Value Investing

Biglari Holdings FY 2015 Annual Meeting Notes

Notes from Biglari Holdings annual meeting for the year ended December 31, 2015 by Adam Gaglio

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Note: Nothing should be taken as a direct quote. Some of the numbers may be wrong as it was difficult to hear a few times. Unless otherwise indicated, Biglari is speaking.

  • 1:07pm start- went through formalities regarding proposals and introducing directors
  • Pre Q&A Remarks
    • Good idea to review history to see where we came from
    • First slide, top part is an email from 2008 stress testing 10% decline in sales [it’s not pretty]
    • Current CEO was very concerned about the business
      • One of the main reasons for his resignation was the belief that company was going to fail
    • Steak ‘n Shake (SnS) losing $100k/day, in violation of debt covenants
    • “I’m self-made entrepreneur”
      • Started first business with $15k
        • Parlayed into bigger and bigger sums
      • Phil & I decided to partner up and have always behaved entrepreneurially
    • Other companies were not interested in taking over SnS
      • ‘We offered them and other individuals generous pay packages’
        • Made it clear that money was no concern
    • SnS resurrected from ashes, now thriving
    • Prior to our management, traffic declining faster than peers
      • After our management, growing faster than peers
    • Minor changes not going to save SnS
      • 10/10 restaurant veterans would have failed in turnaround
      • No time for analysis, needed entrepreneurs
    • This was not an activist campaign that was successful
      • Activists not interested in, or many that are even capable of, running a company and turning it around
      • We are entrepreneurs first, investors second
    • We developed a value proposition that we first formed in our own minds
      • We presented the value prop during the proxy battle and were questioned because our prices were higher than competitors
      • We had better quality but the value proposition was still lower because of higher prices
    • SnS started with $1.6mm of corporate cash in 2008, ended 2015 with $815 million of cash [presents slide showing sources of cash: rights offering, debt, operating cash flow, etc.]
    • CBRL is our most significant investment
      • Without our pressure on the BOD, investment would have turned out much differently
      • Most important change was a moratorium on new stores
        • We didn’t have all the data but could see a productivity decline
      • We prompted management to reveal their return on new restaurant investment
        • Showed their calculation in a filing
          • Running their numbers using Damodaran’s method, return would have been sub 4%
        • Big contention was whether you have to add back G&A
          • If you add a couple stores maybe you don’t need additional G&A, but beyond that, you absolutely do
          • Even without G&A, return would be only 9%
      • Beyond 2011 and 2015, CBRL opened 34 new stores costing $5 million a piece
        • Bet they’re not going too well on that
      • Dividend payout ratio has slowly creeped up, now over 100%
      • Investment a testament to holding company structure
        • Had we opened SnSs instead, wouldn’t have made nearly as much
    • All decisions we make with idea of increasing per share intrinsic value
      • If our interest was increasing managerial domain we would buy more whole businesses, not partial stakes
    • We don’t use committees, consultants, etc. to assist with capital allocation
    • We have 23k employees and only 5 at the holding company
      • Don’t burden pursuit of value with bloated cost structure
    • Ideally we buy great companies like First Guard [compliments First Guard and Ed Campbell at every opportunity] but will get involved with turnaround situations
    • We have a great capital structure
      • All debt is at subsidiaries
        • Pay a higher cost of debt but safer
    • Have long term orientation
      • A lot of people talk about this but few have it
      • We think in terms of decades
        • Doesn’t sit well with some, like those managing money for others
        • We look at minimum of 10-year period
        • Benchmark is S&P 500
    • Our stock performance has been very volatile
      • For a while the stock outperformed the business
      • Final analysis: We have outperformed S&P500 [starting from day current management took over]

Biglari Holdings

Biglari Holdings

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