We continue our Sohn Brazil Conference coverage – Earlier we posted our in-depth coverage from Luis Stuhlberger, Verde Asset Management who runs Brazil’s largest hedge fund, he is macro-oriented and gave a presentation on why he is bearish on Brazil. Next up is Bill Ackman.This was the only speech in English but o the other hand this one was hard to hear so please bear in mind as you read it and as always this post is for information purposes only.. Ackman discussed GGP/HHC, ADP, and VRX. I could be wrong, but I think this is the first time he got so into what went wrong with Valeant. Below is an excerpt followed by the full presentation.
Now we distinguish between that and Valeant, it was a company, that we didn't reach out to it, because we didn't invest in health care before, and the field of healthcare is tense with political risk, etc. But the CEO came to see me, and it was his idea that as we should go to a company called Allegan, which makes the Botox product (looking at the audience - Ackman jokes) I don't see a wrinkle in the forehead here, which has been used extensively, I see a wrinkle there[ laughter], but that's an opportunity for the company. But it's a great product, and we took over the business, and this is incredible...
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Speaker 1: It's great to see you here. We thought to have this conversation basically start by asking you about your investment strategy, of course, we don't want in the sense of deception, I know it's a very long-term investment strategy, things happen in an extended period, but I think it would be great if you could describe, maybe, what you do in your own words, and then use one investment sample to illustrate, why it is a long-term strategy, it's not just a catchphrase but eventually things take time to work out.
Speaker 2: Sure. So, I invest in what I describe as simple, predictable, free cash flow, general business, and we look for a business like that, that have lost their way. You know, great business, easy to understand, that over time, because of consistency, because of that strategic decision of acquisition, has led to underperformance. I grow it to its potential. And we stick to buy a large stake from that company, and we them we use the techniques that can include everything from presenting a conference to write test, and that's kind of the full spectrum of what we do. In terms of long-term, I guess our longest held investment was Howard Hughes Corporation; it came along, we bought 25% stake, a company with overall growth, a small shopping mall business, starting a venture crisis, stock down 99.99%. And we basically strike back zero, because the world believed the company was going bankrupt and the recession was showing that every company was bankrupt. Our assessment was that the company had a significant equity , if you actually ran a restructure to the benefit, not just the crackers, typical bank process, but for the equity home as well, and then it's an asset that we could recover value, that is basically what we did. We did very well the job growth, and them we came covering a more traditional active business stock, with 34 cents to merges banking trading for a $15 share. And we spawn a company called Howard Hughes Corporation, and it was everything in general growth that did fit, so classic shopping malls, but also for the years had acquired other asset, like the ?A corporation that was in the master plan community business,
this is the business of building cities, so we took three or four assets out of the company, and we started into an LLC Corporation ultimately. It actually called Howard Hughes, the aviator, who made a lot of money in the real estate, has a lot of properties in Las Vegas, that was actually an area of the company, we'd like the name, we took the name, we took the corporation, we put all the assets in it, showed the shareholders, and then we hire a magic team. And in this case, I meet a guy that was 14yo, name Dave, that over the course of his life became a real estate investor, build a family office in real estate, and I invited him, he sold most of his assets right before the crisis, he's got a good marketing timing, and I convinced him, and his 19 other employees to become a magic team in this company. Because of the big challenges we had, it's how do you build a magic team from scratch, with a company that has assets all around the country. And the beginning the company emerged a number of 10, on its first decade of existence, and them over the last 7 years, the company has built significant value, and it has come to 35bi of operating income, on its way to getting to 60bi in existing assets. During the construction, we build one of the biggest building in the country, two big towers, we still have a few apartments left. If anyone is interested. I'll get you a good deal, I'll get you discount.
And you are building a company that offers a huge amount of investment opportunity. We have done a great job, the stocks are going well, was worth zero went we started, today has a $120 share price. The first day of trading, trade 32, on the first round. I did talk to some conference men about it, it was worth a dollar and now is $42 a share, the piece in. And we are building a company that I think we'll own for a decade or more, it's got 15mi square feet of undeveloped property and, as we find tenants we build big buildings. We are 20 to 30's on ?, as I said we did do a good job. It's telling the story, it's not cover just by one real angle, it's covered with spots. It's unconventional, but it's worth on the long period of time.
Speaker 1: You mentioned several times we, as you said how you thought the company, of course, it brought the measuring team, which is a huge deal, and them how well were you all involved in this process?
Speaker 2: So, we put together a great board. We own 26% of the company, and as part of that, we were going through 9 seats. But the other directors we recruit, our people I scouted, Summer scouted, we formed a successful partnership. CEO, other positions, a very large price before the crisis, we had ahead ? which is one of the largest funds behind. And the group very closely worked with management. We had small committees that work through every transaction, transactions committees. And the board is formed of people passionate, interested, who stayed in. My job is most as a coach, it never been a CEO, for the company before, who operated a 20 person family office, the company now is over a thousand employees. I haven't had to do that much. It's the best thing, you hire a very talented management team, and you sit back and watch. And then there's more sitting back and watching. I get involved in a big decision, I don't have a policy, I really don't ask for anything, but he calls me very much, asking directly what is my point of view on press releases. I'm happy to help, you know.
Speaker 1: Now, it's very clear, and it just points what you do. Not everyone looks at investing at the long term. And I guess for the last few years with heard a lot more about so many investments that did work that like Herbalife, and even Chipotle the first few months, it did work out in the first few months. But when we look at the returns, not year by year, but we look investment by investment, and we do some internal analysis, we could be wrong about one or two. But, just to guess the numbers, we look investment by investment, we saw that in last 12 years, you made 31 investment that we could identify, that had an impact of at least 2% to the entire portfolio. And what is interesting is that 23 of those were positive to present, and only 8 of them were negative. But, if we go deeper, how much bigger, was the losers in terms of impact on the portfolio? We see that not only the majority of the investment that was winners but also the winners generated 1.5 times more than what the losers lost, at the same time. Everyone has to dig deeper to see that there were actually 4 investments that contributed 20% to the portfolio as a whole, 3 positive and only one negative. So for me, it's a successful strategy, it's successful, no doubt about it. But if we look at the last, the ones that didn't work out, most of them were very reasonable ones, last say the last 2 or 3 years. Do you think there is something about these investments in the last 2 or 3 years? Or is just, you know, statistically? Many of them work, some of them don't, and it's sort of a bad thing that happens to get sure.
Speaker 2: So I'd say that I'd distinguished between Valeant Pharmaceuticals and any other investments we made. I actually believe that everyone one of them is a successful investment, we started over. We have a thesis, we have a brand that is the thesis, that is very public, we've been entirely right on every element of the thesis, except for the shareholders. What I mean by that is the stock is done, the earning per share were 5.32 when we sold the stock, and our view was this business was, at the minimum, fundamentally raise, and this is what I’m here to speak. The shares are going up for the last 5 years, which means this year will be something like $4.05. Imagine the earning are declining to a third and this is not business going well, it's fundamentally in pretty much every market around the world, it has to see the requirements to fix the businesses, is not good for sure, because the stock is out. But in the bull market, stocks are low in 50% in five years, and we still maintaining additional, we maintain deep in the money. We're thinking we are gonna close the end game for the company because they didn't buy that stock at the time for cash, they did buy for debts, and now we with the letter for a procedure routine, with the jury of earning.
It's actually a good a idea for the conference. We now gotta talk very close about Japauli. Japauli is one of the most successful restaurant concepts ever, probably the highest returns on new stores than any restaurant concept in the world. With sales down...The unit volume is down to 2,5mi today, is still one of the most productive fast food concepts in the world. The Burger King, run by the folks from 3G, is doing $3mi a unit with late hours, drive-thru, breakfast, lunch, everybody that they can. So, Japauli, servers lunch, server dinner, doesn't have breakfast, doesn't have late hours, just doesn't have delivery, doesn't have drive thrus, doesn't have dessert, it's the most under, I would say optimized, of the fast food companies, but despite that, months ago they still are generating a 2mi box, on a new store, plus our returns in capital We bought stake, now the business is ahead for the international operations, is completely under the US with only 230 stores. And what they do is difficult to execute, with building supplies, chain of delivery, a healthy sustainable fresh food store. So we like the concepts, we like the brands, we try to get by this food safety issue, but almost every fast food company has food safety issues. Now we gonna be judge on the reinvestment our maker bases everyday, we pay $405 a share, based on our discount plan, we think we can earn on that price 20% return on the terms, without proper tax form, that is our estimate value. Today we bought the stock for $310, just a spot prices, but is much more probable outcome today than it was I think when we made our investment. And we don't have the benefit of being able to trade. We got 10% of the stock, and the chairman, CEO, who is a very talented visionary operator, and he has recognized that the business needs a very talented operator, and the good news is, for all the reason that we drew before, and the fact that this is a pretty decent sized company, this is the most attractive job in the restaurant industry in the US today. And we are gonna attract an incredible CEO, to take this company and do all the things that haven't been done. To optimize operations, optimize cost, introduce breakfast, introduce dessert, introduce drinks, and the combination of all of those things I think will take new volume well above what they were before. And you get to invest I think a discounted value and I think just the hiring of the CEO itself, will be important. I haven't decided that, I don't know what we have in stake, if it's 4 5 year investment. If I could have bought it at this price, I would, but it's going to get quite a lot interesting.
Now we distinguish between that and Valeant, it was a company, that we actually didn't out to at it, because we didn't invest in health care before, and the field of healthcare is tense with political risk, etc. But the CEO came to see me, and his idea was we should go to a company called Allegan, which makes the Botox product, which is looking at the audience, I don't see a wrinkle in the forehead here, which is been used extensively, I see a wrinkle there, but that's an opportunity for the company. But it's a great product, and we took over the business, and this is an incredible unproductive company, and had some great brands, and the CEO's idea was to acquire the brand, take advantage of its low costs, tax structure. At the time, we did diligence, the deal made sense, we bought a stake in the company, and we proposed a transaction. We worked with this team for nine months, I spent time with the CEO, CFO, every officer in the company, worked very closely with them, they kept their words, shook hands, and handshake deal the most part. At the very end of the day, they had an opportunity where they would get a better bid by 15%, and the CEO said, you know, I think it's a good deal at that price, but I don't think it's a great deal, and so we walk away. And so they walked away, we bought the company, and we made a lot of money. And I said: wow, really got to know this team, it showed unbelievable discipline on this acquisition, got a great track record, and we decided. Six months later, they announce the acquisition on a company, and they contacted us, if we would help them finance, buy another company. And I bought equity in the company, without further diligence, the deal they did was a sales transaction, it's a not a deal that you can do with people from the outside, you have to trust men to put more faith in them. I thought I had more faith in them, and bought a larger stake in the company. Turns out, they made 7mi dollars, and it also turns out that over the course of the 9 months that we stopped the businesses, they launched a special pharmaceutical company that was driving sales, using what appeared to be inappropriate practices, there were a bunch of bad reviews on the company. So I made a decision to be an activist pro-defense, I joined a year ago, replaced the CEO, recruit a new one, made deals with the banks, did everything we could. I think we certainly helped to stabilized the business. And I recognize that is gonna take another massive amount of time, so I look at Valeant and I see that is was a completely outliner, we made a passive investment, we rely on confidence in metrics, and we have not done before, and we lost a ton of money. And it was a disaster, and that it's now something that we can all replicate.
So, our strategy is to buy a stake in the businesses and only rely on the public information. Not don't review management, we don't review their collar or anything. You might talk to former employees and all, but if you can't figure the business from the outside their company. Valeant was a company that you couldn't figure out from the outside so I would say, you can't be unable to do this, but if you could, take things out of their ordinary course. Good news is, now very hard on the strategy, and should take us much longer to recover from our levels, and we are going to work hard to achieve it. And we are super motivated. But I have enormous regret about this investment, enormous.
Speaker 1: The last time you were here in Brazil, you were launching you were listing vehicle, and I think you could talk about it, some people may know what it is, but I think you can brief description. But in fact, today is traded in a little bit of a discount, risk lowers the value, and I guess we would argue it is one of the best investments or could be seen as one of the significant investments out there. Cause it gets your portfolio, with everything that you are talking about, about 23 or 24% discount for 20 fees. Does this cut worry you? Is that something that you think about? And how high is it on your priority list to sort get rid of it somehow.
Speaker 2: That's super high. So I'll say as the following 4.3bi asset in value, you can buy a little over 3bi today. It's cash, it's a reasonable investment. Overall it inputs, these are all companies you can look up, get a margin on, good investments. We take serious steps to help address the discount, we triple the pace about a month ago, we listed in the stock machines in London and Amsterdam. One of the issues has been, there is anyone owning more than 5% of the company, because the so-called foreign investment in real estate properties in the US, and that's is a restriction we don't like. Well, frankly I would like to buy more of this and other investors would, but for that, we got to change the supply-demand, and by that, we have to address the discount. So, we are working on resolving an issue, and hope to get that resolved before the end of the year, or sometime in the early quarter of the next year. And we think the best way to address the discount is a one measure making a larger investment in the public company, we love to be able to do that, today we can't. When we took this company public, the cost of production was near 5mi dollar, at the ideal price, with the down 40% below the ideal price, and with a 22% discount, we like to go on board. And I think what is going on right now is, the history from Jan 2004 to August 2015, we recovered 21% of the portfolio, and to August 2015 to March 2016, we were one of the worst performing funds in the world, and that cause a number of our investors to lose confidence. And we balanced from the bottom, but I think what we need to do is take out some of them on hand and just progress on investment. On the progress side of ADP, I haven't talked about this yet publicly, but we are making progress with that. And I mean by that I had a meeting with the CEO last week, and I think we made very good progress, and I think, I'm increasingly confident that we are going to work together. And working together, there is a huge opportunity for that company, so I really like the portfolio, I think the portfolio is quite cheap. You got the electric company at 510 for holding, we can buy that at $240 a share, its a very interesting, pretty liquid trade, and I expect some discounts, and performance is good, and with a discount, you got to double that. As proof as it is, we lose money on something, we lose confidence, double negative. If you can restore confidence and recover your performance, you get better. It was trade actively in Feb of 2016, and so we hope to get it better.
Speaker 1: We hope so too. You just mentioned the ADP, and I think it's your most significant recent investment. It's been a proximity value with a company, and therefore a little bit more confrontational than what you describe before. They are total... when you look at a potential investment, do you required a higher expectation of return or something else, also, to be a more rotational way with the company or it doesn't matter, it's about the phase and all.
Speaker 2: So, we didn't engage in a confrontational with ADP. So, what happened, we only had 3 or 4 points of conflict. Usually, they are not economic rationality they are in motion. And what is going on in ADP, so Nelson proposed one direction on board, so I said okay, let him on board. But he has to win a proxy context, and the team was still fighting. So how much warning, can one new director cause, on a board director of a company, the idea was still terrible, and it only takes all nine directors to work this out. Sometimes you see this particularly with proud big companies, where the boards, would feel embarrassed if they underperform, they rather had a company out of form, so the board could take credit. So we feel this active storms, they are to boards to take credit. We're not on this for the show, and so in the case of ADP I think, we were unfortunate in now denying that lines 10 days before we finishing out a statement, just a matter of timing, and I think it wins a crossroads, so we had this dinner 3 or 4 months ago. So I think, the best vast majority of your rotation, will become some lead in central, and for every investment, you will report a very high, a very large opportunity for us to commit our time and energy, cause it can't become a big-time thing, if it is in a bad situation.
Speaker 1: Good things worked. Almost running out of time, just wanted to ask one last question, about philanthropy, you are known as the great philanthropist, you are involved in many projects, but you choose the Sohn foundation as one of your main, or at least one you've been engaged for a long time, can you explain why?
Speaker 2: So I think, this is an industry that if you are lucky, you are going to make more money than you need, and I always, being philanthropic is not something that is generic, it's something that you learn from the example of other people. So my father is this kind of guy, we talked to me as the kid of the importance of giving back. I made the decision when I was 18, that I would be lucky, I told my dad, I'll be a millionaire by thirty. But I also said if I'm fortunate, all I don't need I'll give back to society. It helps to spread the word, and we made a partnership with them.