Timothy E. Hartch on DENTSPLY and EnergySolution

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All notes are the speakers, except words in the brackets which are mine.

Timothy E. Hartch is a Partner at Brown Brothers Harriman and the co-head of the firm’s public equity investment team, which manages over $9.0 billion in assets as of June 30, 2011. Brown Brothers Harriman has a total aum of over $2.8 trillion. Timothy Hartch is the co-manager of BBH’s large cap Core Select equity portfolios and co-manager & co-founder of an investment partnership that focuses on information and business service companies. Mr. Hartch received an A.B. from Harvard University and a J.D. and M.B.A. from the University of Michigan.

We were founded in 1818, we are the only owner managed partnership bank. We have over $3 trillion aum, in asset management we have close to $43 billion. We have a private equity team, fixed income team, and a public equity team, which I manage. We have dramatically outperformed the S&P because we have outperformed in down markets.

I drew two lessons early in my career: intrinsic value is always an estimate, which is a pretty wide range. Many businesses are very hard to predict in 5-10 years from now. There is a very wide range of possible outcomes.

What has worked for us is to limit ourselves to businesses that are high quality and are more predictable.

It is important to define what is high quality?

Loyal customer base, high churn rates cause you to spend enormous amounts of money just to stand still. You can find this out by speaking to customers.

We try to buy businesses at what we think is 75% of what they are worth.

We do not look at the macro picture.

Above 80% one should proceed with caution.

If you had to put all your money in one business and own it for 20 years what would it be? DENTSPLY (XRAY), which is in the most attractive part of the health-care industry, dental. Plus the company is trading at an attractive valuation.


Why is dental attractive?

The aging population in America and Europe are an attractive market.

The rise in standard of care, or the rising middle class in emerging markets.

Most people purchase dental with private insurance, so supply and demand determine services. This allows better and stable services then a Government run service.

DENTSPLY has competitive advantages which are unrelated to patents. The customers are very loyal. XRAY has the scale over customers as well.

DENTSPLY designs, develops, manufactures, and markets dental consumable products, dental laboratory products, and dental specialty products worldwide.

It is good to look at the negatives as well.

The Large acquisition of Astra Tech, which was expensive transaction. The next two quarters will be tough. One of their suppliers was wiped out from the Tsunami in Japan.

From valuation perspective using DCF we come up with $44. WACC is 8.5%, terminal growth is 2.5%. Based on our DCF model it is trading at 13x 2012 FCF. This is very attractive price for a great company.

I use something which I call the phone call test. Can I call someone up and find a buyer? I think many medical companies would want to buy this company.


Now a small cap: EnergySolution (ES)-it has a 20+ year track of disposing of nuclear waste. The disposal facility is based in a very isolated area in Utah. It has brand loyalty because for something essential like nuclear waste disposal you don’t want to switch based on price.

There are 104 nuclear reactors in the United States, ES has a contract with 84 of them. Exelon selected ES to dismantle its Zion plant. This is a tremendous vote of confidence in ES.

There are many planned closings of nuclear reactors over the next few years, ES is the only one which can provide the service.


Environmental and political risk. The former CEO got in a dispute with politicians in Utah; it has been patched up, but they need to have good relations.

They get a lot of money from the Federal Government, but there could be declines as a result of cuts.

The company has a lot of debt; $800m of debt and $300m of cash. The leverage is a potential for problems. But they are generating $40 million in FCF and we expect that to increase over time, so they should be able to pay down the debt.


Additional licenses

International opportunities in places such as Germany, which is decommissioning its nuclear plants.  ES is the only one with knowledge to do this.

The company made a total of $1.2 billion of acquisitions. I think these acqusitions are worth more today.

Intrinsic value assuming no growth is $8+. ES is trading at 6x 2012 EBITDA and 7x FCF 2012.


XRAY- Management? Company is good asset allocator. Industry is fragmented.

Generally own 20-30 companies. I think there are a lot of companies that are attractive now. WFC, USB we think are remarkably cheap. People are having deja vu of 2008 again. We also like Comcast.

DENTSPLY in emerging markets? It is a global business and is now only 13% of the business, but growing rapidly.

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