← Grant's Current Yield Podcast
Grant's Current Yield Podcast
INTERNATIONAL VALUE MYSTERIES
00:35:15
With special guest David Samra, managing director of Artisan Partners.
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- [00:00]
A
Foreign. This is Current Neil Grant's interest rate observer of the Air. I am Jim Grant, and with me, as always, is the great deputy editor of Grants, Evan Lorenz. And we have a new sound technician today, and his name is Harrison Waddill, who does everything else in this office except conduct sound engineering. So this is an adventure for you listeners and for us speakers, but thank you, Harrison. And we have a guest, as we are wont to do, and our guest name is David Samra, and he is one heck of an investor. He's a managing director at Artisan Partners and a founding partner of the International Value Team. And a great favorite of Evan's is the entire Artisan Partner enterprise. Right.
- [00:50]
B
I've been impressed by their analytic team.
- [00:52]
A
Yeah. And by their results. So we'll get around to David in one moment. Hey, Evan. I have noted a couple of things in the past few days. One, I've noted the New York Times is putting or thinking about putting its podcast behind a paywall. It's good news, right? Yeah.
- [01:04]
B
So you're saying we're going to be safe?
- [01:08]
A
Yeah. Well, ladies and gentlemen, we are not going to do that as of now because we don't care about money that much, do we? I mean, a little, but it's nice.
- [01:18]
B
To have a little spending money occasionally.
- [01:19]
A
But, oh, if money is on the agenda, as it sometimes, indeed almost always is at Grants, we ought to remind our listeners about the upcoming fall Grants Conference, 2024 conference. I guess this is our 40th. Right, 40th annual grants conference. It's Tuesday, October 1st, at the Plaza Hotel. And speakers include Boaz Weinstein and Sean Filer and Bob Robati and Michael Green and Stan Druckenmiller and William A. Ackman. I've got Bill Ackman's title. I think I might have mentioned this once or twice or a half dozen times around. The office of title is Harvard Corporation. Buy, Sell or hold. Yeah, I'm a seller. I'm a seller at zero. No, I speak, ladies and gentlemen, not as a critic of Harvard, but as a proud alumnus of Indiana University. So I want to get that. So we are going to hear from David in just one moment. But the meantime, Evan, I have. I have a new gimmick. And the new gimmick is we are going to play a little bit of Jeopardy. And so I'll be Ken Jennings just for a few minutes intermittently during this podcast. And so let's see, the category is A world moguls for $200. Right. Okay. And the first Clue is kicked out of high school and was three times successfully, successively unsuccessful at getting into a crummy college.
- [02:49]
B
I think I need another clue for that one.
- [02:50]
A
Yeah, well, they'll be coming up. And David, you have to withhold because you're going to get this so soon.
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B
Do I have to answer in the form of a question?
- [02:59]
A
Yes, Otherwise I'd know. 200 bucks. So, David, tell us about this thing about buying low and selling high. How do you do it?
- [03:10]
C
You, you do it very carefully. It's driven mainly through having some well researched conviction in a number. It's driven by spending an enormous amount of time studying businesses trying to estimate what the cash flows are coming out of that business might look like in the future. And we try to narrow that down to a figure that has, it's going to have some sort of volatility around it. But the more research that we do, we can narrow that uncertainty.
- [03:57]
A
So already this is turning into a controversial proposition because I have read in places that markets are so efficient that you add about nothing by the diligence of visiting companies, studying data, et cetera, et cetera. And what say you to that? The evidence for it, of course, is the titanic success of index funds.
- [04:17]
C
Yeah, well, the process is iterative, right? And so part of it is estimating this cash flow. But then the question is, what is that cash flow worth? And that's where the magic of cumulative knowledge build and experience and having some sort of anchor comes in. And it was interesting listening to some other value investors talk about the same thing. But when I first started in this business, people would say, oh, you know, the PE ratio for this business should be xyz. And I would say, well, why, why should the PE ratio? Well, you know, historically it's traded like this or it's moved around like that. And fortunately for me, early on in my career, before I was an investor, I had spent time as not many people know this, but as a certified financial planner and whenever we were thinking about an individual's investments, we would take a look at the expected return from those investments relative to the risk free rate. And that's where your anchor comes from. And as long as you have an understanding about what, what type of business this is, is it an above average business, is it a below average business, is it an average business and what sort of return you expect out of that average business?
- [05:43]
A
The risk free rate.
- [05:45]
C
The risk free rate.
- [05:46]
A
Does that pertain to treasuries trading at 60 cents on the dollar?
- [05:49]
C
It pertains to, you know, to some Extent. It's a guess, right. And so we'll look at the average over, you know, I used to do it over 20 years and then it fell down to this ridiculous last decade. And we look at it over 30 years and you know, it's because I really want to stick to that 6% number which I view as reasonable and as a non US investor it gets somewhat interest.
- [06:14]
A
Speaking of 20 years or 22 years. 22 years, I think, is the length of time that the Artisan International Value Fund has been in operation and in, in support of the proposition that it actually does add something to the value of an investment by knowing what it's about. Over the course of time, your fund, David, has returned about 11.5% per annum as opposed to the index competition, the abstract index competition, which is about seven and a half or less. So that's a pretty wide gap. And that seems to speak to something special happening when you knock on the door of a company that doesn't happen to speak English. So what is the most mystifying encounter you've had abroad with a company that was the most foreign and yet the most repaying?
- [07:03]
C
Well, there are a lot of mysteries outside the United States. There are a lot of mysteries in stock markets in general and a lot of it has to comes down to the way investors behave around companies. So, you know, you for example, will show up in India and recognize the fact that the whole country needs to be painted. And then you'll look at the, you know, the companies that are selling paint and it's trading at 55 or 60 times earnings, which seems to over index on, you know, what could possibly happen with this business? The things that mystify us the most, that are most beneficial is when the opposite happens. When you come across a company so in for today, it might be Alibaba or Samsung Electronics or something like that, where the quality of the business is apparent and obvious and easy to see. And the valuation of the business is apparent and obvious and easy to see. The size, the scale, the return on capital, the capital allocation behavior of the management team are all constructive. Yet the equity will persist at five times earnings. That is the greatest mystery to us, but one that we love.
- [08:26]
B
Value investing inside the United States has struggled for more than a decade. It's underperformed the market overall. You have not struggled for more than two decades. What is it about value investing outside of the United States that is a more attractive proposition? Is it the markets are less efficient? How are you able to just outperform so much?
- [08:45]
C
Well, Cut me off if my answer gets too long here. But first of all, non US Markets are less liquid. Second, most of the capital invested in most of the markets outside the United States comes from the United States. Third, countries outside the United States aren't as good as the United States. They grow slower. The return on capital is lower. Spreads, just trading spreads are wider in many of these markets. And so those markets that companies grow slower, we don't have big giant platform growth companies outside. You have a few of them. TSMC might be one or LVMH or l', Oreal, but there are very few of them. And so the markets outside the United States lend themselves to value investing. And as a result, it's one, hard to be a growth stock investor outside the United States. And two, for people like us, you find because of the complexity, securities oftentimes will get mispriced. And if you are patient and you have an ability to recognize the difference between a good business and a bad business, and when a good business is mispriced, which is kind of our stock and trade kind of the way that we approach value investing, it can be an environment that is very fruitful.
- [10:11]
A
So Evan, our mystery mogul, graduated as was his want as a young man, like three years late from college. Right. And he applied for an entry level job at KFC. And there were 24 of them who applied. Guess who didn't get hired.
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B
Is it our mystery guy?
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A
That guy?
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B
Oh, who is our mystery guy?
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A
Well, that's the question you have to communicate.
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B
Okay, so David, do you have a guess?
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C
I don't have a guess, although I did work at kfc.
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A
They hired you?
- [10:42]
C
They hired me. I was one of the 23.
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A
I see reading your very well written letters, letters to your investors, I see grounds for dismissing you from the union of professional fund managers. For example, you say that it's important to report our mistakes. Now, that is a breach of the etiquette of your tribe. So what do you have to say for yourself?
- [11:10]
C
Well, you know, you try to learn from the dumb things that you do over the years. You know, the stock market and the information flow that we get as money managers can be very seductive in many different ways. And, and by recognizing the things that you do in error, hopefully those seductions, the next time they show up can be ignored and you move on. So we like to report those to our shareholders, especially during time periods when our investment performance looks good. So people remember, hey, there will be time periods when investment performance doesn't look so good because these guys they do occasionally make mistakes, but really what we're trying to do is we're trying to learn from those. And that message not only goes out to my shareholders, but that message also goes out shaming the people, including myself and the analysts that were my partners in crime when we decided to select that security, that, hey, not only am I stupid because I allowed this to happen, but you've made a bunch of errors too. And so hopefully everybody learns from those mistakes.
- [12:34]
A
Well, if they're still on the payroll, I guess they would. So something you said here in the annual report for 2023, I thought, struck me as a very compellingly easy and helpfully simple way of analyzing the environment in which we all do business or write about doing of business. So you say that you're talking about your top holdings. And in aggregate, the revenue and operating profit from these businesses in 2023 was looking at to come in at a little over 385 billion and 44 billion. That's revenue and operating profit. 385 billion for revenue and 44 billion for operating profit. That's 2023. And compare that with the final figures for 2022. And both of them were significantly higher. Revenue was four hundred and fifteen and operating profit was seventy, which was the great standout year for equity performance. And you go on to note this is not your preferred way of having things play out. I guess you didn't send the money back. But did it make you more cautious about 2024?
- [13:49]
C
It didn't. You know, we, and I think probably most people that observe those companies knew that was coming by the time that we entered that year. You know, you could see the fact that the companies where the earnings went backwards were suffering from some sort of headwind in their business. And of course, those headwinds sent the share price down well ahead of the onset of that year, which is what creates the opportunity. Of course, one of the greatest competitive advantages that a value investor has is patience. Whereas most of the stock market is so focused on the immediate.
- [14:35]
A
Patience is something you earn by the nature of the investors who invest with you. No.
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C
And that's also a complicated topic, especially when you manage a mutual fund where people can come and go as they please.
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A
And are they coming or going today?
- [14:54]
C
Some are coming and some are going. And so it's roughly steady, which again, you know, we're closed to new investors and have been closed for almost more than half, almost 60% of the time period that since we've been launched. And so we very carefully try to craft our dialogue to our shareholders and let them know that, especially now, managing so much money, you have a billion dollars or a billion and a half dollars in a single security you can't get out in a day. And your investors need to know that the duration over which you're making these investments needs to match the duration over which they're investing, because otherwise we have a mismatch and we have a liquidity issue. And so it's very, very complicated to find the right people who understand what you do. It helps when your performance is good, David.
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B
So the US makes up 4% of the world's population, but American stocks account for 64% of the MSCI All Worlds Index. And I see from your letters that you mostly invest in international stocks, but I see the odd US Stock in there, too, like Arch Capital Group. I'd love if you wouldn't mind telling me, how do valuations in the US look like to the rest of the world and the rest of the world.
- [16:07]
C
To the US well, just to clarify, Arch Capital's domiciled in Bermuda, and, you know, we've had explaining to do to people that Bermuda is not the United States. It just happens to trade.
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A
It's like Canada in that respect, right?
- [16:21]
C
Yes, that's right. It's like Canada. And it's also, you know, people confuse Alibaba, for example, because it mostly trades in its adr and sometimes compliance will categorize it as an American company. But the valuations outside the United States have always been, throughout my career, more or less lower than in aggregate. Right. The aggregates are an inaccurate way. If all companies, let me use an extreme example. If all companies outside the United States were General Motors and all companies inside the United States were Google, would you ever expect them to trade at the same valuations if they did? There's a massive inefficiency in one place versus another, and that encapsulates the vast majority of the reasons why. Over time, you will generally see valuations in the United States higher than what you will see outside the United States. The quality of the businesses are lower. The rate at which they grow is slower. Socialist structures are stronger outside the United States than they are inside the United countries are smaller. The US have 320 million rich people all speaking one language and have a robust legal system with a venture capital and a private equity community that's unrivaled anywhere else in the world. It was growing very nicely in China, but that was stopped, hopefully temporarily, a few years ago.
- [17:52]
A
Okay, Dave, this is your chance on Jeopardy at This question, mystery mogul. I'm going to give you not one, but two. But I might even get three clues. Okay. Our mystery mogul applied to and was rejected from the Harvard business school for 10 consecutive reporting opportunities. He is a member of the Chinese Communist Party. And he appeared wonderment of the world doing a Michael Jackson riff and looks so strange. And then he disappeared from sight in 2020 for like three or four fiscal quarters.
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C
And would he have happened to put $50 million into his own company very recently?
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A
Who is that?
- [18:31]
C
Is Jack Ma. Who is Jack Ma?
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A
I thought this contestant would never get the answer. So tell us about Alibaba, which is trading like five times earnings, right?
- [18:41]
C
It is, it is. And Alibaba is very simply a great business. It is of course the leading e commerce company in China, similar to Amazon. They sell some products out of their own inventory. But Alibaba is different than Amazon in that it mostly operates as a marketplace for other retailers or what's commonly referred to as 3P. And that makes it effectively a better business. You don't have to hold inventory and that requires capital and you're just collecting a fee. It's also a business that's closer to Google than it is to Amazon because it basically operates as a search engine. It's a big advertising machine effectively that has some of the commerce driven aspects and logistics associated with a retailer. It's a big company. It has a market cap of $180 billion. So it's not hiding anywhere. It is an extremely well capitalized company, about half of the market cap they have, and it's extraordinary in cash and securities. So the enterprise value is $90 billion and the company generates, you know, last year a little over $15 billion of operating profit, which included an extremely profitable core business. And then they have some other businesses that they started up like other tech companies tend to do, and those are losing money right now, but growing. And if you just download their most recent set of financial statements and you are provided with the numbers for the loss making businesses and you back those out and they're not that significant. You can see that the stock trades at five times earnings, which is extraordinary for such a large company. Now there are very good reasons for that. Not that the company is shrinking dramatically, but it has a lot of competition and it's not really growing that quickly. There are parts of the business that are growing. It has a big international e commerce business that's growing. You also get some other things for free. You get one of the largest cloud companies in China that you're not paying for. So, you know, when you, when you, when you're small, you have a small pool of capital that you're investing. And we had many of these when we were running small amounts of money. We could go to South Korea or we could go to places in Italy, and we could find these little companies that were terribly mispriced and we would invest in them, and if we got everything right, it would work out really well. But as you get larger and larger and larger, because the markets are so quote, unquote efficient, it's extremely difficult to find what is observably an extremely good business that generates a lot of cash, that has no financial risk, that has very successful leadership with a proven track record of creating value. And they're buying back stocks, meaningful amounts of stock at 5 times earnings, and they know what they're doing. And the insiders are putting money in and, you know, you try to click all those items. You know, you want a, a good business with a strong balance sheet and a management team with a track record of creating value, and you want to buy it in a seriously undervalued price. And that's a needle and a haystack.
- [22:39]
A
And a company that's situated in communist.
- [22:41]
C
China, well, you know, everything comes with a risk.
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A
I read this right here and in the Artists and International Value Fund Report, Investopedia defines a centrally planned economy. And it didn't sound good as I read.
- [22:55]
C
Well, you want to report to your shareholders, you know, what exactly the risks are.
- [23:02]
B
A friend of our publication says you can have good news or good prices, but not both. And China certainly seems to not have a lot of good news. Their economic model of fixed asset investment, fueled by a lot of debt, seems to be crashing and people are worried about problems. Do you tend to run towards countries that have headline issues like that to try to find babies that are thrown out with bathwater?
- [23:21]
C
You know, we tend to run towards all sorts of problems, whether they be country based or company based. You know, it is, you know, as Jim mentioned earlier, finding a security that is mispriced in a market that has so much money and so many institutional investors chasing after it is not easy. But the reality is human psychology is human psychology. And people tend to like good news and dislike bad news. And I'm wired to be much more interested in bad news than good news. And I've spent the better part of the last 22 years trying to find people who feel similarly about bad news. And, you know, bad news is a living. Yeah, bad news Bad news in the stock market is extraordinary. It's an extraordinary gift.
- [24:25]
A
It's a precious gift that is all too scarce, if you ask me, at.
- [24:29]
B
Least in the 50 states.
- [24:30]
A
I love this quote that you quoted from Phil Kore, this great gentleman of yesteryear who wrote a book called the Art of Speculation. And the quote says, quote, typically a major market movement runs so far that the amateur in speculation forgets that an opposite trend has ever been known. More than a slight rise in money rates is necessary to kill a real bull market. Close quote. And, Guy, you saw that in the bond market, certainly, right? I mean, 40 years of persistently falling interest rates and they finally got to zero.
- [25:02]
C
Yeah, it's interesting. And the amateur investor I think we can define a little bit differently today because there's been new entrants into this industry over the last decade where we've been operating with extremely low interest rates, not only on a nominal level, but on a real level. They've been negative over that time period. And it's created extraordinary behavior on the part of most investors, much of which, to my surprise, and maybe not to your surprise, but to my surprise, we haven't seen much in terms of repercussions since rates have gone up, and they've gone up a lot.
- [25:43]
A
Don't get me started.
- [25:45]
B
How many times have you seen a market in 2021 go from a full bubble level to a full correction to just being fully priced to, again, extraordinarily overvalued? It always seems like corrections always overshoot on either end, but this one didn't.
- [26:00]
C
The excitement around AI, if I can categorize this as an AI market.
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A
Yeah, I wouldn't linger too long on that topic in this room, David.
- [26:14]
C
Well, again, I think that human psychology is what we're dealing with here in the stock market, and that is what creates the opportunity. And whatever turns out to be false in the current reality will potentially result in some level of opportunities. One of our earliest investments was in a company called amdocs. And I don't know if you've ever come across this company. It's an Israeli company. It was one of these that was listed in the United States that my compliance group told me was an American company. And they were casualty of the tech bubble when it had burst. Effectively, what they did is they ran billing software for telecommunications companies. One of the things that a telecommunication company is not going to do is stop sending out its bills. And it was a net cash business, and it was trading at 6 times earnings. Not so different than where Alibaba is trading today and you know, it's growth. You know, the AT&T was a very large customer. It had the somewhat concentrated customer base and its business went backwards for a little, little while and then you know, as they very well positioned company and as they started to take on new customers and it started to grow. It went from, you know, six times earnings up to 20 times earnings. And that's what we love. We love to find a good business because a good business has an opportunity to go from a very low multiple to one that's more reflective of a better than average business multiple. And that's, that's the Samra juice, so to speak. That's what we recognized very early on. Not that we're looking to buy a good business at a fair price. There's a lot of value investors today that are running around talking about that and doing that. No, we want to find a very good business at a significantly undervalued price. And that's way harder to do than finding a good business.
- [28:34]
A
What do you do when you don't find them? What's the most cash you have ever had had in your portfolio?
- [28:40]
C
So this is also part of human psychology. We went through a big run and very good investment performance post the financial crisis. And I went back to my customers who had signed on to a limit for cash at 10% when we started way back in 2002 and I got them to agree to increase that limit to 15. And so we can go to 15 and hold cash at that level. When the environment.
- [29:12]
A
Why a limit at all?
- [29:14]
C
There are business reality. You know, I was an analyst when we started. You know, I put all my own money in the fund and but you know, I work for somebody and somebody wanted to have a business and had parameters and we got in a room and we arm wrestled around those parameters of what I would like to do as an investor and what they would like to have as a business. And that's where we came out as to what was acceptable. And we work on these terms over time, but today we live with a 15% limit.
- [29:44]
A
Well, shouldn't there be a codicil that if treasury bill rates are in excess of 4.9% cashes could be a maximum of 95%. David, tell us the parable of the wall you built on sand on a rising slope.
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C
Well, I. Sometimes I tend to do things on a whim and luckily I'm married.
- [30:11]
A
Like investing, right?
- [30:12]
C
Not in investing, just wrong things. Personal things. Personal things. And well, I have a house in San Francisco. And it's built on sand and I wanted to. And it's on a hill. And I wanted to take what was a very ugly looking backyard when I bought the house and several years later try to turn it into a nice patio. And I learned that building on sand is complicated because it's unstable, but building on sand on a hill is even more unstable. And so with a lot of complexity and a lot of cost, we ended up with 14 steel beams, several of which were 40ft long, in order to execute on this quite expensive patio, which is very nice. It has a view of the Golden Gate Bridge.
- [31:10]
A
And I'm sure it's worth every million dollars.
- [31:13]
C
Exactly. And, well, I, I wrote about a little bit about this in my shareholder letter because, you know, if you, then if I tried to sell my home and I've, you know, I've tried to get a value on it on several occasions because San Francisco tends to get crazy. And you show the house square footage to a realtor, you know, they'll, they'll give you a number based on the amount of square footage that you have. And I say, no, no, no, no, no, no, you don't understand. But all these other houses, they don't have steel beams. Mine has steel beams in a beautiful patio. And they just, you know, they, they look at you with a blank stare. And, and, and, and what I was. The point that I was trying to make and I was never able to deliver this message to my shareholders because I had Covid that year was, you know, in this time period where, where people use the word de. Globalizing. But I think just we're sort of moving things around because of practical realities. You know, there are a lot of things that we don't see. We don't see semiconductors really. You know, we have a lot of electronic products, but we don't, we don't see them. We don't see PPI until we need ppi. And we don't look at where a lot of the products that we use are manufactured. And if we have this goal and objective, you know, to move all of this manufacturing out of its most efficient geography to, I don't know where, Mexico or somewhere in Latin America or India or Indonesia or Vietnam. There are costs associated with that. And who's going to pay for those costs? Who's going to want to pay for those costs? And that will lead to inflation. And interestingly was, that was several years ago when I wrote that little missive. We're seeing some of that now. We're seeing some of the incremental costs associated with the changes that are being made across the globe. And I haven't done the math to see exactly what the impact might be to inflation. Perhaps here at Grant, you've had a number cruncher who's looked at this, but the reality is sometimes when you're moving around things that people can't see, it's very, very hard to get paid for that. And the costs will show up in political uncertainty or higher interest rates, which end up costing people money in many different ways.
- [33:56]
A
So for 40 foot steel beams aren't free.
- [33:59]
C
They are not free. And nor is the giant crane required to deliver those in an urban environment.
- [34:08]
A
Well, David, thank you for being with us. This is David Sommer. As you have been hearing, ladies and gentlemen, the winner of Grant's Jeopardy and the astute manager of the Artisan International Value. I feel a little bit, David, as if we buried the lead in disappointing fashion by having it kind of seep out that you're closed to new investment. So. So could you just open for the.
- [34:30]
C
Listeners of this podcast if they would send an email on the amount they would like to invest and if it's small enough, perhaps.
- [34:39]
A
No. Let us qualify this to all attendees at the 2024 grants conference. Right. If they could do it, that would be good. Right.
- [34:49]
C
All right, thank you very much.
- [34:50]
A
Thanks for being with us.
- [34:51]
C
It's been my pleasure.
- [34:51]
A
Until next time, ladies and gentlemen, this is Jim Grant. On behalf of current yield Grants, interest rate observer of the air.