Pershing Square’s Annual Presentation to European Investors, including comments on Valeant’s Papa and Herbalife.
H/T Activist Stocks
Pershing Square 2016 YTD Fund Performance Review
Pershing Square 2016 Portfolio Review – Mondelez International (MDLZ)
- One of the world’s largest snack companies with 2015 revenues of ~$27 billion(1)
- ~$65bn equity market capitalization
- Born out of the breakup of Kraft Foods in 2012
- High-quality, simple, predictable, free-cash-flow-generative business
- Only large, publicly traded, uncontrolled “pure-play” snacks company
- We currently own shares and derivatives representing a ~5.7% ownership stake in the company
Mondelez: Fantastic Billion Dollar Brands
Mondelez has the most attractive stable of sweet snack brands of any packaged food company
Snacks is One of the Best Food Categories
Strong global growth and scale
- $1.2 trillion global market with historical growth of 6% per annum(1)
- Tremendous future growth opportunity in emerging markets
- Category responds well to advertising and in-store merchandising
High category margins
- Low private-label penetration
- Strong sales in highly profitable immediate consumption channels
Secular winner in global packaged foods
- Well-aligned with consumer trends of eating more frequent, smaller meals and convenience
- “Small treats” significantly better positioned than processed meals and other center store products
Mondelez EBIT Margins vs. Peers
Mondelez is Effectively a New Company
We believe MDLZ’s enormous efficiency opportunity exists because MDLZ was created through a series of acquisitions made by legacy Kraft that were never properly optimized or integrated
Mondelez Zero-Based Budgeting (ZBB)
While management has embraced ZBB to address their high G&A, Mondelez’s version of ZBB is much less robust than the 3G approach
Gross Margin Opportunity: Advantaged Assets
Mondelez has invested ~$1.5 billion to upgrade its manufacturing base, which should expand gross margins by ~250 bps by 2018
- We are looking forward to substantial increases in gross margins increase as the new Salinas, Mexico facility ramps up
- We believe the potential for long-term gross margin expansion is strong
Case Study: Heinz Gross Margins Under 3G
Under 3G management, Heinz expanded global gross margins by ~600 bps and Europe gross margins by ~1,100 bps in just two years without a material additional capital investment
Additional Levers for Margin Expansion
Mondelez can dramatically improve its profitability using the same tools used by 3G
- Net revenue management
- Elimination of unproductive trade spend, particularly in Europe
- Reduction in global SKU count from ~74,000 in 2013 to ~30,000 in 2015 and materially lower by 2018
- Procurement Productivity
- Consolidation of suppliers from ~100,000 in 2013 to ~60,000 in 2015 and materially lower by 2018
- SG&A rationalization
- Implementation of zero-based budgeting across the organization
- Creation of an “ownership culture” through appropriate incentives
Opportunity Far Exceeds Established Targets
While management is making progress with their plan to increase margins to 17-18% by 2018, we believe optimized margins are far higher
Mondelez: Share Price Performance
MDLZ stock increased 8% from our average cost at announcement date to April 21, 2016*
Canadian Pacific Railway Limited (CP)
CP Remains an Attractive Investment
Recent macroeconomic concerns have caused CP’s shares to trade at a discount to their intrinsic value
- 2016 guidance calls for an OR below 59% and double-digit EPS growth
- Tailwinds to EPS growth from a lower share count, pensions, and f/x
- Q1 Results: record 58.9% OR despite 5% revenue decline
- CP is right-sizing its network to the currently tepid demand environment, which management has stated will improve results meaningfully
- Longer-term, management has highlighted a potential OR of mid-50s%
- Note that declines in fuel prices, which are passed through to customers via a fuel surcharge, raise the OR potential by ~350-400 bps (vs. 2014)
- Pension expense is an incremental tailwind of ~180 bps (vs. 2015)
- CP has announced it will resume its share repurchase program after ending its pursuit of NS
CP: Share Price Performance Since Inception
CP stock increased 251% from our average cost at announcement date to April 21, 2016*
Valeant Pharmaceuticals International, Inc. (VRX)
- Develops and sells medical products with major franchises in eye care, medical dermatology, gastroenterology, and emerging market branded generics
- ~$11bn equity market capitalization
- ~$41bn enterprise value
- Pershing Square began buying Valeant shares on February 9th 2015 at $161 per share, and currently owns a ~9% economic stake in the company, including options
- Valeant shares have declined 83% from our average cost of $196 per share at announcement date to April 21, 2016
- Pershing Square has recently taken steps to stabilize the company and to protect our investment, including adding two team members to the board, Bill Ackman and Steve Fraidin
Recent Events
Following a 51% decline the day of Valeant’s March 15th investor call, Pershing Square took immediate action to stabilize the company and to protect our investment
Significant Progress Since March 15th Investor Call
- March 15th – Two Pershing Square team members begin two week, on-site diligence process to improve understanding of the company’s business and financial position
- March 17th – William Ackman joins the board as an observer
- March 21st – Company issues press release indicating:
- William Ackman joins board of directors
- CEO Michael Pearson to step down when successor is identified
- Ad Hoc Committee review of accounting and financial reporting matters nearing completion
- April 5th – Valeant Ad Hoc Committee announces completion of its review of Philidor
- No additional accounting misstatements identified
- Ad Hoc Committee to dissolve
- April 7th – Valeant receives lender consent for credit facility amendment
- Among other changes, deadline for filing 10-K extended to May 31st, 2016
- Valeant affirms intention to file 10-K on or before April 29, 2016
- April 25th – Valeant announces Joe Papa, former Perrigo CEO, to succeed Mike Pearson
- Papa brings more than three decades of leadership and operations experience in healthcare
Joe Papa
Papa’s scientific and industry background, shareholder orientation, history of commercial excellence, and strong ethics make him the ideal leader for Valeant
- Papa has spent his career in the pharmaceutical industry, most recently as CEO of Perrigo, which specializes in OTC and generic drugs
- Papa has more than 35 years of experience in the pharmaceutical, healthcare services and specialty pharmaceutical industries, including 20 years of branded prescription drug experience.
- At Perrigo, Papa built a strong operational performance track record
- Consistent strategy to deliver quality, affordable healthcare products
- Averaged 6% “same store” organic revenue growth since 20081
- 1,100 bps increase in operating margin of company’s largest segment2 since 2007
- 29% annualized EPS growth since 2007, driven by organic growth and capital allocation
- Impressive shareholder return track record
- Perrigo shareholders enjoyed a 24% annualized return during Papa’s tenure
- The S&P Healthcare index realized a 10% annualized return during same period
Valeant: Share Price Performance
VRX stock has decreased 83% from our average cost at announcement date to April 21, 2016
See full Pershing Square annual presentation below.
[/drizzle]
