1 00:00:02,720 --> 00:00:10,600 Speaker 1: Bloomberg Audio Studios, podcasts, radio news. You're listening to the 2 00:00:10,600 --> 00:00:14,600 Speaker 1: Bloomberg Intelligence Podcast. Catch us live weekdays at ten am 3 00:00:14,640 --> 00:00:18,560 Speaker 1: Eastern on Applecarplay and Android Auto with the Bloomberg Business App. 4 00:00:18,640 --> 00:00:21,880 Speaker 1: Listen on demand wherever you get your podcasts, or watch 5 00:00:21,960 --> 00:00:23,120 Speaker 1: us live on YouTube. 6 00:00:23,520 --> 00:00:25,600 Speaker 2: His friends call him Mikey, and I'm his friend. I'm 7 00:00:25,600 --> 00:00:29,120 Speaker 2: calling him Mikey. Mikey Shaw. Michael Shaw, senior Pharmer, biotechanaists 8 00:00:29,120 --> 00:00:32,040 Speaker 2: Bloomberg Intelligence spased in London. Mike, you got to talk 9 00:00:32,080 --> 00:00:34,080 Speaker 2: to me about what's going on with no vote Nordest. 10 00:00:34,120 --> 00:00:37,360 Speaker 2: I thought these obesity drugs were the bomb here. What's 11 00:00:37,400 --> 00:00:39,080 Speaker 2: going on with their guidance? That was a huge miss 12 00:00:39,200 --> 00:00:40,560 Speaker 2: for them. 13 00:00:40,760 --> 00:00:44,320 Speaker 3: Yeah, two pieces in use today versus the guidance cut, 14 00:00:44,360 --> 00:00:47,760 Speaker 3: so second guidance cut of the year. So reported guidance 15 00:00:47,800 --> 00:00:50,080 Speaker 3: now is calling for some percent sales grows, six percent 16 00:00:50,120 --> 00:00:54,120 Speaker 3: operating profit growth after adjusting for currency, and that compares 17 00:00:54,200 --> 00:00:59,040 Speaker 3: to fourteen and fifteen percent respectively previously. Now a lot 18 00:00:59,080 --> 00:01:02,360 Speaker 3: of that is related to the US market. There, they're 19 00:01:02,400 --> 00:01:05,199 Speaker 3: still seeing headwinds from compound and GLP one, which seems 20 00:01:05,200 --> 00:01:08,360 Speaker 3: to be the main driver that's affecting wegov growth and 21 00:01:08,400 --> 00:01:10,600 Speaker 3: there's a lack of visibility here. So all of that 22 00:01:10,640 --> 00:01:14,120 Speaker 3: creates uncertain z for investors and also kind of questions 23 00:01:14,360 --> 00:01:18,039 Speaker 3: around not only only twenty twenty five numbers, but the 24 00:01:18,080 --> 00:01:20,880 Speaker 3: exit rate into twenty six. So there's concerns about you know, 25 00:01:21,000 --> 00:01:25,479 Speaker 3: mid to long term growth given how concentrated or how 26 00:01:25,520 --> 00:01:30,200 Speaker 3: reliant sorry Novo is on WE'REGOVI for growth. The other 27 00:01:30,319 --> 00:01:33,760 Speaker 3: headwind is competition to a zepic, so that's the GP 28 00:01:33,880 --> 00:01:36,399 Speaker 3: one for diabetes and that's another you know, key growth 29 00:01:36,480 --> 00:01:40,800 Speaker 3: driver for the for the company. Second piece of news 30 00:01:41,400 --> 00:01:45,080 Speaker 3: new CEO appointment. So they went with an internal candidate. 31 00:01:45,440 --> 00:01:48,840 Speaker 3: I think the market was perhaps expecting them to go 32 00:01:48,960 --> 00:01:51,920 Speaker 3: for an external candidate, so you know, perhaps a bit 33 00:01:51,960 --> 00:01:55,520 Speaker 3: of disappointment there. But that said, you know he's been 34 00:01:55,520 --> 00:01:58,800 Speaker 3: at the company. So this is Mike Dudster. He's been 35 00:01:58,840 --> 00:02:01,000 Speaker 3: at the company since ninety two. He's been heading up 36 00:02:01,040 --> 00:02:04,960 Speaker 3: international operations since twenty sixteen, and over that time, you know, 37 00:02:05,160 --> 00:02:10,440 Speaker 3: we've seen international operations sales double to around eighteen billion dollars. 38 00:02:10,639 --> 00:02:12,840 Speaker 3: So you know, he's an internal higher, he's familiar with 39 00:02:12,880 --> 00:02:16,240 Speaker 3: the company culture. I think it's a bit too early 40 00:02:16,280 --> 00:02:20,160 Speaker 3: to you know, to write him off before he's even started. Now, 41 00:02:20,200 --> 00:02:22,519 Speaker 3: his focus is going to be on reget gaining ground 42 00:02:23,120 --> 00:02:26,240 Speaker 3: to Lily in the obesite space, maintaining leadership in the 43 00:02:26,280 --> 00:02:30,200 Speaker 3: diabetes space, and then improving execution. And that's something that's 44 00:02:30,240 --> 00:02:32,360 Speaker 3: going to be key ahead of the Cagary semma launch 45 00:02:32,720 --> 00:02:35,400 Speaker 3: as well as the launch for its oral JP one 46 00:02:35,680 --> 00:02:39,640 Speaker 3: A in obesity, particularly given you know, Cagary Summer perhaps 47 00:02:39,680 --> 00:02:42,400 Speaker 3: isn't as differentiated as we had hoped for, and then 48 00:02:42,440 --> 00:02:47,920 Speaker 3: the oral JLP one profile perhaps trails that of Lily's 49 00:02:48,600 --> 00:02:49,679 Speaker 3: in a car with journalists. 50 00:02:49,720 --> 00:02:52,200 Speaker 4: Though the new CEO said he's planning to review the 51 00:02:52,240 --> 00:02:55,680 Speaker 4: company's cost base with outsetting specific targets and metrics. So 52 00:02:55,720 --> 00:02:59,280 Speaker 4: could this indicate indicate that Novo is preparing for a 53 00:02:59,320 --> 00:03:02,480 Speaker 4: period of silver growth after the initial surge and demand, 54 00:03:02,960 --> 00:03:04,920 Speaker 4: especially the blockbuster we Go V drug. 55 00:03:07,160 --> 00:03:09,800 Speaker 3: I mean, I think it will be hard to slash 56 00:03:09,880 --> 00:03:13,480 Speaker 3: R and D to be honest, So I mean, and 57 00:03:13,840 --> 00:03:17,120 Speaker 3: they would need to you know, continue marketing, continue to 58 00:03:17,160 --> 00:03:21,400 Speaker 3: do DTC in order to you know, in order to 59 00:03:21,440 --> 00:03:26,040 Speaker 3: compete with Lily. They're obviously healy heavily investing into Capex 60 00:03:26,080 --> 00:03:29,000 Speaker 3: at the moment, but there is probably some operating leverage 61 00:03:29,040 --> 00:03:32,680 Speaker 3: in there, you know, to provide some sort of relief. 62 00:03:32,720 --> 00:03:35,000 Speaker 3: I mean, the company's got a margin of about forty 63 00:03:35,040 --> 00:03:37,600 Speaker 3: five percent, which is at the top end for large farmer. 64 00:03:38,200 --> 00:03:39,960 Speaker 2: Hey, Mike, is there any reasons to believe that maybe 65 00:03:40,000 --> 00:03:43,320 Speaker 2: the marketplace has been over estimating the size of this 66 00:03:43,680 --> 00:03:45,200 Speaker 2: OBC drug market? 67 00:03:47,400 --> 00:03:49,960 Speaker 3: I think, I mean, yeah, I think there's always a 68 00:03:50,000 --> 00:03:52,240 Speaker 3: risk with it with an indication this size when you 69 00:03:52,280 --> 00:03:55,360 Speaker 3: look at the market potential. You know, in the US alone, 70 00:03:55,360 --> 00:03:59,880 Speaker 3: it's one hundred and thirty one hundred and forty million patients, 71 00:04:00,000 --> 00:04:04,600 Speaker 3: which is a target population. There is a population then yeah, 72 00:04:04,640 --> 00:04:07,320 Speaker 3: I mean there is a risk that you know, perhaps 73 00:04:07,320 --> 00:04:11,240 Speaker 3: consensus did get ahead of itself. But the difficulty here is, 74 00:04:11,600 --> 00:04:15,040 Speaker 3: you know, you have you know, huge runway of patients. 75 00:04:15,440 --> 00:04:20,000 Speaker 3: There's obviously limited supply, so it's difficult to know kind 76 00:04:20,040 --> 00:04:24,359 Speaker 3: of you know, how quickly that supply can come on board. Now, 77 00:04:24,480 --> 00:04:27,600 Speaker 3: you know, Nova gives guidance around you know, their growth prospects. 78 00:04:27,720 --> 00:04:29,600 Speaker 3: You know where they think sales et cetera. Are going 79 00:04:29,640 --> 00:04:35,960 Speaker 3: to go, but they keep they don't necessarily quantify, you know, 80 00:04:36,000 --> 00:04:38,320 Speaker 3: the cadence supply and how that how quickly that's going 81 00:04:38,360 --> 00:04:41,720 Speaker 3: to come online. So that kind of makes forecasting quite difficult. 82 00:04:42,160 --> 00:04:44,360 Speaker 3: And obviously they don't want to give that information because 83 00:04:44,360 --> 00:04:47,159 Speaker 3: it's competitive information and they want, you know, Lily to 84 00:04:47,200 --> 00:04:47,720 Speaker 3: know about it. 85 00:04:48,320 --> 00:04:50,280 Speaker 2: Wait, back in my analyst days, I would have slammed 86 00:04:50,279 --> 00:04:53,000 Speaker 2: at this management team because that guidance was brutal. They 87 00:04:53,000 --> 00:04:55,200 Speaker 2: were nowhere close to hitting it in they're big reduction 88 00:04:55,240 --> 00:04:56,920 Speaker 2: the guidance and we see the stock down twenty two 89 00:04:56,920 --> 00:04:59,800 Speaker 2: percent today, down thirty seven percent year to date, fifty 90 00:04:59,800 --> 00:05:02,200 Speaker 2: two week low. So they're paying the price for Miikey 91 00:05:02,200 --> 00:05:04,960 Speaker 2: Shaw Folks is one of the best healthcare pharmat analysts 92 00:05:05,000 --> 00:05:07,800 Speaker 2: in the city of London. Every institutional investor wants to 93 00:05:07,800 --> 00:05:09,800 Speaker 2: talk to them. We appreciate getting a few minutes of 94 00:05:09,880 --> 00:05:13,080 Speaker 2: his time. Miikei Shaw, Senior Pharma biotech analysts Bloomberg Intelligence 95 00:05:13,360 --> 00:05:15,480 Speaker 2: over there in our London studios. 96 00:05:17,200 --> 00:05:20,880 Speaker 1: You're listening to the Bloomberg Intelligence podcast. Catch us live 97 00:05:21,000 --> 00:05:24,040 Speaker 1: weekdays at ten am Eastern on Apple, Cocklay and Android 98 00:05:24,080 --> 00:05:27,400 Speaker 1: Auto with the Bloomberg Business App. Listen on demand wherever 99 00:05:27,440 --> 00:05:30,560 Speaker 1: you get your podcasts, or watch us live on YouTube. 100 00:05:30,920 --> 00:05:32,920 Speaker 2: One of my very first jobs on Wall Street back 101 00:05:32,920 --> 00:05:35,760 Speaker 2: in the late eighties, I was a research assistant in 102 00:05:35,800 --> 00:05:38,160 Speaker 2: the equity research department of paynmall recovering the railroad and 103 00:05:38,200 --> 00:05:41,200 Speaker 2: trucking industry. So I love the railroads. And today's a big, 104 00:05:41,240 --> 00:05:45,800 Speaker 2: big deal. Union Pacific agrees to acquire Norfolk Southern for 105 00:05:45,839 --> 00:05:48,640 Speaker 2: seventy two billion dollars. Now, the per share it's cash 106 00:05:48,640 --> 00:05:50,599 Speaker 2: and stock, works out to like three hundred and twenty bucks. 107 00:05:51,200 --> 00:05:54,080 Speaker 2: The Norfolk Southern is trading at a thirteen percent discount 108 00:05:54,080 --> 00:05:56,080 Speaker 2: two hundred and seventy nine dollars in works trading today. 109 00:05:56,120 --> 00:05:58,880 Speaker 2: It's actually down seven dollars today. I don't know what's 110 00:05:58,920 --> 00:06:00,600 Speaker 2: going on out there. I'm not doing this stuff for 111 00:06:00,640 --> 00:06:03,119 Speaker 2: a living anymore. But Lee Klaska, he is a senior 112 00:06:03,120 --> 00:06:06,599 Speaker 2: transport logistics and chipping alys for Bloomberg Intelligence. Lee, I 113 00:06:06,640 --> 00:06:09,039 Speaker 2: look at the stock price of Norfolk Southern and it 114 00:06:09,080 --> 00:06:12,400 Speaker 2: tells me a hefty level of skepticism out there in 115 00:06:12,440 --> 00:06:16,360 Speaker 2: the marketplace that this just mega deal can actually get done. 116 00:06:16,360 --> 00:06:17,039 Speaker 3: How do you view it? 117 00:06:18,080 --> 00:06:20,960 Speaker 5: Yeah, I think the whole speculation before the deal was 118 00:06:21,040 --> 00:06:26,040 Speaker 5: formally announced about possible consolidation, you know, really fueled shares 119 00:06:26,080 --> 00:06:29,640 Speaker 5: of Norfolk Southern previously. And I think people are just 120 00:06:29,680 --> 00:06:31,800 Speaker 5: trying to take maybe a breather right now because there 121 00:06:31,839 --> 00:06:33,120 Speaker 5: are some execution risks. 122 00:06:33,240 --> 00:06:35,000 Speaker 6: Right this deal is not going to close. 123 00:06:35,520 --> 00:06:39,680 Speaker 5: If it does close until early twenty twenty seven, it 124 00:06:39,720 --> 00:06:43,840 Speaker 5: needs regulatory approval, which is not an easy thing to do. 125 00:06:44,200 --> 00:06:47,200 Speaker 5: There were certain rules that we created at the Surface 126 00:06:47,200 --> 00:06:51,279 Speaker 5: Transportation Board to make it very difficult for a large 127 00:06:51,279 --> 00:06:55,960 Speaker 5: class monrail mergers to happen. That was BECAUST at one 128 00:06:56,040 --> 00:06:59,320 Speaker 5: time in the eighties and nineties. Those sorts of deals 129 00:06:59,360 --> 00:07:03,760 Speaker 5: resulted in terrible service. I think that the rails today 130 00:07:04,120 --> 00:07:09,120 Speaker 5: are much more cognizant of service as it relates to integration. 131 00:07:09,680 --> 00:07:09,920 Speaker 1: Uh. 132 00:07:09,960 --> 00:07:13,480 Speaker 5: And I don't really think you know, either company once once, 133 00:07:13,560 --> 00:07:17,080 Speaker 5: assuming a merger does happen, are going scorch earth in 134 00:07:17,160 --> 00:07:19,120 Speaker 5: terms of, you know, what they're going to do to 135 00:07:19,200 --> 00:07:22,120 Speaker 5: their networks. You know, they mentioned on the call that 136 00:07:22,160 --> 00:07:24,640 Speaker 5: they had earlier today that they're really not going to 137 00:07:24,760 --> 00:07:28,320 Speaker 5: lay off any uh, you know, frontline workers. Most of 138 00:07:28,360 --> 00:07:31,760 Speaker 5: the probably layoffs are going to happen, uh you know 139 00:07:31,840 --> 00:07:34,480 Speaker 5: in in in in the offices. 140 00:07:34,960 --> 00:07:35,160 Speaker 2: Uh. 141 00:07:35,240 --> 00:07:38,240 Speaker 5: So you know that would just mean that services uh 142 00:07:38,640 --> 00:07:42,400 Speaker 5: would uh prevail. And one of the reasons why they 143 00:07:42,440 --> 00:07:45,120 Speaker 5: are doing this, you know, from an outsider looking in, 144 00:07:45,520 --> 00:07:48,120 Speaker 5: you know, it does make complete sense. You're going to 145 00:07:48,200 --> 00:07:52,240 Speaker 5: reduce interchanges. They mentioned on their call this morning that 146 00:07:52,320 --> 00:07:55,080 Speaker 5: between the two of them they interchange around a million 147 00:07:55,880 --> 00:07:58,320 Speaker 5: car loads a day, and if they're just able to 148 00:07:58,440 --> 00:08:00,400 Speaker 5: if that's that car load is able to be on 149 00:08:00,520 --> 00:08:05,120 Speaker 5: the same network, it's not only going to improve network fluidity, 150 00:08:05,480 --> 00:08:10,080 Speaker 5: it will actually lower the railroads their costs. Let's hope 151 00:08:10,080 --> 00:08:12,760 Speaker 5: they pass on some of that cost savings to their shippers. 152 00:08:12,920 --> 00:08:15,080 Speaker 6: I think that's what shippers might be concerned about. 153 00:08:15,960 --> 00:08:20,080 Speaker 5: And it'll it'll provide probably a better service product that 154 00:08:20,120 --> 00:08:23,240 Speaker 5: they can go out and compete against other modes such 155 00:08:23,280 --> 00:08:23,920 Speaker 5: as trucks. 156 00:08:23,960 --> 00:08:25,800 Speaker 6: And you know that's you. 157 00:08:25,760 --> 00:08:28,960 Speaker 5: Know, also a good thing because you know, from an 158 00:08:29,000 --> 00:08:33,960 Speaker 5: environmental standpoint, railroads are less fuel efficient. You know, trucking 159 00:08:34,080 --> 00:08:37,720 Speaker 5: kind of deals with you know, turnover issues and trucker 160 00:08:37,800 --> 00:08:41,040 Speaker 5: availability issues. Right now, that's not an issue, but at 161 00:08:41,080 --> 00:08:44,440 Speaker 5: times it can be. And so you know, it is 162 00:08:44,559 --> 00:08:47,240 Speaker 5: definitely a very interesting deal. It will create the first 163 00:08:47,240 --> 00:08:51,920 Speaker 5: trans continental railroad, but you know, they do have their 164 00:08:51,960 --> 00:08:54,600 Speaker 5: work cut out for them to get that regulatory approval. 165 00:08:55,320 --> 00:08:57,880 Speaker 4: So the deal is worth eighty five billion dollars. How 166 00:08:57,920 --> 00:09:00,360 Speaker 4: do they plan to make money back? What are finential 167 00:09:00,400 --> 00:09:03,120 Speaker 4: wins so to speak? To justify that happy price tid. 168 00:09:03,880 --> 00:09:07,480 Speaker 5: Yeah, they laid out two point seven five billion in synergies, 169 00:09:07,480 --> 00:09:09,840 Speaker 5: about one point seven five and that two point seventy 170 00:09:09,880 --> 00:09:11,280 Speaker 5: five is going to be from revenue. 171 00:09:11,600 --> 00:09:13,600 Speaker 6: So what they're saying is that, you know, we. 172 00:09:13,640 --> 00:09:18,240 Speaker 5: Can probably get more volume onto the network because it 173 00:09:18,280 --> 00:09:21,400 Speaker 5: all of a sudden becomes a much more compelling service offering. 174 00:09:21,720 --> 00:09:24,880 Speaker 5: And then about a billion dollars in cost savings and 175 00:09:24,960 --> 00:09:28,480 Speaker 5: some of that. Again, you don't need to CEOs, you 176 00:09:28,520 --> 00:09:31,640 Speaker 5: don't need two CFOs, you don't need two corporate headquarters. 177 00:09:32,520 --> 00:09:35,040 Speaker 5: You know, the dimension They are going to have their 178 00:09:35,040 --> 00:09:39,000 Speaker 5: headquarter in Omaha where Union Pacific is located, and keep 179 00:09:39,040 --> 00:09:43,440 Speaker 5: a I think they word at a major presence in 180 00:09:43,480 --> 00:09:46,160 Speaker 5: Atlanta where Norfolk is currently. 181 00:09:47,080 --> 00:09:48,920 Speaker 6: So but you know, obviously they're not going to need 182 00:09:49,360 --> 00:09:50,840 Speaker 6: as much space as they once have. 183 00:09:51,520 --> 00:09:54,560 Speaker 5: And then there's technology benefits, you know, so you're only 184 00:09:54,880 --> 00:09:58,760 Speaker 5: investing you know, money in technology once, not twice to 185 00:09:58,800 --> 00:10:01,760 Speaker 5: get those productivity improvements. 186 00:10:01,920 --> 00:10:04,880 Speaker 6: So I think those are the major aspects of it. 187 00:10:05,160 --> 00:10:06,800 Speaker 5: And you know they mentioned that you know, they could 188 00:10:06,840 --> 00:10:11,760 Speaker 5: be you know EPs a creative after year or two. 189 00:10:12,800 --> 00:10:15,480 Speaker 2: Well, he mentioned a lot of regulatory agencies are going 190 00:10:15,520 --> 00:10:17,920 Speaker 2: to weigh in here on this deal. I also think 191 00:10:18,280 --> 00:10:21,280 Speaker 2: President Trump is likely to weigh in. Do we know 192 00:10:21,760 --> 00:10:24,720 Speaker 2: anything about how he might view this deal or just 193 00:10:24,760 --> 00:10:29,360 Speaker 2: consolidation in general? What's the views as to the Trump administration? 194 00:10:30,200 --> 00:10:31,480 Speaker 6: I mean, we don't. 195 00:10:31,679 --> 00:10:35,040 Speaker 5: The language that management noted on the call is like 196 00:10:35,160 --> 00:10:39,199 Speaker 5: they wouldn't have moved forward with this transaction if they 197 00:10:39,520 --> 00:10:43,679 Speaker 5: felt that it was impossible to get regulatory approval. So 198 00:10:43,960 --> 00:10:47,079 Speaker 5: whether that means they were talking to the administration, whether 199 00:10:47,120 --> 00:10:49,360 Speaker 5: that means they were talking to the STB or the 200 00:10:49,400 --> 00:10:53,320 Speaker 5: DOJ or everybody in between, that's kind of you know, 201 00:10:53,320 --> 00:10:55,720 Speaker 5: if you read between the lines, is what they were saying. 202 00:10:56,120 --> 00:10:58,040 Speaker 5: The fact that they're not going to lay off any 203 00:10:59,160 --> 00:11:04,480 Speaker 5: union foe is probably a net positive for a Donald 204 00:11:04,760 --> 00:11:06,640 Speaker 5: president Donald Trump to say, you. 205 00:11:06,600 --> 00:11:09,280 Speaker 6: Know, this is okay with me. You know. 206 00:11:09,320 --> 00:11:12,840 Speaker 5: So there's a lot of unknown still and again this 207 00:11:12,920 --> 00:11:14,400 Speaker 5: is this is going to take a long time. 208 00:11:14,520 --> 00:11:15,800 Speaker 6: So we have a deal. 209 00:11:16,160 --> 00:11:20,880 Speaker 5: It has to get Surface Transportation Board approval, which you 210 00:11:20,920 --> 00:11:23,440 Speaker 5: know won't happen at least for a year and a half. 211 00:11:24,160 --> 00:11:27,120 Speaker 4: Could this park more railroad mergers in the US, and 212 00:11:27,160 --> 00:11:30,240 Speaker 4: if it goes through, what will shipping look like in 213 00:11:30,240 --> 00:11:32,760 Speaker 4: fivet to ten years? You said, absolutely, please elaborate. 214 00:11:33,360 --> 00:11:33,760 Speaker 6: Yeah. 215 00:11:33,960 --> 00:11:38,800 Speaker 5: So, so the other railroads in the US are Burlington Northern, 216 00:11:39,480 --> 00:11:42,680 Speaker 5: which is you know, owned by Berkshire Hathway. They may 217 00:11:42,679 --> 00:11:46,160 Speaker 5: make their own bid for Norfolk Southern, or decide, you know, 218 00:11:47,160 --> 00:11:50,400 Speaker 5: we're just going to go after CSX because if they 219 00:11:50,480 --> 00:11:52,920 Speaker 5: do not merge, then they're going to be at a 220 00:11:52,920 --> 00:11:56,680 Speaker 5: competitive disadvantage. Why would you want to send your freight 221 00:11:57,360 --> 00:12:01,000 Speaker 5: across two railroads when you can send it across one. 222 00:12:01,200 --> 00:12:03,720 Speaker 6: So it just would make sense. 223 00:12:04,360 --> 00:12:07,280 Speaker 5: And if there is regulatory appetite for this kind of 224 00:12:07,280 --> 00:12:11,480 Speaker 5: a transaction, you know, you could see a Berkshire hacked 225 00:12:11,520 --> 00:12:15,480 Speaker 5: the Way and CSX coming and you know, if their 226 00:12:15,600 --> 00:12:18,160 Speaker 5: competitors were able to get a deal, there's no reason 227 00:12:18,200 --> 00:12:21,800 Speaker 5: why you wouldn't get a deal done between the two. 228 00:12:22,040 --> 00:12:23,960 Speaker 5: A lot of ifs and butts and candies and nuts, 229 00:12:24,000 --> 00:12:25,320 Speaker 5: but we'll see what happens. 230 00:12:25,720 --> 00:12:27,800 Speaker 2: For an old real estate anamals like myself, today's a 231 00:12:27,800 --> 00:12:29,480 Speaker 2: big day. I got to speak to two of my 232 00:12:29,600 --> 00:12:33,040 Speaker 2: favorite railroad anamals on Wall Street, first Tony Hatch this 233 00:12:33,160 --> 00:12:36,800 Speaker 2: morning and now leak Glasgow Senior Transport Logistics and Shipping 234 00:12:36,800 --> 00:12:40,360 Speaker 2: annals for Bloomberg Intelligence. Again the big M and A 235 00:12:40,559 --> 00:12:43,640 Speaker 2: trade of the year so far and certainly the biggest one, 236 00:12:43,800 --> 00:12:47,480 Speaker 2: well personally one. I never thought i'd see a transatlantic 237 00:12:47,880 --> 00:12:51,120 Speaker 2: a trans continental railroad. Union Pacific Regied acquired Norfolk Southern 238 00:12:51,600 --> 00:12:54,200 Speaker 2: seventy two billion dollars. That's about three and twenty dollars 239 00:12:54,880 --> 00:13:00,000 Speaker 2: a share that's in cash and stock would create North America. 240 00:13:00,400 --> 00:13:03,240 Speaker 2: The US is first transcontinental railroad. 241 00:13:04,040 --> 00:13:05,360 Speaker 6: That's a pretty cool thing. 242 00:13:07,120 --> 00:13:10,839 Speaker 1: You're listening to the Bloomberg Intelligence podcast. Catch us live 243 00:13:10,920 --> 00:13:13,960 Speaker 1: weekdays at ten am Eastern on Apple Coarcklay and Android 244 00:13:14,000 --> 00:13:17,319 Speaker 1: Auto with the Bloomberg Business app. Listen on demand wherever 245 00:13:17,360 --> 00:13:20,480 Speaker 1: you get your podcasts, or watch us live on YouTube. 246 00:13:21,320 --> 00:13:23,559 Speaker 2: Isabell Lee, Paul Sweet. We're live here in our Bloomberg 247 00:13:23,559 --> 00:13:26,360 Speaker 2: Director Broker Studio, streaming live on YouTube as well. So 248 00:13:26,559 --> 00:13:30,280 Speaker 2: check us out there. Aerospace Airlines a lot of earnings 249 00:13:30,280 --> 00:13:32,920 Speaker 2: going on in that part of the world. Boeing in 250 00:13:33,000 --> 00:13:35,679 Speaker 2: jet Blue today. Let's check out with George Ferguson s 251 00:13:35,720 --> 00:13:38,559 Speaker 2: in your Aerospace, Defense and Airlines analys for Bloomberg Intelligence. 252 00:13:38,880 --> 00:13:41,880 Speaker 2: Safely asconsin don there in Princeton, New Jersey. Hey, George, 253 00:13:41,960 --> 00:13:46,400 Speaker 2: let's start with Boeing. I know, you know, for analyst investors, 254 00:13:46,400 --> 00:13:48,839 Speaker 2: for Boeing, it's all about cash flow and free cash 255 00:13:48,840 --> 00:13:52,520 Speaker 2: flow and stemming the free cash flow bleed here. How 256 00:13:52,520 --> 00:13:53,640 Speaker 2: did the company do this quarter? 257 00:13:54,640 --> 00:13:56,959 Speaker 7: Yeah, I mean, so the free cash flow is still 258 00:13:57,000 --> 00:14:02,160 Speaker 7: a little bit negative, not much. Operations positive a little 259 00:14:02,200 --> 00:14:04,000 Speaker 7: bit two hundred million. I think it was roughly on 260 00:14:04,520 --> 00:14:07,160 Speaker 7: two hundred negative free cash flow to a positive and 261 00:14:07,200 --> 00:14:11,400 Speaker 7: cash flow I think roughly. So we're seeing an inflection 262 00:14:11,440 --> 00:14:14,520 Speaker 7: point here in cash flow. So cashlow had been negative 263 00:14:14,520 --> 00:14:16,760 Speaker 7: for the last I think it was six quarters before this, 264 00:14:17,920 --> 00:14:19,720 Speaker 7: and I think that's just the sign of they're getting 265 00:14:19,840 --> 00:14:23,640 Speaker 7: more aircraft delivered. They're gonna you know, they've got a 266 00:14:23,680 --> 00:14:26,440 Speaker 7: lot of inventory still, they'll pull off the shelf to 267 00:14:26,480 --> 00:14:30,200 Speaker 7: build aircraft going forward, to pull a bigger report proportion 268 00:14:30,320 --> 00:14:33,360 Speaker 7: of stuff off the shelf than they would during normal times, 269 00:14:33,360 --> 00:14:36,640 Speaker 7: which should juice that cash flow up. Uh, you know 270 00:14:36,680 --> 00:14:39,720 Speaker 7: pretty well. So I think it it's you know, the 271 00:14:40,080 --> 00:14:43,960 Speaker 7: turnaround is still in u is underway. It looks like 272 00:14:44,040 --> 00:14:47,600 Speaker 7: it's uh, you know, well in uh you know, in 273 00:14:47,760 --> 00:14:51,240 Speaker 7: swing in the results we saw on the way you know, 274 00:14:51,880 --> 00:14:55,760 Speaker 7: company management commented on the end of the year and so, uh, 275 00:14:55,960 --> 00:14:58,400 Speaker 7: you know, I think it was a pretty good results 276 00:14:58,440 --> 00:15:01,280 Speaker 7: quarter for Boeing again, turn around intact. 277 00:15:01,320 --> 00:15:04,080 Speaker 4: How are they addressing quality in safety issues, especially when 278 00:15:04,120 --> 00:15:06,160 Speaker 4: it comes to the seven three seven MAX program. 279 00:15:07,520 --> 00:15:11,200 Speaker 7: Yeah, I mean there it's you know, as Kelly Oprok said, 280 00:15:11,200 --> 00:15:15,480 Speaker 7: it's a process. I think just the sign of seeing 281 00:15:15,640 --> 00:15:20,480 Speaker 7: increased deliveries is showing us that the quality improvement at Spirit, 282 00:15:21,880 --> 00:15:26,560 Speaker 7: you know, has has seen success. And they're talking about 283 00:15:26,600 --> 00:15:29,560 Speaker 7: you know, they're at thirty eight seven thirty sevens a 284 00:15:29,560 --> 00:15:32,360 Speaker 7: month now. Kelly Orperk says he's going to approach the 285 00:15:32,440 --> 00:15:36,000 Speaker 7: FA in a short period of time and work on 286 00:15:36,080 --> 00:15:39,720 Speaker 7: the forty two seven thirty sevens a month. So again, 287 00:15:39,840 --> 00:15:43,119 Speaker 7: he must have some level of confidence that his quality 288 00:15:43,960 --> 00:15:46,160 Speaker 7: and his engineering is good in order to in order 289 00:15:46,200 --> 00:15:49,040 Speaker 7: to go further. It's it's not perfect. They've been slowed 290 00:15:49,080 --> 00:15:52,240 Speaker 7: down a little bit in the certification of seven three 291 00:15:52,320 --> 00:15:55,280 Speaker 7: seven DASH ten and DASH seven. They've pushed them into 292 00:15:55,280 --> 00:15:57,840 Speaker 7: twenty twenty six. I think it's okay, it's not a 293 00:15:57,880 --> 00:16:01,400 Speaker 7: big move. You know, we'd like to see them come 294 00:16:01,480 --> 00:16:04,880 Speaker 7: faster because seven thirty seven to ten is a large 295 00:16:04,920 --> 00:16:07,800 Speaker 7: competitor to the Airbus A three twenty, which is very 296 00:16:07,840 --> 00:16:11,040 Speaker 7: successful and one of the reasons they saw United place 297 00:16:11,080 --> 00:16:13,880 Speaker 7: a big order with Airbus. But again, I think that 298 00:16:13,960 --> 00:16:16,320 Speaker 7: you can't expect this stuff to go on a straight line. 299 00:16:16,640 --> 00:16:18,280 Speaker 7: And the fact that they think twenty twenty six is 300 00:16:18,280 --> 00:16:21,920 Speaker 7: when they could get certification, it doesn't tell me anything's broke. 301 00:16:21,960 --> 00:16:25,200 Speaker 7: It just tells me the process is nonlinear, and I 302 00:16:25,240 --> 00:16:27,360 Speaker 7: think to be expected in aerospace. 303 00:16:27,200 --> 00:16:27,520 Speaker 6: All right. 304 00:16:27,800 --> 00:16:31,840 Speaker 2: Also, Jet Blue posted a smaller than expected loss. Here, 305 00:16:31,880 --> 00:16:34,200 Speaker 2: what's going on with Jet Blue and an airline businesses 306 00:16:34,240 --> 00:16:36,920 Speaker 2: as because I think the last quarter, Boy, these airline 307 00:16:36,920 --> 00:16:40,040 Speaker 2: companies are really reticent to give any kind of guidance. 308 00:16:40,920 --> 00:16:42,640 Speaker 7: Yeah, I mean a lot of them have come back 309 00:16:42,680 --> 00:16:45,720 Speaker 7: with guidance and a lot of cases lower a lot. 310 00:16:45,840 --> 00:16:48,200 Speaker 7: You know, the airline business right now is really counting 311 00:16:48,200 --> 00:16:51,880 Speaker 7: on less capacity in the second half of twenty twenty five, 312 00:16:52,240 --> 00:16:54,080 Speaker 7: and we'll see how that goes. Last time I looked 313 00:16:54,120 --> 00:16:57,400 Speaker 7: at domestic capacity plans for three Q it's kind of 314 00:16:57,400 --> 00:17:01,040 Speaker 7: about zero growth. I mean, I think they need to 315 00:17:01,080 --> 00:17:03,720 Speaker 7: cut capacity in the marketplace. If you look at Jet 316 00:17:03,800 --> 00:17:07,040 Speaker 7: Blues results, load factor fell by. I think it was 317 00:17:07,400 --> 00:17:10,960 Speaker 7: around three hundred basis points down to the low eighties 318 00:17:11,320 --> 00:17:16,480 Speaker 7: from mid eighties, and they held fares pretty much flat. 319 00:17:16,520 --> 00:17:19,520 Speaker 7: Yields were kind of just up a little bit. So 320 00:17:19,560 --> 00:17:21,919 Speaker 7: that just tells me that there's too much capacity in 321 00:17:21,960 --> 00:17:25,600 Speaker 7: this market. They just can't fill airplanes at the right price. 322 00:17:26,080 --> 00:17:28,520 Speaker 7: Jet Blue has other problems, like you know, the gear 323 00:17:28,600 --> 00:17:31,679 Speaker 7: turbo fan keeps them from expanding. That means costs are 324 00:17:31,720 --> 00:17:33,640 Speaker 7: ballooning on them. But I don't see how they'd want 325 00:17:33,680 --> 00:17:36,760 Speaker 7: to expand right now because again, what I see as 326 00:17:36,800 --> 00:17:39,920 Speaker 7: a market that has can't fill airplanes at the price 327 00:17:40,520 --> 00:17:44,080 Speaker 7: that's going to keep them very profitable, and so someone's 328 00:17:44,080 --> 00:17:46,120 Speaker 7: got to cut. And the question is who the full 329 00:17:46,160 --> 00:17:49,439 Speaker 7: service carriers are saying, Hey, we got premium to subsidize us. 330 00:17:49,560 --> 00:17:52,040 Speaker 7: We don't care the low costs are going to have 331 00:17:52,080 --> 00:17:55,280 Speaker 7: to jet Blue will cut in three Q but every 332 00:17:55,280 --> 00:17:57,240 Speaker 7: time they cut, their costs go high or per seat, 333 00:17:57,400 --> 00:18:00,000 Speaker 7: so they're a bit of a challenging position. 334 00:18:00,720 --> 00:18:03,119 Speaker 4: It does seem like the issues just compound for the 335 00:18:03,119 --> 00:18:07,400 Speaker 4: companies in this space from aircraft shortages, delivery delays, pilot shortages, 336 00:18:07,480 --> 00:18:11,880 Speaker 4: wage inflation, labor and negotiation and so on. Are there 337 00:18:11,960 --> 00:18:14,840 Speaker 4: differences in how Boeing and Jet Blue addressing the issues 338 00:18:15,000 --> 00:18:18,760 Speaker 4: or is really an industry wide consensus and problem. 339 00:18:19,280 --> 00:18:21,600 Speaker 7: Well, I mean if you talk to Boeing, everybody wants 340 00:18:21,640 --> 00:18:23,600 Speaker 7: an airplane, right and they're sold out in the seven 341 00:18:23,680 --> 00:18:25,280 Speaker 7: thirty seven and seventy eight seven to the end of 342 00:18:25,280 --> 00:18:28,159 Speaker 7: the decade. Everybody wants the newest. And I think what 343 00:18:28,280 --> 00:18:31,080 Speaker 7: needs to happen is again the airlines are just putting 344 00:18:31,119 --> 00:18:34,000 Speaker 7: too much capacity in the marketplace, especially in the US, 345 00:18:34,600 --> 00:18:38,239 Speaker 7: and someone has to cry uncle and say, hey, you know, 346 00:18:38,400 --> 00:18:42,040 Speaker 7: we can't take the profitability at these levels. Park some airplanes, 347 00:18:42,080 --> 00:18:45,200 Speaker 7: get them out of the business so they can write 348 00:18:45,200 --> 00:18:48,560 Speaker 7: size capacity. And I think nobody wants to do it. 349 00:18:49,280 --> 00:18:51,920 Speaker 7: You have some competitors that are in a situation where 350 00:18:51,960 --> 00:18:55,360 Speaker 7: they they you know, some of them are declared Chapter eleven. 351 00:18:55,640 --> 00:18:58,679 Speaker 7: It's like Spirit and then and then refashioned themselves and 352 00:18:58,680 --> 00:19:01,480 Speaker 7: got back out in the marketplace. But it's either someone's 353 00:19:01,520 --> 00:19:04,119 Speaker 7: going to have to go away or the market's going 354 00:19:04,160 --> 00:19:07,639 Speaker 7: to have to get negative enough and profitability that people 355 00:19:07,640 --> 00:19:10,879 Speaker 7: start to park airplanes. As we get into laid end 356 00:19:10,880 --> 00:19:12,880 Speaker 7: of this year, four Q and one Q, those are 357 00:19:13,240 --> 00:19:17,120 Speaker 7: weak quarters for the US airline industry. If something doesn't improve, 358 00:19:17,440 --> 00:19:20,400 Speaker 7: if you've got a Jet Blue that's barely positive positive 359 00:19:20,400 --> 00:19:24,399 Speaker 7: and profitability in two q without a change in this market, 360 00:19:24,520 --> 00:19:27,200 Speaker 7: that's that's a strong negative. Near the end of the year, 361 00:19:27,240 --> 00:19:29,800 Speaker 7: people will start to cut capacity and try to boost fars. 362 00:19:29,960 --> 00:19:31,720 Speaker 2: So, George, who does that? Is it one of the 363 00:19:31,720 --> 00:19:34,840 Speaker 2: big three? I mean, Jet Blue can't drive capacity in 364 00:19:34,840 --> 00:19:37,800 Speaker 2: this industry. It's got to be one of the big three, right, Yeah. 365 00:19:38,040 --> 00:19:40,960 Speaker 7: Look, I don't think it's. The big three are in 366 00:19:41,040 --> 00:19:43,760 Speaker 7: a game of chicken with the low cost right they 367 00:19:43,840 --> 00:19:47,280 Speaker 7: think that they've got pole position here and that they 368 00:19:47,320 --> 00:19:50,720 Speaker 7: just keep capacity and someone's going to fail on the 369 00:19:50,720 --> 00:19:53,080 Speaker 7: low cost side because the low cost doesn't have this, 370 00:19:53,760 --> 00:19:57,080 Speaker 7: you know, premium seating. They might be right right right now, 371 00:19:57,119 --> 00:20:00,240 Speaker 7: it looks like their profitability is hanging in there. Low 372 00:20:00,280 --> 00:20:02,240 Speaker 7: cost carriers are the ones taking it on the chin. 373 00:20:03,119 --> 00:20:06,600 Speaker 2: Yep. We saw Southbuth Airlines actually now kind of start 374 00:20:06,680 --> 00:20:09,359 Speaker 2: charging for bags and you can do seat reservations and 375 00:20:09,359 --> 00:20:12,240 Speaker 2: all this stuff on that premium Yep. They didn't do before, 376 00:20:12,280 --> 00:20:14,440 Speaker 2: which was part of their cachet. One could argue their brand, 377 00:20:14,440 --> 00:20:16,720 Speaker 2: but they're saying, heck, we need the revenue. George, thanks 378 00:20:16,760 --> 00:20:17,840 Speaker 2: so much for joining us. 379 00:20:17,880 --> 00:20:18,480 Speaker 6: We appreciate that. 380 00:20:18,520 --> 00:20:22,880 Speaker 2: George Ferguson, Senior Aerospace, Defense and Airlines Analyst. If it flies, 381 00:20:23,560 --> 00:20:24,920 Speaker 2: he knows what's going on there. 382 00:20:25,480 --> 00:20:30,159 Speaker 1: This is the Bloomberg Intelligence Podcast, available on Apple, Spotify, 383 00:20:30,320 --> 00:20:34,320 Speaker 1: and anywhere else you get your podcasts. Listen live each weekday, 384 00:20:34,520 --> 00:20:37,800 Speaker 1: ten am to noon Eastern on Bloomberg dot com, the 385 00:20:37,880 --> 00:20:41,760 Speaker 1: iHeartRadio app, tune In, and the Bloomberg Business app. You 386 00:20:41,800 --> 00:20:45,080 Speaker 1: can also watch us live every weekday on YouTube and 387 00:20:45,280 --> 00:20:48,119 Speaker 1: always on the Bloomberg terminal