BI Weekend: Union Pacific Deal, Novo Nordisk Earnings

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1:36Bloomberg Audio Studios, podcasts, radio, news. This is Bloomberg Intelligence with Paul Sweeney. The real our performance has been the U.S. corporate high yield. These are two big time blue chip companies. One person's chaos is another person's animal spirits. Breaking market headlines and corporate news from across the globe. Our view is that the economy is slowing down. There is the possibility of a death spiral. Post-quotum computing and AI are going to power the future. People are just buying everything with tax. Bloomberg Intelligence with Paul Sweeney on Bloomberg Radio, YouTube, and Bloomberg Originals.

2:14I'm Paul Sweeney. I'm Nora Melinda filling in on Bloomberg Intelligence. On today's Bloomberg Intelligence show, we dig inside the big business stories impacting Wall Street and the global markets. Each and every week, we provide in-depth research and data on some of the 2 ,000 companies and 130 industries our analysts cover worldwide. Today we'll look at why the planemaker Boeing reported a smaller than expected loss last quarter. Plus we'll discuss why the Dutch brewing company Heineken reported a decline in beer volume sales. But first we begin with news in the railroad industry. This week Union Pacific agreed to buy Norfolk Southern in a 72 billion dollar cash in stock transaction.

2:48The merger would create the first and only U.S. Transcontinental Railroad. For more on this and the future of the railroad industry guest host Isabel Lee and I we're joined by Lee Clasgow, Bloomberg Intelligence Senior transport, logistics, and shipping analyst. We first asked Lee to give us his outlook on how this mega deal can get done. Yeah, I think the whole speculation before the deal was formally announced about a possible consolidation. And I think people are just trying to take maybe a breather right now because there are some execution risks, right? This deal is not going to close. If it does close until early 2027, it needs regulatory approval, which is not an easy thing to do.

3:26There were certain rules that were created at the Surface Transportation Board to make it very difficult for large class one rail mergers to happen. That was because at one time in the 80s and 90s, those sorts of deals resulted in terrible service. I think that the rails today were much more cognizant of service as it relates to integration. And I don't really think either company once once assuming a merger does happen are going scorch earth in terms of you know what they're going to do to their networks you know they mentioned on the call that they had earlier today that they're really not going to lay off any you know frontline workers most of the probably layoffs are going to happen you know in the offices so you know that would just mean that services would prevail.

4:24And one of the reasons why they are doing this, you know, from an outsider looking in, you know, it does make complete sense between the two of them. They interchange around a million carloads a day. And if they're just able to, if that carload is able to be on the same network, it's not only going to improve network fluidity, it'll actually lower the railroads, their costs. Let's hope they pass on some of that cost savings to their shippers. I think that's what shippers might be concerned about. And it'll provide probably a better service product that they can go out and compete against other modes, such as trucks.

5:02And that's also a good thing because from an environmental standpoint, railroads are less fuel efficient. You know, trucking kind of deals with, you know, turnover issues and trucker availability issues. Right now, that's not an issue, but at times it can be. And so, you know, it is definitely a very interesting deal. It will create the first transcontinental railroad. But, you know, they do have their work cut out for them to get that regulatory approval. So the deal is worth$85 billion. How do they plan to make money back? What are the financial wins, so to speak, to justify that hefty price tag?

5:41Yeah, they laid out$2.75 billion in synergies, about$1.75 of that$2.75 is going to be from revenue. So what they're saying is that, you know, we can probably get more volume onto the network because it all of a sudden becomes a much more compelling service offering. And then about a billion dollars in cost savings. And some of that, again, you don't need two CEOs, you don't need two CFOs, you don't need two corporate headquarters. You know, the dimension they are going to have their headquarter in Omaha, where Union Pacific is located, and keep a, I think they worded a major presence in Atlanta, where Norfolk is currently.

6:24So, but, you know, obviously they're not going to need as much space as they once have. And then there's technology benefits, you know, so you're only investing, you know, money in technology once, not twice to get those productivity improvements. So I think those are the major aspects of it. And, you know, they mentioned that, you know, they could be, you know, EPS accretive after year two. Lee, you mentioned a lot of regulatory agencies are going to weigh in here on this deal. I also think President Trump is likely to weigh in. Do we know anything about how he might view this deal or just consolidation in general?

7:05What's the view as to the Trump administration? I mean, we don't. The language that management noted on the call is like they wouldn't have moved forward with this transaction if they felt that it was impossible to get regulatory approval. So whether that means they were talking to the administration, whether that means they were talking to the STB or the DOJ or everybody in between, that's kind of, you know, if you read between the lines is what they were saying. The fact that they're not going to lay off any union folks is probably a net positive for a Donald, President Donald Trump to say, you know, this is okay with me.

7:47So there's a lot of unknowns still. And again, this is going to take a long time. So we have a deal. It has to get surface transportation board approval, which won't happen at least for a year and a half. Could this spark more railroad mergers in the U.S.? And if it goes through, what will shipping look like in five to 10 years? You said absolutely. Please elaborate. Yeah. So so the other railroads in the U.S. are Burlington Northern, which is, you know, owned by Berkshire Hathaway. They may make their own bid for Norfolk Southern or decide, you know, we're just going to go after CSX because if they do not merge, then they're going to be at a competitive disadvantage.

8:32Why would you want to send your freight across two railroads when you can send it across one? So it just it just would make sense. And if there is regulatory appetite for this kind of a transaction, you know, you could see a Berkshire Hathaway and CSX coming. And, you know, if if if their competitors were able to get a deal, there's no reason why you wouldn't get a deal done between between the two. A lot of ifs and buts and candies and nuts, but we'll see what happens. Our thanks to Lee Klaskow, Bloomberg Intelligence Senior Transport Logistics and Shipping Analyst. We move next to news in the drug and pharmaceutical space.

9:11This week, the Danish drugmaker Novo Nordisk announced that insider Mazir Mike Dustar would need to take over as the company's CEO. This came after Novo cut its full-year outlook, stating it had seen a decline of its blockbuster weight-loss drug, Wagovi. For more, guest host Isabel Lee and I were joined by Michael Shaw, a Bloomberg Intelligence Senior Pharmaceutical and Biotech Analyst. We first asked Michael to break down Novo's recent guidance. Reported guidance now is calling for 7 % sales growth, 6 % operating profit growth after adjusting for currency. And that compares to 14 % and 15 % respectively previously.

9:45Now, a lot of that is related to the U.S. market. there they're still seeing headwinds from compound and GLP one which seems to be the main driver that's affecting Wagovi growth and there's a lack of visibility here so all of that creates uncertainty for investors and also kind of questions of around not only 2025 numbers but the exit rate into 26 so there's concerns about you know mid to long-term growth given how concentrated or how reliant sorry Novo is on Wagovi for growth the other headwind is competition to a ZenPIC. So that's the GLP-1 for diabetes. And that's another key growth driver for the company.

10:26Second piece of news, new CEO appointment. So they went with an internal candidate. I think the market was perhaps expecting them to go for an external candidate. So perhaps a bit of disappointment there. But that said, he's been at the company. So this is Mike Dutster. He's been at the company since 92. He's been heading up international operations since 2016. And over that time, you know, we've seen international operations sales double to around $18 billion. So, you know, he's an internal hire. He's familiar with the company culture. I think it's a bit too early to, you know, to write him off before he's even started.

11:06Now, his focus is going to be on regat, gaining ground to Lilly in the obesity space, maintaining leadership in the diabetes space and then improving execution. And that's something that's going to be key ahead of the Kagrisema launch, as well as the launch for its oral GLP-1 in obesity, particularly given Kagrisema perhaps isn't as differentiated as we had hoped for. And then the oral GLP-1 profile perhaps trails that of Lillies. The new CEO said he's planning to review the company's cost base without setting specific targets and metrics. So could this indicate that Novo is preparing for a period of slower growth after the initial surge in demand of especially the blockbuster WeGoV drug?

11:52I mean, I think it will be hard to slash R &D, to be honest. So, I mean, and they would need to continue marketing, continue to do DTC in order to compete with Lilly. They're obviously heavily investing into CapEx at the moment, but there is probably some operating leverage in there, you know, to provide some sort of relief. I mean, the company's got a margin of about 45%, which is at the top end for large pharma. Hey, Mikey, is there any reason to believe that maybe the marketplace has been overestimating the size of this obesity drug market? I think, I mean, yeah, I think there's always a risk with an indication this size.

12:37is when you look at the market potential, in the US alone, it's 130, 140 million patients, which is the target population. I think that's one third of our population. Yeah, I mean, there is a risk that perhaps consensus did get ahead of itself. But the difficulty here is you have a huge runway of patients. There's obviously limited supply. So it's difficult to know kind of, you know, how quickly that supply can come on board. Now, you know, Nova gives guidance around, you know, the growth prospects, you know, where they think sales, et cetera, are going to go, but they keep, they don't necessarily quantify, you know, the cadence of supply and how that, how quickly that's going to come online.

13:24So that kind of makes forecasting quite difficult. And obviously they don't want to give that information because it's competitive information and they don't want, you know, Lily to know about it either. Our thanks to Michael Shaw, Bloomberg Intelligence Senior, pharma biotech analyst. Coming up, we'll discuss the importance of Samsung producing AI chips for the EV giant Tesla. You're listening to Bloomberg Intelligence on Bloomberg Radio, providing in-depth research and data on 2 ,000 companies and 130 industries. You can access Bloomberg Intelligence via B.I. Go on the terminal. I'm Nora Melinda.

13:52And I'm Paul Sweeney, and this is Bloomberg. Looking for more investing options? Meet SIBO, the exchange that pioneered options trading. With exclusive trading products like VIX and SPX options, SIBO can help you trade in any market environment. There are risks associated with SIBO company products. Review the disclosures and disclaimers at SIBO.com slash US underscore disclaimers. Quick one before you jump back in. You're listening for ways to help teams move faster, make sharper decisions, and turn scattered context into work they can use. ChatGPT for Business can help. ChatGPT for Business gives teams a shared workspace with admin controls, permissions, and access to work and codecs in ChatGPT.

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15:49You're listening to the Bloomberg Intelligence Podcast. Catch us live weekdays at 10 a.m. Eastern on Apple CarPlay and Android Auto with the Bloomberg Business App. Listen on demand wherever you get your podcasts or watch us live on YouTube. I'm Paul Sweeney. And I'm Nora Melinda filling in on Bloomberg Intelligence. We move on to earnings in the aerospace and airline industries. This week, planemaker Boeing reported a smaller than expected loss for the second quarter, along with revenue that beat analysts' expectations. Boeing also said it almost halted its cash burn last quarter. Separately, JetBlue Airways posted a smaller than expected loss in the second quarter as demand rebounded.

16:26For more, guest host Isabel Lea and I were joined by George Ferguson, Bloomberg Intelligence Senior Aerospace Defense and Airlines Analyst. We'll first ask George for his key takeaways on Boeing's earnings. The free cash flow is still a little bit negative, not much. Cash from operations positive, a little bit,$200 million I think it was roughly on. $200 million negative free cash flow,$200 million positive in cash flow I think roughly. So we're seeing an inflection point here in cash flow. So cash flow had been negative for the last six quarters before this. And I think that's just a sign of they're getting more aircraft delivered.

17:03They're going to you know, they've got a lot of inventory still. They'll pull off the shelf to build aircraft going forward to pull a bigger proportion of stuff off the shelf than they would during normal times, which should juice that cash flow up pretty well. So I think the turnaround is still underway. It looks like it's well in swing in the results we saw and the way company management commented on the end of the year. And so I think it was a pretty good results quarter for Boeing. Again, turnaround intact. How are they addressing quality and safety issues, especially when it comes to the 737 MAX program?

17:46Yeah, I mean, as Kelly Ortberg said, it's a process. I think just the sign of seeing increased deliveries is showing us that the quality improvement at Spirit has seen success. And they're talking about they're at 38, 737s a month now. Kelly O 'Pork says he's going to approach the FAA in a short period of time and work on the 42 737s a month. So again, he must have some level of confidence that his quality and his engineering is good in order to go further. It's not perfect. They've been slowed down a little bit in the certification of 737-10 and 7. They've pushed them into 2026. I think it's OK.

18:37It's not a big move. You know, we'd like to see them come faster because 737-10 is a large competitor to the Airbus A320, which is very successful and one of the reasons they saw United place a big order with Airbus. But again, I think that you can't expect this stuff to go in a straight line. And the fact that they think 2026 is when they could get certification, it doesn't tell me anything's broke. It just tells me the process is nonlinear and I think to be expected in aerospace. All right. Also, JetBlue posted a smaller than expected loss here. What's going on with JetBlue and the airline businesses these days?

19:14Because I know the last quarter, boy, these airline companies are really reticent to give any kind of guidance. Yeah, I mean, a lot of them have come back with guidance and a lot of cases lower. A lot, you know, the airline business right now is really counting on less capacity in the second half of 2025. And we'll see how that goes. Last time I looked at domestic capacity plans for 3Q, it was kind of about zero growth. I mean, I think they need to cut capacity in the marketplace. If you look at JetBlue's results, load factor fell by, I think it was around 300 basis points, down to the low 80s from mid-80s.

19:52And they held fares pretty much flat. Yields were kind of just up a little bit. So that just tells me that there's too much capacity in this market. it. They just can't fill airplanes at the right price. JetBlue has other problems like, you know, the the gear turbofan keeps them from expanding. That means costs are ballooning on them. But I don't see how they'd want to expand right now. What I see is a market that has can't fill airplanes at the price that's that's going to keep them very profitable. And so someone's got to cut. And the question is who? The full service carriers are saying, hey, we got premium to subsidize us.

20:27We don't care. The low costs are going to have to. JetBlue will cut in 3Q, but every time they cut, their costs go higher per seat. So they're in a bit of a challenging position. It does seem like the issues just compound for the companies in this space from aircraft shortages, delivery delays, pilot shortages, wage inflation, labor negotiation and so on. Are there differences in how Boeing and JetBlue addressing the issues or is it really an industry wide consensus and problem? Well, I mean, if you talk to Boeing, everybody wants an airplane, right? And they're sold out in the 737 and 787 at the end of the decade.

21:04Everybody wants the newest. And I think what needs to happen is, again, the airlines are just putting too much capacity in the marketplace, especially in the U.S., and someone has to cry uncle and say, hey, we can't take the profitability at these levels, park some airplanes, get them out of the business so they can right-size capacity. and I think nobody wants to do it. You have some competitors that are in a situation where some of them have already declared chapter 11, it's like spirit, and then refashioned themselves and got back out in the marketplace. But it's either someone's going to have to go away or the market's going to have to get negative enough in profitability that people start to park airplanes.

21:47As we get into late end of this year, 4Q and 1Q, those are weak quarters for the U.S. airline industry. If something doesn't improve, if you've got a JetBlue that's barely positive in profitability in 2Q, without a change in this market, that's a strong negative near the end of the year. People will start to cut capacity and try to boost fares. So, George, who does that? Is it one of the big three? I mean, JetBlue can't drive capacity in this industry. It's got to be one of the big three, right? Yeah. Look, I don't think it's the big three are in a game of chicken with the low cost, right? They think that they've got pole position here and that they just keep capacity and someone's going to fail on the low cost side because the low cost doesn't have this premium seating.

22:31They might be right. Right now, it looks like their profitability is hanging in there. The low cost carriers are the ones taking it on the chin. Our thanks to George Ferguson, Bloomberg Intelligence Senior Aerospace Defense and Airlines Analyst. We move to news from the EV giant Tesla. This week, we heard Samsung will make AI chips for Tesla in a$16.5 billion multi-year deal. That's according to Tesla CEO Elon Musk. Musk made the statement on X where he stated that the strategic importance of this deal is hard to overstate. For more guest hosts, John Tucker and I were joined by Craig Trudell, Bloomberg Global Auto's editor.

23:05We first asked Craig what this deal between Tesla and Samsung will do for the carmaker. Samsung is an existing supplier of these high-powered semiconductors that are used for its driving systems that it markets as full self-driving and autopilot. And contrary to those names that you cannot buy a Tesla today and have it drive itself for you, you still need to pay attention and keep your hands on the wheel and eyes on the road. But it is the case that those systems are becoming more capable and that Tesla is trying to kind of press the issue with them to the point where, you know, they're taking people out of the driver's seat and having, you know, supervisors in the passenger seat of cars in Austin, Texas, and trying to take that elsewhere as well.

23:58Uh, this, this will be, uh, interestingly, Musk announced that, uh, they will be going to a TSMC chip, uh, for, for the next generation of, of semis that they use and then go to Samsung, uh, relying on, on supply from, from this plant in Texas that, that Samsung is poised to, to open, uh, in, in, in the near future. And what near future, how, how long does it take to build a, fab plant. The cool kids say fab, right? That's what they do. Yeah, that's right. Yeah. I mean, I think, you know, this is a project on Samsung's part that's been in the works for some time, right? And so they, you know, were sort of moved actually by the CHIPS Act under the Biden administration.

24:44And Trump was critical of the CHIPS Act, you know, on the campaign trail. And yet We've seen sort of a continuation and somewhat of an embrace of it, you know, as we've seen a change in the White House. In terms of the exact timing of when exactly this new AI chip, you know, will be coming out of that Texas factory, it's not yet clear. And the companies have not said much because, you know, they, of course, agreed to, you know, some privacy here that Musk proceeded to sort of loosen up on, you know, at least over social media. Craig, do we know at this stage to what extent Elon Musk is engaged in the day-to-day, the strategic of Tesla, now that he stepped back from his Doge responsibilities?

25:36I mean, I think you can you can glean so much from his his, you know, activity on X as to what he's paying attention to. And it absolutely is the case that we're seeing him posting more about things like this deal with Samsung. And I do think that that's helpful sort of for sentiment around Tesla. And yet I would say, too, that, you know, if if there was a sort of, you know, scorecard or sort of informal scorecard that you'd be keeping track of where he's sort of devoting most of his time and attention to, I would say it's as much or more on XAI and just AI in general than it is on Tesla specifically.