Motley Fool Hidden Gems Investing - Motley Fool Money: 05.02.2014

Episode Date: May 2, 2014

The government reports surprising employment numbers. Ford and Yum name new CEOs. LinkedIn fails to connect. And Coach falls out of fashion. We discuss those stories and talk creativity with Pixar President Ed Catmull. Learn more about your ad choices. Visit megaphone.fm/adchoices

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From Fool Global Headquarters, this is Motley Fool Money. It's the Motley Fool Money Radio Show. I'm Chris Hill, and joining me in studio this week for Motley Fool One, Jason Moser. For Motley Fool Supernova, Matt Argersinger. And for million-dollar portfolio, Ron Gross. Good to see you, gents. Hey, Adam. Happy to be here. We've got a few companies with earnings results and a couple of companies with brand-new CEOs. The head of Pixar and Disney Animation, Ed Catmull, is our guest this week. And as always,

we'll give you an inside look at the stocks on our radar. But we begin with the big macro. The jobs report for April was surprising in a good way. 288,000 jobs added and the unemployment rate dropped to 6.3%. And, Ron, when you throw in some pretty strong consumer spending numbers that we saw earlier in the week, how are we looking? I like what I see. I think it's great. $288,000, best since January 2012. February and March both revised up. The Fed felt comfortable tapering another $10 billion from their stimulus program. GDP, that we saw a few days ago, definitely the weak point, only 0.1%, which on the face of it is a worrying headline. But I actually do believe that is weather-related.

I'm sorry for those of you who are sick of hearing us talk about the weather. But I do think that is the primary reason for that weak number, and I think we're already seeing a pickup. Matty, anything stand out to you? Well, people are going to look at the jobs number, which I thought was a great number. They're going to say, well, there were a lot of people that left the workforce. The quality of the jobs might not be that good. But I'm an optimist, and I agree with Ron. The numbers look really good to me. Government numbers tend to get a bad rap, but I think we really

now see a trend, I think, that the economy is much more on firmer footing. And this is just another indication. And Jason, we don't know how the numbers break out, but what we do know is that when people leave the workforce, some of them are leaving because they're retiring. They're leaving because they want to, yeah. No, I think this was, I compared this jobs report to that Seinfeld episode of Even Steven. You know how he throws $20 out the window and then finds $20 in his jacket pocket. So, I mean, there were, you know, 288,000 jobs is great. Numbers revised up for February and March. That's great. I mean, obviously, the participation rate

fell, and that's not good. Wages are stagnant, and that's not so good. But, you know, I mean, I think that things are still turning and going in the right direction. I think that this probably really, I think, gave the weather excuse for all of these companies this quarter a little bit more a stable footing there, because it really was a bad winter all the way around, and I think these numbers help bear that out. Well, you have to also remember that we're in a little bit of a different economy nowadays. I don't want to say things are different now. It's a new normal.

But there are, with the share economy, people working from home, doing part-time things, doing services for other people, there's a lot of economic activity on the labor front that doesn't get picked up in these government numbers. Agreed. Pre-recession, let's remember, we were at about a 5% unemployment rate. We've now got ourselves back down to 6.3%. We're really chipping away at it. We're not at 5% yet, but we're really making nice progress. This week, both Ford Motor and Yum! Brands named new CEOs. Ford's Chief Operating Officer Mark Fields will take over July 1st for Alan Mulally.

And Greg Creed, the head of Taco Bell, is going to take over as the head of Yum! Brands on January 1st. Jason, let's start with Ford Motor. This was the guy all along, Mark Fields. Oh, yeah. I mean, we didn't know it for a fact, but I think we all kind of knew it. You know, Mark Fields has been that guy who has really served as Alan Mulally's right-hand man to help Ford make this turnaround. It was 2006 when Mulally got there, and Ford was operating at a loss of around $15 billion, and they brought the company back up to profitability there. So, So, Fields was part of really developing that culture that Mullally helped instill there. I think this makes a lot of sense. Mark Fields is still a relatively young guy, 53 years

old. So, we can expect, I think, a number of years of service from him. It was interesting to see Mullally, Alan Mullally, want to step down a little bit early. I was reading where he ... it's possible there is a tech firm out there talking him up as possibly joining their board. We know that he is a big fan of serving in some capacity. So, while he he may be looking forward to retirement. He may not be fully retiring from this. Was I the only one surprised by the Yum! Brands news? David Novak, given all of the challenges that Yum! Brands has had over the last 18 months or so, it really seems like they've turned the corner. I figured he would want to be part of that resurgence

that I think a lot of people are expecting over the next couple of years. He's going out on top, baby. The breakfast taco had such a great reception. He's pulling a George Costanza to pull another Seinfeld reference. He's going out on top! But isn't that why this guy, Greg Creed, got tapped to be the next CEO at Yum! Brands? I mean, he is the guy who gets credit for the breakfast taco, for the Doritos Locos taco. Makes a lot of sense. I mean, they've got someone in there with some good executive experience. Well, you know, I have to say, it might be a good time to come in. Because, I mean, we know what Yum!'s comps look like, certainly, especially in China, year over year.

So, it's not going to take a lot for them to get better and see better results. Yeah, Creed's got to be looking at this and thinking, wow, this is a great opportunity. Because the work has basically already been done, right? I mean, they've tightened up their supply chain in China, and that's really a big, pivotal market for young brands with their KFC presence there, particularly. So, he just kind of has to get in there and really not screw this up, and he's going to be in pretty good shape. Shares of eBay down this week after reporting a loss in the first quarter due to a tax charge, because eBay is repatriating $9 billion in cash and will pay $3 billion in taxes on that.

Why are they doing this, Matt? This is a big question, because, I mean, if you look at other companies that have a lot of cash overseas, companies, Apple, Microsoft. Apple just issued $12 billion in debt a couple of weeks ago at an average rate of 2.9%. So, why take this big tax hit for eBay when they could probably do the same thing? Their balance sheet is in great shape. They only have about $4 billion in debt versus $10 billion in cash. Doing a big bond deal of $9 billion, for example, wouldn't burden that balance sheet too much. CEO John Donahoe gave some vague saying, well, we need financial flexibility, we're worried about our credit rating long-term,

I have to believe that this isn't something Carl Icahn would have signed off, but maybe so. I don't know. When you look at how the business is performing, though, if they're looking for ways to deploy that after taxes $6 billion, putting more money behind PayPal seems like a pretty smart bet. Way to go. That is obviously the best part of the business. Revenue was up 19% there, versus only 14% for the marketplace business. Excuse me, 10% for the marketplace business. But still, I thought overall the results were pretty good. Now, if this helps them, maybe make some acquisitions, do some buybacks. Again, the $3 billion hit, it's

lost money, but they have some more money now to work with. Twitter's first quarter results were better than expected. Their monthly active users are now coming in at 255 million. But that's lower than expected, Jason. And we're seeing the growth slowing with Twitter. Yeah, but I feel like this has always been that battle between expectations and reality. And maybe now expectations are actually coming back to reality. I mean, last year, obviously, being a tremendous year for the market in general, and with your Facebooks and LinkedIns and tech doing so well,

I think that there were some high expectations baked into Twitter from the very beginning. But, I mean, when you look at this quarter, when you look at the way the company's performing, it's doing very well. I mean, total sales up about 120% from a year ago. Timeline views are up. Ad revenue per 1,000 timeline views, that's up 96% from a year ago. it's not like these guys are messing the bed here. They're doing a great job. I think it's just the expectations were unreasonable from the get-go. And the stock price is back down to where now it seems a bit more reasonable. And let's just let them deliberately grow this business. I think Twitter's here to stay. It's embedded with a lot of their platform partners. They'll

use NBA, for example. We're watching the playoffs here. Every playoff game you see, they've got that Twitter feed going. I mean, Twitter's a big part of a lot of these real-time events. And I think they're going to continue to exploit that, learn from it, and make a lot of money from it. Yeah, Ron, when you look at the stock, it's basically been cut in half from where it was in late December. Is it now in your value territory? Well, it's certainly not in our value territory, but we've had it on our watch list for a bit of time, and we're looking at it really closely. And what we're seeing now, I think, is the battle of the momentum investor versus the long-term investor. And the second you see

growth slow, those momentum guys just dump the stock, which creates opportunities, I think, for long-term investors. Coming up, a little advice for any business. Don't make Steve Broido angry. You wouldn't like him when he's angry. This is Motley Fool Money. As always, people on the program may have interest in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. Welcome back to Motley Fool Money, Chris Hill here in studio with Jason Moser, Matt Argersinger, and Ron Gross. Shares of Coach down more than 10% this week after a third-quarter earnings report showed that

sales in North America fell 21%. And, Ron, if that's not bad enough ... Those were comp sales. 21%, yeah. Coach also warned that sales in 2014 would, and I'm quoting here, moderate further. Is that secret code for something? It's secret code for things that are not going well. And this hits close to home because it is a holding of a million-dollar portfolio, and we've been smacked around pretty good on it. Stock's down 24% over the last year, versus Michael Kors, which is up 65%. That's an 89% swing, for those of you who aren't good with the math. North America's the trouble

here. It's been deteriorating for quite some time, as companies like Michael Kors and K-Spade kind of eat their lunch. Bright Spot is international, specifically China, but we need to see the North American business firm up, new designer. Mr. Vevers has some ideas behind that, some good critically accepted new designs coming. We need to see that translate into sales, because we can't keep seeing negative results like this. As you mentioned, the designs have gotten some good reviews. When do those start rolling out, and when will we start to know if they are resonating with consumers? I think we're several months away still. Probably September, the fall, I think is what

we're looking at. First quarter revenue for 3D Systems came in higher than expected, but gross profit margins are shrinking, Matty. A lot to chew on. What stood out to you in their quarter? Well, 3D Systems is a company that makes a lot of acquisitions. Even though the top line number looked really strong, if you look at the organic revenue growth, it was 28%. That's pretty solid. But a company that, for many, a lot of 3D printers, price pretty high, then maybe that's not fast enough. And yet, the gross margin you mentioned, I was actually pleasantly surprised, though, that if you look back, not just this quarter, but

if you look back two years, the gross margin's held pretty steady. And that's really what you want to watch with 3D systems. Because in my view, and I think a lot of people think, the 3D printer is becoming a little bit more of a commodity product. There's a lot of competitors in there. Prices keep coming down for the printers. So, if they aren't able to maintain those gross margins, you'd have to really question whether or not they have a sustainable profit business model. And they do, but I mean, it's just, how profitable can it be? And gross margins are still holding pretty well. Prices are coming down on this stock, too. It's down about 45% year-to-date.

It's been tough. Is it a buy at this price, or is this, we want to wait and see one more quarter, how they're doing? I think you got, if you like 3D printing, and we certainly do in Supernova and Rule Breakers, we like the space. It's one you want to own in a basket. I walked away from CES, Consumer Electronics Show in Vegas earlier this year, and I was amazed at just the number of 3D printing companies. And at that point, I think 3D Systems was at its all-time high right at that point. And I walked away saying, you know, this is getting a little bit of a tight industry. I'm not as enthusiastic about it. But I still like it as a package

along with, say, Stratasys or X1 and some of the other ones. Shares of LinkedIn falling on Friday after its latest earnings report. Jason, first quarter sales and profit both higher than expected. What's the problem? Not a bad quarter. But yeah, just to sort of echo on something Ron was talking about there earlier. You see the momentum investors starting to flee from some of these bigger, faster-growing tech names. LinkedIn is still growing, but the growth is slowing a little bit. I think that's probably got some people a little bit spooked, and so they're taking off and looking for other stocks out there. But no, I think that LinkedIn, when you're

looking at it from a long-term perspective, they're still doing a lot of things well. Sales up 46%. I was really impressed with the premium subscription segment of the business. the smallest segment of the business, but they saw 46% growth in that segment as well, which to me, I don't know how sustainable that is. I don't know how many people pay for LinkedIn subs. Apparently, some of us do. I don't. I don't know if anyone in here does. Do not. I think probably the biggest challenge LinkedIn faces, at least in the near term, is one of engagement. Because really, while they're not looking to serve that ad market

like a Facebook does, they do need to find, they need to give us a reason to go back to the site continually and keep our profiles up to date. I think things like endorsements have basically lost all meaning at this point. They're pretty diluted. So, I think that's something they're going to have to work on there. But to put it into context here, you look at LinkedIn today selling at 42X operating cash flow. You compare that to something like Facebook, and that's at 32X. It makes sense. LinkedIn's smaller. Maybe we're looking for a little bit more growth there. But I think that long-term investors, this is actually a pretty good-looking stock at these levels.

This week, Frontier Airlines became the first airline to charge for the following items, advanced seat assignments, putting carry-on bags in overhead bins, and water, which is now going for $1.99 on Frontier Airlines flights. United Airlines became the first airline to incur the wrath of our man behind the glass, Steve Broido. First, Steve, before we get to your recent experience with United, what do you think of the Frontier Airlines charging for water and carry-on bags in the overhead bins? I think on the surface, it's unfriendly. But when you really dig down, all airlines are

charging for these things. It's just where those charges appear. So, if I'm paying $500 for a ticket on United or $200 on Spirit Airlines or whatever, or Frontier in this case, you're still paying the same amount of money. They're just charging it differently. Speaking of United, you made only your latest trip out to Las Vegas. Little trouble getting back to the office though yeah a little trouble in the form of a seven hour delay or a plane that was supposed to leave at around one left around 8 30 two hours stuck on a plane uh and multiple hour lines to talk to people they offered me a seven dollar food voucher which is nice as long as you got a voucher i know and uh the uh the closing deal was 150 credit which was generously

offered and i said you know what this isn't going to work for me so uh i have the united mileage plus credit card which i canceled i was a shareholder sold my shares and now i'm sure wow now i'm shorting united airlines wow really literally that is a guy taking action steve-o i did i contacted the company said unacceptable don't cross steve this is not cool you know um united subsequently contacted me and offered me uh an extra hundred dollars bringing the offer up to 250 dollars um i don't really know what i'm gonna do with that they've sent it to me i may accept it i may not i'm not really sure what i'm gonna do good for you steve after taping let me go out and buy you a coffee. Absolutely.

Atta baby. I'll give you a $7 voucher for coffee. Let's wrap up with the stocks on our radar this week, and Steve will hit you with a quick question. Ron, what do you got? Steve, a stock you never heard of, Lidol. LDL. $400 million market cap stock. They make filters and insulation

for auto, medical, and HVAC type industrial applications. Stock is at least 20% undervalued right here. Stock's around $24. We think it's worth at least $29. Steve? Is this the go-to company for folks that are putting insulation in vehicles?

I mean, is it Lidl, and then No. 2 is no one knows? There are international companies, foreign companies that are larger than them, but they do have major contracts with many of the OEMs. Matt Argersinger, what do you got? I'm looking at Zillow, ticker Z, of course, the online real estate company. They report earnings next week. This is a company that, I have to say, if you look at the momentum stocks, and tech stocks and internet stocks have been crushed over the last few weeks,

Zillow keeps hitting new all-time highs. It's incredible. There's also news recently about Tiger Global taking a stake. That's their major hedge fund. They bought almost a 10% stake in Zillow. They also made a $50 million investment in Redfin, which is a competitor of Zillow. So, it's an interesting company to focus on right now. I'm interested to see if the earnings match up to the stock price next week. Did you say the name of the hedge fund is Tiger Global? Tiger Global. That's a pretty strong name. Steve, question about Zillow?

It seems like Zillow is trying to disrupt real estate as we know it today. How does it stand a chance against thousands and thousands and thousands of realtors who just hate Zillow? They don't want to be disrupted. They don't want, you know what, I'm better than an online resource. So, in a way, they're not really disrupting the realtors. And the realtors, I think, even those that hate Zillow, recognize the fact that it's just got tons of eyeballs. And they're willing to pay for the leads and put their ads up no matter what. So I feel like it's just a resource to them, whether they like it or not.

I do think, yeah, it's a misconception. They're not really going after the realtor. They're a resource for the realtor. And realtors have varying thoughts on that. My wife is a realtor, so I have a little information on this front. But they are a resource if you want to capture and use them for marketing. Jason Moser, what do you got this week? Yeah, looking at MWI Veterinary Supply.

Ticker is MWIV. They distribute animal health products to vets in the U.S. and the U.K. Grown sales at 23 percent annualized over the last five years. Net income up 26 percent. I've actually spoken to the vet I take my dogs to. A lot of good things to say about them as a distributor and supplier. And so it's a stock with earnings coming up early next week. I will be keeping a close eye on it. Steve? What's the best name for a dog? Well, it's a tie between Duvall and Piper. Those are my two dogs, so I'm playing that card right there. You agree with that, Steve?

I do indeed. That sounds great. Go Piper. All right, Ron Gross, Matt Argesinger, Jason Moser. Guys, thanks for being here. Thanks, Chris. Coming up, a conversation with Pixar president Ed Catmull. We'll talk about Steve Jobs and the secrets behind Pixar's success. Don't go anywhere. You're listening to Motley Fool Money. Welcome back to Motley Fool Money. I'm Chris Hill. The highest grossing animated film of

all time is Disney's Frozen. The second highest is Pixar's Toy Story 3. And it is not a coincidence that the same man is in charge of both companies. Ed Catmull is the president of Pixar Animation and Disney Animation. And in his 40 years in the business, he has helped revolutionize not just animated films, but the movie industry writ large. It is a journey that he captures in his new book, Creativity Incorporated, Overcoming the Unseen Forces That Stand in the Way of True Inspiration. Ed, thank you so much for being here. It was my pleasure. I think for a lot of people, their first encounter with Pixar is the movie Toy Story, which came out in the mid-90s. But one of the things that you write about is that, boy, Pixar was around for a lot longer than that.

What is sort of the origin story of Pixar, and how did you get involved? Well, the origin for me was growing up in the 50s, post the Depression, post World War II, in a very safe environment. And at that time, the two iconic figures were Albert Einstein and Walt Disney, both of whom I deeply admired. But I grew up, I wanted to be an animator. And by the time I got to college, I realized I didn't even know what the path was to get there, so I switched over into physics. And it was in graduate school, where I also had a degree in computer science, that I was at the Foundation School for Computer Graphics.

And I realized that here was the time to marry art and technology. So on getting my doctorate degree, I had the goal of creating the first computer animated film. And along the way, I met some amazing people. George Lucas bought into this. He was the first person in the film industry willing to bring high technology into the film industry. John Lasseter joined us, who is a unique genius in the field of animation. and after six years at lucasfilm steve bought us out from lucasfilm or steve jobs bought us out in 1986 and at that time there was no business so we were selling hardware that we designed

while we were at lucasfilm for imaging and medical processing and and so forth uh and uh steve at the time had also bought next he had left apple um under difficult circumstances so now there was two companies uh that he owned and we started off this path of figuring out how to sell hardware while keeping alive our dream of making an animated film uh we finally got our chance when, because of a great contract we had with Disney, they decided to let us also make an animated film. So we entered into that contract in 1991, and in 1995, we came out with Toy Story. So this is now 20 years after starting down this path that we finally achieved the goal.

I was going to say, it seems like the overnight success that I think a lot of people just sort of attributed obviously took you close to 20 years to get there. You mentioned Steve Jobs. It's almost like Pixar is an afterthought when people think about Steve Jobs and his impact on the business world and everything that he did at Apple and reshaping the music industry with iTunes and the iPod and mobile phones with the iPhone. But walk me through a little bit of your experience with Steve Jobs, because he could come off as very forceful, even egotistical. What was your first meeting with him like? Well, at the first meeting, he was actually still at Apple. And while we were trying to spin out from Lucasfilm, then he disappeared from the radar. And we, of course, learned later it was because of his conflict with Apple.

And then he wanted to buy us to turn us into what later became Next. But we declined the first time. He then formed Next and came back to us and again wanted to acquire us, but this time to let us be the kind of company that we wanted to be. And the thing about Steve, which a lot of people don't realize, is that Steve went through what is classically called the hero's journey. So he'd build up this kingdom, if you will, which is Apple, and then he had a conflict and he had to leave it.

And as he formed Next and he formed Apple, he was initially the kind of person that people have in their stereotypical view of him. And he did have those characteristics when he began with. What people didn't realize is that Steve was so smart that while he was starting up both Pixar and Next, he was doing a lot of things which you could call overreaching or almost overachieving. He would get deals that were too good. In fact, they were so good, they were good in the short term but not good in the long term. But Steve was so smart that he realized that these ways of working weren't giving him the results that he wanted.

So he changed his behavior. The way he interacted with people changed. He became very empathetic. The way he delivered hard news changed. And he was always really passionate and intense. But the way he delivered the news changed. And what's interesting is that after he made this change about 15 or 20 years ago, everybody that was with him stayed with him through the rest of his life because he was a good friend of them.

And because they all stayed with him, nobody talked with the press or reporters or anybody else writing about him because they weren't going to psychoanalyze Steve while he was still alive. So this arc in Steve's life is missing from the public record. You're listening to Motley Fool Money, talking with Ed Catmull. His new book is Creativity Incorporated, Overcoming the Unseen Forces That Stand in the Way of True Inspiration. I was telling you during the break, I love this subtitle because this really is a theme that pops up repeatedly in your book and in the history of Pixar and even carrying over into Disney animation. It seems like there are so many points along the way where either a film is on the verge of collapsing or, in some cases, the company is on the verge of collapsing, where Pixar is facing financial troubles. Or in the case of some of the movies, it takes years to really figure out how to get the story right.

What is it about the culture at Pixar that enables you and your team to really work through these things? Because let's face it, Ed, some of these movies that have turned out to be phenomenal Academy Award winning films, at various points along the way, they are absolute train wrecks. Well, one of the things we learned early on is that the beginning of the movie, when we first basically mock it up, we make what are called reels. So you draw what you think is going to happen, and then you edit it together with temporary music and temporary voices. And you get a feeling for what it's going to be.

And these early versions are all terrible. As John Lasseter would say, it's like the worst thing you've ever seen. So you need to go through several iterations to figure out what works or what doesn't work. But by definition, if they're terrible, you can't judge the team by what they've produced, because I just said it was terrible. So you have to judge them by the spirit of the team, how well they're working, are they focused, do they laugh, are they intent. You put all those things together, and you protect them at that early stage. So that was one of our lessons, realizing that's how they all start,

and that the front end is different than the back end. I will say that when we were first struggling with Pixar, I watched what took place at Disney, because Disney in the 90s produced this set of four phenomenal films, which was Little Mermaid, Beauty and the Beast, Aladdin, and Lion King. And then they started to go downhill. and the question is okay what's going on why are they going downhill but i looked at other companies because i had friends in silicon valley we were close to silicon valley and a lot of my

classmates formed well-known companies but i would watch a lot of these companies rise and then fall and yet they had smart and creative people and so something was was going screwy with them So I began to formulate this question of what's going on when you're successful? There's something mysterious that's happening. Because these aren't dumb people. They're really smart people. And I would even give an example from manufacturing. Because Pixar initially had to sell a computer, so we had to figure out manufacturing.

And, of course, the role model at that time was Toyota. And I realized that figuring out the production line was a creative act. So this was an aha moment in not just seeing how do they get to be so good. It's like, well, they're actually creating it on the line and the way they give authority to people down the line. But you recall a few years ago they had a brake problem, and the management actually hid the problem from a while, or from the public. So the question was, what is going on in that company that would make them go counter to a deep cultural value?

So whatever the forces are, they're really strong, they operate all the time, and they're hidden. And the implication is that they're hidden from me, and I can't see them either. And unless we realize that that's going on, we can easily get blindsided and do some dumb things. Human nature is always at work here, and there are things that we can do to be more aware of it. We're not changing the nature, but if we're aware of the nature, then we can take an attitude which makes us adapt to the changes and the random things that life throws at us. Coming up, what do animators at Disney and Pixar think about competition like the Lego movie? More with Ed Catmull. This is Motley Fool Monday.

Welcome back to Motley Fool Money, talking with Ed Catmull. His new book is Creativity Incorporated. Disney is obviously a huge corporation with many divisions. If you just look at the studio division, it makes up, I think, less than 10% of the overall company's revenue. And yet, I think, Ed, if I were the head of merchandising for the Walt Disney Corporation, I would be calling you every other week just bugging you about what is the next thing in the pipeline so I can sell more dolls, so I can sell more T-shirts, et cetera. How much pressure do you get from other divisions within Disney? Because I have to believe that merchandising and theme parks are increasingly dependent on the creative output of Pixar and Disney animation. Well, there are three items there.

First of all, all of Disney has been very good at not telling us what to do. that is if they were trying to do things to satisfy their particular needs it would screw up the process so everybody from bob eiger through the consumer products says okay just make great movies um and that's worked really well and a lot of people assume that like they don't like something we do they'll say well disney made us do it but it's not true disney has given us the ability to make good stuff but they've also given us the ability to screw up and uh while it's always painful they accept that that's part of the process um the second thing is we um we didn't want to be an island because we uh and actually that's what happened before it was the the when

disney animation was that even when they were very successful in the 90s the needs were so large that it could be overwhelming to the studio. So basically they set up barriers and just kind of threw the film over the wall to do with it what you will. We wanted a different approach. And so what we did was we put in a person who had responsibility to both sides. That is, there's a person who is responsible to us and the marketing. And another person has responsibility between us and consumer products.

So the model that we, or the way we talked about it, is like we're an island with bridges. So we need the ownership of the local culture, but we do not want to be isolated. So we want to have bridge people to make sure that there's a good flow of communication back and forth. And when you have the right people in there, then it just works wonders on both sides. but the third element in terms of the of the toys is um when we make our films we have a span of risks uh now we want them to all be great films so that goes without saying but it's clear that if you make um something like we just announced in incredibles 2 as an example then um that the public wants it, consumer products wants it. It will be difficult to make, but Brad Bird is excited

about doing it. So while it would be difficult, it's a low-risk idea. So there's a certain range of our films which are low-risk. When you do a Cars film, then you know that we will do well with it. And so there's less risk with it. But at the same time, we've got the other end where the films would not pass the elevator test. So the idea of a rat cooking does not sound like a commercial idea or a trash compact that falls in love with a robot. Or if you make a film about an old man who floats away on a house with a stowaway, well, no matter how successful the film is, you are never going to sell a lot of toy walkers.

So what we try to do is say, okay, let's span this range because you do want to do some things that are commercially likely to succeed because we want to be healthy and we're in a business. It's important for our films to do well. But we're also a group of artists, and we want to push the boundaries. So we will pick films that are sometimes really hard to figure out. But by saying it explicitly to people, we're spanning that range from the very hard, or conceptually hard, to those that are likely to do well,

then we make ourselves financially healthy, and that allows us to continue to take risks. One of our guests in the past on the show has been Jim Sinegal, the co-founder of Costco, currently the chairman of the board and for a very long time the CEO. And one of the things we had talked about was how he would, from time to time, check out the competition. He would walk into a Walmart. He would walk into a Target and just see how they are doing business and pick up what he could and put it to use for Costco. How much do you check out the competition? I'm curious, with the success of a recent animated film like The Lego Movie, if that's something that people at Pixar or Disney Animation are studying in any way.

Well, first of all, the people in the studio are all film lovers. And the movie business is unlike a lot of other businesses in that you want a healthy ecosystem. So it's to our advantage if other companies, Fox or Warner Brothers or DreamWorks, puts out a good movie and people go and have a good experience. So if they have a good experience, they're more likely to want to go back another time and see another movie from somebody else. and we're good friends with a lot of people a lot of these different companies

so we we want them to do well but of course when our film is out there we don't want any of them to be around so we have this like uh split personality on this is like do great just don't do it near us i know you got a lot on your plate but before i let you go i have to ask when it comes to the creative process. What's been the biggest change in your thinking since you first started your career? Well, I would say the biggest recognition was that, just this belief that everybody is creative

and that people are focused on a small number of people and what they do and just people want to turn into them. And it was a realization that no, actually, problem solving is part of every element of our life. And it's how we think about the problems in our life. And it's our intentions and our freedom to think that we can make a difference that allows us to do something that makes a mark in the world. He is the president of Pixar Animation and Disney Animation. He's an Academy Award winner, and he can now add best-selling author to his resume. Ed Catmull's book is Creativity Incorporated, Overcoming the Unseen Forces That Stand in the Way of True Inspiration.

It is a great read. Ed, thanks so much for being here. Thank you, Chris. That's going to do it for this week's show. Our engineer is Steve Broido. Our producer is Matt Greer. The show is mixed by Rick Engdahl. I'm Chris Hill.

We'll see you next week.