you listen to
12:16
Speaker 1: his rally speech last night, he sort of outlined what
12:19
Speaker 1: his strategy is for the mid terms, it's you know
12:22
Speaker 1: that the economy is great, We're going for safe boarders.
12:27
Speaker 1: I think he used the slogan that the Democrats are
12:30
Speaker 1: mobs and the Republicans are about jobs, and that's pretty
12:33
Speaker 1: effective argument whether it and there are there is polling
12:38
Speaker 1: that shows that, you know, there is a narrowing of
12:42
Speaker 1: this race, that the blue tide is actually could be
12:46
Speaker 1: questioned um, and that the poll numbers are moving in
12:49
Speaker 1: the GOP's direction. So that kind of messaging may quite
12:53
Speaker 1: maybe quite effective. As we run down to the final
12:57
Speaker 1: days of the Smith term campaign, just a little bit
13:00
Speaker 1: more on Saudi Arabia, Marty is it uh? Is it
13:05
Speaker 1: a situation where business interests are colliding with strategic interests? Actually,
13:11
Speaker 1: I would say that they're similar their blind uh and
13:16
Speaker 1: we and others have written stories while the headline people
13:20
Speaker 1: like Jamie Diamond about out of the investor conference next week,
13:25
Speaker 1: a lot of the underlings are going to be in
13:30
Speaker 1: the region and attending that conference because there are such
13:34
Speaker 1: financial there is such financial importance to the Saudi Arabia
13:41
Speaker 1: UM wealth that no one can afford to kind of ostracized.
13:46
Speaker 1: So there are deep historical financial connections that will underpin
13:52
Speaker 1: that relationship, just as there are deep political uh strategic
13:57
Speaker 1: relationships on the government side that will continue that relationship.
14:01
Speaker 1: Thanks very much for being with us, Always a pleasure
14:04
Speaker 1: Marty Schenker. He is our chief content officer here at
14:07
Speaker 1: the Bloomberg News. Much appreciated talking about Saudi Arabia and
14:11
Speaker 1: US relations in light of the disappearance and alleged murder
14:16
Speaker 1: of the Jamal Kashogi, a contributing journalist to The Washington Post.
14:24
Speaker 1: It's time to talk about Brazil and Brazil's largest airline group.
14:29
Speaker 1: Well in English, it's called Goal Intelligent Airlines. It carries
14:34
Speaker 1: more than thirty three million passengers each year on more
14:37
Speaker 1: than seven daily flights more than sixty destinations. The chief
14:42
Speaker 1: financial officer is Richard Larkin. He joins us here in
14:45
Speaker 1: our Bloomberg Interactive Broker's studios. Richard Lark, thank you very
14:48
Speaker 1: much for being here. Thank you a good morning. Start
14:51
Speaker 1: by just describing for people that may not be familiar
14:54
Speaker 1: with your airline how it came to be and how
14:59
Speaker 1: it has come to really be the premier airline in Brazil. Yeah,
15:04
Speaker 1: we started in two thousand one, which is about one
15:07
Speaker 1: year after we had uh deregulation in Brazil UH. And
15:12
Speaker 1: we started with a traditional low cost carrier based on
15:17
Speaker 1: a single fleet type, which for US was the Boing
15:19
Speaker 1: seven thirty seven high operating efficiency, high utilization, and we
15:24
Speaker 1: started with four aircraft in two thousand one, and a
15:28
Speaker 1: combination of the cost advantage of the company plus the
15:32
Speaker 1: fair dynamic allowed us to over a ten year period,
15:36
Speaker 1: UH become the largest airline in Brazil. That was also
15:40
Speaker 1: helped by two acquisitions that we did. And over the
15:42
Speaker 1: last couple of years we've we've been investing heavily in
15:45
Speaker 1: our product, UH technology and the onboard customer experience, which
15:51
Speaker 1: has allowed us today to become the number one business
15:55
Speaker 1: airline in Brazil. All right, so let's fast forward to now.
15:59
Speaker 1: We have a situation where the Brazilian economy has been
16:03
Speaker 1: mired in a deep recession, the worse in its history. UH.
16:06
Speaker 1: Things are starting to look up a little bit, at
16:08
Speaker 1: least when you look at bond and stock markets, possibly
16:11
Speaker 1: because of the candidate Bosonaro that looks like the front
16:13
Speaker 1: runner who has a much more conservative view towards cutting
16:17
Speaker 1: the deficit and rearranging some of the pension the pensions.
16:21
Speaker 1: I'm just wondering, from your perspective, how much will this
16:24
Speaker 1: give a boost to your company should this go through
16:29
Speaker 1: and there is some measure of reform that gets enacted
16:33
Speaker 1: on the governmental level. Yeah, Obviously we can't predict the
16:36
Speaker 1: outcome of the elections, but assuming UH we see that, UH,
16:40
Speaker 1: you know, we see well adjust to the outcome. UH,
16:43
Speaker 1: you know, we see UM. A lot of components in
16:48
Speaker 1: bolson Oars platform are very clear in terms of the
16:50
Speaker 1: impact that they're going to have on our sectors, such as,
16:53
Speaker 1: in addition to the reforms you mentioned, you know, pension
16:58
Speaker 1: tax reform, we're also UH in his platform seeing some
17:02
Speaker 1: things will be positive for the airline sectors, such as
17:05
Speaker 1: increasing airport privalizations. We have a dire need for improvement
17:09
Speaker 1: and infrastructure and airports and airspace in Brazil, and a
17:14
Speaker 1: general liberalization of a lot of the other regulations that
17:16
Speaker 1: affect our sectors, such as bilateral agreements UH on international
17:23
Speaker 1: travel for on capital rules UM and UH. We also
17:28
Speaker 1: think that UM the policies are gonna have a positive
17:31
Speaker 1: impact on demand, particularly in the corporate space and within
17:34
Speaker 1: that particularly the agro UH, the agro sector in Brazil,
17:38
Speaker 1: which is a big portion of our air travel base. Also,
17:42
Speaker 1: just to get specific on goal for a moment, ratings upgrade,
17:46
Speaker 1: when it comes to your credit tender offers, redemptions, improved
17:51
Speaker 1: cash liquidity. This is all giving you greater financial flexibility,
17:58
Speaker 1: any idea what you're gonna do with the money. Well,
18:02
Speaker 1: in the short term, we're continuing deleveraging over the next
18:05
Speaker 1: two years. UH. We expected delever by another two billion eyes,
18:08
Speaker 1: which is uh, you know, call it five six million dollars. UH,
18:13
Speaker 1: and that that's the main focus of this this additional
18:17
Speaker 1: cash flower generating. In the short term is continued deleveraging. UH.
18:21
Speaker 1: We were upgraded back to a single B, but our
18:24
Speaker 1: our target is to get back to double B minus
18:26
Speaker 1: entity within the next two years. I'm curious about the
18:30
Speaker 1: mix of your travelers. How much is domestic versus international
18:34
Speaker 1: and how has that shifted. Yeah, today we're about eighty
18:38
Speaker 1: five percent domestic international. We have been globalizing our business
18:43
Speaker 1: constantly over the over the years, pretty much since our founding.
18:46
Speaker 1: Today we have over ninety code shares and interlines. You know,
18:50
Speaker 1: we sell tickets in over a hundred forty countries around
18:53
Speaker 1: the world. And in fact, one of the reasons that
18:56
Speaker 1: we're up in New York today is we're UH talking
18:58
Speaker 1: about our our direct service that we're adding to Miami
19:03
Speaker 1: and Orlando. In two weeks we launch uh service, and
19:07
Speaker 1: that's gonna allow us to expand our non Brazilian o
19:11
Speaker 1: in these non Brazilian revenues from the current fifteen to
19:14
Speaker 1: around over the next three or five years. So how
19:16
Speaker 1: does the backdrop of increased trade tensions and tariffs, etcetera
19:20
Speaker 1: affect your business if at all, especially as you try
19:22
Speaker 1: to globalize. Well, we we have a platform that has
19:26
Speaker 1: been developed over a period of time based on a
19:29
Speaker 1: lot of global partnerships. Uh. You know, Uh, we have
19:32
Speaker 1: a very strong relationship with Delta Airlines, with Air France KLM,
19:36
Speaker 1: and UH what really drives these flows is the demand. Uh.
19:42
Speaker 1: On the Brazilian side of the equation. For example, we
19:45
Speaker 1: take our what we're adding service to to South Florida.
19:48
Speaker 1: Part of it is leisure, but there's a very large
19:51
Speaker 1: uh small business uh component in South Florida. A lot
19:54
Speaker 1: of Brazilians have small businesses there, and we don't see
19:58
Speaker 1: that very much affected by anything on the trade side. Obviously,
20:01
Speaker 1: it is affected by on the currency side, which affects
20:05
Speaker 1: purchasing power, which affects our business. Uh, but we're expecting
20:08
Speaker 1: improvements on that. Well, that's where I was gonna go.
20:11
Speaker 1: Was the idea that if you have a devaluing currency,
20:15
Speaker 1: that makes it just that much more challenging to buy
20:17
Speaker 1: the twenty Boeing seven three seven Max aircraft. Tell us
20:22
Speaker 1: about why you decided on the seven three seven Max
20:25
Speaker 1: and how that's going to change the operating efficiency of
20:29
Speaker 1: the company. Yeah, the main reason is the fuel economy.
20:33
Speaker 1: The seven thirty seven Max eight, which is the model
20:35
Speaker 1: war operating we are have already have three operating in
20:38
Speaker 1: the fleet. UH is already achieving for us a fifteen
20:41
Speaker 1: percent fuel economy and about a third of our costs
20:44
Speaker 1: are our jet fuel. That hasn't a significant impact on
20:47
Speaker 1: our margins. So that's been the main driver UH to
20:50
Speaker 1: have that absolute cost reduction. Secondarily, you know, Brazil is
20:54
Speaker 1: a very dynamic competitive market and our competitors are also
20:58
Speaker 1: investing in in proved aircraft on the airbow side of
21:02
Speaker 1: the equation. We're the only Boeing operator in Brazil. But
21:05
Speaker 1: the second reason is the larger, slightly larger configuration of
21:10
Speaker 1: the Max. UH will be configured with a hundred and
21:13
Speaker 1: eighties six seats as opposed to our current hundred seventy seven.
21:17
Speaker 1: That gives us a greater revenue productivity. But the final reason,
21:20
Speaker 1: which is important, which is facilitating these flights that were
21:24
Speaker 1: launching in two weeks to mamor Orlando. Is the additional
21:27
Speaker 1: range of about uh kilometers on the max that allows
21:31
Speaker 1: us to do direct flights to Miami Orlando. Richard Lark,
21:34
Speaker 1: thank you so much for being with us. Thank you,
21:36
Speaker 1: Richard Larcas, chief financial officer of Goal Airlines based in
21:40
Speaker 1: South Howlo, Brazil, but joining us here in our eleven
21:42
Speaker 1: three oh studios. Among all stocks, Procter and Gamble really
21:49
Speaker 1: stands out posting a game today that is the biggest
21:52
Speaker 1: since October two thousand and eight, more than eight percent climb. Well,
21:58
Speaker 1: they beat earnings, they posted great expectations. Joining us now
22:01
Speaker 1: to talk about this, Sarah how Zach Bloomberg Opinion, consumer calumnists, Sarah,
22:05
Speaker 1: come on in here. Is this just that we like
22:07
Speaker 1: to buy really expensive creams and we just keep on
22:10
Speaker 1: buying them and Procter and Gamble cashed in on that.
22:13
Speaker 1: So that's certainly a part of it. Beauty was a
22:16
Speaker 1: particularly strong division with seven percent organic sales growth in
22:19
Speaker 1: the quarter, and they definitely have been having success with
22:22
Speaker 1: their premium lines within Beauty, so s K two, which
22:25
Speaker 1: has very high price tags, has been leading the growth
22:28
Speaker 1: in that division for some time now. But that said,
22:31
Speaker 1: that's not the whole picture. They really had strength in
22:34
Speaker 1: their uh they grew sales and their grooming division, their
22:36
Speaker 1: healthcare division, their fabric divisions. So um a broad based
22:41
Speaker 1: series of categories fueling this gain this quarter. Sara, this
22:44
Speaker 1: has to do also with organic sales growth, correct, it does.
22:49
Speaker 1: So organic sales growth, what they mean with that number
22:52
Speaker 1: is sort of excluding M and A activity and currency fluctuations,
22:57
Speaker 1: and so that's a closely watched metric for the particular
23:00
Speaker 1: company given its global reach. But if you're talking about organics, UM,
23:04
Speaker 1: that is definitely an area that they're focused on in
23:06
Speaker 1: naturals um, understanding that the consumer is kind of moving
23:09
Speaker 1: in this direction and considering that more of a priority. So,
23:12
Speaker 1: for example, in the diaper's division, they now have this
23:15
Speaker 1: Pampers natural lines that's supposed to be made in a
23:17
Speaker 1: more sustainable way, and that helps drive growth in the quarter.
23:20
Speaker 1: I love this sort of organic growth versus organics. And
23:24
Speaker 1: then I have to wonder, what is organic face cream?
23:27
Speaker 1: I mean, how is that organic? I don't I just
23:29
Speaker 1: boggles of mind. I do want to ask you, though, Sarah.
23:32
Speaker 1: They also said that they were gaining market share at
23:34
Speaker 1: a number of different divisions. Who's the loser here? Who
23:37
Speaker 1: are they grabbing market share from? Yeah, it's it's not.
23:41
Speaker 1: I think it varies widely across the globe. So for example,
23:45
Speaker 1: I think one interesting place to look is in their
23:47
Speaker 1: loves diaper division. That's a place where they had been
23:49
Speaker 1: getting smacked by the private label diapers makers because they
23:53
Speaker 1: had so underpriced. So you can assume that's from the
23:56
Speaker 1: likes of Walmart, from Target, from Amazon who have strong
23:59
Speaker 1: private label offerings. There. They slash prices in the Love's
24:02
Speaker 1: division this quarter to try to get some of that
24:04
Speaker 1: market share back, and so presumably that's sort of where
24:08
Speaker 1: that push and pole is taking place. Have they been
24:11
Speaker 1: able to raise prices or is that still a challenge.
24:15
Speaker 1: That's a really good question. So they have announced they're
24:17
Speaker 1: going to be raising prices on some key brands like Bounty, Sharman,
24:21
Speaker 1: and Pops because of commodity costs, right, pulp costs, paper
24:25
Speaker 1: costs are increasing, and so they're going to be taking
24:27
Speaker 1: those price increases starting October thirties one. We don't know
24:31
Speaker 1: yet how consumers are going to respond to that, and
24:34
Speaker 1: I think that's a really important thing when you look
24:35
Speaker 1: at how sustainable as this growth that they deliver this quarter. Uh,
24:39
Speaker 1: that's a real X factor. Executives were cautioning on the
24:42
Speaker 1: conference call today that trying to take these price increases
24:45
Speaker 1: could result in some volatility because they don't know how
24:48
Speaker 1: much Kimberly Clark or Colgate pal Mama is going to
24:51
Speaker 1: move in the same direction, and they could end up
24:53
Speaker 1: losing shoppers when they take that that action. I am
24:56
Speaker 1: the strange person that actually pays attention to the price
24:59
Speaker 1: of my toilet paper or my paper towels. Do you
25:02
Speaker 1: phim No to you, Sarah, I I pay attention to that.
25:07
Speaker 1: I mean the differential can be dollars, like entire dollars
25:10
Speaker 1: in one package. I don't. I'm definitely a person who's
25:13
Speaker 1: just on autopilot. You know, I'm revealing too much about myself.
25:19
Speaker 1: I want to get your sense on how much Procter
25:21
Speaker 1: and Gamble is just doing things right itself, and how
25:24
Speaker 1: much it's indicative of the strong consumer the people have
25:27
Speaker 1: really been rejecting so far this year. I mean, Procter
25:29
Speaker 1: Gamble shares are still down nearly two percent year to date,
25:32
Speaker 1: so you know, is the consumer a lot stronger than
25:34
Speaker 1: people think, and does this give wind to other consumer
25:37
Speaker 1: product companies. I do think this is an indicator of
25:41
Speaker 1: the fact that the consumer environment is strong, and we
25:43
Speaker 1: see this in so many different ways. We've got this
25:45
Speaker 1: in strong quarters from major retailers into two and I
25:50
Speaker 1: think this is an additional reflection of that. That said,
25:53
Speaker 1: I do think that the consumer has been strong for
25:55
Speaker 1: a while now, right, so the fact that PNG is
25:58
Speaker 1: seeing this inflection point speak to some of the things
26:01
Speaker 1: they're doing right. I think, particularly in the grooming category,
26:04
Speaker 1: that is a business where they were just assaulted by
26:07
Speaker 1: these newcomers like Dollar Shave Club and Harry's UM. They
26:10
Speaker 1: were offering these sort of disruptive subscription models and they
26:13
Speaker 1: finally returned to growth there this quarter, and so that
26:16
Speaker 1: suggests that, you know, they on the one hand, did
26:18
Speaker 1: some smart things in terms of adjusting their price structure
26:21
Speaker 1: to be more competitive with those guys UM, and also
26:24
Speaker 1: just got their mix of products in the right places
26:27
Speaker 1: in front of the right shoppers. I got to imagine though,
26:30
Speaker 1: that whatever happens in China is also important to Proctor
26:34
Speaker 1: and Gamble. They cited double digit growth in some of
26:37
Speaker 1: their skin care lines in China, yes, and and China
26:41
Speaker 1: isn't very so China is very important to their future.
26:43
Speaker 1: Right now, it's actually only nine percent of their total
26:46
Speaker 1: annual sales, but certainly that that will change over time
26:49
Speaker 1: as the middle class grows there. But China is definitely
26:52
Speaker 1: a real success story for PNG. It was only two
26:55
Speaker 1: years ago that they were posting declining sales in that
26:57
Speaker 1: market overall, and they've just been doing a lot of
27:00
Speaker 1: consumer product one oh one type work there. I think
27:02
Speaker 1: the l A brand is a great example of that.
27:04
Speaker 1: So in China, they really wanted to make that brand stronger,
27:08
Speaker 1: so they change the packaging of their ol A face product. Um.
27:12
Speaker 1: That's a place where in the Chinese market you might
27:14
Speaker 1: have an actual like over the counter service with a
27:18
Speaker 1: customer representative there. So they sort of change the training
27:22
Speaker 1: and the approach to that kind of service. It's really worked,
27:25
Speaker 1: not as pim. She doesn't say change the cream, it's
27:28
Speaker 1: changed the packaging. Change the way people talk about where
27:31
Speaker 1: most of the marketing, it really is the one that
27:34
Speaker 1: grabs most of the money. We're so gullible. It's true
27:36
Speaker 1: when something is more expensive and packaged in a prettier
27:39
Speaker 1: package can be as gross margins they could be over.
27:44
Speaker 1: Thanks very much, Sarah hall Zack, an expert in all
27:47
Speaker 1: things retail our Bloomberg Opinion consumer columnist, telling us about
27:53
Speaker 1: Procter and Gamble. Thanks for listening to the Bloomberg P
27:56
Speaker 1: and L podcast. You can subscribe and listen to interviews
27:59
Speaker 1: that app, podcasts, SoundCloud, or whatever podcast platform you prefer.
28:03
Speaker 1: I'm pim Fox. I'm on Twitter at pim Fox. I'm
28:07
Speaker 1: on Twitter at Lisa Abramo wits one. Before the podcast,
28:10
Speaker 1: you can always catch us worldwide on Bloomberg Radio