Latest / Bloomberg Intelligence / Retailers Pivoting To ’What’s Your Walmart Strategy?’ in 2018: Ed Yruma

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Retailers Pivoting To ’What’s Your Walmart Strategy?’ in 2018: Ed Yruma · 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
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  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. This
• 0:35
  Speaker 1: year has been one of relative pain for the retail industry,
• 0:39
  Speaker 1: at least outside of Walmart and Amazon, with a lot
• 0:42
  Speaker 1: of brick and mortar stores closing, companies reconsidering their balance sheets.
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  Speaker 1: What will next year bring with us to discuss his
• 0:51
  Speaker 1: Eddi Ruma. He's an equity research analyst covering retail in
• 0:54
  Speaker 1: e commerce for key Bank Capital Markets in New York
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  Speaker 1: and just comes from the Key Bank but the Market's
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  Speaker 1: Consumer conference which went from through today and ed, we're
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  Speaker 1: so happy to have you and what are you looking
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  Speaker 1: for for next year? Glad to be here. Look, I
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  Speaker 1: think one of the things that's been an interesting takeaway
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  Speaker 1: from the conferences that results seem to have gotten a
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  Speaker 1: little bit better towards the end of this year, and
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  Speaker 1: so we think that you know better demand plus hopefully
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  Speaker 1: inventory levels that are aligned should drive a much better alright,
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  Speaker 1: a much better that's a very general statement. What are
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  Speaker 1: the pressures that you see afflicting the retailers on a
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  Speaker 1: day when we find out that Walmart is even taking
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  Speaker 1: the words stores out of their name. It is an
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  Speaker 1: interesting move by Walmart. I mean certainly, Um, you know,
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  Speaker 1: Amazon is the innovator in retail today and we've seen,
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  Speaker 1: as you pointed out, a Walmart that has been incredibly
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  Speaker 1: innovative as well, and you know is racing to catch up.
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  Speaker 1: And I think what we've been hearing from retailers here
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  Speaker 1: at the conference and even prior to the conferences that
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  Speaker 1: continued focus on e commerce, right, this is a business
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  Speaker 1: that requires a constant investment the consumers. No of what
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  Speaker 1: e commerce is or should be is changing. Uh. And
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  Speaker 1: certainly those best in class competitors like an Amazon or
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  Speaker 1: Walmart continue to get better. Okay, But did you say,
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  Speaker 1: did you hear anything at your conference that made you think, gee,
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  Speaker 1: this is something I hadn't thought of before, or these
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  Speaker 1: guys have really figured out a way to do something
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  Speaker 1: that no one else has. What have you learned from
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  Speaker 1: the conference? You know, one thing that we've heard that's
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  Speaker 1: pretty interesting is there's been this rush of companies to
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  Speaker 1: sell on Amazon, and I think there's a lot of
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  Speaker 1: discussions today on is that actually the right decision for
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  Speaker 1: my business? And what I mean by that specifically is
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  Speaker 1: Amazon is a great place if you're not seeing promotions
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  Speaker 1: other places in the market, but if one competitor promotes,
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  Speaker 1: Amazon matches it and that drives down price. So we're
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  Speaker 1: now hearing retailers and apparelmenters rethink whether having their product
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  Speaker 1: in having that on the Amazon platform is the way
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  Speaker 1: to go. Well. Having said that, though, I was reading
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  Speaker 1: a story today that Publicist, w PP and Omnicom, these
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  Speaker 1: are the big ad firms. They plan to boost ADS
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  Speaker 1: spending with Amazon between forty and one hundred percent next year.
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  Speaker 1: WPP says that it's currently spending around two hundred million
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  Speaker 1: that could increase about fifty Publicists spends anywhere from two
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  Speaker 1: to three hundred million on Amazon, and on the COMES
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  Speaker 1: spends about a hundred million dollars a year. They say
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  Speaker 1: they could double that amount next year. So I mean,
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  Speaker 1: is that something that the companies at your conference didn't
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  Speaker 1: recognize or are they going in another direction? I think
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  Speaker 1: it's certainly recognized that Amazon is the dominant force in retail.
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  Speaker 1: The question is is it best to have your products
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  Speaker 1: on Amazon or is it best to try to have
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  Speaker 1: them be sold directly on your website. I'd also had
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  Speaker 1: We've heard a lot of conversation here about Walmart and
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  Speaker 1: what they're doing with Lord and Taylor and whether it
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  Speaker 1: makes sense for more partners to uh be on that
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  Speaker 1: Walmart platform that quite frankly is in a much earlier
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  Speaker 1: stage of development. What they say, I think they're very
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  Speaker 1: open to it, you know, I think they clearly like
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  Speaker 1: Lord and Taylor, Lord tailors, lots of existing relationships, and
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  Speaker 1: to be on that Walmart platform, which traffic could be
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  Speaker 1: very exciting. So I heard from numerous companies here that
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  Speaker 1: this is something that they were actively involved in discussions around.
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  Speaker 1: So you hear constantly what's your Amazon strategy? We think
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  Speaker 1: next year you're going to hear more of this, what's
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  Speaker 1: your Walmart strategy? So just shifting gears a little bit,
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  Speaker 1: are more people going to be wearing yoga pants to
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  Speaker 1: work next year? Certainly, comfort is a big theme that
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  Speaker 1: we're continue to hear. What's interesting is that that comfort
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  Speaker 1: that used to only get in the yoga pant is
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  Speaker 1: now you're able to get that in denim that stretches,
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  Speaker 1: You're able to get that in other types of apparel,
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  Speaker 1: and so a certainly comfort is going to continue to
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  Speaker 1: be big. Is that specifically yoga pants? Time will tell, Well,
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  Speaker 1: I'm talking specifically at leisure because I know there were
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  Speaker 1: some pretty disappointing earnings this year from the likes of
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  Speaker 1: Nike and under Armor. And you're gonna get Lulu Lemon
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  Speaker 1: results after the market closes today, So we'll be watching
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  Speaker 1: for that some of those transparent yoga pants. But what's
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  Speaker 1: your what's your sense for at leisure? But there's certainly
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  Speaker 1: a little bit of pressure, you know. I think this
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  Speaker 1: has been a great growth market for almost ten years now,
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  Speaker 1: and certainly as the market's load, we've we've seen a
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  Speaker 1: little bit of change and performance. Um. We had Kevin
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  Speaker 1: Plank doing a talk yesterday and I think he was
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  Speaker 1: pretty forthrighting the challenges that his businesses faced both in
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  Speaker 1: seventeen uh and as his market continuous see that level
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  Speaker 1: of disruption. So uh, no all clear yet in in
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  Speaker 1: sports and and and athletic um, but you know, we
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  Speaker 1: are hopeful that at least this very very well. Seventeen
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  Speaker 1: uh ends up being leading a path to hopefully I'm
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  Speaker 1: more calm eighteen ed. Where are we with respect to
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  Speaker 1: brick and mortar store closures? How many are you expecting?
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  Speaker 1: Are people in the industry expecting next year? Uh? This
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  Speaker 1: is one area where the train is likely not to change.
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  Speaker 1: We continue to hear retailers talking about store closures, examining,
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  Speaker 1: you know, kind of what's the optimal store footprint? UM
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  Speaker 1: and so I think eighteen will be a repeat of seventeen.
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  Speaker 1: I I continue to think that we're going to see
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  Speaker 1: focus shift to eat com I think though the offset,
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  Speaker 1: and this we did hear quite frequently, it's that the
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  Speaker 1: store fleet that you do have should be compelling, it
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  Speaker 1: should be engaging, it should bring a sense of community.
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  Speaker 1: So we had companies like Shinola, which is um largely
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  Speaker 1: direct brand, talking about the strength of having a store fleet.
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  Speaker 1: So clearly the number of stores are coming down, but
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  Speaker 1: hopefully the stores that remain in existence are more interesting.
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  Speaker 1: Just quickly, Harmon International, which is owned by Samsung, they
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  Speaker 1: announced that they've got a combination with under Armor for
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  Speaker 1: what's called the U A sport wireless flex headphones. Is
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  Speaker 1: that the kind of thing that under Armour and companies
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  Speaker 1: like that apparel makers should be focused on. Obviously, the
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  Speaker 1: convergence of technology is impacting all industries, but certainly in
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  Speaker 1: apparel um under Armor understands, you know. They they've got
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  Speaker 1: a great data platform, so they know how long your
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  Speaker 1: run is, they know what you've been eating, and sort
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  Speaker 1: of capitalize on that by giving other tech products around
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  Speaker 1: that I think are really important. But ultimately, what's to
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  Speaker 1: drive the success of underarmers selling more shirts and shoes
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  Speaker 1: and that that's been a that's been a challenge for them.
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  Speaker 1: The shares of under Armore down more than fifty so
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  Speaker 1: far this year, Thanks very much. Eduma. He is equity
• 7:13
  Speaker 1: research channelists covering retail and e commerce for a key
• 7:16
  Speaker 1: bank Capital Markets. President Donald Trump is set to make
• 7:37
  Speaker 1: a statement on Jerusalem from the Diplomatic Reception Room in
• 7:40
  Speaker 1: the White House that will take place at one pm
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  Speaker 1: Eastern time. Will of course bring that to you live
• 7:47
  Speaker 1: and to speak more about the topic of foreign relations,
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  Speaker 1: we have with US Caitlin Weber or Bloomberg News, government
• 7:54
  Speaker 1: analyst for Bloomberg Intelligence, and Nick Wadhams are foreign policy reporter. Nick.
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  Speaker 1: Let's be again with you, what do we expect the
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  Speaker 1: president to say in any detail about Jerusalem as the
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  Speaker 1: capital of Israel. Well, he will say that the US
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  Speaker 1: recognizes Jerusalem as Israel's capital, and he will also direct
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  Speaker 1: the State Department to begin the process which is expected
• 8:20
  Speaker 1: to take many years, you know, at least four or
• 8:22
  Speaker 1: five years of the process of building an embassy there. Um,
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  Speaker 1: he will continue to sign a waiver as required under
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  Speaker 1: US law, Um that he'll keep the embassy for now
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  Speaker 1: in Tel Aviv. But really this is a symbolic move
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  Speaker 1: where he will declare that the US recognizes that Jerusalem
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  Speaker 1: is the capital of Israel. Nick and Caitlin, I'm going
• 8:47
  Speaker 1: to get you at one in one second. But Nick,
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  Speaker 1: you say it's a symbolic move, but it's one that's
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  Speaker 1: gotten a lot of attention worldwide. Of course, the Middle
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  Speaker 1: East has been a spot of incredible tensions, and the
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  Speaker 1: U s allies are coming out sharply critical of this move,
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  Speaker 1: saying that it will hinder any attempts to broker a
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  Speaker 1: peace agreement just quickly. Uh, do you think that this
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  Speaker 1: could have a much bigger consequence that it might seem
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  Speaker 1: just based on its sort of symbolic nature. Yeah, I mean,
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  Speaker 1: the concern about from allies UM about this move is
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  Speaker 1: that it will basically pre judge negotiations over the status
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  Speaker 1: of of Jerusalem has worked out in any negotiation. And
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  Speaker 1: then also it would UH sort of cast doubt on
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  Speaker 1: the idea that the US is a neutral uh and
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  Speaker 1: unbiased arbiter in these negotiations, that the US is willing
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  Speaker 1: to recognize Jerusalem is the capital as Israel's capital, than uh,
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  Speaker 1: it is biased towards Israel and against the Palestinians in
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  Speaker 1: these negotiations and can't be seen as a sort of
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  Speaker 1: an honest and neutral broker. So it's it's important also
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  Speaker 1: to think that the relationship that the US has with
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  Speaker 1: its allies will also UH dictate some of the path
• 9:58
  Speaker 1: of the ongoing tensions with North Korea. Kaitlin, can you
• 10:01
  Speaker 1: just bring us up to up to speed with respect
• 10:04
  Speaker 1: to the state of play in North Korea, the UH,
• 10:07
  Speaker 1: the sort of exercises that have been going on with
• 10:11
  Speaker 1: South Korea and the US and kind of where are
• 10:13
  Speaker 1: allies stand right now. Yeah, over the past year, we've
• 10:17
  Speaker 1: really seen tensions between the West and North Korea kind
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  Speaker 1: of ebb and flow. UM. Earlier, this fault looked like
• 10:23
  Speaker 1: they were sort of um decreasing. They had been, you know,
• 10:26
  Speaker 1: a couple of months, but when North Korea didn't launch
• 10:29
  Speaker 1: any any missile tests, that all changed last late last month, UM,
• 10:33
  Speaker 1: when North Korea really escalated, UM it's test launching. They
• 10:38
  Speaker 1: they potentially the furthest reaching I CBM missile it had
• 10:41
  Speaker 1: UM had so far. So you know, looking sort of
• 10:46
  Speaker 1: you know to next year, we think it could be
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  Speaker 1: potentially a really decisive year in that conflict. UM. Some
• 10:52
  Speaker 1: people think it might be the sort of the last
• 10:54
  Speaker 1: chance to prevent North Korea from becoming really a full
• 10:57
  Speaker 1: fledged nuclear weapons power. And there's an number of released
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  Speaker 1: sensitive events on the on the calendar next year, UM,
• 11:04
  Speaker 1: including the Olympics in South Korea in February, and then
• 11:06
  Speaker 1: also the the end of the the the anniversary of
• 11:09
  Speaker 1: the end of the Korean War, and the anniversary of
• 11:11
  Speaker 1: the founding of North Korea. Those are both events that
• 11:13
  Speaker 1: are often marked with missile tests. Caitlin, if you could
• 11:18
  Speaker 1: comment on the perhaps not bipartisan and the more unilateral
• 11:23
  Speaker 1: approach on the part of US foreign policy under President
• 11:26
  Speaker 1: Donald Trump, because I believe that allies such as UK
• 11:30
  Speaker 1: Prime Minister Theresa May coming out and offering negative comments
• 11:35
  Speaker 1: about the upcoming speech that President Trump is going to
• 11:40
  Speaker 1: make detailing a Jerusalem as the capital of Israel. So
• 11:43
  Speaker 1: he's got allies who do not agree with that stand.
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  Speaker 1: I think in terms of North Korea, UM, the Trump
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  Speaker 1: administration has sort of gone back and forth between whether
• 11:52
  Speaker 1: or not they want to UM work with China and
• 11:56
  Speaker 1: the U N in terms of pressuring Piong Yang I
• 11:58
  Speaker 1: sort of come into line. UM. You know, the there
• 12:02
  Speaker 1: was un sanctions about six months ago that went into
• 12:05
  Speaker 1: place UM, and since then the US has passed UM
• 12:10
  Speaker 1: much stronger unilateral sanctions, something that was really looked at
• 12:13
  Speaker 1: UM negatively by the Chinese government. It's it's unclear, UM.
• 12:17
  Speaker 1: You know what going forward what the Trump administration stands
• 12:21
  Speaker 1: will be, whether they want to continue to go it
• 12:23
  Speaker 1: alone or or work sort of more multilaterally. I think,
• 12:27
  Speaker 1: you know North Korea, before it agrees to talks, is
• 12:31
  Speaker 1: it's likely going to you know, going to have to
• 12:33
  Speaker 1: be a high level multilateral effort. Nick, come on in here.
• 12:37
  Speaker 1: I want to talk about just generally the U S
• 12:40
  Speaker 1: foreign policy. I know there's been a lot of criticism
• 12:43
  Speaker 1: aimed at Rects tillersting questions about whether he will remain
• 12:47
  Speaker 1: in place as Secretary of State. I'm just wondering, is
• 12:50
  Speaker 1: there behind the scenes more cohesion among the foreign policy
• 12:55
  Speaker 1: walks in this administration than perhaps it might seem from
• 12:59
  Speaker 1: the outside It My impression is there is not cohesion.
• 13:03
  Speaker 1: And and one of the challenges that we've faced in
• 13:06
  Speaker 1: reporting out the foreign policy priorities of this administration is, uh,
• 13:11
  Speaker 1: you never really know who is calling the shots or
• 13:13
  Speaker 1: or what the priorities are. I mean, if you look
• 13:15
  Speaker 1: at North Korea, for example, Uh, you saw the U. S.
• 13:20
  Speaker 1: Investador to the UN, Nicky Hamley, make remarks at a
• 13:22
  Speaker 1: Security Council meeting last week where she basically gave a
• 13:26
  Speaker 1: sort of policy prescription that was different from what the
• 13:30
  Speaker 1: State Department said. She said, country should cut off all
• 13:32
  Speaker 1: ties with North Korea and uh, sever all diplotic ties.
• 13:37
  Speaker 1: When we question the State Department spokeswoman on that um
• 13:40
  Speaker 1: a day later, she said, uh, she wouldn't go that far.
• 13:44
  Speaker 1: She said that essentially they're encouraging countries to reduce ties,
• 13:48
  Speaker 1: but she wouldn't say they wanted countries to cut off
• 13:50
  Speaker 1: all ties. So, I mean, that's just a small example
• 13:53
  Speaker 1: of something we face all the time. Where you never
• 13:56
  Speaker 1: quite know who is speaking for the President, who is
• 13:59
  Speaker 1: speaking for US US policy, because in the different branches
• 14:03
  Speaker 1: and the different agencies there are substantive differences on what
• 14:08
  Speaker 1: various people say the US is doing and should be doing.
• 14:12
  Speaker 1: Is there is there any surprise that the oil prices
• 14:15
  Speaker 1: are actually lower today as a result of this. I mean,
• 14:17
  Speaker 1: normally you would say, all right, there's turmoil in the
• 14:20
  Speaker 1: Middle East and they're going to be problems because of
• 14:22
  Speaker 1: some policy change on the part of the United States.
• 14:25
  Speaker 1: You don't see any any reaction in the market. Well,
• 14:28
  Speaker 1: I mean, we will see. I think we really have
• 14:31
  Speaker 1: to wait until after the President speaks. Everybody I've been
• 14:34
  Speaker 1: talking to it the State Department says, wait till you wait,
• 14:37
  Speaker 1: wait till you hear what he says. It will be
• 14:39
  Speaker 1: a more nuanced speech than you than you think. Um.
• 14:42
  Speaker 1: But so far, yes, there people are saying that they
• 14:47
  Speaker 1: have not seen a great deal of protests outside US
• 14:50
  Speaker 1: embassies on the street in places like Cairo. Uh So
• 14:55
  Speaker 1: a muted response so far. But the real test will
• 14:58
  Speaker 1: be after the President delivers his speech. And of course
• 15:01
  Speaker 1: we're also looking at what the trade ramifications will be
• 15:05
  Speaker 1: with some of our allies stemming from the tax plan,
• 15:08
  Speaker 1: because it evidently is not being met with some criticism overseas.
• 15:12
  Speaker 1: Caitlin Webber, government analyst for Bloomberg Intelligence focusing on US
• 15:16
  Speaker 1: trade policy, as well as well as Nick Waddam's foreign
• 15:20
  Speaker 1: policy reporter for Bloomberg News. Both of you thank you
• 15:23
  Speaker 1: so much for your insights. Definitely a lot of moving
• 15:26
  Speaker 1: piece is hard to get your arms around, but really,
• 15:29
  Speaker 1: Pim and when we talk to people, what's going to
• 15:30
  Speaker 1: affect the markets? Are some of these trade tensions that
• 15:33
  Speaker 1: are picking up. Well. The company is Transao, and it's
• 15:53
  Speaker 1: chief executive is Chris Poppas, and he joins us here
• 15:56
  Speaker 1: in our eleven three oh studios and Transio Well, it
• 16:00
  Speaker 1: has its fingers in many different industries, automotive building as
• 16:04
  Speaker 1: well as electrical medical packaging. It's in the plastics business
• 16:09
  Speaker 1: as we remember. Chris, thank you very much for being here.
• 16:11
  Speaker 1: Much appreciated. I wanted to just skip ahead to Hurricane
• 16:16
  Speaker 1: Harvey and the rebuilding efforts that have gone on because
• 16:20
  Speaker 1: I know that several of your facilities were affected by
• 16:23
  Speaker 1: the hurricane, and I wonder if you could just give
• 16:25
  Speaker 1: us a quick update on what's going on. Well, we
• 16:27
  Speaker 1: had in our case actually no real impact on our facilities.
• 16:31
  Speaker 1: We were a distance from the hurricane and Louisiana, So
• 16:35
  Speaker 1: in our case, UM we had a short term lift
• 16:38
  Speaker 1: because our facilities are up and running while others were not.
• 16:41
  Speaker 1: But more broadly, the hurricane, while devastating a course for
• 16:44
  Speaker 1: the region, UM is going to stimulate construction activity post
• 16:50
  Speaker 1: for rebuilding and automotive you know, something like a million
• 16:53
  Speaker 1: cars will have to be replaced over the course the
• 16:56
  Speaker 1: next year or so, so aside from blips or sort
• 16:59
  Speaker 1: of temporary effects from the hurricanes. I'd love to get
• 17:03
  Speaker 1: your take just overall of what you're seeing with respected demand,
• 17:06
  Speaker 1: because Trina really has a pretty amazing view of the
• 17:10
  Speaker 1: economy since the products are and everything from automake automobiles
• 17:15
  Speaker 1: to smartphones to anything else that you buy that has
• 17:18
  Speaker 1: plastic components. Right. We we cross over many applications as
• 17:21
  Speaker 1: you mentioned, you know, including carpet construction, packaging, and we
• 17:25
  Speaker 1: do it globally, so we have a good view. Now
• 17:27
  Speaker 1: sixty sixty two percent of our sales are in Europe,
• 17:31
  Speaker 1: so I have a better view of Europe, of course
• 17:32
  Speaker 1: than the Americas. We have twenty in Asia, but you know,
• 17:36
  Speaker 1: we're pretty constructive on all of those segments. Um. And
• 17:40
  Speaker 1: when we gave our guidance, for example, for next year,
• 17:42
  Speaker 1: which we just just came out with about seven dollars
• 17:45
  Speaker 1: and ninety cents of share of earnings, we did not
• 17:48
  Speaker 1: forecast any real uplift in the economy from seventeen to eighteen.
• 17:52
  Speaker 1: We generally felt the economy of eighteen would be similar
• 17:56
  Speaker 1: to seventeen, which is pretty modest actually in terms of
• 17:59
  Speaker 1: actual growth. And you're talking global here, and we're talking
• 18:02
  Speaker 1: global here, so we're thinking in a two two and
• 18:04
  Speaker 1: alf Uh, you know, economic growth agenda to drive our
• 18:09
  Speaker 1: earnings growth. But if we had more than that, if
• 18:12
  Speaker 1: the economies in fact grew faster, because we're in so
• 18:14
  Speaker 1: many different segments, we would generally see a rise across
• 18:17
  Speaker 1: all those segments. I'm fascinated by this because we've been
• 18:20
  Speaker 1: hearing from a number of strategists saying that the FED
• 18:23
  Speaker 1: is going to hike four times next year, that we're
• 18:25
  Speaker 1: reaching the synchronized global growth story. Uh, this forecast that
• 18:30
  Speaker 1: you just gave out their flies in the face of that,
• 18:33
  Speaker 1: Why are you bearished? No, we're not bearish. We're saying
• 18:37
  Speaker 1: that we can see a rise in our earnings this year.
• 18:40
  Speaker 1: We forecast about seven sixty a share next year seven nine.
• 18:45
  Speaker 1: We're saying that we can see a rise in our
• 18:47
  Speaker 1: earnings independent of whether there is in fact a global lift.
• 18:51
  Speaker 1: So we gave our guidance. We were just saying that
• 18:54
  Speaker 1: on the basis of today's economic activity, we could see
• 18:58
  Speaker 1: earnings next year of seven dollars ninety cents. If in
• 19:01
  Speaker 1: fact the economy grows globally, then we would in fact
• 19:05
  Speaker 1: have generally higher earnings in that so we're not barished.
• 19:08
  Speaker 1: We just wanted to make that reference to our forecast,
• 19:11
  Speaker 1: to our earnings guidance. I just want to make it
• 19:13
  Speaker 1: even simpler. You make the plastic that makes lego blocks,
• 19:17
  Speaker 1: isn't that right? Well, that's an application that we are in,
• 19:19
  Speaker 1: of course, along with many, many, many many others. No, No,
• 19:22
  Speaker 1: I clearly, but I mean you know everybody knows. Or
• 19:27
  Speaker 1: yogurt cups would be another example. Very good, Um, tell
• 19:31
  Speaker 1: us about a business in China, because I know that
• 19:33
  Speaker 1: you've just really started production there at a new plant.
• 19:37
  Speaker 1: We have a new plant. We've been in China for years.
• 19:39
  Speaker 1: We're in China, or in Korea, we're in Indonesia with
• 19:42
  Speaker 1: with assets with plants and sales, of course, but we
• 19:45
  Speaker 1: just started up a new plastics facility and ABS plant
• 19:48
  Speaker 1: we call it, which is used in engineered applications, automotive
• 19:52
  Speaker 1: apply and smartphones, and we put it in China, and
• 19:56
  Speaker 1: we just started up a month ago on time, on
• 19:58
  Speaker 1: budget because of the growth in that particular region for
• 20:03
  Speaker 1: those markets and the kind of material we make there
• 20:06
  Speaker 1: is relatively unique compared to others, and our customers, mainly automotive,
• 20:10
  Speaker 1: want us to be where they're going to be building
• 20:13
  Speaker 1: their cars, which of course is in China. So in
• 20:16
  Speaker 1: that scenario, it made sense for us to put that
• 20:18
  Speaker 1: asset in China, which we did. Which product do you
• 20:21
  Speaker 1: think will be the biggest growth story next year? I
• 20:23
  Speaker 1: think too are rubber products for high performance tires, where
• 20:28
  Speaker 1: we also have a new plant coming up in January
• 20:31
  Speaker 1: in Germany, and our engineered performance plastics where we have
• 20:35
  Speaker 1: the new plant in China. Those two will be our
• 20:38
  Speaker 1: growth story for next year. Now. We on our investor
• 20:41
  Speaker 1: Day about a year and a half ago, we suggested
• 20:43
  Speaker 1: a hundred million dollars of EBITDA growth in performance plastics
• 20:48
  Speaker 1: and we outline investments that would drive that. Two of
• 20:51
  Speaker 1: those are the rubber plant in in Germany and the
• 20:54
  Speaker 1: A B. S plant in China. So we're delivering on
• 20:56
  Speaker 1: those investments as we described in November of two thousand six.
• 21:01
  Speaker 1: Is it easy to raise money we have, Well, we
• 21:05
  Speaker 1: have a fantastic balance sheet, you know, we're our leverage
• 21:07
  Speaker 1: is one point three times. We're generating. We have the
• 21:10
  Speaker 1: highest free cash flow yield of anybody in the chemical
• 21:12
  Speaker 1: space at about so we have very strong cash flows.
• 21:16
  Speaker 1: We just refinanced our balance sheet just a few months ago. Um,
• 21:20
  Speaker 1: we have a terrific balance sheet in our case. But
• 21:22
  Speaker 1: the answer your question is it is easy to raise
• 21:24
  Speaker 1: money if you need to raise money. In our case,
• 21:27
  Speaker 1: we have a stellar balance sheet, lots of free cash flow,
• 21:30
  Speaker 1: lots of capability to grow anymore without having access the
• 21:34
  Speaker 1: capital markets. We just complete our first acquisition successful nice
• 21:40
  Speaker 1: comping in in Italy that makes some term plastic glastomers.
• 21:44
  Speaker 1: Very nice product line. We're looking. But it's hard, it's
• 21:47
  Speaker 1: really hard. Valuations are high, very hard to do acquisitions.
• 21:51
  Speaker 1: In our view, in today's market, high valuation is tough
• 21:54
  Speaker 1: to do. Chris Pappas, thank you so much for joining us.
• 21:56
  Speaker 1: A pleasure speaking with you. Chris, Pappas is chief executive
• 21:59
  Speaker 1: officer of Trinco, which is based in Pennsylvania but has
• 22:03
  Speaker 1: plants and sells products all over the world. It's amazing
• 22:07
  Speaker 1: how big the market is for all this stuff that
• 22:10
  Speaker 1: you buy, all the components, the plastics, uh and and such.
• 22:30
  Speaker 1: A year ago, if you asked too many credit fund managers,
• 22:33
  Speaker 1: they would say, we're in the eighth, maybe ninth inning
• 22:36
  Speaker 1: this year. Perhaps we're in the seventh inning, or perhaps
• 22:39
  Speaker 1: we're in the eleventh inning. We're gonna go extra innings
• 22:42
  Speaker 1: to fifteen. Here to talk about that. As Frank oh
• 22:44
  Speaker 1: c No. He has senior portfolio manager at new Fleet
• 22:47
  Speaker 1: Asset Management, which oversees twelve billion dollars and it's based
• 22:50
  Speaker 1: in Hartford. Thank you so much of Frank for joining us.
• 22:53
  Speaker 1: I want to start with how close we are to
• 22:55
  Speaker 1: the end of this credit cycle, because we have gotten
• 22:58
  Speaker 1: a couple of calls recently from some pretty high profile
• 23:01
  Speaker 1: credit investors that were getting towards the end. Yeah, sure,
• 23:04
  Speaker 1: thanks for having me. I would say we're in a
• 23:06
  Speaker 1: very long seventh inning right now. Whenever we have a
• 23:11
  Speaker 1: benign credit environment, historically, it's very easy to say that
• 23:14
  Speaker 1: the end is two years out. Uh, you know five
• 23:17
  Speaker 1: we were talking about two in fifteen, we were talking
• 23:19
  Speaker 1: about two thousand and seventeen being the end. What we're
• 23:22
  Speaker 1: seeing right now is fundamentally, uh, we're in good shape.
• 23:26
  Speaker 1: It's still a benign credit environment. The faults are low,
• 23:29
  Speaker 1: balance sheets are in good shape, there's not a lot
• 23:32
  Speaker 1: of debt do an. Interest coverage is strong. Um, we
• 23:35
  Speaker 1: are starting to see some late cycle behavior, aggressive terms
• 23:40
  Speaker 1: loosening of credit standards, but by and large a two
• 23:44
  Speaker 1: and a half percent GDP. You know, environment is good
• 23:46
  Speaker 1: for fixed income in and for credit. So are you
• 23:49
  Speaker 1: holding less cash than you had been perhaps a year ago?
• 23:53
  Speaker 1: We are, We are fully invested. Our view is that
• 23:57
  Speaker 1: this fundamental environment is good for credit. Layer onto that
• 24:01
  Speaker 1: a strong technical environment. There is a strong bid for
• 24:04
  Speaker 1: yield globally, and so when there are investors looking for yield,
• 24:09
  Speaker 1: there are buyers of loans and high yield, which is
• 24:12
  Speaker 1: where we traffic, and so we want to take advantage
• 24:14
  Speaker 1: of that by being fully invested. Have you also gone
• 24:17
  Speaker 1: further down the credit spectrum into lower rated high yield
• 24:21
  Speaker 1: dead like triple C, single B. That's a good question.
• 24:25
  Speaker 1: We are a fundamental bottoms up credit shop at New fleet.
• 24:31
  Speaker 1: We started adding credit risk in the summer of two
• 24:34
  Speaker 1: thousand sixteen. We were risk off in fifteen and late fourteen.
• 24:38
  Speaker 1: Started adding risk around the summer of sixteen when valuations
• 24:42
  Speaker 1: we were attractive, not only in the loan market, in
• 24:45
  Speaker 1: the high yield market as well. We added single bs
• 24:49
  Speaker 1: and some triple cs. We started adding energy. UM Today,
• 24:53
  Speaker 1: I would say that we're UM less risk on a
• 24:56
  Speaker 1: pure relative basis, but I'm gonna stick with our credit quality,
• 25:01
  Speaker 1: UH band Right now, what if you could tell people
• 25:04
  Speaker 1: a little bit about the vertics new fleet dynamic credit
• 25:08
  Speaker 1: et F and how if you're an issuer, how do
• 25:13
  Speaker 1: you get your attention to actually buy some debt to
• 25:17
  Speaker 1: go into that e t F. Sure. So that's an
• 25:20
  Speaker 1: e t F that we launched last December h b
• 25:23
  Speaker 1: l H wise the ticker symbol UH. That is a
• 25:25
  Speaker 1: product that was born out of a few things. UH. First,
• 25:29
  Speaker 1: we'll take the market. What we found was that the
• 25:32
  Speaker 1: loan market, in the high yield market has slowly been converging.
• 25:37
  Speaker 1: If they're not brothers and sisters are definitely cousins. Uh.
• 25:40
  Speaker 1: There are loans now that look like bonds. There are
• 25:44
  Speaker 1: bonds that the bond market, the high yield market, for example,
• 25:48
  Speaker 1: is secured now and soft of the borrowers have both
• 25:53
  Speaker 1: a loan and a high yield security. And so our
• 25:56
  Speaker 1: view was that we ought to have a product that
• 25:58
  Speaker 1: can look at the entire capital struck sure of a borrower,
• 26:01
  Speaker 1: rather than a fund that can just buy loans and
• 26:03
  Speaker 1: a fund that can just buy bonds. If we like
• 26:05
  Speaker 1: a particular part of the capital structure, we want the
• 26:08
  Speaker 1: ability to buy it. What we also found was that
• 26:11
  Speaker 1: the client was moving in this direction as well. Clients
• 26:14
  Speaker 1: are not willing to outsource the complexity of allocating between
• 26:19
  Speaker 1: the two. They want to put a dollar into leverage finance,
• 26:23
  Speaker 1: allow us to do the allocation, and then allow themselves
• 26:26
  Speaker 1: to frankly, run their run their practice. Frank in the
• 26:29
  Speaker 1: notes that you sent over, you said that it's important
• 26:32
  Speaker 1: for this asset class to be a permanent part of
• 26:35
  Speaker 1: people's portfolios. How do you square that idea of investing
• 26:40
  Speaker 1: truly investing in a company for the long term with
• 26:43
  Speaker 1: an e t F that is frequently used for traders
• 26:48
  Speaker 1: who want to be able to get in and out. Yeah,
• 26:50
  Speaker 1: the e t F that we manage is active, and
• 26:52
  Speaker 1: so from our perspective, we manage the t F very
• 26:55
  Speaker 1: similar to we do then we would a mutual funds, right,
• 26:57
  Speaker 1: but so it is active and it's un clearer at
• 27:00
  Speaker 1: any given time with the underlying composition will be the
• 27:02
  Speaker 1: way that'say, H, Y, G or J and K would uh.
• 27:06
  Speaker 1: But the point of an e t F in large
• 27:09
  Speaker 1: part is taking in this case assets that don't trade
• 27:12
  Speaker 1: all that frequently and UH sort of pulling them together
• 27:15
  Speaker 1: and then having them sort of backing a share that
• 27:18
  Speaker 1: trades like a stock and people can get out quickly.
• 27:21
  Speaker 1: Does that concern you? It's not too dissimilar than the
• 27:25
  Speaker 1: mutual fund market. Right. Every morning we come in and
• 27:28
  Speaker 1: we have an inflow or outflow from the day before.
• 27:30
  Speaker 1: The real difference is that we can create units on
• 27:33
  Speaker 1: the e t F side at any time of the day.
• 27:36
  Speaker 1: But if there is an environment where people are selling
• 27:39
  Speaker 1: loans in high yield, will have an outflow in the
• 27:41
  Speaker 1: mutual funds and we'll have a redemption unit in the
• 27:44
  Speaker 1: e t F. So from my perspective, we're managing liquidity
• 27:48
  Speaker 1: the liquidity risk UH really very similarly in both products.
• 27:53
  Speaker 1: I wonder if you could just go back to the
• 27:55
  Speaker 1: Vertus new Fleet Dynamic Credit e t F because I
• 27:57
  Speaker 1: just want to understand what guides your action? How do
• 28:02
  Speaker 1: you know what to buy? What do you need to
• 28:04
  Speaker 1: know to put? You know, different different issues in there.
• 28:07
  Speaker 1: Because you've got one Walter Investment Management, right, that's currently
• 28:10
  Speaker 1: in bankruptcy, that's right, right, But then you've got others
• 28:13
  Speaker 1: like Gates Global that's I believe a Blackstone deal. How
• 28:17
  Speaker 1: what what sort of drives your decision making? Sure? So
• 28:20
  Speaker 1: we have a team of eleven credit analysts UH and
• 28:24
  Speaker 1: those analysts look at the entire capital structure of a borrower.
• 28:27
  Speaker 1: So the banks, the arranging banks syndicate whether it's a
• 28:31
  Speaker 1: loan or a high old issue, and we do our
• 28:33
  Speaker 1: own fundamental credit analysis. What makes us different is that
• 28:37
  Speaker 1: Walter Investment Management is a great, great example. We own
• 28:41
  Speaker 1: the loan rather than the hot than the bond issuance.
• 28:45
  Speaker 1: The bonds in the fifties. The loan is in the
• 28:47
  Speaker 1: mid nineties and will be a part recovery. So we
• 28:49
  Speaker 1: actively decided to be up the capital structure in that name.
• 28:54
  Speaker 1: Um As as an example, there are borrowers that don't
• 28:58
  Speaker 1: have bonds there, you know, on the shores that don't
• 29:00
  Speaker 1: have loans. We now have the ability to look at
• 29:03
  Speaker 1: the entire opportunity set to trillion plus of loans in
• 29:07
  Speaker 1: high yield rather than individual markets. I'm looking at the
• 29:11
  Speaker 1: composition of the fund and there is a certificant proportion
• 29:15
  Speaker 1: that's rated triple C or lower or single B or lower.
• 29:19
  Speaker 1: And I'm just wondering. You know, we've seen that, say
• 29:23
  Speaker 1: with UH with third avenue, right, the idea of what
• 29:27
  Speaker 1: happens if there are a sudden rash of redemptions, even
• 29:30
  Speaker 1: if it's a mutual fund. UH, what's your sort of
• 29:34
  Speaker 1: game plan if there were to be some kind of crisis. Yeah,
• 29:37
  Speaker 1: I would not categorize the single b's and triple cs
• 29:41
  Speaker 1: that we own here as the third avenue. Event um,
• 29:46
  Speaker 1: these are single b by and large loans. The triple
• 29:49
  Speaker 1: cs might be larger loans Walter Investment Management, for example,
• 29:53
  Speaker 1: it would would be one of those stress situations UM.
• 29:56
  Speaker 1: In et F form, UH, there are liquid the guidelines.
• 30:01
  Speaker 1: We need to have a certain market cap public market cap,
• 30:04
  Speaker 1: the loan issue has to be a certain size. We
• 30:07
  Speaker 1: manage a similar product on the mutual fun size that
• 30:11
  Speaker 1: has roughly seventy of the issues are over a billion dollars,
• 30:15
  Speaker 1: and so we're actively managing that type of liquidity rather
• 30:18
  Speaker 1: than a one off distress situation. Uh like like many
• 30:23
  Speaker 1: of the names that maybe we're in the Third Avenue deal.
• 30:25
  Speaker 1: Thanks for being with us, much appreciated, very educational. Franco
• 30:28
  Speaker 1: Sino is the senior portfolio manager for New Fleet Asset Management,
• 30:32
  Speaker 1: helping to manage about twelve billion dollars in assets. They
• 30:38
  Speaker 1: are a bill. They are based in Hartford, Connecticut. Thanks
• 30:47
  Speaker 1: for listening to the Bloomberg P and L podcast. You
• 30:49
  Speaker 1: can subscribe and listen to interviews at Apple Podcasts, SoundCloud,
• 30:53
  Speaker 1: or whatever podcast platform you prefer. I'm pim Fox. I'm
• 30:57
  Speaker 1: on Twitter at pim Fox. I'm on Twitter at Lisa Abramo.
• 31:01
  Speaker 1: It's one before the podcast. You can always catch us
• 31:03
  Speaker 1: worldwide on Blueberg Radio.