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Speaker 2: Michael halein, Bloomberg Intelligence Senior restaurant and food service analyst,
Speaker 2: joins us Now. Michael McDonald's down the most in twenty
Speaker 2: twenty two. What do you think of the quarter? What
Speaker 2: was the big takeaway?
Speaker 3: Yeah, it was a weaker quarter than most expected. For sure,
Speaker 3: sales growth was kind of weak.
Speaker 4: You know.
Speaker 3: They cited the impact from the Israel Hamas war, and
Speaker 3: obviously that hurt results in the Middle East, but also
Speaker 3: in Muslim countries like Malaysia and Indonesia, and then also
Speaker 3: countries like France that have a large Muslim population. It
Speaker 3: may have impacted sales here in the US a bit
Speaker 3: as well. There were some calls to boycott a brand
Speaker 3: right after the start of the Israel Hamas war. Those
Speaker 3: kind of went away in December. In January, however, so
Speaker 3: there could have been a mild impact in the United
Speaker 3: States as well. And then in terms of key takeaways
Speaker 3: from the call, you know, they don't expect their developmental
Speaker 3: markets where the Middle East is located to improve really
Speaker 3: until the war ends. And they cited some consumer weakness
Speaker 3: in the United States, which they have before, right, but
Speaker 3: it seems like it may be spreading in terms of
Speaker 3: you know, just low income consumer weakness. You know, it
Speaker 3: sounds like their customers right now are managing their guest checks.
Speaker 5: Hey, Mike, I'm just looking at the PGeo function on
Speaker 5: the Bloomberg turbine. I see that roughly sixty percent of
Speaker 5: the revenue comes from franchise operated stores in about forty
Speaker 5: percent from company operating stores. How did they make that
Speaker 5: decision about what when they go to a particular location,
Speaker 5: whether the franchise or own it.
Speaker 3: I think a big part of it is return on investment, right,
Speaker 3: So if the returns on the investment are very strong,
Speaker 3: they typically want to hold on to those stores or
Speaker 3: develop stores. You know, they'll they'll do some store development
Speaker 3: in the United States and in their more established markets,
Speaker 3: but it's going to be a small percentage of what
Speaker 3: they're doing going forward. You know, most of their growth
Speaker 3: is going to be you know, done by their strong
Speaker 3: franchise partners, particularly particularly in China and some of these
Speaker 3: other very fast growing markets talk.
Speaker 2: About the input part of the situation in terms of
Speaker 2: their costs, in terms of their labor and all that
Speaker 2: kind of good stuff.
Speaker 3: Yeah, so come on, you know, inflation is easing for
Speaker 3: them this year, but it's still probably higher than normal.
Speaker 2: They're looking at cows, man cows.
Speaker 3: That's part of it, for sure. Beef and dairy costs
Speaker 3: are expected to be higher this year. So but they're
Speaker 3: looking at a you know, low single digit commodity inflation
Speaker 3: in the United States and abroad. Abroad had you know,
Speaker 3: Europe had very high inflation last year, and that that's
Speaker 3: gonna settle down a bit. Labor inflation is going to
Speaker 3: be continue to be, you know higher, and a big
Speaker 3: chunk of a big part of that here is you know, uh,
Speaker 3: in the US, you know, their California April first puts
Speaker 3: in the twenty dollars minimum wage for fast food workers,
Speaker 3: and so that's going to impact some of their stores,
Speaker 3: primarily their franchisees. However, so so they're still seeing you know,
Speaker 3: higher inflation than you know, we had in the twenty
Speaker 3: teens for sure.
Speaker 5: Hey, Mike, I look at the stock and you know
Speaker 5: I need to pay a twenty two twenty three times
Speaker 5: earnings for this stock. What am I really getting? Is
Speaker 5: it something more than GDP top line growth? What's really
Speaker 5: the call behind this kind of stock?
Speaker 3: Yeah, Well, with their global growth, they should They're gonna
Speaker 3: probably grow higher quicker than GDP. Know, what you're buying
Speaker 3: with a franchise business is you know, pretty pretty stable
Speaker 3: and predictable earnings growth, free cash flow growth. There's not
Speaker 3: a lot of operating leverage in the model, and so
Speaker 3: they're asset light and so they can lever the business
Speaker 3: up and return cash to shareholders pretty aggressively. So it's
Speaker 3: definitely an attractive model, especially one with the strong top
Speaker 3: line growth like McDonald's has. And they they're also you know,
Speaker 3: most investors can consider them slightly insulated against a recession
Speaker 3: in slower economic times, and a big part of that
Speaker 3: is that the is the value that they offer. During
Speaker 3: the Great Recession, they outperformed the quick service industry pretty significantly,
Speaker 3: acquired a lot of market share during that time, and
Speaker 3: so investors feel there's some safety investing in McDonald's versus
Speaker 3: some of the other restaurant chains out there.
Speaker 2: But Mike, that confuses me with what you said about
Speaker 2: customers watching their checks and their items and what they're buying,
Speaker 2: because you would think if things are hard and people
Speaker 2: are struggling, that you would get more value and people
Speaker 2: would go to McDonald's. But you were mentioning how in
Speaker 2: general people are watching their money more so they're not
Speaker 2: How does that kind of square?
Speaker 3: Yeah, So what we've seen is a lot of traffic
Speaker 3: deterioration over the last couple of years because price increases
Speaker 3: have been so aggressive and people's spending is being pinched.
Speaker 1: Right.
Speaker 3: But the thing about quick service, you know, they're in
Speaker 3: the lower end of the market, right, and so they'll
Speaker 3: see during an economic slowdown, they'll see higher and middle
Speaker 3: income consumers kind of fall into their bucket. They'll try
Speaker 3: they'll spend less at higher cost full service occasions, and
Speaker 3: they'll visit McDonald's more often, whereas a lot of the
Speaker 3: low income consumers will kind of fall out of that
Speaker 3: bucket and decide to opt for the grocery store more often. So, uh,
Speaker 3: they'll lose some traffic on the low end, but they'll
Speaker 3: they'll probably gain some with some of the middle and
Speaker 3: upper income consumers.
Speaker 5: So, like, who's really their competition these When I was
Speaker 5: a kid, it was Burger King and Wendy's, but now
Speaker 5: there's so much more out there.
Speaker 6: How do you kind of slice it?
Speaker 3: Yeah, it's the restaurant business, man. It's it's so fragmented.
Speaker 3: There's there's competition every may everywhere, man, you know, to
Speaker 3: your point, convenience stores, grocery stores, food trucks, you know,
Speaker 3: you name it. Still, primarily their biggest competition are the
Speaker 3: fast food restaurants that are located closer closest to them.
Speaker 3: So it depends on the market. You know, California, Jack
Speaker 3: in the Box is number two, you know, on the
Speaker 3: East Coast, Yeah, you know, Burger King is number two,
Speaker 3: and in most markets, i'd say in the United States,
Speaker 3: Wendy's obviously is a big competitor of theirs, but also
Speaker 3: you know, places like Chipotle and shake Shack, you know,
Speaker 3: are also all competing for restaurant dollars with McDonald's. But
Speaker 3: you know, we don't look too closely at market share
Speaker 3: in this business because it is so fragmented. And you know,
Speaker 3: I don't really like total addressable more getting restaurants because
Speaker 3: nobody's gonna eat at McDonald's three times a day, seven
Speaker 3: days a week, you know, so.
Speaker 2: That who's there documentary that doing that?
Speaker 3: There was Yeah, yes there, we gotta.
Speaker 2: Leave it there. Mike, thanks a lot. Mike Calin, Bloomberg
Speaker 2: Intelligence senior restaurant and food service analysts, joining us.
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Speaker 6: Es Day Lauder.
Speaker 5: The stocks of thirteen percent today, that's the short term
Speaker 5: pop well, and I guess some cost cuts. We'll get
Speaker 5: to that with our next guest. Down forty two percent
Speaker 5: on a trailing twelve month basis. That's the longer term
Speaker 5: story I want to dig into as well, and we
Speaker 5: can do it all with one Deborah Aichin. She is
Speaker 5: the senior Luxury analyst for Bloomberg Intelligence. She joins us
Speaker 5: from London via zoom You want to talk luxury, you
Speaker 5: want to talk high street shopping, talk to Debacon.
Speaker 6: So deb let's.
Speaker 5: Start with s day Lauder today. Good day for the company.
Speaker 5: Stocks up thirteen percent today. What's driving the stock today?
Speaker 4: Absolutely, it's all about well, let's let's say having really
Speaker 4: impacted negatively with several earnings with earnings down grades and
Speaker 4: misses over the last six seven quarters, the company positively
Speaker 4: positively surprised. It met its organic sales decline of eight percent,
Speaker 4: not a growth, and its EPs came in slightly better,
Speaker 4: so down twenty percent. But the big thing is the
Speaker 4: restructure program. So it already has a restructure program in
Speaker 4: play that didn't seem to be deep enough, wide enough,
Speaker 4: and have enough detail to it. And now they've raised
Speaker 4: five hundred to seven hundred million of cost on a
Speaker 4: deeper restructure program to bring up to one point four
Speaker 4: billion through twenty five and twenty six, mostly twenty five
Speaker 4: or majority twenty five weighted, so with the expectation. So
Speaker 4: that's kind of like four hundred million extra on what
Speaker 4: they were expecting before in terms of operating profitability.
Speaker 2: What was the problem that they had to fix by
Speaker 2: doing that? Like, why is it so hard to be
Speaker 2: s day Ladder? I thought everyone would pay a million
Speaker 2: dollars for perfect skin, not talking my book or anything.
Speaker 1: Right.
Speaker 4: The big thing over the last couple of years that
Speaker 4: we've seen We've always known that Estill order a very
Speaker 4: premium product, and it did so well for so many years,
Speaker 4: but it had very high exposure in Asia. So we
Speaker 4: ended up a couple of years ago with a stuffed retail,
Speaker 4: duty free travel retail area across China and some parts
Speaker 4: of Asia, which were exacerbated by South Korea also in
Speaker 4: the issues there with the Dae Goose shopper and what
Speaker 4: we found, and we'd always been saying, you know, there's
Speaker 4: supply side, the way that they organized themselves, the logistics.
Speaker 4: They didn't have the hubs in place in Asia to
Speaker 4: do as much as they were doing, so they were
Speaker 4: caught short or caught overstuffed, so they had far too
Speaker 4: much in trade and that has taken a long long
Speaker 4: time to temper down and start to normalize. And we
Speaker 4: should return overall to growth this next quarter.
Speaker 6: And dead let's stay with the China stories.
Speaker 5: I know from talking to you over the years and
Speaker 5: reading your research, the China consumer is just critical for
Speaker 5: luxury shopping.
Speaker 6: Can you give us a sense because.
Speaker 5: I don't want to walk down Madison Avenue or Fifth Avenue.
Speaker 5: I see all the European tourists back, they're back in,
Speaker 5: you know, in size, not so much with the Chinese.
Speaker 6: What's going on there?
Speaker 4: The big thing. We very late in getting visas through
Speaker 4: the reopening of you as we thought from the beginning
Speaker 4: of last year reopening of travel, but the viewers that
Speaker 4: travel internationally won't come back until the second half the year.
Speaker 4: And we are starting to hear some of those luxury
Speaker 4: companies sane. We're seeing more Chinese, more Asian customers in
Speaker 4: our stores back home. There's a lot more spent in
Speaker 4: flights are fuller. The surveys that we're doing are saying
Speaker 4: that they will travel, but a lot of that travel
Speaker 4: so far has been across Asia.
Speaker 2: But what's interesting is that not all are created equal.
Speaker 2: I feel like you can Jerry pick a couple of
Speaker 2: luxury stocks that have been somewhat immune and I'm just
Speaker 2: wondering what those are. And I still and in the
Speaker 2: skincare world too, like what is that immune skincare high
Speaker 2: end product? That doesn't matter, We're all buying it anyway.
Speaker 4: I think that you know there are there's some huge
Speaker 4: numbers in terms of some of the brands within the
Speaker 4: portfolio doing extremely well, lots of the brands of double
Speaker 4: digit but it's that trade that draws down. When you
Speaker 4: look at the Europe number for Estill order that's where
Speaker 4: they stock travel retail, that's where it sits in its
Speaker 4: P and L, and it's down minus fourteen. But actually
Speaker 4: Europe underline is flat and it's the same for the
Speaker 4: North American market. Within that there are brands like the
Speaker 4: Ordinary and and several of the higher end brands doing
Speaker 4: very very well up double digit. And it's the same
Speaker 4: across if I think about the way that actually luxury
Speaker 4: and you know Lorel aside Loreal is doing phenomenally well
Speaker 4: with a high base of its product in what a
Speaker 4: classes as Lorel looks. But let's go to some of
Speaker 4: the luxury companies and the way that LVMH and others
Speaker 4: are building sizeable scale in perfume and cosmetics. That's for
Speaker 4: growth of six to eight percent per year and very
Speaker 4: strong margin. So there are a lot of brands out
Speaker 4: there doing very very well. But in particular what has
Speaker 4: happened is and stockpicking, cherry picking. It's about the brands
Speaker 4: who've had the portfolio that hasn't had so much Asia
Speaker 4: travel retail or where it's really been able to manage that.
Speaker 4: Because even if I think about LVMH within its selective
Speaker 4: retail and it hous dfs due to free stores and Sophora,
Speaker 4: and at one point last year they were both down
Speaker 4: and they've now fully recovered. We're starting to see if
Speaker 4: the US some robust numbers coming through even from that
Speaker 4: aspirational end across the luxury across brands. It's getting a
Speaker 4: little better, but it's going to take time.
Speaker 6: And that's John Talker with the aspirational spend.
Speaker 2: Do you invest in your face.
Speaker 6: Other than maximum No? No, I invest in my face
Speaker 6: maximum strength.
Speaker 5: You know, sunblock is basically the only thing for this
Speaker 5: Irish American.
Speaker 2: Okay, but that's a really good thing. I mean, you're
Speaker 2: doing something, you know. I was just thinking that the
Speaker 2: only thing that I will not buy on sale is
Speaker 2: my skincare. Skincare because you just it never goes on sale.
Speaker 2: If you find something that works for you, you're sick
Speaker 2: with a certain aged woman who does media and on TV,
Speaker 2: like I will pay for it. Then that's I mean,
Speaker 2: I'm not wrong, deb right.
Speaker 4: The other thing that you do is you actually, without realizing,
Speaker 4: you trade up and right right now at the moment,
Speaker 4: there are some youngsters who are under twenty who were
Speaker 4: already moving into antih and the market is trying to
Speaker 4: stop that so as you get older, you're trading up.
Speaker 4: My story, which I think car relate to Paula Wellbach,
Speaker 4: was late in the autumn. I was in England and
Speaker 4: Cambridge and there were three Chinese consumers who couldn't get
Speaker 4: product from La Prairie very high end skincare product which
Speaker 4: is under the House of Biased Off. It's bigcause brand
Speaker 4: b Niveia, and they were there spending over three thousand
Speaker 4: pounds on a little gift pack. Each of La Prairie
Speaker 4: very high end eye product was way up of my
Speaker 4: price range.
Speaker 2: And these names, these real companies, What is this?
Speaker 6: I just used Irish spring and a wash cloth.
Speaker 2: Kind of the lebable hurts my soul, invest in your face?
Speaker 2: This is this is a strong takeaway from that.
Speaker 5: How are the luxury stock? What's what's kind of the
Speaker 5: luxury call here? I look at the FA function for
Speaker 5: es Day latter and it looks like for your the
Speaker 5: fiscal twenty twenty five, the June of twenty five year,
Speaker 5: the street's looking for a big pickup in revenue and
Speaker 5: profitability for Esday latter.
Speaker 6: What's behind that?
Speaker 4: That's that's all about that inventory. The to put that
Speaker 4: inventory in Asia into context, it's dragged down skincare in
Speaker 4: this quarter organic cells minus ten percent. It's dragged down
Speaker 4: Europe to minus fourteen, where underlying Europe was flat because
Speaker 4: it stores that travel retail. So it's about that inventory normalizing,
Speaker 4: and they're saying that that has happened right now at
Speaker 4: the end of two Q, so we head into three
Speaker 4: Q with normalized level and so therefore if that is
Speaker 4: the case, then it's better manage. We should start to
Speaker 4: see double digit growth coming from there. And if we
Speaker 4: were looking underlying without that area, then we saw mid
Speaker 4: single digit growth. So that's what that's about. And then
Speaker 4: also on top of this new restructuring program and with
Speaker 4: some of those benefits to come through twenty five, we've
Speaker 4: been playing around on MODL on the calculator and what
Speaker 4: we see there is around an expectation of twelve to
Speaker 4: thirteen percent uplift to that twenty twenty five operating profit
Speaker 4: to hopefully come through one consensus.
Speaker 2: Hey, deb really appreciate it. Thank you so so much.
Speaker 2: Debora Aig and Bloomberg Intelligence. I've seen industry analyst so
Speaker 2: just releases the question at the end of the day
Speaker 2: when it's trying to wind up coming back and traveling
Speaker 2: and like that we're back to that trade, which was
Speaker 2: the trade last last year at this exact same time.
Speaker 2: And do we buy it this time? Do you think
Speaker 2: it's really.
Speaker 5: Boy, I don't know. I think so now they're back
Speaker 5: to that. We heard from the mccow and Singapore gaming companies.
Speaker 5: The Chinese travelers are there.
Speaker 6: Okay, let's go.
Speaker 5: A little bit further now so they can get the
Speaker 5: visas and the flights, uh to come to Europe and
Speaker 5: to come to the US. Because again Fifth Avenue talked
Speaker 5: to merchants on Fifth Avenue and Madison Avenue.
Speaker 6: And they're just they're waiting for that.
Speaker 5: They thought it would be a twenty yeah, you know
Speaker 5: this year. I mean at twenty three event was not so,
Speaker 5: but they're I'm.
Speaker 2: Going to see Paul like strolling down Fifth Avenue, like
Speaker 2: going into stores.
Speaker 5: Like like I was into my Mega store getting some
Speaker 5: work on my watch, and I did ask that question,
Speaker 5: and I typed a deb acon right away, say here's
Speaker 5: some feedback from the store on fith Avenue coming starting
Speaker 5: to come back a little bit, starting to come back
Speaker 5: a little bit over the last three or four months.
Speaker 5: So but you know, they're just not taking over the
Speaker 5: city in the same time. Yeah, yeah, traffic they.
Speaker 6: Did in some of these luxury shopping areas.
Speaker 1: You're listening to the Bloomberg Intelligence Podcast. Catch us live
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Speaker 5: So Alex and I were talking earlier this morning at
Speaker 5: you know, around ten am Wall Street time. ISM released
Speaker 5: us some really good services data, So let's get right
Speaker 5: to that with Anthony Nieves. He's the chair of the
Speaker 5: ISM Services Business Committee. He joins us at via zoom.
Speaker 5: So Anthony again, the ISM Services Index came in at
Speaker 5: fifty three point four. That's the headline. Consensus was fifty
Speaker 5: two in the last period. Is fifty point six. Big
Speaker 5: jump there? Can you walk us through that?
Speaker 7: Certainly when you look at the composite index, it was
Speaker 7: driven by new orders increasing two point two percentage points
Speaker 7: from the fifty two point eight to fifty five point zero,
Speaker 7: and employment rebounded nicely. We contracted last month in December
Speaker 7: was attributed to the pullback. The pullback was attributed to
Speaker 7: the fact that the cycle time of hiring with the
Speaker 7: holidays and vacations and whatnot, and that rebounded nicely to
Speaker 7: fifty point five, up significantly six point seven percentage points.
Speaker 2: Hey Anthony, great to see you. We love this data.
Speaker 2: I love the ins and analysis from it. It wasn't
Speaker 2: like all sunshine and rainbows though. Walk us through sort
Speaker 2: of what areas of services did well, what area of
Speaker 2: services may be still contracting.
Speaker 7: That's a great question. And you look at the composite
Speaker 7: index and also prices were increasing seven point three percentage
Speaker 7: points fifty six point seven up to sixty four. Food
Speaker 7: prices still remain very strong. That I feel has impacted
Speaker 7: the FED. Looking at interest rate cuts, our respondents are
Speaker 7: telling us that they'd love to see continued cuts in
Speaker 7: the interest rates. But the bright side of that, there's
Speaker 7: capital spending, new projects of being released. When you look
Speaker 7: at the top five industries that contribute to GDP, overall,
Speaker 7: real estate rental and leasing is still contracting. The increases
Speaker 7: coming from professional, scientific, technical services as well as healthcare
Speaker 7: social assistance very strong this month.
Speaker 5: So I mean the services is seventy percent of our economy.
Speaker 6: I mean I can't.
Speaker 5: See a GDP contraction scenario coming out of you know,
Speaker 5: we get data like this.
Speaker 6: I mean, are you guys at ism or what's your
Speaker 6: economic call here?
Speaker 7: When we look at this monthly report coupled with the
Speaker 7: semi annual forecast, what our respondents indicated to us that
Speaker 7: the first half, especially in services wasn't going to be
Speaker 7: that robust, but the second half was going to be better.
Speaker 7: I feel we're slightly ahead of the trend. And to
Speaker 7: your point about GDP growth, think what was it three
Speaker 7: point three percent last year? When we look at the
Speaker 7: composite index this month annualized, it's at one point five.
Speaker 7: And if we see the second half as they indicated
Speaker 7: to us, being stronger, we'll have this incremental growth continue.
Speaker 7: It'll be a good story for the services sector.
Speaker 2: So when we jump to the prices paid, though, I
Speaker 2: mean it's pretty staggering, jumped the most since twenty twelve.
Speaker 2: Was this a supply story or a demand story because
Speaker 2: we have seen a lot of supply chain snarls, et cetera.
Speaker 7: Well, we definitely see that it's a demand issue, especially
Speaker 7: with new orders. Even though it looks like, you know,
Speaker 7: it's fifty five, it's middling as far as the growth
Speaker 7: two point two percentage points up in the fifty two
Speaker 7: point eight, but definitely it has some constraint on transportation,
Speaker 7: and that was indicated to us by our respondents. They
Speaker 7: said that there's challenges with the Suez Canal with the
Speaker 7: conflict over in the Red Sea, as well as the
Speaker 7: Panama Canal. We're seeing the capacity has reduced to less
Speaker 7: than half of what it was based on the issues
Speaker 7: with being able to fill up the locks with the
Speaker 7: water shortage over there.
Speaker 5: Interesting, all right, So what are you looking for going
Speaker 5: forward here? Just to kind of get a sense of
Speaker 5: the consumer. Is it the labor market? Is that the
Speaker 5: primary driver here or what else kind of from your perspective,
Speaker 5: influences the consumer?
Speaker 7: Well, you know, the labor market and employment you look
Speaker 7: at it a fifty point five. That's a really interesting
Speaker 7: story there. It continues the same trend and pattern that
Speaker 7: we've seen. Certain industries they're still going through job cuts,
Speaker 7: whereas others are finding competitiveness in the marketplace and trying
Speaker 7: to recruit and hire applicable workers. But overall, it's really
Speaker 7: coming down to where is it driven from, and right
Speaker 7: now it seems to be those two industries that I
Speaker 7: mentioned previously, professional scientific, technical services, as well as the
Speaker 7: healthcare and socialists.
Speaker 2: Before you go, Anthony, before we let you go, is
Speaker 2: this an economy that has the risk of actually running
Speaker 2: hotter if you're just looking at the responding data here?
Speaker 7: Not really, because looking at it at the fifty three
Speaker 7: point four, it's not over. It's not in any rook
Speaker 7: of overheating at this point.
Speaker 2: Hey, Anthony, really great to get your perspective. Thank you
Speaker 2: so much. Interested in goldilocks, I mean the end of
Speaker 2: the day, like, hey, prices paid a little bit, but
Speaker 2: this is definitely a goldilocks story, Anthony Navis. He joins
Speaker 2: us chair of the Ism Services Business Committee. It's really
Speaker 2: nice to get the details of the big data.
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Speaker 2: Is the ISM Services index really solid? Price is paid,
Speaker 2: really solid? Employment higher, new orders higher? So let's get
Speaker 2: the breakdown here on what this all means. Danielle de
Speaker 2: Martino Booth, the CEO and chief strategist of QI Research. Danielle,
Speaker 2: what do you make of this economy? I mean, it's
Speaker 2: really hard to see any kind of slowing. It's really
Speaker 2: hard to see sort of where that's going to come from.
Speaker 8: What's your take, Well, I think of all of the
Speaker 8: of all of the indicators that we've seen in the
Speaker 8: last few days, where it's going to come from part
Speaker 8: is the most apparent at this juncture.
Speaker 4: You know.
Speaker 8: One of the things that we noticed when the ISM
Speaker 8: Services report came out in December was that the employment
Speaker 8: component had dropped to forty three and change. We went, oh,
Speaker 8: my gosh, that's absolutely the worst we've ever seen.
Speaker 9: Hurse.
Speaker 8: This morning it rebounded back above the fifty line that
Speaker 8: separates expansion and contraction. All good and well, you say, right, well,
Speaker 8: you look under the hood. ISM Services covers eighteen industries.
Speaker 8: In November, there were ten that had rising employment. In
Speaker 8: December there were seven of those eighteen with rising employment
Speaker 8: in seven sectors. In January there were three. And so
Speaker 8: I think we have to be very careful with the
Speaker 8: data about getting too excited about any one headline, you know,
Speaker 8: One of the things that came out on Friday in
Speaker 8: the employment report was that the headline employment had increased
Speaker 8: by three hundred and twenty five thousand. You peel the
Speaker 8: onion back a layer and you find out then since
Speaker 8: the month of February, since February, we have been at
Speaker 8: a single full time job created in the United States.
Speaker 8: In fact, it's been negative ninety seven thousand since then.
Speaker 8: So the reason I think markets are a little bit
Speaker 8: schizophrenic is because you have to keep looking left and
Speaker 8: right or you're gonna get run over.
Speaker 4: Yeah.
Speaker 5: One of the many reasons I like Kevin Danielle on
Speaker 5: the show because I like to just take the headline
Speaker 5: number and run with it. She doesn't do that. She
Speaker 5: doesn't allow me to do that. She says, I got
Speaker 5: to peel back lets and onions and things like that. So, Danielle,
Speaker 5: I think if I kind of read your very good
Speaker 5: social media profile, you're not in the soft landing camp,
Speaker 5: are you.
Speaker 6: What's your call here?
Speaker 5: I sense you're more cautious and you think the market
Speaker 5: should be more cautious.
Speaker 8: Yeah, I do think the market should be more cautious.
Speaker 8: We have we have several sign posts that show that
Speaker 8: October is probably when the National Bureau of Economic Research
Speaker 8: is going to go back and backdate the recession. We
Speaker 8: actually have one of their main indicators that they follow UH,
Speaker 8: which is income X transfers ex Government transfers, adjust it
Speaker 8: for inflation. That's negative. If you if you look at
Speaker 8: in adoption production, one of the huge arbiters of recession for
Speaker 8: the nb ER, it also UH is negative. And in
Speaker 8: fact we're starting to see problematic inventory build in autos.
Speaker 8: We had that we had at auto sales come in
Speaker 8: at fifth teen point zero million seasonally adjusted annualized rate
Speaker 8: they were expected to commit at fifteen point seven. That
Speaker 8: was a quiet report that kind of went by the
Speaker 8: wayside last Thursday. So there are so many revisions going on.
Speaker 8: Goldman SAX did a huge report at the end of
Speaker 8: the year that said every single month of retail sales
Speaker 8: in twenty twenty three had been revised downwards and that
Speaker 8: retail sales were flat on the year. I think we're
Speaker 8: having such an issue with statisticians in Washington, DC because
Speaker 8: so many of their seasonal analysis modeling is based off
Speaker 8: of and includes the pre pandemic era. So the time
Speaker 8: the dust settles are like, oh, wait, wait, now that
Speaker 8: we've got everything in or maybe we've got the smallest
Speaker 8: sample size in the history of say the non farm
Speaker 8: payroll survey. Once we get all of the data in hand,
Speaker 8: we were incorrect, We're going to go back and revise
Speaker 8: that down.
Speaker 2: That's a lot of Danielle. This makes your job difficult,
Speaker 2: our job difficult, and the Fed's job even more difficult.
Speaker 2: So we're now looking at a little over four cuts
Speaker 2: priced in for this year. What do you think is legit,
Speaker 2: particularly with all this uncertainty and revisions that you're talking about,
Speaker 2: and when would it start.
Speaker 8: Well, had it not been for the very strong tone
Speaker 8: that Chair j. Powell voiced on sixty minutes last night,
Speaker 8: I would be more in the camp of saying if
Speaker 8: they do start to cut rates, they will do so
Speaker 8: at every meeting beginning in May, so May, June, July,
Speaker 8: and September. But Chair Powell seems so adamant in communicating
Speaker 8: that he will be the apolitical FED chair. He will
Speaker 8: be nonpartisan, he will not be viewed as being political.
Speaker 8: In an election year, it's a toss up fifty to
Speaker 8: fifty whether or not the Fed historically has cut rates
Speaker 8: or raised rates. May taken any action in the FMC
Speaker 8: that immediately precedes the election. That would be the September,
Speaker 8: the eighth, eighteenth FOMC. I wouldn't be surprised to see
Speaker 8: three rate cuts May, June, and July and then a pause.
Speaker 6: Interesting.
Speaker 5: So, from your perspective, Danielle, the data you look at,
Speaker 5: which is not necessarily the data that lay people like
Speaker 5: me look at, which is basically how much does it
Speaker 5: cost to fill up my car with gas? Is inflation
Speaker 5: whipped in this country or no?
Speaker 8: You know, it's interesting you asked that question because recently
Speaker 8: true inflation truflation, which a bunch of bond traders introduced
Speaker 8: to me. They actually gave me the raw data. We
Speaker 8: ran a quick correlation. It's got a point ninety seven
Speaker 8: correlation with headline inflation, the headline CPI. Two times ago,
Speaker 8: true inflation hopped down underneath the FEDS two percent target.
Speaker 8: I said, well, what happened there? And it was mostly
Speaker 8: led by hotels. It was one sector. Last week it
Speaker 8: dropped down to one point four one point four percent YEP,
Speaker 8: And so I reached out to the founders of trueflation,
Speaker 8: I said, what gives what was that huge swing factor?
Speaker 8: Did I miss it did I fill up at the
Speaker 8: gas tank for a lot less and they said no, Danielle,
Speaker 8: ten out of twelve categories had appreciably large declines, meaning
Speaker 8: the disinflation that was a one off here or there
Speaker 8: has become extremely widespread. If you've got ten out of
Speaker 8: your twelve major categories more than three hundred million real
Speaker 8: time prices feed this monster model per day, with again
Speaker 8: a ninety seven percent correlation with headline CPI. I think
Speaker 8: that Pal's bigger impediment going into the second half of
Speaker 8: twenty twenty four might be larger rate cuts than he
Speaker 8: anticipates or would like, if inflation's coming down as quickly
Speaker 8: as it is.
Speaker 5: All right, Danielle, thank you so much for joining us.
Speaker 5: We always appreciate getting your input. Danielle di Martino Booth.
Speaker 5: She's the CEO and chief strategist at QI Research, joining
Speaker 5: us via Zoom from Big d Dallas, Texas. She was
Speaker 5: on the Fed Dallas fed down there years past. A
Speaker 5: great perspective there. We appreciate chatting with her.
Speaker 1: You're listening to the Bloomberg Intelligence Podcast. Catch us live
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Speaker 5: Just talk about the real company out there, Element Solutions.
Speaker 5: Ben Glicklich joins us. He's the CEO of Element Solutions.
Speaker 5: He joins us live here on our Bloomberg Interactive Broker Studio.
Speaker 5: We appreciate you're based done in Fort Lauderdale in Miami.
Speaker 1: Nice.
Speaker 2: Why are you here?
Speaker 6: Yeah, well in Miami because everybody's is it going crazy
Speaker 6: down there?
Speaker 4: What is it?
Speaker 6: I mean, is it just nuts with all these people
Speaker 6: coming down.
Speaker 9: There's a ton of energy.
Speaker 6: It's a great place to live and work.
Speaker 9: For better or worse. I'm on the road three months,
Speaker 9: three weeks out of the month because the business is
Speaker 9: very global.
Speaker 2: Just for background. Paul wants to be there, like he
Speaker 2: wants to move to Florida. He wants to do the
Speaker 2: show from there.
Speaker 6: Exactly. I talked to us about Elements Solutions. I know
Speaker 6: you guys are in. Just tell us about your company,
Speaker 6: what you do, and then we'll go from there.
Speaker 4: Great. So.
Speaker 9: Element Solutions is a provider of chemical technology that enables
Speaker 9: high performance applications so our materials and process solutions are
Speaker 9: used in manufacturing high value products from semiconductors to smartphones
Speaker 9: to high performance autom So.
Speaker 5: Your customers are technology companies primarily.
Speaker 9: So our customers are technology supply chains. Technology supply we're
Speaker 9: we're selling to printed circuit board manufacturers, semiconductor manufacturers, it's
Speaker 9: very fragmented below the original equipment manufacturers that make the
Speaker 9: smartphones in the cars. So we're a critical enabler of
Speaker 9: their technologies, but we're not selling directly to them.
Speaker 2: So you're not making like plastic for the end user
Speaker 2: kind of thing either, because usually, like what I love
Speaker 2: about chemicals is that is that really closed early cycle
Speaker 2: read on the global economy, right, like what air Products
Speaker 2: is doing when relationship telling me about China, that's not you, guys.
Speaker 9: So we're selling critical components that enable performance of high
Speaker 9: value products. So we do have a read on what
Speaker 9: the next generation smartphone is going to look like. We
Speaker 9: have a read on trends in automotive and other electronics
Speaker 9: and markets.
Speaker 6: How did you find yourself to this business. It's a
Speaker 6: fantastic business.
Speaker 5: I'll take your word for it, but I mean it's
Speaker 5: not something I would have thought about just off.
Speaker 6: You have to been dropped in there somehow.
Speaker 9: So better lucky than good, I would say. I partnered
Speaker 9: with our chairman, Sir Martin Franklin, who's been very successful
Speaker 9: building multiple different businesses, and together through acquisitions, we've built
Speaker 9: this portfolio of market leading companies.
Speaker 5: Doesn't when I think chemical company, I don't think South Beach, true,
Speaker 5: I think like Cleveland, What are you doing in South Beach?
Speaker 7: Not that?
Speaker 6: Or Miami? What's no reason not to be there? Everybody
Speaker 6: else is.
Speaker 9: So we are there because it's as good of a
Speaker 9: place as any, and our business is very dispersed. We
Speaker 9: have one hundred and sixty locations in over thirty countries,
Speaker 9: more than sixty manufacturing sites, and so my job is
Speaker 9: to make sure that our folks are working on the
Speaker 9: right things with the right incentives. And so I'm traveling
Speaker 9: as chief cheerleader to visit our people all over the
Speaker 9: world most of my time, and coming home to Florida
Speaker 9: is in such.
Speaker 6: A bet that's not a bad thing.
Speaker 5: And so public and traded company EESI is the ticker
Speaker 5: for those playing at home, it's up. I guess it's
Speaker 5: got a market cap about five and a quarter billion,
Speaker 5: dollars on a trailing twelve month basis up at about two percent,
Speaker 5: and you're to date off about six percent. What's the
Speaker 5: message you bring to your shareholders? You're in New York,
Speaker 5: I'm sure you're seeing some shareholders as well. What's the
Speaker 5: message for your company?
Speaker 9: So this business has come off of a difficult demand
Speaker 9: environment in twenty twenty three, Electronics markets drew down significantly,
Speaker 9: the global industrial economy stuttered a little bit. And as
Speaker 9: we enter twenty twenty four, we manage twenty three well,
Speaker 9: preserve profits, made some great capital allocation decisions to position
Speaker 9: the business well for growth, and our end markets are
Speaker 9: getting better. Semiconductor markets are improving, Electronics markets are improving,
Speaker 9: So we're well positioned for you know, several years here
Speaker 9: of above cycle above cycle average growth.
Speaker 2: Is that an inventory thing or is it an end
Speaker 2: user demand thing? I mean just restocking inventory At this point.
Speaker 6: It's an end user demand thing.
Speaker 9: We did have a drawdown of channel inventories post COVID.
Speaker 9: There was a bullwhip effect. Electronics were overbought by the
Speaker 9: supply chain in twenty twenty one into twenty twenty two.
Speaker 9: There was a big inventory clearance in twenty twenty three,
Speaker 9: and now we're starting to see semiconductor production increase. We're
Speaker 9: starting to see new smartphone models gaining traction. Our story
Speaker 9: is not just one of units, it's content per unit,
Speaker 9: and so the more technically challenging, the more robust the application,
Speaker 9: the more value for a company like ours. And so
Speaker 9: we're going to grow over and above units through the cycle,
Speaker 9: and unit growth is poised to recover nicely here.
Speaker 5: So I'm just looking at the FA function on the
Speaker 5: Bloomberg terminal financial analysis. It looks like the street's got
Speaker 5: kind of mid single digit kind of revenue growth over
Speaker 5: the next several years, mid teens EPs growth. So it
Speaker 5: some operating leverage in your business model? Is is that
Speaker 5: what you're telling investors to buy or do you also say, hey,
Speaker 5: this is also a fragmented business and if we see
Speaker 5: things out there to buy to maybe goose our growth rate,
Speaker 5: we'll do that.
Speaker 6: How do you think about that?
Speaker 9: So the answer is yes, in the first instance, the
Speaker 9: business's asset light. It generates incredibly strong cash flows. So
Speaker 9: our moat isn't in manufacturing process, it's in technology and people,
Speaker 9: and so we don't have to invest a lot of
Speaker 9: capital in order to drive the business's growth, and then
Speaker 9: we're able to find very interesting things to do with
Speaker 9: that strong cash flow. So we've been very inquisitive in
Speaker 9: our history, and we doubled our adjuster learnings per share
Speaker 9: in our first three years as a public company. We
Speaker 9: set a goal to do that in five years. We
Speaker 9: set another goal to double it again in five years,
Speaker 9: and we're in the middle of that process right now.
Speaker 9: The goal is to compound EPs in the teens.
Speaker 2: So what about the what about the input side? Like
Speaker 2: it sounds like you're trying to run pretty lean, but
Speaker 2: we still definitely see inflation kind of all around. Any
Speaker 2: kind of manufacturing is going to get hit by that.
Speaker 2: And I appreciate that you're sort of on a different scale,
Speaker 2: But what do you see.
Speaker 9: So we've had inflation over the past several years, started
Speaker 9: to stem big inflation, and logitition copper to stop a
Speaker 9: little bit of both. So logistics have plateaued. They're starting
Speaker 9: to come in a little bit. But with some of
Speaker 9: the disruptions in global supply chains, we're starting to see
Speaker 9: a bit of pressure there. Raw material price inflation has
Speaker 9: slowed down. We're starting actually to see some deflation. As
Speaker 9: a company we're able to take price from customers when
Speaker 9: our costs increase and typically able to hold that and
Speaker 9: so margins have gotten better in the back half of
Speaker 9: twenty twenty three and we expect that to continue in
Speaker 9: twenty twenty four.
Speaker 5: So you recently acquired a company, a new science, a
Speaker 5: new copper science company.
Speaker 6: What is that?
Speaker 9: So this is a really exciting opportunity. There aren't big
Speaker 9: step change breakthroughs in material science in our markets. What
Speaker 9: used to work typically works with small modifications. Okay, we
Speaker 9: acquired a business called Couprion that has a product called
Speaker 9: active copper, which is nano particular copper. That is a
Speaker 9: new mechanism to enable next generation electronics. If you think
Speaker 9: about your smartphone, it's computing power is getting greater through
Speaker 9: smaller lines on the circuit board and smaller holes connecting
Speaker 9: the layers of the circuit board, and conventional material science
Speaker 9: struggles to deal with those technical challenges. Coupriyon is a
Speaker 9: solution for that. So it's got huge potential. We've got
Speaker 9: great customer engagement. It's a very very exciting story, not
Speaker 9: just for our company, but for our customers.
Speaker 2: In a broader sense. The smartphone trough like the electronics
Speaker 2: trough you were mentioning, sort of we had a lot
Speaker 2: of buying and then that came down during the pandemic.
Speaker 2: Now and then we're sort of have we troughed? Are
Speaker 2: we going to see a meaningful acceleration over the next say,
Speaker 2: eighteen months? So yeah, cause it is Paul going to
Speaker 2: buy a new phone. That's twelve physicists, I'm an eleven. Yeah,
Speaker 2: it's fine, okay, so speak to me about.
Speaker 9: Yeah, there's so the smartphone mark we call the bottom
Speaker 9: in broader electronics in the second quarter, and we saw
Speaker 9: recovery in the back half. The slope of that recovery
Speaker 9: is uncertain, but the long term legs of increased technical
Speaker 9: requirements for electronics are very very long running, and the
Speaker 9: smartphone replacement cycle has extended, and smartphone saturation of the
Speaker 9: market is getting there. We troth from a unit's perspective,
Speaker 9: in twenty twenty three, we'll see unit growth in twenty
Speaker 9: twenty four, we expect that, but we're starting to gear
Speaker 9: up for.
Speaker 6: The next thing.
Speaker 9: The next thing is enabled by AI, right, so more
Speaker 9: computing power proliferating around the edge of the network has
Speaker 9: very very high technical demands and We're not capacitated by
Speaker 9: the number of people on Earth when it comes to AI, right,
Speaker 9: the number of smartphones is kind of driven by the
Speaker 9: number of people walking around AI. You know, Industrial automation
Speaker 9: is not capped by that, and as we get autonomous
Speaker 9: factories and autonomous cars, there's just more and more application
Speaker 9: space for high performance electronics, which is great for our company.
Speaker 6: Thirty seconds, who you compete with?
Speaker 9: We've got great competitors, but diverse competitors. We're the only
Speaker 9: company in our market that can speak to the breadth
Speaker 9: of electronics applications that that we have in our portfolio.
Speaker 9: So we compete a bit with DuPont. We compete with
Speaker 9: a company called at Tech that's part of MKAS Group.
Speaker 9: We've got local competitors and markets like Japan and China.
Speaker 9: It's a competitive market, but our ability to provide value
Speaker 9: to customers through materials compatibility and a broad product offering
Speaker 9: is unrivaled.
Speaker 6: See I was trying to figure out how he got
Speaker 6: to where he is now. I figured it out and
Speaker 6: investment banking to private equity. Then he says, screw this,
Speaker 6: I'm going to go and do it myself.
Speaker 5: And he went to like a real industry and get
Speaker 5: a real job that makes stuff.
Speaker 6: I've seen that route before. A lot of success.
Speaker 2: Industry is really fun.
Speaker 6: Yeah, really like I'm not just going to bank these people.
Speaker 6: I'm gonna go do it.
Speaker 5: Ben Glicklich, CEO of Element Solutions, appreciate you coming in
Speaker 5: here into our studio. It's a fascinating company. Never would
Speaker 5: have thought about it. I learned something new today Element Solutions.
Speaker 5: You need all the chemical stuff for the tech and
Speaker 5: the chips and all that kind.
Speaker 6: Of stuff, and there are people that do that for
Speaker 6: a living. That's good.
Speaker 4: Up.
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