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14:01Paul Sweeney:wherever you get your podcasts or watch us live on YouTube.

14:06Scarlet Fu:Carnival Cruise Line, the stock is up 16 % so far this year, just a bit ahead of the S &P 500. But if you look at other measures, there might be some concern. And so let's do that right now with Jody Lurie. She is Bloomberg Intelligence Credit Analyst on the outlook for this industry. And Jody, you're looking at some alternative data. And the alternative data suggests maybe there's a bit of moderation coming for Carnival and its competitors.

14:34Siddharth Philip:Yes, Scarlett. So we use Alt-D-Go and we look at the cruise lines. And one of the things we like to focus on is new versus returning cruisers. And that data is sort of indicative of how much adoptability there is in the sector. Now, if you remember, cruise lines are only two to three percent of the total leisure sector. And so it's still a relatively small percentage. But as you noted in the introduction, people book out way earlier. So you get insight into the psyche of the consumer going into next year and the following year based on how they're booking. We are seeing that returning cruisers are still booking pretty strong.

15:09Siddharth Philip:We're seeing that pre-cruise onboard spending is still strong. But I kind of question what that actual onboard spend is going to look like in 26 as the consumer feels their wallet a little bit more strained, as inflation sort of really dips into not just the lowest income consumer, but more of the middle market consumer.

15:29Ed Ludlow:Jody, as a credit analyst, would you rather see one of your cruise companies build a new ship, put a new ship in the water or pay back debt?

15:39Siddharth Philip:Would I rather see? So I don't think that that's a one or the other situation. You know, obviously, while they were working through all of their balance sheet upheaval over the past few years, paying down debt was definitely more favorable. But I think that the companies can kind of do both because what new ships do is they provide additional cash in the door through on board or through through bookings, advanced bookings. And so what that means is that they don't necessarily have to rely on the debt markets to fill those cash gaps the same way that they do when, say, they're not able to cruise.

16:15Siddharth Philip:Now, something to note about Carnival and, you know, the cruise lines in general is from a capital structure standpoint and from a credit perspective, they've actually done pretty well. And Carnival actually just finally got upgraded to investment grade this week by Fitch. So it's actually been a pretty strong tailwind for the company from the credit perspective that will likely feed into the relative value of the bonds. But in terms of that growth story, that large momentum, that might be stalling a little bit.

16:44Scarlet Fu:So cruise operators want to get a Paul Sweeney or a Lisa Matteo to become a cruiser and not just a cruiser for the first time, but to become returning cruisers. How expensive is it for them to acquire these kinds of customers?

16:58Siddharth Philip:How expensive is it for them to acquire these customers? I think it really depends. It depends on the cruise line itself. And I think what's so interesting is that we are seeing much of a differentiation in terms of the different brands to the point that we're now seeing Four Seasons and Ritz-Carlton come into the space in the form of really high-end luxury yachts. We're seeing biking continue their position as very kid unfriendly, mostly just older couples wanting to go on ships and having everything included. And Royal Caribbean is finally entering into that space. So when that happens, I'm a little curious to see who decides to go to celebrity over Viking and if that creates some sort of cannibalism in the sector.

17:44Siddharth Philip:It's more what's interesting is when you think about it in comparison to Vegas, where you see that slowdown in Vegas and the fact that a lot of the cruise lines have been structuring their new island locations as this alternative to Vegas. It has a very Vegas vibe to the swim up bar, to all the sort of activities you can do, all this sort of a la carte situations. Yeah, I mean, that's that's really where a lot of the cruise lines are spending their money. And whether customers are going to see that as a better alternative to Vegas remains to be seen. All right.

18:15Ed Ludlow:Last month, I don't know if I told you this, Judy, I was cruising the Amalfi Coast. And I did see. No, I was just we took a. But what I did see is the Ritz yacht. And it intrigued you. It was amazing. So, Jodi, talk to us about that. What would make, you know, a hotel company go into the cruise business? Because I look pretty cool with that boat.

18:41Siddharth Philip:Yeah. And they only have a few ships. We're talking three ships at the moment. And for Marriott, I think they're sort of dipping their toe in the water, no pun intended, just to kind of see the appetite. because there is a certain customer. If you talk the high, high-end customer, they don't want to be on a big ship. They don't want to be on the gigantic icon class ship. That is not their speed. Even the smaller ships are still a little bit too much for them. I mean, why should they participate with the plebs? But they don't want to have to own a yacht themselves. So it's a nice middle ground for them.

19:14Siddharth Philip:So I do think that there is a little bit of an opportunity there. I'm not so sure it's going to get super large in terms of the number of ships that they have, but it definitely creates a different situation.

19:27Scarlet Fu:Yeah, the intimacy, the exclusivity is what makes it appealing, especially to someone like Paul, who was nodding along as you were describing all that. You talked earlier about onboard spending. Talk to us about the economics of having everything included. So you pay one price and like all your needs are met versus a la carte pricing, where they're really trying to get you to spend more and splurge for different things, whether it's extra drinks or excursions that you tack on to the cruise itself.

19:54Siddharth Philip:And that, Scarlett, dips into a lot of the data that we looked at through Alt-D. And by that, I mean, is that we looked at ticket versus onboard spending data. And what we're seeing is for the brand name ships, so meaning the Royal Caribbean, the Carnival, the Norwegian, the brands, those in particular might be reducing the amount that they gain in terms of ticket price, meaning the amount that they generate in revenue, so that they can get people on the ship and then charge them an onboard spending. And onboard spending, they actually, they benefit a little bit from, in terms of cash flows, from a margin perspective, it's pretty attractive.

20:31Siddharth Philip:And anytime you can get somebody to open their wallet and spend money is attractive. Now, the big sort of risk of that is if you, you know, if you appeal to a customer that might feel a little bit more strained, they'll be fine spending the ticket price, but they might not want to spend as much on every single excursion that comes their way. They might go for the sort of base ship opportunity. That's becoming less and less attractive. The companies are making it so that that main dining hall experience isn't what you want to do. And so we might be at a little bit of an impasse when you have customers getting on the ship saying, I don't want to spend so much.

21:06Siddharth Philip:But the cruise line saying, well, if you really want the good experience, you have to spend more. So we'll see how that plays out into 26.

21:13Ed Ludlow:Stay with us. More from Bloomberg Intelligence coming up after this.

21:19Paul Sweeney:Hello, I'm Michelle Hussain. And for more than 20 years, I was at the BBC. military withdrawal from Afghanistan. But all the time I was delivering the headlines, I wanted to go further than the news of the day, to spend more time with the people shaping our world. And that's what I'm doing here on this podcast, speaking to people from Nigel Farage, to tech journalist Kara Swisher. And the tech industry is running wild. You know, they've gotten what they wanted and they've seen a huge run up in their stock prices. This will be a place where every weekend you can count on one essential conversation to help make sense of the world.

22:02Paul Sweeney:So please join me, listen and subscribe to the Michelle Hussain Show from Bloomberg Weekend, wherever you get your podcasts.

22:11Ed Ludlow:You certainly ask interesting questions.

22:17Paul Sweeney:You'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.

22:32Ed Ludlow:We're getting right smack into it, getting into the holiday shopping season. I know it's only the beginning of October, but we're starting to see it. And the question is, what's it going to be like in there, particularly for the toy part of the market? Lindsay Dutch joins us. She's Bloomberg Intelligence Consumer Hardline's senior analyst. And here we go. Toymakers face demand, uncertainty and risks ahead of holiday buying. Lindsay, talk to us about kind of the toy business as we go into this all important holiday shopping season. Hi, Paul.

23:05Scarlet Fu:Thanks for having me. I think the outlook for toys is really interesting. And I'm really excited to hear more from management teams when we get the third quarter earnings in late October. The demand picture looks very uncertain. You know, this was supposed to be an up year for toys, but tariffs and just broader economic uncertainty has really weighed on the sector. But I think the bigger issue in particular this year is, you know, because of the tariff announcements in April and lots of uncertainty, big retailers, you're talking Walmart, Target, basically held back on placing their orders, which they would normally place for holiday in the second quarter.

23:49Scarlet Fu:They did place the orders. They're receiving them in the third quarter. So we did, you know, get that back. But because of that delay and because these retailers are really looking to sell through their inventory, I think that the opportunity for reorders for some of those like hot holiday toy items is limited. And that's really going to weigh this year on those toy makers. Is there going to be a shortage of toys that people want to buy? Is that going to be a problem in 2025? I mean, that could be a possibility. If something is like really, really hot, we could go back to those days where you're like standing at the store early on a Black Friday morning to get the, you know, one of 20 that Walmart has.

24:35Scarlet Fu:There's a possibility for that because I don't really think that there's going to be a lot of reordering. I do think the toy makers are trying to prepare. They are taking on inventory because the other thing that Walmart and Target did is because of the tariffs, they would have typically imported, you know, in their contract with Mattel or Hasbro, they would have imported the product like direct to their own warehouse. But they kind of switch their plan a little bit. And it's really the toy makers that are importing it to the U.S. and sort of replenishing the Walmart or Target warehouse from like domestically.

25:12Scarlet Fu:So there's also a shift in sort of how the order is being placed. And so it just is creating a really uncertain environment in the back half. Lindsay, what about the closing of the de minimis exemption? You know, before this, a lot of Americans were buying directly from websites overseas and just getting stuff shipped to them from China, from the UK, from other parts of the world. And now that their consumers will be taxed on it, they face a tariff, that avenue might have been closed off. So that leaves them going to the traditional distributors as a result. How do you see that playing out? Yeah, I think that could have an effect.

25:49Scarlet Fu:I mean, when you think about these big toy makers, Hasbro, Mattel, even Spin Master, which is a little bit on the smaller side, you know, a lot of their product is flowing through big box national retailers. So it might not have a huge impact on on them specifically. we could see the consumer, you know, switch avenues a little bit. But Walmart, Target are still and those big national retailers are still huge and where people do go to shop for toys. I mean, we still also have Toys R Us trying to make a comeback and Macy's stores and Kohl's also being a bigger push into toys. So you could see a little bit of shift in, I guess, where the consumer shops, but we don't see that having a major impact on these companies.

26:37Ed Ludlow:And are the toy makers viewing tariffs as a one-time thing they have to deal with, or are they thinking that it might be something longer term?

26:47Scarlet Fu:They have been working to diversify supply chains for some time now. It's kind of wild to think about, but when we came into this year, Hasbro and Mattel were 40 to 50 percent of their toys manufactured in China. That was actually almost half of the broader industry average. And, you know, when you think about toys in general, upwards of 80 to 85 percent were made in China. There's been a lot of diversification, acceleration of diversification efforts happening this year. You know, redistribution of sourcing, you know, how they're sourcing U.S. sold product. There's also been changes in pricing.

27:27Scarlet Fu:And, you know, are we going to be able to sell this product in the U.S. or not? because of tariffs. So there's been a lot of change this year. We don't have disclosure on exact numbers anymore. But I think that, you know, the companies will continue to try to sort of maximize their efforts. But Hasbro and Mattel have said that tariffs will be about$100 million in 25 in terms of costs. That's even with price increases going into effect. And that that cost could be about the same or more in at least 26.

28:01Paul Sweeney:This is the Bloomberg Intelligence Podcast, available on Apple, Spotify, and anywhere else you get your podcasts. Listen live each weekday, 10 a.m. to noon Eastern on Bloomberg.com, the iHeartRadio app, TuneIn, and the Bloomberg Business app. You can also watch us live every weekday on YouTube and always on the Bloomberg Terminal.

28:28This is Special Agent Regal, Special Agent Bradley Hall. The time is approximately 11.15 a.m.

28:38Paul Sweeney:About to start consensual telephone call with Dr.

28:43Scarlet Fu:Daiwa Zhang.

28:46Paul Sweeney:China's Ministry of State Security is one of the most mysterious and powerful spy agencies in the world. But in 2017, the FBI got inside.

29:09Ed Ludlow:I've never seen that much evidence in my entire career, and I don't think we'll ever see that much evidence again.

29:15Paul Sweeney:I now have several terabytes of an MSS officer, no doubt, no question, of his life. And that's a unicorn. This is a story of the inner workings of the MSS and how one man's ambition and mistakes opened its vault of secrets. Listen to The Sixth Bureau from Bloomberg Podcasts starting on February 13th on the iHeartRadio app, Apple Podcasts, or wherever you get your podcasts.