Speaker 1: Welcome to the Bloomberg Penl podcast. I'm Paul Sweene. You,
Speaker 1: along with my co host Lisa Brahma wits each day
Speaker 1: we bring you the most noteworthy and useful interviews for
Speaker 1: you and your money, whether at the grocery store or
Speaker 1: the trading floor. Find a Bloomberg Penl podcast on Apple
Speaker 1: podcast or wherever you listen to podcasts, as well as
Speaker 1: at Bloomberg dot com. Well, it certainly looks like the
Speaker 1: media spotlight is back on the US regional bank business. Uh,
Speaker 1: given today's big deal BB and T is merging with
Speaker 1: SunTrust Banks in a twenty eight billion dollar deal, creating
Speaker 1: the sixth largest bank in the US. To help us
Speaker 1: break it this deal down and what it means for
Speaker 1: the sector overall that, we have two interesting guests today
Speaker 1: that will help us do that. First is Chris Whale
Speaker 1: and chairman of Whale and Global Advisers. He's on the
Speaker 1: phone in New York. And Arnold Cacuda. Arnold is a
Speaker 1: senior credit analyst carving the global banking sector for Bloomberg Intelligence.
Speaker 1: He joins us in our Bloomberg eleven three oh studios
Speaker 1: here in New York. Gentlemen, thank you for joining US.
Speaker 1: I'll start with you, Chris, what do you make of
Speaker 1: this deal? Why did this deal happen? Why did it happen? Now?
Speaker 1: I think mostly this is about cost savings. Uh. These
Speaker 1: are two very consistent performers. They're big, um, they're probably
Speaker 1: two of the largest banks. It would be allowed to
Speaker 1: do a deal by regulators right now. U S Bank
Speaker 1: could also do a deal if they chose to. But
Speaker 1: they like the size they're at, which is roughly where
Speaker 1: these two banks are going to be. And you look
Speaker 1: at the asset and equity returns and like I say,
Speaker 1: they're dead center of peer group one, which is all
Speaker 1: the big banks and anything above ten billion in assets.
Speaker 1: So you know to me, they're going to consolidate the
Speaker 1: back end. They're going to keep doing what they're doing.
Speaker 1: They have slightly lower funding costs and the big banks,
Speaker 1: and they're good CNI lenders, kind of middle market lenders.
Speaker 1: RESI is not a huge part of their book in
Speaker 1: either case. Although sun Trusts used to be very big
Speaker 1: in residential lending before the crisis. UM, But unlike a
Speaker 1: US bank, they don't have that big trust business at
Speaker 1: big off balance cheap component that would make them a
Speaker 1: money center. So there's still a big, big regional bank.
Speaker 1: Now if you look in the evaluations one point three
Speaker 1: one point four Tom's book about the same. So Arnold,
Speaker 1: come on in here, Arnold Cucuta of Bloomberg Intelligence. Is
Speaker 1: there a risk that when banks start to get very
Speaker 1: big through consolidation, that they start feeling compelled to take
Speaker 1: on more risk and go global? Is that sort of
Speaker 1: a concern from a credit perspective or is this wholly
Speaker 1: a positive? Well, so far it looks like, um, you know,
Speaker 1: the combined entities, Uh, they're they're asset quality, credit quality
Speaker 1: is going to be you know towards the better end appears,
Speaker 1: and you know they're not talking about you know, taking
Speaker 1: on more risk if anything. You know, they have a
Speaker 1: good um you know, synergies overlap in the mid Atlantic.
Speaker 1: You got you got UM B, B and T more
Speaker 1: mid Atlantic focus and then um UM sun Trust who
Speaker 1: has more of a Southeast and mid Atlantic so you know,
Speaker 1: taking out costs the first thing, and then that's going
Speaker 1: to help their effigiency ratio, which is basically your costs
Speaker 1: as a percentage of revenue, which is going to be
Speaker 1: pure leading exceeding even lower than even US bank corps,
Speaker 1: which should bring their returns their profitability to the highest
Speaker 1: of the peer group. So you know that that's something
Speaker 1: that you know, really that's what the equity trade on,
Speaker 1: is profitability. And if that's going to take that higher
Speaker 1: than US Bancorp, you know, there's a lot to like,
Speaker 1: and I think you see it in the stock reaction today.
Speaker 1: So Chris is interesting to note that. I'm sorry, Chris, No,
Speaker 1: they are efficient. They're very good at what they do,
Speaker 1: especially BB and T s I I described this as
Speaker 1: an exemple are getting together with a very good UH bank.
Speaker 1: You know, BB and T as far as lending and
Speaker 1: overall operational efficiency is great. But what they don't have
Speaker 1: is that huge funding advantage you know, forty plus basis
Speaker 1: points the US Bank has because of their their float
Speaker 1: from their custodial business and everything else They're They're funding
Speaker 1: costs is half of the average for peer group one,
Speaker 1: which is extraordinary, and that's because you have a lot
Speaker 1: of employers and a lot of other customers who just
Speaker 1: leave money on deposit with US Bank. Chris, I mean
Speaker 1: both you as well as Arnold. Both of you are
Speaker 1: talking very positively about this transaction. The stock but to
Speaker 1: your question, Yes, the answer is yes, but we have
Speaker 1: to chase bigger loans, yes, no question. In other words,
Speaker 1: take more risk. Yeah, and they don't bank the way
Speaker 1: a community bank banks. So bank at the community level
Speaker 1: knows our customers. Once you see these large mergers, the
Speaker 1: ability of the branch managers of those banks gets constrained
Speaker 1: because the Fed starts to look at them like a
Speaker 1: big bank. To your point, right, they end up in
Speaker 1: a world where the law of large numbers governs their
Speaker 1: production more than know your customer. And that's why the
Speaker 1: small bank is much better at managing credit. So Arnold,
Speaker 1: is that is that consistent with what you've seen in
Speaker 1: terms of smaller banks taking on a bit uh perhaps risk,
Speaker 1: but they actually know who they're dealing with, whereas at
Speaker 1: big banks, customers become numbers and there can be more
Speaker 1: sort of holess stick credit concerns. I mean, there is
Speaker 1: a concern with that right where you know, they say
Speaker 1: scale helps profitability, but then again, well, if you're having
Speaker 1: a fewer eyeballs or technology to kind of look through
Speaker 1: something while your revenues increasing, things can fall through the track. Cox.
Speaker 1: But you know, then again it's uh, you get efficiencies
Speaker 1: and technology, right, so you know, the more you can
Speaker 1: invest there and then you have a bigger based to
Speaker 1: kind of offset it over then then yes, definitely, I
Speaker 1: think I think that helps too. But but more so
Speaker 1: I think, um, you know, in terms of added oversight, um,
Speaker 1: you know the two fifty billion there, they're both exceeding that, right,
Speaker 1: Yet you're taking to two billion banks pretty much doubling
Speaker 1: the size. You're gonna go over two hundred fifty billion.
Speaker 1: But a key thing I think that is driving this
Speaker 1: merger and that I think will drive even more regional
Speaker 1: bank mergers is uh this October proposal by the FED
Speaker 1: which really lowers regulation for the regional banks, and so
Speaker 1: kind of the new threshold to look at I think
Speaker 1: in terms of big regional banks is seven billion, right,
Speaker 1: and so US bank Corps four than seventy billion, and
Speaker 1: you still got a long way to go from that.
Speaker 1: So I think as long as you stay under seven bill,
Speaker 1: you're still going to get this you know, less regulation
Speaker 1: that that that's going to come into sex right October.
Speaker 1: It's size, but it's also the composition of the business.
Speaker 1: If you have a lot of touch points with many
Speaker 1: other financial institutions, then even somebody is boring his Bank
Speaker 1: of New York. I love them, right, but they're custodian.
Speaker 1: They are very significant in the grand scheme of things.
Speaker 1: US Bank has much more street exposure. And then another
Speaker 1: one that you know we could have talked about in
Speaker 1: this group is P and C. P and C is
Speaker 1: much more Wall Street exposure than a BBT or a
Speaker 1: sun Trust. You know, these are two commercial lenders. They
Speaker 1: come from the Southeast, which was a tough area. It
Speaker 1: still is. The the off market areas still haven't come
Speaker 1: back in the Southeast. So you know, it's an interesting merger.
Speaker 1: But I agree with my colleague. I think could cost
Speaker 1: savings is driving this um and there was nothing else
Speaker 1: to do. They could buy a smaller bank, but it's
Speaker 1: not going to move the needle um sold. The street
Speaker 1: barely cares about this transaction. Let's be fair. We all
Speaker 1: love banks, but you know it's not that big, right
Speaker 1: so Arnold. So the obviously the equity markets like this deal.
Speaker 1: Both SunTrust and BBT stocks are up. There's a credit
Speaker 1: market support consolidation in the banking sector. Well, um, you know,
Speaker 1: unlike M and A and other space where you know,
Speaker 1: typically you'd see huge bond deals, sit to finances. This
Speaker 1: is an all stock, um, you know merger, and then
Speaker 1: you know you don't need that financing. And and the
Speaker 1: thing with that is, you know, banks are highly regulated.
Speaker 1: They need to keep their equity ratios you know where
Speaker 1: they are or you know, at at high levels. And
Speaker 1: and even post merger, you know, they they're still targeting
Speaker 1: a ten percent common equity at one ratio, which is
Speaker 1: you know, still pretty solid. So um and and and
Speaker 1: the thing is, you know we talk about size. They're
Speaker 1: increasing in size, but they're not going to become global
Speaker 1: systemically important banks, right. Um. You know, you know, Chris
Speaker 1: talked about kind of the state streets the US bank course,
Speaker 1: but I'm sorry, I'm the being hy melon. But those guys,
Speaker 1: even though asset wise they're not that big, they're huge
Speaker 1: custol Global custolial presence makes them highly systemically important. Right,
Speaker 1: So that's why they're they're considered gesip's higher equity and
Speaker 1: debt requirements. So this is not the case for you know,
Speaker 1: the merger that we see today. Well, I'm sure that
Speaker 1: we will have you both back on when we announce er.
Speaker 1: We discussed the next merger between a two regional banks
Speaker 1: that will inevitably get to announced based on this backdrop.
Speaker 1: That makes a lot of sense for them to do so.
Speaker 1: Chris Whale and chairman of Whaling Global Advisors, and Arnold Cakuta,
Speaker 1: senior credit analyst of focusing on the global banking sector
Speaker 1: for Bloomberg Intelligence, joining us here in our Bloomberg Director
Speaker 1: Broker Studios. Both of you, thank you so much for
Speaker 1: being with us. So Earlier this week we were speaking
Speaker 1: with the head of fixed income for JP Morgan's of
Speaker 1: a Bank, Tom Kennedy, who said that when the FED
Speaker 1: talks about being patient with raising rates, it means they're
Speaker 1: not going to raise rates for the next three months,
Speaker 1: but then they're gonna be data dependent again. Joining us
Speaker 1: now to weigh in on that and all things fixed
Speaker 1: income is Kevin get Us, Executive vice president and head
Speaker 1: of fixed Income for Raymond James, joining us here in
Speaker 1: our bloombergiddera active broker's studios. So, Kevin, what do you
Speaker 1: make of that? Well, I would say that it actually
Speaker 1: goes contrary to what Robert Kaplan said today about being patient.
Speaker 1: I think patient uh to the FED is longer than
Speaker 1: a three month period, So you know when we started
Speaker 1: the year, UM, we thought that June could be the
Speaker 1: next rate height and they would be on the sidelines
Speaker 1: until then. It seems like that's now pushed to September
Speaker 1: at a minimum, And some are saying, you know, and
Speaker 1: if you look at FED funds probability index UM, the
Speaker 1: next double digit chance of anything is the FED lowering
Speaker 1: rates in January. So I actually think it means something
Speaker 1: longer than three months, and I think the Fed will
Speaker 1: kind I watched this market for the next uh probably
Speaker 1: six to nine months. So alright, so the FED is
Speaker 1: on the sidelines. What do you think gets them back
Speaker 1: into the game, if you will, to re engage. What
Speaker 1: do you think are the data points that they are
Speaker 1: focusing on. It centers around inflation um, whether it's wage
Speaker 1: or price. So as long as you know the latest
Speaker 1: even the wage, our greatest hope for inflation came from wages,
Speaker 1: right average early learning slowly ticked up during the course
Speaker 1: of eighteen UM. Yet more recently it's appears to have
Speaker 1: stopped um or you know, up one tenth or something
Speaker 1: like that. So until we see really any wage inflation
Speaker 1: UM price inflation will get numbers next week with further
Speaker 1: definition it's just not there. The interesting thing is, and
Speaker 1: somebody else has made this point, so I'm stealing it.
Speaker 1: Just full disclosure. But last year the Federal Reserve hiked
Speaker 1: numerous times, and the expected inflation over the next decade plummeted.
Speaker 1: It fell off a cliff. There was no inflation pressures
Speaker 1: last year, and yet the Feds still raised rates. So
Speaker 1: what changed? What changed for the Fed? Yeah, they realized
Speaker 1: they made a mistake by raising rates too many times.
Speaker 1: And think that they realized they made a mistake. Yeah,
Speaker 1: two out of the three mandates were met a long
Speaker 1: time ago. The mandate of inflation has yet to be met.
Speaker 1: And we touched two percent basically once for a short
Speaker 1: period of time and then fell back slightly below it.
Speaker 1: So you know, they got to their target. They said, okay,
Speaker 1: here we go, this is the launch and and you
Speaker 1: know around every corner is another brick wall for inflation.
Speaker 1: So I think the world has just changed for us
Speaker 1: to calculate inflation in the way that meets the FEDS
Speaker 1: real mandate, and I think that they just missed it.
Speaker 1: In fact, part of the global slowdown is because of that.
Speaker 1: I want to push back a little bit because some
Speaker 1: people could say you're like, all right, bring it, because
Speaker 1: some people could say, all right, the inflation expectations were
Speaker 1: falling last year, the Federal Reserve still raised rates, and
Speaker 1: inflation has continued to accelerate, albeit not at the pace
Speaker 1: that people would like to see. But wages are still
Speaker 1: going up. Doesn't this say that they didn't make a
Speaker 1: miss stake and that they were right to raise rates
Speaker 1: to normalize? Yeah, I mean you can. You can certainly
Speaker 1: make that argument. It's the problem is is you know
Speaker 1: where are we now? UM? We're we've peeked and turned
Speaker 1: back down UM or slight increases UM, it's not UM,
Speaker 1: it's not hurting the job market, but it's not creating wealth.
Speaker 1: It's going to help the economy. So you know, I
Speaker 1: would say that um, the fet is going to do
Speaker 1: more harm to the economy than meet the mandate of inflation. UM,
Speaker 1: and I doubt will be at two percent all year long. So, Kevin,
Speaker 1: as you're out and about talking to your clients, institutional
Speaker 1: and retail clients, what are they doing? What do you sense?
Speaker 1: It is the risk appetite. They really embraced this market
Speaker 1: and are back in, you know, maybe allocating more of
Speaker 1: an investment rate, the high yield and maybe going out
Speaker 1: on the risk curve. What are you hearing from them?
Speaker 1: You know, we've kind of UM, we've we've taken this
Speaker 1: UM approach that UM, they needed a shortened duration last year, UM,
Speaker 1: and UH still invest in quality and stay away from
Speaker 1: some of the risk here aspects of the fixed income market. UM.
Speaker 1: And that proved to be pretty true until the end
Speaker 1: of the year. And then UM, you know, the Fed
Speaker 1: put the brakes on the dollar UM. UH made some
Speaker 1: some real fundamental changes, and UM it felt okay to
Speaker 1: go back into risk. I think that what we're saying
Speaker 1: this year is stay with quality UM. But you you
Speaker 1: have the ability to go back out on the duration
Speaker 1: curve UM with your investments without getting hurt. This is
Speaker 1: so interesting to me because you're seeing this in et
Speaker 1: F flows two and other people are doing this as well. UH.
Speaker 1: Two funds that are actually they've seen the biggest withdrawals
Speaker 1: year today in the fixed income space are too short
Speaker 1: term US debt funds. In other words, it's a reversal
Speaker 1: of the flight to cash last year, coming out of cash,
Speaker 1: going into duration and going into risk. How long is
Speaker 1: that gonna work? You know? It could work for a while.
Speaker 1: I think, Look, the fundamental change of the bond market
Speaker 1: actually actually occurred with the elections, which gave them the
Speaker 1: Democrats back the house. So you know what what the
Speaker 1: market was worried. If you remember, the MENI market was
Speaker 1: um kind of on its heels for the first part
Speaker 1: of the year because of the tax uh rebates and
Speaker 1: things that they that were taking them away from what
Speaker 1: was gonna fundamentally be able to finance in the state
Speaker 1: county municipal market. That went away with the election, and
Speaker 1: then so money started plunging back into the meuni market
Speaker 1: is actually driven spreads tighter as well as some risk
Speaker 1: and a lot of investment grade credits. So I think, um,
Speaker 1: I think you have a real opportunity, um, and we're
Speaker 1: not part of it. This is not a credit crisis
Speaker 1: that we're in. It doesn't appear to be one in
Speaker 1: the future. You don't have inflationary pressures that are gonna
Speaker 1: gonna hurt the long in the market. You can swim
Speaker 1: for a while out in the open water right now,
Speaker 1: So just real quickly, any place you're telling your clients
Speaker 1: to really just avoid. You know that this is a
Speaker 1: we We've had about a five year stretch for yield
Speaker 1: and UM. The offset to that is a down and
Speaker 1: credit trade that UM still makes us nervous. UM. There's
Speaker 1: a been a lot spoken about the legers woman market
Speaker 1: that that index itself dropped pretty hard, then it came
Speaker 1: back up UM. But we're still We're still a quality
Speaker 1: UM quality buyer right now. So if you're going, if
Speaker 1: you want to go along end, avoid triple C. Yeah.
Speaker 1: So so long if you want to reach duration, you
Speaker 1: reach it in your knees. If you want to reach
Speaker 1: for yield, reach it inside of five years in corporates,
Speaker 1: got it? Kevin? Kevin Gettish, thanks so much. Kevin's executive
Speaker 1: vice president, head of fixed income from Raymond James based
Speaker 1: in Memphis, Tennessee. But he joins us in our eleven
Speaker 1: three oh studio today. Facebook's advertising model it's coming to
Speaker 1: our attack, you know. Yet again it's particularly in Europe.
Speaker 1: So what we've had just recently in Europe is German
Speaker 1: antitrust regulators have ordered the social network to overall how
Speaker 1: attracts its users internet browsing smartphone apps. This is once again,
Speaker 1: I think if you think about Facebook and they're advertising
Speaker 1: model and social media in general list. They're really kind
Speaker 1: of coming under some increased regulatory oversight that investors, I
Speaker 1: think in the back of the mind really have as
Speaker 1: a risk factor here, they do accept shares are not
Speaker 1: down that much, which is really the question I want
Speaker 1: to ask Alex web about his European technology columnists with
Speaker 1: Bloomberg Opinion joining us from London. Alex, why do shareholders
Speaker 1: not care more about the fact that Germany is taking
Speaker 1: a much harder stance with them. I think there's probably
Speaker 1: two things that play here. On the one hand, it
Speaker 1: might be prized into the share as already. You know,
Speaker 1: we've seen this Facebook stock take a huge pummeling since
Speaker 1: the middle of last year when it first said that
Speaker 1: it was going to have to that its margins were
Speaker 1: going to be impacted by some of the measures they're
Speaker 1: putting in place to reduce the amount of dangerous content.
Speaker 1: But equally, the this German UH decision probably will take
Speaker 1: a while to play out. You know, there's going to
Speaker 1: be an appeal process. It could then you know, ultimately
Speaker 1: be overturned and and for now it's only in Germany.
Speaker 1: What really becomes significant though, and this is the issue
Speaker 1: with the German decision, is that Germany is seen as
Speaker 1: the model for the rest of Europe. Germany was almost
Speaker 1: given this as a test case by European authorities to
Speaker 1: do the legwork and see what needed to be done,
Speaker 1: and other European nations might start following suit. So, Alex,
Speaker 1: what do you think is the risk that again, this
Speaker 1: will be more of a European wide issue. We've seen
Speaker 1: again just coming from the EU regulations against the facebooks
Speaker 1: of the world's and the Googles of the world, and
Speaker 1: just US technology companies in general taking a much harder
Speaker 1: review of US tech. What is the risk or the
Speaker 1: concern at this point that some of these issues may
Speaker 1: become more European wide. What the problem that Facebook has
Speaker 1: in Europe right now is that user engagement is declining.
Speaker 1: There's been a huge amount of antipathy towards its platforms,
Speaker 1: not just Facebook itself, but Instagram and WhatsApp. That means
Speaker 1: that it's under more pressure therefore to increase its average
Speaker 1: revenue per user. That means that um even if the
Speaker 1: number of people who are using the website declines, it
Speaker 1: can still grow revenue because it's getting more AD dollars
Speaker 1: for each user. Now in order to deliver that. They've
Speaker 1: got to have more compelling, more granular data on the
Speaker 1: users they have and being able to tie together what'sapp,
Speaker 1: Instagram and Facebook, which is what this ruling is all about.
Speaker 1: That people have to consciously opt into that rather than
Speaker 1: finding a way to opt out. UM that damages their
Speaker 1: ability to find that granular data and therefore expand their
Speaker 1: their average revenue per user to set off the declining
Speaker 1: user growth. So, Alex, we should really go over what
Speaker 1: exactly this German ruling said. Basically, it was it's an
Speaker 1: overhaul or it's forcing Facebook to overall how it tracks
Speaker 1: its users internet browsing and smartphone apps. So in plain English,
Speaker 1: why does this matter? What happens right now is if
Speaker 1: you visit a website and anywhere on and you are
Speaker 1: a Facebook US sir and frankly even if you're not
Speaker 1: a Facebook user, but there if on that website there's
Speaker 1: a button which says like this page or share this page.
Speaker 1: Irrespective of whether you click that button or not, that
Speaker 1: website will send a cookie to Facebook servers indicating that
Speaker 1: either you the user or be this particular computer UM
Speaker 1: has visited this website. And that's the way of tracking
Speaker 1: you know how people navigate the internet, possibly what the
Speaker 1: interests are, and building up you know, these very complex
Speaker 1: models of what people's interests are. This stops their ability
Speaker 1: to do that, to do that without people opting actively
Speaker 1: opting into it, and therefore, you know, poses a huge
Speaker 1: risk to Facebook's advertising model. So, Alex, is there a
Speaker 1: what is your sense of regulatory oversight? It seems to
Speaker 1: be obviously focused on Facebook, But how about Snap, Twitter, Google?
Speaker 1: Are you hearing that there is a growing sense that
Speaker 1: maybe these companies as well need to be monitored? Frank
Speaker 1: frankly Snap on Twitter, No, these are small companies. You know,
Speaker 1: Snap has about hundred and eighty million active users. Twitter,
Speaker 1: as we learned today has about a hundred hundred twenty million.
Speaker 1: That's global daily active uses. Now Facebook has one point
Speaker 1: six billion daily active users. It's a whole different realm
Speaker 1: they're operating in. Nonetheless, it is a threat for Google.
Speaker 1: Google has a similar thing. They also find you can
Speaker 1: get cookie sent to them from every website that people visit,
Speaker 1: uh and therefore build up these profiles and what your
Speaker 1: interests are. That then feeds into the ads that you
Speaker 1: get served on YouTube and Google Search, and so they
Speaker 1: are highly vulnerable to being the next company that comes
Speaker 1: into the firing line on this privacy front. I want
Speaker 1: to go back to where we started and just to
Speaker 1: wrap up the conversation with this idea of you know,
Speaker 1: how much of a financial risk is this to Facebook,
Speaker 1: to the behemoths that capture the great majority of the
Speaker 1: advertising dollars and the eyeballs. And I'm just wondering, because
Speaker 1: right now you said perhaps it's priced into the shares
Speaker 1: that there will be more regulatory oversight. How does one
Speaker 1: put a price on this? How do you know what
Speaker 1: it actually is priced in? It's very very difficult to pass.
Speaker 1: You know. Ultimately, this is a multi stage process and
Speaker 1: we're still very early in that process. Um that means
Speaker 1: that people, you know, even with some of the difficulties
Speaker 1: Facebook's had over the past year, revenue has continued to grow,
Speaker 1: and I think there might be a sense that Facebook
Speaker 1: somehow finds a way now it's it's when the inflection
Speaker 1: point is It's very very hard to tell, you know,
Speaker 1: if if those fines start getting imposed and we actually
Speaker 1: start seeing Facebook implement these measures across you know, huge
Speaker 1: markets like Europe where it's three million people something like that,
Speaker 1: that that is a huge threat to Facebook's growth opportunity. Now,
Speaker 1: it's whether in the growth economies like Asia and Sub
Speaker 1: Saharan Africa, if their regulators are as tough and often
Speaker 1: they do follow suit for what happens in Europe, that
Speaker 1: that's that that would be the bigger concern for Facebook's
Speaker 1: next leg of growth. Alex web thank you so much
Speaker 1: for being with us. Alex Webb, European technology columnist for
Speaker 1: Bloomberg Opinion, joining us from London. Lisa, you and I've
Speaker 1: been talking about just just today on the strength of
Speaker 1: the consumer and how strong I mean, we just had
Speaker 1: the guest on talking about retail sales forecast growth of
Speaker 1: five percent in nineteen. So we're right in the midst
Speaker 1: of a bunch of consumer companies reporting earnings over the
Speaker 1: last couple of days. And help us kind of break
Speaker 1: that down and what those results mean about the consumer.
Speaker 1: We want to bring in. Ken Shay Ken is a
Speaker 1: senior analyst covering the global food, beverage, and tobacco industry
Speaker 1: for Bloomberg Intelligence. He calls in from Bloomberg's headquarters in Princeton,
Speaker 1: New Jersey. Ken, thanks so much for joining us again.
Speaker 1: Tyson reporting today Kellogg's reporting today. What are some of
Speaker 1: your takeaways, uh from some of these big consumer products companies. Yeah, Hi, Paul,
Speaker 1: Uh Yeah, today Kellogg Insison report, you know, to Bellweather
Speaker 1: companies within the package food industry here in the US.
Speaker 1: I think the broad takeaway to investors is that top
Speaker 1: line sales growth remains elusive for these big companies. You know,
Speaker 1: a lot of it is secular in nature. That is,
Speaker 1: there's just not many more new mouths the feet of
Speaker 1: the US. You know, population is pretty steady. Arguably, these
Speaker 1: companies have not innovated to a degree that's exciting people
Speaker 1: to go to their products, um, and it's really suffering
Speaker 1: the bottom line as well. You know, it's hard to
Speaker 1: grow when the top line is not growing. And that's
Speaker 1: kind of the broad takeaway for both Tyson and Kellogg
Speaker 1: this round. All right, So let's start with Kellogg, which
Speaker 1: is near and dear to my heart because I've struggled
Speaker 1: through breakfast with two kids, getting them at the door
Speaker 1: in the morning, and that seems to be the demographic
Speaker 1: that Kellogg tries to cater to. Kellogg shares now down
Speaker 1: five point four percent after disappointing earnings earnings result and
Speaker 1: you have to wonder talking about breakfast, how much are
Speaker 1: they shifting gears away from sugar heavy, carb heavy types
Speaker 1: of stuff. Is that really part of the issue in
Speaker 1: sort of reshaping the view on healthy food. Yes, highly so,
Speaker 1: that's exactly you know. Kellogg Is, to its credit, has
Speaker 1: been really cutting costs dramatically over the last few years.
Speaker 1: One of the leaders I would i would say was
Speaker 1: in the packaged food space. However, you can't really cut
Speaker 1: yourself the prosperity. The new CEO, Steve Callahan knows that
Speaker 1: he's come aboard and say, you know, we're gonna pivot
Speaker 1: now to grow our top line and we're going to
Speaker 1: get there by investing a new product innovation. We're going
Speaker 1: to make some selective acquisitions. Uh. Those are the two
Speaker 1: key ways anyway. Um, but the challenge it has is
Speaker 1: it's just over indexed the heavy carb products. I mean,
Speaker 1: if you think about breakfast cereals and pop tarts and
Speaker 1: pring goals and Jesus these are all some are growing
Speaker 1: better than others. But at this end of the day,
Speaker 1: you know, that's not really in sync where many consumers
Speaker 1: are going today. They're pursuing mes like protein u natural
Speaker 1: products with no artificial ingredients contemporary new brands, and that
Speaker 1: doesn't really fit well to where Kellogg is right now.
Speaker 1: So what is the strategy. There's the strategy to diversify
Speaker 1: and try to chase the organic, healthy moving consumers. Maybe
Speaker 1: you know, go go buy some of these startups. Or
Speaker 1: is it to try to introduce new products or maybe
Speaker 1: even be more aggressive on promotion. Well, they have done
Speaker 1: a little bit of that call they recently to their credit,
Speaker 1: but um Our x bar it's one of the UH
Speaker 1: products that is doing really well in the space if
Speaker 1: it's a convenient, health oriented or natural snack bar that
Speaker 1: caters to a lot of the themes that I mentioned.
Speaker 1: They're also chasing international growth. UM. They've bought a just
Speaker 1: Food distributor in Africa and Nigeria is doing very well
Speaker 1: and they're going to try to capitalize that and grow
Speaker 1: their international exposure UM. And that's great and it's really
Speaker 1: they deserve credit for doing that. The challenge they have
Speaker 1: though is really twofold and doing that, and that is
Speaker 1: first of all, they're not the only big packaged food
Speaker 1: company trying to you know, expand to growthier markets outside
Speaker 1: of the US. So it comes at a healthy price
Speaker 1: tag to do that. And second, when they buy these
Speaker 1: new assets, it requires a lot of management time and investment,
Speaker 1: so they don't really carry the weight in margin in
Speaker 1: the near term. So you know, we we we haven't
Speaker 1: touched on Tyson yet, which is the chicken manufacturer distributor. UH,
Speaker 1: and we talked about them earlier about possibly buying a
Speaker 1: sort of organic, locally sourced California Northwestern Chicken company. And
Speaker 1: right now it shares down nearly three after showing that
Speaker 1: they are disappointing on their earnings and on their expansion,
Speaker 1: and they are also looking for, to use your word,
Speaker 1: can growthier pastures. But I have to wonder, if you
Speaker 1: take a step back, how much Kellogg's and also Tyson
Speaker 1: are both symptomatic of a larger protest and shift away
Speaker 1: from big food that is more processed. Well, I think
Speaker 1: that's part of it. It's hard to quantify that, but clearly, UM,
Speaker 1: we know that millennials today in particular are not brand
Speaker 1: conscious as as many of their parents were. We know
Speaker 1: that they like to eat healthier. Um, they have more
Speaker 1: information on their fingertips than with their cell phone or
Speaker 1: their smartphone, I should say, uh. In terms of ingredients
Speaker 1: that are in these products, so they are a less
Speaker 1: or should say, a more pickle less brand loyal crowd.
Speaker 1: Then many of these legacy package food companies are accustomed with.
Speaker 1: Given that that's the case, who's benefiting well? I would
Speaker 1: say some of the companies that are carring to niches
Speaker 1: um uh comes to mind. Mandolie for instance. Although Sweet
Speaker 1: Snacks doesn't seem a cater to this, um, they are
Speaker 1: doing a good job in a brand innovation. Just to
Speaker 1: take a look at their OREO reinvention and explain and
Speaker 1: you know, the different flavors. That's actually catching on with
Speaker 1: a lot of consumers. Although it sounds counterintuitive a sweet
Speaker 1: snack like that, it's actually doing pretty well. Um. Pet
Speaker 1: food companies are doing well. That's tapping into the increasing
Speaker 1: trend of consumers that treat their pets like children and
Speaker 1: there will just spoil them with high end premium products.
Speaker 1: And that was behind General mills purchase of Blue Buffalo
Speaker 1: last year. So that that that's a growth business that's
Speaker 1: doing pretty well. They paid up for it, but nevertheless
Speaker 1: the business is doing well. Yeah, Ken Shay, thank you
Speaker 1: so much for being with us. Ken Say senior analysts
Speaker 1: focused on the global food, beverages, and tobacco industries for
Speaker 1: Bloomberg Intelligence. Thanks for listening to the Bloomberg PL podcast.
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Speaker 1: or whatever podcast platform you prefer. I'm Paul Sweeney. I'm
Speaker 1: on Twitter at pt Sweeney and Lisa bram Woyds I'm
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