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Speaker 2: All right, so it's in thick of earning season and
Speaker 2: there's a lot of interesting company stories coming out. What
Speaker 2: we want to highlight right now is Baker Hughes. It's
Speaker 2: an oil field services company with really two main businesses.
Speaker 2: One is legitimately just oil field services. You're helping oil
Speaker 2: producers make more oil out of the ground offshore and onshore.
Speaker 2: The other one is called Industrial and Energy Technology. That's
Speaker 2: new energy, that's LNG, it's export facilities, two big businesses.
Speaker 2: Revenue came in for the fourth quarter at about six
Speaker 2: point eight four billion dollars. Earnings came in a fifty
Speaker 2: one cents a share. And we're joined now by Lorenzo Simonelli.
Speaker 2: He's chairman, president and CEO of Baker Hughes. Lorenzo, it's
Speaker 2: so good to see you. Thanks for joining us today.
Speaker 3: Alex. Good to be with you as always.
Speaker 4: So listen.
Speaker 2: The stock is down three percent. The commentary from analyst
Speaker 2: is your outlook isn't as rosy as your peers like
Speaker 2: Halliburton and Slumberge.
Speaker 4: What do you say to that?
Speaker 3: I would say, first of all, we're coming off some
Speaker 3: great results in twenty twenty three, and also we've laid
Speaker 3: out a clear strategy, as Baker hughes, over the coming years.
Speaker 3: As you look at twenty twenty four, we've given a
Speaker 3: guidance that is the balanced approach with all of the
Speaker 3: geopolitical and also uncertainty that's happening around the globe. So
Speaker 3: we stick to our guidance and we think that we're
Speaker 3: executing and as you look at the guidance, we've got
Speaker 3: considerable growth in twenty twenty four and great performance as well.
Speaker 2: So what's the biggest question mark? I guess so if
Speaker 2: you're more conservative than your peers, where is the question mark?
Speaker 2: Is it going to be the new energy orders? Is
Speaker 2: it going to be on shore demand or is it
Speaker 2: going to be offshore? Is it domestic or international that
Speaker 2: has you thinking questioning the most?
Speaker 3: You know, you look at what's happening around the world,
Speaker 3: and you see the geopolitics, you see what's happening from
Speaker 3: the OPEC cuts, you see what's happening from the consolidation
Speaker 3: in North America, and that leads some uncertainty relative to
Speaker 3: the activity levels within North America Land. We still see
Speaker 3: that North America should be flatish, but US Land will
Speaker 3: likely be negative for the year given some of the consolidation,
Speaker 3: and also some of the activity international again will be
Speaker 3: in the high single digits, So we still see that
Speaker 3: being robust. And I think again, as we look at
Speaker 3: giving guidance, we're taking a balanced approach to what's taking
Speaker 3: place around the world at this moment and also giving
Speaker 3: a predictability to our investors on what can be achieved
Speaker 3: and also confidence in what we can achieve.
Speaker 5: Lorenzo, I just looking at your business here, and I
Speaker 5: see that about three quarters of your revenue as comes
Speaker 5: from outside of the United States, So obviously you are
Speaker 5: attuned as much as anyone to the geopolitical risks around
Speaker 5: the world. What are you telling your investors about what's
Speaker 5: happening in Eastern or if it's happening in the Middle East,
Speaker 5: and how that may impact your business.
Speaker 3: We're telling them that we've taken every caution and also
Speaker 3: we're managing the situation. We haven't seen any impact and
Speaker 3: we don't anticipate a big impact, but we do think
Speaker 3: some of the development plans may be delayed slightly over
Speaker 3: the long term. No change in what the NOCs and
Speaker 3: also large customers are laying out from a capital spend,
Speaker 3: but there may be some I would say delays. Again,
Speaker 3: as we look at the outlook internationally, we're still anticipating
Speaker 3: high single digit growth and we think that internationally is
Speaker 3: a key place for us to be and we look
Speaker 3: to perform there over the coming years.
Speaker 2: Lorenzo, what's your take on the demand side? I guess
Speaker 2: that would focus more on oil and it does also
Speaker 2: hit on the red sea issue. But what's the man
Speaker 2: going to look like for twenty twenty four? I'm getting
Speaker 2: notes about twenty twenty five, but I have no idea
Speaker 2: what's going to happen this year?
Speaker 3: Wow, Alex, it's so always difficult to predict some of
Speaker 3: these elements, just like it is oil price and you
Speaker 3: know this space well. I think demand continues to be robust.
Speaker 3: A lot of it's going to depend on the economic
Speaker 3: situation as you look at some of the events unfolding
Speaker 3: also globally, and we anticipate that again demand will increase
Speaker 3: this year and continue to be strong, especially in the
Speaker 3: developing world.
Speaker 5: What are your customers telling you here I know obviously
Speaker 5: close contact with them. What are they telling you about
Speaker 5: their spending plans over the next couple of years.
Speaker 3: Again, it varies. You've seen in North America obviously some consolidation,
Speaker 3: so people are going through that consolidation and they'll be
Speaker 3: looking to adjust some of their spending plans in the
Speaker 3: short term, but again continuing to be robust on the
Speaker 3: long term as you continue to see the demand be
Speaker 3: there on the international side, these NOCs have more year
Speaker 3: projects that they're executing. There'll be some variation in the
Speaker 3: timing of those, but again the long term continues to
Speaker 3: be solid, and as you look at our guidance, again
Speaker 3: we're anticipating that maybe there's some tempered view on some
Speaker 3: of the case of the development, but the developments are
Speaker 3: going to happen.
Speaker 2: OC Paul just you know, national oil companies just pull
Speaker 2: up with the oil jargon there. Lorenzo, you mentioned the
Speaker 2: M and A situation, and I find that so interesting
Speaker 2: because that was one of my questions to all these
Speaker 2: CEOs when they announce these big mergers, is are you
Speaker 2: actually going to be slowing your oil production growth over time,
Speaker 2: and they're all like, no, no, no, no, no, it's going
Speaker 2: to be really good. It's going to keep growing. What
Speaker 2: do you think that timeline actually looks like? In the
Speaker 2: beginning their synergies, they get more out of the ground,
Speaker 2: but then that tapers off.
Speaker 4: What do you notice?
Speaker 3: So as you look at the normal evolution of consolidation
Speaker 3: we've seen this cycle before, you are going to continue
Speaker 3: to see a production increases, but you're also going to
Speaker 3: see synergies between the consolidation and as they go through
Speaker 3: their integration activities, I think you'll likely see some temperate
Speaker 3: measures relative to some of their procurement, but again production,
Speaker 3: they're going to seize the opportunity to continue to increase
Speaker 3: production as the demand is there.
Speaker 5: Yeah, I mean, you know, I'm not an expert in
Speaker 5: this unlike Alex. But a term I you see here
Speaker 5: a lot and I don't hear it that much anymore
Speaker 5: is peak oil? When are we going to be at
Speaker 5: peak oil? Are we at peak? I don't hear that
Speaker 5: discussion anymore. So when you're talking to investors, how do
Speaker 5: you talk to them about the long term kind of
Speaker 5: demand for oil?
Speaker 3: You've got to look at it from a standpoint of
Speaker 3: the energy transition is going to be multi decades and
Speaker 3: it's going to require an energy mix that is abundant
Speaker 3: of providing as clean as possible fuel sources to the public,
Speaker 3: and that means oil is going to have a role
Speaker 3: to play. And we see oil and gas in particular
Speaker 3: having a strong robust outlook as we go forward. And
Speaker 3: the question on pea coil has been asked many times.
Speaker 3: There will be a time when pea coil comes. I
Speaker 3: think it's not at this stage, and we continue to
Speaker 3: focus very much on gas and also LNG.
Speaker 4: Well i'm speaking of so Llen G. Paul is huge
Speaker 4: for Baker Hughes.
Speaker 2: So they helped to build the export terminals that you
Speaker 2: get and that has been a humongous driver here in
Speaker 2: the US. And just to focus on that for a second,
Speaker 2: they booked about one hundred and sixty nine million dollars
Speaker 2: worth of new energy orders in the quarter and overall
Speaker 2: for the year seven hundred and fifty million. Like that's
Speaker 2: growing at a very rapid clip, Lorenzo. Somehow, restricting ler
Speaker 2: G exports in the US is becoming something people are
Speaker 2: talking about. The permit process has gotten a lot slower.
Speaker 4: What is going on, Alex.
Speaker 3: It has gotten slower, and again we're monitoring the situation,
Speaker 3: and I'm disappointed because as you look at the benefits
Speaker 3: of USLNG not only for the US but also for
Speaker 3: the world, and also what's been achieved with the geopolitical
Speaker 3: uncertainty and also providing to Europe, there's been commitments that
Speaker 3: have been made and we should continue the USLNG exports
Speaker 3: and also the permitting of these projects. That being said,
Speaker 3: international projects are continuing to move forward, and we have
Speaker 3: an expectation that again in twenty twenty four there'll be
Speaker 3: sixty five mtpa FIDD, and we're again seeing about thirty
Speaker 3: to sixty mtpa FIDD in twenty five and twenty six,
Speaker 3: and by twenty thirty there'll be a global capacity in
Speaker 3: place of eight hundred mtpa. So, you know, we'll monitor
Speaker 3: the US situation. It's disappointing. I think it will sort
Speaker 3: itself out. There's been a lot of commitments that have
Speaker 3: been made to international partners.
Speaker 5: Because you know, again, Lorenzo, I've learned so much just
Speaker 5: from talking to Alex about the energy business. Now that
Speaker 5: we're the US is a net energy exporter, it just
Speaker 5: seems like the natural gas part of the liquified natural
Speaker 5: gas part of.
Speaker 6: It has to grow, you know.
Speaker 5: So I guess my question is if I wanted to
Speaker 5: go down to Corpus Christy and hire you guys to
Speaker 5: build me a LNG facility, could you do it?
Speaker 4: Yeah, you have to wait a while. Their backlogs really deep, Lorenzo.
Speaker 3: We have a very good backlog and we continue to
Speaker 3: grow our backlog in LNG, and yes, we can build.
Speaker 3: We have the most versatile portfolio of solutions around LNG,
Speaker 3: small scale, large scale, stick modular, onshore, offshore floating. So
Speaker 3: you're coming to the right place, Baker Hughes for LNG,
Speaker 3: and I.
Speaker 2: Should point out MTPA million tons per annum, So it
Speaker 2: just basically means the capacity, like how much you can
Speaker 2: actually process an export because you got a cool natural
Speaker 2: gas down before you export. Lorenzo, I am going to
Speaker 2: see you next week for the annual meeting. In your
Speaker 2: annual meeting in Florence, the talk will definitely be Italy.
Speaker 4: Really, I know you are to me right.
Speaker 6: Not Florence, South Carolina, Florence, Italy. They hate Lorenz nice.
Speaker 2: And the talk is definitely going to be revolving a
Speaker 2: lot around that LNG story for investors. Just looking at
Speaker 2: the numbers today, the stock doown three percent. What's your
Speaker 2: main message before we get to the broader outlook next week.
Speaker 3: The main message is we're coming off a terrific twenty
Speaker 3: twenty three where we posted some record results. Our strategy
Speaker 3: is very clear. We set out guidance that continues to grow.
Speaker 3: The business continues to post improvements in our embat homogen rates.
Speaker 3: We're expecting OFSC to be a twenty percent for twenty
Speaker 3: twenty five, it to be a twenty percent by twenty
Speaker 3: twenty six. We're not changing those expectations and we're taking
Speaker 3: a balanced approach to twenty twenty four. But when you
Speaker 3: look at the guidance, it continues to move the company
Speaker 3: forward and also posts very good results.
Speaker 2: Lorenzo, I really appreciate that the conservative approach and then
Speaker 2: sort of moving a lot faster in the next couple
Speaker 2: of years.
Speaker 4: Thanks a lot.
Speaker 2: I look forward to seeing you next week in Florence, Italy.
Speaker 2: Thank you, Lorenzo Semonelli. He's chairman, CEO and president of
Speaker 2: Baker Hughes. Now we're going to do something that only
Speaker 2: Paul and I can do. Talk to a CEO, then
Speaker 2: bring a Bloomberg Intelligence analyst who's been covering the company
Speaker 2: for years on to then talk about it. This is
Speaker 2: what we can offer you on the Bloomberg Intelligence Show
Speaker 2: every day, Scott Levine, he covers oil services for Bloomberg Intelligence.
Speaker 2: What did you make of the move today the numbers
Speaker 2: and just talking with Lorenzo in the last ten minutes.
Speaker 7: Yeah, now, I think so. The stock is down a
Speaker 7: bit today, and we've seen Halliburton and SLB up on
Speaker 7: earnings over the past week. Frankly, the guidance that Baker
Speaker 7: gave today for mid teens EBIT dog growth is almost
Speaker 7: identical to what SLB gave. I think the difference here
Speaker 7: is probably the conservatism around the messaging number one, certainly
Speaker 7: the mid load to mid single digital client that they're
Speaker 7: calling for, spending growth in North America, high single digit
Speaker 7: growth in international trails what we saw out of both
Speaker 7: of those two companies. And then secondarily, you know, LNG,
Speaker 7: as you mentioned, is a really big driver for Baker
Speaker 7: that's unique to them, certainly much more so for them
Speaker 7: as a producer of modules for LNG plants, which neither
Speaker 7: SLB and Hell do and I would say that the
Speaker 7: commentary there was maybe a little bit more downbeat as well.
Speaker 7: They're looking for modest growth and FID capacity this year
Speaker 7: they focused more on some of the businesses outside of that.
Speaker 7: So I think it's probably more so the tone out
Speaker 7: of Baker being a bit more sober than the guidance
Speaker 7: per se, which was in line with consensus, and the
Speaker 7: growth outlooks similar to what we saw at the piers there.
Speaker 5: So I'm looking at the A n R function for Baker, Hughes, Halibert,
Speaker 5: all the comps.
Speaker 6: Street likes this stuff. They like these oil services companies.
Speaker 6: What's the bull call on this?
Speaker 5: Is this?
Speaker 6: People? You're going to need oil forever?
Speaker 7: Yeah, well they're you know, they are investing in the
Speaker 7: future with the energy transition and the new energy business
Speaker 7: as well.
Speaker 4: But I think, you.
Speaker 7: Know, so look two years ago twenty twenty two, this
Speaker 7: group was outstanding, right, you know, the group was up
Speaker 7: sixty percent, the market was down closed to twenty percent.
Speaker 7: Last year the group performed okay in a much stronger market,
Speaker 7: and the growth expectations for the group have moderated and
Speaker 7: are moderating still in twenty twenty four. I think within
Speaker 7: that context, Folks are still comfortable with large cap globally
Speaker 7: diversified oil field service companies like Baker Hues, like SLB
Speaker 7: to a lesser extent, Haliburton because they're more focused on
Speaker 7: North America. But they're still comfortable with these companies. They're large,
Speaker 7: they're global, the balance sheets are in good shape, that
Speaker 7: we're turning more than fifty percent of the free cash
Speaker 7: to investors, and so that appeals to investors that kind
Speaker 7: of are attuned to this new energy environment where it's discipline,
Speaker 7: growth and capital returns rather than the wildcatter mentality. So
Speaker 7: I think it's what I like.
Speaker 6: I like the wildcatter.
Speaker 7: I like that.
Speaker 4: Yeah, I called SLB slummers. I'm definitely gonna hear from
Speaker 4: them later, but SLB.
Speaker 2: So to that point, though, I feel like if you
Speaker 2: talk to SLB, they'll talk a lot about digitalization and
Speaker 2: all that kind of stuff, whereas Baker Hughes talks really
Speaker 2: about LNG and they build these big terminals they help
Speaker 2: to do that, like with the likes of Bechtel, for example,
Speaker 2: do you feel like at some point these guys are
Speaker 2: gonna be you can really bet on them different ways,
Speaker 2: Like I'm gonna bet On Baker Hughes for LNG. I'm
Speaker 2: gonna bet an SLB for an AI component and digitalization,
Speaker 2: like can I do that yet?
Speaker 6: You can?
Speaker 7: And I think those are accurate depictions of the business.
Speaker 7: But I wouldn't overstate their signs magnificance, like I feel
Speaker 7: like Halliburton gets maligned a lot for the North American exposure.
Speaker 4: And they're all some solid international.
Speaker 7: It's over half their business.
Speaker 4: I totally didn't know that until yeah no the other day.
Speaker 7: But SLB is eighty percent international, and these guys are
Speaker 7: closer to SLB than they are to HOL in terms
Speaker 7: of that geographic split. So, you know, while the statement
Speaker 7: is true, I think it's it's equal parts branding as
Speaker 7: it is the business mix, and investors are naturally going
Speaker 7: to look for ways to differentiate between the companies, and
Speaker 7: so they'll, you know, they'll gravitate towards the differences more
Speaker 7: than they will the similarities. But I think there are
Speaker 7: a lot of similarities in the balance sheet. All the
Speaker 7: companies are focused on global markets to more or lesser extent,
Speaker 7: and so with with Baker, the LNG emphasis is a differentiator.
Speaker 7: For sure, they have a much bigger equipment business than
Speaker 7: either SLB or Halliburton does. And so it's natural folks
Speaker 7: to focus on that specifically. And and some of the
Speaker 7: weakness and demand out of Europe maybe is weighing on
Speaker 7: that story a little bit, but it's still a very
Speaker 7: strong business for them.
Speaker 5: And if I were an investor, I would prefer my
Speaker 5: oil field services and equipment companies to be more international
Speaker 5: rather than less, given how tough it is to get
Speaker 5: stuff done here in the US.
Speaker 8: Is that right?
Speaker 1: Yeah?
Speaker 7: I think certainly there's much more visibility.
Speaker 4: On it years ago statement.
Speaker 7: Yeah, I guess it depends what time we're talking about.
Speaker 7: And and and you know, look, shale had the year
Speaker 7: that the energy you know, blew the lights out twenty
Speaker 7: twenty two. Shale came back much stronger from COVID than
Speaker 7: international markets did they get tough faster, but they got
Speaker 7: crushed more significantly, And so that was a little bit
Speaker 7: of a one year snap back and shale and and
Speaker 7: so you know, we've now we're now past that. International
Speaker 7: really reaccelerated and overtook shale toward the middle of last year,
Speaker 7: and the expectation is that they'll they'll do so again
Speaker 7: this year. So I still think there's much more of
Speaker 7: a multi year growth visibility on international including.
Speaker 2: Offshore energy is definitely going to be a talking point
Speaker 2: in the presidential election.
Speaker 4: The reality is a little different.
Speaker 2: When we say, drill, baby, drill, We're gonna unleash American
Speaker 2: energy independence. My question is is that not happening? And
Speaker 2: then my other question is are we going to see
Speaker 2: restrictions or any sort of slowing down of LNG exports.
Speaker 7: Regarding the latter, I don't think so, no, and I
Speaker 7: don't you know, yes, we've already heard some of the
Speaker 7: drill baby drill mantra, and I think you know, they're.
Speaker 4: Ten million barrels a day and good.
Speaker 7: Enough that hearkens back to a different time. That's you know,
Speaker 7: I think the intent there is is for for voters
Speaker 7: to see that messaging, right. But the area where you
Speaker 7: think you probably see the most difference, frankly, is in
Speaker 7: the energy transition technologies. And you know, for example, we
Speaker 7: you know, plug Power yesterday was a thirty percent as
Speaker 7: a you know, based on enthusiasm for them getting a
Speaker 7: loan from the Department of Energy, and so you know,
Speaker 7: there's been some concern and pushback regarding the incentives around
Speaker 7: hydrogen development, et cetera. And so if we were to
Speaker 7: see a change anywhere, I think, you know, if indeed
Speaker 7: we see a change in the Republican Party getting the
Speaker 7: president presidency in twenty four, it'll be with regard to
Speaker 7: the er the incentives for the energy transition, and maybe
Speaker 7: that getting some throat cold water thrown on it. But
Speaker 7: as far as US oil, you know, during the Biden administration,
Speaker 7: production has grown fine. Despite some of the tough talk
Speaker 7: you heard about cracking down on leases in the Gulf
Speaker 7: of Mexico, offshore is done just fine, and I don't
Speaker 7: think it's much of a difference factor in terms of
Speaker 7: conventional oil and gas.
Speaker 4: So great, Scott, thank you so much. I appreciate it.
Speaker 2: Thanks for all answering all my emails with my chickens
Speaker 2: running too earlier in the day. It Scott of being
Speaker 2: a Bloomberg intelligency covers all the oil field services.
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Speaker 5: Annett Rathbund cio at CBIZ maybe SEBIZ Investment Advisory Services, Independence, Ohio.
Speaker 5: That sounds like really right smack in the middle of Ahio.
Speaker 5: If I had to guess, I don't know.
Speaker 6: And thanks so much for joining us here.
Speaker 5: Again, I thought we might take a meaningful pause here
Speaker 5: in the first quarter with these markets, given the real
Speaker 5: rip we had in November and December. What do you
Speaker 5: make of this market here as we you know, kind
Speaker 5: of get into the back half of January and twenty
Speaker 5: twenty four.
Speaker 8: Sure, thanks for having me. And actually, Independence, Ohio is
Speaker 8: ten minutes south of cleveland'srection we go, so they should
Speaker 8: really said Cleveland, Ohio. But anyway, you know, SMP, it's
Speaker 8: kind of surprising after all the bearish talk last year
Speaker 8: that we would be reaching record highs multiple days in
Speaker 8: a row. It looks like today might be another one
Speaker 8: of those days. But it's important to remember what's driving this, right.
Speaker 8: I mean, everyone's talked about tech driving this magnificent seven
Speaker 8: becoming even more magnificent, But you know, there may be
Speaker 8: a reason why if you look at the underlying trends
Speaker 8: in the SMP five hundred you do have tech leading,
Speaker 8: but how many stocks and how many sectors or sub
Speaker 8: industries are actually hitting those record highs along with the
Speaker 8: SMP five hundred, the cyclical parts of the sectors that
Speaker 8: represent the cyclical parts of the economy, they're not reaching
Speaker 8: record highs, right, So this is a reflection of some
Speaker 8: of the changes or the bifurcation that we see in
Speaker 8: the economy being reflected here. So do I think that
Speaker 8: tech can continue to run?
Speaker 9: Well?
Speaker 8: Look, I mean I think that tech is a part
Speaker 8: of utilities. The pandemic has taught us that it is
Speaker 8: a part of infrastructure. We can't live without it. It
Speaker 8: is part of our daily lives. It's I mean, some
Speaker 8: people might say Netflix is a part of their you know,
Speaker 8: social infrastructure as we thought today. I don't think tech
Speaker 8: is going away, and there's a reason why they're doing
Speaker 8: so well during the earning season. So I don't know
Speaker 8: if it can continue to run at such high valuations.
Speaker 8: We might be expecting more than perfection from them for
Speaker 8: the rest of the year. But certainly this isn't some
Speaker 8: kind of a bubble. That's for me.
Speaker 2: Well, So I love your idea that tech is safety
Speaker 2: like it's utility. From that end, because I've wondered that
Speaker 2: over the last six to eight months, and I do
Speaker 2: wonder if earnings then matter. I know that's like sacrilege
Speaker 2: and earning season.
Speaker 4: But then if that's the case, just buy the dip.
Speaker 2: And that's why basically the market just doesn't want to
Speaker 2: go down.
Speaker 7: Right.
Speaker 8: And also, you know, if you think about how far
Speaker 8: we've come with tech, I mean, they're taking up so
Speaker 8: much of that. So if there is buying the dip,
Speaker 8: it's actually also magnified. Now one risk is if we
Speaker 8: do hit a soft landing patch where you know, we
Speaker 8: may we're maybe pricing in a soft landing, but maybe
Speaker 8: there is actually growth happening. If the FED lowers rates
Speaker 8: maybe March, probably not, maybe in May, then we may
Speaker 8: have recurrence of m and a activity some more exciting
Speaker 8: opportunities that can be financed at a cheaper of cost.
Speaker 8: If that happens, then then there is a risk that
Speaker 8: some of the money that went into the by the
Speaker 8: dip may be going back into some of the cyclical
Speaker 8: sectors because they are so cheap.
Speaker 5: Speaking of technology, meta platforms formerly known as Facebook, it
Speaker 5: is up about one point eight percent today, all time high.
Speaker 5: Now has a market cap once again of one point
Speaker 5: zero one trillion dollars, So the tech play is still
Speaker 5: in play.
Speaker 6: Netflix up fourteen percent as well, not.
Speaker 2: Even that, but asml yep a tech playover in Europe
Speaker 2: is also set for a record close like it's sort
Speaker 2: of encompassing many different types of tech it is.
Speaker 6: It's kind of a cross the board. Hey, and what
Speaker 6: do you think?
Speaker 5: What do you think or what are you guys discounting
Speaker 5: in terms of FED cuts in twenty twenty four. I mean,
Speaker 5: the market is anywhere from five to six and a
Speaker 5: lot of folks are saying, whoa, whoa, whoa, that's a
Speaker 5: little too much.
Speaker 6: How do you guys think about that?
Speaker 8: Yeah? I do think that five to six is probably
Speaker 8: too much. When it was really pricing in six, I thought, way,
Speaker 8: maybe something might go wrong if we need six rate cuts.
Speaker 8: But here's the thing. The FED officials have been slowly
Speaker 8: walking things back right, so I feel like they're trying
Speaker 8: to set us up or set the expectations so that
Speaker 8: it wouldn't be such a surprise if they don't cut rates.
Speaker 8: They don't wait until the second half of the year
Speaker 8: to start cutting rates. So maybe in March, maybe we
Speaker 8: don't get a rate cut, but maybe we get a
Speaker 8: repositioning of the where the FED might be. I think
Speaker 8: the biggest surprise is going to be if the FED
Speaker 8: actually says we're revisiting the two percent target. Maybe it's
Speaker 8: two and a half, maybe it's three.
Speaker 4: Well, but that would be here.
Speaker 6: Okay.
Speaker 2: If they came out and said we want to revisit
Speaker 2: and go to three, that would be huge.
Speaker 8: That would be huge, right. But the thing is FED
Speaker 8: super core, which is services minus food, energy and shelter.
Speaker 8: Month of our month has been at zero point three percent.
Speaker 8: That is not a two percent. So if the FED
Speaker 8: wants to start and that's been there for a while,
Speaker 8: So if the FED wants to start earlier than the
Speaker 8: second half of the year, they're going to have to
Speaker 8: come up with some reason. Because they've been telling us services, services,
Speaker 8: service is super core. We're not seeing any easing there.
Speaker 8: And actually the PMI today right that came out, service
Speaker 8: is still very strong and that's a larger part of
Speaker 8: the economy and inflation and services tends to be stickier.
Speaker 8: So we're gonna have to see some concessions somewhere to
Speaker 8: justify an early cut. But certainly the expectations have been
Speaker 8: heading in that direction.
Speaker 5: All right, and I thanks so much for joining us
Speaker 5: and a Rath, but Cio, it's ce Busy Investment Advice
Speaker 5: Services Independence Ohio.
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Speaker 5: Wait, I'm looking at Netflix Olex really good quarter in
Speaker 5: terms of subscribers last night. They're also talking up a
Speaker 5: big advertising game over the next couple of years. Stocks
Speaker 5: up thirteen percent at a fifty two week high. Here,
Speaker 5: it's not at its all time high, but it's very
Speaker 5: close over the last I guess twelve months is a
Speaker 5: fifty three percent, So nice move for the folks at Netflixt.
Speaker 5: Check in with somebody who knows this digital advertising digital
Speaker 5: media business really really well. Front of the show, Mark Douglas.
Speaker 5: He's a founder and CEO of Mountain. He's zooming in
Speaker 5: from Miami. I mean, nobody zooms in from like Cleveland.
Speaker 5: In January, they zoom in from Miami. So we literally
Speaker 5: just had something from Cleveland. But these these you know,
Speaker 5: these media types. Mark, thanks so much for joining us here. Boy,
Speaker 5: let's just start with Netflix. A couple of things. One
Speaker 5: love to get your thoughts about kind of what the
Speaker 5: results from last night, and then two love to get
Speaker 5: your thoughts on getting into wrestling.
Speaker 9: Well, let's start with the wrestling. I think that's the
Speaker 9: that's the most interesting part of it. You know, the
Speaker 9: thing about Netflix is with every other streaming network, you
Speaker 9: have to have a show you want to watch to
Speaker 9: go there. With Netflix, you just go because it's Netflix.
Speaker 9: And then they make the shows popular just because they
Speaker 9: have this massive audience. And they essentially did that for
Speaker 9: Formula one, and obviously Formula one was already a big
Speaker 9: popular sport, but they made it, you know much really
Speaker 9: expand the audience and increase the value of Formula one.
Speaker 9: I think they're going to do the exact same thing
Speaker 9: for WWE. Like, what was the likelihood I was going
Speaker 9: to watch a WWE event, you know, yesterday? Very small likelihood?
Speaker 9: Now very large.
Speaker 2: I agree with you, Like I don't necessarily want to
Speaker 2: watch WWE, but like if they did a documentary of it,
Speaker 2: one hundred percent I'd be in on that. Are you
Speaker 2: worried about content spend, like is all that just going
Speaker 2: to cost too much for what Netflix is promising?
Speaker 4: The street?
Speaker 9: Well, I mean they that used to be a huge
Speaker 9: problem with Netflix, meaning you know, on Wall Street, people
Speaker 9: are like, this company will never make money, and then
Speaker 9: they focused on profitability and they prove them wrong. And
Speaker 9: so I think they have that pretty much under control.
Speaker 9: And then obviously the app business is just pure profit,
Speaker 9: like every dollar revenue they bring in there, you know,
Speaker 9: net of like you know, paying their sales reps commission
Speaker 9: is just more profit than Netflix. So I think they
Speaker 9: have that formula very tight, and it's reflected in how
Speaker 9: the stock market is responded, you know, the value of
Speaker 9: the company right now.
Speaker 5: So you know, Mark, let's just step back a little
Speaker 5: bit because one of the growth drivers for Netflix, in
Speaker 5: addition to wrestling, I guess, is advertising. Now, this is
Speaker 5: something a business that but Netflix has said repeatedly and
Speaker 5: pointedly that they're not going to get into the advertising business. Well,
Speaker 5: now they're into the advertising business. Can you And this
Speaker 5: is your Balily book, this is where you guys operated
Speaker 5: Mountain and how do you think they're gonna do here?
Speaker 5: And then what's that mean for the industry?
Speaker 9: I think they'll do well in the long term, but
Speaker 9: I think in the short term they're struggling, still struggling
Speaker 9: a bit there. And the reason why is it coming
Speaker 9: into the television advertising market with a very traditional kind
Speaker 9: of revenue model like that like upfront and go, let's
Speaker 9: sell only to the thousand largest advertisers. Meanwhile, you have
Speaker 9: companies that are treating advertising like a digital advertising market,
Speaker 9: and that's my own company, Mountain, that's Amazon in particular.
Speaker 9: And you see Amazon's ad business for TV. They had
Speaker 9: the confidence that next week they're just flipping their entire
Speaker 9: customer base over to an ad supporting model. That's because
Speaker 9: they have tremendous confidence on the ability to monetize it.
Speaker 9: And the reason for that is they have all of
Speaker 9: these digital app buyers on their search business on the
Speaker 9: Amazon dot Com website. So I think Netflix to really
Speaker 9: grow the app business, they have to stop operating in
Speaker 9: the past on the business, you know, using an old
Speaker 9: kind of traditional media business model. They have to enter
Speaker 9: the future. That's what Amazon's doing, That's what Mountain has
Speaker 9: led the way up. And if they do that, they're
Speaker 9: going to be very successful. As a matter fact, I
Speaker 9: think if they do that, the stock the company can
Speaker 9: double in size. I think Netflix is almost a start
Speaker 9: when you look at you know, in terms of like
Speaker 9: they Jef's IPO, when you look at the potential on
Speaker 9: the app business if they if they do it right.
Speaker 2: So walk me through the amount of Okay, so if
Speaker 2: if I'm going to advertise on CBS and I'm going
Speaker 2: to advertise on Netflix, how much am my pan for each? Like,
Speaker 2: how is that calculus going to change? And also would
Speaker 2: I put ads on both?
Speaker 1: Yeah?
Speaker 9: And so as a traditional we'll call it brand media buyer,
Speaker 9: you will definitely you'll just go where the audience that
Speaker 9: you're trying the reaches, you know, and and in traditional
Speaker 9: media it's age and it's it's very traditionally targeted, and
Speaker 9: you're happy to do both. The problem that you're kind
Speaker 9: of alluding to is the brand advertising market is not
Speaker 9: growing grows half a percent a year, So if you
Speaker 9: enter that segment of the market, you are in a
Speaker 9: market share war from day one. And you're seeing that
Speaker 9: in Netflix growth rate on advertising it's growing relatively slow.
Speaker 9: But if you go over the digital market where Google
Speaker 9: and Meta and Amazon Mound operate, you know, there it's
Speaker 9: it's like millions of e commerce companies who are eager
Speaker 9: to be on Netflix, who are eager to be on
Speaker 9: every TV network, and there's a lot more growth there.
Speaker 9: So Netflix, Amazon's doing it right. I think my general
Speaker 9: thing is Netflix will have a good year on advertising.
Speaker 9: Amazon will have a great year, and I think eventually
Speaker 9: Netflix will see, you know, see where the real growth
Speaker 9: is and and pivot over to there. And that that's
Speaker 9: how it works.
Speaker 6: Mark.
Speaker 5: I mean, if if you know anybody who's looked at
Speaker 5: broadcaster cable television over the last several years, in terms
Speaker 5: of the advertising.
Speaker 6: It's pretty much all healthcare.
Speaker 5: You know, it's basically letting you know of all the
Speaker 5: conditions you're probably suffering from or could be suffering from.
Speaker 5: And here's the little acronym we're going to put to it,
Speaker 5: so you can remember the name. You can go ask
Speaker 5: your doctor for this or that drug or you know, procedure. Yeah,
Speaker 5: I mean there's no Yeah, I don't see general motors.
Speaker 5: I don't see Coca cola anymore. I don't you know
Speaker 5: all that kind of stuff. What is the future of
Speaker 5: advertising for broadcasting cable television?
Speaker 9: Is there one be well that that's what we essentially,
Speaker 9: that's what we've been talking about. Now, compare that to
Speaker 9: looking at ads on meta you know, on Instagram, it's
Speaker 9: all e commerce, it's all products you may be interested in,
Speaker 9: and you know, disruptive companies and things like that. So
Speaker 9: the TV industry is in a transition. You know, NBC
Speaker 9: made an interesting announcement at cs cs IS at the
Speaker 9: start of the year in Vegas. It's a big, big
Speaker 9: part of the show is advertising is all these big advertising companies,
Speaker 9: and they announced that sixty percent of the ads that
Speaker 9: run on NBC linear, you know, cable and streaming, they
Speaker 9: expect to be targeted against people's interests and not just
Speaker 9: their age. And that's a big, big difference because now
Speaker 9: that starts to enable e commerce companies and other companies
Speaker 9: to treat television like they're treating Instagram. And so that's
Speaker 9: a transition from traditional media to digital media for television
Speaker 9: and that that that that is happening, and you know,
Speaker 9: going back to Netflix. Netflix kind of sees easy money
Speaker 9: in the old way, but I think the long term
Speaker 9: they have to be part of that. And the answer
Speaker 9: your question is all of those TV networks are going
Speaker 9: to adapt, They're going to go where all the emerging
Speaker 9: companies are with the emerging ad dollars.
Speaker 2: So anecdotally, we cut the core when my daughter was
Speaker 2: really little, right, but we're watching Hulu and we have
Speaker 2: as on Hulu, and she literally is like what is this?
Speaker 4: Like why am I w And she's like what's with
Speaker 4: all the car commercials? She's like who's buying all these cars?
Speaker 4: Like what do I care about that? Like she literally
Speaker 4: like blew her little brain about, like what actually was happening?
Speaker 2: I thod that that was quite funny, But I think
Speaker 2: it's a deeper point to what you're saying on like
Speaker 2: how to reach younger people who have like no concept
Speaker 2: of traditional television and what advertising actually is.
Speaker 9: Yeah, I mean it's the death of Another way to
Speaker 9: stated is we're going to watch the death of broadcasting
Speaker 9: and broadcast ads and see the you know, the growth
Speaker 9: of you know, match dads, so to say, ads that
Speaker 9: are really tuned to your household and to your daughter's
Speaker 9: interests and your interests and things like that, and all
Speaker 9: the advertisers want the ladder and they're slowly amandoning forma.
Speaker 9: They're moving away from the broadcasting and moving more in
Speaker 9: the digitally targeted television advertising.
Speaker 5: All right, Mark, Always good to touch base with you.
Speaker 5: Mark dougas founder and CEO of Mountain.
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Speaker 1: Say Alexa playing Bloomberg eleven thirty.
Speaker 5: Andrew Auerbach she joins us. She's head of private investments
Speaker 5: at Cambridge Associates.
Speaker 6: I guess we're a little located at Boston. There you go, Andrew,
Speaker 6: Thanks so much for joining us here.
Speaker 5: I love you to just kind of give us a
Speaker 5: lay of the land about the private equity venture capital
Speaker 5: marketplace here today. Is the money still flowing there, our
Speaker 5: deals still getting done.
Speaker 6: What's the lay of the land look like.
Speaker 10: Yeah, it's great to be here again and check in
Speaker 10: with you all on the state of the private markets today.
Speaker 10: And the lay of the land is wintry and a
Speaker 10: little baron.
Speaker 4: If I might.
Speaker 10: Transaction volumes have been pretty low for most of twenty three.
Speaker 10: We're hoping it picks up a little.
Speaker 4: Bit more in twenty four. But to just give you.
Speaker 10: One one indicator of how tumbleweeds are rolling through the
Speaker 10: town square. The rate of distributions back to limited partners, right,
Speaker 10: they're the investors in private investment funds, private credit funds,
Speaker 10: what have you. Distributions back to LPs are at their
Speaker 10: lowest point in about twenty five years. That's relative to
Speaker 10: the market size. The market's grown, but that is that's
Speaker 10: a heavy statistic in a January, you know. And so
Speaker 10: there's more work to be done here, and the gps
Speaker 10: are getting at that work well.
Speaker 5: I mean, is it primarily been driven by this interest
Speaker 5: rate environment we've been in here? It's tough to get
Speaker 5: deals done, to get liquidity for the LPs if I'm
Speaker 5: sitting on an investment here.
Speaker 6: Is it primarily driven by the interest rate environment?
Speaker 10: Exactly? Exactly? With the with the zero interest rate environment
Speaker 10: exiting stage left and interest costs doubling overnight, it's definitely
Speaker 10: created a throttle back in GP's ability to work with
Speaker 10: our companies to generate attractive exit opportunities. And then buyers
Speaker 10: like there's a big there's a big bid ask gap
Speaker 10: right now and you're observing this all over the place,
Speaker 10: as are we. Because the next buyer can't borrow the
Speaker 10: same amount of debt to buy the company, and so
Speaker 10: they won't and they won't pay for that. They won't
Speaker 10: they won't pay as much either, And so we're waiting
Speaker 10: for a bit of a capitulation moment maybe to unlock
Speaker 10: a little bit of of the pent up demand for
Speaker 10: exits right now that the LPs are waiting for.
Speaker 2: I mean, Andrew, I think the market would love that.
Speaker 2: In the meantime, it does feel though there's been lots
Speaker 2: of different ways to access money to give it back
Speaker 2: to LPs, and LP's going to private equity be and like,
Speaker 2: I'm not going to invest more money until you giving
Speaker 2: my old money back and then leverage upon leverage upon leverage.
Speaker 2: Is there trouble brewing here? Like, what's an unintended consequence?
Speaker 10: Yeah? So you're absolutely right, and so transaction volumes are down.
Speaker 4: Fundraising for twenty three.
Speaker 10: I think you'd have to go back about eight years
Speaker 10: to find another year that matched in terms of volumes
Speaker 10: are down, Right, We have to look back eight years
Speaker 10: to find another year that had this much capital coming in.
Speaker 10: And you're right about the leverage on leverage, Alex's the
Speaker 10: risk here is that gps are feeling the pressure and
Speaker 10: they're looking for ways to deliver some kind of distributions
Speaker 10: to LPs, and there's certain things they're doing. I'll do
Speaker 10: anything for a distribution, but I won't do that is
Speaker 10: sort of the environment we're in. LPs aren't liking some
Speaker 10: of the financial engineering efforts that are going on, navloans
Speaker 10: being one of the hotter topics, if you will, in
Speaker 10: the LP and GP community right now.
Speaker 5: All right, talk to us about what has been one
Speaker 5: of the most amazing growth stories I've seen in financial
Speaker 5: services over the last a dozen years, which has been
Speaker 5: private credit. What's your thoughts on that marketplace, that asset
Speaker 5: class and kind of the deals that are getting done there.
Speaker 10: Yeah, I mean, so as we said, you know, we
Speaker 10: were just talking about going from fourth to first gear
Speaker 10: in the private equity markets. Because of interest rates increasing
Speaker 10: as significantly as they have, it's really created a moment
Speaker 10: for private credit, if you will, to shine, and in
Speaker 10: that sense, the returns available for private credit investors because
Speaker 10: interest rates are now what they are, because the transaction
Speaker 10: environment is slower, private credit may be able to put
Speaker 10: more bells and whistles in the forms of covenant actual
Speaker 10: covenants on certain tiers of the market, and so things
Speaker 10: are looking things are looking up from a private credit perspective,
Speaker 10: while interest rates are staying at the levels that they are,
Speaker 10: and in some ways, think about mezzanine think about private
Speaker 10: middle return private credit strategies, they could deliver a thirteen
Speaker 10: percent return to an investor. It's kind of knocking on
Speaker 10: the door of certain private equity firms that might not
Speaker 10: be measuring up right now. So there's we're watching some
Speaker 10: stuff unfold this year that's going to be very interesting.
Speaker 2: How much what do you like right now? If I
Speaker 2: was gonna put money to work? How much should I
Speaker 2: be putting into work?
Speaker 4: And where.
Speaker 10: Wonderful questions And actually there's a lot of tech. There's
Speaker 10: a lot of discussion around this right because the public markets,
Speaker 10: as we know, have recovered quite strongly, and you've been
Speaker 10: talking about that, and where those pockets of opportunity are
Speaker 10: private markets take anywhere from let's argue five, seven, ten
Speaker 10: years to really watch those absolute returns roll in. And
Speaker 10: so part of the debate right now, alex is should
Speaker 10: we keep it in publics or should we move to privates?
Speaker 10: Now I live in private, I live in privates, and
Speaker 10: so within privates, depending on what you're looking for. That
Speaker 10: private credit that Paul's talking about very interesting. If you
Speaker 10: have a fixed income allocation you'd like to offset with
Speaker 10: a little bit more of a return in the private
Speaker 10: credit realm, I'll give you some. I'll give you an
Speaker 10: interesting a spec from private equity. You know, venture valuations
Speaker 10: have been coming down significantly and we're watching the returns
Speaker 10: come down and it's definitely a lot of capitals cleared
Speaker 10: out of that particular market. And as we talk about
Speaker 10: it here at Cambridge Associates, venture is looking very interesting
Speaker 10: right now, precisely because capital has been coming off to
Speaker 10: the sidelines.
Speaker 6: All right, Andrew, always a fascinating discussion. You always appreciate
Speaker 6: getting some of your time.
Speaker 5: Andrew Hourback, Head of Private Investments at Cambridge Associates.
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