Associated Bank Thought Leadership Podcast

WGN: We're on with Keith Butala, part of the leveraged finance group at Associated Bank. Keith, welcome.

Keith Butala: Steve, thanks for having me. I appreciate it.

WGN: I want to focus our conversation a little bit on the Federal Reserve chairman speaking, talking about inflation and it being too high still, although not offering any forward guidance. He kind of sounds like the Fed might be thinking about raising interest rates again. What is the impact of that?

KB: Yeah, I think as we consider the way our customers look at interest rates, it's a very, very important piece of their every day—the way they're doing business, the way that they're impacting their customers, but also their suppliers. And for a lot of them, this is a key piece of their gross profit margin, in the way that they look at the profitability of their business, and how they're going to be able to continue to move forward depending on if it goes up or down.

WGN: So a higher interest rate would not be good for local businesses.

KB: I think for those who aren't at the absolute top tier of the businesses that can kind of leverage their pricing power and their ability to push either suppliers or their demand, it is definitely an issue that they need to focus on.

WGN: Not everybody on the Federal Reserve believes that we're in a trouble zone, though. I know there was like a dueling conversation last week or maybe the week before—the Chicago Fed president talking about the inflation being too high. But one of the other Fed folks talking about price pressures easing. Are they seeing two different worlds out there? What are you seeing?

KB: Yeah, you know, I thought Goolsbee made a very interesting point where he said while inflation is a piece of the consideration, the workforce is also a big piece of this. And I don't think they're seeing different things, but they're seeing the different impact, because when we talk about inflation, there are a lot of drivers. And the biggest driver right now that I think is impacting everyone is the energy inflation, right? So we talked about household inflation and goods inflation. But the piece of the energy is really dynamic right now, as we talk about the war in Iran and the impact that we have throughout the economy.

WGN: The Fed president of New York, John Williams, talked about how inflation readings are starting to trend a little bit lower. I think he was sort of seeing some of what we've now seen in not only consumer confidence, but just at the price at the pump. Just what we're seeing in terms of gas prices dropping, some of those inflation pressures are easing.

KB: Yeah. So I think the price at the pump is a big indicator. But really, when we think of the long-range stretch, it's beyond that. It's jet fuel, it's price at the pump, it's how the international community can help supplement some of either the crude oil or how we operate and the forward-looking consideration because it's going to take a long time to fall back. And I think a lot of people, including Associated Bank representatives like Doug McClure, have talked about how this is going to be a delayed response as it starts falling below levels of a pre-Iran war.

WGN: Well, let's focus a little bit on price pressures, because this is something that our local companies have been dealing with. They're trying to, you know, figure out what’s the sweet spot while trying to make up some of those inflationary problems. Talk to us a little bit about this and sort of the strategy that goes into pricing by some of these companies.

KB: Yeah. So when I've talked to business leaders about pricing, there's really been three elements here and it's can you pass on the price? So that's going to impact your consumer specialty or retail-based. Can you cut costs? But we're going to start talking about how does it impact your long-term consideration, and also how can you more make your business more dynamic or efficient? There's a lot of tools that we can understand to help make that, but most of them involve an investment. And when we talk about rising prices, investment is a really difficult conversation because that's often incumbent on ownership to either put in capital or to find more bank capital or debt from that perspective.

WGN: And when you have small companies up against big companies, too, there's sort of a big give and take there, isn't there?

KB: Yeah, very much so. So I think the easiest way for me to understand working with lower middle market companies is, if you are a small company and you want to pass on pressure prices in your business to business, going to John Deere is a lot harder than going to a consumer and saying, I want you to pay 20 more cents for this good, this lunch. It's saying I want to change my contract, my forward looking, my lifeblood, that is from a concentration of all of my business or a majority of my business going to a single large entity. So it's harder to find the value when you're smaller, which means you need to be more dynamic and think of things like, can we be more efficient with workstations? Can we use AI or other tools to implement a streamlined process and make it easier for us to realize the profit that we were before the inflationary pressures? And then we can maybe keep those if the inflation comes down.

WGN: Talk to us a little bit about what some of the companies are doing, what you're seeing some of these strategies are—food producers, for example.

KB: Yeah. So this is a really interesting piece for me, where I think if you look at club channels and you look at retail channels and you look at convenience channels—and a lot of the food producers that we work with are very much focused on gaining a share of the consumer's wallet. So if the consumer has less money in an inflationary environment, how are you going to capture that? And I think convenience is a big piece, where you think protein is hot right now and convenience is a big piece right now, and they'll say, let's create smaller, higher-priced, higher-margin elements that you can grab at the counter. Rather than paying $20 for a full plate, you can pay $6 for something that you can pick up, go feel good about, and feel energized throughout your day.

WGN: But the budget might not represent that, right? When you think about it later, you're going, wait, did I just pay $7 for one of these small little helpings of food?

KB: Yeah. From a personal perspective, I absolutely feel that. And I think part of it is, how can I forward plan? You know, this is the personal consumer's thought process similar to a business of, am I thinking about handling today, tomorrow, next week, or am I thinking about handling next month, next quarter, next year? And it's a difficult process as we look through all of these dynamic pricing environments.

WGN: It can be exhausting in some circles, right? Talk to us about the manufacturing side of that. We talked about the food producers. But what about the manufacturers?

KB: Yeah, so the manufacturers, I think the most interesting piece that is kind of prevalent in today's society is AI. And how are you using that? Because I work mostly with small manufacturers and they are limited on budget, FTE and ability to analyze data. And really what we're talking about here is can you take key KPIs and use those in order to make your business more efficient, realize that margin and push through cost pressures throughout your business rather than on one single item? And for me, it's, can you use an AI system to evaluate tens of thousands of lines of data rather than rely on a single person to review a couple hundred? And I think those pieces are helping those businesses work through. But also workstations, are they clean? Are they clear? Are they efficient? Have you been able to see your bottlenecks? Those are big pieces that we see people trying to push and help realize some of the inflationary pressures.

WGN: We're going to talk about a couple of other initials here, and I want to make sure our listeners know what we're talking about. You mentioned FTE. What does that mean?

KB: Yeah, so it's full-time employees. So how many employees are on the payroll on an everyday basis.

WGN: All right. And then we'll talk now about something called FP&A.

KB: So, finance planning and accounting.

WGN: Okay. Okay. So AI is helping companies with that.

KB: Yeah. So if you think about the overall cost and spend ability of a small business, not everybody can hire a high-powered CFO that has a, you know, a big-four background in the accounting departments. But in order to help supplement that, maybe you have a strong controller who can then use some of the AI elements in order to fulfill roles of data analytics and review those and make it a little easier to understand and help your CEO make the decisions that they wouldn't be able to previously make without more FTE, which is more cost, more benefits and really can be difficult to sustain in this inflationary environment.

WGN: Did I read recently—and sorry to catch you off guard off with this question—but Ford Motor Company hired back a lot of human engineers because they weren't happy with the way AI was working for the company. And so now they want the engineers to train the AI. Yeah, yeah. So it's not always been a smooth transition, has it?

KB: No, not at all. And I think that's a great example of the idea of AI is amazing, I think, for a lot of people, and what it could do, but we have to train them, right? And I think that's a human element, especially with things like Ford Motor Company, with art, right? There's a lot of people find beauty in the old Corvettes, and they don't like some of the changes of the new cars. And to me, having an AI program better understand what people want is good, but really that's always going to be what's in the heart of how engineers, how people are, how the actual producers are creating it and finding out what the public wants.

WGN: Yeah, we talking about the employment aspect of all of this. Employment, at least according to ADP, which was out earlier this week—we'll get a jobs government jobs report too—show a little bit of a slowdown in hiring, but still pretty steady. Talk to us a little about how that's impacting businesses.

KB: Yeah, I found that a really interesting article largely because most of the business owners that I'm speaking with right now are having conversations similar to what we had post-COVID, where it was the active workforce that they're looking to help create, you know, boxes, they're manufacturing metal components, they're doing the hard labor, the blue collar labor. They haven't been able to find as many people. There was a lull post-COVID where unemployment was going up, and it was easier to find employees. And now we're almost back to the demand not being the issue, really, to be able to put the throughput. And part of that throughput is finding people who want to be an active, everyday employee. You know, and that's anecdotal, but I think hearing that the article that you referenced versus what we hear from a day-to-day perspective, it gives me pause to think, where are we in that sense.

WGN: The markets have been doing pretty well. I saw these headlines. The Nasdaq had its best quarter since June 20th. The S&P also had a pretty good quarter. If you look at the stock market, you don't see any problems, do you?

KB: That's right. And I think a lot of the stock market—understanding that I'm not a professional in that arena—but is driven by a few sectors and a lot of the sectors aren't necessarily ones like data centers and AI that are pushing the traditional American worker, right? I'm not in AI, you're not in AI, but we're still impacted by it every day. And I think there's a lot of infrastructure potential there that can create jobs. But I would pause to understand how that's going to be realized throughout the total economy over time.

WGN: Are you one of the people that's concerned about a potential AI bubble? Are we spending too much on AI? Has there been too much investment and attention to AI?

KB: Yeah, you know, I think to me it's a real consideration of what can it be? You know, again, to your Ford Motor Company example, what if that does permanently have a place within those engineering communities? I don't want it to replace people. And I think the bubble is suggesting too much investment, but what does it mean to have a true bubble in this perspective if it's an unlimited potential? I wish I could speak more thoughtfully on the topic, but I think from that perspective, I'll leave it to the pros.

WGN: Right. I always ask our thought leaders if they have any predictions, and what they're seeing in their crystal ball. And here we are at the middle of the year. What is the rest of the year look like?

KB: Yeah, so I like the idea of a strong American economy. If we can get past some of these inflationary pressures and hopefully end the war with Iran, there's a lot of positive indicators. And we talk about the Fed saying maybe we raise rates, but maybe we keep them steady. We're looking for a 2%. We're looking to keep reducing unemployment. It feels like there are a lot of positive momentum factors here. And from the businesses we're talking about, they're excited. I mean, demand is the trickiest part. And if they have the demand, the throughputs got to come on the back end in order to realize all the potential that the American economy can have.

WGN: Keith, great conversation. How can people get a hold of you and have a one on one if they want?

KB: Yeah, you can call me anytime. I'm at 312-544-4520. But you can also email me at Keith.Butala@AssociatedBank.com.