Pershing Square Capital Management conference call for the third quarter ended September 30, 2016.

Q3 2016 Hedge Fund Letters

Readers can see the full presentation below but first let us provide a recent update – it has been a bad year for Bill Ackman as DealBreaker noted on Tuesday which was is the beginning of the post Bess Lessin era :( ) “whatever happen’s today the big loser is Bill Ackman”. Valeant tanked about 20 percent or so on bad earnings and BusinessInsider exclusive on leaked documents from Philidor. Today, the stock is up despite a Reuters report which states “Valeant gets investigative subpoena over former ties with Philidor’

As we tweeted yesterday although not as bad as Sir. Crispin Odey, Ackman is having a tough year.

Third – this is pure speculation and I have no inside info here but I would not want my frenemy being very close with the future president especially when this frenemy keeps buying up shares of a company (Herbalife Ltd. (NYSE:HLF) ) which I (as in Bill Ackman since I have no position) have a big public short. Who will be in charge of FTC, SEC etc.next? FTC commissioner has set terms but I would not want a President who likes my frenemy wants a stronger executive branch and controls Congress. Again just a guess but still…

Finally, this is more speculative but Ackman REALLY did not want Trump (or Clinton I think) to win and urged Michael Bloomberg to run. I cannot imagine Ackman is happy with a Trump presidency although Fannie Mae and Freddie Mac will be very interesting to watch with new regulations but could be net negative for Ackman even though he is not a macro guy.

Anyway, video and comments below as the call happens.  Sorry for syntax, grammar but it is crazy morning at ValueWalk. Expect talk on Valeant, Herbalife, Fannie Mae, Freddie Mac and what not ansd see more here.

Ackman’s Pershinge Makes Backroom Layoffs

QSR is now 15% of capital – there is softness in US like Burger-King where SSS came partially bc prior comp but also weakness in industry – prices pasted down to customers

Good cost control – reducing overhead by 8% this Q – Tim Hortons is firing on all cylinders – Berkshire prefs can be called next year but there is a lot of cash

HHC – hit a bit by Houston but overall positive – its 10% of portfolio

Wardvillage nearing completion of first condo tower

Great real estate

Chipotle new investment 10-11% of capital – we will have detailed presentation – we announced 9.9% stake for avg price $405 dollar per share – great brand, culture, economic model – we have watched for years how it has disrupted the whole industry. But company hit speed bump with food safety – company has successfully implemented good food control but sales lag.

Reputation has bruised but with time the business will recover and become much cover. It will not be smooth or predictable.

Chipotle is authentic brand and it has grown from 1 in 1990? to 2000? today – it also owns content and has local events etc. We think it is one of the best large scale food brands in the united states

Food safety we have done surveys while it can never be eliminated anywhere also we cannot use next years earnings we use really conservative assumption using 5k restaurants some recovery of customers and some menu extensions like catering — thoughtful management we can get attractive return with little macro issues little non GAAP adjustments, high taxes which could be lowered, good balance sheet – so we are very excited. We have had constructive relationship with the company and it is part of the process for those advisors to leak to the media. But this is not some hostile engagement.

Valeant is trying to be more transparent – adjusted EPS is done in Q3 announcement. Management expects lighter revenue due to competition, expenses etc.

Bosch & Lamb doing well on adjusted basis even if flat on regular basis

Valeant is a 4% position but is levered and could make a lot – there is some confusion – there are three businesses

1. Over counter – generic, Bausch & Lamb – very valuable – as independent worth 14-15x EBITDA
2. Branded RX – these trade at 9x EBITDA
3. Diversified more cigar butt – buying drugs before become generic then hiking pricing – these are suffering

1 and 2 are growing very nicely. The higher quality are becoming a disproportionate part of the business which is good over time for valuation but company wont view company as SOPT until balance sheet is better which company is trying to determine whether to sell.

Company said might sell Salix that is uncertain but CFO said if offered price where it is worth more to us than them we will consider that sale. If Valeant sold half non core assets and Salix it could pay off all bank debt and would own just high quality businesses and all the revenues would come from there.

Good compliance in place and cooperating with SEC etc

Nomad focusing on core products and integrating recent acquisition

Nomad

Company has revised agreement for pref stock liabilities – company has $450M in cash and some shares – shaved off $10M, also raised equity

Fannie Mae

Still waiting on Perry Capital appeal – some developments over summer – they are submitting additional docs from Fairholme case which is also pending

In spet, Sweeny required govt to turn over docs of various privileges the documents all related to prior to net worth sweep – basically what govt knew at time they restructured pref stock – we do not have access to docs but perry and fairholme does. The govt is very nervous about these docs and trying to appeal the decision. It would appear Perry panel is waiting to see docs.

A new TX lawsuit is interesting it argues FHFA violates sep of powers – interesting new argument

FHFA –

Speculation on Trump and Fannie Mae versus Obama on GSEs we do not know although Ackman says Obama admin put in net worth sweep hard to reverse a new admin is best time for them to say whats in best interests of America from blank sheet and believe it will be in best interests to keep GSEs as essential entities and we would not want $5T of liabilities esp GOP to have that as Govt debt so a new restructure with Govt warrants and original agreement where shareholders own 20% with more capital and little chance of collapse. Common sense and new Admin which wants infrastructure and growth and the common equity owned by Govt which is several hundred billion big opportunity for settlement and negotiation. This is resolved not by courts but by President Trump and they are biz people not academics so I think its very positive development and stock markets reflected that.

Herbalife

FTC was very aggressive

No retail sales

Pyramid schemes are confidence games and its been shaken. Michael Johnson resigned as CEO and this is big negative for confidence of distributor

Most important development is John Oliver takedown on Herbalife (where we had no business and we are out of business of activist short selling.

John Oliver was very effective and video on youtube has been viewed in Spanish 1.1M times and more in english this is big deal and will have meaningful impact – this company needs 2M distributors a year this is difficult when people become more aware especially as Betting On Zero comes to HBO – Endgame is near

Sold CP – great investment, great activism, great CEO.

If we had permanent capital we would never sell CP

We sold Zoetis (ZTS) we quickly engaged with management. Zoetis is great business and no politics or aggressive politics or other such attributes.

We also sold APD

Organizational – most challenging in firms history starting from August of last year. We think we have reversed decline since mostly due to Valeant which was originally a passive investment. We made a mistake in believing management on Salix and walking away from Allergan deal.

We learned an expensive lesson for the firm we want to focus on long term and lead by conversation with Brian Welsch we have base and bonus some earn into profit interest where you own economic slice which you lose if you leave firm

We have developed new comp to get permanent equity in firm if you have been here 10 years and retire as long as not competing you can keep 25% of profit. It is still a variable compensation driven by the profits of the firm which causes even more LT focus. Those documents are not finished but will be done before end of year – no other company does this but we think this will help Pershing Square survive for the next century and incentivize that.

We are hiring more analysts a few in the finals one will be hired. We have had great recent hires from private equity 3/4 year programs. The goal is small investment team of about 10 and some attrition but we attract top candidates in analyst programs and this creates good work environment and PE is very applicable here.

Pershing Square

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