Leucadia Annual Meeting Notes
Board: Berkshire Hathaway
I jumped on a train last week to check out Rich Handler's first Leucadia annual meeting. Since they've been discussed several times on this board I figured some others might find them interesting.
For those of you who are thinking about going to a future meeting I highly recommend it. Each leader of their subsidiary businesses gave a brief presentation. I wish Berkshire would pick a few subsidiaries to do this each year so investors could get a better feeling for their businesses.
It lasts about two hours and has a Q & A portion at the end. There is no food so if you're hopping on an early train from DC, like I did, make sure you build in some time for snacks. FWIW I was very impressed with Rich Handler. If you're considering an investment I think there are three questions you probably need to answer:
1) Is LUK better off by buying JEF?
2) Is JEF worth more as part of LUK?
3) Is Rich Handler the real deal?
Joeseph Steinberg Introduction
· Newly retired Ian Cumming is in front row
· Whole BOD sits up on stage
· CEOs from national beef and Berkadia, Garcadia, are introduced and formal proxy stuff is announced. All was approved
Rich Handler & Brian Friedman
Growth in BV per share over 10 yrs. 12.8% for Leucadia and 14.2% for Jeffries
1) Be patient and do smart things over time. Don't do anything dumb. Later on he described what “dumb” meant to him. “I've seen people take great companies and lever them to the hilt and drive them right over a cliff. These were very smart people with degrees from prestigious universities. You can make mistakes but you have to get the big things right.” Joeseph Steinberg stepped in and added, “we don't ever want a margin call because in this business you’re done if you do.” [BH] Believe he was referring to the investment banking business of Jeffries.
2) Diversification is a good thing. We've all been wrong from time to time and I’ve faced several crises during the twenty-three years I’ve been at Jeffries.
3) Capital structure is important through cycles. Be disciplined in the good times so you can prosper and grow during the bad times.
4) Culture is important (honest and transparent). No arrogance, which is the downfall of many companies.
5) Be humble when things are going well b/c bad stuff is right around the corner.
6) Joe & Ian rarely agree on deals but when they do things work out very well for shareholders.
7) We have the sourcing team intact including Joe in the mix. We also have Jeffries with many contacts to do smart deals with new process that will be more formal than in the past.
8) We are motivated by building BV per share over time. Leucadia is complicated and difficult to understand.
Cash & investments $2.8 billion. Deferred tax asset $1.8 billion
Leucadia harvested $2 billion worth of proceeds in last 12 months. In the future they will continue to seek out unique opportunities that other people won't do. Between the two companies they have a robust deal flow. With Leucadia’s resources we can do larger deals. Interestingly, they bought an asset management business and believe they build a great business there. I believe the firm they acquired was a fund of funds business (top water-fund of funds?). Gasification project in Louisiana looks good. Oregon terminal we'll see how that goes it’s in the very early stages. We have talent in running media, telecom, healthcare, mining, metals, industrial, and telecom businesses. We're going to build a broader team across more sectors than the past
Presenter Tim Klein
Tim is a founding partner.
National Beef is the 4th largest beef producer in the U.S. with 14% market share. Beef is a commodity product where we want to find ways to add more value. They’ve done that by building a tannery business which adds more value to the hides. Next year they'll be doing 16,000 hides per week. They also want to greatly expand their direct to consumer business, which is their highest margin segment. They bought out their partners in Kansas City Steaks so they can control all the marketing . Kansas City Steaks does only $20 million in annual sales vs Omaha Steaks who does $400 million. Cow herd has been in decline for some time - a generation Production has gotten much more efficient. World demand continues to grow (north and South America are biggest producers). They expect China will open for US beef in one to two years. Japan is currently the largest importer of US beef. A Chinese gentleman from the audience confirmed that there is lots of interest on the part of the Chinese of getting high quality U.S. beef.
Presenter: Randy Jensen
JV with Berkshire
This was previously known as GMAC commercial mortgage services. They own very few of the actual mortgages. For example, their maximum potential loss, if 100% our loans go to zero is only $1 billion. It’s the fifth largest multi-family loan originator (apartments). This was very profitable businesses for Fannie and Freddie even throughout the financial crisis. They can take escrow amounts and invest a portion of those into other assets so you can consider this a float business. Leucadia originally invested $218 million and almost all of that initial investment has been returned. There are plenty of opportunities ahead as most of these are 10 year loans. There are 1.5 trillion in non-bank loans outstanding loans and $800 billion come due in the next five years
Cash earnings from this business were $135 million in 2012 (non GAAP number here). The servicing portfolio is the largest it's ever been, clocking in at $257 billion, even while the loans they acquired wind down. Service/service transactions revenue is good - off balance sheet float which provides a nice upside to their earning potential as interest rates rise. Rich Handler mentioned later that this is inevitable whether people want rates to go up or not. They doubled their sales footprint with acquisition of Hendricks. This market is consolidating and scale matters. The previous owners built a serving operation in India for this very purpose and it’s working well.
Presenter Ken Garff
· JV with Garff automotive group. (Act as the dealer principal)
· Sold 5,394 units in 2012 3.4 percent margins (over 3% is good).
· Own 21 dealerships and 1,800 employees on pace to do 50,000 units (Iowa, Texas, CA)
· 52% of sales are domestic models and 48% are imports.
· They believe there is pent up demand. The average age of vehicle in the U.S. is 10.8 years, the oldest its ever been. [BH] Vehicles are also lasting longer than ever so this shouldn’t be a big surprise. Overall the turnover cycle is expanding. Two other tailwinds are that vehicle lending is very aggressive right now and trade-in values are strong.
· They do a nice business when nationwide sales hit 15 million units.
· 17,900 dealerships on U.S. , top 10 dealers only have 8 percent, age of dealer owners are aging. Acquisition strategy clusters in medium/large markets. Profitable but underperforming dealers.
· Industry does $700 billion in sales per year . Their goal is to have a net profit of $1,000 per vehicle sold.
Presenter Rich handler
Leucadia’s largest operating company
This is a client-focused firm . [BH] A little shot here at the companies who were betting against their clients. Their first goal, post merger is to do nothing different. They are focused on cross-selling and growing their revenues.
They did $302 million in net income in 2012.Investment banking is a roller coaster type of business. When he joined 23 years ago $7 million net income business with 150 employees. Rising rate environment is tough on fixed income. Selectively act as merchant capital players when our clients want us to.
Q & A
I didn’t catch all the Q & A but here are the parts I felt were most important.
Q: Comp ratios for other investment banks are in the low 50% range which Jeffries is around 58%. Handler described how they hired a bunch of people during the downturn and they all get paid stock upfront. Once they start growing revenues this number will drop back to a normal range.
Q: Other investment banks like Goldman had good quarters and you didn’t, why?
One disadvantage is that we don't have a fixed income derivative business which is a license to print money in times of volatility. The bad news is that business can blow you up in times like 2008 and 2009.
Q: Why focused on book value per share and not stock price?
He believes book value is one way to drive value of the share price.
Q: How will you split your time between Leucadia and Jeffries?
I’ll spend 60% at each. ;-) [BH] It seems he’s quite content with the team at Jeffries so most of his building will happen on the Leucadia side. Joeseph Steinberg mentioned they got him a new office and all the Leucadia people are sitting on one floor now.
Q: What is a dumb thing?
I've seen people take great companies lever them to the hilt and drive them over a cliff.
You have to get the big things right.
Joe. We don't ever want a margin call b/c then you are done.
Q: stock buy backs? Philosophy?
We bought back shares before the merger when we thought Jeffries’ shares were cheap and we got clearance from compliance. We have an existing stock repurchase plan that has approved purchasing up to 25 million shares. He wouldn’t set a threshold for what makes them attractive like Berkshire’s 1.2 X BV.
Q: What will Joe do with his time?
I'm moving to new office in same building with LUK people. [BH] It appears that Joe is going to be actively involved in looking at deals. They also mentioned that Ian is only a phone call away.
Q: Recent banking deals JEF announced?
[BH] They recently helped with a merger. It’s their belief that Dodd/Frank will drive more consolidation. It hasn't happened yet because CEO’s don’t want to give up their roles. They believe it makes sense and thinks more mergers are inevitable.