Sequoia Fund’s Ruane, Cunniff & Goldfarb Investor Day 2015 transcript

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H/T Market Folly

Remarks have been edited for clarity and relevance.

Bob Goldfarb: Good morning and welcome to our investor day. We are going to follow the same format we have followed for a number of years. We will take questions until 12:30. We have to vacate the room by one o’clock but we will be around between 12:30 and one o’clock to answer any questions that you may still have. Before we begin, I would like to introduce our team. On my right are Greg Alexander and Greg Steinmetz. On my left are David Poppe, who is the president of our firm, and Jon Brandt. The rest of our team is seated in the front of the room. In alphabetical order they are: Saatvik Agarwal, Girish Bhakoo, Jon Gross, who is our director of client services, John Harris, Jake Hennemuth, Arman Kline, Antonius Kufferath, Trevor Magyar, Scott O’Connell, Will Pan, Terence Paré, Rory Priday, Chase Sheridan, Inder Soni, Stephan van der Mersch, and Marc Wallach. I would also like to introduce the directors of the Sequoia Fund, who are seated in the front row: Vinny Ahooja, Roger Lowenstein, and Sharon Osberg. Bob Swiggett is away in Africa. Who wants to ask the first question?

Question: Howard Schiller has resigned as the chief financial officer at Valeant Pharmaceuticals after four years. The Financial Times joked that he may be exhausted from ‘‘all this fiddling.’’ With Valeant’s lofty stock price likely bringing its percentage of our fund’s assets to upwards of 20% and with the company’s accelerated growth likely to be impacted by the specter of rising interest rates, have you been reevaluating our position?

Rory Priday: He has done quite a bit of fiddling. The market cap since Howard Schiller joined Valeant went from less than $15 billion to over $70 billion today. But I think some people get burned out at the company just because of the number of deals that they do and the number of products that they manage. Some people refer to their time at Valeant as a tour of duty. It was a little concerning for us that he left, but he is going to be on the board hopefully for a long time. He told us that he would be there as long as investors wanted to have him. So I do not think he is going anywhere.

David Poppe: The fact that Howard is staying on the board is a pretty strong sign that there are no disagreements or unhappiness. Not so long ago, he was telling us that Valeant closed a deal at eight o’clock at night on New Year’s Eve. It is a very intense pace. Sometimes you make a lot of money and that pace is too much. I think it is more about that than it is about anything else.

Question: Last year you spoke about your investment in Rolls-Royce. In your December report, it was quite a horror show that was reported for Rolls-Royce. Could you give us an update?

Arman Kline: We try to be supportive of the companies we invest in, but sometimes we do not agree with the management team. That is what happened at Rolls-Royce. The board has now chosen a new chief executive with whom we are pleased. We have not had a chance to meet him yet, but I was in London last week and met with the board. The strategy seems to be more in line with what we would like to see. We are looking forward to meeting the new CEO. Our initial research on him has been positive. So we are cautiously optimistic, and we continue to think that the core aerospace business at Rolls-Royce is very attractive.

Question: How do you think about selling a company? Is it because there is a negative development at that company or is it more because of a change in your thesis about an industry?

David Poppe: If I understood the question correctly, you have noticed that we sometimes sell when there is a negative development at one of our companies. So, is our general strategy to sell upon negative news or do we sell for some other reason? Speaking broadly, we always sell based on valuation. Valuation can seem too high because of negative developments, but every situation is unique. So it depends on what the negative development is. Some things are temporary and fixable, and some things may seem more intractable. We would not be sellers because there is negative news like a short term earnings miss or something like that.

Question: If I could ask about Valeant as well.... Being students of the family of Berkshire, can you discuss your views and perhaps comment on what Mr. Munger insinuated about Valeant recently?

Bob Goldfarb: After reading about Mr. Munger’s comments, Rory looked for all the books on Harold Geneen that he could find. I think he is the man to answer your question. Rory?

Rory Priday: We were not at the Daily Journal meeting, where Mr. Munger made the remark comparing Valeant and ITT. So we do not know exactly what he said. But it was something to the effect that Valeant was like ITT, except that Mike Pearson was worse than Harold Geneen, who became CEO of ITT in 1959. ITT was one of a number of serial acquirers that were active particularly in 1960s. Geneen bought a raft of companies — some of the names you will recognize today like Sheraton and Avis. Bob can provide more context than I can because he is pretty familiar with the company as well. But Geneen bought a lot of disparate businesses in different industries. I recall from the books I read that ITT’s sales went from $700 million to $17 billion over eighteen years and the earnings went from $29 million to $550 million. But ITT also issued a lot of equity and was prone to issue equity in order to buy these companies. By the time Geneen stepped down from the CEO’s spot, ITT’s share count had increased tenfold.

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